Tax Test 1

Frazier, age 55, is married but is filing a separate return. His wife Emma itemizes her deductions.

$0. Frazier is ineligible to use the standard deduction and therefore must itemize because he is married filing a separate return when his spouse itemizes deductions.

Ruby and Woody are married and file a joint tax return. Ruby is age 66, and Woody is 69. Their taxable retirement income is $10,000.

$26,600. A taxpayer who is age 65 or over or blind in 2018 qualifies for an additional standard deduction of $1,300 or $1,600, depending on filing status. Ruby and Woody's standard deduction is $24,000 (married filing jointly) plus the additional $1,300 for Ruby being age 65 or older and another $1,300 for Woody's being age 65 or older.

A taxpayer, age 64, purchases an annuity from an insurance company for $50,000. She is to receive $300 per month for life. Her life expectancy is 20.8 years from the annuity starting date. Assuming that she receives $3,600 this year, what is the exclusion percentage and how much is included in her gross income? Round the exclusion percentage to two decimal places. Round the final answer for the income to the nearest dollar.

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CChapter 4 problem 27

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Chapter 4 problem 55

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Problem 24 Chapter 3

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Problem 28 (c,d,f,h) Chapter 3

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Roy and Brandi are engaged and plan to get married. Roy is a full-time student and earns $9,000 from a part-time job. With this income, student loans, savings, and nontaxable scholarships, he is self-supporting. For the year, Brandi is employed and reports $61,000 in wages. How much Federal income tax, if any, can Brandi save if she and Roy marry in 2018 and file a joint return?

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Simon, age 12, generates $4,800 interest income and no earned income for 2018. He incurs no investment expenses. Determine the following. Simon's net unearned income.

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Simon, age 12, generates $4,800 interest income and no earned income for 2018. He incurs no investment expenses. Determine the following. Simon's total Federal income tax liability.

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chapter 4 problem 52

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LO.4 Caden and Lily are divorced on March 3, 2017. For financial reasons, however, Lily continues to live in Caden's apartment and receives her support from him. Caden does not claim Lily as a dependent on his 2017 Federal income tax return, but he does so on his 2018 return. Explain.

An ex-spouse can qualify as a dependent under the member-of-the-household rule for the qualifying relative category except in the year of the divorce. This explains Caden's actions with reference to Lily for years 2017 and 2018.

What is the difference between an excise tax and a general sales tax?

An excise tax is limited to a particular transaction (e.g., sale of gasoline), while a general sales tax covers a multitude of transactions (e.g., sale of all nonfood goods). Sales tax is usually state imposed, excise tax is usually a federal tax

LO.2 In choosing between the standard deduction and itemizing deductions from AGI, what effect, if any, does each of the following variables have? The taxpayer's uninsured personal residence that recently was destroyed by wildfire (the region was declared a disaster area by the Federal government).

Because a large casualty loss seems probable, this increases the advantage to be gained by itemizing

Determine the taxpayer's current-year (1) economic income and (2) gross income for tax purposes from the following events: Dawn purchased an automobile for $1,500 that was worth $3,500. The seller was in desperate need of cash.

Dawn has economic income of $2,000. Dawn did not realize gross income at the time of the bargain purchase. She will have realized gain when (and if) she sells the automobile for more than $1,500, her cost.

Rex became a partner with a 30% interest in the partnership profits when he invested $200,000. In 2018, the partnership generated $400,000 of taxable income, and Rex withdrew $100,000. In 2019, the partnership had $600,000 of taxable income, and Rex withdrew $200,000. What is Rex's gross income from the partnership in 2018 and 2019?

Rex must include in his gross income his share of the partnership's income, regardless of whether his share of the profits is actually distributed to him. Therefore, Rex must recognize as gross income from the partnership $120,000 ($400,000 × 30%) in 2018 and $180,000 ($600,000 × 30%) in 2019. The withdrawal of $200,000 merely reduces Rex's basis for his partnership interest.

Which of the following individuals are required to file a 2018 Federal income tax return? Should any of these individuals file a return even if filing is not required? Why or why not? Ronald is a dependent child under age 19 who received $6,800 in wages from a part-time job.

Ronald is not required to file. His gross income of $6,800 is less than his $7,150 standard deduction (earned income plus $350). However, Ronald should file a return to obtain a tax refund if any income taxes were withheld from his pay.

Distinguish between an estate tax and an inheritance tax. Do some states impose both? Neither?

Some states impose both an estate tax and an inheritance tax. Some states (e.g., Florida and Texas) levy neither tax.

Wesley and Camilla (ages 90 and 88, respectively) live in an assisted care facility and for the last two years received their support from the following sources. Percentage of Support Social Security benefits 16% Son 20 Niece 29 Cousin 12 Brother 11 Family friend (not related) 12 Who is eligible to claim Wesley and Camilla as dependents under a multiple support agreement?

Son, niece, and brother. The cousin and the family friend do not meet the relationship test.

Determine Amos's gross income in each of the following cases: In the current year, Amos purchased an automobile for $25,000. As part of the transaction, Amos received a $1,500 rebate from the manufacturer.

The $1,500 is a reduction in the cost of the automobile and is not income.

Determine the taxpayer's current-year (1) economic income and (2) gross income for tax purposes from the following events: Valery found a suitcase that contained $100,000. She could not determine who the owner was.

The $100,000 is an increase in wealth realized, must be included in Valery's gross income, and is economic income.

Determine the taxpayer's current-year (1) economic income and (2) gross income for tax purposes from the following events: Elliot, a 6-year-old child, was paid $5,000 for appearing in a television commercial. His parents put the funds in a savings account for the child's education.

The $5,000 is economic income and gross income for tax purposes.

Determine Amos's gross income in each of the following cases:Amos sold his business. In addition to the selling price of the stock, he received $50,000 for a covenant not to compete—an agreement that he will not compete with his former business for five years.

The $50,000 payment received under the covenant is included in Amos's gross income because the payment is an increase in wealth realized.

In connection with the Medicare component of FICA, comment on the following: The applicability of the .9% increase in the 1.45% regular tax rate.

The .9% Medicare addition applies to taxpayers with wages or net self-employment income in excess of $200,000 ($250,000 for married filing jointly).

LO.2, 3, 5 David is age 78, is a widower, and is being claimed as a dependent by his son. How does this situation affect the following? The availability of any additional standard deduction.

The 2018 additional standard deduction of $1,600 is allowed in full since he is 78 (age 65 or over).

Distinguish between an estate tax and an inheritance tax. Which, if either, does the Federal government impose?

The Federal government imposes an estate tax.

How many dependents are there? Leo and Amanda (ages 48 and 46, respectively) are married and furnish more than 50% of the support of their two children, Elton (age 18) and Trista (age 24). During the year, Elton earns $4,500 providing transportation for elderly persons with disabilities, and Trista receives a $5,000 scholarship for tuition at the law school she attends.

Two. Elton is a qualifying child, so his gross income does not matter. Trista is not a qualifying child—although a full-time student, she is not under age 24. However, Trista falls within the qualifying relative category. She passes the gross income test because the tuition portion of a scholarship is nontaxable.

LO.4Isabella, Emma, and Jacob share equally in the support of their parents. Jacob tells his sisters that they each can claim one of the parents as a dependent. Explain what Jacob means.

Under a multiple support agreement, Isabella, Emma, or Jacob can claim either (or both) of their parents as dependents. Jacob is suggesting that his sisters each claim one of their parents as a dependent via a multiple support agreement.

For a person who receives Social Security benefits, what effect, if any, can an increase in other income have on that person's taxable income?

Under the formula for computing taxable Social Security benefits, an increase in other income increases modified adjusted gross income, which can cause an increase in the taxable benefits, thus causing taxable income to increase by more than the other income.

LO.2, 3, 5 David is age 78, is a widower, and is being claimed as a dependent by his son. How does this situation affect the following? David's own individual filing requirement.

The filing requirements for persons being claimed as dependents by others are more complex than those applicable to regular taxpayers. The requirements depend on whether the dependent has only earned income, only unearned income, or both earned and unearned income and on the amount of gross income.

Do all states impose a general sales tax?

The following states do not impose a general sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon.

Regarding the statute of limitations on additional assessments of tax by the IRS, determine the applicable period in each of the following situations. Assume a calendar year individual with no fraud or substantial omission involved. The income tax return for 2017 was filed on February 19, 2018.

The normal three-year statute of limitations will begin to run on the original due date of the return (usually, the fifteenth day of the fourth month after year-end; April 15). However, for 2017 returns, the due date is April 17, 2018 because April 15, 2018 is a Sunday and Emancipation Day in the District of Columbia is observed on Monday, April 16, 2018. When the return is filed early, the normal filing date controls.

LO.2 In choosing between the standard deduction and itemizing deductions from AGI, what effect, if any, does each of the following variables have? The number of dependents the taxpayer(s) can identify.

The number of dependents has no effect on whether a taxpayer itemizes or chooses the standard deduction option.

Which of the following items can be inclusions in gross income? Amount an off-duty motorcycle police officer received for escorting a funeral procession.

The police officer has earned income, and it is included in gross income. Income from everything should be reported

What purpose is served by a statute of limitations? How is it relevant in the case of tax controversies?

The purpose of a statute of limitations is to preclude parties from prosecuting stale claims. The passage of time makes the defense of such claims difficult because witnesses and other evidence may no longer be available. In the Federal tax area, statutes of limitations cover additional assessments by the IRS and the pursuit of refund claims by taxpayers. Generally three years

What is the purpose of the unified transfer tax credit?

The purpose of the unified transfer tax credit is to eliminate the tax on all but substantial gifts and estates.

Which of the following items can be inclusions in gross income? A damage deposit the taxpayer recovered when he vacated the apartment he had rented.

The refunded deposit is a nontaxable return of capital. You are just getting your money back. No gain happening

With regard to the IRS audit process, comment on the following: A "no change" RAR results.

The revenue agent's report (RAR) accepts the taxpayer's return as filed.

LO.1, 8, 9 Late in the tax year, the Polks come to you for tax advice. They are considering selling some stock investments for a loss and making a contribution to a traditional IRA. In reviewing their situation, you note that they have large medical expenses and a casualty loss (in a Federal disaster area), with neither being covered by insurance. What advice would you give to the Polks?

The sale of the stock investment will result in a capital loss. The capital loss will offset any capital gain, and any excess (up to $3,000) can be applied against ordinary income to arrive at AGI. The contribution to the traditional IRA is a deduction for AGI. Thus, both the capital loss and the IRA contribution reduce AGI. By reducing AGI, the Polks will increase their allowable medical and casualty deductions. [The medical deduction is the excess over 7.5% of AGI, whereas the casualty loss is the excess over 10% of AGI.]

LO.4 Magda maintains a household that includes her eldest son (age 30) and one of Magda's cousins (age 28). The cousin is a dependent but her son is not. Explain.

The son is not a qualifying child due to the age requirement. He probably is not a qualifying relative because of the gross income test. The cousin apparently meets all of the requirements of the qualifying relative category.

Which of the following items can be inclusions in gross income? During the year, shares of stock that the taxpayer had purchased as an investment doubled in value.

The taxpayer still owns the stock. Because there is no realization event, there is no gross income.

Does the Federal government impose a general sales tax?

There is no Federal general sales tax.

Contrast FICA and FUTA as to the following: Reduction of tax based on a merit rating system.

This applies only to FUTA. The merit system rewards employers who have low employee turnover because this reduces the payout of unemployment benefits.

LO.1 Which of the following items can be inclusions in gross income? Tips received by Matt, a bartender, from patrons. (Matt is paid a regular salary by the cocktail lounge that employs him.)

Tips are earned income and included in gross income.

In connection with the Medicare component of FICA, comment on the following: Any dollar limitation imposed.

Unlike the Social Security portion of FICA, there is no dollar limit on the imposition of the Medicare tax.

With regard to the IRS audit process, comment on the following: The audit is conducted at the office of the IRS.

What is described is an office audit.

Connor purchased an annuity that was to pay him a fixed amount each month for the remainder of his life. He began receiving payments in 2002, when he was 65 years old. In 2018, Connor was killed in an automobile accident. What are the effects of the annuity on Connor's final tax return?

When Connor began receiving payments, he had a life expectancy of 20 years (see Exhibit 4.1), but he collected on the annuity for approximately 16 years (2002-2018). Therefore, he did not recover all of his capital. The unrecovered capital can be deducted as a loss in Connor's final tax return.

With regard to the IRS audit process, comment on the following: A special agent joins the audit team.

When a special agent becomes involved, this usually means that fraud is suspected.

How does the pay-as-you-go procedure apply to wage earners? To persons who have income from sources other than wages?

For wage earners, the tax law requires employers to withhold a specified dollar amount from wages paid to the employee to cover income taxes and payroll taxes. Persons with nonwage income generally are required to make quarterly payments to the IRS for estimated taxes. Both procedures ensure that taxpayers will be financially able to meet their annual tax liabilities. That is, the amounts withheld are meant to prepay the employee's income taxes and payroll taxes related to the wages earned.

LO.2, 3, 5 David is age 78, is a widower, and is being claimed as a dependent by his son. How does this situation affect the following? The standard deduction allowed to David.

In 2018, the basic standard deduction is the greater of $1,050 or earned income plus $350. The total basic standard deduction allowed, however, cannot exceed $12,000 (the 2018 standard deduction for single taxpayers)

Which of the following individuals are required to file a 2018 Federal income tax return? Should any of these individuals file a return even if filing is not required? Why or why not? Quinn, age 20, is a full-time college student who is claimed as a dependent by his parents. Quinn reports taxable interest and dividends of $2,500.

Quinn must file a return. He has unearned income of more than $1,050 and no additional standard deductions.

Regarding the statute of limitations on additional assessments of tax by the IRS, determine the applicable period in each of the following situations. Assume a calendar year individual with no fraud or substantial omission involved. The income tax return for 2017 was never filed because the taxpayer thought no additional tax was due.

Regardless of the fact that an innocent misunderstanding was involved, there is no statute of limitations when a return is not filed.

LO.1 Which of the following items can be exclusions from gross income? Amount collected on a loan previously made to a college friend.

excluded from taxable income but the interest made is taxable

Isabella files her income tax return 35 days after the due date of the return without obtaining an extension from the IRS. Along with the return, she remits a check for $40,000, which is the balance of the tax she owes. Disregarding the interest element, what are Isabella's penalties for failure to file and for failure to pay?

no. Interest is not paid if the refund is made within 45 days of when the return was filed. However, a return is not considered filed until its due date. Thus, the period from April 17 to May 28, 2018, does not satisfy the 45-day requirement.

Margie is 15 and claimed as a dependent by her parents. She reports $800 in dividends income and $1,400 in wages from a part-time job.

$1,750. When filing her own tax return, Margie is limited to the greater of $1,050 or $1,750 (the sum of the earned income for the year plus $350).

Shonda is age 68 and single. She is claimed by her daughter as a dependent. Her earned income is $500, and her interest income is $125.

$2,650. When filing her own tax return, Shonda is limited to the greater of $1,050 or $850 (the sum of the $500 of earned income for the year plus $350). This limitation applies only to the "basic" standard deduction. A dependent who is 65 or older or blind is also allowed the additional standard deduction amount on his or her own return. Therefore, Shonda's standard deduction is $2,650 ($1,050 + $1,600).

With regard to the IRS audit process, comment on the following: The audit is resolved by mail.

A correspondence audit is probably involved. These audits involve a limited number of issues (i.e., taxpayer failed to report some dividend income) and most often are easily resolved.

LO.1 Which of the following items can be inclusions in gross income? Jefferson receives a new BMW from his grandmother when he passes the CPA exam.

A gift is an exclusion item, so it is not included in gross income. The grandmother may owe gift tax. If an employer gives you a gift then it is included as taxable income

Distinguish between taxes that are proportional and those that are progressive.

A tax is proportional if the rate of tax remains constant for any given income level. The tax is progressive if a higher rate of tax applies as the tax base increases. Focus on this class is progressive. Income moves up, rate goes up

What is the purpose of the constructive receipt doctrine?

According to the constructive receipt doctrine, the taxpayer cannot avoid tax on his or her income by refusing to accept the income at the time it is set aside or made available. The constructive receipt doctrine prevents cash basis taxpayers from deferring their income by intentionally avoiding the receipt of the income in the current tax year.

Al is a medical doctor who conducts his practice as a sole proprietor. During 2018, he received cash of $280,000 for medical services. Of the amount collected, $40,000 was for services provided in 2017. At the end of 2018, Al had accounts receivable of $60,000, all for services rendered in 2018. In addition, at the end of the year, Al received $12,000 as an advance payment from a health maintenance organization (HMO) for services to be rendered in 2019. Compute Al's gross income for 2018: Advise Al on which method of accounting he should use.

Al should use the cash method of accounting so that he will not have to pay income taxes on uncollected accounts receivable. The tax law does not require Al to use the accrual method.

Al is a medical doctor who conducts his practice as a sole proprietor. During 2018, he received cash of $280,000 for medical services. Of the amount collected, $40,000 was for services provided in 2017. At the end of 2018, Al had accounts receivable of $60,000, all for services rendered in 2018. In addition, at the end of the year, Al received $12,000 as an advance payment from a health maintenance organization (HMO) for services to be rendered in 2019. Compute Al's gross income for 2018: Using the cash basis of accounting.

Al's gross income for 2018 on the cash basis is $292,000 ($280,000 + $12,000), which is the amount he actually collected in that year.

LO.4 Heather, age 12, lives in the same household with her mother, grandmother, and uncle. Which of Heather's relatives takes precedence in determining your answer?

As the parent, the mother takes precedence. If the mother waives the dependency exemption, the exemption goes to whoever has the higher AGI between the grandmother and the uncle.

LO.2 In choosing between the standard deduction and itemizing deductions from AGI, what effect, if any, does each of the following variables have? Taxpayer's filing status (e.g., single; married, filing jointly).

Because the amount of the standard deduction varies depending on filing status, this factor is highly relevant to the taxpayer's decision.

Ben lost his job when his employer moved its plant. During the year, he collected unemployment benefits for three months, a total of $1,800. While he was waiting to hear from prospective employers, he painted his house. If Ben had paid someone else to paint his house, the cost would have been $3,000. The cost of the paint Ben used was $800. What is Ben's gross income for tax purposes from the above events?

Ben must recognize $1,800 of income from the unemployment benefits. His savings from painting his house are not included in gross income—it was not income realized because the savings were not an amount received from another.

Compute the 2018 Federal income tax liability and the marginal and effective tax rates in each of the following independent cases. Use the Tax Rate Schedules in Appendix A for this purpose. Chandler is single and reports taxable income of $94,800.

Chandler: Using the rates for a single taxpayer, her tax liability is $17,042.1 Her marginal rate is 24%. Her average rate is 17.98% ($17,042/$94,800).

Which of the following items can be inclusions in gross income? Child support payments received.

Child support payments received are not included in gross income. Property settlement is not included in AGI

LO.1 Which of the following items can be exclusions from gross income? Award received by the taxpayer for compensatory damages from her broken leg.

Excluded from taxable income

LO.1 Which of the following items can be exclusions from gross income? Insurance proceeds paid to the taxpayer on the death of her uncle—she was the designated beneficiary under the policy.

Excluded from taxable income, anybody can be the benficiary not just family. Proceeds are always excluded

LO.1 Which of the following items can be exclusions from gross income? Interest income on City of Chicago bonds.

Excluded from taxable income. Interest on them is taxable. Municipal bonds are not taxable, corporate bonds are taxable

LO.2 In choosing between the standard deduction and itemizing deductions from AGI, what effect, if any, does each of the following variables have? Whether the taxpayer(s) rent or own their personal residence.

If the taxpayer is still making house payments, the interest expense deduction on the home mortgage and real property taxes may make itemizing more attractive.

LO.2 In choosing between the standard deduction and itemizing deductions from AGI, what effect, if any, does each of the following variables have? The age of the taxpayer(s).

If the taxpayer is 65 or over, an additional standard deduction is available. This might favor the standard deduction choice

Contrast FICA and FUTA as to the following: Governmental administration of the tax.

FICA is administered by the Federal government. FUTA, however, is handled by both the Federal and state government.

Contrast FICA and FUTA as to the following: Upon whom imposed.

FICA is imposed on both employer and employee, while FUTA is imposed only on the employer.

Contrast FICA and FUTA as to the following: Purpose of the tax.

FICA offers some measure of retirement security, and FUTA provides a modest source of income in the event of loss of employment.

LO.2 In choosing between the standard deduction and itemizing deductions from AGI, what effect, if any, does each of the following variables have? The health (i.e., physical condition) of the taxpayer(s).

If the taxpayer is blind, an additional standard deduction is available. This might favor the standard deduction choice.

Chloe, a single parent, maintains a home in which she and Dean, Chloe's unmarried son, live. Dean, age 18, earns $5,000 from a part-time job.

Head-of-household filing status is available because the son is a dependent under the qualifying child category.

Assume the same facts as in part (c), except that Dean is age 19, not 18.

Head-of-household filing status is not available. Due to the age test, the son is not a qualifying child. (It is assumed that the son is not disabled or a full-time student.) Due to the gross income test, the son does not satisfy the requirements of a qualifying relative.

Evie lives alone but maintains the household where her dependent daughter Zoe lives.

Head-of-household filing status is not available. The daughter is not a member of the taxpayer's household.

Frank maintains a household that includes Georgia, an unrelated friend who qualifies as his dependent.

Head-of-household status is not available because the friend, although a dependent, does not meet the relationship test. 14

LO.4 Heather, age 12, lives in the same household with her mother, grandmother, and uncle. For whom is Heather a dependent?

Heather is a qualifying child to all three parties.

Regarding the statute of limitations on additional assessments of tax by the IRS, determine the applicable period in each of the following situations. Assume a calendar year individual with no fraud or substantial omission involved. The income tax return for 2017 was prepared on April 4, 2018, but was never filed. Through some misunderstanding between the preparer and the taxpayer, each expected the other to file the return.

If a return that is due is not filed, the statute of limitations does not start to run. It does not matter that the failure to file was due to an innocent error on the part of the taxpayer or adviser.

LO.2 In choosing between the standard deduction and itemizing deductions from AGI, what effect, if any, does each of the following variables have? Whether married taxpayers decide to file separate returns.

If married persons file separate returns, the returns must be consistent. Thus, if one spouse itemizes, the other spouse also must itemize.

Which of the following items can be inclusions in gross income? While his mother Shirley was in the hospital, the taxpayer sold some of Shirley's jewelry to help pay for the medical costs.

If the jewelry was sold at a gain, it is included in the mother's gross income (this assumes that the son sold it for his mother). If sold at a loss, it is an unallowable loss on a personal use asset. Loss is not deductible. Not a lot of people include the gain

Distinguish between an estate tax and an inheritance tax.

If the tax is imposed on the right to pass property at death, it is classified as an estate tax. If it taxes the right to receive property from a decedent, it is termed an inheritance tax.

The Grays live in Clay County, which is adjacent to Jackson County. Although the retail stores in both counties are comparable, the Grays usually drive a few extra miles to shop in Jackson County. As to why the Grays might do this, consider the following: Clay County and Jackson County are in the same state.

In some states, the sales tax rate varies depending on the county and/or city.

LO.1 Which of the following items can be exclusions from gross income? Alimony payments received (divorce finalized in 2016).

Included as taxable income

Which of the following items can be inclusions in gross income? Interest received by the taxpayer on an investment in school bonds issued by IBM.

Interest income on corporate bonds is included in gross income.

Bree maintains a home in which she and her father live. The father then enters a nursing facility for treatment of a mental illness.

Is the stay in the nursing home temporary or permanent? If the father can be expected to return to the taxpayer's home, she qualifies for head-of-household filing status. If the stay is permanent, then she would need to pay more than half of the nursing home costs.

The Grays live in Clay County, which is adjacent to Jackson County. Although the retail stores in both counties are comparable, the Grays usually drive a few extra miles to shop in Jackson County. As to why the Grays might do this, consider the following: Clay County is in a different state than Jackson County.

Jackson County must be in a state that imposes a lower (or no) sales tax. With certain major purchases (i.e., big-ticket items), any use tax imposed by the state of the Grays' residence could come into play.

Compute the 2018 Federal income tax liability and the marginal and effective tax rates in each of the following independent cases. Use the Tax Rate Schedules in Appendix A for this purpose. Lamar, a head of household, records taxable income of $57,050.

Lamar: Using the rates for filing as a head of household, his tax liability is $7,099.2 His marginal rate is 22%. His average rate is 12.4% ($7,099/$57,050).

Determine the taxpayer's current-year (1) economic income and (2) gross income for tax purposes from the following events: Larry spent $1,000 to raise vegetables that he and his family consumed. The cost of the vegetables in a store would have been $2,400.

Larry has economic income of $1,400 from the production in his garden. However, for tax purposes, no income is realized. The realization requirement is not satisfied because the vegetables are consumed by Larry and his family rather than sold to others.

LO.4Mark and Lisa were divorced last year. This year, Mark has custody of their children, but Lisa provides nearly all of their support. Who is entitled to claim the children as dependents?

Mark will prevail because custody (not support) controls in a divorce setting.

An employer provides all of his employees with life insurance protection equal to twice the employee's annual salary. Melba, age 42, has an annual salary of $70,000. Is Melba required to recognize income even though she is still alive at the end of the year and thus nothing has been collected on the life insurance policy? Explain.

Melba's insurance coverage of $140,000 is twice her annual salary of $70,000. Because this exceeds $50,000, she is required to include in gross income the premiums on $90,000 of excess insurance coverage. The premiums amount is computed by using a table provided by the IRS. For Melba's age, 42 years, the premium amount is $.10 per month per $1,000 of insurance coverage for her annual insurance coverage in excess of $50,000 (see Exhibit 4.3), which is $108 [($.10)(12)(90)].

Which of the following individuals are required to file a 2018 Federal income tax return? Should any of these individuals file a return even if filing is not required? Why or why not? Mike is single and is 67 years old. His gross income from wages was $10,800.

Mike need not file because his gross income of $10,800 is less than the $13,600 filing requirement. Mike, however, should file, even though a return is not required, to obtain a refund if any income taxes were withheld from his pay.

Brianna, a calendar year taxpayer, files her income tax return for 2017 on February 3, 2018. Although she makes repeated inquiries, she does not receive her refund from the IRS until May 28, 2018. Is Brianna entitled to interest on the refund? Explain.

No. Interest is not paid if the refund is made within 45 days of when the return was filed. However, a return is not considered filed until its due date. Thus, the period from April 17 to May 28, 2018, does not satisfy the 45-day requirement.

Regarding the statute of limitations on additional assessments of tax by the IRS, determine the applicable period in each of the following situations. Assume a calendar year individual with no fraud or substantial omission involved. The income tax return for 2017 was filed on June 25, 2018.

Now the statute of limitations starts to run on the filing date. If the date of filing controlled (see part a. above), the taxpayer could shorten the assessment period by filing late.

LO.1 Which of the following items can be inclusions in gross income? Sherri sells her Super Bowl tickets for three times what she paid for them.

Sale of property at a gain, even if the property is personal use property, is included in gross income [less the cost (basis) of the tickets]. If a personal use asset is sold at a loss, the loss is not included in gross income.

Which of the following individuals are required to file a 2018 Federal income tax return? Should any of these individuals file a return even if filing is not required? Why or why not? Sam is married and files a joint return with his spouse, Lana. Both Sam and Lana are 67 years old. Their combined gross income was $24,250.

Sam and Lana are not required to file because their gross income of $24,250 is less than the $26,600 filing requirement ($24,000 + $1,300 + $1,300).

LO.1 Which of the following items can be inclusions in gross income? Amounts received by the taxpayer, a baseball "Hall of Famer," for autographing sports equipment (e.g., balls and gloves).

The baseball player has earned income, and it is included in gross income. Income from any source is usually included

Determine Amos's gross income in each of the following cases:Amos owned some land he held as an investment. As a result of a change in the zoning rules, the property increased in value by $20,000.

The change in the zoning rules that causes the property to increase in value is economic gain but is not a realized gain for tax purposes. Amos's wealth increased, but the realization requirement is not satisfied because he did not receive any additional property, nor were any improvements made to his property. Amos will not realize this increase in wealth for tax purposes until he sells the property.

Determine the effects of the following on a cash basis taxpayer's gross income for 2018 and 2019. On the morning of December 31, 2018, the taxpayer received a $1,500 check from a customer. The taxpayer did not cash the check until January 3, 2019.

The check is a cash equivalent; therefore, the $1,500 must be included in the cash basis taxpayer's 2018 gross income when it was actually received.

Determine the effects of the following on a cash basis taxpayer's gross income for 2018 and 2019. The same as part (a), except the customer asked the taxpayer not to cash the check until January 3, 2019, after the customer's salary check could be deposited.

The check is not a cash equivalent because of the restrictive conditions placed upon it. Therefore, a cash basis taxpayer does not include the $1,500 in gross income until 2019.

Compare and contrast the economist's concept used to recognize income with the concept employed in measuring taxable income.

The economist's concept of income focuses on changes in the values of assets owned, whereas under tax accounting, realization is required before income is recognized. Generally, realization occurs when there is an exchange of goods and services whose value is capable of objective measurement.

Is the same amount available for both the Federal gift tax and the estate tax? Explain.

Yes. The credit for 2018 is $4,417,800; for 2017, it is $2,141,800.

Does the use of the credit for a gift affect the amount of credit available for the estate tax? Explain.

Yes. The credit is available to cover transfers by gift or by death (or both), but the amount can be used only once. 21