1 ACCT/BADM 3260 Tax Return Project #2 The following is a tax return problem for 2017. The assignment is to manually prepare the clients federal income tax return (Form 1040 and appropriate schedules) for this year. You are not required to complete a state tax return. Necessary tax forms may be obtained from the IRS website (www.irs.gov). All facts necessary to complete this return are contained in the following information supplied by your clients. Care should be taken to compute the tax correctly and not let your clients misconceptions of the tax law cloud your professional judgment. The return is due on December 4, 2017 at the beginning of class. No late assignments will be accepted. The problem must be completed as a team. Do not work with other teams. Team assignments are posted on HuskyCT. One grade is assigned to each teams solution, and this grade represents of the grade earned by each member of the team. The other half of each team members grade will be determined based on peer evaluation (subject to my discretion). See the separate peer evaluation form and instructions. A team member may earn a grade of 0 if the rest of the team notifies me that the member did not participate in the project (for example, by leaving the team members name off of the project, or through the peer evaluation process). No solo projects will be accepted! Please note, I will only answer questions related to this project posted on the HuskyCT discussion thread entitled Tax Return 2 Questions. I will respond to the posts through HuskyCT (unless the question is already answered). This allows everyone to receive identical responses from me. I will only answer questions posted prior to 5pm on December 3, 2017. Before handing in the project, please: 1. Include all necessary calculations on separate sheets, 2. Identify the team members that worked on the project on the front page of your project (you may include a cover page, but it is not required), 3. Be sure to complete all necessary parts of all necessary forms (dont include unnecessary forms), 4. Be sure to put the tax forms in order based on the attachment sequence number - failure to do so will result in a 25 point deduction (any time Dom and Tina require separate forms, put Doms forms first), and 5. Round numbers on each line on the tax return (e.g., 7, 8a, etc.) to the nearest whole dollar. When computing totals on the form (e.g., line 22, 37, etc.) sum up the rounded number on each line on the form. Staple the return together at the top left corner and do not use folders, paperclips, and/or envelopes. Forms not stapled together are more likely to be lost which would result in lost credit. Finally, I will only accept forms completed by hand (i.e., pen/pencil); I will not accept typewritten forms. I suggest completing the project in pencil and then copying the forms to produce forms completed in permanent ink (this trick comes in handy when youre preparing your own returns for filing with the IRS!). 2 Use the following information to complete Dom and Tina Petties 2017 federal income tax return (if you use the 2016 Form 1040 and Form 1040 schedules, be sure to apply the 2017 tax rules. For example, the standard deduction and personal exemption amounts on the 2016 forms have not been updated; you must use the correct 2017 amounts). Ignore the requirement to attach the Form(s) W-2 to the front page of the Form 1040. If required information is missing, use reasonable assumptions to fill in the gaps. Note: when computing the tax liability, use the method we used in class, not any tax tables provided by the IRS. Facts: Dom (age 55) and Tina Pettie (age 50) are married and live in Rancho Cucamonga, California. The Petties have five children: Jane (age 26), Mary (age 23), Anna (age 18), Kim (age 16), and Violet (age 12). Anna, Kim, and Violet live at home and their parents provide for all of their needs. Jane and Mary do not live at home and dont receive any support from their parents Dom told them not to come around home no more. The Petties provided the following information: Doms social security number is 987-65-4321 Tinas social security number is 999-88-7777 Janes social security number is 123-45-6789 Marys social security number is 111-22-3333 Annas social security number is 222-33-4444 Kims social security number is 333-44-5555 Violets social security number is 444-55-6666 The Petties current mailing address is 521 Frying Pan Road, Rancho Cucamonga, CA 91701 Dom was previously married to Joan Benny. Joans social security number is 888-99- 0000. Dom is a talent agent. For the first two months of the year, he was employed by SoCal Casting (SCC). However, he resigned from his position with SCC to run down his dream of starting his own agency, called SuperStarDom (SSD). SSD conducts business as a sole proprietorship. SSD started business on January 1, 2017 and is located at 7 Sunset Boulevard, Santa Monica, California 90401 (EIN 20-7777777). Tina works for herself as a part-time travel agent. Dom received a W-2 from SCC with the following information: 1. Wages: $35,600 2. Federal Income Tax Withheld: $4,200 3. Social Security Wages: $40,000 4. Social Security Tax Withheld: $2,480 5. Medicare Wages: $40,000 6. Medicare Tax Withheld: $580 17. State Tax Withheld: $7,157 The W-2 also notes that Dom contributed $4,400 to his traditional 401k. 3 Dom reported the following information for SSDs business activities (SSD uses the cash method of accounting): Revenues: Credit card receipts 475,000 Cash receipts 92,000 Total revenue 567,000 Expenses: Advertising 50,450 Insurance-professional 15,750 Office rent 77,000 Equipment leases (e.g., copiers) 6,050 Meals and entertainment 97,524 Wages 52,000 Taxes and licenses 54,875 Employee health insurance 25,718 Employee benefit programs 17,856 Utilities 39,425 Print and copy supplies 42,800 Legal and professional fees 15,550 Maintenance 10,002 Total Expenses 505,000 SSD purchased and placed in service the following fixed assets during the year: Item Date Purchased Amount Computers March 1 $9,500 Printers June 1 $12,375 Qualified Leasehold Improvement October 1 $21,000 SSD does not elect out of bonus depreciation and wants to take Section 179 expensing in a way that maximizes the current year depreciation (including 179 expense). Dom worked part-time on SSDs business activities until he finished his employment with SCC early in the year. Dom worked full-time on SSDs business activities for the rest of the year. SSD filed Forms 1099 for payments made to contractors when required to do so. Dom and Tina paid $27,000 for health insurance for the family (for the time he was working at SSD). This amount is not included in the totals for SSD above. Neither Dom nor Tina had access to employer-provided health insurance during the year while they were paying the premiums for this policy. The health insurance policy met the requirements for ACA minimum coverage. 4 In need of cash to support SSD, in February, Dom withdrew $27,000 from his 401(k) account. He received a Form 1099-R with the following information: 1. Gross Distribution: $27,000 2a. Taxable Amount: $27,000 4. Federal Income Tax Withheld: $2,000 In addition, Dom established a SEP-IRA retirement plan using his business earnings from SSD. He would like to make the maximum contribution possible to this plan for the 2017 tax year. Assume that you will file this tax return by April 15, 2018 and Dom will be able to fund the SEP-IRA with the full amount allowable by the date he files the return. Dom paid his ex-wife Joan $46,000 of alimony this year. Dom did not pay any child support. Tina received a Form 1099-Misc from her largest client reporting that she received $15,000 from this client during 2017 as payment for her travel services. Tina received an additional $11,000 from clients who were not required to issue Tina a Form 1099. During the tax year, Tina paid the following business-related expenses: Printer Paper $400 Printer Toner $1,675 Miscellaneous supplies $754 Professional subscriptions $832 Meals $580 On March 17, 2017 Tina purchased a new laptop computer for her business at a cost of $1,740. Tina also purchased a new laser printer/photocopier combination at a cost of $955 on the same date. In April, Tina purchased computer software to use in her business for $350. These assets are used entirely in Tinas business (there is no personal use). Assume this property is not listed property. Tina does not elect out of bonus depreciation. Tina does not want to use any Section 179 expensing, even if it would be beneficial to allocate it to her assets instead of, or in addition to, Doms assets. Tina capitalizes these assets for financial accounting purposes. Tina owns a 1959 Chevy Impala. She started to use the Impala for her business on January 1, 2013. She drove 1,482 business miles during 2017 (she has documentation to verify). She drove the vehicle for a total of 5,000 miles during the year. She also has access to another vehicle (Doms) that she can use for personal purposes. She paid $1,500 of property taxes on the Impala. Tina started her travel agent service in 2011 and she uses the cash method of accounting. She is the only person performing services in the business. She did not make any payments that require her to file a Form 1099. Dom had some bad luck with his car this year (original cost of $5,500). He had a breakdown in Bakersfield and needed a new engine. Turns out he hadnt changed his oil since 1985. He got lucky, though, because his friend Buck is a mechanic in Bakersfield and gave him a deal on a new engine only $3,500. 5 The Pettie family purchased (and moved into) their current residence at 521 Frying Pan Road in Rancho Cucamonga in late January of 2017. The residence is 2,400 square feet. The purchase price of the residence was $2,000,000 (building value was $500,000 and the lot value was $1,500,000). The mortgage on the purchase was $1,400,000. After moving in, Tina used one room (600 square feet) exclusively for her travel agent business. Expenses relating to the Rancho Cucamonga residence were as follows: Mortgage Interest ($1,400,000 acquisition loan, reported on a Form 1098) $42,000 Points paid on purchase of principal residence (Reported on a Form 1098) $4,000 Property taxes $17,450 Utilities $8,700 Homeowners Insurance $20,000 In addition to the primary mortgage on the home, the Petties borrowed $550,000 on a home equity line of credit (HELOC) against their home. They initiated this HELOC immediately upon purchasing the home. They received a Form 1098 with the following information relating to the line of credit: Mortgage interest: $28,200 They used the funds from the home equity line of credit to go towards buying John Lennons long-lost guitar (which, like many taxpayers/preparers, had already gently wept for the taxman). Tina owns 20 acres of vacant ground within the city limits of Los Angeles. Tina acquired the land as a gift from her parents on July 1, 2007. The land was valued at $45,000 per acre on the date of the gift. Her parents purchased the land in 1991 at a price of $6,000 per acre. Tina has held this land as an investment since she received it. For 2017, she paid $5,250 of property tax on the land. On September 15, 2017 Tina exchanged this land with a development company that plans to develop the 20 acres (Tina and the development company are not related). In exchange for the 20 acres, Tina received a condominium in Hollywood that was valued at $1,300,000. For purposes of depreciation, the building is valued at $400,000 and the land is valued at $900,000. The condominium is located at 90210 Melrose Place, Unit A, Los Angeles, California 90069. Immediately following the exchange, Tina made the condo available for rent. Tina first rented out the Melrose Place unit on November 1, 2017. The revenue and expenses from the rental unit from November through December is as follows: Rental revenue $70,200 HOA fee expense $8,000 Property taxes paid $15,750 Utilities expense $550 No Form(s) 1099 were required to be filed for this rental. 6 The Petties also received Forms 1099 for the year containing the following information: 1099-INT Death Valley City Bonds 8. Tax-Exempt Interest: $36,200 9. Private Activity Bond Interest: $19,700 1099-INT First Bank of the Rich and Famous 1. Interest Income $6,500 1099-INT Reseda School District 8. Tax-Exempt Interest: $4,000 1099-INT Department of the Treasury 3. Interest on U.S. Savings bonds $11,500 1099-INT Rio Tinto Diamonds 1. Interest Income $4,600 1099-DIV WreckEm, Inc. 1a. Ordinary Dividends $3,000 1b. Qualified Dividends $3,000 1099-DIV Rebel Corporation 1a. Ordinary Dividends $2,500 1b. Qualified Dividends $2,500 1099-DIV Wildflowers Corporation 1a. Ordinary Dividends $3,500 1b. Qualified Dividends $3,500 The Petties did not own, control, or manage any foreign bank accounts nor were they a grantor or beneficiary of a foreign trust during the tax year. The Petties also sold stock during the year. They purchased 2,000 shares of GE stock on the 8th of November 2006 for $71,000 and sold all of the stock on August 14th 2017 for $50,000. They decided that they couldnt keep waiting for the stock price to go back up, since thats the hardest part. They received the proper 1099-B forms from their broker, who indicated that the basis in the stock was not reported to the IRS (because it was purchased prior to the implementation of basis reporting). Dom is really interested in learning to fly into the great wide open. He took several flying lessons during the year, costing him $13,000. However, during his July lesson, his airplanes engine malfunctioned, leading to some unexpected freefallin and a broken arm. It was determined that the maintenance procedures at the flight school were inadequate. Dom sued and won $12,000 to cover his medical expenses, $60,000 to cover emotional distress associated with not being able to play John Lennons guitar while his arm was broken, and $18,000 in punitive damages. 7 The Petties paid the following expenses during the year (in addition to the items listed above): Dentist (unreimbursed by insurance) $900 Doctors (unreimbursed by insurance) $2,750 ER visits (unreimbursed by insurance Dom keeps getting beat up, but he wont back down from any fights) $4,025 Prescriptions (unreimbursed by insurance) $425 Vehicle property tax based upon value (NOT on the vehicle used in Tinas business) $3,300 Cash contributions to qualified charities supporting refugees $4,000 Tuition for Tina Wine making class $7,000 Tuition for Anna Community college first year (majoring in History of Rock, half time student) $5,500 Tina wants to make the maximum contribution to an IRA. Determine how much she can contribute and how much she can deduct. She will contribute any non-deductible amount to a non-deductible IRA. (Recall these contributions can be made up to the date of the filing of the return, but no later than April 15. As noted earlier, assume that you will file the return by April 15.) Tina has never contributed to an IRA before. Dom plays in a band, the Wandering Milburys, for fun. This year, they got their first paying gig and Dom got paid $1,100. He drove 450 miles related to his band activities this year. While traveling with the band, lodging cost him $300 and meals cost him $117. His band guitar (not John Lennons) cost $2,000 and he bought it in 2015. Dom and Tina paid $15,000 (total) for daycare for Violet. The daycare was provided by American Girls Daycare at 231 Ventura Blvd., Sherman Oaks, CA 91403 (EIN: 444-44-4444). They paid $4,500 for Kims summer day camp at Camp Nowhere (417 Mullholland Dr., Los Angeles, CA 90077, EIN: 555-55-5555). Other Information The Petties made federal estimated tax payments related to the 2017 tax year as follows during the current year: April 15, 2017 $10,000 June 15 $10,000 September 15 $10,000 January 15, 2018 $10,000 The Petties both want to contribute to the Presidential Election Campaign. The Petties would like to receive a refund (if any) of tax they may have overpaid for the year. Their preferred method of receiving the refund is by check. If they have an underpayment, you do not need to compute any penalty.