Question

1. Using the Scenario, complete the following sections of the Form 1040:

• Filing Status, front page
• Standard Deduction, front page
• Dependents, front page
• Paid Preparer Use Only, back page
• Lines 1 through 6, front page
• Any Schedules or Forms as required

____________________________________________

Scenario: Year ending December 31, 2021

Assume that the taxpayers, Jim B. Baldwin (social security number 333-33-3330) and Sara M. Baldwin (social security number 444-44-4440) file a joint return. Both are 50 years old, have good eyesight, and live with their three children, Ned, Joseph and Megan, at 789 N. Code Drive, Chicago, Illinois 60699, (312) 679-9999. Mr. Baldwin wants to contribute $3 of his income tax to the Presidential Election Campaign Fund. Mrs. Baldwin elects not to contribute.

The Baldwins son, Ned, is a junior in college and he is 20 years old. He worked during the summer and earned $4,000. Their other son, Joseph, is a 17-year old high school student. He earned $3,600 during the summer and worked part-time during the remainder of the year. Neither son had any additional income. Their daughter, Megan, is eight years old and an elementary school student. She had no earned or unearned income during the year. In August, the Baldwins paid $6,300 in tuition for their son, Ned, for the academic period that started in September. Neds social security number is 300-11-0001, Josephs social security number is 300-22-0002, and Megans social security number is 300-33-0003.

The Baldwins claim Mrs. Baldwins mother, Julia D. Major, as a dependent under a multiple-support agreement under which they provide 55% of her support. Mrs. Julia D. Major lived with the Baldwins during all of 2021. Her social security number is 400-44-0004. Tina Major, Julias daughter, provides the Baldwins with a written, signed statement, that she will not claim her mother as a dependent in 2021. Tina Major lives at 1425 S. 62nd Street, Chicago, IL 60699, and her social security number is 500-55-0005.

The Baldwins use Pat OBrian, a professional tax preparer, to prepare their income tax return. Pat OBrians PTIN is P98756432, and she works for Midwest Tax Preparation (EIN #36-0987456), which is located in a nearby suburb of Buffalo Grove, IL (telephone number 1-312-555-4010). However, the Baldwins do not authorize her to discuss their return with the IRS.

Wages and Expenses Generally

During 2021, Mrs. Baldwin was employed as an elementary school teacher. Her Form W-2 for 2021 reports the following:

Box 1. Wages, tips and other compensation $133,000

Box 2. Federal income tax withheld $ 16,939

Box 4. Social security tax withheld $ 8,246

Box 6. Medicare tax withheld $ 1,929

Box 17. State income tax $ 6,584

Mrs. Baldwin is not covered by her employers retirement plan. In addition, Mr. Baldwin is a self-employed individual who does not maintain a Keogh or a SEP plan. Mrs. Baldwin made a $1,500 contribution to a traditional IRA and a $2,000 contribution to a Roth IRA in 2021. Mr. Baldwin decided against making a contribution to a traditional IRA.

The Baldwins received a $520 state income tax refund. They used itemized deductions of $25,300 on their 2020 federal income tax return and elected to take the state income tax as a deduction. The Baldwins also received a $310 federal income tax refund.

The Baldwins made federal estimated tax payments of $21,000 for 2021.

The Baldwins incurred the following medical expenses during 2021:

prescription drugs $1,000

doctor bills $3,550

hospital bills $1,750

transportation $ 100

eyeglasses $ 500

Mr. Baldwin, who is self-employed, paid $6,750 in premiums for health insurance

coverage for himself and his family.

The Baldwins bought a new residence in September 2021. They sold their prior

residence on September 13, 2021. The Baldwins paid their 2021 real estate taxes on

the prior residence of $4,300 due on July 1, 2021. They estimated real estate taxes for that home for 2022 of $3,700. As the bill will be paid in 2022, they allowed the buyer a credit equal to 70% of the estimated amount.

The real estate taxes on the new property they purchased on September 1, 2022, are

not payable until 2022.

The Baldwins had lived in their prior residence for twenty (20) years and they realized a gain on the sale of $560,000. Mr. and Mrs. Baldwin paid the total of $9,500 home mortgage interest on the two residences. They also paid $3,000 in points when they purchased their new home. Neither mortgage had a principal amount in excess of $750,000.

They paid the following personal interest in 2021:

$1,600 to finance Mrs. Baldwins car, and

$ 400 in credit card interest.

The Baldwins gave $1,500 in cash to various recognized charities; no individual gift was $250 or more; all charities sent an acknowledgment of the contribution.

Mrs. Baldwin bought $345 of supplies for her classroom.

Dividends and Interest

During 2021, the Baldwins received $500 in interest from the Heartland National Bank and $150 as nominees for Julia Major from the Third National Savings and Loan.

They received $200 in interest from tax-exempt bonds issued by the State of Illinois.

The Baldwins received the following qualified dividends: $400 from E&Z Tax Preparation, Inc., $300 from Secure Money Market Fund, and $250 from Rapid Growth Mutual Fund. They also received a $100 capital gain distribution from Rapid Growth. In addition, the Baldwins received $700 in nonqualified foreign corporation dividends from Consolidated Tapioca, and paid foreign taxes of $10 to various countries in connection with this investment. The responses to the questions on Part III of Schedule B are No.

Sale of Stock and Other Investments

During 2021, the Baldwins sold the following capital assets:

(1) On February 2, 100 shares of Ahab Inc. were sold for $1,000. They had been purchased on November 18, 2008 for $3,500.

(2) On November 5, 200 shares of Pequod Inc. were sold for $10,000. They had been purchased on January 5, 2008 for $2,000.

(3) On December 4, 100 shares of Squall Inc. were sold for $12,500. They had been purchased on January 4, 1998 for $4,000.

(4) On December 10, 200 shares of Kismet Inc. were sold for $5,624. They had been purchased on September 5, 2002 for $2,000.

(5) On December 15, a number of gold coins were sold for $11,800. The coins had been purchased on October 15, 2002 for $3,200.

Child Care Expenses

During 2021, the Baldwins daughter, Megan, attended two child care centers. They were: Happy Day Care, 4210 W. Maple, Chicago, Illinois 60699, whose identification number is 36-0987564; and Greenfields Day Care, 901 N. Ash, Chicago, Illinois 60699, whose identification number is 36-1234567. The Baldwins paid $3,720 to Happy Day Care and $1,860 to Greenfields Day Care. The Baldwins did not receive employer-provided dependent care benefits.

Interiors Unlimited

Mr. Baldwin operates Interiors Unlimited, which sells home furnishings at retail, as a sole proprietor during the entire year.

The business address is 45 Boswell Blvd., Villa Park, Illinois 60181. His employer identification number is 36-3457896. The business code is 442200.

In order to clearly show business income, Mr. Baldwin maintains an inventory at cost and he uses the accrual method of accounting for his sales and purchases. Interiors Unlimited does not manufacture any of the goods it sells.

Total gross receipts of the business were $195,233 and returns and allowances amounted to $1,535. The business books showed the following information:

Inventory at beginning of year (valued at cost) . . . . . . $45,000

Merchandise purchased . . . . . . . . . . . . . . . . . . . . . . . . 97,000

Inventory at end of year . . . . . . . . . . . . . . . . . . . . . . . . 22,000

Truck expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550

Other interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300

Rent (property) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,800

Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280

Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000

Wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,451

Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,450

Utilities and telephone . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200

Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,240

Legal and accounting

(includes $200 of tax preparation fees) . . . . . . . . . . . . 400

Office expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400

Meals and entertainment . . . . . . . . . . . . . . . . . . . . . . . . 1,040

Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330

The business had the following depreciable property:

Computers purchased in March 2021 orig. cost $ 2,432

Computers purchased in 2018 (mid-quarter, third quarter) orig. cost 7,264

Equipment purchased in 2018 (mid-quarter, fourth quarter) orig. cost 15,275

FFE purchased in 2016 (half-year) orig. cost 10,500

Using, as applicable, Section 179, Bonus Depreciation and MACRS calculate the depreciation for 2021 for Interiors Unlimited to be reported on the Baldwins Tax Return

In June 2021, Interiors Unlimited sold a truck, purchased in 2013, used in the business with an original cost of $15,000, with an adjusted basis of $0. The sales price was

$16,200.