Question

(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?

Answer 1

(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).