Davenport University
Federal Taxation I
ACCT 315/715
Instructor: XXXXXXXXXXJudy Knapp
T A X R E T U R N P R O B L E M
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REQUIREMENT
Prepare the Federal Income Tax return for
Dave and Diane Cartmill for the year ended 2018
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Dave and Diane Cartmill are ma
ied and file a joint return. Dave was born on 3/17/1969 and Diane was born on 6/19/1973. Dave owns a used bookstore (self‑employed, Sch. C), and Diane is a college professor. Dave's Social Security number is XXXXXXXXXX, and Diane's is XXXXXXXXXXThe Cartmills live at 1258 Dickinson Rd, Grand Rapids, MI XXXXXXXXXXTheir phone number is XXXXXXXXXXThe Cartmills each designate that $3 is to go to the Presidential Election Campaign Fund.
Dave has one daughter, Erin (SS# XXXXXXXXXX; BD 08/04/1995), from a previous ma
iage. Erin is age 23 and a full‑time law student at Wayne State University. She worked part‑time during the year earning $3,890, which she spent for her own support. In addition, she received a $5,200 scholarship from Michigan State University. Erin lived at home while not in school and Dave and Diane provided an additional $6,800 toward Erin's support.
They also provided over half the support of Diane’s son, Jason (SS# XXXXXXXXXX, BD 05/20/1999), from a previous ma
iage. Jason is age 19 and a full‑ time student at Davenport University. Jason worked part‑time during the year, earning $2,900. He filed a joint return with his spouse, Kim, who earned $15,400 during the year.
Dave and Diane also have twins, Kayla (SS XXXXXXXXXX; bd 02/08/2008) and Ka
ie (SS XXXXXXXXXX; bd 02/08/2008), age ten, who live with them.
Dave's mother, Doris, (SS# XXXXXXXXXX), was born on 8/26/1932. Doris is blind and lives with the Cartmills. The Cartmills pay $5,400 per year for dependent care expenses for Doris as they are both employed. The dependent care provider is Senior Care, 1215 Magna Carta, Grand Rapids, MI, XXXXXXXXXXEIN# XXXXXXXXXXIn addition, Dave and his
other Mike each incu
ed out‑of‑pocket costs of $3,950 for Doris's support. Also, Dave provided lodging for Doris during the entire year. Dave estimates the fair rental value of the lodging is $6,000. Doris received $10,700 in Social Security Benefits and $650 of interest during the year, all of which she put in the bank. Mike is willing to do whatever is necessary to enable Dave to claim Doris as a dependent.
Diane is a professor at Kalamazoo Community College (# XXXXXXXXXX; 6767 W O Ave, Kalamazoo, MI 49003), where she earned $ 92,800. The University withheld Federal income tax of $9,280, state income tax of $4,697, Grand Rapids city income tax of $1,347, and the co
ect amount of FICA. Her employer pays for health care for the entire family. Diane has a 401K plan at work.
The Cartmills received $3,450 of interest from Second Bank on a joint account. They received interest of $1,650 on City of Seattle bonds they bought in January. Dave received a dividend of $1,145 on General Bicycle Corporation stock he owns. Diane received a dividend of $1,836 on Acme Clothing Corporation stock she owns. General Bicycle and Acme Clothing are both domestic Corporations. Dave and Diane received a dividend of $ 341 on jointly owned stock in Maple Leaf Brewing Company, a Canadian corporation. All of the securities were held with a Grand Rapids
okerage firm and are “qualified dividends”.
In July, a severe storm came through the area and did considerable damage to the summer home (382 Flying Dutchman, Holland, MI XXXXXXXXXXthat they had purchased for $98,000 two years earlier. The home’s fair market value before the storm was $133,000 and the insurance agent valued the home at $75,000 after the incident. Insurance recovery was $45,000.
Dave’s business, Dave’s Bargain Books, is located at 1645 Li
ary Ave., Grand Rapids, MI. 49503, and his employer identification number is #38‑ XXXXXXXXXXDave's sales for the year were $323,465. He uses the cash method of accounting for tax purposes and his business expenses on the cash basis are as follows:
Advertising....................................
$ 5,500
Bank service charges...........................
XXXXXXXXXX
Professional dues..............................
XXXXXXXXXX
Professional journals..........................
XXXXXXXXXX
Contributions to employee benefit plans XXXXXXXXXX,100
Insurance on office contents........ XXXXXXXXXX2,300
Accounting services............................
4,940
Miscellaneous office expense.......... XXXXXXXXXX524
Store (26K) and equipment (10k) rental XXXXXXXXXX,000
Utilities........................................... XXXXXXXXXX2,964
Telephone......................................... XXXXXXXXXX843
Wages........................................... XXXXXXXXXX67,926
Payroll taxes.................................. XXXXXXXXXX3,678
Returns and Allowances.............. XXXXXXXXXX1,800
Purchases…………………………. XXXXXXXXXX58,600
Beginning Inventory………………. XXXXXXXXXX61,800
Ending Inventory…………………... XXXXXXXXXX24,600
Dave put 8,450 business miles on his Ford Explorer this year and 15,650 personal miles (total miles= 24,130). He uses the automatic mileage method. Dave purchased the truck July 11, 2014 and did not take any Sec 179 Immediate Expensing. He does keep written records of his mileage.
June 16, 2018 Dave purchased a new business computer information system to track inventory and customers, etc., the cost was $18,200. On the same date he spent $27,625 for furniture to refu
ish his office. He did elect Sec.179 Immediate Expensing, for these items.
Diane's mother, Susan, died on Feb 17, 2006, leaving Diane her entire estate. Included in the estate was Susan's residence at 538 Lighthouse Ln., Holland, MI XXXXXXXXXXSusan's basis in the residence was $45,000. Fair market value of the residence on Feb 17, 2006 was $128,000 (this is Diane's basis). Diane began renting the house January 1, XXXXXXXXXXIn 2018 the house was rented the entire year at $1,750 a month. The house is depreciated using the MACRS straight‑line method for residential real estate with zero salvage value. In computing depreciation, they allocate a value of $33,000 to the lot on which the house is located. They incu
ed the following expenses during the year on the rental property:
XXXXXXXXXXProperty insurance..................... $1,600
XXXXXXXXXXProperty taxes........... XXXXXXXXXX7,200
XXXXXXXXXXMaintenance and repairs XXXXXXXXXX,800
XXXXXXXXXXManagement fees..... XXXXXXXXXX1,800
The Cartmills sold 1,000 shares of Capp Corp stock they had received as a wedding present on June 25, XXXXXXXXXXThe stock was worth $62 per share in January. By September 3, its value had dropped to $51 per share, and the Cartmills sold the stock on that