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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
Category: Tax
Satisfied Customers: 585
Experience:  10 years experience
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if a dependent child earned 100k income from a sole proprietorship,

Customer Question

if a dependent child earned 100k income from a sole proprietorship, should i file my taxes as single or household?
Submitted: 8 years ago.
Category: Tax
Expert:  Merlo replied 8 years ago.
Hello nuka,

Could you please clarify what you mean by dependent child?

Are you saying that you can be claimed as a dependent on someone else's tax return?

If that is the case, please explain how it is that you are being claimed by someone else when you have this much income?

Customer: replied 8 years ago.
Both the motheer and the child live in Arizona.

Child:12 years old, opend, opened on-line business at age 8, selling clothing for pets. the company operate under Sole proprietorship.

Mother's cash inflows:

Salary: $150,000

Annual bonus: $75,000

Interest an dividends: $25,000

Payment from the father: $48,000(per year) =50% of the expenses of being a signle parent.

Mother's cash outflows:

IRA contribution: $5,000

mortgage principal and interest: $18,000

Cash charitable contribution to church: $20,000

State taxes paid this year for last year's tax return: $5,000

Current year state withholding: $15,000

Current year federal withholding: $45,000

Payroll taxes: $3,500

Property Taxes: $3,000

State sales taxes: $2,500

Medical expenses: $5,000

Financial and tax planning fees: $6,000

Gifts to family and friends: $24,000

Entertainment and travel: $48,000

Saving to 529 plan: $24,000

Roth 401K contribution: $12,000 (the mother is fully vested)

Groceries: $10,000

Utilities: $7,500

House and yard upkeep: $24,000

Child's school tuition: $15,000 (the mother anticipate the tuition will increase 5% a year until the child graduates. The child wants to attend a 4-year college, currently costs $18,000 a year with 7% annual inflation adjustment. The mother expects the child to finish his undergraduate degree in 4 years and start 2-year master program (costs $35,000 per year, with projected a 10% annual inflation adjustment on the cost of this Master program.)

Miscellaneous: $5,500

Mother's Assests:

Checking account: $10,000

CD: $110,000

Total: $120,000

Invested assets:

401K: $450,000 (under investigation by the office of comtroller currenct and should be shut down)

ABC corp stock: $52,000 (received from grandfather who passed away: the value of the stock: $50,000 on the grandfather's date of death). Currently, the stock is worth $55,000. The mother plan to donate the stock to the church this year.

Global mutual fund: $250,000 (The global mutual fund paid $500 in Greman taxes on the mother's behalf this year.) 5000 shares purchase for $55 a share three years ago. The mother wants to sell 1000 shares of the global mutual fund and have her IRA purchse 1000 shares of the global mutual fund.

IRA: $100,000 (the child is the primary beneficiary, and the mother's estate list the child as the contingent beneficiary)

Total: $852,000

Personal-Use Assets

Home: $400,000 (including $100,000). Asking price. If mother decides to sell and move to Australia, she would have to pay 5% commistion to the realtor.

Auto and personal property: $150,000

Lake property (land received from the grandfather): $ 60,000 (the value on the granfather's date of death; currently worth-$65,000)

Beach house: $1,250,000 ($800,000 for the land. The mother lost money on the rental property every year for at least 5 years. ($32,000 loss from previous years. Current year loss of $5,000. Mr. Smith wants to exchange the mother's beach house to piece of land in Montana valued at $1,000,000 plus $270,000 cash. If mother decides to exchange, she would use the Montana land for the investement purposes. In addition, she would give Mr. Smith $50,000 of beach equipment. Mr. Smith would aslo give the mother $30,000 of property.
Another party offers to pay $1,250,000 for the beach house.

Total: $1,860,000

TOTAL ASSETS: $2,832,000


Home mortgage: $150,000 (the mother refinanced 6 years ago to combine togther the first mortgage with a $100,000 home equity loan. The loan is for 30 years with a 6.25% fixed interest rate.

NET WORTH: $2,680,000

Additional information about the mother:

She established a trust for th ebenefit of her grandmother. She can modifiy the trust at her chosing. The trust earns $15,000 of interest income each year is invested soley in bonds. The trustee made a $10,00 distribution earlier this year to the grandmother.

Investment information: 401K
Large balanced funds: 100% allocation
FMV: $450,000
5-year return: 5.00%
5-year Standard deviation: 17.00%

IRA holding:
MNO technology fund: 100%
FMV: $100,000
Beta: 2.00
5-year return: -10.00%
5-year Standard deviation: 25.50%

Insurance information:
Life insurance:
The mother: face value: $1,000,000 (30-year term)
Cash value: $0
Annual premium: $1,500
Bought 5 years ago.

Mother's Disability insurance:
$10,000 a month
to age 65
Inflation rider: 3%
Premium: $5,000 a year (100% of permium-paid by employer)

Mother's Medical insurance:
HMO: $15 per office visit
Coinsurance 20%
Deductible: $1,000
Permium: paid by the employer.

Homewoners insurance:

HO-5 Arizona home

Dwelling Amount: $300,000
Contents covrage: $150,000 replacement cost
Liability: $1,000,000
Premuim: $1,200/year

beach house
Dwelling Amount: $400,000
Contents covrage: $200,000 replacement cost
Liability: $1,000,000
Premuim: $5,500/year

Auto insurance:

Type: Personal auto policy
Liability limits: 100/300/100
Collision: $500 broad from deductible
Comprahensive (other-than Collision): $250 deductible
Premium: $800/year

The plans:
1. donate ABC stock to her church this year
2. develop a plan to better protect her assests from estate taxes and pass them to the child.
3. The child wants to develop a sucession plan for the business in the event of his death or disability.
4. The mother wants to expand her insurnace coverage to minimize her risk exposure.
5. The mother wants to change her assets allocation to better match her risk-tolerance level.
6. The mother wants to pay 25% of the child undergraduate tution.


a. What's the mother adjusted gross in come?
b. If the mother gives the ACB stock to the church now, what's the total amount of her charitable contribution this year?
c. What's the income tax treatment of the trust the mother create for her grandmother? (any taxes paid on the $10,000 distribution or how much tax paid for the $15,000 of interest income?)
d. What's the amount of exepmtion the trustee can claim on the income tax return for the trust mother created for her grandmother?
e. If mother sells the lake property today, what's the gain if she incurs $1,000 in transaction costs?
f. If the moher enters the transaction with Mr. Smith,
-what's the amount of her recognized gain on the sale of the beach house?
- what's the amount of her gain on the sale of the beach house?
-what's Mr. Smith basis in the beach house?
h. if the mother accepts the offer on her home, what's her taxable gain on the transaction?
i. the mother is concerned about paying AMT this year, should she:
-prepay $3,000 of the child's tution for next year?
or contribute $3000 more to the Roth 401K plan
or pay $3000 more this month with her mortgage payment
or prepay $3000 of next year's anticipated contributions to the church?
j.Which of the transaction will reduce the mother tax liability the most next year?
-contributing $10,000 from her checking account to a 529 plan for the child?
-contributing $2,000 from her checking accoutn to an ESA for the child?
k. If the mother won't sell the beach house, what's net amount of cash she deduct this year related to beach house rental activities?
l. If the mother decides to sell the beach house to the second interested party at the end of this year, what's net loss amount can she deduct this year related to the beach house rental activites?
m. What is the amount the mother will have to report as a loss if she implements her idea about ehe global mutual fund when the stock is trading at $51 a share?
n. How much can the ex-husband deduct on his idivudual income tax return this year to his payment ro the ex-wife?

Expert:  Merlo replied 8 years ago.
Hello nuka,

I am sorry, but your post now goes way beyond the scope of your original question, and I do not have the time to devote to answering all of these questions.

I will put your questions back on the open board and see if there is another tax expert who can help you.

Customer: replied 8 years ago.
Ok, I've raised the amount from $15 to $45, I still need help from someone. thanks
Customer: replied 8 years ago.
I would be very thankful if you could help me to solve this case. I will pay the $45. Please let me know if you can help me. Thank you.
Customer: replied 8 years ago.
I need the answers for all the questions. Please let me know how much. The questions are listed in the bottom. Thank you.
Expert:  Merlo replied 8 years ago.
Nuka, I am sorry, but I just do not have anywhere close to the time it would take to answer these questions.

Your question is currently on the open board and there are currently 12 other tax experts here in the forum who can assist you if they feel they have the time.