TAX PROBLEM

Required: Prepare their 2021 tax return. Directions include the following:

1. Round all amounts to the nearest dollar. The Vances have no carryforwards, no foreign bank accounts and are not subject to the Alternative Minimum Tax.

2. Turn in the forms and schedules that they are required to file with the Internal Revenue Service. The forms are 1040 (and accompanying schedules 1,2,3, A, B, C, D, E & SE), 4562 (2), 4797, 8863, and 8949. These forms are available online. Forms and schedules should be placed in the correct order (numerically, as listed above). I prefer 2021 forms, but if you start on this early and 2021 is not available yet (usually mid-late October) 2020 forms are fine. However, do not forget to update numbers that we know about that may not be accurate on the 2020 forms (%, thresholds, rates, etc.)

1. Paul J. and Judy L. Vance are married and file a joint return. Paul is self-employed as a dentist, and Judy teaches at a university. Paul and Judy have three children. The oldest is Vince who lives at home. Vince received his BS degree from Ohio University in 2017 and claimed the appropriate education credits for his 4 years there. Vince is now a law student at the University of Cincinnati and worked part-time during the year, earning $2,500, which he spent for his own support. Paul and Judy provided $6,000 toward Vinces support (including $3,000 for Vinces fall tuition). They also provided over half the support of their daughter, Joan, who is a full-time student at Edgecliff College in Cincinnati. Joan worked part-time as an independent contractor during the year, earning $4,200. Joan lived at home until she was married in December 2021. She filed a joint return with her husband, Patrick, who earned $30,000 as an employee during the year. Jennifer is the youngest and lived in the Vances home for the entire year.

The Vances provide you with the following additional information:

Paul and Judy would like to take advantage on their return of any educational expenses paid for their children.

The Vances do not want to contribute to the presidential election campaign.

The Vances live at 621 Franklin Avenue, Cincinnati, OH 45211.

Pauls birthday is 3/5/1965 and his Social Security number is 344-55-6666.

Judys birthday is 4/24/1968 and her Social Security number is 566-77-8888.

Vinces birthday is 11/6/1998 and his Social Security number is 576-18-7928.

Joans birthday is 2/1/2002 and her Social Security number is 575-92-4321.

Jennifers birthday is 12/12/2009 and her Social Security number is 613-97-8465.

The Vances do not have any foreign bank accounts or trusts.

2. Judy is a lecturer at Xavier University in Cincinnati. In addition to her salary, Judy also receives full health insurance coverage for herself and her entire family. In addition, no one in the Vance household purchased health insurance through healthcare.gov or a state exchange. She also worked part-time during the year for Delta Airlines. Her W-2s for these two positions are included in the workpapers.

3. The Vances received several payments of interest and dividends throughout the year. The 1099-INTs and 1099-DIVs are included in the workpapers.

4. Paul practices under the name Paul J. Vance, DDS. His business is located at 645 West Avenue, Cincinnati, OH 45211, and his employer identification number is 01-2222222. Paul uses the cash method of accounting for his business. Pauls accounting records are part of the workpapers.

In June, Paul decided to refurbish his office. This project was completed and the assets placed in service on July 1. Pauls expenditures included $15,000 for new office furniture, $5,000 for new dental equipment (seven-year recovery period), and $4,000 for a new computer. Paul elected to compute his cost recovery allowance using MACRS. He did not elect to use 179 immediate expensing and he chose to not claim any bonus depreciation.

Paul was required to file 1099s on some of the payments that he made in his business. All of the required 1099s were filed timely.

Paul was not required to provide health insurance to any of his employees because all employees worked part-time.

5. Judys mother, Sarah, died on July 2, 2015, leaving Judy her entire estate. Included in the estate was Sarahs residence (325 Oak Street, Cincinnati, OH 45211). Sarahs basis in the residence was $45,000. The fair market value of the residence on July 2, 2015, was $170,000. The property was distributed to Judy on January 1, 2016. The Vances have held the property as rental property and have managed it themselves. From 2016 until June 30, 2021, they rented the house to the same tenant. The tenant was transferred to a branch office in California and moved out at the end of June. Since they did not want to bother finding a new tenant, Paul and Judy sold the house on June 30, 2021. They received $165,000 for the house and land ($25,000 for the land and $140,000 for the house), less a 6 percent commission charged by the broker. They had depreciated the house using the MACRS rules and conventions applicable to residential real estate. To compute depreciation on the house, the Vances had allocated $25,000 of the propertys basis to the land on which the house is located. The Vances collected rent of $2,500 a month during the six months the house was occupied during the year. The Vances were not required to file any Forms 1099 for this rental activity. They incurred the following related expenses during the year:

6. The Vances sold 250 shares of Capp Corporation stock on September 3, 2021, for $32 a share (minus a $50 commission). The Vances received the stock from Pauls father on June 25, 1987, as a wedding present. Pauls father originally purchased the stock for $10 per share in 1974. The stock was valued at $9.50 per share on the date of the gift. The Vances did not receive a 1099-B reporting either the tax basis or the proceeds.

8. Paul and Judy have given you a file containing the following receipts for expenditures during the year:

Prescription medicine and drugs (net of insurance reimbursement) $576

Doctor and hospital bills (net of insurance reimbursement) $ 3,682

Penalty for underpayment of last years state income tax $20

Interest on credit cards (consumer purchases) $675

Real Estate Taxes $7,215

Cash contribution to St. Matthews church $ 8,080 (donation receipt was received)

Payroll deductions for Judys contributions to the United Way $150 (donation receipt was received)

9. The Vances have a mortgage on their primary residence. The 1098 is part of the workpapers provided.

10. The Vances filed their 2020 federal, state, and local returns on April 12, 2021. They paid the following additional 2020 taxes with their 2020 tax returns: federal income taxes of $630, state income taxes of $250, and city income taxes of $75. This means they paid these taxes in 2021, not 2020 (they just related to 2020, but the Vances are cash basis taxpayers).

11. The Vances made timely estimated federal income tax payments of $500 each quarter during 2021. They also made estimated state income tax payments of $300 each quarter and estimated city income tax payments of $160 each quarter. The Vances made all fourth-quarter payments on December 31, 2021. They would like to receive a refund in the form of a check for any overpayments.

Property insurance Property taxes Maintenance Depreciation (to be computed) $500 800 465 ? Property insurance Property taxes Maintenance Depreciation (to be computed) $500 800 465