REG 34 - Individual Tax Issues

Question 1

Jim and Kay Ross contributed to the support of their two children, Dale and Kim, and Jim’s widowed parent, Grant. For 2014, Dale, a 19-year old full-time college student who lives at home when not at college, earned $4,500 as a baby-sitter.

Kim, a 23-year old bank teller, earned $12,000. Kim provided more than 50% of her support during 2014. Grant received $5,000 in dividend income and $4,000 in nontaxable social security benefits.

Grant, Dale, and Kim are U.S. citizens and Grant and Dale were over one-half supported by Jim and Kay.

How many exemptions can Jim and Kay claim on their 2014 joint income tax return?

Answer 1

3. For a taxpayer to claim an individual as an exemption on his tax return, the individual must be a qualifying child or qualifying relative. Kim is not a qualifying child or a qualifying relative because she provides over 50% of her own support. Therefore, no one can claim her as a dependent.

Dale is a qualifying child and can therefore be claimed as a dependent. He meets the relationship, age, residence (lives at home for more than half the year; time at college counts as home), joint return, and citizen test.

Grant does not qualify as a qualifying relative because he fails the gross income test. His gross income exceeds the personal exemption amount for 2014 of $3,950.

Hence, Jim and Kay may take an exemption for Dale and, including themselves, take a total of three personal exemptions.

Question 2

T/F: For purposes of determining whether a relative qualifies for a dependency exemption as a qualifying relative, the taxpayer must provide over half the child’s support, including any scholarships received by the child.

Answer 2

False.
Scholarships do not count as support.
A child of the taxpayer (under age 19) earned $5,000 this year and received a scholarship that paid tuition of $8,000. If the child uses the funds from wages for necessities, the child will still satisfy the support test if the taxpayer provides at least $5,001 of necessities (5,001/10,000 > 1/2).

Question 3

For head of household filing status, which of the following costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household?
Food consumed in the home
Value of services rendered in the home by the taxpayer

Answer 3

Yes, No
For head of household filing status, the following costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household: rent; mortgage interest; taxes; insurance on the home; repairs; utilities; and food eaten in the home. The following costs may not be considered: clothing; education; medical treatment; vacations; life insurance; transportation; rental value of home owned by taxpayer; and the value of services provided by the taxpayer or a member of the taxpayer’s household.

This response correctly indicates that the food consumed may be considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household and that value of services provided by the taxpayer may not be considered.

Question 4

T/F: A dependent child must reside in the home of the taxpayer in order for the taxpayer to qualify as an abandoned spouse.

Answer 4

True
An abandoned spouse is a married taxpayer who is allowed to file as though they are unmarried. An abandoned spouse may file as a head of household. The following requirements must be met:
1. The taxpayer’s spouse has not lived in the home for the last 6 months of calendar year.
2. The taxpayer must provide more than half the cost of maintaining a home for self and a dependent child.

Question 5

T/F: TP supports an aged parent as a dependent. TP can claim an additional standard deduction.

Answer 5

False.

Only if TP can prove he has provided more than 50% of her support, and other relative tests.

Question 6

T/F: The amount of the standard deduction varies according to filing status.

Answer 6

True

Question 7

T/F: For a child who does not itemize deductions, net unearned income is earned income less the standard deduction.

Answer 7

False.
A taxpayer claimed as a dependent by another is entitled to a “mini” standard deduction and no personal exemption. The “mini” standard deduction is $1,000 (2014)

Question 8

T/F: The amount of the standard deduction varies according to whether the taxpayer is blind or deaf.

Answer 8

False.

Special adjustments are made to the standard deduction when the taxpayer is blind at year end or reaches age 65.

Question 9

What are the allowable itemized deductions for computing alternative minimum taxable income?

Answer 9

a. The phaseout of itemized deductions is subtracted from taxable income (i.e., phaseout does not apply for AMT).
b. Medical deduction is allowed only to the extent it exceeds 10% of AGI.
c. No deduction is allowed for taxes (it must be added back to taxable income).
d. Two percent miscellaneous deductions are not allowed.
e. Home mortgage interest is deductible only if the loan proceeds are used to acquire or improve the home.

Question 10

An employee who has social security tax withheld in an amount greater than the maximum for a particular year, may claim
A. Such expenses as either a credit or an itemized deduction, at the election of the employee, if that excess resulted from correct withholding by two or more employers.
B. Reimbursement of such excess from his employers, if that excess resulted from correct withholding by two or more employers.
C. The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.
D. The excess as a credit against income tax, if that excess was withheld by one employer.

Answer 10

C. An employee who has social security tax withheld in an amount greater than the maximum for a particular year, may claim the excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers. An employee who had excess social security tax withheld from one employer should be reimbursed by the employer.

Question 11

The alternative minimum tax (AMT) is computed as the
A. Excess of the regular tax over the tentative AMT.
B. Excess of the tentative AMT over the regular tax.
C. The tentative AMT plus the regular tax.
D. Lesser of the tentative AMT or the regular tax.

Answer 11

B. The alternative minimum tax (AMT) ensures that all taxpayers share the tax burden fairly by preventing taxpayers with substantial income from avoiding significant tax liability. The AMT equals the excess of the tentative AMT tax over the regular tax.

Question 12

The credit for prior year alternative minimum tax liability may be carried
A. Forward for a maximum of 5 years.
B. Back to the 3 preceding years or carried forward for a maximum of 5 years.
C. Back to the 3 preceding years.
D. Forward indefinitely.

Answer 12

D. To allow for timing differences resulting in adjustments to the taxpayer’s minimum tax basis, the alternative minimum tax credit may be claimed to reduce a taxpayer’s regular tax liability to account for the timing differences.
The credit is given only for adjustments resulting from timing differences.
This credit may be carried forward indefinitely.

Question 13

In 2014, Don Mills, a single taxpayer, had $70,000 in taxable income before personal exemptions. Mills had no tax preferences. His itemized deductions were as follows:

State and local income taxes
$5,000
Home mortgage interest on loan to acquire residence
6,000
Miscellaneous deductions that exceed 2% of adjusted gross income
2,000

What amount did Mills report as alternative minimum taxable income before the AMT exemption?
	A.  	$72,000
	B.  	$75,000
	C.  	$77,000
	D.  	$83,000

Answer 13

C. The alternative minimum tax ensures that all taxpayers share the tax burden fairly by preventing taxpayers with substantial income from avoiding significant tax liability. The alternative minimum tax equals the excess (if any) of the tentative minimum tax over the regular tax. In computing a taxpayer’s alternative minimum taxable income, several adjustments and preferences are made to a taxpayer’s taxable income before personal exemptions. Adjustments are a substitution of an amount used in computing alternative minimum tax for an amount used computing regular tax. Preferences involve the addition of the difference between alternative minimum tax and regular tax treatments. Included in the preferences are those stipulating that state and local income taxes and miscellaneous itemized deductions are not deductible for alternative minimum tax purposes. Home mortgage interest on loan to acquire residence is deductible under both the regular tax and the alternative minimum tax.

Thus, Mills must add back his state and local income taxes of $5,000 and miscellaneous deductions that exceed 2% of adjusted gross income of $2,000 to his $70,000 of taxable income before personal exemptions, putting his alternative minimum taxable income at $77,000.

Question 14

Alternative minimum tax preferences include
Tax exempt interest from private activity bonds issued After August 7, 1986
Charitable contributions of appreciated capital gain property

Answer 14

Yes, no
The alternative minimum tax ensures that all taxpayers share the tax burden fairly by preventing taxpayers with substantial income from avoiding significant tax liability. The alternative minimum tax equals the excess (if any) of the tentative minimum tax over the regular tax. In computing a taxpayer’s alternative minimum taxable income, several adjustments and preferences are made to a taxpayer’s taxable income before personal exemptions.

Adjustments are a substitution of an amount used in computing alternative minimum tax for an amount used computing regular tax. Preferences involve the addition of the difference between alternative minimum tax and regular tax treatments. There are numerous adjustments and preferences, including depreciation adjustments and preferences. Charitable contributions of appreciated capital gain property are not preference items.

Question 15

On their joint tax return, Sam and Joann had adjusted gross income (AGI) of $150,000 and claimed the following itemized deductions:

Interest of $15,000 on a $100,000 home equity loan to purchase a motor home
Real estate tax and state income taxes of $18,000
Unreimbursed medical expenses of $15,000 (prior to AGI limitation)
Miscellaneous itemized deductions of $5,000 (prior to AGI limitation).

Both Sam and Joann are less than 65 years old. Based on these deductions, what would be the amount of AMT add-back adjustment in computing alternative minimum taxable income?
	A.  	$21,750
	B.  	$23,750
	C.  	$35,000
	D.  	$38,750

Answer 15

C. The following amounts are added back to taxable income to compute AMT income:

Interest because proceeds were not used for principal residence $15,000
Taxes 18,000
Medical expenses (no adjustment since 10% of AGI threshold applies for regular tax also) -0-
2% miscellaneous itemized deductions (deducted $5,000 - (2% x $150,000) for regular tax) 2,000
Total add-back $35,000