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2021
Income Tax
Fundamentals
Gerald e. WhittenburG
Steven l. Gill
San Diego State University
Australia ● Brazil ● Canada ● Mexico ● Singapore ● United Kingdom ● United States
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-322
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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some third party content may be suppressed. Editorial review has deemed that any suppressed
content does not materially affect the overall learning experience. The publisher reserves the right
to remove content from this title at any time if subsequent rights restrictions require it. For
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Income Tax Fundamentals, 2021 Edition
© 2021, 2020 Cengage Learning, Inc.
Gerald E. Whittenburg and Steven L. Gill
WCN: 02-300
Senior Vice President, Higher Ed Product,
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ALL RIGHTS RESERVED. No part of this work covered by the copyright herein
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Analyst: Ashley Maynard
Project Manager: Carly Belcher
Tax forms reproduced courtesy of the Internal Revenue Service (www.irs.gov).
Library of Congress Control Number: 2020919760
ISBN: 978-0-357-14136-6
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Printed in the United States of America
Print Number: 01
Print Year: 2020
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-322
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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ConCise, Current, & PraCtiCal!
Income Tax Fundamentals’
Winning Forms Approach Is Time-Tested
I
ncome Tax Fundamentals 2021 Edition is designed as a self-contained book for an introductory course in individual income taxation. We take pride in the concise, current,
and practical coverage of the income tax return preparation process. Income Tax
Fundamentals continues to be the market-leading textbook with a tax forms-based approach
that is a reliable choice, with an experienced author team that offers a commitment to
accuracy. The workbook format of the textbook presents materials in practical sections with
multiple examples and review problems. The presentation of the material does not assume
that the reader has taken a course in accounting, making it appropriate for use as a selfstudy guide to federal income tax. Income Tax Fundamentals adopters tell us:
Great text. I have used it for years mostly because of its simple and straightforward approach to the basic income tax elements.
— Jerold K. Braun, Daytona State College
This text provides an excellent overview for community tax classes. The software
gives these students good hands-on experience with the concepts.
— Jay Wright, New River Community College
I love this book with all its comprehensive problems that progress from easy to difficult.
— LoAnn Nelson, PhD, CPA, Lake Region State College
The layout of the chapters is well-thought out.
— James Hromadka, San Jacinto College
I enjoy using the Whittenburg text...it is the best I have found.
— Jana Hosmer, Blue Ridge Community College
Whittenburg and Gill’s hallmark “Forms Approach” allows students to practice filling out tax
returns right in the book while also having the option to download tax forms online. Income
Tax Fundamentals has been redesigned to follow the new Form 1040 and supporting Schedules
1 through 3. Every attempt to align the concepts with the schedules has been made so
students can follow from the detailed form to the schedule and eventually to Form 1040.
Each individual tax form required to complete the problems
in the textbook is included within Income Tax Fundamentals
and within the complimentary ProConnect Tax software.
ProConnect Tax is an industry-leading tax preparation software
that is hosted on the cloud and provides robust tax content
and easy navigation. The ProConnect Tax website offers community and knowledge-based content, view alerts, and FAQ
articles. All of the 2020 individual income tax return problems in the textbook may be solved
using the ProConnect Tax software, or students may prepare the tax returns by hand.
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-322
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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eamesBot/Shutterstock.com
Income Tax Fundamentals
New
to
Evolves Each Year
to Benefit You
this editioN
Many Changes to Tax Law
In the past year, the tax law has experienced a number of significant changes. In December 2019, the Taxpayer Certainty and Disaster
Tax Relief Act of 2019 (TCDTR Act) was enacted as part of an omnibus spending package. In what has become typical “extender’s bill”
fashion, this law extended several tax provisions that had expired, or were going to expire, at the end of 2019. That same month,
December 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was passed, making changes to
the way in which retirement savings contributions and distributions are taxed. In response to the COVID-19 pandemic, The Families
First Coronavirus Response Act was passed in March 2020 and made only a few changes to the tax law, such as extending the 2019
tax year individual filing deadline from April 15, 2020 to July 15, 2020. Shortly thereafter, the Coronavirus Aid, Relief, and Economic
Security (CARES) Act was passed. The CARES Act included extensive economic impact programs, including loan forgiveness and smallbusiness relief through grants and loans, unemployment insurance, and a bevy of payroll tax deferrals and credits. The CARES Act
also contained individual tax relief, some of which had provisions that were retroactively applied to 2019 or prior. To the extent these
provisions significantly affect individual income taxpayers (for example, the $1,200 economic impact payment and related recovery
rebate credit), they have been included in this edition. Because many of the COVID-related relief provisions are temporary and will
end with tax year 2020, discussions of provisions that are expected to end include “with and without COVID provisions” examples,
self-study problems, and end-of-chapter problems, so that the instructor can determine which level of coverage is appropriate.
Introduction of Additional Real-life Source Documents
We continue to include commonly used source documents in the exercises and tax return problems, such as Form W-2, a myriad of
forms 1099, Form 1095-A, and additional accounting schedules, such as trial balances and income statements in an effort to replicate the tax return preparation process. Information that is extraneous to the problem is included to encourage students to use
analytical and critical-thinking skills to deal with less structured problems.
Additions to Content
To address pending state legislation, a new section regarding the classification of an employee versus an independent contractor has
been added. Given the increased probability of cancellation of debt due to the economic downturn, the topic of forgiveness of debt
income has been added.
Updated CUmUlative software problem
The cumulative software problem included as Group 5 questions at the end of Chapters 1–8 have been updated to include more
source documents (Forms W-2, 1099, etc.), current COVID-related events, and extraneous information to encourage students to
think more critically about the relevance of certain items when preparing tax returns.
a Complete learNiNg system—CeNgageNowv2
CengageNOWv2 for Taxation takes students from motivation to mastery. It elevates thinking
by providing superior content designed with the entire student workflow in mind. Students
learn more efficiently with a variety of engaging assessments and learning tools. For instructors,
CengageNOWv2 provides ultimate control and customization and a clear view into student performance that allows for the opportunity to tailor the learning experience to improve outcomes.
Motivation
Many instructors find that students come to class unmotivated and unprepared. To help with engagement and preparedness,
CengageNOWv2 for Whittenburg offers the following feature:
Self-Study Questions based on the information presented in the textbook help students prepare for class lectures or review prior to an
exam. Self-Study Questions provide ample practice for the students as they read the chapters, while providing them with valuable feedback and checks along the way, as the solutions are provided conveniently in Appendix E of the textbook.
Application
Students need to learn problem-solving skills in order to complete taxation problems on their own. However, as students try to work
through homework problems, sometimes they become stuck and need guidance. To help reinforce concepts and keep students on
the right track, CengageNOWv2 for Whittenburg offers the following:
iv
●
End-of-chapter homework: Group 1 and 2 problems
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-322
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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●
●
●
●
Algorithmic versions: End-of-chapter homework is available for at least 10–15 problems per chapter.
Detailed feedback for each homework question: Homework questions include enhanced, immediate feedback so students can learn
as they go. Levels of feedback include an option for “check my work” prior to submission of an assignment. Then, after submitting
an assignment, students receive even more extensive feedback explaining why their answers were incorrect. Instructors can decide
how much feedback their students receive and when, including providing the full solution, if they wish.
Built-in Test Bank: Provides online assessment.
CengageNOWv2’s Adaptive Study Plan: Complete with quizzes, an eBook, and more, it is designed to provide assistance for students
who need additional support and prepare them for the exam.
Mastery
Finally, students need to make the leap from memorizing concepts to critical thinking. They need to be able to connect multiple
topics and master the material. To help students grasp the big picture of taxation, tax return preparation, and achieve the end goal of
mastery, CengageNOWv2 for Whittenburg offers the following:
●
Comprehensive Problems: Allow students to complete the tax return problems by entering the relevant information on tax
forms and schedules in the ProConnect Tax software or by manually preparing the tax forms and schedules provided within
each chapter.
Cengage Learning Testing Powered by Cognero®
Cognero® is a flexible, online system that allows instructors to:
●
author, edit, and manage test bank content from multiple Cengage Learning solutions
●
create multiple test versions in an instant
●
deliver tests from your LMS, your classroom or wherever you want
Cognero® possesses the features necessary to make assessment fast, efficient, and effective:
●
●
●
Simplicity at every step: A desktop-inspired interface features drop-down menus and familiar, intuitive tools.
Full-featured test generator: Choose from 15 question types (including true/false, multiple choice, and essay). Multi-language
support, an equation editor, and unlimited metadata help ensure your tests are complete and compliant.
Cross-compatible capability: Import and export content into other systems.
CL Testing Powered by Cognero® is accessible through the instructor companion site, www.cengage.com/login.
Key Terms
Key Terms with page references are located at the end of all of the chapters and reinforce the important tax terms introduced and
discussed in each chapter.
Key Points
Following the Key Terms is a brief summary of the learning objective highlights for each chapter to allow students to focus
quickly on the main points of each chapter.
reliable instruCtor resourCes are Convenient
Solutions Manual
The manual, located on the instructor companion website: www.cengage.com/login, contains detailed solutions to the end-of-chapter problems in the textbook, Chapter Outlines and Suggested Minimum Assignments, and the solutions for the Additional Comprehensive Problems
are located in Appendix D.
Comprehensive Instructor Companion Website
This password-protected site contains instructor resources: the Solutions Manual, the Test Bank, Cognero® testing tools, Solutions
to the Cumulative Tax Return Problems, ProConnect Tax software solutions and instructions, PowerPoints, and more:
www.cengage.com/login.
as we go
to
Press
To access tax law information after the publication of this textbook, please visit www.cengage.com. At the home page, input the
ISBN of your textbook (from the back cover of your book). This will take you to the product page where free companion resources
are located.
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-322
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
v
ax Re
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who provid,65ed
$53,700
r $311,025
$53,700
over 10 peessrcove
$85,500
ent
$85
,50
$10
0
0,000
S
E
10%
V
of
I
tax
$1,
$10
410.00 + 12%
able income
0,000
$163,300
*
JECT
$6,162.00 + 22% of the excess over $14,10
$163,300
$207,350
NG OB
0*
of the excess
$13,158.00 +
$207,350
over $53,700
$518,400
24% of
LEARNI
*
le to:
(a)
(a)
(a)
●
b
$518,400
* For taxabl
should be a
chapter, you e income belowS.$10ta0,0x00,lathew.IRS requires use of the
is
th
g
n
ti
le
p
Tax Tables
U.
ts.sented in App
ct iv es of
ire m enpre
After com
Ch ild Ta x Cr
endix A.
ed rti ng re qu
ry an d ob je
● Learning Objectives
re poit
Amount per chi
hi sto
to17ta x an d
t er
Ex pl ai n th e
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iered
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uction of $50
enCre
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nt
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help organize
modified AGI:
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ess of
If neither individ
De sc rib e th
al s.
du
all diervitax
ual nor spouse
payers, in exc
maximum ded tu
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rm
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ess s.
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of
x
uct
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ta
ion
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e
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00
th
in
rn
fil
tu
ly
plan,
if under age 50,
re
to
pp
information
and
x
g
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ta
in
If
e
the
rd
$20
individual is
co
or $7,000 if age the
t fil
LO 1.3
an active par
50 or over
Sta nd ard De ul at io n of ta x ac 0,000
al s w ho m us
Married/Joint
ticipant in ano
AGI
ther plan:
th e ca lcdu cti on s
tif y in di vi du
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en
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nd
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ta
rs
de
Up
4
are
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un
to $104,000
dd Fil
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an
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x.
s
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rrie
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uct
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sta
ing Jointly or
it.Up to $65,000
in g
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rebate cred
$6,000 (under
$12re
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dow(er)
0 ve ry
$104,001–$12
50)
ts. Separately
en
d the
Hend
3,999
LO 1.5
ad of
$7,000 (50 or
the
end-of-chapter
$24,800
Household
$65
,001–$74,
$124,000 and
over)
payment an
ify in g de pe
999
ct
al
pa
qu
Ad
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for
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tro
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LO 1.
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am
Au to Sta nd ard
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– $196,000 and ount is phased out when AG
Mi lea ge Al low
$206,000 for join
is bet
LO 1.11
ween:WCN 02-200-322
an ce snot be copied, scanned,
Business:Learning.
Copyright 2021 Cengage
All Rights Reserved.
May
orI in
part.
– $124,000 or duplicated,
$0.575
filers
esint whole
LO 1.1
LO 1.2
vi
the excess ove
$13,158.00 +
r $85,500
24% of the exc
$31,830.00 +
ess over $85,50 *
32% of the exc
ess over $163,3 0
$45,926.00 +
35% of the exc
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$154,793.50
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+ 37% of the
excess over $51 50
8,400
ins and loss
to capital ga
and $139,000
Charity Work:
for all other file
$0.14 Medic
Contributions
al/Movi
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OVerVIeW
n
An introductio
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Real-World Applications
Keep Students Engaged
loy
6-6 Sel f-E mp
me nt Tax
6-19
7-37
tterstock.com; Zhuk
ILYA AKINSHIN/Shu
n Exp ens es
7-7 Ad op tio
l-needs
owed in specia
00 credit is all
r. The full $14,3
id.
pa
yea
t
ses
tha
en
for
exp
n
is allowed
alified adoptio
final, the credit
amount of qu
ardless of the
a U.S. citizen
adoptions reg
le child who is
gib
eli
an
of
tion
0 of qualified rnet company
op
,00
ad
$6
the
ys
th
pa
wi
r
Inte
ans in
taxpaye
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In connection
ponsitiex
nt tio
cial needs, a
meop
ge
spe
When
ExAMPLE
na
th
ad
wi
ma
d
a
ild
fie
ch
for
ali
ed0 of qu
ands other pets.
s, nse
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catpe
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te
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tion
ali
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op
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fin
rna
a
ck20, and $8
rttion is not
sta
for alte tive
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ngetoad
ented
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anall
ference oth
enbe
. Th
er
ow
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s giv
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uld
atesina20
. On the
creed
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when combined
hirurr
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sinc
the
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wa
of
al
he
ow
se
ion
all
rci
dit
be
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l
r. Exe
paid or
would to pay substantia
fied
of quali
file the AMT
during the yea
ed in 2020
ve , then $14,300 tax
to ha
exercised
and refuses to
paid or incT)urr
ses him
20
caufin
extra rmitte
in 20livi
and re
$8,600 m
d aserican” according to
alizedHe
about the
tax (AM
is dxim
dit pe
crefai
tion we
minimu
-Am
r.
op
um
“un
yea
ad
d
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an
the
ma
r”
if
for
e
,
s
handh his other tax itemowed in 2020 (th
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wit
be all return because the AMT
s would
expense
51 with his tax
Form 62
return?
tax
♦
).
this
n
20
sig
20
ofhim. Would you
Would You
Sign This
?
Tax Return
ite
ions
ident of the Un
ear Adopt
n e, Survivors,
S. citizen or res
n Multiy
tioAg
ENT TA X
opld
ad(O
s the
curity
lesl Se
who is not a U. t availases
7-7c Foreig
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ildYM
LF
chO
ble So
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n
6
po
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im
no
ich
)
op
is
ter 9, employwh
ad
CA
in
the
ar Chap
enses t (FI
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tock.com.
ov Oleg/Shutters
●
Objective
6.6 Learning
report
Calculate and
ment tax
the self-employ
urity and
Sec
l
(both Socia
ns) for
Medicare portio
payers.
tax
self-employed
The “Would You Sign This
Tax Return?” feature places
readers in the office of a tax
preparer with interesting and
sometimes humorous realworld tax ethics questions that
will intrigue students. Many
of these features are inspired
by the authors’ own experiences working with various
clients in tax preparation. As
part of each scenario, students
decide if they would sign the
tax return. The instructor can
use the cases to spark group
discussions on basic tax
preparation
ethics.
1-5 Fil ing
exp
sed in
nibu
tions Ac
cusye
the
distax
ntr
adop
In the case of
Cotio
d nce
es.eAs
fie
ed be
taxfor
ura
urrare
qulali
were
Ins
old a specified
incdic
withh
dit for era
ensses
d Me
anor
))id
sesDIpa
ployer
enAS
if the
Emexp
exp(O
as es.
States, the creThe Fedfiedilitad
dit
A tax
urannce
FIC
Instio
the
dit the amount
y op
paycre
for
cre
tch
to
ali
nt
ma
sab
the
ed
Qu
ou
Di
e,
nt,
uir
al.
d
acc
for
ou
req
an
fin
o
eream
intboth
base
al. Th
s are
becomes
s finum
yeren
are
mexim
plotak
fin
a ma
nistration.
iralem
n be
min
to co
me
Adtio
adop
d sthe
up
becoan
adop
gestio
curity
the
l Sethe
’s wa
wh
ichyee
ciaich
inSo
whplo
the adoption ees thege
ar hinem
toarthe
taxalye
tioAn taxes. Since
iny the tot
FIC
in nta taxofyeeac
of op
ed
d pa
ed rce
d ad
urr
the
an
tea
inc
ar
nt,
ins
ye
or
ou
es
id
tax
am
als.
l
tax
pa
paid or incurr pe
nt
equa
methe
anses
then
exp
mplyloyin
n wi
loyed individu
f-eon
tio
eld
seled
●
thh
allyow
wiop
ar,alsis pa
id by self-emp
taxiviyedu
for qualified ad
rlie
edr ind
loy
y ea
ject, the selfentire tax is pa
anmp
sub
lf-e
in
the
Se
s,
are
or
s
yer
al,
yer
plo
fin
becomes
have no em
d their emplo pectivdic
, . The maximum
se individuals
employees an d $6,00
0, res
and Me elyare
nt tax
becomes final.the the FICA taxes to which ys $3
ancial Security
rts,0So
patwo pa,00
an self-employme
r of
the
of
Like
ye
of
n
pa
n
Sta tus an d Tax
ts
tio
tax
sis
op
rtio
a
po
ad
,
con
o
ity
19
the
loyment
thcur
d t20
Co mp uta tio
tax als
anen
n lwiSe
tiocia
18ym
20plo
theecSo
. self-emp
In em
of the
n
conn
n tes
sjecint to
rtio
Sta
d
po
nse
sub
ite
pe
are
gs
ExAMPLE
The
Un
ex
dic
n
nin
nt.
the
Me
tio
ear
rce
of
op
Div
pe couple
the
nt
nt of
2.9ing
t toide
d ad
isorc
fieou
jec
res
e
or
rat
sub
qusealiam
n
tax
are
ofba
ze
s
gs
are
citi
an
nin
dic
S.
ys
ear
themay save significa
Me
pa
a U.
r
in
t
All
.
the
d
ye
no
d
20
pa
ate
is
an
20
str
o
tax
“ab
in
nt
0
wh
illu
nt taxes if on
,70ild
are
final, the
$1le37ch
s rce
yeaarscre
is 12
ditandoned spouse” and ca
mepe
eliisgib
co.4
ratne be
e or both of
ntsyfor
cla5im
am
optio
n use the head
sepa
adtax
Secur
the spouses qu
r ma
theity
yeou
of house
Socia
yel ar
xim
tax
The, the
of household filin
The ba
thepema
s. um
alify as an
20. 20
andd ex
nse
option hold filing status for on
Intax
es fie
ratali
g status. The com
nt0 tax
year the adspo
me
qu
e
e
spo
loy
(th
of
use
mp
20
use
,00
f-e
20
wit
sel
$3
is
bination of he
h
commonly see
married filing
urn for
dit
ret
cre
additional table:
tax
no
ad
e
n
sep
al,
om
in
fin
arately filing sta
the year (or yea
come
ing
or her inc
spo
be
*
t
low
his
use
no
0%
fol
on
ha
es
2.9
tus
s
rs)
00
do
cus
for the other
leading up to
se for
tody of a child,
of $12,0
adoption
a divorce. In ca
Maximum $ Ba
the separated
te: If a foreign
No
.
.4%
tax
ses
al)
12
fin
pa
wh
s
for
yer
ere each
se
s may each cla
become
Unlimited
Maximum $ Ba
im head of house
Yea. r♦
hold status.
is allowed
118,500
Unlimited
2016
1-5lim
e ite
e
Qby
00
dualif ying
127,2
Unurred
ion Assistanc enses inc
Widow(er)
Adopt8,4
2017
A tax
paite
with depen
yer
00 ounts paid or exp
lim
er-Provided earni12
ofdamay continue to bene
Untio
oy
n
am
pl
dent Child
s
op
ng
Em
ad
a
d
fit from the joi
spouse. To quali
7-7
th the
wi
2018lude from W-2
ed
ect
nt return rates
nn
00
fy
co
d
pro
2,9
to use the joint
13
ce ite
enses
lim
an
may exc
ist
Un
exp
e
for 2 years aft
n
ye
ass
of
n
tio
plo
ma
tio
op
ret
em
intain
urn rates, the
d ad
adop
An
fie
er the death of
an
ing
19
ali
r
20
qu
de
a
nt
ho
un
for
ou
wi
use
d
r
do
am
he
w(er) must pa
ploye
7,700
13nis
n cre
and head ofhold where a depend
chdit
ild0,0liv
gleter
nts are fur
optioove
sinAf
y over half the
00es.
his or her em
ent child, stepc
r $20ut
e as thentad
the 2-year perio
e ase
20if the amou
cost
for the
20e,
omph
ploye
is the sam
-ong sta
hild, adopted
meas inc
fili
loyer
d,
r childtax
the
mpnn
pe
the
f-e
se
le
sel
child by the em
tus
ab
tax
on
ch
.
pa
lud
ild, or foster
n.nnection
yers often quali
exc itional Medicarethe same ma
atioco
ormin
infion
relus
al amount
fy for the head
for mo
in
6.8
cent add
LO
exc
culated filin
gram. The tot *A 0.9 per-o
See
.
an
cal
tly)
d
of
is
an
ho
join
tax
ut
usehold
d im g
e phaseld ($250,000 mayrrie
an exc
es during a
both a credit
taxion
an
A lus
ditjec
●
a scre
($14,300). Th househoind
t dto
th ge
sub
ividual ma cla
1-5FIC
imesbowa
uced by
f TaxesCo
. An
is red
may not claeiv
mSe
, bu
ildind
pu
loyment tax
ch
adoption credit
ta
le
ivitdual also rec
tio
f-empFo
gib
ity
sel
eli
n
ed
cur
for
an
loy
l
nt
of
mp
cia
n
ou
r
Soare
2020, the
tio If a self-e
base am
there
with the adop
sev
gs subject to
tax maximum
ount of earnin 32 pe
37,700. en income tax brackets (10
$1pe
expense. cial Security
rcent,
eed35
not exc
e, the total am
percent, 12 pe
rcent,
for the same year, the So
frodm37 percent)
re an
rcent, 22 perce
tax for 2020 can
wages. Therefor
mo
req
nt
of
or
uir
nt
me
ed
. Individuals wi
ou
00
loy
$4
to
am
mp
use the tax tra
nt, 24 percent,
the
gs of
d self-e
th taxable incom
les presented
both FICA an
on net earninmorethi
the
e from a tabde
sed
in
om
e below $100,0
po
tha
inc
ng
in
im
n
ss
Ap
$10
is
tax portion of
st
gro
pe
0,0
e
rde
ndix A. Taxpayer
00
lud
ha
nt tax
etax rat
00 are
e
use
inc
me
om
nt
“Th
the
loy
inc
me
in:
mp
hip
loy
ste
f-e
s with income
ers
of
mp
Ein
e schedules (al
theresin
ertf-e
partn
sel
The sel
of
Alb
m
gle
to
fro
tax
d
sha
gs
equal to or
ute
ve
rat
so
nin
e
uti
rib
presented in Ap
schedule is pre
t ear
Neatt
nt.en
is oft
s, the distrib
n me
to additional tax
tioloy
sented below.
pendix A). An
mp
ota
quf-e
ess deduction
sin
es
Ce
bu
exa
.”
dis
rta
or
cus
mple
tax
in
e
de
The followingsel sin
sed in Chapter
high-income tax
om
s tra
thelesinc
6.
bu d isess
payers are sub
or an
ject
world to underst
Single Tax
Real-world examples within
Tax Break segments provide
actual, effective examples of
tax-planning strategies that
clearly illustrate the concepts
discussed throughout the
book and cover nearly every
basic tax-planning technique
used by tax preparers.
TA X
BR EA K
Interesting tax facts within
“Would You Believe?” sections
grab students’ attention with
interesting asides, including
captivating facts and stories
about tax laws and preparation.
?
Wouldu
Yo
Believe
Rate Schedule
If taxable incom
e
is over–
$
0
9,875
40,125
85,525
●
But not
over–
$ 9,875
40,125
85,525
The tax is:
10% of the tax
able income
$987.50 + 12%
of the excess ove
$4,617.50 + 22%
r $9,875
of
2-1 The Na
tur e of Gr oss
Inc om e
the excess ove
r $40,125
The CARES163
0
Ac,30
t allo
$14,605.50 +
ws higher
163,300 financial
education24%
of the excess ove
institu
aid
tions to suprpo
207gra
$85
,35nts
0 which ma
rt ,52
stu5dents by usi
y,27
$33
be
exp
use
ens
1.5
d
0
es
for ofune
+ 32%
related to the dis
ng emergency
207,350
thexpe
exccte
ess doveexp
ruption of cam
ens
r $16
es,
,400
3,3
such as une518
00 unmet financial
pu
s
op
xpected expens $47,367.50 + 35% erations on acc
need, or
518,400 chi
es for food, ho of the excess ove ount of the CO
ldcare. The
VID-19 pandem
using, course r $207,350
---se----pa
- yments $15
materials, techno
ic,
are con
6,2sid
35ere
+ 37%
logy, health car
d gra
of nts
the an
excd
essare
oveexc
e, or
r $51
8,4
lud
00from inc
ed
ome.
The tax rates
New Tax Law boxes
throughout the textbook
draw students’ attention to
specific areas affected by
new tax legislation.
2-3
!
Ne w
Ta x
Law
applicable to
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in
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part.
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ExAm
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vii
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Income Tax Fundamentals
Delivers Proven End-of-Chapter Strengths
●
●
The pages are perforated, allowing students to complete end-of-chapter problems and
submit them for homework. Students can also tear out tax forms as needed.
Several question types ensure a variety of assignment options:
● Multiple-Choice Questions
● Problems
● Writing Assignments
● Comprehensive Problems
● The Cumulative Software Problem provided in Chapters 1–8 gives students the flexibility to
use multiple resources, such as the tax forms within the book, ProConnect Tax or alternative
tax preparation software. The problem evolves with each succeeding chapter’s content,
allowing students to build on their comprehension of various tax topics.
● Additional Comprehensive Tax Return Problems located in Appendix D.
Digital Tools Enhance Student Understanding
CengageNOWv2 is a powerful online homework tool.
This online resource includes an interactive eBook, end-ofchapter homework, detailed student feedback and interactive
quizzing, that covers the most challenging topics, a lab
guide for using the ProConnect Tax software, flashcards, and much more. The student companion
website offers—at no additional costs—study resources for students. Go to www.cengage.com,
and input the ISBN number of your textbook (from the back cover of your book). This will take
you to the product page where free companion resources are located.
ProConnect Tax access is included with each textbook. A detailed
reference lab guide will help the student use the tax software for
solving end-of-chapter problems.
For students who are new to the ProConnect Tax software product,
we have placed tips throughout the textbook providing guidance to
assist students with the transition from a paper form to using the
tax software.
viii
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Note to Students:
Maximize Your
Reading Experience
This textbook includes many examples to help illustrate learning objectives. After
reading each section, including the examples, answer the corresponding Self-Study
Problems. You can find the solutions to the Self-Study Problems at the end of the
textbook in Appendix E to check your accuracy. Use your performance to measure your
understanding, and re-read the Learning Objectives section if needed. Many key tax
terms are defined in each chapter, which will help improve your overall comprehension.
USING TAx SOFTWARE
Numerous tax return problems in the textbook can be solved using either the online tax preparation
software or hand preparation. The popular software, ProConnect Tax, is available with the textbook.
Helpful tips for using ProConnect Tax have been placed throughout the book so that students can
more easily train on the software and prepare the tax returns included in each of the first eleven
chapters. A student guide to ProConnect Tax is provided at the companion website. Your college may
offer additional tax preparation software, but remember that you can always prepare the solutions
manually on the chapter-provided tax forms, schedules and worksheets.
USING ThE “WOULD YOU SIGN ThIS TAx RETURN?” FEATURE
A practitioner who knows when to say “I cannot sign this tax return,” even if it means losing a client,
is exercising the most basic ethical wisdom. Most chapters contain a “Would You Sign This Tax Return?”
case reflecting a common client issue. Each issue corresponds to an obvious concept illustrated in the
previous section. However, the approach to advise the client is not always obvious nor easy. The art
of explaining tax rules to a client who does not understand them, or, worse, wants to break them,
requires not only a good understanding of the rules, but also good interpersonal skills and sometimes
the gift of persuasion. The news in the last several years has shown reports of respected CPA firms with
members who failed to say the simple words, “I cannot sign this tax return,” demonstrating that simple
ethical practice is not always easy. We hope instructors will use these cases to spark group discussions or
contemplation, and, perhaps, add examples from their own experience.
USING ThE CUMULATIvE SOFTWARE PROBLEM
The Cumulative Software Problem can be found at the end of Chapters 1–8. The case information
provided in each chapter builds on the information presented in previous chapters, resulting in a
lengthy and complex tax return by the conclusion of the problem in Chapter 8. Your instructor may have
you work in groups to prepare each of the tax returns. The groups can follow the real-world accounting
firm model using a preparer, a reviewer, and a firm owner who takes responsibility for the accuracy of
the return and signs it. All of the issues in the problem are commonly seen by tax preparers and are
covered in the textbook. The full return is difficult to prepare by hand, so tax software is recommended.
If the problem is prepared using tax software, the data should be saved so the additional information in
the succeeding chapters can be added without duplicating input from previous chapters.
ix
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x
About
the
Authors
Gerald E. Whittenburg On March 8, 2015, we unexpectedly lost our dear friend and co-author Gene
Whittenburg. As the original author of Income Tax Fundamentals, Gene was critical in designing the forms-based approach that
the book has used successfully for over two decades. Gene started his life in a small town in Texas, entered the Navy, served
his country in Vietnam, earned a Bachelor’s, Master’s, and PhD degrees, and served as a distinguished faculty at San Diego
State University for almost 40 years. We intend to continue to honor Gene by committing to uphold his standard of publishing
excellence.
Steven L. Gill is an associate professor of accounting and taxation in the Charles W. Lamden School of Accountancy
at San Diego State University. He also serves as the Director of Graduate Programs at the Fowler College of Business at SDSU.
Steve received a BS in Accounting from the University of Florida, an MS in Taxation from Northeastern University, and a PhD in
Accounting from the University of Massachusetts. Prior to entering academia, he worked for almost 12 years in the field of tax and
accounting, including roles in public accounting, internal audit, corporate accounting, and, ultimately, vice president of finance.
Although currently in inactive status, Steve holds a Certified Public Accountant designation. He has published a wide variety of
articles in various academic and practitioner journals, and has taught at both the undergraduate and graduate levels, including
taxation and financial and management accounting. Steven also serves as an author on Cengage’s Federal Tax Research series.
reviewers
Janice Akao, Butler Community College
Sandra Augustine, Hilbert College
George Barbi, Lanier Technical College
Lydia Botsford, DeAnza College
Mike Bowyer, Montgomery Community College
Jerold Braun, Daytona State College
Lindy Byrd, Augusta Technical College
Greg Carlton, Davidson County Community College
Diana Cescolini, Chaffey College
John Chappell, Northland Community and Technical College
Marilyn Ciolino, Delgado Community College
Diane Clugston, Cambria-Rowe Business College
Tonya Coates, Western Piedmont Community College
Thomas Confrey, SUNY Orange
Amy Conley, Genesee Community College
Eric DaGragnano, Western Governors University
Geoffrey Danzig, Miami Dade College – Hialeah Campus
Richard Davis, Susquehanna University
Susan Davis, Green River Community College
Vaun Day, Central Arizona College
Ken Dennis, San Diego City College
Kerry Dolan, Great Falls College Montana State University
Vicky C. Dominguez, College of Southern Nevada
Lisa Farnam, College of Western Idaho
John Fasler, Whatcom Community College
Brian Fink, Danville Area Community College
Brenda Fowler, Central Carolina Community College
George Frankel, San Francisco State University
Alan Fudge, Linn-Benton Community College
Gregory Gosman, Keiser University
Nancy Gromen, Blue Mountain Community College
Jeffery Haig, Copper Mountain College
Tracie Hayes, Randolph Community College
Michael Heath, River Parishes Community College
Cindy Hinz, Jamestown Community College
Rob Hochschild, Ivy Tech Community College
Japan Holmes, Jr., Savannah Technical College
Jana Hosmer, Blue Ridge Community College
James Hromadka, San Jacinto College
Carol Hughes, Asheville Buncombe Technical
Community College
Norma Hunting, Chabot College, Hayward, California
Adrian Jarrell, James Sprunt Community College
Paul Johnson, Mississippi Gulf Coast Community College
Jessica Jones, Mesa Community College
Dieter Kiefer, American River College
Christopher Kinney, Mount Wachusett Community College
Angela Kirkendall, South Puget Sound Community College
Mark Klamrzynski, Phoenix College
Raymond Kreiner, Piedmont College
William Kryshak, University Wisconsin-Stout
Linda Lane, Walla Walla Community College
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Christie Lee, Lanier Technical College
Anna Leyes, Ivy Tech Community College
Jeannie Liu, Rio Hondo College
Susan Logorda, Lehigh Carbon Community College
Heather Lynch, Northeast Iowa Community College
Diania McRae, Western Carolina University
Deanne Michaelson, Pellissippi State Community College
Jennifer Morton, Ivy Tech Community College
Sharon O’Reilly, Gateway Technical College
Mike Prockton, Finger Lakes CC
John Ribezzo, Community College of Rhode Island
Lance Rodrigues, Ohlone College
Hanna Sahebifard, Golden West College
Larry Sayler, Greenville University
James Shimko, Jackson Community College
Barry Siebert, Concordia University–Saint Paul
Kimberly Sipes, Kentucky State University
Amy Smith, Pearl River Community College
Thomas Snavely, Yavapai College
Joanie Sompayrc, UT-Chattanooga
Barbara Squires, Corning Community College
Todd Stowe, Southwest Florida College
Gracelyn Stuart-Tuggle, Palm Beach State College
Robert L. Taylor, C.P.A., Lees-McRae College
Teresa Thamer, Brenau University
Craig Vilhauer, Merced College
Stan Walker, Georgia Northwestern Technical School
Teresa Walker, Greensboro College
Joe Welker, College of Western Idaho
Jean Wells, Howard University
Mary Ann Whitehurst, Southern Crescent Technical College
Sharon Williams, Sullivan University
Douglas Woods, Wayne College
Patty Worsham, Chaffey College
Jay Wright, New River Community College
Douglas Yentsch, South Central College
James Zartman, Elizabethtown PA College
Jane Zlojutro, Northwestern Michigan College
Acknowledgments
The authors wish to thank all of the instructors who provided feedback for the 2021 edition via surveys as well as the following
supplement authors and verifiers for their most valuable suggestions and support:
D. Elizabeth Stone Atkins—High Point University, High Point, NC
David Candelaria—Mt. San Jacinto College, Menifee, CA
Jim Clarkson—San Jacinto College South, Houston, TX
Pennie Eddy—Appalachian Technical College, Jasper, GA
Paul Shinal—Cayga Community College, Auburn, NY
In addition, gratitude is expressed to Susan Gill, Kathleen Smith, and Steve Smith for their expert assistance reviewing chapters
of this textbook. We would also like to thank Janice Stoudemire, Tracy Newman, and Wendy Shanker on their work of reviewing
and verifying the content in CengageNOWv2, including the end-of-chapter items, and Test Bank problems. We would also like to
extend our thanks to the Tax Forms and Publications Division of the Internal Revenue Service for their assistance in obtaining
draft forms each year.
We appreciate your continued support in advising us of any revisions or corrections you feel are appropriate.
Steven L. Gill
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xii
the AnnotAted 1040 mAp
The annotated 1040 map is an expanded tax formula, illustrating where each piece of the tax formula is covered in the textbook.
The 1040 map helps you understand how all of the elements of the textbook and the tax formula fit together. Use this as a reference and bookmark this page.
LO 1.5
LO 1.8
LO 1.6, 7.1
LO 2.2
LO 2.9
LO 2.9
LO 5.3
LO 2.7
LO 2.16
LO 4.1 to 4.6
LO 2.10
LO 2.9
LO 5.3
LO 2.7
LO 2.16
LO 5.9
LO 1.8, 5.6 to 5.10
LO 4.10
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xiii
LO 1.5, 2.9, 4.4, 6.4
LO 1.8, 7.1
LO 2.2, 9.1
9.1
LO 7.2
LO 7.1
LO 7.5
LO 1.7
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xiv
LO 5.7
LO 2.13
Chapter 3
LO 8.8
LO 4.7, 4.8
LO 2.15
LO 2.6, 2.12
LO 5.5
LO 5.5
LO 5.1
LO 5.5
LO 6.6
LO 5.4
LO 5.2
LO 2.9
LO 2.13
LO 5.3
LO 5.8
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xv
LO 6.5
LO 7.4
LO 6.6
LO 6.7
LO 6.8
LO 7.6
LO 7.3
LO 7.5
LO 7.9
LO 7.8
LO 7.4
LO 1.4
LO 9.3
LO 6.6, 6.7
LO 6.6
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ta b l e o f c o n t e n t s
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chapter 2
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chapter 3
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The Individual Income Tax Return
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
1.10
1.11
history and objectives of the Tax System
Reporting and Taxable Entities
The Tax Formula for Individuals
Who Must File
Filing Status and Tax Computation
Qualifying Dependents
Economic Impact Payment and Recovery Rebate Credit
The Standard Deduction
A Brief overview of Capital Gains and Losses
Tax and the Internet
Electronic Filing (E-Filing)
Questions and Problems
1-2
1-3
1-6
1-8
1-11
1-14
1-21
1-22
1-24
1-27
1-29
1-32
Gross Income and Exclusions
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
2.12
2.13
2.14
2.15
2.16
2.17
2.18
The Nature of Gross Income
Salaries and Wages
Accident and health Insurance
Meals and Lodging
Employee Fringe Benefits
Prizes and Awards
Annuities
Life Insurance
Interest and Dividend Income
Municipal Bond Interest
Gifts And Inheritances
Scholarships
Alimony
Educational Incentives
Unemployment Compensation
Social Security Benefits
Community Property
Forgiveness of Debt Income
Questions and Problems
2-2
2-4
2-9
2-9
2-10
2-14
2-15
2-19
2-20
2-27
2-28
2-29
2-29
2-32
2-35
2-36
2-40
2-42
2-47
Business Income and Expenses
3.1
3.2
3.3
3.4
3.5
3.6
3.7
Schedule C
Inventories
Transportation
Travel Expenses
Meals and Entertainment
Educational Expenses
Dues, Subscriptions, and Publications
3-2
3-7
3-13
3-15
3-18
3-19
3-22
Glow Images/Getty Images
chapter 1
xvi
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Table of Contents
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chapter 5
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chapter 6
3.8
3.9
3.10
3.11
3.12
Special Clothing and Uniforms
Business Gifts
Bad Debts
office in the home
hobby Losses
Questions and Problems
3-22
3-23
3-24
3-26
3-29
3-33
Additional Income and the Qualified Business
Income Deduction
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
What Is a Capital Asset?
holding Period
Calculation of Gain or Loss
Net Capital Gains
Net Capital Losses
Sale of a Personal Residence
Rental Income and Expenses
Passive Loss Limitations
Net operating Losses
Qualified Business Income (QBI) Deduction
Questions and Problems
4-2
4-3
4-3
4-8
4-10
4-19
4-22
4-25
4-29
4-35
4-48
Deductions For and From AGI
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
5.10
health Savings Accounts
Self-Employed health Insurance Deduction
Individual Retirement Accounts
Small Business and Self-Employed Retirement Plans
other for AGI Deductions
Medical Expenses
Taxes
Interest
Charitable Contributions
other Itemized Deductions
Questions and Problems
5-2
5-7
5-8
5-13
5-16
5-18
5-21
5-28
5-32
5-37
5-46
Accounting Periods and Other Taxes
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6.1
6.2
6.3
6.4
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LO
6.5
6.6
6.7
6.8
Accounting Periods
Accounting Methods
Related Parties (Section 267)
Unearned Income of Minor Children
and Certain Students
The Individual Alternative Minimum Tax (AMT)
Self-Employment Tax
The Nanny Tax
Special Taxes for high-Income Taxpayers
Questions and Problems
6-2
6-3
6-5
6-8
6-14
6-19
6-31
6-32
6-44
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xvii
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Table of Contents
chapter 7
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chapter 8
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chapter 9
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chapter 10
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Tax Credits
7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9
Child Tax Credit
Earned Income Credit
Child and Dependent Care Credit
The Affordable Care Act
Education Tax Credits
Foreign Exclusion and Tax Credit
Adoption Expenses
Energy Credits
Low-Income Retirement Plan Contribution Credit
Questions and Problems
7-2
7-5
7-17
7-21
7-27
7-34
7-36
7-38
7-41
7-47
Depreciation and Sale of Business Property
8.1
8.2
8.3
8.4
8.5
8.6
8.7
8.8
8.9
8.10
8.11
8.12
Depreciation
Modified Accelerated Cost Recovery System
(MACRS) and Bonus Depreciation
Election to Expense (Section 179)
Listed Property
Limitation on Depreciation of Luxury Automobiles
Intangibles
Section 1231 Gains and Losses
Depreciation Recapture
Business Casualty Gains and Losses
Installment Sales
Like-Kind Exchanges
Involuntary Conversions
Questions and Problems
8-2
8-3
8-10
8-14
8-15
8-17
8-18
8-20
8-25
8-27
8-30
8-32
8-36
Andy Dean Photography/Shutterstock.com
xviii
Payroll, Estimated Payments,
and Retirement Plans
9.1
9.2
9.3
9.4
9.5
9.6
9.7
9.8
Withholding Methods
Estimated Payments
The FICA Tax
Federal Tax Deposit System
Employer Reporting Requirements
The FUTA Tax
Qualified Retirement Plans
Rollovers
Questions and Problems
9-2
9-14
9-16
9-25
9-33
9-36
9-37
9-40
9-43
Partnership Taxation
10.1
10.2
10.3
10.4
Nature of Partnership Taxation
Partnership Formation
Partnership Income Reporting
Current Distributions and Guaranteed
Payments
10-2
10-3
10-5
10-15
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Table of Contents
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chapter 11
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chapter 12
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LO
LO
10.5
10.6
10.7
10.8
10.9
Tax Years
Transactions Between Partners and the Partnership
Qualified Business Income Deduction for Partners
The At-Risk Rule
Limited Liability Companies
Questions and Problems
10-16
10-16
10-17
10-19
10-20
10-23
The Corporate Income Tax
11.1
11.2
11.3
11.4
11.5
11.6
11.7
11.8
11.9
Corporate Tax Rates
Corporate Gains and Losses
Special Deductions and Limitations
Schedule M-1
Filing Requirements and Estimated Tax
S Corporations
Corporate Formation
Corporate Accumulations
The Corporate Alternative Minimum Tax
Questions and Problems
11-2
11-2
11-4
11-7
11-8
11-17
11-19
11-29
11-30
11-33
Tax Administration and Tax Planning
12.1
12.2
12.3
12.4
12.5
12.6
12.7
The Internal Revenue Service
The Audit Process
Interest and Penalties
Statute of Limitations
Preparers, Proof, and Privilege
The Taxpayer Bill of Rights
Tax Planning
Questions and Problems
12-2
12-6
12-11
12-15
12-16
12-19
12-22
12-27
Appendices
Pgiam/iStock Unreleased/Getty Images
Appendix
Appendix
Appendix
Appendix
A
B
C
D
Tax Rate Schedules and Tax Table
Earned Income Credit Table
Withholding Tables
Additional Comprehensive
Tax Return Problems
Appendix E Solutions to Self-Study Problems
Glossary of Tax Terms
Index
List of Forms
List of Schedules
List of Worksheets
A-1
B-1
C-1
D-1
E-1
G-1
I-1
L-1
L-2
L-2
Questions
Please contact the Cengage Learning Taxation publishing team if you have any questions:
Jonathan Gross, Associate Product Manager:
Chris Walz, Marketing Manager:
Tricia Hempel, Senior Content Manager:
jonathan.gross@cengage.com
chris.walz@cengage.com
patricia.hempel@cengage.com
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Chapter 1
jxfzsy/Getty Images
The Individual
Income Tax Return
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LEARNING OBJECTIVES
After completing this chapter, you should be able to:
LO 1.1
Explain the history and objectives of U.S. tax law.
LO 1.2
Describe the different entities subject to tax and reporting requirements.
LO 1.3
Apply the tax formula for individuals.
LO 1.4
Identify individuals who must file tax returns.
LO 1.5
Determine filing status and understand the calculation of tax according to filing status.
LO 1.6
Define qualifying dependents.
LO 1.7
Determine the tax impact of the economic impact payment and the recovery rebate credit.
LO 1.8
Calculate the correct standard or itemized deduction amount for taxpayers.
LO 1.9
Compute basic capital gains and losses.
LO 1.10
Access and use various Internet tax resources.
LO 1.11
Describe the basics of electronic filing (e-filing).
OVerVIeW
T
his chapter introduces the U.S. individual
income tax system. Important elements of
the individual tax formula are covered,
including the tax calculation, who must
file, filing status, and the interaction of itemized
deductions and the standard deduction. The
chapter illustrates all of the steps required for
completion of a basic Form 1040. There is also
a discussion of reporting and taxable entities.
An introduction to capital gains and losses
is included to provide a basic understanding of
capital transactions prior to the detailed coverage in
Chapter 4. An overview of tax information available
at the Internal Revenue Service (IRS) website and
other helpful tax websites is also provided.
A discussion of the process for electronic filing
(e-filing) of an individual tax return completes the
chapter.
1-1
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1-2
Chapter 1
●
The Individual Income Tax Return
Learning Objective 1.1
1-1 hISTORy ANd OBJECTIVES Of ThE TAx SySTEm
Explain the history and
objectives of U.S. tax
law.
1-1a Tax Law history and Objectives
The U.S. income tax was established on March 1, 1913 by the Sixteenth Amendment to the
Constitution. Prior to the adoption of this amendment, the U.S. government had levied various
income taxes for limited periods of time. For example, an income tax was used to help finance the
Civil War. The finding by the courts that the income tax law enacted in 1894 was unconstitutional
eventually led to the adoption of the Sixteenth Amendment. Since adoption of the amendment,
the constitutionality of the income tax has not been questioned by the federal courts.
Many people inaccurately believe the sole purpose of the income tax is to raise
sufficient revenue to operate the government. The tax law has many goals other than raising
revenue. These goals fall into two general categories—economic goals and social goals—
and it is often unclear which goal a specific tax provision was written to meet. Tax provisions
have been used for such economic motives as reduction of unemployment, expansion of
investment in productive (capital) assets, and control of inflation. Specific examples of
economic tax provisions are the limited allowance for expensing of capital expenditures and
the bonus depreciation provisions. In addition to pure economic goals, the tax law is used
to encourage certain business activities and industries. For example, an income tax credit
encourages businesses to engage in research and experimentation activities, the energy
credits encourage investment in solar and wind energy businesses, and a special deduction
for soil and water conservation expenditures related to farm land benefits farmers.
Social goals have also resulted in the adoption of many specific tax provisions. The
child and dependent care credit, the earned income credit, and the charitable contributions
deduction are examples of tax provisions designed to meet social goals. Social provisions
may influence economic activities, but they are written primarily to encourage taxpayers to
undertake activities to benefit themselves and society.
An example of a provision that has both economic and social objectives is the provision
allowing the gain on the sale of a personal residence up to $250,000 ($500,000 if married)
to be excluded from taxable income. From a social standpoint, this helps a family afford a
new home, but it also helps achieve the economic goal of ensuring that the United States
has a mobile workforce.
The use of the income tax as a tool to promote economic and social policies has
increased in recent years. Keeping this in mind, the beginning tax student can better
understand how and why the tax law has become so complex.
1-1b The Tax Cuts and Jobs Act of 2017
Although the tax laws often change in some way each year, significant overhauls of the tax
code are actually quite rare. However, in December 2017, The Tax Cuts and Jobs Act or TCJA
(PL 115-97) was signed into law. For budgetary reasons, many of the provisions of the tax
law are set to expire over the next decade. Many of the more important expiring provisions
are listed below along with the chapter in this textbook in which they are discussed.
Summary of Major Tax Provisions Scheduled to Expire
TCJA Provision
Expires
Reduction of individual tax rates
Increased standard deduction
Suspension of personal exemptions
Qualified business income deduction
Suspension of itemized deduction phase-out
Temporary cap on state and local taxes
Suspension of miscellaneous itemized deductions subject
to 2 percent floor
Suspension of moving expense deduction
Reduced limits on mortgage interest deduction
Chapter
2025
2025
2025
2025
2025
2025
1
1
1
4
5
5
2025
2025
2025
5
5
5
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1-2 Repor ting and Taxable Entities
TCJA Provision
Restrictions on personal casualty losses
Increased AMT exemption and phase-out
Changes to kiddie tax
Increased child tax credit
100 percent bonus depreciation
Expires
Chapter
2025
2025
2025
2025
Phases out
starting 2023
5
6
6
7
8
1-3
It remains uncertain whether these provisions will be extended or made permanent; however, when appropriate, the textbook includes background on the pre-TCJA law in the event
those provisions return.
Due to the COVID-19 pandemic, a series of additional temporary tax provisions were
enacted or administratively put in place. These included the Families First Coronavirus
Response Act of 2020 and the Coronavirus Aid, Relief, and Economic Security Act of 2020
(CARES Act). Some of the more significant provisions are listed below.
Provision
Chapter
Educational assistance plans
Qualified tuition plans
Net operating losses
Distributions from retirement plans
Charitable contributions deduction
Recovery rebate credit
Payroll tax deferral
Employee retention credit
Sick and family leave credit
Paycheck Protection Program
Self-Study Problem 1.1
2
2
4 & 11
5
5 & 11
1
9
9
9
9
See Appendix E for Solutions to Self-Study Problems
Which of the following is not a goal of the income tax system?
a. Raising revenue to operate the government.
b. Providing incentives for certain business and economic goals, such as higher
employment rates, through business-favorable tax provisions.
c. Providing incentives for certain social goals, such as charitable giving, by
allowing tax deductions, exclusions, or credits for selected activities.
d. All the above are goals of the income tax system.
1-2 REPORTING ANd TAxABLE ENTITIES
1.2 Learning Objective
Under U.S. tax law, there are five basic tax reporting entities. They are individuals, corporations, partnerships, estates, and trusts. The taxation of individuals is the major topic of
this textbook; an overview of the taxation of partnerships and corporations is presented
in Chapters 10 and 11, respectively. Taxation of estates and trusts is a specialized area not
covered in this textbook.
Describe the different
entities subject to
tax and reporting
requirements.
1-2a The Individual
The most familiar taxable entity is the individual. Taxable income for individuals generally includes income from all sources such as wages, salaries, self-employment
earnings, rents, interest, and dividends. Most individual taxpayers file Form 1040.
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1-4
Chapter 1
●
The Individual Income Tax Return
The Form 1040 has undergone only minor changes for 2020. The Form 1040-SR (for taxpayers age 65 and over) remains available for 2020 and has been redesigned in a way that
largely increases the size of the form from two to four pages.
Schedules 1-3 remain more or less the same:
Schedule
1
2
3
Primary Purpose
Additional forms of income other than wages, interest, dividends,
distributions from qualified retirement plans such as IRAs and pensions,
Social Security benefits, and capital gains and losses, along with many of
the deductions for adjusted gross income
Additional taxes beyond the basic income tax such as the alternative
minimum tax, repayments of excess advance premium tax credit, selfemployment taxes, and household employment taxes
Credits and payments other than withholding including education credits,
the credit for child and dependent care expenses, residential energy credit,
estimated tax payments, excess Social Security taxes withheld, and the net
premium tax credit
In addition to Schedules 1–3, certain types of income and deductions must be
reported on specific schedules that are included with the Forms 1040 or 1040-SR.
Schedule
A
B
C
D
E
F
Primary Purpose
Itemized deductions such as medical expenses, certain taxes, certain
interest, charitable contributions, and other miscellaneous deductions
Interest income (over $1,500) or ordinary dividend income (over $1,500)
Net profit or loss from a sole proprietor trade or business, other than farm
or ranch activities
Capital gains and losses
Rental, royalty, and pass-through income from partnerships, S corporations,
estates, and trusts
Farm or ranch income
These tax forms and schedules and some less common forms are presented in this
textbook.
?
Would
You
Believe
The origin of the Form 1040 has been rumored to be associated with the year 1040 b.c.
when Samuel warned his people that if they demanded a king, the royal leader would be
likely to require they pay taxes. However, in the early 1980s, the then-Commissioner of
the IRS, Roscoe Eggers indicated that the number was simply the next one in the control
numbering system for federal forms in 1914 when the form was issued for taxpayers for
the tax year 1913. About 350,000 people filed a 1040 for 1913. All the returns were
audited. In 2019, less than 1 percent of the approximately 150 million individual tax
returns were audited.
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1-2 Repor ting and Taxable Entities
1-2b The Corporation
Corporations are subject to the U.S. income tax and must report income annually on
Form 1120. Corporations are taxed at a flat rate of 21 percent for all corporations regardless of income level.
Some corporations may elect S corporation status. An S corporation does not generally
pay regular corporate income taxes; instead, the corporation’s income passes through to
the shareholders and is included on their individual returns. S corporations must report tax
information annually on Form 1120S. Chapter 11 covers the basics of corporate taxation,
including a discussion of S corporations.
1-2c The Partnership
The partnership is not a taxable entity; instead it is a reporting entity. Generally, all
income or loss of a partnership is included on the tax returns of the partners. However,
a partnership must file Form 1065 annually to report the amount of the partnership’s
total income or loss and show the allocation of the income or loss to the partners. The
partners, in turn, report their share of ordinary income or loss on their tax returns.
Other special gains, losses, income, and deductions of the partnership are reported and
allocated to the partners separately, since these items are given special tax treatment at
the partner level. Capital gains and losses, for example, are reported and allocated separately, and the partners report their share on Schedule D of their income tax returns. See
Chapter 10 for a discussion of partnerships, including limited partnerships and limited
liability companies.
Summary
Form or Schedule
1040
Schedule 1
Schedule 2
Schedule 3
Schedule A
Schedule B
Schedule C
Schedule D
Schedule E
Schedule F
1041
1120
1120S
1065
Schedule K-1 (Form 1065)
of
major Tax formS
and
ScheduleS
Description
Individual income tax return
Additional income and adjustments to income
Additional taxes
Additional credits and payments
Itemized deductions
Interest and dividend income
Profit or loss from business (sole proprietorship)
Capital gains and losses
Supplemental income and loss (rent, royalty, and passthrough income from Forms 1065, 1120S, and 1041)
Farm and ranch income
Fiduciary (estates and trusts) tax return
Corporate tax return
S corporation tax return
Partnership information return
Partner’s share of partnership results
All of the forms listed here, and more, are available at the IRS website (www.irs.gov).
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1-5
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1-6
Chapter 1
●
The Individual Income Tax Return
Self-Study Problem 1.2
See Appendix E for Solutions to Self-Study Problems
Indicate which is the most appropriate form or schedule(s) for each of the following
items. Unless otherwise indicated in the problem, assume the taxpayer is an individual.
ITEm
form or Schedule
1. Bank interest income of $1,600 received by a taxpayer who
itemizes deductions
2. Capital gain on the sale of AT&T stock
3. Income from a farm
4. Estate income of $850
5. Partnership reporting of an individual partner’s share of
partnership income
6. Salary of $70,000 for a taxpayer under age 65 who
itemizes deductions
7. Income from a sole proprietorship business
8. Income from rental property
9. Dividends of $2,000 received by a taxpayer who does not
itemize deductions
10. Income of a corporation
11. Partnership’s loss
12. Charitable contributions deduction for an individual who
itemizes deductions
13. Single individual, age 67, with no dependents whose only
income is $18,000 (all from Social Security) and who does
not itemize deductions or have any credits
Learning Objective 1.3
1-3 ThE TAx fORmuLA fOR INdIVIduALS
Apply the tax
formula for
individuals.
Individual taxpayers calculate their tax in accordance with a tax formula. Understanding the
formula is important, since all tax determinations are based on the result. The formula is:
Gross Income
2 Deductions for Adjusted Gross Income
5 Adjusted Gross Income
2 Greater of Itemized Deductions or the Standard Deduction
2 Qualified Business Income Deduction
5 Taxable Income
3 Tax Rate (using appropriate tax tables or rate schedules)
5 Gross Income Tax Liability and Additional Taxes
2 Tax Credits and Prepayments
5 Tax Due or Refund
?
Would
You
Believe
According to the 2019 Comprehensive Taxpayer Attitude Survey, 87 percent of American taxpayers
continue to say that it is “not at all” acceptable to cheat on taxes. Ninety-five percent agree that
it is every American’s civic duty to pay their fair share of taxes. However, about 30 percent of
taxpayers do not trust the IRS to fairly enforce the tax laws and to help taxpayers understand their
tax obligations. Trust is especially lower among the more educated and high-income taxpayers.
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1-7
1-3 The Tax Formula for Individuals
1-3a Gross Income
The calculation of taxable income begins with gross income. Gross income includes
all income, unless the tax law provides for a specific exclusion. The exclusions from
gross income are discussed in Chapter 2. Gross income from wages, interest, dividends,
pensions, Social Security, and capital gains and losses are reported directly on Form 1040
(interest and dividends and capital gains and losses may first flow through Schedules B
and D, respectively). All other forms of income are reported on Schedule 1.
1-3b deductions for Adjusted Gross Income
The first category of deductions includes the deductions for adjusted gross income. These
deductions include certain trade or business expenses, certain reimbursed employee
business expenses paid under an accountable plan, pre-2019 alimony payments, student
loan interest, the penalty on early withdrawal from savings, contributions to qualified
retirement plans, and certain educator expenses. Later chapters explain these deductions
in detail. Deductions for gross income are reported on Schedule 1.
1-3c Adjusted Gross Income (AGI)
The amount of adjusted gross income is sometimes referred to as the “magic line,” since it
is the basis for several deduction limitations, such as the limitation on medical expenses.
A taxpayer’s adjusted gross income is also used to determine limits on certain charitable
contributions and contributions to certain individual retirement accounts.
Talk Show Host Stephen Colbert’s Tax Tip: Be extremely wealthy … all kinds of breaks for guys like that!
Colbert Report, April 3, 2006
?
Would
You
Believe
1-3d Standard deduction or Itemized deductions
Itemized deductions are personal expense items that Congress has allowed as tax deductions. Included in this category are medical expenses, certain interest expenses, certain
taxes, charitable contributions, certain casualty losses, and a small number of miscellaneous items. Taxpayers should itemize their deductions only if the total amount exceeds
their standard deduction amount. The following table gives the standard deduction
amounts for 2020.
Filing Status
Single
Married, filing jointly
Married, filing separately
Head of household
Qualifying widow(er)
Standard Deduction
$ 12,400
24,800
12,400
18,650
24,800
Taxpayers who are 65 years of age or older or blind are entitled to an additional
standard deduction amount. For 2020, the additional standard deduction amount remains
unchanged at $1,650 for unmarried taxpayers and $1,300 for married taxpayers and
surviving spouses. Taxpayers who are both 65 years of age or older and blind are entitled to
two additional standard deduction amounts. See LO 1.8 for a complete discussion of the
basic and additional standard deduction amounts.
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1-8
Chapter 1
●
The Individual Income Tax Return
1-3e Exemptions
Prior to the TCJA, taxpayers received a deduction called an exemption for themselves,
spouse (if married filing jointly), and dependents. Exemptions were suspended by the TCJA
starting in 2018. The suspension is scheduled to expire at the end of 2025.
1-3f The Gross Tax Liability
A taxpayer’s gross tax liability is calculated by referencing the tax table or by using a tax rate
schedule. Tax credits and prepayments are subtracted from gross tax liability to calculate
the net tax payable to the government or the refund to the taxpayer.
TAX
BREAK
Taxpayers may provide information with their individual tax return authorizing the IRS to deposit
refunds directly into their bank account. Taxpayers with a balance due may also pay their tax bill
with a credit card, subject to a fee.
Self-Study Problem 1.3
See Appendix E for Solutions to Self-Study Problems
Bill is a single taxpayer, age 27. In 2020, his salary is $29,000 and he has
interest income of $1,500. In addition, he has deductions for adjusted gross income
of $2,200 and he has $6,500 of itemized deductions. Calculate the following
amounts:
1. Gross income
$
2. Adjusted gross income
$
3. Standard deduction or itemized deduction amount
$
4. Taxable income
$
Learning Objective 1.4
1-4 WhO muST fILE
Identify individuals
who must file
tax returns.
Several conditions must exist before a taxpayer is required to file a U.S. income tax return.
These conditions primarily relate to the amount of the taxpayer’s income and the taxpayer’s
filing status. Figures 1.1 through 1.3 summarize the filing requirements for taxpayers in
2020. If a taxpayer has any nontaxable income, the amount should be excluded in determining whether the taxpayer must file a return.
Taxpayers are also required to file a return if they have net earnings from selfemployment of $400 or more, or owe taxes such as Social Security taxes on unreported tips.
When a taxpayer is not required to file but is due a refund for overpayment of taxes, a return
must be filed to obtain the refund.
A taxpayer who is required to file a return should electronically file the return or mail the
return to the appropriate IRS Campus Processing Site listed on the IRS website (www.irs.gov).
Generally, individual returns are due on the fifteenth day of the fourth month of the year
following the close of the tax year. For a calendar year individual taxpayer, the return due
date is generally April 15. If the 15th falls on a weekend or holiday, returns are due the
next business day. However, there are two exceptions: (1) In Maine and Massachusetts,
Patriots’ Day is celebrated on the third Monday of April. When Patriots’ Day is on April 15
or the first business day after April 15, the tax filing deadline is deferred for an additional
day for residents of Maine and Massachusetts. (2) The second exception is a result of
Emancipation Day, a holiday observed in the District of Columbia. Emancipation Day is
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1-4 Who Must File
FIGURE 1.1
WhO muST fILE
Chart A—For Most People
IF your filing status is . . .
AND at the end of 2020
you were* . . .
THEN file a return if your gross
income** was at least . . .
Single
under 65
65 or older
$12,400
14,050
Married filing jointly***
under 65 (both spouses)
65 or older (one spouse)
65 or older (both spouses)
$24,800
26,100
27,400
Married filing separately
any age
Head of household
under 65
65 or older
$18,650
20,300
Qualifying widow(er)
under 65
65 or older
$24,800
26,100
$5
*If you were born on January 1, 1956, you are considered to be age 65 at the end of 2020. (If your spouse died in 2020 or
if you are preparing a return for someone who died in 2020, see Pub. 501.)
**Gross income means all income you received in the form of money, goods, property, and services that isn't exempt from
tax, including any income from sources outside the United States or from the sale of your main home (even if you can
exclude part or all of it). Don’t include any social security benefits unless (a) you are married filing a separate return and
you lived with your spouse at any time in 2020, or (b) one-half of your social security benefits plus your other gross
income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly). If (a) or (b) applies, see the
instructions for lines 6a and 6b to figure the taxable part of social security benefits you must include in gross income.
Gross income includes gains, but not losses, reported on Form 8949 or Schedule D. Gross income from a business means,
for example, the amount on Schedule C, line 7, or Schedule F, line 9. But, in figuring gross income, don’t reduce your
income by any losses, including any loss on Schedule C, line 7, or Schedule F, line 9.
***If you didn't live with your spouse at the end of 2020 (or on the date your spouse died) and your gross income was at
least $5, you must file a return regardless of your age.
FIGURE 1.2
Chart B—For Children and Other Dependents (See Who Qualifies as Your Dependent, later.)
If your parent (or someone else) can claim you as a dependent, use this chart to see if you must file a return.
In this chart, unearned income includes taxable interest, ordinary dividends, and capital gain distributions. It also includes
unemployment compensation, taxable social security benefits, pensions, annuities, and distributions of unearned income from a trust.
Earned income includes salaries, wages, tips, professional fees, and taxable scholarship and fellowship grants. Gross income is the
total of your unearned and earned income.
Single dependents. Were you either age 65 or older or blind?
No. You must file a return if any of the following apply.
• Your unearned income was over $1,100.
• Your earned income was over $12,400.
• Your gross income was more than the larger of—
• $1,100, or
• Your earned income (up to $12,050) plus $350.
Yes. You must file a return if any of the following apply.
• Your unearned income was over $2,750 ($4,400 if 65 or older and blind).
• Your earned income was over $14,050 ($15,700 if 65 or older and blind).
• Your gross income was more than the larger of—
•
•
$2,750 ($4,400 if 65 or older and blind), or
Your earned income (up to $12,050) plus $2,000 ($3,650 if 65 or older and blind).
Married dependents. Were you either age 65 or older or blind?
No. You must file a return if any of the following apply.
• Your unearned income was over $1,100.
• Your earned income was over $12,400.
• Your gross income was at least $5 and your spouse files a separate return and itemizes deductions.
• Your gross income was more than the larger of—
• $1,100, or
• Your earned income (up to $12,050) plus $350.
Yes. You must file a return if any of the following apply.
• Your unearned income was over $2,400 ($3,700 if 65 or older and blind).
• Your earned income was over $13,700 ($15,000 if 65 or older and blind).
• Your gross income was at least $5 and your spouse files a separate return and itemizes deductions.
• Your gross income was more than the larger of—
•
•
$2,400 ($3,700 if 65 or older and blind), or
Your earned income (up to $12,050) plus $1,650 ($2,950 if 65 or older and blind).
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1-9
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1-10
Chapter 1
●
The Individual Income Tax Return
FIGURE 1.3
Chart C—Other Situations When You Must File
You must file a return if any of the seven conditions below apply for 2020.
1.
You owe any special taxes, including any of the following.
a. Alternative minimum tax.
b. Additional tax on a qualified plan, including an individual retirement arrangement (IRA), or other tax-favored account.
But if you are filing a return only because you owe this tax, you can file Form 5329 by itself.
c. Household employment taxes. But if you are filing a return only because you owe this tax, you can file Schedule H by
itself.
d. Social security and Medicare tax on tips you didn't report to your employer or on wages you received from an employer
who didn't withhold these taxes.
e. Write-in taxes, including uncollected social security and Medicare or RRTA tax on tips you reported to your employer or
on group-term life insurance and additional taxes on health savings accounts. See the instructions for Schedule 2, line 8.
f. Recapture taxes. See the instructions for line 16 and Schedule 2, lines 7b and 8.
2.
You (or your spouse, if filing jointly) received health savings account, Archer MSA, or Medicare Advantage MSA
distributions.
3.
You had net earnings from self-employment of at least $400.
4.
You had wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from
employer social security and Medicare taxes.
5.
Advance payments of the premium tax credit were made for you, your spouse, or a dependent who enrolled in coverage
through the Marketplace. You or whoever enrolled you should have received Form(s) 1095-A showing the amount of the
advance payments.
6.
Advance payments of the health coverage tax credit were made for you, your spouse, or a dependent. You or whoever
enrolled you should have received Form(s) 1099-H showing the amount of the advance payments.
7.
You are required to include amounts in income under section 965 or you have a net tax liability under section 965 that you
are paying in installments under section 965(h) or deferred by making an election under section 965(i).
observed on April 16; however, when the 16th is a Saturday, the holiday is celebrated on
the prior Friday and when the 16th is Sunday, the holiday is celebrated on the following
Monday. In 2021, April 15 is a Thursday, Patriots’ Day is Monday the 19th and Emancipation
Day is Friday the 16th, thus the filing deadline will be Thursday, April 15th.
TAX
BREAK
Due to the COVID-19 pandemic, the 2019 individual income tax return due date was deferred until
July 15, 2020. Note however that the extended due date remained October 15.
A six-month extension of time to file may be requested on Form 4868 by the April due
date. Regardless of the original filing deadline, the extension is until October 15 unless that
day falls on a weekend or holiday in which case the extended due date is the following
business day. However, all tax due must be paid by the April due date or penalties and
interest will apply. Due to the COVID-19 pandemic, income tax returns and payments that
would have been due April 15, 2020, were extended to July 15, 2020.
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1-5 Filing Status and Tax Computation
Self-Study Problem 1.4
1-11
See Appendix E for Solutions to Self-Study Problems
Indicate by a check mark whether the following taxpayers are required to file a return
for 2020 in each of the following independent situations:
filing Required?
yes
No
1. Taxpayer (age 45) is single with income of $10,000.
2. Husband (age 67) and wife (age 64) have an income of
$25,000 and file a joint return.
3. Taxpayer is a college student with a salary from a part-time
job of $6,500. She is claimed as a dependent by her parents.
4. Taxpayer has net earnings from self-employment of $4,000.
5. Taxpayers are married with income of $15,900 and file a
joint return. They expect a refund of $600 from excess
withholding.
6. Taxpayer is a waiter and has unreported tips of $450.
7. Taxpayer is a qualifying widow (age 48) with a dependent
son (age 18) and income of $22,800.
1-5 fILING STATuS ANd TAx COmPuTATION
1.5 Learning Objective
An important step in calculating the amount of a taxpayer’s tax liability is the determination of the taxpayer’s correct filing status. The tax law has five different filing statuses:
single; married filing jointly; married filing separately; head of household; and qualifying widow(er). A tax table that must be used by most taxpayers, showing the tax liability
for all five statuses, is provided in Appendix A. The tax table must be used unless the
taxpayer’s taxable income is $100,000 or more or the taxpayer is using a special method
to calculate the tax liability. If taxpayers cannot use the tax table to determine their tax, a
tax rate schedule is used. Each filing status has a separate tax rate schedule as presented
in Appendix A.
Determine filing status
and understand the
calculation of
tax according
to filing status.
1-5a Single filing Status
A taxpayer who does not meet the definition of married, qualifying widow(er), or head
of household status must file as single. This status must be used by any taxpayer who is
unmarried or legally separated from his/her spouse by divorce or separate maintenance
decree as of December 31 of the tax year. State law governs whether a taxpayer is married,
divorced, or legally separated. If a taxpayer’s spouse dies during the year, the taxpayer’s
status is married for that year.
1-5b married filing Jointly
Taxpayers are considered married for tax purposes if they are married on December 31 of
the tax year. Also, in the year of one spouse’s death, the spouses are considered married
for the full year. In most situations, married taxpayers pay less tax by filing jointly than by
filing separately. Married taxpayers may file a joint return even if they did not live together
for the entire year.
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1-12
Chapter 1
●
The Individual Income Tax Return
TAX
BREAK
Head of Household is a filing status that can be difficult to understand but comes with some
substantial tax benefits if a taxpayer qualifies. Single parents should carefully analyze their
situation since Head of Household provides lower tax rates and higher standard deductions
than Single filing status. This benefit is not just limited to single parents. All unmarried taxpayers
that maintain a household and provide support for another person should consider whether they
qualify for this tax-advantageous status.
1-5c married filing Separately
Married taxpayers may file separate returns and should do so if it reduces their total tax
liability. They may file separately if one or both had income during the year. If separate
returns are filed, both taxpayers must compute their tax in the same manner. For example,
if one spouse itemizes deductions, the other spouse must also itemize deductions. Each
taxpayer reports his or her income, deductions, and credits and is responsible only for the
tax due on their return. If the taxpayers live in a community property state, they must follow
state law to determine community income and separate income. The community property
states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. See Chapter 2 for additional discussion regarding income and losses
from community property.
A legally married taxpayer may file as head of household (based on the general filing
status rules) if he or she qualifies as an abandoned spouse. A taxpayer qualifies as an
abandoned spouse only if all of the following requirements are met:
1. A separate return is filed,
2. The taxpayer paid more than half the cost (rent, utilities, etc.) to maintain his or her
home during the year,
3. The spouse did not live with the taxpayer at any time in the last 6 months of the year, and
4. For over 6 months during the year the home was the principal residence for a dependent child, stepchild, or adopted child. Under certain conditions, a foster child may
qualify as a dependent.
In certain circumstances, married couples may be able to reduce their total tax liability
by filing separately. For instance, since some itemized deductions, such as medical expenses
and casualty losses, are reduced by a percentage of adjusted gross income (discussed in
Chapter 5), a spouse with a casualty loss and low separate adjusted gross income may
benefit from filing separately.
1-5d head of household
If an unmarried taxpayer can meet special tests or if a married taxpayer qualifies as an abandoned spouse, they are allowed to file as head of household. Head of household tax rates
are lower than rates for single or married filing separately. A taxpayer qualifies for head of
household status if both of the following conditions exist:
1. The taxpayer was an unmarried or abandoned spouse as of December 31 of the tax
year, and
2. The taxpayer paid more than half of the cost of keeping a home that was the principal
place of residence of a dependent child or other qualifying dependent relative. An unrelated dependent or a dependent, such as a cousin, who is too distantly related, will not
qualify the taxpayer for head of household status. If the dependent is the taxpayer’s parent,
the parent need not live with the taxpayer. In all cases other than dependent parents, who
may maintain a separate residence, the qualifying dependent relative must actually live
in the same household as the taxpayer. A divorced parent who meets the above requirements, but has signed an IRS form or a qualifying legal agreement shifting the dependency
deduction to his or her ex-spouse, may still file using head of household status.
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1-5 Filing Status and Tax Computation
Divorcing couples may save significant taxes if one or both of the spouses qualify as an
“abandoned spouse” and can use the head of household filing status. The combination of head
of household filing status for one spouse with married filing separately filing status for the other
spouse is commonly seen in the year (or years) leading up to a divorce. In cases where each
spouse has custody of a child, the separated taxpayers may each claim head of household status.
TAX
BREAK
1-5e Qualifying Widow(er) with dependent Child
A taxpayer may continue to benefit from the joint return rates for 2 years after the death of
a spouse. To qualify to use the joint return rates, the widow(er) must pay over half the cost
of maintaining a household where a dependent child, stepchild, adopted child, or foster
child lives. After the 2-year period, these taxpayers often qualify for the head of household
filing status.
1-5f Tax Computation
For 2020, there are seven income tax brackets (10 percent, 12 percent, 22 percent, 24 percent,
32 percent, 35 percent, and 37 percent). Individuals with taxable income below $100,000 are
required to use the tax tables presented in Appendix A. Taxpayers with income equal to or
more than $100,000 use the tax rate schedules (also presented in Appendix A). An example
of the single tax rate schedule is presented below. Certain high-income taxpayers are subject
to additional taxes discussed in Chapter 6.
Single Tax Rate Schedule
If taxable income
is over–
But not
over–
The tax is:
0
$ 9,875
10% of the taxable income
9,875
40,125
$987.50 + 12% of the excess over $9,875
40,125
85,525
$4,617.50 + 22% of the excess over $40,125
85,525
163,300
$14,605.50 + 24% of the excess over $85,525
163,300
207,350
$33,271.50 + 32% of the excess over $163,300
207,350
518,400
$47,367.50 + 35% of the excess over $207,350
518,400
---------
$
$156,235 + 37% of the excess over $518,400
The tax rates applicable to net long-term capital gains currently range from 0 percent
to 31.8 percent depending on the taxpayer’s tax bracket and the kind of capital asset. The
calculation of the tax on capital gains is discussed in detail in Chapter 4, and the applicable
tax rates are discussed in this chapter.
The tax rates for qualifying dividends, discussed in detail in Chapter 2, range from 0
percent to 23.8 percent in 2020.
ExAmPLE
Carol, a single taxpayer, has adjusted gross income of $120,000 and
taxable income of $105,000 for 2020. Her tax is calculated using the 2020
tax rate schedule from Appendix A as follows:
$19,279.50 5 $14,605.50 1 [24% 3 ($105,000 2 $85,525)] ♦
ExAmPLE
Meg is a single taxpayer during 2020. Her taxable income for the year is
$27,530. Using the tax table in Appendix A, her gross tax liability for the
year is found to be $3,106. ♦
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-322
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1-13
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1-14
Chapter 1
●
The Individual Income Tax Return
TAX
BREAK
Taxpayers considering marriage may be able to save thousands of dollars by engaging in tax
planning prior to setting a wedding date. If the couple would pay less in taxes by filing as
married rather than as single (which will frequently happen if one spouse has low earnings for the
year), they may prefer a December wedding. They can take advantage of the rule that requires
taxpayers to file as married for the full year if they were married on the last day of the year.
On the other hand, if filing a joint return would cause the couple to pay more in taxes (which
frequently happens if both spouses have high incomes), they may prefer a January wedding.
Self-Study Problem 1.5
See Appendix E for Solutions to Self-Study Problems
Indicate the filing status (or statuses) in each of the following independent cases, using
this legend:
A – Single
B – Married, filing a joint return
C – Married, filing separate returns
d – Head of household
E – Qualifying widow(er)
Case
filing Status
1. The taxpayers are married on December 31 of the tax year.
2. The taxpayer is single, with a dependent child living in her home.
3. The taxpayer is unmarried and is living with his girlfriend.
4. The taxpayer is married and his spouse left midyear and has
disappeared. The taxpayer has no dependents.
5. The unmarried taxpayer supports her dependent mother, who
lives in her own home.
6. The taxpayer’s wife died last year. His 15-year-old dependent son
lives with him.
tIp
Learning Objective 1.6
Define qualifying
dependents.
In ProConnect, much of the input is controlled by the left-hand margin. Filing status is part
of Client Information under the General heading. By clicking on Filing Status, a dropdown
appears in the main window to allow the preparer to select the taxpayer’s filing status. For
married filing jointly and separately statuses, the Live With Spouse box should be checked
if it applies.
1-6 QuALIfyING dEPENdENTS
1-6a dependents
Prior to 2018, taxpayers were able to deduct approximately $4,000 each for themselves, their
spouse (if married filing jointly), and any dependents. The TCJA eliminated the personal and
dependency exemptions in lieu of a larger standard deduction; however, dependents remain
important for other reasons. For example, head of household filing status, the child tax
credit, and the earned income tax credit all require having a qualified dependent. Lastly, the
suspension of personal and dependency exemptions is scheduled to expire after 2025 which
means, exemptions may yet return. A dependent is an individual who meets the tests discussed on the following page to be considered either a qualifying child or a qualifying relative.
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1-15
1-6 Qualifying Dependents
The IRS started requiring the disclosure of Social Security numbers for each dependent claimed
by a taxpayer to stop dishonest taxpayers from claiming extra dependents or even claiming
pets. Before this change, listing phony dependents was one of the most common forms of tax
fraud. Reportedly, 7 million dependents disappeared from the tax rolls after Congress required
taxpayers to include dependents’ Social Security numbers on tax returns.
?
Would
You
Believe
1-6b Qualifying Child
For a child to be a dependent, he or she must meet the following tests:
1. Relationship Test
The child must be the taxpayer’s child, stepchild, or adopted child, or the taxpayer’s
brother or sister, half-brother or half-sister, or stepsibling, or a descendant of any of
these. Under certain circumstances, a foster child can also qualify. The taxpayer must
be older than the child unless the child is permanently disabled.
2. Domicile Test
The child must have the same principal place of abode as the taxpayer for more than half
of the taxable year. In satisfying this requirement, temporary absences from the household
due to special circumstances such as illness, education, and vacation are not considered.
3. Age Test
The child must be under age 19 or a full-time student under the age of 24. A child is
considered a full-time student if enrolled full-time for at least 5 months of the year.
Thus, a college senior graduating in May or June can qualify in the year of graduation.
4. Joint Return Test
The child must not file a joint return with his or her spouse. If neither the spouse nor
the child is required to file, but they file a return merely to claim a refund of tax, they
are not considered to have filed a return for purposes of this test.
5. Citizenship Test
The dependent must be a U.S. citizen, a resident of the United States, Canada, or
Mexico, or an alien child adopted by and living with a U.S. citizen.
6. Self-Support Test
A child who provides more than one-half of his or her own support cannot be claimed as a
dependent of someone else. Support includes expenditures for items such as food, lodging,
clothes, medical and dental care, and education. To calculate support, the taxpayer uses the
actual cost of the above items, except lodging. The value of lodging is calculated at its fair
rental value. Funds received by students as scholarships are excluded from the support test.
In the event that a child satisfies the requirements of dependency for more than one
taxpayer, the following tie-breaking rules apply:
●
●
●
If one of the individuals eligible to claim the child is a parent, that person will be
allowed to claim the dependent.
If both parents qualify (separate returns are filed), then the parent with whom the child
resides the longest during the year prevails. If the residence period is the same or is not
ascertainable, then the parent with the highest AGI (Adjusted Gross Income) prevails.
If no parents are involved, the taxpayer with the highest AGI prevails.
ExAmPLE Bill, age 12, lives in the same household with Irene, his mother, and
Darlene, his aunt. Bill qualifies as a dependent of both Irene and Darlene.
Since Irene is Bill’s mother, she has the right to claim Bill as a dependent.
The tie-breaking rules are not necessary if the taxpayer who can claim the
dependent does not claim the dependent. Hence, Darlene can claim Bill as
a dependent if Irene does not claim him. ♦
In the case of divorced or legally separated parents with children, the ability to claim
a qualifying child belongs to the parent with whom the child lived for more than 6 months
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1-16
Chapter 1
●
The Individual Income Tax Return
out of the year. The opportunity to claim the child as a dependent can be shifted to the
noncustodial parent if the custodial parent signs IRS Form 8332, and the form is attached to
the noncustodial parent’s tax return.
Figure 1.4 illustrates the interaction of the qualifying child dependency tests described
on the previous page.
1-6c Qualifying Relative
A person who is not a qualifying child can be a qualifying relative if the following 5-part
test is met. A child of a taxpayer who does not meet the tests to be a qualifying child can
still qualify as a dependent under the qualifying relative tests described below.
1. Relationship or Member of Household Test
The individual must either be a relative of the taxpayer or a member of the household.
The list of qualifying relatives is broad and includes parents, grandparents, children,
grandchildren, siblings, aunts and uncles by blood, nephews and nieces, “in-laws,” and
adopted children. Foster children may also qualify in certain circumstances. If the potential
dependent is a more distant relative, additional information is available at the IRS website
(www.irs.gov). For example, cousins are not considered relatives for this purpose.
In addition to the relatives listed, any person who lived in the taxpayer’s home as a
member of the household for the entire year meets the relationship test. A person is not
considered a member of the household if at any time during the year the relationship
between the taxpayer and the dependent was in violation of local law.
ExAmPLE
Scott provides all of the support for an unrelated family friend who lives with
him for the entire tax year. He also supports a cousin who lives in another
state. The family friend can qualify as Scott’s dependent, but the cousin cannot. The family friend meets the member of the household test. Even though
the cousin is not considered a relative, he could have been a dependent if he
met the member of the household part of the test. ♦
2. Gross Income Test
The individual cannot have gross income equal to or above the exemption amount
($4,300 in 2020). Although exemptions are no longer deductible, the exemption amount
will continue to be updated by the IRS. Gross income does not include any income
exempt from tax (for example, tax-exempt interest or exempt Social Security benefits).
3. Support Test
The dependent must receive over half of his or her support from the taxpayer or a group
of taxpayers (see multiple support agreement below). Unlike the gross income test, income
exempt from tax and earned by the potential dependent is considered for the support test.
4. Joint Return Test
The dependent must not file a joint return unless it is only to claim a refund of taxes.
5. Citizenship Test
The dependent must meet the citizenship test discussed above.
ExAmPLE
A taxpayer has a 26-year-old son with gross income less than the exemption
amount and receives more than half of his support from his parents. The son
fails the test to be a qualifying child based on his age, but passes the test to
be a dependent based on the qualifying relative rules. ♦
Figure 1.5 illustrates the qualifying relative tests described above.
As long as the dependency tests are met, a person who was born or died during the
year, such as a baby born before or on December 31, can be claimed as a dependent.
Taxpayers must provide a Social Security number for all dependents.
If a dependent is supported by two or more taxpayers, a multiple support agreement
may be filed. To file the agreement, the taxpayers (as a group) must provide over 50 percent
of the support of the dependent. Assuming that all other dependency tests are met, the
group may give the dependent to any member of the group who provided over 10 percent
of the dependent’s support.
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1-6 Qualifying Dependents
FIGURE 1.4
START
dEPENdENCy TESTS fLOW ChART fOR
QuALIfyING ChILd
Was the
relationship
test met?
No
Yes
Was the domicile
test met?
No
Yes
Is the child under
19 or a full-time
student under 24?
No
Yes
Was the
joint return
test met?
NO
DEPENDENCY
No
Yes
U.S. citizen or
resident of U.S.,
Mexico, Canada?
No
Yes
Was the support
test met?
No
Yes
DEPENDENCY
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1-17
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1-18
Chapter 1
●
The Individual Income Tax Return
FIGURE 1.5
START
dEPENdENCy TESTS fLOW ChART fOR
QuALIfyING RELATIVE
Was the relationship
or member of household test met?
No
Yes
Is gross income less than
the exemption amount No
($4,300 in 2020)?
Yes
Was the support
test met?
No
Yes
Was the joint
return test
met?
NO
DEPENDENCY
No
Yes
U.S. citizen or
resident of U.S.,
Mexico, Canada?
No
Yes
DEPENDENCY
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1-6 Qualifying Dependents
Spouse information is entered under Client Information and is just under Taxpayer
Information on the left-hand margin. Dependents are a category under General. Be sure
and input date of birth and other fields. Typically, the Child Tax Credit and the Earned
Income Credit should be set to When Applicable to permit the software to make the correct
determination based on input. New dependents can be added by clicking the [1] tab at
the top of the main window for Dependents.
1-19
tIp
1-6d Credits for dependents
Although deductions for personal exemptions are no longer permitted from 2018 through
2025, dependent status is important for claiming a number of individual tax credits such as
the child tax credit, the credit for other dependents, and the earned income tax credit. Many
of these tax credits are covered in Chapter 7; however, due to the relatively large number
of taxpayers that are eligible for the child tax credit and the credit for other dependents, an
overview is provided here.
A tax credit differs from a tax deduction. A tax deduction serves to lower the taxable
income of the taxpayer.
ExAmPLE
Emily’s adjusted gross income is $50,025. She is eligible for a $12,400
standard deduction. This lowers her taxable income to $37,625
($50,025 2 $12,400). If Emily is single, her 2020 tax liability is $4,318. ♦
A tax credit lowers the tax liability dollar for dollar. A credit is generally more advantageous
than a deduction.
ExAmPLE
Emily (from the previous example) is also eligible for a $500 tax credit.
Rather than reduce her taxable income, the tax credit reduces the tax itself to
$3,818 ($4,318 2 $500). ♦
In 2020, the child tax credit is $2,000 per child. To qualify for the credit, the child must
be a qualifying child under the age of 17 and have a Social Security number at the time the
tax return is filed. Additional requirements are covered in Chapter 7.
The credit for other dependents is $500 per dependent. An “other dependent” need not
be a child but must qualify as either a qualifying child or qualifying dependent. Additional
requirements are covered in Chapter 7.
ExAmPLE
Bruce and Demi Mehr have two children, Anna (age 12) and Clark (age 18).
Both Anna and Clark qualify as qualifying children under the dependent
rules. Assuming all other requirements are met, the Mehrs may claim a
$2,000 child tax credit for Anna and a $500 other dependent credit for
Clark (as he is not under age 17). ♦
ProConnect is designed to automatically compute the child tax credit and other dependent
credit based on the information input in the Dependent window. If no such credit is being
shown, it could be due to missing information (for example, birthdate) or the credits
were inadvertently suppressed in the Dependent window. The child tax credit and other
dependent credit can be overridden under Credits/EIC, Residential Energy, Oth Credits in
the left-hand margin but this is generally not a good idea.
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1-20
Chapter 1
●
The Individual Income Tax Return
Self-Study Problem 1.6
See Appendix E for Solutions to Self-Study Problems
Indicate in each of the following situations whether the taxpayer has a dependent in 2020.
yes
No
1. Betty and Bob, a married couple, had a new baby in
December 2020.
2. Charlie, age 25, supports his 26-year-old brother, who is not
a full-time student. His brother lives with Charlie all year.
His brother’s gross income is $4,500 from a part-time job.
3. Donna and her sister support their mother and provide
60 percent of her support. If Donna provides 25 percent of her
mother’s support and her sister signs a multiple support agreement,
can Donna claim the mother as a dependent?
4. Frank is single and supports his son and his son’s wife, both
of whom lived with Frank for the entire year. The son (age 20)
and his wife (age 19) file a joint return to get a refund,
reporting $2,500 ($2,000 earned by the son) of gross
income. Both the son and daughter-in-law are full-time students.
5. Gary is single and provides $5,000 toward his 19-year-old
daughter’s college expenses. The remainder of her support is
provided by a tax-exempt $9,500 tuition scholarship. The daughter
is a full-time student.
ILYA AKINSHIN/Shutterstock.com; Zhukov Oleg/Shutterstock.com.
6. Helen is 50 years old and supports her 72-year-old mother,
who is blind and has $5,000 of Social Security benefits that
are not taxable.
Would You
Sign This
Tax Return?
Your clients, Adam and Amy Accrual, have a 21-year-old daughter named April. April is single and
is a full-time student studying for her bachelor’s degree in accounting at California Poly Academy
(CPA) in Pismo Beach, California, where she lives with her roommates year-round. Last year, April
worked at a local bar and restaurant four nights a week and made $18,000, which she used
for tuition, fees, books, and living expenses. Her parents help April by sending her $300 each
month to help with her expenses at college. This is all of the support given to April by her parents.
When preparing Adam and Amy’s tax return, you note that they claim April as a dependent for
tax purposes. Adam is insistent that they can claim April because of the $300 per month support
and the fact that they “have claimed her since she was born.” He will not let you take April off his
return as a dependent. Would you sign the Paid Preparer’s declaration (see example above) on
this return? Why or why not?
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1-7 Economic Impact Payment and Recover y Rebate Credit
1-7 ECONOmIC ImPACT PAymENT ANd RECOVERy
REBATE CREdIT
The economic impact payment (EIP) and recovery rebate credit (RRC) are designed
to be integrated one-time actions in response to the economic impact of the
COVID-19 pandemic. The EIP is a direct payment to certain taxpayers authorized
by the CARES Act. The amount of the EIP starts at $1,200 ($2,400 for married filing
jointly) with an additional $500 for each qualifying child. Taxpayers that were claimed
as a dependent are not eligible for an EIP. The EIP phases out 5 percent of the taxpayer’s AGI that exceeds $150,000 for married filing jointly, $75,000 for single, and
$112,500 for head of household.
1-21
1.7 Learning Objective
Determine the tax
impact of the economic
impact payment and the
recovery rebate credit.
Example: Aisha is a head of household taxpayer with a 13-year-old qualifying child.
Her 2019 AGI was reported as $138,050. Aisha’s EIP before any phase
out would be $1,700 ($1,200 for herself plus $500 for the qualifying
child). However, her income exceeds the phase-out threshold by $25,550
($138,050 2 $112,500). The phase out is $1,278 ($25,550 3 5 percent)
leaving an EIP of $422 ($1,700 2 $1,278).
A qualifying child is a child that would have otherwise qualified for the child tax
credit (a dependent child under the age of 17 as of the time of filing a 2018 or 2019 tax
return).
Example: Tina and Than are married filing jointly taxpayers in 2018 with a child that
was 16 years of age at the end of 2018. Their 2018 income was below
the phase-out threshold. They had not yet filed a 2019 tax return and thus
received an EIP of $2,900 ($2,400 for married filing jointly plus $500 for
the qualifying child). Despite the child turning 17 in 2019 and thus being
ineligible for the additional $500, the EIP was based on 2018 information
and therefore will include a payment for the child.
The payment amount was based on either the taxpayers’ 2019 tax returns (if filed)
or 2018 (if filed). If no tax returns were filed, the IRS used Social Security, Veteran’s or
Railroad Retirement benefits to determine eligibility. Lastly, if no returns were filed and
no such benefits were received, the taxpayer could self-report their information to the IRS
to obtain an EIP. Because of the speed at which the payments were designed to be issued,
the actual amount of the EIP may not actually match the taxpayer’s situation at the time
of the payment. For example, if the taxpayer had filed taxes for 2018 but not 2019, and
had children born in 2019 or 2020, these children would not have been considered in the
EIP calculation.
The EIP is not considered gross income; however, it does interact with the RRC, but in
a very taxpayer favorable way. The RRC is a credit that is designed to account for situations
when the EIP was not representative of the taxpayer’s 2020 tax position. The RRC is a 2020
refundable tax credit much like the Earned Income Credit. The RRC is the same amount
as the EIP (e.g., $1,200 for a single taxpayer), and has the same phase-out limits. The way
in which the RRC and EIP interact, is that the EIP is considered an advanced refund of
the RRC. When the EIP and RRC are equal, they offset and there is no effect on the tax
liability of the taxpayer. When the EIP exceeds the RRC, the taxpayer is not required to pay
back any excess. If, on the other hand, the EIP is less than the RRC, the excess RRC may
be claimed as additional refundable credit.
Example: Helga, a single taxpayer receives a $1,200 EIP in 2020. At the time
of preparing her 2020 tax return, Helga calculates a $1,200 RRC. The
amounts are equal and offsetting and will not affect her tax payments or
tax refund.
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1-22
Chapter 1
●
The Individual Income Tax Return
Example: Georgia and Floyd, married filing jointly taxpayers with two children,
received an EIP of $3,400. By the end of 2020, one of the children had
reached age 17; thus, the RRC claimed on their 2020 tax return was
only $2,900. Although the EIP reduces the RRC, it does not do so below
zero and thus, the income tax refund or payment due for 2020 is not
affected.
Example: Florida and James are married taxpayers with one qualifying child in 2019
and received a $2,900 EIP in 2020. They adopted a child in 2020 and thus
finished the year with 2 qualifying children. Their RRC was $3,400. They
will reduce the RRC by $2,900 and claim the additional refundable credit of
$500 on their 2020 tax return.
Taxpayers that received an EIP and were not eligible (e.g., non-residents or an incarcerated
taxpayer) are required to return the EIP payment to the IRS.
Self-Study Problem 1.7
See Appendix E for Solutions to Self-Study Problems
What is the net effect of the EIP and RRC on each of the following taxpayers:
1. Mirka and Liam are married and file jointly with AGI of $97,000 in 2020. In 2020
they received an EIP of $2,900 based on their filing status and having a dependent
child that was age 14 at the end of 2019.
$
2. Phoebe was a dependent taxpayer in 2018 and had not filed a tax return. In
2020, she failed to request and did not receive an EIP, although she was no longer
a dependent and had AGI of $28,000 as a single taxpayer.
$
3. Mahima received a $1,200 EIP in 2020. Due to the birth of her son in 2020,
Mahima was classified as a head of household taxpayer with AGI of $47,000.
$
Learning Objective 1.8
1-8 ThE STANdARd dEduCTION
Calculate the correct
standard or itemized
deduction amount
for taxpayers.
The standard deduction was placed in the tax law to provide relief for taxpayers with few
itemized deductions. The amount of the standard deduction is subtracted from adjusted
gross income by taxpayers who do not itemize their deductions. If a taxpayer’s gross income
is less than the standard deduction amount, the taxpayer has no taxable income. The 2020
standard deduction amounts are presented below:
Filing Status
Single
Married, filing jointly
Married, filing separately
Head of household
Qualifying widow(er)
Standard Deduction
$ 12,400
24,800
12,400
18,650
24,800
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1-8 The Standard Deduction
1-8a Additional Amounts for Old Age and Blindness
Taxpayers who are 65 years of age or older or blind are entitled to an additional standard deduction amount. For 2020, the additional standard deduction amount remains
unchanged at $1,650 for unmarried taxpayers and $1,300 for married taxpayers and
qualifying widows or widowers. Taxpayers who are both at least 65 years old and blind
are entitled to two additional standard deduction amounts. The additional standard
deduction amounts are also available for the taxpayer’s spouse, but not for dependents.
An individual is considered blind for purposes of receiving an additional standard
deduction amount if:
1. Central visual acuity does not exceed 20/200 in the better eye with correcting lenses, or
2. Visual acuity is greater than 20/200 but is limited to a field of vision not greater than
20 degrees.
ExAmPLE
John is single and 70 years old in 2020. His standard deduction is $14,050
($12,400 plus an additional $1,650 for being 65 years of age or older). ♦
ExAmPLE
Bob and Mary are married in 2020 and file a joint return. Bob is age 68,
and Mary is 63 and meets the test for blindness. Their standard deduction
is $27,400 ($24,800 plus $1,300 for Bob being 65 years or older and
another $1,300 for Mary’s blindness). ♦
1-8b Individuals Not Eligible for the Standard deduction
The following taxpayers cannot use the standard deduction, but must itemize instead:
1. A married individual filing a separate return, whose spouse itemizes deductions
2. Most nonresident aliens
3. An individual filing a short-period tax return because of a change in the annual
accounting period
ExAmPLE
Ann and Ed are married individuals who file separate returns for 2020.
Ann itemizes her deductions on her return. Ed’s adjusted gross income is
$12,000, and he has itemized deductions of $900. Ed’s taxable income is
calculated as follows:
Adjusted gross income
Itemized deductions
Taxable income
$ 12,000
(900)
$ 11,100
Since Ann itemizes her deductions, Ed must also itemize deductions and is
not entitled to use the standard deduction amount. ♦
1-8c Special Limitations for dependents
The standard deduction is limited for the tax return of a dependent. The total standard deduction may not exceed the greater of $1,100 or the sum of $350 plus the dependent’s earned
income up to the basic standard deduction amount in total (e.g., $12,400 for single taxpayers),
plus any additional standard deduction amount for old age or blindness. The standard deduction amount for old age and blindness is only allowed when a dependent files a tax return.
It is not allowed to increase the standard deduction of the taxpayer claiming the dependent.
ExAmPLE
Penzer, who is 8 years old, earned $17,000 as a child model during 2020.
Penzer is claimed as a dependent by his parents on their tax return. Penzer
is required to file a tax return, and his taxable income will be $4,600
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1-23
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1-24
Chapter 1
●
The Individual Income Tax Return
($17,000 less $12,400, the standard deduction amount). If Penzer had
earned only $9,000, his standard deduction would be $9,350 [the greater
of $1,100 or $9,350 ($9,000 1 $350)], and he would not owe any tax or
be required to file a return. ♦
ExAmPLE
Geoffrey, who is 4 years old and claimed as a dependent on his parents’
tax return, earned $6,500 of interest income on a large bank account left to
him by his grandmother. He had no earned income. His standard deduction
is $1,100 (the greater of $1,100 or $350). His taxable income will be
$5,400 ($6,500 less $1,100, the standard deduction amount). Dependent
children may be taxed at trust income tax rates when their taxable income
is made up of unearned income, such as interest. The special “kiddie tax”
calculations are covered in Chapter 6. ♦
Self-Study Problem 1.8
See Appendix E for Solutions to Self-Study Problems
Indicate in each of the following independent situations the amount of the standard
deduction the taxpayers should claim on their 2020 income tax returns.
1. Adam is 45 years old, in good health, and single.
2. Bill and Betty are married and file a joint return. Bill is 66 years old, and
Betty is 60.
3. Charlie is 70, single, and blind.
4. Debbie qualifies for head of household filing status, is 35 years old, and
is in good health.
5. Elizabeth is 9 years old, and her only income is $3,600 of interest
on a savings account. She is claimed as a dependent on her parents’
tax return.
6. Frank and Frieda are married with two dependent children. They file a
joint return, are in good health, and both of them are under 65 years
of age.
Learning Objective 1.9
1-9 A BRIEf OVERVIEW Of CAPITAL GAINS ANd LOSSES
Compute basic capital
gains and losses.
When a taxpayer sells an asset, there is normally a gain or loss on the transaction. Depending
on the kind of asset sold, this gain or loss will have different tax consequences. Chapter 4 of
this textbook has detailed coverage of the effect of gains and losses on a taxpayer’s tax liability. Because of their importance to the understanding of the calculation of an individual’s
tax liability, a brief overview of gains and losses will be discussed here.
The amount of gain or loss realized by a taxpayer is determined by subtracting the
adjusted basis of the asset from the amount realized. Generally, the adjusted basis of an
asset is its cost less any depreciation (covered in Chapter 8) taken on the asset. The
amount realized is generally what the taxpayer receives from the sale (e.g., the sales
price less any cost of the sale). The formula for calculating the gain or loss can be stated
as follows:
Gain (or loss) realized 5 Amount realized 2 Adjusted basis
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1-9 A Brief Over view of Capital Gains and Losses
Most gains and losses realized are also recognized for tax purposes. Recognized gains
and losses are those that are included in the taxpayer’s taxable income. The exceptions to
this general tax recognition rule are discussed in Chapter 4.
ExAmPLE
Lisa purchased a rental house a few years ago for $100,000. Total
depreciation to date on the house is $25,000. In the current year she
sells the house for $155,000 and receives $147,000 after paying selling
expenses of $8,000. Her gain on the sale is $72,000, calculated as follows:
Amount realized ($155,000 2 $8,000)
Adjusted basis ($100,000 2 $25,000)
Gain realized
$ 147,000
(75,000)
$ 72,000
This gain realized will be recognized as a taxable gain. ♦
1-9a Capital Gains and Losses
Gains and losses can be either ordinary or capital. Ordinary gains and losses are treated for
tax purposes just like other items of income such as salaries and interest, and they are taxed
at ordinary rates. Capital gains and losses receive special tax treatment.
A capital gain or loss arises from the sale or exchange of a capital asset. In general,
a capital asset is any property (either personal or investment) held by a taxpayer, with
certain exceptions as listed in the tax law (see Chapter 4). Examples of capital assets held
by individual taxpayers include stocks, bonds, land, cars, boats, and other items held as
investments or for personal use. Typical assets that are not capital assets are inventory and
accounts receivable.
The tax rates on long-term (held more than 12 months) capital gains are summarized
as follows:
Income Level
2020 Long-term capital gains rate*
Married filing jointly
$0–$80,000
$80,001–$496,600
.$496,600
0%
15%
20%
Single
$0–$40,000
$40,001–$441,450
.$441,450
Head of household
$0–$53,600
$53,601–$469,050
.$469,050
Married filing separately
$0–$40,000
$40,001–$248,300
>$248,300
0%
15%
20%
0%
15%
20%
0%
15%
20%
*Special higher rates for “high-income” taxpayers are covered in Chapter 6.
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1-25
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1-26
Chapter 1
●
The Individual Income Tax Return
Gain from property held 12 months or less is deemed to be short-term capital gain and is
taxed at ordinary income rates. Capital gains from the sale of assets that have been depreciated,
or capital gains from “collectibles,” may be taxed at higher rates as discussed in Chapter 4.
ExAmPLE
In the current year, Chris, a single taxpayer, sells AT&T stock for $25,000. He
purchased the stock 5 years ago for $15,000, giving him an adjusted basis
of $15,000 and a long-term gain of $10,000. Chris’ taxable income without
the sale of the stock is $140,000, which puts him in the 24 percent ordinary tax
bracket. The tax due on the long-term capital gain would be $1,500 (15% 3
$10,000) instead of $2,400 (24% 3 $10,000) if the gain on the stock were
treated as ordinary income. ♦
When calculating capital gain or loss, the taxpayer must net all capital asset transactions
to determine the nature of the final gain or loss (see Chapter 4 for a discussion of this
calculation). If an individual taxpayer ends up with a net capital loss (short-term or longterm), up to $3,000 per year can be deducted against ordinary income. The net loss not used
in the current year may be carried forward and used to reduce taxable income in future
years (see Chapter 4 for a discussion of capital losses). Losses from capital assets held for
personal purposes, such as a nonbusiness auto or a personal residence, are not deductible,
even though gains on personal assets are taxable.
TAX
BREAK
Taxpayers may wish to postpone the sale of capital assets until the holding period is met to
qualify for the preferential long-term capital gains rate. Of course, there is always the risk that
postponing the sale of a capital asset such as stock may result in a loss if the price of the stock
decreases below its cost during volatile markets. The economic risks of a transaction should
always be considered along with the tax benefits.
ExAmPLE
TAX
BREAK
Amy purchased gold coins as an investment. She paid $50,000 for the
coins. This year she sells the coins to a dealer for $35,000. As a result, Amy
has a $15,000 capital loss. She may deduct $3,000 of the loss against her
other income this year. The remaining unused loss of $12,000 ($15,000 2
$3,000) is carried forward and may be deducted against other income
in future years. Of course, the carryover is subject to the $3,000 annual
limitation in future years. ♦
Volunteer Income Tax Assistance (VITA) Program
The Volunteer Income Tax Assistance (VITA) program offers free tax help to people who generally
make $55,000 or less, persons with disabilities, the elderly and limited English-speaking taxpayers
who need assistance in preparing their own tax returns. IRS-certified volunteers provide free
basic income tax return preparation with electronic filing to qualified individuals. VITA sites are
generally located at community and neighborhood centers, libraries, schools, shopping malls,
and other convenient locations across the country.
Many universities and colleges operate VITA sites in conjunction with their accounting
programs. This is a small but vital part of the VITA program run by the IRS. The majority of the
VITA sites are not run by schools, but rather by community groups, such as churches, senior
groups (AARP), military bases, etc. If a student has a chance to participate in a VITA program,
they should do so if at all possible. The experience provides valuable insight into preparing
tax returns for others. Please see the IRS website www.irs.gov to locate the nearest VITA site
and for more information.
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1-10 Tax and the Internet
Self-Study Problem 1.9
1-27
See Appendix E for Solutions to Self-Study Problems
Erin purchased stock in JKL Corporation several years ago for $8,750. In the current
year, she sold the same stock for $12,800. She paid a $200 sales commission to her
stockbroker.
1. What is Erin’s amount realized?
$
2. What is Erin’s adjusted basis?
$
3. What is Erin’s realized gain or loss?
$
4. What is Erin’s recognized gain or loss?
$
5. How is the gain or loss treated for tax purposes (if any)?
The IRS recommends considering the following when getting married:
●
●
●
●
●
Social Security numbers on the tax return need to match the Social Security
Administration’s (SSA) records. Be sure and report any name changes to the SSA.
Taxpayers may want to consider changing their withholding, especially if both
spouses work.
Marriage is likely to trigger a “change in circumstance” if a taxpayer is receiving
advance payments on the premium tax credit. The appropriate health insurance
marketplace should be notified.
Change of address with the U.S. Postal Service (online) and with the IRS (Form 8822).
Change in filing status to married filing jointly or separately should be considered.
TAX
BREAK
1-10 TAx ANd ThE INTERNET
1.10 Learning Objective
Taxpayers and tax practitioners can find a substantial amount of useful information on the
Internet. Government agencies, businesses, organizations, and groups (e.g., the IRS, AICPA,
and Cengage) maintain sites that contain information of interest to the public.
The information available on various websites is subject to rapid change. Discussed
below are some current Internet sites that are of interest to taxpayers. Taxpayers should be
aware that the locations and information provided on the Internet are subject to change by
the site organizer without notice.
Access and use various
Internet tax resources.
1-10a The IRS Website, www.irs.gov
One of the most useful websites containing tax information is the one maintained by the IRS.
The IRS site has a search function to assist users in locating information. A number of common tasks are available at the home page such as refund status or making a tax payment. The
Forms and Publications search function is particularly useful and allows the user to locate
and download almost any tax form, instructions, or publication available from the IRS. A Help
function is available to aid users of the IRS website. Online and telephone assistance from
the IRS is provided for users who have questions or want to communicate with the IRS. The
IRS also has a YouTube channel, a podcast, a Twitter account, and a Linkedin, Instagram, and
Facebook page. The YouTube channel has numerous educational videos covering a number of
tax-related topics, including how to check on a refund and how to file a tax return extension.
The IRS offers various news feeds on Twitter, including @IRSnews, which are good sources of
tax information. The IRS also offers IRS2GO—a mobile phone application.
A 2020 screenshot of the IRS website (www.irs.gov) is presented in Figure 1.6.
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1-28
Chapter 1
●
IRS WEBSITE
Source: Internal Revenue Service
FIGURE 1.6
The Individual Income Tax Return
1-10b Intuit’s ProConnect Tax Online
Intuit offers a line of tax preparation products such as ProConnect Tax, Lacerte, and the
well-known Turbo Tax. Many of the Intuit products have training and support available
online at no charge. You can find ProConnect help at https://proconnect.intuit.com/
community/support/.
?
Would
You
Believe
The IRS issues warnings to taxpayers each year about identity theft scams via e-mail known as
“phishing” scams. The e-mails look official and may even have a link to a bogus website that
looks almost identical to www.irs.gov (and may even mention USA.gov or IRS.gov). The fake
e-mails may also appear to have been sent by the IRS Taxpayer Advocate’s Office. Taxpayers
who get these messages should not respond to the e-mail or click on the links. Although the IRS
maintains Twitter and Facebook accounts, the IRS does not initiate contact with taxpayers by
e-mail, texting, or any social media.
Self-Study Problem 1.10
See Appendix E for Solutions to Self-Study Problems
Indicate whether the following statements are true or false by circling the appropriate
letter.
t
F
1. Taxpayers can download tax forms and IRS publications from the IRS
website.
t
F
2. A help function is available to aid users of the IRS website.
t
F
3. The IRS has a mobile phone app.
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1-11 Electronic Filing (E-Filing)
1-29
1-11 ELECTRONIC fILING (E-fILING)
1.11 Learning Objective
Electronic filing (e-filing) is the process of transmitting federal income tax return information to the IRS Service Center using a device with Internet access. For the taxpayer,
electronic filing offers faster processing and generally a faster refund. The fastest refund
can be obtained through a direct deposit to the taxpayer’s bank account (however, the
taxpayer can also choose to be paid by check). IRS statistics show an error rate of less
than 1 percent on electronically filed returns, compared with more than 20 percent on
paper returns.
Two methods of e-filing of individual income tax returns are available with the IRS.
The first e-filing method is using an Internet-connected device and tax preparation
software such as Intuit’s ProConnect Tax Online, which is included as part of this
textbook. Individual taxpayers may transmit their returns from their homes, workplaces,
libraries, retail outlets, or, in some limited situations, a mobile phone app. The IRS website
contains detailed information on this process as the IRS is constantly working to make
e-filing more user-friendly and widely available. The IRS provides free tax preparation
and e-filing software to individuals with income below certain thresholds (see www.irs
.gov/freefile). Individuals with higher income may still e-file free, using IRS fill-in forms
(see www.freefilefillableforms.com). The fillable forms program performs calculations
but will not provide the tax preparation guidance that standard tax software programs
provide.
The second e-filing option is to use the services of a tax professional, including certified
public accountants, tax attorneys, IRS-enrolled agents, and tax preparation businesses
qualifying for the IRS tax professional e-filing program.
Electronic filing represents a significant growth area in computerized tax services.
More than 90 percent of all individual taxpayers now e-file. Mandatory electronic
filing is currently in the process of being phased in for the professional tax return
preparation industry. In the future, electronic filing will likely be required for most
tax returns filed.
Describe the basics
of electronic filing
(e-filing).
Self-Study Problem 1.11
See Appendix E for Solutions to Self-Study Problems
Indicate whether the following statements are true or false by circling the appropriate letter.
t
F
1. Compared to paper returns, electronic filings significantly reduce the error
rate for tax returns filed.
t
F
2. Individuals may not use electronic filing for their own personal tax returns,
but must engage a tax professional if they wish to e-file.
t
F
3. Taxpayers who e-file generally receive faster refunds.
t
F
4. Taxpayers who e-file can only request their refund in the form of a check.
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1-30
Chapter 1
●
The Individual Income Tax Return
Key ter ms
individual, 1-3
Form 1040, 1-3
corporation, 1-5
partnership, 1-5
tax formula for individuals, 1-6
gross income, 1-7
adjusted gross income, 1-7
standard deductions, 1-7
itemized deductions, 1-7
exemptions, 1-8
single filing status, 1-11
married filing jointly, 1-11
married filing separately, 1-12
abandoned spouse, 1-12
head of household, 1-12
qualifying widow(er), 1-13
dependent, 1-14
qualifying child, 1-15
qualifying relative, 1-16
tax deduction, 1-19
tax credit, 1-19
economic impact payment (EIP), 1-21
recovery rebate credit (RRC), 1-21
adjusted basis, 1-24
amount realized, 1-24
ordinary gains and losses, 1-25
capital gains and losses, 1-25
capital assets, 1-25
e-filing, 1-29
Key pOINts
Learning Objectives
Key points
LO 1.1:
●
Explain the history and
objectives of U.S. tax law.
●
●
●
●
LO 1.2:
●
Describe the different entities
subject to tax and reporting
requirements.
●
●
●
LO 1.3:
●
Apply the tax formula
for individuals.
●
●
●
LO 1.4:
●
Identify individuals who must
file tax returns.
●
The income tax was established on March 1, 1913 by the Sixteenth Amendment
to the U.S. Constitution.
In addition to raising money to run the government’s programs, the income tax is
used as a tool for enacting economic and social policies.
Examples of economic tax provisions are the limited allowance for expensing
capital expenditures and bonus depreciation provisions. The child and dependent
care credit, earned income credit, and the charitable contributions deduction are
examples of social tax provisions.
The Tax Cuts and Jobs Act (TCJA) of 2017 has a number of significant individual
tax provisions that expire in 2025.
A number of temporary tax provisions were enacted in 2020 to assist taxpayers
affected by the COVID-19 pandemic.
Individual taxpayers file Form 1040 or 1040-SR (if age 65 or older) and any
supplemental schedules required.
Corporations must report income annually on Form 1120 and pay taxes at a flat
rate of 21 percent.
An S corporation generally does not pay regular corporate income taxes;
instead, the corporation’s income or loss passes through to its shareholders and is
included in their individual tax returns. S corporations file on Form 1120S.
A partnership files Form 1065 to report the amount of partnership income or loss and
to allocate the items of income, loss, deduction, and credit to the partners. Generally,
all income or loss of a partnership is included in the tax returns of the partners.
AGI (adjusted gross income) is gross income less deductions for adjusted gross income.
AGI less the larger of itemized deductions or the standard deduction and less the
qualified business income deduction equals taxable income.
Appropriate tax tables or rate schedules are applied to taxable income to
calculate the gross tax liability.
The gross income tax liability plus additional taxes less credits and prepayments
equals the tax due or refund.
Conditions relating to the amount of the taxpayer’s income must exist before a
taxpayer is required to file a U.S. income tax return.
Taxpayers are also required to file a return if they have net earnings from selfemployment of $400 or more, or owe taxes such as Social Security taxes on
unreported tips.
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Key Points
LO 1.5:
Determine filing status and
understand the calculation of
tax according to filing status.
LO 1.6:
Define qualifying dependents.
●
●
●
●
●
LO 1.7:
Determine the tax impact of the
economic impact payment and
the recovery rebate credit.
LO 1.8:
Calculate the correct standard
or itemized deduction amount
for taxpayers.
●
●
●
●
●
●
LO 1.9:
●
Compute basic capital gains
and losses.
●
●
●
●
●
●
●
●
LO 1.10:
●
Access and use various Internet
tax resources.
●
LO 1.11:
●
Describe the basics of electronic
filing (e-filing).
●
1-31
There are five filing statuses: single; married filing jointly; married filing
separately; head of household; and qualifying widow(er).
Tax is calculated using the appropriate tax table or tax rate schedule for the
taxpayer’s filing status.
Personal exemptions were suspended by the TCJA for tax years 2018–2025.
Dependents are still important for determining filing status and certain credits.
A dependent is an individual who is either a qualifying child or qualifying
relative.
Taxpayers with income below certain thresholds were eligible for an economic impact
payment (EIP) of $1,200 per taxpayer and $500 for each qualifying dependent.
The EIP is an advanced refund of the recovery rebate credit (RRC) of an equal
amount for the tax year 2020 only.
For most taxpayers, the EIP and the RRC will be equal and offsetting amounts.
The standard deduction was placed in the tax law to provide relief for taxpayers
with few itemized deductions.
For 2020, the standard deduction amounts are: Single $12,400; Married,
filing jointly $24,800; Married, filing separately $12,400; Head of household
$18,650; Qualifying widow(er) $24,800.
Taxpayers who are 65 years of age or older or blind are entitled to additional
standard deduction amounts of $1,650 for unmarried taxpayers and $1,300 for
married taxpayers and surviving spouses in 2020.
The amount of gain or loss realized by a taxpayer is determined by subtracting
the adjusted basis of the asset from the amount realized.
Gains and losses can be either ordinary or capital.
Ordinary gains and losses are treated for tax purposes like other items such as
salary and interest.
Capital gains and losses result from the sale or exchange of capital assets.
Common capital assets held by individual taxpayers include stocks, bonds, land,
cars, boats, and other items held as investments. Typical assets that are not
capital are inventory and accounts receivable.
Gain from property held 12 months or less is deemed to be short-term capital
gain and is taxed at ordinary income tax rates.
Gain from property held more than 12 months is deemed to be long-term capital
gain and is taxed at preferential income tax rates.
The long-term capital gain rates for 2020 vary between 0, 15, and 20 percent,
depending on the taxpayer’s income.
If an individual taxpayer ends up with a net capital loss (short-term or long-term),
up to $3,000 per year can be deducted against ordinary income. Any excess
capital loss is carried forward to subsequent tax years. Losses from personal-use
assets are not deductible.
Taxpayers and tax practitioners can find a substantial amount of useful
information on the Internet.
Useful websites containing tax information include the IRS (www.irs.gov) and
the Intuit websites.
Electronic filing (e-filing) is the process of transmitting federal income tax return
information to the IRS Service Center using a device with Internet access.
Electronic filing offers a faster refund through a direct deposit to the taxpayer’s
bank account or the taxpayer can request the refund be sent by check.
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1-32
Chapter 1
●
The Individual Income Tax Return
QUestIONs and prOBLems
GrOUp 1:
muLTIPLE ChOICE QuESTIONS
LO 1.1
LO 1.1
LO 1.2
LO 1.2
LO 1.3
LO 1.3
LO 1.3
LO 1.4
1. Which of the following recent tax changes is not scheduled to expire after 2025?
a. Suspension of personal exemptions
b. General lowering of individual tax rates
c. Restrictions on the deduction of casualty and theft losses
d. Reduction of corporate tax rates to 21 percent
2. Which of the following tax forms are used by individuals in 2020?
a. 1040A
b. 1040-EZ
c. 1040-SR
d. 1120
3. Typical corporate income is reported on:
a. Form 1040
b. Form 1120
c. Form 1040X
d. Form 1065
4. On which of these would capital gain income be reported?
a. Schedule 1
b. Schedule 2
c. Schedule 3
d. Form 1040
5. Which of the following is a deduction for adjusted gross income in 2020?
a. Personal casualty losses
b. Medical expenses
c. Student loan interest
d. Mortgage interest
e. None of the above
6. All of the following are itemized deductions in 2020 except:
a. Charitable contributions
b. Deductible IRA contributions
c. State and local taxes
d. Medical expenses
e. All of the above are itemized deductions
7. Ramon, a single taxpayer with no dependents, has adjusted gross income for 2020 of
$98,000 and his itemized deductions total $9,000. What taxable income will Ramon
show in 2020?
a. $74,950
b. $85,800
c. $79,000
d. $85,600
e. $89,000
8. Ben is a single taxpayer with no dependents and is 32 years old. What is the minimum
amount of income that he must have to be required to file a tax return for 2020?
a. $4,200
b. $12,400
c. $12,000
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Questions and Problems
d. $12,200
e. None of the above
9. Joan, who was divorced in 2020, had filed a joint tax return with her husband in 2019.
During 2020, she did not remarry and continued to maintain her home in which her five
dependent children lived. In the preparation of her tax return for 2020, Joan should file as:
a. A single individual
b. A qualifying widow(er)
c. Head of household
d. Married, filing separately
e. None of the above
LO 1.5
LO 1.5
11. Margaret and her sister support their mother and together provide 85 percent of their
mother’s support. If Margaret provides 40 percent of her mother’s support:
a. Her sister is the only one who can claim their mother as a dependent.
b. Neither Margaret nor her sister may claim their mother as a dependent.
c. Both Margaret and her sister may claim their mother as a dependent.
d. Margaret and her sister may split the dependency exemption.
e. Margaret may claim her mother as a dependent if her sister agrees in a multiple
support agreement.
LO 1.6
LO 1.6
LO 1.6
LO 1.6
10. Glenda, a single taxpayer from Kansas, paid for more than one-half of the support for
her mother, Dorothy. Dorothy did not live with Glenda in Kansas, but rather has lived
in a nursing home in an adjacent state since Dorothy’s husband died three years ago.
Glenda’s filing status should be:
a. Single
b. Married filing separately
c. Qualifying widower
d. Head of household
e. Parental dependent
12. Kardi, age 65, and Kanye, age 62, are married with a 23-year-old daughter who lives
in their home. They provide over half of their daughter’s support, and their daughter
earned $4,600 this year from a part-time job. Their daughter is not a
full-time student. The daughter can/cannot be claimed as a dependent because:
a. She can be claimed because she lives in their household for 12 months.
b. She can be claimed because she is a qualifying child.
c. She can be claimed because she is a qualifying relative.
d. She cannot be claimed because she fails the gross income test.
13. Yasmine and her spouse Carlos, who file married filing jointly, provide all the support
for their 16-year-old son, Miguel. If Miguel qualifies as a qualifying child under the
dependent rules, Yasmine and Carlos will be able to claim
a. $0
b. $500
c. $1,000
d. $2,000
e. $2,500
14. Lakota and Dominique file married filing jointly and have a 13-year-old daughter.
They also provide 25 percent of the support for Lakota’s 82-year-old mother, who
lives in a nursing home nearby. The amount of the combined child tax credit and
other dependent credit for Lakota and Dominique is:
a. $0
b. $1,000
c. $1,500
d. $2,000
e. $2,500
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1-33
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1-34
Chapter 1
LO 1.7
LO 1.7
LO 1.8
LO 1.8
LO 1.8
LO 1.9
LO 1.9
LO 1.9
●
The Individual Income Tax Return
15. Which of the following taxpayers is not eligible for an economic impact payment in
2020?
a. Savannah, a married taxpayer with no children, and has AGI of $75,000 in 2020
b. Blake, a single taxpayer with no income in 2020, and who was incarcerated
c. Kaylee, a 24-year old single individual (not a dependent) who did not file a tax
return in either 2018 or 2019 as her income was below the filing threshold
d. Ava, a married taxpayer that had a child in 2020. Her joint AGI in 2020 was
$76,000.
16. As a married couple, Yihong and Kaylee’s EIP was $2,400. In 2020, they computed
their recovery rebate credit as $2,900 due to the birth of a child in 2020. The 2020 net
impact of the EIP and RRC will be to:
a. increase their income
b. decrease their tax liability by $500
c. increase their tax liability by $500
d. have no impact on their tax liability
17. Morgan is 65 years old and single. He supports his father, who is 90 years old, blind,
and has no income. What is Morgan’s standard deduction?
a. $12,400
b. $14,050
c. $20,300
d. $18,650
e. $20,000
18. Taxpayers who are 65 or older get the benefit of:
a. An additional exemption
b. An additional amount added to their standard deduction
c. An additional amount added to their itemized deductions
d. None of the above
19. Taxpayers who are blind get the benefit of:
a. An additional exemption
b. An additional amount added to their standard deduction
c. An additional amount added to their itemized deductions
d. None of the above
20. Which of the following is not a capital asset to an individual taxpayer?
a. Stocks
b. A 48-foot sailboat
c. Raw land held as an investment
d. Inventory in the taxpayer’s business
e. All of the above are capital assets
21. Joyce purchased General Electric stock 4 years ago for $10,000. In the current year,
she sells the stock for $25,000. What is Joyce’s gain or loss?
a. $15,000 long-term gain
b. $15,000 short-term gain
c. $15,000 ordinary loss
d. $15,000 extraordinary gain
e. No gain or loss is recognized on this transaction
22. Alex purchased a rental house 4 years ago for $270,000. Her depreciation at the time
of the sale is $40,000. Due to a decrease in real estate prices, she sells the house for
only $240,000 in 2020. What is her gain or loss for tax purposes?
a. $0
b. $10,000 loss
c. $10,000 gain
d. $35,000 loss
e. $25,000 gain
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Questions and Problems
LO 1.9
LO 1.10
LO 1.10
LO 1.11
23. Dorit, a single taxpayer, has a long-term capital loss of $7,000 on the sale of bonds in
2020 and no other capital gains or losses. Her taxable income without this transaction
is $43,000. What is her taxable income considering this capital loss?
a. $40,000
b. $36,000
c. $43,000
d. $55,000
e. Some other amount
24. Access the Internet and go to www.irs.gov and select “Search Forms & Instructions.”
Enter “4868” into the search box. What is Line 5 of the Form 4868?
a. Total payments
b. Balance due
c. Your name
d. Estimate of total tax liability
e. Your social security number
25. Access the Internet and go to www.irs.gov and select “News” in the upper right hand
corner (on mobile devices, select “Menu” in the upper right hand corner and select
“News”). Select “IRS Guidance”(on mobile devices, hit the plus on “more News,” then
scroll down until you see “IRS Guidance”) and then select “IRS Guidance in Plain
English.” Which of the following is a public pronouncement that has only immediate
or short-term value?
a. Private letter ruling
b. Revenue ruling
c. Revenue procedure
d. Notice
e. Announcement
26. Electronically filed tax returns:
a. May not be transmitted from a taxpayer’s home computer
b. Constitute more than 90 percent of the returns filed with the IRS
c. Have error rates similar to paper returns
d. Offer larger refunds than paper returns
GrOUp 2:
PROBLEmS
LO 1.1
1. List three major purposes the tax system is meant to serve:
a.
b.
c.
LO 1.3
2. Rahul and Ruby are married taxpayers. They are both under age 65 and in good
health. For 2020 they have a total of $42,000 in wages and $300 in interest income.
Rahul and Ruby’s deductions for adjusted gross income amount to $6,000 and their
itemized deductions equal $18,700. They have two children, ages 32 and 28, that are
married and provide support for themselves.
a. What is the amount of Rahul and Ruby’s adjusted gross income?
$
b. What is the amount of their itemized deductions or standard deduction?
$
c. What is their taxable income?
$
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1-35
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1-36
Chapter 1
LO 1.3
●
The Individual Income Tax Return
3. Xialu is a single taxpayer who is under age 65 and in good health. For 2020, she has a
salary of $25,000 and itemized deductions of $7,000. Leslie allows her mother to live
with her during the winter months (3–4 months per year), but her mother provides
all of her own support otherwise.
a. How much is Leslie’s adjusted gross income?
$
b. What amount of itemized or standard deduction(s) should she claim?
$
c. What is the amount of Leslie’s taxable income?
$
LO 1.3
LO 1.9
4. In 2020, Manon earns wages of $54,000. She also has dividend income of $2,800.
Manon is single and has no dependents. During the year, Manon sold silver coins
held as an investment for a $7,000 loss. Calculate the following amounts for Manon:
a. Adjusted gross income
$
b. Standard deduction
$
c. Taxable income
$
LO 1.3
LO 1.5
LO 1.8
5. Diego, age 28, married Dolores, age 27, in 2020. Their salaries for the year
amounted to $48,000. They had dividend income of $2,500. Diego and Dolores’ deductions for adjusted gross income amounted to $3,000, their itemized deductions
were $16,000, and they have no dependents.
a. What is the amount of their adjusted gross income?
$
b. What is the amount of their itemized deductions or standard deduction?
$
c. What is the amount of their taxable income?
$
d. What is their tax liability for 2020?
$
LO 1.3
LO 1.5
LO 1.8
6. Marco and Tatiana are married and file separate returns for 2020. Tatiana itemizes her
deductions on her return. Marco’s adjusted gross income was $18,000, his itemized
deductions were $2,400. Neither have any dependents. Calculate Marco’s income tax
liability assuming the couple does not live in a community property state.
$
LO 1.3
LO 1.5
LO 1.8
7. Alicia, age 27, is a single, full-time college student. She earns $13,200 from a parttime job and has taxable interest income of $1,450. Her itemized deductions are $845.
Calculate Alicia’s taxable income for 2020. (Please note: Chapter 6 will cover the computation of tax credits for dependent college students under age 24.)
$
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Questions and Problems
LO 1.3
LO 1.5
LO 1.8
8. Jonathan is a 35-year-old single taxpayer with adjusted gross income in 2020
of $47,000. He uses the standard deduction and has no dependents.
a. Calculate Jonathan’s taxable income. Please show your work.
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������������������������������������������������������������������������
b. When you calculate Jonathan’s tax liability are you required to use the tax tables or
the tax rate schedules, or does it matter?
������������������������������������������������������������������������
c. What is Jonathan’s tax liability?
������������������������������������������������������������������������
LO 1.3
LO 1.5
LO 1.8
9. Brock, age 50, and Erin, age 49, are married with three dependent children. They file
a joint return for 2020. Their income from salaries totals $50,000, and they received
$8,000 in taxable interest, $5,000 in royalties, and $3,000 in other ordinary income.
Brock and Erin’s deductions for adjusted gross income amount to $2,500, and they
have itemized deductions totaling $19,250. Calculate the following amounts:
a. Gross income
$
b. Adjusted gross income
$
c. Itemized deduction or standard deduction amount
$
d. Taxable income
$
e. Income tax liability (Do not consider the alternative minimum tax covered in
Chapter 6 or any credits.)
$
LO
LO
LO
LO
10. Jackson, age 35, and Peggy, age 34, are married and file a joint income tax return
for 2020. Their salaries for the year total $85,000 and they have dividend income of
$4,000. They have no deductions for adjusted gross income. Their itemized deductions
are $24,900. Jackson and Peggy do not have any dependents.
a. What is the amount of their adjusted gross income?
1.3
1.5
1.6
1.8
$
b. What is their deduction for personal exemptions?
$
c. What is the amount of their taxable income?
$
LO 1.3
LO 1.5
LO 1.8
11. Wanda is a single 50-year-old taxpayer with no dependents. Her only income is $41,000
of wages. Calculate her taxable income and her tax liability. Please show your work.
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1-38
Chapter 1
LO 1.4
LO 1.4
●
The Individual Income Tax Return
12. Nicoula is a server at a La Jolla restaurant. Nicoula received $1,200 in unreported
tips during 2020 and owes Social Security and Medicare taxes on these tips. Her
total income for the year, including the tips, is $4,300. Is Nicoula required to file an
income tax return for 2020? Why or why not?
13. For each of the following situations (none of the taxpayers claim dependents), indicate
whether the taxpayer(s) is (are) required to file a tax return for 2020. Explain your answer.
a. Helen is a single taxpayer with interest income in 2020 of $8,750.
b. Joan is a single college student who is claimed as a dependent by her parents. She
earned $1,550 from a part-time job and has $1,150 in interest income.
c. Leslie, age 64, and Mark, age 66, are married and file a joint return. They received
$17,800 in interest income from a savings account.
d. Ray, age 60, and Jean, age 57, are married and file a joint tax return. Their only
income is $14,700 in interest income.
e. Harry, a 19-year-old single taxpayer, had net earnings from self-employment of $1,500.
LO 1.5
LO 1.5
14. Determine from the tax table in Appendix A the amount of the income tax for each of
the following taxpayers for 2020:
Taxpayer(s)
Filing Status
Allen
Boyd
Caldwell
Dell
Evans
Single
MFS
MFJ
H of H
Single
Taxable Income
Income Tax
$21,000
24,545
35,784
27,450
44,999
$��������������
$��������������
$��������������
$��������������
$��������������
15. For each of the following cases, indicate the filing status for the taxpayer(s) for 2020
using the following legend:
A—Single
D—Head of household
B—Married filing a joint return
E—Qualifying widow(er)
C—Married filing separate returns
Case
Filing Status
a. Linda is single and she supports her mother (who has no
income), including paying all the costs of her housing in
an apartment across town.
b. Frank is single and he has a dependent child living in
his home.
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Questions and Problems
1-39
c. Arthur is single and he supports his 30-year-old brother,
who lives in his own home.
d. Leslie’s final decree of divorce was granted on June 18,
2020. She has no dependents.
e. Tom and Carry were married on December 31, 2020.
LO 1.5
16. Melissa and Whitney are married taxpayers with taxable income of $106,000.
a. When you calculate their tax liability, are you required to use the tax tables or the
tax rate schedules, or does it matter?
b. What is their 2020 tax liability?
LO 1.5
17. Jessica and Carl were married on July 1, 2020. What are their options for filing status
for their 2020 taxes?
LO 1.5
18. Maggie is single and supports her 85-year-old parents who have no income and live
in a home rented for them by Maggie. What is Maggie’s filing status and why?
LO 1.5
19. List each alternative filing status available to unmarried individual taxpayers and the
circumstances under which the alternatives can be used.
LO 1.5
LO 1.6
LO 1.6
20. Marquez is single and supports his 30-year-old son who has income of $2,000 and
lives in his own apartment.
a. Can Marquez claim his son as a dependent?
b. Can Marquez claim head of household filing status? Why or why not?
21. In each of the following situations, determine whether the taxpayer(s) has/have a
dependent and if so, the total amount of child tax credit and other dependent credit
(assuming no limitations apply).
Dependent? Total Child and Other
Dependent Credit
(Yes/No)
a. Donna, a 20-year-old single taxpayer, supports her
mother, who lives in her own home. Her mother has
income of $1,350.
b. William, age 43, and Mary, age 45, are married and support
William’s 19-year-old sister, who is not a student. The
sister’s income from a part-time job is $4,300.
c. Devi was divorced in 2019 and receives child support of
$250 per month from her ex-husband for the support of
their 8-year-old son, John, who lives with her. Devi is 45
and provides more than half of her son’s support.
d. Wendell, an 89-year-old single taxpayer, supports his son,
who is 67 years old, lives with him, and earns no income.
e. Wilma, age 65, and Morris, age 66, are married. They
file a joint return.
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1-40
Chapter 1
●
The Individual Income Tax Return
LO 1.6
22. What is the total dollar amount of personal and dependency exemptions which a
married couple with two children (ages 11 and 14, both of which are qualified children)
and $80,000 of adjusted gross income would deduct in 2020? What is the total child
and other dependent credit that could be claimed (before any limitations)
LO 1.6
23. If Charles, a 16-year-old child model, earns $50,000 a year and is completely selfsupporting even though he lives with his parents, can his parents claim him as a
dependent? Why or why not?
LO 1.6
24. Marc’s brother, Phillip, who is a 20-year-old French citizen, lives in France for the full
year. Marc supports Phillip while he attends college. Can Marc claim Phillip as a dependent? Why or why not?
LO 1.7
25. Luke and Vanessa have been married since 2016 and have filed jointly each year since
then.Their 2019 EIP was based on their 2019 tax return that was filed in early February
2020. In May 2020, they celebrated the adoption of a child. If their AGI was never
greater than $120,000, what was their EIP and RRC in 2020?
EIP $�����������
RRC $�����������
LO 1.8
26. Describe the difference between the standard deduction and itemized deductions.
How should a taxpayer decide whether to take the standard deduction or claim itemized deductions?
LO 1.10
27. Go to the IRS website (www.irs.gov/newsroom) and note the name of the most
recent news release.
LO 1.10
28. Go to the IRS website (www.irs.gov) and print out a copy of the most recent
Schedule F of Form 1040.
LO 1.10
29. Go to the Turbo Tax Blog (http://blog.turbotax.intuit.com/) and search the blog for
an article on the deduction of student loan interest. What is the maximum deduction
that can be taken in a year?
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Questions and Problems
GrOUp 3:
WRITING ASSIGNmENTS
RESEARCH
ETHICS
1. Jerry, age 23, a full-time student and not disabled, lives with William and Sheila Carson.
Jerry is William’s older brother. Jerry is single, a U.S. citizen, and does not provide more
than one-half of his own support. William and Sheila are both 21 and file a joint return.
Can William and Sheila claim Jerry as a qualifying child?
Required: Go to the IRS website (www.irs.gov) and review Publication 501. Write a
letter to William and Sheila stating if they can claim Jerry as a qualifying child.
2. Jason and Mary Wells, friends of yours, were married on December 30, 2020. They know
you are studying taxes and have sent you an e-mail with a question concerning their filing
status. Jason and Mary would each like to file single for tax year 2020. Jason has prepared
their taxes both as single and married filing jointly, and he has realized that the couple will
get a larger combined refund if they each file single. Jason argues “that it’s not as if we were
married for very long in 2020.” Prepare an e-mail to respond to Jason and Mary’s inquiry.
GrOUp 4:
COmPREhENSIVE PROBLEmS
Instructions for working all Group 4 Comprehensive Tax Return Problems in
this textbook are as follows:
Birthdays: If using the tax software, create birthdates for taxpayers and dependents.
Adult taxpayers should have ages between 25 and 64 unless a different age is specified.
Wages: Assume the wages subject to income tax in the problems are the same as
Social Security wages and Medicare wages unless presented otherwise. Create employer
names and other information which may be required by your tax software package.
Missing Data: Please make realistic assumptions about any missing data. Decide
whether taxpayers contribute to the Presidential Election Campaign, which does not
affect tax liability. No taxpayers will have traded virtual currency unless specific details
are provided. All taxpayers request a refund of any overpaid tax unless otherwise
indicated.
Tax Forms: Tax forms to complete the problems are found at the end of each chapter.
Additional copies can be found on the IRS website (www.irs.gov).
1A. Maria Tallchief is a single taxpayer (birthdate May 18, 1993) living at 543 Space Drive,
Houston, TX 77099. Her Social Security number is 466-33-1234. For 2020, Maria has
no dependents, and her W-2, from her job at a local restaurant where she parks cars,
contains the following information:
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1-41
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1-42
Chapter 1
●
The Individual Income Tax Return
Safe, accurate,
FAST! Use
a Employee’s social security number
466-33-1234
OMB No. 1545-0008
Visit the IRS website at
www.irs.gov/efile
b Employer identification number (EIN)
1 Wages, tips, other compensation
2 Federal income tax withheld
c Employer’s name, address, and ZIP code
3 Social security wages
4 Social security tax withheld
Burger Box
1234 Mountain Road
Houston, TX 77099
20,250.34
20,250.34
33-1235672
1,255.12
5 Medicare wages and tips
6 Medicare tax withheld
20,250.34
293.63
7 Social security tips
d Control number
8 Allocated tips
9
e Employee’s first name and initial
1,196.69
Last name
Suff.
Maria Tallchief
543 Space Drive
Houston, TX 77099
10 Dependent care benefits
11 Nonqualified plans
13
Statutory
employee
12a See instructions for box 12
C
o
d
e
Retirement
plan
Third-party
sick pay
14 Other
12b
C
o
d
e
12c
C
o
d
e
12d
C
o
d
e
f Employee’s address and ZIP code
15 State
16 State wages, tips, etc. 17 State income tax
Employer’s state ID number
18 Local wages, tips, etc. 19 Local income tax
20 Locality name
TX
Form
W-2
Wage and Tax Statement
Copy B—To Be Filed With Employee’s FEDERAL Tax Return.
This information is being furnished to the Internal Revenue Service.
2020
Department of the Treasury—Internal Revenue Service
These wages are Maria’s only income for 2020. Maria received a $1,200 EIP in 2020.
Required: Complete Form 1040 for Maria Tallchief for the 2020 tax year.
1B. Using the information from Problem 1A, assume Maria’s birthdate is May 18, 1953 and
complete Form 1040-SR for Maria Tallchief for the 2020 tax year.
2A. Hardy and Dora Knox are married and file a joint return for 2020. Hardy’s Social Security number is 466-47-3311 and her birthdate is January 4, 1976. Dora’s Social Security
number is 467-74-4451 and her birthday is July 7, 1975. They live at 143 Maple Street,
Knoxville, TN 37932. For 2020, Hardy did not work, and Dora’s W-2 from her teaching
job showed the following:
Safe, accurate,
FAST! Use
a Employee’s social security number
467-74-4451
OMB No. 1545-0008
Visit the IRS website at
www.irs.gov/efile
b Employer identification number (EIN)
1 Wages, tips, other compensation
2 Federal income tax withheld
c Employer’s name, address, and ZIP code
3 Social security wages
4 Social security tax withheld
51,020.40
33-0711111
51,020.40
Knoxville Unified School District
1700 Harding Valley Street
Knoxville, TN 37932
3,163.26
5 Medicare wages and tips
51,020.40
739.80
8 Allocated tips
9
Last name
Dora Knox
143 Maple Street
Knoxville, TN 37932
6 Medicare tax withheld
7 Social security tips
d Control number
e Employee’s first name and initial
3,052.87
Suff.
10 Dependent care benefits
11 Nonqualified plans
13
Statutory
employee
14 Other
Retirement
plan
12a See instructions for box 12
C
o
d
e
Third-party
sick pay
12b
C
o
d
e
12c
C
o
d
e
12d
C
o
d
e
f Employee’s address and ZIP code
15 State
Employer’s state ID number
16 State wages, tips, etc. 17 State income tax
18 Local wages, tips, etc. 19 Local income tax
20 Locality name
TN
Form
W-2
Wage and Tax Statement
Copy B—To Be Filed With Employee’s FEDERAL Tax Return.
This information is being furnished to the Internal Revenue Service.
2020
Department of the Treasury—Internal Revenue Service
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Questions and Problems
Hardy and Dora have a son named Fort (birthdate December 21, 2000, Social Security
number 552-52-5552), who is a dependent living with them, is not a full-time student,
and generates $5,200 of gross income for himself. Hardy and Dora received a $2,400
EIP in 2020.
Required: Complete Form 1040 for Hardy and Dora for the 2020 tax year.
2B. Abigail (Abby) Boxer is a single mother (birthdate April 28, 1982) working as a civilian
accountant for the U.S. Army. Her Social Security number is 676-73-3311 and she lives
at 3456 S Career Avenue, Sioux Falls, SD 57107. Helen, Abby’s 18-year-old daughter
(Social Security number 676-73-3312 and birthdate April 16, 2002), is a dependent
child living with her mother, and she does not qualify for the child tax credit due to
her age but does qualify for the other dependent credit of $500. Abby’s Form W-2 from
the U.S. Department of Defense shows the following:
Safe, accurate,
FAST! Use
a Employee’s social security number
676-73-3311
OMB No. 1545-0008
Visit the IRS website at
www.irs.gov/efile
b Employer identification number (EIN)
1 Wages, tips, other compensation
2 Federal income tax withheld
c Employer’s name, address, and ZIP code
3 Social security wages
4 Social security tax withheld
59,664.57
31-1575142
59,664.57
DFAS Cleveland Center
PO Box 998002
Cleveland, OH 44199
3,699.20
5 Medicare wages and tips
6 Medicare tax withheld
59,664.57
865.14
7 Social security tips
d Control number
8 Allocated tips
9
e Employee’s first name and initial
4,993.32
Last name
Abigail Boxer
3456 S. Career Avenue
Sioux Falls, SD 57107
Suff.
10 Dependent care benefits
11 Nonqualified plans
13
Statutory
employee
14 Other
Retirement
plan
12a See instructions for box 12
C
o
d
e
Third-party
sick pay
12b
C
o
d
e
12c
C
o
d
e
12d
C
o
d
e
f Employee’s address and ZIP code
15 State
Employer’s state ID number
16 State wages, tips, etc. 17 State income tax
18 Local wages, tips, etc. 19 Local income tax
20 Locality name
SD
Form
W-2
Wage and Tax Statement
Copy B—To Be Filed With Employee’s FEDERAL Tax Return.
This information is being furnished to the Internal Revenue Service.
2020
Department of the Treasury—Internal Revenue Service
Abby also has taxable interest from Sioux Falls Savings and Loan of $127 and
tax-exempt interest from bonds issued by the state of South Dakota of $300. Abby
received a $1,700 EIP in 2020.
Required: Complete Form 1040 for Abigail for the 2020 tax year.
GrOUp 5:
CumuLATIVE SOfTWARE PROBLEm
1. Albert Gaytor and his wife Allison are married and file a joint return for 2020. The
Gaytors live at 12340 Cocoshell Road, Coral Gables, FL 33134. Captain Gaytor is a
charter fishing boat captain but took 6 months off from his job in 2020 to train and
study for his Masters Captain’s License.
In 2020, Albert received a Form W-2 from his employer, Coconut Grove Fishing
Charters, Inc.:
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1-44
Chapter 1
●
The Individual Income Tax Return
Safe, accurate,
FAST! Use
a Employee’s social security number
266-51-1966
OMB No. 1545-0008
Visit the IRS website at
www.irs.gov/efile
b Employer identification number (EIN)
1 Wages, tips, other compensation
2 Federal income tax withheld
c Employer’s name, address, and ZIP code
3 Social security wages
4 Social security tax withheld
67,254.70
60-3456789
67,254.70
Coconut Grove Fishing Charters, Inc.
2432 Bay Blvd.
Coconut Grove, FL 33133
4,169.79
5 Medicare wages and tips
6 Medicare tax withheld
67,254.70
975.19
7 Social security tips
d Control number
8 Allocated tips
9
e Employee’s first name and initial
5,588.17
Last name
Suff.
Albert T. Gaytor
12340 Cocoshell Road
Coral Gables, FL 33134
10 Dependent care benefits
11 Nonqualified plans
13
Statutory
employee
Retirement
plan
14 Other
12a See instructions for box 12
C
o
d
e
Third-party
sick pay
12b
C
o
d
e
12c
C
o
d
e
12d
C
o
d
e
f Employee’s address and ZIP code
15 State
Employer’s state ID number
16 State wages, tips, etc. 17 State income tax
18 Local wages, tips, etc. 19 Local income tax
20 Locality name
FL
Form
W-2
Wage and Tax Statement
Copy B—To Be Filed With Employee’s FEDERAL Tax Return.
This information is being furnished to the Internal Revenue Service.
Name
Albert T. Gaytor
Allison A. Gaytor
Crocker Gaytor
Cayman Slacker
Sean Slacker
2020
Department of the Treasury—Internal Revenue Service
Social Security Number
Date of Birth
266-51-1966
266-34-1967
261-55-1212
261-11-4444
344-23-5656
09/22/1971
07/01/1972
12/21/2003
03/13/2002
05/01/2001
The Gaytors have a 17-year-old son, Crocker, who is a full-time freshman at Brickell State
University. The Gaytors also have an 18-year-old daughter, Cayman, who is a part-time
student at Dade County Community College (DCCC). Cayman is married to Sean Slacker,
who is 19 years old and a part-time student at DCCC. Sean and Cayman have a 1-year-old
child, Wanda Slacker (Social Security number 648-99-4306). Sean, Cayman, and Wanda all
live in an apartment up the street from Albert and Allison during the entire current calendar year. Sean and Cayman both work for Sean’s wealthy grandfather as apprentices in his
business. Their wages for the year were a combined $50,000, which allowed them to pay
all the personal expenses for themselves and their daughter. The Gaytors received a $2,900
EIP in 2020.
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Questions and Problems
Albert and Allison have a savings account and received the following Form 1099-INT
for 2020:
CORRECTED (if checked)
PAYER’S name, street address, city or town, state or province, country, ZIP
or foreign postal code, and telephone no.
Vizcaya National Bank
9871 Coral Way
Miami, FL 33134
OMB No. 1545-0112
Payer’s RTN (optional)
$
Interest
Income
2020
1 Interest income
348.19
Form 1099-INT
2 Early withdrawal penalty
PAYER’S TIN
RECIPIENT’S TIN
60-7654321
266-51-1966
Copy B
$
For Recipient
3 Interest on U.S. Savings Bonds and Treas. obligations
$
Albert T. Gaytor
$
Street address (including apt. no.)
$
6 Foreign tax paid
8 Tax-exempt interest
12340 Cocoshell Road
City or town, state or province, country, and ZIP or foreign postal code
FATCA filing
requirement
Account number (see instructions)
(keep for your records)
$
10 Market discount
Coral Gables, FL 33134
Form 1099-INT
This is important tax
information and is
being furnished to the
7 Foreign country or U.S. possession
IRS. If you are
required to file a
return,
a negligence
9 Specified private activity bond
penalty or other
interest
sanction may be
imposed on you if
$
this income is
11 Bond premium
taxable and the IRS
determines that it has
not been reported.
$
4 Federal income tax withheld 5 Investment expenses
RECIPIENT’S name
$
$
12 Bond premium on Treasury obligations 13 Bond premium on tax-exempt bond
$
$
14 Tax-exempt and tax credit
bond CUSIP no.
15 State 16 State identification no.
www.irs.gov/Form1099INT
17 State tax withheld
$
$
Department of the Treasury - Internal Revenue Service
Required: Use a computer software package such as Intuit ProConnect to complete Form
1040 for Albert and Allison Gaytor for 2020. Be sure to save your data input files since this
case will be expanded with more tax information in later chapters. Make assumptions regarding any information not given.
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1-46
Chapter 1
●
The Individual Income Tax Return
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Questions and Problems
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Chapter 1
●
The Individual Income Tax Return
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-322
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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Questions and Problems
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-322
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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Chapter 1
●
The Individual Income Tax Return
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-322
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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Questions and Problems
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-322
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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Chapter 1
●
The Individual Income Tax Return
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-322
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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Questions and Problems
1-53
Student Name
Class/Section
Date
Key number ta x return sum m ary
CHAPTER 1
Comprehensive Problem 1A
Adjusted Gross Income (Line 11)
Taxable Income (Line 15)
Total Tax (Line 24)
Tax Refund (Line 35a)
Comprehensive Problem 1B
Adjusted Gross Income (Line 11)
Standard Deduction or Itemized Deductions (Line 12)
Total Tax (Line 24)
Tax Refund (Line 35a)
Comprehensive Problem 2A
Adjusted Gross Income (Line 11)
Standard Deduction or Itemized Deductions (Line 12)
Total Tax (Line 24)
Amount Overpaid (Line 34)
Comprehensive Problem 2B
Adjusted Gross Income (Line 11)
Standard Deduction or Itemized Deductions (Line 12)
Credit for Other Dependents (Line 19)
Total Tax (Line 24)
Amount Overpaid (Line 34)
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-322
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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Chapter 2
Glow Images/Getty Images
Gross Income and
Exclusions
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-322
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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