COMPREHENSIVE INDIVIDUAL TAX RETURN PROBLEM
PAUL D. TURNER - 2017
Every student will have four weeks to work on one of the four versions of the Paul Turner case. There will be 20 questions to answer with each question worth 3 points for a total of 60 points. You will have an unlimited number of attempts and an Excel template will be provided to you. The test is in Black board in the Paul Turner folder. The problem (this document) and the excel template can be found under "Course Documents" - "Paul Turner" folder.
1. What is the net Form W-2 wages?
1. Paul Turner is single and has two children, Allen and Lee Ann, from his previous marriage. Allen lives with Paul and Paul provides more than half of his support. In the current year, Allen earned $300 of interest income and $5,000 working at a fast-food restaurant. Allen graduated from high-school in December 2016 and was not a registered student during 2017. Lee Ann lives with her mother, Wilma (Lee Ann lived with Wilma for all of the current year). Wilma provides more than half of Lee Ann's support. Paul pays "alimony" of $400 per month to Wilma. The payments are to continue until Lee Ann reaches age 18, when they will be reduced to $250. Paul uses the cash method of accounting and a calendar year for reporting. Paul's birthday is May 31, 1976. Allen's birthday is October 5, 1998. Lee Ann's birthday is December 1, 2003. Paul prefers to report any "kiddie tax" on his tax return.
- Paul is employed as a nuclear engineer with Atom Systems Consultants, Inc. (ASCI). Paul's pay stubs indicate that he had $7,320 withheld in federal taxes, $4,978 in state taxes. He earned $80,000 of wages subject to employee Social Security taxes and Medicare taxes. ASCI has an extensive fringe benefits program for its employees.
- Paul earned salary of $82,500 (before subtracting his 401(k) and flexible spending plan contributions). He contributed $6,500 to his 401(k) account, and he contributed $2,600 to his flexible spending account.
- ASCI paid $497 of whole life insurance premiums to cover Paul's personal whole life insurance policy. ASCI also paid health club dues of $825 to a nearby health club on Paul's behalf.
- Taking advantage of ASCI's educational assistance program, during the fall Paul enrolled in two graduate engineering classes at a local college. ASCI paid his tuition, fees, and other course-related costs of $5,300.
- Paul received free parking in the company's security garage that would normally cost $200 per month.
- Paul manages the safety program for ASCI. In recognition of his superior handling of three potential crises during the year, Paul was awarded the Employee Safety Award on December 15. The cash award was $800.
- On January 15, of the current year, Paul's father died. From his father's estate, he received stock valued at $30,000 (father's basis was $12,000) and his father's house valued at $105,000 (father's basis in the house was $55,000).
- Paul owns several other investments and received the following information reports for the current tax year:
General Dynamics - Gross qualified dividends - $600
New Jersey Economic Development bonds - Gross interest - $300
IBM bonds - Gross interest - $600
State of Nebraska bonds - Gross Interest - $200
Form 1098-Mortgage Interest Statement
Sunbelt Credit Union - Mortgage interest - $7,100
Northeast Bank - Home-equity loan interest - $435
Form K-1 Grubstake Mining and Development:
Distribution to shareholder - $1,000
Ordinary income (1% of $200,000) - $2,000
- In addition to the investments discussed above, Paul owns 1,000 shares of Grubstake Mining & Development common stock. Grubstake is organized as an S corporation and has 100,000 shares outstanding. Grubstake reported taxable income of $200,000 and paid a distribution of $1.00 per share during the current year. Paul does not materially participate in Grubstake's activities.
- Paul slipped on a wet spot in front of a computer store last July. He broke his ankle and was unable to work for two weeks. He incurred $1,300 in medical costs, all of which were paid by the owner of the store. The store also gave him $1,000 for pain and suffering resulting from the injury. ASCI did not pay his salary during the two weeks he missed because of the accident. However, ASCI's disability insurance plan paid him $1,500 in disability pay for the time he was unable to work. Under this plan, ASCI pays the premiums of $500 for the disability insurance as a taxable fringe benefit. The disability plan premiums and the disability benefit payments were not included in Paul's W-2 wages reported in paragraph 3.
- Paul received a Form 1099-B from his broker for the sale of the following securities during the current year. The adjusted basis amounts were reported to the IRS.
- In addition to the taxes withheld from his salary, he also made timely estimated federal tax payments of $175 per quarter and timely estimated state income tax payments of $150 for the first three quarters. The $150 fourth-quarter state payment was made on December 28 of the current year. Paul would like to receive a refund for any overpayment.
- In August of the current year, he received a federal refund of $60 and a state tax refund of $240 related to the tax returns he filed for the prior year. His itemized deductions for the prior year were $18,430.
- Paul found a renter for his father's house on August 1. The monthly rent is $400, and the lease agreement is for one year. The lease requires the tenant to pay the first and last months' rent and a $400 security deposit. The security deposit is to be returned at the end of the lease if the property is in good condition. On August 1, Paul received $1,200 from the tenant per the terms of the lease agreement. In November, the plumbing froze and several pipes burst. The tenant had the repairs made and paid the $300 bill. In December, he reduced his rental payment to $100 to compensate for the plumbing repairs. Paul provides you with the following additional information for the rental in the current year.
Property taxes $620
Other maintenance expenses 285
Insurance expense 495
Management fee 350
Depreciation (to be computed) ?
Local practice is to allocate 10 percent of the fair market value of the property to the land. (See ¶8 for basis information.) Paul makes all decisions with respect to the property.
- Paul paid $2,050 in real estate taxes on his principal residence. The real estate tax is used to pay for town schools and other municipal services.
- Paul drives a 2014 Acura TL. His car registration fee (based on the car year) is $50 and covers the period 1/1/17 through 12/31/17. In addition, he paid $280 in property tax to the state based on the book value of the car.
- In addition to the medical costs presented in ¶11, Paul incurred the following unreimbursed medical costs:
Dentist $ 310
Prescription drugs 215
Over-the-counter drugs 140
Emergency room charges 440
LASIK eye surgery 2,000
- On August 1, Paul took advantage of low interest rates and refinanced his $75,000 home mortgage with her original lender. The new home loan is for 15 years. He paid $215 in closing costs and $1,600 in discount points (prepaid interest) to obtain the loan. The house is worth $155,000, and Paul's basis in the house is $90,000. As part of the refinancing arrangement, he also obtained a $10,000 home-equity loan. He used the proceeds from the home-equity loan to reduce the balance due on her credit cards. Paul received several Form 1098 statements from her bank for interest paid by him in the current year. Details appear below. (See also ¶9)
Primary home mortgage $7,100
Home-equity loan 435
Credit cards 498
Car loan 390
- On May 14 of the current year, Paul contributed clothing to the Salvation Army. The original cost of the clothing was $740. He has substantiation valuing the donation at $360. In addition, he made the following cash contributions and received a statement from each of the following organizations acknowledging his contribution:
Larkin College $700
United Way 152
First Methodist Church 790
Amos House (homeless shelter) 200
Local Chamber of Commerce 100
- On April 1 of the current year, Paul's house was robbed. He apparently interrupted the burglar because all that's missing is an antique brooch he inherited from his grandmother (June 12, 2005) and $300 in cash. Unfortunately, he didn't have a separate rider on her insurance policy covering the jewelry. Therefore, the insurance company reimbursed him only $500 for the brooch. His basis in the brooch was $6,000, and its fair market value was $7,500. His insurance policy also limits to $100 the amount of cash that can be claimed in a theft.
- Paul sells real estate in the evening and on weekends (considered an active trade or business). He runs his business from a rental office he shares with several other realtors. Paul has been operating in a business-like way since 2003 and has always shown a profit. He had the following income and expenses from his business:
Commissions earned $21,250
Real estate license 130
- He has used his Acura TL in his business during the current year. During the year, he properly documented 6,500 business miles. The total mileage on his car (i.e., business-use and personal-use miles) during the year was 15,000 miles. Paul elects to use the standard mileage method to calculate his car expenses. He spent $45 on tolls and $135 on parking related to the real estate business.
- Paul's company has an accountable expense reimbursement plan for employees from which Paul receives $12,000 for the following expenses:
Car rentals 600
- During the current year, Paul also paid $295 for business publications other than those paid for by his employer and $325 for a local CPA to prepare his tax return for the prior year.