Essay on How Helen Is Taxed During Year Three

Essay on How Helen Is Taxed During Year Three

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Question 1
In order to determine how Helen is taxed during year three, two items must be discussed:

1. Helen’s gross income for the year
2. Helen’s enrollment as a full-time student in the UMD MBA program.

Item 1
Gross income, defined in IRC §61(a)(1), states that gross income means all income from whatever source derived including compensation for services. Therefore, Helen’s compensation as an assistant manager for Bank of America causes her to have gross income of $40,000.

Item 2
Since Helen was enrolled as a full-time student in an MBA program, we must research her options to deduct the tuition expense as a miscellaneous itemized deduction on Schedule A or receive the Lifetime Learning Credit.

Treasury Regulation 1.162-5 states that expenses made by an individual for education are deductible as ordinary and necessary business expenses if the education maintains or improves skills required in the individuals trade or business and does not satisfy minimum education requirements or qualify the individual for a new trade or business. Revenue Ruling 1968-591 states that individuals may still deduct expenses if they leave their trade or business for a year or less.

IRC §25A(c) describes the Lifetime Learning Credit. The Lifetime Learning Credit states that a taxpayer may deduct 20% of their qualified education expenses (tuition and related fees) up to a $2000 maximum. The education must be taken to acquire or improve a taxpayer’s job skills.

Based on my interpretation of the law, the ability of Helen to deduct her MBA tuition as a miscellaneous itemized deduction subject to the 2% floor on Schedule A of her tax return or receive the Lifetime Learning Credit depends on her job skills before and after the education. Based on t...


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...0 states that expenses for home improvements are not deductible, but add to the basis of the home which will change the gain or loss recognized when the house is sold.
C. The tax treatment for Zorro depends on whether he itemized the medical expenses he incurred. According to IRS Publication 4345, if a taxpayer receives a settlement due to physical injuries and did not take an itemized deduction for the medical expenses than the settlement in nontaxable. However, if the taxpayer took the itemized deductions for the medical expenses then the taxpayer must include the portion of income that provides a tax benefit.
D. The tax treatment for the discharge of the debt in exchange for the baseball collection depends on the fair value of the collection. If the fair market value of the collection is less than the $1,000 then the difference is deemed as gross income to Zorro.

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