Comprehensive Problem 2 - Part 1: Taxpayer information, Form 1040, Schedule 1, Schedule 2, Schedule 3, Schedule A, and Schedule B

Gregory and Lulu Clifden's Tax Return

Note: This problem is divided into four parts. You will need to complete some of the forms in the other parts in order to determine the amounts to be used on Form 1040. Some of the data information will be reproduced in the other parts for convenience.

Gregory R. and Lulu B. Clifden live with their family at the Rock Glen House Bed & Breakfast, which Gregory operates. The Bed & Breakfast (B&B) is located at 33333 Fume Blanc Way, Temecula, CA 92591. Gregory (born May 4, 1976) and Lulu (born June 12, 1977) enjoy good health and eyesight.

1. The Clifdens have three sons. Gerald was born April 16, 2002, Gary was born December 2, 2007, and Glenn was born January 13, 2009. All three boys live at home and the Clifdens provide more than 50% of their support.

2. The Rock Glen House B&B is operated as a sole proprietorship and had the following income and expenses for the year:

Room rental income	$137,896
Vending machine income	2,100
Advertising expense	4,810
Depreciation for book and tax purposes	18,100
Mortgage interest on the B&B	22,987
Wages of cleaning people	17,540
Taxes and licenses	6,420
Supplies consumed	18,870
Business insurance	6,300
Laundry expenses	4,289
Accounting fees	1,850
Office expenses	2,400
Utilities	6,350

All of the above amounts relate to the business portion of the Bed & Breakfast; the personal portion is accounted for separately. The Rock Glen House B&B uses the cash method of accounting and has no inventory. The employer tax ID number is 95-1234567.

3. The Clifdens made estimated federal income tax payments of $2,000 and estimated state income tax payments of $6,000 (all made during 2019).

4. Lulu worked about 1,000 hours as a substitute schoolteacher with the local school district. She also spent $276 out-of-pocket for various supplies for her classroom. Lulu's Form W-2 from the school district is located on a separate tab.

5. Gregory is retired from the U.S. Navy. His annual statement from the Navy, Form 1099-R.

6. Gregory and Lulu paid (and can substantiate) the following amounts during the year:

Mastercard interest	$1,480
Dental expenses (orthodontics for Gary)	5,457
California state income tax (for 2018)	2,130
Charitable contributions	4,875
Deductible interest on home (personal portion)	9,631
Real estate taxes (personal portion)	3,830
Life insurance premiums	845
Automobile registration fees (deductible portion)	45
Tax return preparation fee	475
Contributions to Donald Trump's re-election campaign	1,000

7. During the year, Gregory and Lulu received the following qualifying dividends and interest:

Interest:
Bob's Big Bank	$381
Bank of Ireland	271
City of Temecula Tax Exempt Bonds	1,490
Vintage Bank	See 1099-INT
Qualified dividends:
Southwest Airlines	$250
Heinz Foods	550

Also, Lulu owns Series EE U.S. savings bonds. During the year, the bond redemption value increased by $1,300. Lulu has not elected the accrual method for these bonds. There were no Irish taxes paid on the interest from the Bank of Ireland. All the above stocks, bonds, and bank accounts are community property.

8. Lulu has a stock portfolio. During the year she sold stock, for which she received 1099-B Forms, as follows (basis was provided to the IRS in all cases):

	Orange Co.		Gold Co.	Green Co.
Sales price	$8,114		See Form	$1,449
Basis	3,803		1099-B	2,578
Date acquired	02/11/19			10/31/14
Date sold	06/19/19			10/23/19

9. Lulu paid her ex-husband $4,800 alimony in the current year, as required under the 2002 divorce decree. Her ex-husband's name is Hector Leach and his Social Security number is 566-23-5431.

10. Gregory does all the significant work in the Bed & Breakfast and therefore he pays self-employment tax on 100 percent of the earnings from the B&B.

11. During the year, Gregory's uncle Martin died. Martin had a $50,000 life insurance policy that named Gregory as the beneficiary. Gregory received the check for the benefits payable under the policy on November 30 of the current year. Martin also left Gregory a parcel of land with an appraised value of $120,000.

12. Gregory is a general partner in a partnership that owns a boutique hotel in northern California and leases the property to a hotel management company. Gregory does not materially participate in the partnership activity but the partnership activity does rise to the level of a trade or business. See Schedule K-1 from the partnership.

13. Lulu was not eligible for health care benefits due to the part-time nature of her job thus health insurance for the Clifden household was purchased by Gregory. The Clifdens purchased health insurance through the Covered California program and received the Form 1095-A. They had no other health insurance during 2019. Assume that the self-employed health insurance deduction is $1,424. The Clifdens did not claim an advance premium credit. Click here to access the completed Form 1095-A to use when completing Form 8962.

Required: Gregory and Lulu have come to you to prepare their 2019 federal income tax return. You are not required to complete the state income tax return. Do not file a federal Form 4952.

• Click here to access the tax table for this problem.
• The taxpayers do not want to make a contribution to the presidential election campaign.
• Enter all amounts as positive numbers, except for a "loss." If required, enter a "loss" as a negative number on the tax form.
• If an amount box does not require an entry or the answer is zero, enter "0".
• If required, round your answers to the nearest dollar. On Schedule SE, use the rounded amounts in subsequent computations.
• Remember, the taxpayers make the election to include any child's interest and dividends on their tax return.
• Make realistic assumptions about any missing data (addresses, etc.) that you may need.

The following is a list of the 13 forms and schedules that you will need to complete the tax return:

Part 1 Form 1040, Schedule 1, Schedule 2, Schedule 3, Schedule A, schedule B

Part 2 Schedule C, Schedule D, Schedule SE, Form 8949, Qualified Dividends and Capital Gain Tax Worksheet

Part 3 Schedule E, Form 8812, Child Tax Credit Worksheet

Part 4 Form 8962, Form 8995

For the current year, Lulu's Form W-2 from the school district showed the following:

a Employee's social security number 256-43-8819

OMB No. 1545-0008

Safe, accurate, FAST! Use

IRSe ~ file

Visit the IRS website at www.irs.gov/efile

b

Employer identification number (EIN) 43-7654321

1

Wages, tips, other compensation 13,700.00

2

Federal income tax withheld 1,694.00

c

Employer's name, address, and ZIP code Temecula Valley Unified School Dist. 31350 Rancho Vista Road Temecula, CA 92592

3

Social security wages 13,700.00

4

Social security tax withheld 849.40

5

Medicare wages and tips 13,700.00

6

Medicare tax withheld 198.65

7

Social security tips

8

Allocated tips

d

Control number

9

10

Dependent care benefits

e

Employee's first name and initial Lulu B. Clifden 33333 Fume Blanc Way Temecula, CA 92591

Last name

Suff.

11

Nonqualified plans

12a

See instructions for box 12

C o d e

13

Statutory employee	Retirement plan	Third-party sick pay

12b

C o d e

14

Other

12c

C o d e

12d

C o d e

f

Employee's address and ZIP code

15 State CA

Employer's state ID number

16

State wages, tips, etc. 13,700.00

17

State income tax 400.00