Question

John and Sandy Ferguson got married eight years ago and have a seven-year old daughter Samantha. In 2017, John worked as a computer technician at a local university earning a salary of $52,000, and Sandy worked part-time as a receptionist for a law firm earning a salary of $29,000. John also does some Web design work on the side and reported revenues of $4,000 and associated expenses of $750. The Fergusons received $800 in qualified dividends and a $200 refund of their state income taxes. The Fergusons always itemize their deductions and their itemized deductions were well over the standard deduction amount last year.The Fergusons had qualifying insurance for purposes of the Affordable Care Act (ACA). Use Tax Rate Schedule for reference.

The Fergusons reported making the following payments during the year:

State income taxes of $4,400. Federal tax withholding of $4,000.

Alimony payments to John’s former wife of $10,000.

Child support payments for John’s child with his former wife of $4,100.

$3,200 of real property taxes.

Sandy was reimbursed $600 for employee business expenses she incurred. She was required to provide documentation for her expenses to her employer.

In addition to the $750 of Web design expenses, John attended a conference to improve his skills associated with his Web design work. His trip was for three days and he incurred the following expenses: airfare $370, total taxi fares for trip $180, meals $80, and conference fee of $200.

$3,600 to Kid Care day care center for Samantha’s care while John and Sandy worked.

$14,000 interest on their home mortgage.

$3,000 interest on a $40,000 home-equity loan. They used the loan to pay for family vacation and new car.

$6,000 cash charitable contributions to qualified charities.

Donation of used furniture to Goodwill. The furniture had a fair market value of $400 and cost $2,000.

a) What is the Fergusons’ 2017 federal income taxes payable or refund, including any self-employment tax and AMT, if applicable? (Use the 2017 AMT exemptions.)

b) Prepare 1040 Tax form AND Form 6251.

Answer 1

Answer: $1,601.10 refund, computed as follows:

Description	Amount	Explanation
Gross income:		Note: Sandy’s reimbursement for her employee business expenses is excluded from gross income.
Salary	$81,000	($52,000 + $29,000)
Self-employment revenues	4,000
Dividends	800
State income tax refund	200
(1) Gross income	86,000
For AGI deductions:
Self-employment expenses other than travel expenses	750
John’s self employment related travel expenses	590	$370 airfare, taxi fares $180, Meals $40 ($80 × 50%)
John’s conference fees	200
Employer portion of self-employment taxes	174	$2,460 × 92.35% × 7.65% = $174. See Note A below
Alimony	10,000
(2) Total for AGI deductions	11,714
(3) AGI	74,286	(1) - (2)
Itemized deductions:
State income taxes	4,400
Real property taxes	3,200
Home mortgage interest expense	14,000
Home equity loan interest expense	3,000
Charitable contributions cash	6,000
Charitable contributions property	400	Lesser of fair market value or basis
(4) Total itemized deductions	31,000	Standard deduction for MFJ is $12,600 so the Fergusons deduct itemized deductions
(5) Personal and dependency exemptions	12,000	$4,000 × 3
(6) Total from AGI deductions	43,000	(4) + (5)
Taxable income	31,286	(3) – (6)
(7) Tax on income other than qualified dividends	$3,650.40	$31,286 – 800 = $30,486. Tax = $3,650.40. from MFJ tax rate schedule $1,845 + 1,805.40 [15% × (30,486 – 18,450)]
(8) Tax on qualified dividends	0	$800 × 0%; all $800 would have been taxed at 15% if it had been ordinary income.
(9) Total Federal income tax	$3,650.40	(7) + (8)
(10) Self Employment tax	348	See Note A below:
(11) Alternative Minimum tax	0	See Note C below
(12) Total taxes	$3,998.40	(9) + (10) +(11)
(13) Child and dependent care credit	600	See Note B below
(14) Child tax credit	1,000	One qualifying child
(15) Federal tax withholding	4,000
Tax payable (refund)	($1,601.60)	(12) – (13) – (14)- (15)

Note A: John’s self employment taxes are computed as follows:

Description	Amount	Explanation
(1) Self-employment revenue	$4,000
Expenses:
Day to day expenses	750
Travel expenses	590
Education expenses	200	Conference fee
(2) Total self-employment expenses	1,540
Net self-employment income	$2,460	(1) – (2)

Tax on self-employment income (John is under wage base limit for social security portion) is $2,460 × 92.35% × 15.3% = $348.

Note B:

Child and dependent care credit:

Description	Amount	Explanation
(1) Child and dependent care expenditures	$3,600
(2) Limit on qualifying expenditures for one dependent	$3,000
(3) Ferguson’s earned income	$83,460	$81,000 salary + $2,460 net self-employment income = $83,460
(4) Expenditures eligible for credit	$3,000	Least of (1), (2), and (3)
(5) Credit percentage rate	20%	AGI over $43,000
Child and dependent care credit	$600	(4) × (5)

Note C: Alternative minimum tax

Note: This solution uses the 2015 AMT exemption amount

Description	Amount	Explanation
(1) Taxable income	$31,286
(2) Exemptions	12,000
(3) AMTI before other adjustments	$43,286	(1) + (2)
Plus adjustments:
(4) Real estate property taxes	3,200
(5) State income taxes	4,400
(6) Home-equity interest expense (loan proceeds used to purchase car)	3,000
Minus adjustments:
(7) State income tax refund	(200)
(8) Alternative minimum taxable income	$53,686	(3) + (4) + (5) + (6)+(7)
(9) AMT Exemption	$83,400	MFJ 2014 exemption amount
AMT base	$0	(8) – (9), limited to $0
(10) TMT	$0
(11) Regular tax	3,650.40
AMT	$0	(11) > (10) so, $0