Income tax Exam 1
Interest & Dividends
Interest - Ordinary Income - Corporate and Treasury bonds - US Saving bonds Dividends - Qualified dividends (capital gain)
Portfolio Expenses
Investment interest expense - Interest on loans used to acquire investments - Interest expense itemized deduction ( no floor) --> For AGI -Limited to investment income for the year - Unlimited carryover
Portfolio Income
Investments, capital gain, annuities
You won the Nobel Prize and received with it a cash prize of $1.2 million. After receiving the prize money you donate it all to charity.
It's taxable because you received the money so it would be stated as a part of your income - If you would've donated the money straight to charity, then it wouldn't be taxable
Pam purchased an original issue zero-coupon corporation bond for $10,000. The bond is a 5-year bond with a yield of 8% semi-annually. Even though she will not receive any cash inflow during the first year of holding the bond, how much income will Pam have to report on her tax return due to this bond assuming she purchased it on January 1?
$10,000 * 8% = $400 $10,400 * 8% = $416 $416+400 = $816
Jane is a professional bull rider who practices as a sole proprietor. This year, she had net income of $120,000 from her business. She also paid $60,000 in wages to employees and has $25,000 in property (unadjusted basis of equipment purchased last year). Jane had no capital gains or qualified dividends during the year. Her taxable income before the deduction for QBI is $140,000. Calculate Jane's deduction for QBI:
$120,000 * 20% = $24,000 If her taxable income before QBI deduction would be $250,000 + she would have gotten no deduction.
Annuities
- Paid over a fixed time period - Paid over lifetime Annuity exclusion ratio (80%) = Original investment(200,000)/Expected value of annuity(250,000) Expected Value (250,000) = # of payments (10) * Amount of payments (25,000) 25,000 *80% = 20,000 tax free 5,000 taxable
Tie-breaking Rules
- Parent - Residency - Adjusted Gross Income
What is deductible? Gerald paid his car registration fee to the state of Utah for $150 this year.
$150
Schedule E
- Rents and royalties - Passive activity rules - Flow-through entities (s-corp)
Standard Deductions
- Single/MFS $12,000, MFJ $24,000, HoH $18,000 - Additional amount (blind or over 65) - $1,600 single/HoH, $1,300 MFJ/MFS - If claimed as a dependent - Greater of $1,050 - $350 + individual's earned income (to the regular standard deduction)
Deductions From AGI
- Standard deduction/ or - Itemized deductions - Qualified business deduction
What is deductible? Carl cashed out his certificate of deposit early because he needed the cash. Interest paid out was $500 and the fee for early withdrawal was $45
$45 is deductable
What is deductible? Gladys pays $45,000 to Bill annually in alimony and $15,000 in child support payments.
$45,000
State tax refunds
- State income taxes were deducted as itemized - State refund is received in current year - Standard deduction taken in prior year; not taxable - Itemized deduction taken: - Take difference between itemized and standard - If difference is more than tax refund, entire refund is taxable - If difference is less than tax refund, the difference amount is taxable
Deduction on Taxes
- State, local, and foreign taxes - Real estate taxes - Personal property taxes (only if PPT is assessed on existing value (boats, cars on age)) - Sales taxes (only for places without state income taxes (Nevada, Texas, Florida) - Limited to $10,000 per year (after 2017)
Dale is single and works as a mascot for a local minor league baseball team. Dale had $65,000 in AGI during 2018 and had the following medical expenses: Dental work $1,200 Surgery for broken elbow $4,500 Eye doctor fees $700 Fees for overnight stay at hospital $2,300 Prescription drugs $500 Over-the-counter drugs $750 Medical insurance premiums $1,800 (medical miles driven was 200 miles) a) How much will Dale be able to include as itemized deductions on his tax return (Assuming he's 41 years old)
$65,000 * 7.5% = $4,875 Total medical expenses ->1,200 + 4,500 + 700 + 2,300 + 500 + 1,800 + 36(200*18 cents=3600 cents) = $11,036 $11,036 + $4,875 = $6,161
Considerations in Developing Tax Systems
- Sufficiency - Effects of Change - Static v Dynamic Forecasting - Income v Substitution - Equity - Certainty - Convenience - Economics
Tax Planning
- Timing of income/deductions - Income shifting - Converting from high to low tax rates
Tax Research
- Understand the facts - Identify the issues - Locate relevant authorities - Analyze tax authorities - Document and communicate research results
Schedule C
- Will increase audit potential - Profit Motivated - Ordinary and necessary (reasonable) - Self-employment tax (15.3%)
Kenny Banya, a single father with three dependent children living with him, earned $90,000 in salary in 2018 as a risk management consultant. He also had the following during the year: - Received $500 in interest income - Paid $7,500 in mortgage interest - Paid $3,500 in interest on his personal vehicle loan - Paid $1,500 in state income taxes - Donated $11,000 in cash to charity Calculate Kenny's TAXABLE INCOME for 2018
$90,000 +500 =$90,500 -20,000 (7,500+1,500+11,000) = $70,500
Deductions For AGI
- Business expense - Rent/royalty expenses - Losses - Health insurance (SE) - Self-Employment tax (1/2) - Early withdrawal penalty - Alimony payments
Limitations
- Business purpose doctrine - Step-transaction doctrine - Substance over form - Economic substance
Income & Loss Categories
- Categories: Passive, Portfolio, Active Passive losses can't offset other categories Losses are carried over indefinitely Rental real estate exception (2,500)
Dependency Requirements
- Citizen or resident of the U.S. - Did not file a joint return with their spouse - Qualifying child - Qualifying relative
Tax Preparer Responsibility
- Comply with standards - Reasonable effort to inquire of clients - May rely on third party info if... - May use estimates if... - May depart from proceeding if... - Must inform taxpayers of errors promptly - Advice must show competence and professionalism
IRS Audit Types
- Corrections V Audits - Correspondence - Office - Field
Tax Penalties
- Failure to file - Failure to pay - Underpayment penalties - Fraudulent filing - Interest
Frank and Estelle divorced last year. George, their son, lives with Estelle. Frank covers all of Estelle and George's costs of living
- Frank files tax as single because they don't live with him - Estelle files single because she doesn't maintain 50% or more of the house
Abandoned Spouse = HoH
- Married at the end of the year - Joint return is not filed - Pays more than 1/2 costs to maintain household for the entire year that is the principal residence for a child for more than 1/2 year - Lived apart from the spouse for the last 6 months of the year - Taxpayer may file as HoH instead of MFS
Filing Status
- Married filing jointly (best) - Married Filing Separately - Qualifying Widow/Widower (same as MFJ, needs a dependent child) - Single (worst) - Head of Household
Itemized deductions
- Medical Expenses - Taxes - Interest - Charitable contributions
Head of Household
- Not married (or surviving spouse) at end of year - Maintain a household (over 1/2 of costs) - Have a 'qualifying person' live in their home for 1/2 of year
Gross Income Recognized - Realization
1) Engages in an activity with another 2) Property rights change
Peggy had a short-term loss of $1,800 and a long-term loss of $3,400 in 2016. How much of each loss will Peggy be able to deduct in 2016 and how much will she carryover to 2017?
1,800 + 3,400 = 5,200 2016 --> $3,000 2017 --> $2,200 LTCL
Jesse made the following donations during the year: $2,000 in cash to the American Red Cross $2,500 in cash to the local youth baseball league An urn valued at $45,000 that he purchased for $15,000 twenty years ago (given to his local church congregation) Caterpillar stock given to his church purchased five years ago for $9,000 (current worth is $5,000) Purchased season tickets to Aggie football for $1,200 (fair value of tickets is $800) $1,200 to his unemployed brother-in-law to fund his dog's ACL surgery How much will Jesse be able to include as itemized deductions on his tax return?
2,000 + 2,500 + 45,000 + 9,000 + 400 (half of tickets at fair value) = $58,900
Chip is a single tax payer and paid the following taxes during this tax year. Federal income tax withheld from paychecks $12,500 State income tax withheld from paychecks $2,500 Social Security tax withheld from wages $6,500 State income tax paid with prior year tax return $5,700 Vehicle license fees (based on the car's age) $150 4-wheeler license fees (based on value) $100 State sales tax paid $1,575 Real estate taxes paid on residence $2,100 Calculate the amount that Chip will be allowed to deduct as itemized deductions:
2,500 + 5,700 + 100 + 2,100 = $10,400 $10,000 limit so he will be able to deduct $10,000 as itemized deductions
What is deductible? Wick rents out a duplex and received $45,000 in rents during the year. He paid $35,000 on the mortgage on the property ($21,000 in interest), $4,500 in repairs, $6,000 in property taxes, and $2,000 in fuel driving to and from the property.
21,000 + 4,500 + 6,000 + 2,000 = $33,500
What is a Tax
A payment required by a government entity that is unrelated to any specific benefit or service rendered - Income tax - Employment taxes - Excise Taxes - Transfer taxes - State and Local taxes - Implicit taxes
Capital Gains & Losses
Advantages - Deferral of gains - Preferential rates (0% 15% 20%) Gain or Loss = Selling Price less Tax basis (cost) - Identification method (FIFO, SPECIFIC ID) - Short-term(-1yr) or Long-term (+1yr) Rates - 0% -15% -20%
Rental Real Estate Exeption
Allowed a $25,000 maximum deduction against ordinary income (loss) Must be active participants in the rental activity (at least 10% and be active in decision making) Phased out between 100k and 150k of AGI - 50 cents on the dollar
Corporation due date
April 15 - You can get an extension
Individual due date
April 15 - You can get an extension
Tax Rate Structures Progressive
As tax base increases so does tax rate
Tax Rate Structures Regressive
As tax base increases, rate decreases
Income Shifting
Between family members - Assignment of income - Arm's length transactions - Kiddie tax Owners and businesses - Duplication of lower tax brackets Across jurisdictions - Allocation of expenses - Transfer pricing
What money should you pay tax on?
Basically any money you have or get or find you should technically pay tax on
For-Profit Activities
Business - For AGI (normal business deductions) Investment - For AGI (rent, royalties, s-corp income) - From AGI (Investment interest(maybe))
Deductions on Hobby Losses
Business and pleasure? Determining factors: - Manner in which the activity is carried out - Expertise/success of taxpayer and/or advisors - Time and effort expended - History of income/losses in activity and amount of profits (profit in 3 of 5 years) - Elements of personal pleasure in the activity
Todd sold the following stocks in 2016 Buthead 12/31/11 $5,000 basis, amount realized $1,500 Daria 9/13/15 $12,500 basis, amount realized $15,600 Anderson 8/23/13 $5,200 basis, amount realized $12,400 Ezekiel 1/12/2016 $11,700 basis, amount realized $8,300 Assume that Todd is in the 25% tax bracket: a)Calculate Todd's net short-term capital gain/loss & his net long-term capital gain/loss
Buthead LT, Daria ST, Anderson LT, Ezekiel ST Buthead (3,500) LTCL, Anderson 7,200 LTCG = 3,700 NLTCG Daria 3,100 STCG, Ezekiel (3,400) STCL = (300) NSTCL 3700 - 300 = 3,400 NLTCG
Schedule F
Farming
Frank maintains a household that includes his son, George, and George's wife, Susan. George and Susan are both unemployed.
Can file as Head of Household
What is deductible? Arthur works full-time as an architect, but enjoys photography. The local high school has contracted with him to take photos of sporting events for promotions. The will pay him $12,000 annually. Arthur bought some expensive equipment in preparation for this assignment costing $25,000
Can take $12,000 for income but no deduction. (The Hobby Law)
How are net long term gains taxed?
Capital gain rates
Tax Rate Terms - Marginal
Change in Tax / Change in Income - Applies to the next additional increment of income
Passive activities
Taxpayer does not materially participate in passive activities - Rental activities - Limited partners (flow-through entities) - All other trade or business activities unless individual's activity is: - Regular - Continuous - Substantial Income is taxed at ordinary rates Losses subject to limits - Passive
Estelle maintains a household. Her aunt, Mary, is in a nursing home. Estelle can claim Mary as a dependent.
Estelle would have to file as single because Mary doesn't live with her for more than 1/2 the year.
Sally quits her job at V&V to work on her own. Her net income from her own firm was $70,000 in the first year. Calculate Sally's FICA taxes in this scenario and her self-employment tax deduction:
FICA = $70,000 * 92.35%(1-.0765) = $64,645 * 15.3% = $9,891 --> Tax Paid 1/2 SE deduction = $9,891/2 = $4,946
Other sources of taxable Income
Flow throughs (s-corp partnerships) - Separately stated items Alimony - Transfer of cash under agreement or decree - Not designated as something other than alimony - Spouses no longer cohabitate - Payments stop at death Prizes and awards - Scientific, literary, charitable achievement - Recipient didn't tak action - No future services owed - Prize is given to charity/government - Employee awards for length of service or safety achievement - Less than $400 - Not Cash
Which one is better: For AGI or From AGI
For AGI is better
Other sources of taxable income
Gambling - Winnings are gross income - Losses are deductible as itemized deductions Social Security Imputed - Bargain Purchases - Depends on relationship - Below-market loans - Difference between market and rate charged by the lender Discharge of indebtedness - Excludable if taxpayer is insolvent before and after - If discharge makes taxpayer solvent a portion is excludable
Miscellaneous Deductions
Gambling losses (not subject to 2% floor) --> up to gambling income
Individual Tax Formula
Gross Income - for AGI deductions = Adjusted gross Income (AGI) - from AGI deductions = Taxable Income * Tax Rate = Income tax + Other Taxes = Total Tax - Credits - Payments = Tax Due or (refund)
Gross Income Definition
Gross income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or service.
Estelle maintains a household. Her mother, Carrie, is in a nursing home. Estelle can claim Carrie as a dependent.
Head of Household because it's her mom.
Terms Ordinary Capital Gain Exempt
High tax 10 % 12 % 22% 24% 28% 32% 35% 37% Capital Gain 0%(10 %, 12%) 15%(22% 24% 28% 32% 35%) 20% (37%) Exempt NO TAX
You received $50,000 in cash payments from your former spouse this year.
If Alimony -> Taxable If child support -> Not taxable If part of settlement -> Not taxable
Types of Income
Income from Services -Earned Income -Wages -Service Revenue Income from Property -->Unearned -Interest -Dividends -Rents -Royalties -Capital Gains Other Sources --> Unearned -Flow through entities -Alimony -Prizes/awards
Passive Income
Income from activities that don't have material participation
At your graduation party your Uncle Tom asks you if his upcoming social security payments will be taxable
Maybe
Qualifying Relative
NOT a qualifying child Relationship - Descendant, ancestor, sibling, son/daughter of sibling, aunt/uncle, in-laws, anyone who lives with the taxpayer all year (cousin is not a qualifying relative unless he lives with them for the whole year. Support - Taxpayer pays more than 1/2 of living expenses
NSTCL and NLTCG
NSTCL -15,000, NLTCG 1000 -14,000 STCL 2018 -> -3000 2019 -> -11,000 STCL Sell car for 15,000 LTCG $4,000 NLTCG
John and Peggy Redcorn had combined income of $96,000 not including the following capital gains: Short-term capital gains $5,000 Short-term capital losses $(3,000) Long-term capital gains $12,000 Long-term capital losses $(1,000) Calculate the Redcorns tax liability in 2018 (assuming they have zero children):
Net Short-Term CG -> $5,000 - $3,000 = $2,000 Net Long-Term CG --> $12,000 - $1,000 = $11,000 $96,000 +$2,000 =98,000 -24,000 (standard deduction for MFJ) =74,000 +11,000 =85,000 85,000 -77,200 =7,800 * 15% = $1,170 74,000 -19,050 *10% = $1,905 =54,950 *12% = $6,594 $6,594 + 1,905 + 1,170 = $9,669
Netting of Gains/Losses
Net all ST gains and losses to get Net Short-Term Capital Gain (NSTCG) or loss (NSTCL) Net LT gains and losses to get Net Long-Term Capital Gain (NLTCG) or loss (NLTCL) If both return gains or losses, netting process ends Otherwise, net the outcomes together - NSTCG > NLTCL = Short-term - NSTCL > NLTCG = short-term - NLTCG > NSTCL = long-term - NLTCL > NSTCG = long-term Result is the net gain/loss Net short term gains are taxed at ordinary rates Net long term gains are taxed at capital gain rates Up to $3,000 in net capital losses can be deducted against ordinary income
Taxable or not? What if the tenant paid the rent in advance but had not decided whether or not to renew the lease in January and if they did not you would be required to refund the check?
Not taxable - Claim of right
Taxable or not? Last year you had $4,000 withheld from your paycheck for state income taxes. This year, when you filed your return you received a refund of $500 of the money withheld. Is the $500 refund taxable?
Not taxable - Recovery of amounts previously deducted
How are net short term gains taxed?
Ordinary rates
Deduction for Qualified Business Income
Partnership, S-Corp, Sole Proprietorship Lesser of: - 20% of QBI (after wage limits) - 20% of excess of taxable income over taxpayer's net capital gains Qualified Business (any trade/business other than) - Specified service trade/business - Health, law, consulting, athletics, financial svcs, brokerage, etc. - Architecture and engineering are specifically excluded Limitations: greater of... - 50% of wages paid or - Sum of 25% of wages plus 2.% of the unadjusted basis of all qualified property immediately after acquisition
Limitations
Personal use assets (Gains taxable, losses not deductible) Related party sales (Dad paid 10,000, you buy for 8,000. You sell for 10,000 you get gain but dad doesn't get deductables) Wash Sales
What does QBI stand for?
Qualified Business Income
Education Deductions
Qualified Education Loans - Interest expense - Limited at $2,500 - Phases out gradually when modified AGI reaches $65,000 ($135,000 MFJ) up to $80,000 ($165,000 MFJ)
Deductions on Charitable Contributions
Qualified charitable organizations - Exempt Organizations Select Check Tool (IRS.gov) Generally limited to 60% of taxpayer's AGI Contributions of money - Deductible in year paid - Transportation and travel for charitable purpose ($.14/mile) Contributions of property - Capital gain property - Fair market value is deductible (Car is worth what you can sell it for, If you buy a painting for 10K and donate it and now its worth 100K you can only deduct 10K) - Appreciation is not included as gross income - Ordinary income property - Deduct the lesser of the FMV or property's adjusted basis
Deductions on Interest
Qualified residence mortgage interest - Acquiring, constructing, substantially improving - Limited to $750k of acquisition indebtedness Investment interest - Limited to net investment income
Qualifying person
Qualifying Child - Unmarried - Or married but taxpayer can claim exemption Qualifying relative - Lives with taxpayer 1/2 year (exept mom & dad, they don't have to live with you for 1/2 year or more) - Taxpayer can claim as a dependent - Related through qualifying family relationship
Medical Deductions
Qualifying Expenses - Care, prevention, diagnosis, cure of... - Injury, disease, or bodily function - Not reimbursed by health insurance or paid through spending account (HSA) - (Can't deduct cosmetic surgery) Mileage rate is 18 cents per mile -> transportation Expenses are reduced by 7.5% of AGI (10% after 2018)
Tax Rate Structures Proportional (Flat)
Rate stays the same regardless of fluctuations in tax base
Timing Strategies
Rates Constant -Accelerate deductions -Defer Income Rates Change -Increasing: Calculate optimal tax strategies -Decreasing: Accelerate deductions, defer income
Qualifying Child
Relationship test - Child or descendant of a child - Sibling or descendant of a sibling Age Test - Under 19 (or under 24 if a full-time student) - Younger than the taxpayer - Permanently and totally disabled Residence test - Same principal residence as the taxpayer for 1/2 year (have to live with you, sick at hospital or at college in dorms counts as home) Support test - Dependent must not provide more than 1/2 their own support - Support = food, household, clothing, recreation, medical, child care, lodging, gifts, education, wedding costs, etc.
Joe has two distinct streams of income. First, he runs a computer repair business full time. Next, he rents out a duplex that he has owned for several years. Below is all the income and expenses for Joe personally and for his business: Dividend income $400 Computer repair revenue $74,300 Computer repair expenses $34,560 Rents Received $24,000 Depreciation on Rental $6,700 Real estate taxes on Rental $2,600 Real estate taxes on home $1,400 Donations to Joe's church $6,500 Calculate Joe's AGI
SE = $74,300 - 34,560 = 39,740 * 0.9235 (1-.0765) = 36,700 *.153 = $5,615 --> SE tax *1/2 = $2,808 --> Deduction Dividends $400 Schedule C $39,740 Schedule E $14,700 = Total Income -> $54,840 - 1/2 SE tax ($2,808) = AGI --> $52,032
Sally works for Varson & Varson CPA's as a tax accountant. Her annual salary is $60,000. Calculate how much V&V and Sally will each pay in FICA taxes on her salary for the year and how much it will cost them 'after-tax': (Assume a marginal rate of 25% for each)
Sally = $60,000 * 7.65%(Medicare + SS -> 6.2 + 1.45) = $4,590 Sally = $4,590 * (1-0%) = $4,590 V&V = $60,000 * 7.65 = $4,590 V&V = $4,590 * (1-0.25) = $3,443
Estelle maintains a household. Her cousin, Suzy, lives with her but doesn't provide for any of her own needs. Estelle provides 100% of Suzy's costs of living.
Single but could claim Suzy as a decedent.
FICA
self-employment tax
Uncle Tom decides you are his new tax preparer. Later during the party, you hear him tell Grandpa Joe that he was discharged of $25,000 in credit card balances and him describing this as a form of 'tax-free income'.
Taxable?
Social security benefits
Taxable? - Minimum of 0% - Maximum of 85% Modified Adjusted Gross Income (mAGI) - Regular AGI less SS benefits plus - Tax-exempt interest - Excluded foreign income - Certain Other 'for AGI' deductions
Tax Rate Terms - Effective
Tax / Income - Average level of taxation on each dollar of income
Tax Rate Terms - Average
Tax / Taxable Income - Average level of taxation on each dollar of taxable income
Tax =
Tax Base * Tax Rate
Net Investment Income
Tax is 3.8% Net investment income - Gross investment income (interest, non-qualified, ST capital gains, dividends, royalties, annuities) less deductible investment expense Imposed on lesser of: - Net Investment income - Excess of modified AGI over $250K(MFJ)/200K(single, HoH)
As a token of your long career with your current company they give you an all-expenses paid vacation to Burley, Idaho
Taxable
While driving through Nevada to California you stop at a local gas station and throw a quarter in a slot. To your surprise you win a $25,000 jackpot
Taxable
Taxable or not? You receive notice from a tenant of one of your properties that they have prepaid next year's rent in full and the check is waiting for you on the front porch of the property.
Taxable - Constructive receipt
Taxable or not? A local locksmith has not paid his most recent bill from you. He does not have the ability to pay the bill, but is willing to change the locks on your personal residence to satisfy the bill.
Taxable - Form of receipt
Taxable or not? Your client sells a stock that he has held on to for less than one year. The gross proceeds are $10,000 and is marginal tax rate is 25%. How much should your client expect to pay in taxes on this sale?
Taxable - If bought for $4,000. 10,000-4,000 = 6,000 6,000*25% = 1,500 - Return of Capital
Property distributions
Taxable/(deductible) amount is the gain/(loss) on the sale - Proceeds from sale (50k) - selling expenses(1k) = Amount realized on sale (49k) Amount realized on sale (49k) - basis in property sold(20k) = Gain/(loss) on sale (29k gain)
Statute of limitations
Three years from later of: - Date return was filed - Tax return's original due date
Gross Income Recognized - Economic Benefit
When assets are enhanced due to a transaction
Beavis buys 100 shares of Buthead stock on January 14, 2016 for $150 per share. He sold the stock on March 26, 2017 for $175 per share. Beavis has to pay a $50 commission to his broker for every purchase and a $25 fee for every sale to his stock broker. a) What is Beavis's adjust basis in his Buthead stock? b) What amount (and type) of gain will Beavis show on his stock for 2017?
a) $100 * $150 = $15,000 + $50 = $15,050 basis/cost $100 * $175 = $17,500 - $25 = $17,475 realized 17,475 - 15,050 = $2,425 --> long-term Capital Gain (more than a year)
Kenny Banya, a single father with three dependent children living with him, earned $90,000 in salary in 2018 as a risk management consultant. He also had the following during the year: - Received $500 in interest income - Paid $7,500 in mortgage interest - Paid $3,500 in interest on his personal vehicle loan - Paid $1,500 in state income taxes - Donated $11,000 in cash to charity a) What will Kenny owe in taxes for 2018 b) Assume that Kenny also sold a stock for $6,000 c) What if the charitable contributions turned out instead to just be transfers to his girlfriend in the Philippines and therefore not deductible (ignore the CG in b)
a) $90,000 +500 =$90,500 -20,000 (7,500+1,500+11,000) = $70,500 70,500 -51,800 =18,700 * 22% = $4,114 51,800 -13,600 =38,200 * 12% = $4,584 13,600 * 10% = $1,360 =4,114 + 4,584 + 1,360 = $10,058 10,058 - 6,000 (child credit, 2,000 per child) = $4,058 b) $6,000 * 15% (capital gain rate) = 900 $4,058 + 900 = $4,958 c) $90,500 -18,000 (standard deductions) --> itamized deductions were 9,000 without the charity) = 72,500 72,500 -51,800 =20,700 * 22% = $4,554 51,800 - 13,600 = 38,200 * 12% = $4,584 13,600 * 10% = $1,360 =4,554 + 4,584 + 1,360 = 10,498 $10,498 - 6000 = $4,498
John & Peggy are married and file jointly. John is a mechanic and paid $2,300 for a toolbox for work and was not reimbursed this cost by his employer. Peggy paid $500 in investment expenses and $2,400 in investment interest expense during the year. How much of their investment expenses will be deductible in the following situations? a) The couple's AGI $95,000 and they had $1,500 in investment income b) The couple's AGI was $95,000 and they had $1,500 in investment income and a ($1,000 long-term capital loss)
a) 1,500 of interest expense 900 to next years b)1,500 900 to next year PS Dividends do not count because they are long-term LTCL does not decrease investment income
Brett is a single taxpayer and owns his own home. He originally borrowed $250,000 for the home which is currently worth $315,000. Brett paid $12,000 in mortgage interest this year on the home. He also paid $1,400 in interest on his car loan, $2,300 in credit card interest and $800 in interest on a loan that he used to purchase stock in Wal-Mart. How much interest will Brett be able to deduct in the following situations? a)Assume that Brett made $1,600 in interest income during the year and has no other investment expenses b)Assume that Brett made $600 in interest income during the year and has no other investment expenses
a) 12,000 + 800 = $12,800 b) 12,000 + 600(limited to net investment income) = $12,600
Bart & Lisa file as a married filing jointly. In March of this year they received a $1,200 refund from the state of Utah for income taxes that they paid in the preceding year. In each of the following independent scenarios, calculate the amount of the refund that Bart must include as taxable income. (Assume a $12,600 standard deduction in the prior year) a) Last year Bart & Lisa claimed itemized deductions of $13,350. Their itemized deductions included state income taxes paid of $2,850. b) Last year Bart & Lisa had itemized deductions of $12,560 and they chose to claim the standard deduction. Their itemized deductions included state income taxes paid of $2,850. c) Last year Bart & Lisa claimed itemized deductions of $16,230. Bart's itemized deductions included state income taxes paid of $2,850.
a) 13,350 - 2,850 = $10,500 --> because under 12,600 they don't have to pay max. 13,350 - 12,600 = $750 b) 0. Because they got no benefits c) 16,230 - 2,850 = $13,380 --> More than 12,600 so they have to pay MAX. --> $1,200
Rudy owns a duplex in southern Utah. The duplex had a net loss of $14,000 during the year. Rudy's AGI before the loss was $91,000. Rudy has no other passive activities a) How much of the loss on the duplex will Rudy be able to deduct on his return? b) Assuming Rudy's AGI is $136,000 how much of the loss will he be able to deduct now?
a) 14,000 b) 36,000 into phaseout 36,000 *.5 = 18,000 has phased out 25,000 - 18,000 = $7,000 max deduction other 7,000 to next year
Anne purchased an annuity from an insurance company that promised to pay her $20,000 per year for the next 10 years. Anne paid $145,000 for the annuity, and in exchange she will receive $200,000 over the term of the annuity. a) How much of the first $20,000 payment should Anne include in gross income? b) How much income will Anne recognize over the term of the annuity?
a) 145,000/200,000 = 72.5% 20,000* 72,5% = 14,500 Taxfree 5,500 taxable b) If shes 70 now 20,000 * 16 = 320,000 145,000/320,000 = 45% 20,000 * 45% = 9,063 taxfree 10,937 taxable
Beavis made the following purchases of Buthead stock over the years: 8/4/2012 --> 100 shares of $150 9/7/2013 --> 170 shares of $165 6/8/2015 --> 150 shares of $135 Beavis sold 200 shares of stock at $175 per share on July 14, 2017: (assume Beavis is in the 22% tax bracket) a) Calculate Beavis's capital gain tax using the FIFO method: b) Calculate Beavis's capital gain tax using specific idendification (to minimize his taxes):
a) 200 * 175 = 35,000 100 * 150 = 15,000 100 * 165 = 16,500 16,500 + 15,000 = 31,500 (basis) 35,000 - 31,500 = $3,500 3,500 * 15% = $525 b) 170 * 165 = 28,050 30 * 150 = 4,500 28,050 + 4,500 = 32,550 35,000 - 32,550 = $2,450 $2,450 * 15% = $367
Clarice is a married student working on her accounting degree at the University of Illinois. She borrowed $35,000 to pay tuition this year. The interest on this debt was $4,200. Given the following scenarios, calculate Clarice's student loan interest deduction for the year: a) Clarice's and her husband's AGI before deducting interest on higher education loans is $60,000 b) Their combined AGI before deducting interest on higher education loans is $140,000 c) Thier combined AGI before deducting interest on higher education loans is $180,000
a) 60,000 < 135,000 would be able to deduct $4,200 but there is a $2,500 limit. So $2,500. b) 140,000 - 135,000 = 5,000 5,000/30,000 = 16.67% (Face out %) 2,500 * (1-16.67%) = $2,083 c) 180,000 > 165,000 So ZERO
Frank and Estelle are divorced. They had three kids together. The kids live with Estelle who works various part time jobs between culinary classes as she trains to become a vegan chef. Frank owns his own logging business which generates a substantial amount of income. He pays a considerable amount in child support and alimony to his ex-wife and kids. a) What would Frank's status be on his tax return b) What would Estelle's filing status be on her return? c) Who will be allowed to claim the kids as dependents on their tax return? d) Who will be allowed child tax credits on their tax return?
a) Single most likely b) Single most likely c) Depends usually on divorce decree. Sometimes whoever files first. d)
Ricky invested $15,00 into Pistol Pete Partnership. Ricky is a limited partner. Ricky's tax basis in the partnership is $15,000 and his at-risk amount is $12,000. His share of partnership losses was $30,000. Ricky's other income items included wages of $50,000, long-term capital gains of $5,000 and income from a separate limited partnership of $10,000 a) How much of Ricky's loss is allowed considering only the tax basis loss limitations? b) How much of the loss from part a) is allowed under the at-risk limitations? c) How much of Ricky's loss from the limited partnership can he deduct in the current year considering all limitations?
a) under basis limitations --> $15,000 b) under at-risk limitations --> $12,000 c) Income from a separate limited partnership of $10,000
Tax evasion
the use of illegal actions to reduce one's taxes
Tax avoidance
the use of legitimate methods to reduce one's taxes