Ken is 63 years old and unmarried. He retired at age 55 when he sold his business, Though Ken is retired, he is still very active. Ken reported the following financial information this year. Assume Ken’s modified adjusted gross income for purposes of the bond interest exclusion and for determining the taxability of his Social Security benefits is $70,000 and that Ken files as a single taxpayer. Determine Ken’s 2009 gross income.
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 Social Security benefits for the year.
e. Ken resided in Ireland from July 1, 2008, through June 30, 2009, visiting relatives.
While he was there he earned $35,000 working in his cousin’s pub. He was paid $17,000 for his services in 2008 and $18,000 for his services in 2009.
Assume Ken elects to use the foreign-earned income exclusion to the extent he is eligible.
f. 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 he applied the rest toward his new car payment.
g. Ken’s son, Mike, instructed his employer to make half of his final paycheck of the year payable to Ken. Ken received the check on December 30 in the amount of $1,100.
h. Ken received a $610 refund of the $3,600 in state income taxes his employer withheld from his pay last year. Ken claimed $5,500 in itemized deductions last year (the standard deduction for a single filer was $5,450).
i. Ken received $30,000 of interest from corporate bonds and money market accounts.
58000
To determine Ken's 2009 gross income, we need to calculate the income from each of the sources provided.
a. Ken won $1,200 in an illegal game of poker: This amount is considered taxable income, regardless of the legality of the game. Therefore, add $1,200 to the total.
b. Ken sold 1,000 shares of stock for $32 a share: To calculate the gain from the sale of the stock, subtract the tax basis (or investment) in the stock from the selling price per share and then multiply that by the number of shares sold. In this case, the gain would be ($32 - $31) * 1,000 = $1,000. Add $1,000 to the total.
c. Ken received $25,000 from an annuity: This amount is considered taxable income. Add $25,000 to the total.
d. Ken received $13,000 in Social Security benefits: Social Security benefits are taxable, but only a portion of it may be included in gross income. To determine the taxable portion, use the IRS formula. However, since we are assuming Ken's modified adjusted gross income is $70,000, we won't be able to calculate the exact taxable amount without additional information. For the purpose of this calculation, we will assume 85% of the Social Security benefits ($13,000 * 0.85 = $11,050) is taxable. Add $11,050 to the total.
e. Ken earned $35,000 working in his cousin's pub in Ireland: Since Ken elected to use the foreign-earned income exclusion, we can exclude the income earned while he was in Ireland from his gross income. In this case, the exclusion is limited to the maximum exclusion amount, which for 2009 was $91,500. Since Ken earned $35,000, we can subtract that amount from the total for now.
f. Ken received a $500 cash scholarship: Scholarships used for tuition and books are generally not taxable. However, since Ken used $300 for books, we will only exclude the remaining $200 from the total.
g. Ken received $1,100 from his son's employer: Since Ken received this payment as a gift, it is not considered taxable income. Do not add this amount to the total.
h. Ken received a $610 state income tax refund: Refunds of state income taxes are generally not taxable unless Ken itemized deductions in the previous year. In this case, Ken claimed $5,500 in itemized deductions, which includes state income taxes. Therefore, add $610 to the total.
i. Ken received $30,000 of interest from corporate bonds and money market accounts: This amount is considered taxable income. Add $30,000 to the total.
Now let's calculate the total gross income:
$1,200 (illegal poker winnings)
+ $1,000 (stock sale gain)
+ $25,000 (annuity)
+ $11,050 (taxable portion of Social Security benefits)
+ $200 (excluded scholarship amount)
+ $610 (state income tax refund)
+ $30,000 (interest from bonds and money market accounts)
Total Gross Income = $68,060
Therefore, Ken's 2009 gross income is $68,060.