Federal Income Tax
Jones & Company
Kentucky
Mr. & Mrs. Grant
95, Hickory Road
18.04.2016
Dear Grant,
Thank you for giving us the opportunity to compute your tax returns for the year ended 2015. Attached is a copy of form 1040 which is supposed to be filed by the end of 18th April 2016. The original form 1040 has been filed with the relevant department.
In order to determine the amount of tax to be paid there are some rules that have to be applied in the calculation. Therefore, not all income earned by the family is taxable some of them will be tax exempt.
The total taxable income will comprise of the income earned by both of you which in this case includes wages and salaries, interest received and the income from annuity contract. All the interest will be taxable except the interest from Nevada state school which is tax exempt since it’s meant for an education program. Compensation payment received should also be included in the taxable income also. The total gross income that is taxable will be equal to $104,450.
After calculating the gross income that is taxable we are supposed to deduct the allowable deductions. The allowable expenses include all the expenses that were incurred in the process of earning revenue and other expenses that have been specified by the law. The total allowable deductions were $47,102. The total figure of allowable deduction includes exemptions that are provided to individuals who have dependents. The total amount allowed is $4,000.
We will deduct the expenses from the total gross income to get the taxable income of $57,438. The total tax for the period will be $7,691. Since $10,450 had already been paid withheld it means that we overpaid tax in 2015 and we should therefore seek for a refund. The refund of $ 2,759 will be paid by check as had been requested by you.
Thanks for your continued support.
Jones & Company
CPA consultan
Income
The section below will outline the items that will be included in the calculation of taxable income. Before determining the taxable income we will calculate the gross taxable income, the interest received, compensations and annuity contract that were received during the year. The first section of the taxable income will be calculated as indicated below. Bob and Melissa will be filling their income jointly and therefore, we will add the income they received to get the total taxable. Some payments that were received such as lawsuit and disability payment received by Melissa and Bob will not be included as part of taxable income since they are not taxable.
Gross wages Amount in $
Bob
National storage 66,200
Lexington 2,710
Workers compensation 4,350
Melissa
Jensen photography wages 24,500
Total income in the year 2015 97,760
Income from interest
Taxable interest refers to the interest that is received from financial institutions, personal lending and from any other source identified in law (IRS, 403). It’s important during the calculation of taxable income to identify all the taxable income and include as part of taxable income. Some interest such as those received from treasury bills, notes and bonds should not be included since they are subject to federal tax and therefore, they are received net of tax. According to IRS (403) Form 1040 includes section 8a and 8b where taxable and non-taxable incomes are recorded.
There are some interests that are non-taxable according to Internal Revenue Service. Some of the interest income that are regarded as non –taxable are; interest received from insurance dividends, interest that is received from government bonds that are meant to finance development projects and the interest that is received from a program that is meant to support education. Therefore, the interest received from Kentucky bank, Lexington city and U.S Treasury bond will be regarded as taxable income. Non-taxable income in this case will be the interest that was received Nevada state school board.
According to IRS (403) any interest that is incurred by citizens in order to secure an investment should reduce the taxable income by including it in the itemized deduction section. The total taxable income for both Bob and Melissa is as indicated below.
Source Amount in $
Kentucky bank 130
Lexington City 450
Total taxable interest 580
The interest received from treasury bonds and those received from Nevada state school will not be include since they are non-taxable. Therefore, the total amount of $580 will be added to the other income under the income section in order to get the total income that is include in section 22 of form 1040.
Annuities
Annuities refer to the amount that are either bought by employer or an individual and that are payable in a year. IRS (575) specifies the steps that should be followed in order to calculate the annuity that is taxable under the income section of form 1040. Firstly, the cost of the annuity in each year needs to be estimated. This is done by dividing the total cost by the number of years that the contract will be effective. The taxable amount is the difference between the amount received and the cost of annuity (IRS, 575). If the amount received is less than the tax, then there will be no taxable amount.
The calculation of annuity taxable in Grants case is as indicated in the table below.
Annuity received in the first year $15,000
Cost of annuity in year one $88,000/10 years $8,800
Taxable amount $6,200
Compensation
IRS (525) outlines some of the compensation that should be taxable and those that are regarded as non-taxable. If an employee receives compensation from an employee in the course of providing his or her professional services, such compensation should be included as taxable income (IRS, 525). An example of such compensation would be stock options. The compensation that was received by Bob in the form of worker’s compensation should be included in the taxable income. However if an employee receives compensation as a result of incurring an injury while at work should not be included as taxable income. Also, any payment that goes towards compensating an employee as a result of disability will not be included in the taxable income. Therefore, the disability payment of $3,500 that was received by Bob in the year 2015 will not be taxable. The amount that will be included in the total taxable income will be $4,350.
The total income for Grants will be as indicated below
Total income from wages, salaries and compensation $ 97,760
Total taxable interest $ 580
Taxable amount on annuities $ 6,200
Total income $ 104,540
Deductions
IRS (500) specifies the deductions that are allowable and that should be deducted from the total income in order to get the taxable income. Expenses such as medical expenses, interest payments, charity contributions, car usage expenses, property taxes among other are identified as allowable expenses.
According to IRS (500) medical expenses that are allowable should be the difference between the medical expenses incurred and 10% of the gross income that has been calculated. There was no medical allowance for Grant since the expenses were less than 10% of the gross income.
The total itemized deduction for Grant will be as indicated below
Item Amount in $
Property taxes 1,800
Property taxes on vehicles 250
Interest on mortgage 8,560
Interest on investment 640
Allowable contribution 7000
Tax preparation fee 200
State income tax 4,975
Loss of property 11,500
Travel allowance 8,177
Total allowable expenses 43,102
Calculation of loss on property
The amount that is allowable for Grant will be the difference between the fair value of the stolen property and the amount that was reimbursed by the insurance companies. The loss of property as a result of theft was calculated using IRS guidelines and is as indicated below
Total fair value of property $14,000
Less
Amounts received from insurance $2,500
Amount allowable as deductible expenses $11,500
Travel allowance
Calculation of The travel allowance
Both Melissa and Bob used their cars for various activities and therefore in accordance to the Internal Revenue Service they are allowed to claim for allowable deduction depending on the miles driven.
Amount claimed on business travel (0.54*14,980) $8,089
Amount claimed on medical travels (0.54*465) $88
Total allowance $8,177
Taxable income
The taxable income will be the difference between the total income section and the total allowable expenses. Therefore, Grants taxable income is as indicated in the table below
Total income $ 104,540
Total allowable expenses $ 43,102
Taxable income $ 61,438
Less allowance (dependents) $ 4,000
Net taxable amount $ 57,438
Using the tax tables the total tax will be $2,759
According to IRS, individuals who have dependents are allowed to claim $4,000 as allowable expenses. The Grants will qualify for this allowance since they are filing jointly and because of the two children that they are supporting.
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