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Tax Return Problem –?Decision Making –?Communications Daniel B. Butler and Freida C. Butler, husband and wife,...

Tax Return Problem –?Decision Making –?Communications Daniel B. Butler and Freida C. Butler, husband and wife, file a joint return. The Butlers live at 625 Oak Street in Corbin, KY 40701. Dan's Social Security number is 111-11-1112, and Freida's is 123-45-6789. Dan was born on January 15, 1965, and Freida was born on August 20, 1966.

During 2016, Dan and Freida furnished over half of the total support of each of the following individuals, all of whom still live at home:

Gina, their daughter, age 22, a full-time student, who married on December 21, 2016, has no income of her own and for 2016 did not file a joint return with her husband, Casey, who earned $10,600 during 2016. Gina's Social Security number is 123-45-6788.

Sam, their son, age 20, who had gross income of $6,300 in 2016, dropped out of college in October 2016. He had graduated from high school in May 2016. Sam's Social Security number is 123-45-6787.

Ben, their oldest son, age 26, is a full-time graduate student with gross income of $5,200. Ben's Social Security number is 123-45-6786.

Dan was employed as a manager by WJJJ, Inc. (employer identification number 11-1111111, 604 Franklin Street, Corbin, KY 40702), and Freida was employed as a salesperson for Corbin Realty, Inc. (employer identification number 98-7654321, 899 Central Street, Corbin, Ky 40701). Selected information from the W–2 Forms provided by the employers is presented below. Dan and Freida use the cash method.

Line Description Dan Freida
1   Wages, tips, other compensation $74,000 $86,000
2   Federal income tax withheld 11,000 12,400
17 State income tax withheld    2,960       3,440   

Freida sold a house on December 30, 2016, and will be paid a commission of $3,100 (not included in the $86,000 reported on the W–2) on the January 10, 2017 closing date.

Other income (as reported on 1099 Forms) for 2016 consisted of the following:

Dividends on CSX stock (qualified) $4,200
Interest on savings at Second Bank 1,600
Interest on City of Corbin bonds 900
Interest on First Bank CD 382

The $382 from First Bank was original issue discount. Dan and Freida collected $16,000 on the First Bank CD that matured on September 30, 2016. The CD was purchased on October 1, 2014, for $14,995, and the yield to maturity was 3.3%.

Dan received a Schedule K–1 from the Falcon Partnership, which showed his distributive share of income as $7,000. In addition to the above information, Dan and Freida's itemized deductions included the following:

Paid on 2016 Kentucky income tax $    700
Personal property tax paid 600
Real estate taxes paid 1,800
Interest on home mortgage (Corbin S&L) 4,900
Cash contributions to the Boy Scouts 800

Sales tax from the sales tax table is $1,860. Dan and Freida made Federal estimated tax payments of $8,000. All members of the family had health insurance coverage for all of 2016. Dan and Freida do not wish to contribute to the Presidential Election Campaign. The Kentucky income tax rate is 4%.

Part 1—Tax Computation

Compute Dan and Freida's 2016 Federal income tax payable (or refund due). If you use tax forms for your computations, you will need Form 1040 and Schedules A, B, and E.

Homework Answers

Answer #1

Part 1—Tax Computation:

Calculation of Taxable Income
Wages and Salaries 160000
Taxable Interest 1982 =1900+382
Tax Exempt Interest 900 Interest on Municipal bond is tax exempt
Ordinary Dividends 4200
Qualified Dividends 4200
Partnership 7000
Adjusted Gross Income 173182 $3,100 commission is not part of gross income Schedule A:
Itemised Deduction 15200 Schedule A State Income Tax 7100
Exemptions 14800 Exemptions Real estate Tax 1800
Personal Properety Tax 600
Taxable Income 143182 Mortgage Interest 4900
Tax 27626 Taxable Income of 69000 to 139350 = 9500+25% of excess of 69000 =
9500+(138982-60000) * 25% = 26996
26996 + 630 = 27626
Gift by cash or check 800
Total Tax 27626 Total Itemised Deduction 15200
Federal Income Tax witheld 23400
Estimated Tax Payments 8000 Exemptions Mr A and B are entitled for their exemptionis + their son and daughter's exemption 14800(3700*2)
Total payments 31400
Amount Overpaid 3774 =31400 - 27626
Amount to be Refunded or refund due 3774
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