A tax homework with multiple parts to it.

This assignment has many parts to it like solving for AGI, gains and losses, itemized deductions, and taxable income. For problem 1 you have to use $109,00 as the salary. For problem 2 you have to use 314,250 for the total revenue. both those questions have a blank spot to fill in with these numbers

ACCT 306
Fall 2023
Imagine you are a tax return preparer. Your clients are Sally and Jim. Sally and Jim are married
taxpayers who have no reason to file separately. Sally is 45 and works as an accountant for a CPA
firm. Jim is 48 and is self-employed. He has a bakery, which he operates as a sole proprietorship. Sally
and Jim have three individuals they support, two children and a nephew. Sally and Jim provide you
with a lot of information related to their current tax year. They have quite an eventful life! You have
organized their information and are now ready to work on their tax return. Each question below builds
on previous questions to walk you through the individual income tax formula. Your final goal is to
determine the amount of Sally and Jim’s tax refund or amount owed for the current tax year, 2023.
1. Sally provides you with the following information related to her job for the current year.
•
Sally’s salary was ***
•
In addition, her employer paid $14,000 of medical insurance premiums for Sally and Jim.
•
Sally also received a few other benefits at work. First, the CPA firm wants to encourage their
employees to stay healthy, so they pay for memberships to a community gym located a short drive
away. The value of the gym membership Sally received this year was $1,200.
•
Second, the CPA firm uses software to help clients prepare household budgets and come up with a
financial plan. Because the CPA firm already purchased the software license and there is no
additional cost, employees can use the software to prepare their own personal budgets and financial
plans. If Sally had to buy her own software license, it would have cost her $100.
•
Third, she is provided free parking at work, with a value of $300 a month ($3,600 a year).
•
Fourth and finally, Sally does not have to eat her meals at work, but during busy season she can eat
dinner in the cafeteria at no charge. The CPA firm adopted this policy to encourage employees to
stay on the premises and continue working during busy season. During busy season, Sally ate most
of her dinners on the premises. The total value of those meals was $850.
***.
a. Complete the table below and determine the amount of income related to her job as an accountant
that Sally must include in AGI for the current year. Show all work for any calculations and round
all numbers to the nearest dollar.
Potential Item of Income:
Salary
Insurance Premiums
Gym Membership
Software
Parking
Meals
Total:
Amount Included in AGI:
2. Jim provides you with the following information related to his business for the current year.
•
Jim’s sole proprietorship is Cash Basis. Unless otherwise noted below, all his items of revenue and
expense represent cash received and cash paid in the current tax year. All amounts are reasonable.
Jim provides you with his items of income and expense (see the following page). However, you ask
a few follow-up questions and learn the following:
•
Jim received $25,000 in checks from customers in December. However, he did not cash the checks
until January of the next tax year, so he did not include this in his current year revenue.
•
The insurance expense of $12,000 is a prepaid expense. On November 1, 2023 Jim paid $12,000
for 12-months of insurance coverage for November 1, 2023 to October 31, 2024.
•
The rent expense of $18,000 is also a prepaid expense. On July 1, 2023 Jim paid $18,000 for 18months of rent for October 1, 2023 to March 31, 2025.
•
The $9,000 of taxes is composed of $6,000 of Federal Income taxes (related to the prior year tax
return) and $3,000 of sales and payroll taxes.
•
The $1,000 of contributions is a contribution to the town mayor’s reelection campaign. The mayor
is very friendly towards businesses, so Jim wants him to win the election.
•
The $500 of fees represents fines for parking violations that Jim received while making business
deliveries.
•
You confirm that all meals and entertainment expenses were directly related to business.
•
The $1,500 of Miscellaneous expenses is groceries that Jim bought for his family. Jim accidentally
used his business credit card.
•
Jim incurred the $7,000 of research and experimentation costs in May 2023 while developing a
new process for baking cakes. He is working on obtaining a patent.
•
After looking through his expenses, you realize that Jim forgot about his automobile expenses. Jim
used his personal car to make deliveries for his bakery business. He drove his personal car 3,000
miles for personal purposes and 7,000 for business purposes in the current tax year. In addition,
Sally drove the car 2,000 miles for commuting.
•
Finally, you realize that Jim did not calculate any depreciation expense for the current year. Jim has
two assets purchased in previous years and one asset purchased in the current year. Jim does NOT
elect Section 179 Expense and he elects OUT of Bonus Depreciation.
o Machinery with an original cost basis of $50,000 placed in service in August 2021. This
was the only asset placed in service in 2021.
o Warehouse with an original cost basis of $450,000 placed in service in March 2022. This
was the only asset placed in service in 2022.
o Truck with a cost basis of $45,000 placed in service in November 2023 (the current year).
a. Complete the table below and determine the amount of qualified business income that Jim must
include in AGI during the current year. Show all work for any calculations and round all numbers
to the nearest dollar.
Potential Item of
Amount Reported by
Amount Included in /
Income/Expense:
Jim
Deductible for AGI
Total Revenue:
***
***
Less:
Less:
Less:
Insurance
12,000
Supplies
50,000
Rent
18,000
Utilities
47,000
Taxes
9,000
Contributions
1,000
Fees
500
Meals
3,000
Entertainment
2,000
Miscellaneous
1,500
R&E
7,000
Automobile
0
Depreciation
0
Total Expenses:
151,000
Net Business Income:
***
***
3. You ask Sally and Jim if they have any other sources of income, and they provide you with the
following information for the current tax year.
•
Sally and Jim inherited artwork from a relative that passed away in January of the current tax year.
The relative had originally purchased the artwork for $10,000 in 1985. When they inherited the
artwork, it was worth $35,000.
•
Sally went on the TV game show Wheel of Fortune and won a car with an FMV of $22,000. Sally
does not like the car though, so she plans to sell it in the next tax year.
•
Jim’s mother gave Jim a cash gift of $50,000 so that Jim could install a pool at the house.
•
Sally was hit by a car while crossing the street in a crosswalk and broke her leg. She sued the
driver and won the lawsuit. She received $40,000 to compensate her for her injury. She also
received $20,000 for punitive damages.
•
In her spare time, Sally builds and decorates miniature dollhouses. After working hard as an
accountant, it is good stress relief. She often gives them away to friends and family, but sometimes
she does sell them. During the year she sold several dollhouses for a total of $3,500. Sally
estimates that her expenses, mostly for supplies such as wood and paint, total $4,000.
•
Jim went to Las Vegas two times during the year to gamble. On one trip he won $5,000. On the
second trip he lost $6,000.
•
Sally and Jim earned $2,500 of interest from their savings account and $1,000 of interest from a
City of San Diego bond
a. Complete the table below and determine the amount of additional income that Sally and Jim
must include in AGI. Show all work for any calculations and round all numbers to the nearest
dollar.
Potential Item of Income:
Artwork Inheritance
Car
Cash Gift
Lawsuit Winnings
Dollhouses
Gambling
Interest
Amount Included in AGI:
Total:
4. Next, you ask Sally and Jim if they sold any assets this year. They provide you with the following:
•
Sally and Jim have an investment account and report a ($10,000) net short-term capital loss on the
sale of stock and a net long-term capital gain of $5,000 on the sale of stock. In addition, the
investment account reports they earned $3,500 of qualified dividends.
•
In December of the current tax year, Sally and Jim sold their home. This home was their primary
residence that they had lived in for the last 15 years. They calculated that the gain on the sale of
their home was $515,000. ($1,000,000 sales price less $485,000 adjusted tax basis).
•
Sally and Jim sold a coin collection for $45,000. They had inherited the coin collection in three
years ago when a relative passed away and the coin collection had an FMV of $40,000. The
relative had originally purchased the coin collection for $35,000 in 2005.
•
Sally and Jim also sold one of their personal vehicles. They had originally purchased the vehicle in
a decade ago for $35,000. They sold it this year for $12,000.
•
In the current tax year, Sally and Jim sold stock to Sally’s sister Kelly for $25,000 (the fair market
value). They had originally purchased the stock in 2004 for $27,000.
•
On January 10, 2023 Sally and Jim sold 1,000 shares of XYZ Corp. stock for $50,000. They had
originally purchased the stock in 2016 for $51,000. On January 20, 2023 they decided they liked
that stock and decide to buy back 250 shares of XYZ Corp. stock for $15,000.
•
Finally, Jim informs you that he sold two assets used in his business this year.
o Jim sold land purchased in 2005 for $200,000 and sold for $225,000
o Jim also sold equipment purchased in 2019 for $75,000 with A/D of $75,000 (fully
depreciated) and sold for $10,000.
o Within the last five years, Jim had previously sold one business asset and incurred a
($3,000) §1231 loss. Jim has not sold any other business assets in any previous years.
a. Calculate the recognized gain/loss for each disposition. Organize and complete the §1231 and
Capital Gains netting procedures. Show all work and round all numbers to the nearest dollar.
Ordinary
Short-Term
Long-Term 28%
§1231
Long-Term 25%
Long-Term 0/15/20%
b. Complete the table below to indicate the total amount of income from question 4 to be reported in
AGI by character.
Character of Income
Ordinary
25%
28%
0/15/20%
Total:
Amount Included in AGI
5. Sally and Jim do not have any other deductions for AGI. (Ignore any additional Self-Employed
Deductions For AGI).
a. Complete the table below to determine Sally and Jim’s AGI for the current tax year.
1.
2.
3.
4.
Items of Income
Sally’s Salary and Benefits
Jim’s Qualified Business Income
Additional Income
Property Dispositions
Amount Included in AGI:
AGI:
6. You ask Sally and Jim if they have any non-business expenses for the year. They provide you with
the following information.
•
Sally and Jim have already prepaid some of their current year taxes. Sally’s employer withheld
$31,400 of Federal Income Taxes and $14,200 of State Income Taxes. In addition, they have
made estimated tax payments of $22,000 for Federal Income Taxes and $12,000 for State
Income Taxes.
•
Sally paid $600 interest on her car loan. She uses this car for commuting.
•
Sally and Jim paid $800 for copays for doctor visits and $1,200 for prescription drugs.
•
Sally and Jim paid $19,000 for hospital bills for Sally’s elective cosmetic surgery.
•
During the year, Jim had to have his appendix removed. The total hospital bill was $55,000.
The insurance company only reimbursed them for $18,000. Sally and Jim do not expect to
receive any more from the insurance company.
•
Sally and Jim paid $19,500 of home mortgage interest on their home ($400,000 mortgage).
They also paid $17,000 of property taxes on their home.
•
Sally and Jim contributed $40,000 of cash to the San Diego Zoo, a public charity. As a thank
you for donating, the Zoo sent Sally and Jim free zoo tickets and other merchandise, with a
total fair market value of $6,000.
•
Jim paid $700 interest on his credit card. He mostly used this credit card for buying groceries
and other household items.
a. Determine which expenses qualify as itemized deductions and determine the total allowable
amount for itemized deductions. Review previous questions for any other relevant
information. Show all work and round all numbers to the nearest dollar.
Medical
Taxes
Interest
Charitable
Other
Contributions
Deductible
Amount:
Total Itemized Deductions =
.
7. Now that you have calculated Sally and Jim’s AGI and total itemized deductions, continue with the
individual income tax formula. Review previous questions for any other relevant information.
Show all work and round all numbers to the nearest dollar.
a. Calculate Jim and Sally’s Taxable Income.
AGI
Less: Greater of Standard Deduction or
Itemized Deductions
Less: Qualified Business Income Deduction
Taxable Income:
b. What amount of Jim and Sally’s Taxable Income is taxed at each rate?
Ordinary
25%
28%
0/15/20%
Taxable Income:
c. What is the amount of Jim and Sally’s total tax liability for the current tax year?
Total Tax Liability =
.
8. Now that you have calculated Sally and Jim’s total tax liability, complete the individual income tax
formula. Review previous questions for any other relevant information. Show all work and round
all numbers to the nearest dollar.
a. Calculate the amount of Sally and Jim’s Child and Dependent Tax Credit and complete the
table below. To determine the credit, Sally and Jim provide you with the following information:
•
Lisa is their 17-year-old daughter, who is a high school student. She earned $5,000 and
lived with Sally and Jim for the entire year. Sally and Jim provided more than half the
support for Lisa.
•
Jeremy is their 10-year-old nephew, who is an elementary school student. He earned $300
and lived with Sally and Jim for the entire year. Sally and Jim provided more than half the
support for Jeremy.
•
Michael is their 21-year-old son, a high school graduate who works full-time. He earned
$26,000 and lived with Sally and Jim for the entire year. Sally and Jim provided more than
half the support for Michael.
Potential Dependent
Preliminary Credit
Amount
Lisa
Jeremy
Michael
Total Initial Credit:
Allowable Credit:
b. Complete the table below and calculate the amount of Sally and Jim’s refund or total tax owed
for the current tax year.
Total Tax Liability
Less: Credits
Less: Prepayments
Total Tax Owed/(Refunded):