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INDIVIDUAL TAX RETURN PROBLEM 5
Required:
Use the following information to complete Paul and Judy Vance's2014 federal income tax return. If information is missing, usereasonable assumptions to fill in the gaps.
You may need the following forms and schedules to complete theproject: Form 1040, Schedule A, Schedule B, Schedule C, Schedule D,Schedule E, Schedule SE, Form 2106-EZ, Form 4562 (for the dentalpractice), Form 4562 (for the rental property), Form 4797, Form8863, and Form 8949. The forms, schedules, and instructions can befound at the IRS website (www.irs.gov). The instructions can behelpful in completing the forms.
Facts:
Paul J. and Judy L. Vance are married and file a joint return.Paul is self-employed as a dentist, and Judy is a collegeprofessor. Paul and Judy have three children. The oldest is Vincewho lives at home. Vince is a law student at the University ofCincinnati and worked part-time during the year, earning $1,500,which he spent for his own support. Paul and Judy provided $6,000toward Vince's support (including $4,000 for Vince's fall tuition).They also provided over half the support of their daughter, Joan,who is a full-time student at Edgecliff College in Cincinnati. Joanworked part-time as an independent contractor during the year,earning $3,200. Joan lived at home until she was married inDecember 2014. She filed a joint return with her husband, Patrick,who earned $20,000 during the year. Jennifer is the youngest andlived in the Vances' home for the entire year. The Vances provideyou with the following additional information:
Paul and Judy would like to take advantage on their return ofany educational expenses paid for their children.
The Vances do not want to contribute to the presidentialelection campaign.
The Vances live at 621 Franklin Avenue, Cincinnati, OH45211.
Paul's birthday is 3/5/1957 and his Social Security number is333-45-6666.
Judy's birthday is 4/24/1960 and her Social Security number is566-77-8888.
Vince's birthday is 11/6/1991 and his Social Security number is576-18-7928.
Joan's birthday is 2/1/1995 and her Social Security number is575-92-4321.
Jennifer's birthday is 12/12/2002 and her Social Security numberis 613-97-8465.
The Vances do not have any foreign bank accounts or trusts.
Judy is a lecturer at Xavier University in Cincinnati, where sheearned $30,000. The university withheld federal income tax of$3,375, state income tax of $900, Cincinnati city income tax of$375, $1,860 of Social Security tax and $435 of Medicare tax. Shealso worked part of the year for Delta Airlines. Delta paid her$10,000 in salary, and withheld federal income tax of $1,125, stateincome tax of $300, Cincinnati city income tax of $125, SocialSecurity tax of $620, and Medicare tax of $145.
The Vances received $800 of interest from State Savings Bank ona joint account. They received interest of $1,000 on City ofCincinnati bonds they bought in January with the proceeds of a loanfrom Third National Bank of Cincinnati. They paid interest of$1,100 on the loan. Paul received a dividend of $540 on GeneralBicycle Corporation stock he owns. Judy received a dividend of $390on Acme Clothing Corporation stock she owns. Paul and Judy receiveda dividend of $865 on jointly owned stock in Maple Company. All ofthe dividends received in 2014 are qualified dividends.
Paul practices under the name "Paul J. Vance, DDS." His businessis located at 645 West Avenue, Cincinnati, OH 45211, and hisemployer identification number is 01-2222222. Paul's gross receiptsduring the year were $111,000. Paul uses the cash method ofaccounting for his business. Paul's business expenses are asfollows:
Advertising
1,200 $
Professional dues
490
Professional journals
360
Contributions to employee benefit plans
2,000
Malpractice insurance
3,200
Fine for overbilling State of Ohio for work performed on welfarepatient
5,000
Insurance on office contents
720
Interest on money borrowed to refurbish office
600
Accounting services
2,100
Miscellaneous office expense
388
Office rent
12,000
Dental supplies
7,672
Utilities and telephone
3,360
Wages
30,000
Payroll taxes
2,400
In June, Paul decided to refurbish his office. This project wascompleted and the assets placed in service on July 1. Paul'sexpenditures included $8,000 for new office furniture, $6,000 fornew dental equipment (seven-year recovery period), and $2,000 for anew computer. Paul elected to compute his cost recovery allowanceusing MACRS. He did not elect to use §179 immediate expensing, andhe chose to not claim any bonus depreciation.
Judy's mother, Sarah, died on July 2, 2009, leaving Judy herentire estate. Included in the estate was Sarah's residence (325Oak Street, Cincinnati, OH 45211). Sarah's basis in the residencewas $30,000. The fair market value of the residence on July 2,2009, was $155,000. The property was distributed to Judy on January1, 2010. The Vances have held the property as rental property andhave managed it themselves. From 2010 until June 30, 2014, theyrented the house to the same tenant. The tenant was transferred toa branch office in California and moved out at the end of June.Since they did not want to bother finding a new tenant, Paul andJudy sold the house on June 30, 2014. They received $140,000 forthe house and land ($15,000 for the land and $125,000 for thehouse), less a 6 percent commission charged by the broker. They haddepreciated the house using the MACRS rules and conventionsapplicable to residential real estate. To compute depreciation onthe house, the Vances had allocated $15,000 of the property's basisto the land on which the house is located. TheVances collected rentof $1,000 a month during the six months the house was occupiedduring the year. They incurred the following related expensesduring this period:
Property insurance
$500
Property taxes
800
Maintenance
465
Depreciation (to be computed)
?
The Vances sold 200 shares of Capp Corporation stock onSeptember 3, 2014, for $42 a share (minus a $50 commission). TheVances received the stock from Paul's father on June 25, 1980, as awedding present. Paul's father originally purchased the stock for$10 per share in 1967. The stock was valued at $14.50 per share onthe date of the gift. No gift tax was paid on the gift.
Judy is required by Xavier University to visit several highschools in the Cincinnati area to evaluate Xavier Universitystudents who are doing their practice teaching. However, she is notreimbursed for the expenses she incurs in doing this. During thespring semester (January through April 2014), she drove herpersonal automobile 6,800 miles in fulfilling this obligation. Judydrove an additional 6,700 personal miles during 2014. She has beenusing the car since June 30, 2013. Judy uses the standard mileagemethod to calculate her car expenses.
Paul and Judy have given you a file containing the followingreceipts for expenditures during the year:
Prescription medicine and drugs (net of insurancereimbursement)
376 $
Doctor and hospital bills (net of insurance reimbursement)
2,468
Penalty for underpayment of last year's state income tax
15
Real estate taxes on personal residence
4,762
Interest on home mortgage (paid to Home State Savings &Loan)
8,250
Interest on credit cards (consumer purchases)
595
Cash contribution to St. Matthew's church
3,080
Payroll deductions for Judy's contributions to the UnitedWay
150
Professional dues (Judy)
325
Professional subscriptions (Judy)
245
Fee for preparation of 2013 tax return paid April 12, 2014
500
The Vances filed their 2013 federal, state, and local returns onApril 12, 2014. They paid the following additional 2013 taxes withtheir returns: federal income taxes of $630, state income taxes of$250, and city income taxes of $75.
The Vances made timely estimated federal income tax payments of$1,500 each quarter during 2014. They also made estimated stateincome tax payments of $300 each quarter and estimated city incometax payments of $160 each quarter. The Vances made allfourth-quarter payments on December 31, 2014. They would like toreceive a refund for any overpayments.
Paul and Judy have qualifying insurance for purposes of theAffordable Care Act (ACA).
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