Whittenburg Gerald E., Altus-Buller Martha. Income Tax Fundamentals
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LO 6.4 15. Jasper is single and is a computer software consultant with a college degree. He feels
that one of the reasons for his success is that he continually updates his knowledge by
taking classes at the local college in various areas related to software design and infor-
mation technology. This year he spent $2,000 on course tuition and fees.
a. Assuming Jasper has AGI of $92,000, how much lifetime learning credit can Jasper
claim on his tax return? Would the answer be different if Jasper were married and
supporting a wife who was not working?
_________________________________________________ ______________________
_________________________________________________ ______________________
_________________________________________________ ______________________
b. Assuming Jasper has AGI of $45,000, how much lifetime learning credit can Jasper
claim on his tax return?
_________________________________________________ ______________________
_________________________________________________ ______________________
LO 6.5 16. Martha and Lew are married taxpayers with $400 of foreign tax withholding from div-
idends in a mutual fund. They have enough foreign income from the mutual fund to
claim the full $400 as a foreign tax credit. Their tax bracket is 25 percent and they
itemize deductions. Should they claim the foreign tax credit or a deduction for foreign
taxes on their Schedule A? Why?
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 6.8 17. Cindy and Paul are married and live together in Arizona. During the year, Paul
receives a salary of $45,000 and $4,000 of dividends from stock that is his separate
property. Cindy receives a salary of $27,000. Cindy and Paul receive $1,500 in interest
income from a savings account that was established with community funds.
a. If Cindy and Paul file separate income tax returns, what amo unt of income must
each report?
Cindy $____________
Paul $____________
b. If Cindy and Paul liv ed in Louisiana instead of Arizona, what amount of income
would each report on separate income tax returns?
Cindy $ ____________
Paul $ ____________
LO 6.5 18. Carl and Jenny adopt a Russian orphan. The adoption takes 2 years and two trips to
Russia and is final in 2010. They pay $6,000 in 2009 and $7,500 in 2010 of qualified
adoption expenses, and have AGI of $150,000.
a. What is the adoption credit Carl and Jenny can claim in 2010?
$ ____________
b. How much credit could they claim if the adoption falls through and is never
finalized?
_________________________________________________ ______________________
c. How much credit could they claim if their AGI was $200,500?
_________________________________________________ ______________________
LO 6.5 19. Mike bought an energy-efficient heat pump for his home, at a cost of $2,500 in 2010.
a. If the heat pump has a 2-year warranty, what is Mike’s credit?
$ ____________
Questions and Problems 6-41
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b. If the heat pump cost $6,000 and has a 3-year warranty, what is Mike’s credit?
$ ____________
LO 6.5 20. In 2010, Jeff spends $2,000 on certified, energy-efficient insulation for his main home
and installs certified, energy-efficient windows costing $3,000.
a. What percentage is used to determine the credit for energy-efficient improvements
to homes? % ____________
b. What is Jeff ’s credit for his 2010 purchases? $ ____________
LO 6.6 21. Otto and Monica are married taxpayers who file a joint tax return. For the current tax
year, they have adjusted gross income of $80,300. They have excess depre ciation on
realty of $67,500, which must be added back to arrive at alternative minimum taxable
income. The amount of their mortgage interest expense for the year was $25,000, and
they made charitable contributions of $7,500. If Otto and Monica’s taxable income for
the current year is $40,500, determine the following amounts:
Problem 21 contains an alternative minimum tax calculation . Plea se see the "As
We Go To Press" page at the beginning of the text and the caveat at Section 6.8
regarding a possible change in the 2010 law.
a. What is the amount of their regular income tax? $ ____________
b. What is the amount of their tentative minimum tax? $ ____________
c. What amount of tax must they pay? $ ____________
LO 6.6 22. Please list two common deductions which are allowed for regular tax purposes but are
not deducti ble for alternative minimum tax (AMT) purposes.
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 6.6 23. Although the alternative minimum tax (AMT) is meant to prevent high-income tax-
payers from using tax shelters to avoid paying tax, why might married taxpayers
with several children living in a state with high state income taxes and property
taxes (for example California or New York) find themselves paying AMT?
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 6.6 24. Why has the alternative minimum tax (AMT) become a controversial tax in recent years?
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 6.6 25. What are the two tax rates which are used to calculate alternative minimum tax, ignor-
ing the special treatment of dividends and capital gains?
_________________________________________________ ________________________
LO 6.6 26. Please show the simplified formula for calculating AMT. Do not show tax rates or an
exemption amount.
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
6-42 Chapter 6
Credits and Special Taxes
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
LO 6.7 27. Explain the purpose of the provision in the tax law that taxes unearned income of cer-
tain minor children at their parents’ tax rates.
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 6.7 28. Brian and Kim have a 12-year-old child, Stan. For 2010, Brian and Kim have taxable
income of $52,000, and Stan has nonqualifying dividend income of $4,500 and invest-
ment expenses of $250. No election is made to include Stan’s income on Brian a nd
Kim’s return.
a. For purposes of the parental tax, calculate Stan’s
net unearned income. $____________
b. Calculate the amount of Stan’s parental tax. $____________
c. Calculate Stan’s total tax for 2010. $____________
LO 6.7 29. Nikkie and Jean have two children, Richard (age 4) and Roberta (age 3). For purposes
of the parental tax, Richard has net unearned income of $6,000 and Roberta has net
unearned income of $4,000. Assuming that their total parental tax for 2010 is
$2,400, allocate the total parental tax to Richard and Roberta.
a. Richard’s parental tax $____________
b. Roberta’s parental tax $____________
LO 6.7 30. Please explain the two different ways that the tax on unearned income of minor chil-
dren, or ‘‘kiddie tax,’’ can be reported.
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 6.7 31. Does the tax on unearned income of minor children, or ‘‘kiddie tax,’’ apply to wages
earned by minors in summer and other jobs?
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 6.8 32. Go to the IRS Web site (www.irs.gov) and determine which IRS publication addresses
the topic of community property. Print out the page with the Table of Contents of this
IRS publication.
GROUP 3:
COMPREHENSIVE PROBLEMS
.............................................. .............................................. .
1. David and Darlene Jasper have one child, Sam, who is 6 years old. The Jaspers reside at
4639 Honeysuckle Lane, Los Angeles, CA 90248. David’s Social Security number is
577-11-3311, Darlene’s is 477-98-4731, and Sam’s is 589-22-1142. David and Dar-
lene’s earni ngs and withholdings for 2010 are:
David: Earnings from Apple Company (office manager) $25,000
Federal income tax withheld 2,800
State income tax withheld 1,050
Questions and Problems 6-43
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Darlene: Earnings from Rose Company (perfume tester) $24,500
Federal income tax withheld 2,650
State income tax withheld 900
Their other income includes interest from Pine Tree Savings and Loan of $1,900.
Other information and expenditures for 2010 are as follows:
Interest: On home acquisition mortgage $11,125
Credit card 925
Taxes: Property taxes on personal residence 1,515
State income taxes paid in 2010 (for 2009) 315
Contribution (with written acknowledgement) to church 410
Medical insurance 475
Medical and dental expenses 2,800
Income tax return preparation fee paid in 2010 200
Payment of union dues 225
Child care for Sam 3,500
Required: Complete the Jaspers’ federal tax return for 2010. Use Form 1040, Schedule A,
Form 2441, and Schedule M, on pages 6-47 through 6-52. Assume any other data you need.
Problem 2A contains an alternative minimum tax calculation. Please see the ‘‘As We
Go To Press’’ page at the beginning of the text and the caveat at Sectio n 6.8 regarding
a possible change in the 2010 law.
2A. Steve Jackson (age 51) is a single taxpayer living at 3215 Pacific Dr., Del Mar, CA
92014. His Social Security number is 465-88-9415. In 2010, Steve’s earnings and
income tax withholding as the manager of a local hotel are:
Earnings from the Ocean View Hotel $100,000
Federal income tax withheld 13,500
State income tax withheld 6,300
Steve’s other income includes interest from SDG&E bonds of $2,500 and interest
on a savings account at Wells Fargo Bank of $3,190. Also, Steve received tax-exempt
interest of $29,200 on private activity bonds that is subject to alternative minimum tax.
During the year, Steve paid the following amounts (all of which can be substantiated):
Home mortgage interest $31,700
Credit card interest 1,760
Auto insurance 900
State income taxes paid in 2010 (for 2007 audit) 12,540
Property taxes on personal residence 6,200
Kaiser HMO premiums 1,800
Other medical expenses 790
CPA fees paid to handle 2007 IRS audit 7,000
Charitable contributions:
Girl Scouts 800
San Diego State University (contribution) 10,000
Italian Red Cross 250
Required: Complete Steve’s federal tax return for 2010. Use Form 1040, Schedule A,
Schedule B, Form 6251, and any other appropriate schedule(s) you need on pages 6-53
through 6-58. Make realistic assumptions about any missing data.
6-44 Chapter 6
Credits and Special Taxes
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Problem 2B contains an alternative minimum tax calculation. Please see the ‘‘As We
Go To Press’’ page at the beginning of the text and the caveat at Sectio n 6.8 regarding
a possible change in the 2010 law.
2B. Kent Pham, CPA, is a 45-year-old single taxpayer living at 169 Trendie Street,
La Jolla, CA 92037. His Social Security number is 865-68-9635. In 2010, Kent’s
W-2 as the controller of a local corporation showed the following:
Earnings from the Gentry Hotel $130,000
Federal income tax withheld 22,000
State income tax withheld 12,090
Kent’s other income includes interest from GMAC bonds of $3,250 and inter-
est on a savings account at The Cove Bank of $4,145. Also, Kent received tax-
exempt interest of $37,960 on private activity bonds that is subject to alternative
minimum tax.
During the year, Kent paid the following amounts (all of which can be
substantiated):
Home mortgage interest $42,210
Home equity debt interest on loan used to purchase a Lexus 6,800
Credit card interest 2,280
California annual auto registration tax (deductible portion) 770
Auto insurance 1,170
State income taxes paid in 2010 (for 2009) 16,302
Property taxes on personal residence 8,060
Blue Cross premiums 2,340
Other medical expenses 1,025
CPA fees paid to handle 2007 IRS audit 9,100
Charitable contributions:
Tree-huggers Historical Society (a qualified charity) 1,040
Campanile Educational (a qualified charity) 12,000
Tecate
´
Orphanage (a Mexican organization) 500
Required: Complete Kent’s federal tax return for 2010. Use Form 1040, Schedule A,
Schedule B, Form 6251, and any other appropriate schedule(s) you need on pages 6-53
through 6-58. Make realistic assumptions about any missing data.
GROUP 4:
CUMULATIVE SOFTWARE PROBLEM
.............................................. .............................................. .
The cumulative software problem contains an alternative minimum tax calculation.
Please see the ‘‘As We Go To Press ’’ page at the beginning of the tex t and the caveat at
Section 6.8 regarding a possible change in the 2010 law.
The following additional information is available for the Dr. Ivan and Irene Incisor family
from Chapters 1–5.
Questions and Problems 6-45
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
In 1995, Ivan’s grandfather died and left a portfolio of municipal bonds. Ivan still owns
these bonds, and in 2010 they pay Ivan $50,000 in tax-free interest. Since the bonds are
private activity bonds, the $50,000 is a tax preference for purposes of the alternative min-
imum tax (AMT). Assume for Chapters 6, 7, and 8 that Ivan’s federal income tax withhold-
ing from his wages is $12,000, not $6,000.
Required: Combi ne this new infor mation about the Incisor family with the information
from Chapters 15 and complete a revised 2010 tax return for Ivan and Irene. Be sure
to save your data input files since this case will be expanded with more tax information
in later chapters.
Please note: This pr oblem requires the calculation of alternative minimum tax (AMT).
The home equity interest of $900 on the purchase of an automobile is not deductible
for AMT (see line 4 of Form 6251). Pleas e also note that page 2 of Form 6251 must be
filled-in to calculate the lower AMT amount on qualified dividends.
6-46 Chapter 6
Credits and Special Taxes
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Questions and Problems 6-47
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
6-48 Chapter 6
Credits and Special Taxes
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Questions and Problems 6-49
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
6-50 Chapter 6
Credits and Special Taxes
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.