QUESTIONS
1. Personal perspectives and position: What is your experience and knowledge level regarding individual taxes? How did your personal tax experience and knowledge help you in completing this tax return? (Please include the experience and knowledge you have gained this semester, in addition to what you had before starting this class.)
2. Other salient perspectives and positions: What resources did you use in preparing this tax return? Provide references to page numbers in your textbook and specific addresses within the IRS website.
3. Key assumptions: How did you decide what filing status to use? How did you decide who the dependents were? How did you decide which income was includible or excluded? How did you decide which expenses were deductible? Please explain.
4. Quality of evidence: Show your work in an Excel attachment for the following line item: Form 1040 Line 44. (When calculating the tax amount, make sure you consider the preferential tax rates for net long-term capital gains and qualified dividends. If your tax amount calculated in your Excel worksheet is slightly different from the tax amount calculated by the software, just make a note of it on the spreadsheet. It may be a rounding difference, but you should not be off by too much.)
5. Conclusions, implications, and consequences: From your answers to the line items in this tax return, is this individual in a position to receive a refund from the IRS or to pay additional tax to the IRS?
6. Identify criteria for assessing alternatives: Based on the amount owed or to be refunded, what are the key tax issues that should be considered during the next year? List at least two key tax issues and explain each. (Think outside the box; this is not given in the problem.)
7. Applies criteria to alternatives: Based on these key tax issues, what are the taxpayer's options for the next year? Identify options for each tax issue listed. (Again, think outside the box.)
8. Evaluates results: As a tax preparer, what would you recommend this client to do next year based on the options identified?
Individual Tax Return
Required:
- Use the following information to complete Armando and Lourdes Gonzales's 2016 federal income tax return. If information is missing, use reasonable assumptions to fill in the gaps.
- You may need the following forms and schedules to complete the project: Form 1040, Schedule A, Schedule B, Schedule C, Schedule D, Schedule E, Schedule SE, Form 2106-E7., Form 4562 (for the dental practice), Form 4562 (for the rental property), Form 4797, Form 8863, and Form 8949. The forms, schedules, and instructions can be found at the IRS website (irs website). The instructions can be helpful in completing the forms.
Facts:
1. Armando Z. and Lourdes K. Gonzales are married and file a joint return. Armando is self-employed as a dentist, and Lourdes is a college professor. Armando and Lourdes have three children. The oldest is Ricardo, who lives at home. Ricardo is a law student at the University of Cincinnati and worked part time during the year, earning $1,500, which he spent for his own support. Armando and Lourdes provided $6,000 toward Ricardo's support (including $4,000 for Ricardo's fall tuition). They also provided over half the support of their daughter, Selena, who is a full-time student at Edgecliff College in Cincinnati. Selena worked part time as an independent contractor during the year, earning $3,200. Selena lived at home until she was married in December 2016. She filed a joint return with her husband, Tony, who earned $20,000 during the year. Felipe is the youngest and lived in the Gonzales's home for the entire year. The Gonzaleses provide you with the following additional information:
- Armando and Lourdes would like to take advantage on their return of any educational expenses paid for their children.
- The Gonzaleses do not want to contribute to the presidential election campaign.
- The Gonzaleses live at 621 Franklin Avenue, Cincinnati, Ohio 45211.
- Armando's birthday is 3/5/1958 and his Social Security number is 333-45-6666.
- Lourdes's birthday is 4/24/1961 and her Social Security number is 566-77-8888.
- Ricardo's birthday is 11/6/1993 and his Social Security number is 576-18-7928.
- Selena's birthday is 2/1/1997 and her Social Security number is 575-92-4321.
- Felipe's birthday is 12/12/2004 and his Social Security number is 613-97-8465.
- The Gonzaleses do not have any foreign bank accounts or trusts.
2. Lourdes is a lecturer at Xavier University in Cincinnati, where she earned $30,000. The university withheld federal income tax of $3,375, state income tax of $900, Cincinnati city income tax of $375, $1,860 of Social Security tax, and $435 of Medicare tax. She also worked part of the year for Delta Airlines. Delta paid her $10,000 in salary, and withheld federal income tax of $1,125, state income tax of $300, Cincinnati city income tax of $125, Social Security tax of $620, and Medicare tax of $145.
3. The Gonzaleses received $800 of interest from State Savings Bank on a joint account. They received interest of $1,000 on City of Cincinnati bonds they bought in January with the proceeds of a loan from Third National Bank ofCincinnati. They Page C-8 paid interest of $1,100 on the loan. Armando received a dividend of $540 on General Bicycle Corporation stock he owns. Lourdes received a dividend of $390 on Acme Clothing Corporation stock she owns. Armando and Lourdes received a dividend of $865 on jointly owned stock in Maple Company. All of the dividends received in 2016 are qualified dividends.
4. Armando practices under the name "Armando Z. Gonzales, DDS." His business is located at 645 West Avenue, Cincinnati, Ohio 45211, and his employer identification number is 01-2222222. Armando's gross receipts during the year were $111,000. Armando uses the cash method of accounting for his business. Armando's business expenses are as follows:
Advertising
Professional dues
Professional journals
Contributions to employee benefit plans
Malpractice insurance
Fine for overbilling State of Ohio for work performed on welfare patient Insurance on office contents
Interest on money borrowed to refurbish office
Accounting services
Miscellaneous office expense
Office rent
Dental supplies
Utilities and telephone
Wages
Payroll taxes
In June, Armando decided to refurbish his office. This project was completed and the assets placed in service on July 1. Armando's expenditures included $8,000 for new office furniture, $6,000 for new dental equipment (seven-year recovery period), and $2,000 for a new computer. Armando elected to compute his cost recovery allowance using MACRS. He did not
elect to use §179 immediate expensing, and he chose to not claim any bonus depreciation.
5. Lourdes's mother, Maria, died on July 2, 2011, leaving Lourdes her entire estate. Included in the estate was Maria's residence (325 Oak Street, Cincinnati, Ohio 45211). Maria's basis in the residence was $30,00o. The fair market value of the residence on July 2, 2011, was $155,000. The property was distributed to Lourdes on January 1, 2012. The Gonzaleses have held the property as rental property and have managed it themselves. From 2012 until June 3o, 2016, they rented the house to the same tenant. The tenant was transferred to a branch office in California and moved out at the end of June. Since they did not want to bother finding a new tenant, Armando and Lourdes sold the house on June 3o, 2016. They received $140,000 for the house and land ($15,000 for the land and $125,000 for the house), less a 6 percent commission charged by the broker. They had depredated the house using the MACRS rules and conventions applicable to residential real estate. To compute depreciation on the house, the Gonzaleses had allocated $15,000 of the property's basis to the land on which the house is located. The Gonzaleses collected rent of $1,000 a month during the six months the house was occupied during the year. They incurred the following related
expenses during this period:
Property insurance $500
Property taxes Boo
Maintenance 465
Depreciation (to be computed)
6. The Gonzaleses sold 200 shares of Capp Corporation stock on September 3, 2016, for $42 a share (minus a $5o commission). The Gonzaleses received the stock from Armando's father on June 25, 1980, as a wedding present. Armando's father page (>9 originally purchased the stock for $io per share on January 1, 1968. The stock was valued at $14.50 per share on the
date of the gift. No gift tax was paid on the gift.
7. Lourdes is required by Xavier University to visit several high schools in the Cincinnati area to evaluate Xavier University students who are doing their practice teaching. However, she is not reimbursed for the expenses she incurs in doing this.
During the spring semester (January through April 2016), she drove her personal automobile 6,800 miles in fulfilling this obligation. Lourdes drove an additional 6,700 personal miles during 2016. She has been using the car since June 3o, 2015.
Lourdes uses the standard mileage method to calculate her car expenses.
8. Armando and Lourdes have given you a file containing the following receipts for expenditures during the year:
Prescription medicine and drugs (net of insurance reimbursement) Doctor and hospital bills (net of insurance reimbursement)
Penalty for underpayment of last year's state income tax Real estate taxes on personal residence
Interest on home mortgage (paid to Home State Savings & Loan) Interest on credit cards (consumer purchases)
Cash contribution to St. Matthew's church
Payroll deductions for Lourdes's contributions to the United Way Professional dues (Lourdes)
Professional subscriptions (Lourdes)
Fee for preparation of 2015 tax return paid April 12, 2016
9. The Gonzaleses filed their 2015 federal, state, and local returns on April 12, 2016. They paid the following additional 2015 taxes with their returns: federal income taxes of $630, state income taxes of $25o, and city income taxes of $m.
10. The Gonzaleses made timely estimated federal income tax payments of $4500 each quarter during 2016. They also made estimated state income tax payments of $3oo each quarter and estimated city income tax payments of $ifio each quarter. The Gonzaleses made all fourth-quarter payments on December 31, 2016. They would like to receive a refund for any overpayments.
11. Armando and Lourdes have qualifying insurance for purposes of the Affordable Care Act (ACA).