After a long courtship, Andy and Wendy Chung were married on March 18, 2013. This was a second marriage for both. Andy has a 12 year-old son from his first marriage. While Andy doesn't have custody, he did provide support during 2013 for both his son and his ex-wife. A total of $9,800 was paid in 2013, including $2,000 to make a shortfall in child support from prior years. Monthly child support had been set at $200 by their written divorce agreement.
Wendy has one child -Phillip is 26 and is working on a master's degree at UST. He earned $3,280 in 2013 ($350 withheld for federal taxes) and interest from a Houston ISD (independent school district) bond of
$3,900. The $100,000 bond was purchased by Wendy on January 2, 2012 the $2,430 in interest earned in 2013 was to help pay for Phillip's college expenses. Wendy also had her annual dividend from her investment in Coca Cola stock deposited directly to Phillip's account. The dividend amount was $1,874. Interest earned Wendy's and Andy's other investments totaled $2,320 in 2013.
During 2013 Andy worked as a programmer for Southwest Airlines . He earned $65,967 with $6,550 taken out for federal income taxes and $5,046 for FICA. His employer has a cafeteria plan, providing $15,200 in benefits . Andy chose to allocate $825/month for family health care coverage, $4,000 for retirement, and take the rest in the form of cash. The company also pays for parking, which would have cost Andy $325/month.
Wendy works as an independent real estate agent. During the year she earned commissions and other fees of $98,900, and paid $9,300 in estimated taxes. She also drove 19,330 miles to view property with clients. She paid $8,250 in office rent to her host real estate company, Remix. She also paid $1,210 for a special cancer policy due to a family history of cancer.
Using her knowledge ofreal estate, in early 2012 Wendy purchased two houses, one for $194,000 and the other for $108,300. She paid $44,900 and $55,700 respectively to have these properties brought up to standard. In March, 2013 she sold the first house for $234,500 (not including $3,220 paid in selling costs) and the second she rented to family. The rental rate was $1,520 per month. At the time the one year rental contract was signed in July, 2013, she received $1,500 as a security deposit and $3,040 for the first and last month's rent (whenever the last month comes). She received timely payments at the end of each month, including a rent check on December 30 for January's 2014 rent. Interest paid in 2013 on loans associated for the house she sold was $1,520. Insurance coverage for that house was $310 for 2013. For the rental house, the interest paid in 2013 on her note was $4,290. She also paid $810 for the annual insurance in May, 2013 on the rental house plus $2,110 in plumbing repairs in August. A new AC unit cost $4,900 in September 2013. Oh, the joys of property ownership!
Wendy put $6,500 of the sales proceeds from the first house into a traditional IRA (paid in January, 2014) and used the rest to reinvest in a parcel of land. The balance of the land purchase price was financed. She paid a total of $2,455 in interest on that loan in 2013 .
Wendy took a 4 day trip to New York at a cost of $780 for transportation and $690 for hotels. Meals while she was away cost $218. The purpose of the trip was to learn more about the real estate business by touring urban neighborhoods . On evenings after the tours and meetings, Wendy attended a couple of Broadway plays. In April, Wendy paid $560 for a computer and $399 for software to assist in her work, and $590 in July for an iPhone. $27 was spent for real estate related app. She uses these as tools in her real estate activity along with personal use.
Wendy does some consulting for a few corporate clients. In 2013 she was paid $13,290 for services. She invoiced another client $1,190, but does not expect payment as the client appears to be on the verge of bankruptcy. She paid $830 for a listing in a local real estate publication to promote her consulting work. Another $4,000 was spent for a special real estate website. Wendy estimates 5% of her home is devoted to a business office, though other personal activities are also carried on in that space.
Andy's employer has a program to encourage employees to improve their education. In 2013 Andy was reimbursed $1,975 for 6 hours of coursework in Spanish, at a local university .
Andy decided to get out of the stock market in 2013. He sold 320 shares of Apple stock for $425 per share (cost $326/share several years ago). 250 shares of IBM were sold for $110 in January, 2013. He only held them for 8 months and they were purchased for $124/share. A $100 commission was paid for each of the two transactions. Finally, Andy sold all of his Utopia shares for $15,900. He paid $21,350 for these shares in 2011. This was a startup company and he was one of the first investors.
The Chungs purchased a home in April 2013. Interest paid on their loan in 2013 was $4,425. Their purchase agreement required the Chungs to pay a full year's property tax of $4,100 (from January to December 2013 at time of closing). In addition, they made improvements to the house -kitchen upgrade ($4,300) and new carpet ($6,930). They also paid their 2014 property taxes in December, 2013 ($4,325). Their old home was sold for a gross price of $209,300 . A commission of $4,000 was paid to the selling agent. Pro-rated property tax paid by the buyer on seller's behalf was $2,990. The buyer required the Chungs to remove an old play-scape and storage building. The cost ofremoval was $785. The house cost $165,000 several years ago and $12,400 were made in improvements by the Chungs. 2013 interest for the mortgage was $1,230.
Wendy is a 10% partner is in a real estate venture . The venture has a December 31 year-end. For the latest partnership year, the partnership earned $156,000 in ordinary income and $241,000 in capital gains (all but $21,400 was long term). The partnership also made $1,840 in charitable contributions and paid $3,210 in investment interest expense in 2013.
The Chungs try to be generous with their resources. In 2013 they donated $6,500 to a local organization that works with at-risk kids. They also gave $3,500 worth of miscellaneous personal property items to be sold at a garage sale. The original cost of these items was $11,500. Together, Andy and Wendy help raise money for their local United Way organization. They viewed their time spent to be worth $500.
During 2013 Andy's employer gave them all a nice Christmas gift - season tickets to home games of the local hockey team. The tickets cost $200. In addition, Andy was able to take Wendy on a honeymoon trip to Niagara Falls. Southwest Airlines provides free "open seat" tickets to employees who fly on a standby basis . The tickets would have cost $900 on the date of their flight, but could have been purchased from a travel agent for $743 if bought three weeks earlier. The trip would have added 10,000 miles to Andy's frequent flier miles, if he were a prticipant.
On his way to work, November 1, 2013, Andy hit an icy patch in the road and received injuries that required 10 days in the hospital. All but $3,400 of the medical costs of $54,300 was covered by his insurance policy. An accidental in urance policy that Andy purchased through a professional organization paid Andy $1,900. The policy cost Andy $295 in 2013. The car was a total loss - valued at $17,500 at time of the accident, insurance reirpbursed him $11,000 . He used the proceeds to buy another car for $15,900 - a 1999 Volvo this time. In 2013 the interest on the car loan was $293. The insurance on the car was $742 for the next six months .
One of Andy's favorite activities is raising rare orchids in his greenhouse. During 2013 Andy sold orchids to a variety of friends, relatives an9 other acquaintances. Total revenue during the year was $3,220. The expenses he paid for this activity included $1,540 for materials, $990 for travel to an orchid grower's convention, and $735 for subscriptions and books related to orchids.
Andy's father died in February, 2013 at the age of 73. Andy was the beneficiary of a $50,000 policy, which he elected to receive in 5 annual installments of $12,000 each. The first installment arrived in December, 2013 . Andy' mother came to live with Andy and Wendy in March, 2013 . Her only income was from $1,430 in social security and an annuity of $450 per month (purchased by Andy's mother in 2008 for $65,000 when she was 67). Andy's father's 2013 income included $1,956 in qualified pension payments that ceased upon his death.
Requirements:
1. Identify at least 20 events or tax related items in this case (no duplications), describe the tax effect, and explain the tax consequences based on sound judgment and relevant tax authority or tax concept/doctrine. Be sure to specify which concept or doctrine applies if appropriate. For purposes of this part of the exam, do not include itemized deductions. Site a reference to the Master Tax Guide to support you treatment, whether or not it has tax effect.
2. Compute the tax liability for the Chungs and any other taxpayers in the case for whom there is sufficient information. Be careful to label all of your work and provide any computations that are required to arrive at the determination of adjusted gross income, taxable income, and the tax liability or tax refund. For the computation, use the spreadsheet posted to BB as a guide. You r printouts should be large enough to be easily read.
If additional information is required to draw a conclusion concerning any particular item, clearly identify what information is required. Then state the assumptions you are going to make regarding that information. If there are any conflicts in the information provided, identify them and make reasonable adjustments to the information to complete the assignment.