SMChap004 PDF

Chapter 04 - Individual Tax Overview
Chapter 4
Individual Tax Overview
SOLUTIONS MANUAL
Discussion Questions
1. [LO 1] How are realized income, gross income, and taxable income similar, and how are
they different?
Realized income is more broadly defined than gross income which is more broadly
defined than taxable income.
Gross income includes all realized income that taxpayers are not allowed to exclude
from gross income or are not permitted to defer to a later year. Consequently, gross
income is the income that taxpayers actually report on their tax returns and pay taxes on.
In the tax formula, taxable income is gross income minus allowable deductions for and
from AGI. Taxable income is the base used to compute the tax due before applicable
credits. However, any income included in gross income can be considered “taxable”
income because gross income is income that is taxable and causes an increase in the
taxes that a taxpayer is required to pay (gross income increases taxable income).
2. [LO 1] Are taxpayers required to include all realized income in gross income? Explain.
No. Taxpayers are allowed to permanently exclude certain types of income from gross
income or defer certain types of income from taxation (gross income) until a subsequent
tax year. Consequently, taxpayers are not required to include all realized income in
gross income.
3. [LO 1] All else being equal, should taxpayers prefer to exclude income or defer it?
Why?
Taxpayers should prefer to exclude income rather than defer income. When they exclude
income they are never taxed on the income. When they defer income, they are still taxed
on the income, but they are taxed in a subsequent tax year.
4. [LO 1] Why should a taxpayer be interested in the character of income received?

A taxpayer should be interested in the character of income received because the
character of the income determines the rate at which the income will be taxed. Tax
exempt and tax deferred income is not taxed in the current year. Ordinary income is
taxed at the rates provided in the tax rate schedule. Qualified dividend income and long-
term capital gains are generally taxed at a maximum 15% rate.
5. [LO 1] Is it easier to describe what a capital asset is or what it is not? Explain.

It is easier to describe what a capital asset is not. In general, a capital asset is any asset
other than
 Accounts receivable from the sale of goods or services.
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 Inventory and other assets held for sale in the ordinary course of business.
 Assets used in a trade or business, including supplies.
Thus any asset used for investment or personal purposes is considered to be a capital
asset.
6. [LO 1] Are all capital gains (gains on the sale or disposition of capital assets) taxed at the
same rate? Explain.
No. If a taxpayer holds a capital asset for a year or less the gain is taxed at ordinary tax
rates. If the taxpayer holds the asset for more than a year before selling, the gain is
generally taxed at a maximum 15% rate but could be taxed as high as 20% for high
income taxpayers. If the taxpayer sells more than one capital asset during the year and
recognizes both capital gains and capital losses, the gains and losses are netted together
before determining the applicable tax rate.
7. [LO 1] Are taxpayers allowed to deduct net capital losses (capital losses in excess of
capital gains)? Explain.
In general, a taxpayer is allowed to deduct, as a “for AGI deduction,” up to $3,000 of
net capital loss against ordinary income. If the net capital loss exceeds $3,000, the
taxpayer is allowed to carry the loss over indefinitely to deduct in subsequent years
(subject to the $3,000 annual deduction limitation). If however, a capital loss arises
from the sale of a personal use asset (such as a personal automobile or a personal
residence), the loss is not deductible.
8. [LO 1] Compare and contrast for and from AGI deductions. Why are for AGI deductions
likely more valuable to taxpayers than from AGI deductions?
All deductions are classified as either “for AGI” or “from AGI” deductions. Gross
income minus “for AGI deductions” equals AGI. AGI minus “from AGI deductions”
equals taxable income. “For AGI deductions” are often referred to as deductions above
the line, while deductions from AGI are referred to as deductions below the line. The
line is AGI (the last line on the front page of the individual tax return).
Though both types of deductions may reduce a taxpayer’s taxable income, “for AGI”
deductions are generally more valuable to taxpayers because they
reduce AGI which may allow taxpayers to deduct more of their from AGI deductions
(and other tax benefits) that are subject to AGI limitations. “From AGI deductions”
don’t affect AGI.
9. [LO 1] What is the difference between gross income and adjusted gross income, and
what is the difference between adjusted gross income and taxable income?
Gross income is more inclusive than is adjusted gross income (AGI). Gross income is all
income from whatever source derived that is not excluded or deferred from income. AGI
is gross income minus “for AGI” deductions. So the primary difference between gross
income and AGI is the amount of “for AGI deductions.” Adjusted gross income is more
inclusive than taxable income. AGI is gross income minus “for AGI” deductions.
Taxable income is AGI minus “from AGI”
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deductions. Consequently, the difference between AGI and taxable income is the amount
of “from AGI” deductions.
10. [LO 1] How do taxpayers determine whether they should deduct their itemized
deductions or utilize the standard deduction?
Taxpayers generally deduct the greater of (1) the applicable standard deduction or (2)
their total itemized deductions, after limitations. However, taxpayers that do not want to
bother with tracking itemized deductions may choose to deduct the standard deduction,
even when itemized deductions may exceed the standard deduction.
11. [LO 1]. Why are some deductions called “above-the-line” deductions and others are
called “below-the-line” deductions? What is the “line”?
The line is adjusted gross income (AGI). AGI is considered the line because of the
significance it plays in the amount of deductions allowed from AGI. “For AGI”
deductions are called above-the-line deductions because they are deducted in
determining AGI. “From AGI” deductions are called below-the-line deductions because
they are deducted after AGI has been determined. They are deducted from AGI to arrive
at taxable income. Below-the-line deductions may be subject to limitations based on the
taxpayer’s AGI.
12. [LO 1] What is the difference between a tax deduction and a tax credit? Is one more
beneficial than the other? Explain.
A deduction generally reduces taxable income dollar for dollar (although from AGI
deductions may not reduce taxable income dollar for dollar). This translates into a tax
savings in the amount of the deduction times the marginal tax rate. In contrast, credits
reduce a taxpayer’s taxes payable dollar for dollar. Thus, generally speaking, credits are
more valuable than deductions.
13. [LO 1] 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?
In addition to the individual income tax, individuals may also be required to pay other
income based taxes such as the alternative minimum tax (AMT) or self-employment
taxes. These taxes are imposed on a tax base other than the individual’s taxable income.
The AMT tax base is alternative minimum taxable income, which is the taxpayer’s
taxable income adjusted for certain items to more closely reflect the taxpayer’s economic
income than does taxable income The tax base for self-employment taxes is the net
earnings derived from self-employment activities.
14. [LO 1] Identify three ways taxpayers can pay their income taxes to the government.
Taxpayers can pay taxes through (1) income taxes withheld from the taxpayer’s salary or
wages by her employer, (2) estimated tax payments directly to the government, and (3)
taxes the taxpayer overpaid in the previous year that the taxpayer elects to apply as an
estimated payment for the current year.
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15. [LO 1] 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?
No, taxpayers may claim a dependency exemption for a qualifying child and/or a
qualifying relative only if the qualifying child or relative is a citizen of the United States
or a resident of the United States, Canada, or Mexico. Further, the qualifying child or
qualifying relative must meet the joint tax return test if the person is married (no joint
return with spouse unless there is no tax liability (positive taxable income) on the joint
return and there would have been no tax liability on either separate tax return if the
spouses had filed separately).
16. [LO 2] Emily and Tony are recently married college students. Can Emily qualify as her
parents’ dependent? Explain.
Depending on the circumstances, Emily may qualify as a dependent of her parents. A
taxpayer who files a joint return with his or her spouse may not qualify as a dependent of
another, unless there is no tax liability on the couple's joint return and there would not
have been any tax liability on either spouse’s tax return if they had filed separately. As
long as Emily and Tony meet these criteria, then Emily will qualify as a dependent of her
parents assuming she also meets tests to be her parents’ qualifying child or qualifying
relative.
17. Compare and contrast the relationship test requirements for a qualifying child with the
relationship requirements for a qualifying relative.
The relationship test for the qualifying child includes the taxpayer’s child or descendant
of a child (child or grandchild) while the relationship test for qualifying relatives
includes both descendants and ancestors of the taxpayer (child, grandchild, parents, or
grandparent). The relationship test for the qualifying relative includes a descendant or
ancestor of the taxpayer (child, grandchild, parent, or grandparent). The relationship
test for qualifying child includes siblings of the taxpayer or descendants of siblings of the
taxpayer while the qualifying relative test also includes siblings of the taxpayer and sons
or daughters of the taxpayer’s siblings. The relationship test for qualifying relative also
includes the taxpayer’s in laws, aunt, uncle, and any person (even if no blood
relationship) who has the same principal place of abode as the taxpayer for the entire
year. Thus, the relationship test for qualifying relative is much more broad in scope than
the relationship test for qualifying child.
18. [LO 2] 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 taxpayer?
Why or why not?
The rules for determining who qualifies as a dependent as a qualifying child and who
qualifies as a dependent as a qualifying relative overlap to some extent. The primary
differences between the two are
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(1) the relationship requirement is more inclusive for qualifying relatives than
qualifying children,
(2) qualifying children are subject to age restrictions while qualifying relatives are
not,
(3) qualifying relatives are subject to a gross income restriction while qualifying
children are not, and
(4) taxpayers need not provide more than half a qualifying child’s support, though
the child cannot provide more than half of his/her own support, but, absent a
multiple support agreement, taxpayers must provide more than half the support of
a qualifying relative.
(5) qualifying children are subject to a residence test (they must live with the
taxpayer for more than half the year) while qualifying relatives are not.
An individual may not be a qualifying child and a qualifying relative of the same
taxpayer. By definition, a qualifying relative must be someone who is not a qualifying
child. Consequently, the qualifying relative tests apply only when the individual does not
pass the qualifying child tests.
19. [LO 2] 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 parents determine who gets to deduct the dependency exemption for a qualifying child
of both parents when the parents are divorced or file separate returns?
The priority in claiming a qualifying child is as follows:
(1) The parent of the child.
(2) If both parents qualify, then the parent with whom the child has resided with the
longest during the year.
(3) If the child resides with the parents equally or the child resides with taxpayers
who are not parents (the child is not a qualifying child of a parent), then the
taxpayer with the highest AGI.
In the case of divorced parents or parents filing separately, the parent with whom the
child has resided with the longest during the year has priority for the exemption (the
custodial parent). However, the custodial parent can release the exemption to the
noncustodial parent through a written declaration. The noncustodial parent attaches the
declaration to his or her tax return. If the child resides an equal time with each parent
(as would likely be the case if the married couple was filing separately), the parent with
the higher AGI has priority.
20. [LO 2] 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.
Because her father meets the relationship and gross income test for a qualifying relative,
the support test is the only obstacle for Isabella to claim a dependency exemption for her
father. The basic support test requires that Isabella must have provided more than half
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of the support for her father in order to claim a dependency exemption for him. Because
Isabella provides only 30% of her father’s support, she does not meet the basic test.
However, Isabella could potentially
qualify to claim a dependency exemption for her father under a multiple support
agreement. For Isabella to qualify, the following requirements must be met:
1. No other taxpayer paid over half of her father’s support.
2. Isabella and at least one other person provided more than half the support of
her father, and Isabella and the other person or persons would have been allowed
to claim an exemption for Hastings except for the fact that neither met the support
test.
3. Isabella provided over 10% of her father’s support (she provided 30%).
4. The other person or persons who provided more than 10% of Hastings’ support
must provide a signed statement to Isabella agreeing not to claim Hastings as a
dependent. Isabella would include the names, addresses, and social security
numbers of each other person on a Form 2120- which she would include with her
tax return for the year.
21. [LO 3] What requirements do an abandoned spouse and qualifying widow or widower
have in common?
Taxpayers qualifying as an abandoned spouse are treated as not married at the end of
the year and may therefore qualify for the head of household filing status. The
requirements for both abandoned spouse and qualifying widow or widower require that
the taxpayer no longer be living with his or her spouse at year end, whether through
death (for qualifying widow or widower) or by separation (for at least 6 months for
abandoned spouse). Further, both require that the taxpayer has a dependent child who
resides with the taxpayer. The qualifying widow status requires that the dependent child
live with the taxpayer for the entire year. The abandoned spouse status requires that the
dependent child live with the taxpayer for more than half the year. Furthermore, for
qualifying widow status, the dependent child must be a child or stepchild (including an
adopted child but not a foster child) for whom the taxpayer can claim a dependency
exemption. For abandoned spouse/head of household purposes, the dependent child
must be a child, stepchild (including an adopted child), or a foster child.
22. [LO 3] 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 not qualify as the taxpayer’s dependent) as long as the
taxpayer pays more than half the costs of maintaining the household of the mother or
father. Explain.
False. The taxpayer must be able to claim a dependency exemption of his or her father
or mother in order for the father or mother to be a qualifying person for purposes of
determining head of household filing status.
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23. [LO 3] Is a qualifying relative always a qualifying person for purposes of determining
head of household filing status?
No. A qualifying relative who meets the relationship test only because the individual
lived as a member of the taxpayer’s household for the entire year (no qualifying family
relationship) is not a qualifying person for head of household filing status purposes.
24. [LO 3] 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?
Married couples filing joint returns combine their income and deductions and agree to
share joint and several liability for the resulting tax. Filing a joint return generally
results in a lower tax liability than does filing separately due to more favorable tax rate
schedules and higher phase-out thresholds for various tax benefits. However, a couple
may prefer to file separate returns in certain circumstances for nontax reasons. For
example, when a married couple is separated but the couple does not want to have
anything to do with each other or when one spouse does not want to be liable for the tax
liability of both parties, the couple may choose to file separately.
25. [LO 3] 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?
Each spouse is liable for the full amount of taxes owed on a joint return, regardless of
which spouse earned the associated income.
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Problems
26. [LO 1] 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 qualifies for
the child tax credit.
a. Use the 2013 tax rate schedules to determine Jeremy’s taxes due.
Jeremy will owe $13,827.50 calculated as follows:
Description Amount Computation

(1) Gross income 106,000 $100,000 salary + $6,000
interest income
(2) For AGI deductions 0
(3) Adjusted gross income $106,000 (1) – (2)
(4) Standard deduction 8,950 Head of household
(5) Itemized deductions 17,000
(6) Greater of standard deductions or 17,000 (5) > (4)
itemized deductions
(7) Personal and dependency 11,700 3,900 × 3 (personal
exemptions exemption and two
dependency exemptions)
(8) Taxable income $77,300 (3) - (6)- (7)
Income tax liability $13,827.5 (77,300 – 48,600) × 25%
0 + $6,652.50 (see tax rate
schedule for head of
household)
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b. Assume that in addition to the original facts, Jeremy has a long-term capital gain of
$4,000. What is Jeremy’s tax liability including the tax on the capital gain (use the tax rate
schedules rather than the tax tables)?
Jeremy will owe $14,427.50 calculated as follows:

(1) Gross income 110,000 $100,000 salary + $6,000 interest
income + 4,000 long-term capital
gains
(6) Greater of standard 17,000 (5) > (4)
deductions or itemized
deductions
(7) Personal and 11,700 3,900 × 3 (personal exemption and
dependency exemptions two dependency exemptions)
(8) Taxable income $81,300 (3) – (6) – (7)
Income tax liability $14,427.5 ($77,300 – 48,600) × 25% +
6,652.5 + 4,000 × 15% (See tax rate
schedule for head of household.
Also note that the qualified dividend
is taxed at a maximum rate of 15%.)
c. Assume the original facts except that Jeremy had only $7,000 in itemized deductions.
What is Jeremy’s total income tax liability (use the tax rate schedules rather than the tax
tables)?
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Jeremy will owe $15,840, calculated as follows:

(1) Gross income 106,000 $100,000 salary + $6,000
interest income
itemized deductions
(7) Personal and dependency 11,700 3,900 × 3 (personal
dependency exemptions)
(8) Taxable income $85,350 (3) – (6) – (7)
Income tax liability $15,840 (85,350– 48,600) × 25% +
6,652.5 (see tax rate
schedule for head of
household)
27. [LO 1] 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?
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David and Lilly will receive a tax refund of $800 calculated as follows:

(1) Total tax $1,700
(2) Child tax credit 1,000
(3) Prepayments 1,500
Tax (refund) ($800) (1) – (2) – (3)
Prepayments are fully refundable when payments exceed the taxes after credits because the
refundable amount is essentially an overpayment of taxes.
28. [LO 1] {Planning} 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 deductions
a. What is the amount of Rick’s after-tax compensation (ignore payroll taxes)?
Rick’s after-tax compensation is $99,506.75 calculated as follows:

(1) Gross income 125,000
(4) Standard deduction 6,100 Single taxpayer
(5) Personal and 3,900 3,900 × 1 (personal exemption)
dependency exemptions
(6) Taxable income $115,000 (3) – (4) – (5)
(7) Income tax liability $25,493.25 (115,000 – 87,850) × 28% +
17,891.25 (see tax rate
schedule for Single individuals)
After-tax compensation $99,506.75 (1) – (7)
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b. Suppose Rick receives a competing job offer of $120,000 in cash compensation

and nontaxable (excluded) benefits worth $4,000. What is the amount of Rick’s
after-tax compensation for the competing offer? Which job should he take if taxes
were the only concern?
Rick’s after-tax compensation is $99,906.75 calculated as follows:

(1) Gross income 120,000 120,000 cash
compensation
(4) Standard deduction 6,100 Single
(5) Personal and dependency exemptions 3,900 3,900 × 1 (personal

exemption)
(6) Taxable income $110,000 (3) – (4) – (5)
(7) Income tax liability $24,093.2 (110,000 – 87,850) ×
5 28% + 17,891.25 (see
tax rate schedule for
single individuals)
After-tax compensation $99,906.7 (1) – (7) + $4,000
5 excluded benefits
Note that Rick’s after-tax benefit is higher with lower salary and more nontaxable
benefits. Rick is likely to take the second option, particularly if he would have paid for
the benefits had they not been provided to him as compensation.
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29. [LO 1] {Planning} 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 contrast, engagement 2 will generate $7,000 of revenue at a cost of $3,000,
which is deductible as an itemized deduction. Tex files as a single taxpayer.
a. Calculate Tex’s taxable income assuming he chooses engagement 1 and assuming he

chooses engagement 2. Assume he has no itemized deductions other than those generated
by engagement 2.
Description Engagement 1 Engagement 2 Computation

(1) Gross income before new $120,000 $120,000
work engagement
(2) Income from engagement 7,000 7,000
(3) Additional for AGI deduction (4,000) 0
(4) Adjusted gross income $123,000 $127,000 (1) + (2) + (3)
(5) Greater of itemized (6,100) (6,100) $3,000
deductions or standard itemized
deduction deductions for
engagement 2
(6) Personal exemption (3,900) (3,900)
Taxable income $113,000 $117,000 (4) + (5) + (6)
b. Calculate Tex’s taxable income assuming he chooses engagement 1 and assuming he

chooses engagement 2. Assume he has $4,500 of itemized deductions other than those
generated by engagement 2.
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Description Engagement 1 Engagement Computation

2
(1) Gross income before new work $120,000 $120,000
engagement
(5) Greater of itemized deductions (6,100) (7,500) $3,000 + 4,500 for
or standard deduction engagement 2
Taxable income $113,000 $115,600 (4) + (5) + (6)
c. Calculate Tex’s taxable income assuming he chooses engagement 1 and assuming he

chooses engagement 2. Assume he has $7,000 of itemized deductions other than those
generated by engagement 2.
Description Engagement 1 Engagement Computation

2
(1) Gross income before new work $120,000 $120,000
engagement
(5) Greater of itemized deductions (7,000) (10,000) $7,000 + $3,000*
or standard deduction of $6,100 *engagement 2
only
Taxable income $112,100 $113,100 (4) + (5) + (6)
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30. [LO 1] {Planning} 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 over the weekend at Autofix for $400. If Matteo works over the
weekend, he will have to pay the $400 to have his car repaired, but he will earn $500.
Assume Matteo pays tax at a flat 15 percent rate?
a. Strictly considering tax factors, should Matteo work or repair his car if the $400
he must pay to have his car fixed is not deductible?
If Matteo works, he will receive $500, but he will have to pay $75 in taxes ($500 x
15%), netting him $425. He then must pay $400 for his car to be repaired which means
he will save $25 ($425 – 400) by working. If he doesn’t work, he won’t have any income,
he won’t pay any taxes, and he won’t have to pay to have his car repaired. Overall, he
would be $25 better off by working.
Note that taxes may not be the only concern here. Matteo would also need to
factor in how much he enjoys repairing his car and how much he enjoys working. He
could also consider whether he will do a better job repairing his car or whether Autofix
could do a better job
b. Strictly considering tax factors, should Matteo work or repair his car if the $400
he must pay to have his car fixed is deductible for AGI?
If Matteo works, he will receive $500, and he will be allowed to deduct the $400
repair expense, leaving him with taxable income of $100 ($500 – 400) on which he will
pay $15 in taxes. So, if he works, he will receive $500, pay $400 to have his car fixed,
and pay $15 in taxes, leaving him with $85. If he doesn’t work, he won’t have any
income, he won’t pay any taxes, and he won’t be out of pocket because he will do his own
repair work (assuming the repair only requires labor). So, he’s $85 better off by working
and having his car repaired by Autofix.
Note that taxes may not be the only concern here. Matteo would also need to
factor in how much he enjoys repairing his car and how much he enjoys working. He
could also consider whether he will do a better job repairing his car or whether Autofix
could do a better job.
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31. [LO 1, 2] 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
Deductions For AGI 8,000 4,000 0
Itemized Deductions 0 4,000 8,000
Chin has the highest taxable income, followed by Baker and then Ahmed. Chin’s
taxable income is highest because he had no for AGI deductions, and Ahmed has the
lowest because he had the most for AGI deductions. Baker did not benefit from the
itemized deductions because they did not exceed the standard deduction. Chin only
benefited from the itemized deductions to the extent the deductions exceeded the
standard deduction. See the following analysis:
Description Ahmed Baker Chin Computation

(1) Gross income $80,000 $80,000 $80,000
(2) For AGI deductions (8,000) (4,000) 0
(3) Adjusted gross income $72,000 $76,000 $80,000 (1)+ (2)
(4) Standard deduction (6,100) (6,100) (6,100) Single taxpayer
(5) Itemized deductions 0 (4,000) (8,000)
(6) Greater of standard (6,100) (6,100) (8,000) Ahmed: (4) > (5)
deductions or itemized Baker: (4) > (5)
deductions Chin: (5) > (4)
(7) Personal and dependency (3,900) (3,900) (3,900) 3,900 × 1
exemptions (personal
exemption)
Taxable income $62,000 $66,000 $68,100 (3) + (6)+ (7)
32. [LO 2] Aishwarya’s husband passed away in 2012. She needs to determine whether
Jasmine, her 17-year old step-daughter who is single, qualifies as her dependent in 2013.
Jasmine is a resident but not a citizen of the United States. She lived in Aishwarya’s
home from June 15 through December 31, 2013. Aishwarya provided more than half of
Jasmine’s support for the 2013.
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a. Is Aishwarya allowed to claim a dependency exemption for Jasmine for 2013?
Yes, Aishwarya may claim a dependency exemption for Jasmine in 2013. Jasmine meets the
citizenship/residency test because she is a resident of the United States, and she meets the
requirements to be considered Aishwarya’s qualifying child as follows:
Test Jasmine
Relationship Yes, stepdaughter qualifies
Age Jasmine is under 19 at the end of the year
Residence Jasmine had the same principal residence as Aishwarya for more
than half the year
Support Jasmine does not provide more than half her own support.
b. Would Aishwarya be allowed to claim a dependency exemption for Jasmine for 2013 if
Aishwarya provided more than half of Jasmine’s support in 2013, Jasmine lived in Aishwarya’s
home from July 15 through December 31 of 2013, and Jasmine reported gross income of
$5,000 in 2013?
No. Jasmine would fail the qualifying child test because she did not have the same principal
residence as Aishwarya for more than half the year. Jasmine would fail the qualifying relative
test because her gross income exceeds the $3,900 personal exemption amount for 2013.
c. Would Aishwarya be allowed to claim a dependency exemption for Jasmine for 2013 if
Aishwarya provided more than half of Jasmine’s support in 2013, Jasmine lived in Aishwarya’s
home from July 15 through December 31 of 2013, and Jasmine reported gross income of
$2,500 in 2013?
Yes, Jasmine would qualify as Aishwarya’s qualifying relative as follows:
Test Jasmine
Relationship Yes, stepdaughter qualifies
Support Aishwarya provided more than half of Jasmine’s support
Gross income Jasmine’s gross income does not exceed the dependency
exemption amount.
33. [LO 2] 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 was
away at school for the rest of the year. He received $9,500 in scholarships this year for
his outstanding academic performance and earned $4,800of income working a part-time
4-17
job during the year. The Samsons paid a total of $5,000to support Jason while he was
away at college. Jason used the scholarship, the earnings from the part-time job, and the
money from the Samsons as his only sources of support.
a. Can the Samsons claim Jason as their dependent?
Yes, the Samsons may claim Jason as their dependent. He is their qualifying child. See the
following analysis.
Test Jason
Relationship Yes, adopted son qualifies
Age Yes, under age 24 and a full-time student (and younger than
parents).
Residence Yes, temporary absences away at school count as time in the
parents’ home.
Support Yes. The Samsons provided $5,000 of support for Jason. Jason
provided $4,800 of his own support (Jason did not provide more
than half his own support). Jason also received $9,500 of
scholarship money, but this does not count as support provided
for himself because he is an actual child of the Samsons.
b. Assume the original facts except that Jason’s grandparents, not the Samsons, provided
him with the $5,000 worth of support. Can the Samsons (Jason’s parents) claim Jason as
their dependent? Why or why not?
Yes, the Samsons may claim Jason as their dependent. Jason is their qualifying child. See the
following analysis.
Test Jason
Relationship Yes, Jason is their (adopted) son.
Age Yes, under age 24 and a full-time student (and younger than his
parents).
parents’ home.
Support Yes, even though Jason’s parents did not provide any of his
support, Jason did not provide more than half of his own support
because his grandparents provided $5,000 of support for Jason.
Jason provided $4,800 of his own support. Jason also received
$9,500 of scholarship money, but this does not count as support
provided for himself because he is an actual child of the Samsons,
who are claiming him as a dependent.
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c. Assume the original facts except substitute Jason’s grandparents for his parents.
Determine whether Jason’s grandparents can claim Jason as a dependent.
No, the grandparents may not claim Jason as a dependent. He is neither a qualifying child nor
a qualifying relative.
Test Jason
Relationship Yes, Jason is the descendant of the taxpayers’ child (one of
Jason’s parents is the child of the taxpayer’s grandparents)
grandparents).
grandparents’ home since that is his permanent residence.
Support No, Jason’s grandparents provided $5,000 of support. Jason
provided $4,800 of his own support through his part time job. He
also provided $9,500 of his own support through a scholarship.
In this case, because the taxpayers are not Jason’s parents, the
$9,500 scholarship counts as support provided by Jason. So, he
provides more than half his own support, and he does not meet
the support test to qualify as a qualifying child of his
grandparents. Because the grandparents did not provide more
than half of Jason’s support, Jason would not qualify as a
qualifying relative either.
d. Assume the original facts except that Jason earned $5,500 while working part-time and
used this amount for his support. Can the Samsons claim Jason as their dependent? Why
or why not?
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No, the Samsons may not claim Jason as their dependent. He is neither their qualifying child
nor their qualifying relative. See the following analysis.
Test Jason
Relationship Yes, adopted son qualifies
parents).
parents’ home.
Support No, the Samsons provided $5,000 of support for Jason. Jason
provided $5,500 of his own support. Jason also received $9,500
of scholarship money, but this does not count as support provided
for himself because he is an actual child of the Samsons.
Nevertheless, because Jason provided more than half of his own
support, he is neither a qualifying child nor a qualifying relative
to his parents. Jason could also not be a qualifying relative
because his income of $5,500 was greater than the personal
exemption amount.
34. [LO 2] 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 for the year is $2,000. Tim used all $2,000 toward his own support. The Smiths
provided the rest of Tim’s support by providing him with lodging valued at $5,000 and
food valued at $2,200.
a. Are the Smiths able to claim a dependency exemption for Tim?
Yes. The Smiths may claim Tim as a dependent as a qualifying relative as analyzed below
Test Tim
Relationship Yes, Tim meets qualifying relative test.
Age Not applicable to qualifying relative
Residence Not applicable to qualifying relative
Support Yes. The Smiths provided more than half of Tim’s support
($7,200/$9,200).
Gross income Yes, Tim’s gross income is less than the exemption amount.
b. Assume the original facts except that Tim earned $10,000 and used all the funds for his
own support. Are the Smiths able to claim Tim as a dependent?
No. The Smiths may not claim Tim as a dependent because he is not a qualifying relative as
analyzed below.
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Test Tim
Relationship Yes, Tim meets qualifying relative test.
Support No, the Smiths did not provide more than half of Tim’s support
($7,200/$17,200).
Gross income No, Tim’s gross income ($10,000) is more than the exemption
amount.
c. Assume the original facts except that Tim is a friend of the family and not John’s uncle.
No. The Smiths may not claim Tim as a dependent because he is not a qualifying relative as
analyzed below.
Test Tim
Relationship No. No family relationship, and Tim did not live with the Smiths
for the entire year.
Support Yes, the Smiths provided more than half of Tim’s support
($7,200/$9,200).
d. Assume the original facts except that Tim is a friend of the family and not John’s uncle
and Tim lived with the Smiths for the entire year.
Yes. The Smiths may claim Tim as a dependent because he is a qualifying relative as analyzed
below.
Test Tim
Relationship Yes. Tim is not related, but he lived with the Smiths for the entire
year.
Support Yes. The Smiths provided more than half of Tim’s support
($7,200/$9,200).
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35. [LO 2] 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 year.
a. Is Francine a qualifying child to Donna?
Yes, see analysis below.

Test Francine
Relationship Yes, Francine is Donna’s daughter.
Age Yes, under age 19 at end of year (and younger than Donna)
Residence Yes, Francine lived with Donna for more than half the year.
Support Yes, Francine does not provide more than half her own support.
b. Is Francine a qualifying child to Darren?
Yes, see analysis below.
Test Francine
Relationship Yes, Francine is Darren’s daughter.
Age Yes, under age 19 at end of year (and younger than Darren)
Residence Yes, Francine lived with Darren for more than half the year.
Support Yes, Francine does not provide more than half her own support..
c. Assume Francine spends more time living with Darren than Donna after the separation.
Who may claim Francine as a dependency exemption for tax purposes?
Darren. When a child is a qualifying child of both parents, the parent with whom the child
resides for the longest period of time during the year is entitled to claim the exemption. In this
case, because Francine lived with Darren longer than she lived with Donna, Darren is entitled
to the exemption. However, Darren could release the exemption to Donna under the divorce
agreement.
d. Assume Francine spends an equal number of days with her mother and her father and that
Donna has AGI of $52,000 and Darren has AGI of $50,000. Who may claim a dependency
exemption for Francine?
Donna. Because Francine lived with Donna and Darren an equal amount of time during the
year, the tiebreaker on who may claim the exemption for Francine is based on each taxpayer’s
AGI. In this case Donna’s AGI is higher than Darren’s so she is entitled to the exemption
deduction. However, Donna could release the exemption to Darren.
4-22
36. [LO 2] 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 half of
her own support. Abbi is a full-time student at a local university and does not have any
gross income.
a. How many personal and dependency exemptions are Jamel and Jennifer allowed to
claim?
Jamel and Jennifer may claim five exemptions in total. Two personal exemptions for
themselves and three exemptions for their daughters who all qualify as their qualifying
children as analyzed below.
Test Jade Lindsay Abbi

Relationship Yes, daughter Yes, daughter Yes, daughter
Age Yes, under age 19 at Yes, under age 19 at Yes, under age 24 at
end of year (and end of year (and end of year and a
younger than younger than full-time student
parents) parents) (and younger than
parents).
Residence Yes, lived at home Yes, lived at home Yes, lived at home
entire year entire year entire year
Support Yes, did not provide Yes, did not provide Yes, did not provide
more than half of more than half of more than half of
own support own support own support
b. Assume the original facts except that Abbi is married. She and her husband live with
Jamel and Jennifer while attending school and they file a joint return. Abbi and her husband
reported a $1,000 tax liability on their tax return. If all parties are willing, can Jamel and
Jennifer claim Abbi as a dependent on their tax return? Why or why not?
No, Jamel and Jennifer may not claim Abbi as a dependent because she filed a joint return
with her husband, and they reported a tax liability on their joint return.
c. Assume the same facts as part b. except that Abbi and her husband report a $0 tax
liability on their joint tax return. Also, if the couple had filed separately, Abbi would have not
had a tax liability on her return, but her husband would have had a $250 tax liability on his
separate return. Can Jamel and Jennifer claim Abbi as a dependent on their tax return? Why or
why not?
4-23
No. Jamel and Jennifer may not claim Abbi as a dependent even though she is their qualifying
child because she fails the joint return test. Even though the couple had no tax liability on
their joint return and Abbi would not have had a tax liability on a separate return, because
Abbi’s husband would have reported a tax liability on his separate return, Jamel and Jennifer
may not claim her as a dependent.
d. Assume the original facts except that Abbi is married. Abbi files a separate tax return.
Abbi’s husband files a separate tax return and reports a $250 tax liability. Can Jamel and
Jennifer claim Abbi as a dependent?
Yes. Because Abbi files a separate return, and she meets all other dependency requirements
(see answer to part a). Jamel and Jennifer may claim a dependency exemption for Abbi.
37. [LO 2, 3] 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 Frankie (15%), and his niece Sharon (20%).
a. Absent a multiple support agreement, of the parties mentioned in the problem, who
may claim a dependency exemption for Dean as a qualifying relative?
Because they do not provide over half of Dean’s support individually, neither Camille,
Rachel, Zander, Frankie, nor Sharon is eligible to claim Dean as a dependent qualifying
relative. In addition, Frankie fails the relationship test because he is unrelated to Dean,
and he did not live with Dean for the entire year (he did not live with him at all during the
year).
b. Under a multiple support agreement, who is eligible to claim a dependency

exemption for Dean as a qualifying relative? Explain.
Camille, Rachel, and Sharon are eligible because of the following:

1. No one taxpayer paid over half the support for Dean.
2. Together, Camille, Rachel, Sharon, and Zander provided more than half of Dean’s
support (80%) and Camille, Rachel, Sharon, and Zander would have each been able to
claim a dependency exemption for Dean except for the fact that each did not meet the
support test (Frankie fails the relationship test for qualifying relative)
3. Camille, Rachel, and Sharon each provided over 10% of Dean’s support.
4. Camille, Rachel, and Sharon can claim the exemption, but the two parties who do not
claim it must provide a signed statement to the person claiming the exemption stating
that she will not claim an exemption for Dean. The person claiming the exemption
would attach a Form 2120 to her return indicating the names, addresses, and social
security numbers of the two who did not claim Dean as a dependent.
4-24
c. Assume that Camille is allowed to claim Dean as a dependent under a multiple

support agreement. Camille is single and Dean is her only dependent. What is
Camille’s filing status?
Camille must file as a single taxpayer. Because she claims Dean as a dependent under a
multiple support agreement, Dean is not a qualifying person for purposes of determining
head of household status for Camille.
38. [LO 2] {Research} Mel and Cindy Gibson’s 12-year-old daughter Rachel was abducted
on her way home from school on March 15, 2013. Police reports indicated that a stranger
had physically dragged Rachel into a waiting car and sped away. Everyone hoped that
the kidnapper and Rachel would be located quickly. However, as of the end of the year,
Rachel was still missing. The police were still pursuing several promising leads and had
every reason to believe that Rachel was still alive. In 2014, Rachel was returned safely to
her parents.
a. Are the Gibsons allowed to claim an exemption deduction for Rachel in 2012 even though
she only lived in the Gibson’s home for two and one half months? Explain and cite your
authority.
Yes, the Gibsons will be able to claim a dependency exemption for Rachel. IRC §152(f)(6)
indicates that for purposes of determining whether a child is considered to be a qualifying
child of the taxpayer, a child who is (1) presumed by law enforcement officers to have been
kidnapped by someone who is not a member of the family of the child or the taxpayer, and (2)
who had, for the taxable year in which the kidnapping occurred, the same principal place of
abode as the taxpayer for more than half of the portion of the year before the date of the
kidnapping shall be treated as meeting the residence test for a qualifying child under §152(c)
(1)(B). Because Rachel did not provide more than half her own support for the year, she would
qualify as a dependent of the Gibsons as their qualifying child.
b. Assume the original facts except that Rachel is unrelated to the Gibsons, but she has been
living with them since January 2008. The Gibsons have claimed a dependency exemption for
Rachel for the years 2008 through 2012. Are the Gibsons allowed to claim a dependency
exemption for Rachel in 2013? Explain and cite your authority.
No. In this case, because Rachel does not meet the relationship test for a qualifying
child, the special rule of §152(f)(6) does not apply. Rachel may only qualify as a
dependent as a qualifying relative. However, because she is not related to the Gibsons
under §152(d)(2), and she did not live with the Gibsons for the entire taxable year
[§152(d)(2)(H)] she does not qualify as a qualifying relative of the Gibsons. So, they
cannot claim her as a dependent.
4-25
39. {LO 2} {Research} 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, when Bob filed the tax return he didn’t know Dylan’s Social Security
number and, therefore, didn’t include an identifying number for his son on the tax return.
Instead, Bob submitted an affidavit with his tax return stating he had requested Dylan’s
Social Security number from Dylan’s birth state. Is Bob allowed to claim a dependency
exemption for Dylan without including Dylan’s identifying number on the return?
No. IRC §151(e) states, “No exemption shall be allowed under this section with respect to any
individual unless the TIN {tax identification number} of such individual is included on the
return claiming the exemption.” A taxpayer may include an affidavit stating a request for an
identifying number has been made in lieu of the actual identifying number, but only in
situations where the number has been applied for for a foreign person or nonresident
alien[Reg. §301.6109-1(c)]. Since Dylan is not a foreign person or a nonresident alien, Ryan
is not allowed to claim a dependency exemption for Dylan. See also [2000-1 USTC ¶50,324]
Thomas W. Furlow, Jr. v. United States of America, (CA-4) where the taxpayer was denied a
dependency exemption for his son because he failed to provide the child’s social security
number or taxpayer identification number even though the father attached an affidavit to the
return in lieu of a tax identification number.
40. [LO 2, 3] 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 clothing, entertainment, and health-insurance costs. These costs comprised
only a small part of the total costs of maintaining the household. Kimberly does not
qualify as her parent’s dependent.
a. Determine the appropriate filing status for Kimberly.
Single. To qualify as head of household, a taxpayer must pay more than half the costs of
maintaining a household that is the principal place of abode for a dependent who is a
qualifying child (or for maintaining a separate household for her mother or father if the
mother or father also qualifies as a dependent of the taxpayer). Kimberly does not provide
more than half the costs of maintaining the household where her children reside. Because she
does not qualify as head of household, and she is not married, she must file as a single
taxpayer.
b. If Kimberly lived in her own home and provided all the costs of maintaining the
household, what would her filing status be?
4-26
Head of household. She meets the requirement of paying for more than half (for more than
half the taxable year) the costs of maintaining a household that is the principal place of abode
for a dependent who is a qualifying child.
c. Assume Kimberly qualifies as her parents’ dependent. How many personal and
dependency exemptions may she claim on Kimberly’s tax return?
Zero. Because Kimberly can be claimed as a dependent by another person, she is not allowed
to claim a personal exemption for herself and she is not allowed to claim any dependency
exemptions.
41. (LO 2, 3) 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 of $5,000.
Ashton lived in Lee’s home from April 1 through the end of the year
b. Lee is Ashton’s uncle. Ashton is 20 years old, not a full-time student, and has gross
income of $7,000. Ashton lived in Lee’s home from April 1 through the end of the
year
c. Lee is Ashton’s uncle. Ashton is 22 years old and was a full-time student from
January through April. Ashton’s gross income was $5,000. Ashton lived in Lee’s
home from April 1 through the end of the year
d. Lee is Ashton’s cousin. Ashton is 18 years old, has gross income of $3,000, and is
not a full-time student. Ashton lived in Lee’s home from April 1 through the end of
the year
e. Lee and Ashton are cousins. Ashton is 18 years old, has gross income of $3,000,
and is not a full-time student. Ashton lived in Lee’s home for the entire year.
a. Head of Household. Ashton is Lee’s qualifying child. Consequently Ashton is a

qualifying person for determining head of household status for Lee.
b. Single. Ashton does not qualify as Lee’s dependent, so he is not a qualifying person
for determining head of household status for Lee. Ashton is not Lee’s qualifying child
because Ashton is too old, and Ashton is not Lee’s qualifying relative because Ashton
has too much gross income.
c. Single. Same as b. Ashton is too old to be Lee’s qualifying child because he was not
a full-time student during five months of the year. Also, Ashton is not Lee’s qualifying
dependent because he has too much gross income.
4-27
d. Single. Ashton is not a qualifying person for determining head of household status
for Lee because he does not qualify as Lee’s dependent. Ashton does not have a
qualifying family relationship with Lee for either qualifying child or qualifying
relative.
e. Single. Ashton is not a qualifying person for determining head of household status
for Lee because even though he qualifies as Lee’s dependent, he does so only because
he lived in Lee’s home for the entire year.
42. (LO 2, 3) 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
Kenneth (10%), his friend Milt (14%), and his cousin Henry (12%).
a. Absent a multiple support agreement, of the parties mentioned in the problem, who may
claim a dependency exemption for Ray as a qualifying relative?
No one. Because they individually do not provide over half of Ray’s support, Ray is not
a qualifying relative of any of his children (Diane, Karen, Mike, and Kenneth). He is
also not a qualifying relative of Milt or Henry because they fail the relationship test
and support test for Ray.
b. Under a multiple support agreement, who is eligible to claim a dependency exemption

for Ray as a qualifying relative? Explain.
Diane, Karen, and Mike are eligible because of the following:

1. No one taxpayer paid over half the support for Ray.
2. Together, Diane, Karen, Mike, and Kenneth provided more than half of Ray’s support
(65%) and Diane, Karen, Mike, and Kenneth would have each been able to claim a
dependency exemption for Ray except for the fact that each did not meet the support test
(Milt and Henry fail the relationship test for qualifying relative).
3. Diane, Karen, and Mike each provided over 10% of Ray’s support.
4. Diane, Karen, and Mike can claim the exemption, but the two parties who do not claim it
must provide a signed statement to the person claiming the exemption stating that they
will not claim an exemption for Ray. The person claiming the exemption would attach a
Form 2120 to his or her tax return indicating the names, addresses, and social security
numbers of the two who did not claim Ray as a dependent.
c. Assume that under a multiple support agreement, Diane claims a dependency

exemption for Ray. Diane is single with no other dependents. What is her filing status?
4-28
Single. Even though Diane can claim a dependency exemption for Ray, because Diane
did not provide more than half of Ray’s support, Ray is not a qualifying person for
purposes of determining head of household status for Diane.
43. [LO 3] 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?
Married filing jointly. For tax purposes, the couple is still considered married for the year of
the spouse’s death.
b. Assuming Bonita doesn’t remarry and still has two dependent children living at home,
what will her filing status be next year?
Qualifying widow. See the analysis below.
Qualifying widow test:

Test Bonita
Time Yes, within two years after the end of the year of the death of Juan
Unmarried Yes, Bonita has remained unmarried.
Dependents Yes, Bonita maintains a home for her two dependent children.
c. Assuming Bonita doesn’t remarry and doesn’t have any dependents next year, what will
her filing status be next year?
Single. Because Bonita is not a qualifying widow and is not married, she must file as a
single taxpayer. See the analysis below.
Qualifying widow test:

Test Bonita
Time Yes, within two years after the end of the year of the death of Juan
Unmarried Yes, Bonita has remained unmarried.
Dependents No, Bonita does not maintain a home for any dependent children.
44. [LO 3] 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?
4-29
To be married for filing status purposes, taxpayers must be married at the end of the year.
Although Gary and Lakesha were married on the last day of the year, they are still
considered married for the entire year for filing purposes. Gary and Lakesha may file as
married filing jointly, or they may elect to file as married filing separately.
b. Assume instead that Gary and Lakesha were married on January 1 of this year. What is
their filing status for last year (neither has been married before and neither had any
dependents last year)?
Single. Gary and Lakesha were not married at the end of the year, therefore they must
both file single.
45. [LO 3] 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 status?
Head of household. An unmarried taxpayer may qualify as head of household by

paying more than half the costs of maintaining a separate household that is the
principal place of abode for the taxpayer’s mother or father if the mother or father also
qualifies as a dependent of the taxpayer. Elroy pays more than half the costs of
maintaining Irene’s household. Furthermore, Irene qualifies as Elroy’s qualifying
relative as follows:
Test Irene
Relationship Yes. Irene is Elroy’s mother.
Support Yes. Elroy provides more than half of Irene’s support.
Gross income Yes, Irene’s gross income is less than the exemption amount.
b. Assume the original facts except that Elroy has taken over the care of his grandmother,
Renae, instead of his mother. What is Elroy’s filing status?
Single. To qualify as head of household, an unmarried taxpayer must pay more than
half the costs of keeping up a home for the year and must have lived with a qualifying
person in the taxpayer’s home for more than half the year (unless the qualifying person
is a mother or father and then special rules apply). Because Elroy did not live in the
same home for more than half the year, Renae is not a qualifying person for purposes of
determining whether Elroy qualifies as for the head of household filing status.
Consequently, Elroy will file as a single taxpayer.
4-30
c. Assume the original facts except that Elroy’s mother Irene lives with him and that she
receives an annual $4,500 taxable distribution from her retirement account. Elroy still
pays all the costs to maintain the household. What is his filing status?
Single. Although Elroy provides more than half the cost of maintaining a household in
which his mother lives, she does not qualify as his dependent. She is not Elroy’s child
(and she is older than him) and thus cannot be a qualifying child. Further, she is not a
qualifying relative, as analyzed below.
Test Irene
Relationship Yes. Irene is Elroy’s mother.
Support Yes. Elroy provided more than half of Irene’s support.
Gross income No, Irene’s gross income of $4,500 is more than the exemption
amount.
46. [LO 3] 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 his children. Kano and Hoshi do not file a joint return.
a. What is Kano’s filing status?
Head of household. Kano provides more than half the cost of maintaining a home that is
the principal place of abode for a qualifying child. His two children are qualifying
children, as analyzed below.
Kano qualifies as an abandoned spouse, as analyzed below.

Test Kano
Married Yes, Kano is still married to Hoshi at the end of the year.
Separate Return Yes, Kano files a separate return from Hoshi.
Maintains Yes, Kano provides more than half the cost of maintaining his home
Home for a qualifying child (see following table).
Time Separated Yes, Kano has not lived with Hoshi for the last six months of the year.
4-31
Test Two Children

Relationship Yes, Kano’s children.
Age Yes, under age 19 at year end (and younger than Kano).
Residence Yes, both children lived with Kano for more than half of the year.
Support Yes, Kano provides more than half of their support.
b. Assume the original facts except that Kano and Hoshi separated in May of the current
year. What is Kano’s filing status?
Head of household, determined as follows:
Kano qualifies as an abandoned spouse, as analyzed below.
Test Kano
Home for a qualifying child (see following table).
Kano’s two children are qualifying children, as shown below.
Test Two Children

Relationship Yes, Kano’s children.
Age Yes, under age 19 at year end (and younger than Kano).
Residence Yes, both children lived with Kano for more than half of the year.
Support Yes, Kano provides more than half of their support.
Because Kano qualifies as an abandoned spouse, he can be treated as though he was not
married at the end of the year. This enables him to qualify for head of household status
because he is considered unmarried, and he provides more than half the cost of
maintaining a home which is the principal residence for a dependent qualifying child.
c. Assume the original facts except that Kano and Hoshi separated in November of this
year. What is Kano’s filing status?
4-32
Married filing separately. Kano does not qualify as head of household because he does not
qualify as an abandoned spouse, analyzed as follows.
Test Kano
Home for a qualifying child.
Time Separated No, Kano has not been separated from his spouse for the last six
months of the year.
d. Assume the original facts except that Kano’s parents, not Kano, paid more than half of
the cost of maintaining the home in which Kano and his children live. What is Kano’s
filing status?
Married filing separately. Kano does not meet the criteria for an abandoned spouse.
Consequently, he is still considered married. See the analysis below for abandoned spouse
requirements.
Test Kano
Maintains No, Kano does not provide more than half the cost of maintaining his
Home home for a qualifying child. His parents provide this cost.
47. [LO 3] 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
situations:
a. Horatio and Kelly did not have any children and neither reported any dependents in the current
year.
Horatio and Kelly will both file as single taxpayers.
b. Horatio and Kelly had one child Amy who turned 10 years of age in the current year. Amy
lived with Kelly for all of the current year, and Kelly provided all of her support.
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Horatio will file as a single taxpayer. Kelly will file as a head of household because
during the current year she paid more than half the costs of maintaining a household
for Amy (a qualified person), and Amy resided with her for more than half the taxable
year. Amy is a qualified person because she is a qualifying child who qualifies as the
taxpayer’s dependent (she meets the relationship, age, residence, and support test).
c. Assume the same facts as in b. but Kelly released the exemption for Amy to Horatio even
though Amy did not reside with him at all during the current year.
Horatio will file as a single taxpayer. Even though he is allowed to claim the
exemption for Amy, she did not reside with him during the year, so he cannot meet the
head of household test. Kelly will file as head of household because during the current
year she paid more than half the costs of maintaining a household for Amy (a qualified
person) and Amy resided with her for more than half the taxable year. Amy is a
qualified person because Kelly is the custodial parent and she would have been able to
claim an exemption for Amy as a qualifying child (she meets the relationship, age,
residence, and support test) except for the fact that she released the dependency
exemption to Horatio.
d. Assume the original facts except that during the current year Madison a 17-year old friend of
the family lived with Kelly (for the entire year) and was fully supported by Kelly.
Horatio would file as single. Kelly would also file as single. Even though Kelly would
be allowed to claim a dependency exemption for Madison as a qualifying relative,
Madison is not a qualifying person for purposes of the head of household test because
she only qualifies as a dependent to Kelly because she was a member of Kelly’s
household for the entire year. Madison does not have a family relationship with Kelly.
e. Assume the original facts except that during the current year Kelly’s mother Janet lived with
Kelly. For the current year, Kelly was able to claim a dependency exemption for her mother
under a multiple support agreement.
Horatio would file as single. Kelly would also file as single. Even though Kelly may
claim a dependency exemption for Janet, Janet is not a qualifying person for purposes
of the head of household test because Janet qualifies as Kelly’s dependent under a
multiple support agreement.
4-34
48. [LO 2, 3] 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 $3,000 and did not live
with Frank.
Single with two exemptions; one personal and one dependency exemption for Bill.
Frank will file as single, not head of household. Bill is not a qualifying person for purposes of
the head of household test because Bill did not live as member of Frank’s household for more
than half the year.
Frank can claim an exemption for Bill because Bill qualifies as Frank’s qualifying relative as
follows:
Test Bill
Relationship Yes, Bill is taxpayer’s brother.
Support Yes, more than half of Bill’s support is provided by Frank.
Gross income Yes, Bill’s gross income ($3,000) is less than the exemption
amount.
4-35
b. Geneva and her spouse reside with their son, Steve, who is a 20-year-old undergraduate student
at State University. Steve earned $13,100 at a part-time summer job, but he deposited this
money in a savings account for graduate school. Geneva paid all of the $12,000 cost of
supporting Steve.
Married filing jointly with two personal exemptions and one dependency exemption for
Steve. Steve meets the test to be Geneva and her husband’s qualifying child as follows:
Test Steve
Relationship Yes, Steve is the taxpayers’ son.
Age Yes, under age 24 and a full-time student (and younger than
parents).
parents’ home
Support Yes, even though the Steve earned $13,100, he did not use any of
that money to provide for his support. Steve’s parents provided
more than half (all, in fact) of his support for the year. A
qualifying child is not subject to the gross income test.
c. Hamish’s spouse died last year, and Hamish has not remarried. Hamish supports his father
Reggie, age 78, who lives in a nursing home and had interest income this year of $2,500.
Head of household with two exemptions. Hamish is not a qualifying widower because
he does not maintain a household for a dependent child. However, he does qualify for
head of household because he is not married and he pays more than half the cost of
maintaining a separate household that is the principal place of abode for his father,
and his father also qualifies as his dependent (as a qualifying relative) as follows:
Because Reggie is considered to be Hamish’s qualifying relative (and a qualifying person for
Test Reggie
Relationship Yes, Reggie is Hamish’s father.
Support Yes, Hamish provides more than half of Reggie’s support.
Gross income Yes, Reggie’s gross income of $2,500 is less than the exemption
amount.
purposes of the head of household filing status), Hamish may also claim a dependency
exemption for Reggie.
4-36
d. Irene is married but has not seen her spouse since February. She supports her spouse's 18-year-
old child Dolores, who lives with Irene. Dolores earned $4,500 this year.
Head of household with two exemptions. Irene qualifies for being treated as unmarried
for the year (abandoned spouse) as follows:
Test Irene
Married Yes, Irene is still married at the end of the year.
Separate Return Yes, Irene files a separate return from her spouse.
Maintains Yes, Irene provides more than half the cost of maintaining a home for
Home a qualifying child.
Time Separated Yes, Irene has not lived with her spouse for the last six months of the
year.
Because she is treated as though she were unmarried, she may file as head of household
because she pays more than half the costs (for more than half the taxable year) of
maintaining a household that is the principal place of abode for a dependent who is her
qualifying child. Dolores is Irene’s qualifying child, as determined below:
Test Dolores
Relationship Yes, Dolores is the taxpayers’ stepchild.
Age Yes, under age 19 (and younger than Irene)
Residence Yes, Dolores lived with taxpayer for more than half of the year.
Support Yes, Dolores did not provide more than half of her own support.
Irene may claim one personal exemption for herself and one dependency exemption for
Dolores.
e. Assume the same facts as in part d. Also assume that Craig is Irene’s husband. Craig
supports his 12-year-old son Ethan, who lives with Craig. Ethan did not earn any
income.
Head of household with two exemptions. Craig qualifies for being treated as
unmarried (abandoned spouse rules) as follows:
Test Irene
Married Yes, Craig is still married at the end of the year.
4-37
Separate Return Yes, Craig files a separate return from his spouse.
Maintains Yes, Craig provides more than half the cost of maintaining a home
Home for a qualifying child.
Time Separated Yes, Craig has not lived with his spouse for the last six months of the
year.
Because he is treated as though she were unmarried, he may file as head of household
because he pays more than half the costs (for more than half the taxable year) of
maintaining a household that is the principal place of abode for a dependent who is his
qualifying child. Ethan is Craig’s qualifying child, as determined below:
Test Dolores
Relationship Yes, Ethan is the taxpayers’ child.
Age Yes, under age 19 (and younger than Craig)
Residence Yes, Ethan lived with taxpayer for more than half of the year.
Support Yes, Ethan did not provide more than half of his own support.
Craig may claim one personal exemption for himself and one dependency exemption
for Ethan. Note that both Irene in part d. and Craig may claim head of household
filing status because they both qualify to be treated as unmarried for filing status
purposes.
49. [LO 2, 3] 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 her 18-year-
old nephew, Newt (Newt is Alexandra’s brother’s son). Newt’s parents are dead, and so Newt
supports himself. Newt’s gross income is $5,000.
Alexandra will file single with one personal exemption. Alexandra is single and does
not qualify for head of household because she does not provide more than half the costs
of maintaining a home for a dependent child or qualifying relative because Newt is
neither a qualifying child (he provides more than half his own support) nor a qualifying
relative. See the analysis below.
Test Qualifying Child Test for Newt

Relationship Yes, Newt is a descendant of Alexandra’s sibling.
Age Yes, under age 19 (and younger than Alexandra)
Residence Yes, Newt lived with Alexandra for more than half of the year.
Support No, Newt provides more than half his own support.
4-38
Test Qualifying Relative Test for Newt

Relationship Yes, Newt is the taxpayer’s nephew.
Age Not applicable to qualifying relative.
Residence Not applicable to qualifying relative.
Support No, Alexandra does not provide more than half of Newt’s
support.
Gross income No. Newt’s gross income of $5,000 exceeds the exemption
amount.
b. Bharati supports and maintains a home for her daughter, Daru, and son-in-law,
Sam. Sam earned $15,000 and filed a joint return with Daru, who had no income.
Single with one personal exemption. Bharati may not claim Daru and Sam as
dependents because they file a joint return. Couples filing a joint return may still
qualify as dependents if neither would have a tax liability if they had filed separately
(Rev. Rul. 54-567 and Rev. Rul. 65-34). Sam would have had a tax liability if he had
filed a separate return. Because Bharati does not have any dependents, Bharati does
not qualify for head of household status.
c. Charlie intended to file a joint return with his spouse, Sally. However, Sally died in December.
Charlie has not remarried.
Married filing jointly with two personal exemptions. A taxpayer is still considered to be
married for the year in which his spouse died. Because there are two taxpayers on a
joint return, Charlie is allowed two personal exemptions [§152(b)].
d. Deshi cannot convince his spouse to consent to signing a joint return. The couple has not
separated.
Married filing separately with one personal exemption. Both spouses must consent to
file a joint return.
e. Edith and her spouse support their 35-year-old son, Slim. Slim is a full-time
college student who earned $5,500 over the summer in part-time work.
Married filing jointly with two personal exemptions. They get one personal exemption
each, but Slim does not qualify as their dependent. He is neither their qualifying child
nor their qualifying relative. See the following analysis.
4-39
Test Slim—Qualifying child

Relationship Yes, Slim is the taxpayers’ son.
Age No, not under age 24 and attending school full-time.
parents’ home
Support Yes, Slim did not provide more than half of his own support.
Test Slim—Qualifying relative

Relationship Yes, Slim is the taxpayer’s son.
Support Yes, more than half of the Slim’s support is provided by the
taxpayer.
Gross income No, Slim’s gross income ($5,500) is more than the exemption
amount.
50. [LO 3] 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 year 4, the couple divorced. Both Jasper and Crewella filed single
tax returns in year 4. In year 5, the IRS audited the couple’s joint year 2 tax return and
each spouse’s separate year 3 tax returns. The IRS determined that the year 2 joint return
and Crewella’s separate year 3 tax return understated Crewella’s self-employment
income causing the joint return year 2 tax liability to be understated by $4,000 and
Crewella’s year 3 separate return tax liability to be understated by $6,000. The IRS also
assessed penalties and interest on both of these tax returns. Try as it might, the IRS has
not been able to locate Crewella, but they have been able to find Jasper.
a. What amount of tax can the IRS require Jasper to pay for the Dahvill’s year 2 joint return?
Explain.
Because Jasper is jointly and severally liable for the year 2 return, he is responsible to
pay the entire $4,000.
b. What amount of tax can the IRS require Jasper to pay for Crewella’s year 3 separate tax return?
Explain.
Because they filed separately in year 3, Jasper is not responsible for any of the $6,000.
4-40
51. {LO 3} {Research} 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 year, Marty spent nine months in Australia. Marty was extremely homesick while
in Australia, since he had never lived away from home. However, Marty knew this
assignment was only temporary, and he couldn’t wait to come home and find his room
just the way he left it. Janice has always filed as head of household, and Marty has
always been considered a qualifying child (and he continues to meet all the tests with the
possible exception of the residence test due to his stay in Australia). However, this year
Janice is unsure whether she qualifies as head of household due to Marty’s nine-month
absence during the year. Janice has come to you for advice on whether she qualifies for
head of household filing status. What do you tell her?
To qualify for head of household status a taxpayer must maintain a residence that is the
principal place of abode for more than one-half of the taxable year of a qualifying child.
The issue here is whether Marty’s nine-month military stay in Australia disqualifies
Janice from head of household status. Reg. §1.2-2(c)(1) states that temporary absences
of a qualifying child from the household due to special circumstances does not preclude
taxpayers from qualifying for head of household status. Military service is one of the
special circumstances described in the regulation. However, this regulation indicates
that it must be reasonable to assume that the qualifying child will return to the household
after the absence and
4-41
that the taxpayer (head of household) maintains the household in anticipation of the
return of the qualifying child. Because Marty will be returning to his home, Janice can
file as head of household status.
52. {LO 3} {Research} Doug Jones timely submitted his 2013 tax return and elected married
filing jointly status with his wife Darlene. Doug and Darlene did not request an extension
for their 2013 tax return. Doug and Darlene owed and paid the IRS $124,000 for their
2013 tax year. Two years later, Doug amended his return and claimed married filing
separate status. By changing his filing status, Doug sought a refund for an overpayment
for the tax year 2013 (he paid more tax in the original joint return than he owed on a
separate return). Is Doug allowed to change his filing status for the 2013 tax year and
receive a tax refund with his amended return?
No, he is not allowed to change his filing status by amending his return. Reg. §1.6013-
1(a) states that “for any taxable year with respect to which a joint return has been filed,
separate returns shall not be made by the spouses after the time for filing the return of
either has expired.” In this case, Doug amended the return and changed his filing status
two years later. Because the due date of the original return has passed, Doug is not
allowed to change his filing status.
Comprehensive Problems
53. {Tax Forms} 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
qualifying moving expenses, and Marc paid alimony to a prior spouse in the amount of
$1,500. Marc and Michelle have a 10-year-old son, Matthew, who lived with them
throughout the entire year. Thus, Marc and Michelle are allowed to claim a $1,000 child
tax credit for Matthew. Marc and Michelle paid $6,000 of expenditures that qualify as
itemized deductions and they had a total of $5,500 in federal income taxes withheld from
their paychecks during the course of the year.
a. What is Marc and Michelle’s gross income?
$76,500. See analysis below.
b. What is Marc and Michelle’s adjusted gross income?
4-42
c. What is the total amount of Marc and Michelle’s deductions from AGI?
d. What is Marc and Michelle’s taxable income?
e. What is Marc and Michelle’s taxes payable or refund due for the year (use the tax rate
schedules)?
$102.50 tax refund. See analysis below.

(1) Gross income 76,500 $64,000 salary + $12,000 salary + $500
corporate bond interest
(2) For AGI deductions 4,000 2,500 qualified moving expenses + 1,500
alimony paid
(3) Adjusted gross income 72,500 (1) – (2)
(4) Standard deduction 12,200 Married filing jointly

(6) Greater of standard
deductions or itemized 12,200 (4) > (5)
deductions
(7) Personal and 11,700 3,900 × 3 (two personal exemptions and
dependency exemptions one dependency exemption)
(8) Total deductions from 23,900 (6) + (7)
AGI
(9) Taxable income $48,600 (3) - (8)
(10) Income tax liability $6,397.5 (48,600 – 17,850) × 15% + 1,785 (see
tax rate schedule for married filing
jointly).
(11) Other taxes 0
(12) Total tax $6,397.5 (10) + (11)
(13) Credits (1,000) Child credit for 10-year old son Matthew
(14) Prepayments (5,500)
Taxes (refund) with return ($102.5) (12) + (13)+ (14)
4-43
f. Complete the first two pages of March and Michelle’s Form 1040.
4-44
4-45
4-46
54. {Tax Forms} 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)?
$60,100 taxable income and $2,127.5 refund. See analysis below.

(1) Gross income 100,000 Salary income. Gain
home sale of $50,000 is
excluded.

(4) Standard deduction 12,200 Married filing jointly;

(6) Greater of standard deductions or 16,500 Greater of (4) or (5)

itemized deductions
(7) Personal and dependency exemptions 23,400 6 exemptions × 3,900
exemption amount
4-47
(8) Total deductions from AGI 39,900 (6) + (7)

(9) Taxable income $60,100 (3) – (8)
(10) Income tax liability $8,122.5 (60,100 – 17,850) ×
15% + 1,785 (see tax
rate schedule for
married filing jointly).
(11) Other taxes 0
(12) Total tax $8,122.5 (10) + (11)
(13) Credits (4,000) Child credits for four
children (4 ×$1,000)
Tax (refund) with return ($2,127.5) (12) + (13)+ (14)
b. Complete the first two pages of the Jacksons’ Form 1040.
4-48
4-49
4-50
c. What would their taxable income be if their itemized deductions totaled $6,000 instead of
$16,500?
(1) Gross income 100,000 Salary. All gain from

home sale is excluded
from gross income.
itemized deductions
exemption amount
Taxable income $64,400 (3) – (8)
4-51
d. What would their taxable income be if they had $0 itemized deductions and $6,000 of for
AGI deductions?

(1) Gross income 100,000 $100,000 salary
(2) For AGI deductions 6,000
(5) Itemized deductions 0
itemized deductions
exemption amount
Taxable income $58,400 (3) – (8)
Note that if the $6,000 expense is a for AGI deduction, the Jacksons are able to deduct all
of the expense, but if it’s a from AGI deduction and they are not able to itemize deductions,
they don’t get to deduct any of it.
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?
Because individual taxpayer’s deductible losses on the disposition of investment (or

capital) assets is limited to $3,000. The Jacksons would be allowed to deduct $3,000 of the
$5,000 loss against their taxable income. The remaining $2,000 loss would carry over to
next year. Consequently, with the loss, their taxable income would be $57,100 ($60,100
from part a minus $3,000).
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 Jackson’s taxable income?
4-52
Same as it is in part a. $60,100. Though the assets have appreciated, they will not realize
or recognize this gain for income tax purposes until they sell their investment assets, at
which time they will increase their gross income (and corresponding taxable income) by
the gain.
55. 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 the maintaining the home.
She received a salary of $105,000 and contributed $6,000 of it to a qualified retirement
account. She also received $10,000 of alimony from her former husband. Finally,
Camille paid $5,000 of expenditures that qualified as itemized deductions.
a. What is Camille’s taxable income?

(1) Gross income 115,000 105,000 salary + 10,000 alimony
(2) For AGI deductions 6,000 Qualified retirement contribution
(3) Adjusted gross income $109,000 (1) - (2)
(4) Standard deduction 8,950 Head of household see analysis
below.
(6) Greater of standard 8,950 (4) > (5)
deductions or itemized
deductions
(7) Personal and dependency 11,700 3,900 × 3 (One personal
exemptions exemption and two dependency
exemptions. See analysis below.)
(8) Total deductions from AGI 20,650 (6)+(7)
Taxable income $88,350 (3) - (8)
4-53
Test Kaly and Parker- Qualifying child tests

Relationship Yes, taxpayer is their mother.
Age Yes, both children are under age 19 (and younger than their
mother).
Residence Yes, both children lived with taxpayer for more than half of the
year.
Support Yes, neither child provided more than half of their own support.
Camille may file as head of household because she is unmarried at the end of the year and
she pays more than half the cost of maintaining a home that is the principal place of abode
for a qualifying child.
b. What would Camille’s taxable income be if she incurred $14,000 of itemized

deductions instead of $5,000?

(1) Gross income 115,000 105,000 salary + 10,000
alimony
(2) For AGI deductions 6,000 Qualified retirement
contribution
(4) Standard deduction 8,950 Head of household see
analysis below.
itemized deductions
dependency exemptions. See
analysis below.)
(8) Total deductions from AGI 25,700 (6)+ (7)

Test Kaly and Parker

Relationship Yes, taxpayer is their mother.
4-54
Age Yes, both children are under age 19 (and younger than their
mother).
Residence Yes, both children lived with taxpayer for more than half of the
year.
Support Yes, neither child provided more than half of their own support.
Camille may file as head of household because she is unmarried at the end of the year and
she pays more than half the cost of maintaining a home that is the principal place of abode
for a qualifying child.
c. Assume the original facts except that Camille’s daughter Kaly is 25 years old and a full-
time student. Kaly’s gross income for the year was $5,000. Kaly provided $3,000 of her own
support and Camille provided $5,000 of support. What is Camille’s taxable income?

(1) Gross income 115,000 105,000 salary + 10,000
alimony
(2) For AGI deductions 6,000 Qualified retirement
contribution
(3) Adjusted gross income $109,000 (1) - (2)
(4) Standard deduction 8,950 Head of household, see
analysis below.
(6) Greater of standard deductions 8,950 (4) > (5)
or itemized deductions
exemptions exemption and one
dependency exemption. See
analysis below.)
Parker is still a qualifying child (see analysis in previous solution), but Kaly is no longer a
qualifying child, nor a qualifying relative, as analyzed below.
Test Kaly—Qualifying child

Relationship Yes, taxpayer is Kaly’s mother.
Age No, not under age 24 and attending school full-time (and younger
than her mother)
4-55
parents’ home.
Support Yes, Kaly did not provide more than half of her own support.
Test Kaly—Qualifying relative

Relationship Yes, taxpayer is Kaly’s mother.
Support Yes, more than half of the Kaly’s support is provided by the
taxpayer.
Gross income No, Kaly’s gross income ($5,000) is more than the exemption
amount.
Camille may still file as head of household because she is unmarried at the end of the year
and she pays more than half the cost of maintaining a home that is the principal place of
abode for a child (Parker) whom she can claim as a dependent.
56. 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 qualifying child.
What amount of taxes will Tiffany owe (or what amount will she receive as a refund)
when she files her tax return.
4-56
$1,025 taxes payable. See analysis below.

(1) Income tax liability $3,525
(2) Other taxes 0
(3) Total tax $3,525 (1) + (2)
(4) Credits (1,000) Child tax credit for
qualifying child under 17
years old at year end
Tax due with return $1,025 (3) + (4) + (5)
4-57

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Chapter 04 - Individual Tax Overview

4. [LO 1] Why should a taxpayer be interested in the character of income received?

5. [LO 1] Is it easier to describe what a capital asset is or what it is not? Explain.

15. [LO 1] If a person is considered to be a qualifying child or qualifying relative of a

Jeremy will owe $13,827.50 calculated as follows:

Description Amount Computation

Jeremy will owe $14,427.50 calculated as follows:

Description Amount Computation

Jeremy will owe $15,840, calculated as follows:

Description Amount Computation

Description Amount Computation

Rick’s after-tax compensation is $99,506.75 calculated as follows:

Description Amount Computation

b. Suppose Rick receives a competing job offer of $120,000 in cash compensation

Rick’s after-tax compensation is $99,906.75 calculated as follows:

Description Amount Computation

(4) Standard deduction 6,100 Single

(5) Personal and dependency exemptions 3,900 3,900 × 1 (personal

a. Calculate Tex’s taxable income assuming he chooses engagement 1 and assuming he

Description Engagement 1 Engagement 2 Computation

Taxable income $113,000 $117,000 (4) + (5) + (6)

b. Calculate Tex’s taxable income assuming he chooses engagement 1 and assuming he

Description Engagement 1 Engagement Computation

c. Calculate Tex’s taxable income assuming he chooses engagement 1 and assuming he

Description Engagement 1 Engagement Computation

Description Ahmed Baker Chin Computation

a. Is Aishwarya allowed to claim a dependency exemption for Jasmine for 2013?

Yes, Jasmine would qualify as Aishwarya’s qualifying relative as follows:

a. Can the Samsons claim Jason as their dependent?

a. Are the Smiths able to claim a dependency exemption for Tim?

a. Is Francine a qualifying child to Donna?

Yes, see analysis below.

b. Is Francine a qualifying child to Darren?

Yes, see analysis below.

Test Jade Lindsay Abbi

b. Under a multiple support agreement, who is eligible to claim a dependency

Camille, Rachel, and Sharon are eligible because of the following:

c. Assume that Camille is allowed to claim Dean as a dependent under a multiple

a. Determine the appropriate filing status for Kimberly.

a. Head of Household. Ashton is Lee’s qualifying child. Consequently Ashton is a

b. Under a multiple support agreement, who is eligible to claim a dependency exemption

Diane, Karen, and Mike are eligible because of the following:

c. Assume that under a multiple support agreement, Diane claims a dependency

a. What is Bonita’s filing status this year?

Qualifying widow. See the analysis below.

Qualifying widow test:

Qualifying widow test:

a. What is Elroy’s filing status?

Head of household. An unmarried taxpayer may qualify as head of household by

a. What is Kano’s filing status?

Kano qualifies as an abandoned spouse, as analyzed below.

Test Two Children

Head of household, determined as follows:

Kano qualifies as an abandoned spouse, as analyzed below.

Kano’s two children are qualifying children, as shown below.

Test Two Children

Test Qualifying Child Test for Newt

Test Qualifying Relative Test for Newt

Test Slim—Qualifying child