Whittenburg Gerald E., Altus-Buller Martha. Income Tax Fundamentals
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NOTE: The words and phrases appe aring below
have been defined to reflect their conventional use
in the field of taxation. Such definitions may, there-
fore, be incomplete for other purposes.
Accelerated Cost Recovery System (ACRS)
For tax years after 1980, a rapid write-off of the cost of a capital
asset is allowed by this system, which was later renamed Modi-
fied Accelerated Cost Recovery System (MACRS). The minimum
number of years over which the asset may be depreciated and
the applicable percentage of the asset’s cost that may be
deducted each year depend on the class of the property.
Accelerated death benefits
Early payouts of life insurance, also called accelerated death ben-
efits or viatical settlements, are excluded from gross income for
certain terminally or chronically ill taxpayers. The taxpayer may
either collect an early payout from the insurance company or sell
or assign the policy to a viatical settlement provider.
Accident and health benefits
Employee fringe benefits provided by employers through the
payment of health and accident insurance premiums, or the
establishment of employer-funded medical reimbursement plans.
Employers generally are entitled to a deduction for such pay-
ments, whereas employees generally exclude the fringe benefits
from gross income.
Accounting method
The method which determines when income and expenses are
reported for tax purposes. Major accounting methods include the
cash basis, the accrual basis, and the hybrid method.
Accounting period
The period of time, usually a year, used by a taxpayer for the
determination of taxable income and tax liability. Unless a fiscal
year is chosen, taxpayers must determine and pay their income
tax liability using the calendar year (i.e., January 1 through
December 31) as the period of measurement. An example of a
fiscal year is July 1 through June 30. A change in accounting peri-
ods (e.g., from a calendar year to a fiscal year) generally requires
the consent of the IRS.
Accrual method
A method of accounting that reflects expenses incurred and
income earned for any one tax year. In contrast to the cash basis
of accounting, expenses do not have to be paid to be deductible,
nor does income have to be received to be taxable. Unearned
income (e.g., prepaid interest and rent) generally is taxed in the
year of receipt, regardless of the method of accounting used by
the taxpayer.
Adjusted basis
The cost or other basis of property reduced by depreciation allowed
or allowable and increased by capital improvements. See Basis.
Adjusted gross income
A determination peculiar to individual taxpayers used to calculate
limitations on the amount of certain expenses which may be
deductible, including medical expenses, charitable contributions,
personal casualty losses, and certain miscellaneous deductions.
Generally, adjusted gross income represents gross income less cer-
tain business expenses and expenses attributable to the produc-
tion of rent or royalty income.
Adoption expenses
Adoption fees, court costs, attorney fees, and other expenses
related to the legal adoption of an eligible child.
Alimony payments
Payments from one spouse to another, required as a result of a
divorce or separation agreement, which meet certain statutory
requirements. Alimony and separate maintenance payments are
included in the gross income of the recipient and are deducted
by the payor.
American Opportunity credit
A tax credit available for post-secondary education expenses.
Amortization
The allocation (and charge to expense) of the cost or other basis of
an intangible asset over its estimated useful life. Some intangible
assets which have an indefinite life are amortizable. Examples of
amortizable intangibles include patents, copyrights, and goodwill.
Amount realized
The amount received by a taxpayer on the sale or exchange of
property less the cost incurred to transfer the property. The mea-
sure of the amount received is the sum of the cash and the fair
market value of any property or services. Determining the amount
realized is the starting point for arriving at a realized gain or loss.
Annuity
A fixed sum payable at specified intervals for a specific period of
time or for life. Payments represent a partial return of capital
Glossary of Tax Terms
G-1
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and a return (interest) on the capital investment. An exclusion
ratio is generally used to compute the amounts of nontaxable
and taxable income.
Automobile expenses
Automobile expenses are generally deductible only to the extent
the automobile is used in business or for the production of
income. Personal commuting expenses are not deductible. The
taxpayer may deduct actual expenses (including depreciation and
insurance), or the standard (‘‘automatic’’) mileage rate may be
used.
Bad debts
An ordinary deduction is permitted if a business debt, such as an
account receivable, subsequently becomes worthless, providing
the income arising from the debt was previously included in tax-
able income. The deduction is allowed only in the year of worth-
lessness. A nonbusiness bad debt deduction is allowed as a short-
term capital loss when a debt which did not arise in connection
with the creditor’s trade or business activities becomes worthless.
Loans between related parties (family members) generally are
classified as nonbusiness debts.
Basis
The amount assigned to an asset for income tax purposes. For
assets acquired by purchase, the basis would be the cost of the
asset. Special rules govern the basis of property received as a
result of another’s death or by gift.
Boot
Cash or property of a type other than that permitted to be
received tax free in a nontaxable exchange. The receipt of boot
will cause an otherwise tax-free transfer to become taxable to
the extent of the lesser of the fair market value of such boot or
the realized gain on the transfer.
Business gifts
Business gifts are deductible only to the extent that each gift
does not exceed $25 per person per year. Exceptions are made
for promotional gifts and for certain employee awards.
Capital asset
All assets are capital assets except those specifically excluded by
the tax law. Major categories of noncapital assets include prop-
erty held for resale in the normal course of business (i.e., inven-
tory), trade accounts and notes receivable, depreciable property,
and real estate used in a trade or business.
Capital expenditure
An expenditure, the amount of which should be added to the
basis of the property improved. For income tax purposes, this
generally precludes a deduction for the full amount of the
expenditure in the year paid or incurred. Any tax deduction has
to come in the form of cost recovery or depreciation.
Capital gain
The gain from the sale or exchange of a capital asset. See Capital
asset.
Capital loss
The loss from the sale or exchange of a capital asset. See Capital
asset.
Cash basis
A method of accounting under which income is reported when
received and expenses are deductible when paid by the taxpayer.
Prepaid rent and prepaid interest must be deducted using the
accrual method.
Casualty loss
A casualty is defined as ‘‘the complete or partial destruction of
property resulting from an identifiable event of a sudden, unex-
pected or unusual nature’’ (e.g., floods, storms, fires, auto acci-
dents). Individuals may deduct a casualty loss only if the loss is
incurred in a trade or business; is incurred in a transaction
entered into for profit; or arises from fire, storm, shipwreck, or
other casualty or from theft. Personal casualty losses are deduct-
ible as itemized deductions subject to a $100 nondeductible floor
and only to the extent that the taxpayer’s total losses from
personal-use property (net of the $100 floor) exceed 10 percent
of adjusted gross income. Special rules are provided for the
netting of certain casualty gains and losses.
Change in accounting method
A change in the taxpayer’s method of accounting (e.g., from the
FIFO to the LIFO inventory method) generally requires prior
approval from the IRS. In some instances, the permission for
change will not be granted unless the taxpayer agrees to certain
adjustments prescribed by the IRS.
Change in accounting period
A taxpayer must obtain the consent of the IRS before changing
his or her tax year. Income for the short period created by the
change must be annualized.
Charitable contributions
Contributions are deductible (subject to various restrictions and
ceiling limitations) if made to qualified nonprofit charitable
organizations. A cash basis taxpayer is entitled to a deduction
in the year of payment. Accrual basis corporations may accrue
contributions at year-end if payment is authorized properly
prior to the end of the year and payment is made on or before
the fifteenth day of the third month following the end of the
tax year.
Child and dependent care credit
This credit is available to individuals who are employed on a full-
time basis and maintain a household for a dependent child or
disabled spouse or dependent. The amount of the credit is equal
G-2 Glossary of Tax Terms
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to a percentage of the cost of employment-related child and
dependent care expenses, up to a stated maximum amount.
Child support payments
Payments for child support do not constitute alimony, and are,
therefore, not included in gross income by the recipient or
deducted as alimony by the payor.
Child tax credit
A direct reduction in tax liability granted for each qualifying
child under age 17. The child tax credit is phased out based on
the level of modified adjusted gross income.
Closely held corporation
A corporation, the stock ownership of which is not widely dis-
persed. Instead, a few shareholders are in control of corporate
policy and are in a position to benefit personally from such policy.
Community property
Community property is all property, other than separate property,
owned by a married couple. The income from community prop-
erty is generally split equally between husband and wife. The
classification of property as community property is important in
determining the separate taxable income of married taxpayers.
Deferred compensation
Compensation which will be taxed when received or upon the
removal of certain restrictions and not when earned. An example
would be contributions by an employer to a qualified pension or
profit-sharing plan on behalf of an employee. Such contributions
will not be taxed to the employee until the funds are made avail-
able or distributed to the employee (e.g., upon retirement). See
Qualified pension or profit-sharing plan.
Depreciation
The write-off for tax purposes of the cost or other basis of a tan-
gible asset over its estimated useful life or recovery period as
specified in ACRS or MACRS tables.
Direct charge-off metho d
A method of accounting for bad debts whereby a deduction is
permitted only when an account becomes partially or completely
worthless. See Reserve for bad debts.
Earned income
Income from personal services as distinguished from income gen-
erated by property.
Earned income credit
The earned income credit is a refundable credit available to qual-
ifying individuals with income below certain levels.
Education expenses
Employees may deduct education expenses if such items are
incurred either (1) to maintain or improve existing job-related skills
or (2) to meet the express requirements of the employer or the
requirements imposed by law to retain employment status. Such
expenses are not deductible if the education is required to meet
the minimum educational requirements for the taxpayer’s job or
the education qualifies the individual for a new trade or business.
Educational Savings Accoun ts
Taxpayers may contribute a specified amount for themselves, a
spouse, a child, or a grandchild. The contributions are nondeduc-
tible, but earnings may be accumulated and distributed tax free
if used to pay post-secondary education expenses. Contributions
cannot be made after the beneficiary reaches 18.
Entertainment expenses
Such expenses are deductible only if they are directly related to or
associated with a trade or business. Various restrictions and docu-
mentation requirements have been imposed upon the deductibil-
ity of entertainment expenses to prevent abuses by taxpayers.
Exemptions
An exemption is a deduction allowed individual taxpayers in
arriving at taxable income. There are two basic types of exemp-
tions, the personal exemption, available for the taxpayer and his
or her spouse, and the dependency exemption, available for
qualified dependents of the taxpayer.
Fair mark et value
The amount at which property would change hands between a
willing buyer and a willing seller, neither being under any com-
pulsion to buy or sell, and both having reasonable knowledge of
the relevant facts.
First-in, first-out (FIFO)
An accounting method for determining the cost of inventories.
Under this method, the cost of inventory on hand is deemed to
be the cost of the most recently acquired units.
Foreign tax credit or deduction
Both individual taxpayers and corporations may claim a foreign
tax credit on income earned and subject to tax in a foreign coun-
try or U.S. possession. As an alternative to the credit, a deduction
may be taken for the foreign taxes paid.
Gift
A transfer of property for less than adequate consideration. Gifts
usually occur in a personal setting (such as between members of
the same family).
Goodwill
The ability of a business to generate income in excess of a nor-
mal rate on assets due to superior managerial skills, market posi-
tion, new product technology, etc. In the purchase of a business,
goodwill is the difference between the purchase price and the
value of the net assets. Goodwill is an intangible asset which pos-
sesses an indefinite life; however, it is amortized over 15 years
for federal income tax purposes.
Glossary of Tax Terms G-3
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Gross income
Income subject to the federal income tax. Gross income does not
include income such as interest on municipal bonds. In the case
of a manufacturing or merchandising business, gross income
means gross profit (i.e., gross sales or gross receipts less cost of
goods sold).
Head of household
An unmarried individual who maintains a household for another
and satisfies certain conditions. Such status enables the taxpayer
to use income tax rates lower than those applicable to other
unmarried individuals but higher than those applicable to surviv-
ing spouses and married persons filing a joint return.
Hobby loss
A nondeductible loss arising from a personal hobby as contrasted
with an activity engaged in for profit. Generally, the law provides
a presumption that an activity is engaged in for profit if profits
are earned during any 3 or more years in a 5-year period.
Holding period
The period of time property has been held by the taxpayer. The
holding period is of significance in determining whether gains or
losses from the sale or exchange of capital assets are long-term
or short-term.
HOPE tax credit
A HOPE Scholarship tax credit is available for post-secondary
education expenses. For tax years 2009 and 2010, the Hope Credit
has been modified and is referred to as the American Opportunity
credit.
Installment method
A method of accounting enabling a taxpayer to spread the
recognition of gain on the sale of property over the payment
period. Under this procedure, the seller computes the gross profit
percentage from the sale (i.e., the gain divided by the contract
price) and applies the percentage to each payment received to
arrive at the gain to be recognized.
Involuntary conversion
The loss or destruction of property through theft, casualty, or
condemnation. If the owner reinvests any proceeds within a pre-
scribed period of time in property that is similar or related in ser-
vice or use, any gain realized on an involuntary conversion can,
at the taxpayer’s election, be deferred for federal income tax
purposes.
Itemized deductions
Personal expenditures allowed by the Code as deductions from
adjusted gross income. Itemized deductions include certain medi-
cal expenses, interest on home mortgages, real and personal
property taxes, charitable contributions, personal casualty losses,
and other miscellaneous expenses.
Life insurance proceeds
Generally, life insurance proceeds paid to a beneficiary upon the
death of the insured are exempt from federal income tax. An
exception exists when a life insurance contract has been trans-
ferred for valuable consideration to another individual who
assumes ownership rights. In such a case, the proceeds are
income to the assignee to the extent that the proceeds exceed
the amount paid for the policy (cash surrender value at the time
of transfer) plus any subsequent premiums paid.
Lifetime learning credit
The lifetime learning credit may be used in any tax year the
American Opportuni ty credit is not used f or expens es paid for
education. Unlike the American Opportunity credit, the lifetime
learning credit may be claimed fo r an unlimit ed number of tax
years.
Like-kind exchange
An exchange of property held for productive use in a trade or
business or for investment (except inventory and stocks and
bonds) for property of the same type. Unless different property
is received (i.e., ‘‘boot’’), the exchange will be completely
nontaxable.
Limited Liability Company (LLC)
Business organizations usually treated as partnerships for tax pur-
poses but offering the limited liability of a corporate stockholder
to all members.
Listed property
Listed property includes computer and peripheral equipment,
unless used exclusively at a regular business establishment,
passenger automobiles, property used for transport ation, and
property used for entertainment, recreation, or amusement.
The depreciation of listed property is subject to certain
limitations.
Medical expenses
Medical expenses of an individual, spouse, and dependents are
allowed as an itemized deduction to the extent that total medi-
cal expenses, less insurance reimbursements, exceed limitations
based on the taxpayer’s AGI.
Modified Accelerated Cost Recovery System
(MACRS)
See Accelerated Cost Recovery System (ACRS).
Moving expenses
A deduction in arriving at adjusted gross income is permitted to
employees and self-employed individuals providing certain tests
are met (e.g., the taxpayer’s new job must be at least fifty miles
farther from the old residence than the old residence was from
the former place of work).
G-4 Glossary of Tax Terms
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Necessary
Appropriate and helpful in furthering the taxpayer’s business or
income-producing activity. See Ordinary.
Net operating loss
To mitigate the effect of the annual accounting period, taxpayers
are allowed to use a loss as a deduction from income in past or
future years. A carryback period of 2 years and a carryforward
period of 20 years are allowed.
Nonbusiness bad debts
A bad debt loss not incurred in connec tion with a taxpayer’s
trade or business. Such loss is deductible as a short-term
capital loss and will only be allowed in the year the debt
becomes entirely worthless. In addition to family loans, many
investor losses fall into the classification of nonbusiness bad
debts.
Nonrecourse debt
An obligation on which the endorser is not pers onally l iable.
An example of a no nrecourse debt is a mortgage on real estate
acquired by a partnership without the assumption of any liabil-
ity on the mortgage by the partnership or any of the partners.
The acquired property generally is pledged as collateral for the
loan.
Office-in-the-home expenses
Employment and business-relate d expenses attributable to the
use of a residence (e.g., den or office) are allowed only if the
portion of the residence is used exclusively and on a regular
basis as the taxpayer’s place of business or as a place of business
which is used by patients, clients, or customers. If the expenses
are employment related, the us e must be for the convenience
of the employer as opposed to being merely appropriate and
helpful.
Ordinary
Common and accepted in the general industry or type of activity
in which the taxpayer is engaged. It comprises one of the tests
for the deductibility of expenses incurred or paid in connection
with a trade or business: for the production or collection of
income; for the management, conservation, or maintenance of
property held for the production of income; or in connection
with the determination, collection, or refund of any tax. See
Necessary.
Organizational expenses
Organizational expenses are associated with the formation of a
business prior to the beginning of operation. A corporation may
amortize organizational expenses over a period of 180 months.
Certain expenses related to starting a company do not qualify for
amortization (e.g., expenses connected with issuing or selling
stock or other securities).
Partnerships
Partnerships are conduit entities and are not subject to taxation.
Various items of partnership income, expenses, gains, and losses
flow through to the partners and are reported on their income
tax returns.
Passive losses
Passive losses are deductible only to the extent of passive income.
Unused passive losses carry forward indefinitely (until the activity
which generated the losses is disposed of ) and can be used by
taxpayers to offset passive income in future years.
Patents
A patent is an intangible asset which may be amortized over its
life. The sale of a patent usually results in long-term capital gain
treatment.
Personal expenses
Expenses of an individual incurred for personal reasons which are
not deductible unless specifically allowed under the tax law.
Personal property
Generally, all property other than real estate. It is sometimes des-
ignated as ‘‘personalty’’ while real estate is termed ‘‘realty.’’ Per-
sonal property can also refer to property not used in a taxpayer’s
trade or business or held for the production or collection of
income. When used in this sense, personal property could include
both realty (e.g., a personal residence) and personalty (e.g., per-
sonal effects such as clothing and furniture).
Personal residence
The sale of a personal residence may result in the recognition of
capital gain (but not lo ss). Taxpayers may permanently exclude
$250,000 ($500,000 if married) of gain on the sale of their per-
sonal residence from income providing certain require ments
are met.
Points
Loan origination fees generally deductible as interest by a buyer
of property. A seller of property who pays points is required to
reduce the selling price, and, therefore, does not receive an inter-
est deduction.
Portfolio income
Portfolio income includes dividends, interest, royalties, annuities,
and realized gains or losses on the sale of assets producing port-
folio income.
Prizes and awards
The fair market value of a prize or award generally is included in
gross income.
Qualified pension or profit-sharing plan
An employer-sponsored plan that meets certain requirements.
If these requirements are met, none of the employer’s contributions
Glossary of Tax Terms G-5
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to the plan will be taxed to the employee until distributed to him
or her. The employer will be allowed a deduction in the year the
contributions are made.
Realized gain or loss
The difference between the amount realized upon the sale or
other disposition of property and the adjusted basis of such
property.
Recognized gain or loss
The portion of realized gain or loss that is subject to income tax-
ation. See Realized gain or loss.
Reserve for bad debts
An allowance permitted for estimated uncollectible accounts.
Actual write-offs are charged to the reserve, and recoveries of
amounts previously written-off are credited to the reserve. This
method is not generally allowed for tax purposes.
Rollover
Transfer of pension funds from one plan or trustee to another.
The transfer may be a direct transfer or a rollover distribution.
Roth IRAs
The Roth IRA allows nondeductible contributions. Although the
contributions to a Roth IRA are not deductible, earnings accumu-
late tax free, and qualified distributions are generally not
included in income when received.
S corporation
A small business corporation whose shareholders have filed an
election permitting the corporation to be treated in a manner
similar to partnerships for income tax purposes. Of major signifi-
cance are the facts that S corporations usually avoid the corpo-
rate income tax and that corporate losses can be claimed by the
shareholders.
Scholarships
Scholarships are generally taxable income to the recipient except
for amounts received for tuition, books, and supplies.
Section 401(k) plan
A Section 401(k) plan is a qualified retirement plan which
grants employee parti cipant s a deferr al of income for employer
contributions to the plan. The plan allows taxpayer s to elect to
receive compensation or to have the employer make a contribu-
tion to the retirement plan. The plan may be structured as a
salary reduction plan. There is a maximum annual dollar limita-
tion, as well as a li mitation based on the employee’s
compensation.
Section 1231 assets
Section 1231 assets include depreciable assets and real estate
used in a trade or business, held for the long-term holding
period. Under certain circumstances, the classification als o
includes tim ber, coal, do mestic iron ore, livestock (held for
draft, breeding, dairy, or sporting purposes), and unharvested
crops.
Self-employment income
Self-employment income is the taxpayer’s net earnings from self-
employment, which includes gross income from a taxpayer’s trade
or business, less trade or business deductions. Self-employment
income also includes the taxpayer’s share of income from a part-
nership trade or business.
Self-employment tax
The self-employment tax consists of two components: the Social
Security portion and the Medicare portion. The Social Security por-
tion of the self-employment tax consists of a tax of 12.4 percent
imposed on an individual’s net earnings from self-employment,
up to a maximum which changes yearly. The Medicare portion
of the tax consists of a tax of 2.9 percent imposed on the indi-
vidual’s net earnings from self-employment, with no maximum.
In calculating the self-employment tax, a deduction is allowed
for one-half of the otherwise applicable self-employment tax.
This deduction is calculated by multiplying the taxpayer’s self-
employment income, before the self-employment tax deduction,
by one-half of the total self-employment tax rate. If a sel f-
employed individual also receives wages subject to FICA, the
maximum Social Security tax base on the self-employed earnings
is reduced.
Separate property
Separate property is property, other than community property,
acquired by the spouse before marriage or after marriage as a
gift or inheritance.
Standard deduction
Taxpayers can deduct the larger of the standard deduction or
their itemized deductions in calculating taxable income. An extra
standard deduction amount is allowed for elderly and blind tax-
payers (see text for amounts).
Tax home
Since travel expenses of a taxpayer are deductible only if the
taxpayer is away from home, the deductibility of such expenses
rests upon the definition of ‘‘tax home.’’ The IRS position is that
the ‘‘tax home’’ is the business location, post, or station of the
taxpayer. If the taxpayer is temporarily reassigned to a new post
for a period of 1 year or less, the taxpayer’s home should be his
or her personal residence and the travel expenses should be
deductible.
Trade or business expenses
Deductions for AGl which are attributable to a taxpayer’s busi-
ness or profession.
G-6 Glossary of Tax Terms
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Transportation expenses
Transportation expenses for a taxpayer include only the costs of
transportation (taxi fares, automobile expenses, etc.) in the course
of employment where the taxpayer is not ‘‘away from home’’ in a
travel status. Commuting expenses are not deductible.
Travel expenses
Travel expenses include meals (50 percent deductible), lodging,
and transportation expenses while away from home in the pur-
suit of a trade or business (including that as an employee).
Unearned income
For tax purposes, unearned income (e.g., rent) is taxable in the
year of receipt. In certain cases involving advance payments for
goods and services, income may be deferred.
Vacation home
The Tax Code places restrictions upon taxpayers who rent their
residence or vacation home for part of the tax year. The restric-
tions may result in the limitation of certain expenses related to
the vacation home.
Glossary of Tax Terms G-7
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G-8 Glossary of Tax Terms
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Solutions to Self-Study
Problems
Chapter 1 The Individual Income Tax Return
.............................................. ......................................
Self-Study Problem 1.1
Answer is d. Answers a, b, and c are goals of the U.S. income tax system.
Self-Study Problem 1.2
1. Schedule B, Form 1040
2. Schedule D, Form 1040
3. Schedule F, Form 1040
4. Form 1041
5. Schedule K-1, Form 1065
6. Form 1040
7. Schedule C, Form 1040
8. Schedule E, Form 1040
9. Schedule 1, Form 1040A or Schedule B, Form 1040
10. Form 1120
11. Form 1065
12. Schedule A, Form 1040
13. Form 1040EZ
Self-Study Problem 1.3
1. Gross income ¼ $28,500 þ $1,500 ¼ $30,000
2. Adjusted gross income ¼ $30,000 $2,100 ¼ $27,900
3. Itemized deductions ¼ $6,250
4. Taxable income ¼ $27,900 $6,250 $3,650 ¼ $18,000
Self-Study Problem 1.4
Refer to Figures 1.1, 1.2, and 1.3 in Chapter 1.
1. No
2. No
3. Yes
4. Yes
5. No However, the taxpayers must file to obtain a refund.
6. Yes Social Security taxes are due.
7. Yes See Figure 1.1.
8. Yes
Self-Study Problem 1.5
1. B or C
2. D
S-1
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3. A
4. C
5. D
6. E The taxpayer is a ‘‘qualifying widower.’’
Self-Study Problem 1.6
1. 2 Two personal exemptions.
2. 4 Two personal and two dependency exemptions.
3. 1 One personal exemption; the brother fails to meet the
gross income test to be a qualifying relative. The fact that
the brother is a student is irrelevant since he is older
than 24.
4. 2 One personal exemption and one dependency exemption
for the mother.
5. 3 One personal and two dependency exemptions.
6. 2 One personal and one dependency exemption since the
scholarship is not considered support.
7. 2 One personal and one dependency exemption.
Self-Study Problem 1.7
1. $5,700
2. $12,500 ¼ $11, 400 þ $1,100
3. $8,500 ¼ $5,700 þ $1,400 þ $1,400
4. $8,400
5. $950
6. $11,400
Self-Study Problem 1.8
1. $12,600 ¼ $12, 800 $200
2. $8,750
3. $3,850 ¼ $12,800 $200 $8,750
4. $3,850 ¼ $12,800 $200 $8,750
5. Because the stock has been held for more than a year, the
gain is a long-term capital gain. The long-term capital gain will
be taxed at 0 percent for taxpayers in the 10 or 15 percent tax
brackets or 15 percent for all other tax brackets.
Self-Study Problem 1.9
1. False
2. True
3. True
4. False
Self-Study Problem 1.10
1. True
2. False
3. True
4. False
S-2 Solutions to Self-Study Problems
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.