Ch 4 Ch. 4 Indiv. Income tax, Dependents, & Filing Status + Quiz Questions

In year 1 Jill reported total itemized deductions of $14,000 including $4,000 in state income taxes paid in Yr 1. Jeff's standard deduction in Yr 1 was 12,000. In year 2 Jill received a state income refund of $1, 500 related to taxes paid in Yr 1. Under the tax benefit rule, what portion of the $1,500 refund must be included in Jill's Year 2 gross income?

$ 1, 500

Willy owns 50% interest in an S corporation that earned $150,000 in 2020. He also owns shares of stock in a C corporation paid dividends 0f $30,000 to Willy in 2020. How much taxable income must Willy report from these investments in 2020?

$75,000 of income from S corporation and $30,000 of dividend Income from the C Corporation.

After their divorce in 2017, Jeff was required to pay $180,000 per year to his former spouse, Darlene. This required payment to Darlene includes $60,000 for child support. Jeff's payment will reduced to $120,000 per year when the child turns 18 years old in 2030. How much alimony should Jeff be able to deduct in 2020?

120,000 = 180,000- 60,000 = 120,000 Types of payment that do not qualify as alimony oProperty divisions oChild support payments fixed by the divorce or separation agreement

Sally elected to reinvest the dividends on her Apple Stock. Sally's apple dividends were $5,000 in 2020 and Sally purchased 25 additional shares of Apple. The 25 shares purchased were valued at $4,500 as of Dec 31, 2020. Sally has never sold any of her Apple Stock. How should Sally report this activity on her 2020 tax return?

Dividend Income of $5,000

For purposes of determining head of household filing status, the taxpayer's mother or father is considered to be a qualifying person of the taxpayer (even if the mother or father does not qualify as the taxpayer's dependent) as long as the taxpayer pays more than half the costs of maintaining the household of the mother or father. Explain.

False. The taxpayer must be able to claim his or her father or mother as a dependent in order for the father or mother to be a qualifying person for purposes of determining head of household filing status.

Are taxpayers allowed to deduct net capital losses (capital losses in excess of capital gains)? Explain

In general, a taxpayer is allowed to deduct, as a "for AGI deduction," up to $3,000 of net capital loss against ordinary income. If the net capital loss exceeds $3,000, the taxpayer is allowed to carry the loss over indefinitely to deduct in subsequent years (subject to the $3,000 annual deduction limitation). If however, a capital loss arises from the sale of a personal use asset (such as a personal automobile or a personal residence), the loss is not deductible.

On Jan 1, 2020, Tim purchases $30,000 of corporate bonds paying interest at 5% annually. On June 30, 2020 he sold the bonds to Jane. Tim and Jane are cash basis taxpayers. What interest income on the bonds, if any, should Tim and Jane report in 2020.

Jane reports $750 of interest income and Time reports $ 750 of interest income

Which statement about the cash flow method of accounting is FALSE?

Large corporations primarily use the cash method of accounting

Barney paid $10,000 for a parcel of land in 2016 as an investment. He sold the land in 2020 for $14,000 and paid the real estate broker a sales commission of $700. How should this transaction be reported on Barney's 2020 tax return?

Long Term Capital Gain of $3,300 14,000 - 10,000 - 700 = 3,300

Juan and Bonita are married and have two dependent children living at home. This year, Juan is killed in an avalanche while skiing.What is Bonita's filing status this year?

Married Filing Jointly

For tax purposes, why is the married filing jointly tax status generally preferable to the married filing separately filing status? Why might a married taxpayer prefer not to file a joint return with the taxpayer's spouse?

Married couples filing joint returns combine their income and deductions and agree to share joint and several liability for the resulting tax. Filing a joint return generally results in a lower tax liability than does filing separately due to more favorable tax rate schedules and higher phase-out thresholds for various tax benefits. However, a couple may prefer to file separate returns in certain circumstances for nontax reasons. For example, when a married couple is separated but the couple does not want to have anything to do with each other or when one spouse does not want to be liable for the tax liability of both parties, the couple may choose to file separately.

A taxpayer's spouse died on January 5, Year 3, leaving the taxpayer to provide all of the support for their 13-year-old child. The taxpayer had not remarried as of the end of the year. For Year 3, what is the taxpayer's most advantageous filing status?

Married filing jointly

Aishwarya's husband passed away in 2019. She needs to determine whether Jasmine, her 17-year-old stepdaughter, who is single, qualifies as her dependent in 2020. Jasmine is a resident but not a citizen of the United States. She lived in Aishwarya's home from June 15 through December 31, 2020. Aishwarya provided more than half of Jasmine's support for 2020.Would Aishwarya be allowed to claim Jasmine as a dependent for 2020 if Aishwarya provided more than half of Jasmine's support in 2020, Jasmine lived in Aishwarya's home from July 15 through December 31 of 2020, and Jasmine reported gross income of $2,500 for the year?

NO

Aishwarya's husband passed away in 2019. She needs to determine whether Jasmine, her 17-year-old stepdaughter, who is single, qualifies as her dependent in 2020. Jasmine is a resident but not a citizen of the United States. She lived in Aishwarya's home from June 15 through December 31, 2020. Aishwarya provided more than half of Jasmine's support for 2020.Would Aishwarya be allowed to claim Jasmine as a dependent for 2020 if Aishwarya provided more than half of Jasmine's support in 2020, Jasmine lived in Aishwarya's home from July 15 through December 31 of 2020, and Jasmine reported gross income of $5,000 for the year?

No

If a person meets the qualifying relative tests for a taxpayer, is that person automatically considered to be a dependent of the taxpayer?

No, taxpayers may claim a qualifying relative as a dependent only if the qualifying relative is a citizen of the United States or a resident of the United States, Canada, or Mexico. Further, the qualifying relative must meet the joint tax return test if the person is married (no joint return with spouse unless there is no tax liability (positive taxable income) on the joint return and there would have been no tax liability on either separate tax return if the spouses had filed separately).

Are taxpayers required to include all realized income in gross income? Explain.

No. Taxpayers are allowed to permanently exclude certain types of income from gross income or defer certain types of income from taxation (gross income) until a subsequent tax year. Consequently, taxpayers are not required to include all realized income in gross income.

Juan and Bonita are married and have two dependent children living at home. This year, Juan is killed in an avalanche while skiing.Assuming Bonita doesn't remarry and still has two dependent children living at home, what will her filing status be next year?

Qualifying Widower

Which of the following is NOT excludable from gross income?

Self-Employment Income

Juan and Bonita are married and have two dependent children living at home. This year, Juan is killed in an avalanche while skiing.Assuming Bonita doesn't remarry and doesn't have any dependents next year, what will her filing status be next year?

Single

David and Lilly Fernandez have determined their tax liability on their joint tax return to be $2,100. They have made prepayments of $1,900 and also have a child tax credit of $2,000.What is the amount of their tax refund or taxes due?

Tax refund = $2,100 − 2,000 − 1,900 = ($1,800)

How do taxpayers determine whether they should deduct their itemized deductions or utilize the standard deduction?

Taxpayers generally deduct the greater of (1) the applicable standard deduction or (2) their total itemized deductions, after limitations. However, taxpayers that do not want to bother with tracking itemized deductions may choose to deduct the standard deduction, even when itemized deductions may exceed the standard deduction.

All else being equal, should taxpayers prefer to exclude income or to defer it? Why?

Taxpayers should prefer to exclude income rather than defer income. When they exclude income, they are never taxed on the income. When they defer income, they are still taxed on the income but they are taxed in a subsequent tax year.

Where does the qualified business income (QBI) deduction fit in the individual income tax formula and what type of deduction is it?

The QBI deduction is a from AGI deduction but it is not an itemized deduction. That is, the deduction does not affect AGI but it does reduce taxable income even if the taxpayer does not itemize deductions. The deduction is equal to 20 percent of the taxpayer's QBI and it is subject to certain limits.

Which of the following is NOT connected to the income realization principle?

The Taxpayer is permitted an itemized deduction for the contribution of appreciated stock to the WVU Foundation

What is not impacted by a taxpayer's filing status?

The number of dependents the taxpayer may claim

The Federal taxation of a social security recipient's social security benefits is NOT impacted by which of the following?

The tax law of the US State where the recipient lives most of the year

T/F? Partnerships and S corporations are both flow through entities

True

Aishwarya's husband passed away in 2019. She needs to determine whether Jasmine, her 17-year-old stepdaughter, who is single, qualifies as her dependent in 2020. Jasmine is a resident but not a citizen of the United States. She lived in Aishwarya's home from June 15 through December 31, 2020. Aishwarya provided more than half of Jasmine's support for 2020.Is Aishwarya allowed to claim Jasmine as a dependent for 2020?

Yes

relationship test requirements for a qualifying child

relationship test requirements for a qualifying child The relationship test for a qualifying child includes the taxpayer's child or descendant of a child (child or grandchild)he relationship test for qualifying child includes siblings of the taxpayer or descendants of siblings of the taxpayer

relationship requirements for a qualifying relative.

the relationship test for qualifying relatives includes both descendants and ancestors of the taxpayer (child, grandchild, parents, or grandparent).qualifying relative test also includes siblings of the taxpayer and sons or daughters of the taxpayer's siblings.The relationship test for qualifying relative also includes the taxpayer's in laws, aunt, uncle, and any person (even if there is no qualifying family relationship as described above) who has the same principal place of abode as the taxpayer for the entire year. Thus, the relationship test for qualifying relative is much broader in scope than the relationship test for qualifying child.