Information:Julie and David Day are married taxpayers who file jointly. Their addresses and social security numbers have been pre-populated into all of the forms. They also have 3 dependent children: two under 13 who live at home and one 20-year old who is a full time student at a state university. Their names and social security numbers have also been pre-populated.

David Day works as a claims adjuster for the insurance company with a gekko as its mascot. Julie is self-employed as a life coach.

1.David received the following 2019 earnings statement from his employer.

Description

Amount

Gross Pay

$100,000

401(k) contribution

(5,000)

Pretax health insurance premiums

(6,000)

Federal income tax withheld

(7,000)

FICA - Social Security and Medicare

(7,650)

State income tax withheld

(2,500)

Net Pay

$71,850

2.Self-employment income:Julie operates her life coaching business as a sole proprietorship and uses thecash methodfor tax purposes. Some information on Schedule C has been pre-populated. Use the information below to fill out the rest of Schedule C. Note that some of the items may be reported elsewhere on the tax return (i.e., not all of them go directly on the Schedule C).

a.Cash receipts of $80,000 during 2019. She also performed a one-week seminar at the end of 2019 for which she received a $5,000 payment on January 10, 2020.

b.For financial reporting purposes, she recorded $36,000 of labor costs related to her assistant during 2019. She didn't give the final $1,500 paycheck to her assistant until the first week of 2020.

c.Paid $2,750 for the employer portion of FICA taxes for her assistant's wages.

d.Paid $4,000 of property taxes on her office building.

e.Julie paid $1,300 for utilities and another $700 for office supplies that were completely used by the end of the year.

f.Julie prepaid $18,000 of rent for a 12-month period beginning July of 2019.

g.Julie prepaid interest of $1,200 on a business loan for the six-month period Oct. 2019-March 2020.

h.Julie spent $2,000 on business meals during 2019.

i.Depreciation:Calculate the amount of depreciation on the below assets. You do not need to complete Form 4562. Assume Julie took 50% bonus depreciation on the tangible personal property in the year she placed the asset into service. Also, recall that you must adjust the full year depreciation rate when an asset is sold during the year.

Description

Life

Cost Basis

Purchase Date

Sale Date

Convention

Computer

5

3,000

January 2015

N/A

Half-year

Furniture

7

5,000

December 2016

N/A

Mid-quarter

Office Building

39

120,000

September2013

July 2019

Mid-month

j.Sale of the office building:Julie sold the office building in July of 2019. The amount realized on the sale is $135,000. Assume the adjusted basis at the date of the sale is $100,000 (cost basis 120,000 - 20,000 of accumulated depreciation).

oCalculate the gain or loss on the asset sale, and then report it in Part III of Form 4797. Line 32 on the second page of the form eventually transfers to the first page of the form.

oJulie has $3,000 of nonrecaptured net 1231 losses from two years ago. Report accordingly on page 1 of the Form 4797.

oFinish completing Form 4797, and you will find that a portion of the gain ends up on Schedule D Line 11, and a portion of the gain ends up on Line 14 of Schedule 1.

k.Record the total net profit from the complete Schedule C on the applicable line of the Form 1040.

l.Julie made estimated tax payments of $2,000 related to her coaching business. Report the amount directly on Line 18d of Form 1040 (you do not need to complete Schedule 3).

m.Julie contributed $5,000 to a SEP IRA.

3.Self-employment taxes:Calculate the amount of self-employment taxes related to Julie's self-employment income and report on the relevant lines of the Form 1040. You do not need to complete Form SE or Schedule 2, but it may help to look at the Form SE to double-check your calculation.

4.Qualified business income deduction:Calculate the qualified business income deduction and enter on Line 10 of Form 1040. Recall that QBI is net income from self-employment less the deductible component of self-employment taxes (i.e., take your Schedule C net income number and subtract the deduction for self-employment taxes you calculated above). Note that the Days do not have enough taxable income to worry about either excluded services or the wage limitations.

5.Interest and Dividends:The Days received the below payments related to interest and dividends for the year. Report the taxable amounts on the correct lines of the Form 1040.

$100 interest on an original issue corporate bond, discount amortization for the year is $50

$175 interest on a corporate bond, premium amortization for the year is $75

$200 interest on a city of Sugar Land bond

$1,000 of qualified dividends and $500 of nonqualifying dividends

6.Stock Sale:The Days had the below transactions in the stock of WDC. Assume the Days want to minimize their tax (not necessarily minimize the gain) when choosing between FIFO or specific identification. Report the gain/loss on the appropriate area of Schedule D (either Line 1a or Line 8a depending on whether it is short-term or long-term). You do not need to complete Form 8949.

Purchased 100 shares at $57 per share in September of 2018

Purchased 100 shares at $62 per share in November of 2018

Sold 100 shares at $82 per share in October of 2019

7.Itemized vs Standard Deduction:The Days are going to have enough itemized deductions to exceed their standard deduction of $24,000. Use the below information to complete Schedule A. Take the total from Schedule A and enter on the appropriate line of the Form 1040. Note that the items may or may not qualify as an itemized deduction.

State income tax withheld, see Item #1

Property taxes of $8,000 on their home

Home insurance premiums of $1,800

Interest of $8,000 on their home mortgage and interest of $1,000 on a car loan

Cash contributions of $5,000 to their church

Medical expenses of $13,000

8.Regular Tax Liability:After calculating taxable income, use the below tax brackets to calculate the Days' tax liability and enter this amount the appropriate line of the Form 1040. Recall that income taxed at ordinary rates must be separated from income taxed at preferential rates. You must show work for this calculation if you want to be eligible for partial credit.

2019 Brackets for Married Filing Jointly

Rate

Taxable Income Bracket

Tax Owed

10%

$0 to $19,400

10% of Taxable Income

12%

$19,400 to $78,950

$1,940 plus 12% of excess over $19,400

22%

$78,950 to $168,400

$9,086 plus 22% of excess over $78,950

24%

$168,400 to $321,450

$28,765 plus 24% excess over $168,400

9.Child and Dependent Care Credit:The Days paid $10,000 of child care expenses during the year in order that Julie could work in her life coaching business. Calculate the amount of child and dependent care credit that the Days are eligible to claim. Their applicable credit percentage is 20% because their AGI is well over $43,000 for 2019. The credit would be reported on Schedule 3, but you are not required to complete that form so just include the credit in the total on line 13b of the Form 1040. You do not need to complete Form 2441.

10.American Opportunity Tax Credit:The Days paid the tuition for their oldest son to go to university. They paid well over $4,000 in tuition costs during 2019. Calculate the amount of AOC that the Days are eligible to claim. The credit is 40% refundable (60% nonrefundable). Enter the appropriate amounts on Line 13b and Line 18c of Form 1040. You do not need to complete Form 8863.

11.Child Tax Credit:Calculate the amount of child tax credit that the Days are eligible to claim. The 2019 AGI phase-out for married couples begins at $400,000. The Days are well below this threshold, and you should include the full credit amount on Line 13a of Form 1040.

12.Subtotal the amounts necessary to fill in Lines 14, 16, 18e, and 19 of the Form 1040.

13.Amount Due or Refund Due:Determine whether the Days will owe additional money on their return or be due a refund. If they are due a refund, they would like the amount refunded (don't worry about inputting their bank account information). Complete Lines 20-23 accordingly.