Calculation based on accounting terms, personal income tax PDF

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Chapter 5: Gross Income (Exclusions)

Question 1 Fred specified in his will that his nephew John should serve as executor of Fred’s estate. John received $10,000 for serving as executor. Can John exclude the $10,000 from his gross income? Explain. No, John cannot exclude $10,000 from his gross income because the amount, $10,000 that he received is considered as earnings for services which he serves as executor.

Question 2 Leonard’s home was damaged by a fire. He also had to be absent from work for several days to make his home habitable. Leonard’s employer paid Leonard his regular salary. $2,500, while he was absent from work. In Leonard’s pay envelope was the following note from the employer. To help you in your time of need. Leonard’s fellow employees also took up a collection and gave him $900. Leonard spent over $4000 repairing the fire damage. Based on the above information, how much is Leonard required to include in his gross income? Ans: Based on the text above, Leonard only can include $2,500 to his gross income because that amount, he received from his employer is his regular salary. The amount of $900 cannot include in this gross income because it is a nontaxable income where his colleagues donated to him out of generosity.

Question 6 Billy fell off a bar stool and hurt his back. As a result, he was unable to work for three months. He sued the bar owner and collected $100,000 for the physical injury and $50,000 for the loss of income. Billy also collected $15,000 from an income replacement insurance policy he purchased. Amber was away from work for three months following hear bypass surgery.

Amber collected $30,000 under an income replacement insurance policy purchased by her employer. Are the amounts received by Billy and Amber treated the same under the tax law? Explain. Ans: No, both of them are not treated under the same tax law. First, Billy gets $150,000 for physical personal injury compensation from the bar owner. Besides that, Billy also claimed another $15,000 from the insurance he purchased as for the income replacement. Both of these transactions are excluded from Billy’s gross income. Unlike Amber, the amount of $30,000, that she received from her employer as an income replacement will taxed because the insurance is not purchased by Amber so she needs to pay the tax.

Question 8 Holly was injured while working in a factory and received $12,000 as workers’ compensation while she was unable to work because of the injury. Jill who was self-employed, was also injured and unable to work. Jill collected $12,000 on an insurance policy she had purchased to replace her loss of income while she was unable to work. How much are Holly and Jill each required to include in their gross income? Ans: $12,000 is for Holly as worker’s compensation due to his injury cause in a factory while Jill faced the same issues as Holly just the only difference is Holly is a factory’s worker while Jill is self-employed. But still, Jill can claim for coverage for her injury where she received $12,000 as income replacement from the insurance she purchased. Therefore, the money that they received excluded from the gross income and nontaxable.

Question 10 What is the difference between a cafeteria plan and an employee flexible spending plan? Ans:

Cafeteria Plan  A plan that provided by the employer

Flexible Spending Plan  A plan that allows employees to

which for employee to choose from a

modify the cafeteria plan to satisfy

pre-tax

and fulfill their specific needs.

 

benefits

variation.

[ CITATION Kag202 \l 2052 ] More complex to operate Require more time to regulate and execute.

 

More direct and easy to manipulate. Not required much time as time used in cafeteria plan because flexible spending plan only focus on choosing the right plan to employees.

Question 20 Valentino is a patient in a nursing home for 45 days of 2020. While in the nursing home, he incurs total costs of $13,500. Medicare pays $8,000 of the costs. Valentino receives $15000 from his long-term care insurance policy, which pays while he is in the facility. Assume that the Federal daily excludible amount for Valentino is $380. Of the $15,000, what amount may Valentino exclude from his gross income? Ans: 1. Total excludible amount = $380  45 days = $17100 2. Actual costs = $13500 3. The amount excluded from Valentino’s gross income is, $17100  $13500 = $3600

Question 22 Ellie purchases an insurance policy on her life and names her brother, Jason, as the beneficiary. Ellie pays $32,000 in premiums for the policy during her life. When she dies, Jason collects the insurance proceeds of $500,000. As a result, how much gross income does Jason report?

Ans: $0. The reason because life insurance paid to the beneficiary because previously Ellis’s insurance policy is excluded from income tax. Therefore, Jason does not need to report the benefits he gets in gross income as the death benefits received are nontaxable. The death benefits only can be taxable under this scenario where when the amount of death benefits is included in the estate and the beneficiary has name under this estate, therefore, the death benefits are taxable. [ CITATION Pat20 \l 2052 ]

Question 24 Leland pays premiums of $5,000 for an insurance policy in the face amount of $25000 upon the life of Caleb and subsequently transfers the policy to Tyler for $7,500. Over the years, Tyler pays subsequent premiums of $1,500 on the policy. Upon Caleb’s death, Tyler receives the proceeds of $25,000. As a result, what amount is Tyler required to include in his gross income? Ans: $25,000  $7500  $1500 = $16000. Therefore, $16000 is the amount that Tyler must included in his gross income.

Question 25 Jarrod receives a scholarship of $18,500 from East State University to be used to pursue a bachelor’s degree. He spends $12,000 on tuition, $1500 on books and suppliers, $4000 for room and board, and $1000 for personal expenses. How much may Jarrod exclude from his gross income? Ans: $18500  $4000  $1000 = $13500. Jarrod may exclude $13500 from his gross income as it is not excluded the room and board, and the personal expenses which both of this item is not consider expenses for study use. Question 28 Determine the gross income of the beneficiaries in the following cases:

a. Justin’s employer was downsizing and offered employees an amount equal to one year’s salary if the employee would voluntary retire. Ans: The amount that Justin received by his employer for not working must included in his gross income. This is because although he has stop working but still, he gets the payments.

b. Trina contracted a disease and was unable to work for six months. Because of her dire circumstances, her employer paid her one-half of her regular salary while she was away from work. Ans: Trina still need to include in her gross income from her payment received because her payment is not a gift due to the policy and regulations fixed by IRS where whenever what employer had given to employee, it still considers a payment although her employer just donated to her.

c. Coral Corporation collected $1,000,000 on a key person life insurance policy when its chief executive died. The corporation had paid the premiums on the policy of $77,000 which were not deductible by the corporation. Ans: The life insurance’s benefits are excluded from Coral Corporation gross income because the corporation is the key person on the life insurance policy after the chief executive died. Therefore, the Coral Corporation act as beneficiary of the policy upon the death of the insured.

d. Juan collected $40,000 on a life insurance policy when his wife, Leona, died in 2020. The insurance policy was provided by Leona’s employer, and the premiums were excluded from Leona’s gross income as group term life insurance. In 2020, Juan also collected the $3500 accrued salary owned to Leona at the time of her death. Ans: The $40,000 payment of life insurance that Juan gets is nontaxable because he is the beneficiary of the policy upon the death of his wife. But, the accrued salary $3,500 is taxable and must be included in his gross income. Question 30

What is the taxpayer’s gross income in each of the following situations? a. Darrin received a salary of $50,000 from his employer, Green Construction. Ans: Darrin’s gross income = $50,000.

b. In July, Green gave Darrin an all-expenses-paid trip to Las Vegas (value of $3,000) for exceeding his sales quota. Ans: Darrin’s gross income = $3,000 which is the value for the trip to Las Vegas.

c. Marta received $10,000 from her employer to help her pay medical expenses not covered by insurance. Ans: Marta’s taxable gross income is $0 where $10,000 is a compensation for Marta from her employer.

d. Blake received $15,000 from his deceased wife’s employer to help him in his time of greatest need. Ans: It is an excluded gift received by his deceased wife’s employer which Blake needed it.

e. Clint collected $50,000 as the beneficiary of a group term life insurance policy when his wife died. The premiums on the policy were paid by his deceased wife’s employer. Ans: Zero because Clint is a beneficiary upon death of his wife and are excluded from gross income.

Tax Return Problem 57 Alfred E. Old and Beulah A. Crane, each age 42, married on September 7, 2017, Alfred and Beulah will file a joint return for 2019. Alfred’s Social Security number is 111-11-1109. Beulah’s Social Security number is 123-45-6780, and she adopted “Old” as her married name. They live at 211 Brickstone Drive, Atlanta, GA, 30304. Alfred was divorced from Sarah Old in March 2016. Under the divorce agreement, Alfred is to pay Sarah $1,250 per month for the next 10 years or until Sarah’s death, whichever occurs first. Alfred pays Sarah $15,000 in 2019. In addition, in January 2019, Alfred pays Sarah $50,000, which is designated as being for her share of the marital property. Also, Alfred is responsible for all prior years’ income taxed, Sarah’s Social Security number is 123-45-6788. Alfred’s salary for 2019 is $150,000. He is an executive working for Cherry, Inc. (Federal I.D. No. 98-7654321). As part of his compensation package, Cherry provides him with group term life insurance equal to twice his annual salary. His employer withheld $24,900 for Federal income taxes and $8,000 for state income taxes. The proper amounts were withheld for FICA taxes. Alfred and Beulah had interest income of $500. They receive a $1,900 refund on their 2018 state income taxes. They claimed the standard deduction on their 2018 Federal income tax return. Alfred and Beulah pay $4,500 interest and $1,450 property taxes on their personal residence in 2019. Their charitable contributions total $2,400 (all to their church). They paid sales taxes of $1,400, for which they maintain the receipts. Alfred and Beulah have never owned or used any virtual currency, and they do no want to contribute to the Presidential Election Campaign.

Compute the Old’s net taxable payable (or refund due) for 2019. Suggested software: ProConnect Tax Online.

Calculation Part Contents

Amount ($)

Form 1040 Salary Taxable Refund Interest Income Total Income Minus AGI Alimony Paid Total Adjusted Gross Income Schedule A (-) Itemized Deductions (refer to schedule A’s calculation) (-) Exemption Taxable Income Total Taxes (refer to calculation A) (-) Federal Income Tax Total Payment Net Tax Payable (refer to calculation B)

150,000 1,900 500 152,400 (15,000) 137,400 (17,750) 119,650 (24,400) 97,250 30,080 24,900 24,900 5,180

Calculation A Since taxable income is $150,000, therefore the tax owned is 24%. [($150,000  $85,525) × 24%] + $14605.50 = $15,474 + $14605.50 = $30,080 Calculation B Total Taxes  Total Payment = $30,080  $24,900 = $5,180

Schedule A’s Calculation Contents Income taxes Real Estate Tax Total Taxes Interest that Alfred has paid Home Mortgage Gifts Total Itemized Deductions

Amount ($) 8,000 1,450 10,850 4,500 2,400 17,750

Chapter 6: Deductions & Losses (In General)

Question 2 Michael earned $20,000 at the K-M Resort Golf Club during the summer prior to his senior year in college. He wants to make a contribution to a traditional IRA, but the amount is dependent on whether it reduces his taxable income. If Michael is going to claim the standard deduction, will a contribution to a traditional IRA reduce his taxable income? Explain. Ans: In my point of view, Michael can contribute any amounts that he wants as long as it does not exceed the amount that he earned, $20,000. Therefore, his contributions can consider as a deduction for adjusted gross income. Hence, Michael is able to claim the standard deduction.

Question 3 Classify each of the following expenditures paid in 2020 as a deduction for AGI, a deduction from AGI or not deductible:

a. Roberto gives cash to his father as a birthday gift. b. Sandra gives cash to her church. c. Albert pays Dr. Dafashy for medical services

For/ From AGI/ Not Deductible Not deductible From AGI From AGI

rendered. d. Mia pays alimony to Bill. e. Rex, who is self-employed, contributes to his pension

For AGI For AGI

plan. f. Bonita pays expenses associated with her rental

For AGI

property.

Question 6

Nanette, a single taxpayer, is a first-grade teacher. Potential deductions are charitable contributions of $800, personal property taxes on her cat of $240, and various supplies purchased for use in her classroom of $225 (none reimbursed by her school). How will these items affect Nanette’s Federal income tax return for 2020? Ans: The charitable contributions and her personal property tax by Nanette which in total is $1040, these can be deduct from Adjusted Gross Income. On the other hand, the purchase that cost $225 for her classroom is as a deduction for Adjusted Gross Income.

Question 9 Monique owns a building that she leases to an individual who operates a grocery store. Bent income is $10,000, and rental expenses are $6,000. On what form 1040 schedule or schedules are the income and expenses reported? Ans: In this case, Monique should use Schedule E. The purpose of filling schedule E is when Monique owns a property and she rent out; therefore, she needs to report income by filling in the schedule E. [ CITATION Wit19 \l 2052 ]

Question 26 Shanna, a calendar year and cash basis taxpayer, rents property to be used in her business from Janice. As part of the rental agreement. Shanna pays $8,400 rent on April 1, 2020 for the 12 months ending March 31, 2021. a. How much is Shanna’s deduction for rent expense in 2020? Ans: $8400 is Shanna’s deduction for rent expense for the year 2020. b. Assume the same facts, except that the $8,400 is for 24 months’ rent ending March 31, 2022. How much is Shanna’s deduction for rent expense in 2020? Ans: ($8400  24 months) × 9 months = $3150 Shanna’s deduction for the rent expense in 2020 is $3150.

Question 29 Vella owns and operates an illegal gambling establishment. In connection with this activity, he has the following expenses during the year. Items $ Rent 24,000 Bribes 40,000 Travel Expenses 4,000 Utilities 18,000 Wages 230,000 Payroll taxes 13,800 Property Insurance 1,600 Illegal Kickbacks 22,000 What are Vella’s total deductible expenses for tax purposes? Ans: Total deductible expenses (Rent + Travel Expenses + Utilities + Wages + Payroll Taxes + Property Insurance) = $24,000 + $4,000 + $18,000 + $230,000 + $13,800 + $1,600 = $291,400

Question 33

Amos is a self-employed tax attorney. He and Monica, his employee, attend a tax conference in Dallas sponsored by the American Institute of CPAs. The following expenses are incurred during the trip:

Conference registration Airfare Taxi Fares Lodging in Dallas

Amos $900 $1,200 $100 $750

Monica $900 $700 $0 $300

a. Amos pays for all of these expenses. Calculate the effect of these expenses on Amos’s AGI. Ans: The total expenses to reduce his AGI is $4850. The reason he can claim them in AGI because all the expenses he paid is related with his tax law practice. Calculation: Conference Registration = $900 +$900 = $1,800 Airfare = $1,200 + $700 = $1900 Taxi Fares = $100 + $0 = $100 Logging in Dallas = $750 + $300 = $1050 Total expenses: $4,850 b. Would your answer to part (a) change if the American Bar Association had sponsored the conference? Explain. Ans: Well, I think no because all the expenses above are related with his business which also as a tax attorney.

Question 39 Fynn incurred and paid the following expenses during 2020.



$50 for a ticket for running a red light while he was commuting to work.



$100 for a ticket for parking in a handicapped parking space.



$200 to an attorney to represent him in traffic court as to the two tickets.



$500 to an attorney to draft an agreement with a tenant for one-year lease on an apartment that Fynn owns.



$1000 to an attorney to negotiate a reduction in his child support payments.



$2500 to an attorney to negotiate a reduction in his qualified alimony payments to a former spouse.

Calculate the amount of Fynn’s deductible expenses. Ans: In general, the purpose of deduction is for individual or business’s expenses that can be deduct from the adjusted gross income while fill in the tax form. [ CITATION Kag203 \l 2052 ] So, above expenses, only the expenses that cost $500 which for an attorney to draft agreement with a tenant on his property is qualify for deductible expenses because this considers as ordinary and necessary expenses compared to other expenses. Others expenses is not qualified as deductible expenses because they are considered as personal expenses.

Tax Problem 57 Roberta Santos, age 41, is single and lives at 120 Sanbome Avenue, Springfield, II. 60781. Her Social Security number is 123-45-6780. Roberta has been divorced from her former husband, Wayne, for three years. She has a son, Jason, who is 17, and a daughter, June, who is

18. Jason’s Social Security number is 111-11-1112, and June’s is 123-45-6788. Roberta has never owned or used any virtual currency. She does not want to contribute $3 to the Presidential Election Campaign Fund. Roberta, an advertising executive, earned a salary from ABC Advertising of $80,000 in 2019. Her employer withheld $9,000 in Federal income tax and $3,100 in state income tax. Roberta has legal custody of Jason and June. The divorce decree provides that Roberta is to receive the dependency deductions for the children. Jason lives with his father during summer vacation. Wayne indicates that his expenses for Jason are $5,500. Roberta can document that she spent $6,500 for Jason’s support during 2019. In prior years, Roberta gave a signed Form 8332 to Wayne regarding Jason. For 2019, she has decided not to so. Roberta provides all of June’s support. Roberta’s mother died on January 7, 2019. Roberta inherited assets worth $625,000 from her mother. As the sole beneficiary of her mother’s life insurance policy, Roberta received insurance proceeds of $300,000. Her mother’s cost basis for the life insurance policy was $120,000. Roberta’s favorite aunt gave her $13,000 for her birthday in October. On November 8, 2019, Roberta sells for $22,000, Amber stock that she had purchased for $24,000 from her first cousin, Walt, on December 5, 2013. Walt’s cost basis for the stock was $26,000, and the stock was worth $23,000 on December 5, 2015. On December 1, 2019, Roberta sold Falcon stock for $13,500. She had acquired the stock on July 2, 2015, for $8000. An examination of Roberta’s records ...