CHAPTER 3 COMPUTING THE TAX

1. Meg, age 23, is a full-time law student and is claimed by her parents as a dependent. During 2014, she received $1,400 interest income from a bank savings account and $6,000 from a part­time job. What is Meg’s taxable income for 2014?

2. Heloise, age 74 and a widow, is claimed as a dependent by her daughter. For 2014, she had income as follows: $2,500 interest on municipal bonds; $3,200 Social Security benefits; $3,000 income from a part-time job; and $2,800 dividends on stock investments. What is Heloise’s taxable income for 2014?

3. Pedro is married to Consuela, who lives with him. Both are U.S. citizens and residents of Nebraska. Pedro furnishes all of the support of his parents, who are citizens and residents of Mexico. He also furnishes all of the support of Consuela’s parents, who are citizens and residents of El Salvador. Consuela has no gross income for the year. If Pedro files as a married person filing separately, how many personal and dependency exemptions can he claim on his return?

4. 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 2014, 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 2014.

5. Ellen, age 39 and single, furnishes more than 50% of the support of her parents, who do not live with her. Ellen practices as a self-employed interior decorator and has gross income in 2014 of $120,000. Her deductions are as follows: $30,000 business and $8,100 itemized.

a. What is Ellen’s taxable income for 2014?

b. Can Ellen qualify for head of household filing status? Explain.

6. In 2014, Ashley earns a salary of $55,000, has capital gains of $3,000, and receives interest income of $5,000. Her husband died in 2013. Ashley has a dependent son, Tyrone, who is age 8. Her itemized deductions are $9,000.

a. Calculate Ashley’s taxable income for 2014.

b. What is her filing status?

7. During the year, Irv had the following transactions:

Long-term loss on the sale of business use equipment	$7,000
Long-term loss on the sale of personal use camper	6,000
Long-term gain on the sale of personal use boat	3,000
Short-term loss on the sale of stock investment	4,000
Long-term loss on the sale of land investment	5,000

How are these transactions handled for income tax purposes?

8. During 2014, Addison has the following gains and losses:

LTCG	$10,000
LTCL	3,000
STCG	2,000
STCL	7,000

a. How much is Addison’s tax liability if she is in the 15% tax bracket?

b. If her tax bracket is 33% (not 15%)?

9. During 2014, Jackson had the following capital gains and losses:

Gain from the sale of coin collection (held three years)	$12,000
Gain from the sale of land held as an investment for six years	9,000
Gain from the sale of stock held as an investment (held for 10 months)	3,000

a. How much is Jackson’s tax liability if he is in the 15% tax bracket?

b. If his tax bracket is 33% (not 15%)?

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10. During 2014, Madison had salary income of $80,000 and the following capital transactions:

LTCG	$13,000
LTCL	15,000
STCG	13,000
STCL	6,000

How are these transactions handled for income tax purposes?

11. Mr. Lee is a citizen and resident of Hong Kong, while Mr. Anderson is a citizen and resident of the U.S. In the taxation of income, Hong Kong uses a territorial approach, while the U.S. follows the global system. In terms of effect, explain what this means to Mr. Lee and Mr. Anderson.

12. The Deweys are expecting to save on their taxes for 2014. Not only have both incurred large medical expenses, but both reached age 65. During the year, they also recognized a $30,000 loss on some land they sold which was purchased as an investment several years ago. Are the Deweys under a mistaken understanding regarding their tax position? Explain.

13. Deductions forAGI are often referred to as “above­the­line” or “page 1” deductions. Explain.

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14. Adjusted gross income (AGI) sets the ceilingor the floorfor certain deductions. Explain and illustrate what this statement means.

15. During the current year, Doris received a large gift from her parents and a sizeable inheritance from an uncle. She also paid premiums on an insurance policy on her life. Doris is confused because she cannot find any place on Form 1040 to report these items. Explain.

16. Mel is not quite sure whether an expenditure he made is a deduction forAGI or a deduction fromAGI. Since he plans to choose the standard deduction option for the year, does the distinction matter? Explain.

17. When filing their Federal income tax returns, the Youngs always claimed the standard deduction. After they purchased a home, however, they started to itemize their deductions from AGI.

a. Explain the reason for the change.

b. Suppose they purchased the home in November 2013, but did not start itemizing until tax year 2014. Why the delay as to itemizing?

18. The Dargers have itemized deductions that exceed the standard deduction. However, when they file their joint return, they choose the standard deduction option.

a. Is this proper procedure?

b. Aside from a possible misunderstanding as to the tax law, what might be the reason for the Darger’s choice?

19. Under what circumstances, if any, may an ex-spouse be claimed as a dependent?

20. In resolving qualified child status for dependency exemption purposes, why are tiebreaker rules necessary? Can these rules be waived?