TAX RETURN AND CLIENT LETTER I. PURPOSE The purposes of this project include giving you practice with preparing a federal income tax return as well as practice with research, writing, and at your own option, teamwork. II. FACT PATTERN A. Introduction Below is the fact pattern for your client, Alyssa M. Carter. Your goals are to prepare the 2019 federal income tax return and a client letter for your long-time client and friend Alyssa. B. Alyssas Personal Status Alyssa was age 40 and in good health at the end of 2019. Alyssa was a WNE University alumna, an accounting major, who graduated in 2002. On November 29, 2018, Alyssa officially by court-decree divorced her now exhusband prominent local attorney Mark Wilson. Their separation agreement awarded Alyssa custody of their two children: Elijah and Logan. The children were in school fulltime and ages 17 and 11, respectively, at the end of the 2019. The decree required Mark to pay Alyssa child support of $300 per child ($600 combined) per month. Mark timely paid the $7,200 during 2019. The agreement also required Mark to pay Alyssa monthly maintenance of $500 per month. Mark timely paid the first ten months of the maintenance, totaling $5,000 during 2019. Mark paid the final two months when he made one large catch-up payment in February 2020. On January 18, 2019, Mark transferred to Alyssa his (Marks) one-half interest in their marital home in compliance with the terms of their divorce agreement. In 2009, Alyssa and Mark had together paid $300,000 for the home, a nice detached four-bedroom house. The home had a fair market value of $400,000 on the date Mark transferred his one-half share of the title to Alyssa. AC 413 Page 2 Alyssa took care of her widower father, Vince Carter, age 67. Alyssa, Vince, and Alyssas children lived in the home throughout all of 2019. Alyssa paid the mortgage payments of $3,000 per month for the home. Kevins sole source of income was Social Security benefits totaling $18,000 per year. B. Alyssas Schedule C Profit or Loss From Business Alyssa decided to pursue her deep-rooted entrepreneurial ambition. First, near the end of 2018, Alyssa quit her long-standing job with PricewaterhouseCoopers (PwC). Then, on January 1, 2019, Alyssa opened her own CPA business. Alyssa chose to operate the business as a sole proprietorship. She named the business Alyssa M. Carter, CPA (AMC). Alyssa asked you, her tax preparer, to elect the cash method of accounting with a December 31st yearend. Alyssa also asked you to use the fastest cost recovery method that the federal government allowed on capital purchases. Below is the detail for AMCs revenues and expenditures for 2019. 1. AMC had the following revenue-related items for 2019: a. Fees collected in 2019 for 2019 services rendered = $ 240,000. b. Fees collected in advance in 2019 for January 2020 services = $ 5,500. c. Accounts receivables from 2019 fees collected in 2020 = $ 11,500. d. Interest income on AMCs savings account at Berkshire Bank = $90. e. Qualified dividend income on AMCs investment in CVS Health = $120. 2. AMC made the following expenditures items during 2019: a. Rent for office space = $ 30,000. b. Purchase of computers and printers for business = $37,000. c. Utilities for office = $ 6,000 d. Payments of employees gross wages for part-time help during tax season = $ 20,000. e. Transfers by checks to the U.S. Treasury for employees federal income tax withholding = $ 3,000; and for employees FICA tax withholdings = $ 1,530; for 2019. AC 413 Page 3 f. Payments to the U.S. Treasury for AMCs share of FICA taxes = $ 1,530. g. Payments to Health New England for AMCs share of employees accident and health insurance premiums = $ 12,000. h. Payments to Health New England for family plan health insurance premiums for Alyssa, Karen, and for Alyssas children = $ 18,000. i. Political contributions of $3,000 each to the Democratic and Republican candidates for mayor of Springfield, MA. j. Tickets to various Majestic Theatre plays to which Alyssa brought current and prospective clients = $ 1,200. k. Food, meals, and drinks before, during, and after the above theatre events for Alyssa and clients = $ 1,300. l. Alyssa timely paid through AMC her individual estimated income tax payments for 2019, totaling the following amounts for the year: Federal = $ 10,000; MA = $ 4,000. D. Wagering Winnings and Losses Alyssa enjoyed playing the slots and the tables at Springfields MGM Resorts International casino. Alyssa received a Form W-2G from the casino showing line 1 reportable winnings of $2,000 and line 4 federal income tax withholdings of $400 for 2019. Upon Alyssas request, MGM sent to Alyssa her players club card statement. The statement established that Alyssa had gambling losses of $5,000 for 2019. E. Alyssas Personal Expenses Alyssas personal expenses during 2019 included the following payments: a. Unreimbursed qualified medical expenses for herself and her dependents = $ 2,600. b. Mortgage principal on home = $ 7,200. c. Mortgage interest on home = $ 10,600. d. Property taxes on home = $ 9,300. e. Homeowners insurance = $ 2,100. f. Utilities for home = $4,970. g. Groceries for home consumption = $15,600 h. Charitable contribution by check to WNE University = $ 2,500. AC 413 Page 4 F. U.S. Estimated Income Tax Payments Prepare the four federal estimated income tax vouchers for Alyssa for 2020. Alyssa wants to pay the minimum safe harbor estimated income tax payments for 2020. Alyssa expects to have two and a half times to three times the profit from her business in 2020 as compared to 2019. III. FEDERAL INCOME TAX RETURN Upload for your entire team a Form 1040, U.S. Individual Income Tax Return and supporting schedules for 2019. Upload the tax return to Kodiak as one single document, not schedule by schedule. Complete all the pertinent information on the forms, e.g., principal business code on Schedule C. A. At a minimum, include the following forms: Form 1040-ES, Estimated Income Tax, Payment Vouchers 1-4 Form 1040, U.S. Individual Income Tax Return, and accompanying numbered schedules. Schedule 1, Additional Income and Adjustments to Income Schedule 2, Additional Taxes Schedule 3. Additional Credits and Payments Schedule A, Itemized Deductions Schedule C, Profit or Loss From Business Schedule SE, Self-Employment Tax. If clients self-employment income is high enough, then Form 8959, also Additional Medicare Tax. Form 8995, QBI Deduction, Simplified Computation Form 4562, Depreciation and Amortization C. Simplifying the Return To make this project easier for you, disregard the Alternative Minimum Tax. Also, do not prepare the State income tax return. Do not compute any underpayment estimate income tax penalty even if it would apply. Do not prepare anyone elses tax return.