Tax Accounting

3 CHAPTER TAX DETERMINATION face-to-face AND DEPENDENCY EXEMPTIONS AN OVERVIEW OF PROPERTY TR rail simple machinenomic nervous systemACTIONS Instructor The render items in 2 the print discharge margin and ExamView footrace-creation softw ar ar numbered by disbelief type within each chapter. Thus, utilisers of ExamView endure much easily lagger their salternatives using the printed evidence swear in the same numbering system.Status render Topic TRUE OR foolish 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Level of menses income assess marks Definition of valuateation revenue income Income evaluateationation and example of world(a) approach Effect of AGI on the checkup rebate register posture living(a) first mate versus marital ro subroutine burst supernumerary metre subtractions single and conjoin piths measuring rod evidence and adjustment for inflation additive quantity demonstration of a babelike Itemized consequences versus stock(a) implication staple and redundant measuring stick imports Itemized deductions or criterion deduction Itemized deductions or exemplification deduction Itemized deductions or standard deduction received deduction for nonmigratory noncitizen Standard deduction requirements when conjoin some stars charge up separately Standard deduction course of study of dying Dependents standard deduction Dependents standard deduction Dependents standard deduction Dependents person-to-person immunity non entirelyowed Claiming a fel number one on a separate return object of marital locating intention of marital spatial relation Gross income interrogatory and informations agree outpouring and corking expenditures Support test and unexpended funds of inter helpless triune throw organization amount of fend rendered by hooked disarticulate decree silent custodial pargonnt wins Relationship test for former in-laws and ex- wife 3-1 unchang ed unvaried unvarying Modified unvarying tender unvaried idempotent modernistic unaltered same(predicate) same(predicate) parvenu unaltered unvarying unvarying new-fangled New unaltered Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged New New Unchanged 7 8 10 11 12 14 15 16 19 20 21 22 23 24 25 26 1 2 3 4 5 variance Q/P in Prior magnetic variation interrogation/ Problem 29 3-2 30 Question/ Problem 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 2009 gradely Edition/Test depose Relationship test ex-sister-in-law Unchanged Status Present Edition Unchanged New Unchanged Unchanged Unchanged Unchanged Unchanged New New Unchanged Unchanged Unchanged New Modified Unchanged Unchanged Unchanged Modified Modified Unchanged Modified Unchanged Unchanged Unchanged 30 Q/P in Prior Edition 31 33 34 35 36 37 Topic Qualifying squirt duration test and regular tudent stead Qualifying barbarian stay on test Married kidskin and enou nce return test Citizenship/ conformation test for reliants Citizenship/ mansion test for hookeds theft valuateationes nature of valuate computer backup Reconciliation Act of 2001 and elimination of the phaseout of rights Kiddie measure realize income and backup exception Kiddie evaluate when non applicable Kiddie tax how applied Kiddie tax when agnate election forthcoming claw whitethorn be infallible to single file Kiddie tax un pull in income requirement Kiddie tax married file collectively exception Requirements for fiscal twelvemonth, timely filed return hold up match condition Surviving first mate berth year of death Marri fester penalty married persons register separate returns brainpower of folk status Head of base status Aband bingled spouse status contrast married file separate Personal use sackinges versus face-to-face use turn a profits long-run non bad(p) letter turn over lowest rate applicable consummate(a) of fall upon on c ontributeables Offsetting different-term large(p) privationes to different term capital deduces MULTIPLE CHOICE 40 41 42 44 45 46 47 48 49 50 51 52 53 54 1 2 3 4 5 6 7 8 9 10 11 12 13 Itemized deductions Deductions for AGI AGI determination AGI determination AGI determination AGI determination assessable income of a hooklike valuateable income of a myrmecophilous tax revenueable income of a helpless taskable income of a dependent decision of exemptions purpose of exemptions Determination of exemptions Unchanged Unchanged Unchanged New Unchanged New Unchanged New Modified New Modified New Modified 1 2 3 5 7 9 11 13 Tax Determination Personal and addiction Exemptions An Overivew of space proceeding 14 15 Question/ Problem 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Topic Qualifying child worthy discriminateies quintuple condense agreement Determination of exemptions Definition of a fling carnal knowledge Exceptions to the kiddie tax Filing status for old days a fter spouses death Widows file status Filing status in selected situations Abandoned spouse file status Filing status of non strait chuck out spouse red on business and individualized assets revenue enhancement of different classes of capital gains Taxation of different classes of capital gains Capital passing game limitation Netting of different-term goinges and differentterm gains MATCHING 1-12 13-24 25-36 Characteristics of tax determination personal and settlement exemptions, tax rates, register status Characteristics of tax determination personal and dependence exemptions, tax rates, file status Dependency exemption categories base on b anys child and strait sex act choreS 1 2 4 5 6 7 8 9 10 11 12 13 14 as authentic AGI Determining AGI Determining AGI ratable income of a dependent Taxable income of a dependent Taxable income of a dependent Determination of exemptions Determination of assessable income Determination of ratable income and filing status Determinati on of rateable income and filing status Computation of capital gains and spillagees Taxation of capital gains and losses Taxation of capital gains and losses Taxation of capital gains and losses discourse of net losses and carry everyplace possibility Unchanged Unchanged New New Modified New Unchanged Modified New Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Determination of exemptions Definition of bye child Unchanged Unchanged Status Present Edition Unchanged Unchanged New New New Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged New New New 3-3 14 15 Q/P in Prior Edition 16 17 21 22 23 24 25 26 27 1-12 Unchanged 13-24 Unchanged 25-36 1 2 5 7 8 10 11 12 13 14 3-4 2009 Annual Edition/Test edge Question/ Problem Topic examine 1 2 3 4 5 6 7 8 10 11 12 13 14 territorial versus global systems of income receipts Compargond Treatment of scholarships for addiction exemption purposes Exceptions to the control test for settlement exemption purpo ses Effect of lodge property law on application of the hoggish income test to married dependents Exceptions to the vernacular income test for pass child purposes Qualifying child and tie-breaker rules Stealth tax definition of Kiddie tax exceptions to its application Filing status comparison of the tax firmnesss of different types Filing status situations which cut back and do non qualify for head of theatre Filing status living(a) spouse transition status Ramifications of the election to file a knock Federal income tax return with a non resident alien Concentrating deductions from AGI and take awaying the standard deduction in alternate years Correlation between quintuple birth agreement and deduction for medical expenses Status Present Edition Q/P in Prior Edition Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged New Unchanged Unchanged Unchanged Unchanged New Unchanged 1 2 3 4 5 6 7 8 9 10 11 12 9 Tax Determination Personal and Dependency Exempti ons An Overivew of billet judicial proceeding TRUE/FALSE 1. Currently, the top Federal income tax rate in effect is the highest it has incessantly been. autonomic nervous system F The income tax rate in effect in 1944-1945 ranged from 23% to 94%. PTS 1 referee p. 3-3 3-5 2.As utilise in the income tax formula, glaring income would non include the receipt of a loan the taxpayer obtained from a confide. autonomic nervous system T Borrowing money does not result in pure(a) income. PTS 1 referee font 1 3. Kim, a resident of Korea, is a citizen of the U. S. Any income Kim receives from fine-tune he owns in Korea is not defer to the U. S. income tax. autonomic nervous system F Under the global system of taxation followed by the U. S. , foreign-sourced income is subject to tax. Although Kim is not a resident, he is a citizen of the U. S. PTS 1 reader Global Tax Issues on p. 3-5. 4. An decrease in the amount of a taxpayers AGI cease increase the amount of medical expenses al lowed as a deduction.autonomic nervous system T More medical expenses washstand be deducted since the 7. 5% of AGI floor leave be smaller. PTS 1 reader shell 4 5. Because tho one taxpayer is involved in both cases, the standard deduction for a surviving spouse is the same amount as that for a married person filing a separate return. autonomic nervous system F The amount of the standard deduction for a surviving spouse is the same as for married persons filing jointlyor twice that of a married person filing separately. PTS 1 reader control board 3-1 6. The additional standard deduction for age and cecity is the same amount for single as for married taxpayers. autonomic nervous system F For 2008, comp atomic number 18 $1,350 (single) with $1,050 (married).PTS 1 referee tabular array 3-2 3-6 2009 Annual Edition/Test Bank 7. The base and additional standard deductions be subject to an one-year adjustment for inflation. autonomic nervous system T The inflation adjustment is m ade each year to both the basic standard deduction and the additional standard deduction. PTS 1 ref p. 3-8 8. Tad acquires his 70-year-old mother as a dependent. The mother whitethorn not look at an additional standard deduction for her age. autonomic nervous system F The mother ass vociferation the additional standard deduction for her age. PTS 1 reviewer exercise 9 9. In 2008, Sally is 72 and single. If she has itemized deductions of $6,000, she should usurp the standard deduction alternative.autonomic nervous system T The standard deduction yields $6,800 ($5,450 + $1,350). PTS 1 referee role model 6 10. Leslie and Morgan ar married and file a joint return. Both are over 65 years of age and Leslie is blind. Their standard deduction for 2008 is $13,000 ($10,900 + $1,050 + $1,050). autonomic nervous system F Their standard deduction is $14,050 ($10,900 + $1,050 + $1,050 + $1,050). PTS 1 ref Table 3-1 Table 3-2 11. Derek is a surviving spouse. If he has itemized deductio ns of $11, five hundred for 2008, Derek should not claim the standard deduction. autonomic nervous system T The standard deduction would just house $10,900. PTS 1 ref p. 3-8 Table 3-1 12. Cameron and Carley are ages 70 and 69 and file a joint return. If they have itemized deductions of 13,300 for 2008, they should not claim the standard deduction. autonomic nervous system T The standard deduction plys and $13,000 ($10,900 + $1,050 + $1,050). PTS 1 referee p. 3-8 Table 3-1 Table 3-2 13. Claire, age 66, claims head of business firm filing status. If she has itemized deductions of $8,500 for 2008, she should not claim the standard deduction. ANS F The standard deduction yields $9,350 ($8,000 + $1,350). PTS 1 reader p. 3-8 Table 3-1 Table 3-2 Tax Determination Personal and Dependency Exemptions An Overivew of place proceedings 14. Enrique is a citizen of Honduras and a resident of the U. S. If he files a U. S. income tax return, Enrique bathroomnot claim the standard dedu ction. ANS F Either U. S. itizenship or residency give suffice in order to claim the standard deduction. PTS 1 reviewer p. 3-9 3-7 15. Dan and Donna are hubby and wife and file separate returns for the year. If Dan itemizes his deductions from AGI, Donna open firenot claim the standard deduction. ANS T If Dan itemizes, Donna must itemize. PTS 1 referee p. 3-9 16. Logan, an 80-year-old widower, dies on January 2, 2008. Even though he stretch outd for only dickens days, on his concluding income tax return for 2008, the full basic and additional standard deductions can be claimed. ANS T No proration of the standard deduction is incumbent in this case. PTS 1 ref p. 3-9 17. Benjamin, age 16, is claimed as a dependent by his put ups.During 2008, he acquire $700 at a car wash. Benjamins standard deduction is $1,200 ($900 + $300). ANS F His standard deduction is the greater of $900 or $1,000 ($700 + $300). PTS 1 referee lesson 10 18. Debby, age 18, is claimed as a dependent by her mother. During 2008, she earned $1,100 in hobby income on a savings account. Debbys standard deduction is $1,400 ($1,000 + $300). ANS F Debbys standard deduction is the minimum allowed of $900. PTS 1 reader Example 8 19. Katrina, age 16, is claimed as a dependent by her parents. During 2008, she earned $5,200 as a mark off at a grocery store. Her standard deduction is $5,500 ($5,200 earned income + $300).ANS F Her standard deduction cannot exceed the regular standard deduction procurable to single persons (or $5,450 for 2008). PTS 1 referee Example 11 3-8 20. 2009 Annual Edition/Test Bank A dependent cannot claim a personal exemption on his or her own return. ANS T PTS 1 reader Example 12 21. When separate income tax returns are filed by married taxpayers, one spouse cannot claim the other spouse as an exemption. ANS F An exemption is allowed if the spouse has no consummate(a) income and is not claimed as a dependent by another. PTS 1 reader p. 3-11 22. dyke and Minerva are divorce in December of 2008. Since they were not married at the end of the year, they are considered not married for 2008.ANS T They must be married at the end of the year (unless one spouse dies) in order to be considered married. PTS 1 referee Table 3-3 23. For the year a spouse dies, the surviving spouse is considered married for the entire year for income tax purposes. ANS T PTS 1 REF Table 3-3 24. In find whether the placetain test is met for dependency exemption purposes, only the nonexempt administer of a scholarship is considered. ANS F In applying the concord test, all of the scholarship is disregarded. lores are treated differently for purposes of the pure(a) income test. PTS 1 REF Example 23 25. Scott buys his mother a sewing machine. For purposes of sustaining the support test, Scott can count the cost of the sewing machine.ANS T Capital expenditures can be considered in determining support. It is assumed that the sewing machine is largely for the mother s use. PTS 1 REF Example 26 26. If the individual does not throw funds that have been received from another source (e. g. , Social certification benefits), the unexpended amounts are not considered for purposes of the support test. ANS T The funds are counted only if used for support purposes. PTS 1 REF Example 24 Tax Determination Personal and Dependency Exemptions An Overivew of Property proceedings 3-9 27. Using borrowed funds from a mortgage on her alkali, Lisa provides 55% of her support, enchantment her daughters furnished the rest.Lisa cannot be claimed as a dependent below a multiple support agreement. ANS T The daughters do not provide more(prenominal) than one-half of their mothers support. In this situation, the mother is self-supporting. PTS 1 REF Example 25 28. Roy and Linda were divorced in 2007. The divorce decree awards custody of their children to Linda exclusively is silent as to who is entitled to claim them as dependents. If Roy furnished more than half of their support, he can claim them as dependents. ANS F non unless Linda hopes. PTS 1 REF p. 3-17 29. In 2008, Hal furnishes more than half of the support of his ex-wife and her father, neither of whom lives with him. The divorce occurred in 2007.Hal whitethorn claim the father-in-law that not the ex-wife as dependents. ANS T The father-in-law meets the affinity test, only if the ex-wife does not. However, except in the year of divorce, an ex-wife can be a dependent on a lower floor the share of the family unit test. PTS 1 REF p. 3-14 30. After her divorce, Hope continues to support her ex- preserves sister, Cindy, who does not live with her. Hope cannot claim Cindy as a dependent. ANS F For purposes of the relationship test, divorce does not change in-law status. PTS 1 REF p. 3-14 31. Darren, age 20 and not disabled, earns $4,500 during 2008. Darrens parents cannot claim him as a dependent unless he is a regular scholar.ANS T Being age 20, Darren cannot be a crack chi ld unless he is a full-time savant. As a departure child, he is exempt from the gross income test. PTS 1 REF p. 3-12 32. Keith, age 17 and single, earns $3,800 during 2008. Keiths parents can claim him as a dependent even if he does not live with them. ANS F Keith does not meet the definition of a alteration child so the gross income test does apply. PTS 1 REF p. 3-12 p. 3-14 3-10 2009 Annual Edition/Test Bank 33. Sarah furnishes more than 50% of the support of her son and daughter-in-law who live with her. If the son and daughter-in-law file a joint return, Sarah cannot claim them as dependents. ANS F If certain conditions are satisfied (e. g. they did not have to file but did so to obtain a refund), the son and daughter-in-law can qualify as Sarahs dependents. PTS 1 REF Example 28 34. Hernando, a resident of California, supports his parents who are residents of Mexico but citizens of El Salvador. Hernando can claim his parents as dependents. ANS T The parents are residents of Mexico. PTS 1 REF p. 3-17 35. Carol lives in Michigan and supports her nephew who is a Canadian citizen that resides in Ontario, Canada. Carol may not claim her nephew as a dependent. ANS F As a resident of Canada, Carols nephew meets the citizenship or mansion house test. PTS 1 REF p. 3-17 36. Stealth taxes are directed at high income taxpayers.ANS T Such stealth taxes as the phaseout of exemptions do not stupefy until taxpayers reach significant income levels. PTS 1 REF Tax in the countersign on p. 3-20 37. The phaseout of the benefits of personal and dependency exemptions for certain taxpayers is scheduled to be eliminated. ANS T But the rescission is not completed until 2010. PTS 1 REF p. 3-18 38. The kiddie tax does not apply as to a child whose earned income is more than one-half of his or her support. ANS T PTS 1 REF p. 3-23 39. Once a child reaches age 19, the kiddie tax no longstanding applies. ANS F The kiddie tax does apply if the child is a full-time student under a ge 24. PTS 1 REF p. -23 Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions 3-11 40. When the kiddie tax applies and the parents file separate returns, the applicable parent (for determining the parental tax) is the one with the greater ratable income. ANS T PTS 1 REF p. 3-25 41. When the kiddie tax applies, the child direct not file an income tax return as the childs income will be reported on the parents return. ANS F The child carry not file only if the parental election (if available) picks up all of the childs income. PTS 1 REF p. 3-24 42. A child who has unearned income of $1,800 or less cannot be subject to the kiddie tax. ANS T PTS 1 REF p. 3-23 43. A child who is married cannot be subject to the kiddie tax.ANS F besides if he or she files a joint return is such child exempt from the kiddie tax. PTS 1 REF p. 3-23 44. An individual taxpayer uses a fiscal year February 1-January 31. The payable consider of this taxpayers Federal inco me tax return is June 15 of each tax year. ANS F The tax return is due on or forwards the fifteenth day of the quartetteth month by-line the end of the fiscal year. Here, the due date is May 15. PTS 1 REF p. 3-27 45. Surviving spouse filing status begins in the year in which the decedent spouse died. ANS F Surviving spouse filing status begins in the year pursual the year of death. PTS 1 REF Example 38 46. In January 2008, Jakes wife dies and he does not remarry.For tax year 2008, Jake may not be able to use the filing status available to married persons filing joint returns. ANS T If the executor of his wifes land does not agree to filing a joint return, Jakes only option is to file using married, filing separate status. PTS 1 REF p. 3-30 3-12 2009 Annual Edition/Test Bank 47. For tax purposes, married persons filing separate returns are treated the same as single taxpayers. ANS F Single taxpayers can enjoy some tax benefits that are unavailable to married persons filing sepa ratelye. g. , earned income credit, credit for child and dependent care expenses, deduction for interest p wait on on student loans. PTS 1 REF p. 3-29 p. 3-30 48.Katelyn is divorced and maintains a class in which she and her daughter, Crissa, live. Crissa, age 22, earns $11,000 during 2008 as a model. Katelyn qualifies for head of household filing status. ANS F Crissa is not Katelyns dependent. She fails the age test for notch child purposes and the gross income test for the adjustment relative category. PTS 1 REF Example 41 49. Mike is divorced and maintains a home in which he and his dependent niece live. Mike qualifies for head of household filing status. ANS T To be head of household, the dependent involved must meet the relationship test. Such is the case with a niece. PTS 1 REF Example 39 50.In equipment casualty of income tax consequences, chuck out spouses are treated the same way as married persons filing separate returns. ANS F An abandoned spouse is treated as a s ingle taxpayer. Consequently, an abandoned spouse qualifies for head of household filing status. PTS 1 REF p. 3-31 51. In 2008, Gordon sold his personal use political machine for a loss of $6,000. He alike sold a personal stamp parade for a gain of $7,000. As a result of these bargains, $7,000 is subject to income tax. ANS T Gordon must recognize a capital gain of $7,000. The $6,000 loss on the barter of the personal use political machine is nondeductible. PTS 1 REF Example 43 52. In some cases, the tax on semipermanent capital gains can be as low as 0%.ANS T If the taxpayers tax bracket is 15% (or less), the 0% rate applies. PTS 1 REF Example 46 Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions 3-13 53. conglomerate on the change of collectibles held for more than 12 months is subject to tax at a rate no higher than 28%. ANS T PTS 1 REF p. 3-33 54. For 2008, Stuart has a short-run capital loss, a collectible long-run capital gain, and a longterm capital gain from land held as investiture. The short-term loss is first applied to the collectible capital gain. ANS T PTS 1 REF Example 48 MULTIPLE CHOICE 1. Which, if any, of the succeeding(a) is a deduction from AGI? a. care salarys. b. Child support payments. c.Unreimbursed employee expenses. d. Loss on the deal of a personal automobile. e. no(prenominal) of the higher up. ANS C Alimony payments (choice a. ) are deductions for AGI. Child support payments (choice b. ) and personal capital losses (choice d. ) are nondeductible items. PTS 1 REF Example 2 Example 43 discover 3-3 2. Which, if any, of the pursuance is a deduction for AGI? a. Alimony payments. b. occupy on home mortgage. c. Unreimbursed employee expenses. d. Charitable contributions. e. None of the above. ANS A Except for alimony (choice a. ), all other items (choices b. , c. , and d. ) are deductions from AGI. PTS 1 REF p. 3-6 face 3-3 3.During 2008, Marie had the following proceedings S alary Bank loan (proceeds used to buy personal auto) Alimony received Child support received Inheritance from deceased aunty $40,000 10,000 6,000 12,000 50,000 3-14 Maries AGI is a. $40,000. b. $46,000. c. $52,000. d. $96,000. e. None of the above. 2009 Annual Edition/Test Bank ANS B $40,000 (salary) + $6,000 (alimony) = $46,000. The inheritance and child support are exclusions. Amounts borrowed are not income. PTS 1 REF Example 1 process 3-1 4. During 2008, Sam had the following proceedings Salary Interest income on General Electric mess bonds demo from parents Contribution to traditional IRA Lottery winnings Sams AGI is a. $59,000. b. $61,000. c. $65,000. d. $85,000. e. None of the above.ANS E $60,000 (salary) + $2,000 (interest on GE bonds) $5,000 (IRA contribution) + $3,000 (lottery winnings) = $60,000. The gift from his parents is a nontaxable exclusion. PTS 1 REF p. 3-5 Exhibit 3-1 Exhibit 3-2 $60,000 2,000 24,000 5,000 3,000 5. During 2008, Colin had the following tra nsactions Salary Interest income on city of Denver bonds Damages for personal injury (car accident) Punitive remediation (same car accident) specie dividends from General Motors Corporation stock Colins AGI is a. $74,000. b. $120,500. c. $124,000. d. $124,500. e. $224,000. ANS C $70,000 (salary) + $50,000 (punitive damages) + $4,000 (cash dividends) = $124,000. The damages from personal injury and the municipal bond interest are nontaxable exclusions.PTS 1 REF Example 2 Exhibit 3-1 Exhibit 3-2 $ 70,000 500 100,000 50,000 4,000 Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions 6. In 2008, Walter had the following transactions Salary Capital loss from a stock coronation Moving expense to change jobs Received refund of $10,000 loan he made to his brother in 2004 (includes interest of $1,000) Property taxes on personal residence Walters AGI is a. $67,000. b. $68,000. c. $69,000. d. $78,000. e. None of the above. $80,000 (4,000) (10,000) 11, 000 2,000 3-15 ANS B $80,000 (salary) $3,000 (allowable loss on stock enthronisation) $10,000 (moving expenses) + $1,000 (interest on loan) = $68,000.The loose loss of $1,000 from the stock investiture deal can be carried over to 2009. The loan repayment of $10,000 is a return of capital and has no effect on gross income. Property taxes paid on a personal residence is a deduction from AGI and has no impact on the determination of AGI. PTS 1 REF p. 3-5 p. 3-34 Exhibit 3-3 7. Monica, age 18, is claimed by her parents as a dependent. During 2008, she had interest income from a coast savings account of $1,000 and income from a part-time job of $4,500. Monicas taxable income is a. $4,500 $4,800 = $0. b. $5,500 $5,350 = $150. c. $5,500 $4,800 = $700. d. $5,500 $900 $3,400 = $1,200. e. None of the above.ANS C Monicas standard deduction is $4,500 (earned income) + $300 = $4,800. Thus, her taxable income is $700 ($5,500 $4,800). She is not in line for a personal exemption. PTS 1 REF Example 10 8. Tony, age 15, is claimed as a dependent by his grandmother. During 2008, Tony had interest income from General Motors Corporation bonds of $1,000 and earnings from a part-time job of $700. Tonys taxable income is a. $0. b. $1,700 $700 $900 = $100. c. $1,700 $1,000 = $700. d. $1,700 $900 = $800. e. None of the above. ANS C Tonys standard deduction of $1,000 ($700 + $300) partially offsets his gross income of $1,700, resulting in taxable income of $700. PTS 1 REF Example 10 3-16 2009 Annual Edition/Test Bank 9.Anna is a widow, age 74 and blind, who is claimed as a dependent by her son. During 2008, she received $4,800 in Social Security benefits, $1,200 in cant interest, and $1,800 in cash dividends from stocks. Annas taxable income for 2008 is a. $3,000 $900 $2,700 = $0. b. $3,000 $2,600 = $400. c. $3,000 $900 $1,350 = $750. d. $7,800 $900 $2,700 = $4,200. e. None of the above. ANS A Although Anna has no earned income, she is entitled to a minimum regular standard dedu ction of $900. She also is allowed additional standard deductions for age and blindness of $2,700 ($1,350 + $1,350). At this level of income, the Social Security benefits are a nontaxable exclusion.PTS 1 REF Example 9 Exhibit 3-1 Table 3-2 10. Grace, age 67 and single, is claimed as a dependent on her sons tax return. During 2008, she had interest income of $2,400 and $700 of earned income from queer sitting. Graces taxable income is a. $150. b. $750. c. $850. d. $2,100. e. None of the above. ANS B $3,100 gross income greater of $900 or ($700 earned income + $300) $1,350 (additional standard deduction for age 65 and older) = $750. She is not worthy for a personal exemption. PTS 1 REF Example 9 11. troy weight and Edie are married and under 65 years of age. During 2008, they furnish more than half of the support of their 18-year old daughter, Jobeth, who lives with them.Jobeth earns $15,000 from a part-time job, most of which she sets apart for future college expenses. troy we ight and Edie also provide more than half of the support of Troys first cousin-german who does not live with them. Edies father, who died on January 3, 2008, at age 80, has for numerous years hooked as their dependent. How many personal and dependency exemptions should Troy and Edie claim? a. Two. b. Three. c. Four. d. Five. e. None of the above. ANS C Four (Troy, Edie, Jobeth, and the father). Jobeth can be claimed because as a qualifying child she is not subject to the gross income test. Troys cousin does not meet the relationship test and is not a constituent of their household.It is assumed that Edies father, as was true in the past, able as a dependent up to the point of death. PTS 1 REF p. 3-11 p. 3-12 p. 3-14 Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions 3-17 12. Evan and Eileen Carter are husband and wife and file a joint return for 2008. Both are under 65 years of age. They provide more than half of the support of their dau ghter, Pamela (age 25), who is a full-time medical student. Pamela receives a $3,400 scholarship covering her fashion and board at college. They furnish all of the support of Belinda (Evans grandmother), who is age 70 and lives in a nursing home.They also support Peggy (age 66), who is a relay link of the family and lives with them. How many personal and dependency exemptions may the Carters claim? a. Two. b. Three. c. Four. d. Five. e. None of the above. ANS D Five (Evan, Eileen, Pamela, Belinda, and Peggy). Personal exemptions for the Carters and dependency exemptions for the rest. Pamela is not a qualifying childalthough a full-time student, she is not under age 24. Pamela does meet the qualifying relative category even though the type of scholarship aid she receives is taxable (the gross income test is satisfied). Belinda is not a ingredient of the household but satisfies the relationship test.Peggy does not touch the relationship test but is a division of the household. PT S 1 REF p. 3-11 p. 3-12 p. 3-14 13. In which, if any, of the following situations may the individual not be claimed as a dependent of the taxpayer? a. A former spouse who lives with the taxpayer (divorce took place this year). b. A stepmother who does not live with the taxpayer. c. A married daughter who lives with the taxpayer. d. A half brother who does not live with the taxpayer and is a citizen and resident of Canada. e. A cousin who lives with the taxpayer. ANS A In the year of divorce, a former spouse cannot qualify under the subdivision of the household test (choice a. ). The stepmother meets the relationship test (choice b. ).A married daughter can be claimed as long as she does not violate the joint return test (choice c. ). In the case of the half brother, Canada or Mexico can satisfy the residency test (choice d. ). A cousin does not satisfy the relationship test so must be a member of the household (choice e. ). PTS 1 REF p. 3-14 p. 3-17 3-18 2009 Annual Edition/Test Bank 14. During 2008, Jen (age 66) furnished more than 50% of the support of the following persons Jens electric current husband who has no income and is not claimed by someone else as a dependent. Jens stepson (age 18) who lives with her and earns $6,000 as a dance instructor. He dropped out of school a year ago.Jens x who does not live with her. The divorce occurred both years ago. Jens former brother-in-law who does not live with her. Presuming all other dependency tests are met, on a separate return how many personal and dependency exemptions may Jen claim? a. Two. b. Three. c. Four. d. Five. e. None of the above. ANS C All of the persons listed except the ex-husband meet either the relationship or member of the household tests. The current husband qualifies as he has no income and is not claimed as a dependent by someone else. The stepson avoids the gross income limitation since he is a qualifying child under 19 years of age. PTS 1 REF p. 3-11 p. 3-12 p. 3-14 15.A qualifyi ng child cannot include a. A nonresident alien. b. A married son who files a joint return. c. An uncle. d. A daughter who is away at college. e. A brother who is 28 years of age and disabled. ANS C A qualifying child can be a nonresident alien under the adopted child exception (choice a. ). The filing of a joint return is not fatal if filing is not required and its purpose is to obtain a tax refund (choice b. ). An uncle does not meet the relationship test (choice c. ). A temporary absence is permissible under the domicile test (choice d. ). A brother meets the relationship test, and disability waives the age test (choice e. ). PTS 1 REF p. 3-12 p. 3-17 16.Ellen, age 12, lives in the same household with her father, grandfather, and uncle. The cost of maintaining the household is provided by her grandfather (40%) and her uncle (60%). Disregarding tie-breaker rules, Ellen is a qualifying child as to a. All parties involved (i. e. , father, grandfather, and uncle). b. Only her grandfa ther and uncle. c. Only her uncle. d. Only her father. e. None of the above. ANS A Under the abode and relationship tests, Ellen is a qualifying child as to all parties. The amount of support provided by each person is not relevant. PTS 1 REF p. 3-12 Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions 17.Millie, age 80, is back up during the current year as follows Weston (a son) Faith (a daughter) Jake (a cousin) Brayden (unrelated close family friend) Percent of Support 10% 35% 35% 20% 3-19 During the year, Millie lives with Brayden. Under a multiple support agreement, indicate which parties can qualify to claim Millie as a dependent. a. Weston, Faith, Jake, and Brayden. b. Faith and Brayden. c. Weston and Faith. d. Faith, Jake, and Brayden. e. None of the above. ANS B Weston does not qualify because he does not contribute more than 10% of the support. (This eliminates choices a. and c. ) Jake does not qualify because he satisfies neither the relationship nor member of the household tests. (This eliminates choices a. and d. Brayden does not meet the relationship test, but he does satisfy the member of the household test. PTS 1 REF Example 27 18. The Hutters filed a joint return for 2008. They provide more than 50% of the support of Carla, Melvin, and Aaron. Carla (age 18) is a cousin and earns $4,000 from a part-time job. Melvin (age 25) is their son and is a full-time law student. He received from the university a $3,800 scholarship for tuition. Aaron is a brother who is a citizen of Israel but resides in Mexico. Carla and Melvin live with the Hutters. How many personal and dependency exemptions can the Hutters claim on their Federal income tax return? a. Two. b. Three. c.Four. d. Five. e. None of the above. ANS C The Hutters can claim two personal exemptions and two dependency exemptions. Carla is not a qualifying child and is subject to the gross income test. Melvin is not a qualifying child due to age (not under 24) but is a qualifying relative. meets Melvin the gross income test since this type of scholarship is nontaxable. Aaron meets the residency requirement. PTS 1 REF p. 3-11 p. 3-12 p. 3-17 Example 19 Example 21 3-20 2009 Annual Edition/Test Bank 19. For the qualifying relative rule (for dependency exemption purposes) a. The dependent must be under age 19 or a full-time student under age 24. b.The dependent must reside with the taxpayer claiming the exemption. c. The dependent need not be related to the taxpayer claiming the exemption. d. The dependent must be a citizen or resident of the U. S. e. None of the above. ANS C survivals a. and b. relate to the qualifying child rules. An unrelated person can qualify if a member of taxpayers household (choice c. ). A dependent can be a citizen or resident of Canada or Mexico (choice d. ). PTS 1 REF Concept Summary 3-1 20. For tax year 2008, an exception to the kiddie tax rules includes a. A child who is a full-time student. b. A child who is married and files a joint return. c. A child who is 18 years old. d.A child whose unearned income is more than half of his or her support. e. None of the above. ANS B Student status (choice a. ) is relevant only to include, in the application of the tax, those at least 19 but under age 24. Choice c. relates to pre-2008 rules. Choice d. would be an exception if the reference was to earned income (not unearned income). PTS 1 REF p. 3-23 21. Kyle, whose wife died in December 2005, filed a joint tax return for 2005. He did not remarry, but has go along to maintain his home in which his two dependent children live. What is Kyles filing status as to 2008? a. Head of household. b. Surviving spouse. c. Single. d. Married filing separately. e.None of the above. ANS A Kyle, who filed a joint return in 2005, was entitled to file as a surviving spouse in 2006 and 2007. In 2008, he will be entitled to file as a head of household. PTS 1 REF Example 38 Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions 3-21 22. Emily, whose husband died in December 2008, maintains a household in which her dependent daughter lives. Which (if any) of the following is her filing status for the tax year 2008? (Note Emily is the executor of her husbands estate. ) a. Single. b. Married, filing separately. c. Surviving spouse. d. Head of household. e. Married, filing jointly.ANS E As the executor, it is unlikely that she would refuse to consent to a joint return. Since she is deemed married in the year of her husbands death, she cannot file as single (choice a. ) or head of household (choice d. ). She does not qualify for surviving spouse status until the next year (i. e. , 2009). PTS 1 REF p. 3-30 23. Which of the following taxpayers may file as a head of household in 2008? Ron provides all the support for his mother, Betty, who lives by herself in an apartment in Fort Lauderdale. Ron pays the rent and other expenses for the apartment and decently claims his mother as a dependent. tammy provides over one-half the support for her 18-year old brother, Dan.Dan earned $4,200 in 2008 working at a fasting food restaurant and is saving his money to attend college in 2009. Dan lives in Tammys home. Joes wife left him late in December of 2007. No legal action was taken and Joe has not heard from her in 2008. Joe supported his 6-year-old son, who lived with him throughout 2008. a. Ron only. b. Tammy only. c. Joe only. d. Ron and Joe only. e. Ron, Tammy, and Joe. ANS E Ron may file as a head of household. His mother is not required to live in his household in order for him to qualify as a head of household. Tammy can claim Dan as a dependent because Dan is a qualifying child and is not subject to the gross income requirement.Joe can file as a head of household under the abandoned spouse rules. PTS 1 REF p. 3-30 p. 3-31 3-22 2009 Annual Edition/Test Bank 24. Wilma is married to Herb, who abandoned her in 2006. She has not seen or communicate d with him since June of that year. She maintains a household in which she and her two dependent children live. Which of the following statements about Wilmas filing status in 2008 is turn down? a. Wilma can use the rates for single taxpayers. b. Wilma can file a joint return with Herb. c. Wilma can file as a surviving spouse. d. Wilma can file as a head of household. e. None of the above statements is appropriate. ANS D Wilma meets the abandoned spouse rules.Therefore, she can file as a head of household. Otherwise, her filing status would be married, filing separately. PTS 1 REF p. 3-31 25. Arnold is married to Sybil, who abandoned him in 2006. He has not seen or communicated with her since April of that year. He maintains a household in which their son, Evans, lives. Evans is age 25 and earns over $20,000 each year. For tax year 2008, Arnolds filing status is a. Married, filing jointly. b. Married, filing separately. c. Head of household. d. Surviving spouse. e. Single. ANS B Ar nold cannot file jointly without Sybils consent (choice a. ). He is not an abandoned spouse since Evans is not a dependent child.Evans cannot be claimed as a qualifying child (age test) and is not a qualifying relative (gross income test). Because Arnold is still treated as existence married, his only option is married, filing separately (choice b. ). PTS 1 REF p. 3-29 to 3-32 26. During the year, Kim sold the following assets business auto for a $1,000 loss, stock investment for a $1,000 loss, and sport yacht for a $1,000 loss. Presuming adequate income, how much of these losses may Kim claim? a. $0. b. $1,000. c. $2,000. d. $3,000. e. None of the above. ANS C The loss on the business auto of $1,000 is an general loss, magic spell the loss on the stock investment of $1,000 is a capital loss. The loss on the yacht of $1,000 is personal and, therefore, cannot be deducted.PTS 1 REF p. 3-33 Example 43 Example 44 Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions 27. Perry is in the 33% tax bracket. During 2008, he had the following capital asset transactions Gain from the sale of a stamp collection (held for 10 years) Gain from the sale of an investment in land (held for 4 years) Gain from the sale of stock investment (held for 8 months) Perrys tax consequences from these gains are as follows a. (15% $10,000) + (28% $30,000) + (33% $4,000). b. (15% $30,000) + (33% $4,000). c. (5% $10,000) + (28% $30,000) + (33% $4,000). d. (15% $40,000) + (33% $4,000). e. None of the above. 30,000 10,000 4,000 3-23 ANS A Collectibles are taxed at a maximum of 28%, piece of music long-term capital gains are subject to a top rate of 15%. short capital gains are treated the same as usual income. PTS 1 REF p. 3-33 28. Kirby is in the 15% tax bracket and had the following capital asset transactions during 2008 Long-term gain from the sale of a coin collection Long-term gain from the sale of a land investment Short-term gain from the sal e of a stock investment Kirbys tax consequences from these gains are as follows a. (5% $10,000) + (15% $13,000). b. (0% $10,000) + (15% $13,000). c. (15% $13,000) + (28% $11,000). d. (15% $23,000). . None of the above. ANS B Collectibles and short-term capital gains are taxed at Joans regular 15% tax bracket, while longterm capital gains are subject to a rate of 0% (5% antecedent to 2008). PTS 1 REF p. 3-33 $11,000 10,000 2,000 29. For the current year, David has salary income of $80,000 and the following property transactions Stock investment sales Long-term capital gain Short-term capital loss Loss on sale of motor home (purchased 4 years ago and used for family vacations) $ 9,000 (11,000) (2,000) 3-24 2009 Annual Edition/Test Bank What is Davids AGI for the current year? a. $76,000. b. $77,000. c. $78,000. d. $89,000. e. None of the above.ANS C The loss from the sale of the camper is personal and, therefore, is not deductible. Netting the short-term capital loss of $11,000 again st the long-term capital gain of $9,000 produces a net short-term capital loss of $2,000. Offsetting the capital loss against ordinary income yields AGI of $78,000 ($80,000 $2,000). PTS 1 REF Example 43 Example 49 30. During 2008, Trevor has the following capital transactions LTCG Long-term collectible gain STCG STCL $ 6,000 2,000 4,000 10,000 After the veiling process, the following results a. Long-term collectible gain of $2,000. b. LTCG of $6,000, Long-term collectible gain of $2,000, and a STCL of $6,000. c.LTCG of $6,000, Long-term collectible gain of $2,000, and a STCL carryover to 2009 of $3,000. d. LTCG of $2,000. e. None of the above. ANS D First, the STCG and STCL are combined, resulting in a STCL of $6,000. Of this STCL, $2,000 is applied against the collectible gain of $2,000, and the $4,000 balance is applied against the LTCG of $6,000. The result is a LTCG of $2,000. PTS 1 MATCHING Match the statements that relate to each other. Note Choice L may be used more than on ce. a. Not available to 65-year old taxpayer who itemizes b. Exception for U. S. citizenship or residency test (for dependency exemption purposes) c. Largest basic standard deduction available to a dependent who has no earned income d.Not considered for dependency exemption purposes e. Qualifies for head of household filing status f. A child (age 15) who is a dependent and has only earned income. g. Not considered in applying support test (for dependency exemption purposes) h. Phaseout of personal and dependency exemptions i. Unmarried taxpayer who can use the same tax rates as married persons filing jointly j. Exception to the support test (for dependency exemption purposes) k. A child (age 16) who is a dependent and has net unearned income l. No correct match provided REF Example 48 Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.Abandoned spouse Stealth tax Additional standard deduction Scholarship fu nds Surviving spouse Marriage penalty Canada and Mexico Age of a qualifying relative $900 Kiddie tax applies Kiddie tax does not apply Multiple support agreement 3-25 1. ANS E PTS 1 REF p. 3-31 non An abandoned spouse qualifies for head of household filing status. 2. ANS H PTS 1 REF p. 3-20 NOT An example of a stealth tax is the phaseout of exemptions. Tax in the News on p. 3-20 3. ANS A PTS 1 REF p. 3-8 NOT A taxpayer who itemizes (claims deductions from AGI) is not eligible for either the basic or additional standard deductions. 4. ANS G PTS 1 REF p. 3-14 p. -15 NOT Scholarship funds are not considered when applying the support test. The taxable portion of scholarships are taken into account in applying the gross income test. 5. ANS I PTS 1 REF p. 3-30 6. ANS L PTS 1 REF p. 3-29 NOT The traditional marriage penalty applied in some cases where married persons filed a joint return. 7. ANS B PTS 1 REF p. 3-17 NOT Citizenship or residency in these countries will suffice. 8. ANS D PT S 1 REF p. 3-19 9. ANS C PTS 1 REF p. 3-10 NOT This amount could be greater if earned income exists. 10. ANS K PTS 1 REF p. 3-25 11. ANS F PTS 1 REF p. 3-23 NOT The kiddie tax is inapplicable in situations where the child has no unearned income. 12. ANS J PTS 1 REF p. -15 Match the statements that relate to each other. Note Choice L may be used more than once. a. Available to a 70-year-old father claimed as a dependent by his son b. The highest income tax rate applicable to a taxpayer c. Equal to tax liability divided by taxable income d. Not eligible for the standard deduction e. No one qualified taxpayer meets the support test f. Taxpayers cousin does not qualify g. A dependent child (age 17) who has only unearned income h. Highest applicable rate is 35% i. relevant rate could be as low as 0% j. level best rate is 28% k. Income from foreign sources not subject to tax l. No correct match provided 3-26 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 009 Annual Edition/Test Bank Mu ltiple support agreement Kiddie tax not imposed Nonresident alien Tax Rate Schedule Gain on collectibles (held more than one year) Marginal income tax rate Average income tax rate Additional standard deduction Relationship test (for dependency exemption purposes) Long-term capital gains Global system of taxation Territorial system of taxation 13. ANS E PTS 1 REF p. 3-15 NOT A qualified taxpayer is one who satisfies the more-than-10% contribution test and meets all of the other requirements for claiming a dependency exemption. 14. ANS L PTS 1 REF p. 3-23 NOT The kiddie tax can apply when the child has unearned income. 15. ANS D PTS 1 REF p. 3-9 16. ANS H PTS 1 REF p. 3-21 17. ANS J PTS 1 REF p. 3-33 18. ANS B PTS 1 REF p. 3-21 19. ANS C PTS 1 REF p. 3-21 20.ANS A PTS 1 REF Example 9 21. ANS F PTS 1 REF p. 3-14 NOT A cousin can qualify as a dependent under the member of the household test but not under the relationship test. 22. ANS I PTS 1 REF Example 46 23. ANS L PTS 1 REF p. 3-5 NO T Global Tax Issues on p. 3-5 24. ANS K PTS 1 REF p. 3-5 NOT Global Tax Issues on p. 3-5 Regarding dependency exemptions, classify each statement in one of the four categories a. Could be a qualifying child. b. Could be a qualifying relative. c. Could be either a qualifying child or a qualifying relative. d. Could be neither a qualifying child nor a qualifying relative. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36.A son lives with taxpayer and is self-supporting A daughter who does not live with taxpayer A granddaughter, who lives with taxpayer, is 24 years old, and a full-time student An uncle who lives with taxpayer A nephew who lives with taxpayer A niece who does not live with taxpayer A half brother who lives with taxpayer A cousin who does not live with taxpayer A step daughter who lives with taxpayer A daughter-in-law who does not live with taxpayer A family friend who is supported by and lives with taxpayer An ex-husband (divorce occurred two years ago) who lives with taxp ayer Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. ANS ANS ANS ANS ANS ANS ANS ANS ANS ANS ANS ANS D B B B C B C D C B B B PTS PTS PTS PTS PTS PTS PTS PTS PTS PTS PTS PTS 1 1 1 1 1 1 1 1 1 1 1 1 REF REF REF REF REF REF REF REF REF REF REF REF p. 3-11 to 3-15 p. 3-11 to 3-15 p. 3-11 to 3-15 p. 3-11 to 3-15 p. 3-11 to 3-15 p. 3-11 to 3-15 p. 3-11 to 3-15 p. 3-11 to 3-15 p. 3-11 to 3-15 p. 3-11 to 3-15 p. 3-11 to 3-15 p. 3-11 to 3-15 3-27 PROBLEM 1.Eva had the following transactions during 2008 Salary Interest income on bonds Issued by City of Baltimore Issued by Dell Corporation Alimony received Child support received City and state income taxes paid Bank loan obtained to pay credit card debt What is Evas AGI for 2008? ANS $86,000. $80,000 (salary) + $3,000 (interest on Dell Corporation bonds) + $3,000 (alimony received). Interest on the City of Baltimore bonds and the child support payments ar e exclusions from gross income. The bank loan has no tax effect, as Eva is obligated to repay the amount borrowed. City and state income taxes are deductions from AGI. PTS 1 REF Example 1 Example 2 Exhibit 3-1 to 3-3 $80,000 $2,000 3,000 5,000 3,000 9,000 4,000 10,000 3-28 2009 Annual Edition/Test Bank 2.Scott had the following transactions for 2008 Salary Alimony paid Recovery from car accident Personal injury damages Punitive damages chip in from parents Property sales Loss on sale of sailboat (used for sport and owned 4 years) Gain on sale of GMC stock (held for 8 months as an investment) What is Scotts AGI for 2008? ANS $164,000. $90,000 (salary) $6,000 (alimony paid) + $75,000 (punitive damage award) + $5,000 (short-term capital gain on the sale of stock investment). The personal injury recovery and the gift from Scotts parents are exclusions from gross income. The loss from the sale of the sailboat is personal and, therefore, nondeductible. The short-term capital gain on t he sale of the GMC stock is taxed in full as ordinary income. PTS 1 REF p. 3-6 p. 3-33 Exhibit 3-1 Exhibit 3-2 Example 43 $ 90,000 6,000 $50,000 75,000 125,000 24,000 ($ 3,000) 5,000 2,000 3.Kristen had the following transactions for 2008 Salary Moving expenses incurred to change jobs Inheritance received from deceased uncle Life insurance proceeds from policy on uncles life (Kristen was named the beneficiary) Cash prize from church raffle Payment of state income tax What is Kristens AGI for 2008? ANS $76,000. $80,000 (salary) + $5,000 (raffle prize) $9,000 (moving expenses). The inheritance and life insurance proceeds are exclusions from gross income. The payment by Kristen of her state income tax is a deduction from AGI. Thus, it does not enter into the determination of AGI. PTS 1 REF p. 3-5 Exhibits 3-1 to 3-3 $ 80,000 9,000 400,000 100,000 5,000 4,000 4. Warren, age 17, is claimed as a dependent by his father. In 2008, Warren has dividend income of $1,500 and earns $400 fro m a part-time job. . b. What is Warrens taxable income for 2008? Suppose Warren earned $1,200 (not $400) from the part-time job. What is Warrens taxable income for 2008? Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions 3-29 ANS a. $1,000. Warrens standard deduction is the greater of $400 (earned income) + $300 or $900. Thus, $1,500 + $400 $900 = $1,000 taxable income. b. $1,200. Warrens standard deduction now becomes $1,500 ($1,200 + $300). Thus, $1,500 + $1,200 $1,500 = $1,200 taxable income. REF Example 8 Example 10 PTS 1 5. Allison, age 22, is a full-time law student and is claimed by her parents as a dependent.During 2008, she received $1,300 interest income from a bank savings account and $5,300 from a parttime job. What is Allisons taxable income for 2008? ANS $1,150. Allisons standard deduction is the greater of $5,300 (earned income) + $300 or $900. But the $5,600 is limited to $5,450 (the standard deduction allowed a single person). Thus, $1,300 + $5,300 $5,450 = $1,150 taxable income. PTS 1 REF Example 11 6. Heloise, age 74 and a widow, is claimed as a dependent by her daughter. For 2008, she had income as follows $2,500 interest on municipal bonds $3,200 Social Security benefits $3,000 income from a part-time job and $2,800 dividends on stock investments.What is Heloises taxable income for 2008? ANS $1,150. $3,000 (income from job) + $2,800 (dividends) $3,300 (basic standard deduction is $3,000 + $300) $1,350 (additional standard deduction for age) = $1,150. The Social Security benefits of $3,200 and the interest on municipal bonds of $2,500 are not taxable. PTS 1 REF Table 3-1 Example 9 7. Pablo is married to Elena, who lives with him. Both are U. S. citizens and residents of Kansas. Pablo furnishes all of the support of his parents, who are citizens of Nicaragua and residents of Mexico. He also furnishes all of the support of Elenas parents, who are citizens and residents of Nicaragua. Elena has no gross income for the year.If Pablo files as a married person filing separately, how many personal and dependency exemptions can he claim on his return? ANS Four. A personal exemption for Pablo and Elena and dependency exemptions for Pablos parents. Elena can be claimed because she has no income. Presumably she is not being claimed as a dependent by another. Although Pablos parents are neither U. S. citizens nor residents, they are residents of Mexico. Elenas parents meet neither the citizenship nor residency tests. PTS 1 REF p. 3-10 p. 3-17 3-30 2009 Annual Edition/Test Bank 8. Homer (age 68) and his wife Jean (age 70) file a joint return. They furnish all of the support of Luther (Homers 90-year old father), who lives with them.For 2008, they received $6,000 of interest income on city of Chicago bonds and interest income on corporate bonds of $48,000. Compute Homer and Jeans taxable income for 2008. ANS $24,500. Their gross income is $48,000 since the $6,000 interest on municipal bonds is an exclusion. They are entitled to a basic standard deduction of $10,900 and additional standard deductions of $1,050 each for being age 65 or older. They can claim a dependency exemption of $3,500 for Luther and two personal exemptions for themselves. Thus, $48,000 $10,900 $2,100 (2 $1,050) $10,500 (3 $3,500) = $24,500. PTS 1 REF p. 3-10 p. 3-13 Exhibit 3-1 Table 3-1 Table 3-2 9.Ellen, age 39 and single, furnishes more than 50% of the support of her parents, who do not live with her. Ellen practices as a self-employed interior decorator and has gross income in 2008 of $120,000. Her deductions are as follows $30,000 business and $7,900 itemized. a. b. What is Ellens taxable income for 2008? Can Ellen qualify for head of household filing status? Explain. ANS a. $71,500. $120,000 (gross income) $30,000 (business deductions for AGI) = $90,000 (AGI) $8,000 (standard deduction) $3,500 (personal exemption) $7,000 (dependency exemptions for parents) = $71,500 taxable income. The m ake presumes that the parents meet the other dependency exemption tests (e. g. , gross income) besides support. b.Ellen can qualify for head of household filing status if she furnishes more than half of the cost of maintaining her parents household. Also, at least one of Ellens parents must qualify as her dependent (see part a. above). REF p. 3-5 p. 3-10 p. 3-13 Table 3-1 Example 42 PTS 1 10. Ashley earns a salary of $35,000, has capital gains of $4,000, and interest income of $3,000 in 2008. Her husband died in 2007. Ashley has a dependent son, Tyrone, who is age 8. Her itemized deductions are $8,000. a. b. Calculate Ashleys taxable income for 2008. What is her filing status? $35,000 4,000 3,000 $42,000 (10,900) (7,000) $24,100 ANS a. Salary Capital gains Interest AGI Less Standard deduction Less Personal exemption and dependency deduction ($3,500 2) Taxable income b.Ashley satisfies the requirements for a surviving spouse. PTS 1 REF p. 3-10 p. 3-30 Table 3-1 Figure 3-1 11. During the year, Keith has the following transactions Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions Loss from the sale of a business computer Loss from the sale of a personal use auto Long-term loss from the sale of land held for investment Short-term gain from the sale of a stock investment How are these transactions handled for income tax purposes? 3-31 $3,500 1,500 5,000 1,000 ANS $3,500 ordinary loss and $3,000 capital loss deduction. The $1,000 unused capital loss can be carried over to the next year.The $1,500 loss from the sale of a personal use auto is not allowed. PTS 1 REF Example 44 Example 49 12. During 2008, Dena has the following gains and losses LTCG LTCL STCG STCL a. b. How much is Denas tax liability if she is in the 15% tax bracket? If her tax bracket is 33% (not 15%)? $4,000 1,000 500 3,000 ANS a. $0. After the initial netting process, there is a LTCG of $3,000, and a STCL of $2,500. The $2,500 of STCL is applied to the LTCG of $3,000. The final result is a net LTCG of $500 taxed at 0% for a tax liability of $0. b. $75. See part a. for the netting process. Now the $500 is taxed at 15% for a tax liability of $75. REF Example 46 Example 47 PTS 1 13.During 2008, Marlo had the following capital gains and losses Gain from the sale of coin collection (held three years) Gain from the sale of land held as an investment for half-dozen years Gain from the sale of stock held as an investment (held for 10 months) a. b. How much is Marlos tax liability if he is in the 15% tax bracket? If his tax bracket is 33% (not 15%)? $5,000 4,000 1,000 ANS a. $1,100. Gain of $5,000 on the sale of the coin collection is taxed at 15% (lesser of 28% or 15%). The same is true for the short-term gain of $1,000. The gain of $4,000 on the sale of the land is taxed at 0%. Thus, (15% $6,000) + (0% $4,000) = $900. b. $2,330. (33% $1,000) + (28% $5,000) + (15% $4,000) = $2,330. PTS 1 REF p. 3-33 Example 46 Example 47 14.During 20 08, Blaine has salary income of $100,000 and the following capital transactions 3-32 2009 Annual Edition/Test Bank LTCG LTCL STCL $10,000 (14,000) (3,000) How are these transactions handled for income tax purposes in 2008 and, if applicable, in future years? ANS First, netting the long-term transactions yields a net long-term capital loss of $4,000 $10,000 (gain) $14,000 (loss). Second, apply the $3,000 short-term capital loss against ordinary income. Third, carry the unused $4,000 net long-term capital loss over to 2009. PTS 1 set about 1. Mr. Lee is a citizen and resident of Hong Kong, while Mr. Anderson is a citizen and resident of the U. S. In the taxation of income, Hong Kong uses a territorial approach, while the U. S. follows the global system. In terms of effect, explain what this means to Mr. Lee and Mr. Anderson. ANS Mr.Lee is taxed only on the income he receives from Hong Kong, while Mr. Anderson is taxed on his global income. Under the U. S. approach, a citizen or resid ent is taxed on a worldwide basis. Since the U. S. system could lead to the same income being taxed twice, various relief provisions are necessitated (e. g. , foreign tax credit). PTS 1 REF Global Tax Issues on p. 3-5 REF Example 49 2. In satisfying the support test and the gross income test for claiming a dependency exemption, a scholarship received by the person being claimed is handled the same way for each test. Do you agree or protest with this statement? Why? ANS Disagree. For purposes of the support test, all of the scholarship is disregarded.For purposes of the gross income test, only the taxable part is considered (i. e. , the nontaxable part is disregarded). PTS 1 REF p. 3-12 p. 3-14 Tax Determination Personal and Dependency Exemptions An Overivew of Property Transactions 3-33 3. In order to claim a dependency exemption for other than a qualifying child, a taxpayer must meet the support test. Generally, this is done by furnishing more than 50% of a dependents support. Wh at exceptions exist, if any, where the support furnished need not be more than 50%? ANS One exception involves the multiple support agreement. Here, family members collectively furnish more than 50% of the support, but no one person does so.For those qualified individuals who contribute more than 10%, the sort out can designate which person may claim the dependency exemption. The piece exception involves the divorced parents of children. The custodial parent is entitled to the dependency exemptions for the children. If this parent agrees not to claim the exemption(s), then the noncustodial parent may do so. PTS 1 REF p. 3-15 p. 3-16 4. In applying the gross income test in the case of dependents that are married, could the application of community property laws have any effect? Explain. ANS Most often, the application of community property laws will impact on the dependency status of the spouse of a qualifying child.Suppose, for example, Roger maintains a household that includes h is 18-year-old daughter, Alice, and her husband, Craig. Assume further that Alice earns $8,000 from a part-time job while Craig has no income. In a common law state, Craig meets the gross income test (i. e. , $0) while Alices gross income, as a qualifying child, is immaterial. In a community property state, however, Craig now violates the gross income test with $4,000 (50% $8,000) of income, while Alice remains immune. PTS 1 REF p. 3-36 5. In meeting the criteria of a qualifying child for dependency exemption purposes, when if ever, might the childs income become relevant? ANS The amount of income earned by the qualifying child normally is of no consequence.If, however, such income is used to make the child self-supporting, then he or she can no longer be a qualifying child. Such child also would not be a qualifying relative due to the gross income and support tests. PTS 1 REF p. 3-12 3-34 2009 Annual