Question

Your clients, David and Charlene Thomas, (David is 65 and Charlene is 45) have hired you to complete their 2017 tax return (2017 tax year). They wish to pay the minimum amount of taxes possible in this tax year. Disregard AMT; BUT DO CONSIDER ALL OTHER available credits). They have provided you with the following information.         

General information

They reside in Austin, Texas at 555 Lookout Dr., zip 78725. Their SS numbers are 111-11-1111 and 222-22-2222 respectively. They provide the majority of the support and home for their two adopted children: Austin is a full-time student, son (age 10) and their daughter is Stephanie (age 19) graduated in June 2017 but has not been able to find/keep a full-time job. She earned a total of $5,500 in 2017 as a part-time office clerk and spent approximately 4 months visiting a friend in California. Their SS numbers are: 555-55-5555 and 333-33-3333, respectively. (All ages as of Dec 31, 2017)

They also provide 100% support for David’s 85 year old mother, Mary Thomas who has lived full-time (as a resident) in an apartment in San Jose, Mexico for several years. Mary has no other sources of income. (SS #777-77-7777)

Charlene’s mother, Hattie Hunter (age 76, widowed) lives near Charlene and David in her own apartment which Charlene pays for ($15,000 per year – including utilities). Her SS number is 666-66-6666. Except for $7,000 which Hattie received in Jan 2016 as an inheritance from her half-brother’s estate, she has no other source of income (assume she is a Canadian citizen does NOT qualify for U.S. social security/Medicare).

Charlene’s aunt died in January 2017 of cancer and she inherited a lump sum of $200,000 in life insurance proceeds which she invested in mutual stock funds and an interest-bearing cash account at Edward Jones – see below. She draws money from the account throughout the year to buy “things” for her family.

David’s grandmother died during 2017 and left him an antique diamond pendant. Its fair market value at the date of death was $17,000. He gave the ring to his daughter, Stephanie.

David won $2,800 from a Texas Lotto game. He paid $150 total for several tickets and retained the receipts. David lost gross $1,500 in a poker game in Las Vegas. He had no other winnings and has documentation.

Charlene received twelve monthly child support payments (for a total of $20,000) from her ex-husband Ralph Broke.

David’s information

David in a senior site manager for a young, growing construction firm. He received a W-2 for his wages of $130,000. HIS employer withheld $31,000 in Federal income tax on HIS salary. Assume his employer withheld the proper amount of FICA taxes.

David’s employer provides him with a $250,000 group term life insurance policy. The company provides all employees with this policy insurance policy equal to three times their annual salary or $250,000, whichever is less (assume that the taxable portion of this item was – incorrectly - not included in W-2 - and therefore will need to be added to “Line 7”) *Refer Pub 525 and/or IRS website for information on how to calculate any taxable portion.

David is eligible for a bonus this year. Based upon his performance in 2017 he will receive a $15,000 bonus. The bonus was paid in January 2018.

His firm does NOT reimburse him for any out of pocket expenses that he may incur. David is not covered by any retirement plan and does not wish to make the contribution to an IRA for 2017.

Charlene’s Information

Charlene uses her own name as the name of her company. She uses her social security number in lieu of an EIN.

Charlene is a cash basis, self-employed photographer with currently only two major commercial clients. She received two 1099-Misc forms (total receipts of $45,000) for photo shoots in 2017. She also received a payment of $8,000 in Feb. 2017 from a former client for a photo package sold in late Dec. 2016. She did not receive a Form 1099 for this amount.

Charlene works out of her home but does not have a specific “office in the house” as she typically does her office related work in the den or living room. She uses a “business use only” computer system that is fully depreciated. She incurred the following business related expenses during the year:

Printing/copying                                                                    $ 8,000

Legal & Agent fees                                                                    1,125

Office Supplies                                                                         5,750

Internet Service used 100% for her work                                      1,200

Postage/UPS                                                                              400

Premium for Insurance Policy (100% Business)                                175  

During 2017 Charlene purchased new 5 year equipment in July to use in her photography business. The cost of the equipment was $19,000. She does not elect to use Section 179, but wishes to maximize her depreciation deduction.

Addition information Interest Income:

Interest from a City of Boston bond (on 1099-INT) for $250

Interest from a AT&T bond (on 1099-INT) for $75

Interest from a savings account they hold jointly at Express Bank located in Windsor, Canada (no 1099-INT received) for $600 US. The savings account has a balance of $150,000 US in it at year end and represents David’s inherited funds (received in 2009) from his deceased father.

Edward Jones Money Market (on 1099-INT) for $10,600.

DO NOT FILE ANY FORMS RELATING TO FOREIGN ACCOUNTS

Dividend Income:

Charlene’s American Mutual Funds Account at Edward Jones (on 1099-DIV) for $6,600

Apple, Inc. stock. (on 1099-DIV) for $350. Charlene received the stock from her grandparents as a graduation present (college – May 1992). The value of the gift was $15,000 at that time and it has a current market value at the end of the year of $38,500.

Stock Transactions:

Dell, 15 shares sold, net sales proceeds from broker $5,500; date sold 03/1/2017. Basis $ 75 per share, date purchased 10/3/2011.

Clear Channel, 80 shares sold, net sales proceeds from broker $1,000; date sold 4/1/2017. Basis $105 per share, date purchased 12/10/2009.

(Assume IRS is notified of basis by broker and Box D is checked on Form 8949).

Rental Property

David and Charlene purchased a rental property in April 2014. It was placed in service that same month. For 2017 they had rental income of $24,000. The property’s address is 4506 Stassney, Austin Texas 78704

The expenses for the year were as follows:

Mortgage interest    (on Form 1098)                                                  $ 10,000

Real estate tax                                                                                   8,000

Repairs and maintenance                                                                   2,000

Insurance                                                                                       3,000

The purchase price of the property (building only for depreciation purposes) was $100,000.

Medical Expenses (unreimbursed portions)

Premiums for health insurance for the family                                       $10,800

(this is the portion David paid had to pay for the medical Plan provided

by his employer)

Premiums for health insurance for Hattie Hunter (Charlene’s mother)          4,500

Medicine and drugs (prescription)                                                          3,500

Eyeglasses                                                                                         1,500      

Other Unreimbursed “qualified” medical expenses paid by

the taxpayer – all relating to doctor care and a hospital stay

when Hattie fell and broke several bones, etc.                                       14,000

Mileage to & from a medical clinic in Houston -

475 miles on Dec 11, 2017: USE APPROPRIATE MEDICAL MILAGE RATE

Additional Interest Paid

Home Mortgage paid on Austin home paid to Country (on form (1098)      4,000

Home Mortgage paid on weekend house (paid to Regional) (on 1098)           3,000

Business Use Credit Card (100%) used by Charlene                                     500

Additional Taxes Paid

Real Estate Taxes - Austin home                                                        $ 8,800

Real Estate Taxes – weekend home                                                       1,200

Contributions (you have verified all dates as correct)

All “cash” and clients have all required receipts and required documentation. (all are IRS recognized non-profit organizations)

United Way of Austin (paid by credit card on 12/31/17).                                     $225

Salvation Army (check dated in 6/20/17)                                                        175

American Heart Association (check dated and mailed on 12/31/17

received “thank you” note is dated 1/12/18)                                                            500

First Baptist Church (paid by check dated 10/11/16; Church cashed in 2017)         700

First Baptist Church – paid by credit card on Nov 2017                                       1,500

Charlene volunteers at a local IRS qualified non-profit organization. This organization presented her with a $125 check this year in recognition for her “best fund-raising idea” – which netted the organization over $10,000 in additional funds. In addition, Charlene has receipts accounting for $800 out of pocket expenses she incurred during the year, all associated with events she attended on behalf (as a representative) of the organization. She wonders if these expenses are deductible as charitable contributions – if so deduct them.

Other/Miscellaneous

CPA fees

Income Tax preparation fees for 2016 tax return                                  $ 1,850                                     

assume 50% is related to Charlene’s Sch C)  

Amending the 2015 tax return,                                                               500

Amending their 2016 tax return in Nov 2017                                             600

Tax planning advice related to the 2017 tax year.                                      700

Agreed upon fee to prepare 2017 return in 2018 (to be paid in 2018)        2,000

Safe deposit box used 100% for storage of Hallie’s mementos                   125   

David’s Engineers Society dues and State license                                  1,150

David’s unreimbursed “work related” office supplies                              3,175   

David’s airfare to a one-day business meeting in New Orleans                  850

Interest paid on David’s student loan (got his master’s in 2014)                800

Child care Expenses

Paid for (son) Austin: Five Star After-School Care,

   Austin, TX ID# 05-3434567   (two days a week)                               $ 6,550

Estimated Taxes Paid (on time)

Paid $4,000 for each of the four quarters; total of $16,000.

If applicable, client would like any over-payment to be applied to 2017

Needed:   Your textbook, IRS Forms, and references such as Pub 17

PREPARE the couple’s joint tax return for 2017. Assume that they want to claim the maximum amount of deductions possible and pay the minimum amount of taxes.

Make sure to use the 2017 TAX RATES (posted on TRACS or the IRS
Website) rather than the TAX TABLES!!!!!!!   

                IGNORE ALL TAX CREDITS >>>>ALL OF THEM!!!!!

Turn in a manually prepared (NOT TYPED) tax return with all required schedules – use supporting working papers and/or schedules which can help explain your computations For example, if there is not enough lines to schedule out your totals, use a supporting schedule which shows how you arrived at the total. (You may use tax preparation software if you wish to double check your answers, but do not turn in tax software prepared forms – beware, tax software will consider tax credits).

Only attach IRS required forms and schedules. Points will be deducted for non-necessary forms or attachments. Except for the following - If any Sch A deductions are limited attach a worksheet showing the calculation of the limitation

Answer 1