Determine R’s taxable income and regular tax liability and Alternative Minimum Taxable Income (AMTI). Also, find whether he has an AMT liability.
Explanation of Solution
Determine R’s taxable income and regular tax liability.
Calculation of taxable income and regular tax liability | ||
Description | Amount | |
Salary | $650,000 | |
Long-term | $1,100 | Refer working note 1 |
Interest income | $23,000 | Refer working note 2 |
Lottery winnings | $60,000 | |
Life insurance proceeds | $0 | Refer working note 3 |
Adjusted Gross income before rental loss | $734,100 | |
Real estate rental loss | $0 | Refer working note 4 |
Adjusted Gross income | $734,100 | |
Less: Itemized deductions: | $(30,100) | Refer working note 5 |
Taxable income | $704,000 | |
Regular income tax liability | $225,983 | Refer working note 6 |
Compute R’s AMT (alternative minimum tax).
Calculation of AMT | ||
Particulars | Amount | |
Taxable income | $704,000 | |
Add: Adjustments and preferences | ||
Incentive stock option adjustment | $6,000 | Refer working note 7 |
State and local income taxes | $8,900 | |
Interest on private activity bonds | $30,000 | |
Alternative minimum taxable income (AMTI) | $748,900 | |
Less: Exemption | $(8,075) | Refer working note 8 |
AMT base | $740,825 | |
TMT | $203,521 | Refer working note 9 |
Less: Regular Income tax liability | $225,983 | Refer working note 6 |
AMT | $0 |
Calculate R’s tax owned or (refund due).
Calculation of total tax liability | |
Particulars | Amount |
Regular income tax liability | $225,983 |
Alternative minimum tax | $0 |
Total tax liability | $225,983 |
Less: Estimated tax payments | (210,000) |
Tax owned | $15,983 |
Working Note (1):
Long-term capital gain of $13,100 is offset by long-term capital loss of $12,000. Hence, net long-term capital gain is $1,100
Working Note (2):
$30,000 of interest on private activity bonds and $40,000 of other tax-exempt interest is excluded from gross income. $23,000 of interest income on growth stock is included in gross income.
Working Note (3):
The life insurance proceeds of $800,000 are excluded from gross income.
Working Note (4):
Calculate the amount of loss on rental property.
R is an active participant. Hence, he may deduct a loss of $35,000
Working Note (5):
Calculate itemized deductions.
Calculation of itemized deduction | |
State and local income taxes | $8,900 |
Gambling losses | $8,000 |
Charitable contributions | $13,200 |
Itemized deductions | $30,100 |
Note: Consumer interest of $4,200 is not deductible. As the assistant is not the dependent of R, Medical expense of $15,000 is not deductible.
Working Note (6):
Calculate regular income tax liability.
Working Note (7):
Calculate the amount of incentive stock option adjustment.
Working Note (8):
Determine the AMT exemption (files as single taxpayer).
Working Note (9):
Calculate the amount of tentative minimum tax.
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Chapter 12 Solutions
South-western Federal Taxation 2018: Individual Income Taxes
- Robert A. Kliesh, age 41, is single and has no dependents. Roberts Social Security number is 111-11-1115. His address is 201 Front Street, Missoula, MT 59812. He does not contribute to the Presidential Election Campaign fund through the Form 1040. Robert works as a financial analyst and is very well regarded in his field. This year his salary totaled 650,000. His professional success has allowed him to purchase investments in real estate and corporate stocks and bonds. He also spends time volunteering with various organizations that help people develop financial literacy skills. Examination of Roberts financial records provides the following information for 2018. a. On January 16, Robert sold 1,000 shares of stock for a loss of 12,000. The stock was acquired 14 months ago for 17,000 and sold for 5,000. On February 15, he sold 400 shares of stock for a gain of 13,100. That stock was acquired in 2010 for 6,000 and sold for 19,100. b. He received 30,000 of interest on private activity bonds that he purchased in 2015. He also received 40,000 of interest on tax-exempt bonds that are not private activity bonds. c. Robert received gross rent income of 190,000 from an apartment complex he owns. He qualifies as an active participant in the activity. The property is at 50 Big Sky Resort Road, Big Sky, Montana, 59716. d. Expenses related to the apartment complex, acquired in 2009, were 225,000. e. Roberts taxable interest income, all from corporate bonds, totaled 23,000. Because he invests only in growth stocks, he receives no dividend income. f. He won 60,000 in the Montana lottery. g. Robert was the beneficiary of an 800,000 life insurance policy on the life of his uncle Jake. He received the proceeds in October. h. In February, Robert exercised an incentive stock option that was granted by his employer in 2015. The strike price of the option was 10 per share. 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Use Forms 1040 and 6251 and Schedules A, B, D, and E to compute the tax liability (including AMT) for Robert A. Kliesh for 2018. Omit Forms 8283, 8582, and 8949. Suggested software: ProConnect Tax Online.arrow_forwardDevon Bishop, age 45, is single. He lives at 1507 Rose Lane, Albuquerque, NM 87131. His Social Security number is 111-11-1117. Devon does not want 3 to go to the Presidential Election Campaign Fund. Devons wife, Ariane, passed away in 2014. Devons son, Tom, who is age 18, resides with Devon. Toms Social Security number is 123-45-6788. Devon owns a sole proprietorship for which he uses the accrual method of accounting and maintains no inventory; the business operates as Devons Copy Shop, 422 E. Main Street, Albuquerque, NM 87131, IRS business activity code: 453990. His revenues and expenses for 2018 are as follows. Other income received by Devon includes the following. During the year, Devon and his sole proprietorship were involved in the following property transactions. 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Compute Devons lowest net tax payable or refund due for 2018 assuming that he makes any available elections that will reduce the tax. If you use tax forms for your computations, you will need Form 1040 and its Schedules 1, 4, 5, A, B, C, D, and SE and Forms 4562, 8824, and 8949. Suggested software: ProConnect Tax Online.arrow_forwardJohn Benson, age 40, is single. His Social Security number is 111-11-1111, and he resides at 150 Highway 51, Tangipahoa, LA 70465. John has a 5-year-old child, Kendra, who lives with her mother, Katy. As a result of his divorce in 2016, John pays alimony of 6,000 per year to Katy and child support of 12,000. The 12,000 of child support covers 65% of Katys costs of rearing Kendra. Kendras Social Security number is 123-45-6789, and Katys is 123-45-6788. Johns mother, Sally, lived with him until her death in early September 2019. He incurred and paid medical expenses for her of 15,588 and other support payments of 11,000. Sallys only sources of income were 5,500 of interest income on certificates of deposit and 5,600 of Social Security benefits, which she spent on her medical expenses and on maintenance of Johns household. Sallys Social Security number was 123-45-6787. John is employed by the Highway Department of the State of Louisiana in an executive position. His salary is 95,000. The appropriate amounts of Social Security tax and Medicare tax were withheld. In addition, 9,500 was withheld for Federal income taxes and 4,000 was withheld for state income taxes. In addition to his salary, Johns employer provides him with the following fringe benefits. Group term life insurance with a maturity value of 95,000; the cost of the premiums for the employer was 295. Group health insurance plan; Johns employer paid premiums of 5,800 for his coverage. The plan paid 2,600 for Johns medical expenses during the year. Upon the death of his aunt Josie in December 2018, John, her only recognized heir, inherited the following assets. Three months prior to her death, Josie gave John a mountain cabin. Her adjusted basis for the mountain cabin was 120,000, and the fair market value was 195,000. No gift taxes were paid. During the year, John reported the following transactions. On February 1, 2019, he sold for 45,000 Microsoft stock that he inherited from his father four years ago. His fathers adjusted basis was 49,000, and the fair market value at the date of the fathers death was 41,000. The car John inherited from Josie was destroyed in a wreck on October 1, 2019. He had loaned the car to Katy to use for a two-week period while the engine in her car was being replaced. Fortunately, neither Katy nor Kendra was injured. John received insurance proceeds of 16,000, the fair market value of the car on October 1, 2019. On December 28, 2019, John sold the 300 acres of land to his brother, James, for its fair market value of 160,000. James planned on using the land for his dairy farm. Other sources of income for John are: Potential itemized deductions for John, in addition to items already mentioned, are: Part 1Tax Computation Compute Johns net tax payable or refund due for 2019. Part 2Tax Planning Assume that rather than selling the land to James, John is considering leasing it to him for 12,000 annually with the lease beginning on October 1, 2019. James would prepay the lease payments through December 31, 2019. Thereafter, he would make monthly lease payments at the beginning of each month. What effect would this have on Johns 2019 tax liability? What potential problem might John encounter? Write a letter to John in which you advise him of the tax consequences of leasing versus selling. Also prepare a memo addressing these issues for the tax files.arrow_forward
- Individual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT