Fluent Essays

FORM 1040 – U.S. INDIVIDUAL INCOME TAX RETURNAssume that the taxpayers, George A. Warden (social security number 333-33-3330) and Mary S. Warden (social securitynumber 444-44-4440) fi le a joint return. Both are 50-years old, have good eyesight, and live with their three children, Edward,John and Ruth, at 789 N. Code Drive, Chicago, Illinois 60699. The Warden’s home phone number is 312-555-9999. Mr. Wardenelects to have $3 of his income tax go to the Presidential Election Campaign Fund. Mrs. Warden elects not to contribute.The Wardens’ son, Edward, is a junior in college and he is 20 years old. He worked during the summer and earned $4,000.Their other son, John, is 17 and a high school student. He earned $3,600 during the summer and worked part-time duringthe remainder of the year. Neither son had any additional income. Their daughter, Ruth, is eight years old and anelementary school student. She had no earned or unearned income during the year. Edward’s social security number is300-11-0001, John’s social security number is 300-22-0002, and Ruth’s social security number is 300-33-0003. In August, theWardens paid $4,000 in tuition for their son, Edward, for the academic period that started in September.The Wardens claim Mrs. Warden’s mother, Grace D. Taylor, as a dependent under a multiple-support agreement. The totalsupport of Mrs. Taylor is $6,000, received from the following three sources:(1) $3,000 from Mary Warden,(2) $1,000 from another daughter, Thelma Taylor, and(3) $2,000 in social security benefi ts.Mrs. Grace D. Taylor lived with the Wardens during all of 2010. Her social security number is 400-44-0004. Thelma Taylorprovides the Warden’s with a written, signed statement, that she will not claim her mother as a dependent in 2010. ThelmaTaylor lives at 1425 S. 62nd Street, Chicago, IL 60699, and her social security number is 500-55-0005.The Wardens use Trish Ford, a professional tax preparer, to prepare their income tax return. Trish Ford’s PTIN is P98765432,and she works for E&Z Tax Preparation (EIN #36-0987654), which is located in a nearby suburb of Middle America (telephonenumber 312-555-1040). However, the Warden’s do not authorize her to discuss their return with the IRS.INCOME AND EXPENSES GENERALLYDuring 2010, Mrs. Warden was employed as a salesperson by XPert Publishing Inc. Her Form W-2 for 2010 reportsthe following:Box 1. Wages, tips and other compensation $75,000Box 2. Federal income tax withheld $4,950Box 4. Social security tax withheld $4,650Box 6. Medicare tax withheld $1,088Box 17. State income tax $2,250Mrs. Warden is not covered by her employer’s retirement plan. In addition, Mr. Warden is a self-employed individualwho does not maintain a Keogh or a SEP plan. Mrs. Warden made a $1,500 contribution to a traditional IRA and a $2,000contribution to a Roth IRA in 2010. Mr. Warden decided against making a contribution to a traditional IRA.The Wardens received a $30 state income tax refund. They itemized in the prior year and elected to take their $2,000 stateincome tax payment as a deduction. The Wardens also received a $20 federal income tax refund.Form 1040, Schedule AThe Wardens made federal estimated tax payments of $2,000 for 2010.The Wardens incurred the following medical expenses during 2010:• prescription drugs, $1,000;• doctor bills, $3,550;• hospital bills, $1,750;• transportation, $100; and• eyeglasses, $500.ô€€•ô€€ƒIn addition, Mr. Warden, who is self-employed, paid $3,750 in premiums for health insurance coverage for himself andhis family.The Wardens paid their 2009 real estate taxes of $1,810 on July 1, 2010. In addition, they sold their residence on September13, 2010. They allowed the buyer a credit equal to 70\% of the estimated real estate taxes of $2,000 for 2010. The real estatetaxes on the new property they purchased on May 1, 2010, are not payable until 2011. There was no taxable gain on thesale of their prior residence.Mr. and Mrs. Warden paid $3,878 in deductible home mortgage interest to a bank. They also paid $3,000 in points whenthey purchased their new home. They paid the following personal interest in 2010:• $600 to fi nance Mrs. Warden’s car, and• $400 in credit card interest.The Wardens gave $1,500 in cash to various recognized charities; no individual gift was $250 or more; all charities sent anacknowledgment of the contribution.Form 4684, Section ADuring 2010, a burglar entered their home and stole a ring and a coin collection. The ring had been purchased in May 15,1990 at a cost of $3,000. Mrs. Warden had purchased the coin collection in July 15, 1991 at a cost of $1,100. An insurancecompany appraised the ring at a fair market value of $5,000, but limited its loss coverage on jewelry under a homeowners’policy to $1,500. The insurance company excluded the coin collection from the insurance policy because of its policyrestrictions on such items. At the time of the theft, the fair market value of the coin collection was $2,000.Form 2106Mrs. Warden incurred employee business expenses in connection with her occupation as salesperson for the publishingcompany. On January 3, 2010, she purchased a new car that was used primarily for business reasons. The car cost $20,000.During 2010, the car was driven a total of 20,000 miles by Mrs. Warden. Of those miles, 16,600 were business related. Mrs.Warden drove 1,250 miles while commuting (fi ve-mile daily roundtrip commute), and 2,150 miles for personal purposes.Mrs. Warden depreciates the car using a fi ve-year MACRS recovery period, the 200\% declining-balance method, and thehalf-year convention. However, it should be noted that depreciation on the car is limited because of the “listed propertyâ€rules. Mrs. Warden’s gasoline, oil and insurance expenses on the car amounted to $4,750. She paid $600 in interest on theinstallment loan incurred to purchase the car. She also paid $50 for business parking fees and $75 for a car rental whileaway from home. Mrs. Warden elects to claim the actual automobile-related expenses.Assume the answers for Form 2106, Lines 18, 19, 20 and 21 are “Yes.â€Mrs. Warden elected not to claim any Code Sec. 179 deduction or additional bonus depreciation on the car in 2010.Mrs. Warden incurred the following other business expenses:• meals and entertainment, $1,500;• airfare, $233;• gifts to customers, $150; and• business seminar, $60.Mrs. Warden received $5,000 as a car expense reimbursement from her employer under a plan that required her to account for theexpenses. The $5,000 was not reported on her Form W-2. Mrs. Warden was not reimbursed for her other business expenses.The Wardens paid $500 for the preparation of their 2009 tax return (including $200 for the preparation of Schedule C, Profi tor Loss from Business for George Warden’s furniture business), $50 for the rental of a safe deposit box where they storedtheir securities, and $350 for investment publications.ô€€–ô€€ƒForm 1040, Schedule BDuring 2010, the Wardens received $500 in interest from the Heartland National Bank and $150 as nominees from the ThirdNational Savings and Loan. They received $200 in interest from tax-exempt bonds issued by the state of Illinois.The Warden’s received the following qualifi ed dividends: $400 from E&Z Tax Preparation, Inc., $300 from Secure MoneyMarket Fund, and $250 from Rapid Growth Mutual Fund. They also received a $100 capital gain distribution from RapidGrowth. In addition, the Warden’s received $700 in nonqualifi ed foreign corporation dividends from Consolidated Tapioca,and paid foreign taxes of $10 to various countries in connection with this investment. The responses to the questions on PartIII of Schedule B are “No.â€Form 1040, Schedule DDuring 2010, the Wardens 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 12, 2009for $2,500.(2) On November 5, 200 shares of Pequod Inc. were sold for $5,000. They had been purchased on January 5, 2010for $2,000.(3) On December 4, 100 shares of Squall Inc. were sold for $10,000. They had been purchased on January 4, 2000 for$4,000.(4) On December 10, 200 shares of Kismet Inc. were sold for $5,000. They had been purchased on September 5, 2004for $2,000.(5) On December 15, a number of gold coins were sold for $2,000. The coins had been purchased on October 15,2003 for $3,000.Form 1040, Schedule EMr. and Mrs. Warden own and rent a brick two-fl at apartment building located at 12 West 5th Ave., Chicago, Illinois 60626.The apartment building is not used for personal purposes by either the Wardens or members of their family. Mr. Wardenactively participates in the operation of the building. The Wardens received rents of $12,000 in 2010. Their expenses areas follows:• cleaning and maintenance, $2,500;• mortgage interest, $4,000;• repairs, $750;• advertising, $500;• insurance, $1,000 and• real estate taxes, $1,250.The current depreciation fi gure, taken from the Wardens’ work papers (not reproduced), is $3,000.Form 2441During 2010, the Wardens’ daughter, Ruth, attended two child care centers. They were: Happy Day Care, 4210 W. Maple,Chicago, Illinois 60699, whose identifi cation number is 36-0987654; and Greenfi elds Day Care, 901 N. Ash, Chicago, Illinois60699, whose identifi cation number is 36-1234567. The Wardens paid $3,720 to Happy Day Care and $1,860 to Greenfi eldsDay Care. The Wardens did not receive employer-provided dependent care benefi ts.ô€€—ô€€ƒBUSINESS INCOMEForm 1040, Schedule CMr. Warden operated Interiors Unlimited, selling home furnishings at retail, as a sole proprietor during the entire year.The business address is 45 Boswell Blvd., Villa Park, Illinois 60181. His employer identifi cation number is 36-3456789. Thebusiness code is 442200.In order to clearly show business income, Mr. Warden maintains an inventory at cost and he uses the accrual methodof accounting for his sales and purchases. Total gross receipts of the business were $127,247 and returns and allowancesamounted to $1,500. The business books showed the following information:Inventory at beginning of year (valued at cost) . . . . . . . . . . . . . $35,000Merchandise purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000Inventory at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,000Truck expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550Other interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300Rent (property) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7,800Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,000Wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12,541Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,450Utilities and telephone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,200Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,240Legal and accounting(includes $200 of tax preparation fees) . . . . . . . . . . . . . . . . . . . . . . 400Offi ce expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7,858Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400Meals and entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,040Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330Form 4562On January 10, 2010, Mr. Warden purchased offi ce furniture at a cost of $5,000. The furniture is used 100\% for business. Itis seven-year MACRS property. Mr. Warden elects to expense $1,000 of the cost under Code Sec. 179. Mr. Warden electednot to claim the bonus depreciation available for any business property placed in service during 2010.On July 15, 2010, Mr. Warden purchased a pickup truck for use in his business. It was driven 8,000 miles. The truck, used100\% for business, cost $47,000 and sales tax was $3,000, for a basis of $50,000. The truck is considered fi ve-year MACRSproperty. Also, it falls in the classifi cation of a light, general-purpose truck, subject to depreciation limits.On June 15, 2006, Mr. Warden purchased fi xtures for the store. The current depreciation deduction for the fi xtures is$536.Mr. Warden bought a brick building on July 1, 1998, $75,000 of the price being allocable to the building for depreciationpurposes. No capital improvements were made. Depreciation on the building is computed by using the MACRS method.The allowable MACRS deduction for 2010 would be calculated at the rate of 2.564\%.Form 4684On September 1, 2010, a garage that had been purchased for $25,000 on July 1, 2001, and used exclusively for Mr. Warden’sbusiness was damaged by fi re. In order to repair the garage after the fi re, Mr. Warden spent $7,795. The repairs are consideredto be an improvement to the property, which, prior to the casualty, was being depreciated under the MARCS method fornonresidential property. The amount of depreciation claimed prior to 2010 was $5,422.Mr. Warden uses Form 4684, Section B, to determine the recognized casualty gain or loss from the fi re damage to the garage.Assume that the fair market value of the garage was $24,650 before the fi re and it had a fair market value immediatelyafter the fi re of $14,760. Assume, in completing Form 4684, that the total amount of depreciation that Mr. Warden hadclaimed for the garage up to the date of the fi re was $5,876 and that he had received $5,000 from a fi re insurance policyhe had on the garage.After the fi re, and taking into account the allowable loss deduction, the cost of repair and the insurance recovery, the newadjusted basis of the garage for depreciation purposes is $22,028. Since the basis had to be adjusted, the garage will be depreciatedon a straight-line method for the remainder of the original depreciation period. The allowable MACRS deduction for2010 would be calculated based on a rate of 3.33\% per year using a mid-month convention.Form 4797On January 3, 2010, Mr. Warden sold a business truck for $550. He had purchased the truck for $5,000 on March 12, 2001.Total depreciation allowed or allowable on the truck prior to 2010 was $5,000.