Question

Gregory and Lulu Clifden's Tax Return

Note: This problem is divided into four parts. You will need to complete some of the forms in the other parts in order to determine the amounts that are used on Form 1040.

Gregory R. and Lulu B. Clifden live with their family at the Rock Glen House Bed & Breakfast, which Gregory operates. The Bed & Breakfast (B&B) is located at 33333 Fume Blanc Way, Temecula, CA 92591. Gregory's Social Security number is 543-88-9756 and Lulu's is 256-43-8819. Both are in their mid-40s and enjoy good health and eyesight.

1. The Clifdens have three sons, Gerald A. (SS# 466-74-1131), Gary T. (SS# 465-76-8375), and Glenn E. (SS# 475-23-1426). Gerald is 17 years old, Gary is 12 years old, and Glenn is 10 years old.

2. The Rock Glen House Bed & Breakfast is operated as a sole proprietorship and had the following income and expenses for the year:

Room rental income $137,775
Vending machine income 2,100
Advertising expense 4,810
Depreciation 18,100
Mortgage interest on the B&B 33,010
Wages of maid 17,540
Taxes and licenses 6,420
Supplies 8,870
Business insurance 6,300
Laundry expenses 4,290
Accounting fees 1,850
Office expenses 2,400
Utilities 6,350

All of the above amounts relate to the business portion of the Bed & Breakfast; the personal portion is accounted for separately. The Rock Glen House Bed & Breakfast uses the cash method of accounting and has no inventory. The employer tax ID number is 95-1234567.

3. The Clifdens made estimated federal income tax payments of $2,000 and estimated state income tax payments of $6,000 (all made during 2017).

4. Lulu is a substitute schoolteacher with the local school district. For the current year, Lulu's Form W-2 from the school district showed the following:

Wages $10,300
Federal income tax withheld 1,650
State income tax withheld 380
FICA (OASDI & Medicare) 787.95

5. Gregory is retired from the U.S. Navy. His annual statement from the Navy, Form 1099-R.

6. Gregory and Lulu paid (and can substantiate) the following amounts during the year:

Mastercard interest $1,480
Dental expenses 2,600
California state income tax (for 2016) 450
Charitable contributions 1,875
Mortgage interest on home purchase
(personal portion) 7,631
Real estate taxes (personal portion) 830
Life insurance premiums 845
Investment interest expense 3,100
Automobile registration fees
(deductible portion) 450
Tax return preparation fee 475
Contributions to George Clinton’s
reelection campaign 1,000

None of the investment interest is related to amounts borrowed to purchase the City of Atlanta tax-exempt bonds.

During the year, Gregory and Lulu received the following qualifying dividends and interest:

Interest:
Bob’s Big Bank $375
Bank of Ireland 220
City of Atlanta Tax Exempt Bonds 1,490
Vintage Bank See 1099-INT
Qualified dividends:
Southwest Airlines $220
Heinz Foods 560

7. Also, Lulu owns Series EE U.S. savings bonds. During the year, the bond redemption value increased by $1,300. Lulu has not elected the accrual method for these bonds. There were no Irish taxes paid on the interest from the Bank of Ireland. All the above stocks, bonds, and bank accounts are community property.

8. Lulu has a stock portfolio. During the year she sold the following stock, shown on her Forms 1099-B as follows:

Orange Co. Gold Co. Green Co.
Sales price $6,100 See $2,575
Basis 3,800 Form 1,450
Date acquired 02/11/15 1099-B 10/31/12
Date sold 06/19/17 10/23/17

9. Lulu paid her ex-husband $4,800 alimony in the current year, as required under the divorce decree. Her ex-husband's name is Hector Leach and his Social Security number is 566-23-5431.

10. Gregory does all the significant work in the Bed & Breakfast and therefore he pays self-employment tax on 100 percent of the earnings from the B&B.

11. During the year, Gregory's uncle Martin died. Martin had a $50,000 life insurance policy that named Gregory as the beneficiary. Gregory received the check for the benefits payable under the policy on November 30 of the current year. Martin also left Gregory a small nonoperating farm with an appraised value of $120,000.

12. Two years ago, Gary won a contest and received a cash prize. The money is in a savings account in Gary's name. His interest on the savings account in the current year is $3,500. Instead of having Gary fill out a tax return and pay the ‘‘kiddie tax,’’ Gregory and Lulu elect to report the interest income on their joint tax return.

13. Lulu was not eligible for health care benefits due to the part-time nature of her job thus health insurance for the Clifden household was purchased by Gregory. The Clifdens are not eligible for an exemption from coverage. The Clifdens purchased health insurance through the Covered California program and received the Form 1095-A. They had no other health insurance during 2017. Assume that the self-employed health insurance deduction is $1,152. The Clifdens did not claim an advance premium credit.

Required: Gregory and Lulu have come to you to prepare their 2017 federal income tax return. You are not required to complete the state income tax return. Gregory and Lulu have completed a tax organizer and have also given you several IRS forms (see Forms 1099-R, 1099-B and 1099-INT) that they were not sure what to do with. Make realistic assumptions about any missing data (addresses, etc.) that you need. Do not file a federal Form 4562, Form 4952, or Form 8829, or claim the Earned Income Credit (even if they qualify) for the Clifdens. The following is a list of the forms and schedules that you will need to complete the tax return:

Form 1040 Schedule SE Child Tax Credit Worksheet
Schedule A Form 8812 Qualified Dividends and Capital Gain Tax Worksheet
Schedule B Form 8814 Shared Responsibility Payment Worksheet
Schedule C Form 8849
Schedule D Form 8962

Answer 1