John and Sandy Ferguson got married eight years ago and have a seven-year old daughter Samantha. In 2016, 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 had qualifying insurance for purposes of the Affordable Care Act (ACA). 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 2016 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.
> Julie paid a day care center to watch her two-year old son this year while she worked as a computer programmer for a local start-up company. What amount of child and dependent care credit can Julie claim in each of the following alternative scenarios? a.
> Trey claims a dependency exemption for both of his two daughters, ages 14 and 17, at year-end. Trey files a joint return with his wife. What amount of child credit will Trey be able to claim for his daughters in each of the following alternative situatio
> Terry Hutchison worked as a self-employed lawyer until two years ago when he retired. He used the cash method of accounting in his business for tax purposes. Five years ago, Terry represented his client ABC Corporation in an antitrust lawsuit against XYZ
> Eva received $60,000 in compensation payments from JAZZ Corp. during 2016. Eva incurred $5,000 in business expenses relating to her work for JAZZ, Corp. JAZZ did not reimburse Eva for any of these expenses. Eva is single and she deducts a standard deduct
> Kyle worked as a free-lance software engineer for the first three months of 2016. During that time, he earned $44,000 of self-employment income. On April 1, 2016 Kyle took a job as a full-time software engineer with one of his former clients Hoogle Inc.
> Alice is self-employed in 2016. Her net business profit on her Schedule C for the year is $140,000. What is her self-employment tax liability for 2016?
> Rasheed works for Company A, earning $350,000 in salary during 2016. Assuming he has no other sources of income, what amount of FICA tax will Rasheed pay for the year?
> Brooke works for Company A for all of 2016, earning a salary of $50,000. a. What is her FICA tax obligation for the year? b. Assume Brooke works for Company A for half of 2016, earning $50,000 in salary and she works for Company B for the second half o
> In 2016, Deon and NeNe are married filing jointly. They have three dependent children under 18 years of age. Deon and NeNe’s AGI is $811,300, their taxable income is $720,250, and they itemize their deductions as follows: real property taxes of $10,000,
> Once they’ve computed their taxable income, how do taxpayers determine their regular tax liability? What additional steps must taxpayers take to compute their tax liability when they have preferentially taxed income?
> In 2016, Janet and Ray are married filing jointly. They have five dependent children under 18 years of age. Janet and Ray’s taxable income is $140,000, and they itemize their deductions as follows: real property taxes of $5,000, state income taxes of $9,
> Compare and contrast an employee’s FICA tax payment responsibilities with those of a self-employed taxpayer.
> Bobbie works as an employee for Altron Corp. for the first half of the year and for Betel Inc. for rest of the year. She is relatively well paid. What FICA tax issues is she likely to encounter? What FICA tax issues do Altron Corp. and Betel Inc. need to
> Are an employee’s entire wages subject to the FICA tax? Explain.
> Lee is single and he runs his own business. He uses the cash method of accounting to determine his business income. Near the end of the year, Lee performed work that he needs to bill a client for. The value of his services is $5,000. Lee figures that if
> Is it possible for a taxpayer who pays AMT to have a marginal tax rate higher than the stated AMT rate? Explain.
> How do the AMT tax rates compare to the regular income tax rates?
> Describe what the AMT exemption is and who is and isn’t allowed to deduct the exemption. How is it similar to the standard deduction and how is it dissimilar?
> The starting point for computing alternative minimum taxable income is regular taxable income. What are some of the plus adjustments, plus or minus adjustments, and minus adjustments to regular taxable income to compute alternative minimum taxable income
> Brown Thumb Landscaping is a calendar-year, accrual-method taxpayer. In September, Brown Thumb negotiated a $14,000 contract for services it would provide to the city in November of the current year. The contract specifies that Brown Thumb will receive $
> Describe, in general terms, why Congress implemented the AMT.
> In January of year 0, Justin paid $4,800 for an insurance policy that covers his business property for accidents and casualties. Justin is a calendar-year taxpayer who uses the cash method of accounting. What amount of the insurance premium may Justin de
> What is a tax bracket? What is the relationship between filing status and the width of the tax brackets in the tax rate schedule?
> Describe the consequences for failing to file a tax return and for paying tax owed late.
> What is the due date for individual tax returns? What extensions are available?
> What determines if a taxpayer is required to file a tax return? If a taxpayer is not required to file a tax return, does this mean that the taxpayer should not file a tax return?
> Describe how the underpayment penalty is calculated.
> What are the consequences of a taxpayer underpaying his or her tax liability throughout the year? Explain the safe harbor provisions that may apply in this situation.
> Describe the two methods that taxpayers use to prepay their taxes.
> When a U.S. taxpayer pays income taxes to a foreign government, what options does the taxpayer have when determining how to treat the expenditure on her U.S. individual income tax return?
> Is the foreign tax credit a personal credit or a business credit? Explain.
> How are business credits similar to personal credits? How are they dissimilar?
> Clem is married and is a skilled carpenter. Clem’s wife, Wanda, works part-time as a substitute grade school teacher. Determine the amount of Clem’s expenses that are deductible for AGI this year (if any) under the following independent circumstances:
> Under what circumstances can a college student qualify for the earned income credit?
> Why is the earned income credit referred to as a negative income tax?
> Jennie’s grandfather paid her tuition this fall to State University (an eligible educational institution). Jennie is claimed as a dependent by her parents, but she also files her own tax return. Can Jennie claim an education credit for the tuition paid b
> Compare and contrast the lifetime learning credit with the American opportunity credit.
> Diane has a job working three-quarter time. She hired her mother to take care of her two small children so Diane could work. Do Diane’s child care payments to her mother qualify for the child and dependent care credit? Explain.
> Is the child tax credit a refundable or nonrefundable credit? Explain.
> What is the difference between a refundable and nonrefundable tax credit?
> Explain why there is such a large number and variety of tax credits.
> What are the three types of tax credits, and explain why it is important to distinguish between the different types of tax credits.
> Mike wanted to work for a CPA firm but he also wanted to work on his father’s farm in Montana. Because the CPA firm wanted Mike to be happy, they offered to let him work for them as an independent contractor during the fall and winter and let him return
> Jim files single and has three dependent children. Calculate his deductible total personal and dependency exemptions under the following independent conditions: a. Jim has AGI of $150,000. b. Jim has AGI of $303,000. c. Jim has AGI of $450,000.
> How do the tax consequences of being an employee differ from those of being self-employed?
> What are the primary factors to consider when deciding whether a worker should be considered an employee or a self-employed taxpayer for tax purposes?
> When a taxpayer works as an employee and as a self-employed independent contractor during the year, how does the taxpayer determine her employment and self-employment taxes payable?
> 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 2016, she completed her freshman year and one semester as a sophomore. Katie’s expenses
> In 2016, 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 joi
> Reba Dixon is a fifth grade school teacher who earned a salary of $38,000 in 2016. 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
> Matt and Meg Comer are married. They do not have any children. Matt works as a history professor at a local university and earns a salary of $64,000. Meg works part-time at the same university. She earns $21,000 a year. The couple does not itemize deduct
> Sue has 5,000 shares of Sony stock that has an adjusted basis of $27,500. She sold the 5,000 shares of stock for cash of $10,000, and she also received a piece of land as part of the proceeds. The land was valued at $20,000 and had an adjusted basis to t
> Karyn loaned $20,000 to her co-worker to begin a new business several years ago. If her co-worker declares bankruptcy on June 22of the current year, is Karyn allowed to deduct the bad debt loss this year? If she can deduct the loss, what is the character
> In 2016, Jeff, who is single, is entitled to the following deductions before phase-outs: State income taxes………………………………….$7,850 Real estate taxes……………………………………….1,900 Home mortgage interest……………………………8,200 Charitable contributions……………………………..1,700 a
> Dahlia is in the 28 percent tax rate bracket and has purchased the following shares of Microsoft common stock over the years: If Dahlia sells 800 shares of Microsoft for $40,000 on December 20, 2016, what is her capital gain or loss in each of the follow
> John bought 1,000 shares of Intel stock on October 18, 2013 for $30 per share plus a $750 commission he paid to his broker. On December 12, 2016, he sells the shares for $42.50 per share. He also incurs a $1,000 fee for this transaction. a. What is Jo
> Five years ago, Kate purchased a dividend-paying stock for $10,000. For all five years, the stock paid an annual dividend of 4 percent before tax and Kate’s marginal tax rate was 25 percent. Every year Kate reinvested her after-tax dividends in the same
> Hayley recently invested $50,000 in a public utility stock paying a 3 percent annual dividend. If Hayley reinvests the annual dividend she receives net of any taxes owed on the dividend, how much will her investment be worth in four years if the dividend
> At the beginning of his current tax year, Eric bought a corporate bond with a maturity value of $50,000 from the secondary market for $45,000. The bond has a stated annual interest rate of 5 percent payable on June 30 and December 31, and it matures in f
> At the beginning of his current tax year David invests $12,000 in original issue U.S. Treasury bonds with a $10,000 face value that mature in exactly 10 years. David receives $700 in interest ($350 every six months) from the Treasury bonds during the cur
> Dana intends to invest $30,000 in either a Treasury bond or a corporate bond. The Treasury bond yields 5 percent before tax and the corporate bond yields 6 percent before tax. Assuming Dana’s federal marginal rate is 25 percent and her marginal state rat
> Matt recently deposited $20,000 in a savings account paying a guaranteed interest rate of 4 percent for the next 10 years. If Matt expects his marginal tax rate to be 20 percent for the next 10 years, how much interest will he earn after-tax for the firs
> Anwar owns a rental home and is involved in maintaining it and approving renters. During the year he has a net loss of $8,000 from renting the home. His other sources of income during the year were a salary of $111,000 and $34,000 of long-term capital ga
> Molly Grey (single) acquired a 30 percent limited partnership interest in Beau Geste LLP several years ago for $48,000. At the beginning of year 1, Molly has tax basis and an at-risk amount of $20,000. In year 1, Beau Geste incurs a loss of $180,000 and
> Tammy teaches elementary school history for the Metro School District. In 2016 she has incurred the following expenses associated with her job: Noncredit correspondence course on history ………………………………$ 900 Teaching cases for classroom use……………………………………
> Rubio recently invested $20,000 (tax basis) in purchasing a limited partnership interest. His at-risk amount is $15,000. In addition, Rubio’s share of the limited partnership loss for the year is $22,000, his share of income from a different limited part
> Larry recently invested $20,000 (tax basis) in purchasing a limited partnership interest. His at-risk amount is also $20,000. In addition, Larry’s share of the limited partnership loss for the year is $2,000, his share of income from a different limited
> George recently received a great stock tip from his friend, Mason. George didn’t have any cash on hand to invest, so he decided to take out a $20,000 loan to facilitate the stock acquisition. The loan terms are 8 percent interest with interest-only payme
> On January 1 of year 1, Nick and Rachel Sutton purchased a parcel of undeveloped land as an investment. The purchase price of the land was $150,000. They paid for the property by making a down payment of $50,000 and borrowing $100,000 from the bank at an
> Mickey and Jenny Porter file a joint tax return, and they itemize deductions. The Porters incur $2,000 in employment-related miscellaneous itemized deductions. They also incur $3,000 of investment interest expense during the year. The Porters’ income for
> Rich and Shauna Nielson file a joint tax return, and they itemize deductions. Assume their marginal tax rate on ordinary income is 25 percent. The Nielsons incur $2,000 in miscellaneous itemized deductions, excluding investment expenses. They also incur
> Becky recently discovered some high-tech cooking technology that has advantages over microwave and traditional ovens. She received a patent on the technology that gives her exclusive rights to the technology for 20 years. Becky would prefer to retain the
> Shaun bought 300 shares of Dental Equipment, Inc. several years ago for $10,000. Currently the stock is worth $8,000. Shaun’s marginal tax rate this year is 25 percent, and he has no other capital gains or losses. Shaun expects to have a marginal rate of
> Arden purchased 300 shares of AMC common stock several years ago for $1,500. On April 30, Arden sold the shares of AMC common for $500 and then purchased 250 shares of AMC preferred stock two days later for $700. The AMC preferred stock is not convertibl
> Christina, who is single, purchased 100 shares of Apple Inc. stock several years ago for $3,500. During her year-end tax planning, she decided to sell 50 shares of Apple for $1,500 on December 30. However, two weeks later, Apple introduced its latest iPh
> Stephanie is a 12-year-old who often assists neighbors on weekends by babysitting their children. Calculate the 2016 standard deduction Stephanie will claim under the following independent circumstances (assume that Stephanie’s parents will claim her as
> Three years ago, Adrian purchased 100 shares of stock in X Corp. for $10,000. On December 30 of year 4, Adrian sells the 100 shares for $6,000. a. Assuming Adrian has no other capital gains or losses, how much of the loss is Adrian able to deduct on he
> For 2016, Sherri has a short-term loss of $2,500 and a long-term loss of $4,750. a. How much loss can Sherri deduct in 2016? b. How much loss will Sherri carryover to 2017, and what is the character of the loss carryover?
> In 2016, Tom and Amanda Jackson (married filing jointly) have $200,000 of taxable income before considering the following events: a. On May 12, 2016, they sold a painting (art) for $110,000 that was inherited from Grandma on July 23, 2014. The fair marke
> During the current year, Ron and Anne sold the following assets: a. Given that Ron and Anne have taxable income of only $20,000 (all ordinary) before considering the tax effect of their asset sales, what is their gross tax liability for 2016 assuming the
> George bought the following amounts of Stock A over the years: On October 12, 2016, he sold 1,200 of his shares of Stock A for $38 per share. a. How much gain/loss will George have to recognize if he uses the FIFO method of accounting for the shares sold
> Grayson is in the 25 percent tax rate bracket and has the sold the following stocks in 2016: a. What is Grayson’s net short-term capital gain or loss from these transactions? b. What is Grayson’s net long-term gain or
> Why might investors purchase interest-paying securities rather than dividend- paying stocks?
> When should investors consider making an election to amortize market discount on a bond into income annually?
> In what ways are U.S. savings bonds treated more favorably for tax purposes than corporate bonds?
> Why would taxpayers generally prefer the tax treatment of market discount to the treatment of original issue discount on corporate bonds?
> Zack is employed as a full-time airport security guard. This year Zack’s employer transferred him from Dallas to Houston. At year-end, Zack discovered a number of unreimbursed expenses related to his employment in Dallas prior to his move to Houston.
> How are Treasury notes and Treasury bonds treated for federal and state income tax purposes?
> Compare and contrast the tax treatment of interest from a Treasury bond and qualified dividends from corporate stock.
> What is the underlying policy rationale for the current tax rules applicable to interest income and dividend income?
> All else being equal, would a taxpayer with passive losses rather have wage income or passive income?
> What tests are applied to determine if losses should be characterized as passive?
> What types of losses may potentially be characterized as passive losses?
> What limitations are placed on the deductibility of investment interest expense? What happens to investment interest expense that is not deductible because of the limitations?
> How is the amount of net investment income determined for a taxpayer with investment expenses and other noninvestment miscellaneous itemized deductions?
> Are dividends and capital gains considered to be investment income for purposes of determining the amount of a taxpayer’s deductible investment interest expense for the year?
> Clark owns stock in BCS Corporation that he purchased in January of the current year. The stock has appreciated significantly during the year. It is now December of the current year, and Clark is deciding whether or not he should sell the stock. What tax
> Simon lost $5,000 gambling this year on a trip to Las Vegas. In addition, he paid $2,000 to his broker for managing his $200,000 portfolio, and $1,500 to his accountant for preparing his tax return. In addition, Simon incurred $2,500 in transportation
> Describe three basic tax planning strategies available to taxpayers investing in capital assets.
> Nick does not use his car for business purposes. If he sells his car for less than he paid for it, does he get to deduct the loss for tax purposes? Why or why not?
