Identify and explain two reasonable tax planning items the family could use to minimize their tax liability and/or maximize their wealth.

· You have been engaged to prepare the 2020 federal income tax return for Joseph and Diana Cohen.

· Your tax form submission should include, as applicable: Form 1040, Schedules 1, 4, A, B, C, D, E, SE and Forms 4684 and 8949.You will come across many items on the tax return we have not talked about in class; if we have not covered it in class, and it is not included in the information below, you do not need to address it on this assignment.

· Your solution should contain a detailed Excel workpaper that calculates the tax due or refunded with the return and calculated in the form of the tax formula. The calculation should be well labeled and EASY to follow. This presentation will be factored into your grade. Do NOT include any references or citations on your workpaper.

 

· You must complete a typed return using 2020 forms found on Canvas.

· Use the following assumptions in preparing the return:

o Use all opportunities under law to minimize the 2020 federal income tax.

o If required information is missing, use reasonable assumptions to fill in the gaps.

o Use whole dollars when preparing the tax return.

o Do not prepare a state income tax return.

o Ignore alternative minimum tax.

 

Part 2: Client memo

· Complete a letter to the client regarding tax planning advice. Identify and explain two reasonable tax planning items the family could use to minimize their tax liability and/or maximize their wealth. All items would be implemented in future years and do not impact the current tax return.

o This memo should not exceed one single-spaced page.

JOSEPH AND DIANA COHEN

INDIVIDUAL FEDERAL INCOME TAX RETURN

 

Joseph (age 52) and Diana (age 54) Cohen are married and live in Pleasantville, New Jersey. Joseph is the Vice-President of Sales at a small start-up company. Diana is a former advertising executive who currently consults with former clients. The Cohens have three children Rebecca (age 18), Alan (age 15), and David (age 12). In January, Rebecca left home to attend a liberal arts college. The Cohens pay for Rebecca’s tuition and room in board while she takes classes full time; she is not currently employed.

 

The Cohens provided the following information:

· Joseph’s social security number is 598-94-2583

· Diana’s social security number is 301-52-2942

· Rebecca’s social security number is 887-44-8710

· Alan’s social security number is 810-42-9092

· David’s social security number is 855-11-3021

· The Cohen’s mailing address is 85 North Maple Drive, Pleasantville, New Jersey 08232

 

Joseph Cohen reported the following the following information relating to his employment during the year:

 

Employer	Gross Wages	Federal Income Tax Withholding	State Income Tax Withholding
Alternative Energy	$148,325	$35,230	$8,900

 

The above amounts do not reflect any income items described below. Joseph’s employer withheld all payroll taxes it was required to withhold. The entire Cohen family was covered by minimum essential health insurance during each month in 2020. The insurance, valued at $16,000, was provided by Joseph’s employer, Alternative Energy.

 

Diana Cohen received the following self-employment income during the year (she uses the cash method of accounting).

 

Consulting revenue reported to her on a Form 1099-MISC, Box 7

High-end Retail $32,000

Jensen’s Health Products $8,500

Strategic Solutions $3,750

 

In this self-employment endeavor, Diana is an active participant and the activities qualify as trade or businesses for the Qualified Business Income Deduction. Unfortunately, Diana did not keep records of any of her business expenses for the year.

 

The Cohens also received the following during the year:

 

Interest income from First Bank of New Jersey $320

Interest income from Patterson, New Jersey School District $200

Interest income from U.S. Treasury Bond $350

Interest income from General Mills corporate bond $400

Interest income from the State of Maine’s

Tourism Support Private Activity Bond $50,000

Qualified dividend income from Rio Tinto $1,500

Qualified dividend income from Microsoft $750

Qualified dividend incomefrom Cooper Tire $200

Qualified dividend income from Cardinal Health $425

Qualified dividend income from Union Pacific $140

Qualified dividend income from Procter & Gamble $190

Qualified dividend income from PepsiCo $225

Qualified dividend income from Kellogg $200

Qualified dividend income from Abbott Labs $275

Qualified dividend income from 3M $350

Life insurance payment – Mutual life (mother’s passing) $150,000

Cash gift from her father $5,000

New Jersey state income tax refund* $325

 

* Refund was from state tax they paid in 2019. They deducted all of their state taxes as itemized deductions in 2019. Total itemized deductions were $32,000, $3,000 of which were state taxes.

 

Diana received the following payments as a result of a lawsuit she filed for damages sustained in a car accident:

· Medical Expenses for physical injuries $16,500

· Emotional Distress (from having been physically injured) $7,300

· Punitive Damages $30,000

Total $53,800

 

Eight years ago, Joseph purchased an annuity contract for $88,000. He received his first annuity payment on January 1, 2020. The annuity will pay Joseph $15,000 per year for ten years (beginning with this year). The $15,000 payment was reported to Joseph on Form 1099-R for the current year.

 

On January 3, 2020, the Cohens sold their prior principal residence. They purchased that residence in 2011 and had lived there full-time until they sold it this year. They originally purchased the home for $310,000. The Cohen family has never claimed any tax depreciation (nor were they allowed to) on the home. The sales price of the home was $825,000. The home is located at 45 East Entrada Trail, Lexington New Jersey 40502.

 

The Cohens took two trips to Atlantic City. While on the first trip they lost $2800 gambling, but on the second trip they won $2600.

 

The Cohens did not own, control or manage any foreign bank accounts, nor were they grantors or beneficiaries of a foreign trust during the tax year.

 

The Cohens made the following payments during 2020:

 

Dentist (unreimbursed by insurance) $1,500

Doctors (unreimbursed by insurance) $475

Prescriptions (unreimbursed by insurance) $255

Real property taxes on residence $4,200

Vehicle registration fee (based on age of the vehicle) $175

Mortgage interest on principle residence $7,845

Contribution to the American Lung Association $2,300

Contribution to the Habitat for Humanity $1,200

Contribution to Methodist Church of NJ $3,000

Contribution to Senator Rick Hartley’s Re-election Campaign $2,500