28.CHAPTER 3 Compute 2015 taxable income in each of the following independent situations. a. Drew and Meg, ages 40 and 41 respectively, are married and file a joint return. In addition to four dependent children, they have AGI of $65,000 and itemized deductions of $15,000. AGI $65,000 (15,000) Less: Itemized deductions Personal and dependency exemptions (6 × $4,000) Taxable income (24,000) $26,000 b. Sybil, age 40, is single and supports her dependent parents, who live with her. Sybil also supports her grandfather, who lives in a nursing home. She has AGI of $80,000 and itemized deductions of $8,000. AGI Less: Standard deduction (head of household) Personal and dependency exemptions (4 × $4,000) Taxable income $80,000 (9,250) (16,000) $54,750 c. Scott, age 49, is a surviving spouse. His household includes two unmarried stepsons who qualify as his dependents. He has AGI of $75,000 and itemized deductions of $10,100. AGI $75,000 (12,600) Less: Standard deduction (surviving spouse) Personal and dependency exemptions (3 × $4,000) Taxable income (12,000) $50,400 d. Amelia, age 33, is an abandoned spouse and maintains a household for her three dependent children. She has AGI of $58,000 and itemized deductions of $9,500. AGI $58,000 (9,500) Less: Itemized deductions Personal and dependency exemptions (4 × $4,000) Taxable income (16,000) $32,500 e. Dale, age 42, is divorced but maintains the home in which he and his daughter, Jill, live. Jill is single and qualifies as Dale’s dependent. Dale has AGI of $64,000 and itemized deductions of $9,900. AGI $64,000 Less: Itemized deductions (9,900) Personal and dependency exemptions (2 × $4,000) (8,000) Taxable income $46,100 29. (LO 1, 8) Compute Emily’s 2015 taxable income 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 Contribution to traditional IRA 6,000 5,500 Gift from parents 25,000 Capital gain from stock investment, held for 7 months 2,000 Amount lost in football office betting pool 500 Number of potential dependents (two cousins, who live in Canada) ? Age 40 Salary Interest on bonds Alimony received Capital gain IRA contribution AGI Standard deduction Personal and dependency exemptions (1 × $4,000) Taxable income $85,000 1,100 6,000 2,000 (5,500) $88,600 (6,300) (4,000) $78,300 The alimony payments and bond interest are taxable. The gift is a nontaxable exclusion. The $2,000 of the capital gain is taxable. Net gambling losses are not deductible. Cousins do not meet the relationship test. 30. Compute Aiden’s 2015 taxable income on the basis of the following information. Aiden is married but has not seen or heard from his wife for over three years. Salary $80,000 Interest on bonds issued by City of Boston 3,000 assume that the taxpayer is claimed as another person’s dependent.100 from repairing cars.000. ages 17 and 18. An uncle cannot be a QC.000. age 18. d. In each case. 32.050 or $1.550 (additional standard deduction).000 100. 33.700) because it provided a greater deduction than did head of household (as an abandoned spouse.000 9. QC. Leo and Amanda (ages 48 and 46. Trista falls within the qualifying relative category. mother-in-law.500 The interest ($3. c. Trista is not a qualifying child—although a fulltime student. Two personal and two dependency exemptions. age 15. Lucy. Mattie. c. has income as follows: $400 cash dividends from a stock investment and $500 from grooming pets. and Trista receives a $5.000) Taxable income $80. charitable contributions) Number of dependents (children. a. $5.150. b. N. has income as follows: $500 from a bank savings account and $3. (LO 4) Taxpayer’s son has gross income of $7. the amount allowed cannot exceed the standard deduction available in 2015 for single taxpayers. Excluded from gross income are the life insurance proceeds ($200.000). B.250). His gross income is $7. She passes the gross income test because the tuition portion of a scholarship is nontaxable. $9. A qualifying child cannot be older than the taxpayer.050 or $850 [$500 (earned income) + $350]. Sarah. has income as follows: $675 interest on a bank savings account and $800 for painting a neighbor’s fence. Elton (age 18) and Trista (age 24).000) on the bonds is not taxable.050. Taxpayer’s niece has gross income of $3. Taxpayer’s cousin does not live with her.000 200. Taxpayer’s daughter is age 25 and disabled B. The greater of $1. interest on home mortgage. so his gross income does not matter. Taxpayer’s older nephew is age 23 and a full-time student. $3. 31. age 60) 2. Elton is a qualifying child. 4) Determine the number of personal and dependency exemptions in each of the following independent situations.200 (earned income) + $350 + $1. respectively) are husband and wife and furnish more than 50% of the support of their two children. Determine the amount of the 2015 standard deduction allowed in the following independent situations.200 from babysitting. During the year. $1. Cannot be a QR due to the gross income test. However.050. has income as follows: $600 cash dividends from a stock investment and $4.000) and the inheritance ($100. she is not under age 24.000 2.000. Taxpayer’s sister lives with him.500 providing transportation for elderly persons with disabilities.000 2. h. (LO 3. Aiden chose to itemize his deductions from AGI ($9.700 from handling a paper route.000 5.200 (9. .Interest on CD issued by Wells Fargo Bank Cash dividend received on Chevron common stock Life insurance proceeds paid due to the death of Aunt Margie (Aiden was the designated beneficiary of the policy) Inheritance received on death of Aunt Margie Jackson (a cousin) repaid a loan Aiden made to him in 2012 (no interest was provided for) Itemized deductions (state income tax. Mel.700 (earned income) + $350. d. The greater of $1. QR. i. Taxpayer’s grandson lives with her. Elton earns $4. Cannot be a QC due to the abode test. has income as follows: $700 interest from a certificate of deposit and $6. B. e. Taxpayer’s brother does not live with her.000) $58.000 2.100 (earned income) + $350 = $6. Her gross income is $8.300. Four. f. The loan repayment ($5.450. j. b. QC. $5. Taxpayer’s daughter is age 18 but does not live with him. Taxpayer’s uncle lives with him.150 [$800 (earned income) + $350].200 $84. She is age 17 and has dropped out of school. $6. QR. a.000 scholarship for tuition at the law school she attends. e. Cannot be QR due to the gross income test. property taxes on residence.000) is a nontaxable return of capital. Although $6. Cannot be a QR due to the gross income test. g. age 67 and a widow. $1.100.700) (16. Curtis. age 16. N. $4.700 3 Age 43 Salary Interest on CD Dividend AGI Itemized deductions Personal and dependency exemptions (4 × $4. age 18. a.000. QR. All are full-time students. The parties. Clint. her ex-husband.000 from a part-time job. Andy is still immune from the gross income test. They both fall within the qualifying relative category. citizen and resident. Reginald. The parents qualify because they are U. Paige (age 19). and grandmother are eligible to claim her as a dependent. Raul’s household includes his friend Helena. Gretchen. One personal and one dependency exemption. contributes 100% of the support of his parents. due to a higher AGI. a. She maintains a household in which she. Karen provides more than half of all of their support. d. a niece (age 18). Three. Olive is age 91 and blind. One. Two. Audrey furnishes more than 50% of the household’s support.S. .000). her mother-inlaw. age 45. and his wife. The eligible parties can rotate the exemptions as they choose. Determine how many personal and dependency exemptions are available in each of the following independent situations. Both persons fall within the qualifying relative category.b. Olive. niece. Raul provides all of Helena’s support. a U. contributes 100% of the support of his parents. b. a. 9) Wesley and Myrtle (ages 90 and 88. and grandmother ($40. (LO 4. a U. citizens but are residents of Germany. All parties live in Iowa (a common law state). Jenny.S. One personal and two dependency exemptions. who does not live with her. Four. Three. if anyone. The stepmother meets the relationship test.S. furnishes more than 50% of the support of her married son. and a son (age 26). 34. he can qualify except in the year of the divorce. c. The cousin and the family friend do not meet the relationship test.000).000 in gross income. live. Jackie provides all of the support of a family friend’s son (age 20) who lives with her. 35. Karen is single and was divorced last year. Winston lives alone. Determine the number of personal and dependency exemptions in each of the following independent situations. and brother. who are citizens of Panama. Pablo’s mother does qualify. who is age 19 and a citizen of Costa Rica. can claim an itemized deduction for paying the medical expenses of Wesley and Myrtle? c. The cousin and son are not. a U. Raul. citizen and resident. that person can claim them. the father (as parent) takes preference. Andy (age 18). Thus. Raul is not her adoptive father. Andy maintains a household that includes a cousin (age 12). Two. Percentage of Support Social Security benefits 16% Son 20 Niece 29 Cousin 12 Brother 11 Family friend (not related) 12 Who is eligible to claim the Federal income tax dependency exemptions under a multiple support agreement? a. The parents qualify as dependents under the Mexico/Canada exception. Although the ex-husband is a member of the household. Audrey (age 45) is divorced this year. uncle ($50. due to the relationship and age tests. Specify whether any such exemptions would come under the qualifying child or the qualifying relative category.S. 36. During the year. Pablo’s father does not qualify because he is a citizen and resident of Panama. and his mother is a legal resident of the United States. Crystal. One personal and one dependency exemption. c. a U. she does not meet the gross income test and cannot be a qualifying relative. citizen. Paige is treated as having $4.S. Olive meets the relationship test. but the father does not. Helena is not a qualifying child under the exception to the citizenship or residency test. If the father forgoes the exemption. citizen and resident. Andy earned $8. As a qualifying child. (LO 5) In each of the following independent situations. but he maintains a household in which his parents live. Winston qualifies for head-of-household filing status as long as one parent is his dependent. d. and his mother. b. 39. determine Winston’s filing status. The household is maintained by the uncle. report AGI as follows: father ($30. Therefore. In a community property situation. the father. Four. Andy furnishes all of their support. Three. who live with her. a. and her brother-in-law (age 23 and not a full-time student). lives in Costa Rica. and grandmother. In this tiebreaker situation. The mother qualifies as Winston’s dependent. Assume the same facts as in (c). who are citizens of Canada and live there. the uncle is next in order of preference.S. lives in a household with her father. however. Son. Must Wesley and Myrtle be claimed as dependents by the same person(s) for both tax years? Explain. Pablo’s father is a resident of Panama. Because Andy is a qualified child. citizens. She also furnishes most of the support of her stepmother. b. b. Paige meets the gross income requirements of a qualifying relative. Two fall within the qualifying relative category. contributes 100% of the support of her parents. Clint cannot qualify as a member of Audry’s household in the year of the divorce. uncle. If the eligible person who is awarded the exemption also pays the medical expenses. and it is assumed that each meets the gross income test. except that all parties live in Washington (a community property state). The brother-in-law’s age and non-student status have no bearing on the dependency issue.and brother-in-law satisfy the relationship test. Winston is not married. uncle. Two. Who is eligible to claim Jenny as a dependent on a Federal income tax return? Jenny is a qualifying child as to all three parties. 38. all of whom file their own Federal income tax returns.000). c. No. age 14. The niece is in the qualifying child category. who are U. as a resident of the United States. Three. Pablo. Which of Jenny’s relatives takes precedence in claiming the exemption? Explain. respectively) live in an assisted care facility and for years 2015 and 2016 received their support from the following sources. he is not subject to the gross income test. and the family friend’s son is a member of the taxpayer’s household. The mother. a. Karen maintains a household that includes her ex-husband. Who. except that Winston’s wife disappeared (i. (LO 3. 40.000 at a church raffle. Morgan earns a $95. Chloe is the executor of Christopher’s estate and maintains the household in which she and Dylan live. she can claim three exemptions—two personal and one dependency. b. During 2014 and 2015. Being under 19 years of age. She is not a surviving spouse because she cannot claim Dylan as a dependent. 4. Winston’s wife died last year. 44. Chloe is a surviving spouse. her son is a qualifying child. 2. Travis is a full-time student. e. Morgan (age 45) is single and provides more than 50% of the support of Rosalyn (a family friend. For 2013. $80. Same as (d). 3. Travis is a qualifying child due to his student status. Jerold (age 44). For 2015. Jerold can file a joint return.000 for an RV that cost $60. 2. head-of-household status requires that the dependent be a member of the taxpayer’s household. Thus. lives. Both Rosalyn and Flo live with Morgan. Winston must use single filing status. but Jerold (a citizen of France) lives in Canada.000) 4. and Jerold (a nephew. Thus. Because she is the executor of Christopher’s estate..000 Macy earns is assigned to her. 6.000 salary.600) $41. Jerold will have two exemptions. She can claim Dylan as a dependent. Chloe should file a joint return. The answer as to filing status does not change: joint return for 2014 and surviving spouse for 2015. age 18). live. Charlotte’s father received $2. Chloe.e. Besides interest on City of Miami bonds in the amount of $5. 5) Christopher died in 2013 and is survived by his wife. c. but he maintains a household in which his married daughter. Dylan. For 2015. (LO 4. he can issue a consent on her behalf. For 2014. As executor of Nadia’s estate. contributes $5.000) (9.872.750 . age 18).Winston lives alone.750 − $50. he is a full-time student. 4. Ward. (He does not satisfy the requirements of an abandoned spouse—a mother-in-law is not a child). Macy (age 18).000 (16. All of their support is furnished by Chloe. Ward qualifies as Winston’s dependent.250) $64.000 $82. Charlotte reports itemized deductions of $10.845.000 and was used only for vacations. Thus.510.500.450) = $5. 41.00. Travis is a qualifying child. who live with her. Year Earnings Student? 2013 5. and receives sales proceeds of $15. Both Karin and her husband (Winston’s son-in-law) qualify as Winston’s dependents. What is Jerold’s Federal income tax filing status for 2014 and 2015 if all parties reside in: Idaho (a community property state)? a. Winston can qualify for head of household if the mother-in-law is his dependent. Winston must use married filing separately filing status.000 (5. Chloe must file as single. 5) Nadia died in 2014 and is survived by her husband.50. Charlotte also maintains the household in which her parents live. Winston maintains a household in which he and a family friend.200 in itemized deductions. Because Winston is still married. c. Travis and Macy do not file jointly during either year. compute the 2015 tax liability for Charlotte. For 2014. while Macy earns $7.500 (50% × $7. a short-term capital loss of $2. Dylan reports the following information. He maintains the household where he.400 using surviving spouse rate schedule: $1. Jerold has three exemptions—one personal and two dependency. 5. Kansas (a common law state)? b. and Jerold furnished all of their support. The dependent must meet the relationship test. Winston maintains a household in which he and his mother-in-law live. Consequently. He does not meet the requirements of a surviving spouse because a mother-in-law is not a child. Dylan saves his earnings. Karin.200) = $10. $95.000) Standard deduction Taxable income Tax on $41. so all of the $7. Flo (a niece. 3.750 using head-of-household rate schedule: $6.000) Standard deduction Taxable income Tax on $64.000 Yes What is Chloe’s Federal income tax filing status for: a. 8) Use the Tax Rate Schedules to compute Morgan’s 2015 Federal income tax liability. and a cash prize of $4. Dylan is a qualifying child—although not under age 19. Therefore. Travis (age 22). and Macy live.500. he is not subject to the gross income test. Kansas is a common law state. d.000. and she furnished 60% of their support. Gross income Contribution to traditional IRA AGI Less: Personal and dependency exemptions (4 × $4.000 (28.400 − $18.287. age 36).000 salary. As a qualifying child.000) $90. Charlotte earns an $80. her married son. Macy will not be a dependent under the qualifying relative category because of the gross income test. (LO 1.000 each year from a parttime job. Winston must use single filing status. 43. Jerold can qualify as a surviving spouse. 6) Using the Tax Rate Schedules. She has $8.000) (12.400 from a part-time job. 5.50 + 25%($64. he cannot use head-of-household filing status.000 (2.000 Yes 2014 7. Except in the case of parents. she did not die) two years ago.000) meets the gross income test. The father does not fail the gross income test because tax-exempt income is not counted. Charlotte (age 40) is a surviving spouse and provides all of the support of her four minor children. she can consent on his behalf to file jointly.00 + 15%($41. Salary Short-term capital loss Cash prize AGI Less: Personal and dependency exemptions (7 × $4. 4.000 to a traditional IRA. and Macy is a qualifying relative—her gross income of $3. Travis. b. Jerold is the executor of his wife’s estate. and their 18year-old son.400 (LO 1. Dylan is not a qualifying child (due to the age test) and is not a qualifying relative (due to the gross income test). and her daughter-in-law.000 No 2015 6. The corporation provides services to each customer every month. for Federal income tax purposes. matching what is reported in the taxpayer's financial statements for that year. sells its services under 12-month. Bigham Corporation. goods and a few other items to be earned after the end of the tax year of receipt.000 Note that for the 24-month contracts. CHAPTER 4 21. $40. 22. 2016 Income c. each spouse is taxed on one-half of the income from property belonging to the community. b.g.500 a month in alimony 24.000 × 6/24= $6.. Length of Contract Total Proceeds 12 months 14. citizen or a resident. d. How much gain or loss does Casper recognize on the transfer of the stock? a.000 on its 2016 financial statements. 2015. As part of the divorce settlement. $14. Simba’s salary). $ 0 e. Revenue Procedure 2004–34 does not apply to prepaid rent or prepaid interest. Jerold and Flo meet the relationship test. Rev. separate property produces separate income that the owner-spouse must report on his or her Federal income tax return. who is better able to pay the tax on the amount received. In all community property states. wages. Bigham sold the following customer contracts: and Determine the income to be recognized in taxable income in 2015 and 2016. What are the tax consequences for Casper and Cecile regarding these transactions? Alimony and separate maintenance payments are deductible by the party making the payments and are includible in the gross income of the party receiving the payments. income from personal services (e. each spouse is taxed on one-half of the income. The laws of Texas.” Idaho (Community Property State) a.000 × 18/24 = $18. $ 900 c. any property is deemed to be community property. Otherwise. Simba and Zola are married but file separate returns. A transfer of property other than cash to a former spouse under a divorce decree or agreement is not a taxable event. Cecile sold the stock for $40. Simba received $80. Thus. On July 1. Revenue Procedure 2004–34 permits an accrual basis taxpayer to defer recognition of income for advance payments for services. $14. he is a resident of Canada. Accordingly. Casper is not required to recognize gain on the transfer of the stock. The portion of the advance payment that relates to services performed in the tax year of receipt is included in gross income in the tax year of receipt. b. $24. Length of Contract 2015 Income 12 months 24 months 2016 Income a. enter “$0. c. salaries. Dividends Interest Salary South Carolina (Common Law State) d. and 24-month contracts.000. 23. all property is deemed either to be separately owned by the spouse or to belong to the marital community.000 12 months 24 months 24 months 2015 Income a. b. In addition Casper is required to pay Cecile $1.000 × 6/12 = $7. Wisconsin. $900 f. . f.000 × 6/12 = $7.000 is reported on Bigham’s 2017 financial statements. Bigham will only report $12. and income from a professional partnership) is generally treated as if one-half is earned by each spouse.000 on the date of the transfer. Property may be held separately by a spouse if it was acquired before marriage or received by gift or inheritance following marriage.000 c. The transferee does not recognize income and has a cost basis equal to the transferor’s basis.000 $ 600 South Carolina (Common Law State) d. 2004–34 does not allow for deferral beyond the year subsequent to the year the advance payment was received.000 of salary and $1. Louisiana.000 Length of Contract 24. The transferor is not entitled to a deduction and does not recognize gain or loss on the transfer. the income from separate property belongs to the community. Zola collected $900 in taxable interest on certificate of deposit that she inherited from her aunt.Proc. For Federal tax purposes. an accrual basis calendar year taxpayer. income is shifted from the income earner to the income beneficiary.e. $24. Casper transferred stock to Cecile. Although Jerold is not a U.000 b. In these states. e. Compute Zola’s gross income under two assumptions as to the state of residency of the couple.200 of taxable dividends on stock he purchased in his name and paid from the salary that he earned since the marriage.. If an amount is zero. The portion of the advance payment that relates to services to be performed after the tax year of receipt is included in gross income in the subsequent tax year. In the remaining community property states.000 a month after receiving it. she is a member of Morgan’s household. Casper and Cecile are divorced this year. He made five payments to her during the year. .Although Rosalyn does not meet the relationship test.000 d. Advance payments for these items are always taxed in the year of receipt. $ 0 Interest Salary Note that the stock is a community asset because it was created with community funds (i. Casper purchased the stock for $25. and Idaho distinguish between separate property and the income it produces. The remaining $6. and it had a market value of $43. Under a community property system.S. Idaho (Community Property State) Dividends a. Assume that tax avoidance is not a principal purpose of any of the loans.000 or less do not apply if a principal purpose of a loan is tax avoidance. there is a $10.000 carryover basis) when she sells the stock.050 ($1.000 sales price – $25. Cecile has $7.Does Casper receive a deduction for the $7. In addition. the $1. an accrual basis taxpayer.260 − $210). However. 37. The company also sold a 36-month service contract for $1.200 is included in the 2015 gross income.260 × 6/36). a. if the borrower’s net investment income for the year does not exceed $1. The sale was reported in 2015 for financial accounting purposes. 2. This vague tax avoidance standard makes practically all compensation related and corporation-shareholder loans suspect.000 exception applies. Yes. the balance on the contract sold in 2015 for services that would not all be performed by the end of the tax year of receipt. As with gift loans. if the proceeds of such a loan are used to purchase income-producing property.000 exception does not apply to the loan to Woody because the proceeds were used to purchase income-producing assets. However. In this example. the company sold a 6-month service contract for $240. That is.000. the imputed interest is the difference between the amount that would have been charged at the Federal rate and the amount actually charged.000 800 Gift Woody 8. the imputed interest cannot exceed the borrower’s net investment income for the year (gross income from all investments less the related expenses).000 exception should apply when an employee’s borrowing was necessitated by personal needs (e. $120 is included in 2015 gross income ($240 × 3/6 = $120). or generosity). Elizabeth made the following interest-free loans during the year. On loans of $100. Richard: Gift loans (made out of love. c. 25.000 exception also applies to this loan. how much does she report? d. Drake would include in 2016 gross income $1. The $10. and Drake immediately delivered it to the customer. sells home appliances and service contracts. When Cecile sells the stock. The advance payment for services qualifies for proration over the life of the contract because all of the income will be earned by the end of the tax year following the year of receipt. 3. However. $105.000 × 5% × 6/12 = $2. Thus.000 exemption for compensation-related loans and corporation shareholder loans.000 -0Purchase Residence If interest is charged on the loan but is less than the Federal rate. Cecile has a realized and recognized capital gain of $15. no interest is imputed. the portion of the advance payment that relates to services to be performed after the tax year of receipt is included in gross income in the tax year following the tax year of receipt of the advance payment. the income imputed to the lender is limited to the borrower’s net investment income. other limitations apply instead.500 alimony paid? b.000 ($40.000 600 Purchase Stock Irene 105. How much income does Cecile have from the $7. Therefore.500 of income from the alimony received. b.g. For the sale of the six-month service contract.200 advance payment from a customer for an appliance that Drake special ordered from the manufacturer. Borrower Amount Borrower’s Net Investment Income Purpose of Loan Richard 5.000 exception. the company received a $1.260 in July 2015.000 or less between individuals.000 or less between individuals. Casper may deduct the $7. unless the loan proceeds are used to purchase incomeproducing property. the imputed interest is limited to Woody’s investment income ($600). b. Determine the effect of each of the following transactions on the company’s 2015 gross income assuming that the company uses any available options to defer its taxes. However. Woody: Compensation-related loans (employer loans to employees). a. However.625 as interest income..500 of alimony paid.000 or less. Nevertheless. Irene: Corporation-shareholder loans (a corporation’s loans to its shareholders). these limitations for loans of $100. What are the effects of the imputed interest rules on these transactions? Compute Elizabeth’s gross income from each loan: The imputed interest rules apply to the following types of below-market loans: 1. This exemption eliminates immaterial amounts that do not result in apparent shifts of income. None of the exceptions apply to the loan to Irene because the loan was for more than $100. affection. to meet unexpected expenses) rather than tax considerations. In October 2015. Richard is not subject to the imputed interest rules because the $10.500 alimony received? c. In December 2014. Elizabeth must recognize $2.625. .000. Drake must include in 2015 gross income $210 ($1. therefore. The appliance did not arrive from the manufacturer until January 2015.000 exception does not apply if tax avoidance is one of the principal purposes of a loan. (LO 2) Drake Appliance Company. the $10. under the $100. the $10. Assume that the relevant Federal rate is 5% and that the loans were outstanding for the last six months of the year. The advance payment received in 2014 for goods delivered in 2015 qualifies for deferral because the company satisfied the tax and financial accounting conformity requirement. no interest is imputed on loans of $100. No interest is imputed on total outstanding gift loans of $10. The $1. 500 Under the $100. Jody borrowed $25. $60. c. Because of the customer’s poor credit record.000 each month for the 12 months in 2016 and the remaining $132. Actual receipt applies to the $120. Yes. c.000 to her employer’s qualified pension fund. No. The cost of the appliancewas$750. and Kait did not charge Jake any interest. This loan is a gift loan between individuals that is eligible for the $100. Did Freda actually or constructively receive $252. Sam’s wife was very ill. the fair market value of the note was only $600. Mike’s sister had $900 of investment income for the year. So the imputed interest income for the six months is calculated as follows: $60. 51. Assume that all of the loans were made at the beginning of the tax year unless otherwise indicated. (LO 2. $750. So in this case. The Federal rate was 5%. c. Sam and his wife had no investment income for the year.000 deferred income is not constructively received in 2016 because under the actual contract terms. after Freda had earned the right to collect the $132. He borrowed $8. Sam’s employer maintains an emergency loan fund for its employees. She also benefited by not having to pay the tax on the income shifted into 2017 until she filed her 2017 income tax return or made payments on estimated taxes for 2017. and he incurred unusually large medical expenses. What is her gross income from the annuity payments in the first year? a.On December 31. The company must include $1.000 for six months. Mike loaned his sister $90. Was Freda in constructive receipt of the income in 2016? Explain.000 in 2017. Jody had $3. During the year. The interest of $260 will be taxed as it accrues over the 24-month life of the contract. Assume that Pam retires in June 2015 and collects six annuity payments this year.000 .000 exception.000 per month for the remainder of her life. Mike did not charge interest on the loan. Freda rejected the employer’s offer.000 actually received in 2017 was constructively received in 2016 because it was made available to her in that year.000 exception is not available on corporation shareholder loans. Jake. The $100. The employer wanted to make the early payment so as to deduct the expense in 2016.100 for the tax year. The Federal rate was 5.to be paid at the rate of $40 a month for 24 months. So the imputed amount is $0. rather than $132. 38. d. in arriving at gross income of $450. Her employer offered to pay her $21. The $132.200 in gross receipts and can deduct the cost of the appliance. and there appears to be no tax avoidance motive. In December 2016.” What could explain Freda’s willingness to spread her salary over a longer period of time? b.000 in 2016? a. the employer offered $133. she did not have the right to receive the income in 2016. The imputed interest would be calculated as follows: $25.200. a.000 in January 2017. Sam did not use the funds to buy investments. The fair market value of the note is not relevant for purposes of determining the accrual method taxpayer’s gross income. Although Mike’s sister has $900 of investment income. Jake used the $60.000 to pay off college loans. The $132. Freda countered that she would accept $10. The employer accepted Freda’s terms for 2016 and 2017. The corporation charged Jody 4% interest. the imputed interest is limited to Jake’s net investment income of $2.100.000. 2015. the limit has no effect on the amount of imputed interest. In 2015. 5) Freda is a cash basis taxpayer. Interest is imputed on this loan.000 exception.000 exception. She is 66 years old and has contributed $42. she negotiated her salary for 2016. 49. interest is not imputed under this exception if the borrower’s net investment income is not greater than $1. The Federal rate was 5%. the company sold an appliance for $1. (LO 4) Indicate whether the imputed interest rules should apply in the following situations. This loan is an employer-employee loan for not greater than $10.000 in January 2017. Cost (her investment) = $42.000 × 5% × 1/2 = $1. Jake had dividend and interest income of $2.000 × 12 months) she received in 2016. She elects to receive her retirement benefits as an annuity of $3. The constructive receipt doctrine cannot change actual events to “what might have been done.000 ($10.5%. The Federal rate was 5%. Thus.000 to buy a new home.500 of investment income for the year. b. (LO 4) Pam retires after 28 years of service with her employer.500 from his employer’s emergency loan fund for six months. She used the funds to pay her daughter’s college tuition.000. no interest is imputed.000. The company received$500cash anda notefromthe customer for $700and $260interest. The loan from Kait to Jake is classified as a gift loan between individuals that is eligible for the $100.000 from her controlled corporation for six months.000 to Freda at that time. Freda may have expected to be in a lower marginal tax bracket in 2017.000 × (5% − 4%) × 1/2 = $125 Kait loaned her son.000 per month in 2016 for a total of $252. 400 56. Assume that Pam lives 25 years after retiring. She is considering getting a parttime job that would pay her $5. What is Ted’s gross income from the purchase of the automobile? The discount on the price of the automobile of $4.000 + 50%($14.000 With the additional income of $5.0765) Increased taxable Social Security benefits ($2.000 × 15%) FICA tax ($5.000 × 12 payments = $36.492) ÷ $5. Investment in the contract $42.000) Less: Capital recovered ($200 exclusion × 160 payments) (32. and $3.492 What would be the effective tax rate (increase in tax/increase in income) on the additional income from the part-time job? b.000 (750) (383) (375) $3. The price for a nonemployee would have been $33.000) are includible in her gross income. Melissa’s after-tax income from her part-time job would be: Salary Less: Federal income tax ($5. However. She does not itemize her deductions.e. which is $240 ($300 × 80%).000) Unrecovered cost (loss in the final year return) $10.900 ($33.600 exclusion) = $22. The company’s cost was $29. .000 Income from collections in final year: ($24.considering Social Security and Medicare tax (7.000 a year. The discount can be excluded from Ted’s gross income because the price he paid was above the employer’s cost.580 ($29. Her effective tax rate would be 30.500 ($3.000 210 Collections in 2015 (6 payments × $3. 17 years and 6 months). Therefore. She collected eight payments in the year of her death. the additional $5.000 of dividend income.65%) as well as Federal income tax on the earnings of $5.000. The maximum qualified employee discount that can be excluded for a service is 20%. (LO 2) Ted works for Azure Motors.000 × . She is in the 15% marginal income tax bracket. The company does not charge employees the $300 dealer preparation fee that nonemployees must pay.000 (1. Ted must include in gross income 80% of the dealer preparation fee.000þ$580).Employee’s investment Number of anticipated payments [Exhibit 4. of $300.000) − $25. is unmarried and has no dependents.500 So the part-time job would result in an increase in taxable Social Security benefits of $2.000 + 50%($14. a service. Thus.000 collected − 8 × $200 = $1. All employees can buy a car at the company’s cost plus 2%. Also.000) − $25.000] = $1.000].000? a. $14. Pam will have recovered her investment as a return of capital prior to the twenty-fourth year (i.000 in earned income.000 − $3. her taxable Social Security benefits would be as follows: 50%[$25.000] = $3.600 − $29. What is her gross income from the annuity payments in the twenty-fourth year? b. who is 70 years old.500 × 15%) After-tax income from part-time job $5.000 Assume that Pam dies after collecting 160 payments. Ted purchased an automobile for $29. Her annual income consists of a taxable pension of $17.000 Total amount collected (160 × $3. Her modified AGI before the additional $5.65% Social Security and Medicare tax rate on the $17. (LO 4) Melissa.000.600 ($33.000 was $20.500 − $1.2] $42..600þ$300 preparation fee).000) Exclusion for capital recovery ($200 × 6 payments) Include in gross income = $200 exclusion per payment $18. CHAPTER 5 11. Melissa will be subject to a 15% income tax rate and 7. What are Pam’s gross income and deductions from the annuity contract in the year of her death? c. WhatwouldbeMelissa’safter-taxincomefromthepart-timejob.000 from the part-time job.16% [($5.000.200) $16. all annuity payments received in the twenty-fourth year ($36.000 = $480.000).000 in Social Security benefits. $3.000 income will increase Social Security benefits subject to income tax.000) is a qualified employee discount. an automobile dealership. her taxable Social Security benefits would be calculated as follows: 50%[$20.800 The simplified method is used to calculate the annuity exclusion percentage because this is a qualified retirement plan distribution. Donald had purchased a life insurance policy (premiums totaled $250. The payments received for not working must be included in Justin’s gross income because he experienced an increase in wealth when the payment was received (although he may experience a decrease in future income). Donald’s wife.000 are excluded from Juan’s gross income. $50.500 accrued salary owed to Leona at the time of her death. Blake received $15. b. unless this is paid under a nondiscriminatory medical reimbursement plan available to other employees. (LO 2) Donald was killed in an accident while he was on the job in 2015.000 salary.” d.000 in the event of accidental death. c. d. b. She received her first installment this year. died in 2014. a. In 2015.000 in 2015 from his employer. Employer payments. not excluded as gift.000 each year for a 25-year period. The payments were not gifts. Darlene.000) for exceeding his sales quota. Juan collected the $3. $ 20. The corporation collected the proceeds as the beneficiary of the policy upon the death of the insured.000 (twice his annual salary). The accrued salary must be included in Juan’s gross income because it would have been taxable to Juan’s wife if she had collected it (“income in respect of a decedent”). Donald’s employer paid Darlene an amount equal to Donald’s three months’ salary ($60.000 –0– .000 as compensation. Accrued salary.000) that paid $600.000 the payment is part of company policy provides the earmarks of compensation rather than a gift. because the Internal Revenue Code specifically provides that employers cannot be considered donors to their employees. Leona. a. c. Clint collected $50.000 $20. her employer paid her one-half of her regular salary while she was away from work. Coral Corporation collected $1 million on a key person life insurance policy when its chief executive died. The fact that the corporation paid the premiums and the premiums were excluded from Leona’s gross income does not affect the tax treatment of the proceeds. d. and the premiums were excluded from Leona’s gross income as group term life insurance. The insurance policy was provided by Leona’s employer. Zero. received several payments as a result of Donald’s death.000.000). The corporation had paid the premiums on the policy of $77. 30. b. The payments received by Trina must be included in her gross income. Because of her dire circumstances. Megan received $10. Green gave Darrin an all-expense-paid trip to Las Vegas (value of $3.000 from his deceased wife’s employer “to help him in his time of greatest need. The premiums on the policy were paid by his deceased wife’s employer. The life insurance proceeds of $40. 31. The proceeds were payable to Darlene.000.000 is an excluded gift because it was paid based on Blake’s need. which was payable to his widow in a lump sum. although they were made because of her dire circumstances. The $15. the value of the trip. Trina contracted a disease and was unable to work for six months. What is Darlene’s gross income from the items listed below a. Green Construction. Juan collected $40.000 60. Darlene’s gross income from the receipts is $86.000 in accrued salary that was paid to Darlene. e.000 from her employer to help her pay medical expenses not covered by insurance. Life insurance proceeds paid to the beneficiary upon death of the insured are excluded from gross income. Donald had $20. c. b.000 on a life insurance policy when his wife.000 $480. Group term life insurance proceeds. which were not deductible by the corporation. Premiums on this policy totaling $12. $3. The life insurance proceeds are excluded from Coral Corporation’s gross income. In July 2015. which is what the employer does for all widows and widowers of deceased employees. earned before death.000 as the beneficiary of a group term life insurance policy when his wife died.28 (LO 2) Determine the gross income of the beneficiaries in the following cases: Justin’s employer was downsizing and offered employees an amount equal to one year’s salary if the employee would voluntarily retire. The fact that $ 60. Amount Gross Received Income a. who elected to receive installment payments as an annuity of $30. Donald’s employer had provided Donald with group term life insurance of $480.000. The $10. (LO 2) What is the taxpayer’s gross income in each of the following situations? Darrin received a salary of $50. He collected the proceeds as the beneficiary of the policy upon the death of the insured.500 had been included in Donald’s gross income under § 79. c. and supplies. The $16.000 and $6. books. Leigh must include in gross income the punitive damages of $80. The scholarship provided the following: Tuition and fees 15. August 2015 3.200 Determine the effect on Adrian’s gross income for 2015 and 2016 Adrian received a total of $13. **Expected return: $30. The $6.000. Determine the effect of the scholarship on Sally’s gross income. The employer grants the children of all executives a scholarship equal to one-half of annual tuition. Willy also received a $6. fees.000 included in Leigh’s gross income? Explain. The fact that the “scholarships” are awarded only to the children of executives indicates that the employer is not simply making payments to assist the student seeking his or her education. Adrian’s total expenses for the period covered by the scholarship were not known.000 × 25 years.000 January-May 2016 1. The other amounts ($15.000 scholarship received as a contest winner is excluded from gross income.000 $ 30. Therefore. and supplies. books. fees.650) in gross income. Sally’s brother. The $8.000 *Investment in contract: nontaxable $600. January 2016 3.500 received for tuition. b. Determine the effect of the scholarships on Willy’s and his father’s gross income. 32.000 Loss of income while her arm was healing 6.000*/$750.000 $ 6.. but he received $8.500 in August and $7. his intended field of study. b. he must include $4. (LO 2) Sally was an all-state soccer player during her junior and senior years in high school.000 Books and supplies 1. The athletic scholarship is considered a payment to further the recipient’s education and is not compensation for services. She accepted an athletic scholarship from State University.500 Transportation 1.200 a. was not a gifted athlete.500 Books and educational supplies August-December 2015 1.700 Tuition.000 “scholarship” is additional compensation to Willy’s father. (LO 2) Determine the effect on gross income in each of the following cases: .e.000 Housing and meals 6. he is allowed to defer reporting the income until 2016.700 − $9. Assume that Leigh also collected $25. He received $6. a. (LO 2) Adrian was awarded an academic scholarship to State University for the 2015–2016 academic year. 34. Although contest winnings are generally subject to tax.000 + $1. Therefore.000 $86.300 amount received for damage to her automobile. 35.d. Annuity proceeds Less: Recovery of capital ($600.750 + $1.000 received for room and board and the $1.000 insurance proceeds. Is this $25.000**) × $30.300 Physical damage to her arm caused by the collector 15. the $6.050 ($13. When he received the money in 2015.000 scholarship (to be used for tuition) as the winner of an essay contest related to bioengineering.000 24. when all the uncertainty is resolved.650 ($3. and supplies can be excluded from Sally’s gross income as a scholarship.000 Punitive damages 80.000 of damages for slander to her personal reputation caused by the bill collector misrepresenting the facts to Leigh’s employer and other creditors. Adrian’s expenditures for the relevant period were as follows: Tuition. Willy.300). The $25.700 + $3. Adrian had enough personal savings to pay all expenses as they came due. but rather to compensate an employee. b.200 received for transportation must be included in her gross income.200) on tuition. This amount is a nontaxable recovery of capital (i. However. 36. The amount received for room and board is not excludible from gross income.700 and spent $9.000) may be excluded as arising out of the physical personal injury. except the $3. it reduces her basis for the automobile by $3.750 Room and Board August-December 2015 2. (LO 2) Leigh sued an overzealous bill collector and received the following settlement: Damages to her automobile that the collector attempted to repossess 3.000 What effect does the settlement have on Leigh’s gross income? a.800 January-May 2016 2.000 from their father’s employer as a scholarship during the year.000 is included in Leigh’s gross income because it did not arise out of a physical personal injury.200 in December 2015. books. the exception is when the prize is a scholarship. Because the compensatory damages of $75. Therefore. Therefore.000 in her gross income.000 in punitive damages in a lawsuit she filed against a tanning parlor for severe burns she received from using its tanning equipment. the $150. It appears that Ava’s meals are not provided for the convenience of the employer.000 is included in Eloise’s gross income. a friend of yours from high school.500 How will these items affect Trevor’s AGI (ignore the impact of self-employment taxes)? A. Scott is not required to include anything in gross income for the use of the condominium. Nell must include the $10. the use of the apartment should qualify as a noadditional-cost service because the apartment would otherwise be vacant.000 . works as a server at the ST Cafe.000 (37. She is permitted to leave the premises for lunch.000 arose from a physical personal injury.000 are included in Orange Corporation’s gross income under the tax benefit rule. The damages of $50.000 for damages to her personal reputation. When you inquire about why his bank deposits substantially exceed his tip income. During this time.000 in settlement of a sex discrimination case against her former employer. (LO 3) Trevor.000 and punitive damages of $300. a. The damages to Nell’s personal reputation are not for physical personal injury or sickness. A comparison to the poorer quality of the self-prepared lunch is not a valid measure of the benefit she actually received. she pays $2 for a lunch that would cost $12 at a restaurant.000 punitive damages in her gross income. his employer permitted Ira to live in an apartment the company maintains for customers during the buying season.000 must be included in her gross income. The lodging is for the convenience of the employer. CHAPTER 6 39. but the punitive damages of $30.000 from a cosmetic surgeon who botched her nose job. he confides to you that he is a bookie on the side. c. she would probably bring her lunch at a cost of $3 per day. On average. For the first month on the new job. Orange Corporation. b. Ava is required to include in gross income the difference between the amount she paid for the meals. e.Eloise received $150. taking telephone calls from the company’s European branch. The month that Ira occupied the apartment was not during the buying season. The punitive damages of $300. because of the close proximity of the condominium to the office. an accrual basis taxpayer. b. this is a taxable fringe benefit. if the prices in the cafeteria were not so low and the food was not so delicious. and the apartment would not otherwise have been occupied.000 are included in her gross income. 42. Apparently Ira is not being provided the housing for the convenience of his employer.000) $15. Therefore. but she usually eats in the company’s cafeteria because it is quick and she is on a tight schedule. they are excluded from Joanne’s gross income. Ira recently moved to take a job. Beth received $10. a. However. Often he works late.000 from a lawsuit filed against its auditor who overcharged for services rendered in a previous year. d. but rather as a convenience for the employee. The settlement in the sex discrimination case did not arise out of physical personal injury or sickness. Scott often stays in a company-owned condominium when he has a late-night work session. c. He asks you to help him prepare his Federal income tax return.000 29. Ira was searching for a home to purchase or rent.000 $ 8. She also received $40.000 for the physical personal injury are not included in Beth’s gross income. $2.000 29.000 8. However. The condominium is across the street from the company office. Also. The effect of the illegal gambling business on Trevor’s AGI is as follows: Gross income Deductible expenses: Salaries Payouts to winners Increase in AGI $52. Thus.000 in compensatory damages and $30. Nell received $10. assuming the company received tax benefit from deducting the audit fees in a previous year. the condominium is considered to be on the employer’s business premises according to the Tax Court. and the amount she would be required to pay of $12 to an unrelated restaurant. Trevor then provides you with the following documented income and expenses for the year: Tip Income Gambling income Gambling expenses Payouts to winners Employee compensation Bribe to police officer who is aware of Trevor’s bookie activity 16. Joanne received compensatory damages of $75.000 52. She must also include the $40. received $50. The compensatory damages of $10.000 7. Scott is an executive for an international corporation located in New York City.000 in punitive damages. (LO 2) Does the taxpayer recognize gross income in the following situations? Ava is a filing clerk at a large insurance company. Her books show the following income and expenses for the current year: Income from fees.000 $18.132 [$2. Alex must report the $18.000 3.000 as revenues. Her outside income comes from prizes for winning horse shows. The balance of $51.132.000. half of which she uses for the horse activity (i.200 (4. The activity produces the following revenues and expenses: Revenue Property taxes Materials and supplies Utilities Advertising Insurance Depreciation 18.000. tack houses. paddocks.000 is eligible) Total deductible expenses $ 4.000 in his gross income. 44.500 2.750 $15.000 + $18.000 ($18. His taxable income (ignore the impact of self-employment taxes)? B. fences. Because Nancy is in the hotel business.000 4.800) 1. and sales Expenses Entry fees Feed and veterinary bills Supplies $22.000 revenues − $3. is exploring the possibility of expanding the chain into a city in the Northeast.000) is amortized over a period of 180 months at the rate of $283 per month ($51.000 property taxes). Her expenses for this are $53. Because Nancy was not in the restaurant business. conducts an activity in 2015 that is appropriately classified as a hobby. Of the $53.000 can be deducted..000 is deductible as follows: Materials and supplies Utilities Advertising Insurance Depreciation (because depreciation is sequenced last. All of the property taxes of $3.000.000) (13. During the year.000 are classified as miscellaneous itemized deductions and will be subject to the 2%-of-AGI floor. Based on the regulatory environment for hotels in the city.e.000 before considering income or loss from her miniature horse business. the $15. the amount of the expenses he is permitted to deduct.000) × 2%] of these expenses is disallowed. Samantha’s office in her home is 10% of the square footage of the house. and sales of yearlings. all investigation expenses associated with the hotel business are deductible in the year paid or incurred.750 of the $4.000 are deductible in the current year.000 4. the total deduction for the year is $35. has AGI of $100. Consequently. and his taxable income. Trevor also must include the tip income of $16. Alex’s AGI is $42. The restaurant begins operations on September 1.000 900 .000 1.200 (LO 3) Samantha. 41. or a total of $38. she decides not to expand. (LO 3) Alex.000 − $3.000 5. only $2. the investigation expenses of $35. (LO 3) Nancy.200) Reportable net income from hobby Less: Personal exemption Taxable income 45.000 5. She uses the office exclusively for maintaining files and records on the horse activities. an executive.500 2. Determine the amount of income Alex must report. $1.000 750 4. who is single.000 ÷ 180) commencing in September (the month the business is started). stables. Trevor’s taxable income also increases by $15.000. Because the remaining expenses of $16.000 − $2. stud fees.000 [$5. an amount of $2.000 Without regard to this activity. the owner of a very successful hotel chain in the Southeast.000) $39.000 + ($283 × 4 months)] for the restaurant investment.000 750 2.000 (reduction for excess over $50.000 (3.000 ($53.000 of expenses associated with this investigation. she can deduct only part of these investigation expenses. Even though Nancy decides not to pursue the expansion of her hotel chain into another city. and other related improvements).500 is not deductible because this expense violates public policy. Samantha’s home is on 20 acres. Determine the amount that Nancy can deduct in the current year for investigating these two businesses.250 exceed the balance of $15. she also investigates opening a restaurant that will be part of a national restaurant chain.200 [($42. She incurs $35. Other AGI Revenues from hobby Less: Expenses Property taxes Miscellaneous itemized deduction ($15.000 − $1.The bribe to police of $7. Consequently. prizes.000)] can be immediately expensed.000 for the hotel investigation + $3. $42.000 These expenses of $15. 000 24.000 7.420 23. Samantha can deduct the remaining property taxes and mortgage interest of $23.000 (1.580 $27.420) $18.880) Less: 2% of AGI ($122.420 were deductible anyway.300 8.140 Note that the deductions of the miniature horse operation are $19.000) Deduction for AGI ($ 9.000 New AGI $122.000 11. The net effect is as follows: Loss on horse farm Add: Otherwise deductible taxes and interest ($9.700 + $ 3.880 Depreciation: On horse equipment On horse farm improvements On home (10% office portion) Total Limited to: Net Income $ 3.000 4.420 .000 $1.120) In addition.000 1.580 (2.000 2.880 Less: Depreciation (11.000 $3.000 Balance (16. What are Samantha’s tax consequences if the miniature horse activity is a hobby? a.200 − $2. Samantha will be able to deduct $9.440) $16.880) $ –0– The items are handled as follows: AGI $100.120 for AGI as follows: Remainder of income after other expenses and before amounts that affect basis (depreciation) (see part a. Samantha’s deductions associated with the hobby may not exceed her gross income from the activity. above) $ 1. If the miniature horse activity is classified as a business.000 7.000 Otherwise nondeductible expenses (16.140).000 Plus: Horse farm income 22.200 800 The mortgage interest is only on her home because the horse farm improvements are not mortgaged.000) Property taxes on horse farm improvements Property taxes on home (10% × $2.000 Mortgage interest (10% × $24.400 800 220 (3.120) 3.000 900 500 2.580 Other expenses Entry fees Feed and veterinary bills Supplies Publications and dues Travel Salary and wages $1. of which $3. The net increase in taxable income is: Income $22.200) $2.560 ($3.300 8.000 1.580 as an itemized deduction. Income Deduct: Balance Deduct: $22.620) Other expenses and depreciation of hobby ($16.140) Net increase in taxable income $ 5.860 If it is a business? b.Publications and dues Travel to horse shows (no meals) Salaries and wages of employees Depreciation Horse equipment Horse farm improvements On 10% of personal residence Total home mortgage interest Total property taxes on home Total property taxes on horse farm improvements 500 2.000 $11.700) $ 1.420 + $16.000 Itemized deductions: Interest and taxes on horse farm (hobby portion) Interest and taxes on home ($26.000) $18. If the miniature horse activity is held to be a hobby. 015 Depreciation (30/50 × $7. Rent income was $5.555.000 is a capital expenditure. Anna has no net rental income and has an itemized deduction of $10. 48.000 $ –0– .900) as itemized deductions.000 7. using the court’s approach to allocating property taxes and interest.e. How would your answer in part (a) differ using the IRS’s method of allocating property taxes and interest? b. and the related depreciation is included in the $7. and left it vacant for 315 days. it is classified as rental property.800 7.000 (6.100 15.860 in part a.500 9. Under the IRS’s approach.500) (945) Remainder to apply to rental operating expenses and depreciation $6.040.000 Deduct: Taxes and interest (30/365 × $11. Related expenses for the year were as follows: Real property taxes Mortgage interest Utilities Insurance Repairs Depreciation $ 3. limited to remainder] Net rental income $7.500.900) $ 100 (100) $ –0– Anna can deduct the remaining taxes and interest of $4.500 total less $945 allocated to rental). 47.700) Contrast this decrease of $5. Percentage of use Gross income Expenses: Rental 87% Personal 13% $ 7.500) Remainder to apply to rental operating expenses and depreciation Utilities and repairs [30/50 × ($2.600. The $11.000 Determine the effect on Adelene’s AGI. used it personally for 20 days. there is no effect on AGI.500 of depreciation. Because the house was rented for less than 15 days. rented her personal residence for 14 days while she was visiting Brussels.800 and the mortgage interest of $7. These expenses are classified as itemized deductions (i.500 less rental allocation of $6.500 3. Anna rented her vacation home for 30 days.500 = $4. (LO 3) During the year (not a leap year).000 2. She had the following income and expenses: Rent income Expenses Real estate taxes Interest on mortgage Utilities Repairs Roof replacement (a capital expenditure) Depreciation $ 7. deductions from AGI).055 Utilities and repairs [30/50 × ($2.600 ($11.500 Compute Anna’s net rent income or loss and the amounts she can itemize on her tax return. The only expenses that can be deducted in this case are the real property taxes of $3. Gross income Deduct: Taxes and interest (30/50 × $11.000)] (2.400 + $1. (LO 3) How would your answer to Problem 48 differ if Anna had rented the house for 87 days and had used it personally for 13 days? Because Anna used it for fewer than 15 days.000) = $2.040) Remainder $4.555 of property taxes and mortgage interest ($11. 49. under the court’s approach.400 + $1. a. Gross income $7. The roof replacement of $12. who lives in a winter resort area.Net decrease is taxable income ($5.500 2.400 1.000 2. she has no net rental income and has an itemized deduction of $4. (LO 3) Adelene. Thus.000 is excluded from Adelene’s gross income.700 2.015) Net rental income $ –0– She can itemize $10. limited to remainder) (4. Therefore.560 difference is due to the difference between hobby and business treatment.000. the rental income of $5.500.700 with the increase of $5..000 12. 500) Utilities and repairs ($2.600 3.200 8. Income (Note 1): Salary Dividend Rental of vacation home (Note 2) Adjusted gross income Itemized deductions: State income taxes (greater than sales tax.000 400 –0– $43. Note 3) Property tax on home Interest on home mortgage Interest and property taxes on vacation home (Note 2) Charitable contributions Tax return preparation fee (Note 4) Taxable income before personal exemption $43.100 300 2. age 40.Interest and taxes ($9.100 –0– (19.000 (963) $3.856 total − $963 vacation home portion) of property taxes and mortgage interest on the vacation home are itemized deductions. had the following income and expenses during 2015: Income Salary Rental of vacation home (rented 60 days. (2) Rental income Less: Taxes and interest (60/365 × $5.300 2.758 3. Whether extended or not.300) $1.856) Remainder Less: Utilities and maintenance (1/2 × $2. and the interest expense of $3. choose the method that maximizes his deductions. vacant 245 days) Municipal bond interest Dividend from General Electric Expenses Interest on home mortgage Interest on vacation home Interest on loan used to buy municipal bonds Property tax on home Property tax on vacation home State income tax State sales tax Charitable contributions Tax return preparation fee Utilities and maintenance on vacation home Depreciation on rental 50% of vacation home $43. limited to $1.000 is excludible from gross income.000 2.500 × 13%) of property taxes as itemized deductions and take a rental loss deduction for AGI of $12. (LO 1.893) $23.893 ($5.893 1. 50.600) Remainder Less: Depreciation ($3. the results in this problem are the same.170 ($9. If Chee has any options.737) $ –0– Note that $4.400 $3.037 (1.912 $ –0– Anna could deduct $325 ($2.488 ($12.737 (1.507 Notes (1) The municipal bond interest of $2. Tax preparation fees are reduced by 2% of AGI (in this case.300 900 1.100 $2.000 400 8.000 is a capital expenditure.400 + $1.005 $1. and the related depreciation is included in the depreciation of $7. 3) Chee.000 × 13%) is not deductible as an itemized deduction because it is not qualified residence interest. the option to deduct the greater of state income tax or sales tax had not been extended to 2015.000 4.200 1. single.525 $19.500. . The roof replacement of $12.495 2.500 Calculate Chee’s taxable income for the year before personal exemptions.000 + $2.100 on the loan to buy municipal bonds is not deductible.400 4.098 3. used personally 60 days.737) Net income from vacation home $4. The mortgage interest of $1.000) Depreciation ($7.400 4.958 442 6. (3) (4) At the time of publication.500) Total expenses Net income (loss) $10.488. 2% of AGI exceeds $300).500.488) 975 $2.