ACC570 CH 3 SOLUTIONS
37.
43.
a.
Three. As a niece, Ida is a qualifying child. Under the qualifying child category,
Ida does not have to meet the gross income test. In this regard, her age and student
status does make a difference.
b.
One. Since Clint is not a qualifying child, the gross income test applies.
c.
Three. The parents need not live with Trent as they meet the relationship test.
Though not stated, it is assumed that the gross income test is satisfied.
d.
One. Carol can claim a personal exemption. Because of Form 8332, the
dependency exemptions for the children belong to Jack.
Salary
Short-term capital loss
Cash prize
AGI
Less: Personal and dependency exemptions (7 × $3,650)
Standard deduction
Taxable income
$80,000
(3,000)
1,000
$78,000
(25,550)
(11,400)
$41,050
Tax on $41,050 using surviving spouse rate schedule: $1,675 + 15%($41,050
– $16,750) = $5,320.
The father does not fail the gross income test because tax-exempt income is not counted.
The unused capital loss of $1,000 is carried over to the following year.
48.
a.
Wages
Money market interest
Bond interest (City of Boston bond interest is tax-exempt)
Gross income
Less: Standard deduction*
Personal exemption**
Taxable income
$4,000
1,900
–0–
$5,900
(4,300)
(–0–)
$1,600
b
Money market interest
Bond interest
Total unearned income
Minus: $950 + $950 standard deduction
Income taxed at parents’ rate
$1,900
–0–
$1,900
(1,900)
$ –0–
Income taxed at Taylor’s rate
$1,600
Total tax ($1,600 × 10%)***
$ 160
*A dependent’s standard deduction is limited to the greater of $950 or the sum of his or
her earned income plus $300.
**A dependent may not claim a personal exemption on his or her return.
***Since Taylor’s unearned income is not more than $1,900, her tax is determined without
using her parents’ rate. Thus, Taylor’s 2010 tax liability is $160 ($1,600 taxable
income × 10%).
52.
a.
Chester has a collectible gain of $6,000, a LTCG of $2,000, and a STCL of $4,000.
Offsetting the STCL against the collectible gain leaves: $2,000 collectible gain and
$2,000 LTCG. The tax liability is $860 [($2,000  28%) + ($2,000  15%).
b.
$300 [($2,000 15%) + ($2,000  0%)].
54.
Salaries ($51,000 + $39,000)
Interest income (Note 1)
Chevron bonds
Wells Fargo Bank CD
Gift from parents (Note 2)
Loan repayment (Note 3)
Bingo winnings (Note 4)
Jury duty fees (Note 5)
IRA contribution (Note 6)
Adjusted gross income (AGI)
Itemized deductions from AGI (Note 7)
Medical [$1,800 – (7.5% × $89,000)]
Taxes ($1,900 + $5,000)
Interest on home mortgage
Charitable contributions
Bingo losses
Campaign contributions (Note 8)
Personal and dependency exemptions (6 × $3,650) (Note 9)
Taxable income
$90,000
$ 900
1,300
$ –0–
6,900
3,100
3,600
900
–0–
Tax from Tax Table (Note 9)
Less: withholdings ($4,100 + $3,000)
Net tax payable (or refund due)
2,200
–0–
–0–
1,000
800
(5,000)
$89,000
(14,500)
(21,900)
$52,600
$7,059
7,100
($ 41)*
*The solution does not take into account the Making Work Pay credit. This credit is not
discussed until Chapter 12 of the text. [Note: Had the credit been considered, the Fullers
would have an additional refund of $800 (for a total of $841).]
Notes
(1)
Interest on municipal bonds of $2,100 is an exclusion from income.
(2)
The gift of $26,000 is excluded from gross income.
(3)
As long as no interest is involved, the repayment of a loan is a nontaxable return
of capital (i.e., the $10,000).
(4)
Gambling winnings (i.e., bingo of $1,000) are included in gross income. Losses
(i.e., bingo of $900) can be claimed (to the extent of gambling income) as an
itemized deduction from AGI.
(5)
The jury duty fees of $800 are included in gross income but related expenses of
$60 cannot be deducted.
(6)
The IRA contribution of $5,000 is a deduction for AGI.
(7)
The Fullers should choose to itemize as $14,500 exceeds the standard deduction
of $11,400.
(8)
The political contribution of $100 is not deductible.
(9)
Eva is a full-time student for the year although she graduated in May. Therefore,
she is a qualifying child and her gross income makes no difference.
CH 26:
36.
a.
Current-Year Method
First Quarter Payment [$50,000 tax ÷ 4 payments × 90% required]
Second Quarter Payment
Third Quarter Payment
Fourth Quarter Payment
Prior-Year Method
First Quarter Payment [($48,000 ÷ 4) × 110% required]
Second Quarter Payment
Third Quarter Payment
Fourth Quarter Payment
$11,250
11,250
11,250
11,250
$45,000
$13,200
13,200
13,200
13,200
$52,800
Thus, Trudy will use the current-year method for her estimates this year. The remaining
tax [$50,000 – $45,000 = $5,000] is due with the return, but no underpayment penalty is
assessed.
b.
Because Trudy’s prior-year AGI did not exceed $150,000, the underpayment penalty is
avoided if she remits only 100% of the prior-year tax.
Current-Year Method
First Quarter Payment [$50,000 tax ÷ 4 payments × 90% required]
$11,250
Second Quarter Payment
11,250
Third Quarter Payment
11,250
Fourth Quarter Payment
11,250
$45,000
Prior-Year Method
First Quarter Payment [($20,000 ÷ 4) × 100% required]
Second Quarter Payment
Third Quarter Payment
Fourth Quarter Payment
$ 5,000
5,000
5,000
5,000
$20,000
Thus, Trudy now uses the prior-year method for her estimates this year. The
remaining tax ($50,000 – $20,000 = $30,000) is due with the return but no
underpayment penalty is assessed.