Diego B. (age 42) and Isabel S. (age 41) Castillo are married and live at 11426 W. Antelope Drive, Grapevine, TX 76092. Diego is the manager for Escondite, a popular restaurant in Grapevine. Isabel is a self-employed architect. They are calendar-year, cash-basis taxpayers.

Diegos annual salary from Escondite is $98,000. He also earns an annual bonus. The amount is determined in late December based on performance during the year and is paid in January of the following year. Diegos 2021 bonus was $6,000 (received in 2022), and his 2022 bonus was $7,000 (received in 2023). Diego participates in his employers group health insurance plan to which he contributed $7,200 in 2022 for medical coverage. These contributions are made with after-tax dollars. The health plan covers Diego, Isabel, and their two dependent children. Escondite does not provide any retirement benefits, but it has established a 401(k) plan to enable its employees to save for retirement. Diego contributed $19,000 to the plan in 2022. Diegos Form W2 from Escondite shows $15,800 of Federal income tax was withheld during the year. Diego commutes to and from work six days a week (a roundtrip of 18 miles) in the family SUV. During 2022, Diego drove the SUV a total of 12,700 miles ratably throughout the year.

Isabel is a licensed architect who works part time as an architectural consultant. Her professional activity code is 541310. Her major clients are real estate developers (both residential and commercial) for whom she prepares structural designs and construction plans. She also advises on building code requirements regarding the renovation and remodeling of existing structures. Isabel does some of her work at client locations and the remainder in her office at home (see item 3).

Isabel collected $72,000 in consulting fees during 2022. This total includes a $3,000 payment for work she performed in 2021 and does not include $5,000 she billed in December for work performed in late 2022. In addition, Isabel has a $6,400 unpaid invoice for work done in 2020. This client was convicted of arson in August 2019 and is now serving a five-year sentence in state prison. Isabel feels certain that she will never collect the $6,400 she is owed.

Isabels business expenses for 2022 are:

Drafting supplies	$4,800
Reproduction materials (e.g., molds, models, photos, blueprints, copies)	3,200
On-site work clothing (e.g., hip boots, safety glasses, safety helmet)	860
Professional license fee	400
Subscriptions to professional journals	250
Dues to professional organizations	240

In addition, Isabel drove the family Acura (purchased on June 7, 2021) 940 miles on her job assignments. She uses the standard mileage method to deduct business costs related to the Acura. During 2022, Isabel drove the car a total of 10,000 miles. Both business and total mileage occurred ratably throughout the year.

When the Castillos purchased their home on February 2, 2020, they set aside 300 square feet (out of a total of 2,400 square feet) of living space for Isabels office. The Castillos do not use the simplified method for computing the home office deduction. As of January 1, 2022, the home had an adjusted basis of $240,000 ($40,000 of which is attributable to the land) for purposes of line 37 of Form 8829. The fair market value of the property was $282,000. Relevant information concerning the residence for all of 2022 appears below.

Homeowners insurance	$3,200
Repairs and maintenance	1,800
Utilities	6,200
Painting (office area only)	1,250

The cost of Isabels office furniture and equipment was previously deducted under 179 in the years these assets were acquired. On June 29, 2022, she purchased a fireproof file cabinet for $800 to safeguard the blueprints of her structural designs and construction plans. Whenever possible, Isabel prefers to avoid depreciating capital expenditures over time.

One of Isabels clients was interested in building a shopping center on a tract of land she owned in Ector County. Isabel inherited the property from her uncle when he died on June 6, 1999. At that time, the land was valued at $40,000. It has since been rezoned for commercial use and has a current value of $200,000. On February 10, 2022, Isabel exchanged the Ector parcel for a similar tract in McLennan County worth $190,000 plus cash of $10,000.

On September 2, 2022, Isabel sold a tract of land in Hansford County to a farmer who owned the adjoining property. The land was inherited from the same uncle who died in 1999 and was valued at $30,000 on June 6, 1999. Under the terms of the sale, Isabel received cash of $20,000 and a note receivable to be paid in four equal installments at one-year intervals from the date of sale. Each note calls for the payment of $25,000 plus simple interest of 8%. To the extent allowed by law, Isabel wants to defer recognition of gain for as long as possible.

In early 2021, Diego learned that one of the restaurants best servers, Alexis Garcia, was suffering domestic abuse at the hands of her husband Robert. When Robert started to abuse their five-year-old daughter as well, Alexis decided it was time to leave. Before they left on April 14, 2021, Diego loaned Alexis $5,500 to help her relocate with her daughter. Diego had her sign an interest-free note due in one year. Diego never heard from Alexis again. In late 2022, Diego learned that Alexis and her daughter had left the United States with no plans to ever return. Based on this information, Diego has no expectation the loan will ever be repaid.

On August 5, 2017, Diego purchased 1,000 shares of Farmers Markets America (FMA) common stock for $16 a share as part of its initial public offering. The corporation was formed to establish and operate farmers markets in mid-size cities throughout the United States. Although some market locations were profitable, the venture as a whole proved to be a failure. In April 2022, FMAs remaining assets were seized by its creditors, and FMA stock became worthless.

In addition to the items previously noted, the Castillos had the following receipts for 2022:

In December 2021, the Castillos made a major purchase of household items (e.g., appliances, furniture, etc.) at HomeStuff. They called the manager when they realized they did not receive the advertised sale price. Consequently, the store corrected the mistake and sent a $430 refund that the Castillos received in January 2022.

In December 2018, Diego lent his sister Elle $4,000 to help pay for a honeymoon trip following her wedding to John Anderson. At that time, Elle signed a note payable that stated she would pay Diego the loans principal amount plus 2.5% simple interest within five years. Diego was pleasantly surprised when Elle paid him back (plus interest of $500) on December 20, 2022.

On March 20 of each year, Isabels parents send a generous gift of cash as a birthday present. Just as she has done for the past seven years, Isabel immediately contributed half of the gift to each of her kids 529 college savings plans.

The Castillos had the following expenditures for 2022:

The $1,000 net gambling loss for 2022 is the difference between the Castillos gambling winnings of $1,200 and losses of $2,200. The life insurance premiums relate to the universal life insurance policies that Diego and Isabel own. The first beneficiary on both policies is the other spouse, with the second beneficiaries being the children. Included in the medical expenses is $1,200, which was incurred in 2021 and paid in early February 2022. The Castillos can substantiate the $2,800 in sales taxes paid based on their purchase receipts for the year. The local sales tax rate in Grapevine is 2%. (Hint: Be sure to check to see if the Optional Sales Tax Tables provide the Castillos with a greater deduction.) Isabel contributed to the governors campaign fund because she thinks his influence was key in getting the McLennan County land rezoned for commercial use (see item 4).

The Castillos maintain a household that includes their two children, Nico (age 16) and Rosa (age 19). Nico is a junior in high school and a talented wrestler. In hopes of competing at the state tournament, all of his free time is consumed with weight training and wrestling practices. Rosa graduated from high school on June 7, 2022, and decided to take a gap year. She is an accomplished vocalist and during 2022 earned $7,200 performing at various events (e.g., weddings, funerals). Rosa placed most of her earnings in a savings account for future use and kept only a small amount to spend on herself. Rosa plans to start college in fall of 2023.

Relevant Social Security numbers are noted below.

Name	Social Security Number
Diego B. Castillo	123-45-6876
Isabel S. Castillo	123-45-6877
Rosa J. Castillo	123-45-6878
Nico W. Castillo	123-45-6879

Requirements

Prepare a 2022 Federal income tax return (with all appropriate forms and schedules) for the Castillos following these guidelines:

Diego and Isabel choose to file a joint income tax return.

They do not wish to contribute to the Presidential Election Campaign Fund.

They do not own any foreign bank accounts or other foreign investments.

They had no transactions in digital assets during the tax year.

They prefer to receive a refund of any overpaid taxes.

The taxpayers are preparing their own return (i.e., no preparer is involved).

For the past several years, the Castillos have itemized their deductions from AGI.

The taxpayers have the necessary substantiation (e.g., records, receipts) to support all transactions reported in their tax return.

Make necessary assumptions for information not given in the problem but needed to complete the return.