Dan turned age 65 and retired this year. He owned and operated a tugboat in the local harbor before his retirement. The boat cost \($100,000\) when he purchased it two years ago. A tugboat is 10-year property. Dan deducted \($10,000\) of depreciation on the boat the year he purchased it and he deducted \($18,000\) of depreciation last year. He did not elect Section 179 expensing or bonus depreciation. He sold the tugboat in November of this year for \($90,000,\) collecting an \($18,000\) down payment. The buyer agreed to pay 8% interest annually on the unpaid balance and to pay \($18,000\) annually for four years toward the principal. The four \($18,000\) principal payments and related interest payments begin next year. Dan received \($72,000\) of business income and incurred other business expenses of

\($30,000\) this year before he retired. He received Social Security benefits of \($2,000\) and withdrew

\($20,000\) from a regular IRA account. He contributed \($5,000\) to his church, paid real property taxes of \($2,000,\) and home mortgage interest of \($6,500.\) Dan paid \($200\) of state income taxes when he filed last year’s return earlier this year and he made estimated state income tax payments of \($800\) during this year and \($220\) after year end. In addition, Dan made federal estimated payments of \($8,000.\) Dan is a single, cash basis taxpayer. Ignore self employment taxes.

a. Compute the depreciation for the current year on the tugboat.

b. Compute the amount of gain to be reported currently on the sale of the tugboat.

Assume that Dan wants to use the installment method if it can be used. The accumulated depreciation on the tugboat is subject to Sec. 1245 depreciation recapture and must be reported currently.

c. How much interest, if any, must Dan report this year?

d. What is the income from the business, excluding the gain on the sale of the tugboat?

e. What is Dan’s AGI?

f. What is the amount of Dan’s itemized deductions?

g. What is Dan’s taxable income?