Mr. Clay Potts (Social Security number 112-11-2111) is 56 years old (Date of Birth: April 15, 1967) and was married to Mrs. Beatrice Potts (Social Security number 124-54-6789; DOB: April 16, 1966). Beatrice died on December 15, 2021. Clay inherited all of Beatrices assets. She was 55 years old when she passed away. Clay continues to live at 2875 El Camino Real, Tustin, CA 92782 with his dependent children, Clay, Jr, age 12 (DOB: May 15, 2011) and Chip, age 17 (DOB: May 16, 2006.) Clay Jr.s Social Security number is 123-45-6888 and Chips Social Security Number is 252-65-9523. Clay had the following transactions in 2022:

1. Clay received $325,000 included in his W-2 Box 1 from Pottery Barn Corporation, where he is an accountant. Withholding for Federal income tax was $71,000. Assume the proper amount of Social Security and Medicare tax has been withheld including the .9% Additional Medicare Tax (if any).
2. On October 1, 2022, Pottery Barn moved its headquarters (where Clay works) to a new development in the Inland Empire near their new logistics center. Because the area is not yet built up and the nearest restaurants are over 30 minutes away, Pottery Barn encourages its employees to eat lunch in its offices every day. The lunch costs Pottery Barn $220 per employee per month. Clay eats a free lunch every day in the office for 3 months.
3. Beatrice was working for Kiln corporation prior to her death. Clay received $5,000 for funeral expenses from her employer to assist Clay. The amount was received in 2022.
4. Clays father passed-away in 2021 and in 2022 he received a parcel of land worth $ 1,750,000. There was also a life insurance policy from American International Group (AIG) of $2,000,000 where Clay was the sole beneficiary. The proceeds were paid to him in an annuity of $225,000 per year for 10 years starting January 1, 2022.
5. Clay received $4,200 interest from Tustin school district bonds.
6. Clay received $12,000 of interest from U.S. Treasury bills.
7. Clay received $2,500 interest from a CD at Wells Fargo.
8. Clay inherited an IRA account of $15,000 from his father. He took $7,500 out of the account to meet living expenses in 2022.
9. Clay received dividends of $25,000 noted in Box 1a of a Form 1099-DIV, of which $15,000 were dividends from Vodaphone Group PLC stock (a UK listed Company) that he has owned for 250 days, and the remaining $10,000 dividends were from Apple, Inc. stock which he has owned for 40 days.
10. Clay incurred $10,500 of interest expense on a margin loan with Merrill Lynch which was used to purchase investments. 40% of the loan was used to purchase the Tustin school district bonds.
11. Clay received 100 shares of Tesla, Inc. common stock as a stock dividend (he purchased his original Tesla shares in 2017.) The shares had a fair market value of $20,000 at the time he received them, and he did not have the option of receiving cash.
12. Clay paid $12,500 alimony to his former wife, Annie Potts (Social Security number 124-48- 8786). The divorce was finalized in 2004. The divorce agreement was last modified in 2018.
13. Clay kept the receipts for the 2022 sales taxes he paid of $3,100.
14. Clays other expenses in 2022 include the following:
    • Real estate taxes on principal residence of $9,500.
    • Mortgage interest on principal residence of $20,500.
    • Cash contributions to his church totaled $8,500.
    • Non-cash contributions of $450 to Goodwill Industries.
    • Medical Expenses related to doctors, etc. of $45,000 (Note: the maximum amount was paid out of his Health Savings Account, see below.)
    • Job-related unreimbursed expenses of $9,500 related to travel for his job.
    • Contributions to the Mayor of Tustins political campaign of $2,900.
    • State income tax paid and withheld totaled $6,500

15. Clay set up a new Health Savings Account for the maximum amount allowed in 2022. He has a high deductible medical plan at Pottery Barn, Inc. The account earned $1,000 of interest income in 2022. The balance in the account was zero at 12/31/2022.

16. Clay contributed $16,000 to each of the kids 529 plans in 2022.

Assignment:

Compute the Potts net federal tax payable (or refund due) for 2022. Use Form 1040 and any additional applicable other forms that you need to file a return with the IRS for 2022.

Do not prepare the California return.

In addition to the federal returns for 2022, you will need to prepare a narrative discussing all the items in this problem and why income items are taxable or nontaxable and why deduction items are deductible or not deductible. The narrative should include a reference to the appropriate Internal Revenue Code section to support your conclusions.