Purpose: The purpose of this is not merely to learn how to fill-in
Purpose: The purpose of this is not merely to learn how to fill-in
forms but to enable you to meet the following goals:
Calculate individual income tax.
Identify and calculate business deductions and losses.
Apply the elements of taxation of property transactions, including
basis, cost recovery, gains and losses and non-recognition
transactions.
Task: In order to successfully complete this assignment, you must.
Prepare the 2020 federal income tax returns, including all required forms
and schedules, as needed for all members of the Lopez family.
Throughout the return you will see instances where a line on the 1040,
indicates to attach either a schedule or a specific form if required. You
should review the information and instructions to determine and if required
include it as part of a completed return. You can ignore the requirement to
attach a W-2.
When the form contains the phrase (attach schedule), without identifying a
specific form or schedule, this indicates that the amount on the form needs to
be further detailed but there is no specific form on which to do so.
In these cases, you should prepare a schedule that does so, such as in the
following example:
Professional Fees $1,200
Auto expenses 300
Miscellaneous 120
Total, Form 1040, Schedule A, line 11 $1,620
Be sure to attach a list of any positions or conclusions that you made in the
preparation of the return. These will assist in the grading of the return and
would be part of the expectations at a firm to be included in the client file.
Assume that the return is being filed on time.
2
Criteria for Success: In order to earn maximum credit for this
assignment be sure to review the grading rubric.
Dimension/Task Fair Quality
(30 pt.)
Average Quality
(40 pts.)
Excellent
(45 pts.)
Business
Income – 20%
Your return meets
ANY of these
criteria:
-Key items requiring
special tax treatment
were not identified.
-Business income is
materially incorrect
Your return meets ANY
of these criteria:
-A key item requiring
special tax treatment
was not identified.
-A key item was
incorrectly computed.
Your return includes ALL
of the following criteria:
-Key items requiring
special tax treatment
were all identified.
-Business income is
correct.
Adjusted Gross
Income -20%
Your return meets
ANY of these
criteria:
-Key items requiring
special tax treatment
were not identified.
-AGI is materially
incorrect
Your return meets ANY
of these criteria:
-A key item requiring
special tax treatment
was not identified.
-A key item was
incorrectly computed
Your return includes ALL
of the following criteria:
-Key items requiring
special tax treatment
were all identified.
– Adjusted gross income
is correct
Content-
Taxable Income
– 20%
Your return meets
ANY of these
criteria:
– Key items requiring
special tax treatment
were not identified.
-Taxable income is
materially incorrect.
Your return meets ANY
of these criteria:
-A key item requiring
special tax treatment
was not identified.
-A key item was
incorrectly computed
Your return includes ALL
of the following criteria:
-Key items requiring
special tax treatment
were all identified.
-Taxable income is
correct
Content- Tax
Liability– 20%
Your return meets
ANY of these
criteria:
– Key items requiring
special tax treatment
were not identified.
-Tax liability is
materially incorrect.
Your return meets ANY
of these criteria:
-A key item requiring
special tax treatment
was not identified.
-A key item was
incorrectly computed
Your return includes ALL
of the following criteria:
-Key items requiring
special tax treatment
were all identified.
-Taxable liability is
correct
– All pertinent tax credits
properly applied.
Completeness-
20%
Your return meets
ANY of these
criteria:
-Many schedules or
forms are missing
-Many schedules or
forms are
incomplete
Your return meets ANY
of these criteria:
-A schedule or form is
missing
-A schedules or form is
incomplete
Your return includes ALL
of the following criteria:
-Necessary schedules and
forms are provided.
-Schedules and forms are
complete.
3
Jorge Lopez age 44 (SSN 111-11-1111) and his wife Margarita Lopez age 42 (SSN 111-22-2222)
live at 145 Gulf View Drive, Palm View, FL 34221. The Lopez have a daughter Amanda (SSN 111-
33-3333), age 20 and a son Max, age 10 (SSN 111-44-4444). In addition, they provide 100% of
the support for Jorge’s mother Celia (SSN 112-11-1111) who is a resident of Mexico.
Amanda is a single full-time college student at FSU; she is now enrolled in her first year of law
school, which she began in August of 2020. Amanda worked during the summer as a lifeguard
for Lifeguards R Us at the Palm View Beach. She was able to work on her tan as well as earn
$2,850, for which she received a W-2and had no federal income taxes withheld. Amanda
completed her undergraduate studies in May of 2020 also at FSU, earning her bachelor’s in
Psychology. Amanda also had the following sources of income: $200 of interest income and
$300 of qualified dividend income. The Palm View Bar Association awarded Amanda a $2,000
per semester scholarship assuming she maintains a high GPA in law school. Amanda applied the
scholarship to her tuition. Jorge and Margarita help Amanda during the school year by paying
her room $7,000, board $2,000 and tuition $11,000 ($3,000 for undergraduate studies and
$8,000, for law school.) Jorge and Margarita provide more than 50% of Amanda’s support for
the year.
Max is enrolled in an after-school program for 10 months of the year at a cost of $250 a month
at Palm Youth Program (FEI# 11-8989898 123 Main Street Palm View FL 34221). During school
summer and winter breaks he attends a day camp offered by the same youth program for a
total cost of $2,200. Max attends St Mary’s Parochial School where the tuition is $ 400 per
month for 10 months, for “active parishioners” (those who donate a minimum of $2,000 per
year to St Mary’s Church.) For non-parishioners the tuition is $650 per month.
Jorge Lopez worked as a Sales Executive for Smiley Inc. (FEI 34-9876543 located at 123
Corporate Drive, Chicago, Il 60606) He received a salary and bonuses totaling gross wages of
$124,200 (withholdings include $18,500 of federal income tax, Social security of $7,700 and
Medicare of $1,801). Additionally, Smiley provides Jorge with a retirement plan and medical
insurance worth $7,400; the entire family is covered under this policy.
Margarita is a sole practitioner; her business is not a “specified trade or business.” She along
with her 2 part-time employees sews custom wedding dresses from the detached garage at the
home under the label Daisy Couture (EIN 59-1234567). The garage is 12% of the house’s total
square footage of 3,000. The business code is 315240. She had the following income and
expenses:
Gross Revenue $121,000
Cost of materials (material, thread, etc.) 28,000
Wages (including all payroll taxes required) 33,000
Website & Domain 700.
Business telephone 1,000.
The Lopez home cost a total of $475,000, of which the cost of the land was $75,000. The
current FMV of the house is $550,000 and the FMV in January 2013 was $485,000. The garage
as a workspace is depreciable under MACRS using the mid-month convention. They purchased
the home in June of 2012 and Margarita began her business in January of 2014. They spent an
additional $32,000 in 2014 to remodel the garage to create a separate workroom as well as
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dressing rooms and an area to meet with prospective brides and their entourage. It was placed
in service on 6/1/2014.
In addition, Daisy Couture purchased 3 sewing machines in 2015 for $4,200 each as well as
computer equipment for $4,000. She has not taken Sec 179 nor bonus depreciation in the past.
During the current year, an additional specialized sewing machine for working with lace was
purchased for $7,000 on April 1.
The Lopez incurred the following other income and expenses:
Total Expenses related to the Principal Residence:
Utility bills $4,600
Real Estate taxes 4,300
Mortgage interest 6,800
Homeowner’s Insurance 1,900
Eyeglasses and exam for Margarita (unreimbursed by insurance) 600
Braces for Max (unreimbursed by insurance) 10,000
Cash contribution to Mayor Crawley’s Re-election Campaign 500
Cash contribution to St Mary’s Church 3,000
Sales tax on purchases (nonbusiness) 4,700
Dividends from 3G stock 900
Interest from City of Tampa bonds 700
Interest from savings account 210
During the year the following events also occurred:
a. During the year on October 1, Margarita’s great aunt Consuelo died. Jorge and
Margarita received $100,000 from the life insurance policy. Neither Jorge nor Margarita
paid any of the premiums.
b. In addition to the life insurance, Consuelo bequeathed to Margarita her collection of
antique fans. Consuelo had started the collection as a child and her basis in the fans,
was $ 750, the FMV of the fans at the date of Consuelo’s death was $10,000. Margarita
sold them to a collector on December 30 for $10,800.
c. Jorge enjoys playing the drums and plays in a band on weekends. His band, Las
Cucarachas has developed a local following and they decided to try recording some
original music. The recording was completed in October of this past year. His share of
the gross revenue was $1,400 for playing shows and $150 of recording sales. His share
of the expenses are as follows:
Studio Rental $1,500
Recording production 1,000
New drums and drumsticks 400
Website 200
Printing Flyers 350
5
d. Jorge and Margarita had purchased a plot of land in North Carolina in 2015 for $25,000.
This year on June 7 th they sold the property for $110,000, to an unrelated third party.
$5,000 in selling expense was part of the closing costs paid by the Lopez. In accordance
with the agreement, the buyers paid a deposit of $30,000 at closing and agreed to pay
$20,000 plus 5% interest each year for the next four years.
e. The Lopez had the following sales activity in their brokerage account during the year (all
transactions were reported on a Form 1099-B. Basis information on each stock was
reported to the IRS):
Description Date
Purchased
Basis Date Sold Amount
Realized
2,000 shares of Microsoft 1/18/2020 $22,000 8/1 $27,500
125 shares of Apple Inc. 5/18/2005 15,000 8/1 32,000
150 shares of Visa 6/15/2011 18,000 8/1 24,000
1,000 shares of Cardinal 5/15/2016 23,000 8/1 28,000
250 shares of 3G 6/17/2013 14,000 8/1 12,500
Additional Info: The Lopez’s have a $15,000 long-term capital loss carryover
from the prior tax year. Amount realized is net of all brokerage fees.
f. On September 1 of this year, the Lopez’s purchased a 2-bedroom condo in
Breckenridge, CO. This property is held as a rental investment. The property cost
$465,000 (of which $50,000 is allocated to land and $15,000 to the furniture and
fixtures) and is located on 1234 Ski Runway, Breckenridge, CO 80424. The family
resided in the home for personal recreation for 25 days and rented the condo for 75
days during 2020. $25,000 in gross rental receipts was collected in 2020, which included
$4,600 that was received in advance for the 2020 ski season. They will use the IRS
Method when allocating the rental expenses and MACRS mid-month convention for
calculating depreciation. They pay a rental management company to handle all aspects
of renting and care for the property. Additional information regarding the property are
summarized below:
Description Amount
Property Taxes (allocated for the portion of year) $4,000
Interest on mortgage 3,800
Repairs 1,800
Condo Maintenance Fees 3,200
Insurance (allocated for the portion of year) 600
Utilities 1,200
Management Fee paid to rental management company 4,200
g. During the year Margarita contributed $3,000 to an IRA for 2020.
h. Margarita purchased an annuity in 2016 and invested $36,000 and receives $4,000
yearly over a 12-year period. She received a $4,000 payment in December of this year.
i. The Lopez total federal income tax bill for 2019 was $20,500 and they made timely
quarterly estimated payments for 2020 of $3,200 per quarter.
j. Additional information about the Lopez family.
o If a refund results, the taxpayers want a check sent to them.
6
o They do not wish to contribute to the Presidential Election Campaign fund.
o The Lopez did not own, control or manage any foreign bank accounts nor were
they grantors or beneficiaries of a foreign trust during the tax year.
o They did not acquire, sell or exchange virtual currency.
o They do not elect to defer any taxes pursuant to the CARES Act.
Required:
Prepare the 2020 federal income tax returns, including all required forms and
schedules, as needed for all members of the Lopez family. Remember that they have
hired you prepare their return correctly while minimizing their current tax liability.
Any decisions, assumptions position you take should be defensible and have tax
savings for the client at their core.
Throughout the return you will see instances where a line on the 1040, indicates to
attach either a schedule or a specific form. You should review the information and
instructions to determine and if required include it as part of a completed return.
You can ignore the requirement to attach a W-2.
When the form contains the phrase (attach schedule), without identifying a specific
form or schedule, this indicates that the amount on the form needs to be further
detailed but there is no specific form on which to do so.
In these cases, you should prepare a schedule that does so, such as in the following
example:
Professional Fees $1,200
Auto expenses 300
Miscellaneous 120
Total, Form 1040, Schedule A, line 11 $1,620
Be sure to attach a list and explanations of any positions, assumptions or
conclusions that you made in the preparation of the return. These will assist in the
grading of the return and would be part of the expectations at a firm to be included
in the client file for the reviewer.
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