Interview questions, Other Subject

Matthew and Cindy McGee are calendaryear, cash basis taxpayers who are married filing jointly. Matthew is the custodial parent of his son, Jesse, from a previous marriage. The social security numbers and dates of birth for members of this family are as follows:

The McGee family resides at 3196 Laurel Farms Road, Murfreesboro,TN 37130.

An in-depth interview with Matthew and Cindy, coupled with a review of all their documentation, reveals the following information for the current year:

• Cindy worked throughout the year for Jacobson and Associates as a paralegal. Matthew worked for Atlantis International as a computer networking specialist for the first half of the year. Cindy's W-2 indicates gross wages of$49,000 and income tax withholding of $6,400. Matthew's W-2 indicates gross wages of $41,000 and income tax withholding of $ 5,365. (You may omit the requirement to attach a copy of the W-2 to the tax return.)

• Matthew's work with Atlantis International necessitated overseas travel, and while on a trip in June Matthew suffered an on-the-job injury. He was unable to work during his recuperation, so he drew $5,000 in workman's compensation benefits.

• Matthew's on-the-job injury and the extensive amount of time he spent away from home while traveling caused him to reconsider his career while at home recuperating. Once fully recuperated, Matthew decided to open his own business doing all types of computer-related work locally rather than return to his employment at Atlantis International. He operates this business as a sole proprietorship (under the business name Quality IT Solutions) from the basement of his home. Matthew earned revenues of $35,000 and incurred the following expenses related to this business:

Office expense $750
Taxes and licenses expense 525
Advertising expense 1,125
Supplies expense 635

Additionally, Matthew fully documented business-related mileage of 1,035 miles that he put on his personal vehicle driving to various job sites. This is a service business, so Matthew had no cost of goods sold. He also elected to forego any deduction for the business use of his home (i.e. the home office deduction), and he has opted to use the standard mileage rate to account for his business transportation expenses rather than his actual costs. (You may omit the requirement to complete Part IV of Schedule C.)

• Matthew knew his decision to pursue self-employment had tax consequences, so he came to you earlier in the year to ask for your help. You advised him to make estimated tax payments on Form 1040-ES totaling $5,000 to prepay an estimate of his self-employment and income tax liability. Matthew followed your advice and made timely estimated tax payments.

• Matthew and Cindy received a Form 1099-INT from Regions Bank indicating they earned a total of $275 in interest income on theirjoint savings account.

• The McGeesalso received a Form 1098 from Regions Bank indicating they paid a total of $9,140 in home mortgage interest. The loan qualified as acquisition debt, and the average outstanding principal balance of $225,000.They also paid $2,530 in property taxes on this home.

• Matthew and Cindy paid a total of $1,360 interest on personal debt (i.e. a car loan and credit cards).

• The McGees paid $2,825 in tuition and fees and $500 for books for Cindy to attend classes at a qualified educational institution. Cindy is working toward a Master's Degree on a part-time basis.(Assume the McGees'AGI severely limits their education tax credit, so they receive the most benefit from taking a for AGI education deduction.)

• The McGees gave $3,075 to their local church, an organization officially recognized by the IRS as a nonprofit, tax exempt entity.

• Matthew and Cindy had no liability for Tennessee income tax, but they paid sales tax on all applicable, personal purchases. The sales tax rate for the state of Tennessee is 7%, and the sales tax rate for Rutherford County is an additional 2.75%. (Search for the "sales tax deduction calculator" on the IRS website, and use it to simplify the calculation of their deductible sales tax.)

• Cindy likes to make and decorate cakes for special occasions. Friends and family paid her a total of $1,500 for various cakes she made for them throughout the year. She spent $250 for cake-making supplies. While she has baked cakes for several years now, this is the first year she made a profit doing so.

• The McGee family had $2,700 in out-of-pocket medical expenses and a total of $775 in 2% miscellaneous itemized expenses(before considering the cake-baking expenses).(Record the 2% miscellaneous itemized expenses on line 23 of Schedule A and omit providing any detail.)

• Matthew received $9,600 in court-ordered child support. He also completed his legal obligation to pay his ex-wife $1,250 a month in alimony in June; therefore, he paid $7,500 in the current year. His ex-wife's social security number is 444-44-4444.

• Matthew and Cindy paid $3,750 for Jesse's care after school and when school was not in session.

Matthew and Cindy have adequate documentation to support each of the aforementioned expenses, and they have no carryforwards from previous years that will impact their return for the current year.

Posted Date: 3/22/2013 5:36:45 AM | Location : United States







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