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taxation of individuals

Questions and Answers of Taxation of Individuals

How do the tax consequences of being an employee differ from those of being self-employed?
What are the primary factors to consider when deciding whether a worker should be considered an employee or a self-employed taxpayer for tax purposes?
When a taxpayer works as an employee and as a self-employed independent contractor during the year, how does the taxpayer determine her employment and self-employment taxes payable?
Compare and contrast an employee’s FICA tax payment responsibilities with those of a self-employed taxpayer.
Bobbie works as an employee for Altron Corp. for the first half of the year and for Betel Inc. for the rest of the year. She is relatively well paid. What FICA tax issues is she likely to encounter?
Are an employee’s entire wages subject to the FICA tax? Explain.
Lee is single and he runs his own business. He uses the cash method of accounting to determine his business income. Near the end of the year, Lee performed work that he needs to bill a client for.
What is the difference between the tentative minimum tax (TMT) and the AMT?
Is it possible for a taxpayer who pays AMT to have a marginal tax rate higher than the stated AMT rate? Explain.
How do the AMT tax rates compare to the regular income tax rates?
Describe what the AMT exemption is and who is and isn’t allowed to deduct the exemption. How is it similar to the standard deduction and how is it dissimilar?
The starting point for computing alternative minimum taxable income is regular taxable income. What are some of the plus adjustments, plus or minus adjustments, and minus adjustments to regular
Do taxpayers always add back the standard deduction when computing alternative minimum taxable income? Explain.
Describe, in general terms, why Congress implemented the AMT.
In very general terms, how is the alternative minimum tax system different from the regular income tax system? How is it similar?
Lauren is 17 years old. She reports earned income of $3,000 and unearned income of $2,200. Is it likely that she is subject to the kiddie tax? Explain.
What is the kiddie tax and on whose tax return is the kiddie tax liability reported?Explain.
Does the kiddie tax apply to all children no matter their age? Explain.
Does the kiddie tax eliminate the tax benefits gained by a family when parents transfer income-producing assets to children? Explain.
What is the difference between earned and unearned income?
Augustana received $10,000 of qualified dividends this year. Under what circumstances would all $10,000 be taxed at the same rate? Under what circumstances might the entire $10,000 of income not be
Are there circumstances in which preferentially taxed income (long-term capital gains and qualified dividends) is taxed at the same rate as ordinary income?Explain.
Once they’ve computed their taxable income, how do taxpayers determine their regular tax liability? What additional steps must taxpayers take to compute their tax liability when they have
What is the tax marriage penalty and when does it apply? Under what circumstances would a couple experience a tax marriage benefit?
In 2016, for a taxpayer with $50,000 of taxable income, without doing any actual computations, which filing status do you expect to provide the lowest tax liability? Which filing status provides the
What is a tax bracket? What is the relationship between filing status and the width of the tax brackets in the tax rate schedule?
During 2016, your clients, Mr. and Mrs. Howell, owned the following investment assets:Broker’s Commission Date Purchase Paid at Time Investment Assets Acquired Price of Purchase 300 shares of IBM
Anwar owns a rental home and is involved in maintaining it and approving renters. During the year he has a net loss of $8,000 from renting the home. His other sources of income during the year were a
Molly Grey (single) acquired a 30 percent limited partnership interest in Beau Geste LLP several years ago for $48,000. At the beginning of year 1, Molly has tax basis and an at-risk amount of
Rubio recently invested $20,000 (tax basis) in purchasing a limited partnership interest. His at-risk amount is $15,000. In addition, Rubio’s share of the limited partnership loss for the year is
Larry recently invested $20,000 (tax basis) in purchasing a limited partnership interest. His at-risk amount is also $20,000. In addition, Larry’s share of the limited partnership loss for the year
George recently received a great stock tip from his friend, Mason. George didn’t have any cash on hand to invest, so he decided to take out a $20,000 loan to facilitate the stock acquisition. The
On January 1 of year 1, Nick and Rachel Sutton purchased a parcel of undeveloped land as an investment. The purchase price of the land was $150,000. They paid for the property by making a down
Mickey and Jenny Porter file a joint tax return, and they itemize deductions.The Porters incur $2,000 in employment-related miscellaneous itemized deductions.They also incur $3,000 of investment
Rich and Shauna Nielson file a joint tax return, and they itemize deductions.Assume their marginal tax rate on ordinary income is 25 percent. The Nielsons incur $2,000 in miscellaneous itemized
Becky recently discovered some high-tech cooking technology that has advantages over microwave and traditional ovens. She received a patent on the technology that gives her exclusive rights to the
Shaun bought 300 shares of Dental Equipment Inc. several years ago for$10,000. Currently the stock is worth $8,000. Shaun’s marginal tax rate this year is 25 percent, and he has no other capital
Arden purchased 300 shares of AMC common stock several years ago for$1,500. On April 30, Arden sold the shares of AMC common for $500 and then purchased 250 shares of AMC preferred stock two days
Christina, who is single, purchased 100 shares of Apple Inc. stock several years ago for $3,500. During her year-end tax planning, she decided to sell 50 shares of Apple for $1,500 on December 30.
Christopher sold 100 shares of Cisco stock for $5,500 in the current year.He purchased the shares several years ago for $2,200. Assuming his ordinary income tax rate is 28 percent, and he has no
For 2016, Sherri has a short-term loss of $2,500 and a long-term loss of$4,750.a) How much loss can Sherri deduct in 2016?b) How much loss will Sherri carryover to 2017, and what is the character of
In 2016, Tom and Amanda Jackson (married filing jointly) have $200,000 of taxable income before considering the following events:a) On May 12, 2016, they sold a painting (art) for $110,000 that was
During the current year, Ron and Anne sold the following assets:Capital Asset Market Value Tax Basis Holding Period L stock $ 50,000 $41,000 > 1 year M stock 28,000 39,000 > 1 year N stock 30,000
George bought the following amounts of Stock A over the years:Date Purchased Number of Shares Adjusted Basis Stock A 11/21/1990 1,000 $24,000 Stock A 3/18/1996 500 9,000 Stock A 5/22/2005 750 27,000
Grayson is in the 25 percent tax rate bracket and has the sold the following stocks in 2016:Date Purchased Basis Date Sold Amount Realized Stock A 1/23/1992 $ 7,250 7/22/2016 $ 4,500 Stock B
Matt and Meg Comer are married. They do not have any children. Matt works as a history professor at a local university and earns a salary of $64,000. Meg works part-time at the same university. She
Sue has 5,000 shares of Sony stock that has an adjusted basis of $27,500. She sold the 5,000 shares of stock for cash of $10,000, and she also received a piece of land as part of the proceeds. The
Karyn loaned $20,000 to her co-worker to begin a new business several years ago. If her co-worker declares bankruptcy on June 22 of the current year, is Karyn allowed to deduct the bad debt loss this
Dahlia is in the 28 percent tax rate bracket and has purchased the following shares of Microsoft common stock over the years:Date Purchased Shares Basis 7/10/2006 400 $12,000 4/20/2007 300 10,750
John bought 1,000 shares of Intel stock on October 18, 2013, for $30 per share plus a $750 commission he paid to his broker. On December 12, 2016, he sells the shares for $42.50 per share. He also
Five years ago, Kate purchased a dividend-paying stock for $10,000. For all five years, the stock paid an annual dividend of 4 percent before tax and Kate’s marginal tax rate was 25 percent. Every
Hayley recently invested $50,000 in a public utility stock paying a 3 percent annual dividend. If Hayley reinvests the annual dividend she receives net of any taxes owed on the dividend, how much
At the beginning of his current tax year, Eric bought a corporate bond with a maturity value of $50,000 from the secondary market for $45,000. The bond has a stated annual interest rate of 5 percent
At the beginning of her current tax year, Angela purchased a zero-coupon corporate bond at original issue for $30,000 with a yield to maturity of 6 percent.Given that she will not actually receive
Seth invested $20,000 in Series EE savings bonds on April 1. By December 31, the published redemption value of the bonds had increased to $20,700. How much interest income will Seth report from the
At the beginning of his current tax year, David invests $12,000 in original issue U.S. Treasury bonds with a $10,000 face value that mature in exactly 10 years.David receives $700 in interest ($350
Dana intends to invest $30,000 in either a Treasury bond or a corporate bond. The Treasury bond yields 5 percent before tax and the corporate bond yields 6 percent before tax. Assuming Dana’s
Matt recently deposited $20,000 in a savings account paying a guaranteed interest rate of 4 percent for the next 10 years. If Matt expects his marginal tax rate to be 20 percent for the next 10
All else being equal, would a taxpayer with passive losses rather have wage income or passive income?
What tests are applied to determine if losses should be characterized as passive?
What are the implications of treating losses as passive?
What types of losses may potentially be characterized as passive losses?
When taxpayers borrow money to buy municipal bonds, are they allowed to deduct interest expense on the loan? Why or why not?
What limitations are placed on the deductibility of investment interest expense?What happens to investment interest expense that is not deductible because of the limitations?
How is the amount of net investment income determined for a taxpayer with investment expenses and other noninvestment miscellaneous itemized deductions?
Are dividends and capital gains considered to be investment income for purposes of determining the amount of a taxpayer’s deductible investment interest expense for the year?
Clark owns stock in BCS Corporation that he purchased in January of the current year. The stock has appreciated significantly during the year. It is now December of the current year, and Clark is
Describe three basic tax planning strategies available to taxpayers investing in capital assets.
Nick does not use his car for business purposes. If he sells his car for less than he paid for it, does he get to deduct the loss for tax purposes? Why or why not?
What is a “wash sale”? What is the purpose of the wash sale tax rules?
This year, David, a taxpayer in the highest tax rate bracket, has the option to purchase either stock in a Fortune 500 company or qualified small business stock in his friend’s corporation. All
Are all long-term capital gains taxable at the same maximum rate? If not, what rates may apply to long-term capital gains?
What happens to capital losses that are not deductible in the current year?
What limitations are placed on the deductibility of capital losses for individual taxpayers?
What tax rate applies to net short-term capital gains?
What methods may taxpayers use to determine the adjusted basis of stock they have sold?
What is the deciding factor in determining whether a capital gain is a shortterm or long-term capital gain?
Why does the tax law provide preferential rates on certain capital gains?
Why does the tax law allow a taxpayer to defer gains accrued on a capital asset until the taxpayer actually sells the asset?
What is the definition of a capital asset? Give three examples of capital assets.
Compare and contrast the tax treatment of dividend-paying stocks and growth stocks.
Why might investors purchase interest-paying securities rather than dividendpaying stocks?
When should investors consider making an election to amortize market discount on a bond into income annually? [Hint: See §1278(b).]
In what ways are U.S. savings bonds treated more favorably for tax purposes than corporate bonds?
Why would taxpayers generally prefer the tax treatment of market discount to the treatment of original issue discount on corporate bonds?
How are Treasury notes and Treasury bonds treated for federal and state income tax purposes?
Compare and contrast the tax treatment of interest from a Treasury bond and qualified dividends from corporate stock.
What is the underlying policy rationale for the current tax rules applicable to interest income and dividend income?
Describe how interest income and dividend income are taxed. What are the similarities and differences in their tax treatment?
Joe and Jessie are married and have one dependent child, Lizzie. Lizzie is currently in college at State University. Joe works as a design engineer for a manufacturing firm while Jessie runs a craft
Shauna Coleman is single. She is employed as an architectural designer for Streamline Design (SD). Shauna wanted to determine her taxable income for this year. She correctly calculated her AGI.
Jeremy and Alyssa Johnson have been married for five years and do not have any children. Jeremy was married previously and has one child from the prior marriage.He is self-employed and operates his
Read the following letter and help Shady Slim with his tax situation. Please assume that his gross income is $172,900 (which consists only of salary) for purposes of this problem.December 31, 2016 To
This year Evan graduated from college and took a job as a deliveryman in the city. Evan was paid a salary of $68,500 and he received $700 in hourly pay for part-time work over the weekends. Evan
Jim files single and has three dependent children. Calculate his deductible total personal and dependency exemptions under the following independent conditions:a) Jim has AGI of $150,000.b) Jim has
In 2016, Jeff, who is single, is entitled to the following deductions before phase-outs:State income taxes $7,850 Real estate taxes 1,900 Home mortgage interest 8,200 Charitable contributions 1,700a)
Tammy teaches elementary school history for the Metro School District. In 2016 she has incurred the following expenses associated with her job:Noncredit correspondence course on history $ 900
Stephanie is a 12-year-old who often assists neighbors on weekends by babysitting their children. Calculate the 2016 standard deduction Stephanie will claim under the following independent
Zack is employed as a full-time airport security guard. This year Zack’s employer transferred him from Dallas to Houston. At year-end, Zack discovered a number of unreimbursed expenses related to
Simon lost $5,000 gambling this year on a trip to Las Vegas. In addition, he paid $2,000 to his broker for managing his $200,000 portfolio and $1,500 to his accountant for preparing his tax return.

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