FTax IRGTB ch04 p001-032

FTax IRGTB ch04 p001-032 - Personal and Dependency...

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Unformatted text preview: Personal and Dependency Exemptions; Filing Status; Determination of Tax for an Individual; Filing Requirements 4 Solutions to Tax Return Problems The solution to problem 4-53 is on page 4-2; the solution to problem 4-54 is on pages 4-3 through 4-6; the solution to problem 4-55 is on pages 4-7 through 4-10; the solution for tax research problems 4-60 and 4-61 are on page 4-9 through 4-10. 4-1 4-2 Chapter 4 Personal and Dependency Exemptions; Filing Status; etc. Tax Return Problem 4-53 Solutions to Tax Return Problems 4-3 Tax Return Problem 4-54 4-4 Chapter 4 Personal and Dependency Exemptions; Filing Status; etc. Tax Return Problem 4-54 - continued Solutions to Tax Return Problems 4-5 Tax Return Problem 4-54 - continued 4-6 Chapter 4 Personal and Dependency Exemptions; Filing Status; etc. Tax Return Problem 4-54 - continued Solutions to Tax Return Problems 4-7 Tax Return Problem 4-55 4-8 Chapter 4 Personal and Dependency Exemptions; Filing Status; etc. Tax Return Problem 4-55- continued Solutions to Tax Return Problems 4-9 Tax Return Problem 4-55 - continued 4-10 Chapter 4 Personal and Dependency Exemptions; Filing Status; etc. Tax Return Problem 4-55 - continued Solutions to Tax Research Problems 4-11 Solutions to Tax Research Problems 4-60 5The election for husband and wife to file jointly is allowed by Code 6013. Two exceptions are provided. A joint return is not allowed if (1) either spouse is a nonresident alien at any time during the tax year, or (2) the spouses use different taxable years. If one spouse is a citizen or resident of the United States and both spouses elect, under 6013(g), the nonresident alien spouse may be treated as a resident and file a joint return. The election makes Chapters 1-5 and 24 of the Internal Revenue Code applicable to both spouses. Accordingly, both spouses' incomes must be included in the joint return and both spouses will be subject to withholding. This election is for the year made and all subsequent years until terminated. It may be terminated voluntarily, by death, by legal separation, by the Secretary of Treasury [in certain instances per 6013 (g)(5)]. Once an election is terminated, it may never be made by the same two spouses again. In this problem, C and N may elect to file jointly; however, they must then include N's worldwide income on that return. If N has little or no income, this will be beneficial The risks are related to the fact that this is a one-time election which continues until terminated. Should C and N terminate the election, they lose the ability to re-elect, so it is not wise to elect without careful consideration. Ted qualifies for the maximum earned income exclusion of $92,900 for 2011. Thus, his taxable income for 2010 is $29,150, computed as follows (computations for 2010 and 2011 are shown for convenience): 2010 $110,000 20,000 $130,000 (91,500) (5,700) (3,650) $ 29,150 2011 $110,000 20,000 $130,000 (92,900) (5,800) (3,700) $ 27,600 555- 4-61 5- Foreign earned income Interest income Total income Foreign earned income exclusion Standard deduction Personal exemption Taxable income 115According to the prescribed method of computing the tax under 901, for 2010 the first $91,500 is excluded and the balance is taxed as if the exclusion did not exist. Thus the $29,150 of taxable income is taxed at the rates that apply to income from $91,401 to $120,650. The actual tax is determined by taking the difference between the tax on taxable income without the exclusion and the tax on the excluded amount. For 2010 and 2011, the tax is as computed below. Tax calculation for 2010 Taxable income Foreign earned income exclusion Taxable income without the exclusion 2010 tax on taxable income without the exclusion 2010 tax on excluded income Tax on taxable income $29,150 91,500 $120,650 $27,491 (19,329) $8,162 4-12 Chapter 4 Personal and Dependency Exemptions; Filing Status; etc. Tax calculation for 2011 Taxable income Foreign earned income exclusion 11Taxable income without the exclusion 2011 tax on taxable income without the exclusion 2011 tax on excluded income Tax on taxable income $27,600 92,900 $120,500 $27,357 (19,629) $7,746 115Note that for reporting purposes all of the foreign earned income is reported (the gross amount) and the exclusion is claimed as a negative item on line 21 Other Income. Form 2555 is used to determine the amount of the foreign earned income exclusion. Personal and Dependency Exemptions; Filing Status; Determination of Tax for an Individual; Filing Requirements 4 Test Bank True or False 1. A person who is claimed as a dependent on another person's return claims a personal exemption of zero on his or her own return. 2. When support is provided in a form other than a current cash expenditure (e.g., a home in which the dependent is living), it is the cost of the support item that is considered in determining whether the support test is met. 3. Social Security benefits spent on food and lodging are not included in support for an individual. 4. A person who receives more than one-half of his or her support in welfare payments from the state cannot qualify as a dependent of another individual. 5. Under a multiple support agreement, A, who provided 55 percent of the support of his mother, may assign the exemption to his sister, L, who provided 25 percent of the support. 6. A multiple support agreement allows a group of individuals to divide the exemption amount so that each member of the group has a proportional share of the total exemption deduction for the common dependent. 7. The general rule for children of divorced or separated parents who together provide over one-half the support and together have custody more than one-half the year is that the exemption goes to the parent providing the greater amount of support. 8. The general rule for children of divorced or separated parents who together provide over one-half the support and together have custody more than one-half the year is that the exemption goes to the custodial parent. 9. A single woman whose only income is taxable interest of $2,900 and Social Security benefits of $7,300 for 2011 cannot qualify as a dependent of her son because she fails to meet the gross income test. 4-13 4-14 Chapter 4 Personal and Dependency Exemptions; Filing Status; etc. 10. A 16-year-old child with earned income of $8,000 cannot be claimed as a dependent on his or her parents' tax return. Individual F lives with his daughter W and her husband H, and is their dependent. If W dies, H may continue to support F and claim him as a dependent. A taxpayer may not claim an exemption for any child who filed a joint return with her spouse. A U.S. citizen's family member who is a French citizen and Mexican resident could meet the citizenship test for purposes of the dependency exemption. A taxpayer with adjusted gross income in excess of a certain amount can lose the entire exemption deduction. A single taxpayer with one dependent receives a total exemption deduction that is less than that of a head of household with one dependent. Once a married couple files a joint return for a year, they may not file amended separate returns for that year after the due date. A person whose spouse died in 2011 may qualify as a surviving spouse only in 2011 and 2012, if all other requirements are met. A person who qualifies as an abandoned spouse can file as a head of household. To qualify as an abandoned spouse, a taxpayer must claim at least one dependency exemption. In determining the amount spent for support of a potential dependent, amounts spent on entertainment and vacations are included. V is 11 years of age, her only income is interest from savings of $3,200, and she has no itemized deductions. V is claimed as a dependent by her parents. V's taxable income is $2,250 for 2011, $1,300 of which is taxed at her parents' marginal tax rate. A parent whose 12-year-old child's only income is interest of $4,100 may elect to report the income on his own return and pay the tax with that return. A taxpayer filing as a head of household whose taxable income in 2011 is $60,000 owes Federal income tax of $15,000 (25% $60,000). An extension of time to file a return for up to six months is automatic (i.e., no explanation is required so long as the proper form is filed before the due date). A single taxpayer whose only income is from a sole proprietorship with gross income of $8,700 and net income of $3,800 is not required to file a tax return for 2011. A taxpayer generally may amend his or her tax return for any missed deductions within three years of the original due date. A taxpayer whose estimated tax due after withholding is less than $1,000 need not make estimated payments even if the other requirements are met. A taxpayer who does not file a tax return is protected by a seven-year statute of limitations (i.e., the IRS cannot assess a deficiency after seven years). 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. Test Bank 4-15 29. A taxpayer who files late and fails to get the proper extension must pay a penalty of 0.5 percent per month (up to a maximum of 25%), beginning with the due date of the tax return (usually April 15 for calendar year individuals) and ending with the date the return is filed. Multiple Choice 30. G and J are married and have three children: R, S, and C. R, age 19, was the star of the men's volleyball team at State University, where he was a full-time student in the current year. He received a scholarship valued at $8,000. G and J provide his other support of $5,000. S, who was a full-time high school student all year, worked part-time, earning $3,700. G and J spent $4,000 toward S's support. C was a high school freshman and had no income during the year. How many exemptions may G and J claim on their joint tax return? a. b. c. d. Two Three Four Five 31. V is 66 years of age and has good sight. V provided $8,000 of the support of his elderly mother, who lives in a rest home and whose only income is Social Security benefits of $6,200. What is V's filing status and how many exemptions may he claim? a. b. c. d. Head of household and two Head of household and one Single and two Single and one 32. Which one of the following is not included in determining the amount of support given to a dependent? a. b. c. d. Services performed by the parent for the dependent Gifts of toys Expenditures for recreation Expenses for education 33. Which one of the following items when spent is not included in support? a. b. c. d. Social security old age benefits spent on food State aid to dependent children spent on rent University scholarships for academic excellence Charitable contributions paid on one's behalf by a parent 34. D, whose parents are deceased, is supported by her grandparents and other relatives. Her support this year was provided as follows: Interest income Social security survivor's benefits Contributions by maternal grandparents Contributions by paternal grandparents Contributions by mother's brother Contributions by father's sister $1,500 2,000 1,500 1,500 1,000 600 Under a multiple support agreement, who may claim a dependency exemption for D? a. b. c. d. Any of those listed Either set of grandparents Either set of grandparents or the mother's brother None of those listed because the Social Security benefits and interest income exceed the exemption amount 4-16 Chapter 4 Personal and Dependency Exemptions; Filing Status; etc. 35. F and B were divorced in 1996, their divorce decree gave custody of their child to B, and under a separate written agreement, B surrendered the dependency exemption to F for the current year. F paid child support of $800 in the current year. B provided the other support of $2,000 for their only child. What is B's filing status and her number of exemptions? a. b. c. d. Head of household and one Head of household and two Single and one Single and two 36. Z and X are the divorced parents of JR. The divorce was granted in June of 1996 and Z was given custody, except for specific visits to X. Z provided $4,500 and X provided $5,000 toward JR's total support of $9,900. Which one of the following is true for the current year? a. b. c. d. If no agreement is executed, X is entitled to the dependency exemption, because X provided more than 50 percent of JR's support. If Z signs an agreement waiving the dependency exemption and it is attached to X's return, X may take the dependency exemption. If no agreement is signed, Z is entitled to the dependency exemption. Both b. and c. 37. Which of the following is not true of the gross income test for the dependency exemption (i.e., in testing to determine if the individual is a qualifying relative)? a. b. c. d. Generally, a dependent's gross income may not exceed the exemption amount. Gross income is interpreted to mean "gross cash receipts." A child of the taxpayer, under age 24, who is a full-time student at any time during five calendar months of the tax year is exempted from the test. A child of the taxpayer under age 19 is exempted from the test. 38. L is single, 35 years of age, and owns her own home. She provides more than one-half the support for M, who is unrelated to L and lives legally in L's home for the entire year. M also is single, is a citizen of the United States, and has gross income of $2,800. What is L's filing status and her proper number of exemptions for the current calendar year? a. b. c. d. Single and one Single and two Head of household and two Married filing separately and one 39. Which of the following generally has the least favorable tax rates? a. b. c. d. Head of household Married, filing jointly Married, filing separately Single 40. Which one of the following statements is true of returns filed by married persons filing jointly? a. b. c. d. Each spouse is liable for one-half the tax due if there are any deficiencies. Each spouse is liable for his or her proportional share due, based on percentage of total income, if there are any deficiencies. Once a married couple files a joint return for a year, they may not switch to separate returns after the due date for that return. The joint return is available more for convenience than for tax savings. Test Bank 4-17 41. In what situation is a married person generally required to file separately? a. b. c. d. They are separated and planning a divorce. Another taxpayer could claim one spouse as a dependent. Either spouse is a nonresident alien. Use of the separate return tables yields a lower tax than use of the joint return tables. 42. A taxpayer filing as a head of household or as a surviving spouse must determine the costs of maintaining the home. What item below may not be included in these costs? a. b. c. d. Clothing Food consumed on the premises Insurance Repairs 43. Which statement below is not true of single filing status? a. b. c. d. A single taxpayer may claim dependency exemptions. Single filing status applies to anyone who does not qualify as married, surviving spouse, or head of household. A person whose divorce becomes final on December 30, and does not re-marry the next day, will use single filing status for the calendar year if he/she is not head of household. A married person may elect to use single filing status if filing separately. 44. Which of the following taxpayers is not required to use the tax tables? a. b. c. d. A single taxpayer with taxable income of $88,000. A married couple with taxable income of $110,000. A head of household with taxable income of $65,000. No taxpayer is required to use the tax tables. 45. Compared with a single taxpayer who has the same taxable income, a taxpayer filing as head of household owes a. b. c. d. A smaller amount of tax The same amount of tax A larger amount of tax Either the same or a smaller amount of tax, depending on the amount of taxable income 46. W is a full-time student and is claimed as a dependent by his parents. During 2011, he had tax-exempt interest income of $1,500 and wages of $2,300. He also had records supporting itemized deductions of $75. How much is W's standard deduction? a. b. c. d. $2,600 $950 $2,300 $5,700 47. Fred, 19 years of age and single, is claimed as a dependent on his parents' return. He has decided not to go to college. The following information is derived from his tax return for 2011: Taxable interest and dividends Salary from part-time job Itemized deductions $3,600 2,500 1,270 4-18 Chapter 4 Personal and Dependency Exemptions; Filing Status; etc. Which of the following is false? a. b. c. d. 48. Fred's taxable income is $3,300. Fred will not itemize his deductions for the year. $1,700 of the interest and dividends will be taxed at Fred's parents' marginal tax rate if it is higher than Fred's rate. Fred's standard deduction is $2,800. Pat, age 12, received the following income in 2011: Dividends Interest Wages $2,900 1,900 500 She deposited all her income in a savings account. Pat is a U.S. citizen and lives with her parents, who provide the full $13,000 annual cost of her support. Which statement is false? a. b. c. d. 49. Pat's parents may claim her as a dependent. Pat has net unearned income of $2,900. Pat has taxable income of $4,350. Pat's standard deduction is $800. A 35 percent tax is assessed on income in excess of specified levels. Which of the following is not true of the 35 percent bracket? a. b. c. d. The 35 percent bracket applies to unlimited amounts of income over the specified levels. The level at which a head of household encounters the 35 percent bracket is the same as that for a single individual. The fact that a taxpayer reaches the 35 percent bracket does not affect the amount of tax paid on the income in lower tax brackets. The 35 percent bracket applies to all types or characters of income. 50. A $2,000 non-refundable tax credit for two taxpayers with the same filing status results in a. b. c. d. A $2,000 tax reduction A tax reduction equal to $2,000 times the marginal tax bracket A tax reduction equal to the lesser of $2,000 or the gross tax No tax savings 51. A taxpayer whose income consists of wages plus interest income under $400, is single with no dependents, and plans to claim the deduction for interest paid on his home mortgage may file a. b. c. d. Form 1040 only. Form 1040 or Form 1040A only. Form 1040A or Form 1040EZ only. Form 1040, Form 1040A, or Form 1040EZ. 52. Which of the following is not true of the due date for the individual tax return? a. b. c. d. The due date is the fifteenth day of the fourth month following the taxable year. An automatic extension of time to file the individual return will be granted upon request. An extension of time to file also allows the taxpayer to pay his or her tax late with no penalty. Interest will be charged, however. An extension beyond four months from the original due date will be granted if an adequate reason is given. Test Bank 4-19 53. J paid her 2011 taxes by filing quarterly estimated tax payments of $2,000 each. She requested an automatic extension of the filing due date in March, 2012, and in July filed her completed return showing total 2011 tax liability of $9,500. If she paid $8,400 in 2011 taxes, enclosed no money with Form 4868 in March, and enclosed $1,500 with Form 1040 in July, what interest or penalty does she not owe? a. b. c. d. Failure-to-file penalty Failure-to-pay penalty Interest on balance due Penalty on underpayment of estimated tax 54. K owed $9,500 in taxes for 2011, paid as follows: estimated tax payments of $2,100 each quarter, $1,000 with her Form 4868 (request for automatic extension) in March, and the remaining $100 with her Form 1040 in July. K's 2010 total tax was $8,000. What interest or penalty does she owe? a. b. c. d. Failure-to-pay penalty Interest on balance due Penalty on underpayment of estimated tax None of the above 55. A penalty is assessed against individuals for failure to make adequate estimated tax payments. Which of the following is not true of that penalty? a. b. c. d. The penalty is not assessed if the tax due is less than $1,000. The penalty is not assessed if the total prepayments--withholding, estimated tax payments, and others--are at least 90 percent of the total tax due for the year. The penalty is assessed from the due date of the installment until the tax is actually paid (if later). The penalty is not assessed if the total prepayments--withholding, estimated tax payments, and others--equal or exceed the prior year's tax (unless taxable income exceeded $150,000). 56. Which statement concerning the statute of limitations is not true? a. b. The statute of limitations never ends if the return is fraudulent. If an individual (calendar year) taxpayer files a return for calendar year 2010 on March 15, 2011, the IRS normally may not assess an additional tax liability against the taxpayer after April 15, 2014 for reasons other than a false or fraudulent return, no return, or a substantial omission of income. The statute of limitations period does not change regardless of the amount of income that is omitted or deduction improperly claimed. The statute of limitations begins to run only if a return is filed. c. d. 57. Tax indexation a. b. c. d. Decreases (or eliminates) bracket creep Results in unlegislated tax increases Provides adjustments in standard deductions and tax brackets only Provides adjustments tied to changes in the Index of Leading Economic Indicators 58. Information from the following table will be useful for answering this question. All figures are for 2011. Personal, dependency exemption: $3,700 Basic Standard Deduction $11,600 5,800 8,500 5,800 Additional Standard Deduction* $1,150 1,150 1,450 1,450 Filing Status Married, filing jointly Married, filing separately Head of household Single *blind taxpayer, taxpayer 65 or older 4-20 Chapter 4 Personal and Dependency Exemptions; Filing Status; etc. Which of the following taxpayers must file a return for 2011? a. b. c. d. 59. A single taxpayer, age 67, has Social Security benefits of $9,000 and interest income of $10,950 A married couple, both under 65 years, have interest income of $18,200 A single taxpayer, age 65, has self-employment earnings of $2,700 A single teenager, claimed as a dependent by her parents, has part-time wages of $5,100 Information from the following table will be useful for answering this question. All figures are for 2011. Personal, dependency exemption: $3,700 Basic Standard Deduction $11,600 5,700 8,500 5,800 Additional Standard Deduction $1,150 1,150 1,450 1,450 Filing Status Married, filing jointly Married, filing separately Head of household Single *blind taxpayer, taxpayer 65 or older Which one of the following taxpayers is not required to file a tax return for 2011? a. b. c. d. A blind 47-year-old single person whose only gross income is interest income of $9,350 A 66-year-old single taxpayer who is not claimed as a dependent and whose only gross income is interest of $9,550 A 26-year-old head of household with two children whose only gross income is wages of $22,400 A 35-year-old single taxpayer whose only income is gross rents of $9,500 and who has expenses directly attributable to the rents of $4,900 60. Chris, a single taxpayer, has investment income in addition to his salary. Use the information below to answer the following question concerning Chris' estimated tax payments during 20X1. Assume that all forms of income, withholding, and deductions occur at a constant rate throughout the year. Salary Federal income tax withheld Interest income $39,000 $3,200 14,150 If Chris pays quarterly installments of $300 on or before the due dates (his 20X0 tax liability was $7,200), and he pays the remaining tax liability on April 15, 20X2, calculate the penalty for underestimation of tax that Chris will owe to the nearest dollar. Assume a penalty interest rate of 10 percent, and installment due dates 365, 304, 212, and 90 days prior to April 15. a. b. c. d. 61. $70 $175 $186 $280 H and W are married and have a 15-year-old daughter who lives with them the entire taxable year. The couple's marginal tax rate for federal tax purposes is 35 percent and their state income tax rate is 5 percent. What amount will their daughter save them in taxes? a. b. c. d. e. $1,480 $2,480 $0 $950 None of the above Test Bank 4-21 62. Which of the following statements about the child tax credit is true? a. b. c. d. e. The credit would not be available for an 18-year-old child who is a full-time student. Taxpayers who have two qualifying children are allowed to claim only one credit. A married couple with A.G.I. of $150,000 would be entitled to claim the credit. The credit is not refundable More than one of the above is true 63. Which of the following statement about the child tax credit is true? a. b. c. d. e. The credit is available for a qualifying child or a qualifying relative. The credit is available regardless of how much income the taxpayer has. The amount of the credit is limited to $1,000 per return. More than one of the above is true. None of the above is true. Personal and Dependency Exemptions; Filing Status; Determination of Tax for an Individual; Filing Requirements 4 Solutions to Test Bank True or False 1. True. The personal exemption is disallowed for any taxpayer who is claimed as a dependent on another taxpayer's return. This rule prevents two taxpayers (e.g., a child and his or her parent) from benefiting from two exemptions for the same person. (See p. 4-2.) 2. False. When support is provided in a noncash form, such as the use of property or lodging, the amount of support is the fair market value or fair rental value. (See p. 4-5.) 3. False. Support is determined by the amount spent for the support of an individual rather than the source of the funds. Social Security benefits are deemed to be provided by the recipient individual. Only income amounts such as scholarships are ignored. [See Examples 5 and 6, p. 4-5, and Reg. 1.152-1(a)(2)(ii).] 4. True. State welfare payments are treated as provided toward support. Therefore, no welfare beneficiary can be considered a dependent when he or she receives more than one-half of his or her support from the state. (See p. 4-6.) 5. False. A multiple support agreement is not valid if any party provided over half of the dependent's support. [See p. 4-7 and 152(c).] 6. False. The multiple support agreement allows the group to assign the whole exemption to a member of the group. (See p. 4-7.) 7. False. Generally, under the rules for a qualifying child the exemption is claimed by the parent with custody the greater portion of the year. There is an exception to this rule. The exemption goes to the noncustodial parent if there is a decree of separation agreement providing so or if the custodial parent signs a written consent. [See p. 4-11 and 152(e).] 8. True. If a couple is divorced or legally separated, special rules are used to assign exemptions for their children. If over half of a child's support is provided by one parent or collectively by both parents and the child is in custody of one or both parents for more than half of the year, the parent with custody for the greater portion of the year may claim the exemption. Thus the custodial parent normally claims the exemption. (See p. 4-11.) 4-23 4-24 Chapter 4 Personal and Dependency Exemptions; Filing Status; etc. 9. False. Social Security benefits are generally excluded from gross income. They may be includible, but only if the sum of A.G.I., one-half of the Social Security payments, and any tax-exempt interest exceed specified amounts ($25,000 for single taxpayers). Since her adjusted gross income of $2,900 is less than the exemption amount, she can still qualify as a dependent. (See p. 4-8 and 151.) 10. 11. 12. False. A qualifying child is not subject to the gross income tests. This test applies for determining whether an individual is a qualifying relative. [See p. 4-3 and Reg. 151(c)(1)(B).] True. A relationship created by marriage does not cease upon divorce or the death of the spouse. [See p. 49 and Reg. 1.152-2(d).] False. The usual rule is that a dependent for whom an exemption is claimed may not file a joint return. If the joint return was filed solely for a refund (i.e., the gross tax is zero) the joint return test is met. If the joint return showed a gross tax (i.e., before credits and prepayments) greater than zero, the joint return test is not met and the dependency exemption is lost. (See p. 4-10 and Rev. Rul. 54-567, 1954-2 C.B. 108.) True. A dependent must be a citizen or national of the United States, or a resident of the United States, Mexico, or Canada. [See p. 4-9 and 151(e).] False. There is no phase-out for 2011. (See p. 4-12.) False. The personal and dependency exemption amount is $3,700 regardless of the taxpayer's filing status. The exemption phase-out does not apply for 2011. (See p. 4-12.) True. The reverse, however, is possible. [See 6013(b).] False. If the spouse died in 2011, the survivor may file as a surviving spouse during 2012 and 2013, if all other requirements are met. In 2011, the surviving spouse may file a joint return with the deceased spouse if he or she does not remarry before the close of the year. Of course, the the surviving spouse remarries, he or she could file a joint return with the new spouse. [See p. 4-17 and 2(a).] True. A taxpayer who meets the requirements to be an abandoned spouse meets all the requirements for head of household. [See Example 20, p. 4-19, and 2(c).] False. A person may qualify if either the exemption is claimed or if the exemption was not claimed because it was assigned to a separated or former spouse. Of course, over one-half of the cost of the home must be provided by the abandoned spouse, and the child must live in the home for more than one-half of the year. [See p. 4-19 and 7703(b).] True. Amounts spent for entertainment and vacations are considered in the support test. (See Exhibit 4.1 and p. 4-5.) True. Taxable income is $2,250 ($3,200 $950 standard deduction $0 exemption). V's net unearned income is taxed at her parents' rate. V's net unearned income is $1,300 ($3,200 unearned income $1,900 statutory base amount). (See Examples 25, 26 and 27 and pp. 4-26 through 4-28.) True. The election may be made so long as the only income is interest or dividend income and the total income is between $950 and $9,000. (See p. 4-31.) False. The first $46,250 of the taxable income of a head of household is taxed at a rate of 15 percent or less. Only that over $46,250 is taxed at 25 percent. (See Exhibit 4-5 and p. 4-27.) True. An extension of six months is automatically granted if filed before the due date. Requests for additional time must be accompanied by a reason. (See p. 4-35.) False. Although the taxpayer would have zero taxable income ($3,800 standard deduction exemption) a return is required since self-employment income exceeds $400. (See p. 4-32.) 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. Solutions to Test Bank 4-25 26. 27. 28. 29. True. The limitation on IRS and taxpayer initiated changes to a tax return generally is three years. [See p. 4-41 and 6511(a).] True. The floor on underpayments of estimates subject to penalty for individuals is $1,000. (See p. 4-38.) False. The limitation period is generally three years from the date a return is filed, or its due date if later. However, if no return is filed, the period never starts. (See Exhibit 4-10 and pp. 4-41 through 4-43.) False. The penalty for failure to file is 5 percent per month (up to 25 percent). It is the penalty for failure to pay that is 0.5 percent. Each is in addition to interest accruing from the due date. (See p. 4-36.) Multiple Choice 30. d. G and J are entitled to two personal exemptions on their joint return. They are also entitled to dependency exemptions for each of their three children since each is considered a qualified child. Each child meets the six conditions (relationship, residence, age, joint return, citizenship and not selfsupporting). In addition, each child is considered a qualifying relative. R qualifies under the support test because the scholarship is not included in support. S qualifies under the support test because she gets more than 50 percent of her support from her parents. All three children are exempted from the gross income test because they are full-time students under age 24. (See pp. 4-3 through 4-11 and 152.) V is entitled to one personal exemption. He also is entitled to a dependency exemption for his mother who has no gross income. V may file as head of household because he provides over one-half of the cost of the home in which his mother lives. For parents only, the home provided need not be the taxpayer's home. [See pp. 4-2 through 4-11, 4-17 through 4-20, and 2(b) and 152.] The value of the taxpayer's services is ignored when determining the amount of support. (See pp. 4-5 through 4-6 and 152.) The value of scholarships is not included in the support computations. (See Exhibit 4-1, Example 4, and pp. 4-5 through 4-6.) Any of the persons listed except the father's sister may claim the exemption under a multiple support agreement. The father's sister may not, because she provided less than 10 percent of the total support [$600 is less than (0.10 $8,100)]. [See Example 7, pp. 4-7 through 4-8, and 152(c).] B may file as head of household since she provided over one-half of the cost of the home in which she and her qualifying child lived. It is not necessary that a dependency exemption be claimed for a divorced or separated parent to qualify as head of household. B is not entitled to the dependency exemption because she granted the exemption by a written agreement to F. [See Example 18 and p. 4-11 and pp. 4-17 through 4-18, and 152(e).] If divorced parents together provide more than one-half of the support of a child and have custody more than one-half of the year, the exemption generally goes to the parent who has custody the greater period of time. It does not matter that one provided more than half of the support. However, if the custodial parent signs an agreement surrendering the exemption, it may be claimed by the noncustodial parent. Therefore, both answers b. and c. are correct. (See p. 4-11.) Gross income, as used here, is gross income as used in the tax formula. Accordingly, it includes only the gross profit from sales of inventory. It excludes nontaxable receipts. (See Example 8, p. 4-8 and 151(e)(1).) Although L is entitled to a dependency exemption for M, she cannot qualify as a head of household if the dependent is not related (i.e., a person who merely lives in the residence for the entire tax year cannot be a qualifying individual.) [See Exhibit 4-3, pp. 4-17 through 4-18, and 2(b)(3) and 152.] A married couple will generally pay a lower tax by filing jointly. All the other categories were devised to provide relief from inequities due to variance in state property laws, and not being married. (See p. 4-15.) 31. a. 32. 33. 34. a. c. c. 35. a. 36. d. 37. b. 38. b. 39. c. 4-26 Chapter 4 Personal and Dependency Exemptions; Filing Status; etc. 40. 41. 42. c. c. A couple may switch from separate returns to a joint return within three years, but the reverse is not true after the due date. [See 6013(b).] This situation requires separate filing. The other situations may warrant separate filing but do not require it. (See pp. 4-16 through 4-17.) a. For determining head-of-household status, the costs of maintaining a home must be for the mutual benefit of the occupants. Costs include such expenses as property taxes, mortgage interest, rent, utilities, insurance, repairs, upkeep, and food consumed on the premises. The cost of maintaining a home does not include clothing, educational expenses, medical expenses, or transportation. [See pp. 4-18 and 4-19 and Reg. 1.2-2(d).] d. Married people must use a married filing status. Single filing status, defined on the last day of the year, does not alone disqualify a taxpayer from claiming dependency exemptions. (See pp. 4-16 through 4-19 and 3.) b. Any taxpayer with taxable income over $100,000 cannot use the tax tables. Any other taxpayer must use the tables. (See p. 4-23 and 3.) d. Below the minimum level at which single taxpayers owe 15 percent on part of their taxable income ($8,500 in 2011), people with either filing status pay the same rate: 10 percent. (See Exhibit 4-5 and p. 4-22.) a. W's standard deduction is the larger of his earned income (up to the usual standard deduction) plus $300, $2,600 ($2,300 $300) or $950 in 2011. (See p. 4-26.) c. Fred's $1,700 of investment income that exceeds the threshold in 2011 of $1,900 ($3,600 interest and dividends - $1,900 $1,700) is not taxed at his parents' rate because he is 19 or older and is not a fulltime student less than 24. Fred's taxable income is $3,300 [($3,600 $2,500 $6,100) standard deduction ($2,500 $300 $2,800)]. [See pp. 4-26 through 4-30 and 1(g)(2)(A).] 43. 44. 45. 46. 47. 48. d. Pat's net unearned income is $2,900 ($2,900 $1,900 threshold $1,900). Pat's taxable income equals her adjusted gross income ($2,900 $1,900 $500) less her $950 standard deduction: $4,350. Her standard deduction is the larger of $950 or $800 ($500 $300). [See pp. 4-26 through 4-30, and 1(g)(2)(A) and 911(d)(2).] d. The first three answers are true. The last answer is false, since the 35 percent bracket does not apply to a net capital gain. (See Chapter 3.) c. If the tax is greater than or equal to $2,000, the effect is a $2,000 savings. However, a nonrefundable credit is limited to the tax. (See Chapter 3.) 49. 50. 51. 52. a. Forms 1040A and 1040EZ provide no means of claiming the deduction for interest paid on a home mortgage, which is an itemized deduction claimed on Schedule A. (See p. 4-32.) c. There is no extension of time to pay the tax due. In other words, an extension of time to pay is not allowed with the extension of time to file (i.e., the tax must be paid or penalties for failure to pay will be assessed). (See p. 4-37.) 53. a. Taxpayer does not owe a failure-to-file penalty because she filed Form 1040 before her extension ended October 15, 2012. She underpaid estimated taxes during 2011 and, owed interest by failing to pay the balance due by April 15 and incurred the failure-to-pay penalty by continuing to owe more than 10 percent of her total tax after filing Form 4868. [See pp. 4-36 through 4-38; Reg. 1.6081-4(a); and 6601(a), 6651(a)(1), 6651(a)(2), and 6511(a).] b. She underestimated and underpaid her remaining 2011 tax liability on her Form 4868. However, because her underpayment was less than 10 percent of her total tax liability of $9,500, she avoided the failure-to-pay penalty. By increasing her quarterly estimated tax payments to 25 percent of her tax liability in 2010 (25% $8,000 $2,000) she avoided the penalty on underpayment of estimated tax. Interest must be paid regardless. [See pp. 4-35 through 4-39; Reg. 1.6081-4(a); and 6601(a), 6651(a)(1), 6651(a)(2), and 6511(a).] 54. Solutions to Test Bank 4-27 55. 56. c. c. The penalty is assessed from the due date of the installment until the due date of the tax return, or the date the amount is paid if sooner. (See pp. 4-38 through 4-39.) In the case of a substantial omission of income from a tax return, the statute of limitations is extended to six years. A substantial omission is defined as an omission of income in excess of 25% of the gross income reported on the return. (See p. 4-43 and 6501(e).) Bracket creep and the avoidance of unlegislated tax increases are the purposes of tax indexation, which also includes adjustments to personal and dependency exemptions. Adjustments are tied to the Consumer Price Index. [See p. 4-43 and 1(f), 1(g)(4), 151(d)(3), and 639(c)(4).] Any taxpayer with self-employment income exceeding $400 must file a return and pay selfemployment tax. All of the others listed are exempted from filing under the applicable rules. The teenager may file, however, to recover any income tax withheld from her wages. (See p. 4-32.) The taxpayer in a must file because the additional standard deduction for blindness may not be considered in determining waiver from filing. The taxpayer in c must file because gross income of $22,200 exceeds $19,600 (the sum of standard deduction of $8,500 and the personal and dependency exemptions of $11,100). The taxpayer in d must file because gross income of $9,500 exceeds the sum of her standard deduction and dependency exemption even though no tax will be due. The taxpayer in b does not need to file because his gross income is less than $10,950 (sum of his standard deduction of $5,800 in 2011 plus $1,450 for being over 65 years of age and his exemption deduction of $3,700). (See p. 4-32.) For each quarter, Chris' penalty equals the amount of underpayment for the period [($7,200 4) $800 $300] the annual interest rate (10%) the period outstanding (365, 304, 212, or 90 365). (See Example 36 and pp. 4-40 through 4-44.) The couple is entitled to claim an exemption for their daughter of $3,700 in 2011 and its value is $1,480 ($3,700 (35% 5% 40%)). The couple also would be entitled to a child tax credit but it is phased out ($50 per $1,000 of A.G.I. in excess of $110,000). The credit is completely phased out once A.G.I. exceeds $130,000 (($50 ($130,000 $110,000 $20,000)/1,000)). Since the couple is in the 35% tax bracket their taxable income at a minimum is $379,150 which far exceeds $130,000. (See p. 4-12.) Part a states that the credit would not be available for an 18-year-old child who is a full-time student. This is true since the credit is available only if the child is under age 17 at the end of the year. Item b states that taxpayers who have two qualifying children are allowed to claim only one credit. Item b is false since there is a credit for each qualifying child. If there are 10 qualifying children then 10 credits or $10,000 is available subject to phase-out. Part c states that a married couple with A.G.I. of $150,000 would be entitled to claim the credit. This is false since the child tax credit is reduced $50 per $1,000 of A.G.I. in excess of $110,000 for joint filers so it is completely phased out once A.G.I. exceeds $130,000. Part d states that the credit is not refundable. This is false since the credit may be refundable. (See p. 4-12.) None of the statements are true. The credit is available only for a qualifying child and not a qualifying relative. The credit is phased-out as income rises so those with too much income cannot benefit from the credit. The credit is limited to $1,000 per child, not $1,000 per return. (See p. 4-12.) 57. a. 58. c. 59. b. 60. c. 61. a. 62. a. 63. e. Personal and Dependency Exemptions; Filing Status; Determination of Tax for an Individual; Filing Requirements 4 Comprehensive Problems 1. F is unmarried, has a 15-year-old child who lives with him for whom an exemption is claimed, and has the following items of income and expense for the calendar year 2011: Salaries and wages Federal income tax withheld FICA withheld Interest income $50,760 $2,120 3,868 1,790 11-Tax rates (selected for 2011): Top of 10% Bracket $ 8,500 12,150 17,000 Top of 15% Bracket $34,500 46,250 69,000 Top of 25% Bracket $ 83,600 119,400 139,350 Single Head of Household Married, joint Standard Deduction $ 5,800 8,500 11,600 11-Calculate F's adjusted gross income, taxable income, gross tax, and tax due. Present your answers in good form. Use the above schedules since the tax tables are not yet available. 4-29 4-30 Chapter 4 Personal and Dependency Exemptions; Filing Status; etc. 2. Z is unmarried, claims a dependency exemption for his 18-year-old child who lives with his former spouse, and has the following items of income and expense for his calendar year 2011: Income from sole proprietorship: Gross income Cash operating expenses Tax depreciation expense Net income Interest income Personal exemption Dependency exemptions for minor children Estimated tax payments 11-Tax rates (selected for 2011): Top of 10% Bracket $ 8,500 12,150 17,000 Top of 15% Bracket $34,500 46,250 69,000 Top of 25% Bracket $ 83,600 119,400 139,350 $ 42,600 $ 14,500 4,950 (19,450) 23,150 $ 2,540 1 1 $ 5,000 Single Head of Household Married, joint Standard Deduction $ 5,800 8,500 11,600 11-Calculate Z's adjusted gross income, taxable income, gross tax, and tax due or refund. Note that the combined O.A.S.D.I. and M.H.I. self-employment tax rate is 15.3 percent. Present your answers in good form. Use the above tax schedules since the tax tables are not available. Solutions to Comprehensive Problems 4-31 Solutions to Comprehensive Problems 1. F, a head of household, is entitled to a standard deduction of $8,500 in 2011 and personal and dependency exemptions of $3,700 for 2011. Accordingly, he will not itemize and his taxable income is determined as follows: Salaries and wages Interest income Adjusted gross income Standard deduction 2011 Personal and dependency exemption 2011 Taxable income Tax for Head of Household Tax on $12,150 ($36,650 $12,150 $24,500) 15% Total gross tax Less withholding Less Child Tax Credit Tax due (refund) $50,760 1,790 $52,550 (8,500) (7,400) $36,650 $ 1,215 3,675 $ 4,890 (2,120) (1,000) $ 1,770 due 2. The calculations for Z, a single taxpayer, follow: Self-employment tax ($23,150 92.35% 15.3%) Income from sole proprietorship Interest income Deduction for one-half self-employment Adjusted gross income Standard deduction in 2011 Personal and dependency exemptions in 2011 Taxable income Federal income tax ($8,500 10%) [($10,855 $8,500 $2,355) 15%)] Estimated tax payments Tax due (refund) $ 3,271 $23,150 2,540 (1,635) $24,055 (5,800) (7,400) $10,855 1,203 (5,000) $ (526) ...
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