Tax Return Problem - Decision Making
Alice J. and Bruce M. Byrd are married taxpayers who file a joint return. Their Social Security numbers are 123-45-6789 and 111-11-1112, respectively. Alice's birthday is September 21, 1969, and Bruce's is June 27, 1968. They live at 473 Revere Avenue, Lowell, MA 01850. Alice is the office manager for Lowell Dental Clinic, 433 Broad Street, Lowell, MA 01850 (employer identification number 98-7654321). Bruce is the manager of a Super Burgers fast-food outlet owned and operated by Plymouth Corporation, 1247 Central Avenue, Hauppauge, NY 11788 (employer identification number 11-1111111).
• The following information is shown on their Wage and Tax Statements (Form W-2) for 2016.
Line Description Alice Bruce
|
Line
|
Description
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Alice
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Bruce
|
|
1
|
Wages, tips, other compensation
|
$58,000
|
$62,100
|
|
2
|
Federal income tax withheld
|
4,500
|
6,300
|
|
3
|
Social Security wages
|
58,000
|
62,100
|
|
4
|
Social Security tax withheld
|
3,596
|
3,850
|
|
5
|
Medicare wages and tips
|
58,000
|
62,100
|
|
6
|
Medicare tax withheld
|
841
|
900
|
|
15
|
State
|
Massachusetts
|
Massachusetts
|
|
16
|
State wages, tips, etc.
|
58,000
|
62,100
|
|
17
|
State income tax withheld
|
2,950
|
3,100
|
• The Byrds provide over half of the support of their two children, Cynthia (born January 25, 1992, Social Security number 123-45-6788) and John (born February 7, 1996, Social Security number 123-45-6786). Both children are full-time students and live with the Byrds except when they are away at college. Cynthia earned $4,200 from a summer internship in 2016, and John earned $3,800 from a part-time job.
• During 2016, the Byrds provided 60% of the total support of Bruce's widower father, Sam Byrd (born March 6, 1940, Social Security number 123-45-6787). Sam lived alone and covered the rest of his support with his Social Security benefits. Sam died in November, and Bruce, the beneficiary of a policy on Sam's life, received life insurance proceeds of $1,600,000 on December 28.
• The Byrds had the following expenses relating to their personal residence during 2016:
|
Property taxes
|
$5,000
|
|
Qualified interest on home mortgage
|
8,700
|
|
Repairs to roof
|
5,750
|
|
Utilities
|
4,100
|
|
Fire and theft insurance
|
1,900
|
• The Byrds had the following medical expenses for 2016:
|
Medical insurance premiums
|
$4,500
|
|
Doctor bill for Sam incurred in 2015 and not paid until 2016
|
7,600
|
|
Operation for Sam
|
8,500
|
|
Prescription medicines for Sam
|
900
|
|
Hospital expenses for Sam
|
3,500
|
|
Reimbursement from insurance company, received in 2016
|
3,600
|
• The medical expenses for Sam represent most of the 60% that Bruce contributed toward his father's support.
• Other relevant information follows:
• When they filed their 2015 state return in 2016, the Byrds paid additional state income tax of $900.
• During 2016, Alice and Bruce attended a dinner dance sponsored by the Lowell Police Disability Association (a qualified charitable organization). The Byrds paid $300 for the tickets. The cost of comparable entertainment would normally be $50.
• The Byrds contributed $5,000 to Lowell Presbyterian Church and gave used clothing (cost of $1,200 and fair market value of $350) to the Salvation Army. All donations are supported by receipts, and the clothing is in very good condition.
• Alice and Bruce made a gift to a needy family who lost their home in a fire ($100). In addition, they made several cash gifts to homeless men downtown ($35).
• In 2016, the Byrds received interest income of $2,750, which was reported on a Form 1099-INT from Second National Bank, 125 Oak Street, Lowell, MA 01850 (Employer Identification Number 98-7654322).
• The home mortgage interest was reported on Form 1098 by Lowell Commercial Bank, P.O. Box 1000, Lowell, MA 01850 (Employer Identification Number 98-7654323). The mortgage (outstanding balance of $425,000 as of January 1, 2016) was taken out by the Byrds on May 1, 2012.
• Alice's employer requires that all employees wear uniforms to work. During 2016, Alice spent $850 on new uniforms and $566 on laundry charges.
• Bruce paid $400 for an annual subscription to the Journal of Franchise Management and $741 for annual membership dues to his professional association.
• Neither Alice's nor Bruce's employer reimburses for employee expenses.
• The Byrds do not keep the receipts for the sales taxes they paid and had no major purchases subject to sales tax.
• All members of the Byrd family had health insurance coverage for all of 2016.
• This year the Byrds gave each of their children $2,000, which was then deposited into their Roth IRAs.
• Alice and Bruce paid no estimated Federal income tax. Neither Alice nor Bruce wants to designate $3 to the Presidential Election Campaign Fund.
• Part 1-Tax Computation
• Compute net tax payable or refund due for Alice and Bruce Byrd for 2016. If they have overpaid, they want the amount to be refunded to them. If you use tax forms for your computations, you will need Forms 1040 and 2106 and Schedules A and B. Suggested software: H&R BLOCK At Home.
• Part 2-Tax Planning
• Alice and Bruce are planning some significant changes for 2017. They have provided you with the following information and asked you to project their taxable income and tax liability for 2017.
• The Byrds will invest the $1,600,000 of life insurance proceeds in short-term certificates of deposit (CDs) and use the interest for living expenses during 2017. They expect to earn total interest of $32,000 on the CDs.
• Bruce has been promoted to regional manager, and his salary for 2017 will be $88,000. He estimates that state income tax withheld will increase by $4,000 and the Social Security tax withheld will be $5,456.
• Alice, who has been diagnosed with a serious illness, will take a leave of absence from work during 2017, so she will not receive a salary or incur any work-related expenses during the year. The estimated cost for her medical treatment is $15,400, of which $6,400 will be reimbursed by their insurance company in 2017. Their medical insurance premiums will increase to $9,769. Property taxes on their residence are expected to increase to $5,100. The Byrds' home mortgage interest expense and charitable contributions are expected to be unchanged from 2016.
• John will graduate from college in December 2016 and will take a job in New York City in January 2017. His starting salary will be $46,000.
• Assume that all of the information reported in 2016 will be the same in 2017 unless other information has been presented above.