1.

Armando Z. and Lourdes K. Gonzales are married and file a joint return. Armando is

self-employed as a dentist, and Lourdes is a college professor. Armandos and Lourdes

have three children. The oldest is Ricardo, who lives at home. Ricardo is a law student

at the University of Cincinnati and worked part time during the year, earning $1,500,

which he spent for his own support. Armando sand Lourdes provided $6,000 toward

Ricardo's support (including $4,000 for Ricardo's fall tuition). They also provided

over half the support of their daughter, Selena, who is a full-time student at Edgecliff

College in Cincinnati. Selena worked part time as an independent contractor during

the year, earning $3,200. Selena lived at home until she was married in December

2017. She filed a joint return with her husband, Tony, who earned $20,000 during the

year. Felipe is the youngest and lived in the Gonzales's home for the entire year. The

Gonzaleses provide you with the following additional information:

Armandos and Lourdes would like to take advantage on their return of any educa

-

tional expenses paid for their children.

The Gonzaleses do not want to contribute to the presidential election campaign.

The Gonzaleses live at 621 Franklin Avenue, Cincinnati, Ohio 45211.

Armando's birthday is 3/5/1959 and his Social Security number is 333-45-6666.

Lourdes's birthday is 4/24/1962 and her Social Security number is 566-77-8888.

Ricardo's birthday is 11/6/1994 and his Social Security number is 576-18-7928.

Selena's birthday is 2/1/1998 and her Social Security number is 575-92-4321.

Felipe's birthday is 12/12/2005 and his Social Security number is 613-97-8465.

The Gonzaleses do not have any foreign bank accounts or trusts.

2.

Lourdes is a lecturer at Xavier University in Cincinnati, where she earned $30,000.

The university withheld federal income tax of $3,375, state income tax of $900,

Cincinnati city income tax of $375, $1,860 of Social Security tax, and $435 of

Medicare tax. She also worked part of the year for Delta Airlines. Delta paid her

$10,000 in salary, and withheld federal income tax of $1,125, state income tax of

$300, Cincinnati city income tax of $125, Social Security tax of $620, and Medi

-

care tax of $145.

3.

The Gonzaleses received $800 of interest from State Savings Bank on a joint ac

-

count. They received interest of $1,000 on City of Cincinnati bonds they bought in

January with the proceeds of a loan from Third National Bank of Cincinnati. They

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C-8

Appendix C

paid interest of $1,100 on the loan. Armando received a dividend of $540 on

General Bicycle Corporation stock he owns. Lourdes received a dividend of $390

on Acme Clothing Corporation stock she owns. Armandos and Lourdes received a

dividend of $865 on jointly owned stock in Maple Company. All of the dividends

received in 2017 are qualified dividends.

4.

Armando practices under the name "Armando Z. Gonzales, DDS." His business

islocated at 645 West Avenue, Cincinnati, Ohio 45211, and his employer identification number is 01-2222222. Armando's gross receipts during the year were

$111,000. Armando uses the cash method of accounting for his business. Armando's

business expenses are as follows:

Advertising

$1,200

Professional dues

490

Professional journals

360

Contributions to employee benefit plans

2,000

Malpractice insurance

3,200

Fine for overbilling State of Ohio for work

5,000

performed on welfare patient

Insurance on office contents

720

Interest on money borrowed to refurbish office

600

Accounting services

2,100

Miscellaneous office expense

388

Office rent

12,000

Dental supplies

7,672

Utilities and telephone

3,360

Wages

30,000

Payroll taxes

2,400

In June, Armando decided to refurbish his office. This project was completed and

the assets placed in service on July 1. Armando's expenditures included $8,000 for

new office furniture, $6,000 for new dental equipment (seven-year recovery period),

and $2,000 for a new computer. Armando elected to compute his cost recovery al

-

lowance using MACRS. He did not elect to use 179 immediate expensing, and he

chose to not claim any bonus depreciation.

5.

Lourdes's mother, Maria, died on July 2, 2012, leaving Lourdes her entire estate.

Included in the estate was Maria's residence (325 Oak Street, Cincinnati, Ohio

45211). Maria's basis in the residence was $30,000. The fair market value of the

residence on July 2, 2012, was $155,000. The property was distributed to Lourdes

on January 1, 2013. The Gonzaleses have held the property as rental property and

have managed it themselves. From 2013 until June 30, 2017, they rented the house

to the same tenant. The tenant was transferred to a branch office in California and

moved out at the end of June. Since they did not want to bother finding a new

tenant, Armandos and Lourdes sold the house on June 30, 2017. They received

$140,000 for the house and land ($15,000 for the land and $125,000 for the house),

less a 6 percent commission charged by the broker. They had depreciated the house

using the MACRS rules and conventions applicable to residential real estate. To

compute depreciation on the house, the Gonzaleses had allocated $15,000 of the

property's basis to the land on which the house is located. The Gonzaleses collected

rent of $1,000 a month during the six months the house was occupied during the

year. They incurred the following related expenses during this period:

Property insurance

$500

Property taxes

800

Maintenance

465

Depreciation (to be computed)

?

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Appendix C

C-9

6.

The Gonzaleses sold 200 shares of Capp Corporation stock on September 3,

2017, for $42 a share (minus a $50 commission). The Gonzaleses received the

stock from Armando's father on June 25, 1981, as a wedding present. Armando's

father originally purchased the stock for $10 per share on January 1, 1969. The

stock was valued at $14.50 per share on the date of the gift. No gift tax was paid

on the gift.

7.

Armandos and Lourdes have given you a file containing the following receipts for

expenditures during the year:

Prescription medicine and drugs (net of insurance reimbursement)

$376

Doctor

and hospital bills (net of insurance reimbursement)

2,468

Penalty

for underpayment of last year's state income tax

15

Real

estate taxes on personal residence

4,762

Interest

on home mortgage (paid to Home State Savings & Loan)

8,250

Interest

on credit cards (consumer purchases)

595

Cash

contribution to St. Matthew's church

3,080

Payroll

deductions for Lourdes's contributions to the United Way

150

8.

The Gonzaleses filed their 2016 federal, state, and local returns on April 12, 2017.

They paid the following additional 2016 taxes with their returns: federal income

taxes of $630, state income taxes of $250, and city income taxes of $75.

9.

The Gonzaleses made timely estimated federal income tax payments of $1,500 each

quarter during 2017. They also made estimated state income tax payments of $300

each quarter and estimated city income tax payments of $160 each quarter. The

Gonzaleses made all fourth-quarter payments on December 31, 2017. They would

like to receive a refund for any overpayments.

10.

Armandos and Lourdes have qualifying insurance for purposes of the Affordable

Care Act (ACA).