Jane Smith, age 40, is single and has no dependents. She is employed as a legal secretary by Legal Services, Inc. She owns and operates Typing Services located near the campus of Florida Atlantic University at 1986 Campus Drive. Jane is a material participant in the business. She is a cash basis taxpayer. Jane lives at 2020 Oak crest Road, Boca Raton, FL 33431. Jane’s Social Security number is 123–45–6789. Jane indicates that she wants to designate $3 to the Presidential Election Campaign Fund. During 2011, Jane had the following income and expense items:
a. $100,000 salary from Legal Services, Inc.
b. $20,000 gross receipts from her typing services business.
c. $700 interest income from Acme National Bank.
d. $1,000 Christmas bonus from Legal Services, Inc.
e. $60,000 life insurance proceeds on the death of her sister.
f. $5,000 check given to her by her wealthy aunt.
g. $100 won in a bingo game.
h. Expenses connected with the typing service:
|
Office rent |
$7,000 |
|
Supplies |
4,400 |
|
Utilities and telephone |
4,680 |
|
Wages to part time typists |
5,000 |
|
Payroll taxes |
500 |
|
Equipment rentals |
3,000 |
i. $9,500 interest expense on a home mortgage (paid to San Jose Savings and Loan).
j. $15,000 fair market value of silverware stolen from her home by a burglar on October 12, 2011. Jane had paid $14,000 for the silverware on July 1, 2002. She was reimbursed $1,500 by her insurance company.
k. Jane had loaned $2,100 to a friend, Joan Jensen, on June 3, 2008. Joan declared bankruptcy on August 14, 2011, and was unable to repay the loan. Assume that the loan is a bona fide debt.
l. Legal Services, Inc., withheld Federal income tax of $18,000 and FICA tax of $5,448 {Social Security tax of $4,050 [($101,000 − $4,580) × 4.2%] + Medicare tax of $1,398 [($101,000 − $4,580) × 1.45%]}.
m. Alimony of $10,000 received from her former husband, Ted Smith.
n. Interest income of $800 on City of Boca Raton bonds.
o. Jane made estimated Federal tax payments of $1,000.
p. Sales taxes from the sales tax table of $964.
q. Charitable contributions of $2,500.
Part 1—Tax Computation
Compute Jane Smith’s 2011 Federal income tax payable (or refund due). If you use tax forms for your computations, you will need Forms 1040 and 4684 and Schedules A, C, and D. Suggested software: H&R BLOCK At Home.
Part 2—Tax Planning
In 2012, Jane plans to continue her job with Legal Services, Inc. Therefore, items a, d, and l will recur in 2012. Jane plans to continue her typing services business (refer to item b) and expects gross receipts of $26,000. She projects that all business expenses (refer to item h) will increase by 10%, except for office rent, which, under the terms of her lease, will remain the same as in 2011. Items e, f, g, j, and k will not recur in 2012. Items c, i, m, n, p, and q will be approximately the same as in 2011.
Jane would like you to compute the minimum amount of estimated tax she will have to pay for 2012 so that she will not have to pay any additional tax upon filing her 2012 Federal income tax return. Write a letter to Jane that contains your advice and prepare
a memo for the tax files.