58. Daniel B. Butler and Freida C. Butler, husband and wife, file a joint return. The Butlers live at 625 Oak Street in Corbin, KY 40701. Dan’s SSN is 111-11-1112, and Fredia’s is 123-45-6789. Dan was born on 1/15/67.
During 2018 Dan and Freida furnished over half of the total support of each of the following individuals, all of whome still live at home:
Gina, their daughter 22 a full time student who married on 12/21/18 has no income of her own and for 2018 did not file a joint return with her husband Casey, who earned $10,600.00 during 2018. Gina’s SSN is 123-45-6788
Sam their son is 20 who had a gross income of 6300 in 2018 dropped out of college in October 2018. HE had graduated high school in May 2018. Sam’s SSN is 123-45-6787.
Ben their oldest son age 26 is a full time graduate student with gross income of 5200. Ben’s SSN is 123-45-6786
Dan was employed as a manager by WJJJ, inc. EIN # 11-11111111, 604 Franklin Street Corbin KY 40702, and Freida was employed as a salesperson for Corbin Realty KY 40701. Selected information from the W-2 forms provided by the employers is presented below. Dan and Freida use the cash method.
Line Description Dan Freida
1 Wages,tips, other compensation 74,000 86,000
2 Federal income tax withheld 11,000 12,400
17 State income tax withheld 2,960 3,440
Freida sold a house on 12/30/18 and will be paid a commission of $3100(not included in the 86k reported on W-2) on the January 10, 2019 closing date.
Other income (as reported on 1099 forms) for 2018 consisted of the following:
Dividends on CSX stock (qualified) 700.00
Interest on savings at Second bank 1600.00
Interest on City of Corbin bonds 900.00
Interest on First Bank CD 382. 00
The $382 from First Bank was original issue discount. Dan and Freida collected 16k on the First Bank CD that matured on 09/30/18. The CD was purchased on 10/1/16 for $14,995.00 and the yield to maturity was 3.3%
Dan received a Schedule K-1 from Falcon Partnership which showed his distribution share of income as $7,000.00. In addition to the above information, Dan and Freida’s itemized deductions included the following:
Paid on 2018 Kentucky income tax 700.00
Personal property tax paid 600.00
Real estate taxes paid 1,800.00
Interest on home mortage (Corbin S&L) 4,900.00
Cash contributions to the Boy Scouts 800.00
Sales tax from the sales tax table is $1,860. Dan and Freida made estimated tax payments of $8000.00. The Kentucky income tax rate is 4%.
Part 1- Tax Computation
Compute Dan and Freida’s 2018 icome tax payable (or refund due) If you use tax forms for the computations you will need Form 1040 and Schedules A, B and E
Part 2 Tax Planning
Dan plans to reduce his work schedule andonly work half time for WJJJ in 2019. He has been writing songs for several years and wants to devote his time to developing a career as a songwriter. Because of the uncertainty in the music business, however, he would like you to make all computations assuming that he will have no income from song writing in 2019. To make up for the loss of income Freida plans to increase the amount of time she spends selling real estate. She estimates that she will be able to earn $90k in 2019. Assume that all other income and expense items will be approximately the same as they were for 2019. Assume that Sam will be in enrolled in college as a full time student for the summer and fall semesters. Will the Butlers have more or less disposable income (after Federal income tax) in 2019? Write a letter to the Butlers that contains your advice and prepare a memo for the tax files.