Frank B. and Lucy B. Rose have no dependents and are both under age 65. Frank is a statutory employee of Green Valley, a wholesaler of recyclable materials(business code is 421930); his Social Security number is 111-11-1111. Lucy is a manager with Freight-Rite, a trucking company, and her Social Security number is 123-45-6789. The Roses live at 482 Devon Drive, Clearwater, fL 33758. They do not not contribute to the Presidential Election Campaign fund.
In 2009 , Frank earned $66,000 in commissions. His employer does not withhold income taxes. Frank paid $5,000 in estimated taxes. Lucy earned $70,000 from which her employer withheld Federal income taxes of $6,000. Assume both employers withheld the correct amounts of Social Security and Medicare taxes. Neither Frank nor Lucy received any expense reimbursements.
Frank uses his automobile in his employment, and during 2009, his business mileage is 29,000 miles (divided evenly throughout the year). Parking and tolls in connection with business use $520 and $190, respectively. Fines paid for traffic violations (during business use) total $600. In deducting business use of his automobile, Frank always uses the automatic mieage method. His other employment-related expenses for the year are as follows:
Airfare------$4,100
Meals-------3,800
Lodging------3,200
Entertainment-----2,000
Business gifts----870
The business gifts consist of 30 fruit baskets Frank sent to key customers during the Christmas season. Each basket cost $25 (not including $4 for wrapping and shipping). During the year, Lucy enrolled in a weekend MBA program at a local university. In this regard, she spent the following amounts: $3,800 (tuition), $820 (books and computer supplies), $250 (meals while on campus), and $220 Bus fare to and from campus). Lucy took her secretary to lunch on two occasions ($91 and $86) and her boss on one occasion ($110). She spent $140 on professional dues and $ 120 on trade journals.
Neither Fank nor Lucy is covered under an employer-sponsored retirement plan. However, each contributes $5,000 (for a total of $10,000) to a traditional IRA.
In addition to their salaries,the Roses received the amounts listed below during the year:
Interest on certificate of deposit issued by Tampa State Bank------$2,200
Inheritance from Albert-----50,000
Distribution from Cardinal Life-----100,600
The distribution from Cardinal Life represents the maturity value ($100,000) plus interest ($600) of an insurance policy on Albert's life. Albert was Frank's uncle and had designated Frank as the beneficiary of the policy. Because Albert died overseas, the insurance company had delayed in making the distribution to Frank.
The Roses had other expenditures as follows:
Charitable contributions(cash)-----$2,600
Medical and dental expenses---9,000
Real property taxes on residence-----4,900
Sales taxes-actual amount (receipts available)----2,400
Home mortgage interest---5,900
Tax return preparation fee----500
Part 1 Tax Computation
Compute the Roses' Federal income tax payable or refund due, assuming they file a joint income tax return, for 2009. If they have overpaid, they want the amount refunded. You will need Forms 1040 and 2106 and schedule A,B, and C. Suggested software: H&R BLOCK At home.
Part 2 Tax Planning
The Roses request your help in deciding where to invest the extra $150,000 (life insurance and inheritance) they received in 2009. They are considering two alternatives:
* municipal bonds that yield 4.5%
* common stock that regularly pays cash dividends (and appreciates) at the rate of 7%
a. calculate the better alternative for next year. Assume that Lucy and Frank will have the same income and deduction in 2010, except for the income from the investment they choose.
b. write a memo to the Roses explaining their alternatives.