COMPUTE FEDERAL INCOME TAX PAYABLE OR RECEIVABLE FOR THE TAXPAYERS. YOU MUST SHOW ALL APPLICABLE LINES OF THE FIT FORMULA FOR INDIVIDUALS.

Tommy and Sara OMara, a married couple, have two children, Curly and Moe OMara (ages 4 and 5, respectively). In January of the taxable year, Sara's mother, Evermore O'Mara, moves in with Tommy and Sara. They provide over half of her support for the rest of the year. Evermore's gross income for the year is $1,200. Prior to living with Tommy and Sara, Evermore lived on her own and supported herself with personal savings.

Tommy is a tennis instructor who generated $150,000 of cash receipts in the current year as a sole proprietor. He has various expenses relating to his business considered below.

Sara is an x-ray technician who has a $60,000 annual salary (from which $6,000 of federal income tax was withheld). Sara has knee surgery at the hospital where she works and the hospital discounts her bill by $2,000. This is 20% of the amount of the hospital's usual charge for the surgery. (See M&M Chapter 6 and 132.)

Tommy provided tennis lessons to his lawyer in exchange for the lawyer's drafting of wills for Tommy and Sara. The services were worth $4,000. Additionally, he performed services for various clients during the year for which he has not yet been paid. (Note: Because Tommy is a cash basis taxpayer, these accounts receivable are not income until they are collected.) Towards the end of the year these accounts receivable amount to $40,000; to improve his cash flow, Tommy sells $11,000 of the AR to a factoring company for $10,000.

Tommy and Sara recover $12,000 from their insurance company when their car, used solely for personal purposes, is totaled by a falling tree during a hurricane (which the president of the United States lawfully declared a major disaster). They paid $18,000 for the car two years ago. Prior to the hurricane its fair market value was $14,100. (See M&M Chapter 10.)

While the couple was unlucky as a result of the hurricane, Sara also had some good luck, finding some collectible coins worth $5,000 in an old trunk.

Sara received a $700,000 cash inheritance from her father's estate. Sara was also paid $10,000 by her father's estate for serving as the executor of the estate.

Sara felt REALLY lucky about the inheritance because her father previously told her she would be excluded from his will because he said Tommy really screwed up his tennis stroke by giving some pointers. (Saras father was REALLY serious about his tennis game. So much so that 4 she wasnt totally sure if he was serious about removing her from the will.) Sara invested the inheritance in certificates of deposit and earned $15,000 of interest.

Well, the luck keeps flowing in recognition of his outstanding service to the profession, Tommy is awarded an all expenses paid vacation to Hawaii worth $5,000.

Tommy incurs the following expenses in his tennis business: (1) $20,000 cost of supplies; (2) $27,000 of rent (for court time); (3) $2,000 of utilities (primarily for outdoor lights in the early morning and late at night, along with keeping the water fountain flowing he has some REALLY dedicated players); and (4) $39,000 of salaries. (His secretary spent a lot of time redirecting his now deceased father-in-law away from the facility.)

Tommy also purchased a new tennis ball launcher for $40,000. The equipment has a 7-year class life, however Tommy properly elects to expense the entire amount under section 179.

Tommy is not the only one spending; Sara incurred $2,400 of expenses to attend a seminar related to her employment. $600 is for meals and the rest is for plane fare and lodging. Her employer paid the seminar tuition of $1,000. Sara spends $200 for New Balance shoes that she only wears at work. The shoes have a special design for arch support and are quite fashionable in appearance. [Remember to consider the various limitations in 67.]

Both Sara and Tommy pay professional dues. Sara paid $300 in dues to the Association of XRay Technicians and Tommy paid $1,000 in US Tennis Association dues. They also made several other joint expenditures during the year including:

Paid $9,000 of interest on the mortgage of their residence, $1,000 of interest on their personal credit cards, and $5,000 of property taxes. The interest on their personal credit cards resulted from the $15,000 they spent on remodeling a bathroom in their residence.

Gave $8,000 of cash to various public charities (assume qualifying under 501(c)(3))

Taxpayers pay $7,000 in state income taxes and $3,000 in state sales taxes. [Note: We didnt cover this in class, but read 164 closely with respect to state sales taxes.]

Taxpayers incur $4,000 in medical expenses.

Because Tommy is self-employed, he also made federal estimated tax payments of $10,000.

As a sole proprietor, Tommy is entitled to a deduction under section 199A equal to 20% of the net operating income from his business. You can refer to M&M Chapter 37 if you have interest in the details of this deduction, but for purposes of this assignment, just assume that Tommys qualified business income is $35,000 and that his deduction is therefore $7,000 ($35,000 20%).