Chapter 3

Question 1

Determination of “Adjusted Gross Income”

Answer 1

Gross income is essentially all income that a taxpayer realizes during the tax year minus any available exclusions from gross income. An exclusion may be defined as an item of income that is not required to be included in gross income pursuant to a specific provision of the income tax law.

Question 2

Exclusion vs Deduction

Answer 2

An exclusion is an item of income that is not required to be included in gross income.

A deduction is an expense paid or incurred by a taxpayer that the tax law specifically allows to be subtracted from the amount of income that is otherwise subject to tax.

Question 3

How do you get gross income ad adjusted gross income?

Answer 3

All income - Exclusions = Gross Income

Gross Income - Deductions = Adjusted Gross Income

Question 4

Above the line deductions vs below the line deductions?

Answer 4

Deductions subtracted from gross income in determining adjusted gross income are referred to as above-the-line deductions.

Deductions subtracted from adjusted gross income in determining taxable income are referred to as below-the-line deductions.

Question 5

Which type of deduction is available regardless of the ability to itemize?

Answer 5

Above the line deductions

A taxpayer claims itemized or below-the-line deductions only if the total of such deductions exceeds the available standard deduction. For this reason, above-the- line deductions are often more valuable to the taxpayer.

Question 6

Above-the-line deductions reduce AGI, while below-the-line deductions do not.

Answer 6

True

Question 7

what are some types of above the line deductions?

Answer 7

• Trade or business deductions
• Certain types of business expenses
• Losses from the sale or exchange of property (subject to limitations)
• deductions attributable to rent and royalties
• Deductible contributions to IRA’s
• Deductible alimony payments
• Deductible moving expenses for members of the armed services
• Contributions to medical savings accounts
• Deductible interest payments made on qualified education loans

Question 8

Taxable income

Answer 8

An individual’s taxable income is determined by subtracting either the total of the taxpayer’s allowable itemized deductions or the taxpayer’s applicable standard deduction amount (below the line deductions), which- ever is greater.

Question 9

Standard deduction for dependents?

Answer 9

A special rule applies to taxpayers who are dependents who file their own tax return.

The special standard deduction amount allowable on a dependent’s tax return is the greater of
• a sum equal to the amount of the dependent’s earned income for the year plus $350 (but not more than the regular standard deduction amount), OR
• $1,050 (for 2018)

Question 10

Standard deduction for the Aged or Blind Taxpayers?

Answer 10

Another special rule applies to taxpayers who are 65 years of age or older and/or are legally blind. An additional deduction on top of the standard is allowed for these groups.

these “additional amounts” are as follows:
$1,600 for taxpayers who are unmarried ling as either head of household or single. $1,300 for married taxpayers ling jointly, separately or as a surviving spouse.

Question 11

Phaseouts on itemized deductions?

Answer 11

The phaseout of itemized deductions is temporarily repealed for tax years after December 31, 2017 and before January 1, 2026. Certain itemized deductions resume being phased out beginning in 2026.

Question 12

How to determine a qualifying child dependent?

Answer 12

1) First, the individual must bear a relationship to the taxpayer that meets ONE of the following three descriptions:
- Must be a son, daughter, stepchild, foster child or legally adopted.
- A descendant of any individual who meets the definition of child (above)
- A brother, sister, stepbrother, stepsister of the taxpayer or descendant of any such person
2) Must live in the same residence unless there is special allowable circumstances (illness, education, vacation, military service)
3) The individual must be:
- Under the age of 19 at the end of the year.
- Or, under the age of 24 for students in full time education
- Or, totally or permanently disabled.
4) the individual must not have provided more than half his or her own support for half of the year

Question 13

How to determine a qualified relative?

Answer 13

1) He or she must bear a specified relationship to the taxpayer. Specified relationships include a child of the taxpayer; a descendant of such a child; a brother, sister, step- brother, stepsister, father, or mother; an ancestor of a father or mother; a stepfather or stepmother; a nephew or niece; an uncle or aunt; and a son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
Must live in the same residence.
2) The individual’s gross income for the year must be less than the “exemption amount” ($4,050 for 2017 as indexed for inflation)
3) the taxpayer must provide over one half of the support for the year

Question 14

Surviving Spouse Filing Rules

Answer 14

A surviving spouse may file married filing joint the year of their spouses death, and 2 years following that year.

Question 15

Subchapter-C Corporations tax bracket

Answer 15

Subchapter C corporations are subject to Subchapter C corporations are subject to a single flat rate of 21 percent on taxable income.a single flat rate of 21 percent on taxable income.

Question 16

THE KIDDIE TAX

Answer 16

Under current tax law, however, this planning strategy is significantly curtailed. Families are prevented from shifting large amounts of unearned income to children and making the shift effective for income tax purposes. The provision that limits such income shifting is referred to as the kiddie tax.

Question 17

Kiddie Tax Example

Answer 17

Kyle Bradford is 10 years old. He lives with his mother, Melody, who is unmarried. In 2018, he has $5,700 in earned income from doing work for neighbors, and $3,200 in interest income from a custodial bank account. Kyle’s standard deduction is $6,050 which is the greater of $1,050 or the sum of earned income of $5,700 and $350. Kyle’s taxable income is $2,850 the difference between his total income of $8,900 and his standard deduction of $6,050. The $2,850 is taxed as follows:
• $1,050 is not taxed exempted by the $1,050 allocated to unearned income.
• $1,050 is taxed at Kyle’s rate of 10%.
• $750 is taxed at trusts and estate rate of 10%.

Question 18

For tax years beginning in 2018, taxpayers with adjusted gross income over $250,000 are subject to an overall limitation on their itemized deductions.

Answer 18

False.

For the tax years 2018 through 2025, the overall limitation on itemized deductions has been suspended.

Question 19

A father can claim a dependency exemption for his 18-year-old married daughter who files a joint return with her spouse who has substantial income.

Answer 19

False.
A taxpayer may generally not claim a personal exemption for a child who is married and files a joint return with his or her spouse.

Question 20

A deductible contribution to an IRA is an above-the-line deduction.

Answer 20

True

Question 21

The kiddie tax applies only to income from assets received from a child’s parents.

Answer 21

False.
The kiddie tax rules generally apply to unearned income of a child, regardless of whether the income-producing assets were received from the child’s parents.

Question 22

In order for an individual to be treated as a qualifying child of the taxpayer under the dependency exemption rules, that individual must not have provided more than half of his or her own support during the year.

Answer 22

True

Question 23

The phaseout of a deduction or a tax credit can increase the effective rate of tax that taxpayers actually pay.

Answer 23

True

Question 24

A taxpayer can qualify as a head of household by maintaining a parent in a nursing home.

Answer 24

True

Question 25

A taxpayer who may be claimed as a dependent of another taxpayer will also be entitled to a personal exemption for himself or herself.

Answer 25

False.
For the tax years 2018 through 2025, personal exemptions have been eliminated for all taxpayers and dependents even though individuals may still be claimed as dependents.

Question 26

The standard deduction for all individual taxpayers is $6,800.

Answer 26

False

Question 27

Under the kiddie tax rules, net unearned income of a child under a specified age is taxed at the marginal rate of the child’s parents.

Answer 27

From 2018 to 2025, a portion of the net unearned income of a minor child is taxed at the rates for trusts and estates.

Question 28

Corporations are generally required to file tax returns by the 15th day of the fourth month after the close of their taxable year.

Answer 28

True

Question 29

To file as a surviving spouse, a taxpayer must maintain a residence for a child of the taxpayer for whom he or she is entitled to a dependency exemption.

Answer 29

True
The qualifications of claiming someone as a dependent apply even though the personal and dependency exemptions are suspended between 2018-2025 under the TCJA.

Question 30

A noncustodial parent may claim the child as a dependent if the custodial parent signs a written declaration agreeing not to claim the exemption for that year.

Answer 30

True