Question

Joseph P. Smith and his wife Gladys G. Smith are married and file a joint return for 2016. Joseph’s social security number is 499-99-4321 and he is 44 years old. Gladys social security number is 637-44-9876 and she is 43 years old. They live at 1502 Seaman Court,

Flemington, NJ 08822.

Mr. Smith is a construction worker employed by LLL Construction.

His form W-2 from LLL Construction showed the following:

                                    Wages                                     $42,000

                                    Withholding (federal)                 4,500

The Smiths have a 17-year old son, Jackson, who is enrolled in the eleventh grade at Flemington Perpetual Catholic School. Jackson’s social security number is 669-90-0099. The Smiths also have an 18-year old daughter, Lois, who is a full-time freshman at Oceanside Community College (OCC). Lois’s social security number is 669-90-0100. Mr. and Mrs. Smith also have full custody of Joseph’s nephew, Larry Loser (social security number 664-66-6688) who is 18 years old and a part-time student at OCC. All three of the children live at home, and Joseph and Gladys pay the majority of expenses for Jackson, Lois, and Larry (none of the children work).

Joseph and Gladys have the following investment income for 2016:

            Interest from the Trustworthy Savings Bank              $651

            Dividends (qualified) Seaside Bank stock                      150

            Dividends (qualified) Seaside Gas Company stock        260

            Dividends (non-qualified) Hot Mutual Fund                              45

            Interest on NJ State Municipal Bonds                            750

            Interest on Seaside Electric Company Bonds                675

Joseph went to the local casino and won $3800 playing the slot machines. The next day he decided to go back to the casino and unfortunately he spent (lost) $1550 that day.

One of Gladys friends died during the year and Gladys received $10,000 in life insurance proceeds.

In July, Joseph’s aunt died and left him a piece of real estate (undeveloped land) worth $65,000.

Five years ago, Joseph and Gladys were divorced. Joseph married Suzy Sunshine

(SS# 020-22-2222), but the marriage did not work out and they were divorced a year later. They had a child while married, Sara Sunshine (social security number 555-50-5588, age 7). Under the divorce decree, Joseph has to pay Suzy $18,000 per year until Sara reaches age 18 at which time the payment is reduced to $12,000 per year. Three years ago, Joseph and Gladys were remarried.

During 2016, Joseph spent $250 on safety glasses, $150 on steel toed work boots, $100 on a reflective vest to use while directing traffic, and $300 on jeans that he wears to work. He also spent $2250 on tools that he uses for work. LLL Construction gave him $1000 to use to purchase a demolition saw (not part of the $2250 spent on tools, and not included in his paycheck).

Joseph is tired of working in construction and went back to school, part time, in January. He spent $3600 on tuition to the local community college and has a 1098-T supporting that expense. He has never been enrolled in higher education prior to this time. He paid for the tuition using a student loan.

Gladys was laid off from her job on January 2, 2016 and received unemployment compensation of $12,000 during 2016.

Joseph and his family are covered under a health insurance plan provided by LLL Construction, and LLL pays $300 per month and Joseph pays $250 per month for this plan (the $250 is deducted pre-tax from Joseph’s paycheck). During the year, Gladys had an emergency appendectomy; the total bill was $22,500, the insurance covered $18,000 and Joseph and Gladys paid the remainder.

On September 1, 2016 Gladys took a job as a medical transcriptionist and works from home. She does her work on the dining room table. The house is 2000 square feet, and the dining room is 400 square feet. Her income and expenses follow:

            Income (paid on a 1099-Misc)                                                $19,050

            Home office expenses (direct)                                               $2600

            Home office expenses (indirect, but not allocated)               $12,000

            Office expenses                                                                          1,380

            Computer supplies                                                                         800

            Telephone                                                                                     300

            Faxes (sent from Staples)                                                              250

            Internet service                                                                              480                      

In addition to the above items, Gladys incurred travel expenses to attend a seminar on medical transcription. She spent $1200 on airfare, $750 on lodging, $325 on a rental car, and $560 on meals. Gladys has documentation for these expenses.

Gladys drove her 2014 Land Rover 2,845 miles for business related purposes, and the vehicle was driven a total of 8,646 miles during the year. Gladys uses the standard mileage rates and has substantiation for the mileage.

In July, Joseph loaned a fried $5,000 to purchase a car. His friend lost his job in 2016 and has not made any payments on the loan. He plans to start making payments again, however, with additional interest as soon as he has new employment.

Joseph and Gladys paid the following in 2016 (all by check or can otherwise be substantiated):

            Contributions to Flemington Perpetual Catholic Church                               $2600

            Tuition to the Flemington Perpetual Catholic School (for Jackson)               5,000

            Clothes to the Salvation Army (10 bags in good condition)                              275

            Contributions to George Kerry’s Congressional campaign                               250

            Psychotherapy for Gladys                                                                                  1,000

            Eyeglasses for Jackson                                                                                       375

            Prescription medication and drugs                                                                  1,850

            Credit card interest                                                                                           1,345

            Interest on Glady’s student loans                                                                      3,125

            Investment interest on stock margin account                                                   345

            Auto loan interest                                                                                              900

            Auto insurance                                                                                                   1,600

            Dave Deduction, CPA, for preparation of last year’s tax return                       200

            Safe deposit rental for storage of stocks and tax data                                     100

            Contribution to educational savings account for Jackson                                 1,000

            Home mortgage interest                                                                                   6,910

            Home property (real estate) taxes                                                                    4,400

           

In June, a hurricane destroyed a large shed on their property. The insurance company paid $6500 to replace the shed, but Joseph built a new shed himself for $1800.

Joseph’s grandfather died and left a portfolio of municipal bonds. In 2016 Joseph received $20,000 in tax-free interest (ignore AMT tax calculations).

On July 14, Joseph and Gladys purchased a second house to use as a rental property. They paid $130,000 for the property (the land value, included in the $130,000, is $30,000). They collected rent of $8000 during the year, and paid real estate taxes of $2600, mortgage interest of $1600, repairs of $750, and $600 advertising the property for rent.

Joseph owned 1,000 shares of Really Huge Airline stock with a basis of $30 per share. The stock was purchased six years ago on June 10. Joseph sells 500 shares of Really Huge Airline stock to his uncle Geovanni and 500 shares to his sister Pristine for $5 per share on December 31, 2016. The market price of Really Huge Airline stock on December 31, 2016 was $35 per share.

Joseph purchased 5 acres of raw land in Speculator, NY, 10 years ago. His basis in the land was $90,000. On August 1, 2016 he sold the land for $150,000.

On May 15, 2016 Joseph and Gladys sold their personal residence for $585,150 and purchased a new house for $485,000. They had owned the old house for 5 years and Gladys had inherited it when her mother passed away. Her mother had paid $17,000 for it when she purchased it many years ago, and it had a market value of $525,000 when she passed away) The house had been their personal residence ever since Gladys mother passed away. They moved into the new house on May 18, 2016.

Joseph sold the following securities during the year and received a 1099-B that showed the following information:

Security                       Description      Purchased       Sold                 Selling Price    Adjusted Basis

Orange Inc.                 100 shares       02/11/97         04/16/16         $3,080             $4,550

Blue, Inc.                     100 shares       07/17/01         07/31/16         $2,000             $3,600

Red (Preferred)           100 shares       12/08/15         09/25/2016     $8,975             $10,510

Plum (Bonds)               due 4/2015      12/30/05         01/02/2016     $5,155             $5,320

Peach Mutual Fund     5,010 shares    05/30/06         10/22/2016     $60,120           $56,480

The selling price is net of sales commissions. In addition to the above amounts, the Hot Mutual Fund distributed a long-term capital gain of $450 on December 30, 2016.

To do:

Using the information above, complete the 1040 form for Joseph and Gladys including all additional forms and schedules. You may use tax software or can access the required forms on the IRS.gov website. Please use 2016 forms.

Answer 1

Joseph P. Smith and his wife Gladys G. Smith are married and file a joint return for 2016.

Joseph’s social security number is 637-44-9876 and he is 43 years old. Gladys social security

number is 637-44-9876 and she is 43 years old. They live at 1502 Seaman Court,

Flemington, NJ 08822.

Mr. Smith is a pharmacist employed by the LLL Constriction.

His form W-2 from the Flemington Pharmacy showed the following:

Wages $42000

Withholding (federal) 4500

The Smiths have a 17-year old son, Jackson, who is enrolled in the eleventh grade at

Flemington Perpetual Catholic School. Jackson’s social security number is 669-90-0099. The

Smiths also have an 18-year old daughter, Lois, who is a Full-time freshman at Oceanside

Community College (OCC). Lois’s social security number is 669-90-0100, and she is married

to Larry Loser (social security number 664-66-6688) who is 18 years old and also a part-time

student at OCC. Lois and Larry have a 1-year old son, Lucky Loser (social security number

664-66-6689). Lois, Larry and Lucky live with Joseph and Gladys. Lois and Larry work Full-

time in 2016; Joseph and Gladys pay the majority of expenses for Jackson, Larry and Lucky.