Information:Julie and David Day are married taxpayers who file jointly. Their addresses and social security numbers have been pre-populated into the Form 1040. They also have 3 dependent children: two under 17 who live at home and one 20-year old who is a full time student at a state university. Their names and social security numbers have also been pre-populated.
David Day works as a claims adjuster for the insurance company with a gekko as its mascot. Julie is self- employed as a life coach.
David received the following 2018 earnings statement from his employer.
Self-employment income:Julie operates her life coaching business as a sole proprietorship and uses the cash method for tax purposes. Some information on Schedule C has been pre-populated. Use the information below to fill out the rest of Schedule C. Record the total net profit from the complete Schedule C on the applicable line of the Form 1040. Note that some of the items may be reported elsewhere on the tax return (i.e., not all of them go directly on the Schedule C).
Cash receipts of $75,000 during 2018. She also performed a one-week seminar at the end of 2018 for which she received a $10,000 payment on January 10, 2019.
For financial reporting purposes, she recorded $36,000 of labor costs for work that her assistant performed during 2018. She did not give the final $1,500 paycheck to her assistant until January 1, 2019.
Paid $2,750 for the employer portion of FICA taxes for her assistant’s wages.
Paid $4,500 of property taxes on her office building.
Depreciation:Calculate the amount of depreciation on the below assets. You do not need to
complete Form 4562. Assume Julie took 50% bonus depreciation on the tangible personal property in the year she placed the asset into service. Also, recall that you must adjust the full year depreciation rate when an asset is sold during the year.
Sale of the office building:Julie sold the office building in July of 2018. The amount realized on the sale is $135,000. Assume the adjusted basis at the date of the sale is $100,000 (cost basis 120,000 – 20,000 of accumulated depreciation).
oCalculatethegainontheassetsale.
oJuliehas$4,000ofnonrecapturednet§1231lossesfromtwoyearsago.
Description
|
Amount
|
Gross Pay
|
$110,000
|
401(k) contribution
|
(7,000)
|
Pretax health insurance premiums
|
(6,000)
|
Federal income tax withheld
|
(9,000)
|
FICA – Social Security and Medicare
|
(8,415)
|
Net Pay
|
$79,585
|
Description
|
Life
|
Cost Basis
|
Purchase Date
|
Sale Date
|
Convention
|
Computer
|
5
|
3,000
|
January 2015
|
N/A
|
Half-year
|
Furniture
|
7
|
5,000
|
December 2016
|
N/A
|
Mid-quarter
|
Office Building
|
39
|
130,000
|
September 2013
|
July 2018
|
Mid-month
|
oDeterminethecharacterofthegainandwhereitshouldbereported.Aportionofthegain will be reported on Schedule D Line 11, and a portion of the gain will be reported on Line 14 of Schedule 1. You do not need to complete Form 4797 but it may help to use the form and/or its instructions.
In 2018, Julie paid $1,800 for utilities and another $1,000 for office supplies that were completely used by the end of the year.
Julie prepaid $18,000 of rent for a 12-month period beginning July of 2018.
Julie prepaid interest of $1,200 on a business loan for the period October 2018-March 2019.
Julie spent $2,000 on business meals during 2018.
Julie made estimated tax payments of $4,000 related to her coaching business. Note that
estimated payments are typically reported on Schedule 5 which you are not required to
complete. Instead, include this amount in your total number on Line 17 of Form 1040
Julie contributed $5,000 to a traditional IRA.
Self-employment taxes:Calculate the amount of self-employment taxes related to Julie’s self- employment income and report on the relevant lines of the Form 1040. You do not need to complete Form SE or Schedule 4, but it may help to look at the Form SE to double-check your calculation.
Qualified business income deduction:Calculate the qualified business income deduction and enter on Line 9 of Form 1040. Recall that QBI is net income from self-employment less the deductible component of self-employment taxes (i.e., take your Schedule C net income number and subtract the deduction for self-employment taxes you calculated above). Note that the Days do not have enough taxable income to worry about either excluded services or the wage limitations.
Interest and Dividends:The Days received the below payments related to interest and dividends for the year. Report the taxable amounts on the correct lines of the Form 1040.
$300 interest on an original issue corporate bond, discount amortization for the year is $50
$275 interest on a corporate bond, premium amortization for the year is $75
$400 interest on a city of Sugar Land bond
$1,000 qualifying dividends
Stock Sale:The Days had the below transactions in the stock of WDC. Assume the Days want to minimize their tax (not necessarily minimize the gain) when choosing between FIFO or specific identification. Report the gain/loss on the appropriate area of Schedule D (either Line 2 or Line 9 depending on whether it is short-term or long-term). You do not need to complete Form 8949.
Purchased 100 shares at $59 per share in September of 2017
Purchased 100 shares at $64 per share in November of 2017
Sold 100 shares at $85 per share in October of 2018
Itemized vs Standard Deduction:The Days are going to have enough itemized deductions to exceed their standard deduction of $24,000. Use the below information to complete Schedule A. Take the total from Schedule A and enter on the appropriate line of the Form 1040. Note that the items may or may not qualify as an itemized deduction.
No state income tax but $5,000 of sales tax
Property taxes of $6,000 on their home
Theft and fire insurance premiums on their home of $1,200
Interest of $8,000 on their home mortgage
Interest of $1,000 on a car loan
Cash contributions of $5,000 to their church
Medical expenses of $15,000
Regular Tax Liability:After calculating taxable income, use the below tax brackets to calculate the Days’ tax liability and enter this amount the appropriate line of the Form 1040. Recall that income taxed at ordinary rates must be separated from income taxed at preferential rates.
Child and Dependent Care Credit:The Days paid $10,000 of child care expenses during the year in order that Julie could work in her life coaching business. Calculate the amount of child and dependent care credit that the Days are eligible to claim. Their applicable credit percentage is 20% because their AGI is well over $43,000 for 2018. The credit would be entered on Schedule 3, but because you are not required to complete that form, include the credit in whatever total you on line 12 of the Form 1040. You do not need to complete Form 2441.
10.American Opportunity Credit:The Days paid the tuition for their oldest son to go to university. They paid well over $4,000 in tuition costs during 2018. Calculate the amount of AOC that the Days are eligible to claim. The credit is partially refundable so enter 40% of the credit in the total on Line 12 and 60% of the credit in your total on Line 17 of Form 1040. You do not need to complete Form 8863.
11.Child Tax Credit:Calculate the amount of child tax credit that the Days are eligible to claim. The 2018 AGI phase-out for married couples begins at $400,000. The Days are well below this threshold, and you should include the full credit amount in your total on Line 17 of Form 1040 (i.e., it is fully refundable for the Days). You do not need to complete Form 8812.
12. Subtotal the amounts necessary to fill in Lines 12, 15, and 18 of the Form 1040.
13.Amount Due or Refund Due:Determine whether the Days will owe additional money on their return or be due a refund. If they are due a refund, they would like the amount refunded (don’t worry about inputting their bank account information). Complete Lines 19-22 accordingly.