Question

Note: This problem is for the 2018 tax year.

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 123-45-6780. Dan was born on January 15, 1967, and Freida was born on August 20, 1968.

During 2018, Dan and Freida furnished over half of the total support of each of the following individuals, all of whom still live at home:

1. Gina, their daughter, age 22, a full-time student, who married on December 21, 2018, has no income of her own and for 2018 did not file a joint return with her husband, Casey, who earned $10,600 during 2018. Gina's Social Security number is 123-45-6788.
2. Willie, their son, age 20, who had gross income of $6,300 in 2018, dropped out of college in October 2018. He had graduated from high school in May 2018. Willie's Social Security number is 123-45-6787.
3. 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	11,000	12,400
17	State income tax withheld	2,960	3,440

Freida sold a house on December 30, 2018, and will be paid a commission of $3,100 (not included in the $86,000 reported on the W–2) on the January 10, 2019, closing date.

Other income (as reported on 1099 Forms) for 2018 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, 2018. The CD was purchased on October 1, 2016, for $14,995, and the yield to maturity was 3.3%.

Dan participated on a game show and won a cash prize of $7,000.

In addition to the above information, Dan and Freida's itemized deductions included the following:

Paid on 2018 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 United Way		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 2018. Dan and Freida do not wish to contribute to the Presidential Election Campaign. The Kentucky income tax rate is 4%.

Required:

Complete the Butler's Form 1040.

Form 1040 (2018) Daniel B. and Freida C. Butler 111-11-1112 Page 2 Attach Form(s) W-2. Also attach Form(s) W-2G and 1099-R if tax was withheld. 1 Wages, salaries, tips, etc. Attach Form(s) W-2 . . . . . . . . . . . . . . . . . . . . . . 1 160,000 2a Tax-exempt interest 2a 900   b   Taxable interest 2b 1,982 3a Qualified dividends 3a 4,200   b   Ordinary dividends 3b 4,200 4a IRAs, pensions, and annuities 4a   b   Taxable amount 4b 5a Social security benefits 5a   b   Taxable amount 5b 6 Total income. Add lines 1 through 5. Add any amount from Schedule 1, line 22 7,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 173,182 7 Adjusted gross income. If you have no adjustments to income, enter the amount from line 6; otherwise, subtract Schedule 1, line 36, from line 6 . . . . . . . . . . . . . . 7 173,182 Standard Deduction for– • Single or married filing separately, $12,000 • Married filing jointly or Qualifying widow(er), $24,000 • Head of household, $18,000 • If you checked any box under Standard deduction, see instructions. 8 Standard deduction or itemized deductions (from Schedule A) . . . . . . . . . . . 8 24,000 9 Qualified business income deduction (see instructions) . . . . . . . . . . . . . . . . . . . . 9 10 Taxable income. Subtract lines 8 and 9 from line 7. If zero or less, enter -0- . . . . 10 11 a Tax (see inst) ? (check if any from: 1 ◻ Form(s) 8814 2 ◻ Form 4972 3 ◻ ) b Add any amount from Schedule 2 and check here . . . . . . . . . . . . . . . . . ► ◻ 11 ? 12 a Child tax credit/credit for other dependents ? b Add any amount from Schedule 3 and check here . . . . . . . . . . . . . . . . . ► ◻ 12 ? 13 Subtract line 12 from line 11. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . 13 ? 14 Other taxes. Attach Schedule 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ? 15 Total tax. Add lines 13 and 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ? 16 Federal income tax withheld from Forms W-2 and 1099 . . . . . . . . . . . . . . . . . . . . 16 ? 17 Refundable credits:   a EIC (see inst.) b Sch 8812   c Form 8863 Add any amount from Schedule 5 ? . . . . . . . . . . . . . . . . . . 17 ? 18 Add lines 16 and 17. These are your total payments . . . . . . . . . . . . . . . . . . . . . 18 ? Refund 19 If line 18 is more than line 15, subtract line 15 from line 18. This is the amount you overpaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ? 20a Amount of line 19 you want refunded to you. If Form 8888 is attached, check here . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ► ◻ 20a ? Direct deposit? ► b Routing number X X X X X X X X X ► c Type: ◻ Checking ◻ Savings See instructions. ► d Account number X X X X X X X X X X X X X X X X X 21 Amount of line 19 you want applied to your 2019 estimated tax . . . . . . . . . . . . . . . . . . ► 21 Amount You Owe 22 Amount you owe. Subtract line 18 from line 15. For details on how to pay, see instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ► 22 23 Estimated tax penalty (see instructions) . . . . . ► 23 Form 1040 (2018)

*** I need help with 11a, 11, 12a, 12, 13, 14, 15, 16, 17, 17 b where it says "Add any amount from Schedule 5," 18, 19, and 20a. I have put a question mark in all the boxes I need help with. Please and thank you.

Answer 1

Part 1—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
Prize income (Note 4) 7,000
Deductions for adjusted gross income (–0–)
Adjusted gross income $173,182
Standard deduction (greater than itemized deductions) (24,000)
Taxable income $149,182
Tax liability (Note 5) $ 24,405
Dependent credit (Note 6) (1,000)
Less: Tax withheld by employers ($12,400 + $11,000) (23,400)
Estimated tax payments (8,000)
Net tax payable (or refund due) for 2018 ($ 7,995)

See the tax return solution beginning on p. 4-28 of the Solutions Manual.

(1)

The $3,100 commission for Freida is not included in her gross income until it is received in 2020.

(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)

The game show winnings are taxable income. Therefore, Dan must include this amount in his gross income.

(5)

The Butler’s tax liability is $24,405:

Tax on dividend income ($4,200 × 15%) $ 630
Tax on other taxable income ($144,982) (from tax schedule) 23,775
$24,405

(6)

Gina qualifies as a dependent. Under the qualifying child requirements, she does not have to satisfy the gross income test. In any event, this is not a problem because Gina has $0 gross income. Gina does not file a joint return with her husband. Therefore, because all of the requirements are satisfied for a qualifying child, Dan and Freida can claim a dependent credit for Gina. Ben, their son, fails to qualify as a dependent because of the age requirement for a qualifying child and because of the gross income test for a qualifying relative. Willie, their son, does qualify as a dependent as a qualifying child. It appears he has too much gross income ($6,300). However, there is no gross income test under the qualifying child requirements. He does satisfy the qualifying child age requirement by being a full-time student during five calendar months. Because Willie is not under age 17, Dan and Frieda cannot claim the $2,000 child credit for Willie but can claim the $500 dependent credit.