Federal Taxation I

ACCT 315/715

T A X R E T U R N P R O B L E M

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REQUIREMENT

Prepare the Federal Income Tax return for Dave and Diane Pelton for the year ended 2017

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Dave and Diane Pelton are married and file a joint return. Dave was born on 3/17/1963 and Diane was born on 6/19/1967. Dave owns a used bookstore (selfemployed, Sch. C), and Diane is a college professor. Dave's Social Security number is 354-69-2250, and Diane's is 384-39-2985. The Peltons live at 1258 Dickinson Rd, Grand Rapids, MI 49507. Their phone number is 616-584-5621. The Peltons each designate that $3 is to go to the Presidential Election Campaign Fund.

Dave has one daughter, Erin (SS# 307-50-4861; BD 08/04/1994), from a previous marriage. Erin is age 23 and a fulltime law student at Wayne State University. She worked parttime during the year earning $3,890, which she spent for her own support. In addition, she received a $5,200 scholarship from Michigan State University. Erin lived at home while not in school and Dave and Diane provided an additional $6,800 toward Erin's support.

They also provided over half the support of Dianes son, Jason (SS# 306-15-8012, BD 05/20/1998), from a previous marriage. Jason is age 19 and a full time student at Davenport University. Jason worked parttime during the year, earning $2,900. He filed a joint return with his spouse, Kim, who earned $15,400 during the year.

Dave and Diane also have twins, Emily (SS 386-54-2189; bd 02/08/2007) and Emma (SS 386-54-2190; bd 02/08/2007), age ten, who live with them.

Dave's mother, Jane, (SS# 101-52-1317), was born on 8/26/1931. Jane is blind and lives with the Peltons. The Peltons pay $5,400 per year for dependent care expenses for Jane as they are both employed. The dependent care provider is Senior Care, 1215 Magna Carta, Grand Rapids, MI, 49503 (EIN# 38-6451321). In addition, Dave and his brother Mike each incurred outofpocket costs of $2,950 for Jane's support. Also, Dave provided lodging for Jane during the entire year. Dave estimates the fair rental value of the lodging is $6,000. Jane received $9,700 in Social Security Benefits and $350 of interest during the year, all of which she put in the bank. Mike is willing to do whatever is necessary to enable Dave to claim Jane as a dependent.

Diane is a professor at Kendrick Community College (#38-7854123; 6767 W O Ave, Kalamazoo, MI 49003), where she earned $ 89,800. The University withheld Federal income tax of $8,980, state income tax of $4,597, Grand Rapids city income tax of $1,347, and the correct amount of FICA. Her employer pays for health care for the entire family. Diane has a 401K plan at work.

The Pelton's received $3,975 of interest from Second Bank on a joint account. They received interest of $1,750 on City of Seattle bonds they bought in January. Dave received a dividend of $920 on General Bicycle Corporation stock he owns. Diane received a dividend of $1475 on Acme Clothing Corporation stock she owns. General Bicycle and Acme Clothing are both domestic Corporations. Dave and Diane received a dividend of $181 on jointly owned stock in Maple Leaf Brewing Company, a Canadian corporation. All of the securities were held with a Grand Rapids brokerage firm and are qualified dividends.

In July, a severe storm came through the area and did considerable damage to the summer home (382 Flying Dutchman, Holland, MI 49423) that they had purchased for $98,000 two years earlier. The homes fair market value before the storm was $133,000 and the insurance agent valued the home at $75,000 after the incident. Insurance recovery was $45,000.

Daves business, Daves Bargain Books, is located at 1645 Library Ave., Grand Rapids, MI. 49503, and his employer identification number is #386478224. Dave's sales for the year were $313,431. He uses the cash method of accounting for tax purposes and his business expenses on the cash basis are as follows:

Advertising.................................... $ 3,500

Bank service charges........................... 110

Professional dues.............................. 600

Professional journals.......................... 280

Contributions to employee benefit plans..... 8,100

Insurance on office contents................... 2,300

Accounting services............................ 4,840

Miscellaneous office expense................... 524

Store (20K) and equipment (10k) rental...... 30,000

Utilities................................................. 2,964

Telephone............................................ 822

Wages........................................... 65,826

Payroll taxes.................................. 3,678

Returns and Allowances.............. 1,700

Purchases. 58,700

Beginning Inventory. 60,800

Ending Inventory... 23,600

Dave put 9,450 business miles on his Ford Explorer this year and 12,980 personal miles (total miles= 22,430). He uses the automatic mileage method. Dave purchased the truck July 11, 2013 and did not take any Sec 179 Immediate Expensing. He does keep written records of his mileage.

June 16, 2017 Dave purchased a new business computer information system to track inventory and customers, etc., the cost was $17,000. On the same date he spent $26,825 for furniture to refurbish his office. He did elect Sec.179 Immediate Expensing, for these items.

Diane's mother, Susan, died on Feb 17, 2005, leaving Diane her entire estate. Included in the estate was Susan's residence at 538 Lighthouse Ln., Holland, MI 49424. Susan's basis in the residence was $40,000. Fair market value of the residence on Feb 17, 2004 was $127,000 (this is Diane's basis). Diane began renting the house January 1, 2006. In 2017 the house was rented the entire year at $1,650 a month. The house is depreciated using the MACRS straightline method for residential real estate with zero salvage value. In computing depreciation, they allocate a value of $31,000 to the lot on which the house is located. They incurred the following expenses during the year on the rental property:

Property insurance..................... $1,400

Property taxes.............................. 7,200

Maintenance and repairs............. 2,400

Management fees.........................1,200

The Peltons sold 1,000 shares of Capp Corp stock they had received as a wedding present on June 25, 2001. The stock was worth $62 per share in January. By September 3, its value had dropped to $42 per share, and the Peltons sold the stock on that date. Dave's father had given them the stock. He had paid $8.50 per share for it in 1973. Its value at the date of gift was $19.50 per share. No gift tax was paid on the gift. (The Peltons basis would be $8.50 per share.)

On December 30, 2017 as he was leaving the grocery store, Dave found a Michigan lottery ticket someone had apparently dropped. On January 3, 2018 when the lottery held its weekly drawing, Dave discovered he had won $52,000, which he received on January 8.

Diane is required by her employer to visit several high schools in the Battle Creek- Lansing area to evaluate KCC students who are doing their medical rotations. She also spent $580 on meals taking out the students afterwards to discuss how the rotations were progressing. She is not reimbursed by KCC for the expenses she incurs in doing this. During the year, she drove her personal automobile 8,900 miles in fulfilling this obligation. Diane purchased her car April 12, 2014, and put a total of 23,786 miles on it in 2017. Her average daily commuting miles is 24 and her annual commuting miles are 2160. All other miles driven were personal. Diane did not keep detailed records of her gas and oil purchases and had no major repairs on the car this year. She does journal her business mileage.

Since Diane must travel out of town, the Peltons take their twins, Emily and Emma to daycare. Their daycare provider is Betty Bop Babies at 324 Sybil St, Grand Rapids, MI 49508. The EIN number is #38-2546888. The Peltons received a receipt for $12,580 in daycare costs for 2017. The cost is evenly divided for the care for the twins.

Dave contributed $8,500 to Self-Employed SEP Plan on December 30. Diane is covered by a KCC retirement plan.

Dave and Diane have given you a file containing the following receipts for out-of-pocket expenditures during the year:

Medicines and drugs.................... $ 886

Doctors and hospital ............. 6,348

Penalty for underpayment of last year's

state income tax....................... 549

Real estate taxes on personal residence 7,962

Michigan vehicle registration fees 342

State sales tax on new furniture....... 512

State sales tax on new sailboat........ 841

Interest on Home mortgage (paid to

Home Bank)........................... 11,650

Interest on credit cards............... 2,535

Cash contributions to Hope Church...... 10,600

Payroll deductions for Diane's contribution

to the United Way.................... 800

Professional dues (Diane).............. 425

Professional subscriptions (Diane)..... 225

Fee for preparation of last years 1040 850

On the 15^th of January, April, June and September, 2017 the Peltons made quarterly estimated Federal income tax payments of $ 2,000 ($8,000 total payments). They made estimated payments for state income tax of $1,800 for the year. All Michigan estimated payments were made in 2017.

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22222 | VtedLI 87,100 or foreign postal Interest 2 89.800 Medicare tax wihhold Fom 1099-INT 234 SLEEPLES Copy 1 For State Tax Interest on U.S. Savingn Bands and Treas obligation PELTON 33-95412671 Federal income 1258 DICKINSON RD DAVE AND DIANE PELTON Foreign tan a Steet adress Iincluding apt no.) City or town, state or province,country, and P ar forign postal codeS -7854123 39,300 89.800 347 GR RAP GRAND RAPLDS, AII 49507 11 Bond pee ATCA ing S W- 2 Wage and Tax Statement 201X At Noien, see Copy A For Secial Security Administration-Send this entire page with Form W-3 to the Social Securily Administration; photocopies are not acceptable CatNo. 10134D Do Not Cut, Fold, or Staple Forms on This Page Department of the Treaay-ItemaRee Svice VOID Dividends and Distributions 1S5 Fom 1099-INT T BROTHERS 20 Fom 1099 DIV DAYTON, OH 46415 Copy 1 Copy B For Recipient For State Tax DAVE PELTON Fareign pai boing furnished reet addens (including apt. no 1258 DICKINSON RD 28 DICKINSON RID City or sown, ataeo GRAND RAPIDS, MI 49507 GRAND RAPIDS,MM 49507 Department of the Tneanury-Intamal Revonue Service keep for your records 22222 | VtedLI 87,100 or foreign postal Interest 2 89.800 Medicare tax wihhold Fom 1099-INT 234 SLEEPLES Copy 1 For State Tax Interest on U.S. Savingn Bands and Treas obligation PELTON 33-95412671 Federal income 1258 DICKINSON RD DAVE AND DIANE PELTON Foreign tan a Steet adress Iincluding apt no.) City or town, state or province,country, and P ar forign postal codeS -7854123 39,300 89.800 347 GR RAP GRAND RAPLDS, AII 49507 11 Bond pee ATCA ing S W- 2 Wage and Tax Statement 201X At Noien, see Copy A For Secial Security Administration-Send this entire page with Form W-3 to the Social Securily Administration; photocopies are not acceptable CatNo. 10134D Do Not Cut, Fold, or Staple Forms on This Page Department of the Treaay-ItemaRee Svice VOID Dividends and Distributions 1S5 Fom 1099-INT T BROTHERS 20 Fom 1099 DIV DAYTON, OH 46415 Copy 1 Copy B For Recipient For State Tax DAVE PELTON Fareign pai boing furnished reet addens (including apt. no 1258 DICKINSON RD 28 DICKINSON RID City or sown, ataeo GRAND RAPIDS, MI 49507 GRAND RAPIDS,MM 49507 Department of the Tneanury-Intamal Revonue Service keep for your records