Response to the following problem:
Joseph P. Smith and his wife Gladys G. Smith are married and file a joint return for 2016. Joseph's social security number is 499-99-4321 and he is 44 years old. Gladys social security number is 637-44-9876 and she is 43 years old. They live at 1502 Seaman Court,
Flemington, NJ 08822.
Mr. Smith is a construction worker employed by LLL Construction.
His form W-2 from LLL Construction showed the following:
Wages $42,000
Withholding (federal) 4,500
The Smiths have a 17-year old son, Jackson, who is enrolled in the eleventh grade at Flemington Perpetual Catholic School. Jackson's social security number is 669-90-0099. The Smiths also have an 18-year old daughter, Lois, who is a full-time freshman at Oceanside Community College (OCC). Lois's social security number is 669-90-0100.Mr. and Mrs. Smith also have full custody of Joseph's nephew, Larry Loser (social security number 664-66-6688) who is 18 years old and a part-time student at OCC. All three of the children live at home, and Joseph and Gladys pay the majority of expenses for Jackson, Lois, and Larry (none of the children work).
Joseph and Gladys have the following investment income for 2016:
Interest from the Trustworthy Savings Bank $651
Dividends (qualified) Seaside Bank stock 150
Dividends (qualified) Seaside Gas Company stock 260
Dividends (non-qualified) Hot Mutual Fund 45
Interest on NJ State Municipal Bonds 750
Interest on Seaside Electric Company Bonds 675
Joseph went to the local casino and won $3800 playing the slot machines. The next day he decided to go back to the casino and unfortunately he spent (lost) $1550 that day.
One of Gladys friends died during the year and Gladys received $10,000 in life insurance proceeds.
In July, Joseph's aunt died and left him a piece of real estate (undeveloped land) worth $65,000.
Five years ago, Joseph and Gladys were divorced. Joseph married Suzy Sunshine (SS# 020-22-2222), but the marriage did not work out and they were divorced a year later. They had a child while married, Sara Sunshine (social security number 555-50-5588, age 7). Under the divorce decree, Joseph has to pay Suzy $18,000 per year until Sara reaches age 18 at which time the payment is reduced to $12,000 per year. Three years ago, Joseph and Gladys were remarried.
During 2016, Joseph spent $250 on safety glasses, $150 on steel toed work boots, $100 on a reflective vest to use while directing traffic, and $300 on jeans that he wears to work. He also spent $2250 on tools that he uses for work. LLL Construction gave him $1000 to use to purchase a demolition saw (not part of the $2250 spent on tools, and not included in his paycheck).
Joseph is tired of working in construction and went back to school, part time, in January. He spent $3600 on tuition to the local community college and has a 1098-T supporting that expense. He has never been enrolled in higher education prior to this time. He paid for the tuition using a student loan.
Gladys was laid off from her job on January 2, 2016 and received unemployment compensation of $12,000 during 2016.
Joseph and his family are covered under a health insurance plan provided by LLL Construction, and LLL pays $300 per month and Joseph pays $250 per month for this plan (the $250 is deducted pre-tax from Joseph's paycheck). During the year, Gladys had an emergency appendectomy; the total bill was $22,500, the insurance covered $18,000 and Joseph and Gladys paid the remainder.
On September 1, 2016 Gladys took a job as a medical transcriptionist and works from home. She does her work on the dining room table. The house is 2000 square feet, and the dining room is 400 square feet. Her income and expenses follow:
Income (paid on a 1099-Misc) $19,050
Home office expenses (direct) $2600
Home office expenses (indirect, but not allocated) $12,000
Office expenses 1,380
Computer supplies 800
Telephone 300
Faxes (sent from Staples) 250
Internet service 480
In addition to the above items, Gladys incurred travel expenses to attend a seminar on medical transcription. She spent $1200 on airfare, $750 on lodging, $325 on a rental car, and $560 on meals. Gladys has documentation for these expenses.
Gladys drove her 2014 Land Rover 2,845 miles for business related purposes, and the vehicle was driven a total of 8,646 miles during the year. Gladys uses the standard mileage rates and has substantiation for the mileage.
In July, Joseph loaned a fried $5,000 to purchase a car. His friend lost his job in 2016 and has not made any payments on the loan. He plans to start making payments again, however, with additional interest as soon as he has new employment.
Joseph and Gladys paid the following in 2016 (all by check or can otherwise be substantiated):
Contributions to Flemington Perpetual Catholic Church $2600
Tuition to the Flemington Perpetual Catholic School (for Jackson) 5,000
Clothes to the Salvation Army (10 bags in good condition) 275
Contributions to George Kerry's Congressional campaign 250
Psychotherapy for Gladys 1,000
Eyeglasses for Jackson 375
Prescription medication and drugs 1,850
Credit card interest 1,345
Interest on Glady's student loans 3,125
Investment interest on stock margin account 345
Auto loan interest 900
Auto insurance 1,600
Dave Deduction, CPA, for preparation of last year's tax return 200
Safe deposit rental for storage of stocks and tax data 100
Contribution to educational savings account for Jackson 1,000
Home mortgage interest 6,910
Home property (real estate) taxes 4,400
In June, a hurricane destroyed a large shed on their property. The insurance company paid $6500 to replace the shed, but Joseph built a new shed himself for $1800.
Joseph's grandfather died and left a portfolio of municipal bonds. In 2016 Joseph received $20,000 in tax-free interest (ignore AMT tax calculations).
On July 14, Joseph and Gladys purchased a second house to use as a rental property. They paid $130,000 for the property (the land value, included in the $130,000, is $30,000). They collected rent of $8000 during the year, and paid real estate taxes of $2600, mortgage interest of $1600, repairs of $750, and $600 advertising the property for rent.
Joseph owned 1,000 shares of Really Huge Airline stock with a basis of $30 per share. The stock was purchased six years ago on June 10. Joseph sells 500 shares of Really Huge Airline stock to his uncle Geovanni and 500 shares to his sister Pristine for $5 per share on December 31, 2016. The market price of Really Huge Airline stock on December 31, 2016 was $35 per share.
Joseph purchased 5 acres of raw land in Speculator, NY, 10 years ago. His basis in the land was $90,000. On August 1, 2016 he sold the land for $150,000.
On May 15, 2016 Joseph and Gladys sold their personal residence for $585,150 and purchased a new house for $485,000. They had owned the old house for 5 years and Gladys had inherited it when her mother passed away. Her mother had paid $17,000 for it when she purchased it many years ago, and it had a market value of $525,000 when she passed away) The house had been their personal residence ever since Gladys mother passed away. They moved into the new house on May 18, 2016.
Joseph sold the following securities during the year and received a 1099-B that showed the following information:
Security Description Purchased Sold Selling Price Adjusted Basis
Orange Inc. 100 shares 02/11/97 04/16/16 $3,080 $4,550
Blue, Inc. 100 shares 07/17/01 07/31/16 $2,000 $3,600
Red (Preferred) 100 shares 12/08/15 09/25/2016 $8,975 $10,510
Plum (Bonds) due 4/2015 12/30/05 01/02/2016 $5,155 $5,320
Peach Mutual Fund 5,010 shares 05/30/06 10/22/2016 $60,120 $56,480
The selling price is net of sales commissions. In addition to the above amounts, the Hot Mutual Fund distributed a long-term capital gain of $450 on December 30, 2016.
To do:
Using the information above, complete the 1040 form for Joseph and Gladys including all additional forms and schedules. You may use tax software or can access the required forms on the IRS.gov website. Please use 2016 forms.