Tax 4001

Spring 2013
Hampton
Homework Set #10

DUE DATE: April 9, 2013

1) Compute the taxable income for Mike for 2012 based on the following (his filing status is single). He lives in a
rented apartment and has no itemized deductions:
Salary
Interest Income from ING Direct
Child support payments
Alimony payments
Gift from Great Uncle
Capital Loss on Stocks
Gambling income (illegal in his state)
Dependents
Age

$85,000
$5,000
$9,500
$4,000
$19,750
$6,000
$1,500
0
36

2) Compute the taxable income and tax liability for Madison for 2012 based on the following information. She is
married, but has not seen or heard from her husband in 4 years. She owns her home and paid $2,500 in
property taxes and $6,000 in home mortgage interest in 2012.
Salary

$70,000

Interest Income from City of Olathe Bonds

$2,600

Interest on CD from Bank of America

$2,000

Dividend from GE stock (she has owned the stock for several years)

$3,000

Life Insurance paid on death of Grandfather (Madison was the beneficiary of the policy)

$50,000

Inheritance received on death of Uncle Louie

$18,000

Niece repaid a loan to her from 2008

$8,000

Itemized deductions (mortgage interest and property taxes)

$7,000

Dependents (children ages 12, 11, and 10)

Age

3
44

3)

Determine the standard deduction allowed for 2012 in the following independent situations. In each
case, assume the taxpayer is claimed as another persons dependent.
a. David, age 21, has income as follows: $1,200 interest from a money market account and $7,000
from a part-time job as a bank teller.
b. Addy, age 19, has income as follows: $350 interest from a CD and $3,750 from baby-sitting.
c. June, age 68 and a widow, has income as follows: $2,000 from cash dividends and $2,300 from
working as a tailor.

4)

Determine the amount of gross income for the following situations:

a)

Alex Stucky won the Bowl-O-Rama bowling tournament. In recognition, he received a

custom-made bowling ball worth $1,200 and cash worth $2,500.
b) Dann Fisher was awarded the Outstanding Faculty Teaching Award at his college. He
directed the prize money of $1,500 to be paid directly to the University of Central Florida
Scholarship Fund.
5)

Elaine sued an extremely aggressive timeshare salesperson and received the following settlement in
2012:

Damage to Elaines truck caused by the salesperson

850

Physical Damage to her leg caused by the salesperson

15,000

Loss of income while leg was healing

9,000

Punitive damages

100,000

How much is included in her taxable income in 2012?

6)

In December of each year, Gracie contributes 15% of her gross income to the American
Red Cross (a 50% organization) Gracie is in the 33% marginal tax bracket and is
considering the following alternatives as charitable contributions for the year:
a)
b)
c)
d)

Cash
FMV= $25,000
Panther Stock held for 3 years ($30,000 basis)
FMV= $25,000
Unimproved land held for 10 months ($20,000 basis) FMV= $25,000
Cougar Stock held for 8 years (basis $5,000)
FMV= $25,000
Which option would be the most advantageous taxwise?

7) Charles, who is single, has an AGI of $375,000 during 2012. He incurred the following
expenses and losses during the year. Compute his allowed itemized deductions for
2012.
$42,000
Medical expenses before 7.5% of AGI limit
$8,500
State and Local Income Taxes
$2,700
State Sales Tax
$7,500
Real Estate Property Tax
$16,000
Home Mortgage interest
$6,750
Charitable contribution to church
$50,000
Casualty loss before 10% limitation (after $100) floor
$9,400
Unreimbursed employee expenses subject to 2% of AGI limitation
$4,800
Gambling losses (Charles has $3,500 of gambling income)
8) Clara, age 72 and single, is claimed as a dependent on her sons tax return. During 2012, she had dividend
income of $2,500 and $1,900 of earned income from housecleaning. What is her taxable income?
9) Jonathan is claimed as a dependent on his parents tax return. In 2012, he earned $3,400 at a part-time job
selling shoes and had interest income from his bank savings account of $6,500. He is 21 years old and a full-time
student at State University. His parents taxable income is approximately $250,000.
a. Compute Jonathans taxable income and tax liability.
b. If Jonathan was NOT a full-time student, would his parents be able to claim him as a dependent? How
much would his taxable income and tax liability be in this case?
10) Cecil incurred $60,000 of interest expense related to his investments in 2012. His investment income included
$30,800 of interest and a $24,200 net long term capital gain on the sale of securities. Cecil has asked you to
compute the amount of his deduction for investment interest, taking into consideration any options he might
have. What is the maximum amount of Cecils investment interest deduction in 2012?

11) Brad, who uses the cash method of accounting, lives in a state that imposes an income tax (including
withholding from wages). On April 14, 2011, he files his state return for 2010, paying an additional $600 in state
income taxes. During 2011, his withholdings for state income tax purposes amount to $3,550. On April 13, 2012,
he files his state return for 2011, claiming a refund of $800. Brad received the refund on August 3, 2012.
a. If Brad itemized his deductions, how much may Brad claim as a deduction for state income taxes on his
Federal income tax return for calendar year 2011 (filed in April 2012)?
b. If Brad itemized his deductions, how will the refund of $800 that he received in 2012 be treated for
Federal income tax purposes?
c. Assume that Brad itemized deductions in 2012 and that he elected to have the $800 refund applied
toward his 2012 state income tax liability. How will the $800 be treated for Federal income tax
purposes?
12) Assuming that Brad did NOT itemize deductions in 2011, how will the refund of $800 received in 2012 be treated
for Federal income tax purposes?
13) Eric comes to you asking for your advice. He wishes to invest $20,000 either in a debt security or in an equity
investment. His choices are as shown below:
(1) Mockingbird Corporation bond, annual coupon rate of 7.50%.
(2) City of Colby general obligation bond, coupon rate of 6.00%.
(3) Robin Corporation, 7.50% preferred stock (produces qualified dividend income).
These alternatives are believed to carry comparable risk. Assuming that Eric is in the 35% marginal tax bracket,
which investment alternative could be expected to produce the superior annual after-tax return?
14) Assume the same facts as #13, except that Eric is a C-corporation, rather than an individual, and is in the 34%
marginal tax bracket. Assume that the dividend income received from Robin Corporation qualifies for the 70%
dividends received deduction. Which investment strategy would maximize Eric, Inc.s annual return?
15) Knightro Glycerin is single with no dependents and has business income from his work as a CPA of $80,000 in
2012. He has transportation expenses (from visiting clients) of $4,600 and meals and entertainment expenses
(with clients) of $5,200. In addition, he paid $10,000 in home mortgage interest and $2,800 in property taxes.
a. Assume that Knightro is selfemployed. Compute his taxable income (remember to take into account
the effect of SE tax). (Use the full 15.3% for SE Tax for this example)
b. Assume Knightro is an employee of Ernst & Young, and he is reimbursed $9,800 from Ernst & Young
for these expenses. In order to be reimbursed, Knightro had to turn in an expense reimbursement form
along with his receipts. Compute Knightros taxable income. How much can Ernst and Young deduct for
these reimbursed expenses?
c. Assume Knightro is an employee of Ernst & Young, but he is NOT reimbursed for the expenses.
Compute Knightros taxable income.