Taxation

Lynn O’Keefe, age 53, is president of O’Keefe’s Furniture Store. He reports the following W-2 information:

Home address: 46 Germantown Rd., Chattanooga, TN 37411

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Telephone number: 615-555-5555

Social security number 000-00-0001

Employer: O’Keefe’s Furniture store, 1201 Hamilton Ave., Chattanooga, TN 37401, employer number 64-1453236.

Wages: $99,500

Federal income tax withholdings: $27,500

Social security taxes: $ 6,169

Medicare taxes: $ 1,443

Lynn O’Keefe has a health insurance policy through O’Keefe’s Furniture Store that covers his entire family.

Heather O’Keefe, age 50, social security number 000-00-0002, works at home as a housewife.

The O’Keefe’s were covered under a health insurance plan during the entire 2020 calendar year.

Both Lynn and Heather want $3 of their taxes to go to the Presidential Election Campaign Fund. The O’Keefe children are grown. However, Heather’s mother, Molly Shoulders, lives with them. Molly received social security of $5,400, and interest income of $5,000 during the year. She has no other income.

In addition to the income above, Lynn and Heather incurred the following tax transactions during the year:

1. Interest income from the Hamilton National Bank, $750.

2. Lynn received a pre-mature distribution from an IRA account of $9,550, which he used to purchase a new car.

3. The O’Keefe’s have no interest in any foreign accounts or trusts.

4. Lynn purchased 10,000 shares of Bassett Inc. stock on April 22, 1981 for $120,000. He sold the stock on August 12, 2020 for $105,000. The basis of this stock was not reported to the IRS.

5. To promote the family business, Lynn and Heather give a large party at Christmas time for all their best customers. The party cost $2,300.

6. During the year, Lynn drove his personal automobile 30,000 miles including 3,000 miles to and from work, and 2,000 round and about town. The other 25,000 miles were related to business trips (to buy furniture). The company reimbursed him at a rate of 20 cents per mile ($5,000) for those business trips.

In addition, Lynn spent $2,900 for meals and $4,500 for lodging while on the business trips. The cost of meals was not reimbursed by his company because he forgot to file for reimbursement. If he had filed a reimbursement request, the company would have paid for the meals. The lodging was fully reimbursed by the company.

7. Heather has a good reputation as a home decorator. She writes articles and gives seminars around Chattanooga. The amount of business has been small, so she has not applied for a business license. However, she did receive the following for some of her work.

a. Article in Southern Living, $350.

b. Seminar on Medical Office decor for Erlanger Hospital, $75.

c. “Gift” for decorating Dr. Barber’s office, $100.

d. “Gift” for doing flower arrangements at a friend’s wedding, $40.

e. McCallie Schools, for seminar on keeping rooms clean, $165.

To allow her to prepare outlines and hand out materials for these seminars and to write her articles, Heather spent $2,500 to purchase a personal computer and $1,000 to purchase a laser printer. The computer and printer were used 80% of the time to further her career as a home decorator. The balance, 20%, was used for personal letters and using Quicken to keep her check book accurate. Heather does not use a portion of her residence exclusively for business.

Potential itemized deductions included the following:

a. Medical expenses included health insurance of $2,500; medical expenses paid for Molly in excess of Medicare, $12,500; Heather’s eyeglasses $700.

b. Real estate taxes, $2,500.

c. Sales taxes on purchases, $1,580.

d. Home mortgage interest paid to bank, $6,400.

e. Interest on bank credit cards, $1,050.

f. Cash contributions to their church, $5,600.

g. Fee for preparation of personal income tax return, $600.

REQUIRED: Complete the O’Keefe’s federal income tax return for 2020.

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