Individuals (Form 1040)
David R. and Sheri N. Johnson (ages 45 and 46) are married and live at 641 Cody Way, Casper, WY 82609. David is a consulting engineer, while Sheri is a paralegal. They file a joint return and use the cash basis for tax purposes.
Trained as a mining engineer, David has developed considerable expertise in the treatment and disposition of waste material. He is also well-versed in the Federal and state requirements for land reclamation projects. David maintains a consulting practice through which he advises clients on these matters. David’s business activity code is 541990. Most of his clients are small and medium-size mine owner/operators located in Wyoming and contiguous states (e.g., Montana, Idaho, Utah). Usually, David is retained by a client on a contract fee basis and is reimbursed for all out-of-pocket expenses. In performing his services, David usually visits the job site and later submits his recommendations in a written report along with a statement for his services and expenses. David received the following amounts from his consulting business in 2016:
The following fees for rendered services are not included in the receipts listed in item 1 above:
Echo Mining: Payment received January 2017; work done December 2016 $5,100 Sesa Mining: Payment received January 2016; work done December 2015 4,400 Cormorant Mining: No payment received; work done March 2016 3,700
David did not incur travel expenses in any of these engagements (i.e., the work was done in his office). As Cormorant Mining is in bankruptcy, David does not expect to collect any of this fee.
Other expenses paid by David in 2016 relating to his practice are listed below.
Contribution to H.R. 10 (Keogh) retirement plan $9,000 Premiums on medical insurance (covering self, spouse, and dependents) 3,800 Landscape models purchased from topographer for reclamation projects 3,200 Advertising in trade journals 2,400 Office supplies (including drafting materials) 1,200 Business phone and Internet service 860 State occupation license 300 Subscriptions to trade journals 240 Membership dues to trade associations 180
David operates his consulting business out of an office in his home. Twenty percent of the 3,000-square-foot living area is devoted to the office. David inherited the home on Cody Way from his father, who died on June 6, 2006, when it had a fair market value of $400,000 ($40,000 of which was allocated to the land). The Johnsons moved into the home in 2006, and David began using his home office in the same year. The home’s current fair market value is $500,000 ($50,000 allocated to the land). County land records reflect that David’s father bought the land in 1969 for $6,000 and built the house in 1973 at a cost of $60,000. David depreciates the business use of his home using MACRS, treating the home as 39-year nonresidential reality.
Additional information regarding the property for 2016 follows:
Utilities $4,800 Repairs and maintenance 2,900 Property/casualty insurance 2,300
The property taxes and mortgage interest paid in 2016 on the home are listed in item 15 below. In addition to the repairs and maintenance noted above, David had the office repainted at a cost of $1,200. The furniture in the office, including business equipment (e.g., computer, fax machine, copier), was properly expensed in the year bought and has a zero basis. However, on March 5, 2016, David purchased a heavy-duty, fire-resistant file cabinet with security-vault features for $4,800. He made the acquisition to safeguard and maintain the privacy of client data. If possible, David prefers to avoid capitalizing and depreciating the cabinet.
On February 4, 2015, David paid $41,000 (including sales tax) for a used Infiniti crossover SUV (gross weight under 6,000 pounds), which he uses 90% of the time for business. No trade-in was involved, and he did not claim any § 179 expensing of the cost. Last year, David elected to use the actual operating cost method to compute deductible expenses for his business use of the Infiniti. Under this method, he depreciates the SUV using MACRS (half-year convention). (Hint: See Table 3 in the Instructions to Form 4562.) His operating expenses for the Infiniti for 2016 are as follows:
Gasoline $3,300 Auto insurance 1,600 Repairs 240 Auto club dues 180 Oil changes and lubrication 120 License and registration 60
During business use, David received three moving traffic violations (total fines of $680) and incurred tolls and parking charges of $440. The Infiniti was driven a total of 14,500 miles during 2016 (mileage was incurred evenly during the year).
Sheri is a licensed paralegal and is employed on a part-time basis by several local attorneys. She commuted to work using the family Suburban for a total of 813 miles and paid parking fees of $310. Her earnings and job-related expenses are summarized below.
Salary (from four employers) $38,000 Laptop computer 1,200 Subscriptions and dues to professional organizations 180 Continuing education correspondence course 120 Occupational license fee 80
Sheri purchased the laptop computer on March 12 and uses it 80% of the time for business. The correspondence course is required continuing education so she can retain her license.
Sheri is considering going to law school, so she attended a series of LSAT preparation sessions at a cost of $350. Because Sheri is a part-time employee, she is not covered by any of her employers’ medical or retirement plans. Sheri is covered under David’s insurance, and during 2015, she contributed $5,000 to a traditional IRA that she established several years ago. The Johnsons use the automatic mileage method to calculate any tax deductions that they are entitled to for use of the Suburban.
With funds received from the settlement of his father’s estate, David purchased rental property at 4620 Cottonwood Lane, Casper, WY 82609. Of the $250,000 purchase price, $30,000 was allocated to the land. After an $80,000 renovation to the house (e.g., new flooring, roof, heating unit), the property was rented beginning February 1, 2010. In 2014, the Johnsons decided that their investment would be more marketable if the house was rented as furnished. Consequently, in May of that year, they spent $38,000 on new furniture (including drapes, carpeting, and appliances). Under the current lease agreement, the property rents for $2,200 a month (payable at the beginning of each month) with utilities not included. Information regarding the property for 2016 appears below.
Rent received $28,600 Property/casualty insurance premiums paid 3,100 Property taxes paid 2,400 Yard maintenance paid 1,200 Repairs 800
The rent received includes $2,200 for January 2017. The tenants prepaid the rent in mid-December because they went on vacation during the Christmas/New Year holidays. In addition to the property taxes listed above, David paid a special tax assessment of $2,400 to the city of Casper for repaving the street in front of the property. The Johnsons use MACRS to depreciate the rental home and the furnishings within it (assume half-year convention for the personalty).
The Johnsons acquired 1,000 shares of common stock in Cormorant Mining on March 7, 2015, to hold for investment purposes. David performed services for the company in late 2014, submitting a bill for $3,900. Because Cormorant was experiencing cash-flow problems at the time, David accepted the stock as payment for his services. Unfortunately, Cormorant is currently in bankruptcy (see item 2 above), and expectations are that the shareholders will not recover anything on their stock investments. The stock is not publicly traded.
On March 10, 1997, David’s father gave the Johnsons a plot of land located in Teton County as an anniversary present. It had a value of $150,000 at the time of the gift (no gift tax was due on the transfer). The land had been purchased by David’s father on June 1, 1987, for $50,000. In December 2014, a real estate developer contacted the Johnsons and offered $800,000 for the property. After considerable negotiation, the following transaction took place on March 4, 2015: the Johnsons transferred the Teton plot in return for $8,000 in cash and four city lots in Laramie (WY) worth $792,000. The Johnsons considered the city lots to be a good investment because they are located near the state university. All closing costs and legal fees were absorbed by the real estate developer.
David inherited an antique gun collection from his father when he died—mainly large caliber rifles used for buffalo hunting. Although David has no idea what his father’s cost basis was in these guns, the collection had a date-of-death value of $22,000. Concerned about the maintenance and security of the collection, David sold it to a dealer for $29,000 on July 10, 2016.
On July 12, 2002, using $50,000 of funds she had received from an aunt’s life insurance policy, Sheri purchased grazing land in Converse County (WY). On August 2, 2015, she sold the land to a local rancher for $75,000. Under the terms of the sale, Sheri received a down payment of $15,000 and 10 annual notes of $6,000 each. Sheri is also to receive simple interest of 8% on the outstanding principle balance each year. On August 4, 2016, Sheri collected $10,800 ($6,000 on the note and interest of $4,800) on the maturity of the first note.
Although the Johnsons had several Schedule D transactions during 2015, they ended up with a net short-term capital loss of $7,000. Of this loss, $3,000 was deducted in 2015, and $4,000 carried over to 2016.
For several years, Sheri’s widowed mother, Vivian Olson, has lived with the Johnsons and has been claimed by them as a dependent. On December 30, 2015, Vivian suffered a heart attack. After six days in the ICU of a local hospital, Vivian died. In early February 2016, the Johnsons paid the following expenses related to Vivian:
Burial expenses $4,400 Medical expenses incurred in 2015 4,200 Medical expenses incurred in 2016 3,100 Remainder of church pledge for 2016 600
Fortunately, the balance of Vivian’s medical expenses ($11,900) was covered by insurance. Besides personal and household effects, Vivian’s major asset was life insurance. As the designated beneficiary of the policy, Sheri received $20,000 of death benefits on March 13, 2016.
Besides the items already mentioned, the Johnsons had the following receipts during 2016:
Interest income: City of Cheyenne general purpose bonds $1,900 CD at Wells Fargo Bank 1,100 Money market account at Bank of America 400 Yard (garage) sale 950 Qualified dividends on Meadowlark Corporation common stock 700 Jury duty fees 420
The yard sale involved used furniture, appliances, books, toys, and other household goods having an estimated original cost value of $1,800. In connection with her jury duty assignment in June, Sheri drove the Suburban 40 miles and incurred expenses of $30 for parking and $45 for meals.
In addition to the items already noted, the Johnsons had the following expenditures for 2016:
Interest on home equity loan used to finance the purchase of personal items (e.g., camper) $4,400 Charitable contributions (not including Vivian’s pledge) 3,200 Ad valorem property taxes on personal residence 3,100 Medical and dental bills (including prescription drugs of $400)
other than those relating to Vivian (see item 13)
The Johnsons drove the Suburban 420 miles to various medical and dental appointments. Wyoming has no state or local income tax but does impose a general sales tax. The county in which they live imposes an additional local sales tax of 1%. Although they do not keep track of their sales taxes, they purchased a camper for $40,000 in May 2016. The sales tax on this purchase was $1,600.
Besides Vivian (see item 13), the Johnsons’ household includes two daughters, Meredith (age 19) and Kirby (age 18), and one son, Toby (age 17). Kirby and Toby are full-time students in high school. Meredith graduated a year ago and earned $9,000 working part time during 2016. She deposited these earnings in a savings account, hoping someday to attend college.
For tax year 2015, the Johnsons had an overpayment of $150, which they applied toward their 2016 income tax. Sheri’s income tax withholdings for the year are $5,100, and the Johnsons made Federal quarterly tax payments totaling $16,000 ($4,000 each installment).
Relevant Social Security numbers are noted below.
Name Social Security Number David Johnson 111-11-1112 Sheri Johnson 123-45-6785 Vivian Olson 123-45-6786 Meredith Johnson 123-45-6787 Kirby Johnson 123-45-6788 Toby Johnson 123-45-6789
Prepare an income tax return (with appropriate supporting forms and schedules) for the Johnsons for 2016. In doing this, follow these guidelines:
Make necessary assumptions for information not given but needed to complete the return.
The taxpayers have the necessary written substantiation (e.g., records, receipts) to support the transactions involved.
If any refund is due, apply it toward next year’s taxes.
The Johnsons do not wish to contribute to the Presidential Election Campaign Fund.