Chapter 7Hw - Homework PDF

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1.Matt recently deposited $20,000 in a savings account paying a guaranteed interest rate of 4 percent for the next 10 years. Required: a. If Matt expects his marginal tax rate to be 22 percent for the next 10 years, how much interest will he earn after-tax for the first year of his investment? b. How much interest will he earn after-tax for the second year of his investment if he withdraws enough cash every year to pay the tax on the interest he earns? c. How much will he have in the account after four years? d. How much will he have in the account after seven years a. After one year, Matt will have earned $624 or $20,000 × 0.04(1 - 0.22) after tax. b. In the second year, Matt will earn $643 after tax or $20,624 × 0.04(1 - 0.22) after tax. c. After four years, Matt will have $22,615 or $20,000 × (1 + 0.04(1 - 0.22))4 in the savings account. d. After seven years, Matt will have $24,799 or $20,000 × (1 + 0.04(1 - 0.22))7 in the savings account. 2. Dana intends to invest $30,000 in either a Treasury bond or a corporate bond. The Treasury bond yields 5 percent before tax and the corporate bond yields 6 percent before tax. a-1. Assuming Dana’s federal marginal rate is 24 percent and her marginal state rate is 5 percent, which of the two options should she choose? Assume that Dana itemizes deductions.

 Corporate bond  Treasury bond a-2. How much interest after-tax would Dana earn by investing in the corporate bond? (Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.) The Treasury bond yields $1,140 or $30,000 × [0.05 × (1 - 0.24)] after tax. The corporate bond yields $1,300 or $30,000 × [0.06 × (1 - 0.24 - 0.05(1 - 0.24))] after tax. Note that the actual state rate is reduced by 24 percent to allow for the deductibility of state income taxes on the federal income tax return. Thus, she should choose the corporate bond.

b-1. If she were to move to another state where her marginal state rate would be 10 percent, which of the two options should she choose? Assume that Dana itemizes deductions.

 Corporate bond  Treasury bond b-2. How much interest after-tax would Dana earn by investing in the corporate bond as per requirement b1? (Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.)

3.At the beginning of his current tax year, David invests $12,000 in original issue U.S. Treasury bonds with a $10,000 face value that mature in exactly 10 years. David receives $700 in interest ($350 every six months) from the Treasury bonds during the current year, and the yield to maturity on the bonds is 5 percent. (Round your intermediate calculations to the nearest whole dollar amount.) If David elects to amortize the $2,000 bond premium, he will use the constant yield method (similar to the effective interest method used to amortize bond premium under GAAP) to amortize the bond premium semiannually. Ultimately, he will report $599 of interest income from the bond. Premium amortization = Interest received – Reported interest Reported interest = Adjusted basis of bond at beginning of semiannual period × 0.05 × 0.5

b. How much interest will he report this year if he does not elect to amortize the bond premium? If David does not elect to amortize the bond, he will simply report the entire $700 payment he receives as interest income for the year.

5. At the beginning of her current tax year, Angela purchased a zero-coupon corporate bond at original issue for $30,000 with a yield to maturity of 6 percent. Given that she will not actually receive any interest payments until the bond matures in 10 years, how much interest income will she report this year assuming semiannual compounding of interest?

$30,000 × 0.06 × ½ = $30,900 × 0.06 × ½ = Total

$

900 927 $ 1,827

6.Five years ago, Kate purchased a dividend-paying stock for $10,000. For all five years, the stock paid an annual dividend of 4 percent before tax and Kate’s marginal tax rate was 24 percent. Every year Kate reinvested her after-tax dividends in the same stock. For the first two years of her investment, the dividends qualified for the 15 percent capital gains rate; however, for the last three years the 15 percent dividend rate was repealed and dividends were taxed at ordinary rates. (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.) a. What is the current value (at the beginning of year 6) of Kate’s investment assuming the stock has not appreciated in value? $10,000 × (1 + (0.04 × (1 – 0.15)))2 × (1 + (0.04 × (1 – 0.24)))3 = $11,697

b. What will Kate’s investment be worth three years from now (at the beginning of year 9) assuming her marginal tax rate increases to 35 percent for the next three years? $11,697 × (1 + (0.04 × (1 – 0.35)))3 = $12,633

8.John bought 1,000 shares of Intel stock on October 18, 2015, for $30 per share plus a $750 commission he paid to his broker. On December 12, 2019, he sells the shares for $42.50 per share. He also incurs a $1,000 fee for this transaction. a. What is John’s adjusted basis in the 1,000 shares of Intel stock? John’s basis in the 1,000 shares of Intel stock is $30,750. This is the purchase price of $30,000 (i.e., $30 × 1,000) plus the $750 commission paid to the broker.

b. What amount does John realize when he sells the 1,000 shares? On the sale, John realizes $41,500. This is the sales price of $42,500 (i.e., 1,000 × $42.50) minus the transaction fee of $1,000.

c-1. What is the gain/loss for John on the sale of his Intel stock? c-2. What is the character of the gain/loss? c-1. & c-2. John’s gain on the sale is $10,750 which is the amount realized minus his adjusted basis (i.e., $41,500 – $30,750). The gain is a long-term capital gain because John held the stock for more than a year before selling.

11. Dahlia is in the 32 percent tax rate bracket and has purchased the following shares of Microsoft common stock over the years: Date Purchased 7/10/2009 4/20/2010 1/29/2011 11/02/201 3

Share s

Basis 12,00 400 $ 0 10,75 300 0 12,23 500 0 250

7,300

If Dahlia sells 800 shares of Microsoft for $40,000 on December 20, 2019, what is her capital gain or loss in each of the following assumptions? (Do not round intermediate calculations.) a. She uses the FIFO method. Under the FIFO method, the first 400 shares sold have a $12,000 basis, the next 300 have a $10,750 basis, and the last 100 shares have a basis of $2,446 (100/500 × $12,230) for a total basis of $25,196. The resulting capital gain would be $40,000 less the $25,196 tax basis of the shares sold or $14,804

b. She uses the specific identification method and she wants to minimize her current year capital gain. The shares purchased in 2009 cost $30 per share, the shares purchased in 2010 cost $35.83 per share, the shares purchased in 2011 cost $24.46 per share, and the shares purchased in 2013 cost $29.20 per share. To minimize her capital gain, Dahlia should specifically identify the 300 shares purchased in 2010, then the 400 shares purchased in 2009 and then 100 of the shares purchased in 2013. Under the specific identification method, the 300 shares purchased in 2010 have a $10,750 basis, the 400 shares purchased in 2009 have a $12,000 basis, and the 100 shares purchased in 2013 have a basis of $2,920 (100/250 × $7,300) for a total basis of $25,670. The resulting capital gain would be the $40,000 sales proceeds less the $25,670 tax basis of the shares sold or $14,330.

13.Karyn loaned $20,000 to her co-worker to begin a new business several years ago. If her co-worker declares bankruptcy on June 22 of the current year, how much of the bad debt loss will Karyn be able to deduct this year? $0. According to IRC §166 and Publication 550, taxpayers may deduct non-business bad debts in the year the amount of the loss can be determined. Because Karyn will not be able to measure her actual loss until the bankruptcy process is complete, she must wait to deduct her loss until she knows with certainty the amount of her loss.

14. Sue has 5,000 shares of Sony stock that have an adjusted basis of $27,500. She sold the 5,000 shares of stock for cash of $10,000, and she also received a piece of land as part of the proceeds. The land was valued at $20,000 and had an adjusted basis to the buyer of $12,000. What is Sue's gain or loss on the sale of 5,000 shares of Sony stock?

Sue’s gain on the sale is $2,500, which is the amount realized of $30,000 ($10,000 + $20,000) less her adjusted basis of $27,500. Note that the value of the land is included in her amount realized along with the cash she received.

15. During the current year, Ron and Anne sold the following assets: (Use the dividends and capital gains tax rates and tax rate schedules.) Capital AssetMarket ValueTax BasisHolding Period L stock $ 50,000 $41,000 > 1 year M stock 28,000 39,000 > 1 year N stock 30,000 22,000 < 1 year O stock 26,000 33,000 < 1 year Antiques 7,000 4,000 > 1 year Rental home 300,000* 90,000 > 1 year

*$30,000 of the gain is 25 percent gain (from accumulated depreciation on the property). Ignore the Net Investment Income Tax. a. Given that Ron and Anne have taxable income of only $20,000 (all ordinary) before considering the tax effect of their asset sales, what is their gross tax liability for 2019 assuming they file a joint return? Ron and Anne’s netting process is reflected in the following table:

Description Stock N Stock O Step 1: Antiques Unrecaptured §1250 Gain Remaining Gain from Rental Property Stock L Stock M Step 2: Steps 3(B): Go to step 6 Step 4 : Go to step 5 Step 5

Short-Term $ 8,000 $ (7,000) $ 1,000

Long-Term 28%

$

Long-Term 25%

3,000 $

$

1,000

$

Long-Term 0/15/20%

3,000

$

30,000

30,000

$ $ $ $

180,000 9,000 (11,000) 178,000

$

178,000

Ron and Anne’s ordinary income will increase from $20,000 to $21,000 due to their $1,000 net short-term capital gain. Ron and Anne’s gross tax liability of $29,080 is computed as follows:

Amount and Type Applicable of Income Rate Tax Explanation $19,400; 10% $ 1,940 $19,400 × 10%. The first $19,400 of Ron and Anne’s ordinary $21,000 of ordinary income is taxed at 10% (see

$1,600; ordinary

12%

$

$30,000; 25% rate capital gain

12%

$ 3,600

$3,000; 28% rate capital gains

12%

$

360

$24,750; 0/15/20% rate capital gains $153,250; 0/15/20% rate capital gains

0%

$

0

Gross tax liability

15%

192

$22,988

MFJ tax rate schedule for this and other computations). $1,600 × 12%. Ron and Anne’s remaining $1,600 of ordinary income ($21,000 – $19,400) is taxed at 12%. $30,000 × 12%. The 25% gains are taxed at the lower of Ron and Anne’s marginal tax rate (12%) or 25%. In this case, the $30,000 of gains will be taxed at 12%. $3,000 × 12%. The 28% gains are taxed at the lower of Ron and Anne’s marginal tax rate (12%) or 28%. In this case, the $3,000 of gains will be taxed at 12%. $24,750 × 0%. $24,750 ($78,750 - $21,000 ordinary income - $30,000 25% capital gain - $3,000 28% capital gain) of 0/15/20% rate capital gain fits into the remaining space below the maximum zero rate amount ($78,750), so it is taxed at 0%. $153,250 × 15%. All of the remaining $153,250 ($178,000 - $24,750) of 0/15/20% capital gain is taxed at 15% because Ron and Anne’s taxable income (including the gains) is above the maximum zero rate amount ($78,750) and below the maximum 15-percent rate amount ($488,850).

$29,080

b. Given that Ron and Anne have taxable income of $400,000 (all ordinary) before considering the tax effect of their asset sales, what is their gross tax liability for 2019 assuming they file a joint return? Ron and Anne’s netting process is reflected in the following table:

Description Stock N Stock O Step 1: Antiques Unrecaptured §1250 Gain Remaining Gain from Rental Property Stock L Stock M Step 2: Steps 3(B): Go to step 6 Step 4 : Go to step 5 Step 5

Short-Term $ 8,000 $ (7,000) $ 1,000

Long-Term 28%

$

Long-Term 25%

3,000 $

$

1,000

$

Long-Term 0/15/20%

3,000

$

30,000

30,000

$ $ $ $

180,000 9,000 (11,000) 178,000

$

178,000

The netting process used to determine Ron and Anne’s gross tax liability for the year is unchanged from the process used in part a.

Ron and Anne’s ordinary income will increase from $400,000 to $401,000 due to their $1,000 net short-term capital gain. Ron and Anne’s gross tax liability of $130,501 is computed as follows:

Amount and Type Applicable of Income Rate $19,400; 10% $ ordinary

$59,550; ordinary

12%

$

$89,450; ordinary

22%

$

$153,050; ordinary

24%

$

$79,550; ordinary

32%

$

$87,850; 0/15/20% rate capital gains

15%

$

$90,150; 0/15/20% rate capital gains

20%

$

25%

$

28%

$

$30,000; 25% rate capital gains $3,000; 28% rate capital gains Gross tax liability

Tax Explanation 1,940 $19,400 × 10%. The first $19,400 of Ron and Anne’s $401,000 of ordinary income is taxed at 10% (see MFJ tax rate schedule for this and other computations). 7,146 $59,550 × 12%. The next $59,500 ($78,950 $19,400) of Ron and Anne’s $401,000 of ordinary income is taxed at 12%. 19,679 $89,450 × 22%. The next $89,450 ($168,400 $78,950) of Ron and Anne’s $401,000 of ordinary income is taxed at 22%. 36,732 The next $153,050 ($321,450 - $168,400) of Ron and Anne’s $401,000 of ordinary income is taxed at 24%. 25,456 The remaining $79,550 ($401,000 - $321,450) of Ron and Anne’s ordinary income is taxed at 32%. 13,178 $87,850 × 15%. $87,850 ($488,850 - $401,000 ordinary income) of 0/15/20% rate capital gain fits below the maximum 15-percent rate amount ($488,850), so it is taxed at 15%. 18,030 $90,150 × 20%. All of the remaining $90,150 ($178,000 - $87,850) of 0/15/20% capital gain pushes Ron and Anne’s taxable income above the maximum 15-percent rate amount ($488,850) so it is taxed at 20%. 7,500 $30,000 × 25%

840 $3,000 × 28%

$130,501

17. In 2019, Tom and Amanda Jackson (married filing jointly) have $200,000 of taxable income before considering the following events: (Use the dividends and capital gains tax rates and tax rate schedules.) a. On May 12, 2019, they sold a painting (art) for $110,000 that was inherited from Grandma on July 23, 2017. The fair market value on the date of Grandma’s death was $90,000 and Grandma’s adjusted basis of the painting was $25,000. b. They applied a long-term capital loss carryover from 2018 of $10,000. c. They recognized a $12,000 loss on the 11/1/2019 sale of bonds (acquired on 5/12/2009). d. They recognized a $4,000 gain on the 12/12/2019 sale of IBM stock (acquired on 2/5/2019). e. They recognized a $17,000 gain on the 10/17/2019 sale of rental property (the only §1231 transaction) of which $8,000 is reportable as gain subject to the 25 percent maximum rate and the remaining $9,000 is subject to the 0/15/20 percent maximum rates (the property was acquired on 8/2/2013). f. They recognized a $12,000 loss on the 12/20/2019 sale of bonds (acquired on 1/18/2019). g. They recognized a $7,000 gain on the 6/27/2019 sale of BH stock (acquired on 7/30/2010). h. They recognized an $11,000 loss on the 6/13/2019 sale of QuikCo stock (acquired on 3/20/2012).

i.

They received $500 of qualified dividends on 7/15/2019.

After completing the required capital gains netting procedures, what will be the Jacksons’ 2019 tax liability? ST LT 28% 25% 0/15/20% (d)$ 4,000 (a) $ 20,000 (e) $ 8,000 (c) $(12,000) (f) (12,000) (b) (10,000) (e) 9,000 (g) 7,000 (h) (11,000) (8,000)

(8,000) 8,000 $ 0

$ 10,000 (7,000)

$

8,000

$

$

8,000 (5,000) 3,000

3,000 (3,000) $ 0

$

$ (7,000) 7,000 $

0

$

0

2019 Taxable Income: Taxable Income before the events$200,000 Qual. Dividend 500 LTCG 25% 3,000 Taxable Inc $203,500

2019 Tax Liability: Ordinary Income:$28,765 + 24% × ($200,000 – $168,400)$36,349 Capital Gains:* + 24% × $3,000 25% gains 720 Dividends:** + 15% × $500 75 Total tax liability $37,144 *The 25% gains are taxed at the lower of the marginal tax rate (24%) or the 25% maximum rate. Since the Jackson’s have $121,450 ($321,450 - $200,000 ordinary income) remaining in the 24% bracket, the 25% gains are taxed at the lower marginal tax rate. **The qualified dividends are taxed at the 15 percent rate because taxable income fits between the maximum zero rate amount and the maximum 15-percent rate amount.

18. Christina, who is single, purchased 100 shares of Apple Inc. stock several years ago for $3,500. During her year-end tax planning, she decided to sell 50 shares of Apple for $1,500 on December 30. However, two weeks later, Apple introduced its latest iPhone, and she decided that she should buy the 50 shares (cost of $1,600) of Apple back before prices skyrocket. (Leave no answers blank. Enter zero if applicable.) a. What is Christina's deductible loss on the sale of 50 shares? What is her basis in the 50 new shares? Christina has engaged in a wash sale because she bought identical stock within 30 days of selling Apple stock. Therefore, her $250 ($1,500 less $1,750) loss is disallowed. The basis of Christina’s 50 shares of new Apple stock is $1,850 ($1,600 purchase price plus $250 of disallowed loss). b. Assume the same facts, except that Christina repurchased only 25 shares for $800. What is Christina’s deductible loss on the sale of 50 shares? What is her basis in the 25 new shares? Christina has engaged in a partial wash sale because she bought 25 shares of identical stock within 30 days of selling Apple stock. Therefore, she may deduct $125 or 50 percent of her $250 ($1,750 less $1,500) loss; the

remaining $125 is disallowed. The basis of Christina’s 25 shares of new stock is $925 ($800 purchase price plus $125 of disallowed loss). 20. On January 1 of year 1, Nick and Rachel Sutton purchased a parcel of undeveloped land as an investment. The purchase price of the land was $150,000. They paid for the property by making a down payment of $50,000 and borrowing $100,000 from the bank at an interest rate of 6 percent per year. At the end of the first year, the Suttons paid $6,000 of interest to the bank. During year 1, the Suttons’ only source of income was salary. On December 31 of year 2, the Suttons paid $6,000 of interest to the bank and sold the land for $210,000. They used $100,000 of the sale proceeds to pay off the $100,000 loan. The Suttons itemize deductions and are subject to a marginal ordinary income tax rate of 32 percent.

a. & b. Should the Suttons treat the capital gain from the land sale as investment income in year 2 in order to minimize their year 2 tax bill? If so, how much does this cost or save them in year 2?



No, this would cost the Suttons $4,800 in year 2. 

Yes, this would save the Suttons $1,800 in year 2. 

No, this would cost the Suttons $1,800 in year 2. 

Yes, this would save the Suttons $4,800 in year 2.

21.Rubio recently invest...