In this project we are asked to complete a 2017 joint tax return for Gary and Jennifer Smith whose information is provided below. Most people today use tax return software to prepare their tax returns. The three most commonly used software packages are available from Tax Cut, H&R Block and Intuit’s Turbo tax. A registration code is provided in our textbook for the Tax Cut software on the page opposite the inside cover of everyone’s textbook. It does not matter to me whether Tax Cut, H&R Block or Intuit’s Turbo tax is used in completing this project. Please note, however, that because this project must be submitted in hard copy format that while Turbo Tax and H&R Block will allow those who have not purchased their tax software to use it for free, it will not allow you to print unless you purchase their software. I mention this because sometime in the past students have used these software packages were unable to print their tax return which must be submitted in hard copy format for this project. Gary and Jennifer Smith have been happily married for the past 35 years, and look forward to a very comfortable retirement. Gary, who expects to continue working until age 75, began collecting social security in 2016 when he reached 70 years of age. Gary received $36,000 in social security benefits in 2017 as reported on Form SSA-1099 which he received from the Social Security Administration. Jennifer.is 66 years old and also began collecting social security benefits this year. The amount of social security benefits Jennifer received this year was $25,200. This 30% difference in what Gary and Jennifer received in social security benefits is primarily due to the fact that Gary waited until age 70 to be begin collecting social security whereas Jennifer began collecting at age 66.. Jennifer and Gary have requested your help in preparing their 2017 federal tax return. Gary’s social security number is 164-32-0418. Jennifer’s social security number is 059-48-3125. They live at 220 Easton Avenue, New Brunswick, New Jersey 08903. Jennifer’s elderly mother, Mrs. Cindy Watkins, has lived with the Smiths for the past 15 years. Mrs. Watkins was born on January 1, 1915. The Smiths provides the majority of Mrs. Watkin’s support. Mrs. Watkins, who not long ago reached the age of 100 years old, is in good health, Her income this year consists of $2,000 of dividend income and $5,000 of interest income on a State of New Jersey municipal bond. Mrs. Watkins social security number is 333-88-9999. Gary, a professional engineer, is an employee at both Nicholas Machinery Company and at ABC Manufacturing Company. Shown below is information from the W-2 forms that Gary received from these two companies in 2017 Nicholas ABC Box 1 Wages, tips and other compensation $340,000.00 $160,000.00 Box 2 Federal Income Tax Withheld 104,419.00 40,000.00 Box 3 Social Security Wages 127,200.00 127.200.00 Box 4 Social Security Tax Withheld 7,886.40 7,886.40 Box 5 Medicare wages and tips 350,000.00 160,000.00 Box 6 Medicare Tax withheld 6,425.00 2,320.00 Box 16 State Wages NJ 350,000.00 160,000.00 Box 17 State Income Tax 11,618.00 2,482.00 Gary’s Box 1 amounts for Nicholas Machinery Company, (wages, tips and other compensation) and for ABC Manufacturing Company are the amounts of Gary’s salary from these companies which should be included in his gross income. Gary’s Box 3 amount (Social Security Wages) ($127,200) for both of the companies he worked for in 2017 is the maximum amount of wages subject, in 2016, to a 6.2% social security tax rate. For both companies for which Gary was an employee in 2016 Gary’s Box 3 amounts ($127,200) is less than his Box 5 amount (Medicare wages and tips) because the maximum tax base on social security for 2017 is limited to $127,200 whereas Medicare tax withheld (at a rate of 1.45%) applies to his entire salary income. Recall from our first day class handout and as also can be seen on page 1-19 in Chapter 1 of our textbook the Medicare tax for high income earners (those with wages or self-employment income exceeding $200,000 or $250,000 (for joint filers) increased beginning in 2015 from 1.45% to 2.35% on the wages exceeding the specified levels. This .9% Medicare surtax only applies to the employee’s share of earned income and has no impact on the employer’s responsibility whatsoever in paying the company’s share of employment taxes. Thus there is an additional Medicare tax of .9% withheld from Gary’s salary on $150,000 which is the difference between Gary’s total Medicare wages of $350,000 and the $200,000 amount upon which he would have had Medicare withheld at 1.45%. Often the amount in Box 1 (Wages Tips and Compensation) is the same as the amount in Box 5 (Medicare wages and tips). Box 1 amounts, however, are often lower than Box 5 amounts because the tax law permits individuals to elect (if specified conditions are met) to reduce the amount of salary that must be reported as gross income by an amount(s), an employee elects to be set aside and used for a special purpose, that the tax law permits. For example, in the case of the W-2 from Nicholas Machinery Company Box 1, (Wages, tips and other compensation) for Gary is $10,000 less than his gross salary (shown in Box 5, as Medicare wages and tips) because Gary elected to participate in the Nicholas Machinery Company’s 401(k) plan. A 401(k) plan (described in IRC § 401) permits an employee to elect to contribute extra funds on a pre-tax basis to a company’s pension plan. By doing so the employee is allowed to reduce his/her current’s year’s gross income (effectively excluding from gross income) the additional amount contributed to the company’s pension plan. The first time you use Tax Cut, H&R Block Tax Software or Turbo tax you may be puzzled in trying to figure out where to enter all this W-2 information. It’s easy once you get the hang of it: Select forms, then open, W-2 Wage and Tax Statement and then separately for each of Gary’s employers enter the information that applies to each box for each of his employers. If you do it right the software Tax will do a lot of nifty things such as (1) including among the Smith’s itemized deductions the New Jersey State income tax withheld from the salary from both of the company’s that Gary worked for and (2) automatically calculating the amount of excess social security tax withheld from Gary’s salary because he worked for two employers and his social security wages (Box 3) from both employer’s combined exceeded $127,200. Nicholas Manufacturing Company (hereinafter Nicholas) provides Gary and its other employees with various fringe benefits. Nicholas pays for Gary's health insurance plan which cost Nicholas $19,000 annually. This health insurance coverage provided Gary and Jennifer with health insurance coverage for the entire year. Nicholas sent Gary a Form 1095B which indicated that Nicholas provided both Gary and Jennifer health insurance coverage for the entire year. Note that under Obama Care everyone must now have health insurance coverage for the entire year. If Form 1095B is properly completed then line 61 on page 2 of Form 1040 should automatically be checked off to indicate that Gary and Jennifer have full year health insurance coverage. Nicholas has a group term life insurance plan. Under this group-term life insurance plan, Gary and the company’s other full-time employees receive an amount of group term life insurance coverage equal to each employee’s annual salary for 2017. In Gary’s case he therefore is provided with $350,000 of group term life insurance, an amount equal to his salary for this year. Jennifer is the beneficiary of this policy. Assume that Box 1 (Wages, tips and other compensation) of the W-2 which Gary received from Nicholas includes the income imputed to Gary as of result of Nicholas Manufacturing Company having purchased on Gary’s behalf more than $50,000 worth of group term life insurance. Nicholas provides Gary with free parking on the company’s premises valued at $200 per month. In addition Gary is also permitted free use of the company’s Athletic facilities which is located on the Company’s premises. If Gary had gone to a comparable outside Athletic Facility he would have to pay $500 per year. ABC also provided Gary this year with $16,500 of “working condition fringe benefits” such as reimbursements for professional dues, the professional engineering society which he pays annual dues and educational expenses relating to a Master’s Degree that he is completing in engineering in his specialty which is in mechanical engineering. Jennifer Smith is a physician who works long hours as a sole practitioner. She has an office at 174 George Street, New Brunswick, New Jersey 08903. The form that you should complete relative to Jennifer’s business is Schedule C. As a general rule, all business related expenses of a self-employed person (such as Jennifer) should be recorded on Schedule C. In completing Schedule C for a self-employed person it is often unclear as to what lines on Schedule C various items of expense should be recorded because the these line items are labeled with a broad descriptor (e.g., line 18 is labeled office expense). Although I do make some suggestions, as shown below, as to what line items some items should appear please do not be concerned if you are unsure as to what line a particular item of expense should be listed. Questionable items (in terms of what line in Schedule C to be them on) can be listed individually in Part V of schedule C. In regards to Jennifer’s schedule C it is much less important that everyone record an item of self- employment expense on the same line number than to ensure that Jennifer’s business’s net income from her business be equal to the amount of Jennifer’s gross receipts less expenses from this business and this amount be carried forward to line 12 of Form 1040 Note that the amount of Jennifer’s Schedule C self-employment income affects the amount of her self-employment tax (the Social Security and Medicare Tax) that she has to pay on her earnings. In addition, there may be questions on Schedule C and in other forms you must complete for the Smiths for which I have not provided all the answers. For example, schedule C asks in Question “G’ whether Jennifer materially participated in this business in 2016.” The answer to this question is “Yes”. For tax purposes Jennifer's business is on a cash basis with receipts this year of $605,000. The business also paid the following expenses: Employee Salaries $150,000 Employer's share (Jennifer’s share) of FICA and other payroll taxes on her employees 12,400 Malpractice insurance (include on line 15 of schedule C) 60,000 Physician License fee paid to the State of NJ 400 Accounting Fees 1,000 Expenses related to Jennifer's participation at the AMA Meeting in Chicago: Air Fare (record as travel line 24a of schedule C) 450 Hotel (record as travel line 24a of schedule C) 700 (These expenses are not subject to either of the limitations shown on line 24b of Schedule C) Continuing Professional Education Course 3,000 Rent Expense 20,000 Repairs and Maintenance 950 Supplies 10,000 Utilities Expense 1, 500 Jennifer also works as a physician at Robert Wood Johnson University Hospital. This hospital treats Jennifer as an employee and gave her a W-2 which included the following information: RWJ University Hospital Box 1 Wages, tips and other compensation $50,000 Box 2 Federal Income Tax Withheld 14,000 Box 3 Social Security Wages 50,000 Box 4 Social Security Tax Withheld 3,100 Box 5 Medicare wages and tips 50,000 Box 6 Medicare Tax withheld 725 Box 16 State Wages NJ 50,000.00 Box 17 State Income Tax 4,100 Go slowly in entering W-2 information for a spouse. When you entered the basic information for Gary and Jennifer Smith in the form called Information Worksheet Turbo Tax assumed that the name entered first was the taxpayer’s and second name entered is the spouse of this taxpayer. If you entered Gary’s name first he is treated as the taxpayer and Jennifer is treated as the spouse. If Jennifer’s name was entered first she is treated by Turbo Tax as the taxpayer and Gary is treated as the spouse. If you did as I did and entered Gary’s name first on this Information Worksheet, you will need to do the following in recording Jennifer’s W-2 information. Select the form called W-2 Wages and Tax Statement. Type in the name of Jennifer’s employer: (Robert Wood Johnson University Hospital). Make sure to check the button that says Check if for spouse. This assumes that in entering the employment data for Gary you entered his name as the taxpayer’s and Jennifer’s as the spouse. Gary withdrew $40,000 from a Roth IRA he set up seven years ago with Vanguard Investments. He received a 1099R from Vanguard which indicates that Box 7 of Form 1099R applies to this distribution. In order to get this amount to properly appear on page 1 of 1040 select Code Q in the dropdown menu of box 7 of Form 1099-R to indicate that this is a qualified Roth Distribution. This amount needs to be shown on line 15a of Form 1040 and on form 1099-R in Box 1 (gross distribution) and in Box 2a (taxable amount). Jennifer previously worked as an employee at Lenox Hill Hospital in New York City where she participated in the hospital’s defined contribution plan. During the time Jennifer worked at Lenox Hill Hospital she contributed $100,000 on a pre-tax basis to this employer’s defined contribution plan. Jennifer now has $450,000 in this plan. In 2016 Jennifer withdrew $25,000 out of this plan. The hospital provided Jennifer with a 1099R which shows that she withdrew this amount from this plan. This 1099R indicates that Code 7 applies to this distribution. This amount needs to be shown on line 16a of Form 1040 and on form 1099-R in Box 1 (gross distribution) and in Box 2a (taxable amount). You should select Code 7 in the dropdown menu of Box 7 to indicate that this is a Normal distribution. Together, the Smith’s have assets of approximately $15 million. These assets include stock in JKL Technologies, which has a current market value of $700,000. This stock was purchased by the Smiths in 1988 for $50,000, and paid them $1,500 in qualifying dividend income in 2017. The Smiths also received additional qualifying dividend income as follows: From: Microsoft $920.00 Exxon $876.00 IBM $5,015.00 Johnson and Johnson $4,858.55 J.P. Morgan Chase $607.36 United Airlines $3,500.00 Dupont Corporation $2,700.00 The Smith’s also own stock in AXA Financial Corporation, a French Corporation which is listed on the New York Stock Exchange. AXA distributed a $3,000 qualifying dividends to the Smiths. The Smith’s only received $2,700 of this payment because the French government withheld $300 of French Income Tax on this distribution. Smith’s also received a $790 dividend from Xin Hua Corporation, a Chinese Company listed on the Shanghai stock exchange but not listed on any stock exchange in the United States. This dividend payment does not meet the requirement of being a qualifying dividend. See the last item on the last page of our capital gains handout to better understand the significance of this dividend payment not meeting the requirements of a qualifying dividend. The Smiths received a $2,000 dividend from Schlomo Corporation. Schlomo Corporation is another foreign corporation not listed on a U.S. Exchange. The Smiths also own shares in Dreyfus Premier, a mutual fund they purchased five years ago for which they have the following: Qualifying dividend income of $950 Capital gains distribution of $1,275. Note that mutual funds such as Dreyfus Premier-see above--do not pay income tax in the way that regular corporations (referred to as “C” Corporations in the tax law) do. The mutual fund shareholders instead pay tax on the mutual fund company’s earnings (more or less) in the manner described by the authors of our textbook beginning at the bottom of page 6-5 wherein they write as follows: “Millions of taxpayers now invest in stocks, bonds, and other securities indirectly through mutual funds. Mutual funds typically buy and sell investments realizing gains and losses as well as collect earnings from investments such as interest on bonds or dividends on stock. Like corporations, mutual funds make distributions. However, the treatment of these distributions differ somewhat from regular corporate dividends in that they are generally characterized to reflect the nature of the income realized by the mutual fund. Mutual fund distributions are normally characterized as ordinary dividends or capital gains dividends. Ordinary dividends represent the individual’s share of the fund’s earnings from its own investments such as interest or dividends as well as any short-term gains the funds may realize. An individual reports all ordinary dividends as dividend income. The mutual fund designates the portion that represents “qualifying dividend” income which is taxed at the generally lower, 0% 15% or 20% rate. Capital gain dividends represent the long term capital gains and losses actually realized by the mutual fund during the year. All capital gain dividends are treated as long-term capital gains.” Note that the amounts the authors of our textbook refer to as capital gains dividends are reported by mutual funds to their shareholders as “capital gains distributions” amounts which should be reported in the same manner as if were another other long term capital gain. For example, the $1,275 amount shown above reported to the Smiths by Dreyfus Premier Mutual Fund as a capital gains distribution should be reported by them as if in the same manner as if they had another long term capital gain of this amount. The tax return mechanics of this is, however, somewhat convoluted because the amounts of qualifying dividends and capital gains distributions from a mutual fund need to be first reported on Schedule B of Form 1040. From this form any capital gains distribution from a mutual fund is transferred to Schedule D (the IRS form on which capital gains are shown). Note that companies are required to provide each shareholder to whom they pay a dividend with a Form 1099-Div. This form provides information in regards to the dividend paid to a particular shareholder. The information provided for each company includes the following Box 1a Total ordinary dividend Box 1b Qualified dividends Box 3 non dividend distribution Box 6 Foreign Tax Paid Recall the following information from the last page of our capital gains. It reads as follows: Individuals who receive dividends from domestic corporations (those incorporated in one of the 50 States of the U.S) and from foreign corporations whose stock is readily traded on an established U.S. securities market are permitted to treat these so called “qualifying dividends” in a manner similar to a NCG. That is, these dividends are taxed at a maximum tax rate of 15% or 20% depending on taxpayer’s taxable income with a 0% rate applying to taxpayers in the 10% and 15% tax bracket. While “qualifying dividends” are added to any NCG they are not subject to the process by which capital gains and loss are netted. In almost all cases the dividends which the Smiths received are “qualified ones”. In such cases the corporations which pays the dividends should indicate that Box 1a of IRS Form 1099-Div which is entitled “ordinary dividends is equal in amount to Box 1b which is entitled “qualified dividends. This is important information for us to know when completing a tax return using Turbo Tax because this program requires that for each company a Box 1a and Box 1b information be entered. The Box 1a and Box 1b amounts will be equal whenever a domestic corporation or one listed on a U.S Securities market pays a dividend (recall from the Chapter 6 notes that a dividend by definition is a distribution out of either current or accumulated earnings and profits).. If a dividend is distributed from a corporation which does not meet this requirement for example from a foreign corporation whose shares are not listed on a U.S. stock exchange the amount in Box 1a will be equal to the amount of the total dividend paid with no amount listed in Box 1b. For example this will be the case for Shlomo Corporation, which as described above is a foreign corporation not listed on a U.S Stock Exchange from which the Smith’s received $2,000 of Box 1a total ordinary income none of which is consider a Box 1b “qualified dividend”. The best way to enter dividend income in Turbo Tax is to select “View” then under “Forms” Schedule B-Interest Income and Dividend income. Go then to “dividend income smart worksheet”. An alternative way to enter dividend income using Turbo Tax is to complete a separate 1099 Form Div for each company for which the Smiths received dividends. You can do this in Turbo Tax be selecting “View” then under “Forms” Schedule B-Interest Income and Dividend income. Go then to “Schedule B Form 1099 Div to separately prepare this form for each company from which the Smiths have received a dividend. The Smiths own City of New Brunswick municipal bonds which paid them $18,000 in interest in 2017. In 2017 they also received $1,200 of interest on U.S. Treasury Bills. The Smiths also received $300 in interest in 2017 from a savings account they had at Wells Fargo Bank. In addition this year the Smiths received $800 of interest on a General Electric Corporation bond. Jennifer is a partner in a business known as the Karla and Jackson Partnership. Gary is a shareholder in a Subchapter S Corporation, ISM Technologies Corporation. Partnerships and S Corporations are treated similarly for tax purposes inasmuch as these businesses do not pay any income tax. They instead file informational returns notifying the IRS in regards to how much income and/or loss, credits, and deductions they might have which in turn needs to be included on the individual tax returns of each of these businesses shareholders. Partnerships and S Corporation are in effect conduits in the sense that these businesses pass through to their shareholders (in the case of an S Corporation) or partners (in the case of an S Corporation), items of income or deduction as if these owners received or paid the particular item(s) of tax significance. Partnerships are required to file an information return with the IRS (no tax is paid by the partnership) indicating the social security numbers of each individual partners (each partner receives a Schedule K-1 (Form 1065) from the partnership and how much of the partnership income and other items of tax significance should be included on each partner(s) individual tax return. For example, assume that two individuals (A&B who own 50% of a business) create a partnership, the A & B Partnership which had the following: Revenues $100,000 Less: Expenses: 40,000 Net Income 60,000 Assume further that not included, in the income shown above, is a long-term capital gain of $12,000 and qualifying dividends of 5,000. Under these circumstances both partners A&B will receive a Form 1065 (K-1) from the partnership which shows how much each should include in their individual income of those items which had particular tax significance: The K-1 (Form 1065) received by both Partner A and Partner B would show the following: Line 1 Ordinary Income (Loss) $30,000 Line 9a Net long-term capital gain (loss) $6,000 Line 6b (qualified dividends) $2,500 Note line numbers shown are those from the K-1 from Form 1065. The descriptions of the items shown give us a good indication as to how these items will be reported on each partner’s individual tax return. For each of these individual partners the applicable amounts are recorded on each partner’s individual income tax returns on page 2 of Schedule E of Form 1040. These amounts then get transferred by Turbo Tax or Tax Cut to the applicable section of the tax return (e.g. the net long term capital gain of $6,000 in the case of hypothetical partner A & B gets transferred to Schedule D (the form on which capital gains are to be reported). If A&B were instead shareholders in an S Corporation you would select under forms Schedule E and then enter on the second page of this form the applicable amount from the Schedule K-1 of Form 1120S for the applicable shareholder. Shown below is information from a Schedule K-1 for (Form 1065) for the Karla and Jackson Partnership in which Jennifer is a partner. Also shown is information from a Schedule K-1 (Form 1120S) for ISM Technologies, the S Corporation in which Gary is a shareholder. In completing your tax return project please assume the following in regards to the Karla and Johnson Partnership and ISM Technologies S Corporation, respectively. The amounts shown are the proportionate amounts of income and deductions for the Karla and Jackson Partnership attributable to Jennifer’s interest in this partnership. Similarly, the amounts shown for ISM Technologies are the proportionate amounts of income and deduction for ISM Technologies for Gary’s attributable to Gary interest in this S corporation. Karla and Jackson ISM Technologies Partnership S Corporation Ordinary business income (loss) -16,490 15,200 Interest Income 162 Dividend Income Ordinary Income 298 Qualifying Dividends 298 Net long term capital gain 417 Net Short Term capital gain (loss) -22,000 Cash Contributions (subject to 50% AGI Limitation) 590 If you are using Turbo Tax please select Schedule K-1 (WKS) for Form 1065-Partnerships. Record (in Turbo Tax) for the Karla and Jackson partnership the amounts shown above for ordinary loss, interest income, dividend income amounts and net long term capital gain. The amounts shown above represent the proportionate share of these amounts attributable to Jennifer’s interested in this partnership. After performing the above tasks please select the Schedule K-1 (WKS) for Form 1120S Subchapter S Corporations. Record (in Turbo Tax) for ISM Technologies the amounts shown above for ordinary income, net short term capital loss and cash contributions. Please note while it is not critical to answer all the questions on these two K-1 Worksheets it is important to check the boxes on each K-1 worksheet which indicates that the taxpayer materially participates in the business activities. The mortgage on the Smith's secondary residence is from Statewide Savings Bank. On this mortgage the Smiths owe $40,000 and paid $2,000 of interest in 2017. The mortgages interest and points that the Smiths paid in 2017 were all reported to them on Form 1098. The Smiths every week buy lottery tickets, usually New Jersey Pick Six Tickets. They have never won more than $80, which Jennifer won in 2009 when she got three of the Pick Six numbers in April of that year. On September 17, 2017 Jennifer’s luck improved when she got five of the Pick Six Numbers. While being disappointed that she did not get all six numbers (the prize would have been $6 Million if she had) Jennifer was nonetheless happy that she was one of the 15 people that week who received $7,563 in prize winnings. Jennifer received her check for $7,563 on October 3, 2017 and kept buying lottery tickets each week. During the year Jennifer purchased a total of $740 of lottery tickets. Please include these gambling winnings on line 21 of page 1 of form 1040 in the category entitled “other income” In 2017 Jennifer and Gary purchased a new home at a cost of $800,000. This home is their primary residence. To help pay for this new home they borrowed $600,000 from PMC Corporation and paid mortgage interest in 2017 total $30,000 on this new home. In obtaining the mortgage from PMC to acquire this new residence the Smiths paid PMC $7,000 in points, so that they could obtain a more favorable interest rate on their mortgage than they otherwise would have obtained. On July 15, 2017 the Smith’s secondary residence located in Texas which they had purchased on September 1, 1999 for $275,000 was struck by a hurricane resulting in substantial damage. The beautiful oak tree standing in front of this home crashed into the home. Flooding in the basement and first floor area was significant. Assume the President of the US declared the area where the Smith’s had their home a “Federally Declared Disaster Area because of the severity of the hurricane that struck.”The value of this home prior to the hurricane was $425,000. Afterwards it was just $225,000. The Smith’s insurance policy reimbursed them $68,000 for the damages sustained to their house. This casualty loss deduction should be reported on Form 4684. Both Gary and Jennifer work for employers that pay for their health insurance. In the case of Gary, Nicholas Machinery Company has a health insurance plan that covers both Gary and his spouse Jennifer. The health insurance plan of RWJ University Hospital, at which Jennifer works as an employee, also covers both Jennifer and Gary. When Gary files a medical reimbursement claim for illness his plan with Nicholas pays first, typically with any unreimbursed expense not paid for by his plan being paid for by Jennifer’s plan with RWJ University Hospital. When Jennifer files a medical reimbursement claim for illness her plan with RWJ University Hospital pays first with any unreimbursed expense not paid for by her plan with RWJ University Hospital being paid for by Gary’s plan with Nicholas Manufacturing Company. It costs Nicholas Machinery $28,000 for this coverage for Gary and Jennifer. It cost RWJ University Hospital $14,000 for this health insurance coverage for Jennifer and Gary. Both Nicholas Manufacturing and RWJ University Hospital provide this generous type of health insurance to all their employees, spouses and dependent children. Even though the Smiths had this generous employer provided health insurance and timely filed with either Jennifer’s and/or Gary’s medical plan for reimbursement for all their medical bills, they wound up the year with unreimbursed medical expenses of $125,000 for doctor and hospital bills. . The amount was large because Gary was very ill due to rare illness not covered by either his employer provided insurance nor by Jennifer’s. Most importantly Gary is all better now. Due to their considerable financial wealth Gary and Jennifer do not miss the $125,000 they had to pay for medical bills this year. They are just happy to be health again. In 2017 the Smiths paid $2,100 to the CPA who prepared their tax return. The Smiths keep their stock market securities in a safety deposit box that they maintain at PNC Bank. This safe deposit box annually cost the Smiths $120. The Smiths made the following charitable contributions in 2017: The American Cancer Society $ 90,000 The American Heart Association 45,000 Rutgers University 5,000 During the year the Smiths paid a total of $21,000 in real estate taxes: $15,000 on their principal residence and $6,000 on their secondary residence. The couple also paid NJ sales tax of $9,000 during the year. In 2016 the Smith's total federal income tax liability was $20,000. They were entitled to a refund of federal tax for that year of $18,000, since they paid $38,000 in federal income tax payments for 2015. The Smiths decided not to claim this refund, and elected, on their 2016 federal return, to treat this excess payment of $18,000 as applied against their 2017 federal estimated tax. The Smiths paid a total of $24,000 in Federal estimated tax payments for 2017 with one-quarter of this amount, $6,000 being paid on each of the four appropriate dates (that is on April 15, 2017, June 15, 2017, September 15, 2017 and January 15, 2018. They also made State of New Jersey estimated tax payments for 2017 For 2017, these payments totaled $8,000, with one-quarter of this amount, $2,000, being paid on each of the four appropriate dates. In recording these estimated tax payments and the overpayment of the prior year’s federal income tax (described in the prior paragraph) you may find it helpful to click the menu item in Turbo Tax for forms and then select the form for tax payments. In August 2017 Jennifer received a check for $350,000 from Prudential Insurance Company. This amount was the proceeds from a life insurance policy that was purchased in 1986 by Jennifer's brother, Arturo who died in May 2016. Although Gary and Jennifer have been happily married for the past 35 year, Gary had for a short time prior to his marriage to Jennifer been married to his first wife Cynthia Smith.. Gary’s marriage to Cynthia did not work out and they were divorced a year later. Gary agreed to pay Cynthia alimony of $20,000 for the rest of her life which he has been paying Cynthia since their divorce in 1975. In 2017 Gary paid alimony of $20,000 to Cynthia Smith whose social security number is 472-60-1284 On her birthday Jennifer received a gift worth $900 from her sister Zuly. In completing the Smith's return, there is some information that I did not give you which you may be called upon to provide. For example, in question 8 on Schedule B the question is asked “During 2017, did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust? If “Yes” you may have to file Form 3520 (See instructions).” When you come to questions like this: answer in a way that will not require you to complete additional forms such as, in this case, Form 3520. Of course in actually doing someone’s tax return you should have access to that person so that you can ask him/her questions that need to be answered to complete the tax return. REQUIRED: Prepare the Smiths jointly filed Federal tax return for 2016 You can prepare the Smith's tax return either by hand or by using commercially available software such as Tax Cut, Intuit’s Turbo Tax or H&R Block’s Tax Cut. A registration code is provided for Tax Cur’s Software is on the page opposite the inside cover of everyone’s textbook. It does not matter to me if you use Turbo Tax, Tax Cut or the Tqx Act Software provided with our book.. In using Turbo Tax you will get to a screen in which you can make a selection to start a new tax return. You should do this. You will then be asked if you want to transfer information from last year’s return. This is a nifty feature which allows you to transfer basic information such as a taxpayer’s name, social security number and other information from a prior year’s return to the current one. Transferring information in this way is helpful if you were preparing the same taxpayer’s return from year-to-year. This being the first year that you will be preparing the Smith’s tax return we should make an election to continue without transferring. Turbo Tax will then prompt you to enter personal information for the taxpayer such as the taxpayers, name, social security number, etc. You can enter this information in this way, in effect by being interviewed by Turbo Tax or you can go to the menu item on the top selecting the choice under the heading “view”. Under this heading you will find a choice for “forms”. The first form I suggest you open is the Federal income tax return worksheet. Complete as much of this form as you can based on the information that you know about the Smiths. In completing this Federal income tax return worksheet you will be asked for the date of birth for the Smiths. Turbo Tax asks for information such as a taxpayer’s date of birth so that if the Smiths wind up being better off taking a standard deduction rather than itemizing the extra amount of standard deduction available to a taxpayer over 65 can be automatically calculated. This is a non-issue for the Smiths because their itemized deductions are much greater than their standard deduction. Consequently recording their date of birth on this worksheet would seem inconsequential. Nonetheless, if you do not record information such as this Turbo Tax might when you get ready to print the Smiths return indicates that the return has errors and will prompt you for this type of information. You can deal with this in more than one way. You can make up dates on which Jennifer and Gary Smith were each born. These dates should be consistent with the facts I have given you in regards to Jennifer and Gary Smith. Alternatively, it will also be okay if you do not record their birth dates. In using Turbo Tax you may see something that pops up asking you to register your version of Turbo Tax. I suggest ignoring all the registration information and simply clicking on “start a new return”, then click on “continue without transferring”. I suggest you then click on “view”. The next think to choose is either “step-by-step” or “forms”. As an explanation, Turbo tax will allow you to complete a tax return by going through an interview process something it sometimes refers to as step-by-step or by selecting various forms and completing these forms. You can prepare the Smith’s tax return either way, that is, by using the step-by-step approach, form selection approach or a combination of the two.. The tax return which you complete for the Smith’s should look the same at the end whether you use the interview approach or the form approach or a combination of the two. Most accountants seem to prefer the form selection approach which I prefer as well. Much of what I explained in the early pages of this assignment relate to the form selection approach. After you complete a Federal information worksheet for Jennifer and Gary Smith I suggest you select Form W-2 wages and Tax Statement; complete as much of this form as you can based on the W-2 information (one for each of Gary’s two employers) I gave you about Gary. After that I would complete as much of the tax payment worksheet as you can based on the information you have. After that I would complete as much as seems appropriate of Schedule A (itemized deductions); Schedule B (Interest and Dividends); Schedule C (Income from a Sole Proprietorship); Schedule D (Capital Gain and Loss); and 1040ES-Vouchers 1 and 2. You will need to enter the social security benefits that Gary and Jennifer receive on Forms Turbo Tax calls Social Security Benefit Worksheet. Shown below are the only Federal Forms you should submit with the Smith’s tax return: • Form 1040 (page 1 & 2) • Schedule A • Schedule B • Schedule C • Schedule D • Schedule SE • Form 4684 (one page) • 1040-ES (Vouchers 1, 2, 3 and 4) Please remember in completing this assignment to prepare (1040-ES (Vouchers 1, 2, 3 and 4--see the last item in the list shown just above. These 1040-ES Vouchers are estimated tax forms for the Smiths for 2018. In completing these estimated tax vouchers note that based on considerably changed circumstances the Smith’s taxable income will be much less in 2017 than it was in 2017. Assume based on these circumstances you have determined that the Smith’s should pay just $7,000 per quarter on each of due dates for which estimated is usually due. There will be no need for the Smiths to pay any estimated state (New Jersey) taxes for 2018. Some of the decisions you will need in completing this tax return project, in regards to whether something is includable or excludable from gross income, deductible or not, and if deductible where it is deductible or knowing where to simply put something in Turbo Tax, may require research. In doing so you may want to consult such sources as parts of our text, that we have not gone over yet but may contain relevant information, instructions on Turbo Tax, a tax service such as RIA or CCH and/or instructions for IRS forms. As always, please do not hesitate to ask me as well. In this regard class members should feel free to ask me any questions that may seem relevant. Turbo tax will allow you to print out selected forms for review. You can do this whenever you want. However, when you believe you are already to submit your final copy for me, go to print and check off the box that says tax return for filing. Turbo tax will suggest, prior to your printing a final version of your return that a review of your return be done to uncover errors. We will discuss the significance of this in class. In handing in your work, please manually, print your name on the top right hand side of page one, only, of the Federal Form 1040 which you printed out as part of your solution. Your signature as preparer of this return should also appear on page 2 of Federal Form 1040 in the “Paid Preparer Use Only” Section
