Comprehensive Problem 3-1
Ken (age 31) and Amy (age 28) Booth have brought you the following information regarding their income, expenses, and withholding for the year. They are unsure which of these items must be used to calculate taxable income.
Income: | | Ken's salary (salesman) | $28,100 | Amy's wages (part-time nurse) | 17,900 | Insurance reimbursement for repairs from an auto accident | 500 | Gift from Uncle George | 2,000 | Interest income from Lodge State Bank | 674 | Federal income taxes withheld: | | From Ken's salary | 2,200 | From Amy's wages | 650 | |
Amy owns and operates a computer bookstore named "The Disk Drive." The store is located at 2000 Broadway Street, Menomonie, WI 54751. During 2015, Amy had the following income and expenses:
Sales of books | $319,240 | Expenses | | Store rental | 15,900 | Office expense | 6,000 | Advertising | 11,900 | City business license | 1,000 | Payroll | 84,550 | Payroll taxes | 8,468 | Utilities | 8,000 | Other | 3,000 | Inventory | | January 1 | 250,000 | December 31 | 232,000 | Purchases during the year | 165,000 | |
The previous year was Amy's first year of operating the bookstore. Amy and Ken elected to carry forward a $4,752 net operating loss from the first year of business into 2015. (Note: Net operating losses are reported on the "Other Income" line of Form 1040.)
This year, Amy loaned a friend $20,000 so that he could make an investment. Instead of making the investment, the friend lost all the money gambling and left for parts unknown. Amy has no hope of ever collecting on this bad debt.
Ken, who ordinarily never gambles, won $25,000 at a casino birthday party for one of his friends. This amount should be reported on the "Other Income" line of Form 1040.
The Booths support Ken's parents, Rod (Social Security number 124-80-9050) and Mary (Social Security number 489-37-6676) Booth, who live in their own home. Ken and Amy live at 2345 Wilson Avenue, Menomonie, WI, 54751, and their Social Security numbers are 343-75-3456 (Ken) and 123-45-7890 (Amy).
Click here to access the tax table to use for this problem.
You may ignore any related self-employment taxes.
Required:
Complete the Booth's federal income tax return for 2015. Use Form 1040, Schedule C, Schedule D, and Form 8949. A statement is required to be attached to a return for a nonbusiness bad debt, but this requirement may be ignored for this problem. Assume no 1099-B is filed in association with the bad debt when filling out Schedule D.
Note: If an amount box does not require an entry or the answer is zero, enter "0". If required, enter a "loss" as a negative number on the tax form. However, do not enter deductions or other items as negative numbers.
Hint: You may need to complete the other forms before completing the Form 1040.
Form 1040 | Department of the TreasuryInternal Revenue Service (99) U.S. Individual Income Tax Return | 2015 | OMB No. 1545-0074 | IRS Use Only | For the year Jan. 1Dec. 31, 2015, or other tax year beginning | , 2015, ending , 20 | See separate instructions. | Your first name and initial Ken | Last name Booth | Your social security number 343-75-3456 | If a joint return, spouse's first name and initial Amy | Last name Booth | Spouse's social security number 123-45-7890 | Home address (number and street). If you have a P.O. box, see instructions. 2345 Wilson Avenue | Apt. no. | Make sure the SSN(s) above and on line 6c are correct. | City, town or post office, state, and ZIP code. If you have a foreign address, also complete spaces below (see instructions). Menomonie, WI 54751 | Presidential Election Campaign Check here if you, or your spouse if filing jointly, want $3 to go to this fund. Checking a box below will not change your tax or refund. You Spouse | Foreign country name | Foreign province/state/country | Foreign postal code | Filing Status | | Married filing jointly (even if only one had income) | Exemptions | 6a | Yes | Yourself. If someone can claim you as a dependent, do not check box 6a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | } | Boxes checked on 6a and 6b No. of children on 6c who: lived with you did not live with you due to divorce or separation (see instructions) Dependents on 6c not entered above Add numbers on lines above | _______ _______ | b | Yes | Spouse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | | c | Dependents: | | | (4) If child under age 17 qualifying for child tax credit (see instructions) | | | (1) First name | Last name | (2) Dependent's social security number | (3) Dependent's relationship to you | If more than four dependents, see instructions and check here | | Rod Booth | | 124-80-9050 | Father | | | Mary Booth | | 489-37-6676 | Mother | | | | | | | | | | | | | | d | Total number of exemptions claimed . . . . . . . . . . . . . . . . . . . . | Income Attach Form(s) W-2 here. Also attach Forms W-2G and 1099-R if tax was withheld. If you did not get a W-2, see instructions. | 7 | Wages, salaries, tips, etc. Attach Form(s) W-2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 7 | | | 8a | Taxable interest. Attach Schedule B if required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 8a | | | b | Tax-exempt interest. Do not include on line 8a . . . . . . . . . | 8b | | | | | | 9a | Ordinary dividends. Attach Schedule B if required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 9a | | | b | Qualified dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 9b | | | | | | 10 | Taxable refunds, credits, or offsets of state and local income taxes . . . . . . . . . . . . . . . . | 10 | | | 11 | Alimony received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 11 | | | 12 | Business income or (loss). Attach Schedule C or C-EZ . . . . . . . . . . . . . . . . . . . . . . . . . . . | 12 | | | 13 | Capital gain or (loss). Attach Schedule D if required. If not required, check here | 13 | | | 14 | Other gains or (losses). Attach Form 4797 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 14 | | | 15a | IRA distributions . . . . . . . . . . . | 15a | | | b Taxable amount . . . | 15b | | | 16a | Pensions and annuities . . . . . . | 16a | | | b Taxable amount . . . | 16b | | | 17 | Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E | 17 | | | 18 | Farm income or (loss). Attach Schedule F . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 18 | | | 19 | Unemployment compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 19 | | | 20a | Social security benefits | 20a | | | b Taxable amount . . . | 20b | | | 21 | Other income. List type and amount NOL from 2014 and gambling income | 21 | | | 22 | Combine the amounts in the far right column for lines 7 through 21. This is your total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 22 | | | Adjusted Gross Income | 23 | Educator expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 23 | | | | | | 24 | Certain business expenses of reservists, performing artists, and fee-basis government officials. Attach Form 2106 or 2106-EZ . . | 24 | | | | | 25 | Health savings account deduction. Attach Form 8889 . . . . . | 25 | | | | | 26 | Moving expenses. Attach Form 3903 . . . . . . . . . . . . . . . . . . | 26 | | | | | 27 | Deductible part of self-employment tax. Attach Schedule SE | 27 | | | | | 28 | Self-employed SEP, SIMPLE, and qualified plans . . . . . . . . . | 28 | | | | | 29 | Self-employed health insurance deduction . . . . . . . . . . . . . | 29 | | | | | 30 | Penalty on early withdrawal of savings . . . . . . . . . . . . . . . . | 30 | | | | | 31a | Alimony paid b Recipient's SSN | 31a | | | | | 32 | IRA deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 32 | | | | | 33 | Student loan interest deduction . . . . . . . . . . . . . . . . . . . . . | 33 | | | | | 34 | Tuition and fees. Attach Form 8917 . . . . . . . . . . . . . . . . . . . . . . | 34 | | | | | 35 | Domestic production activities deduction. Attach Form 8903 | 35 | | | | | 36 | Add lines 23 through 35 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 36 | | | 37 | Subtract line 36 from line 22. This is your adjusted gross income . . . . . . . . . . . . . . | | 37 | | | For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions. | Cat. No. 11320B | Form 1040 (2015) | |