In: Accounting
(a) In 2010 Jim loaned Patti $5,000, as a personal loan. In 2014 (when the outstanding loan is still $5,000), Patti informs Jim that she will not be able to repay the loan. In 2014, Jim has $1,000 short-term capital gain and $40,000 wage income. In 2015, Patti repays the $5,000. How much, if any, of that does Jim have to include in his income for 2015?
(b) If Jim was in the 12% tax bracket in 2014 and the 37% tax bracket in 2015, is he better or worse off as a result of part (a)? By how much?
(c) Suppose, instead, that Jim has a $3,000 short-term capital gain in 2014. How much, if any, of the 2015 repayment does he include in his income?
(a)ANSWER
Jim will have to include $5,000 in his income for 2015.
(b)ANSWER
Jim is better off as a result of part.He will save $1,200 in taxes.
CALCULATION
In 2014, Jim would have owed $600 in taxes on the $5,000 loan (12% of $5,000).
In 2015, he will owe $1,850 in taxes on the $5,000 loan (37% of $5,000).
(c)ANSWER
Jim will have to include $3,000 in his income for 2015.
WORKING
Jim would have owed $360 in taxes on the $3,000 gain (12% of $3,000).
He will owe $1,050 in taxes on the $3,000 loan (37% of $3,000).