Alex and Wendy

2010

I met Alex and Wendy in 2005, to prepare their tax returns. Alex asked me to prepare their returns, and gave me their W-2s. He told me he had two daughters, Judy and Lorrie. He explained to me that Judy, 14 years old, was the daughter of his deceased wife, and Lorrie was his daughter with Wendy, and was 4 years old. He also mentioned that he and Wendy were divorced, and Lorrie lived with Wendy. They want to take advantage of the best filing status and exemptions.

It was obvious to me that Alex and Wendy were still in love. They were holding hands and spoke and looked like a loving couple. I stared at them, trying to figure it all out,

Oh, were getting remarried in 4 years. Judy doesnt like Wendy, and when shes 18, Im kicking her out so Wendy can then move back in. Judy and Wendy can not live in the same house, said Alex.

Oh, Ive never heard anything quite like this, I said.

Anyway, I gathered their information, and did their returns, and Alex paid me for both tax returns.

2011

Alex and Wendy came in to my office again, and Wendy told me that she had just lost her job at the beginning of the year. She was beginning to get unemployment, and asked me if she should have taxes taken out.

2012

Alex and Wendy dropped off their taxes again, and they had told me that they had gotten married.

Congratulations! Oh, this is earlier than you had originally planned. Did things work out with Wendy and Judy? I said.

No, since Wendy lost her job, she didnt have health insurance, so I decided to marry her so she would be covered. She still lives in her own house with Lorrie, said Alex.

2013

Alex and Wendy came by again, and dropped all their tax information off. Nothing much had changed except Wendy got a job working at a daycare making minimum wage. She still didnt have health insurance there, but it didnt matter because she was covered through Alexs job.

2014

This trip, Alex told me that Wendy and Lorrie moved in with Alex. Judy moved out when she turned 18 and got a full-time job at a local restaurant. They were finally a happy family.

What should I do about my house? Should I sell it? Or rent it? said Wendy.

Part 1 (focus on filing status and exemptions):

1)What is the tax problem(s) that you need to research?

2)Are you missing any important tax information that you need to make a better recommendation?

3)Address their filing status for each year. 2010 2014, and why?

4)Who takes who as an exemption and why for 2010, 2011, 2012, 2013, and 2014. Are there any special steps that the taxpayers need to be aware of?

Part 2 (focus on Wendys question):

5)What is the tax problem(s) that you need to research?

6)What should Wendy do about her house?

7)What additional tax issues do Alex and Wendy have for 2014 and beyond?