Ken is 63 years old and unmarried. He retired at age 55 when he sold his business, Understock.com. Though Ken is retired, he is still very active. Ken reported the following financial information this year. Assume Ken’s modified adjusted gross income for purposes of the bond interest exclusion and for determining the taxability of his Social Security benefits is $70,000 and that Ken files as a single taxpayer. Determine Ken’s 2009 gross income.
Ken won $1,200 in an illegal game of poker (the game was played in Utah, where gambling is illegal). Ken will need to include this amount as income. Ken will not be able to use the deduction for gambling loses.
Ken sold 1,000 shares of stock for $32 a share. He inherited the stock two years ago. His tax basis (or investment) in the stock was $31 per share. Ken will have a taxable gain of $1,000.00 that should be included in his income. The question is this taxed at a preferential rate because it is a capitol gain.
Ken received $25,000 from an annuity he purchased eight years ago. He purchased the annuity, to be paid annually for 20 years, for $210,000.
Gross income per payment is $14,500.
Ken resided in Ireland from July 1, 2008, through June 30, 2009, visiting relatives. While he was there he earned $35,000 working in his cousin’s pub. He was paid $17,000 for his services in 2008 and $18,000 for his services in 2009. Assume Ken elects to use the foreign-earned income exclusion to the extent he is eligible.
Congress allows taxpayers to exclude foreign earned income up to an annual maximum amount. The maximum exclusion is indexed for inflation, and in 2009 the maximum is $91,400. The effect of this exclusion reduces the effect to $0.00 for foreign income added to gross income. Time in foreign country meets the time required as he resided in Ireland 365 days.
Ken decided to go back to school to learn about European history. He received a $500 cash scholarship to attend. He used $300 to pay for his books and he applied the rest toward his new car payment. Ken must add 200.00 to gross income.
Ken’s son, Mike, instructed his employer to make half of his final paycheck of the year payable to Ken. Ken received the check on December 30 in the amount of $1,100. Ken adds $0.00 to gross income because the income can be assigned at Mike’s wishes, but the income’s tax liability cannot be assigned to someone else.
Ken received a $610 refund of the $3,600 in state income taxes his employer withheld from his pay last year. Ken claimed $5,500 in itemized deductions last year (the standard deduction for a single filer was $5,450). Ken would add $50 to gross income because of the $610 state refund. Ken received $30,000 of interest from corporate bonds and money market accounts. Ken must add $30,000 to gross income for interest earned on corporate bonds.
Comprehensive Problem
Jeremy and Alyssa Johnson have been married for five years and do not have any children. Jeremy was married previously and has one child from the prior marriage. He is self-employed and operates his own computer parts store. For the first two months of the year, Alyssa worked for Staples, Inc., as an employee. In March, Alyssa accepted a new job with Super Toys, Inc. (ST), where she worked for the remainder of the year. This year, the Johnsons received $255,000 of gross income.
Determine the Johnson’s AGI given the following information: Expenses associated with Jeremy’s store include $40,000 in salary (and employment taxes) to employees, $45,000 of cost of goods sold, and $18,000 in rent and other administrative expenses. As a salesperson, Alyssa incurred $2,000 in travel expenses related to her employment that were not reimbursed by her employer. The Johnsons own a piece of investment real estate. They paid $500 of real property taxes on the property and they incurred $200 of expenses in travel costs to see the property and to evaluate other similar potential investment properties. The Johnsons own a rental home. They incurred $8,500 of expenses associated with the property. The Johnson’s home was only five miles from the Staples store where Alyssa worked in January and February. The ST store was 60 miles from their home, so the Johnsons decided to move to make the commute easier for Alyssa. The Johnson’s new home was only ten miles from the ST store. However, it was 50 miles from their former residence. The Johnsons paid a moving company $2,000 to move their possessions to the new location. They also drove the 50 miles to their new residence. They stopped along the way for lunch and spent $60 eating at Denny’s. None of the moving expenses were reimbursed by ST. Jeremy paid $4,500 for health insurance coverage for himself. Alyssa was covered by health plans provided by her employer, but Jeremy is not eligible for the plan until next year. Jeremy paid $2,500 in self-employment taxes.
Alyssa contributed $4,000 to ST’s employer-provided traditional 401k plan. Jeremy paid $5,000 in alimony and $3,000 in child support from his prior marriage. Alyssa paid $3,100 of tuition and fees to attend night classes at a local university. The Johnsons would like to deduct as much of this expenditure as possible rather than claim a credit. The Johnsons donated $2,000 to their favorite charity.
Business expenses must be ordinary and necessary to be deductible. Ordinary expenses must be common in the trade of the business. Business expenses are costs associated with conducting business. These expenses are deductible is the business is being operated to make a profit. (IRS,2013,p.1) Unreimbursed employment expenses
Taxes and investment expenses are deductible from AGI not for AGI. To be deductible investment related expenses must exceed 2% of the adjusted gross income.
Rental expenses 8,500. Rental expenses are deductible for AGI as long as the expenses were incurred to get the property ready to rent and then to maintain for a rental Moving expenses 2,012 In order to be able to deduct moving expenses the IRS has 3 main requirements. 1. The move is related to the start of work. 2. The new home is within 50 miles from the old location or previous job. 3. Must work 39 weeks during the year following the move. If transferred or fired the 39 week requirement is overlooked. Self-employed health insurance 4,500.
Jeremy may deduct all of his health insurance costs since he is not eligible under his wife’s plan at ST company. The amount is deductible if he is self-employed and showed a profit for the year, or received wages from an S corporation in which he is more than a 2% shareholder. self-employment taxes 1,250. Jeremy is able to deduct 1/2 of his $2500 taxes from the AGI deduction. Contributions for retirement 4,000.
Alyssa will be able to deduct her entire $4000 contribution to her 401K. If the couple is married and filing jointly and is $96,000 or less than the full amount can be deducted. (IRS, 2013, p. 1) Alimony 5,000.
Child support is not deductible in AGI, but alimony is deductible if the payments are made per a court decree, or legal separation agreement Education expenses 3,100.
Tuition and expenses can be deducted if the expenses were paid by the student or spouse. The deduction limited to:
- $4,000 if your adjusted gross income (AGI) is $65,000 or less or $130,000 or less if you’re married filing jointly
- $2,000 if your modified AGI is more than: ◦$65,000 but less than $80,000 ◦$130,000 but less than $160,000 if you’re married filing jointly
The amount that is deductible is limited to the lessor amount of the qualified expenses. Contributions to charity.
Charitable contributions are from AGI not for AGI. The amount of charitable contributions that can be deducted depends upon the type of organization that funds were given to, the kind of property that was donated to the charity organization, and the value of the donated property.
Joe operates a business that locates and purchases specialized assets for clients, among other activities. Joe uses the accrual method of accounting but he doesn’t keep any significant inventories of the specialized assets that he sells. Joe reported the following financial information for his business activities during year 0. Determine the effect of each of the following transactions on the taxable business income. a. Joe has signed a contract to sell gadgets to the city. The contract provides that sales of gadgets are dependent upon a test sample of gadgets operating successfully. In December, Joe delivers $12,000 worth of gadgets to the city that will be tested in March. Joe purchased the gadgets especially for this contract and paid $8,500.
Joe cannot include any income in year 0 from his contract with the city, because the sale is conditional upon a future event, this means Joe does not have a right to the income yet. Joe paid $180 for entertaining a visiting out-of-town client. The client didn’t discuss business with Joe during this visit, but Joe wants to maintain good relations to encourage additional business next year.
Entertainment is not a deductible business expense unless there is business discussion during the entertainment visit. On November 1, Joe paid $600 for premiums providing for $40,000 of “key man” insurance on the life of Joe’s accountant over the next 12 months.
The insurance premiums on a “key man” policy are not deductible, because any life insurance income paid to Joe would be tax exempt, so $0 deduction. At the end of year 0, Joe’s business reports $9,000 of accounts receivable. Based upon past experience, Joe believes that at least $2,000 of his new receivables will be uncollectible.
Bad debt expense cannot be deducted this year, because Joe only thinks that that some of it will be uncollectible. Items that are partially or completely uncollectable can be deducted next year. The receivables will be reflected in sales and will increase income by $9,000. In December of year 0, Joe rented equipment for a large job. The rental agency required a minimum rental of three months ($1,000 per month). Joe completed the job before year-end, but he returned the equipment at the end of the lease.
Joe can deduct $1,000 in year 0 and the remaining $2,000 in year 1, based on the economic performance rules for leases and the lease terms. Joe hired a new sales representative as an employee and sent her to Dallas for a week to contact prospective out-of-state clients. Joe ended up reimbursing his employee $300 for airfare, $350 for lodging, $250 for meals, and $150 for entertainment. Joe requires the employee to account for all expenditures in order to be reimbursed.
Joe is allowed to deduct the full cost of the airfare and lodging as a business expense. He is only allowed to deduct 1/2 of the cost of meals and entertainment, and all these expenses need to have receipts and documentation to support the expense. Joe uses his BMW (a personal auto) to travel to and from his residence to his factory. However, he switches to a business vehicle if he needs to travel after he reaches the factory. Last month, the business vehicle broke down and he was forced to use the BMW both to travel to and from the factory and to visit work sites. He drove 120 miles visiting work sites and 46 miles driving to and from the factory from his home.
Miles driven to and from work are not deductable, because they are a personal expense. Joe can deduct the 120 miles visiting work sites at the current standard mileage amount OR the operating costs of the car for the time it was used for business, whichever is greater. h. Joe paid a visit to his parents in Dallas over the Christmas holidays. While he was in the city, Joe spent $50 to attend a half-day business symposium. Joe paid $200 for airfare, $50 for meals during the symposium, and $20 on cab fare to the symposium. Since Joe was really traveling for the holiday, he can only deduct $50 for the cost of the symposium, ½ of the $50 for meals during the symposium, and $20 for cab fare to the symposium.
