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    Personal income tax

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    1. Under the terms of a divorce agreement, Taylor is to pay his wife Penny $2,000 per month. The payments are to be reduced to $1,600 per month when their 12 year-old child reaches age 18. During the current year, Taylor paid $24,000 under the agreement. Assuming all of the other conditions for alimony are satisfied, Taylor can deduct from gross income (and Penny must include in gross income) as alimony:
    a. $24,000.
    b. $19,200.
    c. $4,800.
    d. $0.
    e. None of the above.

    2. Bornei Company acquires used special tools (three-year property) on February 15, 2003, at a cost of $75,000. Bornei also acquires a used machine (five-year property) on November 15, 2003, at a cost of $50,000. No election is made to use the straight-line method. The company does not make the § 179 election. Determine the total deductions in calculating taxable income related to the machines for 2004.
    a. $34,998.
    b. $39,835.
    c. $46,248.
    d. $49,338.
    e. None of the above.

    3. David and Eliza are married and under 65 years of age. During 2004, they furnish more than half of the support of their 18-year old son, Timothy. Timothy earns $4,000 from a part-time job, most of which he sets aside for future college expenses. During 2004, they also furnish more than half of the support of their 25-year old son, Rick, who is a full-time college student. Rick earns $4,000 from a part-time job, most of which he currently spends for college expenses. David and Eliza also provide more than half of the support of David's cousin who lives with them for the entire year. How many personal and dependency exemptions should David and Eliza claim?
    a. Two.
    b. Three.
    c. Four.
    d. Five.
    e. Six.

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    Solution Preview

    1. Under the terms of a divorce agreement, Taylor is to pay his wife Penny $2,000 per month. The payments are to be reduced to $1,600 per month when their 12 year-old child reaches age 18. During the current year, Taylor paid $24,000 under the agreement. Assuming all of the other conditions for alimony are satisfied, Taylor can deduct from gross income (and Penny must include in gross income) as alimony:
    a. $24,000.
    b. $19,200.
    c. $4,800.
    d. $0.
    e. None of the above.

    Answer: a.

    2. Bornei Company acquires used special tools (three-year property) on February 15, 2003, at a cost of $75,000. Bornei also acquires a used machine (five-year property) on November 15, 2003, at a cost of $50,000. No election is made to use the straight-line method. The company does not make the § 179 election. Determine the total deductions in calculating taxable income related to the machines for 2004.
    a. $34,998.
    b. $39,835.
    c. $46,248.
    d. $49,338.
    e. None of the above.

    Answer: e.

    Depreciation for used special tools = (200%/3 years) x $75,000 = $49,999.99
    Depreciation for used machine = (200%/5 years) x $50,000 = $20,000.00
    Total deductions as depreciation expenses = $69,999.99

    MACRS depreciation methods
    The following is a list of depreciation methods that may apply under MACRS:
    ? 200 percent declining balance over a GDS recovery period
    ? 150 percent declining balance over a GDS recovery ...

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