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Taxation: Income, Liability, Marginal, Average and Effective

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1) Faith, a single taxpayer, had the following income and deductions for the tax year 2006:

INCOME: Salary $70,000
Business income 30,000
Qualifying dividends 10,000
Tax-exempt income 20,000
TOTAL INCOME $130,000

DEDUCTIONS: Business expenses $20,000
Itemized deductions 12,000
Personal exemption 3,400
TOTAL DEDUCTIONS $35,400

a. What is Faith's taxable income and tax liability for the year?
b. What are Faith's marginal, average, and effective tax rates?

2) The following information is available for Tom and Alice Horton, a married couple filing a joint return, for 2007:

Salary (earned by Tom) $100,000
Interest income 12,000
Deductible IRA contributions 8,000
Itemized deductions 11,000
Exemptions 6,800
Withholding 15,000

a. What is the amount of their gross income?
b. What is the amount of their adjusted gross income?
c. What is the amount of their taxable income?
d. What is the amount of their tax liability (gross tax)?
e. What is the amount of their tax due or (refund due)?

3) Marvin, a cash basis taxpayer, died on September 30, 2007. His wife, Charlette, provides you with the following information.

From January 1, 2007 until his death, Marvin received a salary of $60,000. Charlette received a salary of $35,000 during 2007. Marvin had earned commissions of $20,000 which his widow, Charlette, received after his death. Charlette was the beneficiary of a $100,000 whole life policy purchased by Marvin and a $50,000 group term life insurance policy purchased by Marvin's employer. The employer had paid premiums of $250 in Marvin's behalf. In addition, the corporation paid Charlette a $10,000 employee death benefit in Marvin's name. All employees' families received similar benefits regardless of financial need. Marvin and Charlette had itemized deductions of $9,600. They have no children but provide 100% support for Marvin's widowed mother who lives with them and has no income. What is the amount of their taxable income on their 2007 tax return?

4) Lindsey Forbes, a detective who is single, operates a small pottery business in her spare time. In the current year, she reported the following income and expenses from this activity which is classified as a trade or business.

Revenue from sale of pottery $ 9,000
Depreciation on potter's wheel ( 3,000)
Property taxes on shed where she does work ( 1,200)
Supplies used such as clay, etc. . ( 6,500)

In addition, she had salary of $60,000 and itemized deductions, not including those listed above, of $5,100.

What is the amount of Lindsey's taxable income assuming the pottery business is classified a
trade or business?

5) Charlie is married and files a joint return. He reports the following items of income and loss for the year:
Salary $ 120,000
Activity A (passive) 13,000
Activity B (nonbusiness rental real estate) ( 45,000)

If Charlie actively participates in the management of Activity B, what is his AGI for the year and what is the passive loss carryover to next year?

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This solution shows step-by-step calculations and brief justifications to determine taxable income, tax liability, marginal tax, average tax, effective tax, gross income, and passive loss carryover.

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