Peter and Gamora Quill are your newest tax clients. They are married and have 1 child. They own a home in College Station, TX, where they live. In between jobs guarding the galaxy they have come to see you for some tax planning for 2020.

Personal Info

Peter, age 38, SSN: 123-45-6789

Gamora, age 39, SSN: 234-56-7891

Meredith, their daughter, age 2. SSN: 345-67-8912

They plan on having another child in the next couple of years.

Home address: 1000000 Galaxy Street; College Station, TX 77840

They are all citizens of Earth and the United States.

Income and Asset Info

Schedule C Income

As U.S. citizens they must report their galaxy-wide income. They each earn about $400,000 each year from jobs guarding the galaxy BUT they also have high expenses related to their work. They net about $150,000 eachannually.

They are not employees; they are independent contractors.

Their businesses have been run as sole proprietorships. In the past, they have each separately filled Schedule Cs as part of their income tax return in order to report their income.

They have no employees.

They have a stock portfolio of $300,000, which generates $9,000 of qualified dividends annually and a bond portfolio of $100,000, which generates $3,000 of taxable interest annually.

Their bond portfolio consists of corporate bonds paying 3% interest.

Rental Income and the rent house

They own a rental home, a single-family dwelling. It generates net income after expenses of $12,000 annually. It was purchased for $150,000 and they have taken $50,000 of straight-line depreciation on it. They would like to sell it because they are tired of worrying about renters. They think they can sell it for $220,000.

Merediths Income

Meredith has interest income of $5,000 annually from a trust fund set up per her grandfather Egos will.

Personal Residence

They own their personal residence. They bought it for $250,000 2 years ago and it is now worth $350,000. They would like to sell it, and buy a slightly larger home.

Child Care Expenses

No grandparents or other relatives live on the planet, so they have high child care expenses, while they work at varied locations throughout the galaxy. $50,000 paid to Guardians of the Guardians of the Galaxys Children, Inc.

Other Info

Mortgage interest: $7,000

Property taxes: $8,000

Medical expenses: $12,000, not including medical insurance. Their medical expenses are remarkably low, given what they do.

Medical insurance: They have a high deductible plan. The insurance premiums are $6,000 annually.

Charitable deductions: $10,000 annually to the Rock n Roll Hall of Fame

They have no savings in a retirement plan. There is no retirement plan set up through their businesses.

Address the following tax issues related to the Quills.

1. Will Merediths income be taxed? If so, how? Is there a way to shift income from the parents to the child and would it be a good idea in this case? Why or why not? Show your calculations.

2. The Quills would like to write-off the GHI. They believe it is worthless. Can they take a $100,000 write-off? Why or why not? If not, what are the options for getting it out of their portfolio, and what would be the tax treatment?

3. Their bond interest income is currently in taxable bonds. Find a real life example of a municipal bond that would generate tax-free interest income for them and determine if they would be better off with their current bond or if they would be better off with the tax-exempt bond. Be sure to provide info about the bond, a link to the web page. Show your calculations.

4. What would the tax consequences be of selling the rental house? Be sure to show your calculations.

5. What would be the tax consequences of selling their personal residence? Be sure to show your calculations.

6. Is there any way that the Quills can get any type of tax benefit for medical/insurance expenses? Explain.

7. The Quills businesses are both sole proprietorships. Choose what you think is their best business structure and explain why it might be better for them than sole proprietorships. If you think the sole proprietorship is the best structure, explain why.