Tax Accounting

3 CHAPTER TAX DETERMINATION; PERSONAL AND DEPENDENCY EXEMPTIONS; AN OVERVIEW OF PROPERTY TRANSACTIONS Instructor: The test items in both the print Test Bank and ExamView test-creation software are numbered by question type within each chapter. Thus, users of ExamView can more easily preview their selections using the printed Test Bank in the same numbering system.Status: Present Topic TRUE OR FALSE 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Level of current income tax rates Definition of gross income Income taxation and example of global approach Effect of AGI on the medical deduction Filing status: surviving spouse versus married filing separate Additional standard deductions: single and married amounts Standard deduction and adjustment for inflation Additional standard deduction of a dependent Itemized deductions versus standard deduction Basic and additional standard deductions Itemized deductions or standard deduction Itemized deductions or stan dard deduction Itemized deductions or standard deduction Standard deduction for resident alien Standard deduction requirements when married persons file separately Standard deduction: year of death Dependents standard deduction Dependents standard deduction Dependents standard deduction Dependents personal exemption not allowed Claiming a spouse on a separate return Determination of marital status Determination of marital status Gross income test and scholarships Support test and capital expenditures Support test and unexpended funds of dependent Multiple support agreement: amount of support rendered by dependent Divorce decree silent: custodial parent wins Relationship test for former in-laws and ex-wife 3-1 Unchanged Unchanged Unchanged Modified Unchanged New Unchanged Unchanged New Unchanged Unchanged Unchanged New Unchanged Unchanged Unchanged New New Unchanged 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 Edition Q/P in Prior Edition Question/ 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 Annual Edition/Test Bank 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 child: age test and full-time tudent status Qualifying child: abode test Married child and joint return test Citizenship/residency test for dependents Citizenship/residency test for dependents Stealth taxes: nature of Tax Relief Reconciliation Act of 2001 and elimination of the phaseout of exemptions Kiddie tax: earned income and support exception Kiddie tax: when not applicable Kiddie tax: how applied Kiddie tax: when parental election available; ch ild may be required to file Kiddie tax: unearned income requirement Kiddie tax: married filing jointly exception Requirements for fiscal year, timely filed return Surviving spouse status Surviving spouse status: year of death Marriage penalty: married persons filing separate returns Head of household status Head of household status Abandoned spouse status: contrast married filing separate Personal use losses versus personal use gains Long-term capital gain: lowest rate applicable Taxation of gain on collectibles Offsetting different-term capital losses to different term capital gains 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 Taxable income of a dependent Taxable income of a dependent Taxable income of a dependent Taxable income of a dependent Determination of exemptions Determination of exemptions Determination of exemptions Unc hanged Unchanged Unchanged New Unchanged New Unchanged New Modified New Modified New Modified 1 2 3 5 7 9 11 13 Tax Determination; Personal and Dependency Exemptions An Overivew of Property Transactions 14 15 Question/ Problem 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Topic Qualifying child: eligible parties Multiple support agreement Determination of exemptions Definition of a qualifying relative Exceptions to the kiddie tax Filing status for years after spouses death Widows filing status Filing status in selected situations Abandoned spouse filing status Filing status of nonqualifying abandoned spouse Loss on business and personal assets Taxation of different classes of capital gains Taxation of different classes of capital gains Capital loss limitation Netting of different-term losses and differentterm gains MATCHING 1-12 13-24 25-36 Characteristics of tax determination: personal and dependency exemptions, tax rates, filing status Characteristics of tax determination: personal and dependency exemptions, tax rates, filing status Dependency exemption categories: qualifying child and qualifying relative PROBLEMS 1 2 4 5 6 7 8 9 10 11 12 13 14 Determining AGI Determining AGI Determining AGI Taxable income of a dependent Taxable income of a dependent Taxable income of a dependent Determination of exemptions Determination of taxable income Determination of taxable income and filing status Determination of taxable income and filing status Computation of capital gains and losses Taxation of capital gains and losses Taxation of capital gains and losses Taxation of capital gains and losses: treatment of net losses and carryover possibility Unchanged Unchanged New New Modified New Unchanged Modified New Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Determination of exemptions Definition of qualifying child Unchanged Unchanged Status: Present Edition Unchanged Unchanged New New New Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged N ew 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 Bank Question/ Problem Topic ESSAY 1 2 3 4 5 6 7 8 10 11 12 13 14 Territorial versus global systems of income taxation Compared Treatment of scholarships for dependency exemption purposes Exceptions to the support test for dependency exemption purposes Effect of community property law on application of the gross income test to married dependents Exceptions to the gross income test for qualifying child purposes Qualifying child and tie-breaker rules Stealth tax: definition of Kiddie tax: exceptions to its application Filing status: comparison of the tax results of different types Filing status: situations which qualify and do not qualify for head of household Filing status: surviving spouse transition status Ramifications of the election to file a joint Federal income tax return with a nonresident alien Concentrating deduction s from AGI and claiming the standard deduction in alternate years Correlation between multiple support agreement and deduction for medical expenses Status: Present Edition Q/P in Prior Edition Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged New Unchanged Unchanged Unchanged Unchanged New Unchanged 1 2 3 4 5 6 7 8 9 10 11 12 9 Tax Determination; Personal and Dependency Exemptions An Overivew of Property Transactions TRUE/FALSE 1. Currently, the top Federal income tax rate in effect is the highest it has ever been. ANS: F The income tax rate in effect in 1944-1945 ranged from 23% to 94%. PTS: 1 REF: p. 3-3 3-5 2.As used in the income tax formula, gross income would not include the receipt of a loan the taxpayer obtained from a bank. ANS: T Borrowing money does not result in gross income. PTS: 1 REF: Example 1 3. Kim, a resident of Korea, is a citizen of the U. S. Any income Kim receives from land he owns in Korea is not subject to the U. S. income tax. ANS: F Und er 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 REF: Global Tax Issues on p. 3-5. 4. An decrease in the amount of a taxpayers AGI can increase the amount of medical expenses allowed as a deduction.ANS: T More medical expenses can be deducted since the 7. 5% of AGI floor will be smaller. PTS: 1 REF: Example 4 5. Because only 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. ANS: 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 REF: Table 3-1 6. The additional standard deduction for age and blindness is the same amount for single as for married taxpayers. ANS: F For 2008, compare $1,350 (single) with $1,050 (married).PTS: 1 REF: Table 3-2 3 -6 2009 Annual Edition/Test Bank 7. The basic and additional standard deductions are subject to an annual adjustment for inflation. ANS: T The inflation adjustment is made annually to both the basic standard deduction and the additional standard deduction. PTS: 1 REF: p. 3-8 8. Tad claims his 70-year-old mother as a dependent. The mother may not claim an additional standard deduction for her age. ANS: F The mother can claim the additional standard deduction for her age. PTS: 1 REF: Example 9 9. In 2008, Sally is 72 and single. If she has itemized deductions of $6,000, she should claim the standard deduction alternative.ANS: T The standard deduction yields $6,800 ($5,450 + $1,350). PTS: 1 REF: Example 6 10. Leslie and Morgan are 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). ANS: 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 deductions of $11,500 for 2008, Derek should not claim the standard deduction. ANS: T The standard deduction would only provide $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. ANS: T The standard deduction provides only $13,000 ($10,900 + $1,050 + $1,050). PTS: 1 REF: p. 3-8 | Table 3-1 | Table 3-2 13. Claire, age 66, claims head of household filing status. If she has itemized deductions of $8,500 for 2008, she should not claim the standard deduction. ANS: F The standard deduction yields $9,350 ($8,000 + $1,350). PTS: 1 REF: p. 3-8 | Table 3-1 | Table 3-2 Tax Determination; Personal and Dependency Exemptions An Overivew of Property Transactions 14. Enrique is a citizen of Honduras and a resident of the U. S. If he files a U. S. income tax return, Enrique cannot c laim the standard deduction. ANS: F Either U. S. itizenship or residency will suffice in order to claim the standard deduction. PTS: 1 REF: p. 3-9 3-7 15. Dan and Donna are husband and wife and file separate returns for the year. If Dan itemizes his deductions from AGI, Donna cannot claim the standard deduction. ANS: T If Dan itemizes, Donna must itemize. PTS: 1 REF: p. 3-9 16. Logan, an 80-year-old widower, dies on January 2, 2008. Even though he lived for only two days, on his final income tax return for 2008, the full basic and additional standard deductions can be claimed. ANS: T No proration of the standard deduction is necessary in this case. PTS: 1 REF: p. 3-9 17. Benjamin, age 16, is claimed as a dependent by his parents.During 2008, he earned $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 REF: Example 10 18. Debby, age 18, is claimed as a dependent by her mother. During 2008, she earned $1,100 in interest 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 REF: Example 8 19. Katrina, age 16, is claimed as a dependent by her parents. During 2008, she earned $5,200 as a checker 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 available to single persons (or $5,450 for 2008). PTS: 1 REF: 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 REF: Example 12 21. When separate income tax returns are filed by married taxpayers, one spouse cannot claim the other spouse as an exemption. ANS: F An exemption is allowed if the spouse has no gross income and is not claimed as a dependent by another. PTS: 1 REF: p. 3-11 22. Butch and Minerva are divorced 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 REF: 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 determining whether the support test is met for dependency exemption purposes, only the taxable portion of a scholarship is considered. ANS: F In applying the support test, all of the scholarship is disregarded. Scholarships are treated differently for purposes of the gross income test. PTS: 1 REF: Example 23 25. Scott buys his mother a sewing machine. For purposes of meeting 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 mothers use. PTS: 1 REF: Example 26 2 6. If the individual does not spend funds that have been received from another source (e. g. , Social Security 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 Transactions 3-9 27. Using borrowed funds from a mortgage on her home, Lisa provides 55% of her support, while her daughters furnished the rest.Lisa cannot be claimed as a dependent under a multiple support agreement. ANS: T The daughters do not provide more than half of their mothers support. In this situation, the mother is self-supporting. PTS: 1 REF: Example 25 28. Roy and Linda were divorced in 2007. The divorce decree awards custody of their children to Linda but is silent as to who is entitled to claim them as dependents. If Roy furnished more than half of their support, he can claim them as dependents. ANS: F Not unles s Linda consents. PTS: 1 REF: p. 3-17 29. In 2008, Hal furnishes more than half of the support of his ex-wife and her father, neither of whom lives with him. The divorce occurred in 2007.Hal may claim the father-in-law but not the ex-wife as dependents. ANS: T The father-in-law meets the relationship test, but the ex-wife does not. However, except in the year of divorce, an ex-wife can be a dependent under the member of the household test. PTS: 1 REF: p. 3-14 30. After her divorce, Hope continues to support her ex-husbands sister, Cindy, who does not live with her. Hope cannot claim Cindy as a dependent. ANS: F For purposes of the 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 full-time student.ANS: T Being age 20, Darren cannot be a qualifying child unless he is a full-time student. As a qualifying 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 qualifying 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 residence test. PTS: 1 REF: p. 3-17 36. Stealth taxes are directed at higher income taxpayers.ANS: T Such stealth taxes as the phaseout of exemptions do not begin until taxpayers reach significant income levels. PTS: 1 REF: Tax in the News 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 longer applies. ANS: F The kiddie tax does apply if the child is a full-time student under age 24. PTS: 1 REF: p. -23 Tax Determination; Personal and Dependency Exemptions An Overivew of Property Transactions 3-11 40. When the kiddie tax applies and the parents file separate returns, the applicable parent (for determining the parental tax) is the one with the greater taxable income. ANS: T PTS: 1 REF: p. 3-25 41. When the kiddie tax applies, the child need not file an income tax return as the childs income will be reported on the parents return. ANS: F The child need 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 Only if he or she files a joint return is such child exempt from the kiddie tax. PTS: 1 REF: p. 3-23 44. An individual taxpayer uses a fiscal year February 1-January 31. The due date of this taxpayers Federal income tax return is June 15 of each tax year. ANS: F The tax return is due on or before the fifteenth day of the fourth month following 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 deceased spouse died. ANS: F Surviving spouse filing status begins in the year following 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 estate 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 many tax benefits that are unavailable to married persons filing separatelye. g. , earned income credit, credit for child and dependent care expenses, deduction for interest paid on student loans. PTS: 1 REF: p. 3-29 | p. 3-30 48.Katelyn is divorced and maintains a household in which she and her daughter, Crissa, live. Crissa, age 22, earns $11,000 during 2008 as a model. Katelyn qualifies for head of household filing status. ANS: F Crissa is not Katelyns dependent. She fails the age test for qualifying child purposes and the gross income test for the qualifying 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 terms of income tax consequences, abandoned spouses are treated the same way as married persons filing separate returns. ANS: F An abandoned spouse is treated as a single taxpayer. Consequently, an abandoned spouse qualifies for head of household filin g status. PTS: 1 REF: p. 3-31 51. In 2008, Gordon sold his personal use automobile for a loss of $6,000. He also sold a personal stamp collection for a gain of $7,000. As a result of these sales, $7,000 is subject to income tax. ANS: T Gordon must recognize a capital gain of $7,000. The $6,000 loss on the sale of the personal use automobile is nondeductible. PTS: 1 REF: Example 43 52. In some cases, the tax on long-term 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. Gain on the sale 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-term capital loss, a collectible long-term capital gain, and a longterm capital gain from land held as investment. 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 following is a deduction from AGI? a. Alimony payments. b. Child support payments. c.Unreimbursed employee expenses. d. Loss on the sale of a personal automobile. e. None of the above. 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 | Exhibit 3-3 2. Which, if any, of the following is a deduction for AGI? a. Alimony payments. b. Interest 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 | Exhibit 3-3 3.During 2008, Marie had the following transactions: Salary Bank loan (proceeds used to buy personal auto) Alimony received Child support received Inheritance from deceased aunt $40,000 10,000 6,000 12,000 50,000 3-14 Maries AGI is: a. $40,000. b. $46,000. c. $52,000. d. $96,000. e. 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 | Exhibit 3-1 4. During 2008, Sam had the following transactions: Salary Interest income on General Electric Corporation bonds Gift 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 transactions: Salary Interest income on City of Denver bonds Damages for personal injury (car accident) Punitive damages (same car accident) Cash 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 investment Moving expense to change jobs Received repayment 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 investment) $10,000 (moving expenses ) + $1,000 (interest on loan) = $68,000.The unused loss of $1,000 from the stock investment sale can be carried over to 2009. The loan repayment of $10,000 is a return of capital and has no effect on gross income. Property taxes paid on a personal residence is a deduction from AGI and has no impact on the determination of AGI. PTS: 1 REF: p. 3-5 | p. 3-34 | Exhibit 3-3 7. Monica, age 18, is claimed by her parents as a dependent. During 2008, she had interest income from a bank savings 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 eligible 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 inc ome 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 bank interest, and $1,800 in cash dividends from stocks. Annas taxable income for 2008 is: a. $3,000 $900 $2,700 = $0. b. $3,000 $2,600 = $400. c. $3,000 $900 $1,350 = $750. d. $7,800 $900 $2,700 = $4,200. e. None of the above. ANS: A Although Anna has no earned income, she is entitled to a minimum regular standard deduction of $900. She also is allowed additional standard deductions for age and blindness of $2,700 ($1,3 50 + $1,350). At this level of income, the Social Security benefits are a nontaxable exclusion.PTS: 1 REF: Example 9 | Exhibit 3-1 | Table 3-2 10. Grace, age 67 and single, is claimed as a dependent on her sons tax return. During 2008, she had interest income of $2,400 and $700 of earned income from baby sitting. Graces taxable income is: a. $150. b. $750. c. $850. d. $2,100. e. 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 eligible for a personal exemption. PTS: 1 REF: Example 9 11. Troy 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 aside for future college expenses. Troy and Edie also provide more than half of the support of Troys cousin who does not live with them. Edies fathe r, who died on January 3, 2008, at age 80, has for many years qualified 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 member of their household.It is assumed that Edies father, as was true in the past, qualified as a dependent up to the point of death. PTS: 1 REF: p. 3-11 | p. 3-12 | p. 3-14 Tax Determination; Personal and Dependency Exemptions An Overivew of Property Transactions 3-17 12. Evan and Eileen Carter are husband and wife and file a joint return for 2008. Both are under 65 years of age. They provide more than half of the support of their daughter, Pamela (age 25), who is a full-time medical student. Pamela receives a $3,400 scholarship covering her room and board a t college. They furnish all of the support of Belinda (Evans grandmother), who is age 70 and lives in a nursing home.They also support Peggy (age 66), who is a friend of the family and lives with them. How many personal and dependency exemptions may the Carters claim? a. Two. b. Three. c. Four. d. Five. e. None of the above. ANS: D Five (Evan, Eileen, Pamela, Belinda, and Peggy). Personal exemptions for the Carters and dependency exemptions for the rest. Pamela is not a 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 member of the household but satisfies the relationship test.Peggy does not satisfy the relationship test but is a member of the household. PTS: 1 REF: p. 3-11 | p. 3-12 | p. 3-14 13. In which, if any, of the following situations may the individual not be claimed as a dependent of t he taxpayer? a. A former spouse who lives with the taxpayer (divorce took place this year). b. A stepmother who does not live with the taxpayer. c. A married daughter who lives with the taxpayer. d. A half brother who does not live with the taxpayer and is a citizen and resident of Canada. e. A cousin who lives with the taxpayer. ANS: A In the year of divorce, a former spouse cannot qualify under the member of the household test (choice a. ). The stepmother meets the relationship test (choice b. ).A married daughter can be claimed as long as she does 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 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 ex-husband who does not live with her. The divorce occurred two 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 qualifying child cannot include: a. A nonresident alien. b. A married son who files a joint return. c. An uncle. d. A daughter who is away at co llege. e. A brother who is 28 years of age and disabled. ANS: C A qualifying child can be a nonresident alien under the adopted child exception (choice a. ). The filing of a joint return is not fatal if filing is not required and its purpose is to obtain a tax refund (choice b. ). An uncle does not meet the relationship test (choice c. ). A temporary absence is permissible under the domicile test (choice d. ). A brother meets the relationship test, and disability waives the age test (choice e. ). PTS: 1 REF: p. 3-12 | p. 3-17 16.Ellen, age 12, lives in the same household with her father, grandfather, and uncle. The cost of maintaining the household is provided by her grandfather (40%) and her uncle (60%). Disregarding tie-breaker rules, Ellen is a qualifying child as to: a. All parties involved (i. e. , father, grandfather, and uncle). b. Only her grandfather and uncle. c. Only her uncle. d. Only her father. e. None of the above. ANS: A Under the abode and relationship tests, Ellen is a qualifying child as to all parties. The amount of support provided by each person is not relevant. PTS: 1 REF: p. 3-12 Tax Determination; Personal and Dependency Exemptions An Overivew of Property Transactions 17.Millie, age 80, is supported 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 me ets 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 Choices 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 tha n 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 continued 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, mai ntains 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 properly claims his mother as a dependent. Tammy provides over one-half the support for her 18-year old brother, Dan. Dan earned $4,200 in 2008 working at a fast 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 communicated with him since June of that year. She maintains a household in which she and her two dependent child ren live. Which of the following statements about Wilmas filing status in 2008 is correct? 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 Arnold cannot file jointly without Sybils consent (choice a. ). He is not an abandoned spouse since Ev ans 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 being married, his only option is married, filing separately (choice b. ). PTS: 1 REF: p. 3-29 to 3-32 26. During the year, Kim sold the following assets: business auto for a $1,000 loss, stock investment for a $1,000 loss, and pleasure yacht for a $1,000 loss. Presuming 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 ordinary loss, while the loss on the stock investment of $1,000 is a capital loss. The loss on the yacht of $1,000 is personal and, therefore, cannot be deducted.PTS: 1 REF: p. 3-33 | Example 43 | Example 44 Tax Determination; Personal and Dependency Exemptions An Overivew of Property Transactions 27. Perry is in the 33% tax 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%, while long-term capital gains are subject to a top rate of 15%. Short-term capital gains are treated the same as ordinary 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 sale of a stock investment Kirbys tax consequences from these gains are as follows: a. (5% $10,000) + ( 15% $13,000). b. (0% $10,000) + (15% $13,000). c. (15% $13,000) + (28% $11,000). d. (15% $23,000). . None of the above. ANS: B Collectibles and short-term capital gains are taxed at Joans regular 15% tax bracket, while longterm capital gains are subject to a rate of 0% (5% prior to 2008). PTS: 1 REF: p. 3-33 $11,000 10,000 2,000 29. For the current year, David has salary income of $80,000 and the following property transactions: Stock investment sales Long-term capital gain Short-term capital loss Loss on sale of camper (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 against the long-term capital gain of $9,000 produces a net short-term capital loss of $2,000. Offsetting the capital loss against ordinary income yields AGI of $78,000 ($80,000 $2,000). PTS: 1 REF: Example 43 | Example 49 30. During 2008, Trevor has the following capital transactions: LTCG Long-term collectible gain STCG STCL $ 6,000 2,000 4,000 10,000 After the netting process, the following results: a. Long-term collectible gain of $2,000. b. LTCG of $6,000, Long-term collectible gain of $2,000, and a STCL of $6,000. c.LTCG of $6,000, Long-term collectible gain of $2,000, and a STCL carryover to 2009 of $3,000. d. LTCG of $2,000. e. None of the above. ANS: D First, the STCG and STCL are combined, resulting in a STCL of $6,000. Of this STCL, $2,000 is applied against the collectible gain of $2,000, and the $4,000 balance is applied against the LTCG of $6,000. The result is a LTCG of $2,000. PTS: 1 MATCHING Match the statements that relate to each other. Note: Choice L may be used more than once. a. Not available to 65-year old taxpayer who itemizes b. Exception for U. S. citizenship or r esidency test (for dependency exemption purposes) c. Largest basic standard deduction available to a dependent who has no earned income d.Not considered for dependency exemption purposes e. Qualifies for head of household filing status f. A child (age 15) who is a dependent and has only earned income. g. Not considered in applying support test (for dependency exemption purposes) h. Phaseout of personal and dependency exemptions i. Unmarried taxpayer who can use the same tax rates as married persons filing jointly j. Exception to the support test (for dependency exemption purposes) k. A child (age 16) who is a dependent and has net unearned income l. No correct match provided REF: Example 48 Tax Determination; Personal and Dependency Exemptions An Overivew of Property Transactions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.Abandoned spouse Stealth tax Additional standard deduction Scholarship funds Surviving spouse Marriage penalty Canada and Mexico Age of a qualifying relative $900 Kiddi e tax applies Kiddie tax does not apply Multiple support agreement 3-25 1. ANS: E PTS: 1 REF: p. 3-31 NOT: An abandoned spouse qualifies for head of household filing status. 2. ANS: H PTS: 1 REF: p. 3-20 NOT: An example of a stealth tax is the phaseout of exemptions. Tax in the News on p. 3-20 3. ANS: A PTS: 1 REF: p. 3-8 NOT: A taxpayer who itemizes (claims deductions from AGI) is not eligible for either the basic or additional standard deductions. 4. ANS: G PTS: 1 REF: p. 3-14 | p. -15 NOT: Scholarship funds are not considered when applying the support test. The taxable portion of scholarships are taken into account in applying the gross income test. 5. ANS: I PTS: 1 REF: p. 3-30 6. ANS: L PTS: 1 REF: p. 3-29 NOT: The traditional marriage penalty applied in some cases where married persons filed a joint return. 7. ANS: B PTS: 1 REF: p. 3-17 NOT: Citizenship or residency in these countries will suffice. 8. ANS: D PTS: 1 REF: p. 3-19 9. ANS: C PTS: 1 REF: p. 3-10 NOT: This amount co uld be greater if earned income exists. 10. ANS: K PTS: 1 REF: p. 3-25 11. ANS: F PTS: 1 REF: p. 3-23 NOT: The kiddie tax is inapplicable in situations where the child has no unearned income. 12. ANS: J PTS: 1 REF: p. -15 Match the statements that relate to each other. Note: Choice L may be used more than once. a. Available to a 70-year-old father claimed as a dependent by his son b. The highest income tax rate applicable to a taxpayer c. Equal to tax liability divided by taxable income d. Not eligible for the standard deduction e. No one qualified taxpayer meets the support test f. Taxpayers cousin does not qualify g. A dependent child (age 17) who has only unearned income h. Highest applicable rate is 35% i. Applicable rate could be as low as 0% j. Maximum rate is 28% k. Income from foreign sources not subject to tax l. No correct match provided 3-26 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 009 Annual Edition/Test Bank Multiple support agreement Kiddie tax not imposed Nonre sident alien Tax Rate Schedule Gain on collectibles (held more than one year) Marginal income tax rate Average income tax rate Additional standard deduction Relationship test (for dependency exemption purposes) Long-term capital gains Global system of taxation Territorial system of taxation 13. ANS: E PTS: 1 REF: p. 3-15 NOT: A qualified taxpayer is one who satisfies the more-than-10% contribution test and meets all of the other requirements for claiming a dependency exemption. 14. ANS: L PTS: 1 REF: p. 3-23 NOT: The kiddie tax can apply when the child has unearned income. 15. ANS: D PTS: 1 REF: p. 3-9 16. ANS: H PTS: 1 REF: p. 3-21 17. ANS: J PTS: 1 REF: p. 3-33 18. ANS: B PTS: 1 REF: p. 3-21 19. ANS: C PTS: 1 REF: p. 3-21 20.ANS: A PTS: 1 REF: Example 9 21. ANS: F PTS: 1 REF: p. 3-14 NOT: A cousin can qualify as a dependent under the member of the household test but not under the relationship test. 22. ANS: I PTS: 1 REF: Example 46 23. ANS: L PTS: 1 REF: p. 3-5 NOT: Global Tax Iss ues 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 taxpayer Tax De termination; 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 t he child support payments are exclusions from gross income. The bank loan has no tax effect, as Eva is obligated to repay the amount borrowed. City and state income taxes are deductions from AGI. PTS: 1 REF: Example 1 | Example 2 | Exhibit 3-1 to 3-3 $80,000 $2,000 3,000 5,000 3,000 9,000 4,000 10,000 3-28 2009 Annual Edition/Test Bank 2.Scott had the following transactions for 2008: Salary Alimony paid Recovery from car accident Personal injury damages Punitive damages Gift from parents Property sales Loss on sale of sailboat (used for pleasure and owned 4 years) Gain on sale of GMC stock (held for 8 months as an investment) What is Scotts AGI for 2008? ANS: $164,000. $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 the sale of the GMC stock is taxed in full as ordinary income. PTS: 1 REF: p. 3-6 | p. 3-33 | Exhibit 3-1 | Exhibit 3-2 | Example 43 $ 90,000 6,000 $50,000 75,000 125,000 24,000 ($ 3,000) 5,000 2,000 3.Kristen had the following transactions for 2008: Salary Moving expenses incurred to change jobs Inheritance received from deceased uncle Life insurance proceeds from policy on uncles life (Kristen was named the beneficiary) Cash prize from church raffle Payment of state income tax What is Kristens AGI for 2008? ANS: $76,000. $80,000 (salary) + $5,000 (raffle prize) $9,000 (moving expenses). The inheritance and life insurance proceeds are exclusions from gross income. The payment by Kristen of her state income tax is a deduction from AGI. Thus, it does not 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 d ividend income of $1,500 and earns $400 from a part-time job. . b. What is Warrens taxable income for 2008? Suppose Warren earned $1,200 (not $400) from the part-time job. What is Warrens taxable income for 2008? Tax Determination; Personal and Dependency Exemptions An Overivew of Property Transactions 3-29 ANS: a. $1,000. Warrens standard deduction is the greater of $400 (earned income) + $300 or $900. Thus, $1,500 + $400 $900 = $1,000 taxable income. b. $1,200. Warrens standard deduction now becomes $1,500 ($1,200 + $300). Thus, $1,500 + $1,200 $1,500 = $1,200 taxable income. REF: Example 8 | Example 10 PTS: 1 5. Allison, age 22, is a full-time law student and is claimed by her parents as a dependent.During 2008, she received $1,300 interest income from a bank savings account and $5,300 from a parttime job. What is Allisons taxable income for 2008? ANS: $1,150. Allisons standard deduction is the greater of $5,300 (earned income) + $300 or $900. But the $5,600 is limited to $5,450 (the standard deduction allowed a single person). Thus, $1,300 + $5,300 $5,450 = $1,150 taxable income. PTS: 1 REF: Example 11 6. Heloise, age 74 and a widow, is claimed as a dependent by her daughter. For 2008, she had income as follows: $2,500 interest on municipal bonds; $3,200 Social Security benefits; $3,000 income from a part-time job; and $2,800 dividends on stock investments.What is Heloises taxable income for 2008? ANS: $1,150. $3,000 (income from job) + $2,800 (dividends) $3,300 (basic standard deduction is $3,000 + $300) $1,350 (additional standard deduction for age) = $1,150. The Social Security benefits of $3,200 and the interest on municipal bonds of $2,500 are not taxable. PTS: 1 REF: Table 3-1 | Example 9 7. Pablo is married to Elena, who lives with him. Both are U. S. citizens and residents of Kansas. Pablo furnishes all of the support of his parents, who are citizens of Nicaragua and residents of Mexico. He also furnishes all of the support of Elenas parents, who a re 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 exempt ion) $7,000 (dependency exemptions for parents) = $71,500 taxable income. The answer presumes that the parents meet the other dependency exemption tests (e. g. , gross income) besides support. b.Ellen can qualify for head of household filing status if she furnishes more than half of the cost of maintaining her parents household. Also, at least 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 r equirements 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 six years Gain from the sale of stock held as an investment (held for 10 months) a. b. How much is Marlos tax liability if he is in the 15% tax bracket? If his tax bracket is 33% (not 15%)? $5,000 4,000 1,000 ANS: a. $1,100. Gain of $5,000 on the sale of the coin collection is taxed at 15% (lesser of 28% or 15%). The same is true for the short-term gain of $1,000. The gain of $4,000 on the sale of the land is taxed at 0%. Thus, (15% $6,000) + (0% $4,000) = $900. b. $2,330. (33% $1 ,000) + (28% $5,000) + (15% $4,000) = $2,330. PTS: 1 REF: p. 3-33 | Example 46 | Example 47 14.During 2008, Blaine has salary income of $100,000 and the following capital transactions: 3-32 2009 Annual Edition/Test Bank LTCG LTCL STCL $10,000 (14,000) (3,000) How are these transactions handled for income tax purposes in 2008 and, if applicable, in future years? ANS: First, netting the long-term transactions yields a net long-term capital loss of $4,000 [$10,000 (gain) $14,000 (loss)]. Second, apply the $3,000 short-term capital loss against ordinary income. Third, carry the unused $4,000 net long-term capital loss over to 2009. PTS: 1 ESSAY 1. Mr. Lee is a citizen and resident of Hong Kong, while Mr. Anderson is a 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 resident is taxed on a worldwide basis. Since the U. S. system could lead to the same income being taxed twice, various relief provisions are necessitated (e. g. , foreign tax credit). PTS: 1 REF: Global Tax Issues on p. 3-5 REF: Example 49 2. In satisfying the support test and the gross income test for claiming a dependency exemption, a scholarship received by the person being claimed is handled the same way for each test. Do you agree or disagree with this statement? Why? ANS: Disagree. For purposes of the support test, all of the scholarship is disregarded.For purposes of the gross income test, only the taxable 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 tax payer must meet the support test. Generally, this is done by furnishing more than 50% of a dependents support. What exceptions exist, if any, where the support furnished need not be more than 50%? ANS: One exception involves the multiple support agreement. Here, family members collectively furnish more than 50% of the support, but no one person does so.For those qualified individuals who contribute more than 10%, the group can designate which person may claim the dependency exemption. The second exception involves the divorced parents of children. The custodial parent is entitled to the dependency exemptions for the children. If this parent agrees not to claim the exemption(s), then the noncustodial parent may do so. PTS: 1 REF: p. 3-15 | p. 3-16 4. In applying the gross income test in the case of dependents that are married, could the application of community property laws have any effect? Explain. ANS: Most often, the application of community property laws will impact on the depen dency status of the spouse of a qualifying child.Suppose, for example, Roger maintains a household that includes his 18-year-old daughter, Alice, and her husband, Craig. Assume further that Alice earns $8,000 from a part-time job while Craig has no income. In a common law state, Craig meets the gross income test (i. e. , $0) while Alices gross income, as a qualifying child, is immaterial. In a community property state, however, Craig now violates the gross income test with $4,000 (50% $8,000) of income, while Alice remains immune. PTS: 1 REF: p. 3-36 5. In meeting the criteria of a qualifying child for dependency exemption purposes, when if ever, might the childs income become relevant? ANS: The amount of income earned by the qualifying child normally is of no consequence.If, however, such income is used to make the child self-supporting, then he or she can no longer be a qualifying child. Such child also would not be a qualifying relative due to the gross income and support tests. PTS: 1 REF: p. 3-12 3-34 2009 Annual