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
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
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
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
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 2018 tax year. a. Kenny died on March 2, 2017. Marge, his wife, and Bart, their son, survive. Marge filed a joint return in 2017. Bart, age 18 in 2018, is a part-time college student and continues to live at home with his mother. He works part-time, earning $3,200. What is Marge's filing status in 2018? 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, 2018, 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 2015, filed a joint tax return for 2015. 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 2018?
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
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 24%. Due to the corporation's results and the distribution paid, the IRS will receive total taxes of A) $12,000. B) $12,900. C) $13,500. D) $10,500.
Answer: A Corporate tax $50,000 × 21% corporate tax rate on $50,000 $10,500 Lily's tax on dividend $10,000 × 15% dividend rate 1,500 Total tax $12,00
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 2018, 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) $24,000. B) $25,300. C) $25,600. D) $13,600.
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 2018? A) $1,050 B) $2,000 C) $2,350 D) $12,000
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 taxable income of 15,000 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) 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 $4,800. Ben and Karla can claim how many personal and dependency exemptions on their tax return? A) The couple can claim both twin as a dependent B) The couple cannot claim either twin as a dependent C) The couple can only claim the daughther as a dependent D) The couple can only claim the son as a dependent.
Answer: A Explanation: 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 both twins as dependents.
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. Which of the following statements is correct regarding the number of dependents Anita can claim? A) Anita can claim her daughter, but not her son, as a dependent B) Anita can claim her son, but not her daughter, as a dependent C) Both the son and daughter qualify as Anita's dependents D) Neither the daughter nor the son qualify as Anita's dependent
Answer: A Explanation: Anita will claim 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
27) Yusef, age 15, is a dependent of his parents. In 2018 he earned $5,000 from a part-time job and $8,000 of interest income on bonds given him by his grandparents, resulting in taxable income of $7,650. Under kiddie tax rules, calculation of tax requires dividing taxable income between net unearned income and earned taxable income. Yusef's taxable income will be divided as follows: A) net unearned income -$5,900 and earned taxable income -$1,750. B) net unearned income -$7,650 and earned taxable income -$0. C) net unearned income -$0 and earned taxable income -$7,650. D) net unearned income -$1,750 and earned taxable income -$5,900.
Answer: A Explanation: Unearned income $8,000 Less: Statutory deduction -1,050 Standard deduction -1,050 Net unearned income $5,900 Taxable income $7,650 Less net unearned income -5,900 Earned taxable income $1,750
49) In 2018, Sam is single and rents an apartment for which he pays $800 per month, pays state income tax of 2,000 and make charitable contribution of 1,000. Sam's adjusted gross income is 47,000.
Answer: Adjusted gross income $47,000 Minus: Standard deduction ( 12,000) Taxable income $35,000
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 2018. 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 2019. What tax issues are present in this situation?
Answer: Are Paul and Hannah able to claim the baby as a dependent on their 2018 tax return and claim a child tax credit? Page Ref.: I:2-13 and I:2-14 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
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
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
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
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 2018 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
20) On June 1, 2018, Ellen turned 65. Ellen has been a widow for five years and has no dependents. Her standard deduction is A) $25,300. B) $24,000 C) $25,600. D) $13,600.
Answer: C Explanation: $12,000 + $1,600 = $13,600 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 $4,150. 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
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
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
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 is A) married filing separately B) single C) head of household. D) Married filing jointly.
Answer: C Explanation: Dave's mother qualifies as his dependent. 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 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 $13,000 during the year, which was her only income. What is her standard deduction? A) $13,000 B) $1,050 C) $12,000 D) $13,350
Answer: C 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. 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
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
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
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) $22,000 C) $23,100 D) $38,500
Answer: C Explanation: Taxable income is $110,000 ($350,000 - $240,000). The tax liability is $23,100[.21 × 10,000 Page Ref.: I:2-27 Objective: 4
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
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
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
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 2018, 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 2018 and 2019 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
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
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
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: Single taxpayers with taxable income exceeding $38,600 but less than $425,800 will have a 15% tax rate on long-term capital gains. The 24% marginal tax rate for single taxpayers ranges from $82,500 to $157,500.
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) 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
(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
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
19) The following information is available for Bob and Brenda Horton, a married couple filing a joint return, for 2018. Both Bob and Brenda are age 32 and have no dependents. Salaries: $200,000 Interest income: 12,000 Deductible IRA contributions: 11,000 Itemized deductions: 25,600 Withholding: 31,000 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)?
Answer: Hortons Salary $200,000 Interest 12,000 Gross Income $212,000 a. Minus: IRA Contributions 11,000 Adjusted gross income $201,000 b. Minus: Itemized deductions ( 25,600) Taxable Income $175,400 c. Tax liability (using Rate Schedule) * $30,675 d. Minus: Withholding - 31,000 Tax due (refund) ( $ 325) e. *$28,179 + [.24 (175,400 - 165,000)] Page Ref.: I:2-3 through I:2-7; Example I:2-1 Objective: 1
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
11) 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
47) Sean and Martha are both over age 65 and Martha is considered blind by tax law standards. Their total income in 2018 from part-time jobs and interest income from a bank savings account is $80,000. Their itemized deductions are $25,000. Required: Compute their taxable income.
Answer: Salary & interest $60,000 Less: Standard deduction [$24,000 + (3 × 1,300)] (27,900) Taxable income $32,100 The standard deduction is increased because of age for both and blindness for Martha.
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 $2,500 or 1,400. If the taxpayer has one or two qualifying children. 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 $2,500 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
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
23) Tobe is a 22-year-old college student with $5,000 of interest income and $6,000 of earned income. Kiddie tax will apply to him if A) he is a part-time student and the cost of his support exceeds $12,000. B) he is a part-time student and the cost of his support is $12,000 or less. C) he is a full-time student and the cost of his support exceeds $12,000. D) he is a full-time student and the cost of his support is $12,000 or less.
D) he is a full-time student and the cost of his support is $12,000 or less. Answer: C Explanation: Kiddie tax will apply to a full-time student between the ages of 19 through 23 with unearned income exceeding $2,100 in 2018 and whose earned income is less than or equal to one-half of his support.
45) Amanda has two dependent children, ages 10 and 12. She earned $30,000 from her waitress job. How much of her child credit is refundable? A) $1,200 B) $1,400 C) $2,800 D) $4,000
Explanation: The child credit earned is $4,000 ($2,000 per child), of which $1,200 will offset the income tax liability. The refundable component of the $2,800 balance is limited to $1,400: the lesser of (1) 15% of the taxpayer's earned income in excess of $2,500 (which is $4,125) or (2) $1,400.
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.
Proprietorship S Corporation C Corporation Business income: 15 Copyright © 2019 Pearson Education, Inc. Operating income $100,000 $100,000 $100,000 Compensation paid to Paige ( 50,000) ( 50,000) Charitable contributions ( 5,000) Net business income $100,000 $ 50,000 $ 45,000 Corporate income tax $ 9,450 Paige's income: Business income (above) $100,000 $ 50,000 Compensation (above) 50,000 $ 50,000 Dividends 14,000 Other income 6,000 6,000 6,000 Adjusted gross income $106,000 $106,000 $ 70,000 Charitable contributions 5,000 5,000 Other itemized deductions 12,000 12,000 12,000 Taxable income $ 89,000 $ 89,000 $ 58,000 Individual income tax $ 15,650* $ 15,650* $ 7,826** Total tax $ 15,650 $ 15,650 $ 14,576 *$14,089.50 + [.24 × ($89,000 -82,500) rounded **Tax on dividends: $14,000 × .15 = $2,100 plus Tax on taxable income of $58,000 - 14,000 or $44,000: $4,453.50 + [.22 × ($44,000 - 38,700)] = $5,620 (rounded). The total is $7,720.
17) Hannah is single with no dependents and has a salary of $102,000 for 2018, along with tax-exempt interest income of $3,000 from a municipality. Her itemized deductions total $12,600. Required: Compute her taxable income.
Salary: 102,000 Less Itemized deductions (12,600) Taxabe income +=89,400
42) Nate and Nikki have two dependent children ages 12, and 15. Their modified AGI is $410,000. What is the amount of the child credit to which they are entitled? A) $0 B) $500 C) $3,500 D) $4,000
The child credit before the phase-out is $4,000 (2 × $2,000); the 17-year-old does not qualify. They have excess AGI of $10,000 ($410,000 - $400,000). Their credit should be reduced by 10 ($10,000/$1,000) × $50 = $500. Thus, their child credit is $3,500. Objective: 2