Tax Cuts and Jobs Act of 2017
THE CASE
Cordell Hayward and Claudia Jansen are partners in a small, boutique accounting firm, C&C CPAs, LLP. After working for a Big 4 public accounting firm for several years, they decided fifteen years ago to start their own firm. Over time, they have built up a sizeable clientele of individual and private company clients. Their firm is located in Cleveland, Ohio, and most of their clients are local. They do have several out of state clients, mainly individuals who have moved out of the area but continue to have C&C prepare their tax returns.
Following the passage of the Tax Cuts and Jobs Act of 2017, C&C has been fielding a lot of questions from their clients about what the new law will mean for their taxes. Cordell and Claudia have been following the legislation for several months, but now that the Act has been signed, they realize that they need to be able to provide solid answers to their clients.
As clients are beginning to send in their 2017 tax information, Cordell and Claudia have decided to select a few of their clients and prepare their taxes under both the old and new tax laws. They’ve chosen clients with a range of personal situations, which they expect will give them a clearer picture of the impact of the new legislation.
The clients Cordell and Claudia selected are:
- Mark and Mary Watson, a couple with two adult children
- Jason and Jocelyn Pederson, a couple with two young children
- Renata Cruz, a young, single woman with no children
- Darryl Hubbard, a single father of three children
Mark and Mary Watson
Mark and Mary Watson (age 56 and 58, respectively) are empty-nesters who reside outside of Houston, Texas in a master-planned community named The Woodlands.Their two children, Michael (age 23) and Martha (age 22) have graduated from college and they both live and work in Dallas.While the Watsons miss having their children at home, they are enjoying their newfound financial freedom. They have started thinking about retirement and possibly relocating to their favorite vacation destination, Hilton Head Island, South Carolina, for their golden years. The Watsons have been responsible savers and have more than enough money in their 401(K) accounts to enjoy a comfortable retirement.
Mary is the operations manager of Hook’em Forever (an S Corporation for tax purposes), a Houston-based marketing firm, and is very active in the business. Two years ago, Mary was also presented with a 2% ownership stake in Hook’em Forever as a reward for being with the company for 25 years. She started her career in the Cleveland office of the firm, then transferred to the main Houston office several years ago. Mark is a financial analyst for Buzz Energy, a Houston-based energy company. Mark and Mary first retained the services of C&C CPAs when they lived in Cleveland, and have continued to work with them since moving to Texas.
During 2017, Mary earned a salary of $174,000 from her position at Hook’em Forever. Additionally, her share of Hook’em Forever’s ordinary income was $25,000. Mark earned a salary of $129,000 from Buzz Energy. Although both Mark and Mary graduated from college with business degrees, they are not overly active with making investments. They contribute to the to their employer-sponsored 401(K) accounts, but do not have any other sources of income. In 2017, both Mark and Mary contributed the maximum amount to their 401(k)s, including the catch-up contribution for taxpayers over the age of 50.
The Watsons purchased their current home in 2009 for $450,000. To purchase the home, they took out a $360,000, 30-year fixed-rate mortgage.In 2017, they paid $9,650 in mortgage interest and $10,400 in property tax on the house. They also paidapproximately $1,900 of sales tax on their purchases during the year. In 2014, the Watsons took out a home equity loan of $75,000 to pay for a major kitchen renovation in their home. They paid $1,200 in home equity interest in 2017. The Watsons donated $2,000 to the business school at their alma mater.
Jason and Jocelyn Pederson
Jason and Jocelyn (age 35 and 34, respectively) Pederson met in college and lived in downtown Cleveland for several years before getting married and moving to the suburbs. After a few years of enjoying the quiet life, the Pedersons decided to start a family. Their daughter, Emma, was born in 2014. They recently welcomed their second child, Ethan, to the family in July, 2017. The Pedersons live in Bainbridge, Ohio.Bainbridge is a beautiful, somewhat rural setting located about 45 minutes southeast of Cleveland. They are considering moving to a larger home closer to the home office of Jason’s employer, Private Capital Advisors, Inc., a private equity advising company located in Akron, Ohio. Jason’s mother is good friends with Claudia Jansen, andhe and Jocelyn have been clients of C&C CPAs for about 10 years.
During 2017, Jason earned a salary of $325,000 from his position at Private Capital Advisors, Inc. Jocelyn was an elementary school teacher before Emma was born, but has since decided to be a stay at home parent until Ethan reaches kindergarten age. Jason and Jocelyn have some investments which earned $4,750 of qualified dividends and $420 of interest income in 2017.
The Pedersons purchased their current home in Bainbridge in 2011 for $525,000 and took out a $400,000, 30-year fixed-rate mortgage to acquire the residence. In 2017, the Pedersons paid $12,250 in mortgage interest. The real estate taxes on their current home are $9,180 per year. Jason had $10,160 of Ohio income tax withheld from his paycheck.
The Pedersons are very active with their church and contributed $5,150 in 2017. They also contributed $1,000 to join the booster club at nearby Erie State University. The Pedersons are big football fans, and Erie State has one of the top football programs in the Midwest. Membership in the booster club gives them the right to purchase tickets for home games.
Renata Cruz
Renata Cruz graduated from Bayshore University in California four years ago, with a degree in graphic design. Since then, she has been working in marketing in San Francisco. She has been struggling a bit financially, so when a position opened up with a well-respected design firm in her native Cleveland, she decided moving back to the Midwest made a lot of sense. Her parents still live there, as do several of her high school friends, and the cost-of-living is much lower than in California. She got the job, and moved to Ohio in May of 2017. She expects the move will help her get a more solid financial foundation before she gets older and wants to start a family.
Renata generally prepares her own taxes, but she is a feeling a little nervous this year, with the move, splitting the year between California and Ohio, and all the talk she’s been hearing about new tax laws. Her parents have been clients at C&C CPAs for many years, and suggested she have them prepare her returns this year.
Renata is 26 years old, and single with no children. In 2017, she earned a salary of $12,000 from her old job in California and $32,000 from her new job in Ohio. She also received dividend income of $800 from some stock her parents gave her when she was a child. For the last few years, she has been steadily paying off the loans she took out to pay her tuition at Bayshore University. In 2017, her payments totaled $5,500, of which $2,600 was for interest.
As part of the new job offer, the firm committed to reimburse Renata up to $5,000 for her moving expenses. She kept all of her receipts, and submitted the following:
Packing and transportation of household goods $4,500
Hotel stays while she drove her car from CA to OH 480
Meals during the trip 140
Security deposit for her new apartment 1,000
Fees to get an Ohio driver’s license and plates 60
She also tracked her mileage. She drove 2,500 miles from San Francisco to Cleveland. Renata was reimbursed the full $5,000.
During 2017, Renata paid dues of $200 to the American Association of Graphic Design and $180 to the Ohio Graphic Arts Society, two professional associations for designers. She also paid $400 for a continuing education workshop she attended, and $100 for a subscription to Design Weekly. None of these costs were reimbursed by her employer.
Renata makes regular contributions to the Humane Society of $50 per month. Before moving, she donated $500 worth of clothing and household items to Goodwill. In January of 2017, she paid $150 of personal property tax to the state of California for her car for the prior year. She had $230 withheld from her California salary for state taxes, and $740 withheld from her Ohio salary. She did not pay any other state or local income tax.
Darryl Hubbard
Darryl Hubbard (age 46) has been a client of C&C CPAs for several years. His wife, Kim, was a CPA and always prepared their tax returns herself. She passed away in 2011, and Darryl found he needed some help with the taxes. He had met Cordell Hayward several times at professional events he attended with Kim, and he decided to engage C&C to prepare his returns starting in 2012. Darryl is a high school chemistry teacher in Beachwood, Ohio, a suburb of Cleveland. He has three children— Dwayne, Devin, and Kallie.
Dwayne is 20 years old and a sophomore at Buckeye University in Cincinnati, Ohio. He lives on-campus with two roommates during the school year, but comes home during breaks. He had a summer job in 2017 and earned $4,500, which he uses for personal expenses like clothes and going out with friends. Darryl pays Dwayne’s tuition, room, and board. Dwayne expects to graduate in the spring of 2020 with a degree in computer science. Devin is 16 years old and a high school student. He plays football and will probably get a scholarship to go to college when he graduates. Kallie is 10 years old and in 5th grade.
Beachwood is one of the highest-paying school districts in Ohio, and having taught in the district for over 20 years, Darryl earns a salary of $86,000. Though the school covers most of the costs for supplies in his classroom lab, he sometimes has to spend his own money for extras, like a classroom subscription to an online chemistry simulation website that his students use to run experiments they can’t do in the classroom. He estimates that he spent $600 on supplies this year. Darryl frequently stays after school to help students, prepare lessons, and grade papers. Devin also stays late for football practice, and even though Kallie is very mature for her age, Darryl isn’t comfortable with her being home alone after school. Her elementary school provides after-school care for students, and Kallie goes there until Darryl picks her up on his way home. He paid $4,500 for after-school care in 2017.
Darryl paid $6,250 of interest for the mortgage on their home in 2017, as well as $4,140 in property taxes. He and Kim bought the house in 2007, taking out a 30-year fixed-rate mortgage for $200,000. He had $2,980 withheld from his salary for state and municipal income taxes. He had to pay a small additional amount, $160, to the state when he filed his 2016 taxes in April. He paid C&C CPAs $1,500 for preparing his 2016 returns. He also makes a regular monthly donation of $150 per month to the Boys & Girls Clubs of Cleveland.
In August, Darryl was in a car accident on his way home from work. No one was hurt, but his car, a 2012 Lincoln Navigator, was totaled. According to Kelley Blue Book, the car was worth $22,000, but unfortunately the insurance company only reimbursed him for $12,000. He bought the Navigator for $30,000 in 2013.
MEMO QUESTIONS
The memo portion of this assignment is an INDIVUAL assignment. You should not discuss the memo with anyone other than the professor or graduate assistant without requesting permission. It is appropriate to use and cite sources for this memo if you feel it is necessary.
How does the Tax Cuts and Jobs Act of 2017 impact their tax situation? And many people who opposed the Tax Cuts and Jobs Act (the Act) argued that it is unfair to lower and middle income taxpayers, even though most taxpayers will pay less tax under the new rules. Explain their reasoning. Do you agree or disagree?
Additional Details for Memo Assignment
Memo should be one to two pages.Remember to use a professional tone and format as this is a letter to a client that presumably is paying for your services.The memo should clearly describe the differences in their tax situation under old and new tax law. For example, the memo would discuss the new flow-through income deduction in regards to a taxpayer’s income from a flow-through entity such as a partnership or S-corporation. While it is not necessary to discuss all four clients in the memo, selection of fewer (including one) client requires additional details about the transactions that had different tax treatment. It is acceptable to select all four clients and discuss specific transactions without reference to the specific taxpayer. For example, the memo could discuss that tax rate decreases result in a decreased tax liability without discussing specific client and tax numbers.
The memo should be completed individually by each group member and submitted separately. A hard copy of the memo is due in class on Tuesday April 24. Electronic and late submissions will not be accepted.
