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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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