PROBLEM 1-INDIVIDUALS (FORM 1040) Jason R. and Jenni L. Dane are married and live at 13071 Sterling Drive, Marquette, MI 49866. Jason is a self-employed insurance claims adjuster (business activity code 524290), and Jenni is the dietitian for the local school district. They choose to file a joint tax return each year. Jason represents several national casualty insurance companies on a contract basis. He operates this business on the cash basis. He is paid a retainer and receives additional compensation if the claims he processes for the year exceed a specified number. As an independent contractor, he is responsible for whatever expenses he incurs. Jason works out of an office near his home. The office is located at 1202 Moose Road. He shares Suite 326 with a financial consultant, and operating expenses are divided equally between them. The suite has a common waiting room with a receptionist furnished and paid by the landlord. Jason paid his one half share of the 2018 expenses as detailed below. 1. Office rent Utilities (includes telephone and fax) Replacement of waiting room furniture on April 22 Renters' insurance (covers personal liability, casualty, theft) Office expense (supplies, postage) New Toshiba copier on February 7 Waiting room coffee service (catered) Waiting room magazine subscriptions $11,600 4,300 3,600 1,400 740 300 280 90 For his own business use, lason purchased a $2,100 laptop computer on June 17 and a $1,200 Nikon camera on February 5. Except for his vehicle (see item 2 below), Jason uses the $ 179 write-off option whenever possible. Jason has no expenditures for which he is required to file Form 1099s 2. On January 2, 2018, Jason paid $31,000 (including sales tax) to purchase a gently used Toyota Camry that he uses 92% of the time for business. No trade-in was involved, and he did not claim any $ 179 expensing. Jason uses the actual operating cost method to compute his tax deduction. He elects to use the 200% declining balance MACRS depreciation method with a half-year convention. His expenses relating to the Camry for 2018 are as follows: Gasoline Auto insurance Interest on car loan Auto club dues Oil changes and lubrication License and registration $3,500 1,700 820 325 210 190 In connection with his business use of the Camry, Jason paid $510 for tolls and $350 in fines for traffic violations. In 2018, Jason drove the Camry 14,532 miles for business and 1,248 miles for personal use (which includes his daily, round-trip commute to work) 3. Jason handles most claim applications locally, but on occasion he must travel out of town Expenses in connection with these business trips during 2018 were $930 for lodging and $1,140 for meals. He also paid $610 for business dinners he had with several visiting executives of insurance companies with whom he does business. Jason's other business-related expenses for 2018 are listed below. Contribution to H.R. 10 (Keogh) retirement plan Premiums on medical insurance covering self and family (spouse and children) Premiums on disability insurance policy (pays for loss of income in the event Jason is disabled and cannot work) State and local occupation fee Birthday gift for receptionist ($25 box of Godiva chocolates plus $3 for gift wrap) $8,000 4,600 2,400 450 28 4. Jenni earns $32,000 working as a registered dietician for the Marquette Public School District. The job she holds, manager of the school lunch program, is not classified as full time. Consequently, she is not eligible to participate in the teacher retirement or health insurance programs. Jenni's expenses for 2018 are summarized as follows: Contribution to traditional IRA $5,500 Job hunting expense 720 Continuing education program 350 Membership dues to the National Association of Dietitians 120 Subscription to Nutrition Today 90 In order to work full time and earn a larger salary, Jenni applied for a position as chief dietitian for a chain of nursing homes. According to the director of the recruiting service she hired, the position has not yet been filled, and Jenni is one of the leading candidates. The continuing education program was sponsored by the National Association of Dietitians and consisted of a one-day seminar on special diets for seniors. Jenni drove the family Chevrolet Malibu 930 miles on job-related use and 5,200 miles in commuting to work, out of a total of 8,670 miles driven for the year. The Danes purchased the car on July 11, 2016, for $23,400. Jenni uses the automatic mileage method for computing any available deduction for business use of the car. 5. The Danes have supported Jesse Voss (Jenni's widowed father) for several years, appropriately claiming him as a dependent for tax purposes. On December 27, 2017, Jesse suffered a massive stroke. The doctors did everything they could for Jesse, but he died in the intensive care unit of Riverwood Hospital on January 8, 2018. In January and February of 2018, the Danes paid the following bills on behalf of Jesse: medical expenses of $11,800 not covered by Medicare ($6,000 incurred in 2017 and $5,800 in 2018) and funeral expenses of $15,300. Jesse's health insurance was limited to his Medicare coverage because the Danes's medical insurance (see item 3 above) only covered Jason, Jenni, and their sons. Jesse's will named Jenni as executor and sole heir of his estate 6. One of the assets that Jenni inherited with the transfer of Jesse's estate was his house. Upon the advice of the financial consultant who shares office space with Jason, the Danes decided to convert Jesse's home into a furnished rental house. After several minor repairs (e.g., touching up the paint on the interior walls, replacing various window screens, pressure washing the brick exterior, etc.), the property was advertised for rent in the classified section of the local State income tax (see item 17 below) State sales taxes Property taxes on personal residence 3,456 1,120 3,800 4,200 3,600 Interest on home mortgage reported on Form 1098 Charitable contributions The Danes's medical insurance does not cover dental services. The Danes pledge contributions of $1,200 per year to their church, The Water's Edge Church in Marquette, Michigan. In 2018, they paid the pledges for 2017 through 2019. During 2018, the Danes drove the Malibu 270 miles for medical purposes (e g., trips to the hospital, doctor and dentist offices) and 320 miles delivering meals to the poor for Meals-on-Wheels, a qualified charity. 16. The Danes have two sons who live with them: Ethan and Isaac. Both are full-time students. Ethan is an accomplished singer and earned $4,200 during the year performing at special events (e.g., weddings, anniversaries, civic functions). Ethan deposits his earnings in a savings account intended to help cover future college expenses. Isaac does not have a job. 17. The Form W-2 Jenni receives from her employer reflects wages of $32,000. Appropriate amounts for Social Security and Medicare taxes were deducted. Income tax withholdings were $1,320 for Federal and $1,056 for state. The Danes made quarterly tax payments of $1,900 for Federal and $600 for state on each of the following dates: April 10, 2018; June 11, 2018; September 10, 2018; and December 28, 2018. None of the Danes hold any foreign financial accounts. Relevant Social Security numbers are noted below Name Jason R. Dane Jenni L. Dane Jesse S. Voss Ethan T. Dane Isaac S. Dane Social Security Number Birth Date 123-45-6781 123-45-6784 123-45-6788 123-45-6789 06/06/1976 08/14/1977 03/12/1938 09/13/2001 07/20/2003 Requirements Prepare an income tax return (with all appropriate forms and schedules) for the Danes for 2018 following these guidelines: Make necessary assumptions for information not given in the problem but needed to complete the return. . The taxpayers are preparing their own return (i.e., no preparer is involved) . The taxpayers have substantiation (e.g., records, receipts) to support all transactions for the year . If any refund is due, the Danes want a refund check sent to them by mail. . The Danes had itemized deductions from AGI for 2017 of $16,700, of which $1,500 was for state and local income taxes. The Danes do not want to contribute to the Presidential Election Campaign Fund PROBLEM 1-INDIVIDUALS (FORM 1040) Jason R. and Jenni L. Dane are married and live at 13071 Sterling Drive, Marquette, MI 49866. Jason is a self-employed insurance claims adjuster (business activity code 524290), and Jenni is the dietitian for the local school district. They choose to file a joint tax return each year. Jason represents several national casualty insurance companies on a contract basis. He operates this business on the cash basis. He is paid a retainer and receives additional compensation if the claims he processes for the year exceed a specified number. As an independent contractor, he is responsible for whatever expenses he incurs. Jason works out of an office near his home. The office is located at 1202 Moose Road. He shares Suite 326 with a financial consultant, and operating expenses are divided equally between them. The suite has a common waiting room with a receptionist furnished and paid by the landlord. Jason paid his one half share of the 2018 expenses as detailed below. 1. Office rent Utilities (includes telephone and fax) Replacement of waiting room furniture on April 22 Renters' insurance (covers personal liability, casualty, theft) Office expense (supplies, postage) New Toshiba copier on February 7 Waiting room coffee service (catered) Waiting room magazine subscriptions $11,600 4,300 3,600 1,400 740 300 280 90 For his own business use, lason purchased a $2,100 laptop computer on June 17 and a $1,200 Nikon camera on February 5. Except for his vehicle (see item 2 below), Jason uses the $ 179 write-off option whenever possible. Jason has no expenditures for which he is required to file Form 1099s 2. On January 2, 2018, Jason paid $31,000 (including sales tax) to purchase a gently used Toyota Camry that he uses 92% of the time for business. No trade-in was involved, and he did not claim any $ 179 expensing. Jason uses the actual operating cost method to compute his tax deduction. He elects to use the 200% declining balance MACRS depreciation method with a half-year convention. His expenses relating to the Camry for 2018 are as follows: Gasoline Auto insurance Interest on car loan Auto club dues Oil changes and lubrication License and registration $3,500 1,700 820 325 210 190 In connection with his business use of the Camry, Jason paid $510 for tolls and $350 in fines for traffic violations. In 2018, Jason drove the Camry 14,532 miles for business and 1,248 miles for personal use (which includes his daily, round-trip commute to work) 3. Jason handles most claim applications locally, but on occasion he must travel out of town Expenses in connection with these business trips during 2018 were $930 for lodging and $1,140 for meals. He also paid $610 for business dinners he had with several visiting executives of insurance companies with whom he does business. Jason's other business-related expenses for 2018 are listed below. Contribution to H.R. 10 (Keogh) retirement plan Premiums on medical insurance covering self and family (spouse and children) Premiums on disability insurance policy (pays for loss of income in the event Jason is disabled and cannot work) State and local occupation fee Birthday gift for receptionist ($25 box of Godiva chocolates plus $3 for gift wrap) $8,000 4,600 2,400 450 28 4. Jenni earns $32,000 working as a registered dietician for the Marquette Public School District. The job she holds, manager of the school lunch program, is not classified as full time. Consequently, she is not eligible to participate in the teacher retirement or health insurance programs. Jenni's expenses for 2018 are summarized as follows: Contribution to traditional IRA $5,500 Job hunting expense 720 Continuing education program 350 Membership dues to the National Association of Dietitians 120 Subscription to Nutrition Today 90 In order to work full time and earn a larger salary, Jenni applied for a position as chief dietitian for a chain of nursing homes. According to the director of the recruiting service she hired, the position has not yet been filled, and Jenni is one of the leading candidates. The continuing education program was sponsored by the National Association of Dietitians and consisted of a one-day seminar on special diets for seniors. Jenni drove the family Chevrolet Malibu 930 miles on job-related use and 5,200 miles in commuting to work, out of a total of 8,670 miles driven for the year. The Danes purchased the car on July 11, 2016, for $23,400. Jenni uses the automatic mileage method for computing any available deduction for business use of the car. 5. The Danes have supported Jesse Voss (Jenni's widowed father) for several years, appropriately claiming him as a dependent for tax purposes. On December 27, 2017, Jesse suffered a massive stroke. The doctors did everything they could for Jesse, but he died in the intensive care unit of Riverwood Hospital on January 8, 2018. In January and February of 2018, the Danes paid the following bills on behalf of Jesse: medical expenses of $11,800 not covered by Medicare ($6,000 incurred in 2017 and $5,800 in 2018) and funeral expenses of $15,300. Jesse's health insurance was limited to his Medicare coverage because the Danes's medical insurance (see item 3 above) only covered Jason, Jenni, and their sons. Jesse's will named Jenni as executor and sole heir of his estate 6. One of the assets that Jenni inherited with the transfer of Jesse's estate was his house. Upon the advice of the financial consultant who shares office space with Jason, the Danes decided to convert Jesse's home into a furnished rental house. After several minor repairs (e.g., touching up the paint on the interior walls, replacing various window screens, pressure washing the brick exterior, etc.), the property was advertised for rent in the classified section of the local State income tax (see item 17 below) State sales taxes Property taxes on personal residence 3,456 1,120 3,800 4,200 3,600 Interest on home mortgage reported on Form 1098 Charitable contributions The Danes's medical insurance does not cover dental services. The Danes pledge contributions of $1,200 per year to their church, The Water's Edge Church in Marquette, Michigan. In 2018, they paid the pledges for 2017 through 2019. During 2018, the Danes drove the Malibu 270 miles for medical purposes (e g., trips to the hospital, doctor and dentist offices) and 320 miles delivering meals to the poor for Meals-on-Wheels, a qualified charity. 16. The Danes have two sons who live with them: Ethan and Isaac. Both are full-time students. Ethan is an accomplished singer and earned $4,200 during the year performing at special events (e.g., weddings, anniversaries, civic functions). Ethan deposits his earnings in a savings account intended to help cover future college expenses. Isaac does not have a job. 17. The Form W-2 Jenni receives from her employer reflects wages of $32,000. Appropriate amounts for Social Security and Medicare taxes were deducted. Income tax withholdings were $1,320 for Federal and $1,056 for state. The Danes made quarterly tax payments of $1,900 for Federal and $600 for state on each of the following dates: April 10, 2018; June 11, 2018; September 10, 2018; and December 28, 2018. None of the Danes hold any foreign financial accounts. Relevant Social Security numbers are noted below Name Jason R. Dane Jenni L. Dane Jesse S. Voss Ethan T. Dane Isaac S. Dane Social Security Number Birth Date 123-45-6781 123-45-6784 123-45-6788 123-45-6789 06/06/1976 08/14/1977 03/12/1938 09/13/2001 07/20/2003 Requirements Prepare an income tax return (with all appropriate forms and schedules) for the Danes for 2018 following these guidelines: Make necessary assumptions for information not given in the problem but needed to complete the return. . The taxpayers are preparing their own return (i.e., no preparer is involved) . The taxpayers have substantiation (e.g., records, receipts) to support all transactions for the year . If any refund is due, the Danes want a refund check sent to them by mail. . The Danes had itemized deductions from AGI for 2017 of $16,700, of which $1,500 was for state and local income taxes. The Danes do not want to contribute to the Presidential Election Campaign Fund