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 $100,000 and they sold their home this year. They initially purchased the home three years ago for $200,000 and they sold it for $250,000. The gain on the sale qualified for the exclusion from the sale of a principal residence. The Jacksons incurred $16,500 of itemized deductions and they had $6,250 withheld from their paychecks for federal taxes. They are also allowed to claim a child tax credit for each of their children. a. What is the Jacksons’ taxable income and what is their tax liability or (refund)? b. Complete the first two pages of the Jacksons’ Form 1040 (use 2015 forms if 2016 forms are unavailable). c. What would their taxable income be if their itemized deductions totaled $6,000 instead of $16,500? d. What would their taxable income be if they had $0 itemized deductions and $6,000 of for AGI deductions? e. Assume the original facts except that they also incurred a loss of $5,000 on the sale of some of their investment assets. What effect does the $5,000 loss have on their taxable income? f. Assume the original facts except that the Jacksons owned investments that appreciated by $10,000 during the year. The Jacksons believe the investments will continue to appreciate, so they did not sell the investments during this year. What is the Jacksons’ taxable income?
> Rank the following three single taxpayers in order of the magnitude of taxable income (from lowest to highest) and explain your results. Ahmed $ 80,000 8,000 Baker $ 80,000 Chin Gross Income $ 80,000 Deductions For AGI 4,000 4,000 Itemized Deductions
> 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 work over the weekend. Matteo could get his car repaired ov
> Describe the business purpose, step-transaction, and substance-over-form doctrines. What types of tax planning strategies may these doctrines inhibit?
> 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 cost of $4,000, which is deductible for AGI. In contr
> 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 deducts the standard deduction instead of itemized deducti
> 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 amount of their tax refund or taxes due?
> 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 $17,000 in itemized deductions. Neither of his dependents qu
> Doug Jones timely submitted his 2016 tax return 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 Darlene owed and paid the IRS $124,000 for their 2016 tax
> 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 on a special assignment to Australia. During the current
> 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 widow (spouse died five years ago) who provides a home for h
> 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 supports his 17-year-old brother, Bill. Bill earned $3,0
> 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 for the current year in the following independent situat
> 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 provided all the means necessary to support himself and h
> Relative to arm’s-length transactions, why do related-party transactions receive more IRS scrutiny?
> 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. Irene has no gross income. a. What is Elroy’s filing sta
> 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 Lakesha have for last year? b. Assume instead that Gary
> 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 doesn’t remarry and still has two dependent children liv
> 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%), his daughters Diane (20%) and Karen (15%), his sons Mike (20%) and Kenne
> 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 Ashton’s uncle. Ashton is 15 years old and has gross income
> 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 mortgage, property taxes, and food). Kimberly pays for Bailey’s
> 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 requirements to be considered a qualifying child; however, w
> 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 car and sped away. Everyone hoped that the kidnapper and
> 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%), his daughters Camille (25%) and Rachel (30%), his son Zander (5%), his friend F
> 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 all live at home. None of the daughters provide more than h
> Explain the assignment of income doctrine. In what situations would this doctrine potentially apply?
> 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 own support. Francine is 15 years old at the end of the
> 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 employment but has been unable to find any—his gross income
> 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 his parents’ home for three months of the year, and he w
> 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?
> How are realized income, gross income, and taxable income similar, and how are they different?
> What is the constructive receipt doctrine? What types of taxpayers does this doctrine generally affect? For what tax planning strategy is the constructive receipt doctrine a potential limitation?
> 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 the taxpayer’s spouse?
> What requirements do an abandoned spouse and qualifying widow or widower have in common?
> Isabella provides 30% 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 father? Explain.
> 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 qualify as a qualifying child for either parent)? How do
> 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 qualifying child and a qualifying relative of the same taxpaye
> 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?
> Several judicial doctrines limit basic tax planning strategies. What are they? Which planning strategies do they limit?
> 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”?
> 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 corporate bonds. Marc and Michelle also paid $2,500 of qual
> 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 allowed to claim a $1,000 child tax credit for her qua
> Camille Sikorski was divorced last year. She currently owns and provides a home for her 15-year-old daughter, Kaly, and 18-year-old son, Parker. Both children lived in Camille’s home for the entire year and Camille paid for all the costs of maintaining t
> Using the facts from the previous problem, how would your answer change if Manny’s after-tax rate of return were 8 percent?
> Manny, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December he performed $20,000 of legal services for a client. Manny typically requires his clients to pay his bills immediately upon receipt. Assume
> Using the facts from the previous problem, how would your answer change if Isabel’s after-tax rate of return were 8 percent?
> Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $20,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $20,000 bill any
> What is an “implicit tax” and how does it affect a taxpayer’s decision to purchase municipal bonds?
> Tesha works for a company that pays a year-end bonus in January of each year (instead of December of the preceding year) to allow employees to defer the bonus income. Assume Congress recently passed tax legislation that decreases individual tax rates as
> Billups, a physician and cash-method taxpayer, is new to the concept of tax planning and recently learned of the timing strategy. To implement the timing strategy, Billups plans to establish a new policy that allows all his clients to wait two years to p
> Yong recently paid his accountant $10,000 for elaborate tax planning strategies that exploit the timing strategy. Assuming this is an election year and there could be a power shift in the White House and Congress, what is a potential risk associated with
> 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 to identify the three basic elements of tax evasion and
> 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 goals: purchasing a Pa
> 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 the long term. a. How much cash will Komiko retain, a
> 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 return (the investment is tax deferred). When she cashes
> 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, what is Anne’s annual after-tax rate of return from the b
> Helen holds 1,000 shares of Fizbo Inc. stock that she purchased 11 months ago. The stock has done very well and has appreciated $20/share since Helen bought the stock. When sold, the stock will be taxed at capital gains rates (long-term rate is 15% and s
> Dennis is currently considering investing in municipal bonds that earn 6 percent interest, or in taxable bonds issued by the Coca-Cola Company that pay 8 percent. If Dennis’ tax rate is 20 percent, which bond should he choose? Which bond should he choose
> Laurie is thinking about investing in one or several of the following investment options: Corporate bonds (ordinary interest paid annually) Dividend-paying stock (qualified dividends) Life insurance (tax-exempt) Savings account Growth stock a. Assuming a
> Using the facts in the previous problem, what are some ways that Bendetta could shift some of the rental income to Jenine? What are the disadvantages associated with these income-shifting strategies?
> Bendetta, a high-tax-rate taxpayer, owns several rental properties and would like to shift some income to her daughter, Jenine. Bendetta instructs her tenants to send their rent checks to Jenine so Jenine can report the rental income. Will this shift the
> Hyundai is considering opening a plant in two neighboring states. One state has a corporate tax rate of 10 percent. If operated in this state, the plant is expected to generate $1,000,000 pretax profit. The other state has a corporate tax rate of 2 perce
> Orie and Jane, husband and wife, operate a sole proprietorship. They expect their taxable income next year to be $300,000, of which $125,000 is attributed to the sole proprietorship. Orie and Jane are contemplating incorporating their sole proprietorship
> Moana is a single taxpayer who operates a sole proprietorship. She expects her taxable income next year to be $250,000, of which $200,000 is attributed to her sole proprietorship. Moana is contemplating incorporating her sole proprietorship. Using the si
> Tawana owns and operates a sole proprietorship and has a 40 percent marginal tax rate. She provides her son, Jonathon, $8,000 a year for college expenses. Jonathon works as a pizza delivery person every fall and has a marginal tax rate of 15 percent. a.
> Geraldo recently won a lottery and chose to receive $100,000 today instead of an equivalent amount in ten years, computed using an 8 percent rate of return. Today, he learned that interest rates are expected to increase in the future. Is this good news f
> Using the facts from the previous problem, when should Hank send the bill if he expects his marginal tax rate to be 33 percent next year? 25 percent next year?
> Hank, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December he performed $20,000 of legal services for a client. Hank typically requires his clients to pay his bills immediately upon receipt. Assume hi
> Using the facts from the previous problem, when should Reese pay the bill if she expects her marginal tax rate to be 33 percent next year? 25 percent next year?
> Under what circumstances would you expect the after-tax return from an investment in a capital asset to approach that of tax-exempt assets assuming equal before-tax rates of return?
> Reese, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $20,000 bill from her accountant for consulting services related to her small business. Reese can pay the $20,000 bill any ti
> Why is understanding the time value of money important for tax planning?
> Describe the ways in which the timing strategy has limitations.
> How do changing tax rates affect the timing strategy? What information do you need to determine the appropriate timing strategy when tax rates change?
> What factors increase the benefits of accelerating deductions or deferring income?
> What are some common examples of the timing strategy?
> In this chapter we discussed three basic tax planning strategies. What different features of taxation does each of these strategies exploit?
> Describe the three parties engaged in every business transaction and how understanding taxes may aid in structuring transactions.
> “Tax avoidance is discouraged by the courts and Congress.” Is this statement true or false? Please explain.
> Distinguish earned income from unearned income, and provide an example of each.
> What is the difference between tax avoidance and tax evasion?
> 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 Jim’s shares paid $350 of dividends and he used these f
> Randy has found conflicting authorities that address a research question for one of his clients. The majority of the authorities provide an unfavorable answer for his client. Randy estimates that if the client takes the more favorable position on its tax
> Latrell recently used his Delta Skymiles to purchase a free round trip ticket to Milan, Italy (value $1,200). The frequent flyer miles used to purchase the ticket were generated from Latrell’s business travel as a CPA. Latrell’s employer paid for his bus
> J.C. has been a professional gambler for many years. He loves this line of work and believes the income is tax-free. a. Use an available tax research service to determine whether J.C.’s thinking is correct. Is the answer to this question found in the In
> Georgette has identified a 1983 court case that appears to answer her research question. What must she do to determine if the case still represents “current” law?
> Justine would like to clarify her understanding of a code section recently enacted by Congress. What tax law sources are available to assist Justine?
> For each of the following citations, identify the type of authority (statutory, administrative, or judicial) and explain the citation. a. IRC Sec. 280A(c)(5) b. Rev. Proc. 2004-34, 2004-1 C.B. 911 c. Lakewood Associates, RIA TC Memo 95-3566. d. TAM 20042
> For each of the following citations identify the type of authority (statutory, administrative, or judicial) and explain the citation. a. Reg. Sec. 1.111-1(b) b. IRC Sec. 469(c)(7)(B)(i) c. Rev. Rul. 82-204, 1982-2 C.B. 192 d. Amdahl Corp., 108 TC 507 (19
> Robert has found a “favorable” authority directly on point for his tax question. If the authority is a court case, which court would he prefer to have issued the opinion? Which court would he least prefer to have issued the opinion?
> Juanita, a Texas resident (5th Circuit), is researching a tax question and finds a 5th Circuit case ruling that is favorable and a 9th Circuit case that is unfavorable. Which circuit case has more “authoritative weight” and why? How would your answer cha
