Exam (elaborations)
TAX4001 Laursen Fall2021 Exam II (1)
TAX4001 Laursen Fall2021 Exam II (1)
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TAX4001 Laursen Fall2021 Exam IIIndividual Income Tax Formula - ANS-Gross income
(-) Deductions for AGI
= AGI
(-) 1) Deductions from AGI (greater of itemized or standard deduction) and 2) The
deduction for QBI
= Taxable Income
x Tax rate
= Gross tax liability
(-) Tax credits and prepayments
= Tax due or refund
Gross Income (section 61) - ANS-all income from whatever source derived, whether
money, property, or services
Taxpayers recongize income when: - ANS-1) receiving economic benefit
2) realizing income
3) there is no provision allowing them to exclude or defer income from gross income
Constructive receipts doctrine - ANS-taxpayer must realize and recognize income when
actually or constructively received
Constructively received - ANS-When an amount is credited to the taxpayer's account or
made available to the taxpayer (or taxpayer's agent) without restriction.
T or F: The Constructive receipts doctrine applies to both accrual and cash basis
taxpayers. - ANS-F: only to cash basis taxpayers
realization principle - ANS-1) Taxpayer engages in a transaction with another party
2) Transaction results in a measurable change in property rights
form of receipt - ANS-taxpayers realize income whether they receive money, property,
or services in a transaction
tax benefit rule - ANS-Refunds on an expense deducted in a previous year are included
in gross income to the extent it reduced taxes in the year of deduction
, T or F: A taxpayer who took the standard deduction in the prior year and received a
refund in the current year never adds the refund to the current gross income. - ANS-T:
no tax benefit was received
The taxpayer receives a refund in the current year of $3,000 and used itemized
deductions of $15,000 in the prior year. The standard deduction was $6,300 in the prior
year. What counts as income in the current year? What if the itemized deductions were
$8,300 in the prior year? - ANS-The full $3,000 counts as income in the current year
since $15,000 -6,300 = $8,700 additional deduction (tax benefit)
$2,000 would count as income
$8,300 - 6,300 = $2,000
In 2020 Courtney paid $3,500 in Ohio state income taxes, and she included this
payment with her other itemized deductions when she filed her federal income tax
return in March of 2021. Courtney filed her 2020 federal return as a head of household
and claimed $20,750 of itemized deductions (including $3,500 state income taxes,
$2,500 of real estate taxes, $8,000 of mortgage interest expense, and $6,750 of
charitable contributions). She also filed an Ohio state income tax return in March of
2021 and discovered she only owed $3,080 in Ohio income tax for 2020. Hence,
Courtney received a $420 refund of her Ohio income tax in June of 2021.
Applying the tax benefit rule, how much of the $420 refund, if any, is Courtney required
to include in her gross income for 2021 given that the standard deduction for head of
household filing status in 2020 was $18,650? - ANS-The full $420
$20,750- $18,650 = $2,100
and $3,500 + $2,500 < 10,000 so we do not need to consider the limit on tax deductions
Claim of right doctrine (judicial court doctrine) - ANS-Income received with no
restrictions is income now
ex: end of year bonus would be counted as realized income
T or F: If income received with no restrictions in a prior period must be paid back in the
current period the taxpayer can deduct the full amount. - ANS-F: The taxpayer can only
deduct the compensation repayment if it exceeds $3,000
Annuity Income - ANS-purchaser pays fixed amount for the right to receive a future
stream of payments paid
1) over a fixed period
2) for the duration of a person's life
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