ALAN R. SUMUTKA
ACC-410 FUNDAMENTALS OF FEDERAL TAXATION
CASE 14 - TAX ISSUES OF RETIRED TAXPAYERS
Bill and Pam decided to “call it quits” and to retire. They
sold their home in
REQUIRED:
PART A: Deduction Issues:
1. If Bill is age 65 or older and/or is blind,
how is the standard deduction affected? How about if Pam is also age 65
or older and/or is blind?
2. STATE TAX RESEARCH: What is a "NJ Homestead
rebate"? If Bill and Pam received a $500 NJ Homestead rebate before
they moved, how is it treated for federal tax purposes? (To locate the
answer, you must go to the NJ Division of Taxation website. To do so, go
to A. Sumutka's home page, click on "Useful Tax
Sites on the Internet," "State," "NJ - State Dept Tax
Site." You are now at the NJ Division of Taxation website.)
PART B: Income issues:
1. Bill and Pam have been in their NJ home for
quite a number of years. If they purchased it for $150,000, sold it after
5/6/97 for $350,000, incurred closing costs of $10,000 upon sale, and purchased
the condo in Florida for $200,000,
a. how much is the gain on sale of the
residence, if any.
b. how is the gain, if any, treated for tax
purposes?
c. what is the basis of the new
2. Assume that Bill received $14,000 from social security and Pam
received $10,000 from social security. They
earned $3000 in dividends from Philadelphia Electric common stock, $5000
in interest from a Mercer County,
NJ public purpose bond, and $23,000 in interest from other sources.
a. How much of their social security represents
(1) income under the broad concept, (2) an exclusion, and (3) gross income?
b. Same as 2a, except assumed that they earned
$27,000 in dividends (instead of $3000).
PART C: Retirement plan/annuity issues:
1. Assume that Pam made the following
contributions to her Roth IRA and the accounts have the
following balances before
withdrawals:
|
A/C |
Contribution |
Balance |
|
A/C #1 |
$2,000 |
$5,000 |
|
A/C #2 |
12,000 |
18,000 |
|
A/C #3 |
6,000 |
7,000 |
If she is over age 59 ½, her first
contribution was more than 5 years ago, and she withdraws
$4000 from account #3, how is it taxed?
2. Assume that Bill made the following contributions to his traditional
IRA and the accounts have the
following balances before withdrawals:
|
A/C |
Contribution |
Balance |
|
Deductible A/C #1 |
$2,000 |
$5,000 |
|
Deductible A/C #2 |
12,000 |
18,000 |
|
Nondeductible A/C #3 |
6,000 |
7,000 |
If he is over age 59 ½ and withdraws $4000 from account #3, how is it taxed?
3. Assume that Bill purchased a single life annuity from ABC Mutual for himself at a cost of $20,160 long before he retired. The contract specified that he would received $100 per month on reaching age 57 on 9/01/x1. Assume that Bill is now age 57 and starts to receive his annuity payments. What amount, if any, can he exclude from his gross income in 19x1?
4. Assume that Bill is a bachelor with no heirs,
he retires on 8/1/98, and is to receive his first retirement plan annuity check
of $1000 per month on 9/1/98.
a. If Bill made no contributions to the plan,
how would the annuity be taxed?
b. If Bill made $60,000 in 401(k) plan
contributions while an employee, how would the annuity be taxed?
c. If Bill contributed $20, 160 in nondeductible
contributions and is age 57 on the annuity starting date, how would the annuity
be taxed in 1998.
d. Same as 4c, except that Bill uses the
“safe harbor method” calculation.
e. Same as 4c, except that the annuity starting
date is 9/1/85.