Tax Return Problem 5 -Individual Tax Instructions: Please complete the 2016 federal income tax return for Joseph and Diana Cohen. Ignore the requirement to attach the form(s) W-2 to the front page of the Form 1040. If required information is missing, use reasonable assumptions to fill in the gaps. You are not required to complete the state income tax forms or calculate the AMT. Please sign the return with your name, but do not include your social security number. Email the entire return to me by the due date. The return should be in order according the attachment sequence no. located in the upper right hand corner of the tax forms. Tax Form 1040 is the first form. The tax forms can be found on the IRSs website at irs.gov or in Connect, under Library, Student Resources. You will need the following forms Form 1040 Schedule A for tax form 1040 Schedule B for tax form 1040 Schedule C for tax form 1040 Schedule D for tax form 1040 Form 8949 Schedule E for tax form 1040 Schedule SE for tax form 1040 Joseph and Diana Cohen live in Pleasantville, New Jersey. Joseph is the Vice-President of Sales at a small start-up company. Diana is a former advertising executive who currently consults with former clients. The Cohens have three children Rebecca (age 18), Alan (age 15), and David (age 12). In January, Rebecca left home to attend a liberal arts college. All three children qualify as Joseph and Dianas federal income tax dependents. The Cohens plan to file a joint tax return. The Cohens provided the following information: Josephs social security number is 598-94-2583 Dianas social security number is 301-52-2942 Rebeccas social security number is 887-44-8710 Alans social security number is 810-42-9092 Davids social security number is 855-11-3021 The Cohens mailing address is 85 North Maple Drive, Pleasantville, New Jersey 08233 Hint Use the information above to complete lines 1-6 on page 1 of tax form 1040. Joseph Cohen reported the following the following information relating to his employment during the year: Employer Gross Wages Federal Income Tax Withholding State Income Tax Withholding Alternative Energy $118,325 $29,230 $15,000 The above amounts do not reflect any income items described below. Josephs employer withheld all payroll taxes it was required to withhold. The entire Cohen family was covered by minimum essential health insurance during each month in 2016. The insurance was provided by Josephs employer, Alternative Energy. Hint See Chapter 5 on how to report the salary (Income Summary at the end of the chapter). See Chapter 8 on how to report the federal income tax withholding (Income Summary at the end of the chapter). The state income tax withholding is reported on Schedule A. See Chapter 6 on how to report the state income tax withholding. Diana Cohen received the following revenue during the year (she uses the cash method of accounting). Consulting revenue reported to her on a Form 1099-MISC, Box 7 High-end Retail $32,000 Jensens Health Products $8,500 Strategic Solutions $3,750 During the year, Diana paid the following business expenses: Consultant-related: Airfare $2,900 Hotel $1,450 Meals $390 Parking $320 Diana drove 290 business miles for her consulting-related activities (she has documentation to verify) Dianas business activity does not require the filing of Form(s) 1099 to report payments she made during the tax year. In addition, Ms. Cohen drove a 2013 Lexus purchased on January 1, 2013 for all her business mileage. She drove the vehicle a total of 10,605 miles during the year for all purposes. Diana has written documentation to support the mileage amounts. She also has access to another vehicle for personal purposes. Hint See Chapter 9 Exhibit 9-7 for an example of Schedule C. Remember to calculate the self-employment taxes on Schedule SE. The self-employment taxes will require reporting the deductible portion as a for AGI deduction on page 1 of the 1040, and the tax as an Other Taxes on page 2 of the 1040. Please use the 2016 IRS mileage rate. The Cohens also received the following during the year: Interest income from First Bank of New Jersey $320 Interest income from Patterson, New Jersey School District $200 Interest income from U.S. Treasury Bond $350 Interest income from General Mills corporate bond $400 Qualified dividend income from Rio Tinto $1,500 Qualified dividend income from Microsoft $750 Qualified dividend income from Cooper Tire $200 Qualified dividend income from Cardinal Health $425 Qualified dividend income from Union Pacific $140 Qualified dividend income from Procter & Gamble $190 Qualified dividend income from PepsiCo $225 Qualified dividend income from Kellogg $200 Qualified dividend income from Abbott Labs $275 Qualified dividend income from 3M $350 Dividend income (not qualified) from China Fund $2,000 The Cohens did not own, control or manage any foreign bank accounts nor were they a grantor or beneficiary of a foreign trust during the tax year. Hint See Chapter 7 for interest and dividend income and use tax form Schedule B to report the interest and dividend income. Follow the instructions on lines 4 and 6 to report the income on tax form 1040. Remember to report any tax-exempt interest on line 8b. All dividend income is reported on line 9a, but only the qualified dividend income is reported on line 9b. Remember qualified dividends are taxed at the preferential tax rates (see page 7-6). To calculate the tax liability, use the following steps. 1. Taxable Income less qualified dividends = taxable income at regular tax rates 2. Calculate the tax on the amount in step 1 at regular tax rates (tax rate schedules) 3. Calcuate the tax on the qualified dividends 4. Add the tax amounts from steps 2 and 3 for the total tax liability The Cohens had the following activity in their brokerage account during the year (all transactions were reported on a Form 1099-B. Basis information on each stock sale was reported to the IRS): Sold 2,000 shares of Microsoft 7/1/15 $22,500 Sold 75 shares of Apple, Inc. 4/15/15 $28,750 Sold 350 shares of Cooper Tire 10/14/15 $14,700 Sold 1,000 shares of Cardinal Health 9/3/15 $35,000 Sold 50 shares of Union Pacific 1/7/15 $2,750 Relevant tax basis/holding period information related to sales of securities in the current year: Purchased 2,000 shares of Microsoft on 5/1/15 for $21,000 Purchased 200 shares of Apple, Inc. on 3/8/2013 for $90,000 Purchased 300 shares of Cooper Tire on 1/12/2012 for $9,000 Purchased 50 shares of Cooper Tire on 6/28/15 for $2,000 Received 1,000 shares of Cardinal Health from Dianas father as a gift on 10/10/99. Her fathers basis in the stock at the time of the gift was $7,000. Fair market value of the stock at the date of the gift was $41,000 Purchased 100 shares of Union Pacific on 9/5/14 for $6,000 The Cohens have a $43,000 long-term capital loss carryover from their prior tax year. Hint See Chapter 7 and use tax forms Schedule D and 8949 to report the stock sales. Start with form 8949 and follow the instructions on how and where to report on Schedule D. Then Schedule D will provide instructions on how and where to report on tax form 1040. To start form 8949, first separate the short term and long term stock sales. Next fill in form 8949 by reporting the short-term sales in Part I and the long-term sales in Part II. One of the stock sales contains both a short term sale and long term sale. Report the short-term stock shares in Part I and the long-term stock sales in Part II. Next complete Schedule D. You need to complete lines 1b, 7, 8b, 14, 15, 16 and 21. You will report the carryover loss on line 14. Remember to consider the capital loss limitations. Examples of tax form 8949 and Schedule D are shown in Exhibits 7-5 and 7-6. The Cohens received a New Jersey state income tax refund of $400 in May of 2016. The Cohens received the refund because they had overpaid their New Jersey state individual income tax in 2014. On their 2014 Federal income tax return, the Cohens deducted and received tax benefit for all the state tax income taxes they paid in 2014. Hint See Chapter 5 Exhibits 5-4 and 5-7. Report the refund under income on page 1 of the tax form 1040. Diana is a 10% owner in an advertising agency named Bright Ideas (BI) (EIN 20-1234567). BI is a Subchapter S corporation. The company reported ordinary business income for the year of $150,000. Diana received a K-1 from BI reporting her allocation of this business income. Sarah acquired the stock several years ago. Her basis in the stock before considering her 2016 income allocation was $92,000. Sarah is a passive owner with respect to this entity. Hint See Chapter 5 Exhibits 5-4 and 5-7. Report the S corporation income on Schedule E Part II on lines 28, 30, 32 and 41. The amount on line 41 is the amount that is reported on tax form 1040. Joseph received 5,000 shares of restricted (common) stock from his employer on July 1, 2016. The terms of the restricted stock grant are such that if Joseph is still employed by Alternative Energy on July 1, 2020 the entire 5,000 shares will vest and become his property. Joseph, upon the advice of his tax advisor, prepared and filed an IRC Section 83(b) election on July 8, 2016. On July 1, 2016, shares were valued at $5 per share. Joseph estimates the value of the shares in five years will be at least $150 per share. Joseph notified Alternative Energy about the IRC Section 83(b) election in a timely manner. None of the income tax consequences of this restricted stock grant was included in the $118,325 reported as part of Josephs gross wages (see above). Hint See Chapter 12 page 12-17. Example 12-13 shows the tax consequences of making the IRC Section 83(b) election. If there is any taxable income as a result of the IRC Section 83(b) election, it will be reported on line 7 of tax form 1040. In May, Joseph was injured in a home accident. The injury prevented Joseph from working for about a month. During this time, Joseph received $15,000 in disability payments attributable to a disability insurance policy. The disability policy premiums were paid on Josephs behalf as a nontaxable fringe benefit. Hint See Chapter 5 page 5-30 Disability Insurance. If there is any taxable income as a result of the disability payments, it will be reported on line 7 of tax form 1040. Hint The income reported on line 7 of tax form 1040 could consist of 3 different amounts. The Cohens paid the following expenses during the year: Dentist (unreimbursed by insurance) $1,500 Doctors (unreimbursed by insurance) $ 2,425 Prescriptions (unreimbursed by insurance) $ 675 Real property taxes on residence $7,525 Vehicle property tax based upon value $1,250 Mortgage interest on principal residence $12,550 Margin interest paid to broker $600 Contribution to United Way $2,000 Contribution to American Cancer Society $5,000 Contribution to neighborhood drive to oppose development project $500 Contribution to a local church $12,000 Fee paid to Mouser, Johnson, and Hintze CPAs for tax preparation $450 The Cohens also donated clothing, electronics, furniture and other household goods to the Salvation Army of Pleasantville, New Jersey on April 15, 2016. Estimated thrift value of the goods donated was $275. Hint See Chapter 6. Exhibit 6-10 shows how to complete Schedule A. The medical expenses may not be deductible. Please read the instructions on line 3 of the Schedule A Note that not all of the contributions may be deductible. The amount of the itemized deductions are reported on line 40 on tax form 1040. You do not need to calculate any possible limitation just enter the total amount of the itemized deductions on tax form 1040. Miscellaneous Information The Cohens would like to contribute to the Presidential Election Campaign. The Cohens would also like to receive a refund (if any) of tax they may have overpaid for the year. Their preferred method of receiving the refund is by check. Hint Report the campaign contribution election on page 1 of form 1040 in the upper right hand corner. To receive the refund by check, do not complete the bank routing information. You do not need to complete form 8888.