Test bank taxation of individuals and business entities 2015 6e by brian c spilker chap004

Chapter 04 Individual Income Tax Overview, Exemptions, and Filing Status True / False Questions Relative to for AGI deductions, from AGI deductions tend to relate to items that are more personal in nature True False Taxpayers need not include an income item in gross income unless there is a specific tax provision requiring the taxpayer to include the income item in gross income True False The standard deduction amount for married filing separately taxpayers (MFS) is less than the standard deduction amount for married filing jointly taxpayers True False Taxpayers are generally allowed to claim deductions for expenditures unless a specific tax provision indicates the expenditure is not deductible True False From AGI deductions are generally more valuable to taxpayers than for AGI deductions True False From AGI deductions are commonly referred to as deductions "below the line." True False For AGI deductions are commonly referred to as deductions "below the line." True False For AGI deductions are commonly referred to as deductions "above the line." True False Itemized deductions and the standard deduction are deductions from AGI but deductions for personal and dependency exemptions are deductions for AGI True False 4-1 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 10 The standard deduction amount varies by filing status True False 11 Taxpayers are allowed to deduct more for each personal exemption they claim than for each dependency exemption they claim True False 12 A personal automobile is a capital asset True False 13 The character of income determines the rate at which the income is taxed True False 14 Inventory is a capital asset True False 15 Qualified dividends are taxed at the same rate as ordinary income True False 16 Certain types of income are taxed at a lower rate than ordinary income True False 17 In addition to the individual income tax, individuals may be required to pay taxes imposed on tax bases other than the individual's regular taxable income True False 18 Tax credits reduce taxable income dollar for dollar True False 19 Tax credits are generally more valuable than tax deductions because tax credits reduce a taxpayer's gross tax liability dollar for dollar while tax deductions not True False 20 Taxpayers may prepay their tax liability through withholdings and through estimated tax payments True False 21 In certain circumstances, a taxpayer who provides less than half the support of another may still be able to claim a dependency exemption for that person as a qualifying relative True False 4-2 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 22 A child who is her parents' qualifying child can claim a personal exemption for herself as long as her parents choose not to claim her as a dependent True False 23 A taxpayer who is claimed as a dependent on another's tax return may not claim any personal or dependency exemptions on his or her tax return True False 24 Anna is a qualifying child of her parents However, she was recently married Anna and her husband filed a joint return If they had filed separately, Anna would have owed no taxes, though her husband would have owed just $5 Because Anna herself owed no taxes, her parents can still claim her as a dependent True False 25 To be considered a qualifying child of a taxpayer, the individual must be the son or daughter of the taxpayer True False 26 For purposes of the qualifying child residence test, a child's temporary absence from the taxpayer's home for attending school full-time is counted as though the child lived in the taxpayer's home during the absence True False 27 An individual may never be considered as both a qualifying relative and a qualifying child of the same taxpayer True False 28 An individual may be considered as a qualifying child of her parents and a qualifying child of her grandparents in the same year True False 29 An individual may meet the relationship test to be a taxpayer's qualifying relative even if the individual has no family relationship with the taxpayer True False 30 When determining whether a child meets the qualifying child support test for the parents, scholarships earned by the child not count as self support provided by the child True False 31 When determining whether a child meets the qualifying child support test for the child's grandparents, scholarships earned by the child not count as self support provided by the child True False 4-3 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 32 An individual with gross income of $5,000 could qualify as a qualifying child of another taxpayer but could not qualify as a qualifying relative of another taxpayer True False 33 An individual receiving $5,000 of tax exempt income during the year could qualify as a qualifying child of another taxpayer but could not qualify as a qualifying relative of another taxpayer True False 34 The relationship requirement is more broadly defined (includes more relationships) for a qualifying relative than it is for a qualifying child True False 35 The relationship requirement for qualifying relative includes cousins True False 36 The relationship requirement for qualifying relative requires the potential qualifying relative to have a family relationship with the taxpayer True False 37 The test for qualifying children includes an age restriction but the test for qualifying relative does not True False 38 The test for a qualifying child includes a gross income restriction while the test for qualifying relative does not True False 39 If a taxpayer does not provide more than half the support of a child, that child cannot qualify as the taxpayer's qualifying child True False 40 To determine filing status, a taxpayer's marital status is determined on January of the tax year in question True False 41 It is generally more advantageous from a tax perspective for a married couple to file separately than it is for them to file jointly True False 42 It is generally more advantageous from a nontax perspective for a married couple to file separately than it is for them to file jointly True False 4-4 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 43 Jeremy and Annie are married During the year Jeremy dies When Annie files her tax return for the year in which her husband dies, she may file under the married filing jointly filing status even if she does not remarry True False 44 Jennifer and Stephan are married at year end and they file separate tax returns If Jennifer itemizes deductions on her return, Stephan must also itemize deductions on his return even if his itemized deductions don't exceed his standard deduction True False 45 Bonnie and Ernie file a joint return Bonnie works and receives income during the year but Ernie does not If the couple files a joint tax return, Ernie is responsible for paying any taxes due if Bonnie is unable to pay the taxes True False 46 Eric and Josephine were married in year In year 2, Eric dies The couple did not have any children Assuming Josephine does not remarry, she may file as a qualifying widow in year True False 47 Taxpayers who file as qualifying widows/widowers are treated exactly the same for tax purposes in all respects as taxpayers who are married filing jointly for tax purposes True False 48 A taxpayer may qualify for the head of household filing status even if she does not have any dependent children True False 49 A taxpayer may qualify for the head of household filing status if she has no dependent children but pays more than half of the cost of maintaining a separate household for her dependent mother and/or father True False 50 If an unmarried taxpayer provides more than half the support for a cousin who lives in the taxpayer's home for the entire year, the taxpayer will qualify for head of household filing status True False 51 If an unmarried taxpayer is able to claim a dependency exemption for another individual, the taxpayer is automatically eligible for the head of household filing status True False 4-5 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 52 Charles, who is single, pays all of the costs of maintaining a home for himself and Damarcus Charles and Damarcus have no family relationship but Damarcus lives with Charles for the entire year Damarcus qualifies as a qualifying relative for Charles (Charles claims a dependency exemption for Damarcus on his tax return) Charles qualifies for head of household filing status True False 53 In certain circumstances, a married taxpayer who files separately may qualify for the head of household filing status True False 54 If no one qualifies as the dependent of an unmarried taxpayer, the unmarried taxpayer may still be able to qualify for the head of household filing status True False Multiple Choice Questions 55 The income tax base for an individual tax return is: A Realized income from whatever source derived B Gross income C Adjusted gross income D Adjusted gross income minus from AGI deductions 56 Which of the following series of inequalities is generally most accurate? A Gross income ≥ adjusted gross income ≥ taxable income B Adjusted gross income ≥ gross income ≥ taxable income C Adjusted gross income ≥ taxable income ≥ gross income D Gross income ≥ taxable income ≥ adjusted gross income 4-6 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 57 Which of the following statements regarding realized income is true? A Taxpayers need not include realized income in gross income unless a specific provision of the tax code requires them to so B Realized income requires some type of transaction or exchange with a second party C Once income is realized it may not be excluded from gross income D None of these statements is true 58 Which of the following statements regarding exclusions and/or deferrals is false? A Exclusions are favorable because taxpayers never pay tax on income that is excluded B Interest income from municipal bonds is excluded from gross income C Deferrals are income items taxpayers realize in one year but include in gross income in a subsequent year D An income item need not be realized in order to qualify as an exclusion item 59 Sally received $50,000 of compensation from her employer and she received $400 of interest from a corporate bond What is the amount of Sally's gross income from these items? A $ B $40 C $50,00 D $50,40 60 Lebron received $50,000 of compensation from his employer and he received $400 of interest from a municipal bond What is the amount of Lebron's gross income from these items? A $ B $40 C $50,00 D $50,40 4-7 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 61 Joanna received $60,000 compensation from her employer, the value of her stock in ABC company appreciated by $5,000 during the year (but she did not sell any of the stock), she received $30,000 of life insurance proceeds from the death of her husband What is the amount of Joanna's gross income from these items? A $60,00 B $65,00 C $95,00 D $97,00 62 Which of the following statements regarding tax deductions is false? A Taxpayers are not entitled to any deductions unless specific provisions in the tax code allow the deductions B Deductions can be labeled as deductions above the line or deductions below the line C From AGI deductions tend to be associated with business activities while for AGI deductions tend to be associated with personal activities D The standard deduction is a from AGI deduction 63 Which of the following statements regarding for AGI tax deductions is true? A Taxpayers subtract for AGI deductions from gross income to determine AGI B A taxpayer may deduct for AGI deductions only if the deductions exceed the taxpayer's standard deduction amount C A taxpayer may deduct for AGI deductions only if the deductions exceed the taxpayer's deductible exemption amounts D A taxpayer may deduct for AGI deductions only if the deductions exceed the taxpayer's itemized deductions 64 All of the following are for AGI deductions except: A Moving expenses B Rental and royalty expenses C Business expenses for a self-employed taxpayer D Charitable contributions 4-8 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 65 Which of the following is NOT a from AGI deduction? A Standard deduction B Itemized deduction C Personal exemption D None of these All of these are from AGI deductions 66 Which of the following is not an itemized deduction? A Alimony paid B Medical expenses C Personal property taxes paid on a personal use automobile D Charitable contributions 67 Which of the following shows the correct relationship among standard deduction amounts for the respective filing statuses? A Single > Head of Household > Married Filing Jointly B Married Filing Jointly > Married Filing Separately > Head of Household C Married Filing Jointly > Head of Household > Single D Head of Household > Married Filing Separately > Married Filing Jointly 68 Which of the following statements regarding exemptions is correct? A Personal exemptions are more valuable than dependency exemptions B Taxpayers filing a married filing joint return are limited to two exemptions on their tax returns C Exemption amounts are considered to be for AGI deductions D Taxpayers subtract exemption deductions from adjusted gross income in determining taxable income 4-9 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 69 Which of the following types of income are not considered ordinary income? A Compensation income B Net long-term capital gains (in excess of short-term capital losses) C Qualified dividend income D Both compensation income and qualified dividend income E Both net long-term capital gains (in excess of short-term capital losses) and qualified dividend income 70 All of the following represents a type or character of income except: A Tax exempt B Capit al C Qualified dividend D Norm al 71 Which of the following statements is true: A Income character determines the tax year in which the income is taxed B Income character depends on the taxpayer's filing status C Qualified dividend income is taxed at a lower rate than the same amount of ordinary income D A taxpayer selling a capital asset at a gain recognizes ordinary income 72 Which of the following statements regarding tax credits is true? A Tax credits reduce taxable income dollar for dollar B Tax credits provide a greater tax benefit the greater the taxpayer's marginal tax rate C Tax credits reduce taxes payable dollar for dollar D None of these statements is true 4-10 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 106 Mason and his wife Madison have been married for five years Jaxon, who is 18 years old and unrelated to Mason and Madison, has been living with Mason and Madison for the last two years In May of year 1, Mason and Madison divorced Mason and Jaxon stayed in the home and Madison moved out During year 2, Mason provided all of Jaxon's support and Jaxon lived in the home for all of year Jaxon did not earn any income during year What is Mason's most favorable filing status for year 2? A Singl e B Married filing separately C Surviving spouse D Head of household While Jaxon qualifies as Mason's dependent for year as a qualifying relative, Jaxon is not related to Mason through a qualified family relationship (he would not be considered a related party if he had not lived with Mason for the entire year) Consequently, Mason may not qualify for head of household status and he must file as a single taxpayer AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 04-03 Determine a taxpayer's filing status Level of Difficulty: Hard Topic: Filing status 107 Miguel, a widower whose wife died in year 1, maintains a household for himself and his daughter who qualifies as his dependent Miguel did not remarry What is the most favorable filing status that Miguel qualifies for in year 3? A Singl e B Qualifying widower C Head household D Married, filing separately Miguel may file as a qualifying widower in years and AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 04-03 Determine a taxpayer's filing status Level of Difficulty: Easy Topic: Filing status 4-71 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 108 Jasmine and her husband Arty have been married for 25 years In May of this year, the couple divorced During the year, Jasmine provided all the support for herself and her 22-year-old child Dexter who lived in the same home as Jasmine for the entire year Dexter is employed full-time, earning $29,000 this year What is the Jasmine's most favorable filing status for the year? A Singl e B Married filing separately C Surviving spouse D Head of household Dexter does not qualify as Jasmine's dependent due to his age and his income so Jasmine must file single for the year AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 04-03 Determine a taxpayer's filing status Level of Difficulty: Medium Topic: Filing status Essay Questions 4-72 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 109 Kabuo and Melinda got married on December 15, year Kabuo's salary for the year was $54,000, and Melinda's was $62,000 In addition, Kabuo received $250 of interest income, ($100 of which was from municipal bonds), and Melinda received $10,000 of alimony from a former spouse If Kabuo and Melinda choose to file jointly, what is their year gross income? $126,150, computed as follows: AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 04-01 Describe the formula for calculating an individual taxpayer's taxes payable or refund and generally explain each formula component Level of Difficulty: Easy Topic: Individual income tax formula 110 John Maylor is a self-employed plumber of John's John Service, his sole proprietorship In the current year, John's John Service had revenue of $120,000 and $40,000 of business expenses John also received $2,000 of interest income from corporate bonds What is John's adjusted gross income assuming he had no other income or expenses (ignore any deduction for self-employment tax)? $82,000, computed as follows: AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 04-01 Describe the formula for calculating an individual taxpayer's taxes payable or refund 4-73 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education and generally explain each formula component Level of Difficulty: Easy Topic: Individual income tax formula 111 The Inouyes filed jointly in 2014 Their AGI is $78,000 They reported $16,000 of itemized deductions and they have two children, one of whom qualifies as their dependent The 2014 standard deduction amount is $12,400 and each exemption is $3,950 What is the total amount of from AGI deductions they are allowed to claim on their 2014 tax return? $27,850, determined as follows: From AGI deductions include the following: Greater of standard deduction ($12,400) or itemized deductions ($16,000) is $16,000 Three personal and dependency exemptions is $3,950 × = $11,850 Total from AGI deductions is $27,850 ($16,000 + $11,850) AACSB: Analytic AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 04-01 Describe the formula for calculating an individual taxpayer's taxes payable or refund and generally explain each formula component Level of Difficulty: Easy Topic: Individual income tax formula 112 The Tanakas filed jointly in 2014 Their AGI is $120,000 They reported $10,000 of itemized deductions and they have two dependent children The 2014 standard deduction amount is $12,400 and each exemption is $3,950 What is the total amount of from AGI deductions they are allowed to claim on their 2014 tax return? $28,200, computed as follows: From AGI deductions include the following: Greater of standard deduction ($12,400) or itemized deductions ($10,000) is $12,400 Four personal and dependency exemptions is $3,950 × = $15,800 Total from AGI deductions is $28,200 ($12,400 + $15,800) AACSB: Analytic AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 04-01 Describe the formula for calculating an individual taxpayer's taxes payable or refund and generally explain each formula component Level of Difficulty: Medium Topic: Individual income tax formula 4-74 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 113 The Dashwoods have calculated their taxable income to be $80,000 for 2014, which includes $2,000 of long-term capital gains Using the appropriate tax rate schedule, calculate the Dashwood's income tax liability assuming they are married and file a joint return $11,512.5 computed as follows: $10,162.50 + [25% × ($78,000 - 73,800) + ($2,000 × 15) AACSB: Analytic AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 04-01 Describe the formula for calculating an individual taxpayer's taxes payable or refund and generally explain each formula component Level of Difficulty: Medium Topic: Individual income tax formula 114 Tom Suzuki's tax liability for the year is $2,450 He had $2,050 of federal income taxes withheld from his paycheck during the year by his employer and has $2,000 in tax credits What are Tom's taxes due or tax refund for the year? $1,600 tax refund, computed as follows: AACSB: Analytic AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 04-01 Describe the formula for calculating an individual taxpayer's taxes payable or refund and generally explain each formula component Level of Difficulty: Easy Topic: Individual income tax formula 4-75 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Jane and Ed Rochester are married with a two-year-old child who lives with them and whom they support financially In 2014, Ed and Jane realized the following items of income and expense: They also qualified for a $1,000 tax credit Their employers withheld $1,800 in taxes from their paychecks (in the aggregate) Finally, the 2014 standard deduction amount is $12,400 and the 2014 exemption amount is $3,950 4-76 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 115 What is the couple's gross income? $69,400, see calculations below Feedback: AACSB: Analytic AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 04-01 Describe the formula for calculating an individual taxpayer's taxes payable or refund and generally explain each formula component Learning Objective: 04-02 Explain the requirements for determining a taxpayer's personal and dependency exemptions Learning Objective: 04-03 Determine a taxpayer's filing status Level of Difficulty: Medium Topic: Filing status Topic: Individual income tax formula Topic: Personal and dependency exemptions 4-77 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 116 What is the couple's adjusted gross income? $62,400, see calculations below Feedback: AACSB: Analytic AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 04-01 Describe the formula for calculating an individual taxpayer's taxes payable or refund and generally explain each formula component Learning Objective: 04-02 Explain the requirements for determining a taxpayer's personal and dependency exemptions Learning Objective: 04-03 Determine a taxpayer's filing status Level of Difficulty: Medium Topic: Filing status Topic: Individual income tax formula Topic: Personal and dependency exemptions 4-78 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 117 What is the couple's taxable income? $38,150, see calculations below Feedback: AACSB: Analytic AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 04-01 Describe the formula for calculating an individual taxpayer's taxes payable or refund and generally explain each formula component Learning Objective: 04-02 Explain the requirements for determining a taxpayer's personal and dependency exemptions Learning Objective: 04-03 Determine a taxpayer's filing status Level of Difficulty: Medium Topic: Filing status Topic: Individual income tax formula Topic: Personal and dependency exemptions 4-79 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 118 What are the couple's taxes due or tax refund (use the tax rate schedules not tax tables)? $2,015 tax due, see calculations below Feedback: AACSB: Analytic AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 04-01 Describe the formula for calculating an individual taxpayer's taxes payable or refund and generally explain each formula component Learning Objective: 04-02 Explain the requirements for determining a taxpayer's personal and dependency exemptions Learning Objective: 04-03 Determine a taxpayer's filing status Level of Difficulty: Medium Topic: Filing status Topic: Individual income tax formula Topic: Personal and dependency exemptions 4-80 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 119 Greg is single During 2014, he received $60,000 of salary from his employer That was his only source of income He reported $3,000 of for AGI deductions, $7,000 of itemized deductions The 2014 standard deduction amount of a single taxpayer is $6,200 and the 2014 exemption amount is $3,950 What is Greg's taxable income? $46,050, computed as follows: AACSB: Analytic AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 04-01 Describe the formula for calculating an individual taxpayer's taxes payable or refund and generally explain each formula component Learning Objective: 04-02 Explain the requirements for determining a taxpayer's personal and dependency exemptions Learning Objective: 04-03 Determine a taxpayer's filing status Level of Difficulty: Easy Topic: Filing status Topic: Individual income tax formula Topic: Personal and dependency exemptions 4-81 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 120 Sam and Tacy have been married for 25 years They have filed a joint return every year of their marriage They have two sons Christopher and Zachary Christopher is 19 years old and Zachary is 14 years old Christopher lived in his parents' home from January through August and he lived in his own apartment from September through December During the year, Christopher attended college for one month before dropping out Christopher's living expenses totaled $12,000 for the year Of that, Christopher paid $5,000 from income he received while working a part time job Sam and Tacy provided the remaining $7,000 of Christopher's support Zachary lived at home the entire year and did not earn any income How many personal and dependency exemptions are Sam and Tacy entitled to claim for the year and for whom are they allowed to claim the exemption(s)? Three exemptions: Two personal exemptions—one each for Sam and Tacy and one dependency exemption for Zachary (qualifying child) Christopher does not qualify as either a qualifying child or qualifying relative See analysis below Qualifying child test: Qualifying relative test: AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze 4-82 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Learning Objective: 04-03 Determine a taxpayer's filing status Level of Difficulty: Hard Topic: Filing status 121 Sullivan's wife Susan died four years ago Sullivan has not remarried and he maintains a home for his dependent child Sammy In 2014, Sullivan received $70,000 of salary from his employer and he paid $6,000 of itemized deductions What is Sullivan's taxable income for 2014? Taxable income is $53,000, computed as follows: AACSB: Analytic AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 04-01 Describe the formula for calculating an individual taxpayer's taxes payable or refund and generally explain each formula component Learning Objective: 04-02 Explain the requirements for determining a taxpayer's personal and dependency exemptions Learning Objective: 04-03 Determine a taxpayer's filing status Level of Difficulty: Medium Topic: Filing status Topic: Individual income tax formula Topic: Personal and dependency exemptions 4-83 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 122 Hannah, who is single, received a qualified dividend of $1,000 Hannah's marginal ordinary income tax rate is 28% What amount of tax must she pay on the $1,000 dividend? $150 ($1,000 × 15%) AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 04-01 Describe the formula for calculating an individual taxpayer's taxes payable or refund and generally explain each formula component Level of Difficulty: Easy Topic: Individual income tax formula 123 Doug and Lisa have determined that their tax liability on their joint return is $3,700 They have made prepayments of $1,000 and also are entitled to child tax credits of $2,000 What is the amount of their tax refund or taxes due? $700 taxes due ($3,700 tax liability minus $2,000 tax credits minus $1,000 prepayments) AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 04-01 Describe the formula for calculating an individual taxpayer's taxes payable or refund and generally explain each formula component Level of Difficulty: Easy Topic: Individual income tax formula 124 By the end of year 1, Harold and Jamie Allred had been married for 30 years and have filed a joint return every year of their marriage Their three sons, Jacob, Larry, and Andi, are ages 13, 16, and 23 respectively and all live at home and are fully supported by their parents Andi is employed full time, earning $17,000 in year How many exemptions are Harold and Jamie entitled to claim? The Allreds may claim four exemptions They may claim personal exemptions for Harold and Jamie and dependency exemptions for Jacob and Larry Andi does not qualify as a dependent because he is neither a qualifying child (fails age test) nor qualifying relative (fails gross income test) AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 04-02 Explain the requirements for determining a taxpayer's personal and dependency exemptions Level of Difficulty: Medium Topic: Personal and dependency exemptions 4-84 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 125 In 2014, Brittany, who is single, cares for her father Raymond Brittany pays the bills relating to Raymond's home She also buys groceries and provides the rest of his support Raymond has no gross income Brittany received $45,000 of salary from her employer during the year Brittany reports $3,000 of itemized deductions What is Brittany's taxable income? $28,000 ($45,000 - $9,100 standard deduction for head of household - 7,900 (2 × 3,950) personal and dependency exemptions) AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 04-01 Describe the formula for calculating an individual taxpayer's taxes payable or refund and generally explain each formula component Learning Objective: 04-02 Explain the requirements for determining a taxpayer's personal and dependency exemptions Learning Objective: 04-03 Determine a taxpayer's filing status Level of Difficulty: Medium Topic: Filing status Topic: Individual income tax formula Topic: Personal and dependency exemptions 126 In February of 2013, Lorna and Kirk were married During 2014, Lorna received $40,000 of compensation from her employer and Kirk received $30,000 of compensation from his employer The couple together reported $2,000 of itemized deductions Lorna and Kirk filed separately in 2014 What is Lorna's taxable income and what is her tax liability (use the applicable tax rate schedule)? Taxable income is $29,850 ($40,000 - $6,200 standard deduction - $3,950 personal exemption) Tax liability is $4,023.75 [$907.50 + 15% × (29,850 - 9,075] AACSB: Analytic AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 04-01 Describe the formula for calculating an individual taxpayer's taxes payable or refund and generally explain each formula component Learning Objective: 04-02 Explain the requirements for determining a taxpayer's personal and dependency exemptions Learning Objective: 04-03 Determine a taxpayer's filing status Level of Difficulty: Medium Topic: Filing status Topic: Individual income tax formula Topic: Personal and dependency exemptions 4-85 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education ... correct? A Anne is a qualifying child of Catherine B Anne is not a qualifying child of Catherine because she fails the gross income test C Anne is not a qualifying child of Catherine because... McGraw-Hill Education 77 All of the following are tests for determining qualifying child status except the A gross income test B age test C support test D residence test 78 Which of the following... $14,000, and Charlotte's grandparents paid $9,000 Which of the following statements most accurately describes whether Charlotte's parents can claim a dependency exemption for Charlotte? A Yes, Charlotte