Tag: adjusted gross income

Applying the IRS Code Rules

Applying the IRS Code Rules
Applying the IRS Code Rules

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Applying the IRS Code Rules

Complete 6 problems that require you to apply research and knowledge of the rules and laws associated with at-risk or passive activity losses, as well as the individual alternative minimum tax (AMT).

Note: The assessments in this course are presented in sequence and must be completed in order. Do not complete Assessment 6 until you have submitted and received faculty feedback for Assessment 5.

Tax regulations are in a state of constant change. Being able to locate and correctly interpret and apply the information to a problem is a highly valued skill.

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

  • Competency 1: Analyze the background of the federal income tax system.
    • Correctly explain the tax effect in a specified scenario for the last year and the current year.
  • Competency 2: Analyze the basics of individual income tax return preparation. 
    • Correctly calculate the initial basis, allowed losses, and ending at-risk amounts.
    • Correctly explain how to treat a loss on a federal income tax return.
    • Correctly calculate what can be deducted on a final income tax return.
    • Correctly calculate the loss disallowed by at-risk rules and how much of the loss is disallowed by the passive loss rules.
    • Correctly calculate itemized deductions for AMT purposes and identify the amount of the AMT adjustment.

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Context

There is a separate tax system from the one you have been studying. The goal of this second system is to identify individual and corporate taxpayers who might escape paying taxes by using the Internal Revenue Code’s advanced tax incentives and programs. This alternative minimum tax (AMT) system employs rules based on a taxpayer’s AMT income. As you will learn, little income escapes the IRS.

Over the coming decade, a growing number of taxpayers will become liable for the AMT. Rather than affecting only high-income taxpayers who would otherwise pay no tax, the AMT has extended its reach to many upper-middle-income households. As more taxpayers incur the AMT, there will likely be increased pressure to reduce or eliminate the tax (CBO, 2010).

Questions to Consider

epen your understanding, you are encouraged to consider the questions below and discuss them with a fellow learner, a work associate, an interested friend, or a member of the business community.

  • What are some advantageous rules individual taxpayers can employ to avoid the AMT?
  • How far in advance should a taxpayer develop a tax strategy?
  • Is developing a tax strategy something only high-income people should do?

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Resources 

Required Resources

The following resources are required to complete the assessment.

Assessment 6 Problems: Applying the IRS Code In a Word document, provide complete answers with explanations to the problems below.

Problem 1

In 2014, Matthew contributes equipment with an adjusted basis of $40,000 and a FMV of $36,000 to Construction Limited Partnership (CLP) in return for a 3% limited partnership interest. Matthew’s share of CLP income and losses for the year were as follows:

Interest $ 1,000

 Dividends 600

Capital gains 1,800

Ordinary loss (8,650)

CLP had no liabilities. What are Matthew’s initial basis, allowed losses, and ending at-risk amount?

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Problem 2

 During the current year, Ben worked 1,500 hours as a tax consultant and 500 hours as a real estate agent. His one other employee (his wife) worked 350 hours in the real estate business. Ben earned $60,000 as a tax consultant, and together the couple lost $18,000 in the real estate business. How should Ben treat the loss on his federal income tax return?

Problem 3

Chrystal died owning an interest in a passive activity property. The property had an adjusted basis of $270,000, a fair market value of $284,000, and suspended losses of $25,000. What can be deducted on her final income tax return?

Problem 4

Howard has a $76,000 loss from an investment in a partnership in which he does not participate. His basis in the interest is $70,000.

a. How much of the loss is disallowed by the at-risk rules?

 b. How much of the loss is disallowed by the passive loss rules?

Problem 5

Roberta gave her daughter a passive activity last year that had an adjusted basis of $37,500. The activity had suspended losses of $17,500 and a fair market value of $60,000. In the current year, her daughter realized income of $9,000 from the passive activity. What is the tax effect on Roberta and her daughter last year and in the current year?

Problems are continued on the next page

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Problem 6

Create a table for the answer to this problem. Include these categories: AMT; Regular Tax: Adjustment.

Charles had the following itemized deductions in 2014:

State income taxes                                           $3,000

Charitable contributions                                     4,900

Mortgage interest (personal residence)              14,000

Medical expenses [$8,000-(7.5% ×$75,000)]       2,375

Miscellaneous [$3,200-(2%×$75,000)]                1,700

  1.  What are Charles’ itemized deductions for AMT purposes?
  2. What is the amount of the AMT adjustment?
Internet Resources

Access the following resources by clicking the links provided. Please note that URLs change frequently. Permissions for the following links have been either granted or deemed appropriate for educational use at the time of course publication.

IRS.gov is the homepage for the federal IRS Web site. Use the tabs at the top of the page to navigate the site. The Interactive Tax Assistant and Tax Trails are tools that walk you through a series of questions to find answers to tax questions.

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Internet Resources

Access the following resources by clicking the links provided. Please note that URLs change frequently. Permissions for the following links have been either granted or deemed appropriate for educational use at the time of course publication.

  • lynda.com. (n.d.). Income tax fundamentals: Accounting tutorials. Retrieved from http://www.lynda.com/Business-Accounting-tutorials/Income-Tax-Fundamentals/188210-2.html
  • IRS. (n.d.). IRS videos. https://www.youtube.com/user/irsvideos.
    • The IRS has a channel on YouTube devoted to income tax information in a video format. There are numerous videos available to help you with the course assessments. Videos are available with closed captions and in ASL and multilingual versions. You can search this channel by topic.

Cruz, A., Deschamps, M., Niswander, F., Prendergast, D., Schisler, D., & Trone, J. (2016). Fundamentals of taxation 2016 [with taxation software] (9th ed.). New York, NY: McGraw-Hill.

  • Chapter 13, “At-Risk/Passive Activity Loss Rules and the Individual Alternative Minimum Tax.”

Assessment Instructions

Note: The assessments in this course are presented in sequence and must be completed in order. Do not complete Assessment 6 until you have submitted and received faculty feedback for Assessment 5.

For this assessment, complete the following: 

  • Download the Assessment 6 Problems document, linked in the Resources under the Required Resources heading.
  • Using the primary source of IRS.gov and the IRS Interactive Tax Assistant and Tax Trails (linked in the Resources under the Required Resources heading), locate and interpret regulations and publications that relate to each problem.
  • Record your answers to the problems in a Word document.
  • Provide an explanation for each answer.
  • Submit the Word document containing your answers to the problems and the explanations for your answers.

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Inclusions, Exclusions, and AGI Assessment 3

Inclusions, Exclusions, and AGI
Inclusions, Exclusions, and AGI

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Inclusions, Exclusions, and AGI Assessment 3

Overview 

Apply the rules associated with inclusions and exclusions to an individual’s gross income and apply another set of code rules to determine a taxpayer’s AGI.Note: Completing a tax form requires specific steps that need to be executed in a sequence. The assessments in this course are presented in sequence and must be completed in order. Incorrect entries in previous assessments will result in incorrect entries in future assessments. Do not complete Assessment 3 until you have submitted and received faculty feedback for Assessment 2.

Understanding the ever-changing rules for including and excluding income in the calculation of a taxpayer’s adjusted gross income (AGI) for income tax purposes is a skill that is developed through practice.By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

• Competency 2: Analyze the basics of individual income tax return preparation.o Analyze official rules and instructions to correctly calculate deductible self-employment taxes.o Interpret official rules and instructions to record correct entries on tax forms.o Apply rules and instructions to correctly compute AGI for the year.

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Context

I don’t know what to do or where to turn in this taxation matter. Somewhere there must be a book that tells all about it, where I could go to straighten it out in my mind. But I don’t know where the book is, and maybe I couldn’t read it if I found it.” — Warren G. Harding, the 29th President of the United States, 1921–1923.

About now, you may be nodding your head in agreement with President Harding’s quote about the complexity of the tax code, with its many inclusions and exclusions. What started out as a simple document, designed to raise capital to make the new nation independent from the British Empire, has evolved over the centuries and decades into a complex maze of rules and regulations.Nowhere is that more pronounced than in the rules for including and excluding income in the calculation of a taxpayer’s adjusted gross income (AGI) for income tax purposes. 

Gross income is commonly defined as the amount of a company’s or a person’s income before all reductions, except that which is specifically excluded by the Internal Revenue Code, before taking deductions or taxes into account. Since not all of an individual’s personal income is subject to taxation, one must crack open the voluminous tax codebook to discover exclusions from the tax collector’s grasp.

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Question to Consider

To deepen your understanding, you are encouraged to consider the questions below and discuss them with a fellow learner, a work associate, an interested friend, or a member of the business community.The primary purpose of the Internal Revenue Service is to raise revenue for the government. However, the U.S. Congress has chosen to exempt certain income from taxation, such as scholarships, gifts, life insurance proceeds, municipal bond interest, and employee fringe benefits.

• Why you believe Congress has provided these exemptions to taxpayers?

• Which of the additional exemptions would you challenge?

• Which of the additional exemptions do you agree with?

Resources

Required Resources

The following resources are required to complete the assessment.

Internet Resources

Access the following resources by clicking the links provided. Please note that URLs change frequently. Permissions for the following links have been either granted or deemed appropriate for educational use at the time of course publication.
RS.gov is the homepage for the federal IRS Web site. Use the tabs at the top of the page to navigate the site. The Interactive Tax Assistant and Tax Trails are tools that walk you through a series of questions to find answers to tax questions

Want help to write your Essay or Assignments? Click here

Download the appropriate forms and publications from the IRS Web site to complete this assessment.•IRS.gov. (n.d.). Retrieved from http://www.irs.gov/• IRS. (n.d.). Interactive tax assistant. Retrieved from http://www.irs.gov/uac/Interactive-Tax-Assistant-(ITA)-1• IRS. (n.d.). Tax trails. Retrieved from www.irs.gov/Individuals/Tax-Trails%2d%2d%2dMain-Menu

FORM 1040: INCOME

This section of the Form 1040 encompasses the major components of total income and many types of nontaxable income for the filing taxpayer(s). Major components of this section include interest income, dividend income, unemployment compensation, social security benefits, and other types of income received by the taxpayer(s).
Licensed under a Creative Commons Attribution 3.0 License.

FORM 1040: ADJUSTED GROSS INCOME

Filing taxpayers can deduct additional items from total income for purposes of computing AGI. These items are termed “for AGI deductions”, or “above the line” deductions. The line refers to the AGI line on Form 1040.
The major items covered in this section of the Form 1040 are student loan interest, health savings accounts, moving expenses, self-employment taxes, early withdrawals from savings, and deductions for alimony paid.
Licensed under a Creative Commons Attribution 3.0 License.

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Resources

J. K. Lasser Institute. (2015). Your income tax 2015: For preparing your 2014 tax return.

Hoboken, NJ: Wiley.J. K. Lasser Institute. (2014). Your income tax 2014: For preparing your 2013 tax return.

Hoboken, NJ: Wiley.Drake, A. E. (2015, January 5). Reducing your taxes before the end of the year. Mondaq Business Briefing.Vento, J. J. (2014, March).

Beating the tax man. USA Today, 142(2826), 58–59.

Ashton, M. (2015, March 5). The forgotten tax deductions.

Mondaq Business Briefing.

Halperin, D. I., & Warren, A. C., Jr. (2014). Understanding income tax deferral.

New York University Tax Law Review, 67 Tax L. Rev. 317.

Internet Resources

Access the following resources by clicking the links provided.

Please note that URLs change frequently. Permissions for the following links have been either granted or deemed appropriate for educational use at the time of course publication.
lynda.com. (n.d.). Income tax fundamentals: Accounting tutorials. Retrieved from http://www.lynda.com/Business-Accounting-tutorials/Income-Tax-Fundamentals/188210-2.htmlIRS. (n.d.). IRS videos. https://www.youtube.com/user/irsvideos.The IRS has a channel on YouTube devoted to income tax information in a video format. There are numerous videos available to help you with the course assessments. Videos are available with closed captions and in ASL and multilingual versions.

You can search this channel by topic.
Cruz, A., Deschamps, M., Niswander, F., Prendergast, D., Schisler, D., & Trone, J. (2016). Fundamentals of taxation 2016 [with taxation software] (9th ed.). New York, NY: McGraw-Hill.Chapter 3,

“Gross Income: Inclusions and Exclusions.”Chapter 4, “Adjustments for Adjusted Gross Income.”

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Assessment Instructions

Note: The assessments in this course are presented in sequence and must be completed in order. In Assessments 2–5, you will work step-by-step toward completing a 1040 tax return and all the necessary related forms, based on a provided scenario. Do not complete Assessment 3 until you have submitted and received faculty feedback for Assessment 2.

Incorrect entries in Assessment 2 affect the entries in Assessment 3.
For this assessment, use information and publications from IRS.gov and the other IRS resources linked in the Resources under the Required Resources heading to determine the adjusted gross income (AGI) for Jacob and Taylor Weaver, based on the provided scenario.

Complete the following:

Read the information in the scenario below.Download the appropriate forms and publications from IRS.gov.Enter information from Assessment 2, Schedules C and SE, into the 1040 form.Apply the rules for adjustments to adjusted gross income.Enter applicable information from the scenario into the 1040 form.Interpret official rules and instructions to record correct entries on the tax form.Calculate the AGI for the Weavers.Submit the tax form.

Scenario

Jacob and Taylor Weaver, ages 45 and 42 respectively, are married and are filing jointly in2016. They have three children, Ashley, age 9; Patrick, age 6; and John, age 18.Social Security numbers are: Jacob, 222-33-4444; Taylor, 555-66-7777; Ashley, 888-99-1234; Patrick, 789-56-4321; John, 123-45-6789. Taylor works part-time as a paralegal.She earned $26,000 in 2016.Taxes withheld: $4,200 withheld.Estimated tax payments: $25,000.$350 paid with their 2015 state tax return.Jacob and Taylor bought their first house in 2016.

Home mortgage interest: $7,246.Property tax: $2,230.Federal income withholding: $2,350.Charities: $4,500.$435 to rent a moving truck.$8,000 to put new siding on the house.$11,600 for child care expenses ($5,800 for each child).It was paid to Lil Tigers Daycare, 1115 S. Garrison St., Muncie, IN 47305 (EIN 98-7654321).Taylor is a part-time student at Ball State University in Muncie.She received a 1098-T indicating tuition and fees for 2016 in the amount of $6,011.Health insurance for the family, through Taylor’s job, cost $6000 for all 12 months of 2016.They paid deductibles and co-payments of $550.

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