Reference no: EM13519913

60. Mason R. and Lily B. Hill, married and ages 34 and 32, live at 2240 Poplar Drive, Apt. 12, Louisville, KY 40241. Their Social Security numbers are 123-45-6789 and 123-45-6788, respectively.
• Although trained as a nurse, Lily does not have time to hold a job. She spends a great deal of time caring for her paternal grandparents, the Bakers, both of whom are infirm. The Bakers are adamant about continuing to live in their home and refuse to consider moving to an assisted living facility. Also, they are unwilling to hire "outsiders" as care providers. In a show of gratitude for Lily's efforts, they have named her the sole heir in their wills and have granted her survivorship rights in their investment assets (e.g., bank accounts and stocks and bonds).
• Mason is employed as the regional sales manager for BYLO, a national chain of budget clothing stores. His annual salary of $60,000 is supplemented by an expense allowance of $30,000. Under BYLO's arrangement, the expense allowance is treated as additional income to Mason, and he does not have to render any accounting as to the use of the funds. Past experience, however, indicates that all (or more) of the allowance will be spent on job-related expenses. Mason has elected out of BYLO's contributory § 401(k) retirement plan but is covered by its noncontributory medical insurance.
• At the convenience of BYLO, Mason maintains an office and storage space in his apartment. Of the 1,600 square feet of living space, one-fourth is devoted to this purpose.
The storage area comprises one whole room and is used to store various merchandise samples that Mason sends to selected store managers or takes with him on business trips. The remaining business use is devoted to office space (e.g., desk, file cabinets, and equipment). Information regarding Mason's apartment cost is summarized below.
Annual rental $12,000
Utilities 3,600
Renter's insurance 1,100
Janitorial service 1,200
The janitorial service is provided under a contract with the local agency of a national service. (Mason has no responsibility for payroll taxes as to the persons performing the service.) The renter's insurance policy premium of $1,100 includes a $500 rider that specifically covers items (e.g., copier, computer, and office furniture) used in
Mason's business.
• On March 2, 2012, Mason purchased a new copier/printer for $550. At the same time, he purchased a file cabinet for $3,800. The cabinet is fireproof and has a sophisticated electronic security feature. Mason wants to write off these acquisitions as soon as possible. All of Mason's other office furnishings are fully depreciated. Other expenditures in connection with the operation of the office are as follows:
Postal and delivery charges $260
Stationery and supplies 310
Telephone and conference calls 540 Tax Return Problem

• Besides the items already noted, Mason had the following job-related expenses during 2012:

Airfare $5,600
Lodging 2,800
Meals 3,100
Entertainment 1,800
Taxis, limos 400
Business gifts (does not include shipping charge) 800
Most of the entertainment expense involved business lunches during which Mason was able to discuss company policy and resolve various local problems with the manager of the BYLO store he was visiting. The business gifts were $50 gift cards to a national steak house sent to 20 managers of the top-performing stores. The $50 cards (which cost Mason only $40) were mailed prior to Christmas, and for security purposes, a $5 per card shipping charge included certified mail delivery.

• Mason used his automobile (a 2011 Chevrolet Impala) for different purposes. The mileage driven during 2012 was as follows:

Mileage Allocation
Purpose 1/1-6/30 7/1-12/31
Personal 2,000 2,100
Business 9,000 6,000
Mason has always used the automatic (standard) mileage method in accounting for his car usage for tax purposes. Parking and tolls in connection with business mileage were $420.
• Very distressed over his lack of pay increases and his career path, Mason looked into other employment opportunities during 2012. He contacted his college's job placement service to obtain advice on securing a better position in the same field. This led to a cash outlay of $3,300 for travel, interviews, and biographical data. The results were disappointing. Nevertheless, he did receive one promising offer that he is considering.
The offer is described in Part 2 of this problem. For the time being, however,
Mason remains an employee of BYLO.

• In addition to those previously discussed, the Hills had the following receipts during 2012:

Interest income-
Premier Credit Union (savings account) $1,900
Wells Fargo Bank certificate of deposit 900
City of Memphis (general purpose bonds) 1,700 $4,500
Federal income tax refund 1,000
Rental deposit refund-Cardinal Apartments 1,200
Manufacturer's rebate 400
The income tax refund involved 2011 Federal taxes that they had overpaid. After several years of haggling, the Hills managed to recover the damage deposit they had made on the apartment they rented before moving to their current location. In 2011, when the Hills bought a new refrigerator/freezer for personal use, they received a mail-in coupon that provided a discount from the manufacturer. They received the $400 rebate in early February 2012.

• The Hills's other expenditures for 2012 appear below.

Dental bills $3,500
State income tax 110
Interest paid on car loan 600
Contribution to mayor's reelection campaign 50
Payment of annual church pledge 600
Premiums on life insurance 900
The dental bills were for crowns and bridges that Mason needed-the BYLO health insurance does not cover dental procedures. The state income tax was for $110 the
Hills still owed when they filed their 2011 return in 2012. The insurance premiums were for a policy covering Mason's life issued by Prudential Insurance Company, with
Lily as the designated beneficiary.
Part 1-Tax Computation
Using the appropriate forms and schedules, compute the Hills's Federal income tax for 2012. Assume that the proper amount of Social Security and Medicare taxes were withheld.
Disregard the alternative minimum tax (AMT) as it is not discussed until Chapter 12 in the text. Income tax withholdings for 2012 were $6,800 (Federal) and $3,600 (State of Kentucky.) The Hills do not want to contribute to the Presidential Election
Campaign Fund. Also, they want any overpayment of taxes refunded to them and not applied toward next year's tax liability. Suggested software: H&R BLOCK At Home.
Part 2-Follow-Up Advice
One of the offers Mason received during his job hunting efforts contained the following conditions:

• Annual salary of $65,000.

• No expense allowance, but the company will pay directly or reimburse for all employmentrelated expenses (including office in the home and business mileage but not any job hunting expenses).
• Mason must render an adequate accounting to the new employer as to the expenses involved, and any excess reimbursement must be returned.
Based on the job description he received, Mason estimates that the expenses involved in the new job will be comparable to those of his current position.
Although Mason is disappointed that the new salary is only $5,000 more than he currently receives, he has been told that some savings will occur due to the new expense account arrangement.
Mason requests your advice on this matter. Write a letter to him explaining how much he will benefit taxwise if he takes the new job. In making your comparison, assume that the 2012 tax rules apply (e.g., tax rates, amount of personal exemption, and standard deduction).