Whittenburg Gerald E., Altus-Buller Martha. Income Tax Fundamentals
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Questions and Problems 3-39
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3-40 Chapter 3
Business Income and Expenses, Part I
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LO 3.5 21. During 2010, Jerry is a self-employed therapist, and his net earned income is $160,000
from his practice. Jerry’s Keogh Plan, a defined contribution plan, states that he will
contribute the maximum amount allowable. Calculate Jerry’s contribution.
$ ____________
LO 3.5 22. Tony is a 45-year-old psychiatrist who has net earned income of $300,000 in 2010.
What is the maximum amount he can contribute to his simplified employee pen sion
(SEP) for the year? _____ _______________
LO 3.6 23. During 2010, Jill, age 39, participated in a Section 401(k) plan which provides for max-
imum employee contributions of 12 percent. Jill’s salary was $90,000 for the year. Jill
elects to make the maximum contribution. What is Jill’s maximum tax-deferred con-
tribution to the plan for the year?
$ ____________
LO 3.5 24. Anthony, a self-employed plumber, makes a maximum contribution to his SEP. His
net earned income is $40,000. How much is he allowed to contribute to the plan?
$ ____________
LO 3.7 25. Allen (age 32) takes a distribution of $20,000 from his Traditional IRA account which
he plans to deposit into an IRA with a different bank. During the 60-day rollover
period, he gambles and loses the entire IRA balance. What income and/or penalties
must he show on his tax return related to the failed rollover?
____________________________ ___________________ _______________________
___ ___________ ___________ _______________________________________________
___ ___________ ___________ _______________________________________________
_________________________________________________ ________________________
LO 3.3 26. Steinar loaned a friend $9,500 to buy some stock 3 years ago. In the current year the
debt became worthless.
a. How much is Steinar’s deduction for the bad debt for this year? (Assume he has no
other capital gains or losses.)
$ ____________
b. What can Steinar do with the deduction not used this year?
______________________________________________________ ________________
______________________________________________________ ________________
______________________________________________________ ________________
_________________________________________________ ______________________
GROUP 3:
COMPREHENSIVE PROBLEMS
.............................................. .............................................. .
1. Rebecca and Walter Bunge have been married for 5 years. They live at 883 Scrub
Brush Street, Apt. 52B, Las Vegas, NV 89125. Rebecca is self-employed and Walt
is a high school teacher. Rebecca’s Social Security number is 222-43-7690 and
Walt’s is 700-01-0002. Walt’s earnings from teaching are:
Earnings from Las Vegas School Dist. $50,000
Federal income tax withheld 5,000
State income tax withheld 0
Questions and Problems 3-41
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
In addition, Walt was covered under the Nevada State Teachers’ Pension Plan.
Rebecca owns and operates a computer bookstore named ‘‘The Disk Drive.’’ The
store is located at 1112 Desert Way, Las Vegas, NV 89130. During 2010, Rebecca had
the following income and expenses:
Sales of books $320,400
Expenses
Store rental 15,000
Office expense 6,000
Advertising 14,000
City business license 1,000
Payroll 89,000
Payroll taxes 9,100
Utilities 8,000
Other 3,000
Inventory
January 1 250,000
December 31 235,000
Purchases during the year 165,000
Last year was Rebecca’s first year of operating the book store. Rebecca and Walt
elected to carry forward a $5,000 net operating loss from the fir st year of business
into 2010. (Note: Net operating losses are reported on line 21 of Form 1040.)
The Bunges own a ski condo in Utah. The condo was rented for 40 days during
2010 and used by the Bunges for 10 days. Pertinent information about the condo rental
is as follows:
Rental income $6,000
Interest 4,800
Homeowners Association Dues 2,000
Utilities 1,000
Maintenance 2,800
Depreciation (assume fully depreciated) 0
The above amounts do not reflect any allocation between rental and personal use of
the condo. The Bunges are active managers of the condo.
This year Rebecca loaned a friend $20,000 so that he could make an investment.
Instead of making the investment, the friend lost all the money gambling and left
for parts unknown. Rebecca has no hope of ever collecting on this bad debt.
Walter, who ordinarily never gambles, won $30,000 at a casino birthday party for
one of his friends. This amount should be reported as other income on line 21 of Form
1040.
Required: Complete the Bunge’s federal tax return for 2010. Use Form 1040, Sched-
ule C, Schedule D, Schedule E, Schedule M, and any other appropriate schedule(s) you
need from pages 3-45 through 3-52 to complete their tax return.
2A. Dr. George E. Beeper is a single taxpayer. He lives at 45 Mountain View Dr., Apt. 321,
Spokane, WA 99210. Dr. Beeper’s Social Security number is 775-88-9531. Dr. Beeper
3-42 Chapter 3
Business Income and Expenses, Part I
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
works for the Pine Medical Group, and his earnings and income tax withholding for
2010 are:
Earnings from Pine Medical $116,000
Federal tax withheld 25,000
State tax withheld 0
Dr. Beeper owns a rental house located at 672 Lake Street, Spokane, WA 9921 2.
The house rents for $1,000 per month and was rented for the entire year. The follow-
ing are the related expenses for the rental house:
Real estate taxes $ 3,500
Mortgage interest 12,500
Insurance 900
Depreciation (assume fully depreciated) 0
Gardening 1,000
Repairs 600
Maintenance 3,636
The house was purchased on July 5, 1965. Dr. Beeper han dles all rental activities
(e.g., rent collection , finding tenants, etc.) himself.
During May 2010, Dr. Beeper transferred $67,000 out of his Section 401(k) plan
from a former employer (Elm Medical Group) to an individual retirement account
with the Spokane State Bank. The transfer was made directly from the Section
401(k) plan trustee to the bank.
Required: Complete Dr. Beeper’s federal tax return for 2010. Use Form 1040, Sched-
ule E, Form 8582, Schedule M, and any other appropriate schedule(s) from pages 3-53
through 3-58 to complete this tax return. Do not complete Form 4562 for reporting
depreciation. Make realistic assumptions about any missing data.
2B. Professor Patricia (Patty) Pa
ˆ
te
´
is retired from the Palm Springs Culinary Arts Academy
(PSCAA). She is a single taxpayer and is 68 years old. Patty lives at 98 Colander Stree t,
Henderson, NV 89052. Professor Pa
ˆ
te
´
’s Social Security number is 565-66-9378. Patty
receives monthly retirement benefits from her PSCAA retirement plan. Earnings and
income tax withholding shown on her retirement 2010 Form 1099-R are:
Gross distribution and taxable amount $61,200
Federal tax withheld 7,350
State tax withheld 0
Patricia ow ns a rental condo locat ed at 392 Spatula Way, The Lakes, NV 88905.
The condo rents for $850 per month and was rented for the entire year. The following
are the related expenses for the rental house:
Real estate taxes $2,725
Mortgage interest 7,500
Insurance 410
Depreciation (assume fully depreciated) 0
Home Owners’ Association dues 1,540
Repairs 1,300
Gardening 2,090
Questions and Problems 3-43
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
The condo was purchased on August 31, 1976. Professor Pa
ˆ
te
´
handles all rental
activities (e.g., rent collection, finding tenants, etc.) herself.
During March 2010, Patricia took a $75,000 distribution from her 401(k) plan
(which is not included in the Form 1099-R above). Patricia received only $60,000
because the 401(k) plan administrators withheld $15,000 federal income tax from
the d istribution. Forty-five days after the distribution, Patty deposited $50,000 in a
rollover IRA, keeping $10,000 of the $60,000 received in order to remodel her
kitchen.
Required: Complete Professor Pa
ˆ
te
´
’s federal tax return for 2010. Use Form 1040,
Schedule E, Form 8582, Schedule M, and a ny other appropriate schedule(s) from
pages 3-53 through 3-58 to complete this tax return. Do not complete Form 4562
for reporting depreciation. Make realistic assumptions about any missing data.
GROUP 4:
CUMULATIVE SOFTWARE PROBLEM
.............................................. .............................................. .
The following additional information is available for the Dr. Ivan and Irene Incisor family.
The Incisors own a rental beach house in Hawai i. The beach house was rented for the
full year during 2010 and was not used by the Incisors during the year. The Incisors were
active participants in the management of the rental. Pertinent information about the rental
house is as follows:
Address–1237 Pineapple St., Lihue, HI 96766
Net rental income $20,350
Interest 7,800
Taxes 2,400
Utilities 1,825
Maintenance 3,000
The house is fully depreciated so there is no depreciation expense.
In July, Ivan loaned a friend $7,000 so he could buy a car. Ivan’s friend lost his job in
2010 and stopped making payments on the loan. He plans to start making payments
again, however, with additional interest as soon as he has new employment.
For the 2010 tax year, on March 15, 2011, Ivan contributed $5,000 to a traditional IRA
for himself and $5,000 to a traditional IRA for his wife. He is no t covered by a qualified
retirement plan at work.
Irene had a retirement plan at the job from which she was laid off in November 2009.
The plan had a balance of $24,000. On May 10, 2010, Irene had the entire retirement plan
balance rolled directly into an IRA at Timador & Embaucar Brokerage, Inc.
Required: Combi ne this new infor mation about the Incisor family with the information
from Chapters 1–2 and complete a revised 20 10 tax return for Ivan and Irene. Be sure
to save your data input files since this case will be expanded with more tax information
in later chapters. A statement is required to be attached to the return for a nonbusiness
bad debt, but this requirement may be ignored for this problem.
3-44 Chapter 3
Business Income and Expenses, Part I
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Questions and Problems 3-45
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
3-46 Chapter 3
Business Income and Expenses, Part I
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Questions and Problems 3-47
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
3-48 Chapter 3
Business Income and Expenses, Part I
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.