<p> TAX PROBLEMS – Class Two ( 2011 )</p><p>1. Frank & Susan, a married couple, file a joint return for 2010. They are U. S. Citizens who provided more than half of the support of the following individuals in 2010:</p><p> a. Their 18 year old son, Lance, who is in his first year of college and lives at the dorms on campus. Lance earned $ 12,000 in 2010 from his summer job.</p><p> b. Frank’s sister, Marge, who is disabled but lives on her own. Her only income source was $ 14,000 in social security benefits.</p><p> c. Frank’s best friend, Steve, lived with Frank & Susan during 2010 while he searched for a job. His earnings for the year were $ 2,500.</p><p> d. Frank’s elderly mother, Adriana, who lives in Mexico City. Adriana has no legal status in the United States and is a citizen of Mexico. She had no earnings in 2010.</p><p>ISSUE: How many personal & dependency exemptions will Frank & Susan be able to claim on their 2010 tax returns?</p><p>ISSUE: Assume Frank & Susan were divorced in 2009, but the Frank continued to support Lance, Marge, Steve and Adriana in 2010 – as indicated above. Will Frank qualify as Head of Household in 2010?</p><p>2. In each of the following situations, will the prize or award received be Fully Includable, Partially Includable or Not Includable in the taxpayer’s taxable income:</p><p> a. William won a $ 10,000 jackpot in Las Vegas after having lost $ 2,000 gambling.</p><p> b. Irina won the Nobel Prize for Chemistry and donated the $ 400,000 prize to her university’s Chemistry Department.</p><p> c. Tom’s employer awarded him a $ 300 watch in honor of his 10 years of service to the company.</p><p> d. Joe won $ 1,000,000 on “The Weakest Link” – a game show.</p><p>3. In each of the following situations, will the life insurance premiums or benefits be Fully Includable, Partially Includable or Not Includable in the taxpayer’s gross income:</p><p> a. As part of Chung’s employee benefits package, his employer provides Chung with $ 80,000 in group term life insurance in 2010.</p><p> b. Susan receives $ 100,000 in life insurance benefits on the death of her rich uncle Moneybags.</p><p> c. Marcus, the insured on a whole-life policy of $ 250,000, is dying of cancer. He is considering the following two options. Discuss the tax consequences to both Marcus and Sam: OPTION ONE: Cashing out his policy and taking a trip around the world.</p><p>OPTION TWO: “Selling” his policy to Sam, an investor. Sam will pay Marcus the sum of $ 175,000 and Marcus will make Sam an irrevocable beneficiary on the policy. When Marcus dies, Sam gets $ 250,000.</p><p> d. Bruin Corporation has taken out life insurance policies on several key employees without their knowledge (each policy is $ 100,000). Whitney, their division manager, dies in a traffic accident the following week and Bruin receives $ 100,000. </p><p>4. The following taxpayers received Tax Refunds in 2010 from tax returns they filed for 2009. Will these sums be includable in or excludable from their gross income:</p><p> a. James received a $ 2,000 federal income tax refund with $ 100 in interest.</p><p> b. In 2009, Jane did not itemize deductions on her federal income tax return. In 2010, she receives a $ 300 state income tax refund for state taxes paid in 2009, with $ 30 interest.</p><p> c. In 2009, Tony itemized deductions on his federal tax return. In 2010 he receives the sum of $ 1,000 as a City of New York income tax refund for city taxes paid in 2009.</p><p>5. Graciela, an executive with L. A. Distributors (LAD), a California corporation, is transferred on October 1, 2009 to LAD’s division in Chile. She works in Chile until September 30, 2010, earning $ 60,000 in 2009 and $ 120,000 in 2010 (annual US & Chilean income combined). What amounts, if any, will Graciela be able to exclude (foreign income exclusion) in 2009 and 2010?</p><p>6. In 2010, Joyce had an automobile accident caused by another driver’s negligence. Joyce received $ 20,000 in personal injury damages from the driver’s insurance carrier. Joyce also received $ 1,000 in County of Los Angeles bond interest, interest from U.S. Treasury bonds of $ 2,500 and stock dividends valued at $ 5,000. </p><p> a. What is Joyce’s gross income in 2010? b. What is her taxable income in 2010? c. Would it make a difference if Joyce was given the option to take cash or stock dividends prior to electing to receive the $ 5,000 stock dividends?</p><p>7. Dylan, is a divorced person and custodian of his 13 year old child. Pursuant to a marital settlement agreement executed with his ex-wife in 1999, Dylan is supposed to receive $ 4,000 per month from his wealthy ex-wife. $ 1000 is designated as child support and $ 3,000 is alimony (payable monthly until Dylan dies or remarries). However, in 2010, Dylan’s ex-wife paid him only $ 20,000. Dylan’s gross income (exclusive of support payments from his ex- wife) in 2010 was $ 30,000. What should Dylan report on his tax return as gross income for 2010?</p>