Chapter 5 HW Solutions (1)

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Chapter 5 HW 15. In a community property state, each spouse will report exactly half of the income earned by the other. Hence, Bonnie and Clyde will each report $32,700 ($18,500+$14,000+$200). In a common-law state, Bonnie will report $37,200 which is her separate income ($37,000) plus half of the joint income ($200). Likewise, Clyde will report $28,200. 18. Geri should include the interest in gross income last year, because they are a cash method taxpayer, and they are treated as having received the income when it is paid or credited to their account. At that point, they have control over the interest income. 46. a. Louis received a tax benefit for the lesser of the refund ($900) or the excess of the itemized deductions above the standard deduction ($13,200-$12,950= $250). Hence, Louis must include $250 of the $900 refund in gross income. b. Because he didn’t itemi ze his deductions, Louis received no tax benefit from the $900 tax overpayment. Hence, none of the refund is included in his gross income. c. Louis received a tax benefit for the lesser of the refund ($900) or the excess of the itemized deductions above the standard deduction ($14,390-$12,950= $1,440). Hence, Louis must include the entire $900 refund in gross income. 55. a. All $500 is economic income realized this year and is, therefore, included in gross income. b. The value of the car, $17,000, is economic income realized this year and is, therefore, included in gross income. c. The entire award is excluded and therefore tax exempt. The award is excluded because it was for scientific, literary, or charitable achievement, and the taxpayer immediately transferred the award to a qualified charity. d. All $2,500 is economic income realized this year and is, therefore, included in gross income. e. All $1,000 is economic income realized this year and is, therefore, included in gross income. f. Gene should include $400 in his gross income. 56. a. Grady excludes the entire $8,200 because the sum of his modified AGI plus 50 percent of his Social Security benefits ($12,100 + $250 + $4,100 (50% of Social Security benefits) = $16,450) is below the minimum amount ($25,000 or less for single taxpayers) for including Social Security benefits.

b. $850. Grady is single and his modified AGI plus 50 percent of his Social Security benefits ($22,000 + $600 + $4,100 (50% of Social Security benefits) = $26,700) falls between $25,000 and $34,000. His taxable Social Security benefits are the lesser of (a) 50 percent of the Social Security benefits ($8,200 × 50% = $4,100) or (b) 50 percent of ([$22,600 modified AGI + $4,100 (50 percent of Social Security benefits) - $25,000] = $850). Thus, his taxable Social Security benefits are $850. 65. a. The gift is realized income that is entirely excluded from gross income. b. Inheritances are realized income but are entirely excluded from gross income. The increase in the value of the shares during the year has not yet been realized. c. The gift of the bonds is realized income that is entirely excluded from gross income. The interest accrued up to October 31 st is excluded because it was accrued at the time of the gift. Hence, the accrued income was part of the gift. Grady is taxed on $500 of interest that accrued after the date of the gift (he is taxed on it when he receives it). d. A bona fide loan is not realized income. If the loan is actually a disguised gift, the gift would be realized income but the value is excluded from gross income. 66. a. $0. The value of the auto is ex cluded from Bart’s gross income (Note that Bart will take a tax basis of $17,000 in the auto). b. $0. The gift of cash is excluded from Bart’s gross income. c. $0. All $100,000 of insurance proceeds are excluded. d. $0. The value of the shares ($45,0 00) is excluded from Bart’s income (Note that Bart will take a tax basis of $45,000 in the shares). 69. a. The $30,000 is excluded from Janus’s gross income because it is a payment for a physical injury. However, the $250,000 of punitive damages is inc luded in Janus’s gross income because the payment is intended to punish Tiny Toys rather than compensate Janus for her injuries. b. The reimbursed medical costs and the payment for emotional distress associated with a physical injury are excluded. c. Pete must include the $20,000 payment in gross income because the payments are not associated with a physical injury. d. Bevis must include the $800 unemployment benefits in his gross income because unemployment benefits are a replacement for lost wages. 70. A. None of the $200,000 is taxable as life insurance proceeds are generally not taxable for income

tax purposes. Whether the $200,000 proceeds is subject to estate tax depends on whether her father’s estate was the beneficiary (in that case, it may be su bject to estate tax) or Janelle was the beneficiary (in that case, it would not be subject to estate tax). b. None. Because Janelle was medically certified as terminally ill with an illness expected to cause death within 24 months. 72. $465,000. Dontae’s $400,000 salary + $20,000 club membership + $5,000 season tickets + $40,000 housing allowance are included in his gross income. The $10,000 health insurance and $1,500 dental insurance is an excludable benefit under §106, and the $4,000 tuition reimbursement is excludable under §127. 75. Answer: $46,950, computed as follows: Ken’s Gross Income Description Amount Explanation a) Illegal income $1,200 Gross income includes income from all sources — legal or illegal b) Gain on stock sale 1,000 Ken recognizes a $1,000 gain on the sale [$32,000 (32 × $1,000) minus $31,000 (31 × $1,000)]. Note that only the sale proceeds in excess of the stock basis are included in gross income. c) Annuity 14,500 25,000 – (210,000 / 20) d) Disability benefits 0 excluded because the policy was purchased by the taxpayer e) Scholarship 200 $200 used towards car payment does not qualify for exclusion; $300 used for books may be excluded f) Paycheck from son 0 Under assignment of income doctrine, the income is taxed to the taxpayer who earned the income. The gift receipt is not taxable to Ken. g) State income tax refund 50 Portion of refund he received tax benefit for last year. See below for computation. h) Interest income 30,000 Included in gross income Gross income $46,950 State Tax Refund/Tax Benefit Rule Description Amount Explanation (1) Itemized deductions with $610 overpayment $13,000 (2) 2022 Standard deduction 12,950 Single filing status (3) Reduction in taxable income with $610 overpayment 13,000 Greater of (1) and (2) (4) Itemized deductions without the $610 overpayment that was refunded 12,390 (1) minus $610 (5) Reduction in taxable income without the $610 overpayment that was refunded 12,950 Greater of (2) and (4) Tax benefit from prior year $610 overpayment of state taxes $50 (3) – (5)

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