Question

Develop a 2018 individual tax return (with all required forms and supporting schedules) for Rob and Laura Petrie that is both professional in appearance and technically correct. The use of tax software or a professional tax preparer to complete this project is prohibited. You can access fill-in forms (in pdf format) on the IRS website (www.irs.gov) by clicking on “More” on the left side of the homepage in the “Forms and Pubs” section. Next, click on the “Current Forms and Pubs” link and perform a search for the specific forms and schedules you need. A search of “Form 1040” will result in a list that includes Form 1040 and all associated schedules and instructions for each. Make certain you use 2018 forms and schedules.

The tax return you submit for a grade must be submitted by the deadline and completed online/printed out. Handwritten tax forms and/or late submittals are unacceptable. Assemble your completed project according to the “Attachment Sequence Number” that appears just under “2018” on the upper right corner of each form/schedule. Complete and attach the cover sheet I have provided to your completed tax project. Be prepared to turn in a hardcopy of your cover sheet/project at the beginning of class on the due date assigned for your class. Projects not submitted at the beginning of class will be considered late.

Projects for Section 01 are due: Tuesday, March 19th

Projects for Section 03 are due: Wednesday, March 20th

The objective of this project is to enhance your understanding of the Internal Revenue Code rules as they relate to the individual taxpayer through practical application. After you have tried to the best of your ability to resolve any questions you have on your own, you are welcome to contact accounting lab staff or me with very specific questions. The learning experience can be enhanced if students are allowed to resolve a few relatively minor issues among themselves. However, the objective can only be achieved if each student substantially completes his/her own project. Examples of student collaboration that are not acceptable include, but are not limited to:

• Comparing completed forms/schedules,

• Comparing check figures (for example AGI, taxable income, tax liability, etc.),

• Working together as a group of two or more students to prepare a single tax return and making copies for each student to submit, or

• Coordinating with one or more students to determine what should be entered on numerous lines of the tax forms/schedules so that it appears that a single return was prepared and copied.

Interview Information

Rob and Laura are calendar year, cash basis taxpayers who are married filing jointly. Rob is the custodial parent of his son, Ritchie, from a previous marriage. The social security numbers and dates of birth for members of this family are as follows:

Social Security Number

Date of Birth

Rob

111-11-1111

7/21/1978

Laura

222-22-2222

11/16/1982

Ritchie

333-33-3333

3/25/2007

.

The Petrie family resides at 3196 Laurel Farms Road, Murfreesboro,TN 37130.

An in-depth interview with Rob and Laura, coupled with a review of all their documentation, reveals the following information for the current year:

• Laura worked throughout the year for Webber and Associates as a CPA. Laura’s W-2 indicates gross wages of $52,500 and income tax withholding of $12,680. (You may omit the requirement to attach a copy of the W-2 to the tax return.)

• Rob’s extensive travel caused him to reconsider his career. He left the employment of Pegasus International as of 1/4/2018 and started his own business doing all types of computer-related work locally. He operates this business as a sole proprietorship (under the business name Quality IT Solutions) from the basement of his home. Rob collected revenues of $152,500 and paid the following expenses related to this business:

Liability insurance expense

$ 1,302

Repairs and maintenance

3,742

Taxes and licenses expense

1,960

Supplies expense

6,160

All these expenses pass the 12-month rule test for tax recognition in 2018.

Additionally, Rob fully documented business-related mileage of 1,364 miles that he put on his personal vehicle driving to various job sites. This is a service business, so Rob had no cost of goods sold. He also elected to forego any deduction for the business use of his home (i.e. the home office deduction), and he opted to use the standard mileage rate to account for his business transportation expenses rather than his actual costs. (You may omit the requirement to complete Part IV of Schedule C.)

• Rob knew his decision to pursue self-employment had tax consequences, so he came to you earlier in the year to ask for your help. You advised him to make estimated tax payments on Form 1040-ES totaling $25,500 to prepay an estimate of his self-employment and income tax liability. Rob followed your advice and made timely estimated tax payments by completing and filing Form 1040-ES throughout 2018.

• Rob and Laura received a Form 1099-INT from Bank of America indicating they earned a total of $416 in interest income on their joint savings account.

• The Petries sold 230 shares of Quantum Corp stock for $50.00 per share on August 27, 2018. They originally paid $35.00 per share when they purchased the stock on January 19, 2007. They paid $150 to their broker to transact the sale. This information was reported to the Petries on Form 1099-B. Additionally, all information including basis was reported to the IRS. Therefore, Form 8949 is not required.

• Rob likes to play the state lottery. In 2018, he won $5,500 from the Mega Millions jackpot. Rob is a stickler for record-keeping and also tracked all the times he played the lottery in 2018 and did not win. Rob had $480 in 2018 gambling losses prior to winning at Mega Millions, and no additional losses thereafter.

• The Petries also received a Form 1098 from Regions Bank indicating they paid a total of $12,560 in home mortgage interest. The loan qualified as acquisition debt with an average outstanding principal balance of $256,000. They also paid $5,209 in real property taxes on this home and $456 interest on personal debt (i.e. a car loan and credit cards).

• The Petries paid $2,200 in tuition and fees and $635 for books for Laura to attend classes at a qualified educational institution. Laura is working toward a Master’s Degree on a part-time basis. (Note: The Petries’ AGI precludes this from taking advantage of the one education tax credit that would otherwise apply to this situation.)

• The Petries gave $4,700 to their local church, an organization officially recognized by the IRS as a nonprofit, tax exempt entity.

• Rob and Laura had no liability for Tennessee income tax, but they paid sales tax on all applicable, personal purchases. (Search for the “sales tax deduction calculator” on the IRS website, and use it to simplify the calculation of their deductible sales tax. Assume the Petries had no additional large purchases that were subject to sales tax in 2018.)

• The Petrie family had $17,000 in out-of-pocket medical expenses.

• Rob completed his legal obligation to pay his ex-wife $1,150 a month in alimony in July; therefore, he paid $8,050 in the current year. His ex-wife’s social security number is 444-44-4444.

• Rob and Laura paid $3,700 for Ritchie’s care after school and when school was not in session. The provider of this care is as follows: Happy Child Daycare (Fed ID # 12-3333333) 565 Greenleaf Lane, Murfreesboro, TN 37130.

Additional Notes:

• Rob and Laura have adequate documentation to support each of the aforementioned expenses, and they have no carryforwards from previous years that will impact their return for the current year.

• Round all amounts presented on the tax return to the nearest dollar and leave the “cents” column blank. Any lines on the tax return that you don’t need to use should be left blank – do not enter zeros.

• These taxpayers have no AMT liability, so you may omit Form 6251.

• Everyone in the household had health insurance for the entire year.

• Rob and Laura did not own any foreign bank accounts or investments.

• If any underpayment of taxes exists, assume that Rob and Laura paid in the appropriate percentage based on prior year taxes and are therefore not subject to any underpayment penalties.

Answer 1