California Problem 1 Paul and Marla Martinez

Paul was born August 1, 1964 and works as an engineer at Dillworth Technology, his taxable wages (after 401k deductions, etc.) is $165,000 per year. His wife Marla (born September 11, 1967) was an office manager for Neptune Designs ? she earned $31,000 during the first part of the year and then was laid off for the rest of 2014. Their wage amounts are the same for federal and California. Marla has also received $13,000 in unemployment compensation from the state of California.

Paul has had $35,000 of Federal income taxes withheld from his paychecks and $15,000 California income taxes withheld from his paychecks. Marla had $6,000 Federal income tax and $1,500 California income tax withheld from her Neptune Designs paycheck. There were no taxes withheld on her unemployment compensation.

They have sold some stocks during the year ? see Schedule D. Note that everything they sold is long-term capital gains and already has the basis reported to the IRS by the broker; therefore NO Form 8949 has been filed for the Federal tax return. You should assume that the cost basis for California purposes is the same as for Federal purposes. None of the stocks sold are qualified small business stock.

They received $400 of qualified dividend income from their Dillworth Technology stock. They also received interest income of $56 from Chase Bank. Marla is originally from New York City and a few years ago her parents gave her some City of New York municipal bonds which she still owns. She received $300 of interest income from these bonds which is tax exempt for Federal income tax purposes.

They have children but they finished college and have moved out ? Paul and Marla do not support them.

They have owned their own home in San Jose since 1991, have mortgage interest of $9,800, and property taxes of $4,000. They own two cars and the deductible part of their DMV fees is $120. In April 2014, they filed their joint 2013 California income tax return and paid $1000 tax due to California.

Here is a list of their cash donations to various organizations:

Saint Mary?s (Roman Catholic Church) $2,000

Second Harvest Food Bank $500

Santa Clara University (Fundraising Campaign) $1,000

Make-A-Wish Foundation $100

With time on her hands, Marla has prepared and filed their joint federal Form 1040 but she has hired you to prepare the California Form 540 (and any required schedules).You have reviewed the Federal forms and have already concluded they are correct.

You need to prepare a California Form 540 and a California Schedule CA540. If required, you should also prepare a California Schedule D540 (hint: read the directions). You may assume there is NO Federal or California AMT to consider.

Hints: Form 540, Line 91 Overpaid Tax is $1,216.

SCHEDULE A (Form 1040) OMB No. 1545-0074 Itemized Deductions Department of the Treasury Internal Revenue Service (99) Information about Schedule A and its separate instructions is at www.irs.gov/schedulea. Attach to Form 1040. Name(s) shown on Form 1040 2014 Attachment Sequence No. 07 Your social security number PAUL AND MARLA MARTINEZ Medical and Dental Expenses Taxes You Paid 1 2 3 4 5 6 7 8 Interest You Paid 9 10 11 Note. Your mortgage interest deduction may be limited (see instructions). 123-45-6789 Caution. Do not include expenses reimbursed or paid by others. Medical and dental expenses (see instructions) . . . . . 1 Enter amount from Form 1040, line 38 2 Multiply line 2 by 10% (.10). But if either you or your spouse was 3 born before January 2, 1950, multiply line 2 by 7.5% (.075) instead Subtract line 3 from line 1. If line 3 is more than line 1, enter -0- . . State and local (check only one box): a Income taxes, or . . . . . . . . . . . 5 b General sales taxes Real estate taxes (see instructions) . . . . . . . . . 6 Personal property taxes . . . . . . . . . . . . . 7 Other taxes. List type and amount 8 Add lines 5 through 8 . . . . . . . . . . . . . . . . Home mortgage interest and points reported to you on Form 1098 10 Home mortgage interest not reported to you on Form 1098. If paid to the person from whom you bought the home, see instructions and show that person's name, identifying no., and address . . } 11 12 Points not reported to you on Form 1098. See instructions for special rules . . . . . . . . . . . . . . . . . 12 13 Mortgage insurance premiums (see instructions) . . . . . 13 14 Investment interest. Attach Form 4952 if required. (See instructions.) 14 15 Add lines 10 through 14 . . . . . . . . . . . . . . . Gifts to 16 Gifts by cash or check. If you made any gift of $250 or more, see instructions . . . . . . . . . . . . . . . . 16 Charity 17 Other than by cash or check. If any gift of $250 or more, see If you made a gift and got a instructions. You must attach Form 8283 if over $500 . . . 17 benefit for it, 18 Carryover from prior year . . . . . . . . . . . . 18 see instructions. 19 Add lines 16 through 18 . . . . . . . . . . . . . . . Casualty and Theft Losses . . . . 4 0 9 21,620 --- 15 9,800 --- 17,500 --4,000 --120 --- . . . . . . 9,800 --- . . . . . . 3,600 --- . . . . . . 19 3,600 --- . . . . . . 20 0 --- . . . . . 27 0 --- 28 20 Casualty or theft loss(es). Attach Form 4684. (See instructions.) . . 0 --- 29 35,020 --- Job Expenses 21 Unreimbursed employee expensesjob travel, union dues, and Certain job education, etc. Attach Form 2106 or 2106-EZ if required. Miscellaneous 21 (See instructions.) Deductions 22 Tax preparation fees . . . . . . . . . . . . . 22 23 Other expensesinvestment, safe deposit box, etc. List type and amount Other Miscellaneous Deductions 24 25 26 27 28 23 Add lines 21 through 23 . . . . . . . . . . . . 24 Enter amount from Form 1040, line 38 25 Multiply line 25 by 2% (.02) . . . . . . . . . . . 26 Subtract line 26 from line 24. If line 26 is more than line 24, enter -0- . Otherfrom list in instructions. List type and amount 29 Is Form 1040, line 38, over $152,525? Total Itemized No. Your deduction is not limited. Add the amounts in the far right column for lines 4 through 28. Also, enter this amount on Form 1040, line 40. Deductions } . Yes. Your deduction may be limited. See the Itemized Deductions Worksheet in the instructions to figure the amount to enter. 30 If you elect to itemize deductions even though they are less than your standard deduction, check here . . . . . . . . . . . . . . . . . . . For Paperwork Reduction Act Notice, see Form 1040 instructions. Cat. No. 17145C . Schedule A (Form 1040) 2014 SCHEDULE D (Form 1040) Department of the Treasury Internal Revenue Service (99) OMB No. 1545-0074 Capital Gains and Losses Attachment Sequence No. 12 Your social security number Name(s) shown on return PAUL AND MARLA MARTINEZ Part I 2014 Attach to Form 1040 or Form 1040NR. Information about Schedule D and its separate instructions is at www.irs.gov/scheduled. Use Form 8949 to list your transactions for lines 1b, 2, 3, 8b, 9, and 10. 123-45-6789 Short-Term Capital Gains and LossesAssets Held One Year or Less See instructions for how to figure the amounts to enter on the lines below. This form may be easier to complete if you round off cents to whole dollars. (d) Proceeds (sales price) (e) Cost (or other basis) (g) Adjustments to gain or loss from Form(s) 8949, Part I, line 2, column (g) (h) Gain or (loss) Subtract column (e) from column (d) and combine the result with column (g) 1a Totals for all short-term transactions reported on Form 1099-B for which basis was reported to the IRS and for which you have no adjustments (see instructions). However, if you choose to report all these transactions on Form 8949, leave this line blank and go to line 1b . 0 1b Totals for all transactions reported on Form(s) 8949 with Box A checked . . . . . . . . . . . . . 2 Totals for all transactions reported on Form(s) 8949 with Box B checked . . . . . . . . . . . . . 3 Totals for all transactions reported on Form(s) 8949 with Box C checked . . . . . . . . . . . . . 0 0 0 4 Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684, 6781, and 8824 . 5 Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts from Schedule(s) K-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Short-term capital loss carryover. Enter the amount, if any, from line 8 of your Capital Loss Carryover Worksheet in the instructions . . . . . . . . . . . . . . . . . . . . . . . 7 Net short-term capital gain or (loss). Combine lines 1a through 6 in column (h). If you have any longterm capital gains or losses, go to Part II below. Otherwise, go to Part III on the back . . . . . Part II 4 0 5 0 6 ( 7 0) 0 Long-Term Capital Gains and LossesAssets Held More Than One Year See instructions for how to figure the amounts to enter on the lines below. This form may be easier to complete if you round off cents to whole dollars. 8a Totals for all long-term transactions reported on Form 1099-B for which basis was reported to the IRS and for which you have no adjustments (see instructions). However, if you choose to report all these transactions on Form 8949, leave this line blank and go to line 8b . (d) Proceeds (sales price) 75,000 (e) Cost (or other basis) (g) (h) Gain or (loss) Adjustments Subtract column (e) to gain or loss from from column (d) and Form(s) 8949, Part II, combine the result with line 2, column (g) column (g) 34,000 41,000 8b Totals for all transactions reported on Form(s) 8949 with Box D checked . . . . . . . . . . . . . 9 Totals for all transactions reported on Form(s) 8949 with Box E checked . . . . . . . . . . . . . 10 Totals for all transactions reported on Form(s) 8949 with Box F checked . . . . . . . . . . . . . . 11 Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and long-term gain or (loss) from Forms 4684, 6781, and 8824 . . . . . . . . . . . . . . . . . . . . . . 11 0 12 Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts from Schedule(s) K-1 12 0 13 Capital gain distributions. See the instructions . . . . . . . . . . . . . . . . . . 14 Long-term capital loss carryover. Enter the amount, if any, from line 13 of your Capital Loss Carryover Worksheet in the instructions . . . . . . . . . . . . . . . . . . . . . . . 15 Net long-term capital gain or (loss). Combine lines 8a through 14 in column (h). Then go to Part III on the back . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 0 For Paperwork Reduction Act Notice, see your tax return instructions. Cat. No. 11338H 0 0 0 14 ( 15 0) 41,000 Schedule D (Form 1040) 2014 Page 2 Schedule D (Form 1040) 2014 Part III 16 Summary Combine lines 7 and 15 and enter the result . . . . . . . . . . . . . . . . . . 16 41,000 If line 16 is a gain, enter the amount from line 16 on Form 1040, line 13, or Form 1040NR, line 14. Then go to line 17 below. If line 16 is a loss, skip lines 17 through 20 below. Then go to line 21. Also be sure to complete line 22. If line 16 is zero, skip lines 17 through 21 below and enter -0- on Form 1040, line 13, or Form 1040NR, line 14. Then go to line 22. 17 Are lines 15 and 16 both gains? Yes. Go to line 18. No. Skip lines 18 through 21, and go to line 22. 18 Enter the amount, if any, from line 7 of the 28% Rate Gain Worksheet in the instructions 18 0 19 Enter the amount, if any, from line 18 of the Unrecaptured Section 1250 Gain Worksheet in the instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 0 21 ( ) 20 . . Are lines 18 and 19 both zero or blank? Yes. Complete the Qualified Dividends and Capital Gain Tax Worksheet in the instructions for Form 1040, line 44 (or in the instructions for Form 1040NR, line 42). Do not complete lines 21 and 22 below. No. Complete the Schedule D Tax Worksheet in the instructions. Do not complete lines 21 and 22 below. 21 If line 16 is a loss, enter here and on Form 1040, line 13, or Form 1040NR, line 14, the smaller of: The loss on line 16 or ($3,000), or if married filing separately, ($1,500) } . . . . . . . . . . . . . . . Note. When figuring which amount is smaller, treat both amounts as positive numbers. 22 Do you have qualified dividends on Form 1040, line 9b, or Form 1040NR, line 10b? Yes. Complete the Qualified Dividends and Capital Gain Tax Worksheet in the instructions for Form 1040, line 44 (or in the instructions for Form 1040NR, line 42). No. Complete the rest of Form 1040 or Form 1040NR. Schedule D (Form 1040) 2014 Form 1040 2014 (99) Department of the TreasuryInternal Revenue Service U.S. Individual Income Tax Return For the year Jan. 1-Dec. 31, 2014, or other tax year beginning Your first name and initial , 2014, ending MARTINEZ See separate instructions. MARTINEZ MARLA A. IRS Use OnlyDo not write or staple in this space. Last name PAUL E. OMB No. 1545-0074 , 20 Your social security number 1 2 3 4 5 6 7 8 9 Spouse's social security number Last name If a joint return, spouse's first name and initial 2 3 4 5 6 7 8 9 0 Apt. no. Home address (number and street). If you have a P.O. box, see instructions. 1009 Whisman Court City, town or post office, state, and ZIP code. If you have a foreign address, also complete spaces below (see instructions). Presidential Election Campaign Check here if you, or your spouse if filing jointly, want $3 to go to this fund. Checking Foreign postal code a box below will not change your tax or refund. You Spouse San Jose, CA 95123 Foreign country name Filing Status Check only one box. Exemptions Foreign province/state/county 1 4 Single Married filing jointly (even if only one had income) 2 3 c Head of household (with qualifying person). (See instructions.) If the qualifying person is a child but not your dependent, enter this child's name here. Married filing separately. Enter spouse's SSN above and full name here. 6a b 5 Qualifying widow(er) with dependent child Yourself. If someone can claim you as a dependent, do not check box 6a . Spouse . Dependents: (1) First name . . . . . . . . . . . (2) Dependent's social security number Last name . . . . . . . . . . . . . . . . } (4) if child under age 17 qualifying for child tax credit (see instructions) (3) Dependent's relationship to you Total number of exemptions claimed . . . 0 . . . . . . . . . . . . . . . . 7 196,000 --- . 8b . . . . . . . . . 8a 56 --- . 300 --. . . 9a 400 --- . . 400 --. . . . . . 10 11 0 --- 41,000 --- 13,000 --- 21 22 250,456 --- 36 37 0 250,456 ----- Wages, salaries, tips, etc. Attach Form(s) W-2 . . . . Taxable interest. Attach Schedule B if required . Tax-exempt interest. Do not include on line 8a . Ordinary dividends. Attach Schedule B if required . . . . . . . b 2 . 8a b 9a . . . . Add numbers on lines above . 7 . 0 . 10 11 Qualified dividends . . . . . . . . . . . 9b Taxable refunds, credits, or offsets of state and local income taxes Alimony received . . . . . . . . . . . . . . . 12 13 14 Business income or (loss). Attach Schedule C or C-EZ . . . . . . . . . Capital gain or (loss). Attach Schedule D if required. If not required, check here Other gains or (losses). Attach Form 4797 . . . . . . . . . . . . . 15a 16a 17 IRA distributions . 15a b Taxable amount . . . Pensions and annuities 16a b Taxable amount . . . Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E 15b 16b 17 Farm income or (loss). Attach Schedule F . Unemployment compensation . . . . Social security benefits 20a 18 19 20b 21 22 Other income. List type and amount Combine the amounts in the far right column for lines 7 through 21. This is your total income 23 Educator expenses 24 Certain business expenses of reservists, performing artists, and fee-basis government officials. Attach Form 2106 or 2106-EZ 25 Health savings account deduction. Attach Form 8889 . 24 25 26 27 28 Moving expenses. Attach Form 3903 . . . . . . Deductible part of self-employment tax. Attach Schedule SE . Self-employed SEP, SIMPLE, and qualified plans . . 26 27 28 29 30 31a Self-employed health insurance deduction Penalty on early withdrawal of savings . . . . . . . . . . Alimony paid b Recipient's SSN IRA deduction . . . . . . . Student loan interest deduction . . Tuition and fees. Attach Form 8917 . 29 30 31a 32 33 34 . . . . . . . . . . . . 32 33 34 35 36 37 Adjusted Gross Income 0 . 18 19 20a If you did not get a W-2, see instructions. 2 Dependents on 6c not entered above d Attach Form(s) W-2 here. Also attach Forms W-2G and 1099-R if tax was withheld. Boxes checked on 6a and 6b No. of children on 6c who: lived with you did not live with you due to divorce or separation (see instructions) If more than four dependents, see instructions and check here Income Make sure the SSN(s) above and on line 6c are correct. Domestic production activities deduction. Attach Form 8903 35 Add lines 23 through 35 . . . . . . . . . . . . . Subtract line 36 from line 22. This is your adjusted gross income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b Taxable amount . . . . . . . . . . . 12 13 14 23 . . For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions. . . . . . . . . . Cat. No. 11320B Form 1040 (2014) Page 2 Form 1040 (2014) 38 Amount from line 37 (adjusted gross income) Tax and Credits 39a Check if: Standard Deduction for People who check any box on line 39a or 39b or who can be claimed as a dependent, see instructions. All others: Single or Married filing separately, $6,200 Married filing jointly or Qualifying widow(er), $12,400 Head of household, $9,100 . . Other Taxes 58 59 60a Unreported social security and Medicare tax from Form: a b 61 First-time homebuyer credit repayment. Attach Form 5405 if required 62 63 Form 8960 c Taxes from: a Form 8959 b Add lines 56 through 62. This is your total tax . . Payments If you have a qualifying child, attach Schedule EIC. Sign Here Paid Preparer Use Only . You were born before January 2, 1950, Spouse was born before January 2, 1950, . . Blind. Blind. . } . . . . . 38 . 250,456 --- 40 41 42 35,020 --- 215,436 7,900 ----- 43 207,536 --- 44 45 46 47 39,975 0 0 39,975 --------- 55 56 57 0 39,975 ----- 61 62 0 --- 63 39,975 --- Total boxes checked 39a 39b . . 42 43 Exemptions. If line 38 is $152,525 or less, multiply $3,950 by the number on line 6d. Otherwise, see instructions Taxable income. Subtract line 42 from line 41. If line 42 is more than line 41, enter -0- . . Form 4972 c Tax (see instructions). Check if any from: a Form(s) 8814 b 44 45 46 47 48 49 50 51 52 53 54 55 56 57 64 65 66a b 67 68 69 70 71 72 75 76a Alternative minimum tax (see instructions). Attach Form 6251 . Excess advance premium tax credit repayment. Attach Form 8962 . . . . . . . . . . . . . . . 48 . . . . . 52 Residential energy credits. Attach Form 5695 . . . . 53 3800 b 8801 c Other credits from Form: a 54 Add lines 48 through 54. These are your total credits . . . . . Subtract line 55 from line 47. If line 55 is more than line 47, enter -0- . . . . . . . . . . . . Self-employment tax. Attach Schedule SE . . . . . . . Add lines 44, 45, and 46 . . . . . . . Foreign tax credit. Attach Form 1116 if required . . . . . . . . . . . . . . . Additional tax on IRAs, other qualified retirement plans, etc. Attach Form 5329 if required . . . . . . . . . . . . . . . 8919 Household employment taxes from Schedule H . . . 49 50 51 Credit for child and dependent care expenses. Attach Form 2441 Education credits from Form 8863, line 19 . . . . . Retirement savings contributions credit. Attach Form 8880 Child tax credit. Attach Schedule 8812, if required . . . b 4137 . . . . . . . . . . . . . . 58 59 60a 60b Full-year coverage Health care: individual responsibility (see instructions) . . . . . Instructions; enter code(s) . . . . . . . . . . . 64 Federal income tax withheld from Forms W-2 and 1099 . . 41,000 --2014 estimated tax payments and amount applied from 2013 return 65 Earned income credit (EIC) . . . . . . . . . . 66a Nontaxable combat pay election 66b Additional child tax credit. Attach Schedule 8812 . . . . 67 American opportunity credit from Form 8863, line 8 . Net premium tax credit. Attach Form 8962 . . . . Amount paid with request for extension to file . . . . . . . . . 68 69 70 . 71 72 Credits from Form: a 2439 b Reserved c Reserved d 73 Add lines 64, 65, 66a, and 67 through 73. These are your total payments . Excess social security and tier 1 RRTA tax withheld Credit for federal tax on fuels. Attach Form 4136 . . . . . . . . . . . . 74 41,000 --- If line 74 is more than line 63, subtract line 63 from line 74. This is the amount you overpaid 75 1,025 --- Amount of line 75 you want refunded to you. If Form 8888 is attached, check here 76a 1,025 --- . b d c Type: Routing number Checking Savings x x x x x x x x x Account number x x x x x x x x x x x x x x x x x Amount of line 75 you want applied to your 2015 estimated tax 77 77 78 Amount you owe. Subtract line 74 from line 63. For details on how to pay, see instructions 78 79 Estimated tax penalty (see instructions) . . . . . . . 79 Do you want to allow another person to discuss this return with the IRS (see instructions)? Yes. Complete below. No Personal identification number (PIN) Phone no. Designee's name Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. Your signature Date Your occupation Daytime phone number Spouse's signature. If a joint return, both must sign. Date Spouse's occupation If the IRS sent you an Identity Protection PIN, enter it here (see inst.) PTIN Check if self-employed Joint return? See instructions. Keep a copy for your records. . Itemized deductions (from Schedule A) or your standard deduction (see left margin) Subtract line 40 from line 38 . . . . . . . . . . . . . . . . . Third Party Designee . 40 41 Direct deposit? See instructions. Amount You Owe . If your spouse itemizes on a separate return or you were a dual-status alien, check here b 73 74 Refund { . Print/Type preparer's name Firm's name Preparer's signature Date Firm's EIN Firm's address Phone no. www.irs.gov/form1040 Form 1040 (2014)