Ralph Reed, who turned 65 in December of 2019 and his wife, Mary, the older woman at 67, have been married for 40 years. They support several family members including Ralph's parents who live down the street, two teenage girls still in high school and a son, 22, just finishing graduate school. In addition, Ralph's best friend from his college band days, who has no visible means of support although he is 55, lives with Ralph and Mary in the pool house. Ralph, though long suffering, has been paying more than 50% of their support, if not all 100%, throughout 2019.

Ralph works full-time and receives a salary of $110,000. In 2019, before the Christmas break, he also received a bonus check of $10,000, which he did not deposit until January 2, 2020. Only $8,000 of Federal Income Tax was withheld from his paychecks, since they only owed $7,900 in taxes in 2018.

Ralph and Mary received interest of $5,500 on several mutual funds. In addition, they received $700 of interest on Pittsburgh Stadium Bonds.

After spending $2,000 in lottery tickets during the year, Mary had Bingo winnings of $1,000 in the big jackpot in December of 2019.

Mary settled a lawsuit successfully and received $2,000 in compensation for injuries and $5,000 in punitive damages.

Ralph sold two blocks of stock held over two years. One had a gain of $2,000 and the other had a loss of $6,000.

Their son, who finished graduate school in 2019, had tuition of $20,000.

Ralph also has the following unreimbursed employee business expenses related to his position working for a very miserly boss:

Internet connection to work from home one day per week $50/month

Books, Publications and Subscriptions to keep current in field $1,000

Briefcase $500

Continuing Education to maintain certification related to job $5,000

Not Reimbursed by Employer

Ralph and Mary had the following additional expenses related to itemized deductions :

State and Local Tax Withheld $8,000

Mortgage Interest 4,000

Real Estate Taxes 5,000

Charitable Contributions - Cash 2,000

Medical Expenses 5,000

Tax Preparation Fees 1,000

They also paid $10,000 for their parents medical bills.

Based on this information, please do the following:

1. Calculate Taxable Income and 2019 Federal Taxes in total and owed.
2. Show the incremental and average tax rates
3. Determine if they are subject to a penalty or not for underpayment of their 2019 taxes.

Show all work. To insure proper credit, please supply the following pieces of information:

Marital Status

Gross Income items (by line on 1040 if it helps you)

Deductions for AGI

AGI

Standard Vs Itemized Deductions

Personal and Dependency Exemptions

Taxable Income

Taxes

Taxes Owed or Refund Due

New Information:

Mary likes to do taxes, so she started a Tax Preparation Business out of her home. She made the following purchases related to her business:

New Tax Preparation Software $2,000

Dedicated Phone Line to do Electronic Filing $100 per month

Tax Magazines/Books $200

Completed Tax Course at Community College $1,000 Tuition, $200 Books

She collected $25,000 from friends and neighbors for preparing their returns.

Please try this Tax Form Completion Problem.

I just added the following information to the Comprehensive Problem for Exam 1.

In this problem, Mary has a business. so you will need to fill out Schedules C and SE for a Sole Proprietorship.

You can use the Excel file I provided for the Solution to Exam 1, and just add this information.

Mary likes to do taxes, so she started a Tax Preparation Business out of her home. She made the following purchases related to her business:

New Tax Preparation Software $2,000

Dedicated Phone Line to do Electronic Filing $100 per month

Tax Magazines/Books $200

Completed Tax Course at Community College $1,000 Tuition, $200 Books

She collected $25,000 from friends and neighbors for preparing their returns.