Phase II—Chapters 5–8
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 2019. They provide you with the following information.
- Joyce writes children’s books for a variety of publishers. She has been self-employed since 2011. 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 four 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, 2019, 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, 2020, and must have it completed by November 30, 2020. The Schnappaufs’ home has two telephones. Joyce has a separate phone number for her business. The information on Joyce’s business is listed below.
Royalties (Exhibits A-10, A-11 and A-12) Publisher’s advance $4,000 Office supplies 170 Train tickets 535 Airfare (4 trips) 1,670 Lodging (12 nights) 2,240 Meals (12 days) 610 Telephone ($28 monthly fee per phone line) 672 Internet provider 570 Cell phone, including business calls 913 Business-related postage 87 Printing/copying 162 Legal fees 2,000 Interest on auto 254
Exhibit A-10Exhibit A-11Exhibit A-12
- On January 2, 2019, 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 45 percent of the time for business and drives a total of 10,800 miles during 2019. The total expenses for the 10,800 miles driven are: repairs and maintenance, $240; insurance, $920; and gasoline, $1,960. The correct depreciation expense for 2019 is .
- 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, 2005, 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, 2011, the fair market value of the house was $108,000. The total household expenses for 2019 are as follows:
Heat $2,170 Insurance 1,480 Electricity 740 Repairs to kitchen 3,100 Cleaning 1,560
- Bill and Joyce each contribute the maximum to their respective IRA accounts in 2019. 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 12/31/19 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.
- 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) 345 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.
- The Schnappaufs pay the following property taxes:
Wakefield house $11,200 Family car used by Bill (ad valorem) 480 Joyce’s car (ad valorem) 520
- 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
Exhibit A-13Exhibit A-14The proceeds from the home equity loan were used to renovate their kitchen.
- Bill and Joyce make cash charitable contributions to the United Fund Campaign ($5,700), Adelade University ($2,510), Tremon University ($1,900), and Christ the King Church in Kingston, R.I. ($8,100). The Schnappaufs have documentation to verify their cash contributions. They also donate property to the Salvation Army on July 15, 2019:
Property FMV Original Cost Date Acquired Antique table $410 $225 1/4/07 Dishwasher 130 700 5/6/11 Sofa bed 90 800 13/14/13 Men’s suits (2) 140 540 Various
The Salvation Army acknowledges that these amounts represent the fair market value of the donated items.
- The Schnappaufs incur $3,450 in gambling losses.
- Because Joyce is self-employed, they make federal estimated tax payments of $210 per quarter on April 15, 2019, June 15, 2019, September 15, 2019, and January 15, 2020. They also make estimated payments of $150 per quarter to the state of Rhode Island on April 15, 2019, June 15, 2019, September 15, 2019, and December 31, 2019.
- Bill and Joyce paid $7,400 in tuition, $840 for books, and $9,300 for room and board for Will, a junior, to attend Springbrook State University. They also paid $16,410 in tuition, $950 in books, and $10,100 in room and board for Dan, a freshman at Prescott College.
- Other information:
- Joyce’s business is named Queensbridge Books, and her employer I.D. number is 05-3456345.
- The Salvation Army’s address is 15 High Street, Wakefield, R.I. 02879.
- 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.
- The only form that can be completed at the end of phase II is Form 8283.
- Do not calculate total income or adjusted gross income on page 1 of Form 1040.
- 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.
- Do not calculate the total itemized deductions on Schedule A.
- Do not total Joyce’s expenses on Schedule C.
- Do not compute Joyce’s self-employment tax on Schedule SE.
- Do not complete the summary section of Form 4562.
- 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.