James A. Varney and Denise M. Varney 1. James and Denise Varney are married and file a joint return. James is 48 years of age and Denise is 49. James is employed fulltime as an electrical engineer for Livingston Unitech Corporation, Ltd. Denise is a selfemployed design consultant. They have two children, Pamela and Vernon, who live at home, did not earn any income, and receive all of their support from their parents. Pamela is 20 years old and attended college on a fulltime basis, and Vernon is a 16-year-old high school student. The Varneys currently live at 3102 Willowpoint Drive, Houston, Texas 77069, in a home they have owned since July, 1998. The phone number they wish to show on their tax return is James's daytime office number of 7139848987. 2. Social security numbers (SSN) and birthdates (DOB) for James, Denise, and their children are provided below:

James A. Varney (DOB: 11/5/1970) . SSN: 332259610

Denise M. Varney (DOB: 4/12/1969) . SSN: 333519251

Pamela G. Varney (DOB: 11/6/1998) .. SSN: 452196552

Vernon N. Varney (DOB: 2/12/2003) .. SSN: 452-23-5694

3. James, Denise, Pamela, and Vernon were covered by health insurance all year.

4. Neither Denise nor James want to contribute $3 to the Presidential Election Campaign Fund.

5. James and Denise want to file their return on paper.

6. James received a Form W2 for 2018 from his employer, Livingston Unitech Corporation, Ltd., 3445 Synergy Lane, Houston TX 77069 (EIN 683123857) which reported the following relevant information:

Box 1: Gross wages and taxable benefits . . . . . . . . . . . . . . . . . $118,000

Box 2: Federal income tax withheld . . . . . . . . . . . . . . . . . . . . . . 21,500

Box 3: Social Security wages . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,000

Box 4: Social Security tax withheld . . . . . . . . . . . . . . . . . . . . . . . 7,316

Box 5: Medicare wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,000

Box 6: Medicare tax withheld . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,711

7. Denise operates her business under the name "Design by Denise." Her office is located at 2359 Dawnridge Drive, Houston, Texas 77025. The federal EIN for her business is 514867579 and the principal business code is 541400. Denise, who materially participates in her business, has operated it profitably for 3 of the last 4 years and is fully "at risk" with respect to her investment. She also has filed all required Forms 1099.

Gross receipts (not reported on Form 1099) . . . . . . . . . . . . . . . . . . . . . . $90,000

Gross receipts (reported on Form 1099; payer was Bernice Ngs Furnishings, EIN 688752318, nonemployee compensation) . . . . 25,000

Expenses: Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000

Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000

Legal services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500

Office expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300

Equipment and machinery rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,800

Office rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000

Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000

Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500

Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,400

Subscriptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500

8. In accounting for her business, Denise uses the cash method. For 2018, her records show the following income and expenses. She participated in Jamess health insurance plan and did not have to pay any premiums.

9. In connection with her business, Denise often travels from her business location to the homes and offices of her clients, where she provides advice and expertise on interior design. During 2018, her written auto log shows that she drove her vehicle (a 2018 Mitsubishi Mirage that she purchased and put in service on May 13, 2017) 22,400 miles for business purposes, 3,800 miles for commuting, and 1,800 miles for personal purposes. Denise did not keep track of all her specific expenditures for the car and she wishes to deduct her auto expenses using the standard mileage rate for 2018. She has written evidence to support her mileage. The business car was available for use during off-duty hours, but she and her spouse also have another vehicle available for personal use.

10. Also in connection with her business, Denise purchased a Mac computer and HP laser color printer. The computer was purchased for $2,200 on November 10, 2018. The printer was purchased for $5,800 on September 30, 2018. Denise used both the computer and printer for business purposes at her office 85 percent of the time, and personal purposes 15 percent of the time, for which she has written evidence. Denise would like to deduct the maximum allowable amount on each of these assets.

11. In addition, Denise sold a storage building that she used in her business. She paid $30,000 for the building on January 12, 2013, and sold it on March 14, 2018 for $33,000. Her adjusted basis in the building was $26,027. (Assume this basis already accounts for whatever you claim as a 2018 depreciation deduction for the building.) Denise depreciates the building using straight-line depreciation. The transaction was reported on Form 1099-S, and Denise has no prior year section 1231 losses.

12. James and Denise received Forms 1099INT reporting in box 1 (regular or OID interest) or box 8 (taxexempt interest) the following interest income during 2018:

Box 1 Box 8

Regular or OID..........................................................................Texas

Johnson & Johnson . . . . . . . . . 700 . . . . . . . . . . . . . . . . . . . . . . 0

Caterpillar . . . . . . . . . . . . . . . . . 900 . . . . . . . . . . . . . . . . . . . . . . 0

Fidelity TaxFree Bond Fund . . . . 0 . . . . . . . . . . . . . . . . . . . . . . . . 600

13. James and Denise received Forms 1099DIV reporting the following dividends during 2018.

Box 1a Box 1b

Ordinary...................................... Qualified

American Sun Corp. . . . . . . . $400 . . . . . . . . . . . . . . . . . . . . $ 400

Global Genetic Dynamics . . . 200 . . . . . . . . . . . . . . . . . . 200

J.P. Morgan . . . . . . . . . . . . . . 300 . . . . . . . . . . . . . . . . . . . . 300

14. James and Denise have neither a foreign bank account nor a foreign trust.

15. James and Denise received Form 1099B from Morgan Stanley reporting the following stock sales during 2018. For all of the sales, the basis amount was reported to the IRS.

Corporation Shares Date Acquired Date Sold Sales Price Basis Box 3

Bishop Radiocorp, Inc. 600 21518 91818 $23,200 $18,175

McGowan Chemical 800 42018 102118 10,000 13,800

Total shortterm $33,200 $31,975

Patel Royal Electric, Inc. 300 72512 110518 6,700 8,500

Agro Memory Group 100 31011 121218 9,400 7,000

Total longterm $16,100 $15,500

16. Statements describing the above sales are not being attached separately in lieu of Form 8949.

17. In a transaction not reported on Form 1099-B, James sold two African jewels on August 13, 2018 for $2,400. He bought the jewels on July 27, 1998 for $300.

18. In August 2018, Pamela enrolled on a fulltime basis for a bachelor's degree at the University of Houston, 4800 Calhoun Road, Houston, Texas 77004 (EIN 746001399). Pamela graduated from Memorial City High School in May and attended the University of Houston from August to December, 2018. In August, James and Denise paid $3,500 in qualified tuition for Pamela's first semester. In December, they paid another $3,500 in qualified tuition for her second semester beginning in January, 2019. Pamela received a Form 1098T from the University reporting payments received for qualified tuition and related expenses of $7,000 in box 1. Box 2 is empty but Box 7 is checked. Assume that, if eligible, the Varneys want to claim credits rather than deductions for these expenses.

19. Neither Pamela nor Vernon have been convicted of a felony for possessing or distributing a controlled substance.

20. James and Denise made timely estimated Federal income tax payments of $10,000 for the year ($2,500 each quarter on April 15, June 15, September 15, 2018 and January 15, 2019).

21. James and Denise incurred and paid the following personal expenses during 2018:

Taxes: Real estate taxes on home (with State Street Bank (reported on Form 1098 together with mortgage interest see interest, below) . . . . . . . . . . . . . . . . . 8,691

Sales tax rate (State 6.25%; Local 2.00%) . . . . . . . . . . . . . . . . . . . . . . . . . . 8.25%

Interest: Home mortgage with State Street Bank (also reported on Form 1098 together with Real Estate taxes, see above) . . . . . . . . . . . . . . . . . . . . . . . 9,600

Cash contributions (all substantiated): United Way . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500

Make A Wish Foundation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,275 22.

Use these check figures on Form 1040 and Schedule 1 to help you in preparing your return:

Business income (Schedule 1, line 12) . . . . . . . . . . . . . . . . . . . . . . . $ 46,832

Total income (1040, line 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178,230 AGI (1040, line 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174,921

Taxable income (1040, line 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,180

Tax overpaid (1040, line 19) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,369

Assignment: Complete the Varney's Federal income tax return for 2018. Assume that the Varneys are filing their return on time (before April 15, 2019). In preparing the return, you will need to use forms 1040, 4562, 4797, 8949, 8863, and schedules 1, 3, 4, 5, A, B, C, D, and SE. (Note: you may need to print and extra p.2 for Form 8949.) The total tax return is approximately 23 pages. If the Varneys have a refund due, request that it be credited to their 2019 taxes.