Chapter I2
Determination of Tax
Discussion Questions
I2-1
The components of the formula are:
Income
Exclusions
Gross income
Deductions for adjusted gross income
Adjusted gross income
Deductions from adjusted gross income
Itemized deductions
Personal exemptions
Dependency exemptions
Taxable income
Tax rates
Gross tax
Credits
Prepayments
Tax due
Refund due
pp. I2-2 and I2-3.
I2-2 The term "income" includes all income from whatever source derived. Gross income refers
only to income from taxable sources. pp. I2-3 and I2-6.
I2-3 a.
A deduction is an amount that is subtracted from income, while a credit is an amount
that is subtracted from the tax itself.
b.
In general, a $10 credit is worth more than a $10 deduction because the credit results
in a direct dollar for dollar tax savings. The savings from a deduction depends on the tax bracket
that is applicable to the taxpayer.
c.
If a refundable credit exceeds the taxpayer's tax liability, the taxpayer will receive a
refund equal to the difference. In the case of nonrefundable credits the taxpayer will not receive a
refund, but may be entitled to a carryover or carryback. pp. I2-8, I2-10 through I2-12.
I2-1
I2-4
There are five conditions.
Support - the taxpayer must provide over 50% of the dependent's support.
Gross Income - the dependent's gross income must be less than the amount of the exemption.
The taxpayer's children who are either under age 19 or full-time students under age 24 are exempt
from this condition.
Joint Return - in general, a married dependent cannot file a joint return.
Relationship - dependents must either be related to the taxpayer or reside with the taxpayer.
Citizenship - dependents must either be a U. S. citizen, national, or resident or reside in
Canada or Mexico. pp. I2-13 through I2-18.
I2-5 a.
Support includes amounts spent for food, clothing, shelter, medical and dental care,
education, and the like. Support does not include the value of services rendered by the taxpayer for
the dependent nor does it include a scholarship received by a son or daughter of the taxpayer.
b.
Yes. When several individuals contribute to the support of another, it is possible for
members of the group to sign a multiple support agreement that enables one member of the group to
claim a dependency exemption. Also, in the case of divorced couples, the parent with custody for
over half of the year receives the dependency exemption even if that parent did not provide more
than 50% of the child's support. Similarly, if the custodial parent agrees, the dependency exemption
can be given to the noncustodial parent even if that parent provided 50% or less of the child's
support.
c.
The value of an automobile given to an individual may represent support for that
individual. The automobile must be given to the individual and must be used exclusively by the
individual. pp. I2-13 through I2-16.
I2-6 A taxpayer will use a rate schedule instead of a tax table if taxable income exceeds the
maximum in the tax table (currently $100,000) or if the taxpayer is using a special tax computation
method such as short-year computation. pp. I2-19 and I2-20.
I2-7 a.
In general, it is the taxpayer's gross income that determines whether the individual
must file a return. The specific dollar amounts are listed in the text. Certain individuals must file
even if they have less than the specified gross income amounts. These include taxpayers who receive
advance payments of the earned income credit and taxpayers with $400 or more of self-employment
income. Dependent individuals must file if they have either (1) unearned income over $700 (1998)
or (2) total gross income in excess of the standard deduction.
b.
Taxpayers who owe no tax because of deductions or other reasons must still file a
return if they have gross income in excess of the filing requirement amounts. pp. I2-32 and I2-33.
I2-2
I2-8
I2-9
To claim head-of-household status, the taxpayer must:
·
Be unmarried as of the last day of the tax year.
·
Not be a surviving spouse.
·
Be a U.S. citizen or resident.
·
Pay over half of the costs of maintaining a qualified household. Generally, a
dependent relative must live in the household for over one-half of the year.
Exceptions are provided if the dependent is the taxpayer's parent and for a parent
where a nondependent child lives in the taxpayer's household. pp. I2-22 and I2-23.
A surviving spouse is a person who was widowed in either of the two preceding years who:
·
Has not remarried.
·
Is a U. S. citizen or resident.
·
Was qualified to file a joint return in the year of death.
·
Maintains a household for himself or herself and a dependent child. pp. I2-21 and I222.
I2-10 April 15. The normal due date is delayed to the next day that is not a Saturday, Sunday or
holiday. p. I2-33.
I2-11 Single taxpayers, married persons filing separately and heads-of-households each have one
rate schedule. Married couples filing jointly and surviving spouses use the same rate schedule. pp.
I2-22 through I2-24.
I2-12 Yes. In general, the source of income is not important. It is the use that is important. An
exception does exist for a child's scholarship. Parents do not have to consider a child's scholarship in
determining whether they provide over half of the child's support. p. I2-13.
I2-13 It can be, but as was noted in the preceding answer, parents may ignore a child's scholarship
in deciding whether they provide over half of the child's support. pp. I2-14 and I2-16.
I2-14 The purpose of the multiple support agreement is to allow one member of a group to claim a
dependency exemption when the members together contribute more than 50% of the support of one
person and each member of the group contributes over 10%. The multiple support agreement results
in an exception to the requirement that the taxpayer alone must provide over half of the dependent's
support. p. I2-15.
I2-3
I2-15 In general, the parent with custody for the greater part of the year receives the exemption. In
order for either parent to be eligible to claim the exemption, the parents must together contribute
more than 50% of the child's support. The noncustodial parent is entitled to the dependency
exemption only if the custodial parent agrees in writing to allow the noncustodial parent to claim the
exemption. pp. I2-14 and I2-15.
I2-16 In general, a couple must be married on the last day of the tax year in order to file a joint
return. In addition, the husband and wife must have the same tax year. Also, if one spouse is a
nonresident alien then that spouse must agree to include his or her income on the return. pp. I2-17
and I2-21.
I2-17 The phrase "maintain a household" means to pay over half of the costs of the household.
These costs include property taxes, mortgage interest, rent, utility charges, upkeep and repairs,
property insurance and food consumed on the premises. Such costs do not include clothing,
education, medical treatment, vacations, life insurance and transportation. p. I2-23.
I2-18 A married person, if otherwise qualified, can claim head-of-household status if he or she is
married to a nonresident alien or if he or she qualifies as an abandoned spouse. To be an abandoned
spouse, the taxpayer must have lived apart from his or spouse for the last six months of the year and
maintain a household for a dependent son or daughter in which they both live. pp. I2-22 and I2-24.
I2-19 a.
A C Corporation is taxed on its own income. In other words, it is taxed as a separate
entity. An S Corporation is normally not taxed on its own income. Instead, its income flows through
and is reported by the shareholders. Each shareholder reports his or her share of the income even if it
is not actually distributed.
b.
Some corporations are ineligible for making an S corporation election. Others may
choose the C corporation because of lower corporate tax rates on taxable income up to $75,000.
Other considerations not discussed in Chapter 2 include fringe benefits, the need to retain earnings in
the business and dividend policy. pp. I2-26 through I2-28.
I2-20 a.
The major categories of property excluded from capital asset status are:
·
Inventory
·
Trade receivables
·
Certain properties created by the efforts of the taxpayer
·
Depreciable business property and business land
·
Certain government publications.
b.
Yes. A net long-term capital gain is taxed at 20% (10% in the case of an individual
taxpayer who is in the 15% tax bracket). The maximum rate applicable to mid-term capital gains is
28%. Short-term capital gains are taxed much like other income.
c.
The availability of favorable tax rates for long-term and mid-term gains is one
implication of capital asset classification. Another is the limitation on the amount of capital loss that
can be deducted from other income. At the present time only $3,000 of net capital loss can be
deducted from other income by an individual taxpayer in any year.
I2-4
I2-21 Section 1231 property includes depreciable business property and business land. Although
such property is excluded from capital asset status, gains from such property are sometimes accorded
similar treatment. Net Sec. 1231 losses, however, are not subject to the $3,000 limitation applicable
to capital losses.
I2-22 Yes. By waiting the taxpayer can convert the short-term gain to a mid-term gain taxed at a
maximum rate of 28% or long-term gain taxed at a maximum rate of 20%. The mid-term rate will be
available if the taxpayer holds the property over 12 months while the long-term rate will be available
if the taxpayer holds the property over 18 months. The taxpayer should, however, take into
consideration other nontax factors such as whether the value of the asset may decline during the
extended holding period.
I2-23 a.
Shifting income means moving it from one tax return to another. Splitting income
means creating additional taxable entities (such as corporations) so as to spread income between
more taxpayers.
b.
Different taxpayers are in different tax brackets. As a result, taxes can be saved by
shifting income from a taxpayer who is in a high tax bracket to a taxpayer who is in a lower tax
bracket.
c.
The tax on the unearned income of a minor (i.e., the kiddie tax) was created to reduce
the opportunity to reduce taxes by shifting income from parents who are in high tax brackets to
young children who have little or no other income and would, therefore, normally be in a low tax
bracket. pp. I2-30 and I2-31.
I2-24 a.
Both the husband and wife are liable for additional taxes on a joint return. An
exception exists for the so called innocent spouse. See Question I2-25 for specific conditions that
must be met.
b.
In the event of nonpayment of tax (e.g., due to separation, divorce or abandonment)
the IRS can look to either spouse to collect the taxes. pp. I2-31 and I2-32.
I2-25 Couples may change from joint returns to separate returns only prior to the due date for the
return. Couples may change from separate returns to a joint return within three years of the due date
including extensions. p. I2-32.
Issue Identification Questions
I2-26 The main issue is whether Yung can claim a dependency exemption for his nephew. The
nephew must be a U.S. resident in order to qualify. Normally, this requires that a person have a visa
as a permanent resident, but a dependency exemption has been permitted when special circumstances
were present. For example, the Tax Court allowed an exemption when it considered the length of the
independent's stay, the individual's intent, and the presence of substantial assets in the U.S. [Carmen
R. Escobar, 68 TC 304 (1977)]. The nephew's desire to stay, the uncertain political future of Hong
Kong given the return to Chinese control, and the desire of other members of the family to move here
I2-5
could all be factors that are considered in determine whether the nephew is a resident. pp. I2-13
through I2-19.
I2-27 The primary tax issue is whether Joy or Ed is entitled to claim Joan as a dependent. This will
depend on who provides more support. The rental value of the room that Joy provides and the cost
of the clothing, meals, and other expenses (in excess of Ed's contribution) must exceed $300 per
month for Joy to be entitled to a dependency exemption. A second issue, assuming that Joy is
unmarried, relates to whether Joy qualifies as a head of household. If she is entitled to the
dependency exemption for Joan, then Joy also qualifies as a head of household. pp. I2-13 through
I2-17, I2-22.
I2-28 The primary tax issue is whether they should file a joint return. Filing jointly could produce a
tax savings because more income will be taxed at the low 15% rate. Carmen, however, should
carefully consider whether Carlos is disclosing all of his income. If not, she may be liable for
additional taxes, interest, and penalties resulting from the unreported income. The innocent spouse
rules may not protect her. She is not required to know with certainty Carlos' income in order to be
liable. The fact that Carmen is "surprised" that Carlos' income is so low suggests that she has reason
to know that there is unreported income. pp. I2-31 and I2-32.
I2-29 The primary tax issue is the filing status for both Bill and Jane. Both can file as single
taxpayers because they were divorced prior to the end of the tax year. To file as a head of household
a taxpayer must pay more than one-half of the costs of maintaining a household (as one's home) in
which a dependent relative lives for more than one-half of the year. In the case of divorce, the child
need not be a dependent of the custodial spouse. The facts in this question are similar to W.E. Grace
v. CIR, 25 AFTR 2d 70-328, 70-1 USTC ¶ 9149 (5th Cir., 1970) and Levon P. Biolchin v. Cir., 26
AFTR 2d 70-5727, 70-2 USTC ¶ 9674 (7th Cir., 1970) where the courts disregarded the fact that the
taxpayer owned the house and denied head of household status. Jane should also fail to quality for
head of household status because she did not pay more than one-half of the costs of maintaining the
household. Secondary issues concern the treatment of child support payments and whether the
furnishing of home expenses can be treated as alimony. p. I2-22.
I2-6
Problems
I2-30
Lanes
Waynes
Salary
Interest
Gross Income
Minus: IRA Contribution
Adjusted gross income
Minus: Itemized deductions
Exemptions
Taxable Income
$20,000
1,000
$21,000
( 2,000)
$19,000
( 8,000)
( 5,400)
$ 5,600
$110,000
5,000
$115,000
-0$115,000
( 9,000)
( 5,400)
$100,600
Gross tax (from Tax Table)
Gross tax (using Rate Schedule)
Minus: Withholding
Tax due (refund)
$
--$ 22,663
( 22,000)
$ 663
840*
--( 850)
$ 10
* This amount is based on the 1998 rate schedule. The 1998 tax table was unavailable at the
time this solution was prepared. The actual answer using the tax table would be very close. p. I2-7.
I2-31 a.
Either Mario or Elaine. Caroline cannot because she is unrelated to Anna, and Doug
cannot because he provides less than 10% of Anna's support.
b.
Elaine would have to complete a multiple support
declaration.
c.
No. Head-of-household status cannot be based on a dependency exemption obtained
as the result of a multiple support agreement.
d.
No. Old-age allowances are not available for dependents. pp. I2-13 through I2-15.
I2-32 a.
b.
Salary
Interest
Adjusted gross income
Minus: Standard deduction
Exemptions
Taxable income
$ 1,800
1,600
$ 3,400
( 4,250)
( 2,700)
-0-
Salary
Interest
Adjusted gross income
Minus: Standard deduction ($1,800 + $250)
Exemption
$ 1,800
1,600
$ 3,400
( 2,050)
-0-
I2-7
Taxable income
pp. I2-12 and I2-13.
$ 1,350
I2-33 a.
Adjusted gross income
Minus: Standard deduction
Exemptions
Taxable income
$36,000
( 7,100)
( 5,400)
$23,500
Salary (Carl)
Minus: Itemized deductions
Exemption
Taxable income
$14,000
-0( 2,700)
$11,300
Salary (Carol)
Minus: Itemized deductions
Exemption
Taxable income
$22,000
( 5,000)
( 2,700)
$14,300
b.
pp. I2-31 and I2-32.
I2-34 a.
Salary and interest
Minus: Standard deduction
Exemptions
Taxable income
$18,800
( 7,100)
( 5,400)
$ 6,300
Gross tax
b.
$ 945
Salary
Minus: Standard deduction
Exemptions
Taxable income
$18,000
( 3,550)
( 2,700)
$11,750
Gross tax
$ 1,763
Note that Hal would also be required to file a separate return and pay a tax of $15 based upon taxable
income of $100 ($800 interest - $700 standard deduction). p. I2-17.
c.
Hal and Ruth should file a joint return. Although the parents will have to pay an
additional $756 in taxes, Hal and Ruth will save $833 [($1,763 + $15) - $945].
I2-35 a.
Brian may not be claimed as a dependent because his gross income exceeds $2,700
(1998). The gross income test may not be waived for Brian because he is over age 23.
I2-8
b.
No effect, Brian’s student status is irrelevant because he is over age 23. Thus, Wes
and Tina may not claim Brian in this case.
c.
Sherry may be claimed as a dependent by Wes and Tina. Even though her gross
income is greater than the maximum allowable, $2,700 (1998), she is a full-time student and under
age 24 and the gross income test is waived.
d.
Under these facts, Sherry would not be eligible to be claimed as a dependent because
the gross income test may not be waived as she is not a full-time student and is over age 18.
e.
Granny may not be claimed as a dependent as she fails the gross income test. Her
interest from the U.S. bonds exceed $2,700 and no exception applies. If Granny’s interest had been
less than $2,700, she would have qualified as the Social Security is not included in her gross income.
f.
Charley would probably not qualify as a dependent of Wes and Tina because he does
not satisfy the relationship test. If Charley lived in Wes and Tina’s home the entire year, he would
have satisfied the test. Further, if the adoption proceedings were finalized by year-end, Charley
would qualify as a dependent of Wes and Tina as he would be their nephew. Extended family
relationships created by adoption satisfy the relationship test.
p. I2-17.
I2-36 a.
b.
Joan, the custodial spouse, receives both the dependency exemption and child credit.
No. pp. I2-15 and I2-16.
I2-37
Form
a.
b.
c.
d.
e.
1040EZ
1040A
1040
1040A
1040A
Filing Status
Single
Single
Head-of-Household
Single
Head-of-Household
Exemptions
Child Credit
1
1
1
1
2
0
0
0
0
1
pp. I2-13 through I2-19.
I2-38 a.
b.
Salary
Minus: Itemized deductions
Personal exemptions
Taxable income
$68,000
(10,600)
( 5,400)
$52,000
Gross tax
$ 9,055*
Mary's tax:
Salary
$36,000
I2-9
Minus: Standard deduction
Personal exemption
Taxable income
Gross tax
( 4,250)
( 2,700)
$29,050
$ 4,839*
Bill's tax:
Salary
Minus: Itemized deductions
Personal exemption
Taxable income
$32,000
( 9,000)
( 2,700)
$20,300
Gross tax
$ 3,045*
Their taxes total $7,884 ($4,839 + $3,045).
* These amounts are based upon the 1998 tax rate schedule because the 1998 tax was unavailable
when the solution was prepared.
c.
Their tax will be $1,171 ($9,055 - $7,884) higher if they marry before year end. This
is partially attributable to the fact that on a joint return, more income is taxed at 28% as opposed to
15%. Another contributing factor is that Mary's standard deduction on her single return is greater
than her itemized deductions on a joint return. pp. I2-20 through I2-23.
I2-39 a.
No dependency exemption or child credit. A cousin must live with the taxpayers in
order to qualify as a dependent as a cousin does not meet the automatic relationship test.
b.
One dependency exemption. Because the social security benefits are excluded from
gross income, the father meets the gross income test. The father is not required to live with Bob to
meet the relationship test.
c.
One dependency exemption, no child credit. The daughter is exempt from the gross
income limitation because she is a full-time student under age 24. Because she is over 16, she does
not qualify for the child credit.
d.
No dependency exemption or child credit. The mother cannot be claimed as a
dependent by anyone because she provided over half of her own support. pp. I2-13 through I2-19.
I2-40 a.
Adjusted gross income
Phase-out amount
Excess
$260,000
(186,800)
73,200
 2,500
29.28
Round to
Percentage
x
I2-10
30
2%
Phase-out percentage
60%
I2-11
Personal exemption amount before phase-out ($2,700 x 4)
Phase-out percentage
Phase-out
10,800
x
60%
6,480
Personal exemption amount in computing taxable income
($10,800 - 6,480)
$4,320
pp. I2-18 and I2-19.
b.
The tentative child credit of $800 ($400 x 2) is fully phased-out because of the high
adjusted gross income.
Adjusted gross income
Phase-out amount
Excess
Phase-out rate
Multiples
Rounded
$260,000
(120,300)
$139,700
$ 1,000
139.7
140
The phase-out of $7,000 (140 x $50) far exceeds the tentative credit.
I2-41 a.
Amy must file because her gross income exceeds the limit.
b.
Betty need not file as her gross income ($4,100) is less than $8,000.
c.
Chris must file as his gross income of $2,000 is in excess of the $1,850 ($1,600 +
$250) standard deduction amount. Chris' standard deduction is limited to the amount of earned
income.
d.
Dawn must file because her unearned income is over $700 and her total gross income
exceeds the standard deduction amount.
e.
Doug must file because his gross income is over $2,700 and he is married and not
living with his spouse. pp. I2-32 and I2-33.
I2-42 a.
Yes.
b.
No. The aunt would have to live with the taxpayer.
c.
No. Because she qualifies for the more favorable surviving spouse status, she cannot
file as head-of-household.
d.
Yes. Because he qualifies as an abandoned spouse he can file as a head-of-household.
pp. I2-22 and I2-23.
I2-43 a.
1996: Wayne and Celia would file a joint return for 1996 even though Wayne died
in October, 1996.
1997: Celia qualifies for head-of-household status. She does not qualify as a
surviving spouse because she cannot claim her son, Wally, (the gross income
I2-12
test is not met as he is a part-time student) and the surviving spouse rules
require a dependent child living in the taxpayer's home for the entire year.
For head-of-household status, Wally does not have to be a dependent relative
as he is an unmarried descendant. This is one of the exceptions to the general
rule.
1998: Same as 1997.
1999: Same as 1997.
b.
Head-of-household. Josh does not qualify as a dependent but Juanita pays over onehalf the cost of maintaining the household for an unmarried descendant. This exception to the
general rule allows Juanita to use the head-of-household status.
c.
Gertrude may use the head-of-household filing status. Even though she is still legally
married, she meets the tests for an abandoned spouse. She lived apart from her spouse for the last six
months of the taxable year and paid over half the cost of maintaining a household for her dependent
son. pp. I2-20 through I2-24.
Note to Instructor: A good exercise is to ask the class how this problem would change if Wally was
a full-time student rather than part-time. Celia would qualify as a surviving spouse in 1997 and
1998.
I2-44 a.
b.
c.
$95,000 ($46,000 + $49,000).
$67,000
Gross income
Minus: Business expenses
IRA contributions
Adjusted gross income
Adjusted gross income
Minus: Itemized deductions
Exemptions
Taxable income
$95,000
(24,000)
( 4,000)
$67,000
$67,000
(8,000)
( 8,100)
$50,900
pp. I2-6 and I2-7.
I2-45 Jan's itemized deductions must be reduced by 3% of her adjusted gross income over $124,500
or by $3,765 [.03 x ($250,000 - $124,500)]. This results in total itemized deductions of only $3,235
($7,000 - $3,765) which is less than the standard deduction. Therefore, Jan should claim the
standard deduction. p. I2-10.
I2-46 $1,550 (salary $4,200 + interest $1,600 - standard deduction $4,250). The taxable income
would be the same if she were 13 years of age. However, the tax rate applicable to $200 ($1,600 $1,400) of the interest income would depend on the parents' tax bracket and not be based on Debbie's
income. pp. I2-24 through I2-26.
I2-13
I2-47 a.
Two. One personal and one dependent.
b.
Two. One personal and one dependent; the uncle does not qualify as he is not related
to Bob by blood.
c.
Two. One personal and one dependent.
d.
One. One personal and no dependents; the sister has over $2,700 of gross income.
pp. I2-13 through I2-19.
I2-48 James: Wages
Dividends
Adjusted gross income
Standard deduction (2,800 + 250)
Personal exemption
Taxable income
Tax: $1,550 x .15
$2,800
1,800
4,600
(3,050)
0
$1,550
$ 233
(No kiddie tax as James is 16 years of age.)
Jonas:
Wages
Dividends
Adjusted gross income
Standard deduction
Personal exemption
Taxable income
$ 400
2,000
2,400
( 700)
0
$1,700
Tax: $1,100 x .15
600* x .31**
165
186
$ 351
*Net unearned income is $600, computed as follows:
Unearned income
Statutory deduction
Standard deduction
**Parent's marginal tax rate.
pp. I2-25 and I2-26.
I2-49 a.
b.
c.
d.
None
$10,000 [(0.15 x $50,000) + (0.25 x $10,000)]
$11,295 (using the 1998 tax rate schedule).
$13,505 (using the 1998 tax rate schedule). pp. I2-20, I2-26 and I2-27.
I2-14
$2,000
( 700)
( 700)
$ 600
I2-50 Harry’s child credit is equal to $1,000 (4 x $400 - $50 x 12).
I2-51 a.
The sale would result in a short-term capital gain. As a short-term capital gain is
taxed at the taxpayer’s regular rates and Larry and Jane are in the 39.6% tax bracket the tax would be
$3,960.
b.
Mid-term capital gains are taxed at a maximum rate of 28%. The resulting tax is
$2,800.
c.
Long-term capital gains are taxed at a maximum rate of 20%. The resulting tax is
$2,000.
I2-52
1998
a.
b.
c.
1999
Salary
Minus: Itemized or standard deduction
Exemption
Taxable income
$20,000
( 4,250)
( 2,700)
$13,050
$20,000
( 9,000)
( 2,700)
$ 8,300
Gross Tax
$ 1,958
$ 1,245
Salary
Minus: Itemized or standard deduction
Exemption
Taxable income
$20,000
( 4,250)
( 2,700)
$13,050
$20,000
( 8,000)
( 2,700)
$ 9,300
Gross tax
$ 1,958
$ 1,395
Salary
Minus: Itemized or standard deduction
Exemption
Taxable income
$20,000
( 4,250)
( 2,700)
$13,050
$20,000
(10,000)
( 2,700)
$ 7,300
Gross tax
$ 1,958
$ 1,095
d.
By contributing the $2,000 in 1999, Virginia is able to deduct the entire amount. If
$1,000 is contributed in each year, only the $1,000 contributed in 1999 is deductible. No tax benefit
is received in 1998 because the contribution is less than the standard deduction. If $2,000 is
contributed in 1998, then no tax benefit is received. p. I2-31.
I2-53 a.
b.
c.
1040A
1040
1040
I2-15
d.
1040A p. I2-33.
I2-54 Salary
Minus: Capital loss
IRA deduction
a.
Adjusted gross income
Minus: Itemized deductions
Exemptions
b.
Taxable income
c.
Gross tax (head-of-household rate schedule)
$44,000
( 3,000)
( 2,000)
$39,000
( 7,000)
( 5,400)
$26,600
$ 3,990
pp. I2-23 and I2-29 through I2-30.
I2-55 a.
b.
c.
As no special rules apply, the gross tax is $8,775.
Ralph and Tina are entitled to a child credit for Tina equal to $400.
Pam's gross tax is computed as follows:
Gross income (interest)
Minus: Standard deduction
Taxable income
$1,800
( 700)
$1,100
Tax on first $700 (0.15 x $700)
Tax remaining $400 (0.28 x $400)
Gross tax
$ 98
112
$ 217
d.
If Pam were age 16, her tax would be computed without reference to the parents' tax
rate. Thus, her tax would be $165 (0.15 x $1,100). pp. I2-24 through I2-26.
I2-56 a.
Gail meets the requirements of a surviving spouse. Thus, she is eligible to use the
joint return rate schedule.
b.
Her taxable income and gross tax are computed as follows:
Adjusted gross income
Minus: Itemized deductions [$20,000 - 0.03 x
($370,000 - $124,500)]
Personal and dependency exemptions
Taxable income
$370,000
( 12,635)
( -0- )
$357,365
Gross tax
$115,120
c.
As having a dependent child is one requirement to qualify as a surviving spouse, Gail
must file as a single taxpayer.
I2-16
d.
As a single taxpayer her taxable income and gross tax are computed as follows:
Adjusted gross income
Minus: Itemized deductions
Personal and dependency exemptions
Taxable income
Gross tax
Because of her high AGI, Gail’s child credit also is phased-out.
pp. I2-21 through I2-23.
Tax Form/Return Preparation Problems
I2-57 (See Instructor's Guide)
I2-58 (See Instructor's Guide)
I2-59 (See Instructor's Guide)
Case Study Problems
I2-60 (See Instructor's Guide)
I2-61 (See Instructor's Guide)
Tax Research Problem
I2-62 (See Instructor's Guide)
I2-63 (See Instructor's Guide)
I2-64 (See Instructor's Guide)
I2-17
$370,000
( 12,635)
( -0- )
$357,365
$119,950