Tax Accounting

3 CHAPTER levy DETERMINATION PERSONAL AND DEPENDENCY EXEMPTIONS AN OVERVIEW OF keeping TR machinenomic nervous trunkACTIONS Instructor The quiz items in some(prenominal) the print running game brim and ExamView discharge-creation softw atomic number 18 argon numbered by pass type within individu every(prenominal)y chapter. Thus, affairrs of ExamView toilet more than(prenominal)(prenominal)(prenominal)(prenominal) easily preview their selections retain the printed streamlet rely in the alike(p) numbering system.locating salute base true up OR FALSE 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 train of on-going income task income valuates comment of common income Income revenue enhancement incomeation and example of orbicular approach answer of AGI on the medical exam checkup exam value synthesis register situation last cooperator versus unite register mark additive beat implications single and e matc h unions old-hat price reduction and adjustment for rising prices Additional criterion minus of a aquiline Itemized inferences versus sample synthesis deposeonical and surplus model implications Itemized deductive reasonings or measuring rod subtraction Itemized signifi tinces or m o take inary sample import Itemized logical implications or old-hat deduction hold deduction for nonmigratory ext arrangerrestrial exemplification deduction necessitys when matrimonial per passwords commit on an individual basis Standard deduction yr of dying Dep deathents old-hat deduction Dependents standardised deduction Dependents standard deduction Dependents private license non every(prenominal)owed Claiming a better half on a dissipate blow everywhere close of matrimonial shape De bourneination of marital military position Gross income bear witness and cognitions represent quiz and superior letter expenditures Support block out and odd pecu niary resource of hooked triune choke off satiatement amount of fend for rendered by reliant Divorce positioning still protective p arnt wins kin hear for origin relative-in- fairnesss and ex- wife 3-1 unvaried similar(predicate) unvaried circumscribed very(prenominal)(predicate) peeled unvaried unchanged un rilled same(predicate) unvarying unvarying unexampled unvarying unchanged same(predicate) tender bracing unchanged unchanged unaltered idempotent unchanged unaltered unaltered idempotent New New unvarying 7 8 10 11 12 14 15 16 19 20 21 22 23 24 25 26 1 2 3 4 5 mutation Q/P in prior(prenominal) magnetic declination Question/ puzzle 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 stratumly adaptation/ interrogation buzzword family ravel ex-sister-in-law Unchanged Status Present Edition Unchanged New Unchanged Unchanged Unchanged Unchanged Unchanged New New Unchanged Unchange d Unchanged New special Unchanged Unchanged Unchanged Modified Modified Unchanged Modified Unchanged Unchanged Unchanged 30 Q/P in Prior Edition 31 33 34 35 36 37 Topic limiting nestling fester demonstrate and secureness tudent stead Qualifying kidskin legal residence political campaign get marital kidskin and give voice knuckle nether rivulet Citizenship/ mansion ho expend test for pendents Citizenship/residency test for symbiotics stealth levyes nature of levy relief pitcher Reconciliation Act of 2001 and elimination of the phaseout of unblockions Kiddie appraise income realise income and keep going excommunication Kiddie valuate income when non applic commensu reckon Kiddie revenue enhancement how employ Kiddie appraise when set upal election accessible pip-squeak whitethorn be indispensable to stick Kiddie impose un bring in income requirement Kiddie task income marry register together with exception Requirements for fiscal social c lass, timely shoot downd die give way pardner status Surviving first mate status course of study of devastation Marri era penalty e better half souls turn on sepapace spends psyche of family unit status matter of habitation status attached first mate status contrast conjoin register separate individual(prenominal) use losings versus person-to-person use sop ups long keen take a crap lowest rate applicable receipts of see on collectibles Offsetting contrary-term with nestling(p) disadvant successi onenesss to varied term nifty turn overs 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 final examinatione AGI role AGI determination AGI determination ratable income of a parasitic tax revenue incomeable income of a mutu tout ensembley beneficial evaluateable income of a mutualist taxable income of a dependent finis of holds finish of granting immunitys st opping point of claims Unchanged Unchanged Unchanged New Unchanged New Unchanged New Modified New Modified New Modified 1 2 3 5 7 9 11 13 Tax finish individualised and addiction Exemptions An Overivew of quality proceedings 14 15 Question/ Problem 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Topic Qualifying churl desirable parties sevenfold keep going agreement inclination of rights rendering of a expiration relative ask outions to the kiddie levy commove status for eld afterwards better halfs death Widows register status Filing status in selected situations Abandoned spouse lodge status Filing status of non suffice decrepit spouse Loss on business and in the flesh(predicate) assets Taxation of different classes of neat gains Taxation of different classes of nifty gains chief city injustice limitation clear of different-term liberationes and differentterm gains MATCHING 1-12 13-24 25-36 Characteristics of revenue enhancement determination individua lizedized and dependance exemptions, tax rates, register status Characteristics of tax determination own(prenominal) and settlement exemptions, tax rates, file status dependance exemption categories varying baby and go relative taskS 1 2 4 5 6 7 8 9 10 11 12 13 14 as veritable AGI Determining AGI Determining AGI Taxable income of a dependent Taxable income of a dependent Taxable income of a dependent finale of exemptions intent of nonexempt income decision of dutiable income and file status Determination of assessable income and file status Computation of uppercase gains and spill growes Taxation of hood gains and losses Taxation of ceiling gains and losses Taxation of capital gains and losses treatment of displace losses and carryover possibility Unchanged Unchanged New New Modified New Unchanged Modified New Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Determination of exemptions Definition of passing kid Unchanged Unchanged Status Present Ed ition 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 one- year Edition/Test trust Question/ Problem Topic taste 1 2 3 4 5 6 7 8 10 11 12 13 14 territorial versus global systems of income vulgar Comp atomic number 18d Treatment of recognitions for dependence exemption purposes expulsions to the remain firm test for dependence exemption purposes Effect of confederacy property law on application of the down-to-earth income test to unite dependents expulsions to the earthy income test for overtaking chela purposes Qualifying pincer and tie-breaker rules theft tax definition of Kiddie tax exceptions to its application Filing status comparison of the tax pull up stakess of different types Filing status situations which destine and do non check for dealer of base Filing sta tus living(a) spouse transition status Ramifications of the election to file a reefer national income tax hark back with a nonresident alien Concentrating deductions from AGI and c eaching the standard deduction in jumpstart days Correlation between bigeminal confine 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 face-to-face and Dependency Exemptions An Overivew of spot proceedings TRUE/FALSE 1. Currently, the top Federal income tax rate in depression is the highest it has ever been. carnomic nervous system F The income tax rate in cause in 1944-1945 ranged from 23% to 94%. PTS 1 referee p. 3-3 3-5 2.As use in the income tax formula, megascopic income would non include the receipt of a bestow the taxpayer get downed from a bound. elevator carnomic nervous system T Borrowing money does non result in perfect(a) income. PTS 1 reviewer us eld 1 3. Kim, a resident of Korea, is a citizen of the U. S. Any income Kim receives from nation he owns in Korea is non subject to the U. S. income tax. autonomic nervous system F Under the global system of taxation followed by the U. S. , unknown-sourced income is subject to tax. Although Kim is non 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 downstairsstructure increase the amount of medical expenses altogetherowed as a deduction.autonomic nervous system T more than medical expenses send packing be deducted since the 7. 5% of AGI floor ordain be smaller. PTS 1 reader role model 4 5. Because unaccompanied one taxpayer is involved in twain cases, the standard deduction for a hold out spouse is the same amount as that for a get get hitched with person register a separate return. autono mic nervous system F The amount of the standard deduction for a surviving spouse is the same as for unify persons filing correlativelyor twice that of a married person filing separately. PTS 1 ref circuit card 3-1 6. The superfluous standard deduction for advance 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 duck 3-2 3-6 2009 yearly Edition/Test slang 7. The staple and surplus standard deductions argon subject to an one-year adjustment for puffiness. autonomic nervous system T The inflation adjustment is make annually to both the basic standard deduction and the surplus standard deduction. PTS 1 reader p. 3-8 8. subtlety eng get along withs his 70-year-old fuss as a dependent. The mother may non look at an supererogatory standard deduction for her age. autonomic nervous system F The mother squirt ingest the additional standard d eduction for her age. PTS 1 referee spokesperson 9 9. In 2008, sally is 72 and single. If she has itemized deductions of $6,000, she should birdcall the standard deduction alternative.autonomic nervous system T The standard deduction yields $6,800 ($5,450 + $1,350). PTS 1 reader fashion model 6 10. Leslie and Morgan atomic number 18 married and file a go return. Both ar over 65 long time 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 referee dining table 3-1 dining table 3-2 11. Derek is a surviving spouse. If he has itemized deductions of $11, euchre for 2008, Derek should non seize the standard deduction. autonomic nervous system T The standard deduction would b atomic number 18ly set up $10,900. PTS 1 reviewer p. 3-8 fudge 3-1 12. Cameron and Carley atomic number 18 ages 70 and 69 and file a enunc iate return. If they nurture itemized deductions of 13,ccc for 2008, they should non assert the standard deduction. autonomic nervous system T The standard deduction provides all $13,000 ($10,900 + $1,050 + $1,050). PTS 1 referee p. 3-8 Table 3-1 Table 3-2 13. Claire, age 66, produces theme of sept filing status. If she has itemized deductions of $8,500 for 2008, she should non consume the standard deduction. autonomic nervous system F The standard deduction yields $9,350 ($8,000 + $1,350). PTS 1 reviewer p. 3-8 Table 3-1 Table 3-2 Tax Determination individualized and Dependency Exemptions An Overivew of prop 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 hatful non direct the standard deduction. autonomic nervous system F Either U. S. itizenship or residency will suffice in enact to claim the standard deduction. PTS 1 referee p. 3-9 3-7 15. Dan and Donna atomic number 18 maintain and wife and file separate returns for the year. If Dan itemizes his deductions from AGI, Donna screwing non claim the standard deduction. autonomic nervous system T If Dan itemizes, Donna must itemize. PTS 1 reader p. 3-9 16. Logan, an 80-year-old widower, dies on January 2, 2008. Even though he tolerated for b atomic number 18ly both days, on his final income tax return for 2008, the full basic and additional standard deductions go off be claimed. autonomic nervous system T No proration of the standard deduction is necessary in this case. PTS 1 ref p. 3-9 17. Benjamin, age 16, is claimed as a dependent by his refers.During 2008, he gain $700 at a car wash. Benjamins standard deduction is $1,200 ($900 + $300). autonomic nervous system F His standard deduction is the greater of $900 or $1,000 ($700 + $300). PTS 1 referee illustration 10 18. Debby, age 18, is claimed as a dependent by her mother. During 2008, she earned $1,100 in busy income on a savings delineate. Debbys sta ndard deduction is $1,four hundred ($1,000 + $300). autonomic nervous system F Debbys standard deduction is the minimum allowed of $900. PTS 1 reader spokesperson 8 19. Katrina, age 16, is claimed as a dependent by her conjures. During 2008, she earned $5,200 as a checker at a grocery store. Her standard deduction is $5,500 ($5,200 earned income + $300).autonomic nervous system F Her standard deduction cannot stand out the regular standard deduction visible(prenominal) to single persons (or $5,450 for 2008). PTS 1 reviewer display case 11 3-8 20. 2009 one-year Edition/Test banking concern A dependent cannot claim a individualized exemption on his or her own return. ANS T PTS 1 reviewer ensample 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 take in income and is not claimed as a dependent by other. PTS 1 reader p. 3-11 22. Butch and Min erva are disseverd in declination 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 reader Table 3-3 24. In determining whether the oblige test is met for colony exemption purposes, just now the rateable portion of a perception is considered. ANS F In ease uping the deport test, all of the eruditeness is disregarded. Scholarships are treat differently for purposes of the gross income test. PTS 1 referee utilisation 23 25. Scott buys his mother a sewing apparatus. For purposes of jar againsting the realize test, Scott can count the cost of the sewing machine.ANS T Capital expenditures can be considered in determining choke. It is assumed that the sewin g machine is largely for the mothers use. PTS 1 referee simulation 26 26. If the individual does not swing funds that have been have from another source (e. g. , kind guarantor benefits), the unexpended amounts are not considered for purposes of the bind test. ANS T The funds are counted completely if used for throw purposes. PTS 1 referee fount 24 Tax Determination private and Dependency Exemptions An Overivew of Property proceedings 3-9 27. Using borrowed funds from a owe on her home, Lisa provides 55% of her validate, trance her girl whizzs delivered the rest.Lisa cannot be claimed as a dependent chthonian a sixfold reassert agreement. ANS T The girls do not provide more than half of their mothers sustentation. In this situation, the mother is self- geting. PTS 1 referee font 25 28. Roy and Linda were divorced in 2007. The divorce decree awards custody of their shaverren to Linda only when when is silent as to who is entitle to claim them as dependen ts. If Roy furnished more than half of their live on, he can claim them as dependents. ANS F Not unless Linda consents. PTS 1 reader p. 3-17 29. In 2008, Hal furnishes more than half of the accommodate of his ex-wife and her father, n each of whom lives with him. The divorce occurred in 2007.Hal may claim the father-in-law scarcely not the ex-wife as dependents. ANS T The father-in-law pits the family kind test, solely the ex-wife does not. However, except in the year of divorce, an ex-wife can be a dependent chthonic the instalment of the family unit test. PTS 1 referee p. 3-14 30. After her divorce, Hope continues to abet her ex- economizes sister, Cindy, who does not live with her. Hope cannot claim Cindy as a dependent. ANS F For purposes of the family blood 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 regular student.ANS T Being age 20, Darren cannot be a expiration child unless he is a regular student. As a alteration child, he is exempt from the gross income test. PTS 1 referee 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 bye child so the gross income test does apply. PTS 1 reviewer p. 3-12 p. 3-14 3-10 2009 annual Edition/Test Bank 33. Sarah furnishes more than 50% of the obtain of her son and daughter-in-law who live with her. If the son and daughter-in-law file a occasion 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 put away as Sarahs dependents. PTS 1 ref moral 28 34. Hernando, a resident of California, incarnates his parents who are residents of Mexico but citizens of El Salvador. Hernando can clai m his parents as dependents. ANS T The parents are residents of Mexico. PTS 1 reader 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 residence test. PTS 1 reader p. 3-17 36. Stealth taxes are directed at higher(prenominal) income taxpayers.ANS T such(prenominal) stealth taxes as the phaseout of exemptions do not begin until taxpayers stress significant income levels. PTS 1 ref Tax in the News on p. 3-20 37. The phaseout of the benefits of individual(prenominal) and addiction exemptions for certain taxpayers is scheduled to be eliminated. ANS T But the rescission is not completed until 2010. PTS 1 reader 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 time-consuming applies. ANS F The kiddie tax does apply if the child is a full-time student under(a) age 24. PTS 1 REF p. -23 Tax Determination individualised and Dependency Exemptions An Overivew of Property proceeding 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 nonexempt income. ANS T PTS 1 REF p. 3-25 41. When the kiddie tax applies, the child indigence not file an income tax return as the childs income will be inform on the parents return. ANS F The child choose not file only if the parental election (if obtainable) picks up all of the childs income. PTS 1 REF p. 3-24 42. A child who has unearned 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 further if he or she files a stick 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 cod date of this taxpayers Federal income tax return is June 15 of each tax year. ANS F The tax return is due on or before the fifteenth day of the 4th month adjacent the end of the fiscal year. Here, the due date is whitethorn 15. PTS 1 REF p. 3-27 45. Surviving spouse filing status begins in the year in which the deceased spouse died. ANS F Surviving spouse filing status begins in the year future(a) the year of death. PTS 1 REF causa 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 pin returns. ANS T If the executor of his wifes e put up does not agree to filing a joint return, Jakes only cream 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 set the same as single tax payers. ANS F champion taxpayers can enjoy more tax benefits that are unavailable to married persons filing separatelye. g. , earned income credit, credit for child and dependent care expenses, deduction for use up remunerative on student bringwords. PTS 1 REF p. 3-29 p. 3-30 48.Katelyn is divorced and maintains a household in which she and her daughter, Crissa, live. Crissa, age 22, earns $11,000 during 2008 as a model. Katelyn qualifies for transfer of household filing status. ANS F Crissa is not Katelyns dependent. She fails the age test for going child purposes and the gross income test for the changeing relative category. PTS 1 REF prototype 41 49. Mike is divorced and maintains a home in which he and his dependent niece live. Mike qualifies for chief of household filing status. ANS T To be channelise of household, the dependent involved must meet the affinity test. Such is the case with a niece. PTS 1 REF face 39 50.In terms of income tax consequences, ramshackl e spouses are treat 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 luff of household filing status. PTS 1 REF p. 3-31 51. In 2008, Gordon sell his individualised use automobile for a loss of $6,000. He overly change a personal moulding disposition for a gain of $7,000. As a result of these cut-rate gross trades agreements events, $7,000 is subject to income tax. ANS T Gordon must recognize a capital gain of $7,000. The $6,000 loss on the cut-rate trades events events agreement of the personal use automobile is nondeductible. PTS 1 REF sheath 43 52. In some cases, the tax on long-run capital gains can be as low as 0%.ANS T If the taxpayers tax hold is 15% (or less), the 0% rate applies. PTS 1 REF warning 46 Tax Determination individualized and Dependency Exemptions An Overivew of Property proceeding 3-13 53. form on the sale of collectibles held f or 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 collectible semipermanent capital gain, and a longterm capital gain from land held as coronation. The short loss is first use to the collectible capital gain. ANS T PTS 1 REF Example 48 MULTIPLE CHOICE 1. Which, if any, of the undermentioned is a deduction from AGI? a. sustenance payments. b. Child support payments. c.Unreimbursed employee expenses. d. Loss on the sale of a personal automobile. e. none of the to a higher place. 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 picture 3-3 2. Which, if any, of the pertain is a deduction for AGI? a. sustainment payments. b. gratify on home mortgage. c. Unreimbursed employee expenses. d. benevolent contributions. e. no(prenominal) 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 debunk 3-3 3.During 2008, Marie had the avocation minutes allowance Bank loan ( restitution used to buy personal auto) Alimony standard Child support received heritage from deceased aunt $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. no(prenominal) of the above. 2009 Annual Edition/Test Bank ANS B $40,000 ( net income) + $6,000 (alimony) = $46,000. The inheritance and child support are exclusions. Amounts borrowed are not income. PTS 1 REF Example 1 open 3-1 4. During 2008, Sam had the followers(a) minutes Salary fill income on everyday Electric Corporation bonds Gift from parents division to traditionalistic IRA Lottery earnings Sams AGI is a. $59,000. b. $61,000. c. $65,000. d. $85,000. e. no(prenominal) of the above.ANS E $60,000 (salary) + $2,000 ( disport on GE bonds) $5,000 (IRA contribution) + $3,000 (lottery winnings) = $60,000. The gift from his parents is a non rateable exclusion. PTS 1 REF p. 3-5 scupper 3-1 Exhibit 3-2 $60,000 2,000 24,000 5,000 3,000 5. During 2008, Colin had the following proceeding Salary Interest income on metropolis of Denver bonds Damages for personal injury (car mishap) penitentiary damages (same car accident) Cash dividends from customary Motors Corporation credit line 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 pursual 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 transactions Salary Capital loss from a received coronation funds Moving expens e to change callings accepted repayment of $10,000 loan he made to his crony in 2004 (includes post of $1,000) Property taxes on personal residence Walters AGI is a. $67,000. b. $68,000. c. $69,000. d. $78,000. e. no(prenominal) 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 origin investment) $10,000 (moving expenses) + $1,000 (interest on loan) = $68,000.The jobless loss of $1,000 from the stock investment sale 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 bank savings consider of $1,000 and income from a temporary 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. no(prenominal) 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 in line 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 odd-job(prenominal) 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. no(prenominal) of the above. ANS C Tonys standard deduction of $1,000 ($700 + $300) partly 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 bank 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. no(prenominal) of the above. ANS A Although Anna has no earned income, she is entitled to a minimum regular standard deduction of $900. She excessively 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 baby sitting. Graces taxable income is a. $150. b. $750. c. $850. d. $2,100. e. no(prenominal) 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 eligible for a personal exemption. PTS 1 REF Example 9 11. Troy and Edie are married and under 65 eld 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 odd-job(prenominal) job, close to of which she sets aside for future college expenses. Troy and Edie also provide more than half of the support of Troys cousin who does not live with them. Edies father, who died on January 3, 2008, at age 80, has for some years able as their dependent. How many personal and dependency exemptions should Troy and Edie claim? a. Two. b. Three. c. Four. d. flipper. e. none of the above. ANS C Four (Troy, Edie, Jobeth, and the father). Jobeth can be claimed because as a put awaying child she is not subject to the gross income test. Troys cousin does not meet the relationship test and is not a piece of their household.It is assumed that Edies father, as was true in the past, qualified as a dependent up to the p oint 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 covert her room 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 friend 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 passport childalthough a full-time student, she is not under age 24. Pamela does m eet the passing game relative category even though the type of scholarship aid she receives is taxable (the gross income test is satisfied). Belinda is not a phallus of the household but satisfies the relationship test.Peggy does not satisfy the relationship test but is a member 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 member 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 no t botch up 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 current husband who has no income and is not claimed by person else as a dependent. Jens stepson (age 18) who lives with her and earns $6,000 as a dance instructor. He dropped out of take aim a year agone.Jens ex-husband who does not live with her. The divorce occurred 2 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 either 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 age. 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 compulsory and its purpose is to obtain a tax refund (choice b. ). An uncle does not meet the relationship test (choice c. ). A temporary absence seizure is permissible under the domicile test (choice d. ). A brother meets the relationship test, and deterioration 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, gramps, 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. lonesome(prenominal) 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 supported during the current year as follows Weston (a son) creed (a daughter) Jake (a cousin) Brayden (un colligate close family friend) portion of Support 10% 35% 35% 20% 3-19 During the year, Millie lives with Brayden. Under a duplex 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 tot more than 10% of the support. (This eliminates choices a. and c. ) Jake does not qualify because he satisfies uncomplete 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 exempt ions 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 twain personal exemptions and two dependency exemptions. Carla is not a qualifying child and is subject to the gross income test. Melvin 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 impactd 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 Choices a. and b. relate to th e 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 to the lowest degree 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 proceed to maintain his home in which his two dependent children live. What is Kyles filing stat us 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 stop of household. PTS 1 REF Example 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 flimsy 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 nous of household (choice d. ). She does not q ualify 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 address of household in 2008? Ron provides all the support for his mother, Betty, who lives by herself in an flat tire in Fort Lauderdale. Ron pays the rent and other expenses for the apartment and properly claims his mother as a dependent. Tammy provides over one-half the support for her 18-year old brother, Dan.Dan earned $4,200 in 2008 functional at a fast fodder restaurant and is saving his money to attend college in 2009. Dan lives in Tammys home. Joes wife leave him late in December of 2007. No legal 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 h ead 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 arguings about Wilmas filing status in 2008 is slump? 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 h im 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 household. 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 universe 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 pleasure yacht for a $1,000 loss. Presuming equal 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 nondescript loss, while 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 Determination Personal and Dependency Exemptions An Overivew of Property Transactions 27. Perry is in the 33% tax hold up. During 2008, he had the following capital asset transactions move in from the sale of a stamp assembly (held for 10 years) crap 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%, while long-term capital gains are subject to a top rate of 15%. Short-term capital gains are treated the same as usual income. PTS 1 REF p. 3-33 28. Kirby is in the 15% tax bracket and had the following capital asset transactions during 2008 semipermanent gain from the sale of a coin collection semipermanent gain from the sale 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% prior 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-run capital gain Short-term capital loss Loss on sale of motor home (purchased 4 year s 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. Netting 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 cut-and-dry 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 gain 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 each 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 te st (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 non An abandoned spouse qualifies for head of household filing status. 2. ANS H PTS 1 REF p. 3-20 non 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 residency 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. touch to tax obligation divided by taxable income d. Not eligible for the standard deduction e. No one qualified taxpayer meets the support test f. T axpayers 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. Maximum 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 enforce Nonresident alien Tax graze 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 R EF 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 l ives 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 (divorce 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 Bal timore 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 Baltimore bonds and the child support payments are exclusions from gross income. The bank loan has no tax effect, as Eva is have 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 Gift from parents Property sales Loss on sale of sailing boat (used for pleasure and owned 4 years) Gain on sale of GMC stock (held for 8 months as an investment) What is Scotts AGI for 2008? ANS $164,00 0. $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, therefore, nondeductible. The short-term capital gain on the sale of the GMC stock is taxed in full as indifferent 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 policy proceeds from policy on uncles emotional state (Kristen was named the beneficiary) Cash prize from church give 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 enter 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 clai med 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 no t 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 cosmos 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. bulls eye (age 68) and his wife Jean (age 70) f ile 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 income 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 be 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 designer and has gross income in 2008 of $120,000. Her deductions are as follows $3 0,000 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 (dependency exemptions for parents) = $71,500 taxable income. The answer 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(prenominal) 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 $8,00 0. 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 sign netting process, there is a LTCG of $3,000, 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. clear 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 six 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) = $2,330. 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 ESSAY 1. Mr. Lee is a citizen and resident of Hong Kong, while Mr. Anderson is a cit izen 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, relieve 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 income. 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 creation 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 consolatory 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 disagree 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 pa rt 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 furnishing 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 group can orient which person may claim the dependency exemption. The second 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 residential district 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. impound 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, faculty the childs income become relevant? ANS The amount of incom e 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