Description In 2018, 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 2020, the Schnappaufs provide the following basic information for preparing their 2018 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 2 attachmentsSlide 1 of 2attachment_1attachment_1attachment_2attachment_2.slider-slide > img { width: 100%; display: block; } .slider-slide > img:focus { margin: auto; } Unformatted Attachment Preview A-2 Appendix A INTRODUCTION The information below will allow you to prepare the 2018 federal tax return for Bill and Joyce Schnappauf. The information is provided in three phases, which correspond to the three major components of computing income tax—gross income, deductions and losses, and property transactions. If your instructor assigns these problems, at the end of each major segment (i.e., Chapters 4, 8, and 12), you should complete the appropriate portions of the forms indicated. If you are not using a tax software package, you should not complete the second page of Form 1040 until you have completed Chapter 12. Completing the tax return problem will help you understand the reporting procedures for the information in each major segment of the text. In addition, it will aid you in reviewing the major topics discussed in the book; it serves as an overview of the course. THE SCHNAPPAUF FAMILY In 2018, 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 2019, the Schnappaufs provide the following basic information for preparing their 2018 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—CHAPTERS 1–4 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 2018 W-2 includes his salary ($98,000), bonus ($61,000), and income from group-term life insurance coverage in excess of $50,000 ($132.48), and is reduced by his 7 percent contribution ($6,860) 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 2010. During 2018, the company pays $5,000 in dividends. The basis of Joyce’s stock is $33,000. Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2020 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. Appendix A 4. The Schnappaufs receive a 2017 federal income tax refund of $818 on May 12, 2018. On May 15, 2018, they receive their income tax refund from the state of Rhode Island. In January 2019, the state mails the Schnappaufs a Form 1099-G (Exhibit A-7). Their total itemized deductions in 2017 were $20,161. 5. During 2018, Joyce is the lucky ninety-third caller to a local radio station and wins $300 in cash and a Tablet. 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 Tablet is $720. However, Joyce has a catalog from Supersonic Electronics that advertises the Tablet for $595. 6. The Schnappaufs receive a Form W-2G (Exhibit A-8) for their winnings at the Yardley Casino in Connecticut. 7. On June 26, 2018, Bill receives a check for $15,480 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 $15,100, and the letter from the company stated that his uncle had paid premiums on the policy of $3,620 (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 $125 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 (www.irs.treas.gov). You can also download IRS Publication 17, which is a useful guide in preparing the tax return. 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 through 8 by providing you with information concerning the Schnappaufs’ deductions for 2018. They provide you with the following information. 1. Joyce writes children’s books for a variety of publishers. She has been selfemployed since 2010. 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, 2018, 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, 2019, and must have it completed by November 30, 2019. The Schnappaufs’ home has two telephones. Joyce has a separate phone number for her business. The information on Joyce’s business is listed below. Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2020 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. A-3 A-4 Appendix A Royalties (Exhibits A-10 to A-12) Publisher’s advance Office supplies Train tickets Airfare (4 trips) Lodging (12 nights) Meals (12 days) Telephone ($28 monthly fee per phone line) Internet provider Cell phone, including business calls Business-related postage Printing/copying Legal fees Interest on auto $4,000 170 535 1,670 2,240 610 672 570 913 87 162 2,000 254 2. On January 2, 2018, 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 2018. 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 2018 is $684 ($15,200 3 45% 3 10%). 3. 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, 2004, 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, 2010, the fair market value of the house was $108,000. The total household expenses for 2018 are as follows: Heat Insurance Electricity Repairs to kitchen Cleaning $2,170 1,480 740 3,100 1,560 4. Bill began work on his MBA at Denville University. He enrolled in two courses, and paid $3,000 in tuition and $310 for books. 5. Bill and Joyce each contribute the maximum to their respective IRA accounts in 2018. 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 12/31/18 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. 6. The Schnappaufs incur the following medical expenses (before considering the $700 reimbursement they receive from their health insurance policy): Medical premiums Doctors Chiropractor Dentist Vet fees (family dog Sandy) Prescription drugs Over-the-counter drugs (aspirin, cough syrup) $3,800 1,200 650 1,900 345 340 175 In addition, Bill purchases an Exsoaligner machine for $700. The machine was recommended by the chiropractor to help strengthen Bill’s back muscles. 7. The Schnappaufs pay the following property taxes: Wakefield house Family car used by Bill (ad valorem) Joyce’s car (ad valorem) $11,200 480 520 Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2020 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. Appendix A 8. 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 Brooks’ Bargain Basement revolving account Jefferson Trust bank card $191 67 212 The proceeds from the home equity loan were used to renovate their kitchen. 9. 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, 2018: Property FMV Original Cost Antique table Dishwasher Sofa bed Men’s suits (2) $410 130 90 140 $225 700 800 540 Date Acquired 1/4/07 5/6/11 13/14/13 Various The Salvation Army acknowledges that these amounts represent the fair market value of the donated items. 10. The Schnappaufs incur $3,450 in gambling losses. 11. Because Joyce is self-employed, they make federal estimated tax payments of $210 per quarter on April 15, 2018, June 15, 2018, September 15, 2018, and January 15, 2019. They also make estimated payments of $150 per quarter to the state of Rhode Island on April 15, 2018, June 15, 2018, September 15, 2018, and December 31, 2018. 12. 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. 13. Other information: a. Joyce’s business is named Queensbridge Books, and her employer I.D. number is 05-3456345. b. The Salvation Army’s address is 15 High Street, Wakefield, R.I. 02879. c. 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. a. The only form that can be completed at the end of phase II is Form 8283. b. Do not calculate total income or adjusted gross income on page 1 of Form 1040. c. 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. d. Do not calculate the total itemized deductions on Schedule A. e. Do not total Joyce’s expenses on Schedule C. f. Do not compute Joyce’s self-employment tax on Schedule SE. Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2020 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. A-5 A-6 Appendix A g. Do not complete the summary section of Form 4562. h. 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. PHASE III—CHAPTERS 9–12 This is the third and final phase of the Schnappauf family’s tax return. This phase incorporates the material in Chapters 9, 10, 11, and 12 requires you to analyze the various types of property transactions discussed in those chapters. 1. On February 11, 2018, Bill inherits his father’s summer home. The house, located in South Lake Tahoe, Nevada, has a fair market value of $550,000 at the date of his father’s death. His parents had purchased the house in 1979 for $140,000 and made $122,000 worth of capital improvements to it. Twenty percent of the total value of the property is attributable to the land. Because Bill and Joyce ultimately would like to use the property as a vacation home, they decide to rent it out. Bill actively participates in the management of the property. The property is first advertised for rent on March 1, 2018, but is not rented until April 15, 2018. Bill provides the following income and expense information for the Lake Tahoe rental property: Rent $21,000 Repairs 6,250 Management fee 4,800 Property taxes 15,100 Insurance 3,500 In addition, Bill buys a new stove for $1,800 and a new refrigerator for $1,450 on March 20, 2018. 2. The Schnappaufs receive Form 1099-B (Exhibit A-15) from Pebble Beach Investors for the sale of several securities. The details on the securities sales are provided below. The selling price listed is net of brokerage commissions and represents the amount the Schnappaufs actually receive from the sale. Stock Date Acquired Date Sold Sale Price 150 shares Pfizer Corporation 300 shares Texas Instruments 50 shares Alcoa 25 shares Luminent 60 shares Textron 300 shares Hasbro 5/12/95 7/30/00 6/10/12 4/28/18 9/11/18 1/7/07 8/15/18 10/25/18 10/23/18 9/4/18 10/27/18 12/20/18 $ 6,000 17,100 525 900 10,410 6,125 Purchase Price $ * ** 1,800 2,700 9,100 3,150 *When Joyce graduated from college on May 12, 1995, her father gave her 150 shares of Pfizer Corporation stock that he had acquired on October 27, 1987, for $1,300. At the date of the gift, the fair market value of the stock was $1,800. In January 2004, Pfizer Corporation stock split 2 for 1. **The Schnappaufs acquired 500 shares of preferred stock in Texas Instruments for $7,810. Shortly after the purchase, they received a nontaxable 10 percent stock dividend. 3. On May 18, 2018, Joyce purchases a computer system for $2,700. She also buys a color printer/copier/fax machine for $450. All the equipment is used exclusively in her business. 4. On June 12, 2018, Joyce sells her old computer system for $300 and her printer for $75. She had acquired the computer system and printer on February 18, 2015, for $2,800 and $425, respectively. When the Schnappaufs prepared their 2015 tax return, they elected to expense the computer and printer using Section 179. The computer system and the printer were used exclusively in her business. Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2020 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. Appendix A 5. Joyce receives a Schedule K-1 (Exhibit A-16) for her interest in the furniturerestoration business. 6. Other information: a. The rental property in Lake Tahoe is located at 100 Paraiso Drive, South Lake Tahoe (88197). INSTRUCTIONS: To complete phase III, you need the following additional forms: Schedule E and Forms 4562 and 8582. You now have all the information necessary to complete the schedules that you did not finish in phases I and II. Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2020 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. A-7 A-8 Appendix A Exhibit A-1 a Employee’s social security number 437689 OMB No. 1545-0008 b Employer identification number (EIN) This information is being furnished to the Internal Revenue Service. If you are required to file a tax return, a negligence penalty or other sanction may be imposed on you if this income is taxable and you fail to report it. 2 Federal income tax withheld 1 Wages, tips, other compensation $13,871.00 $152,272.48 05-7652473 c Employer’s name, address, and ZIP code 3 Social security wages 4 Social security tax withheld $128,400.00 USC Equipment Corp. 18 Perry Rd. Warwick, RI 02806 $7,960.80 5 Medicare wages and tips 6 Medicare tax withheld $152,272.48 $2,207.95 7 Social security tips 8 Allocated tips 9 d Control number 10 Dependent care benefits 150-52-0546 e Employee’s first name and initial Suff. 11 Nonqualified plans Last name 13 Bill Schnappauf 27 Northup St. Wakefield, RI 02879 12a See instructions for box 12 C o C d e Statutory employee 14 Other Retirement plan Third-party sick pay 12b C o D d X e $132.48 $6,860.00 12c C o d e 12d C o d e f Employee’s address and ZIP code 15 State RI Form Employer’s state ID number 05-R7652473 W-2 16 State wages, tips, etc. 17 State income tax $152,272.48 Wage and Tax Statement Copy C—For EMPLOYEE’S RECORDS (See Notice to Employee on the back of Copy B.) 18 Local wages, tips, etc. 19 Local income tax 20 Locality name $5,577.18 2018 Instructions for Employee (Also see Notice to Employee, on the back of Copy B.) Department of the Treasury—Internal Revenue Service Safe, accurate, FAST! Use E—Elective deferrals under a section 403(b) salary reduction agreement Box 1. Enter this amount on the wages line of your tax return. F—Elective deferrals under a section 408(k)(6) salary reduction SEP Box 2. Enter this amount on the federal income tax withheld line of your tax return. G—Elective deferrals and employer contributions (including nonelective deferrals) to a section 457(b) deferred compensation plan Box 5. You may be required to report this amount on Form 8959, Additional Medicare Tax. See the Form 1040 instructions to determine if you are required to complete Form 8959. Box 6. This amount includes the 1.45% Medicare Tax withheld on all Medicare wages and tips shown in box 5, as well as the 0.9% Additional Medicare Tax on any of those Medicare wages and tips above $200,000. Box 8. This amount is not included in boxes 1, 3, 5, or 7. For information on how to report tips on your tax return, see your Form 1040 instructions. You must file Form 4137, Social Security and Medicare Tax on Unreported Tip Income, with your income tax return to report at least the allocated tip amount unless you can prove that you received a smaller amount. If you have records that show the actual amount of tips you received, report that amount even if it is more or less than the allocated tips. On Form 4137 you will calculate the social security and Medicare tax owed on the allocated tips shown on your Form(s) W-2 that you must report as income and on other tips you did not report to your employer. By filing Form 4137, your social security tips will be credited to your social security record (used to figure your benefits). Box 9. If you are e-filing and if there is a code in this box, enter it when prompted by your software. This code assists the IRS in validating the W-2 data submitted with your return. The code is not entered on paper-filed returns. Box 10. This amount includes the total dependent care benefits that your employer paid to you or incurred on your behalf (including amounts from a section 125 (cafeteria) plan). Any amount over $5,000 is also included in box 1. Complete Form 2441, Child and Dependent Care Expenses, to compute any taxable and nontaxable amounts. Box 11. This amount is (a) reported in box 1 if it is a distribution made to you from a nonqualified deferred compensation or nongovernmental section 457(b) plan, or (b) included in box 3 and/or 5 if it is a prior year deferral under a nonqualified or section 457(b) plan that became taxable for social security and Medicare taxes this year because there is no longer a substantial risk of forfeiture of your right to the deferred amount. This box shouldn’t be used if you had a deferral and a distribution in the same calendar year. If you made a deferral and received a distribution in the same calendar year, and you are or will be age 62 by the end of the calendar year, your employer should file Form SSA-131, Employer Report of Special Wage Payments, with the Social Security Administration and give you a copy. Box 12. The following list explains the codes shown in box 12. You may need this information to complete your tax return. Elective deferrals (codes D, E, F, and S) and designated Roth contributions (codes AA, BB, and EE) under all plans are generally limited to a total of $18,000 ($12,500 if you only have SIMPLE plans; $21,000 for section 403(b) plans if you qualify for the 15-year rule explained in Pub. 571). Deferrals under code G are limited to $18,000. Deferrals under code H are limited to $7,000. However, if you were at least age 50 in 2017, your employer may have allowed an additional deferral of up to $6,000 ($3,000 for section 401(k)(11) and 408(p) SIMPLE plans). This additional deferral amount is not subject to the overall limit on elective deferrals. For code G, the limit on elective deferrals may be higher for the last 3 years before you reach retirement age. Contact your plan administrator for more information. Amounts in excess of the overall elective deferral limit must be included in income. See the “Wages, Salaries, Tips, etc.” line instructions for Form 1040. Note: If a year follows code D through H, S, Y, AA, BB, or EE, you made a make-up pension contribution for a prior year(s) when you were in military service. To figure whether you made excess deferrals, consider these amounts for the year shown, not the current year. If no year is shown, the contributions are for the current year. A—Uncollected social security or RRTA tax on tips. Include this tax on Form 1040. See “Other Taxes” in the Form 1040 instructions. B—Uncollected Medicare tax on tips. Include this tax on Form 1040. See “Other Taxes” in the Form 1040 instructions. C—Taxable cost of group-term life insurance over $50,000 (included in boxes 1, 3 (up to social security wage base), and 5) D—Elective deferrals to a section 401(k) cash or deferred arrangement. Also includes deferrals under a SIMPLE retirement account that is part of a section 401(k) arrangement. H—Elective deferrals to a section 501(c)(18)(D) tax-exempt organization plan. See “Adjusted Gross Income” in the Form 1040 instructions for how to deduct. J—Nontaxable sick pay (information only, not included in boxes 1, 3, or 5) K—20% excise tax on excess golden parachute payments. See “Other Taxes” in the Form 1040 instructions. L—Substantiated employee business expense reimbursements (nontaxable) M—Uncollected social security or RRTA tax on taxable cost of group-term life insurance over $50,000 (former employees only). See “Other Taxes” in the Form 1040 instructions. N—Uncollected Medicare tax on taxable cost of group-term life insurance over $50,000 (former employees only). See “Other Taxes” in the Form 1040 instructions. P—Excludable moving expense reimbursements paid directly to employee (not included in boxes 1, 3, or 5) Q—Nontaxable combat pay. See the instructions for Form 1040 or Form 1040A for details on reporting this amount. R—Employer contributions to your Archer MSA. Report on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. S—Employee salary reduction contributions under a section 408(p) SIMPLE plan (not included in box 1) T—Adoption benefits (not included in box 1). Complete Form 8839, Qualified Adoption Expenses, to compute any taxable and nontaxable amounts. V—Income from exercise of nonstatutory stock option(s) (included in boxes 1, 3 (up to social security wage base), and 5). See Pub. 525, Taxable and Nontaxable Income, for reporting requirements. W—Employer contributions (including amounts the employee elected to contribute using a section 125 (cafeteria) plan) to your health savings account. Report on Form 8889, Health Savings Accounts (HSAs). Y—Deferrals under a section 409A nonqualified deferred compensation plan Z—Income under a nonqualified deferred compensation plan that fails to satisfy section 409A. This amount is also included in box 1. It is subject to an additional 20% tax plus interest. See “Other Taxes” in the Form 1040 instructions. AA—Designated Roth contributions under a section 401(k) plan BB—Designated Roth contributions under a section 403(b) plan DD—Cost of employer-sponsored health coverage. The amount reported with Code DD is not taxable. EE—Designated Roth contributions under a governmental section 457(b) plan. This amount does not apply to contributions under a tax-exempt organization section 457(b) plan. FF—Permitted benefits under a qualified small employer health reimbursement arrangement Box 13. If the “Retirement plan” box is checked, special limits may apply to the amount of traditional IRA contributions you may deduct. See Pub. 590-A, Contributions to Individual Retirement Arrangements (IRAs). Box 14. Employers may use this box to report information such as state disability insurance taxes withheld, union dues, uniform payments, health insurance premiums deducted, nontaxable income, educational assistance payments, or a member of the clergy’s parsonage allowance and utilities. Railroad employers use this box to report railroad retirement (RRTA) compensation, Tier 1 tax, Tier 2 tax, Medicare tax and Additional Medicare Tax. Include tips reported by the employee to the employer in railroad retirement (RRTA) compensation. Note: Keep Copy C of Form W-2 for at least 3 years after the due date for filing your income tax return. However, keep Copy C until you begin receiving social security benefits, just to help in case there is a question about your work record and/or earnings in a particular year. Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2020 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. A-9 Appendix A Exhibit A-2 CORRECTED (if checked) PAYER’S name, street address, city or town, state or province, country, ZIP or foreign postal code, and telephone no. Wakefield Savings Bank 565 Main St. Wakefield, RI 02879 $ Form 1099-INT 615.00 2 Early withdrawal penalty Copy B $ For Recipient 3 Interest on U.S. Savings Bonds and Treas. obligations 150-52-0546 $ This is important tax information and is $ being furnished to the Internal Revenue 7 Foreign country or U.S. possession Se

Description

In 2018, 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 2020, the Schnappaufs provide the following basic information for preparing their 2018 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

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Appendix A
INTRODUCTION
The information below will allow you to prepare the 2018 federal tax return for Bill and
Joyce Schnappauf. The information is provided in three phases, which correspond to
the three major components of computing income tax—gross income, deductions and
losses, and property transactions. If your instructor assigns these problems, at the end of
each major segment (i.e., Chapters 4, 8, and 12), you should complete the appropriate
portions of the forms indicated. If you are not using a tax software package, you should
not complete the second page of Form 1040 until you have completed Chapter 12.
Completing the tax return problem will help you understand the reporting procedures for the information in each major segment of the text. In addition, it will aid
you in reviewing the major topics discussed in the book; it serves as an overview of the
course.
THE SCHNAPPAUF FAMILY
In 2018, 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 2019, the Schnappaufs provide the following basic information for preparing
their 2018 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—CHAPTERS 1–4
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 2018 W-2 includes his salary ($98,000),
bonus ($61,000), and income from group-term life insurance coverage in excess
of $50,000 ($132.48), and is reduced by his 7 percent contribution ($6,860) 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 2010. During 2018, the
company pays $5,000 in dividends. The basis of Joyce’s stock is $33,000.
Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Copyright 2020 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.
Appendix A
4. The Schnappaufs receive a 2017 federal income tax refund of $818 on May 12,
2018. On May 15, 2018, they receive their income tax refund from the state of
Rhode Island. In January 2019, the state mails the Schnappaufs a Form 1099-G
(Exhibit A-7). Their total itemized deductions in 2017 were $20,161.
5. During 2018, Joyce is the lucky ninety-third caller to a local radio station and
wins $300 in cash and a Tablet. 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 Tablet is $720.
However, Joyce has a catalog from Supersonic Electronics that advertises the
Tablet for $595.
6. The Schnappaufs receive a Form W-2G (Exhibit A-8) for their winnings at the
Yardley Casino in Connecticut.
7. On June 26, 2018, Bill receives a check for $15,480 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
$15,100, and the letter from the company stated that his uncle had paid premiums
on the policy of $3,620 (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 $125 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 (www.irs.treas.gov). You can also download IRS Publication 17, which is a useful
guide in preparing the tax return.
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 through 8 by
providing you with information concerning the Schnappaufs’ deductions for 2018. They
provide you with the following information.
1. Joyce writes children’s books for a variety of publishers. She has been selfemployed since 2010. 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, 2018, 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, 2019, and must have it completed by November 30,
2019. The Schnappaufs’ home has two telephones. Joyce has a separate phone number for her business. The information on Joyce’s business is listed below.
Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Copyright 2020 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.
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Appendix A
Royalties (Exhibits A-10 to A-12)
Publisher’s advance
Office supplies
Train tickets
Airfare (4 trips)
Lodging (12 nights)
Meals (12 days)
Telephone ($28 monthly fee per phone line)
Internet provider
Cell phone, including business calls
Business-related postage
Printing/copying
Legal fees
Interest on auto
$4,000
170
535
1,670
2,240
610
672
570
913
87
162
2,000
254
2. On January 2, 2018, 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 2018. 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 2018 is $684 ($15,200 3 45% 3 10%).
3. 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, 2004, 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, 2010, the fair market value of the
house was $108,000. The total household expenses for 2018 are as follows:
Heat
Insurance
Electricity
Repairs to kitchen
Cleaning
$2,170
1,480
740
3,100
1,560
4. Bill began work on his MBA at Denville University. He enrolled in two courses,
and paid $3,000 in tuition and $310 for books.
5. Bill and Joyce each contribute the maximum to their respective IRA accounts in
2018. 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 12/31/18 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.
6. The Schnappaufs incur the following medical expenses (before considering the
$700 reimbursement they receive from their health insurance policy):
Medical premiums
Doctors
Chiropractor
Dentist
Vet fees (family dog Sandy)
Prescription drugs
Over-the-counter drugs (aspirin, cough syrup)
$3,800
1,200
650
1,900
345
340
175
In addition, Bill purchases an Exsoaligner machine for $700. The machine was
recommended by the chiropractor to help strengthen Bill’s back muscles.
7. The Schnappaufs pay the following property taxes:
Wakefield house
Family car used by Bill (ad valorem)
Joyce’s car (ad valorem)
$11,200
480
520
Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Copyright 2020 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.
Appendix A
8. 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
Brooks’ Bargain Basement revolving account
Jefferson Trust bank card
$191
67
212
The proceeds from the home equity loan were used to renovate their kitchen.
9. 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, 2018:
Property
FMV
Original Cost
Antique table
Dishwasher
Sofa bed
Men’s suits (2)
$410
130
90
140
$225
700
800
540
Date Acquired
1/4/07
5/6/11
13/14/13
Various
The Salvation Army acknowledges that these amounts represent the fair market
value of the donated items.
10. The Schnappaufs incur $3,450 in gambling losses.
11. Because Joyce is self-employed, they make federal estimated tax payments of
$210 per quarter on April 15, 2018, June 15, 2018, September 15, 2018, and
January 15, 2019. They also make estimated payments of $150 per quarter to
the state of Rhode Island on April 15, 2018, June 15, 2018, September 15,
2018, and December 31, 2018.
12. 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.
13. Other information:
a. Joyce’s business is named Queensbridge Books, and her employer I.D. number
is 05-3456345.
b. The Salvation Army’s address is 15 High Street, Wakefield, R.I. 02879.
c. 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.
a. The only form that can be completed at the end of phase II is Form 8283.
b. Do not calculate total income or adjusted gross income on page 1 of Form
1040.
c. 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.
d. Do not calculate the total itemized deductions on Schedule A.
e. Do not total Joyce’s expenses on Schedule C.
f. Do not compute Joyce’s self-employment tax on Schedule SE.
Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Copyright 2020 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.
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Appendix A
g. Do not complete the summary section of Form 4562.
h. 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.
PHASE III—CHAPTERS 9–12
This is the third and final phase of the Schnappauf family’s tax return. This phase incorporates the material in Chapters 9, 10, 11, and 12 requires you to analyze the various
types of property transactions discussed in those chapters.
1. On February 11, 2018, Bill inherits his father’s summer home. The house, located
in South Lake Tahoe, Nevada, has a fair market value of $550,000 at the date of
his father’s death. His parents had purchased the house in 1979 for $140,000 and
made $122,000 worth of capital improvements to it. Twenty percent of the total
value of the property is attributable to the land. Because Bill and Joyce ultimately
would like to use the property as a vacation home, they decide to rent it out.
Bill actively participates in the management of the property. The property is first
advertised for rent on March 1, 2018, but is not rented until April 15, 2018. Bill
provides the following income and expense information for the Lake Tahoe rental
property:
Rent
$21,000
Repairs
6,250
Management fee
4,800
Property taxes
15,100
Insurance
3,500
In addition, Bill buys a new stove for $1,800 and a new refrigerator for $1,450 on
March 20, 2018.
2. The Schnappaufs receive Form 1099-B (Exhibit A-15) from Pebble Beach Investors for the sale of several securities. The details on the securities sales are provided
below. The selling price listed is net of brokerage commissions and represents the
amount the Schnappaufs actually receive from the sale.
Stock
Date
Acquired
Date Sold
Sale Price
150 shares Pfizer Corporation
300 shares Texas Instruments
50 shares Alcoa
25 shares Luminent
60 shares Textron
300 shares Hasbro
5/12/95
7/30/00
6/10/12
4/28/18
9/11/18
1/7/07
8/15/18
10/25/18
10/23/18
9/4/18
10/27/18
12/20/18
$ 6,000
17,100
525
900
10,410
6,125
Purchase
Price
$
*
**
1,800
2,700
9,100
3,150
*When Joyce graduated from college on May 12, 1995, her father gave her 150 shares of Pfizer Corporation stock
that he had acquired on October 27, 1987, for $1,300. At the date of the gift, the fair market value of the stock
was $1,800. In January 2004, Pfizer Corporation stock split 2 for 1.
**The Schnappaufs acquired 500 shares of preferred stock in Texas Instruments for $7,810. Shortly after the
purchase, they received a nontaxable 10 percent stock dividend.
3. On May 18, 2018, Joyce purchases a computer system for $2,700. She also buys a
color printer/copier/fax machine for $450. All the equipment is used exclusively
in her business.
4. On June 12, 2018, Joyce sells her old computer system for $300 and her printer
for $75. She had acquired the computer system and printer on February 18, 2015,
for $2,800 and $425, respectively. When the Schnappaufs prepared their 2015 tax
return, they elected to expense the computer and printer using Section 179. The
computer system and the printer were used exclusively in her business.
Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Copyright 2020 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.
Appendix A
5. Joyce receives a Schedule K-1 (Exhibit A-16) for her interest in the furniturerestoration business.
6. Other information:
a. The rental property in Lake Tahoe is located at 100 Paraiso Drive, South Lake
Tahoe (88197).
INSTRUCTIONS: To complete phase III, you need the following additional forms: Schedule E
and Forms 4562 and 8582. You now have all the information necessary to complete the
schedules that you did not finish in phases I and II.
Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Copyright 2020 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.
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Appendix A
Exhibit A-1
a Employee’s social security number
437689
OMB No. 1545-0008
b Employer identification number (EIN)
This information is being furnished to the Internal Revenue Service. If you
are required to file a tax return, a negligence penalty or other sanction
may be imposed on you if this income is taxable and you fail to report it.
2 Federal income tax withheld
1 Wages, tips, other compensation
$13,871.00
$152,272.48
05-7652473
c Employer’s name, address, and ZIP code
3 Social security wages
4 Social security tax withheld
$128,400.00
USC Equipment Corp.
18 Perry Rd.
Warwick, RI 02806
$7,960.80
5 Medicare wages and tips
6 Medicare tax withheld
$152,272.48
$2,207.95
7 Social security tips
8 Allocated tips
9
d Control number
10 Dependent care benefits
150-52-0546
e Employee’s first name and initial
Suff. 11 Nonqualified plans
Last name
13
Bill Schnappauf
27 Northup St.
Wakefield, RI 02879
12a See instructions for box 12
C
o
C
d
e
Statutory
employee
14 Other
Retirement
plan
Third-party
sick pay
12b
C
o
D
d
X
e
$132.48
$6,860.00
12c
C
o
d
e
12d
C
o
d
e
f Employee’s address and ZIP code
15 State
RI
Form
Employer’s state ID number
05-R7652473
W-2
16 State wages, tips, etc.
17 State income tax
$152,272.48
Wage and Tax
Statement
Copy C—For EMPLOYEE’S RECORDS (See Notice to
Employee on the back of Copy B.)
18 Local wages, tips, etc.
19 Local income tax
20 Locality name
$5,577.18
2018
Instructions for Employee (Also see Notice to Employee, on the back of Copy B.)
Department of the Treasury—Internal Revenue Service
Safe, accurate,
FAST! Use
E—Elective deferrals under a section 403(b) salary reduction agreement
Box 1. Enter this amount on the wages line of your tax return.
F—Elective deferrals under a section 408(k)(6) salary reduction SEP
Box 2. Enter this amount on the federal income tax withheld line of your tax return.
G—Elective deferrals and employer contributions (including nonelective deferrals) to a section 457(b) deferred
compensation plan
Box 5. You may be required to report this amount on Form 8959, Additional Medicare Tax. See the Form 1040
instructions to determine if you are required to complete Form 8959.
Box 6. This amount includes the 1.45% Medicare Tax withheld on all Medicare wages and tips shown in box 5, as
well as the 0.9% Additional Medicare Tax on any of those Medicare wages and tips above $200,000.
Box 8. This amount is not included in boxes 1, 3, 5, or 7. For information on how to report tips on your tax return,
see your Form 1040 instructions.
You must file Form 4137, Social Security and Medicare Tax on Unreported Tip Income, with your income tax return
to report at least the allocated tip amount unless you can prove that you received a smaller amount. If you have
records that show the actual amount of tips you received, report that amount even if it is more or less than the
allocated tips. On Form 4137 you will calculate the social security and Medicare tax owed on the allocated tips
shown on your Form(s) W-2 that you must report as income and on other tips you did not report to your employer.
By filing Form 4137, your social security tips will be credited to your social security record (used to figure your
benefits).
Box 9. If you are e-filing and if there is a code in this box, enter it when prompted by your software. This code
assists the IRS in validating the W-2 data submitted with your return. The code is not entered on paper-filed returns.
Box 10. This amount includes the total dependent care benefits that your employer paid to you or incurred on your
behalf (including amounts from a section 125 (cafeteria) plan). Any amount over $5,000 is also included in box 1.
Complete Form 2441, Child and Dependent Care Expenses, to compute any taxable and nontaxable amounts.
Box 11. This amount is (a) reported in box 1 if it is a distribution made to you from a nonqualified deferred
compensation or nongovernmental section 457(b) plan, or (b) included in box 3 and/or 5 if it is a prior year deferral
under a nonqualified or section 457(b) plan that became taxable for social security
and Medicare taxes this year because there is no longer a substantial risk of forfeiture of your right to the deferred
amount. This box shouldn’t be used if you had a deferral and a distribution in the same calendar year. If you made a
deferral and received a distribution in the same calendar year, and you are or will be age 62 by the end of the
calendar year, your employer should file Form SSA-131, Employer Report of Special Wage Payments, with the
Social Security Administration and give you a copy.
Box 12. The following list explains the codes shown in box 12. You may need this information to complete your tax
return. Elective deferrals (codes D, E, F, and S) and designated Roth contributions (codes AA, BB, and EE) under
all plans are generally limited to a total of $18,000 ($12,500 if you only have SIMPLE plans; $21,000 for section
403(b) plans if you qualify for the 15-year rule explained in Pub. 571). Deferrals under code G are limited to
$18,000. Deferrals under code H are limited to $7,000.
However, if you were at least age 50 in 2017, your employer may have allowed an additional deferral of up to
$6,000 ($3,000 for section 401(k)(11) and 408(p) SIMPLE plans). This additional deferral amount is not subject to
the overall limit on elective deferrals. For code G, the limit on elective deferrals may be higher for the last 3 years
before you reach retirement age. Contact your plan administrator for more information. Amounts in excess of the
overall elective deferral limit must be included in income. See the “Wages, Salaries, Tips, etc.” line instructions for
Form 1040.
Note: If a year follows code D through H, S, Y, AA, BB, or EE, you made a make-up pension contribution for a prior
year(s) when you were in military service. To figure whether you made excess deferrals, consider these amounts
for the year shown, not the current year. If no year is shown, the contributions are for the current year.
A—Uncollected social security or RRTA tax on tips. Include this tax on Form 1040. See “Other Taxes” in the Form
1040 instructions.
B—Uncollected Medicare tax on tips. Include this tax on Form 1040. See “Other Taxes” in the Form 1040
instructions.
C—Taxable cost of group-term life insurance over $50,000 (included in boxes 1, 3 (up to social security wage
base), and 5)
D—Elective deferrals to a section 401(k) cash or deferred arrangement. Also includes deferrals under a SIMPLE
retirement account that is part of a section 401(k) arrangement.
H—Elective deferrals to a section 501(c)(18)(D) tax-exempt organization plan. See “Adjusted Gross Income” in the
Form 1040 instructions for how to deduct.
J—Nontaxable sick pay (information only, not included in boxes 1, 3, or 5)
K—20% excise tax on excess golden parachute payments. See “Other Taxes” in the Form 1040 instructions.
L—Substantiated employee business expense reimbursements (nontaxable)
M—Uncollected social security or RRTA tax on taxable cost of group-term life insurance over $50,000 (former
employees only). See “Other Taxes” in the Form 1040 instructions.
N—Uncollected Medicare tax on taxable cost of group-term life insurance over $50,000 (former employees only).
See “Other Taxes” in the Form 1040 instructions.
P—Excludable moving expense reimbursements paid directly to employee (not included in boxes 1, 3, or 5)
Q—Nontaxable combat pay. See the instructions for Form 1040 or Form 1040A for details on reporting this amount.
R—Employer contributions to your Archer MSA. Report on Form 8853, Archer MSAs and Long-Term Care
Insurance Contracts.
S—Employee salary reduction contributions under a section 408(p) SIMPLE plan (not included in box 1)
T—Adoption benefits (not included in box 1). Complete Form 8839, Qualified Adoption Expenses, to compute any
taxable and nontaxable amounts.
V—Income from exercise of nonstatutory stock option(s) (included in boxes 1, 3 (up to social security wage base),
and 5). See Pub. 525, Taxable and Nontaxable Income, for reporting requirements.
W—Employer contributions (including amounts the employee elected to contribute using a section 125 (cafeteria)
plan) to your health savings account. Report on Form 8889, Health Savings Accounts (HSAs).
Y—Deferrals under a section 409A nonqualified deferred compensation plan
Z—Income under a nonqualified deferred compensation plan that fails to satisfy section 409A. This amount is also
included in box 1. It is subject to an additional 20% tax plus interest. See “Other Taxes” in the Form 1040
instructions.
AA—Designated Roth contributions under a section 401(k) plan
BB—Designated Roth contributions under a section 403(b) plan
DD—Cost of employer-sponsored health coverage. The amount reported with Code DD is not taxable.
EE—Designated Roth contributions under a governmental section 457(b) plan. This amount does not apply to
contributions under a tax-exempt organization section 457(b) plan.
FF—Permitted benefits under a qualified small employer health reimbursement arrangement
Box 13. If the “Retirement plan” box is checked, special limits may apply to the amount of traditional IRA
contributions you may deduct. See Pub. 590-A, Contributions to Individual Retirement Arrangements (IRAs).
Box 14. Employers may use this box to report information such as state disability insurance taxes withheld, union
dues, uniform payments, health insurance premiums deducted, nontaxable income, educational assistance
payments, or a member of the clergy’s parsonage allowance and utilities. Railroad employers use this box to report
railroad retirement (RRTA) compensation, Tier 1 tax, Tier 2 tax, Medicare tax and Additional Medicare Tax. Include
tips reported by the employee to the employer in railroad retirement (RRTA) compensation.
Note: Keep Copy C of Form W-2 for at least 3 years after the due date for filing your income tax return. However,
keep Copy C until you begin receiving social security benefits, just
to help
in case there is a question about your work record and/or earnings in a particular year.
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A-9
Appendix A
Exhibit A-2
CORRECTED (if checked)
PAYER’S name, street address, city or town, state or province, country, ZIP
or foreign postal code, and telephone no.
Wakefield Savings Bank
565 Main St.
Wakefield, RI 02879
$
Form 1099-INT
615.00
2 Early withdrawal penalty
Copy B
$
For Recipient
3 Interest on U.S. Savings Bonds and Treas. obligations
150-52-0546
$
This is important tax
information and is
$
being furnished to the
Internal Revenue
7 Foreign country or U.S. possession
Se