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ACC547 Chapter 4: Individual Income Tax Overview

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Question;Discussion Questions1.(LO1)How are realized income, gross income, and taxable income similar, and how are they different?2.(LO1)Are taxpayers required to include all realized income in gross income? Explain.3.(LO1)All else equal, should taxpayers prefer to exclude income or to defer it? Why?4.(LO1)Compare and contrastforandfromAGI deductions. Why areforAGI deductions likely more valuable to taxpayers thanfromAGI deductions?5.(LO1)What is the difference between gross income and adjusted gross income, and what is the difference between adjusted gross income and taxable income?6.(LO1)How do taxpayers determine whether they should deduct their itemized deductions or utilize the standard deduction?7.(LO1)Why are some deductions called ?above the line? deductions and others are called ?below the line? deductions? What is the ?line??8.(LO1)What is the difference between a tax deduction and a tax credit? Is one more beneficial than the other?9.(LO1)What types of income are taxed at rates different than the rates provided in tax rate schedules and tax tables?10.(LO1)What types of federal income-based taxes, other than the regular income tax, might taxpayers be required to pay? In general terms, what is the tax base for each of these other taxes on income?11.(LO1)Identify three ways taxpayers can pay their income taxes to the government.12.(LO2)Emily and Tony are recently married college students. Can Emily qualify as her parents? dependent? Explain.13.(LO2)In general terms, what are the differences in the rules for determining who is a qualifying child and who qualifies as a dependent as a qualifying relative? Is it possible for someone to be a qualifying child and a qualifying relative of the same taxpayer? Why or why not?14.(LO2)How do two taxpayers determine who has priority to claim the dependency exemption for a qualifying child of both taxpayers when neither taxpayer is a parent of the child (assume the child does not qualify as a qualifying child of either parent)? How do parents determine who gets to deduct the dependency exemption for a qualifying child of both parents when the parents are divorced or file separate returns?15.(LO3)What requirements do the abandoned spouse and qualifying widow or widower have in common?16.(LO3)For tax purposes, why is the married filing jointly tax status generally preferable to the married filing separately filing status? Why might a married taxpayer prefernotto file a joint return with the taxpayer?s spouse?17.(LO3)What does it mean to say that a married couple filing a joint tax return has joint and several liability for the taxes associated with the return?Problems18.(LO1)Jeremy earned $100,000 in salary and $6,000 in interest income during the year. Jeremy has two qualifying dependent children who live with him. He qualifies to file as head of household and has $17,000 in itemized deductions. Neither of his dependents qualifies for the child tax credit.Use the 2009 tax rate schedules to determine Jeremy?s taxes due.Assume that in addition to the original facts, Jeremy has qualifying dividends of $4,000. What is Jeremy?s tax liability including the tax on the dividends (use the tax rate schedules rather than the tax tables)?Assume the original facts except that Jeremy had only $7,000 in itemized deductions. What is Jeremy?s total income tax liability (use the tax rate schedules rather than the tax tables)?19.(LO1)David and Lilly Fernandez have determined their tax liability on their joint tax return to be $1,700. They have made prepayments of $1,500 and also have a child tax credit of $1,000. What is the amount of their tax refund or taxes due?20.(LO1)In 2009, Rick, who is single, has been offered a position as a city landscape consultant. The position pays $125,000 in cash wages. Assume Rick files single and is entitled to one personal exemption. Rick deducts the standard deduction instead of itemized deductions.What is the amount of Rick?s after-tax compensation (ignore payroll taxes)?Suppose Rick receives a competing job offer of $120,000 in cash compensation and nontaxable (excluded) benefits worth $4,000. What is the amount of Rick?s after-tax compensation for the competing offer? Which job should he take if taxes were the only concern?21.(LO1)Through November 2009, Tex has received gross income of $120,000. For December, Tex is considering whether to accept one more work engagement for the year. Engagement 1 will generate $7,000 of revenue at a cost of $4,000 which is deductible for AGI. In contrast, engagement 2 will generate $7,000 of revenue at a cost of $3,000, which is deductible as an itemized deduction. Tex files a single tax return.Calculate Tex?s taxable income assuming he chooses engagement 1 and assuming he chooses engagement 2. Assume he has no itemized deductions other than those generated by engagement 2.Calculate Tex?s taxable income assuming he chooses engagement 1 and assuming he chooses engagement 2. Assume he has $4,500 of itemized deductions other than those generated by engagement 2.Calculate Tex?s taxable income assuming he chooses engagement 1 and assuming he chooses engagement 2. Assume he has $7,000 of itemized deductions other than those generated by engagement 2.22.(LO1)Matteo, who is single and has no dependents, was planning on spending the weekend repairing his car. On Friday, Matteo?s employer called and offered him $500 in overtime pay if he would agree to work over the weekend. Matteo could get his car repaired over the weekend at Autofix for $400. If Matteo works over the weekend, he will have to pay the $400 to have his car repaired but he will earn $500. Assume Matteo pays a tax at a flat rate of 15 percent rate.Strictly considering tax factors, should Matteo work or repair his car if the $400 he must pay to have his car fixed is not deductible?Strictly considering tax factors, should Matteo work or repair his car if the $400 he must pay to have his car fixed is deductible for AGI?23.(LO1, LO2)Rank the following three single taxpayers in order of the magnitude of taxable income for 2009 (from lowest to highest) and explain your results.AhmedBakerChinGross income$80,000$80,000$80,000DeductionsforAGI8,0004,0000Itemized deductions04,0008,00024.(LO2)The Samsons are trying to determine whether they can claim their 22-year-old adopted son, Jason, as a dependent. Jason is currently a full-time student at an out-of-state university. Jason lived in his parents? home for three months of the year and he was away at school for the rest of the year. He received $9,500 in scholarships this year for his outstanding academic performance and earned $3,900 of income working a part-time job during the year. The Samsons paid a total of $4,000 to support Jason while he was away at college. Jason used the scholarship, the earnings from the part-time job, and the money from the Samsons as his only sources of support.Can the Samsons claim Jason as their dependent?Assume the original facts except that Jason?s grandparents, not the Samsons, provided him with the $4,000 worth of support. Can the Samsons (Jason?s parents) claim Jason as their dependent? Why or why not?Assume the original facts except substitute Jason?s grandparents for his parents. Determine whether Jason?s grandparents can claim Jason as a dependent.Assume the original facts except that Jason earned $4,500 while working part-time and used this amount for his support. Can the Samsons claim Jason as their dependent? Why or why not?25.(LO2)John and Tara Smith are married and have lived in the same home for over 20 years. John?s uncle Tim, who is 64 years old, has lived with the Smiths since March of this year. Tim is searching for employment but has been unable to find any?his gross income for the year is $2,000. Tim used all $2,000 toward his own support. The Smiths provided the rest of Tim?s support by providing him with lodging valued at $5,000 and food valued at $2,200.Are the Smiths able to claim a dependency exemption for Tim?Assume the original facts except that Tim earned $10,000 and used all the funds for his own support. Are the Smiths able to claim Tim as a dependent?Assume the original facts except that Tim is a friend of the family and not John?s uncle.Assume the original facts except that Tim is a friend of the family and not John?s uncle and Tim lived with the Smiths for the entire year.26.(LO2)Francine?s mother Donna and her father Darren separated and divorced in September of this year. Francine lived with both parents until the separation. Francine doesnotprovide more than half of her own support. Francine is 15 years old at the end of the year.Is Francine a qualifying child to Donna?Is Francine a qualifying child to Darren?Assume Francine spends more time living with Darren than Donna after the separation. Who may claim Francine as a dependency exemption for tax purposes?Assume Francine spends an equal number of days with her mother and her father and that Donna has AGI of $52,000 and Darren has AGI of $50,000. Who may claim a dependency exemption for Francine?27.(LO2)By the end of 2009, Jamel and Jennifer have been married 30 years and have filed a joint return every year of their marriage. Their three daughters, Jade, Lindsay, and Abbi, are ages 12, 17, and 22 respectively and all live at home. None of the daughters provides more than half of her own support. Abbi is a full-time student at a local university and does not have any gross income.How many personal and dependency exemptions are the Harrisons allowed to claim?Assume the original facts except that Abbi is married. She and her husband live with Jamel and Jennifer while attending school and they file a joint return. Abbi and her husband reported a $1,000 tax liability on their 2009 tax return. If all parties are willing, can Jamel and Jennifer claim Abbi as a dependent on their 2009 tax return? Why or why not?Assume the same facts as part b., except that Abbi and her husband report a $0 tax liability on their 2009 joint tax return. Also, if the couple had filed separately, Abbi would have not had a tax liability on her return but her husband would owe $250 of tax on his separate return. Can Jamel and Jennifer claim Abbi as a dependent on their 2009 tax return? Why or why not?Assume the original facts except that Abbi is married. Abbi files a separate tax return for 2009. Abbi?s husband files a separate tax return and owes $250 in taxes. Can Jamel and Jennifer claim Abbi as a dependent in 2009?28.(LO2)Mel and Cindy Gibson?s 12-year-old daughter Rachel was abducted on her way home from school on March 15, 2009. Police reports indicated that a stranger had physically dragged Rachel into a waiting car and sped away. Everyone hoped that the kidnapper and Rachel would be located quickly. However, as of the end of the year, Rachel was still missing. The police were still pursuing several promising leads and had every reason to believe that Rachel was still alive. In 2010, Rachel was returned safely to her parents.Are the Gibsons allowed to claim an exemption deduction for Rachel in 2009 even though she only lived in the Gibson?s home for two-and-one-half months? Explain and cite your authority.Assume the original facts except that Rachel is unrelated to the Gibsons but she has been living with them since January 2004. The Gibsons have claimed a dependency exemption for Rachel for the years 2004 through 2008. Are the Gibsons allowed to claim a dependency exemption for Rachel in 2009? Explain and cite your authority.29.(LO2)Bob Ryan filed his 2009 tax return and claimed a dependency exemption for his 16-year-old son Dylan. Both Bob and Dylan are citizens and residents of the United States. Dylan meets all the necessary requirements to be considered a qualifying child, however, when Bob filed the tax return he didn?t know Dylan?s Social Security number and, therefore, didn?t include an identifying number for his son on the tax return. Instead, Bob submitted an affidavit with his tax return stating he had requested Dylan?s Social Security number from Dylan?s birth state. Is Bob allowed to claim a dependency exemption for Dylan without including Dylan?s identifying number on the return?30.(LO2, LO3)Kimberly is divorced and the custodial parent of 5-year-old twins, Bailey and Cameron. All three live with Kimberly?s parents, who pay all the costs of maintaining the household (such as mortgage, property taxes, and food). Kimberly pays for her own and the children?s clothing, entertainment, and health insurance costs. These costs comprised only a small part of the total costs of maintaining the household.Determine the appropriate filing status for Kimberly.What if Kimberly lived in her own home and provided all the costs of maintaining the household?31.(LO3)Juan and Bonita are married and have two dependent children living at home. This year, Juan is killed in an avalanche while skiing.What is Bonita?s filing status this year?Assuming Bonita doesn?t remarry and still has two dependent children living at home, what will her filing status be next year?Assuming Bonita doesn?t remarry and doesn?t have any dependents next year, what will her filing status be next year?32.(LO3)Gary and Lakesha were married on December 31 last year. They are now preparing their taxes for the April 15 deadline and are unsure of their filing status.What filing status options do Gary and Lakesha have for last year?Assume instead that Gary and Lakesha were married on January 1 of this year. What is their filing status for last year (neither has been married before and neither had any dependents last year)?33.(LO3)Elroy, who is single, has taken over the care of his mother Irene in her old age. Elroy pays the bills relating to Irene?s home. He also buys all her groceries and provides the rest of her support. Irene has no gross income.What is Elroy?s filing status?Assume the original facts except that Elroy has taken over the care of his grandmother, Renae, instead of his mother. What is Elroy?s filing status?Assume the original facts except that Elroy?s mother, Irene, lives with him and that she receives an annual $4,000 taxable distribution from her retirement account. Elroy still pays all the costs to maintain the household. What is his filing status?34.(LO3)Kano and his wife, Hoshi, have been married for 10 years and have two children under the age of 12. The couple has been living apart for the last two years and both children live with Kano. Kano has provided all the means necessary to support himself and his children. Kano and Hoshi do not file a joint return.What is Kano?s filing status?Assume the original facts except that Kano and Hoshi separated in May of the current year. What is Kano?s filing status?Assume the original facts except that Kano and Hoshi separated in November of this year. What is Kano?s filing status?Assume the original facts except that Kano?s parents, not Kano, paid more than half of the cost of maintaining the home in which Kano and his children live. What is Kano?s filing status?35.(LO2, LO3)In each of the followingindependentcases, determine the taxpayer?s filing status and the number of personal and dependency exemptions the taxpayer is allowed to claim.Frank is single and supports his 17-year-old brother, Bill. Bill earned $3,000 and did not live with Frank.Geneva and her spouse reside with their son, Steve, who is a 20-year-old undergraduate student at State University. Steve earned $13,100 at a part-time summer job, but he deposited this money in a savings account for graduate school. Geneva paid all of the $12,000 cost of supporting Steve.Hamish?s spouse died last year and Hamish has not remarried. Hamish supports his father, Reggie, age 78, who lives in a nursing home and had interest income this year of $2,500.Irene is married but has not seen her spouse since February. She supports her spouse?s 18-year-old child, Dolores, who lives with Irene. Dolores earned $4,500 this year.36.(LO2, LO3)In each of the followingindependentcases, determine the taxpayer?s filing status and the number of personal and dependency exemptions the taxpayer is allowed to claim.Alexandra is a blind widow who provides a home for her 18-year-old nephew, Newt. Newt?s parents are dead and so Newt supports himself. Newt?s gross income is $5,000.Bharati supports and maintains a home for her daughter, Daru, and son-in-law, Sam. Sam earned $15,000 and filed a joint return with Daru, who had no income.Charlie intended to file a joint return with his spouse, Sally. However, Sally died in December. Charlie has not remarried.Deshi cannot convince his spouse to consent to signing a joint return. The couple has not separated.Edith and her spouse support their 35-year-old son, Slim. Slim is a full-time college student who earned $5,500 over the summer in part-time work.37.(LO3)Jasper and Crewella Dahvill were married in year 0. They filed joint tax returns in years 1 and 2. In year 3, their relationship was strained and Jasper insisted on filing a separate tax return. In year 4, the couple divorced. Both Jasper and Crewella filed single tax returns in year 4. In year 5, the IRS audited the couple?s joint year 2 tax return and each spouse?s separate year 3 tax returns. The IRS determined that the year 2 joint return and Crewella?s separate year 3 tax return understated Crewella?s self-employment income causing the joint return year 2 tax liability to be understated by $4,000 and Crewella?s year 3 separate return tax liability to be understated by $6,000. The IRS also assessed penalties and interest on both of these tax returns. Try as it might, the IRS has not been able to locate Crewella, but they have been able to find Jasper.What amount of tax can the IRS require Jasper to pay for the Dahvill?s year 2 joint return? Explain.What amount of tax can the IRS require Jasper to pay for Crewella?s year 3 separate tax return? Explain.38.(LO3)Janice Traylor is single. She has an 18-year-old son named Marty. Marty is Janice?s only child. Marty has lived with Janice his entire life. However, Marty recently joined the Marines and was sent on a special assignment to Australia. During 2009, Marty spent nine months in Australia. Marty was extremely homesick while in Australia, since he had never lived away from home. However, Marty knew this assignment was only temporary, and he couldn?t wait to come home and find his room just the way he left it. Janice has always filed as head of household, and Marty has always been considered a qualifying child (and he continues to meet all the tests with the possible exception of the residence test due to his stay in Australia). However, this year Janice is unsure whether she qualifies as head of household due to Marty?s nine-month absence during the year. Janice has come to you for advice on whether she qualifies for head of household filing status in 2009. What do you tell her?39.(LO3)Doug Jones timely submitted his 2009 tax return and elected married filing jointly status with his wife, Darlene. Doug and Darlene did not request an extension for their 2009 tax return. Doug and Darlene owed and paid the IRS $124,000 for their 2009 tax year. Two years later, Doug amended his return and claimed married filing separate status. By changing his filing status, Doug sought a refund for an overpayment for the tax year 2009 (he paid more tax in the original joint return than he owed on a separate return). Is Doug allowed to change his filing status for the 2009 tax year and receive a tax refund with his amended return?Comprehensive Problems40.Marc and Michelle are married and earned salaries this year (2009) of $64,000 and $12,000, respectively. In addition to their salaries, they received interest of $350 from municipal bonds and $500 from corporate bonds. Marc and Michelle also paid $2,500 of qualifying moving expenses, and Marc paid alimony to a prior spouse in the amount of $1,500. Marc and Michelle have a 10-year-old son, Matthew, who lived with them throughout the entire year. Thus, Marc and Michelle are allowed to claim a $1,000 child tax credit for Matthew. Marc and Michelle paid $6,000 of expenditures that qualify as itemized deductions and they had a total of $5,500 in federal income taxes withheld from their paychecks during the course of the year.What is Marc and Michelle?s gross income?What is Marc and Michelle?s adjusted gross income?What is the total amount of Marc and Michelle?s deductionsfromAGI?What is Marc and Michelle?s taxable income?What is Marc and Michelle?s taxes payable or refund due for the year? (Use the tax rate schedules.)41.Demarco and Janine Jackson have been married for 20 years and have four children who qualify as their dependents. Their income from all sources this year (2009) totaled $200,000 and included a gain from the sale of their home, which they purchased a few years ago for $200,000 and sold this year for $250,000. The gain on the sale qualified for the exclusion from the sale of a principal residence. The Jacksons incurred $16,500 of itemized deductions.What is the Jackson?s taxable income?What would their taxable income be if their itemized deductions totaled $6,000 instead of $16,500?What would their taxable income be if they had $0 itemized deductions and $6,000 of for AGI deductions?Assume the original facts except that they also incurred a loss of $5,000 on the sale of some of their investment assets. What effect does the $5,000 loss have on theirtaxable income?Assume the original facts except that the Jacksons owned investments that appreciated by $10,000 during the year. The Jacksons believe the investments will continue to appreciate, so they did not sell the investments during this year. What is the Jackson?s taxable income?42.Camille Sikorski was divorced last year. She currently owns and provides a home for her 15-year-old daughter, Kaly, and 18-year-old son, Parker. Both children lived in Camille?s home for the entire year, and Camille paid for all the costs of maintaining the home. She received a salary of $105,000 and contributed $6,000 of it to a qualified retirement account. She also received $10,000 of alimony from her former husband. Finally, Camille paid $5,000 of expenditures that qualified as itemized deductions. (The current year is 2009.)What is Camille?s taxable income?What would Camille?s taxable income be if she incurred $14,000 of itemized deductions instead of $5,000?Assume the original facts except that Camille?s daughter, Kaly, is 25 years old and a full-time student. Kaly?s gross income for the year was $5,000. Kaly provided $3,000 of her own support, and Camille provided $5,000 of support. What is Camille?s taxable income?43.In 2009, Tiffany is unmarried and has a 15-year-old qualifying child. Tiffany has determined her tax liability to be $3,525, and her employer has withheld $1,500 of federal taxes from her paycheck. Tiffany is allowed to claim a $1,000 child credit for her qualifying child. What amount of taxes will Tiffany owe (or what amount will she receive as a refund) when she files her tax return?

 

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