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Dave CPA, Accountant
Category: Tax
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Experience:  Vast knowledge within the accounting/tax industry
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# Determine the tax payer gross income for tax purpose: a) Deb,

This answer was rated:
Determine the tax payer gross income for tax purpose:
a) Deb, a cash basis taxpayer, traded a corporate bond with accrued interest of \$300 for corporate stock with a fair market value of \$11,000 at the time of the exchange. Deb’s cost of the bond was \$10,000. The value of the stock had increased to \$12,000 by the end of the year.

b) Deb needed \$10,000 to make a down payment on her house. She instructed her broker to sell some stock to raise the \$10,000. Deb’s cost of the stock was \$3,000. Based on her broker’s advice, instead of selling the stock, she borrowed the \$10,000 using the stock as collateral for the debt.

c) Deb’s boss gave her two tickets to the Rabid Rabbits rock concert because she meets her sales quota. At the time she received the tickets, they had a face price of \$200 and were selling on eBay \$350 each. On the date of the concert, the tickets were selling for \$400 each. Deb and her son attended the concert.
Hello,

It's me again.

The answer is: \$900
\$200 is for the face value of of the tickets
\$700 for the realized gain on the trade of the bond for stock. The increase in value to\$12,000 has nothing to do with her income

The scenario in B has not implications on income since she didn't sell anything. She borrowed money which isn't income.

Let me know if you have any questions. Thanks
Customer: replied 4 years ago.

The scenario in B has not implications on income since she didn't sell anything. She borrowed money which isn't income.

Correct with this one. I have the same answer, just wanted to confirm.'

The scenario C - I have a question - so the price after the boss purchased the time is not important or should not be take into consideration when she is doing her taxes. Correct. That was my answer but when I read the chapter someone confused me.

May I ask you to explain scenarion a - I don't understand this one. Thanks

The increase in the ticket price doesn't impact her reportable tax income since she didn't sell the tickets. Here boss gave he something of value of \$200 dollars. That was the price of the ticket. She didn't sell the ticket for any kind of gain higher than the \$200 she received so she only has to report the \$200, which her boss should put on her W-2 form.

For scenario A she had a bond worth \$10,300 (cost + interest). She traded the bond for something worth \$11,000 at the time of exchange. So she received \$700 benefit because of the exchange. She didn't do anything else that year. She recognizes a \$700 gain/income in the current year. The fact that it increased in value doesn't impact her current year tax income since she didn't sell the stock she received.

Let me know if you need anything else.

Customer: replied 4 years ago.

I thought that the answer is \$1,000.

The gain = \$11,000 (FMV at the time of exchange) - \$10,000(basis)= \$1000

Clarification with the ticket situation. It was 2 tickets so I think we need to multiply \$200 *2 = \$400. Correct?

Sorry. On the gain, it would be \$1,300 (your original point + interest). If you purchased a bond between interest dates and paid some accrued interest to the seller, this interest is taxable to the seller. I had to look up that fact to double check.

For the tickets your question states "At the time she received the tickets, they had a face price of \$200.." The question didn't differentiate between \$200 a piece. If that is the case then the amount would be \$400.
Customer: replied 4 years ago.

Yes, I agree with you... it is not clear if the boss paid \$200 for both tickets or \$200 per ticket = \$400.

Regarding the bond: which one is the correct answer?

11,000 (fair market value ) - 10,000 (cost of the bond) = 1,000

or \$1,300 = 1,000 + 300 accrued interest.

The answer is \$1,300. The \$11,000 - \$10,000 plus the accured interest of \$300. Deb as to report the accrued interest as income. Let me know if you need more clarification. Thanks
Customer: replied 4 years ago.

Ok thanks for clarifying....

Here is my last problem:

A taxpayer is considering three alternative investments of \$10,000. Assume the taxpayer is in the 28% marginal tax bracket for ordinary income and 15% for qualifying capital gains in all tax years. The selected investment will be liquidated at the end of five years. The alternatives are:

•· A taxable corporate bond yielding 5% before tax and the interest can be reinvested at 5% before tax.

•· A Series EE bond that will have a maturity value of \$12,200 (a 4% before-tax rate of return).

•· Land that will increase in value.

The gain on the land will be classified and taxed as long-term capital gain. The income from the bonds is taxed as ordinary income.

Hi,

Typically you have to start over again with a new question. The original question had a stated price attached. Since you are new and I like your attitude, I will help you out, but I'm unclear on what your actual question is. Is the question, what is the best investment?
Customer: replied 4 years ago.

Oh thanks so much. Yes, I like to understand how you came with the answer as I am doing the problem myself. I am glad you like my attitude.

I believe I missed some information... but here is the whole problem

A taxpayer is considering three alternative investments of \$10,000. Assume the taxpayer is in the 28% marginal tax bracket for ordinary income and 15% for qualifying capital gains in all tax years. The selected investment will be liquidated at the end of five years. The alternatives are:

A taxable corporate bond yielding 5% before tax and the interest can be reinvested at 5% before tax.

A Series EE bond that will have a maturity value of \$12,200 (a 4% before-tax rate of return).

Land that will increase in value.

The gain on the land will be classified and taxed as long-term capital gain. The income from the bonds is taxed as ordinary income.

How much must the land increase in value to yield a greater after-tax return than either of the bonds?

Given: Compound amount of \$1 and compound value of annuity payments at the end of five years.

<table border="1" cellspacing="0" cellpadding="0">

Interest Rate

\$1 Compounded for 5 years

\$1 Annuity Compounded for 5 years

5%

\$1.28

\$5.53

4%

\$1.22

\$5.42

3.6%

\$1.19

\$5.37

Ok here is my answer. This question is a little shaky since I don't have the full picture.

First off, the Series EE is only a gain of \$2,200 before tax and not a factor in the equation. Since after tax it's lower than point one.

The corporate bond would increase in value to \$2,700 after five years and have an after tax impact of \$12,000 at 28% The point states that the interest "can be reinvested" but it doesn't say it was. So I disregarded that point.

To beat the corporate bond the land would have to increase by about 45% to increase to \$14,000 (\$10,000 X 1.45) or over \$12,000 after tax at 15%.

I'm not 100% solid on this but i think it's in the right direction.
Customer: replied 4 years ago.

Ok I understand this is a tricky one. I will take your answer to compare my final answer.

I am still working with this one.

But thanks so much for helping me understand all 3 problems.

Good night as I need to take a test very shortly.

Luz

Thanks. If you happy with the first answer please hit accept. Regards, Dave
Dave CPA, Accountant
Category: Tax
Satisfied Customers: 840
Experience: Vast knowledge within the accounting/tax industry
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