Tax Return Problem Cases ACCT 440Spring 2016
Instructions: Use the relevant tax forms for your computations. You must download the relevant forms from the IRS website. Do not use tax software to prepare the returns. You need not complete the state tax returns. Make sure to include all the relevant supporting schedules for your federal return.
There are a total of five returns assignments. All five returns must be turned in no later than Monday, May 2 at 5:00 p.m. Please turn in the returns in one envelope to room JH 1111.
This is an individual assignment. You are not allowed to discuss or share the answers with any other student, friend, tax professional, colleague or a professor.
Tax Return 1:<\/p>\n
Lance H. and Wanda B. Dean are married and live at 431 Yucca Drive, Santa Fe, NM 87501. Lance works for the convention bureau of the local chamber of commerce, while Wanda is employed part-time as a paralegal for a law firm.
a. During 2014, the deans had the following receipts:<\/p>\n
Salaries ($60,000 for Lance, $41,000 for Wanda)
Interestincome\u2013 $101,000
City of Albuquerque general purpose bonds
$1,000
Ford Motor Company bonds
1,100
Ally Bank certificate of deposit
400 2,500
Child support payment from John Allen
7,200
Annual gift from parents
26,000
Settlement from Roadrunner Touring Company
90,000
Lottery winnings
600
Federal income tax refund (for tax year 2013)
400
Wanda was previously married to John Allen. When they divorced several years ago, Wanda was awarded custody of their two children, Penny and Kyle. (Note: Wanda was never issued a form 8332 wavier.) under the divorce decree, John was obligated to pay alimony and child support\u2013the alimony payments were to terminate if Wanda remarried.
In July, while going to lunch in downtown Santa Fe, Wanda was injured by a tour bus. As the driver was clearly at fault, the owner of the bus, Roadrunner Touring Company, paid for her medical expenses (including one-week stay in a hospital). To avoid a lawsuit, Roadrunner also transferred
$90,000 to her in settlement of the personal injuries she sustained.
The Deans has the following expenditures for 2014:
Medical expenses (not coveredbyinsurance) $7,200 Taxes-<\/p>\n
Property taxes on personal residence
$3,600<\/p>\n
State of new Mexico income tax (includes amount<\/p>\n
withheld from wages during 2014)
4,200
7,800
Interest on home mortgage<\/p>\n
6,000
Paid church pledge<\/p>\n
3,600
Life insurance premiums (policy on Lance\u2019s life)<\/p>\n
1,200
Contributions to traditional IRA (on Wanda\u2019s behalf)<\/p>\n
5,000
Traffic fines<\/p>\n
300
Contributions to the reelection campaign fund of the<\/p>\n
major of Santa Fe<\/p>\n
500
Funeral expense for Wayne Boyle<\/p>\n
6,300<\/p>\n
The life insurance policy was taken out but several years ago and designates Wanda as the beneficiary. As a part time employee, Wanda is excluded from coverage under her employer\u2019s pension plan.
Consequently, she provides for her own retirement with a traditional IRA obtained at a local trust company. Because the mayor is a member of the local Chamber of Commerce, Lance felt compelled to make the political contribution.
The Deans\u2019 household includes the following, for whom they provide more than half of the support:<\/p>\n
Social Security Number
Birth Date
Lance Dean (age 42)
123-45-6786
12\/16\/1972
Wanda Dean (age 40)
123-45-6787
08\/08\/1974
Penny Allen (age 19)
123-45-6788
10\/09\/1995
Kyle Allen (age 17)
123-45-6789
05\/03\/1997
Wayne Boyle (age75)
123-45-6785
06\/15\/1939<\/p>\n
Penny graduated from high school on May 9, 2014, and is undecided about college. During 2014, she earned $8,500 (placed in a savings account) playing a harp in the lobby if a local hotel. Wayne is Wanda\u2019s widower father, who died on January 20, 2014. For the past few years, Wayne qualified as a dependent of the Deans.
Federal income tax withheld is $5200 (Lance) and $3000 (Wanda). The proper amount of social security and Medicare tax was withheld.
Determine the Federal income tax for 2014 for the Deans on a joint return by completing the appropriate forms. They do not want to contribute to the Presidential Election Campaign Fund. All members of the family had health care coverage for all of 2014. If an overpayment results, it is to be refunded to them.<\/p>\n
Tax Return 2:
Logan B Taylor is a widow whose wife, Sara died on June 6, 2012. He lives at 4680 Dogwood Lane, Springfield, MO 65801. He is employed as a paralegal by a local law firm. During 2014, he had the following receipts:<\/p>\n
Salary<\/p>\n
$80,000
Interest income-<\/p>\n
City of Springfield general purpose bond
$3,000<\/p>\n
Money market account at Omni Bank
300<\/p>\n
Savings account at Boone State Bank
1,100
4,400
Inheritance from Daniel<\/p>\n
60,000
Life insurances proceeds<\/p>\n
200,000
Amount from sale of St. Louis lot<\/p>\n
80,000
Proceeds from estate sale<\/p>\n
9,000
Federal income tax refund (for 2013 tax overpayment)<\/p>\n
700<\/p>\n
Logan inherited securities worth $60,000 from his uncle, Daniel, who died in 2014. Logan also was the designated beneficiary of an insurance policy on Daniel\u2019s life with a maturity value of $200,000. The lot in St. Louis was purchased on May 2, 2009, for $85,000 and held as an investment. As the neighborhood has deteriorated, Logan decided to cut his losses and sold the lot on January 5, 2014, for $80,000. The estate sale consisted largely of items belonging to Sara and Daniel (e.g., camper, boat, furniture, and fishing and hunting equipment). Logan estimates that the property sold originally cost at least twice the
$9,000 he received and has declined or stayed the same in value since Sara and Daniel died.
Logan\u2019s expenditures for 2014 include the following:
Medicare expenses (including $10,500fordental) $11,500 Taxes\u2014
State if Missouri income tax (includes withholdingsduring2014) $3,200
Property taxes onpersonalresidence 4,500 7,700<\/p>\n
Interest onhomemortgage 4,600
Contributions to church (paid pledges for 2014and2015) 4,800<\/p>\n
Logan and his dependents are covered by his employer\u2019s health insurance policy for all of 2014. However, he is subject to a deductible, and dental care is not included. The $10,500 dental charge was for Helen\u2019s implants. Helen is Logan\u2019s widowed mother, who lives with him (see below). Logan normally pledges $2,400 ($200 per month) each year to his church. On December 4, 2014, upon the advice of his pastor, he prepaid his pledge for 2015.
Logan\u2019s household, all of whom he supports, includes the following:<\/p>\n
Social Security Number
Birth Date
Logan Taylor (age 48)
123-45-6787
08\/30\/1966
Helen Taylor (age 70)
123-45-6780
01\/13\/1944
Asher Taylor (age 23)
123-45-6783
07\/18\/1991
Mia Taylor (age 22)
123-45-6784
02\/16\/1992<\/p>\n
Helen receives a modest Social Security benefit. Asher, a son, is a full-time student in dental school and earns $4,500 as a part time dental assistant. Mia, a daughter, does not work and is engaged to be married.
Using the appropriate forms and schedules, compute Logan\u2019s federal income tax for 2014. Federal income tax of $5,500 was withheld from his wages. If Logan has any overpayment on his income tax, he wants the refund sent to him. Assume that the proper amounts of Social Security and Medicare taxes were withheld. Logan does not want to contribute to the Presidential Election Campaign Fund.
Tax Return 3:
Alice J. and Bruce M. Byrd are married taxpayers who file a joint return. Their Social Security numbers are 123-45-6789 and 111-11-1111, respectively. Alice\u2019s birthday is September 21, 1967, and Bruce\u2019s is June 27, 1966. They live at 473 Revenue Avenue, Lowell, MA 01850. Alice is the office manager for Lowell Dental Clinic, 433 Broad Street, Lowell, MA 01850 (employer identification number 98-765432). Bruce is the manager of a Super Burgers fast-food outlet owned and operated by Plymouth Corporation, 1247 Central Avenue, Hauppauge, NY 11788 (employer identification number 11-1111111)
The following information is shown on their Wage and Tax Statement (Forms W-2) for 2014.<\/p>\n
Lines
Description
Alice
Bruce
1
Wages, tips, other compensation
$58,000
$62,100
2
Federal income tax withheld
4,500
6,300
3
Social Security wages
58,000
62,100
4
Social Security tax withhold
3,596
3,850
5
Medicare wages and tips
58,000
62,100
6
Medicare tax withheld
841
900
15
State
Massachusetts
Massachusetts
16
State wages, tips, etc.
58,000
62,100
17
State income tax withheld
2,950
3,100<\/p>\n
The Byrds provide over half of the support of their two children, Cynthia (born January 25, 1990 Social Security number 123-45-6788) and John (born February 7, 1994, Social Security number 123-45-6786). Both children are full-time student and live with the Byrds except while they are away at college.
Cynthia earned $4,200 from a summer internship in 2014, and john earned $3,800 from a part-time job.
During 2014, the Byrds provided 60% of the total support of Bruce\u2019s widower father, Sam Byrd (Born March 6, 1938, Social Security number 123-45-6787). Sam lived alone and covered the rest of his support with his Social Security benefits. Sam died in November, and Bruce, the beneficiary of a policy on Sam\u2019s life, received life insurance proceeds of $800,000 on December 28.
The Byrds had the following expenses relating to their personal residence during 2014:<\/p>\n
Property taxes
$5,000
Qualified interest on home mortgage
8,700
Repairs to roof
5,750
Utilities
4,100
Fire and theft insurance
1,900
The Byrds had the following medical expenses for 2014:
Medicalinsurancepremiums $4,500
Doctor bill for Sam incurred in 2013 and not paiduntil2014 7,600
OperationforSam 8,500
Prescription medicinesforSam 900
Hospital expensesforSam 3,500
Reimbursement from insurance company, receivedin2014 3,600
The medical expenses for Sam represents most of the 60% that Bruce contributed toward his father\u2019s support.
Other relevant information follows:
o When they filled their 2013 state return in 2014, the Byrds paid additional state income tax of$900.
o During 2014, Alice and Bruce attended a dinner dance sponsored by the Lowell Police Disability Association (a qualified charitable organization). The Byrds paid $300 for the tickets. The cost of comparable entertainment would normally be$50.
o The Byrds contributed $5,000 to Lowell Presbyterian Church and gave used clothing (cost of $1,200 and fair market value of $350) to the Salvation Army. All donations are supported by receipts, and the clothing is in very goodcondition.
o In 2014, the Byrds received interest income of $2,750, which was reported onform 1099-INT from Second NationalBank.
o Alice employer requires that all employees wear uniforms to work. During 2014, Alice spend $850 on new uniforms and $566 on laundrycharges.
o Bruce paid $400 for an annual subscription to the Journal of Franchise Managementand
$741 for annual membership dues to his professional association.
o Neither Alice nor Bruce\u2019s employer reimburses for employeeexpenses.
o The Byrds do not keep the receipts for the sales taxes they paid and had nomajor purchases subject to salestax.
o Everyone in the Byrd family had health care coverage for all months of2014.
o Alice and Bruce paid no estimated Federal income tax. Neither Alice nor Bruce wants to designate $3 to the Presidential Election CampaignFund.
Compute net federal tax payable or refund due for Alice and Bruce Byrd for 2014. If they have overpaid, they want the amount to be refunded to them. If you use tax forms for your computation, you will need forms 1040 and 2106 and Schedule A and B.
Tax Return 4:
Beth R. Jordan lives at 2322 Skyview Road, Mesa, AZ 85201. She is a tax accountant with Mesa Manufacturing Company, 1203 Western Avenue, Mesa, AZ 85201 (employer identification number 11- 1111111). She also writes computer software programs for tax practitioners and has a part-time practice. Beth is single and has no dependents. Beth\u2019s birthday is July 4, 1972, and her Social Security number is 123-45-6789. She wants to contribute $3 to the Presidential Election Campaign Fund.
The following information is shown on Beth\u2019s Wage and Tax Statement (Form W-2) for 2014.<\/p>\n
Line
Description
Amount
1
Wages, tips, other compensation
$63,000.00
2
Federal income tax withheld
10,500.00
3
Social Security wages
63,000.00
4
Social Security withheld
4,030.00
5
Medicare wages and tips
63,000.00
6
Medicare tax withheld
942.50
15
State
Arizona
16
State wages, tips, etc.
63,000.00
17
State income tax withheld
1,954.00<\/p>\n
During the year, Beth received interest of $1,300 from Arizona Federal Savings and Loan and
$400 from Arizona State Bank. Each financial institution reported the interest income on Form 1099-INT. She received qualified dividends of $800 from Blue Corporation, $750 from Green Corporation, and
$650 from Orange Corporation. Each corporation reported Beth\u2019s dividend payments on form 1099-DIV.
Beth received a $1,000 income tax refund from the state of Arizona on April 29, 2014. On her 2013 Federal income tax return, she reported total itemized deductions of $8,200, which included
$2,200 of state income tax withheld by her employer.
Fees earned from her part-time practice in 2014 totaled $3,800. She paid $600 to have the tax returns processed by a computerized tax return service.
On February 8, 2014, Beth bought 500 shares of Gray Corporation common stock for $17.60 a share. On September 12, 2014, she sold the stock for $14 a share.
Beth bought a used sports utility vehicle for $6,000 on June 5, 2014. She purchased the vehicle from her brother-in-law, who was unemployed and was in need of cash. On November 2, 2014, she sold the vehicle to a friend for $6,500.
On January 2, 2014, she acquired 100 shares of Blue Corporation common stock for $30 a share.
She sold the stock on December 19, 2014, for $55 a share.
During the year, Beth records revenue of $16,000 from the sale of a software program she developed. She incurred the following expenditures in connection with her software development business.<\/p>\n
Cost of personal computer
$7,000
Cost of printer
2,000
Furniture
3,000
Supplies 650
Fee paid tocomputerconsultant 3,500
Beth elected to expense the maxim portion of the cost of the computer, printer, and furniture allowed under the provisions of \u00a7179. These items were placed in service on January 15, 2014, and used 100% in her business.
Although her employer suggested that Beth attend a convention on current developments in corporate taxation, she was not reimbursed for the travel expenses of $1,420 she incurred in attending the convention. The $1,420 included $200 for the cost of the meals. During the year, Beth paid $300 for prescription medicines and $2,875 for doctor bills and hospital bills. Medical insurance premiums were paid for her by her employer. Beth paid real property taxes of $1,766 on her home. Interests on her home mortgage were $3,845, and interest to credit card companies was $320. She contributed $30 each week to her church and $10 each week to United Way. Professional dues and subscriptions totaled
$350. Beth paid estimated Federal income taxes of $1,000<\/p>\n
Compute the net federal tax payable or refund due for Beth R. Jordan for 2014. You will need forms 1040, 2106-EZ, and 4562 and Schedule A, B, C, D and SE.
Tax Return 5:
Matthew B. (age 42) and Shelli R. (age 48) Thomson are married and live at 7605 Walnut Street, Kansas City, MO 64114. Matthew is a chemist employed by Sargent Pharmaceuticals, Inc., and Shelli is a self-employed doctor of anesthesiology. They are calendar-year, cash-basis taxpayers.
1. 1. Sargent Pharmaceuticals develops and produces injectable medicines used in chemotherapy treatments for cancer patients. Matthew manages the Kansas City facility for an annual salary of $90,000. Sargent makes contributions to a qualified defined contribution pension plan for all of its full-time employees. Although Matthew also has the opportunity to make contributions into the plan, he chose not to do so in 2013. Matthew participates in his employer\u2019s group health insurance plan to which he contributed $4,000 in 2013 for medical coverage. These contributions were made with after-tax dollars. The health plan covers Matthew, Shelli, and their two dependent children. Because of the risk associated with Matthew\u2019s work (i.e., processing of chemotherapy drugs), Sargent provides all of its employees with $200,000 of group term life insurance coverage. An additional $180 of income is included in Matthew\u2019s Form W\u20132 to report the taxable value of this insurance.
2. 2. In late 2012, three employees at Sargent\u2019s Chicago facility were seriously injured while processing a customer order. While the injuries occurred in what the company described as a \u201cfreak accident,\u201d Matthew began to look for a safer job in the chemical industry. He incurred the following expenses during 2013:
Employment agency fee $3,200
3. Vita consultation, preparation, and distribution 1,800
4. Expenses in connection with job interviews 4,100
5.
6. Matthew received several attractive offers but ultimately decided against changing jobs. Influential in his choice was a promotion to regional manager and a $20,000 pay raise (starting in 2014).
7.
8. 3. Sargent generally reimburses Matthew for expenses related to his work for the company. However, as a matter of policy, Sargent does not reimburse for the following:<\/p>\n
Monthly dinner sessions of the Midwestern chemists
Association (11 meetings in 2013) $825
Dues to professional organizations 240
Subscriptions to professional journals 180
MIA correspondence study course 230<\/p>\n
Each dinner involved the following costs: $40 (fee for speaker), $25 (price of meal), and $10 (parking). Matthew goes to the meeting from work and returns home the same night. The MIA (Management Institute of America) charge was for an online home study course on ways to improve safety measures and avoid accidents in the industrial workplace.
1.
2.
3. 4. Shelli Thomson is a board-certified doctor of anesthesiology. She provides anesthesiology services at a handful of hospitals and surgical centers in the greater Kansas City area on a part-time basis. Shelli is well respected by the surgeons with whom she works. She uses her home as her business address. She keeps her records there and otherwise conducts business (e.g., accepts surgery appointments, renders professional advice, and bills patients) on the premises. Because Shelli does not maintain a specific area for exclusive business use, she does not claim an office in the home for tax purposes. Shelli\u2019s receipts from her practice during 2013 were $245,000, $16,000 of which was for services performed in 2012. Not included in these amounts is $17,500 that she received in January 2014 for services rendered in December 2013. Shelli\u2019s professional activity code is 621111.
4.
5. Shelli had the following business expenses in 2013:<\/p>\n
Medical clothing (eg., lab coats, surgical scrubs) $2,200
Medical malpractice insurance 9,500
State medical license fee 450
Dues to professional organizations 350
Subscriptions to professional journals 340<\/p>\n
1. In addition, she drove the family Suburban (purchased on March 2, 2012) 2,900 miles in connection with her work. She uses the standard mileage method. Total mileage for the Suburban is 9,000 miles for the year.
2.
3. 6. Matthew\u2019s widowed mother, Lucy, suffered a stroke on December 30, 2012, and died in the hospital on February 3, 2013. Most of Lucy\u2019s medical expenses were covered by Medicare, with Matthew paying the rest. On February 18, 2013, he paid $9,800 to the hospital, half of which was attributable to expenses incurred in 2012. At the same time, Matthew also paid the funeral expenses of $16,000. Although Lucy lived in her own home prior to the stroke, Matthew and Shelli have properly claimed her as a dependent for the past few years.
4.
7. As Lucy\u2019s sole heir, Matthew inherited her home and its furnishings (located at 1420 Chickadee Lane, Topeka, KS 66546). The costs and values involved are as follows:<\/p>\n
Cost Basis FVM on 2\/3\/13
Lot $ 10,000 $ 30,000
House110,000 250,000
Furnishings 55,000 25,000
1.
2. Because the real estate market was depressed and the home was located in an attractive rental area, Matthew decided not to sell. Instead, he rented the property fully furnished on May 1, 2013. The terms of the lease (executed on April 30) provide for the following: one-year lease at $2,500 per month (payable on the first of each month), last month\u2019s rent payable in advance, and damage deposit of $3,000. In total, Matthew received $25,500 from the tenants in 2013 for their use of the property. Besides depreciation, his expenses were as follows:<\/p>\n
3. Property taxes $4,800
4. Insurance 3,900
5. Repairs 2,100
6. Real estate renter\u2019s location service 400
7.
8. Matthew plans to use MACRS straight-line depreciation (mid-month convention) for the realty. Regarding the personalty, seeExhibit 8.1 in chapter 8 of the text.
9.
10. 8. While walking the family dogs in late July, Shelli was struck by a delivery van and seriously injured. After being hospitalized for a week, she was released\u2014bruised and sore, but with no permanent injuries. The driver of the van was arrested and ticketed by the police for reckless operation of a vehicle and was later prosecuted for drug use. To prevent adverse publicity related to a lawsuit, the owner of the delivery service paid for Shelli\u2019s medical expenses and sent her a check on August 16, 2013, for $90,000. The check was accompanied by a letter that stated: \u201cThis $90,000 is a settlement for physical injuries sustained by Shelli Thomson.\u201d Shelli was represented in the negotiations with the delivery company by her brother, a practicing attorney. He did not charge the Thomsons for his services.
11.
12. 9. The Thomsons had the following property transactions during 2013:
1. a. On October 5, the City Council condemned unimproved land owned by Matthew for the construction of a fire station. He purchased the land (two vacant lots at 3400 and 3402 Sycamore Lane) as an investment on May 25, 2007, for $14,000. In exchange for the lots, the city gave Matthew a large unimproved lot at 440 Genoa Street that was valued at $20,000. All in all, he was satisfied with the exchange because the Genoa Street property is in a better neighborhood and has a greater potential for appreciation.
2. b. On November 22, Matthew sold a gun collection for $32,000 to an avid collector. The collection was a gift from Matthew\u2019s father on December 25, 2009, when it was worth $22,000. His father bought the collection in 1997 for $14,000. The sale was evidenced by a bill of sale.
3. c. On November 9, they sold 3,000 shares of Dove Pharmaceuticals for $2,000. The stock was purchased by the Thomsons on December 4, 2012, for $25,000. The investment was motivated by the rumor that Dove was developing a new drug for infertility. After the FDA failed to approve the drug, the Thomsons decided to cut their losses. Their broker provided them with a Form 1009\u2013B, which reported the gross proceeds from the sale and their basis in the stock.
13.
14. 10. The Thomsons have a long-term capital loss carryover of $1,500 from 2012.
15.
16. 11. In March 2013, the Thomsons were audited by the Missouri Department of Revenue for tax years 2010 and 2011. The audit proposed no changes for the 2010 tax return. However, the Thomsons were assessed $2,250 additional income tax for 2011 (no interest or penalties were included). The Thomsons agreed with the assessment and paid the $2,250 immediately.
17.
18. 12. During 2013, Matthew was called to serve on a jury. As a result of the service, he was paid $700 and incurred nonreimbursed expenses (e.g., parking) of $60. In conformance with company policy, Matthew remitted the $700 of fees to Sargent.
19.
13. Besides the items already noted, the Thomsons had the following receipts in 2013:<\/p>\n
Life insurance proceeds $50,000
2012 Missouri state income tax refund 450
Proceeds from garage sale 2,600
Interest income-
Kansas City general purpose bonds$480
Citibank certificate of deposit 600 1,080
1.
2.
3. The insurance proceeds relate to a policy on Lucy\u2019s life, which paid Matthew as the designated beneficiary. At the garage sale, the Thomsons sold personal items (e.g., camper, furniture, hunting and fishing equipment) that belonged to Matthew\u2019s father and mother (i.e., Lucy). Matthew and Shelli estimated that the items they sold had cost $7,100. The garage sale proceeds were donated to the Alzheimer\u2019s Association (a qualified charity) in memory of Matthew\u2019s father.
4.
5. 14. The Thomsons had additional expenditures for 2013 as follows:<\/p>\n
6. Dentist bills not covered by insurance $3,100
7. Ad valorem property taxes on personal residence 4,100
8. Interest on home mortgage 2,600
9. Contributions to Goodwill (a qualified charity) 3,600
10.
11. As part of a program sponsored by their church (a qualified charity), the Thomsons used the family Suburban to transport senior citizens to religious services for a total of 900 miles. The Suburban also was used for medical purposes (e.g., visits to an orthodontist) for 480 miles.
12.
13. 15. The Thomsons\u2019 household includes two dependent children: Ethan (age 15) and Bella (age 14), both of whom are full-time students. Relevant Social Security numbers follow:<\/p>\n
NameSocial Security Number
Matthew B. Thomson 111-11-1111
Shelli R. Thomson 123-45-6786
Lucy E. Thomson123-45-6787
Ethan M. Thomson123-45-6788
Bella A. Thomson123-45-6789<\/p>\n
1. 16. Matthew\u2019s Form W\u20132 from Sargent Pharmaceuticals reflects income tax withholdings of $6,500 (Federal) and $4,000 (state). The Thomsons made quarterly income tax payments of $20,000 (Federal) and $9,000 (state) for total payments of $80,000 (Federal) and $36,000 (state). They had their Federal income tax refund of $3,000 for 2012 applied toward their 2013 income tax.
Requirements<\/p>\n
Prepare an income tax return (with appropriate schedules) for the Thomsons for 2013, using the following guidelines:
\u00b7 * The Thomsons choose to file a joint income tax return.
\u00b7 * The Thomsons do not wish to contribute to the Presidential Election Campaign Fund.
\u00b7 * The Thomsons do not own any foreign bank accounts or other investments.
\u00b7 * The Thomsons want to apply any federal tax refund to their 2014 tax liability.
\u00b7 * The taxpayers are preparing their own return (i.e., no preparer is involved).
\u00b7 * For the past several years, the Thomsons have itemized their deductions from AGI instead of using the standard deduction. In addition, the Thomsons have deducted state income taxes (not sales taxes) for the past several years.
\u00b7 * The taxpayers have the necessary substantiation (e.g., records, receipts) to support all transactions reported in their tax return.
\u00b7 Make necessary assumptions for information not given in the problem but needed to complete the return.
TAX RETURN 6<\/p>\n
Carrie A. Morgan, age 45, is single and lives with her dependent mother at 426 Grouse Avenue, Allentown, PA 18105. Her social security number is 111-11-1111.<\/p>\n
1. Carrie is a licensed hairstylist and operates her own business. Located at 480 Laurel Street, Allentown, PA 18105, the business is conducted under the name of \u201cCarrie\u2019s Coiffures.\u201d Carrie\u2019s business activity code is 812112. In addition to 10 workstations (i.e., stylist chairs) and a small reception area, the shop has display and storage areas for the
products Carrie sells (see item 2 below). During the year, Carrie leased nine of the stations to other hairstylists. As is common practice in similar businesses in the area, the other stylists are considered to be self-employed. In fact, the IRS sanctioned the self-employment classification for the stylists in an audit of one of Carrie\u2019s prior tax returns. Each stylist pays Carrie a fixed rent for the use of a workstation, resulting in
$68,000 of rents received during 2012. From her own station, Carrie earned $44,000
(including tips of $12,000) for the styling services she provided to her own clients.<\/p>\n
2. Carrie\u2019s Coiffures is the local distributor for several beauty products (e.g., conditioners,
shampoos) that cannot be purchased anywhere else. Carrie buys these items from the
manufacturers and sells them to regular patrons, walk-in customers, and other
beauticians (including those who lease chairs from her). Carrie\u2019s Coiffures is also
known for the selection and quality of its hairpieces (i.e., wigs, toupees). Through the
shop, Carrie made the following sales during the year:<\/p>\n
Hairpieces and wigs $69,000
Beauty products 48,000<\/p>\n
3. Although Carrie operates her business on a cash basis, she maintains inventory
accounts for the items she sells as required by law. Relevant information about the
inventories (based on lower of cost or market) is summarized below.
4.
12\/31\/11 12\/31\/12
Hairpieces and wigs $10,700 $12,600
Beauty products 11,400 9,900<\/p>\n
5. Carrie\u2019s purchases for 2012 were $30,500 of hairpieces and wigs and $26,100 of beauty
products.<\/p>\n
6. Carrie\u2019s Coiffures had the following operating expenses for 2012:<\/p>\n
Utilities (i.e., gas, electric, telephone) $12,900
Ad valorem property taxes:
On realty (e.g., shop building and land) $4,200
On personalty (e.g., equipment, inventory) 1,800 6,000
Styling supplies (e.g., rinses, dyes, gels, hair spray) 5,700
Fire and casualty insurance 4,100
Liability insurance 4,000
Accounting services 3,800
Janitorial services 2,400
Sewer service, garbage pickup $ 2,300
Water 2,200
Occupation licenses (city and state) 1,500
Waiting room supplies (e.g., magazines, coffee) 1,300
7. As Carrie prefers to avoid employer-employee arrangements and the payroll tax
complexities, she retains outside agencies to handle her accounting and janitorial
needs.<\/p>\n
8. In early 2012, Carrie decided to renovate the waiting room. On May 10, she spent
$10,400 for new chairs, a sofa, various lamps, coffee bar, and other furnishings. Carrie
follows a policy of claiming as much depreciation as soon as possible. The old
furnishings were thrown away or given to customers. For tax purposes, the old
furnishings had a zero basis.<\/p>\n
9. Carrie\u2019s Coiffures is located in a building Carrie had constructed at 480 Laurel Street in
March 1998. The shop was built for a cost of $300,000 on a lot she purchased earlier
for $35,000. Except for a down payment from savings, the cost was financed by a 20-
year mortgage. For tax purposes, MACRS depreciation is claimed on the building.
During 2012, the following expenses were attributable to the property:<\/p>\n
Repainting (both exterior and interior) $8,000
Repairs (plumbing and electrical) 1,900<\/p>\n
10. In May (after her accident settlement discussed in item 11 below), Carrie paid the
balance due on the business mortgage. To do so, she incurred a prepayment penalty of
$4,400. Prior to paying it off, she paid regular interest on the mortgage in 2012 of
$6,000.<\/p>\n
11. In February 2012, Carrie\u2019s Coiffures was cited by the city for improper disposal of
certain waste chemicals. Carrie questioned the propriety of the proposed fine of $2,000
and retained an attorney to represent her at the hearing. By pleading nolo contendere,
the attorney was able to get the fine reduced to $500. Carrie paid both the fine of $500
and the attorney\u2019s fee of $600 in<\/p>\n","protected":false},"excerpt":{"rendered":"
Tax Return Problem Cases ACCT 440Spring 2016 Instructions: Use the relevant tax forms for your computations. You must download the relevant forms from the IRS website. Do not use tax software to prepare the returns. You need not complete the Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-82748","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/82748","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=82748"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/82748\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=82748"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=82748"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=82748"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}