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Concepts in Federal Taxation Chapter 4: Income Exclusions. September 21, 2012. administrative. GSI: Jennifer Chen Email: email@example.com Office Hours: By appointment bSpace : U pdated with slides Still need to upload chapters 1 & 2. Homework Problems. Problems Assignment #4
September 21, 2012
GSI: Jennifer Chen
Office Hours: By appointment
P26, 32, 34, 37, 65
Income “Broadly Defined” (includes income from all sources)
Minus: Excluded income
Equals: Gross income (Chapter 3)
Minus: Deductions and exemptions
Equals: Taxable income
X Tax rate (schedule of rates)
Equals: Income tax
Minus: Tax credits
Equals: Tax (refund) due with return
Allison dies during the current year. She is covered by a $1,000,000 life insurance policy payable to her husband Bob. Bob elects to receive the policy proceeds in 10 annual installments of $120,000. Write a letter to Bob explaining the tax consequences of the receipt of each installment.
Additional considerations for life insurance proceeds:
Lucinda, a welder for Big Auto Inc. dies in an automobile accident on March 14 of this year. Big Auto has a company policy of paying $5,000 to the spouse of any employee who dies. In addition to the $5,000 payment, Big Auto pays Harvey, Lucinda’s husband, $1,600 in salary and $1,100 in vacation pay Lucinda had earned before her death. Harvey also collects $120,000 from a group-term life insurance policy Big Auto provided as part of Lucinda’s compensation package. Lucinda had contributed to a qualified employer sponsored pension plan. Big Auto had matched Lucinda’s contributions to the plan. The plan lets the beneficiary of an employee who dies before payments begin take the plan balance as an annuity or in a lump-sum. Harvey elects to take the $250,000 plan balance in a lump-sum. Write a letter to Harvey explaining the tax consequences of each payment he receives.
Boris is an unmarried systems specialist with a public accounting firm. During all of 2012, he is on temporary assignment in London. He pays $21,000 in British income tax on his $90,000 salary. Boris knows little about taxes and seeks your advice on the taxability of the salary he earns while in London. Write Boris a memorandum explaining the tax treatment of his London salary. Assume that Boris has no other income sources and that he does not itemize deductions.
Tax on taxable income without exclusion $XXX
Less: Tax on exclusion amount (XXX)
Equals: Tax on taxable income $XXX
Calculation of taxable income without exclusion:
Gross income $90,000
Deductions from adjusted gross income:
Standard deduction (5,950)
Personal exemption (3,800)
Taxable income $ 80,250
Tax on $80,250:
$4,867.50 + [25% x ($80,250 - $35,350)] = $16,093
Tax credit for British taxes paid= ($16,093)
Net tax = $0
Bear Company provides all its employees with a $10,000 group term life insurance policy. Elk Company does not provide any life insurance but pays $10,000 to survivors of employees who die. Jackie, an employee of Bear Company, and her sister-in-law, Rosetta, an employee of Elk Company, both die during the current year. Their husbands, Bo and Carl, do not understand the tax effects of the $10,000 payments they receive. Write a letter to Bo and Carl explaining the tax effects of the $10,000 payments each receives.
Payments received from life insurance policies are excluded from the gross income of the recipient.
Death benefit payments are fully taxable.
$10,000 group term life insurance policy
Excluded from gross income
$10,000 death benefit
Included in gross income
This provision is intended to encourage employers to provide life insurance to all their employees so that their families have a cushion if the employee dies while still working (a social goal).
Jonas owns a building that he leases to Dipper, Inc., for $5,000 per month. The owner of Dipper has been complaining about the condition of the restrooms and has proposed making improvements that will cost $24,000. Dipper’s owner is willing to pay to have the improvements made if Jonas will reduce the monthly rent on the building to $4,000 for one year. Write a letter to Jonas explaining the tax effects for Jonas of the proposal by Dipper’s owner.
Determine whether the taxpayer has received taxable income in each of the following situations. Explain why any amount(s) may be excluded:
a. Jim is an employee of Fast Tax Prep, Inc. All employees of Fast Tax Prep are eligible for a 50% discount on the preparation of their income tax return. Jim’s tax return preparation would normally have cost $300, but he paid only $150 because of the discount.
b. Mabel is a lawyer for a large law firm, Winken, Blinken, and Nod. Winken pays Mabel’s annual license renewal fee of $400 and her $300 annual dues to the American Lawyers’ Association. Mabel also takes advantage of Winken’s educational assistance plan and receives payment of the $6,000 cost of taking two night school courses in consumer law.
c. Lori Company runs a nursery near its offices. Employees are allowed to leave their children at the nursery free of charge during working hours. Nonemployees may also use the facility at a cost of $300 per month per child. Dolph is an employee of Lori with 2 children who stay at Lori’s facility while Dolph is at work.
d. At the sporting goods store where Melissa works, her employer lets all employees to buy goods at a 40% discount. Melissa purchases for $300 camping and fishing supplies that retail for $500. The goods had cost her employer $250.
Courtney is an employee of Freemont Company. An average of three times a week, she works out during her lunch hour at a health club provided by Freemont. Discuss the taxability of Freemont’s provision of the health club in the following situations:
a. The health club is owned by Freemont and is located on its business premises. All employees and their dependents are allowed to use the facility. The cost of joining a comparable facility is $60 per month.
b. The health club is located in Freemont’s office building, but is owned by Manzer Fitness World. Freemont pays the $60 per month health club dues.
c. Freemont is in the health club business. The health club is used primarily by customers, although several employees, including Courtney, use it, too.