Huy Xuan Trinh ACCT 3350.

001 Professor Steven Solcher April 10, 2014

Individual Tax Return Project

Tax Computation Overview

Gross Income (minus exclusions) Robert $ $ $ $ $ $ $ $ $ 105,000 Gross Income and bonus received 8,000 Employer Reimbursement 100,000 9,000 200,000 (75,000) 311,111 7,000 665,111 Consulting Income Ford Motor Bonds Cash Received from Like Kind Exchange Loss from worthless stock Gain Recognized from Installment Sales Income generated from gamblings Reference W-2 (Form 1040) W-2 (Form 1040) Schedule-C Schedule B Form 8824 Schedule-D Form 6252 1040

Lisa

Gross Income Deductions for AGI Robert Lisa

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

8,000 24,640 2,700 6,000 4,215 7,000 52,555 612,556

Reimbursed Employee Expenses Deductible Business Expense Deductible Home Office Expenses Bad Debt Expenses Self Employment Tax Deduction State and local sales taxes

Schedule A Schedule C Form 8829 Schedule C Schedule SE

Adjusted Gross Income Deduction from AGI

Itemized 6,000 Robert's contribution of medical coverage 14,000 The Polks' Medical and Dental Expenses 20,000 61,255.60 10% AGI No medical deduction allowed 6,300 Advalorem Tax 13,500 Qualified mortgage Interest 500 Qualified Charitable Contribution 1,150 Unreimberused employee business expenses

Schedule-A

Total Itemized Deduction

$ $ $ $ $ $

12,251.12 2 % of AGI No miscellaneous deduction allowed 20,300 9,377 Reduction to Itemized Deduction because of filing status Standard Deduction 10,923 Allowable Itemized Deductions $ 12,200 11,700 2 personal exemption and 1 dependent exemption 612,556 AGI 422,500 The threshold for exemptions phase-out No Exemptions Allowed 600,356

Personal and Dependency Exemptions

Taxable Income

1. Taxpayer Biographical Information

The Polk filed a joint return and use cash basis for tax purposes. The Polks qualifies for 2 personal exemptions ($3,900*2 = $ 7,800). The Polks may also claim the following as dependent ($3900): Tyler Polk. All dependency tests have been met for a qualifying child. He is under 19, provides none of his support, is the Polks son, lives with his family and is the U.S. citizen. The Polks may not claim the following as dependent: Anne Marie Polk. She is neither a qualifying child nor a qualifying relative. She fails the Age Test to be a qualifying child (she is above 19 and does not attend college) and the Gross Income Test to be a qualifying relative (her gross income is $ 17,000 > $ 3,900). Anna Marie Polk will file a tax return for her own as a single taxpayer. Anna Marie qualifies for one personal exemption ($3,900). However, since the family AGI is higher than the threshold for exemptions phase-out, the Polks is not allowed to take any personal and dependency exemptions.

2. Taxpayer Gross Income

2.1 Robert Polk
Roberts gross incomes include his yearly salary and his previous year bonus (received in 2012): $90,000 + $15,000 = $105,000 Assume that Roberts employer, MGM, has an accountable reimbursement plan, Roberts gross incomes include the $8,000 reimbursement.

2.2
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Lisa Polk
Consulting Income: $100,000 Ford Motor Company bonds: $9,000

Lisas gross incomes include:

Not include: Cash gifts from Lisas parents: The money billed but not paid until 2013 (cash basis tax payer is only taxed when received) The interest income from City of Dallas bonds (tax-exempt income) Assume Sarah Duval is Lisas friends and the loan Lisa made to Sarah is an interest-free loan. Under administrative convenience; the $3,000 loan is exempted from the imputed interest rules. Therefore, the $3,000 repayment is excluded from gross income (as it was not deductible in the year the loan was made). Federal Income Tax refund (2010 return) $9,000

Like-kind Exchange

Amount realized ( 500,000 + 200,000) Adjusted basis Realized gain Recognized gain (Cash Boot Received) Defereed Gain Basis in the tract in Dixie County
Installment Sales

$ $ $ $ $

700,000 400,000 300,000 (200,000) 100,000 400,000

(500,000 - 100000) $

Amount Realized Basis in land Recognized Gain Interest Income

(400,000 + 125,000*4)

(125,000 * 4 * 8%)

$ $ $ $

900,000 200,000 700,000 40,000

Recognized gain in 2012 400,000*(700,000/900,000) 2013 125,000*(700,000/900,000) 2014 125,000*(700,000/900,000) 2015 125,000*(700,000/900,000) 2016 125,000*(700,000/900,000)

$ $ $ $ $ $

311,111 97,222 97,222 97,222 97,222 700,000

Interest Income $ $ 10,000 $ $ 10,000 $ $ 10,000 $ $ 10,000 $ 40,000

311,111 107,222 107,222 107,222 107,222

2.3 Anna Marie Polk

Anna Maries gross income is $ 17,200, derived from performing at various events.

2.4 Other Polks Joint Income

The Polks include $8,200 from gambling winnings in their gross income. However, the amount of taxable income is only $ 7,000 ($ 8,200 - $ 1,200) because of the $ 1,200 losses.

3. Taxpayer Business Expenses & Deduction for AGI

3.1 Robert Polk
Assume the expense from lodging- not at a MGM does not have business purpose and the $500 fines are not deductible because it is against the public policy, the total business-related expenses Robert incurred is as follows:

Airfare Lodging: value of stays at a MGM Meals(50%) Entertainment(50%) Car rentals, limos, taxis

$5,100 $3,300 $400 $175 $750 $9,725

Since reimbursement ($8,000) is less than actual expenses ($ 9,725), Robert may deduct the $8,000 for AGI. The rest, $1,725 ($9,725 - $8,000) is treated as itemized deductions with 50% rule applies for meals and entertainment and the 2% limit for overall miscellaneous deductions. Worthless Stock The Groupon stock that Robert held for more than a year (qualified as long-term investments) became worthless as the company went bankrupt in 2012. Assuming that Groupon had not paid any dividends to Robert, Robert is allowed to deduct the total amount of his investments in the stock: 5000 shares * $15 = $ 75,000. Since the Polks filed jointly, the $ 75,000 loss will be netted against other gains to get the total gain from long-term investments.

3.2 Lisa Polk

Following are Lisas expenses associated with her consulting business: Deductible Business Expenses

Supplies Legal CPA license fee Subscription to professional journals Bad Debt Expense State and Local Sales Tax Dues to professional organizations Auto Expenses (6000 miles*0.565)

$ $ $ $ $ $ $ $ $

4,000 8,000 1,500 7,500 6,000 7,000 250 3,390 37,640

All the expenses above are deductible because they have the business purposes and meet the five negativity test.

Home Office Following are the amount of deductions that Lisa is allowed to take to her home office. Since she used 200 sq. feet of her 2,000 sq. foot house, she is allowed to deduct 10% (200/2000) of all her real estate expenses:

Advalorem Taxes Mortgage Interest Repairs to roof Uitilities

$ 7,000 $ 15,000 $ 2,000 $ 3,000 $ 27,000 *10% $2,700

Bad Debt Expense Lisa is also to deduct $ 6,000 as a bad debt because the person who owed her were convicted of arson in 2012 and is serving time in prison. State and Local Sales Tax Assume the Polks state and local sales taxes are expenses associated with Lisas consulting business, therefore, they are allowed to deduct $ 7,000 as business expenses. Self-Employment Tax Lisa is self-employed. Therefore, she is subjected to the 15.3% self-employment tax, with half of them are deductible for AGI (see Schedule SE).

4. Taxpayer Losses & Deduction from AGI

4.1 Robert Polk
Roberts allowable itemized deductions include: The excess of 10% of AGI from his contributions $6,000 to his employers group health insurance plan. The excess of 2% of AGI from the total miscellaneous deductions. Since $2,300 is smaller than 2% of the Polks AGI ($13,775). None of the amount is deductible.

4.2 Joint Allowable Itemized Deductions

Advalorem Taxes on Residence (90%) Interest on Home Mortgage (90%) Contributions to Salvation Army $ $ $ 6,300 13,500 500

Life insurance premiums are not allowed to deduct. Ad Valorem Taxes and Mortgage Interest are deductible on the amount of personal use (90%). Medical expense 10% AGI limit. The total amount of the family medical expenses was $ 20,000 ($6,000 from Roberts contribution to his employers medical coverage and $14,000 family medical expenses. However, since $20,000 is smaller than 10% of AGI limit ($688,771), none of the amount is deductible. Contribution to Texas governors election campaign fund is not deductible

5. Calculation of Tax Due

5.1 The Polks- MFJ

Tax Amount from Tax Computation Worksheet Self-employment Tax Medicare Taxes on Unearned Income Amount of Tax on Taxable Income Tax Paid Tax Due

$ $ $ $ $ $

106,387 8,429 13,758 128,575 71,000 57,575

The Polks taxable income is separated into two parts: earned income and unearned income. Tax on Earned income is derived by looking at the tax table provided by the IRS. The tax on unearned income is taxed at two levels: 15% and 20% because part of Polks taxable income is in the 39.6% marginal tax rate bracket. Following is an illustration of the computation:

Taxable Income Earned Income

$ $

600,356 Tax on Earned Income 164,245 $ 33,453

Long-term Capital Gain Amount (450,000-164,245) Amount in 39.6% marginal tax rate

$ $ $

436,111 Tax Treatment 285,755 150,356

Amount 15% $ 42,863.25 20% $ 30,071.20 $ 72,934.45

Lisa is the owner of her consulting business. This year she had net operating gain. Therefore, she is also subjected to self-employment tax at 15.3% of her profit. The Polks unearned income this year is higher than the 250,000 threshold. Therefore, they are subjected to additional 3.8% Medicare tax.

5.2 Anna Marie Polk- Single

Gross Income Deduction for AGI Dedudction from AGI

17,200

Standard Deduction $ Personal Exemption $ Taxable Income Tax Due $ $

6,100 3,900 7,200 718