Alice Honeycutt, age 39, is a self-employed accountant. Alice’s Social Security number is 123–45–6789. Her address is 101 Glass Road, Hammond, LA 70402. Her income and expenses associated with her accounting practice for 2012 are as follows:
Revenues (cash receipts during 2012) $195,000
Expenses Salaries $ 97,000
Office supplies 3,200
Depreciation of equipment 45,000
Because Alice is a cash method taxpayer, she does not record her receivables as revenue until she receives cash payment. At the beginning of 2012, her accounts receivable were $52,000, and the balance had decreased to $25,000 by the end of the year. Alice used one room in her 10-room house as the office for her accounting practice (300 square feet out of a total square footage of 3,000). She paid the following expenses related to the house during 2012:
Property taxes 5,000
Alice had purchased the house on September 1, 2011, for $300,000 (exclusive of land cost). Alice has one child, Adolph, age 16. Adolph’s Social Security number is 123–45– 6788. Adolph lives with his father during the summer and with Alice for the rest of the year. Alice can document that she spent $16,000 during 2012 for the child’s support. The father normally provides about $10,000 per year, but this year, he gave Adolph a new car for Christmas. The cost of the car was $24,000. The divorce decree is silent regarding the dependency exemption for Adolph. Alice does not provide her former spouse with a signed Form 8332 for 2012. Under the terms of the divorce decree, Alice is to receive alimony of $8,000 per month. The payments will terminate at Alice’s death or at her remarriage. Alice provides part of the support of her father, age 67. Her father’s Social Security number is 123–45–6787. The total support in 2012 for her father was as follows:
Social Security benefits $5,200 From Alice 2,900 From Bob, Alice’s brother 2,200 From Susan, Alice’s sister 2,300
Bob and Susan have both indicated their willingness to sign a multiple support waiver form if it will benefit Alice. Alice’s deductible itemized deductions during 2012, excluding any itemized deductions related to the house, were $24,000. She made estimated tax payments of $29,000.
Part 1—Tax Computation
Compute Alice’s lowest net tax payable or refund due for 2012.
Part 2—Tax Planning
Alice and her former husband have been discussing the $8,000 alimony he pays her each month. Because his new wife has a health problem, he does not think he can afford to continue to pay the $8,000 each month. He is in the 15% tax bracket. If Alice will agree to decrease the amount by $1,000 each month, he will agree that the amount paid is not alimony for tax purposes. Assume that Alice projects that her marginal tax rate in 2013 will be 25% (both with and without the alimony decrease). Write a letter to Alice that contains your advice on whether she should agree to her former husband’s proposal. Also prepare a memo for the tax files