Gregory R. and Lulu B. Clifden tax return, Taxation

Gregory R. and Lulu B. Clifden live with their family at the Rock Glen House Bed &Breakfast, which Gregory operates. The Bed & Breakfast (B&B) is located at 33333 Fume Blanc Way, Temecula, CA 92591. Gregory’s Social Security number is 543-88-9756 and Lulu’s is 256-43-8819. Both are in their mid-40s and enjoy good health and eyesight.
1.The Clifdens have three sons, Gerald A. (SS# 466-74-1131), Gary T. (SS# 465-76-8375), and Glenn E. (SS# 475-23-1426). Gerald is 17 years old, Gary is 12 years old, and Glenn is 10 years old.
2.The Rock Glen House Bed & Breakfast is operated as a sole proprietorship and had the following income and expenses for the year: Room rental income $164,250 Vending machine income 2,325 Advertising expense 4,720 Depreciation 18,180 Mortgage interest on the B&B 32,940 Wages of maid 15,450 Taxes and licenses 6,420 Supplies 8,930 Business insurance 6,300 Laundry expenses 4,290 Accounting fees 1,850 Office expenses 2,380 Utilities 6,350
All of the above amounts relate to the business portion of the Bed & Breakfast;the personal portion is accounted for separately. The Rock Glen House Bed &Breakfast uses the cash method of accounting and has no inventory. The employer tax ID number is 95-1234567.
3. The Clifdens made estimated Federal income tax payments of $16,000 and esti-mated state income tax payments of $6,000 (all made during 2011).
4. Lulu is a substitute school teacher with the local school district. For the current year,Lulu’s Form W-2 from the school district showed the following: Wages $10,200 Federal income tax withheld 1,650 State income tax withheld 380 FICA (OASDI & Medicare) 576
5. Gregory is retired from the U.S. Navy. His annual statement from the Navy showed the following: Retirement income $9,400 Federal income tax withheld 1,200 State income tax withheld 290
6. Gregory and Lulu paid (and can substantiate) the following amounts during the year: Mastercard interest $1,480 Dental expenses 2,600 California state income tax (for 2009) 450 Charitable contributions 1,875 Mortgage interest on home purchase (personal portion)6,400 Real estate taxes (personal portion) 820 Life insurance premiums 845 Investment interest 4,300 Automobile registration fees(deductible portion)450 Tax return preparation fee 475 Contributions to George Clinton’s reelection campaign 1,000 None of the investment interest is related to amounts borrowed to purchase the City of Atlanta tax-exempt bonds.
7. During the year, Gregory and Lulu received the following qualifying dividends and interest:
Interest:
Vintage Bank $3,775 Bob’s Big Bank 360 Bank of Ireland 220 City of Atlanta Tax Exempt Bonds 1,490
Dividends:
Southwest Airlines 110 Heinz Foods 216 Also, Lulu owns Series EE U.S. savings bonds. During the year, the bond redemption value increased by $1,300. Lulu has not elected the accrual method for these bonds. There were no Irish taxes paid on the interest from the Bank of Ireland. All the above stocks, bonds, and bank accounts are community property.
8. Lulu has a stock portfolio. During the year she sold the following stock, none of which is qualified small business stock:
Orange Co. Gold Co. Green Co.
Sales Price $8,200 $12,100 $7,500
Basis 3,800 14,200 1,450
Date acquired 02/11/03 03/27/11 10/31/03 Date sold 06/19/011 09/18/011 10/23/011
9. Lulu is divorced. As required under the divorce decree, she paid her ex-husband $6,000 alimony in the current year. Her ex-husband’s name is Hector Leach and his Social Security number is 566-23-5431.
10. Gregory does all the significant work in the Bed & Breakfast and therefore he pays self-employment tax on 100 percent of the earnings from the B&B.
11. Gregory’s Uncle Martin died during the year. Uncle Martin had a $50,000 life insurance policy that named Gregory as the beneficiary. Gregory received the check for the benefits payable under the policy on November 30 of the current year. Also, Uncle Martin left Gregory a small non operating farm with an appraised value of $120,000.
12. Two years ago, Gary won a contest and received a cash prize. The money is in a savings account in Gary’s name. His interest on the savings account in the current year is $3,400. Instead of having Gary fill out a tax return and pay the ‘‘kiddie tax,’’ Gregory and Lulu elect to report the interest income on their joint tax return.
Required:
Gregory and Lulu have come to you to prepare their 2011 federal income tax return. Do not complete a California state income tax return. Assume any other information (addresses, etc.) that you need. Do not file a federal Form 4562, Form 4952, or Form 8829 for the Clifdens. The following is a list of the forms and schedules that you will need to complete the tax return:
Form 1040 Schedule D Schedule A Schedule SE Schedule B Form 8814 Schedule C Form 8949

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