Meghan, age 39, and Harry, age 37, are US citizens who were married in May 2018. They live together in California with their two-year old son, Archie, and provide all of his support.

Meghan and Harry had quite a year in 2020:

A. Meghan and Harry purchased a home in Seattle for $750,000 on March 1, 2019. However, Meghan took a job with Walt Disney in 2020 and the family was required to move to be closer to her new job in Los Angeles. The family sold their house on February 1, 2020 for $875,000. Neither Meghan nor Harry have sold any personal residences in the past two years.

B. Meghan and Harry purchased a home in Los Angeles on March 1, 2020 for $1,400,000. In 2020, they paid $23,000 in mortgage interest and $17,000 in real estate taxes.

C. Once they moved, Meghan did some voiceover work for Walt Disney, where she earned $57,000 in salary. Walt Disney withheld federal income tax of $6,375, state income tax of $1,800, Los Angeles city income tax of $675, Social Security tax of $3,600, and Medicare tax of $825.

D. Meghan and Harry own a small bungalow in Laguna Beach for when they want to get away from it all. They used the home for personal use for 100 days and rented the bungalow to friends at fair market value for 50 days and received $12,000 in rental income. With respect to the bungalow, they incurred the following expenses:

a. Real estate taxes               $4,000

b. Insurance                          $5,000

c. Utilities                             $1,000

d. Depreciation                     $8,000

E. During 2020, Harry and Meghan received $550 in interest from Las Vegas municipal bonds, $1,070 interest from U.S. Treasury bonds, and $65 from their savings account at SCD Credit Union.

F. Meghan’s father died on November 15, 2019. Meghan received a $100,000 death benefit from her father’s life insurance policy on February 8, 2020 (the amount of the policy was also $100,000).

G. On April 15, Meghan and Harry paid $2,000 of state income tax owed with their 2019 state income tax return.

H. On May 17, 2020, Harry and Meghan received a federal income tax refund of $975 from their 2019 federal income tax return.

I. Meghan sold 200 shares of DM stock for $18 a share on June 15, 2020. She purchased the stock on December 12, 2013, for $10 a share. She also sold 50 shares of RSA stock for $15 a share on October 2, 2020. She purchased the stock for $100 a share on February 2, 2020.

J. Archie attended daycare while his parents worked. Harry and Meghan paid $4,000 to Little Friends Daycare.

K. Megan paid $10,000 in alimony to her ex-husband, Trevor. While they were separated for many years, their divorce was not finalized until 2018.

L. Harry runs his own consulting firm to assist non-profits focused on mental health initiatives. Harry’s gross receipts during the year were $710,000. Harry uses the cash method of accounting for his business. Harry’s business expenses are as follows:

Advertising	$ 5,000
Professional dues	800
Professional journals	200
Employee wages	48,000
Insurance on office contents	1,120
Accounting services	2,100
Miscellaneous office expense	500
Utilities and telephone	3,360
Payroll taxes	3,600
Depreciation	To be calculated

M. On March 20, 2020 Harry moved his business out of the old offices at 1103 Allium Lane into a newly constructed and equipped office on Grove Street. Harry sold the old office building and all its furnishings in 2019. Harry’s expenditures for the new office building are as follows:

Date Acquired	Asset	Cost
3/20/2020	Land	$ 300,000
3/20/2020	Office building	2,000,000
3/20/2020	Furniture	200,000
4/1/2020	Computer system	350,000

Harry computes his cost recovery allowance using MACRS. He would like to use the §179 immediate expensing, but he has elected to not claim any bonus depreciation. Harry has never claimed §179 or bonus depreciation before.

N. Since he is self-employed, Harry paid $8,000 for self-employed health insurance for the family.  Meghan was not offered health insurance as an employee of Walt Disney.

 • Harry and Meghan made $15,000 in federal estimated tax payments in 2020.

Meghan’s mother, Doria, is 68 and is not legally blind. She has been divorced for over 20 years and never remarried. Her daughter and son-in-law provide 10% of her support.

P. Doria owns and runs multiple yoga studios in Los Angeles (which are considered real property): Yoga Flow, SoulShine Yoga and Hot Yoga LA. She has owned and used each studio for more than a year.

• The Yoga Flow studio was far from her home and she was interested in a new location.  She had purchased the studio in 1999 for $50,000 and the adjusted basis is now $20,000. The Yoga Flow studio had a fair market value of $500,000.  On March 1, 2020, Doria exchanged the Yoga Flow studio for a new yoga studio in Brentwood. The value of the studio she acquired was $495,000 and she received $5,000 in cash.

• Tragically, SoulShine Yoga caught on fire in April 2020 after an instructor accidentally left a candle burning. The studio was destroyed. The old yoga studio was purchased in 2008 for $376,000, and $58,000 of depreciation deductions had been taken. Although the old yoga had a fair market value of $424,900 at the time of the fire, her insurance proceeds were limited to $398,000. Doria found qualified replacement property that she acquired six months later in Beverly Hills for $408,000.

Q. In May, Doria tore her ACL during a yoga session while in tree pose. She had $3,000 of unreimbursed medical expenses.

R. On June 5, 2020, Doria sold her home in Los Angeles, CA, for $510,000. She purchased the home 11 years ago for $470,000. On July 12, 2020, she bought a new home closer to Meghan for $675,000. She put $375,000 down and borrowed $300,000 from a local bank. The full amount of the loan was used to acquire the home. She paid $4,500 in mortgage interest for the remainder of 2020.

S. On June 26, Doria received a $700 refund from the state of CA related to her 2019 state tax return. Doria took the standard deduction on her 2019 federal tax return.

T. Doria owns a houseboat where she goes to relax. The boat is self-sufficient with its own bathroom, eating and sleeping area. While recovering from her knee surgery, she spent 60 days on the houseboat. She rented the houseboat out to friends over the Christmas holiday – 5 days total and received $3,000 in rental income.

U. On December 15, 2020, Doria sold 100 shares of XYZ stock for $27 per share. Doria received the stock as a gift from her beloved Aunt Mabel in 2018. Aunt Mabel purchased the shares for $1,000 bank in 2005. The fair market value of the shares at the time of the gift was $1,500.

V. Doria earned $80,000 of net business income from the various yoga studios and paid $18,000 in federal estimated taxes for 2015.

1. Calculate Meghan and Harry’s refund/tax due on their 2020 return. For purposes of the calculation, you can ignore self-employment tax (and 50% deduction of self-employment tax), alternative minimum tax, and the 20% qualified business income deduction).

2. Calculate Doria’s refund/tax due on her 2020 return. For purposes of the calculation, you can ignore self-employment tax (and 50% deduction of self-employment tax), alternative minimum tax, and the 20% qualified business income deduction).