TAX 4001 Fall 2019 Tax Return Assignment

Facts:

Javier I. and Jennifer A. Thompson are married and live at 123 Milano Street,

Rock Hill, SC 29730. They file a joint return and are calendar year, cash basis

taxpayers.

1. Javier is a self-employed drafter (professional activity code is 542311). He

maintains an office at 2005 Glendale Drive, Suite 300, Greenville, SC 29732. All

of the following expenses paid in 2018 below are business related:

Office rent (prepaid 14 months on 6/1/2018) $18,000

Utilities 2,400

Office expenses (supplies, etc.) 4,800

Contributions to Republican political campaign 300

Tolls (business related) 550

Parking expense (business related) 250

State and local license fees 600

Renters insurance (prepaid 12 months on 6/1/2018) 1,800

New drafting equipment acquired on 6/15/2018 5,000

Advertising 2,500

Meals (including travel related meals for 10 days) 2,400

Entertainment (tickets to sporting events and concerts) 3,000

As is the case with all of Javiers business transactions, the meals and

entertainment expenses are properly documented and supported by receipts. The

meals and entertainment expense relates to taking clients out to eat and

discussing business during the meals and the meals were immediately followed by

taking clients to a sporting event or concert.

Of 16,000 total miles driven in 2018, Javier drove his car (a 2014 Ford Mustang

purchased on 8/1/2015) 9,500 miles for business (not including commuting). Javier

uses the automatic mileage method of claiming automobile expenses.

Javier began his drafting business in March 2017. In starting his business Javier

incurred the following items:

Startup costs incurred on 3/1 $52,000

Office furniture acquired on 3/1 3,000

iMac with 27 monitor acquired on 3/1 2,000

Drafting equipment acquired on 10/1 4,000

Javier claimed bonus depreciation on property acquisitions in 2017. On 6/15/18

Javier disposed of the drafting equipment acquired in 2017 for $3,800 and replaced

it with new equipment as shown in 2018 expenses above (Note: This is not a like

kind exchange). Unlike in 2017, no bonus depreciation was claimed for the 2018

drafting equipment purchase.

2. Jennifer works as a sales executive for Avis rental cars. She receives several

fringe benefits including group health insurance for her family. She purchased a

new Mercedes from Avis for $50,000 when the FMV was $80,000. The purchase

cost for Avis from Mercedes was $60,000. Jennifers company offers free group

term life insurance for all their employees. Jennifer received $500,000 in life

insurance coverage in 2018. Jennifer, also receives a special parking benefit

valued at $2,000 which is a benefit only offered to highly compensated executives.

Jennifer drives to various sales meetings away from her primary place of work

totaling 7,000 business related miles. The remainder of her 18,000 miles driven

were commuting or personal. Jennifer was not reimbursed for these expenses and

like her husband she plans to use the standard mileage deduction as she has done

in prior years.

3. On October 1, 2015 the Thompsons purchased a house in Augusta, GA located

on the National Golf Club of Augusta, home of the Masters Golf Championship.

The house is held as a rental investment. The property cost $800,000 (of which

$400,000 is allocated to the land) and is located at 1606 Jack Nicklaus Way,

Augusta, GA 30904. The Thompson family resided in the house for personal

recreation totaling 40 days and rented the house out 180 days in 2018. $38,000 in

gross rental receipts was collected in 2018 which included $8,000 that was

received in advance for 2019. The Thompsons allocate rental expenses per the

IRS Method. They use MACRS straight-line depreciation, assuming the mid-month

convention. The Thompsons pay a rental management company to handle all

aspects of renting and care of this property.

Information regarding the rental property items for 2018 are summarized below:

Refundable damage deposit 4,000

Property taxes 9,800

Interest on mortgage 14,500

Repairs 4,800

Insurance 2,500

Utilities 3,000

Management fees (paid to rental management company) 8,800

4. Javier bought 400 shares of Apple stock on January 1, 2015 for $200 per

share with a brokerage fee of $1,000. Javier sold 100 shares for $140 per

share on November 12, 2018. Javier then purchased 100 shares of the

same type of Apple stock on December 10, 2018 for $138 share. No

brokerage fee was incurred on the 2018 transactions.

Jennifer had the following stock sales in 2018:

Date Purchased Basis Date Sold Amount Realized

Stock 1 3/16/1997 $7,850 7/22/2018 $6,500

Stock 2 2/12/2018 15,000 9/13/2018 19,500

Stock 3 6/25/2012 11,750 10/12/2018 15,600

Stock 4 7/19/2017 8,250 1/12/2018 12,800

Stock 5 9/18/2006 9,400 11/26/2018 4,500

5. Besides those previously noted, the Thompsons had the following

receipts for 2018:

Drafting fees received for services $90,000

Jennifers W-2 wages (see information below) $80,000

Qualified dividends from Dell Corporation $7,500

Golf cart (see information below)

Income tax refunds for tax year 2017

Federal tax $6,400

State tax 7,800 $14,200

Interest income--

SunTrust Bank $5,600

Greenville municipal bond 6,600

$12,200

Annuity income (see information below) $4,000

Gambling income $3,200

Javier prepared a blueprint floorplan for a client in exchange for a used golf cart.

The blueprint floorplan fee normally would have been charged at $5,000 to the

client. The clients golf cart had a FMV of $4,500 and client had previously paid

$6,000 for the cart. No cash was involved in this transaction.

Jennifers W-2 wage amount (above) includes $10,000 employer contribution to

401K defined contribution plan but does not include any amounts from Item 2.

Jennifer purchased an annuity in 2014 and invested $50,000 and will receive

$4,000 yearly over a 15 year period. Jennifer received a $4,000 annuity payment

in December 2018.

6. In addition to any items previously noted, the Thompsons had the following

expenses for 2018:

Medical and dental expenses not covered by

Insurance $9,000

Real estate tax on personal residence 15,500

Interest

Home mortgage $52,000

Investment interest 11,400

Charitable contributions (See information below)

Gambling expenses (with proof of payment) 4,500

Of the $7,000 in medical expenses, $2,000 was used to pay for an urgent care clinic

visit for Benjamin Thompson, Javiers brother who is not a dependent. Benjamin

was visiting Javier and injured his back while assisting in cleaning out the garage.

$4,700 was used to cover co-payments and uninsured medical and dental

procedures for Jennifer and their children. The remaining $300 was for purchases

of over the counter medications.

On December 24, 2017 the Thompsons after saving their paychecks for years

purchased their dream home as their primary residence for $1.4 million and put

down a $250,000 deposit and financed $1,150,000 with SunTrust Bank. In 2018

they paid SunTrust $52,000 in mortgage interest on this loan.

The charitable contributions were all made to qualified charitable organizations as

follows: $10,000 cash donated to their church; The Thompsons also donated a

painting that was purchased three years ago to a local museum to hang on their

walls. The donated property had a basis $5,000 and the FMV at the time of

donation was $8,000.

7. The Thompsons household includes their three children: Joseph, Patty, and

Gianna. Patty and Gianna are full-time students and live fulltime at their home.

Joseph lived at home all year and is attending University of North Carolina full time

and he also works doing tile and pavement cleaning and earned $8,000 in 2018.

The Thompsons provide more than half of each of the childrens living expenses.

8.Jennifers Form W-2 from Avis shows $30,000 withheld for Federal income tax

and $7,681 for state income tax. Javier made four equal quarterly payments of

$4,000 (Federal) and $2,000 (state). All Social Security numbers are noted below.

Social Security

Name Number Birth Date

Javier A. Thompson 123-45-6789 07/01/1968

Jennifer M. Thompson 123-45-6782 06/27/1969

Joseph Thompson 123-45-6786 04/09/1994

Patty Thompson 123-45-6783 12/06/2001

Gianna Thompson 123-45-6781 07/29/2002

REQUIREMENTS

Prepare an income tax return by hand in blue pen (no tax software) with needed

schedules that can be obtained from the IRS website (irs.gov) for the Thompsons for

2018 Tax Year. You will need to download applicable schedules for F1040 including

schedules A-E, SE, and Form 4562 and perhaps a few other schedules. Attach an

additional sheet/sheets to show calculations where applicable (such as Car and Truck

expenses). In doing this, use the following guidelines:

You may complete assignment individually or in groups up to 5 people.

Place all participating student names on cover sheet.

Make necessary assumptions for information not given in the problem but

needed to complete the return. Be aware of the possible application of

certain tax credits such as the child tax credit.

The taxpayers have the necessary substantiation (e.g., records, receipts)

to support the transactions involved.

If a refund results, the taxpayers want it sent to them.

Regarding possible credits, only consider the child tax credit.

The Thompsons do not wish to contribute to the Presidential Election

Campaign fund.

In the past several years, the Thompsons have itemized their deductions

from AGI (have not claimed the standard deduction option). In 2017 they

claimed $16,600 in itemized expenses.