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 Social Security number is 111–11–1111, and Freida’s is 123–45–6789. Dan was born on January 15, 1962, and Freida was born on August 20, 1962.
During 2012, Dan and Freida furnished over half of the total support of each of the following individuals, all of whom still live at home:
a. Gina, their daughter, age 22, a full-time student, who married on December 21, 2012, has no income of her own and for 2012 did not file a joint return with her husband, Casey, who earned $10,600 during 2012. Gina’s Social Security number is 123–45–6788.
b. Sam, their son, age 20, who had gross income of $6,300 in 2012, dropped out of college in October 2012. He had graduated from high school in May 2011. Sam’s Social Security number is 123–45–6787.
c. Ben, their oldest son, age 26, is a full-time graduate student with gross income of $5,200. Ben’s Social Security number is 123–45–6786.
Dan was employed as a manager by WJJJ, Inc. (employer identification number 11–1111111, 604 Franklin Street, Corbin, KY 40702), and Freida was employed as a salesperson for Corbin Realty, Inc. (employer identification number 98–7654321, 899 Central Street, Corbin, KY 40701). 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
3 Social Security wages $74,000 $86,000
4 Social Security tax withheld $3,108 $3,612
5 Medicare wages and tips $74,000 $86,000
6 Medicare tax withheld $1,073 $1,247
15 State Kentucky Kentucky
16 State wages, tips, etc. $74,000 $86,000
17 State income tax withheld $2,960 $3,440
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Freida sold a house on December 30, 2012, and will be paid a commission of $3,100 (not included in the $86,000 reported on the W–2) on the January 10, 2013 closing date.
Other income (as reported on 1099 Forms) for 2012 consisted of the following:
Dividends on CSX stock (qualified) $4,200
Interest on savings at Second Bank 1,600
Interest on City of Corbin bonds 900
Interest on First Bank CD 382
The $382 from First Bank was original issue discount. Dan and Freida collected $16,000 on the First Bank CD that matured on September 30, 2012. The CD was purchased on October 1, 20010, for $14,995, and the yield to maturity was 3.3%.
Dan received a Schedule K–1 from the Falcon Partnership, which showed his distributive share of income as $7,000. In addition to the above information, Dan and Freida’s itemized deductions included the following:
Paid on 2012 Kentucky income tax $ 700
Personal property tax paid 600
Real estate taxes paid 1,800
Interest on home mortgage (Corbin S&L) 4,900
Cash contributions to the Boy Scouts 800
Sales tax from the sales tax table is $1,860. Dan and Freida made Federal estimated tax payments of $8,000. The Kentucky income tax rate is 4%.
Part 1—Tax Computation
Compute Dan and Freida’s 2012 Federal income tax payable (or refund due). If you use tax forms for your computations, you will need Form 1040 and Schedules A, B, and E. Suggested software: H&R BLOCK At Home.
If the Butler’s should itemize their deductions please be sure to use Schedule A.
Part 2: Dan plans to reduce his work schedule and work only half time for WJJJ in 2013. He has been writing songs for several years and wants to devote more time to developing a career as a song writer. Because of the uncertainty in the music business however, he would like you to make all computations assuming he will have no income from song writing in 2013. To make up for the loss of income Frida plans to increase the amount of time she spends selling real-estate she estimates that she will be able to earn $90,000 in 2013. Assume that all other income and expense items will be approximately the same as they were in 2012. Assume that sam will be 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 2013. Write a letter to the butlers that contains your advice and write a memo for the tax files.