In 2010, Bill and Joyce Schnappauf live in Wakefield, R.I. Bill is 50, and Joyce is 48. Bill is a district sales manager for USC Equipment Corporation, a Rhode Island firm that manufactures and distributes gaming equipment. Joyce is a self-employed author of childrens books. The Schnappaufs have three children, Will, 21, Dan, 19, and Tom, 16. In February 2011, the Schnappaufs provide the following basic information for preparing their 2010 federal income tax return: 1. The Schnappaufs use the cash method of accounting and file their return on a calendar-year basis. 2. Unless otherwise stated, assume that the Schnappaufs want to minimize the current years tax liability. That is, they would like to defer income when possible and take the largest deductions possible, a practice they have followed in the past. 3. Joyces Social Security number is XXXXX 4. Bills Social Security number is XXXXX 5. Wills Social Security number is XXXXX 6. Dans Social Security number is XXXXX 7. Toms Social Security number is XXXXX 8. The Schnappaufs do not have any foreign bank accounts or foreign trusts. 9. Their address isXXXXX Wakefield, R.I. (02879). 10. The Schnappaufs do not wish to contribute to the presidential election campaign. The first phase of the tax return problem is designed to introduce you to some of the tax forms and the supporting documentation (Forms W-2, 1099-INT, etc.) needed to complete a basic tax return. The first four chapters focus on the income aspects of individual taxation. Accordingly, this phase of the tax return focuses on the basic income concepts. 1. Bills W-2 is provided (Exhibit A1). The 2010 W-2 includes his salary ($81,000), bonus ($32,000), and income from group-term life insurance coverage in excess of $50,000 ($85.56), and is reduced by his contribution ($4,000) to USCs qualified pension plan. The company contributes 7 percent of Bills salary ($5,670) to the plan. 2. The Schnappaufs receive two 1099-INTs for interest (Exhibits A2 and A3), two 1099-DIVs for dividends (Exhibits A4 and A5), and a combined interest and dividend statement (Exhibit A6). 3. Joyce and her brother, Bob, are co-owners of, and active participants in, a furniture restoration business. Joyce owns 30 percent, and Bob owns 70 percent of the business. The business was formed as an S corporation in 2001. During 2010, the company pays $3,500 in dividends. The basis of Joyces stock is $20,000. 4. The Schnappaufs receive a 2009 federal income tax refund of $380 on May 12, 2010. On May 15, 2010, they receive their income tax refund from the state of Rhode Island. In January 2011, the state mails the Schnappaufs a Form 1099-G (Exhibit A7). Their total itemized deductions in 2009 were $16,471. 5. During 2010, Joyce is the lucky ninety-third caller to a local radio station and wins $500 in cash and a stereo system. Despite repeated calls to the radio station, she has not received a Form 1099MISC. In announcing the prize, the radio station host said that the manufacturers suggested retail price for the stereo system is $750. However, Joyce has a catalog from Supersonic Electronics that advertises the system for $650. 6. The Schnappaufs receive a Form W-2G (Exhibit A8) for their winnings at the Yardley Casino in Connecticut. 7. On June 26, 2010, Bill receives a check for $16,100 from the United Insurance Corporation. Though he was unaware of it, he was the designated beneficiary of an insurance policy on the life of his uncle. The policy had a maturity value of $15,500, and the letter from the company stated that his uncle had paid premiums on the policy of $2,900 (Exhibit A9). 8. Joyce is active in the school PTO. During the year, she receives an award for outstanding service to the organization. She receives a plaque and two $125 gift certificates that were donated to the PTO by local merchants. 9. To complete phase I, you will need Form 1040, Schedule B, and Schedule D. INSTRUCTIONS: If you are using tax software to prepare the tax return or are not completing phases II and III of the problem, ignore the instructions that follow. If you are preparing the return manually, you cannot complete some of the forms used in phase I until you receive additional information provided in phase II or phase III. Therefore, as a general rule, you should only post the information to the appropriate form and not compute totals for that form. The following specific instructions will assist you in preparing Part I of the return. a. The only form that can be totaled is Schedule B. b. Only post the appropriate information to Schedule D. Do not total any columns. More information is provided in phase III of the tax return problem. c. Do not calculate total income or adjusted gross income on page 1 of Form 1040. d. Post the appropriate information on page 2 of Form 1040, but do not total this page, compute the federal tax liability, or determine the refund or balance due PHA ____________SE IICHAPTERS 58 This is the second phase of the tax return problem you began at the end of Chapter 4. This phase of the tax return incorporates the material from Chapters 5, 6, 7, and 8 by providing you with information concerning the Schnappaufs deductions for 2010. They provide you with the following information. 1. Joyce writes childrens books for a variety of publishers. She has been self-employed since 2002. As a freelance writer, Joyce incurs costs associated with preparing a manuscript for which she does not yet have a contract. During the year, Joyce makes 4 business trips, each 3 days long, to meet with various publishers. For shorter trips that are closer to home, she either drives or takes the train and returns the same day. On December 10, 2010, Joyce receives an advance (see below) on her next book. Under the contract, Joyce is scheduled to begin work on the book on February 1, 2011, and must have it completed by November 30, 2011. The Schnappaufs home has 3 telephones. Joyce has a separate phone number for her business. The information on Joyces business is listed below. Royalties (Exhibits A10A11 to A12) Publishers advance $6,000 Office supplies 225 Train tickets 320 Airfare (4 trips) 1,340 Lodging (12 nights) 1,425 Meals (12 days) 875 Telephone ($28 monthly fee per phone line) 336 Internet provider 384 Long-distance business-related telephone calls 210 Business-related postage 140 Printing/copying 185 Legal fees 620 Interest on auto 550 2. On January 2, 2010, Joyce purchases a new car to use in her business. The car, a Volster, costs $15,200. Joyce pays $5,200 in cash and finances the balance through the dealer. She uses the car 40 percent of the time for business and drives a total of 11,000 miles during 2009. The total expenses for the 11,000 miles driven are: repairs and maintenance, $420; insurance, $680; and gasoline, $1,375. The correct depreciation expense for 2009 is $608 ($15,200 _ 40% _ 10%). 3. Joyces office is located in a separate room in the house and occupies 375 square feet. The total square footage of the house is 2,500. The Schnappaufs purchased the home on July 7, 1996, for $70,000. The local practice is to allocate 10 percent of the purchase price to land. The depreciation percentage for the office is 0.02564. When Joyce started her business on January 1, 2002, the fair market value of the house was $108,000. The total household expenses for 2010 are as follows: Heat $1,600 Insurance 800 Electricity 700 Repairs to kitchen 1,500 Cleaning 2,200 4. Bill began work on his MBA at Denville University. He enrolled in two courses, and paid $2,000 in tuition and $180 for books. 5. Bill and Joyce each contribute $5,000 to their respective IRA accounts in 2010. The IRA account is Joyces only retirement vehicle. Bills basis in his IRA before the current years contribution is $16,000, and Joyces basis is $22,000. The fair market value of Bills IRA on 12/31/10 is $27,150, and the fair market value of Joyces IRA is $32,100. In addition, Bill and Joyce have Coverdell Education Savings Accounts for Thomas and contributed $2,000 to the account. 6. On June 15, 2010, the Schnappaufs 2009 station wagon is totaled in Hurricane Ann. The car was purchased for $26,100 in November 2008. The Schnappaufs receive a check for $20,700 from Zippy Insurance Company that represents the fair market value of the car minus a $500 deductible. On June 26, 2010, they replace the car with a 2010 station wagon. The new car costs $28,100, and the Schnappaufs receive a rebate check from the cars manufacturer for $2,000. 7. The hurricane also damages part of the Schnappaufs house. A tree falls and makes a hole in the roof above the kitchen. Water damages the kitchen, causing the new dishwasher to short out, and it has to be replaced. In addition, the linoleum floor has to be replaced. The cost of fixing the hole in the roof is $1,000. The Schnappaufs receive $750 ($1,000 repair cost minus $250 deductible) to fix the roof. Information concerning the dishwasher and the floor is as follows: Property Date Acquired Original Cost FMV Before FMV After Reimbursement Dishwasher 3/30/10 550 500 0 450 Floor 3/16/10 1,400 1300 0 1000 8. The Schnappaufs incur the following medical expenses (before considering the $700 reimbursement they receive from their health insurance policy): Medical premiums $3,800 Doctors 950 Chiropractor 650 Dentist 1,800 Vet fees (family dog Sandy) 200 Prescription drugs 290 Over-the-counter drugs (aspirin, cough syrup) 175 In addition, Bill purchases an Exsoaligner machine for $700. The machine was recommended by the chiropractor to help strengthen Bills back muscles. 9. The Schnappaufs pay the following property taxes: Wakefield house $8,300 Family car used by Bill (ad valorem) 520 Joyces car (ad valorem) 450 10. The Schnappaufs receive two Form 1098s for the cost of interest on bank loans. They also pay interest on their personal credit cards. Jefferson Trust 1098 (Exhibit A13Wakefield house) Jefferson Trust 1098 (Exhibit A14Home equity) Dempseys Department Store revolving account $137 Brooks Bargain Basement revolving account 62 Jefferson Trust bank card 373 The proceeds from the home equity loan were used to renovate their kitchen and pay for Will and Dans tuition to private school. The interest on the portion of the loan used for private school tuition is $1,100. 11. Bill and Joyce make cash charitable contributions to the United Fund Campaign ($1,300), Adelade University ($350), Tremon University ($1,750), and Christ the King Church in Kingston, R.I. ($1,800). The Schnappaufs have documentation to verify their cash contributions. They also donate property to the Salvation Army on July 15, 2010: Property FMV Original Cost Date Acquired Antique table 475 300 1/4/97 Dishwasher 200 650 5/6/02 Sofa bed 175 700 12/14/04 Men suits 190 420 Various ** The date for sofa bed in book is written 13/14/04, suggesting misprint I have corrected it to 12/14/04** The Salvation Army acknowledges that these amounts represent the fair market value of the donated items. 12. The Schnappaufs incur the following expenses: Type Amount 2009 tax preparation fee (paid in 2010) $ 750 Safety deposit box 60 Investment journals 420 Investment advice 1,300 Business publications (Bill) 350 Gambling losses 1,400 13. Because Joyce is self-employed, they make federal estimated tax payments of $200 per quarter on April 15, 2010, June 15, 2010, September 15, 2010, and January 15, 2011. They also make estimated payments of $125 per quarter to the state of Rhode Island on April 15, 2010, June 15, 2010, September 15, 2010, and December 31, 2010. 14. Bill and Joyce paid $5,300 in tuition, $480 for books, and $7,400 for room and board for Will, a junior, to attend Springbrook State University. They also paid $12,000 in tuition, $540 in books, and $6,900 in room and board for Dan, a freshman at Prescott College. 15. Other information: a. Joyces business is named Queensbridge Books, and her employer I.D. number is 05-3456345. b. The Salvation Armys address is 15 High Street, Wakefield, R.I. 02879. c. To complete phase II, you will need the following additional forms: Schedule A, Schedule C, Schedule SE, and Forms 4562, 4684, 8283, 8606, 8829, and 8863. INSTRUCTIONS: If you are using tax software to prepare the tax return or are not completing phase III of the problem, ignore the instructions that follow. As in phase I, there are forms in phase II that cannot be completed without additional information which is provided in phase III. Therefore, as a general rule, you should only post the information to the appropriate form and not compute totals for that form. The following specific instructions will assist you in preparing Part II of the return. a. The only form that can be completed at the end of phase II is Form 8283. b. Do not calculate total income or adjusted gross income on page 1 of Form 1040. c. Post the appropriate information on page 2 of Form 1040, but do not total this page, compute the federal tax liability, or determine the refund or balance due. d. Do not calculate the total itemized deductions on Schedule A. e. Do not total Joyces expenses on Schedule C. f. Do not compute Joyces self-employment tax on Schedule SE. g. Do not complete the summary section of Form 4562. h. Complete Form 4684 only to the point at which adjusted gross income is requested. i. On Form 8829, complete Part I, and only post the appropriate indirect expenses. Do not calculate the allowable depreciation or the allowable home office deduction