ACCT 407 - Ch. 2
A single taxpayer provided the following information for 2016: Salary $80,000 Interest on local government bonds (qualifies as a tax exclusion) 4,000 Allowable itemized deductions 13,000 What is taxable income? A) $58,950 B) $62,950 C) $66,950 D) $67,000
Answer: B Explanation: $80,000 - $13,000 itemized deductions - $4,050 personal exemption = $62,950
Steven and Susie Tyler have three dependent children ages 13, 15, and 17. Their modified AGI is $108,000. What is the amount of the child credit to which they are entitled? A) $0 B) $1,000 C) $2,000 D) $3,000
Answer: C Explanation: 2 × $1,000 = $2,000. Children age 17 and above do not qualify for the credit.
Deborah, who is single, is claimed as a dependent on her parents' tax return. She had a part-time job during 2015 and earned $850 during the year, which was her only income. What is her standard deduction? A) $850 B) $1,050 C) $1,200 D) $6,300
Answer: C Explanation: For a dependent, the standard deduction is the greater of earned income plus $350 ($850 + 350 = $1,200) or $1,050.
In October 2016, Joy and Paul separated and have not lived with each other since, but they are still legally married. They do not file a joint return. Joy supports their children after the separation and pays the cost of maintaining their home. Joy's filing status in 2016 and 2017 is, respectively, A) single for both years. B) head of household and single. C) married filing separately for both years. D) married filing separately and head of household.
Answer: D Explanation: Joy and Paul are married on the last day of the year so either a joint return or a separate return is required unless Joy qualifies as an abandoned spouse (and thus, head of household). She does not qualify in 2016 since Paul was in the home during the last six months of the year. However, since Paul is gone, a married filing separate return is necessary since he is not around to sign a joint return. In 2017, Joy, though still married, qualifies as an abandoned spouse and, thus, head of household.
The oldest age at which the "Kiddie Tax" could apply to a dependent child is A) 17 B) 18 C) 20 D) 23
Answer: D Explanation: The child must be under age 24.
Eliza Smith's father, Victor, lives with Eliza who is a single taxpayer. During the year, Eliza purchased clothing for her father costing $1,200 and provided him with a room that could have been rented for $6,000. In addition, Eliza spent $4,000 for groceries she shared with her father. Eliza purchased a new television for $900 which she placed in the living room for both her father and her use. What is the amount of support provided by Eliza to her father?
Clothing $1,200 Rental value of room 6,000 Groceries (1/2 × $4,000) 2,000 Total support $9,200
) Suri, age 8, is a dependent of her parents and has unearned income of $6,000. She must file her own tax return.
FALSE Explanation: A dependent earning solely unearned income not exceeding $10,000 may report unearned income on the parents' return.
A married couple need not live together to file a joint return.
TRUE Explanation: A couple legally married at year-end can filed a joint return.
An unmarried taxpayer may file as head of household if he maintains a home for his qualifying child.
TRUE Explanation: A divorced or never married parent can file as head of household if he maintains a home for his qualifying child.
For 2016, unearned income in excess of $2,100 of a child under age 18 is generally taxed at the parents' rate.
TRUE Explanation: The kiddie tax (i.e. tax at the parents' rate) applies when a child's unearned income exceeds $2,100.
When two or more people qualify to claim the same person as a dependent, a taxpayer who is entitled to the exemption through the qualified child rules has priority over a taxpayer who meets the requirements for other relatives.
TRUE Explanation: Tie-breaker rules favor the taxpayer who can claim the dependent under the qualifying child rules.
A legally married same-sex couple can file a joint return.
TRUE Explanation: The Supreme Court has recognized same-sex marriages. Legally married same-sex couples can file joint federal income tax returns.
Steve Greene, age 66, is divorced with no dependents. In 2016 Steve had income and expenses as follows: Gross income from salary $80,000 Total itemized deductions 5,500 Compute Steve's taxable income for 2016. Show all calculations.
68100
Kelly is age 23 and a full-time student with interest and dividend income of $2,600 in the current year. The total cost of her support for the year is $19,000. She is not subject to the kiddie tax.
: FALSE Explanation: She meets the age and student status to be subject to kiddie tax, and her unearned income exceeds the $2,100 threshold.
An individual may not qualify for the dependency exemption as a qualifying child but may still qualify as a dependent.
: TRUE Explanation: A son or daughter, or certain other family members, may exceed the age 19 or age 24 and full-time student status but may still be a dependent based on the qualifying relative criteria.
In 2015, Sam is single and rents an apartment for which he pays $800 per month and makes charitable contributions of $1,000. Sam's adjusted gross income is $47,000. Required: Compute his taxable income. Show all calculations.
Adjusted gross income $47,000 Minus: Standard deduction ( 6,300) Minus: Personal exemption (4,050) Taxable income $36,650
Kate is single and a homeowner. In 2016, she has property taxes on her home of $3,000, makes charitable contributions of $2,000, and pays home mortgage interest of $7,000. Kate's adjusted gross income for 2016 is $77,000. Required: Compute her taxable income for 2016.
Adjusted gross income $77,000 Minus: Itemized deductions: Property taxes $3,000 Home mortgage interest 7,000 Charitable contributions 2,000 ( 12,000) Minus: Personal exemption ( 4,050) Taxable income $60,950
For each of the following taxpayers indicate the applicable filing status, the number of personal and dependency exemptions available, and the number of children who qualify for the child credit. a. Jeffrey is a widower, age 71, who receives a pension of $10,000, nontaxable social security benefits of $12,000, and interest of $2,000. He has no dependents. b. Selma is a single, full-time college student, age 20, who earned $6,800 working part-time. She has $1,700 of interest income and received $1,000 support from her parents. c. Olivia is married, but her husband left her three years ago and she has not seen or heard from him since. She supports herself and her six-year-old daughter. She paid all the household expenses. Her income consists of salary of $18,500 and interest of $800. d. Ruben is a single, full-time college student, age 20, who earned $6,800 working part-time. He has $250 of interest income and received $10,000 support from his parents. e. Cathy is divorced and received $12,000 alimony from her former husband and earned $35,000 working as an administrative assistant. She also received $2,500 of child support for her daughter who lives with her. Cathy filed the appropriate IRS form and gave up the dependency exemption to her former husband.
Answer: Filing Status Exemptions Child Credit a. Single ex: 1 cc: 0 b. Single ex: 1 cc. 0 c. Head-of-Household ex: 2 cc: 1 d. Single ex: 0 cc: 0 e. Head-of-Household ex: 1 cc: 0
Bill and Tessa have two children whom they support and who live in their home. Timmy is 17 and has earned income of $5,000 for the year. Their other child, Tommy, is 15. Tessa's mother also lives with them and may be claimed as their dependent. She is 89 years old. Their adjusted gross income is $130,000. Required: Compute Bill and Tessa's taxable income for 2016 if they file a joint return and they do not itemize deductions.
Answer: Adjusted gross income $130,000 Less: Standard deduction ( 12,600) Allowable exemption ($4,050 × 5) ( 20,250) Taxable income $ 97,150
Gina Lewis, age 12, is claimed as a dependent on her parent's return. She is their only child. She earned $2,300 from a summer job. She also earned interest of $2,750. Her parents' marginal tax rate is 28 percent. Required: a. Compute the amount of Gina's tax liability for 2016. b. Can Gina's parents take a child tax credit for her?
Answer: Adjusted gross income ($2,300 + $2,750) $5,050 Less: Standard deduction [greater of $1,050 or ($2,300 + 350)] (2,650) Allowable exemption (None-dependent of another) 0 Taxable income $2,400 Tax liability: Gina's net unearned income: Unearned income: Interest $ 2,750 Less: Statutory deduction of $1,000 ( 1,050) Less: Greater of a. $1,050 of standard deduction, or Itemized deductions connected with production of income ( 1,050) Net unearned income $ 650 Tax on net unearned income ($650 × 28% (parents tax rate)) $ 182 Tax on taxable income minus net unearned income ($2,400 - $650) × 10% child's tax rate) 175 Total income tax $357 b. She is under age 17 and their qualifying child so she qualifies for the child credit. The credit may be partially phased out. If the parents' marginal tax rate is 28%, their AGI probably is in the phase out range.
Maxine, who is 76 years old and single, is appropriately claimed as a dependent on her daughter Beth's tax return. During 2016 she received $500 interest on a savings account. She had a part time job that earned $3,000. Her total itemized deductions were $1,300. Required: Compute Maxine's taxable income for 2015. Show all calculations.
Answer: Adjusted gross income ($500 + $3,000) $ 3,500 Less: Standard deduction [greater of $1,050 or ($3,000 + 350)] (3,350) Allowable exemption (None-dependent of another) 0 Taxable income $ 150
All of the following items are generally excluded from income except A) child support payments. B) interest on corporate bonds. C) interest on state and local government bonds. D) life insurance proceeds paid by reason of death.
Answer: B Explanation: Interest on corporate bonds is taxable.
Adam attended college for much of 2016, during which time he was supported by his parents. Erin married Adam in December 2016. They live in a common law state. Adam graduated and will commence work in January 2017. Erin worked during 2016 and earned $20,000. Adam's only income was interest of $1,100. Adam's parents are in the 28% tax bracket. Thus, claiming Adam as a dependent would save them $1,134 ($4,050 × .28). a. What is Erin and Adam's tax liability if they file a joint return? b. What is Erin and Adam's total tax liability if they file separate returns and Adam's parents claim him as a dependent?
Answer: a. Salary and interest $21,100 Minus: Standard deduction (12,400) Exemption ($4,050 × 2) ( 8,100) Taxable income $ 600 Gross tax ($600 × .10) $ 60 b. Erin's tax liability: Salary $ 20,000 Minus: Standard deduction( 6,300) Exemption ( 4,050) Taxable income $ 9,650 Gross tax $ 981* *$927.50 + [.15 × ($9,650 - $9,275)] Adam's tax liability: Interest $ 1,100 Minus: Standard deduction (greater of $1,050 or Earned Income + $350) ( 1,050) Exemption ( 0) Taxable income $ 50 Gross tax ($50 × .10) $ 5 Total tax liability on separate returns: ($981 + 5) $ 986 Total tax liability on joint return 60 Erin and Adam's savings on joint return $ 926 Parents' savings if Adam claimed as dependent ( 1,134) Family unit would save if Adam claimed as dependent $ 208
Indicate for each of the following the most favorable filing status for the 2016 tax year. a. Kenny died on March 2, 2015. Marge, his wife, and Bart, their son, survive. Marge filed a joint return in 2015. Bart, age 18 in 2016, is a part-time college student and continues to live at home with his mother. He works part-time, earning $6,200. What is Marge's filing status in 2016? b. Alan Spaulding is single and provides over 50% support of his niece Alicia who lives with him all year long. Alan maintains the household and claims Alicia as a dependent. Alicia makes $3,600 at a part-time job. She is a full-time student, age 18. What is Alan's filing status? c. Lily, who was divorced on July 27, 2015, provides 100% of the support for her parents who live in a nursing home in Kansas and have no income. What is Lily's filing status? d. Holly was abandoned by her husband Fletcher in September of the current year. She has not seen or communicated with him since then. What is Holly's filing status? e. Rick, whose wife died in December 2013, filed a joint tax return for 2013. He did not remarry, but has continued to maintain his home in which his two dependent children live. What is Rick's filing status for 2016?
Answer: a. surviving spouse b. head of household c. head of household d. married filing separately e. head of household
Satish, age 11, is a dependent of his parents. His only source of income in 2016 is $3,000 of interest income on bonds given him by his grandparents. Satish's marginal rate is 10%, and his parent's marginal rate is 28%. Satish's tax is A) $357. B) $195. C) $546. D) $300.
Answer: A Explanation: Interest income $3,000 Adjusted gross income $3,000 Minus: Standard deduction ( 1,050) Taxable income $1,950 Interest $3,000 Statutory Ded. - 1,050 Portion of Std Ded. - 1,050 Net Unearned income $ 900 Tax on net unearned income $900 × 28% = $252 Tax on taxable income minus net unearned income ($1,950 - $900) × 10% = 105 Total Tax $357
Annisa, who is 28 and single, has adjusted gross income of $55,000 and itemized deductions of $5,000. In 2016, Annisa will have taxable income of A) $44,650. B) $45,050. C) $50,000. D) $48,700.
Answer: A Explanation: Adjusted gross income $55,000 Minus: Standard deduction ( 6,300) Exemption ( 4,050) Taxable income $44,650
In 2016, Brett and Lashana (both 50 years old) file a joint tax return claiming as a dependent their son who is blind. Their standard deduction is A) $12,600. B) $13,850. C) $14,150. D) $7,850.
Answer: A Explanation: Blindness of a dependent does not increase the standard deduction of the taxpayers.
You may choose married filing jointly as your filing status if you are married and both you and your spouse agree to file a joint return. Which of the following facts would prevent you from being considered married for filing purposes? A) You were married for several years, but your divorce became final in December. B) You are married but living apart until some problems can be solved. C) Your spouse died during the year. D) None of the above.
Answer: A Explanation: Except in the year of the death of a spouse, marital status is determined as of the last day of the tax year. If the couple is divorced in December, then they are not married for tax purposes and may not file a joint return.
Lewis, who is single, is claimed as a dependent on his parents' tax return. He received $2,000 during the year in dividends, which was his only income. What is his standard deduction for 2016? A) $1,050 B) $2,000 C) $2,350 D) $6,300
Answer: A Explanation: For a dependent, the standard deduction is the greater of earned income plus $350 or $1,050. Dividends are unearned income.
When a spouse dies, the surviving spouse for the year of death A) may file a married filing jointly return. B) must file a tax return using the single filing status. C) must file a tax return using the head of household filing status. D) may file a married filing jointly return only if the death occurred in the last half of the year.
Answer: A Explanation: In the year of death, a joint return can be filed.
In order to qualify to file as surviving spouse, all of the following criteria must be met by the widow or widower except A) he or she and the decedent must have shared the same household as of date of death. B) he or she must be a U.S. citizen or resident. C) he or she be qualified to file a joint return in the year of death. D) he or she must have at least one dependent child living at home the entire year and pay over half of the expenses of the home.
Answer: A Explanation: There is no requirement that the surviving spouse and the deceased spouse were living in the same household as of date of death.
Which of the following types of itemized deductions are included in the category of miscellaneous expenses that are deductible only if the aggregate amount of such expenses exceeds 2% of the taxpayer's adjusted gross income? A) unreimbursed employee business expenses B) charitable contributions C) medical expenses D) home mortgage interest expense
Answer: A Explanation: Unreimbursed employee business expenses, along with tax advisor and preparation fees and expenses for producing investment income, are subcategories of the miscellaneous expenses subject to the 2% of AGI floor.
If a 13-year-old has earned income of $500 and unearned income of $2,500, all of the income can be reported on the parent's return.
Answer: FALSE Explanation: To be eligible, the child's income must come solely from interest and dividends.
Keith, age 17, is a dependent of his parents. During 2016, he received $3,000 of dividend income. The parent's marginal rate is 28% and Keith's rate is 10%. Keith's tax is A) $292.50. B) $130 C) $357. D) None of the above.
Answer: B Explanation: Dividend income $3,000 Standard Deduction - 1,050 Personal Exemption 0 Taxable Income $1,950 Taxed as follows: 1st $1,050 is taxed at child's rate for dividend income (0%) $ 0 The $900 remainder ($1,950 - 1,050) is taxed at the parents' rate for dividend income (15%) 135 Tax liability $135
Elise, age 20, is a full-time college student with earned income from wages of $4,400 and interest income of $500. Elise's parents provide more than half of her support. Elise's 2016 taxable income is A) $0. B) $150. C) $500. D) $3,850.
Answer: B Explanation: Earned income $4,400 Plus: Interest income 500 Adjusted gross income $4,900 Minus: Standard deduction [$4,400 + 350] ( 4,750) Taxable income $ 150
Juanita's mother lives with her. Juanita purchased clothing for her mother costing $1,000 and provided her with a room that Juanita estimates she could have rented for $4,000. Juanita spent $5,000 on groceries she shared with her mother. Juanita also paid $700 for her mother's health insurance coverage. How much of these costs is considered support? A) $5,000 B) $7,500 C) $10,000 D) $10,700
Answer: B Explanation: $1,000 + $4,000 + .5(5,000) = $7,500. Life insurance premiums are not considered support.
Blaine Greer lives alone. His support comes from the following sources: Buddy (his son) $2,600 Ken (his brother) 4,200 Martha (his daughter) 2,300 Natalie (a friend) 1,000 Total support $10,100 Assuming a multiple support declaration exists, which of the individuals may claim Blaine as a dependent? A) Ken or Martha B) Buddy, Ken, or Martha C) Ken, Martha, or Natalie D) None of them
Answer: B Explanation: A qualifying pool of individuals (Buddy, Ken, and Martha) provides more than 50 percent of Blaine's support. Natalie is not part of the qualifying pool as she could not otherwise claim Blaine because he is not related to her and does not live in her home. Of the qualifying pool, any individual who provides more than 10 percent of Blaine's support (Buddy, Ken or Martha) may claim Blaine under a multiple support agreement.
Anna is supported entirely by her three sons John, James, and Joseph who provide for her support in the following percentages: John: 10%, James: 40%, Joseph: 50% Assuming a multiple support declaration exists, which of the brothers may claim his mother as a dependent? A) any of the sons B) James or Joseph C) Joseph only D) None of them
Answer: B Explanation: Although no one provides more than 50 percent of Anna's support, a qualifying pool of individuals (John, James, and Joseph) provide over 50 percent of Anna's support. Any one of them who provides more than 10 percent (James or Joseph) may claim Anna assuming a multiple support agreement is filed.
Anita, who is divorced, maintains a home in which she and her 16 year old daughter live. Anita provides the majority of the support for her daughter and for a son, age 23, who is enrolled part-time at the university and lives in the dorm. The son also works in the campus bookstore and earns spending money of $4,500. How many personal and dependency exemptions may Anita claim? A) 1 B) 2 C) 3 D) 4
Answer: B Explanation: Anita will claim herself and her daughter who is a qualifying child. Anita's son does not qualify as her qualifying child because he fails the age test. He cannot qualify as her dependent under the general provisions because he fails the gross income test.
The child credit is for taxpayers with dependent children under the age of A) 14. B) 17. C) 19. D) 24.
Answer: B Explanation: Children must be under age 17 to qualify.
Charlie is claimed as a dependent on his parents' tax return in 2016. He received $8,000 during the year from a part-time acting job, which was his only income. What is his standard deduction? A) $1,050 B) $6,300 C) $8,000 D) $8,350
Answer: B Explanation: For a dependent, the standard deduction is the greater of earned income plus $350 or $1,050, but no more than the current year regular standard deduction amount. For 2016, the maximum standard deduction for a single person is $6,300.
Husband and wife, who live in a common law state, are eligible to file a joint return for 2016, but elect to file separately. They do not have dependents. Wife has adjusted gross income of $25,000 and has $2,200 of expenditures which qualify as itemized deductions. She is entitled to one exemption. Husband deducts itemized deductions of $11,200. What is the taxable income for the wife? A) $14,650 B) $18,750 C) $20,950 D) None of the above.
Answer: B Explanation: If one spouse on married filing separately returns itemizes deductions, the other spouse must also do so. Income of wife $25,000 Minus: Itemized deductions ( 2,200) Personal exemption ( 4,050) Taxable Income $18,750
) Tom and Alice were married on December 31 of last year. What is their filing status for last year? A) They file as single. B) They file as married joint or married separate. C) They file as single for half the year and married for the other half. D) They file as single for 364 days and married for one day.
Answer: B Explanation: Marital status is determined as of the last day of the tax year. If the couple was married on December 31, they are considered married for the entire year and may file either married filing jointly or married filing separately.
David's father is retired and receives $14,000 per year in Social Security benefits. David's father saves $4,000 of the benefits and spends the remaining $10,000 for his support. How much support must David provide for his father to meet the dependent support requirement? A) $10,000 B) $10,001 C) $14,000 D) $14,001
Answer: B Explanation: The amount that David's father saves is not counted in the support test. Therefore, David need only provide $1 more than his father ($10,000 + $1) to meet the more than 50 percent test.
Which of the following credits is considered a refundable credit? A) child and dependent care credit B) earned income credit C) adoption expense credit D) lifetime learning credit
Answer: B Explanation: The earned income credit is a refundable credit.
All of the following items are deductions for adjusted gross income except A) moving expenses. B) unreimbursed employee business expenses. C) qualifying contributions to individual retirement accounts. D) one-half of self-employment taxes paid.
Answer: B Explanation: Unreimbursed employee business expenses are miscellaneous itemized deductions.
Michelle, age 20, is a full-time college student with earned income from wages of $5,200 and interest income of $700. Michelle's parents provide more than half of Michelle's support. Michelle's 2016 taxable income is A) $0. B) $700. C) $350. D) $4,850.
Answer: C Explanation: Earned income $5,200 Plus: Interest income 700 Adjusted gross income $5,900 Minus: Standard deduction [$5,200 + 350 but not more than $6,300] ( 5,550) Taxable income $ 350
Amanda has two dependent children, ages 10 and 12. She earned $15,000 from her waitress job. How much of her child credit is refundable? A) $1,200 B) $1,500 C) $1,800 D) $2,000
Answer: C Explanation: $1,800 = 15% × (15,000 - 3,000)
Cheryl is claimed as a dependent on her parents' tax return. She had a part-time job during 2016 and earned $4,900 during the year, in addition to $600 of interest income. What is her standard deduction? A) $1,050 B) $4,900 C) $5,250 D) $6,300
Answer: C Explanation: $4,900 + 350 = $5,250. For a dependent, the standard deduction is the greater of earned income plus $350 or $1,050 up to a maximum of the regular standard deduction.
On June 1, 2016, Ellen turned 65. Ellen has been a widow for five years and has no dependents. Her standard deduction is A) $4,050. B) $6,300. C) $7,850. D) $12,600.
Answer: C Explanation: $6,300 + $1,550 = $7,850
In 2016, the standard deduction for a married taxpayer filing a joint return and who is 67 years old with a spouse who is 65 years old is A) $12,600. B) $13,850. C) $15,100. D) $15,700.
Answer: C Explanation: ($15,100 = $12,600 + $1,250 + $1,250)
Julia provides more than 50 percent of the support for three individuals: Theresa, an unrelated child who lives with Julia all year long; Margaret, Julia's cousin, who lives in another city; and Emma, Julia's daughter who lives in her own home. Each of the potential dependents earned less than $4,050. How many dependency exemptions can Julia claim on her 2016 tax return? A) 0 B) 1 C) 2 D) 3
Answer: C Explanation: (Theresa, Emma) Assuming all other tests are met, Theresa qualifies as Julia's dependent. A person who lives with the taxpayer all year long need not be related to the taxpayer. Margaret does not qualify as Julia's dependent. She is not related for tax purposes and, therefore, can't be Julia's dependent unless she lives with Julia all year long. Emma qualifies as Julia's dependent. Since Emma is Julia's daughter, she is related for tax purposes and need not live with Julia to be claimed as Julia's dependent. Therefore, Julia has two dependents.
A married person who files a separate return can claim a personal exemption for his spouse if the spouse is not the dependent of another and has A) gross income that is less than the personal exemption. B) adjusted gross income that is less than the personal exemption. C) no gross income. D) no taxable income.
Answer: C Explanation: A married person who files a separate return can claim a personal exemption for his spouse if the spouse has no gross income during the year and the spouse is not the dependent of another taxpayer.
Which of the following dependent relatives does not have to live in the same household as the taxpayer who is claiming head of household filing status? A) uncle B) brother C) father D) nephew
Answer: C Explanation: A taxpayer with a dependent parent qualifies as head of household even if the parent does not live with the taxpayer.
Amber supports four individuals: Erin, her stepdaughter, who lives with her; Amy, her cousin, who lives in another state; Britney, her friend, who lives legally in Amber's home all year long; and Charlie, her father, who lives in another state. Assume that the dependency requirements other than residence are all met. How many personal and dependency exemptions may Amber claim? A) 2 B) 3 C) 4 D) 5
Answer: C Explanation: Amber may claim one personal exemption and three (Erin, Britney, Charlie) dependency exemptions. Amy, her cousin, does not qualify because a cousin does not satisfy the relationship criteria and can only qualify as a dependent is she lives in the taxpayer's home all year long. Charlie, as a parent, does not have to live with the taxpayer.
Ben, age 67, and Karla, age 58, have two children who live with them and for whom they provide total support. Their daughter is 21 years old, blind, is not a full-time student and has no income. Her twin brother is 21 years old, has good sight, is a full-time student and has income of $4,500. Ben and Karla can claim how many personal and dependency exemptions on their tax return? A) 2 B) 3 C) 4 D) 5
Answer: C Explanation: Ben and Karla get two personal exemptions for themselves. Although their daughter is not their qualifying child, she still qualifies as a dependent since she meets all of the dependency tests for a qualifying relative. Their son qualifies as their dependent as he is their qualifying child and need not meet the gross income test. Therefore, they are entitled to a total of four personal and dependency exemptions.
Frank, age 17, received $4,000 of dividends and $1,500 from a part-time job. Frank is a dependent of his parents who are in the 28% percent bracket. Frank's 2016 taxable income is A) $0. B) $4,000. C) $4,450. D) $3,650.
Answer: D Explanation: ($4,000 + $1,500) - $1,850 std. ded. = $3,650. The standard deduction is the greater of $1,050 or earned income of $1,500 plus $350 ($1,850).
Dave, age 59 and divorced, is the sole support of his mother age 83, who is a resident of a local nursing home for the entire year. Dave's mother had no income for the year. Dave's filing status and exemptions claimed are A) head of household and one exemption. B) single and one exemption. C) head of household and two exemptions. D) single and two exemptions.
Answer: C Explanation: Dave's mother qualifies as his dependent; therefore, he gets two exemptions. He qualifies as head of household since a taxpayer with a dependent parent qualifies even if the parent does not live with the taxpayer.
In 2013, Leo's wife died. Leo has two small children, ages 2 and 4, living at home whom he supports entirely. Leo does not remarry and is not claimed as a dependent on another's return during any of this period. In 2014, 2015, and 2016, Leo's most advantageous filing status is, respectively A) single for all three years. B) head of household for all three years. C) surviving spouse, surviving spouse, head of household. D) surviving spouse, surviving spouse, single.
Answer: C Explanation: In the two years following year of death (2014 and 2015), Leo may file as surviving spouse as long as he has at least one dependent child living in the home during the entire year and he provides over half of the expenses of the home. After the two years following the year of death, Leo qualifies as head of household as he is unmarried and is maintaining a home for a qualifying individual (in this case, his qualifying child).
) John supports Kevin, his cousin, who lived with him throughout 2016. John also supports three other individuals who do not live with him: Donna, who is John's mother Melissa, who John's stepsister Morris, who is Kevin's brother Assume that Donna, Melissa, Morris and Kevin each earn less than $4,050. How many personal and dependency exemptions may John claim? A) 2 B) 3 C) 4 D) 5
Answer: C Explanation: John may claim one personal exemption and three dependency exemptions for Kevin, Donna, and Melissa. Morris is John's cousin and does not qualify as a dependent since he doesn't live in John's home. A cousin is not related for tax purposes and would have to live in the taxpayer's home to be claimed as a dependent.
Liz and Bert divorce and Liz receives custody of their child. Bert is ordered by the court to pay child support of $10,000 per year, and Liz files the appropriate IRS form to allow Bert to claim the dependency exemption for the child. If Liz maintains the home in which she and her child live, her filing status and exemptions claimed will be A) single and one exemption. B) single and two exemptions. C) head of household and one exemption. D) head of household and two exemptions.
Answer: C Explanation: Liz gets a personal exemption for herself. A taxpayer with a qualifying child satisfies the head of household requirement even if the taxpayer releases the dependency exemption to the child's other parent.
Tony supports the following individuals during the current year: Miranda, his former mother-in-law who lives in her own home and has no gross income; his cousin, Jeff, age 23, who is a full-time student, earns $7,000 during the year, and lives with Tony all year long; and Matt, age 22, who is Tony's brother, is a full-time student living on campus and earns $8,000 during the year. How many dependency exemptions may Tony claim? A) 0 B) 1 C) 2 D) 3
Answer: C Explanation: Miranda qualifies as Tony's dependent. She is related to him for tax purposes and does not have to live with him. Jeff earns too much gross income (more than the personal exemption amount) and can not qualify as Tony's dependent. Although Matt earns more gross income than the personal exemption amount, he is considered Tony's qualifying child and, therefore, does not have to meet the gross income test. Therefore, Tony can claim two dependents.
Sally divorced her husband three years ago and has not remarried. Since the divorce she has maintained her home in which she and her now sixteen-year-old daughter reside. The daughter is a qualified child. Sally signed the dependency exemption over to her ex-spouse by filing the appropriate IRS form. What is Sally's filing status for the current year and how many exemptions may she claim? A) single and one B) surviving spouse and one C) head of household and one D) head of household and two
Answer: C Explanation: Sally qualifies as head of household for the current year. A taxpayer with a qualifying child satisfies the head of household requirement even if the taxpayer releases the dependency exemption to the child's other parent.
Sarah, who is single, maintains a home in which she, her 15-year old brother, and her 21-year-old niece live. Sarah provides the majority of the support for her brother, her niece, and her cousin, age 18, who is enrolled full-time at the university and lives in an apartment. While the niece and cousin have no income, her brother has a part-time job and earns $4,000 per year. How many personal and dependency exemptions may Sarah claim? A) 1 B) 2 C) 3 D) 4
Answer: C Explanation: Sarah may claim one personal exemption and two dependency exemptions for her niece and brother. Because her brother qualifies as her qualifying child for purposes of the dependency exemption, he does not have to meet the gross income test. Sarah may not claim her cousin as a dependent since her cousin does not live with her.
Edward, a widower whose wife died in 2013, maintains a household for himself and his 10-year-old daughter. Edward's most favorable filing status for 2016 is A) single. B) surviving spouse. C) head of household. D) married filing jointly.
Answer: C Explanation: Surviving spouse status is only available for the two years following the spouse's death, in this case, 2014 and 2015. However, Edward does qualify for head of household in 2016.
Nate and Nikki have three dependent children ages 12, 15, and 17. Their modified AGI is $120,000. What is the amount of the child credit to which they are entitled? A) $0 B) $500 C) $1,500 D) $2,000
Answer: C Explanation: The child credit before the phase out is $2,000 (2 × $1,000); the 17-year old does not qualify. They have excess AGI of $10,000 ($120,000 - $110,000). Their credit should be reduced by 10 ($10,000/$1,000) × $50 = $500. Thus, their child credit is $1,500.
Ryan and Edith file a joint return showing $130,000 of AGI. They have three dependent children ages 7, 9, and 13. What is the amount of their child credit? A) $0 B) $1,000 C) $2,000 D) $3,000
Answer: C Explanation: The child credit is $1,000 per qualifying child, with a phase-out for AGI exceeding $110,000 on joint returns. $130,000 - $110,000 = $20,000. There are twenty $1,000 increments (or parts thereof) exceeding the $110,000 phase-out floor, so the child credit will be reduced by 20 × $50 = $1,000. Credit before phase-out is 3 children × $1,000 = $3,000. After the phase-out the credit is $2,000 = $3,000 - $1,000.
The filing status in which the rates increase most rapidly is A) single. B) head of household. C) married filing separately. D) married filing jointly.
Answer: C Explanation: The rates on the married filing a separate return schedule increases more rapidly than other individual rate schedules.
Carter dies on January 1, 2016. A joint return election is made in 2016 and Marjorie properly qualifies as a surviving spouse for the two following years. Marjorie has one child that she claims as a dependent for this same period. The number of personal and dependency exemptions allowed Marjorie in 2016 and in 2017, respectively: A) 1 and 1. B) 2 and 2. C) 3 and 2. D) 3 and 3.
Answer: C Explanation: Three exemptions for 2016 (joint return) and two for 2017 (surviving spouse).
The regular standard deduction is available to which one of the following taxpayers? A) a married taxpayer filing a separate return where the other spouse itemizes B) a person who has only unearned income and is a dependent of another C) a nonresident alien D) a same sex couple married under New York state law.
Answer: D Explanation: A person who is a dependent of another has a limited standard deduction. Married individuals filing separate returns when the other spouse itemizes and an individual filing a short period return may not take the standard deduction. The IRS follows the Supreme Court Windsor decision recognizing same sex marriages.
All of the following items are included in gross income except A) alimony received. B) rent income. C) interest earned on a bank account. D) child support payments received.
Answer: D Explanation: Child support is not taxable.
Which of the following is not considered support for the dependent support test? A) food B) clothing C) rental value of lodging D) value of services rendered by the taxpayer for the dependent
Answer: D Explanation: Food, clothing, and the rental value of the lodging are all considered support.
All of the following items are deductions for adjusted gross income except A) alimony paid. B) trade or business expenses. C) rent and royalty expenses. D) state and local income taxes.
Answer: D Explanation: State and local income taxes are itemized deductions.
To qualify as an abandoned spouse, the taxpayer is not required to A) be a U.S. citizen or resident. B) live apart from the spouse for the last six months of the year. C) pay more than half the cost of maintaining the home. D) have a son or daughter in the home for the entire year.
Answer: D Explanation: The dependent son or daughter need only live in the taxpayer's home for more than one half year.
A married taxpayer may file as head of household under the abandoned spouse provisions if all of the following are met except A) the taxpayer lived apart from his or her spouse for the last six months of the year. B) the taxpayer is a U.S. citizen or resident. C) the taxpayer pays over half of the cost of maintaining a household in which the taxpayer and a dependent son or daughter live for over half of the year. D) the taxpayer must have been married for at least two years.
Answer: D Explanation: The first three items are all required to meet the abandoned spouse definition. The requirements do not specify a minimum length of marriage.
Paul and Sally file a joint return showing $87,000 of AGI. They have three dependent children ages 6, 8, and 13. What is the amount of their child credit? A) $0 B) $1,000 C) $2,000 D) $3,000
Answer: D Explanation: Three children under the age of 17 and no phase-out. 3 × $1,000 = $3,000.
Taxable income for an individual is defined as A) AGI reduced by itemized deductions. B) AGI reduced by personal and dependency exemptions. C) total income reduced by the standard deduction. D) AGI reduced by deductions from AGI and personal and dependency exemptions.
D Explanation: Taxable income is AGI reduced by either the standard deduction or itemized deductions and reduced by personal and dependency exemptions.
Generally, deductions for (not from) adjusted gross income are personal expenses specifically allowed by tax law.
FALSE Explanation: Personal expenses, if deductible, are generally from AGI deductions.
Refundable tax credits are allowed to reduce or totally eliminate a taxpayer's tax liability but any credits in excess of the tax liability are lost.
FALSE Explanation: Refundable tax credits may reduce the tax liability to zero and, if some credit still remains, are refundable or paid by the government to the taxpayer.
Taxpayers have the choice of claiming either the personal and dependency exemption or itemized deductions.
FALSE Explanation: Taxpayers claim the greater of itemized deductions or the standard deduction. In addition, taxpayers will reduce taxable income by personal and dependency exemptions.
Taxpayers have the choice of claiming either the personal and dependency exemption or the standard deduction.
FALSE Explanation: Taxpayers claim the greater of itemized deductions or the standard deduction. In addition, taxpayers will reduce taxable income by personal and dependency exemptions.
A qualifying child of the taxpayer must meet the gross income test.
FALSE Explanation: The gross income test only applies to potential dependents who are not a qualifying child of the taxpayer.
) Parents must provide more than half the support of their child under the age of 19 in order to claim her as a dependent qualifying child.
FALSE Explanation: The key support criteria for qualifying child status is that the child cannot provide more than half of her own support.
The person claiming a dependency exemption under a multiple support declaration must provide more than 25% of the dependent's support.
FALSE Explanation: The minimum support percentage for a person claiming the dependency exemption under the multiple support agreement is 10%.
Nonresident aliens are allowed a full standard deduction.
FALSE Explanation: The standard deduction is not available to nonresident aliens.
The standard deduction is the maximum amount of itemized deductions which may be claimed by a taxpayer, and is based on an individual's filing status, age, and vision.
FALSE Explanation: The standard deduction, set by Congress, is not directly related to itemized deductions. It is the alternative to itemized deductions.
The following information is available for Bob and Brenda Horton, a married couple filing a joint return, for 2016. Both Bob and Brenda are age 32 and have no dependents. Salaries $190,000 Interest income 12,000 Deductible IRA contributions 11,000 Itemized deductions 22,600 Withholding 33,000 a. What is the amount of their gross income? b. What is the amount of their adjusted gross income? c. What is the amount of their taxable income? d. What is the amount of their tax liability (gross tax)? e. What is the amount of their tax due or (refund due)?
Hortons Salary $190,000 Interest 12,000 Gross Income $202,000 a. Minus: IRA Contributions 11,000 Adjusted gross income $191,000 b. Minus: Itemized deductions ( 22,600) Exemptions ( 8,100) Taxable Income $160,300 c. Tax liability (using Rate Schedule) $31,870*d. Minus: Withholding - 33,000 Tax due (refund) ( $ 1,130) e. *$29,517.50 + [.28 (160,300 - 151,900)]
Basic Formula of Individual Tax Income
Income from whatever source derived - (exclusions) = gross income - (deductions FOR AGI) =adjusted gross income -deductions FROM AGI (greater of std. or item. ded.) (personal exemption) =taxable income x tax rate = gross tax - credits and prepayments = net tax payable or refundable
Generally, itemized deductions are personal expenses specifically allowed by the tax law.
TRUE Explanation: Personal expenses are not allowed as deductions unless specifically provided in the tax law.
Hannah is single with no dependents and has a salary of $102,000 for 2016, along with tax exempt interest income of $3,000 from a municipality. Her itemized deductions total $6,600. Required: Compute her taxable income.
Salary $102,000 (Interest income is excluded) Less: Itemized deductions ( 6,600) Personal exemption ( 4,050) Taxable income $ 91,350
Kadeisha is single with no dependents and has a salary of $102,000 for 2016, along with tax exempt interest income of $3,000 from a municipality. Her itemized deductions total $6,100. Required: Compute her taxable income.
Salary $102,000 (Interest income is excluded) Less: Standard deduction ( 6,300) Personal exemption ( 4,050) Taxable income $ 91,650
Sean and Martha are both over age 65 and Martha is considered blind by tax law standards. Their total income in 2016 from part-time jobs and interest income from a bank savings account is $60,000. Their itemized deductions are $12,000. Required: Compute their taxable income.
Salary & interest $60,000 Less: Standard deduction [$12,600 + (3 × 1,250)] (16,350) Personal exemptions (2 × 4,050) ( 8,100) Taxable income $35,550 The standard deduction is increased because of age for both and blindness for Martha.
2) Although exclusions are usually not reported on an individual's income tax return, interest income on state and local government bonds must be reported on the tax return.
TRUE
A widow or widower may file a joint tax return and claim an exemption for the deceased spouse in the year of the spouse's death as long as the surviving spouse does not remarry before the end of the year.
TRUE Explanation: A joint return may be filed in the year of death with the deceased spouse getting a full personal exemption.
For purposes of the dependency exemption, a qualifying child may not provide more than one-half of his or her own support during the year.
TRUE Explanation: An otherwise qualifying child will no longer qualify if he provides more than half of his own support.
A child credit is a partially refundable credit.
TRUE Explanation: Generally, the refundable credit is limited to 15% of the taxpayer's earned income in excess of $3,000. If the taxpayer has three or more children, a different limitation applies.
One requirement for claiming a dependent as a qualifying relative is that the taxpayer provides more than 50 percent of the dependent's support (assuming it is not a multiple support agreement situation).
TRUE Explanation: If an individual does not qualify as a child, a key test is whether the taxpayer provides more than half of the individual's support.
The amount of Social Security tax paid by the taxpayer will be a consideration in determining the refundable component of the child care credit for larger families.
TRUE Explanation: In the case of a taxpayer with three or more qualifying children, the refund is limited to the greater of 15% of the taxpayer's earned income in excess of $3,000 or the excess of the taxpayer''s Social Security tax paid over the taxpayer's earned income credit for the year.
The standard deduction may not be claimed by one married taxpayer filing a separate return if the other spouse itemizes deductions.
TRUE Explanation: It if a married couple files separately and one spouse itemized deductions, the other spouse must also itemize.
Nonrefundable tax credits are allowed to reduce or totally eliminate a taxpayer's tax liability but any credits in excess of the tax liability are lost.
TRUE Explanation: Nonrefundable credits can only reduce the tax liability to zero. The excess is lost.
An individual who is claimed as a dependent by another person is not entitled to a personal exemption on his or her own return.
TRUE Explanation: Only one personal exemption is allowed for each person.
Generally, in the case of a divorced couple, the parent who has physical custody of a child for the greater part of the year is entitled to the dependency exemption.
TRUE Explanation: The custodial parent will take the dependency exemption for the child unless a parental release is signed.
The term "gross income" means the total of all income from any source, but after reduction for exclusions.:
TRUE Explanation: The tax law includes all sources of income in gross income unless specifically excluded.
For purposes of the dependency exemption, a qualifying child must be under age 19, a full-time student under age 24, or a permanently and totally disabled child.
TRUE Explanation: Two primary considerations for qualifying child status are age and full-time student status. In addition, an otherwise eligible individual may qualify.
Vincent, age 12, is a dependent of his parents. During 2016, Vincent's earned income from wages is $2,600 and Vincent received $3,000 of interest income. The parent's marginal rate is 28% and Vincent's marginal rate is 10%. Vincent's tax is A) $265. B) $742. C) $412. D) none of the above.
Wages $2,600 Interest 3,000 AGI 5,600 Std Ded. ($2,600 wages + $350) - 2,950 Per. Exmp. 0 Taxable Inc. $2,650 Interest $3,000 Statutory Ded. - 1,050 Portion of Std Ded. - 1,050 Net Unearned income $900 Tax on net unearned income $900 × 28% = $252 Tax on taxable income minus net unearned income ($2,650 - $1,050) × 10% = 160 Total Tax $412
The following information for 2015 relates to Emma Grace, a single taxpayer, age 18: Salary $6,500 Interest income 1,200 Itemized deductions 500 a. Compute Emma Grace's taxable income assuming she is self-supporting. b. Compute Emma Grace's taxable income assuming she is a dependent of her parents.
a. Salary $ 6,500 Interest 1,200 Adjusted gross income $7,700 Minus: Standard deduction ( 6,300) Exemptions ( 4,050) Taxable income 0 b. Salary $ 6,500 Interest 1,200 Adjusted gross income $ 7,700 Minus: Standard deduction ($6,500 + 350, limited to 6,300) ( 6,300) Exemption 0 Taxable income $ 1,400
For each of the following independent cases, indicate the total number of exemptions (personal and dependents) that may be claimed by the taxpayer in 2016. a. Cassie is a single mother providing the sole support of her three children, who all live with her. Her 16 year-old daughter, Tammy, earned $15,200 modeling during the year and her two sons, R.J. and Will, ages 10 and 8, have no income. b. Olivia, 35 years old, provided eighty percent of the support of her grandmother who lived in another state. Her grandmother's only income was from non-taxable social security of $9,500. c. Vanessa and Matt Reardon are married and under 65 years of age. During 2016, they furnish more than half of the support of their 25 year-old son, Bill, who lives with them. Bill earns $2,000 from a part-time job, most of which he sets aside for future college expenses. Bill is not currently a student. Vanessa's father, Henry, who died on January 3, 2016, at age 80, had for many years qualified as their dependent. d. Douglas and Marjorie are husband and wife and file a joint return. Both are under 65 years of age. They provide more than half of the support of their daughter, Ellen (age 23), who is a full-time medical student. Ellen receives a $3,400 taxable scholarship covering her room and board at college. They furnish all of the support of Henry (Douglas's grandfather), who is age 85 and lives in a nursing home. They also support Meg (age 69), who is a friend of the family and lives with them. e. Blair, who is divorced, maintains a home in which she, her twin sons, and her baby daughter live all year. The children's father, Ross, provides over half their support. No special arrangements exist between Blair and Ross.
a. 4 (Cassie, Tammy, R.J., and Will) b. 2 (Olivia, Grandma) c. 4 (Vanessa, Matt, Bill, Henry) d. 5 (Douglas, Marjorie, Ellen, Henry, Meg) e. 4 (Blair, son, son, daughter)
