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 children’s 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 year’s 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. Joyce’s Social Security number is 371-42-5207.
4. Bill’s Social Security number is 150-52-0546. 5.
Will’s Social Security number is 372-46-2611.
6. Dan’s Social Security number is 377-42-3411.
7. Tom’s 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 I— 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. Bill’s 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 USC’s qualified pension plan. The company matches Bill’s 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 Joyce’s stock is $27,000.
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 1099—MISC. In announcing the prize, the radio station host said that the manufacturer’s 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 IRS’s home page (http://www.irs.treas.gov). You can also download IRS Publication 17, which is a useful guide in preparing the tax return. What forms are used and what accounts go into the forms.