Chapter 5 Classwork Solutions
BUS-A 328 Fall 2013 – Chapter 5 classwork
27. Otto and Fiona are negotiating the terms of their divorce. Otto has agreed to transfer property to Fiona over the next two years, but he has reserved the right to make cash payments in lieu of property transfers. Will tax considerations play a role in Otto’s decision to transfer property or pay cash? How will Otto’s choice affect the combined gross income and income taxes paid by Otto and Fiona? Explain. Under the proper conditions (under a written separation agreement or divorce decree that does not designate payments as something other than alimony, the spouses do not live together when the payments are made, and the payments that cease on the recipient’s death), cash payments are deductible alimony whereas property settlements have no immediate tax implications. Because alimony is included in the gross income of the recipient and is deductible by the person making the payment, the choice to make cash payments will not affect their combined gross income. However, the choice will affect combined taxes paid if Otto and Fiona do not have the same marginal tax rates on the payments. The combined taxes payable will be lower if Otto has a higher rate than Fiona (the alimony deduction reduces taxes at a high rate and the alimony income is taxed at a lower rate) than if Fiona has a higher marginal tax rate than Otto.
30. Rolando purchases a golf cart from his employer, E-Z-Go Golf Carts, for a sizable discount. Explain the rules for determining if Rolando’s purchase results in taxable income for him.
Although the general rule is that bargain purchases by an employee from an employer creates taxable compensation income to the employee, the tax law does provide a limited exclusion for employee bargain purchases. Specifically, employees may exclude a) a discount on employer-provided goods as long as the discount does not exceed the employer's gross profit percentage on all property offered to sale to non-employee
27. Otto and Fiona are negotiating the terms of their divorce. Otto has agreed to transfer property to Fiona over the next two years, but he has reserved the right to make cash payments in lieu of property transfers. Will tax considerations play a role in Otto’s decision to transfer property or pay cash? How will Otto’s choice affect the combined gross income and income taxes paid by Otto and Fiona? Explain. Under the proper conditions (under a written separation agreement or divorce decree that does not designate payments as something other than alimony, the spouses do not live together when the payments are made, and the payments that cease on the recipient’s death), cash payments are deductible alimony whereas property settlements have no immediate tax implications. Because alimony is included in the gross income of the recipient and is deductible by the person making the payment, the choice to make cash payments will not affect their combined gross income. However, the choice will affect combined taxes paid if Otto and Fiona do not have the same marginal tax rates on the payments. The combined taxes payable will be lower if Otto has a higher rate than Fiona (the alimony deduction reduces taxes at a high rate and the alimony income is taxed at a lower rate) than if Fiona has a higher marginal tax rate than Otto.
30. Rolando purchases a golf cart from his employer, E-Z-Go Golf Carts, for a sizable discount. Explain the rules for determining if Rolando’s purchase results in taxable income for him.
Although the general rule is that bargain purchases by an employee from an employer creates taxable compensation income to the employee, the tax law does provide a limited exclusion for employee bargain purchases. Specifically, employees may exclude a) a discount on employer-provided goods as long as the discount does not exceed the employer's gross profit percentage on all property offered to sale to non-employee