jan report 09 May 2018
Client Name
Exp. Date Agency
Policy Number Pe
T
Leman & Lerman PA
05/01/18
27th Avenue ACP5944982225
PE
CHAPTER 5 Gross Income
The company has asked you to assist in its financial planning for the hospital and
medical benefits insurance plan by computing the following:
a.
How much taxable compensation is the equivalent of $9,000 of exempt com-
pensation for each of the two classes of employees?
b. What is the company's after-tax cost of the taxable compensation computed in
part (a)?
C.
Decisior
What is the company's after-tax cost of the exempt compensation?
d. Briefly explain your conclusions from the preceding analysis.
46. LO.2,5 Rosa's employer has instituted a flexible benefits program. Rosa will use
the plan to pay for her daughter's dental expenses and other medical
expenses that are not covered by health insurance. Rosa is in the 28% marginal tax
bracket and estimates that the medical and dental expenses not covered by health
insurance will be within the range of $4,000 to $5,000. Her employer's plan permits
her to set aside as much as $5,000 in the flexible benefits account. Rosa does not
itemize her deductions.
Rosa puts $4,000 into her flexible benefits account, and her actual expenses are
$5,000. What is her cost of underestimating the expenses?
b. Rosa puts $5,000 into her flexible benefits account, and her actual expenses are
only $4,000. What is her cost of overestimating her expenses?
What is Rosa's cost of underfunding as compared with the cost of overfunding
the flexible benefits account?
d. Does your answer in part (C) suggest that Rosa should fund the account closer
to the low end or to the high end of her estimates?
a.
C.
47. LO.2 Sparrow Corporation would like you to review its employee fringe benefits
program with regard to the tax consequences of the plan for the company's
president (Polly), who is also the majority shareholder.
4. The company has a qualified retirement plan. The company pays the cost of
employees attending a retirement planning seminar. The employee must be
within 10 years of retirement, and the cost of the seminar is $1,500 per attendee.
b. The company owns a parking garage that is used by customers, employees,
and the general public. Only the general public is required to pay for parking.
The charge to the general public for Polly's parking for the year would have
been $3,600 (a $300 monthly rate).
fixed charge long-distance
A 11
would no longer be able to use the
le
she
would be
and her husband will file a joint return and take the standard deduction. She currently
required to pay her hospitalization insurance premiums of $8,000 each year. Bertha
receives a salary of $55,000 a year. if she retires, she will spend approximately $300
less each month for commuting and clothing. Bertha and her husband have other
sources of income and are in and will remain in the 25% marginal tax bracket. Her
Medicare taxes of 7.65% on her salary, but her retirement pay would not be subject to
income tax for the current year was $8,875. She currently pays Social Security and
this tax. According to Bertha, she and her husband could live well if her after-tax
retirement income was at least 50% of her current income. Provide Bertha with infor-
the required tools. However, the company believes that this practice has led to
44. 20.2.5 Finch Construction Company provides the carpenters it employs with all of
mation she will need to make her decision.
nications
some tools. The company is considering requiring all of its employees to provide their
own tools. Each employee's salary would be increased by $1,500 to compensate for the
additional cost. Write a letter to Finch's management explaining the tax consequences
of this plan to the carpenters. Finch's address is 300 Harbor Drive, Vermillion, SD 57069
45. LO.2,5 Bluebird, Inc., does not provide its employees with any tax-exempt fringe
benefits. The company is considering adopting a hospital and medical ben-
efits insurance plan that will cost approximately $9,000 per employee. To adopt this
plan, the company may have to reduce salaries and/or lower future salary increases
.
Bluebird is in the 35% (combined Federal and state rates) bracket. Bluebird is also
responsible for matching the Social Security and Medicare taxes withheld on
employees' salaries (at the full 7.65% rate). The hospital and medical benefits insur-
ance plan will not be subject to the Social Security and Medicare taxes, and the com-
pany is not eligible for the small business credit for health insurance. The
employees generally fall into two marginal tax rate groups:
Income Tax
Social Security and
Medicare Tax
Total
.15
.0765
.2265
.35
.0145
.3645
CHAPTER 5 Gross Incom
a.
ance
b.
· policy result in more beneficial tax treatment?
Considering only the tax effects, would selling the stock or selling the life insur-
Assume that Laura is a dependent child and that her mother owns the stock and
the life insurance policy, which is on the mother's life. Which of the alternative
means of raising the cash would result in more beneficial tax treatment?
30. LO.2 What is the taxpayer's gross income in each of the following situations?
2.
Construction
Darrin received a salary of $50,000 in 2017 from his employer, Green
C.
e.
$3,000) for exceeding his sales quota.
b. In July 2017, Green gave Darrin an all-expense-paid trip to Las Vegas (value of
not covered by insurance.
Megan received $10,000 from her employer to help her pay medical expenses
time of greatest need.”
d. Blake received $15,000 from his deceased wife's employer “to help him in his
Clint collected $50,000 as the beneficiary of a group term life insurance policy
when his wife died. The premiums on the policy were paid by his deceased
wife's employer.
31. LO.2 Donald was killed in an accident while he was on the job in 2017. Darlene,
Donald's wife, received several payments as a result of Donald's death. What
is Darlene's gross income from the items listed below?
Donald's employer paid Darlene an amount equal to Donald's three months
salary ($60,000), which is what the employer does for all widows and widowers
of deceased employees.
b. Donald had $20,000 in accrued salary that was paid to Darlene.
Donald's employer had provided Donald with group term life insurance of
$480,000 (twice his annual salary), which was payable to his widow in a lump
sum. Premiums on this policy totaling $12,500 had been included in Donald's
gross income under $ 79.
d. Donald had purchased a life insurance policy (premiums totaled $250,000)
that paid $600,000 in the event of accidental death. The proceeds were pay-
able to Darlene, who elected to receive installment payments as an annuity
of $30,000 each year for a 25-year period. She received her first installment
a.
C.
this year.
32. LO.2 Ray and Carin are partners in an accounting firm. The partners have entered
into an arm's length agreement requiring Ray to purchase Carin's partnership
interest from Carin's estate if she dies before Ray. The price is set at 120% of the
book value of Carin's partnership interest at the time of her death. Ray purchased an
in's life to fund this agreement. After Ray had paid $45,000
collected $800,000
insurance
and itemized
income tax. In 2017, they received a $1,
20.
Stale
ne taxes they
Under the tax benefit rule, what amount of the state income tax refund is included
paid in 2016. The standard deduction for married filing jointly in 2016 was $12,600.
in gross income in 2017?
27. LO.2 Ed, an employee of the Natural Color Company, suffered from a rare disease
that was very expensive to treat. The local media ran several stories about
Ed's problems, and the family created a website that generated more than $10,000
in gifts from individuals to help pay the medical bills. Ed's employer provided hospi-
When it became apparent that Ed could not pay all of his medical expenses, the
tal and medical insurance for its employees, but the policy did not cover Ed's illness.
hospital canceled the $25,000 Ed owed at the time of his death. After Ed's death, his
former employer paid Ed's widow $12,000 in “her time of need.” Ed's widow also
collected $50,000 on a group term life insurance policy paid for by Ed's employer.
What are Ed's and his widow's gross income?
28. LO.2 Determine the gross income of the beneficiaries in the following cases:
a. Justin's employer was downsizing and offered employees an amount equal to
one year's salary if the employee would voluntarily retire.
b. Trina contracted a disease and was unable to work for six months. Because of
her dire circumstances, her employer paid her one-half of her regular salary
while she was away from work.
Coral Corporation collected $1 million on a key person life insurance policy
when its chief executive died. The corporation had paid the premiums on the
policy of $77,000, which were not deductible by the corporation.
d. Juan collected $40,000 on a life insurance policy when his wife, Leona, died in
2016. The insurance policy was provided by Leona's employer, and the premi-
ums were excluded from Leona's gross income as group term life insurance. In
2017, Juan collected the $3,500 accrued salary owed to Leona at the time of her
death.
C.
3
29. LO.2,5 Laura was recently diagnosed with cancer and has begun chemotherapy
treatments. A cancer specialist has stated that Laura has less than one year
to live. She has incurred many medical bills and other general living expenses and is
in need of cash. Therefore, she is considering selling stock that cost $35,000 and has
a fair market value of $50,000. This amount would be sufficient to pay her medical
bills. However, she has read about a company (the Vital Benefits Company) that
would purchase her life insurance policy for $50,000. She has paid $30,000 in premi-
ums on the policy.
On equal to twice his
or her annual salary. Employee Alice (age 32) has $90,000 of insurance under the
"group plan," it is impossible to determine the cost of coverage for an individual em-
ployee or partner,
22.
Assuming that the plan is nondiscriminatory, how much must Alice and Kay
each include in gross income as a result of the partnership paying the insurance
premiums
b.
a.
Assume that the partnership is incorporated. Kay becomes a shareholder and an
employee who receives a $75,000 annual salary. The corporation provides Kay
with $150,000 of group term life insurance coverage under a nondiscriminatory
ance premiums?
plan. What is Kay's gross income as a result of the corporation paying the insur-
64. LO.2. 4 Herbert was employed for the first six months of 2017 and earned $90,000
in salary. During the next six months, he collected $8,800 of unemploy-
ment compensation, borrowed $12,000 (using his personal residence as collateral),
and withdrew $2,000 from his savings account (including $60 of interest). He
received dividends of $550. His luck was not all bad, for in December, he won
$1,500 in the lottery on a $5 ticket. Calculate Herbert's gross income.
5. LO.4, 5 Linda and Don are married and file a joint return. In 2017, they received
Decision I
$12,000 in Social Security benefits and $35,000 in taxable pension benefits
and interest.
Compute the couple's adjusted gross income on a joint return.
b. Don would like to know whether they should sell for $100,000 (at no gain or
loss) a corporate bond that pays 8% in interest each year and use the proceeds
to buy a $100,000 nontaxable State of Virginia bond that will pay $6,000 in inter-
est each year.
If Linda in part (a) works part-time and earns $30,000, how much will Linda
and Don's adjusted gross income increase?
5. LO.4 Charles E. Bennett, age 64, will retire next year and is trying to decide
whether to begin collecting his Social Security benefits at that time. His
monthly benefits will increase if he defers his starting date for the benefits. He has
asked you to estimate how much his income tax will increase as a result of collect-
ing Social Security. Charles and his wife Bernice B., file a joint return, have no other
dependents, and claim the standard deduction. Their only income other than the
Social Security benefits are:
Interest and dividends
$ 6,000
Taxable pension
$40,000
C.
The Social Security benefits for the year would be $12,000.
Complete Worksheet 1, Figuring Your Taxable Benefits, included in IRS Publication
915 to determine the taxable portion of this couple's taxable Social Security benefits
(the publication includes a blank worksheet),
of the $12,000 in Social Security benefits?
a.
La
fo
Purchase answer to see full
attachment