Chapter 6 Problem Solutions

Chapter 6 Problem Solutions - Chapter 6 Recommended Problem...

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1 Chapter 6 Recommended Problem Solutions From Chapter 5 (Tax Benefit Rule): 9) If the refund is made for an expenditure deducted in a previous year, then under the tax benefit rule the refund is included in gross income to the extent that the prior deduction produced a tax benefit. In this case, if Jorge deducted the property taxes (and received a tax benefit or tax savings from the deduction) on his prior year tax return, he must include the refund in his gross income this year to the extent the property taxes resulted in a tax benefit. If he did not deduct property taxes on his tax return last year, he is not required to include the refund in his gross income. 46) a) Louis received a tax benefit for the lesser of the refund ($900) or the excess of the itemized deductions above the standard deduction ($6,450-$6,200= $250). Hence, Louis must include $250 of the $900 refund in gross income. b) Because he didn’t itemize his deductions, Louis received no tax benefit from the $900 tax overpayment. Hence, none of the refund is included in his gross income. c) Louis received a tax benefit for the lesser of the refund ($900) or the excess of the itemized deductions above the standard deduction ($7,640-$6,200= $1,440). Hence, Louis must include the entire $900 refund in gross income. From Chapter 6: 12) Taxes qualifying for this deduction include state, local, and foreign income taxes, real estate taxes, and personal property taxes. State and local sales taxes may also be deducted but only in lieu of state and local income taxes. The deduction for sales tax can be based upon either the amount paid or the amount published in the IRS tables (IRS Publication 600). At press time, the deduction for state and local sales taxes is set to expire after 2014. Vehicle registration fees are not deductible (unless calculated based on the value of the vehicle rather than its weight). 14) In each case, the deduction reduces the after-tax cost of the activity, making it more likely that taxpayers will engage in the activity. For example, contributions to charity reduce the cost of giving thereby indirectly encouraging donations to charitable organizations. 17) A casualty is defined as an unexpected, unforeseen, or unusual event such as a “fire, storm, or shipwreck” or loss from theft. 27) A ceiling is a maximum amount for an exclusion or deduction. In contrast to a ceiling, a floor limitation eliminates any deduction for amounts below the minimum amount (i.e., the floor). Ceiling limitations may provide that amounts above the ceiling limit are lost (disallowed) or could be used in other years (carryover). Like a ceiling, a floor can be structured as either a fixed amount or a floating constraint based upon some intermediate number. Unlike ceilings, floor limits eliminate any amounts below the minimum thereby limiting the number of taxpayers who qualify for any adjustment to income.
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