Problem Facts. Larry K. and Cathy L. Zepp have been married 19 years. Larry is 62 years old (Social Security number 123-45-6789) while Cathy is 57 years old (Social Security number 123-45-6788). They live at 1234 Elm Dr. in Indianapolis, Indiana 46202. The couple uses the cash method of accounting and files their return on a calendar-year basis. They are tired of politics and do not want to contribute to the presidential election campaign.

a. Larry is a salesman employed by DSK Industries. This year he earned $110,000. Federal and state income taxes withheld were $17,000 and $6,000 respectively.

b. Cathy recently completed a graduate degree in computer technology. She freelances as an independent contractor in computer graphics. She uses her own name as the name of her business. Her earnings received from various engagements were $12,000. Her only expenses paid during the year were for miscellaneous office supplies of $3,000. She paid estimated federal taxes during the year of $1,000 ($250 on each due date). Her business uses the cash method of accounting.

c. Other income earned by the couple included interest income of $3,000 from a certificate of deposit issued by Highland National Bank and $975 of interest from tax-exempt bonds issued by the State of Indiana.

d. The couple paid moving expenses of $2,000 that are fully deductible. e. The couple owns a duplex that it rents out. It is located at 111 Nowhere Ave., Indianapolis, Indiana. Their rental records reveal the following information for the year.