28.
CHAPTER 3 Comput Computee 2015 2015 taxab taxable le incom incomee in in each each of the the follow followin in in!epe in!epen! n!ent ent "ituat "ituation ion". ". a. #$ew an! %e& ae" '0 an! '1 $e"pecti(el)& a$e ma$$ie! an! file a *oint $etu$n. +n a!!ition to fou$ !epen!ent chil!$en& the) ha(e A,+ of -5&000 an! itemi/e! !e!uction" !e!uction" of -15&000. A,+
-5&000 15&000
e"" +temi/e! !e!uction" Pe$"onal an! !epen!enc) exemption" 4 -'&000 Taxable income
2'&000 -2&000
b. )bil& ae '0& i" "inle an! "uppo$t" he$ !epen!ent !epen!ent pa$ent"& who li(e with he$. )bil al"o "uppo$t" he$ $an!fathe$& who li(e" in a nu$"in home. he ha" A,+ of -80&000 an! itemi/e! !e!uction" of -8&000. A,+ e"" tan!a$! !e!uction hea! of hou"ehol! Pe$"onal an! !epen!enc) exemption" ' 4 -'&000 Taxable income
-80&000 6&250 1&000 -5'&750
c. cott& ae '6& i" a "u$(i(in "pou"e. Hi" hou"ehol! inclu!e" inclu!e" two unma$$ie! "tep"on" who ualif) a" hi" !epen!ent". He ha" A,+ of -75&000 an! itemi/e! itemi/e! !e!uction" of -10&100. A,+
-75&000 12&00
e"" tan!a$! !e!uction "u$(i(in "pou"e Pe$"onal an! !epen!enc) exemption" 3 4 -'&000 Taxable income
12&000 -50&'00
!. Amelia& ae 33& i" an aban!one! "pou"e an! maintain" a hou"ehol! fo$ he$ th$ee !epen!ent chil!$en. he ha" A,+ of -58&000 an! itemi/e! !e!uction" of -6&500. A,+
-58&000 6&500
e"" +temi/e! +temi/e! !e!uction" !e!uction" Pe$"onal an! !epen!enc) exemption" ' 4 -'&000 Taxable income
1&000 -32&500
e. #ale& ae '2& i" !i(o$ce! but maintain" the home in which he an! hi" !auhte$& 9ill& li(e. 9ill i" "inle an! ualifie" a" #ale:" !epen!ent. #ale ha" A,+ of -'&000 an! itemi/e! !e!uction" of -6&600. A,+ -'&000 e"" +temi/e! +temi/e! !e!uction" !e!uction" 6&600 Pe$"onal an! !epen!enc) exemption" 2 4 -'&000 8&000 Taxable income -'&100 26.
; 1& 8 Compute Emil):" 2015 taxable income on the ba"i" of the followin info$mation. He$ filin "tatu" i" "inle. ala$)
-85&000
+nte$e"t income f$om bon!" i""ue! b)
1&100
Alimon) pa)ment" $ecei(e!
&000
Cont$ibution to t$a!itional +RA
5&500
,ift f$om pa$ent"
25&000
Capital ain f$om "toc= in(e"tment& hel! fo$ 7 month"
2&000
Amount lo"t in football office bettin pool
500
>umbe$ of potential !epen!ent" !epen!ent" two cou"in"& cou"in"& who li(e in Cana!a
?
Ae
'0
ala$) +nte$e"t on bon!" Alimon) $ecei(e! Capital ain +RA cont$ibution A,+ tan!a$! !e!uction !e!uction Pe$"onal an! !epen!enc) exemption" 1 4 -'&000 Taxable income
-85&000 1&100 &000 2&000 5&500 -88&00 &300 '&000 -78&300
The alimon) pa)ment" an! bon! inte$e"t a$e taxable. The ift i" a nontaxable nontaxable exclu"ion. The -2&000 of the capital ain i" taxable. >et amblin lo""e" a$e not !e!uctible. Cou"in" !o not meet the $elation"hip te"t.
30. )ea$". ala$)
Compute Ai!en:" 2015 taxable income on the ba"i" of of the followin info$mation. Ai!en i" ma$$ie! but ha" not "een o$ hea$! f$om hi" wife fo$ o(e$ th$ee
+nte$e"t on bon!" i""ue! b) Cit) of @o"ton
-80&000 3&000
+nte$e"t on C# i""ue! b) ell" Ba$o @an= Ca"h !i(i!en! $ecei(e! on Che($on common "toc=
2&000 2&000
ife in"u$ance p$ocee!" pai! !ue to the !eath of Aunt %a$ie Ai!en wa" the !e"inate! beneficia$) of the polic)
200&000
+nhe$itance $ecei(e! on !eath of Aunt %a$ie
100&000
9ac="on a cou"in $epai! a loan Ai!en ma!e to him in 2012 no inte$e"t wa" p$o(i!e! fo$
5&000
+temi/e! !e!uction" "tate income tax& p$ope$t) taxe" on $e"i!ence& inte$e"t on home mo$tae& cha$itable cont$ibution"
6&700
>umbe$ of !epen!ent" chil!$en& ae" 17 an! 18 mothe$DinDlaw& ae 0
3
Ae
'3
ala$) +nte$e"t on C# #i(i!en! A,+ +temi/e! !e!uction" Pe$"onal an! !epen!enc) exemption" ' 4 -'&000 Taxable income
-80&000 2&000 2&200 -8'&200 6&700 1&000 -58&500
The inte$e"t -3&000 on the bon!" i" not taxable. Exclu!e! f$om $o"" income a$e the life in"u$ance p$ocee!" -200&000 an! the inhe$itance -100&000. The loan $epa)ment -5&000 i" a n ontaxable $etu$n of capital. Ai!en cho"e to itemi/e hi" !e!uction" from A,+ -6&700 becau"e it p$o(i!e! a $eate$ !e!uction than !i! hea! of hou"ehol! a" an aban!one! "pou"e -6&250.
31.
a.
.
#ete$mine the amount of the 2015 "tan!a$! !e!uction allowe! in the followin in!epen!ent "ituation". +n each ca"e& a""ume that the taxpa)e$ i" claime! a" anothe$ pe$"on:" !epen!ent. Cu$ti"& ae 18& ha" income a" follow" -700 inte$e"t f$om a ce$tificate of !epo"it an! -&100 f$om $epai$in ca$". -&300. Althouh -&100 ea$ne! income -350 F -&'50& the amount allowe! cannot excee! the "tan!a$! !e!uction a(ailable in 2015 fo$ "inle taxpa)e$". %attie& ae 18& ha" income a" follow" -00 ca"h !i(i!en!" f$om a "toc= in(e"tment an! -'&700 f$om han!lin a pape$ $oute. -5&050. -'&700 ea$ne! income -350.
c.
%el& ae 1& ha" income a" follow" -75 inte$e"t on a ban= "a(in" account an! -800 fo$ paintin a neihbo$:" fence. -1&150. The $eate$ of -1&050 o$ -1&150 G-800 ea$ne! income -350.
!.
uc)& ae 15& ha" income a" follow" -'00 ca"h !i(i!en!" f$om a "toc= in(e"tment an! -500 f$om $oomin pet". -1&050. The $eate$ of -1&050 o$ -850 G-500 ea$ne! income -350.
e.
a$ah& ae 7 an! a wi!ow& ha" income a" follow" -500 f$om a ban= "a(in" account an! -3&200 f$om bab)"ittin. -5&100. -3&200 ea$ne! income -350 -1&550 a!!itional "tan!a$! !e!uction.
32.
.
; ' Taxpa)e$:" "on ha" $o"" income of -7&000. IC. Cannot be IR !ue to the $o"" income te"t. Taxpa)e$:" niece ha" $o"" income of -3&000. @. Taxpa)e$:" uncle li(e" with him. IR. An uncle cannot be a IC. Taxpa)e$:" !auhte$ i" ae 25 an! !i"able! @. Taxpa)e$:" !auhte$ i" ae 18 but !oe" not li(e with him. He$ $o"" income i" -8&000. >. Cannot be a IC !ue to the abo!e te"t. Cannot be a IR !ue to the $o"" income te"t. Taxpa)e$:" cou"in !oe" not li(e with he$. >. Taxpa)e$:" b$othe$ !oe" not li(e with he$. IR. Taxpa)e$:" "i"te$ li(e" with him. he i" ae 17 an! ha" !$oppe! out of "chool. @. Taxpa)e$:" ol!e$ nephew i" ae 23 an! a fullDtime "tu!ent. IR. A ualif)in chil! cannot be ol!e$ than the taxpa)e$. Taxpa)e$:" $an!"on li(e" with he$. Hi" $o"" income i" -7&000. IC. Cannot be a IR !ue to the $o"" income te"t.
33.
; 3& ' #ete$mine the numbe$ of pe$"onal an! !epen!enc) exemption" in each of the followin in!epen!ent "ituation".
a. . c. !. e. f. . h. i.
a.
eo an! Aman!a ae" '8 an! '& $e"pecti(el) a$e hu"ban! an! wife an! fu$ni"h mo$e than 50J of the "uppo$t of thei$ two chil!$en& Elton ae 18 an! T$i"ta ae 2'. #u$in the )ea$& Elton ea$n" -'&500 p$o(i!in t$an"po$tation fo$ el!e$l) pe$"on" with !i"abilitie"& an! T$i"ta $ecei(e" a -5&000 "chola$"hip fo$ tuition at the law "chool "he atten!". Bou$. Two pe$"onal an! two !epen!enc) exemption". Elton i" a ualif)in chil!& "o hi" $o"" income !oe" not matte$. T$i"ta i" not a ualif)in chil!Kalthouh a fullD time "tu!ent& "he i" not un!e$ ae 2'. Howe(e$& T$i"ta fall" within the ualif)in $elati(e cateo$). he pa""e" the $o"" income te"t becau"e the tuition po$tion of a "chola$"hip i" nontaxable.
.
c.
!.
3'. a.
.
c. 35.
a.
.
c.
!.
3.
a.
.
Au!$e) ae '5 i" !i(o$ce! thi" )ea$. he maintain" a hou"ehol! in which "he& he$ exDhu"ban!& Clint& an! hi" mothe$& ;li(e& li(e. Au!$e) fu$ni"he" mo$e than 50J of the hou"ehol!:" "uppo$t. ;li(e i" ae 61 an! blin!. Two. ;ne pe$"onal an! one !epen!enc) exemption. Clint cannot ualif) a" a membe$ of Au!$):" hou"ehol! in the )ea$ of the !i(o$ce. ;li(e meet" the $elation"hip te"t. C$)"tal& ae '5& fu$ni"he" mo$e than 50J of the "uppo$t of he$ ma$$ie! "on& An!) ae 18& an! hi" wife& Paie ae 16& who li(e with he$. #u$in the )ea$& An!) ea$ne! -8&000 f$om a pa$tDtime *ob. All pa$tie" li(e in +owa a common law "tate. Th$ee. ;ne pe$"onal an! two !epen!enc) exemption". @ecau"e An!) i" a ualifie! chil!& he i" not "ub*ect to the $o"" income te"t. Paie meet" the $o"" income $eui$ement" of a ualif)in $elati(e. A""ume the "ame fact" a" in c& except that all pa$tie" li(e in a"hinton a communit) p$ope$t) "tate. Two. ;ne pe$"onal an! one !epen!enc) exemption. A" a ualif)in chil!& An!) i" "till immune f$om the $o"" income te"t. +n a communit) p$ope$t) "ituation& howe(e$& Paie i" t$eate! a" ha(in -'&000 in $o"" income. Thu"& "he !oe" not meet the $o"" income te"t an! cannot be a ualif)in $elati(e. #ete$mine the numbe$ of pe$"onal an! !epen!enc) exemption" in each of the followin in!epen!ent "ituation". Reinal!& a L.. citi/en an! $e"i!ent& cont$ibute" 100J of the "uppo$t of hi" pa$ent"& who a$e citi/en" of Cana!a an! li(e the$e. Th$ee. The pa$ent" ualif) a" !epen!ent" un!e$ the %exicoMCana!a exception. Pablo& a L.. citi/en an! $e"i!ent& cont$ibute" 100J of the "uppo$t of hi" pa$ent"& who a$e citi/en" of Panama. Pablo:" fathe$ i" a $e"i!ent of Panama& an! hi" mothe$ i" a leal $e"i!ent of the Lnite! tate". Two. Pablo:" fathe$ !oe" not ualif) becau"e he i" a citi/en an! $e"i!ent of Panama a" a $e"i!ent of the Lnite! tate"& Pablo:" mothe$ !oe" ualif). ,$etchen& a L.. citi/en an! $e"i!ent& cont$ibute" 100J of the "uppo$t of he$ pa$ent"& who a$e L.. citi/en" but a$e $e"i!ent" of ,e$man). Th$ee. The pa$ent" ualif) becau"e the) a$e L.. citi/en". #ete$mine how man) pe$"onal an! !epen!enc) exemption" a$e a(ailable in each of the followin in!epen!ent "ituation". pecif) whethe$ an) "uch exemption" woul! come un!e$ the ualif)in chil! o$ the ualif)in $elati(e cateo$). An!) maintain" a hou"ehol! that inclu!e" a cou"in ae 12& a niece ae 18& an! a "on ae 2. All a$e fullDtime "tu!ent". An!) fu$ni"he" all of thei$ "uppo$t. Bou$. The niece i" in the ualif)in chil! cateo$). The cou"in an! "on a$e not& !ue to the $elation"hip an! ae te"t". The) both fall within the ualif)in $elati(e cateo$). 9ac=ie p$o(i!e" all of the "uppo$t of a famil) f$ien!:" "on ae 20 who li(e" with he$. he al"o fu$ni"he" mo"t of the "uppo$t of he$ "tepmothe$& who !oe" not li(e with he$. Th$ee. @oth pe$"on" fall within the ualif)in $elati(e cateo$). The "tepmothe$ meet" the $elation"hip te"t& an! the famil) f$ien!:" "on i" a membe$ of the taxpa)e$:" hou"ehol!. Raul& a L.. citi/en& li(e" in Co"ta Rica. Raul:" hou"ehol! inclu!e" hi" f$ien! Helena& who i" ae 16 an! a citi/en of Co"ta Rica. Raul p$o(i!e" all of Helena:" "uppo$t. ;ne. Helena i" not a ualif)in chil! un!e$ the exception to the citi/en"hip o$ $e"i!enc) te"t. Raul i" not he$ a!opti(e fathe$. Na$en maintain" a hou"ehol! that inclu!e" he$ exDhu"ban!& he$ mothe$Dinlaw& an! he$ b$othe$DinDlaw ae 23 an! not a fullDtime "tu!ent. Na$en p$o(i!e" mo$e than half of all of thei$ "uppo$t. Na$en i" "inle an! wa" !i(o$ce! la"t )ea$. Bou$. Two fall within the ualif)in $elati(e cateo$)& an! it i" a""ume! that each meet" the $o"" income te"t. The mothe$D an! b$othe$DinDlaw "ati"f) the $elation"hip te"t. Althouh the exDhu"ban! i" a membe$ of the hou"ehol!& he can ualif) except in the )ea$ of the !i(o$ce. The b$othe$DinDlaw:" ae an! nonD"tu!ent "tatu" ha(e no bea$in on the !epen!enc) i""ue. 9enn)& ae 1'& li(e" in a hou"ehol! with he$ fathe$& uncle& an! $an!mothe$. The hou"ehol! i" maintaine! b) the uncle. The pa$tie"& all of whom file thei$ own Be!e$al income tax $etu$n"& $epo$t A,+ a" follow" fathe$ -30&000& uncle -50&000& an! $an!mothe$ -'0&000. ho i" eliible to claim 9enn) a" a !epen!ent on a Be!e$al income tax $etu$n? 9enn) i" a ualif)in chil! a" to all th$ee pa$tie". The$efo$e& the fathe$& uncle& an! $an!mothe$ a$e eliible to claim he$ a" a !epen!ent. hich of 9enn):" $elati(e" ta=e" p$ece!ence in claimin the exemption? Explain. +n thi" tieb$ea=e$ "ituation& the fathe$ a" pa$ent ta=e" p$efe$ence. +f the fathe$ fo$oe" the exemption& the uncle i" next in o$!e$ of p$efe$ence& !ue to a hihe$ A,+. 38.
; '& 6 e"le) an! %)$tle ae" 60 an! 88& $e"pecti(el) li(e in an a""i"te! ca$e facilit) an! fo$ )ea$" 2015 an! 201 $ecei(e! thei$ "uppo$t f$om the followin "ou$ce". Pe$centae of uppo$t ocial ecu$it) benefit" 1J on 20 >iece 26 Cou"in 12 @$othe$ 11 Bamil) f$ien! not $elate! 12
ho i" eliible to claim the Be!e$al income tax !epen!enc) exemption" un!e$ a multiple "uppo$t a$eement? a. on& niece& an! b$othe$. The cou"in an! the famil) f$ien! !o not meet the $elation"hip te"t. %u"t e"le) an! %)$tle be claime! a" !epen!ent" b) the "ame pe$"on" fo$ both tax )ea$"? Explain. b. >o. The eliible pa$tie" can $otate the exemption" a" the) choo"e. ho& if an)one& can claim an itemi/e! !e!uction fo$ pa)in the me!ical expen"e" of e"le) an! %)$tle? c. +f the eliible pe$"on who i" awa$!e! the exemption al"o pa)" the me!ical expen"e"& that pe$"on can claim them. 36. ; 5 +n each of the followin in!epen!ent "ituation"& !ete$mine in"ton:" filin "tatu". in"ton i" not ma$$ie!. in"ton li(e" alone& but he maintain" a hou"ehol! in which hi" pa$ent" li(e. The mothe$ ualifie" a" in"ton:" !epen!ent& but the fathe$ !oe" not. a. in"ton ualifie" fo$ hea!DofDhou"ehol! filin "tatu" a" lon a" one pa$ent i" hi" !epen!ent.
in"ton li(e" alone& but he maintain" a hou"ehol! in which hi" ma$$ie! !auhte$& Na$in& li(e". @oth Na$in an! he$ hu"ban! in"ton:" "onDinDlaw ualif) a" in"ton:" !epen!ent". b. in"ton mu"t u"e "inle filin "tatu". Except in the ca"e of pa$ent"& hea!DofDhou"ehol! "tatu" $eui$e" that the !epen!ent be a membe$ of the taxpa)e$:" hou"ehol!. in"ton maintain" a hou"ehol! in which he an! a famil) f$ien!& a$!& li(e. a$! ualifie" a" in"ton:" !epen!ent. c. The !epen!ent mu"t meet the $elation"hip te"t. The$efo$e& in"ton mu"t u"e "inle filin "tatu". in"ton maintain" a hou"ehol! in which he an! hi" mothe$DinDlaw li(e. in"ton:" wife !ie! la"t )ea$. !. in"ton can ualif) fo$ hea! of hou"ehol! if the mothe$DinDlaw i" hi" !epen!ent. He !oe" not meet the $eui$ement" of a "u$(i(in "pou"e becau"e a mothe$DinDlaw i" not a chil!. ame a" !& except that in"ton:" wife !i"appea$e! i.e.& "he !i! not !ie two )ea$" ao. e. @ecau"e in"ton i" "till ma$$ie!& he cannot u"e hea!DofDhou"ehol! filin "tatu". He !oe" not "ati"f) the $eui$ement" of an aban!one! "pou"eKa mothe$DinDlaw i" not a chil!. Con"euentl)& in"ton mu"t u"e ma$$ie! filin "epa$atel) filin "tatu". '0.
; '& 5 Ch$i"tophe$ !ie! in 2013 an! i" "u$(i(e! b) hi" wife& Chloe& an! thei$ 18)ea$Dol! "on& #)lan. Chloe i" the executo$ of Ch$i"tophe$:" e"tate an! maintain" the hou"ehol! in which "he an! #)lan li(e. All of thei$ "uppo$t i" fu$ni"he! b) Chloe. #)lan "a(e" hi" ea$nin". #)lan $epo$t" the followin info$mation. Oea$ Ea$nin" tu!ent? 2013 5&000 Oe" 201' 7&000 >o 2015 &000 Oe" hat i" Chloe:" Be!e$al income tax filin "tatu" fo$ a. Bo$ 2013& Chloe "houl! file a *oint $etu$n. @ecau"e "he i" the executo$ of Ch$i"tophe$:" e"tate& "he can con"ent on hi" behalf to file *ointl). @ein un!e$ 16 )ea$" of ae& he$ "on i" a ualif)in chil!. Thu"& "he can claim th$ee exemption"Ktwo pe$"onal an! one !epen!enc). b. Bo$ 201'& Chloe mu"t file a" "inle. he i" not a "u$(i(in "pou"e becau"e "he cannot claim #)lan a" a !epen!ent. #)lan i" not a ualif)in chil! !ue to the ae te"t an! i" not a ualif)in $elati(e !ue to the $o"" income te"t. c. Bo$ 2015& Chloe i" a "u$(i(in "pou"e. he can claim #)lan a" a !epen!ent. #)lan i" a ualif)in chil!Kalthouh not un!e$ ae 16& he i" a fullDtime "tu!ent. A" a ualif)in chil!& he i" not "ub*ect to the $o"" income te"t.
'1.
; 3& '& 5 >a!ia !ie! in 201' an! i" "u$(i(e! b) he$ hu"ban!& 9e$ol! ae '' he$ ma$$ie! "on& T$a(i" ae 22 an! he$ !auhte$DinDlaw& %ac) ae 18. 9e$ol! i" the executo$ of hi" wife:" e"tate. He maintain" the hou"ehol! whe$e he& T$a(i"& an! %ac) li(e& an! 9e$ol! fu$ni"he! all of thei$ "uppo$t. #u$in 201' an! 2015& T$a(i" i" a fullDtime "tu!ent& while %ac) ea$n" -7&000 each )ea$ f$om a pa$ttime *ob. T$a(i" an! %ac) !o not file *ointl) !u$in eithe$ )ea$.
hat i" 9e$ol!:" Be!e$al income tax filin "tatu" fo$ 201' an! 2015 if all pa$tie" $e"i!e in +!aho a communit) p$ope$t) "tate? a. Bo$ 201'& 9e$ol! can file a *oint $etu$n. A" executo$ of >a!ia:" e"tate& he can i""ue a con"ent on he$ behalf. Bo$ 2015& 9e$ol! can ualif) a" a "u$(i(in "pou"e. T$a(i" i" a ualif)in chil! !ue to hi" "tu!ent "tatu"& an! %ac) i" a ualif)in $elati(eKhe$ $o"" income of -3&500 50J 4 -7&000 meet" the $o"" income te"t. Thu"& 9e$ol! ha" th$ee exemption"Kone pe$"onal an! two !epen!enc). Nan"a" a common law "tate? b. The an"we$ a" to filin "tatu" !oe" not chane *oint $etu$n fo$ 201' an! "u$(i(in "pou"e fo$ 2015. Nan"a" i" a common law "tate& "o all of the -7&000 %ac) ea$n" i" a""ine! to he$. T$a(i" i" a ualif)in chil!. %ac) will not be a !epen!ent un!e$ the ualif)in $elati(e cateo$) becau"e of the $o"" income te"t. Thu"& 9e$ol! will ha(e two exemption". '3.
; 1& 2& 3& '& 5& L"in the Tax Rate che!ule"& compute the 2015 tax liabilit) fo$ Cha$lotte. Cha$lotte ae '0 i" a "u$(i(in "pou"e an! p$o(i!e" all of the "uppo$t of he$ fou$ mino$ chil!$en& who li(e with he$. Cha$lotte al"o maintain" the h ou"ehol! in which he$ pa$ent" li(e& an! "he fu$ni"he! 0J of thei$ "uppo$t. @e"i!e" inte$e"t on Cit) of %iami bon!" in the amount of -5&500& Cha$lotte:" fathe$ $ecei(e! -2&'00 f$om a pa$tDtime *ob. Cha$lotte ea$n" an -80&000 "ala$)& a "ho$tDte$m capital lo"" of -2&000& an! a ca"h p$i/e of -'&000 at a chu$ch $affle. Cha$lotte $epo$t" itemi/e! !e!uction" of -10&500. ala$) ho$tDte$m capital lo"" Ca"h p$i/e A,+ e"" Pe$"onal an! !epen!enc) exemption" 7 4 -'&000 tan!a$! !e!uction Taxable income Tax on -'1&'00 u"in "u$(i(in "pou"e $ate "che!ule -1&8'5.00 15J-'1&'00 -18&'50 F -5&287.50. The fathe$ !oe" not fail the $o"" income te"t becau"e taxDexempt income i" not counte!.
''.
-80&000 2&000 '&000 -82&000 28&000 12&00 -'1&'00
; 1& 2& 3& '& 5& & 8 L"e the Tax Rate che!ule" to compute %o$an:" 2015 Be!e$al income tax liabilit). %o$an ae '5 i" "inle an! p$o(i!e" mo$e than 50J of the "uppo$t of Ro"al)n a famil) f$ien!& ae 3& Blo a niece& ae 18& an! 9e$ol! a nephew& ae 18. @oth Ro"al)n an! Blo li(e with %o$an& but 9e$ol! a citi/en of B$ance li(e" in Cana!a. %o$an ea$n" a -65&000 "ala$)& cont$ibute" -5&000 to a t$a!itional +RA& an! $ecei(e" "ale" p$ocee!" of -15&000 fo$ an RQ that co"t -0&000 an! wa" u"e! onl) fo$ (acation". he ha" -8&200 in itemi/e! !e!uction". ,$o"" income Cont$ibution to t$a!itional +RA A,+ e"" Pe$"onal an! !epen!enc) exemption" ' 4 -'&000 tan!a$! !e!uction Taxable income Tax on -'&750 u"in hea!DofDhou"ehol! $ate "che!ule -&872.50 25J-'&750 -50&200 F -10&510.00.
-65&000 5&000 -60&000 1&000 6&250 -'&750
Althouh Ro"al)n !oe" not meet the $elation"hip te"t& "he i" a membe$ of %o$an:" hou"ehol!. 9e$ol! an! Blo meet the $elation"hip te"t. Althouh 9e$ol! i" not a L.. citi/en o$ a $e"i!ent& he i" a $e"i!ent of Cana!a.
CHAPTER ' 21. @iham Co$po$ation& an acc$ual ba"i" calen!a$ )ea$ taxpa)e$& "ell" it" "e$(ice" un!e$ 12Dmonth& an! 2'Dmonth cont$act". The co$po$ation p$o(i!e" "e$(ice" to each cu"tome$ e(e$) month. ;n 9ul) 1& 2015& @iham "ol! the followin cu"tome$ cont$act" an! #ete$mine the income to be $econi/e! in taxable income in 2015 an! 201. enth of Cont$act Total P$ocee!" 12 month" 2' month"
1'&000 enth of Cont$act 2'&000 12 month" 2' month"
2015 +ncome a. b.
201 +ncome c. !.
Re(enue P$oce!u$e 200'3' pe$mit" an acc$ual ba"i" taxpa)e$ to !efe$ $econition of income fo$ a!(ance pa)ment" fo$ "e$(ice"& oo!" an! a few othe$ item" to be ea$ne! afte$ the en! of the tax )ea$ of $eceipt. The po$tion of the a!(ance pa)ment that $elate" to "e$(ice" pe$fo$me! in the tax )ea$ of $eceipt i" inclu!e! in $o"" income in the tax )ea$ of $eceipt& matchin what i" $epo$te! in the taxpa)e$S" financial "tatement" fo$ that )ea$. The po$tion of the a!(ance pa)ment that $elate" to "e$(ice" to be pe$fo$me! afte$ the tax )ea$ of $eceipt i" inclu!e! in $o"" income in the "ub"euent tax )ea$. Re(enue P$oce!u$e 200'3' !oe" not appl) to p$epai! $ent o$ p$epai! inte$e"t. A!(ance pa)ment" fo$ the"e item" a$e alwa)" taxe! in the )ea$ of $eceipt. Length of Contract
2015 Income
12 month" 2' month"
a. b.
2016 Income
-1'&000 4 M12 F -7&000 -2'&000 4 M2'F -&000
c. -1'&000 4 M12 F -7&000 !. -2'&000 4 18M2' F -18&000
>ote that fo$ the 2'Dmonth cont$act"& @iham will onl) $epo$t -12&000 on it" 201 financial "tatement". The $emainin -&000 i" $epo$te! on @iham:" 2017 financial "tatement". Re(.P$oc. 200'3' !oe" not allow fo$ !efe$$al be)on! the )ea$ "ub"euent to the )ea$ the a!(ance pa)ment wa" $ecei(e!. 22.
imba an! ola a$e ma$$ie! but file "epa$ate $etu$n". imba $ecei(e! -80&000 of "ala$) an! -1&200 of taxable !i(i!en!" on "toc= he pu$cha"e! in hi" name an! pai! f$om the "ala$) that he ea$ne! "ince the ma$$iae. ola collecte! -600 in taxable inte$e"t on ce$tificate of !epo"it that "he inhe$ite! f$om he$ aunt. Compute ola:" $o"" income un!e$ two a""umption" a" to the "tate of $e"i!enc) of the couple. +f an amount i" /e$o& ente$ U-0.V +!aho Communit) P$ope$t) tate a. b. c.
#i(i!en!" +nte$e"t ala$)
outh Ca$olina Common aw tate !. e. f.
Ln!e$ a communit) p$ope$t) ")"tem& all p$ope$t) i" !eeme! eithe$ to be "epa$atel) owne! b) the "pou"e o$ to belon to the ma$ital communit). P$ope$t) ma) be hel! "epa$atel) b) a "pou"e if it wa" acui$e! befo$e ma$$iae o$ $ecei(e! b) ift o$ inhe$itance followin ma$$iae. ;the$wi"e& an) p$ope$t) i" !eeme! to be communit) p$ope$t). Bo$ Be!e$al tax pu$po"e"& each "pou"e i" taxe! on oneDhalf of the income f$om p$ope$t) belonin to the communit). The law" of Texa"& oui"iana& i"con"in& an! +!aho !i"tinui"h between "epa$ate p$ope$t) an! the income it p$o!uce". +n the"e "tate"& the income f$om "epa$ate p$ope$t) belon" to the communit). Acco$!inl)& fo$ Be!e$al income tax pu$po"e"& each "pou"e i" taxe! on oneDhalf of the income. +n the $emainin communit) p$ope$t) "tate"& "epa$ate p$ope$t) p$o!uce" "epa$ate income that the owne$D"pou"e mu"t $epo$t on hi" o$ he$ Be!e$al income tax $etu$n. +n all communit) p$ope$t) "tate"& income f$om pe$"onal "e$(ice" e..& "ala$ie"& wae"& an! income f$om a p$ofe""ional pa$tne$"hip i" ene$all) t$eate! a" if oneDhalf i" ea$ne! b) each "pou"e. Idaho (Community Property State)
#i(i!en!" a. b. - 600 c. -'0&000
00
South Carolina (Common Law State)
!. -
0
e. -600 f. - 0
+nte$e"t ala$)
>ote that the "toc= i" a communit) a""et becau"e it wa" c$eate! with communit) fun!" i.e.& imba:" "ala$).
23.
Ca"pe$ an! Cecile a$e !i(o$ce! thi" )ea$. A" pa$t of the !i(o$ce "ettlement& Ca"pe$ t$an"fe$$e! "toc= to Cecile. Ca"pe$ pu$cha"e! the "toc= fo$ -25&000& an! it ha! a ma$=et (alue of -'3&000 on the !ate of the t$an"fe$. Cecile "ol! the "toc= fo$ -'0&000 a month afte$ $ecei(in it. +n a!!ition Ca"pe$ i" $eui$e! to pa) Cecile -1&500 a month in alimon)
2'.
. He ma!e fi(e pa)ment" to he$ !u$in the )ea$. hat a$e the tax con"euence" fo$ Ca"pe$ an! Cecile $ea$!in the"e t$an"action"?
Alimon) an! "epa$ate maintenance pa)ment" a$e !e!uctible b) the pa$t) ma=in the pa)ment" an! a$e inclu!ible in the $o"" income of the pa$t) $ecei(in the pa)ment". Thu"& income i" "hifte! f$om the income ea$ne$ to the income beneficia$)& who i" bette$ able to pa) the tax on the amount $ecei(e!. A t$an"fe$ of p$ope$t) othe$ than ca"h to a fo$me$ "pou"e un!e$ a !i(o$ce !ec$ee o$ a$eement i" not a taxable e(ent. The t$an"fe$o$ i" not entitle! to a !e!uction an! !oe" not $econi/e ain o$ lo"" on the t$an"fe$. The t$an"fe$ee !oe" not $econi/e income an! ha" a co"t ba"i" eual to the t$an"fe$o$:" ba"i". How much ain o$ lo"" !oe" Ca"pe$ $econi/e on the t$an"fe$ of the "toc=? a. Ca"pe$ i" not $eui$e! to $econi/e ain on the t$an"fe$ of the "toc=.
#oe" Ca"pe$ $ecei(e a !e!uction fo$ the -7&500 alimon) pai!? b.
Oe". Ca"pe$ ma) !e!uct the -7&500 of alimon) pai!.
How much income !oe" Cecile ha(e f$om the -7&500 alimon) $ecei(e!? c.
Cecile ha" -7&500 of income f$om the alimon) $ecei(e!.
hen Cecile "ell" the "toc=& how much !oe" "he $epo$t? !.
25.
Cecile ha" a $eali/e! an! $econi/e! capital ain of -15&000 -'0&000 "ale" p$ice -25&000 ca$$)o(e$ ba"i" when "he "ell" the "toc=.
Eli/abeth ma!e the followin inte$e"tDf$ee loan" !u$in the )ea$. A""ume that tax a(oi!ance i" not a p$incipal pu$po"e of an) of the loan". A""ume that the $ele(ant Be!e$al $ate i" 5J an! that the loan" we$e out"tan!in fo$ the la"t "ix month" of the )ea$. @o$$owe$ Amount @o$$owe$:" >et +n(e"tment +ncome Pu$po"e of oan Richa$! 5&000 800 ,ift oo!) 8&000 00 Pu$cha"e toc= +$ene 105&000 D0D Pu$cha"e Re"i!ence
+f inte$e"t i" cha$e! on the loan but i" le"" than the Be!e$al $ate& the impute! inte$e"t i" the !iffe$ence between the amount that woul! ha(e been cha$e! at the Be!e$al $ate an! the amount actuall) cha$e!. hat a$e the effect" of the impute! inte$e"t $ule" on the"e t$an"action"? Compute Eli/abeth:" $o"" income f$om each loan The impute! inte$e"t $ule" appl) to the followin t)pe" of belowDma$=et loan" 1.
Richa$! ,ift loan" ma!e out of lo(e& affection& o$ ene$o"it).
2.
oo!) Compen"ationD$elate! loan" emplo)e$ loan" to emplo)ee".
3.
+$ene Co$po$ationD"ha$ehol!e$ loan" a co$po$ation:" loan" to it" "ha$ehol!e$".
>o inte$e"t i" impute! on total out"tan!in ift loan" of -10&000 o$ le"" between in!i(i!ual"& unle"" the loan p$ocee!" a$e u"e! to pu$cha"e incomeD p$o!ucin p$ope$t). Thi" exemption eliminate" immate$ial amount" that !o not $e"ult in appa$ent "hift" of income. Howe(e$& if the p$ocee!" of "uch a loan a$e u"e! to pu$cha"e incomeDp$o!ucin p$ope$t)& othe$ limitation" appl) in"tea!. ;n loan" of -100&000 o$ le"" between in!i(i!ual"& the impute! inte$e"t cannot excee! the bo$$owe$:" net in(e"tment income fo$ the )ea$ $o"" income f$om all in(e"tment" le"" the $elate! expen"e". Thu"& the income impute! to the len!e$ i" limite! to the bo$$owe$:" net in(e"tment income. +n a!!ition& if the bo$$owe$:" net in(e"tment income fo$ the )ea$ !oe" not excee! -1&000& no inte$e"t i" impute! on loan" of -100&000 o$ le"". Howe(e$& the"e limitation" fo$ loan" of -100&000 o$ le"" !o not appl) if a p$incipal pu$po"e of a loan i" tax a(oi!ance. A" with ift loan"& the$e i" a -10&000 exemption fo$ compen"ationD$elate! loan" an! co$po$ation "ha$ehol!e$ loan". Howe(e$& the -10&000 exception !oe" not appl) if tax a(oi!ance i" one of the p$incipal pu$po"e" of a loan. Thi" (aue tax a(oi!ance "tan!a$! ma=e" p$acticall) all compen"ation $elate! an! co$po$ationD"ha$ehol!e$ loan" "u"pect. >e(e$thele""& the -10&000 exception "houl! appl) when an emplo)ee:" bo$$owin wa" nece""itate! b) pe$"onal nee!" e..& to meet unexpecte! expen"e" $athe$ than tax con"i!e$ation". a. +n thi" example& Richa$! i" not "ub*ect to the impute! inte$e"t $ule" becau"e the -10&000 exception applie". b.
The -10&000 exception !oe" not appl) to the loan to oo!) becau"e the p$ocee!" we$e u"e! to pu$cha"e incomeDp$o!ucin a""et". Howe(e$& un!e$ the -100&000 exception& the impute! inte$e"t i" limite! to oo!):" in(e"tment income -00. Howe(e$& the -1&000 exception al"o applie" to thi" loan the$efo$e& no inte$e"t i" impute!.
c.
>one of the exception" appl) to the loan to +$ene becau"e the loan wa" fo$ mo$e than -100&000. The$efo$e& Eli/abeth mu"t $econi/e -2&25 a" inte$e"t income. -105&000 4 5J 4 M12 F -2&25.
37.
; 2 #$a=e Appliance Compan)& an acc$ual ba"i" taxpa)e$& "ell" home appliance" an! "e$(ice cont$act". #ete$mine the effect of each of the followin t$an"action" on the compan):" 2015 $o"" income a""umin that the compan) u"e" an) a(ailable option" to !efe$ it" taxe". +n #ecembe$ 201'& the compan) $ecei(e! a -1&200 a!(ance pa)ment f$om a cu"tome$ fo$ an appliance that #$a=e "pecial o$!e$e! f$om the manufactu$e$. The appliance !i! not a$$i(e f$om the manufactu$e$ until 9anua$) 2015& an! #$a=e imme!iatel) !eli(e$e! it to the cu"tome$. The "ale wa" $epo$te! in 2015 fo$ financial accountin pu$po"e". a. The -1&200 i" inclu!e! in the 2015 $o"" income. The a!(ance pa)ment $ecei(e! in 201' fo$ oo!" !eli(e$e! in 2015 ualifie" fo$ !efe$$al becau"e the compan) "ati"fie! the tax an! financial accountin confo$mit) $eui$ement. +n ;ctobe$ 2015& the compan) "ol! a Dmonth "e$(ice cont$act fo$ -2'0. The compan) al"o "ol! a 3Dmonth "e$(ice cont$act fo$ -1&20 in 9ul) 2015. b. Bo$ the "ale of the "ixDmonth "e$(ice cont$act& -120 i" inclu!e! in 2015 $o"" income -2'0 4 3M F -120. The a!(ance pa)ment fo$ "e$(ice" ualifie" fo$ p$o$ation o(e$ the life of the cont$act becau"e all of the income will be ea$ne! b) the en! of the tax )ea$ followin the )ea$ of $eceipt. #$a=e mu"t inclu!e in 2015 $o"" income -210 -1&20 4 M3. #$a=e woul! inclu!e in 201 $o"" income -1&050 -1&20 -210& the balance on the cont$act "ol! in 2015 fo$ "e$(ice" that woul! not all be pe$fo$me! b) the en! of the tax )ea$ of $eceipt. That i"& the po$tion of the a!(ance pa)ment that $elate" to "e$(ice" to be pe$fo$me! afte$ the tax )ea$ of $eceipt i" inclu!e! in $o"" income in the tax )ea$ followin the tax )ea$ of $eceipt of the a!(ance pa)ment.
;n #ecembe$ 31& 2015& the compan) "ol! an appliance fo$ -1&200. The compan) $ecei(e!-500ca"h an!a notef$omthe cu"tome$ fo$ -700an! -20inte$e"t&to be pai! at the $ate of -'0 a month fo$ 2' month". @ecau"e of the cu"tome$:" poo$ c$e!it $eco$!& the fai$ ma$=et (alue of the note wa" onl) -00. The co"t of the appliancewa"-750. c.
The compan) mu"t inclu!e -1&200 in $o"" $eceipt" an! can !e!uct the co"t of the appliance& -750& in a$$i(in at $o"" income of -'50. The fai$ ma$=et (alue of the note i" not $ele(ant fo$ pu$po"e" of !ete$minin the acc$ual metho! taxpa)e$:" $o"" income. The inte$e"t of -20 will be taxe! a" it acc$ue" o(e$ the 2'Dmonth life of the cont$act.
38.
; 2& 5 B$e!a i" a ca"h ba"i" taxpa)e$. +n 2015& "he neotiate! he$ "ala$) fo$ 201. He$ emplo)e$ offe$e! to pa) he$ -21&000 pe$ month in 201 fo$ a total of -252&000. B$e!a counte$e! that "he woul! accept -10&000 each month fo$ the 12 month" in 201 an! the $emainin -132&000 in 9anua$) 2017. The emplo)e$ accepte! B$e!a:" te$m" fo$ 201 an! 2017. #i! B$e!a actuall) o$ con"t$ucti(el) $ecei(e -252&000 in 201? a. >o. Actual $eceipt applie" to the -120&000 -10&000 4 12 month" "he $ecei(e! in 201. The -132&000 !efe$$e! income i" not con"t$ucti(el) $ecei(e! in 201 becau"e un!e$ the actual cont$act te$m"& "he !i! not ha(e the $iht to $ecei(e the income in 201. The con"t$ucti(e $eceipt !oct$ine cannot chane actual e(ent" to Uwhat miht ha(e been !one.V
hat coul! explain B$e!a:" willinne"" to "p$ea! he$ "ala$) o(e$ a lone$ pe$io! of time? b.
B$e!a ma) ha(e expecte! to be in a lowe$ ma$inal tax b$ac=et in 2017. he al"o benefite! b) not ha(in to pa) the tax on the income "hifte! into 2017 until "he file! he$ 2017 income tax $etu$n o$ ma!e pa)ment" on e"timate! taxe" fo$ 2017.
+n #ecembe$ 201& afte$ B$e!a ha! ea$ne! the $iht to collect the -132&000 in 2017& the emplo)e$ offe$e! -133&000 to B$e!a at that time& $athe$ than -132&000 in 9anua$) 2017. The emplo)e$ wante! to ma=e the ea$l) pa)ment "o a" to !e!uct the expen"e in 201. B$e!a $e*ecte! the emplo)e$:" offe$. a" B$e!a in con"t$ucti(e $eceipt of the income in 201? Explain. c.
Oe". The -132&000 actuall) $ecei(e! in 2017 wa" con"t$ucti(el) $ecei(e! in 201 becau"e it wa" ma!e a(ailable to he$ in that )ea$.
'6.
; ' +n!icate whethe$ the impute! inte$e"t $ule" "houl! appl) in the followin "ituation". A""ume that all of the loan" we$e ma!e at the beinnin of the tax )ea$ unle"" othe$wi"e in!icate!. %i=e loane! hi" "i"te$ -60&000 to bu) a new home. %i=e !i! not cha$e inte$e"t on the loan. The Be!e$al $ate wa" 5J. %i=e:" "i"te$ ha! -600 of in(e"tment income fo$ the )ea$. a. Thi" loan i" a ift loan between in!i(i!ual" that i" eliible fo$ the -100&000 exception. Althouh %i=e:" "i"te$ ha" -600 of in(e"tment income& inte$e"t i" not impute! un!e$ thi" exception if the bo$$owe$:" net in(e"tment income i" not $eate$ than -1&000. o the impute! amount i" -0.
am:" emplo)e$ maintain" an eme$enc) loan fun! fo$ it" emplo)ee". #u$in the )ea$& am:" wife wa" (e$) ill& an! he incu$$e! unu"uall) la$e me!ical expen"e". He bo$$owe! -8&500 f$om hi" emplo)e$:" eme$enc) loan fun! fo$ "ix month". The Be!e$al $ate wa" 5.5J. am an! hi" wife ha! no in(e"tment income fo$ the )ea$. b.
Thi" loan i" an emplo)e$Demplo)ee loan fo$ not $eate$ than -10&000. am !i! not u"e the fun!" to bu) in(e"tment"& an! the$e appea$" to be no tax a(oi!ance moti(e. Thu"& no inte$e"t i" impute!.
9o!) bo$$owe! -25&000 f$om he$ cont$olle! co$po$ation fo$ "ix month". he u"e! the fun!" to pa) he$ !auhte$:" collee tuition. The co$po$ation cha$e! 9o!) 'J inte$e"t. The Be!e$al $ate wa" 5J. 9o!) ha! -3&500 of in(e"tment income fo$ the )ea$. c. +nte$e"t i" impute! on thi" loan. The -100&000 exception i" not a(ailable on co$po$ation "ha$ehol!e$ loan". The impute! inte$e"t woul! be calculate! a" follow" -25&000 4 5J 'J 4 1M2 F -125
Nait loane! he$ "on& 9a=e& -0&000 fo$ "ix month". 9a=e u"e! the -0&000 to pa) off collee loan". The Be!e$al $ate wa" 5J& an! Nait !i! not cha$e 9a=e an) inte$e"t. 9a=e ha! !i(i!en! an! inte$e"t income of -2&100 fo$ the tax )ea$. !.
The loan f$om Nait to 9a=e i" cla""ifie! a" a ift loan between in!i(i!ual" that i" eliible fo$ the -100&000 exception. o the impute! inte$e"t income fo$ the "ix month" i" calculate! a" follow" -0&000 4 5J 4 1M2 F -1&500 Ln!e$ the -100&000 exception& the impute! inte$e"t i" limite! to 9a=e:" net in(e"tment income of -2&100. o in thi" ca"e& the limit ha" no effect on the amount of impute! inte$e"t.
51.
; ' Pam $eti$e" afte$ 28 )ea$" of "e$(ice with he$ emplo)e$. he i" )ea$" ol! an! ha" cont$ibute! -'2&000 to he$ emplo)e$:" ualifie! pen"ion fun!. he elect" to $ecei(e he$ $eti$ement benefit" a" an annuit) of -3&000 pe$ month fo$ the $emain!e$ of he$ life.
A""ume that Pam $eti$e" in 9une 2015 an! collect" "ix annuit) pa)ment" thi" )ea$. hat i" he$ $o"" income f$om the annuit) pa)ment" in the fi$"t )ea$? a. Co"t he$ in(e"tment F -'2&000
Emplo)ee:" in(e"tment >umbe$ of anticipate! pa)ment" GExhibit '.2
-'2&000 210
Collection" in 2015 pa)ment" 4 -3&000 Exclu"ion fo$ capital $eco(e$) -200 4 pa)ment" +nclu!e in $o"" income
F -200 exclu"ion pe$ pa)ment
-18&000 1&200 -1&800
The "implifie! metho! i" u"e! to calculate the annuit) exclu"ion pe$centae becau"e thi" i" a ualifie! $eti$ement plan !i"t$ibution. A""ume that Pam li(e" 25 )ea$" afte$ $eti$in. hat i" he$ $o"" income f$om the annuit) pa)ment" in the twent)Dfou$th )ea$? b. Pam will ha(e $eco(e$e! he$ in(e"tment a" a $etu$n of capital p$io$ to the twent)Dfou$th )ea$ i.e.& 17 )ea$" an! month". Thu"& all annuit) pa)ment" $ecei(e! in the twent)Dfou$th )ea$ -3&000 a$e inclu!ible in he$ $o"" income. -3&000 4 12 pa)ment" F -3&000 A""ume that Pam !ie" afte$ collectin 10 pa)ment". he collecte! eiht pa)ment" in the )ea$ of he$ !eath. hat a$e Pam:" $o"" income an! !e!uction" f$om the annuit) cont$act in the )ea$ of he$ !eath? c. +n(e"tment in the cont$act -'2&000 Total amount collecte! 10 4 -3&000 F -'80&000 e"" Capital $eco(e$e! -200 exclu"ion 4 10 pa)ment" 32&000 Ln$eco(e$e! co"t lo"" in the final )ea$ $etu$n -10&000 +ncome f$om collection" in final )ea$ -2'&000 collecte! 8 4 -200 F -1&00 exclu"ion F
-22&'00
5. ; ' %eli""a& who i" 70 )ea$" ol!& i" unma$$ie! an! ha" no !epen!ent". He$ annual income con"i"t" of a taxable pen"ion of -17&000& -1'&000 in ocial ecu$it) benefit"& an! -3&000 of !i(i!en! income. he !oe" not itemi/e he$ !e!uction". he i" in the 15J ma$inal income tax b$ac=et. he i" con"i!e$in ettin a pa$tD time *ob that woul! pa) he$ -5&000 a )ea$. hatwoul!be%eli""a:"afte$Dtaxincomef$omthepa$tDtime*ob&con"i!e$in ocial ecu$it) an! %e!ica$e tax 7.5J a" well a" Be!e$al income tax on the ea$nin" of -5&000? a. %eli""a will be "ub*ect to a 15J income tax $ate an! 7.5J ocial ecu$it) an! %e!ica$e tax $ate on the -17&000 in ea$ne! income. Al"o& the a!!itional -5&000 income will inc$ea"e ocial ecu$it) benefit" "ub*ect to income tax. He$ mo!ifie! A,+ befo$e the a!!itional -5&000 wa" -20&000. The$efo$e& he$ taxable ocial ecu$it) benefit" woul! be calculate! a" follow" 50JG-20&000 50J-1'&000 -25&000 F -1&000 ith the a!!itional income of -5&000 f$om the pa$tDtime *ob& he$ taxable ocial ecu$it) benefit" woul! be a" follow" 50JG-25&000 50J-1'&000 -25&000 F -3&500 o the pa$tDtime *ob woul! $e"ult in an inc$ea"e in taxable ocial ecu$it) benefit" of -2&500 -3&500 -1&000. %eli""a:" afte$Dtax income f$om he$ pa$tDtime *ob woul! be ala$) e"" Be!e$al income tax -5&000 4 15J B+CA tax -5&000 4 .075 +nc$ea"e! taxable ocial ecu$it) benefit" -2&500 4 15J Afte$Dtax income f$om pa$tDtime *ob
-5&000 750 383 375 -3&'62
hat woul! be the effecti(e tax $ate inc$ea"e in taxMinc$ea"e in income on the a!!itional income f$om the pa$tDtime *ob? b. He$ effecti(e tax $ate woul! be 30.1J G-5&000 -3&'62 W -5&000.
CHAPTER 5 11. ; 2 Te! wo$=" fo$ A/u$e %oto$"& an automobile !eale$"hip. All emplo)ee" can bu) a ca$ at the compan):" co"t plu" 2J. The compan) !oe" not cha$e emplo)ee" the -300 !eale$ p$epa$ation fee that nonemplo)ee" mu"t pa). Te! pu$cha"e! an automobile fo$ -26&580 -26&000X-580. The compan):" co"t wa" -26&000. The p$ice fo$ a nonemplo)ee woul! ha(e been -33&600 -33&00X-300 p$epa$ation fee. hat i" Te!:" $o"" income f$om the pu$cha"e of the automobile? The !i"count on the p$ice of the automobile of -'&00 -33&00 -26&000 i" a ualifie! emplo)ee !i"count. The !i"count can be exclu!e! f$om Te!:" $o"" income becau"e the p$ice he pai! wa" abo(e the emplo)e$:" co"t. Howe(e$& Te! mu"t inclu!e in $o"" income 80J of the !eale$ p$epa$ation fee& a "e$(ice& of -300& which i" -2'0 -300 4 80J. The maximum ualifie! emplo)ee !i"count that can be exclu!e! fo$ a "e$(ice i" 20J.
28
; 2 #ete$mine the $o"" income of the beneficia$ie" in the followin ca"e"
9u"tin:" emplo)e$ wa" !own"i/in an! offe$e! emplo)ee" an amount eual to one )ea$:" "ala$) if the emplo)ee woul! (olunta$il) $eti$e. a. The pa)ment" $ecei(e! fo$ not wo$=in mu"t be inclu!e! in 9u"tin:" $o"" income becau"e he expe$ience! an inc$ea"e in wealth when the pa)ment wa" $ecei(e! althouh he ma) expe$ience a !ec$ea"e in futu$e income. T$ina cont$acte! a !i"ea"e an! wa" unable to wo$= fo$ "ix month". @ecau"e of he$ !i$e ci$cum"tance"& he$ emplo)e$ pai! he$ oneDhalf of he$ $eula$ "ala$) while "he wa" awa) f$om wo$=. b. The pa)ment" $ecei(e! b) T$ina mu"t be inclu!e! in he$ $o"" income. The pa)ment" we$e not ift"& althouh the) we$e ma!e becau"e of he$ !i$e ci$cum"tance"& becau"e the +nte$nal Re(enue Co!e "pecificall) p$o(i!e" that emplo)e$" cannot be con"i!e$e! !ono$" to thei$ emplo)ee".
Co$al Co$po$ation collecte! -1 million on a =e) pe$"on life in"u$ance polic) when it" chief executi(e !ie!. The co$po$ation ha! pai! the p$emium" on the polic) of -77&000& which we$e not !e!uctible b) the co$po$ation. c.
The life in"u$ance p$ocee!" a$e exclu!e! f$om Co$al Co$po$ation:" $o"" income. The co$po$ation collecte! the p$ocee!" a" the beneficia$) of the polic) upon the !eath of the in"u$e!.
9uan collecte! -'0&000 on a life in"u$ance polic) when hi" wife& eona& !ie! in 201'. The in"u$ance polic) wa" p$o(i!e! b) eona:" emplo)e$& an! the p$emium" we$e exclu!e! f$om eona:" $o"" income a" $oup te$m life in"u$ance. +n 2015& 9uan collecte! the -3&500 acc$ue! "ala$) owe! to eona at the time of he$ !eath. !.
30.
The life in"u$ance p$ocee!" of -'0&000 a$e exclu!e! f$om 9uan:" $o"" income. He collecte! the p$ocee!" a" the beneficia$) of the polic) upon the !eath of the in"u$e!. The fact that the co$po$ation pai! the p$emium" an! the p$emium" we$e exclu!e! f$om eona:" $o"" income !oe" not affect the tax t$eatment of the p$ocee!". The acc$ue! "ala$) mu"t be inclu!e! in 9uan:" $o"" income becau"e it woul! ha(e been taxable to 9uan:" wife if "he ha! collecte! it Uincome in $e"pect of a !ece!entV.
; 2
hat i" the taxpa)e$:" $o"" income in each of the followin "ituation"?
#a$$in $ecei(e! a "ala$) of -50&000 in 2015 f$om hi" emplo)e$& ,$een Con"t$uction. a. -50&000 "ala$). +n 9ul) 2015& ,$een a(e #a$$in an allDexpen"eDpai! t$ip to a" Qea" (alue of -3&000 fo$ excee!in hi" "ale" uota. b.
-3&000& the (alue of the t$ip.
%ean $ecei(e! -10&000 f$om he$ emplo)e$ to help he$ pa) me!ical expen"e" not co(e$e! b) in"u$ance. c.
The -10&000 a" compen"ation& unle"" thi" i" pai! un!e$ a non!i"c$iminato$) me!ical $eimbu$"ement plan a(ailable to othe$ emplo)ee".
@la=e $ecei(e! -15&000 f$om hi" !ecea"e! wife:" emplo)e$ Uto help him in hi" time of $eate"t nee!.V !.
The -15&000 i" an exclu!e! ift becau"e it wa" pai! ba"e! on @la=e:" nee!.
Clint collecte! -50&000 a" the beneficia$) of a $oup te$m life in"u$ance polic) when hi" wife !ie!. The p$emium" on the polic) we$e pai! b) hi" !ecea"e! wife:" emplo)e$. e.
31.
e$o. ife in"u$ance p$ocee!" pai! to the beneficia$) upon !eath of the in"u$e! a$e exclu!e! f$om $o"" income.
; 2 #onal! wa" =ille! in an acci!ent while he wa" on the *ob in 2015. #a$lene& #onal!:" wife& $ecei(e! "e(e$al pa)ment" a" a $e"ult of #onal!:" !eath. hat i" #a$lene:" $o"" income f$om the item" li"te! below a. #onal!:" emplo)e$ pai! #a$lene an amount eual to #onal!:" th$ee month": "ala$) -0&000& which i" what the emplo)e$ !oe" fo$ all wi!ow" an! wi!owe$" of !ecea"e! emplo)ee". b. #onal! ha! -20&000 in acc$ue! "ala$) that wa" pai! to #a$lene. c. #onal!:" emplo)e$ ha! p$o(i!e! #onal! with $oup te$m life in"u$ance of -'80&000 twice hi" annual "ala$)& which wa" pa)able to hi" wi!ow in a lump "um. P$emium" on thi" polic) totalin -12&500 ha! been inclu!e! in #onal!:" $o"" income un!e$ Y 76. !. #onal! ha! pu$cha"e! a life in"u$ance polic) p$emium" totale! -250&000 that pai! -00&000 in the e(ent of acci!ental !eath. The p$ocee!" we$e pa)able to #a$lene& who electe! to $ecei(e in"tallment pa)ment" a" an annuit) of -30&000 each )ea$ fo$ a 25D)ea$ pe$io!. he $ecei(e! he$ fi$"t in"tallment thi" )ea$.
#a$lene:" $o"" income f$om the $eceipt" i" -8&000. Amount ,$o"" Recei(e! +ncome a.
Emplo)e$ pa)ment"& not exclu!e! a" ift. The fact that - 0&000 0&000 the pa)ment i" pa$t of compan) polic) p$o(i!e" the ea$ma$=" of compen"ation $athe$ than a ift.
b.
Acc$ue! "ala$)& ea$ne! befo$e !eath.
c.
,$oup te$m life in"u$ance p$ocee!".
- 20&000 -20&000 -'80&000 0
!.
Annuit) p$ocee!" e"" Reco(e$) of capital -00&000ZM-750&000ZZ 4 -30&000
- 30&000 2'&000
- &000 -8&000
Z+n(e"tment in cont$act nontaxable -00&000 in"u$ance p$ocee!". ZZExpecte! $etu$n -30&000 4 25 )ea$".
32.
; 2 all) wa" an allD"tate "occe$ pla)e$ !u$in he$ *unio$ an! "enio$ )ea$" in hih "chool. he accepte! an athletic "chola$"hip f$om tate Lni(e$"it). The "chola$"hip p$o(i!e! the followin Tuition an! fee" 15&000 Hou"in an! meal" &000 @oo=" an! "upplie" 1&500 T$an"po$tation 1&200
a. #ete$mine the effect of the "chola$"hip on all):" $o"" income. a. The -1&500 $ecei(e! fo$ tuition& fee"& boo="& an! "upplie" can be exclu!e! f$om all):" $o"" income a" a "chola$"hip. The -&000 $ecei(e! fo$ $oom an! boa$! an! the -1&200 $ecei(e! fo$ t$an"po$tation mu"t be inclu!e! in he$ $o"" income. The athletic "chola$"hip i" con"i!e$e! a pa)ment to fu$the$ the $ecipient:" e!ucation an! i" not compen"ation fo$ "e$(ice". b. all):" b$othe$& ill)& wa" not a ifte! athlete& but he $ecei(e! -8&000 f$om thei$ fathe$:" emplo)e$ a" a "chola$"hip !u$in the )ea$. The emplo)e$ $ant" the chil!$en of all executi(e" a "chola$"hip eual to oneDhalf of annual tuition& fee"& boo="& an! "upplie". ill) al"o $ecei(e! a -&000 "chola$"hip to be u"e! fo$ tuition a" the winne$ of an e""a) conte"t $elate! to bioeninee$in& hi" inten!e! fiel! of "tu!). #ete$mine the effect of the "chola$"hip" on ill):" an! hi" fathe$:" $o"" income.
b.
The -8&000 U"chola$"hipV i" a!!itional compen"ation to ill):" fathe$. The fact that the U"chola$"hip"V a$e awa$!e! onl) to the chil!$en of executi(e" in!icate" that the emplo)e$ i" not "impl) ma=in pa)ment" to a""i"t the "tu!ent "ee=in hi" o$ he$ e!ucation& but $athe$ to compen"ate an emplo)ee. Howe(e$& the -&000 "chola$"hip $ecei(e! a" a conte"t winne$ i" exclu!e! f$om $o"" income. Althouh conte"t winnin" a$e ene$all) "ub*ect to tax& the exception i" when the p$i/e i" a "chola$"hip.
3'. ; 2 A!$ian wa" awa$!e! an aca!emic "chola$"hip to tate Lni(e$"it) fo$ the 2015201 aca!emic )ea$. He $ecei(e! -&500 in Auu"t an! -7&200 in #ecembe$ 2015. A!$ian ha! enouh pe$"onal "a(in" to pa) all expen"e" a" the) came !ue. A!$ian:" expen!itu$e" fo$ the $ele(ant pe$io! we$e a" follow" Tuition& Auu"t 2015
3&700
Tuition& 9anua$) 201
3&750
Room an! @oa$! Auu"tD#ecembe$ 2015
2&800
9anua$)D%a) 201
2&500
@oo=" an! e!ucational "upplie" Auu"tD#ecembe$ 2015
1&000
9anua$)D%a) 201
1&200
#ete$mine the effect on A!$ian:" $o"" income fo$ 2015 an! 201 A!$ian $ecei(e! a total of -13&700 an! "pent -6&50 -3&700 -3&750 -1&000 -1&200 on tuition& boo="& an! "upplie". The amount $ecei(e! fo$ $oom an! boa$! i" not exclu!ible f$om $o"" income. The$efo$e& he mu"t inclu!e -'&050 -13&700 -6&50 in $o"" income. hen he $ecei(e! the mone) in 2015& A!$ian:" total expen"e" fo$ the pe$io! co(e$e! b) the "chola$"hip we$e not =nown. The$efo$e& he i" allowe! to !efe$ $epo$tin the income until 201& when all the unce$taint) i" $e"ol(e!.
35. ; 2 eih "ue! an o(e$/ealou" bill collecto$ an! $ecei(e! the followin "ettlement #amae" to he$ automobile that the collecto$ attempte! to $epo""e"" 3&300 Ph)"ical !amae to he$ a$m cau"e! b) the collecto$ 15&000 o"" of income while he$ a$m wa" healin &000 Puniti(e !amae" 80&000 hat effect !oe" the "ettlement ha(e on eih:" $o"" income? a. eih mu"t inclu!e in $o"" income the puniti(e !amae" of -80&000. The othe$ amount" -15&000 an! -&000 ma) be exclu!e! a" a$i"in out of the ph)"ical pe$"onal in*u$)& except the -3&300 amount $ecei(e! fo$ !amae to he$ automobile. Thi" amount i" a nontaxable $eco(e$) of capital i.e.& it $e!uce" he$ ba"i" fo$ the automobile b) -3&300. A""ume that eih al"o collecte! -25&000 of !amae" fo$ "lan!e$ to he$ pe$"onal $eputation cau"e! b) the bill collecto$ mi"$ep$e"entin the fact" to eih:" emplo)e$ an! othe$ c$e!ito$". +" thi" -25&000 inclu!e! in eih:" $o"" income? Explain. b.
3.
The -25&000 i" inclu!e! in eih:" $o"" income becau"e it !i! not a$i"e out of a ph)"ical pe$"onal in*u$).
; 2 #ete$mine the effect on $o"" income in each of the followin ca"e"
Eloi"e $ecei(e! -150&000 in "ettlement of a "ex !i"c$imination ca"e aain"t he$ fo$me$ emplo)e$. a. The "ettlement in the "ex !i"c$imination ca"e !i! not a$i"e out of ph)"ical pe$"onal in*u$) o$ "ic=ne"". The$efo$e& the -150&000 i" inclu!e! in Eloi"e:" $o"" income. >ell $ecei(e! -10&000 fo$ !amae" to he$ pe$"onal $eputation. he al"o $ecei(e! -'0&000 in puniti(e !amae". b.
The !amae" to >ell:" pe$"onal $eputation a$e not fo$ ph)"ical pe$"onal in*u$) o$ "ic=ne"". The$efo$e& >ell mu"t inclu!e the -10&000 in he$ $o"" income. he mu"t al"o inclu!e the -'0&000 puniti(e !amae" in he$ $o"" income.
;$ane Co$po$ation& an acc$ual ba"i" taxpa)e$& $ecei(e! -50&000 f$om a law"uit file! aain"t it" au!ito$ who o(e$cha$e! fo$ "e$(ice" $en!e$e! in a p$e(iou" )ea$. c.
The !amae" of -50&000 a$e inclu!e! in ;$ane Co$po$ation:" $o"" income un!e$ the tax benefit $ule& a""umin the compan) $ecei(e! tax benefit f$om !e!uctin the au!it fee" in a p$e(iou" )ea$.
@eth $ecei(e! -10&000 in compen"ato$) !amae" an! -30&000 in puniti(e !amae" in a law"uit "he file! aain"t a tannin pa$lo$ fo$ "e(e$e bu$n" "he $ecei(e! f$om u"in it" tannin euipment. !.
The compen"ato$) !amae" of -10&000 fo$ the ph)"ical pe$"onal in*u$) a$e not inclu!e! in @eth:" $o"" income& but the puniti(e !amae" of -30&000 mu"t be inclu!e! in he$ $o"" income.
9oanne $ecei(e! compen"ato$) !amae" of -75&000 an! puniti(e !amae" of -300&000 f$om a co"metic "u$eon who botche! he$ no"e *ob.
e.
'2.
@ecau"e the compen"ato$) !amae" of -75&000 a$o"e f$om a ph)"ical pe$"onal in*u$)& the) a$e exclu!e! f$om 9oanne:" $o"" income. The puniti(e !amae" of -300&000 a$e inclu!e! in he$ $o"" income.
; 2 #oe" the taxpa)e$ $econi/e $o"" income in the followin "ituation"?
A(a i" a filin cle$= at a la$e in"u$ance compan). he i" pe$mitte! to lea(e the p$emi"e" fo$ lunch& but "he u"uall) eat" in the compan):" cafete$ia becau"e it i" uic= an! "he i" on a tiht "che!ule. ;n a(e$ae& "he pa)" -2 fo$ a lunch that woul! co"t -12 at a $e"tau$ant. Howe(e$& if the p$ice" in the cafete$ia we$e not "o low an! the foo! wa" not "o !eliciou"& "he woul! p$obabl) b$in he$ lunch at a co"t of -3 pe$ !a). a. +t appea$" that A(a:" meal" a$e not p$o(i!e! fo$ the con(enience of the emplo)e$& but $athe$ a" a con(enience fo$ the emplo)ee. Thu"& thi" i" a taxable f$ine benefit. The$efo$e& A(a i" $eui$e! to inclu!e in $o"" income the !iffe$ence between the amount "he pai! fo$ the meal"& -2& an! the amount "he woul! be $eui$e! to pa) of -12 to an un$elate! $e"tau$ant. A compa$i"on to the poo$e$ ualit) of the "elfDp$epa$e! lunch i" not a (ali! mea"u$e of the benefit "he actuall) $ecei(e!.
cott i" an executi(e fo$ an inte$national co$po$ation locate! in >ew Oo$= Cit). ;ften he wo$=" late& ta=in telephone call" f$om the compan):" Eu$opean b$anch. cott often "ta)" in a compan)Downe! con!ominium when he ha" a lateDniht wo$= "e""ion. The con!ominium i" ac$o"" the "t$eet f$om the compan) office. b.
cott i" not $eui$e! to inclu!e an)thin in $o"" income fo$ the u"e of the con!ominium. The lo!in i" fo$ the con(enience of the emplo)e$. Al"o& becau"e of the clo"e p$oximit) of the con!ominium to the office& the con!ominium i" con"i!e$e! to be on the emplo)e$:" bu"ine"" p$emi"e" acco$!in to the Tax Cou$t.
+$a $ecentl) mo(e! to ta=e a *ob. Bo$ the fi$"t month on the new *ob& +$a wa" "ea$chin fo$ a home to pu$cha"e o$ $ent. #u$in thi" time& hi" emplo)e$ pe$mitte! +$a to li(e in an apa$tment the compan) maintain" fo$ cu"tome$" !u$in the bu)in "ea"on. The month that +$a occupie! the apa$tment wa" not !u$in the bu)in "ea"on& an! the apa$tment woul! not othe$wi"e ha(e been occupie!. c. Appa$entl) +$a i" not bein p$o(i!e! the hou"in fo$ the con(enience of hi" emplo)e$. Howe(e$& the u"e of the apa$tment "houl! ualif) a" a noD a!!itionalDco"t "e$(ice becau"e the apa$tment woul! othe$wi"e be (acant.
CHAPTER 36. ; 3 T$e(o$& a f$ien! of )ou$" f$om hih "chool& wo$=" a" a "e$(e$ at the T Cafe. He a"=" )ou to help him p$epa$e hi" Be!e$al income tax $etu$n. hen )ou inui$e about wh) hi" ban= !epo"it" "ub"tantiall) excee! hi" tip income& he confi!e" to )ou that he i" a boo=ie on the "i!e. T$e(o$ then p$o(i!e" )ou with the followin !ocumente! income an! expen"e" fo$ the )ea$ Tip +ncome ,amblin income ,amblin expen"e" Pa)out" to winne$" Emplo)ee compen"ation @$ibe to police office$ who i" awa$e of T$e(o$:" boo=ie acti(it)
1&000 52&000 26&000 8&000 7&500
How will the"e item" affect T$e(o$:" A,+ ino$e the impact of "elfDemplo)ment taxe"? A. The effect of the illeal amblin bu"ine"" on T$e(o$:" A,+ i" a" follow" ,$o"" income #e!uctible expen"e" ala$ie" Pa)out" to winne$" +nc$ea"e in A,+
-52&000 - 8&000 26&000
37&000 -15&000
The b$ibe to police of -7&500 i" not !e!uctible becau"e thi" expen"e (iolate" public polic). T$e(o$ al"o mu"t inclu!e the tip income of -1&000 in hi" $o"" income. Hi" taxable income ino$e the impact of "elfDemplo)ment taxe"? @. T$e(o$:" taxable income al"o inc$ea"e" b) -15&000. '1.
; 3 >anc)& the owne$ of a (e$) "ucce""ful hotel chain in the outhea"t& i" explo$in the po""ibilit) of expan!in the chain into a cit) in the >o$thea"t. he incu$" -35&000 of expen"e" a""ociate! with thi" in(e"tiation. @a"e! on the $eulato$) en(i$onment fo$ hotel" in the cit)& "he !eci!e" not to expan!. #u$in the )ea$& "he al"o in(e"tiate" openin a $e"tau$ant that will be pa$t of a national $e"tau$ant chain. He$ expen"e" fo$ thi" a$e -53&000. The $e"tau$ant bein" ope$ation" on eptembe$ 1. #ete$mine the amount that >anc) can !e!uct in the cu$$ent )ea$ fo$ in(e"tiatin the"e two bu"ine""e".
E(en thouh >anc) !eci!e" not to pu$"ue the expan"ion of he$ hotel chain into anothe$ cit)& the in(e"tiation expen"e" of -35&000 a$e !e!uctible in the cu$$ent )ea$. @ecau"e >anc) i" in the hotel bu"ine""& all in(e"tiation expen"e" a""ociate! with the hotel bu"ine"" a$e !e!uctible in the )ea$ pai! o$ incu$$e!. @ecau"e >anc) wa" not in the $e"tau$ant bu"ine""& "he can !e!uct onl) pa$t of the"e in(e"tiation expen"e". ;f the -53&000& an amount of -2&000 G-5&000 -3&000 $e!uction fo$ exce"" o(e$ -50&000 can be imme!iatel) expen"e!. The balance of -51&000 -53&000 -2&000 i" amo$ti/e! o(e$ a pe$io! of 180 month" at the $ate of -283 pe$ month -51&000 W 180 commencin in eptembe$ the month the bu"ine"" i" "ta$te!. Con"euentl)& the total !e!uction fo$ the )ea$ i" -35&000 fo$ the hotel in(e"tiation -3&132 G-2&000 -283 4 ' month" fo$ the $e"tau$ant in(e"tment& o$ a total of -38&132. ''.
; 3 Alex& who i" "inle& con!uct" an acti(it) in 2015 that i" app$op$iatel) cla""ifie! a" a hobb). The acti(it) p$o!uce" the followin $e(enue" an! expen"e"
Re(enue P$ope$t) taxe" %ate$ial" an! "upplie" Ltilitie" A!(e$ti"in +n"u$ance #ep$eciation
18&000 3&000 '&500 2&000 5&000 750 '&000
ithout $ea$! to thi" acti(it)& Alex:" A,+ i" -'2&000. #ete$mine the amount of income Alex mu"t $epo$t& the amount of the expen"e" he i" pe$mitte! to !e!uct& an! hi" taxable income.
Alex mu"t $epo$t the -18&000 a" $e(enue". All of the p$ope$t) taxe" of -3&000 can be !e!ucte!. @ecau"e the $emainin expen"e" of -1&250 excee! the balance of -15&000 -18&000 $e(enue" -3&000 p$ope$t) taxe"& the -15&000 i" !e!uctible a" follow" %ate$ial" an! "upplie" Ltilitie" A!(e$ti"in +n"u$ance #ep$eciation becau"e !ep$eciation i" "euence! la"t& onl) -2&750 of the -'&000 i" eliible Total !e!uctible expen"e"
- '&500 2&000 5&000 750 2&750 -15&000
The"e expen"e" of -15&000 a$e cla""ifie! a" mi"cellaneou" itemi/e! !e!uction" an! will be "ub*ect to the 2JDofDA,+ floo$. Con"euentl)& -1&200 G-'2&000 -18&000 4 2J of the"e expen"e" i" !i"allowe!. ;the$ A,+ Re(enue" f$om hobb) e"" Expen"e" P$ope$t) taxe" %i"cellaneou" itemi/e! !e!uction -15&000 -1&200 Repo$table net income f$om hobb) e"" Pe$"onal exemption Taxable income
'5.
-'2&000 -18&000 3&000 13&800 1&200 '&000 -36&200
; 3 amantha& an executi(e& ha" A,+ of -100&000 befo$e con"i!e$in income o$ lo"" f$om he$ miniatu$e ho$"e bu"ine"". He$ out"i!e income come" f$om p$i/e" fo$ winnin ho$"e "how"& "tu! fee"& an! "ale" of )ea$lin". amantha:" home i" on 20 ac$e"& half of which "he u"e" fo$ the ho$"e acti(it) i.e.& "table"& pa!!oc="& fence"& tac= hou"e"& an! othe$ $elate! imp$o(ement". amantha:" office in he$ home i" 10J of the "ua$e footae of the hou"e. he u"e" the office exclu"i(el) fo$ maintainin file" an! $eco$!" on the ho$"e acti(itie". He$ boo=" "how the followin income an! expen"e" fo$ the cu$$ent )ea$
+ncome f$om fee"& p$i/e"& an! "ale" Expen"e" Ent$) fee" Bee! an! (ete$ina$) bill" upplie"
-22&000 1&000 '&000 600
Publication" an! !ue" T$a(el to ho$"e "how" no meal" ala$ie" an! wae" of emplo)ee" #ep$eciation Ho$"e euipment Ho$"e fa$m imp$o(ement" ;n 10J of pe$"onal $e"i!ence Total home mo$tae inte$e"t Total p$ope$t) taxe" on home Total p$ope$t) taxe" on ho$"e fa$m imp$o(ement"
500 2&300 8&000 -3&000 7&000 1&000
11&000 2'&000 2&200 800
The mo$tae inte$e"t i" onl) on he$ home becau"e the ho$"e fa$m imp$o(ement" a$e not mo$tae!.
hat a$e amantha:" tax con"euence" if the miniatu$e ho$"e acti(it) i" a hobb)? a. +f the miniatu$e ho$"e acti(it ) i" hel! to be a hobb)& amantha:" !e!uction" a""ociate! with the hobb) ma) not excee! he$ $o"" income f$om the acti(it). +ncome #e!uct
@alance #e!uct
-22&000 %o$tae inte$e"t 10J 4 -2'&000 P$ope$t) taxe" on ho$"e fa$m imp$o(ement" P$ope$t) taxe" on home 10J 4 -2&200
-2&'00 800 220
3&'20 -18&580
;the$ expen"e" Ent$) fee" Bee! an! (ete$ina$) bill" upplie" Publication" an! !ue" T$a(el ala$) an! wae"
-1&000 '&000 600 500 2&300 8&000
@alance
1&700 - 1&880
#ep$eciation ;n ho$"e euipment ;n ho$"e fa$m imp$o(ement" ;n home 10J office po$tion Total imite! to >et +ncome
- 3&000 7&000 1&000 -11&000 1&880 - 0
The item" a$e han!le! a" follow" A,+
-100&000
Plu" Ho$"e fa$m income
22&000
>ew A,+
-122&000
+temi/e! !e!uction" +nte$e"t an! taxe" on ho$"e fa$m hobb) po$tion +nte$e"t an! taxe" on home -2&200 -2&20 ;the$ expen"e" an! !ep$eciation of hobb) -1&700 -1&880 e"" 2J of A,+ -122&000
- 3&'20 23&580
-27&000
-18&580 2&''0
-1&1'0
>ote that the !e!uction" of the miniatu$e ho$"e ope$ation a$e -16&50 -3&'20 -1&1'0& of which -3&'20 we$e !e!uctible an)wa). The net inc$ea"e in taxable income i" +ncome -22&000 ;the$wi"e non!e!uctible expen"e" 1&1'0 >et inc$ea"e in taxable income
- 5&80
+f it i" a bu"ine""? b. +f the miniatu$e ho$"e acti(it) i" cla""ifie! a" a bu"ine""& amantha will be able to !e!uct -6&120 for A,+ a" follow" Remain!e$ of income afte$ othe$ expen"e" an! befo$e amount" that affect ba"i" !ep$eciation "ee pa$t a. abo(e
- 1&880 e"" #ep$eciation 11&000 #e!uction for A,+ - 6&120
+n a!!ition& amantha can !e!uct the $emainin p$ope$t) taxe" an! mo$tae inte$e"t of -23&580 a" an itemi/e! !e!uction. The net effect i" a" follow" o"" on ho$"e fa$m A!! ;the$wi"e !e!uctible taxe" an! inte$e"t
-6&120 3&'20
>et !ec$ea"e i" taxable income
-5&700
Cont$a"t thi" !ec$ea"e of -5&700 with the inc$ea"e of -5&80 in pa$t a. The -11&50 !iffe$ence i" !ue to the !iffe$ence between hobb) an! bu"ine"" t$eatment.
'7.
; 3 A!elene& who li(e" in a winte$ $e"o$t a$ea& $ente! he$ pe$"onal $e"i!ence fo$ 1' !a)" while "he wa" (i"itin @$u""el". Rent income wa" -5&000. Relate! expen"e" fo$ the )ea$ we$e a" follow"
Real p$ope$t) taxe" %o$tae inte$e"t Ltilitie" +n"u$ance Repai$" #ep$eciation
- 3&800 7&500 3&700 2&500 2&100 15&000
#ete$mine the effect on A!elene:" A,+. @ecau"e the hou"e wa" $ente! fo$ le"" than 15 !a)"& the $ental income of -5&000 i" exclu!e! f$om A!elene:" $o"" income. The onl) expen"e" that can be !e!ucte! in thi" ca"e a$e the $eal p$ope$t) taxe" of -3&800 an! the mo$tae inte$e"t of -7&500. The"e expen"e" a$e cla""ifie! a" itemi/e! !e!uction" i.e.& !e!uction" from A,+. The$efo$e& the$e i" no effect on A,+.
'8.
; 3 #u$in the )ea$ not a leap )ea$& Anna $ente! he$ (acation home fo$ 30 !a)"& u"e! it pe$"onall) fo$ 20 !a)"& an! left it (acant fo$ 315 !a)". he ha! the followin income an! expen"e" Rent income Expen"e" Real e"tate taxe" +nte$e"t on mo$tae Ltilitie" Repai$" Roof $eplacement a capital expen!itu$e #ep$eciation
- 7&000 2&500 6&000 2&'00 1&000 12&000 7&500
Compute Anna:" net $ent income o$ lo"" an! the amount" "he can itemi/e on he$ tax $etu$n& u"in the cou$t:" app$oach to allocatin p$ope$t) taxe" an! inte$e"t. a. ,$o"" income -7&000 #e!uct Taxe" an! inte$e"t 30M35 4 -11&500 6'5 Remain!e$ to appl) to $ental ope$atin expen"e" an! !ep$eciation -&055 Ltilitie" an! $epai$" G30M50 4 -2&'00 -1&000 2&0'0 Remain!e$ -'&015 #ep$eciation 30M50 4 -7&500 F -'&500& limite! to $emain!e$ '&015 >et $ental income - 0 he can itemi/e -10&555 of p$ope$t) taxe" an! mo$tae inte$e"t -11&500 total le"" -6'5 allocate! to $ental. Thu"& un!e$ the cou$t:" app$oach& Anna ha" no net $ental income an! ha" an itemi/e! !e!uction of -10&555. The $oof $eplacement of -12&000 i" a capital expen!itu$e& an! the $elate! !ep$eciation i" inclu!e! in the -7&500 of !ep$eciation. How woul! )ou$ an"we$ in pa$t a !iffe$ u"in the +R:" metho! of allocatin p$ope$t) taxe" an! inte$e"t? b.
,$o"" income #e!uct Taxe" an! inte$e"t 30M50 4 -11&500 Remain!e$ to appl) to $ental ope$atin expen"e" an! !ep$eciation Ltilitie" an! $epai$" G30M50 4 -2&'00 -1&000 F -2&0'0& limite! to $emain!e$ >et $ental income
-7&000 &600 - 100 100 - 0
Anna can !e!uct the $emainin taxe" an! inte$e"t of -'&00 -11&500 le"" $ental allocation of -&600 a" itemi/e! !e!uction". Ln!e$ the +R:" app$oach& "he ha" no net $ental income an! ha" an itemi/e! !e!uction of -'&00. '6.
; 3 How woul! )ou$ an"we$ to P$oblem '8 !iffe$ if Anna ha! $ente! the hou"e fo$ 87 !a)" an! ha! u"e! it pe$"onall) fo$ 13 !a)"?
@ecau"e Anna u"e! it fo$ fewe$ than 15 !a)"& it i" cla""ifie! a" $ental p$ope$t). Pe$centae of u"e ,$o"" income Expen"e"
Rental 87J
Pe$"onal 13J
- 7&000
- 0
+nte$e"t an! taxe" -6&000 -2&500 Ltilitie" an! $epai$" -2&'00 -1&000 #ep$eciation -7&500 Total expen"e" >et income lo""
-10&005
-1&'65 2&658 ''2 &525 -16&'88 -12&'88
675 -2&612 - 0
Anna coul! !e!uct -325 -2&500 4 13J of p$ope$t) taxe" a" itemi/e! !e!uction" an! ta=e a $ental lo"" !e!uction for A,+ of -12&'88. The mo$tae inte$e"t of -1&170 -6&000 4 13J i" not !e!uctible a" an itemi/e! !e!uction becau"e it i" not ualifie! $e"i!ence inte$e"t. The $oof $eplacement of -12&000 i" a capital expen!itu$e& an! the $elate! !ep$eciation i" inclu!e! in the !ep$eciation of -7&500.
50.
; 1& 3
Chee& "inle& ae '0& ha! the followin income an! expen"e" !u$in 2015
+ncome ala$) Rental of (acation home $ente! 0 !a)"& u"e! pe$"onall) 0 !a)"& (acant 2'5 !a)" %unicipal bon! inte$e"t #i(i!en! f$om ,ene$al Elect$ic Expen"e" +nte$e"t on home mo$tae +nte$e"t on (acation home +nte$e"t on loan u"e! to bu) municipal bon!" P$ope$t) tax on home P$ope$t) tax on (acation home tate income tax tate "ale" tax Cha$itable cont$ibution" Tax $etu$n p$epa$ation fee Ltilitie" an! maintenance on (acation home #ep$eciation on $ental 50J of (acation home
-'3&000 '&000 2&000 '00 8&'00 '&758 3&100 -2&200 1&068 3&300 600 1&100 300 2&00 3&500
Calculate Chee:" taxable income fo$ the )ea$ befo$e pe$"onal exemption". +f Chee ha" an) option"& choo"e the metho! that maximi/e" hi" !e!uction". +ncome >ote 1 ala$) #i(i!en! Rental of (acation home >ote 2 A!*u"te! $o"" income +temi/e! !e!uction" tate income taxe" $eate$ than "ale" tax >ote 3 P$ope$t) tax on home +nte$e"t on home mo$tae +nte$e"t an! p$ope$t) taxe" on (acation home >ote 2 Cha$itable cont$ibution" Tax $etu$n p$epa$ation fee >ote ' Taxable income befo$e pe$"onal exemption
-'3&000 '00 0 -'3&'00
-3&300 2&200 8&'00 '&863 1&100 0
16&863 -23&507
>ote" 1
The municipal bon! inte$e"t of -2&000 i" exclu!ible f$om $o"" income& an! the inte$e"t expen"e of -3&100 on the loan to bu) municipal bon!" i" not !e!uctible.
2
Rental income e"" Taxe" an! inte$e"t 0M35 4 -5&85 Remain!e$ e"" Ltilitie" an! maintenance 1M2 4 -2&00 Remain!e$ e"" #ep$eciation -3&500& limite! to -1&737 >et income f$om (acation home
-'&000 63 -3&037 1&300 -1&737 1&737 - 0
>ote that -'&863 -5&85 total -63 (acation home po$tion of p$ope$t) taxe" an! mo$tae inte$e"t on the (acation home a$e itemi/e! !e!uction". 3
'
At the time of publication& the option to !e!uct the $eate$ of "tate income tax o$ "ale" tax ha! not been exten!e! to 2015. hethe$ exten!e! o$ not& the $e"ult" in thi" p$oblem a$e the "ame.
Tax p$epa$ation fee" a$e $e!uce! b) 2J of A,+ in thi" ca"e& 2J of A,+ excee!" -300.
