Harry J. and Ginevra M. Potter are live with their family at the Hedwig House Inn, which Harry operates. The Inn is located at 901 South Fourth Street, Louisville, KY 40203. Harry’s Social Security number is 777-77-7777 and Ginevra’s is 333-33-3333. Both are in their mid-20s and enjoy good health and eyesight.

1. The Potters have two sons, James Sirius (SS# 123-45-6789) and Albus Severus (SS# 234-56-7890), and one daughter, Lily Luna (SS# 345-67-8901). James Sirius is 17 years old, Albus Severus is 12 years old, and Lily Luna is 10 years old.
2. The Hedwig House Inn is operated as a sole proprietorship and had the following income and expenses for the year:

Room rental income $159,000

Butterbeer sales 4,665

Advertising expense 3,450

Depreciation 18,000

Mortgage interest on the Inn 28,450

Wages 17,000

Taxes and licenses 6,700

Supplies 9,100

Business insurance 6,500

Laundry expenses 3,800

Accounting fees 2,500

Office expenses 3,000

Utilities 6,400

All of the above amounts relate to the business portion of the Inn; the personal portion is accounted for separately. The Hedwig House Inn uses the cash method of accounting and has no inventory. The employer tax ID number is 63-5478694.

1. The Potters made estimated federal income tax payments of $17,000 and estimated state income tax payments of $7,000 (all made during 2014). They would like any overpayment of federal income tax refunded.
2. Ginevra is a part-time barista at a coffee shop. For the current year, Ginevra’s Form W-2 from the accounting firm showed the following:

Wages $10,000

Federal income tax withheld 1,700

State income tax withheld 400

FICA (OASDI & Medicare) 780

1. Harry is retired from the U.S. Army. His annual statement from the Army, Form 1099-R (Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.), includes the following amounts:

Gross distribution $9,500

Taxable amount 9,500

Federal income tax withheld 1,300

State tax withheld 300

State/Payer’s state no. KY

State distribution 9,500

1. Harry and Ginevra paid (and can substantiate) the following amounts during the year:

American Express interest $1,550

Dental expenses 2,500

Kentucky state income tax (for 2013) 400

Charitable contributions 1,900

Mortgage interest on home purchase 6,500

(personal portion)

Real estate taxes (personal portion) 800

Life insurance premiums 850

Investment interest 34

Automobile registration fees 420

(deductible portion)

Tax return preparation fee 500

Contributions to Rufus Scrimgeour’s 1,500

Reelection campaign

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

1. During the year, Harry and Ginevra received the following qualifying dividends and interest:

Interest:

Gringott’s Bank $450

Bank of England 220

City of New Albany Tax Exempt Bonds 1,500

Old Time Bank 4,500

Qualified dividends:

General Electric $450

Microsoft 200

Also, Ginevra owns Series EE U.S. savings bonds. During the year, the bond redemption value increased by $1,200. Ginevra has not elected the accrual method for these bonds. There were no English taxes paid on the interest from the Bank of England. All the above stocks, bonds, and bank accounts are community property.

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

Bludger Co. Quaffle Co. Snitch Co.

Sales price $9,000 12,000 $7,000

Basis 4,500 14,000 1,500

Date acquired 09/24/1999 03/12/2014 10/02/1997

Date sold 07/31/2014 06/20/2014 10/18/2014

1. Ginevra paid her ex-husband $10,000 alimony in the current year, as required under the divorce decree. Her ex-husband’s name is Dean Thomas and his Social Security number is 876-54-3210
2. Harry does all the significant work in the Hedwig House Inn and therefore he pays self-employment tax on 100 percent of the earnings from the Inn.
3. During the year, Harry’s uncle Remus died. Remus had a $45,000 life insurance policy that named Harry as the beneficiary. Harry received the check for the benefits payable under the policy on December 1 of the current year. Remus also left Harry a small nonoperating orchard with an appraised value of $125,000.
4. Two years ago, Albus won a contest and received a cash prize. The money is in a savings account in Albus’ name. His interest on the savings account in the current year is $3,500. Instead of having Albus fill out a tax return and pay the “kiddie tax,” Harry and Ginevra elect to report the interest income on their joint tax return.

Required: Harry and Ginevra have come to you to prepare their 2014 federal income tax return. Do not complete a Kentucky state income tax return. Harry and Ginevra have completed a tax organizer and have also given you several IRS forms (summarized above) 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 for the Potters. The following is a list of the forms and schedules that you will need to complete the tax return:

Form 1040 Schedule SE

Schedule A Form 8814

Schedule B Form 8949

Schedule C Qualified Dividends and Capital Gain Tax Worksheet

Schedule D

Answer rating: 100% (QA)

Introduction Harry and Ginevra Potter have sought assistance in preparing their 2014 federal income tax return As their tax advisor Ill guide them through the relevant forms and schedules to ensure ac... View the full answer