Alice J. and Bruce M. Byrd are married taxpayers who file a joint return. Their Social Security numbers are 123-45-6784 and 111-11-1113, respectively. Alice’s birthday is September 21, 1974, and Bruce’s is June 27, 1973. They live at 473 Revere Avenue, Lowell, MA 01850. Alice is the office manager for Lowell Dental Clinic, 433 Broad Street, Lowell, MA 01850 (Employer Identification Number 98-7654321). Bruce is the manager of a Super Burgers fast-food outlet owned and operated by Plymouth Corporation, 1247 Central Avenue, Hauppauge, NY 11788 (Employer Identification Number 11-1111111).

The following information is shown on their Wage and Tax Statements (Form W–2) for 2021.

The Byrds provide over half of the support of their two children, Cynthia (born January 25, 1997, Social Security number 123-45-6788) and John (born February 7, 2001, Social Security number 123-45-6780). Both children are full-time students and live with the Byrds except when they are away at college. Cynthia earned $6,200 from a summer internship in 2021, and John earned $3,800 from a part-time job. Both children received scholarships covering tuition and materials. During 2021, the Byrds provided 60% of the total support of Bruce’s widower father, Sam Byrd (born March 6, 1945, Social Security number 123-45-6787). Sam lived alone and covered the rest of his support with his Social Security benefits. Sam died in November, and Bruce, the beneficiary of a policy on Sam’s life, received life insurance proceeds of $1,600,000 on December 28.

The Byrds had the following expenses relating to their personal residence during 2021:

The medical expenses for Sam represent most of the 60% that Bruce contributed toward his father’s support.

Other relevant information follows:

• When they filed their 2020 state return in 2021, the Byrds paid additional state income tax of $900.

• During 2021, Alice and Bruce attended a dinner dance sponsored by the Lowell Police Disability Association (a qualified charitable organization). The Byrds paid $300 for the tickets. The cost of comparable entertainment would normally be $50.

• The Byrds contributed $5,000 to Lowell Presbyterian Church and gave used clothing (cost of $1,200 and fair market value of $350) to the Salvation Army. All donations are supported by receipts, and the clothing is in very good condition.

• Via a crowdfunding site (gofundme.com), Alice and Bruce made a gift to a needy family who lost their home in a fire ($400). In addition, they made several cash gifts to homeless individuals downtown (estimated to be $65).

• In 2021, the Byrds received interest income of $2,750, which was reported on a Form 1099–INT from Second National Bank, 125 Oak Street, Lowell, MA 01850 (Employer Identification Number 98-7654322).

• The home mortgage interest was reported on Form 1098 by Lowell Commercial Bank, P.O. Box 1000, Lowell, MA 01850 (Employer Identification Number 98-7654323). The mortgage (outstanding balance of $425,000 as of January 1, 2021) was taken out by the Byrds on May 1, 2017.

• Alice’s employer requires that all employees wear uniforms to work. During 2021, Alice spent $850 on new uniforms and $566 on laundry charges.

• Bruce paid $400 for an annual subscription to the Journal of Franchise Management and $741 for annual membership dues to his professional association.

• Neither Alice’s nor Bruce’s employer reimburses for employee expenses.

• The Byrds do not keep the receipts for the sales taxes they paid and had no major purchases subject to sales tax.

• This year, the Byrds gave each of their children $2,000, which was then deposited into their Roth IRAs.

• Alice and Bruce paid no estimated Federal income tax, and they did not engage in any virtual currency transactions during the year. Neither Alice nor Bruce wants to designate $3 to the Presidential Election Campaign Fund. The Byrds received the appropriate recovery rebates (economic impact payments); related questions in ProConnect Tax should be ignored.

Part 1—Tax Computation

Compute net tax payable or refund due for Alice and Bruce Byrd for 2021, and complete their 2021 Federal tax return using appropriate forms and schedules. If they have overpaid their taxes, they want the amount to be refunded to them. Suggested software: ProConnect Tax.

Part 2—Tax Planning

Alice and Bruce are planning some significant changes for 2022. They have provided you with the following information and asked you to project their taxable income and tax liability for 2022.

The Byrds will invest the $1,600,000 of life insurance proceeds in short-term certificates of deposit (CDs) and use the interest for living expenses during 2022. They expect to earn total interest of $32,000 on the CDs.

Bruce has been promoted to regional manager, and his salary for 2022 will be $88,000. He estimates that state income tax withheld will increase by $4,000 and the Social Security tax withheld will be $5,456.

Alice, who has been diagnosed with a serious illness, will take a leave of absence from work during 2022, so she will not receive a salary or incur any work-related expenses during the year. The estimated cost for her medical treatment is $15,400, of which $6,400 will be reimbursed by their insurance company in 2022. Their medical insurance premiums will increase to $9,769. Property taxes on their residence are expected to increase to $5,100. The Byrds’ home mortgage interest expense and charitable contributions are expected to be unchanged from 2021. John will graduate from college in December 2021 and will take a job in New York City in January 2022. His starting salary will be $46,000.

Assume that all of the information reported in 2021 will be the same in 2022 unless other information has been presented above.

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Line 123456567 Description Wages, tips, other compensation Federal income tax withheld Social Security wages Social Security tax withheld Medicare wages and tips Medicare tax withheld State State wages, tips, etc. State income tax withheld Alice $58,000 4,500 58,000 3,596 58,000 841 Massachusetts 58,000 2,950 Bruce $62,100 5,300 62,100 3,850 62,100 900 Massachusetts 62,100 3,100