63. For 2011, Wilson and Virginia Todd qualify for the earned income credit. They have two dependent
children, ages 6 months and 4 years at the end of the year.
a.
Using the EIC tables, calculate the amount of Wilson and Virginia Todd’s earned income credit assuming Wilson has earned income of
$7,000 and Virginia has no earned income. Their adjusted gross income for 2011 is $9,000.
b.
Calculate the amount of Wilson and Virginia Todd’s earned income credit assuming Wilson has earned income of $14,000 and Virginia
has earned income of $2,000. Their adjusted gross income for 2011 is $16,500.
64. Arthur is divorced with two dependent children, one age 13 and the other age 8. His adjusted gross income
for 2011 is $30,000, and he incurs qualified child care expenses of $6,000, $3,000 for each child.
a.
What is the amount of Arthur’s qualified child care expenses after any limitation?
b.
Calculate the amount of Arthur’s child care credit for 2011.
a.
65. Dan and Maureen file a joint income tax return for 2011. They have two dependent children, ages 7 and 9.
Together they earn wages of $200,000. They also receive taxable interest income of $7,000 and interest on City
of Los Angeles bonds of $12,000. During 2011, they received a state income tax refund of $3,000 relating to
their 2010 state income tax return on which they itemized deductions. Their expenses for the year consist of the
following:
Home mortgage interest (on acquisition debt)
$8,000
Interest on credit cards
2,000
Real property taxes
3,000
Cash contributions
15,000
Unreimbursed employee business expenses
20,000
State income taxes withheld
15,000
a.
Earned income credit:
$2,810
The Todd’s earned income is less than the phase-out amount so they do not need to consider AGI.
b.
Earned income credit:
Amount from table for earned income of $16,000
$5,112
The Todd’s earned income is less than the phase-out amount so they do not need to consider AGI.
Calculate Dan and Maureen’s tentative minimum tax liability, before any credits. Show your calculations
66. Edward has business operations in Country F and Country G. He pays tax to Country F of $12,000 on
$30,000 of income and pays tax to Country G of $4,000 on $10,000 of income. In addition to the income from
Country F and Country G, Edward has $100,000 of income from U.S. sources and a total U.S. tax liability,
before the foreign tax credit, of $49,000.
What amount of foreign tax credit may Edward claim on his U.S. tax return?
67. Betty and Steve have a 4-year-old child, Gwen. For 2011, Betty and Steve have taxable income of $150,000.
Gwen has interest income of $10,000 from a bond portfolio her grandfather gave her and no investment
expenses. No election is made to include Gwen’s income on Betty and Steve’s return.
a.
For purposes of the parental tax, calculate Gwen’s net unearned income.
b.
Calculate the amount of Gwen’s parental tax.
c.
Calculate Gwen’s total tax for 2011.
Wages
$200,000
Interest income
7,000
State income tax refund
3,000
Adjusted gross income
$210,000
Tax preferences and adjustments:
State income tax refund
-3,000
Total
$207,000
Less allowable itemized deductions:
Home mortgage interest
$ 8,000
Cash contribution
15,000
Total deductions
-23,000
Alternative minimum taxable income
$184,000
Alternative minimum tax exemption,
$74,450 – (25% ´ ($184,000 – 150,000))
-65,950
Alternative minimum tax base
$118,050
Tentative minimum tax (26% ´ $118,050)
68. John and Susan file a joint income tax return for 2011. They have two dependent children, students, ages 19
and 20. John earns wages of $100,000 and they have interest income of $3,000. In 2011, they settle a state tax
audit and pay $50,000 for back state taxes due to an overly aggressive tax-sheltered investment.
Their other expenses for the year include:
Mortgage interest
Real estate taxes
State taxes withheld
Cash contributions
CPA fees for assistance with the state audit
a.
Calculate John and Susan’s regular tax and tentative minimum tax on the schedule provided.
Less tax on $150,000
30,070
Incremental tax on $8,100
$ 2,268
Parental tax
2,268
Total tax
Regular tax:
Adjusted gross income
Itemized deductions:
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
Total itemized deductions
Exemptions
Taxable income
Tax from 2011 tax table
Alternative minimum tax:
Adjusted gross income
Add: tax preferences and adjustments
Less: allowable deductions
______________________________
______________________________
______________________________
______________________________
Total deductions
Alternative minimum taxable income
The AMT exemption ($74,450)
Alternative minimum tax base
Tentative minimum tax
(26% of income up to $175,000; 28% of income in excess of $175,000)
b.
How much is the total tax liability shown on John and Susan’s 2011 Form 1040?
69. Maxine is a 29-year-old single mother. Her tax liability before credits is $1,000 and her earned income
credit is $2,500. How much earned income credit will be refunded to Maxine? Explain.
70. What is the purpose of the alternative minimum tax?
71. Patricia and Cliff are married but file separate tax returns. Patricia received a salary of $42,000 and Cliff
received $15,000 of dividends from a stock portfolio that is his own separate property.
a.
If Patricia and Cliff live in a common law state, what income should Patricia show on her separate
return?
Salary
Dividends
Adjusted gross income ($100,000 + $3,000)
$103,000
Mortgage interest
$12,000
Real estate taxes
2,000
State taxes ($3,500 + $50,000)
53,500
Contributions
3,000
CPA fees (Misc. exp) [$4,500 – (2% ´ $103,000)]
2,440
Total
72,940
$ 30,060
Personal exemptions (4 ´ $3,700)
14,800
Taxable income
$ 15,260
Tax from tax table
$ 1,528
Adjusted gross income
$103,000
Less allowable deductions
Mortgage interest
$12,000
Contributions
3,000
Total deductions
15,000
Alternative minimum taxable income
$ 88,000
AMT exemption
74,450
Alternative minimum tax base
$ 13,550
Tentative minimum tax, at 26%
$ 3,523
b
b.
If they live in California (a community property state), what income should Patricia show on her
separate return?
Salary
Dividends
72. Rachel and Rob are married and living together in California. Their income is:
Rob’s salary
$120,000
Rachel’s net income from her business
130,000
Interest (Rob’s separate property investments)
4,000
Interest (Rachel’s separate property investments)
2,000
Dividends (community property)
5,000
Total income is $261,000
a. If Rachel files a separate return, she should report income of
b. If Rob and Rachel live in Texas, what should Rachel report as income?
73. Richard has $30,000 of income from a country that imposes a 40 percent income tax and $30,000 of income
from a country that imposes a 30 percent income tax. In addition to the foreign income, he has taxable income
from U.S. sources of $120,000 and a U.S. tax liability, before credits, of $53,450. The amount of Richard’s
foreign tax credit is:
($30,000 + $30,000) / $180,000 x $53,450 = $17,817, which is less than the actual foreign tax paid of $21,000.
b.
74. a. Norm and Linda are married, file a joint return, and have one 5-year-old child. Their adjusted gross
income is $135,000. What is their child credit for the current year?
b. If Norm and Linda had a 3-year-old as well as the 5-year-old and an 18-year-old from Linda’s first marriage,
what would their child credit be for the current year?
c. In b. (above), how many qualifying children do Norm and Linda have? Explain.
75. Jeff is a stay-at-home father who earns $500 from odd jobs and takes care of his daughter. His wife,
Michelle, is the bread-winner and brings in adjusted gross income of $60,000 a year. In addition to the care
provided by Jeff, Michelle pays $4,500 in child care.
In the current year, how much are Jeff and Michelle’s qualifying expenses for the child care credit?
76. In 2011, Erin purchased a solar system to generate electricity for her home, at a cost of $5,000.
a. How much is her tax credit in 2011?
b. If she had purchased a solar heating system for her swimming pool at a cost of $3,500, how much could she
claim as a tax credit?
c. If she had purchased a $5,000 solar electric system and a $4,500 solar heating system for her principal home
(not for the swimming pool), how much could she claim as a tax credit?
d. If she had purchased the electric system for her principal residence and the solar heating system for a second
residence, how much could she claim as a tax credit?
77. In 2011, Brady purchases a 2011 Nissan Leaf electric vehicle for his personal use. He is eligible to claim a
credit of $7,500. He is in the 35 percent marginal tax bracket and his regular
tax liability before credits is $14,800 and his tentative minimum tax is $18,050. What is the
tax benefit Brady realizes from this purchase?
78. Calculate the child credits for the following taxpayers. Please show your work.
a. Ninfa is a single mother with 8-year-old and 9-year-old dependent sons and has $50,000 of AGI.
b. Sharon and Mark have one dependent 2-year-old child and $125,100 of AGI.
c. Carol is single and has one dependent 18-year-old son.
79. What is the maximum investment income a taxpayer is allowed to have and still be allowed to claim the
earned income credit? Why is there an earned income credit in the law?
80. Jeff and Geri are married and have AGI of $95,000 and three young children. Geri pays $6,000 a year to day
care providers so she can teach a yoga class and do household errands. Geri earns $4,000 teaching the yoga
class. How much child and dependent care credit can Jeff and Geri claim? Why?
81. Marion has an 11-year-old daughter. Please calculate her child and dependent care credit under these two
alternatives:
a. Marion pays $4,000 a year in day care costs. Her salary is $30,000.
b. Marion pays $8,000 a year in day care costs. Her salary is $80,000.
82. Martin and Rachel are married and have a 3-year-old child. Martin is going to medical school full-time for
12 months of the year and Rachel earns $45,000. Their child is in day care so Martin can go to school while
Rachel is at work. The cost of their day care is $10,000. What is their child and dependent care credit? Please
show your calculations and explain.
83. Explain what type of education qualifies for the American Opportunity credit and what type of education
qualifies for the lifetime learning credit.
84. John graduates from high school in 2011 and enrolls in a private college in the fall. His parents pay $10,000
for his tuition and fees.
a. Assuming John’s parents have AGI of $46,000, what is the American Opportunity credit they can claim for
John? Explain.
b. Assuming John’s parents have AGI of $170,000, what is the American Opportunity credit they can claim for
John? Explain.
85. Jasmine is a single marketing manager with a college degree. She continually updates her marketing
knowledge and gets fresh ideas by taking classes at the local community college. This year she spent $1,500 on
course tuition and fees. If Jasmine has AGI of $52,000, how much lifetime learning credit can she claim on her
tax return? Explain.
86. Sheila and Jerry are married taxpayers with $600 of foreign tax withholding from the dividends in a mutual
fund. They have enough foreign income from the mutual fund to claim the full $600 as a foreign tax credit.
They are in the highest tax bracket, 35%, and they itemize deductions. Should they claim the foreign tax credit
on the Form 1040 or a deduction for foreign taxes on their Schedule A? Why?
87. Jenny adopts a Vietnamese orphan. The adoption takes 3 years, two trips to Vietnam, and becomes final in
2011. She pays $10,000 in 2009, $5,000 in 2010, and $5,000 in 2011 of qualified adoption expenses. She has
AGI of $150,000.
a. What is the adoption credit Jenny can claim in 2011?
b. How much credit could she claim if the adoption falls through and is never finalized?
88. List at least two AMT preferences and/or adjustments and show the simplified formula for calculating
AMT. Do not include dollar exemption amounts or the tax rate schedule.
89. Assume Alan’s parents make gifts of $10,000 to him every year starting at age one, and that Alan’s parents
are in the highest income tax bracket (35 percent), and that Alan is now 15-years-old and has $11,700 of interest
income for 2011.
a. Please calculate the tax on Alan’s interest income.
b. Please explain why the “kiddie tax” rules are in the law.
90. Other things equal, would a tax credit or a tax deduction reduce income taxes more?
91. Although the Alternative Minimum Tax (AMT) is meant to prevent high-income taxpayers from using tax
shelters to avoid paying tax, why might married taxpayers with several children and jobs resulting in high
unreimbursed employee business expenses find themselves paying AMT?