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BUS280 Lynda Livingston
NOTES ON TAXES
TEXT READINGS FOR THIS SECTION:
Chapter 3: “Managing Your Taxes”
HANDOUT TO ACCOMPANY THIS SECTION INCLUDES:1
“Publication 4: Student’s Guide to Federal Income Tax,” (2000). YES! This is old! However,
they don’t make this any more (why???). So read this to get a good overview of the basics of
our tax system. Remember that some details may have changed, but the outlines are still there.
This is a good place to start your navigation of the tax system. (You’ll appreciate this more
when you get a look at Publication 17!)
TERMS TO KNOW
1040 1040A 1040EZ irs.gov
W2 W4 withholding allowance
exemption deduction filing status single/married/head of household
credits 2441 8863 Schedules A, B, D
AGI AMT tax bracket progressive tax system
flat tax system marginal tax rate average tax rate taxable income
total income qualified dividends child ordinary income
dependent gross income
net income marginal tax rate
average tax rate capital gain/loss
above-the-line deduction
below-the-line deduction
1098 1099
WHERE CAN YOU FIND TAX INFORMATION?
Strangely enough, the best place is at www.irs.gov. They have publications that cover
EVERYTHING. Just type your question into the search box!!!
Publication 17 will tell you just about everything you need to know about the basic 1040. Find this
at:
http://www.irs.gov/pub/irs-pdf/p17.pdf
1
This will be handed out in class.
BUS280/TAX NOTES 2
TAX INFORMATION, continued
Here are some other super neat publications and forms:
Publication 15, Employer’s Tax Guide
Publication 600, State and Local General Sales Taxes
Publication 970, Tax Benefits for Education
Publication 590, Individual Retirement Arrangements
Publication 950, Introduction to Estate and Gift Taxes
Form 2441, Child and Dependent Care Expenses
Form 8606, Nondeductible IRAs
Form 8863, Education Credits (Hope and Lifetime Learning Credits)
NOTES INCLUDED IN THIS HANDOUT
Which Form Should I Use?
What are the Types of “Write Offs” and Other “Tax Breaks”?
Excerpts from Instructions to Form 1040: “Child” and “Dependent”
Determining the Sales Tax Deduction (including excerpts from Publication 600)
Education Issues (including excerpts from Publication 970)
How to Fill in Form 8863: Education Credits
Determining the Credit for Dependent Care Expenses
Stock and Taxes
IRAs (including Form 8606)
General Tax Questions to Ponder
Education Questions
AMT Example
WHICH FORM SHOULD I USE?
follow the path to form 1040EZ!
if you itemize, you use form 1040
yes 1040EZ
less than $100,000?
no no
dependents?
yes 1040A
no
itemizing?
yes 1040
The tree above gives you the SIMPLEST form you can use. You’re free to use more complicated forms if you want to.
BUS280/TAX NOTES 4
WHAT ARE THE TYPES OF “WRITE OFFS” AND OTHER “TAX BREAKS”?
WAYS TO SHELTER INCOME
reductions to taxable income reductions to tax due
exemptions deductions credits
above-the-line below-the-line
standard itemized
threshold unlimited
2% 7.5%
examples: flat amount per dependent IRA by filing status miscellaneous medical mortgage interest child tax credit
student loan interest taxes paid dependent care credit
available on: ALL FORMS 1040A & 1040 ALL FORMS 1040 ONLY 1040 ONLY 1040 ONLY ALL FORMS
but every longer form
adds more credits
Note: On form 1040EZ, the exemption amount and the standard deduction are combined into a single number (because it’s EZ that way!)
EXCERPTS FROM INSTRUCTIONS FOR 1040: “CHILD” AND
“DEPENDENT”
more
BUS280/TAX NOTES 6
CHILD/DEPENDENT, continued
BUS280/TAX NOTES 7
DETERMINING THE SALES TAX DEDUCTION
To determine the amount of our sales tax deduction, we can (a) save our receipts and deduct our
actual expenses; (b) use the standard deduction amount; or (c) use both the standard amount plus actual
expenses on large items. If you choose (c), the “large items” that qualify are these:
To determine the sales tax deduction, we need information from two sources:
1. the IRS, to tell us the standard deduction amount for people of our income level, with our
number of exemptions, in our state. We use Publication 600: “Optional State Sales Tax
Tables” for this. We can also learn the state sales tax percentage here.
2. the Washington State Department of Revenue, to tell us what our local sales tax percentage is.
This will depend upon where we live.
BUS280/TAX NOTES 8
SALES TAX, continued
EXCERPT FROM IRS PUBLICATION 600
BUS280/TAX NOTES 9
SALES TAX, continued
Here is the table for Washington:
The income values in the left-hand column are ranges: from “at least” to “but not more than.”
Note that the 6.5% shown at the top of the Pub. 600 column for Washington is giving you the
same information as what you get from the Washington State Department of Revenue’s “State Sales and
Use Tax” entry.
WHAT YOU FIND FROM WASHINGTON STATE
To find the local tax amount, go to the Washington State Department of Revenue:
http://dor.wa.gov/content/home/
Click on “Find a sales tax rate (GIS).” This leads you to a page where you can enter the address of the
property or search for the correct area on a map. An example of what you’ll find is on the next two
pages.
(project note: The Falkens’ address won’t help you, since it’s fictional. However, you can use
the map feature to highlight King County. They live in location code 1726, so if your results show that
code, you’ve got what you need.)
extra vehicle tax
The .003 extra tax on motor vehicles is not deductible, since you can only deduct tax at the
general rate (“If you paid sales tax on a motor vehicle at a rate higher than the general sales tax rate, you
can deduct only the amount of tax that you would have paid at the general sales tax rate on that vehicle.”
[Pub. 600, p. 1]).
(project note: We will assume that the Falkens knew this, and gave you the proper amount of tax
on their new Prius.)
BUS280/TAX NOTES 10
SALES TAX, continued
Sales Tax
Use this tool to find tax rates for any location within the state of Washington. You'll find tax rates for Sales & Use, Motor
Vehicle Sales/Leases/Rentals, and Lodging. For more information and downloads, see our Taxes page. If you have problems
using this tool, please read our Search Tips or E-mail Us.
Download GIS Data
Address Lookup Location Code Lookup Map Lookup
Enter a Street Address:
Address: 1500 North Warn
City: Tacoma 98416
Zip Code: --
If you know your location code, enter it below and click "Search."
Location Code:
1. Click and drag a box around the area you wish to display.
2. Select the from the toolbar below and pinpoint a location on the map.
3. Your results will appear at the bottom of the page below the map.
Map Size: Small
Table of Contents
All Map Features
Out
Help:
In A closed group, click to open.
An open group, click to close.
A hidden layer, click to make visible.
A visible layer, click to hide.
A visible layer, but not at this scale.
The Information you entered: 1500 N Warner St 98416
Results:
Location Code City County PTBA RTA CEZ Indian Country
2717 Tacoma Pierce Pierce PTBA SOUND TRANSIT DISTRICT
Click Map tab to locate it on the map.
Current June Quarter 1 2007
Period:
BUS280/TAX NOTES 11
Sales & Use Motor Vehicle Sales/Rentals Lodging
Current June Quarter 1 2007
Period:
Sales & Use Motor Vehicle Sales/Rentals Lodging
Retail Sales/Use Tax
Tax Classification 06/01/2007 to 06/30/2007
State Sales and Use Tax .065
Local City/County Sales and Use Tax .019
Regional Transit Authority (RTA) .004
Total Tax Rate .088
See EXAMPLE #4 for an example of how to determine the sales tax deduction.
BUS280/TAX NOTES 12
EDUCATION ISSUES: EXCERPT FROM PUBLICATION 970
BUS280/TAX NOTES 13
PUBLICATION 970, continued
BUS280/TAX NOTES 14
PUBLICATION 970, continued
HOW TO FILL IN FORM 8863: EDUCATION CREDITS
answer
See EXAMPLE #7 for another example of how to determine the education credits.
BUS280/TAX NOTES 15
BUS280/TAX NOTES 16
DETERMINING THE CREDIT FOR DEPENDENT CARE EXPENSES
This requires us to use Form 2441. Here’s an excellent tip from the instructions for that form:
Don’t forget that this credit only applies if you’re using dependent care so that you and your spouse can work.
See EXAMPLES #5 & #6 for examples of how to determine the dependent care credit.
BUS280/TAX NOTES 17
STOCK AND TAXES
Investors in stock can earn returns from two sources, dividends and capital gains (or capital
losses ) . Each requires a different tax treatment.
Forms and schedules that may be required to handle your stock reporting:
lines 9a and 9b of Form 1040
Schedule B, Part II: Ordinary Dividends
Schedule D: Capital Gains and Losses
“Qualified Dividends and Capital Gains Worksheet” from Instructions to Form 1040
capital gains and losses: Schedule D, Form 1040
There are two kinds of capital gains and losses: short-term and long-term. The gain/loss is short-
term if you sold the asset within one year of buying it. These are reported in Part I of Schedule D.
Long-term gains/losses are for stocks you’ve held more than one year. These are reported in Part II of
Schedule D.
dividends: lines 9a and 9b on 1040; Schedule B
The “qualified dividends” are a subset of “ordinary dividends.” Qualified dividends are taxed at
a lower rate than ordinary dividends (this is similar to the treatment of long-term and short-term capital
gains, where the long-term gains enjoy a lower tax rate).
Here’s an example of how Schedule D, the “Qualified Dividends and Capital Gains Worksheet,”
and lines 9a and 9b of the 1040 form work together. We’ll work through this starting on the page after
next (after some helpful charts).
given:
basis on 3,000 shares of SBUX purchased between 2001-2003: $34,750
purchased 250 shares of DD on 1/6/06; share price: $22.35
purchased 1,000 shares of BA @ $50/share on 12/15/02: $50,000 total
sold 3,000 shares of SBUX on 4/5/06 @ $24.45: $73,350 total
sold 250 shares of DD on 4/5/06 @ $19.12: $4,780.00 total
sold 1,000 shares of BA on 4/5/06 @ $51.56: $51,560 total
long-term capital gains distributions from your mutual funds: $5,000 these are reported on Form 1099-DIV
BUS280/TAX NOTES 18
STOCK, continued
STOCK YOU HOLD DIRECTLY
dividends capital gains
ordinary short-term long-term
qualified other
line 9b line 9a Part I Part II
(a subset) (full amount) Schedule D Schedule D
If your ordinary dividends are more than $1,500, you must also report them in Part II of Schedule B.
STOCK YOU HOLD THROUGH MUTUAL FUNDS
dividends capital gains
ordinary short-term long-term
qualified other
line 9b line 9a line 9a line 13
(a subset) (full amount) (treated as Schedule D
ordinary
dividends)
(Note: If the only capital gains you have come from mutual funds, you skip Schedule D and
write your gains on line 13 of the 1040 form.)
Schedule D:
Part I Short-Term Capital Gains and Losses - Assets Held One Year or Less
(a) Description of property (b) Date (c) Date (d) Sales price (e) Cost or other basis (f) Gain or (loss)
(Example: 100 sh. of XYZ Co.) acquired sold Subtract (e) from (d)
(Mo, day, yr.) (Mo, day, yr.)
1 250 sh. of DD 1/6/06 4/5/06 $4,780.00 $5,587.50 ($807.50)
line:
2 nothing on D-1 (which is just space for more transactions) $0
3 Total short-term sales price amounts. $4,780.00
7 Net short-term capital gain or (loss). ($807.50)
Part II Long-Term Capital Gains and Losses - Assets Held More Than One Year
(a) Description of property (b) Date (c) Date (d) Sales price (e) Cost or other basis (f) Gain or (loss)
(Example: 100 sh. of XYZ Co.) acquired sold Subtract (e) from (d)
(Mo, day, yr.) (Mo, day, yr.)
8 3,000 sh. of SBUX various 4/5/06 $73,350 $34,750 $38,600
1,000 sh. of BA 12/15/02 4/5/06 $51,560 $50,000 $1,560
line:
9 nothing on D-1 (which is just space for more transactions) $0
10 Total long-term sales price amounts. $124,910.00
13 Capital gain distributions $5,000.00
15 Net long-term capital gain or (loss). $45,160.00
Part III Summary
16 line 7 + line 15 $44,352.50 to line 13 of Form 1040
17 lines 15 and 16 are both gains yes
18 go to the Instructions for Form 1040 to find this worksheet $0.00 (It's mostly about collectibles, and probably won't apply to you.)
19 $0 (more weird stuff that won't apply)
20 18 and 19 are both zero SO WE HAVE TO DO A WORKSHEET!
(answers to example given page before last) blank worksheet on next page, then finished example
BUS280/TAX NOTES 21
QUALIFIED DIVIDENDS AND CAPITAL GAIN TAX WORKSHEET
(page 38 of Instructions to Form 1040)
(completion of example)
additional givens:
taxable income: $98,750.00
qualified dividends: $750
filing status: married/joint
line:
1 1040, line 43 (taxable income) $98,740.00
2 1040, line 9b (qualified dividends) $750
3 yes--> smaller of line 15 or 16 $44,352.50 from Schedule D
4 line 2 + line 3 $45,102.50
5 $0
6 line 4 - line 5 $45,102.50
7 line 1 - line 6 $53,637.50
8 $61,300 given in worksheet
9 yes --> line 7 > line 8
12 NO $45,102.50 smaller of lines 1 and 6
13 $0
14 line 12 - line 13 $45,102.50
15 (line 14)*(15%) $6,765.38
16 tax on amt on line 7 of worksheet $8,709 see page 74 of the Instructions to 1040
17 line 11 + line 15 + line 16 $15,474.38
18 tax on amt on line 1 of worksheet $17,796 see page 78 of the Instructions to 1040
19 smaller of lines 17 and 18 $15,474.38
to line 44 of Form 1040
excerpts from tax table used above:
BUS280/TAX NOTES 22
IRAs
If you make a nondeductible contribution, just enter the amount on line 1. The total basis from
line 2 is just the sum of your prior nondeductible contributions. Add lines 1 and 2, and put the sum on
lines 3 and 14. End of story! You’ve just created a record of your nondeductible contributions. You’ll
want this when you start taking money out of your IRA, since you won’t have to pay tax again on these
nondeductible contributions.
BUS280/TAX NOTES 23
GENERAL TAX QUESTIONS TO PONDER
1. What is the maximum amount of student loan interest which is deductible for the current year?
2. Can you claim the student loan interest deduction if you don’t itemize?
3. Can you claim the student loan interest deduction if you file on 1040EZ?
4. Not all student loan interest is deductible. What determines whether the interest is “qualified”?
5. What is the minimum marginal personal ordinary tax rate? the maximum?
6. Are the rates on capital gains higher, lower, or the same as the rates on ordinary income?
7. What is the more familiar name of the “Employees Withholding Allowance Certificate”?
8. What does it mean to make estimated tax payments?
9. If you make estimated tax payments, how many times per year is a payment required?
10. If you have two jobs, how should you handle your number of withholding allowances?
11. Are students automatically exempt from withholding?
12. If you a be claimed as a dependent on someone else’s tax return, does this make you more or less
likely to have to file your own return?
13. How can you determine whether you can be claimed as someone’s dependent?
14. How would your answer to #12 change if you could be claimed as a dependent by someone, but she
chooses not to claim you?
15. Are tips taxable as income?
16. Is interest you earn on your savings account taxable?
17. Are scholarships taxable?
18. What are the two tax credits available for higher education expenses?
19. What is the difference between a “credit” and a “deduction”?
20. Name two other tax credits.
BUS280/TAX NOTES 24
EDUCATION QUESTIONS
1. If you have expenses for private high school, which benefits, if any, apply to you?
2. Can you take a Lifetime Learning credit for a student for whom you took the Hope credit last
year?
3. How many Coverdell ESAs can a person have?
4. What is the annual maximum that any person can contribute to your Coverdell ESA?
5. What is the total annual amount than can be contributed to your Coverdell ESA?
6. How many Coverdell ESAs can you contribute to each year?
7. Can you contribute to your own Coverdell ESA?
8. Can you transfer your Coverdell ESA to someone else?
9. Do you ever have to take the money out of your Coverdell ESA?
10. Are contributions to Coverdell ESAs deductible?
11. Are withdrawals from Coverdell ESAs taxable?
12. Can you make a contribution to both a 529 and a Coverdell in the same year?
13. Can you take a Lifetime Learning or Hope credit in the same year that you make withdrawals
from a Coverdell?
14. When must all of the money be out of a Coverdell account?
15. What happens if you take money out of your Coverdell ESA for something other than qualified
education expenses?
16. How much can you put into a 529 plan each year?
17. Can a 529 plan account be transferred to another person?
18. Do you have to open the 529 plan in the state where the beneficiary will go to school?
19. Are contributions to 529 plans deductible?
20. Are withdrawals from 529 plans taxable?
21. What is the maximum amount of the Hope credit?
BUS280/TAX NOTES 25
EDUCATION QUESTIONS, continued
22. Can you take both the Hope and Lifetime Learning credits for the same student in the same
year?
23. If you pay some of your son’s student loan payments, can you claim the student loan interest
deduction?
24. Would you ever choose to take the Lifetime Learning credit instead of the Hope credit for a
student who was eligible for either?
25. If your parents can claim you as a dependent but don’t, can you take the tuition and fees
deduction?
26. Can you claim the Hope credit on the 1040EZ? the 1040A?
27. Can you claim the Hope credit if you are claiming the tuition and fees deduction that year for
the same student?
28. Do you have to be in school half-time to claim the Hope credit? the Lifetime Learning credit?
29. If you buy your books at the UPS Bookstore, are those expenses eligible for the Hope credit?
30. Can you use interest you paid on your credit card debt toward the student loan interest
deduction?
31. If you and your husband both attended South Seattle Community College to improve your job
skills, what is the most you can claim on your joint return for the Lifetime Learning credit?
32. If your aunt pays for your tuition by sending a check directly to UPS, who can claim the expense
toward the Hope credit?
33. Are scholarships taxable?
34. Are room and board expenses “qualified” for:
the Coverdell ESA?
the Lifetime Learning credit?
the Hope credit?
the tuition and fees deduction?
529 plans?
BUS280/TAX NOTES 26
AMT EXAMPLE
The Alternative Minimum Tax is the parallel tax system that is meant to ensure that high-income
people don’t avoid federal tax completely. You may get caught if you live in a high-tax locale, have lots
of kids, and perhaps have some municipal bond interest (which is tax-exempt under the normal system).
To determine whether or not the AMT applies to you, fill in the worksheet on page 38 of the Instructions
to Form 1040; it may send you off to Form 6251. Or not. If you get to line 10 of this worksheet and it
says STOP, you don’t have to worry about the AMT. Here’s an example:2
given:
AGI: $65,000 subtract
itemized deductions: $9,000
medical deductions: $0
taxes you paid from Sch. A: $1,500
filing: married/joint
line:
1 filing Schedule A? yes--> line 41
(note: line 41 = AGI - itemized deductions) $56,000
2 smaller of medical deductions or 2.5% of AGI $0
3 Schedule A line 9 + line 26 $1,500
4 line 1 + line 2 + line 3 $57,500
5 tax refunds from 1040 $0
6 line 4 - line 5 $57,500
7 Katrina stuff $0
8 line 6 - line 7 $57,500
9 married/joint $62,550
10 is line 8 > line 9? no --> stop!
AMT DOESN'T APPLY TO YOU!
write $0 on line 45 of Form 1040
worksheet
2
Hint: As of 2006, about 3 million people were subject to the AMT. That’s not that many.
BUS280/TAX NOTES 27
BUS280/TAX NOTES 28
EXAMPLE #1 (no answers provided)
Please complete the tax return for the Johnson family. The W-2 and 1098 statements for Carol
and Rupert Johnson are attached.
Additional helpful information:
Carol and Rupert have three children: Rupert, Jr. (age 10), Louella (age 3), and Katrina (age
1 ½). (We will not worry about what the social security numbers for these children are,
although in real life, we certainly would have to.) All three children lived with Carol and
Rupert throughout the year.
Carol added $2,000 to her (traditional) IRA this year. We will assume that all of this can be
included on line 23.
Carol and Rupert paid the following for daycare expenses over the year:
daycare provider child in care amount paid
Janet Jones Louella $2,012
111 Phillip St.
Tacoma, WA 98416
Happy Tots Katrina $5,398
112 Phillip St.
Tacoma, WA 98416
Carol and Rupert made the following deductible charitable donations:
church rummage sale (household goods) $50
church pledge (cash donations) $2,500
donation to Friends of the Planet $25
donation to Friends of Other Planets $25
The excise tax portion of Carol and Rupert’s cars totaled $357.00.
Carol and Rupert paid $3,435 in real estate taxes this year.
Carol and Rupert paid $2,345.67 in sales taxes this year.
Carol and Rupert paid $297.88 in credit card interest this year.
Total medical expenses for the family were $4,067.
Carol and Rupert wish to file jointly.
BUS280/TAX NOTES 29
EXAMPLE #2 (no answers provided)
For these questions, you will be considering the situation of Mildred and Jeremiah Obediah, a
married couple. Please be aware that your answers to question #1 will affect your answer to question
#2.
Additional information about the Obediahs:
They plan to file jointly.
They have two children, Nautilus and Persephone. Both children will be claimed as dependents on
their parents’ tax return.
Nautilus is a freshman at the University of Puget Sound. He is 17 years old.
Persephone is 3 years old and attends WeLuvKidz Daycare full time. Daycare expenses for
Persephone for the year were $6789.00.
Mildred graduated from the University of Washington in 1997. She began repaying her associated
student loan in October of 1999.
Both Mildred and Obediah have traditional IRAs. They plan to contribute $2,000 to each IRA on
February 12 next year; this will be their contribution for this year. They would like to deduct as
much of these contributions as possible. All of their prior years’ contributions have been deductible.
Mildred and Obediah own their home.
Mildred and Obediah’s charitable donations for the year were:
$100 to PAWS
$25 in reusable household articles donated to the Association of American Veterans
$200 to St. Stephen’s Episcopal Church
Healthcare expenses for the family for the year were $900.
The Obediahs will pay you $250 for preparing their taxes.
Jeremiah spent $35 to rent a safety deposit box in which to store his tax records.
The Obediahs’ miscellaneous taxes for the year were:
$3,200 in real estate taxes
$2,000 in Seattle sales taxes
$1,500 in gasoline taxes
$500 in automobile excise taxes.
BUS280/TAX NOTES 30
EXAMPLE #2, continued
IRA QUESTIONS
1. Determine the amount of
(a) Mildred’s allowable total contribution
(b) Mildred’s allowable deductible contribution
(c) Mildred’s nondeductible contribution amount
(d) Jeremiah’s allowable total contribution
(e) Jeremiah’s allowable deductible contribution
(f) Jeremiah’s nondeductible contribution amount
TAXES
2. Complete Mildred and Jeremiah’s 1040 (and any required supporting schedules). Be sure to show all
your work.
BUS280/TAX NOTES 31
EXAMPLE #3 (no answers provided)
(a) Determine the refund or payment amount for Alcah Pohn, whose details are as follows:
filing status: single
number of allowances claimed: 2
mortgage interest paid: $15,600
gross income from employment: $56,750
tax preparation fees (to you!): $150
number of dependents: 0
out-of-pocket medical expenses: $1,500
property taxes paid: $2,500
federal income tax withheld: $7,800
cash donations to charity: $100 per month
taxable interest: $200
student loan interest: $600
charitable donation (goods): $175
excise tax of automobile: $100
safety deposit box rental: $35
deductible IRA contributions: $2,000
Use the most recent tax year’s tax tables. These will be in the back of the instructions to the various
forms (1040EZ, 1040A, 1040) available at www.irs.gov. Be sure to be explicit about what form Alcah
will need to file, and note if he will need to include any additional schedules.
(b) Do you think Alcah needs to make any changes to his tax strategy for next year? Explain.
BUS280/TAX NOTES 32
EXAMPLE #4: SALES TAX DEDUCTION
Find the sales tax deduction for the following scenario:
given:
state general sales tax rate: 6.50%
income: $125,000
# of exemptions: 3
local sales tax rate: 2%
general sales taxes paid on specific items: $1,500
ANSWER TO EXAMPLE #4
given:
state general sales tax rate: 6.50%
income: $125,000
# of exemptions: 3
local sales tax rate: 2%
general sales taxes paid on specific items: $1,500
worksheet:
line:
1 state general sales taxes $1,382 from table in Pub. 600
3 local general sales tax rate 2
4 state general sales tax rate 6.5
5 divide line 3 by line 4 0.308 using 3 decimal places
6 multiply line 1 by line 5 $425.23
7 state & local tax on specific items $1,500
8 deduction for sales tax $3,307.23 = lines 1 + 6 + 7
to Schedule A
BUS280/TAX NOTES 33
EXAMPLE #5: CREDIT FOR DEPENDENT CARE EXPENSES
given:
amount of care for Malcolm: $4,250
amount of care for Reese: $3,500
earned income for wife: $54,500
earned income for husband: $5,000
AGI: $64,000
tax due: $10,000
AMT: $0
foreign tax credit: $500
ANSWER TO EXAMPLE #5
given:
amount of care for Malcolm: $4,250
amount of care for Reese: $3,500
earned income for wife: $54,500
earned income for husband: $5,000
AGI: $64,000
tax due: $10,000
AMT: $0
foreign tax credit: $500
Form 2441:
line:
3 expense amounts $6,000 maximum for $6,000
4 "your" earned income $54,500
5 "spouse's" earned income $5,000
6 smallest of lines 3, 4, 5 $5,000
7 AGI $64,000
7 decimal amount 0.20 from chart on Form 2441
9 multiply line 6 by line 8 $1,000.00 = lines 1 + 6 + 7
10 tax due + AMT - foreign tax credit $9,500.00
11 smaller or line 9 or 10 $1,000.00
to line 48 of Form 1040
BUS280/TAX NOTES 34
EXAMPLE #6: MORE ON DEPENDENT CARE BENEFITS
This is example #5, except we’re adding a dependent care expense account.
given:
amount of care for Malcolm: $4,250
amount of care for Reese: $3,500
earned income for wife: $54,500
earned income for husband: $5,000
AGI: $64,000
tax due: $10,000
AMT: $0
foreign tax credit: $500
additions:
dependent care benefits: $3,000
ANSWER TO EXAMPLE #6
Form 2441:
line:
12 dependent care benefits $3,000
15 sum of lines 12 through 14 $3,000
16 qualified expenses $7,750
17 smaller or 15 or 16 $3,000 since lines 13 and 14 are -$0-
18 "your" earned income $54,500
19 "spouse's" earned income $5,000
20 smallest of lines 17, 18, 19 $3,000 from chart on Form 2441
21 enter $0 $0.00
22 line 15 - line 21 $3,000 = lines 1 + 6 + 7
23 enter $5,000 $5,000
24 deductible benefits $0.00 smallest of lines 20, 21, 23
25 smaller of lines 20 & 23 $3,000
26 amount from line 24 $0.00
27 excluded benefits $3,000 line 25 - line 26
28 taxable benefits $0.00 line 22 - line 27
29 enter $6,000 $6,000
30 line 24 + line 27 $3,000
31 line 29 - line 30 $3,000
32 total benefits - amount from line 32 $4,750
33 smaller of line 31 & 21 $3,000
to line 3 of Form 2441
now, continue as before!
BUS280/TAX NOTES 35
EXAMPLE #7: EDUCATION CREDITS
given:
qualified expenses for Paris: $10,000
class standing for Paris: freshman
qualified expenses for Lindsay: $12,000
class standing for Lindsay: junior already taken Hope twice
qualified expenses for Nicole: $5,000
class standing for Nicole: senior already taken Hope twice
filing status for parents: married/joint
AGI: $100,000
taxes before credits: $17,564
foreign tax credit: $250 line 47
dependent care credit: $1,000 line 48
ANSWER TO EXAMPLE #7
Form 8863:
line:
1c qualified expenses for Hope credit $2,200 maximum for Hope is $2,200 on line 1c
1d smaller of line 1c or $1,100 $1,100
1e (c) + (d) $3,300
1f 1/2 of (e) $1,650
2 sum of column (f) $1,650 since only 1 student here
3 tentative Hope credit $1,650
3c Lifetime Learning for Lindsay $12,000
3c Lifetime Learning for Nicole $5,000
4 sum of 3c $17,000
5a smaller of line 4 or $10,000 $10,000
5c 5a - 5b $10,000 since 5b is -$0-
6b (line 5c)*(20%) $2,000
6c tentative Lifetime Learning credit $2,000
7 tentative education credits $3,650
8 married/joint $110,000
9 AGI $100,000
10 line 8 - line 9 $10,000
11 married/joint $20,000
12 line 10/line 11 0.500
13 (line 7)*(line 12) $1,825
14 taxes before credits $17,564
15 credits on lines 47-49 $1,250
16 line 14 - line 15 $16,314
17 smaller of lines 13 and 16 $1,825
to line 50 of Form 1040
BUS280/TAX NOTES 36
EXAMPLE #8: YOUR QUESTIONS, WITH ANSWERS
1. Mike’s roommate question:
Can a deadbeat roommate be claimed as your dependent? (Hint: See instructions for line 6a of Form
1040 in the instructions for Form 1040.)
Yes, as long as you paid for more than half his support, he lived with you for more than half the
year, he is not a qualifying child for anyone else (but how could he be, given that he was with you and
you were supporting him?), and he did not make more then $3,300.
From Publication 17:
BUS280/TAX NOTES 37
EXAMPLE #8, continued
2. Chris’s polygamy question, and addendum:
If you have two wives, do you count them both as spouses? If not, can you count the second one as
dependent? (You should be able to use the same source here.)
You can only have one spouse. That’s why line 6 looks like this:
IF POLYGAMY DID NOT VIOLATE LOCAL LAW (see #2 in Table 3-1 above under “tests to be a
qualifying relative”), then you should be able to claim your second wife as a dependent, using the same
reasoning as in #1 for the deadbeat roommate.
3. Norma’s foster care question:
If money given to a foster parent by the state, for the care of a foster child, taxable income to the
foster parent? (Here, you’re on your own!)
From Publication 17 (kudos to Briana for finding this!).
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