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What is a tax? How does a tax differ from a fine?
Differentiate the tax treatment of an individual's capital losses from the tax treatment of corporate capital losses.
What are the basic tax rates for an individual and a corporation?
What are two fiduciary entities and how are they created? Define grantor, trustee, and beneficiary for a trust.
Which version of the tax code is applicable today?
If a taxpayer has $140,000 of employee salary, how much will be withheld for the Social Security and Medicare taxes in 2016?
Determine Amy's taxable income for 2016 if she has $40,000 of salary income, is single, and has $10,350 in total allowable deductions.
Marlee is a single parent with $25,450 in total allowable deductions and qualifies as head of household for 2016. Determine her taxable income if she has a salary of $71,000 and interest income of $1,500.
Determine George and Mary's taxable income and tax liability for 2016 if George has $65,000 and Mary has $45,000 of salary income, they have $36,200 of total allowable deductions, and they file a joint tax return.
Refer to the information in problem 34. Determine Warner Corporation's income tax liability.
Data from problem 34
The Warner Corporation has gross income of $560,000. It has business expenses of $325,000, a capital loss of $20,000, and $2,500 of interest income on temporary investments
Define tax expenditure?
Explain the integration of the gift and estate taxes.
Sally and Jim are married and have taxable income in 2016 of $160,000. If they could file their income tax as single individuals, each of them would have taxable income of $80,000. Do they have a marriage penalty when they file their joint return? If so, what is the amount of the penalty?
Conrad and Anita (a college student with no income) plan to marry on December 21, 2016. Filing jointly, they expect to have $180,000 of taxable income for the year. If they wait until January of 2017 to marry, Conrad will file as a single person and report the $180,000 of taxable income on his separate return.
a. Will it be to their advantage to marry before the end of 2016 or should they wait until 2017?
b. How much in tax will they save or have to pay extra if they marry in 2016?
c. How would your answers change if Conrad and Anita each expect $90,000 of taxable income in 2016?
Carrie and Stephen have gross salary and wages of $76,000 in 2016 and file a joint return. They have $27,150 of total allowable deductions and a $240 child care credit. Determine their taxable income and their tax liability.
An estate has $20,000 of taxable income in 2016. What amount of tax will the estate pay if it fails to distribute the income to the beneficiaries?
Lilikoi Corporation began business in 2014. Lilikoi earned taxable income of $40,000 in 2014 and $120,000 in 2015. For 2016, Lilikoi Corporation has a net operating loss of $50,000 and decides to carry the loss back, filing a refund claim. Compute the amount of corporate income tax that Lilikoi paid for 2014 and 2015 and then determine the amount of tax that will be refunded from carrying back the 2016 NOL.
June and John decide to form a business. They each plan to contribute $20,000 in exchange for a 50 percent interest in the business. They will then take out a bank loan for $30,000 to cover the balance of their working capital needs. They expect that the business will make a profit of $64,000 in the first year and that it will not make any cash distributions that year. Excluding the business income, June, who files as head of household, has $475,000 of other ordinary taxable income. John is married and files a joint return; he and his wife have $130,000 of other ordinary taxable income. They want to know how much tax the business will pay and how much additional tax they will personally pay in 2016 if they form the business as a partnership, S corporation, or C corporation. Consider only income taxes.
John and Martha are planning to be married. Both are professionals each with taxable incomes of $89,700 annually. They are deciding on a wedding date. They have two dates to choose from: December 14, 2016, or January 11, 2017. If they marry on December 14, 2016, they will have to choose between married filing separately and married filing jointly. Is there an advantage to either method of filing? If they postpone their wedding until the January date and file as single persons, will they reduce their tax bill for 2016?
Jeremy is setting up a service business. He can either operate the business as a sole proprietorship or he can incorporate as a regular C corporation. He expects that the business will have gross income of $80,000 in the first year with expenses of $12,000 excluding the following. He plans to take $30,000 from the business for living expenses as a salary. Compare his tax costs for 2016 considering only income taxes if he is single, has no other income, and total allowable deductions of $10,350. Which option do you recommend based solely on these tax costs?
Carol has recently incorporated her sole proprietorship and is considering making an S election. The corporation has $200,000 of gross revenue and expenses of $75,000 before Carol's salary. She plans to take a gross salary of $60,000 from the business and this will be her only income for the year. Compare the total tax burden for Carol and the corporation with and without the S election. Consider both income and employment taxes. Carol is single and has total allowable deductions of $10,350. She plans to reinvest all of the corporation's net income after taxes into the business. Based on tax burden alone for 2016, should Carol make the S election?
What is the maximum income tax rate that applies to the employee salary, the employment tax rate(s) on the salary, and the capital gain rate(s) on the long-term capital gains, for these four single individual taxpayers in 2016?
a. Employee Salary = $27,000; Capital Gain = $9,000
b. Employee Salary = $132,000; Capital Gain = $24,000
c. Employee Salary = $176,000; Capital Gain = $139,000
d. Employee Salary = $285,000; Capital Gain = $248,000
Differentiate a consumption based tax from an income tax and illustrate with an example.
How does a franchise tax differ from an income tax?
Go to www.taxfoundation.org (the Web site for the Tax Foundation).
a. What is Tax Freedom Day?
b. When were Tax Freedom Days in 2014 and 2015?
What employment taxes are imposed on an employee and an employer?
Over what ranges of taxable income in 2016 will the total income tax liability two persons with equal incomes who file as single individuals equal their income tax liability if they file jointly as a married couple?
Differentiate a progressive tax system from a proportional and a regressive system and give examples of each.
What basic tax rates apply to the ordinary income, dividend income, and interest income of an individual? What are they for a corporation?
What tax rates apply to an individual's capital gains and to which tax brackets do each of this rates apply?
Briefly explain Adam Smith's four canons of taxation.
What Constitutional Amendment allowed implementation of an income tax? In what year was it ratified?
Explain the business purpose doctrine.
In the citation Reg. §1.247-3, what do the 1 and the 247 indicate?
What does it mean when a Tax Court decision says that the decision has been entered under Rule 155?
What are the four sections of a memo to the file? Explain what each section should include.
Kevin deliberately omitted $40,000 of gross income from his restaurant on his 2016 tax return. The return indicated gross income of $200,000 when filed on April 14, 2017. When can the IRS no longer pursue Kevin with the threat of collection of the related tax, interest, and penalties?
Alison accidentally omitted $40,000 of gross income from the restaurant she owned on her 2015 tax return. The return showed gross income of $150,000 when filed on October 15, 2016. When can the IRS no longer pursue Alison with the threat of collection of the related tax, interest, and penalties (assuming there was no fraud)?
Thomas received $30,000 in a legal settlement in 2016. The tax treatment of the item is not certain. Thomas's research results were ambiguous and he is not sure if the income is taxable. Because some doubt remained and because he did not think he would be audited, Thomas decided the income was not taxable and did not include it on his tax return filed on April 14, 2017. His gross income, excluding the $30,000 in question, was $50,000.
a. When does the statute of limitations expire for Tom's 2016 tax return?
b. Would your answer change if the IRS can provide fraud?
Cynthia and Howard, married taxpayers filing a joint return, have $100,000 in taxable income in 2016. They have 4 children (ages 4 through 12) who have no income that is taxable. If they can legally shift $2,000 in taxable income to each child, how much does the family save in taxes?
What are the three courts in which a taxpayer initiates tax litigation to settle a dispute with the IRS? To which courts can adverse decisions from these courts be appealed?
Go to www.aicpa.org (the AICPA's Web site) and search for Statements on Standards for Tax Services. Read the history section of the most recent version of the Statements on Standards for Tax Services. What reasons were provided for revising the SSTS?
Jim was reviewing several of a client's prior tax returns in preparation for completing the current year's return. Jim discovered a serious error on the return filed almost three years earlier that would subject the client to $40,000 in additional taxes.
Your client, Ms. I.M. Gorgeous, is an aspiring actress. She has managed to earn a living doing television commercials but was unable to get the acting parts she really wanted. She decided to have botox injections in her forehead and collagen enhancements to her lips. After these procedures, her career improved dramatically and she received several movie offers. Ms. Gorgeous is sure that she should be able to deduct the cost of the cosmetic enhancements because she read about another actress having a face-lift in 1988 and deducting the cost on her tax return as a medical expense. Can Ms. Gorgeous deduct the cost of these procedures?
Last year your client, Barney Bumluck, worked part-time for Timely Tax Return Preparation Service. Barney was promised an hourly wage plus a commission. He worked under this arrangement from early February until April 15. His accrued pay amounted to $900 plus $120 of commissions. When he went to collect his pay, however, he found only a vacant office with a sign on the door reading "Nothing is sure but death and taxes." Can Barney take a bad debt deduction for the wages and commission he was unable to collect?
Your clients, Sonny and his wife Honey, believe in worshiping Ta-Ra, the Sun God. To practice their religious beliefs, they take a weeklong trip to Hawaii to worship Ta-Ra. The cost of this pilgrimage (including airfare, hotel, and meals) is $2,800. Sonny wants to know if he can deduct the cost of this trip as a charitable contribution to his religion.
Fred Fisher is a licensed scuba diver who lives in Key Largo. He is employed full-time as an engineer. Five years ago he had been employed as a professional diver for a salvage company. While working for the salvage company he became interested in marine archaeology and treasure hunting. Until last year he gave diving lessons on weekends and trained individuals in the sport of treasure hunting under the name of "Fred's DivingSchool." Three of the diving students he taught subsequently found shipwrecks. Fred generally did not engage in recreational diving.
Last year, Fred began a treasure hunting business named "Treasure Seekers Company." He bought a boat specifically designed for treasure hunting and did extensive research on potential locations of shipwrecks. Fred located several shipwrecks, but none were of substantial value. He did retrieve several artifacts but has not sold any yet. Although these artifacts may have some historical significance, they have a limited marketability. Thus, Fred has not yet had any gross income from his treasure hunting activities.
Other than retaining check stubs and receipts for his expenses and an encoded log, Fred did not maintain formal records for Treasure Seekers Company. Fred maintains as few written records as possible because he fears for his safety. He took steps to keep his boat and equipment from public view and took precautionary measures to maintain the secrecy of his search areas. Fred incurred $5,000 of expenses relating to his treasure-hunting activities last year. Can Fred deduct the expenses of his treasure hunting business or will the IRS claim it is a hobby and disallow the expenses?
Locate and read Greg McIntosh, TC Memo 2001-144, 81 TCM 1772, RIA TC Memo ¶2001-144 (6/19/2001). Answer the following questions.
a. What requirements must be met for a taxpayer to recover litigation costs from the IRS?
b. Was the taxpayer in this case able to recover his attorney fees from the IRS? Why or why not?
Locate and read the following two cases:
J.B.S. Enterprises, Inc., T.C. Memo 1991-254,61 TCM. 2829, 1991 PH T.C. Memo ¶91,254
Summit Publishing Company, Inc., T.C. Memo 1990-288,59 TCM. 833, 1990 PH T.C. Memo ¶90,288
List those facts that you feel most influenced the judges to reach different conclusions in these two cases.
Explain the realization principle.
Explain how the community property laws can affect the allocation of income between spouses.
At the beginning of the current year, Martha, a cash-basis taxpayer, purchased a $10,000 three-year bond from Lauderhill Corporation at its issue price of $7,000. At the end of the year, $840 of the interest had accrued. How much income does Martha report for the current year?
Provide three reasons why generally accepted accounting principles are not allowed for tax purposes.
At the end of October, year 1, Dunbar Corporation hired Specialty Training, an accrual-basis, calendar-year taxpayer, to provide a six-week training program for its employees. Dunbar paid Specialty its full training fee of $30,000 on the first day of training. After five weeks of training sessions, Dunbar cancelled the last week of training and demanded a refund of $5,000 because its employees felt the training was misrepresented and failed to provide the in-depth coverage of the topics they had specified. In January, year 2, Specialty refunded $5,000 to Dunbar. Specialty's marginal tax rate for year 1 is 34 percent.
a. What choices does Specialty Training have to account for the $5,000 refund?
b. If Specialty's marginal tax rate in year 2 is 39 percent, how should the company account for the refund for tax purposes?
c. If Specialty's marginal tax rate in year 2 is 25 percent, how should the company account for the refund for tax purposes?
Mac's 24-year-old daughter, Alana, is a full-time student. In 2016, Mac gives Alana 600 shares of Highgrowth stock. Mac purchased the stock 10 months ago at $20 per share. On the gift date, the stock is worth $35 per share. After the gift, Highgrowth declares and pays a $170 dividend to Alana. The next month, Alana sells her 600 shares for $38 per share. Mac and Alana are in the 33 and 15 percent marginal tax brackets, respectively.
a. How much must Alana and Mac include in gross income in 2016?
b. What family tax savings are achieved through this gift?
What are two major categories of differences between financial accounting income and taxable income?
What types of investments are favored by tax law and why?
Krystyna, a single individual, invested $20,000 in corporate bonds with a stated interest rate of 5 percent and another $20,000 in tax-exempt municipal bonds issued for governmental activities with a stated interest rate of 4.75 percent. Calculate her after-tax cash flow from each investment if:
a. her marginal tax rate is 15 percent.
b. her marginal tax rate is 33 percent and her modified adjusted gross income is $430,000.
Justin's 24-year-old son, Carlos, is a full-time student. In April 2016, Justin gave Carlos 450 shares of Striker Oil stock. Justin purchased the stock 8 months earlier at $18 per share. On the gift date, the stock was worth $31 per share. After the gift, Striker Oil declared and paid a $200 dividend to Carlos. Then three months later, Carlos sold his 450 shares for $38 per share. Justin and Carlos are in the 39.6 and 15 percent marginal tax brackets, respectively.
a. How much must Carlos and Justin include in gross income in 2016?
b. What family tax savings were achieved through this gift?
c. How would your answer to (b) change if Carlos held the stock for 5 months before selling for $38 per share?
Some politicians have proposed changing the way Social Security benefits are taxed. One proposal would increase the amount of Social Security benefits included in gross income to 100 percent. A tax rate of 100 percent would then apply for some high-income individuals effectively preventing them from receiving benefits. What do you think about this proposal?
U.S. citizens residing in certain countries are exempt from U.S. tax on their social security benefits. Go to the IRS Web site (www.irs.gov) and locate Publication 915: Social Security and Equivalent Railroad Retirement Benefits to determine which countries are covered under this special provision.
Gamma Corporation, a calendar-year accrual-basis taxpayer, operates department stores. Alpha Corporation and Beta Corporation are wholly-owned domestic subsidiaries of Gamma Corporation and file a consolidated federal tax return under Gamma Corporation's consolidated group. Gamma, Alpha, and Beta enter into a gift card service agreement under which Gamma is primarily liable for the value of the gift cards until redemption while Alpha and Beta are obligated to accept the gift cards as payment for goods and services. Gamma issues the gift cards and reimburses Alpha and Beta for the sale price of the goods and services purchased with the gift cards. The group recognizes revenue in its applicable financial statement when the gift cards are redeemed. In year 1, Gamma Corporation makes $2 million in gift card sales. Gamma tracks redemptions of gift cards electronically and determined that $1,800,000 was redeemed in year 1. How much revenue does Gamma Corporation recognize from the gift card sales for tax purposes and in which year(s)?
Thomas ran for Congress, raising $2 million for his campaign. Six months after losing the election, auditors discovered that Thomas kept $160,000 of the campaign funds using the money to purchase a vacation home. What are the tax consequences of this use of campaign funds?
Samantha has been unemployed for some time and is very short of money. She learned that the local blood bank has a severe shortage of her type of blood and, therefore, is willing to pay $120 for each blood donation. Samantha gives blood twice a week for 12 weeks, receiving $120 for each donation. Are these funds includable in Samantha's gross income?
Alice and Manny agree to divorce. Alice proposes that Manny purchase and assign to her a life insurance policy on his life as part of the divorce agreement. She wants Manny to continue paying the premiums on this policy for the next 10 years. Manny wants to know if the premium payments will be treated as alimony.
A minister receives an annual salary of $16,000 in addition to the use of a church parsonage with an annual rental value of $6,000. The minister accepted this minimal salary because he felt that was all the church could afford to pay. He plans to report these amounts on his income tax return but he is uncertain how to treat the cash gifts he receives from the members of his congregation. These gifts are made out of love and admiration for him. During the year the congregation developed a regular procedure for making gifts on special occasions. Approximately two weeks before each special occasion when the minister was not present, the associate pastor announced before the service that those who wished to contribute to the special occasion gifts could do so by placing cash in envelopes and giving them to the associate who would give them to the minister. Only cash was accepted to preserve anonymity. The church did not keep a record of the amounts given nor the contributors, but the minister estimates that these gifts amount to about $10,000 in the current year. How should he treat these gifts?
John is a single individual who works for Auto Rental Cars in Japan during the entire calendar year. His salary is $140,000. How much of this salary can he exclude?
Nick, age 53, is single and has AGI of $63,000. He contributes $5,000 to his IRA in 2016.
a. How much can Nick deduct if he is not covered by an employer-sponsored qualified retirement plan?
b. How much can Nick deduct if he is covered by an employer-sponsored qualified retirement plan?
Jennifer, age 35, is single and is an active participant in her employer's qualified retirement plan. Compute the maximum Roth IRA contribution that she can make in 2016 if
a. Her adjusted gross income is $135,000.
b. Her adjusted gross income is $59,000.
c. Her adjusted gross income is $38,000 and she makes a $2,000 contribution to a traditional IRA.
Carrie owns a business that she operates as a sole proprietorship. The business had a net profit of $25,000 in 2016. This is Carrie's only earned income.
a. How much must she pay for self-employment taxes?
b. How much can she deduct on her tax return?
c. If the business had a net loss of $10,000 (instead of a $25,000 profit), how much in self-employment taxes must Carrie pay?
George has $83,000 in salary from his full-time position and $43,000 in net income in 2016 from his sole proprietorship. What is his self-employment tax? What portion of this can he deduct?
Luis operates a bakery as a sole proprietorship which generated $280,000 in net income. He has four bakers whom he employs on a full-time basis and who participate in a company-paid health insurance plan. Luis is also covered by this same plan. The annual premiums are $2,300 per person. The business paid $11,500 for health insurance premiums for 2016. Are these insurance premiums deductible? If they are, where should Luis deduct them on his tax return?
Global Corporation is looking for a new CEO. The board of directors selected Miguel as the top candidate. During negotiations, Miguel indicated he wanted a $2 million salary in addition to the stock-based compensation the board was offering. Although this salary level could be considered reasonable, the board was concerned about the $1 million limitation on deductible salary. The board proposed an alternative under which Miguel would be paid a $1 million salary and also offered him an additional $1.25 million bonus, contingent on meeting realistic performance goals. Miguel is confident he can meet these goals. Global Corporation is in the 35 percent marginal tax bracket. Which alternative is better for Miguel and which is better from the corporation's perspective?
Evan is setting up a new business. He can operate the business as a sole proprietorship or he can incorporate as a regular C corporation or as an S corporation. He expects that the business will have gross income of $130,000 in the first year with expenses of $25,000 excluding the following. He plans to take $35,000 from the business for living expenses as a salary and will have the business pay $3,000 annually for his health insurance premiums.
a. Compute the total tax cost in 2016 for each alternative if Evan is single, this is his only source of income, and he has $10,350 of additional deductions.
b. Which alternative business form do you recommend based solely on the first year tax costs?
c. What are some of the other factors Evan should consider in deciding between a C corporation and an S corporation for his business?
Go to www.legalbitstream.com. Locate and read Revenue Ruling 2003-102. What type of medicines and drugs can be reimbursed through a flexible spending arrangement (FSA) according to this ruling? What change took effect in 2011?
Martin Martindale, the 40-year-old founder and President of Martindale Corporation (an accrual-basis calendar-year C corporation), owns 60 percent of the stock and receives a salary of $600,000. Four unrelated shareholders own the rest of the stock equally. The corporation has paid dividends regularly to the shareholders and plans to continue to do so in the future. Martin plans to recommend that the board of directors authorize the payment of a bonus to himself and two other employees (all cash-basis calendar-year individuals). The first employee is the vice president, who owns 10 percent of the corporation and receives a salary of $400,000. The other employee is the controller, who is not currently a shareholder in the corporation and receives a salary of $200,000. Martin would like the bonus to equal 75 percent of each recipient's current salary. Martin believes that the annual salaries are probably a little high when compared to the corporation's competitors. Martin asks you, as the corporation's tax advisor, to recommend what the corporation needs to do so that it gets a deduction for the planned bonuses. Martin would prefer to pay the bonuses next year but have the business deduct them this year.
a. Locate and read Mayson Manufacturing Co., 178 F.2d 115, 38 AFTR 1028, 49-2 USTC ¶9467 and then summarize the important points of this case as it relates to Martindale.
b. Prepare a summary of the relevant Code and regulation sections as they apply to Martindale.
c. Prepare a one-paragraph summary for Martin on what the corporation needs to do to qualify for a deduction for the planned bonuses.
McGuire Corporation is planning to acquire a corporate jet to increase the efficiency and security of its executives who will use the jet for both business trips and personal vacations. McGuire Corporation wants to know how it should determine the amount that is taxed to its employees when they use the corporate jet for personal travel.
Robert, age 35, has accumulated $36,000 in his traditional IRA. He recently married and would like to withdraw $25,000 from his IRA for a down payment on their first house. Write a letter to Robert stating the tax implications of his proposed withdrawal.
Jennifer, age 40, has accumulated $40,000 in her traditional IRA. She would like to withdraw $22,000 from her IRA to pay for her daughter's college expenses. She plans to use $15,000 for tuition and $7,000 for room and board. Write a letter to Jennifer stating the tax implications of her proposed withdrawal.
Elena is single but her mother, Maria, lives with her. Maria's sole income is $7,000 in Social Security (which she saves for unexpected medical expenses) and $500 of interest income on that account. Elena provided a room in her home for Maria that could have been rented for $5,500 and Elena spent $5,200 on groceries for them to share and another $1,800 on clothing for Maria.
a. What is the total amount of support Elena provided for her mother?
b. Can Elena claim Maria as her dependent?
c. What is Elena's filing status?
Mark and Patricia report adjusted gross income of $380,500 and itemized deductions of $64,000 for the interest on home acquisition mortgage (principal amount of $890,000), taxes, and charitable contributions. They file a joint income tax return and claim their four children as dependents. What is their taxable income for 2016?
Cindy files as head of household and has three dependent children ages 12, 14, and 16. Her AGI is $80,000. How much can Cindy claim for the child tax credit?
Greg and Barbara, a married couple with an AGI of $80,000, have three children who are full-time college students. They pay $6,000 for tuition annually for each child. One son is a sophomore in college and the other son is a senior. Their daughter is a graduate student. How much can Greg and Barbara claim for education credits for 2016?
Doris is a single individual with modified AGI of $56,000. During the year, she paid $11,000 tuition for a master's in taxation program. How much can Doris claim for the lifetime learning credit?
Roland worked for Sorbonne Company for the first four months of 2016and earned $40,000 from which his employer withheld $3,060 for payroll taxes. In May, Roland accepted a job with Lyon Company. During the last eight months of the year, Roland earned $84,000 from which Lyon withheld $6,426 for payroll taxes. What is Roland's credit for excess payroll taxes withheld?
Linda received $90,000 in salary income for 2016. She has no dependents. Determine her income tax liability under each of the following independent situations:
a. She files as a single individual.
b. She is married and files a joint return with her spouse. Their only income is her $90,000 salary.
c. She is married but files a separate return.
Andrew, a single individual, has $220,000 in salary and $60,000 in self-employment income in 2016. How much must he pay for his additional Medicare tax?
Lenora and Sam are married and file a joint tax return. Lenora has $180,000 in salary and Sam has $190,000 in self-employment income in 2016. How much must they pay for their additional Medicare tax?
During 2016, Raymond, a single individual, earned a salary of $196,000. He also had the following items of investment income: $40,000 net short-term capital gain on sale of stock, $7,000 dividend income, $5,000 interest income from corporate bonds, and $4,000 interest income from tax-exempt municipal bonds. Compute Raymond's net investment income (NII) tax.
Michelle, a single individual, reports 2016adjusted gross income of $280,000 and has the following itemized deductions before applicable limitations:
Medical expenses.........................................$ 14,000
Interest on home acquisition mortgage
interest with a principal amount of $650,000..........25,000
Interest on home equity loan with a
principal amount of $95,000...............................6,000
Taxes.........................................................18,000
Charitable contributions....................................7,000
Miscellaneous itemized deductions.......................8,800
a. What are Michelle's itemized deductions for regular tax purposes?
b. What are Michelle's itemized deductions for AMT purposes?
Which of the following individuals must file a tax return in 2016?
a. Carolyn is single and age 66. She receives $2,000 of interest income, $3,000 of dividend income, and $6,000 in Social Security benefits.
b. Tim is single, age 18, and a full-time student. He is claimed as a dependent on his parents' tax return. Tim earned $2,000 from a part-time job and $400 in interest income.
c. Justin is single, age 25, and a full-time graduate student. He earned $8,750 from a part-time job.
Kelly Martin is divorced; her dependent child, Barbara, lives with her and is her dependent. Kelly has the following items of income and expense:
Income:
Salary............................................................................$60,000
Cash dividends....................................................................3,000
Interest income on City of New York bonds.................................5,000
Interest income on U.S. Treasury bills..........................................4,000
Net rental income..................................................................3,500
Alimony received from ex-husband............................................2,500
Child support received from ex-husband......................................3,500
Life insurance proceeds received on the death of her mother............100,000
Sales of capital assets:
Stock held for 3 months (basis is $12,000) sold for........................18,000
I Investment land held 5 years (basis is $30,000) sold for...............14,000
Expenses:
Interest on the $150,000 principal from her home acquisition loan........6,000
Property taxes on the home......................................................2,000
Charitable contributions.........................................................7,000
Qualifying child care expense...................................................3,700
Federal income tax withheld....................................................7,000
Compute Kelly's taxable income and her net tax due or refund expected for 2016.
Differentiate between an abandoned spouse and a surviving spouse.
Jennifer and Jason Greco are married and file a joint tax return. Their two dependent children (Jim, age 14 and Jessica, age 16); both live at home. The Grecos have the following income and expenses:
Income:
Jennifer's salary.........................................................$120,000
Jason's net profit from his sole proprietorship........................148,000
Interest income on State of Texas bonds...............................10,000
Interest income on corporate bonds.....................................12,000
Cash dividends............................................................19,000
Long-term capital gain from sale of stock.............................70,000
Expenses:
Interest on the $850,000 principal from their
home acquisition mortgage.............................................48,000
Real property taxes on their home......................................11,000
Charitable contributions to their church...............................49,000
Federal income tax withheld from Jennifer's salary.................35,000
Estimated federal tax payments for this year.........................30,000
a. What is their adjusted gross income and taxable income for 2016?
b. What is their net tax due or refund expected for 2016?
c. Using the total tax you computed in part b, what is their effective tax rate as a percentage of their adjusted gross income?
Lauren is single, age 60, and has an annual salary of $68,000. She paid off her mortgage in December 2015 but expects that her annual real estate taxes will continue to be approximately $5,800. Lauren contributes $2,500 each year to her favorite qualified charities but she has no other itemized deductions. For your answer, assume that the 2016 tax rates, exemption amount, and standard deduction are the same for 2017.
a. If Lauren contributes $2,500 to the charity each year, what will be her income tax liabilities for 2016 and 2017?
b. If Lauren contributes $5,000 to the charity in 2016 but makes no contribution in 2017, what will be her income tax liability for each year?
c. How should Lauren time of her charitable contributions so that she can minimize her total tax liability over the two years?
Manuel plans to make a significant contribution to his favorite charity with one of the following assets. Which asset would you recommend Manuel contribute and why?
a. Stock acquired five years ago at a cost of $13,000. The current fair market value is $10,000.
b. Stock acquired six months ago at a cost of $4,000. The current fair market value is $10,000.
c. Inventory items acquired last year for Manuel's sole proprietorship. Their cost was $12,000, and their current fair market value is $10,000.
d. $10,000 in cash
When would a taxpayer claim the standard deduction rather than itemizing deductions?
Don has a very painful terminal disease and has learned that marijuana may mitigate his pain. Don lives in a state in which it is legal to use the drug if its use is under the direction of a medical doctor. Can Don deduct the cost of the marijuana as a medical expense?
Charlene provides 100 percent of the support for her elderly handicapped mother, Amanda. Amanda insists on living alone in her own apartment even though she has a severe hearing impairment. Amanda has always liked cats, so Charlene purchased a cat that is registered as a hearing assistance animal with the county animal control division. The cat is trained to respond to unusual sounds in an instantaneous and directional manner, alerting Amanda to possible dangers. Charlene paid $800 for the cat and an additional $1,000 for special training. The maintenance costs for the cat are $15 a week. Charlene would like to know if any of these costs qualify as deductible expenses.
Howard is a single parent with an 11-year-old dependent son. The son currently attends sixth grade at public school. Howard accepts a temporary foreign assignment from his employer, which is expected to last from August through December. Because of the unstable political environment in the foreign country, Howard is uncomfortable taking his son with him. Therefore, Howard decides to send his son to a boarding school for the fall term at a cost of $5,000 ($3,000 for tuition and $2,000for room and board). Will the $5,000 qualify for the dependent care credit?
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