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COMPRHENSIVE TAX RETURN PROBLEM – 2015
 

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.
$21,000
Attorney’s fee.
1,900
Title insurance
3,050
Document preparation fee
120
Recording fee
50
Pest inspection fee
210
Prepayment penalty for early retirement of home mortgage (3 points)
1,700
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
$14,000
Meals
305
Lodging
400
House-hunting expenses (including $200 for meals)
 
1,100
Temporary living expenses (25 days; including meals costing $400)
2,400
 
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.
$125,000
Federal income taxes withheld
$15,100
F.I.C.A. taxes withheld
Social security
8,862
Medicare
3, 625
California income taxes withheld
5,000
 
2. Jada L. Smith, Social Security No. 467-32-5452:
Second National Bank
PNC Bank
Total
Gross salary
$17,500
$34,000
$51,500
Federal income taxes withheld
1,100
4,150
5,250
Space
F.I.C.A. taxes withheld
Social security
1,339
2,601
3,740
Medicare
508
986
1,494
Second National Bank
 
PNC Bank
Total
California income taxes withheld.
$0
$2,950
$2,950
 
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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
$95,000
Expenses:
Advertising
350
Bank service charges
45
Dues and publications
630
Insurance
600*
Interest
300
Professional services …
725
Office rent
3,200**
Office supplies
850
Meals and entertainment
600
Miscellaneous expenses
125
* 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
$18,000
Copying machine
6,200
Computers
6,500
Laser printers
3,000
Telephone system
3,050
 
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
$1,525
Second National Bank, New Orleans
575
PNC Bank
400
Orleans Parish municipal bonds. . . . .
1,025
 
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h. Will and Jada received the following dividends during 2013:
Verizon
$400
Coca-Cola Corporation
275
Microsoft Corporation
75
 
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.
 
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k. Jada has summarized the following cash expenditures for 2013 from canceled checks, mortgage company statements, and other documents
 
Prescription medicines and drugs
1,075
Medical insurance premiums (paid by Jada)
3,050
Doctors’ and hospital bills (net of reimbursements)
1,700
Contact lenses and glasses for Will
675
Real estate taxes paid on
New Orleans residence
3,700
Los Angeles residence
8,050
Sales taxes paid on Jada’s new auto
1,485
Ad valorem taxes paid on both autos
800
Interest paid for
New Orleans home mortgage
5,250*
Los Angeles home mortgage
10,200**
 
Credit card interest
775
Personal car loan
2,100
Cash contributions to
African American Episcopal Church
8,000
Salvation Army
1,500
Barack Obama Campaign Fund
1,000
Jada’s unreimbursed employee expenses
470***
Will’s unreimbursed employee expenses
560
Tax return preparation fee
400
 
*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].
 
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l. The Smiths paid the following child care expenses during 2013
 

2,200
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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