Tax Ch 3 Flashcards
1
Q
Basic Tax Formula:
Taxable Income
Tax Liability
A
Basic Tax Formula:
Income - Deductions = Taxable Income
Taxable Income x Rate = Tax Liability
Example:
* A single taxpayer with income of $34,000 and deductions of
$14,000 has taxable income of $20,000 ($34,000 - $14,000 =
$20,000). Using the 2023 tax rate schedule for the single filing
status, the income tax liability is $2,180.00 ($2,194.50 in 2022).
2
Q
A
FEDERAL INCOME TAX FORMULA
Income (broadly defined)
-Less: Exclusions
Gross Income
-Less: Deductions for AGI (above-the-line deductions)
Adjusted Gross Income (“The Line”)
-Less: Itemized or Standard Deduction (below-the-line deductions)
-Less: Personal and Dependency Exemptions (suspended after 2017)
-Less: 20% deduction for QBI (after 2017)
Taxable Income
Tax on Taxable Income
-Less: Tax Credits
Tax Due (or Refund Due)
3
Q
PARTIAL LIST OF EXCLUSIONS
A
PARTIAL LIST OF EXCLUSIONS
4
Q
A
GROSS INCOME
- “All income from whatever source derived”
- Money
- Property
- Barter
- UNLESS: the IRC contains a specific provision excluding a
particular item from income
5
Q
A
INCOME SPECIFICALLY INCLUDED UNDER IRC SECTION 61
- Compensation for services (including fringe benefits)
- Income derived from business
- Gains derived from dealings in property
- Interest and dividends
- Rents and royalties
- Alimony and separate maintenance payments required by a divorce decree
entered prior to 1/1/2019 (or substantially modified after 12/31/2018) - Annuity payments
- Income from life insurance and endowment contracts
- Pensions
- Discharge of indebtedness
- Distributive share of partnership gross income
- Income in respect of a decedent
- Income from an interest in an estate or trust
6
Q
DEDUCTIONS FOR AGI (ABOVE-THE-LINE)
A
DEDUCTIONS FOR AGI (ABOVE-THE-LINE)
7
Q
A
ADJUSTED GROSS INCOME (“THE LINE”)
- Used to determine
- Limitations on deductions
- Limitations on credits
- Phase-out of tax benefits
8
Q
A
DEDUCTIONS FROM AGI (BELOW-THE-LINE)
- Standard Deduction, or
- Sum of:
- Medical expenses
- Interest
-Taxes
-Casualty losses
-Charitable deductions - Miscellaneous itemized deductions
- Qualified Business Income (QBI) deduction
9
Q
STANDARD DEDUCTIONS
A
STANDARD DEDUCTIONS
10
Q
A
ADDITIONAL STANDARD DEDUCTIONS
- Allowed for taxpayer and spouse (not dependent)
- Age 65 or over
- Blind
11
Q
A
SOME TAXPAYERS MUST ITEMIZE DEDUCTIONS
- A married individual filing separately cannot use the standard
deduction if the spouse itemizes deductions. - Nonresident aliens are not permitted to use the standard deduction.
- An individual who files a tax return for less than 12 months because
of a change in the taxpayer’s annual accounting period is not
permitted to use the standard deduction.
12
Q
A
PARTIAL LIST OF ITEMIZED DEDUCTIONS (1 OF 2)
- Charitable contributions
- Home mortgage interest
- Investment interest expense
- State and local income taxes
- Real property taxes on home
- Property taxes based on the value of a car
- Casualty losses in excess of 10% of AGI
- Medical and dental expenses in excess of 7.5% of AGI
13
Q
A
PARTIAL LIST OF ITEMIZED DEDUCTIONS (2 OF 2)
Miscellaneous deductions subject to the 2% AGI limits:
* Pursuant to TCJA 2017, all miscellaneous itemized deductions
subject to the 2% floor are suspended until tax years beginning
after December 31, 2025.
Miscellaneous deductions not subject to the 2% AGI limits:
* Amortizable premium on taxable bonds
* Casualty and theft losses from income-producing property
* Federal estate tax on income in respect of a decedent
* Gambling losses up to the amount of gambling winnings
* Impairment-related work expenses of persons with disabilities
* Losses from Ponzi-type investment schemes
* Unrecovered investment in an annuity
14
Q
A
THE PERSONAL EXEMPTION
- TCJA 2017 suspended personal exemptions until tax years
beginning after December 31, 2025.
15
Q
A
PARTIAL LIST OF TAX CREDITS
- Foreign tax credit
- Credit for child and dependent care expenses
- Credit for the elderly or disabled
- Education credits (American Opportunity and Lifetime Learning)
- Retirement savings contribution credit
- Residential energy credits
- Child tax credit & other dependent credit
- Earned income credit
- Business and investment credits
16
Q
A
ANDERSON CASE (1 OF 2)
ANDERSON CASE (2 OF 2)
17
Q
A
BASIC RULES OF INCOME TAXATION
- Accounting Periods
- Tax Accounting Methods
- Filing Status
- Personal and Dependency Exemptions (Repealed TCJA 2017)
- Standard Deduction for a Dependent
- Kiddie Tax
- Filing Requirements
18
Q
A
TAX ACCOUNTING PERIODS AND METHODS
- Tax year is normally 12 months
– Individuals generally use calendar year
– Some taxpayers (usually businesses) use fiscal year - Methods
- Cash receipts and disbursements
— Applies to individual taxpayers - Accrual method
- Hybrid methods
19
Q
A
ACCRUAL METHOD
- Income is earned when:
–All events have occurred to fix taxpayer’s right to the income.
– The amount can be determined with reasonable accuracy. - Claim of Right Doctrine
–Amounts received are subject to tax even if in dispute.
–If payment has not been received, and is disputed, no income
recognition.
20
Q
A
EXCEPTIONS TO ACCOUNTING METHOD RULES
* Cash Method
– Original Issue Discount (OID)
– Constructive Receipt
– Cash received with obligation to repay
- Accrual Method
– Prepaid income – included when received
– Advance payment for goods and services
–Claim of Right Doctrine
21
Q
A
FILING CATEGORIES FOR INDIVIDUALS
* Married Filing Jointly
* Qualifying Widow(er) /Surviving Spouse
* Married Filing Separately
* Head of Household / Abandoned Spouse
* Single
* Unmarried individuals (other than surviving spouses and heads
of households)
22
Q
A
REQUIREMENTS FOR MARRIED FILING STATUS
- Married Filing Jointly
–Married as of the last day of the taxable year
– Spouse dies during the taxable year - Surviving Spouse (Qualifying Widow(er))
– Allowed for 2 years after death of spouse if taxpayer maintains a
home in which a dependent child lives
23
Q
A
MARRIED FILING SEPARATELY
- Often increases overall taxes
- Typically used when:
–Spouses are separated
–One spouse suspects the other is not reporting income
–Tax minimization purposes
24
Q
A
REQUIREMENT FOR HEAD OF HOUSEHOLD STATUS
- Unmarried as of end of year or an abandoned spouse.
- Must pay more than ½ the cost of maintaining a household for a
dependent relative for more than ½ the tax year.
–While a “dependent relative” may be someone unrelated to the
taxpayer for purposes of determining dependency deductions,
head of household status cannot be claimed if the taxpayers only
dependents are those who are unrelated by blood or marriage.
Exceptions:
* Maintain a separate house for parents if at least one parent
qualifies as a dependent.
25
SPECIAL ELECTION
* A married taxpayer may use a head of household filing status if the
taxpayer:
* is married
* files a separate tax return from the spouse
* maintains as his/her home a household which for more than one-
half of the taxable year is the principal place of abode of a child
who is a dependent
* furnishes over one-half of the cost of maintaining the household
* the spouse is not a member of the household during the last six
months of the year
26
DEPENDENCY TESTS
* Taxpayers can claim as a dependent each person who is
considered a qualifying child or qualifying relative.
--A qualifying child might not be the taxpayer’s child at all.
--A qualifying relative in some cases is not a relative of the
taxpayer.
* All dependents must satisfy:
--The joint return test
--The citizenship or residency test
27
GENERAL TESTS FOR DEPENDENCY
Joint Return Test
* A married dependent must not file a joint return with a spouse,
unless:
--Return is filed to claim refund
--Neither spouse is required to file a return
-- No tax liability exists for either spouse on separate returns
Citizenship/Residency Test
* Must be a citizen or national of the U.S., or
* A resident of the U.S., Canada, or Mexico
28
QUALIFYING CHILD TESTS (1 OF 3)
* In addition to the joint return and residency tests, a qualifying child
must meet each of four tests:
* A relationship test
* An abode test
* An age test
* A support test
29
QUALIFYING CHILD TESTS (2 OF 3)
Relationship Test
* A qualifying child of a taxpayer must be:
--The taxpayer’s child,
-- A descendant of the taxpayer’s child,
--The taxpayer’s brother, sister, stepbrother, stepsister, half
brother, half sister, or
--A descendant of the taxpayer’s brother, sister, stepbrother,
stepsister, half brother, or half sister.
* Once a relationship is established by marriage, it continues even if
there is a change in marital status.
30
QUALIFYING CHILD TESTS (3 OF 3)
Abode Test
* Child must live with the taxpayer for more than half the year.
* Temporary absences (i.e., away at college) do not count
Age Test
* Under the age of 19 as of end of calendar year, or
* Student under the age of 24
* Must be full-time student during 5 months of the year.
Support Test
* The child does not provide more than half of his or her support
during the year.
* If full-time student, scholarships are not considered.
31
QUALIFYING RELATIVE
* In addition to the joint return and residency tests, a qualifying
relative must meet all of the following tests:
* Relationship Test
* Gross Income Test
* Support Test
* Not a Qualifying Child Test
32
QUALIFYING RELATIVE TESTS (1 OF 2)
Relationship Test
* The taxpayer’s child or a descendant of a child
* The taxpayer’s brother, sister, stepbrother, or stepsister
* The taxpayer’s parent or ancestor
* The taxpayer’s stepmother or stepfather
* A child of the taxpayer’s sibling
* A sibling of the taxpayer’s parent
* A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-
in-law, or sister-in-law of the taxpayer
* Any other individual (who may be a totally unrelated person) who, for
the taxable year of the taxpayer, has the same principal place of
abode as the taxpayer and is a member of the taxpayer’s household.
A person who was married to the taxpayer during part of the year
does not qualify.
33
QUALIFYING RELATIVE TESTS (2 OF 2)
Gross Income Test
* Dependent’s gross income < exemption amount referenced in
Section 152(d)(1)(B), which is $4,700 in 2023 ($4,400 in 2022).
Support Test
* Taxpayer must provide more than half of the dependent’s
support.
34
SUPPORT TEST: MULTIPLE SUPPORT AGREEMENTS
* A group providing more than half support may claim a person as a
dependent even though no one taxpayer provides more than half of
the dependent’s support
--Eligible parties must provide > 10% of support
-- Each eligible party must meet all other dependency requirements
--Historically, the qualifying person had to sign agreement not to
claim the personal exemption for the year. No personal
exemption after 2017.
35
SUPPORT TEST: CHILDREN OF DIVORCED PARENTS
* For post-1984 divorce decrees, custodial parent entitled to claim
child as a dependent.
--Noncustodial parent may claim children as dependents if
custodial parent signs a “Release of Claim to Exemption” (no
exemption after 2017).
* If child lives with both parents an equal amount of time, the parent
with the higher AGI gets to claim the child as a dependent.
36
STANDARD DEDUCTION OF A DEPENDENT
* A taxpayer who is a dependent of another will have a limited
standard deduction, equal to the greater of:
-- $1,250 in 2023 ($1,150 in 2022), or
-- $400 (in 2022 and 2023) plus earned income (but not exceeding
normal standard deduction)
* If age 65+ or blind, can still use additional standard deduction
amounts.
37
STANDARD DEDUCTION OF A DEPENDENT: EXAMPLE 1
* Rowan is 17 years old and can be claimed as a dependent by his
parents.
* He earned $3,000 in wages and $450 in interest income during 2023.
* His basic standard deduction is $3,400 ($3,000 of earned income +
$400).
* His taxable income for 2023 is $50.
Wages $3,000 $3,000
Interest Income 450 450
Less Personal Exemption (0) (0)
Less Standard Deduction ($3,400) ($3,400)
Taxable Income $50 $50
38
STANDARD DEDUCTION OF A DEPENDENT: EXAMPLE 2
* Khandi is 17 years old and can be claimed as a dependent by her
parents.
* She earned $14,000 in wages during 2023.
* Her basic standard deduction for 2023 is $13,850 (the regular
basic standard deduction for the single filing status).
* Her taxable income for 2023 is $150.
2022 2023
Wages $14,000 $14,000
Less Personal Exemption (0) (0)
Less Standard Deduction ($12,950) ($13,850)
Taxable Income $1,050 $150
39
STANDARD DEDUCTION OF A DEPENDENT: example 3
* Naomi is 72 years old, single, and can be claimed as a dependent by
her daughter.
* She has $3,200 of interest income during 2023.
* Her basic standard deduction for 2023 is $1,250.
* Her total standard deduction is $3,100 ($1,250 basic standard
deduction + $1,850 additional standard deduction for age in 2023).
* Her taxable income is $100 in 2023.
2022 2023
Interest Income $3,200 $3,200
Less Personal Exemption (0) (0)
Less Basis Standard Deduction ($1,150) ($1,250)
Less Additional Standard Deduction ($1,750) ($1,850)
Taxable Income $300 $100
40
THE KIDDIE TAX
* Net unearned income of a child under age 19 with a living parent
(up to age 24 if full-time student and can be claimed as a
dependent) is taxed at the income tax rates attributable to the
parent
* Net unearned income does not include:
-- Basic standard deduction of $1,250 for 2023 ($1,150 for 2022)
for unearned income
--the next $1,250 for 2023 ($1,150 for 2022) of income which is
taxed at the child’s marginal rate
41
KIDDIE TAX UNEARNED INCOME
* Interest
* Dividends
* Capital gains
* Royalties
* Rents
* Pension and annuity income
* Unearned income from trusts
42
AVOIDING THE KIDDIE TAX
* Invest in savings bonds
* Invest in growth securities
43
KIDDIE TAX EXAMPLE: EARNED & UNEARNED
INCOME: TAX YEAR 2023
Tate is 17 years old. He earned wages of $4,000 and interest income
of $3,000 during 2023. He had no expenses related to producing the
interest income. He is a qualified dependent of his parents.
Wages $4,000
Interest Income $3,000
Total Income $7,000
Less: Personal Exemption (0)
Less: Standard Deduction
(earned income + $400) ($4,400)
Taxable Income $2,600
Taxed at Parents’ Rate $500
Taxed at Child’s Rate $2,100
44
KIDDIE TAX EXAMPLE: UNEARNED INCOME:
TAX YEAR 2023
Gabby is 16 years old and a qualified dependent of her parents. She has unearned income of $5,100. For 2023, $2,600 of Gabby’s unearned income is taxed at her parents’ tax rates
Item 2023
Unearned Income $5,100
Less: Personal Exemption (0)
Less: Standard Deduction $1,250
Taxable Income $3,850
Taxed at Child’s Rate $1,250
Taxed at Parent’s Rate $2,600
45
RETURN FILING REQUIREMENTS
Must file if Gross Income > Standard Deduction + Personal
Exemption (personal exemption is $0 for 2018-2025)
* The additional deduction for blind taxpayers does not apply to
this determination.
Return Filing Dates
* Calendar year taxpayers file on or before April 15th of following
year.
* Partnerships and S corporations file on or before the 15th day of
the third month following the close of the calendar or fiscal year.
* Regular corporate taxpayers (C corporations) must file on or
before the 15th day of the fourth month following the close of the
calendar or fiscal year.
Applications for extension must be filed by the due date for the
return.
* An automatic 6-month extension is available.
46
WHEN TO FILE A TAX RETURN EXAMPLE 1: 2023
Miguel and Tory are married and normally file a joint return. Miguel is
66 years old, and Tory is 64. They must file a return if their gross
income is $29,200 or more in 2023.
Personal Exemption $0
Basic Standard Deduction $27,700
Enrique’s additional standard deduction for his age $1,500
$29,200
47
WHEN TO FILE A TAX RETURN EXAMPLE 2: 2023
Eli is unmarried, age 68, and blind. He must file a return if his adjusted gross income is $15,700 or more for 2023.
Personal Exemption $0
Basic Standard Deduction $13,850
Eli’s additional standard deduction for his age only
(blindness does not count in this calculation) $1,850
$15,700
48
FICA
* Federal Insurance Contribution Act
* Provides for old age, survivors, disability and hospital insurance
* Social Security wage base limit is $160,200 (for 2023)
--12.4% total (6.2% to employee and 6.2% match by employer)
* Medicare tax not subject to wage base limit
-- 2.9% total (1.45% to employee and 1.45% match by employer)
49
3.8% MEDICARE TAX
* Applies to the lesser of:
1. Net investment income, or
2. MAGI over threshold amount:
* MFJ – $250,000
* MFS – $125,000
* Single – $200,000
* Net investment income includes portfolio income, income from
passive activities, gains on disposition of property, but does not
include distributions from qualified plans or IRAs.
Note: Threshold amounts are not indexed for inflation
50
HIGH INCOME MEDICARE TAX
* Additional Medicare tax equal to 0.9 percent of wages during any
taxable year beginning after December 31, 2012, and which are in
excess of:
* MFJ $250,000
* MFS $125,000
* Single $200,000
* This Medicare tax is paid by employees, not employers
* Applies to wages, compensation or self-employment income
Note: Threshold amounts are not indexed for inflation.
51
FUTA
* Federal Unemployment Tax Act
* Paid by employer only
* 6.0% on first $7,000 of employee’s wages
52
SELF-EMPLOYMENT TAX
* FICA tax on earnings up to the wage base of $160,200 (for 2023)
* Total = 15.3%
* 2.9% beyond the wage base for Medicare tax*
* Self-employed worker not required to pay FUTA on himself but is
required to pay FICA.
* Self-employed individuals must also pay the additional Medicare tax imposed by the Affordable Care Act if applicable.
53
BASIC TAX PLANNING PRINCIPLES
1. Receive income in a tax-exempt (excludible) form
2. Shift income to related taxpayers in lower marginal tax brackets
3. Generate income that is taxed at favorable capital gains tax rates
4. Defer income taxes until later
5. Use tax credits to reduce tax liability
54
A FINAL THOUGHT…
It is against the law to EVADE paying income taxes, but a long-
standing landmark U.S. Supreme Court decision states that it is okay
to legally AVOID paying income taxes.
Helping clients AVOID taxes without EVADING them is a hallmark
of sound financial advice
55
Luther has been working part-time through college and earned $20,000 last year with a total federal income tax liability of $1,200.
This year he will earn $100,000 with an expected income tax liability of $15,000.
What is the lowest amount of tax withholding Luther should have to meet the safe harbor rules?
He has two choices:
100% of last year’s tax liability or 90% of this year’s tax liability.
Last year’s income tax liability was $1,200 and 90% of this year is $13,500.
Therefore, the lowest amount that of tax withholding that needs to be met is $1,200
56
Diana is 16 years old. She earned $3,000 during 2023 working at an ice cream store. She earned $4,000 in interest income this year. Diana is claimed as a qualifying dependent by her parents.
How much of Diana’s income will be taxed at her parents’ highest marginal tax rate?
UPDATED FOR 2024:
The correct answer is b.
$1,400.
Rationale
For 2024, Diana’s net unearned income of $1,400 will be taxed at the highest marginal tax rate of her parents ($4,000 of interest income - $1,300 - $1,300). The remaining portion of her taxable income will be taxed at Diana’s rate.
57
Which of the following is not a test that must be satisfied in order to meet the criteria for a qualifying child?
Whether the child has lived with the taxpayer for more than half the year.
If the qualifying child is a descendant of the taxpayer, the taxpayer’s sibling, or a descendant of the taxpayer’s sibling.
If the child’s gross income is less than the exemption-referenced threshold amount for the year.
Whether the qualifying child does not provide more than one-half of his or her own support during the year.
C. If the child’s gross income is less than the exemption-referenced threshold amount for the year.
Rationale
Option c defines the gross income test which is required for a dependent qualifying relative, not for a dependent qualifying child. The four tests for the qualifying child are:
(1) relationship test,
(2) abode test,
(3) age test, and
(4) support test.
The four tests for the qualifying relative are:
(1) relationship test,
(2) gross income test,
(3) support test, and
(4) not a qualifying child test.
In addition, for both the qualifying child and qualifying relative dependency requirements, the joint return test and citizenship test apply.
58
Which of the following is not excluded from gross income?
Gifts.
Scholarships.
Interest income from municipal bonds.
Dividend income.
Dividend income.
Rationale
Dividend income is specifically included in gross income. All of the other items are specifically excluded from gross income.
59
Which of the following taxpayers can use the standard deduction?
Aram, who files a separate return from his wife, Samar.
Samar itemizes deductions on her return.
Glen, who is a nonresident alien.
Raymond, who files a tax return for less than 12 months because he changed his annual accounting period.
Meera, who is a noncitizen spouse but files MFJ.
Meera, who is a noncitizen spouse but files MFJ.
Rationale
Only option d describes a taxpayer who is permitted to use the standard deduction. All of the other taxpayers are required to itemize their deductions.
60
Demi and Bruce are both 67 years old and healthy.
They also have two dependent parents living with them, his mother and her father.
They are filing their tax return and want to know how many personal exemptions they may take for 2024.
You correctly inform them that they can take:
0
Rationale
Personal and dependency exemptions are suspended from 2018 through 2025 (TCJA 2017).
61
Huey, who sells trucks, uses the accrual method of accounting for his business.
Huey just sold a truck to Louis.
Under the accrual method of accounting, Huey recognizes income when:
The bill for the truck is received by Louis.
The truck is delivered to Louis and Huey gives the invoice to Louis.
Huey gets ready to deliver the truck to Louis.
Huey receives the truck from the manufacturer.
truck is delivered to Louis and Huey gives the invoice to Louis.
Rationale
The accrual accounting method recognizes income when the taxpayer has a right to collect. This usually occurs after the completion of a job or the delivery of goods
62
Tina (age 70) and Ike (age 74) are married to each other and file a joint return in 2025 for tax year 2024. Tina is blind. Ike and Tina do not have any dependents.
What is their standard deduction for 2024?
$29,200.
$30,750.
$32,300.
$33,850.
$33,850.
Rationale
Tina and Ike are entitled to the basic standard deduction for taxpayers married filing jointly of $29,200, plus three additional standard deductions of $1,550 each (two for age, one for blindness). Their total standard deduction for 2024 is $33,850.
63
A cash basis taxpayer includes income from a service business when:
The services are performed.
The client is invoiced for the services.
The client’s check is deposited in the bank.
The client’s check is received by the taxpayer.
client’s check is received by the taxpayer.
Rationale
Cash basis is recognized as income when received.
64
Franklin, a consultant, uses the cash method of accounting for his business. Franklin recently provided consulting services to his best customer, Aretha.
When should Franklin recognize income from this service?
When Aretha writes a check, made out to Franklin.
When Franklin deposits Aretha’s check.
When Aretha gives the check to Franklin.
When Aretha receives an invoice from Franklin for the service.
When Aretha gives the check to Franklin.
Rationale
Cash method accounting recognizes income upon either actual or constructive receipt. Actual receipt occurs when the taxpayer has received the cash directly. Constructive receipt occurs when, though not having received the money in hand, the taxpayer has immediate access to the money (e.g., savings account interest.). When Aretha gives the check to Franklin, Franklin has actually received the income and must therefore recognize the income at that time.
65
Sal qualifies as a dependent of his parents. This year, he earned $500 from a part-time job and $1,500 in interest from a savings account. Sal’s taxable income for this year is:
$0.
$200.
$500.
$700.
700.
Rationale
When a person qualifies as a dependent of another, they have a reduced standard deduction.
Note the following:
$1,500 (interest) + $500 (wages) = $2,000 (gross income)
- $1,300 (greater of standard deduction of $1,300 or $450 plus earned income)
= $700 of taxable income
66
Lucille’s dependent husband passed away in January of this year. She does not remarry and still maintains a residence for herself and her son who is 10 years old.
When she is filing her tax return for this year she may file as:
1. Single
2. Married filing jointly
3. Married filing separately
4. Qualifying widow / widower
1 only.
4 only.
2 and 3.
2, 3, and 4.
2 and 3.
Rationale
(1) Since Lucille’s spouse died during the year she is considered married for the year.
(2) and (3) Since Lucille is considered married for the full year (she was married but her spouse died during the year and she did not remarry) she may file MFS or MFJ.
(4) She does not currently qualify for filing qualifying widow / widower since this status applies for the 2 years following the year of a spouse’s death.
67
Whitney’s divorce from her husband, Bobby, became final on December 30 of the current year. Whitney’s children lived with her for the first four months of the current year, but moved in with Bobby after Whitney was declared legally blind. Whitney did not contribute anything to the cost of maintaining the household when the children were living with Bobby. Whitney is 40 years old.
What filing status can Whitney use during the current year and what is her standard deduction?
Married Filing Jointly; $30,750.
Head of Household; $23,850.
Single; $16,550.
Single; $14,600.
Single; $16,550.
Rationale
Option a is incorrect because even though Whitney was married during the current year, she was not married as of the end of the year.
Option b is incorrect because Whitney does not qualify for the Head of Household filing status. Whitney did not maintain a household for a qualifying child for more than half of the year. Her children only lived with her for four months of the year and she did not pay for the cost of maintaining a household for them for the remainder of the year.
Option c is correct; Whitney must use the Single filing status. In addition, she is entitled to one additional standard deduction because of her blindness. Therefore, her standard deduction for the current year is $16,5500 ($14,600 + $1,950).
68
Sebastian is a middle school teacher with gross income this year of $35,000. Based on the following, what is Sebastian’s adjusted gross income?
1. $4,000 qualified education interest expense
2. $2,000 alimony received (2016 decree)
3. $1,000 contribution to a traditional IRA
4. $750 in educator expenses
$27,250.
$28,750.
$29,450.
$31,200.
31,200.
Rationale
Sebastian’s adjusted gross income is his total gross income of $35,000
- $2,500 in qualified education interest expense (the deductible amount is limited to $2,500)
- $1,000 contribution to a traditional IRA
- $300 in educator expenses (the deductible amount is limited to $300 in 2024)
= $31,200.
The alimony is RECEIVED, which is already included in determining his gross income of $35,000. If it was paid then there would be a deduction but that’s not the case.
69
Billy and Jean were married on September 1 of this year. Following a honeymoon in Tahiti, Billy died of a heart attack. Neither Billy nor Jean had any dependents.
What filing status can Jean use this year?
Jean must use the single filing status because she was not married as of the end of the year.
Jean will be able to file as married filing jointly as long as she would have qualified for this filing status if Billy had survived.
Jean may use the head of household filing status.
Jean will be eligible to file as a surviving spouse.
Jean will be able to file as married filing jointly as long as she would have qualified for this filing status if Billy had survived.
Rationale
Jean is considered to be married for the year. Even if she were not considered to be married, Jean would not be eligible for head of household or surviving spouse status because she does not have any dependents.
70
Which of the following is not an allowable itemized deduction from adjusted gross income?
Alimony paid.
Medical expenses.
Charitable contributions.
Home mortgage interest.
Alimony paid.
Rationale
Alimony paid is a deduction FOR AGI, not FROM AGI for decrees on or before 12/31/18. All of the other items are allowable itemized deductions from adjusted gross income.
71
Under which of the following circumstances must a taxpayer itemize his deductions?
1. When the taxpayer has been married for less than one year
2. When the taxpayer is married and files a separate return and the taxpayer’s spouse itemizes deductions
3. When the taxpayer is a nonresident alien
1 and 2.
1 and 3.
2 and 3.
1, 2, and 3.
2 and 3.
Rationale
A married individual who files a separate return (married filing separately filing status) cannot use a standard deduction if that person’s spouse itemizes their deductions.
Nonresident aliens are not eligible to use the standard deduction, and therefore must itemize.
72
UPDATED FOR 2024:
Diana is 16 years old. She earned $3,000 during 2024 working at an ice cream store. She earned $4,000 in interest income this year. Diana is claimed as a qualifying dependent by her parents.
How much of Diana’s income will be taxed at her parents' highest marginal tax rate?
$1,300.
$1,400.
$3,000.
$4,000
$1,400.
Rationale
For 2024, Diana’s net unearned income of $1,400 will be taxed at the highest marginal tax rate of her parents
($4,000 of interest income - $1,300 - $1,300).
The remaining portion of her taxable income will be taxed at Diana’s rate.
73
Which of the following describes one of the five tests that must be met to qualify as a dependent?
The age of the dependent.
The dependent is either a member of the taxpayers household or meets the criteria for family relationship.
The taxpayer is a U.S. citizen.
All of the above.
The dependent is either a member of the taxpayers household or meets the criteria for family relationship.
Rationale
The five dependency tests are:
1. Gross Income Test
2. Support Test
3. Member of Household or Family Member Test
4. Citizenship Test (U.S., Canada or Mexico)
5. Joint Filing Test
74
Erica, age 16, is claimed by her parents as a dependent. During 2024, she had interest income from a bank savings account of $1,050 and income from a part-time job of $4,500. Erica’s taxable income is:
A. $5,550 – $1,300 = $4,250
B. $5,550 – $4,500 = $1,050
C. $5,550 – $4,950 = $600
D. None of the choices
The correct answer is C.
Erica's combined income is $5,550 (earned income of $4,500 plus unearned income of $1,000). Her standard deduction is $4,950 --- the greater of earned income + $450 or $1,300.
$5,550 – $4,950 = $600 of taxable income.
75
Eva is a widow, age 74 and blind, who is claimed as a dependent by her son. During the year, she received $4,800 in Social Security benefits, $1,200 in bank interest, and $2,800 in cash dividends from stocks. Eva’s taxable income for 2024 is:
A. $4,000 – $1,300 – $3,900 = No taxable income
B. $8,800 – $3,900 = $4,900
C. $4,000 – $1,300 – $1,950 = $750
D. None of the choices
The correct answer is A.
Although Eva has no earned income,
she is entitled to a minimum regular standard deduction for dependents of $1,300.
She also is allowed additional standard deductions for age and blindness of $3,900 ($1,950 + $1,950).
At this level of income, the Social Security benefits are a nontaxable exclusion.
76
Which, if any, of the following correctly describes the kiddie tax for the current year?
A. Only applies to children who are age 19 or under during the tax year.
B. Would not apply if the only income earned by the child is interest on municipal bonds.
C. Any amount of unearned income can trigger the tax.
D. Its application relieves the minor from having to file a tax return.
E. None of the choices.
The correct answer is B.
No income shifting occurs when the income is nontaxable (municipals).
Choice A is incorrect. The child may be under age 24 and a full time student and still be subject to the Kiddie Tax.
Choice C is incorrect. Unearned income must exceed $2,600 in 2024.
Choice D is incorrect. Unless the parent(s) elect to include the unearned income on their own return, the child will have to file a return.
77
Katie has the following children:
(1) Matt, age 22, a full time student with unearned income of $3,300
(2) Bill, age 19, not a student with earned income of $27,000
(3) Steven, age 14, a student with unearned income of $1,000 and earned income of $3,000
(4) Robert, age 3, in pre-school with unearned income of $3,000.
Which child will be subject to kiddie tax (i.e., actually have money that is taxed at the parent's rate for the current year)?
A. Matt and Robert
B. Steven and Robert
C. Steven, Robert and Bill
D. Steven, Robert, Bill, and Matt
The correct answer is A.
For the 2024 tax year:
Matt is a full-time student under 24 and has unearned income of more than $2,600.
Bill is no longer a qualified child because he is 19 and not a student.
Steven is young enough, but he has less than $2,600 in unearned income.
Robert is young enough and has unearned income of more than $2,600.
78
In 2024 Keith, age 12, has $10,000 in unearned income and $20,000 in earned income. How much will be taxed at the child’s rate?
A. $0
B. $7,400
C. $8,000
D. $15,400
Solution: The correct answer is C.
Unearned $10,000
Earned Income $20,000
Total Income $30,000
Less SD 2024
($14,600)
The greater of earned income + $450 or $1,300 not to exceed the single standard deduction.
$15,400
At the Parent's Rate $7,400 ($10,000 - $2,600 Kiddie Tax Threshold 2024)
At the Child's Rate $8,000
79
Kyle, whose wife died in December 2020, filed a joint tax return for 2020. He did not remarry, but has continued to maintain his home in which his two dependent children live. What is Kyle’s filing status as to 2023?
A. Head of household
B. Surviving spouse
C. Single
D. Married filing separately
E. None of the choices
Solution: The correct answer is A.
Kyle, who filed a joint return in 2020, was entitled to file as a surviving spouse in 2021 and 2022. In 2023, he will be entitled to file as a head of household.
80
A characteristic of FUTA is that:
A. It is imposed on both employer and employee.
B. It is imposed solely on the employee.
C. Compliance requires following guidelines issued by both state and Federal regulatory authorities.
D. It is applicable to spouses of employees but not to any children under age 18.
E. None of the choices.
The correct answer is C.
FUTA is imposed only on the employer. Since the administration of FUTA is shared by Federal and state governments, employers must comply with the rules issued by each.
81
Match the following descriptions with the correct tax type.
State and local tax based on the value of an asset.
A. General Sales Tax
B. Excise Tax
C. Payroll Tax
D. Estate Tax
E. Property Tax
F. Inheritance Tax
G. Gift Tax
E. Property Tax
82
Match the following descriptions with the correct tax type.
State tax on the right to receive property from a decedent.
A. General Sales Tax
B. Excise Tax
C. Payroll Tax
D. Estate Tax
E. Property Tax
F. Inheritance Tax
G. Gift Tax
F. Inheritance Tax
83
Match the following descriptions with the correct tax type.
Federal tax on the right to gratuitously transfer assets during a person's lifetime.
A. General Sales Tax
B. Excise Tax
C. Payroll Tax
D. Estate Tax
E. Property Tax
F. Inheritance Tax
G. Gift Tax
Gift Tax
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