Question 1

Emma is the sole shareholder in Pacific Corporation and has owned the stock for five years. The basis in her stock is $50,000. Pacific distributes $35,000 to Emma. Accumulated earnings and profits at the beginning of the year equal $25,000 and current earnings and profits equal $5,000.
Required:
a. What are the tax consequences of this information?
b. What are the tax consequences of this information if, instead of distributing $35,000 to Emma, Pacific distributes $100,000 to Emma?

Accepted Answer

The answer of Emma is the sole shareholder in Pacific...

Question 2

Adanya's marginal tax rate is 39.6% and she is trying to decide whether to invest in tax-exempt bonds which pay 5% interest or taxable bonds paying 7% interest. The bonds have equivalent risk. Which of the bonds would yield the highest amount of income after taxes?

Accepted Answer

The answer of Adanya's marginal tax rate is 39.6% and...

Question 3

"Gross income" is a key term in the tax law and is defined in IRC Sec. 61. However, gross income is not reported on Form 1040.

Accepted Answer

Form 1040 requires reporting of "total income." This term is not gross income, adjusted gross income or taxable income.

Question 4

Jeannie, a single taxpayer, retired during the year, to take over the management of some rental property. She had the following items of income and expense:  What is Jeannie's adjusted gross income for the year?

Accepted Answer

The answer of Jeannie, a single taxpayer, retired during the...

Question 5

Daniel plans to invest $20,000 in either a corporate bond paying 5% or a tax-exempt bond with a 4% interest rate. The bonds have an equivalent level of risk. Daniel has a 33% marginal tax rate and wants to maximize his after-tax earnings. Daniel should

Accepted Answer

.05 ( 1 - .33) = 3.35% after-tax return on the corporate bond.

Question 6

On April 1, 2015, Martha, age 67, begins receiving payments of $3,000 monthly from her employer's qualified retirement plan. She had contributed $90,000 to the plan in after-tax dollars. The anticipated number of payments is 210. Using the simplified method, how much of the payments are taxable in 2015?

Accepted Answer

The answer of On April 1, 2015, Martha, age 67,...

Question 7

While certain income of a minor is taxed at the parent's tax rate, discuss how income shifting may still be accomplished and any constraints that may exist on income shifting.

Accepted Answer

The answer of While certain income of a minor is...

Question 8

Rocky owns The Palms Apartments. During the year, Molly Ann, a tenant, moved to another state. Molly Ann paid Rocky $1,500 to cancel the two-year lease she had signed. Rocky then rented the apartment to Elvis who paid the first and last months' rents of $500 each and a security deposit of $800. Rocky also owns a building used as a dance club. The owner of the club requested that Rocky add on another room to be used for private parties. Rocky refused but allowed the club owner to make the addition at a cost of $20,000. What amount should be included in Rocky's income with regard to these items?

Accepted Answer

The answer of Rocky owns The Palms Apartments. During the...

Question 9

Edward is considering returning to work part-time to supplement his pension and Social Security benefits. His current marginal tax rate is 15%. What should he consider from a tax perspective before returning to work?

Accepted Answer

The answer of Edward is considering returning to work part-time...

Question 10

Buzz is a successful college basketball coach. In April 2014, he signed a contract to coach at Mountain State University. In April 2015, Buzz accepted a position as head basketball coach at Beach University. The terms of his contract with Mountain State require that Buzz repay the university $150,000 he received in 2014. Discuss the tax issues encountered by Buzz and your recommendation for their treatment.

Accepted Answer

The answer of Buzz is a successful college basketball coach....

Question 11

Betty is a single retiree who receives Social Security benefits of $12,000, tax-exempt interest of $4,000 and a taxable pension. Determine the amount of taxable Social Security benefits assuming her annual pension is
a. $10,000.
b. $20,000.
c. $50,000.

Accepted Answer

The answer of Betty is a single retiree who receives...

Question 12

On January 1, 1996, Erika Greene purchased a single premium annuity for $15,000 that will pay her $5,000 every year for life beginning on January 1, 2015. Based on actuarial tables published by the IRS, her life expectancy multiple is 10.
a. What is the amount to be excluded Erika's income for 2015?
b. What is the amount to be excluded in Erika's income for the year 2025?

Accepted Answer

The answer of On January 1, 1996, Erika Greene purchased...

Question 13

Gwen's marginal tax bracket is 25%. Gwen pays alimony of $24,000 per year. Gwen's after tax cost for the $24,000 payment is

Accepted Answer

(100% - 25%) × $24,000 = $18,000

Question 14

Marcia and Dave are separated and negotiating a divorce agreement. They live in a common law state and have two children who will remain with Marcia. Dave is willing to transfer the jointly owned home to Marcia. He wishes to keep the couple's jointly owned boat. Dave will either transfer securities to Marcia ($100,000 adjusted basis, $150,000 fair market value) or will pay her $30,000 for 5 years with interest of 8%. What issues should Marcia and Dave consider when formulating their divorce agreement?

Accepted Answer

The answer of Marcia and Dave are separated and negotiating...

Question 15

Ellen is a single taxpayer with qualified dividend income of $5,000, and itemized deductions of $13,000.
Required: Determine Ellen's taxable income and tax liability in 2015, assuming the following salaries
a. $40,000.
b. $100,000.

Accepted Answer

The answer of Ellen is a single taxpayer with qualified...

Question 16

Kevin is a single person who earns $70,000 in salary for 2015 and has other income from a variety of investments, as follows:  Kevin received tax refunds when he filed his 2014 tax returns in April of 2015. His federal refund was $600 and his state refund was $300. Kevin claimed the $300 state tax overpayment as an itemized deduction on his 2014 return. Due to changes in circumstances, Kevin is not itemizing deductions on his 2015 return.
Compute Kevin's taxable income for 2015.

Accepted Answer

The answer of Kevin is a single person who earns...

Question 17

Billy, age 10, found an old baseball glove while exploring his new home. His father, Al, took the glove to a dealer in baseball memorabilia who verified that the glove belonged to Babe Ruth. Al sold the glove for $75,000. What tax issues should Al consider?

Accepted Answer

The answer of Billy, age 10, found an old baseball...

Question 18

Marisa and Kurt divorced in 2013. Under the terms of the divorce agreement, Marisa was to pay Kurt $110,000 in 2013 and $60,000 each year following until Kurt's death or remarriage. What must Kurt report on his tax return for 2015 regarding these transactions?

Accepted Answer

The answer of Marisa and Kurt divorced in 2013. Under...

Question 19

Under the terms of a divorce agreement dated January 1, 2015, Edmond was to pay his wife Donna $3,000 per month in alimony and $500 per month in child support. Payments began on January 1, 2015. In addition, Donna received the family residence with a cost basis of $210,000 and a fair market value of $260,000.
a. What is the amount that Donna must include in income for the twelve-month period ended December 31, 2015?
b. What is the basis in the home which Donna received as a result of the divorce?

Accepted Answer

The answer of Under the terms of a divorce agreement...

Quiz 3: Gross Income: Inclusions