TAX 9869 Lecture Notes - Lecture 35: Payment, Foreign Corporation
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What is the net Form W-2 wages?
What is miscellaneous income?
What is Schedule B income (Interest anddividends)?
What is Schedule C net income (Businessincome)?
What is Schedule D net income (Capital gains andlosses)?
What is Schedule E depreciation (Rentalproperty)?
What is Schedule E net income (Rental income & Sub-Sincome)?
What is the total “For AGI” deductions?
What is Adjusted Gross Income?
What is the Schedule A deduction for taxes?
What is the Schedule A deduction for interestexpense?
What is the Schedule A deduction for charitablecontributions?
What is the Schedule A total itemizeddeductions?
What is the total personal and dependentexemptions?
What is taxable income?
What is the tax on ordinary income?
What is the tax on long-term capital gain (loss) andqualified dividends?
What is the self-employment tax?
What is the kiddie tax?
What is the balance due or (refund)?
Answer above questions with the factsbelow:
Paul Turner is single and has two children, Allen and Lee Ann,from his previous marriage. Allen lives with Paul and Paul providesmore than half of his support. In the current year, Allen earned$300 of interest income and $5,000 working at a fast-foodrestaurant. Allen graduated from high-school in December 2015 andwas not a registered student during 2016. Lee Ann lives with hermother, Wilma (Lee Ann lived with Wilma for all of the currentyear). Wilma provides more than half of Lee Ann's support. Paulpays “alimony” of $400 per month to Wilma. The payments are tocontinue until Lee Ann reaches age 18, when they will be reduced to$250. Paul uses the cash method of accounting and a calendar yearfor reporting. Paul's birthday is May 31, 1975. Allen's birthday isOctober 5, 1998. Lee Ann's birthday is December 1, 2002. Paulprefers to report any “kiddie tax” on his tax return.
Paul is employed as a nuclear engineer with Atom SystemsConsultants, Inc. (ASCI). Paul's pay stubs indicate that he had$7,320 withheld in federal taxes, $4,987 in state taxes. He earned$80,000 of wages subject to employee Social Security taxes andMedicare taxes. ASCI has an extensive fringe benefits program forits employees.
Paul earned salary of $82,500 (before subtracting his 401(k) andflexible spending plan contributions). He contributed $6,500 to his401(k) account, and he contributed $2,600 to his flexible spendingaccount.
ASCI paid $497 of whole life insurance premiums to cover Paul'spersonal whole life insurance policy. ASCI also paid health clubdues of $825 to a nearby health club on Paul's behalf.
Taking advantage of ASCI's educational assistance program,during the fall Paul enrolled in two graduate engineering classesat a local college. ASCI paid his tuition, fees, and othercourse-related costs of $5,300.
Paul received free parking in the company's security garage thatwould normally cost $200 per month.
Paul manages the safety program for ASCI. In recognition of hissuperior handling of three potential crises during the year, Paulwas awarded the Employee Safety Award on December 15. The cashaward was $400.
On January 15, of the current year, Paul's father died. From hisfather's estate, he received stock valued at $30,000 (father’sbasis was $12,000) and his father's house valued at $95,000(father’s basis in the house was $55,000).
Paul owns several other investments and received the followinginformation reports for the current tax year:
Form 1009-Div:
General Dynamics – Gross qualified dividends - $400
Form 1099-Int
New Jersey Economic Development bonds – Gross interest -$300
IBM bonds – Gross interest - $600
State of Nebraska bonds – Gross Interest - $200
Form 1098-Mortgage InterestStatement
Sunbelt Credit Union – Mortgage interest - $7,100
Northeast Bank – Home-equity loan interest - $435
Form K-1 Grubstake Mining andDevelopment:
Distribution to shareholder - $1,000
Ordinary income (1% of $200,000) - $2,000
In addition to the investments discussed above, Paul owns 1,000shares of Grubstake Mining & Development common stock.Grubstake is organized as an S corporation and has 100,000 sharesoutstanding. Grubstake reported taxable income of $200,000 and paida distribution of $1.00 per share during the current year. Pauldoes not materially participate in Grubstake's activities.
Paul slipped on a wet spot in front of a computer store lastJuly. He broke his ankle and was unable to work for two weeks. Heincurred $1,300 in medical costs, all of which were paid by theowner of the store. The store also gave him $1,000 for pain andsuffering resulting from the injury. ASCI did not pay his salaryduring the two weeks he missed because of the accident. However,ASCI's disability insurance plan paid him $1,500 in disability payfor the time he was unable to work. Under this plan, ASCI pays thepremiums of $500 for the disability insurance as a taxable fringebenefit. The disability plan premiums and the disability benefitpayments were not included in Paul’s W-2 wages reported inparagraph 3.
Paul received a Form 1099-B from his broker for the sale of thefollowing securities during the current year. The adjusted basisamounts were reported to the IRS.
Security | Sale Date | Purchase Date | Sales Price | CommissionPaid Sale | His Basis |
Nebraska bonds | 03/14/16 | 10/22/07 | $2,300 | $200 | $1,890 |
| Cassill Corp (500 shares) | 10/20/16 | 02/19/12 | $8,500 | $425 | $9,760 |
In addition to the taxes withheld from his salary, he also madetimely estimated federal tax payments of $175 per quarter andtimely estimated state income tax payments of $150 for the firstthree quarters. The $150 fourth-quarter state payment was made onDecember 28 of the current year. Paul would like to receive arefund for any overpayment.
In August of the current year, he received a federal refund of$60 and a state tax refund of $200 related to the tax returns hefiled for the prior year. His itemized deductions for the prioryear were $18,430.
Paul found a renter for his father's house on August 1. Themonthly rent is $400, and the lease agreement is for one year. Thelease requires the tenant to pay the first and last months' rentand a $400 security deposit. The security deposit is to be returnedat the end of the lease if the property is in good condition. OnAugust 1, Paul received $1,200 from the tenant per the terms of thelease agreement. In November, the plumbing froze and several pipesburst. The tenant had the repairs made and paid the $300 bill. InDecember, he reduced his rental payment to $100 to compensate forthe plumbing repairs. Paul provides you with the followingadditional information for the rental in the current year.
Propertytaxes $720
Other maintenanceexpenses 285
Insuranceexpense 495
Managementfee 350
Depreciation (to becomputed) ?
Local practice is to allocate 10percent of the fair market value of the property to the land. (See¶8 for basis information.) Paul makes all decisions with respect tothe property.
Paul paid $2,050 in real estate taxes on his principalresidence. The real estate tax is used to pay for town schools andother municipal services.
Paul drives a 2013 Acura TL. His car registration fee (based onthe car year) is $50 and covers the period 1/1/16 through 12/31/16.In addition, he paid $280 in property tax to the state based on thebook value of the car.
In addition to the medical costs presented in ¶11, Paul incurredthe following unreimbursed medical costs:
Dentist $ 310
Doctor 390
Prescriptiondrugs 215
Over-the-counterdrugs 140
Optometrist 125
Emergency room charges 440
LASIK eyesurgery 2,000
Chiropractor 265
On April 1, Paul took advantage of low interest rates andrefinanced his $75,000 home mortgage with her original lender. Thenew home loan is for 15 years. He paid $215 in closing costs and$1,600 in discount points (prepaid interest) to obtain the loan.The house is worth $155,000, and Paul's basis in the house is$90,000. As part of the refinancing arrangement, he also obtained a$10,000 home-equity loan. He used the proceeds from the home-equityloan to reduce the balance due on her credit cards. Paul receivedseveral Form 1098 statements from her bank for interest paid by himin the current year. Details appear below. (See also ¶9)
Primary homemortgage $7,100
Home-equityloan 435
Creditcards 498
Carloan 390
On May 14 of the current year, Paul contributed clothing to theSalvation Army. The original cost of the clothing was $740. He hassubstantiation valuing the donation at $360. In addition, he madethe following cash contributions and received a statement from eachof the following organizations acknowledging his contribution:
LarkinCollege $800
UnitedWay 152
First MethodistChurch 790
Amos House (homelessshelter) 200
Local Chamber ofCommerce 100
On April 1 of the current year, Paul's house was robbed. Heapparently interrupted the burglar because all that's missing is anantique brooch he inherited from his grandmother (June 12, 2005)and $300 in cash. Unfortunately, he didn't have a separate rider onher insurance policy covering the jewelry. Therefore, the insurancecompany reimbursed him only $500 for the brooch. His basis in thebrooch was $6,000, and its fair market value was $7,500. Hisinsurance policy also limits to $100 the amount of cash that can beclaimed in a theft.
Paul sells real estate in the evening and on weekends(considered an active trade or business). He runs his business froma rental office he shares with several other realtors. Paul hasbeen operating in a business-like way since 2003 and has alwaysshown a profit. He had the following income and expenses from hisbusiness:
Commissionsearned $21,250
Expenses:
Advertising 2,200
Telephone 95
Real estate license 130
Rent 6,000
Utilities 600
He has used his Acura TL in his business during the currentyear. During the year, he properly documented 5,000 business miles.The total mileage on his car (i.e., business-use and personal-usemiles) during the year was 15,000 miles. Paul elects to use thestandard mileage method to calculate his car expenses. He spent $45on tolls and $135 on parking related to the real estatebusiness.
Paul's company has an accountable expense reimbursement plan foremployees from which Paul receives $12,000 for the followingexpenses:
Airfare $4,700
Hotel 3,400
Meals 2,000
Car rentals 600
Entertainment 900
Incidentals 400
Total 12,000
During the current year, Paul also paid $295 for businesspublications other than those paid for by his employer and $325 fora local CPA to prepare his tax return for the prior year.
Please answer the following Questions with the factsprovided.
What is the net Form W-2 wages?
What is miscellaneous income?
What is Schedule B income (Interest and dividends)?
What is Schedule C net income (Business income)?
What is Schedule D net income (Capital gains and losses)?
What is Schedule E depreciation (Rental property)?
What is Schedule E net income (Rental income & Sub-Sincome)?
What is the total “For AGI” deductions?
What is Adjusted Gross Income?
What is the Schedule A deduction for taxes?
What is the Schedule A deduction for interest expense?
What is the Schedule A deduction for charitablecontributions?
What is the Schedule A total itemized deductions?
What is the total personal and dependent exemptions?
What is taxable income?
What is the tax on ordinary income?
What is the tax on long-term capital gain (loss) and qualifieddividends?
What is the self-employment tax?
What is the kiddie tax?
What is the balance due or (refund)?
Facts:
Paul Turner is single and has two children, Allen and Lee Ann,from his previous marriage. Allen lives with Paul and Paul providesmore than half of his support. In the current year, Allen earned$300 of interest income and $5,000 working at a fast-foodrestaurant. Allen graduated from high-school in December 2015 andwas not a registered student during 2016. Lee Ann lives with hermother, Wilma (Lee Ann lived with Wilma for all of the currentyear). Wilma provides more than half of Lee Ann's support. Paulpays “alimony” of $400 per month to Wilma. The payments are tocontinue until Lee Ann reaches age 18, when they will be reduced to$250. Paul uses the cash method of accounting and a calendar yearfor reporting. Paul's birthday is May 31, 1975. Allen's birthday isOctober 5, 1998. Lee Ann's birthday is December 1, 2002. Paulprefers to report any “kiddie tax” on his tax return.
Paul is employed as a nuclear engineer with Atom SystemsConsultants, Inc. (ASCI). Paul's pay stubs indicate that he had$7,320 withheld in federal taxes, $4,987 in state taxes. He earned$80,000 of wages subject to employee Social Security taxes andMedicare taxes. ASCI has an extensive fringe benefits program forits employees.
Paul earned salary of $82,500 (before subtracting his 401(k) andflexible spending plan contributions). He contributed $6,500 to his401(k) account, and he contributed $2,600 to his flexible spendingaccount.
ASCI paid $497 of whole life insurance premiums to cover Paul'spersonal whole life insurance policy. ASCI also paid health clubdues of $825 to a nearby health club on Paul's behalf.
Taking advantage of ASCI's educational assistance program,during the fall Paul enrolled in two graduate engineering classesat a local college. ASCI paid his tuition, fees, and othercourse-related costs of $5,300.
Paul received free parking in the company's security garage thatwould normally cost $200 per month.
Paul manages the safety program for ASCI. In recognition of hissuperior handling of three potential crises during the year, Paulwas awarded the Employee Safety Award on December 15. The cashaward was $400.
On January 15, of the current year, Paul's father died. From hisfather's estate, he received stock valued at $30,000 (father’sbasis was $12,000) and his father's house valued at $95,000(father’s basis in the house was $55,000).
Paul owns several other investments and received the followinginformation reports for the current tax year:
Form 1009-Div:
General Dynamics – Gross qualified dividends - $400
Form 1099-Int
New Jersey Economic Development bonds – Gross interest -$300
IBM bonds – Gross interest - $600
State of Nebraska bonds – Gross Interest - $200
Form 1098-Mortgage InterestStatement
Sunbelt Credit Union – Mortgage interest - $7,100
Northeast Bank – Home-equity loan interest - $435
Form K-1 Grubstake Mining andDevelopment:
Distribution to shareholder - $1,000
Ordinary income (1% of $200,000) - $2,000
In addition to the investments discussed above, Paul owns 1,000shares of Grubstake Mining & Development common stock.Grubstake is organized as an S corporation and has 100,000 sharesoutstanding. Grubstake reported taxable income of $200,000 and paida distribution of $1.00 per share during the current year. Pauldoes not materially participate in Grubstake's activities.
Paul slipped on a wet spot in front of a computer store lastJuly. He broke his ankle and was unable to work for two weeks. Heincurred $1,300 in medical costs, all of which were paid by theowner of the store. The store also gave him $1,000 for pain andsuffering resulting from the injury. ASCI did not pay his salaryduring the two weeks he missed because of the accident. However,ASCI's disability insurance plan paid him $1,500 in disability payfor the time he was unable to work. Under this plan, ASCI pays thepremiums of $500 for the disability insurance as a taxable fringebenefit. The disability plan premiums and the disability benefitpayments were not included in Paul’s W-2 wages reported inparagraph 3.
Paul received a Form 1099-B from his broker for the sale of thefollowing securities during the current year. The adjusted basisamounts were reported to the IRS.
Security | Sale Date | Purchase Date | Sales Price | CommissionPaid Sale | His Basis |
Nebraska bonds | 03/14/16 | 10/22/07 | $2,300 | $200 | $1,890 |
| Cassill Corp (500 shares) | 10/20/16 | 02/19/12 | $8,500 | $425 | $9,760 |
In addition to the taxes withheld from his salary, he also madetimely estimated federal tax payments of $175 per quarter andtimely estimated state income tax payments of $150 for the firstthree quarters. The $150 fourth-quarter state payment was made onDecember 28 of the current year. Paul would like to receive arefund for any overpayment.
In August of the current year, he received a federal refund of$60 and a state tax refund of $200 related to the tax returns hefiled for the prior year. His itemized deductions for the prioryear were $18,430.
Paul found a renter for his father's house on August 1. Themonthly rent is $400, and the lease agreement is for one year. Thelease requires the tenant to pay the first and last months' rentand a $400 security deposit. The security deposit is to be returnedat the end of the lease if the property is in good condition. OnAugust 1, Paul received $1,200 from the tenant per the terms of thelease agreement. In November, the plumbing froze and several pipesburst. The tenant had the repairs made and paid the $300 bill. InDecember, he reduced his rental payment to $100 to compensate forthe plumbing repairs. Paul provides you with the followingadditional information for the rental in the current year.
Propertytaxes $720
Other maintenanceexpenses 285
Insuranceexpense 495
Managementfee 350
Depreciation (to be computed) ?
Local practice is to allocate 10 percent of the fair marketvalue of the property to the land. (See ¶8 for basis information.)Paul makes all decisions with respect to the property.
Paul paid $2,050 in real estate taxes on his principalresidence. The real estate tax is used to pay for town schools andother municipal services.
Paul drives a 2013 Acura TL. His car registration fee (based onthe car year) is $50 and covers the period 1/1/16 through 12/31/16.In addition, he paid $280 in property tax to the state based on thebook value of the car.
In addition to the medical costs presented in ¶11, Paul incurredthe following unreimbursed medical costs:
Dentist $ 310
Doctor 390
Prescriptiondrugs 215
Over-the-counter drugs 140
Optometrist 125
Emergency room charges 440
LASIK eyesurgery 2,000
Chiropractor 265
On April 1, Paul took advantage of low interest rates andrefinanced his $75,000 home mortgage with her original lender. Thenew home loan is for 15 years. He paid $215 in closing costs and$1,600 in discount points (prepaid interest) to obtain the loan.The house is worth $155,000, and Paul's basis in the house is$90,000. As part of the refinancing arrangement, he also obtained a$10,000 home-equity loan. He used the proceeds from the home-equityloan to reduce the balance due on her credit cards. Paul receivedseveral Form 1098 statements from her bank for interest paid by himin the current year. Details appear below. (See also ¶9)
Primary home mortgage $7,100
Home-equityloan 435
Creditcards 498
Carloan 390
On May 14 of the current year, Paul contributed clothing to theSalvation Army. The original cost of the clothing was $740. She hassubstantiation valuing the donation at $360. In addition, she madethe following cash contributions and received a statement from eachof the following organizations acknowledging his contribution:
LarkinCollege $800
UnitedWay 152
First MethodistChurch 790
Amos House (homelessshelter) 200
Local Chamber of Commerce 100
On April 1 of the current year, Paul's house was robbed. Heapparently interrupted the burglar because all that's missing is anantique brooch he inherited from his grandmother (June 12, 2005)and $300 in cash. Unfortunately, he didn't have a separate rider onher insurance policy covering the jewelry. Therefore, the insurancecompany reimbursed him only $500 for the brooch. His basis in thebrooch was $6,000, and its fair market value was $7,500. Hisinsurance policy also limits to $100 the amount of cash that can beclaimed in a theft.
Paul sells real estate in the evening and on weekends(considered an active trade or business). He runs his business froma rental office he shares with several other realtors. Paul hasbeen operating in a business-like way since 2003 and has alwaysshown a profit. He had the following income and expenses from hisbusiness:
Commissions earned $21,250
Expenses:
Advertising 2,200
Telephone 95
Real estate license 130
Rent 6,000
Utilities 600
He has used his Acura TL in his business during the currentyear. During the year, he properly documented 5,000 business miles.The total mileage on his car (i.e., business-use and personal-usemiles) during the year was 15,000 miles. Paul elects to use thestandard mileage method to calculate his car expenses. He spent $45on tolls and $135 on parking related to the real estatebusiness.
Paul's company has an accountable expense reimbursement plan foremployees from which Paul receives $12,000 for the followingexpenses:
Airfare $4,700
Hotel 3,400
Meals 2,000
Car rentals 600
Entertainment 900
Incidentals 400
Total 12,000
During the current year, Paul also paid $295 for businesspublications other than those paid for by his employer and $325 fora local CPA to prepare his tax return for the prior year. (Pleaseanswer the questions that are provided.
