INDIVIDUAL TAX RETURN PROBLEM 5

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Required:
∙ Use the following information to complete Armando and Lourdes Gonzales’s
2017 federal income tax return. If any information is missing, use reasonable
assumptions to fill in the gaps.
∙ You may need the following forms and schedules to complete the project: Form 1040,
Schedule A, Schedule B, Schedule C, Schedule D, Schedule E, Schedule SE,
Form 4562 (for the dental practice), Form 4562 (for the rental property), Form
4797, Form 8863, and Form 8949. The forms, schedules, and instructions can
be found at the IRS website (www.irs.gov). The instructions can be helpful in
completing the forms.
Facts:
1. Armando Z. and Lourdes K. Gonzales are married and file a joint return. Armando is
self-employed as a dentist, and Lourdes is a college professor. Armando and Lourdes
have three children. The oldest is Ricardo, who lives at home. Ricardo is a law student
at the University of Cincinnati and worked part time during the year, earning $1,500,
which he spent for his own support. Armando and Lourdes provided $6,000 toward
Ricardo’s support (including $4,000 for Ricardo’s fall tuition). They also provided
over half the support of their daughter, Selena, who is a full-time student at Edgecliff
College in Cincinnati. Selena worked part time as an independent contractor during
the year, earning $3,200. Selena lived at home until she was married in December
2017. She filed a joint return with her husband, Tony, who earned $20,000 during the
year. Felipe is the youngest and lived in the Gonzales’s home for the entire year. The
Gonzaleses provide you with the following additional information:

INDIVIDUAL TAX RETURN PROBLEM 5

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∙ Armando and Lourdes would like to take advantage on their return of any educational expenses paid for their children.
∙ The Gonzaleses do not want to contribute to the presidential election campaign.
∙ The Gonzaleses live at 621 Franklin Avenue, Cincinnati, Ohio 45211.
∙ Armando’s birthday is 3/5/1959 and his Social Security number is 333-45-6666.
∙ Lourdes’s birthday is 4/24/1962 and her Social Security number is 566-77-8888.
∙ Ricardo’s birthday is 11/6/1994 and his Social Security number is 576-18-7928.
∙ Selena’s birthday is 2/1/1998 and her Social Security number is 575-92-4321.
∙ Felipe’s birthday is 12/12/2005 and his Social Security number is 613-97-8465.
∙ The Gonzaleses do not have any foreign bank accounts or trusts.
2. Lourdes is a lecturer at Xavier University in Cincinnati, where she earned $30,000.
The university withheld federal income tax of $3,375, state income tax of $900,
Cincinnati city income tax of $375, $1,860 of Social Security tax, and $435 of
Medicare tax. She also worked part of the year for Delta Airlines. Delta paid her
$10,000 in salary, and withheld federal income tax of $1,125, state income tax of
$300, Cincinnati city income tax of $125, Social Security tax of $620, and Medicare tax of $145.
3. The Gonzaleses received $800 of interest from State Savings Bank on a joint account. They received interest of $1,000 on City of Cincinnati bonds they bought in
January with the proceeds of a loan from Third National Bank of Cincinnati. They
C-8 Appendix C
paid interest of $1,100 on the loan. Armando received a dividend of $540 on
General Bicycle Corporation stock he owns. Lourdes received a dividend of $390
on Acme Clothing Corporation stock she owns. Armando and Lourdes received a
dividend of $865 on jointly owned stock in Maple Company. All of the dividends
received in 2017 are qualified dividends.
4. Armando practices under the name “Armando Z. Gonzales, DDS.” His business
is located at 645 West Avenue, Cincinnati, Ohio 45211, and his employer identification number is 01-2222222. Armando’s gross receipts during the year were
$111,000. Armando uses the cash method of accounting for his business. Armando’s
business expenses are as follows:

INDIVIDUAL TAX RETURN PROBLEM 5

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Advertising $ 1,200
Professional dues 490
Professional journals 360
Contributions to employee benefit plans 2,000
Malpractice insurance 3,200
Fine for overbilling State of Ohio for work 5,000
performed on welfare patient
Insurance on office contents 720
Interest on money borrowed to refurbish office 600
Accounting services 2,100
Miscellaneous office expense 388
Office rent 12,000
Dental supplies 7,672
Utilities and telephone 3,360
Wages 30,000
Payroll taxes 2,400
In June, Armando decided to refurbish his office. This project was completed and
the assets placed in service on July 1. Armando’s expenditures included $8,000 for
new office furniture, $6,000 for new dental equipment (seven-year recovery period),
and $2,000 for a new computer. Armando elected to compute his cost recovery allowance using MACRS. He did not elect to use §179 immediate expensing, and he
chose to not claim any bonus depreciation.
5. Lourdes’s mother, Maria, died on July 2, 2012, leaving Lourdes her entire estate.
Included in the estate was Maria’s residence (325 Oak Street, Cincinnati, Ohio
45211). Maria’s basis in the residence was $30,000. The fair market value of the
residence on July 2, 2012, was $155,000. The property was distributed to Lourdes
on January 1, 2013. The Gonzaleses have held the property as rental property and
have managed it themselves. From 2013 until June 30, 2017, they rented the house
to the same tenant. The tenant was transferred to a branch office in California and
moved out at the end of June. Since they did not want to bother finding a new
tenant, Armando and Lourdes sold the house on June 30, 2017. They received
$140,000 for the house and land ($15,000 for the land and $125,000 for the house),
less a 6 percent commission charged by the broker. They had depreciated the house
using the MACRS rules and conventions applicable to residential real estate. To
compute depreciation on the house, the Gonzaleses had allocated $15,000 of the
property’s basis to the land on which the house is located. The Gonzaleses collected
rent of $1,000 a month during the six months the house was occupied during the
year. They incurred the following related expenses during this period:
Property insurance $500

INDIVIDUAL TAX RETURN PROBLEM 5

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Property taxes 800
Maintenance 465
Depreciation (to be computed) ?
Appendix C C-9
6. The Gonzaleses sold 200 shares of Capp Corporation stock on September 3,
2017, for $42 a share (minus a $50 commission). The Gonzaleses received the
stock from Armando’s father on June 25, 1981, as a wedding present. Armando’s
father originally purchased the stock for $10 per share on January 1, 1969. The
stock was valued at $14.50 per share on the date of the gift. No gift tax was paid
on the gift.
7. Armando and Lourdes have given you a file containing the following receipts for
expenditures during the year:
Prescription medicine and drugs (net of insurance reimbursement) $ 376
Doctor and hospital bills (net of insurance reimbursement) 2,468
Penalty for underpayment of last year’s state income tax 15
Real estate taxes on personal residence 4,762
Interest on home mortgage (paid to Home State Savings & Loan) 8,250
Interest on credit cards (consumer purchases) 595
Cash contribution to St. Matthew’s church 3,080
Payroll deductions for Lourdes’s contributions to the United Way 150
8. The Gonzaleses filed their 2016 federal, state, and local returns on April 12, 2017.
They paid the following additional 2016 taxes with their returns: federal income
taxes of $630, state income taxes of $250, and city income taxes of $75.
9. The Gonzaleses made timely estimated federal income tax payments of $1,500 each
quarter during 2017. They also made estimated state income tax payments of $300
each quarter and estimated city income tax payments of $160 each quarter. The
Gonzaleses made all fourth-quarter payments on December 31, 2017. They would
like to receive a refund for any overpayments.
10. Armando and Lourdes have qualifying insurance for purposes of the Affordable
Care Act (ACA)