John and Ellen Watt, ages 33 and 31, are married and live at 2 Briar Street, Sparks, NV 89444. John's SSN is 111-11-1111 and Ellen's is 222-22-2222. The Watts have one son, Wyatt, age 10. Wyatt's SSN is 333-333-333. John is a self-employed electrical contractor and Ellen is a graduate student studying for her masters of accountancy.
John reports all income and expenses under the cash method. He has the following items from his business related to 2016:
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Gross receipts from the business
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$197,000
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Shop rent
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$12,000
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Liability insurance
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$1,000
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Wages paid to employee
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$30,000
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Payroll taxes paid
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$3,000
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Inventory of materials; beginning of the year
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$15,000
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Inventory of materials; end of the year
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$20,000
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Purchases of materials during the year
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$50,000
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Supplies
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$1,000
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Travel
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$2,000
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Meals and entertainment
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$1,400
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Depreciation on equipment acquired prior to 2016
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$12,000
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Specialized equipment acquired in 2016
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$5,000
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Proceeds from business equipment sold in 2016 (original cost $20,000 and MACRS depreciation taken $14,000)
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$15,000
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John has an office in his home. The office is in a room measuring 175 square feet and there is 3,500 square feet in the entire house. The costs related to the house for the year are as follows:
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Utilities (power and phone)
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$ 6,000
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Real estate taxes on their home
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$3,000
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Home mortgage interest
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$7,000
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Purchase price of home (assume 20 % should go to the land)
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$125,000
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John and Ellen sold the following stock investments during 2016:
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Asset
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Date acquired
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Date sold
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Sales Price
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Cost
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A Company stock
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4/18/16
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12/01/16
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$5,000
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$7,000
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X Company stock
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inherited
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12/20/2016
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$60,000
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$0
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P Company stock
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Received as a gift
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11/24/2016
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$25,000
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$0
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Painting (collectible) 28%
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06/14/2009
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06/27/2016
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$30,000
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$22,000
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The X Company stock was inherited from the estate of Ellen's uncle. This stock was originally acquired by Ellen's uncle at a price of $15,000 in 2001 and had a fair market value of $55,000 as of the uncle's date of death. The P Company stock was received in 2016 as a gift from John's parents. This stock was originally acquired by John's parents at a price of $10,000 in 2006 and had a fair market value of $27,000 as of the date of the gift.
In addition, they had the following other income and expenses:
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Miscellaneous cash contributions
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$ 1,500
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Real estate taxes on their home (total same as above on the home office)
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$3,000
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Property taxes on their cars (ad valorem)
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$500
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Home mortgage interest (total same as above on the home office)
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$7,000
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Donated auto to an athletic auction for the local college. They purchased the auto on 3/17/2012 for $12,000 and donated it on 7/4/2016 when the market value was $6,000 according to a local dealer.
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?
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Tax return preparation fees (75% related to John's business and 25% to schedule A)
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$1,600
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Interest earned on a bank savings account
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$1,100
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Day care costs for Wyatt (Ellen was a student for all 12 months of 2016)
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$2,500
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State tax refund received in 2016 for taxes paid in 2015. The Watts used the standard deduction on their 2015 return.
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$800
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Dividends earned and received on A Company stock (qualified)
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$500
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Dividends earned and received on M Company stock (qualified)
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$1,000
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Ellen's tuition and fees for 2016
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$6,000
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Prepare John and Ellen's 1040 tax return for 2016. You will need form 1040 and schedules A, B, C, D, SE, form 4562, 4797, 8849, 8829, 8283 and possibly form 8863. You will also need a Schedule D tax worksheet that can be found in the instructions for schedule D.