ACCT 4331 Tax Return Project Spring 2019 James A. Varney and Denise M. Varney 1. James and Denise Varney are married and file a joint return. James is 48 years of age and Denise is 49. James is employed full-time as an electrical engineer for Livingston Unitech Corporation, Ltd. Denise is a self-employed design consultant. They have two children, Pamela and Vernon, who live at home, did not earn any income, and receive all of their support from their parents. Pamela is 20 years old and attended college on a full-time basis, and Vernon is a 16-year-old high school student. The Varneys currently live at 3102 Willowpoint Drive, Houston, Texas 77069, in a home they have owned since July, 1998. The phone number they wish to show on their tax return is James's daytime office number of 713- 984-8987. 2. Social security numbers (SSN) and birthdates (DOB) for James, Denise, and their children are provided below: James A. Varney (DOB: 11/5/1970) . SSN: 332-25-9610 Denise M. Varney (DOB: 4/12/1969) . SSN: 333-51-9251 Pamela G. Varney (DOB: 11/6/1998) .. SSN: 452-19-6552 Vernon N. Varney (DOB: 2/12/2003) .. SSN: 452-23-5694 3. James, Denise, Pamela, and Vernon were covered by health insurance all year. 4. Neither Denise nor James want to contribute $3 to the Presidential Election Campaign Fund. 5. James and Denise want to file their return on paper. 6. James received a Form W-2 for 2018 from his employer, Livingston Unitech Corporation, Ltd., 3445 Synergy Lane, Houston TX 77069 (EIN 68-3123857) which reported the following relevant information: Box 1: Gross wages and taxable benefits . . . . . . . . . . . . . . . . . $118,000 Box 2: Federal income tax withheld . . . . . . . . . . . . . . . . . . . . . . 21,500 Box 3: Social Security wages . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,000 Box 4: Social Security tax withheld . . . . . . . . . . . . . . . . . . . . . . . 7,316 Box 5: Medicare wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,000 Box 6: Medicare tax withheld . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,711 7. Denise operates her business under the name "Design by Denise." Her office is located at 2359 Dawnridge Drive, Houston, Texas 77025. The federal EIN for her business is 51- 4867579 and the principal business code is 541400. Denise, who materially participates in her business, has operated it profitably for 3 of the last 4 years and is fully "at risk" with respect to her investment. She also has filed all required Forms 1099. 8. In accounting for her business, Denise uses the cash method. For 2018, her records show the following income and expenses. She participated in Jamess health insurance plan and did not have to pay any premiums. 9. In connection with her business, Denise often travels from her business location to the homes and offices of her clients, where she provides advice and expertise on interior design. During 2018, her written auto log shows that she drove her vehicle (a 2018 Mitsubishi Mirage that she purchased and put in service on May 13, 2017) 22,400 miles for business purposes, 3,800 miles for commuting, and 1,800 miles for personal purposes. Denise did not keep track of all her specific expenditures for the car and she wishes to deduct her auto expenses using the standard mileage rate for 2018. She has written evidence to support her mileage. The business car was available for use during off-duty hours, but she and her spouse also have another vehicle available for personal use. 10. Also in connection with her business, Denise purchased a Mac computer and HP laser color printer. The computer was purchased for $2,200 on November 10, 2018. The printer was purchased for $5,800 on September 30, 2018. Denise used both the computer and printer for business purposes at her office 85 percent of the time, and personal purposes 15 percent of the time, for which she has written evidence. Denise would like to deduct the maximum allowable amount on each of these assets. Gross receipts (not reported on Form 1099) . . . . . . . . . . . . . . . . . . . . . . $90,000 Gross receipts (reported on Form 1099; payer was Bernice Ngs Furnishings, EIN 68-8752318, nonemployee compensation) . . . . 25,000 Expenses: Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 Legal services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500 Office expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300 Equipment and machinery rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,800 Office rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,400 Subscriptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 11. In addition, Denise sold a storage building that she used in her business. She paid $30,000 for the building on January 12, 2013, and sold it on March 14, 2018 for $33,000. Her adjusted basis in the building was $26,027. (Assume this basis already accounts for whatever you claim as a 2018 depreciation deduction for the building.) Denise depreciates the building using straight-line depreciation. The transaction was reported on Form 1099-S, and Denise has no prior year section 1231 losses. 12. James and Denise received Forms 1099-INT reporting in box 1 (regular or OID interest) or box 8 (tax-exempt interest) the following interest income during 2018: 13. James and Denise received Forms 1099-DIV reporting the following dividends during 2018. 14. James and Denise have neither a foreign bank account nor a foreign trust. 15. James and Denise received Form 1099-B from Morgan Stanley reporting the following stock sales during 2018. For all of the sales, the basis amount was reported to the IRS. 16. Statements describing the above sales are not being attached separately in lieu of Form 8949. Box 1 Box 8 Regular or OID Texas Johnson & Johnson . . . . . . . . . 700 . . . . . . . . . . . . . . . . . . . . . . 0 Caterpillar . . . . . . . . . . . . . . . . . 900 . . . . . . . . . . . . . . . . . . . . . . 0 Fidelity Tax-Free Bond Fund . . . . 0 . . . . . . . . . . . . . . . . . . . . . . . . 600 Box 1a Box 1b Ordinary Qualified American Sun Corp. . . . . . . . $400 . . . . . . . . . . . . . . . . . . . . $ 400 Global Genetic Dynamics . . . 200 . . . . . . . . . . . . . . . . . . 200 J.P. Morgan . . . . . . . . . . . . . . 300 . . . . . . . . . . . . . . . . . . . . 300 Corporation Shares Date Acquired Date Sold Sales Price Basis Box 3 Bishop Radiocorp, Inc. 600 2-15-18 9-18-18 $23,200 $18,175 McGowan Chemical 800 4-20-18 10-21-18 10,000 13,800 Total short-term $33,200 $31,975 Patel Royal Electric, Inc. 300 7-25-12 11-05-18 6,700 8,500 Agro Memory Group 100 3-10-11 12-12-18 9,400 7,000 Total long-term $16,100 $15,500 17. In a transaction not reported on Form 1099-B, James sold two African jewels on August 13, 2018 for $2,400. He bought the jewels on July 27, 1998 for $300. 18. In August 2018, Pamela enrolled on a full-time basis for a bachelor's degree at the University of Houston, 4800 Calhoun Road, Houston, Texas 77004 (EIN 74-6001399). Pamela graduated from Memorial City High School in May and attended the University of Houston from August to December, 2018. In August, James and Denise paid $3,500 in qualified tuition for Pamela's first semester. In December, they paid another $3,500 in qualified tuition for her second semester beginning in January, 2019. Pamela received a Form 1098-T from the University reporting payments received for qualified tuition and related expenses of $7,000 in box 1. Box 2 is empty but Box 7 is checked. Assume that, if eligible, the Varneys want to claim credits rather than deductions for these expenses. 19. Neither Pamela nor Vernon have been convicted of a felony for possessing or distributing a controlled substance. 20. James and Denise made timely estimated Federal income tax payments of $10,000 for the year ($2,500 each quarter on April 15, June 15, September 15, 2018 and January 15, 2019). 21. James and Denise incurred and paid the following personal expenses during 2018: Taxes: Real estate taxes on home (with State Street Bank (reported on Form 1098 together with mortgage interest- see interest, below) . . . . . . . . . . . . . . . . . 8,691 Sales tax rate (State 6.25%; Local 2.00%) . . . . . . . . . . . . . . . . . . . . . . . . . . 8.25% Interest: Home mortgage with State Street Bank (also reported on Form 1098 together with Real Estate taxes, see above) . . . . . . . . . . . . . . . . . . . . . . . 9,600 Cash contributions (all substantiated): United Way . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 Make A Wish Foundation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,275 22. Use these check figures on Form 1040 and Schedule 1 to help you in preparing your return: Assignment: Complete the Varney's Federal income tax return for 2018. Assume that the Varneys are filing their return on time (before April 15, 2019). In preparing the return, you will need to use forms 1040, 4562, 4797, 8949, 8863, and schedules 1, 3, 4, 5, A, B, C, D, and SE. (Note: you may need to print and extra p.2 for Form 8949.) The total tax return is approximately 23 pages. If the Varneys have a refund due, request that it be credited to their 2019 taxes. Assemble and turn in a hard copy of your completed return for James and Denise Varney assembled as it would be filed with the IRS. Supporting and itemized statements should be attached as appropriate, and tax forms should be assembled in the correct order (see #2, below). Input sheets, estimated payment stubs, and taxpayer worksheets, however, should not be attached. Notes: 1. Because software is not available in the computer lab this year, I simplified the project so that it may be completed by hand. It can be typed or hand-written, but it must be clear and legible. There are no points if I cannot read what you wrote. You are also free to use software if you wish to purchase it, but you are not required to do so. 2. The correct assembly order for the Varneys tax return should be: 1040, Schedule 1, Schedule 3, Schedule 4, Schedule 5, Schedule A, Schedule B, Schedule C, Schedule D, Form 8949, Schedule SE, 4797, 8863, and 4562. (You can use the Attachment Sequence No. in the upper right hand corner of each form (except form 1040) as a guide, but the order given here is the correct order.) 3. The project is due at the beginning of your final exam. You may turn it in at the final exam, or earlier than that in class or office hours, or by sliding it under Prof. Cutlers door, 390C Melcher Hall. You may work in groups of up to 4 students from any section. All students in the group turn in one project with all of their names and receive the same grade. Write your name(s) clearly at the top of the first page, in alphabetical order. Business income (Schedule 1, line 12) . . . . . . . . . . . . . . . . . . . . . . . $ 46,832 Total income (1040, line 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178,230 AGI (1040, line 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174,921 Taxable income (1040, line 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,180 Tax overpaid (1040, line 19) (two acceptable answers, either is fine) . . . . . . . . . . . . 5,369 or 5,614 4. Because tax forms are difficult to grade and you are given so many check figures, the project will be graded very strictly. However, DO NOT simply fill in the correct check figures if your supporting numbers dont actually produce those figures, and DO NOT simply make up numbers so that you get the correct check figures. That is the equivalent of fraud and can result in receiving zero points for the project. 5. I will help and answer detailed, intelligent questions, but I will not do the work for you. For example, you could ask, I have the correct taxable income, but not the correct AGI. I believe the problem is this specific deduction on Schedule A, which I calculated as follows, but after reviewing all my materials on that deduction, I cant figure out what I did wrong? Can you point me in the right direction? Please include a picture of the relevant form(s) with your question as well. Finally, the earlier you ask a question, the more likely it is that I will have sufficient time to help, and conversely, the likelihood of me being able to provide good help gets lower and lower as the due date approaches.