Chap4%20HW%20Solutions - 54 CCH Federal Taxation-Basic...

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54 CCH Federal Taxation—Basic Principles ¶4451 Divorce and Separation Generally, the recipient must include alimony and separate maintenance payments in gross income and the payer is entitled to a tax deduction for adjusted gross income. However, different rules apply to payments made under post-1984 and pre-1985 instruments. Payments designated as child support are not deductible by the payer and are not taxable to the payee. The custodial parent is entitled to the exemption for dependent children unless the right to claim it is expressly waived. Also, no gain or loss is recognized on property transfers between former spouses. ¶4485 Discharge of Debt When a debt is canceled for a consideration, in whole or in part, the debtor realizes taxable income for the amount of the debt discharged. If a creditor gratuitously cancels a debt, then the amount forgiven is not income but a nontaxable gift. Generally, income from a nongratuitous discharge of indebtedness is includible in gross income unless the discharge occurs in a bankruptcy case or the taxpayer becomes insolvent. Stock Option Plans ¶4601 Restricted Stock Plans Corporate employers may issue restricted stock to key employees as an employment incentive. The stock is subject to a substantial risk of forfeiture until the employee reaches some goal such as a defined period of employment in good standing. The value of the stock is generally taxable as ordinary income when the restriction is lifted. The eventual sale of the stock is subject to the capital gains tax. ¶4615 Incentive Stock Option (ISO) Plans ISOs represent another form of corporate incentive designed to reward and retain key employees. If requisite holding periods are met, neither the granting nor the exercising of ISOs are taxable events, except in certain situations where the exercise of ISOs may give rise to the alternative minimum tax. Gain on the eventual sale is subject to the capital gain rates. ¶4625 Employee Stock Purchase Plans With employee stock purchase plans employees are granted options that enable them to buy company stock at a discount. Employees are generally not taxed until the stock is sold. Gain on the eventual sale is divided between an ordinary income component and a capital gain component. ¶4655 Nonstatutory Stock Option Plans If an option is acquired under a nonstatutory program, the employee may be taxed at the ordinary rates when the option is granted or exercised, or when restrictions on the disposition of the option- acquired stock lapse. Gain on the eventual sale is taxed at the capital gain rates. ANSWER TO KEYSTONE PROBLEM—CHAPTER 4 (¶4485.) Obviously, Roy and Ann have decisions to make concerning their future. Should they accept jobs and go to work for a major corporation? Should they settle down on the potato farm and become self-employed? If they are going to work the farm themselves most likely they should hold the title as joint tenants. Further, unless both work at separate jobs with modest or better income, most likely
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This homework help was uploaded on 04/09/2008 for the course ACCT Acct 308 taught by Professor Lau during the Summer '06 term at CSU Fullerton.

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Chap4%20HW%20Solutions - 54 CCH Federal Taxation-Basic...

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