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AFM462 Lecture Notes - Lecture 7: Withholding Tax, Accrual, Term Life Insurance

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lemonbeetle804
27 Dec 2019
School
University of Waterloo
Department
Accounting & Financial Management
Course
AFM462
Professor
David Lin

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Document Summary

Have income to deduct child care expenses. Reduce cnil and help preserve the cgd. Use up any non-refundable personal tax credits. Receive tax free income in lower tax brackets using personal tax credits. Don"t have to prepare a t4 and remit cpp and withholding tax. Accrued remuneration (e. g. bonuses) not paid wit h in 180 days: Not deductible by the corporation in the year accrued. Deductible by the corporation in the year paid. Included in the employees income in the year received. Especially consider whenever a child or spouse of the shareholder is being paid employment income: could lose marital status tax credit if paying spouse a salary. Not usually an issue when employment compensation is being paid to the owner manager. Reasonableness of the bonus in re lated to profit and services rendered. Some justification for expecting a bonus over regular salary. Reasonableness of the time between determining profit and establishing the bonus.

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Related Questions

Simon Fahrquest is the sole shareholder of Dawg Ltd., a very successful business that was incorporated a number of years ago. The company has always qualified as a CCPC and uses a December 31 year end.

Simon has never been particularly fond of peopl, but has always loved dogs, particularly those of mixed breed. While he has no family, he currently owns 12 dogs, none of which are purebred.

While Dawg LTd. has always been very profitable, Simon has chosen to live modestly in a dog firendly residential property that he has owned for many years. Each year, he estimates the amount of cash that he will need for his living expenses which vary year to year and looks to his corporation to provide the needed cash.

Since after meeting Simon's financial needs, Dawg Ltd. always has cash that isn't required for operations, it donates at least $100,000 per year to the Society For The Prevention of Cruelty To Animals (SPCA), a registered charity. The donations specify that the funds must be used for the protection, maintenance, and placement of mixed breen dogs.

For 2016, Simon estimates that he will need $50,000 in after tax cash to meet his personal needs. He expects Dawg LTd. will have taxable income of $350,000 before any payments to him, all of which will qualify for the small business deduction. The provincial tax rate on such income if 2.5 percent.

In Simon's province of residence, the provinical taxes on the first $45,282 of taxable income total $4,528. Additional income will be taxed at a provincial rate of 12 percent. Also in this province, the provincial dividend tax credit for non-eligible dividends is equal to 32 percent of the dividend gross up.

For the 2016 taxation year, Simon estimates that his person tax credits will total $3,260.

Required:

A. Determine the tax cost of providiing Simon with the required $50,000 in after tax cash using only salary payments.

B. Determine the tax cost of providing Simon with the required $50,000 in after tax cash using only dividend payments.

C. Given the information in this problem, do you believe that better results could be achieved with a combination of salary and dividends? Would your answer be different if Simon's personal tax credits totalled $12,000? Calculations are not required in answering this part C.

D. Simon would like to increase his donations to the SPCA and has asked your advice on the most tax advantageous way to do this. What factors should be considered when analyzing this issue?

Ignore CPP Contributions and Canada employment credit in your solution.

No CPP amount is given in this question.

1. Jeremy earned $260,000 in salary and $9,000 in interest income during the year. Jeremy has two qualifying dependent children who live with him. He qualifies to file as head of household and has $20,500 in itemized deductions. Neither of his dependents qualifies for the child tax credit. (use the tax rate schedules.). (Do not round intermediate calculations. Round "Income tax liability" to 2 decimal places.)

a. Use the 2017 tax rate schedules to determine Jeremy’s taxes due.

Description Amount
(1) Gross income ?
(2) For AGI deductions ?
(3) Adjusted gross income $0
(4) Standard deduction ?
(5) Itemized deductions ?
(6) ? ?
(7) Personal and dependency exemptions ?
(8) Taxable income $0
Income tax liability ?

2. b. Assume that in addition to the original facts, Jeremy has a long-term capital gain of $12,500. What is Jeremy’s tax liability including the tax on the capital gain?

Description Amount
(1) Gross income ?
(2) For AGI deductions ?
(3) Adjusted gross income $0
(4) Standard deduction ?
(5) Itemized deductions ?
(6) ? ?
(7) Personal and dependency exemptions ?
(8) Taxable income $0
Income tax liability ?

3. c. Assume the original facts except that Jeremy had only $3,000 in itemized deductions. What is Jeremy’s total income tax liability?

Description Amount
(1) Gross income ?
(2) For AGI deductions ?
(3) Adjusted gross income $0
(4) Standard deduction ?
(5) Itemized deductions ?
(6) ? ?
(7) Personal and dependency exemptions ?
(8) Taxable income $0
Income tax liability ?

4. Jasper and Crewella Dahvill were married in year 0. They filed joint tax returns in years 1 and 2. In year 3, their relationship was strained and Jasper insisted on filing a separate tax return. In year 4, the couple divorced. Both Jasper and Crewella filed single tax returns in year 4. In year 5, the IRS audited the couple’s joint year 2 tax return and each spouse’s separate year 3 tax returns. The IRS determined that the year 2 joint return and Crewella’s separate year 3 tax return understated Crewella’s self-employment income, causing the joint return year 2 tax liability to be understated by $13,300 and Crewella’s year 3 separate return tax liability to be understated by $6,700. The IRS also assessed penalties and interest on both of these tax returns. Try as it might, the IRS has not been able to locate Crewella, but they have been able to find Jasper. (Leave no cells blank - be certain to enter "0" wherever required.)

a. What amount of tax can the IRS require Jasper to pay for the Dahvill’s year 2 joint return?

Amount of tax: ?

5. Trudy and Ben file a joint return. Trudy’s reported income creates $200 of income tax and Ben’s reported income creates $180 of income tax. In addition to the reported income, Trudy has unreported income on which she owes $50 of income tax. How much of the $430 potential tax liability is Ben liable for?

a. $50

b. $180

c. $380

d. $430

6. James received $25,000 of compensation from his employer and he received $1,900 of interest from a municipal bond. What is the amount of James’s gross income?

a. $0

b. $1,900

c. $25,000

d. $26,900

7. Which of the following is a from AGI deduction?

a. moving expenses

b. rental and royalty expenses

c. business expenses for a self employed taxpayer

d. charitable contributions

8.Which of the following is not an itemized deduction?

a. personal casualty losses

b. medical expenses

c. personal property taxes for a personal use automobile

d. charitable contributions

e. none of the choices are correct

9. In May of year 1, David left his wife Juliette. While the couple was apart, they were not legally divorced. Juliette found herself having to financially provide for the couple’s only child (6 years of age) and to pay all the costs of maintaining the household. When Juliette filed her tax return for year 1, she filed a return separate from David. What is Juliette’s most favorable filing status for year 1?

a. head of household

b. single

c. married filing separately

d. qualifying widow

10. Caroline and her husband Chris got divorced in May of this year. During the year, Caroline provided all the support for herself and her 23-year-old child Hans (not a full-time student) who lived in the same home as Caroline for the entire year. Hans earned $29,000 this year. What is the Caroline’s most favorable filing status for the year?

a. head of household

b. married filing separately

c. surviving spouse single

Alfred E. Old and Beulah A. Crane, each age 42, married on September 7, 2014. Alfred and Beulah will file a joint return for 2016. Alfred's Social Security number is 111‐11‐1112. Beulah's Social Security number is 123‐45‐6789, and she adopted “Old” as her married name. They live at 211 Brickstone Drive, Atlanta, GA 30304. Alfred was divorced from Sarah Old in March 2014. Under the divorce agreement, Alfred is to pay Sarah $1,250 per month for the next 10 years or until Sarah's death, whichever occurs first. Alfred pays Sarah $15,000 in 2016. In addition, in January 2016, Alfred pays Sarah $50,000, which is designated as being for her share of the marital property. Sarah's Social Security number is 123‐45‐6788. Alfred's salary for 2016 is $150,000, and his employer, Cherry, Inc. (Federal I.D. No. 98‐ 7654321). His employer withheld $24,900 for Federal income taxes and $8,000 for state income taxes. The proper amounts were withheld for FICA taxes. Beulah recently graduated from law school and is employed by Legal Aid Society, Inc. (Federal I.D. No. 11‐1111111), as a public defender. She receives a salary of $40,000 in 2016. Her employer withheld $7,500 for Federal income taxes and $2,400 for state income taxes. The proper amounts were withheld for FICA taxes. Beulah has $2,500 in qualified dividends on Yellow Corporation stock she inherited. Alfred and Beulah receive a $1,900 refund on their 2015 state income taxes. They itemized deductions on their 2015 Federal income tax return (total of $15,000). Alfred and Beulah pay $4,500 interest and $1,450 property taxes on their personal residence in 2016. Their charitable contributions total $2,400 (all to their church). They paid sales taxes of $1,400, for which they maintain the receipts. Both spouses had health insurance for all months of 2016 and do not want to contribute to the Presidential Election Campaign. Prepare the 2016 Federal income tax return for the Olds'. The required forms are the 2016 Federal 1040 and Schedule A. You may work in groups no larger than 3 (i.e. 1, 2, or 3). Submit one tax return per group. Please provide a cover page with the list of students who participated in each group. Hints: 1) The total itemized deductions should total $18,750. 2) State tax refunds are taxable if the taxpayer benefited from a state tax deduction in the prior year (i.e. if they deducted state tax payments in the prior year, then refunds are taxable in the current year).