INDIVIDUAL TAX RETURN PROBLEM 5 Required: Use the following information to complete Armando and Lourdes Gonzales's 2018 federal income tax return. If any information is missing, use reasonable assumptions to fill in the gaps. Any required forms, schedules, and instructions can be found at the IRS website (www.irs.gov). The instructions can be helpful in completing the forms. Facts: 1. Armando Z. and Lourdes K. Gonzales are married and file a joint return. Armando is self-employed as a dentist, and Lourdes is a college professor. Armando and Lourdes have three children. The oldest is Ricardo, who lives at home. Ricardo is a law student at the University of Cincinnati and worked part time during the year, earning $1,500, which he spent for his own support. Armando and Lourdes pro- vided $6,000 toward Ricardo's support (including $4,000 for Ricardo's fall tuition). They also provided over half the support of their daughter, Selena, who is a full- time student at Edgecliff College in Cincinnati. Selena worked part time as an inde- pendent contractor during the year, earning $3,200. Selena lived at home until she was married in December 2018. She filed a joint return with her husband, Tony, who earned $20,000 during the year. Felipe is the youngest and lived in the Gonzales's home for the entire year. The Gonzaleses provide you with the following additional information: Armando and Lourdes would like to take advantage on their return of any educa- tional expenses paid for their children. The Gonzaleses do not want to contribute to the presidential election campaign. The Gonzaleses live at 621 Franklin Avenue, Cincinnati, Ohio 45211. Armando's birthday is 3/5/1961 and his Social Security number is 333-45-6666. Lourdes's birthday is 4/24/1963 and her Social Security number is 566-77-8888. Ricardo's birthday is 11/6/1995 and his Social Security number is 576-18-7928. Selena's birthday is 2/1/1999 and her Social Security number is 575-92-4321. Felipe's birthday is 12/12/2006 and his Social Security number is 613-97-8465. The Gonzaleses do not have any foreign bank accounts or trusts. 2. Lourdes is a lecturer at Xavier University in Cincinnati, where she earned $30.000. The university withheld federal income tax of $3,375, state income tax of $900, 0,00 Cincinnati city income tax of $375, $1,860 of Social Security tax, and $435 of Medicare tax. She also worked part of the year for Delta Airlines. Delta paid her $10,000 in salary, and withheld federal income tax of $1,125, state income tax of $300, Cincinnati city income tax of $125, Social Security tax of $620, and Medi- care tax of $145. 3. The Gonzaleses received $800 of interest from State Savings Bank on a joint ac- count. They received interest of $1,000 on City of Cincinnati bonds they bought in January with the proceeds of a loan from Third National Bank of Cincinnati. intere Appendix C.. 1795 They paid interest of SL.100 on the loan. Armando received a dividend of $540 on 540 General Bicycle Corporation stock he owns. Lourdes received a dividend of $390 on Acme Clothing Corporation stock she owns. Armando and Lourdes received a 390 dividend of 5865 on jointly owned stock in Maple Company. All of the dividends 365 received in 2018 are qualified dividends. 4. Armando practices under the name "Armando Z. Gonzales, DDS." His business is located at 645 West Avenue, Cincinnati, Ohio 45211, and his employer identi fication number is 01-2222222. Armando's gross receipts during the year were $111.000. Armando uses the cash method of accounting for his business. Armando's business expenses are as follows: VAdvertising $ 1.200 Professional dues 490 Professional journals 360 V Contributions to employee benefit plans 2,000 Malpractice insurance 3.200 Fine for overbilling State of Ohio for work 5.000 performed on welfare patient Insurance on office contents 720 Interest on money borrowed to refurbish office 600 Accounting services 2,100 Miscellaneous office expense 388 Office rent 12.000 Dental supplies 7,672 Utilities and telephone 3.360 Wages 30,000 V Payroll taxes 2,400 In June, Armando decided to refurbish his office. This project was completed and the assets placed in service on July 1. Armando's expenditures included $8,000 for new office furniture, $6,000 for new dental equipment (seven-year recovery period), and $2,000 for a new computer. Armando elected to compute his cost recovery al- lowance using MACRS. He did not elect to use $179 immediate expensing, and he chose to not claim any bonus depreciation. 5. Lourdes's mother, Maria, died on July 2, 2013, leaving Lourdes her entire estate. Included in the estate was Maria's residence (325 Oak Street, Cincinnati, Ohio 45211). Maria's basis in the residence was $30,000. The fair market value of the residence on July 2, 2013, was $155,000. The property was distributed to Lourdes on January 1, 2014. The Gonzaleses have held the property as rental property and have managed it themselves. From 2014 until June 30, 2018, they rented the house to the same tenant. The tenant was transferred to a branch office in California and moved out at the end of June. Since they did not want to bother finding a new ten- ant, Armando and Lourdes sold the house on June 30, 2018. They received $140,000 for the house and land ($15,000 for the land and $125,000 for the house), less a 6 percent commission charged by the broker. They had depreciated the house using the MACRS rules and conventions applicable to residential real estate. To compute depreciation on the house, the Gonzaleses had allocated $15.000 of the property's basis to the land on which the house is located. The Gonzaleses collected rent of $1.000 a month during the six months the house was occupied during the year. You may assume that the rental activity is considered an investment activity (not a trade or business). They incurred the following related expenses during this period: Property insurance $500 Property taxes 800 Maintenance 465 Depreciation (to be computed) ? Investment activity Lopoo turn 018 The Gonzaleses sold 200 shares of Capp Corporation stock on September 3, 2018, for $42 a share (minus a $50 commission). The Gonzaleses received the stock from Armando's father on June 25, 1982, as a wedding present. Armando's father originally purchased the stock for $10 per share on January 1, 1970. The stock was valued at $14.50 per share on the date of the gift. No gift tax was paid on the gift. 7. Armando and Lourdes have given you a file containing the following receipts for expenditures during the year: Prescription medicine and drugs (net of insurance reimbursement) $ 376 Doctor and hospital bills (net of insurance reimbursement) > 2844 2.468 Penalty for underpayment of last year's state income tax 15 Real estate taxes on personal residence 4,762 Interest on home mortgage (paid to Home State Savings & Loan) 8.250 Interest on credit cards (consumer purchases) Cash contribution to St. Matthew's church 3,080 Payroll deductions for Lourdes's contributions to the United Way 150 18. The Gonzaleses filed their 2017 federal, state, and local returns on April 12, 2018. They paid the following additional 2017 taxes with their returns: federal income taxes of $630, state income taxes of $250, and city income taxes of $75. 19. The Gonzaleses made timely estimated federal income tax payments of $1,500 each quarter during 2018. They also made estimated state income tax payments of $300 each quarter and estimated city income tax payments of $160 each quarter. The Gonzaleses made all fourth-quarter payments on December 31, 2018. They would like to receive a refund for any overpayments. 10. Armando and Lourdes have qualifying insurance for purposes of the Affordable Care Act (ACA). 595 s U INDIVIDUAL TAX RETURN PROBLEM 5 Required: Use the following information to complete Armando and Lourdes Gonzales's 2018 federal income tax return. If any information is missing, use reasonable assumptions to fill in the gaps. Any required forms, schedules, and instructions can be found at the IRS website (www.irs.gov). The instructions can be helpful in completing the forms. Facts: 1. Armando Z. and Lourdes K. Gonzales are married and file a joint return. Armando is self-employed as a dentist, and Lourdes is a college professor. Armando and Lourdes have three children. The oldest is Ricardo, who lives at home. Ricardo is a law student at the University of Cincinnati and worked part time during the year, earning $1,500, which he spent for his own support. Armando and Lourdes pro- vided $6,000 toward Ricardo's support (including $4,000 for Ricardo's fall tuition). They also provided over half the support of their daughter, Selena, who is a full- time student at Edgecliff College in Cincinnati. Selena worked part time as an inde- pendent contractor during the year, earning $3,200. Selena lived at home until she was married in December 2018. She filed a joint return with her husband, Tony, who earned $20,000 during the year. Felipe is the youngest and lived in the Gonzales's home for the entire year. The Gonzaleses provide you with the following additional information: Armando and Lourdes would like to take advantage on their return of any educa- tional expenses paid for their children. The Gonzaleses do not want to contribute to the presidential election campaign. The Gonzaleses live at 621 Franklin Avenue, Cincinnati, Ohio 45211. Armando's birthday is 3/5/1961 and his Social Security number is 333-45-6666. Lourdes's birthday is 4/24/1963 and her Social Security number is 566-77-8888. Ricardo's birthday is 11/6/1995 and his Social Security number is 576-18-7928. Selena's birthday is 2/1/1999 and her Social Security number is 575-92-4321. Felipe's birthday is 12/12/2006 and his Social Security number is 613-97-8465. The Gonzaleses do not have any foreign bank accounts or trusts. 2. Lourdes is a lecturer at Xavier University in Cincinnati, where she earned $30.000. The university withheld federal income tax of $3,375, state income tax of $900, 0,00 Cincinnati city income tax of $375, $1,860 of Social Security tax, and $435 of Medicare tax. She also worked part of the year for Delta Airlines. Delta paid her $10,000 in salary, and withheld federal income tax of $1,125, state income tax of $300, Cincinnati city income tax of $125, Social Security tax of $620, and Medi- care tax of $145. 3. The Gonzaleses received $800 of interest from State Savings Bank on a joint ac- count. They received interest of $1,000 on City of Cincinnati bonds they bought in January with the proceeds of a loan from Third National Bank of Cincinnati. intere Appendix C.. 1795 They paid interest of SL.100 on the loan. Armando received a dividend of $540 on 540 General Bicycle Corporation stock he owns. Lourdes received a dividend of $390 on Acme Clothing Corporation stock she owns. Armando and Lourdes received a 390 dividend of 5865 on jointly owned stock in Maple Company. All of the dividends 365 received in 2018 are qualified dividends. 4. Armando practices under the name "Armando Z. Gonzales, DDS." His business is located at 645 West Avenue, Cincinnati, Ohio 45211, and his employer identi fication number is 01-2222222. Armando's gross receipts during the year were $111.000. Armando uses the cash method of accounting for his business. Armando's business expenses are as follows: VAdvertising $ 1.200 Professional dues 490 Professional journals 360 V Contributions to employee benefit plans 2,000 Malpractice insurance 3.200 Fine for overbilling State of Ohio for work 5.000 performed on welfare patient Insurance on office contents 720 Interest on money borrowed to refurbish office 600 Accounting services 2,100 Miscellaneous office expense 388 Office rent 12.000 Dental supplies 7,672 Utilities and telephone 3.360 Wages 30,000 V Payroll taxes 2,400 In June, Armando decided to refurbish his office. This project was completed and the assets placed in service on July 1. Armando's expenditures included $8,000 for new office furniture, $6,000 for new dental equipment (seven-year recovery period), and $2,000 for a new computer. Armando elected to compute his cost recovery al- lowance using MACRS. He did not elect to use $179 immediate expensing, and he chose to not claim any bonus depreciation. 5. Lourdes's mother, Maria, died on July 2, 2013, leaving Lourdes her entire estate. Included in the estate was Maria's residence (325 Oak Street, Cincinnati, Ohio 45211). Maria's basis in the residence was $30,000. The fair market value of the residence on July 2, 2013, was $155,000. The property was distributed to Lourdes on January 1, 2014. The Gonzaleses have held the property as rental property and have managed it themselves. From 2014 until June 30, 2018, they rented the house to the same tenant. The tenant was transferred to a branch office in California and moved out at the end of June. Since they did not want to bother finding a new ten- ant, Armando and Lourdes sold the house on June 30, 2018. They received $140,000 for the house and land ($15,000 for the land and $125,000 for the house), less a 6 percent commission charged by the broker. They had depreciated the house using the MACRS rules and conventions applicable to residential real estate. To compute depreciation on the house, the Gonzaleses had allocated $15.000 of the property's basis to the land on which the house is located. The Gonzaleses collected rent of $1.000 a month during the six months the house was occupied during the year. You may assume that the rental activity is considered an investment activity (not a trade or business). They incurred the following related expenses during this period: Property insurance $500 Property taxes 800 Maintenance 465 Depreciation (to be computed) ? Investment activity Lopoo turn 018 The Gonzaleses sold 200 shares of Capp Corporation stock on September 3, 2018, for $42 a share (minus a $50 commission). The Gonzaleses received the stock from Armando's father on June 25, 1982, as a wedding present. Armando's father originally purchased the stock for $10 per share on January 1, 1970. The stock was valued at $14.50 per share on the date of the gift. No gift tax was paid on the gift. 7. Armando and Lourdes have given you a file containing the following receipts for expenditures during the year: Prescription medicine and drugs (net of insurance reimbursement) $ 376 Doctor and hospital bills (net of insurance reimbursement) > 2844 2.468 Penalty for underpayment of last year's state income tax 15 Real estate taxes on personal residence 4,762 Interest on home mortgage (paid to Home State Savings & Loan) 8.250 Interest on credit cards (consumer purchases) Cash contribution to St. Matthew's church 3,080 Payroll deductions for Lourdes's contributions to the United Way 150 18. The Gonzaleses filed their 2017 federal, state, and local returns on April 12, 2018. They paid the following additional 2017 taxes with their returns: federal income taxes of $630, state income taxes of $250, and city income taxes of $75. 19. The Gonzaleses made timely estimated federal income tax payments of $1,500 each quarter during 2018. They also made estimated state income tax payments of $300 each quarter and estimated city income tax payments of $160 each quarter. The Gonzaleses made all fourth-quarter payments on December 31, 2018. They would like to receive a refund for any overpayments. 10. Armando and Lourdes have qualifying insurance for purposes of the Affordable Care Act (ACA). 595 s U