Tax Return Project

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Davenport University Federal Taxation I ACCT 315/715 TAXRETURN PROBLEM *********************************************************** REQUIREMENT Prepare the Federal Income Tax return for Tom and Beth Stone for the year ended 2016 *********************************************************** Tom and Beth Stone are married and file a joint return. Tom was born on 3/17/1961 and Beth was born on 6/19/1965. Tom owns a used bookstore (self-employed, Sch. C), and Beth is a college professor. Tom's Social Security number is 354-69-2250, and Beth's is 384-39-2985. The Stones live at 1258 Dickinson Rd, Grand Rapids, MI 49507. Their phone number is 616-584-5621. The Stones each designate that $3 is to go to the Presidential Election Campaign Fund. Tom has one daughter, Cheryl (SS# 307-50-4861; BD 08/04/1993), from a previous marriage. Cheryl is age 23 and a full-time law student at Wayne State University. She worked part-time during the year earning $3,890, which she spent for her own support. In addition, she received a $5,200 scholarship from Michigan State University. Cheryl lived at home while not in school and Tom and Beth provided an additional $6,800 toward Cheryl's support. They also provided over half the support of Beth's son, Cole (SS# 306-15-8012, BD 05/20/1998), from a previous marriage. Cole is age 19 and a full- time student at Davenport University. Cole worked part-time during the year, earning $2,900. He filed a joint return with his spouse, Kim, who earned $13,400 during the year. Tom and Beth also have twins, Emily (SS 386-54-2189; bd 02/08/2006) and Hazel (SS 386-54-2190; bd 02/08/2006), age ten, who live with them. Tom's mother, Deborah, (SS# 101-52-1317), was born on 8/26/1931. Deborah is blind and lives with the Stones. The Stones pay $5,400 per year for dependent care expenses for Deborah as they are both employed. The dependent care provider is Senior Care, 1215 Magna Carta, Grand Rapids, ACCT 315/715 -FALL 17 Page 1 of 8 MI, 49503 (EIN# 38-6451321). In addition, Tom and his brother Mike each incurred out-of-pocket costs of $2,950 for Deborah's support. Also, Tom provided lodging for Deborah during the entire year. Tom estimates the fair rental value of the lodging is $6,000. Deborah received $9,700 in Social Security Benefits and $350 of interest during the year, all of which she put in the bank. Mike is willing to do whatever is necessary to enable Tom to claim Deborah as a dependent. Beth is a professor at Kendrick Community College (#38-7854123; 6767 W O Ave, Kalamazoo, MI 49003), where she earned $ 89,800. The University withheld Federal income tax of $8,980, state income tax of $3,597, Grand Rapids city income tax of $1,347, and the correct amount of FICA. Her employer pays for health care for the entire family. The Stone's received $3,975 of interest from Second Bank on a joint account. They received interest of $1,750 on City of Seattle bonds they bought in January. Tom received a dividend of $920 on General Bicycle Corporation stock he owns. Beth received a dividend of $1475 on Acme Clothing Corporation stock she owns. General Bicycle and Acme Clothing are both domestic Corporations. Tom and Beth received a dividend of $181 on jointly owned stock in Maple Leaf Brewing Company, a Canadian corporation. All of the securities were held with a Grand Rapids brokerage firm and are \"qualified dividends\". In July, a severe storm came through the area and did considerable damage to the summer home (382 Flying Dutchman, Holland, MI 49423) that they had purchased for $98,000 two years earlier. The home's fair market value before the storm was $133,000 and the insurance agent valued the home at $75,000 after the incident. Insurance recovery was $45,000. Tom's business, Tom's Bargain Books, is located at 1645 Library Ave., Grand Rapids, MI. 49503, and his employer identification number is #38-6478224. Tom's sales for the year were $259,157. He uses the cash method of accounting for tax purposes and his business expenses on the cash basis are as follows: Advertising.................................... $ 2,500 Bank service charges........................... 110 Professional dues.............................. 600 Professional journals.......................... 280 Contributions to employee benefit plans..... 7,800 Insurance on office contents................... 2,300 Accounting services............................ 4,840 Miscellaneous office expense................... 346 Store and equipment rental......................... 30,000 Utilities and telephone........................ 2,850 Wages.......................................... 40,450 Payroll taxes.................................. 3,094 Purchases............................... 56,000 Beginning Inventory................... 62,900 Ending Inventory........................ 21,300 ACCT 315/715 -FALL 17 Page 2 of 8 Tom put 9,297 business miles on his Ford Explorer this year and 12,980 personal miles (total miles= 22,277). He uses the automatic mileage method. Tom purchased the truck July 11, 2013 and did not take any Sec 179 Immediate Expensing. He does keep written records of his mileage. June 16, 2016 Tom purchased a new business computer information system to track inventory and customers, etc., the cost was $12,000. On the same date he spent $23,825 for furniture to refurbish his office. He did elect Sec.179 Immediate Expensing, for these items. Beth's mother, Susan, died on Feb 17, 2004, leaving Beth her entire estate. Included in the estate was Susan's residence at 538 Lighthouse Ln., Holland, MI 49424. Susan's basis in the residence was $40,000. Fair market value of the residence on Feb 17, 2004 was $127,000 (this is Beth's basis). Beth began renting the house January 1, 2005. In 2016 the house was rented the entire year at $1,650 a month. The house is depreciated using the MACRS straight-line method for residential real estate with zero salvage value. In computing depreciation, they allocate a value of $31,000 to the lot on which the house is located. They incurred the following expenses during the year on the rental property: Property insurance..................... $1,400 Property taxes.............................. 7,200 Maintenance and repairs............. 2,400 Management fees.........................1,200 The Stones sold 1,000 shares of Capp Corp stock they had received as a wedding present on June 25, 2000. The stock was worth $62 per share in January. By September 3, its value had dropped to $42 per share, and the Stones sold the stock on that date. Tom's father had given them the stock, who had paid $9.50 per share for it in 1973. Its value at the date of gift was $18.50 per share. No gift tax was paid on the gift. (The Stone's basis would be $9.50 per share.) On December 30, 2016 as he was leaving the grocery store, Tom found a Michigan lottery ticket someone had apparently dropped. On January 3, 2017 when the lottery held its weekly drawing, Tom discovered he had won $36,000, which he received on January 8. Beth is required by her employer to visit several high schools in the Battle Creek- Lansing area to evaluate KCC students who are doing their medical rotations. She also spent $580 on meals taking out the students afterwards to discuss how the rotations were progressing. She is not reimbursed by KCC for the expenses she incurs in doing this. During the year, she drove her personal automobile 8,900 miles in fulfilling this obligation. Beth purchased her car in April of 2014, and put a total of 23,786 miles on it in 2016. All other miles driven were personal. Beth did not keep detailed records of her gas and oil purchases and had no major repairs on the car this year. She does journal her business mileage. ACCT 315/715 -FALL 17 Page 3 of 8 Since Beth must travel out of town, the Stones take their twins, Emily and Hazel to daycare. Their daycare provider is Betty Bop Babies at 324 Sybil St, Grand Rapids, MI 49508. The EIN number is #38-2546888. The Stones received a receipt for $12,580 in daycare costs for 2016. The cost is evenly divided for the care for the twins. Tom contributed $5,500 to Self-Employed SEP Plan on December 30. Beth is covered by a KCC retirement plan. Tom and Beth have given you a file containing the following receipts for out-of-pocket expenditures during the year: Medicines and drugs.................... $ 886 Doctors and hospital ................... 6,348 Penalty for underpayment of last year's state income tax....................... 549 Real estate taxes on personal residence 7,962 Michigan vehicle registration fees 342 State sales tax on new furniture....... 512 State sales tax on new sailboat........ 841 Interest on Home mortgage (paid to Home Bank)........................... 11,650 Interest on credit cards............... 1,535 Cash contributions to Hope Church...... 10,600 Payroll deductions for Beth's contribution to the United Way.................... 500 Professional dues (Beth).............. 425 Professional subscriptions (Beth)..... 225 Fee for preparation of last year's 1040 850 On the 15th of January, April, June and September, 2016 the Stone's made quarterly estimated Federal income tax payments of $ 1,000 ($4,000 total payments). They made estimated payments for state income tax of $1,200 for the year. All Michigan estimated payments were made in 2016. ACCT 315/715 -FALL 17 Page 4 of 8 ACCT 315/715 -FALL 17 Page 5 of 8 ACCT 315/715 -FALL 17 Page 6 of 8 ACCT 315/715 -FALL 17 Page 7 of 8 ACCT 315/715 -FALL 17 Page 8 of 8