(Test Bank) Tax Determination; Personal And Dependency Exemptions;An Overview Of Property Transactions

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CHAPTER 3 TAX DETERMINATION; PERSONAL AND DEPENDENCY EXEMPTIONS; AN OVERVIEW OF PROPERTY TRANSACTIONS Instructor: The test items in both the print Test Bank and ExamView test-creation software are numbered by question type within each chapter. Thus, users of ExamView can more easily preview their selections using the printed Test Bank in the same numbering system. Status:Q/P Question/ Present in Prior Problem Topic EditionEdition TRUE OR FALSE 1Level of current income tax rates Unchanged 1 2Definition of “gross income” Unchanged 2 3Income taxation and example of global approach Unchanged 3 4Effect of AGI on the medical deduction Modified 4 5Filing status: surviving spouse versus married filing Unchanged 5 separate 6Additional standard deductions: single and married New amounts 7Standard deduction and adjustment for inflation Unchanged 7 8Additional standard deduction of a dependent Unchanged 8 9Itemized deductions versus standard deduction New 10Basic and additional standard deductions Unchanged10 11Itemized deductions or standard deduction Unchanged11 12Itemized deductions or standard deduction Unchanged12 13Itemized deductions or standard deduction New 14Standard deduction for resident alien Unchanged14 15Standard deduction requirements when married Unchanged15 persons file separately 16Standard deduction: year of death Unchanged16 17Dependent’s standard deduction New 18Dependent’s standard deduction New 19Dependent’s standard deduction Unchanged19 20Dependent’s personal exemption not allowed Unchanged20 21Claiming a spouse on a separate return Unchanged21 22Determination of marital status Unchanged22 23Determination of marital status Unchanged23 24Gross income test and scholarships Unchanged24 25Support test and capital expenditures Unchanged25 26Support test and unexpended funds of dependent Unchanged26 27Multiple support agreement: amount of support New rendered by dependent 28Divorce decree silent: custodial parent wins New 29Relationship test for former in-laws and ex-wife Unchanged29 3-13-2 2009 Annual Edition/Test Bank 30Relationship test: ex-sister-in-law Unchanged30 Status:Q/P Question/ Present in Prior Problem Topic EditionEdition 31Qualifying child: age test and full-time student Unchanged31 status 32Qualifying child: abode test New 33Married child and joint return test Unchanged33 34Citizenship/residency test for dependents Unchanged34 35Citizenship/residency test for dependents Unchanged35 36Stealth taxes: nature of Unchanged36 37Tax Relief Reconciliation Act of 2001 and Unchanged37 elimination of the phaseout of exemptions 38Kiddie tax: earned income and support exception New 39Kiddie tax: when not applicable New 40Kiddie tax: how applied Unchanged40 41Kiddie tax: when parental election available; child Unchanged41 may be required to file 42Kiddie tax: unearned income requirement Unchanged42 43Kiddie tax: married filing jointly exception New 44Requirements for fiscal year, timely filed return Modified44 45Surviving spouse status Unchanged45 46Surviving spouse status: year of death Unchanged46 47Marriage penalty: married persons filing Unchanged47 separate returns 48Head of household status Modified48 49Head of household status Modified49 50Abandoned spouse status: contrast married Unchanged50 filing separate 51Personal use losses versus personal use gains Modified51 52Long-term capital gain: lowest rate applicable Unchanged52 53Taxation of gain on collectibles Unchanged53 54Offsetting different-term capital losses to different Unchanged54 term capital gains MULTIPLE CHOICE 1Itemized deductions Unchanged 1 2Deductions for AGI Unchanged 2 3AGI determination Unchanged 3 4AGI determination New 5AGI determination Unchanged 5 6AGI determination New 7Taxable income of a dependent Unchanged 7 8Taxable income of a dependent New 9Taxable income of a dependent Modified 9 10Taxable income of a dependent New 11Determination of exemptions Modified11 12Determination of exemptions New 13Determination of exemptions Modified13Tax Determination; Personal and Dependency Exemptions 3-3 An Overivew of Property Transactions 14Determination of exemptions Unchanged14 15Definition of qualifying child Unchanged15 Status:Q/P Question/ Present in Prior Problem Topic EditionEdition 16Qualifying child: eligible parties Unchanged16 17Multiple support agreement Unchanged17 18Determination of exemptions New 19Definition of a qualifying relative New 20Exceptions to the kiddie tax New 21Filing status for years after spouse’s death Unchanged21 22Widow’s filing status Unchanged22 23Filing status in selected situations Unchanged23 24Abandoned spouse filing status Unchanged24 25Filing status of nonqualifying abandoned spouse Unchanged25 26Loss on business and personal assets Unchanged26 27Taxation of different classes of capital gains Unchanged27 28Taxation of different classes of capital gains New 29Capital loss limitation New 30Netting of different-term losses and different- New term gains MATCHING 1-12Characteristics of tax determination: personal and Unchanged1-12 dependency exemptions, tax rates, filing status 13-24Characteristics of tax determination: personal and Unchanged13-24 dependency exemptions, tax rates, filing status 25-36Dependency exemption categories: qualifying Unchanged25-36 child and qualifying relative PROBLEMS 1Determining AGI Unchanged 1 2Determining AGI Unchanged 2 3Determining AGI New 4Taxable income of a dependent New 5Taxable income of a dependent Modified 5 6Taxable income of a dependent New 7Determination of exemptions Unchanged 7 8Determination of taxable income Modified 8 9Determination of taxable income and filing status New 10Determination of taxable income and filing status Unchanged10 11Computation of capital gains and losses Unchanged11 12Taxation of capital gains and losses Unchanged12 13Taxation of capital gains and losses Unchanged13 14Taxation of capital gains and losses: treatment Unchanged14 of net losses and carryover possibility3-4 2009 Annual Edition/Test Bank Status:Q/P Question/ Present in Prior Problem Topic EditionEdition ESSAY 1Territorial versus global systems of income taxation Unchanged 1 Compared 2Treatment of scholarships for dependency Unchanged 2 exemption purposes 3Exceptions to the support test for dependency Unchanged 3 exemption purposes 4Effect of community property law on application of Unchanged 4 the gross income test to married dependents 5Exceptions to the gross income test for qualifying Unchanged 5 child purposes 6Qualifying child and tie-breaker rules Unchanged 6 7Stealth tax: definition of Unchanged 7 8Kiddie tax: exceptions to its application New 9Filing status: comparison of the tax results of Unchanged 8 different types 10Filing status: situations which qualify and do not Unchanged 9 qualify for head of household 11Filing status: surviving spouse transition status Unchanged10 12Ramifications of the election to file a joint Federal income tax return with a nonresident alien Unchanged11 13Concentrating deductions from AGI and claiming the standard deduction in alternate years New 14Correlation between multiple support agreement Unchanged12 and deduction for medical expensesTax Determination; Personal and Dependency Exemptions 3-5 An Overivew of Property Transactions TRUE/FALSE 1.Currently, the top Federal income tax rate in effect is the highest it has ever been. ANS:F The income tax rate in effect in 1944-1945 ranged from 23% to 94%. PTS:1REF:p. 3-3 2.As used in the income tax formula, gross income would not include the receipt of a loan the tax - payer obtained from a bank. ANS:T Borrowing money does not result in gross income. PTS:1REF:Example 1 3.Kim, a resident of Korea, is a citizen of the U.S. Any income Kim receives from land he owns in Korea is not subject to the U.S. income tax. ANS:F Under the global system of taxation followed by the U.S., foreign-sourced income is subject to tax. Although Kim is not a resident, he is a citizen of the U.S. PTS:1REF:Global Tax Issues on p. 3-5. 4.An decrease in the amount of a taxpayer’s AGI can increase the amount of medical expenses al - lowed as a deduction. ANS:T More medical expenses can be deducted since the 7.5% of AGI floor will be smaller. PTS:1REF:Example 4 5.Because only one taxpayer is involved in both cases, the standard deduction for a surviving spouse is the same amount as that for a married person filing a separate return. ANS:F The amount of the standard deduction for a surviving spouse is the same as for married persons filing jointly—or twice that of a married person filing separately. PTS:1REF:Table 3-1 6.The additional standard deduction for age and blindness is the same amount for single as for mar - ried taxpayers. ANS:F For 2008, compare $1,350 (single) with $1,050 (married). PTS:1REF:Table 3-23-6 2009 Annual Edition/Test Bank 7.The basic and additional standard deductions are subject to an annual adjustment for inflation. ANS:T The inflation adjustment is made annually to both the basic standard deduction and the additional standard deduction. PTS:1REF:p. 3-8 8.Tad claims his 70-year-old mother as a dependent. The mother may not claim an additional standard deduction for her age. ANS:F The mother can claim the additional standard deduction for her age. PTS:1REF:Example 9 9.In 2008, Sally is 72 and single. If she has itemized deductions of $6,000, she should claim the standard deduction alternative. ANS:T The standard deduction yields $6,800 ($5,450 + $1,350). PTS:1REF:Example 6 10.Leslie and Morgan are married and file a joint return. Both are over 65 years of age and Leslie is blind. Their standard deduction for 2008 is $13,000 ($10,900 + $1,050 + $1,050). ANS:F Their standard deduction is $14,050 ($10,900 + $1,050 + $1,050 + $1,050). PTS:1REF:Table 3-1 | Table 3-2 11.Derek is a surviving spouse. If he has itemized deductions of $11,500 for 2008, Derek should not claim the standard deduction. ANS:T The standard deduction would only provide $10,900. PTS:1REF:p. 3-8 | Table 3-1 12.Cameron and Carley are ages 70 and 69 and file a joint return. If they have itemized deductions of $13,300 for 2008, they should not claim the standard deduction. ANS:T The standard deduction provides only $13,000 ($10,900 + $1,050 + $1,050). PTS:1REF:p. 3-8 | Table 3-1 | Table 3-2 13.Claire, age 66, claims head of household filing status. If she has itemized deductions of $8,500 for 2008, she should not claim the standard deduction. ANS:F The standard deduction yields $9,350 ($8,000 + $1,350). PTS:1REF:p. 3-8 | Table 3-1 | Table 3-2Tax Determination; Personal and Dependency Exemptions 3-7 An Overivew of Property Transactions 14.Enrique is a citizen of Honduras and a resident of the U.S. If he files a U.S. income tax return, Enrique cannot claim the standard deduction. ANS:F Either U.S. citizenship or residency will suffice in order to claim the standard deduction. PTS:1REF:p. 3-9 15.Dan and Donna are husband and wife and file separate returns for the year. If Dan itemizes his deductions from AGI, Donna cannot claim the standard deduction. ANS:T If Dan itemizes, Donna must itemize. PTS:1REF:p. 3-9 16.Logan, an 80-year-old widower, dies on January 2, 2008. Even though he lived for only two days, on his final income tax return for 2008, the full basic and additional standard deductions can be claimed. ANS:T No proration of the standard deduction is necessary in this case. PTS:1REF:p. 3-9 17.Benjamin, age 16, is claimed as a dependent by his parents. During 2008, he earned $700 at a car wash. Benjamin’s standard deduction is $1,200 ($900 + $300). ANS:F His standard deduction is the greater of $900 or $1,000 ($700 + $300). PTS:1REF:Example 10 18.Debby, age 18, is claimed as a dependent by her mother. During 2008, she earned $1,100 in in - terest income on a savings account. Debby’s standard deduction is $1,400 ($1,000 + $300). ANS:F Debby’s standard deduction is the minimum allowed of $900. PTS:1REF:Example 8 19.Katrina, age 16, is claimed as a dependent by her parents. During 2008, she earned $5,200 as a checker at a grocery store. Her standard deduction is $5,500 ($5,200 earned income + $300). ANS:F Her standard deduction cannot exceed the regular standard deduction available to single persons (or $5,450 for 2008). PTS:1REF:Example 113-8 2009 Annual Edition/Test Bank 20.A dependent cannot claim a personal exemption on his or her own return. ANS:TPTS:1REF:Example 12 21.When separate income tax returns are filed by married taxpayers, one spouse cannot claim the other spouse as an exemption. ANS:F An exemption is allowed if the spouse has no gross income and is not claimed as a dependent by another. PTS:1REF:p. 3-11 22.Butch and Minerva are divorced in December of 2008. Since they were not married at the end of the year, they are considered not married for 2008. ANS:T They must be married at the end of the year (unless one spouse dies) in order to be considered married. PTS:1REF:Table 3-3 23.For the year a spouse dies, the surviving spouse is considered married for the entire year for in - come tax purposes. ANS:TPTS:1REF:Table 3-3 24.In determining whether the support test is met for dependency exemption purposes, only the tax - able portion of a scholarship is considered. ANS:F In applying the support test, all of the scholarship is disregarded. Scholarships are treated differ - ently for purposes of the gross income test. PTS:1REF:Example 23 25.Scott buys his mother a sewing machine. For purposes of meeting the support test, Scott can count the cost of the sewing machine. ANS:T Capital expenditures can be considered in determining support. It is assumed that the sewing ma - chine is largely for the mother’s use. PTS:1REF:Example 26 26.If the individual does not spend funds that have been received from another source (e.g., Social Security benefits), the unexpended amounts are not considered for purposes of the support test. ANS:T The funds are counted only if used for support purposes. PTS:1REF:Example 24Tax Determination; Personal and Dependency Exemptions 3-9 An Overivew of Property Transactions 27.Using borrowed funds from a mortgage on her home, Lisa provides 55% of her support, while her daughters furnished the rest. Lisa cannot be claimed as a dependent under a multiple support agreement. ANS:T The daughters do not provide more than half of their mother’s support. In this situation, the moth - er is self-supporting. PTS:1REF:Example 25 28.Roy and Linda were divorced in 2007. The divorce decree awards custody of their children to Linda but is silent as to who is entitled to claim them as dependents. If Roy furnished more than half of their support, he can claim them as dependents. ANS:F Not unless Linda consents. PTS:1REF:p. 3-17 29.In 2008, Hal furnishes more than half of the support of his ex-wife and her father, neither of whom lives with him. The divorce occurred in 2007. Hal may claim the father-in-law but not the ex-wife as dependents. ANS:T The father-in-law meets the relationship test, but the ex-wife does not. However, except in the year of divorce, an ex-wife can be a dependent under the member of the household test. PTS:1REF:p. 3-14 30.After her divorce, Hope continues to support her ex-husband’s sister, Cindy, who does not live with her. Hope cannot claim Cindy as a dependent. ANS:F For purposes of the relationship test, divorce does not change “in-law” status. PTS:1REF:p. 3-14 31.Darren, age 20 and not disabled, earns $4,500 during 2008. Darren’s parents cannot claim him as a dependent unless he is a full-time student. ANS:T Being age 20, Darren cannot be a qualifying child unless he is a full-time student. As a qualifying child, he is exempt from the gross income test. PTS:1REF: p. 3-12 32.Keith, age 17 and single, earns $3,800 during 2008. Keith’s parents can claim him as a dependent even if he does not live with them. ANS:F Keith does not meet the definition of a qualifying child; so the gross income test does apply. PTS:1REF:p. 3-12 | p. 3-143-10 2009 Annual Edition/Test Bank 33.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. ANS:F If certain conditions are satisfied (e.g., they did not have to file but did so to obtain a refund), the son and daughter-in-law can qualify as Sarah’s dependents. PTS:1REF:Example 28 34.Hernando, a resident of California, supports his parents who are residents of Mexico but citizens of El Salvador. Hernando can claim his parents as dependents. ANS:T The parents are residents of Mexico. PTS:1REF:p. 3-17 35.Carol lives in Michigan and supports her nephew who is a Canadian citizen that resides in Ontario, Canada. Carol may not claim her nephew as a dependent. ANS:F As a resident of Canada, Carol’s nephew meets the citizenship or residence test. PTS:1REF:p. 3-17 36.Stealth taxes are directed at higher income taxpayers. ANS:T Such stealth taxes as the phaseout of exemptions do not begin until taxpayers reach significant in - come levels. PTS:1REF:Tax in the News on p. 3-20 37.The phaseout of the benefits of personal and dependency exemptions for certain taxpayers is scheduled to be eliminated. ANS:T But the rescission is not completed until 2010. PTS:1REF:p. 3-18 38.The kiddie tax does not apply as to a child whose earned income is more than one-half of his or her support. ANS:TPTS:1REF:p. 3-23 39.Once a child reaches age 19, the kiddie tax no longer applies. ANS:F The kiddie tax does apply if the child is a full-time student under age 24. PTS:1REF:p. 3-23Tax Determination; Personal and Dependency Exemptions 3-11 An Overivew of Property Transactions 40.When the kiddie tax applies and the parents file separate returns, the applicable parent (for de - termining the parental tax) is the one with the greater taxable income. ANS:TPTS:1REF:p. 3-25 41.When the kiddie tax applies, the child need not file an income tax return as the child’s income will be reported on the parents’ return. ANS:F The child need not file only if the parental election (if available) picks up all of the child’s in - come. PTS:1REF:p. 3-24 42.A child who has unearned income of $1,800 or less cannot be subject to the kiddie tax. ANS:TPTS:1REF:p. 3-23 43.A child who is married cannot be subject to the kiddie tax. ANS:F Only if he or she files a joint return is such child exempt from the kiddie tax. PTS:1REF:p. 3-23 44.An individual taxpayer uses a fiscal year February 1-January 31. The due date of this taxpayer’s Federal income tax return is June 15 of each tax year. ANS:F The tax return is due on or before the fifteenth day of the fourth month following the end of the fiscal year. Here, the due date is May 15. PTS:1REF:p. 3-27 45.Surviving spouse filing status begins in the year in which the deceased spouse died. ANS:F Surviving spouse filing status begins in the year following the year of death. PTS:1REF:Example 38 46.In January 2008, Jake’s wife dies and he does not remarry. For tax year 2008, Jake may not be able to use the filing status available to married persons filing joint returns. ANS:T If the executor of his wife’s estate does not agree to filing a joint return, Jake’s only option is to file using married, filing separate status. PTS:1REF:p. 3-303-12 2009 Annual Edition/Test Bank 47.For tax purposes, married persons filing separate returns are treated the same as single taxpayers. ANS:F Single taxpayers can enjoy many tax benefits that are unavailable to married persons filing separ - ately—e.g., earned income credit, credit for child and dependent care expenses, deduction for in - terest paid on student loans. PTS:1REF:p. 3-29 | p. 3-30 48.Katelyn is divorced and maintains a household in which she and her daughter, Crissa, live. Crissa, age 22, earns $11,000 during 2008 as a model. Katelyn qualifies for head of household filing status. ANS:F Crissa is not Katelyn’s dependent. She fails the age test for qualifying child purposes and the gross income test for the qualifying relative category. PTS:1REF:Example 41 49.Mike is divorced and maintains a home in which he and his dependent niece live. Mike qualifies for head of household filing status. ANS:T To be head of household, the dependent involved must meet the relationship test. Such is the case with a niece. PTS:1REF:Example 39 50.In terms of income tax consequences, abandoned spouses are treated the same way as married persons filing separate returns. ANS:F An abandoned spouse is treated as a single taxpayer. Consequently, an abandoned spouse quali - fies for head of household filing status. PTS:1REF:p. 3-31 51.In 2008, Gordon sold his personal use automobile for a loss of $6,000. He also sold a personal stamp collection for a gain of $7,000. As a result of these sales, $7,000 is subject to income tax. ANS:T Gordon must recognize a capital gain of $7,000. The $6,000 loss on the sale of the personal use automobile is nondeductible. PTS:1REF:Example 43 52.In some cases, the tax on long-term capital gains can be as low as 0%. ANS:T If the taxpayer’s tax bracket is 15% (or less), the 0% rate applies. PTS:1REF:Example 46Tax Determination; Personal and Dependency Exemptions 3-13 An Overivew of Property Transactions 53.Gain on the sale of collectibles held for more than 12 months is subject to tax at a rate no higher than 28%. ANS:TPTS:1REF:p. 3-33 54.For 2008, Stuart has a short-term capital loss, a collectible long-term capital gain, and a long- term capital gain from land held as investment. The short-term loss is first applied to the collect - ible capital gain. ANS:TPTS:1REF:Example 48 MULTIPLE CHOICE 1.Which, if any, of the following is a deduction from AGI? a.Alimony payments. b.Child support payments. c.Unreimbursed employee expenses. d.Loss on the sale of a personal automobile. e.None of the above. ANS:C Alimony payments (choice a.) are deductions for AGI. Child support payments (choice b.) and personal capital losses (choice d.) are nondeductible items. PTS:1REF:Example 2 | Example 43 | Exhibit 3-3 2.Which, if any, of the following is a deduction for AGI? a.Alimony payments. b.Interest on home mortgage. c.Unreimbursed employee expenses. d.Charitable contributions. e.None of the above. ANS:A Except for alimony (choice a.), all other items (choices b., c., and d.) are deductions from AGI. PTS:1REF:p. 3-6 | Exhibit 3-3 3.During 2008, Marie had the following transactions: Salary $40,000 Bank loan (proceeds used to buy personal auto) 10,000 Alimony received 6,000 Child support received 12,000 Inheritance from deceased aunt 50,0003-14 2009 Annual Edition/Test Bank Marie’s AGI is: a.$40,000. b.$46,000. c.$52,000. d.$96,000. e.None of the above. ANS:B $40,000 (salary) + $6,000 (alimony) = $46,000. The inheritance and child support are exclusions. Amounts borrowed are not income. PTS:1REF:Example 1 | Exhibit 3-1 4.During 2008, Sam had the following transactions: Salary $60,000 Interest income on General Electric Corporation bonds 2,000 Gift from parents 24,000 Contribution to traditional IRA 5,000 Lottery winnings 3,000 Sam’s AGI is: a.$59,000. b.$61,000. c.$65,000. d.$85,000. e.None of the above. ANS:E $60,000 (salary) + $2,000 (interest on GE bonds) – $5,000 (IRA contribution) + $3,000 (lottery winnings) = $60,000. The gift from his parents is a nontaxable exclusion. PTS:1REF:p. 3-5 | Exhibit 3-1 | Exhibit 3-2 5.During 2008, Colin had the following transactions: Salary $ 70,000 Interest income on City of Denver bonds 500 Damages for personal injury (car accident) 100,000 Punitive damages (same car accident) 50,000 Cash dividends from General Motors Corporation stock 4,000 Colin’s AGI is: a.$74,000. b.$120,500. c.$124,000. d.$124,500. e.$224,000. ANS:C $70,000 (salary) + $50,000 (punitive damages) + $4,000 (cash dividends) = $124,000. The dam- ages from personal injury and the municipal bond interest are nontaxable exclusions. PTS:1REF:Example 2 | Exhibit 3-1 | Exhibit 3-2Tax Determination; Personal and Dependency Exemptions 3-15 An Overivew of Property Transactions 6.In 2008, Walter had the following transactions: Salary $80,000 Capital loss from a stock investment (4,000) Moving expense to change jobs (10,000) Received repayment of $10,000 loan he made to his brother in 2004 (in - cludes interest of $1,000) 11,000 Property taxes on personal residence 2,000 Walter’s AGI is: a.$67,000. b.$68,000. c.$69,000. d.$78,000. e.None of the above. ANS:B $80,000 (salary) – $3,000 (allowable loss on stock investment) – $10,000 (moving expenses) + $1,000 (interest on loan) = $68,000. The unused loss of $1,000 from the stock investment sale can be carried over to 2009. The loan repayment of $10,000 is a return of capital and has no ef - fect on gross income. Property taxes paid on a personal residence is a deduction from AGI and has no impact on the determination of AGI. PTS:1REF:p. 3-5 | p. 3-34 | Exhibit 3-3 7.Monica, age 18, is claimed by her parents as a dependent. During 2008, she had interest income from a bank savings account of $1,000 and income from a part-time job of $4,500. Monica’s tax - able income is: a.$4,500 – $4,800 = $0. b.$5,500 – $5,350 = $150. c.$5,500 – $4,800 = $700. d.$5,500 – $900 – $3,400 = $1,200. e.None of the above. ANS:C Monica’s standard deduction is $4,500 (earned income) + $300 = $4,800. Thus, her taxable in - come is $700 ($5,500 – $4,800). She is not eligible for a personal exemption. PTS:1REF:Example 10 8.Tony, age 15, is claimed as a dependent by his grandmother. During 2008, Tony had interest in - come from General Motors Corporation bonds of $1,000 and earnings from a part-time job of $700. Tony’s taxable income is: a.$0. b.$1,700 – $700 – $900 = $100. c.$1,700 – $1,000 = $700. d.$1,700 – $900 = $800. e.None of the above. ANS:C Tony’s standard deduction of $1,000 ($700 + $300) partially offsets his gross income of $1,700, resulting in taxable income of $700. PTS:1REF:Example 10