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income tax return-David R. and Sheri N. Johnson (ages 45 and 46) are married and live a




Question;David R. and Sheri N. Johnson (ages 45 and 46) are married and live at 641 Cody Way, Casper,WY 82609. David is a consulting engineer, while Sheri is a paralegal. They file a joint return anduse the cash basis for tax purposes.1.Trained as a mining engineer, David has developed considerable expertise in thetreatment and disposition of waste material. He also is well versed in the federal and staterequirements for land reclamation projects. David maintains a consulting practice through whichhe advises clients on these matters. David's business activity code is 541990. Most of his clientsare small and medium-size mine owner/operators located in Wyoming and contiguous states(e.g., Montana, Idaho, Utah). Usually, David is retained by a client on a contract-fee basis and isreimbursed for all out-of-pocket expenses. In performing his services, David usually visits thejob site and later submits his recommendations in a written report along with a statement for hisservices and expenses. David received the following amounts from his consulting business in2012:Fees for services rendered$ 92,800Expense reimbursements:Airfare$8,200Meals6,100Lodging5,200Transportation (taxis, airport limos, car rentals)920Subtotal for expense reimbursement20,420Total received$113,2202.The following fees for services rendered to mining companies are not included in thereceipts listed in item 1 above:Echo Mining: Payment received January 2013, work done December 2012$5,100Sesa Mining: Payment received January 2012, work done December 20114,400Cormorant Mining: No payment received, work done March 20123,700David did not incur travel expenses in any of these engagements (i.e., the work was done in hisoffice). As Cormorant Mining is in bankruptcy, David does not expect to collect any of this fee.3.Other expenses paid by David in 2012 relating to his practice are listed below.Contribution to H.R. 10 (Keogh) retirement plan$9,000Premiums on medical insurance (covering self, spouse, and dependents)3,800Landscape models purchased from topographer for reclamation projects$3,200Advertising in trade journals2,400Office supplies (including drafting materials)1,200Business phone and Internet service860State occupation license300Subscriptions to trade journals240Membership dues to trade associations1804.David operates his consulting business out of an office in his home. Twenty percent of the3,000-square-foot living area is devoted to the office. David inherited the home on Cody Wayfrom his father, who died on June 6, 2003, when it had a fair market value of $400,000 ($40,000of which was allocated to the land). The Johnsons moved into the home in 2003, and Davidbegan using his home office in the same year. The home's current fair market value is $500,000($50,000 allocated to the land). County land records reflect that David's father bought the land in1969 for $6,000 and built the house in 1973 at a cost of $60,000. David depreciates the businessuse of his home using MACRS, treating the home as 39-year nonresidential reality.Additional information regarding the properly for 2012 follows:Utilities$4,800Repairs and maintenance2,900Property/casualty insurance2,300The properly taxes and mortgage interest paid in 2012 on the home are listed in item 15 below.In addition to the repairs and maintenance noted above, David had the office repainted at a costof $1,200. The furniture in the office, including business equipment (e.g., computer, fax machine,copier), was properly expensed in the year bought and has a zero basis. However, on March 5,2012, David purchased a heavy-duty, fire-resistant file cabinet with security-vault features for$4,800. He made the acquisition to safeguard and maintain the privacy of client data. If possible,David prefers to avoid capitalizing and depreciating the cabinet.5.On February 4, 2011, David paid $41,000 (including sales tax) for an Infiniti crossoverSUV (gross weight under 6,000 pounds), which he uses 90% of the time for business. No tradein was involved, and he did not claim any ? 179 expensing of the cost. Under the actualoperating cost method, he depreciates the SUV using MACRS (half-year convention). [Hint. SeeTable 3 in the Instructions to Form 4562.] His operating expenses for the Infiniti for 2012 are asfollows:Gasoline$3,300Auto insurance1,600Repairs240Auto club dues180Oil changes and lubrication120License and registration60During business use, David received three moving traffic violations (total fines of $680) andincurred tolls and parking charges of $440. The Infiniti was driven a total of 14,500 miles during2012 (mileage was incurred evenly during the year).6.Sheri is a licensed paralegal and is employed on a part-time basis by several localattorneys. She commuted to work using the family Suburban for a total of 813 miles and paidparking fees of $310. Her earnings and job-related expenses are summarized below.Salary (from four employers)$38,000Laptop computer1,200Subscriptions and dues to professional organizations180Continuing education correspondence course120Occupational license fee80Sheri purchased the laptop computer on March 12 and uses it 80% of the time for business. Thecorrespondence course is required continuing education so she can retain her license. Sheri isconsidering going to law school, so she attended a series of LSAT preparation sessions at a costof $350. Because Sheri is a part-time employee, she is not covered by any of her employers?medical or retirement plans. During 2012, however, she contributed $5,000 to a traditional IRAthat she established several years ago. The Johnsons use the automatic mileage method tocalculate any tax deductions to which they are entitled for use of the Suburban.7.With funds received from the settlement of his father's estate, David purchased rentalproperly at 4620 Cottonwood Lane. Of the $250,000 purchase price, $30,000 was allocated tothe land. After an $80,000 renovation to the house (e.g., new flooring, roof, heating unit), theproperly was rented beginning February 1, 2006. In 2010, the Johnsons decided that theirinvestment would be more marketable if the house was rented as furnished. Consequently, inMay of that year, they spent $38,000 on new furniture (including drapes, carpeting, andappliances). Under the current lease agreement, the properly rents for $2,200 a month (payable atthe beginning of each month) with utilities not included. Information regarding the properly for2012 appears below.Rent received$28,600Property/casualty insurance premiums paid3,100Property taxes paid2,400Yard maintenance paid1,200Repairs800The rent received includes $2,200 for January 2013. The tenants prepaid the rent in midDecember because they went on vacation during the Christmas/New Year holidays. In addition tothe properly taxes listed above, David paid a special tax assessment of $2,400 to the city ofCasper for repaving the street in front of the properly. The Johnsons use MACRS to depreciatethe rental home and the furnishings within it (assume half-year convention for the personally).8.The Johnsons acquired 1,000 shares of common stock in Cormorant Mining on March 7,2011, to hold for investment purposes. David performed services for the company in late 2010,submitting a bill for $3,900. Because Cormorant was experiencing cash-flow problems at thetime, David accepted the stock as payment for his services. Unfortunately, Cormorant iscurrently in bankruptcy (see item 2 above), and expectations are that the shareholders will notrecover anything on their stock investments. The stock is not publicly traded.9.On March 10, 1994, David's father gave the Johnsons a plot of land located in TetonCounty (WY) as an anniversary present. It had a value of $150,000 at the time of the gift (no gifttax was due on the transfer). The land had been purchased by David's father on June 1, 1984, for$50,000. In December 2011, a real estate developer contacted the Johnsons and offered $800,000for the properly. After considerable negotiation, the following transaction took place on March 4,2012: the Johnsons transferred the Teton plot in return for $8,000 in cash and four city lots inLaramie (WY) worth $792,000. The Johnsons considered the city lots to be a good investmentbecause they are located near the state university. All closing costs and legal fees were absorbedby the real estate developer.10.David inherited an antique gun collection from his father when he died?mainly largecaliber rifles used for buffalo hunting. Although David has no idea what his father's cost basiswas in these guns, the collection had a date-of-death value of $22,000. Concerned about themaintenance and security of the collection, David sold it to a dealer for $29,000 on July 10,2012.11.On July 12, 1998, using $50,000 of funds she had received from an aunt's life insurancepolicy, Sheri purchased grazing land in Converse County (WY). On August 2, 2011, she sold theland to a local rancher for $75,000. Under the terms of the sale, Sheri received a down paymentof $15,000 and 10 annual notes of $6,000 each. Sheri is also to receive simple interest of 8% onthe outstanding principle balance each year. On August 4, 2012, Sheri collected $10,800 ($6,000on the note and $4,800 of interest) on the maturity of the first note.12.Although the Johnsons had several Schedule D transactions during 2011, they ended upwith a net short-term capital loss of $7,000. Of this loss, $3,000 was deducted in 2011, and$4,000 carried over to 2012.13.For several years, Sheri's widowed mother, Vivian Olson, has lived with the Johnsons andhas been claimed by them as a dependent. On December 30, 2011, Vivian suffered a heart attack.After six days in the ICU of a local hospital, Vivian died. In early February 2012, the Johnsonspaid the following expenses related to Vivian:Burial expenses$4,400Medical expenses incurred in 20114,200Medical expenses incurred in 20123,100Remainder of church pledge for 2012600Fortunately, the balance of Vivian's medical expenses ($11,900) was covered by insurance.Besides personal and household effects, Vivian's major asset was life insurance. As thedesignated beneficiary of the policy, Sheri received $20,000 of death benefits on March 13,2012.14.Besides the items already mentioned, the Johnsons had the following receipts during2012:Interest income?City of Cheyenne general purpose bonds$1,900CD at Wells Fargo Bank1,100Money market account at Bank of America400Yard (garage) sale950Qualified dividends on Meadowlark Corporation common stock700Jury duty fees420The yard sale involved used furniture, appliances, books, toys, and other household goods,having an estimated original cost value of $1,800. In connection with her jury duty assignment inJune, Sheri drove the Suburban 40 miles and incurred expenses of $30 for parking and $45 formeals.15.In addition to the items already noted, the Johnsons had the following expenditures for2012:Interest on home equity loan used to finance the purchase of personal items (e.g., camper)$4,400Charitable contributions (not including Vivian's pledge)3,200Ad valorem property taxes on personal residence3,100Medical and dental bills (including prescription drugs of $400) other than those relating toVivian (see item 13)1,800The Johnsons drove the Suburban 420 miles to various medical and dental appointments.Wyoming has no state or local income tax but does impose a general sales tax. The county inwhich they live imposes an additional local sales tax of 1%. Although they do not keep track oftheir sales taxes, they purchased a camper for $40,000 in May 2012. The sales tax on thispurchase was $1,600.16.Besides Vivian (see item 13), the Johnsons? household includes two daughters, Meredith(age 19) and Kirby (age 18), and one son, Toby (age 17). Kirby and Toby are full-time studentsin high school. Meredith graduated a year ago and earned $9,000 working part time during 2012.She deposited these earnings in a savings account, hoping someday to attend college.17.For tax year 2011, the Johnsons had an overpayment of $150, which they applied towardtheir 2012 income tax. Sheri's income tax withholdings for the year are $5,100, and the Johnsonsmade federal quarterly tax payments totaling $16,000 ($4,000 each installment).18.Relevant Social Security numbers are noted below.NameSocial Security NumberDavid Johnson111-11-1111Sheri Johnson123-45-6785Vivian Olson123-45-6786Meredith Johnson123-45-6787Kirby Johnson123-45-6788Toby Johnson123-45-6789RequirementsPrepare an income tax return (with appropriate supporting forms and schedules) for the Johnsonsfor 2012. In doing this, utilize the following guidelines:?Make necessary assumptions for information not given but needed to complete the return.?The taxpayers are preparing their own return (i.e., no preparer is involved).?The taxpayers have the necessary written substantiation (e.g., records, receipts) to supportthe transactions involved.?If any refund is due, apply it toward next year's taxes.?The Johnsons do not wish to contribute to the Presidential Election Campaign Fund.(Hoffman E-1-E-5)


Paper#43262 | Written in 18-Jul-2015

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