Chap5%20HW%20Solutions

Chap5%20HW%20Solutions - 68 CCH Federal Taxation--Basic...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 68 CCH Federal Taxation--Basic Principles 5255 Military Benefits Qualified military benefits are excluded from gross income. Qualified military benefits are benefits that, as of September 9, 1986, were excludable by law. Military retirement pay must be included in gross income. However, veterans' benefits are excludable from gross income. ANSWER TO KEYSTONE PROBLEM--CHAPTER 5 (5255.) The area of management compensation is quite complex. However, one area that cannot be ignored is the tax aspects of the various plans. The goal is for the company to have a tax deduction for purchasing a fringe benefit for the executive and at the same time the executive should recognize no income. Also, group plans prove advantageous because the purchase price of such plans is more favorable. The cafeteria plan is quite popular today because the individual has a choice among various fringes. Furthermore, when both spouses are employed, they can obtain better coverage at the same expense to their employers. Purchasing fringes for an executive, without other employees having a right to participate, will prove much more costly to both the company and the executive. However, sometimes in negotiating to recruit an individual, it is necessary to custom design a package. ANSWERS TO QUESTIONS--CHAPTER 5 Topical List of Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. Tax Exclusion v. Tax Deduction (Overview) Life Insurance Proceeds (5015) Social Security Benefits (5055) Social Security Benefits (5055) Savings Bond Interest (5075) Private Activity Bonds (5075) Annuities (5125) Annuity Exclusion (5125) Compensation for Injuries or Sickness (5145) Employer Contributions to Accident and Health Plans (5155) Cafeteria Plans (5195) Joint and Survivor Annuities (5125) Fringe Benefits (5195) Comprehensive List of Gross Income Exclusions Exclusion of Meals (5185) Educational Assistance Plans (5201) Educational Assistance Plans (5201) Group-Term Life Insurance (5115) Chapter 5 Instructor's Manual 69 Answers to Questions Tax Exclusion v. Tax Deduction 1. Exclusions do not appear on your tax return and tax deductions do appear on your return. Exclusions may still be taxed. See Chapter 9 on tax credits and the alternative minimum tax. Life Insurance Proceeds 2. $5,000. Proceeds less investment in contract. Receipt of life insurance is in essence the recovery of a capital asset. Social Security Benefits 3. In determining if any Social Security benefits are taxable, the first step is to calculate modified adjusted gross income. In this calculation, tax-exempt bond interest is included. Therefore, interest on tax-exempt securities has a direct bearing on the taxation of Social Security benefits. Social Security Benefits 4. Prior to 1994, the amount of Social Security benefits included in income was the lesser of one-half of the benefits or one-half of the excess of taxpayer's income over base ($25,000 single, $32,000 joint return, zero for married filing separately). For 1994 and later years, taxpayers with provisional income exceeding thresholds ($34,000, single taxpayers; $44,000, joint taxpayers) will include the lesser of: (A) 85 percent of the taxpayer's Social Security; or (B) The total of the following: (1) 85 percent of the amount that provisional income exceeds the higher threshold amounts, plus (2) The smaller of (a) the amount of Social Security benefits included under lower limits, or (b) $4,500 for single taxpayers, or $6,000 for joint filers. Savings Bond Interest 5. The taxpayer makes the choice of either being taxed in the year the interest is earned or deferred recognition of interest income until the Series EE bond is redeemed. Private Activity Bonds 6. Annuities 7. An annuity is a contract that pays a fixed income at set regular intervals for a specified period of time. Features would include the number of years for payments, amount of payment to be made, and life expectancy of annuitant. One justification is to stimulate economic development. Another reason is the construction of major projects. For a more extensive list, refer back to 5075. Annuity Exclusion 8. Net cost of annuity Expected payments under contract Payment received under annuity = Excludable Portion Chapter 5 70 CCH Federal Taxation--Basic Principles Compensation for Injuries or Sickness 9. For amounts received under workers' compensation, the law specifically excludes from gross income: (1) Amounts received under workers' compensation acts as compensation for personal injuries or sickness. (2) Amounts of any damages received on account of personal injuries or sickness. (3) Amounts received through accident and health insurance for personal injuries or sickness (other than amounts received by an employee, to the extent such amounts (a) are attributable to contributions by the employer which were not includible in the gross income of the employee or (b) are paid by the employer). (4) Amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country or in the Coast and Geodetic Survey or the Public Health Service, or as a disability annuity payable under the provisions of Section 808 of the Foreign Service Act of 1980. (5) Amounts received as disability income attributable to injuries incurred as a direct result of violent attack which the Secretary of State determines to be a terrorist attack and which occurred while such an individual was an employee of the United States engaged in the performance of official duties outside the United States. Employer Contributions to Accident and Health Plans 10. Employer contributions are excluded from employees' gross income. Cafeteria Plans 11. A cafeteria plan must have a minimum of two benefits consisting of cash and statutory nontaxable benefits. A cafeteria plan is beneficial to the employer in that all items in the plan are tax deductible, but the major advantages are to the employees. That is, they can pick and choose any of the benefit plans that interest them. Joint and Survivor Annuities 12. Under a joint and survivor annuity, two individuals who are alive receive periodic benefits for life. In calculating benefits, both spouses must be taken into consideration. When one spouse dies, the surviving spouse receives payments until his or her death, at which time all payments cease. Fringe Benefits 13. Under the law only statutory nontaxable benefits may be included in a cafeteria plan. Employer contributions for profit-sharing or stock-bonus plans under a qualified cash or deferred arrangement as defined by Code Sec. 401(k)(2) can be included in cafeteria plans. Also, deferred compensation, qualified education programs, scholarships and fellowships, and fringe benefits must be excluded. Gross Income Exclusions 14. a. b. c. d. Excluded Included Included Included Chapter 5 Instructor's Manual 71 e. f. g. h. i. j. k. l. m. Excluded Included Included Included Excluded Excluded Excluded Excluded Excluded Exclusion of Meals 15. If a waiter is required to be available for work through the lunch or dinner break and not leave the restaurant, then the fact that he eats food from the restaurant will not give rise to income. The waiter in this case is required to be on the premises. Educational Assistance Plans 16. 17. $2,000. Grants or awards for items other than tuition, books, and fees must be included in gross income. No. She is allowed to exclude $5,250 from her gross income. Since the reimbursement exceeded $5,250 she would have $750 of income. Group-Term Life Insurance 18. Yes. Premiums for group-term life insurance coverage over $50,000 per year must be included in income regardless of income level, as long as the plan is not discriminatory. The amount to be included in income is determined by the uniform premium schedule covered under Reg. 1.79-3(d)(2). ANSWERS TO PROBLEMS--CHAPTER 5 Topical List of Problems 19. 20. 21. 22. 23. 24. 25. 26. 27. Gift Income (5001) Unemployment Compensation and Disability Income (5145 and 5155) Workers' Compensation (5145 and 5155) Pension Income (5055) Retirement Income (5115) Social Security Benefits (5055) Group Insurance (5155) Investment Income (5075) Social Security Benefits (5055) Chapter 5 72 CCH Federal Taxation--Basic Principles 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. Social Security Benefits (5055) Joint and Survivor Annuity (5125) Annuity: Exclusion Ratio (5125) Annuity: Taxable Portion (5125) Annuity Income: Cost-of-Living Increase (5125) Joint and Survivor Annuity (5125) Annuity Exclusion Computation (5125) Educational Savings Bonds (5075) Punitive Damages (5145) Damages Awards and Legal Fees (5145) Damages Awards (5145) Compensation for Injuries (5145 and 5155) Meals and Lodging (5185) Multiple Choice--Life Insurance (5145) Multiple Choice--Social Security (5075) Multiple Choice--Fringe Benefits (5101) Multiple Choice--Series EE Savings Bonds (5075) Multiple Choice--Fellowships (5201) Multiple Choice--Educational Expenses (5201) Multiple Choice--Exclusions from Income (5145) Comprehensive Problem--Taxable Income Computation Comprehensive Problem--Taxable Income Computation Research Problem--Supplemental Group-Term Life Insurance Answers to Problems Gift Income 19. Leon does not include the value of the cottage, since it was a gift. Income from the cottage does belong to Leon and is taxable income to him. Chapter 5 Instructor's Manual 73 Unemployment Compensation and Disability Income 20. The amount of Read's family income includible in gross income is $27,000, computed as follows: Unemployment compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salary--Robert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salary--Wife . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplemental unemployment compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000 10,000 9,000 3,000 $27,000 All unemployment compensation is includible in gross income. Disability income is excluded from gross income if the injury was job-related. Workers' Compensation 21. All the mentioned insurance proceeds are excludable from Windsor's gross income. If medical expenses were deducted on his 2005 tax return, then at the time he received the reimbursement in 2006, he would have to recognize income to the extent of benefits received in 2006. Pension Income 22. Their taxable income is $100. Gross income: Private pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . One-half Social Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest on bank deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest (nontaxable) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Modified adjusted gross income plus 1/2 Social Security benefits . . . . . . . . . . . . . . . . . . . $15,000 6,000 2,000 1,500 700 $25,200 Since the $25,200 is less than the $32,000 amount allowed married couples filing a joint return, none of the Social Security benefits are taxable. Taxable income: Private pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest on bank deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Standard deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000 Over 65 deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 Less: Personal exemptions (2 $3,200) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retirement Income 23. Harry must include in gross income the cost of the premium for the amount of insurance over $50,000. For an individual 50-54 years of age, the premium is assumed to be $2.76 per thousand per year. Harry must include in income $138 ($2.76 50). $15,000 2,000 1,500 $18,500 12,000 $ 6,500 6,400 $ 100 Chapter 5 74 CCH Federal Taxation--Basic Principles Social Security Benefits 24. Charles Adams must include $750 of his Social Security benefits in gross income. Salary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1/2 Social Security benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provisional income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excludable amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 percent of excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,000 2,000 1,000 1,000 2,500 6,000 $26,500 25,000 $ 1,500 $ 750 The maximum amount that Charles Adams must include in his gross income is the lesser of 50 percent of the excess ($26,500 1 $25,000 = $1,500), which equals $750, or 50 percent of the Social Security benefits ($2,500). Charles Adams's taxable income is $14,300. Adjusted gross income without Social Security and tax-exempt income . . . . . . . . . . . . . . Plus: Social Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted gross income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Standard deduction ($5,000 + $1,250) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,250 Personal exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,200 Taxable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Group Insurance 25. Felix must include all $650 in gross income because the policy discriminates. If the company policy were to be changed, then the calculation would be: Total coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000 ``Tax free'' maximum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 Insurance subject to tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,000 Cost per thousand ($.09 12) = $1.08 Taxable income (50 $1.08) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54 Investment Income 26. Series EE bonds give the investor the opportunity to recognize the interest income yearly or wait until the bonds mature. After August 2004, investors may no longer roll them over into Series HH bonds and defer recognizing income. With Series HH bonds the investor receives interest twice a year. Investments in qualified veterans' bonds and industrial development bonds used for mass transit present other ways of excluding interest from gross income. $23,000 750 $23,750 9,450 $14,300 Chapter 5 Instructor's Manual 75 Social Security Benefits 27. Norm and Pat have $30,225 of taxable income. Computation: Gross income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1/2 Social Security income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provisional income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social Security Computation: (a) $9,000 85% = $7,650 (b) [($46,500 1 $44,000) 85%] + $4,500 = $6,625 Norm and Pat must include $6,625 in their AGI. AGI ($35,000 + $4,000 + $3,000 + $6,625) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Personal exemptions (2 $3,200) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Standard deduction ($10,000 + $2,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social Security Benefits 28. Ron and Gayle have taxable income of $29,800. Computation: Gross income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1/2 Social Security income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provisional income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social Security Computation: (a) $12,000 85% = $10,200 (b) [($50,000 1 $44,000) 85%] + $6,000 = $11,100 Therefore, $10,200 of their Social Security income is included in their AGI. AGI ($36,000 + $4,000 + $10,200) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Personal exemptions (2 $3,200) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Itemized deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Joint and Survivor Annuity 29. The exclusion ratio is 64.4 percent. Annual annuity payment ($200 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Multiple from Table 3 (Ages 66 and 68) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return ($2,400 23.3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exclusion ratio $36,000 $55,920 Annuity: Exclusion Ratio 30. Mary Jones must include $138.37 in her gross income. Annual annuity payment ($125 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Multiple from Table 2 (Age 61) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return ($1,500 23.3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,500 23.3 $34,950 = 64.4% $35,000 4,000 3,000 4,500 $46,500 $48,625 6,400 12,000 $30,225 $36,000 4,000 4,000 6,000 $50,000 $50,200 6,400 14,000 $29,800 $ 2,400 23.3 $55,920 Chapter 5 76 CCH Federal Taxation--Basic Principles Exclusion ratio $22,050 $34,950 = 63.1% $375.00 236.63 $138.37 Payments received in 2002: ($125 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excluded portion ($375 63.1%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxable portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annuity: Taxable Portion 31. Don Smith must include $1,253.17 in his gross income. Annual annuity payment ($147 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Multiple from Table 2 (Age 65) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return ($1,764 20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exclusion ratio $ 7,938 $35,280 = 22.5% $ 1,764 20.0 $35,280 Payments received in 2004: ($147 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exclusion ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excluded from gross income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxable portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annuity Income: Cost-of-Living Increase 32. $1,617.00 22.5% $ 363.83 $1,253.17 Don Smith is taxed on the full amount of the cost-of-living increase. The exclusion rate (22.5% $147 per month) remains constant. Therefore, the $28-per-month increase in annuity benefits is fully taxable. His total taxable annuity income is: Add: ($147 12) 77.5% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,367.10 $28 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336.00 Total taxable annuity income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,703.10 Joint and Survivor Annuity 33. The exclusion ratio for the annuity payment to the husband is 61.4 percent, computed as follows: Cost of annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Multiple from Table 3 (Ages 70 and 67) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Multiple from Table 2 (Age 70) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portion of expected return--2nd annuitant ($1,200 6.0) . . . . . . . . . . . . . . . . . . . . . . . . . Portion of expected return--1st annuitant ($2,400 16.0) . . . . . . . . . . . . . . . . . . . . . . . . . Expected return under the contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of Annuity Expected Return = $28,000 $45,600 = 61.4% $28,000 22.0 16.0 6.0 $ 7,200 38,400 $45,600 The amount excludable from each monthly payment made to the husband is: $200 61.4% = $122.80 The remaining $77.20 is includible in his gross income. After the husband dies, the wife would exclude 61.4 percent of $100, which is $61.40. Chapter 5 Instructor's Manual 77 Annuity Exclusion Computation 34. Peter can exclude $104.75 for each monthly payment from gross income. The exclusion ratio is 41.9 percent. The adjusted multiple used to calculate the exclusion is 19.9. Annuity = $250 per month for life. Cost = $25,000. Annual annuity payment (12 $250) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Multiple from Table 2 and Table 5 (20.0 1 .1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exclusion ratio $25,000 $59,700 = 41.9% $250.00 41.9% $104.75 $ 3,000 19.9 $59,700 Adjusted exclusion ratio: Monthly benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exclusion ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excluded from gross income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Educational Savings Bonds 35. Beth may exclude from her gross income the $4,000 of interest income. Since her qualified expenses exceeded her proceeds from the bond redemption, all the interest is excluded. Also, Beth may exclude all the interest because her AGI is below the phaseout range. Punitive Damages 36. Yes. Punitive damages received on account of nonphysical injury may not be excluded from gross income. Damages Awards and Legal Fees 37. The $24,000 Steven received is included in gross income under the tax law. Inasmuch as the award is taxable income, costs incurred to secure the award are tax deductible. Damages Awards 38. Compensatory damages for lost wages are income; therefore, $100,000 is taxable income. The $20 award for punitive damages is taxable income also. Compensation for Injuries 39. Workers' compensation, medical expense reimbursement, and damages for personal injury received by Robert are excluded from his gross income, but the $16,000 of earned wages is not excluded. Meals and Lodging 40. Clearly, the value of the lodging does not have to be included in Roger Corby's gross income because the lodging furnished is for the convenience of the employer. The value of the meals when not on duty, however, must be included because the employee is not required to have his meals on the premises. The meals eaten while on duty are excludable. Multiple Choice--Life Insurance 41. Anthony must include $30,000 in income. The $50,000 he received for personal injury damages is excluded because it was not punitive damages. Chapter 5 78 CCH Federal Taxation--Basic Principles Multiple Choice--Social Security 42. d. Ms. Green must include 85 percent of her Social Security benefits in her gross income, computed as follows: Modified AGI: Interest from certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000 Tax-exempt interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 Taxable dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 Taxable pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 Wages from consulting work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000 One-half Social Security benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 Provisional income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45,000 (A) $14,00085%=$11,900 (B) [ ($45,0001$34,000)85%]+$4,500=$13,850 Ms. Green must include $11,900 of her Social Security benefits in her income, the lesser of (A) or (B). Multiple Choice--Fringe Benefits 43. d. Memberships in athletic facilities are not excludable unless the athletic facility is on the employer's premises. Multiple Choice--Series EE Savings Bonds 44. b. Eligible expenses do not include room and board. Multiple Choice--Educational Expenses 45. c. Ralph should exclude $2,600 from his gross income. Tuition reimbursement for classes may be excluded from gross income. Ralph cannot exclude the reimbursement for transportation expenses. Multiple Choice--Fellowships 46. a. Amounts received for teaching or as a laboratory assistant are fully taxable. Qualified scholarships include payments for tuition and fees, books, equipment, and supplies required for the student's course of instruction. Multiple Choice--Exclusions from Income 47. b. Compensatory damages for physical injury are not included in gross income. Comprehensive Problem--Taxable Income Computation 48. Rodney and Alice have taxable income of $57,898, computed as follows: Gross Income: Salary--Rodney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salary--Alice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premium on life insurance over $50,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest on deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Itemized deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Personal exemptions (7 $3,200) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45,000 48,000 48 850 400 $94,298 14,000 22,400 $57,898 Chapter 5 Instructor's Manual 79 Comprehensive Problem--Taxable Income Computation 49. The Morrises' taxable income for 2005 is $1,125, computed as follows: Modified AGI: One-half Social Security benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salary--Sam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salary--Sarah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank logo contest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sam's annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Modified AGI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Base amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted gross income ($31,975 1 $4,950 1 $900) Less: Itemized deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Personal exemptions (4 $3,200) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,950 900 7,000 5,500 1,800 7,000 4,000 100 500 225 $31,975 32,000 $26,125 12,200 12,800 $ 1,125 Sam and Sarah do not have to include any of their Social Security benefits in gross income because they were under the $32,000 base. Several of their interest income items were not included because they were from tax-exempt sources. Forgiveness of a loan to their son does not generate income to their son, and Sam and Sarah are allowed no deduction. Only premiums on group-term life insurance over $50,000 are income to the employee. The gifts received by Sam and Sarah are not taxable. Annuity formula: Monthly benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Multiple from Table 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return ($720 20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exclusion ratio: $ 9,000 $14,400 = 62.5% $ 60 20 $14,400 62.5% of $600 = $375 Excluded from gross income $225 Included in gross income Their daughter qualifies as a dependent since support furnished by Sam and Sarah is greater than 50 percent and the gross income test applies to the daughter because she is a full-time student under 24. Research Problem--Supplemental Group-Term Life Insurance 50. Larry prevailed. Rev. Rul. 71-587 concerns itself with the question of whether payments made by the donee (niece) for supplemental group-term life insurance are includible in the taxpayer's gross income under Code Sec. 79(a). Accordingly, premiums paid by the niece were considered as paid by Larry and are not includible in gross income. Chapter 5 ...
View Full Document

Ask a homework question - tutors are online