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Apply the rules associated with inclusions and exclusions to an individual’s gross income and apply another set of code rules to determine a taxpayer’s AGI.

Note: Completing a tax form requires specific steps that need to be executed in a sequence. The assessments in this course are presented in a sequence and must be completed in order. Incorrect entries in previous assessments will result in incorrect entries in future assessments. Do not complete Assessment 3 until you have submitted and received faculty feedback for Assessment 2.

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Introduction

“I don’t know what to do or where to turn in this taxation matter. Somewhere there must be a book that tells all about it, where I could go to straighten it out in my mind. But I don’t know where the book is, and maybe I couldn’t read it if I found it.”

Warren G. Harding, the 29th President of the United States, 19211923.

About now, you may be nodding your head in agreement with President Harding’s quote about the complexity of the tax code, with its many inclusions and exclusions. What started out as a simple document, designed to raise capital to make the new nation independent from the British Empire, has evolved over the centuries and decades into a complex maze of rules and regulations.

Nowhere is that more pronounced than in the rules for including and excluding income in the calculation of a taxpayer’s adjusted gross income (AGI) for income tax purposes. Gross income is commonly defined as the amount of a company’s or a person’s income before all reductions, except that which is specifically excluded by the Internal Revenue Code, before taking deductions or taxes into account. Since not all of an individual’s personal income is subject to taxation, one must crack open the voluminous tax codebook to discover exclusions from the tax collector’s grasp.

Understanding the ever-changing rules for including and excluding income in the calculation of a taxpayer’s adjusted gross income (AGI) for income tax purposes is a skill that is developed through practice.

Note: The assessments in this course are presented in a sequence and must be completed in order. In Assessments 25, you will work step-by-step toward completing a 1040 tax return and all the necessary related forms, based on a provided scenario. Do not complete Assessment 3 until you have submitted and received faculty feedback for Assessment 2. Incorrect entries in Assessment 2 affect the entries in Assessment 3.

Preparation

For this assessment, use information and publications from reading list to determine the adjusted gross income (AGI) for Jacob and Taylor Weaver, based on the provided scenario.

The primary purpose of the Internal Revenue Service is to raise revenue for the government. However, the U.S. Congress has chosen to exempt certain income from taxation, such as scholarships, gifts, life insurance proceeds, municipal bond interest, and employee fringe benefits.

Scenario

Jacob and Taylor Weaver, ages 45 and 42 respectively, are married and are filing jointly in 2021.

• They have three children, Ashley, age 9; Patrick, age 6; and John, age 17.
  • Social Security numbers are: Jacob, 222-33-4444; Taylor, 555-66-7777; Ashley, 888-99-1234; Patrick, 789-56-4321; John, 123-45-6789.
• Taylor works part-time as a paralegal.
  • She earned $31,000 in 2021.
• Income Taxes: $4,200 withheld.
• Interest received from Local Bank: $6,575.
• Estimated tax payments: $25,000.
  • $350 paid with their 2020 state tax return.
• Jacob and Taylor bought their first house in 2021.
  • Home mortgage interest: $12,246.
  • Property tax: $12,230.
• Federal income withholding: $2,350.
• Charities: $4,500.
• $435 to rent a moving truck.
• $8,000 to put new siding on the house.
• $11,600 for child care expenses ($5,800 for each child).
  • It was paid to Lil Tigers Daycare, 1115 S. Garrison St., Muncie, IN 47305 (EIN 98-7654321).
• Taylor is a part-time student at Ball State University in Muncie.
  • She received a 1098-T indicating tuition and fees for 2021 in the amount of $6,011.
• Health insurance for the family, through Taylor’s job, cost $7,500 for all 12 months of 2021.
  • They paid deductibles and co-payments of $2,550.

Instructions

Complete the following:

• Read the information in the scenario below.
• Download the appropriate forms and publications from IRS.gov.
• Enter information from Assessment 2, Schedules C and SE, into the 1040 form.
• Apply the rules for adjustments to adjusted gross income.
  • Enter applicable information from the scenario into the 1040 form.
  • Interpret official rules and instructions to record correct entries on the tax form.
• Calculate the AGI for the Weavers.
• Submit the tax form.

Competencies Measured

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

• Competency 2: Analyze the basics of individual income tax return preparation.
  • Analyze official rules and instructions to correctly calculate deductible self-employment taxes.
  • Interpret official rules and instructions to record correct entries on tax forms.
  • Apply rules and instructions to correctly compute AGI for the year.

Analyze official rules and instructions to complete a Schedule C and related required tax forms, to reflect income and deductions related to self-employment as a sole proprietor.

Note: Completing a tax form requires specific steps that need to be executed in a sequence. The assessments in this course are presented in a sequence and must be completed in order. Incorrect entries in previous assessments will result in incorrect entries in future assessments. Do not complete Assessment 2 until you have submitted and received faculty feedback for Assessment 1.

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Introduction

“The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

Ronald Reagan.

If an individual is searching for a tax strategy to offset his or her income from a primary job, being self-employed on the side is quite possibly one of the best options, along with being a real estate property owner or an investor. Each of these has the advantage of allowing an individual to reduce current income by any losses suffered from freelancing, renting out a property, or investing.

However, the individual takes on additional work for the filing process. Schedule C must be completed, a task that requires an individual to know much more about the tax rules for recognizing income and maximizing expenses than many persons are willing to invest the time to research.

The use of Schedule C is required when the individual’s business is not incorporated or formed as a partnership or limited liability company.

Note: The assessments in this course are presented in a sequence and must be completed in order. In Assessments 25, you will work step-by-step toward completing a 1040 tax return and all the necessary related forms, based on a provided scenario. Do not complete Assessment 2 until you have submitted and received faculty feedback for Assessment 1.

Preparation

Calculating correct entries for self-employment requires significant research. For those are who self-employed, entries from self-employment tax forms are necessary to complete the 1040 form.

For this assessment, use information and publications from reading list to research the regulations and complete the appropriate self-employment schedules, based on the provided scenario.

Scenario

Jacob Weaver is a contractor operating as a sole proprietorship (EIN 12-3456789). 2021 Gross income: $278,322.25.

• Business expenses:
  • Fuel for equipment $64,080.00
  • Repairs and maintenance $17,342.00
  • Lubricants for Equipment $9,670.00
  • Insurance $6,500.00
  • Wages $6,300.00
  • Vehicles $1,768.00
  • Legal and Professional Expenses $1,750.00
  • Taxes and Licenses $1,412.00
  • Advertising $300.00
• Clients owe him a total of $53,000, for work completed in 2021.
• 2021 estimated tax payments were $25,000.
• He is using a bedroom in his house as a home office. (Square footage of home 5,600 Office 240 sq. ft.)

Instructions

Complete the following:

• Read the information provided in the scenario above.
• Download the appropriate forms and publications from IRS.gov to complete this assessment.
• Complete the entries on tax forms required for a sole proprietorship return.
• Analyze official rules and instructions to correctly compute SE tax and SE deduction.
  • 1040sc.
  • 1040sse.
• Determine eligible business deductions.
• Interpret official rules and instructions to record correct entries on tax forms.
• Submit the tax forms

Competencies Measured

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

• Competency 1: Analyze the background of the federal income tax system.
  • Analyze official information to identify tax forms required for a sole proprietorship.
• Competency 2: Analyze the basics of individual income tax return preparation.
  • Analyze official rules and instructions to determine eligible business tax credits.
  • Analyze official rules and instructions to determine eligible deductions.
  • Analyze official rules and instructions to correctly compute SE tax and SE deduction.
  • Interpret official rules and instructions to record correct entries on all tax forms.

Analyze official rules and instructions to determine an individual’s tax liability and complete a basic tax return.

Note: Completing a tax return requires specific steps that need to be executed in a sequence. The assessments in this course are presented in a sequence and must be completed in order. Incorrect entries in this assessment will result in incorrect entries in future assessments. Do not complete Assessment 2 until you have submitted and received faculty feedback for Assessment 1.

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Introduction

Using an official primary source to obtain answers to tax questions is an essential academic skill and step toward financial literacy. In this assessment you will consult the primary sources available to all citizens from the IRS to identify rules such as the age limit of a dependent child, the amount of earnings that trigger a filing requirement, and whether or not tax software is necessary to purchase for every return.

Note: The assessments in this course are presented in a sequence and must be completed in order. Do not proceed to Assessment 2 until you have submitted and received faculty feedback for Assessment 1.

Preparation

This assessment has two parts.

• Part 1: Submit a Word document in which you analyze official rules and instructions to determine an individual’s tax liability.
• Part 2: Submit a completed basic tax form.

Scenario

Read the following scenario before beginning the assessment. Then complete the two parts below.

Your relatives, Jacob and Taylor Weaver, have asked for your help in completing their tax return because they know you took an income tax course at Capella. You caution them that while you plan on eventually becoming an accountant, you are no expert. You agree to informally assist them with basic information gleaned from the IRS Web site. At least you know how to find information.
John Weaver, Jacob and Taylor’s son, is a 17-year-old high school graduate, lives at home, and works part-time at a service station, saving money for college. In 2021, he earned $5,242.00, as reported on his W-2 form. Federal taxes withheld were $940; state taxes withheld were $179.
He does not know his filing status, or if he even has to file a tax return. He is covered by his parents’ health insurance. His father thinks he can claim John as a dependent. John has no other income. John’s Social Security number is 123-45-6789. His address is 1234 Happy Lane, Happytown, MN 50000.

Instructions

Part 1: Provide evidence of requirements for John’s tax return from an official primary resource.

Use reading list tools to find answers to the following tax questions. Copy and paste answers to these questions from the IRS resources into a Word document for submission.

• What is John’s filing status?
• Is John required to file a tax return? Determine requirements for mandatory filing of a return.
• Is John a dependent?
• What is the simplest tax form to use for John? Use information from an official primary source to select a tax form.
• How much would John have to pay to file his return electronically?

Part 2: Complete John’s tax return.

• Download the most appropriate form from IRS.gov and complete a tax return for John. Show all calculations in the Word document.
  • Analyze official rules, instructions, and tax tables to determine the tax owed.
  • Analyze official rules, instructions, and tax tables to determine the amount of a refund.

Competencies Measured

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

• Competency 1: Analyze the background of the federal income tax system.
  • Provide evidence of requirements for a tax return from an official primary source.
  • Determine whether filing a return is mandatory for a scenario.
  • Determine filing status.
  • Determine filing cost for an e-return.
• Competency 2: Analyze the basics of individual income tax return preparation.
  • Analyze official rules, instructions, and tax tables to determine the tax owed.
  • Analyze official rules, instructions, and tax tables to determine the amount of a refund.
• Competency 4: Communicate in a manner that is professional and consistent with expectations for members of the business professions.
  • Communicate in a manner that is professional and consistent with expectations for members of the business professions.