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taxation of individuals

Questions and Answers of Taxation of Individuals

Describe the kinds of insurance premiums an employer can pay on behalf of an employee without triggering includible compensation to the employee.
Explain why taxpayers are allowed to exclude gifts and inheritances from gross income even though these payments are realized and clearly provide taxpayers with the wherewithal to pay.
Explain how state and local governments benefit from the provisions that allow taxpayers to exclude interest on state and local bonds from their gross income.
What are some common examples of taxable and tax-free fringe benefits?
Cassie works in an office and has access to several professional color printers.Her employer allows Cassie and her fellow employees to use the printers to print color postcards for the holidays. This
What are the basic requirements to exclude the gain on the sale of a personal residence?
Explain why an insolvent taxpayer is allowed to exclude income from the discharge of indebtedness if the taxpayer remains insolvent after receiving the debt relief.
When an employer makes a below-market loan to an employee, what are the tax consequences to the employer and employee?
Rolando purchases a golf cart from his employer, E-Z-Go Golf Carts, for a sizable discount. Explain the rules for determining if Rolando’s purchase results in taxable income for him.
Rory and Nicholi, single taxpayers, each annually receive Social Security benefits of $15,000. Rory’s taxable income from sources other than Social Security exceeds $200,000. In contrast, the
Larry Bounds has won the gold bat award for hitting the longest home run in major league baseball this year. The bat is worth almost $35,000. Under what conditions can Larry exclude the award from
Otto and Fiona are negotiating the terms of their divorce. Otto has agreed to transfer property to Fiona over the next two years, but he has reserved the right to make cash payments in lieu of
Clem and Ida have been married for several years, but this year they decided to get divorced. In the divorce decree, Clem agreed to deed his car to Ida and pay Ida $10,000 per year for four years.
Tomiko is a 50 percent owner (partner) in the Tanaka partnership. During the year, the partnership reported $1,000 of interest income and $2,000 of dividends.How much of this income must Tomiko
Brad purchased land for $45,000 this year. At year-end Brad sold the land for$51,700 and paid a sales commission of $450. What effect does this transaction have on Brad’s gross income? Explain.
George purchased a life annuity to provide him monthly payments for as long as he lives. Based on IRS tables, George’s life expectancy is 100 months. Is George able to recover his cost of the
Conceptually, when taxpayers receive annuity payments, how do they determine the amount of the payment they must include in gross income?
Jerry has a certificate of deposit at the local bank. The interest on this certificate was credited to his account on December 31 of last year, but he didn’t withdraw the interest until January of
Jim purchased 100 shares of stock this year and elected to participate in a dividend reinvestment program. This program automatically uses dividends to purchase additional shares of stock. This year
Distinguish earned income from unearned income, and provide an example of each.
Clyde and Bonnie were married this year. Clyde has a steady job that will pay him about $37,000, while Bonnie does odd jobs that will produce about $28,000 of income. They also have a joint savings
Dewey is a lawyer who uses the cash method of accounting. Last year Dewey provided a client with legal services worth $55,000, but the client could not pay the fee. This year Dewey requested that in
Contrast the constructive receipt doctrine with the claim of right doctrine.
The cash method of accounting means that taxpayers don’t recognize income unless they receive cash or cash equivalents. True or false? Explain.
Janet is a cash-method calendar-year taxpayer. She received a check for services provided in the mail during the last week of December. However, rather than cash the check, Janet decided to wait
Describe in general how the cash method of accounting differs from the accrual method of accounting.
This year Jorge received a refund of property taxes that he deducted on his tax return last year. Jorge is not sure whether he should include the refund in his gross income. What would you tell him?
Compare how the return of capital principle applies when (1) a taxpayer sells an asset and collects the sale proceeds immediately and (2) a taxpayer sells an asset and collects the sale proceeds over
What issue precipitated the return of capital principle? Explain.
Andre constructs and installs cabinets in homes. Blair sells and installs carpet in apartments. Andre and Blair worked out an arrangement whereby Andre installed cabinets in Blair’s home and Blair
Tim is a plumber who joined a barter club. This year Tim exchanges plumbing services for a new roof. The roof is properly valued at $2,500, but Tim would have only billed $2,200 for the plumbing
Compare and contrast realization of income with recognition of income.
Describe the concept of realization for tax purposes.
Based on the definition of gross income in §61, related regulations, and judicial rulings, what are the three criteria for recognizing taxable income?
Based on the definition of gross income in §61 and related regulations, what is the general presumption regarding the taxability of income realized?
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
Camille Sikorski was divorced last year. She currently provides a home for her 15-year-old daughter, Kaly, and 18-year-old son, Parker. Both children lived in Camille’s home, which she owns, for
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
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
Doug Jones submitted his 2016 tax return on time and elected married filing jointly status with his wife, Darlene. Doug and Darlene did not request an extension for their 2016 tax return. Doug and
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
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
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
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
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
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
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.
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
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?b) Assuming Bonita
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
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
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
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
Mel and Cindy Gibson’s 12-year-old daughter Rachel was abducted on her way home from school on March 15, 2016. Police reports indicated that a stranger had physically dragged Rachel into a waiting
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
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
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
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
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
Aishwarya’s husband passed away in 2015. She needs to determine whether Jasmine, her 17-year-old stepdaughter, who is single, qualifies as her dependent in 2016. Jasmine is a resident but not a
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
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
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
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
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
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
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?
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
Is a qualifying relative always a qualifying person for purposes of determining head of household filing status?
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
What requirements do an abandoned spouse and qualifying widow or widower have in common?
Isabella provides 30 percent 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
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
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
Compare and contrast the relationship test requirements for a qualifying child with the relationship requirements for a qualifying relative.
Emily and Tony are recently married college students. Can Emily qualify as her parents’ dependent? Explain.
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?
Identify three ways taxpayers can pay their income taxes to the government.
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?
What is the difference between a tax deduction and a tax credit? Is one more beneficial than the other? Explain.
Why are some deductions called “above the line” deductions and others are called “below the line” deductions? What is the “line”?
How do taxpayers determine whether they should deduct their itemized deductions or utilize the standard deduction?
What is the difference between gross income and adjusted gross income, and what is the difference between adjusted gross income and taxable income?
Compare and contrast for and from AGI deductions. Why are for AGI deductions likely more valuable to taxpayers than from AGI deductions?
Are taxpayers allowed to deduct net capital losses (capital losses in excess of capital gains)? Explain.
Are all capital gains (gains on the sale or disposition of capital assets) taxed at the same rate? Explain.
Is it easier to describe what a capital asset is or what it is not? Explain.
Why should a taxpayer be interested in the character of income received?
All else being equal, should taxpayers prefer to exclude income or to defer it?Why?
Are taxpayers required to include all realized income in gross income? Explain.
How are realized income, gross income, and taxable income similar, and how are they different?
Using the IRS website (https://www.irs.gov/uac/The-Tax-Gap), how large is the current estimated “tax gap” (i.e., the amount of tax underpaid by taxpayers annually)?What group of taxpayers
Jayanna, an advertising consultant, is contemplating instructing some of her clients to pay her in cash so that she does not have to report the income on her tax return. Use an available tax service
Using an available tax service or the Internet, identify three basic tax planning ideas or tax tips suggested for year-end tax planning. Which basic tax strategy from this chapter does each planning
Using the facts from the previous problem, how would your answer change if instead, Duff adopted the cash method of accounting to allow him to better control the timing of his cash receipts and
Duff is really interested in decreasing his tax liability, and by his very nature he is somewhat aggressive. A friend of a friend told him that cash transactions are more difficult for the IRS to
Alan inherited $100,000 with the stipulation that he “invest it to financially benefit his family.” Alan and Alice decided they would invest the inheritance to help them accomplish two financial
Komiko Tanaka invests $12,000 in LymaBean, Inc. LymaBean does not pay any dividends. Komiko projects that her investment will generate a 10 percent before-tax rate of return. She plans to invest for
Irene is saving for a new car she hopes to purchase either four or six years from now. Irene invests $10,000 in a growth stock that does not pay dividends and expects a 6 percent annual before-tax
Anne’s marginal income tax rate is 30 percent. She purchases a corporate bond for $10,000 and the maturity, or face value, of the bond is $10,000. If the bond pays 5 percent per year before taxes,

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