Accy 405 - Chapter 3: Tax Formula and Tax Determination; An Overview of Property Transactions

James is single and had taxable income of $103,000 in 2020. His tax liability is:

$18,799.50 = [$14,605.50 + 24%($103,000 − $85,525)]. *Based on the 2020 Tax Rate Schedule for Single Taxpayers*

Martin provides more than half the support of his uncle Mike who does not live with him. Mike's income for the year includes dividends of $1,100, earnings from walking the neighborhood dogs of $1,000, nontaxable Social Security benefits of $5,000, and nontaxable interest from municipal bonds in the amount of $6,000. What is Mike's gross income?

$2,100 Mike's gross income is $2,100 ($1,100 dividends + $1,000 earnings from dog walking).

James and Judy have one dependent child, John, who is 12. In 2020, John received $3,500 of interest income and has no earned income. John's taxable income is:

$2,400 = ($3,500 - $1,100 ) Kiddie Tax

Annie, age 70 and single, is claimed as a dependent on her daughter's tax return. During 2020, she had interest income of $2,400 and $800 of earned income from babysitting. Annie's taxable income is:

$400 $3,200 gross income - $1,150 [greater of $1,100 or $1,150 ($800 earned income + $350)] - $1,650 (additional standard deduction for age 65 and older) = $400.

During 2020, Hayden had the following transactions: Salary: $92,000 Accident insurance proceeds: $4,000 Inheritance from grandparent: $50,000 Contribution to traditional IRA: $6,000 Capital losses: $7,000 Hayden's AGI is:

$79,000 $92,000 (salary) - $6,000 (IRA contribution) - $7,000 (capital losses) = $79,000. The inheritance and accident insurance procceds are non-taxable exclusions. The capital losses are deductible.

The maximum tax rate of long-term gains on collectibles held for more than one year is:

28% When a taxpayer sells a collection or collectible item, taxes must be paid on the gain on the sale. The gain will be classified as short- or long-term based on the amount of time the item has been held by the taxpayer. The highest tax rate that may be applied to the gains classified as long-term is 28%

Steven and Trudy Madison are husband and wife and file a joint return for 2020. Both are under 65 years of age. They provide more than half of the support of their daughter, Jane (age 25), who is a full-time medical student. Jane receives a $5,000 scholarship covering her tuition at college. They furnish all the support of Isabel (Steven's mother), who is age 80 and lives in a nursing home. They also provide more than half the support for Maggie (age 66), who is a friend of the family and lives with them. How many dependents do the Madison's have?

3 dependents Jane is not a qualifying child—although a full-time student, she is not under age 24. Jane does meet the qualifying relative category as the type of scholarship aid she receives is nontaxable (the gross income test is satisfied). Isabel is not a member of the household but satisfies the relationship test. Maggie does not satisfy the relationship test but is a member of the household.

Compute the taxable income for 2020 for Aiden on the basis of the following information. Aiden is married but has not seen or heard from his wife since 2018. Salary: $80,000 Interest on bonds issued by City of Boston: $3,000 Interest on CD issued by Wells Fargo Bank: $2,000 Cash dividend received on Chevron common stock: $2,200 Life insurance proceeds paid upon death of aunt (Aiden was the designated beneficiary of the policy): $200,000 Inheritance received upon death of aunt: $100,000 Jackson (a cousin) repaid a loan Aiden made to him in 2014 (no interest was provided for) $5,000 Itemized deductions (state income tax, property taxes on residence, interest on home mortgage, and charitable contributions) $9,700 Number of dependents (children, ages 17 and 18, and mother-in-law, age 70): 3 dependents Age: 43

AGI = (Salary + interest on CD + cash dividend) AGI = ($80,000 + $2,000 + $2,200) = $84,200 Taxable Income = AGI - standard deduction for head of household $65,550 = $84,200 - $18,650

Compute the taxable income for 2020 for Emily on the basis of the following information. Her filing status is single. Salary $85,000 Interest income from bonds issued by Xerox $1,100 Alimony payments received (divorce occurred in 2014) $6,000 Contribution to traditional IRA $6,000 Gift from parents $25,000 Short-term capital gain from stock investment $2,500 Amount lost in football office pool $500 Age: 40

AGI: Salary = $85,000 Add: Interest income from bonds issued by Xerox = $1,100 Alimony payments received (2014) = $6,000 Short-term capital gain from stock investment = 2,000 Less: Deductions Contribution to traditional IRA = 6,000 AGI = 85000 + 1100 +6000+ 2000 - 6,000 = $88,100 Gift from parents in not taxable to recipient. Amount lost in football office pool is not tax deductible. Taxable Income = AGI - Standard deduction = $88,100 - $12,400 = $75,700

Partial List of Exclusions from Gross Income

Accident insurance proceeds Alimony (divorces after 2018) Annuities (cost element) Bequests Child support payments Cost-of-living allowance (for military) Damages for personal injury or sickness Gifts received Group term life insurance, premium paid by employer (for coverage up to $50,000) Inheritances Interest from state and local (i.e., municipal) bonds Life insurance paid upon death Meals and lodging (if furnished for employer's convenience) Military allowances Minister's dwelling rental value allowance Railroad retirement benefits (to a limited extent) Scholarship grants (to a limited extent) Social Security benefits (to a limited extent) Veterans' benefits Welfare payments Workers' compensation benefits

Partial List of Gross Income Items

Alimony (divorces before 2019) Annuities (income element) Awards Back pay Bargain purchase from employer Bonuses Breach of contract damages Business income Clergy fees Commissions Compensation for services Death benefits Debts forgiven Director's fees Dividends Embezzled funds Employee awards (in certain cases) Employee benefits (except certain fringe benefits) Estate and trust income Farm income Fees Gains from illegal activities Gains from sale of property Gambling winnings Group term life insurance, premium paid by employer (for coverage over $50,000) Hobby income Interest Jury duty fees Living quarters, meals (unless furnished for employer's convenience) Mileage allowance (in certain cases) Military pay (unless combat pay) Notary fees Partnership income Pension distributions Prizes Professional fees Punitive damages Rents Rewards Royalties Salaries Severance pay Strike and lockout benefits Supplemental unemployment benefits Tips and gratuities Travel allowance (in certain cases) Treasure trove (found property) Wages

A special type of capital asset, the gain from which is taxed at a maximum rate of 28% if the holding period is more than one year. EX: art, rugs, antiques, gems, metals, stamps, some coins & bullion, & alcoholic beverages held for investment

Collectibles

The electronic filing of a tax return. The filing is either direct or indirect. In direct filing, the taxpayer goes online using a computer & tax return preparation software. Indirect filing occurs when a taxpayer utilizes an authorized IRS e-file provider. The provider often is the tax preparer.

E-file

A married individual whose spouse itemizes deductions can still claim the standard deduction. True or False?

False, Spouses who file separately must both itemize or both claim the standard deduction.

The exemption amount is $4,200 in 2020. True or False?

False, The exemption amount is $4,300 in 2020. It was $4,200 in 2019.

In 2020, Yule is 35 and single. If he has itemized deductions of $12,400, making an early, extra charitable contribution of $1,000 to his favorite charity before year-end would not provide any tax benefit to him, so he should claim the standard deduction alternative. True or False?

False, Yule's standard deduction is $12,400. Making the charitable contribution would increase his total itemized deductions to $13,400. Since this is in excess of his allowable standard deduction, it would provide a tax benefit to him.

Nondeductible Expenses

Many expenses are not deductible and, therefore, provide no tax benefit. Here are some examples:Personal living expenses. Employee business expenses (unless reimbursed by employer).* Most investment expenses (e.g., investment counsel fees, safe deposit box rental, and publications).* Tax return preparation fees.* Losses on the sale of personal use property (e.g., the furniture you own). Hobby expenses.* Life insurance premiums. Gambling losses (in excess of gains). Child support payments. Fines and penalties. Political contributions. Funeral expenses. Capital expenditures.

Deductions from Adjusted Gross Income

Partial List of Itemized Deductions: Medical expenses in excess of 7.5% of AGI (10% in 2021) State and local income or sales taxes* Real estate taxes* Personal property taxes* Interest on home mortgage (subject to certain limitations) Investment interest (up to the amount of net investment income) Charitable contributions (within specified percentage limitations) Casualty and theft losses in excess of 10% of AGI

Sam and Abby are dependents of their parents, and each has income of $2,100 for the year. Sam's standard deduction for the year is $1,100, and Abby's is $2,450. Because their income is the same, what causes the difference in the amount of the standard deduction?

Sam's $2,100 is unearned income and therefore he is allowed the minimum standard deduction of $1,100. Abby's $2,100 is earned income, therefore she is allowed a $2,450 standard deduction. [$2,100 (earned income for the year) + $350]

Rate schedules that are used by upper-income taxpayers & those not permitted to use the tax table. Separate rate schedules are provided for married individuals filing jointly, heads of households, single taxpayers, estates & trusts, & married individuals filing separate returns. § 1.

Tax Rate Schedules

A table that is provided for taxpayers w/ less than $100,000 of taxable income. Separate columns are provided for single taxpayers, married taxpayers filing jointly, heads of households, & married taxpayers filing separately. § 3.

Tax Table

Compute the taxable income for 2020 in each of the following independent situations: a) Drew and Meg, ages 40 and 41, respectively, are married and file a joint return. In addition to four dependent children, they have AGI of $125,000 and itemized deductions of $27,000. b) Sybil, age 40, is single and supports her dependent parents who live with her, as well as her grandfather who is in a nursing home. She has AGI of $80,000 and itemized deductions of $8,000. c) Scott, age 49, is a surviving spouse. His household includes two unmarried stepsons who qualify as his dependents. He has AGI of $75,000 and itemized deductions of $10,100. d) Amelia, age 33, is an abandoned spouse (head of household) who maintains a household for her three dependent children. She has AGI of $58,000 and itemized deductions of $10,650. e) Dale, age 42, is divorced but maintains the home in which he and his daughter, Jill, live. Jill is single and qualifies as Dale's dependent. Dale has AGI of $64,000 and itemized deductions of $9,900.

Taxable Income = AGI - higher deduction: (standard) or (itemized) a) $98,000 = $125,000 - higher deduction: ($24,800) or ($27,000) b) $61,350 = $80,000 - higher deduction: ($18,650) or ($8,000) c) $50,200 = $75,000 - higher deduction: ($24,800) or ($10,100) d) $39,350 = $58,000 - higher deduction: ($18,650) or ($10,650) e) $45,350 = $64,000 - higher deduction: ($18,650) or ($9,900)

Rebecca sells her personal scooter for $550. She purchased the scooter for $700 three years ago. She also sells a painting for $1,200 that she acquired five years ago for $900. What are the tax implications of these sales?

The sale of the scooter results in a realized loss of $150 but personal use, cannot be offset, not deductible The painting results in a realized gain of $ 300. However, Rebecca only recognizes the gain on the painting

Donald is divorced and maintains a home in which he and a dependent friend live. Donald does not qualify for head-of-household filing status. True of False?

True, To be head of household, the dependent involved must meet be either a qualifying child or a qualifying relative who meets the relationship test. This is not the case with a friend.

The kiddie tax applies if a child is a full-time student under age 24. True or False?

True, the kiddie tax, applies to any child who is under age 19 (or under age 24 if a full-time student)

During 2020, Kevin has the following capital transactions: Long-term capital gain $ 6,000 Long-term collectible gain $2,000 Short-term capital gain $4,000 Short-term capital loss $10,000 After the netting process, the result would be a:

a Long-term capital gain of $2,000. First, the short-term capital gain and short-term capital loss are combined, resulting in a short-term capital loss of $6,000. ($4,000 - $10,000) = -$6,000 Of this short-term capital loss, $2,000 is applied against the Long-Term collectible gain of $2,000, and the $4,000 balance is applied against the long-term capital gain of $6,000. The result is a long-term capital gain of $2,000. ($2,000 - $2,000), ($6,000 - $4,000) = $2,000

During 2020, Jenny, age 14, lives in a household with her father, uncle, and grandmother. The household is maintained by the uncle. The parties, all of whom file separate returns, have AGI as follows: father ($30,000), uncle ($50,000), and grandmother ($40,000). a) Who is eligible to claim Jenny as a dependent? b) Who has precedence to claim Jenny as a dependent?

a) All three are qualifying relatives b) Jenny's father is eligible to claim jenny as dependent under the section 152(F)(1) of Federal tax law

For tax year 2020, determine the number of dependents in each of the following independent situations: a) Leo and Amanda (ages 48 and 46, respectively) are husband and wife and furnish more than 50% of the support of their two children, Elton (age 18) and Trista (age 24). During the year, Elton earns $4,500 providing transportation for elderly persons with disabilities, and Trista receives a $5,000 scholarship for tuition at the law school she attends. b) Audry (age 45) was divorced this year. She maintains a household in which she, her ex-husband (Clint), and his mother (Olive) live and furnishes more than 50% of their support. Olive is age 91 and blind. c) Crystal, age 45, furnishes more than 50% of the support of her married son, Andy (age 18), and his wife, Paige (age 19), who live with her. During the year, Andy earned $8,700 from a part-time job. All parties live in Iowa (a common law state). d) Assume the same facts as in part (c), except that all parties live in Washington (a community property state).

a) Two. Elton is a qualifying child, so his gross income does not matter. Trista is not a qualifying child-although a full-time student, she is not under age 24. However, Trista falls within the qualifying relative category. She passes the gross income test because the tuition portion of a scholarship is nontaxable. b) One. Clint cannot qualify as a member of Audry's household in the year of the divorce. Olive meets the relationship test. c) Two. Because Andy is a qualified child, he is not subject to the gross income test. Paige meets the gross income requirements of qualifying relative. d) One. As a qualifying child, Andy is still immune from the gross income test. In a community property situation, however, Paige is treated as having $4,200 in gross income. Thus, she does not meet the gross income test and cannot be a qualifying relative.

Compute the 2020 standard deduction for the following taxpayers. a) Ellie is 15 and claimed as a dependent by her parents. She has $800 in dividends income and $1,400 in wages from a part-time job. b) Ruby and Woody are married and file a joint tax return. Ruby is age 66, and Woody is 69. Their taxable retirement income is $10,000. c) Shonda is age 68 and single. She is claimed by her daughter as a dependent. Her earned income is $500, and her interest income is $125. d) Frazier, age 55, is married but is filing a separate return. His wife itemizes her deductions.

a. Standard deduction = $1750. When filing her own tax return, Maggie is limited to the greater of $1,100 or $1,750 [earned income ($1,400) +$350] b. Standard deduction = $28,100. A taxpayer who is age 65 or over or blind in 2020 qualifies for an additional standard deduction of $1,650. Ruby and Woody's standard deduction is $24800 plus the additional $1,650 for Ruby being age 65 or older and another $1,650 for Woody's being age 65 or older. [$24,800 + ($1,650 * 2)] = $28,100 c. Standard deduction = $2,500. When filing her own tax return, Shonda is limited to the greater of $1,100 or $850 [earned income ($500) + 350]. A dependent who is 65 or older or blind is also allowed the additional standard deduction of $1,650 on his or her own return. ($1,100) or ($500 + $350) + ($1,650) = $2,500 d. Standard deduction = $0. Frazier is ineligible to use the standard deduction and therefore must itemize because he is married filing a separate return when his spouse itemizes deductions. Both spouses must itemized deductions or claim the standard deduction if married, filing separately.

Which of the following is not a deductible expense? a.Funeral expenses b.Real estate taxes c.Personal property taxes d.Interest on student loans e.Charitable contributions

a.Funeral Expenses Non-deductible expenses include personal living expenses, losses on the sale of personal use property, hobby expenses, life insurance premiums, gambling losses, child support payments, fines and penalties, political contributions, funeral expenses, and capital expenditures.

It is mandatory for most tax return preparers to use: a.The e-file program to file tax returns for their clients. b.Only Form 1040 Schedule 1. c.Either Form 1040 Schedule 1 or Form 1040 Schedule 2. d.Paper-based tax filing processes for their clients. e.Form 1040 Schedule E.

a.The e-file program to file tax returns for their clients. The e-file program is more efficient and is easier for the IRS to manage. Accordingly, its use is required for most tax return preparers.

The abandoned spouse provision enables a married taxpayer w/ a dependent child whose spouse didn't live in the taxpayer's home during the last 6 months of the tax year to file as a head of household rather than as married filing separately.

abandoned spouse

Raoul is a widow, age 71, who lives with his son and is his dependent. During 2020, Raoul's sources of income are interest income of $725 from his bank savings account and interest income of $400 from tax-exempt municipal bonds. What is Raoul's gross income, and must he file a tax return? a.Gross income is $400, and he needs to file a tax return. b.Gross income is $725, and he does not need to file a tax return. c.Gross income is $725, and he needs to file a tax return. d.Gross income is $400, and he does not need to file a tax return. e.Gross income is $1,125, and he needs to file a tax return.

b.Gross income is $725, and he does not need to file a tax return. Raoul's gross income is $725 from the interest earned on the bank account. He does not need to file a tax return because his gross income is less than $2,750, or $1,100 plus his $1,650 additional standard deduction.

Capital assets are defined in the Code as any property held by the taxpayer other than certain items including: a.Inventory, accounts receivable, and intangible assets used in a business. b.Inventory, accounts receivable, and depreciable property used in a business. c.Inventory, accounts payable, and depreciable property used in a business. d.Accounts payable and depreciable property or real estate used in a business. e.Accounts receivable, long-term investments, and depreciable property used in a business.

b.Inventory, accounts receivable, and depreciable property used in a business. The Code definition of capital assets notes the items excluded from the category: any property held by the taxpayer other than certain items including inventory, accounts receivable, and depreciable property or real estate used in a business are capital assets. Examples of capital assets held by an individual taxpayer include a personal residence, automobile, corporate securities, and land.

A qualifying relative must meet which of the following tests? a.Support, exemption, and residency tests b.Relationship, gross income, and support tests c.Relationship, gross income, and exemption tests d.Gross income, exemption, and residency tests e.Age and residence tests

b.Relationship, gross income, and support tests There are several "tests" for a qualifying relative. They are like but not as extensive as the tests for a qualifying child. They include the relationship test, the gross income test, and the support test.

The rates in the Tax Rate Schedules are often referred to as: a.Regulatory. b.Statutory. c.Marginal. d.Computational. e.Average.

b.Statutory The rates in the Tax Rate Schedules are often referred to as statutory because they are set by the tax law.

The standard deduction is the sum of which of the following components? a.Basic, additional, and state standard deductions b.Standard deduction and basic deduction c.Basic standard deduction and additional standard deduction d.Federal standard deduction and state standard deduction e.State, local, and Federal standard deductions

c.Basic standard deduction and additional standard deduction The standard deduction is comprised of two components: the basic standard deduction and the additional standard deduction. The basic deduction applies to all taxpayers, and the additional deduction is limited in scope.

Which of the following is the current status of the exemption deduction? a.There are four categories in effect from 2018-2025. b.A third category has been added and is effective through 2025. c.It has been suspended through 2025. d.It is the same as it was in 2017. e.The standard deduction has been decreased and the exemptions have been increased through 2025.

c.It has been suspended through 2025. in 2018, Congress suspended the deduction for exemptions through 2025 (and increased the standard deduction amount for taxpayers).

A tax credit based solely on the number of qualifying children under 17. The maximum credit available is $2,000 per qualifying child. (In addition, a $500 nonrefundable credit is available for qualifying dependents other than qualifying children.) A qualifying child must be claimed as a dependent on a parent's tax return & have a Social Security number to qualify for the credit. Taxpayers who qualify for the child tax credit may also qualify for a supplemental credit. The supplemental credit is treated as a component of the earned income credit and is therefore refundable. The credit is phased out for higher-income taxpayers. § 24. See also dependent tax credit.

child tax credit

The tax law provides an exemption for each individual taxpayer & an additional exemption for the taxpayer's spouse if a joint return is filed.An individual may also claim a dependency exemption for each dependent, provided certain tests are met. The TCJA of 2017 suspended the deduction for exemptions for tax years after 2017 (& through 2025).

dependency exemptions

For 2018 - 2025, the TCJA of 2017 replaced the dependency exemption w/ a $500 nonrefundable credit. This credit can be claimed for dependents who aren't a qualifying child or under the age of 17. The dependent must be a citizen or resident of the U.S.

dependent tax credit

Which of the following statements regarding the married, filing jointly status is false? a.Filing a joint return carries the potential disadvantage of joint and several liability. b.If married persons file separately, they can change later to a joint return. c.Marital status is determined as of the last day of the tax year. d.Once a joint return has been filed and the due date has passed for a particular year, the spouses cannot switch to separate returns for the year. e.Filing a joint return avoids the marriage penalty.

e.Filing a joint return avoids the marriage penalty. Filing a joint return subjects high-income earning spouses to a marriage penalty of owing more taxes together than they would if they were able to file as single status

Which of the following taxpayers may not use the Tax Table method? a.Taxpayers with taxable income above $95,000 b.Taxpayers with taxable income below $20,000 c.Taxpayers with taxable income between $25,000 and $75,000 d.Taxpayers with taxable income between $75,000 and $95,000 e.Taxpayers with taxable income above $100,000

e.Taxpayers with taxable income above $100,000 Those not eligible for the Tax Table Method are: - Individuals whose taxable income exceeds the maximum (ceiling) amount in the Tax Table. In 2019, the Tax Table applies to taxable income below $100,000 for Form 1040. - an estate or a trust.

Individual taxpayers are placed in 1 of 5 filing statuses each year (single, married filing jointly, married filing separately, surviving spouse, or head of household). Marital status & household support are key determinants. Filing status is used to determine the taxpayer's filing requirements, standard deduction, eligibility for certain deductions & credits, & tax liability.

filing status

An unmarried individual who maintains a household for another & satisfies certain conditions set forth in § 2(b). This status enables the taxpayer to use a set of income tax rates that are lower than those applicable to other unmarried individuals but higher than those applicable to surviving spouses & married persons filing a joint return.

head-of-household

Personal expenditures allowed by the Code as deductions from adjusted gross income. EX: certain medical expenses, interest on home mortgages, state income taxes, & charitable contributions. reported on Schedule A of Form 1040.

itemized deductions

Passive income, such as interest & dividends, that is recognized by a child under age 19 (or under age 24 if a full-time student) is taxed according to the brackets applicable to the child's parent(s), generally to the extent the income exceeds $2,200 for 2020. The additional tax is assessed regardless of the source of the income or the income's underlying property. § 1(g). Standard deduction for a dependent child in 2020 (and 2019) is the greater of: $1,100 of the standard deduction or Earned Income + $350

kiddie tax

The additional tax liability that results for a married couple when compared w/ what their tax liability would be if they weren't married & filed separate returns.

marriage penalty

To qualify for a dependency exemption, the support test must be satisfied. This requires that over 50% of the support of the potential dependent be provided by the taxpayer. Where no one person provides more than 50% of the support, a multiple support agreement enables a taxpayer to still qualify for the dependency exemption. Any person who contributed more than 10% of the support is entitled to claim the exemption if each person in the group who contributed more than 10% files a written consent (Form 2120). Each person who is a party to the multiple support agreement must meet all of the other requirements for claiming the dependency exemption. § 152(c).

multiple support agreement

The tax law provides an exemption for each individual taxpayer & an additional exemption for the taxpayer's spouse if a joint return is filed.An individual may also claim a dependency exemption for each dependent, provided certain tests are met. The TCJA of 2017 suspended the deduction for exemptions for tax years after 2017 (& through 2025)

personal exemptions

An individual who, as to the taxpayer, satisfies the relationship, abode, & age tests. To be claimed as a dependent, such individual must also meet the citizenship & joint return tests & not be self-supporting. §§ 152(a)(1) & (c).

qualifying child

An individual who, as to the taxpayer, satisfies the relationship, gross income, support, citizenship, & joint return tests. Such an individual can be claimed as a dependent of the taxpayer. §§ 152(a)(2) & (d).

qualifying relative

The individual taxpayer can either itemize deductions or take the standard deduction.The amount of the standard deduction depends on the taxpayer's filing status (single, head of household, married filing jointly, surviving spouse, or married filing separately). For 2020, the amount of the standard deduction ranges from $12,400 (for single) to $24,800 (for married, filing jointly). Additional standard deductions of either $1,300 (for married taxpayers) or $1,650 (for single taxpayers) are available if the taxpayer is blind or age 65 or over. Limitations exist on the amount of the standard deduction of a taxpayer who is another taxpayer's dependent.The standard deduction amounts are adjusted for inflation each year. § 63(c).

standard deduction

When a husband or wife predeceases the other spouse, the survivor is known as a surviving spouse. Under certain conditions, a surviving spouse may be entitled to use the income tax rates in § 1(a) (those applicable to married persons filing a joint return) for the 2 years after the year of death of his or her spouse. § 2(a).

surviving spouse

Income received but not yet earned. Normally, such income is taxed when received, even for accrual basis taxpayers.

unearned income