Reference no: EM132680169
Chapter - Deductions and Losses in General
Problems: Narrative Explanation
1. Arnold and Beth file a joint return in 2019. Use the following date to calculate their deduction FOR and FROM AGI:
Mortgage interest on personal residence 6,000
Property taxes on personal residence 2,500
Alimony payments (divorced in 2014) 12,000
Moving expenses 7,000
Charitable contributions 1,500
State income taxes 5,000
Investment interest expense (investment income $5,000) 7,500
Unreimbursed employee expenses 2,500
Sales taxes 2,600
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2. Margarita operates a sole proprietorship that earns $100,000 of qualified business income after deducting salaries of $300,000. The sole proprietorship is not a specified service business. She files a single tax return for 2019. Assume her taxable income before the QBI deduction is $175,000. Margarita's QBI deduction for 2019 is? A more complete explanation of QBI can be found in Chapter 9 Notes
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3. Austin, a single individual with a salary of $100,000, incurred and paid the following expenses in 2019:
Medical expenses 5,000
Alimony (divorced in 2019) 24,000
Charitable contributions 2,000
Casualty loss (after $100 floor) 1,000
Mortgage interest on personal residence 4,500
Property taxes on personal residence 4,200
Moving expenses (Military) 2,500
Contributions to traditional IRA 4,000
Sales taxes (no state of local income taxes) 1,300
Calculate Austin's deductions FOR AGI.
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4. Janet is the CEO of Silver, Inc., a closely held corporation. Her total compensation for 2019 is $5,000,000. Of this amount, $2,000,000 is a salary and $3,000,000 is a bonus. The bonus was calculated as 5% of Silver's net income of $60,000,000 before the bonus and before taxes. The bonus provision has been in effect since Janet became CEO five years ago and is related to Silver's performance. It is approved annually by the entire board of directors (only one of the five directors is an outside director) of Silver.
How much of Janet's compensation can Silver deduct for 2019?
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5. During the year, Jim rented his vacation home for 200 days and lived in it for 19 days. During the remaining days, the vacation home was available for rental use. Is the vacation home subject to limitations on the deductions of a personal/rental vacation home?
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6. Bridget's son, Clyde, is $12,000 behind in making his mortgage payments. Of the $12,000, $7,500 represents interest and the $4,500 represents principal.
Provide a short narrative explanation for each of the following options Bridget has thought of:
a. If Bridget pays the $12,000 to the lender, how much can she deduct? How much can Clyde deduct?
b. If Bridget pays the $7,500 of interest to the lender and gives or lends Clyde $4,500 who pays the principal, how much can Bridget deduct and how much can Clyde deduct?
c. If Bridget gives or lends the $12,000 to Clyde who pays the lender, how much can he deduct and how much can Bridget deduct?
Chapter - Certain Business Expenses
Problems: Narrative Explanation
1. Mike, is single, age 31, reports the following items for 2019:
Salary 50,000
Non business bad debt 6,000
Casualty - Gain (Personal use property held for 2 years 3,000
Dividends 2,000
Mortgage interest on personal residence 10,000
Compute Mike's taxable income:
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2. Jose, is single, reports the following items for 2019:
Salary 44,000
Non business bad debt 7,000
Sec. 1244 loss on stock acquired 3 years ago 70,000
Sec. 1244 gain on stock acquired 10 months ago 26,000
Worthless security purchased in June of last year 4,000
Interest income 8,000
Compute Jose's adjusted gross income:
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3. Julie who is single reports the following items for 2019:
Salary $100,000
A hurricane completely destroyed Julie's duplex during the current year. She lived in half of the duplex and rented out the other half. Julie paid $400,000 for the duplex and has taken $80,000 of cost recovery on the rental portion of the duplex. The duplex was worth $420,000 at the time of the destruction. Julie's insurance policy paid her 90% of the fair market value of the duplex. After the storm, her county was declared a Federal disaster area.
Household items destroyed in the hurricane had a basis of $15,000 and a fair market value of $8,500. There was no insurance recovery on the household items.
Julie purchased a painting three years ago for $4,000. At the time of the hurricane, the painting was worth $10,000. Julie purchased the painting as an investment with the intent that she would sell it when it value exceeded $12,000. There was no insurance recovery on the painting.
Julie had an automobile accident in the current year. She used the car 100% for personal purposes. The car cost $37,000 and had a decline of $5,000 in FMV as a result of the accident. The car was insured, but the policy had a $2,000 deductible clause. Julie chose not to file a claim for the damage.
Julie owned a computer that she used 100% for business. The computer was also completely destroyed in the hurricane. It had a basis of $6,000 and a FMV of $4,000 at the time it was destroyed. She was not reimbursed by her employer for the loss on the computer.
Home mortgage interest - $10,000
Determine the amount of Julie's taxable income for 2019.
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Chapter - Deductions: Employee and Self Employed
Problems: Narrative Explanation
1. Samantha was recently employed by an accounting firm. During the year, she spends $2,500 for a CPA exam review course and begins working on a law degree in night school. Her law degree expenses were $4,200 for tuition and $450 for books (which are not a requirement for enrollment in the course. (Clearly going to law school for $4,200 is fantasy land. Not part of the question, just my personal insight).
Assuming no reimbursement, how much can Samantha deduct for:
a. CPA review course?
b. Law school expenses?
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2. Monica, a self-employed taxpayer, travels from her office in Boston to Lisbon, Portugal, on business. Her absence from her office was spent as follows:
Thursday: Depart for and arrive in Lisbon
Friday: Business meeting
Saturday and Sunday: Vacationing
Monday - Friday: Business meetings
Saturday and Sunday: Vacationing
Monday: Business meeting
Tuesday: Depart Lisbon and return to Boston
a. For tax purposes, how many days has Monica spent on business?
b. What difference does it make as long as she was successful and had fun?
c. Could Monica have spent more time than she did vacationing on the trip without loss of existing tax benefits?
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3. Ben and Molly are married and will file jointly. Ben generates $300,000 of qualified business income from his single member LLC (sole proprietorship Schedule C). Wages paid by the law firm amount to $40,000; the law firm has no significant property. Molly is employed as a tax manager by a local CPA firm. Their modified taxable income is $381,400 (this is also their taxable income before the deduction for qualified business income).
Determine the QBI deduction for 2019 and explain the concept and its purpose.
4. Ava recently graduated from college and is interviewing for a position in marketing. Gull Corporation has offered her a job as a sales representative that will require extensive travel and entertainment but provide valuable experience. Under the offer, she has two options, she receives a salary of $53,000 and absorbs all expenses; she receives a salary of $39,000, and Gull reimburses for all expenses. Gull assures Ava that the $14,000 difference in the two options will be adequate to cover all expenses incurred.
Assuming in both cases that $14,000 will be expended, what would be your recommendation for your sister Ava?
Explain your reasoning and tax implications.
Chapter - Deductions: Itemized Deductions
Problems: Narrative Explanation
1. David, a sole proprietor of a bookstore, pays $7,500 premium for medical insurance for him and his family. Joan, an employee of a small firm that does not provide her with medical insurance; pays medical insurance premiums of $8,000 for herself.
How does the tax treatment differ for David and Joan?
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2. Tabitha sells real estate on March 2 for $260,000. The buyer, Ramona, pays the real estate taxes of $5,200 for the calendar year, at the end of the year when due. Assume this is not a leap year.
a. Determine the real estate tax apportioned to and deductible by the seller, Tabitha, and the amount of taxes deductible by Ramona.
b. Calculate Ramona's basis in the property and the amount realized by Tabitha from the sale.
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2. During 2019, Susan incurred and paid the following expenses for Beth (her daughter) and Ed (her father) along with herself:
Surgery for Beth: $4,500
Red River Academy (Beth)
Tuition 5,100
Room & Board 4,800
Psychiatric treatment 5,100
Doctor bills for Ed 2,200
Prescriptions for all 780
Insulin for Ed 540
Nonprescription drugs for all 570
Nursing home charges for Ed
Medical care 5,000
Lodging 2,700
Meals 2,650
Beth qualifies as Susan's dependent, and Ed would qualify also except that he receives $7,400 of taxable retirement benefits from his former employer.
Beth's psychiatrist recommended Red River Academy because of its small class sizes and specialized psychiatric treatment program that is needed to treat Beth's illness.
Ed, who is a paraplegic, and diabetic, entered Heartland in October. Heartland offers the type of care that he needs.
Upon the recommendation of a physician, Susan has an air filtration system installed in her personal residence. She suffers from severe allergies. In connection with this equipment, Susan incurs and pays the following amounts during the year.
Filtrations system cost and installation: $6,500
Increase in utility cost due to system 700
Cost of certified appraisal 360
The system has an estimated useful life of 10 years. The appraisal was to determine the value of Susan's residence with and without the system. The appraisal states that the system has increased the value of the residence by $2,200.
Ignoring the 10% or 7.5% of AGI limitation, what is the total of Susan's expenses that qualify for the medical expense deduction?
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You are being audited. Be ready to present you case. You have the burden of proof. The agent has just been hired by the IRS, his previous experience was a bartender at Kelly's in Lincoln Park.