Question

Comprehensive Problem 6-52 (LO 6-1, LO 6-2, LO 6-3)

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Read the following letter and help Shady Slim with his tax situation. Please assume that his gross income is $172,900 (which consists only of salary) for purposes of this problem.

December 31, 2019

To the friendly student tax preparer:

Hi, it’s Shady Slim again. I just got back from my 55th birthday party, and I’m told that you need some more information from me in order to complete my tax return. I’m an open book! I’ll tell you whatever I think you need to know.

Let me tell you a few more things about my life. As you may recall, I am divorced from my wife, Alice. I know that it's unusual, but I have custody of my son, Shady, Jr. The judge owed me a few favors and I really love the kid. He lives with me full-time and my wife gets him every other weekend. I pay the vast majority of my son's expenses. I think Alice should have to pay some child support, but she doesn't have to pay a dime. The judge didn't owe me that much, I guess.

I had to move this year after getting my job at Roca Cola. We moved on February 3 of this year, and I worked my job at Roca Cola for the rest of the year. I still live in the same state, but I moved 500 miles away from my old house. I hired a moving company to move our stuff at a cost of $2,300, and I drove Junior in my car. Junior and I got a hotel room along the way that cost us $65 (I love Super 8!).

Can you believe I’m still paying off my student loans, even after 15 years? I paid a total of $900 in interest on my old student loans this year.

Remember when I told you about that guy that hit me with his car? I had a bunch of medical expenses that were not reimbursed by the lawsuit or by my insurance. I incurred a total of $20,000 in medical expenses, and I was only reimbursed for $11,000. Good thing I can write off medical expenses, right?

I contributed a lot of money to charity this year (and have receipt documentation for all contributions). I’m such a nice guy! I gave $1,000 in cash to the March of Dimes. I contributed some of my old furniture to the church. It was some good stuff! I contributed a red velvet couch and my old recliner. The furniture is considered vintage and is worth $5,000 today (the appraiser surprised me!), even though I only paid $1,000 for it back in the day. When I contributed the furniture, the pastor said he didn’t like the fabric and was going to sell the furniture to pay for some more pews in the church. Oh well, some people just have no taste, right? Roca Cola had a charity drive for the United Way this year and I contributed $90. Turns out, I don’t even miss it, because Roca Cola takes it right off my paycheck every month . . . $15 a month starting in July. My pay stub verifies that I contributed the $90 to the United Way. Oh, one other bit of charity from me this year. An old buddy of mine was down on his luck. He lost his job and his house. I gave him $500 to help him out.

I paid a lot of money in interest this year. I paid a total of $950 in personal credit card interest. I also paid $18,000 in interest on my $500,000 home mortgage that helped me buy my dream home. I also paid $2,000 in real estate taxes for my new house.

A few other things I want to tell you about this year. Someone broke into my house and stole my kid's brand new bicycle and my set of golf clubs. The total loss from theft was $900. I paid $125 in union dues this year. I had to pay $1,200 for new suits for my job. Roca Cola requires its managers to wear suits every day on the job. I spent a total of $1,300 to pay for gas to commute to my job this year.

Oh, this is pretty cool. I've always wanted to be a firefighter. I spent $1,400 in tuition to go to the local firefighter's school. I did this because someone told me that I can deduct the tuition as an itemized deduction, so the money would be coming back to me.

That should be all the information you need right now. Please calculate my taxable income and complete pages 1 and 2 of Form 1040 (through taxable income, line 10) and Schedule A. You're still doing this for free, right?

Comprehensive Problem 6-52 Part b

Complete pages 1 and 2 of Form 1040 (through taxable income, line 10) and Schedule A.

Shady Slim’s address is 19010 N.W. 135th Street, Miami, FL 33054.

Social security numbers:

Shady Slim: 123-45-6789        Shady Slim,Jr: 222-22-2222

(Round your intermediate computations to the nearest whole dollar amount. Input all the values as positive numbers. Enter any non-financial information, (e.g. Names, Addresses, social security numbers) EXACTLY as they appear in any given information or Problem Statement. Use 2019 tax rules regardless of year on form)

Please provide the form portions that need to be filled in as this not complete or correct.

Page 1 of Form 1040. Use provided information and follow instructions on form. Form 1040 Department of the Treasury—Internal Revenue Service (99) U.S. Individual Income Tax Return O Single Married filing jointly 2018 Filing status: OMB No. 1545-0074 Married filing separately Head of household Last name Slim You were born before January 2, 1954 You are blind IRS Use Only-Do not write or staple in this space Qualifying widow(er) Your social security number (Enter as xxx-xx-xxxx) 123-45-6789 Your first name and initial Shady Your Standard deduction: Someone can claim you as a dependent If joint return, spouse's first name and initial Last name Spouse's social security number (Enter as XXX-XX-XXXX) Full-year health care coverage or exempt (see inst.) Spouse standard Someone can claim your spouse as a dependent Spouse was born before January 2, 1954 deduction: Spouse is blind D Spouse itemizes on a separate return or you were dual-status alien Home address (number and street). If you have a P.O. box, see instructions Apt. no. 19010 N.W. 135th Street; City, town or post office, state, and ZIP code. If you have a foreign address, attach Schedule 6. HOPA Presidential Election Campaign Check here if you want S3 to go to this fund (see inst.) You Spouse If more than four dependents, see inst. and here ► Dependents (see instructions): (4) Vif child under age 17 qualifies for (see inst.): (2) Dependent's social security number (Enter as XX-XX-XOXOX) (3) Dependent's relationship to you Last name Child tax credit. (1) First name Shady Credit for other dependents Slim, Jr. 222-22-2222 Son Sign Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true,

Answer 1

Taxable income is $145,975, computed as follows:

                  Gross Income                                                                               $ 172,900
                  Less Moving Expenses:
                           Mileage (500 x 19¢)                                    $     95
                           Moving company                                           2,300
                           Lodging                                                              40             -     2,435
                  AGI                                                                                              $ 170,465
                  Itemized Deductions:
                           Medical Expenses                                                 0
                           Mortgage Interest                                        13,000
                           Real Estate Taxes                                          2,000
                           Charitable Contributions                              2,090
                           Misc. Itemized Deductions                                   0              - 17,090                  Taxable income before exempions                                              $ 153,375
                  Personal & Dependency exemptions                                            -    7,400
                      Taxable Income                                                                       $ 145,975

Notes:

1.    House-hunting trip, meals, and movie are not deductible moving expenses.

2.    Student loan interest is not deductible because AGI exceeds the threshold amount of income.

3.    Medical expenses do not exceed the floor limitation of 7.5 percent of AGI so are non-deductible.

4.    Personal credit card interest is not deductible.

5.    Slim can deduct the $1,000 cash donation, the $90 payroll deduction and the basis of the furniture he contributed (capital gain property put to unrelated use).

6.    Casualty losses do not exceed floor limitations ($100 and 10 percent of AGI) thus, they are not deductible.

7.    Miscellaneous itemized deductions: union dues of $100 don't exceed the 2% threshold.

8.    Other non-deductible items: clothing for work, commuting expenses, firefighter education expenses.