Gregory and Lulu Clifden’s Tax Return 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. For the current year, Lulu’s Form W-2 from the school district showed the following: 

5. Gregory is retired from the U.S. Navy. His annual statement from the Navy, Form 1099-R, is on Page D-12. 

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

7. 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 (Page D-12) 

Qualified dividends: 

Southwest Airlines...............$ 250 

Heinz Foods................550

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. 

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 (basis was provided to the IRS in all cases): 

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 selfemployment 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. Gary is a general partner in a partnership that owns a boutique hotel in northern California and leases the property to a hotel management company. Gary does not materially participate in the partnership activity but the partnership activity does rise to the level of a trade or business. The Schedule K-1 from the partnership is shown on Page D-9. 

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 from an exemption from coverage. The Clifdens purchased health insurance through the Covered California program and received the Form 1095-A shown on Page D-11. They had no other health insurance during 2018. Assume that the selfemployed health insurance deduction is $1,540. The Clifdens did not claim an advance premium credit. 

Required: 

Gregory and Lulu have come to you to prepare their 2018 federal income tax return. Do not complete a California state income tax return. Gregory and Lulu have given you several IRS forms (see Pages D-11 and D-12). Make realistic assumptions about any missing data (addresses, etc.) that you need. Do not file a federal Form 4952. The following is a list of the forms and schedules that you will need to complete the tax return: 

Note: 

The forms included in Appendix D are provided for the student to work on only one of the two comprehensive problems. If desired, additional forms may be obtained from the IRS website at www.irs.gov. 

Transcribed Image Text:

a Employee's social security number 256-43-8819 Safe, accurate, Visit the IRS website at efile CRS FASTI Use www.irs.gov/efile OMB No. 1545-000R b Employer identification number (EIN) 43-7654321 2 Federal ncome tax withheld 1 Wages, tips, other compensation 13,500.00 3 Social security wages 13,500.00 1,700.00 c Employer's name, address, and ZIP code 4 Social security tax withheld 837.00 Temecula Valley Unified School Dist. 5 Medicare wages and tips 13,500.00 7 Social security tips 6 Medicare tax withheld 31350 Rancho Vista Rd. 195.75 8 Alocated tips Temecula, CA 92592 d Control number 9 Verification code 10 Dependent care benefits e Employee's first name and initial Suff. 11 Nonqualified plans 12a See instructions for box 12 Last name 13 ry amploy பா கார் plan Lulu B. Clifden Thind-party ick pay 12b 33333 Fume Blanc Way 14 Other 120 Temecula, CA 92591 12d t Employee's address and ZP code 15 Sute Employer's state ID number 16 State wages, tips, atc. 17 State income tax 18 Local wages, tips, ete. 19 Local income tax 20 Locality name CA L 13,500.00 400.00 Department of the Treasury-Internal Revenue Service 2018 Form W-2 Wage and Tax Statement Copy B-To Be Filed With Employee's FEDERAL Tax Return. This information is being furnished to the Internal Revenue Service. Gold Co. Green Co. Orange Co. Sales price Basis Date acquired Date sold $1,450 $8,100 See 3,800 02/11/18 06/19/18 Form 1099-B 2,575 10/31/13 (Page D-12) 10/23/18