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The Polks Tax Calculation
The Polks Tax Calculation
Lisa
$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
Reimbursed Employee Expenses Deductible Business Expense Deductible Home Office Expenses Bad Debt Expenses Self Employment Tax Deduction State and local sales taxes
Itemized 6,000 Robert's contribution of medical coverage 14,000 The Polks' Medical and Dental Expenses 20,000 61,255.60 10% AGI No medical deduction allowed 6,300 Advalorem Tax 13,500 Qualified mortgage Interest 500 Qualified Charitable Contribution 1,150 Unreimberused employee business expenses
Schedule-A
$ $ $ $ $ $
12,251.12 2 % of AGI No miscellaneous deduction allowed 20,300 9,377 Reduction to Itemized Deduction because of filing status Standard Deduction 10,923 Allowable Itemized Deductions $ 12,200 11,700 2 personal exemption and 1 dependent exemption 612,556 AGI 422,500 The threshold for exemptions phase-out No Exemptions Allowed 600,356
Taxable Income
2.2
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Lisa Polk
Consulting Income: $100,000 Ford Motor Company bonds: $9,000
Not include: Cash gifts from Lisas parents: The money billed but not paid until 2013 (cash basis tax payer is only taxed when received) The interest income from City of Dallas bonds (tax-exempt income) Assume Sarah Duval is Lisas friends and the loan Lisa made to Sarah is an interest-free loan. Under administrative convenience; the $3,000 loan is exempted from the imputed interest rules. Therefore, the $3,000 repayment is excluded from gross income (as it was not deductible in the year the loan was made). Federal Income Tax refund (2010 return) $9,000
Like-kind Exchange
Amount realized ( 500,000 + 200,000) Adjusted basis Realized gain Recognized gain (Cash Boot Received) Defereed Gain Basis in the tract in Dixie County
Installment Sales
$ $ $ $ $
(500,000 - 100000) $
(400,000 + 125,000*4)
(125,000 * 4 * 8%)
$ $ $ $
Recognized gain in 2012 400,000*(700,000/900,000) 2013 125,000*(700,000/900,000) 2014 125,000*(700,000/900,000) 2015 125,000*(700,000/900,000) 2016 125,000*(700,000/900,000)
$ $ $ $ $ $
Airfare Lodging: value of stays at a MGM Meals(50%) Entertainment(50%) Car rentals, limos, taxis
Since reimbursement ($8,000) is less than actual expenses ($ 9,725), Robert may deduct the $8,000 for AGI. The rest, $1,725 ($9,725 - $8,000) is treated as itemized deductions with 50% rule applies for meals and entertainment and the 2% limit for overall miscellaneous deductions. Worthless Stock The Groupon stock that Robert held for more than a year (qualified as long-term investments) became worthless as the company went bankrupt in 2012. Assuming that Groupon had not paid any dividends to Robert, Robert is allowed to deduct the total amount of his investments in the stock: 5000 shares * $15 = $ 75,000. Since the Polks filed jointly, the $ 75,000 loss will be netted against other gains to get the total gain from long-term investments.
Supplies Legal CPA license fee Subscription to professional journals Bad Debt Expense State and Local Sales Tax Dues to professional organizations Auto Expenses (6000 miles*0.565)
$ $ $ $ $ $ $ $ $
All the expenses above are deductible because they have the business purposes and meet the five negativity test.
Home Office Following are the amount of deductions that Lisa is allowed to take to her home office. Since she used 200 sq. feet of her 2,000 sq. foot house, she is allowed to deduct 10% (200/2000) of all her real estate expenses:
Bad Debt Expense Lisa is also to deduct $ 6,000 as a bad debt because the person who owed her were convicted of arson in 2012 and is serving time in prison. State and Local Sales Tax Assume the Polks state and local sales taxes are expenses associated with Lisas consulting business, therefore, they are allowed to deduct $ 7,000 as business expenses. Self-Employment Tax Lisa is self-employed. Therefore, she is subjected to the 15.3% self-employment tax, with half of them are deductible for AGI (see Schedule SE).
Life insurance premiums are not allowed to deduct. Ad Valorem Taxes and Mortgage Interest are deductible on the amount of personal use (90%). Medical expense 10% AGI limit. The total amount of the family medical expenses was $ 20,000 ($6,000 from Roberts contribution to his employers medical coverage and $14,000 family medical expenses. However, since $20,000 is smaller than 10% of AGI limit ($688,771), none of the amount is deductible. Contribution to Texas governors election campaign fund is not deductible
Tax Amount from Tax Computation Worksheet Self-employment Tax Medicare Taxes on Unearned Income Amount of Tax on Taxable Income Tax Paid Tax Due
$ $ $ $ $ $
The Polks taxable income is separated into two parts: earned income and unearned income. Tax on Earned income is derived by looking at the tax table provided by the IRS. The tax on unearned income is taxed at two levels: 15% and 20% because part of Polks taxable income is in the 39.6% marginal tax rate bracket. Following is an illustration of the computation:
$ $
Long-term Capital Gain Amount (450,000-164,245) Amount in 39.6% marginal tax rate
$ $ $
Lisa is the owner of her consulting business. This year she had net operating gain. Therefore, she is also subjected to self-employment tax at 15.3% of her profit. The Polks unearned income this year is higher than the 250,000 threshold. Therefore, they are subjected to additional 3.8% Medicare tax.
17,200