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ACC547 Chapter 5: Gross Income and Exclusions

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Question;Discussion Questions1.(LO1)Explain why Congress adopted the definition of gross income in ?61.2.(LO1)Discuss why it might be difficult to determine taxable income using an economist?s definition of income.3.(LO1)Describe the concept of realization for tax purposes.4.(LO1)Explain why the definition of gross income for tax purposes might vary from the definition of income for financial accounting income.5.(LO1)Compare and contrast realization of income with recognition of income.6.(LO1)Tim is a plumber who joined a barter club. This year Tim exchanges plumbing services for a new roof. The roof is properly valued at $2,500, but Tim would have only billed $2,200 for the plumbing services. What amount of income should Tim recognize on the exchange of his services for a roof? Would your answer change if Tim would have normally billed $3,000 for his services?7.(LO1)Andre constructs and installs cabinets in residential homes. Blair sells and installs carpet in residential homes. Andre and Blair worked out an arrangement whereby Andre installed cabinets in Blair?s home and Blair installed carpet in Andre?s home. Neither Andre nor Blair believes they are required to recognize any gross income on this exchange because neither received cash. Do you agree with them? Explain.8.(LO1)What issue precipitated the return of capital principle? Explain.9.(LO1)Compare how the return of capital principle applies when (1) a taxpayer sells an asset and collects the sale proceeds all at once and (2) a taxpayer sells an asset and collects the sale proceeds over several periods (an installment sale). If Congress wanted to maximize revenue from installment sales, how would they have applied the return of capital principle for installment sales?10.(LO1)This year Jorge received a refund of property taxes that he deducted on his tax return last year. Jorge is not sure whether he should include the refund in his gross income. What would you tell him?11.(LO1)Describe in general how the cash method of accounting differs from the accrual method of accounting.12.(LO1)Janet is a cash-method 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 delay will cause the income to be realized and recognized next year. What would you tell her? Would it matter if she didn?t open the envelope? Would it matter if she refused to check her mail during the last week of December? Explain.13.(LO1)The cash method of accounting means that taxpayers don?t recognize income unless they receive cash or cash equivalents. True or false? Explain.14.(LO1)Dewey is a lawyer who uses the cash method of accounting. Last year Dewey provided a client with legal services worth $55,000, but the client could not pay the fee. This year Dewey requested that in lieu of paying Dewey $55,000 for the services, the client could make a $45,000 gift to Dewey?s daughter. Dewey?s daughter received the check for $45,000 and deposited it in her bank account. How much of this income is taxed, if any, to Dewey? Explain.15.(LO1)Clyde and Bonnie were married this year. Clyde has a steady job that will pay him about $37,000, while Bonnie does odd jobs that will produce about $28,000 of income. They also have a joint savings account that will pay about $400 of interest. If Clyde and Bonnie reside in a community property state and file married-separate tax returns, how much gross income will Clyde and Bonnie each report? Any difference if they reside in a common law state? Explain.16.(LO2)Distinguish earned income from unearned income, and provide an example of each.17.(LO2)Jim purchased 100 shares of stock this year and elected to participate in a dividend reinvestment program. This program automatically uses dividends to purchase additional shares of stock. This year Jim?s shares paid $350 of dividends and he used these funds to purchase additional shares of stock. These additional shares are worth $375 at year-end. What amount of dividends, if any, should Jim declare as income this year? Explain.18.(LO2)Jerry has a certificate of deposit at the local bank. The interest on this certificate was credited to his account on December 31 of last year, but he didn?t withdraw the interest until January of this year. Explain to Jerry when the interest income is taxed to him.19.(LO2)Conceptually, when taxpayers receive annuity payments, how do they determine the amount of the payment they must include in gross income?20.(LO2)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? Explain. What happens for tax purposes if George receives more than 100 payments?21.(LO2)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.22.(LO2)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?23.(LO2)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 purposes? Explain.24.(LO2)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 Otto?s decision to transfer property or pay cash? How will Otto?s choice affect the combined gross income and income taxes paid by Otto and Fiona? Explain.25.(LO2)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.26.(LO2)Both Rory and Nicholi 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. What percentage of the Social Security benefits must Rory include in his gross income? What percentage of Social Security benefits is Nicholi required to include in his gross income?27.(LO2)Explain why taxpayers are required to include indirect benefits, such as imputed interest, in gross income. Provide an example of how imputed interest can increase a taxpayer?s gross income.28.(LO2)Explain why an insolvent taxpayer is allowed to exclude income from the discharge of indebtedness if the taxpayer remains insolvent after receiving the debt relief.29.(LO3)Cassie works in an office and has access to several professional color printers. Her employer allows Cassie and her fellow employees to use the printers to print color postcards for the holidays. This year Cassie printed out two dozen postcards worth almost $76. Must Cassie include this amount in her gross income this year? Explain your answer.30.(LO3)Why does Congress allow taxpayers to exclude certain fringe benefits from gross income?31.(LO3)Explain how state and local governments benefit from the provisions that allow taxpayers to exclude interest on state and local bonds from their gross income.32.(LO3)Explain why taxpayers are allowed to exclude gifts and inheritances from gross income even though these payments are realized and clearly provide taxpayers with wherewithal to pay.33.(LO3)Describe the kinds of insurance premiums an employer can pay on behalf of an employee without triggering includible compensation to the employee.34.(LO3)Jim was injured in an accident and his surgeon botched the medical procedure. Jim recovered $5,000 from the doctors for pain and suffering and $2,000 for emotional distress. Determine the taxability of these payments and briefly explain to Jim the apparent rationale for including or excluding these payments from gross income.35.(LO3)Tom was just hired by Acme Corporation and has decided to purchase disability insurance. This insurance promises to pay him weekly benefits to replace his salary should he be unable to work because of disability. Disability insurance is also available through Acme as part of its compensation plan. Acme pays these premiums as a nontaxable fringe benefit, but the plan promises to pay about 10 percent less in benefits. If Tom elects to have Acme pay the premiums, then his compensation will be reduced by an equivalent amount. Should tax considerations play a role in Tom?s choice to buy disability insurance through Acme or on his own? Explain.36.(LO3)Why does Congress allow taxpayers to defer recognizing certain types of realized income?Problems37.(LO1)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?).Asia owns stock that is listed on the New York Stock Exchange, and this year the stock increased in value by $20,000.Ben sold stock for $10,000 and paid a sales commission of $250. Ben purchased the stock several years ago for $4,000.Devon owns 1,000 shares of stock worth $10,000. This year he received 200 additional shares of this stock from a stock dividend. His 1,200 shares are now worth $12,500.Bessie is a partner in SULU Enterprises LLC. This year SULU reported that Bessie?s share of rental income was $2,700 and her share of municipal interest was $750.38.(LO1)XYZ declared a $1 per share dividend on August 15. The dividend was paid to shareholders of record on September 1 (the stock began sellingex-dividendon September 2). Ellis is a cash-method taxpayer. Determine if he must include the dividends in gross income under the following independent circumstances.Ellis bought 100 shares of XYZ stock on August 1 for $21 per share. Ellis received $100 on September 10. Ellis still owns the shares at year-end.Ellis bought 100 shares of XYZ stock on August 1 for $21 per share. Ellis sold his XYZ shares on September 5 for $23 per share. Ellis received the $100 dividend on September 10 (note that even though Ellis didn?t own the stock on September 10, he still received the dividend because he was the shareholder on the record date).Ellis bought 100 shares of XYZ stock for $22 per share on August 20. Ellis received the $100 dividend on September 10. Ellis still owns the shares at year-end.39.(LO1)For the following independent cases, determine whether economic income is present and, if so, whether it must be included in gross income. Identify the tax authority that supports your analysis.Hermione discovered a gold nugget (valued at $10,000) on her land.Jay embezzled $20,000 from his employer and has not yet been apprehended.Keisha found $1,000 inside an old dresser. She purchased the dresser at a discount furniture store at the end of last year and found the money after the beginning of the new year. No one has claimed the money.40.(LO1)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 this year. Hank uses the cash method of accounting and is a calendar-year taxpayer. Compute Hank?s gross income for this year from each of the following alternative transactions:Mike paid Hank $200 in cash in December of this year and promised to pay the remaining $300 with interest in three months.Mike paid Hank $100 in cash in December of this year and gave him a negotiable promissory note for $400 due in three months with interest. Hank sold the note in January for $350.Mike gave Hank tickets to the big game in January. The tickets have a face value of $50 but Hank could sell them for $400. Hank went to the game with his son.Mike bought Hank a new set of snow tires. The tires typically sell for $500, but Mike bought them on sale for $450.41.(LO1)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 amount, if any, Jim should include in his gross income in each of the following situations:Jim received $275 of car repair services from another member of the club.Jim received a $150 credit that gave him the option of receiving a season pass at a local ski resort from another member of the club. However, he forgot to request the pass by the end of the ski season and his credit expired.Jim received a $450 credit that can only be applied for goods or services from club members next year.42.(LO1)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 part in the unit, he refunded the cost of the repair, $5,000, to Acme.Is Ralph required to include the $15,000 payment he received last year in his gross income from last year?What are the tax implications of the repayment if Ralph was in the 35 percent tax bracket when he received the $15,000 payment from Acme, but was in the 28 percent tax bracket when he refunded $5,000 to Acme?How would you answer the question in part (b) if Ralph refunded $2,500 to Acme and not $5,000?43.(LO1)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 standard deduction last year was $5,450.Last year Louis claimed itemized deductions of $5,800. Louis?s itemized deductions included state income taxes paid of $1,750.Last year Louis had itemized deductions of $4,550 and he chose to claim the standard deduction. Louis?s itemized deductions included state income taxes paid of $1,750.Last year Louis claimed itemized deductions of $7,290. Louis?s itemized deductions included state income taxes paid of $2,750.44.(LO1)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 circumstances:Paylate Corporation wrote the check and put it in his office mail slot on December 30 of this year, but Clyde did not bother to stop by the office to pick it up until after year-end.Paylate Corporation mistakenly wrote the check for $100. Clyde received the remaining $900 after year-end.Paylate Corporation mailed the check to Clyde before the end of the year, but although he expected the bonus payment, he decided not to collect his mail until after year-end.Clyde picked up the check in December, but the check could not be cashed immediately because it was postdated January 10.45.(LO1)Identify the amount, if any, that these individuals must include in gross income in the following independent cases. Assume that the individuals are on the cash method of accounting and report income on a calendar-year basis.Elmer was an extremely diligent employee this year and his employer gave him three additional days off with pay (Elmer?s gross pay for the three days totaled $1,200, but his net pay was only $948).Amax purchased new office furniture and allowed each employee to take home $250 of old office furniture.In January each Ajax employee was given a $300 gift card as a bonus. However, half of Ajax employees allowed the gift card to expire without using the credits.46.(LO2)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 first of the next month, and the tenant must make a $500 security deposit that is refunded at the end of the lease. Under lease 2 the building rents for $5,500 per year, payable at the time the lease is signed, but no security deposit is required. Under lease 3 the building rents for $500 per month, payable at the beginning of each month, and the tenant must pay a security deposit of $1,000 that is to be applied toward the rent for the last two months of the lease.What amounts are included in Ralph?s gross income this year if a tenant signs lease 1 on December 1 and makes timely payments under that lease?What amounts are included in Ralph?s gross income this year if the tenant signs lease 2 on December 31 and makes timely payments under that lease?What amounts are included in Ralph?s gross income this year if the tenant signs lease 3 on November 30 and makes timely payments under that lease?47.(LO2)Anne purchased an annuity from an insurance company that promised to pay her $20,000 per year for the next ten years. Anne paid $145,000 for the annuity, and in exchange she will receive $200,000 over the life of the annuity.How much of the first $20,000 payment should Anne include in gross income?How much income will Anne recognize over the term of the annuity?48.(LO2)Larry purchased an annuity from an insurance company that promises to pay him $1,000 per month for the rest of his life. Larry paid $159,900 for the annuity. Larry is in good health and he is 62 years old. Larry received the first annuity payment of $1,000 this month. Use the expected number of payments inExhibit 5-1for this problem.How much of the first payment should Larry include in gross income?If Larry lives that long, how much of the 270th payment should Larry include in gross income?What are the tax consequences if Larry dies just after he receives the 100th payment?49.(LO2)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 payment? Use the expected number of payments inExhibit 5-1for this problem.50.(LO2)Lanny and Shirley are recently divorced. Shirley has custody of their child, Art, and Lanny pays Shirley $22,000 per year. All property was divided equally.How much should Shirley include in income if Lanny?s payments are made in cash but will cease if Shirley dies or remarries?How much should Shirley include in income if only $12,000 of Lanny?s payments is designated as ?nonalimony? in the divorce decree?How much should Shirley include in income if Lanny?s payments drop to $15,000 once Art reaches the age of 18?51.(LO2)Todd and Margo are seeking a divorce. 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 property is to be divided equally.If Margo?s payments cease in the event of Todd?s death, how are the payments treated for tax purposes?How much of the gain would be taxed to Todd if Margo sells the art at the end of five years?Compute the tax cost (benefit) to Todd (Margo) if the payments qualify as alimony. Assume that Todd (Margo) has a marginal tax rate of 15 percent (35 percent), and ignore the time value of money.How much more should Todd demand in order to agree to allow the payments to cease in the event of his death?52.(LO2)For each of the following independent situations, indicate the amount the taxpayer must include in gross income and explain your answer:Phil won $500 in the scratch-off state lottery. There is no state income tax.Ted won a compact car worth $17,000 in a TV game show. Ted plans to sell the car next year.Al Bore won the Nobel Peace Prize of $500,000 this year. Rather than take the prize, Al designated that the entire award should go to Weatherhead Charity, a tax-exempt organization.Jerry was awarded $2,500 from his employer, Acme Toons, when he was selected most handsome employee for Valentine?s Day this year.Ellen won a $1,000 cash prize in a school essay contest. The school is a tax-exempt entity, and Ellen plans to use the funds to pay her college education.Gene won $400 in the office March Madness pool. He paid $40 to join the pool.53.(LO2)Grady received $8,205 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?Grady files single and reports salary of $12,100 and interest income of $245.Grady files married joint and reports salary of $75,000 and interest income of $500.54.(LO2)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 an interest rate of 1 percent. Wally would have paid interest of $2,400 this year if the interest rate on the loan had been set at the prevailing federal interest rate.Wally used the funds as a down payment on a vacation home and repaid the $20,000 loan (including $200 of interest) at year-end. Does this loan result in any income to either party, and if so, how much?Assume that in addition to the facts described in part (a), Pay More forgave the loan and interest on December 31. What amount of gross income does Wally recognize this year? Explain.55.(LO3)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 agreed to reduce the loan amount to $230,000. For each of the following independent situations, indicate the amount Jimmy must include in gross income and explain your answer:The real estate is worth $175,000 and Jimmy has no other assets or liabilities.The real estate is worth $235,000 and Jimmy has no other assets or liabilities.The real estate is worth $200,000 and Jimmy has $45,000 in other assets but no other liabilities.56.(LO3)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 include in his gross income for the year? Provide a tax authority to support your answer.57.(LO3)Fred currently earns $9,000 per month. Fred has been offered the chance to work overseas on a temporary assignment next year. His employer is willing to pay Fred $10,000 per month if he accepts the assignment. Assume that the maximum foreign earned income exclusion for next year is $91,400.How much U.S. gross income will Fred report if he accepts the assignment abroad on January 1 of next year and works overseas for the entire year?Suppose that Fred?s employer has offered Fred only a six-month overseas assignment beginning on January 1 of next year. How much U.S. gross income will Fred report next year if he accepts the six-month assignment abroad and returns home on July 1 of next year?Suppose that Fred?s employer offers Fred a permanent overseas assignment beginning on March 1 of next year. How much U.S. gross income will Fred report next year if he accepts the permanent assignment abroad? Assume that Fred will be abroad for 305 days next year.58.(LO3)For each of the following situations, indicate how much the taxpayer is required to include in gross income and explain your answer:Steve was awarded a $5,000 scholarship to attend State Law School. The scholarship pays Steve?s tuition and fees.Hal was awarded a $15,000 scholarship to attend State Hotel School. All scholarship students must work 20 hours per week at the school residency during the term.Bill was the recipient of an athletic scholarship that pays his $12,000 tuition to State University and provides him with a $500 per month stipend to pay for food and housing. The scholarship requires Bill to participate in athletic competition each term.59.(LO3)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 single taxpayer:Cecil plans to spend all of the proceeds to pay his tuition at State University and estimates his modified adjusted gross income at $63,100.Cecil plans to spend $4,200 of the proceeds to pay his tuition at State University and estimates his modified adjusted gross income at $60,600.60.(LO3)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 gift of $20,000 from Grady?s grandfather.1,000 shares of GM stock worth $120 per share inherited from Grady?s uncle. The uncle purchased the shares for $25 each, and the shares are worth $125 at year-end.A gift of $50,000 of Ford Motor Bonds. Grady received the bonds on October 31, and he received $1,500 of semiannual interest from the bonds on December 31.A loan of $5,000 for school expenses from Grady?s aunt.61.(LO3)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.Thelma gave Bart an auto worth $22,000. Thelma purchased the auto three years ago for $17,000.Bart eventually sold the automobile he received in part (a) for $15,000 (assume his basis in the auto was $17,000).Thelma elects to cancel her life insurance policy, and she gives the cash surrender value of $15,000 to Bart.Bart is the beneficiary of a $100,000 whole life insurance policy on the life of Thelma. Thelma died this year, and Bart received $100,000 in cash.Bart inherited 500 shares of stock from Thelma?s estate. Thelma purchased the shares many years ago for $1,200, and the shares are worth $45,000 at her death.62.(LO3)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?Terry has disability insurance provided by his employer as a nontaxable fringe benefit. Terry?s employer paid $2,800 in disability premiums for Terry this year.Terry paid $2,800 in premiums for his disability insurance this year.Terry?s employer paid the $2,800 in premiums for Terry, but Terry elected to have his employer include the $2,800 as compensation on Terry?s W-2.Terry has disability insurance whose cost is shared with his employer. Terry?s employer paid $1,800 in disability premiums for Terry this year as a nontaxable fringe benefit, and Terry paid the remaining $1,000 of premiums from his after-tax salary.63.(LO3)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 included in Tim?s gross income? Explain. Do you have a recommendation for Tim and his parents?64.(LO3)What amounts are included in gross income for the following taxpayers? Explain your answers.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.Carl was injured in a car accident. Carl?s insurance paid him $500 to reimburse his medical expenses and an additional $250 for the emotional distress Carl suffered as a result of the accident.Ajax published a story about Pete and as a result Pete sued Ajax for damage to his reputation. Ajax lost in court and paid Pete an award of $20,000.Bevis was laid off from his job last month. This month he drew $800 in unemployment benefits.Comprehensive Problems65.Charlie was hired by Ajax this year as a corporate executive and a member of the board of directors. During the current year, Charlie received the following payments or benefits paid on his behalf.Salary payments$92,000Contributions to qualified pension plan10,200Qualified health insurance premiums8,400Year-end bonus15,000Annual director?s fee10,000Group-term life insurance premiums (face = $40,000)750Whole life insurance premiums (face = $100,000)1,420Disability insurance premiums (no special elections)4,350Charlie uses the cash method and calendar year for tax purposes. Calculate Charlie?s gross income for the current year.Suppose that Ajax agrees to pay Charlie an additional $100,000 once Charlie completes five years of employment. Will this agreement alter Charlie?s gross income this year relative to your part (a) answer? Explain.Suppose that in exchange for his promise to remain with the firm for the next four years, Ajax paid Charlie four years of director?s fees in advance. Will this arrangement alter Charlie?s gross income this year relative to your part (a) answer? Explain.Assume that in lieu of a year-end bonus Ajax transferred 500 shares of Bell stock to Charlie as compensation. Further assume that the stock was listed at $35 per share and Charlie would sell the shares by year-end, at which time he expected the price to be $37 per share. Will this arrangement alter Charlie?s gross income this year relative to your part (a) answer? Explain.Suppose that in lieu of a year-end bonus Ajax made Charlie?s house payments (a total of $23,000). Will this arrangement alter Charlie?s gross income this year relative to your part (a) answer? Explain.66.Irene is retired and receives payments from a number of sources. The interest payments are from bonds that Irene purchased over past years and a disability insurance policy that Irene purchased after her retirement. Calculate Irene?s gross income.Interest, bonds issued by City of Austin, Texas$2,000Social Security benefits8,200Interest, U.S. Treasury bills1,300Interest, bonds issued by Ford Motor Company1,500Interest, bonds issued by City of Quebec, Canada750Disability insurance benefits9,500Distributions from qualified pension plan5,40067.Ken is 63 years old and unmarried. He retired at age 55 when he sold his business, Understock.com. Though Ken is retired, he is still very active. Ken reported the following financial information this year.AssumeKen?s modified adjusted gross income for purposes of the bond interest exclusion and for determining the taxability of his Social Security benefits is $70,000 and that Ken files as a single taxpayer. Determine Ken?s 2009 gross income.Ken won $1,200 in an illegal game of poker (the game was played in Utah, where gambling is illegal).Ken sold 1,000 shares of stock for $32 a share. He inherited the stock two years ago. His tax basis (or investment) in the stock was $31 per share.Ken received $25,000 from an annuity he purchased eight years ago. He purchased the annuity, to be paid annually for 20 years, for $210,000.Ken received $13,000 in Social Security benefits for the year.Ken resided in Ireland from July 1, 2008, through June 30, 2009, visiting relatives. While he was there he earned $35,000 working in his cousin?s pub. He was paid $17,000 for his services in 2008 and $18,000 for his services in 2009. Assume Ken elects to use the foreign-earned income exclusion to the extent he is eligible.Ken decided to go back to school to learn about European history. He received a $500 cash scholarship to attend. He used $300 to pay for his books and he applied the rest toward his new car payment.Ken?s son, Mike, instructed his employer to make half of his final paycheck of the year payable to Ken. Ken received the check on December 30 in the amount of $1,100.Ken received a $610 refund of the $3,600 in state income taxes his employer withheld from his pay last year. Ken claimed $5,500 in itemized deductions last year (the standard deduction for a single filer was $5,450).Ken received $30,000 of interest from corporate bonds and money market accounts.68.Consider the following letter and answer Shady?s question.December 31, 2009To my friendly student tax preparer:H

 

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