Chapter 14

Which of the following statements is false?

The taxpayer will opt to take the standard deduction if their AGI is less than $72,600. Reason: The taxpayer will opt for the greater of total itemized deductions or the standard deduction, irrespective of their AGI.

Mr. and Mrs. White file a joint return. They have two children. Both are full-time college students, and the Whites provide more than half of their financial support. Trenton is 22 years old, lives on campus, and he earned $7,000 from a part-time job. Lisa is 26 years old, lives at home, and earns $2,000 from a part-time job. Which of the following statements are true? (Select all that apply.)

Trenton is a qualifying child. Lisa is a qualifying relative. Reason: Trenton is a qualifying child because he is a full-time student and under the age of 24. Reason: Lisa is not a qualifying child because she is not under the age of 24. However, she does meet the requirements of a qualifying relative.

The determination that an individual is a dependent has the potential to impact all of the following except ______.

the due date of the return

Alyssa is a single mother. Based on her AGI and number of children, her earned income credit is $4,215. Her taxable income is $25,000, and the resulting tax is $2,718. Which of the following statements best describes Alyssa's tax position?

Alyssa will owe no federal income tax and will receive a $1,497 refund attributable to the earned income credit.

Total income ______.

includes both income earned from business ventures and as an employee

Mark and Mary file a joint return. They are both 40 years old and have two young children. Their standard deduction is $________

24,800 or $24,800

Ryland is a single taxpayer with a 32% marginal tax rate. Each year, his itemized deductions include $3,000 in property taxes and a $6,500 donation to his university, thus he typically does not exceed the standard deduction. If Ryland decides to bunch his deductions by donating $13,000 to his university every other year instead of $6,500 annually, his total deductions over two years will increase by $___________ , and it will result in a total tax savings of $____________

Blank 1: 3,600 or 3600 Blank 2: 1152 or 1,152

A taxpayer's is determined __________ ________by marital status and family situation, and it determines the rates at which a taxpayer will be taxed.

Blank 1: filing Blank 2: status

Riley reports AMTI of $165,000 in excess of her permitted exemption amount. Her regular tax liability is $44,990. Her AMT is ______.

$0 Reason: ($165,000 × 26%) less her regular tax liability of $44,990 is less than zero so no AMT liability.

Eileen and Elliot are married and file a joint return. Their AGI is $105,000, and they report total itemized deductions of $23,250. If they are subject to a 22% marginal tax rate, the incremental tax benefit from itemizing is ______.

$0 Reason: They will take the standard deduction of $24,400, so there is no incremental benefit from itemizing.

Rian reports AMTI of $119,000 in excess of his permitted exemption amount. His regular tax liability is $22,960. His AMT is ______.

$7,980 Reason: ($119,000 × 26%) less his regular tax liability of $22,960 = $7,980

Bryan and Liz married in 2016. They have two dependent children, ages 3 and 5. Bryan died in 2020. Which of the following statements describes the tax rate schedules Liz will use when she files?

Liz will use the married, filing jointly rates in 2020, 2021, and 2022. In 2023, she will use head of household rates. Reason: Liz may use MFJ rates in the year of death (2020) and two following years (2021, 2022) because she has dependent children. In subsequent years, she will file head of household.

Elizabeth and Shane were married for twenty years and have two grown children. They divorced on December 20 of the current year. Their filing status for this year is ______.

Married, filing jointly for 2019 and single for 2020 Reason: Austin uses married, filing jointly rates in the year of death. Because they have no dependent children, his filing status is single for 2020.

Which of the following is false regarding AGI? All taxable income items are included in the computation of AGI. Deductible expenditures from a sole proprietorship are reported above-the-line, not separately, but included in the net profit number. No deductions are included in the computation of AGI.

No deductions are included in the computation of AGI. Reason: Certain above-the-line deductions are included in the computation of AGI, such as the deduction for self-employment taxes paid.

Which of the following statements concerning the individual alternative minimum tax (AMT) computation is true?

The calculation of alternative minimum taxable income begins with taxable income for regular tax purposes. Reason: The AMT structure contains a 26% and a 28% bracket. Both AMT adjustments and tax preference items result in AMTI varying from taxable income for regular tax purposes.

Which of the following statements about total income is false? Computing total income is the first step in computing taxable income. Total income includes compensation and salaries. Total income excludes income from business ventures in which the taxpayer engages.

Total income excludes income from business ventures in which the taxpayer engages. Reason: It includes the net profit for sole proprietorships, partnership interest, rental property, etc.

True or false: In the event total itemized deductions do not exceed the standard deduction, a taxpayer receives no tax benefit for itemized deductions.

True Reason: The taxpayer will take the standard and itemized deductions become irrelevant.

An above-the-line deduction ______ reduces AGI and ______ reduces taxable income. An itemized deduction ______ reduces AGI and ______ reduces taxable income.

always; always; never; sometimes Reason: An above-the-line deduction always reduces AGI, and thus always reduces taxable income. Itemized deductions are below-the-line, so do not reduce AGI and only sometimes reduce taxable income.

Milton is a retired, unmarried taxpayer with no dependents. In a typical year, his only itemized deductions are his property taxes of $4,500 and a $6,000 donation to his church. His tax accountant has advised him to consider making an $12,000 contribution to his church every other year instead of an annual $6,000 contribution. This technique is best described as ______.

bunching

A taxpayer's marginal tax rate can be difficult to estimate because

certain deductions and credits are a function of AGI.

An extension of time to file an individual tax return ______.

does not extend the time for payment of tax

Itemized deductions only create a tax savings when itemized deductions ______ the standard deduction.

exceed Reason: Unless itemized deductions exceed the standard, itemized deductions do not result in a tax benefit.

Hunt is single. His disabled father lives with him and is considered a dependent. Hunt's filing status is ______.

head of household Reason: Hunt may file head of household because he maintains a household for a dependent family member.

Alternative Minimum Taxable Income (AMTI) ______.

is computed as regular tax purposes adjusted upward or downward for AMT adjustment and preferences

The dependent care credit ______.

is only available if the taxpayer has earned income Reason: The dependent care credit phases out up to 80%. The dependent must be under the age of 13 or physically or mentally incapable of caring for themselves.

The safe-harbor estimate provision ______.

provides taxpayers with certainty because accurately estimating current year tax obligation can be difficult

Kelsi and Kirk are both 35 years old and file a joint return. In 2020, their itemized deductions total $22,500. On their 2020 tax return, they will reduce AGI by ______.

the standard deduction of $24,800 Reason: The standard deduction of $24,800 exceeds their itemized deductions of $22,500. Therefore, they will elect to take the standard deduction.

For a given year, filing status is determined ______.

with respect to the criteria evaluated on the last day of the taxable year

Jenna and Jordan are married and file a joint return. Their AMTI is $850,000 before the exemption. Compute their AMT.

$202,290 Reason: Their exemption is $113,400. AMTI less exemption is $850,000 - $113,400 = $736,600 AMT is computed as: $197,900 × 26% = $51,454 $538,700 × 28% = $150,836 TOTAL = $202,290

Mildred and Milton and married and filing a joint return. Mildred is 72 years old and blind. Milton 70 years old. Their standard deduction is ______.

$28,700 Reason: The standard deduction is increased by $1,300 if the taxpayer is blind or over the age of 65. Because both are over the age of 65 and Mildred is blind, the standard deduction of $24,800 is increased by 3 × $1,300 = $3,900 to be $28,700.

Lily is unmarried with no dependents. In 2020, she reports $97,000 of AGI. Included in AGI is $20,600 of qualified business income and a deduction of $600 for self-employment tax. She also reports $13,000 of itemized deductions. Lily's taxable income is ______.

$80,000 Reason: Taxable income is $80,000 computed as AGI of $97,000 less $13,000 itemized deduction and $4,000 QBI deduction (20% × ($20,600- $600)).

Which of the following statements is true? All unmarried taxpayers must file as a single taxpayer. A child who is considered a dependent of another taxpayer and who earns income is required to file as a single taxpayer. A taxpayer who is married for less than half the year may elect to use the single rates for that year.

A child who is considered a dependent of another taxpayer and who earns income is required to file as a single taxpayer. Reason: Regardless of age, children who earn income must file as a single taxpayer.

Which of the following statements about a qualifying relative as defined under the dependency rules is false?

A qualifying relative must be related to the taxpayer.

Which of the following statements is false with respect to tax payments?

A tax refund indicates that the taxpayer has engaged in careful tax preparation and planning. Reason: A refund indicates that the taxpayer prepaid, through withholding and estimated tax payments, more than their current year tax liability.

Which of the following statements about deductions is true? Itemized deductions can be above-the-line or below-the-line. An above-the-line deduction always reduces taxable income. An itemized deduction always reduces taxable income.

An above-the-line deduction always reduces taxable income. Reason: By definition, itemized deductions are below-the-line. Reason: An itemized deduction will not reduce taxable income unless itemized deductions exceed the standard deduction.

Mark and Mary file a joint return. They are both 40 years old and have two young children. Their standard deduction is $________.

Blank 1: 24,800 or $24,800

To avoid an underpayment penalty, a taxpayer is required to make timely payments of at least ____% of their current tax liability or meet the safe-harbor estimate provisions. The threshold for the safe-harbor estimate is _____% of prior year taxes for taxpayers with AGI less than $150,000 and _____% for taxpayers above that threshold.

Blank 1: 90 Blank 2: 100 Blank 3: 110

Mr. and Mrs. Backlund file a joint return. They provide more than 50% support for their three children, Lindsay (age 27, full-time college student, earned $10,000 from part-time job), Louisa (age 21, full-time college student, earned $17,000 from part-time job) and John (age 17, earned no income). All three children live full time in the Backlund's home. Which of the following statements is true?

Both John and Louisa are qualifying children of the Backlunds. Reason: Lindsay is too old to be a qualifying child and earns too much to be a qualifying relative.

True or false: The classification of an individual as a dependent only has the potential to affect a taxpayers filing status.

False Reason: The determination that an individual is a dependent has the potential to affect filing status in addition to the availability of other provisions of the law, including certain tax credits.

True or false: If requested by the filing deadline, a taxpayer may request a six month extension to both file their return and pay their outstanding tax obligation.

False Reason: The taxpayer may request an extension to file their return, but not to pay their tax obligation.

Mario and Maria Moreno have no children of their own. However, their niece, Lupe, lives with them, and they provide more than one-half of her financial support. Which describes a scenario in which the Moreno's may not consider Lupe a qualifying child?

Lupe is 22 years old, lives with the Morenos full time, and is not a full-time student.

A taxpayer's filing status ______. (Select all that apply.)

impacts the rates at which income is taxed may have implications in determining eligibility for certain tax benefits

The QBI deduction is ______.

is deducted from AGI

John finished graduate school on December 20, 2020 and married on December 27, 2020. His 2020 filing status is ______.

married, filing jointly

Which of the following is false regarding AGI? Deductible expenditures from a sole proprietorship are reported above-the-line, not separately, but included in the net profit number. All taxable income items are included in the computation of AGI. No deductions are included in the computation of AGI.

No deductions are included in the computation of AGI. Reason: Certain above-the-line deductions are included in the computation of AGI, such as the deduction for self-employment taxes paid.

Which of the following could potentially meet the requirements of a qualifying child under the dependency rules? (Select all that apply.)

Taxpayer's sister or brother Taxpayer's grandchild Taxpayer's niece or nephew Taxpayer's child

Mr. and Mrs. Henley could not complete their 2020 Form 1040 before April 15, 2021. (Ignore filing extension under the Cares Act.) They estimate that they will owe a balance of $2,500 with the return. Which of the following statements is true?

The Henleys can file an extension request by April 15 to extend the filing deadline six months, but they must pay the balance with the request. Reason: The Henleys will be subject to a failure to file penalty only if they do not file an extension by April 15. The extension will only extend the filing deadline. It will not extend the tax payment deadline.

Which of the following statements are false?

The amount of the standard deduction is directly related to a taxpayer's cash flows. Reason: It is a standard amount, independent of the taxpayer's cash inflows or outflows.