Tax Assignment

Tax Assignment Paper details: Tax Assignment Income Tax Return Summer 2016 Revised June 27, 2016 TAX RETURN PROJECT-This assignment is due on Wednesday, July 6th, the date of our fin" rel="nofollow">inal exam. In this project we are asked to complete a 2015 join" rel="nofollow">int tax return for Gary and Jennifer Smith’s whose in" rel="nofollow">information is provided below. Most people today use tax return software to prepare their tax returns. The two most commonly used software packages are available from H&R Block Tax Software and Intuit’s Turbo tax. A registration code is provided for the H&R Block Tax Software on the page opposite the in" rel="nofollow">inside cover of everyone’s textbook. Gary and Jennifer Smith have been happily married for the past 25 years, and look forward to a very comfortable retirement. Gary, who expects to contin" rel="nofollow">inue workin" rel="nofollow">ing until age 70, began collectin" rel="nofollow">ing social security in" rel="nofollow">in 2013 when he reached 65 years of age. Gary received $26,000 in" rel="nofollow">in social security benefits in" rel="nofollow">in 2014 as reported on Form SSA-1099 which he received from the Social Security Admin" rel="nofollow">inistration. Jennifer and Gary have requested your help in" rel="nofollow">in preparin" rel="nofollow">ing their 2014 federal tax return. Gary’s social security number is 164-32-0418. Jennifer is 64 years old and also expects to retire at age 70. Her social security number is 059-48-3125. They live at 220 Easton Avenue, New Brunswick, New Jersey 08903. Jennifer’s elderly mother, Mrs. Cin" rel="nofollow">indy Watkin" rel="nofollow">ins, has lived with the Smiths for the past 15 years. Mrs. Watkin" rel="nofollow">ins was born on January 1, 1913. The Smiths provides the majority of Mrs. Watkin" rel="nofollow">in’s support. Mrs. Watkin" rel="nofollow">ins, who not long ago reached the age of 100 years old, is in" rel="nofollow">in good health, Her in" rel="nofollow">income this year consists of $2,000 of dividend in" rel="nofollow">income and $5,000 of in" rel="nofollow">interest in" rel="nofollow">income on a State of New Jersey municipal bond. Mrs. Watkin" rel="nofollow">ins social security number is 333-88-9999. Gary, a professional engin" rel="nofollow">ineer, is an employee at both Nicholas Machin" rel="nofollow">inery Company and at ABC Manufacturin" rel="nofollow">ing Company. Shown below is in" rel="nofollow">information from the W-2 forms that Gary received from these two companies in" rel="nofollow">in 2015. Nicholas ABC Box 1 Wages, tips and other compensation $340,000.00 $160,000.00 Box 2 Federal Income Tax Withheld 84,419.00 40,000.00 Box 3 Social Security Wages 118,500.00 118,500.00 Box 4 Social Security Tax Withheld 7,347.00 7,347.00 Box 5 Medicare wages and tips 350,000.00 160,000.00 Box 6 Medicare Tax withheld 6,425.00 2,320.00 Box 16 State Wages NJ 350,000.00 160,000.00 Box 17 State Income Tax 11,618.00 2,482.00 Gary’s Box 1 amounts for Nicholas Machin" rel="nofollow">inery Company, (wages, tips and other compensation) and for ABC Manufacturin" rel="nofollow">ing Company are the amounts of Gary’s salary from these companies which should be in" rel="nofollow">included in" rel="nofollow">in his gross in" rel="nofollow">income. Gary’s Box 3 amount (Social Security Wages) ($118,500) for both of the companies he worked for in" rel="nofollow">in 2015 is the maximum amount of wages subject, in" rel="nofollow">in 2015, to a 6.2% social security tax rate. For both companies for which Gary was an employee in" rel="nofollow">in 2015 Gary’s Box 3 amounts ($118,500) is less than his Box 5 amount (Medicare wages and tips) because the maximum tax base on social security for 2015 is limited to $118.500 whereas Medicare tax withheld (at a rate of 1.45%) applies to his entire salary in" rel="nofollow">income. Recall from our first day class handout and as also can be seen on page 1-19 in" rel="nofollow">in Chapter 1 of our textbook the Medicare tax for high in" rel="nofollow">income earners (those with wages or self-employment in" rel="nofollow">income exceedin" rel="nofollow">ing $200,000 or $250,000 (for join" rel="nofollow">int filers) in" rel="nofollow">increased begin" rel="nofollow">innin" rel="nofollow">ing in" rel="nofollow">in 2015 from 1.45% to 2.35% on the wages exceedin" rel="nofollow">ing the specified levels. This .9% Medicare surtax only applies to the employee’s share of earned in" rel="nofollow">income and has no impact on the employer’s responsibility whatsoever in" rel="nofollow">in payin" rel="nofollow">ing the company’s share of employment taxes. Thus there is an additional Medicare tax of .9% withheld from Gary’s salary on $150,000 which is the difference between Gary’s total medicare wages of $350,0000,000 and the $200,000 amount upon which he would have had Medicare withheld at 1.45%. Often the amount in" rel="nofollow">in Box 1 (Wages Tips and Compensation) is the same as the amount in" rel="nofollow">in Box 5 (Medicare wages and tips). Box 1 amounts, however, are often lower than Box 5 amounts because the tax law permits in" rel="nofollow">individuals to elect (if specified conditions are met) to reduce the amount of salary that must be reported as gross in" rel="nofollow">income by an amount(s), an employee elects to be set aside and used for a special purpose, that the tax law permits. For example, in" rel="nofollow">in the case of the W-2 from Nicholas Machin" rel="nofollow">inery Company Box 1, (Wages, tips and other compensation) for Gary is $10,000 less than his gross salary (shown in" rel="nofollow">in Box 5, as Medicare wages and tips) because Gary elected to participate in" rel="nofollow">in the Nicholas Machin" rel="nofollow">inery Company’s 401(k) plan. A 401(k) plan (described in" rel="nofollow">in IRC § 401) permits an employee to elect to contribute extra funds on a pre-tax basis to a company’s pension plan. By doin" rel="nofollow">ing so the employee is allowed to reduce his/her current’s year’s gross in" rel="nofollow">income (effectively excludin" rel="nofollow">ing from gross in" rel="nofollow">income) the additional amount contributed to the company’s pension plan. The first time you use H&R Block Tax Software or Turbo tax you may be puzzled in" rel="nofollow">in tryin" rel="nofollow">ing to figure out where to enter all this W-2 in" rel="nofollow">information. It’s easy once you get the hang of it: Select forms, then open, W-2 Wage and Tax Statement and then separately for each of Gary’s employers enter the in" rel="nofollow">information that applies to each box for each of his employers. If you do it right Turbo Tax will do a lot of nifty thin" rel="nofollow">ings such as (1) in" rel="nofollow">includin" rel="nofollow">ing among the Smith’s itemized deductions the New Jersey State in" rel="nofollow">income tax withheld from the salary from both of the company’s that Gary worked for and (2) automatically calculatin" rel="nofollow">ing the amount of excess social security tax withheld from Gary’s salary because he worked for two employers and his social security wages (Box 3) from both employer’s combin" rel="nofollow">ined exceeded $118,500. Nicholas Manufacturin" rel="nofollow">ing Company (herein" rel="nofollow">inafter Nicholas) provides Gary and its other employees with various frin" rel="nofollow">inge benefits. Nicholas pays for Gary's health in" rel="nofollow">insurance plan (cost to Nicholas of $12,000 annually—it covers Gary and Jennifer), and participation in" rel="nofollow">in the company’s group term life in" rel="nofollow">insurance plan. Under this group-term life in" rel="nofollow">insurance plan, Gary and the company’s other full-time employees receive an amount of group term life in" rel="nofollow">insurance coverage equal to each employee’s annual salary for 2015. In Gary’s case he therefore is provided with $350,000 of group term life in" rel="nofollow">insurance, an amount equal to his salary for this year. Jennifer is the beneficiary of this policy. Assume that Box 1 (Wages, tips and other compensation) of the W-2 which Gary received from Nicholas in" rel="nofollow">includes the in" rel="nofollow">income imputed to Gary as of result of Nicholas Manufacturin" rel="nofollow">ing Company havin" rel="nofollow">ing purchased on Gary’s behalf more than $50,000 worth of group term life in" rel="nofollow">insurance. Nicholas provides Gary with free parkin" rel="nofollow">ing on the company’s premises valued at $200 per month. In addition Gary is also permitted free use of the company’s Athletic facilities which is located on the Company’s premises. If Gary had gone to a comparable outside Athletic Facility he would have to pay $500 per year. The other company that Gary works for, ABC is a manufacturer of bicycles and like Nicholas Manufacturin" rel="nofollow">ing Corporation provides Gary and its other full-time employee with various employee benefit in" rel="nofollow">includin" rel="nofollow">ing in" rel="nofollow">in the case of ABC, “qualified employee discounts” on products it manufacturers. Gary took advantage of this program by buyin" rel="nofollow">ing for just $375 from ABC a new bicycle which would have cost Gary $800 if he purchased it elsewhere. The bicycle cost ABC $350 to manufacture. Gary who rides his bicycle to work enjoys workin" rel="nofollow">ing for ABC because it is an environmental sensitive company. Consistent with this vision ABC provides employees with a benefit in" rel="nofollow">included in" rel="nofollow">in IRC Section 132(f) (1) (D). Pursuant to this Section of the Internal Revenue Code ABC reimburses employee up to $20 per month for bicycle main" rel="nofollow">intenance. Gary’s new bike averages only about $12 per month in" rel="nofollow">in main" rel="nofollow">intenance and storage costs per month which ABC reimburses him for each month. ABC also provided Gary this year with $16,500 of “workin" rel="nofollow">ing condition frin" rel="nofollow">inge benefits” such as reimbursements for professional dues, the professional engin" rel="nofollow">ineerin" rel="nofollow">ing society which he pays annual dues and educational expenses relatin" rel="nofollow">ing to a Master’s Degree that he is completin" rel="nofollow">ing in" rel="nofollow">in engin" rel="nofollow">ineerin" rel="nofollow">ing in" rel="nofollow">in his specialty which is in" rel="nofollow">in mechanical engin" rel="nofollow">ineerin" rel="nofollow">ing. Jennifer Smith is a physician who works long hours as a sole practitioner. She has an office at 174 George Street, New Brunswick, New Jersey 08903. The form that you should complete relative to Jennifer’s busin" rel="nofollow">iness is Schedule C. As a general rule, all busin" rel="nofollow">iness related expenses of a self-employed person (such as Jennifer) should be recorded on Schedule C. In completin" rel="nofollow">ing Schedule C for a self-employed person it is often unclear as to what lin" rel="nofollow">ines on Schedule C various items of expense should be recorded because the these lin" rel="nofollow">ine items are labeled with a broad descriptor (e.g., lin" rel="nofollow">ine 18 is labeled office expense). Although I do make some suggestions, as shown below, as to what lin" rel="nofollow">ine items some items should appear please do not be concerned if you are unsure as to what lin" rel="nofollow">ine a particular item of expense should be listed. Questionable items (in" rel="nofollow">in terms of what lin" rel="nofollow">ine in" rel="nofollow">in Schedule C to be them on) can be listed in" rel="nofollow">individually in" rel="nofollow">in Part V of schedule C. In regards to Jennifer’s schedule C it is much less important that everyone record an item of self- employment expense on the same lin" rel="nofollow">ine number than to ensure that Jennifer’s busin" rel="nofollow">iness’s net in" rel="nofollow">income from her busin" rel="nofollow">iness be equal to the amount of Jennifer’s gross receipts less expenses from this busin" rel="nofollow">iness and this amount be carried forward to lin" rel="nofollow">ine 12 of Form 1040 Note that the amount of Jennifer’s Schedule C self-employment in" rel="nofollow">income affects the amount of her self-employment tax (the Social Security and Medicare Tax) that she has to pay on her earnin" rel="nofollow">ings. In addition, there may be questions on Schedule C and in" rel="nofollow">in other forms you must complete for the Smiths for which I have not provided all the answers. For example, schedule C asks in" rel="nofollow">in Question “G’ whether Jennifer materially participated in" rel="nofollow">in this busin" rel="nofollow">iness in" rel="nofollow">in 2015.” The answer to this question is “Yes”. For tax purposes Jennifer's busin" rel="nofollow">iness is on a cash basis with receipts this year of $580,000. The busin" rel="nofollow">iness also paid the followin" rel="nofollow">ing expenses: Employee Salaries $150,000 Employer's share (Jennifer’s share) of FICA and other payroll taxes on her employees 12,400 Malpractice in" rel="nofollow">insurance (in" rel="nofollow">include on lin" rel="nofollow">ine 15 of schedule C) 60,000 Physician License fee paid to the State of NJ 400 Accountin" rel="nofollow">ing Fees 1,000 Expenses related to Jennifer's participation at the AMA Meetin" rel="nofollow">ing in" rel="nofollow">in Chicago: Air Fare (record as travel lin" rel="nofollow">ine 24a of schedule C) 450 Hotel (record as travel lin" rel="nofollow">ine 24a of schedule C) 700 (These expenses are not subject to either of the limitations shown on lin" rel="nofollow">ine 24b of Schedule C) Contin" rel="nofollow">inuin" rel="nofollow">ing Professional Education Course 3,000 Rent Expense 20,000 Repairs and Main" rel="nofollow">intenance 950 Supplies 10,000 Utilities Expense 1, 500 Jennifer also works as a physician at Robert Wood Johnson University Hospital. This hospital treats Jennifer as an employee and gave her a W-2 which in" rel="nofollow">included the followin" rel="nofollow">ing in" rel="nofollow">information: RWJ University Hospital Box 1 Wages, tips and other compensation $50,000 Box 2 Federal Income Tax Withheld 14,000 Box 3 Social Security Wages 50,000 Box 4 Social Security Tax Withheld 2,100 Box 5 Medicare wages and tips 50,000 Box 6 Medicare Tax withheld 725 Box 16 State Wages NJ 50,000.00 Box 17 State Income Tax 4,100 Go slowly in" rel="nofollow">in enterin" rel="nofollow">ing W-2 in" rel="nofollow">information for a spouse. When you entered the basic in" rel="nofollow">information for Gary and Jennifer Smith in" rel="nofollow">in the form called Information Worksheet Turbo Tax assumed that the name entered first was the taxpayer’s and second name entered is the spouse of this taxpayer. If you entered Gary’s name first he is treated as the taxpayer and Jennifer is treated as the spouse. If Jennifer’s name was entered first she is treated by Turbo Tax as the taxpayer and Gary is treated as the spouse. If you did as I did and entered Gary’s name first on this Information Worksheet, you will need to do the followin" rel="nofollow">ing in" rel="nofollow">in recordin" rel="nofollow">ing Jennifer’s W-2 in" rel="nofollow">information. Select the form called W-2 Wages and Tax Statement. Type in" rel="nofollow">in the name of Jennifer’s employer: (Robert Wood Johnson University Hospital). Make sure to check the button that says Check if for spouse. This assumes that in" rel="nofollow">in enterin" rel="nofollow">ing the employment data for Gary you entered his name as the taxpayer’s and Jennifer’s as the spouse. Gary withdrew $30,000 from a Roth IRA he set up seven years ago with Vanguard Investments. He received a 1099R from Vanguard which in" rel="nofollow">indicates that Box 7 of Form 1099R applies to this distribution. In order to get this amount to properly appear on page 1 of 1040 select Code Q in" rel="nofollow">in the dropdown menu of box 7 of Form 1099-R to in" rel="nofollow">indicate that this is a qualified Roth Distribution. This amount needs to be shown on lin" rel="nofollow">ine 15a of Form 1040 and on form 1099-R in" rel="nofollow">in Box 1 (gross distribution) and in" rel="nofollow">in Box 2a (taxable amount). Jennifer previously worked as an employee at Lenox Hill Hospital in" rel="nofollow">in New York City where she participated in" rel="nofollow">in the hospital’s defin" rel="nofollow">ined contribution plan. Durin" rel="nofollow">ing the time Jennifer worked at Lenox Hill Hospital she contributed $100,000 on a pre-tax basis to this employer’s defin" rel="nofollow">ined contribution plan. Jennifer now has $450,000 in" rel="nofollow">in this plan. In 2015 Jennifer withdrew $25,000 out of this plan. The hospital provided Jennifer with a 1099R which shows that she withdrew this amount from this plan. This 1099R in" rel="nofollow">indicates that Code 7 applies to this distribution. This amount needs to be shown on lin" rel="nofollow">ine 16a of Form 1040 and on form 1099-R in" rel="nofollow">in Box 1 (gross distribution) and in" rel="nofollow">in Box 2a (taxable amount). You should select Code 7 in" rel="nofollow">in the dropdown menu of Box 7 to in" rel="nofollow">indicate that this is a Normal distribution. Together, the Smith’s have assets of approximately $15 million. These assets in" rel="nofollow">include stock in" rel="nofollow">in JKL Technologies, which has a current market value of $700,000. This stock was purchased by the Smiths in" rel="nofollow">in 1988 for $50,000, and paid them $1,500 in" rel="nofollow">in qualifyin" rel="nofollow">ing dividend in" rel="nofollow">income in" rel="nofollow">in 2015. The Smiths also received additional qualifyin" rel="nofollow">ing dividend in" rel="nofollow">income as follows: From: Microsoft $920.00 Exxon $876.00 IBM $5,015.00 Johnson and Johnson $4,858.55 J.P. Morgan Chase $607.36 United Airlin" rel="nofollow">ines $3,500.00 Dupont Corporation $2,700.00 The Smith’s also own stock in" rel="nofollow">in AXA Fin" rel="nofollow">inancial Corporation, a French Corporation which is listed on the New York Stock Exchange. AXA distributed a $3,000 qualifyin" rel="nofollow">ing dividends to the Smiths. The Smith’s only received $2,700 of this payment because the French government withheld $300 of French Income Tax on this distribution. Smith’s also received a $790 dividend from Xin" rel="nofollow">in Hua Corporation, a Chin" rel="nofollow">inese Company listed on the Shanghai stock exchange but not listed on any stock exchange in" rel="nofollow">in the United States. This dividend payment does not meet the requirement of bein" rel="nofollow">ing a qualifyin" rel="nofollow">ing dividend. See the last item on the last page of our capital gain" rel="nofollow">ins handout to better understand the significance of this dividend payment not meetin" rel="nofollow">ing the requirements of a qualifyin" rel="nofollow">ing dividend. The Smiths received a $2,000 dividend from Schlomo Corporation. Schlomo Corporation is another foreign corporation not listed on a U.S. Exchange. The Smiths also own shares in" rel="nofollow">in Dreyfus Premier, a mutual fund they purchased five years ago for which they have the followin" rel="nofollow">ing: Qualifyin" rel="nofollow">ing dividend in" rel="nofollow">income of $950 Capital gain" rel="nofollow">ins distribution of $1,275. Note that mutual funds such as Dreyfus Premier-see above--do not pay in" rel="nofollow">income tax in" rel="nofollow">in the way that regular corporations (referred to as “C” Corporations in" rel="nofollow">in the tax law) do. The mutual fund shareholders in" rel="nofollow">instead pay tax on the mutual fund company’s earnin" rel="nofollow">ings (more or less) in" rel="nofollow">in the manner described by the authors of our textbook begin" rel="nofollow">innin" rel="nofollow">ing at the bottom of page 6-5 wherein" rel="nofollow">in they write as follows: “Millions of taxpayers now in" rel="nofollow">invest in" rel="nofollow">in stocks, bonds, and other securities in" rel="nofollow">indirectly through mutual funds. Mutual funds typically buy and sell in" rel="nofollow">investments realizin" rel="nofollow">ing gain" rel="nofollow">ins and losses as well as collect earnin" rel="nofollow">ings from in" rel="nofollow">investments such as in" rel="nofollow">interest on bonds or dividends on stock. Like corporations, mutual funds make distributions. However, the treatment of these distributions differ somewhat from regular corporate dividends in" rel="nofollow">in that they are generally characterized to reflect the nature of the in" rel="nofollow">income realized by the mutual fund. Mutual fund distributions are normally characterized as ordin" rel="nofollow">inary dividends or capital gain" rel="nofollow">ins dividends. Ordin" rel="nofollow">inary dividends represent the in" rel="nofollow">individual’s share of the fund’s earnin" rel="nofollow">ings from its own in" rel="nofollow">investments such as in" rel="nofollow">interest or dividends as well as any short-term gain" rel="nofollow">ins the funds may realize. An in" rel="nofollow">individual reports all ordin" rel="nofollow">inary dividends as dividend in" rel="nofollow">income. The mutual fund designates the portion that represents “qualifyin" rel="nofollow">ing dividend” in" rel="nofollow">income which is taxed at the generally lower, 0% 15% or 20% rate. Capital gain" rel="nofollow">in dividends represent the long term capital gain" rel="nofollow">ins and losses actually realized by the mutual fund durin" rel="nofollow">ing the year. All capital gain" rel="nofollow">in dividends are treated as long-term capital gain" rel="nofollow">ins.” Note that the amounts the authors of our textbook refer to as capital gain" rel="nofollow">ins dividends are reported by mutual funds to their shareholders as “capital gain" rel="nofollow">ins distributions” amounts which should be reported in" rel="nofollow">in the same manner as if were another other long term capital gain" rel="nofollow">in. For example, the $1,275 amount shown above reported to the Smiths by Dreyfus Premier Mutual Fund as a capital gain" rel="nofollow">ins distribution should be reported by them as if in" rel="nofollow">in the same manner as if they had another long term capital gain" rel="nofollow">in of this amount. The tax return mechanics of this is, however, somewhat convoluted because the amounts of qualifyin" rel="nofollow">ing dividends and capital gain" rel="nofollow">ins distributions from a mutual fund need to be first reported on Schedule B of Form 1040. From this form any capital gain" rel="nofollow">ins distribution from a mutual fund is transferred to Schedule D (the IRS form on which capital gain" rel="nofollow">ins are shown). Note that companies are required to provide each shareholder to whom they pay a dividend with a Form 1099-Div. This form provides in" rel="nofollow">information in" rel="nofollow">in regards to the dividend paid to a particular shareholder. The in" rel="nofollow">information provided for each company in" rel="nofollow">includes the followin" rel="nofollow">ing Box 1a Total ordin" rel="nofollow">inary dividend Box 1b Qualified dividends Box 3 non dividend distribution Box 6 Foreign Tax Paid Recall the followin" rel="nofollow">ing in" rel="nofollow">information from the last page of our capital gain" rel="nofollow">ins. It reads as follows: Individuals who receive dividends from domestic corporations (those in" rel="nofollow">incorporated in" rel="nofollow">in one of the 50 States of the U.S) and from foreign corporations whose stock is readily traded on an established U.S. securities market are permitted to treat these so called “qualifyin" rel="nofollow">ing dividends” in" rel="nofollow">in a manner similar to a NCG. That is, these dividends are taxed at a maximum tax rate of 15% or 20% dependin" rel="nofollow">ing on taxpayer’s taxable in" rel="nofollow">income with a 0% rate applyin" rel="nofollow">ing to taxpayers in" rel="nofollow">in the 10% and 15% tax bracket. While “qualifyin" rel="nofollow">ing dividends” are added to any NCG they are not subject to the process by which capital gain" rel="nofollow">ins and loss are netted. In almost all cases the dividends which the Smiths received are “qualified ones”. In such cases the corporations which pays the dividends should in" rel="nofollow">indicate that Box 1a of IRS Form 1099-Div which is entitled “ordin" rel="nofollow">inary dividends is equal in" rel="nofollow">in amount to Box 1b which is entitled “qualified dividends. This is important in" rel="nofollow">information for us to know when completin" rel="nofollow">ing a tax return usin" rel="nofollow">ing Turbo Tax because this program requires that for each company a Box 1a and Box 1b in" rel="nofollow">information be entered. The Box 1a and Box 1b amounts will be equal whenever a domestic corporation or one listed on a U.S Securities market pays a dividend (recall from the Chapter 6 notes that a dividend by defin" rel="nofollow">inition is a distribution out of either current or accumulated earnin" rel="nofollow">ings and profits).. If a dividend is distributed from a corporation which does not meet this requirement for example from a foreign corporation whose shares are not listed on a U.S. stock exchange the amount in" rel="nofollow">in Box 1a will be equal to the amount of the total dividend paid with no amount listed in" rel="nofollow">in Box 1b. For example this will be the case for Shlomo Corporation, which as described above is a foreign corporation not listed on a U.S Stock Exchange from which the Smith’s received $2,000 of Box 1a total ordin" rel="nofollow">inary in" rel="nofollow">income none of which is consider a Box 1b “qualified dividend”. The best way to enter dividend in" rel="nofollow">income in" rel="nofollow">in Turbo Tax is to select “View” then under “Forms” Schedule B-Interest Income and Dividend in" rel="nofollow">income. Go then to “dividend in" rel="nofollow">income smart worksheet”. An alternative way to enter dividend in" rel="nofollow">income usin" rel="nofollow">ing Turbo Tax is to complete a separate 1099 Form Div for each company for which the Smiths received dividends. You can do this in" rel="nofollow">in Turbo Tax be selectin" rel="nofollow">ing “View” then under “Forms” Schedule B-Interest Income and Dividend in" rel="nofollow">income. Go then to “Schedule B Form 1099 Div to separately prepare this form for each company from which the Smiths have received a dividend. The Smiths own City of New Brunswick municipal bonds which paid them $18,000 in" rel="nofollow">in in" rel="nofollow">interest in" rel="nofollow">in 2015 In 2015they also received $1,200 of in" rel="nofollow">interest on U.S. Treasury Bills. The Smiths also received $300 in" rel="nofollow">in in" rel="nofollow">interest in" rel="nofollow">in 2015 from a savin" rel="nofollow">ings account they had at Wells Fargo Bank. In addition this year the Smiths received $800 of in" rel="nofollow">interest on a General Electric Corporation bond. The Smiths every week buy lottery tickets, usually New Jersey Pick Six Tickets. They have never won more than $80, which Jennifer won in" rel="nofollow">in 2008 when she got three of the Pick Six numbers in" rel="nofollow">in April of that year. On September 17, 2015 Jennifer’s luck improved when she got five of the Pick Six Numbers. While bein" rel="nofollow">ing disappoin" rel="nofollow">inted that she did not get all six numbers (the prize would have been $6 Million if she had) Jennifer was nonetheless happy that she was one of the 15 people that week who received $7,563 in" rel="nofollow">in prize win" rel="nofollow">innin" rel="nofollow">ings. Jennifer received her check for $7,563 on October 3, 2015 and kept buyin" rel="nofollow">ing lottery tickets each week. Durin" rel="nofollow">ing the year Jennifer purchased a total of $740 of lottery tickets. Please in" rel="nofollow">include these gamblin" rel="nofollow">ing win" rel="nofollow">innin" rel="nofollow">ings on lin" rel="nofollow">ine 21 of page 1 of form 1040 in" rel="nofollow">in the category entitled “other in" rel="nofollow">income” In 2014 Jennifer and Gary purchased a new home at a cost of $800,000. This home is their primary residence. To help pay for this new home they borrowed $600,000 from PMC Corporation and paid mortgage in" rel="nofollow">interest in" rel="nofollow">in 2015 total $30,000 on this new home. In obtain" rel="nofollow">inin" rel="nofollow">ing the mortgage from PMC to acquire this new residence the Smiths paid PMC $7,000 in" rel="nofollow">in poin" rel="nofollow">ints, so that they could obtain" rel="nofollow">in a more favorable in" rel="nofollow">interest rate on their mortgage than they otherwise would have obtain" rel="nofollow">ined. The mortgage on the Smith's secondary residence is from Statewide Savin" rel="nofollow">ings Bank. On this mortgage the Smiths owe $40,000 and paid $2,000 of in" rel="nofollow">interest in" rel="nofollow">in 2015. The mortgages in" rel="nofollow">interest and poin" rel="nofollow">ints that the Smiths paid in" rel="nofollow">in 2014 were all reported to them on Form 1098. On July 15, 2015 the Smith’s secondary residence located on Hilton Head North Carolin" rel="nofollow">ina which they had purchased on September 1, 1998 for $275,000 was struck by a hurricane resultin" rel="nofollow">ing in" rel="nofollow">in substantial damage. The beautiful oak tree standin" rel="nofollow">ing in" rel="nofollow">in front of this home crashed in" rel="nofollow">into the home. Floodin" rel="nofollow">ing in" rel="nofollow">in the basement and first floor area was significant. The value of this home prior to the hurricane was $425,000. Afterwards it was just $225,000. The Smith’s in" rel="nofollow">insurance policy reimbursed them $68,000 for the damages sustain" rel="nofollow">ined to their house. This casualty loss deduction should be reported on Form 4684. The Smiths had unreimbursed medical expenses of $125,000 from doctor and hospital bills. The amount was large because Gary was very ill. Fortunately he is better now. In 2015 the Smiths paid $2,100 to the CPA who prepared their tax return. The Smiths keep their stock market securities in" rel="nofollow">in a safety deposit box that they main" rel="nofollow">intain" rel="nofollow">in at PNC Bank. This safe deposit box annually cost the Smiths $120. The Smiths made the followin" rel="nofollow">ing charitable contributions in" rel="nofollow">in 2015: The American Cancer Society $ 85,000 The American Heart Association 40,000 Rutgers University 5,000 Durin" rel="nofollow">ing the year the Smiths paid a total of $21,000 in" rel="nofollow">in real estate taxes: $15,000 on their prin" rel="nofollow">incipal residence and $6,000 on their secondary residence. The couple also paid NJ sales tax of $9,000 durin" rel="nofollow">ing the year. In 2014 the Smith's total federal in" rel="nofollow">income tax liability was $20,000. They were entitled to a refund of federal tax for that year of $18,000, sin" rel="nofollow">ince they paid $38,000 in" rel="nofollow">in federal in" rel="nofollow">income tax payments for 2014. The Smiths decided not to claim this refund, and elected, on their 2014 federal return, to treat this excess payment of $18,000 as applied again" rel="nofollow">inst their 2015 federal estimated tax. The Smiths paid a total of $24,000 in" rel="nofollow">in Federal estimated tax payments for 2015 with one-quarter of this amount, $6,000 bein" rel="nofollow">ing paid on each of the four appropriate dates (that is on April 15, 2015; June 15, 2015, September 15, 2015 and January 15, 2016. They also made State of New Jersey estimated tax payments for 2015. For 2015, these payments totaled $8,000, with one-quarter of this amount, $2,000, bein" rel="nofollow">ing paid on each of the four appropriate dates. In recordin" rel="nofollow">ing these estimated tax payments and the overpayment of the prior year’s federal in" rel="nofollow">income tax (described in" rel="nofollow">in the prior paragraph) you may fin" rel="nofollow">ind it helpful to click the menu item in" rel="nofollow">in Turbo Tax for forms and then select the form for tax payments. In August 2015 Jennifer received a check for $350,000 from Prudential Insurance Company. This amount was the proceeds from a life in" rel="nofollow">insurance policy that was purchased in" rel="nofollow">in 1985 by Jennifer's brother, Arturo who died in" rel="nofollow">in May 2014. Although Gary and Jennifer have been happily married for the past 25 year, Gary had for a short time prior to his marriage to Jennifer been married to his first wife, Cynthia. In 2015 Gary paid alimony of $15,000 to Cynthia Smith whose social security number is 472-60-1284. Gary’s marriage to Cynthia did not work out and they were divorced a year later. Gary agreed to pay Cynthia alimony of $15,000 for the rest of her life. In January 2015 Gary’s father died at age 102. Soon after the death of his father Gary’s mother, died a few weeks later after reachin" rel="nofollow">ing her 100th birthday. Gary’s mother (Nelly) and father (Dan) had lived for over 70 years in" rel="nofollow">in a townhouse located at 47 East 88th in" rel="nofollow">in Manhattan that they had purchased in" rel="nofollow">in 1950 for $200,000. This property at the time that Gary’s mother died on January was worth $8 Million. The land was worth $6,000,000 and the townhouse located on it was worth $2,000,000. Upon the death of his mother Gary in" rel="nofollow">inherited $75,000 in" rel="nofollow">in cash, antique furnishin" rel="nofollow">ings valued at $18,000 and the townhouse described above. Gary tried to convin" rel="nofollow">ince Jennifer when his parents died to move with him to the Townhouse his parents had owned . Jennifer, however, told Gary that she wants to contin" rel="nofollow">inue workin" rel="nofollow">ing, as does Gary while livin" rel="nofollow">ing in" rel="nofollow">in New Jersey and does not want to move to Manhattan. Gary therefore decided to rent out the Townhouse which he did begin" rel="nofollow">innin" rel="nofollow">ing on April 1, 2015 Shown below are the 2015 revenues and expenses relatin" rel="nofollow">ing to this property. Rents Received ………………………………………..……………………………………..………$90,000 New York City Real Estate Taxes paid after property became rental property on April 1, 2015 ........ 30,000 Repairs ……………………………………………… …………… …………4,000 Depreciation on the buildin" rel="nofollow">ing can be determin" rel="nofollow">ined from Exhibit 9-5 in" rel="nofollow">in Chapter 9 Gary and Jennifer should report their rental in" rel="nofollow">income on this property on Schedule E. . On her birthday Jennifer received a gift worth $900 from her sister Zuly. In completin" rel="nofollow">ing the Smith's return, there is some in" rel="nofollow">information that I did not give you which you may be called upon to provide. For example, in" rel="nofollow">in question 8 on Schedule B the question is asked “Durin" rel="nofollow">ing 2015, did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust? If “Yes” you may have to file Form 3520 (See in" rel="nofollow">instructions).” When you come to questions like this: answer in" rel="nofollow">in a way that will not require you to complete additional forms such as, in" rel="nofollow">in this case, Form 3520. Of course in" rel="nofollow">in actually doin" rel="nofollow">ing someone’s tax return you should have access to that person so that you can ask him/her questions that need to be answered to complete the tax return. REQUIRED: Prepare the Smiths join" rel="nofollow">intly filed Federal tax return for 2015 You can prepare the Smith's tax return either by hand or by usin" rel="nofollow">ing commercially available software such as Intuit’s Turbo Tax or H&R Block’s Tax Cut. A registration code is provided for the H&R Block Tax Software on the page opposite the in" rel="nofollow">inside cover of everyone’s textbook. It does not matter to me if you use Turbo Tax or Tax Cut. In usin" rel="nofollow">ing Turbo Tax you will get to a screen in" rel="nofollow">in which you can make a selection to start a new tax return. You should do this. You will then be asked if you want to transfer in" rel="nofollow">information from last year’s return. This is a nifty feature which allows you to transfer basic in" rel="nofollow">information such as a taxpayer’s name, social security number and other in" rel="nofollow">information from a prior year’s return to the current one. Transferrin" rel="nofollow">ing in" rel="nofollow">information in" rel="nofollow">in this way is helpful if you were preparin" rel="nofollow">ing the same taxpayer’s return from year-to-year. This bein" rel="nofollow">ing the first year that you will be preparin" rel="nofollow">ing the Smith’s tax return we should make an election to contin" rel="nofollow">inue without transferrin" rel="nofollow">ing. Turbo Tax will then prompt you to enter personal in" rel="nofollow">information for the taxpayer such as the taxpayers, name, social security number, etc. You can enter this in" rel="nofollow">information in" rel="nofollow">in this way, in" rel="nofollow">in effect by bein" rel="nofollow">ing in" rel="nofollow">interviewed by Turbo Tax or you can go to the menu item on the top selectin" rel="nofollow">ing the choice under the headin" rel="nofollow">ing “view”. Under this headin" rel="nofollow">ing you will fin" rel="nofollow">ind a choice for “forms”. The first form I suggest you open is the Federal in" rel="nofollow">income tax return worksheet. Complete as much of this form as you can based on the in" rel="nofollow">information that you know about the Smiths. In completin" rel="nofollow">ing this Federal in" rel="nofollow">income tax return worksheet you will be asked for the date of birth for the Smiths. Turbo Tax asks for in" rel="nofollow">information such as a taxpayer’s date of birth so that if the Smiths win" rel="nofollow">ind up bein" rel="nofollow">ing better off takin" rel="nofollow">ing a standard deduction rather than itemizin" rel="nofollow">ing the extra amount of standard deduction available to a taxpayer over 65 can be automatically calculated. This is a non-issue for the Smiths because their itemized deductions are much greater than their standard deduction. Consequently recordin" rel="nofollow">ing their date of birth on this worksheet would seem in" rel="nofollow">inconsequential. Nonetheless, if you do not record in" rel="nofollow">information such as this Turbo Tax might when you get ready to prin" rel="nofollow">int the Smiths return in" rel="nofollow">indicates that the return has errors and will prompt you for this type of in" rel="nofollow">information. You can deal with this in" rel="nofollow">in more than one way. You can make up dates on which Jennifer and Gary Smith were each born. These dates should be consistent with the facts I have given you in" rel="nofollow">in regards to Jennifer and Gary Smith. Alternatively, it will also be okay if you do not record their birth dates. In usin" rel="nofollow">ing Turbo Tax you may see somethin" rel="nofollow">ing that pops up askin" rel="nofollow">ing you to register your version of Turbo Tax. I suggest ignorin" rel="nofollow">ing all the registration in" rel="nofollow">information and simply clickin" rel="nofollow">ing on “start a new return”, then click on “contin" rel="nofollow">inue without transferrin" rel="nofollow">ing”. I suggest you then click on “view”. The next thin" rel="nofollow">ink to choose is either “step-by-step” or “forms”. As an explanation, Turbo tax will allow you to complete a tax return by goin" rel="nofollow">ing through an in" rel="nofollow">interview process somethin" rel="nofollow">ing it sometimes refers to as step-by-step or by selectin" rel="nofollow">ing various forms and completin" rel="nofollow">ing these forms. You can prepare the Smith’s tax return either way, that is, by usin" rel="nofollow">ing the step-by-step approach, form selection approach or a combin" rel="nofollow">ination of the two.. The tax return which you complete for the Smith’s should look the same at the end whether you use the in" rel="nofollow">interview approach or the form approach or a combin" rel="nofollow">ination of the two. Most accountants seem to prefer the form selection approach which I prefer as well. Much of what I explain" rel="nofollow">ined in" rel="nofollow">in the early pages of this assignment relate to the form selection approach. After you complete a Federal in" rel="nofollow">information worksheet for Jennifer and Gary Smith I suggest you select Form W-2 wages and Tax Statement; complete as much of this form as you can based on the W-2 in" rel="nofollow">information (one for each of Gary’s two employers) I gave you about Gary. After that I would complete as much of the tax payment worksheet as you can based on the in" rel="nofollow">information you have. After that I would complete as much as seems appropriate of Schedule A (itemized deductions); Schedule B (Interest and Dividends); Schedule C (Income from a Sole Proprietorship); Schedule D (Capital Gain" rel="nofollow">in and Loss); and 1040ES-Vouchers 1 and 2. You will need to enter the social security benefits of $26,000 that Gary received on a Form Turbo Tax calls Social Security Benefit Worksheet. Shown below are the only Federal Forms you should submit with the Smith’s tax return: • Form 1040 (page 1 & 2) • Schedule A • Schedule B • Schedule C • Schedule D • Schedule E • Schedule SE • Form 4684 (one page) • 1040-ES (Vouchers 1, 2, 3 and 4) Please remember in" rel="nofollow">in completin" rel="nofollow">ing this assignment to prepare (1040-ES (Vouchers 1, 2, 3 and 4--see the last item in" rel="nofollow">in the list shown just above. These 1040-ES Vouchers are estimated tax forms for the Smiths for 2015. In completin" rel="nofollow">ing these estimated tax vouchers note that based on considerably changed circumstances the Smith’s taxable in" rel="nofollow">income will be much less in" rel="nofollow">in 2014 than it was in" rel="nofollow">in 2013. Assume based on these circumstances you have determin" rel="nofollow">ined that the Smith’s should pay just $5,000 per quarter on each of due dates for which estimated is usually due. There will be no need for the Smiths to pay any estimated state (New Jersey) taxes for 2015. Some of the decisions you will need in" rel="nofollow">in completin" rel="nofollow">ing this tax return project, in" rel="nofollow">in regards to whether somethin" rel="nofollow">ing is in" rel="nofollow">includable or excludable from gross in" rel="nofollow">income, deductible or not, and if deductible where it is deductible or knowin" rel="nofollow">ing where to simply put somethin" rel="nofollow">ing in" rel="nofollow">in Turbo Tax, may require research. In doin" rel="nofollow">ing so you may want to consult such sources as parts of our text, that we have not gone over yet but may contain" rel="nofollow">in relevant in" rel="nofollow">information, in" rel="nofollow">instructions on Turbo Tax, a tax service such as RIA or CCH and/or in" rel="nofollow">instructions for IRS forms. As always, please do not hesitate to ask me as well. In this regard class members should feel free to ask me any questions that may seem relevant. Turbo tax will allow you to prin" rel="nofollow">int out selected forms for review. You can do this whenever you want. However, when you believe you are already to submit your fin" rel="nofollow">inal copy for me, go to prin" rel="nofollow">int and check off the box that says tax return for filin" rel="nofollow">ing. Turbo tax will suggest, prior to your prin" rel="nofollow">intin" rel="nofollow">ing a fin" rel="nofollow">inal version of your return that a review of your return be done to uncover errors. We will discuss the significance of this in" rel="nofollow">in class. In handin" rel="nofollow">ing in" rel="nofollow">in your work, please manually, prin" rel="nofollow">int your name on the top right hand side of page one, only, of the Federal Form 1040 which you prin" rel="nofollow">inted out as part of your solution. Your signature as preparer of this return should also appear on page 2 of Federal Form 1040 in" rel="nofollow">in the “Paid Preparer Use Only” Section. One last thin" rel="nofollow">ing: Preparin" rel="nofollow">ing a tax return usin" rel="nofollow">ing computerized software can save a lot of time and effort. It can, however, be frustratin" rel="nofollow">ing when you know what you are doin" rel="nofollow">ing but are unable to get the computer to do somethin" rel="nofollow">ing the way you know it should be done. For this reason it is acceptable for you to use the override command (you can access it by right clickin" rel="nofollow">ing) to get a result you know is correct.