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 iPhone, and she decided that she should buy the 50 shares (cost of $1,600) of Apple back before prices skyrocket. a. What is Christina’s deductible loss on the sale of 50 shares? What is her basis in the 50 new shares? b. Assume the same facts, except that Christina repurchased only 25 shares for $800. What is Christina’s deductible loss on the sale of 50 shares? What is her basis in the 25 new shares?
> Describe how the underpayment penalty is calculated.
> What are the consequences of a taxpayer underpaying his or her tax liability throughout the year? Explain the safe harbor provisions that may apply in this situation.
> Describe the two methods that taxpayers use to prepay their taxes.
> When a U.S. taxpayer pays income taxes to a foreign government, what options does the taxpayer have when determining how to treat the expenditure on her U.S. individual income tax return?
> Is the foreign tax credit a personal credit or a business credit? Explain.
> How are business credits similar to personal credits? How are they dissimilar?
> Clem is married and is a skilled carpenter. Clem’s wife, Wanda, works part-time as a substitute grade school teacher. Determine the amount of Clem’s expenses that are deductible for AGI this year (if any) under the following independent circumstances:
> Under what circumstances can a college student qualify for the earned income credit?
> Why is the earned income credit referred to as a negative income tax?
> Jennie’s grandfather paid her tuition this fall to State University (an eligible educational institution). Jennie is claimed as a dependent by her parents, but she also files her own tax return. Can Jennie claim an education credit for the tuition paid b
> Compare and contrast the lifetime learning credit with the American opportunity credit.
> Diane has a job working three-quarter time. She hired her mother to take care of her two small children so Diane could work. Do Diane’s child care payments to her mother qualify for the child and dependent care credit? Explain.
> Is the child tax credit a refundable or nonrefundable credit? Explain.
> What is the difference between a refundable and nonrefundable tax credit?
> Explain why there is such a large number and variety of tax credits.
> What are the three types of tax credits, and explain why it is important to distinguish between the different types of tax credits.
> Mike wanted to work for a CPA firm but he also wanted to work on his father’s farm in Montana. Because the CPA firm wanted Mike to be happy, they offered to let him work for them as an independent contractor during the fall and winter and let him return
> Jim files single and has three dependent children. Calculate his deductible total personal and dependency exemptions under the following independent conditions: a. Jim has AGI of $150,000. b. Jim has AGI of $303,000. c. Jim has AGI of $450,000.
> How do the tax consequences of being an employee differ from those of being self-employed?
> What are the primary factors to consider when deciding whether a worker should be considered an employee or a self-employed taxpayer for tax purposes?
> When a taxpayer works as an employee and as a self-employed independent contractor during the year, how does the taxpayer determine her employment and self-employment taxes payable?
> Matt and Carrie are married, have two children, and file a joint return. Their daughter Katie is 19 years old and was a full-time student at State University. During 2016, she completed her freshman year and one semester as a sophomore. Katie’s expenses
> In 2016, Jack and Diane Heart are married with two children, ages 10 and 12. Jack works full-time and earns an annual salary of $80,000, while Diane works as a substitute teacher and earns approximately $25,000 per year. Jack and Diane expect to file joi
> John and Sandy Ferguson got married eight years ago and have a seven-year old daughter Samantha. In 2016, John worked as a computer technician at a local university earning a salary of $52,000, and Sandy worked part-time as a receptionist for a law firm
> Reba Dixon is a fifth grade school teacher who earned a salary of $38,000 in 2016. She is 45 years old and has been divorced for four years. She received $1,200 of alimony payments each month from her former husband. Reba also rents out a small apartment
> Matt and Meg Comer are married. They do not have any children. Matt works as a history professor at a local university and earns a salary of $64,000. Meg works part-time at the same university. She earns $21,000 a year. The couple does not itemize deduct
> Sue has 5,000 shares of Sony stock that has an adjusted basis of $27,500. She sold the 5,000 shares of stock for cash of $10,000, and she also received a piece of land as part of the proceeds. The land was valued at $20,000 and had an adjusted basis to t
> Karyn loaned $20,000 to her co-worker to begin a new business several years ago. If her co-worker declares bankruptcy on June 22of the current year, is Karyn allowed to deduct the bad debt loss this year? If she can deduct the loss, what is the character
> In 2016, Jeff, who is single, is entitled to the following deductions before phase-outs: State income taxes………………………………….$7,850 Real estate taxes……………………………………….1,900 Home mortgage interest……………………………8,200 Charitable contributions……………………………..1,700 a
> Dahlia is in the 28 percent tax rate bracket and has purchased the following shares of Microsoft common stock over the years: If Dahlia sells 800 shares of Microsoft for $40,000 on December 20, 2016, what is her capital gain or loss in each of the follow
> John bought 1,000 shares of Intel stock on October 18, 2013 for $30 per share plus a $750 commission he paid to his broker. On December 12, 2016, he sells the shares for $42.50 per share. He also incurs a $1,000 fee for this transaction. a. What is Jo
> Five years ago, Kate purchased a dividend-paying stock for $10,000. For all five years, the stock paid an annual dividend of 4 percent before tax and Kate’s marginal tax rate was 25 percent. Every year Kate reinvested her after-tax dividends in the same
> Hayley recently invested $50,000 in a public utility stock paying a 3 percent annual dividend. If Hayley reinvests the annual dividend she receives net of any taxes owed on the dividend, how much will her investment be worth in four years if the dividend
> At the beginning of his current tax year, Eric bought a corporate bond with a maturity value of $50,000 from the secondary market for $45,000. The bond has a stated annual interest rate of 5 percent payable on June 30 and December 31, and it matures in f
> At the beginning of his current tax year David invests $12,000 in original issue U.S. Treasury bonds with a $10,000 face value that mature in exactly 10 years. David receives $700 in interest ($350 every six months) from the Treasury bonds during the cur
> Dana intends to invest $30,000 in either a Treasury bond or a corporate bond. The Treasury bond yields 5 percent before tax and the corporate bond yields 6 percent before tax. Assuming Dana’s federal marginal rate is 25 percent and her marginal state rat
> Matt recently deposited $20,000 in a savings account paying a guaranteed interest rate of 4 percent for the next 10 years. If Matt expects his marginal tax rate to be 20 percent for the next 10 years, how much interest will he earn after-tax for the firs
> Anwar owns a rental home and is involved in maintaining it and approving renters. During the year he has a net loss of $8,000 from renting the home. His other sources of income during the year were a salary of $111,000 and $34,000 of long-term capital ga
> Molly Grey (single) acquired a 30 percent limited partnership interest in Beau Geste LLP several years ago for $48,000. At the beginning of year 1, Molly has tax basis and an at-risk amount of $20,000. In year 1, Beau Geste incurs a loss of $180,000 and
> Tammy teaches elementary school history for the Metro School District. In 2016 she has incurred the following expenses associated with her job: Noncredit correspondence course on history ………………………………$ 900 Teaching cases for classroom use……………………………………
> Rubio recently invested $20,000 (tax basis) in purchasing a limited partnership interest. His at-risk amount is $15,000. In addition, Rubio’s share of the limited partnership loss for the year is $22,000, his share of income from a different limited part
> Larry recently invested $20,000 (tax basis) in purchasing a limited partnership interest. His at-risk amount is also $20,000. In addition, Larry’s share of the limited partnership loss for the year is $2,000, his share of income from a different limited
> 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
> 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
> Betty operates a beauty salon as a sole proprietorship. Betty also owns and rents an apartment building. This year Betty had the following income and expenses. Determine Betty’s AGI and complete page 1 of Form 1040 for Betty. You may assume that Betty
> 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
