Individual Taxation Chapter 5

Chapter 5 Problems 42. [LO 1] Although Hank is retired, he is an excellent handyman and often works part‐time on small projects for neighbors and friends. Last week his neighbor, Mike, offered to pay Hank $500 for minor repairs to his house. Hank completed the repairs in December of this year. Hank uses the cash method of accounting and is a calendar‐year taxpayer. Compute Hank’s gross income for this year from each of the following alternative transactions: a. b. Mike paid Hank $200 in cash in December of this year and promised to pay the remaining $300 with interest in three months. Mike paid Hank $100 in cash in December of this year and gave him a negotiable promissory note for $400 due in three months with interest. Hank sold the note in January for $350. Mike gave Hank tickets in December to the big game in January. The tickets have a face value of $50 but Hank could sell them for $400. Hank went to the game with his son. Mike bought Hank a new set of snow tires. The tires typically sell for $500, but Mike bought them on sale for $450. $200 this year. $500 this year if the value of the note at the time of the exchange was $400. Note the difference between a promise to pay in part a. (not gross income) and a negotiable promissory note which is included in gross income. $400 this year. The value of the tickets was $400 when Hank received them. $450. This is the fair market value of the tires at the time Mike transferred them to Hank.

c. d. a. b.

c. d. 46.

[LO1] L. A. and Paula file as married taxpayers. In August of this year they received a $5,200 refund of state income taxes that they paid last year. How much of the refund, if any, must L. A. and Paula include in gross income under the following independent scenarios? Assume the standard deduction last year was $11,600. a. b. c. Last year L. A. and Paula had itemized deductions of $10,200, and they chose to claim the standard deduction.