Zeke and Zena Zastera tax problem

BC442
Tax Accounting
Tax return information
Zeke and Zena Zastera

Tax
Return 2: Note: The IRS Extension
form does not extend the due date of the assignment. Note for purposes of this return, you may work
with another student. (Email me the
names of the person you are working with.)
You each must complete the return using the software, and provide any
associated workpapers.

Following is information that you will need
to complete the federal income tax return for Zena and Zeke Zastera.

Facts:
Zeke and Zena Zastera are married and have 3 children.
Following are the basic facts related to them:

Name

Social Security Number

DOB

Zeke N. Zastera

490-15-8534

08-20-1970

Husband

Zena A. Zastera

504-68-9246

09-10-1973

Wife

Ashley Zastera

853-65-9876

02-26-1994

Daughter

Brittany Zastera

850-63-6667

10-28-1998

Daughter

Matthew Zastera

851-96-4456

02-15-2003

Son

Their address is:
186 Valley Drive
Marion, IA 52302

The mortgage interest and property taxes that they paid on their
personal residence can be found on the attached Form 1098.Zeke works at a local car dealership as a salesperson. His W-2 is attached. Interest received by Zeke and Zena are denoted on the attached
1099s.Matthew was enrolled in before and after school day care that
is provided by the YWCA (EIN 42-9685321) located at 123 1st Ave SE, Cedar
Rapids, 52401.
Zeke and Zena paid a total of $3,000 for the day care.Ashley attended Mount Mercy University on a full-time basis in
2013. The Zasteras paid $10,000 in tuition, $7,000 in room and board and
$1,200 for books for Ashley’s college expenses.Zeke and Zena sold 200 shares of Proctor & Gamble stock for
$39.50 per share on 06-01-2013. At the time of the sale they paid a
commission to their stock broker of $125. They bought the stock on 2-8-2007
for $18.00 per share.Zeke had an extensive collection of baseball cards acquired
between 1975 and 1979 for an estimated cost of $738. (Even though the cost was
unsubstantiated, given the number of baseball cards and the sales price of
a packet of cards in the 1970s, you deem the estimate to be reasonable and
believe you have a position to claim this amount as basis based on the Cohan,8 AFTR 10552 (2nd
Cir., 1930) . On May 28, 2013, Zeke
exchanged his baseball cards for an installed hot tub and season tickets
to the Iowa Cubs games. The value
of the installed hot tub and the season tickets were $3,750 and $1,000,
respectively. On July 15, 2013, Zeke sold all his shares (315.27) of Columbia
Acorn Fund for $6,800. He originally
purchased the 267.27 shares of the Acorn fund on 5/1/2010 for $3,000. He reinvested the dividends and capital
gains and received. The following are
the combined dividend and capital gain distributions in the years since
purchase.
Year Distribution Shares Received by Reinvesting
2010 $120 12.00
shares
2011 $180 15.00
shares
2012 $420 21.00
shares
Finally, the Zasteras
sold 1,000 shares of Donkong, a Qualified Small Business Stock, on July 5, 2013
for $250,000. They acquired the stock
for $20,000 on January 14, 2006. The Zastera’s
were 10% owners of the stock and were the first original owners to sell. (Hint:
See 2013 IRS Publication 550 page 66
on how to compute and report this gain).
Zena owns 10% of a partnership which owns and operates Mexican
Restaurants
in Davenport, Iowa. The partnership K-1 is attached.
Zeke and Zena made the following charitable contributions, in
2013:$2000 to St. Jude Catholic Church$150 to Mount Mercy University$75 to IPTV. $50 was given to a destitute neighbor to buy some shoes for a
job interview.Zeke and Zena had the following medical expenses that weren’t
covered by health insurance.Prescription drugs of $600.Co-Payments and Deductibles (Zeke $1,750, Zena $1,250)Veterinary bill of $70 for office visit, lab report and cat
scan of their now deceased cat, Stuffy.Zena owns and operates a combination of CPA firm and mortuary
called Deep ZZZ. While a seemingly
unusual combination, the businesses create some cross-demand. For instance, when clients see their tax
bill, they sometimes expire, others do estate planning and funeral
planning at the same time, still others select Zena to be the executor of
their estate. Deep ZZZ (EIN 86-6001132) uses the accrual basis of accounting.Deep ZZZ operates from the mortuary Building
at 123 Funeral Home Lane, Cedar
Rapids, Iowa 52401.
Receipts were $168,250, including $3,250 on sales taxes of the
goods sold (inventory consists entirely of caskets, the sales of which
totaled $65,000 excluding the sales tax assessed at 5%). Inventory at the end of last year was $12,000. A physical count of inventory on hand
at the end of this year showed inventory to be $15,000. Inventory is valued at cost.Additional outlays from the Deep ZZZ’s check register are as
follows:

Purchases of Caskets

35,000

Sales Tax

3,250

Hearse Auto insurance

850

Hearse Gasoline

1,200

Vehicle registration

150

Maintenance, Hearse

889

Software license fee

2,250

Tax Return supplies

4,000

Office Supplies

250

Wages

28,000

FICA tax

1,736

Medicare tax

406

Utilities

1,436

Telephone

450

Insurance

6,000

Legal fees

1,500

Bank fees

35

Bad Debt Expense5

1,200

Property Taxes Paid

3,500

Business loan – principal

5,000

Business loan – interest

1,200

Donations1

500

Lobbying2

1,000

Meals and Entertainment3

1,800

Business Investigation4

2,200

1Cash
donations of $500 were made during the year for various causes included
contributions of $200 to the Boy Scouts, $175 to the Girl Scouts and $125 for
various fundraisers for the local school.

2 Zena
went to Des Moines for 3 days to voice her opinion to state legislators
regarding the state sales tax.

Legislators were
attempting to include accounting services as a taxable service.

3 Zena
incurred $1,800 in meals and entertainment expense. $1,200 was incurred in taking potential
clients

to lunch or dinner
to discuss business. $600 was spent in
membership dues to the Airport National golf course

in which Zena
joined to try to drum up business. Her
poor golfing and duck-hook shots wounded

people by hitting
them with golf balls, but did not kill anyone.

4 Zena
incurred $2,200 in business investigation costs. Zena was contemplating getting into the
catering business so that she could bid on catering the meals often held
after the funeral.

Ultimately, Zena
decided not to get into the catering business.

5 DEEP
ZZZ accrues bad debt expense based on the percentage of sales method. On January 1, 2013,

the balance in the
allowance for doubtful accounts was $1,000.
During 2013, $1,200 was accrued and $1,000

of actual writeoffs
occurred, leaving $1,200 as the allowance for doubtful accounts balance on
12/31/2013.

GAAP Depreciation was $5,500.
For Tax purposes, Deep ZZZ computes depreciation using MACRS
percentages (not the optional straight line method.) Written mileage logs for the Hearse
indicate that it was driven 1,200 business miles. Deep ZZZ deducts the actual costs for
the Hearse. The Hearse was used only
for business purposes. (Hearses are excluded from
the Luxury auto limitations.)
Deep ZZZ did not elect to use bonus depreciation or to take §179
expense in 2013 or any prior year.
Following is the depreciation schedule for Deep ZZZ.

Asset

Date purchased

Cost

Prior GDS Depreciation

GDS Life

Mortuary Building Land

7/1/2006

25,000

0

N.A.

Mortuary Building

7/1/2006

$125,000

$20,699

39

Hearse

1/12/2010

$25,684

18,287

5

Display Racks

9/28/2009

$9,759

$6,710

7

Computer

5/19/2013

3,600

0

5

Backhoe

10/12/2008

12,260

$9,183

7

Computer

11/16/2008

$3,750

$3,391

5

Office Furniture

1/9/2006

2,250

$2,150

7

Note: remember mid quarter depreciation and that you have to calculate
depreciation for the alternative minimum tax differently that regular tax. Assume
that no disposals of property acquired during tax years 2006-2012 have occurred
prior to 2013.

On 9/30/2013, Deep ZZZ sold the old computer purchased on
11/16/08 for $400. Zena and Zeke paid $5,600 for a health insurance plan
established under Deep ZZZ to provide health insurance for the Zasteras
that was offered to small businesses through a local small business
association. This amount was paid
with after-tax dollars. (Neither
Zeke nor Zena were eligible for health insurance at their place of
employment.) In 2013, Zena made her
first contribution to a traditional IRA totaling $4,000. Zena is not eligible to participate in a
qualified retirement plan at work.The Zasteras have two vehicles for which they paid Iowa license plate
fees. $350 was paid for their 2012
Jeep Grand Cherokee which weighs 4,500 lbs. and a $120 for their 2006 BMW
Z4 which weighs 2,500 lbs.Zena and Zeke made 4 federal estimated tax payments of $10,500
each on their due dates, except the 4th quarter payment was
made on December 31, 2013. The
federal income taxes for 2012 totaled $8,500. They had to pay an additional $350 of
Iowa income tax when they filed their 2012 return on April 15, 2013 and
they received a refund of $1,250 on their federal 2012 tax return for
which they received an Iowa tax benefit. The Zasteras made 4 state of Iowa
estimated tax payments of $2,050 each on the respective due dates except
the fourth payment which was made on December 31, 2013. In 2012, Zeke owed $2,250 of Iowa income
tax while Zena owed $1,500.

Zena and Zeke own a 4-plex on 147 Poplar Street, Marion
that is fully rented. They bought
the 4-plex on 5-8-10 for $225,000 with $20,000 of the cost allocated to
the land. Following is a breakdown
of the 4-plex purchased and accumulated tax depreciation.

Asset

Cost

Prior GDS Depreciation

GDS life

Land

$20,000

N/A

N/A

Building

$205,000

19,567

27.5

The following is
information regarding the income and expenses of the 4-plex.

Income:

Rent

$30,000

Washer & dryer

2,400

Expenses:

Utilities

5,500

Property tax

4,500

Repairs & maintenance

1,200

Insurance

450

Snow removal

500

Mortgage loan – principal

3,800

Mortgage loan – interest

11,100

Required:
Prepare the federal income and state income
tax return for Zeke and Zena using Tax Act tax return preparation software. Prepare the alternative minimum tax schedule
6251 for both the federal and Iowa returns.
Both Zeke and Zena wish to contribute $3 to the Presidential Election
Campaign.

In
addition, to completing the returns, prepare a book to tax reconciliation. This reconciles the book income of Deep ZZZ
with the taxable income (please do in EXCEL or Word and attach it to your
return).

Also, answer the following questions. (Hint:
By clicking on the forms icon in TaxAct, you have access to various
calculation worksheets that provide the answer to the “limitation” questions
below. I want you to do the limitation
calculation yourself, but you can use the worksheet as a guide to assist you in
the explanation).
1. What is the benefit of making the 4th
quarter estimate payments in 2013 rather than 2014?
2. Please show a mathematical calculation for income tax line, 1040 line
44.
3. Was Zena’s IRA contribution deductible? (why
or why not)?
4. Verify the calculation of the child tax
credit and the child and dependent care credit.

Iowa Tax return
On the Iowa tax return, joint filers complete the
same return, but their incomes are taxed separately. Therefore, it is important that you pay
attention to whom the various investment income belongs. Some of the income belongs to Zena, some
belongs to Zeke, and some is joint income.
By coding the investment income correctly when entering them on the
federal return, they will flow correctly to the Iowa return.
Other items to consider when doing the Iowa return.
·
It is necessary to designate
the amount of the federal 2012 refund that accrues to Zeke and Zena. This is based on their 2012 income, which
indicates 60% of the amount goes to Zeke and 40% goes to Zena.
·
They reside in the Linn-Mar School district.
·
U.S. Government interest is tax
free on state tax returns.
·
Most municipal interest is
taxable in Iowa, however the Zasteras purposely purchased Iowa municipal bonds
that are tax exempt in Iowa.
·
Both Zeke and Zena want to
contribute the $1.50 to the Republican Party on their Iowa return.
Instructions for the Iowa return can be found at the Iowa
Department of Revenue website:
.iowa.gov/tax/forms/indinc.html”>www.iowa.gov/tax/forms/indinc.html

Your return should include:
Form 1040
Schedule A
Schedule B
Schedule C
Line 13 = 9,149, Line 31 = 68,399 (Don’t be concerned about $1 or
$2 differences)
Schedule D
Schedule E
Schedule SE
Form 4797
Form
8606
Form 6251
Form 4562 (Deep Z)
Form 4562 (4-Plex) Line 22 = 7,455
Form
2441

IA Form 1040IA
IA Schedule A
IA Schedule B