Question

Required information [The following information applies to the questions displayed below.) Ken is 63 years old and unmarried. He retired at age 55 when he sold his business, Understock.com. Though Ken is retired, he is still very active. Ken reported the following financial information this year. Assume ken files as a single taxpayer. a. Ken won $1,200 in an illegal game of poker (the game was played in Utah, where gambling is illegal). b. Ken sold 1,000 shares of stock for $32 a share. He inherited the stock two years ago. His tax basis (or investment) in the stock was $31 per share. c. Ken received $25,000 from an annuity he purchased eight years ago. He purchased the annuity, to be paid annually for 20 years, for $210.000. d. Ken received $13,000 in disability benefits for the year. He purchased the disability insurance policy last year, e. Ken decided to go back to school to learn about European history. He received a $500 cash scholarship to attend. He used $300 to pay for his books and tuition, and he applied the rest toward his new car payment. f. Ken's son, Mike, instructed his employer to make half of his final paycheck of the year payable to Ken as a gift from Mike to Ken Ken received the check on December 30 in the amount of $1,100. g. Ken received a $610 refund of the $3,600 in state income taxes his employer withheld from his pay last year, Ken claimed $12,050 in itemized deductions last year (the standard deduction for a single filer was $12,000). h. Ken received $30,000 of interest from corporate bonds and money market accounts. Complete page 2 of Form 1040, Line 1-6 and Form 1040, Schedule 1, Lines 1-22 for Ken. (Input all the values as positive numbers. Enter any non financial information, (e.g. Names, Addresses, social security numbers)

Answer 1

Answer: $58,000, computed as follows:

Ken’s Gross Income
Description	Amount	Explanation
a) Illegal income	$1,200	Gross income includes income from all sources—legal or illegal
b) Gain on stock sale	1,000	Ken recognizes a $1,000 gain on the sale [$32,000 (32 x $1,000) minus $31,000 (31 x $1,000)]. Note that only the sale proceeds in excess of the stock basis are included in gross income.
c) Annuity	14,500	25,000 – (210,000 / 20)
d) Social Security	11,050	MAGI + ½ of benefit exceeds $34,000 $13,000 x 85 percent
e) Foreign-earned income	0	$91,400 x 181/365 = $45,324 maximum exclusion. All, $18,000 excluded.
f) Scholarship	200	$200 used towards car payment does not qualify for exclusion; $300 used for books may be excluded
g) Paycheck from son	0	Under assignment of income doctrine, the income is taxed to the taxpayer who earned the income
h) State income tax refund	50	Portion of refund he received tax benefit for last year. See below for computation.
i) Interest income	30,000	Included in gross income
Gross income	$58,000

State Tax Refund/Tax Benefit Rule
Description	Amount	Explanation
(1) Itemized deductions with $610 overpayment	$5,500
(2) 2008 Standard deduction	5,450	Single filing status
(3) Reduction in taxable income with $610 overpayment	5,500	Greater of (1) and (2)
(4) Itemized deductions without the $610 overpayment that was refunded	4,890	(1) minus $610
(5) Reduction in taxable income without the $610 overpayment that was refunded	5,450	Greater of (2) and (4)
Tax benefit from prior year $610 overpayment of state taxes	$50	(3) – (5)