INTRODUCTION

The information below will allow you to prepare the 2012 federal tax return for Bill and

Joyce Schnappauf. The information is provided in three phases, which correspond to the

three major components of computing income taxgross income, deductions and

losses, and property transactions. If your instructor assigns these problems, at the end of

each major segment (i.e., Chapter 4, Chapter 8, and Chapter 12), you should complete

the appropriate portions of the forms indicated. If you are not using a tax software package,

you should not complete the second page of Form 1040 until you have completed

Chapter 12.

Completing the tax return problem will help you understand the reporting procedures

for the information in each major segment of the text. In addition, it will aid you

in reviewing the major topics discussed in the book; it serves as an overview of the

course.

THE SCHNAPPAUF FAMILY

In 2012, Bill and Joyce Schnappauf live in Wakefield, R.I. Bill is 53, and Joyce is 51. 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 2013, the Schnappaufs provide the following basic information for preparing

their 2012 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 371-42-5207.

4. Bills Social Security number is 150-52-0546.

5. Wills Social Security number is 372-46-2611.

6. Dans Social Security number is 377-42-3411.

7. Toms Social Security number is 375-49-6511.

8. The Schnappaufs do not have any foreign bank accounts or foreign trusts.

9. Their address is 27 Northup Street, Wakefield, R.I. (02879).

10. The Schnappaufs do not wish to contribute to the presidential election campaign.

PHASE ICHAPTERS 14

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 A-1). The 2012 W-2 includes his salary ($94,000),

bonus ($47,000), and income from group-term life insurance coverage in excess

of $50,000 ($121.44), and is reduced by his 7 percent contribution ($6,580) to

USCs qualified pension plan. The company matches Bills contribution to the

plan.

2. The Schnappaufs receive two 1099-INTs for interest (Exhibits A-2 and A-3), two

1099-DIVs for dividends (Exhibits A-4 and A-5), and a combined interest and

dividend statement (Exhibit A-6).

3. Joyce and her brother, Bob, are co-owners of, and active participants in, a furniturerestoration

business. Joyce owns 30 percent, and Bob owns 70 percent of the

business. The business was formed as an S corporation in 2004. During 2012, the

company pays $5,000 in dividends. The basis of Joyces stock is $27,000.

A-2 Appendix A

4. The Schnappaufs receive a 2011 federal income tax refund of $1,342 on May 12,

2012. On May 15, 2012, they receive their income tax refund from the state of

Rhode Island. In January 2013, the state mails the Schnappaufs a Form 1099-G

(Exhibit A-7). Their total itemized deductions in 2011 were $22,854.

5. During 2012, 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

$625. However, Joyce has a catalog from Supersonic Electronics that advertises

the system for $520.

6. The Schnappaufs receive a Form W-2G (Exhibit A-8) for their winnings at the

Yardley Casino in Connecticut.

7. On June 26, 2012, Bill receives a check for $17,400 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

$16,980, and the letter from the company stated that his uncle had paid premiums

on the policy of $2,950 (Exhibit A-9).

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 $75 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.

PREPARATION AID: Tax forms and instructions can be downloaded from the IRSs home

page (http://www.irs.treas.gov). You can also download IRS Publication 17, which is a

useful guide in preparing the tax return.

PHASE 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 2012. They

provide you with the following information.

1. Joyce writes childrens books for a variety of publishers. She has been selfemployed

since 2004. 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, 2012, 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, 2013, and must have it completed by November 30,

2013. The Schnappaufs home has 2 telephones. Joyce has a separate phone number

for her business. The information on Joyces business is listed below.

Appendix A A-3

Royalties (Exhibits A-10 to A-12)

Publishers advance $4,500

Office supplies 180

Train tickets 640

Airfare (4 trips) 1,800

Lodging (12 nights) 2,120

Meals (12 days) 510

Telephone ($28 monthly fee per phone line) 672

Internet provider 416

Cell phone, including business calls 876

Business-related postage 108

Printing/copying 217

Legal fees 1,100

Interest on auto 374

2. On January 2, 2012, Joyce purchases a new car to use in her business. The car, a

Volster, costs $15,200. Joyce pays $2,200 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 10,500 miles during 2012. The total expenses for the 10,500 miles

driven are: repairs and maintenance, $320; insurance, $735; and gasoline, $1,845.

The correct depreciation expense for 2012 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, 1998, 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, 2004, the fair market value of the

house was $108,000. The total household expenses for 2012 are as follows:

Heat $2,170

Insurance 1,425

Electricity 690

Repairs to kitchen 2,750

Cleaning 1,510

4. Bill began work on his MBA at Denville University. He enrolled in two courses,

and paid $2,650 in tuition and $180 for books.

5. Bill and Joyce each contribute the maximum to their respective IRA accounts in

2012. The IRA account is Joyces only retirement vehicle. Bills basis in his IRA

before the current years contribution is $26,000, and Joyces basis is $36,000.

The fair market value of Bills IRA on 12/31/12 is $41,720, and the fair market

value of Joyces IRA is $57,100. In addition, Bill and Joyce contributed $2,000

to a Coverdell Education Savings Account for Thomas.

6. On June 15, 2012, the Schnappaufs 2011 station wagon is totaled in Hurricane

Ann. The car was purchased for $28,700 in November 2010. The Schnappaufs

receive a check for $21,200 from Zippy Insurance Company that represents the

fair market value of the car minus a $750 deductible. On June 26, 2012, they

replace the car with a 2012 station wagon. The new car costs $31,400, and the

Schnappaufs receive a rebate check from the cars manufacturer for $2,500.

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 $700 ($1,000 repair cost minus $300 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 3/30/12 $ 780 $ 780 $-0- $380

Floor 3/16/12 $1,500 $1,350 $-0- $850

A-4 Appendix A

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 1,200

Chiropractor 650

Dentist 1,900

Vet fees (family dog Sandy) 350

Prescription drugs 340

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 $7,700

Family car used by Bill (ad valorem) 480

Joyces car (ad valorem) 510

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 A-13Wakefield house)

Jefferson Trust 1098 (Exhibit A-14Home equity)

Dempseys Department Store revolving account $191

Brooks Bargain Basement revolving account 67

Jefferson Trust bank card 212

The proceeds from the home equity loan were used to renovate their kitchen

and pay for Toms tuition to private school. The interest on the portion of the

loan used for private school tuition is $640.

11. Bill and Joyce make cash charitable contributions to the United Fund Campaign

($1,750), Adelade University ($300), Tremon University ($2,000), and Christ

the King Church in Kingston, R.I. ($2,600). The Schnappaufs have documentation

to verify their cash contributions. They also donate property to the Salvation

Army on July 15, 2012:

Property FMV Original Cost Date Acquired

Antique table $515 $225 1/4/01

Dishwasher 150 700 5/6/05

Sofa bed 160 800 13/14/07

Mens suits (2) 140 540 Various

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

2011 tax preparation fee (paid in 2012) $ 900

Safety deposit box 35

Investment journals 405

Investment advice 875

Business publications (Bill) 550

Gambling losses 2,640

13. Because Joyce is self-employed, they make federal estimated tax payments of

$225 per quarter on April 15, 2012, June 15, 2012, September 15, 2012, and

January 15, 2013. They also make estimated payments of $140 per quarter to

the state of Rhode Island on April 15, 2012, June 15, 2012, September 15,

2012, and December 31, 2012.

Appendix A A-5

14. Bill and Joyce paid $6,150 in tuition, $625 for books, and $7,630 for room and

board for Will, a junior, to attend Springbrook State University. They also paid

$15,000 in tuition, $515 in books, and $8,130 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.

PHASE IIICHAPTERS 912

This is the third and final phase of the Schnappauf familys tax return. This phase incorporates

the material in Chapters 9, 10, 11, and 12 requires you to analyze the various

types of property transactions discussed in those chapters.

1. On February 11, 2012, Bill inherits his fathers summer home. The house, located

in South Lake Tahoe, Nevada, has a fair market value of $496,000 at the date of

his fathers death. His parents had purchased the house in 1974 for $127,000 and

made $59,000 worth of capital improvements to it. Twenty percent of the total

value of the property is attributable to the land. Because Bill and Joyce ultimately

would like to use the property as a vacation home, they decide to rent it out. Bill

actively participates in the management of the property. The property is first advertised

for rent on March 1, 2012, but is not rented until April 15, 2012. Bill provides

the following income and expense information for the Lake Tahoe rental

property:

Rent $18,000

Repairs 4,720

Management fee 2,750

Property taxes 9,375

Insurance 1,900

In addition, Bill buys a new stove for $1,240 and a new refrigerator for $970 on

March 20, 2012.

A-6 Appendix A

2. The Schnappaufs receive Form 1099-B (Exhibit A-15) from Pebble Beach Investors

for the sale of several securities. Details on the securities sales are provided

below. The selling price listed is net of brokerage commissions and represents the

amount the Schnappaufs actually receive from the sale.

Stock

Date

Acquired Date Sold Sale Price

Purchase

Price

150 shares Pfizer Corporation 5/12/89 8/15/12 $ 6,000 $ *

300 shares Texas Instruments 7/30/94 10/25/12 17,100 **

50 shares Alcoa 6/10/06 10/23/12 525 1,800

25 shares Luminent 4/28/12 9/4/12 900 2,700

60 shares Textron 9/11/12 10/27/12 10,410 9,100

300 shares Hasbro 1/7/01 12/20/12 6,125 3,150

*When Joyce graduated from college on May 12, 1989, her father gave her 150 shares of Pfizer Corporation stock

that he had acquired on October 27, 1981, for $1,300. At the date of the gift, the fair market value of the stock was

$1,800. In January 1998, Pfizer Corporation stock split 2 for 1.

**The Schnappaufs acquired 500 shares of preferred stock in Texas Instruments for $7,810. Shortly after the

purchase, they received a nontaxable 10% stock dividend.

3. On May 18, 2012, Joyce purchases a computer system for $2,560. She also buys a

color printer/copier/fax machine for $560. All the equipment is used exclusively

in her business.

4. On June 12, 2012, Joyce sells her old computer system for $355 and her printer

for $110. She had acquired the computer system and printer on February 18,

2009, for $2,710 and $490, respectively. When the Schnappaufs prepared their

2009 tax return, they elected to expense the computer and printer using Section

179. The computer system and the printer were used exclusively in her business.

5. Joyce receives a Schedule K-1 (Exhibit A-16) for her interest in the furniturerestoration

business.

6. Other information:

a. The rental property in Lake Tahoe is located at 100 Paraiso Drive, South Lake

Tahoe (88197).

INSTRUCTIONS: To complete phase III, you need the following additional forms: Schedule

E and Forms 4562 and 8582. You now have all the information necessary to complete

the schedules that you did not finish in phases I and II.

Taxes for the year 2012