Question

Part 1:

Reba Dixon is a fifth-grade school teacher who earned a salary of $38,000 in 2017. She is 45 years old and has been divorced for four years. Reba rents out a small apartment building in Colorado Springs, Colorado. In 2017, Reba received $30,000 of rental payments from tenants and she incurred $19,500 of expenses associated with the rental. They had been living in Colorado for the past 15 years, but ever since her divorce, Reba has been wanting to move back to Georgia to be closer to her family. Luckily, in November 2016, a teaching position opened up and Reba and Heather decided to make the move.

Reba and her daughter Heather (20 years old at the end of 2017) moved to Georgia in December 2016 and purchased a home for $80,000. In 2017, Reba paid $2,000 for home mortgage interest and $1,500 in real estate taxes on this same home.

Heather decided to continue living at home with her mom, and she started attending school full-time in January 2017 at a nearby university. She was awarded a $3,000 taxabll tuition scholarship this year, and Reba helped out by paying the remaining $500 tuition and $700 textbook cost. If possible, Reba thought it would be best to claim the education credit for these expenses.

Reba wasn’t sure if she would have enough items to help her benefit from itemizing on her tax return. However, she kept track of several expenses this year that she thought might qualify if she was able to itemize. Reba paid $2,800 in state income taxes via withholding from her paycheck and $6,500 in cash charitable contributions during 2017. She also paid the following medical-related expenses for her and Heather:

Insurance premiums

$

$4,795

Medical care expenses

$1,100

Prescription medicine

$350

Nonprescription medicine

$100

New contact lenses for Heather

$200

A few years ago, Reba acquired several investments with her portion of the divorce settlement. In 2017, she reported the following income from her investments: $2,200 of interest income from ABC, Inc. corporate bonds and $1,500 interest income from City of Denver municipal bonds. Overall, Reba’s stock portfolio appreciated by $12,000.

Heather reported $3,200 of interest income in 2017 from corporate bonds she received as gifts from her father over the last several years. This was Heather’s only source of income for the year. Reba provides more than one-half of Heather’s support.

Reba had $10,000 of federal income taxes withheld by her employer in 2017. Reba did not make any estimated payments. Reba had qualifying insurance for purposes of the Affordable Care Act (ACA) (She is not subject to a “lack of health care insurance” penalty).

Part 2: In addition to the information in Part 1, now also assume the following for 2017:

The $19,500 of expenses associated with Reba renting out a small apartment building is comprised of the following items: $5,500 depreciation, $6,500 property taxes, $3,000 insurance, $1,000 repairs, and $3,500 utilities. Reba will report this information and the $30,000 of rental payments received from tenants on Schedule E.

Reba is a also a part-time chef who has developed a new way to prepare great tasting, low-carbohydrate meals using fresh ingredients. She teaches cooking classes during the summer months when she is not teaching and reports this activity as a sole proprietorship on Schedule C using a principal business code of 611000 in Box B. Activity for the year included: gross receipts = $15,670, food supplies = $3,850, legal expenses = $900, office expense = $410, advertising = $800, and the purchase of a portable convection oven on June 15 used 100% for business purposes = $1,300 (claim the largest depreciation deduction possible). Reba uses the cash basis of accounting for tax purposes. In addition, Reba occasionally uses her personal car for business. Assume that Reba maintains a mileage log showing that she drove her car a total of 10,000 miles during the year including 900 miles for business purposes. Reba does not maintain a home office.

Reba had two stock transactions during the year: 1) Sold 5,000 shares of LMN Corp. common stock for $110,000 on May 5. The shares were originally purchased for $60 each on August 7, 2013. Reba decided to sell the LMN stock before the market price dropped any lower. 2) Sold 900 shares of Home Depot, Inc. common stock for $150 per share on April 21, 2017. The shares were inherited from Reba’s Aunt on March 21, 1997. We will discuss in class how to determine the basis of these shares.

Reba borrowed $25,000 from a broker to purchase investment assets including stocks and bonds. During the year, she paid the broker $1,750 of interest related to this loan.

complete the spreadsheet belwo

income

salary

taxable interest

non taxable interest

business income schedule c

capital gain or loss

rental real estate

total income

less adjustments for agi

deductible part of self employment tax

adjusted gross income

itemized deductions

medical and dental

taxes

interest

gift to charity

total itemized deductions

less itemized deduction or standard deduction

less exemptions

taxable income

tax less credits

education credit

plus other taxes

self employment tax

less payments

federal income tax witheld

refund / tax due

Answer 1

A -- Reba’s federal income taxes due or taxes payable for the current year.

Description Amount Explanation Gross Income: Salary $38,000 Alimony received 14,400 $1,200 per month × 12 months Rental receipts 30,00 Gift from mother 0 $3,000 gift excluded from income Disability insurance payments 1,200 $800 of $2,000 (40%) of payment excluded because taxpayer paid 40% of premium on insurance policy Interest income from corporate bonds 2,200 Interest income from municipal bonds 0 1 Gross income $85,800 Deductions for AGI: Expenses for rental 19,500 property Moving expenses 2,495 $2,010 (for moving company) + 150 (for lodging) + 335 [for mileage (1,395 × .24 cents a mile)] 2 Total for AGI deductions 21,995 3 AGI $63,805 1-2 From AGI deductions: Medical expenses 64 $6445 - 6,381 [10% × (3)] = $64 State income taxes 2,400 Charitable contributions 6,500 Casualty loss deduction 0 $900 - 100 = 800 - 6381 [10% * (3) ] = $0 4) Total itemized 8,964 deductions (5) Standard deduction 8,950 Head of household filing status. See Note A. below (6) Greater of 8,964 Greater of (4) or (5) itemized deductions or standard deduction (7) Personal and 7,800 One personal and one for Heather. dependency exemptions See Note A. below (2 × 3,800) (8) Total from AGI 16,764 (6) + (7) deductions Taxable income $47,041 (3) - (8) (9) Tax on taxable $6,418.60 See head of household tax rate income schedule; $1,275 + 5,143.65 [15% × (47,041) - (12,750) ] (10) Credits 500 American opportunity credit of $500 for tuition paid on Heather’s behalf (full amount qualifies for credit) Not eligible for child tax credit (age). (11) Tax prepayments 10,000 Withholding Tax refund with return ($4,081.35) (9) - (10) - (11)

Note A. The first question we have to answer to determine Reba’s filing status is whether she

can claim Heather as a dependent. If so, she may qualify for head of household filing status.

If not, she will file a single taxpayer.

Does Heather qualify as Reba’s dependent? Yes, as analyzed below. Test                                                  Is Heather a qualifying child of Reba? Relationship                                                  Yes, daughter Age                    Yes, under age 24 and a full-time student (and youngerthan Reba). Residence      Yes, Heather had the same principal residence as Reba for the entire year. Support           Yes. Heather did not provide more than half of her own support. Her scholarship does not count as support she provided for herself because she is Reba’s child.