Individuals as Taxpayers: Chapter 9 Exercises Overview

Chapter 9 (Individuals as Taxpayers) Exercises 1. What is the difference between a tax deduction and a tax credit? Is one more beneficial than the other? 2. Beth received the following amounts during the year: Salary $30,000 Interest on savings account 900 Gift from her aunt 10,000 Prize won in state lottery 1,000 Alimony from ex-husband (divorced in 2015) 12,000 Child support from ex-husband 6,000 Damages for physical injury in auto accident 25,000 Ten $50 bills in an unmarked envelope found in an airport (airport authorities could not locate anyone who claimed ownership) 500 Federal income tax refund for last year’s tax overpayment 120 In addition, her stock investments increased in value by $5,000. Review Exhibits 9.1 and 9.2 to determine the amount Beth must include in the computation of taxable income and the amount she may exclude.

3. Compute the taxable income for 2021 for Emily (age 40) on the basis of the following information. Her filing status is single. Salary $85,000 Interest income from bonds issued by Xerox 1,100 Alimony payments received (divorce occurred in 2014) 6,000 Contribution to traditional IRA 6,000 Gift from parents 25,000 Short-term capital gain from stock investment 2,500 Amount lost in football office pool (gambling loss) 500 4. Compute the standard deduction allowed for 2021 for the following taxpayers. a. Rebecca Green is 67 and legally blind. She qualifies as a head of household. b. Jeffrey and Donna Dirk are both 72 and file a joint return for 2021. Donna is blind. c. Sue, age 74, has no earned income and is claimed as a dependent on her son’s tax return.

5. In each of the following independent situations, determine the taxpayer’s filing status and the number of dependents the taxpayer is allowed to claim. a. Hamish’s spouse died last year, and Hamish has not remarried. Hamish provides more than half of the support of his father Reggie, age 78, who lives in a nursing home and had interest income this year of $2,500. b. Irene is married but has not seen her spouse since February. She provides more than half of the support of her spouse’s 18 -year-old child Dolores, who lives with Irene. Dolores earned $5,400 this year. c. Edith and her spouse provide more than half of the support of their 35-year-old son, Slim. Slim is a full-time college student who earned $5,500 over the summer in part- time work. d. Frank is single and provides more than half of the support of his 17-year-old brother, Bill. Bill earned $3,000 and did not live with Frank. e. Charlie intended to file a joint return with his spouse, Sally. However, Sally died in December. Charlie has not remarried. 6. Indicate the filing status of Sandy for 2022, 2023, 2024, and 2025 assuming her husband died in 2022 and Sandy has been the sole support of her son since that time.

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7. Compute the taxable income for 2021 under each of the following circumstances. a. Jim is married and files a joint return. Jim and his wife have two dependent children. They have adjusted gross income of $30,000 and itemized deductions of $25,600. b. Jim is single with no dependents. His adjusted gross income is $50,000 with itemized deductions of $10,800. c. Jim is married but files separately and claims two dependent children. His adjusted gross income is $65,000 and his itemized deductions are $10,900. Jim ’ s wife itemizes on her return. d. Tony, age 15, is claimed as a dependent by his grandmother. During 2021, he had interest income from Boeing Corporation bonds of $1,000 and earnings from a part- time job of $800.

8. 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 contributed $2,500 to a traditional individual retirement account and he also paid alimony to a prior spouse in the amount of $1,500 (under a divorce decree effective June 1, 2006). 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 $3,000 child tax credit for Matthew. Marc and Michelle paid $6,000 of expenditures that qualify as itemized deductions and they had a total of $2,500 in federal income taxes withheld from their paychecks during the year. What is Marc and Michelle’s taxes payable or refund due for the year (use the tax rate schedules)?

Chapter 9 Exercises

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