Form 1040-Individuals Income Tax Return

Assume that the taxpayers, George A. and Mary S. Wyatt, both are 40 years old, have good sight, and live with their three dependent children, Edward, John, and Ruth, at 789 N. Code Drive, Chicago, Illinois 60600. Mr. Wyatt elects to have $3 of his income tax go to the Presidential Election Campaign Fund. Mrs. Wyatt elects not to contribute.

The Wyatts' son, Edward, is a junior in college and he is 20 years old. He worked during the summer and earned $3,400. Their other son, John, is 17 and a high school student. He earned $2,400 during the summer and worked part-time during the remainder of the year. Neither son had any additional income. Their daughter, Ruth, is eight and an elementary school student. She had no earned or unearned income during the year. Edward's social security number is 301-11-0001, John's social security number is 300-22-0002, and Ruth's social security number is 300-33-0003.

The Wyatts also claim Mrs. Wyatt's mother, Grace D. Tyler, as a dependent under a multiple-support

agreement. The total support of Mrs. Tyler is $4,000, received from the following three sources: (1) $2,000 from Mary Wyatt, (2) $1,000 from another daughter, Thelma Tyler, and (3) $1,000 in social security benefits. Mrs. Tyler lived with the Wyatts during all of 2016. Her social security number is 400-44-0004. Thelma Tyler states, on Form 2120, that she will not claim her mother as a dependent.

Income and Expenses Generally

During 2016, Mrs.Wyatt was employed as a salesperson by a publishing company. As indicated on her Form W-2, she received $60,000 in taxable wages, from which $2,500 in federal income taxes was withheld.

Mrs. Wyatt is not covered by her employer's retirement plan. In addition, Mr. Wyatt is a self-employed individual who does not maintain a Keogh or a SEP plan. Mrs. Wyatt made a $800 contribution to an IRA. Mr. Wyatt decided against making a contribution to an IRA.

The Wyatts received a $150 state income tax refund. They itemized in the prior year and took the state income tax as a deduction. The Wyatts also received a $120 federal income tax refund.

The Wyatts made estimated tax payments of $3,500 in 2016.

The Wyatts incurred the following medical expenses during 2016: prescription drugs, $600; doctor bills, $2,300; hospital bills, $500; transportation, $100; and eyeglasses, $300. In addition, Mr. Wyatt spent $3,000 for health insurance coverage, of which 40% ($1,200) was deducted as an expense on Line 27 of the front of Form 1040.

The Wyatts paid their 2014 real estate taxes of $1,500 due on July 1, 2016. In addition, they sold their

residence on September 13, 2016. They allowed the buyer 70% of the estimated real estate taxes of $2,000 for 2016. The real estate taxes on the new property they purchased on May 1, 2016, are not payable until 2017. They paid $1,700 in income tax to the state of Illinois in 2016.

Mr. and Mrs. Wyatt paid $3,600 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 2016: $650 for Mrs. Wyatt's car and $300 in credit card interest.

The Wyatts gave $1,000 in cash to various recognized charities; no individual gift was $250 or more.

During 2016, a burglar entered their home and stole a ring and a coin collection. The ring had been purchased in May 2003 at a cost of $3,000. Mrs. Wyatt had purchased the coin collection in July 1996 at a cost of $1,100. An insurance company appraised the ring at a fair market value of $3,000, but limited its loss coverage on jewelry under a homeowners' policy to 50% of fair market value. 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.

ASSIGNMENT: Compute any allowable deduction the Wyatts may have on Form 4684.

Mrs. Wyatt incurred employee business expenses in connection with her occupation as salesperson for the publishing company. On January 3, 2016, she purchased a new car that was used primarily for business reasons. The car cost $19,500, and she paid $500 in sales tax. During 2016, the car was driven a total of 20,000 miles by Mrs. Wyatt. Of those miles, 16,600 were business related, 1,250 miles were for commuting, and 2,150 miles were for personal purposes. Mrs. Wyatt 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. Wyatt's gasoline, oil and insurance expenses on the car amounted to $3,500. She paid $650 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.

Mrs. Wyatt incurred the following other business expenses: meals and entertainment, $500; airfare, $120; gifts to customers, $150; and business seminar, $60.

Mrs. Wyatt received $1,000 as a car expense reimbursement from her employer under a plan that required her to account for the expenses. The $1,000 was not reported on her Form W-2. Mrs. Wyatt was not reimbursed for her other business expenses.

ASSIGNMENT: Prepare a Form 2106 for Mrs. Wyatt.

The Wyatts claim a $500 deduction for preparing their 2015 tax return, $25 for the rental of a safe deposit box where they stored their securities, and $100 for investment publications.

ASSIGNMENT: Prepare a Schedule A for Form 1040.

During 2016, the Wyatts 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 bonds issued by the state of Illinois.

They received the following dividends: $800 from Consolidated Tapioca, $200 from Secure Money Market Fund, and $300 from Rapid Growth Mutual Fund, of which $100 was a qualified capital gain distribution. Of this distribution, the fund reported that $80 was 28% rate gain. The responses to the questions on Part III of Schedule B are "No."

ASSIGNMENT: Prepare a Schedule B for Form 1040.

On September 13, 2016, Mr. and Mrs. Wyatt sold their residence for $133,000. They had paid $80,000 for it on August 15, 1987, and they had made capital improvements totaling $20,000. Selling expenses were $3,000.

During 2016, the Wyatts 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 2, 2014 for $2,500. (2) On November 5, 200 shares of Pequod Inc. were sold for $5,000. They had been purchased on January 5, 2016 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, 2014 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, 2001 for $3,000. Further, keep in mind that $80 of the $100 capital gains distribution from Rapid Growth Mutual Fund was classified as 28% rate gain.

ASSIGNMENT: Prepare a Schedule D for Form 1040.

Mr. and Mrs. Wyatt own and rent an apartment building located in Chicago, Illinois. The apartment building is not used for personal purposes by either the Wyatts or members of their family. Mr. Wyatt actively participates in the operation of the building. The Wyatts received rents of $12,000 in 2016. 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 depreciation figure, taken from the Wyatts' workpapers, is $3,000.

ASSIGNMENT: Prepare a Schedule E for Form 1040.

During 2016, the Wyatts' daughter, Ruth, attended two child care centers. They are: Happy Day Care, 4210

W. Maple, Chicago, Illinois 60600, whose identification number is 36-2343211; and Greenfields Day Care, 901 N.

Ash, Chicago, Illinois 60600, whose identification number is 36-1234567. The Wyatts paid $1,200 to Happy Day

Care and $1,380 to Greenfields Day Care. The Wyatts did not receive employer-provided dependent care benefits.

ASSIGNMENT: Compute the allowable credit for these child care expenditures on Form 2441.

Proprietorship Business Income

Mr. Wyatt operated Interiors Unlimited, selling home furnishings at retail, as a sole proprietor during the entire year 2016. The business address was 45 Boswell Blvd., Villa Park, Illinois 60181. His employer identification number is 36-1234567. The business code is 4317.

In order to clearly show business income, Mr. Wyatt maintains an inventory 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) $31,000 Insurance 1,450

Merchandise purchased 50,000 Utilities and telephone 1,000

Inventory at end of year 20,000 Advertising 2,240

Truck expenses 550 Legal and accounting fees 400

Other interest 300 Office expense 125

Rent (property) 7,800 Depreciation 6,043

Repairs 300 Travel 400

Taxes 2,000 Meals and entertainment 1040

Wages $12,542

On January 10, 2016, Mr. Wyatt purchased office furniture at a cost of $3,000. The furniture is used 100% for business. It is seven-year MACRS property. Mr. Wyatt elects to expense $1,000 of the cost under Code Sec. 179. The basis on which the depreciation is computed is $2,000.

On July 15, 2016, Mr. Wyatt purchased a Ford pickup truck for use in his business. It was driven 8,000 miles. The truck, used 100% for business, cost $17,500 and sales tax was $500, for a basis of $15,000. The truck is considered five-year MACRS property. Also, it falls in the classification of a light, general-purpose truck; therefore, it is subject to the same limitations as are imposed on cars.

In July, a brick garage acquired on July 1, 2009, for $3,000 and used in Mr. Wyatt's business was damaged by fire. The garage had a useful life of 25 years, and depreciation was computed under the straight-line method. Because the garage was repaired, the depreciation deduction for the garage amounts to $80 for 2016. During September, Mr. Wyatt spent $1,669 in repairing and renovating the garage after the fire, but the repairs are not completed until October 1, 2016. These costs represent an improvement and, as such, must be depreciated under the MACRS system for nonresidential property. The MACRS depreciation for these costs is computed by using 0.535%. In computing the casualty gain or loss from the fire on Form 4684, the fair market values of the garage before and after the casualty were $2,000 and $1,130, respectively, and an $800 insurance reimbursement was received. In computing the basis of the property for purposes of determining the casualty gain or loss, the total deductible depreciation up to the date of the fire amounted to $2,160.

ASSIGNMENT: Compute the casualty loss on page 2 of Form 4684.

In 2000, Mr. Wyatt purchased fixtures for the store. The ACRS depreciation deduction for the fixtures is

$545.

Mr. Wyatt bought a brick building on July 1, 2009, $24,000 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 straight-line method and an estimated useful life of 25 years.

On January 3, 2016, Mr. Wyatt sold a business truck for $570. He had purchased the truck for $5,000 on March 12,2000. Total depreciation allowed or allowable on the truck was $5,000.

ASSIGNMENT: Report any gain on the sale on Form 4797, Part III, then carry over the gain to Part I of Form 4797 along with the casualty loss computed on page 2 of Form 4684.

ASSIGNMENT: From the above information, complete a Form 4562 and a Schedule C for Form 1040.

Farm Income and Expenses

Mr. Wyatt owned and operated a farm in Illinois (Employer Identification N6. 36-1234567). The Agricultural Activity Code for this farm is 112111, and the principal product raised is beef cattle. Mr. Wyatt utilizes the cash basis to report farm income and expenses. His books and records show the following information:

Farm income- Amount Farm expenses-continued Amount

Livestock sales $25,000 Freight and trucking $ 250

Cooperative distributions ($30 nontaxable) 150 Insurance 400

Labor hired 3,000

Mortgage interest 100

Farm expenses- Pasture rentals 300

Livestock purchases 15,000 Taxes 450

Depreciation 1,000 Veterinary fees 500

Feed purchased 750

Special Accrual-Basis Farm Computations

For purposes of illustration only, assume that Mr. Wyatt computed his farm income on the accrual basis and fill in the "accrual-method" portion (Part III) of Schedule F (Form 1040). For purposes of completing Part III, (1) Mr. Wyatt's livestock sales amounted to $25,000, (2) his inventory of livestock at the beginning of the year amounted to $10,000, (3) he purchased livestock for $5,000 during the year, and (4) he had an ending inventory of $5,000.

ASSIGNMENT: Prepare a Schedule F for Form 1040.

ASSIGNMENT: After completing Schedules C and F for Mr. Wyatt, compute his social security self-employment tax on Schedule SE. Note that one-half of the self-employment tax is deductible on Line 26 of Form 1040.

ASSIGNMENT: Combine all of the information obtained from Schedules A, B, C, D, E, F, and SE, and Form 2441 with the other pertinent information discussed above to prepare a Form 1040 for the Wyatts.

Form 3903-Moving Expenses

Ms. Deborah Debit has been employed as a certified public accountant in the Chicago, Illinois area. In February 2016, Ms. Debit accepts a position with a public accounting firm located in Albuquerque, New Mexico. The number of miles from her old home to her new workplace is 1,290 miles, and the number of miles from her old home to her old workplace is 20 miles.

During 2016, Ms. Debit incurred the following expenses associated with her move from Chicago to Albuquerque: cost of moving household goods, $1,800; travel and lodging in moving to Albuquerque, $350. Her new employer reimbursed her for $1,000 of the cost of the move.

ASSIGNMENT: Prepare a Form 3903 for Ms. Debit.

Form 8829-Expenses for Business Use of Your Home

Myron Loy is a self-employed accountant. Loy has operated his business from his home since 2001, and he uses one room on an exclusive and regular basis to meet with clients. He determines that his home has a total area of 3,000 square feet and that the room he uses for business has an area of 300 square feet. Loy's tentative net profit from Line 29 of Schedule C $39,500.

Loy determines that he incurred the following expenses during 2016: home mortgage interest, $5,000; real estate taxes, $3,500; home insurance, $400; insurance on contents of business office, $100; electricity, $600; gas, $800; and painting of the home office, $125. It should be noted that, with regard to Loy's expenses for electricity ($600) and gas ($800), Loy determines that only $80 of these utility expenses pertains to the business use of his home and not $140 (10% of $1,400).

Loy's home has an adjusted basis of $125,000 and a fair market value of $145,000 on the date first used as a business. The value of the land on which the residence is located is $15,000. Assume that Loy enters 3.175% as the depreciation percentage on Line 39 of Form 8829.

ASSIGNMENT: Prepare a Form 8829 for Mr. Loy. Assume his social security number is 300-00-0000