Fill out their information to form 1040, schedule B,C and D.

Appendix A

Tax Return Problem - Part I

Detailed Explanation

1. The amount on line 7 of the 1040, reflects Bill's wages of $152,272 and is from Exhibit A-1.

2. The interest income reported on Exhibits A-2 and A-3 is taxable. On the combined interest and dividend 1099 (Exhibit A-6) only the interest on the Ford Motor Bonds is taxable. The New York City Municipal Bonds and the New Jersey Economic Development Bonds are not taxable but are reported on line 8b of the 1040.

a. The $144 withheld on the interest earned from the Ford Motor Bonds is added to the Schnappaufs federal withholdings (see # 6 below).

b. Generally, the maturity value ($15,100) of a life insurance policy is not taxable. However, any interest earned ($380) on the maturity value of the policy is taxable interest. The amount Bill's father paid in premiums is not relevant. Bill can exclude the $15,100 from income, but must include the $380 of interest. Instructors Note: Bill received a 1099-INT from United Insurance (see Exhibit A-9) for the accrued interest which is included on Schedule B.

3. The amount reported on Line 1a and 1b of the 1099-DIV (Exhibit A4 and A-5) and the amount of dividends reported on Exhibit A-6 are included in taxable income as qualified divdidends and taxed at 15%. For the Collingwood Capital Fund (Exhibit A-4), the amount on Line 1a and 1b is also a qualified dividend that is reported on Schedule B and taxed at 15%. The amount on 2a is reported as a capital gain and is taxed at 15%. The $47 of federal tax withheld on the dividends/capital gains from the Collingwood Capital Fund is added to the Schnappaufs federal withholdings (see # 6 below).

4. Under the tax benefit rule, the Schnappaufs state income tax refund of $818 is taxable. A federal tax refund is never taxed. Rather, it represents an over withholding of income tax from the prior period.

5. The Schnappaufs must include $7,345 as other income. This amount represents Bill's blackjack winnings of $6,200 from the Yardly Casino, a tablet ($595) and cash ($300) Joyce won as the lucky ninety-third caller, and the two $125 gift certificates she received from the PTO.

a. Joyce should use the $595 amount for income tax purposes. This amount better represents what a willing buyer would pay a willing seller for the tablet. The manufacturer's suggested retail price is rarely, if ever, the price paid for an item.

b. The $1,240 withheld on the gambling earnings from the Yardly Casino is added to the Schnappaufs federal withholdings (see # 6 below).

6. Their total federal withholdings for Phase I is $25,302. This represents Bill's federal withholding of $23,871 the $1,240 withheld on Bill's blackjack winnings, the $47 withheld on the income from the Collingwood Capital Fund and the $144 withheld on the interest from the Ford Motor Bonds.

7. Other information:

a. The $1,500 of dividends paid to Joyce from the furniture restoration business she operates with her brother is not taxable. A dividend paid by a conduit entity (an S corporation) is not taxable, because it either represents a return of Joyce's initial investment or an amount that was taxable to Joyce in a previous year. The $1,500 reduces Joyce's basis (i.e., investment) in the business.

b. If the student is using tax preparation software, the Schnappaufs will use the standard deduction of $12,600. Both Will and Dan are older than 17 years of age and are not eligible for the child tax credit. Although Tom is eligible for the $1,000 child tax credit because their AGI exceeds $130,000 the tax credit is completely phased out.

c. If the student is using tax preparation software, the computer will compute the tax liability by taxing the capital gain income of $105 and dividend income of $2,253 at 15%. The Schnappaufs remaining taxable income is taxed at 25% (see Capital Gain Tax Worksheet).