Tax 1-6 Analyze a situation to calculate taxable income.

Question 1

Calculate Taxable Income

Mary, a 67-year-old single taxpayer, has AGI of $369,350 in 2016. She has $ 30,000 of itemized deductions, consisting of $2,125 of deductible medical expenses (after the 7.5% floor), $8,000 of home mortgage interest, $11,000 of taxes, $4,000 of charitable contributions, and $4,875 of investment interest expense. How much are her itemized deductions reduced by?

$259,400 threshold for a single filer in 2016

(LO 1-6, pg 41)

Answer 1

Itemized deductions are reduced by 3% of the excess of the AGI over the threshold amounts.

$109,950 is the excess of the AGI over the $259,400 threshold for a single filer in 2016

Mary’s itemized deductions are reduced by $3,299 (3% of $ 109,950).

She is allowed to deduct $ 26,701 of itemized deductions ($30,000 reduced by the phaseout amount of $3,299).

Question 2

Calculate Taxable Income

10. Janet and Bruce Robinson, both age 43, are married taxpayers filing jointly. They have itemized deductions consisting of the following:

$19,500 Home mortgage interest	
$8,700 State income taxes	
$5,200 Property taxes	
$6,200 Charitable contributions	
$895 Tax return preparation fee	
$18,460 Unreimbursed medical expenses 	

Their AGI for 2016 is $463,500. What is the amount of their allowable itemized deductions?

($311,300 threshold)

$35,034

$35,929

$54,389

$58,955

(LO 1-6)

Answer 2

$35,034

Possible Itemized Deductions:
  $19,500 Home mortgage interest	
\+ $8,700 State income taxes	
\+ $5,200 Property taxes	
\+ $6,200 Charitable contributions	
= $39,600

The total itemized deduction amount is $39,600.

The taxpayer’s otherwise allowable itemized deductions are reduced by the lesser of

(a) 3% of the excess of AGI over a specified amount or
(b) 80% of the otherwise allowable itemized deductions for the year.

  $463,500 AGI for 2016
- $311,300 threshold
= $152,200 amount over threshold 
  * 3% 
=  $4,566 reduction 

Therefore:
$39,600
- $4,566
= $35,034

Possible Tier II Deductions:
$895 Tax return preparation fee
$18,460 Unreimbursed medical expenses

Note that the tax preparation fee is a Tier II miscellaneous itemized deduction; deductible only to the extent that it exceeds 2% of AGI, which it does not in this case. (2% of $463,500 = $9,270)

The medical expenses are deductible only to the extent that they exceed 10% of AGI, which they do not.
(10% of $463,500 = $46,350)

Question 3

Calculate Taxable Income

11. John and Jane Irwin, married taxpayers filing jointly, have two dependent children. Their AGI for 2016 is $339,850. What is the amount of personal and dependency exemptions that the Irwins may deduct?

Four exemptions at $4,050 each equals $16,200.

There is a $311,300 threshold amount (for married couples filing jointly).

$3,792

$12,312

$12,636

$16,200

(LO 1-6)

Answer 3

$12,312

Four exemptions at $4,050 each equals $16,200.

The deduction for personal and dependency exemptions is reduced by 2% for each $2,500 (or portion thereof) by which the AGI exceeds a $311,300 threshold amount (for married couples filing jointly).

$339,850 AGI
- $311,300 threshold
= $28,550

$28,550
/ $2,500
= 11.42 (rounded up to 12)

12
* 2
= 24%

$16,200
- 24%
= $3,888

$16,200
- $3,888
= $12,312

Question 4

Calculate Taxable Income

17. Kristen Wiley is a single taxpayer. She has an AGI of $100,000 for the current tax year. She paid unreimbursed employee business expenses of $1,500, investment adviser’s fees of $600, and $425 for income tax preparation during the year. What amount, if any, is allowable as an itemized deduction?

$0

$525

$2,525

(LO 1-6)

Answer 4

$525

  $1,500
\+ $600
\+ $425
= $2,525
- $2,000
= $525

The Tier II miscellaneous itemized deductions are deductible only to the extent that they exceed 2% of AGI. All of the Tier II deductions are added together ($2,525), and then 2% of AGI is subtracted ($2,000) to leave $525 that is deductible.

Question 5

Calculate Taxable Income

22. For a taxpayer under 65 years of age, medical expenses are deductible as an itemized deduction to the extent that the expenses exceed ___% of AGI.

2

7.5

10

(LO 1-6)

Answer 5

10

For taxpayers who are under age 65 at the close of the tax year, the floor is 10% of AGI. If the taxpayer has reached age 65 before the close of the tax year, the floor for deductible medical expenses is 7.5% of AGI.

Question 6

Calculate Taxable Income

23. Which one of the following miscellaneous itemized deductions is a Tier II miscellaneous itemized deduction?
    a. impairment-related work expense of a handicapped individual
    b. gambling losses to the extent of gambling winnings
    c. deduction for unrecovered basis in a commercial annuity
    d. appraisal fee for a charitable contribution

(LO 1-6)

Answer 6

d. appraisal fee for a charitable contribution

The appraisal fee to determine the value of a piece of artwork being donated to charity is a Tier II miscellaneous itemized deduction—an expense related to the determination of, or collection of, a tax liability. Impairment-related work expenses of a handicapped individual, gambling losses to the extent of gambling winnings, and the deduction for unrecovered basis in a commercial annuity are miscellaneous itemized deductions, but are NOT subject to a 2% of AGI limitation.

Question 7

Calculate Taxable Income

24. Beth Franklin is an unmarried taxpayer with three dependent children, so she files using head of household filing status. Her AGI for 2016 is $382,900. Personal exemptions are $4,050 each, and the phaseout begins at $285,350. What is the amount of personal and dependency exemptions that Beth may deduct?

$285,350 threshold amount (for heads of household)

Four exemptions at $4,050 each equals $16,200.

$3,240

$3,520

$12,480

$16,200

(LO 1-6)

Answer 7

The deduction for personal and dependency exemptions is reduced by 2% for each $2,500 (or portion thereof) by which the AGI exceeds a $285,350 threshold amount (for heads of household).

$382,900 AGI
- $285,350 threshold amount
= $97,550

$97,550
/ $2,500
= 39.02 (rounded up to 40)

40
* 2% =
.80 or 80%

Therefore, 80% of the deduction is phased out.

Four exemptions at $4,050 each equals $16,200.

$16,200
* 80%
= 12,960

$16,200
- 12,960
= $3,240

Allowed deduction = $3,240

Question 8

Calculate Taxable Income

25. Janice and Julian Davis, both age 66, are married taxpayers filing jointly. They have itemized deductions consisting of the following:

$21,200 Home mortgage interest	
$9,800 State income taxes	
$6,300 Property taxes	
$7,700 Charitable contributions	
$770 Tax return preparation fee	
$14,630 Unreimbursed medical expenses 

Their AGI for 2016 is $411,300. The itemized deduction phaseout begins at $311,300 for a married couple filing jointly. What is the amount of their allowable itemized deductions?

$42,000

$45,000

$45,700

$60,330

(LO 1-6)

Answer 8

$42,000

Separate the regular itemized deductions from the Tier II deductions and determine if the Tier II deductions qualify:

a. Tax Preparation Fee is deductible only to the extent that it exceeds 2% of AGI, which it does not in this case. ($411,300 * 2% = $8,226)
b. Medical Expenses are deductible only to the extent that they exceed 7.5% of AGI (taxpayer is age 65 or older), which they do not. ($411,300 * 7.5% = $30,748)

That leaves:
   $21,200 Home mortgage interest  
\+ $9,800 State income taxes  
\+ $6,300 Property taxes 
\+ $7,700 Charitable contributions
= $45,000

These are reduced by the lesser of:
(a) 3% of the excess of AGI over a specified amount
or
(b) 80% of the otherwise allowable itemized deductions for the year.

$411,300
- $311,300
= $100,000

$100,000
* 3%
= $3,000

$45,000
- $3,000
= $42,000

As a practical matter, it is almost impossible to bump up against the 80% limitation.

Question 9

Filing Status

To qualify as a ________, an individual must

(1) be a U.S. citizen or resident for the entire taxable year;
(2) be unmarried or considered unmarried at the close of the taxable year; and
(3) provide more than half of the cost of maintaining a household that is the principal place of residence of a qualifying child or an individual for whom a dependency exemption is allowed.

(LO 1-6)

Answer 9

head of household

Question 10

Calculate Taxable Income

Example. During 2016, John and Mary, married taxpayers filing jointly, purchase a principal residence and pay $1,600 for qualified mortgage insurance. For 2016, they have an AGI of $103,650. Therefore, John and Mary’s deduction for qualified mortgage insurance is?

(LO 1-6)

Answer 10

As a result, their deduction is reduced by 40% of the otherwise deductible amount—10% for each of the four $1,000 (or fraction thereof) amounts by which their AGI exceeds $100,000.

40% of $1,600 = $640

Deduction = $1,600 - $640

Deduction = $960

There is a phaseout of the deductibility based on the AGI of the taxpayer. For single and married taxpayers filing jointly, the deduction is reduced by 10% of the amount of qualified mortgage insurance for each $1,000 (or fraction thereof) that the taxpayers’ adjusted gross income (AGI) exceeds $100,000. For married taxpayers filing separate returns, the reduction equals 10% of the amount of qualified mortgage insurance for each $500 (or fraction thereof) that the taxpayers’ AGI exceeds $50,000.

Question 11

Calculate Taxable Income

The following are examples of what:

expenses related to the determination of, or collection of, a tax liability, such as tax return preparation fees, legal fees to defend oneself during an audit, and appraisal expenses for certain charitable contributions;

unreimbursed employee business expenses, such as union and professional dues, home office expense for an employee, unreimbursed travel expenses, certain education expenses, uniforms or special clothing, etc.; and

expenses related to the “production of income,” such as investment counsel or investment adviser fees, certain legal fees, etc.

(LO 1-6)

Answer 11

Tier II miscellaneous itemized deductions

Question 12

Calculate Taxable Income

_____ are deductible only to the extent that the cumulative total exceeds 2% of adjusted gross income.

(LO 1-6)

Answer 12

Tier II miscellaneous itemized deductions

The Tier II miscellaneous itemized deductions are added together, and then 2% of AGI is subtracted. Only the amount, if any, in excess of 2% of AGI, is deducted. Any amounts not deducted due to the 2% of AGI limitation are lost; there is no carry-forward of the disallowed amounts.

Question 13

Exemptions

The following are required to be considered a Qualifying _____

meets the relationship test,

has the same principal place of abode as the taxpayer for more than one-half of the tax year,

meets the age test, and

has not provided more than one-half of his or her own support for the tax year.

(LO 1-6, pg 43)

Answer 13

Qualifying Child

Question 14

Exemptions

The following are required to be considered a Qualifying _____

bears a specified relationship to the taxpayer or whose principal place of abode is the taxpayer’s home and is a member of the taxpayer’s household,

has gross income for the tax year that is less than the exemption amount,

has over half of his or her support provided by the taxpayer, and

isn’t a qualifying child of that taxpayer or any other taxpayer.

(LO 1-6, pg 44)

Answer 14

Qualifying Relative

Question 15

Calculate Taxable Income

The deduction for personal exemptions is reduced by _% for each $2,500 (or portion thereof) by which the AGI exceeds a threshold amount.

(LO 1-6, pg 46)

Answer 15

2% for each

Question 16

Calculate Taxable Income

Example. John and Kathy are joint filers with two dependent children. Their AGI for 2016 is $334,000. Without a phaseout, they would be entitled to a $16,200 exemption deduction (four exemptions at $4,050 each). However, because their AGI exceeds the threshold amount of $311,300, they are required to reduce the $16,200 by the calculated phaseout amount. What is their allowed deduction?

(LO 1-6, pg 46)

Answer 16

The phaseout is 2% for each $2,500 (or portion thereof) by which their AGI exceeds the threshold amount.

They exceed the threshold by $22,700.

$22,700
/ $2,500
= 9.08 (rounded up to 10)

10
* 2% = 20%

Allowed Deduction = $16,200 - 20%

Allowed Deduction = $16,200 - $3,240

Allowed Deduction = $12,960

Question 17

Standard Deduction

For married taxpayers who choose to file separate returns, if one spouse itemizes deductions, the other spouse must also _____.

(LO 1-6, pg 32)

Answer 17

itemize deductions

Question 18

Filing Status

A _____ is one who is, at the end of the tax year, not married, divorced, or legally separated. Also included are individuals who satisfy the “certain married individuals living apart,” or “abandoned spouse” test.

(LO 1-6, pg 32)

Answer 18

single person

Question 19

Filing Status

Taxpayers who want to be considered as certain married individuals living apart, which is sometimes known as the _____ spouse doctrine, must satisfy the following test. Taxpayers are entitled to use the tax schedules applicable to single taxpayers or, if they qualify, the head of household rates, if they:

(1) file a separate return;
(2) maintain as their home a household that is a child’s or stepchild’s principal place of residence for more than half of the tax year;
(3) are entitled to a dependency deduction for such child;
(4) provide more than half of the cost of maintaining the household; and
(5) do not live with their spouse for any period during the last six months of the tax year.

The other spouse generally would file as _____.

(LO 1-6, pg 33)

Answer 19

abandoned

married filing separately

Question 20

Filing Status

Qualifying _____ are also entitled to use the married filing jointly tax rates. To qualify, they must

(1) be unmarried at year-end;
(2) have children for whom he or she is entitled to a dependency exemption;
(3) furnish more than half the cost of maintaining a household that is the principal place of residence for such children; and
(4) have been entitled to file a joint return with the deceased spouse for the year of death.

(LO 1-6, pg 34)

Answer 20

widows or widowers

Question 21

Filing Status

Many tax benefits, such as the child care credit and the Hope or Lifetime Learning credits are generally not available to what filing status?

(LO 1-6, pg 34)

Answer 21

married taxpayers filing separately

Question 22

Filing Status

Where one spouse has significant amounts of potential deductions that are subject to a limitation based on AGI, such as medical expenses, casualty losses,
or Tier II miscellaneous itemized deductions, there is a potential for regular tax savings from filing as _____.

(LO 1-6, pg 34)

Answer 22

married taxpayers filing separately

Question 23

Calculate Taxable Income

Unlike Adjustments, Itemized deductions are deductions “_____ adjusted gross income” and are allowed for certain expenditures that are primarily personal in nature.

(LO 1-6, pg 35)

Answer 23

“from adjusted gross income”

Question 24

Calculate Taxable Income

A taxpayer may deduct the state and local income taxes that were paid during the year. Or, instead of taking a deduction for state and local income taxes paid, a taxpayer may elect to deduct _____.

(LO 1-6, pg 36)

Answer 24

state and local general sales taxes and use taxes

This deduction was designed primarily to help taxpayers in those states without an income tax—Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Taxpayers may either keep their own records, or use the IRS-published tables (based on income, dependents, filing status, etc.) and add sales taxes on major purchases such as automobiles and boats.

Question 25

Calculate Taxable Income

Many taxpayers find that they fall just short
of being able to itemize, so for these individuals a fairly common tax reduction strategy involves _____ itemized deductions. The idea is to alternate between claiming the standard deduction one year, and itemizing deductions the following year.

(LO 1-6, pg 40)

Answer 25

“bunching”

For example, if the taxpayer is itemizing deductions this year and claiming the standard deduction next year, the taxpayer may make two years of charitable contributions this year, but none in the following year. Next years’ property tax payments may be accelerated into the current year and January’s state estimated income tax payment may be made in the current year. Medical expenses and Tier II miscellaneous itemized deductions are likely candidates for bunching, as both involve a floor that must be exceeded. Bunching deductions may allow the floor to be exceeded when ordinarily it would not be.

Question 26

Practice Test 1

Calculate Taxable Income

5. Tony and Paulette Baker are married and will file a joint return. They have one dependent son, Ben, who was born earlier this year. When Ben was born, Paulette’s father gave Tony and Paulette a cash gift of $50,000. Tony is not an active participant in a company-maintained retirement plan. Tony paid child support to a former spouse. They have provided you with the following information.

Tony's Salary = 170,300
Tony's IRA Contribution = 5,500
Itemized Deductions = 10,000
Child Support Paid = 2,000
Worker's Compensation received = $6,000

Based on the information given, what is the Bakers’ taxable income for the 2016 tax year?

(LO 1-6)

Answer 26

$140,050

  170,300 (Salary)
- 5,500 IRA (Contribution)
= 164,800 (AGI)
- 12,600 (Standard Deduction)
- 12,150 (Personal Exemption)
= 140,050 Taxable Income 

A taxpayer is allowed to deduct the greater of the standard deduction ($12,600 for 2016) or total itemized deductions ($10,000). Don’t forget the three exemptions at $4,050 each. The IRA is deductible because neither spouse is an active participant in a company-maintained retirement plan. The child support payments made are not deductible. The workers’ compensation benefits are excluded from income. The gift received is also excluded from income.

Question 27

Practice Test 1

Calculate Taxable Income

61. John and Mary West, married taxpayers filing jointly, have itemized deductions consisting of the following:

10,300 (home mortgage interest)
3,200 (state income taxes)
3,400 (property taxes)
4,000 (charitable contributions)
3,100 (unreimbursed employee business expenses
900 (investment advisor fees)

The otherwise allowable itemized deductions are reduced by 3% of the excess of the AGI over a threshold amount of $311,300 for a married couple filing jointly.

The Wests’ AGI for 2016 is $403,670. What is the amount of allowable itemized deductions?

(LO 1-6)

Answer 27

$18,129

  10,300 home mortgage interest
\+ 3,200 state income taxes
\+ 3,400 property taxes
\+ 4,000 charitable contributions
= $20,900 itemized deductions
- 2,771 phaseout)
= $18,129 allowable itemized deductions

The total itemized deductions equal $20,900. The unreimbursed employee business expenses of $3,100 and investment advisor fees of $900 are Tier II miscellaneous itemized deductions and are not deductible because, when combined, they do not exceed 2% of AGI. Their overall itemized deductions are subject to a phaseout based on the AGI. The otherwise allowable itemized deductions are reduced by 3% of the excess of the AGI over a threshold amount of $311,300 for a married couple filing jointly. The itemized deductions are reduced by $2,771 (3% of $92,370). The $92,370 is the excess of the AGI over the $311,300 threshold. They are allowed to deduct $18,129 of itemized deductions ($20,900 reduced by the phaseout amount of $2,771).

Question 28

Calculate Taxable Income

75. Jason and Donna Christy, married taxpayers filing jointly, have four dependent children. Their AGI for 2016 is $374,100. What is the amount of personal and dependency exemptions that the Christys may deduct?

$311,300 is the threshold amount for married taxpayers filing jointly

Six exemptions at $4,050 each equals $24,300.

(LO 1–6)

Answer 28

374,100 AGI
- 311,300 threshold
= $62,800 excess
 / $2,500 
= 25.12 or 26

26
* 2
= 52%
* $24,300
= $12,636

$24,300
- $12,636
= $11,664

Six exemptions at $4,050 each equals $24,300. The deduction for personal and dependency exemptions is reduced by 2% for each $2,500 (or portion thereof ) by which the AGI exceeds a $311,300 threshold amount (for married couples filing jointly). The excess of $62,800 is divided by $2,500 to give us 25.12.

We round up to 26 (the .12 is the “or portion thereof”) and multiply by 2% to give us a 52% phaseout. 52% of $24,300 equals $12,636. $24,300 reduced by the phaseout of $12,636 equals $11,664.

Question 29

Calculate Taxable Income

The following are examples of what?

Municipal bond interest
gifts and inheritances received
workers’ compensation proceeds received

1-6

Answer 29

Exclusions

Question 30

Calculate Taxable Income

Unemployment compensation

Taxable or nontaxable?

1-6

Answer 30

Taxable

Unemployment compensation is essentially a replacement for wages, and is therefore taxable.

Question 31

Calculate Taxable Income

Workers’ compensation proceeds

Taxable or nontaxable?

1-6

Answer 31

Nontaxable

Workers’ compensation proceeds are received on account of a job-related injury, and are not taxable.

Question 32

Practice Test 2

Calculate Taxable Income

8. Fred Jackson, age 59, is a single taxpayer. He has wage income of $90,000 for the current tax year. Fred is not an active participant in a company-maintained retirement plan. In addition, he has the following:

$4,000 Long term capital gains
$9,000 Short term capital losses
$3,700 Loss from active participation from rental real estate
$5,200 Alimony paid to ex wife
$7,100 Gambling winnings
$4,100 Gambling losses
$3,500 Interest Income
$2,000 Sole Proprietorship (Schedule C) income 
$283 Self employment tax liability 
$6,890 Qualified Home Mortgage Interest 
$1,840 Real Estate tax paid 
$4,925 Investment Interest Expense
$2,975 Charitable contributions
$4,217 Total medical expenses
$1,625 State and local income taxes 
$2,180 Consumer Interest
$1,560 Unreimbursed employee business expense 
$5,500 IRA contribution 

What is the amount of Fred’s allowable itemized deductions?

$20,930

$21,647

$23,607

$30,712

(LO 1–6)

Answer 32

$20,930

  $6,890 Qualified Home Mortgage Interest
\+ $1,840 Real Estate tax paid 
\+ $4,925 Investment Interest Expense
\+ $2,975 Charitable contributions
\+ $1,625 State and local income taxes
\+ $4,100 Gambling losses
= $20,930

The itemized deductions total $20,930. This is comprised of the qualified home mortgage interest of $6,890, the real estate tax paid of $1,840, the investment interest expense of $3,500, the charitable contributions of $2,975, the state and local income taxes of $1,625, and the gambling losses to the extent of gambling winnings ($4,100).

Note that the unreimbursed employee business expenses are not deductible because they do not exceed 2% of AGI.

Also, the medical expenses are not deductible because they do not exceed 10% of adjusted gross income.

Also note that in this situation the investment interest expense of $4,925 is deductible only up to the amount of net investment income, which in this situation is $3,500.

Question 33

Practice Test 2

Calculate Taxable Income

9. The following summarizes several financial events in the life of Jeff Garfield during the current tax year:

$70,000 inheritance
$50,000 gambling winnings 
$17,000 itemized deductions 
$4,000 workers' compensation 
$9,000 unemployment compensation
$500 student loan interest
$6,000 of alimony to his ex-wife

What is his total income for the current tax year?

$52,500

$59,000

$109,500

$133,000

(LO 1–6)

Answer 33

$59,000

$50,000 gambling winnings
+ $9,000 unemployment compensation
= $59,000

The gambling winnings of $50,000 and the unemployment compensation are the only taxable items.

Note that the itemized deductions do not factor into the calculation of total income. Total income is the number about two-thirds of the way down the front of the Form 1040. The itemized deductions are subtracted on the back of the 1040. The inheritance is an exclusion. The workers’ compensation proceeds are also excluded. The alimony paid and the student loan interest paid are both adjustments to income, and do not enter into the computation of total, or gross, income.

Question 34

Practice Test 2

Calculate Taxable Income

10. Mary West is a single taxpayer, age 67. She has the following itemized deductions:

$15,950 Home mortgage interest 
$3,120 State income taxes
$1,480 Property Taxes 
$2,000 Charitable contributions
$500 Gambling losses (to the extent of winnings)
$4,600 Unreimbursed Employee expenses
$400 Tax preparation fee
$16,200 Medical expenses

Mary’s AGI for 2016 is $238,500. What is the amount of her allowable itemized deductions?

$22,820

$23,050

$23,280

$44,250

(LO 1–6)

Answer 34

$23,280

  $15,950 Home mortgage interest 
\+ $3,120 State income taxes
\+ $1,480 Property Taxes 
\+ $2,000 Charitable contributions
\+ $500 Gambling losses (to the extent of winnings)
\+ $230 Tier II Deductions*
= $23,280

The unreimbursed employee business expenses and tax return preparation fees are Tier II miscellaneous itemized deductions, deductible only to the extent that the total Tier II deductions exceed 2% of AGI.

  $4,600 Unreimbursed Employee expenses
\+ $400 Tax preparation fee
= $5,000 
- 2% of AGI $4,770 equals 
= $230. 

The medical expenses are deductible only to the extent that they exceed 7.5% of AGI (taxpayer is 65 or older), which they do not. There is no phaseout of the overall itemized deductions, as Mary’s AGI is under $259,400.

Question 35

Practice Test 2

Calculate Taxable Income

12. Mary West is a single taxpayer, age 67. She has the following itemized deductions:

$15,950 Home mortgage interest 
$3,120 State income taxes
$1,480 Property Taxes 
$2,000 Charitable contributions
$500 Gambling losses (to the extent of winnings)
$4,600 Unreimbursed Employee expenses
$400 Tax preparation fee
$16,200 Medical expenses

Mary’s AGI is $367,400 for 2016. What is the amount of her allowable itemized deductions?

$19,810

$20,040

$23,050

$44,250

(LO 1–6)

Answer 35

$19,810

  $15,950 Home mortgage interest 
\+ $3,120 State income taxes
\+ $1,480 Property Taxes
\+ $2,000 Charitable contributions
\+ $500 Gambling losses (to the extent of winnings)
\+ $230 Tier II Deductions
= $23,280
- $3,240 phaseout amount
= $19,810

The unreimbursed employee business expenses and tax return preparation fees are Tier II miscellaneous itemized deductions, deductible only to the extent that the total Tier II deductions exceed 2% of AGI. 2% of AGI equals $7,325, thus none of the Tier II expenses are deductible.

The medical expenses are deductible only to the extent that they exceed 7.5% of AGI, which they do not. Mary’s overall itemized deductions are subject to a phaseout based on the AGI. The otherwise allowable itemized deductions are reduced by 3% of the excess of the AGI over a threshold amount of $259,400 for single taxpayers. Her itemized deductions are reduced by $3,240 (3% of $108,000).

The $108,000 is the excess of the AGI over the $259,400 threshold. She is allowed to deduct $19,810 of itemized deductions ($23,050 reduced by the phaseout amount of $3,240).

Question 36

Practice Test 2

Calculate Taxable Income

13. Brent and Sheila Nelson are married and will file a joint return. They have provided you with the following information.

$80,000 Brent's Salary
$65,250 Sheila's Salary
$20,000 Alimony payments to Brent's Ex wife
$12,000 Brent's Child support paid
$9,000 Itemized deductions

Based on the information given, what is the Nelsons’ taxable income for the 2016 tax year?

$92,550

$104,550

$108,150

$112,650

(LO 1–6)

Answer 36

$104,550

  $80,000 Brent's Salary
\+ $65,250 Sheila's Salary
- $20,000 Alimony payments to Brent's Ex wife
= $125,250 AGI 
- $12,600 standard deduction
- $4,050 exemptions for Brent
- $4,050 exemptions for Sheila
= $104,550

The $145,250 in salaries is reduced by the alimony payment of $20,000 to give an AGI of $125,250. The AGI is reduced by the greater of the itemized deductions ($9,000) or the standard deduction ($12,600), and further reduced by two exemptions of $4,050 each, for a total of $104,550. The child support paid is not a deductible item.

Question 37

Practice Test 2

Calculate Taxable Income

14. Ron Bates is a single taxpayer with no dependents. His wage income is $156,850, and he has allowable itemized deductions of $14,000. Ron received $1,000 interest income from a qualified private-activity municipal bond, and made an IRA contribution of $5,500. He also received workers’ compensation of $4,000 during the year. Ron is not an active participant in a company-maintained retirement plan.

What is the amount of Ron’s tax liability for 2016? Round your answer to the nearest dollar.

$30,361

$31,481

$31,901

$32,517

(LO 1–6)

Answer 37

$30,361

  $156,850 wage income 
- $5,500 IRA
- $14,000 itemized deductions
- $4,050 personal exemption
= $133,300 taxable income

  $133,300 taxable income 
- $91,150 (from tax rate schedule)
= $42,150 amount over $91,150
* 28% (marginal tax bracket)
= $11,802 tax on amount over $91,150
\+ $18558.75 from tax rate schedule
= $30,361 total tax

The total income of $156,850 is reduced by the deductible IRA contribution of $5,500 to give an AGI of $151,350. The IRA is deductible because Ron is not an active participant in a company-maintained retirement plan. The AGI is reduced by the greater of the allowable itemized deductions of $14,000 or the standard deduction of $6,300. This is further reduced by Ron’s personal exemption of $4,050. This leaves a taxable income of $133,300. The interest income from a qualified private-activity municipal bond is excluded from income; however, remember that it is generally a preference item for purposes of the AMT. Also, the workers’ compensation received is tax-exempt.

Question 38

Practice Test 2

Calculate Taxable Income

75. Jay and Renee Moyer, married taxpayers filing jointly, have one dependent child. Their AGI for 2016 is $418,590. What is the amount of personal and dependency exemptions that the Moyers may deduct?

$0

$1,701

$10,449

$12,150

(LO 1–6)

Answer 38

$1,701

  $418,590 AGI
- $311,300 threshold 
= $107,290 amount over threshold 
/  $2,500 
= 42.9 
* 2
= 86%
* $12,150
= $10,449

$12,150
- $10,449
= $1,701

We round up to 43 and multiply by 2% to give us an 86% phaseout. 86% of $12,150 equals $10,449. $12,150 reduced by the phaseout of $10,449 equals $1,701.

Three exemptions at $4,050 each equals $12,150. The deduction for personal and dependency exemptions is reduced by 2% for each $2,500 (or portion thereof) by which the AGI exceeds a $311,300 threshold amount (for married couples filing jointly). The excess of $107,290 is divided by $2,500 to give us 42.9. The $107,290 is the excess of the AGI over the phaseout threshold of $311,300.

Question 39

Practice Test 1

Calculate Taxable Income

5. Tony and Paulette Baker are married and will file a joint return. They have one dependent son, Ben, who was born earlier this year. When Ben was born, Paulette’s father gave Tony and Paulette a cash gift of $50,000. Tony is not an active participant in a company-maintained retirement plan. Tony paid child support to a former spouse. They have provided you with the following information.

$170,300 Tony's Salary
$5,500 Tony's IRA contributions
$10,000 Itemized deductions
$2,000 Child support paid
$6,000 Workers comp 

Based on the information given, what is the Bakers’ taxable income for the 2016 tax year?

$138,200

$140,050

$144,050

$158,400

(LO 1-6)

Answer 39

$140,050

  $170,300 Tony's Salary
- $5,500 Tony's IRA contributions
= $164,800 AGI
- $12,600 Standard Deduction
- $12,150 Personal Exemptions
= $140,050 taxable income 

A taxpayer is allowed to deduct the greater of the standard deduction ($12,600 for 2016) or total itemized deductions ($10,000). Don’t forget the three exemptions at $4,050 each. The IRA is deductible because neither spouse is an active participant in a company-maintained retirement plan. The child support payments made are not deductible. The workers’ compensation benefits are excluded from income. The gift received is also excluded from income.