TXX 5761 Taxation of Individuals Assignments
ASSIGNMENT #1 – Chapter 3
3: Which of the following items are inclusions in gross income?
a. During the year, stock the taxpayer purchased as an investment doubled in value. (NO
TAX CONSEQUENCES)
b. Amount an off-duty motorcycle police officer rec...
3: Which of the following items are inclusions in gross income?
a. During the year, stock the taxpayer purchased as an investment doubled in value. (NO
TAX CONSEQUENCES)
b. Amount an off-duty motorcycle police officer received for escorting a funeral
procession. (TAXABLE PAYMENTS FOR SERVICES RENDERED)
c. While his mother was in the hospital, the taxpayer sold her jewelry and gave the
money to his girlfriend.
d. Child support payments received. (NO TAX CONSEQUENCES)
e. A damage deposit the taxpayer recovered when he vacated the apartment he had
rented. (NONTAXABLE RETURN OF CAPITAL)
f. Interest received by the taxpayer on an investment in general purpose bonds
issued by IBM.
g. Amounts received by the taxpayer, a baseball “Hall of Famer,” for autographing
sports equipment (e.g. balls, and gloves). (SAME AS B)
h. Tips received by a bartender from patrons. (Taxpayer is paid a regular salary by
the cocktail lounge that employs him).
i. Taxpayer sells his Super Bowl tickets for three times what he paid for them.
j. Taxpayer receives a new BMW from his grandmother when he passes the CPA exam.
(MAY HAVE GIFT TAX CONSEQUNECES TO GRANDMOTHER BUT IS
NONTAXABLE TO THE TAXPAYER).
Pages 3-4 and Exhibit 3.2
4: Which of the following items are exclusions from gross income?
a. Alimony payments received.
b. Damages award received by the taxpayer for personal physical injury – none were
for punitive damages.
c. A new golf cart won in a church raffle.
d. Amount collected on a loan previously made to a college friend. (presuming no
interest is charged)
e. Insurance proceeds paid to the taxpayer on the death of her uncle – she was the
designated beneficiary under the policy.
f. Interest income on City of Chicago bonds.
g. Jury duty fees.
h. Stolen funds the taxpayer had collected for a local food bank drive.
i. Reward paid by the IRS for information provided that led to the conviction of the
taxpayer’s former employer for tax evasion.
j. An envelope containing $8,000 found (and unclaimed) by the taxpayer in a bus station.
Exhibits 3.1 and 3.2
5: To save on U.S. income taxes, Lucas (a U.S. citizen and resident of Vermont) invests in
foreign stocks and bonds. Is Lucas correct in his approach? Explain Lucas is not correct in
his approach because one cannot escape paying taxes. If the investment is a prudent
investment then it is acceptable but the intention to invest it to avoid paying taxes is
unacceptable. This is unethical and cannot be accepted in any form. He being a resident
of Vermont should disclose his investment details to the state of his residence.
Whatever income we earn, we need to pay taxes on it. Investment if made in certain
securities have to be disclosed and so being a citizen he has to disclose the investment
and pay taxes on the same.
Global Tax Issues on page 3-6
,6: One class of deductions is variously described as deductions for AGI, above the line
deductions and page 1 deductions. Explain the meaning of the various designations. A
“deduction for” is one that can be claimed in arriving at AGI. Since AGI is the bottom line
of page 1 of Form 1040, a “deduction for” is an “above the line” deduction or a “page 1”
deduction.
Page 3-5
7: In late 2013, the Polk’s come to you for tax advice. They are considering selling some stock
investments for a loss and making a contribution to a traditional IRA. In reviewing their
situation, you note that they have large medical expenses and a casualty loss, neither of which
is covered by insurance. What advice would you give the Polk’s? The sale of the stock
investment will result in a capital loss. The capital loss will offset any capital gain, and
any excess (of up to $3,000) can be applied against ordinary income to arrive at AGI. The
contribution to the traditional IRA is a deduction for AGI. Thus, both the capital loss and
the IRA contribution reduce AGI. By reducing AGI, the Polk’s will increase their allowable
medical and casualty deductions. [The medical deduction is the excess over 10% (7.5% if
age 65 or over) of AGI in 2013, while the casualty loss is the excess over 10% of AGI.]
Page 3-6 and Examples 3 and 4
8: In choosing between the standard deductions and itemizing deductions from AGI, what
effect, if any, does each of the following have?
a. The age of the taxpayer(s). The age of the taxpayer would favor the standard
deduction choice if it brought into play the additional standard deduction (age 65
or older)/
b. The health (i.e., physical condition) of the taxpayer. If the taxpayer is blind, an
additional standard deduction is available.
c. Whether taxpayers rent or own their residence. If the taxpayer is still making house
payments, the interest deduction may make itemizing more attractive.
d. Taxpayer’s filing status (e.g., single, married, filing jointly). Because the amount of the
standard deduction varies depending on filing status, this factor is highly relevant
to the decision.
e. Whether married taxpayers decide to file separate returns. If married persons file
separate returns, the returns must be consistent in the choice made. Thus if one
spouse itemizes the other spouse must also itemize.
f. The taxpayer’s uninsured personal residence was recently destroyed by fire. Because a
large casualty loss seems probable, this increases the advantage to be gained by
itemizing.
g. The number of personal dependency exemptions the taxpayer can claim. Personal and
dependency exemptions have no effect on whether a taxpayer itemizes or
chooses the standard deduction option.
Page 3-9 to 3-11 and 3-37
10: David is age, 78, is a widower, and is being claimed as a dependent by his son. How does
this situation affect the following?
a. David’s own individual filing requirements. The filing requirements for persons being
claimed as dependents by others are more complex than those applicable to
regular taxpayers. They depend on whether the dependent has only earned
income, only unearned income, or both earned and unearned income, and the
amount of gross income.
These rules are summarized on page 3-21 and 3-22 of text
, b. David’s personal exemption. Dependents are not allowed to claim a personal
exemption.
Example 12
c. The standard deduction allowed to David. In 2013, the basic standard deduction is
the greater of $1,000 or earned income plus $350. The total basic standard
deduction allowed, however, cannot exceed $6,100 (the 2013 standard deduction
for single taxpayers).
Page 3-11
d. The availability of any additional standard deduction. The additional standard
deduction of $1,500 is allowed in full.
Example 10
11: Sam and Abby are dependents of their parents, and each has income of $2,100 for the
year. Sam’s standard deduction for the year is $1,000 while Abby’s is $2, 450. As their income
is the same, what causes the difference in the amount of the standard deduction? Sam’s
$2,100 is unearned income. Thus, he is allowed the minimum standard deduction of
$1,000. Abby’s $2,100 is earned income; so she is allowed a $2,450 [$2,100 (earned
income for the year) + 350] standard deduction.
Page 3-11
14: Heather, age 12, lives in the same household with her mother, grandmother and uncle.
a. Who can qualify for the dependency exemption? Heather is a qualifying child to all
three parties.
b. Who takes preference? As the parent, the mother takes precedence. If the mother
waives, the exemption goes to whoever has the highest AGI as between the
grandmother and the uncle.
Table 3.3
16: Isabella, Emma, and Jacob share equally in the support of their parents. Jacob tells his
sisters to split the dependency exemptions between the two of them. Explain what Jacob
means? Under a multiple support agreement, either Isabella, Emma or Jacob can claim
either (or both) of their parents as dependents. Jacob is suggesting that his sisters
share the exemptions.
Page 3-16 and 3-17
18: Mario, who is single, is a U.S. Citizen and resident. He provides almost all of the support of
his parents and two aunts, who are citizens and residents of Guatemala. Mario’s parents and
aunts are seriously considering moving to and becoming residents of Mexico. Would such a
move have any impact on Mario? Why or Why not? Mario should encourage his parents
and two aunts to make the move to Mexico. As residents of Mexico, they can be claimed
by Mario as dependents. Currently, they do not meet any of the exceptions to the
citizenship or residency test for dependents.
Page 3-18
22: Comment on the availability of head-of-household filing status for 2013 in each of the
following independent situations.
a. Taxpayer lives alone but maintains the household of his parents. In July 2013, the
parents use their savings to purchase a Lexus automobile for $62,000. If the taxpayer
meets the support test, the taxpayer can claim head of household filing status as
at least one of the parents must be his dependent. This seems unlikely, however,
25: In connection with the application of the kiddie tax, comment on the following:
a. The child has only earned income. The kiddie tax does not apply to earned income.
b. The child has a modest amount of unearned income. The kiddie tax does not apply
unless unearned income exceeds $2,000.
c. The child is age 20, not a student, and not disabled. The kiddie tax will not apply.
The age coverage is under 19 or a full-time student under age 24.
d. The child is married. The kiddie tax does not apply if the child is married and files a
joint return.
e. Effect of the parental election. If the parental election is made, the child need not file
a return.
f. The result when parental election is made and the married parents file separate returns.
For married parents filing separate returns, the parent with the greater taxable
income is the applicable parent.
Page 3-32 – 3-34
26: During the year, Hernando has the following transactions:
a. Gain on the sale of stock held as an investment for 10 months.
b. Gain on the sale of land held as an investment for 4 years.
c. Gain on the sale of a houseboat owned for 2 years and used for family vacations.
d. Loss on the sale of a reconditioned motorcycle owned for 3 years and used for
recreational purposes.
How should Hernando treat these transactions for income tax purpose? Gain on the sale of
the stock is a short-term capital gain and is taxed as ordinary income rates. The gain on
the sale of the land and houseboat should be combined. As long-term capital gain, the
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