Maya Chang, age 35, is a single taxpayer who lives at 1225 Primrose Lane, Austin, Texas, 93221. Her social security number is 365-87-2012.
Maya is the manager of a spa and her earnings and withholdings for 2016 are:
W-2 Wages $105,000
Federal Taxes Withheld $20,000
State Taxes Withheld $0 (Texas has no income taxes)
Maya owns a single-family home as a rental property at 2012 Boulder Drive, Hutto, Texas, 93110. The house is rented for the entire year at $1,100 per month and she has the following information:
Property taxes $4,000
Mortgage Interest $12,500
Property Insurance $1,000
Depreciation: $0 (for simplicity we assume it is fully depreciated. We will cover depreciation in Chapter 7).
Gardening Services $800
Other Maintenance $3,000
Maya handles all of the rental management activities herself. She is completely “at risk” in her ownership of the property.
IMPORTANT! Assume that there are NO prior year suspended losses and any prior year losses have been allowed.
Maya likes to gamble and she has made a net of $6,000 during the year in playing the slot machines. (Ignore the deductability of gambling losses for this problem; we cover it in Chapter 5).
She has a checking account that earns no interest income. Except for her rental property, her bank account, and her 401(k) retirement accounts, she has no other investments.
Maya changed jobs last year and is only now moving her 401 (k) plan balance from her old employer’s 401(k) plan to her current employer’s 401(k) plan. The balance in her 401(k) account was $102,000 at the time of the transfer and she had it done directly from her old employer’s 401(k) plan trustee to the new employer’s trustee. She received a Form 1099 confirming the transfer.
Maya is too busy to do her own tax return and hired you to do it. Prepare her 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 to do 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 through it:
- 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 Schedule E.
- Don’t let Form 8582 make you panic. Focus on Parts I and II and 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.
- 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, use 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 when using forms like this, when the doing by hand method, has its limits. DO YOUR BEST!