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Barry, 53, and Vera, 49, are married and are the parents of 22-year-old Julia, 20-year-old Gary, and three-year-old twins, Larry and Laura. They have provided the following information for 2014: ?Barr

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Barry, 53, and Vera, 49, are married and are the parents of 22-year-old Julia, 20-year-old Gary, and three-year-old twins, Larry and Laura. They have provided the following information for 2014:

Barry is a popular television weatherman. He earns a salary of $250,000 per year. In 2014, his employer withheld $46,000 in federal taxes and $11,000 in state income taxes. Barry is an active participant in his employer-sponsored pension plan.
Barry builds upscale dog beds in his spare time. He started out buildin...

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Barry, 53, and Vera, 49, are married and are the parents of 22-year-old Julia, 20-year-old Gary, and three-year-old twins, Larry and Laura. They have provided the following information for 2014:

Barry is a popular television weatherman. He earns a salary of $250,000 per year. In 2014, his employer withheld $46,000 in federal taxes and $11,000 in state income taxes. Barry is an active participant in his employer-sponsored pension plan.
Barry builds upscale dog beds in his spare time. He started out building them for his own dogs, and then his friends wanted to buy them. He sells them online now. He finds building the dog beds relaxing. He has not made any profit over the years doing this—he just finds it enjoyable. He will probably pursue it to a greater extent when he retires. In 2014, he had sales of $35,000 and incurred the following expenses:
Materials and supplies  $23,800

Shipping costs      6,500

Workshop rental      7,200

Website maintenance and promotional costs      1,500

Vera has just started a new career as a retirement coach. Her business is unincorporated. She earned gross revenues of $27,500 and incurred the following expenses:
Office rent $12,000

Trade journal subscriptions        300

Advertising     2,000

Supplies     1,500

Professional development courses        900

Seminar costs     2,400*

Donation to her mother’s campaign to run for governor   30,000

*These costs were incurred for two seminars that Vera held at retirement fairs.

Laura has a speech defect for which her doctor referred her to a speech therapist. The therapist was paid $15,000 and these costs were not covered by insurance.
During the year, Barry and Vera paid $9,000 in health insurance premiums and $800 in dental insurance premiums. Vera paid $5,500 for cataract surgery and Barry paid $7,500 for Botox injections and laser treatments to maintain his television image. Vera paid $3,000 for a dental implant. Her dental plan reimbursed her $2,200.
Barry paid $6,500 to the veterinarian for cancer treatments for one of his dogs.
Vera received a $125,000 cash inheritance from her late uncle.
At the end of the year, Barry sold his shares in Shanna Ltd. for $9,000. He had purchased the shares 11 months earlier for $3,500. Around the same time, Vera sold her shares of Knoll Co. for $3,600. She had purchased the stock three years earlier for $14,900.
Barry and Vera went to Reno for a weekend getaway. Barry won $35,000 playing poker, and Vera lost $10,000 at blackjack.
Barry and Vera have a vacation home in Florida. During 2014, they used the vacation home for 30 days and rented it out for 200 days. The home stood empty for the rest of the year. They received $40,000 of rental revenue and incurred the following expenses:
Mortgage interest $18,000
Property taxes     4,500
Utilities     4,800
Repairs and maintenance     3,900
Insurance     2,100
Advertising     1,000
Depreciation (maximum available)   13,900

As in the past, they will use the IRS method to allocate expenses.

Barry and Vera also received the following in 2014:
Dividends from Kate Corp. $6,000

Interest from a savings account   2,700

Interest from City of Portland bonds 15,800

Barry and Vera paid the following in 2014:
Property taxes on house $16,700

Credit card interest     2,300

Donations to church     3,600

State sales taxes     5,500

Julia is a full-time student at Daye College. She received a scholarship that covered all her tuition, books, and supplies. Her parents pay for her room and board and miscellaneous living expenses. To save money, Julia moves back to her parents’ house during her summer breaks. In 2014, she earned $6,000 from her summer job. She has saved $4,000 of it for a new car and has spent the rest on clothes and entertainment.
Gary is taking two night courses at the local community college. He does not know what kind of career he wants and is trying to “find himself.” In the meantime, he lives in an apartment with his cousin and his parents are happy to support him while he looks for himself. On occasion, he works for a moving company when it needs extra hands. In 2014, he earned $4,000 doing this.
Barry and Vera plan to file a joint return, as usual.
Required:

Calculate Barry and Vera’s AGI and taxable income. Ignore any self- employment taxes. For items that you have not included, explain why they have not been included.


b. Both Barry and Vera want to make contributions to IRAs. Advise them as to what type of IRAs they are eligible to contribute to and the maximum amount, if any, that each of them may contribute.

Question 6 (20 marks)
Kyle Kincaid is the sole proprietor of Kyle’s Cookies Plus.

For 2014, Kyle provided the following information:

Sales $1,500,000

Cost of goods sold      847,300

Interest expense on business loan        11,500

Transportation expense        28,700

Licenses and permits          3,800

Utilities          9,700

Wages for part- and full-time staff      297,600

Advertising      150,000

Supplies             4,900

Kyle started operations in 2013. He has acquired the following assets:

Acquisition Date

Asset*

Cost

Recovery Period

April 1, 2013

refrigeration unit (used)

$ 15,000

3 years

May 1, 2013

integrated cookie machine (new)

300,000

10 years

May 15, 2013

packing machine (used)

95,000

7 years

January 2, 2014

building (new)

750,000

January 2, 2014

land

50,000

April 15, 2014

adaptor set for cookie machine (new)

40,000

5 years

October 16, 2014

pastry machine (new)

325,000

10 years

December 3, 2014

freezer (used)

50,000

7 years

In 2013, Kyle did not elect into Section 179 and did not opt out of bonus depreciation. For 2014, Kyle wants to minimize taxes and will take the necessary elections.

Kyle did not pay himself a salary. Kyle’s wife, Carly, earned $60,000 in salary and commissions from her sales job. Her employer withheld $2,700 in state income taxes and $8,900 in federal income taxes.

Kyle and Carly received $15,200 in dividends from Atlantic Peach Co. and $23,800 in interest from municipal bonds. They made the following expenditures:

Medical bills for their infant daughter $43,000

Property taxes     7,600

State income tax installments paid     5,500

Federal tax installments paid   17,600

Charitable contributions     1,500

Carly is the sole supporter of her elderly aunt who lives in a nearby nursing home.

Required:

Kyle and Carly want to minimize their taxes. Calculate their taxable income or loss for tax purposes. For this calculation, ignore any self-employment taxes. Be sure to show all your work.

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Solution preview

Answer 1
a. Calculation of AGI and Taxable Income
Income from Employment $250,000
Vera – Business Income $10800
Other Income - Income from Barry’s Hobby $35000
Income from Poker $35000
Loss from rental property ($8200)

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