Reference no: EM13331358
1. Joyce writes children s 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 Joyce s business is listed below.
Royalties (Exhibits A-10 to A-12)
Publisher s 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
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. Joyce s 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:
Repairs to kitchen 2,750
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 Joyce s only retirement vehicle. Bill s basis in his IRA before the current year s contribution is $26,000, and Joyce s basis is $36,000. The fair market value of Bill s IRA on 12/31/12 is $41,720, and the fair market value of Joyce s 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 car s 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 Dishwasher Floor
Date 3/30/12 3/16/12
Cost $780 $1,500
Before $780 $1,350
After 0 0
Reimbursement $380 $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
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 Bill s back muscles.
9. The Schnappaufs pay the following property taxes:
Wakefield house $7,700
Family car used by Bill (ad valorem) 480
Joyce s 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-13 Wakefield house)
Jefferson Trust 1098 (Exhibit A-14 Home equity)
Dempsey s 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 Tom s 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
Men s 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:
2010 tax preparation fee (paid in 2012) $ 900
Safety deposit box 35
Investment journals 405
Investment advice 875
Business publications (Bill) 550
Gambling losses 2640
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. Joyce s business is named Queensbridge Books, and her employer I.D. number is XX-XXXXXXX.
b. The Salvation Army s address is XX XXXX XXXXXX, 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 Joyce s expenses on Schedule C.
f. Do not compute Joyce s 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.