Chapter 4

Question 1

Gross income

Answer 1

All realized income (generated in a transaction with a second party where there is a measurable change in property rights between parties). Ex - appreciation in stock investment not realized unless stock is sold.

Question 2

Exclusions

Answer 2

Realized income items taxpayers permanently excluded from income.

Question 3

Deferrals

Answer 3

Realized income items that taxpayers include in gross income in a subsequent year.

Question 4

How does somebody qualify as a dependent of another person?

Answer 4

1) Must be a citizen of the US or a resident of the US, Canada or Mexico.
2) Must not file a return with his or her spouse 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.
3) Must be considered either a qualifying child or a qualifying relative of the taxpayer.

Question 5

How is somebody considered a qualifying child of a taxpayer?

Answer 5

They must satisfy the relationship, age, residence and support tests.

Question 6

Relationship test (qualifying child)

Answer 6

A qualifying child must be an eligible relative of the taxpayer. This includes: The child or descendant of a child. For this purpose, a child includes a taxpayer’s adopted child, stepchild and eligible foster child. Sibling or descendant of a sibling. For this purpose, a sibling includes a taxpayer’s half-brother/sister, stepbrother/sister.

Question 7

Age test (qualifying child)

Answer 7

Must be younger than the taxpayer and either under age 19 at the end of the year or under age 24 at the end of the year AND a full-time student. Full-time student if in school during any part of each five calendar months during the year. An individual of any age who is permanently and totally disabled qualifies.

Question 8

Residence test (qualifying child)

Answer 8

Must have same residence as taxpayer for MORE than half the year. Time that a child or taxpayer is temporarily away from taxpayer’s home because child or taxpayer is ill, is pursuing an education or has another special circumstance counts as though child or taxpayer were living in taxpayer’s home.

Question 9

Support test (qualifying child)

Answer 9

Qualifying child must NOT have provided their own support for the year. Such support generally includes:

Food, school lunches, toilet articles, haircuts
Clothing
Recreation - toys, summer camp, horseback riding, entertainment, vacations expenses, etc.
Medical and dental care
Child care expenses
Allowances and gifts
Wedding costs
Lodging
Education - includes board, uniforms at military, tuition. When determining who provided support for a taxpayer’s child who is a full-time student, scholarships are excluded from the computation.

Question 10

How is somebody considered a qualifying relative of a taxpayer?

Answer 10

The individual is not a qualifying child and they satisfy a relationship, support and gross income test.

Question 11

How does an individual meet the qualifying relative relationship test?

Answer 11

The individual has a qualifying family relationship with the taxpayer, or meets the qualifying relative “member of the household” test.

Question 12

What does a qualifying family relationship with the taxpayer include? (Qualifying relative)

Answer 12

Descendant or ancestor of the taxpayer. For this purpose, a child includes a taxpayer’s adopted child, stepchild and eligible foster child, and a parent includes a stepfather/mother.
A sibling of the taxpayer, including a stepbrother/sister.
A niece or nephew (cousins do not qualify).
An aunt or uncle.
An in-law (mother/father, sister/brother, son/daughter).

Question 13

How does a person meet the qualifying relative “member of the household” test?

Answer 13

The person has the same principal place of abode as the taxpayer for the entire year (even if person does not have a qualifying family relationship with the taxpayer.)

Question 14

What does the support test require? (Qualifying relative)

Answer 14

Taxpayer pays more than half the qualifying relative’s support/living expenses (different from child test). Support/living expenses include food, medicine, clothes, etc. Scholarships of children of a taxpayer who are full-time students are excluded from the support test. Under multiple support agreement, taxpayers who don’t pay over half of an individual’s support may still be allowed to claim the individual under qualifying relative rules if the following applies:

Question 15

How can a taxpayer who doesn’t pay over half of an individual’s support still claim the individual as a dependent? (Qualifying relative)

Answer 15

1) No one taxpayer paid over one-half of the individual’s support.
2) Taxpayer and at least one other person provided more than half the individual’s support, and taxpayer and other person would have been allowed to claim the individual as a dependent except for the fact that they did not provide over half of the support of the individual.
3) Taxpayer contributed over 10% of individual’s support for the year.
4) Each other person who provided over 10% of individual’s support provides a signed statement to the taxpayer agreeing not to claim the individual as a dependent.

Question 16

What does the gross income test require? (Qualifying relative)

Answer 16

A qualifying relative’s gross income for the year be less than $4,150 in 2018.

Question 17

What does a taxpayer’s filing status determine?

Answer 17

Applicable tax rate schedule for determining the taxpayer’s tax liability.
Taxpayer’s standard deduction amount.
The AGI threshold for reductions in certain tax benefits such as itemized deduction for medical expenses and certain tax credits, among other benefits.

Question 18

What are the filing statuses that people file under?

Answer 18

Married filing jointly (MFJ)
Married filing separately (MFS)
Qualifying widow or widower (surviving spouse)
Single
Head of household

Question 19

What are the requirements for MFJ? What does it involve?

Answer 19

Taxpayers must be married on the last day of the year. If a spouse dies during the year, surviving spouse is considered to be married to the spouse who dies unless they remarry during the year.
Combine income and deductions and agree to share joint and several liability for tax liability, means they are both responsible for seeing that tax is paid.

Question 20

How do couples file for MFS? What is different from MFJ? How do deductions work?

Answer 20

Each spouse reports income he or she received during the year and deductions they are claiming on a tax return separate from the other spouse. Tax-related items, like tax rate schedules and and standard deduction amounts are generally one-half what they are for MFJ taxpayers. If one spouse deducts itemized deductions the other is required to even if the standardized deduction is higher.

Question 21

What are the stipulations regarding the qualifying widow or widower status? What requirements does the surviving widow/widower have to meet?

Answer 21

When the taxpayer’s spouse dies, taxpayers who meet certain requirements are allowed to file under this status for up to two years after the end of the year in which the spouse died. The requirements are:

1) The taxpayer remains unmarried.
2) They pay over half the cost of maintaining a household where a child who qualifies as the taxpayer’s dependent lived for the entire year (except for temporary absences).

Dependent child must be a child or stepchild (including an adopted but not foster child) of the taxpayer.

Question 22

Who files as single?

Answer 22

Unmarried taxpayers who do not qualify for head of household status.

Question 23

What filing statuses is head of house more or less favorable than?

Answer 23

In terms of tax rate schedules and standard deduction amounts, filing status is less favorable than MFJ but more favorable than MFS and single.

Question 24

How does somebody to qualify as head of household?

Answer 24

Be unmarried (or be considered unmarried under provisions discussed below) at the end of the year.
Not be a qualifying widow or widower.
Pay more than half the costs of keeping up a home for the year.
Have a “qualifying person” live in the taxpayer’s home for more than half the year (except for temporary absences such as military service, illness, or schooling). However, if qualifying person is taxpayer’s dependent parent, parent is not required to live with taxpayer. (A qualifying person may not qualify more than one person for head of household status).
(Study Exhibit 4-9.)