income tax test 1
Rita files her income tax return 35 days after the due date of the return without obtaining an extension from the IRS. Along with the return, she remits a check for $40,000, which is the balance of the tax she owes. Disregarding the interest element, what are Rita's penalties for failure to file and for failure to pay?
$4,000, determined as follows: Failure to pay penalty [0.5% ´ $40,000 ´ 2 months] $ 400 Plus: Failure to file penalty [5% ´ $40,000 ´ 2 months] $4,000 Less failure to pay penalty for the same period (400) 3,600 Total penalties $4,000
Elijah and Anastasia are married and have five married children and nine minor grandchildren. For 2023, what is the maximum amount they can give to their family (including the sons-and daughters-in-law) without using any of their unified transfer tax credit?
646,000 (19 people *34,000 each)
The Adams Independent School District wants to sell a parcel of unimproved land that it does not need. Its three best offers are as follows: from the state's Department of Public Safety (DPS), $2,300,000; from the Second Baptist Church, $2,200,000; and from Baker Motors, $2,100,000. DPS would use the property for a new state highway patrol barracks, Second Baptist would start a church school, and Baker would open a car dealership. If you are the financial adviser for the school district, which offer would you prefer? Why?
Although the Baker Motors bid is the lowest from a long-term financialstandpoint, it is the best. The proposed use of the property by the state and thechurch probably will make it exempt from the school district's ad valorem tax. Thiswould hardly be the case with a car dealership. In fact, commercial properties (e.g., cardealerships) often are subject to higher tax rate
A taxpayer, age 64, purchases an annuity from an insurance company for $50,000. She is to receive $300 per month for life. Her life expectancy is 20.8 years from the annuity starting date. Assuming that she receives $3,600 this year, how much is included in her gross income? Round any percentages to two decimal places. Round the final answer for the income to the nearest dollar.
The tax accounting problem associated with receiving payments under an annuity contract is one of apportioning the amounts received between recovery of capital and income. The annuitant can exclude from income (as a recovery of capital) the proportion of each payment that the investment in the contract bears to the expected return under the contract. The exclusion amount is calculated as follows: (Investment/Expected Return)Annuity Payment = Exclusion. The expected return is the annual amount to be paid to the annuitant multiplied by the number of years the payments will be received. The payment period may be fixed (a term certain) or may be for the life of one or more individuals. When payments are for life, the taxpayer generally must use the annuity table published by the IRS to determine the expected return. The return of capital is calculated by multiplying the appropriate multiple (life expectancy) by the annual payment. The exclusion ratio (investment expected/return) applies until the annuitant has recovered their investment in the contract. Once the investment is recovered, the entire amount of subsequent payments is taxable. If the annuitant dies before recovering the investment, the unrecovered cost (adjusted basis) is deductible in the year the payments cease (usually the year of death). The taxpayer's expected return is $300 × 12 × 20.8 = $74,880. The exclusion percentage is 0.667735, rounded to 66.77% ($50,000 investment $74,880). The annual tax-free recovery of capital is $2,403.72 (66.77% × $3,600 annual payment) with the remaining $1,196.28, rounded to $1,196 ($3,600 − $2,403.72), included in gross income.
During the year, Tamara had capital transactions resulting in gains (losses) as follows: Sold stock in ABC Company (acquired two years ago) (1,500) Sold collectible coins (held for more than one year) 2,000 Sold stock in XYZ Company (acquired six months ago) (4,100) Sold stock in LMN Company (acquired three years ago) 500 Determine Tamara's net capital gain or loss as a result of these transactions
Individual taxpayers combine capital gains and losses in a specific netting process. To arrive at a net capital gain, capital losses must be taken into account. The capital losses are aggregated by holding period (short-term and long-term) and applied against the gains in that category. If excess losses result, they are then shifted to the category carrying the highest tax rate. A net capital gain will occur if the net long-term capital gain (NLTCG) exceeds the net short-term capital loss (NSTCL). For individual taxpayers, net capital loss can be used to offset ordinary income of up to $3,000 ($1,500 for married persons filing separate returns). If a taxpayer has both short- and long-term capital losses, the short-term category is used first to arrive at the $3,000. Any remaining net capital loss is carried over indefinitely until exhausted. When carried over, the excess capital loss retains its classification as short- or longterm. Tamara has a net long-term capital gain of $1,000 ($2,000 + $500 − $1,500) and a short-term capital loss of $4,100. When netted, the result is an overall net short-term capital loss of $3,100. As a result, Tamara is allowed a $3,000 deduction in the current year and has a $100 short-term capital loss carryover to the following year.
Rusty has been experiencing serious financial problems. His annual salary was $100,000, but a creditor garnished his salary for $20,000 [i.e., the employer paid the creditor (rather than Rusty) the $20,000]. To prevent creditors from attaching his investments, Rusty gave his investments to his 21-year-old daughter, Rebecca. Rebecca received $5,000 in dividends and interest from the investments during the year. Rusty transferred some cash to a Swiss bank account that paid him $6,000 interest during the year. Rusty did not withdraw the interest from the Swiss bank account. Rusty also hid some of his assets in his wholly owned corporation that received $150,000 rent income but had $160,000 in related expenses, including a $20,000 salary paid to Rusty. Rusty reasons that his gross income should be computed as follows: Salary received $80,000 Loss on rental property ($150,000 -$160,000) (10,000) Gross income =$70,000 Determine Rusty's gross income for the year, and explain any differences between your calculation and Rusty's.
Rusty earned $100,000 and used $20,000 to pay his debts. Rusty must include his gross income from all geographic sources. The corporation is the owner of the property; therefore, the rent income and expenses are those of the corporation. Rusty received the salary from the corporation, a separate entity. Salary $100,000 Interest 6,000 Loss -0- Salary 20,000 Gross income $126.000 Rusty is not taxed on the $5,000 interest and dividends received by Rebecca because she is the owner of the income-producing property.
Compute the taxable income for 2023 for Emily on the basis of the following information. Her filing status is single. Salary $85,000 Interest income from bonds issued by Xerox 1,100 Alimony payments received (divorce occurred in 2014) 6,000 Contribution to traditional IRA 6,500 Gift from parents 25,000 Short-term capital gain from stock investment 2,500 Amount lost in football office pool 500 Age 40
Salary $ 85,000 Interest on bonds 1,100 Alimony received 6,000 Capital gain 2,500 IRA contribution (6,500) AGI $ 88,100 Standard deduction (single) (13,850) Taxable income $ 74,250 The alimony payments, bond interest, and capital gain are includible in gross income (i.e., are taxable). The gift is a nontaxable exclusion. The IRA contribution is a for AGI deduction. The gambling losses are not deductible
Bigham Corporation, an accrual basis calendar year taxpayer, sells its ser-vices under 12-and 24-month contracts. The corporation provides services to each customer every month. On July 1, 2023, Bigham sold the following customer contracts: Length of Contract Total Proceeds 12 months $14,000 24 months $24,000 Determine the income to be recognized in taxable income in 2023 and 2024. Length of Contract 2023 Income 2024 Income 12 months a. c. 24 months b. d.
Taxpayers generally must recognize advance payments as income in the year they are received. Code § 451(c) permits an accrual basis taxpayer to adopt an accounting method to recognize in the year of receipt only what is reported in their financial statement. The remaining amount must be recognized in the year following receipt regardless of when it will be earned. The election to defer does not apply to prepaid rent or prepaid interest. Advance payments for these items are always taxed in the year of receipt. Length of Contract 2023 income 12 months a. $14,000 × 6/12 = $7,000 24 months b. $24,000 × 6/24 = $6,000 2024 income 12 months c. $14,000 × 6/12 = $7,000 24 months d. $24,000 × 18/24 = $18,000 Note that, for the 24-month contracts, Bigham will only report $12,000 in its 2024 financial statements. The remaining $6,000 is reported in Bigham's 2025 financial statements. Code § 451(c) does not allow for deferral beyond the year subsequent to the year the advance payment was received.
Compute the 2023 tax liability and the marginal and average tax rates for the following taxpayers (use the 2023 Tax Rate Schedules in Appendix A for this purpose): a. Chandler, who files as a single taxpayer, has taxable income of $98,700. b. Lazare, who files as a head of household, has taxable income of $61,100
The basic tax rate structure is progressive, with current rates ranging from 10% to 37%. Since 2023 Tax Tables have not yet been released, the solution is determined using the 2023 Tax Rate Schedules (Appendix A). Several terms are used to describe tax rates. The rates in the Tax Rate Schedules are often referred to as statutory (or nominal) rates. The marginal rate is the highest rate applied in the tax computation for a particular taxpayer. The average rate is equal to the tax liability divided by taxable income. a. Chandler: Using the rates for a single taxpayer, her tax liability is $17,088. 1 Her marginal rate is 24%. Her average rate is 17.31% ($17,088 / $98,700). b. Lazare: Using the rates for filing as a head of household, his tax liability is $7,143. 2 His marginal rate is 22%. His average rate is 11.69% ($7,143 /$61,100). $98,700 − $95,375 = $3,325. $3,325 × 24% = $798. $798 + $16,290 = $17,088. 2$61,100 − $59,850 = $1,250. $1,250 × 22% = $275. $275 + $6,868 = $7,143.
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Under Texas law, the rents and dividends belong to the community even though this income is derived from separate property. Under California law, the income is community or separate depending on the state law classification of the underlying assets. In this case, the interest is community income because the savings account was funded with community property
During 2023, Inez (a single taxpayer) had the following transactions involving capital assets: Gain on the sale of unimproved land (held as an investment for 3 years) $6,000 Loss on the sale of a camper (purchased 2 years ago and used for family vacations) (5,000) Gain on the sale of ADM stock (purchased 9 months ago as an investment) 2,450 Gain on the sale of a fishing boat and trailer (acquired 18 months ago at an auction and used for recreational purposes) 1,000 How much income tax results from these capital asset transactions if: a. Inez has taxable income of $188,450? b. Inez has taxable income of $32,25
a. Inez has the following results: LTCG (land) $6,000 STCG (ADM stock) 2,450 LTCG (boat and trailer) 1,000 Loss on camper (nondeductible) -0- Inez has a net LTCG of $7,000 and a net STCG of $2,450. Given her taxable income, Inez has a marginal tax rate of 32%. As a result, her tax is $1,834 [($7,000 15%) + ($2,450 32%)]. b. $294 [($7,000 0%) + ($2,450 12%)]. Inez has a net LTCG that will be taxed at 0%; her net STCG will be taxed at her marginal tax rate of 12%.
Compute the 2023 standard deduction for the following taxpayers. a. Ellie is 15 and claimed as a dependent by her parents. She has $800 in dividend income and $1,400 in wages from a part-time job. b. Ruby and Woody are married and file a joint tax return. Ruby is age 66, and Woody is 69. Their taxable retirement income is $10,000. c. Shonda is age 68 and single. She is claimed by her daughter as a dependent. Her earned income is $500, and her interest income is $125. d. Frazier, age 55, is married but is filing a separate return. His wife itemizes her deductions
a. $1,800. When filing her own tax return, Ellie is limited to the greater of $1,250 or $1,800 (the sum of the earned income for the year plus $400). b. $30,700. A taxpayer who is age 65 or over or blind in 2023 qualifies for an additional standard deduction of $1,500 or $1,850, depending on filing status. Ruby and Woody's standard deduction is $27,700 (married filing jointly) plus the additional $1,500 for Ruby being age 65 or older and another $1,500 for Woody's being age 65 or older. c. $3,100. When filing her own tax return, Shonda is limited to the greater of $1,250 or $900 (the sum of the $500 of earned income for the year plus $400). This limitation applies only to the basic standard deduction. A dependent who is 65 or older or blind is also allowed the additional standard deduction amount on his or her own return. Therefore, Shonda's standard deduction is $3,100 ($1,250 + $1,850). d. $0. Frazier is ineligible to use the standard deduction and therefore must itemize because he is married filing a separate return when his spouse itemizes deductions
Determine the amount of the standard deduction allowed for 2023 in the following independent situations. In each case, assume that the taxpayer is claimed as another person's dependent. a. Curtis, age 18, has income as follows: $700 interest from a certificate of deposit and $13,600 from repairing cars. b. Mattie, age 18, has income as follows: $600 cash dividends from investing in stock and $4,700 from working as a lifeguard at a local pool. c. Jason, age 16, has income as follows: $675 interest on a bank savings account and $1,000 for painting a neighbor's fence. d. Ayla, age 15, has income as follows: $400 cash dividends from a stock investment and $500 from grooming pets. e. Sarah, age 67 and a widow, has income as follows: $500 from a bank savings account and $3,200 from babysitting.
a. $13,850. Although $13,600 (earned income) + $400 = $14,000, the amount allowed cannot exceed the standard deduction available in 2023 for single taxpayers. b. $5,100. $4,700 (earned income) + $400. c. $1,400. The greater of $1,250 or $1,400 [$1,000 (earned income) + $400]. d. $1,250. The greater of $1,250 or $900 [$500 (earned income) + $400]. e. $5,450. $3,200 (earned income) + $400 + $1,850 (additional standard deduction)
With regard to the IRS audit process, comment on the following: a. The audit is resolved by mail. b. The audit is conducted at the office of the IRS. c. A "no change" RAR results. d. A special agent joins the audit team
a. A correspondence audit is probably involved. These audits involve a limited number of issues (i.e., taxpayer failed to report some dividend income) and most often are easily resolved. b. An audit that is conducted in an IRS office is called an office audit. c. The revenue agent's report (RAR) accepts the taxpayer's return as filed. d. When a special agent becomes involved, this usually means that fraud is suspected
Compute the taxable income for 2023 in each of the following independent situations: a. Aaron and Michele, ages 40 and 41, respectively, are married and file a joint return. In addition to four dependent children, they have AGI of $125,000 and itemized deductions of $29,000. b. Sybil, age 40, is single and supports her dependent parents who live with her, as well as her grandfather who is in a nursing home. She has AGI of $80,000 and itemized deductions of $8,000. c. Scott, age 49, is a surviving spouse. His household includes two unmarried stepsons who qualify as his dependents. He has AGI of $76,800 and itemized deductions of $10,100. d. Amelia, age 33, is an abandoned spouse who maintains a household for her three dependent children. She has AGI of $58,000 and itemized deductions of $10,650. e. Chang, age 42, is divorced but maintains the home in which he and Lei, his daughter, live. Lei is single and qualifies as Chang's dependent. Chang has AGI of $65,400 and itemized deductions of $14,200
a. AGI $125,000 Less: Itemized deductions (greater than standard deduction) (29,000) =Taxable income $ 96,000 b. AGI $ 80,000 Less: Standard deduction (head of household) (20,800) =Taxable income $ 59,200 c. AGI $ 76,800 Less: Standard deduction (surviving spouse) (27,700) Taxable income $ 49,100 d. AGI $ 58,000 Less: Standard deduction (head of household) (20,800) =Taxable income $ 37,200 e. AGI $ 65,400 Less: Standard deduction (head of household) (20,800) =Taxable income $ 44,600
Al is a medical doctor who conducts his practice as a sole proprietor. Dur-ing 2023, he received cash of $280,000 for medical services. Of the amount collected, $40,000 was for services provided in 2022. At the end of 2023, Al had accounts receivable of $60,000, all for services rendered in 2023. In addition, at the end of the year, Al received $12,000 as an advance payment from a health mainte-nance organization (HMO) for services to be rendered in 2024. Compute Al's gross income for 2023: a. Using the cash basis of accounting. b. Using the accrual basis of accounting. c. Advise Al on which method of accounting he should use.
a. Al's gross income for 2023 on the cash basis is $292,000 ($280,000 + $12,000), which is the amount he actually collected in that year. b. Al's gross income computed by the accrual method is as follows: Cash received $292,000 Less: Income received but will not be earned until 2024 (12,000) Less: Beginning-of-the-year accounts receivable (40,000) Plus: End-of-year accounts receivable 60,000 Gross income $300,000 c. Al should consider using the cash method of accounting so that he will not have to pay income taxes on uncollected accounts receivable. The tax law does not require Al to use the accrual method.
During the year, Alva received dividends on her stocks as follows: Amur Corporation (a French corporation whose stock is traded on an established U.S. securities market) $60,000 Blaze, Inc., a Delaware corporation 40,000 Grape, Inc., a Virginia corporation 22,000 a. Alva purchased the Grape stock three years ago, and she purchased the Amur stock two years ago. She purchased the Blaze stock 18 days before it went ex-dividend and sold it 20 days later at a $5,000 loss. Alva had no other capital gains and losses for the year. She is in the 32% marginal tax bracket. Compute Alva's tax on her dividend income for the year. b. Alva's daughter, who is 25 and not Alva's dependent, had taxable income of $6,000, which included $1,000 of dividends on Grape, Inc. stock. The daughter had purchased the stock two years ago. Compute the daughter's tax liability on the dividends. c. Alva can earn 4.5% before-tax interest on a corporate bond or a 4% dividend on a preferred stock. Assuming that the appreciation in value is the same, which investment produces the greater after-tax income? d. The same as part (c), except that Alva's daughter i
a. Amur dividends (Note 1) $ 60,000 Blaze dividends (Note 2) 40,000 Grape dividends 22,000 Total dividend income $122,000 Note 1: Even though Amur is a foreign corporation, the dividend is a qualified dividend because its stock is traded on an established U.S. securities market. Note 2: The dividend paid by Blaze is not a qualified dividend because the holding period requirement is not satisfied (i.e., must be held more than 60 days during the 121-day period beginning 60 days before the ex-dividend date). Qualified dividends Amur dividend $60,000 Grape dividend 22,000 = $82,000 Applicable rate × 15% Tax on qualified dividends $ 12,300 Non-qualifying dividends Blaze dividend $40,000 Applicable rate × 32% Tax on nonqualified dividends $12,800 Total tax on dividends $25,100 b. The daughter is in the 10% marginal tax bracket. She has $1,000 of qualified dividends that are eligible for the alternative tax rate of 0% (rather than the usual 15%). So the daughter's tax liability on the dividends is $0 ($1,000 × 0%). c. Alva's after-tax return on the bond is 3.06% [(1 − 0.32)(0.045)]. Her after-tax return on the stock is 3.4% [(1 − 0.15)(0.04)]. Therefore, the stock yields the greater after tax return because any appreciation in value is the same. d. The daughter is in the 10% marginal tax bracket. Therefore, her after-tax return on the bond is 4.05% [(1 − 0.10)(0.045)]. Her after-tax return on the stock is 4.0% [(1 − 0.00)(0.04)]. Therefore, the bond yields the greater after-tax return.
Contrast FICA and FUTA as to the following: a. Purpose of the tax. b. Upon whom imposed. c. Governmental administration of the tax. d. Reduction of tax based on a merit rating system.
a. FICA offers some measure of retirement security, and FUTA provides a modest source of income in the event of loss of employment. b. FICA is imposed on both employer and employee, while FUTA is imposed only on the employer. c. FICA is administered by the Federal government. FUTA, however, is handled by both the Federal and state government. d. This applies only to FUTA. The merit system rewards employers who have low employee turnover because this reduces the payout of unemployment benefits.
Nadia died in 2022 and is survived by her husband, Jerold (age 44); her married son, Travis (age 22); and her daughter-in-law, Macy (age 18). Jerold is the executor of his wife's estate. He maintains the household where he, Travis, and Macy live and furnishes all of their support. During 2022 and 2023, Travis is a full-time student, and Macy earns $7,000 each year from a part-time job. Travis and Macy do not file jointly during either year. What is Jerold's filing status for 2022 and 2023 if all parties reside in: a. Idaho (a community property state)? b. Kansas (a common law state)?
a. For 2022, Jerold can file a joint return. As executor of Nadia's estate, he can consent to file a joint return on her behalf. For 2023, Jerold can qualify as a surviving spouse. Travis is a qualifying child due to his student status, and Macy is a qualifying relative—her gross income of $3,500 (50% × $7,000) meets the gross income test. As a result, Jerold has two dependents. b. The answer as to filing status does not change: joint return for 2022 and surviving spouse for 2023. Kansas is a common law state, so all of the $7,000 Macy earns is assigned to her. Travis is a qualifying child. Macy will not be a dependent under the qualifying relative category because of the gross income test. As a result, Jerold has only one dependent (Travis).
The commissioners for Walker County are actively negotiating with Falcon Industries regarding the location of a new manufacturing plant in the area. Since Falcon is considering several other sites, a "generous tax holiday" may be needed to influence the final choice. The local school district is opposed to any "generous tax holiday." a. What would probably be involved in a generous tax holiday? b. Why would the school district be opposed?
a. In this case, the "tax holiday" probably concerns exemption from ad valorem taxes. "Generous" could involve an extended period (e.g., 10 years) and include both reality and personality. b. The school district could be affected in two ways. First, due to the erosion of the tax base, less revenue would be forthcoming. Second, new workers would mean new families and more children to educate.
Vito is the sole shareholder of Vito, Inc. He also is employed by the corpora-tion. On June 30, 2023, Vito borrowed $8,000 from Vito, Inc., and on July 1, 2024, he borrowed an additional $10,000. Both loans were due on demand. No interest was charged on the loans, and the Federal rate was 4% for all relevant dates. Vito used the money to purchase a boat, and he had $2,500 of investment income. Determine all of the tax consequences to Vito and Vito, Inc., in each of the following situations: a. The loans are considered employer-employee loans. b. The loans are considered corporation-shareholder loans.
a. It is unlikely this employer-employee loan would qualify for the $10,000 exception because it appears the loan is made to avoid tax on what would otherwise be taxable compensation. Assuming that it could qualify initially, the total loan exceeds $10,000 as of July 2024. The $100,000 exception does not apply to these loans as it is only available for gift loans. Assuming that the initial loan qualified for the $10,000 exemption, interest is imputed on the $18,000 amount of the loans for the period July through December 2024. Vito, Inc., has interest income, and Vito has interest expense of $360 [0.04($18,000 × 6/12)]. Vito also has compensation income of $360, and Vito, Inc., has compensation expense of the same amount. Note that Vito, Inc's interest income and compensation expense will offset, causing no net change in its taxable income. It is likely that the compensation will increase Vito's gross income with no offsetting deduction. Employer-employee loans are not eligible for the $100,000 exemption. If the loan did not qualify for the $10,000 exemption, Vito would have compensation income and interest expense as calculated in part b. b. It is similarly unlikely that this corporation-shareholder loan would qualify for the $10,000 exemption because it appears that a principal purpose of the loan is to avoid tax on what would otherwise be a taxable dividend. Nor is it eligible for the $100,000 exception, which is only available for gift loans. Therefore, for 2023 and 2024, the corporation has interest income and dividends paid (not deductible) as follows: 2023 ($8,000 × 4% × 6/12) $160 2024 ($8,160 × 4% × 6/12) $163 ($8,160 + $163 + $10,000)(0.04)(6/12) = -366 $529
Walter and Nancy provide 60% of the support of their daughter (age 18) and son-in-law (age 22). The son-in-law (John) is a full-time student at a local university, and the daughter (Stella) holds various part-time jobs from which she earns $11,000. Walter and Nancy engage you to prepare their tax return for 2023. During a meeting with them in late March 2024, you learn that John and Stella have filed a joint return. What tax advice would you give based on the following assumptions? a. All parties live in Louisiana (a community property state). b. All parties live in New Jersey (a common law state).
a. Regardless of where the parties reside, the damage of the joint return needs to be undone. The joint return test applies to both the qualifying child and qualifying relative categories of dependents. The situation can be rectified by filing separate returns on or before April 15, 2024. In Louisiana, half of Stella's income, or $5,500 (50% × $11,000), is assigned to John. Being a qualifying child, Stella can be claimed as a dependent. John, however, is subject to the gross income test contained in the qualifying relative category. Because $5,500 exceeds $4,700, John cannot be claimed as a dependent. b. As noted in part a., the joint return problem needs to be resolved. In New Jersey, none of Stella's income is assigned to John. Consequently, John now meets the gross income test of a qualifying relative. Stella also can be claimed as a dependent because the gross income test does not apply to the qualifying child category
Wesley and Camilla (ages 90 and 88, respectively) live in an assisted care facility and for 2022 and 2023 received their support from the following sources: Percentage of support Social Security benefits 16% Son 20% Niece 29 Cousin 12 Brother 11 Family friend (not related) 12 a. Which persons are eligible to claim Wesley and Camilla as dependents under a multiple support agreement? b. Must Wesley and Camilla be claimed as dependents by the same person(s) for both 2022 and 2023? Explain. c. Who, if anyone, can claim their medical expenses
a. Son, niece, and brother. The cousin and the family friend do not meet the relationship test. b. No. The eligible parties can designate who will claim the dependent as they choose. c. If the eligible person who is selected to claim the dependent also pays the medical expenses, that person can claim them.
Imani and Doug were divorced on December 31, 2023, after 10 years of marriage. Their current year's income received before the divorce was as follows: Doug's salary $41,000 Imani's salary 55,000 Rent on apartments purchased by Imani 15 years ago 8,000 Dividends on stock Doug inherited from his mother 4 years ago 1,900 Interest on a savings account in Imani's name funded with her salary 2,400 Determine Imani's and Doug's separate gross incomes assuming that they live in: a. California b. Texas
a. The transfers of the stock and residence pursuant to the divorce are nontaxable to Nell and Kirby. Nell assumes Kirby's basis in the stock of $150,000, and Kirby's basis in the house is $300,000. The $50,000 cash paid by Kirby will be alimony unless the agreement specifies that the payment is "not alimony." However, because the divorce agreement is finalized after 2018, the $50,000 will have no impact on the taxable income of Kirby or Nell. b. Regardless of their classification as alimony or property settlement, the payments are neither included in Nell's gross income nor deductible by Kirby since they are pursuant to a divorce agreement reached after 2018. c. The monthly payments of $1,200 are in part child support and in part alimony. The monthly amount that will continue after the occurrence of the contingency related to the child is considered alimony. Therefore, $300 per month is considered alimony, and the other $900 received each month is child support. However, regardless of their classification as alimony or child support, they are neither deductible by Kirby nor included in Nell's gross income. d. Even if the divorce were settled in 2017, the cash payments of $1,000 per month do not qualify as alimony because they will not cease upon Nell's death. Therefore, the payments would still be excluded from Nell's gross income and not deductible by Kirby.
compute the taxable social security benefits in each of the following situations a. Tyler and Candice are married and file a joint tax return. They have adjusted gross income of $46,000 before considering their social security benefits, no tax-exempt interest and $12,400 of social security benefits b. Tyler and Candice have adjusted gross income of $12,000 before considering their social security benefits, no tax-exempt interest, and $16,000 of social security benefits c. Tyler and Candice have adjusted gross income of $85,000 before considering their social security benefits, no tax-exempt interest, and $15,000 of social security benefits
a. Their includible Social Security benefits will be $10,540, the lesser of the following: 1. 85% × $12,400 Social Security benefits = $10,540. 2. Sum of: a. 85% × [$46,000 + 1/2($12,400) − $44,000 higher threshold amount] = $6,970 and b. Lesser of: 1. Amount calculated using the lower threshold amount, which is the lesser of: • 50% × $12,400 Social Security benefits = $6,200. • 50% × [$46,000 + 1/2($12,400) − $32,000] = $10,100. 2. $6,000. The sum equals $12,970 ($6,970 + $6,000). Because 85% of the Social Security benefits received is less than this amount, only $10,540 is included in the couple's gross income. b. The taxpayers must include $0 of the benefits in gross income. This is determined as the lesser of the following: 1. 50% × $16,000 Social Security benefits = $8,000. 2. 50% × [$12,000 + 1/2($16,000) − $32,000] = 50% × −$12,000 = −$6,000. None of the benefits would be taxable because the result is not a positive number. c. Their includible Social Security benefits will be $12,750, the lesser of the following: 1. 85% × $15,000 Social Security benefits = $12,750. 2. Sum of: a. 85% × [$85,000 + 1/2($15,000) − $44,000 higher threshold amount] = $41,225 and b. Lesser of: 1. Amount calculated using the lower threshold amount, which is the lesser of: • 50% × $15,000 Social Security benefits = $7,500 • 50% × [$85,000 + 1/2($15,000) − $32,000] = $30,250. 2. $6,000. The sum equals $47,225 ($41,225 + $6,000). Because 85% of the Social Security benefits received is less than this amount, only $12,750 is included in the couple's gross income.
For each of the following situations, determine whether the imputed interest rules should apply and, if so, how much interest must be imputed. Assume that all of the loans were made at the beginning of the tax year unless otherwise indicated. a. Mike loaned his sister $90,000 to buy a new home. Mike did not charge interest on the loan. The Federal rate was 5%. Mike's sister had $900 of investment income for the year. b. Nico's employer maintains an emergency loan fund for its employees. During the year, Nico's wife was very ill and he incurred unusually large medical expenses. He borrowed $8,500 from his employer's emergency loan fund for six months. The Federal rate was 5.5%. Nico and his wife had no investment income for the year. c. Jody borrowed $25,000 from her controlled corporation for six months. She used the funds to pay her daughter's college tuition. The corporation charged Jody 4% interest. The Federal rate was 5%. Jody had $3,500 of investment income for the year. d. Kait loaned her son, Jake, $60,000 for six months. Jake used the $60,000 to pay off college loans. The Federal rate was 5%, and Kait did not charge Jake any interest. Jake had dividend and interest income o
a. This loan is a gift loan between individuals that is eligible for the $100,000 exception. Although Mike's sister has $900 of investment income, interest is not imputed under this exception if the borrower's net investment income is not greater than $1,000. So the imputed amount is $0. b. This loan is an employer-employee loan for not greater than $10,000. Since there appears to be no tax avoidance motive, no interest is imputed. c. Interest is imputed on this loan. The $100,000 exception is not available on corporation-shareholder loans. The imputed interest would be calculated as follows: $25,000 × (5% − 4%) × 1/2 = $125 d. The loan from Kait to Jake is classified as a gift loan between individuals that is eligible for the $100,000 exception. The imputed interest income for the six months is calculated as follows: $60,000 × 5% × 1/2 = $1,500 Under the $100,000 exception, the imputed interest is limited to Jake's net investment income of $2,100. In this case, the limit has no effect on the amount of imputed interest.
Determine the number of dependents in each of the following independent situations, and identify whether the dependent is a qualifying child or a qualifying relative. a. Andy maintains a household that includes a cousin (age 12), a niece (age 18), and a son (age 26). All are full-time students. Andy furnishes all of their support, and all are "members of the household." b. Mandeep provides all of the support of a family friend's son (age 20) who lives with her. She also furnishes most of the support of her stepmother, who does not live with her. c. Raul, a U.S. citizen, lives in Costa Rica. Raul's household includes a friend, Mariana, who is age 19 and a citizen of Costa Rica. Raul provides all of Mariana's support. d. Karen maintains a household that includes her ex-spouse, her mother-in-law, and her brother-in-law (age 23 and not a full-time student). Karen pro-vides more than half of all of their support; all meet the gross income test. Karen is single and was divorced last year
a. Three. The niece is in the qualifying child category. The cousin and son are not, due to the relationship and age tests. They both fall within the qualifying relative category. b. Two. Both persons fall within the qualifying relative category. The stepmother meets the relationship test, and the family friend's son is a member of the taxpayer's household. c. None. Mariana is not a qualifying child under the exception to the citizenship or residency test. Raul is not her adoptive father. d. Three. All fall within the qualifying relative category and each meets the gross income test. The mother- and brother-in-law satisfy the relationship test. The exhusband is a member of the household, and he can qualify except in the year of the divorce. The brother-in-law's age and non-student status have no bearing on the dependency issue.
The Bluejay Apartments, a new development, is in the process of structuring its lease agreements. The company would like to set the damage deposits high enough that tenants will keep the apartments in good condition. The company is actually more concerned about damage than about tenants not paying their rent. a. Discuss the tax effects of the following alternatives: • $1,000 damage deposit with no rent prepayment. • $500 damage deposit and $500 rent for the final month of the lease. • $1,000 rent for the final two months of the lease and no damage deposit. b. Which option do you recommend? Why?
a. • The $1,000 damage deposit is not taxed in the year of receipt. • The damage deposit is not taxable at the time it is collected, but the $500 prepaid rent is taxed in the year of receipt. • The $1,000 prepaid rent is taxed in the year of receipt. b. The Bluejay Apartments should use the first option. Note that in either case, they will receive $1,000 at the signing of the lease and $1,000 less at the end of the lease term (because the rent was prepaid and/or because the deposit must be returned). By collecting the $1,000 damage deposit, tax is deferred without affecting the pretax cash flow