24211_ch04_final_p001-012

24211_ch04_final_p00 - Personal and Dependency Exemptions Filing Status Determination of Tax for an Individual Filing Requirements 4 Solutions to

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Unformatted text preview: Personal and Dependency Exemptions; Filing Status; Determination of Tax for an Individual; Filing Requirements 4 Solutions to Problem Materials DISCUSSION QUESTIONS 4-1 The personal exemption is a deduction allowed each taxpayer. On a joint return, each of the two taxpayers (husband and wife) is entitled to a personal exemption deduction. Dependency exemptions are allowed for each qualifying dependent, whether a qualifying child or other dependent, of the taxpayer. See Question 2 for the definition of a dependent. The exemption amount for both the personal and dependency exemptions is $3,700 for 2011. However, a taxpayer who qualifies to be claimed as a dependent on any other taxpayer's return may not claim a personal exemption (technically the exemption deduction is zero) on his or her own return. (See pp. 4-2 and 4-3 and 151 and 152.) In order for an individual to be considered a qualifying child, six requirements must be met. 1. Relationship test--must be the taxpayer's child, step-child, or foster child, or a sibling or step-sibling, or a descendant of any of these. See question 4-3. 2. Residence test--the qualifying child must have the same place of abode as the taxpayer. 3. The qualifying child must be under age-19, or under age-24 and a full-time student, or totally and permanently disabled. 4. The child may not have filed a joint return if he or she is married at the end of the year, unless there is no tax shown on the return. 5. The child must be a U. S. citizen, resident, or national, or a resident of Canada or Mexico. 6. The child cannot be self-supporting (i.e., provides more than one-half of his or her own support). (See p. 4-3.) 4-3 The relationship test stipulates that a qualifying child must be the taxpayer's-- 4-2 natural, adopted, or foster child, step-child, or foster child, or a sibling or step-sibling, or a descendant of any of these. (See p. 4-3.) 4-1 4-2 Chapter 4 Personal and Dependency Exemptions; Filing Status; etc. 4-4 a. C is entitled to the exemption. Since C cannot be claimed by Q, C and Q are otherwise eligible to claim the exemption for D. Under the tie-breaker rules, the exemption goes to C, since C is a parent of D. b. R is entitled to the exemptions for D. E is a qualifying child of R. Since E can be claimed by R, E cannot claim the exemption for D. Since D is a qualifying child of R, R may claim the exemption. c. S is entitled to the exemption for D. F is not a qualifying child of S, but she may be claimed under the rules for other dependents. Since F can be claimed by S, F cannot claim an exemption for D. Since D is a qualifying child of S, S can claim the exemption for D. (See pp. 4-3 to 4-9.) 4-5 All five of the tests below must be met in order for a taxpayer to be entitled to an exemption for a dependent who is a qualifying relative but not a qualifying child. To emphasize, all five tests must be met (not simply a majority). Support test. The taxpayer must provide more than 50 percent of the qualifying individual's total support. Gross income test. The dependent's gross income must be less than the exemption amount, which is $3,700 in 2011. (See Question 4 above for exceptions.) Relationship test. The taxpayer must be related to the dependent. Qualifying relationships are listed in Code 152(a). Joint return test. The dependent may not have filed a joint return with his or her spouse. An exception is provided if the joint return is filed solely for a refund. Citizenship test. The dependent must be a citizen or resident of the United States or its contiguous countries. (See pp. 4-5 through 4-11.) 4-6 The term support deals with the concept of providing for one's basic well-being. It is clear that support is determined by reference to the amount of the expenditures on behalf of an individual, including amounts provided by the individual for his or her own support. Support includes expenditures for the following items: food, shelter, clothing, medical and dental care, education, and similar items. Transportation, telephone, utilities, child care, charitable contributions, medical insurance premiums, toys, gifts, and entertainment are also included. Examples of items that are not included are the cost of life insurance and boats and the value of services provided by the taxpayer claiming the exemption. (See Exhibit 4-1 and pp. 4-5 through 4-8.) A taxpayer claiming a dependency exemption must provide more than 50 percent of an individual's support. Each of the items in this question represents a special case. Athletic scholarships, like academic scholarships, are not included in support. In determining whether a taxpayer supports a scholarship recipient, the value of the scholarship is not considered. (See Example 4 and pp. 4-5 through 4-7.) Social Security survivors' benefits paid to an orphan are considered as provided by the orphan. Therefore, any taxpayer entitled to the exemption must show that he or she provided more than the support from other sources, including the social security benefits. (See Examples 5 and 6 and pp. 4-5 through 4-7.) Aid to dependent children (state welfare payments) provided by a state is considered as provided by the state. Accordingly, an individual claiming a dependency exemption for an eligible child must show that he or she provided more than all other contributors, including the state. (See p. 4-6.) A qualifying relative must have gross income, as defined in 61 of the Code, of less than the exemption amount to be eligible as a dependent. An exception is provided for a qualifying child. There is no absolute limit on such a child's gross income. Reminder: The three other tests must be met before an exemption may be claimed. For 2011, the exemption amount is $3,700. (See pp. 4-8 and 4-9.) a. b. No. F may not be claimed as a dependent since his gross income ($5,000) exceeds the $3,700 exemption amount for 2011. Yes. Since the Social Security benefits are generally not included in gross income, F now meets the gross income test. 4-7 4-8 4-9 (See p. 4-8.) Solutions to Problem Materials 4-3 4-10 A qualifying relative must be properly related to the taxpayer in order for the taxpayer to claim an exemption deduction. A daughter-in-law is a qualified relative and this relationship survives the divorce or the death of her spouse. a. b. c. d. e. f. Yes. Yes. A brother-in-law is a qualified relative. No. A husband's niece does not qualify, but Q's own brother's daughter would qualify. Yes. An uncle qualifies. No. A great-uncle does not qualify. Yes. Descendants of children qualify. (See pp. 4-8 through 4-9.) 4-11 a. b. No. L may not be claimed by her mother since K and L elected to file a joint return. L's mother could claim a dependency exemption for L if L and K filed separately or if the tax shown on K and L's return was zero. (See p. 4-9.) 4-12 Yes, but there is not have enough information to determine who it is. B lived in the same abode as her mother for more than half of the year, but she also lived with her grandparents. B is a qualifying child of both her mother, P, and her grandparents, M and D. Under the tie-breaker rules, the exemption goes to P. But, if P's gross income was less than $3,700 and she meets the other requirements, her parents can claim her and B, since P cannot claim the exemption if she herself is claimed by M and/or D. (See p. 4-4.) 4-13 Currently there are ten community property states: Alaska, California, Washington, Idaho, Nevada, Texas, Louisiana, New Mexico, Arizona, and Wisconsin. Alaska allows its residents to elect community property treatment. Income generated through the personal efforts of either spouse in these states is owned equally by each spouse and is included in his or her estate. In the so-called "common law"states, the income from earnings is generally owned by the spouse providing the services. The operation of State law as to the ownership of property is respected for Federal income tax purposes. (See pp. 4-14 and 4-15.) The list of filing status classifications and tax schedule designations is as follows: Status Schedule Code Section 4-14 Married filing jointly Surviving spouse Married filing separately Head of household Single Y-1 Y-1 Y-2 Z X 1 (a) 2 (a) 1 (d) 1 (b) 1 (c) Taxpayers with taxable incomes not exceeding $100,000 must use the Tax Tables. (See pp. 4-15, 4-25 and inside-front cover of the textbook.) 4-15 Marital status is determined on the last day of an individual's taxable year. State law generally controls in the determination. A person, unless legally separated under a court ordered decree of separate maintenance or a final decree of divorce, is married for tax purposes if he or she is married under state law. (See p. 4-16.) An abandoned spouse is a married person who may use the rates for unmarried persons. To qualify as an abandoned spouse, a married individual must provide more than one-half the cost of the home that is his or her home and that of a child or stepchild for whom a dependency exemption is claimed. The child or stepchild must live in the home for more than one-half of the taxable year, and the taxpayer's spouse may not have lived in the home at any time during the last half of the taxable year. [See Example 20, p. 4-19, and 143(b).] A surviving spouse is an example of a single individual who may use the rates for married persons filing jointly. A taxpayer is a surviving spouse if his or her spouse died in either of the two taxable years preceding the current taxable year. To qualify, the taxpayer must provide over one-half the cost of maintaining a home that is his or her home and the principal place of abode of a child or stepchild for whom a dependency exemption deduction is claimed. (See Example 16 and p. 4-16.) 4-16 4-4 Chapter 4 Personal and Dependency Exemptions; Filing Status; etc. 4-17 In order to be eligible to use the head-of-household rates, a taxpayer must be unmarried, not be a surviving spouse, and provide over one-half the cost of maintaining the home in which a qualifying child or qualifying familial relative lives for more than one-half of the year. The specific requirements related to the home are as follows: 1. 2. 3. The taxpayer and his or her unmarried son, stepson, daughter, stepdaughter, or descendant of a son or daughter live in the home; The taxpayer and any other dependent of the taxpayer for whom a dependency exemption is claimed live in the home (including siblings, certain in-laws, and others); or The father or mother of the taxpayer for whom a dependency exemption deduction is claimed lives in the home. It is not necessary that it also be the taxpayer's home. A person for whom a dependency exemption is claimed solely because he or she lived in the taxpayer's home for the entire year or under a multiple support agreement cannot qualify the taxpayer as a head of household. A nonresident alien cannot be a head of household. (See Exhibit 4-3 and pp. 4-17 and 4-18.) 4-18 Yes. A person may qualify as a head of household by providing over one-half the cost of the home in which the taxpayer and his or her qualifying child live for more than one-half of the year. It is not necessary that a dependency exemption be claimed when the qualifying individual is qualifying child. For any other qualifying individual, a dependency exemption must be claimed. (See answer to Question 17 above and pp. 4-17 and 4-18.) In all cases except one, the home in which the qualifying individual lives must be the taxpayer's home. This one exception is when the parent(s) of the taxpayer is (are) the qualifying individual. (See answer to Question 17 above and pp. 4-17 and 4-18.) a. b. c. d. e. Yes. No. No. Yes. Yes. 4-19 4-20 (See pp. 4-18 and 4-19.) 4-21 a. M qualifies as an abandoned spouse. To qualify as abandoned spouse, the individual must provide more than half the cost of maintaining a home that houses him or her and a child for whom a dependency exemption deduction is either claimed or could be claimed by the taxpayer except for the fact that the exemption was assigned to the noncustodial parent. Here M provides 65 percent of the support of her son who she claims as a dependent. Thus, she may file as a head of household and claim two exemptions. M still qualifies as an abandoned spouse and could still file as head of household, but she would only claim one exemption. (See p. 4-18.) b. 4-22 Eligible taxpayers are required to use the tax tables. Ineligible taxpayers are those with taxable incomes in excess of $100,000 and those reporting on a taxable year of less than 12 months due to a change of accounting period. (See pp. 4-22 through 4-23.) a. In this case, W's standard deduction is $950 ($6,150 A.G.I. $5,200 taxable income). The standard deduction for someone who is claimed as a dependent by another taxpayer is limited to the greater of his or her earned income plus $300 or $950, but not to exceed $5,800 (2011 normal standard deduction). W's earned income is less than $650 ($950 $300) and the remainder is unearned income such as dividends and interest. (See Examples 25 and 26 and pp. 4-26 and 4-27.) In this case, W's standard deduction is $2,450 ($6,150 A.G.I. $3,700 taxable income). The standard deduction for someone who is claimed as a dependent by another taxpayer is limited to the greater of his or her earned income plus $300 or $950, but not to exceed $5,800 (2011 normal standard deduction). W's earned income is $2,150 ($2,450 $300) and the remaining $4,000 is unearned income. (See Examples 25 and 26 and pp. 4-26 and 4-27.) In this case, W's standard deduction is $5,800 ($6,150 A.G.I. $650 taxable income). The standard deduction for someone who is claimed as a dependent by another taxpayer is limited to the greater of his or her earned income plus $300 or $950, but not to exceed $5,800 (2011 normal standard deduction). Since W's standard deduction is the normal $5,800, at least $5,500 ($5,800 $300) of his 4-23 b. c. Solutions to Problem Materials 4-5 income is earned income. Therefore, no more than $750 ($6,150 $5,500 earned income) of W's income is unearned income. (See Examples 25 and 26 and pp. 4-26 and 4-27.) 4-24 This problem illustrates the difficulties encountered when the taxpayer is a dependent and the kiddie tax applies. (See Examples 25, 26 and 27 and pp. 4-27 through 4-28.) a. Adjusted gross income (interest) Less: Standard deduction Personal exemption Taxable income Unearned income (interest) Less: Base amount Net unearned income 11b. Result: All $100 of taxable income is taxed at 10 percent. Adjusted gross income (interest) Less: Standard deduction Personal exemption Taxable income Unearned income (interest) Less: Base amount Net unearned income 11c. $ 1,950 ( ,950) ,000) ( $ 1,000 $ 1,950 (1,900) $ , 50 $ 1,050 ( ,950) ,000) ( $ ,100 $ 1,050 (1,900) $ ,000 Result: $50 is taxed at parents' rate of 25 percent, and $950 ($1,000 $50) is taxed at 10 percent. Adjusted gross income ($900 interest and wages $5,000) Less: Standard deduction ($5,000 earned income $300) Personal exemption Taxable income Unearned income Less: Base amount Net unearned income $ 5,900 (5,300) ,000) ( $ ,600 ,900 (1,900) $ ,000 $ 11d. Result: All $600 of taxable income is taxed at 10 percent. Adjusted gross income (interest $3,500 and wages $500) Less: Standard deduction Personal exemption Taxable income Unearned income Less: Base amount Net unearned income $ 4,000 ( ,950) ,000) ( $ 3,050 $ 3,500 (1,900) $ 1,600 11- Result: $1,600 is taxed at 25 percent, and $1,450 ($3,050 $1,600) is taxed at 10 percent. (See pp. 4-26 through 4-30.) 4-25 An individual generally is not required to file an individual income tax return if his or her gross income is less than the sum of the appropriate standard deduction (including any additional amount for the elderly) and the personal exemption(s). A single individual whose gross income is less than $9,500 ($5,800 $3,700) in 2011, for example, is not required to file (unless he or she has self-employment income of at least $400). (See pp. 4-32 and 4-33.) 4-6 Chapter 4 Personal and Dependency Exemptions; Filing Status; etc. 4-26 a. b. The due date for the individual income tax return is the fifteenth day of the fourth month following the close of the taxable year, or April 15, for the vast majority who report on the calendar year. Extensions of time to file the return lasting for up to six months are available upon filing the proper form(s). The extension, which is requested using Form 4868, is automatic. There is no extension of time to pay the estimated tax due. October 15, the fifteenth day of the fourth month following the close of the taxable year. (See p. 4-35.) 4-27 a. b. c. The automatic extension on Form 4868 is for six months, usually until October 15. There is no additional extension. The penalty for failure to file is 5% of the tax due ($0) per month (or part thereof) up to a maximum of 25%. Penalty: $0 .05 $0 per month. However, the minimum $135 penalty applies after 60 days. (See pp. 4-35 and 4-36.) 4-28 If R actually owes $4,000 for 2011, estimates of $900 ($4,000 .90/4) each must have been paid by April 15, June 15, September 15, and January 15 (2012) to avoid penalty. (See pp. 4-37 through 4-39.) The lesser of $9,000 (90 percent of the current year tax of $10,000 ($5,500 income tax and $4,500 selfemployment tax)) or $8,925 (100 percent of the prior year tax--$4,950 $3,975) must be paid. The required amount for each quarter to avoid penalty is therefore $2,232 ($8,925/4). (See Example 32 p. 4-38.) a. b. c. d. No, an extension avoids the penalty for failure to file if a return is filed by the extended due date. No. She must pay 90% of the current year's tax or $9,000 (90% $10,000) and she paid $9,100 ($5,750 ($500 4 $2,000) $1,350). Yes. She must pay the lesser of 100% of last year's tax or $9,950 or 90% of the current year's tax or $9,000. During the year, she only paid $7,750 ($5,750 ($500 4 $2,000)). The penalty is computed for the period running from the due date of each estimate to April 15, the due date for the return. Yes, on the $900 from April 15 until July 9. 4-29 4-30 (See pp. 4-35 through 4-39.) 4-31 From a tax policy perspective, it is important to reach some point of final closure in the tax process. The statute of limitations places a time limit--usually three years--on both the IRS and taxpayers for making changes in filed returns. This restriction provides some limit on the period of time a taxpayer needs to keep detailed records; it also provides a framework for the IRS. (See p. 4-41) The six-year period of limitations applies when there is a substantial omission of income from a filed return. Substantial omission is defined as more than 25 percent of the total gross income reported on the return that was filed. (See p. 4-42.) The tax schedules, the standard deduction amounts, and the personal dependency exemptions for individual taxpayers are indexed. The Consumer Price Index is used to annually adjust these items for price level changes. (See p. 4-43) 4-32 4-33 PROBLEMS 4-34 a. b. c. d. e. Two, one personal and one dependency. R provides more than 50 percent of the support of his mother, who meets the gross income test since Social Security benefits are generally excluded. One. D supports F, but F fails to meet the gross income test because he has gross income of $4,400. Three. D can be claimed since the gross income test does not apply to a qualifying child. Three. Presumably the Smiths can claim their high school son. They cannot claim Hans (a foreign exchange student) since he was in the home less than the entire year. Three. The gross income test does not apply to a qualifying child (a student under age 24) since S is not self supporting (scholarship is not included). Total support is $9,000 and S provided $4,000 which is not greater than the required 50 percent. Note that scholarships are not considered support. (See pp. 4-2 through 4-12.) Solutions to Problem Materials 4-7 4-35 a. b. c. Two. Because A's mother is fully supported by him, it is implied that she meets the gross income test. Two. Two personal exemptions. Five. The eldest child qualifies because she is a qualifying child (the gross income test does not apply because she was a full-time student under age 24). Five months is the minimum period a child can be a full-time student and still be exempted from the gross income test. (See pp. 4-2 through 4-12.) 4-36 a. b. No. The only exception to the joint return test is for a married couple that pays no tax. Not necessarily. If their daughter files married filing separately, the parents may be able to claim an exemption for her. If the parents claim an exemption, the value is more than it is to the couple since the parents are in a higher tax bracket. The value of the exemption for their daughter Kate is $925 ($3,700 25%). But if they take this approach, Kate loses her exemption deduction, may have a reduced standard deduction, and loses the ability to file jointly. If Jim filed separately, he would pay tax of $675 [($16,250 $5,800 standard deduction $3,700 personal exemption = $6,750) 0.10]. On her separate return, Kate would pay no tax [($950 $950 standard deduction in 2011) 0.10]. However, if Jim and Kate file jointly, they would pay $0 [($17,200 $11,600 standard deduction in 2011 $7,400 exemption deduction in 2011) 0.10], a savings of $675 [($675 $0) $0]. So the net savings that occur if the parents' claim an exemption for Kate is $250 ($925 $675). (See pp. 4-2 through 4-12 and tax rates inside front cover.) 4-37 The support test can be met using a multiple support agreement if the following tests are met: (1) no one person contributed over half of the support; (2) over half the support was provided by those who are qualifying relatives and (3) the citizenship, joint return and gross income requirements are met. If these tests are met, the exemption is assigned by agreement to a group member who contributed more than 10 percent of the total support. (See p. 4-7.) a. b. c. No one; no person provides more than 50 percent of G's support. A or B. Together, A, B, and C provide more than 50 percent ($4,600 of $9,000). C does not qualify because he provided less than 10 percent of G's total support. No one; together the group, A, B, and C, contribute less than 50 percent of G's support. (See Example 6 and p. 4-7.) 4-38 a. b. c. M, the custodial parent, is entitled to the exemption. M, the custodial parent, is entitled to the exemption. F, since the exemption was included in the divorce decree. (See p. 4-12.) 4-39 a. Head of household with a standard deduction of $8,500 in 2011. For 2008 M could file a final joint return with her husband who died during the year. For 2009 and 2010 she could have filed as a surviving spouse using the schedule for married persons filing jointly. A taxpayer qualifies as a surviving spouse if (1) his or her spouse died within two taxable years preceding the current year and (2) he or she provided a home for a dependent child (ignoring the gross income and joint return tests). For 2011, the best available filing status is head of household. A taxpayer qualifies as head of household if he or she is not married, does not qualify as a surviving spouse and provides more than one-half of the cost of maintaining his or her home as household that is the principal place of abode for more than one-half the year of a qualifying child or a dependent familial relative. For this purpose, a parent must be a dependent but need not live in the taxpayer's home. However the taxpayer still must pay more than half of the cost of keeping up a home for his or her mother or father. Similarly, a child of the taxpayer need not be a dependent. In addition, the individual cannot be a dependent because of a multiple support agreement. (See pp. 4-16 and 4-17.) Single and standard deduction in 2011 of $5,800. S would qualify as a head of household if he were entitled to the dependency exemption for his mother outright, rather than through a multiple support agreement. (See Exhibit 4.3 and pp. 4-17 and 4-18.) It may seem strange that S paid over half the cost of providing the home in which his mother lived, yet failed to provide over one-half the cost of her total support. This is entirely possible. Perhaps the siblings paid for medical care or had the mother in their homes for extended periods of time. S would have qualified as a head of household if he had also provided over one-half of his mother's support. b. 4-8 Chapter 4 Personal and Dependency Exemptions; Filing Status; etc. c. d. Surviving spouse and standard deduction of $11,600 in 2011. R qualifies as a surviving spouse since he is unmarried and provided a home for a dependent child within the two taxable years after the year of her husband's death. (See p. 4-16.) Head of household and standard deduction in 2011 of $8,500. To qualify as a head of household, the taxpayer generally needs to provide over half the cost of a household that is the home of a dependent relative for more than one-half of the year. However, a child of the taxpayer need not be a dependent. In this case, J qualifies even though his spouse claims the dependency exemption for his child. An unmarried child or stepchild need not be a dependent. (See Exhibit 4-3 and pp. 4-16 through 4-18.) 4-40 Yes, Y qualifies for head-of-household status. Even if Y relinquishes the exemption for her son, she may qualify for head of household status. b. No, C does not qualify for head of household filing status. C would qualify for head of household except that he cannot claim an exemption because his mother does not meet the gross income test. If the interest was tax-exempt municipal bond interest, the mother's gross income would be zero and C would be a head of household. c. Yes, grandpa G qualifies for head-of-household status. The qualifying individual need not be claimed as a dependent if he or she is a child, grandchild, or stepchild. G must have lived with J for more than one-half of the year. d. No, B does not qualify for head-of-household status. The home in which the qualifying individual, B's 26-year-old daughter, lives for more than one-half of the year must be the taxpayer's home (unless the qualifying individual is the taxpayer's parent). e. Yes, M qualifies for head of household status. Since E is over 24 years of age she is not a qualifying child. However, she should meet the other tests for a dependent familial relative. In this regard, an unmarried child of the taxpayer need not be a dependent. However, the individual must live in the home of the taxpayer. It would appear that E meets this test since school is a temporary absence. f. No. F will file a final joint return this year and then file as a surviving spouse the next two years. a. (See Exhibit 4-3 and pp. 4-16 through 4-18.) 4-41 K's taxable income for 2011 is determined as follows: Adjusted gross income ($2,800 $1,450) Less: Standard deduction ($5,800, but limited to earned income $2,800 $300) Personal exemption (none allowed since K is claimed as a dependent) Taxable income (See Example 26 and pp. 4-26 through 4-27.) 4-42 B's taxable income for 2010 (since TaxCut version is 2010) is determined as follows: Adjusted gross income Less: Standard deduction ($5,800, but limited to earned income $3,000 $300) Personal exemption (none allowed since B is claimed as a dependent) Taxable income (See Example 36 and pp. 4-26 through 4-27.) $ 3,000 $3,300 ,,,0000 (3,300) $,00 00 $ 4,250 $3,100 ,000 (3,100) $ 1,150 Solutions to Problem Materials 4-9 4-43 S's taxable income for 2011 is determined as follows: Adjusted gross income ($56,015 $560) Less: Standard deduction Personal exemption Equals: Taxable income Tax for a single taxpayer on $47,075 for 2010 from the tax tables (See Example 22, Exhibit 4-5, pp. 4-22 through 4-24, and Appendix A.) $56,575 $5,800 3,700 (9,500) $47,075 $ 7,950 4-44 The 2011 taxable income and tax liability for W and T are computed as follows: Adjusted gross income Less: Itemized deductions Personal exemptions ($3,700 in 2011 3) Taxable income Tax on first $69,000 Tax on excess ($118,150 $69,000 $49,150) 25% Total tax at regular rates (See Exhibit 4-6 and pp. 4-25 and 4-26.) $141,950 $12,700 11,100 (23,800) $118,150 $ 9,500 12,288 $ 21,788 4-45 In each case, the taxpayer is claimed as a dependent. As a result, the personal exemption amount is zero, and the standard deduction is limited to the larger of $950 or the child's earned income plus $300. The calculations are as follows: a. b. c. J's taxable income $2,050 ($3,000 $950) Amount taxed at parents' rate $1,100 ($3,000 $1,900); and $950 at the child's rate. L's taxable income $2,200 ($1,200 $2,500 $1,500) Amount taxed at parents' rate $600 ($2,500 $1,900) and $1,600 at the child's rate. L's taxable income $3,650 ($6,600 $2,850 $5,800). Note that the potential standard deduction of earned income of $6,600 $300 or $6,900 cannot exceed the maximum deduction of $5,800. Amount taxed at parents' rate $950 ($2,850 $1,900) and $2,800 at the child's rate. (See Example 27 and pp. 4-27 through 4-28.) 4-46 G's adjusted gross income (interest income) Less: Standard deduction Personal exemption Taxable income Unearned income Base amount Net unearned income Tax at parents' rate whose income is $131,500 ($2,100 25%) Tax at G's rate [($3,050 $2,100 $950) 10%] Total tax 11(See Example 28 and pp. 4-26 through 4-30.) $ 4,000 $ 950 0 ,950) ( $ 3,050 $ 4,000 (1,900) $ 2,100 $ ,525 ,095 $ ,620 4-10 Chapter 4 Personal and Dependency Exemptions; Filing Status; etc. 4-47 a. b. No. The failure to file penalty is based on the net tax due, which is $0 in this case. In fact, T is entitled to a refund of $1,000 ($11,000 withheld $10,000 tax due). $200 ($1,000 tax due 5% 4 months). The failure to file penalty is based on the amount due as of the due date, April 15, $1,000 ($10,000 tax $9,000 withheld.). (See p. 4-36.) 4-48 a. b. c. The automatic extension is for six months, so a calendar year extended due date is October 15. To avoid the failure to pay penalty, the taxpayer must pay 90 percent of the tax due or $10,800 (90% $12,000). The amount required to be submitted is $7,800 [($12,000 .90 = $10,800) $2,500 withheld $500 estimated payment]. The failure to file penalty is 1/2 of 1 percent (.005) per month on the amount due (up to a maximum of 25 percent). R's penalty is $84 computed as follows (assuming he paid the tax paid with the extension computed in part b of $7,800). Final amount of tax due Payments Withholding $ 2,500 Estimated tax payments 500 7,800 Paid with extension Total payments through due date 4/15 Amount due after payments Months outstanding till paid on July 20 May 15 June 15 July 15 July 17 (any part of a month is considered a full month Total months outstanding Failure to pay penalty .5% per month Failure to file penalty There is not a minimum failure-to-file penalty. (See Example 30 and p. 4-36.) 4-49 a. $12,000. The lesser of 100 percent of the prior year's tax ($12,000) or 90 percent of the current year's tax ($20,000 90% $18,000). Since estimates are due four times during the year, each payment is $3,000. Even though there is no penalty, K owes $8,000 ($20,000 $12,000 assumed paid) with his return, when filed. Required installment ($12,000 25%) Prepayments by due date [estimated tax payment $1,000 withholding prorated $750 ($3,000/4)] Underpayment Penalty rate 365 days to due date/365 Penalty for first quarter 11c. K may use the annualized income installment to avoid penalty in the first quarter and perhaps the second and third. However, if he uses it for one quarter, he must use it for each quarter. $ 3,000 (1,750) $ 1,250 10% $ ,125 , 1 $ ,125 $15,000 (10,800) $ 4,200 1 1 1 1 $ 4 .005 84. b. (See Examples 32 and 33 and pp. 4-37 through 4-40.) Solutions to Problem Materials 4-11 4-50 a. The penalty is based on $35,000, the lesser of 100 percent of the prior year tax ($35,000) or 90 percent of the current year tax [($40,000 .90) $36,000] and is calculated as follows: 4/15 6/15 9/15 1/15/02 Percentage required Required payments Payments made Underpayment Underpayment period Penalty rate (assumed) Penalty (rounded) Total penalty $1,786 b. c. 25% $ 8,750 (2,000) $ 6,750 61/365 ,,.10 $ ,113 50% $17,500 (4,000) $13,500 92/365 ,,.10 $ ,340 75% $ 26,250 (6,000) $ 20,250 122/365 ,,.10 $ ,667 100% $35,000 (8,000) $27,000 90/365 ,,.10 $ ,666 No interest is due since interest runs from the due date of the tax, which is the due date of the tax return. Because Z's prior year A.G.I. exceeded $150,000 (i.e., prior year A.G.I. was $160,000), his underpayment penalty is based on the lesser of $38,500 (110% of $35,000 prior year tax) or $36,000 (90% of current year's tax). Thus Z's penalty will be $1,862, calculated as follows: 4/15 6/15 9/15 1/15/02 Percentage required Required payments Payments made Underpayment Underpayment period Penalty rate (assumed) Penalty (rounded) Total penalty $1,862 25% $ 9,000 (2,000) $ 7,000 61/365 ,,.10 $ ,117 50% $18,000 (4,000) $14,000 92/365 ,,.10 $ ,353 75% $ 27,000 (6,000) $ 21,000 122/365 ,,.10 $ ,702 100% $36,000 (8,000) $28,000 90/365 ,,.10 $ ,690 (See Examples 32 and 33 and pp. 4-37 through 4-39.) 4-51 a. b. No. The tax that must be paid is the tax shown on the tax return. Yes. Interest calculated at the current rate on underpayment from April 15, 2011 until the tax is paid. (See p. 4-38.) 4-52 a. b. c. April 15, 2014--three years from the due date of the return (since it was later than the filing date.) If the amount of the omission exceeds 25 percent of the gross income included in the return, assessments may be made up to April 15, 2017. Because no return was filed to start the running of the statute of limitations, the IRS is never barred from making assessments. (See Exhibit 4-9, pp. 4-41 through 4-43, and 6501.) TAX RETURN PROBLEMS Solutions to the Tax Return Problems (4-534-55) are contained in the Instructor's Resource Guide and Test Bank for 2012. TAX RESEARCH PROBLEMS Solutions to the Tax Research Problems (4-604-61) are contained in the Instructor's Resource Guide and Test Bank for 2012. ...
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This note was uploaded on 02/05/2012 for the course ACCT 110 taught by Professor Smith during the Spring '11 term at Adrian College.

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