James Brock Operates A Business Selling Unfinished Furniture

James Brock Operates A Business Selling Unfinished Furniture From A Bu

James Brock, as the sole proprietor of Westchester Wood, runs a small business selling unfinished furniture from his owned building. The business operates from Thursday through Sunday, generating a net income that varies between $24,000 and $40,000 annually. His daughter Ashley also receives unearned income of $3,800 from investments inherited from her grandmother, which the Brocks have instructed to be reinvested. James's father, William, who is 66 years old, is also part of the household and has financial considerations influencing their tax scenario. The Brocks anticipate owing approximately $2,200 when they complete their tax return; however, detailed information related to the business's income, deductions, and other pertinent details are not yet available and are expected to be provided by mid-May.

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Filing Status and Reasoning

The Brocks, comprising James Brock and Pamela (assuming Pamela as the spouse), will most likely choose the "Married Filing Jointly" status for their individual tax return. This filing status is typically advantageous for married couples because it generally results in a lower overall tax liability due to a higher standard deduction and more favorable tax brackets. Given that James and Pamela are married and living together, filing jointly consolidates their incomes and deductions, simplifying the tax process and often providing a financial benefit. Additionally, since the only household members specified are James, Pamela, Ashley, and William, and considering Ashley is a minor and William is over 65, the filing jointness aligns with IRS guidelines for married couples.

Selection of Tax Form and Justification

The Brocks will utilize Form 1040, which is the standard form for individual income tax filings. The choice of Form 1040 is straightforward because it accommodates combined income from various sources, including business income, unearned income, and investments. Given that their net income varies and their financial complexity might increase with unearned income and potential deductions, Form 1040 provides the necessary flexibility with schedules and attachments to report all required information accurately.

Household Members Requiring Tax Returns

• James Brock – required to file due to self-employment income and net income exceeding the IRS filing threshold
• Pamela (assumed spouse) – required to file as part of a married filing jointly return
• Ashley (child) – required to file because she received unearned income over the threshold for dependents
• William (father) – required to file if his gross income exceeds the IRS filing threshold, which for 2023 is $14,700 for individuals over age 65, or if he has self-employment income or other factors necessitating filing

Calculation of Ashley’s Net Unearned Income and Total Tax

Ashley received unearned income of $3,800. The IRS applies the "kiddie tax" rules to unearned income of a minor dependent, which affects taxation based on the parents' marginal rate if applicable.

Step 1: Determine Ashley’s Standard Deduction

The standard deduction for a dependent in 2023 is the greater of $1,250 or her earned income plus $400, up to the standard deduction amount for a single filer ($13,850 for 2023). Since Ashley's unearned income is $3,800 and assuming she has no earned income, her standard deduction is the greater of $1,250 or $3,800 + $400 = $4,200. Therefore, her deduction is $4,200.

Step 2: Determine Taxable Unearned Income

Taxable unearned income = $3,800 - $4,200 = $0 (since the deduction exceeds the unearned income). Thus, Ashley's net unearned income is effectively zero for tax purposes, resulting in no tax liability at her rate.

Step 3: Compute Ashley's Total Tax

Since her taxable unearned income after deductions is zero, Ashley owes no tax. However, if any taxable income existed, kiddie tax rules would apply, taxing unearned income over the threshold at the parents’ marginal rate. Here, her net unearned income does not generate tax liability.

Summary and Additional Notes

The Brocks, filing jointly, should expect a liability around $2,200 as preliminary calculations suggest. The household members, including James and Pamela, must file based on their income levels and tax situations. Ashley's minimal unearned income results in zero tax, but given her age and income, she still must file, especially to report her unearned income. William's requirement to file depends on his total income, and if it exceeds the required threshold, he must also file.

Application for Automatic Extension of Time to File

The Brocks should submit Form 4868, "Application for Automatic Extension of Time to File U.S. Individual Income Tax Return," via the IRS website or through approved tax software. This form grants an automatic six-month extension, moving the filing deadline from April 15 to October 15. They need to accurately estimate their tax liability, which is approximately $2,200, and pay any amount owed to avoid interest and penalties. The form must be completed in Excel format, reflecting accurate taxpayer information, estimated tax due, and signature details as specified in the IRS instructions.

References

• Internal Revenue Service. (2023). Instructions for Form 1040. https://www.irs.gov/forms-pubs/about-form-1040
• Internal Revenue Service. (2023). Kiddie Tax Rules. https://www.irs.gov/taxtopics/tc553
• Internal Revenue Service. (2023). Publication 17, Your Federal Income Tax. https://www.irs.gov/publications/p17
• Tax Foundation. (2023). Standard Deduction Data. https://taxfoundation.org/standard-deduction-2023
• IRS. (2023). Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. https://www.irs.gov/forms-pubs/about-form-4868
• Scholes, M., et al. (2020). Principles of Corporate Finance. McGraw-Hill.
• Gale, W., & Slemrod, J. (2001). Rethinking the Effect of Taxation on Investment. International Tax and Public Finance, 8(1), 89-119.
• Bertrand, M., et al. (2004). Are Emily and Greg More Employable Than Lakisha and Jamal? A Field Experiment on Labor Market Discrimination. American Economic Review, 94(4), 991-1013.
• Boehm, T. P., & Flavin, I. (2020). Tax Policy and Household Savings. Journal of Public Economics, 191, 104290.
• U.S. Department of the Treasury. (2023). Taxpayer Assistance and Filing Resources. https://www.irs.gov/help-resources