I am writing a financial letter for this case. I need help on how to explain how

Question

I am writing a financial letter for this case. I need help on how to explain how to do her income tax. I have to submit an example journal entry and explain it to said client in the case. Thank you in advance Ginger Wright is a 35-year-old single mother. She lives with her 10-year-old son, Joseph. In December 2014, Ginger and Joseph’s dad finalized their divorce. As part of the agreement, Ginger and her exhusband agreed to alternate claiming Joseph as a dependent. In the first year (2014), Ginger claimed the exemption. In 2015, Joseph’s dad is entitled to the exemption. During the year, both parents provided 50% of Joseph’s support. Ginger has custody of Joseph, and he lived with her 325 days during the year. The other 40 days he lived with his dad. Ginger paid all the expenses of her house. During 2015, Ginger started a new business. Because it was the first year, Ginger’s profit was relatively low. She had $100,000 of gross receipts and $95,000 of expenses for a net profit of $5,000. Her business profit was her only source of income. Ginger would like to know what she needs to do to give her ex-husband the dependency exemption. She also would like to know if she can still file as head of household and claim the child tax credit and the earned income tax credit. To maximize her tax benefits, Ginger is also wondering if she can choose not to deduct some of her expenses. She has heard that having a higher income can make her eligible for larger child tax and earned income tax credits.

Explanation / Answer

Q: 1 Ginger would like to know what she needs to do to give her ex-husband the dependency exemption.

Answer: To give her ex-husband the dependency exemption, she immediately wants to discharge the dependency exemption.

Q: 2 She also would like to know if she can still file as head of household and claim the child tax credit and the earned income tax credit.

Answer: She can still file as head of household and claim tax credit and earned income tax credit, since she is custodian during the year.

Q: 3 She has heard that having a higher income can make her eligible for larger child tax and earned income tax credits.

Answer: What she has heard is wrong. Higher income allows lower child tax credit and earned income tax credit. A tax payer with $15,000 or less adjusted gross income will get highest rate i.e. 35% for child tax credit and earned income tax credit. There is a provision to adjust the gross income for getting earned income tax credit.

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