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 travel expenses and incurring $62,400 of gambling losses. Jake also received $60,000 in revenue from his training activities and he incurred $72,000 of associated costs. Explain how Jake’s gambling winnings and related costs will be treated for tax purposes. Describe the factors that will influence how Jake’s ranch expenses are treated for tax purposes.
> 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
> 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
> 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
> Ralph owns a building that he is trying to lease. Ralph is a calendar-year, cash-method taxpayer and is trying to evaluate the tax consequences of three different lease arrangements. Under lease 1, the building rents for $500 per month, payable on the fi
> Clyde is a cash method taxpayer who reports on a calendar-year basis. This year Paylate Corporation has decided to pay Clyde a year-end bonus of $1,000. Determine the amount Clyde should include in his gross income this year under the following circumsta
> L. A. and Paula file as married taxpayers. In August of this year they received a $5,200 refund of state income taxes that they paid last year. How much of the refund, if any, must L. A. and Paula include in gross income under the following independent s
> Louis files as a single taxpayer. In April of this year he received a $900 refund of state income taxes that he paid last year. How much of the refund, if any, must Louis include in gross income under the following independent scenarios? Assume the stand
> Last year Acme paid Ralph $15,000 to install a new air-conditioning unit at its headquarters building. The air conditioner did not function properly, and this year Acme requested that Ralph return the payment. Because Ralph could not repair one critical
> Jim recently joined the Austin Barter Club, an organization that facilitates the exchange of services between its members. This year Jim provided lawn-mowing services to other club members. Jim received the following from the barter club. Determine the a
> Although Hank is retired, he is an excellent handyman and often works part-time on small projects for neighbors and friends. Last week his neighbor, Mike, offered to pay Hank $500 for minor repairs to his house. Hank completed the repairs in December of
> Tomiko is a 50 percent owner (partner) in the Tanaka partnership. During the year, the partnership reported $1,000 of interest income and $2,000 of dividends. How much of this income must Tomiko include in her gross income?
> For the following independent cases, determine whether economic income is present and, if so, whether it must be included in gross income. Identify a tax authority that supports your analysis. a. Hermione discovered a gold nugget (valued at $10,000) on h
> XYZ declared a $1 per share dividend on August 15. The date of record for the dividend was September 1 (the stock began selling ex-dividend on September 2). The dividend was paid on September 10. Ellis is a cash-method taxpayer. Determine if he must incl
> For the following independent cases, determine whether economic income is present and, if so, whether it must be included in gross income (that is, is it realized and recognized for tax purposes?). a. Asia owns stock that is listed on the New York Exchan
> This year, Leron and Sheena sold their home for $750,000 after all selling costs. Under the following scenarios, how much taxable gain does the home sale generate for Leron and Sheena? a. Leron and Sheena bought the home three years ago for $150,000 and
> This year, Janelle received $200,000 in life insurance proceeds. Under the following scenarios, how much of the $200,000 is taxable? a. Janelle received the proceeds upon the death of her father, Julio. b. Janelle received the $200,000 proceeds because s
> What amounts are included in gross income for the following taxpayers? Explain your answers. a. Janus sued Tiny Toys for personal injuries from swallowing a toy. Janus was paid $30,000 for medical costs and $250,000 for punitive damages. b. Carl was inju
> Tim’s parents plan to provide him with $50,000 to support him while he establishes a new landscaping business. In exchange for the support, Tim will maintain the landscape at his father’s business. Under what conditions will the transfer of $50,000 be in
> Terry was ill for three months and missed work during this period. During his illness Terry received $4,500 in sick pay from a disability insurance policy. What amounts are included in Terry’s gross income under the following independent circumstances? a
> Bart is the favorite nephew of his aunt Thelma. Thelma transferred several items of value to Bart. For each of the following transactions, determine the effect on Bart’s gross income: a. Thelma gave Bart an auto worth $22,000. Thelma purchased the auto t
> Grady is a member of a large family and received the following payments this year. For each payment, determine whether the payment constitutes realized income and determine the amount of each payment Grady must include in his gross income. a. A gift of $
> Brad purchased land for $45,000 this year. At year-end Brad sold the land for $51,700 and paid a sales commission of $450. What effect does this transaction have on Brad’s gross income? Explain.
> Cecil cashed in a Series EE savings bond with a redemption value of $14,000 and an original cost of $9,800. For each of the following independent scenarios, calculate the amount of interest Cecil will include in his gross income assuming he files as a si
> Fred currently earns $9,000 per month. Fred has been offered the chance to transfer for three to five years to an overseas affiliate. His employer is willing to pay Fred $10,000 per month if he accepts the assignment. Assume that the maximum foreign earn
> Grady is a 45-year-old employee with AMUCK Garbage Corporation. AMUCK pays group-term life insurance premiums for employees, and Grady chose the maximum face amount of $120,000. What amount, if any, of the premium AMUCK paid on his behalf, must Grady inc
> Jimmy has fallen on hard times recently. Last year he borrowed $250,000 and added an additional $50,000 of his own funds to purchase $300,000 of undeveloped real estate. This year the value of the real estate dropped dramatically and Jimmy’s lender agree
> Wally is employed as an executive with Pay More Incorporated. To entice Wally to work for Pay More, the corporation loaned him $20,000 at the beginning of the year at a simple interest rate of 1 percent. Wally would have paid interest of $2,400 this year
> Nikki works for the Shine Company, a retailer of upscale jewelry. How much taxable income does Nikki recognize under the following scenarios? a. Nikki buys a diamond ring from Shine Company for $10,000 (normal sales price, $14,000; Shine Company’s gross
> Grady received $8,200 of Social Security benefits this year. Grady also reported salary and interest income this year. What amount of the benefits must Grady include in his gross income under the following two independent situations? a. Grady files singl
> For each of the following independent situations, indicate the amount the taxpayer must include in gross income and explain your answer: a. Phil won $500 in the scratch-off state lottery. There is no state income tax. b. Ted won a compact car worth $17,0
> Todd and Margo are seeking a divorce and no longer live together. Margo has offered to pay Todd $42,000 per year for five years if Margo receives sole title to the art collection. This collection cost them $100,000, but is now worth $360,000. All other p
> Lanny and Shirley are recently divorced and do not live together. Shirley has custody of their child, Art, and Lanny pays Shirley $22,000 per year. All property was divided equally. a. How much should Shirley include in income if Lanny’s payments are mad
> George purchased a life annuity to provide him monthly payments for as long as he lives. Based on IRS tables, George’s life expectancy is 100 months. Is George able to recover his cost of the annuity if he dies before he receives 100 monthly payments? Ex
> Gramps purchased a joint survivor annuity that pays $500 monthly over his remaining life and that of his wife, Gram. Gramps is 70 years old and Gram is 65 years old. Gramps paid $97,020 for the contract. How much income will Gramps recognize on the first
> Larry purchased an annuity from an insurance company that promises to pay him $1,500 per month for the rest of his life. Larry paid $170,820 for the annuity. Larry is in good health, and he is 72 years old. Larry received the first annuity payment of $1,
> Anne purchased an annuity from an insurance company that promised to pay her $20,000 per year for the next 10 years. Anne paid $145,000 for the annuity, and in exchange she will receive $200,000 over the term of the annuity. a. How much of the first $20
> Janet is a cash-basis calendar-year taxpayer. She received a check for services provided in the mail during the last week of December. However, rather than cash the check, Janet decided to wait until the following January because she believes that her de
