Jimmy J. and Kimberly S. Johnson are married and live a Jackson, WY 83001. They file a joint return and are calendar year, cash basis taxpayers.
1. Jimmy is a self-employed insurance agent (professional activity code is 524210) for several major casualty insurance companies. He maintains an office atXXXXX Suite 130, Fort Wayne, IN 46802. He shares the suite with several other professionals and has no employees. A receptionist handles all calls and is provided by the landlord as part of the services offered to tenants. Jimmyâ€™s work-related expenses for 2013 are as follows:
Office rent $8,100
Accounting services 1,200
Office expenses (supplies, use of copier, etc.) 1,100
Legal services (see item 9. below) 300
State and local license fees 900
Renterâ€™s insurance (covers personal liability, casualty, theft) 1,500
Replacement of reception room furnishings (6/5/2013) 2,200
Professional dues and subscriptions to trade publications 400
Business lunches 1,400
Contribution to H.R. 10 (Keogh) plan 8,000
Medical insurance premiums 5,000
The business meals Jimmy paid for were to entertain various visiting executives from the insurance companies he does business with. As is the case with all of Jimmyâ€™s business transactions, the lunches are properly documented and supported by receipts. Because the reception room furnishings were looking shabby, Jimmy and his suite-mates had them replaced. The $2,200 Jimmy spent was his share (i.e., a sofa and coffee table) of the cost. Jimmy follows a policy of avoiding depreciation by utilizing the Section 179 election to expense assets. All of Jimmyâ€™s office equipment (e.g., desk, chairs, file cabinets, computer, etc.) has previously been expensed. Of 10,000 total miles in 2013, Jimmy drives his car (a Ford Explorer purchased on 6/1/2011) 3,200 miles for business (not including commuting) and has business parking and toll charges of $310. The Johnsons use the automatic mileage method of claiming automobile expenses.
2. Kimberly is a registered nurse employed on a part-time basis by Home Care Services. She generally is assigned to provide medical services at the residences of patients recently discharged from the hospital. Her employer does not provide her with an office, and she has no separate office in her home. She does, however, maintain her business records at home and lists it as her business address. After receiving her assignments by phone, she drives the family Buick (purchased on 7/1/2009) directly to the residence of the patient. Home Care Services requires all of its nurses to wear uniforms while on duty. As Kimberly is not a full-time employee, she is not covered by Home Careâ€™s health or retirement plans. Kimberlyâ€™s work-related expenses for 2013 appear below:
Mileage (total Buick miles in 2013 = 10,000) 3,000 miles
Professional dues and subscriptions $180
Continuing education programs (required to
maintain license) 320
Annual license fee 150
Nursing supplies (e.g., masks, gloves) 260
Uniforms purchased (including $240 for shoes) 410
Laundering of uniforms 210
3. At a foreclosure sale on May 8, 2013, the Johnsons purchased a house to be held as a rental investment. The property cost $300,000 (of which $40,000 is allocated to the land) and is located atXXXXX Morgantown, IN 46515. After making minor repairs and placing the property in service on June 1, the Johnsons were fortunate in that they were able to rent it immediately for $1,500 a month (payable on the first of each month). Information regarding the rental property for 2013 is summarized below:
Rent received ($1,500 x 8 months) $12,000
Refundable damage deposit 2,000
Property taxes 1,800
Interest on mortgage 1,500
Street paving assessment 1,200
Although the property was rented for only seven months, in late December 2013 the tenants prepaid the January 2014 rent because they were going to be out of town on New Yearâ€™s Day. The special assessment was levied by the city of Elkhart to resurface the street in front of the house. The Johnsons plan to use MACRS straight-line depreciation, assuming the mid-month convention.
4. On her birthday on May 9, 2006, Kimberly received as a gift from her father unimproved land located in Marshall County (IN). The land cost her father $20,000 in 1974 and had a value of $90,000 on the date of the gift. No gift tax was due as a result of the transfer. On May 1, 2013, Kimberly sold the land to an adjoining property owner for $100,000. Under the terms of the sale, Kimberly received a down payment of $10,000 and six notes maturing annually for $15,000 each with interest payable at the rate of 8%. Kimberly did not elect out of the installment method.
5. When Kimberlyâ€™s father died in 2012, he had a life insurance policy issued by Condor Assurance with a maturity value of $100,000. As the designated beneficiary of the policy, Kimberly picked a settlement option of $23,000 annually, payable over five years. In 2013, she receives a check from Condor for $23,000.
6. Based on a tip from a friend who is an investment adviser, on November 6, 2012, Jimmy purchased 14,000 shares of common stock in Eagle Corporation for $14,000. Eagle, a manufacturer of auto parts, was experiencing financial difficulties and was contemplating bankruptcy. Nevertheless, the adviser was sure that its liquidation value would far exceed the cost of the stock. Eagle went into receivership in early March 2013, and by October 15 of this year, it was determined that its common stock was worthless.
7. In 2012, a hit-and-run driver severely damaged Jimmyâ€™s Ford while it was parked in front of his office. Jimmyâ€™s insurance carrier, Peregrine Company, paid the cost of repairing the vehicle, but he was charged $1,000 under the deductible provision. In 2013, the authorities located the driver who caused the accident, and Peregrine recovered on the loss. As a result, in February 2013 Peregrine reimbursed Jimmy for the $1,000 deductible. Although they itemized when they filed the 2012 income tax return, the Johnsons were unable to claim any deduction for casualty losses.
8. In July 2013, the Johnsonâ€™s state income tax returns for 2010 and 2011 were audited by the Department of Revenue. A no-change determination was made for 2010, but the audit resulted in an additional assessment of $300 for 2011. Jimmy immediately paid this amount to the State of Indiana.
9. Besides those previously noted, the Johnsons had the following receipts for 2013:
Payment for services rendered as an insurance agent
(as supported on Forms 1099 issued by several
payor insurance companies) $72,000
Nursing wages (Form W-2 issued by Home Care
Cash payments received by Jimmy from numerous
repair facilities and building contractors that he
deals with frequently 10,500
Income tax refunds for tax year 2012
Federal tax $1,200
State tax 350 1,550
City of South Bend bonds $900
Interest on Wells Fargo Bank CD 800 1,700
Garage sale 4,200
Loan repayment 20,000
The cash payments were delivered to Jimmy during the Christmas season by special courier. They were enclosed in an envelope marked â€œGIFTâ€ with a note expressing thanks for the business referrals. No arrangement exists, contractual or otherwise, that requires Jimmy to be compensated for any referrals he makes. Although Jimmy realizes that kickbacks are not uncommon in the repair business, he was concerned about the legality of the procedure. During 2013 he retained an attorney, who shares his suite, to research the matter. Without passing judgment on the status of the payors, the attorney found that Jimmyâ€™s acceptance of the payments does not violate any state or local law. Since he is a friend, the attorney charged Jimmy a modest $300 for his advice (see item 1. above).
The garage sale involved mostly items Kimberly inherited from her father (e.g., boat and trailer, camper, hunting and fishing equipment). Kimberly has no proof as to the cost of these assets, nor does she know their value at the time of his death (no estate tax return had to be filed).
Three years ago, Jimmy had loaned his younger sister, Marcie, $20,000 to help start a business. No note was signed, no interest was provided for, and no due date was specified. Much to Jimmyâ€™s surprise, Marcie repaid the loan in late 2013.
Not mentioned above were two tickets that the Johnsons won in a church raffle. The tickets to an Indianapolis opera benefit performance were worth $240 but cost the church only $100. The Johnsons accepted the tickets, but no one in the family wanted to attend.
10. In addition to any items previously noted, the Johnsons had the following expenses for 2013:
Medical and dental expenses not covered by
Ad valorem property tax on personal residence 5,200
Home mortgage $3,800
Interest on home equity loan 1,200 5,000
Charitable contributions 3,000
Tax return preparation fee (60% relates to
Jimmyâ€™s business) 400
Of the $8,000 in medical expenses, $5,000 was used to pay for Zoe Johnsonâ€™s gall bladder operation. Zoe is Jimmyâ€™s mother who lives with them and would otherwise qualify as their dependent except for the gross income test.
During 2013, Kimberly borrowed $20,000 under a home equity loan arrangement. The money was used to help pay family credit card debt and to help pay for her younger sister Claraâ€™s wedding.
11. Besides Zoe, the Johnsonsâ€™ household includes their three children: Dale (age 17), Dana (age 16), and Kirk (age 14). All are full-time students. Dale is very proficient with the bagpipes and during the year earned $4,400 playing at special occasions (i.e., mainly funerals). Dale is saving his earnings for college.
12. Kimberlyâ€™s Form W-2 from Home Care Services shows $2,000 withheld for Federal income tax and $941 for state income tax. Jimmy made equal quarterly payments of $2,600 (Federal) and $500 (state). Relevant Social Security numbers are noted below.
Name Number Birth Date
Jimmy L. JohnsonÂ 07/01/1967 07/01/1967
Kimberly S. JohnsonÂ 02/20/2968 02/20/1968
Dale Johnson 04/09/1996 04/09/1996
Â 12/06/1997 12/06/1997
Kirk JohnsonÂ 07/29/1999 07/29/1999
Zoe Johnson 01/03/1939
Prepare an income tax return (with appropriate schedules) for the Johnsons for 2013. In doing this, use the following guidelines:
â€¢ Make necessary assumptions for information not given in the problem but needed to complete the return. Be aware of the possible application of certain tax credits.
â€¢ The taxpayers have the necessary substantiation (e.g., records, receipts) to support the transactions involved.
â€¢ If a refund results, the taxpayers want it sent to them.
â€¢ The Johnsons do not wish to contribute to the Presidential Election Campaign fund.
â€¢ In the past several years, the Johnsons have itemized their deductions from AGI (have not claimed the standard deduction option).