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Required: 1, 3, 4, 11, 23, 25, 28, 31, 37, 45, 51 Recommended: 18, 19, 29, 46, 52

DISCUSSION QUESTIONS 1. c. b. = d. g. = f. e. h. = a. Figure 3.1

3.

Inclusions in gross income include items b., c., d., g., and h. Item e. is a nontaxable return of capital. Items b. and g. are taxable payments for services rendered. Item a. has no tax consequences. p. 3-3 and Exhibit 3.2 Exclusions include items a., b. (personal injury portion), d. (presuming no interest is charged), e., g. (tuition portion), and i. Exhibits 3.1 and 3.2

4.

11.

a. b. c.

Heather is a qualifying child to all three parties. As the parent, the mother takes precedence. If the mother waives, the exemption goes to whoever has the highest AGI as between the grandmother and the uncle. The father should not be an eligible party due to the abode test. (Note: As the facts do not indicate otherwise, it is assumed that Heathers parents are not divorced). Head of household filing status is not available since neither parent qualifies as a dependent. Head of household filing status is available since the son is a dependent under the qualifying child category. Head of household filing status is not available. Due to the age test, the son is not a qualifying child. (It is assumed that the son is not disabled or a full-time student.) Due to the gross income test, the son does not satisfy the requirements of a qualifying relative. Head of household filing status is not available. The daughter is not a member of taxpayers household. Head of household status is not available because the friend, although a dependent, does not meet the relationship test.

18.

a. b. c.

d. e.

pp. 3-20 and 3-21 19. a. Head of household filing status is not available.

b. c. d.

Head of household filing status is not available. Head of household filing status is available. In c., Florence qualifies as a surviving spouse. She does not in a. and b. because Derrick is not her dependent.

pp. 3-20 and 3-21 23. Gain on the sale of the stock is a short-term capital gain and is taxed at ordinary income rates. The gain on the sale of the land and houseboat should be combined. As long-term capital gain, the total is subject to tax at preferential rates15% or 0%. The loss is personal and, therefore, nondeductible a. The short-term capital loss is first offset against the long-term capital gain from the gun collection. This has the effect of preserving more of the long-term capital gain from the sale of the land. Because the long-term capital gain from collectibles is taxed at a maximum of 28% while regular long-term capital gains are taxed at a lower 15%, the offset sequence followed in part a. favors taxpayers.

25.

b.

PROBLEMS 28. a. AGI Less: Itemized deductions Personal and dependency exemptions (5 $3,650) Taxable income AGI Less: Standard deduction (head of household) Personal and dependency exemptions (5 $3,650) Taxable income AGI Less: Itemized deductions Personal and dependency exemptions (4 $3,650) Taxable income AGI Less: Standard deduction (surviving spouse) Personal and dependency exemptions (5 $3,650) Taxable income AGI Less: Itemized deductions Personal and dependency exemptions (2 $3,650) Taxable income $65,000 (12,000) (18,250) $34,750 $80,000 (8,400) (18,250) $53,350 $75,000 (9,500) (14,600) $50,900 $58,000 (11,400) (18,250) $28,350 $64,000 (9,900) (7,300) $46,800

b.

c.

d.

e.

pp. 3-8, 3-9, and Table 3.1

29.

Salary Alimony paid Capital loss IRA contribution AGI Standard deduction Personal and dependency exemptions (1 $3,650) Taxable income

$90,000 (3,600) (2,000) (5,000) $79,400 (5,700) (3,650) $70,050

The alimony payments are deductible. The gift and bond interest are nontaxable exclusions. The $2,000 of the capital loss is deductible. Gambling losses are not deductible. Cousins do not meet the relationship test. pp. 3-5, 3-6, 3-31, Figure 3.1, Exhibits 3.1 and 3.2, and Table 3.1 31. a. b. c. d. e. $5,700. Although $6,000 (earned income) + $300 = $6,300, the amount allowed cannot exceed that available in 2010 for single taxpayers. $3,900. $3,600 (earned income) + $300. $1,000. The greater of $950 or $700 (earned income) + $300. $950. The greater of $950 or $600 (earned income) + $300. $4,700. $3,000 (earned income) + $300 + $1,400 (additional standard deduction).

pp. 3-9, 3-10, Tables 3.1 and 3.2, and Examples 8 to 11 36. a. b. Jenny is a qualifying child as to all three parties. Therefore, the father, uncle, and grandmother are eligible to claim him as a dependent. In this tie-breaker situation, the father (as parent) will take preference. If the father forgoes the exemption, the grandmother is next in order of preference, due to a higher AGI.

p. 3-12 and Table 3.4 37. a. Three. As a niece, Ida is a qualifying child. Under the qualifying child category, Ida does not have to meet the gross income test. In this regard, her age and student status does make a difference. One. Since Clint is not a qualifying child, the gross income test applies. Three. The parents need not live with Trent as they meet the relationship test. Though not stated, it is assumed that the gross income test is satisfied. One. Carol can claim a personal exemption. Because of Form 8332, the dependency exemptions for the children belong to Jack.

b. c. d.

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

45.

a. b.

Sam and Lana must file since their gross income of $21,000 is more than the $20,900 filing requirement. Ronald is not required to file. Although he can be claimed as a dependent on his parents return, his earned income and gross income is less than his standard deduction. Mike need not file since his gross income of $10,100 is less than the $10,750 filing requirement. Patricia is required to file. Her gross income is less than $9,350, but her net earnings from self-employment are more than $400. Taxpayers in a. and c. should file, even if a return is not required, to obtain a refund if any income tax was withheld.

c. d.

p. 3-22 and Table 3.5 46. a. b. Ben need not file a tax return. He is claimed on his parents return, has earned income only, and gross income is less than the standard deduction. Anita must file a tax return since she is claimed on her parents return and has unearned income greater then $950. Anitas unearned income is less than the amount required to trigger a tax at her parents rate. Furthermore, her parents cannot make the parental election because Anitas unearned income is not over $1,900. Earl must file a tax return since he is claimed on his parents return and has both earned plus unearned income and gross income of more than the larger of $950 or the sum of earned income plus $300. Ellen must file a tax return since she has net self-employment earnings of $400 or more.

c.

d.

51.

a.

Ophelia has the following results: LTCG (land) STCL (ADM) STCG (boat and trailer) Loss on camper (nondeductible)

$3,000 (1,000) 2,000 0

Thus, she has a net LTCG of $3,000 and a net STCG of $1,000. Her tax is $800 [($3,000 15%) + ($1,000 35%)]. b. p. 3-31 52. a. Chester has a collectible gain of $6,000, a LTCG of $2,000, and a STCL of $4,000. Offsetting the STCL against the collectible gain leaves: $2,000 collectible gain and $2,000 LTCG. The tax liability is $860 [($2,000 28%) + ($2,000 15%). $150 [($3,000 0%) + ($1,000 15%)].

b.

$300 [($2,000 15%) + ($2,000 0%)].