1.
Calculate Person J’s Federal income tax payable during 2018.
1.
Explanation of Solution
Federal tax laws: “Federal tax laws reflect the three branches of the federal government. It is a combination of laws enacted by political parties, explanations given by the treasury department, the Internal Revenue Service (IRS) and the decisions of court”.
Calculate Person J’s Federal income tax payable during 2018.
Particulars | Amount | Amount | Amount | Amount |
Salary and bonus | $101,000 | |||
Typing service business net receipts | ($4,580) | |||
Interest income (Refer to Note 1) | $700 | |||
Life insurance proceeds (Refer to Note 2) | $0 | |||
Gift (Refer to Note 3) | $0 | |||
Bingo prize | $100 | |||
Alim | $10,000 | |||
Non-business | ($2,100) | |||
Adjusted gross income | $105,120 | |||
Less: Itemized deductions | $9,500 | |||
Home mortgage interest | $2,500 | |||
Charitable contributions | $946 | |||
Sales taxes | $3,200 | |||
Property taxes | ||||
Silverware loss: Lesser of adjusted basis of $14,000 or FMV of $15,000 | $14,000 | |||
Less: Insurance proceeds | ($10,000) | |||
Less: $100 | ($100) | $3,900 | ||
Auto: Lesser of decline in FMV ($7,000) or adjusted basis ($52,000) | $7,000 | |||
Less: Insurance proceeds if claim filed | ($2,000) | |||
Less: $100 | ($100) | $4,900 | ||
Total ( Refer to Note 5) | $8,800 | $0 | ||
Total itemized deductions | ($16,146) | |||
Less: Deduction for qualified business income (Refer to Note 6) | $0 | |||
Taxable income | $88,974 | |||
Tax on taxable income (from 2018 Tax Tables; Single) | $15,643 | |||
Less: Federal income tax withheld and estimated tax payments | ($17,000) | |||
Net tax payable (or refund due) for 2018 | $1,357 |
Table (1)
Notes:
1) The $800 interest payable on the “City of Boca Raton bonds” is exempted from tax.
2) Life insurance proceeds of $60,000 paid due to the death of Person J’s sister are excluded from gross income.
3) The gift amount of $5,000 from Person J’s aunt is excluded from gross income.
4) The loss of $2,100 on the loan to the friend Person JJ is deducted as a non-business bad debt (that is short-term capital loss). The loan is considered as a “bona fide loan”.
5) As the theft loss and casualty loss occurred due to “Federally declared disaster, neither is deductible”.
6) As Person J is having no qualified business income, no deduction for qualified business income is permitted. The business loss of $4,580 is carried over to 2019 and will equalize any business income in 2019 (or upcoming years), decreasing the associated deduction for qualified business income.
2.
Provide a tentative calculation of Person J’s taxable income for 2019, prepare a letter and prepare a memo regarding tax files.
2.
Explanation of Solution
Calculate Person J’s taxable income:
Particulars | Amount | Amount | Amount |
Salary and bonus | $101,000 | ||
Gross receipts from business | $34,000 | ||
Less: | |||
Office rent | $7,000 | ||
Supplies | $4,840 | ||
Utilities and telephone | $5,148 | ||
Wages | $5,500 | ||
Payroll taxes | $550 | ||
Equipment rentals | $3,300 | ($26,338) | |
Net business income | $7,662 | ||
Interest income | $700 | ||
Alimony | $10,000 | ||
Adjusted gross income | $119,362 | ||
Less: Itemized deductions (Refer to note 1) | ($16,146) | ||
Deduction for qualified business income: (Refer to note 2) | ($616) | ||
Taxable income | $102,600 |
Table (2)
Notes:
1. Higher than 2019 single standard deduction of $12,200.
2. Taxable income prior to the QBI deduction is $103,216; this is also modified taxable income. Therefore the QBI deduction is not restricted by the whole taxable income limitation
Write a letter:
Letter
From
Student A
To
Person J
Dear Sir,
This letter is written in response to your request for a tentative calculation of your 2019 taxable income.
Depending on the 2019 estimate you have given to us, it is ascertained that your estimated taxable income for the 2019 calendar year is $102,600. This estimate depends on the following calcualtion.
Particulars | Amount | Amount | Amount |
Salary and bonus | $101,000 | ||
Gross receipts from business | $34,000 | ||
Less: | |||
Office rent | $7,000 | ||
Supplies | $4,840 | ||
Utilities and telephone | $5,148 | ||
Wages | $5,500 | ||
Payroll taxes | $500 | ||
Equipment rentals | $3,300 | ($26,338) | |
Net business income | $7,662 | ||
Interest income | $700 | ||
Alimony | $10,000 | ||
Adjusted gross income | $119,362 | ||
Less: Itemized deductions (Refer to note 4) | ($16,146) | ||
Deduction for qualified business income (Refer to note 5) | ($616) | ||
Taxable income | $102,600 |
Table (5)
Notes:
4. Higher than 2019 single standard deduction.
5. Taxable income prior to the QBI deduction is $103,216; this is also modified taxable income. Therefore the QBI deduction is not restricted by the whole taxable income limitation.
Please revert back, if more information is needed.
Sincerely,
Student A
Prepare a memo:
Memo
From
Student A
To
Person J
Dear Sir,
Sub: Person J’s 2019 tentative calculation of taxable income.
From my observation, Person S wanted an approximation of the taxable income of 2019.
Besides to the gross receipts from Person S’s typing business of $34,000 (increase-from $20,000 in 2018), the following projection for 2019 are given by Person J:
(1)Following are the items that remain unchanged from 2018:
Particulars | 2018 | 2019 |
Salary | $100,000 | 100,000 |
Christmas bonus | $1,000 | $1,000 |
Itemized deductions | $16,153 | $16,153 |
Interest income | $700 | $700 |
Alimony | $10,000 | $10,000 |
Office rent expense | $7,000 | $7,000 |
Table (3)
(2) Business expenses expected to increase by 10% from 2018 to 2019:
Particulars | 2018 | 2019 |
Supplies | $4,400 | $4,840 |
Utilities and telephone | $4,680 | $5,148 |
Wages | $5,000 | $5,500 |
Payroll taxes | $500 | $550 |
Equipment rentals | $3,000 | $3,300 |
Table (4)
(3) The following 2018 items will not recur in 2019: life insurance proceeds ($60,000), gift ($5,000), bingo winnings ($100), bad debt ($2,100), stolen silverware, auto accident.
Particulars | Amount | Amount | Amount |
Salary and bonus | $101,000 | ||
Gross receipts from business | $34,000 | ||
Less: | |||
Office rent | $7,000 | ||
Supplies | $4,840 | ||
Utilities and telephone | $5,148 | ||
Wages | $5,500 | ||
Payroll taxes | $500 | ||
Equipment rentals | $3,300 | ($26,338) | |
Net business income | $7,662 | ||
Interest income | $700 | ||
Alimony | $10,000 | ||
Adjusted gross income | $119,362 | ||
Less: Itemized deductions (Refer to note 5) | ($16,146) | ||
Deduction for qualified business income (Refer to note 6) | ($616) | ||
Taxable income | $102,600 |
Table (5)
Notes:
5. Higher than 2019 single standard deduction.
6. Taxable income prior to the QBI deduction is $103,216; this is also modified taxable income. Therefore the QBI deduction is not restricted by the whole taxable income limitation.
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Chapter 7 Solutions
South-western Federal Taxation 2018: Individual Income Taxes
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- Individual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT