Janice and Richard Morgan are married and have no dependents (MFJ). Janice works as an employee from Worldwide Publishing and also as a freelance writer. She called her freelance writing business Writers Anonymous (self employed). Richard is an employee, earning a W-2 wage. They live at 132 Stone Avenue, Pleasant Hill, NM 88135.

Self Employed Information (Schedule C): Income from sale of articles 65,000

Rent 13,500

Utilities 7,900

Supplies 1,800

Insurance (business liability) 5,000

Travel (assume fully deductible) 2,300

Meals (while on business travel) 600

Meals (while meeting with clients) 600

Country Club (Used to entertain clients) 4,000

Client entertainment expenses 1,000

Personal items: Wages (Janice) $112,100

Wages (Richard) 45,000

Interest from checking account from First Bank 1,500

Home mortgage interest paid to First Bank 6,500 (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 5,700

Federal income tax withholding 35,000

State income tax withheld 12,500

During the year, Janice invested $3,000 (tax basis and at-risk basis) into ABC limited partnership (a passive investment). Her share of the limited partnership income for the year was $4,000, and Janice received a $5,000 distribution from ABC limited partnership. Hint #2 During the year, Janice invested $10,000 (tax basis and at-risk basis) into DEF limited partnership (a passive investment). Her share of the limited partnership loss for the year was $11,000, and Janice received a $2,000 distribution from DEF limited partnership.

Additionally, Janice had:

(1)Both Janice and Richard made a $6,000 contribution each to their traditional IRA accounts. Janices employer, Worldwide publishing, offers a 401k that Janice contributes to. Richards employer does not offer a 401k.

(2)Sale of LMN publically traded stock on 8/15/2020 for $15,000 (originally purchased for $5,000 on 1/15/2016)

(3)Sale of QRS publically traded stock on 10/15/2020 for $2,000 (originally purchased for $6,000 on 12/15/2019)

(4)Sale of TUV publically traded stock on 4/15/2020 for $7,000 (originally purchased for $2,000 on 7/15/2019)

Prepare the 2020 Federal income tax return for Janice and Richard. (2) 1040, (3) Schedule 1, (4) Schedule 2, (5) Schedule A (even if not needed), (6) Schedule C page 1, (7) explanation (including calculation) for each line item on each form and schedule. This explanation must include ending basis for limited partnerships. Normally, this tax return would require additional forms including schedule B, D, E, SE and form 4797, and 6198, etc. However, I do not require them. Instead, the required calculations/explanations will be sufficient.

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 as they are passive investments. Make sure to include calculations / explanations for any disallowed losses and ending basis for both entities.

3)There should be something in line 14 of schedule 1.

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 16.

5)The taxpayer has a refund. Form 1040 line 34.

6)The FICA cap for 2020 is 137,700. FICA cap is applicable to an individual, not a married couple. i.e. Richards income does not affect Janices SE tax.

7)Assume that both taxpayers have adequate health insurance.

8)Do not forget the Qualified Business Income Deduction (new in 2018), line 13 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.

9)Net capital gains/losses goes on form 1040 line 7.

10)The deductions for traditional IRA is on Schedule 1 line 19. There were two $6,000 IRA contributions. The max for this line item is $12,000.

11)Dont forget to check the box for filing status (single, MFJ, HOH, or MFS).