Comprehensive Problem 2 - Part 1: Taxpayer information, Form 1040, Schedule 1, Schedule 4, Schedule 5, Schedule A, and Schedule B

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 to be used on Form 1040. Some of the data information will be reproduced in the other parts for convenience.

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 and Lulu enjoy good health and eyesight.

1. The Clifdens have three sons. Gerald is 17 years old, Gary is 12 years old, and Glenn is 10 years old. All three boys live at home and the Clifdens provide more than 50% of their support.

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

Room rental income $138,000 Vending machine income 2,100 Advertising expense 4,810 Depreciation for book and tax purposes 18,100 Mortgage interest on the B&B 23,010 Wages of cleaning people 17,540 Taxes and licenses 6,420 Supplies consumed 18,870 Business insurance 6,300 Laundry expenses 4,289 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 B&B 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 2018).

4. Lulu worked about 1,000 hours as a substitute schoolteacher with the local school district. She also spent $276 out-of-pocket for various supplies for her classroom. Lulu's Form W-2 from the school district is located on a separate tab.

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 (orthodontics for Gary) 4,600 California state income tax (for 2017) 2,450 Charitable contributions 3,875 Deductible interest on home (personal portion) 7,631 Real estate taxes (personal portion) 2,830 Life insurance premiums 845 Automobile registration fees (deductible portion) 45 Tax return preparation fee 475 Contributions to Donald Trump's election campaign 1,000

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 Temecula Tax Exempt Bonds 1,490 Vintage Bank See 1099-INT Qualified dividends: Southwest Airlines $250 Heinz Foods 550

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 stock, for which she received 1099-B Forms, as follows (basis was provided to the IRS in all cases):

Orange Co. Gold Co. Green Co. Sales price $8,100 See Form $1,450 Basis 3,800 1099-B 2,575 Date acquired 02/11/18 10/31/13 Date sold 06/19/18 10/23/18

9. Lulu paid her ex-husband $4,800 alimony in the current year, as required under the 2014 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. Gregory is a general partner in a partnership that owns a boutique hotel in northern California and leases the property to a hotel management company. Gregory does not materially participate in the partnership activity but the partnership activity does rise to the level of a trade or business. See Schedule K-1 from the partnership.

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 2018. Assume that the self-employed health insurance deduction is $1,540. The Clifdens did not claim an advance premium credit. Click here to access the completed Form 1095-A to use when completing Form 8962.

Required: Gregory and Lulu have come to you to prepare their 2018 federal income tax return. You are not required to complete the state income tax return. Gregory and Lulu have given you several IRS forms (see 1099-B and 1099-INT) assumptions. Do not file a federal Form 4952.

• Click here to access the tax table for this problem.
• The taxpayers do not want to make a contribution to the presidential election campaign.
• Enter all amounts as positive numbers, except for a "loss." If required, enter a "loss" as a negative number on the tax form.
• If an amount box does not require an entry or the answer is zero, enter "0".
• If required, round your answers to the nearest dollar. On Schedule SE, use the rounded amounts in subsequent computations.
• Remember, the taxpayers make the election to include any child's interest and dividends on their tax return.
• Make realistic assumptions about any missing data (addresses, etc.) that you may need.

The following is a list of the 13 forms and schedules that you will need to complete the tax return:

Form 1040 2018

Lulu's W-2 Form For the current year, Lulu's Form W-2 from the school district showed the following: Safe, accurate, a Employee's social security number 256-43-8819 OMB No. 1545-0008 IRS e n file Visit the IRS website at www.irs.gov/efile FAST! Use 2 b Employer identification number (EIN) 43-7654321 1 Wages, tips, other compensation 13,500.00 Federal income tax withheld 1,700.00 | 4 3 Social security wages 13,500.00 Social security tax withheld 837.00 c Employer's name, address, and ZIP code Temecula Valley Unified School Dist. 31350 Rancho Vista Road Temecula, CA 92592 6 Medicare tax withheld 5 Medicare wages and tips 13,500.00 195.75 7 Social security tips 8 Allocated tips d Control number 9 Verification code 10 Dependent care benefits Lulu's W-2 Form For the current year, Lulu's Form W-2 from the school district showed the following: Safe, accurate, a Employee's social security number 256-43-8819 OMB No. 1545-0008 IRS e n file Visit the IRS website at www.irs.gov/efile FAST! Use 2 b Employer identification number (EIN) 43-7654321 1 Wages, tips, other compensation 13,500.00 Federal income tax withheld 1,700.00 | 4 3 Social security wages 13,500.00 Social security tax withheld 837.00 c Employer's name, address, and ZIP code Temecula Valley Unified School Dist. 31350 Rancho Vista Road Temecula, CA 92592 6 Medicare tax withheld 5 Medicare wages and tips 13,500.00 195.75 7 Social security tips 8 Allocated tips d Control number 9 Verification code 10 Dependent care benefits