Chapter 4 Flashcards
Individual Income Tax Overview, Dependents, and Filing Status
The income tax base for an individual tax return is:
adjusted gross income minus from AGI deductions.
Taxable income, which is adjusted gross income minus from AGI deductions, is the income tax base for an individual tax return.
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?
50,000
$50,000 compensation. The interest income is excluded from gross income because it is interest from a municipal (tax-exempt) bond.
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), and she received $30,000 of life insurance proceeds from the death of her spouse. What is the amount of Joanna’s gross income from these items?
60,000
$60,000 compensation is included in gross income, the increase in the value of her stock is not realized income so it is not included in gross income, and the life insurance proceeds are excluded from gross income.
All of the following are for AGI deductions except:
contributions to qualified retirement accounts
rental and royalty expenses
business expenses for a self-employed taxpayer
medical expenses
medical expenses
Medical expenses are from AGI deductions.
Which of the following types of income are not considered ordinary income?
Compensation income
short-term capital gains
qualified dividend income
both compensation income and qualified dividend income
both short-term capital gains and qualified dividend income
Both short-term capital gains and qualified dividend income
Short-term capital gains are capital gains and not ordinary income (short-term gains enter the capital gains netting process). Qualified dividend income is subject to preferential rates and thus is not considered to be ordinary income.
Which of the following statements is true?
income character determines the tax year in which the income is taxed
income character depends on the taxpayers filing status
qualified dividend income is taxed at a lower rate than if the same amount were ordinary income
a taxpayer selling a capital asset at a gain recognizes ordinary income
qualified dividend income is taxed at a lower rate than if the same amount were ordinary income
Qualified dividends are taxed at 0 percent, 15 percent, or 20 percent (depending on the taxpayer’s income) and are always taxed at a lower rate than the same amount of ordinary income would be. Income character determines the rate at which income is taxed and it does not depend on filing status. Finally, a taxpayer selling a capital asset at a gain recognizes capital gain, not ordinary income.
Which of the following statements is true if a taxpayer has a net long-term capital gain of $7,000 and a net short-term capital loss of $5,000?
$2,000 taxed a preferential 0, 15, or 20 percent rate.
Net capital gains are taxed at 0 percent, 15 percent, or 20 percent (depending on the taxpayer’s income). A net capital gain is the excess of net long-term capital gains over net short-term capital losses. In this case, the net capital gain is $2,000.
Madison’s gross tax liability is $9,000. Madison had $3,000 of tax credits available, and she had $8,000 of taxes withheld by her employer. What are Madison’s taxes due (or taxes refunded) with her tax return?
$2,000 tax refund
Anna is a 21-year-old full-time college student (she plans on returning home at the end of the school year). Her total support for the year was $34,000 (including $8,000 of tuition). Anna covered $12,000 of her support costs out of her own pocket (from savings, she did not work) and she received an $8,000 scholarship that covered all of her tuition costs. Which of the following statements regarding who is allowed to claim Anna as a dependent is true?
Even if Anna’s parents provided the remaining $14,000 of support for Anna ($34,000 minus $12,000 minus $8,000), they would not be able to claim her as a dependent.
Even if Anna’s grandparents provided the remaining $14,000 of support for Anna ($34,000 minus $12,000 minus $8,000), they would not be able to claim her as a dependent.
Because she provided more than half her own support, Anna would not qualify as her parents’ dependent.
None of these are true
Even if Anna’s grandparents provided the remaining $14,000 of support for Anna ($34,000 minus $12,000 minus $8,000), they would not be able to claim her as a dependent.
Anna does not qualify as a qualifying child or relative of her grandparents because she provided more than half her own support. As it relates to the grandparents, the scholarship earned by Anna is treated as support provided by Anna (Anna provided $20,000 and the grandparents provided $14,000 of support). However, because Anna is a full-time college student under age 24, she qualifies as her parents’ qualifying child (the scholarship does not count in the support test with respect to the parents).
Sheri and Jake Woodhouse have one daughter, Emma, who is 16 years old. They also have taken in Emma’s friend, Harriet, who has lived with them since February of the current year and is also 16 years of age. The Woodhouses have not legally adopted Harriet but Emma often refers to Harriet as her “sister.” The Woodhouses provide all of the support for both girls, and both girls live at the Woodhouse residence. Which of the following statements is true regarding whom Sheri and Jake may claim as dependents for the current year?
They may claim Emma as a dependent qualifying child but may not claim Harriet as a dependent.
Michael, Diane, Karen, and Kenny provide support for their mother, Janet, who is 75 years old. Janet lives by herself in an apartment in Los Angeles. Janet’s gross income for the year is $3,000. Janet provides 10 percent of her own support, Michael provides 40 percent of Janet’s support, Diane provides 8 percent of Janet’s support, Karen provides 10 percent of Janet’s support, and Kenny provides the remaining 32 percent of Janet’s support. Under a multiple support agreement, who is eligible to claim Janet as a dependent as a qualifying relative?
Michael and Kenny
Only Michael and Kenny are eligible because they are the only ones who each individually contributed more than 10 percent of Janet’s support.
In June of Year 1, Edgar’s spouse died, and Edgar did not remarry during the year. What is Edgar’s filing status for Year 1 (assuming they did not have any dependents)?
Married filing jointly
If a spouse dies during the year and the surviving spouse does not remarry, for tax purposes the surviving spouse is still considered married to the deceased spouse at the end of the year in which the spouse died.
Jan is unmarried and has no children, but she provides all of the financial support for her mother, who lives in an apartment across town. Jan’s mother qualifies as Jan’s dependent. Which is the most advantageous filing status available to Jan?
Head of household
Jan can claim head of household status if she maintains a separate residence for a parent who is also a dependent.
Jasmine and her spouse 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 Jasmine’s most favorable filing status for the year?
Single
Dexter does not qualify as Jasmine’s dependent due to his age and his income, so Jasmine must file single for the year.
