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Comprehensive Tax Return ProjectTax Year 2012

John and Ruth Kaiser, ages 46 and 47, are husband and wife and reside at 2168 Eagle Court, Rocklin, CA 95677.

1. John is a computer consultant who specializes in installing software systems. John deals mainly with city and county governments and school districts. Currently, John has contracts with Placer and El Dorado Counties which pay him an annual retainer to be on call as needed and he works on a per job basis for other entities. As noted below (see item 3), he conducts his consulting business from an office in his home.

2. Ruth is a teacher employed by the Rocklin School District. She has been completing classes offered by CSU--Sacramento leading to a Master of Arts in Education. In driving to work and school, Ruth uses the family Audi.

3. The Kaisers constructed their residence on Eagle Court in 2010 at a cost of $520,000. They had

acquired the lot from a grandparent several years before for an additional $20,000. Of the 3,200 square feet of livable space, one-fourth (25%) is used as John's office. Besides the interest on the home mortgage and property taxes (see item 18 below), residential expenses for 2012 are as follows:

Utilities $4,200 Security system annual service fee 600 Homeowner's insurance 800 Carpeting of office area, 6/7/12 2,200

John's office furniture (e.g., desk, chairs, drafting tables) was expensed previously under 179 when acquired. On May 16, 2012, however, he bought a new Xerox copier for $850.

4. In August of 2011, John purchased a BMW that he uses exclusively for business. No trade-in was involved and part of the purchase price of $45,000 was financed. For 2011, he did not choose to claim any 179 expensing or additional first year depreciation. Under the actual operating cost method, he uses 200% declining-balance with half-year convention. His expenses relating to the BMW for 2012 are as follows:

Item Amount

Gasoline $2,400

Oil and lubrication 120

Auto insurance 1,400

Interest on car loan 1,200

Repairs (not under warranty) 520

Personal property tax on BMW 610

During 2012, John drove the BMW 18,000 miles.

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5. Except for the work he does for Placer and El Dorado Counties, John's consulting usually requires overnight stays. On a typical trip, he drives to the work location and stays at a motel until the assignment is complete. In addition to the auto expense previously noted (see item 4), his business travel expenses for 2012 are summarized below:

Item Amount

Meals $7,400

Lodging 8,200

Laundry 310

Parking 205

6. To maintain good relations with his clients for whom he does work, John gives fruit baskets

at Christmas. Each basket cost $23 plus wrapping ($2) and shipping ($4), making the total $29. On December 19, 2012, John charged the fruit baskets order of $609 (21 baskets at $29 each) to his Visa credit card. [The Visa bill was paid in January 2013.]

7. Placer and El Dorado Counties pay John an annual retainer of $8,000 and $12,000, respectively. The retainers for a year are to be paid by December 31 of that year. For budgetary reasons, however, El Dorado delayed its 2011 payment until February 2012. All other retainers were paid on schedule.

8. One private client, Jim Beaver, retained John to install a computer software program for investment tracking. When John presented Jim with an invoice for $6,000, Jim offered John a choice: cash or a Jeep Wrangler (2003, V-6) listed for sale at $7,999. The blue book value of a '03 Jeep Wrangler ranges from $3,675 to $7,925. John needed a car for his daughters, so he accepted the Jeep. 9. Expenses incurred by Ruth during 2012 in pursuing the M.S. in Education are as follows:

Tuition (spring and fall 2012) $7,100 Books, lab supplies, computer software 940 Campus parking 230

Mileage driven is 1,040 miles driven evenly throughout the year. For tax purposes, the Kaisers use the standard mileage method for the Audi which was purchased on June 15, 2010. 10. For several years, Ruth has not been pleased with her job with the Rocklin School District. Although the fringe benefits are good (see items 18 and 19 below), her salary is too low. In 2012, therefore, she retained the services of a professional recruitment agency. After considerable effort and multiple job interviews, she received several attractive job offers. When the school district learned of her job search, Ruth was promised greater responsibilities, and she decided against any change. The job search effort cost Ruth $2,275.

11. In the summer of 2011 while on a family outing, the Kaisers had an auto accident. Although it was the other driver's fault, the Kaisers had to file a claim with their own insurance company (State Farm) for the repairs on the Audi. They were charged the $1,000 deductible and were

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unable to deduct any of this amount on their income tax return due to the 10%-of-AGI floor. In 2012, State Farm was able to collect from the other driver's carrier, and the Kaisers recovered the $1,000 deductible.

12. In late 2012, the Kaisers were audited by the California Franchise Tax Board. The agent

checked their state income tax returns for tax years 2009, 2010, and 2011. She assessed deficiencies of $420 for 2010 and $310 for 2011. For year 2009, she accepted the return and made no change. The Kaisers agreed to the assessments and immediately mailed a check for $781 to the state in payment of the assessments and interest.

13. For several years Ruth's parents, Rudi and Paula Dietrich, have been living with the Kaisers. Since they meet the dependency requirements, the Kaisers have claimed the parents on their tax returns. On December 30, 2011, Paula suffered a stroke, was taken to Memorial Hospital, and died in the ICU on January 2, 2012. In February 2012, John received and paid a bill from Memorial for $9,400 ($5,100 of which related to 2011). The Kaisers also paid for Paula's funeral expenses of $4,900. Paula owned her own cemetery lot.

14. Because Rudi (Ruth's father) is physically handicapped and must use a wheelchair, John had some changes made to portions of the Eagle Court residence. A contractor was hired to add ramps to entrances, lower certain counters, widen several hallways, and add guardrails to the bathroom facilities. The contractor charged $6,000 for the job. A reasonable estimate is that the capital improvements increased the value of the residence by $10,000.

15. Several years ago, Ruth took out life insurance policies on the lives of her parents. The policies, face amount of $50,000 each, are issued by Met Life and designate Ruth as the owner and beneficiary. After the death of her mother in 2012, Met Life paid Ruth $50,000. Ruth had previously paid premiums of $18,200 on the policy. In 2012, Ruth paid Met Life $1,400 in premiums on her father's policy.

16. The Kaisers have a $4,000 excess long-term capital loss carryover from 2011. Their property transactions for 2012 are summarized below:

Date Date Cost or Sale

Property Acquired Sold Other Basis

Price

Lot in Yuba City 2/3/05 6/2/12 Inherited $13,100

1,000 shares of JNJ Corporation

common 8/10/04 5/20/12 Gift 14,000 600 shares of PG Corporation

common 12/2/09 11/30/12 $11,000 12,000 Motorcycle 4/25/08 9/2/12 $8,500 2,200

John inherited the Yuba City lot from his grandmother, Ellie, who died in 2005. Ellie had paid $2,000 for the property in 1947, and it was worth $9,000 when she died. In the prior year (2004), Ellie had given John 1,000 shares of JNJ stock. The shares had cost Ellie $30,000 in 2002 and were worth $24,000 on the date of the gift. The JNJ Corporation declared a 2-for-l stock split in early 2006. For sentimental reasons, John wanted to keep half of the JNJ stock. The motorcycle was Johns and he decided to accept a neighbor's unsolicited offer to buy. John's broker, a cousin on his mother's side of the family, did not charge him a commission on the sale

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of the JNJ and PG stocks. 17. Besides the items already noted, the Kaisers had the following receipts during 2012:

Item Amount

John's consulting fees but not including items 7 and 8 above $72,000

Ruth's salary 42,000

Interest income

City of Lincoln bonds $2,400

General Electric bonds 800

Bank of America CD 1,100 4,300

Qualified Dividends

JNJ Corporation common $ 400

PG Corporation common 600 1,000

Income tax refunds (for tax year 2011)

Federal $1,500

California 290 1,790

18. In addition to the items already mentioned, the Kaisers had the following expenditures for 2012:

For medical purposes, the Kaisers are covered by Ruth's policy available through the Rocklin School District. No contribution from the employee is required, no co-payer deductible features are involved, and spouse and children are included. Other dependents (e.g., parents) and dental bills are excluded from coverage.

19. Professional dues, journals, and license fees (teaching and business) are as follows:

Item Amount

Dental (orthodontist) $1,400

Property taxes on personal residence 4,000

Personal property tax on Audi 580

Interest on home mortgage 4,800

Work-related expenses (see item 19) 8,750

Tax return preparation fee (one-half of the preparer's time was devoted to John's business activities)

900

Payment of church pledge (includes $600 left over from 2011 pledge)

3,000

College donations (see item 20) 2,000

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John contributed $8,000 to an H.R. 10 (Keogh) plan that he established several years ago. The administrator of the plan is DKP Trust Company. Ruth is covered by a non-contributory retirement plan that the Rocklin School District maintains for its employees. 20. Ruth and John attended California State University--Sacramento and belong to the alumni association. They sent each athletic department $1,000 (for a total of $2,000) to give them preferred seating at home football games. The charge for seating preference does not include the cost of the tickets for games.

21. The Kaisers have three daughters who live with them. Karla (age 20) and Krystal (age 18) are

high school graduates and have part-time jobs earning $9,000 and $8,000, respectively. As they are saving most of their earnings for college, both receive almost all of their support from their parents. Keri (age 17) is a full-time student and does not work.

22. Ruth's Form W-2 from her employer shows withholding of $4,368 for Federal income tax

and $1,536 for state income tax. The Kaisers made quarterly estimated payments of $12,800 ($3,200 each quarter) to the U.S. Treasury and $1,600 ($400 each quarter) to the state of California.

23. Social Security numbers for the parties involved are as follows:

Name Soc. Sec. Number Birth date

Ruth Kaiser 426-81-7492 02/02/1965

John Kaiser 426-53-5261 01/01/1964

Rudi Dietrich 425-89-6494 05/05/1945

Paula Dietrich 425-74-5213 06/06/1946

Karla Kaiser 427-52-3162 03/03/1992

Krystal Kaiser 427-43-2485 04/04/1994

Keri Kaiser 427-37-4533 07/07/1995

24. The Kaisers estimate that their total on-line purchases amounted to $2,500 during 2012 (no item cost $1,000 or more). Of that amount, they did not pay California (or any other state) sales tax on $2,000 of their purchases.

Item Ruth John

Dues $150 $300

Journals 75 100

Licenses 125 -0-

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Prepare Federal and California joint returns (with appropriate schedules) for the Kaisers for 2012. In doing this, make the following assumptions: The principal business code for John is 541510. The Kaisers itemized their deductions from AGI for tax year 2011. In making the choice between deducting state and local sales taxes and state income taxes, they selected state income taxes.

The Kaisers drove 700 miles for medical (e.g., doctor and dentist visits, hospital trips) purposes and 280 miles for charitable (e.g., canvassing for annual church pledges) purposes in 2012. The family Audi was used in both cases.

All mileage driven by John and Ruth was done evenly throughout 2012.

If a refund is due, they want it sent to them. They do not want to contribute to the Presidential Election Campaign Fund.

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