Taxpayers
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.
Jay and Vonda have been married for a number of years and file a joint tax return for 2020. 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?
What is 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 2020). 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.
Lisa had $50,000 in wages from her day job. She received $40 as compensation for jury duty which she did not have to pay to her boss. She also received punitive damages of $10,000 for a lawsuit against a doctor for malpractice. How much is her gross income?
$60,040
Compensation for jury duty is included in income. If the taxpayer must give the pay to an employer because the employer paid a salary while serving on the jury, he may deduct the amount as an adjustment to income. Punitive damage awards, whether due to physical injury or illness, are included in ordinary income.
Which of the following can never qualify as tax-exempt income for an individual who is filing a federal income tax return?
Interest on United States treasury bonds.
Interest revenue on United States treasury bonds is taxable on a federal income tax return. Interest revenue on US Series EE bonds is tax exempt but only when it meets specific rules: the taxpayer must be at least 24 years old before the bond’s issue date and the proceeds must be used to pay college costs for the taxpayer, spouse or a dependent. Interest revenue on state and municipal bonds are always tax-free on a federal tax return.
What kind of transfer of qualified retirement plan assets cannot be made tax free?
Transfer to Roth
Transfer of qualified retirement assets to a Roth IRA is called a conversion and a taxpayer who does this must include in his gross income distributions from the qualified retirement plan that he would have had to include in income had he not rolled them over into a Roth IRA. He does not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions to the plan that were taxable to him when he contributed. A taxpayer can transfer, tax free, assets (i.e., money or property) from other retirement plans, including traditional IRAs, to a traditional IRA.
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.
Abbey and Ben have several people who lived with them during the latest tax year. Which of the following individuals qualifies as their dependent?
The taxpayer's 12-year-old daughter who attends boarding school during the year.
The daughter of the friend is not a dependent because she is not a blood relative and she did not live with the taxpayer for the entire year. The 24-year-old son made too much money even if he is a student because he is 24 or older. The 20-year-old daughter is married and will file a joint return with her husband; this precludes her from being a dependent on her parent's tax return. The 12-year-old daughter is a blood relative who is considered to have lived with her parents for the entire year even though she attends boarding school.
When Carlos injured his ACL playing basketball, he was unable to work for two months. During this time, he received $2,500 in sick pay from his employer. He also received $1,000 from an insurance policy he had personally purchased several years ago. How much of the amount Carlos received while not working is taxable income?
$2,500
When a taxpayer pays the cost of an accident or health plan, the amounts received for personal injury or sickness are not included as income on the taxpayer's tax return. Therefore, the $1,000 Carlos received from the insurance policy he personally purchased is not taxable income.
Pay a taxpayer receives from his (or her) employer while sick or injured is part of salary or wages is included in taxable income. Therefore the $2,500 Carlos received is taxable income. The total income Carlos reports is $2,500, the sick pay he received from his employer.
According to Publication 525:
Cost paid by you. If you pay the entire cost of an accident or health plan, don't include any amounts you receive from the plan for personal injury or sickness as income on your tax return. If your plan reimbursed you for medical expenses you deducted in an earlier year, you may have to include some, or all, of the reimbursement in your income.
Sick pay. Pay you receive from your employer while you are sick or injured is part of your salary or wages. In addition, you must include in your income sick pay benefits received from any of the following payers.
However, if you paid the premiums on an accident or health insurance policy, the benefits you receive under the policy aren’t taxable.
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.
Roy is 30-years-old and has a traditional IRA with a value of $100,000. Which of the following is a prohibited transaction in his IRA?
Pledge his IRA as security for a loan to return to school.
Using an IRA as security for a loan is a specifically listed prohibited transaction. The other three items are some of the conditions that may allow you to avoid premature distribution penalties.
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.
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.
Billy works as a bagger at a local grocery. Occasionally, he helps customers to their cars. He receives tips of $15 per month. What amount of tip income does Billy need to report to his employer for the year?
$0
Tips of less than $20 per month do not need to be reported to an employer. All tips received must be included in income on the taxpayer's income tax return.
An individual taxpayer has only one passive activity, rental real estate. The taxpayer has a loss from this activity in the current year, but cannot deduct it on the current year tax return. What handling is appropriate for unallowed losses of this type?
Carried forward indefinitely, but not carried back.
Passive losses from rental real estate activities which are not allowed in the current year are carried forward indefinitely until used up.
Kirk passed away. At his death, he had a traditional IRA with a basis of $25,000 and a FMV of $50,000. Kirk had taken no distributions and all the contributions he made were non-deductible. As the spousal beneficiary, which of the following applies to his wife Jenny?
Kirk's $25,000 basis in the IRA may be treated as basis to Jenny upon Kirk's death.
The basis in a traditional IRA, along with the untaxed income in respect of a decedent (IRD) transfers to the beneficiary. A surviving spouse can treat the IRA as her own, or begin taking distributions from the IRA according to the rules established for beneficiaries. The spouse of the decedent is the only beneficiary that can roll an inherited IRA into their own traditional IRA account. Distributions due to death are not subject to a 10% penalty.
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.
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?
Three
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.
Which of the following situations requires the individuals named to report the funds received as taxable income?
Marilyn, who is given money by a real estate developer to influence her vote as a city council member for a new municipal football stadium.
The bribe paid to Marilyn is income. In fact, all income from illegal activities must be reported on a taxpayer's Form 1040, either on Schedule 1 as Other Income or on Schedule C. The money Dean receives from carpool passengers is a reimbursement. The subsidy paid to Joey by a public utility for energy conservation is excluded from income. Bequests, such as the one Peter receives, are also excluded from income—even if the bequest is cash.
J. R. Jackson received cash dividends of $3,000 this year. The tax information provided by the company indicated that these were qualified dividends. Which of the following statements is true?
These dividends are taxed at the lower rate that is applicable for net long-term capital gains.
Qualified dividends are those dividends collected from a U.S. domestic corporation or a qualified foreign corporation. To encourage investments in these companies, the dividends are taxed at the same reduced rate that applies to long-term capital gains.
Bill is 72 and single. His 20X1 income was $14,000 of Social Security payments, $21,000 of dividend and interest income, $30,000 of pension plan payments, and $16,000 of taxable distributions from his IRA account. What is Bill's 20X1 adjusted gross income (AGI)?
$78,900
Only part of Bill's Social Security is taxable. To determine the amount of benefits to include in income, compare his provisional income of $74,000 (one-half of the benefits of $7,000 + all other income sources totaling $67,000) to the upper base amount for single taxpayers of $34,000. A taxpayer must add 85% of excess provisional income (above the upper base amount) to income. However, the amount to include is limited to a maximum of 85% of the social security amount. The excess provisional income of $40,000 is more than his $14,000 in benefits. Therefore, he adds only $11,900 (85% of $14,000 in Social Security benefits) to his other income to arrive at AGI. The resulting AGI is $78,900 ($67,000 other taxable income sources + $11,900 taxable Social Security).
Which of the following statements is true with respect to filing status in connection with an individual tax return?
Single taxpayers pay a higher effective tax rate than individuals who file as head of household or joint filers. They also have the lowest standard deduction of the three.
Taxpayers who meet the requirements for qualifying widow(er) have no reason to file as head of household because that status has fewer tax breaks. However, head of household is taxed at a lower effective tax rate than single filers but at a higher effective tax rate than joint filers. Head of household also gets a higher standard deduction than single filers but lower than joint filers. Single taxpayers pay the highest effective tax rate of the three (single, head of household, or joint filers) and have the lowest standard deduction.
All of the following are correct EXCEPT:
A brother-in-law must live with the taxpayer the entire year to be claimed as a dependent even if the other tests are met.
A qualifying relative need not live with the taxpayer provided they meet all other tests and are related in one of the following ways:
Bart McHenry likes to gamble and has won money several times during the year but lost money during other periods. What are the tax consequences of these gains and losses?
Gambling winnings are included as taxable income but gambling losses are other itemized deductions but only up to the amount reported as winnings.
Winnings from gambling activities are reported within the income of the taxpayer. Losses are shown as Other Itemized Deductions. However, the losses deducted cannot exceed the amount of gambling winnings being reported.
Paula owns and operates a small bakery that generates a $5,000 loss during the tax year. She sold some of the land she uses for the business at a $2,000 gain and some stock she had inherited at a $1,000 loss. She also earned $1,225 from her part-time job as an usher at the local Movie Theater. Her bank personal savings account earned $425 in interest. Paula files as single and claims the standard deduction. Her standard deduction for 2020 is $12,400. What is the amount of her net operating loss for 2020?
$1,775
When calculating an NOL the standard deduction is not included. Other items removed when calculating an NOL are nonbusiness income items such as the interest income.
In this case, Paula does not have nonbusiness capital gains to offset the nonbusiness capital loss, therefore the loss on the sale of the inherited stock is not included in the calculation of her net operating loss. The gain on the sale of the land she sold pertains to her business and cannot offset the sale of the stock she inherited.
The loss on the stock she inherited is a nonbusiness capital loss. A taxpayer can deduct his (or her) nonbusiness capital losses only up to the amount of the nonbusiness capital gains without regard to any section 1202 exclusion. If the taxpayer's nonbusiness capital losses are more than his (or her) nonbusiness capital gains without regard to any section 1202 exclusion, the taxpayer cannot deduct the excess.
By removing the disallowed items, Paula's NOL is $1,775. This is calculated by adding the wages of $1,225, business capital gain of $2,000 and business loss of $5,000. ($1,225 + $2,000 – $5,000 = –$1,775).
Ethel is 65 years old. She receives money from her two investment accounts to supplement her retirement income. She withdraws $25,000 from her IRA and $10,000 from her annuity. She received a 1099-R reflecting the amount of the distributions, including $2,500 withheld for taxes by the custodian of her IRA. She is filing a paper Form 1040 return. What should Ethel do with the Form 1099-R?
Attach only the 1099-R from her IRA because income tax was withheld.
The recipient of an informational return does not send copies to the IRS unless required. A taxpayer must attach (or transmit if filing electronically) Form W-2 to the front of a Form 1040 series tax return. A taxpayer should also attach (or transmit if filing electronically) Forms W-2G and 1099-R, but only if federal income tax was withheld.