Question

Note: This problem is for the 2018 tax year. Alice J. and Bruce M. Byrd are...

Note: This problem is for the 2018 tax year.

Alice J. and Bruce M. Byrd are married taxpayers who file a joint return. Their Social Security numbers are 123-45-6789 and 111-11-1112, respectively. Alice's birthday is September 21, 1971, and Bruce's is June 27, 1970. They live at 473 Revere Avenue, Lowell, MA 01850. Alice is the office manager for Lowell Dental Clinic, 433 Broad Street, Lowell, MA 01850 (employer identification number 98-7654321). Bruce is the manager of a Super Burgers fast-food outlet owned and operated by Plymouth Corporation, 1247 Central Avenue, Hauppauge, NY 11788 (employer identification number 11-1111111).

The following information is shown on their Wage and Tax Statements (Form W-2) for 2018.

Line Description Alice Bruce
1 Wages, tips, other compensation $58,000 $62,100
2 Federal income tax withheld 4,500 5,300
3 Social Security wages 58,000 62,100
4 Social Security tax withheld 3,596 3,850
5 Medicare wages and tips 58,000 62,100
6 Medicare tax withheld 841 900
15 State Massachusetts Massachusetts
16 State wages, tips, etc. 58,000 62,100
17 State income tax withheld 2,950 3,100

The Byrds provide over half of the support of their two children, Cynthia (born January 25, 1994, Social Security number 123-45-6788) and John (born February 7, 1998, Social Security number 123-45-6786). Both children are full-time students and live with the Byrds except when they are away at college. Cynthia earned $6,200 from a summer internship in 2018, and John earned $3,800 from a part-time job.

During 2018, the Byrds provided 60% of the total support of Bruce's widower father, Sam Byrd (born March 6, 1942, Social Security number 123-45-6787). Sam lived alone and covered the rest of his support with his Social Security benefits. Sam died in November, and Bruce, the beneficiary of a policy on Sam's life, received life insurance proceeds of $1,600,000 on December 28.

The Byrds had the following expenses relating to their personal residence during 2018:

Property taxes $5,000
Qualified interest on home mortgage (acquisition indebtedness) 8,700
Repairs to roof 5,750
Utilities 4,100
Fire and theft insurance 1,900

The Byrds had the following medical expenses for 2018:

Medical insurance premiums $4,500
Doctor bill for Sam incurred in 2017 and not paid until 2018 7,600
Operation for Sam 8,500
Prescription medicines for Sam 900
Hospital expenses for Sam 3,500
Reimbursement from insurance company, received in 2018 3,600

The medical expenses for Sam represent most of the 60% that Bruce contributed toward his father's support.

Other relevant information follows:

  • When they filed their 2017 state return in 2018, the Byrds paid additional state income tax of $900.
  • During 2018, Alice and Bruce attended a dinner dance sponsored by the Lowell Police Disability Association (a qualified charitable organization). The Byrds paid $300 for the tickets. The cost of comparable entertainment would normally be $50.
  • The Byrds contributed $5,000 to Lowell Presbyterian Church and gave used clothing (cost of $1,200 and fair market value of $350) to the Salvation Army. All donations are supported by receipts, and the clothing is in very good condition.
  • Via a crowdfunding site (gofundme.com), Alice and Bruce made a gift to a needy family who lost their home in a fire ($400). In addition, they made several cash gifts to homeless individuals downtown (estimated to be $65).
  • In 2018, the Byrds received interest income of $2,750, which was reported on a Form 1099–INT from Second National Bank, 125 Oak Street, Lowell, MA 01850 (Employer Identification Number 98-7654322).
  • The home mortgage interest was reported on Form 1098 by Lowell Commercial Bank, P.O. Box 1000, Lowell, MA 01850 (Employer Identification Number 98-7654323). The mortgage (outstanding balance of $425,000 as of January 1, 2018) was taken out by the Byrds on May 1, 2014.
  • Alice's employer requires that all employees wear uniforms to work. During 2018, Alice spent $850 on new uniforms and $566 on laundry charges.
  • Bruce paid $400 for an annual subscription to the Journal of Franchise Management and $741 for annual membership dues to his professional association.
  • Neither Alice's nor Bruce's employer reimburses for employee expenses.
  • The Byrds do not keep the receipts for the sales taxes they paid and had no major purchases subject to sales tax.
  • All members of the Byrd family had health insurance coverage for all of 2018.
  • This year the Byrds gave each of their children $2,000, which was then deposited into their Roth IRAs.
  • Alice and Bruce paid no estimated Federal income tax. Neither Alice nor Bruce wants to designate $3 to the Presidential Election Campaign Fund.

Required:

Compute the Alice J. and Bruce M. Byrd's Federal income tax for 2018. by providing the following information that would be reported on Form 1040, Schedules A and B. If they have overpaid, they want the amount to be refunded to them.

  • Make realistic assumptions about any missing data.
  • If an amount box does not require an entry or the answer is zero, enter "0".
  • Enter all amounts as positive numbers.
  • It may be necessary to consider the information provided on other schedules before completing Form 1040 information.
  • When computing the tax liability, do not round your immediate calculations. If required, round your final answers to the nearest dollar.

Provide the following that would be reported on the Byrd's Form 1040:

2018 Tax Rate Schedules
Married filing jointly or Qualifying widow(er)—Schedule Y-1
If taxable income is:
Over—
But not
over—
The tax is: of the amount
over—
$0 $19,050 . . . . . . 10% $0
19,050 77,400 $1,905.00 + 12% 19,050
77,400 165,000 8,907.00 + 22% 77,400
165,000 315,000 28,179.00 + 24% 165,000
315,000 400,000 64,179.00 + 32% 315,000
400,000 600,000 91,379.00 + 35% 400,000
600,000 . . . . . . 161,379.00 + 37% 600,000

Alice and Bruce are planning some significant changes for 2019. They have provided you with the following information and asked you to project their taxable income and tax liability for 2019. Assume that the Byrds will itemize their deductions next year.

  • The Byrds will invest the $1,600,000 of life insurance proceeds in short-term certificates of deposit (CDs) and use the interest for living expenses during 2019.
  • They expect to earn interest of $32,000 on the CDs.
  • Bruce has been promoted to regional manager, and his salary for 2019 will be $88,000.
  • He estimates that state income tax withheld will increase by $4,000 and the Social Security tax withheld will be $5,456.
  • Alice, who has been diagnosed with a serious illness, will take a leave of absence from work during 2019. The estimated cost for her medical treatment is $15,400, of which $6,400 will be reimbursed by their insurance company in 2019. Their medical insurance premiums will increase to $9,769.
  • Property taxes on their residence are expected to increase to $5,100.
  • The Byrds' home mortgage interest expense and charitable contributions are expected to be unchanged from 2018.
  • John will graduate from college in December 2018 and will take a job in New York City in January 2019. His starting salary will be $46,000.

In 2019, the deduction for taxes on Schedule A are limited to $10,000 and the medical expenses are reduced by 10% of AGI.

Assume that all of the information reported in 2018 will be the same in 2019 unless other information has been presented above. Use the 2018 Tax Rate Schedules.

Provide the following that would be reported on the Byrds' Tax Planning For 2018. If required, round any computations to the nearest dollar.

1. Calculate the Byrds' projected itemized deductions for 2018:
$

2. Calculate the Byrds' taxable income:
$

3. Calculate the Byrds' related tax liability for 2018:
$

Homework Answers

Answer #1

1) Form 1040 information

1. The taxpayer's status : - married filling jointly

2. The taxable gross income the $122,850

3. Total deductions will be $0 for AGI

4. Adjusted gross income will be $122,850 ($122,850 - $0 = $122,850)

5. $6,400

Total medical expenses = $25,000 of which only 40% is for Sam = $25,000 × 40% = $10,000 out of which 3,600 is reimbursed so the deduction will be of $6,400 ( $10,000 - $3,600 = $6,400)

6.Total taxable income = $122,850 - $6,400 = $116, 450

7. The tax liability for the year is $17,580.

8. Other taxes due is $0

9. Total tax credit available = $24,000 for married filing jointly 10. Total tax withholding = $6,050 ($2,950 + $3,100)

11. The amount overpaid or refund is $0

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