week 3 problem

Good Essays
Comprehensive Problem 67 (Ch. 5)

Ken is 63 years old and unmarried. He retired at age 55 when he sold his business, Understock.com. Though Ken is retired, he is still very active.
Ken reported the following financial information this year. Assume Ken’s modified adjusted gross income for purposes of the bond interest exclusion and for determining the taxability of his Social Security benefits is $70,000 and that Ken files as a single taxpayer. Determine Ken’s 2009 gross income.

a. Ken won $1,200 in an illegal game of poker (the game was played in Utah, where gambling is illegal).

Ken will need to include this amount as income. Ken will not be able to use the deduction for gambling loses.

b. Ken sold 1,000 shares of stock for $32 a share. He inherited the stock two years ago. His tax basis (or investment) in the stock was $31 per share.

Ken will have a taxable gain of $1,000.00 that should be included in his income. The question is this taxed at a preferential rate because it is a capitol gain.

c. Ken received $25,000 from an annuity he purchased eight years ago. He purchased the annuity, to be paid annually for 20 years, for $210,000.

Gross income per payment is $14,500

1
INVESTMENT
$210,000.00

2
NUMBER OF PAYMENTS
20

3
RETURN OF CAPITAL PER PAYMENT $10,500.00 210000/20
4
AMOUNT OF EACH PAYMENT $25,000.00

5
GROSS INCOME ADDED PER YEAR $14,500.00 (4) - (3)

d. Ken received $13,000 in Social Security benefits for the year.

Ken must add to gross income $11,050.

SOCIAL SECURITY
$13,000.00

MODIFIED AGI
$70,000.00

1/2 OF MODIFIED AGI PLUS SOCIAL
SECURITY BENEFITS $48,000.00 (1/2 X $70,000) + $13,000
85% OF SOCIAL SECURITY
$11,050.00
.85 X 13,000

e. Ken resided in Ireland from July 1, 2008, through June 30, 2009, visiting relatives. While he was there he earned $35,000 working in his cousin’s pub. He was paid $17,000 for his services

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