Case Study:
Assume that the taxpayers, George A. Warden (social security number 333-33-3330) and Mary S. Warden (social security number 444-44-4440) file 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, (312) 679-9999. Mr. Warden wants to contribute $3 of his income tax 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 a 17-year old high school student. He earned $3,600 during the summer and worked part-time during the remainder of the year. Neither son had any additional income. Their daughter, Ruth, is eight years old and an elementary school student. She had no earned or unearned income during the year. In August, the Wardens paid $4,000 in tuition for their son, Edward, for the academic period that started in September. Edward's social security number is 300-11- 0001, John's social security number is 300-22-0002, and Ruth's social security number is 300-33-0003.
The Wardens claim Mrs. Warden's mother, Grace D. Taylor, as a dependent under a multiple-support agreement. The total support 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 benefits.
Mrs. Grace D. Taylor lived with the Wardens during all of 2009. Her social security number is 400-44-0004. Thelma Taylor provides the Warden's with a written, signed statement, that she will not claim her mother as a dependent in 2009. Thelma Taylor 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 (telephone number 1-312-555-1040). However, the Warden's do not authorize her to discuss their return with the IRS.
INCOME AND EXPENSES GENERALLY
During 2009, Mrs. Warden was employed as a salesperson by a publishing company. Her Form W-2 for 2009 reports the following:
Box 1. Wages, tips and other compensation $75,000 Box 2. Federal income tax withheld $4,950
Box 4. Social security tax withheld $4,650 Box 6. Medicare tax withheld $1,088
Box 17. State income tax $2,250
Mrs. Warden is not covered by her employer's retirement plan. In addition, Mr. Warden is a self-employed individual who does not maintain a Keogh or a SEP plan. Mrs.
Warden made a $1,500 contribution to a traditional IRA and a $2,000 contribution to a Roth IRA in 2009. 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 the state income tax as a deduction. The Wardens also received a $20 federal income tax refund.
Form 1040, Schedule A
The Wardens made federal estimated tax payments of $2,000 for 2009. The Wardens incurred the following medical expenses during 2009:
• prescription drugs, $1,000;
• doctor bills, $3,550;
• hospital bills, $1,750;
• transportation, $100; and
• eyeglasses, $500.
In addition, Mr. Warden, who is self-employed, paid $3,750 in premiums for health insurance coverage for himself and his family. The Wardens paid their 2008 real estate taxes of $1,810 due on July 1, 2009. In addition, they sold their residence on September 13, 2009. They allowed the buyer a credit equal to 70% of the estimated real estate taxes of $2,000 for 2009. The real estate taxes on the new property they purchased on May 1, 2009, are not payable until 2010. There was no taxable gain on the sale 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 when they purchased their new home. They paid the following personal interest in 2009:
• $600 to finance 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 an acknowledgment of the contribution.
Form 2106
Mrs. Warden incurred employee business expenses in connection with her occupation as salesperson for the publishing company. On January 3, 2009, she purchased a new car that was used primarily for business reasons. The car cost $19,500, and she paid $500 in sales tax. During 2009, 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 (five-mile daily roundtrip commute), and 2,150 miles for personal purposes. Mrs. Warden depreciates the car using a five-year MACRS recovery period, the 200% declining-balance method, and the half-year convention. However, it should be noted that depreciation on the car is limited because of the "listed property" rules. Mrs. Warden's gasoline, oil and insurance expenses on the car amounted to $4,750. She paid $600 in interest on the installment loan incurred to purchase the car. She also paid $50 for business parking fees and $75 for a car rental while away 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."
Mrs. Warden elected not to claim any Code Sec. 179 deduction or additional bonus depreciation on the car in 2009.
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 the expenses. 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 2008 tax return (including $200 for the preparation of Schedule C, Profit or Loss from Business for George Warden's furniture business), $50 for the rental of a safe deposit box where they stored their securities, and $350 for investment publications.
Form 1040, Schedule B
During 2009, the Wardens received $500 in interest from the Heartland National Bank and $150 as nominees from the Third National Savings and Loan. They received $200 in interest from tax-exempt bonds issued by the state of Illinois.
The Warden's received the following qualified dividends: $400 from E&Z Tax Preparation, Inc., $300 from Secure Money Market Fund, and $250 from Rapid Growth Mutual Fund. They also received a $100 capital gain distribution from Rapid Growth. In addition, the Warden's received $700 in nonqualified 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 Part III of Schedule B are "No."
Form 1040, Schedule D
During 2009, 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, 2007 for $2,500.
(2) On November 5, 200 shares of Pequod Inc. were sold for $5,000. They had been purchased on January 5, 2008 for $2,000.
(3) On December 4, 100 shares of Squall Inc. were sold for $10,000. They had been purchased on January 4, 1998 for $4,000.
(4) On December 10, 200 shares of Kismet Inc. were sold for $5,000. They had been purchased on September 5, 2002 for $2,000.
(5) On December 15, a number of gold coins were sold for $2,000. The coins had been purchased on October 15, 2001 for $3,000.
Form 1040, Schedule E
Mr. and Mrs. Warden own and rent a brick two-flat 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. Warden actively participates in the operation of the building. The Wardens received rents of $12,000 in 2009. Their expenses are as 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 figure, taken from the Wardens' work papers (not reproduced) is
$3,000.
Form 2441
During 2009, the Wardens' daughter, Ruth, attended two child care centers. They were: Happy Day Care, 4210 W. Maple, Chicago, Illinois 60699, whose identification number is 36-0987654; and Greenfields Day Care, 901 N. Ash, Chicago, Illinois 60699, whose identification number is 36-1234567. The Wardens paid $3,720 to Happy Day Care and
$1,860 to Greenfields Day Care. The Wardens did not receive employer-provided dependent care benefits.
BUSINESS INCOME
Form 1040, Schedule C
Mr. 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 identification number is 36-3456789. The business code is 442200. In order to clearly show business income, Mr. Warden maintains an inventory at cost and he uses the accrual method of accounting for his sales and purchases. Total gross receipts of the business were $127,247 and returns and allowances amounted to
$1,500. The business books showed the following information:
Inventory at beginning of year (valued at cost) . . . . . . $35,000
Merchandise purchased . . . . . . . . . . . . . . . . . . . . . . . . 70,000
Inventory at end of year . . . . . . . . . . . . . . . . . . . . . . . . 22,000
Truck expenses 550
Other interest 300
Rent (property) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,800
Repairs 280
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,541
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,450
Utilities and telephone . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,240
Legal and accounting
(includes $200 of tax preparation fees) 400
Office expense 125
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,858
Travel 400
Meals and entertainment . . . . . . . . . . . . . . . . . . . . . . . . 1,040
Miscellaneous 330
FARM INCOME AND EXPENSES
Form 1040, Schedule F
Mr. Warden owned and operated a farm in Illinois. The Principal Agricultural Activity Code for this farm is 112111, and the principal product raised is beef cattle. Mr. Warden utilizes the cash basis to report farm income and expenses. His books and records show the following information:
Farm income Amount
Livestock sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,500
Cooperative distributions
($30 nontaxable) 150
Farm expenses Amount
Livestock purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Depreciation . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 1,000
Feed purchased 750
Freight and trucking. 250
Insurance 400
Labor hired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... 3,000
Other interest 100
Pasture rentals 300
Taxes 450
Veterinary fees 500
Assume that Mr. Warden's basis in the livestock sold during 2009 was $19,500.
Required: Prepare the Wardens' 2009 Form 1040 Joint Individual Tax Return, including Schedules A, B, C, D, E, and F and Forms 2106, 2120, and 2441.