Income Tax Return Assignment Spring 2016 - Jeremy and Sharon (Form2015)

Income Tax Return Assignment

Spring 2016

 

You have your own CPA tax practice and you are greeted with new clients:  Jeremy and Sharon Williams and their two children.  You meet with them and they give you the information shown below.  They would like you to prepare their tax return for 2015.  They would like to file married filing jointly. 

NOTE:  Reference to the “current tax year” below for the taxpayers, Jeremy and Sharon, it is for the calendar year 2015.  

Jeremy and Sharon Williams (both 42 years old) are married and have 2 children.  Their son, Johnny is 8 and their daughter, Olivia, is 3.  They live at 151 32nd Avenue Denver, CO 80222.

The following table summarizes the birthdates, etc. for the family members:

 
Social Security Number
Date of Birth
Jeremy
523-33-3456
May 12
Sharon
454-66-1654
March 15
Johnny
523-45-7890
September 16
Olivia
523-50-6423
November 3
 

Sharon sells cosmetics for Packard Company. Jeremy is Vice Principal at the local high school, Palmer High School, and he works independently as a repair/handyman. Their income from their full time jobs is as follows:

 
Salary
Federal Tax Withheld
State Tax Withheld
Sharon
$95,000
$12,500
$6,400
Jeremy
$57,000
$  8,100
$4,150
 

NOTE:  the above salary income is before considering the following items:

1.     Packard has an employee benefits plan that lets employees select benefits equal to as much as 10% of their annual salary or receive the cash equivalent.  Sharon selects the max of 10% of her salary and chooses dental insurance, $40,000 in group term life insurance, disability insurance, and company-provided day care. The total cost to Packard of those benefits is $7,600.  Sharon takes the remaining benefits of $1,900 to which she is entitled in cash.

2.     Because Packard does not have an employee pension plan, Jeremy and Sharon each contribute $5,500 to their individual retirement accounts.

3.     The school district gives Jeremy medical insurance and group term life insurance equal to 100% of his annual salary.  He pays an additional $125 a month to cover Sharon and the children under his medical plan and this is deducted after tax from his salary.

4.     The school district also has a qualified contributory pension plan to which it contributes 5% of Jeremy’s annual salary.  Jeremy is required to contribute 3% of his salary. Jeremy is allowed to make additional contributions of up to 2% of his salary, and he contributes the additional amount.

 

In addition to the life insurance coverage provided by their employers. Jeremy and Sharon purchase $100,000 in whole life insurance on each other, along with a disability insurance policy for Jeremy. The checkbook analysis table that follows shows the costs that they paid for each of these policies.

Sharon's Job requires her to travel throughout her five-state region. Packard has an accountable reimbursement plan from which Sharon receives $8,500 for the following expenses:

Airplane transportation and auto expenses
$4,330
Lodging
  2,350
Incidentals
     400
Business Auto Expense: Note: She has used her Honda Civic in her work for Packard Company. During 2015, she properly documented 6,000 business miles of which she was reimbursed in the above account and amount list. Sharon elects to use the standard mileage method to calculate her car expenses. She spent $45 on tolls and $135 on parking related to her cosmetic sales. 
 

In May, Sharon and Jeremy go to the Blackhawk Casino with Sharon's client Beth and her husband. After wagering $320 without winning, Sharon wins $2,600 on the blackjack table. The casino withholds $780 for federal income tax and $260 for Colorado income taxes.

         

Jeremy hires his students to help him in his summer repair/handyman business. This year, he is able to hire 7 students.  Jeremy shuttles between sites, supervising the job talking to prospective clients and helping. He treats the students as independent contractors. He sent each student a 1099 reporting the amount of non-employee compensation was earned by the student for 2015. His business generates the following income and expenses.

Revenues
$112,000
Supplies
    33,100
Other material
      6,100
Insurance
      5,100
Payments to student help
   48,400
 

During the year, Jeremy and Sharon receive the following portfolio income:

Interest on savings accounts**
$2,030
Interest on U.S. Treasury bills
      400
Qualified Cash Dividends on Johnson Stock
  1,750
Interest on city of Denver bonds
      600
Interest on New Hampshire government bonds
      400
**Note:  $180 of the $2,030 of interest earned from savings was from Jeremy’s Business Savings Account that he maintained for his repair/handyman business. 

 

Jeremy and Sharon own 3,000 shares of Sampson Corporation stock that they purchased ten years ago on June 30, for $37,000.  Early in the current tax year on February 1, they sell all the shares for $16,800.  Note:  The basis of the stock was not reported to the IRS. 

Jeremy and Sharon also sell 100 shares of Johnson Corporation stock for $6,200 on December 1.  They purchased the stock six months earlier on June 1 for $2,700.  The cost basis upon the sale was reported to the IRS.   The couple also sells  250 shares of Mason Corporation for $4,100 on October 23, cost basis $11,350 (purchased five years earlier on July 13).  The cost basis upon sale was not reported to the IRS.

         

Jeremy and Sharon own a 4% investment interest in a limited partnership, BDK Partnership, Federal ID 84-5313212. The limited partnership reports the following information to them.

Ordinary loss
$2,100
Long-term capital gain
      600
Charitable Contribution
      300
Cash distribution
  2,400
         

During the year, the family spends 20 days at its summer vacation home in Buena Vista, Colorado; they rent it to vacationers for 80 days. Information pertaining to the summer vacation home is as follows:

Rental Income
$6,500
Interest on mortgage
  4,450
Property taxes
  1,600
Management fee
      380
Repairs
      320
Utilities
      650
Insurance
      420
Depreciation
  7,000
         

One night, while returning home from school, Jeremy is involved in an automobile accident and is hospitalized for 7 days. He incurs $14,000 in medical expenses. His employer-provided insurance policy reimburses him $11,800 of the costs. In addition, his disability insurance policy pays him $3,200 for time he misses from school.

The car is totally destroyed. It was purchased in ten years ago for $19,500 and Jeremy finds a similar car selling for $11,000. The insurance company reimburses him $7,500.

An analysis of Sharon and Jeremy's checkbook reveals the following payments in the current tax year:

Optometrist
      285
Veterinarian
      275
Prescription drugs
      175
Over-the-counter medicine
     320
Chamber of Commerce contribution
150
Contribution to candidate for Congress
500
United Way
260
Mile High Church
750
Vanderbilt University
520
Auto registration on automobiles ($130 of which is a license fee)
390
Tax preparation fee
375
Automobile insurance
$1,700
Homeowners insurance on their primary residence
      520
Life Insurance
      850
Disability insurance
      480
Country club dues
  3,600
Health club dues
      1,100
 

During the current tax year pertaining to their principal residence, Jeremy and Sharon take out a $41,000 home equity loan that they use to renovate the home. Interest paid on this loan totals $1,950 during the year. Jeremy and Sharon purchased their current home a few years ago by paying $25,000 down and signing a $151,000 mortgage note, secured by the home. The home is worth $230,000, and the balance on the original mortgage is $140,000. They pay interest on their home mortgage of $14,700 during the year. They also pay $310 in interest on their personal credit cards and $1,720 in property taxes on their home during 2015.

         

Required:

a.      Compute Jeremy and Sharon's taxable income for current tax year 2015, the tax on this income and the amount of refund or additional tax due.  You are required to go to the irs.gov website and download the appropriate tax forms and schedules that you believe are needed and complete these forms.  The following are some suggested forms and Schedules but you may need additional forms/schedules depending on how you treat each item referred to above:  Form 1040, Schedule A, Schedule B, Schedule C, Schedule D, Schedule E, Form 2106, Form 8949, and Form 8606.

b.     You should also provide a tax return memorandum showing the following items:  a summary worksheet of the above calculations of income tax and the refund or additional tax due; and a supplemental discussion of the treatment of each item given in the facts of the assignment.  If an item does not affect their taxable income calculation, you should discuss why it does not enter into the computation.  Please address this tax memorandum to your clients:  Jeremy and Sharon Williams. 
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