SMChap 004

Chapter 04 - Individual Tax Overview
Chapter 4
Individual Tax Overview
SOLUTIONS MANUAL
Discussion Questions
1.
[LO 1] How are realized income, gross income, and taxable income similar, and how are
they different?
Realized income is more broadly defined than gross income which is more broadly
defined than taxable income.
Gross income includes all realized income that taxpayers are not allowed to exclude
from gross income or are not permitted to defer to a later year. Consequently, gross
income is the income that taxpayers actually report on their tax returns and pay taxes on.
In the tax formula, taxable income is gross income minus allowable deductions for and
from AGI. Taxable income is the base used to compute the tax due before applicable
credits. However, any income included in gross income can be considered taxable
income because gross income is income that is taxable and causes an increase in the
taxes that a taxpayer is required to pay (gross income increases taxable income).
2.
[LO 1] Are taxpayers required to include all realized income in gross income? Explain.
No. Taxpayers are allowed to permanently exclude certain types of income from gross
income or defer certain types of income from taxation (gross income) until a subsequent
tax year. Consequently, taxpayers are not required to include all realized income in
gross income.
3.
[LO 1] All else being equal, should taxpayers prefer to exclude income or defer it?
Why?
Taxpayers should prefer to exclude income rather than defer income. When they exclude
income they are never taxed on the income. When they defer income, they are still taxed
on the income, but they are taxed in a subsequent tax year.
4.
[LO 1] Why should a taxpayer be interested in the character of income received?

A taxpayer should be interested in the character of income received because the
character of the income determines the rate at which the income will be taxed. Tax
exempt and tax deferred income is not taxed in the current year. Ordinary income is
taxed at the rates provided in the tax rate schedule. Qualified dividend income and longterm capital gains are generally taxed at a maximum 15% rate.
5.
[LO 1] Is it easier to describe what a capital asset is or what it is not? Explain.

It is easier to describe what a capital asset is not. In general, a capital asset is any asset
other than
Accounts receivable from the sale of goods or services.
4-1
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Inventory and other assets held for sale in the ordinary course of business.
Assets used in a trade or business, including supplies.
Thus any asset used for investment or personal purposes is considered to be a capital
asset.
6. [LO 1] Are all capital gains (gains on the sale or disposition of capital assets) taxed at the
same rate? Explain.
No. If a taxpayer holds a capital asset for a year or less the gain is taxed at ordinary tax
rates. If the taxpayer holds the asset for more than a year before selling, the gain is
generally taxed at a maximum 15% rate but could be taxed as high as 20% for high
income taxpayers. If the taxpayer sells more than one capital asset during the year and
recognizes both capital gains and capital losses, the gains and losses are netted together
before determining the applicable tax rate.
7. [LO 1] Are taxpayers allowed to deduct net capital losses (capital losses in excess of
capital gains)? Explain.
In general, a taxpayer is allowed to deduct, as a for AGI deduction, up to $3,000 of
net capital loss against ordinary income. If the net capital loss exceeds $3,000, the
taxpayer is allowed to carry the loss over indefinitely to deduct in subsequent years
(subject to the $3,000 annual deduction limitation). If however, a capital loss arises
from the sale of a personal use asset (such as a personal automobile or a personal
residence), the loss is not deductible.
8.
[LO 1] Compare and contrast for and from AGI deductions. Why are for AGI deductions
likely more valuable to taxpayers than from AGI deductions?
All deductions are classified as either for AGI or from AGI deductions. Gross
income minus for AGI deductions equals AGI. AGI minus from AGI deductions
equals taxable income. For AGI deductions are often referred to as deductions above
the line, while deductions from AGI are referred to as deductions below the line. The
line is AGI (the last line on the front page of the individual tax return).
Though both types of deductions may reduce a taxpayers taxable income, for AGI
deductions are generally more valuable to taxpayers because they
reduce AGI which may allow taxpayers to deduct more of their from AGI deductions
(and other tax benefits) that are subject to AGI limitations. From AGI deductions
dont affect AGI.
9.
[LO 1] What is the difference between gross income and adjusted gross income, and
what is the difference between adjusted gross income and taxable income?
Gross income is more inclusive than is adjusted gross income (AGI). Gross income is all
income from whatever source derived that is not excluded or deferred from income. AGI
is gross income minus for AGI deductions. So the primary difference between gross
income and AGI is the amount of for AGI deductions. Adjusted gross income is more
inclusive than taxable income. AGI is gross income minus for AGI deductions.
Taxable income is AGI minus from AGI
4-2
deductions. Consequently, the difference between AGI and taxable income is the amount
of from AGI deductions.
10.
[LO 1] How do taxpayers determine whether they should deduct their itemized
deductions or utilize the standard deduction?
Taxpayers generally deduct the greater of (1) the applicable standard deduction or (2)
their total itemized deductions, after limitations. However, taxpayers that do not want to
bother with tracking itemized deductions may choose to deduct the standard deduction,
even when itemized deductions may exceed the standard deduction.
11.
[LO 1]. Why are some deductions called above-the-line deductions and others are
called below-the-line deductions? What is the line?
The line is adjusted gross income (AGI). AGI is considered the line because of the
significance it plays in the amount of deductions allowed from AGI. For AGI
deductions are called above-the-line deductions because they are deducted in
determining AGI. From AGI deductions are called below-the-line deductions because
they are deducted after AGI has been determined. They are deducted from AGI to arrive
at taxable income. Below-the-line deductions may be subject to limitations based on the
taxpayers AGI.
12.
[LO 1] What is the difference between a tax deduction and a tax credit? Is one more
beneficial than the other? Explain.
A deduction generally reduces taxable income dollar for dollar (although from AGI
deductions may not reduce taxable income dollar for dollar). This translates into a tax
savings in the amount of the deduction times the marginal tax rate. In contrast, credits
reduce a taxpayers taxes payable dollar for dollar. Thus, generally speaking, credits are
more valuable than deductions.
13.
[LO 1] 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?
In addition to the individual income tax, individuals may also be required to pay other
income based taxes such as the alternative minimum tax (AMT) or self-employment
taxes. These taxes are imposed on a tax base other than the individuals taxable income.
The AMT tax base is alternative minimum taxable income, which is the taxpayers
taxable income adjusted for certain items to more closely reflect the taxpayers economic
income than does taxable income The tax base for self-employment taxes is the net
earnings derived from self-employment activities.
14.
[LO 1] Identify three ways taxpayers can pay their income taxes to the government.
Taxpayers can pay taxes through (1) income taxes withheld from the taxpayers salary or
wages by her employer, (2) estimated tax payments directly to the government, and (3)
taxes the taxpayer overpaid in the previous year that the taxpayer elects to apply as an
estimated payment for the current year.
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15.
[LO 1] 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?
No, taxpayers may claim a dependency exemption for a qualifying child and/or a
qualifying relative only if the qualifying child or relative is a citizen of the United States
or a resident of the United States, Canada, or Mexico. Further, the qualifying child or
qualifying relative must meet the joint tax return test if the person is married (no joint
return with spouse unless there is no tax liability (positive taxable income) on the joint
return and there would have been no tax liability on either separate tax return if the
spouses had filed separately).
16.
[LO 2] Emily and Tony are recently married college students. Can Emily qualify as her
parents dependent? Explain.
Depending on the circumstances, Emily may qualify as a dependent of her parents. A
taxpayer who files a joint return with his or her spouse may not qualify as a dependent of
another, unless there is no tax liability on the couple's joint return and there would not
have been any tax liability on either spouses tax return if they had filed separately. As
long as Emily and Tony meet these criteria, then Emily will qualify as a dependent of her
parents assuming she also meets tests to be her parents qualifying child or qualifying
relative.
17.
Compare and contrast the relationship test requirements for a qualifying child with the
relationship requirements for a qualifying relative.
The relationship test for the qualifying child includes the taxpayers child or descendant
of a child (child or grandchild) while the relationship test for qualifying relatives
includes both descendants and ancestors of the taxpayer (child, grandchild, parents, or
grandparent). The relationship test for the qualifying relative includes a descendant or
ancestor of the taxpayer (child, grandchild, parent, or grandparent). The relationship
test for qualifying child includes siblings of the taxpayer or descendants of siblings of the
taxpayer while the qualifying relative test also includes siblings of the taxpayer and sons
or daughters of the taxpayers siblings. The relationship test for qualifying relative also
includes the taxpayers in laws, aunt, uncle, and any person (even if no blood
relationship) who has the same principal place of abode as the taxpayer for the entire
year. Thus, the relationship test for qualifying relative is much more broad in scope than
the relationship test for qualifying child.
18.
[LO 2] 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 taxpayer?
Why or why not?
The rules for determining who qualifies as a dependent as a qualifying child and who
qualifies as a dependent as a qualifying relative overlap to some extent. The primary
differences between the two are
4-4
(1) the relationship requirement is more inclusive for qualifying relatives than
qualifying children,
(2) qualifying children are subject to age restrictions while qualifying relatives are
not,
(3) qualifying relatives are subject to a gross income restriction while qualifying
children are not, and
(4) taxpayers need not provide more than half a qualifying childs support, though
the child cannot provide more than half of his/her own support, but, absent a
multiple support agreement, taxpayers must provide more than half the support of
a qualifying relative.
(5) qualifying children are subject to a residence test (they must live with the
taxpayer for more than half the year) while qualifying relatives are not.
An individual may not be a qualifying child and a qualifying relative of the same
taxpayer. By definition, a qualifying relative must be someone who is not a qualifying
child. Consequently, the qualifying relative tests apply only when the individual does not
pass the qualifying child tests.
19.
[LO 2] 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 parents determine who gets to deduct the dependency exemption for a qualifying child
of both parents when the parents are divorced or file separate returns?
The priority in claiming a qualifying child is as follows:
(1) The parent of the child.
(2) If both parents qualify, then the parent with whom the child has resided with the
longest during the year.
(3) If the child resides with the parents equally or the child resides with taxpayers
who are not parents (the child is not a qualifying child of a parent), then the
taxpayer with the highest AGI.
In the case of divorced parents or parents filing separately, the parent with whom the
child has resided with the longest during the year has priority for the exemption (the
custodial parent). However, the custodial parent can release the exemption to the
noncustodial parent through a written declaration. The noncustodial parent attaches the
declaration to his or her tax return. If the child resides an equal time with each parent
(as would likely be the case if the married couple was filing separately), the parent with
the higher AGI has priority.
20.
[LO 2] 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.
Because her father meets the relationship and gross income test for a qualifying relative,
the support test is the only obstacle for Isabella to claim a dependency exemption for her
father. The basic support test requires that Isabella must have provided more than half
4-5
of the support for her father in order to claim a dependency exemption for him. Because
Isabella provides only 30% of her fathers support, she does not meet the basic test.
However, Isabella could potentially
qualify to claim a dependency exemption for her father under a multiple support
agreement. For Isabella to qualify, the following requirements must be met:
1. No other taxpayer paid over half of her fathers support.
2. Isabella and at least one other person provided more than half the support of
her father, and Isabella and the other person or persons would have been allowed
to claim an exemption for Hastings except for the fact that neither met the support
test.
3. Isabella provided over 10% of her fathers support (she provided 30%).
4. The other person or persons who provided more than 10% of Hastings support
must provide a signed statement to Isabella agreeing not to claim Hastings as a
dependent. Isabella would include the names, addresses, and social security
numbers of each other person on a Form 2120- which she would include with her
tax return for the year.
21.
[LO 3] What requirements do an abandoned spouse and qualifying widow or widower

have in common?
Taxpayers qualifying as an abandoned spouse are treated as not married at the end of
the year and may therefore qualify for the head of household filing status. The
requirements for both abandoned spouse and qualifying widow or widower require that
the taxpayer no longer be living with his or her spouse at year end, whether through
death (for qualifying widow or widower) or by separation (for at least 6 months for
abandoned spouse). Further, both require that the taxpayer has a dependent child who
resides with the taxpayer. The qualifying widow status requires that the dependent child
live with the taxpayer for the entire year. The abandoned spouse status requires that the
dependent child live with the taxpayer for more than half the year. Furthermore, for
qualifying widow status, the dependent child must be a child or stepchild (including an
adopted child but not a foster child) for whom the taxpayer can claim a dependency
exemption. For abandoned spouse/head of household purposes, the dependent child
must be a child, stepchild (including an adopted child), or a foster child.
22.
[LO 3] True or False. For purposes of determining head of household filing status, the
taxpayers mother or father is considered to be a qualifying person of the taxpayer (even
if the mother or father does not qualify as the taxpayers dependent) as long as the
taxpayer pays more than half the costs of maintaining the household of the mother or
father. Explain.
False. The taxpayer must be able to claim a dependency exemption of his or her father
or mother in order for the father or mother to be a qualifying person for purposes of
determining head of household filing status.
4-6
23.
[LO 3] Is a qualifying relative always a qualifying person for purposes of determining

head of household filing status?
No. A qualifying relative who meets the relationship test only because the individual
lived as a member of the taxpayers household for the entire year (no qualifying family
relationship) is not a qualifying person for head of household filing status purposes.
24.
[LO 3] 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 taxpayers spouse?
Married couples filing joint returns combine their income and deductions and agree to
share joint and several liability for the resulting tax. Filing a joint return generally
results in a lower tax liability than does filing separately due to more favorable tax rate
schedules and higher phase-out thresholds for various tax benefits. However, a couple
may prefer to file separate returns in certain circumstances for nontax reasons. For
example, when a married couple is separated but the couple does not want to have
anything to do with each other or when one spouse does not want to be liable for the tax
liability of both parties, the couple may choose to file separately.
25.
[LO 3] What does it mean to say that a married couple filing a joint tax return has joint
and several liability for the taxes associated with the return?
Each spouse is liable for the full amount of taxes owed on a joint return, regardless of
which spouse earned the associated income.
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Problems
26. [LO 1] 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 qualifies for
the child tax credit.
a. Use the 2013 tax rate schedules to determine Jeremys taxes due.
Jeremy will owe $13,827.50 calculated as follows:
Description
(1) Gross income
Amount
106,000
Computation
$100,000 salary + $6,000
interest income
(2) For AGI deductions

(3) Adjusted gross income
(4) Standard deduction
(5) Itemized deductions
(6) Greater of standard deductions or
itemized deductions
(7) Personal and dependency
0
$106,000
8,950
17,000
17,000
11,700
(1) (2)
Head of household
(5) > (4)
3,900 3 (personal
exemptions
exemption and two
(8) Taxable income

Income tax liability
$77,300
$13,827.5
dependency exemptions)
(3) - (6)- (7)
(77,300 48,600) 25%
+ $6,652.50 (see tax rate

schedule for head of
household)
4-8
b. Assume that in addition to the original facts, Jeremy has a long-term capital gain of
$4,000. What is Jeremys tax liability including the tax on the capital gain (use the tax rate
schedules rather than the tax tables)?
Jeremy will owe $14,427.50 calculated as follows:
Description
(1) Gross income
Amount
110,000
Computation
$100,000 salary + $6,000 interest
income + 4,000 long-term capital
gains

(6) Greater of standard
0
$110,000
8,950
17,000
17,000
(1) (2)
Head of household
(5) > (4)
deductions or itemized
deductions
(7) Personal and
dependency exemptions
(8) Taxable income
11,700
$81,300
$14,427.5
3,900 3 (personal exemption and

two dependency exemptions)
(3) (6) (7)
($77,300 48,600) 25% +
6,652.5 + 4,000 15% (See tax rate
schedule for head of household.
Also note that the qualified dividend
is taxed at a maximum rate of 15%.)
c. Assume the original facts except that Jeremy had only $7,000 in itemized deductions.
What is Jeremys total income tax liability (use the tax rate schedules rather than the tax
tables)?
4-9
Jeremy will owe $15,840, calculated as follows:

Description
(1) Gross income
Amount
106,000
Computation
$100,000 salary + $6,000
interest income

itemized deductions
0
$106,000
8,950
7,000
8,950
11,700
(1) (2)
Head of household
(4) > (5)
3,900 3 (personal
exemptions
exemption and two
(8) Taxable income

dependency exemptions)
(3) (6) (7)
(85,350 48,600) 25% +
$85,350
$15,840
6,652.5 (see tax rate

schedule for head of
household)
27. [LO 1] 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?
4-10
David and Lilly will receive a tax refund of $800 calculated as follows:
Description
(1) Total tax
(2) Child tax credit
(3) Prepayments
Tax (refund)
Amount
$1,700
1,000
1,500
($800)
Computation
(1) (2) (3)
Prepayments are fully refundable when payments exceed the taxes after credits because the
refundable amount is essentially an overpayment of taxes.
28.
[LO 1] {Planning} 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 deductions
a.
What is the amount of Ricks after-tax compensation (ignore payroll taxes)?
Ricks after-tax compensation is $99,506.75 calculated as follows:

Description
(1) Gross income
(5) Personal and
(6) Taxable income
(7) Income tax liability
Amount
125,000
0
$125,000
6,100
3,900
$115,000
$25,493.25
Computation
(1) (2)
Single taxpayer
3,900 1 (personal exemption)
(3) (4) (5)
(115,000 87,850) 28% +
17,891.25 (see tax rate
After-tax compensation
$99,506.75
schedule for Single individuals)

(1) (7)
4-11
b.
Suppose Rick receives a competing job offer of $120,000 in cash compensation

and nontaxable (excluded) benefits worth $4,000. What is the amount of Ricks
after-tax compensation for the competing offer? Which job should he take if taxes
were the only concern?
Ricks after-tax compensation is $99,906.75 calculated as follows:

Description
(1) Gross income
Amount
120,000
Computation
120,000 cash
compensation

0
$120,000
(1) (2)
6,100
Single
(5) Personal and dependency exemptions
3,900
3,900 1 (personal
$110,000
$24,093.2
exemption)
(3) (4) (5)
(110,000 87,850)
28% + 17,891.25 (see
(6) Taxable income

tax rate schedule for

After-tax compensation
$99,906.7
single individuals)
(1) (7) + $4,000
excluded benefits
Note that Ricks after-tax benefit is higher with lower salary and more nontaxable
benefits. Rick is likely to take the second option, particularly if he would have paid for
the benefits had they not been provided to him as compensation.
4-12
29.
[LO 1] {Planning} 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 contrast, engagement 2 will generate $7,000 of revenue at a cost of $3,000,
which is deductible as an itemized deduction. Tex files as a single taxpayer.
a. Calculate Texs taxable income assuming he chooses engagement 1 and assuming he

chooses engagement 2. Assume he has no itemized deductions other than those generated
by engagement 2.
Description
Engagement 1
Engagement 2
(1) Gross income before new

work engagement
$120,000
$120,000
(2) Income from engagement
7,000
7,000
(3) Additional for AGI deduction

(4,000)
Computation
$123,000
$127,000
(1) + (2) + (3)
(5) Greater of itemized

deductions or standard
deduction
(6,100)
(6,100)
$3,000
itemized
deductions for
engagement 2
(6) Personal exemption
(3,900)
(3,900)
$113,000
$117,000
Taxable income
(4) + (5) + (6)
b. Calculate Texs taxable income assuming he chooses engagement 1 and assuming he

chooses engagement 2. Assume he has $4,500 of itemized deductions other than those
generated by engagement 2.
4-13
Description
Engagement 1
Engagement
2
(1) Gross income before new work

engagement
$120,000
$120,000
7,000
7,000

(4,000)
$123,000
$127,000
(5) Greater of itemized deductions

or standard deduction
(6,100)
(7,500)
(3,900)
(3,900)
$113,000
$115,600
Taxable income
Computation
(1) + (2) + (3)

$3,000 + 4,500 for
engagement 2
(4) + (5) + (6)
c. Calculate Texs taxable income assuming he chooses engagement 1 and assuming he

chooses engagement 2. Assume he has $7,000 of itemized deductions other than those
generated by engagement 2.
Description
Engagement 1
Engagement
2
(1) Gross income before new work

engagement
$120,000
$120,000
7,000
7,000

(4,000)
Computation
$123,000
$127,000
(1) + (2) + (3)
(5) Greater of itemized deductions

or standard deduction of $6,100
(7,000)
(10,000)
$7,000 + $3,000*
*engagement 2
only
(3,900)
(3,900)
$112,100
$113,100
Taxable income
(4) + (5) + (6)
4-14
30.
[LO 1] {Planning} Matteo, who is single and has no dependents, was planning on
spending the weekend repairing his car. On Friday, Matteos employer called and offered
him $500 in overtime pay if he would agree to work over the weekend. Matteo could get
his car repaired over the weekend at Autofix for $400. If Matteo works over the
weekend, he will have to pay the $400 to have his car repaired, but he will earn $500.
Assume Matteo pays tax at a flat 15 percent rate?
a. Strictly considering tax factors, should Matteo work or repair his car if the $400
he must pay to have his car fixed is not deductible?
If Matteo works, he will receive $500, but he will have to pay $75 in taxes ($500 x
15%), netting him $425. He then must pay $400 for his car to be repaired which means
he will save $25 ($425 400) by working. If he doesnt work, he wont have any income,
he wont pay any taxes, and he wont have to pay to have his car repaired. Overall, he
would be $25 better off by working.
Note that taxes may not be the only concern here. Matteo would also need to
factor in how much he enjoys repairing his car and how much he enjoys working. He
could also consider whether he will do a better job repairing his car or whether Autofix
could do a better job
b. Strictly considering tax factors, should Matteo work or repair his car if the $400
he must pay to have his car fixed is deductible for AGI?
If Matteo works, he will receive $500, and he will be allowed to deduct the $400
repair expense, leaving him with taxable income of $100 ($500 400) on which he will
pay $15 in taxes. So, if he works, he will receive $500, pay $400 to have his car fixed,
and pay $15 in taxes, leaving him with $85. If he doesnt work, he wont have any
income, he wont pay any taxes, and he wont be out of pocket because he will do his own
repair work (assuming the repair only requires labor). So, hes $85 better off by working
and having his car repaired by Autofix.
Note that taxes may not be the only concern here. Matteo would also need to
factor in how much he enjoys repairing his car and how much he enjoys working. He
could also consider whether he will do a better job repairing his car or whether Autofix
could do a better job.
4-15
31.
[LO 1, 2] Rank the following three single taxpayers in order of the magnitude of taxable
income (from lowest to highest) and explain your results.
Gross Income
Deductions For AGI
Itemized Deductions
Ahmed
Baker
Chin
$ 80,000
8,000
0
$ 80,000
4,000
4,000
$ 80,000
0
8,000
Chin has the highest taxable income, followed by Baker and then Ahmed. Chins
taxable income is highest because he had no for AGI deductions, and Ahmed has the
lowest because he had the most for AGI deductions. Baker did not benefit from the
itemized deductions because they did not exceed the standard deduction. Chin only
benefited from the itemized deductions to the extent the deductions exceeded the
standard deduction. See the following analysis:
Description
(1) Gross income
Ahmed
$80,000
(8,000)
$72,000
(6,100)
0
(6,100)
Baker
$80,000
(4,000)
$76,000
(6,100)
(4,000)
(6,100)
Chin
$80,000
0
$80,000
(6,100)
(8,000)
(8,000)
Computation
(1)+ (2)
Single taxpayer
Ahmed: (4) > (5)
Baker: (4) > (5)
deductions
Chin: (5) > (4)

3,900 1
(3,900)
(3,900)
(3,900)
exemptions
Taxable income
32.
(personal
$62,000
$66,000
$68,100
exemption)
(3) + (6)+ (7)
[LO 2] Aishwaryas husband passed away in 2012. She needs to determine whether
Jasmine, her 17-year old step-daughter who is single, qualifies as her dependent in 2013.
Jasmine is a resident but not a citizen of the United States. She lived in Aishwaryas
home from June 15 through December 31, 2013. Aishwarya provided more than half of
Jasmines support for the 2013.
4-16
a. Is Aishwarya allowed to claim a dependency exemption for Jasmine for 2013?

Yes, Aishwarya may claim a dependency exemption for Jasmine in 2013. Jasmine meets the
citizenship/residency test because she is a resident of the United States, and she meets the
requirements to be considered Aishwaryas qualifying child as follows:
Test
Relationship
Age
Residence
Support
Jasmine
Yes, stepdaughter qualifies
Jasmine is under 19 at the end of the year
Jasmine had the same principal residence as Aishwarya for more
than half the year
Jasmine does not provide more than half her own support.
b. Would Aishwarya be allowed to claim a dependency exemption for Jasmine for 2013 if
Aishwarya provided more than half of Jasmines support in 2013, Jasmine lived in Aishwaryas
home from July 15 through December 31 of 2013, and Jasmine reported gross income of
$5,000 in 2013?
No. Jasmine would fail the qualifying child test because she did not have the same principal
residence as Aishwarya for more than half the year. Jasmine would fail the qualifying relative
test because her gross income exceeds the $3,900 personal exemption amount for 2013.
c. Would Aishwarya be allowed to claim a dependency exemption for Jasmine for 2013 if
Aishwarya provided more than half of Jasmines support in 2013, Jasmine lived in Aishwaryas
home from July 15 through December 31 of 2013, and Jasmine reported gross income of
$2,500 in 2013?
Yes, Jasmine would qualify as Aishwaryas qualifying relative as follows:
Test
Relationship
Support
Gross income
33.
Jasmine
Yes, stepdaughter qualifies
Aishwarya provided more than half of Jasmines support
Jasmines gross income does not exceed the dependency
exemption amount.
[LO 2] 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-ofstate university. Jason lived in his parents home for three months of the year, and he was
away at school for the rest of the year. He received $9,500 in scholarships this year for
his outstanding academic performance and earned $4,800of income working a part-time
4-17
job during the year. The Samsons paid a total of $5,000to support Jason while he was
away at college. Jason used the scholarship, the earnings from the part-time job, and the
money from the Samsons as his only sources of support.
a. Can the Samsons claim Jason as their dependent?
Yes, the Samsons may claim Jason as their dependent. He is their qualifying child. See the
following analysis.
Test
Relationship
Age
Residence
Support
Jason
Yes, adopted son qualifies
Yes, under age 24 and a full-time student (and younger than
parents).
Yes, temporary absences away at school count as time in the
parents home.
Yes. The Samsons provided $5,000 of support for Jason. Jason
provided $4,800 of his own support (Jason did not provide more
than half his own support). Jason also received $9,500 of
scholarship money, but this does not count as support provided
for himself because he is an actual child of the Samsons.
b. Assume the original facts except that Jasons grandparents, not the Samsons, provided
him with the $5,000 worth of support. Can the Samsons (Jasons parents) claim Jason as
their dependent? Why or why not?
Yes, the Samsons may claim Jason as their dependent. Jason is their qualifying child. See the
following analysis.
Test
Relationship
Age
Residence
Support
Jason
Yes, Jason is their (adopted) son.
Yes, under age 24 and a full-time student (and younger than his
parents).
parents home.
Yes, even though Jasons parents did not provide any of his
support, Jason did not provide more than half of his own support
because his grandparents provided $5,000 of support for Jason.
Jason provided $4,800 of his own support. Jason also received
$9,500 of scholarship money, but this does not count as support
provided for himself because he is an actual child of the Samsons,
who are claiming him as a dependent.
4-18
c. Assume the original facts except substitute Jasons grandparents for his parents.
Determine whether Jasons grandparents can claim Jason as a dependent.
No, the grandparents may not claim Jason as a dependent. He is neither a qualifying child nor
a qualifying relative.
Test
Relationship
Age
Residence
Support
Jason
Yes, Jason is the descendant of the taxpayers child (one of
Jasons parents is the child of the taxpayers grandparents)
grandparents).
grandparents home since that is his permanent residence.
No, Jasons grandparents provided $5,000 of support. Jason
provided $4,800 of his own support through his part time job. He
also provided $9,500 of his own support through a scholarship.
In this case, because the taxpayers are not Jasons parents, the
$9,500 scholarship counts as support provided by Jason. So, he
provides more than half his own support, and he does not meet
the support test to qualify as a qualifying child of his
grandparents. Because the grandparents did not provide more
than half of Jasons support, Jason would not qualify as a
qualifying relative either.
d. Assume the original facts except that Jason earned $5,500 while working part-time and
used this amount for his support. Can the Samsons claim Jason as their dependent? Why
or why not?
4-19
No, the Samsons may not claim Jason as their dependent. He is neither their qualifying child
nor their qualifying relative. See the following analysis.
Test
Relationship
Age
Residence
Support
34.
Jason
Yes, adopted son qualifies
parents).
parents home.
No, the Samsons provided $5,000 of support for Jason. Jason
provided $5,500 of his own support. Jason also received $9,500
of scholarship money, but this does not count as support provided
for himself because he is an actual child of the Samsons.
Nevertheless, because Jason provided more than half of his own
support, he is neither a qualifying child nor a qualifying relative
to his parents. Jason could also not be a qualifying relative
because his income of $5,500 was greater than the personal
exemption amount.
[LO 2] John and Tara Smith are married and have lived in the same home for over 20
years. Johns 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 anyhis gross
income for the year is $2,000. Tim used all $2,000 toward his own support. The Smiths
provided the rest of Tims support by providing him with lodging valued at $5,000 and
food valued at $2,200.
a. Are the Smiths able to claim a dependency exemption for Tim?
Yes. The Smiths may claim Tim as a dependent as a qualifying relative as analyzed below
Test
Relationship
Age
Residence
Support
Gross income
Tim
Yes, Tim meets qualifying relative test.
Not applicable to qualifying relative
Yes. The Smiths provided more than half of Tims support
($7,200/$9,200).
Yes, Tims gross income is less than the exemption amount.
b. Assume the original facts except that Tim earned $10,000 and used all the funds for his
own support. Are the Smiths able to claim Tim as a dependent?
No. The Smiths may not claim Tim as a dependent because he is not a qualifying relative as
analyzed below.
4-20
Test
Relationship
Age
Residence
Support
Gross income
Tim
Yes, Tim meets qualifying relative test.
No, the Smiths did not provide more than half of Tims support
($7,200/$17,200).
No, Tims gross income ($10,000) is more than the exemption
amount.
c. Assume the original facts except that Tim is a friend of the family and not Johns uncle.
No. The Smiths may not claim Tim as a dependent because he is not a qualifying relative as
analyzed below.
Test
Relationship
Age
Residence
Support
Gross income
Tim
No. No family relationship, and Tim did not live with the Smiths
for the entire year.
Yes, the Smiths provided more than half of Tims support
($7,200/$9,200).
d. Assume the original facts except that Tim is a friend of the family and not Johns uncle
and Tim lived with the Smiths for the entire year.
Yes. The Smiths may claim Tim as a dependent because he is a qualifying relative as analyzed
below.
Test
Relationship
Age
Residence
Support
Gross income
Tim
Yes. Tim is not related, but he lived with the Smiths for the entire
year.
Yes. The Smiths provided more than half of Tims support
($7,200/$9,200).
4-21
35. [LO 2] Francines 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 year.
a. Is Francine a qualifying child to Donna?
Yes, see analysis below.
Test
Relationship
Age
Residence
Support
Francine
Yes, Francine is Donnas daughter.
Yes, under age 19 at end of year (and younger than Donna)
Yes, Francine lived with Donna for more than half the year.
Yes, Francine does not provide more than half her own support.
b. Is Francine a qualifying child to Darren?

Yes, see analysis below.
Test
Relationship
Age
Residence
Support
Francine
Yes, Francine is Darrens daughter.
Yes, under age 19 at end of year (and younger than Darren)
Yes, Francine lived with Darren for more than half the year.
Yes, Francine does not provide more than half her own support..
c. Assume Francine spends more time living with Darren than Donna after the separation.
Who may claim Francine as a dependency exemption for tax purposes?
Darren. When a child is a qualifying child of both parents, the parent with whom the child
resides for the longest period of time during the year is entitled to claim the exemption. In this
case, because Francine lived with Darren longer than she lived with Donna, Darren is entitled
to the exemption. However, Darren could release the exemption to Donna under the divorce
agreement.
d. Assume Francine spends an equal number of days with her mother and her father and that
Donna has AGI of $52,000 and Darren has AGI of $50,000. Who may claim a dependency
exemption for Francine?
Donna. Because Francine lived with Donna and Darren an equal amount of time during the
year, the tiebreaker on who may claim the exemption for Francine is based on each taxpayers
AGI. In this case Donnas AGI is higher than Darrens so she is entitled to the exemption
deduction. However, Donna could release the exemption to Darren.
4-22
36.
[LO 2] 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 half of
her own support. Abbi is a full-time student at a local university and does not have any
gross income.
a.
How many personal and dependency exemptions are Jamel and Jennifer allowed to
claim?
Jamel and Jennifer may claim five exemptions in total. Two personal exemptions for
themselves and three exemptions for their daughters who all qualify as their qualifying
children as analyzed below.
Test
Relationship
Age
Jade
Yes, daughter
Yes, under age 19 at
end of year (and
younger than
parents)
Lindsay
Yes, daughter
end of year (and
younger than
parents)
Residence
Yes, lived at home

entire year
Yes, did not provide
more than half of
own support
Yes, lived at home

entire year
more than half of
own support
Support
Abbi
Yes, daughter
end of year and a
full-time student
(and younger than
parents).
Yes, lived at home
entire year
more than half of
own support
b.
Assume the original facts except that Abbi is married. She and her husband live with
Jamel and Jennifer while attending school and they file a joint return. Abbi and her husband
reported a $1,000 tax liability on their tax return. If all parties are willing, can Jamel and
Jennifer claim Abbi as a dependent on their tax return? Why or why not?
No, Jamel and Jennifer may not claim Abbi as a dependent because she filed a joint return
with her husband, and they reported a tax liability on their joint return.
c.
Assume the same facts as part b. except that Abbi and her husband report a $0 tax
liability on their joint tax return. Also, if the couple had filed separately, Abbi would have not
had a tax liability on her return, but her husband would have had a $250 tax liability on his
separate return. Can Jamel and Jennifer claim Abbi as a dependent on their tax return? Why or
why not?
4-23
No. Jamel and Jennifer may not claim Abbi as a dependent even though she is their qualifying
child because she fails the joint return test. Even though the couple had no tax liability on
their joint return and Abbi would not have had a tax liability on a separate return, because
Abbis husband would have reported a tax liability on his separate return, Jamel and Jennifer
may not claim her as a dependent.
d.
Assume the original facts except that Abbi is married. Abbi files a separate tax return.
Abbis husband files a separate tax return and reports a $250 tax liability. Can Jamel and
Jennifer claim Abbi as a dependent?
Yes. Because Abbi files a separate return, and she meets all other dependency requirements
(see answer to part a). Jamel and Jennifer may claim a dependency exemption for Abbi.
37.
[LO 2, 3] Dean Kastner is 78 years old and lives by himself in an apartment in Chicago.
Deans gross income for the year is $2,500. Deans support is provided as follows:
Himself (5%), his daughters Camille (25%) and Rachel (30%), his son Zander (5%), his
friend Frankie (15%), and his niece Sharon (20%).
a. Absent a multiple support agreement, of the parties mentioned in the problem, who
may claim a dependency exemption for Dean as a qualifying relative?
Because they do not provide over half of Deans support individually, neither Camille,
Rachel, Zander, Frankie, nor Sharon is eligible to claim Dean as a dependent qualifying
relative. In addition, Frankie fails the relationship test because he is unrelated to Dean,
and he did not live with Dean for the entire year (he did not live with him at all during the
year).
b. Under a multiple support agreement, who is eligible to claim a dependency
exemption for Dean as a qualifying relative? Explain.
Camille, Rachel, and Sharon are eligible because of the following:
1. No one taxpayer paid over half the support for Dean.
2. Together, Camille, Rachel, Sharon, and Zander provided more than half of Deans
support (80%) and Camille, Rachel, Sharon, and Zander would have each been able to
claim a dependency exemption for Dean except for the fact that each did not meet the
support test (Frankie fails the relationship test for qualifying relative)
3. Camille, Rachel, and Sharon each provided over 10% of Deans support.
4. Camille, Rachel, and Sharon can claim the exemption, but the two parties who do not
claim it must provide a signed statement to the person claiming the exemption stating
that she will not claim an exemption for Dean. The person claiming the exemption
would attach a Form 2120 to her return indicating the names, addresses, and social
security numbers of the two who did not claim Dean as a dependent.
4-24
c. Assume that Camille is allowed to claim Dean as a dependent under a multiple

support agreement. Camille is single and Dean is her only dependent. What is
Camilles filing status?
Camille must file as a single taxpayer. Because she claims Dean as a dependent under a
multiple support agreement, Dean is not a qualifying person for purposes of determining
head of household status for Camille.
38.
[LO 2] {Research} Mel and Cindy Gibsons 12-year-old daughter Rachel was abducted
on her way home from school on March 15, 2013. Police reports indicated that a stranger
had physically dragged Rachel into a waiting car and sped away. Everyone hoped that
the kidnapper and Rachel would be located quickly. However, as of the end of the year,
Rachel was still missing. The police were still pursuing several promising leads and had
every reason to believe that Rachel was still alive. In 2014, Rachel was returned safely to
her parents.
a. Are the Gibsons allowed to claim an exemption deduction for Rachel in 2012 even though
she only lived in the Gibsons home for two and one half months? Explain and cite your
authority.
Yes, the Gibsons will be able to claim a dependency exemption for Rachel. IRC 152(f)(6)
indicates that for purposes of determining whether a child is considered to be a qualifying
child of the taxpayer, a child who is (1) presumed by law enforcement officers to have been
kidnapped by someone who is not a member of the family of the child or the taxpayer, and (2)
who had, for the taxable year in which the kidnapping occurred, the same principal place of
abode as the taxpayer for more than half of the portion of the year before the date of the
kidnapping shall be treated as meeting the residence test for a qualifying child under 152(c)
(1)(B). Because Rachel did not provide more than half her own support for the year, she would
qualify as a dependent of the Gibsons as their qualifying child.
b. Assume the original facts except that Rachel is unrelated to the Gibsons, but she has been
living with them since January 2008. The Gibsons have claimed a dependency exemption for
Rachel for the years 2008 through 2012. Are the Gibsons allowed to claim a dependency
exemption for Rachel in 2013? Explain and cite your authority.
No. In this case, because Rachel does not meet the relationship test for a qualifying
child, the special rule of 152(f)(6) does not apply. Rachel may only qualify as a
dependent as a qualifying relative. However, because she is not related to the Gibsons
under 152(d)(2), and she did not live with the Gibsons for the entire taxable year
[152(d)(2)(H)] she does not qualify as a qualifying relative of the Gibsons. So, they
cannot claim her as a dependent.
4-25
39.
{LO 2} {Research} 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, when Bob filed the tax return he didnt know Dylans Social Security
number and, therefore, didnt include an identifying number for his son on the tax return.
Instead, Bob submitted an affidavit with his tax return stating he had requested Dylans
Social Security number from Dylans birth state. Is Bob allowed to claim a dependency
exemption for Dylan without including Dylans identifying number on the return?
No. IRC 151(e) states, No exemption shall be allowed under this section with respect to any
individual unless the TIN {tax identification number} of such individual is included on the
return claiming the exemption. A taxpayer may include an affidavit stating a request for an
identifying number has been made in lieu of the actual identifying number, but only in
situations where the number has been applied for for a foreign person or nonresident
alien[Reg. 301.6109-1(c)]. Since Dylan is not a foreign person or a nonresident alien, Ryan
is not allowed to claim a dependency exemption for Dylan. See also [2000-1 USTC 50,324]
Thomas W. Furlow, Jr. v. United States of America, (CA-4) where the taxpayer was denied a
dependency exemption for his son because he failed to provide the childs social security
number or taxpayer identification number even though the father attached an affidavit to the
return in lieu of a tax identification number.
40.
[LO 2, 3] Kimberly is divorced and the custodial parent of a 3-year-old girl named
Bailey. Kimberly and Bailey live with Kimberlys parents, who pay all the costs of
maintaining the household (such as mortgage, property taxes, and food). Kimberly pays
for Baileys clothing, entertainment, and health-insurance costs. These costs comprised
only a small part of the total costs of maintaining the household. Kimberly does not
qualify as her parents dependent.
a. Determine the appropriate filing status for Kimberly.
Single. To qualify as head of household, a taxpayer must pay more than half the costs of
maintaining a household that is the principal place of abode for a dependent who is a
qualifying child (or for maintaining a separate household for her mother or father if the
mother or father also qualifies as a dependent of the taxpayer). Kimberly does not provide
more than half the costs of maintaining the household where her children reside. Because she
does not qualify as head of household, and she is not married, she must file as a single
taxpayer.
b. If Kimberly lived in her own home and provided all the costs of maintaining the
household, what would her filing status be?
4-26
Head of household. She meets the requirement of paying for more than half (for more than
half the taxable year) the costs of maintaining a household that is the principal place of abode
for a dependent who is a qualifying child.
c. Assume Kimberly qualifies as her parents dependent. How many personal and
dependency exemptions may she claim on Kimberlys tax return?
Zero. Because Kimberly can be claimed as a dependent by another person, she is not allowed
to claim a personal exemption for herself and she is not allowed to claim any dependency
exemptions.
41.
(LO 2, 3) Lee is 30 years old and single. Lee paid all the costs of maintaining his
household for the entire year. Determine Lees filing status in each of the following
alternative situations:
a. Lee is Ashtons uncle. Ashton is 15 years old and has gross income of $5,000.
Ashton lived in Lees home from April 1 through the end of the year
b. Lee is Ashtons uncle. Ashton is 20 years old, not a full-time student, and has gross
income of $7,000. Ashton lived in Lees home from April 1 through the end of the
year
c. Lee is Ashtons uncle. Ashton is 22 years old and was a full-time student from
January through April. Ashtons gross income was $5,000. Ashton lived in Lees
home from April 1 through the end of the year
d. Lee is Ashtons cousin. Ashton is 18 years old, has gross income of $3,000, and is
not a full-time student. Ashton lived in Lees home from April 1 through the end of
the year
e. Lee and Ashton are cousins. Ashton is 18 years old, has gross income of $3,000,
and is not a full-time student. Ashton lived in Lees home for the entire year.
a. Head of Household. Ashton is Lees qualifying child. Consequently Ashton is a
qualifying person for determining head of household status for Lee.
b. Single. Ashton does not qualify as Lees dependent, so he is not a qualifying person
for determining head of household status for Lee. Ashton is not Lees qualifying child
because Ashton is too old, and Ashton is not Lees qualifying relative because Ashton
has too much gross income.
c.
Single. Same as b. Ashton is too old to be Lees qualifying child because he was not
a full-time student during five months of the year. Also, Ashton is not Lees qualifying
dependent because he has too much gross income.
4-27
42.
d.
Single. Ashton is not a qualifying person for determining head of household status
for Lee because he does not qualify as Lees dependent. Ashton does not have a
qualifying family relationship with Lee for either qualifying child or qualifying
relative.
e.
Single. Ashton is not a qualifying person for determining head of household status
for Lee because even though he qualifies as Lees dependent, he does so only because
he lived in Lees home for the entire year.
(LO 2, 3) Ray Albertson is 72 years old and lives by himself in an apartment in Salt Lake
City. Rays gross income for the year is $3,000. Rays support is provided as follows:
Himself (11%), his daughters Diane (20%) and Karen (15%), his sons Mike (20%) and
Kenneth (10%), his friend Milt (14%), and his cousin Henry (12%).
a. Absent a multiple support agreement, of the parties mentioned in the problem, who may
claim a dependency exemption for Ray as a qualifying relative?
No one. Because they individually do not provide over half of Rays support, Ray is not
a qualifying relative of any of his children (Diane, Karen, Mike, and Kenneth). He is
also not a qualifying relative of Milt or Henry because they fail the relationship test
and support test for Ray.
b. Under a multiple support agreement, who is eligible to claim a dependency exemption
for Ray as a qualifying relative? Explain.
1.
2.
3.
4.
Diane, Karen, and Mike are eligible because of the following:

No one taxpayer paid over half the support for Ray.
Together, Diane, Karen, Mike, and Kenneth provided more than half of Rays support
(65%) and Diane, Karen, Mike, and Kenneth would have each been able to claim a
dependency exemption for Ray except for the fact that each did not meet the support test
(Milt and Henry fail the relationship test for qualifying relative).
Diane, Karen, and Mike each provided over 10% of Rays support.
Diane, Karen, and Mike can claim the exemption, but the two parties who do not claim it
must provide a signed statement to the person claiming the exemption stating that they
will not claim an exemption for Ray. The person claiming the exemption would attach a
Form 2120 to his or her tax return indicating the names, addresses, and social security
numbers of the two who did not claim Ray as a dependent.
c. Assume that under a multiple support agreement, Diane claims a dependency
exemption for Ray. Diane is single with no other dependents. What is her filing status?
4-28
Single. Even though Diane can claim a dependency exemption for Ray, because Diane
did not provide more than half of Rays support, Ray is not a qualifying person for
purposes of determining head of household status for Diane.
43.
[LO 3] 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 Bonitas filing status this year?
Married filing jointly. For tax purposes, the couple is still considered married for the year of
the spouses death.
b. Assuming Bonita doesnt remarry and still has two dependent children living at home,
what will her filing status be next year?
Qualifying widow. See the analysis below.
Qualifying widow test:
Test
Bonita
Time
Yes, within two years after the end of the year of the death of Juan
Unmarried
Yes, Bonita has remained unmarried.
Dependents
Yes, Bonita maintains a home for her two dependent children.
c. Assuming Bonita doesnt remarry and doesnt have any dependents next year, what will
her filing status be next year?
Single. Because Bonita is not a qualifying widow and is not married, she must file as a
single taxpayer. See the analysis below.
Qualifying widow test:
Test
Bonita
Time
Yes, within two years after the end of the year of the death of Juan
Unmarried
Yes, Bonita has remained unmarried.
Dependents
No, Bonita does not maintain a home for any dependent children.
44.
a.
[LO 3] 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.
What filing status options do Gary and Lakesha have for last year?
4-29
To be married for filing status purposes, taxpayers must be married at the end of the year.
Although Gary and Lakesha were married on the last day of the year, they are still
considered married for the entire year for filing purposes. Gary and Lakesha may file as
married filing jointly, or they may elect to file as married filing separately.
b. Assume instead that Gary and Lakesha were married on January 1 of this year. What is
their filing status for last year (neither has been married before and neither had any
dependents last year)?
Single. Gary and Lakesha were not married at the end of the year, therefore they must
both file single.
45.
[LO 3] Elroy, who is single, has taken over the care of his mother Irene in her old age.
Elroy pays the bills relating to Irenes home. He also buys all her groceries and provides
the rest of her support. Irene has no gross income.
a. What is Elroys filing status?

Head of household. An unmarried taxpayer may qualify as head of household by
paying more than half the costs of maintaining a separate household that is the
principal place of abode for the taxpayers mother or father if the mother or father also
qualifies as a dependent of the taxpayer. Elroy pays more than half the costs of
maintaining Irenes household. Furthermore, Irene qualifies as Elroys qualifying
relative as follows:
Test
Relationship
Age
Residence
Support
Gross income
b.
Irene
Yes. Irene is Elroys mother.
Yes. Elroy provides more than half of Irenes support.
Yes, Irenes gross income is less than the exemption amount.
Assume the original facts except that Elroy has taken over the care of his grandmother,
Renae, instead of his mother. What is Elroys filing status?
Single. To qualify as head of household, an unmarried taxpayer must pay more than
half the costs of keeping up a home for the year and must have lived with a qualifying
person in the taxpayers home for more than half the year (unless the qualifying person
is a mother or father and then special rules apply). Because Elroy did not live in the
same home for more than half the year, Renae is not a qualifying person for purposes of
determining whether Elroy qualifies as for the head of household filing status.
Consequently, Elroy will file as a single taxpayer.
4-30
c.
Assume the original facts except that Elroys mother Irene lives with him and that she
receives an annual $4,500 taxable distribution from her retirement account. Elroy still
pays all the costs to maintain the household. What is his filing status?
Single. Although Elroy provides more than half the cost of maintaining a household in
which his mother lives, she does not qualify as his dependent. She is not Elroys child
(and she is older than him) and thus cannot be a qualifying child. Further, she is not a
qualifying relative, as analyzed below.
Test
Relationship
Age
Residence
Support
Gross income
46.
Irene
Yes. Irene is Elroys mother.
Yes. Elroy provided more than half of Irenes support.
No, Irenes gross income of $4,500 is more than the exemption
amount.
[LO 3] 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 his children. Kano and Hoshi do not file a joint return.
a. What is Kanos filing status?
Head of household. Kano provides more than half the cost of maintaining a home that is
the principal place of abode for a qualifying child. His two children are qualifying
children, as analyzed below.
Kano qualifies as an abandoned spouse, as analyzed below.

Test
Kano
Married
Yes, Kano is still married to Hoshi at the end of the year.
Separate Return Yes, Kano files a separate return from Hoshi.
Maintains
Yes, Kano provides more than half the cost of maintaining his home
Home
for a qualifying child (see following table).
Time Separated Yes, Kano has not lived with Hoshi for the last six months of the year.
4-31
Test
Relationship
Age
Residence
Support
Two Children
Yes, Kanos children.
Yes, under age 19 at year end (and younger than Kano).
Yes, both children lived with Kano for more than half of the year.
Yes, Kano provides more than half of their support.
b. Assume the original facts except that Kano and Hoshi separated in May of the current
year. What is Kanos filing status?
Head of household, determined as follows:
Kano qualifies as an abandoned spouse, as analyzed below.
Test
Married
Separate Return
Maintains
Home
Time Separated
Kano
Yes, Kano files a separate return from Hoshi.
for a qualifying child (see following table).
Yes, Kano has not lived with Hoshi for the last six months of the year.
Kanos two children are qualifying children, as shown below.

Test
Relationship
Age
Residence
Support
Two Children
Yes, Kanos children.
Yes, under age 19 at year end (and younger than Kano).
Yes, both children lived with Kano for more than half of the year.
Yes, Kano provides more than half of their support.
Because Kano qualifies as an abandoned spouse, he can be treated as though he was not
married at the end of the year. This enables him to qualify for head of household status
because he is considered unmarried, and he provides more than half the cost of
maintaining a home which is the principal residence for a dependent qualifying child.
c. Assume the original facts except that Kano and Hoshi separated in November of this
year. What is Kanos filing status?
4-32
Married filing separately. Kano does not qualify as head of household because he does not
qualify as an abandoned spouse, analyzed as follows.
Test
Married
Separate Return
Maintains
Home
Time Separated
Kano
for a qualifying child.
No, Kano has not been separated from his spouse for the last six
months of the year.
d. Assume the original facts except that Kanos parents, not Kano, paid more than half of
the cost of maintaining the home in which Kano and his children live. What is Kanos
filing status?
Married filing separately. Kano does not meet the criteria for an abandoned spouse.
Consequently, he is still considered married. See the analysis below for abandoned spouse
requirements.
Test
Married
Separate Return
Maintains
Home
Time Separated
47.
a.
Kano
No, Kano does not provide more than half the cost of maintaining his
home for a qualifying child. His parents provide this cost.
Yes, Kano has not lived with Hoshi for the last six months of the year.
[LO 3] 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
situations:
Horatio and Kelly did not have any children and neither reported any dependents in the current
year.
Horatio and Kelly will both file as single taxpayers.

b.
Horatio and Kelly had one child Amy who turned 10 years of age in the current year. Amy
lived with Kelly for all of the current year, and Kelly provided all of her support.
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Horatio will file as a single taxpayer. Kelly will file as a head of household because
during the current year she paid more than half the costs of maintaining a household
for Amy (a qualified person), and Amy resided with her for more than half the taxable
year. Amy is a qualified person because she is a qualifying child who qualifies as the
taxpayers dependent (she meets the relationship, age, residence, and support test).
c.
Assume the same facts as in b. but Kelly released the exemption for Amy to Horatio even
though Amy did not reside with him at all during the current year.
Horatio will file as a single taxpayer. Even though he is allowed to claim the
exemption for Amy, she did not reside with him during the year, so he cannot meet the
head of household test. Kelly will file as head of household because during the current
year she paid more than half the costs of maintaining a household for Amy (a qualified
person) and Amy resided with her for more than half the taxable year. Amy is a
qualified person because Kelly is the custodial parent and she would have been able to
claim an exemption for Amy as a qualifying child (she meets the relationship, age,
residence, and support test) except for the fact that she released the dependency
exemption to Horatio.
d.
Assume the original facts except that during the current year Madison a 17-year old friend of
the family lived with Kelly (for the entire year) and was fully supported by Kelly.
Horatio would file as single. Kelly would also file as single. Even though Kelly would
be allowed to claim a dependency exemption for Madison as a qualifying relative,
Madison is not a qualifying person for purposes of the head of household test because
she only qualifies as a dependent to Kelly because she was a member of Kellys
household for the entire year. Madison does not have a family relationship with Kelly.
e.
Assume the original facts except that during the current year Kellys mother Janet lived with
Kelly. For the current year, Kelly was able to claim a dependency exemption for her mother
under a multiple support agreement.
Horatio would file as single. Kelly would also file as single. Even though Kelly may
claim a dependency exemption for Janet, Janet is not a qualifying person for purposes
of the head of household test because Janet qualifies as Kellys dependent under a
multiple support agreement.
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48.
a.
[LO 2, 3] In each of the following independent situations, determine the taxpayers filing
status and the number of personal and dependency exemptions the taxpayer is allowed to
claim.
Frank is single and supports his 17-year-old brother, Bill. Bill earned $3,000 and did not live
with Frank.
Single with two exemptions; one personal and one dependency exemption for Bill.
Frank will file as single, not head of household. Bill is not a qualifying person for purposes of
the head of household test because Bill did not live as member of Franks household for more
than half the year.
Frank can claim an exemption for Bill because Bill qualifies as Franks qualifying relative as
follows:
Test
Relationship
Age
Residence
Support
Gross income
Bill
Yes, Bill is taxpayers brother.
Yes, more than half of Bills support is provided by Frank.
Yes, Bills gross income ($3,000) is less than the exemption
amount.
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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.
Married filing jointly with two personal exemptions and one dependency exemption for
Steve. Steve meets the test to be Geneva and her husbands qualifying child as follows:
Test
Relationship
Age
Residence
Support
c.
Steve
Yes, Steve is the taxpayers son.
Yes, under age 24 and a full-time student (and younger than
parents).
parents home
Yes, even though the Steve earned $13,100, he did not use any of
that money to provide for his support. Steves parents provided
more than half (all, in fact) of his support for the year. A
qualifying child is not subject to the gross income test.
Hamishs 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.
Head of household with two exemptions. Hamish is not a qualifying widower because
he does not maintain a household for a dependent child. However, he does qualify for
head of household because he is not married and he pays more than half the cost of
maintaining a separate household that is the principal place of abode for his father,
and his father also qualifies as his dependent (as a qualifying relative) as follows:
Because Reggie is considered to be Hamishs qualifying relative (and a qualifying person for
Test
Relationship
Age
Residence
Support
Gross income
Reggie
Yes, Reggie is Hamishs father.
Yes, Hamish provides more than half of Reggies support.
Yes, Reggies gross income of $2,500 is less than the exemption
amount.
purposes of the head of household filing status), Hamish may also claim a dependency
exemption for Reggie.
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d.
Irene is married but has not seen her spouse since February. She supports her spouse's 18-yearold child Dolores, who lives with Irene. Dolores earned $4,500 this year.
Head of household with two exemptions. Irene qualifies for being treated as unmarried
for the year (abandoned spouse) as follows:
Test
Married
Separate Return
Maintains
Home
Time Separated
Irene
Yes, Irene is still married at the end of the year.
Yes, Irene files a separate return from her spouse.
Yes, Irene provides more than half the cost of maintaining a home for
a qualifying child.
Yes, Irene has not lived with her spouse for the last six months of the
year.
Because she is treated as though she were unmarried, she may file as head of household
because she pays more than half the costs (for more than half the taxable year) of
maintaining a household that is the principal place of abode for a dependent who is her
qualifying child. Dolores is Irenes qualifying child, as determined below:
Test
Relationship
Age
Residence
Support
Dolores
Yes, Dolores is the taxpayers stepchild.
Yes, under age 19 (and younger than Irene)
Yes, Dolores lived with taxpayer for more than half of the year.
Yes, Dolores did not provide more than half of her own support.
Irene may claim one personal exemption for herself and one dependency exemption for
Dolores.
e. Assume the same facts as in part d. Also assume that Craig is Irenes husband. Craig
supports his 12-year-old son Ethan, who lives with Craig. Ethan did not earn any
income.
Head of household with two exemptions. Craig qualifies for being treated as
unmarried (abandoned spouse rules) as follows:
Test
Married
Irene
Yes, Craig is still married at the end of the year.
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Separate Return
Maintains
Home
Time Separated
Yes, Craig files a separate return from his spouse.

Yes, Craig provides more than half the cost of maintaining a home
Yes, Craig has not lived with his spouse for the last six months of the
year.
Because he is treated as though she were unmarried, he may file as head of household
because he pays more than half the costs (for more than half the taxable year) of
maintaining a household that is the principal place of abode for a dependent who is his
qualifying child. Ethan is Craigs qualifying child, as determined below:
Test
Relationship
Age
Residence
Support
Dolores
Yes, Ethan is the taxpayers child.
Yes, under age 19 (and younger than Craig)
Yes, Ethan lived with taxpayer for more than half of the year.
Yes, Ethan did not provide more than half of his own support.
Craig may claim one personal exemption for himself and one dependency exemption
for Ethan. Note that both Irene in part d. and Craig may claim head of household
filing status because they both qualify to be treated as unmarried for filing status
purposes.
49.
a.
[LO 2, 3] In each of the following independent cases, determine the taxpayers filing
status and the number of personal and dependency exemptions the taxpayer is allowed to
claim.
Alexandra is a blind widow (spouse died five years ago) who provides a home for her 18-yearold nephew, Newt (Newt is Alexandras brothers son). Newts parents are dead, and so Newt
supports himself. Newts gross income is $5,000.
Alexandra will file single with one personal exemption. Alexandra is single and does
not qualify for head of household because she does not provide more than half the costs
of maintaining a home for a dependent child or qualifying relative because Newt is
neither a qualifying child (he provides more than half his own support) nor a qualifying
relative. See the analysis below.
Test
Relationship
Age
Residence
Support
Qualifying Child Test for Newt

Yes, Newt is a descendant of Alexandras sibling.
Yes, under age 19 (and younger than Alexandra)
Yes, Newt lived with Alexandra for more than half of the year.
No, Newt provides more than half his own support.
4-38
Test
Relationship
Age
Residence
Support
Gross income
Qualifying Relative Test for Newt

Yes, Newt is the taxpayers nephew.
Not applicable to qualifying relative.
Not applicable to qualifying relative.
No, Alexandra does not provide more than half of Newts
support.
No. Newts gross income of $5,000 exceeds the exemption
amount.
b.
Bharati supports and maintains a home for her daughter, Daru, and son-in-law,
Sam. Sam earned $15,000 and filed a joint return with Daru, who had no income.
Single with one personal exemption. Bharati may not claim Daru and Sam as
dependents because they file a joint return. Couples filing a joint return may still
qualify as dependents if neither would have a tax liability if they had filed separately
(Rev. Rul. 54-567 and Rev. Rul. 65-34). Sam would have had a tax liability if he had
filed a separate return. Because Bharati does not have any dependents, Bharati does
not qualify for head of household status.
c.
Charlie intended to file a joint return with his spouse, Sally. However, Sally died in December.
Charlie has not remarried.
Married filing jointly with two personal exemptions. A taxpayer is still considered to be
married for the year in which his spouse died. Because there are two taxpayers on a
joint return, Charlie is allowed two personal exemptions [152(b)].
d.
Deshi cannot convince his spouse to consent to signing a joint return. The couple has not
separated.
Married filing separately with one personal exemption. Both spouses must consent to
file a joint return.
e. Edith and her spouse support their 35-year-old son, Slim. Slim is a full-time
college student who earned $5,500 over the summer in part-time work.
Married filing jointly with two personal exemptions. They get one personal exemption
each, but Slim does not qualify as their dependent. He is neither their qualifying child
nor their qualifying relative. See the following analysis.
4-39
Test
Relationship
Age
Residence
Support
Test
Relationship
Age
Residence
Support
Gross income
50.
SlimQualifying child
Yes, Slim is the taxpayers son.
No, not under age 24 and attending school full-time.
parents home
Yes, Slim did not provide more than half of his own support.
SlimQualifying relative
Yes, Slim is the taxpayers son.
Yes, more than half of the Slims support is provided by the
taxpayer.
No, Slims gross income ($5,500) is more than the exemption
amount.
[LO 3] Jasper and Crewella Dahvill were married in year 0. They filed joint tax returns
in years 1 and 2. In year 3, their relationship was strained and Jasper insisted on filing a
separate tax return. In year 4, the couple divorced. Both Jasper and Crewella filed single
tax returns in year 4. In year 5, the IRS audited the couples joint year 2 tax return and
each spouses separate year 3 tax returns. The IRS determined that the year 2 joint return
and Crewellas separate year 3 tax return understated Crewellas self-employment
income causing the joint return year 2 tax liability to be understated by $4,000 and
Crewellas year 3 separate return tax liability to be understated by $6,000. The IRS also
assessed penalties and interest on both of these tax returns. Try as it might, the IRS has
not been able to locate Crewella, but they have been able to find Jasper.
a. What amount of tax can the IRS require Jasper to pay for the Dahvills year 2 joint return?
Explain.
Because Jasper is jointly and severally liable for the year 2 return, he is responsible to
pay the entire $4,000.
b. What amount of tax can the IRS require Jasper to pay for Crewellas year 3 separate tax return?
Explain.
Because they filed separately in year 3, Jasper is not responsible for any of the $6,000.
4-40
51. {LO 3} {Research} Janice Traylor is single. She has an 18-year-old son named Marty.
Marty is Janices 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 year, Marty spent nine months in Australia. Marty was extremely homesick while
in Australia, since he had never lived away from home. However, Marty knew this
assignment was only temporary, and he couldnt wait to come home and find his room
just the way he left it. Janice has always filed as head of household, and Marty has
always been considered a qualifying child (and he continues to meet all the tests with the
possible exception of the residence test due to his stay in Australia). However, this year
Janice is unsure whether she qualifies as head of household due to Martys nine-month
absence during the year. Janice has come to you for advice on whether she qualifies for
head of household filing status. What do you tell her?
To qualify for head of household status a taxpayer must maintain a residence that is the
principal place of abode for more than one-half of the taxable year of a qualifying child.
The issue here is whether Martys nine-month military stay in Australia disqualifies
Janice from head of household status. Reg. 1.2-2(c)(1) states that temporary absences
of a qualifying child from the household due to special circumstances does not preclude
taxpayers from qualifying for head of household status. Military service is one of the
special circumstances described in the regulation. However, this regulation indicates
that it must be reasonable to assume that the qualifying child will return to the household
after the absence and
4-41
that the taxpayer (head of household) maintains the household in anticipation of the
return of the qualifying child. Because Marty will be returning to his home, Janice can
file as head of household status.
52. {LO 3} {Research} Doug Jones timely submitted his 2013 tax return and elected married
filing jointly status with his wife Darlene. Doug and Darlene did not request an extension
for their 2013 tax return. Doug and Darlene owed and paid the IRS $124,000 for their
2013 tax year. Two years later, Doug amended his return and claimed married filing
separate status. By changing his filing status, Doug sought a refund for an overpayment
for the tax year 2013 (he paid more tax in the original joint return than he owed on a
separate return). Is Doug allowed to change his filing status for the 2013 tax year and
receive a tax refund with his amended return?
No, he is not allowed to change his filing status by amending his return. Reg. 1.60131(a) states that for any taxable year with respect to which a joint return has been filed,
separate returns shall not be made by the spouses after the time for filing the return of
either has expired. In this case, Doug amended the return and changed his filing status
two years later. Because the due date of the original return has passed, Doug is not
allowed to change his filing status.
Comprehensive Problems
53.
a.
{Tax Forms} 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
qualifying moving expenses, and Marc paid alimony to a prior spouse in the amount of
$1,500. Marc and Michelle have a 10-year-old son, Matthew, who lived with them
throughout the entire year. Thus, Marc and Michelle are allowed to claim a $1,000 child
tax credit for Matthew. Marc and Michelle paid $6,000 of expenditures that qualify as
itemized deductions and they had a total of $5,500 in federal income taxes withheld from
their paychecks during the course of the year.
What is Marc and Michelles gross income?
$76,500. See analysis below.
b.
What is Marc and Michelles adjusted gross income?

4-42
c.
What is the total amount of Marc and Michelles deductions from AGI?
d.
What is Marc and Michelles taxable income?

$48,600.
See analysis below.
e.
What is Marc and Michelles taxes payable or refund due for the year (use the tax rate
schedules)?
$102.50 tax refund. See analysis below.
Description
(1) Gross income
Amount
76,500
Computation
$64,000 salary + $12,000 salary + $500
4,000
corporate bond interest

2,500 qualified moving expenses + 1,500
72,500
12,200
alimony paid
(1) (2)
Married filing jointly

6,000
12,200
(4) > (5)
deductions
(7) Personal and
11,700
3,900 3 (two personal exemptions and
one dependency exemption)
(8) Total deductions from
23,900
AGI
(9) Taxable income
$48,600
$6,397.5
(6) + (7)
(3) - (8)
(48,600 17,850) 15% + 1,785 (see
tax rate schedule for married filing
jointly).
(11) Other taxes

(12) Total tax
(13) Credits
(14) Prepayments
Taxes (refund) with return
0
$6,397.5
(1,000)
(5,500)
($102.5)
(10) + (11)
Child credit for 10-year old son Matthew
(12) + (13)+ (14)
4-43
f.
Complete the first two pages of March and Michelles Form 1040.
4-44
4-45
4-46
54.
{Tax Forms} 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 purchased the home three years ago for $200,000 and they sold it for $250,000.
The gain on the sale qualified for the exclusion from the sale of a principal residence.
The Jacksons incurred $16,500 of itemized deductions and they had $6,250 withheld
from their paychecks for federal taxes. They are also allowed to claim a child tax credit
for each of their children.
a. What is the Jacksons taxable income and what is their tax liability or (refund)?
$60,100 taxable income and $2,127.5 refund. See analysis below.
Description
(1) Gross income
Amount
100,000
Computation
Salary income. Gain
home sale of $50,000 is
excluded.

0
$100,000
(1) (2)

12,200
16,500
Married filing jointly;
16,500
Greater of (4) or (5)
itemized deductions
23,400
6 exemptions 3,900
exemption amount
4-47
(8) Total deductions from AGI

(9) Taxable income
39,900
$60,100
$8,122.5
(6) + (7)
(3) (8)
(60,100 17,850)
15% + 1,785 (see tax
rate schedule for
married filing jointly).
(11) Other taxes

(12) Total tax
(13) Credits
0
$8,122.5
(4,000)
(10) + (11)
Child credits for four
children (4 $1,000)
(14) Prepayments
Tax (refund) with return
(6,250)
($2,127.5)
(12) + (13)+ (14)
b. Complete the first two pages of the Jacksons Form 1040.
4-48
4-49
4-50
c. What would their taxable income be if their itemized deductions totaled $6,000 instead of
$16,500?
Description
(1) Gross income
Amount
100,000
Computation
Salary. All gain from
home sale is excluded
from gross income.

0
$100,000
12,200
6,000
12,200
(1) (2)
itemized deductions
Taxable income
23,400
6 exemptions 3,900
35,600
$64,400
exemption amount
(6) + (7)
(3) (8)
4-51
d. What would their taxable income be if they had $0 itemized deductions and $6,000 of for
AGI deductions?
Description
(1) Gross income
Amount
100,000
6,000
$94,000
12,200
0
12,200
Computation
$100,000 salary
itemized deductions
23,400
6 exemptions 3,900
35,600
$58,400
exemption amount
(6) + (7)
(3) (8)

Taxable income
(1) (2)
Note that if the $6,000 expense is a for AGI deduction, the Jacksons are able to deduct all
of the expense, but if its a from AGI deduction and they are not able to itemize deductions,
they dont get to deduct any of it.
e. Assume the original facts except that they also incurred a loss of $5,000 on the
sale of some of their investment assets. What effect does the $5,000 loss have on
their taxable income?
Because individual taxpayers deductible losses on the disposition of investment (or
capital) assets is limited to $3,000. The Jacksons would be allowed to deduct $3,000 of the
$5,000 loss against their taxable income. The remaining $2,000 loss would carry over to
next year. Consequently, with the loss, their taxable income would be $57,100 ($60,100
from part a minus $3,000).
f. Assume the original facts except that the Jacksons owned investments that
appreciated by $10,000 during the year? The Jacksons believe the investments will
continue to appreciate, so they did not sell the investments during this year. What is
the Jacksons taxable income?
4-52
Same as it is in part a. $60,100. Though the assets have appreciated, they will not realize
or recognize this gain for income tax purposes until they sell their investment assets, at
which time they will increase their gross income (and corresponding taxable income) by
the gain.
55.
a.
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 Camilles
home for the entire year and Camille paid for all the costs of the maintaining the home.
She received a salary of $105,000 and contributed $6,000 of it to a qualified retirement
account. She also received $10,000 of alimony from her former husband. Finally,
Camille paid $5,000 of expenditures that qualified as itemized deductions.
What is Camilles taxable income?
Description
(1) Gross income
Amount
115,000
6,000
$109,000
8,950
Computation
105,000 salary + 10,000 alimony
Qualified retirement contribution
(1) - (2)
Head of household see analysis
below.

5,000
8,950
(4) > (5)
11,700
3,900 3 (One personal
deductions
exemptions
exemption and two dependency

Taxable income
exemptions. See analysis below.)

(6)+(7)
(3) - (8)
20,650
$88,350
4-53
Test
Relationship
Age
Residence
Support
Kaly and Parker- Qualifying child tests

Yes, taxpayer is their mother.
Yes, both children are under age 19 (and younger than their
mother).
Yes, both children lived with taxpayer for more than half of the
year.
Yes, neither child provided more than half of their own support.
Camille may file as head of household because she is unmarried at the end of the year and
she pays more than half the cost of maintaining a home that is the principal place of abode
b.
What would Camilles taxable income be if she incurred $14,000 of itemized
deductions instead of $5,000?
Description
(1) Gross income
Amount
115,000
6,000
$109,000
8,950
Computation
105,000 salary + 10,000
alimony
Qualified retirement
contribution
(1) (2)
Head of household see
analysis below.

14,000
14,000
(5) > (4)
itemized deductions
11,700
exemptions
exemption and two

dependency exemptions. See
analysis below.)

Taxable income
Test
Relationship
25,700
$83,300
(6)+ (7)
(3) - (8)
Kaly and Parker

Yes, taxpayer is their mother.
4-54
Age
Residence
Support
Yes, both children are under age 19 (and younger than their
mother).
Yes, both children lived with taxpayer for more than half of the
year.
Yes, neither child provided more than half of their own support.
Camille may file as head of household because she is unmarried at the end of the year and
she pays more than half the cost of maintaining a home that is the principal place of abode
c.
Assume the original facts except that Camilles daughter Kaly is 25 years old and a fulltime student. Kalys gross income for the year was $5,000. Kaly provided $3,000 of her own
support and Camille provided $5,000 of support. What is Camilles taxable income?
Description
(1) Gross income
Amount
115,000
Computation
105,000 salary + 10,000
alimony
Qualified retirement
6,000
$109,000
8,950
contribution
(1) - (2)
Head of household, see
analysis below.

(6) Greater of standard deductions
5,000
8,950
(4) > (5)
or itemized deductions
7,800
exemptions
exemption and one

dependency exemption. See
analysis below.)
16,750
(6) + (7)
Taxable income
$92,250
(3) - (8)
Parker is still a qualifying child (see analysis in previous solution), but Kaly is no longer a
qualifying child, nor a qualifying relative, as analyzed below.
Test
Relationship
Age
Residence
KalyQualifying child
Yes, taxpayer is Kalys mother.
No, not under age 24 and attending school full-time (and younger
than her mother)
4-55
Support
parents home.
Yes, Kaly did not provide more than half of her own support.
Test
Relationship
Age
Residence
Support
KalyQualifying relative
Yes, taxpayer is Kalys mother.
Yes, more than half of the Kalys support is provided by the
taxpayer.
Gross income
No, Kalys gross income ($5,000) is more than the exemption
amount.
Camille may still file as head of household because she is unmarried at the end of the year
and she pays more than half the cost of maintaining a home that is the principal place of
abode for a child (Parker) whom she can claim as a dependent.
56.
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 qualifying child.
What amount of taxes will Tiffany owe (or what amount will she receive as a refund)
when she files her tax return.
4-56
$1,025 taxes payable. See analysis below.

Description
(2) Other taxes
(3) Total tax
(4) Credits
Amount
$3,525
0
$3,525
(1,000)
Computation
(1) + (2)
Child tax credit for
qualifying child under 17
years old at year end
(5) Prepayments
Tax due with return
(1,500)
$1,025
(3) + (4) + (5)
4-57

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Chapter 04 - Individual Tax Overview

[LO 1] Why should a taxpayer be interested in the character of income received?

[LO 1] Is it easier to describe what a capital asset is or what it is not? Explain.

Accounts receivable from the sale of goods or services.

Chapter 04 - Individual Tax Overview

Chapter 04 - Individual Tax Overview

Chapter 04 - Individual Tax Overview

[LO 1] If a person is considered to be a qualifying child or qualifying relative of a

Chapter 04 - Individual Tax Overview

Chapter 04 - Individual Tax Overview

[LO 3] What requirements do an abandoned spouse and qualifying widow or widower

Chapter 04 - Individual Tax Overview

[LO 3] Is a qualifying relative always a qualifying person for purposes of determining

Chapter 04 - Individual Tax Overview

(2) For AGI deductions

exemption and two

(8) Taxable income

+ $6,652.50 (see tax rate

Chapter 04 - Individual Tax Overview

(2) For AGI deductions

3,900 3 (personal exemption and

Chapter 04 - Individual Tax Overview

Jeremy will owe $15,840, calculated as follows:

(2) For AGI deductions

exemption and two

(8) Taxable income

6,652.5 (see tax rate

Chapter 04 - Individual Tax Overview

(1) (2) (3)

What is the amount of Ricks after-tax compensation (ignore payroll taxes)?

Ricks after-tax compensation is $99,506.75 calculated as follows:

schedule for Single individuals)

Chapter 04 - Individual Tax Overview

Suppose Rick receives a competing job offer of $120,000 in cash compensation

Ricks after-tax compensation is $99,906.75 calculated as follows:

(2) For AGI deductions

(4) Standard deduction

(5) Personal and dependency exemptions

28% + 17,891.25 (see

(6) Taxable income

tax rate schedule for

Chapter 04 - Individual Tax Overview

a. Calculate Texs taxable income assuming he chooses engagement 1 and assuming he

(1) Gross income before new

(2) Income from engagement

(3) Additional for AGI deduction

(1) + (2) + (3)

(5) Greater of itemized

(6) Personal exemption

(4) + (5) + (6)

b. Calculate Texs taxable income assuming he chooses engagement 1 and assuming he

Chapter 04 - Individual Tax Overview

(1) Gross income before new work

(2) Income from engagement

(5) Greater of itemized deductions

(6) Personal exemption

(1) + (2) + (3)

c. Calculate Texs taxable income assuming he chooses engagement 1 and assuming he

(1) Gross income before new work

(2) Income from engagement

(1) + (2) + (3)

(5) Greater of itemized deductions