Question
Michael Black, age 45, is single. He lives at 2537 Base Lane, Tuscon, AZ 85701. His Social Security number is 111-11-1112. Michael wants $3 to
Michael Black, age 45, is single. He lives at 2537 Base Lane, Tuscon, AZ 85701. His Social
Security number is 111-11-1112. Michael wants $3 to go to the Presidential Election
Campaign Fund.
Michael's wife, Jill, passed away in June 2016. Michael's son, Todd, who is age 16, resides
with Michael. Todd's Social Security number is 123-45-6788.
Michael owns a sole proprietorship for which he uses the accrual method of accounting
and maintains no inventory. His revenues and expenses for 2018 are as follows:
Sales revenue $650,000
Cost of goods sold (based on purchases for the year) 325,000
Salary expense 80,000
Rent expense 25,000
Utilities 10,000
Telephone 5,500
Advertising 3,000
Bad debts 4,000
Depreciation * 19,000
Health insurance ** 25,000
Accounting and legal fees 6,000
Supplies 1,000
* New office equipment ($19,000); Michael chose to use the immediate expensing 179 election
** $17,000 for employees and $8,000 for Michael
Other income received by Michael includes the following:
Dividend income (qualified dividends):
Swamp, Inc. $6,000
Wrap, Inc. 2,000
Interest income:
First Bank 9,000
Second Bank 1,500
City of Tuscon, AZ bonds 15,000
During the year, Michael and his sole proprietorship had the following property
transactions:
1. Sold Blue, Inc. stock for $40,000 on March 12, 2018. He had purchased the stock on
September 5, 2015, for $55,000.
2. Received an inheritance of $200,000 from his uncle, Jerry. Michael used $125,000 to
purchase Green, Inc. stock on May 15, 2018, and invested $75,000 in Gold, Inc. stock on
May 30, 2018.
3. Received Orange, Inc. stock worth $10,000 as a gift from his aunt, Jane, on June 17, 2018.
Her adjusted basis for the stock was $5,000. No gift taxes were paid on the transfer. Jane
had purchased the stock on April 1, 2012. Michael sold the stock on July 1, 2018, for
$25,000.
4. On July 15, 2018, Michael sold one-half of the Green, Inc. stock for $40,000.
5. Michael was notified on August 1, 2018, that Yellow, Inc. stock he purchased from a
colleague on September 1, 2017, for $47,500 had become worthless. While he perceived
that the investment was risky, he did not anticipate that the corporation would declare
bankruptcy.
6. On August 15, 2018, Michael received a parcel of land in Phoenix worth $210,000 in
exchange for a parcel of land he owned in Tucson. Because the Tucson parcel was worth
$235,000, he also received $25,000 cash. Michael's adjusted basis for the Tucson parcel
was $210,000. He originally purchased it on September 18, 2015.
7. On December 1, 2018, Michael sold the condominium in which he had been living for the
past 20 years (1844 Bighouse Lane, Tuscon, AZ 85701) and moved into a rented
townhouse. The sales price was $480,000, selling expenses were $28,500, and repair
expenses related to the sale were $9,400. Michael purchased the condominium for
$175,000.
Michael's potential itemized deductions, exclusive of the aforementioned information,
are as follows:
Medical expenses (before the 7.5% floor) $ 9,000
Property taxes on residence 6,000
State income taxes 3,000
Charitable contributions 8,000
Mortgage interest on residence 9,500
Sales taxes paid 4,500
During the year, Michael makes estimated Federal income tax payments of $35,000
(payments of $8,750 were made on April 15, 2018, June 15, 2018, September 15, 2018
and December 15, 2018).
THIS RETURN IS FOR 2018 - TAX LAWS IN EFFECT FOR 2018 WILL APPLY
(THEREFORE, IT DOES REFLECT THE NEW TCJA of 2017)
Compute Michael's lowest net tax payable or refund due for 2018 assuming that he
makes any available elections that will reduce the tax. The tax forms required for your
computations are Forms 1040, 4562, 8949, and 8824 and Schedules A, B, C, D, and
SE.
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