TONY AND PEPPER STARK O Income Tax Case Analysis PERSONAL INFORMATION AND BACKGROUND Tony and Pepper have been married for 5 years. They have one son named Anthony who is 2 years old. Last summer. Tony's older sister Stacey died with her husband Rob when their helicopter crashed in a freak accident while on a one hour sightseeing tour over the Grand Canyon. Luckily, their three young daughters June, Charlotte and Ainsley were not on this vacation as they stayed home with Tony and Pepper. Tony was named the sole guardian of his three nieces. Tony was also named as the sole trustee of the trust established by Stacey and Rob's estates to provide for their three children. Name Tony Pepper Relationship Age Married 37 Married 32 Occupation IT Specialist Teacher June Tony's niece 9 Student Health Excellent - Amateur triathlete Excellent - Works out 6 days a week and is training to run the Boston Marathon Excellent Prefers her art classes each week over playing sports Excellent - Takes gymnastic classes three times a week Excellent - A bit of a daredevil and has already broken her arm twice Excellent Charlotte Tony's niece 7 Student Ainsley Tony's niece 5 Student Anthony Terrible Two Tony & 2 Pepper's son Tony inherited the home from Stacey and Rob worth $750,000 free of any mortgages. The home is located in Virginia Beach, Virginia. Tony and Pepper moved from Norfolk, Virginia into Stacey and Rob's home after they died so that June, Charlotte and Ainsley would not have to move. Tony and Pepper sold their Norfolk home for SS50,000. They bought it 5 years ago for $325,000, made $75,000 worth of renovations, and had lived there that entire time. Stacey also left Tony $25,000 in ber will. The trust for the children, for which Tony is trustee, was funded with $1,500,000 in life insurance benefits on a policy on Rob's life. Tony works for a government contractor that primarily works with the Department of State implementing Tony works for a government contractor that primarily works with the Department of State implementing cyber security solutions for embassies around the world. Pepper took a year off from teaching middle school science after Stacey and Rob died. Pepper has started tutoring students out of their home and works about 10 hours a week on average. Pepper spent $300 on books and supplies for her students. She used the loft above the garage for her lessons. Tony's parents are both 72 years old and live in Santa Cruz, California. They sold their flooring company several years ago and have saved enough to live comfortably in retirement. Tony will be their sole heir of his parent's estate when they both have passed away Pepper's parents are both in their mid 60s and live in Richmond, Virginia. Pepper's dad still works as a partner in a large accounting firm. Pepper's mom is a retired second grade teacher. Pepper's mom helps out several times a week with the girls. Pepper is an only child and will be the sole heir of her parent's estate when they both have passed away INCOME INFORMATION Tony had been a W-2 employee of RoboTech Inc. before he was offered an equity position in the company. On January 1, 2019, the company transferred 100 shares of stock to Tony to reward him for his excellent performance over the past decade. The stock was worth about $100 per share at the time. Tony received a $150,000 salary in 2019 plus a profit distribution of $50,000. INVESTMENTS Tony and Pepper own a house in the Outer Banks of North Carolina. They reat the house to weekly vacationers. In 2019 they received $30.000 in rent payments. They paid a 10% commission on rents to Focus INCOME INFORMATION Tony had been a W-2 employee of RoboTech, Inc. before he was offered an equity position in the company. On January 1, 2019, the company transferred 100 shares of stock to Tony to reward him for his excellent performance over the past decade. The stock was worth about $100 per share at the time. Tony received a $150,000 salary in 2019 plus a profit distribution of $50,000. INVESTMENTS Tony and Pepper own a house in the Outer Banks of North Carolina. They rent the house to weekly vacationers. In 2019 they received $30,000 in rent payments. They paid a 10% commission on rents to the leasing agent; $4.500 in taxes: $3,000 in utilities: $1,500 to repair the pool; and $2,500 to a cleaning service. They bought a new HVAC system with a 20-year life and had it installed for a total of $6,500. Pepper owns a 5% membership interest in a small technology company started by her friend when they were in college. She no longer works for the company and hasn't for years. In 2019, she received a $2,500 profit distribution, which is about the average annual profit distribution RETIREMENT INFORMATION Tony participates in his company's 401(k) plan. He contributes the maximum allowed elective deferral each year, pretax from his salary. His employer matches up to 3% of his salary. Pepper contributes $5,000 to an IRA every year. Pepper still has a small amount in her 403(b) plan, but cannot contribute anymore because she is no longer working for the school system. CONDOMINIUM IN FLORIDA Pepper inherited a condominium in Daytona Beach when her favorite Aunt passed away a few months ago. The condominium was worth $250,000 at the time her Aunt passed away. Her Aunt had purchased the condominium for $125,000 almost 20 years ago. The condo does not have any debt. Pepper and Tony do not want the condo and they have put it up for sale. Pepper recently received an offer for the $300,000 and could close at the end of the next month if she accepts the offer. If they cannot sell the property, they will try to rent it for $1.000 per month Even with that rent, they believe they would have a loss due to high maintenance and condo association fees. Plus, they will be able to depreciate about 54.000 per year. Design Layout Rererences help ings Tony and Pepper Stark Projected Cash Flow For the Current Year Cash Inflows Salary/Distribution - Tony Tutoring Income - Pepper Pepper's profit distribution Interest and dividend income Net Proceeds from sale of Norfolk Home Inheritance from Stacy Outer Banks House Rents $150,000 18,000 2,500 2,000 105,000 25,000 $30,000 Total Inflows $382,500 Cash Outflows Extracurricular activities for the kids Contributions to church Contribution to American Cancer Society Current year state income tax withholding Current year federal income tax withholding Self-Employment Taxes Real Property taxes Tax planning fees Car expenses Tony's HSA contribution Entertainment and travel Tony's 401(k) contribution Pepper's IRA contribution Outer Banks House Expenses Tutoring expenses Moving Expenses Investments & savings Groceries/household supplies Utilities House and yard upkeep Medical Insurance premiums Renovation to bathroom 6.000 10,000 2,500 10,000 35.000 11,000 5,000 1.000 20.000 500 15,000 19.000 5,000 21,000 300 4.000 93.200 18.000 8.000 10.000 12.000 15.000 Review View Draw Design Layout References Mailings 529 plan contribution Clothing Medical co-pays and prescription expenses Miscellaneous Help 30,000 10,000 1,000 20,000 Total Outflows $382,500 3 Questions: 1. (6 points) Calculate Tony and Pepper's 2019 "Taxable income" and identify the exclusions from income and above and below the line deductions they may take (assume they file jointly). To receive full credit, you must (a) compute the Taxable income correctly. (b) demonstrate a knowledge of the structure of individual taxation (income, exclusions, deductions). (c) write to clearly explain to Tony how you calculated that answer. 2. (4 points) What are the potential tax consequences of the two options Tony and Pepper have regarding the condominium: (1) sell, or (2) rent. To receive full credit, you must (a) analyze and compare the potential taxation for each option; (b) demonstrate a knowledge of realization recognition, basis, and character of the taxation (ordinary income, capital gains, etc.), and (c) write as if you were providing information thorough enough to help your client make a decision as to which option to take. (Extra Credit) What tax planning recommendations would you make to the Starks? 3. Questions: 1. (6 points) Calculate Tony and Pepper's 2019 "Taxable income" and identify the exclusions from income and above and below the line deductions they may take assume they file jointly). To receive full credit, you must (a) compute the Taxable income correctly; (b) demonstrate a knowledge of the structure of individual taxation (income, exclusions, deductions). (c) write to clearly explain to Tony how you calculated that answer. 2. (4 points) What are the potential tax consequences of the two options Tony and Pepper have regarding the condominium: (1) sell, or (2) rent. To receive full credit, you must (a) analyze and compare the potential taxation for each option; (b) demonstrate a knowledge of realization, recognition, basis, and character of the taxation (ordinary income, capital gains, etc.); and (c) write as if you were providing information thorough enough to help your client make a decision as to which option to take 3. (Extra Credit) What tax planning recommendations would you make to the Starks? Due June 25 by 11:59 pm Questions: 1. (6 points) Calculate Tony and Pepper's 2019 "Taxable income" and identify the exclusions from income and above and below the line deductions they may take assume they file jointly). To receive full credit, you must (a) compute the Taxable Income correctly: (b) demonstrate a knowledge of the structure of individual taxation (income, exclusions, deductions). (c) write to clearly explain to Tony how you calculated that answer. 2. (4 points) What are the potential tax consequences of the two options Tony and Pepper have regarding the condominium: (1) sell, or (2) rent. To receive full credit, you must (a) analyze and compare the potential taxation for each option; (b) demonstrate a knowledge of realization, recognition, basis, and character of the taxation (ordinary income, capital gains, etc.); and (c) write as if you were providing information thorough enough to help your client make a decision as to which option to take 3. (Extra Credit) What tax planning recommendations would you make to the Starks? Due June 25 by 11:59 pm TONY AND PEPPER STARK O Income Tax Case Analysis PERSONAL INFORMATION AND BACKGROUND Tony and Pepper have been married for 5 years. They have one son named Anthony who is 2 years old. Last summer. Tony's older sister Stacey died with her husband Rob when their helicopter crashed in a freak accident while on a one hour sightseeing tour over the Grand Canyon. Luckily, their three young daughters June, Charlotte and Ainsley were not on this vacation as they stayed home with Tony and Pepper. Tony was named the sole guardian of his three nieces. Tony was also named as the sole trustee of the trust established by Stacey and Rob's estates to provide for their three children. Name Tony Pepper Relationship Age Married 37 Married 32 Occupation IT Specialist Teacher June Tony's niece 9 Student Health Excellent - Amateur triathlete Excellent - Works out 6 days a week and is training to run the Boston Marathon Excellent Prefers her art classes each week over playing sports Excellent - Takes gymnastic classes three times a week Excellent - A bit of a daredevil and has already broken her arm twice Excellent Charlotte Tony's niece 7 Student Ainsley Tony's niece 5 Student Anthony Terrible Two Tony & 2 Pepper's son Tony inherited the home from Stacey and Rob worth $750,000 free of any mortgages. The home is located in Virginia Beach, Virginia. Tony and Pepper moved from Norfolk, Virginia into Stacey and Rob's home after they died so that June, Charlotte and Ainsley would not have to move. Tony and Pepper sold their Norfolk home for SS50,000. They bought it 5 years ago for $325,000, made $75,000 worth of renovations, and had lived there that entire time. Stacey also left Tony $25,000 in ber will. The trust for the children, for which Tony is trustee, was funded with $1,500,000 in life insurance benefits on a policy on Rob's life. Tony works for a government contractor that primarily works with the Department of State implementing Tony works for a government contractor that primarily works with the Department of State implementing cyber security solutions for embassies around the world. Pepper took a year off from teaching middle school science after Stacey and Rob died. Pepper has started tutoring students out of their home and works about 10 hours a week on average. Pepper spent $300 on books and supplies for her students. She used the loft above the garage for her lessons. Tony's parents are both 72 years old and live in Santa Cruz, California. They sold their flooring company several years ago and have saved enough to live comfortably in retirement. Tony will be their sole heir of his parent's estate when they both have passed away Pepper's parents are both in their mid 60s and live in Richmond, Virginia. Pepper's dad still works as a partner in a large accounting firm. Pepper's mom is a retired second grade teacher. Pepper's mom helps out several times a week with the girls. Pepper is an only child and will be the sole heir of her parent's estate when they both have passed away INCOME INFORMATION Tony had been a W-2 employee of RoboTech Inc. before he was offered an equity position in the company. On January 1, 2019, the company transferred 100 shares of stock to Tony to reward him for his excellent performance over the past decade. The stock was worth about $100 per share at the time. Tony received a $150,000 salary in 2019 plus a profit distribution of $50,000. INVESTMENTS Tony and Pepper own a house in the Outer Banks of North Carolina. They reat the house to weekly vacationers. In 2019 they received $30.000 in rent payments. They paid a 10% commission on rents to Focus INCOME INFORMATION Tony had been a W-2 employee of RoboTech, Inc. before he was offered an equity position in the company. On January 1, 2019, the company transferred 100 shares of stock to Tony to reward him for his excellent performance over the past decade. The stock was worth about $100 per share at the time. Tony received a $150,000 salary in 2019 plus a profit distribution of $50,000. INVESTMENTS Tony and Pepper own a house in the Outer Banks of North Carolina. They rent the house to weekly vacationers. In 2019 they received $30,000 in rent payments. They paid a 10% commission on rents to the leasing agent; $4.500 in taxes: $3,000 in utilities: $1,500 to repair the pool; and $2,500 to a cleaning service. They bought a new HVAC system with a 20-year life and had it installed for a total of $6,500. Pepper owns a 5% membership interest in a small technology company started by her friend when they were in college. She no longer works for the company and hasn't for years. In 2019, she received a $2,500 profit distribution, which is about the average annual profit distribution RETIREMENT INFORMATION Tony participates in his company's 401(k) plan. He contributes the maximum allowed elective deferral each year, pretax from his salary. His employer matches up to 3% of his salary. Pepper contributes $5,000 to an IRA every year. Pepper still has a small amount in her 403(b) plan, but cannot contribute anymore because she is no longer working for the school system. CONDOMINIUM IN FLORIDA Pepper inherited a condominium in Daytona Beach when her favorite Aunt passed away a few months ago. The condominium was worth $250,000 at the time her Aunt passed away. Her Aunt had purchased the condominium for $125,000 almost 20 years ago. The condo does not have any debt. Pepper and Tony do not want the condo and they have put it up for sale. Pepper recently received an offer for the $300,000 and could close at the end of the next month if she accepts the offer. If they cannot sell the property, they will try to rent it for $1.000 per month Even with that rent, they believe they would have a loss due to high maintenance and condo association fees. Plus, they will be able to depreciate about 54.000 per year. Design Layout Rererences help ings Tony and Pepper Stark Projected Cash Flow For the Current Year Cash Inflows Salary/Distribution - Tony Tutoring Income - Pepper Pepper's profit distribution Interest and dividend income Net Proceeds from sale of Norfolk Home Inheritance from Stacy Outer Banks House Rents $150,000 18,000 2,500 2,000 105,000 25,000 $30,000 Total Inflows $382,500 Cash Outflows Extracurricular activities for the kids Contributions to church Contribution to American Cancer Society Current year state income tax withholding Current year federal income tax withholding Self-Employment Taxes Real Property taxes Tax planning fees Car expenses Tony's HSA contribution Entertainment and travel Tony's 401(k) contribution Pepper's IRA contribution Outer Banks House Expenses Tutoring expenses Moving Expenses Investments & savings Groceries/household supplies Utilities House and yard upkeep Medical Insurance premiums Renovation to bathroom 6.000 10,000 2,500 10,000 35.000 11,000 5,000 1.000 20.000 500 15,000 19.000 5,000 21,000 300 4.000 93.200 18.000 8.000 10.000 12.000 15.000 Review View Draw Design Layout References Mailings 529 plan contribution Clothing Medical co-pays and prescription expenses Miscellaneous Help 30,000 10,000 1,000 20,000 Total Outflows $382,500 3 Questions: 1. (6 points) Calculate Tony and Pepper's 2019 "Taxable income" and identify the exclusions from income and above and below the line deductions they may take (assume they file jointly). To receive full credit, you must (a) compute the Taxable income correctly. (b) demonstrate a knowledge of the structure of individual taxation (income, exclusions, deductions). (c) write to clearly explain to Tony how you calculated that answer. 2. (4 points) What are the potential tax consequences of the two options Tony and Pepper have regarding the condominium: (1) sell, or (2) rent. To receive full credit, you must (a) analyze and compare the potential taxation for each option; (b) demonstrate a knowledge of realization recognition, basis, and character of the taxation (ordinary income, capital gains, etc.), and (c) write as if you were providing information thorough enough to help your client make a decision as to which option to take. (Extra Credit) What tax planning recommendations would you make to the Starks? 3. Questions: 1. (6 points) Calculate Tony and Pepper's 2019 "Taxable income" and identify the exclusions from income and above and below the line deductions they may take assume they file jointly). To receive full credit, you must (a) compute the Taxable income correctly; (b) demonstrate a knowledge of the structure of individual taxation (income, exclusions, deductions). (c) write to clearly explain to Tony how you calculated that answer. 2. (4 points) What are the potential tax consequences of the two options Tony and Pepper have regarding the condominium: (1) sell, or (2) rent. To receive full credit, you must (a) analyze and compare the potential taxation for each option; (b) demonstrate a knowledge of realization, recognition, basis, and character of the taxation (ordinary income, capital gains, etc.); and (c) write as if you were providing information thorough enough to help your client make a decision as to which option to take 3. (Extra Credit) What tax planning recommendations would you make to the Starks? Due June 25 by 11:59 pm Questions: 1. (6 points) Calculate Tony and Pepper's 2019 "Taxable income" and identify the exclusions from income and above and below the line deductions they may take assume they file jointly). To receive full credit, you must (a) compute the Taxable Income correctly: (b) demonstrate a knowledge of the structure of individual taxation (income, exclusions, deductions). (c) write to clearly explain to Tony how you calculated that answer. 2. (4 points) What are the potential tax consequences of the two options Tony and Pepper have regarding the condominium: (1) sell, or (2) rent. To receive full credit, you must (a) analyze and compare the potential taxation for each option; (b) demonstrate a knowledge of realization, recognition, basis, and character of the taxation (ordinary income, capital gains, etc.); and (c) write as if you were providing information thorough enough to help your client make a decision as to which option to take 3. (Extra Credit) What tax planning recommendations would you make to the Starks? Due June 25 by 11:59 pm