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0:00
Erinne M Perry: Hi there, tax accountants! I hope all is well, and I pray that as you are viewing this video, that you're in the best of health and spirit. In this video, we're gonna cover Comprehensive Problem 2-1,
0:13
Erinne M Perry: from Cengage. So, with this problem, for Chapter 1, we had a very simple tax return, and in this chapter, it's a bit simple as well, but there's a bit more nuanced, so we're gonna jump right in. So, it says, Donna and Chris Holzer, they've been married for 3 years. Donna works as a nurse at Dade University Hospital. Chris is a full-time student at Wilson University, and also works part-time during the year at Dade University Hospital.
0:38
Erinne M Perry: Chris's birthday is January 12th, 1998. Donna's birthdate is November 4th, 2000. Both Donna and Chris received a W-2 from Dade University Hospital in a separate tab. Erinne M Perry: It also states that Donna and Chris received Forms 1099, INT, 1099-OID, and 1099-DIV in a separate tab. Erinne M Perry: Chris has mentioned he's a full-time student.
1:02
Erinne M Perry: at Wolfson University. He was given a $1,750 scholarship by the university to help pay for educational expenses, and the scholarship funds were used by Chris for tuition and books. Donna is a valued employee at the hospital. Her supervisor gave her two tickets to a cymbal game.
1:21
Erinne M Perry: of the nearby professional football team, both of them are $45 each. The hospital also sent Dala flowers, valued at $40 when her mother passed away during the year. Chris entered the compos… Erinne M Perry: depositors, exonerating dwelling CED sweepstakes, and he ended up winning $10,000. He took advantage of the no-purchase required option, paid nothing to join his sweepstakes. However, he received a 1099 miscellaneous, reported to $10,000 as a prize.
1:51
Erinne M Perry: They also have a 4-year-old son, Robert F. Hoser, from a prior marriage that ended in divorce in 2019. During 2024, he paid his ex-wife $300 per month in child support. Robert is claimed as a dependent by the ex-wife. And during 2024, Chris's aunt died. The aunt, in her will, left Chris $15,000 in cash. Erinne M Perry: Chris deposited the money into his Lone Star State Bank savings account. So the requirements are to complete the Holzer's federal tax return for 2024,
2:22
Erinne M Perry: on Form 1040, Erinne M Perry: Schedule 1 and the Qualified Dividends and Capital Gains Tax Worksheet. It also says that the Hosers had health insurance for the entire year. They do not want to make a contribution to the presidential campaign, and it's saying for us to make any other realistic assumptions about any missing data. If an amount does not require an entry, or the amount zero enters zero. Erinne M Perry: Positive amounts are entered as positives.
2:50
Erinne M Perry: And if required, we should round amounts to the nearest dollars. Alright, so here we are, we see the 1040, and again, most of the information they input for us, we have their name, their social, their address, and then they do not want to contribute to the presidential election, so we will click no. As I mentioned, I…
3:09
Erinne M Perry: maybe a handful of times have I actually seen, taxpayers want to contribute to this. So, and it says married filing status, so you might say, hey, wait, hold up, there is a child involved, but it clearly says that Robert, the child, is claimed as a dependent by Chris's ex-wife. So therefore, filing status is going to be married filing jointly. Digital assets, it doesn't mention anything about that, so we see here
3:34
Erinne M Perry: at the end, it says, make any other realistic assumptions about missing data. So, therefore. Erinne M Perry: We assume this is no. Can anyone claim them as a dependent? This is going to be no. Based on the information given. Erinne M Perry: None of them are blind.
3:52
Erinne M Perry: So we click none, none. So, the first thing we need to do is figure out the total amount from Forms W2, Box 1. So we're going to open our W-2s to see what's going on with Donna, what's going on with Chris. So, here we see… Erinne M Perry: that Donna Let's see who's W-2? Alright, perfect. Donna has a W-2 for $53,157.
4:18
Erinne M Perry: And then we see Chris has a W-2 for $3,780, so it wants to total. So in such case, we're gonna add the $253,147 plus Erinne M Perry: The 3,780, so that gives us a total of 56,000 $927. Erinne M Perry: There's no other income, and then it asks us for us to add, or wage income, I should say, so it asks us to add lines 1A through 1H, so $56,927 plus 0 is 56,000…
4:52
Erinne M Perry: 927, so we put that together. And then we also know that they have 1099-INT, OID, and 1099-DIV income. So we go through that. Erinne M Perry: And we see that there's interest income of $671 from the Dade County Credit Union. It's in both of their names, both Donna and Chris, so we see interest income of $671, but we also need to see if there's any tax-exempt interest. So we look at all of the boxes.
5:20
Erinne M Perry: There's no early penalty withdrawal, no interest on U.S. savings and bonds, no federal income tax, interest expense, no foreign taxes paid. So we scroll down. Erinne M Perry: do this information, and we see nothing, alright? So we know that there's… Taxable interest of $671, Erinne M Perry: So this goes on line 2B, Erinne M Perry: But then we also see that there's OID income, so we'll scroll back here.
5:49
Erinne M Perry: And as we go to the OID, so with the OID, this… Erinne M Perry: There's with the original issue discount. So, with the 1099-OID, we see that there's the original issue discount for the year. So, this form. Erinne M Perry: Again.
6:06
Erinne M Perry: That's why it's very important to look at the various forms. With the 1099-OID, this is essentially, let's say that they issued bonds, right? And with the bonds, let's say the bonds were worth $1,000, and they only paid, $900 for it. So, there was a discount. The bonds were issued at a discount. They're worth $1,000, but you only paid $900 for it. So, in such case, typically, bonds can be issued by, like.
6:31
Erinne M Perry: and things of that nature. So therefore, in certain cases, when it is state or municipal, in such case, the interest income can be considered tax exempt. So that's what's going on in this case. So we see that there's tax Erinne M Perry: exempt OID income of $134, so we input that on line 2A.
6:53
Erinne M Perry: So, in addition to the 1099, Erinne M Perry: INT, which we saw, and then the 1099-OIN… Erinne M Perry: OID, and we already input the tax-exempt interest. Now we're looking at 1099-DIV, and we see that there's total ordinary dividends of $377, which is subjected to ordinary tax rates, and then we have qualified dividends of $322, and none of the other boxes are completed, so…
7:19
Erinne M Perry: 377 is gonna go on box 3B and Form 1040, and 322 box 3A. So we input that information, $377. Erinne M Perry: And then $322. Erinne M Perry: So now we scroll down, and it's asking us to report additional income from Schedule 1, Line 10. So now we go to our Schedule 1,
7:44
Erinne M Perry: And we need to figure out, what is this other income that we need to report? So, again. Erinne M Perry: He, invested, or he, you know, decided to… Erinne M Perry: make a submission in the sweepstakes. Let's look back at the fact pattern.
8:01
Erinne M Perry: So, it says it here. Okay, yup, he entered the sweepstakes. So, he entered the compositor's exonerating dwelling sweepstakes and won $10,000, right? So impossible is never. So, in such case, so there's $10,000 that he received from the sweepstakes, but Uncle Sam says, hey, you know what? Erinne M Perry: That's still money, so it needs to be reported. And typically, they would issue a 1099 miscellaneous, but in this case, you know.
8:26
Erinne M Perry: It's telling us to just report it, but the key thing is that this is going to be considered taxable income, so we're gonna report this $10,000, Erinne M Perry: So it's gonna transfer over this $10,000. Erinne M Perry: On line 8, Erinne M Perry: And then now it asks us to total up our income. So we're gonna get our handy-dandy calculator.
8:46
Erinne M Perry: So, based on this information right now, again, tax-exempt interest is not going to be taxable. Qualified dividends, as we're going to see a little later, is taxed a bit differently, but for right now, we're going to add up our income. So, $56,927 of wage income, plus $671 of taxable interest. Erinne M Perry: plus $377 of ordinary income, plus $10,000 that was earned from the sweepstakes, that gives us total income of $67,000. Erinne M Perry: $975.
9:20
Erinne M Perry: And then in line 10, there's no adjustments, so $67,975 minus 0, our adjusted gross income is also $67,975. So, the next step is for us to take the standard deduction. Again, we are making assumptions. It doesn't tell us anything about mortgage interest, charitable contributions, so we are assuming that they are taking the standard deduction, and as a married Erinne M Perry: joint couple, their standard deduction is $29,200. So again.
9:50
Erinne M Perry: As it relates to the standard deduction, think of it as an amount of money.
9:56
Erinne M Perry: that the IRS allows you to keep tax-free.
10:03
Erinne M Perry: So, with that being said, we'll get our calculator.
10:17
Erinne M Perry: All right? And with our calculator, so with that being said, we subtract the 29,000 200, Erinne M Perry: And that gives us $38,775. Erinne M Perry: as taxable.
10:39
Erinne M Perry: Oh, whoop, sorry, I skipped a step. So, it's asking us to add lines 12 and 13, so they don't have a business, so there's no qualified business income deduction. So, this amount that we just calculated.
10:54
Erinne M Perry: The 38775, that represents the taxable income. Erinne M Perry: So now from there, we scroll down, we need to figure out what the tax is going to be. So if we scroll up.
11:09
Erinne M Perry: We see here we have the tax table. So we open the tax table, and from there, based on their income amount. Erinne M Perry: Of 38,775, we go to the respective table. Erinne M Perry: So, 38775, so automatically we're thinking, hey, it's $4,189, but if you put… Erinne M Perry: $1,189, that is incorrect. Why? Because Donna and Chris also have
11:37
Erinne M Perry: qualified dividends. So, in such case, the tax situation is going to be just a little different. So, we input this form, or complete this form, rather, so it asks us to enter the amount from Form 1040. So, the amount from Form 1040 is $38,000, Erinne M Perry: $775, and then it asks us to enter the amount from Form 1040 line 3A. So if we go back, we see line 3A is $322.
12:08
Erinne M Perry: So, 322. Erinne M Perry: Then it asks us if we're filing Schedule D,
12:15
Erinne M Perry: Enter the smaller of line 15 to 16, and if we're not.
12:22
Erinne M Perry: We enter 0.
12:25
Erinne M Perry: And then for line 4, it asks us to add lines 2 and 3, which is 323… 22 in total. So it asks us to subtract line 4 from line 1. So 38,000… Erinne M Perry: 775 minus 322, that gives us 38,000.
12:44
Erinne M Perry: $453. So, here it's asking us to enter $47,025 of single or married filing separate, $94,050 if married filing joint or qualifying widower, $63,000 of head of household. So, in our case, it's $94,050. Erinne M Perry: So now we walk through it step by step. It says, enter the smaller of line 1, which is 38775, or line 6. So the smaller of the two is the 38775,
13:12
Erinne M Perry: And then it asks us to enter the smaller of line 5, which is 38,453, or line 7. Line 7 is the small… sorry, line 5, rather, is the smaller amount, 38453. So we follow it step by step. So it says for us to subtract line 8, Erinne M Perry: from line 7. So, based on that, 38775, which is line 7. Erinne M Perry: We subtract line 8 from that, which is 38,453, and the difference is 300…
13:49
Erinne M Perry: And $22. And then from there, it asks us. Erinne M Perry: To enter the smaller of line 1, Erinne M Perry: Which is $38,775, or the smaller of line 4, which is 322, so obviously 322 is the smaller amount. Erinne M Perry: Then it asks us to enter the amount from line 9. Erinne M Perry: which is 322, and we subtract line 11 from line 10, and that gives us 0. So with that being said, the $322 of capital gains is going to be taxed at.
14:20
Erinne M Perry: zero. So now we move on to line 13, and it is asking us to input the amount for a married filing joint couple is $583,750. Erinne M Perry: Because the reason why we're doing all of this is we are ultimately trying to determine how much is going to be taxed at 0%, 15%, or 20%. So in here, we enter the smaller of line 1 or line 13, so line 1 is 38,775, line 13 is over half a million, so we're going to use the $38,000. Erinne M Perry: 775… And then it asks us to add lines 5,
14:57
Erinne M Perry: and 9. So 38,453 plus 322, we add the 2, Erinne M Perry: I mean, we know the math, because obviously the difference is 322, but we'll add it anyway to follow the instructions. So we add lines 5 and 9.
15:16
Erinne M Perry: Which is 38453, plus line 9, which is 322, that gives us 38, Erinne M Perry: 775, and then it asks us to subtract line 15 from 14, and in this case. Erinne M Perry: It's going to be 0, and it asks us to enter the smaller of line 12, which is 0, or line 16, which is 0. Erinne M Perry: So both is 0. So therefore, multiply lines 17 by 15, this is also going to be 0. And then it asks us to add lines 9 and 17, so line 9, Erinne M Perry: It's 322, line 7 is 0, so 322.
15:58
Erinne M Perry: And then we subtract line 19, 322 from line 10, and this also gives us 0. So there's a lot of little nuance, obviously, here. Erinne M Perry: And then it's asking to multiply that amount by 20%, but again, line 20 is 0, so line 21 is also going to be 0. So based on this, it is asking us to figure out the tax for the amount. Erinne M Perry: Online 1.
16:26
Erinne M Perry: So if we scroll up. Erinne M Perry: Oops, sorry, I'm at the wrong spot. It's asking us for figure to tax for the amount on line 5. So if we scroll up line 5, it's $38,453. So, $38,453 falls here. So therefore, in such case, because of the qualified dividends.
16:46
Erinne M Perry: The tax will be $4,153.
16:53
Erinne M Perry: It asks us to add lines 18, Erinne M Perry: Lines 21 and 22, so 0 plus 0 plus 4153. Erinne M Perry: And then for line 24, it's asking us to figure the tax for the amount on line 1, which we already saw previously, $38,775, that would tax them at $4,189. Erinne M Perry: And then here it's asking us to choose the smaller of the two, which is going to be $4,153. So the reason why there is a difference between what you see on the tax table is because, again, when
17:30
Erinne M Perry: Taxpayers have Erinne M Perry: qualified dividends and capital gains. Those qualified dividends and capital gains are subjected to more preferential tax rates. So, as opposed to the ordinary tax rates of 10, 12, 22, etc. Erinne M Perry: capital gains and qualified dividends are taxed at 0, 15, and 20%. So because of Chris and Donna's income, they're $322 from their 1099-INT, Erinne M Perry: As we see here, scroll down on their 1099DIV, rather.
18:04
Erinne M Perry: These $322 is taxed at 0% because of their income. So when we go back to Form 1040, the correct amount of tax, because of the qualified dividends is Erinne M Perry: 4,153. They have no other tax, so it's 4,153. We add up lines 19 and 20.
18:27
Erinne M Perry: In this case, 0 plus 0 is 0. We subtract line 21, 0 from line 18, Erinne M Perry: $4,153, and they don't have any other taxes, so the total tax is $4,153. And then from there, we need to figure out, do they owe money? And how do we figure it out? We look at their W-2 form. So, for Donna. Erinne M Perry: There was $4,209.87. We rounded up to $4,210. Erinne M Perry: Plus… the $200 that was withheld from Chris's job, so there was a total of $4,000,
19:04
Erinne M Perry: $410 withheld. There were no, federal income taxes withheld from 1099s or other forms, so $4,410. Erinne M Perry: So, with that being said, the total payments is $4,410. Erinne M Perry: $4,410. This is their total payment, so therefore, we see that there's a difference. Their tax liability is $4,153.
19:31
Erinne M Perry: and the taxes paid is $4,410. So therefore, we get the difference between the two. Donna and Chris are due a refund of $257, alright? So the key thing to keep in mind, the key thing, you know, there's a lot of nuance in this problem. It discussed in this chapter.
19:51
Erinne M Perry: Gross income inclusion and exclusion. So, we see things of, you know, how Chris, he received a scholarship to go to school. The scholarship was used for tuition and books, so therefore it is not taxable. Donna, she received a gift from her job that is not considered taxable.
20:10
Erinne M Perry: Chris also paid, child support to his ex-wife that is not considered taxable. Then we also see that Chris's aunt died, and he received $15,000 in cash, so for gift taxes, that is not considered taxable. So they put a lot of things into these problems just to kind of ensure that you understand what is taxable, what is included, and what is excluded for tax purposes.
20:34
Erinne M Perry: So this is just a good little problem. In the profession, when you use the tax software, the tax software, you know, automatically does this qualified dividends and capital gains tax worksheet for you, but this is just a great, way for you to get a better understanding of the calculations behind the scenes. So this brings us to the end of Chapter 2, Gross Income Inclusion and Exclusions. Erinne M Perry: Comprehensive problem.
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