Federal Income U.S.A. Tax Questions

Its project in some examples of federal income tax with some questions. More detailes in the attachement. 

Part Three Tax returns and Planning (53 points)

Pam Jones (SSN: 555446666), who has been divorced for five years and is 39 years old, lives in a home at 4209 West 65th Street in Prairie Village, KS 66208. Pam is a paralegal with a Kansas City law firm. Her salary was $64,000 for 2012. Pam’s employer withheld $4,900 federal income tax, $2,500 Missouri state income tax, $2,772 for Social Security, $957 for Medicare, and $640 for Kansas City Earnings Tax. Pam has two children: Stan (age 9)(SSN: 685-66-6331) and Ann (age 7)(SSN: 457-89-0342). Pam has custody of the children, receives $4,800 in alimony per year (her ex-husband’s name is Jack Jones (SSN: 534-78-0912)), and receives $9,000 per year in child support. During 2012, Pam paid $4,100 to After-School Day Care (EIN: 48-6576584) for the care of Ann and $2,300 for the care of Stan.

Pam had interest income from her First Kansas Bank checking account in 2012 of $32 and received a $139 tax refund from the State of Missouri. She paid $2,100 in medical insurance premiums. Interest expense on her home totaled $14,100 for the year. Taxes paid during 2012 included $3,100 of real estate tax, $391 of personal property tax, and a balance due to Kansas of $710 for 2011. Pam contributed $380 to the United Way and $450 worth of clothing to the Salvation Army. Pam does not wish to give to the Presidential Election Campaign Fund.

The law firm Pam works for withheld Kansas City Earnings Tax for 2012 on Pam’s full salary even though Pam worked one day per week from her home in KS for the first time in 2012.

Assignment 1: Prepare Pam’s 2012 federal return using forms you download from the Internet or obtain through a software package. Use the simplest tax form she is eligible to file (1040EZ being simplest, 1040A next, and then 1040). What you submit to me should be what you would submit to the federal government except you will not have some attachments such as W2s. Do not calculate any underpayment penalties.

Assignment 2:

Prepare Pam’s 2012 state and local returns.

Part Four – Tax Planning (20 points):

Greg Allen, age 25, is considering buying his first house, but is uncertain if it is a better decision than renting an apartment. He could rent a 2,000 square foot, 3 bedroom apartment with a carport for $940 per month. Alternatively he could buy a home closer to his work for $175,000. The home is a 3 bedroom, 2-car garage property with similar square footage to the apartment. By paying $2,000 in closing costs, putting $22,000 down, and taking out a $153,000 mortgage, his payment would be $687 (principal and interest at 4.5% for 30 years) plus $200 per month real estate taxes, $100 per month home insurance, and $25 per month private mortgage insurance. He thinks he would stay in the home for 5 years. He expects his rent to increase and home to appreciate at 2% per year over the 5 years. Investments will return 7% before tax over that period. When he sells the home, he will pay a realtor 6% of the sale price and $2,000 in closing costs. Please prepare an analysis of whether he should rent or buy, considering his cash flow and tax consequences at a federal marginal rate of 25% and a state tax rate of 6% using an Excel spread sheet. Greg itemizes whether he buys the house or not. Assume he buys the home on January 1, 2013. Prepare spreadsheets and a less-than-200-word memo explaining your conclusion whether to buy or rent.