Tax Return Project Instructions and Tips

For your tax return project, you need to prepare a 2013 federal income tax return for Will S. and Mari N. Frost. Their information is located in Appendix E, Problem 1 of the file posted to Canvas. We will have a hands-on session on Thursday, March 5 during class time. Bring the tax return information, your laptop, and your software to that session. Plan to take many notes.

On or by Friday, April 17 at 2PM, you should turn in a physical copy of the following Forms and Schedules for the Frosts, produced with H&R Block home software: Form 1040, Schedules A-D, Form 4562 (just the “depreciation summary” page, not all six pages of this form), Form 8829 (Home expenses), and Form 2106 (unreimbursed employee expenses). This should be approximately 15-25 physical pages. You must also e-mail me a PDF file of all Forms, Schedules, and Worksheets by the deadline to receive any credit for the return. No late assignments will be accepted (physical or electronic). You may need to download PDF995 to be able to save your tax return to a PDF file. The print/save function of H&R Block’s software provides a direct link for one to download this software.

For those of you who are interested in extra credit, you may earn up to 3% of extra credit added directly to your final course grade for completing the 2013 federal income tax return for Problem 2 in Appendix E about Matthew B. and Shelli R. Thomson. Again, I require you to utilize H&R Block software and print out Form 1040 and Schedules A-E, Form 2106 (unreimbursed employee expenses). Form 6251 (AMT), Form 4562 (just the “depreciation summary” page, not all six pages of this form), and Form 8829 (Home expenses) – as relevant for this problem. You must provide me with a physical copy of these on or by Friday, April 17 at 2PM. You also must e-mail me a PDF file of your entire Return for Problem 2 (all Forms, Schedules, and worksheets) by the deadline to receive any credit for the return. No late returns (physical or electronic) accepted for extra credit.

You are welcome to slide your signed and sealed (signed across the seal) one envelope with the one or two returns under my door of Bryan 339 at any time prior to the deadline. You also are welcome to physically deliver the envelope to me in class or during my office hours, or to deliver it to a departmental assistant in Bryan 383 to put in my mailbox. (For the latter, have the assistant time stamp your envelope.)

Some key information and check figures to help you through this process are below. I anticipate that many of you will have several questions come up as you tackle this project. Aymone, my graduate student, is available to help with the regular credit tax return on Mondays and Wenesdays in Bryan 335, 10:00AM – 3:00PM. I suggest that you utilize Aymone’s services early and consistently. Plan to meet with Aymone at least twice. The first meeting would be for any questions that arise for you from reading the tax return information and from beginning to tackle the software. The second meeting would be for you bring up any technical issues that you encountered while completing the entire tax return so that you can make last minute finishing touches as needed.

There is no assistance provided for the extra credit return besides the check figures that follow. Aymone nor I will answer questions about it.

Do not consult with your peers or anyone else on either return. This project should be completed individually, entirely on your own. The Honor Code applies.

Have fun!

Problem 1, Key Figures:

A brief summary of the Frosts’ tax return for 2013 appears below.

Gross income—
Salary$94,000
Schedule B5,710
Schedule C35,338
Schedule D3,500
Other (Gambling)1,200
Deductions for AGI—
Deductible self-employment tax(2,497)
IRA Deduction (5,500)
AGI$131,751
Schedule A – Itemized deductions (deductions from AGI)(28,444) Personal and dependency exemptions(15,600)
Taxable income$87,707

Computation of tax liability through use of the Schedule D Tax Worksheet yields a liability of $13,129. To this is added the self-employment tax of $4,993 (see Schedule SE) for a total amount due of $18,122. Since the Frosts paid in a total of $17,800, the resultant tax due of $322 will need to be paid with the timely filed tax return.

Notes and Tips for Problem 1.
Numbers refer to the numbers in the tax return information.
6. Mari reports her §1031 like-kind exchange of the Lincoln County property on Form 8824. Information on the like-kind expense is reported in Part I and Part III is where the realized gain, recognized gain, and basis in the like-kind property received are reported. Mari’s basis in the property is its fair market value when her uncle passed away per §1014. Mari must recognize gain of $10,000, the lesser of the cash received or the realized gain of $160,000. This gain is reported on Line 11 of Part II of Schedule D (Form 1040). 7. The installment method generally applies to gains on dispositions of property if the seller receives at least one part of the purchase price in a year following the year of sale.

To follow this general rule (and defer recognition of some of the realized gain to the periods in which she will ultimately receive the installment payments), Mari should report the gain on the sale of the McCook land by completing Form 6252. The gross profit from the sale is computed in Part I. Mari’s $30,000 basis in the land was the fair market value of the property when her uncle died per §1014. Mari’s gross profit percentage from the sale is computed in Part II to be 0.75 ($90,000 ÷ $120,000), which translates into a gain of $15,000 on the $20,000 installment collected this year. Similar to the gain from the like-kind exchange (see #6 above), the gain on the installment sale is also reported on Line 11 of Part II of Schedule D (Form 1040).

8. nonbusiness bad debt

9. worthless securities

11. South Dakota does not have an income tax, so the Frosts should claim a sales tax deduction. Many taxpayers do not save their purchase receipts to document the sales tax they paid during the year, so they compute their sales tax deduction using the Optional Sales Tax Tables in the Schedule A instructions. For the Frosts, this computation yields a sales tax deduction of $1,728. Since they can substantiate $3,200 in sales tax paid during 2013, they should deduct $3,200 on line 5 of Schedule A (Form 1040). Be sure the sales tax box on line 5b is checked.

Extra Credit: Problem 2

A brief summary of the Thomsons tax return for 2013 appears below.

Gross income—
Salary$90,180
Interest Income 600
Taxable Refund450
Schedule C230,521
Schedule D(3,000)
Schedule E618
Other Income – Jury pay700
Deductions for AGI –
Deductible self-employment tax(10,136)
Line 36 – Jury pay (700)
AGI$309,233
Schedule A – Itemized deductions (deductions from AGI)(59,114) Personal and dependency exemptions(17,940)
Taxable income$232,179

Computation of tax liability through use of the Schedule D Tax Worksheet yields a liability of $52,932. To this is added AMT of $15,469 (see Form 6251), self-employment tax of $20,272 (see Schedule SE) and additional Medicare tax of $478 (see Form 8959) for a total amount due of $89,151. After taking into account the combined withheld tax and estimated tax payments of $89,500 [$6,500 withholding + $83,000 quarterly estimated tax payments], the Thomsons have an overpayment of $349 which they have chosen to apply towards their 2014 tax liability.