Bob Minion, age 43, is a single taxpayer who lives at 2440 Dusty
Trails Drive, Apt 10, Las Vegas, NV, 98765. His social security number
is 365-87-2012. Bob is the manager of a distribution warehouse and his
earnings and withholdings for 2014 is:
W-2 Wages $105,000
Federal Taxes withheld $20,000.
State taxes withheld $0 (Nevada has no income taxes).
Bob owns a single family home as a rental property at 2012 Boulder
Drive, Henderson, NV, 98766. The house was rented for the entire year at
$1,100 per month and he has the following information:
Property taxes: $4,000
Mortgage interest: $12,500
Property insurance: $1,000
Depreciation: $0 (for simplicity, we assume it’s fully depreciated. This topic is covered in chapter 7).
Gardening Services: $800
Other Maintenance: $3,000
Bob handles all of the rental management activities himself. He is completely “at risk” in his ownership of the property.
IMPORTANT!: Assume that there are NO prior year suspended loss and any prior year losses have been allowed.
Bob likes to gamble and he made a net $6,000 during the year playing
in poker tournaments. (Ignore the deductibility of gambling losses for
this problem; we cover it in Ch 5).
He has a checking account that earns no interest income. Except for
his rental property, his bank account, and his 401(k) retirement
accounts, he has no other investments.
Bob changed jobs last year and is only now moving his 401(k) plan
balance from his old employer’s 401(k) plan over to his current
employer’s 401(k) plan. The balance in his 401(k) account was $102,000
at the time of the transfer and he had it done directly from his old
employer’s 401(k) plan trustee to the new employer’s trustee. He
received a Form 1099 confirming the transfer.
Bob is too busy to do his own tax return this year and hired you to
do it. Prepare his Form 1040, Schedule E, and Form 8582 (Hint: this last
form is important). Do not prepare Form 4562. Make reasonable
assumptions about missing information.
Hint 1: Expect do to Form 8582 and Schedule E at the same time —- you
will jump back and forth between the two forms. This is normal. You
will also need to do the first page of Form 1040 (well, everything
except the rental property) before you do these forms.
Hint 2: IMPORTANT. Form 8582 is an insane form and challenging to
prepare manually. That said, I’m going to give you some big hints to get
#2a – Do Part 1 on page 1, then Worksheet 1 on Page 2, then Part II.
When you get to Line 16 on Page 1, use that result to go back to
#2b: Don’t let Form 8582 make you panic. Focus on Parts I and II —
apply the knowledge you have learned about passive losses, real estate,
and active participants in real estate. READ the form instructions (but
not forever–see below). It’s a similar story with Schedule E — read the
directions, apply your knowledge of how rental real estate works.
#2c: It is REALLY easy to get caught up in how confusing the
instructions are for Form 8582 and all of the worksheets supporting it.
Don’t do that. Follow my hints and try to follow how to carry the
amounts through to the other forms — but if you find yourself getting
lost, you should not spend hours and hours untying the mental knots.
Instead, use your best common sense. Frankly, some of these forms are
designed with computer tax software in mind and I don’t want you to get
tied-up. I admit that it is when using forms like this that the “do it
by hand” mock return concept has its limits.
Check figure: Form 1040, Line 75 should be a $1,099 overpayment.