CHAPTER 2 SOLUTIONS

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CHAPTER 2 – SOLUTIONS

END OF CHAPTER MATERIAL

Discussion Questions

• What is a for AGI deduction? Give three examples.

Learning Objective: 02-01

Topic: Form 1040 and 1040A

Difficulty: 1 Easy

Feedback: A deduction for AGI is a deduction permitted under the IRC that is used to calculate AGI. It can also be thought of as a deduction from gross income to arrive at AGI. Examples include deductions for IRAs, Keoghs, or other self- employed qualified pension plans; student loan interest; moving expenses; one-half the self-employment tax; self-employed health insurance deduction; penalty on early withdrawal of savings; and alimony paid.

EA: Yes

• What are the five types of filing status?

Learning Objective: 02-02

Topic: Filing Status

Difficulty: 1 Easy

Feedback: The five types of filing status are: Single Married filing a joint return Married filing separate returns Head of household Qualifying widow(er) with dependent child

EA: Yes

• What qualifications are necessary to file as head of household?

Learning Objective: 02-02

Topic: Filing Status

Difficulty: 1 Easy

Feedback: To qualify as head of household, the taxpayer must be unmarried at the end of the tax year, be a U.S. citizen or resident throughout the year, not be a qualifying widow(er), and maintain a household that is the principal place of abode of a qualifying person for more than half the year or pay more than half the costs of maintaining a separate household for the taxpayer’s mother or father if the mother or father qualifies as a dependent of the taxpayer. Temporary absences, such as attending school do not disqualify the person under this section.

EA: Yes

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• George and Debbie were legally married on December 31, 2016. Can they file their

2016 income tax return using the status of married filing jointly? Why or why not?What other filing status choices do they have, if any?

Learning Objective: 02-02

Topic: Filing Status

Difficulty: 1 Easy

Feedback: Yes, George and Debbie can file using the filing status of married filing jointly. The requirement for this status is that the couple be legally married on the last day of the tax year. Alternatively, the couple could choose to use the married filing separate status.

EA: Yes

• What is the amount of the personal and dependency exemptions for 2016?

Learning Objective: 02-03

Learning Objective: 02-04

Topic: Personal and Dependency Exemptions

Difficulty: 1 Easy

Feedback: The amount is $4,050 for personal and dependency exemptions.

EA: Yes

• What are the three general tests that a qualifying person must meet to be a dependent

of the taxpayer?

Learning Objective: 02-04

Topic: Dependency Exemptions

Difficulty: 1 Easy

Feedback: To be a dependent of the taxpayer, a qualifying child and a qualifying relative must meet the three general tests: dependent taxpayer test, joint return test and citizen or resident test.

EA: Yes

• What are the five specific tests necessary to be a qualifying child of the taxpayer?

Learning Objective: 02-04

Topic: Dependency Exemptions

Difficulty: 1 Easy

Feedback: A person is a qualifying child if he or she meets all five of the following tests: relationship test, age test, residency test, support test, and special test - for qualifying child of more than one taxpayer.

EA: Yes

• What age must a child be at the end of the year to meet the age test under the

qualifying child rules?

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Learning Objective: 02-04

Topic: Dependency Exemptions

Difficulty: 1 Easy

Feedback: At the end of the year, the child must be: under the age of 19; under the age of 24 and a full-time student; or totally and permanently disabled regardless of age. In addition, after 2008, the child must be younger than the person claiming the dependency.

EA: Yes

• What are the four specific tests necessary to be a qualifying relative of the taxpayer?

Learning Objective: 02-04

Topic: Dependency Exemptions

Difficulty: 1 Easy

Feedback: A person qualifies as a qualifying relative if he or she meets all four of the following tests: not a qualifying child test, relationship or member of household test, gross income test, and support test.

EA: Yes

• What is a multiple support agreement, and what is its purpose?

Learning Objective: 02-04

Topic: Dependency Exemptions

Difficulty: 2 Medium

Feedback: Normally, in order to claim someone as a dependent a taxpayer must

provide more than half the support of the person. At times, an individual may receive support from multiple persons, but no one person has provided more than 50% of the support. In such a case, a multiple support agreement can be signed. If every one of the persons providing support could claim the individual as a dependent (absent the support test) then one person who provided more than 10% of the support can receive the dependency exemption if all persons sign a written multiple support agreement.The purpose of the agreement is so someone can obtain the dependency exemption rather than no one. Further, the agreement provides a mechanism such that all parties can agree on who that person should be.

EA: Yes

• Mimi is 22 years old and is a full-time student at Ocean County Community College.

She lives with her parents, who provide all of her support. During the summer, she put her Web design skills to work and earned $4,150. Can Mimi’s parents claim her as a dependent on their joint tax return? Why or why not? Assume that all five tests under qualifying child are met.

Learning Objective: 02-04

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Topic: Dependency Exemptions

Difficulty: 2 Medium

Feedback: All of the dependency tests are met by Mimi’s parents, so they can claim her as a dependent. The fact that Mimi earned $4,150 does not matter since Mimi is under age 24 and she is a full-time student at a qualifying educational institution.Thus, the gross income test is not necessary for a qualifying child as long as Mimi does not provide more than half of her own support.

EA: Yes

• What is the standard deduction for each filing status?

Learning Objective: 02-05

Topic: Standard Deduction

Difficulty: 1 Easy

Feedback: The standard deduction for each filing status for 2016 is: Single $ 6,300 Married filing jointly 12,600 Married filing separately 6,300 Head of household 9,300 Qualifying widow(er) 12,600

EA: Yes

• Under what circumstances must a taxpayer use a tax rate schedule rather than using a

tax table?

Learning Objective: 02-06

Topic: Tax Computation

Difficulty: 1 Easy

Feedback: If the taxable income of a taxpayer is $100,000 or more, a tax rate

schedule must be used. Taxable income of less than $100,000 requires the use of a tax table.

EA: Yes

• When and at what rate is interest calculated on amounts owed to the IRS?

Learning Objective: 02-07

Topic: Interest and Penalties

Difficulty: 2 Medium

Feedback: If the taxpayer still owes tax after April 15

th . The rate charged is the federal short-term rate plus 3 percentage points.

EA: Yes

• Prepare a table of the possible IRS penalties listed in the text and give a brief

summary of the purpose of each penalty.