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From the information below, prepare the federal tax return for William and Joyce Jones. Attach to your return a statement describing how you treated each of the items listed 1 through 24 below.

 

The taxpayers live at 4400 Massachusetts Ave, in Washington, D.C. 20016. William is 53, and Joyce is 51. William is a manager for ABC Corporation, a firm that manufactures and distributes widgets. Joyce is a self-employed author of children’s books. The Jones have three children, Will, 21, Dan, 19, and Tom, 16. In February of this year, the Jones provide the following basic information for preparing their prior year federal income tax return.

 

  • They are on the cash method of accounting and their return is due April 15.
  • They wish to minimize their tax by deferring income and accelerating deductions when possible.
  • Joyce’s social security number is 471-42-5207.
  • William’s social security number is 150-52-0546.
  • Will Jr’s social security number is 372-46-2611.
  • Dan’s social security number is 377-42-3411.
  • Tom’s social security number is 375-49-6511.
  • The taxpayers do not wish to contribute to the presidential election campaign and have no interest in foreign trusts.

    •  

    1.William’s W-2 consists of the following

     

    BOX 1 – Wages                                                                                         $140,000

    2 – Withholding                                                                                             22,000

    12c – Group term life insurance in excess of $50,000                                       100

    12d – Contribution to 401(k) plan                                                                  7,000

     

       

    1. The taxpayers received the following interest payments:

    XYZ Bank of Bermuda ($20,000 balance)                                                    $700

    New York State Bonds ($20,000 face)                                                          600

    New York City Bonds ($20,000 face)                                                                       1,000

    Puerto Rico Bonds ($20,000 face)                                                                 500

    Ford Motor Bonds ($20,000 face)                                                                  600

    $120 of back-up withholding was paid to the IRS from the $600 payment.
     
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    1. Joyce and her brother are co-workers of, and active participants in, a furniture-restoration business. Joyce owns 30 percent, and her brother owns 70 percent of the business. The business was formed as an S corporation and paid a dividend of $4,800 to Joyce. The basis of Joyce’s stock is $31,000. Joyce’s share of the corporation’s income for the year was $5,000 and her share of the corporation’s §179 election was $500.

      2.  

    2. The Jones’s received a federal income tax refund of $1,217 on May 12. On May 15, they received a refund from the District of Columbia for $900 which they had deducted on the preceding year’s return.

      3.  

    3. Joyce is the lucky caller to a local radio station and wins a tablet. She has not received a 1099-MISC, but in announcing the prize, the radio station host said that the manufacturer’s suggested retail price for the tablet is $525. However, Joyce has a catalog from Radio Shack that advertises the tablet for $450.

      4.  

    4. The Jones’ receive a Form W-2G for their winnings at a local casino showing gross winnings of $5,000 and $1,200 of withholding tax. Joyce knows she lost at least $6,000 at the casino during the year.

      5.  

    5. Joyce is active in the school PTA. During the year, she receives an award (a plaque and a $100 gift certificate that were donated to the PTA by local merchants) for outstanding service to the organization.

      6.  

    6. As a freelance writer, Joyce incurs costs associated with preparing a manuscript for which she does not yet have a contract. During the year, Joyce makes 4 business trips, each 3 days long, to meet with various publishers. For shorter trips that are closer to home she either drives or takes the train and returns on the same day. In December, Joyce receives an advance on her next book. Under the contract, Joyce is scheduled to begin work on the book the following February, and must have it completed by November. The taxpayers have 2 telephone lines in their home with Joyce having a separate phone number for her business. The information on Joyce’s business is listed below.

      7.  

     
    Royalties: West Publishing                                         $4,000

    Publishers Advance                                                    $5,200

    Office Supplies                                                           $200

    Train Tickets                                                               $800

    Airfare (4 trips)                                                           $2,500

    Lodging (12 nights)                                                    $3,000

    Meals (12 days)                                                           $700

    Telephone ($100 monthly fee per phone line)            $2,400

    Parking Tickets                                                           $200

    Interest on Auto                                                          $300
     

       

    1. In January, Joyce purchases a used car for $15,000 to use in her business. Joyce pays $2,200 in cash and finances the balance through the dealer. During the year, she drives a total of 5,000 miles, 2,000 of which are for business that she has properly documented. She pays $200 for insurance and $500 for gasoline.

      2.  

    2. Joyce’s office is located in a separate room of the house and occupies 250 square feet. The total square footage of the house is 2,500. The taxpayers purchased the home in 1999, for $70,000, with approximately 20 percent of the purchase price allocated to the land. The total household expenses for the year are as follows

    Heat                                                                            $2,000

    Insurance                                                                     $1,500

    Electricity                                                                    $700

    Repairs to kitchen                                                       $3,000

    Cleaning                                                                      $1,000
     

       

    1. William began work on his MST at American University. He enrolled in two courses and payed $3,200 in tuition and $260 for books.

      2.  
      12.William and Joyce each contribute the maximum to their respective IRA accounts for the year. The IRA account is Joyce’s only retirement vehicle. In addition, William and Joyce contributed $2,000 to a Coverdell Education Savings Account for Tom.
       

       

    1. In June, the taxpayers’ 2012 station wagon is totaled during a hurricane. The car was purchased for $28,700. The taxpayers received a check for $21,200 from the Insurance Company that represents the fair market value of the car minus a $750 deductible and they replace the car with a new car costing $31,400.

      2.  

         

      1. The taxpayers incurred the following medical expenses before receiving $700 reimbursement from their health insurance policy

       
      Medical premiums                                                       $7,000

      Doctors                                                                       $5,000

      Chiropractor                                                                $1,000

      Dentist                                                                        $2,000

      Vet Fees (family dog Sandy)                                      $500

      Prescription drugs                                                       $3,000

      Over-the-counter drugs (aspirin, cough syrup)           $500

       
      In addition, William purchases a back brace for $700, recommended by his chiropractor, to help strengthen his back muscles.

         

      1. The taxpayers pay the following property taxes

        2.  
        House                                                                          $9,000

        William’s car (ad valorem)                                          $500

        Joyce’s car (ad valorem)                                             $700
         

        1. The taxpayers receive two form 1098s for the interest paid on bank loans. They also pay interest on their personal credit cards.

         

        Bank of America 1098 (4400 Mass Ave)                   $9,000

        Sun Trust 1098 (Home Equity)                                   $4,000

        Sear’s                                                                          $200

        Bank of America Mastercard                                      $150

         

        The proceeds from the home equity loan were used to renovate their kitchen and pay for Tom’s tuition at private school. The interest on the portion of the loan used for private school tuition is $1,000.
         

        1. The taxpayers have receipts showing cash contributions to the United Way ($2,000), American University ($3.000), and their local church ($1,000). They also donate the following property to the Salvation Army, at High Street in Washington, D.C., on July 15

         

        Property FMV (self-appraised) Original Cost Date Acquired
        Antique Table $400 $225 1/4/02
        Dishwasher $100 $700 5/6/06
        Sofa Bed $200 $800 3/14/08
        1. The taxpayers incur the following expenses
        Type Amount
        Prior year tax preparation fee (paid in current year) $900
        Safety deposit box $50
        Investment journals $400
        Investment advice $1,200
        Business publication (William) $700

         

        1. The taxpayers made the following estimated tax payments

         

        Date Federal D.C.
        April 15 $300 $1,000
        June 15 $300 $1,000
        September 15 $300 $1,000
        January 15 $300 $1,000

         

        1. The taxpayers paid $7,000 in tuition, $800 for books, and $6,000 for room and $5,000 for board for Will Jr., a junior, to attend American University. They also paid $8,000 is tuition, $700 in books, and $5,000 in board for Dan, a freshman at American.

          2.  

        2. In February, William inherits his father’s summer home that has a FMV of $540,000 at the date of his father’s death. His parents had purchased the house in 1975 for $135,000 and made $75,500 worth of capital improvements to it. Twenty percent of the total value of the property is attributable to land. Because William and Joyce ultimately would like to use the property as a vacation home, they decide to rent it out. William actively participates in the management of the property. The property is first advertised for rent on March 1, but is not rented until April 15. William provides the following income and expense information for the property

         

        Rent                                                                $20,000

        Repairs                                                            $6,000

        Management fee                                             $4,000

        Property taxes                                                 $10,000

        Insurance                                                         $3,000

        In addition, in March William buys a new stove for $2,000 and a new refrigerator for $1,000.
         

        1. The taxpayers receive Form 1099-B totaling $41,000 from Fidelity for the sale of several securities. The selling price listed is net of brokerage commissions and represents the amount the taxpayers receive from the sale.

         

        Stock Date Acquired Date Sold

        (all sales in current year)

        		 Sale Price Purchase Price
        150 shares Pfizer Corporation 5/12/90 8/15 $6000 $ *
        300 shares Texas Instruments 7/30/95 10/25 $17,000 $ 7,000
        50 shares Alcoa 6/10/07 10/23 $500 $2,000
        25 shares Luminent 4/28/Current Year 9/4 $900 $2,000
        60 shares Textron 9/11/Current Year 10/27 $10,000 $9,000
        300 shares Hasbro 1/7/02 12/20 $6,000 $7,000

         

        *When Joyce graduated from college, her father gave her 150 shares of the 300 shares of Pfizer Corporation stock that he had acquired on October 27, 1982, for $1,000. At the date of the gift, the fair market value of the stock was $2,000.

         

        1. On May 18, Joyce purchases a computer system for $2,000. She also buys a color printer/copier/fax machine for $500. All the equipment is used exclusively in her business.

          2.  

        2. On June 12, Joyce sells her old computer system for $400 and her printer for $100. She had acquired the computer system and printer on February 18, 2010, for $3,000 and $500, respectively. When the taxpayers prepared their 2010 tax return, they elected to expense the computer and printer using Section 179. The computer system and the printer were used exclusively in her business.

         

        Final Problem

         
        Hermione and Sebastian are married and have three children living at home for whom they provided over half of their support: Jeremy, age 21, goes to college full-time and earned $7,000 from his part-time job and $500 in interest income from his savings account; Emma is 19 and earned $19,000 as a secretary; Serena is 15 and is in high school. Serena made $42,000 as a model this year, all of which was put into a trust account except for her manager’s fee. Sebastian made $65,000 this year as an engineer and Hermione earned $7,000 as a substitute teacher. If they have $18,000 of itemized deductions and Serena makes a fully deductible contribution to her IRA of $2,000, what is Hermione and Sebastian’s gross income, adjusted gross income and taxable income on their joint return this year? Show all calculations and explain fully any assumptions you are making.
         


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