James (age 58, SS# 123-34-4439) and Martha (age 56; SS# 233-23-9050) Williams are married. James works at a major retailer as manager of the early shift. Martha is a nurse at a local hospital. James' salary (including semi-annual bonus) was $58,000 (federal withholding $12,000); Martha's salary was $46,000 (federal withholding $4,500). They live on 3530 Small Way, in Reno, NV.
The Williams purchased a duplex on 452 Main Street in March two years ago for $82,000 (cost of land was $14,000). In the current year, they had rental income of $6,000 (the renters were only in the house for part of the year; they moved out on August 31). Expenses on the rental property (for the entire year) were:
Mortgage interest expense $6,500
Property taxes $700
Home owner's insurance $540
Repair & maintenance $630
Other expenses $475
The Williams have some investment income from stocks and bonds that they inherited from Martha's grandmother many years ago:
Dividend Income from KPO Stock: $500
Dividend Income from LKT Stock $430
Interest Income from IBM Bonds $200
Interest Income from Local Independent School District bonds $300
The Williams sold 100 shares of Apple, Inc. stock (AAPL) on September 19. The Williams had inherited the stock on March 5, 2010.
They also sold 1,000 shares Microsoft stock (MSFT) on September 19. This stock had been purchased in on May 23, 2008.
Selling expenses for both stock sales were $5.00 per share.
Partnership and S Corporation Income (Income from Schedule K-1)
James is a 25 percent partner of Good Company Partnership. His share of the partnership's income and losses is as follows:
Ordinary Income $12,000
Charitable Contributions $2,000 (line 8)
Long-term Capital Losses ($6,000) (line 4e)
Interest Income $1,500 (line 4a)
Martha is a 10 percent shareholder of Better Corporation (a subchapter S corporation). She received a Schedule K-1 from Better Corporation listing the following items:
Ordinary Income $5,000
Dividend Income $1,000 (line 4b)
Short-term capital loss ($2,000) (line 4d)
Both activities are considered active activities (that means that James and Martha participate materially).
James and Martha's son, Emil (age 23, SS# 455-10-1231) got into some trouble with the law last year. He spent six months in jail and was just released at the beginning of the year. Emil is married to Cindy (age 22; SS# 460-11-2322). They have a 1-year old son, Anton (SS# 545-13-2233). In order to help Emil and Cindy out, James and Martha agreed to have them live in their house from January through September.
Emil did not work during that time and Cindy had a part-time job making $6,800 working at a grocery store checkout. In September, Emil found a job at a local construction firm which allowed him & Cindy to move into an apartment. Martha continued to provide free daycare service for Anton for the remainder of the year. Emil earned about $3,300 from September through December.
Unfortunately, the William's main home value dropped significantly in the last four years. They decided that because they were "under water" with their mortgage, they would apply for a short sale. They qualified and sold their main home for $52,000 on October 11. They had originally purchased that house for $135,000 in February of 2002 (value of the land was $25,000 back then). Their mortgage was $122,000 when they sold the house. They moved into their rental property on Main Street in September (after Emil and Cindy had moved out). As soon as they had decided they were going to do the short sale, they stopped making house payments. Thus, interest payments on their mortgage and home equity loan were only $3,200 and $1,650 respectively. Property taxes were $1,075 and home owner's insurance was $900.
In January, James' aunt died. She left him and Martha an inheritance of $176,000. James also received $5,500 for being the executor of his aunt's estate.
Martha Williams won a cruise in a raffle worth $1,200 (the cost of the raffle ticket was $15).
James had to have surgery on his back. The hospital costs were $22,000. Doctors' fees were $5,800, and prescription medicine was $250. Their insurance only covered $10,000 of this procedure.
The Williams donated 200 shares of Dell stock to the local community college on April 11. Their basis was $3,000. The stock was acquired on various dates.
A severe storm with a flash flood damaged their new principal residence on Main Street on November 4.
The damage was estimated to be $16,000 (the value of the house before the flood was $64,000 after the flood damage it was $48,000). Their insurance did not cover the damage, since they were not covered for flood losses.
The Williams paid $1,200 interest on their car loans. They also paid property taxes for their cars of $318.
The Williams paid $375 for tax preparation and consulting.
All individuals in this case are U.S. citizens.
- Prepare a regular income tax return (form 1040 and all required forms and schedules) for James and Martha Williams (assume they are filing jointly).
- Make up any addresses, social security numbers, names of employers, etc. where needed. Do not leave those lines blank!
- Before making any assumptions, ask me to make sure.
- Sign the return as paid preparer. You will be paid for your work with a grade.