Go to www.irs.gov and download the appropriate tax forms for the current period

Question

Go to www.irs.gov and download the appropriate tax forms for the current period and prepare a tax return for Dick Bench. Dick and Tina Bench live at 230 Main Street, Platteville, WI 53818, and their Social Security numbers are 233-43-4523 and 342-22-3476. They have one child, Tony, who is 8 years old. Tony's Social Security number is 456-34-6578. Dick's salary from a night guard job and income tax withholding for the year are as follows: Wages $36,000 Interest earned on savings account 1,600 Federal income tax withheld 5,000 State income tax withheld 2,000 Dick contributed $4,000 to his IRA account. The Benches moved from Florida to Wisconsin in the beginning of the current year. Their moving expenses include (all non-reimbursed): Cost of moving furniture $3,500 Transportation costs 400 Lodging 200 Meals 160 House-hunting trip before the move 900 Tina started and managed the Cuber Cafe. Revenue and expenses for the year are presented below: Revenue $70,000 Beginning inventory of merchandise supplies 0 Ending inventory of merchandise supplies 3,500 Merchandise and supplies purchased 17,000 Wages 8,500 Utilities 1,500 Rent expenses 7,800 Advertisement expenses 2,000 Payroll taxes 680 Subcontractor 2,200 Other 500 Dick and Tina own a house in Platteville that they rent to students for $800 per month. They incur the following expenses for the year (11 months): Real estate taxes $2,000 Mortgage interest 4,200 Repairs 400 Depreciation 3,000

Directions:

complete the Bench's Federal tax return for the year.

Schedule E, Form 1040, is used to report rental income. Go to www.irs.gov and download Schedule E and review it. Expenses, including depreciation, are deducted from rent revenue when calculating rental income. There is a limit on deductions of expenses from rental of a vacation home. Tax treatment is dependent on the usage of the vacation home:

Primarily personal use—rented less than 15 days, treat it as personal residence.

Primarily rental use—used no more than 14 days or 10% of days rented, treat it as rental property. Allocate expenses between personal and rental days.

Rental/personal use—does not fall into the previous two categories; allocate expenses only to the extent of rental income and follow the order of deduction.

Business income: Schedule C, Form 1040 is used to report business income. Go to www.irs.gov and download Schedule C and review it. There are three parts in Schedule E.

Inventory: In a retail business, cost of goods sold is a direct function of beginning and ending inventories. When calculating costs or goods sold, you must use FIFO, LIFO, or a specific method. Whatever method is used for tax purposes should also be used for financial statement preparation. Part III of Schedule E is used to calculate cost of goods sold.

Gross profit: Part I is used to calculate gross profit.

Net profit/loss: Part II is used to calculate net profit/loss. If there are other expenses, it should be reported in Part IV.

Adjustments to income: Items deducted from gross income to determine the adjusted gross income.

IRA (Individual Retirement Arrangements): Only a traditional IRA contribution is deductible if your income is below a specified level as specified in Part IV.

Moving Expenses: Form 3903 is used to report moving expenses. Go to www.irs.gov and download Form 3903 and go over it. The form will explain what expenses you can report. There are other expenses that you can deduct, but they will not be covered in this course.

Tax credit: It is a direct reduction in tax liability, discussed in Part VI. For the course problem, you would include only child tax credit and education credit.

Explanation / Answer

Wages Income 36000 Cuber Café Rent from Owned House (11 months) Interest On savings Account 1600 Revenue 70000 Rent 8800 Income from Cuber Café 33320 COGS 13500 (17000-3500) Expenses 9400 Loss From Rent of House -600 Wages 8500 Loss -600 Expenes of Moving into new house -5160 Utilities 1500 IRA Contribution -4000 Rent 7800 Total Income 61160 Advertisment 2000 Tax Due 8251.5 1845+15% above 18450 Payroll 680 Tax Paid 7000 Subcontract 2200 Tax Payable 1251.5 other expense 500 Income 33320

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