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 Chapter 4
Individual Income Tax Overview, Exemptions, and Filing Status

Discussion Questions

1. [LO 1] How are realized income, gross income, and taxable income similar, and
how are they different?

Realized income is more broadly defined than gross income which is more broadly
defined than taxable income.

Gross income includes all realized income that taxpayers are not allowed to
exclude from gross income or are not permitted to defer to a later year.
Consequently, gross income is the income that taxpayers actually report on their
tax returns and pay taxes on. In the tax formula, taxable income is gross income
minus allowable deductions for and from AGI. Taxable income is the base used to
compute the tax due before applicable credits. However, any income included in
gross income can be considered “taxable” income because gross income is income
that is taxable and causes an increase in the taxes that a taxpayer is required to
pay (gross income increases taxable income).

2. [LO 1] Are taxpayers required to include all realized income in gross income?
Explain.

No. Taxpayers are allowed to permanently exclude certain types of income from
gross income or defer certain types of income from taxation (gross income) until a
subsequent tax year. Consequently, taxpayers are not required to include all
realized income in gross income.

3. [LO 1] All else being equal, should taxpayers prefer to exclude income or defer it?
Why?

Taxpayers should prefer to exclude income rather than defer income. When they
exclude income they are never taxed on the income. When they defer income, they
are still taxed on the income, but they are taxed in a subsequent tax year.

4. [LO 1] Why should a taxpayer be interested in the character of income received?

A taxpayer should be interested in the character of income received because the

character of the income determines how the income is treated for tax purposes
(including the rate at which the income is taxed). For example, ordinary income is
taxed at the rates provided in the tax rate schedule. Qualified dividend income and
long-term capital gains (after a netting process) are generally taxed at a maximum
 15% rate (20% in the case of high income taxpayers and 0% in the case of low
income taxpayers).

5. [LO 1] Is it easier to describe what a capital asset is or what it is not? Explain.

It is easier to describe what a capital asset is not. In general, a capital asset is any
asset other than:
 Accounts receivable from the sale of goods or services.
 Inventory and other assets held for sale in the ordinary course of business.
 Assets used in a trade or business, including supplies.
Thus, any asset used for investment or personal purposes is considered to be a
capital asset.

6. [LO 1] Are all capital gains (gains on the sale or disposition of capital assets) taxed at
the same rate? Explain.

No. If a taxpayer holds a capital asset for a year or less the gain is taxed at
ordinary tax rates. If the taxpayer holds the asset for more than a year before
selling, the gain is generally taxed at a maximum 15% rate but could be taxed as
high as 20% for high income taxpayers, or as low as 0% for low income taxpayers.
If the taxpayer sells more than one capital asset during the year and recognizes
both capital gains and capital losses, the gains and losses are netted together
before determining the applicable tax rate.

7. [LO 1] Are taxpayers allowed to deduct net capital losses (capital losses in excess of
capital gains)? Explain.

In general, a taxpayer is allowed to deduct, as a “for AGI deduction,” up to $3,000

of net capital loss against ordinary income. If the net capital loss exceeds $3,000,
the taxpayer is allowed to carry the loss over indefinitely to deduct in subsequent
years (subject to the $3,000 annual deduction limitation). If however, a capital loss
arises from the sale of a personal use asset (such as a personal automobile or a
personal residence), the loss is not deductible.

8. [LO 1] Compare and contrast for and from AGI deductions. Why are for AGI
deductions likely more valuable to taxpayers than from AGI deductions?

All deductions are classified as either “for AGI” or “from AGI” deductions. Gross
income minus “for AGI deductions” equals AGI. AGI minus “from AGI
deductions” equals taxable income. “For AGI deductions” are often referred to as
deductions above the line, while deductions from AGI are referred to as deductions
below the line. The line is AGI (the last line on the front page of the individual tax
return).

Though both types of deductions may reduce a taxpayer’s taxable income, “for
AGI” deductions are generally more valuable to taxpayers because they reduce
 AGI which may allow taxpayers to deduct more of their from AGI deductions (and
other tax benefits) that are subject to AGI limitations. “From AGI deductions”
don’t affect AGI.

9. [LO 1] What is the difference between gross income and adjusted gross income,
and what is the difference between adjusted gross income and taxable income?

Gross income is more inclusive than is adjusted gross income (AGI). Gross income
is all income from whatever source derived that is not excluded or deferred from
income. AGI is gross income minus “for AGI” deductions. So the primary
difference between gross income and AGI is the amount of “for AGI deductions.”
Adjusted gross income is more inclusive than taxable income. AGI is gross income
minus “for AGI” deductions. Taxable income is AGI minus “from AGI”
deductions. Consequently, the difference between AGI and taxable income is the
amount of “from AGI” deductions.

10. [LO 1] How do taxpayers determine whether they should deduct their itemized
deductions or utilize the standard deduction?

Taxpayers generally deduct the greater of (1) the applicable standard deduction or
(2) their total itemized deductions, after limitations. However, taxpayers that do not
want to bother with tracking itemized deductions may choose to deduct the
standard deduction, even when itemized deductions may exceed the standard
deduction.

11. [LO 1]. Why are some deductions called “above the line” deductions and others
called “below the line” deductions? What is the “line”?

The line is adjusted gross income (AGI). AGI is considered the line because of the
significance it plays in the amount of deductions allowed from AGI. “For AGI”
deductions are called above-the-line deductions because they are deducted in
determining AGI. “From AGI” deductions are called below-the-line deductions
because they are deducted after AGI has been determined. They are deducted from
AGI to arrive at taxable income. Below the line deductions may be subject to
limitations based on the taxpayer’s AGI.

12. [LO 1] What is the difference between a tax deduction and a tax credit? Is one more
beneficial than the other? Explain.

A deduction generally reduces taxable income dollar for dollar (although from AGI
deductions may not reduce taxable income dollar for dollar). This translates into a
tax savings in the amount of the deduction times the marginal tax rate. In contrast,
credits reduce a taxpayer’s taxes payable dollar for dollar. Thus, generally
speaking, credits are more valuable than deductions.
13. [LO 1] What types of federal income-based taxes, other than the regular income
tax, might taxpayers be required to pay? In general terms, what is the tax base for
each of these other taxes on income?

In addition to the individual income tax, individuals may also be required to pay
other income based taxes such as the alternative minimum tax (AMT) or self-
employment taxes. These taxes are imposed on a tax base other than the
individual’s taxable income. The AMT tax base is alternative minimum taxable
income, which is the taxpayer’s taxable income adjusted for certain items to more
closely reflect the taxpayer’s economic income than does taxable income. The tax
base for self-employment taxes is the net earnings derived from self-employment
activities.

14. [LO 1] Identify three ways taxpayers can pay their income taxes to the government.

Taxpayers can pay taxes through (1) income taxes withheld from the taxpayer’s
salary or wages by her employer, (2) estimated tax payments directly to the
government, and (3) taxes the taxpayer overpaid in the previous year that the
taxpayer elects to apply as an estimated payment for the current year.

15. [LO 1] If a person is considered to be a qualifying child or qualifying relative of a

taxpayer, is the taxpayer automatically entitled to claim a dependency exemption
for the person?

No, taxpayers may claim a dependency exemption for a qualifying child and/or a
qualifying relative only if the qualifying child or relative is a citizen of the United
States or a resident of the United States, Canada, or Mexico. Further, the
qualifying child or qualifying relative must meet the joint tax return test if the
person is married (no joint return with spouse unless there is no tax liability
(positive taxable income) on the joint return and there would have been no tax
liability on either separate tax return if the spouses had filed separately).

16. [LO 2] Emily and Tony are recently married college students. Can Emily qualify as
her parents’ dependent? Explain.

Depending on the circumstances, Emily may qualify as a dependent of her parents.

A taxpayer who files a joint return with his or her spouse may not qualify as a
dependent of another, unless there is no tax liability on the couple's joint return
and there would not have been any tax liability on either spouse’s tax return if they
had filed separately. As long as Emily and Tony meet these criteria, then Emily will
qualify as a dependent of her parents assuming she also meets tests to be her
parents’ qualifying child or qualifying relative.

17. [LO 2] Compare and contrast the relationship test requirements for a qualifying
child with the relationship requirements for a qualifying relative.
 The relationship test for a qualifying child includes the taxpayer’s child or
descendant of a child (child or grandchild) while the relationship test for qualifying
relatives includes both descendants and ancestors of the taxpayer (child,
grandchild, parents, or grandparent). The relationship test for the qualifying
relative includes a descendant or ancestor of the taxpayer (child, grandchild,
parent, or grandparent). The relationship test for qualifying child includes siblings
of the taxpayer or descendants of siblings of the taxpayer while the qualifying
relative test also includes siblings of the taxpayer and sons or daughters of the
taxpayer’s siblings. The relationship test for qualifying relative also includes the
taxpayer’s in laws, aunt, uncle, and any person (even if there is no qualifying
family relationship as described above) who has the same principal place of abode
as the taxpayer for the entire year. Thus, the relationship test for qualifying relative
is much more broad in scope than the relationship test for qualifying child.

18. [LO 2] In general terms, what are the differences in the rules for determining who
is a qualifying child and who qualifies as a dependent as a qualifying relative? Is it
possible for someone to be a qualifying child and a qualifying relative of the same
taxpayer? Why or why not?

The rules for determining who qualifies as a dependent as a qualifying child and
who qualifies as a dependent as a qualifying relative overlap to some extent. The
primary differences between the two are:
(1) the relationship requirement is more inclusive for qualifying relatives
than qualifying children,
(2) qualifying children are subject to age restrictions while qualifying
relatives are not,
(3) qualifying relatives are subject to a gross income restriction while
qualifying children are not, and
(4) taxpayers need not provide more than half a qualifying child’s support,
though the child cannot provide more than half of his/her own support, but,
absent a multiple support agreement, taxpayers must provide more than half
the support of a qualifying relative.
(5) qualifying children are subject to a residence test (they must live with the
taxpayer for more than half the year) while qualifying relatives are not.
An individual may not be a qualifying child and a qualifying relative of the same
taxpayer. By definition, a qualifying relative must be someone who is not a
qualifying child. Consequently, the qualifying relative tests apply only when the
individual does not pass the qualifying child tests.

19. [LO 2] How do two taxpayers determine who has priority to claim the dependency
exemption for a qualifying child of both taxpayers when neither taxpayer is a
parent of the child (assume the child does not qualify as a qualifying child for either
parent)? How do parents determine who gets to deduct the dependency exemption
for a qualifying child of both parents when the parents are divorced or file separate
returns?
 The priority in claiming a qualifying child is as follows:
(1) The parent of the child.
(2) If both parents qualify, then the parent with whom the child has resided
with the longest during the year.
(3) If the child resides with the parents equally or the child resides with
taxpayers who are not parents (the child is not a qualifying child of a parent),
then the taxpayer with the highest AGI.
In the case of divorced parents or parents filing separately, the parent with whom
the child has resided with the longest during the year has priority for the exemption
(the custodial parent). However, the custodial parent can release the exemption to
the noncustodial parent through a written declaration. The noncustodial parent
attaches the declaration to his or her tax return. If the child resides an equal time
with each parent (as would likely be the case if the married couple was filing
separately), the parent with the higher AGI has priority.

20. [LO 2] Isabella provides 30% of the support for her father Hastings, who lives in an
apartment by himself and has no gross income. Is it possible for Isabella to claim a
dependency exemption for her father? Explain.

Because her father meets the relationship and gross income test for a qualifying
relative, the support test is the only obstacle for Isabella to claim a dependency
exemption for her father. The basic support test requires that Isabella must have
provided more than half of the support for her father in order to claim a
dependency exemption for him. Because Isabella provides only 30% of her father’s
support, she does not meet the basic test. However, Isabella could potentially
qualify to claim a dependency exemption for her father under a multiple support
agreement. For Isabella to qualify, the following requirements must be met:
1. No other taxpayer paid over half of her father’s support.
2. Isabella and at least one other person provided more than half the support
of her father, and Isabella and the other person or persons would have been
allowed to claim an exemption for Hastings except for the fact that neither
met the support test.
3. Isabella provided over 10% of her father’s support (she provided 30%).
4. The other person or persons who provided more than 10% of Hastings’
support must provide a signed statement to Isabella agreeing not to claim
Hastings as a dependent. Isabella would include the names, addresses, and
social security numbers of each other person on an IRS Form 2120- which
she would include with her tax return for the year.

21. [LO 3] What requirements do an abandoned spouse and qualifying widow or

widower have in common?

Taxpayers qualifying as an abandoned spouse are treated as not married at the end
of the year and may therefore qualify for the head of household filing status. The
requirements for both abandoned spouse and qualifying widow or widower require
that the taxpayer no longer be living with his or her spouse at year end, whether
 through death (for qualifying widow or widower) or by separation (for at least 6
months for abandoned spouse). Further, both require that the taxpayer has a
dependent child who resides with the taxpayer. The qualifying widow status
requires that the dependent child live with the taxpayer for the entire year. The
abandoned spouse status requires that the dependent child live with the taxpayer
for more than half the year. Furthermore, for qualifying widow status, the
dependent child must be a child or stepchild (including an adopted child but not a
foster child) for whom the taxpayer can claim a dependency exemption. For
abandoned spouse/head of household purposes, the dependent child must be a
child, stepchild (including an adopted child), or a foster child.

22. [LO 3] True or False. For purposes of determining head of household filing status,
the taxpayer’s mother or father is considered to be a qualifying person of the
taxpayer (even if the mother or father does not qualify as the taxpayer’s dependent)
as long as the taxpayer pays more than half the costs of maintaining the household
of the mother or father. Explain.

False. The taxpayer must be able to claim a dependency exemption of his or her
father or mother in order for the father or mother to be a qualifying person for
purposes of determining head of household filing status.

23. [LO 3] Is a qualifying relative always a qualifying person for purposes of

determining head of household filing status?

No. A qualifying relative who meets the relationship test only because the
individual lived as a member of the taxpayer’s household for the entire year (no
qualifying family relationship) is not a qualifying person for head of household
filing status purposes.

24. [LO 3] For tax purposes, why is the married filing jointly tax status generally
preferable to the married filing separately filing status? Why might a married
taxpayer prefer not to file a joint return with the taxpayer’s spouse?

Married couples filing joint returns combine their income and deductions and
agree to share joint and several liability for the resulting tax. Filing a joint return
generally results in a lower tax liability than does filing separately due to more
favorable tax rate schedules and higher phase-out thresholds for various tax
benefits. However, a couple may prefer to file separate returns in certain
circumstances for nontax reasons. For example, when a married couple is
separated but the couple does not want to have anything to do with each other or
when one spouse does not want to be liable for the tax liability of both parties, the
couple may choose to file separately.

25. [LO 3] What does it mean to say that a married couple filing a joint tax return has
joint and several liability for the taxes associated with the return?
 Each spouse is liable for the full amount of taxes owed on a joint return, regardless
of which spouse earned the associated income.

Problems

26. [LO 1] Jeremy earned $100,000 in salary and $6,000 in interest income during the
year. Jeremy has two qualifying dependent children who live with him. He qualifies
to file as head of household and has $17,000 in itemized deductions. Neither of his
dependents qualifies for the child tax credit.
a. Use the 2017 tax rate schedules to determine Jeremy’s taxes due.

Jeremy will owe $13,465 calculated as follows:

Description Amount Computation

(1) Gross income 106,000 $100,000 salary + $6,000
interest income
(2) For AGI deductions 0
(3) Adjusted gross income $106,000 (1) – (2)
(4) Standard deduction 9,350 Head of household
(5) Itemized deductions 17,000
(6) Greater of standard deduction or 17,000 (5) > (4)
itemized deductions
(7) Personal and dependency exemptions 12,150 4,050 × 3 (personal
exemption and two
dependency exemptions)
(8) Taxable income $76,850 (3) - (6)- (7)
Income tax liability $13,465 (76,850 – 50,800) × 25% +
$6,952.50 (see tax rate
schedule for head of
household)

b. Assume that in addition to the original facts, Jeremy has a long-term capital gain of
$4,000. What is Jeremy’s tax liability including the tax on the capital gain?

Jeremy will owe $14,065 calculated as follows:

Description Amount Computation

(1) Gross income 110,000 $100,000 salary + $6,000 interest
income + 4,000 long-term capital
gain
(2) For AGI deductions 0
(3) Adjusted gross income $110,000 (1) – (2)
(4) Standard deduction 9,350 Head of household
 (5) Itemized deductions 17,000
(6) Greater of standard 17,000 (5) > (4)
deduction or itemized
deductions
(7) Personal and dependency 12,150 4,050 × 3 (personal exemption and
exemptions two dependency exemptions)
(8) Taxable income $80,850 (3) – (6) – (7)
Income tax liability $14,065 ($76,850 – 50,800) × 25% +
6,952.50 + 4,000 × 15% (See tax
rate schedule for head of household.
Also note that the qualified dividend
is taxed at a maximum rate of 15%.)

c. Assume the original facts except that Jeremy had only $7,000 in itemized
deductions. What is Jeremy’s total income tax liability (use the tax rate schedules
rather than the tax tables)?

Jeremy will owe $15,377.50, calculated as follows:

Description Amount Computation

(1) Gross income 106,000 $100,000 salary + $6,000
interest income
(2) For AGI deductions 0
(3) Adjusted gross income $106,000 (1) – (2)
(4) Standard deduction 9,350 Head of household
(5) Itemized deductions 7,000
(6) Greater of standard deduction or 9,350 (4) > (5)
itemized deductions
(7) Personal and dependency 12,150 4,050 × 3 (personal
exemptions exemption and two
dependency exemptions)
(8) Taxable income $84,500 (3) – (6) – (7)
Income tax liability $15,377.50 (84,500 – 50,800) × 25% +
6,952.50 (see tax rate
schedule for head of
household)

27. [LO 1] David and Lilly Fernandez have determined their tax liability on their joint tax
return to be $1,700. They have made prepayments of $1,500 and also have a child tax
credit of $1,000. What is the amount of their tax refund or taxes due?

David and Lilly will receive a tax refund of $800 calculated as follows:

Description Amount Computation

(1) Total tax $1,700
 (2) Child tax credit 1,000
(3) Prepayments 1,500
Tax (refund) ($800) (1) – (2) – (3)

Prepayments are fully refundable when payments exceed the taxes after credits because
the refundable amount is essentially an overpayment of taxes.

28. [LO 1] {Planning} Rick, who is single, has been offered a position as a city landscape
consultant. The position pays $125,000 in cash wages. Assume Rick files single and
is entitled to one personal exemption. Rick deducts the standard deduction instead of
itemized deductions
a. What is the amount of Rick’s after-tax compensation (ignore payroll taxes)?

Rick’s after-tax compensation is $99,930.25 calculated as follows:

Description Amount Computation

(1) Gross income 125,000
(2) For AGI deductions 0
(3) Adjusted gross income $125,000 (1) – (2)
(4) Standard deduction 6,350 Single taxpayer
(5) Personal and 4,050 4,050 × 1 (personal exemption)
dependency exemptions
(6) Taxable income $114,600 (3) – (4) – (5)
(7) Income tax liability $25,069.75 (114,600 – 91,900) × 28% +
18,713.75 (see tax rate schedule
for Single individuals)
After-tax compensation $99,930.25 (1) – (7)

b. Suppose Rick receives a competing job offer of $120,000 in cash

compensation and nontaxable (excluded) benefits worth $4,000. What is the
amount of Rick’s after-tax compensation for the competing offer? Which job
should he take if taxes are the only concern?

Rick’s after-tax compensation is $100,330.25 calculated as follows:

Description Amount Computation

(1) Gross income 120,000 120,000 cash
compensation
(2) For AGI deductions 0
 (3) Adjusted gross income $120,000 (1) – (2)

(4) Standard deduction 6,350 Single

(5) Personal and dependency 4,050 4,050 × 1 (personal

exemptions exemption)
(6) Taxable income $109,600 (3) – (4) – (5)
(7) Income tax liability $23,669.75 (109,600 – 91,900) ×
28% + 18,713.75 (see
tax rate schedule for
single individuals)
After-tax compensation $100,330.2 (1) – (7) + $4,000
5 excluded benefits

Note that Rick’s after-tax benefit is higher with lower salary and more nontaxable
benefits. Rick is likely to take the second option, particularly if he would have paid
for the benefits had they not been provided to him as compensation.

29. [LO 1] {Planning} Through November, Tex has received gross income of $120,000.
For December, Tex is considering whether to accept one more work engagement for
the year. Engagement 1 will generate $7,000 of revenue at a cost of $4,000, which is
deductible for AGI. In contrast, engagement 2 will generate $7,000 of revenue at a
cost of $3,000, which is deductible as an itemized deduction. Tex files as a single
taxpayer.

a. Calculate Tex’s taxable income assuming he chooses engagement 1 and

assuming he chooses engagement 2. Assume he has no itemized deductions other
than those generated by engagement 2.

Description Engagement 1 Engagement 2 Computation

(1) Gross income before new $120,000 $120,000

work engagement

(2) Income from engagement 7,000 7,000

(3) Additional for AGI deduction (4,000) 0

(4) Adjusted gross income $123,000 $127,000 (1) + (2) + (3)

(5) Greater of itemized (6,350) (6,350) $3,000 itemized

deductions or standard deduction deductions for
engagement 2
 (6) Personal exemption (4,050) (4,050)

Taxable income $112,600 $116,600 (4) + (5) + (6)

b. Calculate Tex’s taxable income assuming he chooses engagement 1 and

assuming he chooses engagement 2. Assume he has $4,500 of itemized deductions
other than those generated by engagement 2.

Description Engagement 1 Engagement 2 Computation

(1) Gross income before new work $120,000 $120,000

engagement

(2) Income from engagement 7,000 7,000

(3) Additional for AGI deduction (4,000) 0

(4) Adjusted gross income $123,000 $127,000 (1) + (2) + (3)

(5) Greater of itemized deductions (6,350) (7,500) $3,000 + 4,500 for

or standard deduction engagement 2

(6) Personal exemption (4,050) (4,050)

Taxable income $112,600 $115,450 (4) + (5) + (6)

c. Calculate Tex’s taxable income assuming he chooses engagement 1 and assuming

he chooses engagement 2. Assume he has $7,000 of itemized deductions other than
those generated by engagement 2.

Description Engagement 1 Engagement 2 Computation

(1) Gross income before new work $120,000 $120,000

engagement

(2) Income from engagement 7,000 7,000

(3) Additional for AGI deduction (4,000) 0

(4) Adjusted gross income $123,000 $127,000 (1) + (2) + (3)

(5) Greater of itemized deductions (7,000) (10,000) $7,000 + $3,000*

or standard deduction *engagement 2
 only

(6) Personal exemption (4,050) (4,050)

Taxable income $111,950 $112,950 (4) + (5) + (6)

30. [LO 1] {Planning} Matteo, who is single and has no dependents, was planning on
spending the weekend repairing his car. On Friday, Matteo’s employer called and
offered him $500 in overtime pay if he would agree to work over the weekend.
Matteo could get his car repaired over the weekend at Autofix for $400. If Matteo
works over the weekend, he will have to pay the $400 to have his car repaired, but he
will earn $500. Assume Matteo pays tax at a flat 15 percent rate.
a. Strictly considering tax factors, should Matteo work or repair his car if the
$400 he must pay to have his car fixed is not deductible?

If Matteo works, he will receive $500, but he will have to pay $75 in taxes ($500 ×
15%), netting him $425. He then must pay $400 for his car to be repaired, which
means he will gain $25 ($425 – 400) by working. If he doesn’t work, he won’t have
any income, he won’t pay any taxes, and he won’t have to pay to have his car
repaired. Overall, he would be $25 better off by working.

Note that taxes may not be the only concern here. Matteo would also need to factor in
how much he enjoys repairing his car and how much he enjoys working. He could
also consider whether he will do a better job repairing his car or whether Autofix
could do a better job.

b. Strictly considering tax factors, should Matteo work or repair his car if the
$400 he must pay to have his car fixed is deductible for AGI?

If Matteo works, he will receive $500, and he will be allowed to deduct the $400
repair expense, leaving him with taxable income of $100 ($500 – $400) on which he
will pay $15 in taxes. So, if he works, he will receive $500, pay $400 to have his car
fixed, and pay $15 in taxes, leaving him with $85. If he doesn’t work, he won’t have
any income, he won’t pay any taxes, and he won’t be out of pocket because he will do
his own repair work (assuming the repair only requires labor). So, he’s $85 better off
by working and having his car repaired by Autofix.

31. [LO 1, LO 2] Rank the following three single taxpayers in order of the magnitude of
taxable income (from lowest to highest) and explain your results.
 Ahmed Baker Chin
Gross Income $ 80,000 $ 80,000 $ 80,000
Deductions For AGI 8,000 4,000 0
Itemized Deductions 0 4,000 8,000

Chin has the highest taxable income, followed by Baker and then Ahmed. Chin’s
taxable income is highest because he had no for AGI deductions, and Ahmed has the
lowest because he had the most for AGI deductions. Baker did not benefit from the
itemized deductions because they did not exceed the standard deduction. Chin only
benefited from the itemized deductions to the extent the deductions exceeded the
standard deduction. See the following analysis:

Description Ahmed Baker Chin Computation

(1) Gross income $80,000 $80,000 $80,000
(2) For AGI deductions (8,000) (4,000) 0
(3) Adjusted gross income $72,000 $76,000 $80,000 (1)+ (2)
(4) Standard deduction (6,350) (6,350) (6,350) Single taxpayer
(5) Itemized deductions 0 (4,000) (8,000)
(6) Greater of standard (6,350) (6,350) (8,000) Ahmed: (4) > (5)
deduction or itemized Baker: (4) > (5)
deductions Chin: (5) > (4)
(7) Personal and dependency (4,050) (4,050) (4,050) 4,050 × 1
exemptions (personal
exemption)
Taxable income $61,600 $65,600 $67,950 (3) + (6)+ (7)

32. [LO 2] Aishwarya’s husband passed away in 2016. She needs to determine whether
Jasmine, her 17-year-old stepdaughter who is single, qualifies as her dependent in
2017. Jasmine is a resident but not a citizen of the United States. She lived in
Aishwarya’s home from June 15 through December 31, 2017. Aishwarya provided
more than half of Jasmine’s support for 2017.

a. Is Aishwarya allowed to claim a dependency exemption for Jasmine for 2017?

Yes, Aishwarya may claim a dependency exemption for Jasmine in 2017. Jasmine
meets the citizenship/residency test because she is a resident of the United States,
and she meets the requirements to be considered Aishwarya’s qualifying child as
follows:

Test Jasmine
Relationship Yes, stepdaughter qualifies
Age Jasmine is under 19 at the end of the year
Residence Jasmine had the same principal residence as Aishwarya for more
than half the year
Support Jasmine does not provide more than half of her own support.
 b. Would Aishwarya be allowed to claim a dependency exemption for Jasmine for
2017 if Aishwarya provided more than half of Jasmine’s support in 2017, Jasmine
lived in Aishwarya’s home from July 15 through December 31 of 2017, and
Jasmine reported gross income of $5,000 in 2017?

No. Jasmine would fail the qualifying child test because she did not have the same
principal residence as Aishwarya for more than half the year. Jasmine would fail
the qualifying relative test because her gross income exceeds the $4,050 personal
exemption amount for 2017.

c. Would Aishwarya be allowed to claim a dependency exemption for Jasmine for

2017 if Aishwarya provided more than half of Jasmine’s support in 2017, Jasmine
lived in Aishwarya’s home from July 15 through December 31 of 2017, and
Jasmine reported gross income of $2,500 in 2017?

Yes, Jasmine would qualify as Aishwarya’s qualifying relative as follows:

Test Jasmine
Relationship Yes, stepdaughter qualifies
Support Aishwarya provided more than half of Jasmine’s support
Gross income Jasmine’s gross income does not exceed the dependency
exemption amount.

33. [LO 2] The Samsons are trying to determine whether they can claim their 22-year-old
adopted son, Jason, as a dependent. Jason is currently a full-time student at an out-of-
state university. Jason lived in his parents’ home for three months of the year, and he
was away at school for the rest of the year. He received $9,500 in scholarships this
year for his outstanding academic performance and earned $4,800 of income working
a part-time job during the year. The Samsons paid a total of $5,000 to support Jason
while he was away at college. Jason used the scholarship, the earnings from the part-
time job, and the money from the Samsons as his only sources of support.
a. Can the Samsons claim Jason as their dependent?

Yes, the Samsons may claim Jason as their dependent. He is their qualifying child.
See the following analysis.

Test Jason
Relationship Yes, adopted son qualifies
Age Yes, under age 24 and a full-time student (and younger than
parents).
Residence Yes, temporary absences away at school count as time in the
parents’ home.
Support Yes. The Samsons provided $5,000 of support for Jason. Jason
provided $4,800 of his own support (Jason did not provide more
than half of his own support). Jason also received $9,500 of
scholarship money, but this does not count as support provided
 for himself because he is an actual child of the Samsons.

b. Assume the original facts except that Jason’s grandparents, not the Samsons,
provided him with the $5,000 worth of support. Can the Samsons (Jason’s parents)
claim Jason as their dependent? Why or why not?

Yes, the Samsons may claim Jason as their dependent. Jason is their qualifying
child. See the following analysis.

Test Jason
Relationship Yes, Jason is their (adopted) son.
Age Yes, under age 24 and a full-time student (and younger than his
parents).
Residence Yes, temporary absences away at school count as time in the
parents’ home.
Support Yes, even though Jason’s parents did not provide any of his
support, Jason did not provide more than half of his own support
because his grandparents provided $5,000 of support for Jason.
Jason provided $4,800 of his own support. Jason also received
$9,500 of scholarship money, but this does not count as support
provided for himself because he is an actual child of the Samsons,
who are claiming him as a dependent.

c. Assume the original facts except substitute Jason’s grandparents for his parents.
Determine whether Jason’s grandparents can claim Jason as a dependent.

No, the grandparents may not claim Jason as a dependent. He is neither a

qualifying child nor a qualifying relative.

Test Jason
Relationship Yes, Jason is the descendant of the taxpayers’ child (one of
Jason’s parents is the child of the taxpayer’s grandparents)
Age Yes, under age 24 and a full-time student (and younger than his
grandparents).
Residence Yes, temporary absences away at school count as time in the
grandparents’ home since that is his permanent residence.
Support No, Jason’s grandparents provided $5,000 of support. Jason
provided $4,800 of his own support through his part time job. He
also provided $9,500 of his own support through a scholarship. In
this case, because the taxpayers are not Jason’s parents, the
$9,500 scholarship counts as support provided by Jason. So, he
provides more than half of his own support, and he does not meet
the support test to qualify as a qualifying child of his
grandparents. Because the grandparents did not provide more
than half of Jason’s support, Jason would not qualify as a
qualifying relative either.
 d. Assume the original facts except that Jason earned $5,500 while working part-
time and used this amount for his support. Can the Samsons claim Jason as their
dependent? Why or why not?

No, the Samsons may not claim Jason as their dependent. He is neither their
qualifying child nor their qualifying relative. See the following analysis.

Test Jason
Relationship Yes, adopted son qualifies
Age Yes, under age 24 and a full-time student (and younger than his
parents).
Residence Yes, temporary absences away at school count as time in the
parents’ home.
Support No, the Samsons provided $5,000 of support for Jason. Jason
provided $5,500 of his own support. Jason also received $9,500
of scholarship money, but this does not count as support provided
for himself because he is an actual child of the Samsons.
Nevertheless, because Jason provided more than half of his own
support, he is neither a qualifying child nor a qualifying relative
to his parents. Jason could also not be a qualifying relative
because his income of $5,500 was greater than the personal
exemption amount.

34. [LO 2] John and Tara Smith are married and have lived in the same home for over 20
years. John’s uncle Tim, who is 64 years old, has lived with the Smiths since March
of this year. Tim is searching for employment but has been unable to find any—his
gross income for the year is $2,000. Tim used all $2,000 toward his own support. The
Smiths provided the rest of Tim’s support by providing him with lodging valued at
$5,000 and food valued at $2,200.
a. Are the Smiths able to claim a dependency exemption for Tim?

Yes. The Smiths may claim Tim as a dependent as a qualifying relative as analyzed
below.

Test Tim
Relationship Yes, Tim meets qualifying relative test.
Age Not applicable to qualifying relative
Residence Not applicable to qualifying relative
Support Yes. The Smiths provided more than half of Tim’s support
($7,200/$9,200 = 78%).
Gross income Yes, Tim’s gross income is less than the exemption amount.

b. Assume the original facts except that Tim earned $10,000 and used all the funds
for his own support. Are the Smiths able to claim Tim as a dependent?
 No. The Smiths may not claim Tim as a dependent because he is not a qualifying
relative as analyzed below.

Test Tim
Relationship Yes, Tim meets qualifying relative test.
Age Not applicable to qualifying relative
Residence Not applicable to qualifying relative
Support No, the Smiths did not provide more than half of Tim’s support
($7,200/$17,200 = 42%).
Gross income No, Tim’s gross income ($10,000) is more than the exemption
amount.

c. Assume the original facts except that Tim is a friend of the family and not John’s
uncle.

No. The Smiths may not claim Tim as a dependent because he is not a qualifying
relative as analyzed below.

Test Tim
Relationship No. No family qualifying relationship, and Tim did not live with
the Smiths for the entire year.
Age Not applicable to qualifying relative
Residence Not applicable to qualifying relative
Support Yes, the Smiths provided more than half of Tim’s support
($7,200/$9,200 = 78%).
Gross income Yes, Tim’s gross income is less than the exemption amount.

d. Assume the original facts except that Tim is a friend of the family and not John’s
uncle and Tim lived with the Smiths for the entire year.

Yes. The Smiths may claim Tim as a dependent because he is a qualifying relative
as analyzed below.

Test Tim
Relationship Yes. Tim is not related, but he lived with the Smiths for the entire
year.
Age Not applicable to qualifying relative
Residence Not applicable to qualifying relative
Support Yes. The Smiths provided more than half of Tim’s support
($7,200/$9,200 =78%).
Gross income Yes, Tim’s gross income is less than the exemption amount.

35. [LO 2] Francine’s mother Donna and her father Darren separated and divorced in
September of this year. Francine lived with both parents until the separation. Francine
does not provide more than half of her own support. Francine is 15 years old at the
end of the year.
 a. Is Francine a qualifying child to Donna?

Yes, see analysis below.

Test Francine
Relationship Yes, Francine is Donna’s daughter.
Age Yes, under age 19 at end of year (and younger than Donna)
Residence Yes, Francine lived with Donna for more than half the year.
Support Yes, Francine does not provide more than half of her own
support.

b. Is Francine a qualifying child to Darren?

Yes, see analysis below.

Test Francine
Relationship Yes, Francine is Darren’s daughter.
Age Yes, under age 19 at end of year (and younger than Darren)
Residence Yes, Francine lived with Darren for more than half the year.
Support Yes, Francine does not provide more than half of her own
support.

c. Assume Francine spends more time living with Darren than Donna after the
separation. Who may claim Francine as a dependency exemption for tax
purposes?

Darren. When a child is a qualifying child of both parents, the parent with whom
the child resides for the longest period of time during the year is entitled to claim
the exemption. In this case, because Francine lived with Darren longer than she
lived with Donna, Darren is entitled to the exemption. However, Darren could
release the exemption to Donna under the divorce agreement.

d. Assume Francine spends an equal number of days with her mother and her
father and that Donna has AGI of $52,000 and Darren has AGI of $50,000. Who
may claim a dependency exemption for Francine?

Donna. Because Francine lived with Donna and Darren an equal amount of time
during the year, the tiebreaker on who may claim the exemption for Francine is
based on each taxpayer’s AGI. In this case Donna’s AGI is higher than Darren’s so
she is entitled to the exemption deduction. However, Donna could release the
exemption to Darren.

36. [LO 2] Jamel and Jennifer have been married 30 years and have filed a joint return
every year of their marriage. Their three daughters, Jade, Lindsay, and Abbi, are ages
12, 17, and 22 respectively and all live at home. None of the daughters provide more
 than half of her own support. Abbi is a full-time student at a local university and does
not have any gross income.
a. How many personal and dependency exemptions are Jamel and Jennifer
allowed to claim?

Jamel and Jennifer may claim five exemptions in total. Two personal exemptions for
themselves and three exemptions for their daughters who all qualify as their
qualifying children as analyzed below.

Test Jade Lindsay Abbi

Relationship Yes, daughter Yes, daughter Yes, daughter
Age Yes, under age 19 at Yes, under age 19 at Yes, under age 24 at
end of year (and end of year (and end of year and a
younger than younger than full-time student
parents) parents) (and younger than
parents).
Residence Yes, lived at home Yes, lived at home Yes, lived at home
entire year entire year entire year
Support Yes, did not provide Yes, did not provide Yes, did not provide
more than half of more than half of more than half of
own support own support own support

b. Assume the original facts except that Abbi is married. She and her husband live
with Jamel and Jennifer while attending school and they file a joint return. Abbi and her
husband reported a $1,000 tax liability on their tax return. If all parties are willing, can
Jamel and Jennifer claim Abbi as a dependent on their tax return? Why or why not?

No, Jamel and Jennifer may not claim Abbi as a dependent because she filed a joint
return with her husband, and they reported a tax liability on their joint return.

c. Assume the same facts as part (b). except that Abbi and her husband report a $0
tax liability on their joint tax return. Also, if the couple had filed separately, Abbi would
not have had a tax liability on her return, but her husband would have had a $250 tax
liability on his separate return. Can Jamel and Jennifer claim Abbi as a dependent on their
tax return? Why or why not?

No. Jamel and Jennifer may not claim Abbi as a dependent even though she is their
qualifying child because she fails the joint return test. Even though the couple had
no tax liability on their joint return and Abbi would not have had a tax liability on a
separate return, because Abbi’s husband would have reported a tax liability on his
separate return, Jamel and Jennifer may not claim her as a dependent.

d. Assume the original facts except that Abbi is married. Abbi files a separate tax
return. Abbi’s husband files a separate tax return and reports a $250 tax liability. Can
Jamel and Jennifer claim Abbi as a dependent?
 Yes. Because Abbi files a separate return, and she meets all other dependency
requirements (see answer to part a). Jamel and Jennifer may claim a dependency
exemption for Abbi.

37. [LO 2, LO 3] Dean Kastner is 78 years old and lives by himself in an apartment in
Chicago. Dean’s gross income for the year is $2,500. Dean’s support is provided as
follows: Himself (5 percent, his daughters Camille (25 percent) and Rachel (30
percent), his son Zander (5 percent), his friend Frankie (15 percent), and his niece
Sharon (20 percent).

a. Absent a multiple support agreement, of the parties mentioned in the problem,

who may claim a dependency exemption for Dean as a qualifying relative?

Because they do not provide over half of Dean’s support individually, neither
Camille, Rachel, Zander, Frankie, nor Sharon is eligible to claim Dean as a
dependent qualifying relative. In addition, Frankie fails the relationship test
because he is unrelated to Dean, and he did not live with Dean for the entire year
(he did not live with him at all during the year).

b. Under a multiple support agreement, who is eligible to claim a dependency

exemption for Dean as a qualifying relative? Explain.

Camille, Rachel, and Sharon are eligible because of the following:

1. No one taxpayer paid over half the support for Dean.
2. Together, Camille, Rachel, Sharon, and Zander provided more than half of
Dean’s support (80%) and Camille, Rachel, Sharon, and Zander would have
each been able to claim a dependency exemption for Dean except for the fact
that each did not meet the support test (Frankie fails the relationship test for
qualifying relative)
3. Camille, Rachel, and Sharon each provided over 10% of Dean’s support.
4. Camille, Rachel, and Sharon can claim the exemption, but the two parties who
do not claim it must provide a signed statement to the person claiming the
exemption stating that she will not claim an exemption for Dean. The person
claiming the exemption would attach a Form 2120 to her return indicating the
names, addresses, and social security numbers of the two who did not claim
Dean as a dependent.

c. Assume that Camille is allowed to claim Dean as a dependent under a

multiple support agreement. Camille is single and Dean is her only dependent.
What is Camille’s filing status?

Camille must file as a single taxpayer. Because she claims Dean as a dependent
under a multiple support agreement, Dean is not a qualifying person for purposes
of determining head of household status for Camille.
38. [LO 2] {Research} Mel and Cindy Gibson’s 12-year-old daughter Rachel was
abducted on her way home from school on March 15, 2017. Police reports indicated
that a stranger had physically dragged Rachel into a waiting car and sped away.
Everyone hoped that the kidnapper and Rachel would be located quickly. However,
as of the end of the year, Rachel was still missing. The police were still pursuing
several promising leads and had every reason to believe that Rachel was still alive. In
2018, Rachel was returned safely to her parents.
a. Are the Gibsons allowed to claim an exemption deduction for Rachel in 2017
even though she only lived in the Gibson’s home for two-and-one-half months?
Explain and cite your authority.

Yes, the Gibsons will be able to claim a dependency exemption for Rachel. IRC
§152(f)(6) indicates that for purposes of determining whether a child is considered
to be a qualifying child of the taxpayer, a child who is (1) presumed by law
enforcement officers to have been kidnapped by someone who is not a member of
the family of the child or the taxpayer, and (2) who had, for the taxable year in
which the kidnapping occurred, the same principal place of abode as the taxpayer
for more than half of the portion of the year before the date of the kidnapping shall
be treated as meeting the residence test for a qualifying child under §152(c)(1)(B).
Because Rachel did not provide more than half her own support for the year, she
would qualify as a dependent of the Gibsons as their qualifying child.

b. Assume the original facts except that Rachel is unrelated to the Gibsons, but she
has been living with them since January 2012. The Gibsons have claimed a
dependency exemption for Rachel for the years 2012 through 2016. Are the
Gibsons allowed to claim a dependency exemption for Rachel in 2017? Explain and
cite your authority.

No. In this case, because Rachel does not meet the relationship test for a qualifying
child, the special rule of §152(f)(6) does not apply. Rachel may only qualify as a
dependent as a qualifying relative. However, because she is not related to the
Gibsons under §152(d)(2), and she did not live with the Gibsons’ for the entire
taxable year [§152(d)(2)(H)] she does not qualify as a qualifying relative of the
Gibsons. So, they cannot claim her as a dependent.

39. [LO 2] {Research} Bob Ryan filed his tax return and claimed a dependency
exemption for his 16-year-old son Dylan. Both Bob and Dylan are citizens and
residents of the United States. Dylan meets all the necessary requirements to be
considered a qualifying child; however, when Bob filed the tax return he didn’t
know Dylan’s Social Security number and, therefore, didn’t include an identifying
number for his son on the tax return. Instead, Bob submitted an affidavit with his
tax return stating he had requested Dylan’s Social Security number from Dylan’s
birth state. Is Bob allowed to claim a dependency exemption for Dylan without
including Dylan’s identifying number on the return?
 No. IRC §151(e) states, “No exemption shall be allowed under this section with
respect to any individual unless the TIN {tax identification number} of such
individual is included on the return claiming the exemption.” A taxpayer may
include an affidavit stating a request for an identifying number has been made in
lieu of the actual identifying number, but only in situations where the number has
been applied for for a foreign person or nonresident alien [Reg. §301.6109-1(c)].
Since Dylan is not a foreign person or a nonresident alien, Ryan is not allowed to
claim a dependency exemption for Dylan. See also [2000-1 USTC ¶50,324] Thomas
W. Furlow, Jr. v. United States of America, (CA-4) where the taxpayer was denied a
dependency exemption for his son because he failed to provide the child’s social
security number or taxpayer identification number even though the father attached
an affidavit to the return in lieu of a tax identification number.

40. [LO 2, LO 3] Kimberly is divorced and the custodial parent of a 3-year-old girl
named Bailey. Kimberly and Bailey live with Kimberly’s parents, who pay all the
costs of maintaining the household (such as mortgage, property taxes, and food).
Kimberly pays for Bailey’s clothing, entertainment, and health insurance costs. These
costs comprised only a small part of the total costs of maintaining the household.
Kimberly does not qualify as her parents’ dependent.
a. Determine the appropriate filing status for Kimberly.

Single. To qualify as head of household, a taxpayer must pay more than half the
costs of maintaining a household that is the principal place of abode for a
dependent who is a qualifying child (or for maintaining a separate household for
her mother or father if the mother or father also qualifies as a dependent of the
taxpayer). Kimberly does not provide more than half the costs of maintaining the
household where her children reside. Because she does not qualify as head of
household, and she is not married, she must file as a single taxpayer.

b. What if Kimberly lived in her own home and provided all the costs of
maintaining the household?

Head of household. She meets the requirement of paying for more than half (for
more than half the taxable year) the costs of maintaining a household that is the
principal place of abode for a dependent who is a qualifying child.

c. Assume Kimberly qualifies as her parents’ dependent. How many personal

and dependency exemptions may Kimberly claim on her tax return?

Zero. Because Kimberly can be claimed as a dependent by another person, she is

not allowed to claim a personal exemption for herself and she is not allowed to
claim any dependency exemptions.

41. [LO 2, LO 3] Lee is 30 years old and single. Lee paid all the costs of maintaining his
household for the entire year. Determine Lee’s filing status in each of the following
alternative situations:
 a. Lee is Ashton’s uncle. Ashton is 15 years old and has gross income of $5,000.
Ashton lived in Lee’s home from April 1 through the end of the year.
b. Lee is Ashton’s uncle. Ashton is 20 years old, not a full-time student, and has
gross income of $7,000. Ashton lived in Lee’s home from April 1 through the
end of the year.
c. Lee is Ashton’s uncle. Ashton is 22 years old and was a full-time student from
January through April. Ashton’s gross income was $5,000. Ashton lived in
Lee’s home from April 1 through the end of the year.
d. Lee is Ashton’s cousin. Ashton is 18 years old, has gross income of $3,000,
and is not a full-time student. Ashton lived in Lee’s home from April 1
through the end of the year.
e. Lee and Ashton are cousins. Ashton is 18 years old, has gross income of
$3,000, and is not a full-time student. Ashton lived in Lee’s home for the
entire year.

a. Head of Household. Ashton is Lee’s qualifying child. Consequently Ashton is a

qualifying person for determining head of household status for Lee.

b. Single. Ashton does not qualify as Lee’s dependent, so he is not a qualifying

person for determining head of household status for Lee. Ashton is not Lee’s
qualifying child because Ashton is too old, and Ashton is not Lee’s qualifying
relative because Ashton has too much gross income.

c. Single. Same as b. Ashton is too old to be Lee’s qualifying child because he was
not a full-time student during five months of the year. Also, Ashton is not Lee’s
qualifying dependent because he has too much gross income.

d. Single. Ashton is not a qualifying person for determining head of household

status for Lee because he does not qualify as Lee’s dependent. Ashton does not
have a qualifying family relationship with Lee for either qualifying child or
qualifying relative.

e. Single. Ashton is not a qualifying person for determining head of household

status for Lee because even though he qualifies as Lee’s dependent, he does so
only because he lived in Lee’s home for the entire year.

42. [LO 2, LO 3] Ray Albertson is 72 years old and lives by himself in an apartment in
Salt Lake City. Ray’s gross income for the year is $3,000. Ray’s support is provided
as follows: Himself (11 percent), his daughters Diane (20 percent) and Karen (15
percent), his sons Mike (20 percent) and Kenneth (10 percent), his friend Milt (14
percent), and his cousin Henry (12 percent).
a. Absent a multiple support agreement, of the parties mentioned in the problem,
who may claim a dependency exemption for Ray as a qualifying relative?

No one. Because they individually do not provide over half of Ray’s support, Ray is
not a qualifying relative of any of his children (Diane, Karen, Mike, and Kenneth).
 He is also not a qualifying relative of Milt or Henry because they fail the
relationship test and support test for Ray.

b. Under a multiple support agreement, who is eligible to claim a dependency

exemption for Ray as a qualifying relative? Explain.

Diane, Karen, and Mike are eligible because of the following:

1. No one taxpayer paid over half the support for Ray.
2. Together, Diane, Karen, Mike, and Kenneth provided more than half of Ray’s
support (65%) and Diane, Karen, Mike, and Kenneth would have each been able
to claim a dependency exemption for Ray except for the fact that each did not
meet the support test (Milt and Henry fail the relationship test for qualifying
relative).
3. Diane, Karen, and Mike each provided over 10% of Ray’s support.
4. Diane, Karen, and Mike can claim the exemption, but the two parties who do not
claim it must provide a signed statement to the person claiming the exemption
stating that they will not claim an exemption for Ray. The person claiming the
exemption would attach a Form 2120 to his or her tax return indicating the
names, addresses, and social security numbers of the two who did not claim Ray
as a dependent.

c. Assume that under a multiple support agreement, Diane claims a dependency

exemption for Ray. Diane is single with no other dependents. What is her filing
status?

Single. Even though Diane can claim a dependency exemption for Ray, because
Diane did not provide more than half of Ray’s support, Ray is not a qualifying
person for purposes of determining head of household status for Diane.

43. [LO 3] Juan and Bonita are married and have two dependent children living at home.
This year, Juan is killed in an avalanche while skiing.
a. What is Bonita’s filing status this year?

Married filing jointly. For tax purposes, the couple is still considered married for
the year of the spouse’s death.

b. Assuming Bonita doesn’t remarry and still has two dependent children living at
home, what will her filing status be next year?

Qualifying widow. See the analysis below.

Qualifying widow test:

Test Bonita
Time Yes, within two years after the end of the year of the death of Juan
Unmarried Yes, Bonita has remained unmarried.
Dependents Yes, Bonita maintains a home for her two dependent children.
 c. Assuming Bonita doesn’t remarry and doesn’t have any dependents next year,
what will her filing status be next year?

Single. Because Bonita is not a qualifying widow and is not married, she must file
as a single taxpayer. See the analysis below.

Qualifying widow test:

Test Bonita
Time Yes, within two years after the end of the year of the death of Juan
Unmarried Yes, Bonita has remained unmarried.
Dependents No, Bonita does not maintain a home for any dependent children.

44. [LO 3] Gary and Lakesha were married on December 31 last year. They are now
preparing their taxes for the April 15 deadline and are unsure of their filing status.
a.What filing status options do Gary and Lakesha have for last year?

To be married for filing status purposes, taxpayers must be married at the end of
the year. Although Gary and Lakesha were married on the last day of the year, they
are still considered married for the entire year for filing purposes. Gary and
Lakesha may file as married filing jointly, or they may elect to file as married filing
separately.

b. Assume instead that Gary and Lakesha were married on January 1 of this year.
What is their filing status for last year (neither has been married before and neither
had any dependents last year)?

Single. Gary and Lakesha were not married at the end of the year; therefore they
must both file single.

45. [LO 3] Elroy, who is single, has taken over the care of his mother Irene in her old
age. Elroy pays the bills relating to Irene’s home. He also buys all her groceries and
provides the rest of her support. Irene has no gross income.
a.What is Elroy’s filing status?

Head of household. An unmarried taxpayer may qualify as head of household by

paying more than half the costs of maintaining a separate household that is the
principal place of abode for the taxpayer’s mother or father if the mother or father
also qualifies as a dependent of the taxpayer. Elroy pays more than half the costs of
maintaining Irene’s household. Furthermore, Irene qualifies as Elroy’s qualifying
relative as follows:

Test Irene
Relationship Yes. Irene is Elroy’s mother.
Age Not applicable to qualifying relative
Residence Not applicable to qualifying relative
 Support Yes. Elroy provides more than half of Irene’s support.
Gross income Yes, Irene’s gross income is less than the exemption amount.

b. Assume the original facts except that Elroy has taken over the care of his
grandmother, Renae, instead of his mother. What is Elroy’s filing status?

Single. To qualify as head of household, an unmarried taxpayer must pay more than
half the costs of keeping up a home for the year and must have lived with a
qualifying person in the taxpayer’s home for more than half the year (unless the
qualifying person is a mother or father and then special rules apply). Because Elroy
did not live in the same home for more than half the year, Renae is not a qualifying
person for purposes of determining whether Elroy qualifies as for the head of
household filing status. Consequently, Elroy will file as a single taxpayer.

c.Assume the original facts except that Elroy’s mother Irene lives with him and
receives an annual $5,700 taxable distribution from her retirement account. Elroy
still pays all the costs to maintain the household. What is his filing status?

Single. Although Elroy provides more than half the cost of maintaining a household
in which his mother lives, she does not qualify as his dependent. She is not Elroy’s
child (and she is older than him) and thus cannot be a qualifying child. Further, she
is not a qualifying relative, as analyzed below.
Test Irene
Relationship Yes. Irene is Elroy’s mother.
Age Not applicable to qualifying relative
Residence Not applicable to qualifying relative
Support Yes. Elroy provided more than half of Irene’s support.
Gross income No, Irene’s gross income of $5,700 is more than the exemption
amount.

46. [LO 3] Kano and his wife Hoshi have been married for 10 years and have two
children under the age of 12. The couple has been living apart for the last two years
and both children live with Kano. Kano has provided all the means necessary to
support himself and his children. Kano and Hoshi do not file a joint return.
a. What is Kano’s filing status?

Head of household. Kano provides more than half the cost of maintaining a home
that is the principal place of abode for a qualifying child. His two children are
qualifying children, as analyzed below.

Kano qualifies as an abandoned spouse, as analyzed below.

Test Kano
Married Yes, Kano is still married to Hoshi at the end of the year.
Separate Return Yes, Kano files a separate return from Hoshi.
Maintains Yes, Kano provides more than half the cost of maintaining his home
Home for a qualifying child (see following table).
Time Separated Yes, Kano has not lived with Hoshi for the last six months of the year.

Test Two Children

Relationship Yes, Kano’s children.
Age Yes, under age 19 at year end (and younger than Kano).
Residence Yes, both children lived with Kano for more than half of the year.
Support Yes, Kano provides more than half of their support.

b. Assume the original facts except that Kano and Hoshi separated in May of the
current year. What is Kano’s filing status?

Head of household, determined as follows:

Kano qualifies as an abandoned spouse, as analyzed below.

Test Kano
Married Yes, Kano is still married to Hoshi at the end of the year.
Separate Return Yes, Kano files a separate return from Hoshi.
Maintains Yes, Kano provides more than half the cost of maintaining his home
Home for a qualifying child (see following table).
Time Separated Yes, Kano has not lived with Hoshi for the last six months of the year.

Kano’s two children are qualifying children, as shown below.

Test Two Children

Relationship Yes, Kano’s children.
Age Yes, under age 19 at year end (and younger than Kano).
Residence Yes, both children lived with Kano for more than half of the year.
Support Yes, Kano provides more than half of their support.

Because Kano qualifies as an abandoned spouse, he can be treated as though he was

not married at the end of the year. This enables him to qualify for head of household
status because he is considered unmarried, and he provides more than half the cost of
maintaining a home which is the principal residence for a dependent qualifying child.

c. Assume the original facts except that Kano and Hoshi separated in November of
this year. What is Kano’s filing status?

Married filing separately. Kano does not qualify as head of household because he
does not qualify as an abandoned spouse, analyzed as follows.

Test Kano
Married Yes, Kano is still married to Hoshi at the end of the year.
Separate Return Yes, Kano files a separate return from Hoshi.
Maintains Yes, Kano provides more than half the cost of maintaining his home
Home for a qualifying child.
Time Separated No, Kano has not been separated from his spouse for the last six
months of the year.

d. Assume the original facts except that Kano’s parents, not Kano, paid more than
half of the cost of maintaining the home in which Kano and his children live.
What is Kano’s filing status?

Married filing separately. Kano does not meet the criteria for an abandoned spouse.
Consequently, he is still considered married. See the analysis below for abandoned
spouse requirements.

Test Kano
Married Yes, Kano is still married to Hoshi at the end of the year.
Separate Return Yes, Kano files a separate return from Hoshi.
Maintains No, Kano does not provide more than half the cost of maintaining his
Home home for a qualifying child. His parents provide this cost.
Time Separated Yes, Kano has not lived with Hoshi for the last six months of the year.

47. [LO 3] Horatio and Kelly were divorced at the end of last year. Neither Horatio nor
Kelly remarried during the current year and Horatio moved out of state. Determine
the filing status of Horatio and Kelly for the current year in the following independent
situations:
a. Horatio and Kelly did not have any children and neither reported any
dependents in the current year.

Horatio and Kelly will both file as single taxpayers.

b. Horatio and Kelly had one child Amy, who turned 10 years of age in the
current year. Amy lived with Kelly for all of the current year and Kelly
provided all of her support.

Horatio will file as a single taxpayer. Kelly will file as a head of household
because during the current year she paid more than half the costs of maintaining
a household for Amy (a qualified person), and Amy resided with her for more
than half the taxable year. Amy is a qualified person because she is a qualifying
child who qualifies as the taxpayer’s dependent (she meets the relationship, age,
residence, and support test).
c. Assume the same facts as in (b). but Kelly released the exemption for Amy to
Horatio even though Amy did not reside with him at all during the current
year.

Horatio will file as a single taxpayer. Even though he is allowed to claim the
exemption for Amy, she did not reside with him during the year, so he cannot meet
the head of household test. Kelly will file as head of household because during the
current year she paid more than half the costs of maintaining a household for
Amy (a qualified person) and Amy resided with her for more than half the taxable
year. Amy is a qualified person because Kelly is the custodial parent and she
would have been able to claim an exemption for Amy as a qualifying child (she
meets the relationship, age, residence, and support test) except for the fact that
she released the dependency exemption to Horatio.

d. Assume the original facts except that during the current year Madison a 17-
year-old friend of the family, lived with Kelly (for the entire year) and was
fully supported by Kelly.

Horatio would file as single. Kelly would also file as single. Even though Kelly
would be allowed to claim a dependency exemption for Madison as a qualifying
relative, Madison is not a qualifying person for purposes of the head of household
test because she only qualifies as a dependent to Kelly because she was a member
of Kelly’s household for the entire year. Madison does not have a qualifying
family relationship with Kelly.

e. Assume the original facts except that during the current year Kelly’s mother
Janet lived with Kelly. For the current year, Kelly was able to claim a
dependency exemption for her mother under a multiple support agreement.

Horatio would file as single. Kelly would also file as single. Even though Kelly
may claim a dependency exemption for Janet, Janet is not a qualifying person for
purposes of the head of household test because Janet qualifies as Kelly’s
dependent under a multiple support agreement.
48. [LO 2, LO 3] In each of the following independent situations, determine the
taxpayer’s filing status and the number of personal and dependency exemptions the
taxpayer is allowed to claim.
a. Frank is single and supports his 17-year-old brother, Bill. Bill earned $3,000
and did not live with Frank.

Single with two exemptions: one personal and one dependency exemption for
Bill.

Frank will file as single, not head of household. Bill is not a qualifying
person for purposes of the head of household test because Bill did not live as
member of Frank’s household for more than half the year.

Frank can claim an exemption for Bill because Bill qualifies as Frank’s
qualifying relative as follows:

Test Bill
Relationship Yes, Bill is taxpayer’s brother.
Age Not applicable to qualifying relative
Residence Not applicable to qualifying relative
Support Yes, more than half of Bill’s support is provided by Frank.
Gross income Yes, Bill’s gross income ($3,000) is less than the exemption
amount.

b. Geneva and her spouse reside with their son, Steve, who is a 20-year-old
undergraduate student at State University. Steve earned $13,100 at a part-
time summer job, but he deposited this money in a savings account for
graduate school. Geneva paid all of the $12,000 cost of supporting Steve.

Married filing jointly with two personal exemptions and one dependency
exemption for Steve. Steve meets the test to be Geneva and her husband’s
qualifying child as follows:

Test Steve
Relationship Yes, Steve is the taxpayers’ son.
Age Yes, under age 24 and a full-time student (and younger than
parents).
Residence Yes, temporary absences away at school count as time in the
 parents’ home
Support Yes, even though Steve earned $13,100, he did not use any of that
money to provide for his support. Steve’s parents provided more
than half (all, in fact) of his support for the year. A qualifying
child is not subject to the gross income test.

c. Hamish’s spouse died last year, and Hamish has not remarried. Hamish
supports his father Reggie, age 78, who lives in a nursing home and had
interest income this year of $2,500.

Head of household with two exemptions. Hamish is not a qualifying widower

because he does not maintain a household for a dependent child. However, he
does qualify for head of household because he is not married and he pays more
than half the cost of maintaining a separate household that is the principal place
of abode for his father, and his father also qualifies as his dependent (as a
qualifying relative) as follows:

Test Reggie
Relationship Yes, Reggie is Hamish’s father.
Age Not applicable to qualifying relative
Residence Not applicable to qualifying relative
Support Yes, Hamish provides more than half of Reggie’s support.
Gross income Yes, Reggie’s gross income of $2,500 is less than the exemption
amount.

Because Reggie is considered to be Hamish’s qualifying relative (and a qualifying person

for purposes of the head of household filing status), Hamish may also claim a
dependency exemption for Reggie.

d. Irene is married but has not seen her spouse since February. She supports her
spouse's 18-year-old child Dolores, who lives with Irene. Dolores earned
$4,500 this year.

Head of household with two exemptions. Irene qualifies for being treated as
unmarried for the year (abandoned spouse) as follows:
 Test Irene
Married Yes, Irene is still married at the end of the year.
Separate Return Yes, Irene files a separate return from her spouse.
Maintains Yes, Irene provides more than half the cost of maintaining a home for
Home a qualifying child.
Time Separated Yes, Irene has not lived with her spouse for the last six months of the
year.

Because she is treated as though she were unmarried, she may file as head of
household because she pays more than half the costs (for more than half the
taxable year) of maintaining a household that is the principal place of abode for a
dependent who is her qualifying child. Dolores is Irene’s qualifying child, as
determined below:

Test Dolores
Relationship Yes, Dolores is the taxpayer’s stepchild.
Age Yes, under age 19 (and younger than Irene)
Residence Yes, Dolores lived with taxpayer for more than half of the year.
Support Yes, Dolores did not provide more than half of her own support.

Irene may claim one personal exemption for herself and one dependency exemption
for Dolores.

e. Assume the same facts as in part (d). Also, assume that Craig is Irene’s husband.
Craig supports his 12-year-old son Ethan, who lives with Craig. Ethan did not
earn any income.
Head of household with two exemptions. Craig qualifies for being treated as
unmarried (abandoned spouse rules) as follows:

Test Craig
Married Yes, Craig is still married at the end of the year.
Separate Return Yes, Craig files a separate return from his spouse.
Maintains Yes, Craig provides more than half the cost of maintaining a home
Home for a qualifying child.
Time Separated Yes, Craig has not lived with his spouse for the last six months of the
year.

Because he is treated as though he were unmarried, he may file as head of

household because he pays more than half the costs (for more than half the taxable
year) of maintaining a household that is the principal place of abode for a
 dependent who is his qualifying child. Ethan is Craig’s qualifying child, as
determined below:

Test Ethan
Relationship Yes, Ethan is the taxpayers’ child.
Age Yes, under age 19 (and younger than Craig)
Residence Yes, Ethan lived with taxpayer for more than half of the year.
Support Yes, Ethan did not provide more than half of his own support.

Craig may claim one personal exemption for himself and one dependency
exemption for Ethan. Note that both Irene in part (d) and Craig may claim head
of household filing status because they both qualify to be treated as unmarried for
filing status purposes.

49. [LO 2, LO 3] In each of the following independent cases, determine the taxpayer’s
filing status and the number of personal and dependency exemptions the taxpayer is
allowed to claim.
a. Alexandra is a blind widow (spouse died five years ago) who provides a
home for her 18-year-old nephew, Newt. Newt’s parents are dead, and so
Newt supports himself. Newt’s gross income is $5,000.

Alexandra will file single with one personal exemption. Alexandra is single and
does not qualify for head of household because she does not provide more than
half the costs of maintaining a home for a dependent child or qualifying relative
because Newt is neither a qualifying child (he provides more than half his own
support) nor a qualifying relative. See the analysis below.

Test Qualifying Child Test for Newt

Relationship Yes, Newt is a descendant of Alexandra’s sibling.
Age Yes, under age 19 (and younger than Alexandra)
Residence Yes, Newt lived with Alexandra for more than half of the year.
Support No, Newt provides more than half his own support.

Test Qualifying Relative Test for Newt

Relationship Yes, Newt is the taxpayer’s nephew.
Age Not applicable to qualifying relative.
Residence Not applicable to qualifying relative.
Support No, Alexandra does not provide more than half of Newt’s support.
Gross income No. Newt’s gross income of $5,000 exceeds the exemption
amount.

b. Bharati supports and maintains a home for her daughter, Daru, and son-in-
law, Sam. Sam earned $15,000 and filed a joint return with Daru, who had no
income.

Single with one personal exemption. Bharati may not claim Daru and Sam as
dependents because they file a joint return. Couples filing a joint return may still
qualify as dependents if neither would have a tax liability if they had filed
separately (Rev. Rul. 54-567 and Rev. Rul. 65-34). Sam would have had a tax
liability if he had filed a separate return. Because Bharati does not have any
dependents, Bharati does not qualify for head of household status.

c. Charlie intended to file a joint return with his spouse, Sally. However, Sally
died in December. Charlie has not remarried.

Married filing jointly with two personal exemptions. A taxpayer is still considered
to be married for the year in which his spouse died. Because there are two
taxpayers on a joint return, Charlie is allowed two personal exemptions
[§152(b)].

d. Deshi cannot convince his spouse to consent to signing a joint return. The
couple has not separated.

Married filing separately with one personal exemption. Both spouses must
consent to file a joint return.

e. Edith and her spouse support their 35-year-old son, Slim. Slim is a full-time
college student who earned $5,500 over the summer in part-time work.
 Married filing jointly with two personal exemptions. They get one personal
exemption each, but Slim does not qualify as their dependent. He is neither their
qualifying child nor their qualifying relative. See the following analysis.

Test Slim—Qualifying child

Relationship Yes, Slim is the taxpayers’ son.
Age No, not under age 24 and attending school full-time.
Residence Yes, temporary absences away at school count as time in the
parents’ home
Support Yes, Slim did not provide more than half of his own support.
Test Slim—Qualifying relative
Relationship Yes, Slim is the taxpayer’s son.
Age Not applicable to qualifying relative
Residence Not applicable to qualifying relative
Support Yes, more than half of the Slim’s support is provided by the
taxpayer.
Gross income No, Slim’s gross income ($5,500) is more than the exemption
amount.

50. [LO 3] Jasper and Crewella Dahvill were married in year 0. They filed joint tax
returns in years 1 and 2. In year 3, their relationship was strained and Jasper insisted
on filing a separate tax return. In year 4, the couple divorced. Both Jasper and
Crewella filed single tax returns in year 4. In year 5, the IRS audited the couple’s
joint year 2 tax return and each spouse’s separate year 3 tax returns. The IRS
determined that the year 2 joint return and Crewella’s separate year 3 tax return
understated Crewella’s self-employment income, causing the joint return year 2 tax
liability to be understated by $4,000 and Crewella’s year 3 separate return tax liability
to be understated by $6,000. The IRS also assessed penalties and interest on both of
these tax returns. Try as it might, the IRS has not been able to locate Crewella, but
they have been able to find Jasper.
a. What amount of tax can the IRS require Jasper to pay for the Dahvill’s year 2
joint return? Explain.

Because Jasper is jointly and severally liable for the year 2 return, he is
responsible to pay the entire $4,000.

b. What amount of tax can the IRS require Jasper to pay for Crewella’s year 3
separate tax return? Explain.
 Because they filed separately in year 3, Jasper is not responsible for any of the
$6,000.

51. [LO 3] {Research} Janice Traylor is single. She has an 18-year-old son named Marty.
Marty is Janice’s only child. Marty has lived with Janice his entire life. However,
Marty recently joined the Marines and was sent on a special assignment to Australia.
During the current year, Marty spent nine months in Australia. Marty was extremely
homesick while in Australia, since he had never lived away from home. However,
Marty knew this assignment was only temporary, and he couldn’t wait to come home
and find his room just the way he left it. Janice has always filed as head of household,
and Marty has always been considered a qualifying child (and he continues to meet
all the tests with the possible exception of the residence test due to his stay in
Australia). However, this year Janice is unsure whether she qualifies as head of
household due to Marty’s nine-month absence during the year. Janice has come to
you for advice on whether she qualifies for head of household filing status. What do
you tell her?

To qualify for head of household status a taxpayer must maintain a residence that is
the principal place of abode for more than one-half of the taxable year of a qualifying
child. The issue here is whether Marty’s nine-month military stay in Australia
disqualifies Janice from head of household status. Reg. §1.2-2(c)(1) states that
temporary absences of a qualifying child from the household due to special
circumstances does not preclude taxpayers from qualifying for head of household
status. Military service is one of the special circumstances described in the
regulation. However, this regulation indicates that it must be reasonable to assume
that the qualifying child will return to the household after the absence and that the
taxpayer (head of household) maintains the household in anticipation of the return of
the qualifying child. Because Marty will be returning to his home (or at least intends
to), Janice can file as head of household status.

52. [LO 3] {Research} Doug Jones submitted his 2017 tax return on time and elected to
file a joint tax return with his wife, Darlene. Doug and Darlene did not request an
extension for their 2017 tax return. Doug and Darlene owed and paid the IRS
$124,000 for their 2017 tax year. Two years later, Doug amended his return and
claimed married filing separate status. By changing his filing status, Doug sought a
refund for an overpayment for the tax year 2017 (he paid more tax in the original joint
return than he owed on a separate return). Is Doug allowed to change his filing status
for the 2017 tax year and receive a tax refund with his amended return?

No, he is not allowed to change his filing status by amending his return. Reg.
§1.6013-1(a) states that “for any taxable year with respect to which a joint return has
been filed, separate returns shall not be made by the spouses after the time for filing
the return of either has expired.” In this case, Doug amended the return and changed
 his filing status two years later. Because the due date of the original return has
passed, Doug is not allowed to change his filing status.

Comprehensive Problems
53. {Tax Forms} Marc and Michelle are married and earned salaries this year of $64,000
and $12,000, respectively. In addition to their salaries, they received interest of $350
from municipal bonds and $500 from corporate bonds. Marc and Michelle also paid
$2,500 of qualifying moving expenses, and Marc paid alimony to a prior spouse in
the amount of $1,500. Marc and Michelle have a 10-year-old son, Matthew, who
lived with them throughout the entire year. Thus, Marc and Michelle are allowed to
claim a $1,000 child tax credit for Matthew. Marc and Michelle paid $6,000 of
expenditures that qualify as itemized deductions and they had a total of $5,500 in
federal income taxes withheld from their paychecks during the course of the year.
a. What is Marc and Michelle’s gross income?

$76,500. See analysis below.

b. What is Marc and Michelle’s adjusted gross income?

$72,500. See analysis below.

c. What is the total amount of Marc and Michelle’s deductions from AGI?

$24,850. See analysis below.

d. What is Marc and Michelle’s taxable income?

$47,650. See analysis below.

e. What is Marc and Michelle’s taxes payable or refund due for the year (use the tax
rate schedules)?

$285 tax refund. See analysis below.

Description Amount Computation

(1) Gross income 76,500 $64,000 salary + $12,000 salary + $500
corporate bond interest
(2) For AGI deductions 4,000 2,500 qualified moving expenses + 1,500
alimony paid
(3) Adjusted gross income 72,500 (1) – (2)
(4) Standard deduction 12,700 Married filing jointly
(5) Itemized deductions 6,000
(6) Greater of standard
deduction or itemized 12,700 (4) > (5)
deductions
(7) Personal and 12,150 4,050 × 3 (two personal exemptions and
dependency exemptions one dependency exemption)

(8) Total deductions from 24,850 (6) + (7)

AGI
(9) Taxable income $47,650 (3) - (8)
(10) Income tax liability $6,215 (47,650 – 18,650) × 15% + 1,865 (see
tax rate schedule for married filing
jointly).
(11) Other taxes 0
(12) Total tax $6,215 (10) + (11)
(13) Credits (1,000) Child credit for 10-year old son Matthew
(14) Prepayments (5,500)
Taxes (refund) with return ($285) (12) + (13)+ (14)

f. Complete the first two pages of Marc and Michelle’s Form 1040 (use the most
recent forms available).
54. {Tax Forms} Demarco and Janine Jackson have been married for 20 years and have
four children who qualify as their dependents (Damarcus, Janine, Michael, and
Candice). The couple received salary income of $100,000 and they sold their home
this year. They initially purchased the home three years ago for $200,000 and they
sold it for $250,000. The gain on the sale qualified for the exclusion from the sale of a
principal residence. The Jacksons incurred $16,500 of itemized deductions and they
had $6,250 withheld from their paychecks for federal taxes. They are also allowed to
claim a child tax credit for each of their children.
a. What is the Jacksons’ taxable income and what is their tax liability or (refund)?

$59,200 taxable income and $2,302.50 refund. See analysis below.

Description Amount Computation

(1) Gross income 100,000 Salary income. Gain
home sale of $50,000 is
excluded.

(2) For AGI deductions 0

(3) Adjusted gross income $100,000 (1) – (2)

(4) Standard deduction 12,700 Married filing jointly;

(5) Itemized deductions 16,500

(6) Greater of standard deduction or 16,500 Greater of (4) or (5)

itemized deductions
(7) Personal and dependency exemptions 24,300 6 exemptions × 4,050
exemption amount
(8) Total deductions from AGI 40,800 (6) + (7)
(9) Taxable income $59,200 (3) – (8)
(10) Income tax liability $7,947.50 (59,200 – 18,650) ×
15% + 1,865 (see tax
rate schedule for
married filing jointly).
(11) Other taxes 0
(12) Total tax $7,947.50 (10) + (11)
(13) Credits (4,000) Child credits for four
children (4 ×$1,000)
(14) Prepayments (6,250)
Tax (refund) with return ($2,302.5) (12) + (13) + (14)

b. Complete the first two pages of the Jacksons’ Form 1040 (use most recent forms
available).
c. What would their taxable income be if their itemized deductions totaled $6,000
instead of $16,500?

$63,000. See analysis below.

 Description Amount Computation

(1) Gross income 100,000 Salary. All gain from

home sale is excluded
from gross income.
(2) For AGI deductions 0
(3) Adjusted gross income $100,000 (1) – (2)
(4) Standard deduction 12,700 Married filing jointly
(5) Itemized deductions 6,000
(6) Greater of standard deduction or 12,700 Greater of (4) or (5)
itemized deductions

(7) Personal and dependency exemptions 24,300 6 exemptions × 4,050

exemption amount
(8) Total deductions from AGI 37,000 (6) + (7)
Taxable income $63,000 (3) – (8)

d. What would their taxable income be if they had $0 itemized deductions and $6,000
of for AGI deductions?

$57,000. See analysis below.

Description Amount Computation

(1) Gross income 100,000 $100,000 salary
(2) For AGI deductions 6,000
(3) Adjusted gross income $94,000 (1) – (2)
(4) Standard deduction 12,700 Married filing jointly
(5) Itemized deductions 0
(6) Greater of standard deduction or 12,700 Greater of (4) or (5)
itemized deductions
(7) Personal and dependency exemptions 24,300 6 exemptions × 4,050
exemption amount
(8) Total deductions from AGI 37,000 (6) + (7)
Taxable income $57,000 (3) – (8)

Note that if the $6,000 expense is a for AGI deduction, the Jacksons are able to
deduct all of the expense, but if it is a from AGI deduction and they are not able to
itemize deductions, they don’t get to deduct any of it.

e. Assume the original facts but now suppose they also incurred a loss of $5,000 on
the sale of some of their investment assets. What effect does the $5,000 loss have on
their taxable income?

Individual taxpayers’ deductible losses on the disposition of investment (capital)

assets is limited to $3,000. The Jacksons would be allowed to deduct $3,000 of the
$5,000 loss against their taxable income. The remaining $2,000 loss would carry
 over to next year. Consequently, with the loss, their taxable income would be $56,200
($59,200 from part a minus $3,000).

f. Assume the original facts but now suppose the Jacksons own investments that
appreciated by $10,000 during the year. The Jacksons believe the investments will
continue to appreciate, so they did not sell the investments during this year. What is
the Jacksons’ taxable income?

Same as it is in part (a) $59,200. Though the assets have appreciated, they will not
realize or recognize this gain for income tax purposes until they sell their investment
assets, at which time they will increase their gross income (and corresponding
taxable income) by the gain.

55. Camille Sikorski was divorced last year. She currently owns and provides a home for
her 15-year-old daughter, Kaly, and 18-year-old son, Parker. Both children lived in
Camille’s home for the entire year and Camille paid for all the costs of maintaining
the home. She received a salary of $105,000 and contributed $6,000 of it to a
qualified retirement account (a for AGI deduction). She also received $10,000 of
alimony from her former husband. Finally, Camille paid $5,000 of expenditures that
qualified as itemized deductions.
a. What is Camille’s taxable income?

$87,500. See analysis below.

Description Amount Computation

(1) Gross income 115,000 105,000 salary + 10,000 alimony
(2) For AGI deductions 6,000 Qualified retirement contribution
(3) Adjusted gross income $109,000 (1) - (2)
(4) Standard deduction 9,350 Head of household see analysis
below.
(5) Itemized deductions 5,000
(6) Greater of standard deduction 9,350 (4) > (5)
or itemized deductions
(7) Personal and dependency 12,150 4,050 × 3 (One personal
exemptions exemption and two dependency
exemptions. See analysis below.)
(8) Total deductions from AGI 21,500 (6)+(7)
Taxable income $87,500 (3) - (8)

Test Kaly and Parker—Qualifying child tests

Relationship Yes, taxpayer is their mother.
Age Yes, both children are under age 19 (and younger than their
mother).
Residence Yes, both children lived with taxpayer for more than half of the
year.
Support Yes, neither child provided more than half of their own support.
 Camille may file as head of household because she is unmarried at the end of the year
and she pays more than half the cost of maintaining a home that is the principal place
of abode for a qualifying child.

b. What would Camille’s taxable income be if she incurred $14,000 of itemized

deductions instead of $5,000?

$82,850. See analysis below.

Description Amount Computation

(1) Gross income 115,000 105,000 salary + 10,000
alimony
(2) For AGI deductions 6,000 Qualified retirement
contribution
(3) Adjusted gross income $109,000 (1) – (2)
(4) Standard deduction 9,350 Head of household see
analysis below.
(5) Itemized deductions 14,000
(6) Greater of standard deduction or 14,000 (5) > (4)
itemized deductions
(7) Personal and dependency 12,150 4,050 × 3 (One personal
exemptions exemption and two
dependency exemptions. See
analysis below.)

(8) Total deductions from AGI 26,150 (6) + (7)

Taxable income $82,850 (3) – (8)

Test Kaly and Parker

Relationship Yes, taxpayer is their mother.
Age Yes, both children are under age 19 (and younger than their
mother).
Residence Yes, both children lived with taxpayer for more than half of the
year.
Support Yes, neither child provided more than half of their own support.

Camille may file as head of household because she is unmarried at the end of the year
and she pays more than half the cost of maintaining a home that is the principal place
of abode for a qualifying child.

c. Assume the original facts but now suppose that Camille’s daughter, Kaly, is 25
years old and a full-time student. Kaly’s gross income for the year was $5,000. Kaly
provided $3,000 of her own support and Camille provided $5,000 of support. What is
Camille’s taxable income?
 $91,550. See analysis below.

Description Amount Computation

(1) Gross income 115,000 105,000 salary + 10,000
alimony
(2) For AGI deductions 6,000 Qualified retirement
contribution
(3) Adjusted gross income $109,000 (1) – (2)
(4) Standard deduction 9,350 Head of household, see
analysis below.
(5) Itemized deductions 5,000
(6) Greater of standard deduction or 9,350 (4) > (5)
itemized deductions
(7) Personal and dependency 8,100 4,050 × 2 (One personal
exemptions exemption and one
dependency exemption. See
analysis below.)

(8) Total deductions from AGI 17,450 (6) + (7)

Taxable income $91,550 (3) – (8)

Parker is still a qualifying child (see analysis in previous solution), but Kaly is no longer
a qualifying child, nor a qualifying relative, as analyzed below.

Test Kaly—Qualifying child

Relationship Yes, taxpayer is Kaly’s mother.
Age No, not under age 24 and attending school full-time (and younger
than her mother)
Residence Yes, temporary absences away at school count as time in the
parents’ home.
Support Yes, Kaly did not provide more than half of her own support.

Test Kaly—Qualifying relative

Relationship Yes, taxpayer is Kaly’s mother.
Age Not applicable to qualifying relative
Residence Not applicable to qualifying relative
Support Yes, more than half of the Kaly’s support is provided by the
taxpayer.
Gross income No, Kaly’s gross income ($5,000) is more than the exemption
amount.
 Camille may still file as head of household because she is unmarried at the end of the
year and she pays more than half the cost of maintaining a home that is the principal
place of abode for a child (Parker) whom she can claim as a dependent.

56. Tiffany is unmarried and has a 15-year-old qualifying child. Tiffany has determined
her tax liability to be $3,525, and her employer has withheld $1,500 of federal taxes
from her paycheck. Tiffany is allowed to claim a $1,000 child tax credit for her
qualifying child. What amount of taxes will Tiffany owe (or what amount will she
receive as a refund) when she files her tax return?

$1,025 taxes payable. See analysis below.

Description Amount Computation

(1) Income tax liability $3,525
(2) Other taxes 0
(3) Total tax $3,525 (1) + (2)
(4) Credits (1,000) Child tax credit for
qualifying child under 17
years old at year end
(5) Prepayments (1,500)
Tax due with return $1,025 (3) + (4) + (5)