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Federal Income Tax Tax Preparation Problem A list of forms required to complete the problems is located at the bottom of this page. IRS forms and instructions that can be filled in using a computer can be obtained from the IRS web site. (Note: the IRS filled in forms do not calculate). PROBLEM 1 Lynn and Heather O'Keefe Lynn O'Keefe, age 53, is president of O'Keefe's Furniture Store. He reports the following W-2 information: Home address: 46 Germantown Rd., Chattanooga, TN 37411 Telephone number: 615-555-5555 Social security number 000-00-0001 Employer: O'Keefe's Furniture store, 1201 Hamilton Ave., Chattanooga, TN 37401, employer number 64-1453236. Wages: $99,500 Federal income tax withholdings: $27,500 Social security taxes: $ 6,169 Medicare taxes: $ 1,443 Lynn O'Keefe has a health insurance policy through O'Keefe's Furniture Store that covers his entire family. Heather O'Keefe, age 50, social security number 000-00-0002, works at home as a housewife. The O'Keefe's were covered under a health insurance plan during the entire 2016 calendar year. Both Lynn and Heather want $3 of their taxes to go the to Presidential Election Campaign Fund. The O'Keefe children are grown. However, Heather's mother, Molly Shoulders, lives with them. Molly received social security of $5,400, and interest income of $5,000 during the year. She has no other income. In addition to the income above, Lynn and Heather incurred the following tax transactions during the year: 1. Interest income from the Hamilton National Bank, $750. 2. Lynn received a pre-mature distribution from an IRA account of $9,550, which he used to purchase a new car. 3. The O'Keefe's have no interest in any foreign accounts or trusts. 4. Lynn purchased 10,000 shares of Bassett Inc. stock on April 22, 1981 for $120,000. He sold the stock on August 12, 2016 for $105,000. The basis of this stock was not reported to the IRS. 5. To promote the family business, Lynn and Heather give a large party at Christmas time for all their best customers. The party cost $2,300. 6. During the year, Lynn drove his personal automobile 30,000 miles including 3,000 miles to and from work, and 2,000 round and about town. The other 25,000 miles were related to business trips (to buy furniture). The company reimbursed him at a rate of 20 cents per mile ($5,000) for those business trips. In addition, Lynn spent $2,900 for meals and $4,500 for lodging while on the business trips. The cost of meals was not reimbursed by his company because he forgot to file for reimbursement. If he had filed a reimbursement request, the company would have paid for the meals. The lodging was fully reimbursed by the company. 7. Heather has a good reputation as a home decorator. She writes articles and gives seminars around Chattanooga. The amount of business has been small, so she has not applied for a business license. However, she did receive the following for some of her work. a. Article in Southern Living, $350. b. Seminar on Medical Office decor for Erlanger Hospital, $75. c. "Gift" for decorating Dr. Barber's office, $100. d. "Gift" for doing flower arrangements at a friend's wedding, $40. e. McCallie Schools, for seminar on keeping rooms clean, $165. To allow her to prepare outlines and hand out materials for these seminars and to write her articles, Heather spent $2,500 to purchase a personal computer and $1,000 to purchase a laser printer. The computer and printer were used 80% of the time to further her career as a home decorator. The balance, 20%, was used for personal letters and using Quicken to keep her check book accurate. Heather does not use a portion of her residence exclusively for business. Potential itemized deductions included the following: a. Medical expenses included health insurance of $2,500; medical expenses paid for Molly in excess of Medicare, $12,500; Heather's eyeglasses $700. b. Real estate taxes, $2,500. c. Sales taxes on purchases, $1,580. d. Home mortgage interest paid to bank, $6,400. e. Interest on bank credit cards, $1,050. f. Cash contributions to their church, $5,600. g. Fee for preparation of personal income tax return, $600. REQUIRED: Complete the O'Keefe's federal income tax return for 2016. PAGE DOWN PROBLEM 2 Ronald Lump Ronald Lump, 55, is an unmarried, self-employed medical doctor and resides at 2601 Pennsylvania Avenue, Washington D.C. 20001. His Social Security number is 000010003. Ronald's wife died last year, but he continues to maintain a home for his blind 16 year-old dependent son Ronald, Jr., whose Social Security number is 000-00-004. Ronald's telephone number is 202-555-1234. Ronald and his son were covered under a health insurance plan during the entire 2016 calendar year. The relevant tax information given to you includes the following: 1. Ronald uses the cash method of accounting in his business. His employer identification number is 33-0000000. Income and expenses pertaining to his business follow: a. Fees collected - 205,000 b. Bad debt written off - 2,500 c. Legal and accounting services - 2,700 d. Qualifying business meals and entertainment - 1,500 e. Medical journals - 800 f. Office supplies - 1,300 g. Continuing education self-study courses - 3,570 h. Malpractice insurance - 34,000 i. Part-time secretary from "Kelly Girl" - 12,000 j. Health insurance (12 months of family coverage) - 9,000 Ronald timely filed all forms 1099MISC for his business. 2. During the year, Ronald worked at City Hospital and University Hospital, both in Bethesda, Maryland. While he spent 30 to 35 hours per week working at the hospitals, Ronald was not provided with an office at either hospital. Instead, Ronald used a bedroom in his house as his office, where he kept a computer, an answering machine, a copier, telephone, patient records, and medical books and journals. From the office, Ronald contacted other doctors and patients by phone. In addition, he often called hospitals to arrange admission for his own patients. He did all necessary to bill his patients in this office. He also spent time in his office reading medical books and journals, and preparing for patients; however, Ronald did not see any patients at his office. On average, Ronald spent 16 hours per week working in his home office during this year. Ronald did not use the office for any non-business purposes. His part-time secretary also worked in the home office. Ronald has the following expenses relevant to determining a home office expense deduction: a. The bedroom office represented approximately 10% of the total square footage of his house. b. Total interest expense paid on his home mortgage was $18,000. c. Ronald's annual utility bills for the residence were $2,500. d. Property taxes on the house amounted to $7,700 for the year. e. Ronald paid $210,000 for the house when he purchased it on January 1 of 2016. This was the second house that Ronald has owned in the past two years. Real estate tax bills value Ronald's residence at $220,000 ($40,000 related to land and $180,000 related to his residence). f. Ronald has a second telephone line that can only be answered in his office. The cost of this business phone was $480 for the year. 3. In March, Ronald purchased office furniture costing $8,000. Ronald wishes to maximize any deduction relating to this furniture that is available to him this year. 4. Ronald made timely estimated Federal income tax payments of $80,000 ($20,000 each quarter) during the year; the fourth quarter payment was made on January 15, 2017. He also made estimated income tax payments for a total of $3,200 to the Maryland and the District's Commissioners of Revenue. Ronald made the last quarter's payment to both jurisdictions on December 31, 2016. He wanted that tax deduction. Ronald made an additional payment of $345 when he filed his 2015 D.C. income tax return in April, 2016. Ronald paid $125 in additional income taxes for 2015 to Maryland when he filed in April, 2016. 5. Ronald received $1,000 in interest on savings held in a D.C. Savings Bank time deposit. Ronald had no interest in any foreign accounts or trusts. addition, he received a $600 dividend from his mutual life insurance company on a policy that he owns on his life. Accordingly, the cash value of the policy increased $600. He paid premiums on the policy of $2,500 during the year. 6. Ronald received the final settlement on the life insurance policy held on the life of Mrs. Lump. He received a lump-sum of $100,000, plus the first payment of $5,500, a life-time annuity. The insurance company reported that $1,500 of this amount was interest. 7. Ronald's other tax-related transactions were: a. Doctor fees incurred for Ronald, Jr., $5,000 b. Real estate taxes on land held as an investment in Haiti, $500 c. Ronald elects to support the Presidential Election Campaign Fund. REQUIRED: Prepare Ronald Lump's Federal income tax return for 2016. Forms list (Not all forms are required for each problem): Form 1040- (Federal Income Tax Return) Form 1040 - Schedules A&B (Interest/Dividend Income and Itemized Deductions) Schedules A & B Instructions Form 1040 - Schedule C (Business Income) Schedule C instructions Form 1040 - Schedule D (Capital Gains and Losses) & Form 8949 Schedule D instructions Form 1040 - Schedule SE (Self Employment Tax) Instructions Schedule SE Form 2106 - Employee Business Expenses Form 4562 - Depreciation and Amortization Form 5329 - Additional Taxes on Qualified Plans Form 8829 Expenses for Business Use of Your Home