Chapter+6 - 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 6: 1, 2, 5, 11, 16, 25, 33, 35, 36, 37, 38, 42, 43, 53, 55 I:6-1 Deductions for AGI reduce the taxpayer's gross income by the full amount of the deduction even if the standard deduction is used. Deductions from AGI are not beneficial unless their sum exceeds the standard deduction, in which case these deductions will be included as itemized deductions. Also, many deductions from AGI are decreased by a percentage of AGI (e.g., 7.5% for medical expenses, 10% for casualty losses, and 2% for miscellaneous itemized deductions) and for taxpayers with AGI over certain threshold amounts, the total of the from AGI deductions is reduced. p. I:6-3. I:6-2 Expenses incurred in producing rental income are deductions for AGI. p. I:6-3. I:6-5 a. If the expenses are deductions for AGI, Mario's taxable income is: Income $55,000 Deductions for AGI ( 9,000 ) AGI $46,000 Standard deduction ( 5,350) Personal exemption ( 3,400 ) Taxable income $37,250 b. If the expenses are deductions from AGI, Mario's taxable income is: Income $55,000 Deductions for AGI ( 0 ) AGI $55,000 Deductions from AGI ( 7,900) a Personal exemption ( 3,400 ) Taxable income $43,700 a $9,000 - ($55,000 x .02) = $7,900. Note that the taxpayer loses the benefit of the standard deduction if the expenses are deductions from AGI. p. I:6-4. I:6-11 The disallowance for expenses related to tax-exempt income is to prevent the taxpayer from enjoying a double tax benefit. If expenses related to tax exempt income were deductible, the taxpayer would benefit by not paying tax on the income and at the same time would be able to deduct the expenses related to that income. pp. I:6-11 and I:6-12. I:6-16 For travel or entertainment expenses to be deductible, documentation such as account books, logs, receipts, statements of witnesses, etc., must exist. The
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documentation must substantiate the amount, the time and place, the business purpose, and the business relationship with the person entertained. p. I:6-17. I:6-25 The $1,000 income from the hobby is included in Jill's gross income. Since hobby expenses are deductible up to the amount of the income from the hobby, $1,000 of the hobby expenses are potentially deductible. However, they are deductible as miscellaneous itemized deductions subject to the 2% of AGI limit. Thus, unfortunately none of the expenses of the hobby are deductible since they do not exceed this limit ($71,000 x .02 = $1,420). pp. I:6-28 and I:6-29. I:6-33
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Chapter+6 - AF 450 Federal Taxation I Dr. Julia M. Camp...

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