The Rands are successful professionals with combined AGI of approximately $400,000.

  1. The Rands are successful professionals with combined AGI of approximately $400,000. Their household includes two children: Henry (age 16) and Belinda (age 22). Belinda is not a student and has a job where she earns $15,000. After a short family meeting in early April, the parties decide that Belinda should claim Henry as her qualifying child. As a result, Belinda is able to deduct a full dependency exemption and claim a child tax credit and an earned income tax credit for a tax savings of more than $3,000. Had the Rands claimed Henry on their joint return, only a partial dependency exemption would have been allowed, and no child tax credit or earned income tax credit would have been available. These credits are phased out for higher-bracket taxpayers. Has the Rand family acted properly?
  2. No, Henry only meets the definition of a qualifying child to his parents not his sister Belinda. Therefore, Henry may not be reported as a qualifying child on Belinda’s return.
  3. No, the parents have not waived their right to claim Henry on the return; therefore, Belinda cannot claim Henry until the parents do so.
  4. Yes, Belinda’s claim of Henry is entirely proper since Henry meets the definition of a qualifying child as to both his parents and his sister.
  1. Each Saturday morning Ted makes the rounds of the local yard sales. He has developed a keen eye for bargains, but he cannot use all the items he thinks are “real bargains.” Ted has found a way to share the benefits of his talent with others. If Ted spots something priced at $40 that he knows is worth $100, for example, he will buy it and list it on eBay for $70. Ted does not include his gain in his gross income because he reasons that he is performing a valuable service for others (both the original sellers and the future buyers) and sacrificing profit he could receive. “Besides,” according to Ted, “the IRS does not know about these transactions.” Is Ted justified in his action to not report the gains on the sale of these items on his return?
  2. Since Ted is in compliance with the tax law, Ted is justified in not reporting the gains on his personal return.
  3. It depends if Ted classifies his activities as a trade/business or merely a hobby. If the activities are a trade/business, then Ted should include these amounts on his return. If the activities are merely a hobby, then Ted does not have to include these amounts as part of gross income.
  4. Ted should include the gains on the sale of the items in his gross income.
  1. The taxpayer was shot in a hunting accident. The person who shot the taxpayer has admitted to being grossly negligent. The taxpayer estimates that he should receive $40,000 for the personal injury and $60,000 as punitive damages. The defendant has offered to pay $80,000 and sign a settlement agreement specifying that all of the payment is for the physical injury, with no mention of the punitive damages. The defendant argues that since the taxpayer is in the 35 percent marginal tax bracket, the $80,000 will yield a greater after-tax award than a $100,000 award with $60,000 specified as being for punitive damages. Is the defendant correct in his counter-argument?
  2. Yes, since the taxpayer is in the 35% tax bracket receiving the $100,000 would cause the defendant to pay $35,000 in taxes. If the taxpayer accepts the $80,000, he would only have to pay $28,000 in taxes.
  3. No, if the taxpayer accepts the $100,000 reward only $60,000 would have to be included in gross income thus saving the taxpayer money as opposed to reporting all $80,000 as gross income.
  4. Yes, if the taxpayer accepts the $80,000 none of this amount would need to be included in gross income since it is for compensatory damages.
  1. Ron, who lives in Phoenix, has a chronic heart problem. He flies to Rochester, Minnesota, several times each year for checkups and treatment at the Mayo Clinic, which has one of the most highly rated heart treatment programs in the United States. He can get better medical care at Mayo Clinic than he can get anywhere else. Since he is already in Rochester, each trip he visits his two children, who live there with his ex-wife. Is Ron justified in deducting the cost of his airline tickets and his lodging in Rochester as a medical expense?
  2. No, since Ron is making it a personal trip as well, this amount may not be included as a medical expense.
  3. Yes, since Ron’s travel to Rochester is primarily for the medical care he may deduct the travel costs as a medical expense.
  4. Ron may deduct the cost of his airline tickets but not his lodging since he can easily stay with his ex-wife in Rochester. The expense of lodging is unnecessary and therefore cannot be included as part of the medical expense.
  1. Robert Ryan, a candidate for governor, has released his tax return to the public. As Ryan’s former tax adviser, you examine the return closely and realize that a considerable amount of his income was not reported on the return. You confide to a friend in the tabloid newspaper business that you are aware that a candidate for a high public office has filed a fraudulent tax return. Your friend assures you that you will be able to sell your story for at least $25,000 to a tabloid and still remain anonymous. Another friend, a CPA, argues that you should inform Ryan and give him an opportunity to correct the problem. You tell your friend that you are concerned that Ryan will be very vindictive if you approach him about the issue. Which course of action should you choose?
  2. The information you obtained while performing services for Robert Ryan is confidential; therefore, it would be unethical to release this information to the public. However, you should inform Ryan and give him the opportunity to correct the problem.
  3. You didn’t prepare the tax return and Robert Ryan unethically misstated his income not you. Therefore, you have no obligation to Ryan and thus are able to go to the tabloids with this information.
  4. Robert Ryan’s information is confidential as a former client. It is not mandatory to provide him with tax advice regarding this misstatement either since he is just that a former client. So you should not go to the tabloids or Robert Ryan with this information. Just keep it to yourself.
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