Taxpayer Facts
Richard and Natalie Burns are a married couple in their early thirties. They do not have any children yet. They live in a rented condominium in Overland Park, Kansas. Natalie works as a nurse at St. Luke’s South Hospital and Richard is a 30% partner in a small
engineering firm that is operated as a general partnership. They have come to your office with the following information to have their 2023 individual federal income tax completed. They provide you with the following information:
1. Copies of the following documents (available on K-State Canvas as a PDF titled, “Supporting Documents”): – K-1 from Richard’s partnership (no payments were made requiring the filing of a Form 1099, there are no prior year losses or non-at risk amounts, Richard materially participates in the partnership, and all income is considered non-passive income)
– W-2 from Natalie’s job at St. Luke’s South Hospital
– 1099-Int from First Bank
– 1099-Int from Local Credit Union
– 1099-Div from ABC Mutual Fund
2. Natalie and Richard sold their 2016 Honda Accord in 2023 for $12,000. They had purchased it for $20,000. Natalie had used it exclusively for personal driving.
3. Natalie received a gift of $40,000 from her parents late in 2023.
4. Richard’s grandfather passed away in September of 2023. Richard received
$100,000 as the beneficiary on the life insurance policy.
5. In April 2023, Natalie started a part-time business from home doing consulting work
for physicians’ office practices (business identification code 621399). Natalie materially participants in the business and is not eligible for a home office deduction.
During the year, she collected $25,000 in consulting fees and incurred the following expenses, none of which would require Natalie to file a Form 1099 (Natalie uses the cash method of accounting):
• Spent $2,500 advertising in the local medical journal.
• Spent $1,500 on office supplies (not part of cost of goods sold).
• Spent $750 on utilities.
• Spent $800 on an occupational license.
• Spent $1,900 on liability insurance.
6. Natalie and Richard made timely estimated tax payments of $23,000 during the year.
7. During the year, the Burns sold the following capital assets (assume that in all cases, the basis was reported to the IRS):
Asset Acquired Sold Selling price Adjusted Basis
A stock 6-02-16 10-13-23 4,200 3,500
B stock 8-6-07 3-12-23 6,000 8,000
C stock 2-10-23 11-14-23 6,000 20,000
D Stock 6-16-19 12-7-23 5,000 4,500
E Stock 7-11-23 10-10-23 5,000 4,000
Boat 10-2-15 4-25-23 4,000 10,500
Note1: The B stock was sold to Natalie’s brother.
Note2: The boat was used for personal recreation.
Required
Prepare the Burns’ 2023 federal tax return. They have asked you to minimize their tax liability to the extent legally possible. Round numbers to the nearest dollar. Clearly state any assumptions make in completing the tax return. Include any supporting schedules. The following 2023 tax forms are required:
• Form 1040: U.S. Individual Income Tax Return, pages 1 and 2
• Form 1040: Schedule 1, 2, 3
• Form 8949: Sales and Disposition of Capital Assets
• Schedule C: Profit and Loss from Business
• Schedule D: Capital Gains and Losses
• Schedule SE: Self-Employment Taxes (use the short form)
• Computation of tax liability (i.e., the Tax Computation Worksheet and the
Qualified Dividends and Capital Gain Worksheet)
• Instructions for Form 1040:
https://www.irs.gov/pub/irs-pdf/i1040gi.pdf
• Form 1040: U.S. Individual Income Tax Return, pages 1 and 2
https://www.irs.gov/pub/irs-pdf/f1040.pdf
• Form 1040, Schedule 1
https://www.irs.gov/pub/irs-pdf/f1040s1.pdf
• Form 1040, Schedule 2
https://www.irs.gov/pub/irs-pdf/f1040s2.pdf
• Form 8949: Sales and Other Dispositions of Capital Assets
https://www.irs.gov/pub/irs-pdf/f8949.pdf
• Schedule C: Profit and Loss from Business
https://www.irs.gov/pub/irs-pdf/f1040sc.pdf
• Schedule D: Capital Gains and Losses
https://www.irs.gov/pub/irs-pdf/f1040sd.pdf
• Schedule SE: Self-Employment Taxes (you will need 2 forms for this one)
https://www.irs.gov/pub/irs-pdf/f1040sse.pdf
• Computation of tax liability (i.e., the Qualified Dividend and Capital Gain Tax
Worksheet; not normally not filed as part of a tax return, but turn it in for this
project to show your work)
https://www.irs.gov/pub/irs-pdf/i1040gi.pdf (pages 37 and 77 of the
instructions)
• Also include a letter to the Burns explaining to them any carryforward items (both the character and the amount) they might have and how much refund or additional tax they have to pay with their return. You can download the necessary forms, instructions, and tax tables from the IRS website (www.irs.gov); the links to the tax forms are also included above. Make sure you obtain the 2023 tax return forms. You may NOT prepare the tax return using Commercial Tax Software (e.g., TurboTax).
Hints
1) The best way to approach the project may be to complete it in the following order
• Profit and loss from the business (Schedule C),
• Self-employment tax (Schedule SE) – one form for Natalie and one form
for Richard (two forms total)
• Sales and other dispositions of capital assets (Form 8949). Check box “A” for both short-term gains/losses (basis reported to the IRS) and box “D” for long-term gains/losses (basis reported to the IRS); leave columns “f” and “g” blank.
• Capital gains & losses (Schedule D). Be sure to check if there are any capital gain distributions to report.
• Carry over the information from Schedules C, D, and SE to Form 1040, along with any other information that needs to be reported on Form 1040.
Fill out Schedules 1 and 2 for Form 1040 and transfer information to the Form 1040.
• Finally, write a letter to the Burns.
2) Neither Richard nor Natalie elects to contribute to the Presidential Election Campaign. They also do NOT have any 2023 digital assets.
3) Use the Tax Computation Worksheet and the qualified dividend and capital gain worksheet to figure the tax on line 12a of Form 1040 (and turn in with the project).
These links are available at: http://www.irs.gov/pub/irs-pdf/i1040gi.pdf (pages 37 and 77 of the instructions)
4) Assume that the Burns do NOT have to pay the AMT.
5) The dividends are BOTH ordinary and qualified (i.e., put in both places).
6) For the Qualified Business Income Deduction on Line 10 of the Form 1040, enter 20% of the bottom-line amount from Schedule C (Line 31 on Schedule C)
PLUS 20% of the bottom-line amount from Richard’s total partnership income (Schedule 1, Line 5) as the amount of your deduction.
7) Enter Richard’s partnership income (ordinary business income + guaranteed payment) on Schedule 1, Line 5. For this project, you do NOT need to include Schedule E (which is normally required for partnership income).
8) You are NOT required for this project to fill out Schedule B for the taxable interest.
9) When you assemble the forms to upload into Canvas, include only the tax forms and the supporting schedules (do NOT include any of the information reports such as W-2, 1099s, etc.).
10) Round all numbers to the nearest dollar and leave the “cents” column blank. Any lines on the return that are not relevant should be left blank (thus, do not put zeros on every line that does not apply to the taxpayer). Be sure that you include totals on each of the lines with “bullets” in front of them, and make sure that you check any boxes requiring a yes/no answer. Also be sure to fill out the required information at the top of all of the schedules.
11) Do NOT sign or date the return for the client.
12) Be sure to fill in your client’s name and SSN on the top of every form.
13) CHECK FIGURES:
a. The amount on Line 31 of Schedule C is between $10,000 and $20,000.
b. The refund or amount owed on the Form 1040 is under $1,000.
