Chapter 3

Compute the standard deduction for the following taxpayers. If an amount is zero, enter "0". d. Frazier, age 50, is married but is filing a separate return. His wife itemizes her deductions.

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

Determine the amount of the standard deduction allowed for 2017 in the following independent situations. In each case, assume that the taxpayer is claimed as another person's dependent. d. Lucy, age 15, has income as follows: $400 cash dividends from a stock investment and $500 from grooming pets

*$1,050* The greater of $1,050 or $500 (earned income) + $350

Determine the amount of the standard deduction allowed for 2017 in the following independent situations. In each case, assume that the taxpayer is claimed as another person's dependent. c. Mel, age 16, has income as follows: $675 interest on a bank savings account and $800 for painting a neighbor's fence.

*$1,150* The greater of $1,050 or $1,150 ($800 earned income + $350.)

Compute the standard deduction for the following taxpayers. If an amount is zero, enter "0". b. Ruby and Woody are married and file a joint tax return. Ruby is age 66, and Woody is 69. Their taxable retirement income is $11,455.

*$15,200* A taxpayer who is age 65 or over or blind in qualifies for an additional standard deduction of $1,250 or $1,550, depending on filing status. Ruby and Woody's standard deduction is the amount for MFJ $12,700 plus the additional $1,250 for Ruby being age 65 or older and another $1,250 for Woody's being age 65 or older.

Compute the standard deduction for the following taxpayers. a. Margie is 15 and claimed as a dependent by her parents. She has $1,250 in dividends income and $2,040 in wages from a part-time job.

*$2,390* When filing her own tax return, Margie's standard deduction is limited to the greater of $1,050 or $2,390 (the sum of the earned income for the year plus $350).

Compute the standard deduction for the following taxpayers. If an amount is zero, enter "0". c. Shonda is age 68 and single. She is claimed by her daughter as a dependent. Her earned income is $150, and her interest income is $200.

*$2,600* When filing her own tax return, Shonda's standard deduction is limited to the greater of $1,050 or $500 (the sum of the 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 $2,600 ($1,050 + $1,550).

Determine the amount of the standard deduction allowed for 2017 in the following independent situations. In each case, assume that the taxpayer is claimed as another person's dependent. b. Mattie, age 18, has income as follows: $600 cash dividends from a stock investment and $4,700 from handling a paper route.

*$5,050* $4,700 (earned income) + $350.

Determine the amount of the standard deduction allowed for 2017 in the following independent situations. In each case, assume that the taxpayer is claimed as another person's dependent. e. Sarah, age 67 and a widow, has income as follows: $500 from a bank savings account and $3,200 from babysitting.

*$5,100* $3,200 (earned income) + $350 + $1,550 (additional standard deduction).

Determine the amount of the standard deduction allowed for 2017 in the following independent situations. In each case, assume that the taxpayer is claimed as another person's dependent. a. Curtis, age 18, has income as follows: $700 interest from a certificate of deposit and $6,100 from repairing cars.

*$6,350* Although $6,100 (earned income) + $350 = $6,450, the amount allowed *cannot exceed* that available in 2017 for single taxpayers, which is $6,350.

Deductions *for* AGI

*Above the line deductions* because on the tax return, they are taken before the AGI line. Adjustments from gross income to arrive at AGI Include: -Trade and business expenses -Part of the self-employment tax -Unreimbursed moving expenses -Contributions to trade IRAs and other retirement plans -College tuition expenses -Contributions to HSAs -Interest on student loans -Excess capital losses -Alimony payments

Beth received the following amounts during the year: Salary $30,000 Interest in savings account 900 Gift from her aunt 10,000 Prize won in state lottery 1,000 Alimony from ex-husband 12,000 Child support from ex husband 6,000 Damages for injury in auto accident 25,000 Ten $50 bills in an unmarked envelope found in the airport lounge 500 Federal income tax refund for last year's tax overpayment 120 Increase in the value of stock held for investment 5,000 Determine the amount Beth must include in the computation of taxable income

*Taxable Income* = (*$30,000* salary + *$900* interest + *$1,000* lottery + *$12,000* alimony received) + *$500* found money) = *$44,000* (The $120 federal income tax refund is excluded because it represents an adjustment (overpayment). of a nondeductible expenditure made in the previous year. The unrealized gain on the stock held for investment is also not include I gross income)

Gross income includes....

-Alimony -Annuities (income element) -Awards -Bonuses -Commissions -Compensation for services -Death benefits -Dividends -Embezzled funds -Some employee awards and benefits -Estate and trust income -Gains from sale of property -Gambling winnings -Interest -Partnership income -Prizes -Punitive damages -Rents -Salaries -Wages

General rules for filling taxes

-An individual must file tax return if gross income equals or exceeds the sum of the exemption amount plus the applicable standard deduction

Head-of-Household

-An unmarried individual who maintains a household for another -Enables the taxpayer to use a set of income tax rates that are lower than those applicable to other unmarried individuals, but higher than those applicable to surviving spouse and married persons filling a joint return.

Gross income exclusions...

-Annuities (cost element) -Child support payments -Cost-of-living allowance (military) -Damages for personal injury or illness -Gifts received -Inheritances -Interest from state and local (municipal) bonds -Meals and lodging (if furnished for employer's benefit) -Scholarship grants -Welfare payments -Worker's compensation benefits

Tax Table method may not be used if...

-Individuals whose taxable income exceeds the maximum (celling amount) in the Tax table. -An estate or trust

Tiebreaker Rues for Claiming Qualified Child

-Parent -Paren't with the longer period of residence -Parent with the higher AGI -Person with highest AGI

Collectables

-special type of capital asset -the *gain* from which is taxed at a maximum rate of 28% if the holding period is more than on year -Examples: art, rugs, antiques, gems, stamps, coin collections, and alcoholic beverages held for investment

Brad files as Single. His AGI is $294,150. He is entitled to one personal exemption. Brad's allowable exemption amount is determined as follows:

1.) 294,150 - 261,500 = *$32,650* excess 2.) (32,650 / 2,500) = 13.06 = 14 x 2 = *28%* 3.) 28% x $4,050 = *$1,134* phaseout amount 4.) 4,050 - 1,134 = *$2,916* allowable exemption reduction

Determination of Net Capital Gain

1.) Capital Gaines and losses are categorized based on their holding period: -Short term (held for one year or less) -Long term (held for more than one year) 2.) Gains and losses are netted together. -If the losses result, they are applied to the category carrying the *highest* tax rate - A net capital gain occurs if the net long-term capital gain exceeds the net short-term capital loss.

Parker and his wife Marie would have been filing a joint tax return for 2015, however Marie died in October of 2015. Parker has not remarried and continues to maintain a home for himself and his two children during 2015, 2016, 2017, and 2018. What are Parker's filing statuses for 2015, 2016, 2017, and 2018?

2015: Married filing joint return 2016: Qualifying widower 2017: Qualifying Widower 2018: Head of Household A couple may file a joint return if they are married as of the end of the tax year or, when one spouse has died during the tax year, if they were married as of the date of death. As a result, Parker would qualify to file a joint return for 2015. A taxpayer may file a tax return as a qualifying widow or widower for 2 tax years after the year in which a spouse dies provided the couple qualified to file a joint return for the year of death; that the taxpayer provided over 50% of the cost of maintaining the principal residence of a dependent child or stepchild; and that the taxpayer has not remarried as of the end of the current year. As a result, Parker will file as a qualifying widower for 2016 and 2017. In 2018, Parker may no longer file as a qualified widower but may file as a head of household, which is an unmarried taxpayer that maintains a home that is the principal residence of a qualifying relative, such as a child.

During 2017, Inez had the following transactions involving capital assets: Gain on the sale of unimproved land (held as an investment for 3 years) $3,000 Loss on the sale of a camper (purchased 2 years ago and used for family vacations) (5,000) Gain on the sale of ADM stock (purchased 9 months ago as an investment) 4,000 Gain on the sale of a fishing boat and trailer (acquired 18 months ago at an auction and used for recreational purposes) 1,000 *a. If Inez is in the 35% bracket, how much income tax results?* *b. If Inez is in the 15% bracket, how much income tax results?*

35% = tax is *$2,000* [($4,000 LTCG x 15%) + ($4,000 STCG x 35%)]. 15%= The tax is *$600* [($4,000 LTCG x 0%) + ($4,000 STCG x 15%)]

Household (Residence) Test

A qualifying child must live with the taxpayer for *more than half the year*, special absence (education, vacation, medical care, etc.) are ignored

Support Test (Qualifying Child)

A qualifying child must not provide more than half of his or her own support (food, shelter, clothes, etc.) For a full time child who is a full time student, scholarships are not considered to be support.

Age Test

A qualifying child must, *by the end of the year*, be.. 1.) under age 19 2.) under age 24 *and* a full time student Age test does not apply to a child that was disabled for any part of the year. The qualifying child must be younger than the taxpayer who is claiming him or her.

Relationship Test (Qualifying Relative)

A qualifying relative as a more expansive relationship test. The entire family tree counts. -Grandparents -parents -aunts/uncles -In-laws Also includes: -Children who may not meet qualifying child test -members of the household who live with taxpayer for the *entire year* (related or unrelated) However... -an ex-spouse *cannot* qualify in a year following a divorce -anyone who was a spouse for any part of the year *cannot* qualify

Child Tax Credit

A tax credit based on the number of qualifying children *under age 17* (or under 24 if a full time student) -max credit available is $1,000 per child -qualifying child MUST be *claimed as dependent* on the *parent's* tax return

Determine whether the individuals will qualify as the taxpayer's dependent in each of the following independent scenarios. Specify whether the dependency exemption would come under the qualifying child category, the qualifying relative category, or "not applicable" (if the individual does not qualify as a dependent) c. Raul, a U.S. citizen, lives in Costa Rica. Raul's household includes a friend, Helena, who is age 19 and a citizen of Costa Rica. Raul provides all of Helena's support.

Adopted daughter Not a dependent Not applicable

The following information applies to Emily for 2017. Her filing status is single. Salary $85,000 Interest income from bonds issued by Xerox 1,100 Alimony payments received 6,000 Contribution to traditional IRA 5,500 Gift from parents 25,000 Short-term capital gain from stock investments 2,000 Amount lost in football office pool 500 Number of potential dependents (two cousins, who live in Canada) ? Age 40 The personal exemption amount for 2017 is $4,050. Emily has no gambling winnings this year. Identify whether the items are deductible (fully or partially) by Emily. -Amount lost in football office pool -Contribution to a traditional IRA

Amount lost in football office pool = Not deductible Contribution to a traditional IRA = Deductible

Income (broadly defined)

Any increase in wealth; therefore does not include capital or borrowed funds Examples: -Salary -Wages -Interest on CD

Qualifying Relative

Can be claimed as a dependent, if it passes the *SIR* test -Support -Income (Gross Income) -Relationship

Determine whether the individuals will qualify as the taxpayer's dependent in each of the following independent scenarios. Specify whether the dependency exemption would come under the qualifying child category, the qualifying relative category, or "not applicable" (if the individual does not qualify as a dependent) a. Andy maintains a household that includes a cousin (age 12), a niece (age 18), and a son (age 26). All are full-time students. Andy furnishes all of their support.

Cousin Qualified dependent Qualifying relative Niece Qualified dependent Qualifying child Son Qualified dependent Qualifying relative

Personal and Dependency Exemptions

Deduction *from* AGI. Allowed for the taxpayer, the taxpayer's spouse, and each dependent (qualifying child or qualifying relative) of the taxpayer.

Itemized Deductions

Eligible expenses that individual taxpayers can claim on federal income tax returns and which decrease their taxable income, and is claimable in place of a standard deduction (deductions *from* AGI, choose whichever is greater) Include: -Medical expenses in excess of 10% AGI -State and Local income or sales taxes -Real estate taxes -Personal property taxes -Charitable contributions -Misc expenses (in excess of 2% of AGI)

Determine whether the individuals will qualify as the taxpayer's dependent in each of the following independent scenarios. Specify whether the dependency exemption would come under the qualifying child category, the qualifying relative category, or "not applicable" (if the individual does not qualify as a dependent) d. Karen maintains a household that includes her ex-husband, her mother-in-law, and her brother-in-law (age 23 and not a full-time student). Karen provides more than half of all their support. Karen is single and was divorced last year.

Ex-husband Qualified dependent Qualifying relative Mother-in-law Qualified dependent Qualifying relative Brother-in-law Qualified dependent Qualifying relative

Personal Exemption

Exemptions that are allowed for the taxpayer and spouse. Exemption amount for 2017 is $4,050. When a married couple flies a joint return, they may claim two personal exemptions. If a married couples files separate returns, each claims one exemption. An individual *cannot* claim a person exemption if he or she is claimed as a dependent by another.

Determine whether the individuals will qualify as the taxpayer's dependent in each of the following independent scenarios. Specify whether the dependency exemption would come under the qualifying child category, the qualifying relative category, or "not applicable" (if the individual does not qualify as a dependent) b. Minerva provides all of the support of a family friend's son (age 20), who lives with her. She also furnishes most of the support of her stepmother, who does not live with her.

Family friend's son Qualified dependent Qualifying relative Stepmother Qualified dependent Qualifying relative

During 2017, Inez had the following transactions involving capital assets: Gain on the sale of unimproved land (held as an investment for 3 years) $3,000 Loss on the sale of a camper (purchased 2 years ago and used for family vacations) (5,000) Gain on the sale of ADM stock (purchased 9 months ago as an investment) 4,000 Gain on the sale of a fishing boat and trailer (acquired 18 months ago at an auction and used for recreational purposes) 1,000 *Indicate the tax treatment for each item.*

Gain on the sale of unimproved land = Long-term capital gain Loss on the sale of a camper = Not deductible Losses realized from the disposition of personal-use property (property neither held for investment nor used in a trade or business) are not recognized. Gain on the sale of ADM stock = Short-term capital gain Gain on the sale of a fishing boat and trailer = Long-term capital gain Overall, Inez has a long-term capital gain of $4,000 and a short-term capital gain of $4,000

Mason, age 45, earned a salary of $78,000 in the current year. He contributed $4,000 to his traditional IRA, sold stock held for investment for a short-term capital loss of $2,000, and paid $4,600 in alimony to his ex-wife. His AGI is determined as....

Gross income: *$78,000* Less: Deductions *for* AGI: IRA Contribution: *(4,000)* Capital Loss: *(2,000)* Alimony Paid: *(4,600) =AGI: *$67,400*

Unearned income

Includes taxable interest, dividends, capital gains, rents, royalties, the taxable portion of scholarships, pension and annuity income, and income received as the beneficiary of a trust.

Tax Formula

Income Less: (Exclusions) =Gross Income Less: (Deductions for AGI) =AGI Less: The greater of (itemized deductions) Less: (Personal and Dependency Exemption) =Taxable Income Tax on Taxable Income Less: (Tax Credits) =Tax due (refund)

Standard Deduction

Instead of claiming itemized deductions, taxpayers can use standard deduction. Varies given filing status, age, and blindness. It is adjusted every year for inflation. The sum of two components: the *basic* standard deduction and the *additional* standard deduction. Additional standard deductions are available to those that qualify by being age 65 or over or blind. Deduction depends on filing status. Two additional standard deductions are available to a taxpayer who is age 65 or over *and* blind (applies for taxpayer, taxpayer's spouse, but not for a dependent) Basic Standard Deduction: Single: $6.350 MFJ: $12,700 Surviving Spouse: $12,700 HOH: $9,350 MJS: $6,350 Additional Standard Deduction: Single: $1,550 MFJ: $1,250 Surviving Spouse: $1,250 HOH: $1,550 MJS: $1,250

Deductions *from* AGI

Itemized (some personal expenses) or Standard Deduction (whichever is greater) and personal and dependency exemptions

Other Rules for Dependency Exemption

Joint Return Test -Generally, if a dependent is married and files a return with spouse, the supporting taxpayer is not permitted a dependency exemption Citizenship Test -To be a dependent, the individual must be a US citizen, a US resident, or a resident of Canada or Mexico for some part of the calendar year.

Kyle and Elena Smith contributed to the support of their two children, Alexandra and Matthew, and Elena's divorced father, Nick. For 2017, Alexandra, a 22-year-old full-time college student, earned $1,700 from a part-time job. Matthew, a 27-year-old full-time graduate student, earned $23,000 from his job as a teaching assistant. Nick received $12,000 in capital gains income and $7,000 in nontaxable social security benefits. Alexandra, Matthew, and Nick are U.S. citizens and were over one-half supported by Kyle and Elena. How many exemptions can Kyle and Elena claim on their 2017 joint income tax return?

Kyle and Elena will be able to claim 3 exemptions, including 2 for themselves, on their joint return. Alexandra is a qualifying child since she is a student under the age of 24, resulting in the third exemption. Matthew, being older than 24, is not a qualifying child. Since Nick has gross income, which includes the $12,000 in capital gains but excludes the nontaxable social security benefits, in excess of the exemption amount, Nick is not a qualifying relative and does not provide an additional exemption. *3*

Mark and Lisa Sanford are married and file a joint tax return in 2017. They have one dependent, Jack, their son. Jack, a 20 year-old, single, full-time college student. He earned $6,500 during the year. They have gross income $118,000 and itemized deductions of $22,000. Their taxable income is $83,850, and Jack's is $150 determined as....

Mark and Lisa: Gross Income: *$118,000* Less: Deductions *for* AGI: *(-0-)* =AGI: *$118,000* Less: Deductions *from* AGI: The greater of itemized or standard: (*$22,000*) Personal and Dependency Exemptions (3x$4,050): *($12,150)* =Taxable Income: *$83.850* Jack: Gross Income: *$6,500* Less: Deductions *for* AGI: *(-0-)* =AGI: *$6,500* Less: Standard Deduction (Basic): *$6,350* Personal: *(-0-)* =Taxable Income: *$150*

Wesley and Myrtle (ages 90 and 88, respectively) live in an assisted care facility and for 2016 and 2017 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% b. Must Wesley and Myrtle be claimed by the same person(s) for both 2016 and 2017? (yes/no?), because the eligible parties (can/cannot?) rotate the exemptions as they choose.

Must Wesley and Myrtle be claimed by the same person(s) for both 2016 and 2017? *No*, because the eligible parties *can* rotate the exemptions as they choose.

The basic tax structure

Progressive -a higher rate of tax applies as the tax base increases

Qualifying Child

Provision is used for: -Dependency exemption -HOH filing status -Earned income tax credit -Child tax credit -Credit for child and dependent care expenses A qualifying child must meet the everything int the *RASH* test: -Relationship -Age -Support -Household (resident)

Relationship Test (Qualifying Child)

Qualifying Child -Family tree can go *across* and *down* -Taxpayers child, adopted child, step-child, eligible foster child, brother, sister, half sibling, step sibling, or a *descendant* of these parties

Filing requirements for Dependents

Required if dependent as *any* of the following: -Earned income only and gross income that is more than the total standard deduction (including additional) -Unearned income only and gross income of more than $1,050 plus any additional standard deduction -Both earned and unearned income and gross income of more than the larger of $1,050 or the sum of earned income plus $350 (but limited to the basic SD) plus any additional SD

Taxations of Net Capital Gains

ST gains normal going rate LT Gains: Collectables 28% Certain depreciable property used in trade or business 25% All other LT capital gains: 20%, 15%, or 0%

The following information applies to Emily for 2017. Her filing status is single. Salary $85,000 Interest income from bonds issued by Xerox 1,100 Alimony payments received 6,000 Contribution to traditional IRA 5,500 Gift from parents 25,000 Short-term capital gain from stock investments 2,000 Amount lost in football office pool 500 Number of potential dependents (two cousins, who live in Canada) ? Age 40 The personal exemption amount for 2017 is $4,050. Emily has no gambling winnings this year. Emily's taxable income in 2017 is...

Salary $85,000 Interest on bonds 1,100 Alimony received 6,000 Capital gain 2,000 IRA contribution (5,500) AGI $88,600 Standard deduction (6,350) Personal and dependency exemptions (1 × $4,050) (4,050) *Taxable income* *$78,200*

The following information applies to Emily for 2017. Her filing status is single. Salary $85,000 Interest income from bonds issued by Xerox 1,100 Alimony payments received 6,000 Contribution to traditional IRA 5,500 Gift from parents 25,000 Short-term capital gain from stock investments 2,000 Amount lost in football office pool 500 Number of potential dependents (two cousins, who live in Canada) ? Age 40 The personal exemption amount for 2017 is $4,050. Emily has no gambling winnings this year. Indicate whether the following items are taxable or nontaxable to Emily. -Salary -Gift from parents -Alimony payments received -Short-term capital gain from stock investment -Interest income from bonds issued by Xerox

Salary = Taxable Gift from parents = Not taxable Alimony payments received = Taxable Short-term capital gain from stock investment = Taxable Interest income from bonds issued by Xerox = Taxable

Wesley and Myrtle (ages 90 and 88, respectively) live in an assisted care facility and for 2016 and 2017 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% a. Indicate whether the following persons are eligible to claim the dependency exemptions under a multiple support agreement? Select "Yes" if eligible and "No" if not eligible.

Son = Yes Niece = Yes Cousin = No Brother = Yes Family friend =No Under a multiple support agreement, the group together must provide more than 50% of the support. Any person who contributed more than 10% of the support is entitled to claim the exemption, if each person in the group who contributed more than 10% files written consent. Each person who is a party to the multiple support agreement must meet all other requirements (except the support requirement) for claiming the exemption. A person who does not meet the relationship or member-of-the-household requirement, for instance, cannot claim the dependency exemption under a multiple support agreement

Average Tax Rate =

Tax Liability / Taxable Income = Average Tax Rate

Phaseout of Exemptions

The exemption phaseout occurs once AGI exceeds specified threshold amounts MFJ: $313,800 HOH: $287,650 Single: $261, 500 MFS: $156,900 Exemptions (both personal and dependency) are phased out by 2% for each $2,500 by which taxpayers AGI exceeds threshold amount. For MFS, the phaseout is 2% for each $1,250in excess. Steps: 1.) *AGI - Threshold Amount = Excess* 2.)*Excess / $2,500 = reduction factor* (round to whole number) *x 2 = phaseout percent* 3.) *Phaseout % x exemption amount = phaseout amount* 4.) Exemption amount - phaseout amount = allowable deduction. Any exemptions are completely phased out when a taxpayer's AGI exceeds the threshold amount by *more than* *$122,500* ($61,250 for MFS): 122,501 / 2,500 = 49.0004 = 50 x 2 = *100%*

Abandoned Spouse

The taxpayer is treated as not married and qualifies for HOH status if the following conditions are met if the tax payer: -Does not file a joint return -Paid more than half of the cost of maintaining his or her home for the tax year -The spouse did not live in the home during the last six months of the tax year -The home was the principal residence of the taxpayer's qualifying child claimed as a dependent

Support Test (Qualifying Relative)

The taxpayer must furnish over half of the qualifying relative's support. -If the individual does not spend funds that have been received from any source, the unexpended amounts are *not* counted for support test

Wesley and Myrtle (ages 90 and 88, respectively) live in an assisted care facility and for 2016 and 2017 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% c. Who, if anyone, can claim Wesley and Myrtle's medical expenses?

The taxpayer who is awarded the exemption and paid for the medical expenses

Individuals not eligible for the standard deduction

These individual taxpayers must itemize: -A married individual filing separate return where either spouse itemizes deductions -A nonresident alien

(Gross) Income Test

To qualify as a relative, a dependents gross income (any taxable income) must be less than the exemption amount ($4,050).

Kiddie Tax

To reduce tax savings that result from sifting income from parents to children, the *net unearned income* of certain children as if it were the parents income. Applies any child who is under age 19 (or under 24 if a full time student) and has unearned income of *more than $2,100* Does not apply if the child has *earned*income that excess half of their support, if the child files MFJ, or if both parents are deceased.

Treatment of net capital loss

Used to offset ordinary income of up to $3,000 ($1,500 for MFS). If tax payer has both losses, short-term is used first. Any remaining net capital loss is carried over indefinitely until used up (subject to the $3,000 limit). When carried over, the excess capital loss retains its classification as short or long term.

Dependents Standard Deduction

When a dependent is filing his or her own tax return, a *dependents* basic standard deduction is limited to.. the greater of $1,050 or the sum of the individuals *earned* income plus $350 (basic standard cannot exceed that of a single taxpayer, $6,350). If earned income plus $350 is greater than $6,350, the basic standard deduction is used. A dependent who is 65 or over or blind or otherwise is also allowed the additional standard deduction amount on his or her own tax return.

Standard Deduction (Qualifying Child)

When filing his or her own tax return, a dependent's basic standard deduction in 2017 is limited to the greater of $1,050 or the sum of the individual's earned income for the year plus $350. However, if the sum of the individual's earned income plus $350 exceeds the normal standard deduction, the standard deduction is limited to the amount available for the taxpayer's filing status. A dependent who is 65 or over, blind, or both is also allowed the additional standard deduction amount on his or her own return

Paige, age 17, is claimed as a dependent on her parents' 2017 return, on which they report taxable income of $120,000 (no qualified dividends or capital gains). Paige earned $3,900 pet sitting and $4,100 in interest on a savings account. What are Paige's taxable income and tax liability for 2017? If an amount is zero, enter "0". a. Paige's standard deduction is __. b. Paige's personal exemption is $. c. Paige's total taxable income is $; however, only $ will be taxed at her rate. d. Compute Paige's "net unearned income" for the purpose of the kiddie tax. e. Assuming that her parents are in the 25% tax bracket and Paige is in the 10% tax bracket, compute her tax liability.

a. $4,250 b. $0 c. $3,750; $1,750 Earned income $3,900 Interest income 4,100 Gross income $8,000 Less: Personal exemption (0) Less: Standard deduction [greater of $1,050 or $3,900 (earned income) + $350] (4,250) Taxable income *$3,750* Less: Unearned income taxed at parents' rate (2,000) Income taxed at Paige's rate $1,750 Paige's tax rate × 10% Tax at Paige's rate *$175* d. $2,000 Unearned income $4,100 Minus: $1,050 base amount + $1,050 standard deduction (2,100) Unearned income taxed at parents' rate $2,000 e. $675 Paige's parents are in the 25% bracket, so her unearned income would generate $500 of tax (25% × $2,000) Paige's total tax: $500 (unearned income taxed at parents' rate) + $175 (taxed at Paige's rate) = *$675*.

Indicate whether the following items are "Included in" or "Excluded from" gross income: a. During the year, that the taxpayer purchased stock as an investment which doubled in value. b. Amount an off-duty motorcycle police officer received for escorting a funeral procession. c. While his mother was in the hospital, the taxpayer sold her jewelry for $10,000 and gave the money to his girlfriend. d. Child support payments received. e. A damage deposit the taxpayer recovered when he vacated the apartment he had rented. f. Interest received by the taxpayer on an investment in general purpose bonds issued by IBM. g. Amounts received by the taxpayer, a baseball "Hall of Famer," for autographing sports equipment (e.g., balls and gloves). h. Tips received by a bartender from patrons. (Taxpayer is paid a regular salary by the cocktail lounge that employs him.) i. Taxpayer sells his Super Bowl tickets for three times what he paid for them. j. Taxpayer receives a new BMW from his grandmother when he passes the CPA exam.

a. Excluded from b. Included in c. Included in d. Excluded from e. Excluded from f. Included in g. Included in h. Included in i. Included in j. Excluded from

Indicate whether the following items are "Included in" or "Excluded from" gross income: a. Alimony payments received. b. Damages award received by the taxpayer for personal physical injury—none were for punitive damages. c. A new golf cart won in a church raffle. d. Amount collected on a loan previously made to a college friend. e. Insurance proceeds paid to the taxpayer on the death of her uncle—she was the designated beneficiary under the policy. f. Interest income on City of Chicago bonds. g. Jury duty fees. h. Stolen funds the taxpayer had collected for a local food bank drive. i. Reward paid by the IRS for information provided that led to the conviction of the taxpayer's former employer for tax evasion. j. An envelope containing $8,000 found (and unclaimed) by the taxpayer in a bus station.

a. Included in b. Excluded from c. Included in d. Excluded from e. Excluded from f. Excluded from g. Included in h. Included in i. Included in j. Included in

Christopher died in 2015 and is survived by his wife, Chloe, and their 18-year-old son, Dylan (age 18 in 2015). Chloe is the executor of Christopher's estate and maintains the household in which she and Dylan live. All of their support is furnished by Chloe while Dylan saves his earnings. Dylan's status for 2015-2017 is as follows: Year, Earnings, Full-time Student Status 2015, $5,000, Yes 2016, $7,000, No 2017, $6,000, Yes a. What is Chloe's filing status for year 2015? b. What is Chloe's filing status for year 2016? c. What is Chloe's filing status for year 2017?

a. married filing joint b. single c. surviving spouse

Charlotte (age 40) is a surviving spouse and provides all of the support of her four minor children who live with her. She also maintains the household in which her parents live and furnished 60% of their support. Besides interest on City of Miami bonds in the amount of $5,500, Charlotte's father received $2,400 from a part-time job. Charlotte has a salary of $80,000, a short-term capital loss of $2,000, a cash prize of $4,000 from a church raffle, and itemized deductions of $10,500. The personal exemption is $4,050 for 2017. a. Is the cash prize taxable to Charlotte? b. Charlotte does not have any capital gains. How much of the short-term capital loss can Charlotte deduct this year? c. Should Charlotte itemize her deductions or take the standard deduction? d. Can Charlotte claim her parents as dependents? e. Compute Charlotte's taxable income. f. Using the Tax Rate Schedules, tax liability for Charlotte is ___ for 2017. (If required, round your answer to the nearest whole dollar.)

a. yes b. $2,000 c. Charlotte should take the *standard deduction* of $12,700 (for a surviving spouse) since it is greater than her itemized deductions of $10,500 d. Both of her parents qualify as dependents. e. $40,950 f. *$5,210*. Tax on $40,950 using surviving spouse rate schedule: $1,865 + 15%($40,950 - $18,650) = $5,210.

Abandoned Spouse Provision

allows a -*married* taxpayer -with a *dependent child* -whose spouse did not live in the taxpayer's home during the last *six months* of the tax year to... -file as a *head of household* rather than as married filing separately.

Gross income does not include ______ gains

unrealized (ex stock that has appreciated in value, but has not been sold)