CHAPTER 3: CONTINUOUS TAX RETURN PROBLEM 3-1 Problem Facts. Larry K. and Cathy L. Zepp have been married 19 years. Larry is 62 years old (Social Security number 123-45-6789) while Cathy is 57 years old (Social Security number 123-45-6788). They live at 1234 Elm Dr. in Indianapolis, Indiana 46202. The couple uses the cash method of accounting and files their return on a calendar-year basis. They are tired of politics and do not want to contribute to the presidential election campaign. a. Larry is a salesman employed by DSK Industries. This year he earned $110,000. Federal and state income taxes withheld were $17,000 and $6,000 respectively. b. Cathy recently completed a graduate degree in computer technology. She freelances as an independent contractor in computer graphics. She uses her own name as the name of her business. Her earnings received from various engagements were $12,000. Her only expenses paid during the year were for miscellaneous office supplies of $3,000. She paid estimated federal taxes during the year of $1,000 ($250 on each due date). Her business uses the cash method of accounting. c. Other income earned by the couple included interest income of $3,000 from a certificate of deposit issued by Highland National Bank and $975 of interest from tax-exempt bonds issued by the State of Indiana. d. The couple paid moving expenses of $2,000 that are fully deductible. e. The couple owns a duplex that it rents out. It is located at 111 Nowhere Ave., Indianapolis, Indiana. Their rental records reveal the following information for the year. Rentalincome .................................. Rental expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance............................................ Mortgageinterest...................................... Repairs........................................... Realpropertytaxes..................................... Other expenses paid during the year included: Unreimbursedmedicalexpenses............................... . Interestonhomemortgage.................................. . Realpropertytaxesonhome.............................. . Stateincometaxeswithheld(seeabove)......................... . Charitablecontributions..................................... . Rental of safety deposit box to hold gold coins held for investment . . . . . . UnreimbursedemployeebusinessexpensesofLarry................. . $12,000 400 7,000 1,000 600 $ 9,000 12,000 1,900 6,000 1,000 100 3,000 Prepare the 2010 individual income tax return for the Zepps. Complete Form 1040 and Schedules A, B, C, E and SE. Assume that all of the expenses except their business expenses are incurred jointly. Also assume that the making work pay credit is zero. 3-2 Continuous Tax Return: Additional Questions. Answer the following questions relating to the continuous tax return problem for Chapter 3 above: a. What is the Zepps marginal tax rate? Average tax rate? b. The Zepps recently heard that making a contribution to an individual retirement account (IRA) may be a wise tax move. It is their understanding that contributions to a traditional or conventional IRA are deductible and the earnings on the accounts are not taxable until withdrawn (see Chapter 18 for more information). Assuming both Larry and Cathy make a deductible contribution of $4,000 each for a total of $8,000, compute the exact amount of tax the couple will save. Show computations illustrating how the savings are derived. c. This question relates to the income tax of your state and may or may not be applicable. Check with your instructor for further instructions. Larry incurred $3,000 of expenses related to his employment while Cathy incurred $3,000 related to her freelancing activity (i.e., self-employment). Which of the following statements is (are) true regarding the treatment of the expenses for state income tax purposes? 1. Both expenses were deductible in full. 2. Neither of the expenses was deductible. 3. The employment related expenses were deductible but the expenses related to self-employment were not deductible. 4. Theexpensesrelatedtoself-employmentweredeductiblebuttheemployment related expenses were not deductible. d. Assume that Larry (instead of Cathy) had the self-employment income of $9,000. Which of the following statements is true? 1. Larry paid 15.3% self-employment tax on self-employment income of $9,000. 2. Larry paid 15.3% self-employment tax on self-employment income of $8,312. 3. Larry paid the same amount of self-employment tax that Cathy would have paid had she earned the income. 4. Larry pays less than the amount of self-employment tax that Cathy would have paid had she earned the income. Thankyou