Acct 3220 - Taxation Midterm Ch2
34) 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: Page Ref.: I:2-12 and I:2-21 through I:2-24 Objective: 2 and 3
46) 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.
Answer: The additional standard deduction is for Steve's age. Page Ref.: I:2-10 and I:2-11 Objective: 2
7) Paige is starting Paige's Poodle Parlor and is considering alternative organizational forms. She anticipates the business will earn $100,000 from operating before compensating her for her services and before charitable contributions. Page, who is single, has $6,000 of income from other sources and other itemized deductions of $12,000. Her compensation for services will be $50,000. Charitable contributions to be made by the business are expected to be $5,000. Other distributions (dividends) to her from the business are expected to be $14,000. Required: Compare her current income tax assuming she operates the business as a proprietorship, an S corporation, and a C corporation. Ignore payroll and other taxes.
Answer: *$5,183.75 + [.25 ($84,950 - 37,650] rounded **Tax on dividends: $14,000 × .15 = $2,100 plus Tax on taxable income of $53,950 less $14,000 or $39,950: $5,183.75 + [.25 (39,950 - 37,650)] = $5,759 rounded. The total is $7,859 ($2,100 + $5,759). Page Ref.: I:2-27 and I:2-28; Example I:2-36 Objective: 4
10) Discuss reasons why a married couple may choose not to file a joint return.
Answer: 1. One spouse incurs most of medical expenses and itemized deductions can be maximized. 2. They may not want joint tax liability. 3. Casualty losses may be deductible on a separate return but not on a joint return because of the 10% floor. Page Ref.: I:2-33 and I:2-34 Objective: 7
16) 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 Page Ref.: I:2-3 through I:2-7; Example I:2-1 Objective: 1
36) 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: Page Ref.: I:2-12 through I:2-24 Objective: 2 and 3
35) 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: Page Ref.: I:2-24 through I:2-26; Example I:2-35 Objective: 2 and 3
31) 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.
Answer: Page Ref.: I:2-25; Example I:2-32 and I:2-33 Objective: 3
32) 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: Page Ref.: I:2-25; Example I:2-33 Objective: 3
8) Brett, a single taxpayer with no dependents, earns salary of $500,000 and dividend income of $50,000. Itemized deductions for home mortgage interest, property taxes and charitable contributions total $35,000. Calculate Brett's total federal income tax liability for 2016.
Answer: Page Ref.: I:2-31 Objective: 6
8) Kelsey is a cash-basis, calendar-year taxpayer. Her salary is $30,000, and she is single. She plans to purchase a residence in 2017. She anticipates her property taxes and interest will total $8,000 in 2017. Each year, Kelsey contributes approximately $1,500 to charity. Her other itemized deductions total $2,000. For purposes of this problem, assume 2016 tax rates, exemptions, and standard deductions are the same as 2017. a. What will her gross tax be in 2016 and 2017 if she contributes $1,500 to charity in each year? b. What will her gross tax be in 2016 and 2017 if she contributes $3,000 to charity in 2016 but makes no contribution in 2017? c. What will her gross tax be in 2016 and 2017 if she makes no contribution in 2016 but contributes $3,000 to charity in 2017? d. Why does alternative "c" yield the lowest tax?
Answer: Page Ref.: I:2-33 Objective: 7
9) In 2016 Carol and Robert have salaries of $35,000 and $27,000, respectively. Their itemized deductions total $8,000. They are married, under 65, and live in a common law state. a. Compute their taxable income assuming that they file a joint return. b. Compute their taxable income assuming that they file separate returns and that Robert claims all of the itemized deductions.
Answer: Page Ref.: I:2-33 Objective: 7
6) Steve and Jennifer are in the 33% tax bracket for ordinary income and the 15% bracket for capital gains. They have owned several blocks of stock for many years. They are considering the sale of two blocks of stock. The sale of one would produce a gain of $12,000 while the sale of the other would produce a loss of $18,000. For purposes of this problem, ignore personal exemptions, itemized deductions, phase-outs and additional investment taxes. They have no other gains and losses this year. a. How much tax will they save if they sell the block of stock that produces a loss? b. How much additional tax will they pay if they sell the block of stock that produces a gain? c. What will be the impact on their taxes if they sell both blocks of stock?
Answer: a. $990. A net capital loss is limited to $3,000 per year × .33 = $990. They can carryover the remaining $15,000 loss to next year. b. $12,000 × .15 (maximum rate on long-term capital gains) = $1,800. c. $12,000 gain - $18,000 loss = Net capital loss of $6,000 of which $3,000 is currently deductible to save taxes of $3,000 × .33 = $990. They should sell both so that they totally escape taxation of the gain this year. They can carryover the remaining $3,000 loss to next year. Page Ref.: I:2-30 Objective: 5
51) 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.
Answer: 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) Page Ref.: I:2-13 through I:2-17 Objective: 2
33) 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 Page Ref.: I:2-20 through I:2-24 Objective: 3
4) Assuming a calendar tax year and the conventional 15th of the month due date, all of the following business entities must file their 2016 tax returns by the March 15, 2017 except A) the C corporation. B) the S corporation. C) the partnership. D) All of the above entities must file their 2016 tax returns by March 15, 2017.
Answer: A Explanation: A calendar year C corporation 2016 tax return deadline is April 15, 2017. Page Ref.: I:2-35 and I:2-36 Objective:
18) 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. Page Ref.: I:2-10 and I:2-11 Objective: 2
9) 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. Page Ref.: I:2-21 Objective: 3
23) 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. Page Ref.: I:2-12; Example I:2-6 Objective: 2
11) 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. Page Ref.: I:2-22; Example I:2-26 Objective: 3
3) If an individual with a marginal tax rate of 15% has a long-term capital gain, it is taxed at A) 0%. B) 20%. C) 10%. D) 15%
Answer: A Explanation: Taxpayers with a marginal tax rate of 15% or lower will have a 0% tax rate on long-term capital gains. Page Ref.: I:2-30 Objective: 5
15) 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. Page Ref.: I:2-22 Objective: 3
16) 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. Page Ref.: I:2-7; Table I:2-6 Objective: 2
28) 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 Page Ref.: I:2-25; Example I:2-34 Objective: 3
5) Artco Inc. is a C corporation. This year it earned $50,000 of taxable income and paid a $10,000 distribution (dividend) to Lily, its sole shareholder. Lily has a marginal tax rate of 25%. Due to the corporation's results and the distribution paid, the IRS will receive total taxes of A) $9,000. B) $12,500. C) $14,000. D) $10,000.
Answer: A Page Ref.: I:2-27 and I:2-28; Example I:2-36 Objective: 4
52) Paul and Hannah, who are married and file a joint return, are in the process of adopting a child who is born in December 2016. The child, a son, comes to live with them a week after his birth on December 12. The adoption is not finalized until February of 2017. What tax issues are present in this situation?
Answer: Are Paul and Hannah able to claim the baby as a dependent on their 2016 tax return and claim a child tax credit? Page Ref.: I:2-13 and I:2-14 Objective: 2
9) Avi and Rianna are considering marriage before year-end. They each earn a salary of about $150,000, have some investment income and some itemized deductions. What additional taxes will Avi and Rianna face as a married couple?
Answer: As a married couple they will have salary of approximately $300,000, subjecting them to the additional .9% payroll tax on some of their wages. With AGI over $250,000, they will also have to pay the 3.8% investment tax on their investment income. In addition, with their substantial AGI they will face partial phaseout of their personal exemptions and itemized deductions, raising taxable income and increasing their income tax liability. Page Ref.: I:2-31 Objective: 6
25) 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: Page Ref.: I:2-25; Example I:2-33 Objective: 3
37) 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. Page Ref.: I:2-15; Example I:2-14 Objective: 2
15) 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 Page Ref.: I:2-6; Example I:2-1 Objective: 1
6) Rena and Ronald, a married couple, each earn a salary of $200,000. They will be required to pay additional payroll taxes in 2016 of A) $0. B) $1,350. C) $1,800. D) $5,800.
Answer: B Explanation: .009 × ($400,000 combined earned income - $250,000 threshold) = $1,350. Page Ref.: I:2-31 Objective: 6
39) 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. Page Ref.: I:2-17; Example I:2-17 Objective: 2
5) In order to shift the taxation of dividend income from a parent to a child, A) the parent must direct the corporation to pay the dividend to the child. B) the parent must transfer ownership of the stock to the child. C) the parent can deposit the dividend in the child's bank account. D) all of the above will result in shifting the taxation to the child.
Answer: B Explanation: Actual ownership of the asset must transfer to the child. Page Ref.: I:2-32; Examples I:2-42 and I:2-43 Objective: 7
38) 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. Page Ref.: I:2-17; Example I:2-17 Objective: 2
30) 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. Page Ref.: I:2-13 and I:2-14 Objective: 2
40) 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. Page Ref.: I:2-19 Objective: 2
24) 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. Page Ref.: I:2-12; Example I:2-7 Objective: 2
22) 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.
10) 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. Page Ref.: I:2-3; Table I:2-2 Objective: 1
10) 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. Page Ref.: I:2-21 Objective: 3
4) If an individual with a marginal tax rate of 39.6% has a long-term capital gain, it is taxed at A) 0%. B) 20%. C) 10%. D) 15%.
Answer: B Explanation: Taxpayers with a marginal tax rate of 39.6% will have a 20% tax rate on long-term capital gains. Page Ref.: I:2-30 Objective: 5
35) 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. Page Ref.: I:2-15; Example I:2-13 Objective: 2
14) 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. Page Ref.: I:2-6; Table I:2-5 Objective: 1
4) Ray is starting a new business and trying to decide between a C corporation, S corporation and partnership. Which of the following statements regarding his decision is correct? A) An S corporation owner must pay income taxes only on the salary received. B) A partner in a partnership is taxed on his or her share of partnership income. C) A shareholder in a C corporation is taxed on his or her share of corporate income. D) S corporations pay taxes on their current year income.
Answer: B Explanation: The partnership form is a flow-through entity. Page Ref.: I:2-27 through I:2-29 Objective: 4
13) 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. Page Ref.: I:2-5; Table I:2-4 Objective: 1
30) 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 Page Ref.: I:2-24 through I:2-26; Example I:2-35 Objective: 3
6) Silver Inc. is an S corporation. This year it earned $50,000 of taxable income and paid a $10,000 distribution to Daisy, its sole shareholder. Daisy has a marginal tax rate of 25%. Due to the corporation's results and the distribution paid, the IRS will receive total taxes of A) $9,000. B) $12,500. C) $14,000. D) $10,000.
Answer: B Page Ref.: I:2-27 and I:2-28; Example I:2-36 Objective: 4
26) 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: Page Ref.: I:2-25; Example I:2-33 Objective: 3
4) Lila and Ted are married and have AGI of $337,000 in 2016. They had their first children this year, twins. Lila and Ted will be allowed a deduction for personal and dependency exemptions of A) $8,100. B) $16,200. C) $12,636. D) $6,318.
Answer: C Explanation: Page Ref.: I:2-31; Example I:2-38 Objective: 6
45) 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) Page Ref.: I:2-19 and I:2-20; Example I:2-23 Objective: 2
26) 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. Page Ref.: I:2-12; Example I:2-7 Objective: 2
20) 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 Page Ref.: I:2-10 and I:2-11 Objective: 2
17) 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) Page Ref.: I:2-10 and I:2-11 Objective: 2
33) 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. Page Ref.: I:2-13 and I:2-14; Example I:2-9 Objective: 2
41) 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. Page Ref.: I:2-19 and I:2-20 Objective: 2
27) 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. Page Ref.: I:2-12 Objective: 2
16) 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. Page Ref.: I:2-23 Objective: 3
31) 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. Page Ref.: I:2-13 and I:2-14 Objective: 2
5) Form 4868, a six-month extension of time to file, allows a taxpayer to A) avoid interest on underpayment of taxes due. B) extend the filing date of the return as well as payment of the tax due. C) extend the filing date of the return but the estimated amount of tax due must still be paid by the original due date of the return. D) extend the filing date only at the discretion of the IRS.
Answer: C Explanation: An extension to file a return is not an extension to pay any tax that is owed. Page Ref.: I:2-35 and I:2-36 Objective: 8
28) 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. Page Ref.: I:2-13 and I:2-14 Objective: 2
18) 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. Page Ref.: I:2-23 Objective: 3
25) 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. Page Ref.: I:2-12; Example I:2-7 Objective: 2
12) 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). Page Ref.: I:2-22 Objective: 3
32) 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. Page Ref.: I:2-13 and I:2-14 Objective: 2
19) 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. Page Ref.: I:2-23; Example I:2-27 Objective: 3
34) 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. Page Ref.: I:2-13 through I:2-15; Examples I:2-10 and I:2-11 Objective: 2
17) 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. Page Ref.: I:2-23; Example I:2-27 Objective: 3
29) 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. Page Ref.: I:2-13 and I:2-14 Objective: 2
14) 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. Page Ref.: I:2-22 Objective: 3
(T/F) 3) A corporation has revenue of $350,000 and deductible business expenses of $240,000. What is the federal income tax, before credits? A) $16,500 B) $22,500 C) $26,150 D) $42,900
Answer: C Explanation: Taxable income is $110,000 ($350,000 - $240,000). The tax liability is $22,250 plus $3,900 [.39 × 10,000] = $26,150. Page Ref.: I:2-27 Objective: 4
42) 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. Page Ref.: I:2-19 and I:2-20; Example I:2-22 Objective: 2
43) 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. Page Ref.: I:2-19 and I:2-20; Example I:2-22 Objective: 2
20) 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. Page Ref.: I:2-23 Objective: 3
13) 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). Page Ref.: I:2-22 Objective: 3
29) 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.
Answer: C Page Ref.: I:2-25; Example I:2-34 Objective: 3
53) Foreign exchange student Yung lives with Harold and Betty while he studies in the US. He moved into their home January 5, 2016 and has resided with them for the remainder of the year. Yung does not pay anything for his room and board. Harold and Betty provide all of Yung's meals. Yung receives a scholarship to pay for his tuition, books and fees. He works on campus, earning $4,000 a year. What tax issues should Harold and Betty consider?
Answer: Can Harold and Betty claim Yung as a dependent? Does he meet the requirements for a qualified dependent? Do they provide more than half of Yung's support? Does Yung receive amounts from home that he uses for his support? Page Ref.: I:2-13 and I:2-14 Objective: 2
38) Mary Ann pays the costs for her Aunt Hazel to live in a nursing home. Aunt Hazel receives Social Security benefits of $7,000 a year which are turned over to the nursing home. Mary Ann pays the remaining cost of $33,000. Hazel has no other income. Mary Ann visits Hazel twice a week and meets with doctors and nurses regarding Hazel's medical care. What tax issues should Mary Ann consider?
Answer: Can Mary Ann file as head of household? Would Mary Ann be able to claim Hazel as a dependent? Page Ref.: I:2-22 and I:2-23 Objective: 2 and 3
27) 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). Page Ref.: I:2-25; Example I:2-33 Objective: 3
21) 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. Page Ref.: I:2-12 and I:2-21 through I:2-24 Objective: 2
7) A taxpayer can receive innocent spouse relief if A) the understated tax is attributable to erroneous items of the other spouse. B) the innocent spouse did not know and had no reason to know that there was an understatement of tax. C) under the circumstances, it would be inequitable to hold the innocent spouse liable for the understated tax. D) All of the above conditions apply.
Answer: D Explanation: All of the items are required for innocent spouse relief. Page Ref.: I:2-34 Objective: 7
11) 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. Page Ref.: I:2-3 and I:2-4, Tables I:2-2 and I:2-3 Objective: 1
36) 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. Page Ref.: I:2-15 Objective: 2
5) Shane and Alyssa (a married couple) have AGI of $345,000 in 2016. They bought a house this year and paid $16,000 of interest expense on the mortgage and paid $6,500 of property taxes. They will be allowed a deduction from AGI of A) $16,200. B) $22,500. C) $14,947. D) $21,489.
Answer: D Explanation: Gross itemized deductions of $22,500 are reduced by $1,011 [3% × ($345,000 - $311,300)] to $21,489. Page Ref.: I:2-31; Example I:2-39 Objective: 6
6) Lester, a widower qualifying as a surviving spouse, has $209,000 of salary, five personal and dependency exemptions and itemizes deductions. Lester must use which form to report his taxable income? A) Form 1040ES B) Form 1040EZ C) Form 1040A D) Form 1040
Answer: D Explanation: Itemized deductions may be claimed only on Form 1040. Page Ref.: I:2-35 Objective: 8
23) 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. Page Ref.: I:2-23 and I:2-24; Examples I:2-30 and I:2-31 Objective: 3
6) Married couples will normally file jointly. Identify a situation where a married couple may prefer to file separately. A) The spouse with lower income has substantial medical expenses. B) A couple is separated and contemplating divorce. C) One spouse can be held responsible for the entire tax liability. D) All of the above.
Answer: D Explanation: Responses A, B and C all provide situations where married filing separately may be preferential. Page Ref.: I:2-33 Objective: 7
12) 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. Page Ref.: I:2-5; Table I:2-4 Objective: 1
7) Rob is a taxpayer in the top tax bracket, with over a million in taxable income. He plans to sell stock held long-term for a $100,000 gain. This sale will result in an increase to his tax liability of A) $15,000. B) $20,000. C) $39,600. D) $23,800.
Answer: D Explanation: Tax on capital gain of $20,000 ($100,000 × 20%) + additional tax on investment income of $3,800 ($100,000 × 3.8%) = $23,800. Page Ref.: I:2-31 Objective: 6
9) 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.
Answer: D Explanation: Taxable income is AGI reduced by either the standard deduction or itemized deductions and reduced by personal and dependency exemptions. Page Ref.: I:2-2; Table I:2-1 Objective: 1
5) If an individual with a marginal tax rate of 25% has a long-term capital gain, it is taxed at A) 0%. B) 20%. C) 25%. D) 15%.
Answer: D Explanation: Taxpayers with a marginal tax rate between 25% and 35% will have a 15% tax rate on long-term capital gains. Page Ref.: I:2-30 Objective: 5
24) 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. Page Ref.: I:2-25 Objective: 3
22) 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. Page Ref.: I:2-24 Objective: 3
21) 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. Page Ref.: I:2-24 Objective: 3
44) 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. Page Ref.: I:2-19 Objective: 2
8) Suri, age 8, is a dependent of her parents and has unearned income of $6,000. She must file her own tax return.
Answer: FALSE Explanation: A dependent earning solely unearned income not exceeding $10,000 may report unearned income on the parents' return. Page Ref.: I:2-26 Objective: 3
(T/F) 2) The annual tax reporting form filed with the IRS by C corporations is the Schedule C.
Answer: FALSE Explanation: C corporations file Form 1120. Sole proprietors report business income on Schedule C which is included with individual's Form 1040. Page Ref.: I:2-27 Objective: 4
(T/F) 2) A building used in a business is sold after five years of use for a gain. The gain will be treated as a long-term capital gain.
Answer: FALSE Explanation: Depreciable business property is excluded from the definition of a capital asset. Page Ref.: I:2-30 Objective: 5
(T/F) 3) Charishma is a taxpayer with taxable income exceeding $500,000. She sells a stock for a $50,000 gain. She acquired the stock 13 months earlier. The gain will be taxed at a total tax rate of 20%.
Answer: FALSE Explanation: In addition to the higher 20% long-term capital gain rate, she will also pay the additional 3.8% tax on investment income that applies to higher-income taxpayers. Page Ref.: I:2-31 Objective: 6
(T/F) 2) Tax returns from individual and C corporate taxpayers are due on the 15th day of the third month following the close of the tax year.
Answer: FALSE Explanation: Individual returns are due on the 15th day of the fourth month following the close of the tax year. Beginning with the 2016 tax returns, C corporation tax returns are also due the 15th day of the fourth month. Page Ref.: I:2-35 and I:2-36 Objective: 8
(T/F) 3) Tax returns from individual taxpayers and partnerships are due on the 15th day of the fourth month following the close of the tax year.
Answer: FALSE Explanation: Individual returns are due on the 15th day of the fourth month following the close of the tax year. Beginning with the 2016 tax returns, partnership tax returns are due the 15th day of the third month. Page Ref.: I:2-35 and I:2-36 Objective: 8
(T/F) 3) Generally, when a married couple files a joint return, each spouse is liable for one-half of the entire tax and any penalties incurred.
Answer: FALSE Explanation: Joint liability applies for the full tax. Page Ref.: I:2-33 Objective: 7
(T/F) 3) Generally, deductions for (not from) adjusted gross income are personal expenses specifically allowed by tax law
Answer: FALSE Explanation: Personal expenses, if deductible, are generally from AGI deductions. Page Ref.: I:2-4 Objective: 1
(T/F) 7) 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.
Answer: 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. Page Ref.: I:2-6 Objective: 1
6) 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.
Answer: FALSE Explanation: She meets the age and student status to be subject to kiddie tax, and her unearned income exceeds the $2,100 threshold. Page Ref.: I:2-25 Objective: 3
(T/F) 4) A taxpayer is able to change his filing status from married filing jointly to married filing separately by filing amended return.
Answer: FALSE Explanation: Taxpayers are not able to change their status from filing a joint return to separate returns although they can change their status from separate returns to a joint return by filing an amended return. Page Ref.: I:2-34 Objective: 7
(T/F) 5) Taxpayers have the choice of claiming either the personal and dependency exemption or the standard deduction
Answer: 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. Page Ref.: I:2-5 Objective: 1
(T/F) 6) Taxpayers have the choice of claiming either the personal and dependency exemption or itemized deductions
Answer: 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. Page Ref.: I:2-5 Objective: 1
LO6: Provisions Applicable to Higher-Income Taxpayers (T/F) 1) A married couple in the top tax bracket has a new baby. Due to the birth of the baby their taxable income will be reduced in 2016 by $4,050.
Answer: FALSE Explanation: Taxpayers in the top tax bracket will have AGIs exceeding $311,300 so the personal and dependency exemption phaseout will apply. Page Ref.: I:2-31 Objective: 6
(T/F) 2) Ivan Trent, age five, receive $2,900 of dividends per year from a mutual fund he owns; it is his own source of taxable income. Ivan's parents plan to gift a corporate bond they currently own to him. The bond pays $2,100 of interest income per year. The Trent family overall will save taxes if the bond is transferred to the child.
Answer: FALSE Explanation: The child is subject to kiddie tax because he already receives investment income in excess of the $2,100 threshold. The tax on the interest income from the bond owned by the child will still be taxed at the parents' tax rate. Page Ref.: I:2-32 Objective: 7
(T/F) 5) A qualifying child of the taxpayer must meet the gross income test.
Answer: FALSE Explanation: The gross income test only applies to potential dependents who are not a qualifying child of the taxpayer. Page Ref.: I:2-13 and I:2-14 Objective: 2
(T/F) 8) 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.
Answer: FALSE Explanation: The key support criteria for qualifying child status is that the child cannot provide more than half of her own support. Page Ref.: I:2-14 Objective: 2
(T/F) 12) The person claiming a dependency exemption under a multiple support declaration must provide more than 25% of the dependent's support.
Answer: FALSE Explanation: The minimum support percentage for a person claiming the dependency exemption under the multiple support agreement is 10%. Page Ref.: I:2-17 Objective: 2
(T/F) 2) Mia is a single taxpayer with projected AGI of $259,000 in 2016. She is considering selling a long-term investment before year-end. She expects to realize a gain of $25,000. If Mia sells the investment by December 31, her 2016 taxable income will increase by $25,000.
Answer: FALSE Explanation: The recognition of the gain will cause Mia's AGI to exceed the threshold for both the personal exemption and itemized deduction phaseouts so her taxable income will increase by more than $25,000. Page Ref.: I:2-31 Objective: 6
LO8: Compliance and Procedural Considerations (T/F) 1) The requirement to file a tax return is based on the individual's adjusted gross income.
Answer: FALSE Explanation: The requirement to file is based on the individual's gross income. Page Ref.: I:2-35 Objective: 8
(T/F) 2) Nonresident aliens are allowed a full standard deduction.
Answer: FALSE Explanation: The standard deduction is not available to nonresident aliens. Page Ref.: I:2-12 Objective: 2
LO2: Deductions from Adjusted Gross Income (T/F) 1) 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.
Answer: FALSE Explanation: The standard deduction, set by Congress, is not directly related to itemized deductions. It is the alternative to itemized deductions. Page Ref.: I:2-10 Objective: 2
7) 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. Page Ref.: I:2-26 Objective: 3
13) Alexis and Terry have been married five years and file joint tax returns. Alexis began embezzling funds from her employer during the third year of their marriage. Last year, Alexis suddenly left the country and Terry does not know where she is. In the current year, Terry learned that the IRS had assessed him $27,000 in unpaid taxes due to Alexis's embezzlement. What tax issue(s) are present in Terry's situation? What questions would you ask Terry to determine his appropriate response to the IRS?
Answer: Is Terry eligible for innocent spouse relief? Did Terry benefit financially from Alexis's embezzlement? Did Terry have reason to know of the embezzlement? Page Ref.: I:2-33 Objective: 7
37) What options are available for reporting and paying tax on the unearned income of a child under age 24?
Answer: One option allows the child to report the unearned income on his or her own tax return while calculating the tax by reference to the parents' tax rate. Only unearned income in excess of $2,100 is taxed at the parents' rates. A second option allows the parents to elect to include the child's unearned income on their own return. To be eligible for this election, the child's gross income must be entirely from dividends and interest and must not exceed $10,000. Also, there must be no withholding or estimated payments using the child's social security number. Page Ref.: I:2-25 Objective: 3
12) Oscar and Diane separated in June of this year although they continue to live in the same town. They have twin sons, Blake and Cliff, who remain in the family home with Diane. Oscar's income this year was $45,000 while Diane worked only part-time and made $15,000. Oscar also gambles heavily but told Diane that he had no winnings this year. What tax issues should they consider?
Answer: Oscar and Diane have several choices for filing status. Since they are still married on December 31, the last day of the tax year, they could file jointly. That will probably result in the lowest overall tax liability. However, they should consider joint and several liabilities, especially if Diane fears that Oscar may be hiding income. If Diane is maintaining the home in which at least one dependent child lives, she may be able to file as head of household. Of course, they could file separately which would result in the highest overall tax liability. Page Ref.: I:2-34 Objective: 7
LO3: Determining the Amount of Tax (T/F) 1) A married couple need not live together to file a joint return.
Answer: TRUE Explanation: A couple legally married at year-end can filed a joint return. Page Ref.: I:2-21 Objective: 3
4) An unmarried taxpayer may file as head of household if he maintains a home for his qualifying child.
Answer: TRUE Explanation: A divorced or never married parent can file as head of household if he maintains a home for his qualifying child. Page Ref.: I:2-23 Objective: 3
(T/F) 3) 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.
Answer: TRUE Explanation: A joint return may be filed in the year of death with the deceased spouse getting a full personal exemption. Page Ref.: I:2-22 Objective: 3
(T/F) 9) An individual may not qualify for the dependency exemption as a qualifying child but may still qualify as a dependent.
Answer: 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. Page Ref.: I:2-14 Objective: 2
(T/F) 7) 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.
Answer: TRUE Explanation: An otherwise qualifying child will no longer qualify if he provides more than half of his own support. Page Ref.: I:2-14 Objective: 2
(T/F) 14) A child credit is a partially refundable credit.
Answer: 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. Page Ref.: I:2-19 and I:2-20 Objective: 2
(T/F) 10) 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).
Answer: 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. Page Ref.: I:2-15 Objective: 2
(T/F) 15) 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.
Answer: 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. Page Ref.: I:2-19 and I:2-20 Objective: 2
(T/F) 3) The standard deduction may not be claimed by one married taxpayer filing a separate return if the other spouse itemizes deductions.
Answer: TRUE Explanation: It if a married couple files separately and one spouse itemized deductions, the other spouse must also itemize. Page Ref.: I:2-12 Objective: 2
LO7: Tax Planning Considerations (T/F) 1) Mr. and Mrs. Kusra are in the top tax bracket. They have just had a baby. The Kusras plan to gift a corporate bond they currently own to the baby. The bond pays $2,100 of interest income per year. The Kusra family overall will save taxes if the bond is transferred to the child.
Answer: TRUE Explanation: Kiddie tax ramifications do not apply until the child has earned more than $2.100 of investment income. Page Ref.: I:2-32 Objective: 7
LO5: Treatment of Capital Gains and Losses (T/F) 1) A $10,000 gain earned on stock held 13 months is taxed in a more favorable manner than a $10,000 gain earned on stock held 11 months.
Answer: TRUE Explanation: Lower tax rates apply to long-term capital gains. Page Ref.: I:2-30 Objective: 5
(T/F) 8) 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.
Answer: TRUE Explanation: Nonrefundable credits can only reduce the tax liability to zero. The excess is lost. Page Ref.: I:2-6 Objective: 1
(T/F) 4) An individual who is claimed as a dependent by another person is not entitled to a personal exemption on his or her own return.
Answer: TRUE Explanation: Only one personal exemption is allowed for each person. Page Ref.: I:2-12 Objective: 2
(T/F) 4) Generally, itemized deductions are personal expenses specifically allowed by the tax law.
Answer: TRUE Explanation: Personal expenses are not allowed as deductions unless specifically provided in the tax law. Page Ref.: I:2-4 Objective: 1
LO4: Business Income and Business Entities (T/F) 1) The only business entity that pays federal income taxes is the C corporation.
Answer: TRUE Explanation: S corporations and partnerships are both flow-through entities. Sole proprietors report the sole proprietorship income directly on their individual income tax return. Page Ref.: I:2-27 through I:2-29 Objective: 4
(T/F) 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.
Answer: TRUE Explanation: See Additional Comment, p. I:2-3. Page Ref.: I:2-3 Objective: 1
(T/F) 2) A legally married same-sex couple can file a joint return.
Answer: TRUE Explanation: The Supreme Court has recognized same-sex marriages. Legally married same-sex couples can file joint federal income tax returns. Page Ref.: I:2-22 Objective: 3
(T/F) 13) 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.
Answer: TRUE Explanation: The custodial parent will take the dependency exemption for the child unless a parental release is signed. Page Ref.: I:2-17 Objective: 2
5) For 2016, unearned income in excess of $2,100 of a child under age 18 is generally taxed at the parents' rate.
Answer: TRUE Explanation: The kiddie tax (i.e. tax at the parents' rate) applies when a child's unearned income exceeds $2,100. Page Ref.: I:2-25 Objective: 3
LO1: Formula for Individual Income Tax (T/F) 1) The term "gross income" means the total of all income from any source, but after reduction for exclusions.
Answer: TRUE Explanation: The tax law includes all sources of income in gross income unless specifically excluded. Page Ref.: I:12-3 Objective: 1
(T/F) 11) 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.
Answer: TRUE Explanation: Tie-breaker rules favor the taxpayer who can claim the dependent under the qualifying child rules. Page Ref.: I:2-16 Objective: 2
(T/F) 6) 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.
Answer: TRUE Explanation: Two primary considerations for qualifying child status are age and full-time student status. In addition, an otherwise eligible individual may qualify. Page Ref.: I:2-13 and I:2-14 Objective: 2
11) Discuss why Congress passed the innocent spouse provision and detail the requirements to be met in order to qualify as an innocent spouse and be relieved of liability for tax on unreported income.
Answer: The provision was passed because each spouse is liable for the entire tax on a joint return as well as penalties imposed. This would not be fair if one spouse concealed information regarding income or deductions from the other spouse. An innocent spouse is relieved of liability when 1. The amount is attributable to grossly erroneous items of the other spouse. 2. The innocent spouse did not know of and had no reason to know that there was such an understatement of tax. 3. To hold the innocent spouse liable for the understatement would be inequitable. 4. The innocent spouse elects relief within two years after the IRS begins collection activities. Page Ref.: I:2-34 Objective: 7
48) 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.
Page Ref.: I:2-11; Example I:2-3 Objective: 2
19) 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.
Page Ref.: I:2-11; Example I:2-4 Objective: 2
49) 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.
Page Ref.: I:2-11; Example I:2-4 Objective: 2
50) 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?
Page Ref.: I:2-15; Example I:2-14 Objective: 2
17) 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.
Page Ref.: I:2-3 through I:2-7; Example I:2-1 Objective: 1
18) 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.
Page Ref.: I:2-3 through I:2-7; Example I:2-1 Objective: 1
19) 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)?
Page Ref.: I:2-3 through I:2-7; Example I:2-1 Objective: 1
47) 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.
The standard deduction is increased because of age for both and blindness for Martha. Page Ref.: I:2-10 and I:2-11 Objective: 2
