Problems
1. Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $26,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $26,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 40 percent this year and next year, and that she can earn an after-tax rate of return of 10 percent on her investments.
1-a. What is the after-tax cost if Isabel pays the $26,000 bill in January?
(PV of single payment at various ARR: [0%- 1year: 0.909], [10%-2 year: 0.826])
2. Daniel is considering selling two stocks that have not fared well over recent years. A friend recently informed Daniel that one of his stocks has a special designation, which allows him to treat a loss up to $30,000 on this stock as an ordinary loss rather than the typical capital loss. Daniel figures that he has a loss of $36,000 on each stock. If Daniel's marginal tax rate is 35 percent and he has $72,000 of other capital gains (taxed at 15 percent), what is the tax savings from the special tax treatment?
3. Matteo, who is single and has no dependents, was planning on spending the weekend repairing his car. On Friday, Matteo's employer called and offered him $200 in overtime pay if he would agree to work over the weekend. Matteo could get his car repaired over the weekend at Autofix for $148. If Matteo works over the weekend, he will have to pay the $148 to have his car repaired, but he will earn $200. Assume Matteo pays tax at a flat 15 percent rate. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
3-a. Considering monetary considerations only, should Matteo work or repair the car if the $148 he must pay to have his car fixed is not deductible? work or repair?
3-b. Given the answer in a-1 above, by how much is Matteo better or worse off?
3-c. Considering monetary considerations only, should Matteo work or repair the car if the $148 he must pay to have his car fixed is deductible for AGI? work or repair?
3-d. Given the answer in b-1 above, by how much is Matteo better or worse off?
4. Marc and Michelle are married and earned salaries this year of $64,000 and $12,000, respectively. In addition to their salaries, they received interest of $350 from municipal bonds and $500 from corporate bonds. Marc and Michelle also paid $2,500 of qualifying moving expenses, and Marc paid alimony to a prior spouse in the amount of $1,500. Marc and Michelle have a 10-year-old son, Matthew, who lived with them throughout the entire year. Thus, Marc and Michelle are allowed to claim a $1,000 child tax credit for Matthew. Marc and Michelle paid $6,000 of expenditures that qualify as itemized deductions and they had a total of $5,500 in federal income taxes withheld from their paychecks during the course of the year.
4-a. What is Marc and Michelle's gross income?
4-b. What is Marc and Michelle's adjusted gross income?
4-c. What is the total amount of Marc and Michelle's deductions from AGI?
4-d. What is Marc and Michelle's taxable income?
4-e. What is Marc and Michelle's taxes payable or refund due for the year?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.