Ch 14 Exam Individual Tax Formula

Chapter 14 - The Individual Tax Formula

Chapter 14The Individual Tax Formula

True / False Questions

1. Harry and Sally were married on December 31, 2009. Their income for the full year can be reported on a joint return for 2009. True False

2. A taxpayer who knowingly signs a joint return on which his spouse has failed to report her babysitting income is liable for any tax assessments made by the IRS on that income. True False

3. Mrs. Paley, who had no gross income, died July 14, 2008. Her husband did not remarry in 2008 or 2009. They had two grown children who are successful lawyers. Mr. Paley will file as a surviving spouse in both 2008 and 2009. True False

4. Charlie is single and provides 80% of the support for his son, Angel, who lives with Charlie. Angel is 26, single, and a citizen of the United States. Angel earns about $5,000, which he spends on clothes and travel. Charlie's filing status is head of household. True False

5. For the taxable year in which a married person dies, the widow or widower can file a joint return with the deceased. True False

6. An individual's taxable income is equal to adjusted gross income less exemptions and the larger of the standard deduction or itemized deductions. True False

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7. An individual's taxable income is equal to adjusted gross income less exemptions less itemized deductions less the standard deduction. True False

8. Adjusted gross income is equal to total income less itemized deductions. True False

9. In computing taxable income, an individual is entitled to deduction the lesser of itemized deductions or the standard deduction. True False

10. Thomas is 69, has good sight, and files single. His standard deduction for 2009 is $7,100. True False

11. Mr. Andrews, age 62, was single during all of 2009. Mr. Andrews is legally blind. His standard deduction is $5,700. True False

12. Bill and Afton are married. Bill is 67 and Afton is 65. Their itemized deductions equal $14,000 while the 2009 standard deduction is $11,400. Because Bill is over 65, the deduction they take is $15,100 ($14,000 itemized deductions + $1,100 because Bill is over 65). True False

13. Most individual taxpayers use the standard deduction rather than itemizing. True False

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14. Thomas is 57, has good sight, and files single. His standard deduction for 2009 is $5,700. Ordinarily, he gives his church $4,000 each December. He has no other itemized deductions. His tax advisor suggests that he make his payment for 2009 in January of 2010. This is a tax planning technique known as "bunching." True False

15. In order to be claimed as a dependent, the dependent individual must be a U.S. citizen. True False

16. The taxpayer's son is 14, single, and earns $17,500 a year. His mother (a widow) can claim an exemption for him if she pays more than one-half of his support. True False

17. Alan is 12 years old and his parents claim him as a dependent on their tax return. If he earns $1,000 of interest and has no other gross income, he will owe federal income tax. True False

18. Jay is 26-years old and a full time student. He lived at home for all of 2009 and was primarily supported by his parents. Jay earned $4,000 from a part-time job. His parents may claim him as a dependent on their 2009 return. True False

19. All else equal, an individual qualifying for head-of-household filing status will have lower tax liability than an individual filing as single. True False

20. A taxpayer is generally indifferent between being treated as single or head of household if he has $8,350 or less of taxable income. True False

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21. If Evan has $10,000 of wages and sells stock that he has held for 24 months for an $11,000 gain, he will pay taxes on the stock gain at a 5% tax rate. True False

22. It is impossible for a progressive income tax system to be both marriage neutral and horizontally equitable. True False

23. Ron and Sue are married. Ron earns $45,000, and Sue earns $25,000. They have no dependents and do not itemize deductions. They will owe the same amount of income tax whether they file separately or jointly. True False

24. Molly's AGI is $170,000. She files single and uses the standard deduction. If she earns another $10,000, her taxes will increase by more than $2,800. True False

25. Congress could eliminate the marriage penalty if it chose to do so, by adjusting the standard deduction amounts. True False

26. The dependent care credit is equal to a fixed percentage (ranging from 20% to 35%) of the taxpayer's dependent care costs (after such costs have been subjected to an earned income limitation and a dollar limitation). True False

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27. Mr. and Mrs. Newton have two young children. This year, Mr. Newton will earn $40,000; Mrs. Newton made $5,000 in a part time job. During the year, they paid $4,000 for childcare for their two young children while Mrs. Newton was at work. The Newtons will be allowed a dependent care credit of $800 ($4,000 x 20%). True False

28. The earned income credit is only available to low-income taxpayers that have dependent children living at home. True False

29. The earned income credit offsets the impact of payroll tax on low-income families and encourages individuals to seek employment rather than to depend on welfare. True False

30. Harold's total tax liability is his tentative minimum tax plus his regular tax liability. True False

31. The standard deduction and exemptions are deductible in the determination of alternative minimum taxable income. True False

32. All individuals are entitled to an AMT exemption, the amount of which varies with filing status. True False

33. Alternative minimum tax equals the greater of: (1) tentative minimum tax minus regular tax, or (2) zero. True False

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34. On February 3, 2009, Jamie earned $45,000 as an independent contractor. No withholding was taken out of his earnings. Jamie did not have to file a tax return for 2008. Jamie will be penalized if he waits until April 15, 2010 to pay the taxes due on the $45,000. True False

35. Pearl had a tax liability in 2008 of $15,000. For 2009, Pearl projects a tax liability of $31,000. She must make timely quarterly installments of estimated taxes of $3,750 or be subject to underpayment penalties. True False

36. Most individual taxpayers can obtain an automatic extension of time to file their tax returns until October 15. True False

37. An extension of the time to file an individual taxpayer's tax return also extends the time to pay any tax that may be due. True False

38. If a taxpayer's AGI is over $150,000 in 2009, he must make estimated tax payments for 2010 that are based on 110% of his 2009 tax liability in order to meet the estimated tax safe harbor. True False

Multiple Choice Questions

39. Samantha died on May 18, 2008. Her husband Dave lived by himself for the next three years until he remarried in 2011. What was Dave's filing status in 2008 and 2009? A. 2008, Married filing jointly; 2009, Surviving spouseB. 2008, Married filing jointly; 2009, SingleC. 2008, Surviving spouse; 2009, Surviving spouseD. 2008, Surviving spouse; 2009, Single

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40. Leon died on February 23, 2008, and his wife Mary did not remarry. During 2008 and 2009, their daughter Sue lived with Mary. Sue was a full-time student and had no taxable income in either year. She turned 27 in 2009. Which of the following statements correctly describes Mary's filing status in 2009? A. Surviving spouseB. Married filing jointlyC. Head of householdD. Single

41. Mr. Jones and his first wife were legally divorced on February 19, 2009. He remarried the second Mrs. Jones on December 20, 2009. He has no dependent children. Which of the following statements correctly describes Mr. Jones' filing status in 2009? A. Married filing jointly with the second Mrs. JonesB. Married filing jointly with the first Mrs. JonesC. Married filing separately (cannot file joint)D. Single

42. Which of the following statements regarding filing status is false? A. A widow or widower maintaining a home for a dependent child qualifies as surviving spouse for the two tax years following the spouse's death.B. Marital status for tax purposes is determined on the last day of the taxable year.C. Any unmarried individual with a dependent qualifies as head of household.D. An unmarried individual without children or other dependents files as a single taxpayer.

43. Mrs. Raines died in 2006. Mr. Raines has not remarried and maintains a home for one dependent child. What is his filing status for 2008 and 2009? A. 2008, surviving spouse; 2009, head of householdB. 2008, surviving spouse, 2009, surviving spouseC. 2008, head of household; 2009, head of householdD. 2008, head of household; 2009, surviving spouse

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44. Which of the following taxpayers do not qualify for married filing jointly filing status for 2009? A. Mr. Lane died on August 10, 2009. Mrs. Lane has not remarried and has no dependent children.B. Mrs. Holden died on January 15, 2008. Mr. Holden has not remarried and maintains a home for two dependent children.C. Mr. and Mrs. West were legally divorced on December 21, 2009. Mrs. West has not remarried and maintains a home for three dependent children.D. All of the above taxpayers qualify for married filing jointly filing status for 2009.

45. During 2009, Marie, a single taxpayer, 30 years old with good sight, had $50,000 of gross income. Her itemized deductions totaled $6,000. Her 10-year-old sister lived with and was fully supported by her. What is Marie's 2009 taxable income? A. $36,700B. $34,350C. $38,000D. $40,350

46. Mr. and Mrs. Liddy had the following tax data for 2009:

What is their adjusted gross income? A. $39,000B. $36,200C. $45,000D. $41,200

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47. Mr. and Mrs. Aaron had AGI of $53,000 for 2009. Their itemized deductions totaled $13,500. Mr. Aaron was 67; Mrs. Aaron was 63. Neither is blind. What is their taxable income for the year, if they elect to file married filing jointly? A. $39,500B. $28,100C. $32,200D. $34,300

48. Which of the following statements regarding the calculation of taxable income is false? A. The first step in the calculation of taxable income is determining the taxpayer's total income.B. Adjusted gross income is equal to total income less above-the-line deductions.C. Adjusted gross income can be reduced by the greater of the standard deduction or itemized deductions.D. Taxpayers are permitted to deduct the greater of itemized deductions or above-the-line deductions in calculating taxable income.

49. Julie, an unmarried individual, lived with her 13-year-old son, Oscar, during all of 2009. For 2009, she had the following tax information:

Oscar earned $7,000 of interest and dividend income from investments he had inherited from his grandmother's estate. However, his mother insisted that the entire amount be reinvested for Oscar's college education. She provided all of Oscar's support. Calculate Julie's adjusted gross income for 2009. A. $118,800B. $125,800C. $114,800D. $107,400

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Oscar earned $7,000 of interest and dividend income from investments he had inherited from his grandmother's estate. However, his mother insisted that the entire amount be reinvested for Oscar's college education. She provided all of Oscar's support. Calculate Julie's taxable income for 2009. A. $99,150B. $92,800C. $106,450D. $101,100

51. Tamara and Todd Goble file a joint return. Todd is 73 years; Tamara 58. Todd is legally blind. What is their standard deduction? A. $10,000B. $11,400C. $12,500D. $13,600

52. In determining the allowable standard deduction, which of the following statements is true? A. The standard deduction is a function of filing status.B. An individual who is both blind and age 65 by the last day of the taxable year is entitled to an additional standard deduction amount.C. An individual who is claimed as a dependent on another person's tax return is not permitted a standard deduction.D. All of the above statements are true.

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53. Mr. and Mrs. Kay file a joint income tax return. Mr. Kay is 68 years old; Mrs. Kay is 66 and legally blind. Compute their 2009 standard deduction. A. $11,400B. $12,500C. $13,600D. $14,700

54. Melissa, age 16, is claimed as a dependent on her parents' tax return. During 2009, she earned $2,000 babysitting, and also has $3,000 of interest and dividend income from investment assets. Compute Melissa's allowable standard deduction. A. $5,700B. $2,300C. $950D. $0

55. Hunter, age 17, is claimed as a dependent on his parents' tax return. During 2009, he earned $15,000 appearing in television commercials. Compute his allowable standard deduction. A. $950B. $5,700C. $15,300D. $0

56. For 2009, Stephanie had the following tax information:

Stephanie fully supported her aunt who had no gross income. She did not live with Stephanie. Stephanie's taxable income for the year is: A. $58,000B. $55,650C. $52,000D. $49,350

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57. Which of the following statements regarding the relationship between the standard deduction and itemized deductions is false? A. Through a technique called ‘bunching,' taxpayers control the timing of their itemized deductions so that the total exceeds the standard deduction in select years.B. Individuals whose AGI exceeds threshold amounts must reduce the total allowable deduction for certain itemized deductions.C. Individuals elect to itemize deductions only if their total allowable deduction amount exceeds the standard deduction.D. The overall limitation on itemized deductions can reduce such deductions to zero. In that case, the individual would still be entitled to the standard deduction.

58. Mr. and Mrs. Norton have 2009 AGI of $250,000 and no dependents. Their itemized deductions, before the overall limitation, totaled $50,000, none of which are medical expense, investment interest expense, casualty, theft, or gambling loss. Determine their allowable itemized deductions in computing taxable income. A. $50,000B. $47,504C. $49,168D. $0

59. Kent allowed his elderly, widowed father, Martin, to move in with him late this year. Martin's only income was $8,000 in social security benefits. Kent provided $9,000 towards his father's total support of $17,000. What is Kent's filing status and total number of exemptions for the year? A. Single and one exemptionB. Single and two exemptionsC. Head of household and one exemptionD. Head of household and two exemptions

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60. Mr. and Mrs. Anderson file a joint return. Louise is their 27-year-old daughter. She had no income for the year and was a full-time college student until her graduation on December 18th. Louise married a millionaire on December 30, and is filing a joint return with him. Bruce is the Anderson's 17-year-old son. During the year he had income of $5,500 from prizes/awards won at livestock shows. Arnold is the Anderson's 3-year-old son. Arnold earned $12,000 from personal appearances. How many exemptions are the Anderson's entitled to on their tax return if they file married filing jointly? A. 2B. 3C. 4D. 5

61. Imogene is 35 years old and unmarried. She has adopted her ten year-old niece and provides 100% of her financial support. Imogene also provides 60% of financial support for her aging mother who lives in a nursing home. How many exemptions is Imogene entitled to claim on her tax return? A. 0B. 1C. 2D. 3

62. Janine and John are a married couple filing a joint return. They have a 10-year old son. They also provide 60% of financial support for David, an unrelated 12-year old who is the son of old friends from college. David resides with his aunt Sarah, a single individual, who provides 40% of his financial support. How many exemptions will Janine and John claim on their return? A. 1B. 2C. 3D. 4

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63. Janine and John are a married couple filing a joint return. They have a 10-year old son. They also provide 60% of financial support for David, an unrelated 12-year old who is the son of old friends from college. David resides with his aunt Sarah, a single individual, who provides 40% of his financial support. How many exemptions will Sarah claim on her return? A. 0B. 1C. 2D. 3

64. Which of the following statements regarding exemptions is false? A. Taxpayers can claim a dependency exemption for a qualifying child or a qualifying relative.B. For exemption purposes, a qualifying child would include the taxpayer's niece or nephew who resides with the taxpayer.C. Fore exemption purposes, a qualifying relative includes an unrelated individual who is a member of the taxpayer's household.D. An individual who is claimed as a dependent is also entitled to a personal exemption on their own tax return.

65. Mr. and Mrs. Owens file a joint return on which they claim six exemptions. Their 2009 AGI is $270,000. Calculate their allowable deduction for exemptions. A. $0B. $21,900C. $18,396D. $20,733

66. Which of the following is not a requirement for claiming a dependency exemption? A. The dependent must be a U.S. citizen or resident of the U.S., Canada, or Mexico.B. The dependent must be either a qualifying child or a qualifying relative of the taxpayer.C. A qualifying child may not have taxable income greater than the exemption amount.D. A qualifying relative may not have taxable income greater than the exemption amount.

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67. Which of the following statements regarding the overall reductions of itemized deductions and exemptions is false? A. The threshold amounts at which these reductions apply are the same.B. The exemption phase-out can reduce allowable exemptions to zero for very high income taxpayers.C. It is possible for a taxpayer to be subject to the overall reduction of itemized deductions and not be subject to the overall reduction of exemptions.D. A taxpayer whose AGI exceeds the threshold amount for the exemption reduction will also exceed the exemption amount for the itemized deduction reduction.

68. Benjamin is an unmarried individual with no dependents. His taxable income for 2009 is $359,000. Calculate his regular tax liability for 2009. A. $118,470B. $103,613C. $96,291D. $110,831

69. Alice is a divorced individual with two dependent children. Her taxable income for 2009 is $175,000. Calculate her regular tax liability for 2009. A. $49,000B. $42,893C. $40,329D. $37,264

70. Which of the following statements regarding the calculation of regular tax liability is false? A. The appropriate rate schedule for calculating regular tax liability depends on the taxpayer's filing status.B. All income, regardless of character, is taxed using the rate schedules.C. The individual tax rate schedules are adjusted annually for inflation.D. The tax brackets in the married-filing-separately rate schedule are exactly one-half of the brackets in the married-filing-jointly rate schedule.

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71. When calculating regular tax liability A. Tax on dividends and capital gains, computed using the preferential rates, reduces tax computed using the rate schedules.B. Allowable credits reduce both taxable income and tax liability.C. The tax rate schedules reflect a progressive tax system with a top marginal tax rate of 35 percent.D. All of the above are correct.

72. Mr. and Mrs. Daniels had the following income items:

Mr. and Mrs. Daniels have no dependents and claim the standard deduction. Compute their income tax liability on a joint return. A. $19,400B. $18,950C. $19,700D. $20,150

73. Which of the following statements regarding the marriage penalty is false? A. Following recent tax law changes, the marriage penalty has been eliminated and the federal income tax system is now completely marriage neutral.B. The marriage penalty is a consequence of the progressive tax rate system.C. Recent tax law changes provide some relief from the marriage penalty by adjusting the lower tax brackets so that the amount of income in these brackets for a married couple is exactly twice that of a single individual.D. A tax system that was completely marriage neutral could not also be horizontally equitable.

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74. Linda and Raj are engaged. Linda's taxable income is $75,000. Raj's taxable income is $75,000. When they marry in 2009, how much of a marriage penalty will they pay? A. $0B. $388C. $4,050D. None of the above

75. Which of the following statements regarding the marginal tax rate is false? A. The marginal tax rate is defined as the rate applying to the nest dollar of taxable income.B. For taxpayers subject to the overall reduction of itemized deductions or personal exemptions, the marginal tax rate will be higher than the statutory rate appearing in the relevant tax rate schedule.C. For taxpayers subject to the overall reduction of itemized deductions or personal exemptions, the marginal tax rate will be lower than the statutory rate appearing in the relevant tax rate schedule.D. For taxpayers whose allowable tax credits are subject to limitations based on AGI, the marginal tax rate will be higher than the statutory rate appearing in the relevant tax rate schedule.

76. Ms. Burton is a single individual with $200,000 of AGI. She does not itemize and is subject to the overall reduction of her personal exemption due to her high income level. For 2009, her allowable personal exemption is $3,309. She is considering an investment that would generate an additional $10,000 of taxable income. How much additional tax will she owe? A. $3,500B. $3,300C. $3,324D. $3,800

77. Lennie and Margo paid $2,800 for child care of their 7-year-old son. Lennie earned $41,000 in wages and Margo earned $2,500. Calculate their dependent care credit. A. $480B. $500C. $600D. $980

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78. The Harvey's joint income tax liability before credits for 2009 was $1,675. In addition, they were entitled to an earned income credit of $1,200. If $700 in federal income taxes had been withheld during the year, which of the following statements is correct? A. They have a carryforward of unused earned income credit of $125.B. Any unused earned income credit is lost.C. They should receive a refund of $1,200.D. They should receive a refund of $225.

79. IMP employed Marshal until October of 2009 when he changed jobs. He earned $100,000 at IMP; he made $30,000 at the new job with ETD, Inc. Which of the following statements is false? A. The new employer will withhold 7.65% for payroll taxes.B. The new employer will not have to pay payroll taxes if Marshal informs them that he was over the FICA limit at his old job.C. Marshal will be able to claim a credit against his tax liability for excess payroll tax withholding.D. Neither IMP, Inc. nor ETD, Inc. will be entitled to a refund of the employer matching payroll tax paid on Marshal's wages above the ceiling for the year.

80. Mr. and Mrs. Kain are joint filers with $80,000 of AGI. The couple has three dependent children: Beatrice their 19-year-old daughter, Bruce their 16-year-old son; and Arnold their 8-year-old son. For 2009 their child credit is: A. $1,800B. $2,000C. $1,200D. $ -0-

81. Mr. and Mrs. Cox are joint filers with $115,000 of AGI. The couple has three dependent children under 17 years of age. For 2009 their child credit is: A. $1,550B. $3,000C. $2,750D. $2,250

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82. Which of the following statements regarding individual tax credits is false? A. The purpose of the earned income credit is to offset the burden of the payroll tax on low-income workers and to encourage individuals to seek employment rather than to depend on welfare.B. The earned income credit is one of the few refundable tax credits.C. As a taxpayer's AGI increases, the percentage of dependent care costs allowed as a credit also increases.D. The child credit is not available to very high income taxpayers.

83. Which of the following statements concerning the alternative minimum tax imposed upon individual taxpayers is true? A. The determination of alternative minimum taxable income begins with taxable income for regular tax purposes.B. Alternative minimum tax does not need to be calculated if the taxpayer has no tax preferences.C. An individual is allowed the same exemption as a corporation in calculating the alternative minimum tax base.D. The alternative minimum tax rates for individuals are 28% on the first $175,000 of the applicable tax base and 26% on any excess over that amount.

84. Ruth Anne, a single taxpayer, has alternative minimum taxable income before any alternative minimum tax exemption of $152,500. Assume the single filer alternative minimum tax exemption is $46,700 and the related phase-out threshold is $112,500. Calculate Ruth Anne's alternative minimum tax exemption. A. $0B. $46,700C. $10,000D. $36,700

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85. The Ryans, married taxpayers, had the following tax data for 2009:

If the alternative minimum tax exemption applicable to their filing status is $70,950 and the related phase-out threshold is $150,000, what is their alternative minimum taxable income? A. $167,500B. $96,550C. $101,925D. None of the above

86. Dillon and Amanda, a married couple filing a joint return, have the following 2009 tax information:

Assume that taxable income does not include any dividends or capital gains. Calculate their AMT and final tax liability. A. AMT, $0; final tax liability, $101,612B. AMT, $122,500; final tax liability, $224,112C. AMT, $20,888; final tax liability, $122,500D. AMT, $0; final tax liability, $122,500

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87. Wilma and Fred, who file a joint return, have the following 2009 tax information:

If the alternative minimum tax exemption applicable to their filing status is $70,950, and the related phase-out threshold is $150,000, what is their tentative minimum tax? Assume their taxable income does not include any dividend income or capital gain. A. $70,050B. $14,010C. $17,275D. $18,213


If the alternative minimum tax exemption applicable to their filing status is $70,950, and the related phase-out threshold is $150,000, what is their alternative minimum tax liability? Assume their taxable income does not include any dividend income or capital gain. A. $18,213B. $0C. $2,638D. $938

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89. In August of 2009, Mike won $10,000 at the racetrack. No taxes were withheld; this amount will be taxed at 25%. Last year, his tax liability was $2,518. Which of the following statements is true? A. If Mike does not pay the additional tax until April 15, 2010, no underpayment penalty will be due if the federal income tax withheld from 2009 wages is at least $2,518.B. If Mike does not pay the additional tax until April 15, 2010, no underpayment penalty will be due if total withholding is at least 80% of 2008 tax liability.C. Error! Hyperlink reference not valid.Error! Hyperlink reference not valid.9 and by January 15, 2010, to avoid any underpayment penalty.D. Regardless of what amount of federal income tax is withheld from Mike's wages for 2009, he must make a tax deposit of $2,500 by September 15, 2009.

90. Which of the following statements regarding tax payments is true? A. Self-employed individuals must meet income tax payment requirements via quarterly estimated tax payments; self-employment taxes are not due until the return is filed.B. Self-employed individuals meet income and self-employment tax payment requirements via withholding.C. Individuals whose income is all from salary and wages typically meet payment requirements via withholding and need not make estimated tax payments.D. All of the above are true.

91. In January of 2009, Lawrence projects that his employer will withhold $20,000 from his 2009 salary. However, he has income from several other sources and must make quarterly installment payment of tax. Compute the quarterly installment amount that results in a 2009 safe harbor estimate, assuming that Lawrence's 2008 AGI was $140,000 and his tax was $28,000. A. $2,000B. $2,700C. $7,000D. $8,000

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93. Which of the following statements concerning extensions of time to file an individual tax return is true? A. The extension of time to file does not extend the time for payment of tax.B. The first extension of time to file is for two months and is granted automatically.C. A second filing extension of four additional months is available with the approval of the Internal Revenue Service.D. None of the above statements are true.

94. Which of the following statements concerning extensions of time to file an individual tax return is false? A. The extension of time to file does not extend the time for payment of tax.B. An automatic extension of time to file is available for six months.C. The extended due date of a calendar-year individual tax return is October 15 of the next year.D. An extension of time to file prevents the taxpayer from owing interest and penalties.

Application Problems

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95. Determine Mr. Smith's 2009 filing status in each of the following independent cases. a. Mr. Smith and Mrs. Smith were legally divorced on December 1. Mr. Smith has not remarried and has no dependent children.b. Mr. Smith and the first Mrs. Smith were legally divorced on February 10. Mr. Smith remarried the second Mrs. Smith on December 5. He has no dependent children.c. Mrs. Smith dies on June 22. Mr. Smith has not remarried and has no dependent children.d. Mrs. Smith died on November 1, 2007. Mr. Smith has not remarried and maintains a home for one dependent child.e. Mrs. Smith died on April 3, 2008. Mr. Smith has not remarried and has no dependent children.f. Mr. and Mrs. Smith were legally divorced on September 10, 2006. Mr. Smith has not remarried and maintains a home for his two dependent children.

96. Mr. and Mrs. Bennett file a joint income tax return. Determine if each of the following unmarried individuals is either a qualifying child or a qualifying relative for whom the couple can claim an exemption. a. Son Alex, age 22, who lives in his parents' home and works fulltime as a tax accountant. Alex is self-supporting except for the fact that he does not pay rent to his parents.b. Daughter Samantha, age 20, who is a full-time college student. Samantha lives in a dormitory during the school year, but her parents' home is her permanent residence and her parents provide 100 percent of her financial support.c. Mr. Bennett's brother Max who is 42 years old and mentally handicapped. Max lives in a privately operated group home, and Mr. and Mrs. Bennett provide 100 percent of his financial support. Max has no gross income.d. Mrs. Bennett's mother, Vera, age 67, who lives in a retirement community. Mr. and Mrs. Bennett provide about 75 percent of her financial support. Vera earned $5,000 this year as a part-time receptionist.

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97. Charles, a single individual, had AGI totaling $247,000, which includes no dividends or capital gains. He had $22,400 itemized deductions (none of which were medical expense, investment interest expense, casualty, theft, or gambling loss) and no dependents. Using the worksheets in Appendixes 14-A and 14-B, compute his taxable income and regular tax liability.

98. Eileen, a single individual, had $125,000 taxable income. Compute her income tax assuming that: a. Taxable income includes no capital gains.b. Taxable income includes $14,000 of capital gain eligible for the 15 percent preferential rate.

99. Alice Grim, a single taxpayer, has never paid AMT before 2009. In 2009, her $200,000 of taxable income included $180,000 ordinary income and $20,000 capital gain taxed at 15%. Her AMTI was $230,000. Compute Alice's regular tax, AMT, and total income tax for 2009.

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Chapter 14 The Individual Tax Formula Answer Key

True / False Questions

1. Harry and Sally were married on December 31, 2009. Their income for the full year can be reported on a joint return for 2009. TRUE

Difficulty: MediumLearning Objective: 1

2. A taxpayer who knowingly signs a joint return on which his spouse has failed to report her babysitting income is liable for any tax assessments made by the IRS on that income. TRUE

Difficulty: EasyLearning Objective: 1

3. Mrs. Paley, who had no gross income, died July 14, 2008. Her husband did not remarry in 2008 or 2009. They had two grown children who are successful lawyers. Mr. Paley will file as a surviving spouse in both 2008 and 2009. FALSE


4. Charlie is single and provides 80% of the support for his son, Angel, who lives with Charlie. Angel is 26, single, and a citizen of the United States. Angel earns about $5,000, which he spends on clothes and travel. Charlie's filing status is head of household. TRUE

Difficulty: DifficultLearning Objective: 1

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5. For the taxable year in which a married person dies, the widow or widower can file a joint return with the deceased. TRUE


6. An individual's taxable income is equal to adjusted gross income less exemptions and the larger of the standard deduction or itemized deductions. TRUE


7. An individual's taxable income is equal to adjusted gross income less exemptions less itemized deductions less the standard deduction. FALSE


8. Adjusted gross income is equal to total income less itemized deductions. FALSE


9. In computing taxable income, an individual is entitled to deduction the lesser of itemized deductions or the standard deduction. FALSE


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10. Thomas is 69, has good sight, and files single. His standard deduction for 2009 is $7,100. TRUE

$5,700 + $1,400 = $7,100


11. Mr. Andrews, age 62, was single during all of 2009. Mr. Andrews is legally blind. His standard deduction is $5,700. FALSE

$5,700 + $1,400 (because he is single) = $7,100


12. Bill and Afton are married. Bill is 67 and Afton is 65. Their itemized deductions equal $14,000 while the 2009 standard deduction is $11,400. Because Bill is over 65, the deduction they take is $15,100 ($14,000 itemized deductions + $1,100 because Bill is over 65). FALSE


13. Most individual taxpayers use the standard deduction rather than itemizing. TRUE


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14. Thomas is 57, has good sight, and files single. His standard deduction for 2009 is $5,700. Ordinarily, he gives his church $4,000 each December. He has no other itemized deductions. His tax advisor suggests that he make his payment for 2009 in January of 2010. This is a tax planning technique known as "bunching." TRUE


15. In order to be claimed as a dependent, the dependent individual must be a U.S. citizen. FALSE


16. The taxpayer's son is 14, single, and earns $17,500 a year. His mother (a widow) can claim an exemption for him if she pays more than one-half of his support. TRUE


17. Alan is 12 years old and his parents claim him as a dependent on their tax return. If he earns $1,000 of interest and has no other gross income, he will owe federal income tax. TRUE


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18. Jay is 26-years old and a full time student. He lived at home for all of 2009 and was primarily supported by his parents. Jay earned $4,000 from a part-time job. His parents may claim him as a dependent on their 2009 return. FALSE


19. All else equal, an individual qualifying for head-of-household filing status will have lower tax liability than an individual filing as single. TRUE


20. A taxpayer is generally indifferent between being treated as single or head of household if he has $8,350 or less of taxable income. TRUE


21. If Evan has $10,000 of wages and sells stock that he has held for 24 months for an $11,000 gain, he will pay taxes on the stock gain at a 5% tax rate. TRUE


22. It is impossible for a progressive income tax system to be both marriage neutral and horizontally equitable. TRUE


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23. Ron and Sue are married. Ron earns $45,000, and Sue earns $25,000. They have no dependents and do not itemize deductions. They will owe the same amount of income tax whether they file separately or jointly. FALSE


24. Molly's AGI is $170,000. She files single and uses the standard deduction. If she earns another $10,000, her taxes will increase by more than $2,800. TRUE

The phase-out of exemptions will cause taxable income to increase by more than $10,000. Students will need tax rate schedules.


25. Congress could eliminate the marriage penalty if it chose to do so, by adjusting the standard deduction amounts. FALSE


26. The dependent care credit is equal to a fixed percentage (ranging from 20% to 35%) of the taxpayer's dependent care costs (after such costs have been subjected to an earned income limitation and a dollar limitation). TRUE


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27. Mr. and Mrs. Newton have two young children. This year, Mr. Newton will earn $40,000; Mrs. Newton made $5,000 in a part time job. During the year, they paid $4,000 for childcare for their two young children while Mrs. Newton was at work. The Newtons will be allowed a dependent care credit of $800 ($4,000 x 20%). TRUE


28. The earned income credit is only available to low-income taxpayers that have dependent children living at home. FALSE


29. The earned income credit offsets the impact of payroll tax on low-income families and encourages individuals to seek employment rather than to depend on welfare. TRUE


30. Harold's total tax liability is his tentative minimum tax plus his regular tax liability. FALSE


31. The standard deduction and exemptions are deductible in the determination of alternative minimum taxable income. FALSE


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32. All individuals are entitled to an AMT exemption, the amount of which varies with filing status. FALSE


33. Alternative minimum tax equals the greater of: (1) tentative minimum tax minus regular tax, or (2) zero. TRUE


34. On February 3, 2009, Jamie earned $45,000 as an independent contractor. No withholding was taken out of his earnings. Jamie did not have to file a tax return for 2008. Jamie will be penalized if he waits until April 15, 2010 to pay the taxes due on the $45,000. FALSE


35. Pearl had a tax liability in 2008 of $15,000. For 2009, Pearl projects a tax liability of $31,000. She must make timely quarterly installments of estimated taxes of $3,750 or be subject to underpayment penalties. TRUE


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36. Most individual taxpayers can obtain an automatic extension of time to file their tax returns until October 15. TRUE


37. An extension of the time to file an individual taxpayer's tax return also extends the time to pay any tax that may be due. FALSE


38. If a taxpayer's AGI is over $150,000 in 2009, he must make estimated tax payments for 2010 that are based on 110% of his 2009 tax liability in order to meet the estimated tax safe harbor. TRUE


Multiple Choice Questions

39. Samantha died on May 18, 2008. Her husband Dave lived by himself for the next three years until he remarried in 2011. What was Dave's filing status in 2008 and 2009? A. 2008, Married filing jointly; 2009, Surviving spouseB. 2008, Married filing jointly; 2009, SingleC. 2008, Surviving spouse; 2009, Surviving spouseD. 2008, Surviving spouse; 2009, Single

He can file joint in the year his wife died. Because he lives alone (not maintaining a home for a dependent) he cannot file as a surviving spouse, but has to file single.


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40. Leon died on February 23, 2008, and his wife Mary did not remarry. During 2008 and 2009, their daughter Sue lived with Mary. Sue was a full-time student and had no taxable income in either year. She turned 27 in 2009. Which of the following statements correctly describes Mary's filing status in 2009? A. Surviving spouseB. Married filing jointlyC. Head of householdD. Single

To be a surviving spouse, the taxpayer must have a dependent child living with her. Head of household only requires that the parent pay > than half of the cost of the home and the children who live there. Since Sue has no income, her age does not matter and she is Mary's dependent.


41. Mr. Jones and his first wife were legally divorced on February 19, 2009. He remarried the second Mrs. Jones on December 20, 2009. He has no dependent children. Which of the following statements correctly describes Mr. Jones' filing status in 2009? A. Married filing jointly with the second Mrs. JonesB. Married filing jointly with the first Mrs. JonesC. Married filing separately (cannot file joint)D. Single


42. Which of the following statements regarding filing status is false? A. A widow or widower maintaining a home for a dependent child qualifies as surviving spouse for the two tax years following the spouse's death.B. Marital status for tax purposes is determined on the last day of the taxable year.C. Any unmarried individual with a dependent qualifies as head of household.D. An unmarried individual without children or other dependents files as a single taxpayer.


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43. Mrs. Raines died in 2006. Mr. Raines has not remarried and maintains a home for one dependent child. What is his filing status for 2008 and 2009? A. 2008, surviving spouse; 2009, head of householdB. 2008, surviving spouse, 2009, surviving spouseC. 2008, head of household; 2009, head of householdD. 2008, head of household; 2009, surviving spouse


44. Which of the following taxpayers do not qualify for married filing jointly filing status for 2009? A. Mr. Lane died on August 10, 2009. Mrs. Lane has not remarried and has no dependent children.B. Mrs. Holden died on January 15, 2008. Mr. Holden has not remarried and maintains a home for two dependent children.C. Mr. and Mrs. West were legally divorced on December 21, 2009. Mrs. West has not remarried and maintains a home for three dependent children.D. All of the above taxpayers qualify for married filing jointly filing status for 2009.


45. During 2009, Marie, a single taxpayer, 30 years old with good sight, had $50,000 of gross income. Her itemized deductions totaled $6,000. Her 10-year-old sister lived with and was fully supported by her. What is Marie's 2009 taxable income? A. $36,700B. $34,350C. $38,000D. $40,350

$50,000 AGI - $8,350 Standard deduction - $7,300 Exemptions ($3,650 * 2) = $35,000


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46. Mr. and Mrs. Liddy had the following tax data for 2009:

What is their adjusted gross income? A. $39,000B. $36,200C. $45,000D. $41,200

$50,000 + $5,000 - $3,800


47. Mr. and Mrs. Aaron had AGI of $53,000 for 2009. Their itemized deductions totaled $13,500. Mr. Aaron was 67; Mrs. Aaron was 63. Neither is blind. What is their taxable income for the year, if they elect to file married filing jointly? A. $39,500B. $28,100C. $32,200D. $34,300

$53,000 - $13,500 - 2 * $3,650


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48. Which of the following statements regarding the calculation of taxable income is false? A. The first step in the calculation of taxable income is determining the taxpayer's total income.B. Adjusted gross income is equal to total income less above-the-line deductions.C. Adjusted gross income can be reduced by the greater of the standard deduction or itemized deductions.D. Taxpayers are permitted to deduct the greater of itemized deductions or above-the-line deductions in calculating taxable income.



Oscar earned $7,000 of interest and dividend income from investments he had inherited from his grandmother's estate. However, his mother insisted that the entire amount be reinvested for Oscar's college education. She provided all of Oscar's support. Calculate Julie's adjusted gross income for 2009. A. $118,800B. $125,800C. $114,800D. $107,400

$95,000 + $12,800 + $11,000 - $4,000


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Oscar earned $7,000 of interest and dividend income from investments he had inherited from his grandmother's estate. However, his mother insisted that the entire amount be reinvested for Oscar's college education. She provided all of Oscar's support. Calculate Julie's taxable income for 2009. A. $99,150B. $92,800C. $106,450D. $101,100

$95,000 + $12,800 + $11,000 - $4,000 - $8,350 (standard deduction) - $7,300 (2 exemptions)

Difficulty: MediumLearning Objective: 1Learning Objective: 2Learning Objective: 3Learning Objective: 4

51. Tamara and Todd Goble file a joint return. Todd is 73 years; Tamara 58. Todd is legally blind. What is their standard deduction? A. $10,000B. $11,400C. $12,500D. $13,600

$11,400 + $1,100 + $1,100


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52. In determining the allowable standard deduction, which of the following statements is true? A. The standard deduction is a function of filing status.B. An individual who is both blind and age 65 by the last day of the taxable year is entitled to an additional standard deduction amount.C. An individual who is claimed as a dependent on another person's tax return is not permitted a standard deduction.D. All of the above statements are true.


53. Mr. and Mrs. Kay file a joint income tax return. Mr. Kay is 68 years old; Mrs. Kay is 66 and legally blind. Compute their 2009 standard deduction. A. $11,400B. $12,500C. $13,600D. $14,700


54. Melissa, age 16, is claimed as a dependent on her parents' tax return. During 2009, she earned $2,000 babysitting, and also has $3,000 of interest and dividend income from investment assets. Compute Melissa's allowable standard deduction. A. $5,700B. $2,300C. $950D. $0


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55. Hunter, age 17, is claimed as a dependent on his parents' tax return. During 2009, he earned $15,000 appearing in television commercials. Compute his allowable standard deduction. A. $950B. $5,700C. $15,300D. $0


56. For 2009, Stephanie had the following tax information:

Stephanie fully supported her aunt who had no gross income. She did not live with Stephanie. Stephanie's taxable income for the year is: A. $58,000B. $55,650C. $52,000D. $49,350

$65,000 AGI - $7,300 Exemptions - $5,700 Standard deduction. Not head of household unless dependent aunt lives with her.

Difficulty: DifficultLearning Objective: 2Learning Objective: 3

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57. Which of the following statements regarding the relationship between the standard deduction and itemized deductions is false? A. Through a technique called ‘bunching,' taxpayers control the timing of their itemized deductions so that the total exceeds the standard deduction in select years.B. Individuals whose AGI exceeds threshold amounts must reduce the total allowable deduction for certain itemized deductions.C. Individuals elect to itemize deductions only if their total allowable deduction amount exceeds the standard deduction.D. The overall limitation on itemized deductions can reduce such deductions to zero. In that case, the individual would still be entitled to the standard deduction.


58. Mr. and Mrs. Norton have 2009 AGI of $250,000 and no dependents. Their itemized deductions, before the overall limitation, totaled $50,000, none of which are medical expense, investment interest expense, casualty, theft, or gambling loss. Determine their allowable itemized deductions in computing taxable income. A. $50,000B. $47,504C. $49,168D. $0

2009 phase-out threshold is $166,800. AGI exceeds this threshold by $83,200 ($250,000 - $166,800). Reduction is $83,200 * 3% * 1/3 = $832.


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59. Kent allowed his elderly, widowed father, Martin, to move in with him late this year. Martin's only income was $8,000 in social security benefits. Kent provided $9,000 towards his father's total support of $17,000. What is Kent's filing status and total number of exemptions for the year? A. Single and one exemptionB. Single and two exemptionsC. Head of household and one exemptionD. Head of household and two exemptions

Difficulty: MediumLearning Objective: 1Learning Objective: 4

60. Mr. and Mrs. Anderson file a joint return. Louise is their 27-year-old daughter. She had no income for the year and was a full-time college student until her graduation on December 18th. Louise married a millionaire on December 30, and is filing a joint return with him. Bruce is the Anderson's 17-year-old son. During the year he had income of $5,500 from prizes/awards won at livestock shows. Arnold is the Anderson's 3-year-old son. Arnold earned $12,000 from personal appearances. How many exemptions are the Anderson's entitled to on their tax return if they file married filing jointly? A. 2B. 3C. 4D. 5

They would be allowed four exemptions: Mr. and Mrs. Anderson, Bruce, and Arnold. Although Bruce and Arnold each earns more than the personal exemption amount of $3,650, they are both full-time students and under 24. Louise cannot be claimed because she files a joint return with her husband.


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61. Imogene is 35 years old and unmarried. She has adopted her ten year-old niece and provides 100% of her financial support. Imogene also provides 60% of financial support for her aging mother who lives in a nursing home. How many exemptions is Imogene entitled to claim on her tax return? A. 0B. 1C. 2D. 3


62. Janine and John are a married couple filing a joint return. They have a 10-year old son. They also provide 60% of financial support for David, an unrelated 12-year old who is the son of old friends from college. David resides with his aunt Sarah, a single individual, who provides 40% of his financial support. How many exemptions will Janine and John claim on their return? A. 1B. 2C. 3D. 4

Janine and John may claim 3 exemptions. They cannot claim an exemption for David, because he is not a relative and he does not reside in their home. If David lived with Janine and John they would be able to claim him as a dependent.


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63. Janine and John are a married couple filing a joint return. They have a 10-year old son. They also provide 60% of financial support for David, an unrelated 12-year old who is the son of old friends from college. David resides with his aunt Sarah, a single individual, who provides 40% of his financial support. How many exemptions will Sarah claim on her return? A. 0B. 1C. 2D. 3

Sarah can only claim one exemption. She cannot claim David because she provides less than 50% of his financial support.


64. Which of the following statements regarding exemptions is false? A. Taxpayers can claim a dependency exemption for a qualifying child or a qualifying relative.B. For exemption purposes, a qualifying child would include the taxpayer's niece or nephew who resides with the taxpayer.C. Fore exemption purposes, a qualifying relative includes an unrelated individual who is a member of the taxpayer's household.D. An individual who is claimed as a dependent is also entitled to a personal exemption on their own tax return.


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65. Mr. and Mrs. Owens file a joint return on which they claim six exemptions. Their 2009 AGI is $270,000. Calculate their allowable deduction for exemptions. A. $0B. $21,900C. $18,396D. $20,733

The 2009 exemption reduction threshold for MFJ is $250,200. The Owens' AGI exceeds the threshold by $19,800 ($270,000 - $250,200). Dividing this excess by $2,500 and rounding up gives 8, resulting in a 16% reduction percentage. For 2009, this percentage is reduced to 1/3, or 5.33%. Thus the exemption reduction is $1,167 [5.33% * $21,900 (6 exemptions * $3,650)].


66. Which of the following is not a requirement for claiming a dependency exemption? A. The dependent must be a U.S. citizen or resident of the U.S., Canada, or Mexico.B. The dependent must be either a qualifying child or a qualifying relative of the taxpayer.C. A qualifying child may not have taxable income greater than the exemption amount.D. A qualifying relative may not have taxable income greater than the exemption amount.


67. Which of the following statements regarding the overall reductions of itemized deductions and exemptions is false? A. The threshold amounts at which these reductions apply are the same.B. The exemption phase-out can reduce allowable exemptions to zero for very high income taxpayers.C. It is possible for a taxpayer to be subject to the overall reduction of itemized deductions and not be subject to the overall reduction of exemptions.D. A taxpayer whose AGI exceeds the threshold amount for the exemption reduction will also exceed the exemption amount for the itemized deduction reduction.

Difficulty: MediumLearning Objective: 3Learning Objective: 4

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68. Benjamin is an unmarried individual with no dependents. His taxable income for 2009 is $359,000. Calculate his regular tax liability for 2009. A. $118,470B. $103,613C. $96,291D. $110,831


69. Alice is a divorced individual with two dependent children. Her taxable income for 2009 is $175,000. Calculate her regular tax liability for 2009. A. $49,000B. $42,893C. $40,329D. $37,264


70. Which of the following statements regarding the calculation of regular tax liability is false? A. The appropriate rate schedule for calculating regular tax liability depends on the taxpayer's filing status.B. All income, regardless of character, is taxed using the rate schedules.C. The individual tax rate schedules are adjusted annually for inflation.D. The tax brackets in the married-filing-separately rate schedule are exactly one-half of the brackets in the married-filing-jointly rate schedule.


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71. When calculating regular tax liability A. Tax on dividends and capital gains, computed using the preferential rates, reduces tax computed using the rate schedules.B. Allowable credits reduce both taxable income and tax liability.C. The tax rate schedules reflect a progressive tax system with a top marginal tax rate of 35 percent.D. All of the above are correct.


72. Mr. and Mrs. Daniels had the following income items:

Mr. and Mrs. Daniels have no dependents and claim the standard deduction. Compute their income tax liability on a joint return. A. $19,400B. $18,950C. $19,700D. $20,150

TI = $109,300 ($2,000 + $1,000 + $125,000 - $11,400 standard deduction - $7,300 exemptions), of which $3,000 is taxed at 15% and $106,300 is taxed using the rate schedule. Tax on ordinary income is $18,950. Tax on dividends and capital gains is $450. Total tax is $19,400.


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73. Which of the following statements regarding the marriage penalty is false? A. Following recent tax law changes, the marriage penalty has been eliminated and the federal income tax system is now completely marriage neutral.B. The marriage penalty is a consequence of the progressive tax rate system.C. Recent tax law changes provide some relief from the marriage penalty by adjusting the lower tax brackets so that the amount of income in these brackets for a married couple is exactly twice that of a single individual.D. A tax system that was completely marriage neutral could not also be horizontally equitable.


74. Linda and Raj are engaged. Linda's taxable income is $75,000. Raj's taxable income is $75,000. When they marry in 2009, how much of a marriage penalty will they pay? A. $0B. $388C. $4,050D. None of the above

Single, Linda's tax liability is $14,938; Raj's tax liability is $14,938, for a total of $29,876. Married, their tax liability is $30,264, resulting in a net increase of $388.


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75. Which of the following statements regarding the marginal tax rate is false? A. The marginal tax rate is defined as the rate applying to the nest dollar of taxable income.B. For taxpayers subject to the overall reduction of itemized deductions or personal exemptions, the marginal tax rate will be higher than the statutory rate appearing in the relevant tax rate schedule.C. For taxpayers subject to the overall reduction of itemized deductions or personal exemptions, the marginal tax rate will be lower than the statutory rate appearing in the relevant tax rate schedule.D. For taxpayers whose allowable tax credits are subject to limitations based on AGI, the marginal tax rate will be higher than the statutory rate appearing in the relevant tax rate schedule.


76. Ms. Burton is a single individual with $200,000 of AGI. She does not itemize and is subject to the overall reduction of her personal exemption due to her high income level. For 2009, her allowable personal exemption is $3,309. She is considering an investment that would generate an additional $10,000 of taxable income. How much additional tax will she owe? A. $3,500B. $3,300C. $3,324D. $3,800

Without the additional income, her taxable income is $190,991 ($200,000 - $5,700 standard deduction - $3,309 personal exemption) and her tax liability is $48,170. With the additional income, her AGI is $210,000, and her personal exemption drops to $3,236. Her taxable income increases to $201,064 and her tax liability increases to $51,494.


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77. Lennie and Margo paid $2,800 for child care of their 7-year-old son. Lennie earned $41,000 in wages and Margo earned $2,500. Calculate their dependent care credit. A. $480B. $500C. $600D. $980

20% of lesser of $3,000 or the smaller earned income ($2,500).


78. The Harvey's joint income tax liability before credits for 2009 was $1,675. In addition, they were entitled to an earned income credit of $1,200. If $700 in federal income taxes had been withheld during the year, which of the following statements is correct? A. They have a carryforward of unused earned income credit of $125.B. Any unused earned income credit is lost.C. They should receive a refund of $1,200.D. They should receive a refund of $225.


79. IMP employed Marshal until October of 2009 when he changed jobs. He earned $100,000 at IMP; he made $30,000 at the new job with ETD, Inc. Which of the following statements is false? A. The new employer will withhold 7.65% for payroll taxes.B. The new employer will not have to pay payroll taxes if Marshal informs them that he was over the FICA limit at his old job.C. Marshal will be able to claim a credit against his tax liability for excess payroll tax withholding.D. Neither IMP, Inc. nor ETD, Inc. will be entitled to a refund of the employer matching payroll tax paid on Marshal's wages above the ceiling for the year.


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80. Mr. and Mrs. Kain are joint filers with $80,000 of AGI. The couple has three dependent children: Beatrice their 19-year-old daughter, Bruce their 16-year-old son; and Arnold their 8-year-old son. For 2009 their child credit is: A. $1,800B. $2,000C. $1,200D. $ -0-


81. Mr. and Mrs. Cox are joint filers with $115,000 of AGI. The couple has three dependent children under 17 years of age. For 2009 their child credit is: A. $1,550B. $3,000C. $2,750D. $2,250

$3,000 credit is reduced by $50 for every $1,000 of AGI over $110,000.


82. Which of the following statements regarding individual tax credits is false? A. The purpose of the earned income credit is to offset the burden of the payroll tax on low-income workers and to encourage individuals to seek employment rather than to depend on welfare.B. The earned income credit is one of the few refundable tax credits.C. As a taxpayer's AGI increases, the percentage of dependent care costs allowed as a credit also increases.D. The child credit is not available to very high income taxpayers.


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83. Which of the following statements concerning the alternative minimum tax imposed upon individual taxpayers is true? A. The determination of alternative minimum taxable income begins with taxable income for regular tax purposes.B. Alternative minimum tax does not need to be calculated if the taxpayer has no tax preferences.C. An individual is allowed the same exemption as a corporation in calculating the alternative minimum tax base.D. The alternative minimum tax rates for individuals are 28% on the first $175,000 of the applicable tax base and 26% on any excess over that amount.


84. Ruth Anne, a single taxpayer, has alternative minimum taxable income before any alternative minimum tax exemption of $152,500. Assume the single filer alternative minimum tax exemption is $46,700 and the related phase-out threshold is $112,500. Calculate Ruth Anne's alternative minimum tax exemption. A. $0B. $46,700C. $10,000D. $36,700

$152,500 - $112,500 = $40,000 * 25% = $10,000 reduction in exemption amount.


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85. The Ryans, married taxpayers, had the following tax data for 2009:

If the alternative minimum tax exemption applicable to their filing status is $70,950 and the related phase-out threshold is $150,000, what is their alternative minimum taxable income? A. $167,500B. $96,550C. $101,925D. None of the above

$105,000 Regular taxable income + $62,500 AMT increases = $167,500 AMTI before exemption. Because AMTI exceeds the $150,000 threshold, their exemption is subject to phase-out, as follows: $167,500 - $150,000 = $17,500 excess. $17,500 * 25% = $4,375 reduction in exemption. Exemption = $66,575 ($70,950 - $4,375). AMTI = $100,925 ($167,500 - $66,575).


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86. Dillon and Amanda, a married couple filing a joint return, have the following 2009 tax information:

Assume that taxable income does not include any dividends or capital gains. Calculate their AMT and final tax liability. A. AMT, $0; final tax liability, $101,612B. AMT, $122,500; final tax liability, $224,112C. AMT, $20,888; final tax liability, $122,500D. AMT, $0; final tax liability, $122,500

AMTI = $450,000. Tentative minimum tax = $122,500. AMT = $20,888 ($122,500 - $101,612). Final tax liability = $122,500 ($101,612 + $20,888)


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If the alternative minimum tax exemption applicable to their filing status is $70,950, and the related phase-out threshold is $150,000, what is their tentative minimum tax? Assume their taxable income does not include any dividend income or capital gain. A. $70,050B. $14,010C. $17,275D. $18,213

$99,600 Regular taxable income + $41,400 AMT increases = $141,000AMTI before exemptions. Because this amount is below the phase-out threshold, they are entitled to a full exemption of $70,950. AMTI = $70,050 ($141,000 - $70,950). Tentative minimum tax is $18,213 ($70,050 * 26%).


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If the alternative minimum tax exemption applicable to their filing status is $70,950, and the related phase-out threshold is $150,000, what is their alternative minimum tax liability? Assume their taxable income does not include any dividend income or capital gain. A. $18,213B. $0C. $2,638D. $938

$99,600 Regular taxable income + $41,400 AMT increases = $141,000AMTI before exemptions. Because this amount is below the phase-out threshold, they are entitled to a full exemption of $70,950. AMTI = $70,050 ($141,000 - $70,950). Tentative minimum tax is $18,213 ($70,050 * 26%). AMT is $938 ($18,213 - $17,275).


89. In August of 2009, Mike won $10,000 at the racetrack. No taxes were withheld; this amount will be taxed at 25%. Last year, his tax liability was $2,518. Which of the following statements is true? A. If Mike does not pay the additional tax until April 15, 2010, no underpayment penalty will be due if the federal income tax withheld from 2009 wages is at least $2,518.B. If Mike does not pay the additional tax until April 15, 2010, no underpayment penalty will be due if total withholding is at least 80% of 2008 tax liability.C. Error! Hyperlink reference not valid.Error! Hyperlink reference not valid.9 and by January 15, 2010, to avoid any underpayment penalty.D. Regardless of what amount of federal income tax is withheld from Mike's wages for 2009, he must make a tax deposit of $2,500 by September 15, 2009.


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90. Which of the following statements regarding tax payments is true? A. Self-employed individuals must meet income tax payment requirements via quarterly estimated tax payments; self-employment taxes are not due until the return is filed.B. Self-employed individuals meet income and self-employment tax payment requirements via withholding.C. Individuals whose income is all from salary and wages typically meet payment requirements via withholding and need not make estimated tax payments.D. All of the above are true.



Installments plus withholding must equal 100% of prior year tax. $28,000 - $20,000 = $8,000 total installments. Each quarter = $2,000.


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Installments plus withholding must equal 110% of prior year tax, i.e. $40,150, $40,150 - $20,000 = $20,150 total installments. Each quarter = $5,038


93. Which of the following statements concerning extensions of time to file an individual tax return is true? A. The extension of time to file does not extend the time for payment of tax.B. The first extension of time to file is for two months and is granted automatically.C. A second filing extension of four additional months is available with the approval of the Internal Revenue Service.D. None of the above statements are true.


94. Which of the following statements concerning extensions of time to file an individual tax return is false? A. The extension of time to file does not extend the time for payment of tax.B. An automatic extension of time to file is available for six months.C. The extended due date of a calendar-year individual tax return is October 15 of the next year.D. An extension of time to file prevents the taxpayer from owing interest and penalties.


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Application Problems

95. Determine Mr. Smith's 2009 filing status in each of the following independent cases. a. Mr. Smith and Mrs. Smith were legally divorced on December 1. Mr. Smith has not remarried and has no dependent children.b. Mr. Smith and the first Mrs. Smith were legally divorced on February 10. Mr. Smith remarried the second Mrs. Smith on December 5. He has no dependent children.c. Mrs. Smith dies on June 22. Mr. Smith has not remarried and has no dependent children.d. Mrs. Smith died on November 1, 2007. Mr. Smith has not remarried and maintains a home for one dependent child.e. Mrs. Smith died on April 3, 2008. Mr. Smith has not remarried and has no dependent children.f. Mr. and Mrs. Smith were legally divorced on September 10, 2006. Mr. Smith has not remarried and maintains a home for his two dependent children.

a. Single.b. Married filing jointly with the second Mrs. Smith.c. Married filing jointly.d. Married filing jointly as surviving spouse.e. Single.f. Head of household.


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96. Mr. and Mrs. Bennett file a joint income tax return. Determine if each of the following unmarried individuals is either a qualifying child or a qualifying relative for whom the couple can claim an exemption. a. Son Alex, age 22, who lives in his parents' home and works fulltime as a tax accountant. Alex is self-supporting except for the fact that he does not pay rent to his parents.b. Daughter Samantha, age 20, who is a full-time college student. Samantha lives in a dormitory during the school year, but her parents' home is her permanent residence and her parents provide 100 percent of her financial support.c. Mr. Bennett's brother Max who is 42 years old and mentally handicapped. Max lives in a privately operated group home, and Mr. and Mrs. Bennett provide 100 percent of his financial support. Max has no gross income.d. Mrs. Bennett's mother, Vera, age 67, who lives in a retirement community. Mr. and Mrs. Bennett provide about 75 percent of her financial support. Vera earned $5,000 this year as a part-time receptionist.

a. Not a qualifying child or relative.b. Qualifying child.c. Qualifying relative.d. Not a qualifying child or relative, because her earnings are greater than the exemption amount.


97. Charles, a single individual, had AGI totaling $247,000, which includes no dividends or capital gains. He had $22,400 itemized deductions (none of which were medical expense, investment interest expense, casualty, theft, or gambling loss) and no dependents. Using the worksheets in Appendixes 14-A and 14-B, compute his taxable income and regular tax liability.

Using Worksheet 14-A, Charles' itemized deductions are reduced by $802 to $21,598 ($22,400 - $802). Using Worksheet 14-B, Charles' exemption amount is reduced by $803 to $2,847 ($3,650 - $803). Charles' taxable income is $222,555 ($247,000 - $21,598 - $2,847). His regular tax liability is $58,586.

Difficulty: DifficultLearning Objective: 2Learning Objective: 4Learning Objective: 5

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98. Eileen, a single individual, had $125,000 taxable income. Compute her income tax assuming that: a. Taxable income includes no capital gains.b. Taxable income includes $14,000 of capital gain eligible for the 15 percent preferential rate.

a. $28,720b. $26,900 = $2,100 tax on capital gain + $24,800 tax on ordinary income of $111,000.


99. Alice Grim, a single taxpayer, has never paid AMT before 2009. In 2009, her $200,000 of taxable income included $180,000 ordinary income and $20,000 capital gain taxed at 15%. Her AMTI was $230,000. Compute Alice's regular tax, AMT, and total income tax for 2009.

Alice's regular tax is $47,543 = $44,543 tax on ordinary income + $3,000 capital gains tax.Tentative minimum tax is $58,300 = $26% * 175,000 + 28% * $35,000 + $3,000 capital gains tax. AMT = $10,757 ($58,300 - $47,543). Total income tax is $58,300 = $47,543 + $10,757.


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Ch 14 Exam Individual Tax Formula

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