David (Dave) S. Brown and Karen H. Brown are husband and wife and live at

13071 Sterling drive, Aitkin, MN 56431. Dave is a self-employed insurance claims

adjuster (business activity code 524290) and Karen is a dietitian for the local school

district. They choose to file a joint tax return each year1.

Dave represents several national casualty insurance companies on a contract basis.

He operates this business on the cash basis. He is paid a retainer and receives

additional compensation if the claims he processes for the year exceed a specified

number. As an independent contractor, he is responsible for whatever expenses he

incurs. John works out of an office near his home. The office is located at 1202 Motel

Road. He shares suite 326 with a financial consultant, and operating expenses are

divided equally between them. The suite has a common waiting room with a

receptionist furnished and paid by the landlord. Dave paid his one-half of the 2018

expenses as detailed below:

Office rent

$11,600

Utilities (includes telephone and fax)

4,300

Replacement of waiting room furniture on April 22

3,600

Renters' Insurance (covers personal liability, casualty & theft) 1,400

Office expense (supplies, postage)

740

New copier (acquired on February 7)

300

Waiting room coffee service (catered)

280

Waiting room magazines and subscriptions

90

For his own business use, Dave purchased a $2,100 laptop on June 17 and a $1,200

Nikon camera on February 5. Except for his vehicle (see item 2), Dave uses the

section 179 write-off option as much as possible. Dave has no expenditures for

which he is required to file Form 1099s.

2.

On January 2, 2018, Dave purchased a Toyota Camry that he used 92% of the time

for business. No trade-in was involved and he did not claim any section 179

expensing. Dave uses the actual cost method to compute his automobile expense

deduction. His expenses relating to the Camry are as follows:

Gas

$3,500

Auto insurance

1,700

Interest on car loan

820

Auto club dues

325

Oil changes and lubrication

210

License and registration

190

In connection with his business use of the Camry, Dave paid $510 for tolls and $350

in fines for traffic violations. In 2018 Dave drove the Camry 14,352 miles for business

and 1,248 miles for personal use (which includes his daily round-trip commute to the

office).

3.

Dave handles most claim applications locally, but on occasion he must travel out of

town. Expenses in connection with these business trips during 2018 were $930 for

lodging and $1,140 for meals. He also paid $610 for business dinners he had with

several visiting executives of insurance companies with whom he does business.

Dave's other business-related expenses are listed below:

Contribution to a H.R. 10 (Keogh) retirement plan

$8,000

Premiums on a medical insurance plan that overs himself,

His wife and children)

4,600

Premiums on disability insurance policy (pays for loss of

Income if Dave is disabled and cannot work)

2,400

State and local business privilege tax

450

Christmas gift for receptionist ($25 box of Godiva chocolates

plus $3 for gift wrap)

28

4.

Karen earns $32,000 working as a registered dietitian for the Atkin Public School District.

The job she holds, manager of the school lunch program, is not classified as full-time.

Consequently, she is not eligible to participate in the retirement plan or health insurance

program. Karen's expenses for 2018 are summarized as follows:

Contribution to a traditional IRA

$5,500

Job hunting expense

720

Continuing education program

350

Membership dues to the National Association of Dietitians

120

Subscription to

Nutrition Today

90

In order to work full time and earn a larger salary, Karen applied for a full-time position

for which she incurred job hunting expenses. Karen drove the family Chevrolet Malibu

930 miles on business-related matters out of a total of 8,670 miles driven for 2018. The

Browns purchased the car on July 11, 2012 for $23,400. Karen uses the automatic

(standard mileage rate) method for computing any available deduction for the business

use of her automobile.

5.

The Browns have supported Gary Simon (Karen's widowed father) for several years,

appropriately claiming him as a dependent for tax purposes. On December 27, 2017,

Gary suffered a massive stroke. He died on January 8, 2018. In January and February of

2018, the Browns paid the following for Gary:

Medical expenses not covered by Medicare ($6,000 incurred in

2017 and $5,800 incurred in 2018)

$11,800

Funeral expenses

15,300

Gary's health insurance was limited to his Medicare coverage and the Millers' medical

insurance (see item 3 above) only covered Dave, Karen and their sons.

6.

The Browns acquired a residence on February 15, 2018 at 12120 Lake Road, Aitkin, MN

56431. The cost was $270,000 of which $50,000 was allocated to land. They also

bought furniture and appliances in the amount of $14,000 throughout the month of

March. On April 1 they began renting the residence under the following terms: $2,400

rent per month due on the first day of the month; last month's rent paid in advance; and

a $2,000 security (damage) deposit. The tenant complied with all terms except that the

December rent was not paid until January 1, 2019 because of an extended vacation they

took from Thanksgiving through Christmas. Expenses in connection with the property for

2018 were as follows: property taxes, $2,600; repairs, $320; lawn maintenance, $540;

insurance $1,800; and a street paving assessment of $2,100.

7.

In early December 2017, a (former) friend advised Dave to buy stock in Pioneer

Aviation, Inc. (PAI). At that time, PAI was in serious financial shape and was headed for

bankruptcy. Nevertheless, according to Dave's (former) friend, the underlying value of

the company's assets was such that shareholders were bound to recover considerably

more than the current market price of $.50. Excited at the chance of a quick, sure profit,

Dave purchased 20,000 shares for $10,000 on December 15, 2017. In September of

2018, the bankruptcy trustee announced that the stock was worthless and that some of

PAI's creditors would not be paid.

8. On June 14, 2018, the Browns sold 500 shares of Garnet Corporation stock for $17,500

($35 per share). They had bought the shares on November 5, 2017 at $25 (basis of

$12,500.

9. In addition to those previously noted, the Browns receipts for 2018 were as follows:

Payments to John for services rendered (as reported on Form 1099-MISC

by several payor insurance companies) pursuant to contractual arrangements $82,000

Income tax refunds for 2017 tax year:

Federal

210

State of Minnesota

90

Interest income reported on Form 1099 INT:

State of Minnesota general purpose bonds

1,400

General Electric corporate bonds

1,100

Certificate of deposit with Aitkin National Bank

900

Qualifying dividends (on Duke Energy stock) as reported on Form 1099 DIV 1,200

Proceeds from garage sale (see below for more information)

9,200

Inheritance from Gary Simon's estate

100,000

Dave's net state lottery losses ($1,000 of winnings as reported on Form

W2-G and $2,300 of losses)

(1,300)

On June 17, 2018, the Browns held a garage sale to dispose of unwanted personal

assets. The estimated basis of the items sold was $25,500.

10.

Payments made for 2018 expenditures not mentioned elsewhere are as follows:

Medical:

Copayment portion of medical expenses

$1,300

Dental and orthodontist

1,200

Taxes:

State sales taxes

1,120

Property taxes on personal residence

3,800

Interest on home mortgage reported on Form 1098

6,200

Charitable contributions

3,600

The Browns' medical insurance does not cover dental services. The Browns pledge

$1,200 per year to their church. In 2018, they paid the pledges for 2017-2019. During

2018 the Browns drove their Chevrolet Malibu 270 miles for medical purposes (e.g., trips

to the hospital, doctor and dentist offices) and 320 miles delivering meals to the poor for

Meals-on-Wheels, a qualified charity.

11. The Browns have two sons that live with them, Moses and Malone. Both are full-time

students. Moses is an accomplished singer and earned $4,500 during 2018 performing

at weddings, anniversaries and bar mitzvahs. Malone does not have a job.

12. The Form W-2 that Karen receives from her employer reflects wages of $32,000.

Appropriate amounts of Social Security and Medicare taxes are withheld from her pay. In

addition, there was $1,320 of Federal income taxes and $1,056 of state income taxes

withheld from her pay.

13. The Browns made quarterly estimated tax payments of $2,000 for Federal and $600 for

state on each of the following dates: April 15, 2018, June 15, 2018, September 15, 2018

and December 29, 2018. None of the Browns own a foreign financial account. Relevant

social security numbers are:

David S. Brown

123-45-6785

Karen H. Brown

123-45-6786

Gary Simon

123-45-6784

Moses Brown

123-45-6787

Malone Brown

123-45-6788

Requirements:

Determine the Browns' 2018 income tax situation. You are required to use Excel worksheets

to arrive at their taxable income, tax liability and whether they owe or are due a refund.

Other details for the project will be provided in a separate hand-out. Please apply the

following guidelines:

Make necessary assumptions for information not given

The Browns have substantiation to support all transactions noted above

If any refund is due, the Brown want a refund check to be mailed to them

The Browns do not want to contribute to the Presidential Election Campaign Fund.

The Browns have itemized deductions in past years. They had total itemized

deductions of $16,700 in 2017 of which $1,500 was for state and local income

taxes