Tax Return Project - Fall 2011
David and Lauren Hammack are married with one child, Jim, age 12. The couple lives at 2006 Rolling Drive, Indianapolis, IN 46222. David is a product manager for G& P Corporation, a food company. Lauren operates a clothing store as a sole proprietorship (employer identification number 35- 1234567). The couple uses the cash method of accounting except where the accrual method is required. They report on the calendar year.
David earned a salary of $ 60,000 during the year. G& P also provides health insurance for David and his family. Of the total insurance premium, the company paid $ 750. Income taxes withheld from David's salary were $ 7,000. The couple paid $ 9,000 in estimated taxes in four equal installments during the year. Last year's tax liability was $ 5,000.
Lauren's father died on June 20. As a result, Lauren received $ 40,000 as beneficiary of a life insurance policy on her father. In addition, her father's will provided that she receive all of his shares of IBM stock. The stock was distributed to her in October when it was worth $ 30,000.
On August 1 of this year, the couple purchased a six- month Treasury Bill for $ 9,700. They redeemed it on February 1 of the following year for its face value, $ 10,000. In addition, the couple purchased a previously issued AT& T bond with the face value of $ 1,000 for $ 890 on June 1. The bond pays interest at 6 percent per year on January 1 and July 1. On July 1 they received an interest payment of $ 30, which was also reported on Form 1099- INT, sent to them shortly after year- end. The couple plans on reporting any accrued market discount in taxable income when they sell or redeem the bond, in some future year.
Each year, Lauren travels to Paris to attend the annual fashion shows for buyers. When scheduling her trip for this year, Lauren decided to combine business with pleasure. On Thursday, March 6, Lauren departed for Paris, arriving on Friday morning. Friday afternoon was devoted to business discussions with several suppliers. Since the shows began on Monday, she spent the weekend touring Paris. After attending the shows Monday through Wednesday, she returned to Indianapolis on Thursday, arriving late that night. The cost of her round- trip air fare to Paris was $ 500. Meals were $ 30 per day and lodging was $ 100 per day for Friday through the following Wednesday.
In addition to running her own shop, Lauren teaches an M. B. A. course in retailing at the local university. She received a $ 5,400 salary for her efforts this year. The university withheld $ 429 in FICA taxes, but did not make additional tax withholdings related to the salary. The school is ten miles from her office. Normally, she goes home from her office to get dinner before she goes to the school to teach (16 miles from her home). According to her log, she made 80 trips from home to school. In addition, the log showed that she had driven 20,000 miles related to her clothing business. She uses the standard mileage rate to compute her automobile expenses.
Lauren's records, which she maintains for her business using the cash method of accounting, reveal the following additional information:
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Sales
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$100,000
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Cost of Goods Sold
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50,000
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Advertising
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6,000
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Insurance
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1,400
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Rent
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9.000
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Wages
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15,000
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Employment Taxes
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2,000
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The insurance included (1) a $ 200 premium paid in September for coverage of her car from October through March of the following year; and (2) a $ 1,200 payment for fire insurance for June 1 through May 31 of the following year. Similarly, rent expense includes a $ 4,500 payment made on November 1 for rent from November through April. She has a five- year lease requiring semiannual rental payments of $ 4,500 on November1 and May 1.
During the year, David purchased a new automobile for $ 30,000, which he uses 60 percent of the time for business (i. e., “qualified business usage” is 60 percent). His actual operating expenses, excluding depreciation, were $ 3,000.
In addition to the information provided earlier in this problem, the couple paid the following amounts during the year:
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State Income Taxes
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$5.500
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Country Income Taxes
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500
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Real Estate Taxes
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2,400
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Mortgage Interest on their Personal Residence
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3,600
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Charitable Contributions
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2,000
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David and Lauren’s social security numbers are 445- 54- 5565 and 333- 44- 5789, respectively. Their son Jim’s social security number is 464- 57- 4681.
Complete David and Lauren’s tax return for the year. Make all computations (including any special elections required) to minimize the Hammacks’ tax liability based on current tax law. Please complete the following forms: 1040 (including Schedules A, C, and SE), and 2106. There is no alternative minimum tax liability
Attachment:- HAMMACK.pdf2.rar