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Chapter17TaxConsequencesofPersonalActivities

Chapter 17
Questions and Problems for Discussion
1.

The basic income recognition rule is that income from whatever source derived is subject to tax.
Under this inclusive rule, income from personal activities is just as taxable as income from
business, employment, or investment activities. In contrast, the basic rule regarding personal
expenses and losses is that they are nondeductible.

2.

Gifts and inheritances usually represent intrafamily transfers of wealth. Because the aggregate
wealth of the family as a social unit does not increase, the gift or inheritance does not represent
economic income. A second rationale is that gifts and inheritances represent after-tax income of
the donor or decedent, and private transfers of such after-tax income to loved ones should not
be taxed a second time. Finally, a requirement that donees and beneficiaries report the value of
gifts and inheritances as taxable income would be extremely difficult for the IRS to enforce.

3.

First, custodial parents do not include child support payments from noncustodial parents in
taxable income. Second, custodial parents may qualify to file their tax returns as heads of
household rather than single individuals. Third, custodial parents can claim an exemption and
child credit for each child unless they grant the exemption and credit to the noncustodial parent.

4.

Welfare payments are based on financial need of the recipient. Therefore, the recipient, by
definition, has minimal ability to pay tax. In contrast, unemployment benefits are not based on
financial need of the recipient and do not suggest that the recipient has a reduced ability to pay
tax.

5.

Only individuals who paid employee payroll tax or self-employment tax during their working
years are eligible to receive Social Security. Many people believe that these employment tax
payments constitute their personal investment in the Social Security system - a mandatory
savings account to which they are entitled when they retire. In other words, their current Social
Security benefits are simply a return of their after-tax contributions and should not be taxed a
second time.

6.

The annual premium to carry insurance on business property is an expense that must be
deducted against gross revenues to properly measure net business income. In contrast, the
annual premium to carry homeowners insurance is a nonbusiness, personal expense.

7.

Mr. Cox could argue that his stamp collection is an investment asset, and the $25 monthly
charge for a safety deposit box is an investment expense allowable as a miscellaneous itemized
deduction. The alternative is that the collection is a personal asset, and the monthly charge is a
nondeductible personal expense.

8.

This change in the tax law would increase the after-tax cost of charitable contributions
dramatically. Consequently, people might decrease the level of their charitable contributions and
charities might be forced to cut back, or even eliminate, the services provided to the public. In
such case, people that enjoyed or benefited from the services bear the incidence of the tax
increase represented by the reduced charitable contribution deduction.

9.

People who sell used personal items at garage sales typically realize a nondeductible loss
(excess of cost over amount realized on sale). Thus, the cash received on sale is a nontaxable,
partial return of the original cost of the item.

10. The Burton family has less AGI than the Awad family. Thus, the Burton familys unreimbursed
medical expenses exceeded 7.5 percent of AGI by $6,000, while the Awad familys
unreimbursed medical expenses were less than 7.5 percent of AGI.

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Chapter17TaxConsequencesofPersonalActivities
11. A charitable contribution made during life reduces the donors accumulated wealth (potential
taxable estate) and also generates an income tax deduction for the year. A charitable
contribution made at death that reduces the decedents taxable estate does not result in an
income tax deduction for anyone.
12. No. Although the revenue from Mrs. Lelands hobby is taxable income, it is not earned income
from self-employment.
13. The hobby loss rule and the vacation home rule limit the deduction for expenses associated with
a personal activity or residence to the revenue generated by such activity or residence.
However, expenses deductible under the hobby loss rule are miscellaneous itemized
deductions, subject to further limitation, while expenses deductible under the vacation home rule
are above-the-line deductions.
Application Problems
1.

a. Not included in Marcys AGI.


b. $500 included in Marcys AGI.
c.

$8,000 included in Marcys AGI.

d. Not included in Marcys AGI.


2.

Salary
Scholarship payments for room and board
Ms. Queens AGI

$4,200
10,000
$14,200

3.

Lyle may exclude the $600,000 payment received as compensation for his physical injuries from
income. The remaining $1,150,000 payment is taxable income.

4.

a. Ann must include the entire $12,000 alimony payment in AGI.


b. Ann must include $7,200 alimony ($600 12 months) in AGI.
c.

5.

Ann does not include any of the $12,000 gift in AGI.

a. Will does not recognize any income on receipt of the securities.


b. Will recognizes a $85,450 gain on sale of the securities ($175,250 amount realized
$89,800 carryover basis from Sandra).
c.

Sandra does not recognize any gain on transfer of the securities.

6.

Mr. Lynchs only taxable income item (and his AGI) is his $9,279 unemployment compensation.

7.

Social Security benefit ($26,890 85%)


Dividends and interest
Taxable pensions
Mr. and Mrs. Nesters AGI

8.

Mrs. Smalls only taxable income item (and her AGI) is her $10,800 pension. Because her AGI is
so low, none of her Social Security benefit is taxable.

$22,857
78,600
62,900
$164,357

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Chapter17TaxConsequencesofPersonalActivities
9.

a. Because the unreimbursed medical expenses are not deductible above-the-line, their aftertax cost is $11,340.
b. Ms. Lincolns medical expense deduction is $7,717 ($11,340 - $3,623 [$48,300 AGI
7.5%]), and her tax savings from the deduction is $1,929 ($7,717 25%). The after-tax cost
of the expenses is $9,411 ($11,340 - $1,929).
c.

Ms. Lincolns medical expense deduction is $1,792 ($11,340 - $9,548 [$127,300 AGI
7.5%]), and her tax savings from the deduction is $502 ($1,792 28%). The after-tax cost of
the expenses is $10,838 ($11,340 - $502).

10. a. Unreimbursed medical expenses


AGI threshold ($25,000 7.5%)
Mr. and Mrs. Mosss itemized deduction

$2,215
(1,875)
$340

b. Unreimbursed medical expenses


AGI threshold ($50,000 7.5%)
Mr. and Mrs. Mosss itemized deduction

$2,215
(3,750)
-0-

11. Mr. Papp can deduct the $4,200 payment to his CPA as a miscellaneous itemized deduction on
Schedule A. He can also claim miscellaneous itemized deductions for the $900 payment to his
CPA for preparation of a gift tax return and the $3,000 payment to his attorney for estate
planning advice. The other payments to his attorney are nondeductible personal expenses.
12. Mr. Curtis is allowed an itemized deduction for his $3,710 state income tax (because it exceeds
his $2,040 sales tax) and his $7,500 total property tax payments. The other tax payments are
nondeductible.
13. a. Because the property tax payments are not deductible above-the-line, their after-tax cost is
$6,438.
b. Perrys tax savings from his deduction is $2,125 ($6,438 33%), so the after-tax cost of the
property tax payments is $4,313 ($6,438 - $2,125).
c.

Because the property tax payments are not deductible in computing AMTI, their after-tax
cost is $6,438.

14. a. Because the charitable contribution is not deductible above-the-line, Mary has no tax
savings from the contribution.
b. Marys tax savings from her contribution is $1,275 ($8,500 FMV 15%).
c.

Marys tax savings from her contribution is $2,975 ($8,500 FMV 35%).

15. a. The $2,000 cash payment is deductible.


b. The $50 cash payment is nondeductible because the recipient (the vagrant) is not a qualified
charity.
c.

Because the painting is an inventory item rather than a capital asset, Dianes deduction is
limited to her basis in the item, which is zero.

d. The $10,000 political contribution is nondeductible.


e. Because the household furniture is a capital asset to Diane, she can claim the $1,200 FMV
as a contribution deduction.

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Chapter17TaxConsequencesofPersonalActivities
16.

Cash
Cost basis of contribution
Unrealized appreciation
Before-tax cost of contribution (FMV)
Tax avoided on unrealized appreciation (15% $182,000)
Tax savings from deduction (35% $500,000)
Ms. Princes after-tax cost of contribution

$500,000
$500,000
(175,000)
$325,000

Securities
$318,000
182,000
$500,000
(27,300)
(175,000)
$297,700

17. The additional AGI will reduce the medical expense deduction by $1,500 ($20,000 additional AGI
7.5%), the casualty loss deduction by $2,000 ($20,000 additional AGI 10%), and will
eliminate the miscellaneous itemized deductions ($20,000 additional AGI 2% = $400
reduction). The additional AGI will have no effect on the state and local tax deduction or the
charitable contribution deduction.
18. a. Milt realized an $11,700 nondeductible loss on the sale of a personal asset.
b. Milt realized a $15,000 long-term capital gain (collectibles gain) taxed at a maximum rate of
28 percent.
19. Assuming that Conrad collects the comic books primarily for fun rather than for profit, the $3,075
capital gain realized on sale of the Superman comic is included in AGI, while the $325 loss
realized on sale of the Donald Duck comic is a nondeductible personal loss that has no effect on
AGI. If Conrad could sustain an argument that his collecting activity is primarily for investment
purposes, he could recognized the loss as a capital loss.
20. a. Mrs. Carr has an itemized deduction for $21,000 qualified residence interest on her
acquisition debt.
b. Mrs. Carr has an itemized deduction for $3,000 qualified residence interest on her home
equity debt.
c.

No deduction.

d. Mrs. Carr can deduct the $15,000 interest as a business expense on Schedule C.
e. No deduction.
f.

Mrs. Carr is allowed an itemized deduction for $1,750 investment interest because she
recognized more than $1,750 investment income this year.

21.

Wallet
Lesser of basis or decrease in FMV
Insurance
Unreimbursed loss
$100 floor per casualty

$900
-0$900
(100)
$800

Automobile

Trees

$24,000
(17,500)
$6,500
(100)
$6,400

$6,100*
-0$6,100
(100)
$6,000

* The decrease in value in Ms. Whites personal residence can be measured by the
replacement cost of the ornamental trees.
a. Aggregate loss
AGI threshold ($53,000 10%)
Ms. Whites itemized deduction

$13,200
(5,300)
$7,900

b. Aggregate loss
AGI threshold ($210,000 10%)
Ms. Whites itemized deduction

$13,200
(21,000)
-0-

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Chapter17TaxConsequencesofPersonalActivities
22. a. Although Mr. and Mrs. Vale realized a $111,000 gain on the involuntary conversion, they do
not recognize any gain because they replaced the painting with an asset similar or related in
service or use. Thus, they have no tax consequences from the theft.
b. In this case, Mr. and Mrs. Vale must recognize a $111,000 capital gain and pay tax
accordingly.
c.

Mr. and Mrs. Vale have a $38,900 casualty loss ($39,000 unreimbursed loss $100 floor).
Their itemized deduction for this loss is $26,400 ($38,900 casualty loss [10% $125,000
AGI]).

d. Mr. and Mrs. Vale have a $88,900 casualty loss ($89,000 unreimbursed loss $100 floor).
Their itemized deduction for this loss is $76,400 ($88,900 casualty loss [10% $125,000
AGI]).
23. a. The $5,800 revenue generated by Mrs. Hesss hobby in included in AGI as miscellaneous
income. Because she does not itemize deductions, her hobby-related expenses are
nondeductible. Consequently, her hobby generates $5,800 taxable income.
b. Because her hobby-related expenses are less than her revenue, Mrs. Hess is allowed a
$1,040 miscellaneous itemized deduction ($1,700 - $660 [$33,000 AGI 2%[).
Consequently, her hobby generates $4,760 taxable income.
24. a. Gross revenues from painting business
Business expenses
Schedule C net profit included in AGI

$13,290
(8,250)
$5,040

b. Unless Mr. Monk can convince the IRS that he has an actual and honest objective of making
a profit, his painting activity is a hobby. Consequently, he must include his $2,000 income in
AGI and report $2,000 of his expenses as a miscellaneous itemized deduction.
c.

Even though Mr. Monk did not show a profit this year, the fact that his painting activity was
profitable in three of the last five years creates a presumption that the activity is a business.
Gross revenues from painting business
Business expenses
Schedule C deductible loss included in AGI

$2,000
(8,250)
$(6,250)

25. a. The itemized deduction is $5,830 because the average balance of the home equity debt is
less than $100,000.
b. The itemized deduction is $6,485 ([$100,000 $162,000 average balance of home equity
debt] $10,506 interest payment).
c.

The itemized deduction is $10,506 because the mortgage qualifies as acquisition debt and
the average balance is less than $1 million.

26. Mr. and Mrs. Kim have $37,853 qualified residence interest computed as follows.
Average balance of acquisition debt
Average balance of home equity debt (limited)
Qualifying debt

$641,800
100,000
$741,800

($741,800 qualifying debt $981,800 total debt) $50,100 total interest = $37,853

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Chapter17TaxConsequencesofPersonalActivities
27. a. Ms. Imo realized a $93,500 gain ($178,500 amount realized - $85,000 cost basis) on the
2000 sale and excluded the entire gain from income. She realized a $315,000 gain
($700,000 amount realized - $385,000 cost basis) on the current year sale. She excluded
$250,000 gain from income and recognized $65,000 taxable gain.
b. Ms. Imos $65,000 taxable gain is long-term capital gain, and her tax is $9,750 ($65,000
15%).
28. a. Mr. and Mrs. Nixon meet the ownership/use requirement and therefore may exclude the
entire $278,000 gain realized on sale of their former residence from taxable income (i.e.,
they recognize no gain on the sale).
b. Because Mr. and Mrs. Nixon sold the new residence within two years of the sale of their
former residence, they must recognize their $48,000 realized gain as long-term capital gain.
c.

In this case, Mr. and Mrs. Nixon sold their new residence because of a change in place of
employment. Thus, they are eligible for a reduced exclusion computed as follows.
$500,000

629 days* = $430,822 reduced exclusion


730 days

* time period between June 7, 2005, sale and February 26, 2007, sale

Consequently, Mr. and Mrs. Nixon recognize no gain on the sale of the new residence.
29. a. Mrs. Gomez realized an $8,000 nondeductible loss.
b. Mrs. Gomez realized a $114,500 gain ($262,500 $148,000), all of which she may exclude
from taxable income.
c.

Mrs. Gomez realized a $319,000 gain ($467,000 $148,000), $250,000 of which she may
exclude from taxable income and $69,000 of which she must recognize as long-term capital
gain.

18. Mr. and Mrs. Boazs AGI


Itemized deductions
Exemption amount ($3,400 6)
Taxable income

$109,300
(18,523)
(20,400)
$70,377

Regular tax on $70,377 (MFJ)

$10,442

AMT calculation:
Taxable income
Disallowed state income tax deduction
Disallowed property tax deduction
Disallowed home equity loan interest
Disallowed miscellaneous itemized deductions
Disallowed exemption amount
AMTI before exemption
Exemption (MFJ)
Taxable AMTI
Tentative minimum tax
Regular tax
AMT

17-6

$70,377
6,925
4,122
1,377
769
20,400
$103,970
(62,550)
$41,420
.26
$10,769
(10,442)
$327

Chapter17TaxConsequencesofPersonalActivities
Issue Recognition Problems
1.

Does Mr. J recognize $5,000 taxable income on receipt of a reward received for public service?

2.

Is the briefcase a nontaxable gift or taxable compensation to Mr. SA?

3.

How much taxable income does Mr. TL recognize because of the receipt of the vacuum cleaner?
Is Mr. TLs taxable income measured by the $365 retail value of the vacuum cleaner or by the
$275 garage sale price?

4.

Is the $2,700 strike benefit a nontaxable gift to Ms. BG from her fellow pilots, or is it taxable
income paid to her with respect to her employment?

5.

Is the $15,000 cash receipt a nontaxable scholarship or a taxable prize to Ms. LS?

6.

Did Mr. UW recognize $11,500 taxable income because he recovered the sword and established
a legal claim to it? Can Mr. UW defer income recognition until he sells the sword for cash?

7.

Can Mrs. OP exclude the $300,000 receipt from taxable income because the damages
represented compensation for psychological and civil injury?

8.

Does any portion of Zacharys monthly payment constitute child support (nondeductible by
Zachary/nontaxable to Stella) or does the entire payment qualify as alimony (deductible by
Zachary/taxable to Stella)?

9.

Can Mrs. N recover the entire $3,200 cost of the computer as a business deduction, even
though her children use it for personal reasons? By what method can Mrs. N allocate the cost of
the computer between business and personal use?

10. Does the $8,900 cost of Mrs. VVs facelift qualify as a deductible medical expense?
11. Does the $25,000 cost of Mr. Ss lap pool qualify as a deductible medical expense?
12. Do Mrs. PMs travel costs (gas, meals, lodging) qualify as deductible medical expenses?
13. Can Mr. R claim an $18,000 contribution deduction for the annual value of the professional
service he donates to the local charity?
14. Can Mr. and Mrs. FP claim a $500 contribution deduction because their motive in making the
payment was to benefit a charitable organization rather than to obtain the cookies?
15. Can Ms. DS claim a casualty loss deduction because she misplaced or lost her diamond ring?
16. Does the entire acreage qualify as Mr. Ds personal residence or must he treat some portion of
the land as an investment asset? Does Mr. Ds entire $600,000 debt qualify as home acquisition
debt so that he can deduct his interest payments? Must Mr. D classify some portion of his
interest on the debt as investment interest?
17. Can a sailboat qualify as a principal residence? Can Mr. Y defer his $79,000 realized gain on the
sale of his home because he purchased the sailboat?
18. Can Ms. SE deduct her entire $24,700 realized loss as a Section 1231 ordinary loss in the
computation of AGI? Is $15,000 of Ms. SEs realized loss (decline in value that occurred before
she converted the house to rent property) a nondeductible personal loss?

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Chapter17TaxConsequencesofPersonalActivities
19. Can Mr. and Mrs. AQ deduct the $1,700 legal fee as an investment expense? Can they
capitalize the $1,700 fee to their basis in the personal residence?

Research Problems
1.

In Rev. Rul. 97-9, 1997-1 CB 77, the Internal Revenue Service ruled that any amount paid for a
controlled substance (such as marijuana) in violation of federal law is a nondeductible medical
expense.

2.

According to. Reg. Sec. 1.62-1T(d), expenses directly connected with the conduct of a trade or
business are deductible in the computation of AGI. Taxes paid by an individual are deductible as
business expenses only if they are directly attributable to the conduct of a business. However,
the regulation specifically states that state taxes on net income are not deductible [in computing
AGI] even though the taxpayers income is derived from the conduct of a trade or business.
Based on this regulatory authority, Mr. and Mrs. Lukert must report their Massachusetts income
tax as an itemized deduction on Schedule A.

3.

Section 280A(g) provides a special set of rules if an individual rents out a personal residence for
less than 15 days during a taxable year. In the case of such de minimis rental use, the individual
does not include the rental revenue in gross income and is not allowed to deduct any expenses
related to the rental period. The Lorchs rented out their apartment for 11 days in one year and 11
days in the next. Thus, they are not required to recognize the $11,000 rent as taxable income,
and the rental arrangement has no tax consequences.

4.

This research problem is based on the facts in TAM 199945008 (July 12, 1999). According to the
IRS, the amount realized by an individual on the sale of his right to receive a stream of future
lottery winnings was ordinary income and not capital gain. Although the right to the annuity met
the definition of a capital asset, the IRS concluded that payment for the annuity was a substitute
for future ordinary income and should be taxed accordingly. Consequently, Barry Shelton must
recognize $1.79 million ordinary income on the sale of his right to the guaranteed annuity. See
also United States v. Maginnis, 356 F.3d 1179 (CA-9, 2004).

5.

Because Howards second sale would occur with two years of his first sale of a principal
residence, he will not be allowed to exclude any gain realized unless the reason for the second
sale is a change in place of employment, health, or, to the extent provided in regulations,
unforeseen circumstances. (Section 121(c)(2)(B)) In Ltr. Rul. 200403049, the IRS ruled that the
threats of hostile neighbors constituted an unforeseen circumstance within the meaning of the
statute. Based in this ruling, Howard will be entitled to a partial exclusion (based on the number
of days between the two sales as provided in Section 121(c)(1)).

Tax Planning Cases


1.

a. By refusing compensation for her services but asking the uncle to name her as a beneficiary
under his will, Ms. JH may have converted $100,000 taxable income to a $100,000
nontaxable inheritance.
b. The opportunity cost is the delay of Ms. JHs receipt of $100,000 until her uncles death. The
risk is that the uncle will change his mind and write Ms. JH out of the will (i.e., delete the
codicil providing for her bequest) before his death.

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Chapter17TaxConsequencesofPersonalActivities
2.

a. Mr. TBs annual after-tax cost of the nondeductible child support payments is $48,000. Mrs.
TBs after-tax cash flow is also $48,000. Because she has no taxable income, she has no
tax savings from the exemptions and child credits for her dependent children.
b. Under the counterproposal, Mr. TBs after-tax cost decreases to $43,216
Annual child support and alimony payments
Tax savings:
Deduction for alimony ($36,000 28%)
Two exemptions ($6,800 28%)
After-tax cost

$(55,200)
10,080
1,904
$(43,216)

(Note that Mr. TB has too much income to take a child credit for his dependent children.)

Mrs. TBs after-tax cash flow increases to $52,047.


Annual child support and alimony payments
Tax cost:
Taxable alimony
$36,000
Standard deduction
(7,850)
Mrs. TBs exemption
(3,400)
Taxable income
$24,750
Tax on $24,750 (HH)
After-tax cash flow

$55,200

(3,153)
$52,047

3.

Mr. and Mrs. JM may have converted a nondeductible personal expense ($4,950 charitable
contribution to State University) to a deductible business expense ($4,950 advertising for the
Shoreline Grill).

4.

If Mr. Z buys the mutual fund shares, his annual after-tax cash flow will increase by $2,211
($3,300 before-tax income $1,089 tax cost). If Mr. Z pays off his personal debt, his annual
after-tax cash flow will increase by $2,350 (nondeductible interest payments). If Mr. Z pays down
his home mortgage, his annual after-tax cash flow will increase by $1,943 ($2,900 decrease in
interest payments $957 tax savings from itemized deduction). Based on these comparisons of
after-tax cash flow, Mr. Z should pay off his personal debt.

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Chapter17TaxConsequencesofPersonalActivities
Comprehensive Problems for Part Five
1.

Mr. Meyers salary ($70,000 - $6,300 Section 401(k))


Mrs. Meyers salary
Mrs. Meyers share of S corporation income
Mrs. Meyers share of rental real estate loss*
Lottery winnings
Qualifying dividend distribution
Capital gain distribution
Alimony paid
Adjusted gross income (AGI)
*

$63,700
29,400
13,790
(8,100)
6,400
712
3,020
(12,000)
$96,922

The $8,100 rental real estate loss is passive. The Meyers AGI before any rental loss deduction is $105,022.
Therefore, they are entitled to a $22,489 rental real estate exception ($25,000 [50% $5,022 excess AGI over
$100,000]). Consequently, the entire loss is deductible.

Itemized deductions:

Home mortgage interest


Property tax
State income tax
Charitable contributions
Exemption amount ($3,400 3)
Taxable income

(14,200)
(2,780)
(7,000)
(1,945)
(10,200)
$60,797

Tax on $57,065 ordinary taxable income (MFJ)


Tax on $3,732 dividends and LTCG (5%)
Precredit tax
Child credit
Mr. and Mrs. Meyers regular income tax

$7,777
187
$7,964
(1,000)
$6,964

AMT calculation:
Taxable income
Disallowed property tax deduction
Disallowed state income tax deduction
Disallowed exemption amount
AMTI before exemption
Exemption (MFJ)
AMTI

$60,797
2,780
7,000
10,200
$80,777
(62,550)
$18,227

AMT on ordinary AMTI ($14,495 26%)


AMT on dividends and LTCG ($3,732 5%)
Tentative minimum tax

$3,769
187
$3,956

Mr. and Mrs. Meyers do not owe AMT because tentative minimum tax is less than regular
income tax.

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Chapter17TaxConsequencesofPersonalActivities
2.

Mrs. Yanks salary


Insurance settlement
$25,000
Compensation for physical injury
(20,000)
Taxable portion of settlement
Unemployment compensation
Interest
Alimony received
Deductible IRA contribution
Adjusted gross income (AGI)
Standard deduction for head of household
Exemption amount ($3,400 2)
Taxable income
Precredit tax (HH)
Dependent care credit ($1,300 20%)
Child credit
Mrs. Yanks regular income tax
Income tax withholding
Refund due to Mrs. Yank

$38,400
5,000
1,400
629
1,600
(800)
$46,229
(7,850)
(6,800)
$31,579
$4,177
(260)
(1,000)
$2,917
(3,412)
$(495)

AMT calculation:
Taxable income
Disallowed standard deduction
Disallowed exemption amount
AMTI before exemption
Exemption (HH)
AMTI

$31,579
7,850
6,800
$46,229
(42,500)
$3,729
.26
$970

Tentative minimum tax

Mrs. Yank does not owe AMT because tentative minimum tax is less than regular income tax.

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Chapter17TaxConsequencesofPersonalActivities
3.

Mr. Bensons share of partnership income


Interest income
Qualified dividend income
Capital gain distribution
$4,218
Capital loss carryforward
(9,723)
Net capital loss
(5,505)
Passive activity loss (mink farm)
One-half SE tax of $19,5431
Unreimbursed moving expense
Deductible Keogh plan contribution
Adjusted gross income (AGI)
Itemized deductions2
Exemption amount (see worksheet)
Taxable income

$278,300
10,365
13,790

Tax on $163,399 ordinary taxable income (MFJ)


Tax on $13,790 dividends (15%)
Mr. and Mrs. Bensons regular income tax

$34,744
2,069
$36,813

AMT calculation:
Taxable income
Disallowed interest on home equity debt
Disallowed property tax deduction
Disallowed sales tax deduction
Reversal of reduction in itemized deductions
Exemption amount
AMTI before exemption
Exemption ($62,550 (25% [$204,053 $150,000])
AMTI

(3,000)
-0(9,772)
(1,260)
(28,500)
$259,923
(68,229)
(14,505)
$177,189

$177,189
4,120
8,400
1,911
(2,072)
14,505
$204,053
(49,037)
$155,016

AMT on ordinary AMTI ($141,226 26%)


AMT on dividends ($13,790 15%)
Tentative minimum tax
Regular income tax
AMT

$36,719
2,069
$38,788
(36,813)
$1,975

Regular income tax


AMT
Mr. Bensons SE tax
Total tax
Estimated tax payments
Mr. and Mrs. Bensons balance of tax due

$36,813
1,975
19,543
$58,331
(58,000)
$331

SE tax calculation on $257,010 net earnings from self-employment:


Social Security tax ($97,500 12.4%)
Medicare tax ($257,010 2.9%)
SE tax

Mortgage interest on acquisition debt


Mortgage interest on home equity debt
Property tax deduction
Sales tax deduction
Charitable contribution deduction
Tax preparation fee
2% AGI threshold
Miscellaneous itemized deduction
Total itemized deductions

$12,090
7,453
$19,543
$33,890
4,120
8,400
1,911
21,980
$3,350
(5,198)
-0$70,301

Itemized deductions allowed (see worksheet)

17-12

$68,229

Chapter17TaxConsequencesofPersonalActivities
Itemized Deduction Worksheet
Maximum reduction
Total itemized deductions listed on Schedule A
Less deductions for: medical expense
investment interest expense
casualty, theft, or gambling loss
total
Total itemized deductions subject to overall limitation

70,301
-0-00-

Maximum reduction
Adjusted gross income (AGI)
2007 AGI threshold
Excess AGI

-070,301
.80
56,241
259,923
(156,400)
103,523
.03
3,106
.667
2,072

Tentative reduction
Total itemized deductions listed on Schedule A
Less the smaller of the maximum or tentative reduction
Total itemized deductions allowed

70,301
(2,072)
68,229

Exemption Amount Worksheet


2007 exemption
Multiply by number of exemptions (taxpayers and dependents)
Tentative exemption amount
Adjusted gross income (AGI)
2007 AGI threshold for married filing jointly
Excess AGI

3,400
5
17,000
259,923
(234,600)
25,323

Excess AGI divided by $2,500 (rounded up to whole number)


(if 50 or more, the exemption amount is -0-)
Multiply by 2
Percentage (%) reduction in tentative exemption amount
Tentative exemption amount
Percentage reduction
Reduction in exemption amount

11
2
22

Reduction in exemption amount

17,000
.22
3,740
.667
2,495

Exemption amount (17,000 2,495)

14,505

17-13