Amy, age 19 and single, has $8,050 of wages, $800 of interest, and $350 of self-employment income.

Chapter 2

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PROBLEMS

I: 2-29

Computation of Tax.

The following information relates to two married couples:

Lanes Waynes

Salary (earned by one spouse) $32,000 $115,000

Interest income 1,000 10,000

Deductible IRA contribution 5,000 0

Itemized deductions 15,000 15,000

Exemptions 7,300 7,300

Withholding 700 18,700

Compute the 2009 tax due or refund due for each couple. Assume that the itemized deductions have been reduced by the applicable floors.

Lanes Taxable Income: 32,000 + 1,000 – 5,000 – 15000 – 7,300 = 5,700

Lanes Tax: 573.00

Refund: 700 – 573 = 127.00

Wayne’s Taxable Income: 11,500 + 10,000 – 0 – 15,000 – 7,300= 102,700

Wayne’s Tax: 102,700 x 0.25 – 7,625=

18,050

Refund: 18,700 – 18,050= 650.00

I: 2-30

Computation of Taxable Income.

The following information for 2009 relates to Tom, a single taxpayer, age 18:

Salary $1,800

Interest income 1,600

Itemized deductions 600

a. Compute Tom’s taxable income assuming he is self-supporting.

Gross Income = 3,400

Minus Itemized deductions (600)

Minus personal exemption (3,650)

Taxable Income = ($850)

b. Compute Tom’s taxable income assuming he is a dependent of his parents.

Gross Income = 3,400

Minus Itemized deductions (600)

Taxable Income = $2,800

I: 2-31

Joint versus Separate Returns.

Carl and Carol have salaries of $14,000 and $22,000, respectively. Their itemized deductions total $6,000. They are married and both are under age 65.

a. Compute their taxable income assuming they file jointly.

b. Compute their taxable incomes assuming they file separate returns and that Carol claims all of the itemized deductions.

I: 2-32

Joint versus Separate Returns.

Hal attended school much of 2009, during which time he was supported by his parents. Hal married Ruth in December 2009. Hal graduated and commenced work in 2010. Ruth worked during 2009 and earned $18,000. Hal’s only income was $1,100 of interest. Hal’s parents are in the 28% tax bracket. Thus, claiming Hal as a dependent would save them $1,022 (0.28 X $3,650) of taxes.

a. Compute Hal and Ruth’s gross tax if they file a joint return.

b. Compute Ruth’s gross tax if she files a separate return in order to allow Hal’s parents to claim him as a dependent.

c. Which alternative would be better for the family? In other words, will filing a joint return save Hal and Ruth more than $1,022?

I: 2-33

Dependency Exemptions.

Wes and Tina are a married couple and provide financial assistance to several persons during the current year. For the situations below, determine whether the individuals qualify as dependency exemptions for Wes and Tina. In all of the situations below, assume that any dependency tests not mentioned have been met.

a. Brian is age 24 and Wes and Tina’s son. He is a full-time student and lives in an apartment near campus. Wes and Tina provide over 50% of his support. Brian works as a waiter and earned $3,800.

b. Same as Part a except that Brian is a part-time student

c. Sherry is age 22 and Wes and Tina’s daughter. She is a full-time student and lives in the dormitory. Wes and Tina provide over 50% of her support. Sherry works part time as a bookkeeper and earned $3,800.

d. Same as Part c except that Sherry is a part-time student.

e. Granny, age 82, is Tina’s grandmother and lives with Wes and Tina. During the current year, Granny’s only sources of income were her Social Security of $4,800 and interest on U.S. bonds of $3,800. Granny uses her income to pay for 40% of her total support; Wes and Tina provide the remainder of Granny’s support.

I: 2-35

Dependency Exemptions.

Robert provides much of the support for his daughter, Jane, and her two children. Jane earned $20,000. Robert, whose AGI is $350,000, paid the rent of $11,000 on Jane’s apartment and provided an additional $15,000 support. Jane is age 30, and her children are age 7 and age 4.

a. Can Robert claim a dependency exemption for Jane? No.

b. Can Jane claim her children as dependents? Yes.

c. Would you recommend that Robert try to claim the dependency exemption for his grandchildren? Yes.

I: 2-37

Dependency Exemptions.

Anna, age 65, who lives with her unmarried son, Mario, received $7,000, which was used for her support during the year. The sources of support were as follows:

Social Security benefits $1,500

Mario 2,600

Caroline, an unrelated friend 800

Doug, Anna’s son 500

Elaine, Anna’s sister 1,600

Total $7,000

a. Who is eligible to claim Anna as a dependent?

b. What must be done before Mario can claim the exemption?

c. Can anyone claim head-of-household status based on Anna’s dependency exemption? Explain.

d. Can Mario claim an old age allowance for his mother? Explain.

I: 2-38

Dependency Exemption and Child Credit: Divorced Parents.

Joe and Joan divorce during the current year. Joan receives custody of their three children. Joe agrees to pay $5,000 of child support for each child.

a. Assuming no written agreement, who will receive the dependency exemption and child credit for the children? Explain.

b. Would it make any difference if Joe could prove that he provided over one-half of the support for each child?

I: 2-42

Marriage and Taxes.

Bill and Mary plan to marry in December 2009. Bill’s salary is $32,000 and he owns his own residence. His itemized deductions total $12,000. Mary’s salary is $39,000. Her itemized deductions total only $1,600 as she does not own her own residence. For purposes of this problem, assume 2010 tax rates, exemptions, and standard deductions are the same as 2009.

a. What will their tax be if they marry before year-end and file a joint return? 12,000

b. What will their combined taxes be for the year if they delay the marriage until 2010? 13,600

c. What factors contribute to the difference in taxes? Itemized Deductions

I: 2-43

Filing Requirement.

Which of the following taxpayers must file a 2009 return?

a. Amy, age 19 and single, has $8,050 of wages, $800 of interest, and $350 of self employment income.

b. Betty, age 67 and single, has a taxable pension of $9,100 and Social Security benefits of $6,200.

c. Chris, age 15 and single, is a dependent of his parents. Chris has earned income of $1,600 and interest of $400.

d. Dawn, age 15 and single, is a dependent of her parents. She has earned income of $400 and interest of $1,600.

e. Doug, age 25, and his wife are separated. He earned $5,000 while attending school during the year.

I: 2-46

Computation of Taxable Income.

Jim and Pat are married and file jointly. In 2009, Jim earned a salary of $46,000. Pat is self-employed. Her gross business income was $49,000 and her business expenses totaled $24,000. Each contributed $5,000 to a deductible IRA. Their itemized deductions total $13,000. Compute Parts a, b, and c without regard to self employment tax.

a. Compute their gross income.

b. Compute their adjusted gross income.

c. Compute their taxable income assuming they have a dependent daughter.

I: 2-55

Computation of Tax.

Maria is a single taxpayer. Her salary is $51,000. Maria realized a short term capital loss of $5,000. Her itemized deductions total $4,000.

a. Compute Maria’s adjusted gross income.

b. Compute her taxable income.

c. . Compute her tax liability.

CASE STUDY PROBLEMS

I: 2-63

Bala and Ann purchased as investments three identical parcels of land over a several-year period. Two years ago they gave one parcel to their daughter, Kim, who is now age 16. They have an offer from an investor who is interested in acquiring all three parcels. The buyer is able to purchase only two of the parcels now, but wants to purchase the third parcel two or three years from now, when he expects to have available funds to acquire the property. Because they paid different prices for the parcels, the sales will result in different amounts of gains and losses. The sale of one parcel owned by Bala and Ann will result in a $20,000 gain and the sale of the other parcel will result in a $28,000 loss. The sale of the parcel owned by Kim will result in a $19,000 gain. Kim has no other income and does not expect any significant income for several years. Bala and Ann, however, are in the 35% tax bracket. They do not have any other capital gains this year. Which two properties would you recommend that they sell this year? Why?