Tax Return Problem 5 -Individual Tax Instructions: Please…
Tax Return Problem 5 -Individual...
Tax Return Problem 5 -Individual Tax
Please complete the 2016 federal income tax return for Joseph and Diana Cohen. You may complete the tax return using Tax Act or paper forms. The link to download Tax Act and the tax forms are located in the Student Resources. The return is due Monday, December 4, 2017 at 6:00 pm.
Ignore the requirement to attach the form(s) W-2 to the front page of the Form 1040. If required information is missing, use reasonable assumptions to fill in the gaps. You are not required to complete the state income tax forms or calculate the AMT.
Please sign the return with your name, but do not include your social security number. Email the entire return to me by the due date.
Form 1040 (optional draft review – 11/20/17)
Schedule A for tax form 1040 (optional draft review – 11/20/17)
Schedule B for tax form 1040 (optional draft review – 10/30/17)
Schedule C for tax form 1040 (optional draft review – 11/6/17)
Schedule D for tax form 1040 (optional draft review – 10/30/17)
Form 8949 (optional draft review – 10/30/17)
Schedule E for tax form 1040 (optional draft review – 11/13/17)
Schedule SE for tax form 1040 (optional draft review – 11/6/17)
Joseph and Diana Cohen live in Pleasantville, New Jersey. Joseph is the Vice-President of Sales at a small start-up company (date of birth 01/01/1965). Diana is a former advertising executive who currently consults with former clients (date of birth 01/01/1966). The Cohens have three children Rebecca (age 18), Alan (age 15), and David (age 12). In January, Rebecca left home to attend a liberal arts college. All three children qualify as Joseph and Diana’s federal income tax dependents. The Cohens plan to file a joint tax return. The Cohens provided the following information:
• Joseph’s social security number is###-##-####
• Diana’s social security number is###-##-####
• Rebecca’s social security number is###-##-####
• Alan’s social security number is###-##-####
• David’s social security number is###-##-####
• The Cohen’s mailing address is 85 North Maple Drive, Pleasantville, New Jersey 08233
Hint – Use the information above to complete lines 1-6 on page 1 of tax form 1040.
Joseph Cohen reported the following the following information relating to his employment during the year:
Employer Gross Wages Federal Income Tax Withholding State Income Tax Withholding
Alternative Energy $118,325 $29,230 $15,000
The above amounts do not reflect any income items described below. Joseph’s employer withheld all payroll taxes it was required to withhold. The entire Cohen family was covered by minimum essential health insurance during each month in 2016. The insurance was provided by Joseph’s employer, Alternative Energy.
Hint – See Chapter 5 on how to report the salary (Income Summary at the end of the chapter). See Chapter 8 on how to report the federal income tax withholding (Income Summary at the end of the chapter). The state income tax withholding is reported on Schedule A. See Chapter 6 on how to report the state income tax withholding.
Diana Cohen received the following revenue during the year (she uses the cash method of accounting).
Consulting revenue reported to her on a Form 1099-MISC, Box 7
High-end Retail $32,000
Jensen’s Health Products $8,500
Strategic Solutions $3,750
During the year, Diana paid the following business expenses:
Diana’s business activity does not require the filing of Form(s) 1099 to report payments she made during the tax year.
Hint – See Chapter 9 Exhibit 9-7 for an example of Schedule C. Remember to calculate the self-employment taxes on Schedule SE. The self-employment taxes will require reporting the deductible portion as a for AGI deduction on page 1 of the 1040, and the tax as an “Other Taxes” on page 2 of the 1040.
The Cohens also received the following during the year:
Interest income from First Bank of New Jersey $320
Interest income from Patterson, New Jersey School District $200
Interest income from U.S. Treasury Bond $350
Interest income from General Mills corporate bond $400
Qualified dividend income from Rio Tinto $1,500
Qualified dividend income from Microsoft $750
Dividend income (not qualified) from China Fund $2,000
The Cohens did not own, control or manage any foreign bank accounts nor were they a grantor or beneficiary of a foreign trust during the tax year.
Hint – See Chapter 7 for interest and dividend income and use tax form Schedule B to report the interest and dividend income. Follow the instructions on lines 4 and 6 to report the income on tax form 1040.
Remember to report any tax-exempt interest on line 8b. All dividend income is reported on line 9a, but only the qualified dividend income is reported on line 9b.
Remember qualified dividends are taxed at the preferential tax rates (see page 7-6). To calculate the tax liability, use the following steps.
1. Taxable Income less qualified dividends = taxable income at regular tax rates
2. Calculate the tax on the amount in step 1 at regular tax rates (tax rate schedules)
3. Calcuate the tax on the qualified dividends
4. Add the tax amounts from steps 2 and 3 for the total tax liability
The Cohens had the following activity in their brokerage account during the year (all transactions were reported on a Form 1099-B. Basis information on each stock sale was reported to the IRS):
Sold 2,000 shares of Microsoft 7/1/16 $22,500
Sold 75 shares of Apple, Inc. (Hint – not all shares sold) 4/15/16 $28,750
Relevant tax basis/holding period information related to sales of securities in the current year:
Purchased 2,000 shares of Microsoft on 5/1/16 for $21,000
Purchased 200 shares of Apple, Inc. on 3/8/2013 for $90,000
The Cohens have a $43,000 long-term capital loss carryover from their prior tax year.
Hint – See Chapter 7 and use tax forms Schedule D and 8949 to report the stock sales. Start with form 8949 and follow the instructions on how and where to report on Schedule D. Then Schedule D will provide instructions on how and where to report on tax form 1040.
To start form 8949, first separate the short term and long term stock sales. Next fill in form 8949 by reporting the short-term sales in Part I and the long-term sales in Part II. One of the stock sales contains both a short term sale and long term sale. Report the short-term stock shares in Part I and the long-term stock sales in Part II.
Next complete Schedule D. You need to complete lines 1b, 7, 8b, 14, 15, 16 and 21. You will report the carryover loss on line 14.
Remember to consider the capital loss limitations. Examples of tax form 8949 and Schedule D are shown in Exhibits 7-5 and 7-6.
Diana is a 10% owner in an advertising agency named Bright Ideas (“BI”) (EIN 20-1234567). BI is a Subchapter S corporation. The company reported ordinary business income for the year of $150,000. Diana received a K-1 from BI reporting her allocation of this business income. Sarah acquired the stock several years ago. Her basis in the stock before considering her 2016 income allocation was $92,000. Sarah is a passive owner with respect to this entity.
Hint – See Chapter 5 Exhibits 5-4 and 5-7. Report the S corporation income on Schedule E Part II on lines 28, 30, 32 and 41. The amount on line 41 is the amount that is reported on tax form 1040.
In May, Joseph was injured in a home accident. The injury prevented Joseph from working for about a month. During this time, Joseph received $15,000 in disability payments attributable to a disability insurance policy. The disability policy premiums were paid on Joseph’s behalf as a nontaxable fringe benefit.
Hint – See Chapter 5 page 5-30 Disability Insurance. If there is any taxable income as a result of the disability payments, it will be reported on line 7 of tax form 1040.
Hint – The income reported on line 7 of tax form 1040 could consist of 2 different amounts.
The Cohens paid the following expenses during the year:
Dentist (unreimbursed by insurance) $1,500
Doctors (unreimbursed by insurance) $ 2,425
Prescriptions (unreimbursed by insurance) $ 675
Real property taxes on residence $7,525
Vehicle property tax based upon value $1,250
Mortgage interest on principal residence $12,550
Margin interest paid to broker $600
Contribution to United Way $2,000
Contribution to American Cancer Society $5,000
Contribution to neighborhood drive to oppose development project $500
Contribution to a local church $12,000
Fee paid to Mouser, Johnson, and Hintze CPAs for tax preparation $450
The Cohens also donated clothing, electronics, furniture and other household goods to the Salvation Army of Pleasantville, New Jersey on April 15, 2016. Estimated thrift value of the goods donated was $275.
Hint – See Chapter 6. Exhibit 6-10 shows how to complete Schedule A. The medical expenses may not be deductible. Please read the instructions on line 3 of the Schedule A
Note that not all of the contributions may be deductible.
The amount of the itemized deductions are reported on line 40 on tax form 1040. You do not need to calculate any possible limitation – just enter the total amount of the itemized deductions on tax form 1040.
The Cohens would like to contribute to the Presidential Election Campaign. The Cohens would also like to receive a refund (if any) of tax they may have overpaid for the year. Their preferred method of receiving the refund is by check.
Hint – Report the campaign contribution election on page 1 of form 1040 in the upper right hand corner. To receive the refund by check, do not complete the bank routing information. You do not need to complete form 8888.