Name________________________________________________ Business 123C Fall 2011 Quiz Chapters 3 Multiple Choice: Read the questions carefully and circle

the best answer. 1. In terms of the tax formula applicable to individual taxpayers, which, if any, of the following statements is correct? a. The formula does not apply if a taxpayer elects to claim the standard deduction. b. To compute AGI, personal and dependency exemptions must be subtracted from gross income. c. In arriving at taxable income, a taxpayer must choose between the standard deduction and claiming personal and dependency exemptions. d. In arriving at taxable income, a taxpayer must choose between the standard deduction and deductions for AGI. e. None of the above.
Answer: E

2. In October 2010, Joy and Paul separated and have not lived with each other since, but they are still married. Joy supports their children after the separation and pays the cost of maintaining their home. Joy's filing status in 2010 and 2011 is, respectively, a. single for both years. b. head of household and single. c. married filing separately for both years. d. married filing separately and head of household. e. None of the above
Answer: D Explanation: D) Joy and Paul are married on the last day of the year so either a joint return or a separate return is required unless Joy qualifies as an abandoned spouse (and thus, head of household). She does not qualify in 2010 since Paul was in the home during the last six months of the year. However, since Paul is gone, a married filing separate return is necessary since he is not around to sign a joint return. In 2011, Joy, though still married, qualifies as an abandoned spouse and, thus, head of household.
Page Ref.: I:2-24

3. In 2007, Leo's wife died. Leo has two small children, ages 2 and 4, living at home whom he supports entirely. Leo does not remarry and is not claimed as a dependent on another's return during any of this period. In 2008, 2009, and 2010, Leo's most advantageous filing status is, respectively a. single for all three years. b. head of household for all three years. c. surviving spouse, surviving spouse, head of household d. surviving spouse, surviving spouse, single. e. None of the above.
Answer: C Explanation: C) In the two years following death (2008 and 2009), Leo may file as surviving spouse as long as he has at least one dependent child living in the home during the entire year and he provides over half of the expenses of the home. After the two years following the year of death, Leo qualifies as head of household as he is unmarried and is maintaining a home for a qualifying individual (in this case, his qualifying child).
Page Ref.: I:2-22

4. Antonia, age 70, is claimed as a dependent on her sons tax return. During 2010, she had interest income of $1,700 and $800 of wages income from a part-time job. Antonias taxable income is: a. $-0-. b. $1,100. c. $1,400. d. $1,700.

e. None of the above.

Answer: A 1700 + 800 = 2500 1400 1100 = 0

5. You may choose married filing jointly as your filing status if you are married and both you and your spouse agree to file a joint return. Which of the following facts would prevent you from being considered married for filing purposes? a. You were married for several years, but your divorce became final in December. b. You are married but living apart until some problems can be solved. c. Your spouse died during the year but the executor of the estate has agreed to the filing of a joint return. d. None of the above.
Answer: A Explanation: A) Marital status is determined as of the last day of the tax year. If the couple is divorced in December, then they are not married for tax purposes and may not file a joint return.
Page Ref.: I:2-21

6. Blaine Greer lives alone. His support comes from the following sources: Buddy (his son) $2,600 Ken (his brother) 4,200 Martha (his daughter) 2,300 Natalie (a friend) 1,000 Total support $10,100 Assuming a multiple support declaration exists, which of the individuals may claim Blaine as a dependent? a. Ken or Martha b. Buddy, Ken, or Martha c. Ken, Martha, or Natalie d. None of them
Answer: B Explanation: B) A qualifying pool of individuals (Buddy, Ken, and Martha) provides more than 50 percent of Blaine's support. Natalie is not part of the qualifying pool as she could not otherwise claim Blaine because he is not related to her and does not live in her home. Of the qualifying pool, any individual who provides more than 10 percent of Blaine's support (Buddy, Ken or Martha) may claim Blaine under a multiple support agreement.
Page Ref.: I:2-17; Example I:2-17

7. Tony supports the following individuals during the current year: Miranda, his former mother-in-law who lives in her own home and has no gross income; his cousin, Jeff, age 23, who is a full-time student, earns $7,000 during the year, and lives with Tony all year long; and Matt, age 22, who is Tony's brother, is a full-time student living on campus and earns $8,000 during the year. How many dependency exemptions may Tony claim? a. 0 b. 1 c. 2 d. 3 e. None of the above
Answer: C Explanation: C) Miranda qualifies as Tony's dependent. She is related to him for tax purposes and does not have to live with him. Jeff earns too much gross income (more than the personal exemption amount of $3,650) and can not qualify as Tony's dependent. Although Matt earns more gross income than the personal exemption amount, he is considered Tony's qualifying child and, therefore, does not have to meet the gross income test. Therefore, Tony can claim two dependents.
Page Ref.: I:2-15; Example I:2-13

Problems: Read the problems carefully, complete all requirements and show your work.

1. Harry is 52 years old and a CFO for a company in Iowa City Iowa. He adopted then 17 year old Bing in 2007. Bing was now out of high school working fulltime at a restaurant saving money to start college in 2011. Bing earned $16,400 in wages in 2010. Bing was tragically killed in October 2010 by Harrys cousin Billy in a motorcycle accident. Billy was not hurt in the accident. Billy had been living at Harrys house at the time of the accident but moved out immediately after the accident to New York. Billy never earned any income and Harry continued to support him after the accident. Harry is supporting his father -- Walter and Luke Billys father. Neither live with Harry but Harry pays for over 50% of each of their support. Walter is 69 and Luke is 72. They have no medical problems except Luke is legally blind. They have no income except for $5,000 each of social security benefits and Walter has $4,000 in interest income. They use the social security and interest money to wager at one of the local casinos. Harry was married until 2009 when his wife Maria committed suicide. Lastly, Harry sends money to Rich, Harrys 24 year old former brother-in-law who attends college in Berlin Germany. Rich is a Mexican citizen living in Germany for all of 2010. Rich lives off the money that Harry gives him but also got a $10,000 loan to attend the German school.
Harry had the following income in 2010: Salary $180,000 Interest income 10,000 Harry has itemized deductions of $7,000. Compute Harrys federal taxable income and federal tax liability for 2010.

Salary Interest AGI Single Harry Luke

180,000 10,000 190,000 (7,000) (3,650) (3,650) 175,700 (171,850) 3,850

X33%

1,270.50 41,827.25 43,097.75 43,098

2. Tina Evans was a child actress. She was in several movies and was nominated for an Academy Award. But the acting career stopped when she turned 15 and became addicted to drugs. But she gave up the drugs and is now at age 21 attending college full-time studying music. She earned $500 in wages teaching music at a summer

camp. Fortunately her parent had invested her earnings from acting. The money market account earned $11,000 in interest. Tina doesnt spend any of her money on herself. Tina is claimed as a dependent by her parent. She saves all of her money and lived with her parent Lucy. Lucy had a salary for 2010 of $56,000. Lucy had no itemized deductions. Assuming her mother, Lucy, used the most beneficial filing status available to her in 2010, compute the federal taxable income and federal tax liability for 2010 for Tina.

AGI Taxable

500 11,000 11,500 (950) 10,550

NUI

11,000 (950) (950) 9,100

9,100 Taxed at Parents Rate 56,000 (8,400) (7,300) 40,300 5,250 3,850 Tax of Tina X 15% X 25% 787.50 962.50 145.00 1,895.00

1,450 X10% 145

Std Ded 3650 X 2