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Chapter 1: Fundamentals Of Income
Taxation With Correct Solutions.
Which of the following is NOT a requirement that must be satisfied in order for a legally married taxpayer to qualify as an abandoned spouse and use the head-of-household filing status?
A)
The taxpayer must file a separate tax return from the spouse.
B)
The taxpayer must furnish over one-half of the cost of maintaining the household.
C)
The spouse must not be a member of the household during the last 6 months of the tax year.
D)
The taxpayer must be legally separated from the spouse.
D)
The taxpayer must be legally separated from the spouse.
Trevor is 62 years old, single, and a dependent of his daughter. During the current year, Trevor received $2,100 interest on money in a bank account and $2,300 from a part-time job. What is Trevor's taxable income?
A)
$1,
B)
$2,
C)
D)
A)
His bank account interest and salary combine to give Trevor $4,400 of taxable income before his standard deduction. Because Trevor is a dependent of another, his standard deduction is limited to the greater of $1,150 (in 2022) and his earned income plus $400. Therefore, Trevor's standard deduction is $2,700.
$4,400 − $2,700 = $1,700 taxable income
Alfred, aged 21, is a full-time student at a university and is a dependent of his parents. This year, he earned $2,000 from a part-time job and had $950 interest from a savings account. He had a total of $ in itemized deductions in the current year. What is Alfred's taxable income this year?
A)
$
B)
$
C)
$2,
D)
$2,
A)
$
The correct answer is (C). Only Peyton's dividends, prize money, salary, and alimony are included in the AGI.
$1,200 + $1,000 + $35,000 + $12,000 = $49,200 AGI
Quinn and Robin McBride have several children living under their care. Which of the following children does not meet the relationship test for the purpose of Quinn and Robin claiming a qualified child?
A)
Bo, Robin's 8-year-old son from a prior marriage
B)
Kristina, Quinn's 10-year-old cousin
C)
Carl, a 5-year-old foster child placed with Quinn and Robin by a state agency
D)
Harley, Robin's 12-year-old niece
B)
Kristina, Quinn's 10-year-old cousin
Because Kristina is from the same generation as Quinn (even though she is presumably much younger than Quinn), she does not meet the relationship test. A qualifying child must be from a lower generation than the taxpayer. All of the other children are qualifying children under the relationship test.
Which of the following taxpayers can use the standard deduction?
A)
Jorge, who files a separate return from his wife, Esther. Esther itemizes deductions on her return.
B)
Claude, who is a nonresident alien
C)
Christian, who files a tax return for less than 12 months because he changed his annual accounting period
D)
Marguerite, who owns a personal residence
D)
Marguerite, who owns a personal residence
Only option (D) describes a taxpayer who is permitted to use the standard deduction. All of the other taxpayers are required to itemize their deductions.
Diego, aged 16 and a dependent, has $2,100 in interest and dividends and $10,750 in earned income from a part-time job. What is Diego's standard deduction this year?
A)
$2,
B)
$13,
C)
$11,
D)
$12,
C)
$11,
For taxable income between $40,526 and $86,375, the income tax is $4,664.00 plus 22 percent of the amount over $40,525.
[($75,000 − $40,525) × 0.22] + $4,664.00 = $12,248.
Margaret and Lucas are trying to calculate their gross income. Which of the following items should they exclude from their gross income?
I. $100,000 in cash inherited by Margaret from her mother
II. $35,000 borrowed by Margaret and Lucas from First City Bank
III. $50,000 gain from the sale of Lucas's boat
IV. $1,000 of interest earned on a loan made by Lucas to his cousin Lenny
A)
I and II
B)
III and IV
C)
I, II, and III
D)
I, II, and IV
A)
I and II
Ronnie is preparing his federal income tax return. Which of the following items should be included in Ronnie's gross income?
A)
Rental payments made to Ronnie by tenants living in a house that he owns
B)
Interest earned on several municipal bonds that Ronnie bought 5 years ago
C)
$25,000 that Ronnie received as a gift from his favorite uncle
D)
Child support payments paid to Ronnie by his ex-wife
A)
Rental payments made to Ronnie by tenants living in a house that he owns
Progressive Tax System
assesses taxable income at higher rates as taxable income levels increase and in accordance with filing status
Federal Income Tax Formula for Indiviudals
Income - Deductions = Taxable Income * Tax Rate = Tax Liability
Adjusted Gross Income:
used extensively in reducing, or even eliminating, many deductions, credits, or even standard deductions
T/F: AGI is the same as taxable income
FALSE
How to qualify for HOH?
unmarried taxpayer or abandoned spouse who pays more than 50% of the cost of providing a home for a dependent relative for more than 6 montes or 50% of the cost for a separate home for a PARENT so long as the parent can be claimed as a dependent.
Standard Deduction for a dependent is....
$1,150 or earned income + $400 (the higher of the two)
If children DO NOT have unearned income (interest, dividends, capital gains, rent, royalties)
Kiddie tax does not apply
If children DO have unearned income (interest, dividends, capital gains, rent, royalties)
Kiddie tax does apply in 3 ways
What are the 3 ways Kiddie Tax is applied?
0% is applied for unearned income sheltered by the standard deduction of $1,
the next $1,150 of income is taxed at the kid's tax rate
anything above $2,300 ($1,150 *2) is net unearned income taxed at the parents marginal rate on the kids tax return (OUCH)
3 Main Purposes of the Internal Revenue Code?
raise $ for Federal Government
Encourage or discourage taxpayer behaviors
Stimulate or halt an economy
A cash basis taxpayer includes income from a service business when:
the client's check is received by the taxpayer
