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Exam 3: Tax Formula and Tax Determination; an Overview of Property Transactions

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Question 1

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The Martins have a teenage son who has become an accomplished bagpiper. With proper promotion and scheduling, the son has good income potential by charging for his services at special events (particularly funerals). However, the Martins are fearful that the income could generate a kiddie tax and cause them the loss of a dependency exemption deduction. Are the Martins' concerns justified? Explain.

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The income received by the son would be ...

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Question 2

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Match the statements that relate to each other. Note: Choice l. may be used more than once. a.Available to a 70-year-old father claimed as a dependent by his son. b.Equal to tax liability divided by taxable income. c.The highest income tax rate applicable to a taxpayer. d.Not eligible for the standard deduction. e.No one qualified taxpayer meets the support test. f.Taxpayer's ex-husband does not qualify. g.A dependent child (age 18) who has only unearned income. h.Highest applicable rate is 39.6%. i.Applicable rate could be as low as 0%.j.Maximum rate is 28%.k.Income from foreign sources is not subject to tax.l.No correct match provided. -Average income tax rate

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Question 3

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Surviving spouse filing status begins in the year in which the deceased spouse died.

Once they reach age 65, many taxpayers will switch from itemizing their deductions from AGI and start claiming the standard deduction.

In 2017, Hal furnishes more than half of the support of his ex-wife and her father, both of whom live with him. The divorce occurred in 2016. Hal may claim the father-in-law and the ex-wife as dependents.

Regarding dependency exemptions, classify each statement in one of the four categories: a.Could be a qualifying child. b.Could be a qualifying relative. c.Could be either a qualifying child or a qualifying relative. d.Could be neither a qualifying child nor a qualifying relative. -A granddaughter, who lives with taxpayer, is 19 years old, earns $5,000, and is not a full-time student.

Which, if any, of the following statements relating to the standard deduction is correct?

Match the statements that relate to each other. Note: Choice l. may be used more than once. a.Available to a 70-year-old father claimed as a dependent by his son. b.Equal to tax liability divided by taxable income. c.The highest income tax rate applicable to a taxpayer. d.Not eligible for the standard deduction. e.No one qualified taxpayer meets the support test. f.Taxpayer's ex-husband does not qualify. g.A dependent child (age 18) who has only unearned income. h.Highest applicable rate is 39.6%. i.Applicable rate could be as low as 0%.j.Maximum rate is 28%.k.Income from foreign sources is not subject to tax.l.No correct match provided. -Territorial system of taxation

Arnold is married to Sybil, who abandoned him in 2016. He has not seen or communicated with her since April of that year. He maintains a household in which their son, Evans, lives. Evans is age 25 and earns over $6,000 each year. For tax year 2017, Arnold's filing status is:

Match the statements that relate to each other. Note: Choice l. may be used more than once. a.Available to a 70-year-old father claimed as a dependent by his son. b.Equal to tax liability divided by taxable income. c.The highest income tax rate applicable to a taxpayer. d.Not eligible for the standard deduction. e.No one qualified taxpayer meets the support test. f.Taxpayer's ex-husband does not qualify. g.A dependent child (age 18) who has only unearned income. h.Highest applicable rate is 39.6%. i.Applicable rate could be as low as 0%.j.Maximum rate is 28%.k.Income from foreign sources is not subject to tax.l.No correct match provided. -Multiple support agreement

Howard, age 82, dies on January 2, 2017. On Howard's final income tax return, the full amount of the basic and additional standard deductions will be allowed even though Howard lived for only 2 days during the year.

Currently, the top income tax rate in effect is not the highest it has ever been.

Sarah furnishes more than 50% of the support of her son and daughter-in-law who live with her. If the son and daughter-in-law file a joint return, Sarah cannot claim them as dependents.

Because they appear on page 1 of Form 1040, itemized deductions are also referred to as "page 1 deductions."

The major advantage of being classified as an abandoned spouse is that the taxpayer is treated for tax purposes as being single and not married. This means that an abandoned spouse can use the more favorable tax rates available to single persons than those available to married persons filing separately. Comment on the accuracy of this conclusion.

Match the statements that relate to each other. Note: Choice l. may be used more than once. a.Available to a 70-year-old father claimed as a dependent by his son. b.Equal to tax liability divided by taxable income. c.The highest income tax rate applicable to a taxpayer. d.Not eligible for the standard deduction. e.No one qualified taxpayer meets the support test. f.Taxpayer's ex-husband does not qualify. g.A dependent child (age 18) who has only unearned income. h.Highest applicable rate is 39.6%. i.Applicable rate could be as low as 0%.j.Maximum rate is 28%.k.Income from foreign sources is not subject to tax.l.No correct match provided. -Relationship test (for dependency exemption purposes)

In terms of the tax formula applicable to individual taxpayers, which, if any, of the following statements is correct?

Match the statements that relate to each other. Note: Choice l. may be used more than once. a.Available to a 70-year-old father claimed as a dependent by his son. b.Equal to tax liability divided by taxable income. c.The highest income tax rate applicable to a taxpayer. d.Not eligible for the standard deduction. e.No one qualified taxpayer meets the support test. f.Taxpayer's ex-husband does not qualify. g.A dependent child (age 18) who has only unearned income. h.Highest applicable rate is 39.6%. i.Applicable rate could be as low as 0%.j.Maximum rate is 28%.k.Income from foreign sources is not subject to tax.l.No correct match provided. -Nonresident alien

Homer (age 68) and his wife Jean (age 70) file a joint return. They furnish all of the support of Luther (Homer's 90-year old father), who lives with them. In 2017, they received $6,000 of interest income on city of Chicago bonds and interest income on corporate bonds of $48,000. Compute Homer and Jean's taxable income for 2017.

DeWayne is a U.S. citizen and resident. He spends much of each year in the United Kingdom on business. He is married to Petula, a U.K. citizen and resident of London. DeWayne has heard that it is possible that he can file a joint income tax return for U.S. purposes. If this is so, what are the constraints he should consider in making any such decision?