• COMPLETE AN INDIVIDUAL INCOME TAX RETURN FOR THE TAX YEAR OF 2022 Andrew (Andy) S. and Sarah H. Clark are husband and wife and live at 4112 Foxglove Drive, McKinney, TX 75070. Andy is a retired petroleum engineer, and Sarah is a portrait artist. They choose to file a joint tax return. Their daughter, Gabrielle, was given custody of her children in a November 2019 divorce and awarded child support of $1,000 a month. The decree does not indicate who is entitled to the dependency exemptions for the children. Following the divorce, Gabrielle is taking some time to decide how to move forward with her life. She did not work in 2021, so she has no income for the year except the money she received for child support. Andy and Sarah have provided all Gabrielle’s and the twins’ support beyond child support. Name Social Security Number Birth Date AGE Andrew S. Clark 123-45-6785 09/15/1947 2022-1947 = 75 yrs. Sarah H. Clark 123-45-6786 12/03/1952 2022-1952 = 70 yrs. Gabrielle Sparks 123-45-6784 10/19/1985 2022-1985 = 37 yrs. Malone Sparks 123-45-6787 06/25/2012 2022–2012 = 10 yrs. Macie Sparks 123-45-6788 06/25/2012 When he retired at age 65, Andy was chief of offshore operations at Pelican Exploration Corporation. While employed, Andy participated in Pelican’s contributory qualified pension plan, to which he had contributed $250,000 (in after-tax dollars). Under one of the plan options, he chose a life-annuity payout of $60,000 per year over his life. As part of his retirement package, Andy also received nontaxable health insurance coverage. (B) SCHEDULE B - Miscellaneous Gross Income Items Besides the items already mentioned, the Clarks had the following cash receipts in 2022. Social Security benefits (Andy, $12,000; Sarah, $6,000) * 85% = Gross Taxable Income Life insurance proceeds $50,000. The life insurance proceeds concerned a policy owned by Maximilian Clark, which named Andy as sole beneficiary. The receipt of the proceeds came as a complete surprise to Andy. Qualified dividend income (reported on separate Forms 1099–DIV): o Ragusa Corporation 1,200 o Pelican Power 400 Interest income (reported on separate Forms 1099–INT): o IBM bonds 600 o CD at First National Bank of McKinney 400 o Wells Fargo money market fund 300 o City of Beaumont (TX) general-purpose bonds 9,000 (C) SCHEDULE C – Profit or Loss from a Business – one for each taxpayer Also supporting schedules Form(s) 8829 and 4564 (where necessary) 1) Due to Andy’s expertise in Gulf of Mexico offshore operations, Pelican continues to use his services on a consulting basis. Consulting income paid by Pelican (including expense reimbursement) $35,000. After each trip, Andy recovers his expenses when he is paid by Pelican for the services rendered. During 2021, he made seven trips on behalf of Pelican. On a typical trip, Andy flies by commercial airline to New Orleans, Houston, or Corpus Christi, and then takes a company helicopter to the offshore platform. The expenses for these trips are as follows:  Airfare $ 5,100  Lodging 3,100  Meals 2,200  Ground trans. 750 Total $11,150 2) Sarah, an accomplished artist, is well known regionally for oil portraits. She paints in the Photorealism style, providing her clients with portraits that are often mistaken for photographs. Painting in this style is very time- consuming. Consequently, her output averages between 15 and 16 portraits a year. Her fee of $4,000 per portrait was set several years ago and never varies. As this is quite reasonable for a Photorealistic oil portrait, she has a long waiting list of clients who have not yet been scheduled for sittings. She does all the work in the studio the Clarks maintain in their personal residence. Sarah is a cash basis taxpayer with respect to her art business. In early January 2022, Sarah was paid for three portraits she painted and delivered in late 2021. During 2022, Sarah completed 14 new portraits. Payment was received for 11 portraits when they were delivered to the buyers.  One portrait was delivered in mid-2021 to the CEO of a company who promised payment within 30 days. Payment was never received, and the company has since entered bankruptcy. Since the CEO has been indicted for securities fraud, Sarah feels certain that she will never be paid for the portrait.  The final 2 portraits were delivered in late 2021, and payments for both were received in early 2022.  Also, in December 2021, Sarah accepted $4,000 as payment for a portrait to be done in 2022. Sarah keeps receipts for all her expenses. Her total cost for painting supplies in 2022 was $3,010 (e.g., for canvases, brushes, oil paints, smocks, palettes, and other art supplies). The framing of the finished portrait is left to the customer. (D) Business Use of Home (Form 8829) For convenience and security reasons, Sarah prefers to work at home. One-fourth of the 4,000 square-foot living area is devoted to Sarah’s studio. The Clarks built the home at a cost of $350,000 on a lot previously acquired for $100,000, and they moved in on June 15, 2015. As to business use, depreciation is based on MACRS (using the midmonth convention) applicable to 39-year nonresidential realty. Besides home mortgage interest - $2,200 and property taxes - $3,600, other residence-related expenses were:  Utilities $ 4,200  Cleaning service 2,800  Home security 1,600  Home insurance 970  Stain removal - studio floor 1,100  Repairs to studio skylight 340 Other taxpayer payments made for 2022 expenditures not already mentioned are as follows:  Gabrielle’s legal fees and court costs incident to her divorce $9,000  Medicare B insurance premiums for Andy and Sarah $2,244  Health care premiums for dependents $3,600  Dental implants for Sarah $8,000  Cash donations to New Samaria Baptist Church, McKinney, TX $1,200  Subscriptions to professional journals, Oil and gas related (Andy) $160 and Art related (Sarah) $120  Dues to professional organizations (Andy) $140 and the State professional license fee (Andy) $250  2021 tax return preparation fees paid in 2022 ($200 for Andy’s business, $250 for Sarah’s business, and $450 for their personal income tax return) $900. (E) ALSO, EXPLAIN, CITING IRS CODE, WHETHER THESE EVENTS ARE TAXABLE INCOME 1. While walking the dog in late December 2021, Sarah was hit by an out-of-control delivery truck. The mishap sent Sarah to the hospital for several days of observation and medical evaluation. Aside from severe bruises, she suffered no permanent injury. Once apprehended, the driver of the truck was ticketed for DUI. The owner of the truck, a local distributor for a national brewery, was quite concerned about the adverse publicity that would result if Sarah filed a lawsuit. Consequently, it paid all her medical expenses and offered Sarah a settlement if she would sign a release. Under the terms of the settlement, Sarah would receive $134,000, which was $126,000 for personal injury and $8,000 for loss of income because her injuries prevented her from painting for a period of weeks. On January 31, 2022, Sarah signed the release and was immediately paid $134,000. 2. In August 2022, Andy was rear-ended while stopped for a red light. Thankfully, Andy was uninjured. However, his car was damaged. The driver who caused the accident left the scene immediately, so Andy was forced to use his insurance to repair the damage to his car. As a result, Andy was subject to the $1,000 deductible provision in the policy, which he paid with respect to his car repairs in 2022. The Clarks claimed no deductions with respect to the accident on their 2021 income tax return. In late 2022, the insurance company located the driver at fault and recovered the amount paid for repairs. Consequently, in 2022. Andy received a check refunding the $1,000 he paid for his policy’s deductible.