Question: Betty operates a beauty salon as a

> George recently received a great stock tip from his friend, Mason. George didn’t have any cash on hand to invest, so he decided to take out a $20,000 loan to facilitate the stock acquisition. The loan terms are 8 percent interest with interest-only payme

> On January 1 of year 1, Nick and Rachel Sutton purchased a parcel of undeveloped land as an investment. The purchase price of the land was $150,000. They paid for the property by making a down payment of $50,000 and borrowing $100,000 from the bank at an

> Mickey and Jenny Porter file a joint tax return, and they itemize deductions. The Porters incur $2,000 in employment-related miscellaneous itemized deductions. They also incur $3,000 of investment interest expense during the year. The Porters’ income for

> Rich and Shauna Nielson file a joint tax return, and they itemize deductions. Assume their marginal tax rate on ordinary income is 25 percent. The Nielsons incur $2,000 in miscellaneous itemized deductions, excluding investment expenses. They also incur

> Becky recently discovered some high-tech cooking technology that has advantages over microwave and traditional ovens. She received a patent on the technology that gives her exclusive rights to the technology for 20 years. Becky would prefer to retain the

> Shaun bought 300 shares of Dental Equipment, Inc. several years ago for $10,000. Currently the stock is worth $8,000. Shaun’s marginal tax rate this year is 25 percent, and he has no other capital gains or losses. Shaun expects to have a marginal rate of

> Arden purchased 300 shares of AMC common stock several years ago for $1,500. On April 30, Arden sold the shares of AMC common for $500 and then purchased 250 shares of AMC preferred stock two days later for $700. The AMC preferred stock is not convertibl

> Christina, who is single, purchased 100 shares of Apple Inc. stock several years ago for $3,500. During her year-end tax planning, she decided to sell 50 shares of Apple for $1,500 on December 30. However, two weeks later, Apple introduced its latest iPh

> Stephanie is a 12-year-old who often assists neighbors on weekends by babysitting their children. Calculate the 2016 standard deduction Stephanie will claim under the following independent circumstances (assume that Stephanie’s parents will claim her as

> Three years ago, Adrian purchased 100 shares of stock in X Corp. for $10,000. On December 30 of year 4, Adrian sells the 100 shares for $6,000. a. Assuming Adrian has no other capital gains or losses, how much of the loss is Adrian able to deduct on he

> For 2016, Sherri has a short-term loss of $2,500 and a long-term loss of $4,750. a. How much loss can Sherri deduct in 2016? b. How much loss will Sherri carryover to 2017, and what is the character of the loss carryover?

> In 2016, Tom and Amanda Jackson (married filing jointly) have $200,000 of taxable income before considering the following events: a. On May 12, 2016, they sold a painting (art) for $110,000 that was inherited from Grandma on July 23, 2014. The fair marke

> During the current year, Ron and Anne sold the following assets: a. Given that Ron and Anne have taxable income of only $20,000 (all ordinary) before considering the tax effect of their asset sales, what is their gross tax liability for 2016 assuming the

> George bought the following amounts of Stock A over the years: On October 12, 2016, he sold 1,200 of his shares of Stock A for $38 per share. a. How much gain/loss will George have to recognize if he uses the FIFO method of accounting for the shares sold

> Grayson is in the 25 percent tax rate bracket and has the sold the following stocks in 2016: a. What is Grayson’s net short-term capital gain or loss from these transactions? b. What is Grayson’s net long-term gain or

> Why might investors purchase interest-paying securities rather than dividend- paying stocks?

> When should investors consider making an election to amortize market discount on a bond into income annually?

> In what ways are U.S. savings bonds treated more favorably for tax purposes than corporate bonds?

> Why would taxpayers generally prefer the tax treatment of market discount to the treatment of original issue discount on corporate bonds?

> Zack is employed as a full-time airport security guard. This year Zack’s employer transferred him from Dallas to Houston. At year-end, Zack discovered a number of unreimbursed expenses related to his employment in Dallas prior to his move to Houston.

> How are Treasury notes and Treasury bonds treated for federal and state income tax purposes?

> Compare and contrast the tax treatment of interest from a Treasury bond and qualified dividends from corporate stock.

> What is the underlying policy rationale for the current tax rules applicable to interest income and dividend income?

> All else being equal, would a taxpayer with passive losses rather have wage income or passive income?

> What tests are applied to determine if losses should be characterized as passive?

> What types of losses may potentially be characterized as passive losses?

> What limitations are placed on the deductibility of investment interest expense? What happens to investment interest expense that is not deductible because of the limitations?

> How is the amount of net investment income determined for a taxpayer with investment expenses and other noninvestment miscellaneous itemized deductions?

> Are dividends and capital gains considered to be investment income for purposes of determining the amount of a taxpayer’s deductible investment interest expense for the year?

> Clark owns stock in BCS Corporation that he purchased in January of the current year. The stock has appreciated significantly during the year. It is now December of the current year, and Clark is deciding whether or not he should sell the stock. What tax

> Simon lost $5,000 gambling this year on a trip to Las Vegas. In addition, he paid $2,000 to his broker for managing his $200,000 portfolio, and $1,500 to his accountant for preparing his tax return. In addition, Simon incurred $2,500 in transportation

> Describe three basic tax planning strategies available to taxpayers investing in capital assets.

> Nick does not use his car for business purposes. If he sells his car for less than he paid for it, does he get to deduct the loss for tax purposes? Why or why not?

> What is a “wash sale”? What is the purpose of the wash sale tax rules?

> This year, David, a taxpayer in the highest tax rate bracket, has the option to purchase either stock in a Fortune 500 company or qualified small business stock in his friend’s corporation. All else equal, which of the two will he prefer from a tax persp

> Are all long-term capital gains taxable at the same maximum rate? If not, what rates may apply to long-term capital gains?

> What methods may taxpayers use to determine the adjusted basis of stock they have sold?

> What is the deciding factor in determining whether a capital gain is a short-term or long-term capital gain?

> Why does the tax law provide preferential rates on certain capital gains?

> Why does the tax law allow a taxpayer to defer gains accrued on a capital asset until the taxpayer actually sells the asset?

> What is the definition of a capital asset? Give three examples of capital assets.

> Baker paid $775 for the preparation of his tax return and incurred $375 of employee business expenses of which $60 was reimbursed by his employer through an accountable plan. Baker also paid a $100 fee for investment advice. Calculate the amount of the

> Compare and contrast the tax treatment of dividend-paying stocks and growth stocks.

> During 2016, your clients, Mr. and Mrs. Howell, owned the following investment assets: a. Go to the IRS web site (www.IRS.gov) and download the most current version of Form 8949 and Schedule D. Use Form 8949 and page 1 of Schedule D to compute net long-t

> Penny, a full-time biochemist, loves stock car racing. To feed her passion, she bought a used dirt-track car and has started entering some local dirt-track races. The prize money is pretty small ($1,000 for the winner), but she really is not in it for th

> Ted is a successful attorney, but when he turned 50 years old he decided to retire from his law practice and become a professional golfer. Ted has been a very successful amateur golfer, so beginning this year Ted began competing in professional golf tou

> In each of the following independent cases, indicate the amount (1) deductible for AGI, (2) deductible from AGI, and (3) neither deductible for nor deductible from AGI before considering income limitations or the standard deduction. a. Fran spent $90 f

> This year Jack intends to file a married-joint return with two dependents. Jack received $162,500 of salary, and paid $5,000 of interest on loans used to pay qualified tuition costs for his dependent daughter, Deb. This year Jack has also paid qualifie

> Lionel is an unmarried law student at State University Law School, a qualified educational institution. This year Lionel borrowed $24,000 from County Bank and paid interest of $1,440. Lionel used the loan proceeds to pay his law school tuition. Calcul

> Smithers is a self-employed individual who earns $30,000 per year in self-employment income. Smithers pays $2,200 in annual health insurance premiums (not through an exchange) for his own medical care. In each of the following situations, determine th

> In 2016, for a taxpayer with $50,000 of taxable income, without doing any actual computations, which filing status do you expect to provide the lowest tax liability? Which filing status provides the highest tax liability?

> Clyde currently commutes 55 miles to work in the city. He is considering a new assignment in the suburbs on the other side of the city that would increase his commute considerably. He would like to accept the assignment, but he thinks it might require

> What is the tax marriage penalty and when does it apply? Under what circumstances would a couple experience a tax marriage benefit?

> In addition to cash contributions to charity, Dean decided to donate shares of stock and a portrait painted during the earlier part of the last century. Dean purchased the stock and portrait many years ago as investments. Dean reported the following re

> Calvin reviewed his canceled checks and receipts this year for charitable contributions. He has owned the IBM stock and painting since 2005. Calculate Calvin’s charitable contribution deduction and carryover (if any) under the followin

> Ray made the following contributions this year. Determine the maximum amount of charitable deduction for each of these contributions ignoring the AGI ceiling on charitable contributions and assuming that the American Heart Association plans to sell the

> This year, Major Healy paid $40,000 of interest on a mortgage on his home (Major Healy borrowed $800,000 to buy the residence; $900,000 original purchase price and value at purchase; $1,000,000 current worth), $6,000 of interest on a $120,000 home equity

> This year Randy paid $28,000 of interest (Randy borrowed $450,000 to buy his residence, and it is currently worth $500,000). Randy also paid $2,500 of interest on his car loan and $4,200 of margin interest to his stockbroker (investment interest expense

> Tim is a single, cash-method taxpayer with one personal exemption and an AGI of $50,000. In April of this year Tim paid $1,020 with his state income tax return for the previous year. During the year, Tim had $5,400 of state income tax and $18,250 of fe

> Dan has AGI of $50,000 and paid the following taxes during this tax year. Calculate the amount of taxes Dan may include in his itemized deductions for the year. State income tax withholding …………………………………..$ 1,400 State income tax estimated payments…

> Charles has AGI of $50,000 and has made the following payments related to (1) land he inherited from his deceased aunt and (2) a personal vacation taken last year. Calculate the amount of taxes Charles may include in his itemized deductions for the year

> Doctor Bones prescribed physical therapy in a pool to treat Jack’s broken back. In response to this advice (and for no other reason), Jack built a swimming pool in his backyard and strictly limited use of the pool to physical therapy. Jack paid $25,000

> This year Tim is age 45 and is considering enrolling in an insurance program that provides for long-term care insurance. He is curious about whether the insurance premiums are deductible as a medical expense and, if so, what the maximum amount is that c

> Rory and Nicholi, single taxpayers, each annually receive Social Security benefits of $15,000. Rory’s taxable income from sources other than Social Security exceeds $200,000. In contrast, the Social Security benefits are Nicholi’s only source of income.

> Simpson is a single individual who is employed full-time by Duff Corporation. This year Simpson reports AGI of $50,000 and has incurred the following medical expenses: Dentist charges………………………………….……………$ 900

> Describe the type of medical expenditures that qualify for the medical expense deduction. Does the cost of meals consumed while hospitalized qualify for the deduction? Do over-the-counter drugs and medicines qualify for the deduction?

> Explain why the medical expense and casualty loss provisions are sometimes referred to as “wherewithal” deductions and how this rationale is reflected in the limits on these deductions.

> Describe the mechanical limitation on the deduction for interest on qualified educational loans.

> Explain why Congress allows self-employed taxpayers to deduct the cost of health insurance above the line (for AGI) when employees can only itemize this cost as a medical expense. Would a self-employed taxpayer ever prefer to claim health insurance prem

> Describe how a business element is reflected in the requirements to deduct moving expenses and how Congress limited this deduction to substantial moves.

> How is a business activity distinguished from an investment activity? Why is this distinction important for the purpose of calculating federal income taxes?

> It has been suggested that tax policy favors deductions for AGI compared to itemized deductions. Describe two ways in which deductions for AGI are treated more favorably than itemized deductions.

> Determine whether a taxpayer who is claimed as a dependent on another return is entitled to an addition to the standard deduction for age or blindness. (Hint: Read the calculation of the standard deduction under IRC §63.)

> Describe the mechanism for phasing out exemptions. Can a taxpayer lose the benefit of all of her personal and dependency exemptions?

> Larry Bounds has won the gold bat award for hitting the longest home run in major league baseball this year. The bat is worth almost $35,000. Under what conditions can Larry exclude the award from his gross income? Explain.

> Explain why the overall phase-out of itemized deductions has been described as a “haircut” of itemized deductions. Explain whether it is possible for a taxpayer to lose all their itemized deductions under the phase-out rules.

> Explain how the calculation of the standard deduction limits the ability to shift income to a dependent.

> Explain how the standard deduction is rationalized and why the standard deduction might be viewed as a floor limit on itemized deductions.

> Describe the tax benefits from “bunching” itemized deductions in one year. Describe the characteristics of the taxpayers who are most likely to benefit from using bunching and explain why this is so.

> Identify which itemized deductions are subject to floor limitations, ceiling limitations, or some combination of these limits.

> Contrast ceiling and floor limitations, and give an example of each.

> Frank paid $3,700 in fees for an accountant to tabulate business information (Frank operates as a self-employed contractor and files a Schedule C). The accountant also spent time tabulating Frank’s income from his investments and determining Frank’s pers

> Jake is a retired jockey who takes monthly trips to Las Vegas to gamble on horse races. Jake also trains race horses part time at his Louisville ranch. So far this year, Jake has won almost $47,500 during his trips to Las Vegas while spending $27,250 on

> Explain why an employee should be concerned about whether his employer reimburses business expenses using an “accountable” plan?

> How might the reimbursement of a portion of an employee expense influence the deductibility of the expense for the employee?

> Otto and Fiona are negotiating the terms of their divorce. Otto has agreed to transfer property to Fiona over the next two years, but he has reserved the right to make cash payments in lieu of property transfers. Will tax considerations play a role in Ot

> When is the cost of education deductible as an employee business expense?

> Describe the types of expenses that constitute miscellaneous itemized deductions and explain why these expenses rarely produce any tax benefits.

> This week Jim’s residence was heavily damaged by a storm system that spread destruction throughout the region. While Jim’s property insurance covers some of the damage, there is a significant amount of uninsured loss. The governor of Jim’s state has requ

> A casualty loss from the complete destruction of a personal asset is limited to the lesser of fair market value or the property’s adjusted basis. Explain the rationale for this rule as opposed to just allowing a deduction for the basis of the asset.

> Describe the conditions in which a donation of property to a charity will result in a charitable contribution deduction of fair market value and when it will result in a deduction of the tax basis of the property.

> Cash donations to charity are subject to a number of very specific substantiation requirements. Describe these requirements and how charitable gifts can be substantiated. Describe the substantiation requirements for property donations.

> Compare and contrast the limits on the deduction of interest on home acquisition indebtedness versus home equity loans. Are these limits consistent with horizontal equity? Explain.

> What types of taxes qualify to be deducted as itemized deductions? Would a vehicle registration fee qualify as a deductible tax?

> Read the following letter and help Shady Slim with his tax situation. Please assume that gross income is $172,900 (which consists only of salary) for purposes of this problem.

> This year Evan graduated from college, and took a job as a deliveryman in the city. Evan was paid a salary of $68,500 and he received $700 in hourly pay for part-time work over the weekends. Evan summarized his expenses below. Cost of moving his po

> Clem and Ida have been married for several years, but this year they decided to get divorced. In the divorce decree, Clem agreed to deed his car to Ida and pay Ida $10,000 per year for four years. Will either of these transfers qualify as alimony for tax

> Joe and Jessie are married and have one dependent child, Lizzie. Lizzie is currently in college at State University. Joe works as a design engineer for a manufacturing firm while Jessie runs a craft business from their home. Jessie’s craft business co

> Shauna Coleman is single. She is employed as an architectural designer for Streamline Design (SD). Shauna wanted to determine her taxable income. She correctly calculated her AGI. However, she wasn’t sure how to compute the rest of her taxable income.

> Jeremy and Alyssa Johnson have been married for five years and do not have any children. Jeremy was married previously and has one child from the prior marriage. He is self-employed and operates his own computer repair store. For the first two months