Short Paper: Summary

The tax returns of Alexander and Susan Lawson highlight the choices made depending on the couple’s profile of teachers, homeowners, and caregivers of Susan’s mother. Their tax return involves various items of income, tax deductions, and credits, ultimately determining their tax amount. This paper explains how their decisions and situations affected each part of the tax return. Data from their W-2 forms, mortgage interest, real estate taxes, and other expenses were considered to ascertain their overall tax burden for the year: Short Paper: Summary.

How the Required Income Sources Were Determined

This couple’s main source of income for their family was their earnings from their occupation as teachers. According to their W-2, Alexander was paid $39,405, and Susan was paid $52,005. These wages were also subjected to federal income tax, social security, and or Medicare fees. This is the federal withholding that Alexander paid $5,516 and Susan paid $7,200.

HM reported $39,405 of wages for Social Security and $2,443 of the related withholding for Alexander, and $52,005 of wages and $3,224 of the related withholding for Susan. Also, both paid Medicare taxes for the same wages; Alexander paid $571, and Susan paid $755. These income sources were, therefore, clear because they derived from income-generating activities at a local elementary school. Other sources of income consisted of the tax paid and the mortgage interest on their personal residence.

The mortgage interest of $6,805 and mortgage insurance premiums of $2,199 were evidenced by Form 1098. They also incurred real estate taxes for their first home, valued at $3,355, which influenced their figure. As there are no other indicated sources of income apart from their wages and property costs, Goodman et al. (2023) support the conclusion that their income stemmed from employment and proprietorship.

Relevant Deductions Taken

The Lawsons were privileged to recognize several allowable deductions, which were utilized to slash the company’s taxable income for the year. Among these were the Mortgage Interest Deduction and Property Tax Deduction. They also spent $6,805 in charges for mortgage interest toward their main home and $2,199 on mortgage insurance, both of which are tax deductible.

Moreover, they also incurred $3,355 toward real estate taxes, which were also claimed as deductions under the tax laws, signifying a lower tax outgo. These deductions mirror the Tax Cuts and Jobs Act approval for the homeowner to claim the mortgage interest and real estate tax (Brady & Bass, 2020).

In addition, the Lawsons also claimed some costs associated with their respective teaching positions. Alexander had receipts for $1,010 for books, supplies, and other teaching aids for his classroom, while Susan had $495 for similar items. According to IRC Section 163(h), taxpayers who itemize can claim mortgage interest on their first and second residences (Follis & Freeman, 2024). This is testified by the $6,805 claimed under mortgage interest deduction and $2,199 for mortgage insurance premiums on Form 1098.

IRC Section 164(a)(1) permits a deduction for real estate taxes; thus, a deduction of the $3,355 that the Lawsons paid for their property was allowed. Further, under IRC Section 62(a)(2)(D), the educator expense deduction requires teachers to deduct up to $250 ($500 for a married couple, if both are eligible educators), which is a deduction for unrecompensed expenses for school supplies. Alexander and Susan Lawson have provided evidence of the stated operational expenses of $1,010 for classroom material and $495 for the other teacher. This is in compliance with IRS advice to educators or the particular code as acceptable for teaching expenses beyond the tax bill.

Applicable Credits

Looking at the information provided, the Lawsons did not state that they had received any specific tax credits. However, they could claim tax credits like the Child and Dependent Care Credit since they cared for Susan’s elderly mother. However, no particular child or dependent care expenses have been claimed in the tax returns of the subject taxpayers. Child and Dependent Care Credit under IRC Section 21 might have been claimed if they had dependent expenses for Susan’s elderly mother, Ana Alvarez, whom they care for.

The tax law offers expenses for the care of one or more individuals for whom the taxpayer is entitled to deduct a dependency exemption while the taxpayer is employed or seeking employment; however, none of such expenses were recorded. The Earned Income Tax Credit (EITC) could also have been applicable if the Lawsons’ earned income was below a certain level, which is possible depending on the number of individuals in their household. Agostino and Yoo (2020) note that IRC Section 32 specifies the qualification for EITC, which offers tax credit to every low to mid-revenue earner or household, especially those with children.

Supplemental Forms Used

The Lawsons’ tax return was supplemented with other forms, specifically when the application concerned them and their income and deductions. Alex’s and Susan’s W-2 forms proved to be necessary to identify their employment income amount, withholding amounts, and social security and Medicare taxes. These forms provided the details that were needed to report wages, taxes retained, and other issues relating to payroll. Also, Form 1098 has been used to indicate the amount of mortgage interest and mortgage insurance premium paid on the home they occupied for the greater part of the taxable year and used to claim itemized deductions.

Another factor that went into identifying their capacity involved verifying that the right amount of tax had to be paid or receive an extra sum or refund. According to IRC Section 6051, employers should prepare the W-2 form to inform the employee of the wage tips, other compensation, and the amounts that have been withheld for federal income tax, social security, and Medicare. This form is completed to provide information about the taxpayer’s mortgage interest and mortgage insurance premiums in accordance with the provision of the Internal Revenue Code Section 163(h)). Also, the educator expense deduction requires record keeping and providing receipts as provided in the IRC Section 62(a)(2)(D).

How the Correct Tax Liability Was Calculated for the Current Year

Alexander and Susan Lawson’s tax computation involved basic taxation, their gross income, taxable deductions, and taxation rates. The gross income of the Lawsons was obtained by adding the wages on their W-2 forms, through which Alexander and Susan earned $39,405 and $52,005, respectively, thus making a total of $91,410. From this, they were allowed offsets such as mortgage interest, property taxes, and educator expenses. With these deductions and their respective standard deductions, they were able to lower their taxable income.

After this, in order to arrive at the Lawsons’ tax cost, their tax liability was arrived at by applying the IRS’s current tax schedule based on the filing status of ‘Married filing Jointly (Whitlock, 2021). Their taxes depended on the total taxable income; the amount arrived at after any allowable deductions have been made fell under a certain band. Since there existed tax rates, the tax that was due was determined from these, and federal income tax was paid during the year in accordance with the W-2 forms. These withholding amounts were $5,516 for Alexander and $7,200 for Susan; they applied it against their total income tax liability.

Determining the Outcome of the Return

At the end of the Lawsons’ tax return, total tax was computed equivalent to the amount of taxes withheld for the year. The total federal tax withheld was $12,576 derived from W-2 forms as per Alexander’s gross and net salaries, $5,516 solely from Alexander and Susan from $7,200. Subtracting the allowances—mortgage interest, property taxes, and educator expenses—they got their respective taxable income and the total taxes payable (Brady & Bass, 2023).

Since the tax withheld was higher than the tax for the last year, they received the refund. Calculation of the actual refund would depend on deducting the total of taxes required at the conclusion from the totality of taxes paid. This process makes sure that Lawsons have paid enough taxes in the entire fiscal year and that they are compensated if they have overpaid.

The Lawsons finally arrived at their tax return by subtracting the amount of tax on the withholding tax table from the total amount of tax withheld in compliance with the IRC Section 3402 and the IRC Section 31 (Sheppard, 2020). The IRS requires a taxpayer to provide the total amount of tax withheld from wages, and this amount is then compared with the computed tax amount to determine if a return is owed or if the taxpayer should receive a refund. In the case of the Lawsons, they got a refund since the withholding passed the actual tax they owed. Therefore, an outcome of their returns was a refund because, through withholding, their total taxes paid surpassed their tax dues.

Conclusion

Alexander and Susan Lawson’s tax returns contain wages, deductions, and forms germane to the computation of taxes owed. This included their teaching salaries, with other allowable deductions for mortgage interest, real estate taxes, and teaching-related expenses. Credits and additional complex deductions that might have lowered their liability were not an issue. Further, they deserved a refund because the employer over-withheld tax.

The specific tax provisions that influenced their return and the calculation of their total tax liability included the tax laws on mortgage interest deductions (Internal Revenue Code Section 163), educator expense deductions (Internal Revenue Code Section 62(a)(2)(D)), and tax withholding (Internal Revenue Code Sections 3401 and 3402). Their tax circumstances show the benefit of precise withholding and planning and the advantages of employing comparable deductions for taxpayers.

References

Agostino, F., & Yoo, I. (2020). Sailing Permit–IRS Form 1040-C, U.S. Departing alien income tax return, and IRS Form 2063, U.S. departing alien income tax statement and annual certificate of compliance. Journal of Tax Practice & Procedure, 22(2), 49. https://openurl.ebsco.com/EPDB%3Agcd%3A1%3A25604721/detailv2?sid=ebsco%3Aplink%3Acrawler&id=ebsco%3Agcd%3A144538241&link_origin=www.google.com

Brady, P. J., & Bass, S. (2020). Reconciling Form 1040 and Form 1099-R data. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3529672

Brady, P. J., & Bass, S. (2023). Imagine all the people: Using tax data to build a representative sample of the US population. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4453528

Follis, S., & Freeman, M. S. (2024). How to help your clients understand their 1099-K and its everchanging threshholds. ETSU Faculty Works, 1017. https://dc.etsu.edu/etsu-works-2/1017

Goodman, L., Lim, K., Sacerdote, B., & Whitten, A. (2023). Automated tax filing: Simulating a prepopulated Form 1040. National Tax Journal, 76(4), 805–838. https://doi.org/10.1086/726592

Sheppard, H. E. (2020). IRS introduces relief procedures for former U.S. citizens: Path to avoid the exit tax, income taxes, and penalties despite past non-compliance. Taxes; Riverwoods, 98(4), 31–42,52. https://www.proquest.com/docview/2390160853?sourcetype=Trade%20Journals

Whitlock, B. T. (2021). Making a gift tax return (check) list and checking it twice. Taxes; Riverwoods, 99(8), 19–22,35. https://www.proquest.com/docview/2555687274?sourcetype=Trade%20Journals

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ACC 330 Project One Guidelines and Rubric

Competency

In this project, you will demonstrate your mastery of the following competency:

• Prepare basic income tax returns that adhere to tax laws, regulations, and codes

Scenario

You have been hired as a junior accountant at a medium-sized tax and accounting firm. Your manager would like to understand your level of knowledge of preparing a basic tax return. She has provided several client profiles for you to review and would like you to complete a tax return. The firm has found it helpful for new tax professionals to choose which client’s tax return they’d like to work on in their initial weeks with the company.

Once you select the client you would like to work with from the Client Tax Profile A list found in the Supporting Materials section below, review the client’s current year tax package. Refer back to the Tax Organizer you prepared for your selected client in Project One Milestone Two. Determine what information must be used to prepare the client’s tax return.

Keep in mind some items provided by the client may not be required or applicable for the completion of the tax return you are working on. You may wish to utilize checklists or other guidelines found in the Supporting Materials section to assist you in preparing the client’s tax return.

Once the tax return is prepared, you will summarize the outcome of the tax return, including the decisions involved in completing the tax return. For example, you will want to identify how required income sources were determined, what relevant deductions were taken, what applicable credits were applied (if any), whether supplement forms were used, and the tax liability for the current tax year. You’ll also want to document the outcome of the return, such as whether the taxpayer(s) will obtain a refund or will incur an amount due for the tax year.

Directions

Specifically, you must address the following rubric criteria:

Part Two: Short Paper

1. Summarize how decisions made have impacted each section of the completed tax return. Include the following in your summary:
   1. How were required income sources determined?
   2. What relevant deductions were taken?
   3. What applicable credits were applied, if any?
   4. Were supplemental forms used?
   5. How was the correct tax liability calculated for the current year?
   6. How was the outcome of the return determined?
      

      Short Paper: Summary

What to Submit

Short Paper

• Submit a 1- to 2-page Word document with double spacing, 12-point Times New Roman font, and one-inch margins. Sources should be cited according to APA style. The title page and reference page are not included in the total page count requirement.

Supporting Materials

The following resources may help support your work on the project:

Resource: Client Tax Profiles A Description

Resource: Project One Resource Guide

Website: IRS