Income tax Practice 5

B. Allie is 56 and was terminated from Big Stories, Incorporated this year. How much tax and penalty will Allie pay on the distribution?

$12,000. Allie will be taxed at 24% on the $50,000 withdrawal. Consequently, she will pay $12,000 in taxes ($50,000 × 24%). She is not subject to the 10% early distribution penalty on the $50,000 withdrawal because she is over the age of 55 and has separated from service from Big Stories Incorporated.

C. Allie is 67 and retired. How much tax and penalty will Allie pay on the distribution?

$12,000. Allie will be taxed at 24% on the $50,000 withdrawal. Consequently, she will pay $12,000 in taxes ($50,000 × 24%). She is not subject to the 10% early distribution penalty on the $50,000 withdrawal because she is over the age of 59 ½.

Allie received a $50,000 distribution from her 401(k) account this year that she established while working for Big Stories, Incorporated. Assume that her marginal ordinary tax rate is 24 percent. A. Allie is 45 and still employed with Big Stories, Incorporated. How much tax and penalty will Allie pay on the distribution?

$17,000. Allie will be taxed at 24% on the $50,000 withdrawal. Consequently, she will pay $12,000 in taxes (50,000 × 24%). In addition, she must pay a 10% early distribution penalty on the $50,000 withdrawal ($50,000 × 10% = $5,000 penalty).

Dave and Jane file a joint return. They sell a capital asset at a $140,000 loss. Even though they have no capital gains, $3,000 of the loss can still be deducted in the current year if they have at least $3,000 of ordinary income.

True

Larry received $4,250 from disability insurance that he purchased earlier this year from an insurance provider. Larry is allowed to exclude the $4,250 from his gross income.

True

The cash method of accounting requires taxpayers to recognize income when they receive it in the form of cash, property, or services.

True

Gross income includes all realized income that is recognized during the year.

True. Gross income is defined as realized income that is recognized during the year (income that is deferred or excluded income is not included in gross income).

Ralph owns a building that he is trying to lease. Ralph is a calendar-year, cash-method taxpayer and is trying to evaluate the tax consequences of three different lease arrangements. Under lease 1, the building rents for $540 per month, payable on the first of the next month, and the tenant must make a $540 security deposit that is refunded at the end of the lease. Under lease 2, the building rents for $5,940 per year, payable at the time the lease is signed, but no security deposit is required.

Under Kansas City Southern Industries ((1992), 98 TC 242) gross income does not include security deposits that must be returned to the taxpayer. Hence, Ralph does not include any of these payments in gross income this year. Moreover, the first rent payment is not included in his gross income this year because Ralph is a cash-method taxpayer, and he does not receive the payment until next year.

This year, Karl had the following capital gains (losses) from the sale of his investments: $6,000 LTCG, $30,000 STCG, ($12,000) LTCL, and ($18,000) STCL. What is the amount and nature of Karl's capital gains and losses?

6,000 net short-term capital gain. $6,000 (LTCG) + ($12,000) (LTCL) = ($6,000) Net Long-Term Capital Loss (NLTCL); $30,000 (STCG) + ($18,000) (STCL) = $12,000 Net Short-Term Capital Gain (NSTCG); ($6,000) Net Long-Term Capital Loss (NLTCL) + $12,000 Net Short-Term Capital Gain (NSTCG) = $6,000 Net Short-Term Capital Gain (NSTCG).

Last year Louis had itemized deductions of $10,830 and he chose to claim the standard deduction. Louis's itemized deductions included state income taxes paid of $1,780 and no other state or local taxes.

Because he didn't itemize his deductions, Louis received no tax benefit from the $930 tax overpayment. Hence, none of the refund is included in his gross income.

L. A. and Paula file as married taxpayers. In August of this year, they received a $5,420 refund of state income taxes that they paid last year. How much of the refund, if any, must L. A. and Paula include in gross income under the following independent scenarios? Assume the standard deduction last year was $25,900. A. Last year L. A. and Paula had itemized deductions of $19,800, and they chose to claim the standard deduction.

Because they did not itemize their deductions, L. A. and Paula received no benefit from the $5,420 tax overpayment. Hence, none of the refund is included in gross income.

C. Bessie is a partner in SULU Enterprises LLC. This year SULU reported that Bessie's share of rental income was $3,750 and her share of municipal interest was $1,10

Both are included in economic income. Bessie's share of rental income ($3,750) is included in gross income, and her share of municipal interest ($1,100) is excluded from her gross income.

Clyde picked up the check in December, but the check could not be cashed immediately because it was postdated January 10.

Clyde is not taxed until next year because the postdated check is a substantial restriction.

c. Paylate Corporation mailed the check to Clyde before the end of the year (and it was delivered before year-end). Although Clyde expected the bonus payment, he decided not to collect his mail until after year-end.

Clyde is taxed on $1,700 because it was delivered before year-end.

Clyde is a cash-method taxpayer who reports on a calendar-year basis. This year Paylate Corporation has decided to pay Clyde a year-end bonus of $1,700. Determine the amount Clyde should include in his gross income this year under the following circumstances. A. Paylate Corporation wrote the check and put it in Clyde's office mail slot on December 30 of this year, but Clyde did not bother to stop by the office to pick it up until after year-end.

Clyde is taxed on the $1,700 under the constructive receipt doctrine.

B. Paylate Corporation wrote the check and put it in Clyde's office mail slot on December 30 of this year, but Clyde did not bother to stop by the office to pick it up until after year-end. Paylate Corporation mistakenly wrote the check for $240. Clyde received the remaining $1,460 after year-end.

Clyde is taxed on the $240 - the remaining $1,460 is taxed in the next year.

B. Ben sold stock for $13,500 and paid a sales commission of $270. Ben purchased the stock several years ago for $5,400.

Economic income is present and has been realized through the sale. Return of capital limits the addition to gross income to the net gain on the sale, $7,830. The presumption in the law is that realized income is included in gross income. Thus, absent some additional facts which allow the deferral or exclusion of the income, recognition would follow realization, and the income would be taxed.

For the following independent cases, determine the amount of economic income and the amount that must be included in gross income (i.e., is it realized and recognized for tax purposes?). A. Asia owns stock that is listed on the New York Stock Exchange, and this year the stock increased in value by $18,250.

Economic income of $18,250 is present, but there is no realization for tax purposes. Without realization, there can be no recognition. Hence this will not be included in the gross income.

A taxpayer who receives money when taking out a bank loan will include the amount borrowed in their gross income under the all-inclusive definition of income.

False. Debt does not generate a net economic benefit because the amounts received are completely offset by the liability the taxpayer is required to pay from borrowing the funds.

D. What amount of the gain, if any, is subject to the preferential rate for certain capital gains?

Grayson's entire net long-term capital gain of $10,620 will be taxed at a preferential tax rate. The preferential tax rate of 15 percent will apply because Grayson's tax bracket of 24 percent puts him above the maximum zero rate amount and below the maximum 15-percent rate amount.

What is Grayson's overall net gain or loss from these transactions?

Grayson's net capital gain is $10,620, which is the net short-term loss offset against the net long-term capital gain for the year because the signs are opposite. This $30 short-term capital loss (from part a) is netted against the $10,650 net long-term capital gain (from part b). The resulting net capital gain is a long-term capital gain.

B. What is Grayson's net long-term gain or loss from these transactions?

Grayson's net long-term capital gain is $10,650, which is the net long-term gain less the long-term loss for the year. This is the net of the long-term capital gain of $13,640 (i.e. $5,630 from Stock C ($19,380 − $13,750) and $8,010 from Stock D ($14,200 − $6,190)) less the long-term capital loss of $2,990 from Stock A ($5,460 − $8,450).

Grayson (single) is in the 24 percent tax rate bracket and has sold the following stocks in 2023: A. What is Grayson's net short-term capital gain or loss from these transactions?

Grayson's net short-term capital loss is $30, which is the net of the short-term gains and losses for the year. This $30 loss is the short-term capital gain of $4,010 from Stock B (i.e. $20,410 − $16,400) less the short-term capital loss of $4,040 from Stock E (i.e. $4,100 − $8,140).

B. Last year L. A. and Paula claimed itemized deductions of $32,800. Their itemized deductions included state income taxes paid of $8,020 and no other state or local taxes.

L. A. and Paula received a tax benefit for the lesser of the refund ($5,420) or the excess of the itemized deductions above the standard deduction ($32,800 − $25,900 = $6,900). Hence, they must include the entire $5,420 refund in gross income.

C. Last year L. A. and Paula claimed itemized deductions of $29,000. Their itemized deductions included state income taxes paid of $10,560, which were limited to $10,000 due to the cap on state and local tax deductions.

Last year L. A. and Paula claimed itemized deductions of $29,000. Their itemized deductions included state income taxes paid of $10,560, which were limited to $10,000 due to the cap on state and local tax deductions.

Louis files as a single taxpayer. In April of this year he received a $930 refund of state income taxes that he paid last year. How much of the refund, if any, must Louis include in gross income under the following independent scenarios? Assume the standard deduction last year was $12,950. A. Last year Louis claimed itemized deductions of $13,230. Louis's itemized deductions included state income taxes paid of $1,780 and no other state or local taxes.

Louis received a tax benefit for the lesser of the refund ($930) or the excess of the itemized deductions above the standard deduction ($13,230 − $12,950 = $280). Hence, Louis must include $280 of the $930 refund in gross income.

Last year Louis claimed itemized deductions of $14,420. Louis's itemized deductions included state income taxes paid of $2,780 and no other state or local taxes.

Louis received a tax benefit for the lesser of the refund ($930) or the excess of the itemized deductions above the standard deduction ($14,420 − $12,950 = $1,470). Hence, Louis must include the entire $930 refund in gross income.

This year Santhosh purchased 1,000 shares of Cain common stock for $12 per share. At year-end, the Cain shares were worth $32 per share. What amount must Santhosh include in income this year?

None of the choices are correct - Santhosh has not realized any gain. No realization occurs until the stock is sold.

C. What amounts are included in Ralph's gross income this year if the tenant signs lease 3 on November 30 and makes timely payments under that lease?

Ralph must include both the rent paid ($540) and the security deposit ($1,080) in his gross income this year. Because the deposit can be applied toward rent, it is treated as prepaid rent. Under Regulations §1.61-8(b) prepayments of rent are included in gross income regardless of the accounting method employed by the taxpayer. Because he is a cash-method taxpayer, Ralph must include the rental payments he receives in gross income.

B. What amounts are included in Ralph's gross income this year if the tenant signs lease 2 on December 31 and makes timely payments under that lease?

Ralph must include the entire $5,940 this year.

Cammie received 100 NQOs (each option provides a right to purchase 10 shares of MNL stock for $10 per share). She started working for MNL Corporation four years ago (5/1/Y1) when MNL's stock price was $8 per share. Now (8/15/Y5) that MNL's stock price is $40 per share, she intends to exercise all of her options. After acquiring the 1,000 MNL shares with her stock options, she held the shares for over one year and sold (on 10/1/Y6) them at $60 per share. What are Cammie's taxes due on the grant d

Tax on grant date=0, Tax on exercise date= 9600, Tax on sale date= 3000

Shelly is a student who has received an academic scholarship to the University. The scholarship paid $4,000 for tuition, $500 for fees, and $400 for books. What amount must Shelly include in her gross income?

Zero - none of the above benefits is included in gross income. College students seeking a degree are allowed to exclude from gross income scholarships that pay for tuition, fees, books, supplies, and other equipment required for the student's courses. Any excess scholarship amounts (such as for room or meals) are fully taxable. The scholarship exclusion applies only if the recipient is not required to perform services in exchange for receiving the scholarship.