Question

Janice Morgan, age 24, is single and has no dependents. She is a freelance writer. In January 2019, Janice opened her own office located at 2751 Waldham road, Pleasat Hill, NM 88135. She called her business Writers Anonymous. Janice is a cash basis taxpayer. She lives at 132 Stone Avenue, Pleasant Hill, NM 88135. Her Social Security number is 123-45-6789. Janice's parents continue to provide health insurance for her under their policy. Janice wants to contribute to the Presidential Election campaign fund. During 2019, Janice had the following income and expense items connected with her business:

Income from sales of articles $85,000

Rent $16,500

Utilities $7,900

Supplies $1,800

Insurance $5,000

Travel (including meals of $1,200) $3,500

Janice purchased and placed in service the following fixed assets for her business. Janice wants to elect immediate expensing under section 179, if possible.

Furniture and fixtures (new) costing $21,000 on January 10

Computer equipment (new) costing $12,400 on July 28

Janice's itemized deductions are as follows:

State income tax $2,950

Home mortgage interest paid to First Bank $6,000

Property taxes on home $2,500

Charitable contributions $1,200

Janice did not keep a record of the sales tax she paid. The amount allowed by the sales tax table is $437. Janice has interest income of $4,000 on certificates of deposit at Second Bank. Janice makes estimated tax payments of $3,000 for 2019.

Compute Janice Morgan's 2019 Federal income tax payable (or refund due).

Answer 1

Refund due = $181

Explanation:

Initially, compute income from business as follows:

Income = Sales - (Rent + Utilities + Supplies + Insurance + Travel excluding meals + Meals + Depreciation and deduction of 179)

= $85,000 - ($16,500 + $7,900 + $1,800 + $5,000 + [$3,500 - $1,200] + [$1,200 * 50%] + $33,400)

= $17,500

Note:

1.Meals can be deducted up to 50% of the amount incurred.

2.Depreciation and deductions under section 179:

Depreciation and deduction under 179 = Furniture and fixture + Computer equipment

                                                             = $21,000 + $12,400

                                                             = $33,400

Now,Compute the itemized deductions as follows:

Itemized deduction = State income tax + Home mortgage interest + Property tax on home + Charitable contribution

= $2,950 + $6,000 + $2,500 + $1,200

= $12,650

Compute self-employment tax deduction as follows:

Self-employment tax = [Income * (Social security tax + Medicare)] * (6.2 + 6.2 + 1.45 + 1.45) %} / 2

= $17,500 * [100 - (6.2+1.45)] %} *(6.2 + 6.2 + 1.45 + 1.45) %} / 2

= {$16,161 * (6.2 + 6.2 + 1.45 + 1.45) %} / 2

= $2,473 / 2

= $1,236

Here, self-employment tax = $2,473

Self-employment tax deduction = $1,236

Finally, compute tax payable as follows:

Particulars	Amount
Income from business	$17,500
Add: Interest	$4,000
Less: Self Employment tax deduction	($1,236)
Adjusted Gross income	$20,264
Less:Itemized deduction	($12,650)
Less: personal exemption	($4,150)
Taxable income	$3,464
Tax on Taxable income 2019	$3,464*10% =$346
Add: self employment tax	$2,473
Total tax payable	$2,473+$346=$2,819
Less:Estimated tax paid	($3,000)
Total tax payable(Refund)	($181)