2. After you have completed your research and have a working understanding of in
ID: 2588398 • Letter: 2
Question
2. After you have completed your research and have a working understanding of installment sales and the installment method., create two tables in Excel forecasting the amount and character of Ms. Marlin's taxable income and her tax liability over the next 5 years under each of the following two scenarios: 6) Ms. Marlin sells the land for $200,000 on December 31, 2017 and receives all $200,000 in 2017. Under this option, Ms. Marlin would have no interest income from the sale of the land. The gain on the sale of the land in 2017 would be in addition to her S50,000 in taxable income (ordinary income) (ii) (ii) Ms. Marlin sells the land in an installment sale with a $40,000 down payment in 2017 (with no interest) and then four equal annual installments of $40,000/year for 2018- 2021 (with adequate stated interest). Ms. Marlin would not elect out of the installment method. The as follows: payment schedule is December 31, 2017: $40,000 down payment/principal (no interest) December 31, 2018: $40,000 principal and $4,800 interest December 31, 2019: $40,000 principal and S3,600 interest December 31, 2020: $40,000 principal and $2,400 interest December 31, 2021: $40,000 principal and $1,200 interest In making your calculations, assume that tax rates and tax brackets will remain at 2017 levels for the next 5 years. Remember that capital gains are subject to preferential rates that vary depending on the taxpayer's marginal tax bracket, but interest is taxed as ordinary income (at the taxpayer's ordinary income tax rates). There is no set format you need to use for your tables. However, the tables should look professional and all relevant information should be clearly displayed and labeled. Someone reading the tables should be able to quickly and easily interpret the results and identify how you calculated your forecasted tax liability for each scenario. Use form ulas in cells where possibleExplanation / Answer
When a property is sold outright and all the proceeds are received in the same tax year creating a capital gain then the tax is to be computed and paid for the same year at the applicable rate. But when a property is sold under installment sales method, the payment is deferred for future subsequent years. But in the eyes of IRS, the whole profit made thereon is to be taxed in the same year in which the first payment (down payment or first installment) is made unless it is evident that future tax rates will be higher.
If a person sells his assets and receive a down payment in the year of disposition and continues to receive the rest amounts in yearly installments then he would have to pay taxes on the entire profit in spite of the fact that only down payment was received in the year of sale.
Since Ms. Marlin here wants to defer the receipts of installment sales proceeds, only the capital gain and the interest earnings will be considered for taxation purposes. Interest earned on the same is an ordinary business income and to be taxed at the going rate. But the capital gains arising out of it needs to be prorated.
Capital gains each year: Total Gain x Yearly Installment / Total proceeds
For the sake of calculations, let’s assume the gains on sale is $40000 (20% on $200000)
For the first scenario, there will be no interest income because all the proceeds are immediately collected. The total capital gain of $40000 will be taxable. Marlin’s total taxable income for the year would be $90000 ($50000 + $40000)
For the second scenario, the taxable portion in the year 2017 would be nil. Calculations made as below:
$40000 x $40000 / $200000 = $8000
Year Amount received Interest received Total Amount received Capital Gains prorated Total Taxable Income 31-Dec-17 40000 0 40000 8000 8000 31-Dec-18 40000 4800 44800 8000 12800 31-Dec-19 40000 3600 43600 8000 11600 31-Dec-20 40000 2400 42400 8000 10400 31-Dec-21 40000 1200 41200 8000 9200 200000 12000 212000 40000 52000Related Questions
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