Question
50. [LO 2] Anne purchased an annuity from an insurance company that promised to pay her $20,000 per year for the next ten years. Anne paid $145,000 for the annuity, and in exchange she will receive $200,000 over the term of the annuity.

a. How much of the first $20,000 payment should Anne include in gross income?

b. How much income will Anne recognize over the term of the annuity?

51. [LO 2] Larry purchased an annuity from an insurance company that promises to pay him $1,500 per month for the rest of his life. Larry paid $170,820 for the annuity. Larry is in good health, and he is 72 years old. Larry received the first annuity payment of $1,500 this month. Use the expected number of payments in Exhibit 5-1 for this problem.

a. How much of the first payment should Larry include in gross income?

b. If Larry lives more than 15 years after purchasing the annuity, how much of each additional payment should he include in gross income?

c. What are the tax consequences if Larry dies just after he receives the 100th payment?

52. [LO 2] {Research} Gramps purchased a joint survivor annuity that pays $500 monthly over his remaining life and that of his wife, Gram. Gramps is 70 years old and Gram is 65 years old. Gramps paid $97,020 for the contract. How much income will Gramps recognize on the first payment?

53. [LO 2] Lanny and Shirley are recently divorced and do not live together. Shirley has custody of their child, Art, and Lanny pays Shirley $22,000 per year. All property was divided equally.

a. How much should Shirley include in income if Lanny’s payments are made in cash but will cease if Shirley dies or remarries?

b. How much should Shirley include in income if $12,000 of Lanny’s payments is designated as “nonalimony” in the divorce decree?

c. How much should Shirley include in income if Lanny’s payments drop to $15,000 once Art reaches the age of 18?

54. [LO 2] {Planning} Todd and Margo are seeking a divorce and no longer live together. Margo has offered to pay Todd $42,000 per year for five years if Margo receives sole title to the art collection. This collection cost them $100,000, but is now worth $360,000. All other property is to be divided equally.

a. If Margo’s payments cease in the event of Todd’s death, how are the payments treated for tax purposes?

b. How much of the gain would be taxed to Todd if Margo sells the art at the end of five years?

c. Compute the tax cost (benefit) to Todd (Margo) if the payments qualify as alimony. Assume that Todd (Margo) has a marginal tax rate of 15 percent (35 percent) and ignore the time value of money.

d. How much more over the five year period should Todd demand in order to agree to allow the payments to cease in the event of his death? (How much more will make him indifferent between receiving $42,000 a year in non alimony payments and receiving higher payments that are considered to be alimony?)

55. [LO 2] For each of the following independent situations, indicate the amount the taxpayer must include in gross income and explain your answer:

a. Phil won $500 in the scratch-off state lottery. There is no state income tax.

b. Ted won a compact car worth $17,000 in a TV game show. Ted plans to sell the car next year.

c. Al Bore won the Nobel Peace Prize of $500,000 this year. Rather than take the prize, Al designated that the entire award should go to Weatherhead Charity, a tax-exempt organization.

d. Jerry was awarded $2,500 from his employer, Acme Toons, when he was selected most handsome employee for Valentine’s Day this year.

e. Ellen won a $1,000 cash prize in a school essay contest. The school is a tax-exempt entity, and Ellen plans to use the funds to pay her college education.

f. Gene won $400 in the office March Madness pool.

.

56. [LO 2]Grady received $8,200 of Social Security benefits this year. Grady also reported salary and interest income this year. What amount of the benefits must Grady include in his gross income under the following two independent situations?

a. Grady files single and reports salary of $12,100 and interest income of $250.

b. Grady files single and reports salary of $22,000 and interest income of $600.

c. Grady files married joint and reports salary of $75,000 and interest income of $500.

d. Grady files married joint and reports salary of $44,000 and interest income of $700.

e. Grady files married separate and reports salary of $22,000 and interest income of $600.

57. [LO2] George and Weezy received $30,200 of Social Security benefits this year ($12,000 for George; $18,200 for Weezy). They also received $5,000 of interest from jointly owned City of Ranburne Bonds and dividend income. What amount of the Social Security benefits must George and Weezy include in their gross income under the following independent situations?

a. George and Weezy file married joint and receive $8,000 of dividend income from stocks owned by George.

b. George and Weezy file married separate and receive $8,000 of dividend income from stocks owned by George.

c. George and Weezy file married joint and receive $30,000 of dividend income from stocks owned by George.

d. George and Weezy file married joint and receive $15,000 of dividend income from stocks owned by George.

58. [L0 2] Nikki works for the Shine Company, a retailer of upscale jewelry. How much taxable income does Nikki recognize under the following scenarios?

a. Nikki buys a diamond ring from Shine Company for $10,000 (normal sales price, $14,000; Shine Company’s gross profit percentage is 40%).

b. Nikki receives a 25% discount on jewelry restoration services offered by Shine Company. This year, Nikki had Shine Company repair a set of antique ear rings (normal repair cost $500; discounted price $375).

59. [LO 2] Wally is employed as an executive with Pay More Incorporated. To entice Wally to work for Pay More, the corporation loaned him $20,000 at the beginning of the year at a simple interest rate of 1 percent. Wally would have paid interest of $2,400 this year if the interest rate on the loan had been set at the prevailing federal interest rate.

a. Wally used the funds as a down payment on a speed boat and repaid the $20,000 loan (including $200 of interest) at year-end. Does this loan result in any gross income to either party, and if so, how much?

b. Assume instead Pay More forgave the loan and interest on December 31. What amount of gross income does Wally recognize this year? Explain.

60. [LO 3] Jimmy has fallen on hard times recently. Last year he borrowed $250,000 and added an additional $50,000 of his own funds to purchase $300,000 of undeveloped real estate. This year the value of the real estate dropped dramatically and Jimmy’s lender agreed to reduce the loan amount to $230,000. For each of the following independent situations, indicate the amount Jimmy must include in gross income and explain your answer:

a. The real estate is worth $175,000 and Jimmy has no other assets or liabilities.

b. The real estate is worth $235,000 and Jimmy has no other assets or liabilities.

c. The real estate is worth $200,000 and Jimmy has $45,000 in other assets but no other liabilities.