ch 7 tax problems- comprehensive problem

Comprehensive Problems

85. In 2014, Jack and Diane Heart are married with two children, ages 10 and 12. Jack works full-time and earns an annual salary of $80,000, while Diane works as a substitute teacher and earns approximately $25,000 per year. Jack and Diane expect to file jointly and do not itemize their deductions. In the fall of this year, Diane was offered a full time teaching position that would pay her an additional $20,000.

a. Calculate the marginal tax rate on the additional income, excluding employment taxes, to help Jack and Diane evaluate the offer.

b. Calculate the marginal tax rate on the additional income, including employment taxes, to help Jack and Diane evaluate the offer.

c. Calculate the marginal tax rate on the additional income, including self-employment taxes, if Diane earned an additional $20,000 as a self-employed contractor ($20,000 self-employment income in addition to the $25,000 as an employee).

86. {Planning} Matt and Carrie are married, have two children, and file a joint return. Their daughter Katie is 19 years old and was a full-time student at State University. During 2014, she completed her freshman year and one semester as a sophomore. Katie’s expenses while she was away at school during the year were as follows:

Tuition $5,000

Class Fees 300

Books 500

Room and Board 4,500

Katie received a half-tuition scholarship that paid for $2,500 of her tuition costs. Katie’s parents paid the rest of these expenses. Matt and Carrie are able to claim Katie as a dependent on their tax return.

Matt and Carrie's 23 year old son Todd also attended graduate school (fifth year of college) full time at a nearby college. Todd’s expenses while away at school during the year were as follows:

Tuition $3,000

Class Fees 0

Books 250

Room and Board $4,000

Matt and Carrie paid for Todd’s tuition, books, and room and board.

Since Matt and Carrie still benefit from claiming Todd as a dependent on their tax return, they decided to provide Todd with additional financial assistance by making the payments on Todd’s outstanding loans. Besides paying off some of the loan principal, Matt and Carrie paid a total of $900 of interest on the loan.

This year Carrie decided to take some classes at the local community college to help improve her skills as a school teacher. The community college is considered to be a qualifying post-secondary institution of higher education. Carrie spent a total of $1,300 on tuition for the classes and she was not reimbursed by her employer. Matt and Carrie's AGI for 2014 before any education-related tax deductions is $118,000 and their taxable income before considering any education-related tax benefits is $80,000. Matt and Carrie incurred $500 of miscellaneous itemized deductions subject to the 2% floor not counting any education related expenses

Required:

Determine the mix of tax benefits that maximize tax savings for Matt and Carrie. Assume the 2013 rules apply for purposes of the qualified education expense deduction.

Their options for credits for each student are as follows:

a. They may claim either a credit or a qualified education deduction for Katie’s expenses.

b. They may claim either a credit or a qualified education deduction for Todd.

c. They may claim (1) a credit or (2) a qualified education deduction for Carrie. They may deduct any amount not included in (1) or (2) as a miscellaneous itemized deduction subject to the 2 percent of AGI floor.

Remember to apply any applicable limits or phase-outs in your computations.

87. {Tax Forms} Reba Dixon is a fifth grade school teacher who earned a salary of $38,000 in 2014. 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 also rents out a small apartment building. This year Reba received $30,000 of rental payments from tenants and she incurred $19,500 of expenses associated with the rental.

Reba and her daughter Heather (20 years old at the end of the year) moved to Georgia in January of this year. 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, last December, 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 1,395 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 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. However, she kept track of several expenses this year that she thought might qualify if she was able to itemize. Reba paid $2,600 in state taxes and $6,500 in charitable contributions during the year. She also paid the following medical-related expenses for her and Heather:

Insurance premiums $4,795

Medical care expenses $1,100

Prescription medicine $ 350

Nonprescription medicine $ 100

New contact lenses for Heather $ 200

Shortly after the move, Reba got distracted while driving and she ran into a street sign. The accident caused $900 in damage to the car and gave her whiplash. Because the repairs were less than her insurance deductible, she paid the entire cost of the repairs. Reba wasn’t able to work for two months after the accident. Fortunately, she received $2,000 from her disability insurance. Her employer, the Central Georgia School District, paid 60% of the premiums on the policy as a nontaxable fringe benefit and Reba paid the remaining 40% portion.

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 the City of Denver municipal bonds. Overall, Reba’s stock portfolio appreciated by $12,000 but she did not sell any of her stocks.

Heather reported $3,200 of interest income from corporate bonds she received as gifts from her father over the last several years. This was Heather’s only source of income for the year.

Reba had $10,000 of federal income taxes withheld by her employer. Heather made $500 of estimated tax payments during the year. Reba did not make any estimated payments.

Required:

a. Determine Reba’s federal income taxes due or taxes payable for the current year. Complete pages 1 and 2 of Form 1040 for Reba.

b. Is Reba allowed to file as a head of household or single?

.

c. Determine the amount of FICA taxes Reba was required to pay on her salary.

d. Determine Heather’s federal income taxes due or payable.

88. {Tax Forms} John and Sandy Ferguson got married eight years ago and have a seven-year old daughter Samantha. In 2014, John worked as a computer technician at a local university earning a salary of $52,000, and Sandy worked part-time as a receptionist for a law firm earning a salary of $29,000. John also does some Web design work on the side and reported revenues of $4,000 and associated expenses of $750. The Fergusons received $800 in qualified dividends and a $200 refund of their state income taxes. The Fergusons always itemize their deductions and their itemized deductions were well over the standard deduction amount last year.

The Fergusons reported making the following payments during the year

• State income taxes of $4,400. Federal tax withholding of $4,000.
• Alimony payments to John’s former wife $10,000
• Child support payments for John’s child with his former wife $4,100
• $3,200 of real property taxes
• Sandy was reimbursed $600 for employee business expenses she incurred. She was required to provide documentation for her expenses to her employer.
• In addition to the $750 of web design expenses, John attended a conference to improve his skills associated with his web design work. His trip was for three days and he incurred the following expenses. Airfare $370, total taxi fares for trip $180, meals $80, and conference fee of $200.
• $3,600 to Kid Care daycare center for Samantha’s care while John and Sandy worked.
• $14,000 interest on their home mortgage
• $3,000 interest on a $40,000 home-equity loan. They used the loan to pay for family vacation and new car.
• $6,000 cash charitable contributions to qualified charities
• Donation of used furniture to Goodwill. The furniture had a fair market value of $400 and cost $2,000

Required: What is the Ferguson’s 2014 federal income taxes payable or refund, including any self-employment tax and AMT, if applicable? Complete pages 1 and 2 of Form 1040 and Form 6251 for John and Sandy. (Use the 2014 AMT exemptions.)