FORM 1040 ‘ U.S. INDIVIDUAL INCOME TAX RETURN
Assume that the taxpayers, Rick Grimes (social security number 333-33-3330) and Lori Grimes (social
security number 444-44-4444) file a joint return. Both are 40 years old, have good eyesight, and live with
their three children, Carl, Glenn and Amy, at 789 N. Code Drive, Dallas, Texas 75201. The Grime’s home
phone number is 312-555-9999. Mr. Grime elects to have $3 of his income tax go to the Presidential
Election Campaign Fund. Mrs. Grime elects not to contribute.
The Grimes’ son, Glenn, is a junior in college and he is 20 years old. He worked during the summer and
earned $4,000. Their other son, Carl, is 17 and a 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, Amy, is eight years old and an elementary school student. She had no earned or
unearned income during the year. Glenn’s social security number is 300-11-0001, Carl’s social security
number is 300-22-0002, and Amy’s social security number is 300-33-0003. In August, the Grimes paid
$4,000 in tuition for their son, Glenn, for the academic period that started in September.
The Grimes claim Mrs. Grime’s mother, Carol 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 Grime,
(2) $1,000 from another daughter, Thelma Taylor, and
(3) $2,000 in social security benefits.
Mrs. Carol D. Taylor lived with the Grimes during all of 2011. Her social security number
is 400-44-0004. Thelma Taylor provides the Grime’s with a written, signed statement, that she will not
claim her mother as a dependent in 2011. Thelma Taylor lives at 1425 S. 62nd Street, Chicago, IL 60699,
and her social security number is 500-55-0005.
The Grimes use Michelle Gonzalez, a professional tax preparer, to prepare their income tax return.
Michelle’s PTIN is P98765432, and she works for HFW Tax Preparation (EIN #36-0987654), which is
located in a nearby suburb of Middle America (telephone number 312-555-1040). However, the Grime’s
do not authorize her to discuss their return with the IRS.
INCOME AND EXPENSES GENERALLY
During 2011, Mrs. Grime was employed as a salesperson by CDC Publishing Inc. Her Form W-2 for 2011
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. Grime is not covered by her employer’s retirement plan. In addition, Mr. Grime is a self-employed
individual who does not maintain a Keogh or a SEP plan. Mrs. Grime made a $1,500 contribution to a
traditional IRA and a $2,000 contribution to a Roth IRA in 2011. Mr. Grime decided against making a
contribution to a traditional IRA.
The Grimes received a $30 state income tax refund. They itemized in the prior year and elected to take
their $2,000 state income tax payment as a deduction. The Grimes also received a $20 federal income
Form 1040, Schedule A
The Grimes made federal estimated tax payments of $2,000 for 2011. They also incurred the following
medical expenses during 2011:
‘ Prescription drugs, $1,000;
‘ Doctor bills, $3,550;
‘ Hospital bills, $1,750;
‘ Transportation, $100; and
‘ Eyeglasses, $500.
In addition, Mr. Grime, who is self-employed, paid $3,750 in premiums for health insurance coverage for
himself and his family.
The Grimes paid their 2009 real estate taxes of $1,810 on July 1, 2011. They sold
their residence on September 13, 2011. They allowed the buyer a credit equal to 70% of the estimated
real estate taxes of $2,000 for 2011. The real estate taxes on the new property they purchased on May 1,
2011, are not payable until 2011. There was no taxable gain on the sale of their prior residence.
Mr. and Mrs. Grime 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 2011:
‘ $600 to finance Mrs. Grime’s car, and
‘ $400 in credit card interest.
The Grimes gave $1,500 in cash to various recognized charities; no individual gift was $250 or more; all charities sent an acknowledgment of the
Form 4684, Section A
During 2011, a burglar entered their home and stole a ring and a coin collection. The ring had been
purchased in May 15, 1990 at a cost of $3,000. Mrs. Grime had purchased the coin collection in July 15,
1991 at a cost of $1,100. An insurance company appraised the ring at a fair market value of $5,000, but
limited its loss coverage on jewelry under a homeowners’ policy to $1,500. The insurance company
excluded the coin collection from the insurance policy because of its policy restrictions on such items. At
the time of the theft, the fair market value of the coin collection was $2,000.
Mrs. Grime incurred employee business expenses in connection with her occupation as salesperson for
the publishing company. On January 3, 2011, she purchased a new car that was used primarily for
business reasons. The car cost $20,000. During 2011, the car was driven a total of 20,000 miles by Mrs.
Grime. Of those miles, 16,600 were business related. Mrs. Grime drove 1,250 miles while commuting
(five-mile daily roundtrip commute), and 2,150 miles for personal purposes. Mrs. Grime 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. Grime’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. Grime elects to claim the actual
Assume the answers for Form 2106, Lines 18, 19, 20 and 21 are “Yes.”
Mrs. Grime elected not to claim any Code Sec. 179 deduction or additional bonus depreciation on the car
Mrs. Grime incurred the following other business expenses:
‘ Meals and entertainment $1,500;
‘ Airfare $233;
‘ Gifts to customers $150; and
‘ Business seminar $60.
Mrs. Grime 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. Grime was
not reimbursed for her other business expenses.
The Grimes paid $500 for the preparation of their 2009
tax return (including $200 for the preparation of Schedule C, Profit or Loss from Business for George
Grime’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 2011, the Grimes 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 Florida.
The Grime’s received the following qualified dividends: $400 from
Kwik-E- Mart, 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 Grime’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 2011, the Grimes 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, 2009 for $2,500.
(2) On November 5, 200 shares of Farquaad Inc. were sold for $5,000.
They had been purchased on January 5, 2011 for $2,000.
(3) On December 4, 100 shares of Squall Inc.
were sold for $10,000. They had been purchased on January 4, 2000 for $4,000.
(4) On December 10,
200 shares of Kismet Inc. were sold for $5,000. They had been purchased on September 5, 2004 for
(5) On December 15, a number of gold coins were sold for $2,000. The coins had been
purchased on October 15, 2003 for $3,000.
Form 1040, Schedule E
Mr. and Mrs. Grime own and rent a brick two-flat apartment building located at 12 West 5th Ave., Austin,
Texas 70626. The apartment building is not used for personal purposes by either the Grimes or members
of their family. Mr. Grime actively participates in the operation of the building. The Grimes received rents
of $12,000 in 2011. 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 Grimes’ work papers (not reproduced), is $3,000.
During 2011, the Grimes’ daughter, Amy, attended two child care centers. They were: Notso Happy Day
Care, 4210 W. Maple, Dallas, Texas 72135, whose identification number is 36-0987654; and Greenfields
Day Care, 901 N. Ash, Springfield, Texas 72913, whose identification number is 36-1234567. The Grimes
paid $3,720 to Notso Happy Day Care and $1,860 to Greenfields Day Care. The Grimes did not receive
employer-provided dependent care benefits.
Form 1040, Schedule C
Mr. Grime 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, Texas 73181. His employer
identification number is 36-3456789. The business code is 442200.
In order to clearly show business income, Mr. Grime 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
Utilities and telephone 1,200
Legal and accounting (includes $200 of tax preparation fees) 400
Office expense 125
Meals and entertainment 1,040
On January 10, 2011, Mr. Grime purchased office furniture at a cost of $5,000. The furniture is used
100% for business. It is seven-year MACRS property. Mr. Grime elects to expense $1,000 of the cost
under Code Sec. 179. Mr. Grime elected not to claim the bonus depreciation available for any business
property placed in service during 2011.
On July 15, 2011, Mr. Grime purchased a pickup truck for use in
his business. It was driven 8,000 miles. The truck, used 100% for business, cost $47,000 and sales tax
was $3,000, for a basis of $50,000. The truck is considered five-year MACRS property. Also, it falls in the
classification of a light, general-purpose truck, subject to depreciation limits.
On June 15, 2006, Mr. Grime
purchased fixtures for the store. The current depreciation deduction for the fixtures is $536.
Mr. Grime bought a brick building on July 1, 1998, $75,000 of the price being allocable to the building for
depreciation purposes. No capital improvements were made. Depreciation on the building is computed by
using the MACRS method. The allowable MACRS deduction for 2011 would be calculated at the rate of
On September 1, 2011, a garage that had been purchased for $25,000 on July 1, 2001 and used
exclusively for Mr. Grime’s business was damaged by fi re. In order to repair the garage after the fire, Mr.
Grime spent $7,795. The repairs are considered to be an improvement to the property, which, prior to the
casualty, was being depreciated under the MARCS method for nonresidential property. The amount of
depreciation claimed prior to 2011 was $5,422.
Mr. Grime uses Form 4684, Section B, to determine the
recognized casualty gain or loss from the fire damage to the garage. Assume that the fair market value of
the garage was $24,650 before the fire and it had a fair market value immediately after the fi re of
$14,760. Assume, in completing Form 4684, that the total amount of depreciation that Mr. Grime had
claimed for the garage up to the date of the fi re was $5,876 and that he had received $5,000 from a fi re
insurance policy he had on the garage.
After the fi re, and taking into account the allowable loss
deduction, the cost of repair and the insurance recovery, the new adjusted basis of the garage for
depreciation purposes is $22,028. Since the basis had to be adjusted, the garage will be depreciated on a
straight-line method for the remainder of the original depreciation period. The allowable MACRS
deduction for 2011 would be calculated based on a rate of 3.33% per year using a mid-month convention.
On January 3, 2011, Mr. Grime sold a business truck for $550. He had purchased the truck for $5,000 on
March 12, 2001. Total depreciation allowed or allowable on the truck prior to 2011 was $5,000.
FORM 1040 ‘ U.S. INDIVIDUAL INCOME TAX RETURN