Use the following information to complete John and Rose Harringtons 2020 federal income tax return. To the extent you need to use an online IRS calculator and the 2020 version is not available, you may use 2019. Ignore the requirement to attach the Form(s) W-2 to the Form 1040. If required information is missing, use reasonable assumptions to fill in the gaps; otherwise, post a question to the appropriate discussion board. Note: when computing the tax liability, use the method we used in class, not the IRS tax tables.

NOTE: Line 10b on Form 1040, page 1 does not exist for the purposes of this class. NOTE: We will ignore the wage and property/asset limits for the QBID.

Facts:

John (age 42) and Rose Harrington (age 41) are married and live in Mackinac Island, MI. The Harringtons have three children: Danny (age 18), Leslie (age 15), and Lyanna (age 10). Leslie and Lyanna live at home and their parents provide for all of their needs. Danny does not live at home (he is temporarily away for school) but receives more than half of his support from his parents. The Harringtons provided the following information:

• Johns social security number is 987-65-4321

• Roses social security number is 999-88-7777

• Dannys social security number is 123-45-6789 (earns gross income of $5,000)

1

• Leslies social security number is 111-22-3333 (earns gross income of $3,000)

• Lyannas social security number is 222-33-4444 (earns gross income of $0)

• The Harringtons current mailing address is 1 Huron Rd, Mackinac Island, MI 49757

  John is a night watchman at the Iron Forge Co. He received a W-2 from Iron Forge reporting the following information:

1. Wages:

2. Federal Income Tax Withheld:

3. Social Security Wages:

4. Social Security Tax Withheld:

5. Medicare Wages:

6. Medicare Tax Withheld:

17. State Tax Withheld:

$110,000 $25,555 $120,000 $7,440 $120,000 $1,740 $6,381

John contributed $10,000 to his employers traditional 401(k).

Rose is an antique arms dealer. For the first two months of the year, she was employed by Tridents Landing. However, she resigned from her position with Trident to run her own shop full-time. She conducts business, named Swords, Arrows, & Spears (SAS), as a sole proprietorship (EIN 20-7777777). She started her solo business on June 1, 2019 (nights and weekends at first) and is located at 300 North Street, Sault Ste. Marie, MI 49783.

Rose received a W-2 from Tridents Landing with the following information:

1. Wages:

2. Federal Income Tax Withheld:

3. Social Security Wages:

4. Social Security Tax Withheld:

5. Medicare Wages:

6. Medicare Tax Withheld:

17. State Tax Withheld:

$25,000 $2,790 $25,000 $1,550 $25,000 $363 $1,750

The W-2 also notes that Rose is not eligible for a 401(k) or retirement plan at Trident.

Rose reported the following information for the business activities of SAS (she uses the cash method of accounting):

Revenues:

Cash receipts

Total revenue

Expenses:

Advertising

281,000 281,000

3,600

2

General business insurance Retail shop rent Equipment leases office equipment Business meals

Entertainment Wages for staff Taxes and licenses Travel expenses (hotel, transportation) Employee health insurance

Employee benefit programs Utilities Print and copy supplies Legal and professional fees

Total Expenses

14,850 9,000 4,211 1,082 5,509

42,000 11,870 2,983 12,496 2,168 9,425 2,685 15,550 137,429

SAS purchased and placed in service the following fixed assets during the year:

Item

Printers Display Cases

Date Purchased

June 1 February 18

Amount

$2,955 $32,000

SAS does not elect out of bonus depreciation and wants to take Section 179 expensing in a way that maximizes the current year depreciation (including 179 expense). SAS does not have an audited financial statement. On April 17, 2020 Rose purchased a new laptop computer for SAS at a cost of $3,800. On the same day, she sold her old laptop for $1,850. It was originally purchased for $2,700 on June 1, 2019 (it was the only asset he purchased in 2019; she did not take 179 or bonus depreciation on the old laptop). In April, Rose purchased computer software to use in her business for $449. These assets are used entirely in Roses business (there is no personal use). Assume this property is not listed property. Rose capitalizes these assets for financial accounting purposes and does not have an audited financial statement.

Rose owns a black 1987 Trans Am. She started to use the Trans Am for her business on June 1, 2019. She drove 2,100 business miles during 2020 (she has documentation to verify). She drove the vehicle for a total of 21,396 miles during the year. She also has access to another vehicle (Johns) that she can use for personal purposes. She paid $500 of property taxes on the Trans Am. She uses the standard mileage rate to deduct operating expenses on the car. (These expenses are not included in the travel expenses listed above).

SAS was required to, and did, file Forms 1099 for payments made to contractors.

In need of cash to support the family while Rose started her new business, in February, John withdrew $18,000 from his traditional 401(k) account. He received a Form 1099-R with the following information:

1. Gross Distribution: $18,000 3

2a. Taxable Amount: 4. Federal Income Tax Withheld: 7. Distribution code:

$18,000 $3,500 1

The Harrington familys residence is 1,800 square feet. The purchase price of the residence was $236,000 (building value was $100,000 and the lot value was $136,000). The mortgage balance is currently $200,000. John uses a room in the house (200 square feet) exclusively for his job, completing some reports he doesnt have time to finish at Iron Forges site.

Expenses relating to the residence were as follows:

Mortgage Interest ($200,000 loan balance, reported on a Form 1098) Property taxes Utilities Homeowners Insurance

$8,382 $4,450 $6,487 $1,635

In addition to the primary mortgage on the home, the Harringtons borrowed $20,000 on a home equity line of credit (HELOC) against their home. They received a Form 1098 with the following information relating to the line of credit:

Mortgage interest: $1,960

They used the funds from the home equity line of credit to purchase build a wall between their house and their neighbors (the Wights) and also to substantially improve their heating system (its always winter in the Upper Peninsula).

John and Rose paid $17,465 for health insurance for the family. This amount is not included in the totals for SAS above. Neither John nor Rose had access to employer-provided health insurance during the year while they were paying the premiums for this policy.

Rose owns 20 acres of vacant ground in Charlevoix, MI. Rose acquired the land as a gift from her parents on July 1, 2013 (valued at $16,000 per acre on the date of the gift). Her parents purchased the land on January 1, 1992 at a price of $7,000 per acre. Rose has held this land as an investment since she received it. For 2020, she paid $5,280 of property tax on the land.

On September 15, 2020 Rose exchanged this land with an eccentric billionaire who plans to build a castle on the 20 acres (Rose and the development company are not related). In exchange for the 20 acres, Rose received a condominium that was valued at $460,000. For purposes of depreciation, the building is valued at $240,000 and the land is valued at $220,000. The condominium is located at 100 Grotto Place, Oak Grove, MI 49735. Immediately following the exchange, Rose made the condo available for rent.

Rose first rented out the Grotto Place unit on November 1, 2020 (the rental is not considered at trade or business for QBI purposes). The revenue and expenses from the rental unit from November through December is as follows:

4

Rental revenue HOA fee expense Property taxes paid Utilities expense

$15,100 $2,999 $1,570 $890

No Form(s) 1099 were required to be filed for this rental.

The Harringtons also received Forms 1099 for the year containing the following information:

1099-INT Dragon City Bonds

8. Tax-Exempt Interest: 9. Private Activity Bond Interest:

1099-INT First Valyrian Bank

1. Interest Income

1099-INT Pyke School District

8. Tax-Exempt Interest

$5,200 $1,400

$3,703

$7,050

1099-INT Department of the Treasury U.S. Treasury Bond

3. Int on U.S. Savings Bonds & Treas. Obligations

1099-INT West Roast Coffee, Inc.

$2,500

1. Interest Income

1099-DIV Black Castle, Inc.

1a. Ordinary Dividends 1b. Qualified Dividends

1099-DIV King Corporation

1a. Ordinary Dividends 1b. Qualified Dividends

1099-DIV Queen Corporation

1a. Ordinary Dividends 1b. Qualified Dividends

$1,400

$2,780 $2,780

$2,500 $2,500

$1,900 $1,900

The Harringtons did not own, control, or manage any foreign bank accounts nor were they a grantor or beneficiary of a foreign trust during the tax year.

The Harringtons also sold stock during the year. They purchased 500 shares of GE stock on the 8th of November 2011 for $7,925 and sold all of the stock on August 14th 2020 for $3,330. They received the proper 1099-B forms from their broker, who indicated that the basis in the stock was not reported to the IRS.

5

John has been picking up some blacksmithing skills while working at Iron Forge. In his spare time, John works on making his own spears, arrows, axes, and such, which he gives as gifts to Rose. If they dont turn out that great, he doesnt give them to Rose (hes afraid shell use them on him), but instead he sells them on Ebay. He sold 2 spears and 4 axes this year for $850. The metal and supplies to make these cost him $1,100.

The Harringtons paid the following expenses during the year (in addition to the items listed above):

Dentist (unreimbursed by insurance) $900 Doctors (unreimbursed by insurance) $4,750 Vehicle property tax based upon value (NOT on the vehicle used in Roses business) $450 Cash contributions to qualified charities to save the wolves $8,600 Tuition for John reported on a 1098-T Metalworking classes $7,000 Tuition for Danny reported on a 1098-T first year

(majoring in Aerospace Engineering, full time student) $11,500 Books & Subscriptions: 1. Military History by Victor Davis Hanson $299 2. Art & Armour Magazine $79

3. How to Train Your Dragon by Cressida Cowell $29

Both John and Danny attend North Central Michigan College, the local community college (EIN: 12-2345678). Danny lives on campus but plans to return home after completing school.

Rose wants to make the maximum contribution to an IRA. Determine how much she can contribute and how much she can deduct. She will contribute any non-deductible amount to a non-deductible IRA. (Recall these contributions can be made up to the date of the filing of the return, but no later than April 15. As noted earlier, assume that you will file the return by April 15.) Rose has never contributed to an IRA before.

John and Rose want their kids to learn to fly, so they paid $5,750 for Lyannas summer day camp of flying lessons at Aviation North (1593 Airport Rd., Alpena, MI 49707, EIN: 555-55-5555).

Other Information

The Harringtons made federal estimated tax payments related to the 2020 tax year as follows during the current year:

April 15, 2020 June 15 September 15 January 15, 2021

$8,000 $8,000 $8,000 $8,000

The Harringtons both want to contribute to the Presidential Election Campaign. The Harringtons would like to receive a refund (if any) of tax they may have overpaid for the year. Their

6

preferred method of receiving the refund is by check. If they have an underpayment, you do not need to compute any penalty.

Please complete Form 6251 even if the Harringtons dont owe AMT.