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Test 4 Required: Use the following information to compute Paul and Judy Vance's 2015 federal income tax refund or liability. Use the column to the right of the data to discuss whether the item is taxable or deductible or not and why. Then compute Schedule C business income, total income (line 1040, line 22), adjusted gross income, deductions, tax including self-employment tax, credits, and finish up with tax refund or tax due. If information is missing, use reasonable assumptions to fill in the gaps. Facts: 1. Paul J. and Judy L. Vance are married and file a joint return. Paul is selfemployed as a dentist, and Judy is a college professor. Paul and Judy have three children. The oldest is Vince who lives at home. Vince is a law student at the University of Cincinnati and worked part-time during the year, earning $1,500, which he spent for his own support. Paul and Judy provided $6,000 toward Vince's support (including $4,000 for Vince's fall tuition). They also provided over half the support of their daughter, Joan, who is a full-time student at Edgecliff College in Cincinnati. Joan worked part-time as an independent contractor during the year, earning $3,200. Joan lived at home until she was married in December. She filed a joint return with her husband, Patrick, who earned $20,000 during the year. Jennifer is the youngest and lived in the Vances'' home for the entire year. The Vances' provide you with the following additional information: Paul and Judy would like to take advantage on their return of any educational expenses paid for their children. The Vances' live at 621 Franklin Avenue, Cincinnati, OH 45211. Paul's birthday is 3/5/1957 and his Social Security number is 333-45-6666. Judy's birthday is 4/24/1960 and her Social Security number is 566-77-8888. Vince's birthday is 11/6/1991 and his Social Security number is 576-18-7928. Joan's birthday is 2/1/1995 and her Social Security number is 575-92-4321. Jennifer's birthday is 12/12/2002 and her Social Security number is 613-97-8465. 2. Judy is a lecturer at Xavier University in Cincinnati, where she earned $30,000. The university withheld federal income tax of $3,375, state income tax of $900, Cincinnati city income tax of $375, $1,860 of Social Security tax and $435 of Medicare tax. She also worked part of the year for Delta Airlines. Delta paid her $10,000 in salary, and withheld federal income tax of $1,125, state income tax of $300, Cincinnati city income tax of $125, Social Security tax of $620, and Medicare tax of $145. 3. The Vances' received $800 of interest from State Savings Bank on a joint account. They received interest of $1,000 on City of Cincinnati bonds they bought in January with the proceeds of a loan from Third National Bank of Cincinnati. They paid interest of $1,100 on the loan. Paul received a dividend of $540 on General Bicycle Corporation stock he owns. Judy received a dividend of $390 on Acme Clothing Corporation stock she owns. Paul and Judy received a dividend of $865 on jointly owned stock in Maple Company. All of the dividends received are qualified dividends. 4. Paul practices under the name \"Paul J. Vance, DDS.\" His business is located at 645 West Avenue, Cincinnati, OH 45211, and his employer identification number is 01-2222222. Paul's gross receipts during the year were $111,000. Paul uses the cash method of accounting for his business. Paul's business expenses are as follows: Advertising Professional dues Professional journals Contributions to employee benefit plans Malpractice insurance Fine for overbilling State of Ohio for work performed on welfare patient Insurance on office contents Interest on money borrowed to refurbish office Accounting services Miscellaneous office expense Office rent Dental supplies Utilities and telephone Wages Payroll taxes In June, Paul decided to refurbish his office. This project was completed and the assets placed in service on July 1. Paul's expenditures included $8,000 for new office furniture, $6,000 for new dental equipment (seven-year recovery period), and $2,000 for a new computer. Paul elected to compute his cost recovery allowance using MACRS. He did not elect to use 179 immediate expensing, and he chose to not claim any bonus depreciation. $1,200 490 360 2,000 3,200 5,000 720 600 2,100 388 12,000 7,672 3,360 30,000 2,400 5. Judy's mother, Sarah, died on July 2, 2009, leaving Judy her entire estate. Included in the estate was Sarah's residence (325 Oak Street, Cincinnati, OH 45211). Sarah's basis in the residence was $30,000. The fair market value of the residence on July 2, 2009, was $155,000. The property was distributed to Judy on January 1, 2010. The Vances' have held the property as rental property and have managed it themselves. From 2010 until June 30, they rented the house to the same tenant. The tenant was transferred to a branch office in California and moved out at the end of June. Since they did not want to bother finding a new tenant, Paul and Judy sold the house on June 30. They received $140,000 for the house and land ($15,000 for the land and $125,000 for the house), less a 6 percent commission charged by the broker. They had depreciated the house using the MACRS rules and conventions applicable to residential real estate. To compute depreciation on the house, the Vances' had allocated $15,000 of the property's basis to the land on which the house is located. The Vances' collected rent of $1,000 a month during the six months the house was occupied during the year. They incurred the following related expenses during this period: Property insurance Property taxes Maintenance Depreciation (to be computed) $500 800 465 ? 6. The Vances' sold 200 shares of Capp Corporation stock on September 3, 2015, for $42 a share (minus a $50 commission). The Vances' received the stock from Paul's father on June 25, 1980, as a wedding present. Paul's father originally purchased the stock for $10 per share in 1967. The stock was valued at $14.50 per share on the date of the gift. No gift tax was paid on the gift. 7. Judy is required by Xavier University to visit several high schools in the Cincinnati area to evaluate Xavier University students who are doing their practice teaching. However, she is not reimbursed for the expenses she incurs in doing this. During the spring semester (January through April), she drove her personal automobile 680 miles in fulfilling this obligation. Judy drove an additional 670 personal miles during the fall. She has been using the car since June 30, 2013. Judy uses the standard mileage method to calculate her car expenses. 8. Paul and Judy have given you a file containing the following receipts for expenditures during the year: Prescription medicine and drugs (net of insurance reimbursement) Doctor and hospital bills (net of insurance reimbursement) Penalty for underpayment of last year's state income tax Real estate taxes on personal residence Interest on home mortgage (paid to Home State Savings & Loan) Interest on credit cards (consumer purchases) $ 376 2,468 15 4,762 8,250 595 Cash contribution to St. Matthew's church Payroll deductions for Judy's contributions to the United Way Professional dues (Judy) Professional subscriptions (Judy) Fee for preparation of 2014 tax return paid this April 9. The Vances' filed their 2015 federal, state, and local returns on April 12. They paid the following additional 2015 taxes with their returns: federal income taxes of $630, state income taxes of $250, and city income taxes of $75. 10. The Vances' made timely estimated federal income tax payments of $1,500 each quarter. They also made estimated state income tax payments of $300 each quarter and estimated city income tax payments of $160 each quarter. The Vances' made all fourth-quarter payments on time as of Jan 15. They would like to receive a refund for any overpayments. 11. Paul and Judy have qualifying insurance for purposes of the Affordable Care Act (ACA). Required: Compute Paul and Judy Vance's federal income tax refund or liability. Use the column to the right of the data to discuss whether the item is taxable or deductible or not and why. Then compute Schedule C business income, total income (line 1040, line 22), adjusted gross income, deductions, tax including selfemployment tax, credits, and finish up with tax refund or tax due. If information is missing, use reasonable assumptions to fill in the gaps. 3,080 150 325 245 500 Problem 1 Tax Return 2 Go to the IRS web page and download a Form 1040 for 2015 and save it to your computer or flash drive. The web: www.irs.gov Go to -->more forms, current forms and publications, type 1040 in the search box. Be sure to save this form on your computer; please "save as" Your Name Tax Return 2" Type into the pdf form and when it is complete be sure to save it! Put your name on the return. Skip the address and social security number or make up something fun. Complete the return based on the following data: Choose Single as your tax status (Note this is slightly different from the last problem!) Salary $40,000 with Federal tax withholding of 5,000, Interest Income -Chase Bank $50 and Ford Company qualified dividends $ 3000. Note that qualified dividends and long term capital gains are taxed at a preferred rate. Although the taxable income will be the same as tax return 1, the tax will be different. You will go to the instructions and look up the tax amount from the tax tables for the amount of taxable income excluding the qualified dividend. That tax on income before the dividend is then added to the amount of the tax on the qualified dividends. The tax on qualified dividends is multiplied by these percentages: 0% if the top regular tax rate is 10% or 15% 15% if the top regular tax rate is 25% or 28% or 33% or 35% 20% if the regular tax is 39.6% Problem 2 Tax Return 3 Tom Jones and Doris Day, each age 42, married on September 7, 2014. Tom and Doris will file a joint return for the year. Tom's Social Security number is 111-11-1111. Doris's Social Security number is 123-45-6789. They live at 211 Brickstone Drive, Atlanta, GA 30304. Tom was divorced from Sarah Jones in March 2015. Under the divorce agreement, Tom is to pay Sarah $1,250 per month for the next 10 years or until Sarah's death, whichever occurs first. Tom pays Sarah $15,000 in 2015. In addition, in January 2015, Tom pays Sarah $50,000, which is designated as being for her share of the marital property. Sarah's Social Security number is 123-45-6788. Tom's salary for the year is $150,000, and his employer, BlueBus, Inc. (Federal I.D. No. 98-7654321). His employer withheld $24,900 for Federal income taxes and $8,000 for state income taxes. The proper amounts were withheld for FICA taxes. Doris recently graduated from law school and is employed by HelpMe, Inc. (Federal I.D. No. 11-1111111), as a public defender. She receives a salary of $40,000. Her employer withheld $7,500 for Federal income taxes and $2,400 for state income taxes. The proper amounts were withheld for FICA taxes. Doris has $2,500 in qualified dividends on Ford Corporation stock she inherited. Tom and Doris receive a $1,900 refund on their prior state income taxes. They itemized deductions on their prior Federal income tax return (total of $15,000) so the state income tax refund is taxable. Tom and Doris itemized this year. They pay $4,500 interest and $1,450 property taxes on their personal residence. Their charitable contributions total $2,400 (all to their church). They paid state taxes with were deducted from their pay of $8,000 and 2,400. Compute the Jones's net tax payable (or refund due) for the year. If you use 2015 tax forms for your solution, you will need Form 1040 and Schedules A and B. Problem 3 Tax Return 4 Reba Dixon is a fifth-grade school teacher who earned a salary of $38,000 in 2015. She is 45 years old and has been divorced for four years. She received $1,200 of alimony payments each month from her former husband. Reba and her daughter Heather (20 years old at the end of the year) moved to Georgia in January of 2015. Reba provides more than one-half of Heather's support. They had been living in Colorado for the past 15 years, but ever since her divorce, Reba has been wanting to move back to Georgia to be closer to her family. Luckily, a teaching position opened up and Reba and Heather decided to make the move. Reba paid a moving company $2,010 to move their personal belongings, and she and Heather spent two days driving the 1,426 miles to Georgia. During the trip, Reba paid $143 for lodging and $85 for meals. Reba's mother was so excited to have her daughter and granddaughter move back to Georgia that she gave Reba $3,000 to help out with the moving costs. Reba rented a home in Georgia. Heather decided to continue living at home with her mom, but she started attending school full-time in January, 2015 at a nearby university. She was awarded a $3,000 partial tuition scholarship this year, and Reba helped out by paying the remaining $500 tuition cost. If possible, Reba thought it would be best to claim the education credit for these expenses. Reba wasn't sure if she would have enough items to help her benefit from itemizing on her tax return. Reba paid $2,800 in state income taxes and $6,500 in charitable contributions during the year. She also paid the following medical-related expenses for her and Heather: Insurance premiums Medical care expenses Prescription medicine Nonprescription medicine New contact lenses for Heather $ 4,795 1,100 350 100 200 A few years ago, Reba acquired several investments with her portion of the divorce settlement. This year she reported the following income from her investments: $2,200 of interest income from corporate bonds and $1,500 interest income from City of Denver municipal bonds. Overall, Reba's stock portfolio appreciated by $12,000 but she did not sell any of her stocks. Reba had $10,000 of federal income taxes withheld by her employer. Problem 4 Tax Return 5 Addison Brown, single and age 32. She is employed as regional sales manager by PILLS Corporation, a manufacturer and distributor of vitamins and food supplements. Addison is paid an annual salary of $50,000. Addison also has a bookkeeping and tax business that she runs out of her home. Her fees income collected for the year was $25,000. Out of 1,500 square feet of living space in her apartment, Addison has set aside 300 square feet as an office. Expenses for 2015 relating to the office are listed below. Her self-employment-related expenses for 2015 are summarized below. The business gifts were boxes of candy costing $30 sent to 18 clients at Christmas. The continuing education was a noncredit course dealing with improving people management skills that Addison took online. She uses her automobile 10% for business and 90% for personal. The automobile was purchased new on June 30, 2012, for $37,000 (no trade-in was involved). During 2015, Addison drove 15,000 miles (total) and incurred and paid the following expenses relating to the automobile: Besides the items already mentioned, Addison had the following receipts in 2015: Bank of America interest income of $250 and City of Dallas bond interest of $1,000. Addison's expenditures for 2015 (not previously noted) are summarized below. Medical State and local tax 3000 Church pledge Paid Credit card interest Tax return preparation fee 7000 6000 2000 500 Her employer withheld $9,600 for Federal income tax purposes, Compute Addison's Federal income tax payable (or refund) for 2015. Problem 1 Tax Return 2 Go to the IRS web page and download a Form 1040 for 2015 and save it to your computer or flash drive. The web: www.irs.gov Go to -->more forms, current forms and publications, type 1040 in the search box. Be sure to save this form on your computer; please "save as" Your Name Tax Return 2" Type into the pdf form and when it is complete be sure to save it! Put your name on the return. Skip the address and social security number or make up something fun. Complete the return based on the following data: Choose Single as your tax status (Note this is slightly different from the last problem!) Salary $40,000 with Federal tax withholding of 5,000, Interest Income -Chase Bank $50 and Ford Company qualified dividends $ 3000. Note that qualified dividends and long term capital gains are taxed at a preferred rate. Although the taxable income will be the same as tax return 1, the tax will be different. You will go to the instructions and look up the tax amount from the tax tables for the amount of taxable income excluding the qualified dividend. That tax on income before the dividend is then added to the amount of the tax on the qualified dividends. The tax on qualified dividends is multiplied by these percentages: 0% if the top regular tax rate is 10% or 15% 15% if the top regular tax rate is 25% or 28% or 33% or 35% 20% if the regular tax is 39.6% Problem 2 Tax Return 3 Tom Jones and Doris Day, each age 42, married on September 7, 2014. Tom and Doris will file a joint return for the year. Tom's Social Security number is 111-11-1111. Doris's Social Security number is 123-45-6789. They live at 211 Brickstone Drive, Atlanta, GA 30304. Tom was divorced from Sarah Jones in March 2015. Under the divorce agreement, Tom is to pay Sarah $1,250 per month for the next 10 years or until Sarah's death, whichever occurs first. Tom pays Sarah $15,000 in 2015. In addition, in January 2015, Tom pays Sarah $50,000, which is designated as being for her share of the marital property. Sarah's Social Security number is 123-45-6788. Tom's salary for the year is $150,000, and his employer, BlueBus, Inc. (Federal I.D. No. 98-7654321). His employer withheld $24,900 for Federal income taxes and $8,000 for state income taxes. The proper amounts were withheld for FICA taxes. Doris recently graduated from law school and is employed by HelpMe, Inc. (Federal I.D. No. 11-1111111), as a public defender. She receives a salary of $40,000. Her employer withheld $7,500 for Federal income taxes and $2,400 for state income taxes. The proper amounts were withheld for FICA taxes. Doris has $2,500 in qualified dividends on Ford Corporation stock she inherited. Tom and Doris receive a $1,900 refund on their prior state income taxes. They itemized deductions on their prior Federal income tax return (total of $15,000) so the state income tax refund is taxable. Tom and Doris itemized this year. They pay $4,500 interest and $1,450 property taxes on their personal residence. Their charitable contributions total $2,400 (all to their church). They paid state taxes with were deducted from their pay of $8,000 and 2,400. Compute the Jones's net tax payable (or refund due) for the year. If you use 2015 tax forms for your solution, you will need Form 1040 and Schedules A and B. Problem 3 Tax Return 4 Reba Dixon is a fifth-grade school teacher who earned a salary of $38,000 in 2015. She is 45 years old and has been divorced for four years. She received $1,200 of alimony payments each month from her former husband. Reba and her daughter Heather (20 years old at the end of the year) moved to Georgia in January of 2015. Reba provides more than one-half of Heather's support. They had been living in Colorado for the past 15 years, but ever since her divorce, Reba has been wanting to move back to Georgia to be closer to her family. Luckily, a teaching position opened up and Reba and Heather decided to make the move. Reba paid a moving company $2,010 to move their personal belongings, and she and Heather spent two days driving the 1,426 miles to Georgia. During the trip, Reba paid $143 for lodging and $85 for meals. Reba's mother was so excited to have her daughter and granddaughter move back to Georgia that she gave Reba $3,000 to help out with the moving costs. Reba rented a home in Georgia. Heather decided to continue living at home with her mom, but she started attending school full-time in January, 2015 at a nearby university. She was awarded a $3,000 partial tuition scholarship this year, and Reba helped out by paying the remaining $500 tuition cost. If possible, Reba thought it would be best to claim the education credit for these expenses. Reba wasn't sure if she would have enough items to help her benefit from itemizing on her tax return. Reba paid $2,800 in state income taxes and $6,500 in charitable contributions during the year. She also paid the following medical-related expenses for her and Heather: Insurance premiums Medical care expenses Prescription medicine Nonprescription medicine New contact lenses for Heather $ 4,795 1,100 350 100 200 A few years ago, Reba acquired several investments with her portion of the divorce settlement. This year she reported the following income from her investments: $2,200 of interest income from corporate bonds and $1,500 interest income from City of Denver municipal bonds. Overall, Reba's stock portfolio appreciated by $12,000 but she did not sell any of her stocks. Reba had $10,000 of federal income taxes withheld by her employer. Problem 4 Tax Return 5 Addison Brown, single and age 32. She is employed as regional sales manager by PILLS Corporation, a manufacturer and distributor of vitamins and food supplements. Addison is paid an annual salary of $50,000. Addison also has a bookkeeping and tax business that she runs out of her home. Her fees income collected for the year was $25,000. Out of 1,500 square feet of living space in her apartment, Addison has set aside 300 square feet as an office. Expenses for 2015 relating to the office are listed below. Her self-employment-related expenses for 2015 are summarized below. The business gifts were boxes of candy costing $30 sent to 18 clients at Christmas. The continuing education was a noncredit course dealing with improving people management skills that Addison took online. She uses her automobile 10% for business and 90% for personal. The automobile was purchased new on June 30, 2012, for $37,000 (no trade-in was involved). During 2015, Addison drove 15,000 miles (total) and incurred and paid the following expenses relating to the automobile: Besides the items already mentioned, Addison had the following receipts in 2015: Bank of America interest income of $250 and City of Dallas bond interest of $1,000. Addison's expenditures for 2015 (not previously noted) are summarized below. Medical State and local tax 3000 Church pledge Paid Credit card interest Tax return preparation fee 7000 6000 2000 500 Her employer withheld $9,600 for Federal income tax purposes, Compute Addison's Federal income tax payable (or refund) for 2015