TAX 4001 Exam 2024 with 100% Correct Answers
How do taxpayers determine whether they should deduct their itemized deductions or utilize
the standard deduction? - ANSWER Taxpayers generally deduct the greater of (1) the applicable
standard deduction or (2) their total itemized deductions, after limitations. However, taxpayers
that do not want to bother with tracking itemized deductions may choose to deduct the
standard deduction, even when itemized deductions may exceed the standard deduction.
Why are some deductions called "above-the-line" deductions and others are called "below-the-
line" deductions? What is the "line"? - ANSWER The line is adjusted gross income (AGI). AGI is
considered the line because of the significance it plays in the amount of deductions allowed
from AGI. "For AGI" deductions are called above-the-line deductions because they are deducted
in determining AGI. "From AGI" deductions are called below-the-line deductions because they
are deducted after AGI has been determined. They are deducted from AGI to arrive at taxable
income. Below-the-line deductions may be subject to limitations based on the taxpayer's AGI.
What is the difference between a tax deduction and a tax credit? Is one more beneficial than
the other? Explain. - ANSWER A deduction generally reduces taxable income dollar for dollar
(although from AGI deductions may not reduce taxable income dollar for dollar). This translates
into a tax savings in the amount of the deduction times the marginal tax rate. In contrast,
credits reduce a taxpayer's taxes payable dollar for dollar. Thus, generally speaking, credits are
more valuable than deductions.
What types of federal income-based taxes, other than the regular income tax, might taxpayers
be required to pay? In general terms, what is the tax base for each of these other taxes on
income? - ANSWER In addition to the individual income tax, individuals may also be required
to pay other income based taxes such as the alternative minimum tax (AMT) or self-
employment taxes. These taxes are imposed on a tax base other than the individual's taxable
income. The AMT tax base is alternative minimum taxable income, which is the taxpayer's
taxable income
,adjusted for certain items to more closely reflect the taxpayer's economic income than does
taxable income. The tax base for self-employment taxes is the net earnings derived from self-
employment activities.
Identify three ways taxpayers can pay their income taxes to the government. - ANSWER
Taxpayers can pay taxes through (1) income taxes withheld from the taxpayer's salary or
wages by her employer, (2) estimated tax payments directly to the government, and (3) taxes
the taxpayer overpaid in the previous year that the taxpayer elects to apply as an estimated
payment for the current year.
If a person is considered to be a qualifying child or qualifying relative of a taxpayer, is the
taxpayer automatically entitled to claim a dependency exemption for the person? - ANSWER
No, taxpayers may claim a dependency exemption for a qualifying child and/or a qualifying
relative only if the qualifying child or relative is a citizen of the United States or a resident of the
United States, Canada, or Mexico. Further, the qualifying child or qualifying relative must meet
the joint tax return test if the person is married (no joint return with spouse unless there is no
tax liability (positive taxable income) on the joint return and there would have been no tax
liability on either separate tax return if the spouses had filed separately).
Emily and Tony are recently married college students. Can Emily qualify as her parents'
dependent? Explain. - ANSWER Depending on the circumstances, Emily may qualify as a
dependent of her parents. A taxpayer who files a joint return with his or her spouse may not
qualify as a dependent of another, unless there is no tax liability on the couple's joint return
and there would not have been any tax liability on either spouse's tax return if they had filed
separately. As long as Emily and Tony meet these criteria, then Emily will qualify as a dependent
of her parents assuming she also meets tests to be her parents' qualifying child or qualifying
relative.
Compare and contrast the relationship test requirements for a qualifying child with the
relationship requirements for a qualifying relative. - ANSWER The relationship test for a
qualifying child includes the taxpayer's child or descendant of a child (child or grandchild) while
the relationship test for qualifying relatives includes both descendants and ancestors of the
taxpayer (child, grandchild, parents, or grandparent). The relationship test for the qualifying
relative includes a descendant or ancestor of the taxpayer (child, grandchild, parent, or
grandparent). The relationship test for qualifying child includes siblings of the taxpayer or
descendants of siblings of the taxpayer while the qualifying relative test also includes siblings
of the taxpayer and sons or daughters of the taxpayer's siblings. The relationship test for
, qualifying relative also includes the taxpayer's in laws, aunt, uncle, and any person (even if
there is no qualifying family relationship as described above) who has the same principal place
of abode as the taxpayer for the entire year. Thus, the relationship test for qualifying relative is
much more broad in scope than the relationship test for qualifying child.
In general terms, what are the differences in the rules for determining who is a qualifying child
and who qualifies as a dependent as a qualifying relative? Is it possible for someone to be a
qualifying child and a qualifying relative of the same taxpayer? Why or why not? - ANSWER The
rules for determining who qualifies as a dependent as a qualifying child and who qualifies as a
dependent as a qualifying relative overlap to some extent. The primary differences between
the two are
(1) the relationship requirement is more inclusive for qualifying relatives than
qualifying children,
(2) qualifying children are subject to age restrictions while qualifying relatives are not,
(3) qualifying relatives are subject to a gross income restriction while qualifying children
are not, and
(4) taxpayers need not provide more than half a qualifying child's support, though the child
cannot provide more than half of his/her own support, but, absent a multiple support
agreement, taxpayers must provide more than half the support of a qualifying relative.
(5) qualifying children are subject to a residence test (they must live with the taxpayer for more
than half the year) while qualifying relatives are not.
An individual may not be a qualifying child and a qualifying relative of the same taxpayer. By
definition, a qualifying relative must be someone who is not a qualifying child.
Consequently, the qualifying relative tests apply only when the individual does not pass the
qualifying child tests.
Isabella provides 30% of the support for her father Hastings who lives in an apartment by
himself and has no gross income. Is it possible for Isabella to claim a dependency exemption
for her father? Explain - ANSWER Because her father meets the relationship and gross income
test for a qualifying relative, the support test is the only obstacle for Isabella to claim a
dependency exemption for her father. The basic support test requires that Isabella must have
provided more than half of the support for her father in order to claim a dependency
exemption for him. Because Isabella provides only 30% of her father's support, she does not
meet the basic test. However, Isabella could potentially qualify to claim a dependency
exemption for her father under a multiple support agreement. For Isabella to qualify, the
following requirements must be met:
How do taxpayers determine whether they should deduct their itemized deductions or utilize
the standard deduction? - ANSWER Taxpayers generally deduct the greater of (1) the applicable
standard deduction or (2) their total itemized deductions, after limitations. However, taxpayers
that do not want to bother with tracking itemized deductions may choose to deduct the
standard deduction, even when itemized deductions may exceed the standard deduction.
Why are some deductions called "above-the-line" deductions and others are called "below-the-
line" deductions? What is the "line"? - ANSWER The line is adjusted gross income (AGI). AGI is
considered the line because of the significance it plays in the amount of deductions allowed
from AGI. "For AGI" deductions are called above-the-line deductions because they are deducted
in determining AGI. "From AGI" deductions are called below-the-line deductions because they
are deducted after AGI has been determined. They are deducted from AGI to arrive at taxable
income. Below-the-line deductions may be subject to limitations based on the taxpayer's AGI.
What is the difference between a tax deduction and a tax credit? Is one more beneficial than
the other? Explain. - ANSWER A deduction generally reduces taxable income dollar for dollar
(although from AGI deductions may not reduce taxable income dollar for dollar). This translates
into a tax savings in the amount of the deduction times the marginal tax rate. In contrast,
credits reduce a taxpayer's taxes payable dollar for dollar. Thus, generally speaking, credits are
more valuable than deductions.
What types of federal income-based taxes, other than the regular income tax, might taxpayers
be required to pay? In general terms, what is the tax base for each of these other taxes on
income? - ANSWER In addition to the individual income tax, individuals may also be required
to pay other income based taxes such as the alternative minimum tax (AMT) or self-
employment taxes. These taxes are imposed on a tax base other than the individual's taxable
income. The AMT tax base is alternative minimum taxable income, which is the taxpayer's
taxable income
,adjusted for certain items to more closely reflect the taxpayer's economic income than does
taxable income. The tax base for self-employment taxes is the net earnings derived from self-
employment activities.
Identify three ways taxpayers can pay their income taxes to the government. - ANSWER
Taxpayers can pay taxes through (1) income taxes withheld from the taxpayer's salary or
wages by her employer, (2) estimated tax payments directly to the government, and (3) taxes
the taxpayer overpaid in the previous year that the taxpayer elects to apply as an estimated
payment for the current year.
If a person is considered to be a qualifying child or qualifying relative of a taxpayer, is the
taxpayer automatically entitled to claim a dependency exemption for the person? - ANSWER
No, taxpayers may claim a dependency exemption for a qualifying child and/or a qualifying
relative only if the qualifying child or relative is a citizen of the United States or a resident of the
United States, Canada, or Mexico. Further, the qualifying child or qualifying relative must meet
the joint tax return test if the person is married (no joint return with spouse unless there is no
tax liability (positive taxable income) on the joint return and there would have been no tax
liability on either separate tax return if the spouses had filed separately).
Emily and Tony are recently married college students. Can Emily qualify as her parents'
dependent? Explain. - ANSWER Depending on the circumstances, Emily may qualify as a
dependent of her parents. A taxpayer who files a joint return with his or her spouse may not
qualify as a dependent of another, unless there is no tax liability on the couple's joint return
and there would not have been any tax liability on either spouse's tax return if they had filed
separately. As long as Emily and Tony meet these criteria, then Emily will qualify as a dependent
of her parents assuming she also meets tests to be her parents' qualifying child or qualifying
relative.
Compare and contrast the relationship test requirements for a qualifying child with the
relationship requirements for a qualifying relative. - ANSWER The relationship test for a
qualifying child includes the taxpayer's child or descendant of a child (child or grandchild) while
the relationship test for qualifying relatives includes both descendants and ancestors of the
taxpayer (child, grandchild, parents, or grandparent). The relationship test for the qualifying
relative includes a descendant or ancestor of the taxpayer (child, grandchild, parent, or
grandparent). The relationship test for qualifying child includes siblings of the taxpayer or
descendants of siblings of the taxpayer while the qualifying relative test also includes siblings
of the taxpayer and sons or daughters of the taxpayer's siblings. The relationship test for
, qualifying relative also includes the taxpayer's in laws, aunt, uncle, and any person (even if
there is no qualifying family relationship as described above) who has the same principal place
of abode as the taxpayer for the entire year. Thus, the relationship test for qualifying relative is
much more broad in scope than the relationship test for qualifying child.
In general terms, what are the differences in the rules for determining who is a qualifying child
and who qualifies as a dependent as a qualifying relative? Is it possible for someone to be a
qualifying child and a qualifying relative of the same taxpayer? Why or why not? - ANSWER The
rules for determining who qualifies as a dependent as a qualifying child and who qualifies as a
dependent as a qualifying relative overlap to some extent. The primary differences between
the two are
(1) the relationship requirement is more inclusive for qualifying relatives than
qualifying children,
(2) qualifying children are subject to age restrictions while qualifying relatives are not,
(3) qualifying relatives are subject to a gross income restriction while qualifying children
are not, and
(4) taxpayers need not provide more than half a qualifying child's support, though the child
cannot provide more than half of his/her own support, but, absent a multiple support
agreement, taxpayers must provide more than half the support of a qualifying relative.
(5) qualifying children are subject to a residence test (they must live with the taxpayer for more
than half the year) while qualifying relatives are not.
An individual may not be a qualifying child and a qualifying relative of the same taxpayer. By
definition, a qualifying relative must be someone who is not a qualifying child.
Consequently, the qualifying relative tests apply only when the individual does not pass the
qualifying child tests.
Isabella provides 30% of the support for her father Hastings who lives in an apartment by
himself and has no gross income. Is it possible for Isabella to claim a dependency exemption
for her father? Explain - ANSWER Because her father meets the relationship and gross income
test for a qualifying relative, the support test is the only obstacle for Isabella to claim a
dependency exemption for her father. The basic support test requires that Isabella must have
provided more than half of the support for her father in order to claim a dependency
exemption for him. Because Isabella provides only 30% of her father's support, she does not
meet the basic test. However, Isabella could potentially qualify to claim a dependency
exemption for her father under a multiple support agreement. For Isabella to qualify, the
following requirements must be met:
