Reference no: EM131701258
Case Scenario: TAXYEAR 2016 Federal Return Only
RobertT. and LisaJ. Smith(ages 52 and 51) are married and live at 5678 OrangeBlossom Trail, Dallas, TX 75248. Robert is the regional manager for a software company (SoftWare, INC),while Lisa is a self-employed CPA. They file a joint return anduse the cash basis for tax purposes.
1. Robertreceives a yearly salary of $99,000, plus an annual bonus, from Software INC. The annualbonus is determined in December of each year but not paid until January of the followingyear. Robert's bonus is $50,000 for 2015(received in 2016) and $66,000 for 2016 (received in2017). Robertcontributed $20,000to the plan in 2016-and Software made a matching contribution of $10,000. Thecompany providesan office for Robert's use thatis located at Suite 419, 101 Real Boulevard, Dallas, TX. (you need to determine what the total wages on Form W-2 will be based on the numbers noted above-do not calculate Medicare/social security payments.
2. Robert's employment-relatedexpenses (which SoftWare) reimbursed Roberta total of $8,000for2016 are as follows:
Airfare $8,100
Lodging $4,200
Meals $800
Entertainment $350
Car rentals, limos, taxis $ 6,550
While on business trips in his car, Robertwas caught in several small-town speedtraps and paid fines of $2,000.
3: Lisa is a licensed CPA in Texas who works part-time on a consulting basis.Her major clientsare real estate developers (both residential and commercial). Becauseshe limits her engagements, she does not have a separate office but does her work at theclient's premises or in her office at home (see item 4below). Her business expenses for2016are summarized below:
Supplies $4,000
Legal $5,000
CPA license fee $1,500
Subscriptions to professional journals $3,500
Dues to professional organizations--- $1,250
10% relates to lobbying and PAC contributions
Purchase of a new computer for the office $5,000
Volunteer teacher at a local university-the fair market value
of the time that she spends is- $15,000
She would have been billing clients an equivalent amount
In addition, she drove the family Acura (purchased on June 7, 2014) 8,000 miles onher job assignments. Regarding the Acura, Lisauses the automatic mileage method fortax deduction purposes. She drove the car for 25,000 miles during the year.
4. Home office: Lisa uses 400 sq. feet of a 4,000 sq. foot house-which was acquired in 2012, as her office. The office has a door and used to be a bedroom. There is a television in the room and Lisa occasionally watches TV in that room while working-if she falls asleep, she will stay there the entire night. The house has the following expenses:
Ad valorem taxes on personal residence $10,000
Interest on home mortgage $23,000
Home equity loan interest of-
The proceeds were used to finance a purchase of
A personal use auto $10,000
Repairs to roof-resulting from storm damage $10,000
Utilities $5,000
She is looking for a "simplified method"of deducting an office at home so she does not need to track expenses or be concerned about potential recapture in the future.
5. In addition to the above, the Polk's had the following stock transactions during the year:
Stock Date Acquired Date Sold SalesPrice Purchase Price
150 sh Pfizer Corp 5/12/89 8/15/16 $5,000 (1)
300 sh Texas Instr. 7/30/94 10/25/16 $16,100 (2)
50 sh Allergan 6/10/09 10/23/16 $1,525 $1,800
25 sh ExxonMobil 4/28/13 9/4/16 $1,900 $2,700
60 sh Texaco 9/11/13 10/27/16 $11,410 $9,100
300 shHulaHoop 1/7/08 12/1/16 $ 6,125 $3,150
(1) Lisa received a gift of 150 shares of Pfizer Corp stock on 5/12/89- it was gifted to her by her father. He acquired the stock on 10/27/81 for $1,300. In 2/00 the stick split 2 for 1.
(2) The Smith's acquired 500 shares of Texas Instrument stock for $7,810. Shortly after the purchase, they received a nontaxable stock dividend of 10%.
6. On August 5, 2010, Robert purchased 3,000 shares ofNetflix, Inc common stock for $20 a share aspart of its initial public offering. By December2015, the corporation ended its last game and its stock became worthless.
7. Besides the items previously noted, the Polk'shad the following receipts for 2016:
Lisa's consulting income $120,000
Interest income:
City of Dallas bonds $25,000
Ford Motor Company bonds $19,000
Loan repayment by Sarah Duval $30,000
Cash gifts from Lisa's parents $20,000
Federal income tax refund (2015 return) $9,000
Lisa's consulting income includes a $7,000 payment for work she did in 2015 (collected in 2016) butdoes not include $15,000 she billed in November for work performed in 2016 (collected in 2017). One clientwho has owed her $4,999 for work done in 2015 was convicted of arson in 2016and isserving time. Lisafeels certain that she will never-ever collect the $4,999.
8. In addition to the items already mentioned, the Polk'shad the following expenditures for 2016:
Life insurance premiums $4,000
Medical and dental expense not covered by insurance $20,000
Medical insurance noted above Taxes:
State and local sales taxes (actual amount paid) $8,000
Contributions-
Salvation Army (Plano branch) $11,000
Contribution to an indigent local family
that has fallen on hard times $5,000
Committee to elect the BillHill President (CREEP)
of the US $10,000
Stock-held for more than one year having a basis of
$10,000 and a fair market value of $30,000
to a charity organized in Canada
Stock held for less than one year having a basis
of $10,000 and a fair market value - $6,000
Date acquired 10/1/13-contributed 2/1/16 To Goodwill Industries
During 2016, the Smith'shad gambling winnings of $8,000 and losses of $20,000-allsupported by records.
9. See attached K-1 from an investment they made.
10. The Smith'smaintain a household that includes two children, Anna Marie (age 17) andTyler(age 20). Tyler graduated from high school on May 18, 2015, and isa full time student at UTD. Ann Marie is a junior in high school. Tyleris anaccomplished ventriloquistand during 2016was able to earn $17,200 performing at variousfunctions (e.g., weddings, bar mitzvahs, bachelor/bachelorette parties). He placed most of his earnings in a savings accountand kept only a small amount to spend on himself.
11. Robert's Form W-2 from Softwareshows $100,000 withheld for Federal income tax. SoftWare has an accountable expense reimbursement policy.TheSmith's alsohave made 4quarterly income tax payments of $50,000 each. Lisa's professionalactivity code is 541310. Relevant Social Security numbers are noted below:
Social Security
Name Number Birth Date
Robert 461-11-1111 07/01/1963
Lisa 461-45-6781 03/20/1965
Anna Marie 461-45-6784 06/30/2000
Tyler 461-45-6788 05/02/1997
REQUIREMENTS FOR TAX RETURN
Prepare an income tax return (with appropriate schedules) for the Smith's "" for2016."" Make necessary assumptions for facts not stated in the problem.
Prepare notes/comments on questions for return reviewer-critical part of the submission
You will be asked to attest to that on the cover sheet-see comments below-that you must attach to your submission.
- If a refund results,the taxpayers want it sent to them.
The Smith's do not wish to contribute to the PresidentialElection Campaign Fund. In the past several years, theyhave itemizedtheir deductions fromAGI(have not claimed the standard deduction option).