Q: 6 AP: 1, 3 IR: 7 TPC: 1

Part II. The Individual Taxpayer

CHAPTER 1 3. a. The tax is $8,300 ($415,000 2%). b. The tax is $19,000 ([$500,000 2%] + [$225,000 4%]). 1. WPs management must compare the tax costs of operating in each jurisdiction. Value of tangible business property Jurisdiction Fs property tax rate $10,000,000 .04 $400,000 $2,000,000 .15 $300,000 $700,000 $2,000,000 .30 $600,000

Annual gross receipts Jurisdiction Fs gross receipts tax rate

Tax cost of operating in Jurisdiction F Annual gross receipts Jurisdiction Gs gross receipts tax rate Tax cost of operating in Jurisdiction G

Based solely on the comparative tax costs, WP should locate its new branch in Jurisdiction G. CHAPTER 2 Q: 3, 14, 17 AP: 2,7 TPC: 1 2. a. b. c. 7. a. Next years revenue will be $441,000 ($29.4 million base 1.5%). Next years revenue will be $540,000 ($36 million base 1.5%). Next years revenue will be $615,000 ($41 million base 1.5%). Taxpayer As tax on $119,400 of income is computed as follows. 6% of first $30,000 of income 10% of next $40,000 of income 20% of next $49,400 of income $1,800 4,000 9,880 $15,680

Taxpayer As average tax rate is 13.13% ($15,680 $119,400), and his marginal tax rate is 20 percent. b. Taxpayer Bs tax on $383,900 of income is computed as follows. 6% of first $30,000 of income 10% of next $40,000 of income 20% of next $130,000 of income 28% of next $183,900 of income $1,800 4,000 26,000 51,492 $83,292

Taxpayer Bs average tax rate is 21.70% ($83,292 $383,900), and his marginal tax rate is 28%. Based on a static forecast, a 1 percent increase in the sales tax rate would increase Jurisdiction Bs annual revenue by $5 m illion. A new 2 percent corporate income tax would also increase revenue by $5 million (2 percent of a $275 million tax base less $500,000 cost of the new agency).

1.

CHAPTER 14 Q: 5, 6, 13, 16 IR: 6 AP: 1, 3, 10, 11 AP: 13, 14, 15,27,28,31

3.

a. b. c.

$13,050 ($11,900 + $1,150 additional deduction because Mr. K is over age 65) $14,200 ($11,900 + $2,300 additional deductions because Mr. K and Mrs. K are both over age 65) $15,350 ($11,900 + $3,450 additional deductions because Mr. K and Mrs. K are both over age 65, and Mrs. K is blind)

10.

Ms. Ts total income Above-the-line deduction for SE tax AGI Standard deduction Exemption amount ($3,800 2) Taxable income Income tax on $4,882 (head of household)

$23,435 (2,253) $21,182 (8,700) (7,600) $4,882 $488 $306,750 -0$306,750 (28,200) (15,200) $263,350 $63,812

11.

Mr. and Mrs. Ks total income Above-the-line deductions AGI Itemized deductions Exemption amount ($3,800 4) Taxable income Income tax on $263,350 (married filing jointly) Mr. and Mrs. Ls total income Above-the-line deductions AGI Standard deduction ($11,900 + $2,300) Exemption amount ($3,800 2) Taxable income Income tax on $6,300 dividends and capital gain (0%) Income tax on $2,525 ordinary income (MFJ) Mr. RGs total income Above-the-line deductions AGI Itemized deductions Exemption amount ($3,800 7) Taxable income Income tax on $31,000 dividends (15%) Income tax on $371,200 (head of household)

13.

$30,625 -0$30,625 (14,200) (7,600) $8,825 0 253 $253 $462,800 -0$462,800 (34,000) (26,600) $402,200 $4,650 103,570 $108,220

14.

15. a.

$25,661

b. $22,801 ($19,501 regular tax on $93,000 + [15% $22,000])

27.

a.Because Mrs. OP has no earned income, the couple has no dependent care credit.

28.

b. a. b.

Mr. and Mrs. OP have two qualifying children, and the lesser of their earned incomes ($28,000) exceeds the $6,000 limitation on the cost for computing the dependent care credit. Consequently, their dependent care credit is $1,200 (20% $6,000). The Coulters child credit is $4,000 ($1,000 four children). The Coulters dependent care credit is $828 ($3,600 cost 23%). AGI AGI floor Excess AGI $37,600 (15,000) $22,600 35% (12) 23%

$22,600 excess AGI $2,000 = 11.3 Maximum credit percentage Reduction (rounded up to whole point Credit percentage c.

If the Coulters AGI is $137,700, their child credit is $2,600. AGI AGI threshold Excess AGI $27,700 excess AGI $1,000 (rounded up) Maximum total credit Phaseout ($50 28) Child credit $137,700 (110,000) $27,700 28 $4,000 (1,400) $2,600

The Coulters dependent care credit is $720 ($3,600 cost 20%). 31. a. Mr. and Mrs. BHs AMTI before exemption $203,000 AMTI exemption (2011 amount): $74,450 (25% [$203,000 $150,000]) (61,200) Taxable AMTI $141,800 Tentative minimum tax ($141,800 AMTI 26%) Regular tax on $200,000 (2012 married filing jointly) AMT Mr. CKs AMTI before exemption AMTI exemption (2011 amount) Taxable AMTI Tentative minimum tax ($49,550 AMTI 26%) Regular tax on $77,300 (2012 single) AMT $98,000 (48,450) $49,550 $12,883 (15,355) -0$229,500 (19,200) $210,300 $45,500 9,884 $55,384 (41,656) $13,728

$36,868 (43,779) -0-

b.

c.

Ms. Ws AMTI before exemption AMTI exemption (2011 amount): $48,450 (25% [$229,500 $112,500]) Taxable AMTI Tentative minimum tax: $175,000 AMTI 26% $35,300 AMTI 28% Regular tax on $181,000 (2012 head of household) AMT

CHAPTER 16 Q: 1, 4 AP: 2,11, 12, 13 AP: 20,21,22,31,36 Mr. Lays tax is $7,711 ($22,030 35%). Mr. Lays tax is $6,813 ($6,139 [$17,540 35%] + $674 [$4,490 15% preferential rate]). Mr. Lays tax is $4,689 ($2,422 [$6,920 35%] + $2,267 [$15,110 15% preferential rate]). Amount realized (4,052 shares $18) Adjusted basis (cost + reinvested dividends) Mr. Dales recognized gain Amount realized (800 shares $18) Adjusted basis ($14 cost of 800 original shares) Mr. Dales recognized gain Amount realized (800 shares $18) Adjusted basis ($58,393 [800 shares 4,052 shares]) Mr. Dales recognized gain $72,936 (58,393) $14,543 $14,400 (11,200) $3,200 $14,400 (11,529) $2,871

2.

a. b. c.

11.

a.

b.

c.

12.

a. b.

Mrs. Cole recognizes $7,220 ($38,500 cash surrender value $31,280 investment in the policy) as ordinary income. Mrs. Coles $400,000 accelerated death benefit is excludable from her taxable income.

13.

Mr. F is entitled to a tax-free return of his $50,000 investment in the annuity contract. The taxable portion of each $1,300 monthly payment is computed as follows. $50,000 investment $312,000 expected return = .16026 exclusion ratio Monthly payment Exclusion ratio Tax-free return of investment Taxable annuity payment ($1,300 $208) $1,300 .16026 $208 $1,092

20.

a. b. c.

Mr. Alms AGI is $58,850 ($61,850 salary - $3,000 net capital loss). Mr. Alms AGI is $68,500 ($61,850 salary + $6,650 net capital gain ($12,250 capital gain - $5,600 capital loss). Mr. Alms AGI is $60,350 ($61,850 salary - $1,500 net capital loss ($8,000 capital gain distribution - $5,600 capital loss - $3,900 capital loss carryforward). Mr. and Mrs. Revel recognized a $6,100 net long-term capital loss of which they can deduct $3,000 against other sources of income. Therefore, their AGI is $203,200. Mr. and Mrs. Revel recognized a $380 net long-term capital gain. Their AGI is $206,580. Mr. and Mrs. Revel recognized a $9,800 net capital loss of which they can deduct $3,000 against other sources of income. Their AGI is $203,200. Mr. and Mrs. Revel recognized a $4,100 net short-term capital loss of which they can deduct $3,000 against other sources of income. Their AGI is $203,200. Mr. and Mrs. Revel have a $3,100 long-term capital loss carryforward. No carryforward. Mr. and Mrs. Revel have a $1,800 short-term capital loss carryforward and a $5,000 long-term capital loss carryforward. Mr. and Mrs. Revel have a $1,100 short-term capital loss carryforward. $44,000 (3,109) 1,080 (6,470) -0$35,501

21.

a. b. c. d.

22.

a. b. c. d.

31.

Grocery store net profit Deduction for SE tax Dividends and interest income Passive activities: Rental loss deductible up to $25,000) LP interest (nondeductible loss) Mr. and Mrs. Morriss AGI a. b.

36.

Mr. Erwins regular tax on his investment income is $16,895 ($3,735 [$24,900 long -term capital gain 15%] + $13,160 [$37,600 passive activity income 35%]). Mr. Erwins Medicare contribution tax is $2,375 ($62,500 net investment income 3.8%). Mr. Erwins marginal tax rate on long-term capital gain is 18.8% (15% income tax rate + 3.8% Medicare contribution tax rate).

CHAPTER 17 Q: 1, 8, 10 AP: 1, 2,3, 4 AP: 7, 8, 10, 11,21,30,31 TPC: 4 Not included in Marcys AGI. $500 included in Marcys AGI. $8,000 included in Marcys AGI. Not included in Marcys AGI. $4,200 10,000 $14,200

1.

a. b. c. d.

2.

Salary Scholarship payments for room and board Ms. Queens AGI

3. 4.

Lyle may exclude the $600,000 payment received as compensation for his physical injuries from gross income. The remaining $1,150,000 payment is included in gross income. a. b. c. Ann must include the entire $12,000 alimony payment in AGI. Ann must include $7,200 alimony ($600 12 months) in AGI. Ann does not include any of the $12,000 gift in AGI. $22,857 78,600 62,900 $164,357

7.

Social Security benefit ($26,890 85%) Dividends and interest Taxable pensions Mr. and Mrs. Nesters AGI

8.

Mrs. Smalls only income item (and her AGI) is her $10,800 pension. Because her AGI is so low, none of her Social Security benefit is included in gross income.

10.

a.

Unreimbursed medical expenses AGI threshold ($25,000 7.5%) Mr. and Mrs. Mosss itemized deduction Unreimbursed medical expenses AGI threshold ($50,000 7.5%) Mr. and Mrs. Mosss itemized deduction

$2,215 (1,875) $340 $2,215 (3,750) -0-

b.

11.

Mr. Papp can deduct the $4,200 payment to his CPA as a miscellaneous itemized deduction on Schedule A. He can also claim miscellaneous itemized deductions for the $900 payment to his CPA for preparation of a gift tax return and the $3,000 payment to his attorney for estate planning advice. The other payments to his attorney are nondeductible personal expenses.

21. Lesser of basis or decrease in FMV Insurance Unreimbursed loss $100 floor per casualty * a.

Wallet $900 -0$900 (100) $800

Automobile $24,000 (17,500) $6,500 (100) $6,400

Trees $6,100* -0$6,100 (100) $6,000

The decrease in value in Ms. Whites personal residence can be measured by the replacement cost of the ornamental trees. Aggregate loss AGI threshold ($53,000 10%) Ms. Whites itemized deduction Aggregate loss AGI threshold ($210,000 10%) Ms. Whites itemized deduction $13,200 (5,300) $7,900 $13,200 (21,000) -0-

b.

30.

a. b. c.

Mrs. Gomez realized an $8,000 nondeductible loss. Mrs. Gomez realized a $114,500 gain ($262,500 $148,000), all of which she may exclude from gross income. Mrs. Gomez realized a $319,000 gain ($467,000 $148,000), $250,000 of which she may exclude from gross income and $69,000 of which she must recognize as long-term capital gain. $134,300 (23,523) (26,600) $84,177

31.

Mr. and Mrs. Boazs AGI Itemized deductions Exemption amount ($3,800 7) Taxable income AMTI calculation: Taxable income Disallowed state income tax deduction Disallowed property tax deduction Disallowed home equity loan interest Disallowed miscellaneous itemized deductions Disallowed exemption amount AMTI before exemption

$84,177 7,925 5,122 4,377 769 26,600 $128,970

4. If Mr. Z buys the mutual fund shares, his annual after-tax cash flow will increase by $2,211 ($3,300 before-tax income $1,089 tax cost). If Mr. Z pays off his personal debt, his annual after-tax cash flow will increase by $2,350 (nondeductible interest payments). If Mr. Z pays down his home mortgage, his annual after-tax cash flow will increase by $1,943 ($2,900 decrease in interest payments $957 tax savings from itemized deduction). Based on these comparisons of after-tax cash flow, Mr. Z should pay off his personal debt