46. LO.3 Sarah owns a vacation cabin in the
Tennessee mountains. Without considering the cabin, she has gross income of
$65,000. During the year, she rents the cabin for two weeks for $2,500 and uses
it herself for four weeks. The total expenses for the year are $10,000 mortgage
interest; $1,500 property tax; $2,000 utilities, insurance, and maintenance;
and $3,200 depreciation.
a. What effect does the rental of the
vacation cabin have on Sarah’s AGI?
b. What expenses can Sarah deduct, and how
are they classified (i.e., for or from
AGI)?
47. LO.3 Adelene, who lives in a winter
resort area, rented her personal residence for
14 days while she was visiting Brussels.
Rent income was $5,000. Related expenses for the year were as follows:
Real property taxes $ 3,800
Mortgage interest 7,500
Utilities 3,700
Insurance 2,500
Repairs 2,100
Depreciation 15,000
Determine the effect on Adelene’s AGI.
48. LO.3 During the year (not a leap year),
Anna rented her vacation home for 30 days, used it personally for 20 days, and
left it vacant for 315 days. She had the following income and expenses:
Rent income $ 7,000
Expenses
Real estate taxes 2,500
Interest on mortgage 9,000
Utilities 2,400
Repairs 1,000
Roof replacement (a capital expenditure)
12,000
Depreciation 7,500
a. Compute Anna’s net rent income or loss
and the amounts she can itemize on her tax return, using the court’s approach
to allocating property taxes and interest.
b. How would your answer in part (a) differ
using the IRS’s method of allocating property taxes and interest?
49. LO.3 How would your answer to Problem
48 differ if Anna had rented the house for 87 days and had used it personally
for 13 days?
50. LO.1, 3 Chee, single, age 40, had the
following income and expenses during 2016:
Income
Salary $43,000
Rental of vacation home (rented 60 days,
used personally 60 days, vacant 245 days) 4,000
Municipal bond interest 2,000
Dividend from General Electric 400
Expenses
Interest on home mortgage 8,400
Interest on vacation home 4,758
Interest on loan used to buy municipal
bonds 3,100
Property tax on home $ 2,200
Property tax on vacation home 1,098
State income tax 3,300
State sales tax 900
Charitable contributions 1,100
Tax return preparation fee 300
Utilities and maintenance on vacation home
2,600
Depreciation on rental portion of vacation
home 3,500
Calculate Chee’s taxable income for the
year before personal exemptions. If Chee has any options, choose the method
that maximizes his deductions.
51. LO.1, 3, 4 Elisa and Clyde operate a
retail sports memorabilia shop. For the current year, sales revenue is $55,000
and expenses are as follows:
Cost of goods sold $21,000
Advertising 1,000
Utilities 2,000
Rent 4,500
Insurance 1,500
Wages to Boyd 8,000
Elisa and Clyde pay $8,000 in wages to
Boyd, a part-time employee. Because this amount is $1,000 below the minimum
wage, Boyd threatens to file a complaint with the appropriate Federal agency.
Although Elisa and Clyde pay no attention to Boyd’s threat, Chelsie (Elisa’s
mother) gives Boyd a check for $1,000 for the disputed wages. Both Elisa and
Clyde ridicule Chelsie for wasting money when they learn what she has done. The
retail shop is the only source of income for Elisa and Clyde.
a. Calculate Elisa and Clyde’s AGI.
b. Can Chelsie deduct the $1,000 payment on
her tax return? Explain.
c. How could the tax position of the
parties be improved?
52. LO.3, 4 Brittany Callihan sold stock
(basis of $184,000) to her son, Ridge, for $160,000, the fair market value.
a. What are the tax consequences to
Brittany?
b. What are the tax consequences to Ridge
if he later sells the stock for $190,000?
For $152,000? For $174,000?
c. Write a letter to Brittany in which you
inform her of the tax consequences if she sells the stock to Ridge for
$160,000. Explain how a sales transaction could be structured that would
produce better tax consequences for her. Brittany’s address is 32 Country Lane,
Lawrence, KS 66045.
53. LO.3 The Robin Corporation is owned as
follows:
Isabelle 26%
Peter, Isabelle’s husband 19%
Sonya, Isabelle’s mother 15%
Reggie, Isabelle’s father 25%
Quinn, an unrelated party 15%
Robin is on the accrual basis, and Isabelle
and Peter are on the cash basis. Isabelle and
Peter each loaned the Robin Corporation
$40,000 out of their separate funds. On
December 31, 2016, Robin accrued interest
at 7% on both loans. The interest was paid on February 4, 2017. What is the tax
treatment of this interest expense/income to
Isabelle, Peter, and Robin?
54. LO.3 For each of the following
independent transactions, calculate the recognized gain or loss to the seller
and the adjusted basis to the buyer.
a. Bonnie sells Parchment, Inc. stock
(adjusted basis $17,000) to Phillip, her brother, for its fair market value of
$12,000.
b. Amos sells land (adjusted basis $85,000)
to his nephew, Boyd, for its fair market value of $70,000.
c. Susan sells a tax-exempt bond (adjusted
basis $20,000) to her wholly owned corporation for its fair market value of
$19,000.
d. Ron sells a business truck (adjusted
basis $20,000) that he uses in his sole proprietorship to his cousin, Agnes,
for its fair market value of $18,500.
e. Martha sells her partnership interest
(adjusted basis $175,000) in Pearl Partnership to her adult daughter, Kim, for
$220,000.
55. LO.1, 3, 4 During the current year,
Robert pays the following amounts associated with his own residence:
Property taxes $3,000
Mortgage interest 8,000
Repairs 1,200
Utilities 2,700
Replacement of roof 4,000
In addition, Robert paid $1,500 of property
taxes on the home that is owned and used by Anne, his daughter.
a. Which of these expenses can Robert
deduct?
b. Can Anne deduct the $1,500 of property
taxes?
c. Are the deductions for AGI or from AGI
(itemized)?
d. How could the tax consequences be
improved?
Cumulative Problems
56. Roberta Santos, age 41, is single and
lives at 120 Sanborne Avenue, Springfield, IL
60781. Her Social Security number is
123-45-6789. Roberta has been divorced from her former husband, Wayne, for
three years. She has a son, Jason, who is 17, and a daughter, June, who is 18.
Jason’s Social Security number is 111-11-1112, and June’s is 123-45-6788.
Roberta does not want to contribute $3 to the Presidential Election
Campaign Fund.
Roberta, an advertising executive, earned a
salary of $80,000 in 2015. Her employer withheld $9,000 in Federal income tax
and $3,100 in state income tax.
Roberta has legal custody of Jason and
June. The divorce decree provides that
Roberta is to receive the dependency
deductions for the children. Jason lives with his father during summer
vacation. Wayne indicates that his expenses for Jason are $10,500. Roberta can
document that she spent $6,500 for Jason’s support during
2015. In prior years, Roberta gave a signed
Form 8332 to Wayne regarding Jason.
For 2015, she has decided not to do so.
Roberta provides all of June’s support.
Roberta’s mother died on January 7, 2015.
Roberta inherited assets worth $625,000 from her mother. As the sole
beneficiary of her mother’s life insurance policy, Roberta received insurance
proceeds of $300,000. Her mother’s cost basis for the life insurance policy was
$120,000. Roberta’s favorite aunt gave her $13,000 for her birthday in
October.
On November 8, 2015, Roberta sells for
$22,000 Amber stock that she had purchased for $24,000 from her first cousin,
Walt, on December 5, 2010. Walt’s cost basis for the stock was $26,000, and the
stock was worth $23,000 on December 5,
Tax Return Problem
2010. On December 1, 2015, Roberta sold
Falcon stock for $13,500. She had acquired the stock on July 2, 2012, for
$8,000.
An examination of Roberta’s records reveals
that she received the following:
• Interest income of $2,500 from First Savings Bank.
• Groceries valued at $750 from a local grocery store for being the
100,000th customer.
• Qualified dividend income of $1,800 from Amber.
• Interest income of $3,750 on City of Springfield school bonds.
• Alimony of $16,000 from Wayne.
• Distribution of $4,800 from ST Partnership. Her distributive share
of the partnership passive taxable income was $5,300. She had no prior passive
activity losses.
From her checkbook records, she determines
that she made the following payments during 2015:
• Charitable contributions of $4,500 to First Presbyterian Church and
$1,500 to the
American Red Cross (proper receipts
obtained).
• Mortgage interest on her residence of $7,800.
• Property taxes of $3,200 on her residence and $1,100 (ad valorem)
on her car.
• Estimated Federal income taxes of $3,800 and estimated state income
taxes of $1,000.
• Medical expenses of $5,000 for her and $800 for Jason. In December,
her medical insurance policy reimbursed $1,500 of her medical expenses.
• A $1,000 ticket for parking in a handicapped space.
• Attorney’s fees of $500 associated with unsuccessfully contesting
the parking ticket.
• Contribution of $250 to the campaign of a candidate for governor.
• Because she did not maintain records of the sales tax she paid, she
calculates the amount from the sales tax table to be $994.
Calculate Roberta’s net tax payable or
refund due for 2015. Use the appropriate forms and schedules. Suggested
software: H&R BLOCK Tax Software.
57. John and Mary Jane Diaz are married,
filing jointly. Their address is 204 Shoe Lane,
Blacksburg, VA 24061. John is age 35, and
Mary Jane is age 30. They are expecting their first child in early 2017. John’s
salary in 2016 was $105,000, from which $20,800 of Federal income tax and
$4,700 of state income tax were withheld. Mary
Jane made $52,000 and had $3,000 of Federal
income tax and $3,100 of state income tax withheld. The appropriate amounts of
FICA tax and Medicare tax were withheld for John and for Mary Jane. John’s
Social Security number is 111-11-1111, and Mary
Jane’s Social Security number is
123-45-6789.
John and Mary Jane are both covered by
their employer’s medical insurance policies with four-fifths of the premiums
being paid by the employers. The total premiums were $10,000 for John and $6,200
for Mary Jane. Mary Jane received medical benefits of $7,300 under the plan.
John was not ill during 2016. Mary Jane paid noncovered medical expenses of
$1,300.
John makes child support payments of
$15,000 for his son, Rod, who lives with
June, John’s former spouse, except for two
months in the summer when he visits
John and Mary Jane. At the time of the
divorce, John worked for a Fortune 500 company and received a salary of
$225,000. As a result of corporate downsizing, he lost his job.
Mary Jane’s father lived with them until
his death in November. His only sources of income were salary of $2,800,
unemployment compensation benefits of $3,500, and Social Security benefits of
$4,100. Of this amount, he deposited $6,000 in a
Tax Computation Problem savings account.
The remainder of his support of $9,500, which included funeral expenses of
$4,500, was provided by John and Mary Jane.
Other income received by the Diazes was as
follows:
Interest on certificates of deposit $3,500
Share of S corporation taxable income
(distributions from the
S corporation to Mary Jane were $1,100)
1,500
Award received by Mary Jane from employer
for an outstanding suggestion for cutting costs 4,000
John has always wanted to operate his own
business. In October 2016, he incurred expenses of $15,000 in investigating the
establishment of a retail computer franchise. With the birth of their child
expected next year, however, he decides to forgo self-employment for at least a
couple of years.
John and Mary Jane made charitable contributions
of $3,700 during the year and paid an additional $1,800 in state income taxes
in 2016 upon filing their 2015 state income tax return. Their deductible home
mortgage interest was $8,200, and their property taxes came to $4,800. They
paid sales taxes of $2,000, for which they have receipts. They paid a ticket of
$150 that Mary Jane received for running a red light (detected by a red light
camera).
Part 1—Tax Computation
Calculate John and Mary Jane’s tax (or
refund) due for 2016.
Part 2—Tax Planning
Assume that the Diazes come to you for
advice in December 2016. John has learned that he will receive a $30,000 bonus.
He wants to know if he should take it in
December 2016 or in January 2017. Mary Jane
will quit work on December 31 to stay home with the baby. Their itemized
deductions will decrease by $3,100 because Mary Jane will not have state income
taxes withheld. Mary Jane will not receive the employee award in 2017. She
expects the medical benefits received to be $9,000. The Diazes expect all of
their other income items to remain the same in
2017. Write a letter to John and Mary Jane
that contains your advice, and prepare a memo for the tax files.