David R. and Sherri N. Johnson [ages 45(1964) and 46(1963)] are married and live at 641 Cody Way Casper, WY 82609. David is consulting engineer, while Sheri is a paralegal. They file a joint return and use the cash basis for tax purposes.
1. Trained as a mining engineer, David has developed considerable expertise in the treatment and disposition of waste material. He also is well versed in the various Federal and state requirements for land reclamation projects. David maintains a consulting practice through which he renders advice on these matters. David's business activity code is 541990.Most of his clients is small and medium size owners and operators located in Wyoming and contiguous states (e.g. Montana, Idaho, and Utah). Characteristically, David is retained by a client on a contract fee basis and is reimbursed for all out-of-pocket expenses. In performing his service, David usually visits the job location and later submits his recommendations in written report along with statement for his services and expenses.
David was paid the following amounts relating to the consulting practice in 2012:
Fees for services rendered = $92,800
Expenses reimbursement
Airfare $8,200
Lodging $5,200
Meals $6,100
-Transportation(taxi, limo, rentals airports) $920
Subtotal$20,420
Total received = $113,220
2. The following fees for services rendered to mining companies are not included in the receipts listed in item 1 above:
-Echo mining: Payment received January 2013; work done December 2012 - $5100
-Sesa mining: Payment received January 2012; work done December 2011 $4,400
-Cormorant Mining: No payment received; work done March 2012 $3700
David did not incur travel expenses in any of these engagements ( i, e the work was done in his office). As Cormorant Mining is in bankruptcy, David does not expect to collect any of this fee.
3. Other expenses paid by David in 2012 relating to his practice are summarized below:
Advertising in trade journals $2,400
Office supplies(including drafting materials) $1,200
Contribution to H.R. 10(KEOGH) plan $9,000
State occupation license $300
Subscriptions to trade journals $240
Membership dues to trade associations $180
Landscape models(amount paid to a topographer for several land reclamation projects) $3,200
Business phone and internet service $860
Premiums on medical insurance (covering self, spouse, and dependents) $3,800
4. To save on rent and as a matter of convenience, David maintains an office in the home. Twenty percent of the 3,000-square-foot living area is devoted to the office. David inherited the home on Cody Way from his father, who died on June 6, 2003, when it had fair market value of $400,000 of which $40,000 was allocated to the land, and David began to using his home office the same year. The Johnsons moved into the home in 2003.It is current fair market value is $500,000($50,000 allocated to the land). County land records reflect that David's father bought the land in 1969 for $6,000 and built the house in 1973 at cost of $60,000. David depreciates the business use of his home using the MACRS, treating the home as a 39-year nonresidential reality. Additional information regarding the property is listed below:
Property/Casualty insurance $2,300
Repairs and maintenance $2,900
Utilities $4,800
The property taxes and mortgage interest on the property paid in 2012 are listed in item 15 below.
In addition to the repairs and maintenance noted above David had office repainted at cost of $1,200. The furniture in the office, including business equipment (e.g. computer, fax, machine, copier), was properly expensed in the year bought and has zero basis. However, on March 5, 2012, David purchased a heavy-duty, fire-resistant file cabinet with security-vault features for $ 4,800. He made the acquisition to safeguard and maintain the privacy of client data. If possible, David prefers to avoid capitalizing and depreciating the cabinet.
5. On February4, 2011, David purchased for $41,000 (including sales tax) for an Infiniti crossover SUV (gross weight under 6,000 pounds), which he uses 90% of the time for business. No trade-in was involved, and he did not claim any section 179 expensing of the cost. Under the actual operating cost method, he depreciates the SUV using MACRS (half-year convention). {Hint; see table 3 in the instruction to form 4562} His operating expenses pertaining to the operation of the Infiniti for 2012 are as follows:
Gasoline $3,300
Oil changes and lubrication $120
Auto insurance $ 1,600
Repairs $240
Auto club dues $180
License and registration $60
During business use, David received three moving traffic violations (total fines of $680) and incurred tolls and parking charges of $440. The Infiniti was driven a total of 14,500 miles during 2012(mileage was incurred evenly during the year).
6. Sherri is a licensed paralegal and is employed on part-time basis by several local attorneys. She commuted to work (using the family Suburban) for a total of 813 miles and paid parking fees of $310. Her earnings and job-related expenses are summarized below:
Salary (from four employers) $38,000
Subscriptions and dues to professional organizations $180
Laptop computer $1,200
Occupational license fee $80
Continuing education correspondence course $120
She purchased the laptop computer on March 12 and uses it about 80% of the time for business. The correspondence course is required for retention of her license. Sherri is considering going to law school, so she attend a series of LSAT preparation sessions at cost of $350. Because Sherri is a part-time employee, she is not covered by any of her employers medical or retirement plans. During 2012 however, she contributed $5,000 to a traditional IRA that she establish several years ago. As to the family Suburban, the Johnsons use the automatic mileage method for tax purposes.
7. With funds received from the settlement of his father's estate, David purchased rental property at 4620 Cottonwood Land. Of the $250,000 purchases price, $30,000 was allocated to the land. After a substantial renovation to the house (e.g. new flooring, roof, heating unit) costing $80,000, the property was rented beginning February 1, 2006. In 2010, the Johnsons decide that their investment would be more marketable if the house was rented as furnished. Consequently, in May of that year they spent $38,000 on new furniture (including grapes, carpeting, and appliances). Under the current lease agreement, the property rents for $2,200 a month (payable at the beginning of each month) with utilities not included. Information regarding the property for 2012 appears below:
Rent received $28,600
Property taxes $2,400
Property/Casual Insurance premium paid $3,100
Yard maintenance $1,200
Repairs $800
The amount of rent received included $2,200 for January 2013. Because the tenants were going on vacation during the Christmas/New Year holidays, in mid-December they pre-paid the rent for next month. The property taxes listed above do not include a special assessment of $2,400 by the city of Casper for repaving the street in front of the property. Regarding depreciation, the Johnsons use MACRS to depreciate the rental home and the furnishings within it (assume half-year convention for the personality).
8. As another investment, the Johnsons own 1,000 share stock in Cormorant Mining acquired on March 7, 2011. David had performed services for the company late 2010 and submitted a bill for $3,900. Because Cormorant was experiencing a cash-flow problem, David accepted the stock as payment for his services. Cormorant currently is in bankruptcy(see item 2 below) and expectations are that the shareholders will not recover anything on their stock investment. The stock is not publicly traded.
9. On March 10, 1994, David's father gave the Johnsons a plot of land located in Teton County (WY) as an anniversary present. It had a value of $150,000 and no gift tax was due on the transfer. The land had been purchased by David's father on June 1, 1984, for $50,000. In December 2011 the Johnsons contracted by a real estate developer and offered $800,000 for the property. After considerable negotiation, the following transactions took place on March 4, 2012: the Johnsons transferred the Teton plot in return for $8,000 in cash and four city lots in Laramie WY worth $792,000. The Johnsons considered the city lots to be good investments as they are located near the state university. All closing cost and legal fees were absorbed by the real estate developer.
10. One of the items David inherited from his father was an antique gun collection-mainly large caliber rifles used for buffalo hunting. Although David has no idea what his father's cost basis was in these guns, the collection had a date of death value of $22,000. Concerned about the maintenance and security, David sold it to a dealer for $29,000 on July 10, 2012.
11. On July 12, 1998, using $50,000 of funds she had received from an aunt's life insurance policy, Sheri purchased grazing land in Converse Country WY. On August 2, 2011, she sold the land to a local rancher for $75,000. Under the terms of the sale, Sheri received a down payment of $15,000 and 10 annual notes of $6,000 each. Sheri is also to receive Simple interest of 8% on outstanding balance principle each year. On August 4, 2012, Sherri collected $10,800 ($6000 on the note and interest of $4,800) on the maturity of the first note.
12. Although the Johnsons had several Schedule Dtransactions during 2011, they end up with a net short-term capital loss of $7,000. Of this loss $3,000 was deducted in 2011 and $4000 carried over to 2012.
13. For several years, Sheri's widowed mother, Vivian Olson, has lived with the Johnsons and has been claimed by them as a dependent. On December 30, 2011 Vivian suffered a heart attack. After six days in the ICU of local hospital, Vivian died. In early February 2012, the Johnsons paid the following expenses regarding Vivian:
Medical expenses incurred in 2011 $4,200
Medical expenses incurred in 2012 $3,100
Burial expenses $4,400
Remainder of church pledge for 2012 $600
Fortunately, the balance of Vivian's medical expenses ($11,900) was covered by insurance. Besides personal and household effects, Vivian's major assetwas life insurance. As the designated beneficiary of the policy, Sherri was paid the $20,000 of death benefits on March 13, 2012.
14. Besides the items already mentioned, the Johnsons had the following receipts during 2012:
-Interest income
City of Cheyenne general purpose bonds $1,900
CD at Wells Fargo Bank $1,100
Money market account at Bank of America $400
Qualified dividend income issued on Meadowlark Corporation common stock $700
Jury duty fees $420
Yard (garage) sale $950
In connection with her jury duty assignment in June, Sherri drove Suburban 40 miles and incurred expenses of $30 for parking and $45 for meals. The yard sale involved used furniture, appliances, books, toys, and other household goods having an estimated original cost value of $1,800.
15. In addition to the items already noted, the Johnsons had the following expenditures for 2012:
Medical and dental bills (including prescription drugs of $400) Other than those relating to Vivian (see item13) $1,800
Ad valorem property taxes on personal residence $3,100
Interest on home equity loan used to finance the purchase of personal items (e.g. camper) $4,400
Charitable contributions (not include Vivian's pledge) $3,200
The Johnsons drove the Suburban 420 miles to various medical and dental appointments. Wyoming has a no state or local income tax but does impose ageneral sales tax. The county in which they live imposes additional local sales tax of 1%. Although they do not keep track of their sales taxes, they purchased a camper for $40,000 in May 2012. The sales tax on this purchase was $1,600.
16. Besides Vivian (see item13) the Johnsons household includes two daughters, Meredith (age19) and Kirby (age18) and son Toby (age17). Kirby and Toby are full-time students in highschool. Meredith graduated a year ago and works part-time and earned $9,000 during 2012. Meredith deposits in a saving account.
17. For tax year 2011 the Johnsons had an overpayment of $150 which they applied toward their 2012 income tax. Sheri's income tax withholdings for the year are $5,100 and the Johnsons made federalquarterly payments of $4,000 (for a total of $16,000).
18. Relevant Social Security numbers are noted below
David Johnson 111-11-1111
Sheri Johnson-123-45-6785
Vivian Olson- 123-45-6786
Meredith Johnson - 123-45-6787
Kirby Johnson 123-45-6788
Toby Johnson- 123-45-6789
Requirements;
Prepare an income tax return (with appropriate schedules) for the Johnsons for 2012.
Make necessary assumptions for information not given in the problem but needed to complete the return.-If any refund is due, apply it toward next year's taxes -the Johnsons do not wish to contribute to the Presidential election campaign fund. I believe I need these:
forms :
1040
schedule A
schedule B
schedule D
schedule E
schedule SE
2106
2210
4562
6252
8829