1. LO.1 Rearrange the following items to show the correct formula for arriving at taxable income of individuals under the Federal income tax.
a. Deductions for AGI.
b. Income (broadly conceived).
c. Taxable income.
d. Adjusted gross income.
e. Personal and dependency exemptions.
f. Gross income.
h. The greater of the standard deduction or itemized deductions.
2. LO.1, 5, 8, 9 During the year, Addison is involved in the following transactions. What are the possible Federal income tax effects of these transactions?
• Lost money gambling on a trip to a casino.
• Helped pay for her neighbor Howie’s dental bills. Howie is a good friend who is unemployed.
• Received from the IRS a tax refund due to Addison’s overpayment of last year’s Federal income taxes.
• Paid a traffic ticket received while double parking to attend a business meeting.
• Contributed to the mayor’s reelection campaign. The mayor had promised Addison to rezone some of her land.
• Borrowed money from a bank to make a down payment on an automobile.
• Sold a houseboat and a camper on eBay. Both were personal use items, and the gain from one offset the loss from the other.
• Her dependent Aunt Katherine died on June 3 of the year.
• Paid for Katherine’s funeral expenses.
• Paid premiums on her dependent son’s life insurance policy.
3. LO.1 Which of the following items can be inclusions in gross income?
a. During the year, shares of stock that the taxpayer had purchased as an investment doubled in value.
b. Amount an off-duty motorcycle police officer received for escorting a funeral procession.
c. While his mother Shirley was in the hospital, the taxpayer sold Shirley’s jewelry and gave the money to his girlfriend, Serena.
d. Child support payments received.
e. A damage deposit the taxpayer recovered when he vacated the apartment he had rented.
f. Interest received by the taxpayer on an investment in school bonds issued by IBM.
g. Amounts received by the taxpayer, a baseball “Hall of Famer,” for autographing sports equipment (e.g., balls and gloves).
h. Tips received by Matt, a bartender, from patrons. (Matt is paid a regular salary by the cocktail lounge that employs him.)
i. Sherri sells her Super Bowl tickets for three times what she paid for them.
j. Jefferson receives a new BMW from his grandmother when he passes the CPA exam.
4. LO.1 Which of the following items can be exclusions from gross income?a. Alimony payments received.
b. Award received by the taxpayer for compensatory damages from her broken leg.
c. A new golf cart won in a church raffle.
d. Amount collected on a loan previously made to a college friend.
e. Insurance proceeds paid to the taxpayer on the death of her uncle—she was the designated beneficiary under the policy.
f. Interest income on City of Chicago bonds.
g. Jury duty fees.
h. Stolen funds that the taxpayer ostensibly had collected for a local food bank drive.
i. Reward paid by the IRS for information provided that led to the conviction of the taxpayer’s former employer for tax evasion.
j. Rare coins worth $8,000 found in an old trunk purchased by the taxpayer at a garage sale.
5. LO.1 To save on U.S. income taxes, Lucas (a U.S. citizen and resident of Vermont) invests in foreign stocks and bonds. Is Lucas’s approach effective in reducing his taxes?