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Chapter 8: Taxation of Individuals 8-13

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CHAPTER 8
TAXATION OF INDIVIDUALS
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DISCUSSION QUESTIONS
1. What is the difference between a personal exeption and a dependenc! exeption" #re all
taxpa!ers allowed a personal exeption"
Both types of exempto!s "#e $o#th the s"me "mo%!t ! te#ms of " &e&%'to!(
Pe#so!") exempto!s "#e "))o$e& to the t"xp"ye#*s+ f)!, the #et%#! *ths '"! !e-e# .e
,#e"te# th"! t$o+/ $h)e &epe!&e!'y exempto!s "#e "))o$e& fo# those !&-&%")s $ho
0%")fy "s " t"xp"ye#1s &epe!&e!t(
Not ")) t"xp"ye#s "#e e!tt)e& to " pe#so!") exempto!( A t"xp"ye# th"t s ')"me& "s "
&epe!&e!t of "!othe# s !ot "))o$e& " pe#so!") exempto! &e&%'to!( The effe't of
ths p#o-so! s to "))o$ o!)y 2 exempto! &e&%'to! pe# !&-&%")( Note3 If the#e s
tot") t"x 'omp)"!'e/ the! the tot") !%m.e# of exempto!s t"4e! e0%")s the tot") U(S(
pop%)"to!( Ho$e-e#/ t$o f"'to#s/ "&m!st#"t-e 'o!-e!e!'e "!& t"x e-"so!/
p#e-e!t ths f#om h"ppe!!,( Fo# p%#poses of "&m!st#"t-e 'o!-e!e!'e/ the
,o-e#!me!t &oes !ot #e0%#e e-e#y t"xp"ye# to f)e " #et%#!( Othe# t"xp"ye#s $ho "#e
#e0%#e& to f)e " #et%#! 'hoose !ot to f)e 55 t"x e-"so!(
$. What are the five tests that ust et for an individual to be considered a dependent
as a %ualif!in& child" as a %ualif!in& relative" 'riefl! explain each test.
The 6 0%")fy!, 'h)& tests "#e3
2( A,e Test( To meet the ",e test/ the !&-&%") m%st .e %!&e# the ",e of 27 "t the
e!& of the ye"#/ " f%))5tme st%&e!t %!&e# the ",e of 89 "t the e!& of the ye"#/ o# .e
pe#m"!e!t)y "!& tot"))y &s".)e&(
8( No!5S%ppo#t Test( To meet the s%ppo#t test/ the !&-&%") .e!, ')"me& "s "
&epe!&e!t m%st !ot h"-e p#o-&e& mo#e th"! o!e5h")f of the# s%ppo#t(
:( Re)"to!shp Test( U!&e# the #e)"to!shp test "! !&-&%") m%st .e the
t"xp"ye#;s so!/ &"%,hte#/ stepso!/ step&"%,hte#/ e),.)e foste# 'h)& o# &e'e&e!t
of s%'h " 'h)&/ o# the t"xp"ye#;s .#othe#/ sste#/ step.#othe#/ stepsste# o# "!y
&es'e!&"!t of "!y s%'h #e)"t-e(
9( P#!'p") Res&e!'e Test( To meet the p#!'p") #es&e!'e test/ the !&-&%") m%st
)-e $th the t"xp"ye# fo# mo#e th"! o!e5h")f of the ye"#( Tempo#"#y ".se!'es &%e
to ))!ess/ -"'"to!/ e&%'"to!/ m)t"#y se#-'e o# othe# spe'") '#'%mst"!'es "#e
!ot 'o!s&e#e& "s tme )-!, "$"y f#om the p#!'p") #es&e!'e(
6( Ct<e!shp o# Res&e!'y Test( U!&e# the 't<e!shp o# #es&e!'y test/ the 'h)&
m%st .e " 't<e! o# #es&e!t of the U!te& St"tes/ o# " #es&e!t of the U!te&
St"tes/ C"!"&" o# =ex'o(
The 6 0%")fy!, #e)"t-e tests "#e3
8-14 Chapter 8: Taxation of Individuals
1. >#oss I!'ome Test 5 the ,#oss !'ome of " &epe!&e!t '"!!ot ex'ee& the "mo%!t
of the exempto! &e&%'to!(
8( S%ppo#t Test 5 the t"xp"ye# see4!, the exempto! m%st p"y mo#e th"! 2?8 of the
"mo%!t spe!t o! the &epe!&e!ts s%ppo#t( O!)y "mo%!ts spe!t o! s%ppo#t "#e
'o!s&e#e& ! ths test/ !ot the "mo%!ts the &epe!&e!t m"y h"-e e"#!e& .%t &&
!ot spe!& o! s%ppo#t(
:( Re)"to!shp o# =em.e# of Ho%seho)& Test 5 the &epe!&e!t m%st .e ethe# "
#e)"t-e o# " mem.e# of the t"xp"ye#1s ho%seho)& fo# the e!t#e ye"#( A #e)"t-e s
&ef!e& "s )!e") &es'e!&"!ts *"!'esto#/ &"%,hte#+ "!& .)oo& #e)"t-es *"%!t/
!ephe$+(
9( Ct<e! o# Res&e!'y Test 5 " &epe!&e!t m%st .e ethe# " U(S( 't<e! o# " #es&e!t
of the U(S(/ C"!"&"/ o# =ex'o fo# "t )e"st p"#t of the ye"#(
6( @o!t Ret%#! Test 5 " &epe!&e!t '"!!ot f)e " Ao!t #et%#!/ %!)ess the o!)y p%#pose
fo# f)!, the #et%#! s to o.t"! " #ef%!& of t"xes p"&5!( Th"t s/ they "#e !ot
#e0%#e& to f)e %!&e# the f)!, #e0%#eme!ts(
3. Which parent is entitled to clai the dependenc! exeption for a child when the parents are
divorced" Can the other parent ever clai the dependenc! exeption"
The '%sto&") p"#e!t s e!tt)e& to the &e&%'to!/ #e,"#&)ess of the )e-e) of s%ppo#t the
!o!5'%sto&") p"#e!t m"y p#o-&e( The#e "#e 8 poss.)e $"ys th"t the !o!5'%sto&")
p"#e!t '"! ')"m the exempto! &e&%'to!( F#st/ the &-o#'e &e'#ee m"y spe'fy th"t
the !o!5'%sto&") p"#e!t s e!tt)e& to the &epe!&e!'y exempto!*s+( Se'o!&/ the
'%sto&") p"#e!t '"! ,-e the &e&%'to! to the !o!5'%sto&") p"#e!t .y $#tte!
",#eeme!t( The ",#eeme!t m%st .e "tt"'he& to the !o!5'%sto&") p"#e!t1s t"x #et%#!(
(. Wh! is a taxpa!er)s filin& status iportant"
F)!, st"t%s s mpo#t"!t .e'"%se t &ete#m!es $h'h t"x #"te s'he&%)e the t"xp"ye#
m%st %se to '")'%)"te the t"x/ the "mo%!t of the st"!&"#& &e&%'to!/ "!& the !'ome
)e-e) "t $h'h the ph"se5o%t of the exempto! &e&%'to! .e,!s(
*. What is a survivin& spouse" +xplain the tax benefit available to a survivin& spouse.
A s%#--!, spo%se s " s!,)e t"xp"ye# $hose spo%se &e& $th! the )"st t$o ye"#s
"!& $ho h"s " &epe!&e!t 'h)& )-!, ! the home(
The t"x .e!eft s th"t " s%#--!, spo%se f)es %s!, the s"me t"x .e!efts "s "
m"##e& 'o%p)e f)!, Ao!t)y #e'e-es fo# t$o ye"#s fo))o$!, the ye"# of &e"th( I! the
ye"# of the spo%se;s &e"th/ " Ao!t #et%#! s f)e&( Ths p#o-&es " s%#--!, spo%se
$th " )"#,e# st"!&"#& &e&%'to! "!& )o$e# "-e#",e t"x #"tes th"! the !&-&%") $o%)&
h"-e #e'e-e& %!&e# the he"& of ho%seho)& f)!, st"t%s(
,. -nder what circustances can a arried person file as a head-of-household"
The t"x )"$ "))o$s "! "."!&o!e& spo%se to f)e "s " he"& of ho%seho)&( To 0%")fy/
the t"xp"ye# m%st .e m"##e& "t the e!& of the ye"#/ h"-e " &epe!&e!t 'h)& )-!, !
Chapter 8: Taxation of Individuals 8-1(
the home fo# mo#e th"! 2?8 the ye"#/ "!& the t"xp"ye#1s spo%se h"s !ot )-e& ! the
home &%#!, the )"st B mo!ths of the ye"#(
PROBLE=S
3.. /eterine whether each of the followin& individuals can be claied as a
dependent in the current !ear. #ssue that an! tests not entioned have been
satisfied.
a. 0ico is $. and a full-tie colle&e student who receives a scholarship for
1112.... Tuition2 boo3s2 and fees total 11(2.... 4is father &ives hi an
additional 1*2... to pa! for roo and board and other livin& expenses.
N'o meets ")) the tests "s " 0%")fy!, 'h)&( E-e! tho%,h he %se& the
s'ho)"#shp fo# hs s%ppo#t/ s'ho)"#shps "#e !ot 'o!s&e#e& s%ppo#t(
The#efo#e/ the !o!5s%ppo#t test s met "!& N'o s " &epe!&e!t(
b. 5awrence pa!s 1,28.. of his other)s livin& expenses. 4is other receives
132(.. in 6ocial 6ecurit! benefits and 1721.. fro a %ualified eplo!er
retireent pro&ra2 all of which is spent on her support.
L"$#e!'e1s mothe# f")s the ,#oss !'ome test( He# ,#oss !'ome fo# t"x
p%#poses s C9/2DD *pe!so!+/ $h'h s ,#e"te# th"! the C:/9DD exempto!
"mo%!t( The So'") Se'%#ty .e!efts "#e !ot !')%&e& ! ,#oss !'ome
.e'"%se he# A>I s )ess th"! C86/DDD(
c. 8e&an)s father has no sources of incoe. /urin& the !ear2 8e&an pa!s all of
her father)s support. 4e is a citi9en and resident of #ustralia.
=e,"!1s f"the# s !ot " &epe!&e!t( The 't<e! o# #es&e!'y #e0%#eme!t
s met f the &epe!&e!t s " 't<e! o# #es&e!t of the U!te& St"tes/
C"!"&"/ o# =ex'o fo# "!y p"#t of the t"x ye"#( The#efo#e/ =e,"!;s f"the#
&oes !ot meet the #es&e!'y #e0%#eme!t(
d. Tawana and :alph are arried and full-tie colle&e students. The! are both
$$ !ears old. Tawana wor3s as a odel and earns 1723.. and :alph earns
1$21.. durin& the !ear. Tawana and :alph are not re%uired to file a ;oint return
and do so onl! to receive a refund of the taxes withheld on their respective
incoes. Tawana)s parents &ive the an additional 182... to help the
throu&h colle&e.
Be'"%se T"$"!" "!& R")ph "#e !ot #e0%#e& to f)e " Ao!t #et%#!/ T"$"!"
'"! .e ')"me& "s &epe!&e!t .y he# p"#e!ts %!&e# the 0%")fy!, 'h)&
#%)es( R")ph '"! ")so .e ')"me& "s " &epe!&e!t %!&e# the 0%")fy!,
#e)"t-e #%)es s!'e hs ,#oss !'ome s )ess th"! C:/9DD( If hs ,#oss
!'ome ex'ee&e& C:/9DD/ he $o%)& !ot h"-e met the ,#oss !'ome test(
33. /eterine the $.., filin& status in each of the followin& situations:
a. 8ichaela and 4arrison decide to separate on <ctober 1$2 $..,. 'efore filin&
their $.., tax return on =ebruar! 182 $..82 8ichaela files for and is &ranted a
foral separation a&reeent.
="#t") st"t%s s &ete#m!e& o! the )"st &"y of the t"x ye"#( Be'"%se
='h"e)" "!& H"##so! "#e !ot )e,"))y sep"#"te& o! De'em.e# :2/ they "#e
8-16 Chapter 8: Taxation of Individuals
'o!s&e#e& to .e m"##e& fo# 8DDE( If they '"!!ot ",#ee to f)e " Ao!t
#et%#!/ e"'h m%st f)e " #et%#! "s m"##e& f)!, sep"#"te)y(
b. 6ion is sin&le and owns a condoiniu in =lorida. 4is father lives in the
condoiniu2 and 6ion receives 112... per !ear fro his father as rent. The
total expenses of aintainin& the condoiniu are 11(2.... 4is father
receives a pension of 1$(2... and 6ocial 6ecurit! benefits of 182....
Smo! s s!,)e( To o.t"! he"& of ho%seho)& st"t%s fo# s%ppo#t of hs
f"the#/ he m%st 0%")fy "s Smo!;s &epe!&e!t( He '"!!ot .e t#e"te& "s "
0%")fy!, #e)"t-e .e'"%se hs ,#oss !'ome *C86/DDD+ ex'ee&s the C:/9DD
pe#so!") exempto! "mo%!t/ so he f")s the ,#oss !'ome test(
c. 0ic3 is 3$ !ears old and lives with his other. 4e earns 13*2... a !ear and
pa!s 172... a !ear toward the cost of aintainin& the household. 4is other2
who is sin&le2 earns 1*.2... and pa!s 182... toward the cost of aintainin&
the household.
N'4;s mothe# m%st f)e "s s!,)e .e'"%se N'4 '"!!ot .e ')"me& "s "
&epe!&e!t %!&e# ethe# the 0%")fy!, 'h)& o# 0%")fy!, #e)"t-e tests(
d. >aal?s wife died in $..(. 4e aintains a household for his twin dau&hters
who are seniors in hi&h school.
@"m") m"y f)e "s " s%#--!, spo%se *(e(/ "t Ao!t #et%#! #"tes/
&e&%'to!s/ et'(+ .e'"%se he h"s t$o &epe!&e!t 'h)&#e! $ho st)) )-e !
hs home( Ths f)!, st"t%s s o!)y "))o$e& fo# 8DDB "!& 8DDE(
I!st#%'to#;s Note3 To .e " s%#--!, spo%se fo# 8DDB "!& 8DDE/ "t )e"st
o!e of hs &"%,hte#s m%st st)) )-e $th hm "!& s " 0%")fy!, 'h)& o#
0%")fy!, #e)"t-e( Be,!!!, ! 8DD8/ @"m");s f)!, st"t%s $)) .e he"& of
ho%seho)&(
e. @ath! and 6ven are arried with two children2 a&es 17 and 1$. In >une2 @ath!
leaves 6ven and their children. 6ven has not heard fro @ath!2 but a forer
cowor3er of @ath!?s tells 6ven that @ath! wanted to ove to Ireland.
Ass%m!, th"t S-e! p#o-&es mo#e th"! h")f of the 'ost of m"!t"!!,
the home/ he '"! f)e "s " he"& of ho%seho)& %!&e# the "."!&o!e&
spo%se #%)e( NOTE3 If F"thy h"& )eft the home "fte# @%!e :D/ the )"st h")f
of the ye"# #e0%#eme!t $o%)& !ot .e met "!& S-e! $o%)& h"-e to f)e "s
m"##e& f)!, sep"#"te)y( He most )4e)y 'o%)& !ot f)e " Ao!t t"x #et%#! "s
.oth t"xp"ye#s m%st s,! the #et%#!(
37. /eterine the axiu deduction fro #AI in $.., for each of the followin&
taxpa!ers:
a. Bedro is sin&le and aintains a household for his father. 4is father is not a
dependent of Bedro?s. Bedro?s itei9ed deductions are 1*27...
He $)) %se hs tem<e& &e&%'to!s of CB/9DD .e'"%se t ex'ee&s the
st"!&"#& &e&%'to! of C6/:6D fo# " s!,)e t"xp"ye#(
Chapter 8: Taxation of Individuals 8-1,
b. >ie and 5in& are arried. >ie is ** !ears old2 and 5in& is *$. The! have
itei9ed deductions of 1112C...
They $)) %se the# tem<e& &e&%'to!s of C22/7DD .e'"%se t ex'ee&s
the# st"!&"#& &e&%'to! of C22/E6D *C2D/EDD #e,%)"# st"!&"#& &e&%'to!
G C2/D6D "&&to!") &e&%'to! fo# @e .e!, o-e# ",e B6+(
c. 8!ron and 6aantha are arried2 and both are 38 !ears of a&e. 6aantha is
le&all! blind. The! have itei9ed deductions of 11.2(...
The# st"!&"#& &e&%'to! s C22/E6D *C2D/EDD #e,%)"# st"!&"#& &e&%'to!
G C2/D6D "&&to!") &e&%'to! fo# .)!&!ess+( They $)) &e&%'t the
st"!&"#& &e&%'to! .e'"%se t s ,#e"te# th"! the# tem<e& &e&%'to!s of
C2D/6DD(
d. >oel!nn is divorced and aintains a hoe for her $1-!ear-old son2 who is a
part-tie student at the local universit!. 4e pa!s less than one-half of his
support and his earned incoe for the !ear is 132.... 4er itei9ed deductions
are 1,2$...
She $)) %se the st"!&"#& &e&%'to! fo# he"& of ho%seho)& of CE/86D
.e'"%se t ex'ee&s he# tem<e& &e&%'to!s of CE/8DD( @oe)y!! 0%")fes
"s he"& of ho%seho)& .e'"%se he# so!;s ,#oss !'ome s )ess th"! C:/9DD
*the pe#so!") exempto! "mo%!t+( The#efo#e/ @oe)y!! $o%)& meet ")) the
tests fo# he# so! to .e 'o!s&e#e& " 0%")fy!, #e)"t-e(
e. =ran3 is ** !ears of a&e. /urin& the !ear2 his wife dies. 4is itei9ed
deductions are 11.27...
Fo# 8DDB/ F#"!4 s 'o!s&e#e& m"##e&( Hs st"!&"#& &e&%'to! s C22/E6D
*C2D/EDD #e,%)"# st"!&"#& &e&%'to! G C2/D6D "&&to!") &e&%'to! fo#
.e!, o-e# ",e B6+( He $)) &e&%'t the st"!&"#& &e&%'to! .e'"%se t s
,#e"te# th"! hs tem<e& &e&%'to!s of C2D/9DD(
f. #ssue the sae facts as in part e2 except that =ran3?s wife dies in $..*.
Fo# 8DDE/ F#"!4 s 'o!s&e#e& s!,)e *he &oes!;t 0%")fy fo# s%#--!,
spo%se .e'"%se he h"s !o &epe!&e!t 'h)&#e! )-!, ! the home+( Hs
st"!&"#& &e&%'to! s CB/B6D *C6/:6D #e,%)"# st"!&"#& &e&%'to! G
C2/:DD "&&to!") &e&%'to! fo# .e!, o-e# ",e B6+( He $)) &e&%'t hs
tem<e& &e&%'to!s of C2D/9DD .e'"%se t s ,#e"te# th"! hs st"!&"#&
&e&%'to!( Note3 F#"!4 &oes !ot #e'e-e "!y .e!eft *(e(/ "! !'#e"se !
hs tem<e& &e&%'to!s+ fo# .e!, o-e# B6( Be!, o-e# B6 '"! o!)y
!'#e"se hs st"!&"#& &e&%'to!(
3*. 4on&tao is sin&le and has a &ross incoe of 18C2.... 4is allowable
deductions for ad;usted &ross incoe are 172$.. and his itei9ed deductions
are 11$23...
a. What is 4on&tao?s taxable incoe and tax liabilit! for $..,"
Ho!,t"o;s t"x".)e !'ome s CB7/2DD3
8-18 Chapter 8: Taxation of Individuals
>#oss !'ome C 87/DDD
De&%'to!s fo# A>I *9/8DD+
A&A%ste& ,#oss !'ome C 89/8DD
De&%'to!s f#om A>I
The ,#e"te# of3
St"!&"#& &e&%'to! C 6/:6D
o#
Item<e& &e&%'to!s C28/:DD *28/:DD+
Pe#so!") exempto! *:/9DD+
T"x".)e !'ome C B7/2DD
Ho!,t"o;s t"x s C2:/B77( F#om the 8DDE t"x #"te s'he&%)e/ the t"x o!
CB7/2DD s3
C9/:8B(86 G H86I x *CB7/2DD 5 C:2/86D+J K C2:/B77
b. If 4on&tao has 1132C.. withheld fro his salar! durin& $..,2 is he entitled to a
refund or does he owe additional taxes"
Ho!,t"o h"s " #ef%!& of C8D2 *C2:/B77 5 C2:/7DD+(
c. #ssue the sae facts as in parts a and b2 except that 4on&tao is arried. 4is
wife?s salar! is 13.2...2 and she has 132$.. withheld fro her pa!chec3.
What is their taxable incoe and tax liabilit! for $..," #re the! entitled to a
refund2 or do the! owe additional taxes"
The# Ao!t t"x".)e !'ome s C76/EDD3
>#oss !'ome *C87/DDD G C:D/DDD+ C 227/DDD
De&%'to!s fo# A>I *9/8DD+
A&A%ste& ,#oss !'ome C 229/8DD
De&%'to!s f#om A>I
The ,#e"te# of3
St"!&"#& &e&%'to! C2D/EDD
o#
Item<e& &e&%'to!s C28/:DD *28/:DD+
Pe#so!") exempto! *8 x C:/9DD+ *B/8DD+
T"x".)e !'ome C 76/EDD
The# t"x )".)ty s C2B/EE:( F#om the 8DDE t"x #"te s'he&%)e/ the t"x o!
C76/EDD s3
C8/EE8(6D G H86I x *C76/EDD 5 CB:/EDD+J K C2B/EE:
They $)) #e'e-e " #ef%!& of C:8E HC2B/EE: 5 *C2:/7DD G C:/8DD+J(
3,. #rthur and Cora are arried and have $ dependent children. =or $..,2 the!
have a &ross incoe of 1882.... Their allowable deductions for ad;usted &ross
incoe total 172...2 and the! have total allowable itei9ed deductions of
1172$(..
a. What is #rthur and Cora)s $.., taxable incoe"
A#th%# "!& Co#" h"-e " t"x".)e !'ome of C6B/26D3
Chapter 8: Taxation of Individuals 8-1C
>#oss !'ome C 88/DDD
De&%'to!s fo# A>I *9/DDD+
A&A%ste& ,#oss !'ome C 89/DDD
De&%'to!s f#om A>I3
The ,#e"te# of3
Item<e& &e&%'to!s C 29/86D
o#
St"!&"#& &e&%'to! C 2D/EDD *29/86D+
Pe#so!") "!& &epe!&e!'y exempto!s *9 x C:/9DD+ *2:/BDD+
T"x".)e !'ome C 6B/26D
b. What is #rthur and Cora)s $.., incoe tax"
The t"x o! " m"##e& 'o%p)e f)!, Ao!t)y ! 8DDE s CE/B9D( The# !et t"x
)".)ty "fte# the 'h)& t"x '#e&t s C6/E88(
C2/6B6(DD G H26I x *C6B/26D 5 C26/B6D+J K C E/B9D
Less3 Ch)& t"x '#e&t *8 x C2/DDD+ *8/DDD+
Net t"x )".)ty C 6/B9D
c. If #rthur has 1$2C.. and Cora has 132... withheld fro their pa!chec3s durin&
$..,2 are the! entitled to a refund2 or do the! owe additional taxes"
They "#e e!tt)e& to " #ef%!& of C8BD HC6/B9D 5 *C8/7DD G C:/DDD+J(
38. :ebecca and Irvin& incur the followin& edical expenses durin& the current
!ear:
8edical insurance preius 1721..
4ospital C(.
/octors 12$$(
/entist (,(
Deterinarian 1,.
Chiropractor $$.
Cosetic sur&er! 127(.
<ver-the-counter dru&s 1*(
Brescription dru&s 1C(
Crutches 1.(
The! receive 172... in reiburseents fro their insurance copan! of which
13.. is for the cosetic sur&er!. What is their edical expense deduction if
a. Their ad;usted &ross incoe is 1772..."
Re.e''" "!& I#-!,;s "))o$".)e me&'") 'osts .efo#e #em.%#seme!t "#e
CE/:ED( The 'osmet' s%#,e#y/ -ete#!"#"! fees/ "!& the o-e#5the5'o%!te#
&#%,s "#e !ot "))o$".)e me&'") expe!ses( The# %!#em.%#se& me&'")
'osts "#e C:/BED HCE/:ED 5 C:/EDD *C9/DDD 5 C:DD+J( The C9/DDD
#em.%#seme!t s #e&%'e& .y the C:DD #em.%#seme!t fo# the 'osmet'
s%#,e#y( The C:/BED of me&'") expe!ses s s%.Ae't to the E 2?8I A>I
)mt"to!(
The# "))o$".)e &e&%'to! s C:ED3
8-20 Chapter 8: Taxation of Individuals
=e&'") !s%#"!'e p#em%ms C 9/2DD
Hospt") 76D
Do'to#s 2/886
De!tst 6E6
Ch#op#"'to# 88D
P#es'#pto! &#%,s 276
C#%t'hes 2D6
Tot") A))o$".)e me&'") expe!ses C E/:ED
Less3 I!s%#"!'e #em.%#seme!ts *:/EDD+
U!#em.%#se& me&'") expe!ses C :/BED
Less3 A>I )mt"to! *C99/DDD x E(6I+ *:/:DD+
=e&'") expe!se &e&%'to! C :ED
b. Their ad;usted &ross incoe is 1*12..."
No &e&%'to! s "))o$e&( The A>I )mt s C9/6E6 *CB2/DDD x E(6I+/ $h'h
s ,#e"te# th"! the# C:/BED of %!#em.%#se& 'osts(
7.. Baula lives in @ansas which iposes a state incoe tax. /urin& $..*2 she
pa!s the followin& taxes:
=ederal tax withheld (21$(
6tate incoe tax withheld 12C..
6tate sales tax E actual receipts 3,.
:eal estate tax 12,7.
Bropert! tax on car Fad valoreuG $1(
6ocial 6ecurit! tax 723$7
Aasoline taxes 1$7
+xcise taxes 11$
a. If Baula?s ad;usted &ross incoe is 13(2... what is her allowable deduction for
taxes"
P"%)" s "))o$e& "! tem<e& &e&%'to!/ the #e") est"te t"x "!& the
p#ope#ty t"xes she p"& o! the '"# &%#!, the ye"#( I! "&&to!/ she '"!
e)e't to &e&%'t the ,#e"te# of the "mo%!t she p"& ! st"te !'ome t"xes
o# the "mo%!t of he# s")es t"x &e&%'to!( I! &ete#m!!, the "mo%!t of
he# s")es t"x &e&%'to!/ P"%)" &e&%'ts the ,#e"te# of the "'t%") "mo%!t
p"& ! s")es t"x o# the IRS t".)e "mo%!t( She '"! ")so "&& to the t".)e
"mo%!t "!y t"xes she p"& to "'0%#e moto# -eh')es/ .o"ts/ "!& othe#
tems spe'fe& .y the IRS(
Be'"%se the t".)e "mo%!t of C6:D s ,#e"te# th"! the "'t%") "mo%!t of
C:ED/ he# s")es t"x &e&%'to! s C6:D( S!'e the "mo%!t P"%)" p"& !
st"te !'ome t"xes *C2/7DD+ s ,#e"te# th"! he# s")es t"x &e&%'to!/ P"%)"
$o%)& &e&%'t he# st"te !'ome t"xes( The So'") Se'%#ty/ ,"so)!e "!&
ex'se t"xes "#e !ot "))o$".)e t"xes( The fe&e#") !'ome t"x $thhe)& s
!ot " &e&%'t.)e t"x .%t s " p#ep"yme!t of P"%)"1s fe&e#") t"x )".)ty(
P"%)";s &e&%'to! fo# t"xes s C:/8663
St"te !'ome t"x $thhe)& C2/7DD
Re") est"te t"x 2/E9D
P#ope#ty t"x o! '"# *"& -")o#em+ 826
Tot") t"x &e&%'to! C:/866
Chapter 8: Taxation of Individuals 8-$1
b. #ssue the sae facts as in part a2 except that Baula pa!s 112*.. in sales tax
on a otor vehicle she purchased durin& the !ear. What is Baula?s allowable
deduction for taxes"
As &s'%sse& ".o-e/ P"%)" '"! e)e't to &e&%'t the ,#e"te# of the "mo%!t
she p"& ! st"te !'ome t"xes o# the "mo%!t of he# s")es t"x &e&%'to!(
I! &ete#m!!, the "))o$".)e "mo%!t of he# s")es t"x &e&%'to!/ P"%)"
$o%)& t"4e the ,#e"te# of the "'t%") "mo%!t p"& ! s")es t"x C8/2:D *C6:D
G C2/BDD+ o# the C2/7DD she p"& ! st"te !'ome t"xes( S!'e the tot")
s")es t"x "mo%!t of C8/2:D ex'ee&s the "mo%!t P"%)" p"& ! st"te
!'ome t"x *C2/7DD+ she $o%)& e)e't to &e&%'t he# st"te s")es t"xes(
P"%)" s "))o$e& to &e&%'t C9/D863
St"te s")es t"x C8/2:D
Re") est"te t"x 2/E9D
P#ope#ty t"x o! '"# *"& -")o#e%m+ 826
Tot") t"x &e&%'to! C9/D86
73. =ran3 and 5i9 are arried. /urin& $..,2 =ran3 has 1$28.. in state incoe
taxes withheld fro his pa!chec32 and 5i9 a3es estiated tax pa!ents
totalin& 1$2$... In 8a! $..82 the! receive a state tax refund of 17*(. What is
the proper tax treatent of the refund in $..8 if
a. The! use the standard deduction"
Be'"%se they %se the st"!&"#& &e&%'to! *C2D/EDD+ ! 8DDE/ they &o !ot
h"-e to !')%&e the !'ome t"x #ef%!& ! the# 8DD8 t"x".)e !'ome( They
$o%)& o!)y !')%&e the #ef%!& o# " po#to! of t/ f they h"& tem<e& the#
&e&%'to!s "!& &e&%'te& mo#e st"te t"xes the! they "'t%"))y o$e& *(e(/
#e'e-e& " t"x .e!eft+(
b. The! have itei9ed deductions other than state incoe taxes of 1,27.."
F#"!4 "!& L< m%st !')%&e the C9B6 !'ome t"x #ef%!& ! the# 8DD8
t"x".)e !'ome( They &e&%'te& C6/DDD *C8/8DD G C8/8DD+ ! st"te t"xes !
8DDE $he! the# "'t%") st"te t"xes sho%)& h"-e .ee! C9/6:6 *C6/DDD 5
C9B6 #ef%!&+( The#efo#e/ the# tot") tem<e& &e&%'to!s $e#e o-e#st"te&
.y C9B6 H#epo#te& "s C28/9DD *CE/9DD G C6/DDD+ !ste"& of C22/7:6 *CE/9DD
G C9/6:6+J(
b. The! have itei9ed deductions other than state incoe taxes of 1(2C.."
F#"!4 "!& L< m%st !')%&e C8DD of the !'ome t"x #ef%!& ! the# 8DD8
t"x".)e !'ome( As ! p"#t ./ they h"-e &e&%'te& C6/DDD ! st"te t"xes !
8DDE $he! the# "'t%") st"te sho%)& h"-e .ee! C9/6:6 *C6/DDD 5 C9B6
#ef%!&+( Ho$e-e#/ e-e! tho%,h the# #epo#te& &e&%'to!s of C2D/7DD
*C6/DDD G C6/7DD+ ex'ee& the# "'t%") &e&%'to!s of C2D/9:6 *C9/6:6 G
C6/7DD+ .y C9B6/ F#"!4 "!& L< h"-e .e!efte& o!)y .y the "mo%!t the#
#epo#te& &e&%'to!s ex'ee& the st"!&"#& &e&%'to! of C2D/EDD(
Remem.e#/ "t " m!m%m they "#e e!tt)e& to the st"!&"#& &e&%'to!(
The#efo#e/ they o!)y !')%&e C8DD *C2D/7DD 5 C2D/EDD+ of the t"x #ef%!& !
!'ome o! the# 8DD8 t"x #et%#!(
8-22 Chapter 8: Taxation of Individuals
7(. :obin purchases a new hoe costin& 18.2... in the current !ear. 6he pa!s
182... down and borrowed the reainin& 1,$2... b! securin& a ort&a&e on
the hoe. 6he also pa!s 112,(. in closin& costs2 and 112*.. in points to obtain
the ort&a&e. 6he pa!s 17277. in interest on the ort&a&e durin& the !ear.
What is :obin)s allowable itei9ed deduction for interest paid"
Ro.! s "))o$e& to &e&%'t the !te#est p"& o! the "'0%sto! &e.t/
C9/99D/ "!& the po!ts p"& to o.t"! the !t") mo#t,",e C2/BDD/ fo# "
tot") "))o$".)e home mo#t,",e !te#est &e&%'to! of CB/D9D( The ')os!,
'osts "#e !ot &e&%'t.)e !te#est "!& "#e "&&e& to the ."ss of the home(
(7. /eterine the allowable charitable contribution in each of the followin&
situations:
a. @aren attends a charit! auction where she pa!s 1$(. for two tic3ets to a
'roadwa! show. The tic3ets have a face value of 11(..
F"#e! s o!)y "))o$e& to &e&%'t the "mo%!t p"& ! ex'ess of the f"#
m"#4et -")%e of the t$o t'4ets/ C2DD *C86D 5 C26D+( She '"!!ot #e'e-e "
'h"#t".)e 'o!t#.%to! fo# the C26D -")%e of the t'4ets .e'"%se she
#e'e-e& " .e!eft *(e(/ see!, the sho$+ fo# th"t po#to! of he#
'o!t#.%to!(
b. 6tate -niversit! holds a raffle to benefit the football tea. +ach raffle tic3et
costs 11..2 and onl! (.. tic3ets are sold2 with the winner receivin& 11.2....
Aar! bu!s two raffle tic3ets but does not win the 11.2... pri9e.
The C2DD p"& to p%#'h"se the #"ff)e t'4ets s !ot " 'h"#t".)e
'o!t#.%to!(
c. Beter is a nurse at a local hospital and earns 11(. per da!. <ne 6aturda! a
onth2 he volunteers 8 hours of his tie at a edical clinic in a nei&hborin&
town. The round-trip distance fro Beter?s hoe to the clinic is $( iles.
No &e&%'to! s "))o$e& fo# the -")%e of " pe#so!1s tme &o!"te& to
'h"#t".)e $o#4( Ho$e-e#/ Pete# s "))o$e& to &e&%'t 29 'e!ts " m)e fo#
t#"-e) to "!& f#om the hospt")( Pete#;s 'h"#t".)e 'o!t#.%to! s C98
*29 'e!ts x 86 m)es x 28 mo!ths+(
d. >ordan donates stoc3 with a fair ar3et value of 13*2... to Caulfield Colle&e.
6he ac%uired the stoc3 in 1CC1 for 1132.... 4er ad;usted &ross incoe is
1*.2....
@o#&"!;s 'h"#t".)e 'o!t#.%to! s C:B/DDD( P#ope#ty -")%e& "t f"# m"#4et
-")%e s )mte& to " m"xm%m &e&%'to! of :DI of "&A%ste& ,#oss
!'ome( @o#&"! '"! &e&%'t C28/DDD *CBD/DDD x :DI+ ! the '%##e!t ye"#(
The #em"!!, C28/DDD *C:B/DDD 5 C28/DDD+ s '"##e& fo#$"#& fo# 6 ye"#s(
(C. 5ee is a colle&e professor with an ad;usted &ross incoe of 13$2.... 5ee has
a lot of bad luc3 this !ear. =irst2 a tornado blows the roof off of his house2
causin& 172C.. in daa&e. 4is insurance copan! reiburses hi onl!
112$.. for the roof daa&e. 5ater in the !ear2 he is out at a local pub when his
1*$( car stereo is stolen. 4is insurance copan! does not pa! for the stereo
Chapter 8: Taxation of Individuals 8-$3
because it is worth onl! 17.. at the tie and 5ee)s polic! does not cover
losses of less than 1(... What is 5ee)s allowable casualt! and theft loss for
the !ear"
Pe#so!") '"s%")ty "!& theft )osses "#e me"s%#e& "s the )esse# of the
&e')!e ! -")%e &%e to the '"s%")ty o# theft o# the "&A%ste& ."ss of the
p#ope#ty( E"'h )oss o''%##!, &%#!, the ye"# s #e&%'e& .y "!y
!s%#"!'e #em.%#seme!ts "!& the C2DD st"t%to#y f)oo#( The tot")
'"s%")ty "!& theft )osses fo# the ye"# "#e s%.Ae't to " 2DI of "&A%ste&
,#oss !'ome "!!%") )mt"to!( D%e to the t$o )mt"to!s *pe#
o''%##e!'e "!& "&A%ste& ,#oss !'ome+/ Lee;s '"s%")ty )oss &e&%'to! s
CEDD(
Amo%!t of )oss o! #oof *D"m",es+ C 9/7DD
Less3 I!s%#"!'e #em.%#seme!t *2/8DD+
Less3 St"t%to#y f)oo# *2DD+
A))o$".)e )oss o! #oof C :/BDD
Amo%!t of )oss o! ste#eo *F=V+ C 9DD
Less3 St"t%to#y f)oo# *2DD+
A))o$".)e )oss o! ste#eo :DD
Tot") '"s%")ty "!& theft )osses C :/7DD
Less3 A!!%") )oss )mt"to! *2DI x C:8/DDD+ *:/8DD+
De&%'t.)e '"s%")ty )oss C EDD
**. #ni3a and >espar are arried and have two children a&es 1* and 17. Their
ad;usted &ross incoe for the !ear is 1C82.... What aount can the! clai for
the child credit"
A!4" "!& @esp"# '"! ')"m " 'h)& '#e&t of C8/DDD *C2/DDD x 8+( A
t"xp"ye# '"! ')"m " C2/DDD t"x '#e&t fo# e"'h 0%")fy!, 'h)&( The
&ef!to! of " 0%")fy!, 'h)& s sm)"# to the &ef!to! of " 0%")fy!,
'h)& fo# &epe!&e!'y p%#poses ex'ept th"t the 'h)& m%st .e %!&e# ",e
2E "t the e!& of the t"x ye"#(
The '#e&t s ph"se&5o%t "t " #"te of C6D fo# e"'h C2/DDD of !'ome *o#
f#"'to! the#eof+ th"t " m"##e& t"xp"ye#1s "&A%ste& ,#oss !'ome ex'ee&s
C22D/DDD(
a. What aount can the! clai for the child credit if their ad;usted &ross incoe is
111,2*.."
A!4" "!& @esp"# "#e "))o$e& " 'h)& '#e&t of C2/BDD *C8/DDD 5 C9DD+(
Be'"%se the# "&A%ste& ,#oss !'ome ex'ee&s C22D/DDD/ the '#e&t m%st
.e ph"se&5o%t "t " #"te of C6D fo# e"'h C2/DDD of "&A%ste& ,#oss !'ome
*o# f#"'to! the#eof+ th"t ex'ee&s C22D/DDD( A!4" "!& @esp"# m%st
#e&%'e the# 'h)& '#e&t .y C9DD(

C22E/BDD 5 C22D/DDD K CE/BDD C2/DDD K E(B *#o%!& to 8+
C6D x 8 K C9DD #e&%'to! ! '#e&t(
b. What aount can the! clai for the child credit if the children are a&es 18 and
1* and their ad;usted &ross incoe is 1C*2..."
8-24 Chapter 8: Taxation of Individuals
A!4" "!& @esp"# '"! ')"m " 'h)& t"x '#e&t o!)y fo# the 'h)& th"t s 2B
ye"#s o)&( The#efo#e/ the# 'h)& t"x '#e&t s C2/DDD(
,3. 8artina is sin&le and has two children in colle&e. 8atthew is a sophoore2 and
Christine is a senior. 8artina pa!s 132*.. in tuition and fees for 8atthew and
1$2... for his roo and board. Christine)s tuition and fees are 1728..2 and her
roo and board expenses are 1128... 8artina)s ad;usted &ross incoe is
17C2....
E),.)e t"xp"ye#s $ho !'%# expe!ses fo# h,he# e&%'"to! '"! e)e't to
')"m o!e of t$o t"x '#e&ts/ the HOPE S'ho)"#shp T"x C#e&t *HSTC+ o#
the Lfetme Le"#!!, T"x C#e&t *LLTC+( O!)y o!e '#e&t '"! .e ')"me&
fo# e"'h 0%")fy!, st%&e!t( Q%")fe& h,he# e&%'"to! expe!ses "#e
)mte& to t%to! "!& #e)"te& fees( Both '#e&ts "#e ph"se&5o%t #"t".)y fo#
s!,)e t"xp"ye#s $he! "&A%ste& ,#oss !'ome s .et$ee! C9E/DDD "!&
C6E/DDD(
The HOPE S'ho)"#shp T"x C#e&t p#o-&es fo# " 2DDI t"x '#e&t o! the
f#st C2/2DD of 0%")fe& expe!ses "!& " 6DI t"x '#e&t o! the !ext C2/2DD
of h,he# e&%'"to! expe!ses p"& &%#!, the ye"# fo# e"'h 0%")fy!,
st%&e!t( The#efo#e/ the m"xm%m '#e&t " t"xp"ye# m"y ')"m pe# ye"# fo#
e"'h 0%")fy!, st%&e!t s C2/B6D H*C2/DDD x 2DDI+ G *C2/DDD x 6DI+J(
The HSTC '"! o!)y .e ')"me& fo# the f#st t$o ye"#s of %!&e#,#"&%"te
st%&y(
The Lfetme Le"#!!, T"x C#e&t p#o-&es " 8DI '#e&t fo# %p to C2D/DDD
of 0%")fe& h,he# e&%'"to! expe!ses( The LLTC s )mte& to "
m"xm%m "mo%!t of C8/DDD *C2D/DDD x 8DI+/ #e,"#&)ess of the !%m.e#
of 0%")fy!, !&-&%")s !'%##!, h,he# e&%'"to! expe!ses(
a. What aount can 8artina clai as a tax credit for the hi&her education
expenses she pa!s"
="#t!" '"! ')"m " Hope S'ho)"#shp T"x C#e&t *HSTC+ fo# ="tthe$ "!&
the Lfetme Le"#!!, T"x C#e&t fo# Ch#st!e( O!)y the expe!ses
!'%##e& fo# t%to! "!& fees "#e e),.)e fo# ethe# '#e&t( Be'"%se
="tthe$1s t%to! ex'ee&s C8/8DD/ she '"! ')"m "! HSTC of C2/B6D
H*C2/2DD x 2DDI+ G *C2/2DD x 6DI+J(
Ch#st!e s !ot e),.)e fo# the HSTC .e'"%se she s ! he# fo%#th ye"# of
st%&y( ="#t!" '"! ')"m " LLTC of C7BD *C9/8DD x 8DI+( Be'"%se
="#t!";s "&A%ste& ,#oss !'ome ex'ee&s C96/DDD/ he# tot") t"x '#e&t fo#
h,he# e&%'"to! expe!ses of C8/B2D *C2/B6D G C7BD+ m%st .e #e&%'e&
%s!, the fo))o$!, fo#m%)"3
T"x '#e&t pe#'e!t",e K A&A%ste& ,#oss !'ome 5 C9E/DDD
C2D/DDD
T"x '#e&t "))o$e& K C")'%)"te& t"x '#e&t x *2 5 t"x '#e&t pe#'e!t",e+
8DI K C97/DDD 5 C9E/DDD
C2D/DDD
C8/D88 K C8/B2D x *2 5 8DI+
Chapter 8: Taxation of Individuals 8-$(
="#t!"1s h,he# e&%'"to! t"x '#e&t s C8/D88(
b. #ssue that 8artina)s ad;usted &ross incoe is 1*.2.... What aount can
she clai as a tax credit for the hi&her education expenses she pa!s"
Be'"%se ="#t!";s "&A%ste& ,#oss !'ome ex'ee&s C6E/DDD/ she s !ot
e),.)e to ')"m ethe# t"x '#e&t(
INSTRUCTORS NOTE3 S!'e he# A>I s )ess th"! CB6/DDD/ she '"! &e&%'t
*fo# A>I+ C9/DDD of the h,he# e&%'"to! expe!ses(
,,. /eterine whether each of the followin& taxpa!ers ust file a return in $..,:
a. =elicia is a dependent who has wa&es of 1(2$.. and interest incoe of 1$$(.
Be'"%se Fe)'"1s ,#oss !'ome of C6/986 s mo#e th"! he# st"!&"#&
&e&%'to! of C6/:6D/ she m%st f)e " #et%#!(
b. >ason is a dependent who has interest incoe of 1*...
@"so!1s %!e"#!e& !'ome s )ess th"! C86D/ so he &oes !ot h"-e to f)e "
#et%#!(
c. >err! is self-eplo!ed. 4is &ross business receipts are 1732...2 and business
expenses are 17.23... 4is onl! other incoe is 112$.. in interest fro
unicipal bonds.
Be'"%se @e##y1s ,#oss !'ome of C9:/DDD s ,#e"te# th"! C8/E6D *C6/:6D G
C:/9DD+/ he m%st f)e " #et%#!( I! "&&to!/ @e##y m%st f)e .e'"%se hs se)f5
emp)oyme!t !'ome s ,#e"te# th"! C9DD(
d. 8a&nus is *C2 unarried and le&all! blind. 4is incoe consists of 11.2(.. in
6ocial 6ecurit! benefits and 11.2... fro a %ualified eplo!er-provided
pension plan.
=",!%s1s ,#oss !'ome s C2D/DDD/ $h'h s )ess th"! C2D/D6D *C6/:6D G
C:/9DD G C2/:DD ",e exempto!+ "!& he s !ot #e0%#e& to f)e " #et%#!( I
e. Wa!ne and =lorencia are arried and have 1 dependent child. Wa!ne sta!s
hoe and ta3es care of their child. =lorencia)s salar! is 11,28...
L"y!e "!& F)o#e!'"1s ,#oss !'ome of C2E/8DD s mo#e th"! C2E/6DD
HC2D/EDD G *8 x C:/9DD+J/ so they m%st f)e " t"x #et%#!( Note3 The
&epe!&e!'y exempto!s "#e !ot !')%&e& ! &ete#m!!, $hethe# they
h"-e to f)e " #et%#!( The#efo#e/ e-e! tho%,h the# t"x".)e !'ome $)) .e
<e#o HC2E/8DD 5 C2E/6DD 5 C:/9DD *C:/9DD x 2+J/ they st)) m%st f)e " t"x
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