ACTG 395 Chapter 4

Will and Lyndsey are married with no dependents and file a joint tax return. In 2032, they paid $3,000 in qualified student loan interest in addition to $25,750 in itemized deductions. What is the total of their "FROM AGI" deductions in 2023?

$27,700 Reason: They can deduct the larger of their itemized deductions or their 2023 is $27,700. Student loan interest, however, is a FOR AGI deduction.

Put the following items in the order in which they are found in the individual income tax formula.

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

Kara is single with no dependents. She has itemized deductions of $5,000 in 2023. What is the total of her "FROM AGI" deductions for 2023?

13,850 Reason: She can deduct the greater of her standard deduction ($13,850) or her itemized deductions ($5,000), but not both.

Yolanda is your client. With her current level of taxable income, she is paying tax at 24% marginal rate. She received $2,000 in qualified dividends this year. What rate of tax do you expect that Yolanda will pay on her dividends?

15% Reason: Yolanda's 24% marginal tax rate means her taxable income is more than $95,350 but less than $182,100, and for all values in that range, the long-term capital gains rate applied to qualified dividends is 15%.

Deductible capital losses can offset capital gains. If the losses exceeds the gains, then a maximum of $ ___________ may be used to offset ordinary income in any one year.

3,000

The gross income test requires that a qualifying relative's gross income for 2023 be less than $

4,700

Which one of the following assets is classified as a capital asset?

A car used personally

Which of the following assets are classified as capital assets? (Check all that apply.)

A house owned and used by a taxpayer Stock held for investment

Which of the following would most likely NOT qualify as support for meeting the support test?

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

Which of the following choices is NOT a form of a tax prepayment?

A tax refund received in the current year for the prior year

Which of the following statements is TRUE regarding the individual income tax formula?

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

Which of the following examples results in realized income?

A taxpayer sold stock for $1,000. She had originally paid $300 for the stock.

Which of the choices below is NOT one of the tests that must be met to qualify as a qualifying relative?

Age

Which of the following items are deductions FOR adjusted gross income? (Check all that apply.)

Alimony paid for divorces finalized before 1/1/2019 Capital losses Contributions to (non Roth) qualified retirement accounts Health insurance for self-employed persons

Under a multiple support agreement, taxpayers who DON'T pay over half of an individual's support may still be allowed to claim the individual as a dependent if which of the following rules apply? (Check all that apply.)

All other individuals contributing more than 10 percent support provides statements to taxpayer agreeing NOT to claim the individual as a dependent. The taxpayer and at least one other person provided over one-half of the support of the individual. No one taxpayer paid over one-half of the individual's support.

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

Alternative Minimum

Which of the following taxes may be imposed in addition to the individual income tax and are calculated on tax bases other than the regular taxable income? (Check all that apply.)

Alternative minimum tax Self-employment tax

Which one of the following individuals CANNOT meet the residence test for being a qualifying child of another taxpayer?

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

Andrew is trying to determine if Annie will qualify as his dependent. She will NOT meet the criteria for a qualifying child, so Andrew is checking to see if she is a qualifying relative. Assuming there is NOT a multiple support agreement involved, which one of the following criteria for the support test must be met in order for Annie to be considered a qualifying relative for Andrew?

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

Ashley and Roland were married and had two dependent children. Roland died last year. What filing status will Ashley use for the year Roland died and for the current year (assuming she does not remarry)?

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

Which of the following requirements are necessary to qualify for head of household status? (Check all that apply.)

Be unmarried (or considered unmarried under the abandoned spouse provisions) at the end of the year Pay more than half the costs of keeping up a home for the year

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

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

Realized income items that taxpayers permanently omit from income are referred to as __________ , while items that are taxed in a subsequent year are called__________

Blank 1: exclusions or exclusion Blank 2: deferrals, deferred, or deferral

Deductions _____ (for/from) AGI cause a reduction in AGI, which increases the deductibility of _____ (for/from) AGI deductions subject to AGI limitations.

Blank 1: for Blank 2: from

A ___________ -term capital gain is taxed at favorable rates compared to ordinary income, while a ___________ -term capital gain is taxed at ordinary income rates.

Blank 1: long Blank 2: short

A taxpayer's filing status depends on his or her ____ status at the end of the year and whether the taxpayer has any ____.

Blank 1: marital, marriage, or married Blank 2: dependents

Which filing status is best for a married couple that lives together, but one spouse does NOT want to be liable for the other spouse's tax liability?

Both individuals should file "married filing separately."

Which of the following statements is INCORRECT?

Certain types of realized income items may be deferred to a subsequent year, but no income may be excluded from taxation.

Which of the following expenses are classified as itemized deductions for tax purposes? (Check all that apply.)

Charitable contributions Mortgage interest expense

Which one of the following individuals would NOT meet the relationship test for being a qualifying relative of the taxpayer through a qualifying family relationship?

Cousin

Hillary, Craig, and David provide 60% of the support for their elderly aunt, Brooke. Hillary provides 8%, while Craig provides 40% and David provides 12%. Which of the taxpayers are eligible to claim Brooke as a dependent?

Craig and David Reason: Craig or David can claim the dependency because the three individuals provided over half of Brooke's support and Craig and David provided over 10% each.

True or false: Depreciable assets used in a trade or business are classified as capital assets.

FALSE Reason: Capital assets do not include accounts receivable from the sale of goods and services, inventory, or assets used in a trade or business.

True or false: A taxpayer may deduct both his standard deduction and his itemized deductions from AGI in order to calculate taxable income.

FALSE Reason: He can only deduct one of these amounts and should usually choose the larger of the two.

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

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

Which of the following individuals would meet the relationship test for being a qualifying relative of the taxpayer if s/he has only lived with the taxpayer for eight months of the year? (Check all that apply.)

Grandchild Brother Niece Father

Which of the following individuals would meet the relationship test for being a qualifying child of the taxpayer? (Check all that apply.)

Grandchild Child Brother (younger than the taxpayer) Niece (younger than the taxpayer)

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

Gross Income

Which of the following individuals would meet the relationship test for being a qualifying child of the taxpayer? (Check all that apply.)

Half-sister (younger than the taxpayer) Nephew (younger than the taxpayer) Stepson

When a divorced taxpayer pays over half the cost of maintaining a home where she and a dependent child lived for over half the year, she qualifies for which filing status?

Head of household

When is it possible for a qualifying person for determining head of household status to NOT live with the taxpayer?

If the person is the parent of the taxpayer

Which one of the following choices is the definition of realized income?

Income from a transaction with a second party where there is a measurable change in property rights between parties

Corey is 25 and has a full-time job. His younger brother, James, is 20 and was enrolled as a full-time student at the community college during the summer and fall semesters. James lives with Corey. Which of the following statements is correct with respect to the age requirement for a qualifying child?

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

Lan is from Vietnam and has lived in the U.S. for five months during the year. He is not yet considered a resident because he hasn't lived in the U.S. for long enough. He resides with his uncle who is a U.S. citizen. Lan is single and a full-time student. If eligible, Lan would otherwise be considered a qualifying child of his uncle. Which of the following is correct regarding Lan's status as a dependent?

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

Melina's daughter, Linda, is considered permanently and totally disabled. Linda is 30 years old and still lives with Melina. Which of the following statements is accurate regarding the age test for a qualifying child as it applies to Linda?

Linda is deemed to meet the age test because she is permanently and totally disabled.

Which of the following statements is INCORRECT when referring to capital gains and losses?

Losses on personal use assets are fully deductible against ordinary income.

Which filing status is allowed the highest standard deduction amount?

Married filing jointly

Which filing status is used if one spouse dies during the year and the surviving spouse does not remarry before the end of the year?

Married filing jointly (or separately)

Kayla and Ben were married in November of the current year. What will be their filing status for the current year?

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

Which of the following expenses are classified as itemized deductions for tax purposes? (Check all that apply.)

Medical and dental expenses Gambling losses State and local income taxes

Which of the following criteria is NOT necessary to qualify as a dependent of another taxpayer?

Must be unmarried for at least a portion of the year

Which of the following criteria will contribute toward qualifying a taxpayer for head of household status? (Check all that apply.)

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

If a taxpayer is unmarried for the entire year, which of the following filing statuses could possibly be used by the individual? (Check all that apply.)

Qualifying widow or widower Head of household Single

Which one of the following items is NOT a deduction FOR AGI?

Real estate taxes on personal residence

Which of the choices below are the tests that must be met to qualify as a qualifying relative? (Check all that apply.)

Relationship Gross income Support

Which of the following individuals meet the requirements to be qualifying children for Tonya? (Choose all that apply.)

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

Which of the following items does NOT constitute support when determining who provided the support for a child of the taxpayer who is a full-time student?

Scholarships

In addition to the individual income tax, individuals may be required to pay other taxes. Owners of unincorporated businesses may have to pay

Self-employment

Which filing status is allowed the lowest standard deduction amount?

Single

Which of the following choices are filing statuses that may be used by a taxpayer? (Check all that apply.)

Single Head of household Married filing jointly

Which of the following statements is correct?

Stock which has appreciated in value must be sold before it is considered part of gross income.

Which of the following tests states that the qualifying child must NOT have provided more than half his or her own living expenses for the year?

Support

True or false: For AGI deductions are preferable to from AGI deductions.

TRUE Reason: Reducing AGI is desirable due to tax deductions and benefits that are dependent on the level of AGI.

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

TRUE Reason: While certain types of income have been excluded from taxation by Congress, they have the power to tax all income.

Match the type or character of income to its definition.

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

Which of the following statements are correct concerning the married filing separately (MFS) filing status? (Check all that apply.)

Tax-related items for MFS taxpayers (i.e. tax rate schedules, standard deduction amounts), are half the amounts for married filing jointly taxpayers. The MFS status may be useful when one spouse does NOT want to be liable for the tax liability of the other spouse.

In order for an individual to be a qualifying relative, rather than a qualifying child, which of the following criteria must be met? (Check all that apply.)

The individual must meet a "gross income test." The taxpayer must provide over half of the individual's support.

Yolanda is your client. With her current level of taxable income, she is paying tax at a 24% marginal rate. She received $2,000 in qualified dividends this year. What rate of tax do you expect that Yolanda will pay on her dividends?

The qualified dividends are taxed at a favorable rate. Since Yolanda is in the 24% bracket, the dividends will be taxed at 15%.

Select the statement you believe is INCORRECT when comparing the rules for determining who qualifies as a dependent as a qualifying child and who qualifies as a dependent as a qualifying relative.

The relationship requirement is more broadly defined for qualifying children than for qualifying relatives.

Which of the following statements are true regarding the qualifying widow or widower filing status? (Check all that apply.)

The status may be used for up to two years after the year the other spouse died. The surviving spouse must have dependents. The surviving spouse must NOT have remarried during the year.

Which of the following are requirements that must be met to qualify as an abandoned spouse? (Check all that apply.)

The taxpayer's home is the principal residence of a dependent child for over half the year. The taxpayer is still married at the end of the year. The taxpayer pays more than half the costs of maintaining his or her home for the entire year.

Which of the following individuals meet the requirements of a qualifying person for determining head of household filing status?

The taxpayer's mother who is dependent of the taxpayer, but lives in her own home which is maintained by the taxpayer

When can a single taxpayer's mother or father be a qualifying person for determining head of household filing status?

When the taxpayer pays over half the cost of maintaining a parent's home.

A taxpayer who is married at the end of the year, but lived apart from the other spouse for the last six months of the year, may qualify as a(n) _____________________________ and be able to use the head of household filing status.

abandoned spouse

All sources of income are taxable unless specifically excluded through a tax provision. However, ___________ are NOT permitted unless a specific tax provision allows them.

deductions

In a situation where the parents are divorced and the child resides with both parents for the same amount of time during the year, the parent with the ______ should claim the child as his or her dependent.

highest AGI

An individual that is unrelated to the taxpayer may meet the relationship test for a qualifying relative if he or she:

lives with the taxpayer for the entire year.

In order to meet the requirements of the residence test for a qualifying child, the individual must live with the taxpayer for:

more than half the year

Income that is taxed in the current year according to the tax rate schedule is referred to as __________ income

ordinary

If an individual could be a qualifying child for either her parent or her grandparent, the ____________ (parent/grandparent) is entitled to claim the child as a dependent.

parent

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

prepayment

Dividends from corporations that meet certain requirements may be taxed at a favorable rate. These dividends are referred to as:

qualified dividends.

A taxpayer may file as a single taxpayer when:

she is unmarried at the end of the tax year

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

support