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Tax Return Problem
ACCT 374
Spring 2019
Dr. Swenson
Please prepare a 2018 Federal Individual income tax return for the Zimpsons, using
the following information. The return is to be prepared manually (i.e., no software
tools are allowed, and no typing) and it is to be done by each student individually (it
is not a group project). Please use 2018 rules.
Homer and Marge Zimpson are married and will file a joint return. Their Social Security
numbers are 888-88-8888 and 200-20-2000, respectively. Their address at the end of
2013 was 4501 W. Joshua Lane, Tucson, Arizona 85741. Living with them are their
children: Bart (SS # 333-33-3333), Lisa(444-44-4444), and Sammy (555-55-5555). Bart
is 23 and is a full time student at Whatsa Matta U. He earned $3500 from a part time job,
and had received $10,000 in student loans and $15000 in scholarships for the year. Lisa is
18 and is a part time student at a beauty college. She received $9000 in tips this year.
Sammy is 10 but is very enterprising, earning $12,000 from his lemonade stand this year.
The parents provided over half of the support for all children.
Also living in the Zimpsons home are Marge’s parents, Geezer and Geezee. Each earns
$5000 in pension funds, and each collects $5000 per year in Social Security benefits.
Both are blind and 70 years old, and the Zimpsons’s provide all of their support. Because
they are kindly, the Zimpsons also support a local unrelated and unemployed woman
(May Drahpaduse), who because of her bad hygiene, lives in the Zimpsons’ garage.
Marge is an attorney working for the firm of Dewey, Cheatham, and Howe. Her salary
for 2018 was $750,000, from which her employer withheld $30,000 of Federal income
taxes, $12,000 in state income taxes, and $6000 in Social Security (FICA) taxes. Since
she was sent for 2 months to work in the country of Bahlemia, the Bahlemian government
withheld the equivalent of $3200 in US dollars in local taxes.
Marge also enjoys collecting dead animals off the roads, which she then preserves and
sells (the technical term is “taxidermy”), to which she devotes about 20 days a year. In
2018 she sold $25,000 worth of her collection to fellow dead animal enthusiasts. Her
expenses related to this activity were:
Advertising
Business Licenses
Cost of animal carcasses sold
Meals
$6,000
$2,000
$4,000
$3,000
She runs this operation out of one of the house bedrooms. She estimates that the bedroom
is about 10 per cent of the square footage of the house. House expenses (not including
mortgage interest and taxes) for the year were $3,000.
Marge is also a partner in an investment partnership, Takscam LTD. During the year her
share of partnership losses was $28,000. She also had $3,000 of research and
development tax credits “flow through” to her from this partnership. She devotes no time
to this partnership during the year. The partnerships FEIN number is 85-111111.
Marge is also a shareholder in an S corporation, Huzzah, Inc (FEIN 95-22222). For the
year, Marge’s share of S corporation income was $6,000. She also had a $2,000 long
term capital gain flow through from that entity to her.
During the year, Marge was permanently transferred to Dewey, Cheatham, and Howe’s
new office in Phoenix, which is 120 miles away from her old office in Tucson. She was
given $2,000 by her company for moving expenses. She used the money to pay for
moving her office furniture, and related transportation costs. Assume that se meets all
relevant tests for moving expenses.
During the year, the Zimpsons rented their vacation home for $60,000. They rented it for
half the year, and used it for personal purposes the other half of the year. Costs associated
with the home were:
Mortgage interest and taxes
$20,000
Utilities, repairs, and misc. expenses
$10,000
New Roof
$30,000
New heating system
$30000
Depreciation
$2,000
Appraiser’s fee (to see how much their house might be worth) $2,000
Also, during the year the Zimpsons sold their principal residence (at 2308 Elaine Blvd.,
Tucson ,Arizona) and bought their current residence on Joshua Lane. They had
previously lived 5 years in the home. The sales price was $900,000, and their basis was
$400,000.Costs of sale were $25,000.
During 2018 the Zimpsons also received the following:
Dividends from Apple: $5000
Dividends from a Korean company of $6000, on which the Korean government had
withheld the equivalent of $200 in US taxes
Interest from a local bank account: $500
Interest on US Treasury bills: $2000
Interest on State of Nevada bonds: $2000
Winnings on a local TV game show: $600
Refund of State of Arizona income taxes (from 2006): $200
Gift from Marge’s mom: $3000
Stock Dividend from General Motors (GM gave each shareholder 1 share of GM stock.
GM stock as trading for $200 at the time)
Inheritance form Homer’s aunt: $20,000
The Zimpsons paid the following in 2018:
Alimony (To Homer’s ex wife) $27,000
Child Support (to Homer’s ex wife’s children) $3,000
Fines to City of Tucson, for having an unhealthy level of garbage in front of their house
(this was due to May)
$100
Mortgage interest on their principal residences $30,000
Property taxes on their principal residences $20,000
Local sales taxes $20,000
Medical expenses $20,000. They estimated that these expenses were about evenly
attributable to Bart, Lisa, Sammy, and May.
During the year, Homer was involved in an auto accident. His car was totally destroyed,
and had an FMV of $10,000 before the accident (he had bought the car 2 years ago for
$15,000. He received no insurance reimbursement for the car. However, the other driver
admitted fault for the accident and his insurance company paid Homer $500 for the
inconvenience of the accident.
The Zimpsons were active investors and sold the following in 2018:
General Motors, for $7,000. They had bought the stock six months earlier for $2,000.
Cisco stock for $30,000. They had bought the stock 2 years before for $70,000.
Raw land in Montana, for $150,000. They had inherited the land from Homer’s aunt three
years before. At that time, the aunt had a basis of $2,000, and the FMV was $12,000
Stock in Blackhole, Inc, for $0 (the stock was worthless). The Zimpsons had invested
$550,000 in this company five years before. Luckily, the company had made a Section
1244 election.
A Bond in General Electric Corporation, for $3,000. The bond originally cost Homer
$5,000, and he sold it to his brother, Krusty.
Homer is self-employed and has a bird grooming business. Items relating to the business
are as follows:
Revenues
Supplies
Wages paid to employees
Federal Taxes paid
Advertising (on local trees)
Utilities
Meals
Miscellaneous office fees
Medical insurance for his employees
Contributions to pension plans
$170,000
5000
5,000
2,000
5,000
3,000
2,000
10,000
20,000
(half of which was for Homer, and half for his employees)
20,000
In December 2018, his business purchased the following:
Machinery and equipment for $70,000 (salvage value of $5,000); Truck for $40,000
In June of 2018 the company sold an older truck for $10,000. The company bought it in
April 2015 for $15,000 and had taken MACRS depreciation.
To get forms, go to:
www.irs.gov
then select: form and instruction number make sure to use 2018 forms. The
instructions are also on-line—be sure to download those, too. You will need Form
1040 (and related schedules a,b,c,d,e,se), forms 3800, 3903,4797, 4562, 6251, and
others (TBA).