ITAX-2016_SM_CH6 - 6 Gross Income Inclusions and Exclusions Solutions to Problem Materials Discussion Questions 6-1 6-2 6-3 a False Receipts are

ITAX-2016_SM_CH6 - 6 Gross Income Inclusions and Exclusions...

This preview shows page 1 - 3 out of 26 pages.

6 6-1 Gross Income: Inclusions and Exclusions All materials are copyright © Pratt-Kulsrud, LLC Solutions to Problem Materials Discussion Questions 6-1 a. False. Receipts are included in gross income unless specifically listed as exclud- able. (See p. 6-2 and § 61(a).) It is the taxpayer’s responsibility to prove that a particular type of income is excluded and to cite the specific authority providing the exclusions. b. False. Tax returns show that (1) gross receipts except those that are entirely ex- cludable (nontaxable) (2) less excludable portion (3) equals gross income. (See p. 6-2.) Many receipts, such as refunds for state taxes not previously deducted, will not appear on the tax return. c. True. As long as the municipal bond carries tax-exempt status, (i.e., it is issued by a state, a territory, a U.S. possession or any of their political subdivisions and is not an industrial development or arbitrage bond) the interest income is excludable (nontaxable) by individuals and corporations. (See Example 4, p. 6-7 and § 103(a)(1).) 6-2 For C to evaluate which investment would produce a greater after-tax return, she must have knowledge of the interest rate of the state bond, estimate the expected rate of return of anticipated dividends from H, Inc., know her marginal tax rate, estimate future proceeds from the sale of the investments, and select a discount rate to deter- mine the present value of the expected future cash flows. (See Example 4 and p. 6-7.) 6-3 a. The after-tax return will be higher if the taxpayer invests in the State of Kentucky bonds. (See Exhibit 6-2 and Example 4 and pp. 6-7 and 6-8.) Corporate Bonds 7% State Bonds 3% Annual interest income $ 70 .00 $ 30 .00 Federal income tax—35% . (24 .50) (0 .00) After-tax income $ 45 .50 $ 30 .00 After-tax rate of return 4 .55% 3 .0%
6-2 Chapter 6 Gross Income: Inclusions and Exclusions All materials are copyright © Pratt-Kulsrud, LLC b. The after-tax return will be higher if the taxpayer invests in the corporate bonds. Corporate Bonds 7% State Bonds 3% Annual interest income $ 70 .00 $ 30 .00 Federal income tax—15% . (10 .50) (0 .00) After-tax income $ 59 .50 $ 30 .00 After-tax rate of return 5 .95% 3 .0%

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture