Prepare 2012 Income Tax Return For George And Marge

Prepare 2012 Income Tax Return for George and Marge Large Based on Provided Financial Details

This assignment requires preparing the 2012 income tax return for George Large and his wife Marge Large, including Form 1040, Schedules A, C, and SE, along with Forms 2106 and 8829, based on their financial information. The task involves calculating taxable income, allowable deductions, business expenses, rental-home deductions, and appropriate depreciation, and ensuring compliance with IRS regulations for self-employed individuals and homeowners.

Paper For Above instruction

The preparation of the 2012 income tax return for George and Marge Large involves complex calculations and adherence to IRS tax laws. The detailed analysis of their income, expenses, and deductions provides a comprehensive picture of their taxable income and allowable tax credits, which is essential for accurate reporting and compliance.

Introduction

Taxpayers like George and Marge Large exemplify the common complexities faced by self-employed individuals and homeowners when preparing their annual income tax returns. Their financial activities span salary, business income, vehicle expenses, travel, entertainment, property ownership, and charitable contributions, each requiring meticulous documentation and precise application of tax law. Properly preparing their 2012 return necessitates considering all relevant income sources, deductible expenses, and credits to optimize their tax position and ensure compliance with IRS standards.

Income and Expenses of George Large

George’s primary income derives from his employment at Toyboat, Inc., where he earned $80,000, with $8,500 federal withholding and $1,800 state taxes withheld. The reimbursement of $5,000 for travel expenses, which must be repaid if excessive, is relevant as it may influence gross income if not properly accounted for. Since George must account for the reimbursement, excess reimbursement is not taxable if adequately documented, and considering the reimbursed amount was for business expenses, it can be excluded from income under the accountable plan rules. His medical insurance worth $7,200 is provided as a benefit; for tax purposes, employer-paid coverage is generally excluded from income.

Regarding vehicle expenses, George drove 24,000 miles in the year, with his log indicating 18,000 miles were for business. Using the IRS standard mileage rate for 2012, which was 55.5 cents per mile from January to June and 55 cents per mile from July to December, the approximation involves using an average rate of 55.25 cents per mile to reflect the year's proportion. Since the miles were driven evenly, 9,000 miles occurred in each half of the year, leading to a calculation of business miles and corresponding deductions:

  • Business miles: 18,000
  • Total miles driven: 24,000
  • Standard mileage deduction: 18,000 miles × $0.5525 ≈ $9,945

This deduction reduces George’s taxable income.

Entertainment and Business Meals

George purchased two season tickets for $4,000, and during these games, he engaged in business discussions with clients. According to IRS regulations, entertainment expenses are generally nondeductible; however, business meals associated with entertainment can be deductible at 50%. George's combined business meal expenses of $1,500 are eligible for deduction with proper substantiation. The cost of tickets is generally considered an entertainment expense and not deductible unless an explicit exception applies, which is rare for tickets such as these. Therefore, the primary deductible expense here pertains to meals and related entertainment costs, at 50% of $1,500, i.e., $750.

Business Trip Expenses

George’s trip to Toyboat headquarters involved travel costs that are deductible if they are directly related to active conduct of a trade or business. The expenses incurred during the trip include airfare, lodging, meals, and local transportation (taxicabs). Since he finished his business in 3 days, with other days spent sightseeing, only expenses attributable to the business days are fully deductible, while sightseeing days are not. The expenses include:

  • Airfare: $200
  • Lodging: 3 days × $85 = $255
  • Meals: 3 days × $50 = $150
  • Taxicabs: 3 days × $20 = $60

Because the meals occurred during the business portion of the trip, they qualify for a 50% deduction, i.e., $75 (50% of $150). Other expenses are fully deductible if they are directly related to the business purpose.

Marge Large’s Self-Employment Activities

Marge operates her toy boat repair business from her basement, representing a home office deduction based on the percentage of the home's square footage devoted to business use. The home’s total area is not specified; assuming the 25% of the home used for business, direct expenses such as supplies, contract labor, and telephone are deductible proportionally. The indirect expenses applicable to the business include utilities, real estate taxes, mortgage interest, and depreciation.

The expenses are as follows:

  • Supplies: $5,000
  • Contract labor: $3,500
  • Long-distance phone calls (business): $500
  • Utilities: $2,000
  • Real estate taxes: $2,500
  • Mortgage interest: $4,500

The home office deduction is calculated based on the percentage of the home used for business, i.e., 25%. Expenses directly related to the business (supplies, contract labor, phone calls) are fully deductible, while indirect expenses such as utilities, taxes, and mortgage interest are apportioned accordingly (25%). Since no depreciation is considered for simplicity, the deduction is solely based on these expenses.

Home Ownership and Deductible Expenses

The entire house is valued at $225,000, with land valued at $20,000. The cost basis of the house is $150,000, and with no depreciation considered this year, deductions for mortgage interest and property taxes are taken as itemized deductions on Schedule A. Mortgage interest of $4,500 and real estate taxes of $2,500 are deductible expenses, totaling $7,000 as itemized deductions, subject to limitations.

Charitable Contributions

The Large’s charitable donation of $3,500 is fully deductible under IRS rules applicable to itemized deductions, reducing their taxable income.

Calculations for the Tax Return

Using the above data, the taxable income is computed by starting with gross income, subtracting deductions for business expenses, home office, itemized deductions, and charitable contributions. Schedule A captures itemized deduction details, Schedule C reports self-employment income, and Schedule SE calculates self-employment tax based on net earnings.

Conclusion

Accurately preparing the 2012 tax return for George and Marge Large involves detailed documentation and careful application of IRS rules governing income, business expenses, vehicle deductions, travel expenses, home office deductions, and itemized deductions. Proper incorporation of these elements ensures compliance and optimal tax benefit, with thorough records and substantiation being essential. The final tax calculation must integrate all these factors, supported by accurate entries in Form 1040, Schedules A, C, SE, 2106, and 8829, providing a comprehensive and compliant tax report for the 2012 tax year for the Larges.

References

  • Internal Revenue Service. (2012). Publication 463: Travel, Gift, and Car Expenses.
  • Internal Revenue Service. (2012). Schedule A (Form 1040): Itemized Deductions.
  • Internal Revenue Service. (2012). Schedule C (Form 1040): Profit or Loss From Business.
  • Internal Revenue Service. (2012). Schedule SE (Form 1040): Self-Employment Tax.
  • Internal Revenue Service. (2012). Publication 587: Business Use of Your Home.
  • IRS. (2012). Publication 502: Medical and Dental Expenses.
  • IRS. (2012). Publication 526: Charitable Contributions.
  • United States Tax Code (Internal Revenue Code), Sections 162, 164, and 180.
  • Gale, W. G. (2010). Income Tax Fundamentals. Cengage Learning.
  • Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2012). Intermediate Accounting. Wiley.

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