John Smith (Social Security number 111-11-1111) is 50 years old and is married to Joan Smith (Social Security number 123-45-6789). The Smiths live at 512 Ferry Road, Newport Beach, CA 92603. They file a joint return and have two dependent children, Ryan, age 13, and Ashley, age 14. Ryan’s Social Security number is 123-45-6788, and Ashley’s Social Security number is 123-45-6787. In 2018, John and Joan had the following transactions:
1. John received $200,000 in salary from Red Steel Corporation, where he is a construction engineer. Withholding for Federal income tax was $37,750 and the appropriate FICA and Medicare tax withholding was done.
2. John’s mother passed away and he received a parcel of Land worth $500,000 and Life Insurance Proceeds of $150,000.
3. John and Joan received $10,400 interest on Los Angeles school district bonds.
4. John received $5,300 interest from a Merrill Lynch money marketaccount.
5. John received $15,000 of a dividend on Ford Motor Company stock that he has owned for over 2
4. John received $5,300 interest from a Merrill Lynch money marketaccount.
5. John received $15,000 of a dividend on Ford Motor Company stock that he has owned for over 2
years.
6. Joan received 50 shares of Applegate Corporation common stock as a stock dividend. The shares
6. Joan received 50 shares of Applegate Corporation common stock as a stock dividend. The shares
had a fair market value of $2,500 at the time Joan received them, and she did not have the
option of receiving cash.
7. John and Joan received a $5,500 refund on their 2017 California income taxes. They
7. John and Joan received a $5,500 refund on their 2017 California income taxes. They
itemized deductions in 2017.
8. John paid $20,000 alimony to his former wife, Rose Smith (Social Security number 123-45-
8. John paid $20,000 alimony to his former wife, Rose Smith (Social Security number 123-45-
6786). The divorce was finalized in2012.
9. John and Joan kept the receipts for their sales taxes paid of $2,100. 10. John and Joan’s itemized deductions for 2018 were as follows:
9. John and Joan kept the receipts for their sales taxes paid of $2,100. 10. John and Joan’s itemized deductions for 2018 were as follows:
Stateincometaxpaidandwithheldfromhissalarytotaled$15,100. Realestatetaxesontheirprincipalresidencewere$6,800.
Mortgageinterestontheirprincipalresidencewas$20,500.
Cashcontributionstothechurchtotaled$15,800.
Mortgageinterestontheirprincipalresidencewas$20,500.
Cashcontributionstothechurchtotaled$15,800.
MedicalExpensesrelatedtoDoctors,etc.of$5,000(Notetheseexpenseswerepaidout of their Health Savings Account see below).
Jobrelatedunreimbursedexpensesof$5,700relatedtotravel.
TaxPreparationFeesof$2,500.
ContributionstotheMayorofNewportBeach’scampaignwere$3,500.
TaxPreparationFeesof$2,500.
ContributionstotheMayorofNewportBeach’scampaignwere$3,500.
11. John and Joan set up their own Health Savings Account through Merrill Lynch for the maximum amount allowed. The medical plan at Red Steel Corporation is a high deductible plan.
12. John and Joan wish to contribute the maximum to an Individual Retirement Account for 2018. There is no option to contribute to a retirement at work.
13. John and Joan contributed $10,000 for each child to separate qualified tuition plan for each child.
Compute the Smith’s net federal tax payable (or refund due) 2018. Use the 1040 and applicable other forms that you need to file a return with the IRS for 2018. Do not prepare the California return. You have been provided Intuit to complete this assignment. You can also use your own software or prepare by hand. In addition to the federal returns for 2018, you need to prepare a narrative explaining all the items in this problem and why income items are taxable or nontaxable and why deduction items are deductible or not deductible. Lastly, you need to discuss the 2018 return and describe in your narrative your observations of the Smiths’ tax situation and impacts of the Tax Cuts Job Act of 2017 (tax reform) to their tax situation.
