Chapter 4 - Individual Income Tax Overview

True or False The character of income is a factor in determining the rate at which the income is taxed.

True

True or False A personal automobile is a capital asset.

True

True or False A taxpayer may qualify for the head of household filing status if she has no dependent children but pays more than half of the cost of maintaining a separate household for her dependent mother and/or father.

True

True or False A taxpayer who is claimed as a dependent on another's tax return may not claim any dependents on his or her tax return.

True

True or False Certain types of income are taxed at a lower rate than ordinary income.

True

True or False Taxpayers may prepay their tax liability through withholdings and through estimated tax payments.

True

True or False The standard deduction amount varies by filing status.

True

True or False The test for qualifying child includes an age restriction but the test for qualifying relative does not.

True

True or False When determining whether a child meets the qualifying child support test for the parents, scholarships earned by the child do not count as self-support provided by the child.

True

True or False An individual with gross income of $5,000 could qualify as a qualifying child of another taxpayer but could not qualify as a qualifying relative of another taxpayer.

True - The gross income test requires that a qualifying relative's gross income for the year be less than the $4,200 in 2019.

In June of Year 1, Eric's wife, Savannah, died. Eric did not remarry during Year 1, Year 2, or Year 3. Eric maintains the household for his dependent daughter, Catherine, in Year 1, Year 2, and Year 3. Which is the most advantageous filing status for Eric in Year 2? a. Head of household. b. Qualifying widower. c. Single. d. Married filing separately.

b. Qualifying widower. Since he maintains a household for a dependent child and has not remarried as of the end of Year 2, Eric can file as a qualifying widower for Year 2.

Which of the following statements regarding realized income is true? a. Taxpayers need not include realized income in gross income unless a specific provision of the tax code requires them to do so. b. Realized income requires some type of transaction or exchange with a second party. c. Once income is realized it cannot be excluded from gross income. d. None of these statements are true.

b. Realized income requires some type of transaction or exchange with a second party. Realized income requires a transaction with a second party in which there is a change in property rights between parties.

In June of Year 1, Jake's wife, Darla, died. The couple did not have any children and Jake did not remarry in Year 1 or Year 2. Which is the most favorable filing status for Jake in Year 2? a. Married filing separately. b. Single. c. Head of household. d. Qualifying widower.

b. Single. Jake is not married and he does not maintain a household for a dependent in Year 2, so his most favorable filing status (in fact, his only filing status available) is single.

In order to be a qualifying relative of another, an individual's gross income must be less than _______. a. the applicable standard deduction amount b. a fixed amount specified for the particular tax year c. one-half of the individual's support d. None of the choices are correct.

b. a fixed amount specified for the particular tax year Gross income must be less than a fixed amount, indexed for inflation ($4,200 in 2019).

For filing status purposes, the taxpayer's marital status is determined at what point during the year? a. the beginning of the year b. the end of the year c. the middle of the year d. None of the choices are correct.

b. the end of the year Marital status is established as of the end of the year.

Madison's gross tax liability is $9,000. Madison had $3,000 of tax credits available and she had $8,000 of taxes withheld by her employer. What are Madison's taxes due (or taxes refunded) with her tax return? a. $0 taxes due and $0 tax refund. b. $6,000 taxes due. c. $2,000 tax refund. d. $1,000 taxes due.

c. $2,000 tax refund. Gross tax liability minus credits minus payments equals tax refund ($9,000 − 3,000 − 8,000 = $2,000 tax refund).

Lebron received $50,000 of compensation from his employer and he received $400 of interest from a municipal bond. What is the amount of Lebron's gross income from these items? a. $0. b. $400. c. $50,000. d. $50,400.

c. $50,000. $50,000 compensation. The interest income is excluded from gross income because it is interest from a municipal (tax-exempt) bond.

Which of the following relationships does NOT pass the relationship test for a qualifying child? a. Stepsister's daughter. b. Half-brother. c. Cousin. d. Stepsister.

c. Cousin. Stepsister's daughter, half-brother, and stepsister are all valid relationships for a qualifying child.

Which of the following statements regarding tax deductions is false? a. Taxpayers are not entitled to any deductions unless specific provisions in the tax code allow the deductions. b. Deductions can be labeled as deductions above the line or deductions below the line. c. From AGI deductions tend to be associated with business activities while for AGI deductions tend to be associated with personal activities. d. The standard deduction is a from AGI deduction.

c. From AGI deductions tend to be associated with business activities while for AGI deductions tend to be associated with personal activities. For AGI deductions tend to be associated with business activities.

Michael, Diane, Karen, and Kenny provide support for their mother, Janet, who is 75 years old. Janet lives by herself in an apartment in Los Angeles. Janet's gross income for the year is $3,000. Janet provides 10 percent of her own support, Michael provides 40 percent of Janet's support, Diane provides 8 percent of Janet's support, Karen provides 10 percent of Janet's support, and Kenny provides the remaining 32 percent of Janet's support. Under a multiple support agreement, who is eligible to claim Janet as a dependent as a qualifying relative? a. Michael, Diane, Karen, and Kenny. b. Michael, Karen, and Kenny. c. Michael and Kenny. d. Michael.

c. Michael and Kenny. Only Michael and Kenny are eligible because they are the only ones who each individually contributed more than 10 percent of Janet's support.

True or False A taxpayer may not qualify for the head of household filing status if she does not have any dependent children.

False

True or False Anna is a qualifying child of her parents. However, she was recently married. Anna and her husband filed a joint return. If they had filed separately, Anna would have owed no taxes, though her husband would have owed just $5. Because Anna herself owed no taxes, her parents can still claim her as a dependent.

False

True or False For AGI deductions are commonly referred to as deductions "below the line."

False

True or False If a taxpayer does not provide more than half the support of a child, that child cannot qualify as the taxpayer's qualifying child.

False

True or False If an unmarried taxpayer is eligible to claim another as a dependent, the taxpayer is automatically eligible for the head of household filing status.

False

True or False If an unmarried taxpayer provides more than half the support for a cousin who lives in the taxpayer's home for the entire year, the taxpayer will qualify for head of household filing status.

False

True or False Inventory is a capital asset.

False

True or False Itemized deductions and the standard deduction are deductions from AGI but the deduction for qualified business income is a deduction for AGI.

False

True or False Qualified dividends are taxed at the same rate as ordinary income.

False

True or False The relationship requirement for qualifying relative includes cousins.

False

True or False The test for a qualifying child includes a gross income restriction while the test for qualifying relative does not.

False

True or False To be considered a qualifying child of a taxpayer, the individual must be the son or daughter of the taxpayer.

False

True or False Charles, who is single, pays all of the costs of maintaining a home for himself and Damarcus. Charles and Damarcus have no family relationship but Damarcus lives with Charles for the entire year. Damarcus qualifies as a qualifying relative of Charles. (Charles claims Damarcus as a dependent on his tax return.) Charles qualifies for head of household filing status.

False - Charles does not qualify because he and Damarcus have no qualifying family relationship.

True or False Eric and Josephine were married in Year 1. In Year 2, Eric dies. The couple did not have any children. Assuming Josephine does not remarry, she may file as a qualifying widow in Year 3.

False - Josephine does not qualify for the qualifying widow filing status because she does not have a dependent child.

True or False To determine filing status, a taxpayer's marital status is determined on January 1 of each tax year in question.

False - Marital status is determined at year-end.

True or False Tax credits reduce taxable income dollar for dollar.

False - Tax credits directly reduce taxes payable dollar for dollar.

True or False Taxpayers need not include an income item in gross income unless there is a specific tax provision requiring the taxpayer to include the income item in gross income.

False - Tax laws are based on the all-inclusive income concept. Under this concept, gross income generally includes all realized income from whatever source derived.

True or False The only from AGI deductions are the standard deduction and itemized deductions.

False - The deduction for qualified business income is a from AGI deduction that is not an itemized deduction.

True or False An individual receiving $5,000 of tax-exempt income during the year could qualify as a qualifying child of another taxpayer but could not qualify as a qualifying relative of another taxpayer.

False - The taxpayer could qualify as a qualifying relative (doesn't fail the gross income test) because the tax-exempt income is excluded from gross income.

True or False In certain circumstances, a taxpayer who provides less than half the support of another may still be able to claim that person as a dependent as a qualifying relative.

False - This is true under a multiple support agreement.

Which of the following is not an itemized deduction? a. Alimony paid. b. Medical expenses. c. Real estate taxes. d. Charitable contributions.

a. Alimony paid. Alimony paid is a for AGI deduction for divorce decrees before 2019.

Jamison's gross tax liability is $7,000. Jamison had $2,000 of available credits and he had $4,000 of taxes withheld by his employer. What are Jamison's taxes due (or taxes refunded) with his tax return? a. $5,000 taxes due. b. $1,000 taxes due. c. $1,000 tax refund. d. $3,000 taxes due.

b. $1,000 taxes due. Gross tax liability minus credits minus payments equals taxes due ($7,000 − 2,000 − 4,000 = $1,000 taxes due).

Katy has one child, Dustin, who is 18 years old at the end of the year. Dustin lived at home for three months during the year before leaving home to work full time in another city. During the year, Dustin earned $15,000. Katy provided more than half of Dustin's support for the year. Which of the following statements regarding whether Katy may claim Dustin as a dependent for the current year is accurate? a. Dustin is a qualifying child of Katy. b. Dustin fails the residence test for a qualifying child but he is considered a qualifying relative of Katy. c. Dustin fails the support test for a qualifying relative. d. Dustin fails the gross income test for a qualifying relative.

d. Dustin fails the gross income test for a qualifying relative. Dustin fails the qualifying child residence test and he fails the qualifying relative gross income test, so Katy may not claim Dustin as a dependent.

Sally received $60,000 of compensation from her employer and she received $500 of interest from a corporate bond. What is the amount of Sally's gross income from these items? a. $0. b. $500. c. $60,000. d. $60,500.

d. $60,500. $60,000 compensation + $500 interest from a corporate bond (as opposed to interest from municipal bonds).

All of the following are for AGI deductions except: a. Contributions to qualified retirement accounts b. Rental and royalty expenses. c. Business expenses for a self-employed taxpayer. d. Charitable contributions.

d. Charitable contributions. Charitable contributions are from AGI deductions.

In Year 1, Harold Weston's wife died. Since her death, he has maintained a household for their son, Frank (age 3), his qualifying child. Which is the most advantageous filing status available to Harold in Year 4? a. Married filing jointly. b. Surviving spouse. c. Qualifying widower. d. Head of household.

d. Head of household. The special treatment for widows and widowers who maintain a household for a dependent is only available for two years following the year in which the spouse died. After that, the taxpayer is eligible for head of household filing status.

Which of the following statements regarding dependents is true? a. To qualify as a dependent of another, an individual must be a resident of the United States. b. To qualify as a dependent of another, an individual may not file a joint return with the individual's spouse under any circumstance. c. To qualify as a dependent of another, an individual must have a family relationship with the other person. d. To qualify as a dependent of another, an individual must be either a qualifying child or a qualifying relative of the other person.

d. To qualify as a dependent of another, an individual must be either a qualifying child or a qualifying relative of the other person. The individual must be either a qualifying child or a qualifying relative of another to be a dependent of that person.

The income tax base for an individual tax return is: a. realized income from whatever source derived b. gross income c. adjusted income d. adjusted gross income minus AGI deductions

d. adjusted gross income minus AGI deductions Taxable income, which is adjusted gross income minus from AGI deductions, is the income tax base for an individual tax return.

Which of the following types of income are not considered ordinary income? a. Compensation income. b. Net long-term capital gains (in excess of short-term capital losses). c. Qualified dividend income. d. Both compensation income and qualified dividend income. e. Both net long-term capital gains (in excess of short-term capital losses) and qualified dividend income.

e. Both net long-term capital gains (in excess of short-term capital losses) and qualified dividend income. Both net long-term capital gains and qualified dividend income are subject to preferential rates and are thus not considered to be ordinary income.

True or False For AGI deductions are commonly referred to as deductions "above the line."

True

True or False For purposes of the qualifying child residence test, a child's temporary absence from the taxpayer's home to attend school full time is counted as though the child lived in the taxpayer's home during the absence.

True

True or False From AGI deductions are commonly referred to as deductions "below the line."

True

True or False Jeremy and Annie are married. During the year Jeremy dies. When Annie files her tax return for the year in which her husband dies, she may file under the married filing jointly filing status even if she does not remarry.

True

True or False Tax credits are generally more valuable than tax deductions because tax credits reduce a taxpayer's gross tax liability dollar for dollar while tax deductions do not.

True

Catherine de Bourgh has one child, Anne, who is 18 years old at the end of the year. Anne lived at home for seven months during the year before leaving home to attend State University for the remaining five months of the year. During the year, Anne earned $6,000 while working part time. Catherine provided 80 percent of Anne's support and Anne provided the rest. Which of the following statements regarding whether Anne is Catherine's qualifying child for the current year is correct? a. Anne is a qualifying child of Catherine. b. Anne is not a qualifying child of Catherine because she fails the gross income test. c. Anne is not a qualifying child of Catherine because she fails the residence test. d. Anne is not a qualifying child of Catherine because she fails the support test.

a. Anne is a qualifying child of Catherine. Anne meets the relationship, residency, support, and age tests for determining qualifying child status. There is no gross income test for a qualifying child.

Which of the following series of inequalities is generally most accurate? a. Gross income ≥ adjusted gross income ≥ taxable income b. Adjusted gross income ≥ gross income ≥ taxable income c. Adjusted gross income ≥ taxable income ≥ gross income d. Gross income ≥ taxable income ≥ adjusted gross income

a. Gross income ≥ adjusted gross income ≥ taxable income Gross income less for AGI deductions equals adjusted gross income. Adjusted gross income less from AGI deductions equals taxable income.

In June of Year 1, Edgar's wife, Cathy, died, and Edgar did not remarry during the year. What is his filing status for Year 1 (assuming they did not have any dependents)? a. Married filing jointly. b. Single. c. Qualifying widower. d. Head of household.

a. Married filing jointly. If a spouse dies during the year and the surviving spouse does not remarry, for tax purposes the surviving spouse is still considered married to the deceased spouse at the end of the year in which the spouse died.

Jane is unmarried and has no children, but provides more than half of her mother's financial support. Jane's mother lives in an apartment across town and has a part-time job earning $5,000 a year. Which is the most advantageous filing status available to Jane? a. Single. b. Head of household. c. Qualifying individual. d. Surviving single.

a. Single. Jane's mother is not Jane's dependent because she fails the qualifying relative gross income test. Consequently, Jane may not file as a head of household.

Mason and his wife, Madison, have been married for five years. Jaxon, who is 18 years old and unrelated to Mason and Madison, has been living with Mason and Madison for the last two years. In May of Year 1, Mason and Madison divorced. Mason and Jaxon stayed in the home and Madison moved out. During Year 2, Mason provided all of Jaxon's support, and Jaxon lived in the home for all of Year 2. Jaxon did not earn any income during Year 2. What is Mason's most favorable filing status for Year 2? a. Single. b. Married filing separately. c. Surviving spouse. d. Head of household.

a. Single. While Jaxon qualifies as Mason's dependent for Year 2 as a qualifying relative, Jaxon is not related to Mason through a qualified family relationship (he would not be considered a related party if he had not lived with Mason for the entire year). Consequently, Mason may not qualify for head of household status and he must file as a single taxpayer.

Which of the following statements regarding for AGI tax deductions is true? a. Taxpayers subtract for AGI deductions from gross income to determine AGI. b. A taxpayer may deduct for AGI deductions only if the deductions exceed the taxpayer's standard deduction amount. c. The deduction for qualified business income is a for AGI deduction. d. A taxpayer may deduct for AGI deductions only if the deductions exceed the taxpayer's itemized deductions.

a. Taxpayers subtract for AGI deductions from gross income to determine AGI. Taxpayers subtract for AGI deductions from gross income to determine adjusted gross income.

Sheri and Jake Woodhouse have one daughter, Emma, who is 16 years old. They also have taken in Emma's friend, Harriet, who has lived with them since February of the current year and is also 16 years of age. The Woodhouses have not legally adopted Harriet but Emma often refers to Harriet as her "sister." The Woodhouses provide all of the support for both girls, and both girls live at the Woodhouse residence. Which of the following statements is true regarding whom Sheri and Jake may claim as dependents for the current year? a. They may claim Emma as a dependent qualifying child but may not claim Harriet as a dependent. b. They may claim Emma as a dependent qualifying child and they may claim Harriet as a dependent qualifying child. c. They may claim Emma as a dependent qualifying child and they may claim Harriet as a dependent qualifying relative. d. None of these statements are true.

a. They may claim Emma as a dependent qualifying child but may not claim Harriet as a dependent. Emma passes all tests of a qualifying child. Harriet, however, must be tested as a qualifying relative because she does not meet the relationship test of a qualifying child. In order to be considered a qualifying relative, she would have had to live at the Woodhouse residence for the entire year, and not just 11 of 12 months.

Charlotte is the Lucas family's 22-year-old daughter. She is a full-time student at an out-of-state university but plans to return home when the school year ends. During the year, Charlotte earned $4,000 of income working part time. Her support totaled $30,000 for the year. Of this amount, Charlotte paid $7,000 with her own funds, her parents paid $14,000, and Charlotte's grandparents paid $9,000. Which of the following statements most accurately describes whether Charlotte's parents can claim Charlotte as a dependent? a. Yes, Charlotte is a qualifying child of her parents. b. No, Charlotte fails the support test for both qualifying children and qualifying relatives. c. No, Charlotte does not pass the gross income test. d. Yes, Charlotte is a qualifying relative of her parents.

a. Yes, Charlotte is a qualifying child of her parents. Because Charlotte is a full-time student and under 24 years of age she passes the age test of a qualifying child. Her time spent away from school is counted as time at home for the residence test. Also, Charlotte did not provide more than half of her own support. There is no gross income test for qualifying children.

All of the following are tests for determining qualifying child status except the _____. a. gross income test b. age test c. support test d. residence test

a. gross income test Qualifying children must pass the relationship, age, support, and residence tests. There is no requirement relating to gross income for purposes of the qualifying child test.

Earl and Lawanda Jackson have been married for 15 years. They have no children. Ned, who is an old friend from high school, has been living with the Jacksons during the current year. Which of the following is a true statement regarding whether the Jacksons can claim Ned as a dependent for the current year? a. If Ned moved into the Jackson's home in June and he lived there for the remainder of the year, he may qualify as the Jackson's qualifying relative. b. Assume that Ned originally moved into the Jackson's home two years ago and he has lived there ever since. If this year Ned earned $3,000 at a part-time job and he received $5,000 in municipal bond interest, he may qualify as the Jackson's dependent so long as the Jacksons provided more than half his support. c. If Ned lived in the Jackson's home for the entire year, he will qualify as their dependent no matter who provided his support. d. If Ned is over 19 or he is not a full-time student, he cannot qualify as the Jackson's dependent.

b. Assume that Ned originally moved into the Jackson's home two years ago and he has lived there ever since. If this year Ned earned $3,000 at a part-time job and he received $5,000 in municipal bond interest, he may qualify as the Jackson's dependent so long as the Jacksons provided more than half his support. Ned would be considered the Jackson's qualifying relative in this case. The municipal bond interest is excluded from gross income in determining whether the gross income test is met.

Jan is unmarried and has no children, but she provides all of the financial support for her mother, who lives in an apartment across town. Jan's mother qualifies as Jan's dependent. Which is the most advantageous filing status available to Jan? a. Single. b. Head of household. c. Qualifying individual. d. Surviving single.

b. Head of household. Jan can claim head of household status if she maintains a separate residence for a parent who is also a dependent.

In Year 1, the Bennetts' 25-year-old daughter, Jane, is a full-time student at an out-of-state university but she plans to return home after the school year ends. In previous years, Jane has never worked and her parents have always been able to claim her as a dependent. In Year 1, a kind neighbor offers to pay for all of Jane's educational and living expenses. Which of the following statements is most accurate regarding whether Jane's parents would be allowed to claim Jane as a dependent for Year 1, assuming the neighbor pays for all of Jane's support? a. No, Jane must include her neighbor's gift as income and thus fails the gross income test for a qualifying relative. b. Yes, because she is a full-time student and does not provide more than half of her own support, Jane is considered her parent's qualifying child. c. No, Jane is too old to be considered a qualifying child and her parents fail the support test of a qualifying relative because they did not provide more than half her support. d. Yes, because she is a student, her absence is considered as "temporary." Consequently she meets the residence test and is considered a qualifying child of the Bennetts.

c. No, Jane is too old to be considered a qualifying child and her parents fail the support test of a qualifying relative because they did not provide more than half her support. After the age of 24, children can no longer be considered qualifying children, even if they are full-time students, and must be tested as qualifying relatives. The support test for qualifying relatives is different than for qualifying children. The parents must provide more than half of her support to claim a Jane as a dependent.

Which of the following statements regarding tax credits is true? a. Tax credits reduce taxable income dollar for dollar. b. Tax credits provide a greater tax benefit the greater the taxpayer's marginal tax rate. c. Tax credits reduce taxes due dollar for dollar. d. None of these statements are true.

c. Tax credits reduce taxes due dollar for dollar. Credits reduce the taxes due dollar for dollar and are therefore not sensitive to marginal tax rates.

Which of the following statements regarding the difference between the requirements for a qualifying child and the requirements for a qualifying relative is false? a. The relationship requirement is more broadly defined (more inclusive) for qualifying relatives than for qualifying children. b. Qualifying children are subject to age restrictions while qualifying relatives are not. c. The support test for qualifying relatives focuses on the support the potential dependent self-provides while the support test for qualifying children focuses on the support the taxpayer provides. d. Qualifying relatives are subject to a gross income restriction while qualifying children are not.

c. The support test for qualifying relatives focuses on the support the potential dependent self-provides while the support test for qualifying children focuses on the support the taxpayer provides. The support test for a qualifying child considers the amount of support the child provided for herself. The support test for a qualifying relative considers the amount of support the taxpayer provided for the prospective dependent.

Char and Russ Dasrup have one daughter, Siera, who is 16 years old. In November of last year, the Dasrups took in Siera's 16-year-old friend Angela, who has lived with them ever since. The Dasrups have not legally adopted Angela but Siera often refers to Angela as her "sister." The Dasrups provide all of the support for both girls, neither girl receives any income during the year, and both girls live at the Dasrups' residence. Which of the following statements is true regarding whom Char and Russ may claim as dependents for the current year? a. They may claim Siera as a dependent qualifying child; they are not allowed to claim Angela as a dependent. b. They may claim Siera as a dependent qualifying child and they may claim Angela as a dependent qualifying child. c. They may claim Siera as a dependent qualifying child and they may claim Angela as a dependent qualifying relative. d. None of these statements are true.

c. They may claim Siera as a dependent qualifying child and they may claim Angela as a dependent qualifying relative. Siera passes all tests of a qualifying child. Angela, however, must be tested as a qualifying relative because she does not meet the relationship test of a qualifying child. Because Angela lived in the Dasrups' home for the entire year, Char and Russ may claim Angela as a dependent qualifying relative.

Filing status determines all of the following except ___________ a. the applicable standard deduction amount. b. the appropriate tax rate schedule or tax table. c. the top-stated marginal rate in the tax rate schedule. d. the AGI threshold for reductions in certain tax benefits.

c. the top-stated marginal rate in the tax rate schedule. The top-stated marginal rate in the tax rate schedule does not vary by filing status.