Question

Carmin Kovach is single and has two children from her previous marriage. Anika,

9, lives with Carmin. Julius, 11, lives with his father, Ray. Carmin pays alimony of

$400 per month to Ray. The payments are to continue until Julius reaches age 18,

when they will be reduced to $100.

Carmin is 34 and employed as a nuclear engineer with Atom Systems Consultants,

Inc. (ASCI). Her annual salary is $80,000, and ASCI has an extensive fringe

benefits program for its employees.

ASCI has a qualified pension plan that covers all employees. Under the plan,

ASCI matches any contribution to the plan up to 8% of the employee’s annual salary.

Carmin makes the maximum allowable contribution of $6,400, and it is

matched by ASCI.

ASCI provides medical coverage to all employees but not to their dependents.

Carmin’s medical coverage costs ASCI $3,000 during the current year. She

receives $980 in reimbursements for her medical costs. ASCI also provides employees

with a flexible benefits plan. Carmin pays $2,500 into the plan. She uses

$2,400 to purchase medical coverage for Anika. Her medical, dental, and optometry

costs not covered by insurance total $1,900; the flexible benefits plan reimburses

her $100 for these costs.

ASCI also provides employees with group term life insurance of twice their annual

salary, up to a maximum coverage of $150,000. Carmin’s group term life insurance

premiums cost $400. Because of the sensitive and sometimes dangerous

nature of her work, ASCI also provides Carmin with a $300,000 whole life insurance

policy. The whole life insurance policy costs $490.

Taking advantage of ASCI’s educational assistance program, during the fall

Carmin enrolls in two law school classes at a local university. ASCI pays her tuition,

fees, books, and other course-related costs totaling $2,300.

Carmin also receives certain other fringe benefits not available to all employees.

She receives free parking in the company’s security garage that would normally

cost $280 per month. In addition, ASCI pays the $1,000 cost of her nuclear engineer’s

license and $600 per year in professional association dues and professional

magazine subscriptions. ASCI also pays Carmin’s $900 dues to a health club that is

located in the same building as her office.

Carmin routinely enters sweepstakes contests. This year, she is notified that

she has won $5,000 in a breakfast cereal promotion. The prize is to be paid equally

over 10 years. She receives the first payment December 28, although she doesn’t

deposit the check in her checking account until January 3.

In February, Carmin’s father dies. Social Security pays her $600 as a survivor’s

benefit. She also receives stock valued at $30,000 and her father’s house, which

has a value of $90,000, as her share of her father’s estate.

Carmin rents out her father’s house on August 1. The monthly rent is $400,

and the lease agreement is for one year. The lease requires the tenant to pay the first

and last months’ rent and a $400 security deposit. The security deposit is to be

returned at the end of the lease if the property is in good condition. On August 1,

Carmin receives $1,200 from the tenant per the terms of the lease agreement. In

November, the plumbing freezes and several lines burst. The tenant has the repairs

made and pays the $300 bill. In December, he reduces his rental payment to $100

to compensate for the plumbing repairs. Carmin pays other deductible costs for the

rental that total $2,680. The allowable depreciation on the rental house is $1,080.

Carmin owns several other investments. She receives the following amounts

(all in cash) from the stocks and bonds she owns:

General Dynamics common stock $ 300

City of Toronto bonds 1,600

State of Nebraska bonds 400

New Jersey economic development bonds 300

Grubstake Mining Development stock 1,000

.

Carmin owns 1,000 shares of Grubstake Mining Development common stock.

Grubstake is organized as an S corporation and has 100,000 shares outstanding.

Grubstake reports taxable income of $200,000 during the current year.

Carmin sells the following securities during 2013:

Security Sale Date

Purchase

Date

Sale

Price

Commission

Paid Basis

Nebraska Bonds 3/14/13 10/22/10 $1,900 $ 80 $1,710

Cassill Corporation

Stock

10/18/13 2/19/13 $8,900 $450 $9,630

Carmin purchased 500 shares of General Dynamics stock on July 22, 2010, at

a cost of $2,200. On June 15, 2013, she receives 50 shares of General Dynamics

stock as a dividend. The fair market value of General Dynamics stock on June 15,

2013, was $3.50 per share.

Carmin slips on a wet spot in front of a computer store during the current

year. She breaks her ankle and is unable to work for two weeks. She incurs $1,300

in medical costs, all of which are paid by the owner of the store. The store also

gives her $1,000 for pain and suffering resulting from the injury. ASCI continues

to pay her salary during the two weeks she misses because of the accident. ASCI’s

plan also pays her $1,200 in disability pay for the time she is unable to work.

Calculate Carmin’s adjusted gross income on her 2013 tax return. Then do

one or both of the following, according to your professor’s instructions:

a. Include a brief explanation of how you determined each item that affected

adjusted gross income and any items you excluded from gross income. Your

solution to the problem should contain a list of each item included in adjusted

gross income and its amount, with the explanations attached.

b. Write a letter to Carmin explaining how you determined each item that

affected adjusted gross income and any items you excluded from gross income.

You should include a list of each item included in adjusted gross income and

its amount.

Answer 1

Part A
1) Alimony = $400 x 12	$4,800
2) Annual salary	$80,000
3) Allowable contribution	$6,400
6) The amount of tuition fee which is deductible has been calculated as shown below:
Particulars	Amount ($)
Total Tuition Fees	2300
Total Income	75945
Less: Alimony Paid	-4800
	71145
Deduction is available as the difference in not more than $ 80,000
Tuition and Fees Deduction (Since the amount is more than $ 65,000)	2000
8)Prize Award ($ 5,000 / 10)
10) Rental Income
Particulars
Amount ($)
Total Rental Income ($ 400 x 5)	$2,000
Less: Plumbing Costs	$300
Deductible Costs	$2,680
Depreciation	$1,080
Rental Income	-$2,060
11)Income from stocks and bonds
Particulars	Amount ($)
General Dynamics Common Stock	300
City of Toronto Bonds	1600
State of Nebraska Bonds	400
New Jersey Economic Development Bonds	300
Grubstake Mining Development Stock	1000
Total	3600
12)Capital Gain / (Loss)
Security	Nebraska Bonds	Cassill Corporation Stock
Sale Date	3/14/13	10/18/13
Purchase Date	10/22/10	2/19/13
Type	Long-Term	Short-Term
Sale Price	$1,900	$8,900
Commission paid	$80	$450
Net Proceeds	$1,820	$8,450
Basis	$1,710	$9,630
Capital Gain/ (loss)	$110	-$1,180	-$1,070
Dividend income received equals 50x$3.50=	175
12)The amount of payments relating to a case of disability is a taxable amount.	1200
Adjusted Gross Income
Particulars	Amount ($)
Annual Salary	80000
Alimony Paid	-4800
Allowable contribution	-6400
Prize Award	500
Rental Income	-2060
Income from stocks and bonds	3600
Capital Gain / (Loss)	-1070
Dividend Income	175
Disability Payments	1200
Less: Tuition Fees Deduction	-2000
Adjusted Gross Income	69145