TAX 3300 Practice Problems 2

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Chapter 3, Practice Problems 6. In 2022, David is age 78, is a widower, and is being claimed as a dependent by his son. How does this situation affect the following? a. David’s own individual filing requirement. The filing requirements for persons being claimed as dependents by others are more complex than those applicable to regular taxpayers. The requirements depend on whether the dependent has only earned income, only unearned income, or both earned and unearned income and on the amount of gross income. b. The standard deduction allowed to David. The general standard deduction for a single person in 2022 is $12,950. This amount is subject to change based on the facts and circumstances. c. The availability of any additional standard deduction. In this case David is entitled to 1 additional standard deduction: (For being over 65). The additional std. Ded. For a single person in 2022 is $1,750. David’s std. Ded. Is also affected by the fact that he may be claimed as a dependent on another person’s tax return. A person who is claimed as a dependent on another taxpayer’s tax return has a standard deduction limited to the greater of $1,150 or $400 plus earned income. § 63(c)(5) (but in no event greater than the regular standard deduction). So in this case David’s standard deduction would be $1,150 (absent any information on earned income) PLUS the additional std. Ded. Of $1,750 for a total of $2,900. So in this case David’s standard deduction would be $1,150 (absent any information on earned income) PLUS the additional std. Ded. Of $1,750 for a total of $2,900. Filing Requirements: In general, an individual is required to file a return if Gross Income “GI” equals or exceeds that individual’s standard deduction (after 2025 it will be standard deduction plus exemption amount). Therefore, since David’s std. Ded. Is $2,900 this would also be the GI amount which would trigger a filing requirement. 9. Caden and Lily are divorced on March 3, 2021. For financial reasons, however, Lily continues to live in Caden’s apartment and receives her support from him. Caden does not claim Lily as a dependent on his 2021 Federal income tax return but does so on his 2022 return. Explain. Lily meets the criteria for a Qualifying Relative in 2022 under the Member of the Household category. She does not meet the criteria in 2021 because a spouse cannot be a “member of the household” in the year of divorce (or prior) but can be a member of the household in the year after divorce.

11. Mark and Lisa were divorced in 2021. In 2022, Mark has custody of their children, but Lisa provides nearly all of their support. Who is entitled to claim the children as dependents? Mark. When two people qualify to claim the same dependent tie breaker rules are used (two taxpayers may not claim the same dependent). The first tie-breaker rule is custody. Since Mark has custody, Mark may claim the children as dependents. 17. In connection with the application of the kiddie tax, comment on the following: a. The child has only earned income. The kiddie tax does not apply to earned income. b. The child has a modest amount of unearned income. The kiddie tax does not apply unless unearned income exceeds $2,300 in 2022 ($2,200 in 2021) c. The child is age 20, is not a student, and is not disabled. The kiddie tax does not apply. The age coverage is under 19 or a full-time student under age 24 d. The child is married. The kiddie tax does not apply if the child is married and files a joint return. e. Effect of the parental election. If the parental election is made, the child need not file a return f. The result when the parental election is made and the married parents file separate returns. For married parents filing separate returns, the parent with the greater taxable income is the applicable parent 21. Compute the 2022 standard deduction for the following taxpayers. a. Ellie is 15 and claimed as a dependent by her parents. She has $800 in dividend income and $1,400 in wages from a part-time job. 1,150 < 1,400+400  $1,800 b. Ruby and Woody are married and file a joint tax return. Ruby is age 66, and Woody is 69. Their taxable retirement income is $10,000. MFJ: Standard deduction = 25,900 MFJ: Additional Deduction= 1,400, both over 65 so each get 1,400 25,900 + 1,400 + 1,400= $28,700

c. Shonda is age 68 and single. She is claimed by her daughter as a dependent. Her earned income is $500, and her interest income is $125. 1,150 > 500+400  $1,150 1,150 + 1,750 (additional deduction for single) = $2,900 d. Frazier, age 55, is married but is filing a separate return. His wife itemizes her deductions. $0, Frazier may not use any standard deduction because he is married filing separate and his spouse itemizes. 23. Compute the 2022 tax liability and the marginal and average tax rates for the following taxpayers (use the 2022 Tax Rate Schedules in Appendix A for this purpose): The marginal rate is the highest rate applied in the tax computation for a particular taxpayer. The average rate is equal to the tax liability divided by taxable income. a. Chandler, who files as a single taxpayer, has taxable income of $94,800. Using the rates for a single taxpayer, her tax liability is $16,587.5. 1 Her marginal rate is 24%. Her average rate is 17.50% ($16,588 / $94,800). Liability is $15,213.5 + .24 * ($94,800 - $89,075) b. Lazare, who files as a head of household, has taxable income of $57,050. Using the rates for filing as a head of household, his tax liability is $6,668. His marginal rate is 22%. $6,415 plus 22% of the amount over $55,900. His average rate is 11.69% ($6,668 / $57,050). 1$94,800 − $89,075 = $5,725. $5,725 × 24% = $1,374. $1,374 + $15,214 = $16,588. 2$57,050 − $55,900 = $1,150. $1,150 × 22% = $253. $253 + $6,415 = $6,668 24. In 2022, Jack, age 12, has interest income of $4,900 on funds he inherited from his aunt and no earned income. He has no investment expenses. Christian and Danielle (his parents) have taxable income of $82,250 and file a joint return. Assume that no parental election is made. Determine Jack’s net unearned income, allocable parental tax, and total tax liability. In 2022, net unearned income of a dependent child is computed as follows: Unearned income Less: $1,150 Less: The greater of • $1,150 of the standard deduction or • the amount of allowable itemized deductions directly connected with the production of the unearned income Equals: Net unearned income If net unearned income is zero (or negative), the child’s tax is computed without using the parents’ rate. If the amount of net unearned income (regardless of source) is positive, the net unearned income is taxed at the parents’ rate. The child’s remaining taxable income (known as nonparental source income) is taxed at the child’s rate. Jack’s net unearned income is $2,600, computed as follows: Unearned income: $4,900 Less: $1,150 Less: $1,150 of the standard deduction Equals: $2,600 The allocable parental tax is $442, computed as follows: Christian and Danielle’s taxable income: $82,250 Plus: Jack’s net unearned income: $2,600 Revised taxable income: $84,850 Tax on revised parental income: $9,9011 Less: Tax on the parental income: $9,4592 Allocable parental tax: $442 Jack’s taxable

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income: Adjusted gross income: $4,900 Less: Standard deduction: $1,150 (limited) Equals: Taxable income: $3,750 Less: Net unearned income: $2,600 Nonparental source income: $1,150 Tax on $1,150 is $115 ($1,150 × 10%). Jack’s total tax is $557 ($442 + $115). Note: It does not matter that Jack’s unearned income was from property received from a relative rather than from his parents; the “kiddie tax” still applies. Tax Computations: 1 $84,850 − $83,550 = $1,300. $1,300 × 22% = $286. $286 + $9,615 = $9,901. 2 $82,250 − $20,550 = $61,700. $61,700 × 12% = $7,404. $7,404 + $2,055 = $9,459 25. Madeline sells her personal scooter for $550. She purchased the scooter for $700 three years ago. She also sells a painting for $1,200 that she acquired five years ago for $900. What are the tax implications of these sales? Sale of scooter has loss of 700-550=150, since it is for personal use the loss is not deductible Painting has a realized gain of 1,200-900=300, gain on sale of painting is recognized 30. Determine the amount of the standard deduction allowed for 2022 in the following independent situations. In each case, assume that the taxpayer is claimed as another person’s dependent. a. Curtis, age 18, has income as follows: $700 interest from a certificate of deposit and $12,800 from repairing cars. 1,150 < 12,800+400  13,200, standard deduction is limited to $12,950 for single filers, so standard deduction is 12,950 b. Mattie, age 18, has income as follows: $600 cash dividends from investing in stock and $4,700 from working as a lifeguard at a local pool. 1,150 < 4,700+400 = 5,100 c. Jason, age 16, has income as follows: $675 interest on a bank savings account and $800 for painting a neighbor’s fence. 1,150 < 800+400  1,200 d. Ayla, age 15, has income as follows: $400 cash dividends from a stock investment and $500 from grooming pets. 1,150 > 500+400  1,150 e. Sarah, age 67 and a widow, has income as follows: $500 from a bank savings account and $3,200 from babysitting. 1,150 < 3,200+400  3,600 standard deduction Additional deduction of 1,750 for single 3,600 + 1,750 = 5,350

34. Determine the number of dependents in each of the following independent situations and identify whether the dependent is a qualifying child or a qualifying relative. a. Andy maintains a household that includes a cousin (age 12), a niece (age 18), and a son (age 26). All are full-time students. Andy furnishes all of their support, and all are “members of the household.” Three . The niece is in the qualifying child category. The cousin and son are not, due to the relationship and age tests. Cousin fails the relationship test for a Qualifying Child. Therefore, cousin is not a qualifying child. Cousin meets the relationship test for Qualifying Relative ONLY because of the Member of the Household exception (Cousin lives with taxpayer for the entire year). We will assume that cousin has no income (age 12) and therefore meets the income test (Gross Income less than the exemption amount $4,400 in 2022) and Taxpayer meets the support test because Taxpayer furnishes over half of cousin’s support. Additionally, we assume cousin meets the citizen and joint return tests. Niece meets the Relationship test, age test (under 19), Residence test (lives with taxpayer for more than ½ the year) and Support test (niece is not self-supporting) of the Qualifying Child category. Assuming the joint return and citizen tests are met, niece qualifies as a Qualifying Child. Son, does not qualify as a Qualifying Child because son fails the Age Test (not under age 24 and a full time student). Son will qualify as a Qualifying Relative because son lives at home full time (and qualifies for the Support and Gross Income, Citizenship and Joint Return Tests). b. Mandeep provides all of the support of a family friend’s son (age 20) who lives with her. She also furnishes most of the support of her stepmother, who does not live with her. Two . Both persons fall within the qualifying relative category. The stepmother meets the relationship test, and the family friend’s son is a member of the taxpayer’s household. c. Raul, a U.S. citizen, lives in Costa Rica. Raul’s household includes a friend, Mariana, who is age 19 and a citizen of Costa Rica. Raul provides all of Mariana’s support. None . Mariana is not a qualifying child under the exception to the citizenship or residency test. Raul is not her adoptive father d. Karen maintains a household that includes her ex-spouse, her mother-in-law, and her brother-in-law (age 23 and not a full-time student). Karen provides more than half of all of their support. Karen is single and was divorced last year. Three . All fall within the qualifying relative category, and it is assumed that each meets the gross income test. The mother- and brother-in-law satisfy the relationship test. The ex-husband is a member of the household, and he can qualify except in the year of the divorce. The brother-in-law’s age and non- student status have no bearing on the dependency issue

37. Taylor, age 18, is claimed as a dependent by her parents. For 2022, she has the following income: $6,250 wages from a summer job, $800 interest from a money market account, and $300 interest from City of Chicago bonds. a. What is Taylor’s taxable income for 2022? 6,250+800= 7,050 gross income 1,150 < 6,250+400  6,650 Taxable income= 7,050-6,650= 400 b. What is Taylor’s tax for 2022? [Her parents file a joint return and have taxable income of $135,000 (no dividends or capital gains).] Taxable income is between range of 0 and 10,275. 10%*400= 40 44. Christopher died in 2020 and is survived by his wife, Chloe, and their 18-year-old son, Dylan. Chloe is the executor of Christopher’s estate and maintains the household in which she and Dylan live. All of their support is furnished by Chloe, and Dylan saves his earnings. Dylan’s earnings and student status for 2020 to 2022 are as follows: Year Earnings Student Status 2020 $5,000 Yes 2021 7,000 No 2022 6,000 Yes What is Chloe’s filing status for: a. 2020? For 2020, Chloe should file a joint return. Because she is the executor of Christopher's estate, she can consent on his behalf to file jointly. Being under 19 years of age, her son is a qualifying child. Thus, she can claim three exemptions—two personal and one dependency. b. 2021? For 2021, Chloe must file as single. She is not a surviving spouse because she cannot claim Dylan as a dependent. Dylan is not a qualifying child (due to the age test) and is not a qualifying relative (due to the gross income test).

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c. 2022? For 2014, Chloe is a surviving spouse. She can claim Dylan as a dependent. Dylan is a qualifying child— although not under age 19, he is a full-time student. As a qualifying child, he is not subject to the gross income test Chapter 12, Practice Problems 18 . In 2022, Santiago and Amy are married and file a joint tax return. They have three dependent children, ages 12, 14, and 19. All parties are U.S. citizens. The couple’s AGI is $140,000. Determine any available child tax credit and dependent tax credit. Child Tax Credit. 2 available children (under age 17) In 2022, Santiago and Amy can claim a child tax credit of $2,000 for each of the children ages 12 and 14; $4,000 in total ($2,000 × 2 children). There is no child tax credit for the 19 year old because the child is too old. In addition, the couple may claim a $500 dependent tax credit for their 19-year-old child (in 2022, this child is not under age 17 and, therefore, is not eligible for the child tax credit). Since Santiago and Amy’s AGI is not in excess of the $400,000 (threshold amount for MFJ Child Tax Credit) phaseout threshold that applies to the $2,000 general child tax credit and the $500 dependent tax credit, the entire $4,500 credit ($4,000 + $500) is allowed. 19. In 2022, Ivanna, who has three children under age 13, worked full-time while her spouse, Sergio, was attending college for nine months during the year. Ivanna earned $47,000 and incurred $6,400 of child care expenses. Determine Ivanna and Sergio’s child and dependent care credit. To calculate the credit the applicable % will be multiplied by the allowable amount of childcare expenses. Dependent Care Credit. The applicable percentage is a maximum of 35% reduced by 1% for each $2,000 of AGI above $15,000, but not below 20%. Since their AGI is $47,000, there are 16 $2,000 increments above $15,000 [(47,000-15,000)/2,000=16] and therefore the applicable % is reduced 16%, but it cannot be below 20%. Therefore, the applicable % in this case is 20%. Child and Dependent Care Expenses Credit Limitations. Additionally, the credit is limited to the applicable % multiplied by the earned income of the lower earning spouse. Although not working, Sergio is deemed to be fully employed (because he is a full time student) and, with two children, is deemed to have earned $500 for each of the nine months (or a total of $4,500 (Sergio is deemed to earn $250 per child per month). Because Ivanna and Sergio have AGI of $47,000, they are allowed a credit rate of 20% (as discussed above). Ivanna and Sergio’s qualified child care expenses are limited to $4,500 (Sergio’s deemed earned income). Therefore, they are entitled to a tax credit of (20% × $4,500) for the year. 32 . Which of the following individuals qualifies for the earned income credit for 2022?

a. Thomas is single, is 21 years of age, and has no qualifying children. His income consists of $9,000 in wages. No, he does not meet the age requirement, between ages of 25-64 b. Shannon, who is 27 years old, maintains a household for a dependent 11-year-old son and is eligible for head-of-household tax rates. Her income consists of $16,050 of salary and $50 of taxable interest (Shannon’s AGI is $16,100). Shannon is eligible for the earned income credit because she has a qualifying child. Because her earned income and AGI are below the income level where the earned income credit begins to phase out ($20,130 in 2022 for taxpayers not married), Shannon qualifies for the maximum earned income credit which is $3,733 (34% * $10,980, earned Income Credit and Phaseout Percentages, Other Taxpayers one child) c. Keith and Susan, both age 30, are married and file a joint return. Keith and Susan have no dependents. Their combined income consists of $28,500 of salary and $100 of taxable interest (their AGI is $28,600). Keith and Susan are not eligible for the earned income credit. Their earned income exceeds the disqualifying threshold for the credit that is available when there is no qualifying child ($22,610 in 2022, earned Income Credit and Phaseout Percentages, MFJ no child.) d. Colin is a 26-year-old self-supporting, single taxpayer. He has no qualifying children and generates earnings of $14,000. Even though Colin does not have a qualifying child, he is eligible for the earned income credit: he is at least 25 years of age, cannot be claimed as a dependent on another taxpayer’s return, and has earnings below the level at which the credit is completely phased out ($16,480 in 2022, earned Income Credit and Phaseout Percentages, Other Taxpayers). The phase out for Colin is $9,160. The greater of Colins AGI or earned income is $14,000. 14,000-9,160=4,840. $4,840 * 7.65% = $370.26. As a result, Colins maximum credit is reduced by $370.26. Meaning credit = $560 (the maximum credit) less $370.26 (the phase out amount) = $189.74 33. Jason, a single parent, lives in an apartment with his three minor children, whom he supports. Jason earned $27,400 during 2022 and uses the standard deduction. Calculate the amount, if any, of Jason’s earned income credit. Jason’s gross income (earnings) and adjusted gross income $27,400. The Maximum credit available for 2022 for three children $15,410 × 45% = $ 6,935(See chart). However, Jason is above the phase out base of $20,130. Therefore, he is subject to a phase out. $27,400- 20,130 = $ 7,270 ×21.06% = 1,531 Available earned income credit for Jason $ 5,404 (6935-1531).

37. In 2022, Joshua and Ellen are married and file a joint return. Three individuals qualify as their dependents: their two children, ages 5 years and 6 months, and Ellen’s son from a previous marriage, age 19. All parties are U.S. citizens. Joshua and Ellen’s combined AGI is $68,000. Compute their child tax credit and dependent tax credit. Joshua and Ellen may claim the child tax credit for their two children, ages 5 years and 6 months. The full amount of the child tax credit is available for qualifying children born during the tax year. Although Ellen’s son from a previous marriage qualifies as a dependent ($500), he is not eligible for the child tax credit because he is not under age 17 at the end of 2022. However, he is eligible for a dependent tax credit. Because the couple’s combined AGI is below $400,000, their child tax credit is $4,000 ($2,000 × 2); their dependent tax credit is $500. Chapter 5, Practice Problems 2. Leonard’s home was damaged by a fire. He also had to be absent from work for several days to make his home habitable. Leonard’s employer paid Leonard his regular salary, $2,500, while he was absent from work. In Leonard’s pay envelope was the following note from the employer: To help you in your time of need. Leonard’s fellow employees also took up a collection and gave him $900. Leonard spent over $4,000 repairing the fire damage. Based on the above information, how much is Leonard required to include in his gross income? Leonard must include $2,500 in his gross income. Because $2,500 was received from his employer, it cannot qualify as a nontaxable gift, and no other exclusion provision would apply. However, the amount received from his fellow employees was made out of detached generosity and, therefore, is a nontaxable gift. The amount Leonard spent to repair the damage is not relevant to determining his gross income, (although the cost may be partially deductible as a personal casualty loss). 3. Megan is a college student who works as a part-time server in a restaurant. Her usual tip is 20% of the price of the meal. A customer ordered a piece of pie and said that he would appreciate prompt service. Megan abided by the customer’s request. The customer’s bill was $8, but the customer left a $100 bill on the table and did not ask for a receipt. Megan gave the cashier $8 and pocketed the $100 bill (so Megan ends up with $92). Megan concludes that the customer thought that he had left a $10 bill, although the customer did not return to correct the apparent mistake. The customer had commented about how much he appreciated Megan’s prompt service. Megan thinks that a $2 tip would be sufficient and that the excess is like “found money.” How much should Megan include in her gross income? Megan should include $92 in her gross income. Even if the funds were received as the result of a mistake, she has the free and unrestricted use of the funds, with no apparent claims against the funds. In addition, because she received the amount from a customer in her employment capacity, it is unlikely that she received a nontaxable gift.

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6 . Billy fell off a bar stool and hurt his back. As a result, he was unable to work for three months. He sued the bar owner and collected $100,000 for the physical injury and $50,000 for the loss of income. Billy also collected $15,000 from an income replacement insurance policy he purchased. Amber was away from work for three months following heart bypass surgery. Amber collected $30,000 under an income replacement insurance policy purchased by her employer. Are the amounts received by Billy and Amber treated the same under the tax law? Explain. No. Billy's award of $150,000 can be excluded from gross income because it arose out of a physical personal injury even though $50,000 was to replace income he would have earned and would have been subject to tax. The $15,000 he received from the income replacement policy he purchased is excluded from Billy's gross income as a recovery of his cost of the policy (but is not taxable even though the total benefit received may exceed the premiums paid) see IRC$104(a)(3). Amber is taxed on the $30,000 she received under the income replacement insurance policy because the premiums were paid by her employer (and the premiums would not have been included in her gross income). Because the premiums case the benefits, as a general rule, are taxable (subject to exceptions), no exception applies because the $30,000 received by Amber was not for medical care or the loss of a body part. 7. Wes was a major league baseball pitcher who earned $10,000,000 for his 20 wins this year. Sam was also a major league baseball pitcher before a career-ending injury caused by a negligent driver. Sam sued the driver and collected $6,000,000 as compensation for lost estimated future income as a pitcher and $4,000,000 as punitive damages. Do the amounts that Wes and Sam receive have the same effect on their gross income? Explain. No. The $10,000,000 amount that Wes received is included in his gross income. However, Sam is required to include only the $4,000,000 in punitive damages in his gross income. His compensatory damages are excluded from his gross income, even though the amount replaces a loss of income, because the amount was received as a result of physical persona injury. Again the main point here is that compensation for lost wages due to damages is not included in Gl if the damages are a result of physical injury - even if the compensation is for lost wages. 10. Anh suffered injuries when she fell out of her bed while hospitalized. She sued the hospital for $90,000 (for her physical injuries). She lost the case and brought a lawsuit against the lawyer who represented her in the hospital litigation, alleging malpractice. Anh won a judgment of $100,000 from the law firm. What is the tax treatment of this $100,000 judgment for Anh? The $100,000 is includible in Anh's gross income. While she did suffer physical injuries, the lawsuit that produced the award was related to the law firm malpractice claim, not her physical injuries. While it may appear that the damages replace what she failed to win from the hospital (due to legal malpractice), the tax law only allows an exclusion for damages for physical injury; Anh's damages were received for a legal injury. So in summary these damages are not the result of physical (or emotional) injury and there is no other exception to prevent them from being included in Gl.

11 . Ted works for Azure Motors, an automobile dealership. All employees can buy a car at the company’s cost plus 2%. The company does not charge employees the $300 dealer preparation fee that nonemployees must pay. Ted purchased an automobile for $29,580 ($29,000 + $580). The company’s cost was $29,000. The price for a nonemployee would have been $33,900 ($33,600 + $300 preparation fee). What is Ted’s gross income from the purchase of the automobile? The discount on the price of the automobile of $4,600 ($33,600 - $29,000) is a qualified employee discount. The discount can be excluded from Ted's gross income because the price he paid was above the employer's cost. However, Ted must include in gross income 80% of the dealer preparation fee, a service, of $300, which is $240 ($300 x 80%). The maximum qualified employee discount that can be excluded for a service is 20% 13. Eagle Life Insurance Company pays its employees $0.30 per mile for driving their personal automobiles to and from work. The company reimburses each employee who rides the bus $100 a month for the cost of a pass. Tom collected $100 for his automobile mileage, and Mason received $100 as reimbursement for the cost of a bus pass. a. What are the effects of the above on Tom’s and Mason’s gross income? Tom must include the $100 in gross income he does not meet any exception - he is driving his own car. Mason is allowed to exclude the $100 as a qualified transportation fringe (transit pass) and is under the $280 per month limit. b. Assume that Tom and Mason are in the 24% marginal tax bracket and the actual before-tax cost for Tom to drive to and from work is $0.30 per mile. What are Tom’s and Mason’s after-tax costs of commuting to and from work? Tom paid $100 for transportation cost and was reimbursed for that amount. Therefore, Tom's before-tax cost was $0. However, Tom is required to include the $100 in gross income and thus must pay an additional $24 ($100 × 0.24) tax on the reimbursement, which is his after tax cost of commuting. Mason's after-tax cost of commuting is $0 because he is reimbursed for the out-of-pocket cost and is not required to include the reimbursement in income 15. The Sage Company has the opportunity to purchase a building located next to its office. Sage would use the building as a day care center for the children of its employees and an exercise facility for the employees. Occasionally, portions of the building could be used for employees’ family events such as reunions, birthday parties, and anniversaries. The company would like to know if the planned uses of the building would fit into a beneficially taxed employee compensation plan. The facility provides an opportunity to provide the employees with nontaxable income. The child day care services section 129. The exclusion applies to the same types of expenses that, if paid by the employee (and not reimbursed by the employer), would be eligible for the credit for child and dependent care expense discussed in Chapter 12 and exercise facility $132(j)(4).provided to the

employees are specifically excluded from their gross income (subject to limits). Any expense for personal parties would be included in income as there is no specific exception for these types of expenses. 16. Katie, a resident of Virginia, is considering purchasing a North Carolina bond that yields 4.6% before tax. She is in the 35% Federal marginal tax bracket and the 5% state marginal tax bracket. She is aware that State of Virginia bonds of comparable risk are yielding 4.5%. However, the Virginia bonds are exempt from Virginia tax, but the North Carolina bond interest is taxable in Virginia . Which of the two options will provide the greater after-tax return to Katie? Katie can deduct any state taxes paid on her Federal income tax return. In your analysis, assume that the bond amount is $100,000. The Virginia bond yields the greatest after-tax income (Virginia Bond; North Carolina Bond) -Before-tax interest (on $100,000, 4.5% & 4.6%) 4,500; 4,600 -Virginia tax @ 5% 0; (230  4600*5%) -Federal tax benefit from State tax @ 35% 0; 81  230*35% -Federal tax 0; 0 -After-tax income 4,500; 4,451  4600-230+81 17 . Andrea entered into a § 529 qualified tuition program for the benefit of her daughter, Joanna. Andrea contributed $15,000 to the fund. The fund balance had accumulated to $25,000 by the time Joanna was ready to enter college. However, Joanna received a scholarship that paid for her tuition, fees, books, supplies, and room and board. So Andrea withdrew the funds from the § 529 plan and bought Joanna a new car. a. What are the tax consequences to Andrea of withdrawing the funds? Andrea must include $10,000 ($25,000 - $15,000) in her gross income (i.e., the fund earnings). She also will be subject to a 10% penalty. The income inside a 529 plan grows tax free. This income would NEVER be taxed if Andrea had used it to pay for qualified educational expenses. This is more than just a deferral. b. Assume instead that Joanna’s scholarship did not cover her room and board, which cost $7,500 per academic year. During the current year, $7,500 of the fund balance was used to pay for Joanna’s room and board. The remaining amount was left in the § 529 plan to cover her room and board for future academic years. What are the tax consequences to Andrea and to Joanna of using the $7,500 to pay for the room and board? Both Andrea can exclude the $7,500 from their gross income because this amount was used to pay for higher education expenses. Joanna does not have income either because the payment is a gift or an obligation of support by Andrea.

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21. Mio was transferred from New York to Germany. He lived and worked in Germany for 340 days in 2022. Mio’s salary for 2022 is $190,000. In your computation, round any division to four decimal places before converting to a percentage. For example, 0.473938 would be rounded to 47.39%. What is Mio’s foreign earned income exclusion? Under this global system, a U.S. citizen who earns income in another country could experience double taxation: the same income would be taxed in the United States and in the foreign country. Out of a sense of fairness and to encourage U.S. citizens to work abroad (so that exports might be increased), Congress has provided alternative forms of relief from taxes on foreign earned income. The taxpayer can elect either (1) to include the foreign income in his or her taxable income and then claim a credit for foreign taxes paid or (2) to exclude the foreign earnings from his or her U.S. gross income (the foreign earned income exclusion). Foreign earned income consists of the earnings from the individual's personal services rendered in a foreign country (other than as an employee of the U.S. government). To qualify for the exclusion, the taxpayer must be either of the following: • A bona fide resident of the foreign country (or countries). • Present in a foreign country (or countries) for at least 330 days during any 12 consecutive months. The amount of the foreign earned income exclusion changes each year. Persons who qualify are eligible to Exclude up to $112,000 in foreign earned income for 2022. Mio's exclusion is limited to $104,328, computed as follows: $112,000 (2022 limit) × (340 days in Germany = 365 in the year; 93.15%)=$104,328 22 . Ellie purchases an insurance policy on her life and names her brother, Jason, as the beneficiary. Ellie pays $32,000 in premiums for the policy during her life. When she dies, Jason collects the insurance proceeds of $500,000. As a result, how much gross income does Jason report? $0 Life insurance proceeds paid to the beneficiary because of the death of the insured are exempt from income tax 25. Jarrod receives a scholarship of $18,500 from East State University to be used to pursue a bachelor’s degree. He spends $12,000 on tuition, $1,500 on books and supplies, $4,000 for room and board, and $1,000 for personal expenses. Payments or benefits received by a student at an educational institution may be (1) compensation for services, (2) a gift, or (3) a scholarship. If the payments or benefits are received as compensation for services (past or present, the fact that the recipient is a student generally does not render the amounts received nontaxable. The scholarship rules are intended to provide exclusion treatment for education-related benefits that cannot qualify as gifts but are not compensation for services. According to the Regulations, "a scholarship is an amount paid or allowed to, or for the benefit of, an individual to aid such individual in

the pursuit of study or research." The recipient must be a candidate for a degree at an educational institution. A scholarship recipient may exclude from gross income the amount used for tuition and related expenses (fees, books, supplies, and equipment required for courses), provided the conditions of the grant do not require that the funds be used for other purposes. How much may Jarrod exclude from his gross income? Jarrod may exclude $13,500 ($12,000 tuition + $1,500 books and supplies) from his gross income. The $4,000 spent for room and board and $1,000 spent for personal expenses are includible in Jarrod's gross income. 28. Determine the gross income of the beneficiaries in the following cases: a. Justin’s employer was downsizing and offered employees an amount equal to one year’s salary if the employee would voluntarily retire. The payments received for not working must be included in Justin's gross income because he experienced an increase in wealth when the payment was received (although he may experience a decrease in future income) b. Trina contracted a disease and was unable to work for six months. Because of her dire circumstances, her employer paid her one-half of her regular salary while she was away from work. The payments received by Trina must be included in her gross income. The payments were not gifts, although they were made because of her dire circumstances, because the Internal Revenue Code specifically provides that employers cannot be considered donors to their employees. c. Coral Corporation collected $1,000,000 on a key person life insurance policy when its chief executive died. The corporation had paid the premiums on the policy of $77,000, which were not deductible by the corporation. The life insurance proceeds are excluded from Coral Corporation's gross income. The corporation collected the proceeds as the beneficiary of the policy upon the death of the insured. d. Juan collected $40,000 on a life insurance policy when his husband, Leon, died in 2022. The insurance policy was provided by Leon’s employer, and the premiums were excluded from Leon’s gross income as group term life insurance. In 2022, Juan also collected the $3,500 accrued salary owed to Leon at the time of his death. The life insurance proceeds of 40,000 are excluded from Juan's gross income. He collected the proceeds as the beneficiary of the policy upon the death of the insured. The fact that the corporation paid the premiums, and the premiums were excluded from Leon's gross income does not affect the tax treatment of the proceeds. The accrued salary of $3500 must be included in Juan's gross income because it would have been taxable to Juan's husband if he had collected it.

31. Donald was killed in an accident while he was on the job. Darlene, Donald’s wife, received several payments as a result of Donald’s death. What is Darlene’s gross income from the items listed below? a. Donald’s employer paid Darlene an amount equal to Donald’s three months’ salary ($60,000), which is what the employer does for all widows and widowers of deceased employees. Employer payments, not excluded as gift. The fact that the payment is part of company policy provides the earmarks of compensation rather than gift. Amount received ... $60,000 Gross income ... $60,000 b. Donald had $20,000 in accrued salary that was paid to Darlene. Accrued salary, earned before death. Amount received ... $20,000 Gross income ... 20,000 c. Donald’s employer had provided Donald with group term life insurance of $480,000 (twice his annual salary), which was payable to his widow in a lump sum. Premiums on this policy totaling $12,500 had been included in Donald’s gross income under § 79. Amount received ... $480,000 Gross income ... 0 d. Donald had purchased a life insurance policy (premiums totaled $250,000) that paid $600,000 in the event of accidental death. The proceeds were payable to Darlene, who elected to receive installment payments as an annuity of $30,000 each year for a 25-year period. She received her first installment this year. Amount received = $30,000 Less: ($600,000/$750,000) x $30,000=24,000; Gross income: 30,000-24,000= 6,000 Total Gross income = 60,000 + 20,000 + 6,000 = 86,000

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33. Sally was an all-state soccer player during her junior and senior years in high school. She accepted an athletic scholarship from State University. The scholarship provided the following: Tuition and fees $15,000 Housing and meals 6,000 Books and supplies 1,500 Transportation 1,200 a. Determine the effect of the scholarship on Sally’s gross income. The $15,000 received for tuition- fees and the 1,500 received for books supplies can be excluded from Sally’s gross income as a scholarship. The $6,000 received for housing and meals and the 1,200 received for transportation has to be included in the gross income. b. Sally’s brother, Willy, was not a gifted athlete, but he received $8,000 from their father’s employer as a scholarship during the year. The employer grants the children of all executives a scholarship equal to one-half of annual tuition, fees, books, and supplies. Willy also received a $6,000 scholarship (to be used for tuition) as the winner of an essay contest related to bioengineering, his intended field of study. Determine the effect of the scholarships on Willy’s and his father’s gross income. The $8,000 is compensation to father. There is an exception for employees of higher educational non- profit organizations, which this is not, but even if it were the exception would not apply because it is only applicable if the scholarships are offered on a non-discriminatory basis. 36. Determine the effect on gross income in each of the following cases: a. Eloise received $150,000 in settlement of a sex discrimination case against her former employer. Income because not a result of physical injury. b. Nell received $10,000 for damages to her personal reputation. She also received $40,000 in punitive damages. The damage’s to Nell’s personal reputation are not for physical personal injury or sickness. Therefore, Nell must include the $10,000 in her gross income. She must also include the $40,000 punitive damages in her gross income. c. Orange Corporation, an accrual basis taxpayer, received $50,000 from a lawsuit filed against its auditor who overcharged for services rendered in a previous year. Would be income only if taxpayer received a deduction in the prior year. Tax benefit rule. d. Beth received $10,000 in compensatory damages and $30,000 in punitive damages in a lawsuit she filed against a tanning parlor for severe burns she received from using its tanning equipment.

$30,000 income from punitive damages. The 10k is not income because they are damages from personal injury. e. Joanne received compensatory damages of $75,000 and punitive damages of $300,000 from a cosmetic surgeon who botched her nose job. The $75k is for personal injury and is excluded. The $300k is GI 37 . Rex, age 55, is an officer of Blue Company, which provides him with the following nondiscriminatory fringe benefits in 2022: Determine the amount Rex must include in gross income. - Hospitalization insurance premiums for Rex and his dependents. The cost of the coverage for Rex is $2,900 per year, and the additional cost for his dependents is $3,800 per year. The plan has a $3,000 deductible, but his employer contributed $1,500 to Rex’s Health Savings Account (HSA). Rex withdrew only $800 from the HSA, and the account earned $50 of interest during the year. $0, HSA is advantageous to account owners since funds are contributed to the account using pre-tax income. The withdrawal from HAS towards medical expenses is not taxable. In addition, contributions made to an HAS are 100% tax-deductible, and any interest earned in the account is tax free. - Insurance premiums of $840 for salary continuation payments. Under the plan, Rex will receive his regular salary in the event he is unable to work due to illness. Rex collected $4,500 on the policy to replace lost wages while he was ill during the year. $0 from the $840, Section 105 allows the establishment of qualified sick plans. Section 162 allows deductibility of funds spent on the sick pay plan and section 106 states that if the plan is funded with insurance the premiums are not considered part of the taxable income of covered employees. $4,500, This amount is included in gross income since the employer has paid for the policy and it is in lieu of wages only - Rex is a part-time student working on his bachelor’s degree in engineering. His employer reimbursed his $5,200 tuition under a plan available to all full-time employees. $0, under the following criteria tuition reimbursement program is not taxable in the hands of employee: a. The program does not favor highly compensated employees b. The tuition reimbursement must not exceed $5,250 c. The money can only be used towards tuition, fees, and school supplies (including books)

TAX 3300 Practice Problems 2

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