Brenda Baker is a 52 year old professor in the School of Communications at Temple University in Philadelphia, Pennsylvania. Her husband recently passed away on August 5, 2011 and she has not remarried. She has recently been seen keeping company with Brad Johnson, a 26 year old research assistant in her department. She resides at 5250 North Broadway, Philadelphia, PA 19005. She and Brad have gotten very close and have decided to allow Brad to move in with Brenda and her 2 children. Brad has been living with Brenda since March of 2014. Brenda has 2 sons and 2 daughters. The oldest daughter, Sharon, is a 25 year old graduate student at the University of Pennsylvania, and lives on campus, as a requirement of her full scholarship of $48,000 per year that pays for her tuition and books of $32,000 and room and board of $16,000. Her oldest son, James, is a 22 year old weed head who works part-time at 7-eleven. He keeps this job so that he can make money stealing the store Blunts and selling them under the table to some of his weed head friends. He made $2,500 working at 7-eleven in 2014, but made another $1,200 selling Blunts on the side. James lives with whoever has an empty couch and sometimes lives with Brenda when he can't find an empty couch. Brenda has a 17 year old son, Marvin, who is a high school senior and Sheila, a 15 year old drama queen who dresses in Goth and goes around quoting verses from the Book of the Dead. They both live at home with Brenda.
As a professor, Brenda made $90,000 in 2014. She received a distinguished professor award for her work with students in the department. She received $5,000 cash, a plaque that was valued at $100, and a photo with the president of the University. Brenda decided to donate the $5,000 to the scholarship fund of the University because she was so dedicated to her teaching profession and the students at the University. She kept the plaque and the photo with the president. Brad earned $5,000 as a research assistant and received $30,000 in scholarships to pay for his tuition and books. Brenda really likes Brad and pays all of his living expenses. Brad is not very good at saving money and lost $10,000 gambling at the casinos in 2014.
Brenda's husband died under mysterious circumstances and the insurance company has just recently agreed to settle a lawsuit that Brenda filed because the insurance company refused to pay on a $500,000 policy. Her husband was found dead at the home with an 8-inch metal cross in his forehead. His body was surrounded with lit candles, and written in black coal was the numbers 666 on the wall of the room where he was found. The insurance company claimed it was suicide and had refused to pay on the claim, but just recently agreed to pay on the policy after a long legal fight. Brenda received $500,000 on the policy in 2014 and invested the proceeds by setting up a $100,000 college fund for each of her 4 kids. The balance she invested in various securities that had the following results in 2014:
|
INVESTMENT PORTFOLIO
|
|
Security
|
Purchase Date
|
Purchase Price
|
Sale Date
|
Sale Price
|
Dividend Received
|
Interest Received
|
|
IBM (1,000 shares)
|
March 31
|
$40.11
|
June 11
|
$44.25
|
$500.00
|
|
|
GM (1,000 shares)
|
April 1
|
26.15
|
October 10
|
19.10
|
|
|
|
AA (1,000 shares)
|
April 7
|
12.53
|
|
|
200.00
|
|
|
BAC (2,000 shares)
|
April 10
|
15.50
|
|
|
100.00
|
|
|
MMM (1,000 shares)
|
April 15
|
33.47
|
|
|
100.00
|
|
|
SIRI (10,000 shares)
|
August 17
|
3.80
|
|
|
|
|
|
GOOG (500 shares)
|
August 18
|
610.25
|
September 19
|
640.36
|
500.00
|
|
|
City of Philadelphia Municipal Bonds
|
April 2
|
5,000.00
|
|
|
|
300.00
|
|
County of Chester School Bonds
|
April 30
|
10,000.00
|
|
|
|
800.00
|
|
IBM 30 year Bonds
|
May 10
|
10,000.00
|
|
|
|
500.00
|
Because the value of the securities purchased was more than the cash that Brenda had in her account, she had to purchase them on margin. The investment interest incurred on her account was $1,550.00.
Because Brenda and Brad were excellent working together, they started a small business providing web-hosting services. They formed a partnership, working out of the home, and called it BnB Web Hosting Services. They agree to share profits and losses equally. Results for their business, according to their books, are listed below:
|
Description
|
Amount
|
|
Description
|
Amount
|
|
Service Revenue
|
38,000
|
|
Rent Expense (office equipment)
|
750
|
|
Advertising Expense
|
1,000
|
|
Repairs and Maintenance
|
250
|
|
Commission Expense
|
250
|
|
Supplies
|
1,200
|
|
Depreciation Expense
|
3,000
|
|
Taxes (Estimated Federal Income Tax Payments)
|
1,000
|
|
Insurance Expense
|
250
|
|
Travel
|
800
|
|
Legal and Professional Services
|
500
|
|
Utilities Expense
|
680
|
|
Office Expense
|
2500
|
|
Other Expenses
|
820
|
They wanted to present a professional image for the business and purchased various assets for the business as follows:
|
Description
|
Purchase Date
|
Purchase Price
|
|
Computers and printers
|
February 25, 2014
|
$2,500
|
|
Office furniture
|
March 5, 2014
|
5,000
|
|
Telephone and cable equipment
|
September 12, 2014
|
500
|
|
2005 Toyota Tundra pickup truck
|
October 17, 2014
|
4,000
|
|
2015 Hyundai Elantra (new)
|
December 28, 2014
|
15,000
|
Brenda paid $16,000 in insurance expenses for the family health plan. She also paid $1,500 in dental insurance. She incurred $500 in costs to replace her eyeglasses, but has yet to pay the bill. Brenda paid $2,500 in state income tax and Brad paid $500 in state income tax. They looked back at their receipts for sales taxes and could only find those receipts for the business and realized that they paid $1,500 in state sales taxes that they forgot to include in their books. Brenda received a tax invoice for real estate taxes for 2014 for $5,000, but only paid half of the taxes in 2014 and paid the other half in February of 2015. Since Brad was an equal partner in the business, she asked Brad to pay the $250 personal property tax bill. Brad paid the bill in January 2015. Brenda paid mortgage interest of $18,000, she made cash gifts to the Salvation Army ($500), American Red Cross ($1,000) and Eighth Day Church of the Living Saints ($2,500). Brenda's home was burglarized and she lost $7,500 in stolen consumer electronics, jewelry and other personal effects. She paid $500 to repair the locks, $250 to replace a broken window, and $750 to install a new burglary alarm system.
Brenda had $13,500 withheld from her pay for federal income tax. Brad had $500 withheld from his pay. Brenda made quarterly estimated tax payments totaling $2,000. You have been asked by Brenda to prepare her 2014 Federal Income Tax return. She has agreed to pay you $1,000 for the service. You are so happy to do the work, that, not only do you prepare the income tax return, but you also perform a tax analysis and you prepare a memo to Brenda, explaining how you believe better tax planning could improve her tax position. You are very specific and detailed in your analysis as you are eager to earn every penny of the $1,000 she is paying you.