Tax Accounting

3 CHAPTER TAX DETERMINATION soul-to-per tidings AND DEPENDENCY EXEMPTIONS AN OVERVIEW OF PROPERTY TR simple machinenomic nervous systemACTIONS Instructor The psyc lowstructuretric turn up items in both(prenominal) the print visitation commit and ExamView examination-creation softw ar be numbered by chief type within each chapter. Thus, ingestionrs of ExamView preempt to a greater extent easily dr i their salternatives using the printed establish put upt in the same numbering system.Status bounty Topic TRUE OR morose 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Level of true income measure valuates Definition of rough-cut income Income valuate revenueation and example of orbiculate approach Effect of AGI on the medical rebate agitate stance hold up first mate versus unify buck fracture additive sample price reductions single and marry sum of moneys specimen import and adjustment for inflation surplus commonpla ce conclusion of a strung-out Itemized price reductions versus streamer demonstration fundamental and surplus example price reductions Itemized deductions or archetype deduction Itemized deductions or exemplar deduction Itemized deductions or amount deduction meter deduction for nonmigratory physician alien Standard deduction requirements when unify persons institutionalize separately Standard deduction twelvemonth of terminal Dependents standard deduction Dependents standard deduction Dependents standard deduction Dependents in the flesh(predicate) prerogative non al wizardowed Claiming a mate on a separate return function of marital berth decision of marital locating Gross income taste and eruditions take for test and slap-up expenditures Support test and unexpended nones of strung-out eight-fold realise placement amount of comport rendered by bloodsucking divorce decree silent custodial pargonnt wins Relationship test for actor in-laws and ex -married woman 3-1 unchanged unchanged unvaried Modified unaltered crude unaltered idempotent revolutionary unaltered unaltered same(predicate) late unaltered unvarying unaltered saucy New idempotent Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged New New Unchanged 7 8 10 11 12 14 15 16 19 20 21 22 23 24 25 26 1 2 3 4 5 magnetic declination Q/P in Prior magnetic declination interview/ Problem 29 3-2 30 Question/ Problem 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 2009 classly Edition/Test bound Relationship test ex-sister-in-law Unchanged Status Present Edition Unchanged New Unchanged Unchanged Unchanged Unchanged Unchanged New New Unchanged Unchanged Unchanged New Modified Unchanged Unchanged Unchanged Modified Modified Unchanged Modified Unchanged Unchanged Unchanged 30 Q/P in Prior Edition 31 33 34 35 36 37 Topic Qualifying barbarian succession test and full-time tudent view Qualifying tike plate test Married tiddler and occasion return test Citizenship/ h solely test for nether elds Citizenship/ hall test for parasiticals stealing valuate revenuees nature of impose championship Reconciliation Act of 2001 and elimination of the phaseout of prerogatives Kiddie task take in income and underpin excommunication Kiddie valueation when non relevant Kiddie levy how applied Kiddie taxation when agnate election usable tiddler may be requisite to file Kiddie tax un pull in income requirement Kiddie tax married file collectively exception Requirements for monetary yr, timely filed return go teammate emplacement Surviving let onner status year of death Marri develop penalization married persons file separate returns subject teacher of business firm status Head of family line status Abandoned teammate status contrast married file separate Personal intake losings versus own(prenominal) use make headways long-run bully of the United States cod execrab leest rate applicable rank of derive on dues Offsetting different-term capital of the United States passing gamees to different term capital catchs MULTIPLE CHOICE 40 41 42 44 45 46 47 48 49 50 51 52 53 54 1 2 3 4 5 6 7 8 9 10 11 12 13 Itemized deductions Deductions for AGI AGI determination AGI determination AGI determination AGI determination imposeable income of a subordinate valueable income of a certified measureable income of a fit levyable income of a subject ratiocination of exemptions purpose of exemptions Determination of exemptions Unchanged Unchanged Unchanged New Unchanged New Unchanged New Modified New Modified New Modified 1 2 3 5 7 9 11 13 Tax Determination Personal and habituation Exemptions An Overivew of home proceeding 14 15 Question/ Problem 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Topic Qualifying child bailable parties nine-fold sign agreement Determination of exemptions Definition of a expiration pro potal Exceptions to the kiddi e tax Filing status for long time after spouses death Widows file status Filing status in selected situations Abandoned spouse file status Filing status of nonmodification decrepit spouse leaving on business and face-to-face assets revenue of different classes of capital gains Taxation of different classes of capital gains Capital damage limitation Netting of different-term redes and differentterm gains MATCHING 1-12 13-24 25-36 Characteristics of tax determination personal and addiction exemptions, tax rates, file status Characteristics of tax determination personal and habituation exemptions, tax rates, register status Dependency exemption categories limiting child and alteration congress worryS 1 2 4 5 6 7 8 9 10 11 12 13 14 as trus dickensrthy AGI Determining AGI Determining AGI rateable income of a symbiotic Taxable income of a dependent Taxable income of a dependent Determination of exemptions Determination of assessable income Determination of rateable incom e and filing status Determination of assessable income and filing status Computation of capital gains and sackes Taxation of capital gains and injusticees Taxation of capital gains and losses Taxation of capital gains and losses intervention of net losses and railcarry over possibility Unchanged Unchanged New New Modified New Unchanged Modified New Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Determination of exemptions Definition of straits child Unchanged Unchanged Status Present Edition Unchanged Unchanged New New New Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged New New New 3-3 14 15 Q/P in Prior Edition 16 17 21 22 23 24 25 26 27 1-12 Unchanged 13-24 Unchanged 25-36 1 2 5 7 8 10 11 12 13 14 3-4 2009 Annual Edition/Test fix Question/ Problem Topic stress 1 2 3 4 5 6 7 8 10 11 12 13 14 territorial reserve versus global systems of income tax income Comp ard Treatment of scholarships for settlement exemption purposes Exceptions to the sustainment test for addiction exemption purposes Effect of fellowship property law on application of the uncouth income test to married dependents Exceptions to the make income test for change child purposes Qualifying child and tie-breaker rules Stealth tax definition of Kiddie tax exceptions to its application Filing status comparison of the tax gists of different types Filing status situations which qualify and do non qualify for head of family line Filing status surviving spouse transition status Ramifications of the election to file a conjugation Federal income tax return with a nonresident alien Concentrating deductions from AGI and declargoning the standard deduction in alternate years Correlation between aggregate stick out agreement and deduction for medical expenses Status Present Edition Q/P in Prior Edition Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged New Unchanged Unchanged Unchanged Unchanged New Unchanged 1 2 3 4 5 6 7 8 9 10 11 12 9 Tax Determination Personal and Dependency Exemptions An Overivew of situation minutes TRUE/FALSE 1. Currently, the top Federal income tax rate in effect is the highest it has eer been. autonomic nervous system F The income tax rate in effect in 1944-1945 ranged from 23% to 94%. PTS 1 reader p. 3-3 3-5 2.As use in the income tax formula, tax income income would non include the receipt of a loan the tax returner obtained from a camber. autonomic nervous system T Borrowing money does non result in pull in income. PTS 1 referee mannikin 1 3. Kim, a resident of Korea, is a citizen of the U. S. Any income Kim receives from bring he owns in Korea is non survey to the U. S. income tax. autonomic nervous system F Under the global system of taxation followed by the U. S. , foreign-sourced income is subject to tax. Although Kim is not a resident, he is a citizen of the U. S. PTS 1 referee Global Tax Issues on p. 3-5. 4. An decrease in the amount of a taxpayers AGI afte r part increase the amount of medical expenses allowed as a deduction.autonomic nervous system T More medical expenses flock be deducted since the 7. 5% of AGI floor bequeath be smaller. PTS 1 reader typesetters case 4 5. Because entirely one taxpayer is involved in both cases, the standard deduction for a surviving spouse is the same amount as that for a married person filing a separate return. autonomic nervous system F The amount of the standard deduction for a surviving spouse is the same as for married persons filing jointlyor twice that of a married person filing separately. PTS 1 referee plug-in 3-1 6. The additional standard deduction for age and blindness is the same amount for single as for married taxpayers. autonomic nervous system F For 2008, comp atomic number 18 $1,350 (single) with $1,050 (married).PTS 1 reviewer table 3-2 3-6 2009 Annual Edition/Test Bank 7. The sanctioned and additional standard deductions argon subject to an yearbook adjustment for inf lation. autonomic nervous system T The inflation adjustment is made every year to both the basic standard deduction and the additional standard deduction. PTS 1 reviewer p. 3-8 8. Tad assumes his 70-year-old mother as a dependent. The mother may not introduce an additional standard deduction for her age. autonomic nervous system F The mother give the gate engage the additional standard deduction for her age. PTS 1 reader cause 9 9. In 2008, Sally is 72 and single. If she has itemized deductions of $6,000, she should exact the standard deduction alternative.autonomic nervous system T The standard deduction yields $6,800 ($5,450 + $1,350). PTS 1 referee pillowcase 6 10. Leslie and Morgan argon married and file a joint return. Both are over 65 years of age and Leslie is blind. Their standard deduction for 2008 is $13,000 ($10,900 + $1,050 + $1,050). autonomic nervous system F Their standard deduction is $14,050 ($10,900 + $1,050 + $1,050 + $1,050). PTS 1 reader Table 3-1 T able 3-2 11. Derek is a surviving spouse. If he has itemized deductions of $11, euchre for 2008, Derek should not claim the standard deduction. autonomic nervous system T The standard deduction would that try $10,900. PTS 1 referee p. 3-8 Table 3-1 12. Cameron and Carley are ages 70 and 69 and file a joint return. If they have itemized deductions of 13,300 for 2008, they should not claim the standard deduction. autonomic nervous system T The standard deduction admits plainly $13,000 ($10,900 + $1,050 + $1,050). PTS 1 referee p. 3-8 Table 3-1 Table 3-2 13. Claire, age 66, claims head of kinfolk filing status. If she has itemized deductions of $8,500 for 2008, she should not claim the standard deduction. ANS F The standard deduction yields $9,350 ($8,000 + $1,350). PTS 1 ref p. 3-8 Table 3-1 Table 3-2 Tax Determination Personal and Dependency Exemptions An Overivew of prop legal proceeding 14. Enrique is a citizen of Honduras and a resident of the U. S. If he files a U. S. income tax return, Enrique stick outnot claim the standard deduction. ANS F Either U. S. itizenship or residency leave alone suffice in order to claim the standard deduction. PTS 1 reader p. 3-9 3-7 15. Dan and Donna are save and wife and file separate returns for the year. If Dan itemizes his deductions from AGI, Donna cannot claim the standard deduction. ANS T If Dan itemizes, Donna must itemize. PTS 1 reviewer p. 3-9 16. Logan, an 80-year-old widower, dies on January 2, 2008. Even though he alertd for only both days, on his closing income tax return for 2008, the full basic and additional standard deductions can be claimed. ANS T No proration of the standard deduction is infallible in this case. PTS 1 reader p. 3-9 17. Benjamin, age 16, is claimed as a dependent by his stirs.During 2008, he earn $700 at a car wash. Benjamins standard deduction is $1,200 ($900 + $300). ANS F His standard deduction is the greater of $900 or $1,000 ($700 + $300). PTS 1 referee gramm atical case 10 18. Debby, age 18, is claimed as a dependent by her mother. During 2008, she earned $1,100 in post income on a savings account. Debbys standard deduction is $1,400 ($1,000 + $300). ANS F Debbys standard deduction is the minimum allowed of $900. PTS 1 referee Example 8 19. Katrina, age 16, is claimed as a dependent by her parents. During 2008, she earned $5,200 as a assure at a grocery store. Her standard deduction is $5,500 ($5,200 earned income + $300).ANS F Her standard deduction cannot exceed the regular standard deduction uncommitted to single persons (or $5,450 for 2008). PTS 1 reader Example 11 3-8 20. 2009 Annual Edition/Test Bank A dependent cannot claim a personal exemption on his or her own return. ANS T PTS 1 referee Example 12 21. When separate income tax returns are filed by married taxpayers, one spouse cannot claim the other spouse as an exemption. ANS F An exemption is allowed if the spouse has no gross income and is not claimed as a dependent by another. PTS 1 ref p. 3-11 22. masculine and Minerva are break up in December of 2008. Since they were not married at the end of the year, they are considered not married for 2008.ANS T They must be married at the end of the year (unless one spouse dies) in order to be considered married. PTS 1 reviewer Table 3-3 23. For the year a spouse dies, the surviving spouse is considered married for the entire year for income tax purposes. ANS T PTS 1 REF Table 3-3 24. In find out whether the reenforcement test is met for dependency exemption purposes, only the ratable portion of a scholarship is considered. ANS F In applying the clog test, all of the scholarship is disregarded. knowledges are treated differently for purposes of the gross income test. PTS 1 REF Example 23 25. Scott buys his mother a sewing machine. For purposes of catching the support test, Scott can count the cost of the sewing machine.ANS T Capital expenditures can be considered in determining support. It is assu med that the sewing machine is mostly for the mothers use. PTS 1 REF Example 26 26. If the individual does not turn over funds that have been received from another source (e. g. , Social hostage benefits), the unexpended amounts are not considered for purposes of the support test. ANS T The funds are counted only if used for support purposes. PTS 1 REF Example 24 Tax Determination Personal and Dependency Exemptions An Overivew of Property legal proceeding 3-9 27. Using borrowed funds from a mortgage on her home, Lisa provides 55% of her support, objet dart her daughters furnished the rest.Lisa cannot be claimed as a dependent under a six-fold support agreement. ANS T The daughters do not provide to a greater extent than half of their mothers support. In this situation, the mother is self-supporting. PTS 1 REF Example 25 28. Roy and Linda were divorced in 2007. The divorce decree awards custody of their children to Linda barely is silent as to who is entitled to claim them as dependents. If Roy furnished more than half of their support, he can claim them as dependents. ANS F not unless Linda assents. PTS 1 REF p. 3-17 29. In 2008, Hal furnishes more than half of the support of his ex-wife and her father, neither of whom lives with him. The divorce occurred in 2007.Hal may claim the father-in-law precisely not the ex-wife as dependents. ANS T The father-in-law meets the consanguinity test, tho the ex-wife does not. However, except in the year of divorce, an ex-wife can be a dependent under the instalment of the sept test. PTS 1 REF p. 3-14 30. After her divorce, Hope continues to support her ex- husbands sister, Cindy, who does not live with her. Hope cannot claim Cindy as a dependent. ANS F For purposes of the birth test, divorce does not change in-law status. PTS 1 REF p. 3-14 31. Darren, age 20 and not disabled, earns $4,500 during 2008. Darrens parents cannot claim him as a dependent unless he is a full-time learner.ANS T Being age 20, Darren cannot be a suffice child unless he is a full-time bookman. As a laissez passer child, he is exempt from the gross income test. PTS 1 REF p. 3-12 32. Keith, age 17 and single, earns $3,800 during 2008. Keiths parents can claim him as a dependent even if he does not live with them. ANS F Keith does not meet the definition of a do child so the gross income test does apply. PTS 1 REF p. 3-12 p. 3-14 3-10 2009 Annual Edition/Test Bank 33. Sarah furnishes more than 50% of the support of her son and daughter-in-law who live with her. If the son and daughter-in-law file a joint return, Sarah cannot claim them as dependents. ANS F If certain conditions are satisfied (e. g. they did not have to file but did so to obtain a refund), the son and daughter-in-law can qualify as Sarahs dependents. PTS 1 REF Example 28 34. Hernando, a resident of California, supports his parents who are residents of Mexico but citizens of El Salvador. Hernando can claim his parents as dependents. ANS T The par ents are residents of Mexico. PTS 1 REF p. 3-17 35. Carol lives in Michigan and supports her nephew who is a Canadian citizen that resides in Ontario, Canada. Carol may not claim her nephew as a dependent. ANS F As a resident of Canada, Carols nephew meets the citizenship or residency test. PTS 1 REF p. 3-17 36. Stealth taxes are directed at higher(prenominal) income taxpayers.ANS T Such stealth taxes as the phaseout of exemptions do not demoralize until taxpayers reach significant income trains. PTS 1 REF Tax in the intelligence on p. 3-20 37. The phaseout of the benefits of personal and dependency exemptions for certain taxpayers is scheduled to be eliminated. ANS T But the rescission is not completed until 2010. PTS 1 REF p. 3-18 38. The kiddie tax does not apply as to a child whose earned income is more than one-half of his or her support. ANS T PTS 1 REF p. 3-23 39. Once a child reaches age 19, the kiddie tax no lifelong applies. ANS F The kiddie tax does apply if the chil d is a full-time student under age 24. PTS 1 REF p. -23 Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions 3-11 40. When the kiddie tax applies and the parents file separate returns, the applicable parent (for determining the parental tax) is the one with the greater taxable income. ANS T PTS 1 REF p. 3-25 41. When the kiddie tax applies, the child contain not file an income tax return as the childs income will be reported on the parents return. ANS F The child use up not file only if the parental election (if available) picks up all of the childs income. PTS 1 REF p. 3-24 42. A child who has honorary income of $1,800 or less cannot be subject to the kiddie tax. ANS T PTS 1 REF p. 3-23 43. A child who is married cannot be subject to the kiddie tax.ANS F besides if he or she files a joint return is such child exempt from the kiddie tax. PTS 1 REF p. 3-23 44. An individual taxpayer uses a fiscal year February 1-January 31. The due period of this taxpayers Federal income tax return is June 15 of each tax year. ANS F The tax return is due on or forrader the fifteenth day of the quartetth month undermentioned the end of the fiscal year. Here, the due date is May 15. PTS 1 REF p. 3-27 45. Surviving spouse filing status begins in the year in which the departed spouse died. ANS F Surviving spouse filing status begins in the year chase the year of death. PTS 1 REF Example 38 46. In January 2008, Jakes wife dies and he does not remarry.For tax year 2008, Jake may not be able to use the filing status available to married persons filing joint returns. ANS T If the executor of his wifes earth does not agree to filing a joint return, Jakes only option is to file using married, filing separate status. PTS 1 REF p. 3-30 3-12 2009 Annual Edition/Test Bank 47. For tax purposes, married persons filing separate returns are treated the same as single taxpayers. ANS F Single taxpayers can enjoy numerous tax benefits that are unava ilable to married persons filing separatelye. g. , earned income credit, credit for child and dependent care expenses, deduction for interest p fear on student loans. PTS 1 REF p. 3-29 p. 3-30 48.Katelyn is divorced and maintains a abode in which she and her daughter, Crissa, live. Crissa, age 22, earns $11,000 during 2008 as a model. Katelyn qualifies for head of sign of the zodiac filing status. ANS F Crissa is not Katelyns dependent. She fails the age test for mountain pass child purposes and the gross income test for the overtaking relative category. PTS 1 REF Example 41 49. Mike is divorced and maintains a home in which he and his dependent niece live. Mike qualifies for head of household filing status. ANS T To be head of household, the dependent involved must meet the relationship test. Such is the case with a niece. PTS 1 REF Example 39 50.In call of income tax consequences, accustomed spouses are treated the same way as married persons filing separate returns. ANS F An abandoned spouse is treated as a single taxpayer. Consequently, an abandoned spouse qualifies for head of household filing status. PTS 1 REF p. 3-31 51. In 2008, Gordon sold his personal use elevator car for a loss of $6,000. He likewise sold a personal stamp ingathering for a gain of $7,000. As a result of these deals, $7,000 is subject to income tax. ANS T Gordon must recognize a capital gain of $7,000. The $6,000 loss on the exchange of the personal use elevator car is nondeductible. PTS 1 REF Example 43 52. In some cases, the tax on semipermanent capital gains can be as low as 0%.ANS T If the taxpayers tax bracket is 15% (or less), the 0% rate applies. PTS 1 REF Example 46 Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions 3-13 53. recognise on the barter of collectibles held for more than 12 months is subject to tax at a rate no higher than 28%. ANS T PTS 1 REF p. 3-33 54. For 2008, Stuart has a short-run capital loss, a collec tible long-run capital gain, and a longterm capital gain from land held as coronation. The short-term loss is first applied to the collectible capital gain. ANS T PTS 1 REF Example 48 MULTIPLE CHOICE 1. Which, if any, of the side by side(p) is a deduction from AGI? a. criminal maintenance fees. b. Child support payments. c.Unreimbursed employee expenses. d. Loss on the cut-rate trade of a personal automobile. e. no(prenominal) of the supra. ANS C Alimony payments (choice a. ) are deductions for AGI. Child support payments (choice b. ) and personal capital losses (choice d. ) are nondeductible items. PTS 1 REF Example 2 Example 43 manifest 3-3 2. Which, if any, of the interest is a deduction for AGI? a. Alimony payments. b. refer on home mortgage. c. Unreimbursed employee expenses. d. Charitable contributions. e. None of the above. ANS A Except for alimony (choice a. ), all other items (choices b. , c. , and d. ) are deductions from AGI. PTS 1 REF p. 3-6 peril 3-3 3.Dur ing 2008, Marie had the following minutes Salary Bank loan (proceeds used to buy personal auto) Alimony received Child support received Inheritance from deceased auntie $40,000 10,000 6,000 12,000 50,000 3-14 Maries AGI is a. $40,000. b. $46,000. c. $52,000. d. $96,000. e. None of the above. 2009 Annual Edition/Test Bank ANS B $40,000 (salary) + $6,000 (alimony) = $46,000. The inheritance and child support are exclusions. Amounts borrowed are not income. PTS 1 REF Example 1 viewing 3-1 4. During 2008, Sam had the following minutes Salary Interest income on General Electric muckle bonds move over from parents Contribution to handed-down IRA Lottery winnings Sams AGI is a. $59,000. b. $61,000. c. $65,000. d. $85,000. e. None of the above.ANS E $60,000 (salary) + $2,000 (interest on GE bonds) $5,000 (IRA contribution) + $3,000 (lottery winnings) = $60,000. The gift from his parents is a nontaxable exclusion. PTS 1 REF p. 3-5 Exhibit 3-1 Exhibit 3-2 $60,000 2,000 24,000 5,000 3,000 5. During 2008, Colin had the following minutes Salary Interest income on city of Denver bonds Damages for personal injury (car accident) Punitive insurance (same car accident) cash in dividends from General Motors Corporation filiation Colins AGI is a. $74,000. b. $120,500. c. $124,000. d. $124,500. e. $224,000. ANS C $70,000 (salary) + $50,000 (punitive damages) + $4,000 (cash dividends) = $124,000. The damages from personal injury and the municipal bond interest are nontaxable exclusions.PTS 1 REF Example 2 Exhibit 3-1 Exhibit 3-2 $ 70,000 500 100,000 50,000 4,000 Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions 6. In 2008, Walter had the following proceeding Salary Capital loss from a stock enthronement Moving expense to change jobs Received quittance of $10,000 loan he made to his brother in 2004 (includes interest of $1,000) Property taxes on personal residence Walters AGI is a. $67,000. b. $68,000. c. $69,000. d. $78,000 . e. None of the above. $80,000 (4,000) (10,000) 11,000 2,000 3-15 ANS B $80,000 (salary) $3,000 (allowable loss on stock investiture) $10,000 (moving expenses) + $1,000 (interest on loan) = $68,000.The unfermented loss of $1,000 from the stock enthronement trade can be carried over to 2009. The loan repayment of $10,000 is a return of capital and has no effect on gross income. Property taxes paid on a personal residence is a deduction from AGI and has no impact on the determination of AGI. PTS 1 REF p. 3-5 p. 3-34 Exhibit 3-3 7. Monica, age 18, is claimed by her parents as a dependent. During 2008, she had interest income from a stick savings account of $1,000 and income from a part-time job of $4,500. Monicas taxable income is a. $4,500 $4,800 = $0. b. $5,500 $5,350 = $150. c. $5,500 $4,800 = $700. d. $5,500 $900 $3,400 = $1,200. e. None of the above.ANS C Monicas standard deduction is $4,500 (earned income) + $300 = $4,800. Thus, her taxable income is $700 ($5,500 $4,800) . She is not desirable for a personal exemption. PTS 1 REF Example 10 8. Tony, age 15, is claimed as a dependent by his grandmother. During 2008, Tony had interest income from General Motors Corporation bonds of $1,000 and earnings from a part-time job of $700. Tonys taxable income is a. $0. b. $1,700 $700 $900 = $100. c. $1,700 $1,000 = $700. d. $1,700 $900 = $800. e. None of the above. ANS C Tonys standard deduction of $1,000 ($700 + $300) partially offsets his gross income of $1,700, resulting in taxable income of $700. PTS 1 REF Example 10 3-16 2009 Annual Edition/Test Bank 9.Anna is a widow, age 74 and blind, who is claimed as a dependent by her son. During 2008, she received $4,800 in Social Security benefits, $1,200 in shore interest, and $1,800 in cash dividends from stocks. Annas taxable income for 2008 is a. $3,000 $900 $2,700 = $0. b. $3,000 $2,600 = $400. c. $3,000 $900 $1,350 = $750. d. $7,800 $900 $2,700 = $4,200. e. None of the above. ANS A Although Anna has no earn ed income, she is entitled to a minimum regular standard deduction of $900. She also is allowed additional standard deductions for age and blindness of $2,700 ($1,350 + $1,350). At this level of income, the Social Security benefits are a nontaxable exclusion.PTS 1 REF Example 9 Exhibit 3-1 Table 3-2 10. Grace, age 67 and single, is claimed as a dependent on her sons tax return. During 2008, she had interest income of $2,400 and $700 of earned income from bollocks up sitting. Graces taxable income is a. $150. b. $750. c. $850. d. $2,100. e. None of the above. ANS B $3,100 gross income greater of $900 or ($700 earned income + $300) $1,350 (additional standard deduction for age 65 and older) = $750. She is not bailable for a personal exemption. PTS 1 REF Example 9 11. troy weight and Edie are married and under 65 years of age. During 2008, they furnish more than half of the support of their 18-year old daughter, Jobeth, who lives with them.Jobeth earns $15,000 from a part-time job , most of which she sets deviation for future college expenses. troy and Edie also provide more than half of the support of Troys full cousin who does not live with them. Edies father, who died on January 3, 2008, at age 80, has for legion(predicate) years certifiable as their dependent. How many personal and dependency exemptions should Troy and Edie claim? a. Two. b. Three. c. Four. d. Five. e. None of the above. ANS C Four (Troy, Edie, Jobeth, and the father). Jobeth can be claimed because as a qualifying child she is not subject to the gross income test. Troys cousin does not meet the relationship test and is not a element of their household.It is assumed that Edies father, as was true in the past, qualified as a dependent up to the point of death. PTS 1 REF p. 3-11 p. 3-12 p. 3-14 Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions 3-17 12. Evan and Eileen Carter are husband and wife and file a joint return for 2008. Both are under 65 years of age. They provide more than half of the support of their daughter, Pamela (age 25), who is a full-time medical student. Pamela receives a $3,400 scholarship covering her dwell and board at college. They furnish all of the support of Belinda (Evans grandmother), who is age 70 and lives in a nursing home.They also support Peggy (age 66), who is a wiz of the family and lives with them. How many personal and dependency exemptions may the Carters claim? a. Two. b. Three. c. Four. d. Five. e. None of the above. ANS D Five (Evan, Eileen, Pamela, Belinda, and Peggy). Personal exemptions for the Carters and dependency exemptions for the rest. Pamela is not a qualifying childalthough a full-time student, she is not under age 24. Pamela does meet the qualifying relative category even though the type of scholarship aid she receives is taxable (the gross income test is satisfied). Belinda is not a instalment of the household but satisfies the relationship test.Peggy does not acti on the relationship test but is a piece of the household. PTS 1 REF p. 3-11 p. 3-12 p. 3-14 13. In which, if any, of the following situations may the individual not be claimed as a dependent of the taxpayer? a. A former spouse who lives with the taxpayer (divorce took place this year). b. A stepmother who does not live with the taxpayer. c. A married daughter who lives with the taxpayer. d. A half brother who does not live with the taxpayer and is a citizen and resident of Canada. e. A cousin who lives with the taxpayer. ANS A In the year of divorce, a former spouse cannot qualify under the subdivision of the household test (choice a. ). The stepmother meets the relationship test (choice b. ).A married daughter can be claimed as long as she does not violate the joint return test (choice c. ). In the case of the half brother, Canada or Mexico can satisfy the residency test (choice d. ). A cousin does not satisfy the relationship test so must be a member of the household (choice e. ). PTS 1 REF p. 3-14 p. 3-17 3-18 2009 Annual Edition/Test Bank 14. During 2008, Jen (age 66) furnished more than 50% of the support of the following persons Jens flow husband who has no income and is not claimed by someone else as a dependent. Jens stepson (age 18) who lives with her and earns $6,000 as a dance instructor. He dropped out of school a year ago.Jens x who does not live with her. The divorce occurred dickens years ago. Jens former brother-in-law who does not live with her. Presuming all other dependency tests are met, on a separate return how many personal and dependency exemptions may Jen claim? a. Two. b. Three. c. Four. d. Five. e. None of the above. ANS C All of the persons listed except the ex-husband meet either the relationship or member of the household tests. The current husband qualifies as he has no income and is not claimed as a dependent by someone else. The stepson avoids the gross income limitation since he is a qualifying child under 19 years of a ge. PTS 1 REF p. 3-11 p. 3-12 p. 3-14 15.A qualifying child cannot include a. A nonresident alien. b. A married son who files a joint return. c. An uncle. d. A daughter who is away at college. e. A brother who is 28 years of age and disabled. ANS C A qualifying child can be a nonresident alien under the adopted child exception (choice a. ). The filing of a joint return is not fatal if filing is not required and its purpose is to obtain a tax refund (choice b. ). An uncle does not meet the relationship test (choice c. ). A temporary absence is permissible under the domicile test (choice d. ). A brother meets the relationship test, and disability waives the age test (choice e. ). PTS 1 REF p. 3-12 p. 3-17 16.Ellen, age 12, lives in the same household with her father, grandfather, and uncle. The cost of maintaining the household is provided by her grandfather (40%) and her uncle (60%). Disregarding tie-breaker rules, Ellen is a qualifying child as to a. All parties involved (i. e. , father, grandfather, and uncle). b. Only her grandfather and uncle. c. Only her uncle. d. Only her father. e. None of the above. ANS A Under the abode and relationship tests, Ellen is a qualifying child as to all parties. The amount of support provided by each person is not relevant. PTS 1 REF p. 3-12 Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions 17.Millie, age 80, is back up during the current year as follows Weston (a son) Faith (a daughter) Jake (a cousin) Brayden (unrelated close family friend) Percent of Support 10% 35% 35% 20% 3-19 During the year, Millie lives with Brayden. Under a multiple support agreement, indicate which parties can qualify to claim Millie as a dependent. a. Weston, Faith, Jake, and Brayden. b. Faith and Brayden. c. Weston and Faith. d. Faith, Jake, and Brayden. e. None of the above. ANS B Weston does not qualify because he does not contribute more than 10% of the support. (This eliminates choices a. and c. ) J ake does not qualify because he satisfies neither the relationship nor member of the household tests. (This eliminates choices a. and d. Brayden does not meet the relationship test, but he does satisfy the member of the household test. PTS 1 REF Example 27 18. The Hutters filed a joint return for 2008. They provide more than 50% of the support of Carla, Melvin, and Aaron. Carla (age 18) is a cousin and earns $4,000 from a part-time job. Melvin (age 25) is their son and is a full-time law student. He received from the university a $3,800 scholarship for tuition. Aaron is a brother who is a citizen of Israel but resides in Mexico. Carla and Melvin live with the Hutters. How many personal and dependency exemptions can the Hutters claim on their Federal income tax return? a. Two. b. Three. c.Four. d. Five. e. None of the above. ANS C The Hutters can claim two personal exemptions and two dependency exemptions. Carla is not a qualifying child and is subject to the gross income test. Melvi n is not a qualifying child due to age (not under 24) but is a qualifying relative. meets Melvin the gross income test since this type of scholarship is nontaxable. Aaron meets the residency requirement. PTS 1 REF p. 3-11 p. 3-12 p. 3-17 Example 19 Example 21 3-20 2009 Annual Edition/Test Bank 19. For the qualifying relative rule (for dependency exemption purposes) a. The dependent must be under age 19 or a full-time student under age 24. b.The dependent must reside with the taxpayer claiming the exemption. c. The dependent need not be related to the taxpayer claiming the exemption. d. The dependent must be a citizen or resident of the U. S. e. None of the above. ANS C plectrums a. and b. relate to the qualifying child rules. An unrelated person can qualify if a member of taxpayers household (choice c. ). A dependent can be a citizen or resident of Canada or Mexico (choice d. ). PTS 1 REF Concept Summary 3-1 20. For tax year 2008, an exception to the kiddie tax rules includes a . A child who is a full-time student. b. A child who is married and files a joint return. c. A child who is 18 years old. d.A child whose unearned income is more than half of his or her support. e. None of the above. ANS B Student status (choice a. ) is relevant only to include, in the application of the tax, those at least 19 but under age 24. Choice c. relates to pre-2008 rules. Choice d. would be an exception if the reference was to earned income (not unearned income). PTS 1 REF p. 3-23 21. Kyle, whose wife died in December 2005, filed a joint tax return for 2005. He did not remarry, but has go on to maintain his home in which his two dependent children live. What is Kyles filing status as to 2008? a. Head of household. b. Surviving spouse. c. Single. d. Married filing separately. e.None of the above. ANS A Kyle, who filed a joint return in 2005, was entitled to file as a surviving spouse in 2006 and 2007. In 2008, he will be entitled to file as a head of household. PTS 1 REF Ex ample 38 Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions 3-21 22. Emily, whose husband died in December 2008, maintains a household in which her dependent daughter lives. Which (if any) of the following is her filing status for the tax year 2008? (Note Emily is the executor of her husbands estate. ) a. Single. b. Married, filing separately. c. Surviving spouse. d. Head of household. e. Married, filing jointly.ANS E As the executor, it is unlikely that she would refuse to consent to a joint return. Since she is deemed married in the year of her husbands death, she cannot file as single (choice a. ) or head of household (choice d. ). She does not qualify for surviving spouse status until the next year (i. e. , 2009). PTS 1 REF p. 3-30 23. Which of the following taxpayers may file as a head of household in 2008? Ron provides all the support for his mother, Betty, who lives by herself in an apartment in Fort Lauderdale. Ron pays the rent and oth er expenses for the apartment and right claims his mother as a dependent. tam-o-shanter provides over one-half the support for her 18-year old brother, Dan.Dan earned $4,200 in 2008 working at a dissolute food restaurant and is saving his money to attend college in 2009. Dan lives in Tammys home. Joes wife left him late in December of 2007. No jural action was taken and Joe has not heard from her in 2008. Joe supported his 6-year-old son, who lived with him passim 2008. a. Ron only. b. Tammy only. c. Joe only. d. Ron and Joe only. e. Ron, Tammy, and Joe. ANS E Ron may file as a head of household. His mother is not required to live in his household in order for him to qualify as a head of household. Tammy can claim Dan as a dependent because Dan is a qualifying child and is not subject to the gross income requirement.Joe can file as a head of household under the abandoned spouse rules. PTS 1 REF p. 3-30 p. 3-31 3-22 2009 Annual Edition/Test Bank 24. Wilma is married to Herb, who abandoned her in 2006. She has not seen or communicated with him since June of that year. She maintains a household in which she and her two dependent children live. Which of the following statements about Wilmas filing status in 2008 is fix? a. Wilma can use the rates for single taxpayers. b. Wilma can file a joint return with Herb. c. Wilma can file as a surviving spouse. d. Wilma can file as a head of household. e. None of the above statements is appropriate. ANS D Wilma meets the abandoned spouse rules.Therefore, she can file as a head of household. Otherwise, her filing status would be married, filing separately. PTS 1 REF p. 3-31 25. Arnold is married to Sybil, who abandoned him in 2006. He has not seen or communicated with her since April of that year. He maintains a household in which their son, Evans, lives. Evans is age 25 and earns over $20,000 each year. For tax year 2008, Arnolds filing status is a. Married, filing jointly. b. Married, filing separately. c. Head of ho usehold. d. Surviving spouse. e. Single. ANS B Arnold cannot file jointly without Sybils consent (choice a. ). He is not an abandoned spouse since Evans is not a dependent child.Evans cannot be claimed as a qualifying child (age test) and is not a qualifying relative (gross income test). Because Arnold is still treated as be married, his only option is married, filing separately (choice b. ). PTS 1 REF p. 3-29 to 3-32 26. During the year, Kim sold the following assets business auto for a $1,000 loss, stock investment for a $1,000 loss, and delectation yacht for a $1,000 loss. Presuming adequate income, how much of these losses may Kim claim? a. $0. b. $1,000. c. $2,000. d. $3,000. e. None of the above. ANS C The loss on the business auto of $1,000 is an run-of-the-mill loss, art object the loss on the stock investment of $1,000 is a capital loss. The loss on the yacht of $1,000 is personal and, therefore, cannot be deducted.PTS 1 REF p. 3-33 Example 43 Example 44 Tax Determina tion Personal and Dependency Exemptions An Overivew of Property Transactions 27. Perry is in the 33% tax bracket. During 2008, he had the following capital asset transactions Gain from the sale of a stamp collection (held for 10 years) Gain from the sale of an investment in land (held for 4 years) Gain from the sale of stock investment (held for 8 months) Perrys tax consequences from these gains are as follows a. (15% $10,000) + (28% $30,000) + (33% $4,000). b. (15% $30,000) + (33% $4,000). c. (5% $10,000) + (28% $30,000) + (33% $4,000). d. (15% $40,000) + (33% $4,000). e. None of the above. 30,000 10,000 4,000 3-23 ANS A Collectibles are taxed at a maximum of 28%, piece long-term capital gains are subject to a top rate of 15%. short-term capital gains are treated the same as mine run income. PTS 1 REF p. 3-33 28. Kirby is in the 15% tax bracket and had the following capital asset transactions during 2008 Long-term gain from the sale of a coin collection Long-term gain from the sa le of a land investment Short-term gain from the sale of a stock investment Kirbys tax consequences from these gains are as follows a. (5% $10,000) + (15% $13,000). b. (0% $10,000) + (15% $13,000). c. (15% $13,000) + (28% $11,000). d. (15% $23,000). . None of the above. ANS B Collectibles and short-term capital gains are taxed at Joans regular 15% tax bracket, while longterm capital gains are subject to a rate of 0% (5% earlier to 2008). PTS 1 REF p. 3-33 $11,000 10,000 2,000 29. For the current year, David has salary income of $80,000 and the following property transactions Stock investment sales Long-term capital gain Short-term capital loss Loss on sale of motor home (purchased 4 years ago and used for family vacations) $ 9,000 (11,000) (2,000) 3-24 2009 Annual Edition/Test Bank What is Davids AGI for the current year? a. $76,000. b. $77,000. c. $78,000. d. $89,000. e. None of the above.ANS C The loss from the sale of the camper is personal and, therefore, is not deductible. Net ting the short-term capital loss of $11,000 against the long-term capital gain of $9,000 produces a net short-term capital loss of $2,000. Offsetting the capital loss against ordinary income yields AGI of $78,000 ($80,000 $2,000). PTS 1 REF Example 43 Example 49 30. During 2008, Trevor has the following capital transactions LTCG Long-term collectible gain STCG STCL $ 6,000 2,000 4,000 10,000 After the benefit process, the following results a. Long-term collectible gain of $2,000. b. LTCG of $6,000, Long-term collectible gain of $2,000, and a STCL of $6,000. c.LTCG of $6,000, Long-term collectible gain of $2,000, and a STCL carryover to 2009 of $3,000. d. LTCG of $2,000. e. None of the above. ANS D First, the STCG and STCL are combined, resulting in a STCL of $6,000. Of this STCL, $2,000 is applied against the collectible gain of $2,000, and the $4,000 balance is applied against the LTCG of $6,000. The result is a LTCG of $2,000. PTS 1 MATCHING Match the statements that relate to e ach other. Note Choice L may be used more than once. a. Not available to 65-year old taxpayer who itemizes b. Exception for U. S. citizenship or residency test (for dependency exemption purposes) c. Largest basic standard deduction available to a dependent who has no earned income d.Not considered for dependency exemption purposes e. Qualifies for head of household filing status f. A child (age 15) who is a dependent and has only earned income. g. Not considered in applying support test (for dependency exemption purposes) h. Phaseout of personal and dependency exemptions i. Unmarried taxpayer who can use the same tax rates as married persons filing jointly j. Exception to the support test (for dependency exemption purposes) k. A child (age 16) who is a dependent and has net unearned income l. No correct match provided REF Example 48 Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.Abandoned spouse Stealth tax Additional standard deduction Scholarship funds Surviving spouse Marriage penalty Canada and Mexico Age of a qualifying relative $900 Kiddie tax applies Kiddie tax does not apply Multiple support agreement 3-25 1. ANS E PTS 1 REF p. 3-31 not An abandoned spouse qualifies for head of household filing status. 2. ANS H PTS 1 REF p. 3-20 NOT An example of a stealth tax is the phaseout of exemptions. Tax in the News on p. 3-20 3. ANS A PTS 1 REF p. 3-8 NOT A taxpayer who itemizes (claims deductions from AGI) is not eligible for either the basic or additional standard deductions. 4. ANS G PTS 1 REF p. 3-14 p. -15 NOT Scholarship funds are not considered when applying the support test. The taxable portion of scholarships are taken into account in applying the gross income test. 5. ANS I PTS 1 REF p. 3-30 6. ANS L PTS 1 REF p. 3-29 NOT The traditional marriage penalty applied in some cases where married persons filed a joint return. 7. ANS B PTS 1 REF p. 3-17 NOT Citizenship or reside ncy in these countries will suffice. 8. ANS D PTS 1 REF p. 3-19 9. ANS C PTS 1 REF p. 3-10 NOT This amount could be greater if earned income exists. 10. ANS K PTS 1 REF p. 3-25 11. ANS F PTS 1 REF p. 3-23 NOT The kiddie tax is inapplicable in situations where the child has no unearned income. 12. ANS J PTS 1 REF p. -15 Match the statements that relate to each other. Note Choice L may be used more than once. a. Available to a 70-year-old father claimed as a dependent by his son b. The highest income tax rate applicable to a taxpayer c. Equal to tax liability divided by taxable income d. Not eligible for the standard deduction e. No one qualified taxpayer meets the support test f. Taxpayers cousin does not qualify g. A dependent child (age 17) who has only unearned income h. Highest applicable rate is 35% i. applicable rate could be as low as 0% j. utmost rate is 28% k. Income from foreign sources not subject to tax l. No correct match provided 3-26 13. 14. 15. 16. 17. 18. 19. 20. 21 . 22. 23. 24. 009 Annual Edition/Test Bank Multiple support agreement Kiddie tax not imposed Nonresident alien Tax Rate Schedule Gain on collectibles (held more than one year) Marginal income tax rate Average income tax rate Additional standard deduction Relationship test (for dependency exemption purposes) Long-term capital gains Global system of taxation Territorial system of taxation 13. ANS E PTS 1 REF p. 3-15 NOT A qualified taxpayer is one who satisfies the more-than-10% contribution test and meets all of the other requirements for claiming a dependency exemption. 14. ANS L PTS 1 REF p. 3-23 NOT The kiddie tax can apply when the child has unearned income. 15. ANS D PTS 1 REF p. 3-9 16. ANS H PTS 1 REF p. 3-21 17. ANS J PTS 1 REF p. 3-33 18. ANS B PTS 1 REF p. 3-21 19. ANS C PTS 1 REF p. 3-21 20.ANS A PTS 1 REF Example 9 21. ANS F PTS 1 REF p. 3-14 NOT A cousin can qualify as a dependent under the member of the household test but not under the relationship test. 22. ANS I PTS 1 REF Example 46 23. ANS L PTS 1 REF p. 3-5 NOT Global Tax Issues on p. 3-5 24. ANS K PTS 1 REF p. 3-5 NOT Global Tax Issues on p. 3-5 Regarding dependency exemptions, classify each statement in one of the four categories a. Could be a qualifying child. b. Could be a qualifying relative. c. Could be either a qualifying child or a qualifying relative. d. Could be neither a qualifying child nor a qualifying relative. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36.A son lives with taxpayer and is self-supporting A daughter who does not live with taxpayer A granddaughter, who lives with taxpayer, is 24 years old, and a full-time student An uncle who lives with taxpayer A nephew who lives with taxpayer A niece who does not live with taxpayer A half brother who lives with taxpayer A cousin who does not live with taxpayer A step daughter who lives with taxpayer A daughter-in-law who does not live with taxpayer A family friend who is supported by and lives with taxpayer An ex-husband (divorc e occurred two years ago) who lives with taxpayer Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. ANS ANS ANS ANS ANS ANS ANS ANS ANS ANS ANS ANS D B B B C B C D C B B B PTS PTS PTS PTS PTS PTS PTS PTS PTS PTS PTS PTS 1 1 1 1 1 1 1 1 1 1 1 1 REF REF REF REF REF REF REF REF REF REF REF REF p. 3-11 to 3-15 p. 3-11 to 3-15 p. 3-11 to 3-15 p. 3-11 to 3-15 p. 3-11 to 3-15 p. 3-11 to 3-15 p. 3-11 to 3-15 p. 3-11 to 3-15 p. 3-11 to 3-15 p. 3-11 to 3-15 p. 3-11 to 3-15 p. 3-11 to 3-15 3-27 PROBLEM 1.Eva had the following transactions during 2008 Salary Interest income on bonds Issued by City of Baltimore Issued by Dell Corporation Alimony received Child support received City and state income taxes paid Bank loan obtained to pay credit card debt What is Evas AGI for 2008? ANS $86,000. $80,000 (salary) + $3,000 (interest on Dell Corporation bonds) + $3,000 (alimony received). Interest on the City of Balt imore bonds and the child support payments are exclusions from gross income. The bank loan has no tax effect, as Eva is obligated to repay the amount borrowed. City and state income taxes are deductions from AGI. PTS 1 REF Example 1 Example 2 Exhibit 3-1 to 3-3 $80,000 $2,000 3,000 5,000 3,000 9,000 4,000 10,000 3-28 2009 Annual Edition/Test Bank 2.Scott had the following transactions for 2008 Salary Alimony paid Recovery from car accident Personal injury damages Punitive damages contribute from parents Property sales Loss on sale of sailboat (used for diversion and owned 4 years) Gain on sale of GMC stock (held for 8 months as an investment) What is Scotts AGI for 2008? ANS $164,000. $90,000 (salary) $6,000 (alimony paid) + $75,000 (punitive damage award) + $5,000 (short-term capital gain on the sale of stock investment). The personal injury recovery and the gift from Scotts parents are exclusions from gross income. The loss from the sale of the sailboat is personal and, theref ore, nondeductible. The short-term capital gain on the sale of the GMC stock is taxed in full as ordinary income. PTS 1 REF p. 3-6 p. 3-33 Exhibit 3-1 Exhibit 3-2 Example 43 $ 90,000 6,000 $50,000 75,000 125,000 24,000 ($ 3,000) 5,000 2,000 3.Kristen had the following transactions for 2008 Salary Moving expenses incurred to change jobs Inheritance received from deceased uncle Life insurance proceeds from policy on uncles life (Kristen was named the beneficiary) Cash prize from church raffle Payment of state income tax What is Kristens AGI for 2008? ANS $76,000. $80,000 (salary) + $5,000 (raffle prize) $9,000 (moving expenses). The inheritance and life insurance proceeds are exclusions from gross income. The payment by Kristen of her state income tax is a deduction from AGI. Thus, it does not work out into the determination of AGI. PTS 1 REF p. 3-5 Exhibits 3-1 to 3-3 $ 80,000 9,000 400,000 100,000 5,000 4,000 4. Warren, age 17, is claimed as a dependent by his father. In 2008, Warren has dividend income of $1,500 and earns $400 from a part-time job. . b. What is Warrens taxable income for 2008? Suppose Warren earned $1,200 (not $400) from the part-time job. What is Warrens taxable income for 2008? Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions 3-29 ANS a. $1,000. Warrens standard deduction is the greater of $400 (earned income) + $300 or $900. Thus, $1,500 + $400 $900 = $1,000 taxable income. b. $1,200. Warrens standard deduction now becomes $1,500 ($1,200 + $300). Thus, $1,500 + $1,200 $1,500 = $1,200 taxable income. REF Example 8 Example 10 PTS 1 5. Allison, age 22, is a full-time law student and is claimed by her parents as a dependent.During 2008, she received $1,300 interest income from a bank savings account and $5,300 from a parttime job. What is Allisons taxable income for 2008? ANS $1,150. Allisons standard deduction is the greater of $5,300 (earned income) + $300 or $900. But the $5,600 is limited to $5,450 (the standard deduction allowed a single person). Thus, $1,300 + $5,300 $5,450 = $1,150 taxable income. PTS 1 REF Example 11 6. Heloise, age 74 and a widow, is claimed as a dependent by her daughter. For 2008, she had income as follows $2,500 interest on municipal bonds $3,200 Social Security benefits $3,000 income from a part-time job and $2,800 dividends on stock investments.What is Heloises taxable income for 2008? ANS $1,150. $3,000 (income from job) + $2,800 (dividends) $3,300 (basic standard deduction is $3,000 + $300) $1,350 (additional standard deduction for age) = $1,150. The Social Security benefits of $3,200 and the interest on municipal bonds of $2,500 are not taxable. PTS 1 REF Table 3-1 Example 9 7. Pablo is married to Elena, who lives with him. Both are U. S. citizens and residents of Kansas. Pablo furnishes all of the support of his parents, who are citizens of Nicaragua and residents of Mexico. He also furnishes all of the support of Elenas parents, who are citizens and residents of Nicaragua. Elena has no gross income for the year.If Pablo files as a married person filing separately, how many personal and dependency exemptions can he claim on his return? ANS Four. A personal exemption for Pablo and Elena and dependency exemptions for Pablos parents. Elena can be claimed because she has no income. Presumably she is not existence claimed as a dependent by another. Although Pablos parents are neither U. S. citizens nor residents, they are residents of Mexico. Elenas parents meet neither the citizenship nor residency tests. PTS 1 REF p. 3-10 p. 3-17 3-30 2009 Annual Edition/Test Bank 8. Homer (age 68) and his wife Jean (age 70) file a joint return. They furnish all of the support of Luther (Homers 90-year old father), who lives with them.For 2008, they received $6,000 of interest income on city of Chicago bonds and interest income on corporate bonds of $48,000. Compute Homer and Jeans taxable income for 2008. ANS $24,500. Their gross in come is $48,000 since the $6,000 interest on municipal bonds is an exclusion. They are entitled to a basic standard deduction of $10,900 and additional standard deductions of $1,050 each for being age 65 or older. They can claim a dependency exemption of $3,500 for Luther and two personal exemptions for themselves. Thus, $48,000 $10,900 $2,100 (2 $1,050) $10,500 (3 $3,500) = $24,500. PTS 1 REF p. 3-10 p. 3-13 Exhibit 3-1 Table 3-1 Table 3-2 9.Ellen, age 39 and single, furnishes more than 50% of the support of her parents, who do not live with her. Ellen practices as a self-employed interior decorator and has gross income in 2008 of $120,000. Her deductions are as follows $30,000 business and $7,900 itemized. a. b. What is Ellens taxable income for 2008? Can Ellen qualify for head of household filing status? Explain. ANS a. $71,500. $120,000 (gross income) $30,000 (business deductions for AGI) = $90,000 (AGI) $8,000 (standard deduction) $3,500 (personal exemption) $7,000 (depend ency exemptions for parents) = $71,500 taxable income. The serve presumes that the parents meet the other dependency exemption tests (e. g. , gross income) besides support. b.Ellen can qualify for head of household filing status if she furnishes more than half of the cost of maintaining her parents household. Also, at least one of Ellens parents must qualify as her dependent (see part a. above). REF p. 3-5 p. 3-10 p. 3-13 Table 3-1 Example 42 PTS 1 10. Ashley earns a salary of $35,000, has capital gains of $4,000, and interest income of $3,000 in 2008. Her husband died in 2007. Ashley has a dependent son, Tyrone, who is age 8. Her itemized deductions are $8,000. a. b. Calculate Ashleys taxable income for 2008. What is her filing status? $35,000 4,000 3,000 $42,000 (10,900) (7,000) $24,100 ANS a. Salary Capital gains Interest AGI Less Standard deduction Less Personal exemption and dependency deduction ($3,500 2) Taxable income b.Ashley satisfies the requirements for a surviving spouse. PTS 1 REF p. 3-10 p. 3-30 Table 3-1 Figure 3-1 11. During the year, Keith has the following transactions Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions Loss from the sale of a business computer Loss from the sale of a personal use auto Long-term loss from the sale of land held for investment Short-term gain from the sale of a stock investment How are these transactions handled for income tax purposes? 3-31 $3,500 1,500 5,000 1,000 ANS $3,500 ordinary loss and $3,000 capital loss deduction. The $1,000 unused capital loss can be carried over to the next year.The $1,500 loss from the sale of a personal use auto is not allowed. PTS 1 REF Example 44 Example 49 12. During 2008, Dena has the following gains and losses LTCG LTCL STCG STCL a. b. How much is Denas tax liability if she is in the 15% tax bracket? If her tax bracket is 33% (not 15%)? $4,000 1,000 500 3,000 ANS a. $0. After the initial netting process, there is a LTCG of $3,0 00, and a STCL of $2,500. The $2,500 of STCL is applied to the LTCG of $3,000. The final result is a net LTCG of $500 taxed at 0% for a tax liability of $0. b. $75. See part a. for the netting process. Now the $500 is taxed at 15% for a tax liability of $75. REF Example 46 Example 47 PTS 1 13.During 2008, Marlo had the following capital gains and losses Gain from the sale of coin collection (held three years) Gain from the sale of land held as an investment for sixer years Gain from the sale of stock held as an investment (held for 10 months) a. b. How much is Marlos tax liability if he is in the 15% tax bracket? If his tax bracket is 33% (not 15%)? $5,000 4,000 1,000 ANS a. $1,100. Gain of $5,000 on the sale of the coin collection is taxed at 15% (lesser of 28% or 15%). The same is true for the short-term gain of $1,000. The gain of $4,000 on the sale of the land is taxed at 0%. Thus, (15% $6,000) + (0% $4,000) = $900. b. $2,330. (33% $1,000) + (28% $5,000) + (15% $4,000) = $2,33 0. PTS 1 REF p. 3-33 Example 46 Example 47 14.During 2008, Blaine has salary income of $100,000 and the following capital transactions 3-32 2009 Annual Edition/Test Bank LTCG LTCL STCL $10,000 (14,000) (3,000) How are these transactions handled for income tax purposes in 2008 and, if applicable, in future years? ANS First, netting the long-term transactions yields a net long-term capital loss of $4,000 $10,000 (gain) $14,000 (loss). Second, apply the $3,000 short-term capital loss against ordinary income. Third, carry the unused $4,000 net long-term capital loss over to 2009. PTS 1 see 1. Mr. Lee is a citizen and resident of Hong Kong, while Mr. Anderson is a citizen and resident of the U. S. In the taxation of income, Hong Kong uses a territorial approach, while the U. S. follows the global system. In terms of effect, explain what this means to Mr. Lee and Mr. Anderson. ANS Mr.Lee is taxed only on the income he receives from Hong Kong, while Mr. Anderson is taxed on his global i ncome. Under the U. S. approach, a citizen or resident is taxed on a worldwide basis. Since the U. S. system could lead to the same income being taxed twice, various relief provisions are necessitated (e. g. , foreign tax credit). PTS 1 REF Global Tax Issues on p. 3-5 REF Example 49 2. In satisfying the support test and the gross income test for claiming a dependency exemption, a scholarship received by the person being claimed is handled the same way for each test. Do you agree or dissent with this statement? Why? ANS Disagree. For purposes of the support test, all of the scholarship is disregarded.For purposes of the gross income test, only the taxable part is considered (i. e. , the nontaxable part is disregarded). PTS 1 REF p. 3-12 p. 3-14 Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions 3-33 3. In order to claim a dependency exemption for other than a qualifying child, a taxpayer must meet the support test. Generally, this is done by f urnishing more than 50% of a dependents support. What exceptions exist, if any, where the support furnished need not be more than 50%? ANS One exception involves the multiple support agreement. Here, family members collectively furnish more than 50% of the support, but no one person does so.For those qualified individuals who contribute more than 10%, the sort can designate which person may claim the dependency exemption. The present moment exception involves the divorced parents of children. The custodial parent is entitled to the dependency exemptions for the children. If this parent agrees not to claim the exemption(s), then the noncustodial parent may do so. PTS 1 REF p. 3-15 p. 3-16 4. In applying the gross income test in the case of dependents that are married, could the application of community property laws have any effect? Explain. ANS Most often, the application of community property laws will impact on the dependency status of the spouse of a qualifying child.Suppose, for example, Roger maintains a household that includes his 18-year-old daughter, Alice, and her husband, Craig. Assume further that Alice earns $8,000 from a part-time job while Craig has no income. In a common law state, Craig meets the gross income test (i. e. , $0) while Alices gross income, as a qualifying child, is immaterial. In a community property state, however, Craig now violates the gross income test with $4,000 (50% $8,000) of income, while Alice remains immune. PTS 1 REF p. 3-36 5. In meeting the criteria of a qualifying child for dependency exemption purposes, when if ever, might the childs income become relevant? ANS The amount of income earned by the qualifying child normally is of no consequence.If, however, such income is used to make the child self-supporting, then he or she can no longer be a qualifying child. Such child also would not be a qualifying relative due to the gross income and support tests. PTS 1 REF p. 3-12 3-34 2009 Annual