Taxation -AW-Q386

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Professor Pollard

Instructions: Prepare the Smiths’ Federal income tax return for 2013. If they have a refund due, they would prefer having it credited against their 2014 taxes. Make sure to print the return for “filing with the IRS”. Be sure to review all of the numerical information to determine if it necessary for the return. Hint – Look at Appendix B of your textbook to review all IRS forms necessary for the return. The return is due at or before class on April 29, 2015.
a. Will C. and Jada Pinkett Smith
a. Will and Jada Smith are married and file a joint return. Will is 38 years of age and Jada is 42. Will is a self-employed architect, and Jada is employed by PNC Bank as a loan officer. They have two children: Jaden Christopher, age 9, and Willow Camille; age 4. The Smiths currently live at 3303 Don Miguel, Los Angeles, California 90008, in a home they purchased and occupied on October 6, 2013.
Until September 12, 2013 the Smith family lived at 1417 Esplanade Avenue in New Orleans, Louisiana, where Will was employed by Bayou Designs Company, an architecture company and Jada was a bank officer for First National Bank. They sold their home in New Orleans and moved to Los Angeles so that Jada could assume her new job as a trust officer and Will could become self-employed recording artist and actor.

b. Will and Jada sold their home in New Orleans for $450,000 and incurred the following expenses

Sales commission.
Attorney’s fee.
Title insurance
Document preparation fee
Recording fee
Pest inspection fee
Prepayment penalty for early retirement of home mortgage (3 points)
The Smiths had purchased the New Orleans home on July 4, 2005 and never held it for rent or used it for business purposes. The home originally cost $225,500, and they had paid $7,000 for new driveway and $7,900 for landscaping. Within six weeks of receiving a contract of sale on their house, the Smiths paid $10,000 for interior and exterior painting and $750 for steam-cleaning of the carpets. The sale was closed on September 1, 2013 and the Smiths were required to move out of the home by September 15, 2013.

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c. In moving from New Orleans to Los Angeles, the Smiths incurred the following expenses, none of which were reimbursed:
Cost of moving household goods
House-hunting expenses (including $200 for meals)
Temporary living expenses (25 days; including meals costing $400)
Not included in any of the above expenses are the costs for driving two automobiles from New Orleans to Los Angeles. Will and Jada each drove a car, taking turns driving with the children. Although neither one of them kept receipts, Jada noted that her auto mileage was 1,900 miles. In addition, Will noted that the number of miles from their old home to their old workplace was 26 miles, and the number of miles from their old home to their new workplace is 1,916 miles.
d. The Smiths purchased their new home for $825,000 by making a $125,000 down payment and financing the remaining balance with a 30-year, 5% conventional mortgage loan from California Federal Savings and Loan. They were required to prepay 2 points ($9,000) in return for the favorable mortgage terms. New furniture and drapes cost an additional $32,500.
e. The Smiths received the following Forms W-2, reporting their salaries for 2013
1. Will R. Smith, Social Security No. 452-64-5837:
Gross salary from Bayou, Inc.
Federal income taxes withheld
F.I.C.A. taxes withheld
Social security
3, 625
California income taxes withheld
2. Jada L. Smith, Social Security No. 467-32-5452:
Second National Bank
PNC Bank
Gross salary
Federal income taxes withheld
F.I.C.A. taxes withheld
Social security
Second National Bank
PNC Bank
California income taxes withheld.
f. On October 1, 2013 Will rented office space at 4510 Sunset Boulevard, Los Angeles, California 90025. The terms of the one-year lease agreement called for a monthly rent of $800, with the first and last month’s rent paid in advance. Will decided to operate his business in the name of “Will’s Designs” and he elected to use the cash method of accounting for his revenues and expenses. The following items relate to his business for 2013
Gross receipts
Bank service charges
Dues and publications
Professional services …
Office rent
Office supplies
Meals and entertainment
Miscellaneous expenses
* Three months of coverage
** Includes prepayment of rent for September, 2013
Will drove his personal automobile, a 2013 Mercedes C-Class Sedan, 5,000 miles for business purposes from October 1 through December 31. Rather than keeping receipts, he elected to use the automatic mileage method for determining his auto expenses. Will’s total auto mileage for the year was 20,000 miles.
On October 3, 2013 Will purchased the following furniture and equipment for use in his business
Office furniture
Copying machine
Laser printers
Telephone system
Will elects to expense the maximum amount allowed under the optional expensing rules of§ 179. He also elects to compute the maximum depreciation allowance using the appropriate MACRS percentages.
g. The Smiths received interest income during 2013 from the following
U.S. Treasury bills
Second National Bank, New Orleans
PNC Bank
Orleans Parish municipal bonds. . . . .
h. Will and Jada received the following dividends during 2013:
Coca-Cola Corporation
Microsoft Corporation
Google stock dividend (20 new shares of stock valued at $80 per share, received March 9, 2013
1,600 of stock
i. The Smiths have never maintained foreign bank accounts or created foreign trusts.
j. The Smiths report the following stock transactions for 2013:
1. Sold 100 shares of Microsoft stock for $150 per share on August 1, 2013. Will had inherited 500 shares of Microsoft stock from his uncle on July 9, 2009, and the stock was valued at $180 per share on the date of his uncle’s death.
2. Sold 300 shares of IBM stock for $50 per share on December 28, 2013, but did not receive the sales proceeds until January 3, 2013. The Smiths had paid $30 per share for the stock on May 21, 2009.
k. Jada has summarized the following cash expenditures for 2013 from canceled checks, mortgage company statements, and other documents
Prescription medicines and drugs
Medical insurance premiums (paid by Jada)
Doctors’ and hospital bills (net of reimbursements)
Contact lenses and glasses for Will
Real estate taxes paid on
New Orleans residence
Los Angeles residence
Sales taxes paid on Jada’s new auto
Ad valorem taxes paid on both autos
Interest paid for
New Orleans home mortgage
Los Angeles home mortgage
Credit card interest
Personal car loan
Cash contributions to
African American Episcopal Church
Salvation Army
Barack Obama Campaign Fund
Jada’s unreimbursed employee expenses
Will’s unreimbursed employee expenses
Tax return preparation fee
*Does not include the mortgage prepayment penalty identified in item (b) above.
**Does not include the interest points charged for the new mortgage identified in item (d) above.
***Does not include any costs for meals or entertainment.
Jada also noted that she and Will had driven their personal automobiles 500 miles to receive medical treatment for themselves and their children. She also has a receipt for 100 shares of Google stock that she gave to her alma mater, Hampton University, on November 15, 2013. The stock was valued at $70 per share on the date of the gift and was from the block of Google stock Jada had received as a wedding present from her grandfather [see item (j)(2) above for details].
l. The Smiths paid the following child care expenses during 2013

Of the $5,000 total child care expenses, $3,000 was for Willow, and the remaining$2,000 was for Jaden.
m. Social security numbers for the Smith children are provided below
Jaden Christopher Smith, Social Security No. 582-60-4732
Willow Camille Smith, Social Security No. 582-60-5840
n. Will and Jada made estimated Federal income tax payments of $2,750 each quarter, on 4/15/2013, 6/15/2013, 9/15/2013, and 1/15/2014. Note – The Smith’s 2012 federal tax liability is not available to determine under payment penalty (if any).
o. The Smiths have always directed that $6 go to the Presidential Election Campaign by checking the “yes” boxes on their Form 1040.
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