Tax Return Assignment
REQUIREMENTS
Prepare an income tax return by hand in blue pen (no tax software) with provided schedules that were obtained from the IRS website (irs.gov) for the Martinez's for 2015. In doing this, use the following guidelines:
• You may complete assignment individually or in groups up to 5 people. Place all participating student names on cover sheet.
• Make necessary assumptions for information not given in the problem but needed to complete the return. Be aware of the possible application of certain tax credits.
• The taxpayers have the necessary substantiation (e.g., records, receipts) to support the transactions involved.
• If a refund results, the taxpayers want it sent to them.
• The Martinez's do not wish to contribute to the Presidential Election Campaign fund.
• In the past several years, the Martinez's have itemized their deductions from AGI (have not claimed the standard deduction option). In 2014 they claimed $19,600 in itemized expenses.
Facts:
Francisco E. and Eva A. Martinezare married and live at 46 Milano Street, Raleigh, NC 27513. They file a joint return and are calendar year, cash basis taxpayers.
1. Francisco is a self-employed accountant (professional activity code is 541213). He maintains an office at 65 Oreo Way, Suite 105, Raleigh, NC 27514. Francisco's work-related expenses for 2015 are as follows:
Office rent (prepaid 12 months on 6/1/2015) $18,000
Utilities 2,400
Office expenses (supplies, , etc.) 4,800
Fines issued by Raleigh zoning department related to business 300
Tolls (business related) 550
Parking expense (business related) 250
State and local license fees 600
Renter's insurance (prepaid 18 months on 6/1/2015) 1,800
Replacement of reception room furnishings (10/5/2015) 3,000
Purchased Apple iMac (business related) 2,500
Meals 1,400
Entertainment (Carolina Panthers tickets with clients) 3,000
Travel 1,800
As is the case with all of Francisco's business transactions, the meals and entertainment expenses are properly documented and supported by receipts.The mealsand entertainment expense relates to taking clients out to eat and discussing business during the meals. Francisco would then take the client/clients across the street to see home Carolina Panthers football games. No business was discussed during or after the games. Francisco uses MACRS and bonus depreciation for expensing computer and furniture. Francisco traveled to Orlando for a 2 day accounting convention and stayed an extra 3 days for sightseeing. Travel expense is composed of the following ($400 airfare round-trip; $200/night hotel which offers free meals, $50/day rental car, $30/day incidental expenses). Of 14,000 total miles driven in 2015, Francisco drove his truck (a Toyota Tundra purchased on 8/1/2012) 7,500 miles for business (not including commuting). The Martinez's use the automatic mileage method of claiming automobile expenses.
2. Evaworks as a sales executive for Avis rental cars. She receives several fringe benefits including group health insurance for her family. She purchased a new Mercedes from Avis for $50,000 when the FMV was $80,000. The purchase cost for Avis from Mercedes was $60,000. Eva's company offers free group term life insurance for all their employees. Eva received $100,000 in life insurance coverage in 2015 that cost Avis $10 per $1,000 of coverage. Eva drives to various sales meetings away from her primary place of business. As a result she drove 18,000 miles in 2015 of which 7,000 was business related. Eva uses standard mileage deduction. She also incurred $500 in tolls. Eva's company uses an accountable plan and reimbursed her for her mileage and tolls.
3. On September 1, 2012 the Martinez's purchased a house in Augusta, GA located on the National Golf Club of Augusta, home of the Masters Golf Championship. The house is held as a rental investment. The property cost $900,000 (of which $400,000 is allocated to the land) and is located at 1606 Jack Nicklaus Way, Augusta, GA 30904. The Martinez family resided in the house for personal recreation totaling 30 days and rented the house out 160 days in 2015.$48,000 in gross rental receipts was collected in 2015. The Martinez's allocate rental expenses per the IRS Method. They use MACRS straight-line depreciation, assuming the mid-month convention.
Information regarding the rental property expenses for 2015 are summarized below:
Refundable damage deposit 4,000
Property taxes 9,800
Interest on mortgage 14,500
Repairs 4,800
Insurance 2,500
Utilities 3,000
Maintenance $8,800
4. Francisco bought 400 shares of Apple stock on January 1, 2013 for $200 per share with a brokerage fee of $1,000. Francisco sold 100 shares for $140 per share on November 12, 2015. Francisco then purchased 100 shares of the same type of Apple stock on December 10, 2015 for $138 share. No brokerage fee was incurred on the 2015 transactions.
Eva had the following stock sales in 2015:
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Date Purchased
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Basis
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Date Sold
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Amount Realized
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Stock 1
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3/16/1996
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$7,850
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7/22/2015
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$6,500
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Stock 2
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2/12/2015
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15,000
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9/13/2015
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19,500
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Stock 3
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6/25/2011
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11,750
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10/12/2015
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15,600
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Stock 4
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7/19/2006
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8,250
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10/12/2015
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12,800
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Stock 5
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9/18/2015
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9,400
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11/26/2015
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4,500
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5. Besides those previously noted, the Martinez's had the following receipts for 2015:
Payment for services rendered as an accountant
(as supported on Forms 1099 issued by several
payor client companies) $110,000
Eva's W-2 wages (total includes $30,000 in 401K plan) $180,000
Golf cart (see information below)
Income tax refunds for tax year 2014
Federal tax $6,400
State tax 7,800 $14,200
Interest income--
CitiBank $4,800
Raleigh Durham municipality 6,600
$11,400
Gambling income $3,200
Francisco performed accounting services for a client in exchange for a used golf cart. The accounting services performed would have been charged at $4,000 to the client. The client's golf cart had a FMV of $3,500 and he had previously paid $5,000 for the cart. So the transaction was a barter.
6. In addition to any items previously noted, the Martinez's had the following expenses for 2015:
Medical and dental expenses not covered by
Insurance $7,000
Real estate tax on personal residence 4,600
Interest-
Home mortgage $6,800
Interest on home equity loan 2,200 9,000
Charitable contributions (See information below)
Gambling expenses (with proof of payment) 4,500
Of the $7,000 in medical expenses, $2,000 was used to pay for an urgent care clinic visit for Benjamin Martinez, Francisco's brother who is not a dependent. Benjamin was visiting Francisco and injured his back while assisting in cleaning out the garage. The remaining $4,700 was used to cover co-payments and uninsured medical and dental proceduresfor Eva and their children. The remaining $300 was for purchases of over the counter medications.
During 2015, Francisco borrowed $90,000 through a home equity loan to pay off other debts and take his family on a 3 week trip to Pebble Beach, CA. At the time of this loan the FMV of their home was $420,000 and the outstanding home mortgage was $340,000.
The charitable contributions were all made to qualified charitable organizations as follows: $10,000 cash donated to their church; The Martinez's also donated a Ford 150 truck to their son's school. The truck's basis was $25,000 and the FMV at the time of donation was $16,000.
7. The Martinez's' household includes their three children: Diego, Victoria, and Thomas. Victoria and Thomas are full-time students and live fulltime at their home. Diegolived at home all year and is attending University of North Carolina full timeand he also works doing tile and pavement cleaning and earned $8,000 in 2015. The Martinez's provide more than half of each of the children's living expenses.
8.Eva's Form W-2 from Marriott, Inc.shows $40,000 withheld for Federal income tax and $9,941 for state income tax. Francisco made equal quarterly payments of $7,000 (Federal) and $1,000 (state). Relevant Social Security numbers are noted below.
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Name
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Social Security Name
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Birth Date
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Francisco L. Martinez
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123-45-6789
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7/1/1967
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Eva S. Martinez
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123-45-6782
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6/27/1968
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DiegoMartinez
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123-45-6786
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4/9/1992
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VictoriaMartinez
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123-45-6783
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12/6/1999
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ThomasMartinez
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123-45-6781
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7/29/2000
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