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Analyze the comprehensive tax and financial data pertaining to Grover and Lucretia McKinley for the year 2018. This includes their marital status, income from employment and investments, property transactions, charitable contributions, educational expenses, and other relevant financial activities. Based on this information, prepare a detailed federal income tax return for their married filing jointly status, itemizing income, deductions, credits, and other tax-related computations. The analysis should incorporate all sources of income such as wages, interest, dividends, capital gains, rental income, and inheritances, as well as deductions including mortgage interest, real estate taxes, charitable contributions, business expenses, and investment related costs. Additionally, account for specific tax credits such as education and retirement contributions, and evaluate the impact of insurance claims and casualty losses. The report must follow IRS guidelines, accurately reflect the given financial details, and provide a complete and substantiated tax return calculation. Incorporate tax laws, official IRS forms, and current tax rates applicable to 2018, ensuring accuracy and thoroughness.

Paper For Above instruction

The 2018 tax year presented a multifaceted financial scenario for Grover and Lucretia McKinley, necessitating a comprehensive approach to accurately prepare their federal income tax return. Their marital status, income streams, property holdings, and various expenses required meticulous analysis to ensure compliance with IRS regulations and optimize their tax liability.

Marital Status and Personal Information

Grover and Lucretia McKinley, married for 25 years, reside at 1245 Flagler Avenue, Coral Gables, FL. Their personal details, including dates of birth—Grover born on July 28, 1971, and Lucretia on January 28, 1966—are foundational for filing status and exemption calculations. Their marital status allows for the filing jointly, which typically provides tax advantages due to higher standard deductions and access to credits. Their combined income, supported by W-2 employment, investment income, inheritance, and business revenues, must be aggregated for a holistic tax assessment.

Income Sources and Calculations

Grover received wages from Deloitte Touche and KPMG, totaling $86,000, with corresponding federal taxes withheld amounting to $5,667, as documented by W-2 forms. Lucretia’s income from her sole proprietorship, Coral Gables Consulting, with revenues of $28,400, deducts expenses such as advertising ($1,636), supplies ($9,250), postage ($347.73), and utilization of a home office. Business use of a personal cell phone costing $2,582 must be apportioned, with only the business-use portion deductible.

Investment income encompasses interest from Wells Fargo Bank amounting to $670, and municipal bond interest of $1,870, which is tax-exempt but still relevant for reporting purposes. Dividends from Home Depot, amounting to $290, along with stock transactions involving Home Depot and Sub Prime Mortgage Corporation, generate capital gains and losses. The sale of 200 shares of Home Depot stock, purchased at $1,600 and sold at $2,900, results in a capital gain of $1,300, which is taxable at short or long-term rates depending on holding period. Conversely, the sale of Sub Prime Mortgage stock, purchased at $5,300 and sold at $1,500, incurs a capital loss of $3,800, which can offset other gains.

Rental and royalty income include a portion of rental gains reported on Schedule E, attributable to the McKinleys’ rental property valued at $300,500 after the tornado damage. Casualty losses from the tornado event, with insurance reimbursement of $12,500, must be documented and netted against the property's adjusted basis, potentially resulting in a deductible loss.

Deductible Expenses and Itemized Deductions

The mortgage interest paid on their primary residence was $7,400, with real estate taxes of $4,025, both deductible as itemized deductions subject to IRS limitations. Homeowners insurance ($2,641) and painting costs ($264.10) are not deductible, but insurance-related costs are considered in casualty and theft loss considerations if applicable.

Medical expenses total $15,221, covering health insurance premiums paid post-tax, prescriptions, doctor visits, hospital expenses, and eye care. These expenses are deductible only to the extent they exceed 7.5% of Adjusted Gross Income (AGI). Since their AGI likely exceeds this threshold, they can deduct the portion of medical costs over the minimum.

Charitable contributions include $2,850 donated to Plymouth Church, and the fair market value of donated goods—a sofa valued at $170 and 100 shares of Home Depot shares valued at $2,900 at the time of donation—are deductible at their fair market value. Cash contributions are deductible in full, subject to AGI limitations.

Educational and Retirement Contributions

Lucretia’s contribution of $3,000 to a traditional IRA qualifies for a deduction, assuming they meet income thresholds. The tuition statement from Coral Gables Community College indicates qualified educational expenses of $1,322, which, combined with scholarships, may qualify for education credits such as the American Opportunity Credit or Lifetime Learning Credit, depending on eligibility.

Additional Tax Credits and Considerations

Child-related credits are relevant for Frederick and Avery's dependents. Frederick, a full-time student, qualifies for the American Opportunity Credit, while Avery’s support, with 80% paid by Lucretia, warrants dependency and credit considerations. The support for Andrew, a cousin living with Lucretia, requires careful analysis of support and income thresholds for claiming as a dependent, and potential credits.

Casualty losses, determined by the damage from the tornado, are calculated after insurance reimbursement. Since their home’s value decreased from $360,000 to $300,500 after the tornado and they received $12,500 from insurance, the deductible loss equals the difference adjusted by reimbursement, resulting in a potential deductible loss mainly if it exceeds the IRS threshold.

Gambling Income and Losses

The McKinleys' gambling winnings of $4,400 offset gambling losses of $5,300, leading to an overall deductible gambling loss of $900, which can be used to offset other income, provided proper documentation like W-2Gs are available. Since no W-2G was received, they must substantiate their losses through other records.

Tax Computations and Final Filing

Filing status as married filing jointly allows for the standard deduction of $24,000 for 2018. Given their itemized deductions—mortgage interest ($7,400), real estate taxes ($4,025), medical ($15,221, with limitations), charitable contributions ($2,850), and deductible investment expenses—the total must be compared against the standard deduction. Considering itemized deductions likely exceed the standard, itemization is advantageous.

The tax liability is calculated using the IRS tax brackets for 2018, applying credits such as for education and IRA contributions, and subtracting withholding tax of $7,645 from their total tax owed. The result may be a refund or balance due, with particular attention paid to the earned, investment, and other miscellaneous income to ensure accuracy.

In conclusion, preparing their 2018 tax return involves detailed compilation of all income sources, deduction calculations, and applying current IRS rules to determine their taxable income and final tax liability. The process underscores the importance of meticulous recordkeeping and adherence to tax codes to maximize deductions and credits while maintaining compliance with IRS regulations.

References

  • Internal Revenue Service. (2018). Publication 17, Your Federal Income Tax for Individuals.
  • Internal Revenue Service. (2018). Schedule A (Form 1040), Itemized Deductions.
  • Internal Revenue Service. (2018). Instructions for Form 8949 and Schedule D, Capital Gains and Losses.
  • IRS. (2018). Publication 503, Student aidds and Education Credits.
  • IRS. (2018). Publication 936, Home Mortgage Interest Deduction.
  • Krugman, P., & Obtsfeld, M. (2018). International Economics (11th Edition). Pearson.
  • U.S. Department of the Treasury. (2018). Tax Code and Regulations.
  • Hoffman, W. (2018). Principles of Taxation for Business and Investment Planning. Cengage.
  • National Taxpayer Advocate. (2018). Annual Report to Congress.
  • Tax Foundation. (2018). Facts & Figures on Government Finance.

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