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Practice Set Assignments- Comprehensive Tax Return Problems PROBLEM 2-INDIVIDUALS (FORM 1040) Sean B. (age 42) and Michelle R. (age 48) Atwell are married and live at 5944 Overhill Road, Mission Hills, MO 66208 (a suburb of Kansas City). Sean is employed as a chemist by HMT Pharmaceuticals, Inc. and Michelle is a self-employed doctor of anesthesiology They are calendar year, cash basis taxpayers. 1. HMT Pharmaceuticals develops and produces injectable medicines used in chemotherapy treatments for cancer patients. Sean manages the Kansas City facility for an annual salary of $95,000. HMT makes contributions to a qualified defined contribution pension plan for all of its full-time employees. Although Sean also has the opportunity to make contributions to the plan, he chose not to do so in 2019. Sean participates in his employer's group health insurance plan to which he contributed $4,000 in 2019 for medical coverage. These contributions are made with pretax dollars, so his taxable salary is reduced to $91,000 for W-2 reporting, The health plan covers Sean, Michelle, and their two dependent children. Because of the risk associated with Sean's work (ie processing of chemotherapy drugs). HMT provides all of its employees with $200,000 of group term life insurance coverage. An additional $180 of income is included in Sean's Form W-2 to report the taxable value of this insurance. 2. HMT generally reimburses Sean for expenses related to his work for the company. However, as a matter of policy, HMT does not reimburse for the following: Monthly dinner meetings of the Midwestern Chemists Association (MCA) 5825 Dues to professional organisations 240 Subscriptions to professional journals 160 MIA correspondence study course 230 Sean attended 11 MCA dinner meetings in 2016. Each dinner involved the following costs: 540 (fee for speaker), S25 (price of meal), and $10 (parking) Sean goes to the meetings from work and returns home the same night. The MIA (Management Institute of America) charge was for an online home study course on ways to improve safety measures and avoid accidents in the industrial workplace. 3. Michelle Atwell is a board-certified doctor of anesthesiology. She provides anesthesiology Services at a number of hospitals and surgical centers in the greater Kansas City area. Michelle is well respected by the surgeons with whom she works. She uses her home as her business address. She keeps her records there, dictates notes to patient files, participates in conference calls regarding upcoming surgeries and postoperative surgical care, answers work-related phone calls, and compiles and sends patient bills. Because Michelle does not maintain a specific area for exclusive business use, she does not claim a tax deduction for a home office. Michelle's receipts from her practice during 2019 were $185.000, $16.000 of which was for services performed in 2018. Not included in these amounts is $17.500 she received in January 2020 for services rendered in December 2019, Michelle's professional activity code is 621111. Michelle had the following business expenses in 2019: Medical clothing fee.lab coats, surgical scruba) 52.200 Medical malpractice insurance 9,500 State medical license fee 450 Dues to professional organizations 350 Subscriptions to professional Journals 340 In addition, she drove the family Suburban (purchased on March 2, 2018) 2,900 miles in connection with her work. She uses the standard mileage method for computing deductible vehicle costs. Total mileage for the Suburban is 9,000 miles for the year. 4. Sean's widowed mother, Lucy, endured a number of different medical challenges in late 2018. On December 30, 2018, she suffered a massive stroke and died in the hospital on January 16, 2019. Some of Lucy's medical expenses were covered by Medicare, with the remainder being paid by the Atwells On February 18, 2019, Sean paid $39,800 to the hospital. $28,000 of which was attributable to expenses incurred in 2018. At the same time, Sean also paid the funeral expenses of $16,000. Although Lucy lived in her own home prior to the stroke, Sean and Michelle have properly claimed her as a dependent for the past few years. 5. As Lucy's sole heir, Sean inherited her home and its furnishings (located at 5422 SW Sena Drive, Topeka, KS 66604). The costs and values involved are as follows: Lot $ 10,000 30,000 House 110,000 250,000 Furnishings 55,000 25.000 Because the home was located in an attractive rental area, Sean decided not to sell. Instead, he rented the property fully furnished on May 1, 2019. The terms of the lease (executed on April 30) provide for the following: 1-year lease at $2,500 per month (payable on the first of each month), last month's rent payable in advance, and damage deposit of $1,500. In total, Sean received $24,000 from the tenants in 2019 for their use of the property. Besides depreciation, his expenses were as follows: Property taxes $4.800 Insurance 3.900 Repairs 2.100 Real estate renter's location service 400 For MACRS depreciation purposes. Sean plans to use the straight-line method with the mid-month convention to compute the deduction for the realty and the 200% declining-balance method with a half-year convention for the personalty. 6. While walking the family dogs in late July, Sean was struck by a delivery van and seriously injured. After being hospitalized for a week, he was released bruised and sore-but with no permanent injuries. The driver of the van was arrested and ticketed by the police for reckless operation of a vehicle and was later prosecuted for drug use. To prevent adverse publicity related to a lawsuit the owner of the delivery service paid for Sean's medical expenses and sent him a check on August 16, 2019, for $90,000. The check was accompanied by a letter that stated: "This $90,000 is a settlement for physical injuries sustained by Sean Atwell." Sean was represented in the negotiations with the delivery company by his brother, a practicing attorney. He did not charge the Atwells for his services. 7. The Atwells had the following property transactions during 2019. a. On May 5, the City Council condemned unimproved land owned by Sean for the construction of a fire station. He purchased the land two vacant lots at 3400 and 3402 Sycamore Lane) as an investment on May 25, 2012, for $14,000 In exchange for the lots, the city gave Sean a large unimproved lot at 440 Genoa Street that was valued at $20,000. All in all, he was satisfied with the exchange because the Genoa Street property is in a better neighborhood and has a greater potential for appreciation. b. On August 22, Sean sold a gun collection for $32,000 to an avid collector. The collection was a gift from Sean's father on December 25, 2014, when it was worth $22,000. His father bought the collection in 1997 for $14,000. Sean's sale of the collection was documented by a bill of sale, signed by both Sean and the buyer. c.On September 9, the Atwells sold 3,000 shares of Dove Pharmaceuticals for $2,000. The couple purchased the stock on December 4, 2018, for $25,000. The investment was motivated by the rumor that Dove was developing a new drug for infertility. On September 7, the FDA announced that it would not approve the drug due to adverse side effects, and the Dove stock price plummeted. The Atwells broker provided them with a Form 1099-B, which reported the gross proceeds from the sale and their basis in the stock 8. The Atwells have a long-term capital loss carryover of $1,500 from 2018 9. In March 2019, the Atwells were audited by the Missouri Department of Revenue for tax years 2016 and 2017. The audit proposed no changes for the 2016 tax return. However, the Atwells were assessed $2.250 additional income tax for 2017 (no interest or penalties were assessed). The Atwells agreed with the assessment and paid the $2,250 immediately. 10. During 2019, Sean served on a jury for a civil case that was litigated at the county courthouse. As a result of the service, he was paid $700 and incurred unreimbursed parking expenses of $60. In conformance with company policy, Sean remitted the $700 of jury duty fees to HMT. 11. In addition to the items already noted, the Atwells had the following receipts in 2019: Life insurance proceeds $50,000 2018 Minson state income tax refund 450 Proceeds from garage sale 2.600 Interest income Kansas City general purpose bonds 5480 CitiBank certificate of deposit 600 1,080 The insurance proceeds were paid to Sean as the designated beneficiary of Lucy's life insurance policy. At the garage sale, the Atwells sold personal items (eg.camper, furniture, hunting and fishing equipment) that belonged to Sean's father and mother (t.e. Lucy). Sean and Michelle estimated the items they sold originally cost $7.100. The garage sale proceeds were donated to the Alzheimers Research Association (EIN 23-7438025) In memory of Sean's father. 12. The Atwells had the following additional expenditures for 2019: Dental bills not covered by insurance $ 3.100 Ad valorem property taxes on personal residence 14,100 Interest on home mortgage reported on Form 1098 2000 Contributions to Metropolitan Lutheran Ministry (EIN 43-0970991) 23,600 As part of a program sponsored by their church (a qualified charity), the Atwells used the family Suburban to transport senior citizens to religious services for a total of 900 miles during 2019. The Suburban also was used for numerous visits to an orthodontist for both the Atwells children for a total of 480 miles. 13. The Arwells household includes two dependent children: Ethan (age 15) and Bella (age 14), both of whom are full-time students in high school. Relevant Social Security numbers appear below. Name Social Security Number Sean B. Atwell 123-45-6758 Michelle R.Atwell 123-45-6768 Lucy E. Atwell 123-45-6787 Ethan M. Atwell 123-45-6788 Bella A. Atwell 123-45-6978 14. Sean's Form W-2 from HMT Pharmaceuticals reflects income tax withholding of $6,500 for Federal income taxes and $4,000 for state of Missouri income taxes. The Atwells made quarterly income tax payments totaling $33,000 for their Federal taxes and totaling $20,000 for their state taxes. They had their Federal income tax refund of $3,000 (for 2018) applied toward their 2019 income tax. Requirements Prepare an income tax return (with all appropriate forms and schedules) for the Atwells for 2019, using the following guidelines: . The Atwells choose to file a joint income tax return. The Atwells do not wish to contribute to the Presidential Election Campaign Fund. The Atwells do not own any foreign bank accounts or other investments. In addition, the Atwells do not have any financial interests in virtual currencies The Atwells prefer to receive a refund of any overpaid taxes. The taxpayers are preparing their own return i.e., no preparer is involved). . For the past several years, the Atwells have itemized their deductions from AG! instead of using the standard deduction. In addition, the Atwells have deducted state income taxes (not sales taxes) for the past several years. The taxpayers have the necessary substantiation (eg, records, receipts) to support all transactions reported on their tax return. Make necessary assumptions for information not given in the problem but needed to complete the return.