Chapter 16

Chapter 17 - Tax Consequences of Personal Activities

Chapter 17Questions and Problems for Discussion1.The basic income recognition rule is that income from whatever source derived is subject to tax. Under this inclusive rule, income from personal activities is just as taxable as income from business, employment, or investment activities. In contrast, the basic rule regarding personal expenses and losses is that they are nondeductible.

2.Gifts and inheritances usually represent intrafamily transfers of wealth. Because the aggregate wealth of the family as a social unit does not increase, the gift or inheritance does not represent economic income. A second rationale is that gifts and inheritances represent after-tax income of the donor or decedent, and private transfers of such after-tax income to loved ones should not be taxed a second time. Finally, a requirement that donees and beneficiaries report the value of gifts and inheritances as taxable income would be extremely difficult for the IRS to enforce.

3.First, custodial parents do not include child support payments from noncustodial parents in taxable income. Second, custodial parents may qualify to file their tax returns as heads of household rather than single individuals. Third, custodial parents can claim an exemption and child credit for each child unless they grant the exemption and credit to the noncustodial parent.

4.Welfare payments are based on financial need of the recipient. Therefore, the recipient, by definition, has minimal ability to pay tax. In contrast, unemployment benefits are not based on financial need of the recipient and do not suggest that the recipient has a reduced ability to pay tax.

5.Only individuals who paid employee payroll tax or self-employment tax during their working years are eligible to receive Social Security. Many people believe that these employment tax payments constitute their personal investment in the Social Security system - a mandatory savings account to which they are entitled when they retire. In other words, their current Social Security benefits are simply a return of their after-tax contributions and should not be taxed a second time.

6.The annual premium to carry insurance on business property is an expense that must be deducted against gross revenues to properly measure net business income. In contrast, the annual premium to carry homeowners insurance is a nonbusiness, personal expense.

7.Mr. Cox could argue that his stamp collection is an investment asset, and the $25 monthly charge for a safety deposit box is an investment expense allowable as a miscellaneous itemized deduction. The alternative is that the collection is a personal asset, and the monthly charge is a nondeductible personal expense.

8.This change in the tax law would increase the after-tax cost of charitable contributions dramatically. Consequently, people might decrease the level of their charitable contributions and charities might be forced to cut back, or even eliminate, the services provided to the public. In such case, people that enjoyed or benefited from the services bear the incidence of the tax increase represented by the reduced charitable contribution deduction.

9.People who sell used personal items at garage sales typically realize a nondeductible loss (excess of cost over amount realized on sale). Thus, the cash received on sale is a nontaxable, partial return of the original cost of the item.

10.The Burton family has less AGI than the Awad family. Thus, the Burton familys unreimbursed medical expenses exceeded 7.5 percent of AGI by $6,000, while the Awad familys unreimbursed medical expenses were less than 7.5 percent of AGI.

11.A charitable contribution made during life reduces the donors accumulated wealth (potential taxable estate) and also generates an income tax deduction for the year. A charitable contribution made at death that reduces the decedents taxable estate does not result in an income tax deduction for anyone.

12. No. Although the revenue from Mrs. Lelands hobby is taxable income, it is not earned income from self-employment.

13. The hobby loss rule and the vacation home rule limit the deduction for expenses associated with a personal activity or residence to the revenue generated by such activity or residence. However, expenses deductible under the hobby loss rule are miscellaneous itemized deductions, subject to further limitation, while expenses deductible under the vacation home rule are above-the-line deductions.

Application Problems1.a.Not included in Marcys AGI.

b.$500 included in Marcys AGI.

c.$8,000 included in Marcys AGI.

d.Not included in Marcys AGI.

2.Salary

$4,200

Scholarship payments for room and board10,000

Ms. Queens AGI$14,2003.Lyle may exclude the $600,000 payment received as compensation for his physical injuries from income. The remaining $1,150,000 payment is taxable income.

4.a.Ann must include the entire $12,000 alimony payment in AGI.

b.Ann must include $7,200 alimony ($600 12 months) in AGI.

c.Ann does not include any of the $12,000 gift in AGI.

5.a.Will does not recognize any income on receipt of the securities.

b.Will recognizes a $85,450 gain on sale of the securities ($175,250 amount realized ( $89,800 carryover basis from Sandra).

c.Sandra does not recognize any gain on transfer of the securities.

6.Mr. Lynchs only taxable income item (and his AGI) is his $9,279 unemployment compensation.

7.Social Security benefit ($26,890 85%)$22,857

Dividends and interest78,600

Taxable pensions 62,900

Mr. and Mrs. Nesters AGI$164,3578.Mrs. Smalls only taxable income item (and her AGI) is her $10,800 pension. Because her AGI is so low, none of her Social Security benefit is taxable.

9.a.Because the unreimbursed medical expenses are not deductible above-the-line, their after-tax cost is $11,340.

b.Ms. Lincolns medical expense deduction is $7,717 ($11,340 - $3,623 [$48,300 AGI 7.5%]), and her tax savings from the deduction is $1,929 ($7,717 25%). The after-tax cost of the expenses is $9,411 ($11,340 - $1,929).

c.Ms. Lincolns medical expense deduction is $1,792 ($11,340 - $9,548 [$127,300 AGI 7.5%]), and her tax savings from the deduction is $502 ($1,792 28%). The after-tax cost of the expenses is $10,838 ($11,340 - $502).10.a.Unreimbursed medical expenses$2,215

AGI threshold ($25,000 ( 7.5%)(1,875)

Mr. and Mrs. Mosss itemized deduction$340

b.Unreimbursed medical expenses$2,215

AGI threshold ($50,000 ( 7.5%)(3,750)

Mr. and Mrs. Mosss itemized deduction-0-

11.Mr. Papp can deduct the $4,200 payment to his CPA as a miscellaneous itemized deduction on Schedule A. He can also claim miscellaneous itemized deductions for the $900 payment to his CPA for preparation of a gift tax return and the $3,000 payment to his attorney for estate planning advice. The other payments to his attorney are nondeductible personal expenses.

12.Mr. Curtis is allowed an itemized deduction for his $3,710 state income tax (because it exceeds his $2,040 sales tax) and his $7,500 total property tax payments. The other tax payments are nondeductible.

13.a.Because the property tax payments are not deductible above-the-line, their after-tax cost is $6,438.

b.Perrys tax savings from his deduction is $2,125 ($6,438 33%), so the after-tax cost of the property tax payments is $4,313 ($6,438 - $2,125).

c.Because the property tax payments are not deductible in computing AMTI, their after-tax cost is $6,438.

14.a.Because the charitable contribution is not deductible above-the-line, Mary has no tax savings from the contribution.

b.Marys tax savings from her contribution is $1,275 ($8,500 FMV 15%).

c.Marys tax savings from her contribution is $2,975 ($8,500 FMV 35%).

15.a.The $2,000 cash payment is deductible.

b.The $50 cash payment is nondeductible because the recipient (the vagrant) is not a qualified charity.

c.Because the painting is an inventory item rather than a capital asset, Dianes deduction is limited to her basis in the item, which is zero.

d.The $10,000 political contribution is nondeductible.

e.Because the household furniture is a capital asset to Diane, she can claim the $1,200 FMV as a contribution deduction.

16.

CashSecurities

Cost basis of contribution$500,000$318,000

Unrealized appreciation

182,000

Before-tax cost of contribution (FMV)$500,000$500,000

Tax avoided on unrealized appreciation (15% $182,000)

(27,300)

Tax savings from deduction (35% $500,000)(175,000)(175,000)

Ms. Princes after-tax cost of contribution$325,000$297,70017.The additional AGI will reduce the medical expense deduction by $1,500 ($20,000 additional AGI 7.5%), the casualty loss deduction by $2,000 ($20,000 additional AGI 10%), and will eliminate the miscellaneous itemized deductions ($20,000 additional AGI 2% = $400 reduction). The additional AGI will have no effect on the state and local tax deduction or the charitable contribution deduction.

18.a.Milt realized an $11,700 nondeductible loss on the sale of a personal asset.

b.Milt realized a $15,000 long-term capital gain (collectibles gain) taxed at a maximum rate of 28 percent.

19.Assuming that Conrad collects the comic books primarily for fun rather than for profit, the $3,075 capital gain realized on sale of the Superman comic is included in AGI, while the $325 loss realized on sale of the Donald Duck comic is a nondeductible personal loss that has no effect on AGI. If Conrad could sustain an argument that his collecting activity is primarily for investment purposes, he could recognized the loss as a capital loss.

20.a.Mrs. Carr has an itemized deduction for $21,000 qualified residence interest on her acquisition debt.

b.Mrs. Carr has an itemized deduction for $3,000 qualified residence interest on her home equity debt.

c.No deduction.

d.Mrs. Carr can deduct the $15,000 interest as a business expense on Schedule C.

e.No deduction.

f.Mrs. Carr is allowed an itemized deduction for $1,750 investment interest because she recognized more than $1,750 investment income this year.

21.

WalletAutomobileTrees

Lesser of basis or decrease in FMV$900$24,000$6,100*

Insurance-0-(17,500)-0-

Unreimbursed loss$900$6,500$6,100

$100 floor per casualty(100) (100) (100)

$800$6,400$6,000

*The decrease in value in Ms. Whites personal residence can be measured by the replacement cost of the ornamental trees.

a.Aggregate loss$13,200

AGI threshold ($53,000 ( 10%)(5,300)

Ms. Whites itemized deduction$7,900

b.Aggregate loss$13,200

AGI threshold ($210,000 ( 10%)(21,000)

Ms. Whites itemized deduction-0-

22.a.Although Mr. and Mrs. Vale realized a $111,000 gain on the involuntary conversion, they do not recognize any gain because they replaced the painting with an asset similar or related in service or use. Thus, they have no tax consequences from the theft.

b.In this case, Mr. and Mrs. Vale must recognize a $111,000 capital gain and pay tax accordingly.

c.Mr. and Mrs. Vale have a $38,900 casualty loss ($39,000 unreimbursed loss ( $100 floor). Their itemized deduction for this loss is $26,400 ($38,900 casualty loss ( [10% $125,000 AGI]).

d.Mr. and Mrs. Vale have a $88,900 casualty loss ($89,000 unreimbursed loss ( $100 floor). Their itemized deduction for this loss is $76,400 ($88,900 casualty loss ( [10% $125,000 AGI]).

23.a.The $5,800 revenue generated by Mrs. Hesss hobby in included in AGI as miscellaneous income. Because she does not itemize deductions, her hobby-related expenses are nondeductible. Consequently, her hobby generates $5,800 taxable income.

b.Because her hobby-related expenses are less than her revenue, Mrs. Hess is allowed a $1,040 miscellaneous itemized deduction ($1,700 - $660 [$33,000 AGI 2%[). Consequently, her hobby generates $4,760 taxable income.

24.a.Gross revenues from painting business$13,290

Business expenses(8,250)

Schedule C net profit included in AGI$5,040

b.Unless Mr. Monk can convince the IRS that he has an actual and honest objective of making a profit, his painting activity is a hobby. Consequently, he must include his $2,000 income in AGI and report $2,000 of his expenses as a miscellaneous itemized deduction.

c.Even though Mr. Monk did not show a profit this year, the fact that his painting activity was profitable in three of the last five years creates a presumption that the activity is a business.

Gross revenues from painting business$2,000

Business expenses(8,250)

Schedule C deductible loss included in AGI$(6,250)25.a.The itemized deduction is $5,830 because the average balance of the home equity debt is less than $100,000.

b.The itemized deduction is $6,485 ([$100,000 $162,000 average balance of home equity debt] $10,506 interest payment).

c.The itemized deduction is $10,506 because the mortgage qualifies as acquisition debt and the average balance is less than $1 million.

26.Mr. and Mrs. Kim have $37,853 qualified residence interest computed as follows.

Average balance of acquisition debt $641,800

Average balance of home equity debt (limited) 100,000

Qualifying debt$741,800

($741,800 qualifying debt $981,800 total debt) $50,100 total interest = $37,85327.a.Ms. Imo realized a $93,500 gain ($178,500 amount realized - $85,000 cost basis) on the 2000 sale and excluded the entire gain from income. She realized a $315,000 gain ($700,000 amount realized - $385,000 cost basis) on the current year sale. She excluded $250,000 gain from income and recognized $65,000 taxable gain.

b.Ms. Imos $65,000 taxable gain is long-term capital gain, and her tax is $9,750 ($65,000 15%).

28.a.Mr. and Mrs. Nixon meet the ownership/use requirement and therefore may exclude the entire $278,000 gain realized on sale of their former residence from taxable income (i.e., they recognize no gain on the sale).

b.Because Mr. and Mrs. Nixon sold the new residence within two years of the sale of their former residence, they must recognize their $48,000 realized gain as long-term capital gain.

c.In this case, Mr. and Mrs. Nixon sold their new residence because of a change in place of employment. Thus, they are eligible for a reduced exclusion computed as follows.

$500,000 (629 days* = $430,822 reduced exclusion

730 days

* time period between June 7, 2005, sale and February 26, 2007, sale

Consequently, Mr. and Mrs. Nixon recognize no gain on the sale of the new residence.

29.a.Mrs. Gomez realized an $8,000 nondeductible loss.

b.Mrs. Gomez realized a $114,500 gain ($262,500 $148,000), all of which she may exclude from taxable income.

c.Mrs. Gomez realized a $319,000 gain ($467,000 $148,000), $250,000 of which she may exclude from taxable income and $69,000 of which she must recognize as long-term capital gain.

18.Mr. and Mrs. Boazs AGI

$109,300

Itemized deductions(18,523)

Exemption amount ($3,400 6)(20,400)

Taxable income$70,377

Regular tax on $70,377 (MFJ)$10,442AMT calculation:

Taxable income

$70,377

Disallowed state income tax deduction6,925

Disallowed property tax deduction4,122

Disallowed home equity loan interest1,377

Disallowed miscellaneous itemized deductions769

Disallowed exemption amount 20,400

AMTI before exemption$103,970

Exemption (MFJ)

(62,550)

Taxable AMTI

$41,420

.26

Tentative minimum tax$10,769

Regular tax

(10,442)

AMT$327Issue Recognition Problems1.Does Mr. J recognize $5,000 taxable income on receipt of a reward received for public service?

2.Is the briefcase a nontaxable gift or taxable compensation to Mr. SA?

3.How much taxable income does Mr. TL recognize because of the receipt of the vacuum cleaner? Is Mr. TLs taxable income measured by the $365 retail value of the vacuum cleaner or by the $275 garage sale price?

4.Is the $2,700 strike benefit a nontaxable gift to Ms. BG from her fellow pilots, or is it taxable income paid to her with respect to her employment?

5.Is the $15,000 cash receipt a nontaxable scholarship or a taxable prize to Ms. LS?

6.Did Mr. UW recognize $11,500 taxable income because he recovered the sword and established a legal claim to it? Can Mr. UW defer income recognition until he sells the sword for cash?

7.Can Mrs. OP exclude the $300,000 receipt from taxable income because the damages represented compensation for psychological and civil injury?

8.Does any portion of Zacharys monthly payment constitute child support (nondeductible by Zachary/nontaxable to Stella) or does the entire payment qualify as alimony (deductible by Zachary/taxable to Stella)?

9.Can Mrs. N recover the entire $3,200 cost of the computer as a business deduction, even though her children use it for personal reasons? By what method can Mrs. N allocate the cost of the computer between business and personal use?

10.Does the $8,900 cost of Mrs. VVs facelift qualify as a deductible medical expense?

11.Does the $25,000 cost of Mr. Ss lap pool qualify as a deductible medical expense?

12.Do Mrs. PMs travel costs (gas, meals, lodging) qualify as deductible medical expenses?

13.Can Mr. R claim an $18,000 contribution deduction for the annual value of the professional service he donates to the local charity?

14.Can Mr. and Mrs. FP claim a $500 contribution deduction because their motive in making the payment was to benefit a charitable organization rather than to obtain the cookies?

15.Can Ms. DS claim a casualty loss deduction because she misplaced or lost her diamond ring?

16.Does the entire acreage qualify as Mr. Ds personal residence or must he treat some portion of the land as an investment asset? Does Mr. Ds entire $600,000 debt qualify as home acquisition debt so that he can deduct his interest payments? Must Mr. D classify some portion of his interest on the debt as investment interest?

17.Can a sailboat qualify as a principal residence? Can Mr. Y defer his $79,000 realized gain on the sale of his home because he purchased the sailboat?

18.Can Ms. SE deduct her entire $24,700 realized loss as a Section 1231 ordinary loss in the computation of AGI? Is $15,000 of Ms. SEs realized loss (decline in value that occurred before she converted the house to rent property) a nondeductible personal loss?

19.Can Mr. and Mrs. AQ deduct the $1,700 legal fee as an investment expense? Can they capitalize the $1,700 fee to their basis in the personal residence?

Research Problems

1.In Rev. Rul. 97-9, 1997-1 CB 77, the Internal Revenue Service ruled that any amount paid for a controlled substance (such as marijuana) in violation of federal law is a nondeductible medical expense.

2.According to. Reg. Sec. 1.62-1T(d), expenses directly connected with the conduct of a trade or business are deductible in the computation of AGI. Taxes paid by an individual are deductible as business expenses only if they are directly attributable to the conduct of a business. However, the regulation specifically states that state taxes on net income are not deductible [in computing AGI] even though the taxpayers income is derived from the conduct of a trade or business. Based on this regulatory authority, Mr. and Mrs. Lukert must report their Massachusetts income tax as an itemized deduction on Schedule A.

3.Section 280A(g) provides a special set of rules if an individual rents out a personal residence for less than 15 days during a taxable year. In the case of such de minimis rental use, the individual does not include the rental revenue in gross income and is not allowed to deduct any expenses related to the rental period. The Lorchs rented out their apartment for 11 days in one year and 11 days in the next. Thus, they are not required to recognize the $11,000 rent as taxable income, and the rental arrangement has no tax consequences.

4.This research problem is based on the facts in TAM 199945008 (July 12, 1999). According to the IRS, the amount realized by an individual on the sale of his right to receive a stream of future lottery winnings was ordinary income and not capital gain. Although the right to the annuity met the definition of a capital asset, the IRS concluded that payment for the annuity was a substitute for future ordinary income and should be taxed accordingly. Consequently, Barry Shelton must recognize $1.79 million ordinary income on the sale of his right to the guaranteed annuity. See also United States v. Maginnis, 356 F.3d 1179 (CA-9, 2004). 5.Because Howards second sale would occur with two years of his first sale of a principal residence, he will not be allowed to exclude any gain realized unless the reason for the second sale is a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances. (Section 121(c)(2)(B)) In Ltr. Rul. 200403049, the IRS ruled that the threats of hostile neighbors constituted an unforeseen circumstance within the meaning of the statute. Based in this ruling, Howard will be entitled to a partial exclusion (based on the number of days between the two sales as provided in Section 121(c)(1)).

Tax Planning Cases

1.a.By refusing compensation for her services but asking the uncle to name her as a beneficiary under his will, Ms. JH may have converted $100,000 taxable income to a $100,000 nontaxable inheritance.

b.The opportunity cost is the delay of Ms. JHs receipt of $100,000 until her uncles death. The risk is that the uncle will change his mind and write Ms. JH out of the will (i.e., delete the codicil providing for her bequest) before his death.

2.a.Mr. TBs annual after-tax cost of the nondeductible child support payments is $48,000. Mrs. TBs after-tax cash flow is also $48,000. Because she has no taxable income, she has no tax savings from the exemptions and child credits for her dependent children.

b.Under the counterproposal, Mr. TBs after-tax cost decreases to $43,216

Annual child support and alimony payments$(55,200)

Tax savings:

Deduction for alimony ($36,000 28%)10,080

Two exemptions ($6,800 28%) 1,904

After-tax cost$(43,216)

(Note that Mr. TB has too much income to take a child credit for his dependent children.)

Mrs. TBs after-tax cash flow increases to $52,047.

Annual child support and alimony payments$55,200

Tax cost:

Taxable alimony$36,000

Standard deduction(7,850)

Mrs. TBs exemption (3,400)

Taxable income$24,750

Tax on $24,750 (HH) (3,153)

After-tax cash flow$52,047

3. Mr. and Mrs. JM may have converted a nondeductible personal expense ($4,950 charitable contribution to State University) to a deductible business expense ($4,950 advertising for the Shoreline Grill).

4.If Mr. Z buys the mutual fund shares, his annual after-tax cash flow will increase by $2,211 ($3,300 before-tax income ( $1,089 tax cost). If Mr. Z pays off his personal debt, his annual after-tax cash flow will increase by $2,350 (nondeductible interest payments). If Mr. Z pays down his home mortgage, his annual after-tax cash flow will increase by $1,943 ($2,900 decrease in interest payments ( $957 tax savings from itemized deduction). Based on these comparisons of after-tax cash flow, Mr. Z should pay off his personal debt.

Comprehensive Problems for Part Five

1.Mr. Meyers salary ($70,000 - $6,300 Section 401(k))$63,700

Mrs. Meyers salary29,400

Mrs. Meyers share of S corporation income13,790

Mrs. Meyers share of rental real estate loss* (8,100)

Lottery winnings6,400

Qualifying dividend distribution712

Capital gain distribution3,020

Alimony paid(12,000)

Adjusted gross income (AGI)$96,922

*The $8,100 rental real estate loss is passive. The Meyers AGI before any rental loss deduction is $105,022. Therefore, they are entitled to a $22,489 rental real estate exception ($25,000 [50% $5,022 excess AGI over $100,000]). Consequently, the entire loss is deductible.

Itemized deductions:Home mortgage interest(14,200)

Property tax(2,780)

State income tax(7,000)

Charitable contributions(1,945)

Exemption amount ($3,400 ( 3) (10,200)

Taxable income$60,797

Tax on $57,065 ordinary taxable income (MFJ)$7,777

Tax on $3,732 dividends and LTCG (5%) 187

Precredit tax$7,964

Child credit(1,000)

Mr. and Mrs. Meyers regular income tax$6,964

AMT calculation:

Taxable income

$60,797

Disallowed property tax deduction2,780

Disallowed state income tax deduction7,000

Disallowed exemption amount10,200

AMTI before exemption$80,777

Exemption (MFJ)

(62,550)

AMTI

$18,227

AMT on ordinary AMTI ($14,495 26%)$3,769

AMT on dividends and LTCG ($3,732 5%) 187

Tentative minimum tax$3,956Mr. and Mrs. Meyers do not owe AMT because tentative minimum tax is less than regular income tax.

2.Mrs. Yanks salary $38,400

Insurance settlement$25,000

Compensation for physical injury(20,000)

Taxable portion of settlement5,000

Unemployment compensation1,400

Interest 629

Alimony received1,600

Deductible IRA contribution (800)

Adjusted gross income (AGI)$46,229

Standard deduction for head of household(7,850)

Exemption amount ($3,400 ( 2) (6,800)

Taxable income$31,579

Precredit tax (HH)$4,177

Dependent care credit ($1,300 ( 20%)(260)

Child credit (1,000)

Mrs. Yanks regular income tax$2,917

Income tax withholding(3,412)

Refund due to Mrs. Yank$(495)

AMT calculation:

Taxable income

$31,579

Disallowed standard deduction7,850

Disallowed exemption amount 6,800

AMTI before exemption$46,229

Exemption (HH)

(42,500)

AMTI

$3,729

.26

Tentative minimum tax$970Mrs. Yank does not owe AMT because tentative minimum tax is less than regular income tax.

3.Mr. Bensons share of partnership income$278,300

Interest income10,365

Qualified dividend income13,790

Capital gain distribution$4,218

Capital loss carryforward(9,723)

Net capital loss(5,505)(3,000)

Passive activity loss (mink farm)

-0-

One-half SE tax of $19,5431(9,772)

Unreimbursed moving expense(1,260)

Deductible Keogh plan contribution (28,500)

Adjusted gross income (AGI)$259,923

Itemized deductions2(68,229)

Exemption amount (see worksheet) (14,505)

Taxable income$177,189

Tax on $163,399 ordinary taxable income (MFJ)$34,744

Tax on $13,790 dividends (15%) 2,069

Mr. and Mrs. Bensons regular income tax$36,813

AMT calculation:

Taxable income

$177,189

Disallowed interest on home equity debt4,120

Disallowed property tax deduction8,400

Disallowed sales tax deduction1,911

Reversal of reduction in itemized deductions (2,072)

Exemption amount

14,505

AMTI before exemption$204,053

Exemption ($62,550 ( (25% [$204,053 ( $150,000])(49,037)

AMTI

$155,016

AMT on ordinary AMTI ($141,226 26%)$36,719

AMT on dividends ($13,790 15%) 2,069

Tentative minimum tax$38,788

Regular income tax(36,813)

AMT$1,975

Regular income tax$36,813

AMT1,975

Mr. Bensons SE tax19,543

Total tax$58,331

Estimated tax payments(58,000)

Mr. and Mrs. Bensons balance of tax due$331

1SE tax calculation on $257,010 net earnings from self-employment:

Social Security tax ($97,500 ( 12.4%)$12,090

Medicare tax ($257,010 ( 2.9%) 7,453

SE tax $19,543

2Mortgage interest on acquisition debt$33,890

Mortgage interest on home equity debt4,120

Property tax deduction8,400

Sales tax deduction1,911

Charitable contribution deduction 21,980

Tax preparation fee $3,350

2% AGI threshold(5,198)

Miscellaneous itemized deduction

-0-

Total itemized deductions$70,301

Itemized deductions allowed (see worksheet)$68,229Itemized Deduction Worksheet

Maximum reduction

Total itemized deductions listed on Schedule A70,301

Less deductions for:medical expense-0-

investment interest expense-0-

casualty, theft, or gambling loss 0-

total -0-

Total itemized deductions subject to overall limitation70,301

.80

Maximum reduction56,241

Adjusted gross income (AGI)259,923

2007 AGI threshold(156,400)

Excess AGI103,523

.03

3,106

.667

Tentative reduction2,072

Total itemized deductions listed on Schedule A70,301

Less the smaller of the maximum or tentative reduction (2,072)

Total itemized deductions allowed68,229Exemption Amount Worksheet

2007 exemption 3,400

Multiply by number of exemptions (taxpayers and dependents) ( 5

Tentative exemption amount17,000

Adjusted gross income (AGI)259,923

2007 AGI threshold for married filing jointly(234,600)

Excess AGI

25,323

Excess AGI divided by $2,500 (rounded up to whole number) 11

(if 50 or more, the exemption amount is -0-)

Multiply by 2

( 2

Percentage (%) reduction in tentative exemption amount22

Tentative exemption amount17,000

Percentage reduction .22

Reduction in exemption amount3,740

.667

Reduction in exemption amount2,495

Exemption amount (17,000 ( 2,495)14,50517-1