Question

Ken is 63 years old and unmarried. He retired at age 55 when he sold his business, Understock. 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.

g. Ken received the check on December 30 in the amount of $1,100. Ken received a $610 refund of the $3,600 in state income taxes his employer withheld from his pay last year.

h. Ken claimed $12,050 in itemized deductions last year (the standard deduction for a single filer was $12,000).

i.Ken received $30,000 of interest from corporate bonds and money market accounts.

Answer 1

Question:

Determine Ken's gross income

Answer:

$46,950

Explanation:

Gross income is the sum of all wages, salaries, profits, interest payments, rents, and other forms of earnings, before any deductions or taxes.

a. Ken won $1,200 in an illegal game of poker (the game was played in Utah, where gambling is illegal).

$1,200 is eligible for addition to gross income because it is a form of earning, albeit 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.

The gain of the sale of stock is ($32×1,000) - ($31×1,000) = $1000.  $1,000 is eligible for addition to gross income.

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.

The return of capital per payment = $\frac{210,000}{20}$ = $10,500

The amount to be added to gross income is $25,000  - $10,500 = $14,500.

d. Ken received $13,000 in disability benefits for the year. He purchased the disability insurance policy last year.

Since the policy was purchased by Ken, the taxpayer, this amount will be excluded.

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.

The $200 for car payment is added to the gross income while the $300 for books and tuition is excluded.

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.

This income will not be added as it was earned by Ken's son Mike.

g. Ken received a $610 refund of the $3,600 in state income taxes his employer withheld from his pay last year.

h. Ken claimed $12,050 in itemized deductions last year (the standard deduction for a single filer was $12,000).

  Ken's tax benefit due to the deduction of the $610 refund is $12,050 - $12,000 = $50. $50 will be added to his gross income.

i. Ken received $30,000 of interest from corporate bonds and money market accounts.

$30,000 is eligible for addition to his gross income  because it was earned by Ken.

Let us calculate, the sum of amount eligible for Ken's gross income:

Gross income = $1,200 + $1,000 + $14,500 + $200 +$50 + $30,000

Gross income = $46,950

Ken's gross income is $46,950

Answer 2

Total gross income is $46,950.

Gross income based problem:

Computation table of gross income:

Particular                                           Amount

illegal income                                    $1,200

Gain on stock (32,000 - 31,000)      $1,000

Annuity                                              $14,500

Scholarship                                       $200

State income interest                       $50

interest Income                                $30,000

Total gross income                         $46,950

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