CH3 Sol - Tax Formula Components 1. An understanding of the...

Info iconThis preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 4
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 6
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 8
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 10
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 12
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Tax Formula Components 1. An understanding of the components of the tax formula is required in order to properly determine a taxpayer’s tax liability. It is particularly important to distinguish between deductions toward adjusted gross income and deductions from adjusted gross income. Deductions for and from Adjusted Gross Income 2. Deductions for adjusted gross income are primarily of a business nature. Deductions from adjusted gross income are primarily of a personal, nonbusiness nature. Deductions for adjusted gross income are allowable whether or not a taxpayer itemizes while deductions from adjusted gross income are valuable only if they exceed the standard deduction. Certain itemized deductions, personal exemptions, and credits are based on adjusted gross income. Deduction v. Tax Credit 3. A tax deduction reduces taxable income before the determination of the tax liability. A tax credit reduces the tax liability. A tax credit reduces the tax liability dollar for dollar. A tax deduction will reduce the tax liability only proportionately based on a taxpayer’s marginal tax bracket. A $1 deduction at the 35 percent tax bracket saves 35 cents in taxes while a $1 credit saves $1 in taxes. Deductions for Adjusted Gross Income Terminology 4. Other terms used to describe deductions for adjusted gross income include deductions from gross income and business deductions. Standard Deduction v. Personal Exemption 5. The standard deduction allows taxpayers to earn an amount of income with no tax being assessed. One purpose is to keep low—income taxpayers off the tax rolls. Increasing personal exemptions instead of the standard deduction would be beneficial to families with more dependents. Standard V. Itemized Deductions 6. Where taxpayers have total itemized deductions each year that are reasonably close to the standard deduction they may benefit by shifting deductions and placing as many of the itemized deductions in one year as possible. This will allow the taxpayer to itemize deductions for the one year and to use the standard deduction in another. This shifting will increase the total amount of deductions and reduce taxable income. Partial Standard Deduction 7. Passive or unearned income can be placed in the hands of a dependent and taxed at lower rates. Special rules reduce the amount of the standard deduction for dependents with unearned income. Married couples filing separately could arrange their affairs to have one of the spouses take all the itemized deductions while the other uses the standard deduction, and the result would be a smaller taxable income than if they fi led jointly. Special rules eliminate this possibility. Standard Deduction for Dependent Child with Unearned Income 8. The standard deduction for a dependent child with unearned income is limited to the larger of the amount of earned income plus $300 or $950. Spouse Exemption on Separate Return 9. No. The spouse must have no income, earned or unearned, in order to be claimed as an exemption on George’s separate return. Additional Old Age and Blindness Standard Deduction lO. Taxpayers are allowed an additional standard deduction for being over age 65 or blind. The extra amounts do not apply to dependents. Dependency Exemption: Support Test 11. In determining whether a taxpayer has paid over one—half of the support of a dependent, the value of lodging is determined using a marginal cost approach. A minimum base housing cost must be allocated to the taxpayer. The remaining or additional cost is then allocated to the dependent in the support determination. Dependency Exemption: Birth and Death 12. Bill and Becky are allowed a dependency exemption for the child. Birth during the year or death during the year does not prevent an individual from qualifying as a dependent. Dependency Exemption: Full—Time Students 13. Yes. School attendance exclusively at night cannot qualify as full— time attendance. Full—time attendance may include courses taken at night. Attendance at night does not disqualify a person from meeting the full—time attendance requirement. Joint Return of Dependent 14. Yes. Normally a dependent may not file a joint return and still qualify as a dependent of someone else. However, if the joint return is filed only as a claim for refund and no tax liability exists for either spouse on separate returns, the dependency exemption is still allowed. Neither Rhoda nor Mike will have a tax liability on separate returns. Multiple Support Agreement: Requirements 15. The underlying concept of the “multiple support agreement" is to allow an exemption where no one person pays over half of the support of an individual. Requirements: (1) no one person paid over half, (2) each member would be allowed the exemption except for the support test, (3) each member contributed more than 10 percent of support, and (4) statement assigning exemption signed by each person contributing more than 10 percent. Multiple Support Agreement: Allowable Exemptions l6. Amos cannot claim mother because he did not meet 10 percent requirement. Other brothers are eligible. Dependency for Pre—l985 Divorce l7. Wilma. The custodial parent is allowed the exemption unless she grants the exemption to the noncustodial parent. Dependency for Pre—l985 Divorce l8. Wilma must sign a Form 8332 or similar statement agreeing that she will not claim an exemption for the child. Homer must attach the statement to his return. Dependency for Post—1984 Divorce 19. Jane is entitled to the exemption. For years after 1984, the custodial parent is entitled to the exemption unless he or she expressly waives the right to the exemption. Comparing Pre—1985 and Post—1984 Divorce Exemptions 20. Form 8332 is used to grant an exemption to the noncustodial parent. Calculating Standard Deduction and Exemptions 21. a. 2 personal exemptions—John, wife; $12,750 standard deduction—allowed to use the basic standard deduction of $11,600 plus $1,150 for being over age 65. b. 2 personal exemptions—Jack, wife; $13,900 standard deduction—allowed to use the basic standard deduction of $11,600 plus $1,150 for being blind and $1,150 for being over age 65; January 1 of the following year counts as this year. c. 3 personal exemptions—Jim, Mary, father; $11,600 standard deduction (no additional standard deduction for dependents). d. v 2 personal exemptions—Harry, son; $9,950 standard deduction—basic standard deduction for head of household of $8,500 plus $1,450 for being over age 65. e. 5 personal exemptions—Jackson, Joan, 3—year—old, 7—year—old, deceased daughter; dependent alive part of year counts; $11,600 standard deduction. f. 2 personal exemptions—Joe, wife JoAnne; the daughter is not a qualifying child because she is not a full—time student under 24 and not a qualifying relative because she earned over $3,700; $12,750 standard deduction—basic standard deduction of $11,600 plus $1,150 for being over age 65. g. 2 personal exemptions—William, mother; $8,500 standard deduction—head of household (mother does not have to live with William for William to qualify as head of household). h. 1 personal exemption—William; does not pay over half of support of his mother and she has too much income; $5,800 standard deduction. i. 3 personal exemptions—Billy Bob, Mary Sue, Jackie Jo; Jackie Jo is a member of the household; $11,600 standard deduction. j. 2 personal exemptions—Benson, Chester; scholarship does not count in support test; $8,500 standard deduction—head of household. k. 1 personal exemption—Benson; support test not met (money spent from savings counts in support determination); $5,800 standard deduction; Chester is not a qualifying child or a qualifying relative, so Benson files as single. 1. 2 personal exemptions—Richard, son of deceased friend; if son of deceased friend earned more than $3,700, then he would not qualify as a dependent; $8,500 standard deduction; qualifies as head of household because son of deceased friend meets the qualifying relative test since he lived with Richard the entire year. m. 6 personal exemptions—Dan, Pam, 3 foster children, son; $11,600 standard deduction. Definition of Filing Status 22. Filing status is determined by a taxpayer’s marital status and then by other factors within that marital status. A taxpayer’s filing status determines from which tax table or tax rate schedule the tax liability is computed. The taxpayer attempts to qualify for the filing status generating the least amount of tax. Determining Filing Status 23. Since Darlene is still legally married, she may file a joint return with her husband. Darlene also qualifies as a married individual filing separately. It is unlikely that Darlene would choose the latter status as she qualifies as an abandoned spouse, which allows her to be classified as unmarried. As an unmarried taxpayer she is eligible for single status or head of household status. In that case, Darlene’s best filing status would be head of household. Head of Household Expenses v. Support Test Expenses 24. Only those expenses incurred in the support of a dependent are included in the support test. Head of household expenses include only the expenses incurred in running the household. Dependency expenditures for food consumed in the household would count in both computations. Expenditures for food consumed by the dependent outside the household would count only for the dependency exemption. Food consumed by other household members would count only in the household costs while only the portion allocated to the dependent would enter into the dependency computation. Return Requirements: Minimum Gross Income 25. No. Individuals receiving less than certain income amounts are not required to file tax returns. Income filing requirements are based on the basic standard deduction plus taxpayer exemptions. Return Requirements: Dependents with Unearned Income 26. Yes. Since Charles is a dependent and has unearned income exceeding $950. Return Requirements: Refunds and Credits 27. Even though the income received may be less than that required to file a return, a taxpayer may wish to file in order to receive a refund of any income taxes withheld or, as discussed in Chapter 9, to obtain the earned income credit. Return Requirements: Taxable Income 28. Any taxable income requires the filing of a return. In addition, where an individual has $400 or more of self— employment income, a tax return must be filed in order to determine the self—employment tax. Tax Tables v. Tax Rate Schedules 29. The tax tables divide taxable income into $25 and $50 intervals. The taxpayer finds the interval containing his or her taxable income and the table gives the tax liability. With the tax rate schedules, the taxpayer must find the line containing taxable income and then must go through a computation to arrive at the tax liability. In effect, the tax tables take the midpoint of each interval and determine the tax liability from the tax rate schedules, thus saving the taxpayer the computation procedure. Use of the tax tables is required on taxable income under $100,000. Self—Employment Tax Limit 30. Self—employment income subject to tax is limited to the earnings base ($106,800 for 2011) less any wages and tips subject to the Social Security tax. Taxable Income Computation: Married Taxpayers 31. Tom and Linda’s taxable income is $13,250. Adjusted gross income $40,000 Less: Itemized deductions v. $11,600 11,950 Less: Personal exemptions (4 X $3,700) 14,800 Taxable income $13,250 Taxable Income Computation: Single Taxpayer 32. Marie’s taxable income is $49,900. Adjusted gross income $70,000 Less: Itemized deductions v. $8,500 9,000 Less: Personal exemptions (3 X $3,700) 11,100 Taxable income $49,900 Itemized Deductions V. Standard Deduction 33. a. Robert should itemize. His itemized deductions exceed the standard deduction of $5,800. b. Jane will not itemize. Her deductions do not exceed $8,500. 0. Brian’s itemized deductions exceed the $5,800 standard deduction for married individuals fi ling separately; therefore, he will itemize. d. As a surviving spouse, Lisa has a standard deduction of $11,600. Therefore she will not itemize. Taxable Income: Personal Exemptions and Standard Deduction 34. Taxable income is $3,600. a. Adjusted gross income Less: Standard deduction Less: Personal exemptions (4 XTaxable income $3,700) $30,000 11,600 14,800 $3,600 b. Taxable income is $10,500. Adjusted gross income $20,000 Less: Standard deduction 5,800 Less: Personal exemption 3,700 Taxable income $10,500 0. Taxable income is $200. Adjusted gross income $3,100 Less: Standard deduction (earned income plus $300) 2,900 Taxable income $200 d. Taxable income is $45,000. Adjusted gross income $65,000 Less: Itemized deductions of $8,900 v. standard deduction of $5,800 8,900 Less: Personal exemptions (3 x $3,700) 11,100 Taxable income $45,000 ‘ e. Taxable income is $52,400. Adjusted gross income $65,000 Less: Itemized deductions 1,500 Less: Personal exemptions (3 x $3,700) 11,100 Taxable income $52,400 Taxable Income: Standard Deduction—Dependents 35. Mary is allowed the full standard deduction since her earned income plus $300 exceeds the standard deduction. She is not allowed a personal exemption. Adjusted gross income $6,500 Less: Standard deduction 5,800 Taxable income $ 700 Taxable Income: Standard Deduction—Dependents 36. Stanley’s taxable income is $1,700. Adjusted gross income $3,000 Less: Standard deduction (earned income + $300) 1,300 Taxable income $1,700 If Stanley is age 16, $1,600 will be taxed at his marginal rate of 10 percent and $100 (net unearned income ($2,000 — $950 — $950)) will be taxed at his parents’ marginal rate. Taxable Income: Standard Deduction—Dependents 37. Bradford’s taxable income is $1,050. Adjusted gross income $2,000 Less: Standard deduction 950 Taxable income $1,050 Since Bradford is under age 18, he would be taxed on $950 at his marginal rate of 10 percent and the remaining $100 (net unearned income ($2,000 — $950 — $950)) would be taxed at his parents’ marginal rate. Additional Standard Deduction 38. The standard deduction for married persons filing jointly for 2011 is $11,600. Dependents do not help qualify a taxpayer for the additional standard deduction. They qualify for three personal exemptions. Support Test: Dependents and Full—Time Students 39. a. Jodi has provided more than 50 percent of her mother’s support. Basic Medicare payments do not figure into the computation of support. b. Jodi has not provided over half of her daughter’s support. The daughter provided $2,400 of her own support. Support Test: Full—Time Students 40. No. Support is determined based on amounts spent. Since Margaret spent $3,500 and her parents contributed only $3,000 toward Margaret’s support, the parents did not pay over one— half of Margaret's support. Multiple Support Agreement 41. Mark and Nancy. To qualify each member of a multiple support agreement must be entitled to claim the individual as a dependent except for the fact that they did not contribute more than one—half of the support but did contribute more than 10 percent of the support. Opel does not qualify since she did not pay more than 10 percent of the total support cost. Fred does not qualify since Myrtle is not related to Fred and did not live with him. Post—1984 Divorce Dependency 42. Annie can claim head of household filing status. She is not required to claim her son as a dependent in order to qualify for head of household status. Filing Status: Married Persons—Joint and Separate Returns 43. a. Married filing jointly. Marital status is determined as of the last day of the year. b. Married filing separately. To qualify as unmarried under the abandoned spouse rules there must be a dependent child. c. Married filing jointly. A special election can be made to treat the nonresident spouse as a U.S. citizen, otherwise the taxpayer would fi le married fi ling separately. Filing Status: Head of Household and Surviving Spouse 44. a. Bill is entitled to file as a surviving spouse, using the same tax rate schedule as married persons filing jointly. However, he is entitled to claim only three personal exemptions in 2011. b. Bill meets the requirements to file as head of household. Parents need not live with the taxpayer. c. Bill must file as single. To qualify as head of household, a taxpayer must be able to claim a married child as a dependent. Dependency exemption is not allowed where a married child files a joint return with the spouse. However, if the joint return were filed only to claim a refund and no tax liability would exist for either spouse on separate returns, then Bill would qualify as head of household. Filing Status: Surviving Spouse 45. 2011—Married filing jointly and three personal exemptions. Allowed a joint return in year of death. 2012—Surviving spouse with two personal exemptions. 2013—Surviving spouse with two personal exemptions. 2014—Head of household with two personal exemptions. Filing Status 46. Since Mike and Ellen are not divorced they are still eligible to file as married filing jointly. A second alternative would be for Ellen to file as head of household since she has custody of the children and qualifies as an abandoned spouse, while Mike would have to file as married filing separately. Of course they could each file as married filing separately, but that is less favorable than Ellen filing as head of household. Return Requirements 47. a. No return is required. Rebecca’s income is less than the total of the standard deduction amount plus the personal exemption. However, if Rebecca is eligible to be claimed as a dependent of someone else, she is required to file a return because her earned income exceeds $5,800. b. A return is not required. Gross income is less than $19,000. c. A return is required. Earnings from self—employment exceed $400 ($450 X' .9235 = $415.58). Tax Rate Schedules v. Tax Tables 48. Since their taxable income ($92,800) is less than $100,000, they must use the tax tables. Adjusted gross income $112,000 Less: Itemized deductions 11,800 Less: Personal exemptions (2 X $3,700) 7,400 Taxable income $92,800 Income Tax Computation: Single Person 49. Gross income $30,000 Less: Deductions for adjusted gross income 1,800 Adjusted gross income $28,200 Less: Itemized deductions v. $5,800 6,000 Less: Personal exemption 3,700 Taxable income $18,500 Tax from tax rate schedule $ 2,350 Income Tax Computation: Various Filing Statuses 50. a. $11,118.75 ($9,500.00 + 25% of $6,475) b. $15,167.75 ($13,543.75 + 28% of $5,800) C. $14,993.75 ($4,750.00 + 25% of $40,975) d. $13,636.75 ($6,330.00 + 25% of $29,225) Self—Employment Tax Computation 51. Maximum subject to self—employment tax and Social Security tax $106,800 Less: Wages subject to Social Security tax 30,000 Remaining maximum subject to social security tax $ 76,800 $18,470 subject to self—employment tax—lesser of $76,800 or $18,470 self— employment income ($20,000 X .9235). At 13.3 percent, the tax due is $2,456.61. Multiple Choice—Filing Status 52. b. Decedent’s filing status is married filing separate return. A joint return cannot be filed because his surviving spouse has remarried. Multiple Choice—Support Requirements 53. d. Scholarships are ignored in the support computation. Multiple Choice—Head of Household Requirements 54. d. Parents are not required to reside with the taxpayer for the taxpayer to qualify for head of household status. However, the taxpayer must pay over one—half of the household expenses of the parent. Multiple Choice—Head of Household Requirements 55. e. In addition to the three requirements given in (a), (b), and (c), except for a child or grandchild, the qualifying person must be a dependent. ...
View Full Document

Page1 / 12

CH3 Sol - Tax Formula Components 1. An understanding of the...

This preview shows document pages 1 - 12. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online