1) Monique is single, 40 and blind. She has the following items of income and expenses during 2012.

The home mortgage interest and points are paid on loan of $110,000 used to purchase her principal residence. Salary $100,000 Cash Dividends from owning Nike Stock $10,000 Interest income on City of Eugene Bonds $100,000 Interest income on US Treasury Bills $5,000 Net Rental Income $8,000 Alimony paid to ex-husband $13,000 Child support paid $6,000 Stock held for 2 years (AB 15,000) sold for $40,000 Investment property held 2 months (AB $4,000) sold for $100 Home mortgage interest of $5,000 Home mortgage interest points $1,000 Charitable Contributions (all cash) $20,000 Gross Medical Expenses for a Broken Leg $12,000. Insurance reimbursed Monique $9,000 for this procedure. Gross Medical Expenses for a Nose Enlargement $20,000. Insurance reimbursed Monique $18,000 for this procedure.

Answers start on Next Page

a) What is Moniques Taxable Income for 2012? (see below for relevant calculations) Salary Cash Dividends Treasury bills Rental Inc. Net LTCG Alimony Paid AGI Itemized Ded. P&D Exemptions (1) Taxable Income $100,000 10,000 5,000 8,000 21,100 (13,000) 131,100 (26,000) (3,800) 101,300

Calculations for above numbers: Net LTCG: Stock held for 2 years. Sold for 40,000, AB is 15,000. = 25,000 LTCG Stock held for 2 months. Sold for 100, AB is 4,000 = 3,900 STCL. Net LTCG = 25,000 3,900 = 21,100 Net LTCG Standard deduction or Itemize? 40, single and blind. So Standard deduction is basic standard deduction for a single person in 2012 of $5,950 plus an additional standard deduction of $1,450 for an individual filing single. Thus the standard deduction is $5,950+1,450 = $7,400 Itemized Deductions: Home mortgage interest and points both qualify so $5,000+1,000 = 6,000 Charitable Contributions: Cash so 50% property. 50% of AGI is .5*131,100 = 65,550. Thus her charitable contribution is under the applicable limits and all of it is allowed in the current year. Medical Expenses: Gross Medical Expenses for a Broken Leg $12,000. Insurance reimbursed Monique $9,000 for this procedure. So potential net allowable medical expenses of 12,000-9,000 = 3,000 Gross Medical Expenses for a Nose Enlargement $20,000. Insurance reimbursed Monique $18,000 for this procedure. Itemized Deductions for Medical expenses for cosmetic purposes are not allowed. So total potential allowable of $3,000. Medical expenses are subject to 7.5% agi floor. AGI floor = 7.5% * AGI = .075*131,100 = 9,832.5. $3,000 is below AGI floor so cant deduct any of it. So total itemized deductions of 6,000 from home mortgage interest and points + 20,000 from charitable contributions = 26,000 itemized contributions. 26,000 of itemized > $7,400 of standard deduction, so Itemize.

b) How would the answer on the previous page (#5 a) change if the home mortgage interest and points were paid on a loan that was used to purchase Moniques 3rd home, which would be used as a vacation home? In this case, the home mortgage interest and points would not be deductible. This would decrease our itemized deductions to $20,000. However this $20,000 is still > than the $7,400 standard deduction, so still itemize. New taxable income is as follows. Red items are the only ones that have changed from before: Salary Cash Dividends Treasury bills Rental Inc. Net LTCG Alimony Paid AGI Itemized Ded. P&D Exemptions Taxable Income $100,000 10,000 5,000 8,000 21,100 (13,000) 131,100 (20,000) (3,800) 107,300

c) How would the answer on the previous page (#5 a) change if instead of paying child support, Monique received child support of $20,000, and Monique was the full-time caretaker of her 4 year old son. The 4 year old son is incredibly ambitious and relatively intelligent and earned $50,000 during the year teaching Oregon State Students how to add and subtract.

Child support is not taxable when received, so nothing changes for Monique here. She has a 4 year old Son. The son fails the Gross income tests, since he earns more than the value of the P&D exemption during the year ($3,800). However since her son qualifies as a qualifying child, she may still take a personal and dependency exemption for her son. New taxable income is as follows. Red items are the only ones that have changed from before.

Salary Cash Dividends Treasury bills Rental Inc. Net LTCG Alimony Paid AGI Itemized Ded. P&D Exemptions (2) Taxable Income

$100,000 10,000 5,000 8,000 21,100 (13,000) 131,100 (26,000) (7,600) 97,500 3

d) Using the taxable income calculated in and information from #5 part a. What is Moniques remaining Federal Income tax liability (benefit) in 2012? From Part A, we have the following:

Salary Cash Dividends Treasury bills Rental Inc. Net LTCG Alimony Paid AGI Itemized Ded. P&D Exemptions (1) Taxable Income

$100,000 10,000 5,000 8,000 21,100 (13,000) 131,100 (26,000) (3,800) 101,300

So our taxable income is 101,300. Out of this income, the cash dividends of $10,000 and net LTCG of $21,100 are taxed at special rates. So we have 101,300-10,000-21,100 = $70,200 taxed at normal rates: We say that for a single taxpayer, income taxed at normal rates of $70,200 results in a marginal tax rate of 25%. Since our marginal tax rate is 25%, we now know that the tax rate on our net LTCG and dividends is 15%. So we have the following tax liability: Normal Rates (8700-0) * .10 = 870 (35,350-8700) *.15 = 3,997.5 (70,200-35,350) * .25 = 8,712.5 13,580 Capital Rates of 15% Cash Dividends 10,000 * .15 = 1,500 Net LTCG 21,100* .15 = 3,165 4,665 So total tax liability is 13,580+4,665 = 18,245 Remaining tax liability = Total Tax Liability Federal withholding Remaining tax liability = 18,245 0 = 18,245