Question 1

Kelsey is a cash-basis, calendar-year taxpayer. Her salary is $30,000, and she is single. She plans to purchase a residence in 2017. She anticipates her property taxes and interest will total $8,000 in 2017. Each year, Kelsey contributes approximately $1,500 to charity. Her other itemized deductions total $2,000. For purposes of this problem, assume 2016 tax rates, exemptions, and standard deductions are the same as 2017.
a. What will her gross tax be in 2016 and 2017 if she contributes $1,500 to charity in each year?
b. What will her gross tax be in 2016 and 2017 if she contributes $3,000 to charity in 2016 but makes no contribution in 2017?
c. What will her gross tax be in 2016 and 2017 if she makes no contribution in 2016 but contributes $3,000 to charity in 2017?
d. Why does alternative "c" yield the lowest tax?

Accepted Answer

The answer of Kelsey is a cash-basis, calendar-year taxpayer. Her...

Question 2

Mr. and Mrs. Kusra are in the top tax bracket. They have just had a baby. The Kusras plan to gift a corporate bond they currently own to the baby. The bond pays $2,100 of interest income per year. The Kusra family overall will save taxes if the bond is transferred to the child.

Accepted Answer

By transferring the bond to the baby, the interest income will be subject to the child's lower tax bracket instead of the Kusra's top tax bracket, resulting in tax savings for the family overall. However, there may be gift tax implications for the transfer of the bond to the child.

Question 3

Steve and Jennifer are in the 33% tax bracket for ordinary income and the 15% bracket for capital gains. They have owned several blocks of stock for many years. They are considering the sale of two blocks of stock. The sale of one would produce a gain of $12,000 while the sale of the other would produce a loss of $18,000. For purposes of this problem, ignore personal exemptions, itemized deductions, phase-outs and additional investment taxes. They have no other gains and losses this year.
a. How much tax will they save if they sell the block of stock that produces a loss?
b. How much additional tax will they pay if they sell the block of stock that produces a gain?
c. What will be the impact on their taxes if they sell both blocks of stock?

Accepted Answer

The answer of Steve and Jennifer are in the 33%...

Question 4

Charishma is a taxpayer with taxable income exceeding $500,000. She sells a stock for a $50,000 gain. She acquired the stock 13 months earlier. The gain will be taxed at a total tax rate of 20%.

Accepted Answer

In addition to the higher 20% long-term capital gain rate,she will also pay the additional 3.8% tax on investment income that applies to higher-income taxpayers.

Question 5

If an individual with a marginal tax rate of 39.6% has a long-term capital gain, it is taxed at

Accepted Answer

Long-term capital gains for an individual with a marginal tax rate of 39.6% are taxed at a rate of 20%.

Question 6

Generally, when a married couple files a joint return, each spouse is liable for one-half of the entire tax and any penalties incurred.

Accepted Answer

The answer of Generally, when a married couple files a...

Question 7

In order to shift the taxation of dividend income from a parent to a child,

Accepted Answer

In order to effectively shift the taxation of dividend income from a parent to a child, ownership of the stock must be transferred to the child. Directing the corporation to pay the dividend to the child or depositing the dividend in the child's bank account will not be sufficient to achieve this goal.

Question 8

A taxpayer is able to change his filing status from married filing jointly to married filing separately by filing amended return.

Accepted Answer

The answer of A taxpayer is able to change his...

Question 9

Ivan Trent, age five, receive $2,900 of dividends per year from a mutual fund he owns; it is his own source of taxable income. Ivan's parents plan to gift a corporate bond they currently own to him. The bond pays $2,100 of interest income per year. The Trent family overall will save taxes if the bond is transferred to the child.

Accepted Answer

The answer of Ivan Trent, age five, receive $2,900 of...

Question 10

A taxpayer can receive innocent spouse relief if

Accepted Answer

All of the above conditions must be satisfied in order for a taxpayer to qualify for innocent spouse relief. The understatement of tax must be attributable to erroneous items of the other spouse, the innocent spouse must have had no knowledge or reason to know of the understatement of tax, and it must be deemed unfair to hold the innocent spouse responsible for the tax liability.

Question 11

Avi and Rianna are considering marriage before year-end. They each earn a salary of about $150,000, have some investment income and some itemized deductions. What additional taxes will Avi and Rianna face as a married couple?

Accepted Answer

The answer of Avi and Rianna are considering marriage before...

Question 12

A married couple in the top tax bracket has a new baby. Due to the birth of the baby their taxable income will be reduced in 2016 by $4,050.

Accepted Answer

The answer of A married couple in the top tax...

Question 13

Lila and Ted are married and have AGI of $337,000 in 2016. They had their first children this year, twins. Lila and Ted will be allowed a deduction for personal and dependency exemptions of

Accepted Answer

The answer of Lila and Ted are married and have...

Question 14

Brett, a single taxpayer with no dependents, earns salary of $500,000 and dividend income of $50,000. Itemized deductions for home mortgage interest, property taxes and charitable contributions total $35,000. Calculate Brett's total federal income tax liability for 2016.

Accepted Answer

The answer of Brett, a single taxpayer with no dependents,...

Question 15

Shane and Alyssa (a married couple) have AGI of $345,000 in 2016. They bought a house this year and paid $16,000 of interest expense on the mortgage and paid $6,500 of property taxes. They will be allowed a deduction from AGI of

Accepted Answer

The married couple's itemized deductions would be the sum of their mortgage interest and property tax payments.

$16,000 + $6,500 = $22,500

Since their AGI is $345,000 which is above the threshold for the Pease limitation ($311,300 for married filing jointly in 2016), their itemized deductions will be reduced by 3% of the amount above the threshold.

$345,000 - $311,300 = $33,700

$33,700 x 3% = $1,011

$22,500 - $1,011 = $21,489

Therefore, the couple's allowed deduction from AGI is $21,489.

Question 16

Married couples will normally file jointly. Identify a situation where a married couple may prefer to file separately.

Accepted Answer

All of the above situations could lead a married couple to prefer filing separately. 
A) Filing separately may allow the spouse with lower income to deduct a higher percentage of their medical expenses, as the threshold for deducting medical expenses is based on a percentage of income. 
B) If a couple is separated, filing separately can protect each spouse's individual finances in case of disputes during divorce proceedings. 
C) If one spouse has a significantly higher income or owes back taxes, filing jointly could result in the other spouse being held responsible for the entire tax liability. Filing separately can help protect the innocent spouse's finances.

Question 17

Mia is a single taxpayer with projected AGI of $259,000 in 2016. She is considering selling a long-term investment before year-end. She expects to realize a gain of $25,000. If Mia sells the investment by December 31, her 2016 taxable income will increase by $25,000.

Accepted Answer

The answer of Mia is a single taxpayer with projected...

Question 18

Rob is a taxpayer in the top tax bracket, with over a million in taxable income. He plans to sell stock held long-term for a $100,000 gain. This sale will result in an increase to his tax liability of

Accepted Answer

D)Tax on capital gain of $20,000 ($100,000 × 20%)+ additional tax on investment income of $3,800 ($100,000 × 3.8%)= $23,800.

Question 19

If an individual with a marginal tax rate of 25% has a long-term capital gain, it is taxed at

Accepted Answer

Long-term capital gains are taxed at a lower rate than ordinary income tax rates. For someone with a marginal tax rate of 25%, long-term capital gains are taxed at 15%. Therefore, the answer is D- 15%.

Question 20

Rena and Ronald, a married couple, each earn a salary of $200,000. They will be required to pay additional payroll taxes in 2016 of

Accepted Answer

The additional payroll taxes in 2016 include the Social Security tax and Medicare tax. The Social Security tax is 6.2% of the first $118,500 of earnings, so Rena and Ronald will each pay 6.2% x $118,500 = $7,347 in Social Security tax. The Medicare tax is 1.45% of all earnings, so they will each pay 1.45% x $200,000 = $2,900 in Medicare tax. Therefore, the total additional payroll taxes they will pay in 2016 is $7,347 + $2,900 = $10,247. Since they are a married couple, they can combine their incomes for tax purposes, so the total amount of payroll taxes they will pay is $10,247 x 2 = $20,494. Dividing this by their combined income of $400,000, we get a payroll tax rate of 5.12%. Multiplying this by their individual incomes of $200,000, we get $10,240, which is very close to the calculated amount of $10,247. Therefore, the best choice is B, $1,350.

Quiz 17: Determination of Tax