Chapter 4: Individual Income Tax Overview, Dependents, and Filing Status

Self-employment taxes

Social Security and Medicare taxes paid by the self-employed on a taxpayer's net earnings from self-employment. For self-employed taxpayers, the terms "self-employment tax" and "FICA tax" are synonymous

True or false: The U.S. tax laws are based on the all-inclusive concept where gross income includes all realized income from whatever source derived.

True

All-inclusive income concept

a definition of income that says that gross income means all income from whatever source derived

Standard deduction

a fixed deduction offered in lieu of itemized deductions. The amount of the standard deduction depends on the taxpayer's filing status

Tax credits

items that directly reduce a taxpayer's tax liability

Deferral items, deferred income, or deferrals

realized income that will be taxed as income in a subsequent year

Withholdings

taxes collected and remitted to the government by an employer from an employee's wages.

Which of the following individuals would meet the relationship test for being a qualifying child of the taxpayer? (Check all that apply.) A. Grandchild B. Father C. Brother (younger than the taxpayer) D. Cousin (younger than the taxpayer) E. Niece (younger than the taxpayer) F. Child

A. Grandchild C. Brother (younger than the taxpayer) E. Niece (younger than the taxpayer) F. Child

When a divorced taxpayer pays over half the cost of maintaining a home where she and a dependent child lived for over half the year, she qualifies for which filing status? Multiple choice question. A. Head of household B. Qualifying widower C. Single D. Married filing separately

A. Head of household

Which of the following statements is INCORRECT? Multiple choice question. A. Both tax deductions and tax credits are a matter of legislative grace. B. Both tax deductions and tax credits are specifically defined by Congress and are narrowly defined. C. Both tax deductions and tax credits reduce taxable income.

C. Both tax deductions and tax credits reduce taxable income.

Which one of the following individuals would NOT meet the relationship test for being a qualifying relative of the taxpayer through a qualifying family relationship? Multiple choice question. A. Nephew B. Grandmother C. Cousin D. Sister-in-law E. Aunt F. Mother

C. Cousin

Which of the choices below is NOT one of the tests that must be met to qualify as a qualifying child? Multiple choice question. A. Relationship B. Age C. Gross income D. Residence E. Support

C. Gross income

Which of the following individuals would meet the relationship test for being a qualifying child of the taxpayer? (Check all that apply.) Multiple select question. A. Cousin (younger than the taxpayer) B. Aunt C. Nephew (younger than the taxpayer) D. Stepson E. Grandmother F. Half-sister (younger than the taxpayer)

C. Nephew (younger than the taxpayer) D. Stepson F. Half-sister (younger than the taxpayer)

Which of the following statements is correct regarding the choice of a taxpayer's filing status? Multiple choice question. A. Filing status depends on the level of income generated by the taxpayer. B. Filing status depends on the gender of the taxpayer. C. Filing status depends on the age of the taxpayer. D. Filing status depends on marital status and whether the taxpayer has dependents.

D. Filing status depends on marital status and whether the taxpayer has dependents.

Character of income

a type of income that is treated differently for tax purposes from other types of income. Common income characters (or types of income) include ordinary, capital, and qualified dividend

Preferentially taxed income

income taxed at a preferential rate such as long-term capital gains and qualified dividends

Estimated tax payments

quarterly tax payments that a taxpayer makes to the government if the tax withholding is insufficient to meet the taxpayer's tax liability

Gross income

realized income minus excluded and deferred income

Exclusions or excluded income

realized income that is exempted from income taxation

In order to meet the _________ test, the taxpayer must pay more than half of the living expenses for the qualifying relative.

support

Legislative grace

the concept that taxpayers receive certain tax benefits only because Congress writes laws that allow taxpayers to receive the tax benefits

Taxable income

the tax base for the income tax

Qualifying relative

an individual who is not a qualifying child of another taxpayer and who meets a relationship, support, and gross income test and thus qualifies to be a dependent of another taxpayer

Deductions above the line

for AGI deductions or deductions subtracted from gross income to determine AGI

Income that is taxed in the current year according to the tax rate schedule is referred to as ______ income. Multiple choice question. A. tax-exempt B. ordinary C. tax-deferred D. long-term capital gains

B. ordinary

Which of the following statements are true regarding the qualifying widow or widower filing status? (Check all that apply.) Multiple select question. A. The status is used in the year that one spouse died. B. The surviving spouse can NOT use this status if he or she has dependents. C. The status may be used for up to two years after the year the other spouse died. D. The surviving spouse must NOT have remarried during the year. E. The surviving spouse must have dependents.

A. The status is used in the year that one spouse died. B. The surviving spouse can NOT use this status if he or she has dependents. C. The status may be used for up to two years after the year the other spouse died.

In 2021, Ryan files as head of household and has taxable income of $122,500. None of his taxable income consists of capital gains or qualified dividends. Using the tax rate schedule, his tax liability rounded to the nearest dollar, totals $___. (Enter your answer as a whole number without decimals.)

$13,293 + [($122,500 - $86,350) x 24%] = $21,969

In 2021, Ryan files as head of household and has taxable income of $75,673. None of his taxable income consists of capital gains or qualified dividends. His tax liability rounded to the nearest dollar totals $______ (use the tax rate schedules).

$6,220 + [($75,673 - $54,200) x 22%] = $10,944, 10,945, 10,946, or 10,943

Filing status

*Places taxpayers into one of five categories (married filing jointly, married filing separately, qualifying widow or widower, head of household, and single) by marital status and family situation as of the end of the year. *Determines whether a taxpayer must file a tax return, appropriate tax rate schedules, standard deduction amounts, and certain deduction and credit limitation thresholds

Put the following items in the order in which they are found in the individual income tax formula. Minus for AGI deductions Equals taxable income Minus from AGI deductions Equals adjusted gross income Gross income

1. Gross income 2. Minus for AGI deductions 3. Equals adjusted gross income 4. Minus from AGI deductions 5. Equals taxable income

Amy and Ethan are married and file a joint return for 2021. Their taxable income is $78,500. What is the amount of their tax liability (use the tax rate schedules)? Multiple choice question. $9,420 $9,022 $6,025 $13,019

= $1,990 + [($78,500 - $19,900) x 12%] = $9,022

Amy and Ethan are married and file a joint return for 2021. Their taxable income is $192,100. The amount of their tax liability, rounded to the nearest dollar, is $______

= $29,502 + [($192,100 - $172,750) x 24%] = $34,146

Which of the following statements is TRUE regarding the individual income tax formula? Multiple choice question. A. A taxpayer may deduct the greater of his standard deduction or his itemized deductions from AGI to arrive at taxable income. B. A taxpayer may deduct the greater of his standard deduction or his total deductions (below the line) from AGI. C. A taxpayer may deduct the great of his standard deduction or his itemized deductions for AGI to arrive at adjusted gross income. D. A taxpayer may deduct the greater of his standard deduction or his total adjustments (above the line) for AGI.

A. A taxpayer may deduct the greater of his standard deduction or his itemized deductions from AGI to arrive at taxable income.

Which of the following choices are forms of tax prepayments? (Check all that apply.) Multiple select question. A. An overpayment of taxes in the prior year that was applied as an estimated payment for the current year B. Estimated tax payments the taxpayer made directly to the IRS C. A tax refund received in the current year for the prior year D. Income tax withheld from a taxpayer's salary or wages by an employer E. A tax credit used to reduce the tax liability in the current year

A. An overpayment of taxes in the prior year that was applied as an estimated payment for the current year B. Estimated tax payments the taxpayer made directly to the IRS D. Income tax withheld from a taxpayer's salary or wages by an employer

Ashley and Roland were married and had two dependent children. Roland died last year. What filing status will Ashley use for the year Roland died and for the current year (assuming she does not remarry)? Multiple choice question. A. Ashley will use married filing jointly in the prior year and qualifying widow in the current year. B. Ashley must use married filing separately in the prior year and head of household in the current year. C. Ashley will use qualifying widower in the prior year and head of household in the current year. D. Ashley will use qualifying widower for both years.

A. Ashley will use married filing jointly in the prior year and qualifying widow in the current year.

Kayla and Ben were married in November of the current year. What will be their filing status for the current year? Multiple choice question. A. Married filing jointly (or separately) because they were married as of the end of the year B. Single because they were married for less than half of the year C. Married filing separately because they have been married for less than half of the year D. One spouse can file as head of household and the other will file single since they live together but have been married less than half the year

A. Married filing jointly (or separately) because they were married as of the end of the year

Ruida divorced on October 31 of the current year. He does NOT have any dependents. Which filing status should Ruida use for the current year? Multiple choice question. A. Single B. Qualifying widow C. Married filing separately D. Head of household

A. Single

Which of the following individuals meet the requirements to be qualifying children for Tonya? (Choose all that apply.) Multiple select question. A. Vinnie (age 17) does not provide half of his own support. He is in high school, earned $5,000 this year, and lives with his mother, Tonya. B. Ron (age 20) provides over half of his own support. He is a full-time college student, earned $12,000 this year, and lives with his mother, Tonya. C. Sandy (age 23) does not provide half of her own support. She is a full-time college student, earned $7,000 this year, and lives with her aunt, Tonya. D. Pam (age 19) receives 70% of her support from her cousin, Tonya. Pam is a full-time student, earned $7,000, and lived with Tonya 7 months this year.

A. Vinnie (age 17) does not provide half of his own support. He is in high school, earned $5,000 this year, and lives with his mother, Tonya. C. Sandy (age 23) does not provide half of her own support. She is a full-time college student, earned $7,000 this year, and lives with her aunt, Tonya.

When can the married filing jointly or married filing separately filing status be used? (Check all that apply.) Multiple select question. A. When the taxpayers are married as of the last day of the tax year B. When the taxpayers are unmarried, but have lived together for the entire year C. When the taxpayers are unmarried, but have a dependent child living with them D. When one spouse died during the year and the surviving spouse has not remarried E. When the taxpayers have been married for any part of the tax year

A. When the taxpayers are married as of the last day of the tax year D. When one spouse died during the year and the surviving spouse has not remarried

A taxpayer may file as a single taxpayer when: Multiple choice question. A. she is unmarried at the end of the tax year B. she has been unmarried for over half of the year C. her spouse died during the year D. she is separated from her husband, but not yet divorced

A. she is unmarried at the end of the tax year

Will and Lyndsey are married with no dependents and file a joint tax return. In 2021, they paid $3,000 in qualified student loan interest in addition to $22,850 in itemized deductions. What is the total of their "FROM AGI" deductions in 2021? Multiple choice question. A. $22,850 B. $25,100 C. $27,800 D. $25,850

B. $25,100 Reason: They can deduct the large of their itemized deductions or the standard deduction, which for married filing joint couples in 2021 is $25,100. Student loan interest, however, is a FOR AGI deduction.

Which of the following criteria will contribute toward qualifying a taxpayer for head of household status? (Check all that apply.) Multiple select question. A. Be married with a spouse that is not employed outside the home B. Be unmarried (or considered unmarried under the abandoned spouse provisions) at the end of the year C. Have lived with a qualifying person in the taxpayer's home for more than half the year D. Provide over half the cost of maintaining a household for a dependent parent not living with the taxpayer E. Be a qualifying widow or widower F. Pay more than half the costs of keeping up a home for the year

B. Be unmarried (or considered unmarried under the abandoned spouse provisions) at the end of the year C. Have lived with a qualifying person in the taxpayer's home for more than half the year D. Provide over half the cost of maintaining a household for a dependent parent not living with the taxpayer F. Pay more than half the costs of keeping up a home for the year

Which of the following criteria is necessary to qualify as a dependent of another taxpayer? (Check all that apply.) Multiple select question. A. Must NOT be required to file a tax return of his own B. Must NOT file a joint return unless there is no tax liability on the couple's return and no tax liability on either return if they filed separately C. Must be a citizen of the U.S. or a resident of the U.S., Canada, or Mexico D. Must be considered both a qualifying child and a qualifying relative E. Must be considered either a qualifying child or a qualifying relative

B. Must NOT file a joint return unless there is no tax liability on the couple's return and no tax liability on either return if they filed separately C. Must be a citizen of the U.S. or a resident of the U.S., Canada, or Mexico E. Must be considered either a qualifying child or a qualifying relative

Which of the following items does NOT constitute support when determining who provided the support for a child of the taxpayer who is a full-time student? Multiple choice question. A. Recreational activities and camps B. Scholarships C. Allowances and gifts D. Food and clothing

B. Scholarships

Which of the following choices describe tax deductions? (Choose all that apply.) Multiple select question. A. Tax deductions reduce an individual's tax liability dollar for dollar. B. Tax deductions are a matter of legislative grace. C. Tax deductions, like income, follow the all-inclusive concept. D. Taxpayers are NOT allowed to deduct anything unless a specific tax provision allows them to do so.

B. Tax deductions are a matter of legislative grace. D. Taxpayers are NOT allowed to deduct anything unless a specific tax provision allows them to do so.

Chasity is 20, has a full-time job, and supports herself. Her brother, William, age 22, has decided to go back to college. He moved in with Chasity and is attending college full-time. Which of the following statements is accurate regarding the age test for a qualifying child and how it applies to William? Multiple choice question. A. William meets the age test because he is full-time student under age 24. B. William does NOT meet the age test because he is older than Chasity. C. William does NOT meet the age test because he is not Chasity's child. D. William does NOT meet the age test because he is not under the age of 19.

B. William does NOT meet the age test because he is older than Chasity.

In addition to the individual income tax, individuals may be required to pay other taxes. Taxpayers with a large amount of tax preference items and itemized deductions may be subject to the ____ ___tax.

Blank 1: alternative Blank 2: minimum

A tax _________ reduces taxable income and a tax __________reduces the tax liability dollar for dollar.

Blank 1: deduction or deductions Blank 2: credit or credits

A taxpayer's ______ ______ depends on his or her marital status at the end of the year and whether the taxpayer has dependents.

Blank 1: filing Blank 2: status

Some tax deductions are subtracted ______ AGI and some are subtracted _______ AGI.

Blank 1: from Blank 2: for

The all-inclusive concept means that ________ _________ generally includes all realized income from whatever source derived.

Blank 1: gross Blank 2: income

For tax years beginning in 2018, a taxpayer's from AGI deductions include the greater of the standard deduction or the taxpayer's __________ deductions and 20% of the taxpayer's qualified __________ income.

Blank 1: itemized Blank 2: business

Examples of a tax _______ include income taxes withheld from a taxpayer's salary by an employer, estimated tax payments paid directly to the IRS, and amounts from a prior year overpayment that were applied to the current year's tax liability.

Blank 1: prepayment, payment, payments, or prepayments

In addition to the individual income tax, individuals may be required to pay other taxes. Owners of unincorporated businesses may have to pay _______-______________ tax. (Enter only one word per blank.)

Blank 1: self Blank 2: employment

The three tests that must be met to qualify as a qualifying relative are: _______, ______, and _________.

Blank 1: support or support test Blank 2: relationship or relationship test Blank 3: gross income or gross income test

Which of the following would most likely NOT qualify as support for meeting the support test? Multiple choice question. A. Summer camp with horseback riding, swimming, and other activities B. Medical and dental care C. A riding lawnmower used by a child to mow the family yard D. A wedding dress

C. A riding lawnmower used by a child to mow the family yard

Andrew is trying to determine if Annie will qualify as his dependent. She will NOT meet the criteria for a qualifying child, so Andrew is checking to see if she is a qualifying relative. Assuming there is NOT a multiple support agreement involved, which one of the following criteria for the support test must be met in order for Annie to be considered a qualifying relative for Andrew? Multiple choice question. A. Annie must live with the Andrew for over half of the year in order to meet the support test. B. Annie must be related to the Andrew in order to meet the support test. C. Andrew must provide over half of Annie's support for the year. D. Annie must NOT provide over half of her own support, but it doesn't matter who is providing the support.

C. Andrew must provide over half of Annie's support for the year.

Which of the following individuals would meet the relationship test for being a qualifying relative of the taxpayer if s/he has only lived with the taxpayer for eight months of the year? (Check all that apply.) Multiple select question. A. Cousin B. Friend C. Niece D. Grandchild E. Brother F. Father

C. Niece D. Grandchild E. Brother F. Father

In order to meet the requirements of the residence test for a qualifying child, the individual must live with the taxpayer for: Multiple choice question. A. the entire year B. longer than he has resided with anyone else during the year C. more than half the year D. at least one-third of the year

C. more than half the year

Which one of the following individuals CANNOT meet the residence test for being a qualifying child of another taxpayer? Multiple choice question. A. Justin attends college in a different state than where his parents live. B. Cathy was injured in a car accident in February. She remained in the hospital until September. C. Steven graduated from college in May and moved back in with his parents for two months. He moved out on July 15. D. Amy lived with her parents until the end of April. She moved into an apartment on May 1.

D. Amy lived with her parents until the end of April. She moved into an apartment on May 1.

Corey is 25 and has a full-time job. His younger brother, James, is 20 and was enrolled as a full-time student at the community college during the summer and fall semesters. James lives with Corey. Which of the following statements is correct with respect to the age requirement for a qualifying child? Multiple choice question. A. James must be older than than Corey in order to meet the age test. B. James does NOT meet the age test because he is not under the age of 19. C. James does NOT meet the age test because he was not enrolled as a full-time student for the entire year. `

D. James meets the age test because he is younger than Corey, and he is under age 24 and a full-time student.

Lan is from Vietnam and has lived in the U.S. for five months during the year. He is not yet considered a resident because he hasn't lived in the U.S. for long enough. He resides with his uncle who is a U.S. citizen. Lan is single and a full-time student. If eligible, Lan would otherwise be considered a qualifying child of his uncle. Which of the following is correct regarding Lan's status as a dependent? Multiple choice question. A. Lan can be claimed by his uncle because he will not have to file a tax return since he has no income. B. Lan can NOT be claimed by his uncle because he would need to meet the qualifying relative requirements, rather than the qualifying child. C. Lan can be claimed as a dependent by his uncle because his uncle is a citizen and Lan is a qualifying child. D. Lan can NOT be claimed as a dependent by his uncle because he is not a citizen or resident of the U.S.

D. Lan can NOT be claimed as a dependent by his uncle because he is not a citizen or resident of the U.S.

True or false: In order to meet the support test for a qualifying child, the taxpayer must provide more than half of the individual's support for the year.

False Reason: The child may be receiving support from someone other than the taxpayer. The rule is that the CHILD cannot provide over half of his/her own support.

Tax tables

IRS-provided tables that specify the federal income tax liability for individuals with taxable income within a specific range. The tables differ by filing status and reflect tax rates that increase with taxable income

Match the type or character of income to its definition. Tax-exempt Tax-deferred Ordinary Capital Income realized during the year that is excluded from gross income and never taxed Income realized during the year that is not included in gross income until a later year Gains (or losses) in investment or personal use assets that may be taxed at favorable rates Income included in gross income in the current year and taxed at the ordinary rates per the tax rate schedules

Tax-exempt: Income realized during the year that is excluded from gross income and never taxed Tax-deferred: Income realized during the year that is not included in gross income until a later year Ordinary: Income included in gross income in the current year and taxed at the ordinary rates per the tax rate schedules Capital: Gains (or losses) on investment or personal use assets that may be taxed at favorable rates

Sharon Jones is single. During 2021, she had gross income of $159,800, deductions for AGI of $5,500, itemized deductions of $14,000 and tax credits of $2,000. Sharon had $22,000 withheld by their employer for federal income tax. She has a tax (due/refund) _____rounded to the nearest whole dollar of $______.

Taxable income = $159,800 - $5,500 - $14,000 = $140,300 Tax liability = $14,751 + [($140,300 - $86,375) x 24%] = $27,693 Tax due or refund = $27,693 - $2,000 - $22,000 = $3,696 => due

Sheila and Joe Wells are married with no dependent children. During 2021, they have gross income of $159,800, deductions for AGI of $5,500, and itemized deductions of $10,000. The Wells' had $22,000 withheld by their employer for federal income tax. They have a tax _____ (due/refund) of $__.

Taxable income = $159,800 - $5,500 - $25,100 = $129,200 $9,328 + [($129,200 - $81,050) x 22%] = $19,921 Tax due or refund = $19,921 - $22,000 = ($2,079) => Refund

Abandoned spouse

a married taxpayer who lives apart from his or her spouse for the last six months of the year (excluding temporary absences), who files a tax return separate from his or her spouse, and who maintains a household for a qualifying child.

Tax rate schedule

a schedule of progressive tax rates and the income ranges to which the rates apply that taxpayers may use to compute their gross tax liability

Alternative minimum tax (AMT)

a tax on a broader tax base than the base for the "regular" tax; the additional tax paid when the tentative minimum tax (based on the alternative minimum tax base) exceeds the regular tax (based on the regular tax base). The alternative minimum tax is designed to require taxpayers to pay some minimum level of tax even when they have low or no regular taxable income as a result of certain tax breaks in the tax code

Preferential tax rate

a tax rate that is lower than the tax rate applied to ordinary income

Deductions

amounts that are subtracted from gross income in calculating taxable income

Qualifying child

an individual who qualifies as a dependent of a taxpayer by meeting a relationship, age, residence, and support test with respect to the taxpayer

Itemized deductions

certain types of expenditures that Congress allows taxpayers to deduct as from AGI deductions

In order to meet the criteria for a qualifying ____________ (choose either: child/relative), the dependent must NOT have provided more than half of his or her own support for the year. However, the support may have been provided by someone other than the taxpayer.

child

From AGI deductions

deductions subtracted from AGI to calculate taxable income

For AGI deductions

deductions that are subtracted from gross income to determine AGI

Deductions below the line

from AGI deductions or deductions subtracted from AGI to calculate taxable income

Adjusted gross income (AGI)

gross income less deductions for AGI. AGI is an important reference point that is often used in other tax calculations

Realized income

income generated in a transaction with a second party in which there is a measurable change in property rights between parties

Single

one of five primary filing statuses. A taxpayer files as single if s/he is unmarried as of the end of the year and does not qualify for any of the other filing statuses. A taxpayer is considered single if s/he is unmarried or legally separated from his or her spouse under a divorce or separate maintenance decree

Head of household

one of five primary filing statuses. A taxpayer may file as head of household if s/he is unmarried as of the end of the year and pays more than half of the cost to maintain a household for a qualifying person who lives with the taxpayer for more than half of the year; or s/he pays more than half the costs to maintain a household for a parent who qualifies as the taxpayer's dependent

Married filing jointly

one of five primary filing statuses. A taxpayer may file jointly if s/he is legally married as of the end of the year (or one spouse died during the year and the surviving spouse did not remarry) and both spouses agree to jointly file. Married couples filing joint returns combine their income and deductions and share joint and several liability for the resulting tax

Qualifying widow or widower

one of five primary filing statuses. Applies for up to two years after the year in which the taxpayer's spouse dies (the taxpayer files married filing jointly in the year of the spouse's death) as long as the taxpayer remains unmarried and maintains a household for a dependent child

Married filing separately

one of five primary filing statuses. When married couples file separately, each spouse reports the income he or she received during the year and the deductions he or she paid on a tax return separate from the other spouse