Citizens and Dependents
Which of the following students might qualify as a qualifying child on their parents tax return?
Jules, who on Dec 31 is age 23. She was enrolled full-time for the first 6 months of the year at UCLA, but has since graduated.
A full-time student must be enrolled at a school for the number of hours or classes that the school considers full-time. The student must have been a full-time student for some part of each of 5 calendar months during the year. The months need not be consecutive. The student must be under age 24 at the end of the year and cannot provide more than half of his own support.
Mr. and Mrs. Valenca have been married since 20X1. His 30-year old brother lost his job and is living with them until he can find work. In 20X2, Mr. Valenca died in an accident. Mrs. Valenca does not remarry. Her brother-in-law continues to live with her all year and qualifies as her dependent. What filing status should she use when filing her income taxes for 20X3?
Head of household
She can file using the head of household status in 20X3 because a dependent relative lived with her for the year. If she had a qualifying child, she could file as a qualifying widow in 20X3 and 20X4.
TIP: A joint return should have been filed for 20X2 since the couple was married at the date of death.
Jeremiah, a cash basis taxpayer, is a salesman. He sold $100,000 of merchandise in March 20X1. His commission is 2% of sales. In November 20X1, he received $2,000 in commissions for those sales and an advance of $7,000 in commissions for future sales in 20X2. What amount must Jeremiah include in his income for 20X1?
$9,000
The fact that $7,000 is an advance against future commissions and may have to be repaid does not affect the fact that he can use the money now. A cash basis taxpayer reports income when received.
Merry got a $10 tip from a customer at the bakery. That was the only tip she received all month. Which of the following statements is true?
She does not have to report the tip to her employer if her tips total less than $20 for the month.
All tips received are income and are subject to federal income tax.
Employees must give their employers a written report of cash and charge tips if they received $20 or more in tips during the month. Employees should use Form 4137 to figure social security and Medicare taxes on tips not reported to the employer.
Dave and Dyan are married and had interest income on a bank savings account of $4,000, interest on federal treasury bonds of $3,400, interest on their state income tax refund of $400, and interest of $1,500 on New York City bonds. What is the amount of the above items that are includible in the couple's federal taxable income?
$7,800
The interest from the savings account ($4,000), federal bonds ($3,400), and their state income tax refund ($400) are all taxable interest. Thus, $7,800 is included in the couple's federal taxable income. Municipal bond interest ($1,500 on New York City bonds) is not taxable on a federal return.
TIP: The state income tax refund may also be taxable if the taxpayers itemized their deductions in the previous tax year.
Jay and Vonda have been married for a number of years and file a joint tax return for 2021. They provide over half of the support for several children who are single. Their daughter Jane is 17 and made $9,000 during the current tax year but is not in school. Their son Theodore is 20 and made $9,000 and is not in school. Their daughter Nanci is 23 and made $9,000 and is in school full-time. Their son Franklin is 25 and made $9,000 and is in school full-time. How many of these four children qualify as dependents for income tax purposes?
Two
Normally, as long as a couple provides over half of the support for their children and the children do not file a joint return, the children qualify as dependents. However, dependents cannot make too much income (this limit changes each year and is $4,300 for 2021). The income requirement does not apply to children if they are under 19 or if they are under 24 and in school full-time for at least five months of the year. The first child is under 19 so the income is not an issue. The second child is not under 19 and not in school so the income prohibits them from taking him as a dependent. The third child is under 24 and in school full-time so the income is not a problem. The fourth child is 24 or older and the level of income keeps them from taking him as a dependent. Only the first and third children qualify.
Jon and Marlena were married several years ago and have lived together since that time. They have no children. On December 29 of the prior year, they were granted a decree of separate maintenance and they moved into two separate apartments. In January, Marlena came to you to advise her on filing her income tax return for the prior year. What filing status would you most likely advise her to take?
Single
If a couple has divorced or received a legal separation (decree of divorce or separate maintenance), as is the case here, by the end of the tax year, they cannot file as married. There is no information to indicate that Marlena would qualify as head of household. Therefore, you will probably advise her that she will need to file as a single taxpayer. However, it is possible that she might qualify as head of household, especially if she has maintained a home for a dependent parent.
In 20X0 Jerry signed a 5-year lease to rent space to the MacBee restaurant. MacBee paid Jerry $24,000 for the first year's rent and $24,000 in advance rent for the final year of the lease. Jerry reports his income using the accrual method of accounting. How much of the $48,000 is included in Jerry's 20X0 income?
$48,000
Under the accrual method, an amount is includable in income when all events occur that fix the right to receive the income, which is the earliest of the date when:
Since the $48,000 was received in 20X0, it must be reported in 20X0 even though half of it was for the last year's rent. Accrual basis taxpayers cannot postpone reporting income from prepaid rent.
Dennis works in a comic book shop in Austin. When his employer had cash flow problems in August, Dennis did not receive $500 on his weekly check. As a substitute his employer gave him a $500 credit on the $2,000 balance he owed the store for purchase of some vintage comic books. In total, Dennis received $17,500 on his paychecks plus the $500 credit. What amount of wages should Dennis report on his return?
$18,000
The Form W-2 that Dennis receives from his employer should report the $500 credit as income (wages) on a form W2. The taxpayer should receive a Form W-2 from his employer which also includes any noncash payments to the employee for his services in addition to the wages paid. His earned wages of $18,000 includes the $500 he received as a store credit rather than as cash.
All compensation for personal services, no matter what the form of payment, must be included in gross income. Such compensation is subject to taxes in the year received, unless the taxpayer reports income on the accrual basis.
Stephanie received her tax refund for the tax year 20X1 in November of 20X2. Because there was a delay in issuing the refund, the IRS paid Stephanie $50 interest. How should Stephanie report the interest on her 20X2 tax return?
She reports it with the rest of her taxable interest income on Form 1040.
If a taxpayer is due a refund, the IRS may pay interest on it. The interest rates are adjusted quarterly. If the refund is made within 45 days after the due date of the return, no interest will be paid. If the refund is not made within the 45-day period, interest will be paid from the due date of the return or from the date you filed, whichever is later.
Interest received on tax refunds is taxable income. The interest is reported with other taxable interest on Form 1040.
Holly and Harp Oaks were divorced in 20X1. The divorce decree was silent regarding who is entitled to claim their 12-year-old daughter June as a dependent. Holly has legal custody of her daughter and did not sign a statement stating that she won't claim June as a dependent. Holly earned $8,000 and Harp earned $80,000. June had a paper route and earned $3,000. In 20X2, June lived with Harp 4 months of the year and with Holly 8 months. Who is entitled to claim June as a dependent in 20X2?
Holly may, since she has legal custody and physical custody for more than half the year.
In the case of a child of divorced or separated parents, either parent may claim the child as a dependent provided the child is in the custody one or both parents for more than 1/2 the year and the parents provide over 1/2 of the child's support. The divorce decree makes no special statement as to who claims June as a dependent, and there is no indication that Holly signed a written declaration allowing for Harp to claim June. Under the rules for the support test, Holly claims June due to the fact that June lived with Holly more than half the year during 20X1.
Bob Wilson died on October 1 of the current tax year. Bob was married to Rita. Bob's two children (ages six and eight) lived with the couple full time. The children will continue to live with Rita. What filing status should Rita use in the year of death and subsequent years in which the unmarried children continue to live with her?
Rita should file married filing jointly in the year of death, then qualifying widow for two years, and then head of household for subsequent years.
When a married taxpayer dies during the year, the filing status for that year is determined as of the date of death. Because the couple was married when he died, the surviving spouse can file a joint tax return for the year of death. For the next two years, the surviving spouse can file as a qualifying widow(er) as long as they meet all requirements. After those two years, Rita will qualify as head of household as long as she does not remarry and either an unmarried child or dependent relative lives with her.
A nonresident alien taxpayer does not qualify for a social security number. What identifying number should he use on his tax return?
Individual Taxpayer Identification Number (ITIN)
A nonresident or resident alien who does not have, and is not eligible to get a Social Security Number, must apply for an ITIN by using Form W-7. The ITIN is used on the taxpayer's return in place of a Social Security Number.
The IRS issues ITINs to foreign nationals and others who have federal tax reporting or filing requirements and do not qualify for SSNs. A non-resident alien individual not eligible for a SSN who is required to file a U.S. tax return only to claim a refund of tax under the provisions of a U.S. tax treaty needs an ITIN.
Examples of individuals who need ITINs include:
Note: An ITIN is for tax use only. It does not entitle the holder to social security benefits nor does it change his employment or immigration status.
Tips reported to the employer constitute gross income in the year when?
Reported
Tips must be reported to the employer by the 10th day of the month following the month they are received. Tips are considered income in the month the employee reported them. For example, tips received in December 20X1 that are reported to the employer by January 10, 20X2, are considered income in 20X2 and should be included in the employee's 20X2 Form W-2. IRS Form 4137.
Which of the following is taxable income?
$10 received for mowing your neighbor's lawn
The $10 received for mowing the neighbor's lawn is compensation for services performed and is therefore taxable.
A gift received for a bank deposit of $5,000 or more is not taxable if the gift is valued at $20 or less. OID interest of less than one-fourth of 1% (.0025) of the redemption value is considered de minimis and treated as zero. Holiday gifts from an employer which have nominal value are excluded from income.
John and Joanne are the sole supporters of the following individuals, all U.S. citizens, none of whom lives with them. None of these individuals file a joint return or have any gross income.
How many dependents may John and Joanne claim on their joint return?
3
A taxpayer cannot claim a person as a dependent unless providing more than half of the total annual support and that person is a qualifying child or qualifying relative. For these purposes, any person who is not your qualifying child or the qualifying child of another person can be your qualifying relative if they reside with you. A qualifying relative does not need to live with the taxpayer if related in one of several ways. Foster parents are not qualifying relatives.
All three individuals (Jennie, Julie, Jonathan) are qualifying relatives for whom they may claim as a dependent.
§1.152–2(d) - In the case of a joint return, it is not necessary that the prescribed relationship exist between the person claimed as a dependent and the spouse who furnishes the support; it is sufficient if the prescribed relationship exists with respect to either spouse. Thus, a husband and wife making a joint return may claim as a dependent a daughter of the wife's brother (wife's niece) even though the husband is the one who furnishes the chief support. The relationship of affinity once existing will not terminate by divorce or the death of a spouse. For example, a widower may continue to claim his deceased wife's father (his father-in-law) as a dependent provided he meets the other requirements of section 151.
In 20X1, Nancy’s husband died. They had three children, two of whom were still dependents. Nancy does not remarry and the two children remain as her dependents living with her until 20X5. What is her filing status for federal income tax purposes?
She is a qualifying widow (surviving spouse) for 20X2 and 20X3 and head of household for 20X4.
In the year of death, the couple files a joint return as long as they would have been able to file a joint return at the time of death. Because of the qualifying children, she can then file as a qualifying widow for the next two years. After that time, she can file as head of household as long as the children are dependents or unmarried and continue to live with her.
When filing a separate return for a married taxpayer, what information must be provided about the taxpayer's spouse?
SSN and full name
A taxpayer whose filing status is married filing separately must provide the full name and SSN of the spouse. However, married filing separately, the spouse's name is not entered in the usual space for married filing jointly.
Per Form 1040 Instructions:
Check the “Married filing separately” box at the top of Form 1040 if you are married and file a separate return. Enter your spouse’s name in the entry space at the far right of the filing status checkboxes (next to “Qualifying widow(er)”). Be sure to enter your spouse’s SSN or ITIN in the space for spouse’s SSN on Form 1040.
Form 4137 is used _________?
To calculate the social security and Medicare tax owed on tips not reported to employer.
A taxpayer must file Form 4137 if receiving cash and charge tips of $20 or more in a calendar month and he or she did not report all of those tips to the employer. Form 4137 is also used when box 8 of Form W-2 shows allocated tips that the taxpayer must report as income. However, Form 4137 should not be used to report tips received for work covered by the Railroad Retirement Tax Act. In order to get railroad retirement credit, the taxpayer must report these tips to his or her employer. IRS Form 4137.
Municipality X issues a bond with a face value of $10,000. Municipality X will redeem the bond at face value in five years. In order to obtain the bond from Municipality X, an investor must pay $8,000. What is the original issue discount in this case?
$2,000
OID is defined as the difference between the stated redemption price at maturity and the issue price.
$10,000 – $8,000 = $2,000
Wilson Metalis is trying to determine whether a particular person qualifies as a dependent on his individual income tax return for this year. To qualify, a dependent must be either a qualifying relative or a qualifying child. Which of the following would not be considered a qualifying relative in making the determination as to whether a person is a qualifying dependent?
Taxpayer's cousin who has lived in the taxpayer's household for 9.2 months
Qualifying relatives include parent, grandparents, siblings, children, grandchild, aunts, uncles, nephews, nieces, and in-laws, or anyone else who lived in the taxpayer's household for the entire year. Cousins are not considered to be qualifying relatives because of the relationship with the taxpayer, and the cousin in this problem did not live in the taxpayer's household for the entire year.
Gina and George, a married couple, visit their tax preparer Robert. Robert informs them that if they file separately, they will have a lower combined tax than if they file jointly. Gina and George have been married for 10 years and have always filed jointly. What options do they have?
They can file separately this year and may file either jointly or separately in future years.
Taxpayers can figure their tax both on a joint return and on separate returns (using the filing status of married filing separately) and choose the method that gives them the lower combined tax. Selecting a filing status for one year, either jointly or separately, does not affect the selection of a filing status for a future year.
When Susan and Tom were married in June, Susan assumed Tom's last name. In order to prevent delays in processing a return, what should Susan do before filing her return?
Report the name change to the Social Security Administration (SSA) on Form SS-5.
If a taxpayer changes his or her name after a recent marriage or divorce, the taxpayer should take the necessary steps to ensure the name on the tax return matches the name registered with the Social Security Administration. A mismatch between the name shown on the tax return and the SSA records can cause problems in the processing of the return and may even delay the refund. Informing the SSA of a name change is done by filing Form SS-5, Application for a Social Security Card, at a local SSA office or by mail and providing a recently issued document as proof of the legal name change.
There is a penalty for not reporting tips to an employer as required. The penalty is:
Equal to 50% of the social security and Medicare tax due on those tips.
If you did not report tips to your employer as required, you may be charged a penalty equal to 50% of the social security and Medicare tax due on those tips.
Janice dropped off her annual records for the preparation of her tax return. Determine the amount of taxable interest to be reported on Janice's tax return based on the following during the tax year:
$4,270
parent may elect (not required) to report a child's income on their tax return, provided the child's income is only from interest, dividends, and capital gain distributions, and both the child and the parent meet certain conditions. One of these conditions is the child is required to file a return unless the parent makes this election. If the child is not required to file a return, the parent cannot make the election. In this case, Janice's son was not required to file a return, therefore, the election cannot be made.
If you receive non-cash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest. For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. The value is determined by the cost to the financial institution.
$50 interest on Form 1099-OID
$200 interest on CD
$20 value of calculator
$4,000 installment sale interest
$4,270 taxable interest reported on her return