Solutions Guide: Please do not present as your own



Solutions Guide:   Please do not present as your own.  I sometimes post solutions that are totally mine, from the book’s solutions manual, or a mix of my work and the books solutions manual. But this is only meant as a solutions guide for you to answer the problem on your own. I recommend doing this with any content you buy online whether from me or from someone else.

72. Latrell recently used his Delta Sky miles to purchase a free roundtrip ticket to Milan, Italy (value $1,200). The frequent flyer miles used to purchase the ticket were generated from Latrell’s business travel as a CPA. Latrell’s employer paid for his business trips, and he was not taxed on the travel reimbursement. Use an available tax research service to determine how much Income, if any, does Latrell have to recognize as a result of purchasing an airline ticket with Sky miles earned from business travel.

IRS Announcement 2002-18 states that frequent flier miles earned for business travel and redeemed for in-kind benefits (e.g., a free airline ticket) do not represent taxable income. This ruling only applies to in-kind benefits and not frequent flier miles converted to cash. Since Latrell used his frequent flier miles to purchase an airline ticket, he will have no taxable income from the transaction.

49. Bendetta, a high-tax-rate taxpayer, owns several rental properties and would like to shift some income to her daughter, Jenine. Bendetta instructs her tenants to send their rent checks to Jenine so Jenine can report the rental income. Will this shift the income from Bendetta to Jenine? Why, or why not?

Merely sending the checks to Jenine is not sufficient to shift the rental income from Bendetta to Jenine under the assignment of income doctrine. To shift the rental income to Jenine, she must earn the income. In this case, this means that Jenine must actually own the rental property to report the rental income.

40. Marc and Michelle are married and earned salaries this year (2009) of $64,000 and $12,000, respectively. In addition to their salaries, they received interest of $350 from municipal bonds and $500 from corporate bonds. Marc and Michelle also paid $2,500 of qualifying moving expenses, and Marc paid alimony to a prior spouse in the amount of $1,500. Marc and Michelle have a 10-year-old son, Matthew, who lived with them throughout the entire year. Thus, Marc and Michelle are allowed to claim a $1,000 child tax credit for Matthew. Marc and Michelle paid $6,000 of expenditures that qualify as itemized deductions and they had a total of $5,500 in federal income taxes withheld from their paychecks during the course of the year. a. What is Marc and Michelle’s gross income? b. What is Marc and Michelle’s adjusted gross income? c. What is the total amount of Marc and Michelle’s deductions from AGI? d. What is Marc and Michelle’s taxable income? e. What is Marc and Michelle’s taxes payable or refund due for the year? (Use the tax rate schedules.)

a. What is Marc and Michelle’s gross income?

$76,500. See analysis below.

b. What is Marc and Michelle’s adjusted gross income?

$72,500. See analysis below.

c. What is the total amount of Marc and Michelle’s deductions from AGI?

$22,350 . See analysis below.

d. What is Marc and Michelle’s taxable income?

$50,150 See analysis below.

e. What is Marc and Michelle’s taxes payable or refund due for the year (use the tax rate schedules)?

$188 taxes payable. See analysis below.

|Description |Amount |Computation |

|(1) Realized income from all sources |$76,850 |64,000 salary + 12,000 salary + 350 municipal bond interest + |

| | |500 corporate bond interest |

|(2) Excluded or deferred income | 350 |Nontaxable municipal bond interest |

|(3) Gross income |76,500 |(1) – (2) |

|(4) For AGI deductions |4,000 |2,500 qualified moving expenses + 1,500 alimony paid |

|(5) Adjusted gross income |72,500 |(3) – (4) |

|(6) Standard deduction |11,400 |Married filing jointly |

|(7) Itemized deductions |6,000 | |

|(8) Greater of standard deductions or | |(6) > (7) |

|itemized deductions |11,400 | |

|(9) Personal and dependency exemptions |10,950 |3,650 x 3 (two personal exemptions and one dependency |

| | |exemption) |

|(10) Total deductions from AGI | |(8) + (9) |

| |(22,350) | |

|(11) Taxable income | |(5) + (10) |

| |$50,150 | |

|(12) Income tax liability |$6,688 |(50,150 – 16,700) x 15% + 1,670 (see tax rate schedule for |

| | |married filing jointly) Amount rounded to whole dollar. |

|(13) Other taxes |0 | |

|(14) Total tax | |(12) + (13) |

| |$6,688 | |

|(15) Credits |(1,000) |Child credit for 10-year old son Matthew |

|(16) Prepayments |(5,500) | |

|Taxes payable with return | |(14) + (15)+ (16) |

| |$188 | |

41. Demarco and Janine Jackson have been married for 20 years and have four children who qualify as their dependents. Their income from all sources this year (2009) totaled $200,000 and included a gain from the sale of their home, which they purchased a few years ago for $200,000 and sold this year for $250,000. The gain on the sale qualified for the exclusion from the sale of a principal residence. The Jacksons incurred $16,500 of itemized deductions. a. What is the Jackson’s taxable income? b. What would their taxable income be if their itemized deductions totaled $6,000 instead of $16,500? c. What would their taxable income be if they had $0 itemized deductions and $6,000 of for AGI deductions? d. Assume the original facts except that they also incurred a loss of $5,000 on the sale of some of their investment assets. What effect does the $5,000 loss have on their taxable income? e. Assume the original facts except that the Jacksons owned investments that appreciated by $10,000 during the year. The Jacksons believe the investments will continue to appreciate, so they did not sell the investments during this year. What is the Jackson’s taxable income?

a. What is the Jacksons’ taxable income?

$111,600. See analysis below.

|Description |Amount |Computation |

|(1) Realized income from all sources |$200,000 | |

|(2) Excluded or deferred income |50,000 |Gain on sale of home (250K – 200K) |

|(3) Gross income |150,000 |(1) – (2) |

|(4) For AGI deductions | 0 | |

|(5) Adjusted gross income |$150,000 |(3) – (4) |

|(6) Standard deduction |11,400 |Married filing jointly; |

|(7) Itemized deductions |16,500 | |

|(8) Greater of standard deductions or itemized deductions |16,500 |Greater of (6) or (7) |

|(9) Personal and dependency exemptions |21,900 |6 exemptions (given) x 3,650 (2009 |

| | |exemption amount) |

|(10) Total deductions from AGI |38,400 |(8) + (9) |

|(11) Taxable income |$111,600 |(5) – (10) |

b. What would their taxable income be if their itemized deductions totaled $6,000 instead of $16,500?

$116,700. See analysis below.

|Description |Amount |Computation |

|(1) Realized income from all sources |$200,000 | |

|(2) Excluded or deferred income |50,000 |Gain on sale of home (250K – 200K) |

|(3) Gross income |150,000 |(1) – (2) |

|(4) For AGI deductions | 0 | |

|(5) Adjusted gross income |$150,000 |(3) – (4) |

|(6) Standard deduction |11,400 |Married filing jointly |

|(7) Itemized deductions |6,000 | |

|(8) Greater of standard deductions or itemized deductions |11,400 |Greater of (6) or (7) |

|(9) Personal and dependency exemptions |21,900 |6 exemptions (given) x 3,650 (2009 |

| | |exemption amount) |

|(10) Total deductions from AGI |33,300 |(8) + (9) |

|(11) Taxable income |$116,700 |(5) – (10) |

c. Assume the same facts as in part b. except that the Jackson’s report $6,000 of for AGI deductions and $0 itemized deductions. What is the Jackson’s taxable income?

$110,700. See analysis below.

|Description |Amount |Computation |

|(1) Realized income from all sources |$200,000 | |

|(2) Excluded or deferred income |50,000 |Gain on sale of home (250K – 200K) |

|(3) Gross income |150,000 |(1) – (2) |

|(4) For AGI deductions |6,000 | |

|(5) Adjusted gross income |$144,000 |(3) – (4) |

|(6) Standard deduction |11,400 |Married filing jointly |

|(7) Itemized deductions |0 | |

|(8) Greater of standard deductions or itemized deductions |11,400 |Greater of (6) or (7) |

|(9) Personal and dependency exemptions |21,900 |6 exemptions x 3,650 (2009 exemption |

| | |amount) |

|(10) Total deductions from AGI |33,300 |(8) + (9) |

|(11) Taxable income |$110,700 |(5) – (10) |

Note that if the $6,000 expense is a for AGI deduction, the Jacksons are able to deduct all of the expense, but if it’s a from AGI deduction and they are not able to itemize deductions, they don’t get to deduct any of it.

d. Assume the original facts except that they also incurred a loss of $5,000 on the sale of some of their investment assets. What effect does the $5,000 loss have on their taxable income?

Because individual taxpayer’s deductible losses on the disposition of investment (or capital) assets is limited to $3,000. The Jacksons would be allowed to deduct $3,000 of the $5,000 loss against their taxable income in 2009. The remaining $2,000 loss would carryover to next year. Consequently, with the loss their taxable income would be $108,600 ($111,600 from part a minus $3,000).

e. Assume the original facts except that the Jacksons owned investments that appreciated by $10,000 during the year? The Jacksons believe the investments will continue to appreciate, so they did not sell the investments during this year. What is the Jackson’s taxable income?

Same as it is in part a. $111,600. Though the assets have appreciated, they will not realize or recognize this gain for income tax purposes until they sell their investment assets, at which time they will increase their gross income (and corresponding taxable income) by the gain

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