Paul and Donna Decker are married taxpayers, ages 44 and 42, respectively, who file a joint return

Question:

Paul and Donna Decker are married taxpayers, ages 44 and 42, respectively, who file a joint return for 2021. The Deckers live at 1121 College Avenue, Carmel, IN 46032. Paul is an assistant manager at Carmel Motor Inn, and Donna is a teacher at Carmel Elementary School. They present you with W–2 forms that reflect the following information:

Donna is the custodial parent of two children from a previous marriage who reside with the Deckers throughout the school year. The children, Larry and Jane Parker, reside with their father, Bob, during the summer. Relevant information for the children follows:

Under the divorce decree, Bob pays child support of $150 per month per child during the nine months the children live with the Deckers. Bob says that he spends $200 per month per child during the three summer months they reside with him. Donna and Paul can document that they provide $2,000 support per child per year. The divorce decree is silent as to which parent can claim the exemptions for the children.

In August, Paul and Donna added a suite to their home to provide more comfortable accommodations for Hannah Snyder (123-45-6786), Donna’s mother, who had moved in with them in February 2020 after the death of Donna’s father. Not wanting to borrow money for this addition, Paul sold 300 shares of Acme Corporation stock for $50 per share on May 3, 2021, and used the proceeds of $15,000 to cover construction costs. The Deckers had purchased the stock on April 29, 2016, for $25 per share. They received dividends of $750 on the jointly owned stock a month before the sale.

Hannah, who is 66 years old, received $7,500 in Social Security benefits during the year, of which she gave the Deckers $2,000 to use toward household expenses and deposited the remainder in her personal savings account. The Deckers determine that they have spent $2,500 of their own money for food, clothing, medical expenses, and other items for Hannah. They do not know what the rental value of Hannah’s suite would be, but they estimate it would be at least $300 per month.

Interest paid during the year included the following:

Home mortgage interest (paid to Carmel Federal Savings & Loan) $7,890

Interest on an automobile loan (paid to Carmel National Bank) 1,660

Interest on Citibank Visa card 620

In July, Paul hit a submerged rock while boating. Fortunately, he was uninjured after being thrown from the boat and landing in deep water. However, the boat, which was uninsured, was destroyed. Paul had paid $25,000 for the boat in June 2020, and its value was appraised at $18,000 on the date of the accident.

The Deckers paid doctor and hospital bills of $12,700 and were reimbursed $2,000 by their insurance company. They spent $640 for prescription drugs and medicines and $5,904 for premiums on their health insurance policy. They have filed additional claims of $1,200 with their insurance company and have been told they will receive payment for that amount in January 2022. Included in the amounts paid for doctor and hospital bills were payments of $380 for Hannah and $850 for the children.

Additional information of potential tax consequence follows: