You are a new tax staff at Hutchens CPA Firm. You have been asked to draft a tax
ID: 2569600 • Letter: Y
Question
You are a new tax staff at Hutchens CPA Firm. You have been asked to draft a tax memorandum for one of the firm’s new clients, Ms. Kendra Jones. Ms. Jones has a number of unique tax issues this year. Your boss has requested a detailed memorandum outlining the relevant facts, proper tax treatment and applicable tax law. In addition, you will need to present your findings to your boss and Ms. Jones. Ms. Jones is unavailable to answer any clarifying questions regarding the any facts described below.
Facts: Ms. Jones started 2016 working as an elementary education teacher at South Savoy Elementary. Her wages from teaching during the winter/spring of 2016 totaled $32,000. However, at the end of the school year Ms. Jones was told that she would not be re-hired for the fall of 2016 due to budget cuts. Ms. Jones lost her health insurance coverage in mid-May after her employment ended. After losing her job, she received $5,000 in unemployment compensation.
While Ms. Jones loves teaching, she decided to take the summer to explore various avenues for happiness and wealth. She took a part-time job as an instructor at Yoga World, hoping it would allow her the opportunity to re-center. After Ms. Jones had been working at Yoga World for three weeks (earning $900 as an independent contractor), she joined a few other yoga instructors on a weekend get-away to Las Vegas. While she had never been a gambler, Ms. Jones did quite well at the poker table, accumulating winnings of $5,000.
Ms. Jones decided that poker was clearly more lucrative than being a yoga instructor! So, she decided to stay in Las Vegas and become a professional poker player. She found a short-term apartment rental ($4,000 in total) just down the street from the casinos. Ms. Jones figured that at the age of 30, now was the perfect time for this exciting life experience. Ms. Jones purchased $300 worth of books and videos on how to “play poker to win.” Ms. Jones also hired a mime to help her perfect her poker face (cost $500). She started entering herself into amateur poker tournaments and went to the casinos daily to develop her poker skills.
Unfortunately, the remainder of her time in Vegas was not as profitable as her initial trip. She tracked her net winnings/losses on a daily basis (assume that each day = one session) and in the 45 days that she was living in Las Vegas (excluding her first weekend gambling) she had the following winnings/losses:
In addition to the above, Ms. Jones also received free meals and entertainment from the casinos she gambled at totaling $5,000 in value. And, even though her track record may not indicate it, Ms. Jones views herself as a professional gambler, and she would like to treat her poker activities as a business for tax purposes because she’s heard that is usually better (even though she doesn’t know what that really means). Ms. Jones returned to Illinois because her great-great-grandmother passed away.
Unknown to Ms. Jones, she was the beneficiary on her great-great-grandmother’s life insurance policy and Ms. Jones received a $750,000 death benefit. With the extra money from life insurance, Ms. Jones decided to permanently retire from the poker tables. While back in Illinois, she lucked out by finding a previously unknown Thomas Hart Benton (a famous Midwestern painter and muralist) painting at a yard sale. Ms. Jones only paid $100 for the painting but it was later appraised at a value of $10,000.
With her new found wealth, Ms. Jones spent the remainder of the year volunteering at Youth STEM, an organization committed to encouraging youth to pursue education and careers in the fields of science, technology, engineering, and mathematics. She really wanted to make a difference so she volunteered full-time, accumulating 500 volunteer hours and 680 miles commuting going to and from Youth STEM. She also donated the painting to the Youth STEM organization with the understanding that they would attempt to sell it at a charity auction to raise money for their organization. (Ms. Jones had heard about the general rule that allows taxpayers to deduct capital gain property at FMV, but she didn’t do any detailed research about possible exceptions prior to making her donation). Ms. Jones figured that all of those volunteer hours and the donation of the painting would lead to a huge charitable contribution deduction on her tax return, helping to offset any potential taxable income from her salary and lottery winnings.
Ms. Jones has no children or dependents. She paid $7,000 in state income taxes during the year. But, other than state income taxes and her potential charitable contributions above, she has no other itemized deductions.
Questions you should address (but feel free to address any other issues you think are important):
1. How should Ms. Jones’ gambling activity be taxed?
2. What is Ms. Jones’ AGI for the current year?
3. How much can Ms. Jones deduct in charitable contributions?
4. What is Ms. Jones’ Taxable Income?
5. What impact will not having health insurance from mid-May through July have on her taxes?
6. What is Ms. Jones’ Tax Liability?
There are no other relevant facts.
Explanation / Answer
1. Gambling activity of Ms. jones be taxed under seperate head called " income from other source".
Tax rate @30% on all gambling income.
2. Computation of Ms. Jones AGI for current year.
Income from salary
-salary. $32000
-volent. Retirement. $5000
-jim instructer. $900
Total income from salary. $ 37900
Income from other sources:
Sums received from lic for great-great grandmother. $750000
Winning:
From poker player. $5000
Books & training staff (expenses allowed for wholly spent on earning) ($800)
Total loss on poker player. ( $14100)
No income from winning is counted because loss from winning is excess than income ans loss will not set off from any other sources.
Painting. $10000
Expenses on painting purchase. ($100)
Gross total income. =$797800
3. Total deduction for charitable contribution is $10000.
4. Ms. Jones taxable income =$787800
5. No deduction will be allowed for lic premium because mature not completed and discontinued.
6. Ms. Jones tax liability:
Upto $250000= no tax
From ($250000-$500000)*10%=$25000
From($500000-$787800)*20%=$57560
Total=$82560
Education cess@2% =$1651.2
Shec@1% =$825.6
Total tax liability. = $85036.8
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