Chapter 6, Problem 58CP

1.

To determine

Compute Person J’s and Person M’s tax due for 2018.

Explanation of Solution

Compute Person J’s and Person M’s tax due for 2018:

Particulars	Amount	Amount	Amount
Salaries $\left(\text{\$105,000+\$52,000}\right)$ (Refer to note 1)			$157,000
Interest on certificates of deposit			$3,500
Share of S corporation income (Refer to note 2)			$1,500
Award			$4,000
Child support (Refer to note 3)			$0
AGI (Refer to note 4)			$166,000
Itemized deduction
Medical expenses (Refer to note 5)		$0
Charitable contributions		$3,700
State and local taxes
Property	$4,800
State income $\left(\text{\$4,700+\$3,100+\$1,800}\right)$	$9,600
(Limited to $10,000, (Refer to note 6)	$14,400	$10,000
Home mortgage interest		$8,200
			($21,900)
			$144,100
Less: Deduction for qualified business income (Refer to note 7)			($300)
Taxable income			$143,800
Tax on $138,800 (Refer to note 8)			$23,515
Less: Withholding $\left(\$20,800+\$3,000\right)$			($23,800)
Net tax payable ( or refund due) for 2018			($285)

Table (1)

Notes:

1. The payments of medical insurance premium of $16,200 $\left(\text{\$10,000+\$6,200}\right)$ by their employers are excluded from gross income. Similarly, the $7,300 of medical reimbursement gained under the plan by Person M is excludable.

2. Person M includes the share of the Corporation S’s income of $1,500 in the gross income even if cash distributions are only $1,100.

3. Payments of $15,000 made for child support are not deductible.

4. The investigation expenses of $15,000 occurred by Person J which is related with the franchise of retail computer cannot be deducted. This result is acquired as Person J is not in a business that is similar or same to the one being investigated and the new business is not attained.

5. Person J paid medical insurance premiums of $2,000, and Person M paid $1,240. Person M makes payment for non-covered medical expenses of $1,300. The amount of medical inspection is $0 as their payments are low than “7.5% of AGI$\left(\text{7}\text{.5\%}\text{×}\text{\$166,000=\$12,450}\right)$.

6. The payment of state income taxes of $9,600 $\left(\$4,700+\$3,100+\$1,800\right)$ exceeds the state sales taxes of $2,000. The total deduction for “state property and income taxes should not exceed $10,000”.

7. Person M’s qualified business income deductions is $300$\left(\text{\$1,500}\text{×}\text{20\%}\right)$.

8. The amount of $150 ticket related with Person J running a red light cannot be deducted as a personal expenditure.

9. As they are filing jointly, the tax liability of Person J and Person M is computed as follows depending on the tax rate schedules (Refer to table 2):

$\left[\left(\text{\$143,800}-\text{\$77,400}\right)\text{×22\%}\right]\text{+}\text{\$8,907=}\text{\$23,515}$

A dependent tax credit is not permitted for either Person J son (Person S) or father of Person J. Even though Person J supports the son, Person S (son) is living with Person JU (custodial parent). Consequently, Person R (son) is a dependent of Person JU. Additionally, father of Person M is not qualified as a dependent. Person J and M provides over half of the support that is $9,500 furnished by them evaluated with $4,400 given by father. Conversely, the father fails the gross income test. The gross income of father is $6,300$\left(\text{\$2,800}\text{salary}\text{+}\text{\$3,500}\text{unemployement}\text{compensation}\text{benefits}\right)$, which exceeds the permissible amount (less than $4,150).

10. The table below show 2018 tax brackets for married joint filers:

Tax rate	Tax income bracket	Tax owed
22%	$77,401 to $165,000	$8,907 plus 22% of the amount over $77,400

Table (2)

2.

To determine

Prepare a letter with regard to tax advice and write a memo for the tax files.

Explanation of Solution

Write a letter:

Letter

From

Student A

To

Person J

Re: Advice on tax planning.

Dear Sir,

This letter is on response to your query with respect to whether Person D receives a $30,000 bonus during 2018 or holdup receiving it until 2019. Depending on the information provided, tax liability is calculated for both years by assuming that the bonus is received during 2018 and by assuming that the bonus is received during 2019 (Refer to note). Following is the result of tax liability:

Tax taking the bonus in 2018	Amount
For 2018	$30,291
For 2019	$9,195
Total tax	$39,486
Tax taking the bonus in 2019	Amount
For 2018	$23,515
For 2019	$15,795
Total tax	$39,310

Table (3)

If the receipt of the bonus is delayed until 2019, amount of $176 $\left(\text{\$39,486}-\text{\$39,310}\right)$ will be saved. This disregards any earnings that could be received on the $30,000 if bonus is received during 2018. Conversely, as the decision is to receive the bonus in December 2018 or January 2019, the amount of such earnings is probably negligible.

Please revert back if more information is needed for clarification.

Sincerely,

Student A

Note: Tax rate of 2018 is used.

Prepare a memo:

Memo

From

Student A

To

Person J

Re:  Tax files.

Dear Sir,

Person J is a customary tax client, who is having the opportunity to receive a bonus of $30,000 during December 2018 or during January 2019. Person J has enquired whether he should receive bonus in 2018 or extent it until 2019. Anticipated difference in the data provided for the year 2019 return and for the year 2018’s return are as follows:

1. They are expecting for a child during January 2019.

2. Person M will resign from work on December 31, 2018, for staying in home with the child. Thus, the salary will reduce by $52,000 and the state income taxes suspended on the $52,000 is decreased by $3,100.

3. Person M is not expecting to receive award of $4,000.

4. Medical benefits received by Person M during 2019 are $$9,000 instead of $7,300 received during 2018.

Depending on the data given for 2018 taxes and the above assumption following computations are made;

Tax with the bonus	2018	2019
Taxable income in 2018	$143,800	$143,800
Bonus	$30,000	$30,000
Less: person M's salary		($52,000)
Award		($4,000)
Add: Decrease in itemized deductions ( Refer to note 2)		$0
Taxable income with bonus	$173,800	$117,800
Tax before credits ( Refer to note 1)	$30,291	$17,795
Child tax credit	$0	($2,000)
Tax	$30,291	$15,795
Tax without the bonus
Taxable income with bonus	$173,800	$117,800
Less: Bonus	($30,000)	($30,000)
Taxable income without bonus	$143,800	$87,800
Tax before credits ( Refer to note 2)	$23,515	$11,195
	$0	($2,000)
Tax	$23,515	$9,195
Tax taking the bonus in 2018
For 2018		$30,291
For 2019		$9,195
Total tax		$39,486
Tax taking the bonus in 2019
For 2018		$23,515
for 2019		$15,795
Total tax		$39,310

Table (4)

Both will save amount of $176 $\left(\text{\$39,486}-\text{\$39,310}\right)$ by deferring the bonus to January 2019.

Notes:

1. 2018 tax rates used.

2.  Income taxes are decreased by $3,100; therefore, the total amount of taxes for 2019 is $11,300. Conversely, the deduction for state and local taxes should not exceed $10,000 for 2019; consequently, there is no change from 2018.

Regards,

Student A