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. 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 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. 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. Taxation Problem