exam ch2-3

101) Lila and Ted are married and have AGI of $332,000 in 2014. They had their first children this year, twins. Lila and Ted will be allowed a deduction for personal and dependency exemptions of

$12,324.

48) In 2014 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

$12,400.

47) In 2014 the standard deduction for a married taxpayer filing a joint return and who is 67 years old with a spouse who is 65 years old is

$14,800

92) Elise, age 20, is a full-time college student with earned income from wages of $4,400 and interest income of $500. Elise's parents provide more than half of her support. Elise's taxable income is

$150.

97) Keith, age 17, is a dependent of his parents. During 2014, he received $3,000 of dividend income. The parent's marginal rate is 28% and Keith's rate is 10%. Keith's tax is

$150.

52) Husband and wife, who live in a common law state, are eligible to file a joint return for 2014, but elect to file separately. They do not have dependents. Wife has adjusted gross income of $25,000 and has $2,200 of expenditures which qualify as itemized deductions. She is entitled to one exemption. Husband deducts itemized deductions of $11,200. What is the taxable income for the wife?

$18,850

71) Steven and Susie Tyler have three dependent children ages 13, 15, and 17. Their modified AGI is $108,000. What is the amount of the child credit to which they are entitled?

$2,000

73) Ryan and Edith file a joint return showing $130,000 of AGI (with no exclusions under Secs. 911, 931, and 933). They have three dependent children ages 7, 9, and 13. What is the amount of their child credit?

$2,000

102) Shane and Alyssa (a married couple) have AGI of $345,050 in 2014. They bought a house this year and paid $16,000 of interest expense on the mortgage and paid $6,500 of property taxes. They will be allowed a deduction from AGI of

$21,300.

104) Rob is a taxpayer in the top tax bracket, with over a million in taxable income. He plans to sell stock held long-term for a $100,000 gain. This sale will result in an increase to his tax liability of

$23,800.

98) A corporation has revenue of $350,000 and deductible business expenses of $240,000. What is the federal income tax, before credits?

$26,150

74) Paul and Sally file a joint return showing $87,000 of AGI (with no exclusions under Secs. 911, 931, and 933). They have three dependent children ages 6, 8, and 13. What is the amount of their child credit?

$3,000

94) Frank, age 17, received $4,000 of dividends and $1,500 from a part-time job. Frank is a dependent of his parents who are in the 28% percent bracket. Frank's taxable income is

$3,650.

93) 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 taxable income is

$350.

95) Satish, age 11, is a dependent of his parents. His only source of income for the year is $3,000 of interest income on bonds given him by his grandparents. Satish's marginal rate is 10%, and his parent's marginal rate is 28%. Satish's tax is

$380.

49) Annisa, who is 28 and single, has adjusted gross income of $55,000 and itemized deductions of $5,000. In 2014, Annisa will have taxable income of

$44,850.

96) Vincent, age 12, is a dependent of his parents. During 2014, Vincent's earned income from wages is $2,600 and Vincent received $3,000 of interest income. The parent's marginal rate is 28% and Vincent's marginal rate is 10%. Vincent's tax is

$445.

56) Cheryl is claimed as a dependent on her parents' tax return. She had a part-time job during 2014 and earned $4,900 during the year, in addition to $600 of interest income. What is her standard deduction?

$5,250

54) Charlie is claimed as a dependent on his parents' tax return in 2014. He received $8,000 during the year from a part-time acting job, which was his only income. What is his standard deduction?

$6,200

45) A single taxpayer provided the following information for 2014: Salary $80,000 Interest on local government bonds (qualifies as a tax exclusion) 4,000 Allowable itemized deductions 13,000 What is taxable income?

$63,050

67) Juanita's mother lives with her. Juanita purchased clothing for her mother costing $1,000 and provided her with a room that Juanita estimates she could have rented for $4,000. Juanita spent $5,000 on groceries she shared with her mother. Juanita also paid $700 for her mother's health insurance coverage. How much of these costs is considered support?

$7,500

50) On June 1, 2014, Ellen turned 65. Ellen has been a widow for five years and has no dependents. Her standard deduction is

$7,750.

100) If an individual with a marginal tax rate of 15% has a long-term capital gain, it is taxed at

0%

53) 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?

$1,000

55) Deborah, who is single, is claimed as a dependent on her parents' tax return. She had a part-time job during 2014 and earned $850 during the year, which was her only income. What is her standard deduction?

$1,200

103) Rena and Ronald, a married couple, each earn a salary of $200,000. They will be required to pay additional payroll taxes in 2014 of

$1,350.

72) Nate and Nikki have three dependent children ages 12, 15, and 17. Their modified AGI is $120,000. What is the amount of the child credit to which they are entitled?

$1,500

75) Amanda has two dependent children, ages 10 and 12. She earned $15,000 from her waitress job. How much of her child credit is refundable?

$1,800

65) David's father is retired and receives $14,000 per year in social security benefits. David's father saves $4,000 of the benefits and spends the remaining $10,000 for his support. How much support must David provide for his father to meet the dependent support requirement?

$10,001

132) Discuss reasons why a married couple may choose not to file a joint return.

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%

70) The child credit is for taxpayers with dependent children under the age of

17

60) Anita, who is divorced, maintains a home in which she and her 16 year old daughter live. Anita provides the majority of the support for her daughter and for a son, age 23, who is enrolled part-time at the university and lives in the dorm. The son also works in the campus bookstore and earns spending money of $4,500. How many personal and dependency exemptions may Anita claim?

2

63) 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 $3,950. How many dependency exemptions can Julia claim on her 2014 tax return?

2

64) Tony supports the following individuals during the current year: Miranda, his former mother-in-law who lives in her own home and has no gross income; his cousin, Jeff, age 23, who is a full-time student, earns $7,000 during the year, and lives with Tony all year long; and Matt, age 22, who is Tony's brother, is a full-time student living on campus and earns $8,000 during the year. How many dependency exemptions may Tony claim?

2

91) The oldest age at which the "Kiddie Tax" could apply to a dependent child is

23

59) Sarah, who is single, maintains a home in which she, her 15-year old brother, and her 21-year-old niece live. Sarah provides the majority of the support for her brother, her niece, and her cousin, age 18, who is enrolled full-time at the university and lives in an apartment. While the niece and cousin have no income, her brother has a part-time job and earns $4,000 per year. How many personal and dependency exemptions may Sarah claim?

3

80) Carter dies on January 1, 2013. A joint return election is made in 2013 and Marjorie properly qualifies as a surviving spouse for the two following years. Marjorie has one child that she claims as a dependent for this same period. The number of personal and dependency exemptions allowed Marjorie in 2013 and in 2014 is, respectively

3 and 2.

58) Ben, age 67, and Karla, age 58, have two children who live with them and for whom they provide total support. Their daughter is 21 years old, blind, is not a full-time student and has no income. Her twin brother is 21 years old, has good sight, is a full-time student and has income of $4,500. Ben and Karla can claim how many personal and dependency exemptions on their tax return?

4

61) Amber supports four individuals: Erin, her stepdaughter, who lives with her; Amy, her cousin, who lives in another state; Britney, her friend, who lives legally in Amber's home all year long; and Charlie, her father, who lives in another state. Assume that the dependency requirements other than residence are all met. How many personal and dependency exemptions may Amber claim?

4

62) John supports Kevin, his cousin, who lived with him throughout 2014. John also supports three other individuals who do not live with him: Donna, who is John's mother Melissa, who John's stepsister Morris, who is Kevin's brother Assume that Donna, Melissa, Morris and Kevin each earn less than $3,950. How many personal and dependency exemptions may John claim?

4

99) 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 partner in a partnership is taxed on his or her share of partnership income.

106) 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.

107) 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.

39) Taxable income for an individual is defined as

AGI reduced by deductions from AGI and personal and dependency exemptions.

110) Bill and Tessa have two children whom they support and who live in their home. Timmy is 17 and has earned income of $5,000 for the year. Their other child, Tommy, is 15. Tessa's mother also lives with them and may be claimed as their dependent. She is 89 years old. Their adjusted gross income is $130,000. Required: Compute Bill and Tessa's taxable income for 2014 if they file a joint return and they do not itemize deductions.

Adjusted gross income $130,000 Less: Standard deduction ( 12,400) Allowable exemption ($3,950 × 5) ( 19,750) Taxable income $ 97,850

116) In 2014, Sam is single and rents an apartment for which he pays $800 per month and makes charitable contributions of $1,000. Sam's adjusted gross income is $47,000. Required: Compute his taxable income. Show all calculations.

Adjusted gross income $47,000 Minus: Standard deduction ( 6,200) Minus: Personal exemption ( 3,950) Taxable income $36,850

115) Kate is single and a homeowner. In 2014, she has property taxes on her home of $3,000, makes charitable contributions of $2,000, and pays home mortgage interest of $7,000. Kate's adjusted gross income for 2014 is $77,000. Required: Compute her taxable income for 2014.

Adjusted gross income $77,000 Minus: Itemized deductions: Property taxes $3,000 Home mortgage interest 7,000 Charitable contributions 2,000 ( 12,000) Minus: Personal exemption ( 3,950) Taxable income $61,050

113) Steve Greene, age 66, is divorced with no dependents. In 2014 Steve had income and expenses as follows: Gross income from salary $80,000 Total itemized deductions 5,500 Compute Steve's taxable income for 2014. Show all calculations.

Adjusted gross income $80,000 Less: Standard deduction ($6,200 + $1,550) ( 7,750) Allowable exemption ( 3,950) Taxable income $68,300

123) Gina Lewis, age 12, is claimed as a dependent on her parent's return. She is their only child. During 2014, 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 2014. b. Can Gina's parents take a child tax credit for her?

Adjusted gross income ($2,300 + $2,750) $5,050 Less: Standard deduction [greater of $1,000 or ($2,300 + 350)] (2,650) Allowable exemption (None—dependent of another) 0 Taxable income $2,350 Tax liability: Gina's net unearned income: Unearned income: Interest $ 2,650 Less: Statutory deduction of $1,000 ( 1,000) Less: Greater of a. $1,000 of standard deduction, or Itemized deductions connected with production of income ( 1,000) Net unearned Income $ 650 Tax on net unearned income ($650 × 28% (parents tax rate)) $ 182 Tax on taxable income minus net unearned income ($2,350 - $650) × 10% child's tax rate) 170 Total income tax $352 b. She is under age 17 and their qualifying child so she qualifies for the child credit. The credit may be partially phased out. If the parents' marginal tax rate is 28%, their AGI probably is in the phase out range.

119) Maxine, who is 76 years old and single, is appropriately claimed as a dependent on her daughter Beth's tax return. During 2014 she received $500 interest on a savings account. She had a part time job that earned $3,000. Her total itemized deductions were $1,300. Required: Compute Maxine's taxable income for 2014. Show all calculations.

Adjusted gross income ($500 + $3,000) $ 3,500 Less: Standard deduction [greater of $1,000 or ($3,000 + 350)] (3,350) Allowable exemption (None—dependent of another) 0 Taxable income $ 150

112) The following information is available for Bob and Brenda Horton, a married couple filing a joint return, for 2014. Both Bob and Brenda are age 32 and have no dependents. Salaries $180,000 Interest income 12,000 Deductible IRA contributions 11,000 Itemized deductions 22,600 Withholding 32,000 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 $180,000 Interest 12,000 Gross Income $192,000 a. Minus: IRA Contributions 11,000 Adjusted gross income $181,000 b. Minus: Itemized deductions ( 22,600) Exemptions ( 7,900) Taxable Income $150,500 c. Tax liability (using Rate Schedule) $29,387*d. Minus: Withholding - 32,000 Tax due (refund) ( $ 2,613) e.

135) Paul and Hannah, who are married and file a joint return, are in the process of adopting a child who is born in December 2014. 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 2015. What tax issues are present in this situation?

Are Paul and Hannah able to claim the baby as a dependent on their 2014 tax return and claim a child tax credit?

131) Avi and Rianna are considering marriage before year-end. They each earn a salary of about $150,000, have some investment income and some itemized deductions. What additional taxes will Avi and Rianna face as a married couple?

As a married couple they will have salary of approximately $300,000, subjecting them to the additional .9% payroll tax on some of their wages. With AGI over $250,000, they will also have to pay the 3.8% investment tax on their investment income. In addition, with their substantial AGI they will face partial phaseout of their personal exemptions and itemized deductions, raising taxable income and increasing their income tax liability.

69) Blaine Greer lives alone. His support comes from the following sources: Buddy (his son) $2,600 Ken (his brother) 4,200 Martha (his daughter) 2,300 Natalie (a friend) 1,000 Total support $10,100 Assuming a multiple support declaration exists, which of the individuals may claim Blaine as a dependent?

Buddy, Ken, or Martha

136) Foreign exchange student Yung lives with Harold and Betty while he studies in the US. He moved into their home January 5, 2014 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?

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?

137) 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?

Can Mary Ann file as head of household? Would Mary Ann be able to claim Hazel as a dependent?

117) Eliza Smith's father, Victor, lives with Eliza who is a single taxpayer. During the year, Eliza purchased clothing for her father costing $1,200 and provided him with a room that could have been rented for $6,000. In addition, Eliza spent $4,000 for groceries she shared with her father. Eliza purchased a new television for $900 which she placed in the living room for both her father and her use. What is the amount of support provided by Eliza to her father?

Clothing $1,200 Rental value of room 6,000 Groceries (1/2 × $4,000) 2,000 Total support $9,200

129) 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. According to a written agreement, she gave up the dependency exemption to her former husband.

Filing Status Exemptions Child Credit a. Single 1 0 b. Single 1 0 c. Head-of-Household 2 1 d. Single 0 0 e. Head-of-Household 1 0

109) 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?

Form 1040

138) Alexis and Terry have been married five years and file joint tax returns. Alexis began embezzling funds from her employer during the third year of their marriage. Last year, Alexis suddenly left the country and Terry does not know where she is. In the current year, Terry learned that the IRS had assessed him $27,000 in unpaid taxes due to Alexis's embezzlement. What tax issue(s) are present in Terry's situation? What questions would you ask Terry to determine his appropriate response to the IRS?

Is Terry eligible for innocent spouse relief? Did Terry benefit financially from Alexis's embezzlement? Did Terry have reason to know of the embezzlement?

68) 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?

James or Joseph

130) What options are available for reporting and paying tax on the unearned income of a child under age 24?

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 $2,000 is taxed at the parents' rates.

134) 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?

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.

124) 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 $3,000 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: Operating income $100,000 $100,000 $100,000 Compensation paid to Paige ( 50,000) ( 50,000) Charitable contributions ( 5,000) Net $100,000 $ 50,000 $ 45,000 Corporate income tax $ 6,750 Paige's income: Business income (above) $100,000 $ 50,000 Compensation (above) 50,000 $ 50,000 Dividends 14,000 Other income 3,000 3,000 3,000 Adjusted gross income $103,000 $103,000 $ 67,000 Charitable contributions 5,000 5,000 Other itemized deductions 12,000 12,000 12,000 Personal exemption 3,950 3,950 3,950 Taxable income $ 82,050 $ 82,050 $ 51,050 Individual income tax $ 16,369* $ 16,369 $ 7,129** Total tax $ 16,369 $ 16,369 $ 13,879

111) Hannah is single with no dependents and has a salary of $102,000 for 2014, along with tax exempt interest income of $3,000 from a municipality. Her itemized deductions total $6,600. Required: Compute her taxable income

Salary $102,000 (Interest income is excluded) Less: Itemized deductions ( 6,600) Personal exemption ( 3,950) Taxable income $ 91,450

126) Brett, a single taxpayer with no dependents, earns salary of $500,000 and dividend income of $50,000. Itemized deductions for home mortgage interest, property taxes and charitable contributions total $35,000. Calculate Brett's total federal income taxes for 2014.

Salary $500,000 Dividend income 50,000 Adjusted gross income $550,000 Itemized deductions (26,126) [$35,000 - 3% × ($550,000 - $254,200)] Personal exemption (fully phased-out) 0 Taxable income $523,874 Tax calculation: Income tax on dividends (20%) $10,000 Income tax on $473,874 balance (tax rate schedule) 144,700 $154,700 Additional tax on dividends (3.8%) 1,900 Additional tax on salary [.009 × ($500,000 - $200,000)] 2,700 Total tax $159,300

114) Sean and Martha are both over age 65 and Martha is considered blind by tax law standards. Their total income in 2014 from part-time jobs and interest income from a bank savings account is $60,000. Their itemized deductions are $12,000. Required: Compute their taxable income.

Salary & interest $60,000 Less: Standard deduction [$12,400 + (3 × 1,200)] (16,000) Personal exemptions (2 × 3,950) ( 7,900) Taxable income $36,100

133) Discuss why Congress passed the innocent spouse provision and detail the requirements to be met in order to qualify as an innocent spouse and be relieved of liability for tax on unreported income.

The provision was passed because each spouse is liable for the entire tax on a joint return as well as penalties imposed. This would not be fair if one spouse concealed information regarding income or deductions from the other spouse. An innocent spouse is relieved of liability when 1. The amount is attributable to grossly erroneous items of the other spouse. 2. The innocent spouse did not know of and had no reason to know that there was such an understatement of tax. 3. To hold the innocent spouse liable for the understatement would be inequitable. 4. The innocent spouse elects relief within two years after the IRS begins collection activities.

77) Tom and Alice were married on December 31 of last year. What is their filing status for last year?

They file as married joint or married separate.

76) 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?

You were married for several years, but your divorce became final in December.

118) The following information for 2014 relates to Emma Grace, a single taxpayer, age 18: Salary $6,500 Interest income 1,200 Itemized deductions 500 a. Compute Emma Grace's taxable income assuming she is self-supporting. b. Compute Emma Grace's taxable income assuming she is a dependent of her parents.

a. Salary $ 6,500 Interest 1,200 Adjusted gross income $7,700 Minus: Standard deduction ( 6,200) Exemptions ( 3,950) Taxable income 0 b. Salary $ 6,500 Interest 1,200 Adjusted gross income $ 7,700 Minus: Standard deduction ($6,500 + 350, limited to $62100) ( 6,200) Exemption 0 Taxable income $ 1,500

120) Adam attended college for much of 2014, during which time he was supported by his parents. Erin married Adam in December 2014. They live in a common law state. Adam graduated and will commence work in January 2015. Erin worked during 2014 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 $1,106 ($3,950 × .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?

a. Salary and interest $21,100 Minus: Standard deduction (12,400) Exemption ($3,950 × 2) ( 7,900) Taxable income $ 800 Gross tax ($800 × .10) $ 80 b. Erin's tax liability: Salary $ 20,000 Minus: Standard deduction ( 6,200) Exemption ( 3,950) Taxable income $ 9,850 Gross tax $ 1,024* *$907.50 + [.15 × ($9,850 - $9,075)] rounded Adam's tax liability: Interest $ 1,100 Minus: Standard deduction (greater of $1,000 or Earned Income + $350) ( 1,000) Exemption ( 0) Taxable income $ 100 Gross tax ($100 × .10) $ 10 Total tax liability on separate returns: ($1,024 + 10) $1,034 Total tax liability on joint return 80 Erin and Adam's savings on joint return $ 954 Parents' savings if Adam claimed as dependent ( 1,106) Family unit would save if Adam claimed as dependent $ 152

125) Steve and Jennifer are in the 33% tax bracket for ordinary income and the 15% bracket for capital gains. They have owned several blocks of stock for many years. They are considering the sale of two blocks of stock. The sale of one would produce a gain of $12,000 while the sale of the other would produce a loss of $18,000. For purposes of this problem, ignore personal exemptions, itemized deductions, phase-outs and additional investment taxes. They have no other gains and losses this year. a. How much tax will they save if they sell the block of stock that produces a loss? b. How much additional tax will they pay if they sell the block of stock that produces a gain? c. What will be the impact on their taxes if they sell both blocks of stock?

a. $990. A net capital loss is limited to $3,000 per year × .33 = $990. They can carryover the remaining $15,000 loss to next year. b. $12,000 × .15 (maximum rate on long-term capital gains) = $1,800. c. $12,000 gain - $18,000 loss = Net capital loss of $6,000 of which $3,000 is currently deductible to save taxes of $3,000 × .33 = $990. They should sell both so that they totally escape taxation of the gain this year. They can carryover the remaining $3,000 loss to next year.

121) For each of the following independent cases, indicate the total number of exemptions (personal and dependents) that may be claimed by the taxpayer in 2014. 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 $6,500. c. Vanessa and Matt Reardon are married and under 65 years of age. During 2014, 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, 2014, 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 70 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.

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)

128) In 2014 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.

a. Adjusted gross income $62,000 Minus: Standard deduction ( 12,400) Exemptions ( 7,900) Taxable income $41,700 b. Salary (Carol) $35,000 Minus: Itemized deductions 0 Exemption ( 3,950) Taxable income $31,050 Salary (Robert) $27,000 Minus: Itemized deductions ( 8,000) Exemption ( 3,950) Taxable income $15,050

127) Kelsey is a cash-basis, calendar-year taxpayer. Her salary is $30,000, and she is single. She plans to purchase a residence in 2015. She anticipates her property taxes and interest will total $8,000 in 2015. Each year, Kelsey contributes approximately $1,500 to charity. Her other itemized deductions total $2,000. For purposes of this problem, assume 2015 tax rates, exemptions, and standard deductions are the same as 2014. a. What will her gross tax be in 2014 and 2015 if she contributes $1,500 to charity in each year? b. What will her gross tax be in 2014 and 2015 if she contributes $3,000 to charity in 2014 but makes no contribution in 2015? c. What will her gross tax be in 2014 and 2015 if she makes no contribution in 2014 but contributes $3,000 to charity in 2015? d. Why does alternative "c" yield the lowest tax?

a. Salary $30,000 $30,000 Minus: Itemized or standard deduction ( 6,200) ( 11,500) Exemption ( 3,950) ( 3,950) Taxable income $19,850 $ 14,550 Gross Tax $ 2,524* $ 1,729** b. Salary $30,000 $30,000 Minus: Itemized or standard deduction ( 6,200) (10,000) Exemption ( 3,950) ( 3,950) Taxable income $19,850 $16,050 Gross tax $ 2,524* $ 1,954*** c. Salary $30,000 $30,000 Minus: Itemized or standard deduction ( 6,200) (13,000) Exemption ( 3,950) ( 3,950) Taxable income $19,850 $13,050 Gross tax $ 2,524 * $ 1,504 **** *$907.50 + [.15 × ($19,850 -$9,075)] = $2,524 rounded **$907.50+ [.15 × ($14,550 -$9,075)] = $1,729 rounded ***$907.50 + [.15 × ($16,050 - $9,075)] = $1,954 rounded ****$907.50 + [.15 × ($13,050 - $9,075)] = $1,504 rounded d. The contributions have no tax benefit in 2014 because the standard deduction is taken and charitable contributions are itemized deductions.

122) Indicate for each of the following the most favorable filing status for the 2014 tax year. a. Kenny died on March 2, 2013. Marge, his wife, and Bart, their son, survive. Marge filed a joint return in 2013. Bart, age 18 in 2014, is a part-time college student and continues to live at home with his mother. He works part-time, earning $6,200. What is Marge's filing status in 2014? 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, 2013, 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 2011, filed a joint tax return for 2011. 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 2014?

a. surviving spouse b. head of household c. head of household d. married filing separately e. head of household

51) The regular standard deduction is available to which one of the following taxpayers?

an abandoned spouse

41) All of the following items are included in gross income except

child support payments received.

44) Which of the following credits is considered a refundable credit?

earned income credit

108) Form 4868, a six-month extension of time to file, allows a taxpayer to

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.

12) A qualifying child of the taxpayer must meet the gross income test.

false

18) The person claiming a dependency exemption under a multiple support declaration must provide more than 25% of the dependent's support.

false

26) 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.

false

27) 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.

false

28) Suri, age 8, is a dependent of her parents and has unearned income of $6,000. She must file her own tax return.

false

3) Generally, deductions for (not from) adjusted gross income are personal expenses specifically allowed by tax law.

false

31) 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.

false

32) A married couple in the top tax bracket has a new baby. Due to the birth of the baby their taxable income will be reduced in 2014 by $3,950.

false

33) Mia is a single taxpayer with projected AGI of $250,000 in 2014. She is considering selling a long-term investment before year-end. She expects to realize a gain of $25,000. If Mia sells the investment by December 31, her 2014 taxable income will increase by $25,000.

false

34) Charishma is a taxpayer with taxable income exceeding $500,000. She sells a stock for a $50,000 gain. She acquired the stock 13 months earlier. The gain will be taxed at the 20% rate.

false

35) Generally, when a married couple files a joint return, each spouse is liable for one-half of the entire tax and any penalties incurred.

false

36) A taxpayer is able to change his filing status from married filing jointly to married filing separately by filing amended return.

false

37) The requirement to file a tax return is based on the individual's adjusted gross income.

false

38) Tax returns from individual and corporate taxpayers are due on the 15th day of the third month following the close of the tax year.

false

5) Taxpayers have the choice of claiming either the personal and dependency exemption or the standard deduction.

false

6) 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.

false

8) 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.

false

9) Nonresident aliens are allowed a full standard deduction.

false

83) 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?

father

89) To qualify as an abandoned spouse, the taxpayer is not required to

have a son or daughter in the home for the entire year.

82) In order to qualify to file as surviving spouse, all of the following criteria must be met by the widow or widower except

he or she and the decedent must have shared the same household as of date of death.

84) 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. What is Sally's filing status for the current year and how many exemptions may she claim?

head of household and one

86) 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 agrees in writing 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

head of household and one exemption.

85) Dave, age 59 and divorced, is the sole support of his mother age 83, who is a resident of a local nursing home for the entire year. Dave's mother had no income for the year. Dave's filing status and exemptions claimed are

head of household and two exemptions.

81) Edward, a widower whose wife died in 2011, maintains a household for himself and his daughter who qualifies as his dependent. Edward's most favorable filing status for 2014 is

head of household.

40) All of the following items are generally excluded from income except

interest on corporate bonds

87) The filing status in which the rates increase most rapidly is

married filing separately

90) In October 2013, 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 2013 and 2014 is, respectively,

married filing separately and head of household.

78) When a spouse dies, the surviving spouse for the year of death

may file a married filing jointly return

57) 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

no gross income.

42) All of the following items are deductions for adjusted gross income except

state and local income taxes.

79) In 2011, 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 2012, 2013, and 2014, Leo's most advantageous filing status is, respectively

surviving spouse, surviving spouse, head of household.

105) In order to shift the taxation of dividend income from a parent to a child,

the parent must transfer ownership of the stock to the child.

88) A married taxpayer may file as head of household under the abandoned spouse provisions if all of the following are met except

the taxpayer must have been married for at least two years.

1) Gross income is income from whatever source derived less exclusions.

true

10) The standard deduction may not be claimed by one married taxpayer filing a separate return if the other spouse itemizes deductions.

true

11) An individual who is claimed as a dependent by another person is not entitled to a personal exemption on his or her own return.

true

13) 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.

true

14) 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.

true

15) An individual may not qualify for the dependency exemption as a qualifying child but may still qualify as a dependent.

true

16) One requirement for claiming a dependent other than a qualifying child is that the taxpayer provides more than 50 percent of the dependent's support (assuming it is not a multiple support agreement situation).

true

17) 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.

true

19) 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.

true

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.

true

20) A child credit is a partially refundable credit.

true

21) A married couple need not live together to file a joint return.

true

22) A legally married same-sex couple can file a joint return.

true

23) 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.

true

24) An unmarried taxpayer may file as head of household if he maintains a home for his qualifying child.

true

25) For 2014, unearned income in excess of $2,000 of a child under age 18 is generally taxed at the parents' rate.

true

29) The only business entity that pays income taxes is the C corporation.

true

30) 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.

true

4) Generally, itemized deductions are personal expenses specifically allowed by the tax law.

true

7) 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.

true

46) 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?

unreimbursed employee business expenses

43) All of the following items are deductions for (not from) adjusted gross income except

unreimbursed employee business expenses.

66) Which of the following is not considered support for the dependent support test?

value of services rendered by the taxpayer for the dependent