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 where he works for a public accounting firm earning an annual salary of $100,000. After their marriage, Kate left her job in New York and moved into the couple’s newly purchased 3,200-square-foot home in Atlanta. Kate incurred $2,200 of qualified moving expenses. The couple purchased the home on January 3, 2016 by paying $100,000 down and obtaining a $240,000 mortgage for the remainder. The interest rate on this loan was 7 percent and the Sawyers made interest-only payments on the loan through June 30, 2016 (assume they paid exactly one-half of a year’s worth of interest expense on the loan by June 30). On July 1, 2016, because the value of their home had increased to $400,000, the Sawyers were in need of cash, and interest rates had dropped, the Sawyers refinanced their home loan. On the refinancing, they borrowed $370,000 at 6 percent interest. They made interest-only payments on the home loan through the end of the year and they spent $20,000 of the loan proceeds improving their home (assume they paid exactly one-half of a year’s worth of interest on this loan by year end). Kate wanted to try her hand at making it on her own in business, and with James’s help, she started Kate’s Beauty Cuts LLC. She set up shop in a 384-square-foot corner room of the couple’s home and began to get it ready for business. The room conveniently had a door to the outside providing customers direct access to the shop. Before she opened the doors to the business, Kate paid $2,100 to have the carpet replaced with a tile floor. She also paid $1,200 to have the room painted with vibrant colors and $650 to have the room rewired for appropriate lighting. Kate ran an ad in the local newspaper and officially opened her shop on January 24, 2016. By the end of the year, Kate’s Beauty Cuts LLC generated $40,000 of net income before considering the home office deduction. The Sawyers incurred the following home-related expenditures during 2016: • $4,200 of real property taxes. • $2,000 for homeowner’s insurance. • $2,400 for electricity. • $1,500 for gas and other utilities. They determined depreciation expense for their entire house for the year was $8,364. Also, on March 2, Kate was able to finally sell her one-bedroom Manhattan condominium for $478,000. She purchased the condo, which she had lived in for six years prior to her marriage, for $205,000. Kate owns a vacation home in Myrtle Beach, South Carolina. She purchased the home several years ago, largely as an investment opportunity. To help cover the expenses of maintaining the home, James and Kate decided to rent the home out. They rented the home for a total of 106 days at fair market value (this included eight days that they rented the home to James’s brother Jack). In addition to the 106 days, Kate allowed a good friend and customer, Clair, to stay in the home for half-price for two days. James and Kate stayed in the home for six days for a romantic getaway and another three days in order to do some repair and maintenance work on the home. The rental revenues from the home in 2016 were $18,400. The Sawyers incurred the following expenses associated with the home. • $9,100 of interest expense. • $3,400 of real property taxes. • $1,900 for homeowner’s insurance. • $1,200 for electricity. • $1,600 for gas, other utilities, and landscaping. • $5,200 for depreciation. Required: Determine the Sawyer’s taxable income for 2016. Disregard self-employment taxes for Kate. Assume the couple paid $4,400 in state income taxes and files a joint return. The Sawyers would like to use the method for determining deductible home office expenses and the method for allocating expenses to the rental that minimize their overall taxable income for the year. James and Kate have taxable income of $116,592. See the analysis below.
> 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. • Rented it to his favorite brother at a discount for 10 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, does the full gain qualify for exclusion? Explain.
> 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 work-related tasks. She purchased the home at the beginn
> 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 is Rita’s home office deduction for the current year?
> 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 for the current year be if her business generated $10,000 of gross income inst
> 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 tasks. The home office is 300 square feet and the entire ho
> Assume that in addition to renting the condo for 100 days, Alexa uses the condo for 8 days of personal use. Also assume that Alexa receives $30,000 of gross rental receipts. Answer the following questions: a. What is the total amount of for AGI deductio
> Assuming Alexa receives $20,000 in gross rental receipts, answer the following questions: a. What effect does the rental activity have on her AGI for the year? b. Assuming that Alexa’s AGI from other sources is $90,000, what effect does the rental activi
> Assume Alexa receives $30,000 in gross rental receipts. a. What effect do the expenses associated with the property have on her AGI? b. What effect do the expenses associated with the property have on her itemized deductions?
> 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 to the condo? b. What is the total amount of itemized
> Assume Natalie uses the IRS 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 to the condo? b. What is the total amount of itemized deduc
> 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. Expenses associated with use of the home for the entire
> 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 overall amount of the home office deduction is limited?
> 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 reasons, Jenae and Terry decide to file separate tax returns
> 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 property’s value. Because the taxing jurisdiction collec
> 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 one percent of the property’s value. How much in property taxes on the new ho
> 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 considering any property tax deductions). In 2016, he paid r
> 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 on the home to the state government, $500 to the developer of the subdiv
> 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 secured by the home. The Amins have the option of (1) payin
> 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 part of the year. Despite her best efforts, Jennifer has
> On January 1, 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 day, the Roys took out a second loan, secured by the hom
> 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 needed cash so they refinanced the original loan by t
> 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 the home was $265,000. At the end of year 1, her origi
> Compare and contrast the manner in which employees and employers report home office deductions on their tax returns.
> 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 is the amount of the interest expense the Franklins m
> 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 borrowed money from the local credit union. How much intere
> Javier and Anita Sanchez purchased a home on January 1, year 1 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 interest-only payments for the first five years. The San
> Javier and Anita Sanchez purchased a home on January 1 of year 1 for $500,000 by paying $50,000 down and borrowing the remaining $450,000 with a 7 percent loan secured by the home. The loan requires interest-only payments for the first five years. The Sa
> 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 interest-only payments for the first five years. The Sanc
> 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 following alternative situations? a. Troy rented the home
> 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 home) and barely scraping by without the backup savin
> 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 Juanita’s mortgage interest deductions? Explain whether
> Using the Web as a research tool, determine which countries levy a double-tax on corporate income. Based on your research, what seem to be the pros and cons of the double-tax?
> 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 whether the taxpayer is allowed to exclude the gain o
> Marathon Inc. (a C corporation) reported $1,000,000 of taxable income in the current year. During the year it distributed $100,000 as dividends to its shareholders as follows: • $5,000 to Guy, a 5% individual shareholder. • $15,000 to Little Rock Corp.,
> 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.
> 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 vacation 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 the IRS method in your answer.
> 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 number of days he can rent out the home and have it qualify?
> Halle just acquired a vacation home. She plans on spending several months each year vacationing in the home, and she plans on renting the property for the rest of the year. She is projecting tax losses on the rental portion of the property for the year.
> 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 taxpayer. At the end of year 1, the buyer receives a property t
> 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 number for each deductible amount (discuss any issues tha
> Is the break-even period generally longer or shorter 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 employer’s responsibilities for providing a defined benefit plan to employees relative to providing a defined contribution plan.
> 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 grandfather who recently passed away. The couple is de
> 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 Del Boca Vista Corporation (DBVC) where he worked for man
> 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 $360,000. CAP allows Tommy to participate in its nonqualified def
> 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 every $1 an employee contributes (up to 9 percent of the
> Ian retired in June of 2015 at the age of 69 (he turned 70 in August of 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 retirement accounts open for 15 years. What is Ian’s
> Jacquiline is unmarried and age 32. Even though she participates in an employer-sponsored retirement plan, Jacquiline contributed $3,000 to a traditional IRA during the year. Jacquiline files as a head of household, her AGI before the contribution is $43
> 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) contribution. What is Penny’s 2016 saver’s credit in each of the fo
> 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 following alternative scenarios? a. Desmond is not married and h
> What does it mean if an employer “matches” employee contributions to 401(k) plans?
> 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 considering setting up a retirement plan. What is the maxim
> Describe the minimum distribution requirements for defined benefit plans. Are these requirements typically an item of concern for taxpayers?
> Rita is a self-employed taxpayer who turns 39 years old at the end of the year (2016). During 2016, her net Schedule C income was $300,000. This was her only source of income. This year, Rita is considering setting up a retirement plan. What is the maxim
> 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 considering setting up a retirement plan. What is the maximum a
> 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 considering setting up a retirement plan. What is the maxim
> 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 contribution when she completed and filed her 2016 tax ret
> 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 her traditional IRA into a Roth IRA. Her current marginal
> 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 use as a down payment on her first home. Assuming Halle
> Sherry, who is 52 years of age, opened a Roth IRA three years ago. She has contributed a total of $12,000 to a Roth IRA ($4,000 a year). The current value of the Roth IRA is $16,300. In the current year, Sherry withdraws $14,000 of the account balance to
> John is trying to decide whether to contribute to a Roth IRA or 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 marginal income tax rate but he believes that his margin
> Brady Corporation has a profit sharing plan that allocates 10 percent of all after-tax income to employees. The profit sharing is allocated to individual employees based on relative employee compensation. The profit sharing contributions vest to employee
> 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 ordinary income tax rate is 25 percent, what amount of tax
> 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 entire balance into a Roth IRA account. George’s margin
> Describe the distribution or payout options available to taxpayers participating in qualified defined benefit plans. How are defined benefit plan distributions to recipients taxed?
> 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. Michael’s AGI is $50,000 after he contributed $3,000 to
> 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 contribute to her Roth IRA if they file a joint retu
> 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 much can Ashley contribute to her Roth IRA if they file
> 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 wants to get a new car. She withdraws $20,000 from the IRA
> 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 reducing it for withdrawals/distributions described below
> 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 the maximum deductible IRA contribution for each spouse i
> 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 plan, what is the maximum deductible IRA contribution
> Describe the circumstances under which distributions from defined contribution plans are penalized. What are the penalties?
> 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 contribution John can make in 2016? b. If he does par
> 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 in your computations). a. Assume XYZ has a marginal tax
> 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 earn a 7 percent before-tax rate of return on her deferred
> 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?
> 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?
> 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 10 percent of the employee’s salary to the employee
> Kathleen, age 56, works for MH, Inc. in Dallas, TX. 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 401(k) over the past six years. The current balance in her
> 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 contributions) in the account until she retires in 25 years, w
> 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 contributes. The maximum employer contribution under th
> Why might it be good advice from a tax perspective to think hard before deciding to quickly pay down mortgage debt?
> 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 in his company’s 401(k) plan. Under the money purchase p
> Kim has worked for one employer her entire career. While she was working, she participated in the employer’s defined contribution plan [traditional 401(k)]. At the end of 2016, Kim retires and the balance in her defined contribution plan was $2,000,000 a
> Alicia has been working for JMM Corp. for 32 years. Alicia participates in JMM’s defined benefit plan. Under the plan, for every year of service for JMM she is to receive 2 percent of the average salary of her three highest years of compensation from JMM
> Javier recently graduated and started his career with DNL Inc. DNL provides a defined benefit plan to all employees. According to the terms of the plan, for each full year of service working for the employer, employees receive a benefit of 1.5 percent of
> What are the nontax advantages and disadvantages of defined benefit plans relative to defined contribution plans?
> How is the saver’s credit computed?
> What is the maximum saver’s credit available to taxpayers? What taxpayer characteristics are relevant to the determination?
> What is the saver’s credit and who is eligible to receive it?
> What are the nontax considerations for self-employed taxpayers deciding whether to set up a SEP IRA or an individual 401(k)?
> Compare and contrast the annual limitations on deductible contributions for self-employed taxpayers to SEP IRAs, and individual 401(k) accounts.
