Ryan L. and Chloe R. Alford (ages 44 and 42, respectively) are husband and wife who live at 165 Peach Avenue, Denver, CO 80202. Ryan is a regional sales manager for Stilt Industries, a national wholesaler of plumbing and heating supplies, while Chloe is a part time dental hygienist for a chain of dental clinics.
• Ryan is classified by Stilt as a statutory employee with compensation for 2011 (based on commissions) of $91,000. He is expected to maintain his own office and pay for all business expenses from this amount. Stilt does not require him to render an accounting. It does not withhold for Federal and state income taxes but does withhold and account for the payroll taxes incurred (e.g., Social Security and Medicare). Ryan is covered by Stilt’s noncontributory medical plan but has chosen not to participate in its § 401(k) retirement plan.
Ryan’s employment related expenses for 2011 are summarized below.
|
Airfare |
$7,800 |
|
Lodging |
5,000 |
|
Meals (during travel status) |
4,600 |
|
Entertainment |
3,400 |
|
Ground transportation (e.g., limos, rental cars, and taxis) |
900 |
|
Business gifts |
600 |
|
Office supplies (includes postage, overnight delivery, and |
1,300 |
|
copying) |
The entertainment involved business meals for purchasing agents, store owners, and building contractors. The business gifts consisted of $50 gift certificates to a national steak house. These were sent by Ryan during the Christmas holidays to 12 of his major customers. In addition, Ryan drove his 2008 Ford Expedition 13,000 miles for business (7,000 before July 1) and 3,000 for personal during 2011. He purchased the Expedition on March 15, 2008, and has always used the automatic (standard) mileage method for tax purposes. Parking and tolls relating to business use total $280 for 2011.
• When the Alfords purchased their present residence in March 2008, they devoted 300 of the 3,000 square feet of living space to an office for Ryan. The property cost $340,000 ($40,000 of which is attributable to the land) and has since appreciated in value. Expenses during 2011 relating to the residence (see below for mortgage interest and property taxes) are as follows:
|
Insurance |
$2,500 |
|
Repairs and maintenance |
900 |
|
Utilities |
4,600 |
|
Carpeting (office area only) |
1,700 |
In terms of depreciation, the Alfords use the MACRS percentage tables applicable to 39 year nonresidential real property.
• Chloe works part time as a substitute for whichever hygienist is ill or on vacation or when one of the clinics is particularly busy (e.g., prior to the beginning of the school year). Besides her transportation, she has to provide and maintain her own uniforms. Her expenses for 2011 appear below.
|
Uniforms (including laundry charges of $320) |
$710 |
|
State and city occupational licenses |
390 |
|
Professional journal and membership dues in the American |
320 |
|
Dental Hygiene Association |
|
|
Correspondence study course (taken online) dealing with |
|
|
teeth whitening procedures |
400 |
In addition, Chloe drove the family Chevrolet Suburban 1,800 miles going from her home to and from work assignments.
Her Form W–2 for the year shows earnings of $40,000 and income tax withholdings of $4,000 (Federal) and $1,000 (state) and the proper amount of payroll taxes (Social Security and Medicare). Because Chloe is a part time employee, she is not included in her employer’s medical or retirement plans.
• Besides the items already mentioned, the Alfords had the following receipts during 2011:
|
Interest income— |
|
|
|
State of Iowa general purpose bonds |
$1,500 |
|
|
Ford Motor Company bonds |
700 |
|
|
Wells Fargo Bank CD |
1,100 |
$ 3,300 |
|
Federal income tax refund for tax year 2010 |
|
260 |
|
Life insurance proceeds paid by Eagle |
|
|
|
Assurance Corporation |
|
200,000 |
|
Inheritance of savings account from Amy |
|
|
|
Alford |
50,000 |
|
|
Sales proceeds from two ATVs |
|
8,000 |
For several years, the Alfords’ household has included Ryan’s divorced mother, Amy, who has been claimed as their dependent. In late November 2011, Amy unexpectedly died in her sleep of a coronary arrest. Unknown to them, Amy had a life insurance policy and a savings account (with Ryan as the designated beneficiary of each). In 2010, the Alfords purchased two ATVs for $12,000. After several near mishaps, they decided the sport was too dangerous. In 2011, they sold the ATVs to their neighbor.
• Additional expenditures for 2011 include:
|
Funeral expenses for Amy |
|
$ 5,500 |
|
Taxes— |
||
|
Real property taxes on personal |
|
|
|
residence |
$5,400 |
|
|
Colorado state income tax due (paid in |
|
|
|
April 2011 for tax year 2010) |
280 |
5,680 |
|
Mortgage interest on personal residence |
|
6,400 |
|
Paid church pledge |
|
2,400 |
|
Contributions to traditional IRAs for Chloe |
|
|
|
and Ryan ($5,000 + $5,000) |
|
10,000 |
In 2011, the Alfords made quarterly estimated tax payments of $1,400 (Federal) and $500 (state) for a total of $5,600 (Federal) and $2,000 (state). Compute the Alfords’ Federal income tax payable or refund due, assuming that they file a joint income tax return for 2011. If they have overpaid, they want the amount refunded. They do not want to contribute to the Presidential Election Campaign Fund. Social Security numbers are as follows: 123–45–6787 (Amy), 123–45–6788 (Chloe), and 123–45–6789 (Ryan). Ryan’s business code number is 423700. Suggested software: H&R BLOCK At Home.