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Chapter 2
Problems-
I:2-29
I:2-30
I:2-31
I:2-32
I:2-33
I:2-35
I:2-37
I:2-38
I:2-42
I:2-43
I:2-46
I:2-55
I:2-63
Chapter 3
Problems-
I:3-34
I:3-35
I:3-39
I:3-41
I:3-42
I:3-43
I:3-44
I:3-61
Chapter 4
Problems-
I:4-33
I:4-34
I:4-35
I:4-39
I:4-40
I:4-41
I:4-42
I:4-43
Chapter2
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PROBLEMS
I: 2-29
Computation of Tax.
The following information relates to two married couples:
Lanes Waynes
Salary (earned by one spouse) $32,000 $115,000
Interest income 1,000 10,000
Deductible IRA contribution 5,000 0
Itemized deductions 15,000 15,000
Exemptions 7,300 7,300
Withholding 700 18,700
Compute the 2009 tax due or refund due for each couple. Assume that the itemized deductions have been reduced by the applicable floors.
Lanes Taxable Income: 32,000 + 1,000 – 5,000 – 15000 – 7,300 = 5,700
Lanes Tax: 573.00
Refund: 700 – 573 = 127.00
Wayne’s Taxable Income: 11,500 + 10,000 – 0 – 15,000 – 7,300= 102,700
Wayne’s Tax: 102,700 x 0.25 – 7,625=
18,050
Refund: 18,700 – 18,050= 650.00
I: 2-30
Computation of Taxable Income.
The following information for 2009 relates to Tom, a single taxpayer, age 18:
Salary $1,800
Interest income 1,600
Itemized deductions 600
a. Compute Tom’s taxable income assuming he is self-supporting.
Gross Income = 3,400
Minus Itemized deductions (600)
Minus personal exemption (3,650)
Taxable Income = ($850)
b. Compute Tom’s taxable income assuming he is a dependent of his parents.
Gross Income = 3,400
Minus Itemized deductions (600)
Taxable Income = $2,800
I: 2-31
Joint versus Separate Returns.
Carl and Carol have salaries of $14,000 and $22,000, respectively. Their itemized deductions total $6,000. They are married and both are under age 65.
a. Compute their taxable income assuming they file jointly.
b. Compute their taxable incomes assuming they file separate returns and that Carol claims all of the itemized deductions.
I: 2-32
Joint versus Separate Returns.
Hal attended school much of 2009, during which time he was supported by his parents. Hal married Ruth in December 2009. Hal graduated and commenced work in 2010. Ruth worked during 2009 and earned $18,000. Hal’s only income was $1,100 of interest. Hal’s parents are in the 28% tax bracket. Thus, claiming Hal as a dependent would save them $1,022 (0.28 X $3,650) of taxes.
a. Compute Hal and Ruth’s gross tax if they file a joint return.
b. Compute Ruth’s gross tax if she files a separate return in order to allow Hal’s parents to claim him as a dependent.
c. Which alternative would be better for the family? In other words, will filing a joint return save Hal and Ruth more than $1,022?
I: 2-33
Dependency Exemptions.
Wes and Tina are a married couple and provide financial assistance to several persons during the current year. For the situations below, determine whether the individuals qualify as dependency exemptions for Wes and Tina. In all of the situations below, assume that any dependency tests not mentioned have been met.
a. Brian is age 24 and Wes and Tina’s son. He is a full-time student and lives in an apartment near campus. Wes and Tina provide over 50% of his support. Brian works as a waiter and earned $3,800.
b. Same as Part a except that Brian is a part-time student
c. Sherry is age 22 and Wes and Tina’s daughter. She is a full-time student and lives in the dormitory. Wes and Tina provide over 50% of her support. Sherry works part time as a bookkeeper and earned $3,800.
d. Same as Part c except that Sherry is a part-time student.
e. Granny, age 82, is Tina’s grandmother and lives with Wes and Tina. During the current year, Granny’s only sources of income were her Social Security of $4,800 and interest on U.S. bonds of $3,800. Granny uses her income to pay for 40% of her total support; Wes and Tina provide the remainder of Granny’s support.
I: 2-35
Dependency Exemptions.
Robert provides much of the support for his daughter, Jane, and her two children. Jane earned $20,000. Robert, whose AGI is $350,000, paid the rent of $11,000 on Jane’s apartment and provided an additional $15,000 support. Jane is age 30, and her children are age 7 and age 4.
a. Can Robert claim a dependency exemption for Jane? No.
b. Can Jane claim her children as dependents? Yes.
c. Would you recommend that Robert try to claim the dependency exemption for his grandchildren? Yes.
I: 2-37
Dependency Exemptions.
Anna, age 65, who lives with her unmarried son, Mario, received $7,000, which was used for her support during the year. The sources of support were as follows:
Social Security benefits $1,500
Mario 2,600
Caroline, an unrelated friend 800
Doug, Anna’s son 500
Elaine, Anna’s sister 1,600
Total $7,000
a. Who is eligible to claim Anna as a dependent?
b. What must be done before Mario can claim the exemption?
c. Can anyone claim head-of-household status based on Anna’s dependency exemption? Explain.
d. Can Mario claim an old age allowance for his mother? Explain.
I: 2-38
Dependency Exemption and Child Credit: Divorced Parents.
Joe and Joan divorce during the current year. Joan receives custody of their three children. Joe agrees to pay $5,000 of child support for each child.
a. Assuming no written agreement, who will receive the dependency exemption and child credit for the children? Explain.
b. Would it make any difference if Joe could prove that he provided over one-half of the support for each child?
I: 2-42
Marriage and Taxes.
Bill and Mary plan to marry in December 2009. Bill’s salary is $32,000 and he owns his own residence. His itemized deductions total $12,000. Mary’s salary is $39,000. Her itemized deductions total only $1,600 as she does not own her own residence. For purposes of this problem, assume 2010 tax rates, exemptions, and standard deductions are the same as 2009.
a. What will their tax be if they marry before year-end and file a joint return? 12,000
b. What will their combined taxes be for the year if they delay the marriage until 2010? 13,600
c. What factors contribute to the difference in taxes? Itemized Deductions
I: 2-43
Filing Requirement.
Which of the following taxpayers must file a 2009 return?
a. Amy, age 19 and single, has $8,050 of wages, $800 of interest, and $350 of self employment income.
b. Betty, age 67 and single, has a taxable pension of $9,100 and Social Security benefits of $6,200.
c. Chris, age 15 and single, is a dependent of his parents. Chris has earned income of $1,600 and interest of $400.
d. Dawn, age 15 and single, is a dependent of her parents. She has earned income of $400 and interest of $1,600.
e. Doug, age 25, and his wife are separated. He earned $5,000 while attending school during the year.
I: 2-46
Computation of Taxable Income.
Jim and Pat are married and file jointly. In 2009, Jim earned a salary of $46,000. Pat is self-employed. Her gross business income was $49,000 and her business expenses totaled $24,000. Each contributed $5,000 to a deductible IRA. Their itemized deductions total $13,000. Compute Parts a, b, and c without regard to self employment tax.
a. Compute their gross income.
b. Compute their adjusted gross income.
c. Compute their taxable income assuming they have a dependent daughter.
I: 2-55
Computation of Tax.
Maria is a single taxpayer. Her salary is $51,000. Maria realized a short term capital loss of $5,000. Her itemized deductions total $4,000.
a. Compute Maria’s adjusted gross income.
b. Compute her taxable income.
c. . Compute her tax liability.
CASE STUDY PROBLEMS
I: 2-63
Bala and Ann purchased as investments three identical parcels of land over a several-year period. Two years ago they gave one parcel to their daughter, Kim, who is now age 16. They have an offer from an investor who is interested in acquiring all three parcels. The buyer is able to purchase only two of the parcels now, but wants to purchase the third parcel two or three years from now, when he expects to have available funds to acquire the property. Because they paid different prices for the parcels, the sales will result in different amounts of gains and losses. The sale of one parcel owned by Bala and Ann will result in a $20,000 gain and the sale of the other parcel will result in a $28,000 loss. The sale of the parcel owned by Kim will result in a $19,000 gain. Kim has no other income and does not expect any significant income for several years. Bala and Ann, however, are in the 35% tax bracket. They do not have any other capital gains this year. Which two properties would you recommend that they sell this year? Why?
Chapter3
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PROBLEMS
I: 3-34
Noncash Compensation.
For each of the following items indicate, whether the individual taxpayer must include any amount in gross income.
a. Employees of Eastside Bookstore are given their birthdays off with pay.
b. Westside Hardware, Inc. gave each employee 10 shares of Westside stock worth $100 per share in lieu of a cash bonus.
c. Employees of Northside Manufacturing were allowed to take home the company’s old computers when the company purchased new ones.
I: 3-35
Constructive Receipt.
Which of the following constitutes constructive receipt in the current year ended December 31?
a. A salary check received at 6:00 p.m. on December 31, after all the banks have closed.
b. A rent check received on December 30 by the manager of an apartment complex. The manager normally collects the rent for the owner. The owner was out of town.
c. A paycheck received on December 29 that was not honored by the bank because the employer’s account did not have sufficient funds.
d. A check received on December 30. The check was postdated January 2 of the following year.
e. A check received on January 2. The check had been mailed on December 30.
I: 3-39
Constructive Dividend.
Brad owns a successful corporation that has substantial earnings and profits. During the year, the following payments were made by the corporation:
a. Salary of $250,000 to Brad. Officers in other corporations performing similar services receive between $50,000 and $85,000. Unlikely
b. Rent of $25,000 to Brad. The rent is paid in connection with an office building owned by Brad and used by the corporation. Similar buildings rent for about the same amount. Unlikely
c. Salary of $5,000 to Brad’s daughter, who worked for the company full-time during the summer and part-time during the rest of the year while she attended high school. Unlikely
d. Alimony of $40,000 to Brad’s former wife. Although Brad was personally obligated to make the payments, he used corporation funds to make the payments. Discuss the likelihood of these payments being treated as constructive dividends. If a payment is deemed to be a constructive dividend, indicate how such a payment will be treated.
Likely; employees who are also shareholders may borrow money from the company to buy personal items. This loan may be classified by the IRS as a constructive dividend and must be reported on the tax return of the shareholder. In addition, the company would not be able to take a deduction for the constructive dividend
I: 3-41
Prepaid Rent.
Stan rented an office building to Clay for $3,000 per month. On December 29, 2008, Stan received a deposit of $4,000 in addition to the first and last month’s rent. Occupancy began on January 2, 2009. On July 15, 2009, Clay closed his business and filed for bankruptcy. Stan had collected rent for February, March, and April on the first of each month. Stan had received May rent on May 10, but collected no payments afterwards. Stan withheld $800 from the deposit because of damage to the property and $1,500 for unpaid rent. He refunded the balance of the deposit to Clay. What amount would Stan report as gross income for 2008? for 2009?
I: 3-42
Rental Income.
Ed owns Oak Knoll Apartments. During the year, Fred, a tenant, moved to another state. Fred paid Ed $1,000 to cancel the two-year lease he had signed. Ed subsequently rented the unit to Wayne. Wayne paid the first and last month’s rents of $800 each and a security deposit of $500. Ed also owns a building that is used as a health club. The club has signed a fifteen-year lease at an annual rental of $17,000. The owner of the club requested that Ed install a swimming pool on the property. Ed declined to do so. The owner of the club finally constructed the pool himself at a cost of $15,000. What amount must Ed include in gross income?
Ed must include the 34,600.00 for the year.
I: 3-43
Gross Income.
Susan’s salary is $44,000 and she received dividends of $600. She received a statement from SJ partnership indicating that her share of the partnership’s income was $4,000. The partnership distributed $1,000 to her during the year and $600 after year end. She won $2,000 in the state lottery and spent $50 on lottery tickets. Which amounts are taxable?
I: 3-44
Interest Income.
Holly inherited $10,000 of City of Atlanta bonds in February. In March, she received interest of $500, and in April she sold the bonds at a $200 gain. Holly redeemed Series EE U.S. savings bonds that she had purchased several years ago. The accumulated interest totaled $800. Holly received $300 of interest on bonds issued by the City of Quebec, Canada. What amount, if any, of gross income must Holly report?
Chapters
3 & 4
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TAX FORM/RETURN PREPARATION PROBLEMS
I: 3-61
Sally W. Emanual had the following dividends and interest during the current year:
Acorn Corporation bond interest $700
City of Boston bonds interest 1,000
Camp Bank interest 1,250
Jet Corporation dividend (qualified) 1,300
North Mutual fund
Capital gain distribution 100
Ordinary dividend (qualified) 150
Nontaxable distribution 200 450
Blue Corporation foreign dividend 250
Additional information pertaining to Sally Emanual includes
Salary $30,000
Rent income 12,000
Expenses related to rent income 14,000
Pension benefits 8,000
Alimony paid to Sally 4,000
The taxable portion of the pension is $7,000. Sally actively participates in the rental activity. Other relevant information includes
Address: 430 Rumsey Place, West Falls, California 92699
Occupation: Credit manager
Social Security number: 123-45-4321
Marital status: Single
Complete Sally’s Schedule B and page 1 of her Form 1040. Assume Schedule E has already been prepared.
PROBLEMS
I: 4-33
Self-Help Income.
In which of the following situations would the taxpayer realize taxable income?
a. A mechanic performs work on his own automobile. The mechanic would have charged a customer $400 for doing the same work.
b. A mechanic repairs his neighbor’s personal automobile. In exchange, the neighbor, an accountant, agrees to prepare the mechanic’s tax return. The services performed are each worth $200.
c. A mechanic repairs his daughter’s automobile without any charge.
I: 4-34
Excludable Gifts.
Which of the following would be includable in gross income?
a. Alice appeared on a TV quiz show and received a prize of $5,000.
b. Bart received $500 from his employer because he developed an idea that reduced the employer’s production costs.
c. Chuck borrowed $500 from his mother in order to finance his last year in college. Upon his graduation, Chuck’s mother told him he did not have to repay the $500. She intended the $500 to be a graduation present.
I: 4-35
Life Insurance Proceeds.
Don is the beneficiary of a $50,000 insurance policy on the life of his mother, Anna. To date, Anna has paid premiums of $16,000. What amount of gross income must be reported in each of the following cases?
a. Anna elects to cancel the policy and receives $20,000; the cash surrender value of the policy.
b. Anna dies and Don receives the face amount of the policy, $50,000.
c. Anna dies and Don elects to receive $15,000 per year for four years.
I: 4-39
Prizes and Awards.
For each of the following, indicate whether the amount is taxable:
a. Peggy won $4,000 in the state lottery.
b. Jane won a $500 prize for her entry in a poetry contest.
c. Linda was awarded $2,000 when she was selected as Teacher of the Year by the local school district.
I: 4-40
Scholarships.
For each of the following, indicate the amount that must be included in the Taxpayer’s gross income:
a. Larry was given a $1,500 tuition scholarship to attend Eastern Law School. In addition, Eastern paid Larry $4,000 per year to work part-time in the campus bookstore.
b. Marty received a $10,000 football scholarship for attending Northern University. The scholarship covered tuition, room and board, laundry, and books. Four thousand dollars of the scholarship was designated for room and board and laundry. It was understood that Marty would participate in the school’s intercollegiate football program, but Marty was not required to do so.
c. Western School of Nursing requires all third-year students to work twenty hours per week at an affiliated hospital. Each student is paid $10 per hour. Nancy, a third-year student, earned $10,000 during the year.
I: 4-41
Research Grant.
Otto is a biology professor at State University. The university gave Otto a sabbatical leave to study the surface of the flatworm. During the year he received a salary of $50,000, which is less than his regular salary of $56,000. Otto also received a grant to cover expenses associated with the study. The grant was $2,000, as were his related expenses. Otto also incurred memberships and other employment related expenses totaling $1,000. How much must Otto include in gross income?
I: 4-42
Payments for Personal Injury.
Determine which of the following payments for sickness and injury must be included in the taxpayer’s gross income.
a. Pat was injured in an automobile accident. The other driver’s insurance company paid him $2,000 to cover medical expenses and a compensatory amount of $4,000 for pain and suffering.
b. A newspaper article stated that Quincy had been convicted of tax evasion. Quincy, in fact, had never been accused of tax evasion. He sued and won a compensatory settlement of $4,000 from the newspaper.
c. Rob, who pays the cost of a commercial disability income policy, fell and injured his back. He was unable to work for six months. The insurance company paid him $1,800 per month during the time he was unable to work.
d. Steve fell and injured his knee. He was unable to work for four months. His employer financed disability income policy paid Steve $1,600 per month during the time he was unable to work.
e. Ted suffered a stroke. He was unable to work for five months. His employer continued to pay Ted his salary of $1,700 per month during the time he was unable to work.
I: 4-43
Employee Benefits.
Ursula is employed by USA Corporation. USA Corporation provides medical and health, disability, and group term life insurance coverage for its employees. Premiums attributable to Ursula were as follows:
Medical and health $3,600
Disability 300
Group term life (face amount is $40,000) 200
During the year, Ursula suffered a heart attack and subsequently died. Before her death, Ursula collected $14,000 as a reimbursement for medical expenses and $5,000 of disability income. Upon her death, Ursula’s husband collected the $40,000 face value of the life insurance policy.
a. What amount can USA Corporation deduct for premiums attributable to Ursula?
b. How much must Ursula include in income relative to the premiums paid?
c. How much must Ursula include in income relative to the insurance benefits?
d. How much must Ursula’s widower include in income?
