South Western Federal Taxation 2016 Essentials Of Taxation Individuals And Business Entities By Raabe – Test Bank

COMPREHENSIVE TAX RETURN PROBLEMS

Part 1—Tax Computation

Gross income:

Salary $65,000

Interest income ($1,300 + $400) 1,700

Dividend income ($800 + $750 + $650) 2,200

State income tax refund 1,100

Business income (Note 1) 19,800

Net STCG (Note 2) 1,200

Total gross income $91,000

Deductions for AGI:

Business expenses (Note 1) (16,750)

Self-employment tax deduction (Note 3) (216)

Adjusted gross income $74,034

Deductions from AGI:

Itemized deductions (Note 4) (9,834)

Personal exemption (3,950)

Taxable income $60,250

Income tax (Note 5) $10,705

Self-employment tax (Note 3) 431

Total tax $11,136

Taxes withheld (10,500)

Estimated taxes (1,000)

Net tax payable (or refund due) for 2014 ($ 364)

See the tax return solution beginning on p. 11-16 of the Solutions Manual.

Notes

(1) Business receipts

Part-time tax practice revenues $ 3,800

Software writing business royalties 16,000

Total gross income $19,800

Business expenses

Part-time tax practice processing fees $ 600

Software writing business ($7,000 + $2,000 + $3,000 +

$650 + $3,500) 16,150

Total business expenses (deducted for AGI) $16,750

(2) Gray stock ($7,000 − $8,800) STCL ($ 1,800)

Utility vehicle ($6,500 − $6,000) STCG 500

Blue stock ($5,500 − $3,000) STCG 2,500

Net STCG $ 1,200

(3) Beth’s earnings from self-employment during 2014 were $3,050 ($19,800 − $16,750), and the self-employment tax on this amount is computed as follows.

Social Security Medicare

Portion Portion

Ceiling amount $117,000

Less: FICA wages (65,000)

Net ceiling $ 52,000

Net self-employment income ($3,050 × 92.35%) $ 2,817 $2,817

Lesser of net ceiling or net self-employment income* $ 2,817 $2,817

Tax rate × 12.4% × 2.9%

Self-employment tax $ 349 $ 82

Total self-employment tax $431

Beth’s for AGI self-employment tax deduction is $216 ($431 × 50%).

*All of Beth’s net self-employment earnings are subject to both portions of the self-employment tax.

(4) Medical expenses [($300 + $2,875) − (10% × $74,034)] $ –0–

Taxes ($1,954 + $1,766) 3,720

Home mortgage interest 3,845

Charitable contributions ($1,560 + $520) 2,080

Miscellaneous itemized deductions

Professional dues and subscriptions $ 350

Convention expenses, excluding meals 1,220

Meals ($200 × 50%) 100

$1,670

Less: 2% of AGI ($74,034 × 2%) (1,481) 189

Itemized deductions $9,834

(5) Tax on taxable income of $60,250

Tax on dividend income ($2,200 × 15%) $ 330

Tax from Tax Table on remaining taxable

income of $58,050 ($60,250 − $2,200) 10,375

Total income tax $10,705

Part 2—Tax Planning

Gross income:

Salary $65,000

Interest income ($1,300 + $400) 1,700

Dividend income ($800 + $750 + $650) 2,200

State income tax refund 1,100

Net STCG 1,200

Total gross income $71,200

Deductions for AGI (–0–)

Adjusted gross income $71,200

Itemized deductions

Medical expenses

[($300 + $2,875) − (10% × $71,200)] $ –0–

Taxes ($1,954 + $1,766) 3,720

Home mortgage interest 3,845

Charitable contributions ($1,560 + $520) 2,080

Miscellaneous itemized deductions

Professional dues and subscriptions $ 350

Convention expenses, excluding meals 1,220

Meals ($200 × 50%) 100

$1,670

Less: 2% of AGI ($71,200 × 2%) (1,424) 246

Total itemized deductions (9,891)

Personal exemptions ($4,000 × 2) (8,000)

Taxable income $53,309

Income tax for 2015 (based on the head-of-household rate

schedule) (Note 1) $ 7,430

Less: Child tax credit $1,000

Credit for child and dependent care expenditures ($3,000 × 20%) 600

Adoption expenses credit 2,000 (3,600)

Less: Income taxes withheld (10,500)

Net tax payable (or refund due) for 2015 ($ 6,670)

With such a substantial refund due based on these assumptions, Beth should revise her Form W–4 so that a smaller amount of Federal income tax will be withheld from her salary in 2015.

Note

(1) Tax on $51,109 ($53,309 − $2,200) $7,100

Tax on $2,200 ($2,200 × 15%) 330

Total income tax $7,430