Question

Military Scenario 5: William and Nancy Ware Directions: Using the tax software, complete the tax return, including Form 1040 and all appropriate forms, schedules, or worksheets. Answer the questions following the scenario. When entering Social Security numbers (SSNs) or Employer Identification Numbers (EINs), replace the Xs as directed, or with any four digits of your choice. Interview Notes:

• William and Nancy are married and want to file a joint return.
• William and Nancy have an 18-year-old son, Jeffery, who lived with them the entire year.
• William was deployed to Jordan and entered a combat zone on July 7, 2022. He returned to the U.S. on January 28, 2023.
• Nancy has rental property, which she placed into service in 2017.
• Rental property:
• Nancy is an active participant.
• Single family residence at 5460 Lafayette Road, Your City, Your State, Your Zip.
• Purchased property: 5/3/2016.
• Rented: 1/1/2022 to 12/31/2022
• Annual rental income: $21,300
• Insurance: $2,100
• Management fees: $1,075
• Nancy paid $1,850 to repair an air conditioner, a broken lock, and a shed door. She did the broken lock repair herself and feels her time completing the repair was worth $200 compared to the estimate from the locksmith.
• Real estate property tax: $2,438.
• Mortgage Interest: $4,279.
• Depreciation: $2,400 (annual amount previously calculated by Nancy's accountant).
• Nancy did not make any payments that require her to file Form 1099.
• The Wares did not itemize last year and do not have enough deductions to itemize this year.
Test Questions:
1. William and Nancy can claim $14,142 as their total rental expenses on their joint return?
a. True
b. False
2. Code "Q" in box 12a of William’s W-2 represents combat pay.
a. True
b. False
3. Which schedule is used to report rental income and expenses?
a. Schedule C, Profit or Loss From Business
b. Schedule D, Capital Gains or Losses
c. Schedule E, Supplemental Income and Loss
d. Schedule F, Profit or Loss from Farming
4. Combat pay _____________________
a. May increase the Earned Income Credit
b. Is reported on Form W-2 Box 12 with Code Q
c. May increase the Child Tax Credit
d. All of the above

Answer 1

No, William and Nancy cannot claim $14,142 as their total rental expenses on their joint return. Combat pay is not represented by Code "Q" in box 12a of William's W-2. Schedule E is used to report rental income and expenses. Combat pay may increase the Earned Income Credit, is reported on Form W-2 Box 12 with Code Q, and may increase the Child Tax Credit.

Step-by-step explanation:

No, William and Nancy cannot claim $14,142 as their total rental expenses on their joint return. The total rental expenses include various costs such as insurance, management fees, repair costs, real estate property tax, mortgage interest, and depreciation. Adding up all these expenses mentioned in the scenario, the total rental expenses come out to be $12,642. Therefore, the statement is false.

The correct answer for question 2 is False. Code "Q" in box 12a of William's W-2 does not represent combat pay.

Question 3 requires the use of Schedule E to report rental income and expenses. Schedule C is used for reporting profit or loss from business, Schedule D for capital gains or losses, and Schedule F for profit or loss from farming. So the correct answer is c. Schedule E.

Combat pay may increase the Earned Income Credit, is reported on Form W-2 Box 12 with Code Q, and may increase the Child Tax Credit. Therefore, answer option d. All of the above is the correct choice for question 4.