SMChap004

Chapter 04 - Individual Tax Overview

Chapter 4 Individual Tax Overview SOLUTIONS MANUAL Discussion Questions 1.

[LO 1] How are realized income, gross income, and taxable income similar, and how are they different? Realized income is more broadly defined than gross income which is more broadly defined than taxable income. Gross income includes all realized income that taxpayers are not allowed to exclude from gross income or are not permitted to defer to a later year. Consequently, gross income is the income that taxpayers actually report on their tax returns and pay taxes on. In the tax formula, taxable income is gross income minus allowable deductions for and from AGI. Taxable income is the base used to compute the tax due before applicable credits. However, any income included in gross income can be considered “taxable” income because gross income is income that is taxable and causes an increase in the taxes that a taxpayer is required to pay (gross income increases taxable income).

2.

[LO 1] Are taxpayers required to include all realized income in gross income? Explain. No. Taxpayers are allowed to permanently exclude certain types of income from gross income or defer certain types of income from taxation (gross income) until a subsequent tax year. Consequently, taxpayers are not required to include all realized income in gross income.

3.

[LO 1] All else being equal, should taxpayers prefer to exclude income or defer it? Why? Taxpayers should prefer to exclude income rather than defer income. When they exclude income they are never taxed on the income. When they defer income, they are still taxed on the income, but they are taxed in a subsequent tax year.

4.

[LO 1] Why should a taxpayer be interested in the character of income received? A taxpayer should be interested in the character of income received because the character of the income determines the rate at which the income will be taxed. Tax exempt and tax deferred income is not taxed in the current year. Ordinary income is taxed at the rates provided in the tax rate schedule. Qualified dividend income and longterm capital gains are generally taxed at a maximum 15% rate.

5.

[LO 1] Is it easier to describe what a capital asset is or what it is not? Explain. It is easier to describe what a capital asset is not. In general, a capital asset is any asset other than



Accounts receivable from the sale of goods or services.

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 

Inventory and other assets held for sale in the ordinary course of business. Assets used in a trade or business, including supplies.

Thus any asset used for investment or personal purposes is considered to be a capital asset. 6. [LO 1] Are all capital gains (gains on the sale or disposition of capital assets) taxed at the same rate? Explain. No. If a taxpayer holds a capital asset for a year or less the gain is taxed at ordinary tax rates. If the taxpayer holds the asset for more than a year before selling, the gain is generally taxed at a maximum 15% rate but could be taxed as high as 20% for high income taxpayers. If the taxpayer sells more than one capital asset during the year and recognizes both capital gains and capital losses, the gains and losses are netted together before determining the applicable tax rate. 7. [LO 1] Are taxpayers allowed to deduct net capital losses (capital losses in excess of capital gains)? Explain. In general, a taxpayer is allowed to deduct, as a “for AGI deduction,” up to $3,000 of net capital loss against ordinary income. If the net capital loss exceeds $3,000, the taxpayer is allowed to carry the loss over indefinitely to deduct in subsequent years (subject to the $3,000 annual deduction limitation). If however, a capital loss arises from the sale of a personal use asset (such as a personal automobile or a personal residence), the loss is not deductible. 8.

[LO 1] Compare and contrast for and from AGI deductions. Why are for AGI deductions likely more valuable to taxpayers than from AGI deductions? All deductions are classified as either “for AGI” or “from AGI” deductions. Gross income minus “for AGI deductions” equals AGI. AGI minus “from AGI deductions” equals taxable income. “For AGI deductions” are often referred to as deductions above the line, while deductions from AGI are referred to as deductions below the line. The line is AGI (the last line on the front page of the individual tax return). Though both types of deductions may reduce a taxpayer’s taxable income, “for AGI” deductions are generally more valuable to taxpayers because they reduce AGI which may allow taxpayers to deduct more of their from AGI deductions (and other tax benefits) that are subject to AGI limitations. “From AGI deductions” don’t affect AGI.

9.

[LO 1] What is the difference between gross income and adjusted gross income, and what is the difference between adjusted gross income and taxable income? Gross income is more inclusive than is adjusted gross income (AGI). Gross income is all income from whatever source derived that is not excluded or deferred from income. AGI is gross income minus “for AGI” deductions. So the primary difference between gross income and AGI is the amount of “for AGI deductions.” Adjusted gross income is more inclusive than taxable income. AGI is gross income minus “for AGI” deductions. Taxable income is AGI minus “from AGI”



deductions. Consequently, the difference between AGI and taxable income is the amount of “from AGI” deductions. 10.

[LO 1] How do taxpayers determine whether they should deduct their itemized deductions or utilize the standard deduction? Taxpayers generally deduct the greater of (1) the applicable standard deduction or (2) their total itemized deductions, after limitations. However, taxpayers that do not want to bother with tracking itemized deductions may choose to deduct the standard deduction, even when itemized deductions may exceed the standard deduction.

11.

[LO 1]. Why are some deductions called “above-the-line” deductions and others are called “below-the-line” deductions? What is the “line”? The line is adjusted gross income (AGI). AGI is considered the line because of the significance it plays in the amount of deductions allowed from AGI. “For AGI” deductions are called above-the-line deductions because they are deducted in determining AGI. “From AGI” deductions are called below-the-line deductions because they are deducted after AGI has been determined. They are deducted from AGI to arrive at taxable income. Below-the-line deductions may be subject to limitations based on the taxpayer’s AGI.

12.

[LO 1] What is the difference between a tax deduction and a tax credit? Is one more beneficial than the other? Explain. A deduction generally reduces taxable income dollar for dollar (although from AGI deductions may not reduce taxable income dollar for dollar). This translates into a tax savings in the amount of the deduction times the marginal tax rate. In contrast, credits reduce a taxpayer’s taxes payable dollar for dollar. Thus, generally speaking, credits are more valuable than deductions.

13.

[LO 1] What types of federal income-based taxes, other than the regular income tax, might taxpayers be required to pay? In general terms, what is the tax base for each of these other taxes on income? In addition to the individual income tax, individuals may also be required to pay other income based taxes such as the alternative minimum tax (AMT) or self-employment taxes. These taxes are imposed on a tax base other than the individual’s taxable income. The AMT tax base is alternative minimum taxable income, which is the taxpayer’s taxable income adjusted for certain items to more closely reflect the taxpayer’s economic income than does taxable income The tax base for self-employment taxes is the net earnings derived from self-employment activities.

14.

[LO 1] Identify three ways taxpayers can pay their income taxes to the government. Taxpayers can pay taxes through (1) income taxes withheld from the taxpayer’s salary or wages by her employer, (2) estimated tax payments directly to the government, and (3) taxes the taxpayer overpaid in the previous year that the taxpayer elects to apply as an estimated payment for the current year.



15.

[LO 1] If a person is considered to be a qualifying child or qualifying relative of a taxpayer, is the taxpayer automatically entitled to claim a dependency exemption for the person? No, taxpayers may claim a dependency exemption for a qualifying child and/or a qualifying relative only if the qualifying child or relative is a citizen of the United States or a resident of the United States, Canada, or Mexico. Further, the qualifying child or qualifying relative must meet the joint tax return test if the person is married (no joint return with spouse unless there is no tax liability (positive taxable income) on the joint return and there would have been no tax liability on either separate tax return if the spouses had filed separately).

16.

[LO 2] Emily and Tony are recently married college students. Can Emily qualify as her parents’ dependent? Explain. Depending on the circumstances, Emily may qualify as a dependent of her parents. A taxpayer who files a joint return with his or her spouse may not qualify as a dependent of another, unless there is no tax liability on the couple's joint return and there would not have been any tax liability on either spouse’s tax return if they had filed separately. As long as Emily and Tony meet these criteria, then Emily will qualify as a dependent of her parents assuming she also meets tests to be her parents’ qualifying child or qualifying relative.

17.

Compare and contrast the relationship test requirements for a qualifying child with the relationship requirements for a qualifying relative. The relationship test for the qualifying child includes the taxpayer’s child or descendant of a child (child or grandchild) while the relationship test for qualifying relatives includes both descendants and ancestors of the taxpayer (child, grandchild, parents, or grandparent). The relationship test for the qualifying relative includes a descendant or ancestor of the taxpayer (child, grandchild, parent, or grandparent). The relationship test for qualifying child includes siblings of the taxpayer or descendants of siblings of the taxpayer while the qualifying relative test also includes siblings of the taxpayer and sons or daughters of the taxpayer’s siblings. The relationship test for qualifying relative also includes the taxpayer’s in laws, aunt, uncle, and any person (even if no blood relationship) who has the same principal place of abode as the taxpayer for the entire year. Thus, the relationship test for qualifying relative is much more broad in scope than the relationship test for qualifying child.

18.

[LO 2] In general terms, what are the differences in the rules for determining who is a qualifying child and who qualifies as a dependent as a qualifying relative? Is it possible for someone to be a qualifying child and a qualifying relative of the same taxpayer? Why or why not? The rules for determining who qualifies as a dependent as a qualifying child and who qualifies as a dependent as a qualifying relative overlap to some extent. The primary differences between the two are



(1) the relationship requirement is more inclusive for qualifying relatives than qualifying children, (2) qualifying children are subject to age restrictions while qualifying relatives are not, (3) qualifying relatives are subject to a gross income restriction while qualifying children are not, and (4) taxpayers need not provide more than half a qualifying child’s support, though the child cannot provide more than half of his/her own support, but, absent a multiple support agreement, taxpayers must provide more than half the support of a qualifying relative. (5) qualifying children are subject to a residence test (they must live with the taxpayer for more than half the year) while qualifying relatives are not. An individual may not be a qualifying child and a qualifying relative of the same taxpayer. By definition, a qualifying relative must be someone who is not a qualifying child. Consequently, the qualifying relative tests apply only when the individual does not pass the qualifying child tests. 19.

[LO 2] How do two taxpayers determine who has priority to claim the dependency exemption for a qualifying child of both taxpayers when neither taxpayer is a parent of the child (assume the child does not qualify as a qualifying child for either parent)? How do parents determine who gets to deduct the dependency exemption for a qualifying child of both parents when the parents are divorced or file separate returns? The priority in claiming a qualifying child is as follows: (1) The parent of the child. (2) If both parents qualify, then the parent with whom the child has resided with the longest during the year. (3) If the child resides with the parents equally or the child resides with taxpayers who are not parents (the child is not a qualifying child of a parent), then the taxpayer with the highest AGI. In the case of divorced parents or parents filing separately, the parent with whom the child has resided with the longest during the year has priority for the exemption (the custodial parent). However, the custodial parent can release the exemption to the noncustodial parent through a written declaration. The noncustodial parent attaches the declaration to his or her tax return. If the child resides an equal time with each parent (as would likely be the case if the married couple was filing separately), the parent with the higher AGI has priority.

20.

[LO 2] Isabella provides 30% of the support for her father Hastings who lives in an apartment by himself and has no gross income. Is it possible for Isabella to claim a dependency exemption for her father? Explain. Because her father meets the relationship and gross income test for a qualifying relative, the support test is the only obstacle for Isabella to claim a dependency exemption for her father. The basic support test requires that Isabella must have provided more than half



of the support for her father in order to claim a dependency exemption for him. Because Isabella provides only 30% of her father’s support, she does not meet the basic test. However, Isabella could potentially qualify to claim a dependency exemption for her father under a multiple support agreement. For Isabella to qualify, the following requirements must be met: 1. No other taxpayer paid over half of her father’s support. 2. Isabella and at least one other person provided more than half the support of her father, and Isabella and the other person or persons would have been allowed to claim an exemption for Hastings except for the fact that neither met the support test. 3. Isabella provided over 10% of her father’s support (she provided 30%). 4. The other person or persons who provided more than 10% of Hastings’ support must provide a signed statement to Isabella agreeing not to claim Hastings as a dependent. Isabella would include the names, addresses, and social security numbers of each other person on a Form 2120- which she would include with her tax return for the year. 21.

[LO 3] What requirements do an abandoned spouse and qualifying widow or widower have in common? Taxpayers qualifying as an abandoned spouse are treated as not married at the end of the year and may therefore qualify for the head of household filing status. The requirements for both abandoned spouse and qualifying widow or widower require that the taxpayer no longer be living with his or her spouse at year end, whether through death (for qualifying widow or widower) or by separation (for at least 6 months for abandoned spouse). Further, both require that the taxpayer has a dependent child who resides with the taxpayer. The qualifying widow status requires that the dependent child live with the taxpayer for the entire year. The abandoned spouse status requires that the dependent child live with the taxpayer for more than half the year. Furthermore, for qualifying widow status, the dependent child must be a child or stepchild (including an adopted child but not a foster child) for whom the taxpayer can claim a dependency exemption. For abandoned spouse/head of household purposes, the dependent child must be a child, stepchild (including an adopted child), or a foster child.

22.

[LO 3] True or False. For purposes of determining head of household filing status, the taxpayer’s mother or father is considered to be a qualifying person of the taxpayer (even if the mother or father does not qualify as the taxpayer’s dependent) as long as the taxpayer pays more than half the costs of maintaining the household of the mother or father. Explain. False. The taxpayer must be able to claim a dependency exemption of his or her father or mother in order for the father or mother to be a qualifying person for purposes of determining head of household filing status.



23.

[LO 3] Is a qualifying relative always a qualifying person for purposes of determining head of household filing status? No. A qualifying relative who meets the relationship test only because the individual lived as a member of the taxpayer’s household for the entire year (no qualifying family relationship) is not a qualifying person for head of household filing status purposes.

24.

[LO 3] For tax purposes, why is the married filing jointly tax status generally preferable to the married filing separately filing status? Why might a married taxpayer prefer not to file a joint return with the taxpayer’s spouse? Married couples filing joint returns combine their income and deductions and agree to share joint and several liability for the resulting tax. Filing a joint return generally results in a lower tax liability than does filing separately due to more favorable tax rate schedules and higher phase-out thresholds for various tax benefits. However, a couple may prefer to file separate returns in certain circumstances for nontax reasons. For example, when a married couple is separated but the couple does not want to have anything to do with each other or when one spouse does not want to be liable for the tax liability of both parties, the couple may choose to file separately.

25.

[LO 3] What does it mean to say that a married couple filing a joint tax return has joint and several liability for the taxes associated with the return? Each spouse is liable for the full amount of taxes owed on a joint return, regardless of which spouse earned the associated income.



Problems 26. [LO 1] Jeremy earned $100,000 in salary and $6,000 in interest income during the year. Jeremy has two qualifying dependent children who live with him. He qualifies to file as head of household and has $17,000 in itemized deductions. Neither of his dependents qualifies for the child tax credit. a. Use the 2013 tax rate schedules to determine Jeremy’s taxes due. Jeremy will owe $13,827.50 calculated as follows: Description (1) Gross income

Amount 106,000

Computation $100,000 salary + $6,000 interest income

(2) For AGI deductions (3) Adjusted gross income (4) Standard deduction (5) Itemized deductions (6) Greater of standard deductions or itemized deductions (7) Personal and dependency

0 $106,000 8,950 17,000 17,000 11,700

(1) – (2) Head of household (5) > (4) 3,900 × 3 (personal

exemptions

exemption and two

(8) Taxable income Income tax liability

$77,300 $13,827.5

dependency exemptions) (3) - (6)- (7) (77,300 – 48,600) × 25%

0

+ $6,652.50 (see tax rate schedule for head of household)



b. Assume that in addition to the original facts, Jeremy has a long-term capital gain of $4,000. What is Jeremy’s tax liability including the tax on the capital gain (use the tax rate schedules rather than the tax tables)? Jeremy will owe $14,427.50 calculated as follows: Description (1) Gross income

Amount 110,000

Computation $100,000 salary + $6,000 interest income + 4,000 long-term capital gains

(2) For AGI deductions (3) Adjusted gross income (4) Standard deduction (5) Itemized deductions (6) Greater of standard

0 $110,000 8,950 17,000 17,000

(1) – (2) Head of household (5) > (4)

deductions or itemized deductions (7) Personal and dependency exemptions (8) Taxable income Income tax liability

11,700 $81,300 $14,427.5

3,900 × 3 (personal exemption and two dependency exemptions) (3) – (6) – (7) ($77,300 – 48,600) × 25% + 6,652.5 + 4,000 × 15% (See tax rate schedule for head of household. Also note that the qualified dividend is taxed at a maximum rate of 15%.)

c. Assume the original facts except that Jeremy had only $7,000 in itemized deductions. What is Jeremy’s total income tax liability (use the tax rate schedules rather than the tax tables)?



Jeremy will owe $15,840, calculated as follows: Description (1) Gross income

Amount 106,000

Computation $100,000 salary + $6,000 interest income

(2) For AGI deductions (3) Adjusted gross income (4) Standard deduction (5) Itemized deductions (6) Greater of standard deductions or itemized deductions (7) Personal and dependency

0 $106,000 8,950 7,000 8,950 11,700

(1) – (2) Head of household (4) > (5) 3,900 × 3 (personal

exemptions

exemption and two

(8) Taxable income Income tax liability

dependency exemptions) (3) – (6) – (7) (85,350– 48,600) × 25% +

$85,350 $15,840

6,652.5 (see tax rate schedule for head of household) 27. [LO 1] David and Lilly Fernandez have determined their tax liability on their joint tax return to be $1,700. They have made prepayments of $1,500 and also have a child tax credit of $1,000. What is the amount of their tax refund or taxes due?



David and Lilly will receive a tax refund of $800 calculated as follows: Description (1) Total tax (2) Child tax credit (3) Prepayments Tax (refund)

Amount $1,700 1,000 1,500 ($800)

Computation

(1) – (2) – (3)

Prepayments are fully refundable when payments exceed the taxes after credits because the refundable amount is essentially an overpayment of taxes. 28.

[LO 1] {Planning} Rick, who is single, has been offered a position as a city landscape consultant. The position pays $125,000 in cash wages. Assume Rick files single and is entitled to one personal exemption. Rick deducts the standard deduction instead of itemized deductions a.

What is the amount of Rick’s after-tax compensation (ignore payroll taxes)?

Rick’s after-tax compensation is $99,506.75 calculated as follows: Description (1) Gross income (2) For AGI deductions (3) Adjusted gross income (4) Standard deduction (5) Personal and dependency exemptions (6) Taxable income (7) Income tax liability

Amount 125,000 0 $125,000 6,100 3,900 $115,000 $25,493.25

Computation (1) – (2) Single taxpayer 3,900 × 1 (personal exemption) (3) – (4) – (5) (115,000 – 87,850) × 28% + 17,891.25 (see tax rate

After-tax compensation

$99,506.75

schedule for Single individuals) (1) – (7)



b.

Suppose Rick receives a competing job offer of $120,000 in cash compensation and nontaxable (excluded) benefits worth $4,000. What is the amount of Rick’s after-tax compensation for the competing offer? Which job should he take if taxes were the only concern?

Rick’s after-tax compensation is $99,906.75 calculated as follows: Description (1) Gross income

Amount 120,000

Computation 120,000 cash compensation

(2) For AGI deductions (3) Adjusted gross income

0 $120,000

(1) – (2)

(4) Standard deduction

6,100

Single

(5) Personal and dependency exemptions

3,900

3,900 × 1 (personal

$110,000 $24,093.2

exemption) (3) – (4) – (5) (110,000 – 87,850) ×

5

28% + 17,891.25 (see

(6) Taxable income (7) Income tax liability

tax rate schedule for After-tax compensation

$99,906.7

single individuals) (1) – (7) + $4,000

5

excluded benefits

Note that Rick’s after-tax benefit is higher with lower salary and more nontaxable benefits. Rick is likely to take the second option, particularly if he would have paid for the benefits had they not been provided to him as compensation.



29.

[LO 1] {Planning} Through November, Tex has received gross income of $120,000. For December, Tex is considering whether to accept one more work engagement for the year. Engagement 1 will generate $7,000 of revenue at a cost of $4,000, which is deductible for AGI. In contrast, engagement 2 will generate $7,000 of revenue at a cost of $3,000, which is deductible as an itemized deduction. Tex files as a single taxpayer.

a. Calculate Tex’s taxable income assuming he chooses engagement 1 and assuming he chooses engagement 2. Assume he has no itemized deductions other than those generated by engagement 2. Description

Engagement 1

Engagement 2

(1) Gross income before new work engagement

$120,000

$120,000

(2) Income from engagement

7,000

7,000

(3) Additional for AGI deduction (4) Adjusted gross income

(4,000)

Computation

0

$123,000

$127,000

(1) + (2) + (3)

(5) Greater of itemized deductions or standard deduction

(6,100)

(6,100)

$3,000 itemized deductions for engagement 2

(6) Personal exemption

(3,900)

(3,900)

$113,000

$117,000

Taxable income

(4) + (5) + (6)

b. Calculate Tex’s taxable income assuming he chooses engagement 1 and assuming he chooses engagement 2. Assume he has $4,500 of itemized deductions other than those generated by engagement 2.



Description

Engagement 1

Engagement 2


$120,000

$120,000

7,000

7,000

(2) Income from engagement (3) Additional for AGI deduction (4) Adjusted gross income

(4,000)

0

$123,000

$127,000

(5) Greater of itemized deductions or standard deduction

(6,100)

(7,500)


(3,900)

(3,900)

$113,000

$115,600

Taxable income

Computation

(1) + (2) + (3) $3,000 + 4,500 for engagement 2 (4) + (5) + (6)

c. Calculate Tex’s taxable income assuming he chooses engagement 1 and assuming he chooses engagement 2. Assume he has $7,000 of itemized deductions other than those generated by engagement 2. Description

Engagement 1

Engagement 2


$120,000

$120,000

7,000

7,000

(2) Income from engagement (3) Additional for AGI deduction (4) Adjusted gross income

(4,000)

Computation

0

$123,000

$127,000

(1) + (2) + (3)

(5) Greater of itemized deductions or standard deduction of $6,100

(7,000)

(10,000)

$7,000 + $3,000* *engagement 2 only


(3,900)

(3,900)

$112,100

$113,100

Taxable income

(4) + (5) + (6)



30.

[LO 1] {Planning} Matteo, who is single and has no dependents, was planning on spending the weekend repairing his car. On Friday, Matteo’s employer called and offered him $500 in overtime pay if he would agree to work over the weekend. Matteo could get his car repaired over the weekend at Autofix for $400. If Matteo works over the weekend, he will have to pay the $400 to have his car repaired, but he will earn $500. Assume Matteo pays tax at a flat 15 percent rate? a. Strictly considering tax factors, should Matteo work or repair his car if the $400 he must pay to have his car fixed is not deductible? If Matteo works, he will receive $500, but he will have to pay $75 in taxes ($500 x 15%), netting him $425. He then must pay $400 for his car to be repaired which means he will save $25 ($425 – 400) by working. If he doesn’t work, he won’t have any income, he won’t pay any taxes, and he won’t have to pay to have his car repaired. Overall, he would be $25 better off by working. Note that taxes may not be the only concern here. Matteo would also need to factor in how much he enjoys repairing his car and how much he enjoys working. He could also consider whether he will do a better job repairing his car or whether Autofix could do a better job

b. Strictly considering tax factors, should Matteo work or repair his car if the $400 he must pay to have his car fixed is deductible for AGI? If Matteo works, he will receive $500, and he will be allowed to deduct the $400 repair expense, leaving him with taxable income of $100 ($500 – 400) on which he will pay $15 in taxes. So, if he works, he will receive $500, pay $400 to have his car fixed, and pay $15 in taxes, leaving him with $85. If he doesn’t work, he won’t have any income, he won’t pay any taxes, and he won’t be out of pocket because he will do his own repair work (assuming the repair only requires labor). So, he’s $85 better off by working and having his car repaired by Autofix. Note that taxes may not be the only concern here. Matteo would also need to factor in how much he enjoys repairing his car and how much he enjoys working. He could also consider whether he will do a better job repairing his car or whether Autofix could do a better job.



31.

[LO 1, 2] Rank the following three single taxpayers in order of the magnitude of taxable income (from lowest to highest) and explain your results. Gross Income Deductions For AGI Itemized Deductions

Ahmed

Baker

Chin

$ 80,000 8,000 0

$ 80,000 4,000 4,000

$ 80,000 0 8,000

Chin has the highest taxable income, followed by Baker and then Ahmed. Chin’s taxable income is highest because he had no for AGI deductions, and Ahmed has the lowest because he had the most for AGI deductions. Baker did not benefit from the itemized deductions because they did not exceed the standard deduction. Chin only benefited from the itemized deductions to the extent the deductions exceeded the standard deduction. See the following analysis: Description (1) Gross income (2) For AGI deductions (3) Adjusted gross income (4) Standard deduction (5) Itemized deductions (6) Greater of standard

Ahmed $80,000 (8,000) $72,000 (6,100) 0 (6,100)

Baker $80,000 (4,000) $76,000 (6,100) (4,000) (6,100)

Chin $80,000 0 $80,000 (6,100) (8,000) (8,000)

Computation (1)+ (2) Single taxpayer Ahmed: (4) > (5)

deductions or itemized

Baker: (4) > (5)

deductions (7) Personal and dependency

Chin: (5) > (4) 3,900 × 1

(3,900)

(3,900)

(3,900)

exemptions Taxable income 32.

(personal $62,000

$66,000

$68,100

exemption) (3) + (6)+ (7)

[LO 2] Aishwarya’s husband passed away in 2012. She needs to determine whether Jasmine, her 17-year old step-daughter who is single, qualifies as her dependent in 2013. Jasmine is a resident but not a citizen of the United States. She lived in Aishwarya’s home from June 15 through December 31, 2013. Aishwarya provided more than half of Jasmine’s support for the 2013.



a. Is Aishwarya allowed to claim a dependency exemption for Jasmine for 2013? Yes, Aishwarya may claim a dependency exemption for Jasmine in 2013. Jasmine meets the citizenship/residency test because she is a resident of the United States, and she meets the requirements to be considered Aishwarya’s qualifying child as follows: Test Relationship Age Residence Support

Jasmine Yes, stepdaughter qualifies Jasmine is under 19 at the end of the year Jasmine had the same principal residence as Aishwarya for more than half the year Jasmine does not provide more than half her own support.

b. Would Aishwarya be allowed to claim a dependency exemption for Jasmine for 2013 if Aishwarya provided more than half of Jasmine’s support in 2013, Jasmine lived in Aishwarya’s home from July 15 through December 31 of 2013, and Jasmine reported gross income of $5,000 in 2013? No. Jasmine would fail the qualifying child test because she did not have the same principal residence as Aishwarya for more than half the year. Jasmine would fail the qualifying relative test because her gross income exceeds the $3,900 personal exemption amount for 2013. c. Would Aishwarya be allowed to claim a dependency exemption for Jasmine for 2013 if Aishwarya provided more than half of Jasmine’s support in 2013, Jasmine lived in Aishwarya’s home from July 15 through December 31 of 2013, and Jasmine reported gross income of $2,500 in 2013? Yes, Jasmine would qualify as Aishwarya’s qualifying relative as follows:

Test Relationship Support Gross income

33.

Jasmine Yes, stepdaughter qualifies Aishwarya provided more than half of Jasmine’s support Jasmine’s gross income does not exceed the dependency exemption amount.

[LO 2] The Samsons are trying to determine whether they can claim their 22-year-old adopted son, Jason, as a dependent. Jason is currently a full-time student at an out-ofstate university. Jason lived in his parents’ home for three months of the year, and he was away at school for the rest of the year. He received $9,500 in scholarships this year for his outstanding academic performance and earned $4,800of income working a part-time 4-17

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job during the year. The Samsons paid a total of $5,000to support Jason while he was away at college. Jason used the scholarship, the earnings from the part-time job, and the money from the Samsons as his only sources of support. a. Can the Samsons claim Jason as their dependent? Yes, the Samsons may claim Jason as their dependent. He is their qualifying child. See the following analysis. Test Relationship Age Residence Support

Jason Yes, adopted son qualifies Yes, under age 24 and a full-time student (and younger than parents). Yes, temporary absences away at school count as time in the parents’ home. Yes. The Samsons provided $5,000 of support for Jason. Jason provided $4,800 of his own support (Jason did not provide more than half his own support). Jason also received $9,500 of scholarship money, but this does not count as support provided for himself because he is an actual child of the Samsons.

b. Assume the original facts except that Jason’s grandparents, not the Samsons, provided him with the $5,000 worth of support. Can the Samsons (Jason’s parents) claim Jason as their dependent? Why or why not? Yes, the Samsons may claim Jason as their dependent. Jason is their qualifying child. See the following analysis.

Test Relationship Age Residence Support

Jason Yes, Jason is their (adopted) son. Yes, under age 24 and a full-time student (and younger than his parents). Yes, temporary absences away at school count as time in the parents’ home. Yes, even though Jason’s parents did not provide any of his support, Jason did not provide more than half of his own support because his grandparents provided $5,000 of support for Jason. Jason provided $4,800 of his own support. Jason also received $9,500 of scholarship money, but this does not count as support provided for himself because he is an actual child of the Samsons, who are claiming him as a dependent.



c. Assume the original facts except substitute Jason’s grandparents for his parents. Determine whether Jason’s grandparents can claim Jason as a dependent. No, the grandparents may not claim Jason as a dependent. He is neither a qualifying child nor a qualifying relative. Test Relationship Age Residence Support

Jason Yes, Jason is the descendant of the taxpayers’ child (one of Jason’s parents is the child of the taxpayer’s grandparents) Yes, under age 24 and a full-time student (and younger than his grandparents). Yes, temporary absences away at school count as time in the grandparents’ home since that is his permanent residence. No, Jason’s grandparents provided $5,000 of support. Jason provided $4,800 of his own support through his part time job. He also provided $9,500 of his own support through a scholarship. In this case, because the taxpayers are not Jason’s parents, the $9,500 scholarship counts as support provided by Jason. So, he provides more than half his own support, and he does not meet the support test to qualify as a qualifying child of his grandparents. Because the grandparents did not provide more than half of Jason’s support, Jason would not qualify as a qualifying relative either.

d. Assume the original facts except that Jason earned $5,500 while working part-time and used this amount for his support. Can the Samsons claim Jason as their dependent? Why or why not?



No, the Samsons may not claim Jason as their dependent. He is neither their qualifying child nor their qualifying relative. See the following analysis. Test Relationship Age Residence Support

34.

Jason Yes, adopted son qualifies Yes, under age 24 and a full-time student (and younger than his parents). Yes, temporary absences away at school count as time in the parents’ home. No, the Samsons provided $5,000 of support for Jason. Jason provided $5,500 of his own support. Jason also received $9,500 of scholarship money, but this does not count as support provided for himself because he is an actual child of the Samsons. Nevertheless, because Jason provided more than half of his own support, he is neither a qualifying child nor a qualifying relative to his parents. Jason could also not be a qualifying relative because his income of $5,500 was greater than the personal exemption amount.

[LO 2] John and Tara Smith are married and have lived in the same home for over 20 years. John’s uncle Tim, who is 64 years old, has lived with the Smiths since March of this year. Tim is searching for employment but has been unable to find any—his gross income for the year is $2,000. Tim used all $2,000 toward his own support. The Smiths provided the rest of Tim’s support by providing him with lodging valued at $5,000 and food valued at $2,200. a. Are the Smiths able to claim a dependency exemption for Tim?

Yes. The Smiths may claim Tim as a dependent as a qualifying relative as analyzed below Test Relationship Age Residence Support Gross income

Tim Yes, Tim meets qualifying relative test. Not applicable to qualifying relative Not applicable to qualifying relative Yes. The Smiths provided more than half of Tim’s support ($7,200/$9,200). Yes, Tim’s gross income is less than the exemption amount.

b. Assume the original facts except that Tim earned $10,000 and used all the funds for his own support. Are the Smiths able to claim Tim as a dependent? No. The Smiths may not claim Tim as a dependent because he is not a qualifying relative as analyzed below. 4-20 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.


Test Relationship Age Residence Support Gross income

Tim Yes, Tim meets qualifying relative test. Not applicable to qualifying relative Not applicable to qualifying relative No, the Smiths did not provide more than half of Tim’s support ($7,200/$17,200). No, Tim’s gross income ($10,000) is more than the exemption amount.

c. Assume the original facts except that Tim is a friend of the family and not John’s uncle. No. The Smiths may not claim Tim as a dependent because he is not a qualifying relative as analyzed below.


Tim No. No family relationship, and Tim did not live with the Smiths for the entire year. Not applicable to qualifying relative Not applicable to qualifying relative Yes, the Smiths provided more than half of Tim’s support ($7,200/$9,200). Yes, Tim’s gross income is less than the exemption amount.

d. Assume the original facts except that Tim is a friend of the family and not John’s uncle and Tim lived with the Smiths for the entire year. Yes. The Smiths may claim Tim as a dependent because he is a qualifying relative as analyzed below. Test Relationship Age Residence Support Gross income

Tim Yes. Tim is not related, but he lived with the Smiths for the entire year. Not applicable to qualifying relative Not applicable to qualifying relative Yes. The Smiths provided more than half of Tim’s support ($7,200/$9,200). Yes, Tim’s gross income is less than the exemption amount.



35. [LO 2] Francine’s mother Donna and her father Darren separated and divorced in September of this year. Francine lived with both parents until the separation. Francine does not provide more than half of her own support. Francine is 15 years old at the end of the year. a. Is Francine a qualifying child to Donna? Yes, see analysis below. Test Relationship Age Residence Support

Francine Yes, Francine is Donna’s daughter. Yes, under age 19 at end of year (and younger than Donna) Yes, Francine lived with Donna for more than half the year. Yes, Francine does not provide more than half her own support.

b. Is Francine a qualifying child to Darren? Yes, see analysis below. Test Relationship Age Residence Support

Francine Yes, Francine is Darren’s daughter. Yes, under age 19 at end of year (and younger than Darren) Yes, Francine lived with Darren for more than half the year. Yes, Francine does not provide more than half her own support..

c. Assume Francine spends more time living with Darren than Donna after the separation. Who may claim Francine as a dependency exemption for tax purposes? Darren. When a child is a qualifying child of both parents, the parent with whom the child resides for the longest period of time during the year is entitled to claim the exemption. In this case, because Francine lived with Darren longer than she lived with Donna, Darren is entitled to the exemption. However, Darren could release the exemption to Donna under the divorce agreement. d. Assume Francine spends an equal number of days with her mother and her father and that Donna has AGI of $52,000 and Darren has AGI of $50,000. Who may claim a dependency exemption for Francine? Donna. Because Francine lived with Donna and Darren an equal amount of time during the year, the tiebreaker on who may claim the exemption for Francine is based on each taxpayer’s AGI. In this case Donna’s AGI is higher than Darren’s so she is entitled to the exemption deduction. However, Donna could release the exemption to Darren.



36.

[LO 2] Jamel and Jennifer have been married 30 years and have filed a joint return every year of their marriage. Their three daughters, Jade, Lindsay, and Abbi, are ages 12, 17, and 22 respectively and all live at home. None of the daughters provide more than half of her own support. Abbi is a full-time student at a local university and does not have any gross income.

a. How many personal and dependency exemptions are Jamel and Jennifer allowed to claim? Jamel and Jennifer may claim five exemptions in total. Two personal exemptions for themselves and three exemptions for their daughters who all qualify as their qualifying children as analyzed below. Test Relationship Age

Jade Yes, daughter Yes, under age 19 at end of year (and younger than parents)

Lindsay Yes, daughter Yes, under age 19 at end of year (and younger than parents)

Residence

Yes, lived at home entire year Yes, did not provide more than half of own support

Yes, lived at home entire year Yes, did not provide more than half of own support

Support

Abbi Yes, daughter Yes, under age 24 at end of year and a full-time student (and younger than parents). Yes, lived at home entire year Yes, did not provide more than half of own support

b. Assume the original facts except that Abbi is married. She and her husband live with Jamel and Jennifer while attending school and they file a joint return. Abbi and her husband reported a $1,000 tax liability on their tax return. If all parties are willing, can Jamel and Jennifer claim Abbi as a dependent on their tax return? Why or why not? No, Jamel and Jennifer may not claim Abbi as a dependent because she filed a joint return with her husband, and they reported a tax liability on their joint return. c. Assume the same facts as part b. except that Abbi and her husband report a $0 tax liability on their joint tax return. Also, if the couple had filed separately, Abbi would have not had a tax liability on her return, but her husband would have had a $250 tax liability on his separate return. Can Jamel and Jennifer claim Abbi as a dependent on their tax return? Why or why not?



No. Jamel and Jennifer may not claim Abbi as a dependent even though she is their qualifying child because she fails the joint return test. Even though the couple had no tax liability on their joint return and Abbi would not have had a tax liability on a separate return, because Abbi’s husband would have reported a tax liability on his separate return, Jamel and Jennifer may not claim her as a dependent. d. Assume the original facts except that Abbi is married. Abbi files a separate tax return. Abbi’s husband files a separate tax return and reports a $250 tax liability. Can Jamel and Jennifer claim Abbi as a dependent? Yes. Because Abbi files a separate return, and she meets all other dependency requirements (see answer to part a). Jamel and Jennifer may claim a dependency exemption for Abbi. 37.

[LO 2, 3] Dean Kastner is 78 years old and lives by himself in an apartment in Chicago. Dean’s gross income for the year is $2,500. Dean’s support is provided as follows: Himself (5%), his daughters Camille (25%) and Rachel (30%), his son Zander (5%), his friend Frankie (15%), and his niece Sharon (20%). a. Absent a multiple support agreement, of the parties mentioned in the problem, who may claim a dependency exemption for Dean as a qualifying relative? Because they do not provide over half of Dean’s support individually, neither Camille, Rachel, Zander, Frankie, nor Sharon is eligible to claim Dean as a dependent qualifying relative. In addition, Frankie fails the relationship test because he is unrelated to Dean, and he did not live with Dean for the entire year (he did not live with him at all during the year). b. Under a multiple support agreement, who is eligible to claim a dependency exemption for Dean as a qualifying relative? Explain. Camille, Rachel, and Sharon are eligible because of the following: 1. No one taxpayer paid over half the support for Dean. 2. Together, Camille, Rachel, Sharon, and Zander provided more than half of Dean’s support (80%) and Camille, Rachel, Sharon, and Zander would have each been able to claim a dependency exemption for Dean except for the fact that each did not meet the support test (Frankie fails the relationship test for qualifying relative) 3. Camille, Rachel, and Sharon each provided over 10% of Dean’s support. 4. Camille, Rachel, and Sharon can claim the exemption, but the two parties who do not claim it must provide a signed statement to the person claiming the exemption stating that she will not claim an exemption for Dean. The person claiming the exemption would attach a Form 2120 to her return indicating the names, addresses, and social security numbers of the two who did not claim Dean as a dependent.



c. Assume that Camille is allowed to claim Dean as a dependent under a multiple support agreement. Camille is single and Dean is her only dependent. What is Camille’s filing status? Camille must file as a single taxpayer. Because she claims Dean as a dependent under a multiple support agreement, Dean is not a qualifying person for purposes of determining head of household status for Camille. 38.

[LO 2] {Research} Mel and Cindy Gibson’s 12-year-old daughter Rachel was abducted on her way home from school on March 15, 2013. Police reports indicated that a stranger had physically dragged Rachel into a waiting car and sped away. Everyone hoped that the kidnapper and Rachel would be located quickly. However, as of the end of the year, Rachel was still missing. The police were still pursuing several promising leads and had every reason to believe that Rachel was still alive. In 2014, Rachel was returned safely to her parents.

a. Are the Gibsons allowed to claim an exemption deduction for Rachel in 2012 even though she only lived in the Gibson’s home for two and one half months? Explain and cite your authority. Yes, the Gibsons will be able to claim a dependency exemption for Rachel. IRC §152(f)(6) indicates that for purposes of determining whether a child is considered to be a qualifying child of the taxpayer, a child who is (1) presumed by law enforcement officers to have been kidnapped by someone who is not a member of the family of the child or the taxpayer, and (2) who had, for the taxable year in which the kidnapping occurred, the same principal place of abode as the taxpayer for more than half of the portion of the year before the date of the kidnapping shall be treated as meeting the residence test for a qualifying child under §152(c) (1)(B). Because Rachel did not provide more than half her own support for the year, she would qualify as a dependent of the Gibsons as their qualifying child. b. Assume the original facts except that Rachel is unrelated to the Gibsons, but she has been living with them since January 2008. The Gibsons have claimed a dependency exemption for Rachel for the years 2008 through 2012. Are the Gibsons allowed to claim a dependency exemption for Rachel in 2013? Explain and cite your authority. No. In this case, because Rachel does not meet the relationship test for a qualifying child, the special rule of §152(f)(6) does not apply. Rachel may only qualify as a dependent as a qualifying relative. However, because she is not related to the Gibsons under §152(d)(2), and she did not live with the Gibsons for the entire taxable year [§152(d)(2)(H)] she does not qualify as a qualifying relative of the Gibsons. So, they cannot claim her as a dependent.



39.

{LO 2} {Research} Bob Ryan filed his tax return and claimed a dependency exemption for his 16-year-old son Dylan. Both Bob and Dylan are citizens and residents of the United States. Dylan meets all the necessary requirements to be considered a qualifying child; however, when Bob filed the tax return he didn’t know Dylan’s Social Security number and, therefore, didn’t include an identifying number for his son on the tax return. Instead, Bob submitted an affidavit with his tax return stating he had requested Dylan’s Social Security number from Dylan’s birth state. Is Bob allowed to claim a dependency exemption for Dylan without including Dylan’s identifying number on the return?

No. IRC §151(e) states, “No exemption shall be allowed under this section with respect to any individual unless the TIN {tax identification number} of such individual is included on the return claiming the exemption.” A taxpayer may include an affidavit stating a request for an identifying number has been made in lieu of the actual identifying number, but only in situations where the number has been applied for for a foreign person or nonresident alien[Reg. §301.6109-1(c)]. Since Dylan is not a foreign person or a nonresident alien, Ryan is not allowed to claim a dependency exemption for Dylan. See also [2000-1 USTC ¶50,324] Thomas W. Furlow, Jr. v. United States of America, (CA-4) where the taxpayer was denied a dependency exemption for his son because he failed to provide the child’s social security number or taxpayer identification number even though the father attached an affidavit to the return in lieu of a tax identification number. 40.

[LO 2, 3] Kimberly is divorced and the custodial parent of a 3-year-old girl named Bailey. Kimberly and Bailey live with Kimberly’s parents, who pay all the costs of maintaining the household (such as mortgage, property taxes, and food). Kimberly pays for Bailey’s clothing, entertainment, and health-insurance costs. These costs comprised only a small part of the total costs of maintaining the household. Kimberly does not qualify as her parent’s dependent. a. Determine the appropriate filing status for Kimberly.

Single. To qualify as head of household, a taxpayer must pay more than half the costs of maintaining a household that is the principal place of abode for a dependent who is a qualifying child (or for maintaining a separate household for her mother or father if the mother or father also qualifies as a dependent of the taxpayer). Kimberly does not provide more than half the costs of maintaining the household where her children reside. Because she does not qualify as head of household, and she is not married, she must file as a single taxpayer. b. If Kimberly lived in her own home and provided all the costs of maintaining the household, what would her filing status be?



Head of household. She meets the requirement of paying for more than half (for more than half the taxable year) the costs of maintaining a household that is the principal place of abode for a dependent who is a qualifying child. c. Assume Kimberly qualifies as her parents’ dependent. How many personal and dependency exemptions may she claim on Kimberly’s tax return? Zero. Because Kimberly can be claimed as a dependent by another person, she is not allowed to claim a personal exemption for herself and she is not allowed to claim any dependency exemptions. 41.

(LO 2, 3) Lee is 30 years old and single. Lee paid all the costs of maintaining his household for the entire year. Determine Lee’s filing status in each of the following alternative situations: a. Lee is Ashton’s uncle. Ashton is 15 years old and has gross income of $5,000. Ashton lived in Lee’s home from April 1 through the end of the year b. Lee is Ashton’s uncle. Ashton is 20 years old, not a full-time student, and has gross income of $7,000. Ashton lived in Lee’s home from April 1 through the end of the year c. Lee is Ashton’s uncle. Ashton is 22 years old and was a full-time student from January through April. Ashton’s gross income was $5,000. Ashton lived in Lee’s home from April 1 through the end of the year d. Lee is Ashton’s cousin. Ashton is 18 years old, has gross income of $3,000, and is not a full-time student. Ashton lived in Lee’s home from April 1 through the end of the year e. Lee and Ashton are cousins. Ashton is 18 years old, has gross income of $3,000, and is not a full-time student. Ashton lived in Lee’s home for the entire year. a. Head of Household. Ashton is Lee’s qualifying child. Consequently Ashton is a qualifying person for determining head of household status for Lee. b. Single. Ashton does not qualify as Lee’s dependent, so he is not a qualifying person for determining head of household status for Lee. Ashton is not Lee’s qualifying child because Ashton is too old, and Ashton is not Lee’s qualifying relative because Ashton has too much gross income. c.

Single. Same as b. Ashton is too old to be Lee’s qualifying child because he was not a full-time student during five months of the year. Also, Ashton is not Lee’s qualifying dependent because he has too much gross income.



42.

d.

Single. Ashton is not a qualifying person for determining head of household status for Lee because he does not qualify as Lee’s dependent. Ashton does not have a qualifying family relationship with Lee for either qualifying child or qualifying relative.

e.

Single. Ashton is not a qualifying person for determining head of household status for Lee because even though he qualifies as Lee’s dependent, he does so only because he lived in Lee’s home for the entire year.

(LO 2, 3) Ray Albertson is 72 years old and lives by himself in an apartment in Salt Lake City. Ray’s gross income for the year is $3,000. Ray’s support is provided as follows: Himself (11%), his daughters Diane (20%) and Karen (15%), his sons Mike (20%) and Kenneth (10%), his friend Milt (14%), and his cousin Henry (12%). a. Absent a multiple support agreement, of the parties mentioned in the problem, who may claim a dependency exemption for Ray as a qualifying relative? No one. Because they individually do not provide over half of Ray’s support, Ray is not a qualifying relative of any of his children (Diane, Karen, Mike, and Kenneth). He is also not a qualifying relative of Milt or Henry because they fail the relationship test and support test for Ray. b. Under a multiple support agreement, who is eligible to claim a dependency exemption for Ray as a qualifying relative? Explain.

1. 2.

3. 4.

Diane, Karen, and Mike are eligible because of the following: No one taxpayer paid over half the support for Ray. Together, Diane, Karen, Mike, and Kenneth provided more than half of Ray’s support (65%) and Diane, Karen, Mike, and Kenneth would have each been able to claim a dependency exemption for Ray except for the fact that each did not meet the support test (Milt and Henry fail the relationship test for qualifying relative). Diane, Karen, and Mike each provided over 10% of Ray’s support. Diane, Karen, and Mike can claim the exemption, but the two parties who do not claim it must provide a signed statement to the person claiming the exemption stating that they will not claim an exemption for Ray. The person claiming the exemption would attach a Form 2120 to his or her tax return indicating the names, addresses, and social security numbers of the two who did not claim Ray as a dependent. c. Assume that under a multiple support agreement, Diane claims a dependency exemption for Ray. Diane is single with no other dependents. What is her filing status?



Single. Even though Diane can claim a dependency exemption for Ray, because Diane did not provide more than half of Ray’s support, Ray is not a qualifying person for purposes of determining head of household status for Diane. 43.

[LO 3] Juan and Bonita are married and have two dependent children living at home. This year, Juan is killed in an avalanche while skiing. a. What is Bonita’s filing status this year?

Married filing jointly. For tax purposes, the couple is still considered married for the year of the spouse’s death. b. Assuming Bonita doesn’t remarry and still has two dependent children living at home, what will her filing status be next year? Qualifying widow. See the analysis below. Qualifying widow test: Test Bonita Time Yes, within two years after the end of the year of the death of Juan Unmarried Yes, Bonita has remained unmarried. Dependents Yes, Bonita maintains a home for her two dependent children. c. Assuming Bonita doesn’t remarry and doesn’t have any dependents next year, what will her filing status be next year? Single. Because Bonita is not a qualifying widow and is not married, she must file as a single taxpayer. See the analysis below. Qualifying widow test: Test Bonita Time Yes, within two years after the end of the year of the death of Juan Unmarried Yes, Bonita has remained unmarried. Dependents No, Bonita does not maintain a home for any dependent children. 44. a.

[LO 3] Gary and Lakesha were married on December 31 last year. They are now preparing their taxes for the April 15 deadline and are unsure of their filing status. What filing status options do Gary and Lakesha have for last year?



To be married for filing status purposes, taxpayers must be married at the end of the year. Although Gary and Lakesha were married on the last day of the year, they are still considered married for the entire year for filing purposes. Gary and Lakesha may file as married filing jointly, or they may elect to file as married filing separately. b. Assume instead that Gary and Lakesha were married on January 1 of this year. What is their filing status for last year (neither has been married before and neither had any dependents last year)? Single. Gary and Lakesha were not married at the end of the year, therefore they must both file single. 45.

[LO 3] Elroy, who is single, has taken over the care of his mother Irene in her old age. Elroy pays the bills relating to Irene’s home. He also buys all her groceries and provides the rest of her support. Irene has no gross income.

a. What is Elroy’s filing status? Head of household. An unmarried taxpayer may qualify as head of household by paying more than half the costs of maintaining a separate household that is the principal place of abode for the taxpayer’s mother or father if the mother or father also qualifies as a dependent of the taxpayer. Elroy pays more than half the costs of maintaining Irene’s household. Furthermore, Irene qualifies as Elroy’s qualifying relative as follows: Test Relationship Age Residence Support Gross income b.

Irene Yes. Irene is Elroy’s mother. Not applicable to qualifying relative Not applicable to qualifying relative Yes. Elroy provides more than half of Irene’s support. Yes, Irene’s gross income is less than the exemption amount.

Assume the original facts except that Elroy has taken over the care of his grandmother, Renae, instead of his mother. What is Elroy’s filing status? Single. To qualify as head of household, an unmarried taxpayer must pay more than half the costs of keeping up a home for the year and must have lived with a qualifying person in the taxpayer’s home for more than half the year (unless the qualifying person is a mother or father and then special rules apply). Because Elroy did not live in the same home for more than half the year, Renae is not a qualifying person for purposes of determining whether Elroy qualifies as for the head of household filing status. Consequently, Elroy will file as a single taxpayer.



c.

Assume the original facts except that Elroy’s mother Irene lives with him and that she receives an annual $4,500 taxable distribution from her retirement account. Elroy still pays all the costs to maintain the household. What is his filing status? Single. Although Elroy provides more than half the cost of maintaining a household in which his mother lives, she does not qualify as his dependent. She is not Elroy’s child (and she is older than him) and thus cannot be a qualifying child. Further, she is not a qualifying relative, as analyzed below. Test Relationship Age Residence Support Gross income

46.

Irene Yes. Irene is Elroy’s mother. Not applicable to qualifying relative Not applicable to qualifying relative Yes. Elroy provided more than half of Irene’s support. No, Irene’s gross income of $4,500 is more than the exemption amount.

[LO 3] Kano and his wife Hoshi have been married for 10 years and have two children under the age of 12. The couple has been living apart for the last two years and both children live with Kano. Kano has provided all the means necessary to support himself and his children. Kano and Hoshi do not file a joint return. a. What is Kano’s filing status? Head of household. Kano provides more than half the cost of maintaining a home that is the principal place of abode for a qualifying child. His two children are qualifying children, as analyzed below.

Kano qualifies as an abandoned spouse, as analyzed below. Test Kano Married Yes, Kano is still married to Hoshi at the end of the year. Separate Return Yes, Kano files a separate return from Hoshi. Maintains Yes, Kano provides more than half the cost of maintaining his home Home for a qualifying child (see following table). Time Separated Yes, Kano has not lived with Hoshi for the last six months of the year.




Two Children Yes, Kano’s children. Yes, under age 19 at year end (and younger than Kano). Yes, both children lived with Kano for more than half of the year. Yes, Kano provides more than half of their support.

b. Assume the original facts except that Kano and Hoshi separated in May of the current year. What is Kano’s filing status? Head of household, determined as follows: Kano qualifies as an abandoned spouse, as analyzed below. Test Married Separate Return Maintains Home Time Separated

Kano Yes, Kano is still married to Hoshi at the end of the year. Yes, Kano files a separate return from Hoshi. Yes, Kano provides more than half the cost of maintaining his home for a qualifying child (see following table). Yes, Kano has not lived with Hoshi for the last six months of the year.

Kano’s two children are qualifying children, as shown below. Test Relationship Age Residence Support

Two Children Yes, Kano’s children. Yes, under age 19 at year end (and younger than Kano). Yes, both children lived with Kano for more than half of the year. Yes, Kano provides more than half of their support.

Because Kano qualifies as an abandoned spouse, he can be treated as though he was not married at the end of the year. This enables him to qualify for head of household status because he is considered unmarried, and he provides more than half the cost of maintaining a home which is the principal residence for a dependent qualifying child. c. Assume the original facts except that Kano and Hoshi separated in November of this year. What is Kano’s filing status?



Married filing separately. Kano does not qualify as head of household because he does not qualify as an abandoned spouse, analyzed as follows. Test Married Separate Return Maintains Home Time Separated

Kano Yes, Kano is still married to Hoshi at the end of the year. Yes, Kano files a separate return from Hoshi. Yes, Kano provides more than half the cost of maintaining his home for a qualifying child. No, Kano has not been separated from his spouse for the last six months of the year.

d. Assume the original facts except that Kano’s parents, not Kano, paid more than half of the cost of maintaining the home in which Kano and his children live. What is Kano’s filing status? Married filing separately. Kano does not meet the criteria for an abandoned spouse. Consequently, he is still considered married. See the analysis below for abandoned spouse requirements.

Test Married Separate Return Maintains Home Time Separated 47.

a.

Kano Yes, Kano is still married to Hoshi at the end of the year. Yes, Kano files a separate return from Hoshi. No, Kano does not provide more than half the cost of maintaining his home for a qualifying child. His parents provide this cost. Yes, Kano has not lived with Hoshi for the last six months of the year.

[LO 3] Horatio and Kelly were divorced at the end of last year. Neither Horatio nor Kelly remarried during the current year and Horatio moved out of state. Determine the filing status of Horatio and Kelly for the current year in the following independent situations:

Horatio and Kelly did not have any children and neither reported any dependents in the current year.

Horatio and Kelly will both file as single taxpayers. b.

Horatio and Kelly had one child Amy who turned 10 years of age in the current year. Amy lived with Kelly for all of the current year, and Kelly provided all of her support.



Horatio will file as a single taxpayer. Kelly will file as a head of household because during the current year she paid more than half the costs of maintaining a household for Amy (a qualified person), and Amy resided with her for more than half the taxable year. Amy is a qualified person because she is a qualifying child who qualifies as the taxpayer’s dependent (she meets the relationship, age, residence, and support test). c.

Assume the same facts as in b. but Kelly released the exemption for Amy to Horatio even though Amy did not reside with him at all during the current year. Horatio will file as a single taxpayer. Even though he is allowed to claim the exemption for Amy, she did not reside with him during the year, so he cannot meet the head of household test. Kelly will file as head of household because during the current year she paid more than half the costs of maintaining a household for Amy (a qualified person) and Amy resided with her for more than half the taxable year. Amy is a qualified person because Kelly is the custodial parent and she would have been able to claim an exemption for Amy as a qualifying child (she meets the relationship, age, residence, and support test) except for the fact that she released the dependency exemption to Horatio.

d.

Assume the original facts except that during the current year Madison a 17-year old friend of the family lived with Kelly (for the entire year) and was fully supported by Kelly. Horatio would file as single. Kelly would also file as single. Even though Kelly would be allowed to claim a dependency exemption for Madison as a qualifying relative, Madison is not a qualifying person for purposes of the head of household test because she only qualifies as a dependent to Kelly because she was a member of Kelly’s household for the entire year. Madison does not have a family relationship with Kelly.

e.

Assume the original facts except that during the current year Kelly’s mother Janet lived with Kelly. For the current year, Kelly was able to claim a dependency exemption for her mother under a multiple support agreement. Horatio would file as single. Kelly would also file as single. Even though Kelly may claim a dependency exemption for Janet, Janet is not a qualifying person for purposes of the head of household test because Janet qualifies as Kelly’s dependent under a multiple support agreement.



48.

a.

[LO 2, 3] In each of the following independent situations, determine the taxpayer’s filing status and the number of personal and dependency exemptions the taxpayer is allowed to claim.

Frank is single and supports his 17-year-old brother, Bill. Bill earned $3,000 and did not live with Frank. Single with two exemptions; one personal and one dependency exemption for Bill. Frank will file as single, not head of household. Bill is not a qualifying person for purposes of the head of household test because Bill did not live as member of Frank’s household for more than half the year. Frank can claim an exemption for Bill because Bill qualifies as Frank’s qualifying relative as follows: Test Relationship Age Residence Support Gross income

Bill Yes, Bill is taxpayer’s brother. Not applicable to qualifying relative Not applicable to qualifying relative Yes, more than half of Bill’s support is provided by Frank. Yes, Bill’s gross income ($3,000) is less than the exemption amount.



b.

Geneva and her spouse reside with their son, Steve, who is a 20-year-old undergraduate student at State University. Steve earned $13,100 at a part-time summer job, but he deposited this money in a savings account for graduate school. Geneva paid all of the $12,000 cost of supporting Steve. Married filing jointly with two personal exemptions and one dependency exemption for Steve. Steve meets the test to be Geneva and her husband’s qualifying child as follows: Test Relationship Age Residence Support

c.

Steve Yes, Steve is the taxpayers’ son. Yes, under age 24 and a full-time student (and younger than parents). Yes, temporary absences away at school count as time in the parents’ home Yes, even though the Steve earned $13,100, he did not use any of that money to provide for his support. Steve’s parents provided more than half (all, in fact) of his support for the year. A qualifying child is not subject to the gross income test.

Hamish’s spouse died last year, and Hamish has not remarried. Hamish supports his father Reggie, age 78, who lives in a nursing home and had interest income this year of $2,500. Head of household with two exemptions. Hamish is not a qualifying widower because he does not maintain a household for a dependent child. However, he does qualify for head of household because he is not married and he pays more than half the cost of maintaining a separate household that is the principal place of abode for his father, and his father also qualifies as his dependent (as a qualifying relative) as follows: Because Reggie is considered to be Hamish’s qualifying relative (and a qualifying person for Test Relationship Age Residence Support Gross income

Reggie Yes, Reggie is Hamish’s father. Not applicable to qualifying relative Not applicable to qualifying relative Yes, Hamish provides more than half of Reggie’s support. Yes, Reggie’s gross income of $2,500 is less than the exemption amount. purposes of the head of household filing status), Hamish may also claim a dependency exemption for Reggie.



d.

Irene is married but has not seen her spouse since February. She supports her spouse's 18-yearold child Dolores, who lives with Irene. Dolores earned $4,500 this year. Head of household with two exemptions. Irene qualifies for being treated as unmarried for the year (abandoned spouse) as follows: Test Married Separate Return Maintains Home Time Separated

Irene Yes, Irene is still married at the end of the year. Yes, Irene files a separate return from her spouse. Yes, Irene provides more than half the cost of maintaining a home for a qualifying child. Yes, Irene has not lived with her spouse for the last six months of the year.

Because she is treated as though she were unmarried, she may file as head of household because she pays more than half the costs (for more than half the taxable year) of maintaining a household that is the principal place of abode for a dependent who is her qualifying child. Dolores is Irene’s qualifying child, as determined below: Test Relationship Age Residence Support

Dolores Yes, Dolores is the taxpayers’ stepchild. Yes, under age 19 (and younger than Irene) Yes, Dolores lived with taxpayer for more than half of the year. Yes, Dolores did not provide more than half of her own support.

Irene may claim one personal exemption for herself and one dependency exemption for Dolores.

e. Assume the same facts as in part d. Also assume that Craig is Irene’s husband. Craig supports his 12-year-old son Ethan, who lives with Craig. Ethan did not earn any income. Head of household with two exemptions. Craig qualifies for being treated as unmarried (abandoned spouse rules) as follows: Test Married

Irene Yes, Craig is still married at the end of the year. 4-37



Separate Return Maintains Home Time Separated

Yes, Craig files a separate return from his spouse. Yes, Craig provides more than half the cost of maintaining a home for a qualifying child. Yes, Craig has not lived with his spouse for the last six months of the year.

Because he is treated as though she were unmarried, he may file as head of household because he pays more than half the costs (for more than half the taxable year) of maintaining a household that is the principal place of abode for a dependent who is his qualifying child. Ethan is Craig’s qualifying child, as determined below: Test Relationship Age Residence Support

Dolores Yes, Ethan is the taxpayers’ child. Yes, under age 19 (and younger than Craig) Yes, Ethan lived with taxpayer for more than half of the year. Yes, Ethan did not provide more than half of his own support.

Craig may claim one personal exemption for himself and one dependency exemption for Ethan. Note that both Irene in part d. and Craig may claim head of household filing status because they both qualify to be treated as unmarried for filing status purposes. 49.

a.

[LO 2, 3] In each of the following independent cases, determine the taxpayer’s filing status and the number of personal and dependency exemptions the taxpayer is allowed to claim.

Alexandra is a blind widow (spouse died five years ago) who provides a home for her 18-yearold nephew, Newt (Newt is Alexandra’s brother’s son). Newt’s parents are dead, and so Newt supports himself. Newt’s gross income is $5,000. Alexandra will file single with one personal exemption. Alexandra is single and does not qualify for head of household because she does not provide more than half the costs of maintaining a home for a dependent child or qualifying relative because Newt is neither a qualifying child (he provides more than half his own support) nor a qualifying relative. See the analysis below. Test Relationship Age Residence Support

Qualifying Child Test for Newt Yes, Newt is a descendant of Alexandra’s sibling. Yes, under age 19 (and younger than Alexandra) Yes, Newt lived with Alexandra for more than half of the year. No, Newt provides more than half his own support.




Qualifying Relative Test for Newt Yes, Newt is the taxpayer’s nephew. Not applicable to qualifying relative. Not applicable to qualifying relative. No, Alexandra does not provide more than half of Newt’s support. No. Newt’s gross income of $5,000 exceeds the exemption amount.

b. Bharati supports and maintains a home for her daughter, Daru, and son-in-law, Sam. Sam earned $15,000 and filed a joint return with Daru, who had no income. Single with one personal exemption. Bharati may not claim Daru and Sam as dependents because they file a joint return. Couples filing a joint return may still qualify as dependents if neither would have a tax liability if they had filed separately (Rev. Rul. 54-567 and Rev. Rul. 65-34). Sam would have had a tax liability if he had filed a separate return. Because Bharati does not have any dependents, Bharati does not qualify for head of household status. c.

Charlie intended to file a joint return with his spouse, Sally. However, Sally died in December. Charlie has not remarried. Married filing jointly with two personal exemptions. A taxpayer is still considered to be married for the year in which his spouse died. Because there are two taxpayers on a joint return, Charlie is allowed two personal exemptions [§152(b)].

d.

Deshi cannot convince his spouse to consent to signing a joint return. The couple has not separated. Married filing separately with one personal exemption. Both spouses must consent to file a joint return. e. Edith and her spouse support their 35-year-old son, Slim. Slim is a full-time college student who earned $5,500 over the summer in part-time work. Married filing jointly with two personal exemptions. They get one personal exemption each, but Slim does not qualify as their dependent. He is neither their qualifying child nor their qualifying relative. See the following analysis.



Test Relationship Age Residence Support Test Relationship Age Residence Support Gross income

50.

Slim—Qualifying child Yes, Slim is the taxpayers’ son. No, not under age 24 and attending school full-time. Yes, temporary absences away at school count as time in the parents’ home Yes, Slim did not provide more than half of his own support. Slim—Qualifying relative Yes, Slim is the taxpayer’s son. Not applicable to qualifying relative Not applicable to qualifying relative Yes, more than half of the Slim’s support is provided by the taxpayer. No, Slim’s gross income ($5,500) is more than the exemption amount.

[LO 3] Jasper and Crewella Dahvill were married in year 0. They filed joint tax returns in years 1 and 2. In year 3, their relationship was strained and Jasper insisted on filing a separate tax return. In year 4, the couple divorced. Both Jasper and Crewella filed single tax returns in year 4. In year 5, the IRS audited the couple’s joint year 2 tax return and each spouse’s separate year 3 tax returns. The IRS determined that the year 2 joint return and Crewella’s separate year 3 tax return understated Crewella’s self-employment income causing the joint return year 2 tax liability to be understated by $4,000 and Crewella’s year 3 separate return tax liability to be understated by $6,000. The IRS also assessed penalties and interest on both of these tax returns. Try as it might, the IRS has not been able to locate Crewella, but they have been able to find Jasper.

a. What amount of tax can the IRS require Jasper to pay for the Dahvill’s year 2 joint return? Explain. Because Jasper is jointly and severally liable for the year 2 return, he is responsible to pay the entire $4,000. b. What amount of tax can the IRS require Jasper to pay for Crewella’s year 3 separate tax return? Explain. Because they filed separately in year 3, Jasper is not responsible for any of the $6,000. 4-40 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.


51. {LO 3} {Research} Janice Traylor is single. She has an 18-year-old son named Marty. Marty is Janice’s only child. Marty has lived with Janice his entire life. However, Marty recently joined the Marines and was sent on a special assignment to Australia. During the current year, Marty spent nine months in Australia. Marty was extremely homesick while in Australia, since he had never lived away from home. However, Marty knew this assignment was only temporary, and he couldn’t wait to come home and find his room just the way he left it. Janice has always filed as head of household, and Marty has always been considered a qualifying child (and he continues to meet all the tests with the possible exception of the residence test due to his stay in Australia). However, this year Janice is unsure whether she qualifies as head of household due to Marty’s nine-month absence during the year. Janice has come to you for advice on whether she qualifies for head of household filing status. What do you tell her? To qualify for head of household status a taxpayer must maintain a residence that is the principal place of abode for more than one-half of the taxable year of a qualifying child. The issue here is whether Marty’s nine-month military stay in Australia disqualifies Janice from head of household status. Reg. §1.2-2(c)(1) states that temporary absences of a qualifying child from the household due to special circumstances does not preclude taxpayers from qualifying for head of household status. Military service is one of the special circumstances described in the regulation. However, this regulation indicates that it must be reasonable to assume that the qualifying child will return to the household after the absence and



that the taxpayer (head of household) maintains the household in anticipation of the return of the qualifying child. Because Marty will be returning to his home, Janice can file as head of household status. 52. {LO 3} {Research} Doug Jones timely submitted his 2013 tax return and elected married filing jointly status with his wife Darlene. Doug and Darlene did not request an extension for their 2013 tax return. Doug and Darlene owed and paid the IRS $124,000 for their 2013 tax year. Two years later, Doug amended his return and claimed married filing separate status. By changing his filing status, Doug sought a refund for an overpayment for the tax year 2013 (he paid more tax in the original joint return than he owed on a separate return). Is Doug allowed to change his filing status for the 2013 tax year and receive a tax refund with his amended return? No, he is not allowed to change his filing status by amending his return. Reg. §1.60131(a) states that “for any taxable year with respect to which a joint return has been filed, separate returns shall not be made by the spouses after the time for filing the return of either has expired.” In this case, Doug amended the return and changed his filing status two years later. Because the due date of the original return has passed, Doug is not allowed to change his filing status.

Comprehensive Problems 53.

a.

{Tax Forms} Marc and Michelle are married and earned salaries this year of $64,000 and $12,000, respectively. In addition to their salaries, they received interest of $350 from municipal bonds and $500 from corporate bonds. Marc and Michelle also paid $2,500 of qualifying moving expenses, and Marc paid alimony to a prior spouse in the amount of $1,500. Marc and Michelle have a 10-year-old son, Matthew, who lived with them throughout the entire year. Thus, Marc and Michelle are allowed to claim a $1,000 child tax credit for Matthew. Marc and Michelle paid $6,000 of expenditures that qualify as itemized deductions and they had a total of $5,500 in federal income taxes withheld from their paychecks during the course of the year. What is Marc and Michelle’s gross income? $76,500. See analysis below.

b.

What is Marc and Michelle’s adjusted gross income? $72,500. See analysis below.



c.

What is the total amount of Marc and Michelle’s deductions from AGI? $23,900. See analysis below.

d.

What is Marc and Michelle’s taxable income? $48,600.

See analysis below.

e. What is Marc and Michelle’s taxes payable or refund due for the year (use the tax rate schedules)? $102.50 tax refund. See analysis below. Description (1) Gross income (2) For AGI deductions (3) Adjusted gross income (4) Standard deduction

Amount 76,500

Computation $64,000 salary + $12,000 salary + $500

4,000

corporate bond interest 2,500 qualified moving expenses + 1,500

72,500 12,200

alimony paid (1) – (2) Married filing jointly

(5) Itemized deductions (6) Greater of standard

6,000

deductions or itemized

12,200

(4) > (5)

deductions (7) Personal and

11,700

3,900 × 3 (two personal exemptions and

dependency exemptions

one dependency exemption)

(8) Total deductions from

23,900

AGI (9) Taxable income (10) Income tax liability

$48,600 $6,397.5

(6) + (7) (3) - (8) (48,600 – 17,850) × 15% + 1,785 (see tax rate schedule for married filing jointly).

(11) Other taxes (12) Total tax (13) Credits (14) Prepayments Taxes (refund) with return

0 $6,397.5 (1,000) (5,500) ($102.5)

(10) + (11) Child credit for 10-year old son Matthew (12) + (13)+ (14) 4-43



f.

Complete the first two pages of March and Michelle’s Form 1040.







54.

{Tax Forms} Demarco and Janine Jackson have been married for 20 years and have four children who qualify as their dependents (Damarcus, Janine, Michael, and Candice). The couple received salary income of $100,000 and they sold their home this year. They initially purchased the home three years ago for $200,000 and they sold it for $250,000. The gain on the sale qualified for the exclusion from the sale of a principal residence. The Jacksons incurred $16,500 of itemized deductions and they had $6,250 withheld from their paychecks for federal taxes. They are also allowed to claim a child tax credit for each of their children.

a. What is the Jacksons’ taxable income and what is their tax liability or (refund)? $60,100 taxable income and $2,127.5 refund. See analysis below. Description (1) Gross income

Amount 100,000

Computation Salary income. Gain home sale of $50,000 is excluded.

(2) For AGI deductions (3) Adjusted gross income

0 $100,000

(1) – (2)

(4) Standard deduction (5) Itemized deductions

12,200 16,500

Married filing jointly;

(6) Greater of standard deductions or

16,500

Greater of (4) or (5)

itemized deductions (7) Personal and dependency exemptions

23,400

6 exemptions × 3,900 exemption amount



(8) Total deductions from AGI (9) Taxable income (10) Income tax liability

39,900 $60,100 $8,122.5

(6) + (7) (3) – (8) (60,100 – 17,850) × 15% + 1,785 (see tax rate schedule for married filing jointly).

(11) Other taxes (12) Total tax (13) Credits

0 $8,122.5 (4,000)

(10) + (11) Child credits for four children (4 ×$1,000)

(14) Prepayments Tax (refund) with return

(6,250) ($2,127.5)

(12) + (13)+ (14)

b. Complete the first two pages of the Jacksons’ Form 1040.







c. What would their taxable income be if their itemized deductions totaled $6,000 instead of $16,500? $64,400. See analysis below. Description (1) Gross income

Amount 100,000

Computation Salary. All gain from home sale is excluded from gross income.

(2) For AGI deductions (3) Adjusted gross income (4) Standard deduction (5) Itemized deductions (6) Greater of standard deductions or

0 $100,000 12,200 6,000 12,200

(1) – (2) Married filing jointly Greater of (4) or (5)

itemized deductions (7) Personal and dependency exemptions (8) Total deductions from AGI Taxable income

23,400

6 exemptions × 3,900

35,600 $64,400

exemption amount (6) + (7) (3) – (8)



d. What would their taxable income be if they had $0 itemized deductions and $6,000 of for AGI deductions? $58,400. See analysis below. Description (1) Gross income (2) For AGI deductions (3) Adjusted gross income (4) Standard deduction (5) Itemized deductions (6) Greater of standard deductions or

Amount 100,000 6,000 $94,000 12,200 0 12,200

Computation $100,000 salary

itemized deductions (7) Personal and dependency exemptions

23,400

6 exemptions × 3,900

35,600 $58,400

exemption amount (6) + (7) (3) – (8)

(8) Total deductions from AGI Taxable income

(1) – (2) Married filing jointly Greater of (4) or (5)

Note that if the $6,000 expense is a for AGI deduction, the Jacksons are able to deduct all of the expense, but if it’s a from AGI deduction and they are not able to itemize deductions, they don’t get to deduct any of it. e. Assume the original facts except that they also incurred a loss of $5,000 on the sale of some of their investment assets. What effect does the $5,000 loss have on their taxable income? Because individual taxpayer’s deductible losses on the disposition of investment (or capital) assets is limited to $3,000. The Jacksons would be allowed to deduct $3,000 of the $5,000 loss against their taxable income. The remaining $2,000 loss would carry over to next year. Consequently, with the loss, their taxable income would be $57,100 ($60,100 from part a minus $3,000). f. Assume the original facts except that the Jacksons owned investments that appreciated by $10,000 during the year? The Jacksons believe the investments will continue to appreciate, so they did not sell the investments during this year. What is the Jackson’s taxable income?



Same as it is in part a. $60,100. Though the assets have appreciated, they will not realize or recognize this gain for income tax purposes until they sell their investment assets, at which time they will increase their gross income (and corresponding taxable income) by the gain. 55.

a.

Camille Sikorski was divorced last year. She currently owns and provides a home for her 15-year-old daughter, Kaly, and 18-year-old son, Parker. Both children lived in Camille’s home for the entire year and Camille paid for all the costs of the maintaining the home. She received a salary of $105,000 and contributed $6,000 of it to a qualified retirement account. She also received $10,000 of alimony from her former husband. Finally, Camille paid $5,000 of expenditures that qualified as itemized deductions. What is Camille’s taxable income? $88,350. See analysis below.

Description (1) Gross income (2) For AGI deductions (3) Adjusted gross income (4) Standard deduction

Amount 115,000 6,000 $109,000 8,950

Computation 105,000 salary + 10,000 alimony Qualified retirement contribution (1) - (2) Head of household see analysis below.

(5) Itemized deductions (6) Greater of standard

5,000 8,950

(4) > (5)

11,700

3,900 × 3 (One personal

deductions or itemized deductions (7) Personal and dependency exemptions

exemption and two dependency

(8) Total deductions from AGI Taxable income

exemptions. See analysis below.) (6)+(7) (3) - (8)

20,650 $88,350




Kaly and Parker- Qualifying child tests Yes, taxpayer is their mother. Yes, both children are under age 19 (and younger than their mother). Yes, both children lived with taxpayer for more than half of the year. Yes, neither child provided more than half of their own support.

Camille may file as head of household because she is unmarried at the end of the year and she pays more than half the cost of maintaining a home that is the principal place of abode for a qualifying child. b. What would Camille’s taxable income be if she incurred $14,000 of itemized deductions instead of $5,000? $83,300. See analysis below. Description (1) Gross income (2) For AGI deductions (3) Adjusted gross income (4) Standard deduction

Amount 115,000 6,000 $109,000 8,950

Computation 105,000 salary + 10,000 alimony Qualified retirement contribution (1) – (2) Head of household see analysis below.

(5) Itemized deductions (6) Greater of standard deductions or

14,000 14,000

(5) > (4)

itemized deductions (7) Personal and dependency

11,700


exemptions

exemption and two dependency exemptions. See analysis below.)

(8) Total deductions from AGI Taxable income Test Relationship

25,700 $83,300

(6)+ (7) (3) - (8)

Kaly and Parker Yes, taxpayer is their mother. 4-54



Age Residence Support

Yes, both children are under age 19 (and younger than their mother). Yes, both children lived with taxpayer for more than half of the year. Yes, neither child provided more than half of their own support.

Camille may file as head of household because she is unmarried at the end of the year and she pays more than half the cost of maintaining a home that is the principal place of abode for a qualifying child. c. Assume the original facts except that Camille’s daughter Kaly is 25 years old and a fulltime student. Kaly’s gross income for the year was $5,000. Kaly provided $3,000 of her own support and Camille provided $5,000 of support. What is Camille’s taxable income? $92,250. See analysis below. Description (1) Gross income (2) For AGI deductions (3) Adjusted gross income (4) Standard deduction

Amount 115,000

Computation 105,000 salary + 10,000 alimony Qualified retirement

6,000 $109,000 8,950

contribution (1) - (2) Head of household, see analysis below.

(5) Itemized deductions (6) Greater of standard deductions

5,000 8,950

(4) > (5)

or itemized deductions (7) Personal and dependency

7,800


exemptions

exemption and one dependency exemption. See

analysis below.) (8) Total deductions from AGI 16,750 (6) + (7) Taxable income $92,250 (3) - (8) Parker is still a qualifying child (see analysis in previous solution), but Kaly is no longer a qualifying child, nor a qualifying relative, as analyzed below. Test Relationship Age Residence

Kaly—Qualifying child Yes, taxpayer is Kaly’s mother. No, not under age 24 and attending school full-time (and younger than her mother) Yes, temporary absences away at school count as time in the 4-55



Support

parents’ home. Yes, Kaly did not provide more than half of her own support.


Kaly—Qualifying relative Yes, taxpayer is Kaly’s mother. Not applicable to qualifying relative Not applicable to qualifying relative Yes, more than half of the Kaly’s support is provided by the taxpayer. Gross income No, Kaly’s gross income ($5,000) is more than the exemption amount. Camille may still file as head of household because she is unmarried at the end of the year and she pays more than half the cost of maintaining a home that is the principal place of abode for a child (Parker) whom she can claim as a dependent. 56.

Tiffany is unmarried and has a 15-year-old qualifying child. Tiffany has determined her tax liability to be $3,525, and her employer has withheld $1,500 of federal taxes from her paycheck. Tiffany is allowed to claim a $1,000 child tax credit for her qualifying child. What amount of taxes will Tiffany owe (or what amount will she receive as a refund) when she files her tax return.



$1,025 taxes payable. See analysis below. Description (1) Income tax liability (2) Other taxes (3) Total tax (4) Credits

Amount $3,525 0 $3,525 (1,000)

Computation (1) + (2) Child tax credit for qualifying child under 17 years old at year end

(5) Prepayments Tax due with return

(1,500) $1,025

(3) + (4) + (5)


SMChap004

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