Income Tax Return Summer 2016
Revised June 27, 2016
TAX RETURN PROJECT-This assignment is due on Wednesday, July 6th, the date of our final exam.
In this project we are asked to complete a 2015 joint tax return for Gary and Jennifer Smith’s whose information is provided below.
Most people today use tax return software to prepare their tax returns. The two most commonly used software packages are available from H&R Block Tax Software and Intuit’s Turbo tax. A registration code is provided for the H&R Block Tax Software on the page opposite the inside cover of everyone’s textbook.
Gary and Jennifer Smith have been happily married for the past 25 years, and look forward to a very comfortable retirement. Gary, who expects to continue working until age 70, began collecting social security in 2013 when he reached 65 years of age. Gary received $26,000 in social security benefits in 2014 as reported on Form SSA-1099 which he received from the Social Security Administration. Jennifer and Gary have requested your help in preparing their 2014 federal tax return. Gary’s social security number is 164-32-0418. Jennifer is 64 years old and also expects to retire at age 70. Her 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, 1913. 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 2015.
Box 1 Wages, tips and other compensation $340,000.00 $160,000.00
Box 2 Federal Income Tax Withheld 84,419.00 40,000.00
Box 3 Social Security Wages 118,500.00 118,500.00
Box 4 Social Security Tax Withheld 7,347.00 7,347.00
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) ($118,500) for both of the companies he worked for in 2015 is the maximum amount of wages subject, in 2015, to a 6.2% social security tax rate. For both companies for which Gary was an employee in 2015 Gary’s Box 3 amounts ($118,500) is less than his Box 5 amount (Medicare wages and tips) because the maximum tax base on social security for 2015 is limited to $118.500 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 $350,0000,000 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 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 Turbo 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 $118,500.
Nicholas Manufacturing Company (hereinafter Nicholas) provides Gary and its other employees with various fringe benefits. Nicholas pays for Gary’s health insurance plan (cost to Nicholas of $12,000 annually—it covers Gary and Jennifer), and participation in the company’s 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 2015. 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.
The other company that Gary works for, ABC is a manufacturer of bicycles and like Nicholas Manufacturing Corporation provides Gary and its other full-time employee with various employee benefit including in the case of ABC, “qualified employee discounts” on products it manufacturers. Gary took advantage of this program by buying for just $375 from ABC a new bicycle which would have cost Gary $800 if he purchased it elsewhere. The bicycle cost ABC $350 to manufacture. Gary who rides his bicycle to work enjoys working for ABC because it is an environmental sensitive company. Consistent with this vision ABC provides employees with a benefit included in IRC Section 132(f) (1) (D). Pursuant to this Section of the Internal Revenue Code ABC reimburses employee up to $20 per month for bicycle maintenance. Gary’s new bike averages only about $12 per month in maintenance and storage costs per month which ABC reimburses him for each month.
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 2015.” The answer to this question is “Yes”.
For tax purposes Jennifer’s business is on a cash basis with receipts this year of $580,000. 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
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 2,100
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 $30,000 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 2015 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 2015.
The Smiths also received additional qualifying dividend income as follows:
From: Microsoft $920.00
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 2015 In 2015they also received $1,200 of interest on U.S. Treasury Bills. The Smiths also received $300 in interest in 2015 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.
The Smiths every week buy lottery tickets, usually New Jersey Pick Six Tickets. They have never won more than $80, which Jennifer won in 2008 when she got three of the Pick Six numbers in April of that year. On September 17, 2015 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, 2015 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 2014 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 2015 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.
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 2015. The mortgages interest and points that the Smiths paid in 2014 were all reported to them on Form 1098.
On July 15, 2015 the Smith’s secondary residence located on Hilton Head North Carolina which they had purchased on September 1, 1998 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. 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.
The Smiths had unreimbursed medical expenses of $125,000 from doctor and hospital bills. The amount was large because Gary was very ill. Fortunately he is better now.
In 2015 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 2015:
The American Cancer Society $ 85,000
The American Heart Association 40,000
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 2014 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 2014. The Smiths decided not to claim this refund, and elected, on their 2014 federal return, to treat this excess payment of $18,000 as applied against their 2015 federal estimated tax.
The Smiths paid a total of $24,000 in Federal estimated tax payments for 2015 with one-quarter of this amount, $6,000 being paid on each of the four appropriate dates (that is on April 15, 2015; June 15, 2015, September 15, 2015 and January 15, 2016. They also made State of New Jersey estimated tax payments for 2015. For 2015, 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 2015 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 1985 by Jennifer’s brother, Arturo who died in May 2014.
Although Gary and Jennifer have been happily married for the past 25 year, Gary had for a short time prior to his marriage to Jennifer been married to his first wife, Cynthia. In 2015 Gary paid alimony of $15,000 to Cynthia Smith whose social security number is 472-60-1284. Gary’s marriage to Cynthia did not work out and they were divorced a year later. Gary agreed to pay Cynthia alimony of $15,000 for the rest of her life.
In January 2015 Gary’s father died at age 102. Soon after the death of his father Gary’s mother, died a few weeks later after reaching her 100th birthday. Gary’s mother (Nelly) and father (Dan) had lived for over 70 years in a townhouse located at 47 East 88th in Manhattan that they had purchased in 1950 for $200,000. This property at the time that Gary’s mother died on January was worth $8 Million. The land was worth $6,000,000 and the townhouse located on it was worth $2,000,000. Upon the death of his mother Gary inherited $75,000 in cash, antique furnishings valued at $18,000 and the townhouse described above.
Gary tried to convince Jennifer when his parents died to move with him to the Townhouse his parents had owned . Jennifer, however, told Gary that she wants to continue working, as does Gary while living in New Jersey and does not want to move to Manhattan.
Gary therefore decided to rent out the Townhouse which he did beginning on April 1, 2015
Shown below are the 2015 revenues and expenses relating to this property.
Rents Received ………………………………………..……………………………………..………$90,000
New York City Real Estate Taxes paid after property became rental property on April 1, 2015 …….. 30,000
Repairs ……………………………………………… …………… …………4,000
Depreciation on the building can be determined from Exhibit 9-5 in Chapter 9
Gary and Jennifer should report their rental income on this property on Schedule E.
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 2015, 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.
Prepare the Smiths jointly filed Federal tax return for 2015 You can prepare the Smith’s tax return either by hand or by using commercially available software such as Intuit’s Turbo Tax or H&R Block’s Tax Cut.
A registration code is provided for the H&R Block Tax Software on the page opposite the inside cover of everyone’s textbook.
It does not matter to me if you use Turbo Tax or Tax Cut. 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 of $26,000 that Gary received on a Form 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 E
• 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 2015. In completing these estimated tax vouchers note that based on considerably changed circumstances the Smith’s taxable income will be much less in 2014 than it was in 2013. Assume based on these circumstances you have determined that the Smith’s should pay just $5,000 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 2015.
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.
One last thing: Preparing a tax return using computerized software can save a lot of time and effort. It can, however, be frustrating when you know what you are doing but are unable to get the computer to do something the way you know it should be done. For this reason it is acceptable for you to use the override command (you can access it by right clicking) to get a result you know is correct.