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All numbers are for 2021 tax year. Kyle (44 years old) and Elise (39 years old) Terry have four children.
Kyle works for Virgin Galactic as a flight engineer and Elise is a freelance writer / editor. Their family is
covered by a qualified High Deductible Health Insurance Plan. Kyles gross base pay is $120,000 and
Elises net earnings from self-employment is $75,000. Their children are Jacob (16), Katie (14), Rachael
(12), and Luke (10).
For the current tax year, Kyle and Elise prepared for retirement. Kyles employer sponsors a profit
sharing plan and Elise utilizes a SEP IRA. Kyles employer contributes 14% of his gross pay to the profit
sharing plan. The profit sharing plan also includes a CODA (401(k)) option and Kyle contributed the
maximum amount allowed to the 401(k) plan. There is no match. Kyle pays the health insurance
premiums through his employers cafeteria plan, his portion of the health insurance premiums are
$7,000 per year. Kyle also contributed the maximum allowed amount to the HSA plan sponsored by his
employer.
In addition to his base pay, Kyle also had the following occur during the year:
1.
He exercised 1,000 incentive stock options. He received the options in 2018 and the strike price
was $1 per share. He exercised the options on January 1 of 2021 when the share price was $56
per share. He has not sold any of his stock shares.
2.
He received non-qualified stock options during the year. On January 1, 2021 he was awarded
500 options. On the day of the award the options had a strike price of $40 per share and the
share price was $56 per share. Kyle exercised all 500 options on January 2, 2021 when the share
price was $58 per share.
3.
Kyle and Elise sold a rental home during the year. They purchased the rental home for $120,000
in 2010. They had claimed $42,000 of depreciation. The adjusted basis of the rental home at the
Case Study 1 - Kyle and Elise Terry
time of sale was $105,000 due to improvement made. They sold the rental home for $225,000
on January 10, 2021.
Kyle and Elise also incurred the following expenses during the year: $4,000 in student loan interest;
$4,000 contribution to Utahs 529 plan ($1,000 for each child, Kyle lives in Georgia); State income taxes
of $15,000; property taxes of $5,000; mortgage interest of $10,000; and $1,000 to their university
alumni fund, and gave $300 worth of clothing to the Goodwill. Kyle and Elise also gave appreciated stock
to their church. Kyle is an avid investor and purchased Apple stock for $15 per share. He and Elise
donated 200 shares (basis $15/share, FMV at the time of gift $197/share) of Apple stock to their church.
Questions
What is Kyles and Elises tax liability? Please prepare Form 1040 and complete any supporting
documents.
Answer & Explanation
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