Solved by verified expert :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.
â€¢ 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 â€œoutsidersâ€ 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).
â€¢ 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 BYLOâ€™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 BYLOâ€™s contributory Â§
401(k) retirement plan but is covered by its noncontributory medical insurance.
â€¢ 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 Masonâ€™s apartment cost is summarized below.
Annual rental $12,000
Renterâ€™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
renterâ€™s insurance policy premium of $1,100 includes a $500 rider that
specifically covers items (e.g., copier, computer, and office furniture) used
â€¢ 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 Masonâ€™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
â€¢ Besides the items already noted, Mason had
the following job-related expenses during 2012:
Taxis, limos 400
Business gifts (does not include shipping
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.
â€¢ Mason used his automobile (a 2011
Chevrolet Impala) for different purposes. The mileage driven during 2012 was as
Purpose 1/1â€“6/30 7/1â€“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.
â€¢ Very distressed over his lack of pay
increases and his career path, Mason looked into other employment opportunities
during 2012. He contacted his collegeâ€™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
The offer is described in Part 2 of this
problem. For the time being, however,
Mason remains an employee of BYLO.
â€¢ In addition to those previously discussed,
the Hills had the following receipts during 2012:
Premier Credit Union (savings account) $1,900
Wells Fargo Bank certificate of deposit 900
City of Memphis (general purpose bonds) 1,700
Federal income tax refund 1,000
Rental deposit refund Cardinal Apartments
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.
â€¢ The Hillsâ€™s other expenditures for 2012
Dental bills $3,500
State income tax 110
Interest paid on car loan 600
Contribution to mayorâ€™s reelection campaign
Payment of annual church pledge 600
Premiums on life insurance 900
The dental bills were for crowns and bridges
that Mason neededâ€”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 1â€”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 yearâ€™s tax liability.
Suggested software: H&R BLOCK At Home.
Part 2â€”Follow-Up Advice
One of the offers Mason received during his
job hunting efforts contained the following conditions:
â€¢ Annual salary of $65,000.
â€¢ 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).
â€¢ 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).
Solved by verified expert :Mason