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Mason R. and Lily B. Hill Tax problem




Question;Mason;R. and Lily B. Hill, married and ages 34 and 32, live at 2240 Poplar Drive;Apt. 12, Louisville, KY 40241. Their Social Security numbers are 123-45-6789;and 123-45-6788, respectively.;• Although trained as a nurse, Lily does not;have time to hold a job. She spends a great deal of time caring for her;paternal grandparents, the Bakers, both of whom are infirm. The Bakers are;adamant about continuing to live in their home and refuse to consider moving to;an assisted living facility. Also, they are unwilling to hire “outsiders?? as;care providers. In a show of gratitude for Lilyas efforts, they have named her;the sole heir in their wills and have granted her survivorship rights in their;investment assets (e.g., bank accounts and stocks and bonds).;• Mason is employed as the regional sales;manager for BYLO, a national chain of budget clothing stores. His annual salary;of $60,000 is supplemented by an expense allowance of $30,000. Under BYLO’s;arrangement, the expense allowance is treated as additional income to Mason;and he does not have to render any accounting as to the use of the funds. Past;experience, however, indicates that all (or more) of the allowance will be;spent on job-related expenses. Mason has elected out of BYLO’s contributory ?;401(k) retirement plan but is covered by its noncontributory medical insurance.;• At the convenience of BYLO, Mason;maintains an office and storage space in his apartment. Of the 1,600 square;feet of living space, one-fourth is devoted to this purpose.;The storage area comprises one whole room and;is used to store various merchandise samples that Mason sends to selected store;managers or takes with him on business trips. The remaining business use is;devoted to office space (e.g., desk, file cabinets, and equipment). Information;regarding Mason’s apartment cost is summarized below.;Annual rental $12,000;Utilities 3,600;Renter’s insurance 1,100;Janitorial service 1,200;The janitorial service is provided under a;contract with the local agency of a national service. (Mason has no;responsibility for payroll taxes as to the persons performing the service.) The;renter’s insurance policy premium of $1,100 includes a $500 rider that;specifically covers items (e.g., copier, computer, and office furniture) used;in;Mason’s business.;• On March 2, 2012, Mason purchased a new;copier/printer for $550. At the same time, he purchased a file cabinet for;$3,800. The cabinet is fireproof and has a sophisticated electronic security;feature. Mason wants to write off these acquisitions as soon as possible. All;of Mason’s other office furnishings are fully depreciated. Other expenditures;in connection with the operation of the office are as follows;Postal and delivery charges $260;Stationery and supplies 310;Telephone and conference calls 540 Tax Return;Problem;• Besides the items already noted, Mason had;the following job-related expenses during 2012;Airfare $5,600;Lodging 2,800;Meals 3,100;Entertainment 1,800;Taxis, limos 400;Business gifts (does not include shipping;charge) 800;Most of the entertainment expense involved;business lunches during which Mason was able to discuss company policy and;resolve various local problems with the manager of the BYLO store he was;visiting. The business gifts were $50 gift cards to a national steak house sent;to 20 managers of the top-performing stores. The $50 cards (which cost Mason;only $40) were mailed prior to Christmas, and for security purposes, a $5 per;card shipping charge included certified mail delivery.;• Mason used his automobile (a 2011;Chevrolet Impala) for different purposes. The mileage driven during 2012 was as;follows;Mileage Allocation;Purpose 1/1–6/30 7/1–12/31;Personal 2,000 2,100;Business 9,000 6,000;Mason has always used the automatic (standard);mileage method in accounting for his car usage for tax purposes. Parking and;tolls in connection with business mileage were $420.;• Very distressed over his lack of pay;increases and his career path, Mason looked into other employment opportunities;during 2012. He contacted his college’s job placement service to obtain;advice on securing a better position in the same field. This led to a cash;outlay of $3,300 for travel, interviews, and biographical data. The results;were disappointing. Nevertheless, he did receive one promising offer that he is;considering.;The offer is described in Part 2 of this;problem. For the time being, however;Mason remains an employee of BYLO.;• In addition to those previously discussed;the Hills had the following receipts during 2012;Interest income—;Premier Credit Union (savings account) $1,900;Wells Fargo Bank certificate of deposit 900;City of Memphis (general purpose bonds) 1,700;$4,500;Federal income tax refund 1,000;Rental deposit refund Cardinal Apartments;1,200;Manufacturers rebate 400;The income tax refund involved 2011 Federal;taxes that they had overpaid. After several years of haggling, the Hills;managed to recover the damage deposit they had made on the apartment they;rented before moving to their current location. In 2011, when the Hills bought;a new refrigerator/freezer for personal use, they received a mail-in coupon;that provided a discount from the manufacturer. They received the $400 rebate;in early February 2012.;• The Hills’s other expenditures for 2012;appear below.;Dental bills $3,500;State income tax 110;Interest paid on car loan 600;Contribution to mayor’s reelection campaign;50;Payment of annual church pledge 600;Premiums on life insurance 900;The dental bills were for crowns and bridges;that Mason needed—the BYLO health insurance does not cover dental procedures.;The state income tax was for $110 the;Hills still owed when they filed their 2011;return in 2012. The insurance premiums were for a policy covering Mason's life;issued by Prudential Insurance Company, with;Lily as the designated beneficiary.;Part 1—Tax Computation;Using the appropriate forms and schedules;compute the Hillsas Federal income tax for 2012. Assume that the proper amount;of Social Security and Medicare taxes were withheld.;Disregard the alternative minimum tax (AMT) as;it is not discussed until Chapter 12 in the text. Income tax withholdings for;2012 were $6,800 (Federal) and $3,600 (State of Kentucky.) The Hills do not want;to contribute to the Presidential Election;Campaign Fund. Also, they want any overpayment;of taxes refunded to them and not applied toward next year’s tax liability.;Suggested software: H&R BLOCK At Home.;Part 2—Follow-Up Advice;One of the offers Mason received during his;job hunting efforts contained the following conditions;• Annual salary of $65,000.;• No expense allowance, but the company will;pay directly or reimburse for all employmentrelated expenses (including office;in the home and business mileage but not any job hunting expenses).;• Mason must render an adequate accounting;to the new employer as to the expenses involved, and any excess reimbursement;must be returned.;Based on the job description he received;Mason estimates that the expenses involved in the new job will be comparable to;those of his current position.;Although Mason is disappointed that the new;salary is only $5,000 more than he currently receives, he has been told that;some savings will occur due to the new expense account arrangement.;Mason requests your advice on this matter.;Write a letter to him explaining how much he will benefit taxwise if he takes;the new job. In making your comparison, assume that the 2012 tax rules apply;(e.g., tax rates, amount of personal exemption, and standard deduction).


Paper#41995 | Written in 18-Jul-2015

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