ACCT-4021EL Lecture Notes - Lecture 9: Net Income

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3 Dec 2018

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Medical expenses can be claimed for any 12 month period ending in the year (provided it doesn"t overlap with a period claimed in the year before). This amount is then multiplied by the lowest tax rate (15%). One spouse can claim both their medical expenses plus their spouse"s medical expenses. As a result, the general rule of thumb is for the spouse with the lower net income should claim the medical expense credit. This is true as long as they have some taxes payable and their net income is less than ,733 (,302/3%). An individual can also include a minor (under 18) dependent child"s medical expenses, regardless of that child"s net income. They can claim other dependents" medical expenses within certain restrictions. Consider adam and jessica smith and their 2 children, aaron and sherri. Aaron is 20 years old and is attending college and lives at home.

Related Questions

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 Jeremyâs 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 Jeremyâs 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 Jeremyâs 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 coupleâs joint year 2 tax return and each spouseâs separate year 3 tax returns. The IRS determined that the year 2 joint return and Crewellaâs separate year 3 tax return understated Crewellaâs self-employment income, causing the joint return year 2 tax liability to be understated by $13,300 and Crewellaâs 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 Dahvillâs year 2 joint return?

Amount of tax: ?

5. Trudy and Ben file a joint return. Trudyâs reported income creates $200 of income tax and Benâs 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 Jamesâs 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 coupleâs 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 Julietteâs 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 Carolineâs most favorable filing status for the year?

a. head of household

b. married filing separately

c. surviving spouse single

maroonleopard66

First discussion question

Read the belowAICPA article.

President Barack Obama releasedhis last proposed budget, for the governmentâs 2017 fiscal year,on Tuesday February 9. Itcontains tax provisions affecting education, health care, andretirement, as well as proposing extensive changes affectingbusinesses. Many of the changes and areas should now be familiar toyou - Sec. 179, reducing tax benefits for high-income taxpayers,simplified accounting for small businesses, incentives to bringjobs back to America, and last week's discussion of foreign earnedincome for corporations.

Pick a few of the proposals youagree with, plus several you disagree with, and discuss thereasons?

Second Final Question<

First, there is no such thing asa tax "loophole" - they are called deductions. Remember that ALLincome is taxable, unlessspecifically excluded by law. And ALL expenses are disallowedunless specifically included by law.

We have a tax system that triesto modify taxpayer behavior by changing the tax rates on income,and by allowing or disallowing certain types of deductions. But ourtax system is not collecting enough revenue to cover governmentexpenditures. Some think corporations are paying too much, but ifthey don't pay, then the individual taxpayer has to pay. However,as we now know, the individual taxpayer already carries themajority of the tax burden, and if the wealthiest don't pay theirfair share, the middle and lowest earners have to pay. The bottomline is someone has to pay - the question is how to make thatequitable. Is it as simple as having a flat tax forindividuals?

AICPAARTICLE

Presidentâs budget proposes manytax changes By Alistair M. Nevius, J.D. February 9, 2016President Barack Obama released hislast proposed budget, for the governmentâs 2017 fiscal year, onTuesday. It contains tax provisions affecting education, healthcare, and retirement, as well as proposing extensive changesaffecting businesses. The budget presents a wish list of changesthe administration would like to see enacted; however, theRepublican-held Congress is unlikely to support much of thepresidentâs plan. Among the many proposed tax changes are thefollowing: Earned income tax credit The budget proposes expandingthe Sec. 32 earned income tax credit for taxpayers who do not havea qualifying child (including noncustodial parents). The amount ofthe credit available to these taxpayers would increase to roughly$1,000. The credit would also be made available to workers who areages 21â24 and ages 65 and 66. It also would create a newsecond-earner tax credit of up to $500 for married couples in whichboth spouses work. The credit would be phased out for couples whoseadjusted gross income (AGI) exceeded $120,000. Child and dependentcare credit The budget would essentially triple the amount of thechild and dependent care credit to $3,000 per child for familieswith children under the age of 5. It would also increase thephasedown limit so that it does not apply to taxpayers with annualAGI of less than $120,000. (The credit is currently phased down fortaxpayers with AGI above $15,000.) However, the budget would alsoeliminate flexible spending accounts for child care expenses.Education credits The budget proposes folding the Sec. 25A lifetimelearning credit into the American opportunity tax credit. It wouldalso expand the American opportunity tax credit to make itavailable for five years and refundable up to $1,500. (Currently,it is available for four years and is refundable up to $1,000.)Pell Grants would be exempt from taxation and from the Americanopportunity tax credit calculation, and student loan forgivenesswould no longer be considered to result in taxablecancellation-of-debt income. Community colleges The budget wouldcreate a new $5,000 tax creditâcalled the community collegepartnership tax creditâfor employers that help community collegesfill their investment shortfalls and that hire qualifying communitycollege graduates. Presidentâs budget proposes many tax changesPage 1 of 4http://www.journalofaccountancy.com/news/2016/feb/budget-proposes-many-tax-changes-201613856.html2/10/2016 The budget calls for funding of a program calledAmericaâs College Promise that would create a federal-statepartnership to make two years of community college free. Retirementsavings The proposed budget includes a number of proposals that aredesigned to increase access to retirement plans and to makeportability of retirement savings and benefits easier. Theseinclude requiring employers with more than 10 employees that do notoffer a retirement plan to automatically enroll their employees inan IRA. Businesses with fewer than 100 employees would get taxcredits of up to $4,500 for offering automatic IRA enrollment.Reducing tax benefits for high-income taxpayers The budget wouldlimit the value of certain deductions and exclusions from AGI andall itemized deductions. The proposal would reduce to 28% of thevalue of the specified exclusions and deductions that wouldotherwise reduce a taxpayerâs taxable income in the 33%, 35%, or39.6% tax brackets. The definition of net investment income wouldbe expanded to include gross income and gain from any trades orbusinesses of an individual that is not otherwise subject toemployment taxes. The budget also proposes an implementation of theso-called Buffett rule (called a âFair Share Taxâ in the budget),which would require high-income taxpayers to pay at least a 30% taxrate (after charitable contributions). Capital gains tax Under thebudget, the maximum capital gains tax rate would increase to 28%(inclusive of the 3.8% net investment income tax). It would alsoeliminate basis step-ups on gifts and bequests by treatingtransfers of appreciated property as a sale, so that the donor or deceased owner wouldrealize a capital gain on the transfer. The budget would also taxcarried interests at ordinary income tax rates instead of ascapital gain. Corporate tax reform The budget would cut thecorporate tax rate to 28%. It would also impose a 19% minimum taxon foreign earnings, which would be imposed when the earnings areearned. As a transition to the minimum tax, previously untaxedforeign income would be subject to a one-time 14% tax. The budgetwould also provide further rules against earnings stripping andcorporate inversions. Incentives to bring jobs to the United StatesThe budget proposes to provide a tax credit equal to 20% ofeligible expenses to businesses that reduce or eliminate a line ofbusiness currently conducted overseas and start up, expand,or otherwise move the same trade orbusiness to the United States. Sec. 179 expensing The budgetproposes increasing the maximum Sec. 179 expensing limitation to $1million and to index it for inflation (the phaseout threshold wouldremain $2 million, indexed for inflation). Simplified accountingfor small business Presidentâs budget proposes many tax changesPage 2 of 4http://www.journalofaccountancy.com/news/2016/feb/budget-proposes-many-tax-changes-201613856.html2/10/2016 The proposed budget would create a uniform small businessaverage annual gross receipts threshold of $25 million for allowingexceptions from certain accounting rules. Eligible businesses wouldbe allowed to use the cash method, avoid the uniform capitalizationrules, and use an inventory accounting method that either conformsto their financial accounting method or otherwise properly reflectsincome. Startup expenses Under the budget proposal, the limit ondeductible startup expenses would be increased to $20,000 (from$5,000). This amount would be reduced (but not below zero) by theamount by which those expenditures exceed $20,000 (currently$50,000). Research credit The budget would do away with the currentbifurcated Sec. 41 research credit, under which eligible taxpayerscan claim either a 20% regular credit or a 14% simplified credit.Instead, the budget proposes to create a single formula with acredit worth 18%. Increase intobacco tax The budget would increase taxes on tobacco to fund aninitiative to expand access to preschool and to expand homevisiting programs by nurses, social workers, and otherprofessionals. Clean energy The budget would simplify, expand, andmake permanent several tax incentives for clean energy investment.It would also create two new tax credits to provide an incentivefor commercial deployment of carbon capture, utilization, andstorage. The budget would also eliminate $4 billion a year in taxsubsidies to oil, gas, and other fossil fuel producers. Cadillactax The budget proposes changes to the Sec. 4980I excise taxon high-cost employer-sponsored health coverage (known as theCadillac tax). The Cadillac tax has been the focus of repealefforts in Congress, and the recently enacted ConsolidatedAppropriations Act, 2016, P.L. 114-13, postponed its effective dateto 2020. (It was originally scheduled to take effect in 2018.)Under the proposal, the threshold above which the tax applies wouldbe modified to be equal to the greater of the current law thresholdor the average premium for a marketplace gold plan in each state.This is designed to protect employers from paying the tax justbecause they are in a high-cost state. Estate tax The budgetproposes to revert the estate tax to its form in 2009, with a 45%tax rate, a $3.5 million exclusion amount for estate andgeneration-skipping transfer tax purposes, and a $1 million gifttax exclusion (with no indexing for inflation). The budget wouldalso expand the property subject to the new basis reportingconsistency requirement under Sec. 1014(f) to include propertyeligible for the estate tax marital deduction and gifts required tobe reported on a federal gift tax return. Oil tax Presidentâsbudget proposes many tax changes Page 3 of 4http://www.journalofaccountancy.com/news/2016/feb/budget-proposes-many-tax-changes-201613856.html2/10/2016 The budget proposes a $10.25-per-barrel âfeeâ on oil. TheOffice of Management and Budget estimates that this provision wouldraise $319 billion over 10 years.

erinduck149

Paul and Donna Decker are married taxpayers, ages 44 and 42,respectively, who file a joint return for 2016. The Deckers live at1121 College Avenue, Carmel, IN 46032. Paul is an assistant managerat Carmel Motor Inn, and Donna is a teacher at Carmel ElementarySchool. They present you with Wâ2 forms that reflect the followinginformation:

	Paul	Donna
Salary	68,000	56,000
Federal Tax Withheld	6,770	6,630
State Income Tax Withheld	900	800
FICA Tax Withheld	5,202	4,284
SSN's	111-11-1111	123-45-6789

Donna is the custodial parent of two children from a previousmarriage who reside with the Deckers through the school year. Thechildren, Larry and Jane Parker, reside with their father, Bob,during the summer. Relevant information for the childrenfollows:

	Larry	Jane
Age	17	18
SSN's	123-45-6788	123-45-6787
Months spent with Deckers	9	9

Under the divorce decree, Bob pays child support of $150 permonth per child during the nine months the children live with theDeckers. Bob says that he spends $200 per month per child duringthe three summer months they reside with him. Donna and Paul candocument that they provide $2,000 support per child per year. Thedivorce decree is silent as to which parent can claim theexemptions for the children.

In August, Paul and Donna added a suite to their home to providemore comfortable accommodations for Hannah Snyder (123-45-6786),Donna's mother, who had moved in with them in February 2015 afterthe death of Donna's father. Not wanting to borrow money for thisaddition, Paul sold 300 shares of Acme Corporation stock for $50per share on May 3, 2016, and used the proceeds of $15,000 to coverconstruction costs. The Deckers had purchased the stock on April29, 2011, for $25 per share. They received dividends of $750 on thejointly owned stock a month before the sale.

Hannah, who is 66 years old, received $7,500 in Social Securitybenefits during the year, of which she gave the Deckers $2,000 touse toward household expenses and deposited the remainder in herpersonal savings account. The Deckers determine that they havespent $2,500 of their own money for food, clothing, medicalexpenses, and other items for Hannah. They do not know what therental value of Hannah's suite would be, but they estimate it wouldbe at least $300 per month.

Interest paid during the year included the following:

Home Mortgage Interest (Paid to Carmel Federal Savings &Loan)	7,890
Interest on an automobile loan (paid to Carmel National Bank	1,660
Interest on Citibank Visa Card	620

In July, Paul hit a submerged rock while boating. Fortunately,he was uninjured after being thrown from the boat and landing indeep water. However, the boat, which was uninsured, was destroyed.Paul had paid $25,000 for the boat in June 2015, and its value wasappraised at $18,000 on the date of the accident.

The Deckers paid doctor and hospital bills of $10,700 and werereimbursed $2,000 by their insurance company. They spent $640 forprescription drugs and medicines and $5,904 for premiums on theirhealth insurance policy. They have filed additional claims of$1,200 with their insurance company and have been told they willreceive payment for that amount in January 2017. Included in theamounts paid for doctor and hospital bills were payments of $380for Hannah and $850 for the children. All members of the Deckerfamily had health insurance coverage for all of 2016.

Additional information of potential tax consequence follows:

Real Estate Taxes Paid	3,850
Sales Taxes Paid (per table)	1,379
Contributions to Church	1,950
*Appraised* Value of Books Donated toPublic Library	740
Paul's Unreimbursed employee expenses to attend hotel
Airfare	340
Hotel	170
Meals	95
Registration Fee	340

Refund for state income tax for 2014	1,520
(Deckers itemized on their 2014 Federal Tax Return)

Compute net tax payable or refund due for the Deckers for 2016.Ignore the child tax credit in your computations. If the Deckershave overpaid, the amount is to be credited toward their taxes for2017. Please use tax forms for your conputations, you will needforms 1040 and schedules A,B,C, and D.

Check Figures

FORM 1040

AGI $ 133,770

Tax due $68

SCHEDULEA $ 22,520

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ACCT-4021EL Lecture Notes - Lecture 9: Net Income

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