ch 4 individual inc tax formula, dependents, filing status

Question 1

Individual income tax formula

Answer 1

Gross income
- “For AGI” Deductions
=Adjusted Gross Income
-“From AGI” deductions
=Taxable Income

Question 2

Who Qualifies as a Dependent?
Why do we need to know who qualifies as a
dependent?

Answer 2

1. Affects filing status and certain credits
2. You must report your dependents on your tax
   return

Question 3

Who Qualifies as a Dependent?

Answer 3

Dependency requirements
* Citizen of U.S. or resident of U.S., Canada,
or Mexico
* Must not file joint return with spouse
* Unless jointly or separately would owe no tax
* Must be qualifying child (QC) or qualifying
relative (QR) of taxpayer

Question 4

Qualifying Child

Answer 4

Relationship Test
* Child, adopted child, stepchild, foster child
* Brother, sister, half-sibling, step-sibling
* Or descendent of any of these parties
* NOT ancestors, NOT in-laws

Age Test
* Under age 19 (under 24 if a full-time student)
* Age does not matter for disabled individual
* QC cannot be older than taxpayer

Residence Test * Must live with taxpayer more than half the year
* Time away due to school, military, or illness is ok

Support Test
* QC cannot pay more than half his or her own support
* Support includes food, shelter, clothing, medical, etc.
* Exclude scholarship of own child - does not count as their own support

Question 5

Qualifying Relative

Answer 5

Cannot be QC and must satisfy:

Relationship Test
* Descendant or ancestor (e.g., child, grandchild, parent, or grandparent)
* Sibling, including a stepbrother or stepsister
* Nieces and nephews (not cousins)
* Aunt or uncle
* In-law (mother-in law, father-in-law, sister-in law, and brother-in-law)
* Unrelated person who lives in home entire year

Gross Income Test
* Must have “gross income” (tax definition) less than the annual exemption amount

Support Test
* Taxpayer must provide more than half the support
* Same scholarship rule applies for own child

Question 6

Single

Answer 6

Unmarried as of last day of the year, unless
qualify for head of household

Question 6

Filing Status – 5 Types

Answer 6

• Single
• Married filing jointly
• Married filing separately
• Qualifying surviving spouse
• Head of household

Question 7

Married Filing Jointly

Answer 7

Must be married as of the last day of the year
* If one spouse dies the surviving spouse is still
considered to be married to decedent spouse at year end (unless remarry)

• Joint and several liability for tax
• You are BOTH responsible for paying the tax

Question 8

Married Filing Separately

Answer 8

taxpayers are married but file separate returns
* Typically not beneficial from tax perspective
* Tax rates are not advantageous and may lose certain tax benefits

• May be beneficial for non-tax reasons
• No joint and several liability
• No contact with spouse

Question 9

Qualifying Surviving Spouse

Answer 9

• Available for the two years following the year
  of spouse’s death if:
• Does not remarry during two-year period
• Maintains household for dependent child

Benefit: get to use MFJ tax rates and
standard deduction

Question 10

Head of Household

Answer 10

Unmarried or considered unmarried at end of the year
* Not a qualifying surviving spouse
* Pay > 50% of the costs of keeping up a home
during the year
* “Qualifying person” lived in taxpayer’s home for more than half of the year (generally must be family member who is a dependent)
* If a dependent parent, don’t have to live with taxpayer but taxpayer must pay for more than half of cost of maintaining the parent’s home

Question 11

More QC rules, who gets priority, parents or other relatives?

Answer 11

Share custody or live with parents and other
relatives – could qualify as QC for multiple people, but only one taxpayer can claim
* Tie-breaking rules:
1. Parents get priority
2. Days living with each parent
* Divorced parents can agree for one spouse to take the dependency and document in writing
* If same # of days, goes to parent with higher AGI
3. Nonparents - one with higher AGI gets dependent

Question 12

Multiple support agreement like multiple tax payers supporting someone like siblings supporting parents

Answer 12

Could be the case that multiple taxpayers
support someone (e.g., siblings support elderly parent)
* Each taxpayer contributes < 50% of support but in total the group provides > 50%
* If rules are met, designate who gets to claim the dependent with a written form
* This person must provide > 10% of support

Question 13

More on HoH – “Abandoned Spouse”

Answer 13

Someone who is legally married at the end of the year but is considered “unmarried” and can qualify for HoH
* Does not file a joint return with other spouse
* Lived apart from other spouse for last 6 months of the year
* Pays > 50% of the cost of maintaining a household that serves as a principal residence for a dependent child for more than half the year
* Allows a married spouse better tax treatment than MFS

Question 14

Assume that last year Tony passed away, and
during the current year Carmela did not remarry but maintained a household for A.J. and Meadow, her dependent children.
Under these circumstances, what would
Carmela’s filing status be?

Answer 14

2024 & 2025: QSS
2023: MFJ
2026: HoH

Question 15

Assume Janice (Tony’s sister) lived with the
Sopranos, but Janice paid more than half the costs of maintaining a separate apartment that is the principal residence of her mother, Livia, whose gross income is $1,500. Because Janice provided more than half of Livia’s support during the year, and because Livia’s gross income was only $1,500, she qualifies as Janice’s dependent (as a qualifying relative).

Answer 15

Head of Household