fact pattern

Project Description:

income tax fundamentals 2012 edition by whittenburg and altus-buller

fact pattern:

john and jane able file a joint federal income tax return. jane works as a high school teacher for the podunk board of education and, in 2011, had earned income of $47,5000 with federal income tax withheld of $7,125. john is self employed as an architect and had gross receipts from his business of $139,400 during 2011. john made federal estimated income tax payments in each quarter of $2,000 ($8,000 total for the whole year). john's social security number is 383-40-6579 (dob 01/30/62) and jane's social security number is 279-31-5842 (dob 04/17/64). they live at 123 wonder street, anytown, ohio.

the ables have three children that live with them: willie (dob 01/27/99: social security number 462-13-2731), millie (dob 04/18/94: social security number 462-13-2732) and sillie (dob 03/12/91; social security number 462-13-2733). sillie is a second year full-time student at owens community college. sillie's tuition for the year was $3,200 and his books were $800. none of the children had any earned or unearned income for the year.

information that you will need is as follows:

a. the ables had other income as follows:

1. interest income: $625 from a key bank savings account
$1,100 from the u.s. treasury department from a series h bond
$800 from a state of ohio, tax-exempt municipal bond

2. dividends: $1,200 of ordinary dividends from xyz co. of which all are qualified
$600 600 of ordinary dividends from abc co. of which $300 are qualified

3. rental income: $28,000 gross rents from an apartment building that they own

4. capital gains: they sold 100 share of delta co. for $6,600 on 02/14/11 that they had purchased for $4,200 on 09/21/04. they also had a long term capital loss carryover from 2010 of $4,000.

5. lottery winnings: $1,000; cost of lottery tickets in 2011 was $100

b. the ables incurred certain expenses during the year as follows:

1. john's architectural business: $16,000 for office rent
$5,500 for supplies

$9,300 for utilities
$2,900 for computer services
$3,700 for travel and lodging
$21,900 for subcontract services which was the cost of sales for the business
$1,100 for meals

2. jane's teaching supplies: $560

3. apartment building expense: $ 4,700 for repairs
$1,800 for utilities
$21,200 for mortgage interest expense
$1,400 for snow removal and lawn service
$ 940 for insurance

4. the ables also had a vacation home that they used 16 days out of the year and rented 200 days out of the year. rental income was $7,200 and the ables incurred the following expenses associated with the vacation home:

mortgage interest expense $7,800
utilities $850
management fees $1,800
insurance $450
real estate taxes $4,200
repairs and maintenance $1,400

for purposes of calculating the allocable expenses, use the irs method on page 4-4 of income tax fundamentals 2012 edition (whittenburg and altus-buller). do not use the tax court method described on page 4-5.

c. depreciation expense must be considered and calculated based upon the following:

1. architectural business - john does not have any recurring depreciation as he elects to treat his equipment purchases as a current expense under section 179. he will do the same for 2011 by electing to take a section 179 deduction for a computer that he bought for $1,500 in 2011.

2. rental apartment building - the ables bought the apartment building on january 1, 2001 for $350,000 which included land at the value of $50,000. the building has a useful life of 27.5 years and uses straight-line depreciation.

vacation home - the ables bought the vacation home on january 1, 2007 for $150,000 which included land at the value of $25,000. the building has a useful life of 27.5 years and uses straight-line depreciation.

d. other information:

1. john contributes to his delf-employed pension plan every year. for 2011 he contributed $8,000 to the plan.

2. the ables have the following itemized deductions that they would like you to take deductions for to the extent allowable:

a. medical expenses: prescriptions $580
doctors $1,480
hospitals $2,160
long term care insurance $1,200
eyeglasses $465
dentists $2,600
medical insurance $6,200 ( all of which john paid and he needs your advice as to how he can
best claim this as a deduction. i.e., business expense, itemized
deduction, other?)

b. taxes paid in 2011: real estate (home) $4,350
state and local income taxes $2,760

c. charitable donations: 1. cash $2,720
2. used personal property to the salvation army was $700
(thrift shop value of misc. clothing, original cost was $2,800)
3. mileage 1,000 miles for a charity

d. interest: home mortgage interest $8,800

e. child care expenses for willie: $3,400 paid to ymca for after school activities

f. miscellaneous: safe deposit box $50
tax return preparation fees $825
investment business publications $475
jane's union dues $750

required: prepare the federal income tax return for the ables for 2011. you will find pdf fill-in forms at irs.gov under "forms and publications" that you can save.

hint: taxable income should be between $44,000 and $45,000. you will need to use the regular form1040, schedules a & b,c,d,e, and se, and forms 2441, 4562, 8283, 8582, 8863, and 8949
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