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Barry, 53, and Vera, 49, are married andare the parentsof22-year-old Julia,20-year-old Gary,and three-year-old twins,Larry and Laura. Theyhave provided the following information for 2014:
Barry is a popular television weatherman. Heearns a salary of $250,000 per year. In2014, his employer withheld $46,000 in federal taxes and $11,000 in state income taxes.Barryis anactive participantin his employer-sponsored pensionplan.
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 tothe veterinarian forcancer treatments for one of his dogs.
Vera received a $125,000 cash inheritance from her late uncle.
At the endof the year, Barry sold his shares inShanna Ltd. for $9,000. He had purchased the shares 11months earlier for $3,500. Around the same time, Vera sold her shares ofKnoll Co. for $3,600. Shehad purchased the stock threeyears earlier for $14,900.
Barry and Vera went to Reno for aweekend getaway. Barry won $35,000 playing poker, and Veralost $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 ofPortland 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 studentat DayeCollege. She received ascholarship that covered allher tuition, books,andsupplies. Her parents pay for her room and board andmiscellaneous living expenses. Tosave money,Julia moves back to her parents’ houseduring her summer breaks. In 2014, she earned $6,000 from her summerjob. Shehas saved $4,000 ofit for a new car and has spent the rest on clothes and entertainment.
Gary is taking two night courses at thelocal community college. He does not know whatkind of career he wants and is trying to “find himself.” Inthe meantime, he lives in an apartment with his cousin andhis parents are happy tosupport him while he looks for himself. On occasion, he works for a moving company whenitneeds extra hands. In2014, he earned $4,000 doing this.
Barry and Vera plan tofilea joint return, as usual.
Required:
Calculate Barry andVera’sAGI and taxable income.Ignoreany self- employmenttaxes.For items that you have not included, explain why they havenotbeenincluded.
b. Both Barry and Vera want to makecontributions toIRAs.Advise them as to what type ofIRAs theyare eligibleto contribute to and the maximum amount, ifany, that eachof them may contribute.
Question 6 (20 marks)
Kyle Kincaid is the soleproprietor of Kyle’s Cookies Plus.
For 2014,Kyle provided the following information:
Sales $1,500,000
Cost ofgoods sold 847,300
Interest expense onbusiness 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. Hehas acquired the following assets:
Acquisition Date
Asset*
Cost
RecoveryPeriod
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 electinto 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 payhimself a salary. Kyle’s wife, Carly, earned $60,000 in salary and commissions fromher sales job. Heremployer withheld $2,700 in state income taxes and $8,900 infederalincome taxes.
Kyle andCarly received$15,200 individends 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 taxinstallments paid 5,500
Federal taxinstallments paid 17,600
Charitable contributions 1,500
Carlyis thesole supporter of her elderlyauntwho lives ina nearby nursing home.
Required:
Kyle and Carly want to minimize their taxes. Calculate their taxable income or loss for tax purposes. Forthis calculation,ignoreany self-employment taxes. Be sure to show all your work.
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