ACCT 323 7980 INCOME TAX I (Spring 2016)
1) Under a divorce agreement executed this year, an ex-wife receives from her ex-husband cash of $25,000 annually for ten years. The agreement does not say that the payments are excludible from gross income. Does the ex-wife have gross income and, if so, how much? Can the exhusband deduct the annual payments and, if so, is the deduction For AGI or From AGI? What Internal Revenue Code Sections answer these questions?
2) According to the AICPA’s Statements on Standards for Tax Services, what duties does a tax practitioner owe to her client?
3) Why is a thorough knowledge of tax law sources important to a professional tax practitioner?
4) May a taxpayer claim a dependency exemption for a person if the taxpayer provides 50% or less of the person’s support. If so, under what circumstances?
5) In 2015, Justin, a single 18-year old taxpayer, received a salary of $1,800 and interest income of $1,600. He had $600 in itemized deductions. Calculate Justin’s taxable income assuming he is (a) self-supporting and (b) a dependent of his parents.
6) Jerry and Jenny are a married couple. They provided financial assistance to several persons during 2015. For the situations below, determine whether the individuals qualify as dependency exemptions for Jerry and Jenny on their 2015 Married Filing Joint tax return. Assume in each case that dependency tests not mentioned have been satisfied.
(a) Brian, age 24, is Jerry and Jenny’s son. Brian is a full-time student, and he lives in an apartment near the college. Jerry and Jenny provide over 50% of Brian’s support. Brian worked as a stock clerk in a super market and earned $4,500.
(b) Same facts as above, except that Brian is a part-time student.
(c) Sheila, age 22, is Jerry and Jenny’s daughter. She’s a full-time student and lives in a college dormitory. Jerry and Jenny provide over 50% of Sheila’s support. Sheila works part-time as an accounting clerk, and she earned $5,000.
(d) Same facts as in (c), except that Sheila is a part-time student.
(e) Grandma, age 82, is Jenny’s grandmother, and she lives with Jerry and Jenny. In 2015, Grandma’s only income was her Social Security of $4,800 and interest on U.S. bonds of $4,500. Grandma uses her income to pay 45% of her total support, and Jerry and Jenny provide the rest of Grandma’s support.
7) In general what factors determine who must file a federal income tax return? Is an individual required to file a tax return if he or she owes no tax? If an individual is not required to file a federal income tax return, are there situations in which the individual might want to file. Explain.
8) John and Joan had been married for 20 years before John died in October 2013. Joan and her son Marley, age 21, continued to live at home in years 2013 – 2016. Marley worked part-time (earning $5,000 in each of the four years). He also attended college on a part-time basis. Joan provided more than 50% of Marley’s support in each year. What is Joan’s filing status for 2013, 2014, 2015, and 2016? Would Joan’s filing status change if Marley attended school full-time rather than part-time? If so, how?
9) Wanda is a single parent who maintained a household for her unmarried son Jordan, age 19, who worked full-time and earned $16,000. Wanda provided about 40% of Jordan’s support but provided all the expenses of maintaining the household. What is Wanda’s 2015 tax filing status?
10) Tom and Mary are married and have one dependent son. In April, Tom left Mary a note that he needed his freedom and was leaving her. As of December, Mary has neither heard from nor seen Tom. Mary fully supported her son and completely maintained the household. What is Mary’s filing status?
11) Jake and Janice are a married couple with two dependent children. In 2015, their salaries totaled $130,000, and they suffered a capital loss of $8,000. They also received $1,000 of taxexempt interest. They paid home mortgage interest of $10,000, state income taxes of $4,000, and medical expenses of $3,000. They also contributed $5,000 to charity. On their 2015 Married Filing Joint tax return what is their (a) adjusted gross income; (b) their total itemized deductions; (c) the amount of their exemptions; and (d) their taxable income.
12) Chinita is a single taxpayer, whose salary was $51,000 in 2015. In that year, she also suffered a $5,000 short-term capital loss. Her itemized deductions for the year totaled $4,000. What are Chinita’s 2015 (a) adjusted gross income; (b) taxable income; and (c) tax liability?
13) In general, when is income treated as earned by an accrual basis taxpayer?
14) Jean owns a small unincorporated business. Her 15-year-old son Bernardo works part-time in the business and was paid wages of $3,000 in the current year. Who is taxed on his earnings, Bernardo or Jean? Explain.
15) Geraldo rented an office building to Brian for $3,000 per month. On 12/29/14, Geraldo received a deposit of $4,000 in addition to the first and last months’ rent. Brian commenced occupancy of the building on 1/02/15. On 7/15/15, Brian closed his business and filed for bankruptcy. Geraldo collected rent for February, March, and April on the first day of each month. He received the May rent on 5/10/14, but collected no payments thereafter. Geraldo withheld $800 from Brian’s deposit because of damage to the property and $1,500 for unpaid rent. He refunded the balance of the deposit to Brian. What amount of the above payments should Geraldo have reported as gross income in 2014 and 2015?
16) Flowers, a married taxpayer, purchased an annuity for $64,400 that will pay $700 per month over the life of Flowers and Flowers’ spouse. At the time of purchase, the couple’s joint life expectancy was 23 years. Flowers received payment beginning April 1, Year 1, amounting to $6,300 in the first year of the annuity contract. How much is includable in Flowers’ gross income in the first year?
a. $0 b. $2,100 c. $4,200 d. $6,300
17) Ingrid inherited $10,000 of City of Baltimore, Maryland bonds in February. In March she received interest of $500 on the bonds, and in April she sold the bonds for a $200 gain. Ingrid redeemed Series EE U.S. Savings Bonds that she had purchased several years ago. The accumulated interest totaled $800. Ingrid also received $300 of interest on bonds issued by the City of Montreal, Canada. What amount of these receipts, if any, should Ingrid include in her gross income.
18) For each of the following, indicate whether the amount is taxable:
(a) Katrina won $3000 in the state lottery.
(b) Robert won a $500 prize for his entry in a poetry contest.
(c) Lizbeth was awarded $2,000 when she was selected “Teacher of the Year” by her local school district.
19) In each of the following situations, what amount must be included in the taxpayer’s gross income?
(a) Laverne received a $1,500 tuition scholarship to attend Fredonia Law School. In addition, Fredonia paid Laverne $4,000 per year to work part-time in the campus cafeteria.
(b) Marvin received a $10,000 football scholarship for attending Western University. His scholarship covered tuition, room, board, laundry, and books. $4,000 of the scholarship was designated for room and board and laundry. It was understood that Marvin would participate in the school’s intercollegiate football program, but he was not required to do so.
(c) Nightingale Nursing School requires all third-year students to work 20 hours per week at an affiliated local hospital. Each student is paid $10 per hour. Ruth, a third-year student, earned $10,000 for such work during the year.
20) Lamar Corp. has four employees, for whom it provides group life insurance in accordance with a non-discrimination policy. The details are:
Employee Age Key Employee Coverage Premiums Sandy 62 Yes $200,000 $4,000 Randy 52 Yes 40,000 700 Mandy 33 No 80,000 600 Candy 33 No 40,000 300
(a) How much may Lamar deduct for group term life insurance premiums?
(b) How much income must be reported by each employee?