10 CHAPTER DEDUCTIONS AND LOSSES: CERTAIN ITEMIZED DEDUCTIONS SOLUTIONS TO PROBLEM MATERIALS
Question/ Problem 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 *24 25
Topic Effect of changes in AGI on medical expense deduction Definition of a medical expense Cosmetic surgery as a medical expense Nursing home expenses Timing of medical insurance reimbursement Medical expense qualifications Self-employed versus employee medical insurance Medical and casualty loss reimbursement Health savings account (HSA) Free medical care; medical expenses and divorce Apportionment of real estate tax Mortgage interest expense Home equity loan When ``points'' are deductible Deduction of interest on home equity loans Contribution to an individual and church Value received for contribution Charitable contribution: benefit received Timing of contribution Charitable contribution: various Timing of contribution Charitable contribution: various Charitable contribution: reduced deduction election Medical expense deduction and reimbursement Medical expenses: deduction and tax benefit rule 10-1
Status: Present Edition Unchanged Unchanged Unchanged Unchanged New New Unchanged Unchanged Unchanged Unchanged New Unchanged Unchanged Unchanged New New Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Modified Unchanged
Q/P in Prior Edition 1 2 3 4 7 8 9 10 12 13 14
17 18 19 20 21 22 23 24 25
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2008 Comprehensive Volume/Solutions Manual Status: Present Edition New Unchanged Modified Unchanged New Unchanged New Modified New Unchanged New Unchanged Unchanged Unchanged New Unchanged Unchanged Unchanged New Modified New New New Modified Modified 41 42 43 45 37 38 39 27 28 29 31 33 35 Q/P in Prior Edition
Question/ Problem 26 27 *28 29 30 31 32 33 *34 *35 36 37 38 39 40 41 42 43 *44 *45 *46 *47 *48 *49 *50 Research Problem 1 2 3
Topic Capital expenditures as medical expense deduction Self-employed health insurance Medical expense deduction: taxpayer and dependents Medical expenses: dependent and capital expenditures Health savings accounts Apportionment of real estate taxes: effect on basis and amount realized State income tax deduction and refund Investment interest expense: net investment income Investment interest expense Home equity loan: calculation of interest expense deduction Related party loans: interest deduction and inclusion Charitable contribution deduction: exception to tangible-benefit-received rule Stock donation: value of contribution Charitable contribution: reduced deduction election Application of percentage limitations to contribution of long-term capital gain property Charitable contribution: reduced deduction election Tangible benefit derived, year of charitable contribution deduction Choice of property for contribution Itemized deductions: joint vs. separate returns and overall limit on itemized deductions Overall limitation on certain itemized deductions Overall limitation on certain itemized deductions Overall limitation on certain itemized deductions Itemized deduction limitation Cumulative Cumulative
49 50
Interest deduction Timing of charitable contribution Internet activity
Unchanged New New
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*The solution to this problem is available on a transparency master.
Deductions and Losses: Certain Itemized Deductions CHECK FIGURES 24. 25.a. 25.b. 25.c. 26. 27. 28. 30.a. 30.b. 31. $2,200. $4,400. $2,600. $1,850. $9,000. $7,000 for AGI; $0 from AGI. $38,370. $5,600 for AGI ($3,000 + $2,600). $3,000 from AGI; $2,600 for AGI. $294,500 basis; $359,576 amount realized; $65,076 gain on sale; $9,576 property tax. $9,100. $1,800 income in 2008. Income in 2008. $0 income in 2008. Current deduction $20,400. Carryover $9,600. $100,000. $1,500 in 2007; $4,500 in 2008. $3,000 each in 2008. 37.a. 37.b. 38.a. 38.b. 38.c. 39. 40.a. 40.b. 41.a. 41.b. 41.d. 42.a. 42.b. 44. 45. 46. 47. 48. 49. 50.
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32.a. 32.b. 32.c. 32.d. 34.a. 34.b. 35. 36.a. 36.b.
$3,200. $2,880. $11,000. $19,000. $7,000. No. $210,000. Carryover for 5 years as 30% property. $54,000. $84,000. Make reduced deduction election. $660. No. Tax savings filing a joint return $139. $24,783 before; $21,483 after. $33,400 before; $31,782 after. $48,450 before; $44,460 after. $65,977. Refund due for 2006, $361. Refund due for 2007, $315.
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2008 Comprehensive Volume/Solutions Manual
DISCUSSION QUESTIONS 1. a. b. Yes. A traditional IRA deduction will decrease adjusted gross income, which is the base for determining the medical expense deduction (i.e., 7.5% AGI). Increase. A lower AGI will result in a smaller nondeductible amount of medical expenses and a larger medical expense deduction.
pp. 10-2 and 10-3 2. Roberta may include as medical expenses the medical insurance premiums, fees for the alcohol rehabilitation program, contact lenses, and the travel expenses to obtain treatment at Mayo Clinic in Minnesota. p. 10-3 and Exhibit 10-1 Cosmetic surgery is necessary (and therefore deductible) when it ameliorates (1) a deformity arising from a congenital abnormality, (2) a personal injury, or (3) a disfiguring disease. Expenses incurred in connection with the restorative surgery (required as a result of the accident) are deductible because the surgery was necessary. Amounts paid for the unnecessary cosmetic surgery (reshaping the chin) are not deductible as a medical expense. Examples 2 and 3 a. Because Frank is in need of significant medical and nursing care and is placed in the facility primarily for this purpose, all $36,000 of the nursing home cost is deductible (subject to the 7.5% floor). Frank provides less than half of his own support, so he can be claimed as a dependent by one of his sons under a multiple support agreement. To maximize the deduction for medical expenses, Frank's sons could agree that the son who claims Frank under the multiple support agreement pay a larger share of the medical expenses. If Frank is in the nursing home for a long period of time, his sons could alternate claiming him as a dependent.
3.
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b.
pp. 10-3 to 10-6 and Chapter 3 5. Brittany should consider the following tax issues:
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If she receives reimbursement in 2007, she must reduce her medical expense deduction by the amount of the reimbursement. If she receives reimbursement in 2008, she is not required to reduce her 2007 medical expense deduction by the amount of the anticipated reimbursement. If she receives the reimbursement in 2008 and deducted it in 2007, she must include the reimbursement in gross income to the extent she received a tax benefit from the medical expense deduction in 2007. She should consider her expected marginal tax rates for 2007 and 2008 and determine whether it is better to receive the reimbursement in 2007 or 2008.
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p. 10-7 and 10-8 6. A medical expense does not have to relate to a particular ailment to be deductible. The definition of medical care is broad enough to cover preventive measures. Consequently, the cost of periodic physical and dental exams qualifies even though the taxpayer is in good health. Also, the cost of the treatment to stop smoking can be included in medical
Deductions and Losses: Certain Itemized Deductions
10-5
expenses. Costs incurred in a weight loss program related to obesity may be includible in medical expenses if within the IRS guideline. pp. 10-3, 10-4, and Exhibit 10-1 7. David, who is self-employed, may deduct 100% of the premium of $7,500 as a deduction for AGI. Joan, who is an employee, may include the premiums of $8,000 she paid in computing her itemized deduction for medical expenses (subject to the 7.5% floor). Example 10 Arturo, a calendar year taxpayer, paid $16,000 in medical expenses in 2007. Even if he expects $12,000 of these expenses to be reimbursed by an insurance company in 2008, he can include all $16,000 of the expenses in determining his medical expense deduction for 2007. He is not required to consider the potential reimbursement in computing his medical expense deduction for 2007. Casualty losses must be reduced if there is an expectation of reimbursement. Therefore, Arturo's starting point in computing the casualty loss deduction is $6,000 ($20,000 loss $14,000 expected reimbursement). Further reductions are required for the $100 floor and the 10% of AGI floor. pp. 10-7 and 10-8 9. A Health Savings Account (HSA) plan requires a high-deductible medical insurance policy, which means that the premiums on the policy will be less. The contributions to the HSA are deductible for AGI, which reduces the nondeductible amount of itemized deductions subject to certain limitations, and the taxpayer does not have to itemize to obtain the deduction. If the HSA distributions are used to pay for the deductible medical expenses, they are not included in gross income. Also, the interest earned on the HSA is not included in gross income if it is used to pay medical expenses not covered by the high-deductible plan. pp. 10-8 to 10-10 10. Ahmad should be concerned with the following tax issues:
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Is the value of the certificate includible in gross income in 2006, even though it appeared at that time that Ahmad would not have any need for the operation? If Ahmad uses the certificate for his daughter, is the prize includible in gross income in 2007? If Ahmad pays for the prescription glasses for his daughter, can he take a medical expense deduction? If Ahmad uses the certificate for an operation for his daughter, can he take a medical expense deduction? If so, what is his basis in the certificate and what is the amount of his medical expense deduction?
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pp. 10-2 to 10-7 and Chapter 4 11. a. Even though Diego paid all the real property taxes for 2007, they must be prorated for deduction purposes between the buyer and the seller. Diego can deduct property taxes for the period he owned the property (January 1 through June 30). Dinah can deduct property taxes related to the period she owned the property (July 1 through December 31), even though she did not actually pay the taxes. Diego will treat the taxes he paid on Dinah's behalf as a reduction of the amount realized on the sale. Dinah must treat this amount as a reduction in her basis for the property.
b. c.
pp. 10-12, 10-13, and Example 19
10-6 12.
2008 Comprehensive Volume/Solutions Manual Julia can deduct mortgage interest on her principal residence and one of the two other residences. She should choose the one that will result in the highest interest deduction. Her deduction is limited to interest on up to (1) $1,000,000 of acquisition indebtedness, and (2) $100,000 of home equity indebtedness. Julia should consider consolidating the three mortgages into two if possible. p. 10-16 There are many nontax issues (financial, investment, and personal) involved in the Wolfs' decision, but this discussion will be limited to the tax issues. Interest on the home equity loan will be fully deductible, partly as home equity interest and partly as business expense (related to business use of the car). Interest on the conventional loan will be deductible only to the extent the car is used for business purposes. The tax issue related to a possible sale of Bluebird stock concerns deductibility of the loss that will be incurred on the sale. If the Wolfs have capital gains in excess of the loss, the entire loss can be offset against the gains. If they have no capital gains, they will be limited to a capital loss deduction of $3,000 in the year of sale, with excess capital losses being carried forward. It will also be necessary to determine whether the loss is long term or short term. There will also be tax issues related to depreciation on the car, but those issues are independent of the source of funding for the purchase. pp. 10-13 to 10-16 and Chapter 3
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Points paid by a seller are treated as an adjustment to the selling price of the residence. The buyer is treated as having used cash to pay the points that were paid by the seller. The buyer may deduct the points if several conditions are met. These conditions are specified in Rev. Proc. 94-27, which is cited in footnote 31. p. 10-18 Yes. Home equity loans utilize a qualified residence of the taxpayer as security. The proceeds from these loans can be used for personal purposes such as purchasing a personal use automobile. The interest paid on the qualified residence loan is deductible (subject to a statutory ceiling) as an itemized deduction on Schedule A while the interest paid on consumer loans is not deductible. p. 10-16 Contributions are deductible only if made to a qualified charitable organization. The family would not qualify as a charitable organization, so Betty's contribution will not be deductible. The church probably would be a qualified charitable organization. If so, Jack's contribution will be deductible. p. 10-21 The Orange Corporation stock is a capital asset. Paula's deduction for the stock contribution will be determined by the fair market value if she has held the stock for the long-term holding period. Otherwise, it will be determined by the basis (i.e., assuming the FMV is at least equal to the basis). Inventory is ordinary income property, so Paula's deduction will be determined by her basis in the tables and chairs. pp. 10-23 and 10-24 Nancy should consider the following tax issues if she acquires the notebook computer under the conditions specified:
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Can she take a charitable contribution deduction for the $1,000 donation to the university? To the extent the taxpayer receives a benefit from a contribution, the charitable contribution deduction is not allowed. Nancy would be the sole user of the computer and would receive a personal benefit from the contribution. Will she be allowed to take a depreciation deduction for the business use of the computer? If Nancy contributes $1,000 to the university, the university owns the computer. Therefore, she is not entitled to a depreciation deduction.
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Deductions and Losses: Certain Itemized Deductions
10-7
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Is Nancy required to report income as a result of her personal use of the computer? Nancy should report income to the extent of the value of the computer usage for personal use. It does not appear that the de minimis fringe benefit rule would allow an exclusion from gross income. What could Nancy do to avoid the negative tax consequences discussed above? Nancy could purchase a computer for $2,500. She could take a depreciation deduction for the business use (limited by the listed property rules), and would not be required to report income from personal use of the computer.
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pp. 10-20 and 10-21 19. Harry is attempting to accelerate his charitable contribution deduction into 2007. There are several potential advantages to accelerating the deduction by donating the land in 2007.
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His contribution will be deducted in a tax year when his combined Federal/state marginal tax rate is 40% (2007) rather than 30% (2008). He might avoid disallowance of part of the deduction due to AGI percentage limitations because his contribution base will be higher in 2007 than in 2008. He can deduct the fair market value of the land without recognizing the $80,000 appreciation as income. He can step up his basis in the land from $20,000 to $100,000 when he reacquires it in 2008.
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20.
The following issues relate to the assets Zina sold:
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Should the $500 sales receipts be reported on her tax return? What was her basis for the assets she sold? Did she have a gain or loss on the sale? Were the assets used for personal use, trade or business, or production of income? Were the assets capital assets or ordinary income assets? If she sold capital assets, were they held short term or long term?
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The following issues relate to the assets Zina donated:
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Does she plan to itemize deductions? Which organizations were recipients of the donated items? Were the organizations qualified charitable organizations? What types of assets did she donate, ordinary income assets or capital gain assets? What was her basis for the assets she donated? What was the fair market value of the assets she donated? How did she determine the fair market value of the items?
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2008 Comprehensive Volume/Solutions Manual Does she have adequate documentation to qualify for a deduction? Were the household items and used clothing in ``good used condition or better''?
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pp. 10-20 to 10-25 21. William should donate the $100,000 in the year he receives the $1 million won in the state lottery. Donations to a qualified public charity (his church) are limited to 50% of adjusted gross income (AGI). His AGI in the year of receipt would be ample to take the entire contribution as a deduction in that year. If he donates the $100,000 in a tax year when he only has his $40,000 salary plus or minus other income and adjustments on page one of Form 1040, his donation will be limited to $20,000 (50% $40,000) plus or minus 50% of other income and adjustments on page one of Form 1040. William would be allowed to carry forward for five years the excess contribution not taken in the year of contribution subject to the limitations. pp. 10-25 and 10-26 The following tax issues relate to prizes won in the Skins Game:
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Are the prizes won (monetary and nonmonetary) included in gross income? Should the golfers report only 80% of the total amount of money winnings as income and claim no deduction for the amount that goes to charity? Should the golfers report the total amount of money winnings as income and deduct the 20% that goes to charity as a charitable contribution? If so, is the deduction a business expense or an itemized deduction? What amount should be reported as income for the automobile won by the leading money winner--the sticker price, the average selling price, or some other amount? If the average selling price is the appropriate amount to report as income, how should it be determined?
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pp. 10-20 to 10-23 and Chapter 4 The following questions relate to material covered in later chapters:
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If the leading money winner already has an automobile and doesn't need the new one, what will be the tax result when the golfer sells the automobile won as a prize? What is the golfer's basis in the automobile won as a prize? What kind of gain (loss) would result? If a loss results, is it deductible? Chapters 13 and 14 If the leading money winner keeps the automobile won as a prize and sells the automobile he or she had been using previously, what will be the tax result when the old automobile is sold? What kind of gain (loss) would result? If a loss results, is it deductible? Chapters 13 and 14 What will be the tax result if the leading money winner gives the new automobile to a friend or relative? Chapter 13 What will be the tax result if the leading money winner gives the new automobile to a charity? Chapter 13 What will be the tax result if the leading money winner gives the new automobile to his or her caddy, who is an employee? Chapter 13
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General discussion. The stock is appreciated long-term capital gain property. The general rule limits the deduction for the contribution of such property to 30% of AGI. However,
Deductions and Losses: Certain Itemized Deductions
10-9
under the reduced deduction election, a taxpayer may choose to forgo a deduction of the appreciation on capital gain property. This enables the taxpayer to move from the 30% limitation to a 50% limitation. a. Colin can deduct a total of $105,000, the fair market value of the stock. The deduction for 2007 is limited to $54,000 (30% of $180,000 AGI). The remaining $51,000 ($105,000 $54,000) can be carried forward and deducted in the future, subject to the same percentage limitations. If Colin makes the reduced deduction election, he can deduct $84,000 (adjusted basis) in 2007, but he will forgo a deduction for the $21,000 appreciation ($105,000 FMV $84,000 adjusted basis). Although the reduced deduction election appears attractive, it should be considered carefully. The election sacrifices a deduction for the appreciation on long-term capital gain property that might eventually be allowed. Colin should do a time value analysis to compare the value of a deduction of $84,000 in 2007 versus the value of a $54,000 deduction in 2007 plus $51,000 of deductions to be carried over to future years. If Colin dies in December 2007, his executor should make the reduced deduction election, which would yield a charitable contribution deduction of $84,000. If the election is not made, the deduction will be $54,000 (30% of $180,000) and the $51,000 carryover will be lost because the 2007 return will be the final return for Colin.
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pp. 10-23 to 10-27 and Example 36 PROBLEMS 24. Derek and Cynthia can claim a medical expense deduction for the current year of $2,200, determined as follows: Physician bills, dentist bills, and hospital expenses Less: Reimbursement Unreimbursed expenses Health insurance premiums Prescribed medicines and drugs Total medical expenses Less: 7.5% of $100,000 (AGI) Deductible medical expenses $ 6,900 (2,500) $ 4,400 3,000 2,300 $ 9,700 (7,500) $ 2,200
The contribution of $2,400 to the HSA is a deduction for AGI, and is not included in the medical expense calculation. pp. 10-2, 10-3, 10-8 to 10-10, and Examples 12 and 15 25. a. Andy can claim medical expenses he paid for his child, Jodi, even though his former wife is the custodial parent. His deduction for medical expenses in 2007 is computed as follows: Hospitalization Bills for doctor's services Medical expenses for Jodi Total Less: 7.5% of $80,000 AGI Medical expense deduction (assuming Andy itemizes his deductions) $ 5,200 2,800 2,400 $10,400 (6,000) $ 4,400
10-10 b.
2008 Comprehensive Volume/Solutions Manual If the reimbursement for medical care had occurred in 2007, the medical expense deduction would have been only $1,800 [$10,400 (total medical expenses) $2,600 (reimbursement) $6,000 (floor)], and Andy would have paid more income tax. Since the reimbursement was made in a subsequent year, Andy would include $2,600 in gross income for 2008. If Andy had not itemized in 2007, he would not include the $2,600 reimbursement in 2008 gross income because he would have received no tax benefit in 2007. Andy's deduction for medical expenses in 2007 would have been $4,400 (see computation in part a.). He would include the reimbursement in gross income to the extent of his $2,150 tax benefit, as computed below: Other itemized deductions Medical expenses in excess of 7.5% floor Total itemized deductions Standard deduction for head of household in 2007 Tax benefit from medical expense deduction pp. 10-7 and 10-8 $ 5,300 4,400 $ 9,700 (7,850) $ 1,850
c.
26.
Only $6,300 of the cost of the system qualifies since $2,500 of the $8,800 cost of the dust elimination system increased the value of Roberto's residence. The total medical expense is $9,000 ($6,300 + $350 additional operating costs + $1,600 doctor and hospital bills + $750 prescriptions). The $220 appraisal fee is deductible as a miscellaneous itemized deduction, but not as a medical expense. Therefore, Roberto's medical expense deduction is $5,250 [$9,000 (.075 $50,000 AGI)]. Example 6 Self-employed persons can deduct 100% of their medical insurance premiums as a deduction for AGI in 2007. Thus, Jean may deduct $7,000 as a deduction for AGI. p. 10-7 The charges for tuition, room, and board paid to Red River Academy qualify because Beth receives specialized psychiatric treatment. Example 5 Although Ed does not qualify as Susan's dependent, he qualifies as a dependent for medical expense purposes. All of the costs paid for Ed at Heartland Nursing Home are deductible because the primary reason he is there is to receive medical care. p. 10-3 and Exhibit 10-1 Prescription drugs and insulin are deductible, but nonprescription drugs are not. Only $4,300 of the filtration system qualifies since $2,200 of the $6,500 cost increased the value of Susan's residence. The $400 increase in utility bills also is a medical expense. The appraisal fee of $275 is an itemized deduction but is not deductible as a medical expense. Example 6 Deductible medical expenses are summarized below: Surgery for Beth Red River Academy charges for Beth: Tuition Room, board, and other expenses Psychiatric treatment Doctor bills for Ed Prescription drugs for Susan, Beth, and Ed Insulin for Ed $ 7,200 4,400 4,100 4,500 1,800 890 430
27. 28.
Deductions and Losses: Certain Itemized Deductions Charges at Heartland Nursing Home for Ed: Medical care Lodging Meals Deductible cost for filtration system ($6,500 $2,200) Increase in utility bills due to the system Total medical expenses (prior to the 7.5% floor) 29. The following tax issues are suggested by the facts presented:
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$ 4,000 3,700 2,650 4,300 400 $38,370
Can Rebecca claim Susan as a dependent? Can Rebecca take a medical expense deduction for the remodeling expenditures? Can Rebecca take a medical expense deduction for the swimming pool expenditures? Can Rebecca take a medical expense deduction for the cost of Susan's operation? Can Susan take a medical expense deduction for the specially equipped van and the costs of operating it? Can Rebecca take a medical expense deduction for the traveling expenses (transportation, highway tolls, meals, and lodging)? Can Rebecca deduct the medical expenses incurred for Susan if Susan does not qualify as her dependent?
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The following questions should be asked to resolve some of the issues listed above:
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Did Rebecca provide more than half of Susan's support? This will determine whether Rebecca can deduct Susan's medical expenses. In addition, Rebecca may be able to claim head of household filing status if Susan lived with her for more than half the year. Are the remodeling expenses necessary in order to enable Susan to live independently? If so, the expenses are included in medical expenses subject to the 7.5% floor. Is the travel to Denver necessary in order for Susan to receive proper medical treatment? If it is, the travel expenses are included in medical expenses subject to the 7.5% floor. How much expense did Rebecca incur for lodging? The deduction is limited to $50 per night per person.
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pp. 10-3 to 10-7 and Chapter 3 30. a. Because Vaughn is self-employed, he can deduct the $3,000 paid for the highdeductible policy as a deduction for AGI (refer to Example 10). In addition, he may deduct the $2,600 paid to the HSA as a deduction for AGI. Thus, Vaughn may deduct $5,600 ($3,000 + $2,600) for AGI. The $3,000 paid for the high-deductible policy is included with other medical expenses subject to the 7.5% floor. The $2,600 paid to the HSA is a deduction for AGI.
b.
pp. 10-8 to 10-10
10-12 31.
2008 Comprehensive Volume/Solutions Manual Discussion. In 1999, Victor paid $5,500 of real estate taxes attributable to the period Angela owned the residence. Angela would have been entitled to an itemized deduction of $5,500 in 1999 if she itemized. In effect, she paid only $294,500 for the residence ($300,000 $5,500 tax paid by Victor on her behalf). This is the amount of Angela's basis for her personal residence. In 2007, Angela sold the residence for $350,000, but Earl also paid $9,576 of real estate taxes attributable to the time Angela owned the residence. In effect, Angela received $359,576 in the transaction ($350,000 for the residence + $9,576 property tax attributable to Angela but paid by Earl). Angela is entitled to a property tax deduction of $9,576 if she itemizes in 2007. Examples 18 and 19 Angela's realized gain on the sale of her personal residence is $65,076 ($359,576 amount realized $294,500 basis). Letter Willis, Hoffman, Maloney, and Raabe, CPAs 5191 Natorp Boulevard Mason, OH 45040 January 11, 2008 Ms. Angela Henson 17250 Calistoga Drive El Dorado, Kansas 67042 Dear Ms. Henson: I have determined the answers to your questions relating to the sale of your personal residence on December 8, 2007. My answers are based on the information you provided in our meeting on January 4, 2008. Your basis in the residence was $294,500 ($300,000 $5,500 tax attributable to you but paid by Victor). The amount you realized on the sale was $359,576 ($350,000 for the residence + $9,576 property tax attributable to you but paid by Earl). Therefore, your realized gain on the sale was $65,076 ($359,576 amount realized $294,500 basis). If you itemize for 2007, you will be entitled to a property tax deduction of $9,576. Please contact me if you have questions. Thank you for this opportunity to be of service. Sincerely, Tanesha Smith, CPA
32.
General discussion. Cash basis taxpayers deduct state income taxes in the year paid, regardless of the year to which the payment relates, and include refunds as income in the year received (subject to the tax benefit rule). p. 10-13 a. b. c. d. $9,100 ($1,000 + $7,400 + $700). Dorian will have income of $1,800 in 2008 because the tax benefit rule applies. It will be treated as income in 2008. It's treated as if she received the payment and then made a payment to the state. $0 will be included as income in 2008 because she did not receive a tax benefit in 2007.
p. 10-13
Deductions and Losses: Certain Itemized Deductions 33. Willis, Hoffman, Maloney, and Raabe, CPAs 5191 Natorp Boulevard Mason, OH 45040 February 20, 2008 Ms. Amber Stanley 1222 N. Caledonia Drive Delray Beach, FL 33448 Dear Ms. Stanley:
10-13
In our recent meeting, you asked me to determine the amount of your investment interest deduction for 2007. The amount of your deduction will depend on choices that you make with regard to the treatment of the $14,300 net capital gain on the sale of securities and the $5,900 of qualified dividends. The deduction for investment interest is limited to the amount of investment income that you report. If you choose not to treat the net capital gain and qualified dividends as investment income for purposes of computing the investment interest expense limitation, your deduction will be $7,800 ($7,800 interest). However, if you elect to treat the net capital gain and qualified dividends as investment income for purposes of computing the investment interest expense limitation, your deduction will be $28,000 ($7,800 interest + $5,900 dividends + $14,300 net capital gain). The maximum tax rate applicable to net capital gain and qualified dividend income is 15%. Other income may be subject to rates as high as 35%. If you elect to include the capital gains and qualified dividends as investment income, your $14,300 net capital gain and $5,900 of qualified dividends will not qualify for the beneficial tax rate of 15%. Therefore, you must decide between the tax benefit of an additional deduction of $20,200 ($5,900 + $14,300) versus the benefit of the reduced rates applicable to net capital gain and qualified dividends. Due to the complexities of the capital gain provisions, I will need to meet with you again to obtain additional information in order to advise you about the election that is available. Please call me at [phone] to schedule an appointment. Thank you for consulting my firm on this matter. We look forward to serving you in the future. Sincerely, Mary Jones, CPA Partner pp. 10-14 and 10-15
10-14 34. a.
2008 Comprehensive Volume/Solutions Manual Helen's investment interest deduction is limited to net investment income, which is computed as follows: Income from investments Less: Investment expenses* Net investment income * $21,150 (750) $20,400
*Because Helen has no other miscellaneous itemized deductions, the deductible investment expenses are the smaller of (1) $2,250, the amount of investment expenses included in the total of miscellaneous itemized deductions subject to the 2% of AGI floor, or (2) $750, the amount of miscellaneous expenses deductible after the 2% of AGI floor is applied [$2,250 $1,500 (2% of $75,000)]. Helen's investment interest expense deduction in 2007 would be limited to $20,400, the amount of net investment income. The balance of $9,600 would be disallowed in 2007. Total investment interest expense Less: Net investment income Investment interest disallowed in 2007 $ 30,000 (20,400) $ 9,600
b.
The $9,600 of investment interest disallowed may be carried over and becomes investment interest expense in the subsequent year subject to the net investment income limitation in 2008. Helen could increase her investment interest deduction by electing to treat the LTCG of $8,250 as investment income. The amount so elected would not be available for beneficial alternative tax rate treatment for net capital gain, however.
pp. 10-14 and 10-15 35. Interest is deductible only on the portion of a home equity loan that does not exceed the lesser of:
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The fair market value of the residence, reduced by the acquisition indebtedness ($440,000 FMV $140,000 acquisition indebtedness = $300,000). $100,000 ($50,000 for married persons filing separate returns).
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Roland can deduct all of the interest on the first mortgage since it is acquisition indebtedness. Of the $220,000 home equity loan, interest on $100,000 is deductible as home equity interest. Examples 25 and 26 36. a. Magpie Corporation can deduct interest expense of $1,500 in 2007. No interest deduction is permitted in 2007 for interest accrued to Joe because he is a related party (60% shareholder). Under 267, Joe is regarded as related to the corporation. Consequently, the deductibility of the $3,000 to him must await actual payment in 2008. So the remaining interest of $4,500 is deducted in 2008. The $3,000 interest paid to Bill is deductible by Magpie in 2007 and 2008 and is included in his gross income in 2008. Because Bill uses the cash method of accounting, the interest income is not taxed until received in 2008. The $3,000 paid to Joe in 2008 is included in his gross income in 2008.
b.
p. 10-18 and Chapter 6
Deductions and Losses: Certain Itemized Deductions 37.
10-15
Generally, when a donor derives a tangible benefit from a contribution, he or she cannot deduct the value of the benefit. An exception to this benefit rule provides for the deduction of 80% of the amount paid for the right to purchase athletic tickets from colleges and universities. Example 30 a. Under the exception to the benefit rule, Nadia is allowed a $3,200 (80% of $4,000) charitable contribution deduction for the taxable year. None of the $400 paid for game tickets can be deducted. Nadia cannot deduct the $400 portion of the $4,000 that applies to the tickets ($100 4). She is allowed a charitable contribution deduction of $2,880, which is equal to 80% of the $3,600 remainder.
b.
38.
General discussion. The deduction for a contribution of long-term capital gain property is based on the fair market value, while the deduction for a contribution of ordinary income property is equal to the lesser of the adjusted basis or the fair market value. a. Because Becky did not hold the stock for the long-term holding period (December 4, 2006 until July 5, 2007), it is short-term capital gain property that is subject to the rules for ordinary income property. Therefore, her deduction is limited to $11,000. Becky held the stock for the holding long-term period (July 1, 2004, until July 5, 2007); so it is long-term capital gain property. Therefore, her deduction is equal to the fair market value of the stock, $19,000. The deduction for a contribution of loss property (FMV is less than adjusted basis) is limited to the fair market value. Therefore, Becky's deduction is $7,000. Example 32 and related discussion
b.
c.
pp. 10-24 and 10-25 39. Willis, Hoffman, Maloney, and Raabe, CPAs 5191 Natorp Boulevard Mason, OH 45040 December 5, 2007 Mr. Pedro Valdez 1289 Greenway Avenue Foster City, CA 94404 Dear Mr. Valdez: I have evaluated the two alternatives for your charitable contribution deduction. Your potential deduction is $130,000, the fair market value of the painting. It is not reduced by the unrealized appreciation since the painting was assumed to be put to a related use by the museum and the holding period is long-term. Your 2007 charitable contribution deduction is limited to $75,000 (30% $250,000 AGI) if you do not make the reduced deduction election. The remaining $55,000 ($130,000 FMV $75,000 deduction) can be carried forward for five years. If you make the reduced deduction election, you can deduct $90,000 (adjusted basis of the painting) in 2007, because the amount is less than the maximum potential deduction of $125,000 (50% $250,000 AGI). However, if you make the election, you must forgo deducting the $40,000 appreciation on the painting ($130,000 FMV $90,000 adjusted
10-16
2008 Comprehensive Volume/Solutions Manual basis). Based on the facts presented, it does not appear that you should make the reduced deduction election. You would be forgoing an additional deduction of $40,000 in order to increase your 2007 deduction from $75,000 to $90,000. You should plan your contributions carefully over the next five years so that you do not lose any of the $55,000 carryover. I will be pleased to discuss my recommendation in further detail if you wish. Please call me at [phone] if you have any questions. Thank you for consulting my firm on this matter. We look forward to serving you in the future. Sincerely, Carol Eckert, CPA Partner pp. 10-23 to 10-27
40.
a.
No reduction for the appreciation on the Seagull, Inc. stock is necessary because, if sold, it would yield a long-term capital gain. Thus, Ricardo's potential charitable contribution deduction is $250,000 [$110,000 (cash) + $140,000 (fair market value of Seagull, Inc. stock)], but his allowable charitable contribution deduction for the year is limited to $210,000 (50% of $420,000 AGI). Although the 30% of AGI limitation applies to long-term capital gain property, which would result in a current deduction for the Seagull, Inc. stock of $126,000 (30% of $420,000 AGI), the overall 50% of AGI limitation applies to limit the deduction to $100,000. When the contributions for the tax year involve both 50% property (the cash of $110,000 in this case) and 30% property (the Seagull, Inc. stock), the allowable deduction comes first from the 50% property. Therefore, Ricardo's allowable deduction of $210,000 for the current year consists of: Cash Seagull stock [overall limitation of $210,000 (50% of AGI) $110,000 (cash)] $110,000 100,000 $210,000
pp. 10-23 to 10-27 and Example 35 b. The unused portion of the Seagull stock contribution of $40,000 [$140,000 (fair market value) $100,000 (portion used)] may be carried over for five years. The carryover continues to be classified as 30% property in the carryover years. p. 10-27 If Ricardo plans his charitable deductions wisely, sooner or later he will be able to deduct the full $140,000 fair market value of the stock. 41. General discussion. The stock is appreciated long-term capital gain property. The general rule limits the deduction for the contribution of such property to 30% of AGI. However, under the reduced deduction election, a taxpayer may choose to forgo a deduction of the appreciation on capital gain property. This enables the taxpayer to move from the 30% limitation to a 50% limitation. a. Ramon's value for the contribution is $105,000, the fair market value of the stock. The deduction for 2007 is limited to $54,000 (30% of $180,000 AGI). The remaining $51,000 ($105,000 $54,000) can be carried forward and deducted in the future, subject to the same percentage limitations.
Deductions and Losses: Certain Itemized Deductions b.
10-17
If Ramon makes the reduced deduction election, he can deduct $84,000 in 2007, but he will forgo a deduction for the $21,000 appreciation ($105,000 FMV $84,000 adjusted basis). Although the reduced deduction election appears attractive, it should be considered carefully. The election sacrifices a deduction for the appreciation on long-term capital gain property that might eventually be allowed. Ramon should do a time value analysis to compare the value of a deduction of $84,000 in 2007 versus the value of a $54,000 deduction in 2007 plus $51,000 of deductions to be carried over to future years. If Ramon dies in December 2007, his executor should make the reduced deduction election, which would yield a charitable contribution deduction of $84,000. If the election is not made, the deduction will be $54,000 (30% of $180,000) and the $51,000 carryover will be lost because the 2007 return will be the final return for Ramon.
c.
d.
pp. 10-24 to 10-27 and Example 36 42. a. Based on these facts, Roberta can deduct $660 as a charitable contribution for 2007. The deduction is based on the difference between the purchase price of the four tickets (4 $200) and their fair market value (4 $35). Giving the tickets to the minister is of no tax consequence, because the minister is not a qualified charity. p. 10-20 The pledge to the building fund of the church yields no deduction for 2007. In this regard, it makes no difference whether Roberta uses the cash or the accrual method of accounting for tax purposes. Except for limited exceptions involving accrual basis corporations and fiduciary entities, charitable donations are deductible only in the year in which they are paid. Had the check that satisfied the pledge been mailed on December 31, 2007, Roberta could have claimed a deduction for 2007. As the situation is described, however, the $4,000 deduction relates to 2008. p. 10-22 Willis, Hoffman, Maloney, and Raabe, CPAs 5191 Natorp Boulevard Mason, OH 45040 December 5, 2007 Ms. Alice Young 2622 Bayshore Drive Berkeley, CA 94709 Dear Ms. Young: I have evaluated the proposed alternatives for your 2007 year-end contribution to the United Way. I recommend that you sell the Gold Corporation stock and donate the proceeds to the United Way. The four alternatives are discussed below. Donation of cash, the unimproved land, or the Gold stock will each result in a $21,000 charitable contribution deduction. Donation of the Blue Corporation stock will result only in a $3,000 charitable contribution deduction. A direct contribution of the Gold Corporation stock will be a bad move taxwise in that the decline in value of $5,000 ($21,000 $26,000) is not deductible and the amount of the
b.
43.
10-18
2008 Comprehensive Volume/Solutions Manual charitable contribution would be $21,000. However, you will benefit in two ways if you sell the Gold stock and give the $21,000 in proceeds to the United Way. Donation of the proceeds will result in a $21,000 charitable contribution deduction. In addition, sale of the stock will result in a $5,000 long-term capital loss. If you have capital gains of $2,000 or more in 2007, you could use the entire loss in computing taxable income for 2007. If you have no capital gains in 2007, you can deduct $3,000 of the capital loss in 2007 and carry the remaining $2,000 over to 2008. You should make the donation in time for ownership to change hands before the end of the year. Therefore, I recommend that you notify your broker immediately so there will be no problem in completing the donation on a timely basis. I will be pleased to discuss my recommendation in further detail if you wish. Please call me at [phone] if you have questions. Thank you for consulting my firm on this matter. We look forward to serving you in the future. Sincerely, Nora Oldham, CPA Partner Example 44
44.
Willis, Hoffman, Maloney, and Raabe, CPAs 5191 Natorp Boulevard Mason, OH 45040 January 20, 2008 Mr. and Mrs. Bart Parker 2003 Highland Drive Pacific, MO 63069 Dear Mr. and Mrs. Parker: I have reviewed the tax information you provided and have determined that you will save $139 in Federal income tax if you file a joint return for 2007. A detailed computation that supports my conclusion is enclosed. I will be pleased to discuss my recommendation in further detail if you wish. Please call me at 555-9999 if you have questions. Thank you for consulting my firm on this matter. We look forward to serving you in the future. Sincerely, Rodney Rodriguez, CPA Partner Bart and Tara Parker Comparison of Joint and Separate Tax Liabilities Tax Year 2007 Separate and joint tax liabilities for 2007 are computed as shown below. These computations are based on all information provided by Bart and Tara Parker.
Deductions and Losses: Certain Itemized Deductions
10-19
Bart Salary Business net income Interest income** Gross income Deductions for AGI AGI Medical expenses after 7.5% floor State income tax Real estate tax Mortgage interest Unreimbursed employee expenses after 2% floor Total itemized deductions Limited to Exemptions Total deductions from AGI Taxable income Tax Savings filing jointly: Tax filing separately ($2,868 + $19,557) Tax filing jointly Savings *Itemized deduction limitation: AGI Minus threshold $ 38,000 1,500 $ 39,500 (2,400) $ 37,100 $ 6,717 800 1,900 2,100 458 $ 11,975 3,400 ($ 15,375) $ 21,725 $ 2,868
Tara $110,000 2,300 $112,300 (14,000) $ 98,300 0 1,800 1,900 2,100 0 $ 5,800 5,398* 3,400 ($ 8,798) $ 89,502 $ 19,557 $
Joint $ 38,000 110,000 3,800 $151,800 (16,400) $135,400 245 2,600 3,800 4,200 0 $ 10,845 6,800 ($ 17,645) $117,755 $ 22,286 $ 22,425 (22,286) $ 139 $
Reduction (before phaseout) $603 2/3 (phaseout rate for 2007) Total itemized deductions Reduction Deductible amount **Interest income: Bart's interest Tara's interest Their joint interest Bart $ 400 1,100 $1,500
$ 98,300 (78,200) $ 20,100 .03 3.2 $ 603 $ 402
$ 5,800 (402) $ 5,398
Tara $1,200 1,100 $2,300
pp. 10-29 to 10-31
10-20 45.
2008 Comprehensive Volume/Solutions Manual Sergio's itemized deductions before the overall limitation are computed as follows: Medical expenses [$25,443 (7.5% $321,400)] State and local income taxes Real estate taxes Home mortgage interest Charitable contributions Casualty loss [$38,590 (10% $321,400)] Unreimbursed employee expenses [$7,218 (2% $321,400)] Total itemized deductions before overall limitation Sergio's itemized deductions subject to the overall limitation are as follows: Itemized deductions subject to overall limitation: State and local income taxes Real estate taxes Home mortgage interest Charitable contributions Unreimbursed employee expenses Total Sergio must reduce this amount by the smaller of the following: Step 1 3%($321,400 AGI $156,400) 80% of itemized deductions subject to limitation ($16,995 80%) Step 2 $4,950 2=3 $ 4,550 4,025 4,150 3,480 790 $16,995 $ 1,338 4,550 4,025 4,150 3,480 6,450 790 $24,783
$ 4,950 13,596
$ 3,300
Therefore, the amount of the reduction is $3,300 and Sergio has $21,483 of deductible itemized deductions, computed as follows: Deductible itemized deductions subject to overall limitation ($16,995 $3,300) Itemized deductions not subject to overall limitation: Medical expenses Casualty loss Deductible itemized deductions
$13,695 1,338 6,450 $21,483
Sergio would deduct state and local income taxes rather than state sales tax. Credit card interest is not deductible. Example 38 46. Jose and Juanita have AGI of $237,300 for 2007, which will trigger the 3% floor that applies to high income taxpayers. Their itemized deductions before applying the 3% floor are computed as follows:
Deductions and Losses: Certain Itemized Deductions
10-21
State and local income taxes Real estate taxes Home mortgage interest Charitable contributions Gambling losses ($6,600 loss limited to $4,200 of gambling income) Total itemized deductions before overall limitation
$ 5,600 7,900 8,400 7,300 4,200 $33,400
Their itemized deductions after application of the overall limitation are computed below: Itemized deductions subject to overall limitations [$33,400 $4,200 gambling losses (from above)]: Reduction equals the smaller of the following: 3% ($237,300 AGI $156,400) 80% of itemized deductions subject to limitation ($29,200 80%) Amount of reduction ($2,427 2/3) Deductible itemized deductions after overall limitation Itemized deductions not subject to overall limitation: Gambling losses Total allowable itemized deductions pp. 10-29, 10-31, and Example 38 47. Phil's itemized deductions before the overall limitations are computed below: Medical expenses [$36,443 (7.5% $355,900)] State and local income taxes Real estate taxes Home mortgage interest Charitable contributions Casualty loss [$44,589 (10% $355,900)] Unreimbursed employee expenses [$8,318 (2% $355,900)] Gambling losses ($7,900 loss limited to $6,800 of gambling income) Total itemized deductions before overall limitation $ 9,751 5,636 4,950 5,849 5,265 8,999 1,200 6,800 $48,450 $29,200 $ 2,427 23,360 (1,618) $27,582 4,200 $31,782
State sales tax is not deductible because it is less than state and local income taxes. Phil's itemized deductions after application of the overall limitation are computed below: Itemized deductions subject to overall limitation: State and local income taxes Real estate taxes Home mortgage interest Charitable contributions Unreimbursed employee expenses Total Step 1 Calculate the smaller of the following: 3% ($355,900 AGI $156,400) 80% of itemized deductions subject to limitation ($22,900 80%) $ 5,985 18,320 $ 5,636 4,950 5,849 5,265 1,200 $22,900
10-22
2008 Comprehensive Volume/Solutions Manual
Step 2 $5,985 2=3 Amount of reduction Deductible itemized deductions subject to overall limitation Itemized deductions not subject to overall limitation: Medical expenses Gambling losses Casualty loss Total itemized deductions pp. 10-29 to 10-31 and Example 38 48. For the medical expenses, the taxpayers are allowed $5,647 [$25,890 (7.5% $269,900)]. The casualty loss must first be reduced by $100 and then by $26,990 (10% $269,900). Thus, only $2,100 [$29,190 $27,090 ($100 + $26,990)] can be deducted. Note that neither the medical expenses nor the casualty loss is subject to the overall limitation on itemized deductions. Regarding the overall limitation, the cutback adjustment is $2,270 [3%($269,900 $156,400) 2=3]. Because the covered itemized deductions total $60,500 ($10,150 + $14,800 + $19,050 + $16,500) and 80% of $60,500 is $48,400, the 80% rule does not apply. Consequently, the taxpayer's allowable itemized deductions for 2007 are $5,647 (medical) + $2,100 (casualty) + $58,230 ($60,500 $2,270), or $65,977. Interest on credit cards is nondeductible. Tax return filing fees are not deductible because they do not exceed 2% of AGI. Example 38 CUMULATIVE PROBLEMS 49. Part 1--Tax Computation Tax Computation Bruce's salary Alice's salary Interest income Adjusted gross income Less: Itemized deductions (Note 1) Less: Personal and dependency exemptions (Bruce, Alice, John, and Bruce's father) (Note 2) Taxable income Tax from Tax Table Less: Prepayments and credits Income tax withheld ($5,990 + $4,180) Net tax payable (or refund due) for 2006 $ 60,100 54,000 2,700 $116,800 (36,810) (13,200) $ 66,790 $ 9,809 $ 3,990 (3,990) $18,910 9,751 6,800 8,999 $44,460
(10,170) ($ 361)
See the tax return solution beginning on page 10-26 of the Solutions Manual.
Deductions and Losses: Certain Itemized Deductions Notes
(1)
10-23
Itemized deductions are summarized below: Medical expenses: Medical insurance premiums Doctor bill for Sam paid in 2006 for services in 2005 Operation for Sam Prescription medicines for Sam Hospital expenses for Sam Total medical expenses Less: Reimbursement received in 2006 Less: 7.5% of $116,800 AGI Medical expenses deductible in 2006 Taxes: State income taxes ($2,940 + $2,330 + $800) Property taxes on residence Interest on home mortgage Charitable contributions: Church contribution Tickets to charity dinner dance (Only the excess of the ticket price of $300 over the cost of comparable entertainment of $60 is deductible) Used clothing donated (limited to fair market value) Miscellaneous itemized deductions: Uniforms ($447 cost + $206 laundry) Professional journals Total of deductible items Less: 2% of $116,800 AGI Miscellaneous itemized deductions deductible in 2006 Total itemized deductions $ 4,240 7,545 7,450 1,075 3,350 $23,660 (3,500) (8,760) $11,400 $ 6,070 4,870
10,940 8,980
$ 4,900
240 350 $ 653 360 $ 1,013 (2,336) 0 $36,810 5,490
Alice and Bruce would elect to itemize their deductions because the total exceeds the standard deduction of $10,300 for 2006 for married persons filing a joint return.
(2)
In addition to the Byrds' son John, Bruce's father, Sam, qualifies as a dependent. Therefore, the deduction is $13,200 ($3,300 4).
Part 2--Tax Planning Bruce's salary Interest income ($30,000 + $2,700) Adjusted gross income Less: Itemized deductions (Note 1) Less: Personal and dependency exemptions (Bruce and Alice) (2 $3,400) Taxable income Tax from tax rate schedule for 2007 $ 88,000 32,700 $120,700 (31,967) (6,800) $ 81,933 $ 13,331
10-24
2008 Comprehensive Volume/Solutions Manual
Notes
(1)
Itemized deductions are summarized below: Medical expenses: Medical insurance premiums Estimated costs for Alice ($15,200 $4,700 reimbursement) Less: 7.5% of $120,700 AGI Taxes: State income taxes ($2,940 + $4,000) Property taxes on residence Interest on home mortgage Charitable contributions Miscellaneous itemized deductions: Professional journals Less: 2% of $120,700 AGI Miscellaneous itemized deductions deductible in 2007 Total itemized deductions $ 360 (2,414) 0 $31,967 $ 58,000 56,000 750 1,520 7,500 $123,770 (22,520) (17,000) $ 84,250 $ 13,085 (13,400) ($ 315) $4,240 10,500 (9,053) $6,940 4,870 $ 5,687
11,810 8,980 5,490
50.
Paul's salary Donna's salary Dividends State income tax refund Long-term capital gain (Note 1) Adjusted gross income Less: Itemized deductions (Note 2) Less: Personal and dependency exemptions (Paul, Donna, Larry, Jane, Hannah) (Note 3) Taxable income Tax (Note 5) Less: Tax withheld ($6,770 + $6,630) Net tax payable (or refund due) for 2007 Notes
(1)
Sale price of 300 shares Acme Corp. stock (300 $50) Cost of stock (300 $25) Recognized gain on sale (LTCG) Itemized deductions: Medical expenses: Doctor & hospital bills ($8,700 $2,000) Prescription drugs & medicine Insurance premiums
$ 15,000 (7,500) $ 7,500
(2)
$ 6,700 640 2,810
Deductions and Losses: Certain Itemized Deductions Total medical Less: 7.5% of $123,770 AGI Deductible medical Taxes: State income taxes paid ($900 + $800) Real estate taxes Home mortgage interest Contributions: Church Books Casualty loss: Fair market value Less: Nondeductible floor Less: 10% of $123,770 AGI Miscellaneous itemized deductions: Air fare Hotel Meals (50% $95) Registration fee Total deductible items Less: 2% of $123,770 AGI Deductible miscellaneous itemized deductions Total itemized deductions
(3)
10-25
$10,150 (9,283) $ $ 1,700 3,850 867
5,550 7,890
$ 1,950 740 $18,000 (100) (12,377) $ 340 170 48 340 $ 898 (2,475)
2,690
5,523
0 $22,520
Since Donna is the custodial parent, the Deckers qualify for the dependency deduction for both Larry and Jane. Since they provide over 50% of the support of Hannah, they also qualify for a dependency deduction for her. Thus, the personal exemption and dependency deduction is $17,000 ($3,400 5). Consumer interest is not deductible. Therefore, neither the interest on the auto loan of $1,660 nor the credit card interest of $620 is deductible. Tax on $ 8,250* 15% = 63,700 = 12,300 25% = $84,250 $ 1,237.50 8,772.50 3,075.00 $13,085.00
(4)
(5)
*$750 dividend + $7,500 LTCG = $8,250
The answers to the Research Problems are incorporated into the Instructor 's Guide with Lecture Notes to accompany the 2008 Annual Edition of WEST FEDERAL TAXATION: COMPREHENSIVE VOLUME.
10-26 49.
2008 Comprehensive Volume/Solutions Manual
Form
1040
Department of the Treasury
' Internal Revenue Service
U.S. Individual Income Tax Return
For the year Jan 1 - Dec 31, 2006, or other tax year beginning
Your first name MI Last name
2006
, 2006, ending
(99)
IRS Use Only ' Do not write or staple in this space.
, 20
OMB No. 1545-0074 Your social security number
Label
(See instructions.)
BRUCE
If a joint return, spouse's first name
M
MI
BYRD
Last name
016-50-9556
Spouse's social security number
Use the IRS label. Otherwise, please print or type. Presidential Election Campaign
ALICE 473 REVERE AVENUE
J
BYRD
Apartment no.
034-48-4382
Home address (number and street). If you have a P.O. box, see instructions.
City, town or post office. If you have a foreign address, see instructions.
State
ZIP code
J
You must enter your social security number(s) above.
A
AMES
1 2 3 6a b Single Married filing jointly (even if only one had income) Married filing separately. Enter spouse's SSN above & full name here 4
MA 01850
Checking a box below will not change your tax or refund. You Spouse
J
Check here if you, or your spouse if filing jointly, want $3 to go to this fund? (see instructions)
Filing Status
Check only one box.
X
5
Head of household (with qualifying person). (See instructions.) If the qualifying person is a child but not your dependent, enter this child's name here Qualifying widow(er) with dependent child (see instructions)
Boxes checked on 6a and 6b
Exemptions
Yourself. If someone can claim you as a dependent, do not check box 6a Spouse (2) Dependent's (3) Dependent's c Dependents: social security relationship number to you (1) First name Last name
X X
2 1
(4) if qualifying child for child tax credit (see instrs)
b
No. of children on 6c who: with you ? did not live with you due to divorce or separation (see instrs) Dependents on 6c not entered above Add numbers on lines above
? lived
JOHN BYRD SAM BYRD
If more than four dependents, see instructions. d Total number of exemptions claimed
017-27-4148 Son 034-82-8583 Parent
1
7 Wages, salaries, tips, etc. Attach Form(s) W-2 7 Income 8 a Taxable interest. Attach Schedule B if required 8a b Tax-exempt interest. Do not include on line 8a 8b 9 a Ordinary dividends. Attach Schedule B if required 9a Attach Form(s) W-2 here. Also b Qualified dividends (see instrs) 9b attach Forms 10 Taxable refunds, credits, or offsets of state and local income taxes (see instructions) 10 W-2G and 1099-R 11 Alimony received 11 if tax was withheld. 12 Business income or (loss). Attach Schedule C or C-EZ 12 If you did not 13 Capital gain or (loss). Att Sch D if reqd. If not reqd, ck here 13 get a W-2, see instructions. 14 Other gains or (losses). Attach Form 4797 14 15 a IRA distributions 15 a b Taxable amount (see instrs) 15 b 16 a Pensions and annuities 16 a b Taxable amount (see instrs) 16 b 17 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E 17 18 Farm income or (loss). Attach Schedule F 18 Enclose, but do not attach, any 19 Unemployment compensation 19 payment. Also, 20 a Social security benefits 20 a b Taxable amount (see instrs) 20 b please use Form 1040-V. 21 Other income 21 22 Add the amounts in the far right column for lines 7 through 21. This is your total income 22 23 Archer MSA deduction. Attach Form 8853 23 Adjusted 24 Certain business expenses of reservists, performing artists, and fee-basis government officials. Attach Form 2106 or 2106-EZ 24 Gross Income 25 Health savings account deduction. Attach Form 8889 25 26 Moving expenses. Attach Form 3903 26 27 One-half of self-employment tax. Attach Schedule SE 27 28 Self-employed SEP, SIMPLE, and qualified plans 28 29 Self-employed health insurance deduction (see instructions) 29 30 Penalty on early withdrawal of savings 30 31 a Alimony paid b Recipient's SSN 31 a 32 IRA deduction (see instructions) 32 33 Student loan interest deduction (see instructions) 33 34 Jury duty pay you gave to your employer 34 35 Domestic production activities deduction. Attach Form 8903 35 36 Add lines 23 - 31a and 32 - 35 36 37 Subtract line 36 from line 22. This is your adjusted gross income 37 BAA For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see instructions. FDIA0112 11/07/06
4 114,100. 2,700.
116,800.
116,800.
Form 1040 (2006)
Deductions and Losses: Certain Itemized Deductions 49. continued
Form 1040 (2006)
10-27
BRUCE M & ALICE J BYRD
Blind. Total boxes Blind. checked 39 a b If your spouse itemizes on a separate return, or you were a dual-status alien, see instrs and ck here 39 b 40 Itemized deductions (from Schedule A) or your standard deduction (see left margin) 41 Subtract line 40 from line 38 42 If line 38 is over $112,875, or you provided housing to a person displaced by Hurricane Katrina, see instructions. Otherwise, multiply $3,300 by the total number of exemptions claimed on line 6d 43 Taxable income. Subtract line 42 from line 41. If line 42 is more than line 41, enter -044 Tax (see instrs). Check if any tax is from: a Form(s) 8814 b Form 4972 45 46 47 48 49 50 51 52 53 54 55 Alternative minimum tax (see instructions). Attach Form 6251 Add lines 44 and 45 38 Amount from line 37 (adjusted gross income) 39 a Check You were born before January 2, 1942, if: Spouse was born before January 2, 1942,
Tax and Credits
Standard Deduction for ' ? People who checked any box on line 39a or 39b or who can be claimed as a dependent, see instructions. ? All others: Single or Married filing separately, $5,150 Married filing jointly or Qualifying widow(er), $10,300 Head of household, $7,550
016-50-9556 Page 2 38 116,800.
40 41 42 43 44 45 46
36,810. 79,990. 13,200. 66,790. 9,809. 9,809.
Other Taxes
Payments
If you have a qualifying child, attach Schedule EIC.
Foreign tax credit. Attach Form 1116 if required 47 Credit for child and dependent care expenses. Attach Form 2441 48 Credit for the elderly or the disabled. Attach Schedule R 49 Education credits. Attach Form 8863 50 Retirement savings contributions credit. Attach Form 8880 51 Residential energy credits. Attach Form 5695 52 Child tax credit (see instructions). Attach Form 8901 if required 53 Credits from: a Form 8396 b Form 8839 c Form 8859 54 Other credits. Check applicable box(es): a Form 3800 Form c b Form 55 8801 56 Add lines 47 through 55. These are your total credits 57 Subtract line 56 from line 46. If line 56 is more than line 46, enter -058 Self-employment tax. Attach Schedule SE 59 Social security and Medicare tax on tip income not reported to employer. Attach Form 4137 60 Additional tax on IRAs, other qualified retirement plans, etc. Attach Form 5329 if required 61 Advance earned income credit payments from Form(s) W-2, box 9 62 Household employment taxes. Attach Schedule H 63 Add lines 57-62. This is your total tax 64 Federal income tax withheld from Forms W-2 and 1099 64 65 2006 estimated tax payments and amount applied from 2005 return 65 66 a Earned income credit (EIC) 66 a b Nontaxable combat pay election 66 b 67 Excess social security and tier 1 RRTA tax withheld (see instructions) 67 68 Additional child tax credit. Attach Form 8812 68 69 Amount paid with request for extension to file (see instructions) 69 70 Payments from: a Form 2439 b Form 4136 c Form 8885 70 71 Credit for federal telephone excise tax paid. Attach Form 8913 if required 71 72 Add lines 64, 65, 66a, and 67 through 71. These are your total payments 73 If line 72 is more than line 63, subtract line 63 from line 72. This is the amount you overpaid 74 a Amount of line 73 you want refunded to you. If Form 8888 is attached, check here G b Routing number G c Type: Checking XXXXXXXXX G d Account number XXXXXXXXXXXXXXXXX 75 76 Amount of line 73 you want applied to your 2007 estimated tax 75 Amount you owe. Subtract line 72 from line 63. For details on how to pay, see instructions
56 57 58 59 60 61 62 63
9,809.
9,809.
10,170.
Refund
Direct deposit? See instructions and fill in 74b, 74c, and 74d or Form 8888.
72 73 74 a Savings
10,170. 361. 361.
Amount You Owe Third Party Designee Sign Here
Joint return? See instructions. Keep a copy for your records.
76 Yes. Complete the following.
Personal identification number (PIN)
77 Estimated tax penalty (see instructions) 77 Do you want to allow another person to discuss this return with the IRS (see instructions)?
Designee's name
X
No
G
Phone no.
G
G
Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.
A A
Your signature
Date
Your occupation
Daytime phone number
MANAGER
Spouse's signature. If a joint return, both must sign. Date Spouse's occupation
OFFICE MANAGER
Paid Preparer's Use Only
Preparer's signature
A A
Self-Prepared
Date Check if self-employed
Preparer's SSN or PTIN
Firm's name (or yours if self-employed), address, and ZIP code
EIN Phone no.
Form 1040 (2006)
FDIA0112 11/07/06
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SCHEDULE A
(Form 1040)
Department of the Treasury Internal Revenue Service Name(s) shown on Form 1040 (99)
2008 Comprehensive Volume/Solutions Manual
Itemized Deductions
G Attach to Form 1040. G See Instructions for Schedule A (Form 1040).
OMB No. 1545-0074
Attachment Sequence No. Your social security number
2006
07
BRUCE M & ALICE J BYRD
Medical and Dental Expenses Caution. Do not include expenses reimbursed or paid by others. 1 2 3 4 5 6 7 8 9 Interest You Paid 10 11 Medical and dental expenses (see instructions) 1 3 5 6 7 8 Add lines 5 through 8 Home mtg interest and points reported to you on Form 1098 Home mortgage interest not reported to you on Form 1098. If paid to the person from whom you bought the home, see instructions and show that person's name, identifying number, and address G 10
016-50-9556 20,160. 8,760.
4
Taxes You Paid (See instructions.)
116,800. Enter amount from Form 1040, line 38 2 Multiply line 2 by 7.5% (.075) Subtract line 3 from line 1. If line 3 is more than line 1, enter -0State and local income taxes
Real estate taxes (see instructions) Personal property taxes Other taxes. List type and amount G
11,400.
6,070. 4,870.
9
10,940.
8,980.
(See instructions.) 11 12 13 14 Gifts to Charity If you made a gift and got a benefit for it, see instructions. 15 16 Points not reported to you on Form 1098. See instrs for spcl rules Investment interest. Attach Form 4952 if required. (See instrs.) Add lines 10 through 13 Gifts by cash or check. If you made any gift of $250 or more, see instrs Other than by cash or check. If any gift of $250 or more, see instructions. You must attach Form 8283 if over $500 Carryover from prior year Add lines 15 through 17 Casualty or theft loss(es). Attach Form 4684. (See instructions.) Unreimbursed employee expenses ' job travel, union dues, job education, etc. Attach Form 2106 or 2106-EZ if required. (See instructions.) G 13 14 15 12
Note. Personal interest is not deductible.
8,980.
5,140.
16 17
350.
18 19
17 18 19
5,490.
Casualty and Theft Losses
Job Expenses 20 and Certain Miscellaneous Deductions
Employee Business Expenses
(See instructions.) 21 22 Tax preparation fees Other expenses ' investment, safe deposit box, etc. List type and amount G 23 24 25 26 27
1,013.
20 21
1,013.
Other Miscellaneous Deductions Total Itemized Deductions
22 Add lines 20 through 22 23 Enter amount from Form 1040, line 38 24 116,800. Multiply line 24 by 2% (.02) 25 Subtract line 25 from line 23. If line 25 is more than line 23, enter -0Other ' from list in the instructions. List type and amount G
1,013. 2,336.
26
0.
27 28 Is Form 1040, line 38, over $150,500 (over $75,250 if married filing separately)?
X
29
Your deduction is not limited. Add the amounts in the far right column for lines 4 through 27. Also, enter this amount on Form 1040, line 40. Yes. Your deduction may be limited. See instructions for the amount to enter.
No.
G 28
36,810.
If you elect to itemize deductions even though they are less than your standard deduction, check here G
FDIA0301 11/07/06
BAA For Paperwork Reduction Act Notice, see Form 1040 instructions.
Schedule A (Form 1040) 2006
Deductions and Losses: Certain Itemized Deductions 49. continued
Schedule B (Form 1040) 2006
Name(s) shown on Form 1040. OMB No. 1545-0074 Your social security number
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BRUCE M & ALICE J BYRD
016-50-9556
Schedule B ' Interest and Ordinary Dividends
Part I Interest
(See instructions for Form 1040, line 8a.) 1 List name of payer. If any interest is from a seller-financed mortgage and the buyer used the property as a personal residence, see the instructions and list this interest first. Also, show that buyer's social security number and address
Attachment Sequence No.
08
Amount
Second National Bank
2,700.00
Note. If you received a Form 1099-INT, Form 1099-OID, or substitute statement from a brokerage firm, list the firm's name as the payer and enter the total interest shown on that form.
1
2 3
Add the amounts on line 1 Excludable interest on series EE and I U.S. savings bonds issued after 1989. Attach Form 8815
2 3 4
2,700.00
4 Subtract line 3 from line 2. Enter the result here and on Form 1040, line 8a Note. If line 4 is over $1,500, you must complete Part III. 5 List name of payer
2,700.00
Amount
Part II Ordinary Dividends
(See instructions for Form 1040, line 9a.)
Note. If you received a Form 1099-DIV or substitute statement from a brokerage firm, list the firm's name as the payer and enter the ordinary dividends shown on that form.
5
6 Add the amounts on line 5. Enter the total here and on Form 1040, line 9a Note. If line 6 is over $1,500, you must complete Part III.
6
Part III Foreign Accounts and Trusts
(See instructions.)
You must complete this part if you (a) had over $1,500 of taxable interest or ordinary dividends; or (b) had a foreign account; or (c) received a distribution from, or were a grantor of, or a transferor to, a foreign trust. 7 a At any time during 2006, did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account? See instructions for exceptions and filing requirements for Form TD F 90-22.1 b If `Yes,' enter the name of the foreign country 8
Yes
No
X
During 2006, did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust? If `Yes,' you may have to file Form 3520. See instructions X BAA For Paperwork Reduction Act Notice, see Form 1040 instructions. FDIA0401 06/14/06 Schedule B (Form 1040) 2006
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2008 Comprehensive Volume/Solutions Manual NOTES