personal income tax

Problem 11-52 (LO. 2, 3, 7)

Five years ago Gerald invested $150,000 in a passive activity, his sole investment venture. On January 1, 2015, his amount at risk in the activity was $30,000. His shares of the income and losses were as follows:

Year Income (Loss)
2015 ($40,000)
2016 (30,000)
2017 50,000

Gerald holds no suspended at-risk or passive activity losses at the beginning of 2015.

If an answer is zero, enter “0”.

a.  If losses were limited only by the at-risk rules, how much can Gerald deduct in 2015 and 2016?

Year Loss Allowed Disallowed
2015 ($40,000) $ $
2016 ($30,000)
Total $

b.  Refer to the information in part (a) above. Assuming Gerald has $50,000 income in 2017, what is his taxable income in 2017 under at-risk rules?

$

c.  If losses were limited by the at-risk and passive activity loss rules, how much would Gerald be able to deduct in 2015 and 2016?

2015: $

2016: $

d.  Assuming Gerald has $50,000 income in 2017, (and considering both at-risk and passive activity loss rules), what is the amount of Gerald’s suspended passive activity losses at the end of 2017 under the at-risk rules and under the passive activity loss rules?

Under the at-risk rules: $

Under the passive activity loss rules: $

At the end of 2017, what is the amount of Gerald’s adjusted basis in the activity?

$

 Problem 11-58 (LO. 3, 8)

Ida, who has AGI of $80,000 before considering rental activities, is active in three separate real estate rental activities and is in the 28% tax bracket. She has $12,000 of losses from Activity A, $18,000 of losses from Activity B, and income of $10,000 from Activity C. She also has $2,100 of tax credits from Activity A.

Calculate her deductions and credits allowed and the suspended losses and credits.

If an amount is zero, enter “0”.

a.  Ida’s deductions (her utilized loss) total $.

b.  Her suspended loss is $.

c.  After deducting the loss, Ida has available a deduction equivalent of $.

d.  Her utilized credit is $, and her suspended credit is $.

 

Problem 11-60 (LO. 9)

At death, Francine owns an interest in a passive activity property (adjusted basis of $160,000, suspended losses of $16,000, and fair market value of $170,000).

On Francine’s final income tax return, a deduction for suspended losses of $ is allowed.

 

 

Problem 11-64 (LO. 10)

Helen borrowed $150,000 to acquire a parcel of land to be held for investment purposes. During 2016, she paid interest of $12,000 on the loan. She had AGI of $90,000 for the year. Other items related to Helen’s investments include the following:

Investment income $11,000
Long-term capital gain on sale of stock 3,500
Investment counsel fees 200

Helen is unmarried, does not itemize her deductions and does not elect to treat the capital gain as investment income.

a.   Helen’s net investment income is $. Helen’s investment interest expense deduction in 2016 is $.

b.  Indicate whether the following statements are “True” or “False” regarding the treatment of the portion of Helen’s investment interest that is disallowed in 2016.

The investment interest disallowed is carried over and becomes investment interest expense in the subsequent year. True 
The investment interest disallowed is lost and not subject to any carryover. False 
The investment interest disallowed is carried over and may be used to offset any type of income in the subsequent year. False 

 

Discussion Question 12-3 (LO. 2, 3, 4)

Classify the following regular tax amounts as “Preference”, “AMT adjustment”, “Neither AMT adjustment nor Preference”.

 

a.   Percentage depletion expense  
b.   Employee’s exclusion for an employer’s contribution to the employee’s pension plan  
c.   Incentive stock option exercised  
d.   Student loan interest expense  
e.   Excess of accelerated over straight-line depreciation on real property placed in service before 1987  
f.   Exclusion for gains on the sale of certain small business stock  
g.   Medical expenses  

 

iscussion Question 12-4 (LO. 2)

Based on the statements provided and using the Exhibit 12.1 as a guide, label each as being either “True” or “False” with regard to the AMT calculation.

 

a.   Regular taxable income – This taxable income amount is prior to any standard deduction or personal and dependency exemptions taken in the calculation of the taxpayer’s taxable income.  
b.   Plus or minus: Adjustments – Adjustments are timing differences; these amounts reflect the difference between how an item is treated for regular tax purposes and AMT purposes.  
c.   Plus: Preferences – Preferences only increase AMTI, in contrast to adjustments, which can be positive or negative.  
d.   Equals: AMTI – AMTI stands for Alternative Minimum Taxable Income.  
e.   Less: AMT exemption – The exemption amount is indexed to inflation annually. The exemption amount also phases out at a rate of 25% per dollar of AMTI over a certain threshold.  
f.   Equals: AMT base – If the taxpayer’s regular tax liability is more than this, no AMT is due.  
g.   Multiplied by: 26% or 28% – Unlike the corporate AMT rate, the individual AMT rate is mildly progressive. The dollar amount that divides the 26% and 28% brackets is also indexed to inflation annually.  
h.   Equals: Tentative minimum tax (TMT) before FTC – This is the TMT before considering the AMT foreign tax credit.  
i.   Less: AMT FTC – Foreign Tax credit for AMT purposes is calculated the same as the FTC for regular tax purposes.  
j.   Equals: TMT – TMT stands for Tentative Minimum Tax.  
k.   Less: Regular tax liability – This is adjusted to remove any Foreign Tax credit.  
l.   AMT (if TMT > regular tax liability) – Technically, the AMT is a surtax; the AMT amount is the excess of the TMT over the regular tax liability. Practically, the taxpayer will pay the larger of the two amounts.  

 

Problem 12-29 (LO. 2)

Use the following data to calculate Chiara’s AMT base in 2016:

Taxable income $148,000
Positive AMT adjustments 73,000
Negative AMT adjustments 55,000
Preferences 30,000

Chiara will file as a single taxpayer and chooses to itemize her deductions. The personal/dependency exemption amount is $4,050.

Click here to access the exemption table.

 

Chiara’s taxable income $152,050
Plus or minus: Positive adjustments 
Negative adjustments 
Plus: Tax preferences 
Equals: AMTI $
Less:  
Equals: AMT base $

 

 

Problem 12-48 (LO. 3, 4)

Gabriel, age 40, and Emma, age 33, are married with two dependents. They had AGI of $110,000 in 2016 that included net investment income of $10,000 and gambling winnings of $2,500.

They incurred the following expenses during the year (all of which resulted in itemized deductions for regular income tax purposes).

Medical expenses (before 10%-of-AGI floor) $13,000
State income taxes 2,800
Personal property tax 900
Real estate tax 9,100
Interest on personal residence 8,600
Interest on home equity loan (proceeds were used to buy a new fishing boat) 1,800
Investment interest expense 2,600
Charitable contributions (cash) 4,200
Unreimbursed employee expenses (before 2%-of-AGI floor) 3,800

If an amount is zero, enter “0”.

a.  Enter the amount of Gabriel and Emma’s regular income tax itemized deductions; AMT itemized deductions; the net amount of adjustments (if any) and if the adjustment is a positive or negative adjustment.

Regular

Income Tax

AMT

Purposes

Amount of

Adjustment

Positive,

Negative, or None

Medical expenses $ $ $  
State income taxes  
Personal property tax  
Real estate tax  
Interest on residence  
Interest (home equity)  
Investment interest  
Charitable contributions  
Employee expenses  
Totals $ $ $  

 

b.  Gabriel and Emma also earned interest of $5,000 on private activity bonds that were issued in 2013. They borrowed money to buy these bonds and paid interest of $3,900 on the loan.

The effect of this transaction is a tax preference of $.

 

 

Problem 12-54 (LO. 2, 3, 4)

Pat, who is age 66 and single with no dependents, received a salary of $90,000 in 2016. She earned interest income of $1,000, dividend income of $5,000, gambling winnings of $4,000, and interest income from private activity bonds (issued in 2006) of $40,000. The dividends are not qualified dividends. The following additional information is relevant.

Medical expenses (before 7.5%-of-AGI floor) $12,000
State income taxes 4,100
Real estate taxes 2,800
Mortgage interest on residence 3,100
Investment interest expense 1,800
Gambling losses 5,100

a. Compute Pat’s taxable income and AMTI.

Taxable Income Computation
Adjusted gross income $
 
 
Taxable income $
AMTI Computation
Taxable income, before   $
 
 
AMTI $

b. Determine if Pat’s AMT exemption will be limited.

His tentative exemption of $ is   at a rate of 25 cents on the dollar when AMTI exceeds $.

If required, round amounts to the nearest dollar.

Computation of AMT Base and Tax
AMTI $
AMT exemption
AMT base $
Tentative AMT $