sol ch 8 - ANSWER TO KEYSTONE PROBLEM—CHAPTER 8(118605...

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Unformatted text preview: ANSWER TO KEYSTONE PROBLEM—CHAPTER 8 (118605.) Under Assumption 1: If an individual is self-employed, all trade or business expenses are deductible for adjusted gross income (AG1). Since Ralph is self-employed, $8,800 of business expenses incurred by Ralph is deductible for AG]. The $8,800 of business expenses consists of $5,000 in travel expenses, $2,600 in transportation expenses, and $1,200 in entertainment expenses. Only 50 percent of entertainment expenses is deductible for tax purposes ($2,400 X 50% = $1,200). Under Assumption 2: The excess expenses of $2,000 ($l0,000 — $8,000 reimbursement) would normally be deductible, subject to the 2% of AG] limitation. However, only 50% of the meal and entertainment expenses are deductible. Since 80% ($8,000f$10,000) of all expenses were reimbursed, 20% of all expenses were not reimbursed. That means that $4,000 X 20% = $800 of meal and entertainment expenses were not reimbursed, and 50% ($400) of that would not' be deductible. $2,000 excess expenses — $400 nondeductible meal and entertainment expenses = $1,600 of deductible expenses ($400 meal and entertainment and $1,200 of travel and transportation), subject to the 2% of AGI limitation. Answers to Questions Medical Expenses Limits 1. Medicines and drugs are limited to preseription medicines and drugs. Total unreimbursed medical expenses must be reduced by 7.5 percent of adjusted gross incdme. Medical Expenses: Capital Expenditures 2. Capital expenditures incurred for medical expense purposes are deductible to the extent that the expenditure exceeds the increase in value of the related property. Medical Transportation Costs 3. Transportation incurred primarily for and essential to medical care is deductible. A deduction rate of $. l9 per mile is allowed in computing the cost of operating an automobile. The cost of travel to another locality for personal consideration is not deductible. Deductible Medical Expenses 4. No, nonprescription item . No, travel not required for health Yes Yes Yes Deductible Medical Expenses 5. sup-90‘s No, not prescription item Yes Yes Yes . No, specifically excluded by statute 9999‘? Personal Property Taxes 6. Personal property taxes must be based on the value of the property to qualify as an itemized deduction. A tax based partly on value may qualify in part. State and Lacal Income Tax Refunds 7. A refund of a state or local income tax is reported as income in the year received to the extent that a benefit was received in the year paid. The benefit received is the lower of the deduction taken for the taxes paid or the excess of the itemized deductions over the standard deduction for the year the taxes were paid. Deductible Taxes 8. a. Yes, since based on the value of the property b. No, not a deductible tax c . No, not a deductible tax (1. Yes, if sales taxes rather than state income taxes are deducted Deductible Taxes 9. a. No, not deductible tax b. No, not deductible tax c. Yes (:1. No, not deductible tax Net Investment Income Definition 10. Investment income includes portfolio income such as interest, dividends, rents and royalties, and capital gains, along with certain depreciation recapture items. Tax-exempt interest is not included as investment income for purposes of the investment interest limitation. Prepaid Interest 11. Prepaid interest is only deductible for the period to which it applies. Both cash and accrual basis taxpayers must allocate prePaid interest over current and future time periods. The exception to this treatment is for “points” paid on acquisition indebtedness of a principal residence. Charitable Organizations: Categories 12. Qualified charitable organizations are divided into categories: public charities and private charities. Private charities are private nonoperating foundations that do not distribute all of their income to public charities. Public charities would include all other qualified charities. Private Operating v. Nonoperating Foundation 13. A private operating foundation distributes substantially all of its income for the conduct of charitable purposes. A private nonoperating foundation does not distribute all of its income for the conduct of charitable - purposes. Charitable Services Deduction 14. The value of donated services is not deductible as a charitable contribution. Unrelated Use Charitable Contributions IS. When an asset is being sold by a charitable organization, the asset is considered to have unrelated use. The fair market value of tangible personal property with unrelated use generally must be reduced by any gain to determine the charitable deduction. J._C_ «cdgerr—Eac: c— LCTC t¢>c—:Em «$5 _m_.t_>:~:_ up: sum—+5 Em mmDEmSL :0 Dumb OEwm 0:: cm u—uca 50% 9.5.02 2 _§E>€E 2:: 25:38: 0.5 5535 2: 52595 $350923 2: math—.2: 5:3 [email protected] mm E=E>EE cm .: .5055: .5 25.: 2:9... 2: E 5.53 .5: 938. m_ Ea $05.53 5 5:5: 5.522% a E 33555 E Esflfivfi 2: .2 $533 53 5.: 03:33: 5.5 _§E>_:E an an 8:55 5535 mcioombfl. .mm mum—.man ace—mafia.” 555%qu 2: .525 35.55 moms—055 33553:...“ 9.: .5 385 E mac—55a E22 2 3:0.an 2: 3555 A8 .5 .55.an 2: 2 $2095 finish—EH2 2: 25533.3 8 3.8555 2: 2:52 5: o: A: E: EcoEowcmtm 5.5 mafia. :cuEOmEQEE 535558352 gm mam—n. acanmusnEfim 0352:3352 .EoEuEma 50535355 Em 3 @253.- B .5 3:..6 .5 BEEQEQQ 2: E 3332 £528 on 5:5 533% MuohoEEu 2: £98355 :5 mn— u.£5::o: on— 3 5:5 E .3 «unconfi— uu>o_aEm_ .52 2: 5558:: 5:35. 2: :25.» E :5» 2: 5 03:33: E mac. :2: d. .3 38°.— tag... .253: .555: an .5 5:96 5355.5 :25 diam—:52 68395:: .5225 .5 :52 2: on 5:: $2 2:. 5—253 555 .5 .onBQEm .553 .2: :5: mafia $2 an.“ m: amo— bESmao < .2 neg—.55 33 3.325 .mEEE x3 5:555 2: 8 :25me on $3: 539; 5me E: Eatonon 35:5: 2: .5 283.5% cm 600%: $885 2.5: 5:55 .5 55% m .5 :5: an .5 029» BEE—o 2: can? .2 minim...“ 233550 Eastman .mfiom PE .5: Emacs: 30:55 5.5 223:5: 5:359:05 2: :0 8:83 335255 55:35:55 53.3225 :52 .2 angers—mu accrsfibcou 03519—0 a accustom omcumxu $2me 31% 55¢on “.222 08 03.? BxEE :35 83.5:— amou— ooefi a .9920 .3 “wow doc.“ E m_ 5:320 2: 5% coausuou .8605 of. .mm flzoEu>EnEu Egg—mu "agave—um 32qu dengue—u umfiaxu $3qu 2: Em 82m; m_ 62 3.833% 0585 $2» mfg .855 E: Sm 23 $3098 .523:— u£ .520 3 03m m_ .5520 .3 “:95.— acoucuautcoz "mom—.035 .3502 20. lne medical expenses 01 me [Iluuler are Illcluueu among 1Ulll auu oualmuu a memes" UAPUIIJUJ. Medicines and drugs $1,800 Insurance 4,000 Hospital 3,200 Doctor 4,200 Cosmetic surgery (unnecessary) 0 Mileage (400 X $.19) Efi Total medical expenses $13,276 Less 7.5% AGI 6,375 Medical deduction m Medical Expense Computation 27. Medicines and drugs $1,800 Insurance 4,000 Other medical (after reimbursement) ($7,426 - 4,100) 3,376 Total medical $9,126 Less 7.5% AGI 6,3?5 Medical deduction m Tax Expenses Deduction 28. $6,000. The taxpayer would not deduct the sales taxes, since they are less than the state income tax, and he cannot deduct, the license plate fee, or the federal income tax. State Income Tax Refund 29. Adolpho’s tax deduction for state income taxes for 2011 is $3,700, and in 2012 it is $4,400. The refund received in 2012 is income in 2012 to the extent that a tax benefit was realized in 2011. The tax benefit in 2011 was $6,000 - $5,800 = $200. Prepaid Interest 30. Raphael is allowed a $250 deduction for the first year if he makes a Separate payment of the $3,000. Prepaid interest must be allocated over the life of the loan. If the $3,000 is offset against the $20,000 loan, there is no deduction until the loan is paid. Qualified Student Loan Interest 31. There is a $2,500 maximum deduction for AG] in 2011, and no reduction in that maximum occurs because AG] is not more than $60,000. Qualified Student Loan Interest 32. The $2,500 maximum deduction for AGI in 201 l is reduced to give a $1,667r deduction for AGI. The reduction is $833: $65,000 — $60,000 X $2,500 $15,000 5:}. Josepnme IS allowed a ueuucuun 101' me “cher un "or IJCIBUllttI icmucuco. 1 no HIM-dual. uu u“.- luuu u: qu’ state and municipal bonds of $750 (3,4 >< $1,000) is not deductible. The other $250 of interest is deductible as investment interest. The interest paid to her credit card company is personal interest and is not deductible. Interest Expense Deduction 34. Total interest deduction of $13,000 is allowed to Mike and Sally. $6,500 of the investment interest equal to net investment income, is allowed, and $4,000 home mortgage interest is allowed. The remaining $8,500 of investment interest is carried forward. In addition, a maximum of $2,500 of interest on qualified education loans is allowed. Qualified Residence Interest Deduction 35. Deductible interest is $10,000. Interest deduction is limited to interest on the first $100,000 of the home equity loan. ($21,600 interest X $100,000 limiti$216,000 loan = $10,000 deductible interest.) Investment Interest Deduction 36. Total investment interest deduction of $7,000 is allowed. The remaining $14,000 of investment interest is carried forward. Charitable Contributions Deduction: Pledges 37. The charitable contribution for 201] is $200. A contribution is made at the time delivery is effected. The unconditional delivery or mailing of a check which subsequently clears in due course constitutes an effective contribution on the date of delivery or mailing. The pledge is not deductible until paid. Charitable Contributions Deduction Computation 38. AG] = $50,000 AG! % Overall Limit (50%) Limit Deduction Carryover 50% $3,000 $25,000 $25,000 $3,000 $0 30% Public 40,000 15,000 22,000 15,000 25,000 30% Private M 15,000 0 11 3.1 1110 Total Deduction w w w The 30% public deduction is limited to 30% of AGI, or $15,000. The 30% private deduction is limited by 50% of AGI ($25,000) less the 50% contribution ($3,000) less the 30% public contribution ($40,000), or zero. The overall carryover is $33,000. Charitable Contributions Deduction Computation 39. a. AGI = $80,000 AG! % Overall Limit (50%) Limit Deduction Carryover 50% $5,000 $40,000 $40,000 $5,000 $0 30% Public 30,000 24,000 35,000 24,000 6,000 20% 5,909 16,000 5,000 5,000 [1 Total Deduction mom 533.092 smog by $2,000, the‘long-term capital gain, to the basis of $5,000._The carryover is $6,000, all in the 30% public category. The 20% limit is the lesser of (1) $16,000 (20% of AGI) or (2) $5,000 [50% of AGI ($40,000) minus the other contributions ($35,000)]. . Since the deduction from the 20% limit category is already equal to the overall (50%) limit, the charitable contribution deduction remains at $34,000. The carryover, however, would increase to $26,000, $6,000 from the 30% public category, and $20,000 from the 20% category. Charitable Contributions Deduction Computation 40. a. $600—The deduction for ordinary income property given to a charity is limited to basis. . $7,000—The general rule is that when property is given to private charities, the fair market value is used. c. $6,000—Since the asset is to be sold, it has unrelated use and the fair market value must be reduced by the gain. Charitable Contributions Deduction Computation 41. . Charitable deduction is limited to $30,000 ($100,000 AG} X 30%). Carryover is $10,000. . Fair market value is reduced by $8,000 ($40,000 — $32,000). Charitable contribution is $32,000. No carryover, because 50% limit applies. . Fair market value must be reduced by $8,000 and the charitable deduction is limited to $20,000 ($100,000 AGI X 20%). The carryover is $12,000 ($32,000 — $20,000). . Charitable deduction is limited to $20,000 ($100,000 AGI X 20%). The carryover is $20,000. Because the charitable contribution is qualified appreciated stock, no reduction by the capital gain is necessary. Casualty and Theft Losses 42. There are two separate losses, each personal and subject to the $100 reduction. Tkefl Casuan Cash $150 Loss limited to basis $200,000 Wristwatch 200 Less: Insurance 120,000 Beer and cooler j $425 $30,000 Less: Reduction 1110 Less: Reduction 100 Loss from theft m Loss from fire $32,200 Loss from fire $29,900 Loss from thefi 325 Total losses $30,225 Less: 10% Adjusted gross income reduction l0,0!ll Deductible casualty and theft losses M 4.5. Business Personal Cost . $12,000 $6,000 Less: Depreciation am _ Basis for casualty M $6,000 The $3,600 in repairs must be allocated between business and personal. Thus, $2,400 is a business casualty loss deduction deductible for AG] and the $1,200 allocated to personal use is not deductible since it does not exceed the 10 percent ofAGl and the $100 reductions. The basis for casualty has to be computed to compare the decrease in FMV against the basis. Usually the cost of repairing can be used as an estimate of the decrease in FMV. Casualty Losses 44. No deduction in 2011 is allowed since Pablo expected to recover his loss. A $1?,900 deduction is allowed in 2012 ($24,000 — $1,000 — $100 - $5,000) as an itemized deduction. Casualty Losses 45. Sam can deduct $2,800 as a personal casualty loss (itemized deduction) for the year. Fair market value before accident $1200 Fair market value after accident 1,100 Decrease in fair market value $5,900 Less: Reduction 100 Less: 10% Adjusted gross income reduction 3% Deductible casualty loss m Reimbursed Employee Expenses 46. a. Since Peter received less than a full reimbursement from the employer, the reimbursement is allocated proportionately between the travel (2/3) and entertaimnent ('A) expense—$2,000 travel reimbursement and $1,000 meal and entertainment reimbursement. The $400 of unreimbursed travel ($2,400 — $2,000) plus $100 ($200 X 50%) unreimbursed meal and entertainment expenses are deductible as miscellaneous itemized deductions subject to the 2 percent of AGI limitation. b. If Peter receives $3,600 in reimbursement from his employer, neither the expenses nor the reimbursement has to be shown on his tax return. Multiple Choice—Charitable Contribution 47'. c. The deduction for the contribution of short—term stock is limited to basis. Multiple Choice—U nreimbursed Employee Expenses 48. d. Umeimbursed expenses are deductible as miscellaneous itemized deductions. Multiple Choice—Employee Reimbursed Expenses 49. b. The business expenses should be shown as miscellaneous itemized deductions subject to the 2 percent nondeductible floor. 30. D. The excess expenses snouw De snown as mlscenaneous Itemizeu ueuucuuns surqu LU me 2 pencem nondeductible floor. Comprehensive Problem (Tax Return Problem)—Taxable Income Computation 51. Andy and Marcia’s taxable income for 20] l is $62,296, computed as follows: Andy's salary $50,000 Marcia‘s salary 42,000 Dividends 95!! Total gross income $92,950 Less: Deductions toward adjusted gross income Andy's IRA contribution m Adjusted gross income $90,950 Less: Itemized deductions Medical expenses Doctors and hospitals $4,200 Health insurance 2,600 Prescription drugs and medicines 800 Eyeglasses 175 Less: 7.5% ofAGI M ) $954 Taxes Residence 2,300 State income taxes m 5,100 Interest Home mortgage $7,800 Credit cards (nondeductible personal interest) _& 7,800 Miscellaneous Union dues and subscriptions $480 Tax preparation fee 125 Less: 2% of AGI LL.3_L9 ) _Jl Total itemized deductions $13,854 Less: Personal exemptions (4 x $3 ,700) M Taxable income m J‘” um I: .3 WA uuulut-r lUl av 1 1 In we’ve: I, uuunrrucuu w lullvrruu Salary $50,000 Interest Income 3,200 Dividends ' 800 Adjusted Gross Income $54,000 Medical Expenses $4,800 Less: 7.5% ofAGI 4,1150 750 Property Taxes on Personal Residence 3,600 State and Local Income Taxes 2,400 Interest on Home Mortgage 7,600 Investment Interest Expense 4,000 Casualty Loss ($15,000 — $7,000) $8,000 Less: $l00 —100 Less: 10% of AGI ;§A_QQ 2,500 Unreimbu'rsed Expenses 2,000 Less: 2% of AGI M 920 Total Itemized Deductions 21,770 Less: Personal Exemption 3,700 Taxable Income m Tax Liability [$850 + .IS($28,530 - $8,500)] My, Research Problem—Medical Expenses 53. Lodging while away from home under circumstances in which the lodging is primarily for and essential to medical care is deductible. The amount of the deduction is limited to $50 per night for each eligible person. Expenses paid for transportation for and essential to medical care are deductible. The transportation deduction does not include the cost of any meals while away from home to receive medical care. Mary’s deduction is $1,700 ($1,000 transportation and $100 per day for seven days’ lodging). Research Problem—Travel Deductions 54. 0. Burns v. Gray, 61-1 USTC 11 9294, 287 F.2d 698 (CA-6 I961) (CCH STANDARD FEDERAL TAX REPORTS 1]8520.0205). The Commissioner has ruled that a taxpayer’s “home,” for purposes of Code Sec. 162(a)(2), is considered to be located at (I) the taxpayer’s regular or principal (if more than one regular) place of business, or (2) if the taxpayer has no regular or principal place of business because of the nature of the trade or business, then at the regular place of abode in a real and substantial sense. See Rev. Rul. 60—189 and Rev. Rul. 71-247. If a taxpayer fails to come within either category, the taxpayer is considered to be an “itinerant” who has a “home” wherever the taxpayer happens to be working and thus is never “away from home” for traveling expense deduction purposes. Three objective factors used in determining whether a taxpayer has a “regular place of abode in a real and substantial sense” or whether the taxpayer is an itinerant are presented in Rev. Rul. 73-529. The Commissioner’s insistence that a taxpayer’s “home,” for the purposes of this statute, is the principal place of business, regardless of where the family maintains its residence, has historically been the source of some judicial conflict. The Tax Court’s decisions have been consistent with this position, recognizing m. nvnnnl:hn who“ tI-m ravnmmr’c pmnln‘rmén'l ic nnlv ipmnnram M dietinoniehr-td frnm nermsment nr' b. R. Rosenspan, 'i'l-l USTC 19241, 438 F.2d 905 (CA-2 1971), cert. denied 404 US. 364, 92 S.Ct. 54 (CCH STANDARD FEDERAL TAX REPORTS 118520.03). A traveling salesman who could not show that a sleep-in, eat-in home was maintained on either a year- round or a permanent basis was not entitled to a business expense deduction. Similarly, a traveling salesman for several clothing manufacturers, who worked on a straight commission basis, was not entitled to a business expense deduction for the cost of meals, lodging, and tips while traveling “away from home” since the salesman was constantly in a travel status and had no “home” from which to be away. See G.H. James (CA-9) 62-2 USTC 1] 9’? 35, 308 F. 2d 204. c. HA. Stidger, 67-] um 11 9309, 386 us. 237, 8? S.Ct. 1065 (196?) (CCH STANDARD FEDERAL TAX REPORTS 1[8500.069). A member of the military services is not “away from home” while at a permanent duty station and may not deduct traveling expenses, including meals and lodging, incurred at such location. This is so even though it is not feasible or even permissible for the family to join the service member. ...
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This note was uploaded on 12/02/2011 for the course ACCOUNTING 4001 taught by Professor Nathanielbell during the Spring '11 term at FIU.

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sol ch 8 - ANSWER TO KEYSTONE PROBLEM—CHAPTER 8(118605...

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