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INDIVIDUAL TAX RETURN PROBLEM 5Required: Use the following information to complete Paul and Judy Vance s 2011 federalincome tax return. If information is missing use reasonable assumptions to fillin the gaps. You may need the following forms and schedules to complete the project:Form 1040 Schedule A Schedule B Schedule C Schedule D Schedule EAppendix CC-7Schedule SE Form 2106-EZ Form 4562 (for the dental practice) Form 4562(for the rental property) Form 4797 and Form 8863. The forms schedulesand instructions can be found at the IRS Web site (www.irs.gov). Theinstructions can be helpful in completing the forms.Facts:1. Paul J. and Judy L. Vance are married and file a joint return. Paul is selfemployedas a dentist and Judy is a college professor. Paul and Judy havethree children. The oldest is Vince who lives at home. Vince is a law studentat the University of Cincinnati and worked part-time during the year earning$1500 which he spent for his own support. Paul and Judy provided $6000toward Vince s support (including $4000 for Vince s fall tuition). They alsoprovided over half the support of their daughter Joan who is a full-timestudent at Edgecliff College in Cincinnati. Joan worked part-time as an independentcontractor during the year earning $3200. Joan lived at home untilshe was married in December 2011. She filed a joint return with her husbandPatrick who earned $20000 during the year. Jennifer is the youngest andlived in the Vances home for the entire year. The Vances provide you with thefollowing additional information: Paul and Judy would like to take advantage on their return of anyeducational expenses paid for their children. The Vances do not want to contribute to the presidential electioncampaign. The Vances live at 621 Franklin Avenue Cincinnati OH 45211. Paul s birthday is 3/5/1957 and his Social Security number is 333-45-6666. Judy s birthday is 4/24/1960 and her Social Security number is 566-77-8888. Vince s birthday is 11/6/1988 and his Social Security number is 576-18-7928. Joan s birthday is 2/1/1992 and her Social Security number is 575-92-4321. Jennifer s birthday is 12/12/1999 and her Social Security number is613-97-8465. The Vances do not have any foreign bank accounts or trusts.2. Judy is a lecturer at Xavier University in Cincinnati where she earned $30000.The university withheld federal income tax of $3375 state income tax of$900 Cincinnati city income tax of $375 $1260 of Social Security tax and$435 of Medicare tax. She also worked part of the year for Delta Airlines.Delta paid her $10000 in salary and withheld federal income tax of $1125state income tax of $300 Cincinnati city income tax of $125 Social Securitytax of $420 and Medicare tax of $145.3. The Vances received $800 of interest from State Savings Bank on a jointaccount. They received interest of $1000 on City of Cincinnati bonds theybought in January with the proceeds of a loan from Third National Bank ofCincinnati. They paid interest of $1100 on the loan. Paul received a dividendof $540 on General Bicycle Corporation stock he owns. Judy received a dividendof $390 on Acme Clothing Corporation stock she owns. Paul and Judyreceived a dividend of $865 on jointly owned stock in Maple Company. All ofthe dividends received in 2011 are qualified dividends.4. Paul practices under the name Paul J. Vance DDS. His business is located at645 West Avenue Cincinnati OH 45211 and his employer identification numberis 01-2222222. Paul s gross receipts during the year were $111000. Paul usesC-8Appendix Cthe cash method of accounting for his business. Paul s business expenses are asfollows:Advertising $ 1200Professional dues 490Professional journals 360Contributions to employee benefit plans 2000Malpractice insurance 3200Fine for overbilling State of Ohio for work 5000performed on welfare patientInsurance on office contents 720Interest on money borrowed to refurbish office 600Accounting services 2100Miscellaneous office expense 388Office rent 12000Dental supplies 7672Utilities and telephone 3360Wages 30000Payroll taxes 2400In June Paul decided to refurbish his office. This project was completed and theassets placed in service on July 1. Paul s expenditures included $8000 for newoffice furniture $6000 for new dental equipment (seven-year recovery period)and $2000 for a new computer. Paul elected to compute his cost recoveryallowance using MACRS. He did not elect to use 179 immediate expensingand he chose to not claim any bonus depreciation.5. Judy s mother Sarah died on July 2 2006 leaving Judy her entire estate.Included in the estate was Sarah s residence (325 Oak Street Cincinnati OH45211). Sarah s basis in the residence was $30000. The fair market value of theresidence on July 2 2006 was $155000. The property was distributed to Judyon January 1 2007. The Vances have held the property as rental property andhave managed it themselves. From 2007 until June 30 2011 they rented thehouse to the same tenant. The tenant was transferred to a branch office inCalifornia and moved out at the end of June. Since they did not want to botherfinding a new tenant Paul and Judy sold the house on June 30 2011. Theyreceived $140000 for the house and land ($15000 for the land and $125000 forthe house) less a 6 percent commission charged by the broker. They haddepreciated the house using the MACRS rules and conventions applicable toresidential real estate. To compute depreciation on the house the Vances hadallocated $15000 of the property s basis to the land on which the house islocated. The Vances collected rent of $1000 a month during the six monthsthe house was occupied during the year. They incurred the following relatedexpenses during this period:Property insurance $500Property taxes 800Maintenance 465Depreciation (to be computed) ?6. The Vances sold 200 shares of Capp Corporation stock on September 32011 for $42 a share (minus a $50 commission). The Vances received thestock from Paul s father on June 25 1980 as a wedding present. Paul sfather originally purchased the stock for $10 per share in 1967. The stockwas valued at $14.50 per share on the date of the gift. No gift tax was paidon the gift.Appendix CC-97. Judy is required by Xavier University to visit several high schools in the Cincinnatiarea to evaluate Xavier University students who are doing their practice teaching.However she is not reimbursed for the expenses she incurs in doing this. Duringthe spring semester (January through April 2011) she drove her personal automobile6800 miles in fulfilling this obligation. Judy drove an additional 6700 personalmiles during 2011. She has been using the car since June 30 2010. Judy usesthe standard mileage method to calculate her car expenses.8. Paul and Judy have given you a file containing the following receipts for expendituresduring the year:Prescription medicine and drugs (net of insurance reimbursement) $ 376Doctor and hospital bills (net of insurance reimbursement) 2468Penalty for underpayment of last year s state income tax 15Real estate taxes on personal residence 4762Interest on home mortgage (paid to Home State Savings & Loan) 8250Interest on credit cards (consumer purchases) 595Cash contribution to St. Matthew s church 3080Payroll deductions for Judy s contributions to the United Way 150Professional dues (Judy) 325Professional subscriptions (Judy) 245Fee for preparation of 2010 tax return paid April 14 2011 5009. The Vances filed their 2010 federal state and local returns on April 14 2011.They paid the following additional 2010 taxes with their returns: federal incometaxes of $630 state income taxes of $250 and city income taxes of $75.10. The Vances made timely estimated federal income tax payments of $1500 eachquarter during 2011. They also made estimated state income tax payments of$300 each quarter and estimated city income tax payments of $160 each quarter.The Vances made all fourth-quarter payments on December 31 2011. They wouldlike to receive a refund for any overpayments.

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