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Taxing Options and Deductibility

Taxing Options and Deductibility
Brenda and her sister Mallory have been discussing the advice they received from their financial planners. Brenda would rather have an adjustment for adjusted gross income (AGI); whereas, Mallory declares she would rather have an adjustment from AGI. With which sister would you agree? Why?

Now Brenda and Mallory are discussing their babysitting jobs. Brenda says the people she works for are wonderful because they only tell her what time to arrive; the rest is up to her. Mallory asked if Brenda's employers withheld taxes from her payments. Brenda told Mallory that she has learned that her employer may deduct charitable contributions as part of her itemized deductions. Whereas Mallory said that she is trying to raise funds to buy a new house. Her church takes a collection for her, and Brenda contributes $3,000.

What is the deductibility of Brenda's contribution?
What impact does Brenda's level of income have on her AGI and charitable contributions?
Should Mallory be having her taxes withheld? Why?
Under what circumstances can Mallory have her taxes withheld? Explain.

Advertising Expenses and Other Tax Advantages
Brenda left her babysitting job and opens a beauty salon. She purchases inventory supplies as well as various fixed assets. She advertises both on radio and TV. Since she really wants to get her salon noticed, she pays for a spot during the Super Bowl.

Does the advertising expense qualify under reasonable and necessary business expense? Why or why not?
Where on her tax form would Brenda take the advertising expense? Would Brenda's decision to use accrual or cash accounting impact her inventory? Why or why not?
When making a decision about a career in business, Mallory is considering becoming an executive. She has heard executives not only receive a base salary but great stock options as well. Many of her friends who are working as executives have complained about these so called perks as unfair tax advantages. However, another of her friends argues these salaries are excessive.

Do you agree with the statement? Why or why not?
Have tax regulations had any impact on executives' pay? Why or why not?

Please include references.

Solution Preview

Taxing Options and Deductibility
Brenda and her sister Mallory have been discussing the advice they received from their financial planners. Brenda would rather have an adjustment for adjusted gross income (AGI); whereas, Mallory declares she would rather have an adjustment from AGI. With which sister would you agree? Why?

-- It's technically not an adjustment for AGI, this is worded incorrectly. It is an adjustment to AGI. Such adjustments include SEP and IRA deductions (limits apply), qualified educator expenses, tuition and fees deductions, self-employment tax deductions, alimony that has been paid by the taxpayer or the taxpayer's spouse, and so forth. An adjustment from AGI would include adjustments like employee business expenses, child care expenses, etc. I would rather have an adjustment to AGI - which lowers your adjusted gross income. The lower the AGI (line 37 on the 1040), the lower your total tax, as the AGI is then carried over and your deductions from AGI are then calculated. Brenda is correct.

References - http://taxes.about.com/od/deductionscredits/a/adjustments-to-income.htm

Now Brenda and Mallory are discussing their babysitting jobs. Brenda says the people she works for are wonderful because they only tell her what time to arrive; the rest is up to her. Mallory asked if Brenda's employers withheld taxes from her payments. Brenda told Mallory that she has learned that her employer may deduct charitable contributions as part of her itemized deductions. Whereas Mallory said that she is trying to raise funds to buy a new house. Her church takes a collection for her, and Brenda contributes $3,000.

This is also worded incorrectly. Brenda's employer cannot deduct charitable contributions as part of her pay. If she deducts charitable contributions as is not on payroll (she's not, since they're not withholding payroll taxes), it doesn't make sense. Where is the employer paying the money, that's a charitable deduction? If she is on payroll, the employer is performing this illegally, because she isn't withholding taxes and is only ...

Solution Summary

This solution explains each tax options and deductibility scenario presented. The appropriate tax laws and Internal Revenue Code (IRC) are cited. All questions in the scenario are thoroughly answered and explained.

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