In each of the following independent situations, determine the taxpayer’s filing status and the number of personal and dependency exemptions the taxpayer is allowed to claim. a. Frank is single and supports his 17-year-old brother, Bill. Bill earned $3,000 and did not live with Frank. b. Geneva and her spouse reside with their son, Steve, who is a 20-year-old undergraduate student at State University. Steve earned $13,100 at a part-time summer job, but he deposited this money in a savings account for graduate school. Geneva paid all of the $12,000 cost of supporting Steve. c. Hamish’s spouse died last year, and Hamish has not remarried. Hamish supports his father Reggie, age 78, who lives in a nursing home and had interest income this year of $2,500. d. Irene is married but has not seen her spouse since February. She supports her spouse's 18-year-old child Dolores, who lives with Irene. Dolores earned $4,500 this year. e. Assume the same facts as in part d. Also assume that Craig is Irene’s husband. Craig supports his 12-year-old son Ethan, who lives with Craig. Ethan did not earn any income.
> Jimmy has fallen on hard times recently. Last year he borrowed $250,000 and added an additional $50,000 of his own funds to purchase $300,000 of undeveloped real estate. This year the value of the real estate dropped dramatically and Jimmy’s lender agree
> Wally is employed as an executive with Pay More Incorporated. To entice Wally to work for Pay More, the corporation loaned him $20,000 at the beginning of the year at a simple interest rate of 1 percent. Wally would have paid interest of $2,400 this year
> Nikki works for the Shine Company, a retailer of upscale jewelry. How much taxable income does Nikki recognize under the following scenarios? a. Nikki buys a diamond ring from Shine Company for $10,000 (normal sales price, $14,000; Shine Company’s gross
> Grady received $8,200 of Social Security benefits this year. Grady also reported salary and interest income this year. What amount of the benefits must Grady include in his gross income under the following two independent situations? a. Grady files singl
> For each of the following independent situations, indicate the amount the taxpayer must include in gross income and explain your answer: a. Phil won $500 in the scratch-off state lottery. There is no state income tax. b. Ted won a compact car worth $17,0
> Todd and Margo are seeking a divorce and no longer live together. Margo has offered to pay Todd $42,000 per year for five years if Margo receives sole title to the art collection. This collection cost them $100,000, but is now worth $360,000. All other p
> Lanny and Shirley are recently divorced and do not live together. Shirley has custody of their child, Art, and Lanny pays Shirley $22,000 per year. All property was divided equally. a. How much should Shirley include in income if Lanny’s payments are mad
> George purchased a life annuity to provide him monthly payments for as long as he lives. Based on IRS tables, George’s life expectancy is 100 months. Is George able to recover his cost of the annuity if he dies before he receives 100 monthly payments? Ex
> Gramps purchased a joint survivor annuity that pays $500 monthly over his remaining life and that of his wife, Gram. Gramps is 70 years old and Gram is 65 years old. Gramps paid $97,020 for the contract. How much income will Gramps recognize on the first
> Larry purchased an annuity from an insurance company that promises to pay him $1,500 per month for the rest of his life. Larry paid $170,820 for the annuity. Larry is in good health, and he is 72 years old. Larry received the first annuity payment of $1,
> Anne purchased an annuity from an insurance company that promised to pay her $20,000 per year for the next 10 years. Anne paid $145,000 for the annuity, and in exchange she will receive $200,000 over the term of the annuity. a. How much of the first $20
> Janet is a cash-basis calendar-year taxpayer. She received a check for services provided in the mail during the last week of December. However, rather than cash the check, Janet decided to wait until the following January because she believes that her de
> Describe in general how the cash method of accounting differs from the accrual method.
> This year Jorge received a refund of property taxes that he deducted on his tax return last year. Jorge is not sure whether he should include the refund in his gross income. What would you tell him?
> Compare how the return of capital principle applies when (1) a taxpayer sells an asset and collects the sale proceeds all immediately and (2) a taxpayer sells an asset and collects the sale proceeds over several periods (installment sales). If Congress w
> What issue precipitated the return of capital principle? Explain.
> Andre constructs and installs cabinets in homes. Blair sells and installs carpet in apartments. Andre and Blair worked out an arrangement whereby Andre installed cabinets in Blair’s home and Blair installed carpet in Andre’s home. Neither Andre nor Blair
> Compare and contrast realization of income with recognition of income.
> Conceptually, when taxpayers receive annuity payments, how do they determine the amount of the payment they must include in gross income?
> Describe the concept of realization for tax purposes.
> Based on the definition of gross income in §61 and related regulations, what is the general presumption regarding the taxability of income realized?
> Tom was just hired by Acme Corporation and has decided to purchase disability insurance. This insurance promises to pay him weekly benefits to replace his salary should he be unable to work because of disability. Disability insurance is also available th
> Jim was injured in an accident and his surgeon botched the medical procedure. Jim recovered $5,000 from the doctors for pain and suffering and $2,000 for emotional distress. Determine the taxability of these payments and briefly explain to Jim the appare
> How are state-sponsored 529 educational savings plans taxed if investment returns are used for educational purposes? Are the returns taxed differently if they are not ultimately used to pay for education costs?
> Describe the kinds of insurance premiums an employer can pay on behalf of an employee without triggering includible compensation to the employee.
> What are some common examples of taxable and tax-free fringe benefits?
> What are the basic requirements to exclude the gain on the sale of a personal residence?
> When an employer makes a below-market loan to an employee, what are tax consequences to the employer and employee?
> Tim suffered greatly this year. In January a freak storm damaged his sailboat and in July Tim’s motorcycle was stolen from his vacation home. Tim originally paid $27,000 for the boat, but he was able to repair the damage for $6,200. Tim paid $15,500 f
> Rolando purchases a golf cart from his employer, E-Z-Go Golf Carts, for a sizable discount. Explain the rules for determining if Rolando’s purchase results in taxable income for him.
> Trevor is a single individual who is a cash method, calendar-year taxpayer. For each of the next two years (year 1 and year 2), Trevor expects to report AGI of $80,000, contribute $3,500 to charity, and pay $2,500 in state income taxes. a. Estimate Tr
> Clyde and Bonnie were married this year. Clyde has a steady job that will pay him about $37,000 while Bonnie does odd jobs that will produce about $28,000 of income. They also have a joint savings account that will pay about $400 of interest. If Clyde an
> Dewey is a lawyer who uses the cash method of accounting. Last year Dewey provided a client with legal services worth $55,000, but the client could not pay the fee. This year Dewey requested that in lieu of paying Dewey $55,000 for the services, the clie
> Contrast the constructive receipt doctrine with the claim of right doctrine.
> Charlie was hired by Ajax this year as a corporate executive and a member of the board of directors. During the current year, Charlie received the following payments or benefits paid on his behalf. Salary payments………………………………………………..$ 92,000 Contribu
> Diana and Ryan Workman were married on January 1 of last year. Diana has an eight-year-old son, Jorge, from her previous marriage. Ryan works as a computer programmer at Datafile Inc. (DI) earning a salary of $96,000. Diana is self-employed and runs a da
> Consider the following letter and answer Shady’s question. To my friendly student tax preparer: Hello, my name is Shady Slim. I understand you are going to help me figure out my gross income for the year…whatever that means. It’s been a busy year and I’m
> Ken is 63 years old and unmarried. He retired at age 55 when he sold his business, Understock.com. Though Ken is retired, he is still very active. Ken reported the following financial information this year. Assume Ken files as a single taxpayer. Determin
> Aishwarya’s husband passed away in 2015. She needs to determine whether Jasmine, her 17-year old stepdaughter who is single, qualifies as her dependent in 2016. Jasmine is a resident but not a citizen of the United States. She lived in Aishwarya’s home f
> Rank the following three single taxpayers in order of the magnitude of taxable income (from lowest to highest) and explain your results. Ahmed $ 80,000 8,000 Baker $ 80,000 Chin Gross Income $ 80,000 Deductions For AGI 4,000 4,000 Itemized Deductions
> Matteo, who is single and has no dependents, was planning on spending the weekend repairing his car. On Friday, Matteo’s employer called and offered him $500 in overtime pay if he would agree to work over the weekend. Matteo could get his car repaired ov
> Describe the business purpose, step-transaction, and substance-over-form doctrines. What types of tax planning strategies may these doctrines inhibit?
> Through November, Tex has received gross income of $120,000. For December, Tex is considering whether to accept one more work engagement for the year. Engagement 1 will generate $7,000 of revenue at a cost of $4,000, which is deductible for AGI. In contr
> Rick, who is single, has been offered a position as a city landscape consultant. The position pays $125,000 in cash wages. Assume Rick files single and is entitled to one personal exemption. Rick deducts the standard deduction instead of itemized deducti
> David and Lilly Fernandez have determined their tax liability on their joint tax return to be $1,700. They have made prepayments of $1,500 and also have a child tax credit of $1,000. What is the amount of their tax refund or taxes due?
> Jeremy earned $100,000 in salary and $6,000 in interest income during the year. Jeremy has two qualifying dependent children who live with him. He qualifies to file as head of household and has $17,000 in itemized deductions. Neither of his dependents qu
> Doug Jones timely submitted his 2016 tax return and elected married filing jointly status with his wife, Darlene. Doug and Darlene did not request an extension for their 2016 tax return. Doug and Darlene owed and paid the IRS $124,000 for their 2016 tax
> Janice Traylor is single. She has an 18-year-old son named Marty. Marty is Janice’s only child. Marty has lived with Janice his entire life. However, Marty recently joined the Marines and was sent on a special assignment to Australia. During the current
> In each of the following independent cases, determine the taxpayer’s filing status and the number of personal and dependency exemptions the taxpayer is allowed to claim. a. Alexandra is a blind widow (spouse died five years ago) who provides a home for h
> Horatio and Kelly were divorced at the end of last year. Neither Horatio nor Kelly remarried during the current year and Horatio moved out of state. Determine the filing status of Horatio and Kelly for the current year in the following independent situat
> Kano and his wife Hoshi have been married for 10 years and have two children under the age of 12. The couple has been living apart for the last two years and both children live with Kano. Kano has provided all the means necessary to support himself and h
> Relative to arm’s-length transactions, why do related-party transactions receive more IRS scrutiny?
> Elroy, who is single, has taken over the care of his mother Irene in her old age. Elroy pays the bills relating to Irene’s home. He also buys all her groceries and provides the rest of her support. Irene has no gross income. a. What is Elroy’s filing sta
> Gary and Lakesha were married on December 31 last year. They are now preparing their taxes for the April 15 deadline and are unsure of their filing status. a. What filing status options do Gary and Lakesha have for last year? b. Assume instead that Gary
> Juan and Bonita are married and have two dependent children living at home. This year, Juan is killed in an avalanche while skiing. a. What is Bonita’s filing status this year? b. Assuming Bonita doesn’t remarry and still has two dependent children liv
> Ray Albertson is 72 years old and lives by himself in an apartment in Salt Lake City. Ray’s gross income for the year is $3,000. Ray’s support is provided as follows: Himself (11%), his daughters Diane (20%) and Karen (15%), his sons Mike (20%) and Kenne
> Lee is 30 years old and single. Lee paid all the costs of maintaining his household for the entire year. Determine Lee’s filing status in each of the following alternative situations: a. Lee is Ashton’s uncle. Ashton is 15 years old and has gross income
> Kimberly is divorced and the custodial parent of a 3-year-old girl named Bailey. Kimberly and Bailey live with Kimberly’s parents, who pay all the costs of maintaining the household (such as mortgage, property taxes, and food). Kimberly pays for Bailey’s
> Bob Ryan filed his tax return and claimed a dependency exemption for his 16-year-old son Dylan. Both Bob and Dylan are citizens and residents of the United States. Dylan meets all the necessary requirements to be considered a qualifying child; however, w
> Mel and Cindy Gibson’s 12-year-old daughter Rachel was abducted on her way home from school on March 15, 2016. Police reports indicated that a stranger had physically dragged Rachel into a waiting car and sped away. Everyone hoped that the kidnapper and
> Dean Kastner is 78 years old and lives by himself in an apartment in Chicago. Dean’s gross income for the year is $2,500. Dean’s support is provided as follows: Himself (5%), his daughters Camille (25%) and Rachel (30%), his son Zander (5%), his friend F
> Jamel and Jennifer have been married 30 years and have filed a joint return every year of their marriage. Their three daughters, Jade, Lindsay, and Abbi, are ages 12, 17, and 22 respectively and all live at home. None of the daughters provide more than h
> Explain the assignment of income doctrine. In what situations would this doctrine potentially apply?
> Francine’s mother Donna and her father Darren separated and divorced in September of this year. Francine lived with both parents until the separation. Francine does not provide more than half of her own support. Francine is 15 years old at the end of the
> John and Tara Smith are married and have lived in the same home for over 20 years. John’s uncle Tim, who is 64 years old, has lived with the Smiths since March of this year. Tim is searching for employment but has been unable to find any—his gross income
> The Samsons are trying to determine whether they can claim their 22-year-old adopted son, Jason, as a dependent. Jason is currently a full-time student at an out-of-state university. Jason lived in his parents’ home for three months of the year, and he w
> What is the difference between gross income and adjusted gross income, and what is the difference between adjusted gross income and taxable income?
> Compare and contrast for and from AGI deductions. Why are for AGI deductions likely more valuable to taxpayers than from AGI deductions?
> Are taxpayers allowed to deduct net capital losses (capital losses in excess of capital gains)? Explain.
> Are all capital gains (gains on the sale or disposition of capital assets) taxed at the same rate? Explain.
> Is it easier to describe what a capital asset is or what it is not? Explain.
> Why should a taxpayer be interested in the character of income received?
> How are realized income, gross income, and taxable income similar, and how are they different?
> What is the constructive receipt doctrine? What types of taxpayers does this doctrine generally affect? For what tax planning strategy is the constructive receipt doctrine a potential limitation?
> For tax purposes, why is the married filing jointly tax status generally preferable to the married filing separately filing status? Why might a married taxpayer prefer not to file a joint return with the taxpayer’s spouse?
> What requirements do an abandoned spouse and qualifying widow or widower have in common?
> Isabella provides 30% of the support for her father Hastings who lives in an apartment by himself and has no gross income. Is it possible for Isabella to claim a dependency exemption for her father? Explain.
> How do two taxpayers determine who has priority to claim the dependency exemption for a qualifying child of both taxpayers when neither taxpayer is a parent of the child (assume the child does not qualify as a qualifying child for either parent)? How do
> In general terms, what are the differences in the rules for determining who is a qualifying child and who qualifies as a dependent as a qualifying relative? Is it possible for someone to be a qualifying child and a qualifying relative of the same taxpaye
> Compare and contrast the relationship test requirements for a qualifying child with the relationship requirements for a qualifying relative.
> Emily and Tony are recently married college students. Can Emily qualify as her parents’ dependent? Explain.
> If a person is considered to be a qualifying child or qualifying relative of a taxpayer, is the taxpayer automatically entitled to claim a dependency exemption for the person?
> Identify three ways taxpayers can pay their income taxes to the government.
> What types of federal income-based taxes, other than the regular income tax, might taxpayers be required to pay? In general terms, what is the tax base for each of these other taxes on income?
> Several judicial doctrines limit basic tax planning strategies. What are they? Which planning strategies do they limit?
> What is the difference between a tax deduction and a tax credit? Is one more beneficial than the other? Explain.
> Why are some deductions called “above-the-line” deductions and others are called “below-the-line” deductions? What is the “line”?
> Demarco and Janine Jackson have been married for 20 years and have four children who qualify as their dependents (Damarcus, Janine, Michael, and Candice). The couple received salary income of $100,000 and they sold their home this year. They initially pu
> Marc and Michelle are married and earned salaries this year of $64,000 and $12,000, respectively. In addition to their salaries, they received interest of $350 from municipal bonds and $500 from corporate bonds. Marc and Michelle also paid $2,500 of qual
> Tiffany is unmarried and has a 15-year-old qualifying child. Tiffany has determined her tax liability to be $3,525, and her employer has withheld $1,500 of federal taxes from her paycheck. Tiffany is allowed to claim a $1,000 child tax credit for her qua
> Camille Sikorski was divorced last year. She currently owns and provides a home for her 15-year-old daughter, Kaly, and 18-year-old son, Parker. Both children lived in Camille’s home for the entire year and Camille paid for all the costs of maintaining t
> Using the facts from the previous problem, how would your answer change if Manny’s after-tax rate of return were 8 percent?
> Manny, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December he performed $20,000 of legal services for a client. Manny typically requires his clients to pay his bills immediately upon receipt. Assume
> Using the facts from the previous problem, how would your answer change if Isabel’s after-tax rate of return were 8 percent?
> Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $20,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $20,000 bill any
> What is an “implicit tax” and how does it affect a taxpayer’s decision to purchase municipal bonds?
> Tesha works for a company that pays a year-end bonus in January of each year (instead of December of the preceding year) to allow employees to defer the bonus income. Assume Congress recently passed tax legislation that decreases individual tax rates as
> Billups, a physician and cash-method taxpayer, is new to the concept of tax planning and recently learned of the timing strategy. To implement the timing strategy, Billups plans to establish a new policy that allows all his clients to wait two years to p
> Yong recently paid his accountant $10,000 for elaborate tax planning strategies that exploit the timing strategy. Assuming this is an election year and there could be a power shift in the White House and Congress, what is a potential risk associated with
> Jayanna, an advertising consultant, is contemplating instructing some of her clients to pay her in cash so that she does not have to report the income on her tax return. Use an available tax service to identify the three basic elements of tax evasion and
