Income Tax Fundamentals 2012 Edition by Whittenburg and Altus-Buller Fact Pattern: 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 architec t 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 se curity number is 279-31-5842 (DOB 04/17/64). They live at 123 Wonder Street, Anytown, O hio. 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) a nd 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 bo nd $800 from a State of Ohio, tax-exempt municipal bond 2. Dividends: fied ied 3. Rental income: n $28,000 gross rents from an apartment building that they ow $1,200 of ordinary dividends from XYZ Co. of which all are quali $600 of ordinary dividends from ABC Co. of which $300 are qualif

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 carryov er 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: 3. Apartment building expense: $560 $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 incurre d the following expenses associated with the vacation home: Mortgage interest expense Utilities Management fees Insurance Real estate taxes Repairs and maintenance $7,800 $850 $1,800 $450 $4,200 $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 Ta x Court Method described on Page 4-5. C. Depreciation expense must be considered and calculated based upon the followi ng: 1. Architectural business - John does not have any recurring depreciation as h e 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 b ought for $1,500 in 2011. 2. Rental apartment building - The Ables bought the apartment building on Janua ry 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 ,000 which ul 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 co ntributed $8,000 to the plan. The Ables bought the Vacation home on January 1, 2007 for $150 included land at the value of $25,000. The building has a usef

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 Doctors Hospitals Long term care insurance Eyeglasses Dentists Medical insurance paid and he as to how he can best claim this as a deduction. i.e., business expense, itemized deduction, other?) b. Taxes paid in 2011: c. Charitable donations: 700 (Thrift shop value of misc. clothing, original cos t was $2,800) 3. Mileage d. Interest: Home mortgage interest e. Child care expenses for Willie: r school activities f. Miscellaneous: 1,000 miles for a charity $8,800 $3,400 paid to YMCA for afte Safe deposit box Tax return preparation fees $50 $825 Real estate (Home) State and Local income taxes $4,350 $2,760 $580 $1,480 $2,160 $1,200 $465 $2,600 $6,200 ( all of which John needs your advice

1. Cash $2,720 2. Used personal property to the Salvation Army was $

Investment business publications $475 Jane's union dues $750 Required: Prepare the federal income tax return for the Ables for 2011. You wil l 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