12. Two years ago, Gary won a contest and received a cash prize. The money is in a savings account in Gary’s name. His interest on the savings account in the current year is $3,400. Instead of having Gary fill out a tax return and pay the ‘‘kiddie tax,’’

Gregory and Lulu elect to report the interest income on their joint tax return.

Required: Gregory and Lulu have come to you to prepare their 2010 federal income tax return. Do not complete a California state income tax return. Assume any other information (addresses, etc.) that you need. Do not file a federal Form 4562, Form 4952, or Form 8829 for the Clifdens. The following is a list of the forms and schedules that you will need to complete the tax return:

Form 1040 Schedule D Schedule A Schedule M Schedule B Schedule SE Schedule C Form 8814 Note: The forms included in Appendix D are provided for the student to work only one of the two comprehensive problems. If desired, additional forms may be obtained from the IRS Web site at www.irs.gov.

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Qualified Dividends and Capital Gain Tax Worksheet-Line 44 Before you begin: Keep for Your Records See the instructions for line 44 on page 35 to see if you can use this worksheet to figure your tax. If you do not have to file Schedule D and you received capital gain distributions, be sure you checked the box on line 13 of Form 1040. 1. Enter the amount from Form 1040, line 43. However, if you are filing Form 2555 or 2555-EZ (relating to foreign earned income), enter the amount from line 3 of the worksheet on page 36...... 2. Enter the amount from Form 1040, line 96* 3. Are you filing Schedule D?* Yes. Enter the smaller of line 15 or 16 of Schedule D. If either line 15 or line 16 is a loss, enter -()- No. Enter the amount from Form 1040, line 13 4. Add lines 2 and 3 5. If filing Form 4952 (used to figure investment interest expense deduction), enter any amount from line 4g of that form. Otherwise, enter -0- 6. Subtract line 5 from line 4. If zero or less, enter -0- 7. Subtract line 6 from line 1. If zero or less, enter -0-. 8. Enter: $34,000 if single or married filing separately, 3/2010 5. 6. 7. $68,000 if married filing jointly or qualifying widow(er), $45,550 if head of household. 8. 9. Enter the smaller of line 1 or line 8 10. Enter the smaller of line 7 or line 9 9. 10. 11. Subtract line 10 from line 9. This amount is taxed at 0% 11. 12. Enter the smaller of line 1 or line 6 12. 13. Enter the amount from line 11 13. 14. Subtract line 13 from line 12 15. Multiply line 14 by 15% (.15) 14. 15. 16. Figure the tax on the amount on line 7. If the amount on line 7 is less than $100,000, use the Tax Table to figure this tax. If the amount on line 7 is $100,000 or more, use the Tax Computation Worksheet 16. 17. Add lines 15 and 16 17. 18. Figure the tax on the amount on line 1. If the amount on line 1 is less than $100,000. use the Tax Table to figure this tax. If the amount on line 1 is $100,000 or more, use the Tax Computation Worksheet 19. Tax on all taxable income. Enter the smaller of line 17 or line 18. Also include this amount on Form 1040, line 44. If you are filing Form 2555 or 2555-EZ. do not enter this amount on Form 1040, line 44. Instead, enter it on line 4 of the worksheet on page 36 18. 19. *If you are filing Form 2555 or 2555-EZ, see the footnote in the worksheet on page 36 before completing this line.