Note: This problem is for the 2020 tax year.

Daniel B. Butler and his spouse Freida C. Butler file a joint return. The Butlers live at 625 Oak Street in Corbin, KY 40701. Dan's Social Security number is 111-11-1112, and Freida's is 123-45-6780. Dan was born on January 15, 1969, and Freida was born on August 20, 1970.

During 2020, Dan and Freida furnished over half of the total support of each of the following individuals, all of whom still live at home:

1. Gina, their daughter, age 22, a full-time student, who married on December 21, has no income of her own and did not file a joint return with her husband, Casey, who earned $10,600 during 2020. Gina's Social Security number is 123-45-6788.
2. Willie, their son, age 19, graduated high school in May 2020. He is taking a leap year and will not begin college until 2021. He had gross income of $6,300 in 2020. Willie's Social Security number is 123-45-6787.
3. 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). Selected information from the W2 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 December 30, 2020, and will be paid a commission of $3,100 (not included in the $86,000 reported on the W2) on the January 10, 2021, closing date.

Other income (as reported on 1099 Forms) for 2020 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 an original issue discount. Dan and Freida collected $16,000 on the First Bank CD that matured on September 30, 2020. The CD was purchased on October 1, 2018, for $14,995, and the yield to maturity was 3.3%.

Dan participated on a game show and won a cash prize of $7,000.

In addition to the above information, Dan and Freida's itemized deductions included the following:

Paid on 2020 Kentucky income tax		$700
Personal property tax paid		600
Real estate taxes paid		1,800
Interest on home mortgage (Corbin S&L)		4,900

Sales tax from the sales tax table is $1,860. Dan and Freida made Federal estimated tax payments of $8,000. They have never owned or used any virtual currency, and they do not wish to contribute to the Presidential Election Campaign. For 2020, they received the correct amount of economic impact payments (2020 recovery credits). The Kentucky income tax rate is 4%.

Required:

Compute Dan and Freida's 2020 Federal income tax payable (or refund due). Use Form 1040 and Schedules 1, B and the Qualified Dividends and Capital Gain Tax Worksheet to complete this tax return. If there is a tax overpayment, the Butlers would like a refund. If additional tax is due, assume no underpayment penalty applies.

It may be necessary to complete the tax schedules before completing Form 1040.

• Enter all amounts as positive numbers.
• If an amount box does not require an entry or the answer is zero, enter "0".
• When computing the tax liability, do not round your immediate calculations.
• If required, round your answers to the nearest dollar.
• Make realistic assumptions about any missing data.
• Use the Tax Rate Schedule provided. Do not use the Tax Tables.

Dan plans to reduce his work schedule and work only half-time for WJJJ in 2021. He has been writing songs for several years and wants to devote more 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 songwriting in 2021. 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 $90,000 in 2021. Assume that all other income and expense items will be approximately the same as they were in 2020 (including the prize winnings). Assume that Willie will be enrolled in college as a full-time student for the summer and fall semesters. No changes regarding Gina and Ben. The $3,100 commission received on January 10, 2021, is included in the $90,000 income to be earned by Freida in 2021. The 22% 2020 marginal tax rate remains the same in 2021. Assume a payroll tax rate for FICA and Medicare of 7.65% and the Kentucky state income rate of 4%. Assume Interest income, dividend income, prize income and the standard deduction will be the same for 2021. Complete the following letter regarding whether the Butlers will have more or less disposable income (after Federal income tax) in 2021.

Dear Dan and Freida

You asked me to estimate your after-tax income under the assumption that Dan will work only halftime next year. The $37000 reduction in Dans pay will be partially offset by a $4000 estimated increase in the amount Freida will earn. This net $33000 reduction in salary and wages will also result in a decrease in your Kentucky income tax, Social Security tax, and Medicare tax. The net reduction in your after-tax cash flow will be approximately $22,185 . The calculations are presented below:

	Taxable Income		Cash Flow
Decrease in salary and other earned income	($33000 )		($33000 )
Decrease in Social Security and Medicare tax			2525
Decrease in Kentucky income tax	1320		1320
Decrease in Federal taxable income	($31680 )
Decrease in Federal income tax			6970
After-tax decrease in cash flow			($22185 )

If you have any further questions, please call me.

Sincerely,

John Jones, CPA

You asked me to estimate your after-tax income under the assumption that Dan will work only halftime next year. The $37000 reduction in Dans pay will be partially offset by a $4000 estimated increase in the amount Freida will earn.

How they got 4000$? Thank you