67. [LO1, LO 2, LO3] Ken is 63 years old and unmarried. He retired at age 55 when he sold his usiness, !ndersto"#."om.

$hough Ken is retired, he is still %ery a"ti%e. Ken re&orted the 'ollowing 'inan"ial in'ormation this year. Assume Ken(s modi'ied ad)usted gross in"ome 'or &ur&oses o' the ond interest e*"lusion and 'or his determining the ta*a ility o' his +o"ial +e"urity ene'its is ,7-,--- and that Ken 'iles as a single ta*&ayer. .etermine Ken(s 2--/ gross in"ome.

a. b. c. d. e.

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 $ 2 a share. !e inherited the stock two years ago. !is ta" basis (or in#estment) in the stock was $ 1 per share. Ken recei#ed $2$,000 from an ann%ity he p%rchased eight years ago. !e p%rchased the ann%ity, to be paid ann%ally for 20 years, for $210,000. Ken recei#ed $1 ,000 in &ocial &ec%rity benefits for the year. Ken resided in 'reland from (%ly 1, 200), thro%gh (%ne 0, 200*, #isiting relati#es. +hile he was there he earned $ $,000 working in his co%sin,s p%b. !e was paid $1-,000 for his ser#ices in 200) and $1),000 for his ser#ices in 200*. .ss%me Ken elects to %se the foreign/earned income e"cl%sion to the e"tent he is eligible. Ken decided to go back to school to learn abo%t 0%ropean history. !e recei#ed a $$00 cash scholarship to attend. !e %sed $ 00 to pay for his books and he applied the rest toward his new car payment. Ken,s son, 1ike, instr%cted his employer to make half of his final paycheck of the year payable to Ken. Ken recei#ed the check on 2ecember 0 in the amo%nt of $1,100. Ken recei#ed a $310 ref%nd of the $ ,300 in state income ta"es his employer withheld from his pay last year. Ken claimed $$,$00 in itemi4ed ded%ctions last year (the standard ded%ction for a single filer was $,5$0). Ken recei#ed $ 0,000 of interest from corporate bonds and money market acco%nts.

f.

g.

h.

i.

Answer: $58,000, computed as follows: Description a) Illegal income ) Gain on stoc! sale Kens Gross Income Amount Explanation $1,200 Gross income includes income from all sourceslegal or illegal 1,000 "en recogni#es a $1,000 gain on t$e sale %$&2,000 '&2 ( $1,000) minus $&1,000 '&1 ( $1,000))* +ote t$at onl, t$e sale proceeds in e(cess of t$e stoc! asis are included in gross income* 1-,500 25,000 . '210,000 / 20) 11,050 1AGI 2 3 of enefit e(ceeds $&-,000 $1&,000 ( 85 percent 0 $61,-00 ( 181/&75 8 $-5,&2ma(imum e(clusion* All, $18,000 e(cluded* 200 $200 used towards car pa,ment does not 9ualif, for e(clusion: $&00 used for oo!s ma, e e(cluded 0 <nder assignment of income doctrine, t$e income is ta(ed to t$e ta(pa,er w$o earned t$e income 50 ;ortion of refund $e recei=ed ta( enefit for last ,ear* 0ee elow for computation* &0,000 Included in gross income $58,000 Rule Explanation

c) Annuit, d) 0ocial 0ecurit, e) 4oreign5earned income f) 0c$olars$ip g) ;a,c$ec! from son $) 0tate income ta( refund i) Interest income Gross income

State Tax Refun !Tax "enefit Description Amount '1) Itemi#ed deductions wit$ $710 $5,500 o=erpa,ment '2) 2008 0tandard deduction 5,-50 '&) >eduction in ta(a le income wit$ 5,500 $710 o=erpa,ment '-) Itemi#ed deductions wit$out t$e -,860 $710 o=erpa,ment t$at was refunded '5) >eduction in ta(a le income wit$out 5,-50 t$e $710 o=erpa,ment t$at was refunded ?a( enefit from prior ,ear $710 $50 o=erpa,ment of state ta(es

0ingle filing status Greater of '1) and '2) '1) minus $710 Greater of '2) and '-) '&) . '5)

66.

0eremy and 1lyssa 0ohnson ha%e een married 'or 'i%e years and do not ha%e any "hildren. 0eremy was married &re%iously and has one "hild 'rom the &rior marriage. He is sel'2em&loyed and o&erates his own "om&uter &arts store. 3or the 'irst two months o' this year, 1lyssa wor#ed 'or +ta&les, 4n". as an em&loyee. 4n 5ar"h, 1lyssa a""e&ted a new )o with +u&er $oys, 4n". 6+$7 where she wor#ed 'or the remainder o' the year. $his year the 0ohnsons re"ei%ed ,255,--- o' gross in"ome. .etermine the 0ohnson(s 184 gi%en the 'ollowing in'ormation9 a. :*&enses asso"iated with 0eremy(s store in"lude ,;-,--- in salary 6and em&loyment ta*es7 to em&loyees, ,;5,--- o' "ost o' goods sold, and ,1<,--- in rent and other administrati%e e*&enses. 1s a sales&erson, 1lyssa in"urred ,2,--- in tra%el e*&enses related to her em&loyment that were not reim ursed y her em&loyer. $he 0ohnsons own a &ie"e o' in%estment real estate. $hey &aid ,5-- o' real &ro&erty ta*es on the &ro&erty and they in"urred ,2-- o' e*&enses in tra%el "osts to see the &ro&erty and to e%aluate other similar &otential in%estment &ro&erties. $he 0ohnsons own a rental home. $hey in"urred ,<,5-- o' e*&enses asso"iated with the &ro&erty. $he 0ohnson(s home was only 'i%e miles 'rom the +ta&les store where 1lyssa wor#ed in 0anuary and 3e ruary. $he +$ store was 6- miles 'rom their home, so the 0ohnsons de"ided to mo%e to ma#e the "ommute easier 'or 1lyssa. $he 0ohnson(s new home was only ten miles 'rom the +$ store. Howe%er, it was 5- miles 'rom their 'ormer residen"e. $he 0ohnsons &aid a mo%ing "om&any ,2,--- to mo%e their &ossessions to the new lo"ation. $hey also dro%e the 5- miles to their new residen"e. $hey sto&&ed along the way 'or lun"h and s&ent ,6- eating at .enny(s. =one o' the mo%ing e*&enses were reim ursed y +$. 0eremy &aid ,;,5-- 'or health insuran"e "o%erage 'or himsel'. 1lyssa was "o%ered y health &lans &ro%ided y her em&loyer, ut 0eremy is not eligi le 'or the &lan until ne*t year. 0eremy &aid ,2,5-- in sel'2em&loyment ta*es. 1lyssa "ontri uted ,;,--- to +$(s em&loyer2&ro%ided traditional ;-1# &lan. 0eremy &aid ,5,--- in alimony and ,3,--- in "hild su&&ort 'rom his &rior marriage.

. ".

d. e.

'.

g. h. i.

).

1lyssa &aid ,3,1-- o' tuition and 'ees to attend night "lasses at a lo"al uni%ersity. $he 0ohnsons would li#e to dedu"t as mu"h o' this e*&enditure as &ossi le rather than "laim a "redit. $he 0ohnsons donated ,2,--- to their 'a%orite "harity.

#.

Answer: $12-,@&8, computed as follows: Description Gross income a Ardinar, and necessar, usiness e(penses <nreim ursed emplo,ment e(penses c >eal propert, ta(es and in=estment e(penses* d >ental e(penses e 1o=ing e(penses Amoun t $255,00 0 10&,000 #o$nsons AGI Explanation

Ardinar, e(penses associated wit$ Berem,Cs usiness <nreim ursed emplo,ee usiness e(penses are deducti le from AGI not for AGI ?a(es and in=estment e(penses are deducti le from AGI not for AGI* >ental e(penses are deducti le for AGI e=en t$oug$ t$e, are tec$nicall, in=estment or Dproduction of income e(penses*E Fer old residence to new place of emplo,ment is more t$an 50 miles fart$er t$an $er old residence to $er old place of emplo,ment '70 . 5 8 55* ?$e location of $er new residence is irrele=ant* ?$e Bo$nsons are allowed to deduct costs of mo=ing '$2,000 mo=ers including 2- cents a mile for dri=ing t$emsel=es '50 ( 2-G 8$12* 1eals are an indirect cost of mo=ing and are not deducti le* Berem, ma, deduct all t$e costs of $is $ealt$ insurance ecause $e is not eligi le for 0?Cs $ealt$ plan* 3 of self5emplo,ment ta(es allowed as for AGI deduction Hontri ution to retirement plan deducted for AGI Alimon, allowed as for AGI deduction* H$ild support pa,ments are not deducti le Kualified education e(penses allowed as for AGI deduction: 0ee +ote A elow H$arita le contri utions are from not for AGI deductions AGI

5 5

8,500 2,012

f 0elf5emplo,ed $ealt$ insurance g 0elf5 emplo,ment ta(es $ >etirement plan contri ution i Alimon, I Jducation e(penses ! H$arita le contri utions ?otal for AGI deductions AGI

-,500 1,250 -,000 5,000 &,100 5 1&1,&72 $12&,7& 8

+ote A: Kualif,ing education e(penses are deducti le up to a ma(imum of $-,000* 0ince t$e Bo$nsonCs modified AGI of $127,@&8 'AGI wit$out deducting education

e(penses) is elow $1&0,000, t$e Bo$nsons are allowed to deduct t$e lesser of t$eir actual 9ualified e(penditures of $&,100 or $-,000* 0o, t$e, can deduct $2,000 as a for AGI deduction*

<1 0oe o&erates a usiness that lo"ates and &ur"hases s&e"iali>ed assets 'or "lients, among other a"ti%ities. 0oe uses the a""rual method o' a""ounting ut he doesn(t #ee& any signi'i"ant in%entories o' the s&e"iali>ed assets that he sells. 0oe re&orted the 'ollowing 'inan"ial in'ormation 'or his usiness a"ti%ities during year -. .etermine the e''e"t o' ea"h o' the 'ollowing transa"tions on the ta*a le usiness in"ome.

a.

(oe has signed a contract to sell gadgets to the city. 6he contract pro#ides that sales of gadgets are dependent %pon a test sample of gadgets operating s%ccessf%lly. 'n 2ecember, (oe deli#ers $12,000 worth of gadgets to the city that will be tested in 1arch. (oe p%rchased the gadgets especially for this contract and paid $),$00. (oe paid $1)0 for entertaining a #isiting o%t/of/town client. 6he client didn,t disc%ss b%siness with (oe d%ring this #isit, b%t (oe wants to maintain good relations to enco%rage additional b%siness ne"t year. 7n 8o#ember 1, (oe paid $300 for premi%ms pro#iding for $50,000 of 9key man: ins%rance on the life of (oe,s acco%ntant o#er the ne"t 12 months. .t the end of the year (year 1), (oe,s b%siness reports $*,000 of acco%nts recei#able. ;ased %pon past e"perience, (oe belie#es that at least $2,000 of his new recei#ables will be %ncollectible. 'n 2ecember of year 0, (oe rented e<%ipment for a large =ob. 6he rental agency re<%ired a minim%m rental of three months ($1,000 per month), b%t (oe completed the =ob before year/end. (oe hired a new sales representati#e as an employee and sent her to 2allas for a week to contact prospecti#e o%t/of/state clients. (oe ended %p reimb%rsing his employee $ 00 for airfare, $ $0 for lodging, $2$0 for meals, and $1$0 for entertainment. (oe re<%ires the employee to acco%nt for all e"pendit%res in order to be reimb%rsed. (oe %ses his ;1+ (a personal a%to) to tra#el to and from his residence to his factory. !owe#er, he switches to a b%siness #ehicle if he needs to tra#el after he reaches the factory. >ast month, the b%siness #ehicle broke down and he was forced to %se the ;1+ both to tra#el to and from the factory and to #isit work sites. !e dro#e 120 miles #isiting work sites and 53 miles dri#ing to and from the factory from his home. (oe paid a #isit to his parents in 2allas o#er the ?hristmas holidays. +hile he was in the city, (oe spent $$0 to attend a half/day b%siness symposi%m. (oe paid $200 for airfare, $$0 for meals d%ring the symposi%m, and $20 on cab fare to the symposi%m.

b.

c. d.

e.

f.

g.

h.

a.

$0 income. Joe does not include any income in year 0 from his contract with the city because the sale is contingent upon a future event. Consequently, Joe does not have a fixed right to the income. $0 deduction. Entertainment is not a deductible business expense unless there is a substantial business discussion on the day of the entertainment. his payment is not deductible. $0 deduction. he insurance premiums on a !ey"man policy are not deductible because any life insurance proceeds paid to Joe would be tax exempt. #ence, !ey" man life insurance premiums are an expense associated with the production of tax exempt income. $0 bad debt expense. $nly those receivables that have been identified as partially or completely uncollectible can be deducted next year. %nder the economic performance rules, Joe will deduct the cost of the lease over the lease term. hus he will deduct $&,000 in year 0 and the remaining $',000 in year &. Joe is allowed to deduct the full cost of the airfare ($)00* and lodging ($)+0* as an ordinary and necessary business expense. #owever, Joe is allowed to deduct only one"half of the $'+0 cost of meals and one"half of the $&+0 cost of the entertainment (assuming Joe,s employee provides proper substantiation for the meals and entertainment.*. -hile the ./ miles from his home to the factory is personal and therefore not deductible, Joe can either deduct the business portion of the operating costs of his car, or a standard amount (++ cents in '000* for each mile driven. 1f he elects the standard usage rate, Joe is entitled to a $// (.++ x &'0* deduction. he primary purpose of Joe,s trip was to visit relatives, so only the expenses directly related to business are deductible. #ence, Joe can deduct $'+ for meals (the trip is away from home overnight*, $'0 for cab fare, and $+0 for the cost of the symposium.

b.

c.

d. e.

f.

g.

h.