Integrative Problem

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Integrative Problem:

85. Edna, 63, is a widow and works for Rhododendron Corporation. Her annual salary

is $40,000. Rhododendron provides the following benefits to all employees:

• Medical insurance—The cost of Edna’s policy is $1,800. She incurs $950 in valid

medical expenses and is reimbursed for $760 of the expenses by the company policy.

• Group term life insurance—Each employee is provided with $90,000 worth of

coverage under the policy.

• Qualified pension plan—Rhododendron matches employee contributions up

to $2,000. Edna contributes 8% of her salary to the plan.

Edna has the following other items that may affect her current-year taxes:

a. She receives $125 per month from a qualified annuity. The annuity cost

$9,100. Edna is to receive the annuity for life. She began receiving the payments in January, when her life expectancy was 15 years.

b. She receives a $200 refund of last year’s state income taxes during the current

year. Last year, her itemized deductions totaled $6,900. In the current year,

Edna’s itemized deductions are $4,300.

c. She has a separate medical policy she purchased to cover costs that her

employer-provided policy does not cover. She pays $1,400 for the policy,

which reimburses her for $350 of her medical expenses.

d. She owns 6% Puerto Rico bonds with a face value of $40,000. The bonds pay

interest annually on December 20.

e. She sells stock she owned for $20,000 on July 1. She had paid $26,000 for the

stock three years earlier. Edna invests the proceeds from the sale of the stock

in a money-market savings account that pays 4% interest.

f. Her brother dies and leaves her the farm he had inherited from their father.

The farm is valued at $160,000. Edna leases the farm to a local farmer and

receives $8,000 in rent during the current year.

g. On April 1, she gives $5,000 of Kao Corporation bonds she owns to her

granddaughter. The bonds pay annual interest of 8% on December 31.

h. She receives a watch worth $300 from Rhododendron for her twenty years of

loyal service. Rhododendron does not routinely give out length-of-service awards.

i. She sells land that she had held as an investment for $19,000 on October 1.

She had paid $17,000 for the land two years earlier. Edna invests the proceeds

in state of Oregon bonds that pay 4% interest annually on December 31.

Compute Edna’s gross income, adjusted gross income, taxable income, and her

income tax liability. Edna has no dependents.