Tax Return-Individual Number Six (after Chapter 14)
Please complete the required federal individual income tax return forms for the following taxpayers. Unless instructed otherwise, the information provided is for the taxpayer’s 2012 tax year. Please complete their 2012 tax return. Ignore the requirement to attach the Form(s) W-2 to the front page of the Form 1040. If required information is missing, use reasonable assumptions to fill in the gaps.
Carlos and Maria Gomez live in Lubbock, Texas. The Gomezes have two children: Luis (14) and Amanda (12):
•Luis’s Social Security number is 589-24-8432
•Amanda’s Social Security number is 599-74-8733
•The Gomez’s current mailing address is 543 West La Patera, Lubbock, Texas 79401
•Luis and Amanda qualify as dependents of Carlos and Maria for federal income tax purposes
Carlos is a civil engineer. For the first two months of the year, he was employed by West Texas Engineering (WTE). However, he resigned his position with WTE to start his own engineering firm called Gomez Professional Engineers (GPE). GPE is conducted as a sole proprietorship with Carlos being the sole owner. GPE started business on January 1 of the current year and is located at 1515 West Industrial Road Lubbock, Texas 79401 (EIN 20-1616167). Maria works for herself as a part-time bookkeeper.
Carlos provided the following W-2 from WTE.
Carlos’s employer withheld all applicable and appropriate payroll taxes.
Carlos reported the following information for GPE’s business activities:
Credit Card Receipts$352,000
Cash Receipts $648,000
Total Revenue $1,000,000
Office Building Rent$62,000
Meals and Entertainment$2,975
Taxes and licenses$44,875
Employee health insurance$42,000
Employee benefit programs$14,500
Legal and professional fees$15,550
Repairs and maintenance$10,000
Total Expenses $788,400
Also during the year, GPE purchased the following fixed assets.
Laptop computersMarch 1$20,500
Office furnitureOctober 10$19,000
GPE does not want to claim any bonus depreciation or Section 179 expensing on any of these assets.
GPE began business on January 1 of the current year and it uses the cash method of accounting. Carlos worked part-time on GPE business activities until he finished his employment with WTE early in the year. Carlos worked full-time on GPE business activities for the rest of the year.
GPE filed 1099s for payments made to contractors when required to do so.
Carlos and Maria paid $22,000 for health insurance for his family (for the time he was working at GPE). This amount is NOT included in the totals for GPE above. Neither Carlos nor Maria had access to employer-provided health insurance during the year while they were paying the premiums for this policy.
In need of cash, in February, Carlos withdrew $20,000 from his 401(k) account. He received the following 1099-R:
In addition, Carlos has established a SEP-IRA retirement plan from funds he earned working on GPE business activities. He would like to make the maximum contribution possible to this plan for the 2012 tax year. Assume that you will file the return by April 15 of 2013 and Carlos will be able to fund the SEP IRA with the full amount allowable by the date he files the return.
Maria received the following 1099-Misc from her bookkeeping activities for her largest client:
She received an additional $4,000 from clients who were not required to issue Maria a 1099.
During the tax year, Maria paid the following business-related expenses:
On March 1, Maria purchased a new laptop computer for her business at a cost of $1,850. Maria also purchased a new laser printer/photocopier combination at a cost of $840 on the same date. In April, Maria purchased computer software to use in her business for $400. Maria would like to recover the cost of these assets as soon as possible.
Maria drove 2,050 business miles during the year (she has documentation to verify). She drove the vehicle for a total of 10,000 miles during the year (7,950 personal miles). She also has access to another vehicle that she can use for personal purposes.
Maria started her bookkeeping service in 2009 and she uses the cash method of accounting. She is the only person performing services in the business. She did not make any payments that would have required her to file a Form 1099.
On January 3, of the current year, the Gomezes sold their prior principal residence. They purchased the residence in 2007 and lived there full-time since that date. They originally purchased the home for $310,000. The Gomez family has never claimed any tax depreciation (nor were they allowed to) on the home in any tax year. The sales price of the home was $405,000. This home was located at 45 East Entrada Trail, Lubbock Texas 79401.
The Gomez family purchased (and moved into) their current residence at 543 West La Patera, Lubbock, Texas 79401 in late January of the current year. The La Patera residence is 2,000 square feet. The purchase price of the residence was $500,000 (building value was $350,000 and the lot value was $150,000). The mortgage on the purchase was $300,000. Expenses relating to the La Patera residence were as follows:
Property taxes $8,750
In addition to the primary mortgage on the home, the Gomezes borrowed $150,000 on a Home Equity Line of Credit (“HELOC”) against the La Patera home. They received the following Form 1098 relating to the line of credit:
They used the borrowed funds to pay off personal debts on credit cards, take a European vacation and to purchase two new personal vehicles.
Maria utilized a room in the La Patera home for her bookkeeping business. The room was used exclusively on a regular basis as the principal place of business for Maria’s business. Maria wants to maximize her home office deduction related to this use. The room she uses is 200 square feet.
In the summer of the current year, the Gomez family rented out the La Patera residence to a family. The La Patera residence is situated along the ninth green of the famous Lubbock Country Club (LCC). The LCC hosted the U.S. Senior Open golf tournament this year. The Gomez family rented their residence to a golfer participating in the event for $1,000 per day for 10 days (the home office remained locked and off limits to the renters, however). During this time the Gomez family went on vacation touring the west coast of the United States. The total additional expenses that the Gomez family incurred related to cleaning and other variable costs were $1,500.
Maria owns 20 acres of vacant ground within the city limits of Lubbock. This land was acquired by Maria as a gift from her parents on July 1, 2005. The land was valued at $4,000 per acre on the date of the gift. Her parents purchased the land in 1990 at a price of $500 per acre. Maria has held this land as an investment during her ownership. On September 15, of the current year, Maria exchanged this land with a development company that wanted to develop the 20 acres (Maria and the development company are not related). In exchange for the 20 acres, Maria received a condominium in Lubbock that was valued at $160,000. For purposes of depreciation, the common land element of the unit is valued to be 25 percent of the total value of the unit. The condominium is located at 990 El Mar, Unit A, Lubbock Texas 79401.
Maria first rented out the El Mar unit on October 1. The following is the information from the rental activity from October through December.
HOA fee expense$300
Property taxes paid$225
No Form(s) 1099 were required to be filed for this rental.
The Gomezes also received the following Forms 1099 for the year:
The Grand Junction City bond was issued in 2008.
The Lubbock Texas School District bond was issued in 2010.
The Gomezes did not own, control or manage any foreign bank accounts nor were they a grantor or beneficiary of a foreign trust during the tax year.
The Gomezes paid the following expenses during the year (in addition to the personal residence-related items listed above):
Dentist (unreimbursed by insurance)$ 500
Doctors (unreimbursed by insurance)$1,750
Prescriptions (unreimbursed by insurance)$ 425
Vehicle property tax based upon value$ 950
Contribution to qualified charities$3,500
The Gomezes did not pay any state individual income taxes during the year.
The Gomezes made federal estimated tax payments related to the current year as follows during the current year:
January 15 (following year)$11,000
The Gomezes want to contribute to the Presidential Election Campaign. The Gomezes would like to receive a refund (if any) of any tax they may have overpaid for the year. Their preferred method of receiving the refund is by check.