Chapter 3 Computing The Tax

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Discussion Questions
1. LO.1, 5, 8, 9 During the year, Addison is involved in the following transactions. What are the possible Federal income tax effects of these transactions?
• Lost money gambling on a trip to a casino.
• Helped pay for her neighbor Howie’s dental bills. Howie is a good friend who is unemployed.
• Received from the IRS a tax refund due to Addison’s overpayment of last year’s
Federal income taxes.
• Paid a traffic ticket received while double parking to attend a business meeting.
• Contributed to the mayor’s reelection campaign. The mayor had promised Addison to rezone some of her land.
• Borrowed money from a bank to make a down payment on an automobile.
• Sold a houseboat and a camper on eBay. Both were personal use items, and the gain from one offset the loss from the other.
• Her dependent Aunt Katherine died on June 3 of the year.
• Paid for Katherine’s funeral expenses.
• Paid premiums on her dependent son’s life insurance policy.
2. LO.1 Which of the following items can be inclusions in gross income?
a. During the year, shares of stock that the taxpayer had purchased as an investment doubled in value.
b. Amount an off-duty motorcycle police officer received for escorting a funeral procession.
c. While his mother Shirley was in the hospital, the taxpayer sold Shirley’s jewelry and gave the money to his girlfriend, Serena.
d. Child support payments received.
e. A damage deposit the taxpayer recovered when he vacated the apartment he had rented.
f. Interest received by the taxpayer on an investment in school bonds issued by
IBM.
g. Amounts received by the taxpayer, a baseball “Hall of Famer,” for autographing sports equipment (e.g., balls and gloves).
h. Tips received by Matt, a bartender, from patrons. (Matt is paid a regular salary by the cocktail lounge that employs him.)
i. Sherri sells her Super Bowl tickets for three times what she paid for them.
j. Jefferson receives a new BMW from his grandmother when he passes the CPA exam.
3. LO.1 Which of the following items can be exclusions from gross income?
a. Alimony payments received.
b. Award received by the taxpayer for compensatory damages from her broken leg.
c. A new golf cart won in a church raffle.
d. Amount collected on a loan previously made to a college friend.
e. Insurance proceeds paid to the taxpayer on the death of her uncle—she was the designated beneficiary under the policy.
f. Interest income on City of Chicago bonds.
g. Jury duty fees.
h. Stolen funds that the taxpayer ostensibly had collected for a local food bank drive.
i. Reward paid by the IRS for information provided that led to the conviction of the taxpayer’s former employer for tax evasion.
j. Rare coins worth $8,000 found in an old trunk purchased by the taxpayer at a garage sale.
4. LO.1, 8, 9 Late in the tax year, the Polks come to you for tax advice. They are considering selling some stock investments for a loss and making a contribution to a traditional IRA. In reviewing their situation, you note that they have large medical expenses and a casualty loss, with neither being covered by insurance.
What advice would you give to the Polks?
5. LO.2 In choosing between the standard deduction and itemizing deductions from
AGI, what effect, if any, does each of the following variables have?
a. The age of the taxpayer(s).
b. The health (i.e., physical condition) of the taxpayer(s).
c. Whether the taxpayer(s) rent or own their personal residence.
d. Taxpayer’s filing status (e.g., single; married, filing jointly).
e. Whether married taxpayers decide to file separate returns.
f. The taxpayer’s uninsured personal residence that recently was destroyed by fire.
g. The number of personal and dependency exemptions the taxpayer(s) can claim.
6. LO.2, 3, 5 David is age 78, is a widower, and is being claimed as a dependent by his son. How does this situation affect the following?
a. David’s own individual filing requirement.
b. David’s personal exemption.
c. The standard deduction allowed to David.
d. The availability of any additional standard deduction.
7. LO.4 Patsy maintains a household that includes her eldest son (age 30) and one of
Patsy’s cousins (age 28). She can claim the cousin as a dependent but not her son. Explain.
8. LO.4 Heather, age 12, lives in the same household with her mother, grandmother, and uncle.
a. Who can claim Heather as a dependent on a Federal income tax return?
b. Which of Heather’s relatives takes precedence in claiming the exemption?
9. LO.4 Camden and Lily are divorced on March 3, 2015. For financial reasons, however,
Lily continues to live in Camden’s apartment and receives her support from him. Camden does not claim Lily as a dependent on his 2015 Federal income tax return, but he does so on his 2016 return. Explain.
10. LO.4 Isabella, Emma, and Jacob share equally in the support of their parents. Jacob tells his sisters that they should split the dependency exemptions among themselves. Explain what Jacob means.
11. LO.4 Mark and Lisa were divorced last year. This year, Lisa has custody of their children, but Mark provides nearly all of their support. Who is entitled to claim the children as dependents?
12. LO.4 Peter maintains a household in which live his 18-year-old son Kip and Kip’s wife Kerry. Although Peter provides most of their support, he does not claim them as dependents because Kip and Kerry file a joint return. Is Peter correct?
Explain.
13. LO.4 Mario, who is single, is a U.S. citizen and resident. He provides almost all of the support of his parents and two aunts, who are citizens and residents of
Guatemala. Mario’s parents and aunts are seriously considering moving to and becoming residents of Mexico. Would such a move have any income tax effect on
Mario? Why or why not?
14. LO.4, 5 Comment on the availability of head-of-household filing status in each of the following independent situations.
a. Al lives alone but maintains the household of his parents. In July, the parents use their savings to purchase a new BMW for $62,000.
b. Bree maintains a home in which she and her father live. The father then enters a nursing facility for treatment of a mental illness.
c. Chloe a single parent, maintains a home in which she and Dean, Chloe’s unmarried son, live. Dean, age 18, earns $5,000 from a part-time job.
d. Assume the same facts as in part (c), except that Dean is age 19, not 18.
e. Chee is married and maintains a household in which he and his dependent stepson live.
f. Evie lives alone but maintains the household where her dependent daughter
Zoe lives.
g. Frank maintains a household that includes Georgia, an unrelated friend who qualifies as his dependent.
15. LO.5 Several years ago, after a particularly fierce argument, Fran’s husband moved out and has not been heard from or seen since. Because Fran cannot locate her husband, she uses a “married, filing separate” income tax return. Comment on
Fran’s Federal filing status.
16. LO.6 Jayden calculates his Federal income tax by using both the Tax Tables and the Tax Rate Schedules. Because the Tax Rate Schedules yield a slightly lower tax liability, he plans to pay this amount.
a. Why is there a difference?
b. Is Jayden’s approach permissible?
17. LO.7 In connection with the application of the kiddie tax, comment on the following.
a. The child generates only earned income.
b. The child reports a modest amount of unearned income.
c. The child is age 20, not a student, and not disabled.
d. The child is married.
e. A parental election is made.
f. A parental election is made, and the married parents file separate returns.
18. LO.8 During the year, Hernando recorded the following transactions. How should
Hernando treat these transactions for income tax purposes?
• Gain on the sale of stock held as an investment for 10 months.
• Gain on the sale of land held as an investment for 4 years.
• Gain on the sale of a houseboat owned for 2 years and used for family vacations.
• Loss on the sale of a reconditioned motorcycle owned for 3 years and used for recreational purposes.
19. LO.4, 5, 9 Marcie is divorced, and her married son, Jamie (age 25), and his wife,
Audrey (age 18), live with her. During the year, Jamie earned $4,800 from a part-time job and filed a joint return with Audrey to recover his withholdings. Audrey reports zero gross income.
Marcie can prove that she provided more than 50% of Jamie and Audrey’s support. Marcie does not plan to claim Jamie as a dependent because Jamie earns too much gross income. She does not plan to claim Audrey as a dependent because Audrey signed the joint return with Jamie. In fact, Marcie plans to use single filing status, as none of the persons living in her household qualifies as her dependent.
Comment on Marcie’s intentions based on the following assumptions.
a. All parties live in Indiana (a common law state).
b. All parties live in California (a community property state).