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taxation of individuals

Questions and Answers of Taxation of Individuals

James and Kate Sawyer were married on New Year’s Eve of 2015. Before their marriage, Kate lived in New York and worked as a hair stylist for one of the city’s top salons. James lives in Atlanta
Derek and Meagan Jacoby recently graduated from State University and Derek accepted a job in business consulting while Meagan accepted a job in computer programming. Meagan inherited $75,000 from her
Alisha, who is single, owns a sole proprietorship in which she works as a management consultant. She maintains an office in her home where she meets with clients, prepares bills, and performs other
Assume Rita’s consulting business generated $13,000 in gross income for the current year. Further, assume Rita uses the actual expense method for computing her home office expense deduction.a) What
Assume Rita’s consulting business generated $15,000 in gross income.a) What is Rita’s home office deduction for the current year?b) What would Rita’s home office deduction be if her business
Brooke owns a sole proprietorship in which she works as a management consultant.She maintains an office in her home where she meets with clients, prepares bills, and performs other work-related
Assume Natalie uses the Tax Court method of allocating expenses to rental use of the property.a) What is the total amount of for AGI (rental) deductions Natalie may deduct in the current year related
Dillon rented his personal residence at Lake Tahoe for 14 days while he was vacationing in Ireland. He resided in the home for the remainder of the year.Rental income from the property was $6,500.
Jenae and Terry Hutchings own a parcel of land as tenants by entirety. That is, they both own the property but when one of them dies the other becomes the sole owner of the property. For nontax
Kirk and Lorna Newbold purchased a new home on August 1 of year 1 for$300,000. At the time of the purchase, it was estimated that the real property tax rate for the year would be .5 percent of the
Craig and Karen Conder purchased a new home on May 1 of year 1 for$200,000. At the time of the purchase, it was estimated that the real property tax rate for the year would be 1 percent of the
Jesse Brimhall is single. In 2016, his itemized deductions were $4,000 before considering any real property taxes he paid during the year. Jesse’s adjusted gross income was $70,000 (also before
In year 1, Peter and Shaline Johnsen moved into a home in a new subdivision.Theirs was one of the first homes in the subdivision. In year 1, they paid $1,500 in real property taxes to the state
Rajiv and Laurie Amin are recent college graduates looking to purchase a new home. They are purchasing a $200,000 home by paying $20,000 down and borrowing the other $180,000 with a 30-year loan
Jennifer has been living in her current principal residence for three years. Six months ago Jennifer decided that she would like to purchase a second home near a beach so she can vacation there for
On January 1 of year 1 Brandon and Alisa Roy purchased a home for $1.5 million by paying $500,000 down and borrowing the remaining $1 million with a 7 percent loan secured by the home. Later the same
On January 1 of year 1, Jason and Jill Marsh acquired a home for $500,000 by paying $400,000 down and borrowing $100,000 with a 7 percent loan secured by the home. On January 1 of year 2, the Marshes
In year 0, Eva took out a $50,000 home-equity loan from her local credit union.At the time she took out the loan, her home was valued at $350,000. At the time of the loan, Eva’s original mortgage
On January 1 of year 1, Arthur and Aretha Franklin purchased a home for$1.5 million by paying $200,000 down and borrowing the remaining $1.3 million with a 7 percent loan secured by the home.a) What
Lewis and Laurie are married and jointly own a home valued at $240,000. They recently paid off the mortgage on their home. In need of cash for personal purposes unrelated to the home, the couple
Javier and Anita Sanchez purchased a home on January 1, 2016, for $500,000 by paying $200,000 down and borrowing the remaining $300,000 with a 7 percent loan secured by the home. The loan requires
Troy (single) purchased a home in Hopkinton, MA, on January 1, 2007, for$300,000. He sold the home on January 1, 2016, for $320,000. How much gain must Troy recognize on his home sale in each of the
Sarah (single) purchased a home on January 1, 2008, for $600,000. She eventually sold the home for $800,000. What amount of the $200,000 gain on the sale does Sarah recognize in each of the following
Celia has been married to Daryl for 52 years. The couple has lived in their current home for the last 20 years. In October of year 0, Daryl passed away. Celia sold their home and moved into a
Steve Pratt, who is single, purchased a home in Spokane, Washington, for $400,000.He moved into the home on February 1 of year 1. He lived in the home as his primary residence until June 30 of year
Steve and Stephanie Pratt purchased a home in Spokane, Washington, for$400,000. They moved into the home on February 1 of year 1. They lived in the home as their primary residence until November 1 of
Steve and Stephanie Pratt purchased a home in Spokane, Washington, for$400,000. They moved into the home on February 1 of year 1. They lived in the home as their primary residence until June 30 of
Lauren owns a condominium. In each of the following alternative situations, determine whether the condominium should be treated as a residence or nonresidence for tax purposes.a) Lauren lives in the
Several years ago, Junior acquired a home that he vacationed in part of the time and rented out part of the time. During the current year Junior:• Personally stayed in the home for 22 days.•
A self-employed taxpayer deducts home office expenses including depreciation expense. The taxpayer then sells the home at a $100,000 gain. Assuming the taxpayer meets the ownership and use tests,
What limitations exist for self-employed taxpayers in deducting home office expenses, and how does the taxpayer determine which expenses are deductible and which are not in situations when the
For taxpayers qualifying for home office deductions, what are considered to be indirect expenses of maintaining the home? How are these expenses allocated to personal and home office use? Can
Compare and contrast the manner in which employees and employers report home office deductions on their tax returns.
Are employees or self-employed taxpayers more likely to qualify for the home office deduction? Explain.
How are the tax issues associated with home offices and vacation homes used as rentals similar? How are the tax issues or requirements dissimilar?
Is it possible for a rental property to generate a positive annual cash flow and at the same time produce a loss for tax purposes? Explain.
Describe the circumstances in which a taxpayer acquires a home and rents it out and is not allowed to deduct a portion of the interest expense on the loan the taxpayer used to acquire the home.
Under what circumstances would a taxpayer who generates a loss from renting a home that is not a residence be able to fully deduct the loss? What potential limitations apply?
In what circumstances is the IRS method for allocating expenses between personal use and rental use for second homes more beneficial to a taxpayer than the Tax Court method?
Compare and contrast the IRS method and the Tax Court method for allocating expenses between personal use and rental use for vacation homes. Include the Tax Court’s justification for departing from
A taxpayer stays in a second home for the entire month of September. He would like the home to fall into the residence with significant rental use category for tax purposes. What is the maximum
Halle just acquired a vacation home. She plans on spending several months each year vacationing in the home and on renting the property for the rest of the year. She is projecting tax losses on the
Is it possible for a taxpayer to receive rental income that is not subject to taxation?Explain.
Is a homeowner allowed a property tax deduction for amounts included in the monthly mortgage payment that are earmarked for property taxes? Explain.
A taxpayer sold a piece of real property in year 1. The amount of year 1 real property taxes was estimated at the closing of the sale and the amounts were allocated between the buyer and the
Consider the settlement statement in Appendix A to this chapter. What amounts on the statement are the Jeffersons allowed to deduct on their 2016 tax return?Indicate the settlement statement line
Harry decides to finance his new home with a 30-year fixed mortgage. Because he figures he will be in this home for a long time, he decides to pay a fully deductible discount point on his mortgage to
Under what circumstances is it likely economically beneficial to pay points to reduce the interest rate on a home loan?
Is the break-even period generally longer for points paid to reduce the interest rate on initial home loans or points paid for the same purpose on a refinance?Explain.
Compare and contrast the characteristics of a deductible point from a nondeductible point on a first home mortgage.
When a taxpayer has multiple loans secured by her residence that in total exceed the limits for deductibility, how does the taxpayer determine the amount of the deductible interest expense?
Can portions of one loan secured by a residence consist of both acquisition indebtedness and home-equity indebtedness? Explain.
Why might it be good advice from a tax perspective to think hard before deciding to quickly pay down mortgage debt?
How are acquisition indebtedness and home-equity indebtedness similar? How are they dissimilar?
Lars and Leigha saved up for years before they purchased their dream home.They were considering (1) using all of their savings to make a large down payment on the home (90 percent of the value of the
Barbi really wants to acquire an expensive automobile (perhaps more expensive than she can really afford). She has two options. Option 1: finance the purchase with an automobile loan from her local
Juanita owns a principal residence in New Jersey, a cabin in Montana, and a houseboat in Hawaii. All of these properties have mortgages on which Juanita pays interest. What limits, if any, apply to
A taxpayer purchases and lives in a home for a year. The home appreciates in value by $50,000. The taxpayer sells the home and purchases a new home.What information do you need to obtain to determine
Under what circumstances can a taxpayer meet the ownership and use requirements for a residence but still not be allowed to exclude all realized gain on the sale of the residence?
Under what circumstances, if any, can a taxpayer fail to meet the ownership and use requirements but still be able to exclude all of the gain on the sale of a principal residence?
What are the ownership and use requirements a taxpayer must meet to qualify for the exclusion of gain on the sale of a residence?
A taxpayer owns a home in Salt Lake City, Utah, and a second home in St.George, Utah. How does the taxpayer determine which home is her principal residence for tax purposes?
When determining whether a dwelling unit is treated as a residence or a nonresidence for tax purposes, what constitutes a day of personal use and what constitutes a day of rental use?
Does a residence for tax purposes need to be situated at a fixed location? Explain.
How does a taxpayer determine whether a dwelling unit is treated as a residence or nonresidence for tax purposes?
Gerry (age 56) and Elaine (age 54) have been married for 12 years and file a joint tax return. The couple lives in an apartment in downtown Manhattan.Gerry’s father, Mortey, recently retired from
Tommy (age 47) and his wife, Michelle (age 49), live in Columbus, Ohio, where Tommy works for Callahan Auto Parts (CAP) as the vice president of the brakes division. Tommy’s 2016 salary is
Alex is 31 years old and has lived in Los Alamos, New Mexico, for the last four years where he works at the Los Alamos National Laboratory (LANL). LANL provides employees with a 401(k) plan and for
Ian retired in June 2015 at the age of 69 (he turned 70 in August 2015). Ian’s retirement account was valued at $490,000 at the end of 2014 and $500,000 at the end of 2015. He has had all of his
Jacquiline is unmarried and age 32. Even though she participates in an employersponsored retirement plan, Jacquiline contributed $3,000 to a traditional IRA during the year. Jacquiline files as a
Penny is 57 years old and she participates in her employer’s 401(k) plan. During the year, she contributed $2,000 to her 401(k) account. Penny’s AGI is $29,000 after deducting her 401(k)
Desmond is 25 years old and he participates in his employer’s 401(k) plan.During the year, he contributed $3,000 to his 401(k) account. What is Desmond’s 2016 saver’s credit in each of the
Reggie is a self-employed taxpayer who turns 59 years old at the end of the year(2016). In 2016, his net Schedule C income was $300,000. This was his only source of income. This year, Reggie is
Rita is a self-employed taxpayer who turns 39 years old at the end of the year(2016). In 2016, her net Schedule C income was $300,000. This was her only source of income. This year, Rita is
Hope is a self-employed taxpayer who turns 54 years old at the end of the year(2016). In 2016, her net Schedule C income was $120,000. This was her only source of income. This year, Hope is
Elvira is a self-employed taxpayer who turns 42 years old at the end of the year(2016). In 2016, her net Schedule C income was $120,000. This was her only source of income. This year, Elvira is
Sarah was contemplating making a contribution to her traditional individual retirement account for 2016. She determined that she would contribute $5,500 to her IRA and she deducted $5,500 for the
Yuki (age 45 at year-end) has been contributing to a traditional IRA for years(all deductible contributions), and her IRA is now worth $50,000. She is trying to decide whether she should roll over
Seven years ago, Halle (currently age 41) contributed $4,000 to a Roth IRA account.The current value of the Roth IRA is $9,000. In the current year Halle withdraws $8,000 of the account balance to
Sherry, who is 52 years of age, opened a Roth IRA three years ago. She has contributed a total of $12,000 to the Roth IRA ($4,000 a year). The current value of the Roth IRA is $16,300. In the current
John is trying to decide whether to contribute to a Roth IRA or a traditional IRA. He plans on making a $5,000 contribution to whichever plan he decides to fund. He currently pays tax at a 30 percent
Jimmer has contributed $15,000 to his Roth IRA and the balance in the account is $18,000. In the current year, Jimmer withdrew $17,000 from the Roth IRA to pay for a new car. If Jimmer’s marginal
George (age 42 at year-end) has been contributing to a traditional IRA for years (all deductible contributions) and his IRA is now worth $25,000. He is planning on transferring (or rolling over) the
Michael is single and 35 years old. He is a participant in his employer’s sponsored retirement plan. How much can Michael contribute to a Roth IRA in each of the following alternative situations?a)
Harriet and Harry Combs (both 37 years old) are married and both want to contribute to a Roth IRA. In 2016, their AGI is $50,000. Harriet earned$46,000 and Harry earned $4,000.a) How much can Harriet
Jackson and Ashley Turner (both 45 years old) are married and want to contribute to a Roth IRA for Ashley. In 2016, their AGI is $186,000. Jackson and Ashley each earned half of the income.a) How
Brooklyn has been contributing to a traditional IRA for seven years (all deductible contributions) and has a total of $30,000 in the account. In 2016, she is 39 years old and has decided that she
In 2016, Rashaun (62 years old) retired and planned on immediately receiving distributions (making withdrawals) from his traditional IRA account. The balance of his IRA account is $160,000 (before
In 2016, Susan (44 years old) is a highly successful architect and is covered by an employee-sponsored plan. Her husband, Dan (47 years old), however, is a Ph.D. student and is unemployed. Compute
William is a single writer (age 35) who recently decided that he needs to save more for retirement. His 2016 AGI is $65,000 (all earned income).a) If he does not participate in an employer-sponsored
John (age 51 and single) has earned income of $3,000. He has $30,000 of unearned(capital gain) income.a) If he does not participate in an employer-sponsored plan, what is the maximum deductible IRA
XYZ Corporation has a deferred compensation plan under which it allows certain employees to defer up to 40 percent of their salary for five years. For purposes of this problem, ignore payroll taxes
Leslie participates in IBO’s nonqualified deferred compensation plan. For 2016, she is deferring 10 percent of her $300,000 annual salary. Based on her deemed investment choice, Leslie expects to
Paris participates in her employer’s nonqualified deferred compensation plan.For 2016, she is deferring 10 percent of her $320,000 annual salary. Assuming this is her only source of income and her
Marissa participates in her employer’s nonqualified deferred compensation plan. For 2016, she is deferring 10 percent of her $320,000 annual salary. Assuming this is her only source of income and
In 2016, Nitai (age 40) contributes 10 percent of his $100,000 annual salary to a Roth 401(k) account sponsored by his employer, AY Inc. AY Inc. matches employee contributions dollar for dollar up to
Kathleen, age 56, works for MH, Inc. in Dallas, Texas. Kathleen contributes to a Roth 401(k) and MH contributes to a traditional 401(k) on her behalf. Kathleen has contributed to $30,000 to her Roth
In 2016, Nina contributes 10 percent of her $100,000 annual salary to her 401(k) account. She expects to earn a 7 percent before-tax rate of return. Assuming she leaves this (and any employer
In 2016, Maggy (34 years old) is an employee of YBU Corp. YBU provides a 401(k) plan for all its employees. According to the terms of the plan, YBU contributes 50 cents for every dollar the employee
Matthew (48 at year-end) develops cutting-edge technology for SV Inc., located in Silicon Valley. In 2016, Matthew participates in SV’s money purchase pension plan (a defined contribution plan) and

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