Daniel B. Butler and Freida C. Butler, husband and wife, file a joint return. The Butlers live at 625 Oak Street in Corbin, KY 40701. Dan's Social Security number is 111-11-1111, and Freida's is 123-45-6789. Dan was born on January 15, 1965, and Freida was born on August 20, 1966.
During 2016, Dan and Freida furnished over half of the total support of each of the following individuals, all of whom still live at home:
Dan was employed as a manager by WJJJ, Inc. (employer identification number 11-1111111, 604 Franklin Street, Corbin, KY 40702), and Freida was employed as a salesperson for Corbin Realty, Inc. (employer identification number 98-7654321, 899 Central Street, Corbin, Ky 40701). Selected information from the W–2 Forms provided by the employers is presented below. Dan and Freida use the cash method.
Line | Description | Dan | Freida |
1 | Wages, tips, other compensation | $74,000 | $86,000 |
2 | Federal income tax withheld | 11,000 | 12,400 |
17 | State income tax withheld | 2,960 | 3,440 |
Freida sold a house on December 30, 2016, and will be paid a commission of $3,100 (not included in the $86,000 reported on the W–2) on the January 10, 2017 closing date.
Other income (as reported on 1099 Forms) for 2016 consisted of the following:
Dividends on CSX stock (qualified) | $4,200 | |
Interest on savings at Second Bank | 1,600 | |
Interest on City of Corbin bonds | 900 | |
Interest on First Bank CD | 382 |
The $382 from First Bank was original issue discount. Dan and Freida collected $16,000 on the First Bank CD that matured on September 30, 2016. The CD was purchased on October 1, 2014, for $14,995, and the yield to maturity was 3.3%.
Dan received a Schedule K–1 from the Falcon Partnership, which showed his distributive share of income as $7,000 (non passive income).
In addition to the above information, Dan and Freida's itemized deductions included the following:
Paid on 2016 Kentucky income tax | $700 | |
Personal property tax paid | 600 | |
Real estate taxes paid | 1,800 | |
Interest on home mortgage (Corbin S&L) | 4,900 | |
Cash contributions to the Boy Scouts | 800 |
Sales tax from the sales tax table is $1,860. Dan and Freida made Federal estimated tax payments of $8,000. All members of the family had health insurance coverage for all of 2016. Dan and Freida do not wish to contribute to the Presidential Election Campaign. The Kentucky income tax rate is 4%.
Required:
Compute Dan and Freida’s 2016 Federal income tax payable (or refund due). Use Form 1040 and Schedules A, B, and E to complete this tax return. If there is a tax overpayment, the Butlers would like a refund. If additional tax is due, assume no underpayment penalty applies.
It may be necessary to complete the tax schedules before completing Form 1040.
Tax Computation | ||
Gross income | ||
Salary and commissions ($74,000 + $86,000) (Note 1) | $160,000 | |
Interest income on certificate of deposit | $382 | |
Interest income on Second Bank savings account (Note 2) | $1,600 | |
Dividends on CSX stock (Note 3) | $4,200 | |
Income from partnership (Note 4) | $7,000 | |
Deductions for adjusted gross income | $0 | |
Adjusted gross income | $173,182 | |
Itemized deductions | ||
State income tax (Note 5) | $7,100 | |
Personal property tax | $600 | |
Real estate tax | $1,800 | |
Home mortgage interest | $4,900 | |
Cash contributions | $800 | |
Total itemized deductions | -$15,200 | |
Personal and dependency exemptions (Note 6) | -$15,800 | |
Taxable income | $142,182 | |
Tax liability (Note 7) | $26,838 | |
Less: Tax withheld by employers ($12,400 + $11,000) | -$23,400 | |
Estimated tax payments | -$8,000 | |
Net tax payable (or refund due) for 2015 | -$4,562 | |
Notes:- | ||
(1) The $3,100 commission for Freida is not included in her gross income until it is received in 2015. | ||
(2) The $900 of interest on the City of Corbin bonds is excluded from gross income. | ||
(3) The dividends of $4,200 on the CSX stock are included in Dan and Freida’s gross income. | ||
(4) Dan’s share of the partnership profits is $7,000 (per the Schedule K–1 received). Therefore, he must include this amount in his gross income | ||
(5) The state income tax paid of $7,100 ($2,960 + $3,440 + $700) exceeded the sales tax of $1,860 from the sales tax table. | ||
(6) Dan and Freida’s personal and dependency exemptions deduction is $15,800 = ($3,950 × 4) | ||
(7) The Butler’s tax liability is $26,838: | ||
Tax on dividend income ($4,200 × 15%) | $630 | |
Tax on other taxable income ($142,182 - $4200 = $137,982) | ||
[$10,162 + 25%($137,982 − $73,800) | $26,208 | |
$26,838 |
Daniel B. Butler and Freida C. Butler, husband and wife, file a joint return. The Butlers...
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