Reference no: EM131028794

Comprehensive Tax Return Project-Tax Year 2015

John and Ruth Kaiser, husband and wife, reside at 2168 Eagle Court, Rocklin, CA 95677.

1. John is a computer consultant who specializes in installing software systems. John deals mainly with city and county governments and school districts. Currently, John has contracts with Placer and El Dorado Counties which pay him an annual retainer to be on call as needed and he works on a per job basis for other entities. As noted below (see item 3), he conducts his consulting business from an office in his home.

2. Ruth is a teacher employed by the Rocklin School District. She has been completing classes offered by CSU--Sacramento leading to a Master of Arts in Education. In driving to work and school, Ruth uses the family Audi.

3. The Kaisers constructed their residence on Eagle Court in 2013 at a cost of $520,000. They had acquired the lot from a grandparent several years before for an additional $20,000. Of the 3,200 square feet of livable space, one-fourth (25%) is used as John's office. Besides the interest on the home mortgage and property taxes (see item 18 below), residential expenses for 2015 are as follows:

Utilities $4,200
Security system annual service fee 600
Homeowner's insurance 800
New computer (100% business) 2,200

John's office furniture (e.g., desk, chairs, drafting tables) was expensed previously under § 179 when acquired. On May 16, 2015, however, he bought a new Xerox copier for $850.

4. In August of 2014, John purchased a BMW that he uses exclusively for business. No trade-in was involved and part of the purchase price of $45,000 was financed. For 2014, he did not choose to claim any §179 expensing or additional first year depreciation. Under the actual operating cost method, he uses 200% declining-balance with half-year convention. His expenses relating to the BMW for 2015 are as follows:

Item	Amount
Gasoline	$2,400
Oil and lubrication	120
Auto insurance	1,400
Interest on car loan	1,200
Repairs (not under warranty)	520
Personal property tax on BMW	610

During 2015, John Drove the BMW 18,000 miles.

5. Except for the work he does for Placer and El Dorado Counties, John's consulting usually requires overnight stays. On a typical trip, he drives to the work location and stays at a motel until the assignment is complete. In addition to the auto expense previously noted (see item 4), his business travel expenses for 2015 are summarized below:

Item	Amount
Meals	$7,400
Lodging	8,200
Laundry	310
Parking	205

6. To maintain good relations with his clients for whom he does work, John gives fruit baskets at Christmas. Each basket cost $23 plus wrapping ($2) and shipping ($4), making the total $29. On December 19, 2015, John charged the fruit baskets order of $609 (21 baskets at $29 each) to his Visa credit card. [The Visa bill was paid in January 2016.]

7. Placer and El Dorado Counties pay John an annual retainer of $8,000 and $12,000, respectively. The retainers for a year are to be paid by December 31 of that year. For budgetary reasons, however, El Dorado delayed its 2014 payment until February 2015. All other retainers were paid on schedule.

8. One private client, Jim Beaver, retained John to install a computer software program for investment tracking. When John presented Jim with an invoice for $6,000, Jim offered John a choice: cash or a Jeep Wrangler (2006, V-6) listed for sale at $7,999. The blue book value of a '06 Jeep Wrangler ranges from $3,675 to $7,925. John needed a car for his daughters, so he accepted the Jeep.

9. Expenses incurred by Ruth during 2015 in pursuing the M.S. in Education are as follows:

Tuition (spring and fall 2015) $7,100
Books, lab supplies, computer software 940
Campus parking 230

Mileage driven was 1,040 miles. For tax purposes, the Kaisers use the standard mileage method for the Audi which was purchased on June 15, 2013.

10. For several years, Ruth has not been pleased with her job with the Rocklin School District. Although the fringe benefits are good (see items 18 and 19 below), her salary is too low. In 2015, therefore, she retained the services of a professional recruitment agency. After considerable effort and multiple job interviews, she received several attractive job offers. When the school district learned of her job search, Ruth was promised greater responsibilities and potential salary enhancements so she decided against any change. The job search effort cost Ruth $2,275.

11. In the summer of 2014 while on a family outing, the Kaisers had an auto accident. Although it was the other driver's fault, the Kaisers had to file a claim with their own insurance company (State Farm) for the repairs on the Audi. They were charged the $1,000 deductible and were unable to deduct any of this amount on their income tax return due to the 10%-of-AGI floor. In 3 2015, State Farm was able to collect from the other driver's carrier, and the Kaisers recovered the $1,000 deductible.

12. In late 2015, the Kaisers were audited by the California Franchise Tax Board. The agent checked their state income tax returns for tax years 2012, 2013, and 2014. She assessed deficiencies of $420 for 2013 and $310 for 2014. For year 2012, she accepted the return and made no change. The Kaisers agreed to the assessments and immediately mailed a check for $781 to the state in payment of the assessments and interest.

13. For several years Ruth's parents, Rudi and Paula Dietrich, have been living with the Kaisers. Since they meet the dependency requirements, the Kaisers have claimed the parents on their tax returns. On December 30, 2014, Paula suffered a stroke, was taken to Memorial Hospital, and died in the ICU on January 2, 2015. In February 2015, John received and paid a bill from Memorial for $9,400 ($5,100 of which related to 2014). The Kaisers also paid for Paula's funeral expenses of $4,900. Paula owned her own cemetery lot.

14. Because Rudi (Ruth's father) is physically handicapped and must use a wheelchair, John had some changes made to portions of the Eagle Court residence in 2015. A contractor was hired to add ramps to entrances, lower certain counters, widen several hallways, and add guardrails to the bathroom facilities. The contractor charged $6,000 for the job. A reasonable estimate made by a professional appraiser (not related or friends of the Kaisers) is that the capital improvements increased the value of the residence by $3,000.

15. Several years ago, Ruth took out life insurance policies on the lives of her parents. The policies, face amount of $50,000 each, are issued by Met Life and designate Ruth as the owner and beneficiary. After the death of her mother in 2015, Met Life paid Ruth $50,000. Ruth had previously paid premiums of $18,200 on the policy. In 2015, Ruth paid Met Life $1,400 in premiums on her father's policy.

16. The Kaisers have a $4,000 excess long-term capital loss carryover from 2014. Their property transactions for 2015 are summarized below:

John inherited the Yuba City lot from his grandmother, Ellie, who died in 2008. Ellie had paid $2,000 for the property in 1950, and it was worth $9,000 when she died. In the prior year (2007), Ellie had given John 1,000 shares of JNJ stock. The shares had cost Ellie $30,000 in 2005 and were worth $24,000 on the date of the gift. The JNJ Corporation declared a 2-for-1 stock split in early 2009. For sentimental reasons, John wanted to keep half of the JNJ stock. The motorcycle was John’s and he decided to accept a neighbor's unsolicited offer to buy. John's broker, a cousin on his mother's side of the family, did not charge him a commission on the sale of the JNJ and PG

17. Besides the items already noted, the Kaisers had the following receipts during 2015:

Item	Amount
John's Consulting fees but not including items 7 and 8 above		$72,000
Ruth's salary		42,000
Interest income
City of Lincoln, CA bonds	$2,400
General Electric bonds	800
Bank of America Certificate of Deposits	1,100	4,300
Qualified Dividends
JNJ Corporation common	$400
PG Corporation common	600	1,000
Income tax refunds (for tax year 2014)
Federal	$1,500
California	290	1,790

18. In addition to the items already mentioned, the Kaisers had the following expenditures for 2015:

Item	Amount
Dental (orthodontist)	$1,400
Property taxes on personal residence	4,000
Personal property tax on Audi (since the amount is not significant and all can be deducted as an itemized deduction ignore allocation to Form 2106 and use all as an tax itemized deduction).	580
Interest on home mortgage	4,800
Work-related expenses (see item 19)	8,750
Tax return preparation fee (one-half of the preparer's time was devoted to John's business activities)	900
Payment of church pledge (includes $600 left over from 2014 pledge)	3,000
College donations (see item 20)	2,000

For medical purposes, all the Kaisers have qualifying medical coverage through Ruth's policy available through the Rocklin School District. No contribution from the employee is required, no co-payer deductible features are involved, and spouse and children are included. Other dependents (e.g., parents) and dental bills are excluded from coverage.

19. Professional dues, journals, and license fees (teaching and business) are as follows:

Item	Ruth	John
Dues	$150	$300
Journals	75	100
Licenses	125	-0-

John contributed $8,000 to an H.R. 10 (Keogh) plan that he established several years ago. The administrator of the plan is DKP Trust Company. Ruth is covered by a non-contributory retirement plan that the Rocklin School District maintains for its employees.

20. Ruth and John attended California State University--Sacramento and belong to the alumni association. They each sent the athletic department $1,000 (for a total of $2,000) to give them preferred seating at home football games. The charge for seating preference does not include the cost of the tickets for games.

21. The Kaisers have three daughters who live with them. Karla (age 20) and Krystal (age 18) are high school graduates and have part-time jobs earning $9,000 and $8,000, respectively. As they are saving most of their earnings for college, both receive almost all of their support from their parents. Keri (age 17) is a full-time student and does not work.

22. Ruth's Form W-2 from her employer shows withholding of $6,384 for Federal income tax and $1,536 for state income tax. The Kaisers made the required quarterly estimated payments of $10,694 ($2673.50 each quarter) to the U.S. Treasury and $1,600 ($400 each quarter) to the state of California.

23. Social Security numbers for the parties involved are as follows:

Name	Soc. Sec. Number	Birth date
Ruth Kaiser	426-81-7492	02/02/1969
John Kaiser	426-53-5261	01/01/1968
Rudi Dietrich	425-89-6494	05/05/1947
Paula Dietrich	425-74-5213	06/06/1948
Karla Kaiser	427-52-3162	03/03/1995
Krystal Kaiser	427-43-2485	04/04/1997
Keri Kaiser	427-37-4533	07/07/1998

24. The Kaisers estimate that their total on-line purchases amounted to $2,500 during 2015 (no item cost $1,000 or more). Of that amount, they did not pay California (or any other state) sales tax on $2,000 of their purchases.

Prepare Federal and California joint returns (with appropriate schedules) for the Kaisers for 2015. In doing this, make the following assumptions:

• The principal business code for John is 541510.
• The Kaisers itemized their deductions from AGI for tax year 2014. In making the choice between deducting state and local sales taxes and state income taxes, they selected state income taxes. The amount of 2014 itemized deductions were high enough that they received the entire benefit of the state income tax itemized deduction compared to the standard deduction which makes their refund taxable.
• The Kaisers drove 700 miles for medical (e.g., doctor and dentist visits, hospital trips) purposes and 280 miles for charitable (e.g., canvassing for annual church pledges) purposes in 2015. The family Audi was used in both cases.
• If a refund is due, they want it sent to them.
• They do not want to contribute to the Presidential Election Campaign Fund.