Ch. 3 Answers

Ch. 3 Answers - Determination; Exemptions; Overview of...

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Unformatted text preview: Determination; Exemptions; Overview of Property Transactions Tax 3-5 DISCUSSION QUESTIONS 1. b. Income (broadly conceived) BEAMSEUTOUIE I MC? 352 CHMT‘HL 3 i. Exclusions h. Gross income d. Deductions for AGI c. Adjusted gross income e. The greater of the standard deduction or itemized deductions f. Personal and dependency exemptions a. Taxable income Otherwise statedt b. * i. = h. — d. = c. — e. ~ f. = a. The income tax withheld (choice g.) is subtracted from any income tax liability to arrive at the tax due (or refund). Figure 3-1 0 The value of the car included in gross income as gambling income is taxable. o The repayment of a loan, unless interest is included, is a nontaxable recovery of capital. Gains and losses from the sale of personal use assts cannot offset each other. The gains are taxable and the losses are not deductible. Unless Becky was still in surviving spouse status, her marriage enables her to file a joint return and take advantage of more favorable income tax rates. Reaching age 19 may mean that the son no longer meets the definition of a qualified child for dependency exemption purposes. It also could mean that the kiddie tax no longer applies. In both cases, however, this result would be nullified if the son is a full— time student. Paying off the mortgage reduces (or eliminates) any related interest deduction. In many cases, the interest deduction determines whether a taxpayer itemizes or takes the standard deduction option. pp. 3-3, 3-11, 3-23, 3-29, 3—35, and Examples 1, 2, and 43 All items (a., c., d., e., f, g.) except b. are inclusions in gross income. Item b. is a nontaxable return of capital. p. 3-3 and Exhibit 3-2 Items a., c., and f. are full exclusions. Item b. must be separated—the one—third portion relating to personal injury is an exclusion, while the two—thirds balance attributable to punitive damages is an inclusion. Item (1. also must be separatedwthe portion dealing with tuition is an exclusion, while that covering room and board is an inclusion. Item g.— property that is “found” (i.e., treasure trove) is an inclusion in gross income. p. 3—3 and Exhibits 3—1 and 3—2 3—6 10. 11. 2009 Individual Volume/Solutions Manual Double taxation will occur if the country where the services are performed imposes an income tax. The compensation income earned in the foreign country also is subject to US. tax, due to the application of the global (or worldwide) tax approach. US. tax law, however, does mitigate the double tax result by allowing an exclusion for foreign earned income and/ or a credit for foreign taxes paid. Global Tax Issues, p. 3—5 The sale of the stock investment will result in a capital loss. The capital loss will offset any capital gain, and=any excess (of 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 AGl. By reducing AGI, the Polks will increase their allowable medical and casualty deductions. (The medical deduction is the excess over 7.5% of AGI, while the casualty loss is the excess over 10% of AGI.) p. 36 and Exhibit 3—3 The Andersons are expecting more than they will receive. To take advantage of the medical__dedu_ction, taxpayers must itemize. By itemizing, the standard deduction (includin'g‘the"additiOnal standard deduction for age 65 or older) cannot be blaiined. Thus, the Andersons can claim a tax benefit from either their medical expenses or their age but not from both. pp. 3—7 and 3—8 a. The filing requirements for persons being claimed as dependents by others are more complex than those applicable to regular taxpayers. They depend on whether the dependent has only earned income, only unearned income, or both earned and unearned income, and the amount of gross income. These rules are summarized on pp. 3-25 and 3-26 of the text. b. Dependents are not allowed to claim a personal exemption. Example l2 c. The basic standard deduction is the greater of: $900 or earned income plus $300. The total basic standard deduction allowed, however, cannot exceed $5,450. p. 3—10 d. The additional standard deduction of $1,350 is allowed in full. Example 9 a. The non-filing spouse has no gross income and is not claimed as a dependent of another taxpayer. . Yes, it would matter. Barring some special agreement between the parties, one—half of the filing spouse’s income would be assignable to the non—working spouse. This will make the no~income requirement impossible to meet. p. 3—11 To be a qualifying child, one of her daughters must be a full—time student (under age 24) or disabled. The other daughter is not, and being over age 19 is not a qualifying child. She does, however, satisfy the qualifying relative test which has no age limitation. Concept Summary 3—1 a. Heather is a qualifying child to all three parties. b. As the parent, the mother takes precedence. If the mother waives, the exemption goes to whoever has the highest AGI as between the grandmother and the uncle. 12. 13. 14. 15. 16. 17. Determination; Exemptions; Overview of Property Transactions Tax 3-7 c. The father should not be an eligible party due to the abode test. (Note: As the facts do not indicate otherwise, it is assumed that Heather’s parents are not divorced). Table 3-4 An ex-spouse can qualify as a dependent by being a member of the taxpayer’s household in any year other than that of the divorce and only if the relationship does not violate state law. Former in-laws, however, can be dependents under the regular qualifying relative rules. p. 3-14 Probably Margo’s income is such that her personal and dependency exemptions are subject to a phaseout. At the other extreme, Margo’s AGI could be so low that another dependency exemption provides no tax benefit. p. 3—19 Roberto should definitely encourage his parents and aunts to move to Mexico. As residents -of Mexico, they will now qualify as dependents. Needless to say, being able to claim four additional dependency exemptions is bound to help Roberto’s income tax situation. p. 3—17 a. The variation occurs because the tax for a particular income range in the Tax Table is based on the midpoint amount. See the computation described in Example 31. b. No. Except in limited, situations described on p. 3-20 of the text, all taxpayers must use the Tax Table method. a. The kiddie tax was designed to lessen the tax advantages that result from shifting unearned income to lower bracket dependent children. . The kiddie tax does not apply to earned income. Also, unearned income must exceed $1,800. c. For 2008 and thereafter, the age exception has been raised from “under 18” to “under 19.” Also, full—time students under age 24 are now covered by the tax. d. Married children filing a joint return and those whose earned income is more than half of their support. e. If the parental election is made, the child need not file a tax return. pp. 3—23 and 3-24 a. If either spouse itemizes deductions from AGI, the other spouse also must itemize. Consequently, Jack’s suggestion is not proper. ' b. Presuming they file separately and itemize, their total deduction is $8,000 ($7,500 + $500). If they claim the standard deduction, $10,900 ($5,450 + $5,450) is allowed. The same result takes place on a joint return. For tax purposes, therefore, the standard deduction is the better choice. p. 3—29 and Table 3-1 3-8 18. 19. 20. 21. 22. 23. 24. 25. 2009 Individual Volume/Solutions Manual a. Because he is a US. citizen, Oliver must file a Federal income tax return. b. if the parties make an election under §6013(g). Although such an election allows Oliver to file a jOll’lt return, it subjects all of Regina’s foreign income to US. taxation. Global Tax Issues on p. 3—30 a. Head of household filing status is available since only one parent needs to qualify as a dependent. . Head of household filing status is available since the son is a dependent under the qualifying child category. 0. 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. d. Head of household filing status is not available. The daughter is not a member of taxpayer’s houSehold. pp. 3730 and 3—31 a. Head of household filing status is not available. b. Head of household filing status is not available. c. Head of household filing status is available. d. In c., Florence qualifies as a surviving spouse. She does not in a. and b. because Derrick is not her dependent. p. 3-31 and Example 41 If Fran maintains a household for a dependent child, she probably qualifies as an abandoned spouSe. If so, Fran can file as a head of household. pp. 3—31 and 3—32 Gain on the sale of the stock is a short—term capital gain and is taxed at ordinary income rates. The gain on the sale of the land and houseboat should be combined. As long-term capital gain, the total is subject to tax at preferential ratesml 5% or 0% (5% for 2007). The loss is personal and, therefore, nondeductible. pp. 3—32 and 3—33 One reason might be that her tax bracket is 15% or less. If so, her tax rate on a long—term capital gain is 5% in 2007 and 0% in 2008. p. 3—33 Collectibles are subject to an alternative tax rate of 28% unless the taxpayer is in a lower bracket. Therefore, Milton must be in a 28% or higher bracket, while Arlene’s tax bracket is 25%. p. 3—33 a. The short—term capital loss is first offset against the long—term capital gain from the gun collection. This has the effect of preserving more of the long-term capital gain from the sale of the land. Determination; Exemptions; Overview of Property Transactions Tax 3—9 b. Because the long-term capital gain from collectibles is taxed at a maximum of 28% while regular long—term capital gains are taxed at a lower 15%, the offset sequence followed in part a. favors taxpayers. p. 3—34 26. a. If the parties live in Indiana, Marcie can use head of household filing status. Her household includes a related dependent, Audry. The joint return test does not disqualify Audry because the purpose of the filing is to recover amounts withheld. Due to the age test, Jamie does not meet the definition of a qualifying child. Furthermore, he does not satisfy the requirement of a qualifying relative in View of the gross income test. b. If the parties live in California, Jamie’s earnings become $1,800 (50% X $3,600). Since this is less than the exemption amount of $3,500, Jamie passes the gross income test and can be claimed by Marcie as a dependent. Although Audry now has gross income of $1,800, this does not disqualify her from her status as a dependent. Like part a. above, Marcie can use head of household filing status. pp. 3—17, 3-36, and Examples 54 and 55 27. Under a multiple support agreement, Erica should claim her mother as a dependent. As part of the contribution toward support, Erica should pay for any medical expenses her mother incurs. With her children and because her brothers do not itemize, Erica is the party most likely to obtain a tax benefit from her mother’s medical expenses. However, if Erica receives no benefit from a medical expense deduction (due to 7.5% of AGI limit), then the dependency exemption should be rotated and the medical expenses divided accordingly. pp. 3—36, 3—37, and Example 56 PROBLEMS 28. a. AGI $55,000 Less: Standard deduction (married filing jointly) (10,900) Personal and dependency exemptions (4 X $3,500) (14,000) Taxable income $30,100 1). AGI $80,000 Less: Standard deduction (head of household) (8,000) Personal and dependency exemptions (5 X $3,500) 5 17,500) Taxable income $54,500 0. AGI $75,000 Less: Itemized deductions (9,000) Personal and dependency exemptions (4 X $3,500) 114,000) Taxable income 52 000 d. AGI $48,000 Less: Standard deduction (surviving spouse) (10,900) Personal and dependency exemptions (5 X $3,500) 1 17,500) Taxable income 19 600 3-10 29. 30. 31. 2009 Individual Volume/Solutions Manual 6. AGI $54,000 Less: Standard deduction (head of household) (8,000) Personal and dependency exemptions (2 X $3,500) _(_7,000) Taxable income $39,000 pp. 3-6 to 3-8 and Table 3—1 Salary $70,000 Alimony paid (6,000) Capital loss (3,000) IRA contribution (5,000) Office pool 1,500 AGI $57,500 Standard deduction (5,450) Personal and dependency exemptions (3 X $3,500) 3 10.500) Taxable income $41,550 The alimony payments are deductible. The gift and bond interest are nontaxable exclusions. Only $3,000 of the capital loss is deductible—~the balance of $2,000 is carried over to 2009. pp. 3—5, 3-6, 3-34, Figure 3—1, Exhibits 3—1 and 3-2, and Table 3-1 Salary $80,000 Interest on bonds 3,000 Interest on CD 2,800 Dividend 3,300 AGI $89,100 Standard deduction (abandoned spouse—~head of household) (8,000) Personal and dependency exemptions (4 X $3,500) 3 14,000) Taxable income $67,100 The interest ($3,000) on the bonds is taxable. Excluded from gross income are the life insurance proceeds ($100,000) and the inheritance ($200,000). The loan repayment ($6,000) is a nontaxable return of capital. Marilyn chose the standard deduction ($8,000) over itemizing her deductions from AGI ($7,900) because it provided the greater deduction. pp. 3—3, 3-7, 3—8, Figure 3-1, and Exhibits 3—1 to 3-3 a. $5,450. Although $5,200 (earned income) + $300 = $5,500, the amount allowed cannot exceed that available in 2008 for single taxpayers. b. $3,900. $3,600 (earned income) + $300. c. $1,000. The greater of $900 or $700 (earned income) + $300. d. $900. The greater of $900 or $500 (earned income) + $300. e. $3,650. $2,000 (earned income) + $300 + $1,350 (additional standard deduction). pp. 3-9, 3—10, Tables 3-1 and 3—2, and Examples 8 to 11 32 33. 34. a. b. 0. Determination; Exemptions; Overview of Property Transactions Tax 3-11 QC. Cannot be QR due to the gross income test. B. QR. A mother cannot be a QC. d. B. e. f. QR. Cannot be a QC due to the abode test. QR. g. QR. h. B. i. j. B. QR. Cannot be a QC due to the abode test. Concept Summary 3~l a. Four. Two personal and two dependency exemptions. 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 fits under the qualifying relative category. She passes the gross income test because the tuition portion of a scholarship is nontaxable. . Two. One personal and one dependency exemption. Regardless of the year of divorce, Clint cannot qualify as he is not a member of Audry’s household. Olive meets the relationship test. . Two. One personal and one dependency exemption. As a daughter, Carin is a qualifying chld. Pierce, who is not a qualifying child, cannot come under the qualifying relative category due to the gross income test. (Note: The joint return test appears inapplicable in this case.) . Three. One personal and two dependency exemptions. Pierce’s income is now $2,000 (50% X $4,000), and he satisfies the gross income test of less than $3,500. pp. 3—10 to 3-17 a. Three. The parents qualify as dependents under the Mexico/Canada exception. b. Two. Pablo’s father does not qualify. Pablo’s mother qualifies since she is a resident of the U.S. c. Three. The parents qualify since they are U.S. citizens. d. Two. Under a special exception, an adopted child need not be a citizen or resident of the U.S. (or contiguous country) as long as his or her principal abode is with a U.S. citizen. p. 3-17 and Example 29 3—12 35. 36. 37. 38. 2009 Individual Volume/Solutions Manual Three. The niece is in the qualifying child category. The cousin and son are not, due to the relationship and age tests. They both come within the qualifying relative category. . Two. Both persons come within the qualifying relative category. The stepmother meets the relationship test, while the family friend’s son is a member of taxpayer’s household. . fie. Helena is a qualifying child under the exception to the citizenship or residency test. She lives with her adoptive father who is a US. citizen. . Two. Two. come under the qualifying relative category, and it has been assumed that each meets the gross income test. The mother— and brother—in—law satisfy the relationship test. While the ex—husband is a member of the household, he cannot qualify in the year of the divorce. The brother-in—law’s age and non—student status have no bearing on the dependency issue. Example 29 and Concept Summary 3—1 a. Billy is a qualifying child as to all three parties. Therefore, the mother, aunt, and grandfather are eligible to claim him as a dependent. b. In this tie-breaker situation, the mother (as parent) will take preference. If the mother forgoes the exemption, the grandfather is next in order of preference, due to a higher AGI. pp. 3-12, 3-13 and Table 3—4 a. Three. As a niece, lda is a qualifying child. Under the qualifying child category, Ida does not have to meet a gross income test. In this regard and because of her age, her student status makes a difference. b. Qn_e. Since Clint is not a qualifying child, the gross income test does apply. c. Three. The parents need not live with Trent as they meet the relationship test. Though not stated, it is assumed that the gross income test is satisfied. d. One. Carol can claim a personal exemption. Because of the divorce decree, the dependency exemptions for the children are awarded to Jack (Carol’s ex—husband). pp. 3—10 and 3-17 a. Daughter and brother. The son is not eligible as he has not contributed more than 10%. The cousin and the family friend do not meet the relationship test. b. No. The eligible parties can rotate the exemptions as they choose. c. If the eligible person who is awarded the exemption also pays the medical expenses, then such person can claim them. Examples 27 and 56 DJ \0 40. 41. Determination; Exemptions; Overview of Property Transactions Tax 3—13 Exemption amount (10 X $3,500) $35,000 Step 1: AGl $280,000 Phaseout threshold (239.950) Excess amount 40,050 Step 2: $40,050 + $2,500 = i7 (rounded up) X 2 = 34% (phaseout percentage) Step 3: $35,000 X 34% = $11,900 (exemption phaseout) Step 4: $11,900 X 1/3 (reduction-of-phaseout fraction) = $3,967 (adjusted phaseout) 13.967) Step 5: Allowable exemption deduction $31033 Example 30 a. Wages $3,200 Bank interest 1,800 Bond interest (State of Maryland bond interest is tax—exempt) —0— Gross income $5,000 Less: Standard deduction* (3,500) Personal exemption** (—0—) Taxable income 1,500 b Bank interest $1,800 Bond interest —0— Total unearned income $1,800 Minus: $900 + $900 standard deduction (1481.10) Income taxed at parents’ rate Income taxed at Jocelyn’s rate Total tax ($1,500 X 10%)*** 54$; *A dependent’s standard deduction is limited to the greater of $900 or the sum ofhis or her earned income plus $300. **A dependent may not claim a personal exemption on his or her return. ***Since Jocelyn’s unearned income is not more than $1,800, her tax is determined Without using her parents’ rate. Thus, Jocelyn’s 2008 tax liability is $150 ($1,500 taxable income X 10%). pp. 3—10, 3-23, Exhibit 3—1, and Example 12 a. Regardless of where the parties reside, it is essential that the damage of the joint return be undone. The joint return test applies to both the qualifying child and qualifying relative categories of dependency exemptions. The situation can be rectified by filing separate returns on or before April 15, 2009. In Louisiana, one—half of the daughter’s income, or $5,500 (50% X $11,000), is assigned to John. Being a qualifying child, the daughter can be claimed as a dependent. John, however, is subject to the gross income test contained in the qualifying relative category. Since $5,500 exceeds $3,500, John cannot be claimed as a dependent. b. As noted in part a., the joint return problem needs to be resolved. In New Jersey, none of the daughter’s income is earned by John. Consequently, John now meets the gross income test of a qualifying relative. The daughter also can be claimed as a dependent since there is no gross income test applicable to the qualifying child category. Examples 52, 54, and 55 3—14 2009 Individual Volume/Solutions Manual 42. a. Salary $80,000 Short—term capital 1033 (3,000) Cash prize 1,000 AGI $78,000 Less: Personal and dependency exemptions (7 X $3,500) (24,500) Standard deduction 1 10,900) Taxable income $42,600 Tax on $42,600 using surviving spouse rate schedule: $1,605 + 15%($42,600 —$l6,050)= 5 588. The father does not fail the gross income test because tax—exempt income is not counted. The unused capital loss of $1,000 is carried over to the following year. b. Gross income $85,000 Contribution to traditional IRA (5,000) AGI $80,000 Less: Personal and dependency exemptions (4 X $3,500) (14,000) Itemized deductions (8,200) Taxable income $57,800 Tax on $57,800 using head of household rate schedule: $5,975 + 25%($57,800 — $43,650) = $9,513. Although Rosalyn does not meet the re1ationship test, she is a member of Morgan’s household. Jerold and F10 meet the relationship test. Jerold is not a US. citizen or resident but is a resident of Canada. pp. 3-7, 3-8, 3—10, 3—30, 3—34, Figure 3—1, Table 3—1, and Concept Summary 3-1 43. Uneamed income $2,400 Minus: $900 base amount + $900 standard deduction 1 800 Unearned income taxed at parents” rate 600 Terri’s parents are in the 25% bracket, so her unearned income would generate $150 of tax (25% X $600). Computation of Terri’s taxable income and tax: Earned income $1,900 Interest income 2,400 Gross income $4,300 Less: Personal exemption (~0—) Less: Standard deduction [greater of $900 or $1,900 (earned income) + $300] 12,200) Taxable income ' $2,100 Less: Unearned income taxed at parents’ rate (600) Income taxed atTerri’s rate $1,500 Terri’s tax rate X 100 0 Tax at Terri’s rate $ 150 Terri’s total tax: $150 (unearned income taxed at parents” rate) + $150 (taxed at Terri’s rate) = $300. Example 36 I 44. 45. 46. Determination; Exemptions; Overview of Property Transactions Tax 3—15 21. Earned income $1,400 interest income 3,200 Gross income and A61 $4,600 Less: Standard deduction [greater of $900 or $1,400 (earned income) + $300] {1,7001 Taxable income 2 900 b. Taxed at parents’ rate: Unearned income $3,200 Less: $900 + $900 1 800 Net unearned income (taxed at parents’ rate) $1,400 Taxed at Rhett’s rate: Taxable income $2,900 Less: amount taxed at parents’ rate 1 1.400) Taxed at Rhett’s rate ' 1 500 c. The parental election cannot be made as Rhett’s income is not solely from interest and dividends. p. 3—24 and Example 36 a. Sam and Lana must file since their gross income of $20,200 is more than the $20,000 filing requirement. 'b. Ronald is not required to file. Although he can be claimed as a dependent on his parents’ return, his earned income and gross income is less than $5,450 (his standard deduction). 0. Mike need not file since his gross income of $10,100 is less than the $10,300 filing requirement. (1. Patricia is required to file. Her gross income is less than $8,950, but her net earnings from self—employment are more than $400. Taxpayers in a. and c. should file, even if a return is not required, to obtain a refund if any income tax was withheld. p. 3-25 and Table 3—6 a. Ben need not file a tax return. He is claimed on his parents’ return, has earned income only, and gross meome is less than the standard deduction of $5,450. b. Anita must file a tax return since she is claimed on her parents’ return and has unearned income greater then $900. Anita’s unearned income is less than the amount required to trigger a tax at her parents’ rate. Furthermore, her parents cannot make the parental election because Anita’s unearned income is not over $1,800. Earl must file a tax return since he is claimed on his parents’ return and has both earned plus unearned income and gross income of more than the larger of $900 or the sum of earned income plus $300. 3—16 2009 Individual Volume/Solutions Manual d. Pat must file a tax return since she has net self—employment earnings of $400 or more. pp. 3—25, 3—26, and Table 3—6 47. a. If they stay single, each has a tax liability of $13,844. Using the tax rate schedules for 2008 applicable to single persons, the tax on $70,000 (taxable income) is $4,481.25 + 25%($70,000 — $32,550) = $13,843.75, or $13,844 (rounded). Thus, their combined tax liability is $27,688 ($13,844 + $13,844). If they marry in 2008, the following results: Gross income (and A01) ($76,950 + $76,950) $153,900 Standard deduction (married persons filing jointly) ( 10,900) Personal exemptions ($3,500 - 2) (7,0001 Taxable income $136,000 Tax on $136,000 using the rate schedule for married persons filing jointly is $25,550 + 280/0($136,000 — $131,450) = $26,824. Thus, Spencer and Ava save $864 ($27,688 — $26,824) for 2008 by marrying and filing a joint return. b. Presuming no marriage and using the rate schedules for 2008 applicable to single persons, Addison’s tax on $50,000 (taxable income) is $4,481.25 + 25%($50,000 — $32,550) = $8,843.75, or $8,844 (rounded). Corey’s tax is $0. If Cory and Addison marry and file a joint return, the following takes place: Addison’s wages $58,950 Corey’s wages 2,000 AGI $60,950 Standard deduction (married persons filing jointly) (10,900) Personal exemptions ($3,500 - 2) (7,000) Taxable income $43,050 Tax on $43,050 using the rate schedule for married persons filing jointly is $1,605 + 15%($43,050 — $16,050) = $5,655. By comparing the $8,844 Addison would pay (and Corey’s $0 tax) if they do not marry with the $5,655, the parties would save $3,189 by marrying and filing jointly for 2008. pp. 3—29 and 3—30 48. a. Prior to 2005, an unmarried child could qualify a taxpayer for head of household filing status even if the child was not a dependent. The Working Families Tax Relief Act of 2004 deleted this exception. For tax years after 2004, the child must be a dependent. Therefore, Winston must use single filing status. b. Winston must use single filing status. See answer to part a. above. 0. Winston qualifies for head of household filing status. As long as one parent is his dependent, this is enough. Determination; Exemptions; Overview of Property Transactions Tax 3-17 (1. Winston must use single filing status. Except in the case of parents, head of household status requlres that the dependent be a member of taxpayer’shousehold. pp. 3—30, 3-31, and Examples 41 and 42 49. a. For year 2007, Jerrod can use married filing joint status. Because he is the executor of the estate, he can make the election to file jointly on Nadia’s behalf. He can claim Macy as a dependent since she is a qualifying child. As such, her gross income is immaterial. b. For year 2008, Jerrod must file as a single individual. He cannot be a surviving spouse as Macy is not his dependent. She is not a qualifying child due to the age test, and she is not a qualifying relative due to the gross income test. Jerrod cannot be a head of household for the same reason—Macy is not a dependent. c. For 2009, Jerrod qualifies for surviving spouse filing status. Macy now comes under the qualifying child category and is Jerrod’s dependent. Although she is not under age 19, she is under age 24 and a full—time student. Thus, her gross income makes no difference. Concept Summary 3-1 and Example 38 50. a. For year 2007, Rosalyn should file a joint return. Because she is the executor of the estate, she can issue the consent on behalf of Perry. Rosalyn can claim two personal (hers and Perry) and two dependency exemptions. Sue is a qualifying child and is exempt from the gross income test by being under 19 years of age. Peyton meets the relationship test and satisfies the gross income test. Example 38 For year 2008, Rosalyn should file as a head of household. She is not a surviving spouse because Sue is not her dependent. Sue is not a qualifying child due to the age limitation, and she is not a qualifying relative due to the gross income test. Peyton meets the qualifying relative test. Thus, Rosalyn can claim one personal and one dependency exemption. Example 40 b. For year 2007, Rosalyn should file a joint retum (see part a. above). Rosalyn can claim two personal and one dependency exemption. Sue qualifies as a dependent because she is a qualifying child. Peyton is not a qualifying relative since the $4,000 (50% of $8,000) he earns disqualifies him under the gross income test. For year 2008, Rosalyn should file as a single taxpayer. She can claim one personal and no dependency exemptions. Sue is not a qualifying child due to the age limitations and is not a qualifying relative due to the gross income test. Peyton is not a qualifying relative due to the gross income test—he earns $4,000 (50% of $8,000), which is more than $3,500. (Note: In both parts a. and b., it has been assumed that Peyton and Sue do not file a joint return.) pp. 3-30, 3—36, and Concept Summary 3—1 3-18 2009 Individual Volume/Solutions Manual 51. a. Olivia has the following results: LTCG (land) $4,000 STCL (IBM) ‘ (1,000) STCG (boat and trailer) 2,000 Loss on camper (nondeductible) —0— Thus, she has a net LTCG of $4,000 and a net STCG of $1,000. Her tax is $930 [($4,000- 15%) + ($1,000- 33%)]. b. $150 [($4,000« 0%) + ($1,000- 15%)]. 0. $350 [($4,000 v 5%) + ($1,000 - 15%)]. pp. 3—33 and 3—34 52. a. Brayden has a collectible gain of $5,000, a LTCG of $2,000, and a STCL of $4,000. Offsetting the STCL against the collectible gain leaves: $1,000 collectible gain and $2,000 LTCG. The tax liability is $580 [($1,000 ~ 28%) + ($2,000 - 15%). b. sm[($1,000-15%)+($2,000. 0%)]. c. $250 [($1,000 - 15%) + ($2,000- 5%)]. pp. 3—33 and 3—34 53.- a. By concentrating the payment of three years of charitable contributions (2007, 2008, and 2009) into one year (2008), this will allow the Hundleys to itemize their deductions from AGI in 2008. Otherwise their itemized deductions (normally $9,500) are of no benefit, as they do not exceed the standard deduction ($10,700 for 2007 and $10,900 for 2008). b. Presuming the $9,500 of normal itemized deductions already includes one year of church pledge payments, the additional payment of $7,200 ($3,600 for 2007 and $3,600 for 2009) yields itemized deductions of $16,700 ($9,500 + $7,200) for 2008. This exeeeds the standard deduction that would have been claimed by $5,800 ($16,700 — $10,900). Therefore, the tax savings by concentrating the charitable contributions becomes $1,450 (25% X $5,800). The same tax that would have been paid will result for 2007 and 2009 as the standard deduction is claimed for each of these years. Examples 50 and 51 ...
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This note was uploaded on 12/03/2008 for the course ACG 352 taught by Professor B during the Fall '08 term at Bryant.

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Ch. 3 Answers - Determination; Exemptions; Overview of...

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