The following couple came to you for assistance with preparing their tax return for 2018. They filed a tax extension form for 2018 and paid $1000 in estimated taxes at that time.
The reason for each tax decision you make must have a brief, pertinent tax explanation not just a number.
James and Sue Downs are married and have two children, Joe, 20, who attends college full time and does bartending on the weekend so save up and buy a car. He earned $6,000 in 2018. His tuition is $22,000 that his parents paid less a $4,000 scholarship for room and board. Darlene is 17 and a senior in high school and only babysits occasionally, mostly for free.
James’ W-2 income is $130,000 with Federal withholding of $16,000, NY withholding of $6,000. His employer pays for a high deductible health plan and contributes $5,000 ratably to the James family HSA account and James deducts $1500 from his salary for the HSA. On the W-2, it shows that James contributed $5,000 to his 401(k) plan. FICA tax was $7861 and Medicare tax $1205.
James has a side job where he does yard work during the spring, summer and fall. He earned $38,000 and his tools cost $600, his truck that he only uses for yard work, was purchased in September 2017 for $32,000. The gas, tolls, insurance and oil changes cost $5,000 in 2018 and he drove 2800 miles. James uses occasional contract labor from time to time and incurred $3000 during 2018. James provided the projects, tasks and time frame for each temporary helper on a daily basis. James uses half of his 2 car garage to contain his tools and his business records and the other half is occasionally rented to the neighbors for a total of $500 earned during 2018.
Sue is a part-time school substitute teacher and occasional lunchroom monitor. She earned $18,000 in 2018 and spent $100 on special treats to give the children when she substituted. Sue worked also at a 3-month overseas teaching assignment in Japan. She earned $15,000 and paid $300 in Japanese taxes on this income. Free room and board was provided to her. Sue wants to contribute $5000 to a traditional IRA and not sure if she can fund it in this month of May.
James and Sue own their home and pay $8,000 in real estate taxes and $6,000 in interest. Their medical co-pays were $1300 since Joe had had some physical therapy as a result of a wrist injury playing basketball. The Downs other medical payments were $650.
The Downs own a beach cottage at the NJ seashore that they mainly rent out for 3 months of the year, June through August for $7200. They spent two weeks in September at the cottage for their vacation. The taxes are $2800 for the year, utilities of $900 and $600 for ground maintenance for the year. The renters pay the utility bills during their rental period.
The Downs home was caught in a high-wind hurricane that downed a huge tree on their property that smashed into the house causing significant damage. The town condemned the property and the Downs expect to receive $300,000 from their insurance company and $20,000 from the town in order to relocate to a safer location.
The Downs sold 200 shares of B & A stock that they purchased for $1200 in 2010, had a stock dividend of 20 shares that they sold in 2016 and sold 200 shares for $1860 in 2018.
They invested in a start-up company called Newbie, as the first investors for $10,000 each in 2016 but the company folded in 2018.
They donated 50 shares of Apple stock to Long Island University that cost them $1,000 and that was worth $6,500 when they donated it on September 15, 2018. They earn interest each year on their NY Transit Authority bonds of $600.
James loaned his sister-in-law, Svetlana, $50,000 to help her open her own dental practice in 2007. Svetlana signed a note that she would repay the loan in monthly installments with 1% interest over a 10-year period. She did not payback the loan or the interest, as she just never had the extra cash. The dental practice just covered the bills and her modest salary. James did not go to a collection agency because he knew his sister-in-law didn’t have the money to repay the loan.
What are the Downs’ tax liability for 2018? Prepare a summary of all the information for input on a tax return. There are approximately 50 items that should be addressed – a 2 point value for each aspect. Tax return is extra credit.
The topics covered include: exemptions/dependents, filing status, standard vs. itemized deductions, income includible or excludible, business income and expenses, adjustments to arrive at AGI, capital gains and losses, nonbusiness bad debts, qualified business income, tax credits, etc.