Tax Return Problem


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 111-11-1112, and Freida’s is 123-45-6780. Dan was born on January 15, 1967, and Freida was born on August 20, 1968.

During 2018, 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, 2018, has no income of her own and for 2018 did not file a joint return with her husband, Casey, who earned $10,600 during 2018. Gina’s Social Security number is 123-45-6788.
  2. Willie, their son, age 20, who had gross income of $6,300 in 2018, dropped out of college in October 2018. He had graduated from high school in May 2018. 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 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
17 State income tax withheld 2,960 3,440

Freida sold a house on December 30, 2018, and will be paid a commission of $3,100 (not included in the $86,000 reported on the W–2) on the January 10, 2019, closing date.

Other income (as reported on 1099 Forms) for 2018 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
Prize 7,000

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, 2018. The CD was purchased on October 1, 2016, for $14,995, and the yield to maturity was 3.3%. During the year, 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 2018 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 United Way 800

Sales tax from the sales tax table is $1,860. Dan and Freida made Federal estimated tax payments of $8,000. All members of the family had health insurance coverage for all of 2018. Dan and Freida do not wish to contribute to the Presidential Election Campaign. The Kentucky income tax rate is 4%.

Part 1—Tax Computation

Compute Dan and Freida’s 2018 Federal income tax payable (or refund due). If you use tax forms for your computations, you will need Form 1040 and Schedules 1, 5, and B.

Part 2—Tax Planning

Dan plans to reduce his work schedule and work only half-time for WJJJ in 2019. 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 2019. 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 2019. Assume that all other income and expense items will be approximately the same as they were in 2018 (including the prize winnings). Assume that Willie 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 2019? What’s your advice to the Butlers, and prepare a memo for the tax files.

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