1. Tax Laws. (Obj. 7) Which amendment to the Constitution gave Congress the power to levy and collect income taxes? What was the origination date of our current income tax system?
2. Tax Laws. (Obj. 7) Susan Klammer engages a local tax professional to prepare her tax return each year. She sees no reason to learn more about the tax laws. After she fi les her return each year, she just wants to forget the whole thing. Explain to Klammer why it would be her advantage to know more about the tax laws.
3. Income Tax Objectives. (Obj. 7) Th e primary objective of the U.S. income tax system is to raise rev- enues to cover government spending. Name some of the other objectives of our income tax system.
4. Taxable Income Formula. (Obj. 1) Is the basic taxable income formula the same for most taxpayers? What is the diff erence between the basic formula and the expanded formula used by individuals?
5. Gross Income. (Obj. 2) Th e Code lists a number of diff erent gross income sources. When a taxpayer receives something that is not one of the listed items, is it exempt from tax? Explain your answer.
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Name _________________________________ Section ________________ Date ____________6. Itemized Deductions. (Obj. 2) Itemized deductions fall into one of seven groups. Two of the groups are (1) job expenses and most other miscellaneous itemized deductions and (2) other miscellaneous deductions. What are the other fi ve groups?
7. Standard Deduction. (Obj. 3) Under what circumstances is a person’s standard deduction is $0?
8. Itemized Deductions. (Obj. 2) Explain when itemized deductions are used in computing taxable income.
9. Standard Deduction. (Obj. 3) Who qualifi es for the additional standard deduction? What additional amount is available?
10. Standard Deduction. (Obj. 3)Compute each taxpayer’s 2009 total standard deduction.
a. Bryce, age 20, is a full-time student. His parents claim him as a dependent. Bryce has interest income of $320 and wages from a part-time job of $3,800.
b. Same as in Part a., except that Bryce’s wages are $6,500.
c. Heather, age 66, is married and fi les a separate return. Her husband also uses the standard deduction on his return.
d. Juliet, age 19, is blind and claimed as a dependent by her parents. Her only income is $5,200 of taxable interest.
Overview of the Tax Structure 1–37 11. Exemptions. (Obj. 4) Henry and Margaret were married on December 28. Henry, age 22 and a full- time student, had no gross income during the year. He lived with his parents and was supported by them prior to his marriage. Margaret’s gross salary for the year was $35,000.
a. Under what circumstances is Margaret entitled to claim an exemption for Henry?
b. Under what circumstances are Henry’s parents entitled to claim an exemption for him?
12. Exemptions. (Obj. 4) How many exemptions can be claimed on a joint income tax return by an employed taxpayer who is married and has two unmarried children? One child, a daughter age 17, has no income. Th e other child, a son age 22, is a part-time college student. Th e son earned $3,700 during the year. Th e taxpayer provides over half of each child’s support. Th e taxpayer’s spouse is not employed.
13. Exemptions. (Obj. 4) Kevin Kirby, age 67 and blind, is married to Susan Kirby, age 56 with good vision. Th eir 37-year-old divorced daughter, along with her 18-year-old son, live with them. Th e Kirbys provided more than half the support of their daughter and grandson. Th e daughter earned wages of $4,800 during the year; the grandson, a part-time college student, earned wages of $5,000. How many exemptions can the Kirbys claim on their 2009 tax return? Explain.
14. Exemptions. (Obj. 4) Vera and Billy were divorced during the year. Vera was awarded custody of the children, George, age 6, and Jean, age 9. Th ere was no agreement about who would receive the dependency exemptions for the children. Billy provides all support for the children.
a. Who receives the dependency exemptions?
15. Exemptions. (Obj. 4)
a. If Shirley Brown has a child born at 10 p.m. on December 31 of the taxable year, can she claim a full exemption for this child for the year or must she prorate her exemption?
b. If a qualifying dependent of a taxpayer dies on January 4 of the taxable year, may the tax- payer claim a full exemption for the dependent for the year or must the taxpayer prorate the exemption?
c. If Mark Freeze’s divorce decree is fi nalized before the end of the taxable year, can he claim a full exemption for his spouse for the part of the year during which he was married? Explain.
16. Exemptions. (Obj. 4)
a. What is the amount of each exemption in 2009?
b. How does the taxpayer’s AGI aff ect the exemption deduction?
17. Exemptions. (Obj. 4) Jenna Wren claims one personal exemption and three dependency exemp- tions on her 2009 tax return. Her fi ling status is head of household. Compute Wren‘s personal and dependency exemption deduction if her AGI is:
a. $191,850.
b. $238,650.
Overview of the Tax Structure 1–39 18. Exemptions. (Obj. 4) Andy Noble claims one personal and one dependency exemption. His fi ling status
is single. Compute Nobel’s 2009 personal and dependency exemption deduction if his AGI is: a. $180,300.
b. $212,600.
c. $234,900.
19. Exemptions. (Obj. 4) Isabel Retsma is married, but fi les separately from her husband in 2009. She claims one personal exemption and no dependents. Compute her exemption deduction if her AGI is:
a. $126,515.
b. $180,975.
20. Exemptions. (Obj. 4) John and Jamie Kerr do not claim any dependents on their joint tax return. Compute their 2009 exemption deduction if the Kerrs’ AGI is:
a. $233,700.
b. $292,450.
c. $314,350.
21. Dependents. (Obj. 4) Indicate by inserting an X in the proper column which of the following persons pass, with respect to the taxpayer, (1) the relationship test for a qualifying child or (2) the relationship test for a qualifying relative. Th e taxpayer is 46 years old and unmarried.
Qualifying Qualifying
Child? Relative?
a. Taxpayer’s 31-year-old cousin ——— ——— b. Taxpayer’s father ——— ——— c. Taxpayer’s 67-year-old foster mother ——— ——— d. Taxpayer’s 50-year-old stepsister ——— ——— e. Taxpayer’s 45-year-old brother-in-law ——— ——— f. Taxpayer’s grandchild ——— ——— g. Taxpayer’s 42-year-old half-brother ——— ——— h. Taxpayer’s 21-year-old nephew (sister's son) ——— ——— i. Father (age 62) of taxpayer’s former spouse ——— ——— j. Uncle (age 59) of taxpayer’s deceased spouse ——— ——— k. Taxpayer’s 29-year-old son-in-law ——— ——— l. Taxpayer’s grandfather ——— ——— m. Taxpayer’s mother-in-law (taxpayer’s spouse deceased) ——— ———
Overview of the Tax Structure 1–41 22. Filing Status. (Obj. 5) Indicate the proper fi ling status for each of the following taxpayers.
a. Unmarried; divorced last year; no dependents
b. Married; spouse has been properly claimed as a dependent on another taxpayer’s return c. Married on December 31, no dependents
d. Widower; spouse died last year; has a dependent 6-year-old child; has not remarried e. Legally separated from spouse by a separate maintenance decree; has no dependents
f. Married; maintains a household for more than six months of the year for self and an adopted 4-year-old child who qualifi es as a dependent; spouse left home on February 15 of current year and has not been seen since
g. Unmarried; maintains a home for entire year for self and his 8-year-old dependent grand- child
h. Married; has $15,000 of gross income; spouse has fi led a separate return
i. Widower; spouse died January 16 last year; has not remarried; maintained parent’s home for the entire year; parent qualifi es as a dependent
23. Filing Status. (Obj. 5) Graciela Autry provides 52% of the household costs for her widowed mother during the year. Autry claims her mother as a dependent. Can Autry she fi le a return as head of household if her mother lives alone? Explain the reason behind your answer.
24. Filing Requirements. (Obj. 6) For each of the following situations, determine whether the taxpayer must fi le a tax return for 2009. Provide a full explanation for your answer, including which threshold was used in making your determination.
a. Andy, age 17, is claimed as a dependent on his parents’ tax return. He earned $3,190 from his paper route and other after-school jobs. Andy deposits most of his earnings in a savings account at the local bank. His interest income was $400.
b. Marla, age 25, is claimed as a dependent on her parents’ tax return. She received a $5,000 tax-free academic scholarship during the year. Marla had interest income of $125 and $525 of gross income from her self-employed business. Her expenses in connection with her business were $75.
c. Joe, age 20 and single, graduated from college last year. He has not been able to fi nd a full-time job. Joe had wages from a part-time job of $5,000 and no other income. Although he used some of his earned income for support items, the majority of Joe's support came from his parents.
25. Fiscal Year. (Obj. 6) Most individual taxpayers use the calendar year for reporting their taxable income. However, a few use the fi scal year. What is a fi scal year?
26. Tax Years. (Obj. 6) Th e date a tax year closes is an important date from a taxpayer’s point of view because it stops the IRS from assessing a tax defi ciency on a closed tax year. It is an important date from the government’s point of view because it stops a taxpayer from making a refund claim on a closed tax year.
a. If a taxpayer fi les her tax return for 2009 on April 1, 2010, on what specifi c date does her 2009 tax year close under the normal closing rule?
b. If a taxpayer inadvertently (mistakenly) omits too much gross income from his or her income tax return, the normal closing of a tax year is extended by three years. What percentage of the taxpayer’s gross income must be omitted from his or her income tax return in order for the clos- ing year to be extended? As part of your answer, explain exactly how this percentage is applied.
27. Standard Deduction and Filing Requirements. (Obj. 6) For each of the following individuals, determine (1) the amount of their total standard deduction and (2) the maximum amount of gross income each can have before having to fi le an income tax return for 2009.
Standard Maximum
Deduction Gross Income
a. Steve is 36 years old. His fi ling status is single and he has 20/20 vision. On May 10, 2009, Steve paid $3,575 in general sales tax on a new car costing $55,000. Steve does not itemize. b. Maggie is a 70 years old widow. Her son claims her
as a dependent. Maggie is permanently blind. Her gross income includes $1,000 of investment income, but no earned income.
c. Same as in Part b., except that Maggie has no investment income.
d. Same as in Part b., except that Maggie is not claimed a dependent on her son’s return. e. Jeannie and Tom fi le a joint tax return. Jennie
turned 65 on January 1, 2010; Tom turned 69
on March 8, 2010. Neither has any vision problems. f. Sally fi les a separate tax return from her husband.
She is 40 years old and blind.
g. Joe’s wife died in 2009. Joe is 70 years old and has good eyesight. At the time of her death, Joe’s wife was 60 and had good eyesight. Joe paid $3,000 in real estate taxes on his principal residence during the year. Joe does not itemize.
Overview of the Tax Structure 1–43 28. Capital Assets. (Obj. 2)
a. In the tax laws, a capital asset is defi ned in terms of what it is not. What broad groups of assets are not capital assets?
b. Explain the general holding period rules for capital assets, and indicate the time an asset must be held to receive a maximum tax rate of 15% (0%).
29. Capital Gains. (Obj. 2)
a. Jerry Long sold some stock certifi cates held for investment during the year. Describe how the following sales would be treated.
Stock Purchase Date Sale Date Cost Selling Price ABC 1-5-2009 11-5-2009 $10,000 $ 8,000 XYZ 8-9-2001 9-8-2009 6,000 10,500
b. If the selling price of the ABC stock was $5,000 (instead of $8,000), how (if at all) would this aff ect Long’s 2009 taxable income and tax liability?
30. Tax Planning. (Obj. 7)
a. Defi ne the concept of tax planning and distinguish between short-term and long-term tax planning.
c. Identify three tax-planning principles that will help a taxpayer achieve a tax-planning objective.
d. Under what circumstances should a taxpayer plan to control the timing of payments that are deductible as itemized deductions?
31. Internet Problem: Completing and Printing Form 2120. (Obj. 4)
Go to the IRS Web site, open Form 2120, and complete the form using the following in- formation. Once you are fi nished, print out Form 2120.
Helen Baker (SSN 123-45-6789) has acknowledged in writing that Jim Moon (SSN 987- 65-4321), her brother, will take the dependency exemption in 2009 for their mother, Mary C. Moon.
Jim’s address: 420 Dogwood Lane, Marlborough, NH 03455. Helen’s address: 5283 West Main Street, Keene, NH 03431.