David and Ariel Olson are married taxpayers, ages 44 and 42, respectively, who file a joint return for 20x1. David is an assistant manager at Martinsville Motor Inn, and Ariel is a teacher at Martinsville Elementary School. They present you with W-2 forms that reflect the following information: Salary David $53,000 Ariel $40,000 Employer Contributions to 401(k) (not included above) 10,000 8,000 Federal income tax withheld 4,770 4,630 State income tax withheld 1,400 1,100 FICA (Social Security and Medicare) withheld 5,202 4,284 Ariel is the custodial parent of two children from a previous marriage who reside with the Olsons throughout the school year. The children, Thomas and Tara Parker, reside with their father, Bob, during the summer. Ariel and Bob divorced 12 years ago. Relevant information for the children follows: Age Months spent with Olsons Thomas 15 9 Tara 18 9 Under the divorce decree, Bob pays child support of $150 per month per child during the nine months the children live with the Olsons. Bob says that he spends $200 per month per child during the three summer months they reside with him. Ariel and David can document that they provide $2,000 support per child per year. In August, David and Ariel added a suite to their home to provide more comfortable accommodations for Doris, Ariel's mother, who had moved in with them in February 20x0 after the death of Ariel's father. Not wanting to borrow money for this addition, David sold 210 shares of Fillmore Corporation stock on May 3, 20x1, and used the proceeds of $22,000 to cover construction costs. The Olsons had purchased the stock six months ago for $50 per share. They received dividends of $750 on the jointly owned stock a month before the sale. The Olsons also have a ($4,000) long term capital loss carryforward from year 20x0. Doris, who is 66 years old, received $7,500 in Social Security benefits during the year, of which she gave the Olsons $2,000 to use toward household expenses and deposited the remainder in her personal savings account. The Olsons determine that they have spent $2,500 of their own money for food, clothing, entertainment, and other items for Doris. They do not know what the rental value of Doris's suite would be, but they estimate it would be at least $300 per month. Doris does not file her own tax return. Interest paid by the Olsons during the year included the following: Home mortgage interest (paid to Martinsville Federal Savings & Loan) $7,890 Interest on an automobile loan (paid to Martinsville National Bank) Interest on Citibank Visa card 1,660 620 In July, David hit a submerged rock while boating. Fortunately, he was uninjured after being thrown from the boat and landing in deep water. However, the boat, which was uninsured, was destroyed. David had paid $25,000 for the boat in June 20x0, and its value was appraised at $18,000 on the date of the accident. In December, David contributed $3,000 into his traditional IRA, and Ariel contributed $1,000 into her traditional IRA. The Olsons paid doctor and hospital bills of $8,200 and were reimbursed $2,000 by their insurance company. They have filed additional claims of $1,200 with their insurance company and have been told they should expect to receive payment for that amount in January 20x2. They spent $640 for prescription drugs and medicines and $5,904 for premiums on their health insurance policy. The Olsons also paid additional doctor and hospital bills of $3,000 for Doris and $1,500 total for the children. Additional information of potential tax consequence follows: Real estate taxes paid Cash contributions to church Appraised value of books donated to public library (original cost of $1,800) Refund of state income tax for 20x0* *(the Olsons itemized on their 20x0 Federal tax return; their total state and local taxes were less than $10,000, and their total itemized deductions exceeded their standard deduction by $5,400) Compute net tax payable or refund due for the Olsons for 20x1. $6,850 4,600 740 1,520