John and Jane Able file a joint federal income tax return. Jane works as a high school teacher for the Podunk Board of Education and, in 2011, had earned income of $47,5000 with federal income tax withheld of $7,125. John is self employed as an architect and had gross receipts from his business of $139,400 during 2011. John made federal estimated income tax payments in each quarter of $2,000 ($8,000 total for the whole year). John’s social security number is 383-40-6579 (DOB 01/30/62) and Jane’s social security number is 279-31-5842 (DOB 04/17/64). They live at 123 Wonder Street, Anytown, Ohio.
The Ables have three children that live with them: Willie (DOB 01/27/99: social security number 462-13-2731), Millie (DOB 04/18/94: social security number 462-13-2732) and Sillie (DOB 03/12/91; social security number 462-13-2733). Sillie is a second year full-time student at Owens Community College. Sillie’s tuition for the year was $3,200 and his books were $800. None of the children had any earned or unearned income for the year.
Information that you will need is as follows:
A. The Ables had other income as follows:
1. Interest income: $625 from a Key Bank savings account
$1,100 from the U.S. Treasury Department from a Series H bond
$800 from a State of Ohio, tax-exempt municipal bond
2. Dividends: $1,200 of ordinary dividends from XYZ Co. of which all are qualified
$600 600 of ordinary dividends from ABC Co. of which $300 are qualified
3. Rental income: $28,000 gross rents from an apartment building that they own
4. Capital gains: They sold 100 share of Delta Co. for $6,600 on 02/14/11 that they had purchased for $4,200 on 09/21/04. They also had a long term capital loss carryover from 2010 of $4,000.
5. Lottery winnings: $1,000; cost of lottery tickets in 2011 was $100
B. The Ables incurred certain expenses during the year as follows:
1. John’s architectural business: $16,000 for office rent
$5,500 for supplies
$9,300 for utilities
$2,900 for computer services
$3,700 for travel and lodging
$21,900 for subcontract services which was the cost of sales for the business
$1,100 for meals
2. Jane’s teaching supplies: $560
3. Apartment building expense: $ 4,700 for repairs
$1,800 for utilities
$21,200 for mortgage interest expense
$1,400 for snow removal and lawn service
$ 940 for insurance
4. The Ables also had a vacation home that they used 16 days out of the year and rented 200 days out of the year. Rental income was $7,200 and the Ables incurred the following expenses associated with the vacation home:
Mortgage interest expense $7,800
Management fees $1,800
Real estate taxes $4,200
Repairs and maintenance $1,400
For purposes of calculating the allocable expenses, use the IRS Method on page 4-4 of Income Tax Fundamentals 2012 edition (Whittenburg and Altus-Buller). Do not use the Tax Court Method described on Page 4-5.
C. Depreciation expense must be considered and calculated based upon the following:
1. Architectural business – John does not have any recurring depreciation as he elects to treat his equipment purchases as a current expense under Section 179. He will do the same for 2011 by electing to take a Section 179 deduction for a computer that he bought for $1,500 in 2011.
2. Rental apartment building – The Ables bought the apartment building on January 1, 2001 for $350,000 which included land at the value of $50,000. The building has a useful life of 27.5 years and uses straight-line depreciation.
Vacation home – The Ables bought the Vacation home on January 1, 2007 for $150,000 which included land at the value of $25,000. The building has a useful life of 27.5 years and uses straight-line depreciation.
D. Other information:
1. John contributes to his delf-employed pension plan every year. For 2011 he contributed $8,000 to the plan.
2. The Ables have the following Itemized Deductions that they would like you to take deductions for to the extent allowable:
a. Medical expenses: Prescriptions $580
Long term care insurance $1,200
Medical insurance $6,200 ( all of which John paid and he needs your advice as to how he can
best claim this as a deduction. i.e., business expense, itemized
b. Taxes paid in 2011: Real estate (Home) $4,350
State and Local income taxes $2,760
c. Charitable donations: 1. Cash $2,720
2. Used personal property to the Salvation Army was $7000
(Thrift shop value of misc. clothing, original cost was $2,800)
3. Mileage 1,000 miles for a charity
d. Interest: Home mortgage interest $8,800
e. Child care expenses for Willie: $3,400 paid to YMCA for after school activities
f. Miscellaneous: Safe deposit box $50
Tax return preparation fees $825
Investment business publications $475
Jane’s union dues $750
Required: Prepare the federal income tax return for the Ables for 2011. You will find pdf fill-in forms at irs.gov under “forms and publications” that you can save.
Hint: Taxable income should be between $44,000 and $45,000. You will need to use the regular Form1040, Schedules A & B,C,D,E, and SE, and Forms 2441, 4562, 8283, 8582, 8863, and 8949