Tax Accounting Chapter 3 - Computing the Tax

During the year, Addison is involved in the following transactions. What are the possible Federal income tax effects of these transactions? 1. Lost money gambling on a trip to a casino. 2. Helped pay for her neighbor Howie's dental bills. Howie is a good friend who is unemployed. 3. Received from the IRS a tax refund due to Addison's overpayment of last year's Federal income taxes. 4. Paid a traffic ticket received while double parking to attend a business meeting. 5. Contributed to the mayor's reelection campaign. The mayor had promised Addison to rezone some of her land. 6. Borrowed money from a bank to make a down payment on an automobile. 7. Sold a houseboat and a camper on eBay. Both were personal use items, and the gain from the one offset the loss from the other. 8. Her dependent Aunt Katherine died on June 3 of year. 9. Paid for Katherine's funeral expenses. 10. Paid premiums on her dependent son's life insurance policy. - 1. Gambling losses are deductible only to the extent of gambling gains. 2. Barring an exception for dependents, no deduction is allowed for payment of some other person's expenses. 3. A Federal income tax refund is not income because it is an adjustment of a prior expenditure that was not deductible. 4. Fines and penalties are not deductible. It does not matter whether they stem from personal or business activities. 5. Political contributions are not deductible. It does not matter that the contribution resulted in a benefit to Addison. 6. Borrowing money does not result in income. 7. Gains and losses form the sale of personal use assets cannot offset each other. The gains are taxable, and the losses are not deductible. 8. A dependency expansion is available for the aunt. The full amount is allowed. 9. No deduction can be claimed for income tax purposes for the funeral expenses. 10. Premiums on personal life insurance policies are not deductible even when paid on behalf of a dependent. Which of the following can be INCLUSIONS in gross income? a. During the year, shares of stock that the taxpayer had purchased as an investment doubled in value. b. Amount of off-duty motorcycle police officer received for escorting a funeral procession. c. While his mother Shirley was in the hospital, the taxpayer sold Shirley's jewelry and gave the money to his girlfriend, Serena. d. Child support payments received. e. A damage deposit the taxpayer recovered when he vacated the apartment he had rented. f. Interest received by the taxpayer on an investment in school bonds issued by IBM. g. Amounts received by the taxpayer, a baseball "Hall of Famer," for autographing sports equipment (balls and gloves). h. Tips received by Matt, a bartender, from patrons. (Matt is paid a regular salary by the cocktail lounge that employs him.) i. Sherri sells her Super Bowl tickets for three times what she paid for them. j. Jefferson receives a new BMW from his grandmother when he passes the CPA exam. - b, c, f, g, h, i. Item e. is nontaxable return of capital. Items b. and g. are taxable payments for services rendered. Items a. and d. have no tax consequences. Item j. may have gift tax consequences to the grandmother, but it is nontaxable to the taxpayer. Which of the following can be EXCLUSIONS from gross income? a. Alimony payments received. b. Award received by the taxpayer for compensatory damages from her broken leg. c. A new golf cart won in a church raffle. d. Amount collected on a loan previously made to a college friend. e. Insurance proceeds paid to the taxpayer on the death of her uncle -- she was the designated beneficiary under the policy. f. Interest income on City of Chicago bonds. g. Jury duty fees. h. Stolen funds that the taxpayer ostensibly had collected for a local food bank drive. i. Reward paid by the IRS for information provided that led to the conviction of the taxpayer's former employer for tax evasion. j. Rare coins worth $8,000 found in an old trunk purchased by the taxpayer at a garage sale. - b, d, f, g. Late in the tax year, the Polks come to you for tax advice. They are considering selling some stock investments for a loss and making a contribution to a traditional IRA. In reviewing their situation, you note that they have large medical expenses and a casualty loss, with neither being covered by insurance. What advice would you give to the Polks. - The sale of the stock investment will result in a capital loss. The capital loss will offset any capital gain, and any excess (up to $3,000) can be applied against ordinary income to arrive at AGI. The contribution to the traditional IRA is a deduction FOR AGI. Thus, both the capital loss and the IRA contribution reduce AGI. By reducing AGI, the Polks will increase their allowable medical and casualty deductions. (The medical deduction is the excess over 10% (7.5% if age 65 or over) of AGI, whereas the casualty loss is the excess over 10% of AGI.