Question

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 111‐11‐1112, 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.

a) Gina, their daughter, age 22, a full‐time student, has no income of her own. Gina’s Social Security number is 123‐45‐6788.

b) Sam, their son, age 20, who had gross income of $6,300 in 2016. He graduated from high school in May 2016, Started College in August 2016, then dropped out of college in September 2016. Sam’s Social Security number is 123‐45‐6787.

c) Ben, their oldest son, age 26, is a full‐time graduate student with gross income of $5,200. Ben’s Social Security number is 123‐45‐6786.

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 1,000 12,400

17 State income tax withheld 12,960 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.

Before marrying Freida, Dan was married and divorced to Sarah. Under the divorce agreement, Dan is to pay Sarah $500 per month. Dan paid Sarah $5,500 in 2016, his December alimony payment was not made until January of 2017. Sarah’s Social Security number is 123‐45‐6785

The Butlers also had (1) $1,600 in interest income from their savings account, (2) they sold ABC stock on 8/15/2016 for $10,000 (originally purchased for $4,000 on 1/15/2013), and (3) they sold XYZ stock on 10/15/2016 for $3,000 (originally purchased for $4,000 on 12/15/2015).

Prepare the 2016 Federal income tax return for the Butlers’. You may work in groups no larger than 3 (i.e. 1, 2, or 3). Submit one tax return per group. Please submit (1) a cover page with a list of students who participated in the group project, (2) Form 1040, (3) calculation of Capital gain (including LT or ST), and (4) calculation of tax.

Hints:

1) Take the standard deduction

2) Don’t forget to check the box for the filing status

3) Review the rules as for what qualifies as a “student” for purposes of the Qualifying Child tests. See IRS publication 501 page 13.

4) Make sure you are not using 2017 information (i.e. personal exemptions, standard deduction, tax brackets etc.).

5) Normally interest and capital gains would require additional forms (Schedule B and Schedule D). However for this assignment do not prepare those forms/schedules, simply enter the appropriate amount directly onto form 1040.

Answer 1

Part 1:

Amount of standard deduction shall be $12600 since Daniel and Frieda are a married couple and filing income tax return jointly.

Part 2:

Name of the tax payers: Daniel B Butler and Frieda C Butler.

Dan’s Social Security Number: 111-11-1112

Frieda’s Social Security Number: 123-45-6789    

Part 3:

The child qualifying test is dependent on the following criterions:

1. The child must be younger than the person filing tax return or the child must be below 19 years. However, in case of a student he / she may be below the age of 24 to qualify as child for the purpose of income tax.
2. In case of permanent and total disability there is no age limit for claiming the child benefit in the income tax.
3. The child must pass dependent tax payer test.
4. The child must pass citizen or resident test.

Taxable income after taking standard deduction:

Particulars	Amount ($)	Amount ($)
Wages, tips and other compensation	160000
Commission on sale of house	3100
Interest income	1600
Capital gain on sale of ABC stock (LT)	6000
Capital loss on sale of XYZ stock (ST)	-1000
		169700
Less: Eligible expenditures
Divorce alimony	5500
		5500
		164200
Less: Standard deduction		12600
Taxable income after taking standard deduction		151600

Note: It is to be noted that the taxable income her has been computed only till the standard deduction thus, the above is not complete fully as there are other adjustments which are to be made to compute the taxable income of the taxpayers to ascertain the income tax liability.