Form 1040 U.S. Individual Income Tax Return

Assume that the taxpayers, George A. Warden (social security number 333-33-3330) and Mary S. Warden (social security number 444-44- 4440) file a joint return. Both are 50-years old, have good eyesight, and live with their three children, Edward, John and Ruth, at 789 N. Code Drive, Chicago, Illinois 60699. The Wardens home phone number is 312-555-9999. Mr. Warden elects to have $3 of his income tax go to the Presidential Election Campaign Fund. Mrs. Warden elects not to contribute. The Wardens oldest son, Edward, is 20 years old and a student at the University of Finance and Accounting. He worked during the summer and earned $4,000. Their other son, John, is 17 and a high school student. He earned $3,600 working full-time during the summer and part-time during the remainder of the year. Neither son had any additional income. Their daughter, Ruth, is eight years old and an elementary school student. She had no earned or unearned income during the year. Edwards social security number is 300-11-0001, Johns social security number is 300-22-0002, and Ruths social security number is 300-33-0003. In August, the Wardens paid $4,000 in tuition for their son, Edward, for the academic period that started in September. They received a Form 1098-T for 2014 showing the payment received in Box 1. Box 8 is checked indicating Edward was at least a half-time student. Edward had not claimed the American Opportunity Credit or Hope Scholarship Credit in any four prior tax years, did not complete the first four years of post-secondary education before 2014, and he had not been convicted of any felony. The Wardens claim Mrs. Wardens mother, Grace D. Taylor, as a dependent under a multiple-support agreement. The total support of Mrs. Taylor is $6,000, received from the following three sources:

(1) $3,000 from Mary Warden,

(2) $1,000 from another daughter, Thelma Taylor, and

(3) $2,000 in social security benefits.

Mrs. Grace D. Taylor lived with the Wardens during all of 2014. Her social security number is 400-44-0004. Thelma Taylor provides the Wardens with a written, signed statement, that she will not claim her mother as a dependent in 2014. Thelma Taylor lives at 1425 S. 62^ndStreet, Chicago, IL 60699, and her social security number is 500-55-0005. The Wardens use Trish Ford, a professional tax preparer, to prepare their income tax return. Trish Fords PTIN is P98765432, and she works for E&Z Tax Preparation (EIN #36-0987654), which is located in a nearby suburb of Middle America (telephone number 312-555-1040). However, the Wardens do not authorize her to discuss their return with the IRS. Income and Expenses Generally During 2014, Mrs. Warden was employed as a salesperson by XPert Publishing Inc. Her Form W-2 for 2014 reports the following:

Box 1. Wages, tips and other compensation $75,000

Box 2. Federal income tax withheld $4,950

Box 4. FICA tax withheld $4,650

Box 6. Medicare tax withheld $1,088

Box 17. State income tax $2,250

Mrs. Warden is not covered by her employers retirement plan. In addition, Mr. Warden is a self-employed individual who does not maintain a Keogh or a SEP plan. Mrs. Warden made a $1,500 contribution to a traditional IRA and a $2,000 contribution to a Roth IRA in 2014. Mr. Warden decided against making a contribution to any IRA. The Wardens received a $30 state income tax refund. They itemized in the prior year and elected to take their $2,000 state income tax payment as a deduction. The Wardens also received a $20 federal income tax refund.

Form 1040, Schedule A

The Wardens made federal estimated tax payments of $2,000 for 2014.

The Wardens incurred the following medical expenses during 2014:

prescription drugs, $1,000;

doctor bills, $3,550;

hospital bills, $1,750;

transportation, $100; and

eyeglasses, $500.

In addition, Mr. Warden, who is self-employed, paid $3,750 in premiums for health insurance coverage for himself, his wife and children.

The health insurance coverage meets all the requirements under the individual mandate. Grace Taylor is covered under Medicare. The Wardens paid their 2013 real estate taxes of $1,810 on July 1, 2014. In addition, they sold their residence on September 13, 2014. They allowed the buyer a credit equal to 70% of the estimated real estate taxes of $2,000 for 2014. The real estate taxes on the new property they purchased on May 1, 2014, are not payable until 2015. There was no taxable gain on the sale of their prior residence. Mr. and Mrs. Warden paid $3,878 in deductible home mortgage interest to a bank. They also paid $3,000 in points when they purchased their new home. They paid the following personal interest in 2014:

$600 to finance Mrs. Wardens car, and

$400 in credit card interest.

The Wardens gave $1,500 in cash to various recognized charities; no individual gift was $250 or more; all charities sent an acknowledgment of the contribution.

Form 4684, Section A

During 2014, a burglar entered their home and stole a ring and a coin collection. The ring had been purchased in May 15, 1994 at a cost of $3,000. Mrs. Warden had purchased the coin collection in July 15, 1995 at a cost of $1,100. An insurance company appraised the ring at a fair market value of $5,000, but limited its loss coverage on jewelry under a homeowners policy to $1,500. The insurance company excluded the coin collection from the insurance policy because of its policy restrictions on such items. At the time of the theft, the fair market value of the coin collection was $2,000.

Form 2106

Mrs. Warden incurred employee business expenses in connection with her occupation as salesperson for the publishing company. On January 3, 2014, she purchased a new car that was used primarily for business reasons. The car cost $20,000. During 2014, the car was driven a total of 20,000 miles by Mrs. Warden. Of those miles, 16,600 were business related. Mrs. Warden drove 1,250 miles while commuting (five-mile daily roundtrip commute), and 2,150 miles for personal purposes. Mrs. Warden depreciates the car using a five-year MACRS recovery period, the 200% declining-balance method, and the half-year convention. However, it should be noted that depreciation on the car is limited because of the listed property rules. Mrs. Wardens gasoline, oil and insurance expenses on the car amounted to $4,750. She paid $600 in interest on the installment loan incurred to purchase the car. She also paid $50 for business parking fees and $75 for a car rental while away from home. Mrs. Warden elects to claim the actual automobile-related expenses. Assume the answers for Form 2106, Lines 18, 19, 20 and 21 are Yes. Mrs. Warden elected not to claim any Code Sec. 179 deduction or additional bonus depreciation on the car in 2014.

Mrs. Warden incurred the following other business expenses:

meals and entertainment, $1,500;

airfare, $233;

gifts to customers, $150; and

business seminar, $60.

Mrs. Warden received $5,000 as a car expense reimbursement from her employer under a plan that required her to account for the expenses. The $5,000 was not reported on her Form W-2. Mrs. Warden was not reimbursed for her other business expenses. The Wardens paid $500 for the preparation of their 2013 tax return (including $200 for the preparation of Schedule C, Profit or Loss from Business for George Wardens furniture business), $50 for the rental of a safe deposit box where they stored their securities, and $350 for investment publications.

Form 1040, Schedule B

During 2014, the Wardens received $500 in interest from the Heartland National Bank and $150 as nominees from the Third National Savings and Loan. They received $200 in interest from tax-exempt bonds issued by the state of Illinois. The Wardens received the following qualified dividends: $400 from E&Z Tax Preparation, Inc., $300 from Secure Fund, and $250 from Rapid Growth Mutual Fund. They also received a $100 capital gain distribution from Rapid Growth. In addition, the Wardens received $700 in nonqualified foreign corporation dividends from Consolidated Tapioca, and paid foreign taxes of $10 to various countries in connection with this investment. The responses to the questions on Part III of Schedule B are No.

Form 1040, Schedule D

During 2014, the Wardens sold the following capital assets: (1) On February 2, 100 shares of Ahab Inc. were sold for $1,000. They had been purchased on November 12, 2013 for $2,500. (2) On November 5, 200 shares of Pequod Inc. were sold for $5,000. They had been purchased on January 5, 2014 for $2,000. (3) On December 4, 100 shares of Squall Inc. were sold for $10,000. They had been purchased on January 4, 2004 for $4,000. (4) On December 10, 200 shares of Kismet Inc. were sold for $5,000. They had been purchased on September 5, 2008 for $2,000. (5) On December 15, a number of gold coins were sold for $2,000. The coins had been purchased on October 15, 2007 for $3,000. The Wardens received a Form 1099-B from their broker for 2014 that showed the proceeds and basis for Items 1 - 4. The gold coins were sold to an acquaintance who did not provide a Form 1099-B.

Form 1040, Schedule E

Mr. and Mrs. Warden own and rent a brick two-flat apartment building located at 12 West 5th Ave., Chicago, Illinois 60626. The apartment building is not used for personal purposes by either the Wardens or members of their family and was rented at fair rental value for the entire year. Mr. Warden actively participates in the operation of the building. The Wardens received rents of $12,000 in 2014. Their expenses are as follows:

cleaning and maintenance, $2,500;

mortgage interest, $4,000;

repairs, $750;

advertising, $500;

insurance, $1,000 and

real estate taxes, $1,250.

The current depreciation figure, taken from the Wardens work papers (not reproduced), is $3,000. The Wardens did not make any payments that required them to file Form(s) 1099.

Form 2441

During 2014, the Wardens daughter, Ruth, attended two child care centers. They were: Happy Day Care, 4210 W. Maple, Chicago, Illinois 60699, whose identification number is 36-0987654; and Greenfields Day Care, 901 N. Ash, Chicago, Illinois 60699, whose identification number is 36-1234567. The Wardens paid $3,720 to Happy Day Care and $1,860 to Greenfields Day Care. The Wardens did not receive employer-provided dependent care benefits.

Business Income

Form 1040, Schedule C

Mr. Warden operated Interiors Unlimited, selling home furnishings at retail, as a sole proprietor during the entire year. The business address is 45 Boswell Blvd., Villa Park, Illinois 60181. His employer identification number is 36-3456789. The business code is 442200. Mr. Warden filed all of the appropriate payroll tax forms and Form(s) 1099 for 2014. In order to clearly show business income, Mr. Warden maintains an inventory at cost and he uses the accrual method of accounting for his sales and purchases. Total gross receipts of the business were $127,247 and returns and allowances amounted to $1,500. The business books showed the following information:

Inventory at beginning of year (valued at cost) . . . . . . . . . . . . . . . $35,000

Merchandise purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000

Inventory at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,000

Truck expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550

Other interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300

Rent (property). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7,800

Repairs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280

Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000

Wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12,541

Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,450

Utilities and telephone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,200

Advertising. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,240

Legal and accounting

(includes $200 of tax preparation fees). . . . . . . . . . . . . . . . . . . . . . . . . 400

Office expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,158

Travel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400

Meals and entertainment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,040

Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .330

Form 4562

On January 10, 2014, Mr. Warden purchased office furniture at a cost of $5,000. The furniture is used 100% for business. It is seven-year MACRS property. Mr. Warden elects to expense $1,000 of the cost under Code Sec. 179. Mr. Warden elected not to claim the bonus depreciation available for any business property placed in service during 2014. On July 15, 2014, Mr. Warden purchased a pickup truck for use in his business. It was driven 8,000 miles. The truck, used 100% for business, cost $47,000 and sales tax was $3,000, for a basis of $50,000. The truck is considered five-year MACRS property. Also, it falls in the classification of a light, general-purpose truck, subject to depreciation limits. On June 15, 2010, Mr. Warden purchased fixtures for the store for $6,000. The current depreciation deduction for the fixtures is $536. Mr. Warden bought a brick building on July 1, 2002, $75,000 of the price being allocable to the building for depreciation purposes. No capital improvements were made. Depreciation on the building is computed by using the MACRS method. The allowable MACRS deduction for 2014 would be calculated at the rate of 2.564%.

Form 4684

On September 1, 2014, a garage that had been purchased for $25,000 on July 1, 2005 and used exclusively for Mr. Wardens business was damaged by fire. In order to repair the garage after the fire, Mr. Warden spent $7,905. The repairs are considered to be an improvement to the property, which, prior to the casualty, was being depreciated under the MACRS method for nonresidential property. The amount of depreciation claimed prior to 2014 was $5,422. Mr. Warden uses Form 4684, Section B, to determine the recognized casualty gain or loss from the fire damage to the garage. Assume that the fair market value of the garage was $24,650 before the fire and it had a fair market value immediately after the fire of $14,760. Assume, in completing Form 4684, that the total amount of depreciation that Mr. Warden had claimed for the garage up to the date of the fire was $5,876 and that he had received $5,000 from a fire insurance policy he had on the garage. After the fire, and taking into account the allowable loss deduction, the cost of repair and the insurance recovery, the new adjusted basis of the garage for depreciation purposes is $22,029. Since the basis had to be adjusted, the garage will be depreciated on a straight-line method for the remainder of the original depreciation period. The allowable MACRS deduction for 2014 would be calculated based on a rate of 3.33% per year using a mid-month convention.

Form 4797

On January 3, 2014, Mr. Warden sold a business truck for $550. He had purchased the truck for $5,000 on March 12, 2005. Total depreciation allowed or allowable on the truck prior to 2014 was $5,000.

Farm Income and Expenses

Form 1040, Schedule F

Mr. Warden owned and operated a farm in Illinois. The Principal Agricultural Activity Code for this farm is 112111, and the principal product raised is beef cattle. Mr. Warden utilizes the cash basis to report farm income and expenses. His books and records show the following

information:

Farm income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amount

Livestock sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,500

Cooperative distributions

($30 nontaxable) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

Farm expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Livestock purchases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000

Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000

Feed purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750

Farm expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amount

Freight and trucking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250

Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400

Labor hired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000

Other interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

Pasture rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300

Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450

Veterinary fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500

Assume that Mr. Wardens basis in the livestock sold during 2014 was $19,500. Mr. Warden did not receive a subsidy in 2014