ACCOUNTING 308 TAX RETURN PROJECT #2

Janice Morgan, age 24, is single and has no dependents. Janice works as an employee from Worldwide Publishing and also as a freelance writer. In January 2019, Janice opened her own office located at 2751 Waldham Road, Pleasant Hill, NM 88135. She called her freelance writing business Writers Anonymous. Both Writers Anonymous and Janice operate on the cash basis. She lives at 132 Stone Avenue, Pleasant Hill, NM 88135. Her Social Security number is 123-45- 6789. During 2019, Janice reported the following income and expense items connected with her business Writers Anonymous (a sole proprietorship):

Income from sale of articles 75,000

Rent 23,500

Utilities 7,900

Supplies 1,800

Insurance 5,000

Travel (assume fully deductible) 2,300

Meals (client meetings) 600

Meals (Used by Janice while on business travel) 600

Country Club (Used to entertain clients) 4,000

Client entertainment expenses 1,000

Janice has the following personal items:

Wages from Worldwide Publishing $110,000

Interest from checking account from First Bank 4,000

Home mortgage interest paid to First Bank 10,000 (Secured by principal residence, acquisition debt)

Home Equity Line of Credit 3,000 (Secured by principal residence, used to pay off credit cards)

Property taxes on personal residence 4,000

Charitable contributions 10,700

Federal income tax withholding 26,000 State income tax withheld 8,500

During the year, Janice invested $10,000 (tax basis and at-risk basis) into XYZ limited partnership (a passive investment). Her share of the limited partnership income for the year was $5,000, and Janice received a $5,000 distribution from XYZ limited partnership.

During the year, Janice also invested $6,000 (tax basis and at-risk basis) into ABC limited partnership (a passive investment). Her share of the limited partnership loss for the year was $7,000, and Janice received a $2,000 distribution from ABC limited partnership.

Additional Questions:

Janice is considering making a contribution to an IRA.

(1) Assume she is eligible to contribute to her employers 401k. What is her maximum deduction for a Traditional IRA? What is her maximum contribution for a traditional IRA?

(2) Assume she is eligible to contribute to her employers 401k. What is her maximum deduction for a Roth IRA? What is her maximum contribution for a traditional IRA?

Prepare the 2019 Federal income tax return for Janice Morgan. (1) Cover page with student names (2) 1040, (3) Schedule 1, (4) Schedule 2, (5) Schedule A, (6) Schedule C page 1, (7) calculation/explanation of the taxable portion from the limited partnerships (must include loss carryforwards and ending basis as well as their classification (passive vs. at-risk)), (8) calculation of self-employment tax, (9) calculation of tax, and (10) the answers to the additional questions (provide an explanation). Normally, this tax return would require additional forms (Schedule B, Schedule E, Schedule SE, Etc.). However, I do not require them. Instead, the required calculations/explanations will be sufficient. Schedule 1 Hints: 1) The Net income from the Schedule C (Writers Anonymous) will go on Schedule 1, line 3 2) Schedule 1 line 5 will include the net income/loss from the limited partnerships. These are NOT subject to Self-Employment tax. 3) There should be something in line 14 of schedule 1. Other Hints: 4) Schedule 2, line 4 is for the self-employment tax. SE tax is separate from and in addition to the tax calculated on form 1040 line 12. 5) The taxpayer has a refund. 6) The FICA cap for 2019 is 132,900 7) Assume that Janice has adequate health insurance. 8) Do not forget the Qualified Business Income Deduction (new in 2018), line 10 form 1040. Assume Janice qualifies for this deduction. In Chapter 15, we can discuss the rules in more detail. Assume that the QBID is a deduction equal to 20% of Qualified Business Income (QBI). With QBI being equal to net total of Schedule 1 line 3, 5, and 14. That is line 3 + line 5 line 14.