Copyright 2017 Pearson Education, Inc.

1 Copyright © 2017 Pearson Education, Inc.

Pearson's Federal Taxation 2017: Individuals, 30e (Rupert)

Chapter I2: Determination of Tax

LO1: Formula for Individual Income Tax

1) The term "gross income" means the total of all income from any source, but after reduction for exclusions.

Answer: TRUE

Explanation: The tax law includes all sources of income in gross income unless specifically excluded.Page Ref.: I:12- 3

Objective: 1

2) Although exclusions are usually not reported on an individual's income tax return, interest income on state and local government bonds must be reported on the tax return.

Answer: TRUE

Explanation: See Additional Comment, p. I:2-3.Page Ref.: I:2-3

Objective: 1

3) Generally, deductions for (not from) adjusted gross income are personal expenses specifically allowed by tax law.

Answer: FALSE

Explanation: Personal expenses, if deductible, are generally from AGI deductions.Page Ref.: I:2-4

Objective: 1

4) Generally, itemized deductions are personal expenses specifically allowed by the tax law.

Answer: TRUE

Explanation: Personal expenses are not allowed as deductions unless specifically provided in the tax law.Page Ref.: I:2-4

Objective: 1

5) Taxpayers have the choice of claiming either the personal and dependency exemption or the standard deduction.

Answer: FALSE

Explanation: Taxpayers claim the greater of itemized deductions or the standard deduction. In addition, taxpayers will reduce taxable income by personal and dependency exemptions.Page Ref.: I:2-5

Objective: 1

6) Taxpayers have the choice of claiming either the personal and dependency exemption or itemized deductions.

Answer: FALSE

Explanation: Taxpayers claim the greater of itemized deductions or the standard deduction. In addition, taxpayers will reduce taxable income by personal and dependency exemptions.Page Ref.: I:2-5

Objective: 1

7) Refundable tax credits are allowed to reduce or totally eliminate a taxpayer's tax liability but any Pearsons Federal Taxation 2017 Comprehensive 30th Edition Pope Test Bank Visit TestBankDeal.com to get complete for all chapters

2 Copyright © 2017 Pearson Education, Inc.credits in excess of the tax liability are lost.

Answer: FALSE

Explanation: Refundable tax credits may reduce the tax liability to zero and, if some credit still remains, are refundable or paid by the government to the taxpayer.Page Ref.: I:2-6

Objective: 1

8) Nonrefundable tax credits are allowed to reduce or totally eliminate a taxpayer's tax liability but any credits in excess of the tax liability are lost.

Answer: TRUE

Explanation: Nonrefundable credits can only reduce the tax liability to zero. The excess is lost.Page Ref.: I:2-6

Objective: 1

9) Taxable income for an individual is defined as

• AGI reduced by itemized deductions.
• AGI reduced by personal and dependency exemptions.
• total income reduced by the standard deduction.
• AGI reduced by deductions from AGI and personal and dependency exemptions.

Answer: D

Explanation: Taxable income is AGI reduced by either the standard deduction or itemized deductions and reduced by personal and dependency exemptions.Page Ref.: I:2-2; Table I:2-1

Objective: 1

10) All of the following items are generally excluded from income except

• child support payments.
• interest on corporate bonds.
• interest on state and local government bonds.
• life insurance proceeds paid by reason of death.

Answer: B

Explanation: Interest on corporate bonds is taxable.

Page Ref.: I:2-3; Table I:2-2

Objective: 1

11) All of the following items are included in gross income except

• alimony received.
• rent income.
• interest earned on a bank account.
• child support payments received.

Answer: D

Explanation: Child support is not taxable.

Page Ref.: I:2-3 and I:2-4, Tables I:2-2 and I:2-3

Objective: 1

3 Copyright © 2017 Pearson Education, Inc.12) All of the following items are deductions for adjusted gross income except

• alimony paid.
• trade or business expenses.
• rent and royalty expenses.
• state and local income taxes.

Answer: D

Explanation: State and local income taxes are itemized deductions.

Page Ref.: I:2-5; Table I:2-4

Objective: 1

13) All of the following items are deductions for adjusted gross income except

• moving expenses.
• unreimbursed employee business expenses.
• qualifying contributions to individual retirement accounts.
• one-half of self-employment taxes paid.

Answer: B

Explanation: Unreimbursed employee business expenses are miscellaneous itemized deductions.Page Ref.: I:2-5; Table I:2-4

Objective: 1

14) Which of the following credits is considered a refundable credit?

• child and dependent care credit
• earned income credit
• adoption expense credit
• lifetime learning credit

Answer: B

Explanation: The earned income credit is a refundable credit.

Page Ref.: I:2-6; Table I:2-5

Objective: 1

15) A single taxpayer provided the following information for 2016:

Salary $80,000 Interest on local government bonds (qualifies as a tax exclusion) 4,000 Allowable itemized deductions 13,000

What is taxable income?

A) $58,950

B) $62,950

C) $66,950

D) $67,000

Answer: B

Explanation: $80,000 - $13,000 itemized deductions - $4,050 personal exemption = $62,950 Page Ref.: I:2-6; Example I:2-1

Objective: 1

4 Copyright © 2017 Pearson Education, Inc.16) Bill and Tessa have two children whom they support and who live in their home. Timmy is 17 and has earned income of $5,000 for the year. Their other child, Tommy, is 15. Tessa's mother also lives with them and may be claimed as their dependent. She is 89 years old. Their adjusted gross income is $130,000.

Required: Compute Bill and Tessa's taxable income for 2016 if they file a joint return and they do not itemize deductions.

Answer:

Adjusted gross income $130,000

Less: Standard deduction ( 12,600)

Allowable exemption ($4,050 × 5) ( 20,250) Taxable income $ 97,150 Page Ref.: I:2-3 through I:2-7; Example I:2-1

Objective: 1

17) Hannah is single with no dependents and has a salary of $102,000 for 2016, along with tax exempt interest income of $3,000 from a municipality. Her itemized deductions total $6,600.

Required: Compute her taxable income.

Answer:

Salary $102,000 (Interest income is excluded)

Less:

Itemized deductions ( 6,600) Personal exemption ( 4,050) Taxable income $ 91,350 Page Ref.: I:2-3 through I:2-7; Example I:2-1

Objective: 1

18) Kadeisha is single with no dependents and has a salary of $102,000 for 2016, along with tax exempt interest income of $3,000 from a municipality. Her itemized deductions total $6,100.

Required: Compute her taxable income.

Answer:

Salary $102,000 (Interest income is excluded)

Less:

Standard deduction ( 6,300) Personal exemption ( 4,050) Taxable income $ 91,650 Page Ref.: I:2-3 through I:2-7; Example I:2-1

Objective: 1