Homework 1 –
1. In the following independent situations, is the tax position of the tax payer likely to change? Explain why or why not. a) Yes, this is likely to change John’s tax position because of capital gains and losses on the disposition because of property now convert to ordinary income and losses. b) Yes, this is likely to change Theresa’s tax position because now she is self employed and has to deal with the safe harbor of withholdings is lost and new quarterly payments on income and self employment taxes must be made. c) Paul purchased a personal residence will have a tax position change because you will have a new mortgage interest and property tax deductions cause the standard deductions to be replaced by itemization on Schedule A. 7. Distinguish between taxes that are proportional and those that are progressive. Proportional taxes – The tax rate remains constant for any given income level. Progressive taxes-The tax rate is a higher rate of tax applies as the tax base increases. The Federal income tax, Federal gift and estate taxes, and most state income tax rate structures are progressive. 12. The Morgan family lives in Massachusetts. They moor their sailboat in Rhode Island. What might be a plausible reason for the possible inconvenience?
A plausible reason for the possible inconvenience would be Rhode Island has no Property tax, and sale s & use taxes.
26. a) Yes, it has relevance to state income tax. It is a being asked because some states require individuals a use tax on purchase that were not originally taxed.
b) I would say: This will in pack your state income tax and federal tax and your preparer of your tax return that is my job.
32. a) Severance Taxes – are transaction taxes that are based ib the notion that the state has an interest in its natural resources. Taxes are imposed when the natural resources are extracted b) Franchise taxes – is levied on the right to do business in the state – varies from state to state c) Occupational Fees – Applicable to various trades or businesses (e.g. liquor store
license; taxicab permit , fee to practice law, medicine or accounting) d) Customs duties – tariff on certain imported goods, – provided most of the revenues needed Federal Government
e) Export duties – tariff on certain export goods
41. No,she is not entitle to interest because returns filed early are deemed to have been filed on the due date, which is April 15, 2013.
42. a) My advice to Andy is to do an amended tax return to the year he inadvertently omitted the gross income.
b) No, because that is the right thing to do.
c) Yes, I would do his return if he listen to me on the first two questions.
47. a) Revenue neutrality – every new tax law that lowers taxes must include a revenue offset that makes up for the loss.
b) pay-as-you-go or paygo – same as revenue neutrality c) sunset provision – tax reduction can be limited to a period of years. When the period expires, the prior law is reinstated
d) indexation – is based upon the rise in the consumer price index over the prior year
50. a) Social Consideration – A tax credit is allowed for amounts spent to furnish care for certain minor or disabled dependents to enable the taxpayer to seek or maintain gainful employment. Who could deny the social desirability of encouraging taxpayers to provide care for their children while they work? b) Equity Consideration – the concept of equity is relative. Renters receive no Federal income tax benefit from the rent they pa. For homeowners however a large portion of the house payments they make may qualify for the federal interest and property tax deductions. c) Political Consideration- the major advantage extended was the provision
allowing married taxpayers to file joint returns and compute their tax liability as if one-half of the income had been earned by each spouse. This result is automatic in a community property state, because half of the income earned by one spouse belongs to the other spouse. The income-splitting benefits of a joint return are now incorporated as part of the tax rates applicable to married taxpayers. d) Social Consideration-A tax deduction is not allowed for certain expenditures deemed to be contrary to public policy. The disallowance extends to such items as fines, penalties illegal kickbacks, bribes to government officials and gambling losses in excess of gains. Social considerations dictate that the tax law should not encourage these activities by permitting a deduction. e)
52. Judicial concept would be arm’s length concept. Dealings between related parties, transaction may be tested by looking to whether the tax payers acted in an arm’s length manner. The question to be asked is; Would unrelated parties have handled the transaction in the same way?
3. Items can be inclusions in gross income:
b. amount an off-duty motorcycle police officer received for escorting a funeral procession d. child support payments received
g. amounts received by the taxpayer, a baseball “Hall of Famer” for autographing sports equip. h. tips received by Matt, a bartender from patrons. i. Sherri sell her Super Bowl tickets for three times what she paid for them.
7. My advice to them is to sell the stock so they contribute to the IRA and use the itemized deductions, so they can use the medical expenses and casualty loss.
11. A dependent basic standard deduction is limited to the greater of $1,000 or the sum of the individuals earned income.
12. Yes, Kirby can be claimed as a dependent by her parents because she is only 18 years old.
17. Lisa the mother has the right to claim them as a dependent because she has the custody of the children.
22. She has to use Single because of the abandon spouse rule.
29. 85,000 salary
1,100 interest income
12,000 Gift from Parents difference between 13,000 anad 25,000 2,000 Short term capital gain
106,100 – AGI
(6,100) Standard deduction
100,000 Taxable Income
34. a) 1- personal ; 0-dependent
b) 1-personal; 1-dependent
c) 1-personal; 2-dependent
47. a) 4,000 wages b) Taxable Income 1,800 interest4,800 x 10% = $80 tax
(1,000) standard Deduction
4,800 Taxable Income
49. a) 3,000 taxable incomeb) 3,000 at her rate / 5,000 at her parents rate c) Yes, the Kiddie Tax election can be made because child is under age 19 and reports unearned income of more than 2,000.