Question

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.

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