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Ken is 63 years old and unmarried. He retired at age 55 when he sold his...

Ken is 63 years old and unmarried. He retired at age 55 when he sold his business, Understock.com. Though Ken is retired, he is still very active. Ken reported the following financial information this year. Assume Ken files as a single taxpayer. Ken won $1,200 in an illegal game of poker (the game was played in Utah, where gambling is illegal). Ken sold 1,000 shares of stock for $32 a share. He inherited the stock two years ago. His tax basis (or investment) in the stock was $31 per share. Ken received $25,000 from an annuity he purchased eight years ago. He purchased the annuity, to be paid annually for 20 years, for $210,000. Ken received $13,000 in disability benefits for the year. He purchased the disability insurance policy last year. Ken decided to go back to school to learn about European history. He received a $500 cash scholarship to attend. He used $300 to pay for his books and tuition, and he applied the rest toward his new car payment. Ken’s son, Mike, instructed his employer to make half of his final paycheck of the year payable to Ken as a gift from Mike to Ken. Ken received the check on December 30 in the amount of $1,100. Ken received a $610 refund of the $3,600 in state income taxes his employer withheld from his pay last year. Ken claimed $12,050 in itemized deductions last year (the standard deduction for a single filer was $12,000). Ken received $30,000 of interest from corporate bonds and money market accounts.

Complete page 2 of Form 1040, Line 1-6 and Form 1040, Schedule 1, Lines 1-22 for Ken.

Solutions

Expert Solution

SOLUTION:

a)Ken won $1,200 in an illegal game of poker (the game was played in Utah, where gambling is illegal).

Ken will need to include this amount as income. Ken will not be able to use the deduction for gambling loses.

b. Ken sold 1,000 shares of stock for $32 a share. He inherited the stock two years ago. His tax basis (or investment) in the stock was $31 per share.

Ken will have a taxable gain of $1,000.00 that should be included in his income. The question is this taxed at a preferential rate because it is a capitol gain.

c. Ken received $25,000 from an annuity he purchased eight years ago. He purchased the annuity, to be paid annually for 20 years, for $210,000.

Gross income per payment is $14,500

1
INVESTMENT
$210,000.00

2
NUMBER OF PAYMENTS
20

3
RETURN OF CAPITAL PER PAYMENT
$10,500.00
210000/20
4
AMOUNT OF EACH PAYMENT
$25,000.00

5
GROSS INCOME ADDED PER YEAR
$14,500.00
(4) – (3)

d. Ken received $13,000 in Social Security benefits for the year.

Ken must add to gross income $11,050.

SOCIAL SECURITY
$13,000.00

MODIFIED AGI
$70,000.00

1/2 OF MODIFIED AGI PLUS SOCIAL
SECURITY BENEFITS
$48,000.00
(1/2 X $70,000) + $13,000
85% OF SOCIAL SECURITY
$11,050.00
.85 X 13,000

e. Ken resided in Ireland from July 1, 2008, through June 30, 2009, visiting relatives. While he was there he earned $35,000 working in his cousin’s pub. He was paid $17,000 for his services in 2008 and $18,000 for his services in 2009. Assume Ken elects to use the foreign-earned income exclusion to the extent he is eligible.

Congress allows taxpayers to exclude foreign earned income up to an annual maximum amount. The maximum exclusion is indexed for inflation, and in 2009 the maximum is $91,400. The effect of this exclusion reduces the effect to $0.00 for foreign income added to gross income. Time in foreign country meets the time required as he resided in Ireland 365 days.

f. Ken decided to go back to school to learn about European history. He received a $500 cash scholarship to attend. He used $300 to pay for his books and he applied the rest toward his new car payment.

Ken must add 200.00 to gross income.

g. Ken’s son, Mike, instructed his employer to make half of his final paycheck of the year payable to Ken. Ken received the check on December 30 in the amount of $1,100.

Ken adds $0.00 to gross income because the income can be assigned at Mike’s wishes, but the income’s tax liability cannot be assigned to someone else.

h. Ken received a $610 refund of the $3,600 in state income taxes his employer withheld from his pay last year. Ken claimed $5,500 in itemized deductions last year (the standard deduction for a single filer was $5,450).

Ken would add $50 to gross income because of the $610 state refund.

i. Ken received $30,000 of interest from corporate bonds and money market accounts.

Ken must add $30,000 to gross income for interest earned on corporate bonds.

Gambling Winnings
$1,200.00
Gain from sale of stock
$1,000.00
income from annuity
$14,500.00
Income from social security benefits
$11,050.00
$500 Scholarship in excess of the amount used for school
$200.00
Income from state refund
$50.00
interest on corporate bonds
$30,000.00
Gross Income
$58,000.00


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