income tax.doc income_tax.docQuestion 1
(a) List AND explain at least four (4) reasons for provisions of the federal income tax law
other than raising revenue for the federal government. (8 points—2 points each)
1.
2.
3.
4.
(b) Some of these provisions result in taxpayers with the same income paying different rates
and amounts of federal income tax. For example, taxpayers whose income consists of
qualified dividends and net capital gains pay less tax than someone who earns the same
income as salary. What is the reason for the lower tax rate on qualified dividends and net
capital gains? (3 points)
(c) Define horizontal equity. Remember to use your own words. Is the reason for the lower
tax rate on qualified dividends and net capital gains more important than the violation of
the principle of horizontal equity that results? Explain in detail. (3 points)
2
Question 7
Bob Adams is 42 years old. He deducted medical expenses on his U. S. individual income tax
return for 2014. For tax year 2014, his total medical expenses exceeded the 10-percent floor based
on adjusted gross income by $4,750. His total itemized deductions for tax year 2014 exceeded the
standard deduction he otherwise could have claimed by $8,624.
In 2015, he received an unexpected reimbursement from his health insurance company of $8,890
for medical expenses he paid in 2014 and deducted on his U. S. individual income tax return for
2014. How much of this $8,890 reimbursement must he include in his gross income for 2015?
Explain. Show all calculations. (4 points)
3
Question 9
Carl suffered two different casualty losses during 2015.
His storage building, which he used for personal, nonbusiness purposes, was destroyed by a
tornado on March 18, 2015. It was not insured. His adjusted basis in the storage building was
$4,268, but it had a fair market value of $5,200 at the time of the tornado.
His car was destroyed by a flood on November 8, 2015. His adjusted basis in the car, which he
used solely for personal purposes, was $18,295, but it had a fair market value of $12,300 at the
time of the flood. It was not insured. His adjusted gross income for 2015 was $40,450.
What is his total itemized deduction for the casualty losses he incurred in 2015? Show all
calculations. (12 points)
4
Question 10
Mary Washington is self-employed. She did not work as an employee at any time during
2015. Therefore, she did not have any wages in 2015. She did not have any other income in
2015. Her net business income as shown on Schedule C of her Form 1040 was $74,286.
(a) What is her self-employment tax liability for 2015? Show all calculations. (6 points)
(b) How much, if any, of her self-employment tax liability for 2015 may she deduct in
calculating her adjusted gross income for 2015? Show all calculations. (4 points)
Question 1
(a) List AND explain at least four (4) reasons for provisions of the federal income tax law
other than raising revenue for the federal government. (8 points—2 points each)
1.
2.
3.
4.
(b) Some of these provisions result in taxpayers with the same income paying different rates
and amounts of federal income tax. For example, taxpayers whose income consists of
qualified dividends and net capital gains pay less tax than someone who earns the same
income as salary. What is the reason for the lower tax rate on qualified dividends and net
capital gains? (3 points)
(c) Define horizontal equity. Remember to use your own words. Is the reason for the lower
tax rate on qualified dividends and net capital gains more important than the violation of
the principle of horizontal equity that results? Explain in detail. (3 points)
2
Question 7
Bob Adams is 42 years old. He deducted medical expenses on his U. S. individual income tax
return for 2014. For tax year 2014, his total medical expenses exceeded the 10-percent floor based
on adjusted gross income by $4,750. His total itemized deductions for tax year 2014 exceeded the
standard deduction he otherwise could have claimed by $8,624.
In 2015, he received an unexpected reimbursement from his health insurance company of $8,890
for medical expenses he paid in 2014 and deducted on his U. S. individual income tax return for
2014. How much of this $8,890 reimbursement must he include in his gross income for 2015?
Explain. Show all calculations. (4 points)
3
Question 9
Carl suffered two different casualty losses during 2015.
His storage building, which he used for personal, nonbusiness purposes, was destroyed by a
tornado on March 18, 2015. It was not insured. His adjusted basis in the storage building was
$4,268, but it had a fair market value of $5,200 at the time of the tornado.
His car was destroyed by a flood on November 8, 2015. His adjusted basis in the car, which he
used solely for personal purposes, was $18,295, but it had a fair market value of $12,300 at the
time of the flood. It was not insured. His adjusted gross income for 2015 was $40,450.
What is his total itemized deduction for the casualty losses he incurred in 2015? Show all
calculations. (12 points)
4
Question 10
Mary Washington is self-employed. She did not work as an employee at any time during
2015. Therefore, she did not have any wages in 2015. She did not have any other income in
2015. Her net business income as shown on Schedule C of her Form 1040 was $74,286.
(a) What is her self-employment tax liability for 2015? Show all calculations. (6 points)
(b) How much, if any, of her self-employment tax liability for 2015 may she deduct in
calculating her adjusted gross income for 2015? Show all calculations. (4 points)

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