Test Return #3

[Bees Knees]

Tax Year = 2008

Bart is Single and has no dependents.

Bart was born on 2/13/1952

Bart lives at 123 Main Street, Hopkins, MN 55343. This is a rental duplex in which Bart purchased on 5/23/2008. He lives on the main floor and rents out the apartment on the second floor to his son, Gerard. Prior to this, Bart had lived at 114 Main Street, Hopkins, MN 55343. Bart had been a renter in that residence since 2002. Since 2002, Bart has had no ownership in any other residence. Bart has been using 123 Main Street as a rental duplex since the day he purchased it. The rental portion of the building represents 50% of the total square footage of the building.

Bart works full time as an auto mechanic for Denny Heckler’s Auto Mart Bonanza car dealership located in Bloomington Minnesota, about 10 miles from his residence. His 2008 W-2 has the following entries:
• Box 1 = $62,000.00
• Box 2 = $7,150.00
• Box 3 = $68,200.00
• Box 4 = $4,228.40
• Box 5 = $68,200.00
• Box 6 = $988.90
• Box 12a = Code D, $6,200
• Box 13 = Retirement Plan box checked
• Box 15 = State = MN, ID = 1234567
• Box 16 = $62,000
• Box 17 = $3,350

Bart has one 1099-INT from Wells Fargo for 2008 with $63.25 reported in box 1.

Bart received a $523 refund in 2008 for his 2007 MN state income tax return. Assume Bart itemized on his 2007 federal return and deducted state income taxes paid rather than general sales taxes on Schedule A. Assume his deduction in 2007 for state income taxes was less than the amount by which total itemized deductions exceeded his standard deduction. Assume his deduction in 2007 for state income taxes exceeded the amount that would have been deductible as general sales taxes by at least $523.

Bart received a $600 economic stimulus payment during 2008.

Bart received $8,800 rent from his 32 year old son for the rental portion of the duplex in 2008. Assume Gerard paid fair rental value for the duplex apartment. Gerard is not a dependent of Bart.

Bart originally paid $192,000 for the duplex on 5/23/2008. Assume that amount represents the total cost of the property including closing costs that add to basis. Assume $20,000 of the total represents the cost of land. Bart paid $6,000 down and financed $186,000 through Wells Fargo Mortgage, a local bank. 100% of the loan financed through Wells Fargo Mortgage is for the duplex. The interest rate on his mortgage is 5% and the life of the mortgage is 30 years.

Bart received a 2008 Form 1098 from Wells Fargo Mortgage with the following information:

6/23/2008 payment, $223.49 principal, $775.00 interest.
7/23/2008 payment, $224.42 principal, $774.07 interest.
8/23/2008 payment, $225.36 principal, $773.13 interest.
9/23/2008 payment, $226.30 principal, $772.19 interest.
10/23/2008 payment, $227.24 principal, $771.25 interest.
11/23/2008 payment, $228.19 principal, $770.30 interest.
12/23/2008 payment, $229.14 principal, $769.35 interest.
2008 totals, $1,584.14 principal, $5,405.29 interest.

Bart paid $1,450.00 for the first and second half 2008 real estate taxes for the property. At closing on 5/23/2008, the closing statement reduced the amount due from the buyer by $568.08 for the seller’s share of unpaid real estate taxes.

Bart paid $1,050.00 for 2008 hazard insurance. The payment was for the 12 month period beginning on 5/23/2008.

Bart also paid $198 for water and sewer and $692 for garbage service during 2008 for the duplex. Gerard paid for his own portion of the electric, heat, and phone bills.

Bart also replaced the wall to wall carpeting in Gerard’s apartment on 8/15/2008. The old carpeting was 15 years old at the time and needed replacing due to normal use. The total cost of replacing the carpeting was $1,598.95.

Assume there are no other items reportable on a depreciation schedule for the rental portion of the duplex.

Bart donated $1,212 to his church during 2008. Assume there were no other donations.

Bart paid $6,500 for out of pocket medical expenses during 2008 that was not covered by his employer paid health insurance.

Bart paid $2,016 for tools that were not reimbursed by his employer during 2008. These tools are ordinary and necessary for Bart’s W-2 job and are not used for personal purposes, nor were they used for the rental activity.

Bart paid $200 in 2008 for tax preparation of his 2007 tax return.

Assume Bart did not incur any other expenses in 2008 that would affect his federal tax return, nor did he receive any other taxable income. Assume Bart is an active participant in his rental activity.

Bart wants you to calculate the highest possible refund, or lowest possible balance due for his 2008 federal Form 1040.

What is his refund or balance due?

Vote for your answer. You may comment on the problem but do not give away how you calculated your answer.

If you vote for an answer in the poll and later wish to change your answer, you can post the answer you voted for and the new answer you wish to change it to. I will reveal the correct answer, plus an explanation as soon as the poll expires.

[spanel]

Wow im way off

Not sure what im overlooking, but im showing he owes

Fed -2207
MN -34

Fed 5337 (with fthb)
Thats with 0 Tax due in 2007 and paid by 4/15/09.


chris

[erchess]

What an interesting problem

I still have to learn about the FTHBC so I will do that before attempting the problem.

Spaniel you could be correct. There is a choice "none of the above" and sooner or later it will be the correct answer.

[spanel]

Fthb

Might have to do with the credit as I did NOT figure that into the equation. I'll figure that in and post back.....

I tend NOT to do the 08 credit because its a BAD BAD idea.

Chris

[JG EA]

I voted none of the above. Do you want us to tell you what we got if it is this choice? I got $5612 refund.

[Bees Knees]

You can tell us what you voted for. The choices in the poll allow you to vote without letting others know what you voted for. If you don't care whether people know your answer or not, you can let us know.

Bart said he wanted the largest possible refund. So whether or not something is a good idea or not, he wants it if it increases his refund.

[BP.]

Oh, Jeez, and the poll closes on Monday? Just printed out the test, and I think I'm gonna need a second cup of coffee just to read through it!

[Bees Knees]

Hint

I don’t post easy scenarios. There is a reason for every piece of information I gave you. Look in TheTaxBook for the answer.

[Earl]

After using three sheets of paper to compute my vote is a refund of $5,487.

[Larmil]

I don’t post easy scenarios. There is a reason for every piece of information I gave you. Look in TheTaxBook for the answer.

The one (reason) that I cannot find is the reason for the breakdown of the mortgage payment. I think I have the answer, but I missed on test 2 so I will not vote yet.

[nalawson]

I have already posted my vote, but I too am not understanding the posting of the individual mortgage payments. I have an idea of why they were posted, but don't know how it relates to this example, so I may have to change my answer later if clarity eventually comes to me.
Nancy

[S T]

Well

I have not posted yet either, thought I had the answer, then Larmil and nalawson posted about the mortgage interest issue, then Earl changed his answer, then deleted his post. Shows I am not so confident

I am pretty confident in what I have, but just waiting a "few" to see what other posts are. I have reviewed TTB and the Pubs and other referenes cited for the "issue at hand", and this except for one or two points was certainly alot easier for me than Test 2.

A few twists and turns in this "Test 3" - but I am okay with that, as whatever Bee's gives us, we will all learn from or maybe find out some of our weak areas .

I have to say, Bees, thank you so much for taking your time to give us these exercises, they are probably better than what we could learn at a "hands on seminar". The exercises also tie in to the TTB and the Pubs, and that is what has lent to me a great resource and assisted me in understanding some rules and regulations that I don't have much exposure too. So hopefully these particular exercises and the points therein will stay in the back of my mind, if I encounter them at a future point in time.

I am one of those "people" that learn by "hands on teaching or experience " not by memorization, although, Thank Goodness my memory is still, more than working sufficiently.

It makes us think, research, review, and also double check our software programs! Then the bonus, is that you explain why and how to arrive at the answer, and still keep that post open for anyone to pose a question or an opposition


Sandy

[Bees Knees]

The one (reason) that I cannot find is the reason for the breakdown of the mortgage payment. I think I have the answer, but I missed on test 2 so I will not vote yet.

I'll give another hint. There is a reason why there is a breakdown of the mortgage payments. Look in TTB. It covers an issue in which you need to know that information to figure it out.

I'll give another hint. There is another issue that obviously deals with depreciation. Ask yourself; what kind of activity is this? What asset(s) needs to be depreciated? What is the class life of the asset(s)? What are the depreciation options available that could lead to the greatest possible refund / and or lowest balance due?

I don’t want to give things away, but often times there are more than one correct answer to the way a tax return may be prepared. The key to this one is our client wants the highest possible refund this year, which may lead to less of a refund in future years.

[Brian EA]

I am coming up with a refund of $5512 and for the life of me I cannot figure out where the additional $25 came from; so I am voting for a refund of $5487.
From an elimination process this is the closest answer.

After voting I realized that the majority of folks voted that none of the answers are correct; however I did not change my answer.

[Larmil]

Thanks

I'll give another hint. There is a reason why there is a breakdown of the mortgage payments. Look in TTB. It covers an issue in which you need to know that information to figure it out.

I'll give another hint. There is another issue that obviously deals with depreciation. Ask yourself; what kind of activity is this? What asset(s) needs to be depreciated? What is the class life of the asset(s)? What are the depreciation options available that could lead to the greatest possible refund / and or lowest balance due?

I don’t want to give things away, but often times there are more than one correct answer to the way a tax return may be prepared. The key to this one is our client wants the highest possible refund this year, which may lead to less of a refund in future years.

Thanks, Bees. I learned something today thanks to you and WebCD.