Chapter+9 - AF 450 Federal Taxation I Dr. Julia M. Camp...

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AF 450 – Federal Taxation I Dr. Julia M. Camp Solutions to Suggested Problems Chapter 9: 1, 3, 5, 7, 10, 26, 30, 37, 52, 55, 58, 64, 66, 67, 72, 74, 77 I:9-1 It is important to distinguish whether an individual is an employee or an independent contractor (self-employed) because some expenses are only partially deductible by employees or not deductible at all. A self-employed individual who incurs a business-related expenditure may deduct the expense for determining AGI on Schedule C, Form 1040 under Section 162. In addition, employers pay certain payroll taxes on behalf of their employees. On the other hand, an individual's employment related activities such as travel and transportation are deductible from AGI and are subject to different tax rules and regulations. Individuals may prefer to be classified as employees because the employee portion of the social security tax rate in 2007 of 7.65% is less than the self-employment tax rate of 15.3%. This difference is mitigated somewhat because self-employed individuals receive an income tax deduction equal to 50% of their self- employment tax. Consideration should also be given to the hospital insurance portion of the FICA tax, which continues to apply without limit at a 1.45% rate for both employees and employers and at a 2.90% rate for self-employed individuals. p. I:9-3. I:9-2 Deductib le For From AGI AGI Non- Deductib le 2% Nondeductib le Floor 50% Deductibl e a. Reimbursed business meals b. Auto expenses going to and from work c. Legal expenses in preparation of the taxpayer's tax return d. Unreimbursed employee travel and transportation expenses e. Unreimbursed entertainment expenses f. Qualified moving expense of an employee g. Education-related expenses involving tuition and books X a X X X X X X X X X X X b X a Since pursuant to an accountable plan, the reimbursement is not included in gross income and the expense is not deductible. The 50% reduction is applied at the employer level. b Business meals are subject to the 50% deduction limit. pp. I:9-2 through I:9-23.
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I:9-3 a. Marilyn may deduct the travel expenses including air fare, lodging and meals for AGI assuming that the trips are necessary and not personal in nature. (Note: the business meal portion of this expense is reduced by 50%.) b. Reimbursed travel expenses are generally deductible for AGI. However, since the reimbursements are made pursuant to an accountable plan, Marc will not report the reimbursement or the deductions on his return. c. Marc may deduct unreimbursed expenses as a miscellaneous itemized deduction subject to the 2% nondeductible floor. d. Kay may deduct travel expenses for AGI. Any business meals are reduced by 50%. pp. I:9-4 through I:9-8, I:9-16 through I:9-18. I:9-4
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Chapter+9 - AF 450 Federal Taxation I Dr. Julia M. Camp...

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