Chapter 4 and 5 - Problems - Jan 30

# Chapter 4 and 5 - Problems - Jan 30 - Problems from January...

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Problems from January 30 th Chapter 4 – Problems 46. a. The \$30,000 per year received by Al is alimony—ordinary income to Al and deductible as a deduction for AGI by Karen. Al’s basis in the stock is simply a carry-over from the basis when it was jointly owned – that is, \$40,000 (\$80,000 × 50%). b. The \$50,000 per year for years 1, 2, and 3 and the \$30,000 per year for subsequent years are alimony—ordinary income to Al and deductible as a deduction for AGI by Karen. The payments in the first three years are not ‘‘front-loaded” because they are the same for each of those years. So there is no alimony recapture. Economically, though, Al has given up a one-half interest in the stock, which if he had received would have a cost basis to him of \$40,000 (\$80,000 × 50%) and a fair market value of \$60,000. Therefore, with the higher cash payments of \$60,000 (\$20,000 × 3), Al will lose the ability to take a recovery of capital deduction for \$40,000, as compared to receiving less cash but also receiving his share of the stock. In addition, any recognized gain on the future stock sale is eligible for the beneficial capital gain rates. c. Using the formula on page 4-21: R = D + E D = B – (C + 15,000) = 30,000 + (30,000 + 15,000) = (\$15,000) In tax, negative numbers are almost always treated as zero. There is no recapture from Year 2. E = A – ((B – D + C)/2) + 15,000) = 80,000 – ((30,000 – 0 + 30,000)/2) + 15,000) = 80,000 – (30,000 + 15,000) = 80,000 – 45,000 = \$35,000 R = 0 + 35,000 + \$35,000 Al will report \$80,000 of alimony in year 1 and Karen can deduct this amount. In years 2 & 3, Al will report \$30,000 of income and Karen will deduct these amounts. However, alimony recapture of \$35,000 will also be reported in year 3. Al will receive a \$35,000 deduction for AGI in year 3, and Karen will have \$35,000 to include in gross income. The returns for year 3 will look kind of odd because they’ll have both deductions and inclusions for alimony – but that’s the way it’s reported. You don’t “net” the alimony and the alimony recapture. You show each separately. 49.

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Chapter 4 and 5 - Problems - Jan 30 - Problems from January...

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