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Comprehensive Tax Return Problem 2 Neil B. (age 42) and Mae R. (age 48) King are married and live at 7605 Walnut Street, Kansas City, MO 64114.
Comprehensive Tax Return Problem 2 Neil B. (age 42) and Mae R. (age 48) King are married and live at 7605 Walnut Street, Kansas City, MO 64114. Neil is a chemist employed by Sargent Pharmaceuticals, Inc., and Mae is a self-employed doctor of anesthesiology. They are calendar year, cash basis taxpayers.
1. Sargent Pharmaceuticals develops and produces injectable medicines used in chemotherapy treatments for cancer patients. Neil manages the Kansas City facility for an annual salary of $90,000. Sargent makes contributions to a qualified defined contribution pension plan for all of its full-time employees. Although Neil also has the opportunity to make contributions to the plan, he chose not to do so in 2016. Neil participates in his employer's group health insurance plan, to which he contributed $4,000 in 2016 for medical coverage. These contributions are made with pre-tax dollars. The health plan covers Neil, Mae, and their two dependent children. Because of the risk associated with Neil's work (i.e., processing chemotherapy drugs), Sargent provides all of its employees with $200,000 of group term life insurance. An additional $180 of income is included in Neil's Form W-2 to report the taxable value of this insurance.
2. In late 2015, three employees at Sargent's Chicago facility were seriously injured while processing a customer order. While the injuries occurred in what the company called a "freak accident," Neil began to look for a safer job in the chemical industry.
He incurred the following expenses during 2016:
Employment agency fee $3,200
Résumé consultation, preparation, and distribution 1,800
Expenses in connection with job interviews 4,100
Neil received several attractive offers but ultimately decided against changing jobs. Influential in his choice was a promotion to regional manager and a $20,000 pay raise starting in 2017.
3. Sargent generally reimburses Neil for expenses related to his work for the company.
However, as a matter of policy, Sargent does not reimburse for the following:
Monthly dinner meetings of the Midwestern Chemists Association [MCA] $825
Dues to professional organizations 240
Subscriptions to professional journals 180
MIA correspondence study course 230
Neil attended 11 MCA dinner meetings in 2016. Each dinner involved the following costs: $40 (fee for speaker), $25 (price of meal), and $10 (parking). Neil goes to the meetings from work and returns home the same night. The MIA (Management Institute of America) charge was for an online home study course on ways to improve safety measures and avoid accidents in the industrial workplace.
4. Mae King is a board-certified doctor of anesthesiology. She provides anesthesiology services at a number of hospitals and surgical centers in the greater Kansas City area on a part-time basis. Mae is well respected by the surgeons with whom she works. She uses her home as her business address. She keeps her records there and otherwise conducts business (e.g., conducts pre-surgery appointments, renders professional advice, bills patients) on the premises. Because Mae does not maintain a specific area for exclusive business use, she does not claim an office in the home for tax purposes. Mae's receipts from her practice during 2016 were $245,000, $16,000 of which was for services performed in 2015. Not included in these amounts is $17,500 she received in January 2017 for services rendered in December 2016. Mae's professional activity code is 621111.
5. Mae had the following business expenses in 2016:
Medical clothing (e.g., lab coats, surgical scrubs) $2,200
Medical malpractice insurance 9,500
State medical license fee 450
Dues to professional organizations 350
Subscriptions to professional journals 340
In addition, she drove the family Suburban (purchased on March 2, 2015) 2,900 miles in connection with her work. She uses the standard mileage method for computing deductible vehicle costs. Total mileage for the Suburban is 9,000 miles for the year.
6. Neil's widowed mother, Lucy, suffered a stroke on December 30, 2015, and died in the hospital on February 3, 2016. Most of Lucy's medical expenses were covered by Medicare, with Neil paying the remainder. On February 18, 2016, he paid $9,800 to the hospital, half of which was attributable to expenses incurred in 2015. At the same time, Neil also paid the funeral expenses of $16,000. Although Lucy lived in her own home prior to the stroke, Neil and Mae have properly claimed her as a dependent for the past few years.
7. As Lucy's sole heir, Neil inherited her home and its furnishings (located at 1420 Chickadee Lane, Topeka, KS 66546).
The costs and values involved are as follows:
Cost Basis FMV on 2/3/16
Lot $ 10,000 $ 30,000
House 110,000 250,000
Furnishings 55,000 25,000
Because the real estate market was depressed and the home was located in an attractive rental area, Neil decided not to sell. Instead, he rented the property fully furnished on May 1, 2016. The terms of the lease (executed on April 30) provide for the following: one-year lease at $2,500 per month (payable on the first of each month), last month's rent payable in advance, and damage deposit of $3,000. In total, Neil received $25,500 from the tenants in 2016 for their use of the property. Besides depreciation, his expenses were:
Property taxes $4,800
Real estate renter's location service 400
For MACRS depreciation purposes, Neil plans to use the straight-line method with the mid-month convention to compute the deduction for the realty and the 200% declining-balance method with a half-year convention for the personalty.
8. While walking the family dogs in late July, Mae was struck by a delivery van and seriously injured. After being hospitalized for a week, she was released—bruised and sore but with no permanent injuries. The driver of the van was arrested and ticketed by the police for reckless operation of a vehicle and was later prosecuted for drug use. To prevent adverse publicity related to a lawsuit, the owner of the delivery service paid for Mae's medical expenses and sent her a check on August 16, 2016, for $90,000. The check was accompanied by a letter that stated "This $90,000 is a settlement for physical injuries sustained by Mae King." Mae was represented in the negotiations with the delivery company by her brother, a practicing attorney. He did not charge the Kings for his services.
9. The Kings had the following property transactions during 2016:
a. On May 5, the City Council condemned unimproved land owned by Neil for the construction of a fire station. He purchased the land (two vacant lots at 3400 and 3402 Sycamore Lane) as an investment on May 25, 2009, for $14,000. In exchange for the lots, the city gave Neil a large unimproved lot at 440 Genoa Street that was valued at $20,000. All in all, he was satisfied with the exchange because the Genoa Street property is in a better neighborhood and has a greater potential for appreciation.
b. On August 22, Neil sold a gun collection for $32,000 to an avid collector. The collection was a gift from Neil's father on December 25, 2011, when it was worth $22,000. His father bought the collection in 1997 for $14,000. Neil's sale of the collection was documented by a bill of sale, signed by both Neil and the buyer.
c. On September 9, the Kings sold 3,000 shares of Dove Pharmaceuticals for $2,000. The couple purchased the stock on December 4, 2015, for $25,000. The investment was motivated by the rumor that Dove was developing a new drug for infertility. On September 7, the FDA announced that it would not approve the drug due to adverse side effects, and the Dove stock price plummeted. The Kings' broker provided them with a Form 1099-B, which reported the gross proceeds from the sale and their basis in the stock.
10. The Kings have a long-term capital loss carryover of $1,500 from 2015.
11. In March 2016, the Kings were audited by the Missouri Department of Revenue for tax years 2013 and 2014. The audit proposed no changes for the 2013 tax return. However, the Kings were assessed $2,250 additional income tax for 2014 (no interest or penalties were included). The Kings agreed with the assessment and paid the $2,250 immediately.
12. During 2016, Neil served on a jury for a civil case that was litigated at the county courthouse. As a result of the service, he was paid $700 and incurred unreimbursed parking expenses of $60. In conformance with company policy, Neil remitted the $700 of jury duty fees to Sargent.
13. In addition to the items already noted, the Kings had the following receipts in 2016:
Life insurance proceeds $50,000
2015 Missouri state income tax refund 450
Proceeds from garage sale 2,600
Interest income— Kansas City general purpose bonds $480
CitiBank certificate of deposit 600 1,080
The insurance proceeds were paid to Neil as the designated beneficiary of Lucy's life insurance policy. At the garage sale, the Kings sold personal items (e.g., camper, furniture, hunting and fishing equipment) that belonged to Neil's father and Neil's mother, Lucy. Neil and Mae estimated that the items they sold originally cost $7,100. The garage sale proceeds were donated to the Alzheimer's Association (a qualified charity) in memory of Neil's father.
14. The Kings had additional expenditures for 2016 of:
Dentist bills not covered by insurance $3,100
Ad valorem property taxes on personal residence 4,100
Interest on home mortgage 2,600
Contributions of Goodwill (a qualified charity) 3,600
As part of a program sponsored by their church (a qualified charity), the Kings used the family Suburban to transport senior citizens to religious services, for a total of 900 miles. The Suburban also was used for numerous visits to an orthodontist for both of the Kings' children, for a total of 480 miles.
15. The Kings' household includes two dependent children: Ethan (age 15) and Bella (age 14), both of whom are full-time students. Relevant Social Security numbers appear below:
Name Social Security Number
Neil B. King 123-45-6785
Mae R. King 123-45-6786
Lucy E. King 123-45-6787
Ethan M. King 123-45-6788
Bella A. King 123-45-6789
16. Neil's Form W-2 from Sargent Pharmaceuticals reflects income tax withholding of $6,500 (Federal) and $4,000 (state). The Kings made quarterly income tax payments of $20,000(Federal) and $9,000 (state), for total payments of $80,000(Federal) and $36,000(state). They had their Federal income tax refund of $3,000 (for 2015) applied toward their 2016 income tax.
Requirements income tax return (with appropriate schedules) for the Kings for 2016, using the following guidelines:
The Kings choose to file a joint income tax return.
The Kings do not want to contribute to the Presidential Election Campaign Fund.
The Kings do not own any foreign bank accounts or other investments.
The Kings want to apply any federal tax refund to their 2017 tax liability.
The taxpayers are preparing their own return (i.e., no preparer is involved).
For the past several years, the Kings have itemized their deductions from AGI instead of using the standard deduction. In addition, the Kings have deducted state income taxes (not sales taxes) for the past several years.
The taxpayers have the necessary substantiation (e.g., records, receipts) to support all transactions reported in their tax return. Make necessary assumptions for information not given in the problem but needed to complete the return.