Docstoc

2004 Standard Deduction for Federal Income Tax

Document Sample
2004 Standard Deduction for Federal Income Tax Powered By Docstoc
					                                    CHAPTER 3

       TAX DETERMINATION; PERSONAL AND DEPENDENCY EXEMPTIONS;
                AN OVERVIEW OF PROPERTY TRANSACTIONS

                    SOLUTIONS TO PROBLEM MATERIALS




                                                                Status:       Q/P
Question/                                                       Present     in Prior
Problem                          Topic                          Edition     Edition

   1         Tax formula                                        New
   2         Transactions with no income tax effect             New
   3         Gross income: exclusions                           Unchanged      3
   4         Gross income: inclusions                           Unchanged      4
   5         Income tax: international considerations           Unchanged      5
   6         Effect of AGI on some deductions from              New
   7         Issue ID                                           Unchanged      7
   8         Dependents and the determination of their          New
                standard deduction and personal exemptions
   9         Dependency exemption: treatment of scholarships    Unchanged      9
                for the support and gross income tests
  10         Dependency exemption: multiple support agreement   Unchanged    10
  11         Dependency exemption: gross income and             Unchanged    11
                relationship tests
  12         Issue ID                                           Unchanged    12
  13         Issue ID                                           Unchanged    13
  14         Stealth taxes                                      Unchanged    14
  15         Income tax rates: background and instability       New
  16         Characteristics of the kiddie tax                  Unchanged    15
  17         Filing requirement                                 Modified     16
  18         Marriage penalty                                   New
  19         Surviving spouse status                            Unchanged    19
  20         Filing status                                      Unchanged    20
  21         Issue ID                                           Unchanged    21
  22         Treatment of capital gains                         Unchanged    22
  23         Treatment of capital gains                         New
  24         Capital loss tax treatment                         Unchanged    24


                                         3-1
3-2                2005 Comprehensive Volume/Solutions Manual


                                                                      Status:        Q/P
Question/                                                             Present      in Prior
Problem                           Topic                               Edition      Edition

    25      Capital transactions: treatment of collectibles          Unchanged      25
    26      Issue ID                                                 Unchanged      26
    27      Multiple support agreement: planning for                 Unchanged      27
*   28      Taxable income calculation                               New
*   29      Taxable income calculation                               Unchanged      29
*   30      Taxable income calculation                               Unchanged      30
    31      Standard deduction of dependent                          Modified       31
    32      Personal and dependency exemptions                       New
    33      Personal and dependency exemptions                       Unchanged      33
    34      Personal and dependency exemptions                       Modified       34
*   35      Exemption deduction determination: phaseout              New
*   36      Determine taxable income                                 Unchanged      36
*   37      Unearned income of child under age 14                    Modified       37
    38      Dependency exemptions: joint return test                 Unchanged      38
    39      Dependent’s tax liability: unearned income               Unchanged      39
*   40      Tax liability calculations                               New
*   41      Taxable income calculation                               Unchanged      41
*   42      Child’s income taxed at parents’ rate                    Unchanged      42
*   43      Child’s income taxed at parents’ rate                    Unchanged      43
*   44      Marriage penalty                                         New
    45      Filing requirements                                      Modified       45
    46      Filing requirements                                      Unchanged      46
    47      Filing status determination                              Unchanged      47
    48      Filing status determination                              Unchanged      48
    49      Filing status determination                              Unchanged      49
    50      Filing status determination; dependency exemptions       Unchanged      50
*   51      Capital transactions: determination of tax               New
*   52      Capital transactions: determination of tax               New
    53      Tax planning: alternating years for itemized             New
               deductions with standard deduction
* 54        Cumulative                                               New
* 55        Cumulative                                               Unchanged      55



Research
Problem

      1     Divorced parents with equal custody of children;         New
               no waiver
      2     Joint return and innocent spouse relief                  Unchanged
      3     Internet activity                                        Unchanged


            *The solution to this problem is available on a transparency master.
         Tax Determination; Exemptions; Overview of Property Transactions                3-3


                                      CHECK FIGURES

28.a. $46,600.                                42.     Taxable income $1,550; tax $185.
28.b. $37,900.                                43.     $9,500.
28.c. $27,350.                                44.     Filing separately yields same result
28.d. $22,350.                                        as filing jointly.
29.   $19,550.                                45.a.   Sam and Lana need not file.
30.   $54,200.                                45.b.   Bobby is not required to file.
31.a. $4,850.                                 45.c.   Mike is required to file.
31.b. $3,450.                                 45.d.   Marge must file.
31.c. $800.                                   46.a.   Ben must file.
31.d. $850.                                   46.b.   Anita must file.
31.e. $3,250.                                 46.c.   Earl must file.
32.a. Three.                                  46.d.   Karen is not required to file.
32.b. Four.                                   46.e.   Pat must file.
32.c. Three.                                  47.a.   Joint return.
32.d. Two.                                    47.b.   Head of household.
33.a. Three.                                  47.c.   Surviving spouse.
33.b. Two.                                    47.d.   Head of household.
33.c. Three.                                  48.a.   Head of household.
34.a. Four.                                   48.b.   Single.
34.b. Two.                                    48.c.   Head of household.
34.c. Three.                                  48.d.   Single.
34.d. Three.                                  49.     2002 married filing joint; 2003
34.e. Two.                                            surviving spouse; 2004 head of
35.   $25,420.                                        household.
36.   $67,100.                                50.     Head of household; one.
37.a. $900.                                   51.a.   $3,180.
37.b. $90.                                    51.b.   $1,400.
39.   Transferring the duplex saves           52.a.   $1,460.
      $2,277.                                 52.b.   $600.
40.a. $5,390.                                 53.     Yes; saves $587.
40.b. $9,963.                                 54.     Taxable income $70,900.
40.c. $13,400.                                55.     Refund due $799.
41.   $11,750.
3-4                   2005 Comprehensive Volume/Solutions Manual


DISCUSSION QUESTIONS

 1.   b.     Income (broadly conceived)
      i.     Exclusions
      h.     Gross income
      d.     Deductions for AGI
      c.     Adjusted gross income
      f.     The greater of the standard deduction or itemized deductions
      g.     Personal and dependency exemptions
      a.     Taxable income

      Otherwise stated: b. – i. = h. – d. = c. – f. – g. = a. The child tax credit (choice e.) is
      subtracted from any income tax liability to arrive at the tax due (or refund). p. 3-2 and
      Figure 3-1

 2.   Borrowing money has no tax effect as it must be repaid. Collecting a loan that was made
      (presuming no interest is involved) and the recovery of a rent deposit are return of capital
      situations. A loss on the sale of a personal asset has no tax effect. p. 3-3 and Examples 1
      and 35

 3.   b. and d. are exclusions. a., c., e., and f. are inclusions. p. 3-3, Example 2, and Exhibits
      3-1 and 3-2

 4.   b., e., and f. are inclusions. a., c., and d. are exclusions. Although b. is described as a
      ―gift,‖ it is obviously a ―bribe.‖ pp. 3-3, 3-5, and Exhibits 3-1 and 3-2

 5.   The biggest difference would be the elimination of various provisions in the tax law that
      mitigate the effect of double taxation. Thus, there would be no need for the foreign tax
      credit, as foreign source income would be subject only to foreign taxes. It would not be
      subject to U.S. tax, as it would not be from a U.S. source. See Global Tax Issues on
      p. 3-5.

 6.   a.     Yes. It reduces AGI, and this allows a larger casualty loss deduction. Casualty
             losses must exceed 10% of AGI.

      b.     Yes, it ceases to be relevant. Personal casualty losses are deductions from AGI,
             and the standard deduction is in lieu of such deductions.
      pp. 3-5, 3-6, Examples 3 and 4 and Exhibit 3-3

 7.   This may not be the case. Since the Masons will become 65 years old, the standard
      deduction amount will increase and this alternative may prove more beneficial than
      itemizing (dfrom). pp. 3-6 to 3-8 and Tables 3-1 and 3-2

 8.   a.     No personal exemption is allowed a dependent.

      b.     $800 is one of two choices as a standard deduction. The other is earned income +
             $250.

      c.     Both are taxed, but earned income may help determine the standard deduction
             selected.
      d.     Additional standard deductions for age and blindness (if appropriate) are allowed
             a dependent.
           Tax Determination; Exemptions; Overview of Property Transactions                 3-5


      pp. 3-9, 3-10, and Examples 9 and 11

 9.   a.       A scholarship received by a student is not included for purposes of computing
               whether the taxpayer furnished more than half of the student’s support. p. 3-11
               and Example 13

      b.       For purposes of satisfying the gross income test, the nontaxable portion of a
               scholarship is not considered, but the taxable (i.e., included in gross income)
               portion is. p. 3-14

10.   a.       The person being claimed under a multiple support agreement must otherwise
               qualify as a dependent. Thus, the gross income, relationship, absence of a joint
               return, and citizenship tests must also be satisfied.

      b.       A person cannot be awarded the dependency exemption unless his or her
               contribution is more than 10%.
      c.       Form 2120 must be completed by the parties waiving the exemption and included
               with the return of the person claiming the exemption.

      pp. 3-11, 3-12, and Example 17

11.   As to the cousins, only the one who lives with Nelda qualifies. Cousins do not satisfy the
      relationship test; so they must qualify as members of the taxpayer’s household. Nieces
      meet the relationship test; so the niece qualifies. p. 3-13

12.   a.       Adriana and Hector qualify for 2004.

      b.       Adriana, Hector, and Carrie.

      c.       An ex-spouse cannot be claimed as a dependent in the year of the divorce.

      d.       If their relationship was in violation of state law.

      p. 3-13 and Footnote 14

13.   Roberto should definitely encourage his parents and aunts to move to Mexico. As
      residents of Mexico, they will now qualify as dependents. Needless to say, being able to
      claim four additional dependency exemptions is bound to help Roberto’s income tax
      situation. p. 3-14

14.   a.       Stealth taxes are not separate taxes. On a phase-out basis (predicated on
               increasing income), they operate to deny higher bracket taxpayers various tax
               benefits available to others. They avoid the need for Congress to enact new taxes
               to raise revenue.

      b.       The Tax Relief Reconciliation Act of 2001 provides for the elimination of two of
               these stealth taxes—phase-out of personal and dependency exemptions and of
               certain itemized deductions. Unfortunately, the phase-out does not begin until
               2006 and is not complete until 2010. The Jobs and Growth Tax Relief
               Reconciliation Act of 2003 accelerated some of the 2001 Act provisions.
      See the Tax in the News on p. 3-16.
3-6                   2005 Comprehensive Volume/Solutions Manual


15.   a.     The rates were 15%, 28%, 31%, 36%, and 39.6%.

      b.     Over a phase-in period from 2001 to 2006, the rates would become 10%, 15%,
             25%, 28%, 33%, and 35%.

      c.     JGTRRA accelerated the phase-in to 2003.

      d.     After 2010, pre-2001 rates are to be restored.

      e.     Adam Smith’s canon of certainty this is not!

      pp. 3-17, 3-18, and Tax in the News on p. 3-18

16.   a.     For the kiddie tax to apply, the child must not have reached age 14 by the close of
             the taxable year.

      b.     The kiddie tax does not apply unless unearned income is more than $1,600.
      c.     For married individuals filing separate returns, the individual with the greater
             taxable income is the applicable parent.

      d.     For children of divorced parents, the taxable income of the custodial parent is
             used to determine the allocable parental tax.

      pp. 3-20 to 3-22

17.   a.     In 2004, a single individual who is age 65 or over and blind would have a filing
             requirement of $9,150 ($4,850 standard deduction + $1,200 additional standard
             deduction for age + $3,100 personal exemption). The additional standard
             deduction for blindness is not considered in computing the filing level.

      b.     The standard deduction, the additional standard deduction for being age 65 or
             over, and the personal exemption are taken into consideration in determining the
             filing requirements, but the additional standard deduction for blindness is not
             considered.

      pp. 3-7, 3-8, 3-23, and Tables 3-1, 3-2, and 3-4
18.   a.     It causes some married couples to pay a larger income tax than if they were single.
             See the results of Example 30 in the text and compare Example 31.

      b.     The standard deduction was increased, and the reach of the 15% tax bracket was
             extended for married persons filing a joint return. p. 3-27

      c.     Lower-income couples who claim the standard deduction will benefit the most.
             See Tax in the News on p. 3-27.

19.   For 2004, Ginger can file either a joint return or as married filing separately. The former
      filing status is preferable, but this depends on whether the executor of her husband’s
      estate agrees. Ginger does not qualify as a surviving spouse for 2005 and 2006, because
      she does not have a dependent ―child‖ as a member of her household. She would,
      however, qualify for head of household filing status. p. 3-28 and Example 32

20.   a.     Head of household. Example 33
           Tax Determination; Exemptions; Overview of Property Transactions                    3-7


      b.       Single. p. 3-28

      c.       Head of household. p. 3-28

      d.       In c., Florence qualifies as a surviving spouse. This is not so in a. and b. as
               Derrick is not Florence’s dependent. p. 3-28 and Example 30

21.   If Fran maintains a household for a dependent child, she probably qualifies as an
      abandoned spouse. If so, Fran can file as a head of household. pp. 3-28 and 3-29

22.   The loss on the RV is not deductible, while the gain on the sailboat is taxable. Both gains
      (i.e., sailboat and land) are capital. Whether they are short- or long-term depends on the
      holding period (more than one year for long-term capital gains). pp. 3-29, 3-30, and
      Example 35

23.   Kaitlyn’s stamp collection is a ―collectible,‖ and the former rate of 28% was not changed
      by JGTRRA of 2003.
      a.       $4,200 (28% X $15,000).

      b.       $2,250 (15% X $15,000).

      pp. 3-30 and 3-31

24.   Of the loss, $3,000 ($2,000 short-term and $1,000 long-term) is deducted against ordinary
      income with the short-term loss being used first. The remaining $1,000 of long-term
      capital loss is carried over to 2005 as a long-term capital loss. p. 3-31 and Example 40

25.   Collectibles include art, antiques, gems, metals, stamps, some coins and bullion, and
      alcoholic beverages which are held as investments.

      a.       If held for more than one year, collectibles are taxed at a maximum rate of 28%.
               If the taxpayer’s marginal tax rate is lower, the lower rate applies.

      b.       The beneficial treatment under the alternative tax applies only if the holding
               period is greater than one year. If held for one year or less, they are taxed at the
               taxpayer’s regular tax rate.
      pp. 3-30, 3-31, and Example 39

26.   a.       If the parties live in New York, Marcie can claim Audry as her dependent. The
               fact that Audry filed a joint return does not matter when the purpose of the filing
               is to recover amounts withheld. However, Marcie cannot claim Jamie because he
               fails the gross income test. But since Marcie can claim Audry, she qualifies for
               head of household filing status. pp. 3-14 and 3-28

      b.       If the parties live in Arizona, Marcie can claim both Jamie and Audry. Jamie’s
               income now becomes $1,750 (50% X $3,500), and he now satisfies the gross
               income test (not in excess of $3,100). As in part a. above, Marcie qualifies for
               head of household filing status. p. 3-33 and Example 43
27.   Under a multiple support agreement, Erica should claim her mother as a dependent. As
      part of the contribution toward support, Erica should pay for any medical expenses her
      mother incurs. With her children and because her brothers do not itemize, Erica is the
3-8                   2005 Comprehensive Volume/Solutions Manual


      party most likely to obtain a tax benefit from her mother’s medical expenses. However, if
      Erica receives no benefit from a medical expense deduction (due to 7.5% of AGI limit),
      then the dependency exemption should be rotated and the medical expenses divided
      accordingly. p. 3-33 and Example 44


PROBLEMS

28.   a.     AGI                                                                   $70,000
             Less: Itemized deduction                                              (11,000)
                   Personal and dependency exemptions (4 X $3,100)                 (12,400)
             Taxable income                                                        $46,600

             No additional standard deduction is allowed for a dependent age 65 or over (one
             of Emily’s parents).

      b.     AGI                                                                   $60,000
             Less: Standard deduction                                               (9,700)
                   Personal and dependency exemptions (4 X $3,100)                 (12,400)
             Taxable income                                                        $37,900

      c.     AGI                                                                   $50,000
             Less: Standard deduction (head of household)                           (7,150)
                   Personal and dependence exemptions (5 X $3,100)                 (15,500)
             Taxable income                                                        $27,350

      d.     AGI                                                                   $40,000
             Less: Standard deduction (head of household)                           (7,150)
                   Additional standard deduction (Abigail)                          (1,200)
                   Personal and dependency exemptions (3 X $3,100)                  (9,300)
             Taxable income                                                        $22,350

      pp. 3-9, 3-10, 3-26 to 3-29, Table 3-1 and 3-2

29.   Salary                                                                       $40,000
      Interest on GMC bonds                                                          1,200
      Alimony                                                                       (2,400)
      Capital loss                                                                  (3,000)
      IRA contribution                                                              (3,000)
      Office pool                                                                    3,200
      AGI                                                                          $36,000
      Standard deduction                                                            (7,150)
      Personal and dependency exemptions (3 X $3,100)                               (9,300)
      Taxable income                                                               $19,550

      The child support payments are nondeductible. The gift is a nontaxable exclusion. Only
      $3,000 of the capital loss is deductible—the balance of $1,000 is carried over to 2005.

      pp. 3-5 to 3-8, 3-31, Figure 3-1, Exhibits 3-1 and 3-2, and Table 3-1
           Tax Determination; Exemptions; Overview of Property Transactions                     3-9


30.   Salary                                                                            $70,000
      Prize                                                                               5,000
      AGI                                                                               $75,000
      Itemized deductions ($4,800 + $3,600)                                              (8,400)
      Personal and dependency exemptions (4 X $3,100)                                   (12,400)
      Taxable income                                                                    $54,200

      The $2,000 of interest on the Chicago bonds, the insurance proceeds of $50,000, and the
      $90,000 of damages for personal injuries are all exclusions. Itemized deductions
      ($8,400) were claimed as they exceeded the standard deduction ($7,150).

      pp. 3-6, 3-8, Figure 3-1, and Exhibits 3-1 to 3-3

31.   a.        $4,850. Although $4,800 (earned income) + $250 = $5,050, the amount allowed
                cannot exceed that available in 2004 for single taxpayers.

      b.        $3,450. $3,200 (earned income) + $250.
      c.        $800. The greater of $800 or $400 (earned income) + $250.

      d.        $850. The greater of $800 or $600 (earned income) + $250.

      e.        $3,250. $1,800 (earned income) + $250 + $1,200 (additional standard deduction).

      pp. 3-9, 3-10, Tables 3-1 and 3-2, and Examples 8 to 11

32.   a.        Three. Ann does not qualify due to the gross income test. Although she is their
                child who is a full-time student, she is not under age 24.

      b.        Four. Although Pierce is not a full-time student, he is their child under age 19.
                Ann now qualifies because she meets the gross income test.

      c.        Three. As Elton meets the relationship test, he does not have to live with Alice.

      d.        Two. Trent does not meet the relationship test as does Petula, but he is a member
                of the household. However, Trent does not pass the gross income test. He does
                not meet the under-19-years-of-age exception or the student exception, as he is not
                a ―child‖ of the taxpayer.
      pp. 3-10 to 3-14

33.   a.        Three. The parents qualify as dependents under the Mexico/Canada exception.

      b.        Two. Pablo’s father does not qualify. Pablo’s mother qualifies since she is a
                resident of the U.S.

      c.        Three. The parents qualify since they are U.S. citizens.

      p. 3-14

34.   a.        Four. Two personal exemptions (Miles and Macy) and two dependency
                exemptions (Macy’s parents). The parents need not live with Miles and Macy as
                they meet the relationship test.
3-10                     2005 Comprehensive Volume/Solutions Manual


       b.        Two. The ex-wife does not meet the relationship test although her brother
                 (Rhett’s ex-brother-in-law) does.

       c.        Three. The ex-wife now satisfies the member of the household test. The ex-
                 brother-in-law meets the relationship test.

       d.        Three. One personal exemption and two dependency exemptions. Nephews and
                 nieces meet the relationship test and do not have to live with the taxpayer
                 (although the niece does).

       e.        Two. One personal exemption and one dependency exemption (the nephew). The
                 niece does not meet the gross income test. The full-time student exception applies
                 only to a child of the taxpayer.

       pp. 3-10 to 3-14

35.    Exemption amount (10 X $3,100)                                            $31,000
       Step 1: AGI                                               $235,000
               Phase-out threshold                               (214,050)
               Excess amount                                     $ 20,950
       Step 2: $20,950 ÷ $2,500 = 9 (rounded up) X 2 = 18% (phase-out percentage)
       Step 3: Less: $31,000 X 18%                                                (5,580)
       Step 4: Deduction for personal and dependency exemptions                  $25,420

       p. 3-15

36.    Salaries ($46,000 + $51,000)                                                    $97,000
       Interest income                                                                   2,100
       Contributions to traditional IRAs                                                (5,000)
       Adjusted gross income                                                           $94,100
       Less: Itemized deductions                                         $11,500
             Personal exemptions (2 X $3,100)                              6,200
             Dependency exemptions (3 X $3,100)                            9,300       (27,000)
       Taxable income                                                                  $67,100

       The $900 of interest on San Francisco bonds and the $24,000 gift from Keri’s parents are
       exclusions. The $16,000 loss on the sale of the RV is a personal loss and nondeductible.
       Demi falls under the full-time student exception to the gross income test. As to the same
       test, Kevin satisfies the under-the-age-of-19 test. Consequently, each can be claimed as a
       dependent. Homer passes the gross income test because at that income level Social
       Security benefits are exclusions.

       pp. 3-4 to 3-6, 3-8, 3-14, Example 35, Exhibits 3-1 and 3-2, and Figure 3-1

37.    a.        Wages                                                                   $2,100
                 Bank interest                                                            1,150
                 Bond interest (City of Chicago bond interest is tax-exempt)                 -0-
                 Gross income                                                            $3,250
                 Less: Standard deduction*                                               (2,350)
                        Personal exemption**                                                (-0-)
                 Taxable income                                                          $ 900
           Tax Determination; Exemptions; Overview of Property Transactions               3-11


      b.       Bank interest                                                         $1,150
               Bond interest                                                             -0-
               Total unearned income                                                 $1,150
               Minus: $800 + $800 standard deduction                                 (1,600)
               Income taxed at parents’ rate                                         $ -0-

               Income taxed at Bob’s rate                                            $ 900

               Total tax ($900 X 10%)***                                             $   90

      *A dependent’s standard deduction is limited to the greater of $800 or the sum of his or
       her earned income plus $250.

      **A dependent may not claim a personal exemption on his or her return.

      ***Since Bob’s unearned income is not more than $1,600, his tax is determined without
         using his parents’ rate. Thus, Bob’s 2004 tax liability is $90 ($900 taxable income X
         10%).

      pp. 3-9, 3-10, 3-20 to 3-22, Exhibits 3-1 and 3-2, and Example 10.

38.   a.       In Louisiana, John and Irene are each deemed to have income of $1,600 (50% X
               $3,200). Consequently, neither would violate the gross income test of $3,100.
               They both can be claimed as dependents by Walter and Nancy. Example 43

      b.       In New Jersey, only John can be claimed as a dependent. Irene does not meet the
               gross income test (i.e., $3,200 exceeds $3,100). She does not qualify under the
               student exception and is not under 19 years of age. Example 42

39.   If Don kept the duplex, the annual tax thereon would generate an income tax liability of
      $3,300 (33% of $10,000). If Don transfers title to the duplex to Sam, the income tax
      consequences would be as follows:

      (1)      Sam would be limited to an $800 standard deduction and would have taxable
               income of $9,200 ($10,000 – $800 standard deduction), which would be taxed at
               his own rate because he is not under 14 years of age.

      (2)      Sam would pay $1,023 tax on the $9,200 taxable income [($7,150 X 10%) +
               ($2,050 X 15%)].

      The tax saving to the family unit in 2004 if Don transfers the duplex would be $2,277
      ($3,300 – $1,023), assuming Sam had no other income or expenses. In addition, the
      phase-out of Don’s exemptions would be reduced. However, there are other tax
      consequences to be considered. If the state in which the family resides imposes a state
      income tax, a further tax saving might result from the transfer. Another consideration is
      the possibility of Federal and state gift taxes that the transfer might generate.

      pp. 3-9 and 3-17
3-12                   2005 Comprehensive Volume/Solutions Manual


40.    a.     Gross income                                                              $70,000
              Short-term capital loss                                                    (3,000)
              Cash prize                                                                  2,000
              AGI                                                                       $69,000
              Less: Personal and dependency exemptions (6 X $3,100)                     (18,600)
                    Standard deduction                                                   (9,700)
              Taxable income                                                            $40,700

              Tax on $40,700 using surviving spouse rate schedule: $1,430 + 15%($40,700 –
              $14,300) = $5,390

              Hector’s father does not fail the gross income text because tax-exempt income is
              not counted. The unused capital loss of $1,000 is carried over to the following
              year.

       b.     Gross income                                                              $80,000
              Contribution to traditional IRA                                            (3,000)
              AGI                                                                       $77,000
              Less: Personal and dependency exemptions (4 X $3,100)                     (12,400)
                    Standard deduction (head of household)                               (7,150)
              Taxable income                                                            $57,450

              Tax on $57,450 using head of household rate schedule: $5,325 + 25%($57,450 –
              $38,900) = $9,963

              Although Rosalyn does not meet the relationship test, she is a member of Penny’s
              household. Jerold and Zoe meet the relationship test. Jerold is not a U.S. citizen
              or resident but is a resident of Canada.

       c.     Gross income and AGI (gifts and inheritances are not taxable)            $105,000
              Less: Personal and dependency exemptions (3 X $3,100)                      (9,300)
                    Itemized deductions                                                 (16,000)
              Taxable income                                                           $ 79,700

              Tax on $79,700 using married filing jointly rate schedule: $8,000 + 25%($79,700
              – $58,100) = $13,400

              An ex-wife does not meet the relationship test but an ex-stepson does.
       pp. 3-6, 3-8, 3-13, 3-14, 3-17, 3-26 to 3-28, 3-31, Figure 3-1, and Tables 3-1 and 3-2

41.    Salary income ($49,000 + $50,000)                                               $ 99,000
       Interest income ($900 + $2,300)                                                    3,200
       AGI                                                                             $102,200
       Personal and dependency exemptions (5 X $3,100)                                  (15,500)
       Itemized deductions                                                              (13,600)
       Taxable income                                                                  $ 73,100

       The tax on $73,100 using the tax rate schedules applicable to married persons filing
       jointly is: $8,000 + 25%($73,100 – $58,100) = $11,750
       The $1,200 of interest from state bonds and the $30,000 gift are exclusions from gross
       income. As Odette meets the relationship test, she need not live with the Holts. Courtney
       qualifies as a dependent as she comes under the full-time student exception for a child
        Tax Determination; Exemptions; Overview of Property Transactions                    3-13


      under age 24 for the gross income test. (Five months meets the definition of ―full-time.‖)
      Dennis does not qualify for the under the age exception (less than 19 years old), while
      Wade does—Wade is a ―child‖ of the Holts while Dennis is not.

      pp. 3-13, 3-14, 3-17, and Exhibits 3-1 and 3-2

42.   Unearned income                                                                  $1,800
      Minus: $800 base amount + $800 standard deduction                                (1,600)
      Unearned income taxed at parents’ rate                                           $ 200

      Ginni’s parents are in the 25% bracket, so her unearned income would generate $50 of
      tax (25% X $200). Computation of Ginni’s taxable income and tax:

             Earned income                                                             $2,100
             Interest income                                                            1,800
             Gross income                                                              $3,900
             Less: Personal exemption                                                    -0-
             Less: Standard deduction [greater of $800 or $2,100 (earned
                    income) + $250]                                                    (2,350)
             Taxable income                                                            $1,550
             Less: Unearned income taxed at parents’ rate                                (200)
             Income taxed at Ginni’s rate                                              $1,350
             Ginni’s tax rate                                                          X 10%
             Tax at Ginni’s rate                                                       $ 135

      Ginni’s total tax: $50 (unearned income taxed at parents’ rate) + $135 (taxed at Ginni’s
      rate) = $185.

      pp. 3-20 to 3-22 and Example 28

43.   Unearned income (interest)                                                     $11,100
           Base amount not taxed at parents’ rate                                       (800)
           Standard deduction                                                           (800)
      Unearned income taxed at parents’ rate                                         $ 9,500

      Nash’s parents cannot make the parental election. pp. 3-20 to 3-22 and Example 28

44.                         Willis, Hoffman, Maloney, and Raabe, CPAs
                                      5191 Natorp Boulevard
                                         Mason, OH 45040

      November 9, 2004

      Mr. and Mrs. Gabe Malat
      140 State Street
      Russellville, AR 72801

      Dear Mr. and Mrs. Malat:

      Your recent letter requested that I determine what the Federal income tax liability will be
      depending on whether you choose to file separately or jointly for 2004.
      Based on the information that was provided, by filing a joint return the tax is $32,266.
      On separate returns, the tax is $17,392.75 for Lily and $14,872.75 for Gabe, for a
3-14                   2005 Comprehensive Volume/Solutions Manual


       combined total of $32,266 (rounded). In summary, the same tax results whether you file
       jointly or as married persons filing separately. Although there are some tax disadvantages
       for married persons who file separately, none of these apply in your case. Moreover,
       please do not continue to rely on my advice beyond your filing status for year 2004.

       If I can be of further service to you, do not hesitate to contact me.

       Sincerely,

       John M. Camp
       Tax Manager

       [Note: In the interest of diplomacy, the letter does not attempt to correct the Malat’s
       misconception about the marriage penalty. The penalty came about because some
       married couples paid higher taxes than if they had stayed single. The Malats appear to
       associate the penalty with what used to be the horrendous tax result when married persons
       filed separately. In passing, it should be mentioned that the Malats, under the same facts,
       would have paid $704 less tax had they been single. Thus, the marriage penalty is not
       entirely gone!]

       pp. 3-26 and 3-27

45.    a.     Sam and Lana need not file since their gross income of $16,500 is less than the
              $17,800 filing requirement.

       b.     Bobby is not required to file. Although he can be claimed as a dependent on his
              parents’ return, his earned income and gross income is less than $4,850 (his
              standard deduction).

       c.     Mike is required to file since his gross income of $9,200 is more than the $9,150
              filing requirement.

       d.     Marge is required to file. Her gross income is less than $7,950, but her net
              earnings from self-employment are more than $400.

              Taxpayers in a. and b. should file, even if a return is not required, to obtain a
              refund if any income tax was withheld.
       pp. 3-22, 3-23, and Table 3-4

46.    a.     Ben must file a tax return. He is claimed on his parents’ return. He has earned
              income only, but gross income of more than the standard deduction of $4,850.

       b.     Anita must file a tax return since she is claimed on her parents’ return and has
              unearned income greater than $800. Anita’s unearned income is less than the
              amount required to trigger a tax at her parents’ rate. Furthermore, her parents
              cannot make the parental election because Anita’s unearned income is not over
              $1,600.

       c.     Earl must file a tax return since he is claimed on his parents’ return and has both
              earned plus unearned income and gross income of more than the larger of $800 or
              the sum of earned income plus $250.
           Tax Determination; Exemptions; Overview of Property Transactions                  3-15


      d.       Karen is not required to file a tax return. Her gross income of $3,800 ($2,600
               wages + $1,200 interest) is less than her filing requirement of $4,050 [$2,850 (the
               greater of $800 or the sum of earned income + $250) + $1,200 (additional
               standard deduction for being blind)].

      e.       Pat must file a tax return since she has net self-employment earnings of $400 or
               more.

      pp. 3-22 and 3-23

47.   a.       Bianca should file a joint return—she can sign for her late husband as executor of
               his estate.

      b.       Bianca does not qualify for surviving spouse filing status due to not meeting the
               ―child‖ requirement. She does, however, qualify for head of household status.

      c.       Now, Bianca qualifies for surviving spouse status. ―Child‖ includes a stepchild.
      d.       Bianca is an abandoned spouse and is regarded as being single. Consequently, she
               can use head of household filing status.

      pp. 3-26 to 3-28 and Examples 32 to 34

48.   a.       Winston can use head of household filing status. As long as the child is not
               married, being a dependent is not necessary.

      b.       Winston must use single filing status. See answer to part a. above.

      c.       Winston qualifies for head of household filing status. As long as one parent is his
               dependent, this is enough.

      d.       Winston must use single filing status. Except in the case of parents, head of
               household status requires that the dependent be a member of taxpayer’s
               household.

      pp. 3-25 to 3-28 and Examples 33 and 34

49.   In 2002, Sue is eligible to use the married, filing jointly status. Henry’s executor must
      consent to filing a joint return.

      In 2003, Sue’s filing status is qualifying widow (surviving spouse), since Mike qualifies
      as Sue’s dependent because he is a full time student under 24 years old.

      In 2004, Mike became a part-time student and earned over $3,100; therefore, his mother
      cannot claim him as a dependent. Sue’s filing status is head of household for 2004.

      pp. 3-14, 3-26, 3-28, and Examples 32 and 33

50.   Tracy may file as a head of household since she maintains a home which is the residence
      of an unmarried child. It is not necessary that the unmarried child be a dependent in order
      for Tracy to qualify as a head of household. Tracy cannot file as a surviving spouse
      because Gary does not qualify as her dependent. Even though Gary is classified as a full-
      time student [August–December (5 months)], he is not under age 24, and his gross
3-16                  2005 Comprehensive Volume/Solutions Manual


       income exceeds $3,100. Therefore, Tracy can claim only one exemption. pp. 3-14, 3-28,
       and Example 33

51.    a.     Tax on short-term capital gain (28% X $6,000)                           $1,680
              Tax on long-term capital gains of $3,000 + $7,000
                (15% X $10,000)                                                        1,500
              Total tax                                                               $3,180

              The long-term loss of $1,000 on the sale of the powerboat is a nondeductible
              personal loss.

       b.     Tax on short-term capital gain (15% X $6,000)                           $ 900
              Tax on long-term capital gain (5% X $10,000)                               500
              Total tax                                                               $1,400

       pp. 3-29 to 3-31 and Examples 35 to 39
52.    a.     The loss on the Crow Corporation stock of $8,000 is first applied to the gain on
              the painting of $10,000. The painting is a collectible taxed at a 28% rate. After
              this combination, the end result is:

                      Tax on remaining collectible gain (28% X $2,000)                $ 560
                      Tax on land gain (15% X $6,000)                                    900
                      Total tax on all gains                                          $1,460

       b.     Use the same netting procedure, then tax the net collectible gain at 15% and the
              land gain at 5%. Thus, $300 (15% X $2,000) + $300 (5% X $6,000) = $600.

       pp. 3-30, 3-31, and Example 39

53.    If Amelia does nothing, her taxes for both years would be as follows:

                                                                        2004           2005
              AGI                                                     $60,000        $61,000
              Less: Personal exemption                                 (3,100)        (3,100)
                    Standard deduction                                 (4,850)        (4,850)
              Taxable income                                          $52,050        $53,050
       The income tax for 2004 is $9,750 [$4,000 + 25%($52,050 – $29,050)] and for 2005 is
       $10,000 [$4,000 + 25%($53,050 – $29,050)] for a total of $19,750 ($9,750 + $10,000).

       If Amelia prepays her church pledge, her taxes for both years would be as follows:

                                                                        2004           2005
              AGI                                                     $60,000        $61,000
              Less: Personal exemption                                 (3,100)        (3,100)
                    Itemized deductions
                            ($1,300 + $1,100 + $4,800)                 (7,200)            -0-
                     Standard deduction                                    -0-        (4,850)
              Taxable income                                          $49,700        $53,050
       The income tax for 2004 is $9,163 [$4,000 + 25%($49,700 – $29,050)] and for 2005 is
       $10,000 [$4,000 + 25%($53,050 – $29,050)] for a combined total of $19,163 ($9,163 +
       $10,000).
        Tax Determination; Exemptions; Overview of Property Transactions                         3-17


      Consequently, Amelia’s prepayment of her church pledge in 2004 saves her $587
      ($19,750 – $19,163) in income taxes.

      p. 3-32


CUMULATIVE PROBLEMS

54.   Salaries ($45,000 + $49,000) (Note 1)                                               $94,000
      Interest income—
              CD at Bank America (Note 2)                      $2,100
              Interest on loan (Note 3)                         1,000                       3,100
      Property sale (Note 4)                                                               (3,000)
      AGI                                                                                 $94,100
      Itemized deductions ($3,600 + $4,800 +$2,400) (Note 5)                              (10,800)
      Personal and dependency exemptions (4 X $3,100) (Note 6)                            (12,400)
      Taxable income                                                                      $70,900
      Notes

      (1)       Gross income does not include life insurance proceeds ($50,000), gifts ($22,000),
                and inheritances ($97,100).

      (2)       Gross income does not include interest on municipal bonds ($1,300).

      (3)       Although the loan repayment ($10,000) is a nontaxable return of capital, the
                interest ($1,000) the brother paid is includible in gross income.

      (4)       The sale of the GE stock resulted in a $3,500 ($15,000 cost – $11,500 selling
                price) short-term capital loss. But only $3,000 of an excess capital loss can be
                deducted each year—the $500 unused balance is carried forward. The garage sale
                resulted in a nondeductible personal loss of $7,100 ($900 – $8,000).

      (5)       Deductions are itemized as $10,800 exceeds the standard deduction of $9,700.

      (6)       No dependency exemption is allowed for Fletcher as his gross income exceeds
                $3,100—the taxable portion of the scholarship, or $3,200, is what is considered.
                In spite of Fletcher’s full-time student status, he is not under 24 years of age. Cole
                falls under the full-time student exception to the gross income test, while Gina
                falls under the less than 19 years old exception.

55.   Part I. Tax Computation

      Salary                                                                              $62,000
      Interest income ($5,700 + $6,300)                                                    12,000
      Less alimony payments ($300 X 11 payments)                                           (3,300)
      AGI                                                                                 $70,700
      Less: Standard deduction (Note 1)                                                    (7,000)
            Personal and dependency exemptions ($3,050 X 2)                                (6,100)
      Taxable income                                                                      $57,600
      Tax on taxable income (see Tax Tables) head of household                            $10,101
      Less amounts withheld of $10,900                                                    (10,900)
      Net tax payable (or refund due) for 2003                                           ($ 799)
3-18                   2005 Comprehensive Volume/Solutions Manual


       Note 1: The standard deduction of $7,000 for a head of household is greater than the
       itemized deductions of $6,400 ($3,300 + $1,300 + $1,800).

       See the tax return solution beginning on page 3-20 of the Solutions Manual.

       Part II. Tax Planning

                               Willis, Hoffman, Maloney, and Raabe, CPAs
                                         5191 Natorp Boulevard
                                            Mason, OH 45040

       February 26, 2004


       Mr. Horace Fern
       321 Grant Avenue
       Cheyenne, WY 82002
       Dear Horace:

       I am enclosing your completed tax return for 2003. Please sign on page 2 of Form 1040
       and use the enclosed envelope for mailing the return to the IRS by April 15, 2004.

       Regarding your tax position for 2004, the death of your mother causes you to lose a
       dependency exemption for her. Also, you will no longer qualify for head of household
       filing status. Instead, you must use the less favorable tax rates applicable to single
       taxpayers. You also will lose a deduction for alimony payments. The salary increase
       causes more income to be taxed. A quick summation of the changes is as follows:

       2003 taxable income                                             $57,600
       Taxable income for 2004 will increase because of:
          Increase in income for 2004 (salary)                           6,200
          Decrease in deductions:
             Exemption for mother claimed in 2003                        3,050
             Alimony paid to ex-wife                                     3,300
             Itemized deductions of $6,400 in 2004 (standard deduction
                is less) versus standard deduction in 2003 of $7,000       600
       Taxable income for 2004 will decrease because of:
          Increase in exemption amount for 2004                            (50)
       Projected taxable income for 2004                               $70,700

       Tax on projected 2004 taxable income using tax rate schedule applicable to single
       taxpayers:

       $14,325 + 28%($70,700 – $70,350)                                    $14,423
       Less: 2003 tax                                                      (10,101)
       Increase in tax                                                     $ 4,322

       One investment decision you should reappraise are the CDs you hold. Although they
       appear to be yielding a return of around 3%, the interest is fully taxed at a rate of 25% or
       28%. Investments in stock, on the other hand, now carry two important advantages.
       First, dividends are taxed at a top rate of 15%. Second, long-term (more than a year)
       gain, if any, also is taxed at a top rate of 15%.
         Tax Determination; Exemptions; Overview of Property Transactions             3-19


      If I can be of further assistance to you, please call me.

      Sincerely,

      Jane Welsch, CPA
      Partner

      Enclosure




The answers to the Research Problems are incorporated into the 2005 Comprehensive Volume of
the Instructor’s Guide with Lecture Notes to Accompany WEST FEDERAL TAXATION:
COMPREHENSIVE VOLUME.
3-20   2005 Comprehensive Volume/Solutions Manual


55.
         Tax Determination; Exemptions; Overview of Property Transactions   3-21


55. continued
3-22            2005 Comprehensive Volume/Solutions Manual


55. continued

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:369
posted:7/18/2010
language:English
pages:22
Description: 2004 Standard Deduction for Federal Income Tax document sample