Appendix AIn 2016, Bill and Joyce Schnappauf live in Wakefield, R.I. Bill is 53, and Joyce is 51. Bill is a district sales manager for USC Equipment Corporation, a Rhode Island firm that manufactures and distributes gaming equipment. Joyce is a self-employed author of children's books. The Schnappaufs have three children, Will, 21, Dan, 19, and Tom, 16. In February 2017, the Schnappaufs provide the following basic information for prepar- ing their 2016 federal income tax return:

1. The Schnappaufs use the cash method of accounting and file their return on a calendar-year basis.

2. Unless otherwise stated, assume that the Schnappaufs want to minimize the cur- rent year's tax liability. That is, they would like to defer income when possible and take the largest deductions possible, a practice they have followed in the past.

3. Joyce's Social Security number is###-##-#### 4. Bill's Social Security number is###-##-#### 5. Will's Social Security number is###-##-#### 6. Dan's Social Security number is###-##-#### 7. Tom's Social Security number is###-##-#### 8. The Schnappaufs do not have any foreign bank accounts or foreign trusts. 9. Their address is***** Wakefield, R.I. (02879).

10. The Schnappaufs do not wish to contribute to the presidential election campaign.Phase I

The first phase of the tax return problem is designed to introduce you to some of the tax forms and the supporting documentation (Forms W-2, 1099-INT, etc.) needed to com- plete a basic tax return. The first four chapters focus on the income aspects of individual taxation. Accordingly, this phase of the tax return focuses on the basic income concepts.

1. Bill's W-2 is provided (Exhibit A-1). The 2016 W-2 includes his salary ($98,000), bonus ($61,000), and income from group-term life insurance coverage in excess of $50,000 ($132.48), and is reduced by his 7 percent contribution ($6,860) to USC's qualified pension plan. The company matches Bill's contribution to the plan.

2. The Schnappaufs receive two 1099-INTs for interest (Exhibits A-2 and A-3), two 1099-DIVs for dividends (Exhibits A-4 and A-5), and a combined interest and dividend statement (Exhibit A-6).

3. Joyceandherbrother,Bob,areco-ownersof,andactiveparticipantsin,afurniture- restoration business. Joyce owns 30 percent, and Bob owns 70 percent of the business. The business was formed as an S corporation in 2008. During 2016, the company pays $5,000 in dividends. The basis of Joyce's stock is $33,000.

. The Schnappaufs receive a 2015 federal income tax refund of $987 on May 12, 2016. On May 15, 2016, they receive their income tax refund from the state of Rhode Island. In January 2017, the state mails the Schnappaufs a Form 1099-G (Exhibit A-7). Their total itemized deductions in 2015 were $20,161.

5. During 2016, Joyce is the lucky ninety-third caller to a local radio station and wins $300 in cash and a Tablet. Despite repeated calls to the radio station, she has not received a Form 1099MISC. In announcing the prize, the radio station host said that the manufacturer's suggested retail price for the Tablet is $720. How- ever, Joyce has a catalog from Supersonic Electronics that advertises the Tablet for $595.

6. The Schnappaufs receive a Form W-2G (Exhibit A-8) for their winnings at the Yardley Casino in Connecticut.

7. On June 26, 2016, Bill receives a check for $15,480 from the United Insurance Corporation. Though he was unaware of it, he was the designated beneficiary of an insurance policy on the life of his uncle. The policy had a maturity value of $15,100, and the letter from the company stated that his uncle had paid premiums on the policy of $3,620 (Exhibit A-9).

8. Joyce is active in the school PTO. During the year, she receives an award for out- standing service to the organization. She receives a plaque and two $125 gift cer- tificates that were donated to the PTO by local merchants.

9. To complete phase I, you will need Form 1040, Schedule B, and Schedule D.

INSTRUCTIONS: If you are using tax software to prepare the tax return or are not complet- ing phases II and III of the problem, ignore the instructions that follow. If you are pre- paring the return manually, you cannot complete some of the forms used in phase I until you receive additional information provided in phase II or phase III. Therefore, as a gen- eral rule, you should only post the information to the appropriate form and not compute totals for that form. The following specific instructions will assist you in preparing Part I of the return.

a. The only form that can be totaled is Schedule B. b. Only post the appropriate information to Schedule D. Do not total any columns.

More information is provided in phase III of the tax return problem. c. Do not calculate total income or adjusted gross income on page 1 of Form 1040. d. Post the appropriate information on page 2 of Form 1040, but do not total this

page, compute the federal tax liability, or determine the refund or balance due.

PREPARATION AID: Tax forms and instructions can be downloaded from the IRS's home page (http://www.irs.treas.gov). You can also download IRS Publication 17, which is a useful guide in preparing the tax return.Phase IIThis is the second phase of the tax return problem you began at the end of Chapter 4. This phase of the tax return incorporates the material from Chapters 5, 6, 7, and 8 by providing you with information concerning the Schnappaufs' deductions for 2016. They provide you with the following information.

1. Joyce writes children's books for a variety of publishers. She has been self- employed since 2008. As a freelance writer, Joyce incurs costs associated with pre- paring a manuscript for which she does not yet have a contract. During the year, Joyce makes 4 business trips, each 3 days long, to meet with various publishers. For shorter trips that are closer to home, she either drives or takes the train and returns the same day. On December 10, 2016, Joyce receives an advance (see below) on her next book. Under the contract, Joyce is scheduled to begin work on the book on February 1, 2017, and must have it completed by November 30, 2017. The Schnappaufs' home has 2 telephones. Joyce has a separate phone num- ber for her business. The information on Joyce's business is listed below.

Royalties (Exhibits A-10 to A-12) Publisher's advance $4,000 Office supplies 170 Train tickets 535 Airfare (4 trips) 1,670 Lodging (12 nights) 2,240 Meals (12 days) 610 Telephone ($28 monthly fee per phone line) 672 Internet provider 570 Cell phone, including business calls 913 Business-related postage 87 Printing/copying 162 Legal fees 2,000 Interest on auto 254

2. On January 2, 2016, Joyce purchases a new car to use in her business. The car, a Volster, costs $15,200. Joyce pays $2,200 in cash and finances the balance through the dealer. She uses the car 45 percent of the time for business and drives a total of 10,800 miles during 2016. The total expenses for the 10,800 miles driven are: repairs and maintenance, $240; insurance, $920; and gasoline, $1,960. The correct depreciation expense for 2016 is $684 ($15,200 45% 10%).

3. Joyce's office is located in a separate room in the house and occupies 375 square feet. The total square footage of the house is 2,500. The Schnappaufs purchased the home on July 7, 2002, for $70,000. The local practice is to allocate 10 percent of the purchase price to land. The depreciation percentage for the office is 0.02564. When Joyce started her business on January 1, 2008, the fair market value of the house was $108,000. The total household expenses for 2016 are as follows:

Heat Insurance Electricity Repairs to kitchen Cleaning

$2,170 1,480 740 3,100 1,560

4. Bill began work on his MBA at Denville University. He enrolled in two courses, and paid $3,000 in tuition and $310 for books.

5. Bill and Joyce each contribute the maximum to their respective IRA accounts in 2016. The IRA account is Joyce's only retirement vehicle. Bill's basis in his IRA before the current year's contribution is $26,000, and Joyce's basis is $36,000. The fair market value of Bill's IRA on 12/31/16 is $41,720, and the fair market value of Joyce's IRA is $57,100. In addition, Bill and Joyce contributed $2,000 to a Coverdell Education Savings Account for Thomas.

6. On June 15, 2016, the Schnappaufs' 2015 station wagon is totaled in Hurricane Ann. The car was purchased for $28,700 in November 2014. The Schnappaufs receive a check for $21,200 from Zippy Insurance Company that represents the fair market value of the car minus a $750 deductible. On June 26, 2016, they replace the car with a 2016 station wagon. The new car costs $31,400, and the Schnappaufs receive a rebate check from the car's manufacturer for $2,500.

7. The hurricane also damages part of the Schnappaufs' house. A tree falls and makes a hole in the roof above the kitchen. Water damages the kitchen, causing the new dishwasher to short out, and it has to be replaced. In addition, the lino- leum floor has to be replaced. The cost of fixing the hole in the roof is $3,000. The Schnappaufs receive $2,500 ($3,000 repair cost minus $500 deductible) to fix the roof. Information concerning the dishwasher and the floor is as follows:

Property Date Acquired Original Cost FMV Before FMV After Reimbursement

Dishwasher 3/30/16 $ 840 $ 840 $-0- $380

Floor 3/16/16 $1,800 $1,650 $-0- $8508. The Schnappaufs incur the following medical expenses (before considering the

$700 reimbursement they receive from their health insurance policy):

Medical premiums $3,800 Doctors 1,200 Chiropractor 650 Dentist 1,900 Vet fees (family dog Sandy) 350 Prescription drugs 340 Over-the-counter drugs (aspirin, cough syrup) 175

In addition, Bill purchases an Exsoaligner machine for $700. The machine was

recommended by the chiropractor to help strengthen Bill's back muscles.Continued Phase II9. The Schnappaufs pay the following property taxes:

Wakefield house $11,200 Family car used by Bill (ad valorem) 480 Joyce's car (ad valorem) 520

10. The Schnappaufs receive two Form 1098s for the cost of interest on bank loans. They also pay interest on their personal credit cards.

Jefferson Trust 1098 (Exhibit A-13Wakefield house) Jefferson Trust 1098 (Exhibit A-14Home equity) Dempsey's Department Store revolving account $191 Brooks' Bargain Basement revolving account 67 Jefferson Trust bank card 212

The proceeds from the home equity loan were used to renovate their kitchen and pay for Tom's tuition to private school. The interest on the portion of the loan used for private school tuition is $640.

11. Bill and Joyce make cash charitable contributions to the United Fund Campaign ($2,700), Adelade University ($510), Tremon University ($1,900), and Christ the King Church in Kingston, R.I. ($3,100). The Schnappaufs have documenta- tion to verify their cash contributions. They also donate property to the Salvation Army on July 15, 2016:

Property FMV Original Cost Date Acquired

Antique table $410 $225 1/4/05

Dishwasher 130 700 5/6/09

Sofa bed 90 800 13/14/11

Men's suits (2) 140 540 VariousThe Salvation Army acknowledges that these amounts represent the fair market

value of the donated items. 12. The Schnappaufs incur the following expenses:

Type amount 2015 tax preparation fee (paid in 2016) $ 800

Safety deposit box 60

Investment journals 380

Investment advice 1,050

Business publications (Bill) 675

Gambling losses 3,450

13. Because Joyce is self-employed, they make federal estimated tax payments of $210 per quarter on April 15, 2016, June 15, 2016, September 15, 2016, and January 15, 2017. They also make estimated payments of $150 per quarter to the state of Rhode Island on April 15, 2016, June 15, 2016, September 15, 2016, and December 31, 2016.14. Bill and Joyce paid $7,400 in tuition, $840 for books, and $9,300 for room and board for Will, a junior, to attend Springbrook State University. They also paid $16,410 in tuition, $950 in books, and $10,100 in room and board for Dan, a freshman at Prescott College.

15. Other information: a. Joyce's business is named Queensbridge Books, and her employer I.D. num-

ber is 05-3456345. b. The Salvation Army's address is***** Wakefield, R.I. 02879. c. To complete phase II, you will need the following additional forms: Schedule

A, Schedule C, Schedule SE, and Forms 4562, 4684, 8283, 8606, 8829, and 8863.

INSTRUCTIONS: If you are using tax software to prepare the tax return or are not complet- ing phase III of the problem, ignore the instructions that follow.

As in phase I, there are forms in phase II that cannot be completed without addi- tional information which is provided in phase III. Therefore, as a general rule, you should only post the information to the appropriate form and not compute totals for that form. The following specific instructions will assist you in preparing Part II of the return.

a. The only form that can be completed at the end of phase II is Form 8283. b. Do not calculate total income or adjusted gross income on page 1 of Form

1040. c. Post the appropriate information on page 2 of Form 1040, but do not total

this page, compute the federal tax liability, or determine the refund or balance

due. d. Do not calculate the total itemized deductions on Schedule A. e. Do not total Joyce's expenses on Schedule C. f. Do not compute Joyce's self-employment tax on Schedule SE. g. Do not complete the summary section of Form 4562. h. Complete Form 4684 only to the point at which adjusted gross income is

requested. i. On Form 8829, complete Part I, and only post the appropriate indirect

expenses. Do not calculate the allowable depreciation or the allowable home office deduction.