Question

3. During 2019, Marvin had the following transactions:

Salary $50,000

Bank loan (proceeds used to buy personal auto) 10,000

Alimony paid (divorce was finalized in 2010). 12,000

Child support paid 6,000

Gift from aunt 20,000

Marvin’s AGI is:

a. $32,000.

b. $38,000.

c. $44,000.

d. $56,000.

e. $64,000

4.The realization requirement gives an incentive to own assets that have increased in value and to

sell assets whose value has decreased.

a. True

b. False

Answer 1

Q3- option B is correct.

Marvin's AGI = salary $50000 - Alimony paid $12000

= $38000

Amounts borrowed are not income.

The gift is an exclusion.

The child support is nondeductible.

Hence this answer is correct.

Q4- option A is correct.

Generally, the tax law follows the realisation requirement. Thus, economic gain and losses are not recognised until the asset are sold or exchange. The sale at a loss, assuming the loss is deductible, will result in after tax proceeds greater than the value of the assets sold. If the assets has increased in value ,the after tax proceeds will be less than the value of the asset sold, decreasing the taxpayer's net worth computed at market value.