ACCT 351, Fall 2012, Sections 3, 4, 5
Tax Preparation Assignment
(Due Date for Monday Section: Dec 10)
(Due Date for TR sections: Dec 11)
This is an individual assignment. The entire tax return has to be completed on an individual basis
without the help of tax software. You may not share your work with other students. Failing to
follow these instructions may result in referring you to the Office for Academic Integrity.
1. Paul and Paula Baker are married taxpayers, ages 45 and 43 who file a joint tax return for 2011.
They live at 129 Maple Ave., Vienna, VA 22180. Paul runs an equipment rental business. Paula is a
salesperson in a publishing company. Her W2 information follows.
Salary
Federal taxes withheld
Virginia income taxes withheld
Social security withheld
Medicare withheld
Dependent care benefit received
Paula
$65,000
7,700
2,100
2604
899
1,000
2. Paula’s employer does not offer any type of health insurance or retirement benefits. Paula incurred
certain expenses in connection with her job as a salesperson. She used her own car for business
related driving. She drove her car 19,100 miles in 2011. Of the total miles, $15,500 was work
related, (8,000 miles before July 1, and 7,500 miles during the second half of the year). Her
commuting miles were 2,400 (daily commute 8 miles) and she drove 1,200 miles for other personal
purposes. Paula uses the standard mileage rates for calculating her car expenses on their tax return.
Paula also incurred the following job-related expenses. She was reimbursed $5,000 under an
accountable plan. The $5,000 was not reported on her Form W-2.
Employee expenses
Meals and entertainment
Travel expenses while away from home
Other business expenses
Paula
$800
2,850
220
3. Bakers have two children, Tim aged 3 and Tom aged 19. Tom is a full time college student. Baker’s
paid $9,000 for his tuition and fees, $800 for his books, and $5,200 for his room and board while he
attended college during 2011. Bakers intend to claim American Opportunity credit for Tom. Their
social security and date of birth (DOB) information are:
Paul Baker
Paula Baker
Tim
Tom
Soc. Sec. No.
111-11-1112
222-22-3333
222-22-2222
333-33-3333
DOB
5/6/1965
12/9/1967
5/5/2008
12/8/1992
4. Partial list of Baker family’s tax related information:
Items
Other medical expenses, doctors, medicine, dentists, etc.
Charitable donations, cash
Home mortgage interest
Interest on car loan
Interest on credit cards
Real estate taxes paid for their personal residence
Virginia car taxes paid in 2011
Tax preparation fees paid in 2010
Refund of state income taxes for 2010 (the family had itemized in 2010*)
Amount
10,200
1,500
9,950
1,980
670
4,480
660
460
567
* Assume their itemized deductions in 2010 was greater than their standard deduction by $6,200.
5. Baker’s paid $7,500 to KinderCare LLC for child care. The company’s EIN (employer identification
number) is: 54-2899600; and its address is: 1000 Main St., Fairfax, VA 22030.
6. Baker’s own two rental properties. Rental condo #1 (part of a multi-family residential building) is
located on 1700 University Dr., Fairfax, VA 22030, and was purchased on July 1, 2005 for $500,000
(Land $100,000, building, $400,000). This property was purchased as an investment property and
has been rented since its purchase. For 2011, the rental income and expenses are as follows:
Rent received
Mortgage interest paid
Property taxes paid
Condo fees
Management fees
Depreciation
$11,900
$14,500
$6,750
$3,200
$2,400
$14,544
Bakers did not make personal use of this condo and had no suspended rental losses on this property
from prior years. Rental condo # 2 (multifamily residential condo located on 1600 International
Drive, McLean, VA 22102) purchased on July 1, 2011 for $280,000 (Land $70,000, building,
$210,000). This property was purchased as an investment property and has been rented since its
purchase. Bakers rented the property on July 10 and it remained rental for the rest of 2011 (property
was owned for 183 days and rented for 174 days in 2011). For 2011, the rental income and expenses
are as follows:
Rent received
Mortgage interest paid
Property taxes paid
Condo fees
Depreciation
$13,000
$4,900
$1,700
$900
$3,501
Backers did not make personal use of this condo. They are active participants in the rental of both
properties.
7. Paul Baker’s business is operated as a sole proprietorship. The business is names, Northern Virginia
Rental Experts, and its facilities are located at 19240 Lee Highway, Fairfax, VA. The main activity
of the business is rental of construction and agricultural equipment and machinery. He also sells
some small agricultural tools equipment. Paul uses Hybrid Method (accrual for inventory, inventory
reported at cost, and cash basis for all other expenses) to report his taxable income in this business.
In collections from customers totaled $320,000. Expenses were as follows:
Amount
$11,400
50,000
14,800
2,400
37,800
2,960
55,870
2,720
4,234
5,112
2,440
5,750
12,000
5,080
3,400
32,450
19,740
17,230
Beginning inventory of merchandize
Purchases
Ending inventory of merchandize
Returns and allowances
Wages paid to employees (other than Paul who works in the business)
Social security, Medicare and other payroll related taxes
Facility rent
Supplies
Car and truck expenses used solely for business (assume fully depreciated)
Office expenses
Utilities
Interest expense (on loans used for regular business activity)
Insurance, business liability
Legal and professional services
Heath care premiums to cover himself and his family
Depreciation
Advertising
Repairs
Since Paul is not covered by any employer retirement account, he contributed $5,000 to a
traditional IRA account in December of 2011. During 2011, Paul made four equal payments of
$1,100 for quarterly estimated taxes to cover for federal income taxes resulting from his business
activity. He also made four quarterly estimated tax payments of $600 to cover his VA income tax
liability. He made these payments on the 15th of April 2011, June 2011, Sept. 2011 and January
2012. Paul uses cash method of accounting, except for calculating cost of goods sold. Inventory
is valued at cost and there was no change in inventory valuation during the year.
Bakers had the following personal casualties in 2011
Item
Damage to family
house roof*
Personal Auto*
Date
purchased
Date of
incident
Adjusted
basis
FMV
before
incident
FMV
after
incident
Insurance
proceeds
05/12/1992
04/18/2011
23,500
14,050
1,560
1,500
08/20/2008
04/18/2011
28,300
22,300
4,800
14,500
Type
Personal
Personal
*The roof and the automobile were damaged as a result of a major hurricane (single event)
8. On October 1, 2011, Paul’s business warehouse was damaged by fire. The warehouse was purchased
on 5/20/2001 for $370,000 and had an adjusted basis at the date of fire of $280,000. Assume that fair
market value of the warehouse before fire was $350,000 and immediately after the fire its value was
appraised to be $320,000. He received $25,300 from insurance company. and spent $28,000
repairing the warehouse. Depreciation claimed on the warehouse up to the date of fire was $17,435
9. Bakers also sold the following stocks in 2011:
Item
250 shares of IBM
Date Acquired
05/12/2007
Date Sold
04/18/2011
Cost or
other basis
$23,000
Sale Price
$26600
50 share of Google
08/20/2008
06/09/2011
19,400
14,500
100 share of GE
12/10/2010
4/9/2011
8,400
9,500
Bakers also have a short-term capital loss carry forward from 2010 of $1,900.
10. They also received $2,800 dividends from PEPCO Utilities of which $2600 was qualified dividend.
Required:
Prepare the 2011 tax return for the Baker family. You need to download all the relevant forms from
IRS site (you can also search for the forms in Google using the form number or worksheet name).
Prepare a draft return and make any necessary corrections in your draft version. After completing the
draft version, type your final results. Organize your tax return in proper order and attach your
original hand-written draft and turn in your assignment by the due date. WRITE YOUR NAME and
G NUMBER ON TOP RIGHT SIDE of Form 1040 or on the cover page, if any.
GUIDE TO TAX RETURN PREPARATION:
Use 2011 tax forms and prepare the return for 2011. The forms you need are:
Forms 1040, 2441, 4684, 8582, 8863,
Child Tax Credit Worksheet. (IRS Publication 972, pages 4 and 5).
Qualified Dividends and Capital Gains Worksheet
IRA deduction worksheet.
Schedules, A, B, C, D, E, SE
Instructions for completing these forms can be found in individual instruction booklets found for each
form on www.irs.gov, or in IRS publication 17.
What follows are my suggestions on the steps required to prepare this return. It is possible that I have
overlooked certain steps, but this is as close as I could get. I leave you to read IRS instructions and find
additional steps, if necessary.
1. Complete the top section and Dependent section of Form 1040. Bakers choose Yes in response to the
Presidential Election Campaign question.
2. Enter Paula’s gross wage on line 7.
3. Complete Schedule B for dividend income. Carry relevant amounts to lines 9a and 9b of Form 1040.
4. Complete Schedules C. Carry net profit to line 12 of 1040.
5. Complete Schedule SE. Enter the resulting figures on pages 1 and 2 of Form 1040, lines 27 and 56.
6. Complete Schedule D both pages. No need to complete Form 8949 for this exercise. Carry the result,
to line 13 of Form 1040.
7. Partially complete page 1 of Form 4684 using information for personal casualty and theft. Stop when
it prompts you to enter AGI.
8. Complete page 2 of the Form 4684 for fire damage to the warehouse. Carry any losses on line 38a to
line 14 of Form 1040.
9. Complete Form 1040, page 1 (lines 7, 9, 10, 12, 13, 14) using available information.
10. Complete page 1 of Schedule E to line 22.
11. Complete Form 8582. Amounts in part II, III, IV of this form should be shown in positive even if
indicating a loss. To complete Form 8582, you need to calculate Modified Adjusted Gross Income or
MAGI. To calculate MAGI, add up amounts in lines 7 through 21 of Form 1040 (except line 17
which is not known at this time). Subtract self-employed health insurance. The resulting amount is
MAGI. Complete Form 8582 using MAGI and any loss or income from rental properties 1 and 2.
Total losses allowed on line 16 should be carried over to Schedule E, line 22. Do not complete any
worksheets for Form 8582.
12. Return to Schedule E and complete the rest of this form. Carry the amount on line 26 of Schedule E
to line 17 of Form 1040.
13. Complete IRA deduction worksheet.
14. Complete page 1 of 1040.
15. Complete page 1 of from 4684 and carry the resulting amount from line 18 to Schedule A line 20.
16. Complete Form 2106. Carry over the amount from line 10 of this form to line 21 of Schedule A.
17. Complete Schedule A using other relevant information. Be careful to include the first three
installments of estimated VA tax payments on line 5a.
18. Complete Form 6521 (optional for this exercise).
19. Go to page 2 of Form 1040 and complete lines 38 through 43. Calculate tax using tax tables in your
book or the tax Schedules shown in the front cover of your book for 2011. Enter the resulting tax
figure on line 44 and 46. Since Bakers have some qualified dividend, be careful about calculation of
their taxes. You need to fill in Qualified Dividends and Capital Gains Worksheet at this stage.
However, if you can calculate the tax using textbook procedures, you may skip preparation of the
Worksheet.
20. Form 2441. Complete page 2 and then page 1 of Form 2441. Enter the resulting credit on line 48.
(To find earned income for lines 4 and 18 of this form, simply use tentative profit from line 29 of
Schedule C. (Caution: Do not follow IRS Form instructions for this step.)
21. Complete Form 8863 and carry the resulting nonrefundable and refundable credits to lines 49 and 66
of Form 1040.
22. Complete Child Tax Credit Worksheet to calculate the credit and enter the resulting credit on line 51
of Form 1040.
23. Complete Form 1040 lines 54, 55, 61, 62 (estimated tax payments), 63 and the remainder of page 2.
Assemble your tax return in the following order (DO NOT INCLUDE instruction pages that
accompany some forms).
1040 (page 1, page 2)
A
B
C (both pages)
D (both pages)
E (page 1 only)
SE (page 1 only)
2441
4684 (both pages)
8863 (both pages)
8582 (page 1 only)
Child tax credit worksheet
Qualified Dividends and Capital Gains Worksheet
Ignore any other worksheets that IRS publications may instruct you to prepare.
IRA deduction worksheet.