Use the “fact pattern file” to answer the questions; you need to determine which items of income or deductions are included in taxable income and which expenses are allowed deductions for tax return purposes
Dependency Questions: (20 points)
Determine whether Kathleen is a dependent and explain why or why not?
Determine whether Mrs. Clyente’s father is a dependent and explain why or why not?
Determine whether Mr. Clyente’s mother is a dependent and explain why or why not?
Determine whether Jennifer is a dependent and explain why or why not?
Determine whether Nathan is a dependent and explain why or why not?
Determine whether Nathan’s care provider is a dependent and explain why or why not?
Calculate the Clyente’s Adjusted Gross Income (Must show all of your work for partial credit /25 points)
Calculate the Clyente’s Taxable Income (5 points)
Calculate the Clyente’s Deduction for AGI (Must show your work for partial credit /10 points)
Calculate the Clyente’s deductions from AGI (Must show your work for partial credit /25 points)
Short Response Questions (5 points each)
Dick and Jane are divorced in 2013. At the time of the divorce, Dick had a lawsuit pending. He had filed suit against a former employer for overtime pay. As part of a divorce agreement, Dick agreed to pay Jane one-half of the proceeds from the lawsuit. In 2014, Dick collected $250,000 from the former employer and paid Jane $125,000. What are the tax consequences for Dick receiving the $250,000 and then paying Jane the $125,000?
In some foreign countries, the tax law specifically designates the types of income items that are includible in gross income. How does this approach compare with the U.S. Internal Revenue Code (§ 61)? What is a major advantage to the approach used in the U.S. tax law?
Melissa is a compulsive coupon clipper. She often brags about the time she purchased a cart full of groceries for $5.00, when the cost without coupons would have been $50. Discuss whether Melissa realizes gross income from her coupon clipping.
CONTENTS OF CLYENTE 2014
Wilma Clyente Age: 41 SSN: 017-36-9721
Henry D. Clyente (spouse) 45 034-67-1776
Kathleen Clyente (daughter) 25 025-36-3456
Jennifer Clyente (daughter) 14 024-67-0491
Nathan Clyente (son) 4 016-76-1940
Section 1: Who Are the Dependents?
Kathleen is in her second year of medical school and got married in June of 2014 to Andrew Sonilaw. She worked during the summer as a paramedic and made $2,500 with about $500 withheld for federal income taxes. Jennifer is in private school this year. Nathan is in pre-school half days and Louise Treewood (a Welsh woman who lives with us) takes care of him for the rest of the day, we pay her a small salary for her services; but we provide her with a bedroom and all meals. In addition to these individuals who live in my house, I give my father approximately $300/month to augment his only other income, his social security benefits of about $8,000 annually, which he uses entirely to provide his own support. I moved him to an apartment here when the rest of the family moved from California last spring. My mother-in-law resides in a nursing home because she requires extensive medical care and my husband and I pay for her care at the facility, which after her long-term care insurance coverage reimbursement is a total yearly amount of $9,500 that we have to pay.
Hint: Remember as you work on the exam that expenses paid for on behalf of other individuals are only deductible by the taxpayer if the other individuals are dependents of the taxpayers and the type of deduction is allowed under the Code so it is a good idea to determine who the dependents are first before you determine the deductions which will be allowed for the Clyentes on their personal tax return.
Section 2: What is the Clyente’s Gross Income? (Carefully Read the Following Information)
Starting June first (2014) I became President of NuCo Corp. in Manchester. My W-2 from NuCo for 2014 shows the following: Gross salary-$100,000; Federal income tax-$24,200; State income tax-$5,000; Life insurance $505; Reimbursed Moving Expenses-$7,800; Social Security-$4,200 and Medicare-$1,450.
Until May 15, 2014, I was Vice President, Finance, for OLDCO, Inc. My wage summary from that company reads as follows: Gross salary-$60,000; Federal income tax-$16,100; State income tax-$3,000; Life insurance (PS-58) $450; Social Security-$2,520 and Medicare-$870.
In addition to the above, I received the distribution of my 2013 bonus final payment of $15,000 gross (less $4,000 Federal withholding) by mail (as usual) on January 3, 2014. Since I left the company with some hard feelings, OLDCO is now claiming that they made a mistake in the calculation and that I have to return $3,000. My lawyer said he would fight it for a flat fee of $500.
Consulting: While employed by OLDCO I had three small companies for which I did consulting in the first quarter of 2014. Although I did the major part of this work at their offices, I did use my study at home for some of the work; however, I did not use my study solely for the consulting business. My gross billings were $12,000 but one of my clients is refusing to pay me $900. The only expenses that I can identify as directly relating to this business are $127 of long distance telephone calls and $755 of luncheon and dinner meetings.
Woodworking: Last tax year (2013) my husband started a woodworking business in California. Unfortunately, his business expenses exceeded the income from the venture. He is, however, going to give it another go here. He did not have any sales in 2014 but he has expended the following sums during the year to continue the business here:
Lawyer’s fees $350
New lathe $700
Special router $150
Printing (circulars) $100
Rental Vacation Home: Last fall (2013) we rented our new chalet in Vermont to a very nice couple for $1,000/month starting in November until March 31, 2014. The chalet cost $60,000 in the Spring of 2013 and we could only use it during my two-week vacation last summer. Insurance cost me $1,200/year and taxes another $600. It cost $600/month for all utilities during the rental period. We also received the March rent in November as a security deposit.
Until we receive a decent offer, we also are renting our old house in California but I have included that information on the sheet concerning my move here.
Rental Old Home: We are currently trying to sell our old home in California. We bought it 15 years ago for $45,000 and have it on the market at its appraised value of $620,000. Because it has not yet sold, we rented it for $1000/month on a six month lease basis which ended December 31, 2014 and since it still has not sold, we will continue to rent it on an “at-will” basis. Hopefully, it will sell soon. We have in hand an offer to buy for $480,000; $150,000 payable now and $110,000 payable in each of the next three January’s. I don’t know how that works for tax purposes, but we are seriously considering it because it cost $1,500 in insurance, $400 in maintenance, $1,245 in taxes and $3,211 in interest just to carry the house through the six month rental period.
Canada Corp. Ltd. $850
First Nat’l Savings $793
Money Market Fund $2,788
NOW Checking $54
Local Savings $452
AT&T Debentures $766
City of Boston Bond $150
We had no trades this year but I understand that Downoutsco, Inc. of which Henry owned 200 shares (total cost: $4,000) declared bankruptcy in January of 2014; we are told the stock is worthless so we will never get our money back.
Henry got “lucky” in March when he hit the California Lottery for $100. He purchased a 50 cent ticket every week without fail and has not missed a week. Even after we moved to New Hampshire he has continued doing so.
IMPORTANT: There is on other item of income listed in the details within the Expenses Section, Can you find it? Hint: issue is expenses related to the new home they have purchased which her employer is providing some type of benefit which is taxable to her.
Section 3: What are the Clyente’s Allowed Deductions for AGI and from AGI?:
NEW HOME SEARCH & MOVING EXPENSES
After I had accepted the position with NuCo, my husband and I flew to Manchester to house hunt. The total cost for that first trip was $1,500. Two weeks later we were back again with the kids and found our new house in Manchester. Total cost of this final trip was $2,100.
At the end of May, I moved my family here and incurred the following expenses:
Moving Company $5,000
Food (en route) $82
Lodging (en route) $250
Temporary Living Expense here $677
Cost to move my father $3,000
For these expenses, the Company reimbursed me a flat $7,800 (based on mileage) under the corporate policy for new employees.
PRIMARY PERSONAL RESIDENCE (MORTAGE INTEREST AND REAL ESTATE TAXES)
Our new home costs $950,000 on which we have a $550,000 first mortgage. The Company is giving me an interest free swing loan for the balance until we can sell my old home; imputed interest based on IRS tables should be 3.5% for a total of $11,600. However, before we moved in the entire interior of the house was papered and painted at a cost of $2,500 and the roof was re-shingled for $15,000.
In addition, we had new insulation installed at $2,500. We probably would not have bought this house but for the fact that the NuCo Board made it a requirement of the job that I live within 5 minutes commute of the office. In consideration of this they will, and have paid, one half of the real estate taxes on the house as long as I am employed by them.
NEW JOB SEARCH
As you already know, I switched jobs in 2014. Late in 2013, I decided to move to the New England area and contacted an executive search firm to assist me in obtaining a new position. They set up several interviews during January and February, the last of which was with NuCo. In all I made three round trips to Manchester for interviews at $350 per trip airfare and $100 per trip for hotels and $50 for meals. I also paid the search firm $3,000 as their fee for placement help. None of this was reimbursed either by NuCo or any other firm I interviewed with.
All of my medical and drug expenses are reimbursed by the various companies’ health plans (the cost for health insurance from both companies combined was $4,226, of which I paid one-half through payroll deductions) except that they did not pay to have my daughter’s nose “fixed” or for my father’s medical expenses. The total doctor and hospital bill for my daughter was $9,566 and for my father, $766, including $251 for drugs. Incidentally, my daughter’s nose was broken in an automobile accident while driving a friend’s car. She was not at fault and we are suing the other party for $30,000 which should cover the cost of her cosmetic surgery and the damage to the vehicle of $670 (which I already paid) if we win.
Under an agreement with my husband’s first wife (they were divorced in 1985), we pay her $380,000 over 30 years or until she remarries. (She has not.) The agreement provides for payments of $5,000/year for the first 10 years, $7,000/year for the next 10 years and $26,000/year for the remaining 10. However, if anything happens to their son, Harrison, (the only child who lives with her) during that period or if he finishes his schooling before the period is over, the yearly payments are cut in half. 2014 was year 27 of the agreement and we paid her $26,000.
In 2014, I paid $9,700 for Kathleen’s tuition and books. The hospital where she worked last summer awarded her a $500 scholarship to continue her studies and indicated that they would like her to come back to practice there when she finished medical school. Tuition for Jennifer’s school is $4,000. They keep the tuition down by asking for voluntary contributions from the students’ parents. I have included our contribution in the list of charitable contributions.
Mortgage Interest (California) $6,800
Mortgage Interest (Vacation Home) $1,500
VISA (Personal Credit Card) $400
Investment Fees (Related to Taxable Income) $7,500
Loans from OLDCO (Personal loan) $800
Real estate (California) $5,100 (first 6 months)
Real estate (Vacation Home) $3,200
2013 Fed. Tax Bal. (paid 4/15/14) $5,180
2013 State Tax Bal. (paid 4/15/14) $900
Sales tax $1,600 (this was taken from receipts for items for the new house)
Gas tax (auto) $57
Gas tax (snowmobile at chalet) $8
CHARITABLE GIVING PROGRAM FOR 2014
United Fund $2,000
BU Law School $500
Jennifer’s School $2,000
NuCo Charitable Foundation $500
Mass General Hospital 200 shares of BBM (cost-$10,000: Fair Market Value-$15,000)
Americans for Democratic Action $50
Garage was broken into and $350 of tools was stolen. The insurance company would only pay $250. Two weeks later we also noticed that the CB radio was missing from the car and no one remembers seeing it since the break-in. The police said they could draw no conclusions from its disappearance. Value $150.
TAX PREPARATION FEES
$750 paid April 13, 2014.
LOSS ON PERSONAL LOAN
In April 2014 Uncle Leo died. Two years ago I had loaned him $5,000 to help him over some rough times. He never repaid me and I do not think I could ask his wife to repay and, in fact, I am not sure if I did, whether she could have given Leo’s sorry financial state.
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