Accounting 250
Tax Return Information
Use the following information to complete Thurston and Lovie Howell’s Federal Income Tax return for XXXXXXXXXXDo not prepare a California tax return) If information is missing, use reasonable assumptions to fill in the gaps. Ignore any alternative minimum tax calculations. This is an individual project to assess your ability to research tax issues and prepare a tax return. You should not use the help of friends, CPAs or H&R Block. You can use your textbook, internet and/or IRS publications.
I recommend that you use a software program such as TaxAct, Turbo Tax, etc., as they will perform all of the necessary calculations. If you do not use a software program, you can get the required forms and instructions at www.irs.com
Facts:
You are a CPA with a tax practice in Costa Valley, California. It is April 14th and after a busy tax season, you are dreaming of your upcoming trip to Maui. Into your office walks Thurston Howell (a new client) with 6 shoe boxes of receipts, bills, memos and legal documents. He says he knows nothing about taxes, so he brought every scrap of paper he could find. He says he will pay you $300 in non-sequential, unmarked twenty dollar bills for preparing the return.
He said he is employed as a zoo-keeper at the Wally World Zoo and Amusement Park. His wife, Lovie, is a self-employed travel agent. They have three children, Gilligan (son), Mary Ann, (daughter), and Ginger, (daughter). They also have a dachshund named Skipper (dogger). All of the children lived at home except for Ginger who is a full time student in the Bachelors’ Degree program at the University of California, Death Valley,(EIN # XXXXXXXXXXSand View Circle, Death Valley, CA 93787, but she returns home during breaks and during the summer.
Mr. Howell provided you with the following information.
1. They do not want to contribute to the Presidential election campaign as they believe the American Revolution was a mistake are loyal to the Queen of England.
2. They live at 666 Minnow Lane, Lost Island, California 92888
3. Their birthdays and social security numbers are as follows:
Thurston XXXXXXXXXX 10/11/1960
Lovie XXXXXXXXXX 10/28/1962
Ginger XXXXXXXXXX 4/8/2000
Mary Ann XXXXXXXXXX 9/24/2004
Gilligan XXXXXXXXXX 6/30/2015
Skipper N/A 11/18/2011
4. They do not have any foreign bank accounts or trusts
You sorted through all of the boxes and found the following:
1. Thurston received a W-2 form from Wally World (EIN# XXXXXXXXXX), 126 Dumbo Road, Lost Island, CA. 92460, indicating that he earned $65,000 in salary, had Federal Income tax of $13,000 and California State tax of $5,000 withheld.
2. They received a 1099 form from Madoff Investments indicating the following.
a. They received $6,000 interest of which $2,000 was from Los Angeles Municipal Water District and $4,000 was from Generous Motors 7% bonds.
b. They received $1,800 in dividends on shares they have held more than three years of which $200 was from a foreign corporation.
c. They sold 100 shares of Enron Stock on June 18 of the tax year for $2,000 less a brokerage fee of $150. They bought the stock for a total cost of $8,000 on May 15, XXXXXXXXXXOn the same day ,they also sold 200 shares of Minnow Development Corporation for $3,000 less a brokerage fee of $200. They bought the stock for a total cost of $2,000 on July 5, 2000. Box D was checked for both sales.
3. Lovie’s travel business is named Three Hour Tours. She has an office in their home that she has used solely for her business. Since January 1st 2009. The office occupies 300 sq. ft. Of their 3,000 sq. ft. house. They bought their home on January 1, 2009 for $500,000 of which $100,000 was allocated to the land. In prior years they deducted $9,191 depreciation related to the office. She uses her Social Security Number as her employer identification number. She uses the cash method of accounting and had gross receipts of $60,000 for the year. She had the following expenses.
Advertising $20,000
Travel Society Dues 4,000
Travel Magazines 1,000
Business Insurance 8,000
Client Entertainment XXXXXXXXXX
Reservation Software XXXXXXXXXX,000
(expense the software)
Client Meals XXXXXXXXXX
Business Telephone XXXXXXXXXX,000
4. January 1st of the tax year they purchased a rental house at 757 Nathan Lane, Broadway, CA 90644 that they immediately rented to Dee Professor for $2,000 per month. They paid $240,000 and they estimated the land was worth about $80,000. Income from this property qualifies as qualified business income.
5. During the year they had the following expenses for the rental house:
Gardening $1,200
Water $2,400
Property Taxes $4,000
Loan interest
reported on 1098
from Sub Prime Bank $18,000
6. They made the following donations during the year:
Checks to Our Lady of Perpetual Debt Church,
9541 Holy Water Way, Costa Valley, CA 92459 $600
Clothes donated to Goodwill, 125 Downluck St,
Costa Valley, CA XXXXXXXXXXon July 5th of the tax year
(est. Thrift Store Value) $240
Painting by Pablo Picasso they donated to the Lost Island
Art museum, 12821 Monet Ave, Lost Island, CA 92460
on June 30 of the tax year. They bought it at a garage sale
for $25 on June 8, 2009 and it is was recently appraised
to be worth $4000.
7. One box contained the following items which Thurston thought might be deductible.
Uniform expense of $300 for his zookeeper uniform which has his name and Wally World emblazoned on the shirt and pants.
Receipts for $250 of gas to go from home to work.
Tuition fees of $1,500 paid to the Siegfried and Roy School of Lion Training ( EIN # XXXXXXXXXX, 54 White Tiger Way, Lost Wages, NV XXXXXXXXXXThis course improved his skills as a zookeeper but did not qualify for any education credits.
8. Another box contained the following receipts for Ginger
Tuition and fees for U.C. Death Valley $4,000 (reported on Form 1098T)
Textbooks XXXXXXXXXXpurchased from school)
Dormitory Expense 2,000
Sweater and Equipment she needed to
Compete on the school’s hockey team XXXXXXXXXX
A W-2 from Costmo Stores that she made $2,000 while working part-time during the school year.
Thurston has not taken any of the allowable education incentives for her in prior years and wants to take whatever will lower his taxes the most.
9. On May 18 of this year their sailboat, “The Titanic II” sunk in a major storm. They bought the boat September 7, 2000 for $32,000 and it was worth $14,000 when it sank and was not insured.
10. The medical expense box had the following receipts :
Medical Insurance premiums deducted from Thurston’s pay $9,600
Doctor’s bills for the Children XXXXXXXXXX
Prescriptions for Thurston XXXXXXXXXX
Hospital Bills for Lovie’s appendectomy 2,000
Doctor’s bills for Skippers Nose Job XXXXXXXXXX
Eyeglasses for Gilligan XXXXXXXXXX
11. They had the following expenses in their home
Housekeepers $2,100
Gas 1,200
Electricity 2,400
Water 1,200
Property Taxes 7,200
Gardener 1,800
Insurance XXXXXXXXXX
Mortgage interest paid too Wells City Bank(reported on Form XXXXXXXXXX12,400
The mortgage was used to purchase the house on 1/1/2009. The outstanding
Balances at the start and end of the tax year were $287,000 and $264,000
Respectively.
They want you to allocate the appropriate expenses for Lovie’s
Home office
12. During the year, they paid $3,000 to the Costa Valley Day Care Center (EIN# XXXXXXXXXXphone # XXXXXXXXXXBratt Circle, Costa Valley, CA 92459 for Gilligan and $4,000 to Our Lady of Perpetual Debt School (EIN # XXXXXXXXXXHoly Water Way, Costa Valley, CA 92459 for Mary Ann’ s tuition.
13. They did not make any estimated payments and received a refund of $800 for overpayment of the prior year’s California Income Tax. They took the California Tax as an itemized expense in the prior year.(Assume the full amount is includable in income.)
14. You agreed to charge them $300 to prepare the return even though the return was more complicated than you originally thought.
You should submit all forms that are required to be filed with the IRS to the dropbox. In addition to the tax return, please prepare a memo to the Howells informing them of any elections that you made, assumptions you had to make to prepare the return, and suggestions for how they might minimize their taxes for future years such as retirement plan contributions, etc. Indicate in the memo the amount you will charge them to prepare next year’s return assuming the facts and number of forms do not change significantly.