Test 4
Required: Use the following information to compute Paul and Judy Vance’s 2015
federal income tax refund or liability. Use the column to the right of the data to
discuss whether the item is taxable or deductible or not and why. Then compute
Schedule C business income, total income (line 1040, line 22), adjusted gross
income, deductions, tax including self-employment tax, credits, and finish up with
tax refund or tax due. If information is missing, use reasonable assumptions to fill in
the gaps.
Facts:
1. Paul J. and Judy L. Vance are married and file a joint return. Paul is selfemployed as a dentist, and Judy is a college professor. Paul and Judy have three
children. The oldest is Vince who lives at home. Vince is a law student at the
University of Cincinnati and worked part-time during the year, earning $1,500,
which he spent for his own support. Paul and Judy provided $6,000 toward
Vince’s support (including $4,000 for Vince’s 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 $3,200. Joan lived at home until she was married in December.
She filed a joint return with her husband, Patrick, who earned $20,000 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’ live at 621 Franklin Avenue, Cincinnati, OH 45211.
Paul’s birthday is 3/5/1957 and his Social Security number is 333-45-6666.
Judy’s birthday is 4/24/1960 and her Social Security number is 566-77-8888.
Vince’s birthday is 11/6/1991 and his Social Security number is 576-18-7928.
Joan’s birthday is 2/1/1995 and her Social Security number is 575-92-4321.
Jennifer’s birthday is 12/12/2002 and her Social Security number is 613-97-8465.
2. Judy is a lecturer at Xavier University in Cincinnati, where she earned $30,000.
The university withheld federal income tax of $3,375, state income tax of $900,
Cincinnati city income tax of $375, $1,860 of Social Security tax and $435 of
Medicare tax. She also worked part of the year for Delta Airlines. Delta paid her
$10,000 in salary, and withheld federal income tax of $1,125, state income tax of
$300, Cincinnati city income tax of $125, Social Security tax of $620, and
Medicare tax of $145.
3. The Vances’ received $800 of interest from State Savings Bank on a joint
account. They received interest of $1,000 on City of Cincinnati bonds they bought
in January with the proceeds of a loan from Third National Bank of Cincinnati.
They paid interest of $1,100 on the loan. Paul received a dividend of $540 on
General Bicycle Corporation stock he owns. Judy received a dividend of $390 on
Acme Clothing Corporation stock she owns. Paul and Judy received a dividend of
$865 on jointly owned stock in Maple Company. All of the dividends received are
qualified dividends.
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’s gross receipts during the year were $111,000. Paul uses the
cash method of accounting for his business. Paul’s business expenses are as
follows:
Advertising
Professional dues
Professional journals
Contributions to employee benefit plans
Malpractice insurance
Fine for overbilling State of Ohio for work performed on welfare patient
Insurance on office contents
Interest on money borrowed to refurbish office
Accounting services
Miscellaneous office expense
Office rent
Dental supplies
Utilities and telephone
Wages
Payroll taxes
In June, Paul decided to refurbish his office. This project was completed and the
assets placed in service on July 1. Paul’s expenditures included $8,000 for new
office furniture, $6,000 for new dental equipment (seven-year recovery period),
and $2,000 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.
$?1,200
490
360
2,000
3,200
5,000
720
600
2,100
388
12,000
7,672
3,360
30,000
2,400
5. Judy’s mother, Sarah, died on July 2, 2009, leaving Judy her entire estate.
Included in the estate was Sarah’s residence (325 Oak Street, Cincinnati, OH
45211). Sarah’s basis in the residence was $30,000. The fair market value of the
residence on July 2, 2009, was $155,000. The property was distributed to Judy on
January 1, 2010. The Vances’ have held the property as rental property and have
managed it themselves. From 2010 until June 30, 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. They received $140,000 for the
house and land ($15,000 for the land and $125,000 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 $15,000 of the property’s
basis to the land on which the house is located. The Vances’ collected rent of
$1,000 a month during the six months the house was occupied during the year.
They incurred the following related expenses during this period:
Property insurance
Property taxes
Maintenance
Depreciation (to be computed)
$500
800
465
?
6. The Vances’ sold 200 shares of Capp Corporation stock on September 3, 2015,
for $42 a share (minus a $50 commission). The Vances’ received the stock from
Paul’s father on June 25, 1980, as a wedding present. Paul’s father originally
purchased the stock for $10 per share in 1967. The stock was valued at $14.50 per
share on the date of the gift. No gift tax was paid on the gift.
7. Judy is required by Xavier University to visit several high schools in the
Cincinnati area to evaluate Xavier University students who are doing their practice
teaching. However, she is not reimbursed for the expenses she incurs in doing
this. During the spring semester (January through April), she drove her personal
automobile 680 miles in fulfilling this obligation. Judy drove an additional 670
personal miles during the fall. She has been using the car since June 30, 2013.
Judy uses the standard mileage method to calculate her car expenses.
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)
Doctor and hospital bills (net of insurance reimbursement)
Penalty for underpayment of last year’s state income tax
Real estate taxes on personal residence
Interest on home mortgage (paid to Home State Savings & Loan)
Interest on credit cards (consumer purchases)
$? 376
2,468
15
4,762
8,250
595
Cash contribution to St. Matthew’s church
Payroll deductions for Judy’s contributions to the United Way
Professional dues (Judy)
Professional subscriptions (Judy)
Fee for preparation of 2014 tax return paid this April
9. The Vances’ filed their 2015 federal, state, and local returns on April 12. They
paid the following additional 2015 taxes with their returns: federal income taxes
of $630, state income taxes of $250, and city income taxes of $75.
10. The Vances’ made timely estimated federal income tax payments of $1,500
each quarter. 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 time as of Jan 15. They would like to
receive a refund for any overpayments.
11. Paul and Judy have qualifying insurance for purposes of the Affordable Care
Act (ACA).
Required:
Compute Paul and Judy Vance’s federal income tax refund or liability. Use the
column to the right of the data to discuss whether the item is taxable or
deductible or not and why. Then compute Schedule C business income, total
income (line 1040, line 22), adjusted gross income, deductions, tax including selfemployment tax, credits, and finish up with tax refund or tax due. If information
is missing, use reasonable assumptions to fill in the gaps.
3,080
150
325
245
500
