TAX PLANNING CASES
Nick and Jolene are married. Nick is 61 and retired in 2012 from his job with Amalgamated Company. Jolene is 56 and works part-time as a special education teacher. Nick and Jolene have a substantial amount of investment savings and would like to reorganize it to achieve the best after-tax return on their investments. They give you the following list of projected cash receipts for 2013:
Jolene's salary $13,000
Nick's pension-fully taxable 12,500
Interest income 4,000
Dividend income 2,500
Social Security benefits 7,000
Farmer's Fund annuity 6,000
In addition, Nick tells you that he owns a duplex that he rents out. The duplex rents for 2013 are $18,000, and Nick estimates expenses of $22,000 related to the duplex. The annuity was purchased 18 years ago for $20,000, and pays $500 per month for 10 years.
Nick and Jolene's investments consist of the following:
6-month certificates of deposit (CDs) $100,000
1,000 shares of Lardee's common stock (current market value = $7 per share, projected 2013 dividend = $1 per share)-cost 10,000
2,000 shares of Corb Company common stock (current market value = $20 per share, projected 2013 dividend = $.75 per share)-cost 20,000
a. Assuming that Nick and Jolene have total allowable itemized deductions of $12,350 in 2013 and that they have no dependents, determine their 2013 taxable income and tax liability based on the projections they gave you.
b. The 6-month CDs consist of two $50,000 certificates, both of which yield 4% interest.
One CD matures on January 3, 2013. Nick's banker tells him that he can 3-54 Part 2 Gross Income renew the CD for one year at 4%. Nick's stockbroker tells him that he can purchase tax-exempt bonds with a yield of 3%. Nick would like you to determine whether the tax-exempt bonds provide him a better after-tax return than the CD.
c. Jolene is concerned that they are not getting the best return on their Corb Company stock. When they purchased the stock in 2002, the $.75 per share dividend was yielding 10% before taxes. However, the rise in market value has far outpaced the dividend growth, and it is yielding only 3.75%, based on the current market value. Jolene thinks they should sell the stock and purchase either the 3% tax-exempt securities or the 4% CD if it would be a better deal from an income tax viewpoint. Calculate the tax effect on their 2013 income of selling the shares, and determine whether they should sell the shares and invest the after-tax proceeds in tax-exempt securities or the 4% CD. Do this calculation after you have determined the best option regarding the CD that matures in January.
INTEGRATIVE PROBLEMS
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
Communication
Skills
Part - Gross Income
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.
COMPREHENSIVE PROBLEM
During the current year, the Harlow Corporation, which specializes in commercial construction, has the following property transactions:
a. In April, a tornado damages a crane and a dump truck at one of its construction sites. The crane was acquired in 2010 for $120,000 and has an adjusted basis of $39,650. The dump truck was acquired in 2008 for $70,000 and has an adjusted basis of $33,880. The insurance company reimburses Harlow $35,000 for the crane and $42,000 for the dump truck. The company decides not to replace the dump truck and uses the insurance proceeds to purchase a new crane for $110,000.
b. The company trades a road grader with a fair market value of $72,000 for a bulldozer worth $60,000. Harlow receives $12,000 in the exchange. The road grader originally cost $90,000 and has an adjusted basis of $50,000. The bulldozer cost $85,000, and its adjusted basis is $37,000.
c. A fire destroys the company's supply warehouse. The warehouse originally cost $300,000 and has an adjusted basis of $200,000. Its fair market value before the fire was $250,000. The insurance company pays Harlow $230,000, which it uses to acquire a warehouse costing $280,000.
d. The city of PeaceDale condemns land that Harlow had acquired in 1979 for $22,000 and held as an investment. The city pays Harlow the $195,000 fair market value of the land. Harlow uses the proceeds to acquire a commercial office park for $350,000.
e. Harlow sells an automobile used by its president for business purposes for $10,000 to a local car dealership. The car originally cost $32,000, and its adjusted basis is $15,000. The company had an agreement to replace the automobile with a customized four-wheel-drive vehicle from a company that specializes in custom cars. However, the day the company sells the automobile, it is informed that the custom car company will not be able to deliver the vehicle for at least 10 weeks. Harlow terminates its contract with the custom car company and buys a new automobile from the local car dealership for $55,000.
Determine the realized and recognized gain or loss on each of Harlow's property transactions and the basis of any property acquired in each transaction.