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How do two taxpayers determine who has priority to claim the dependency exemption for a qualifying child of both taxpayers when neither taxpayer is a parent of the child (assume the child does not qualify as a qualifying child for either parent)?How do parents determine who gets to deduct the dependency exemption for a qualifying child of both parents when the parents are divorced or file separate returns
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?
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Compare and contrast the relationship test requirements for a qualifying child with the relationship requirements for a qualifying relative.
Emily and Tony are recently married college students.Can Emily qualify as her parents’ dependent? Explain.
dentify three ways taxpayers can pay their income taxes to the government.
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?
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Why are some deductions called “abovetheline” deductions and others called “belowtheline” deductions?What is the “line”?
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Why are some deductions called “abovetheline” deductions and others called “belowtheline” deductions?What is the “line”?
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How do taxpayers determine whether they should deduct their itemized deductions or utilize the standard deduction?
What is the difference between gross income and adjusted gross income, and what is the difference between adjusted gross income and taxable income?
Compare and contrast for and from AGI deductions.Why are for AGI deductions likely more valuable to taxpayers than from AGI deductions?
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Are taxpayers allowed to deduct net capital losses (capital losses in excess of capital gains)? Explain.
Are all capital gains (gains on the sale or disposition of capital assets) taxed at the same rate?Explain.
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Why should a taxpayer be interested in the character of income received?
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All else being equal, should taxpayers prefer to exclude income or defer it?Why?
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Are taxpayers required to include all realized income in gross income? Explain.
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Using the IRS Web site (www.irs.gov/uac/The-Tax-Gap), how large is the current estimated “tax gap” (i.e., the amount of tax underpaid by taxpayers annually)? What group of taxpayers represents the largest “contributors” to the tax gap?
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Jayanna, an advertising consultant, is contemplating instructing some of her clients to pay her in cash so that she does not have to report the income on her tax return. Use an available tax service to identify the three basic elements of tax evasion and penalties associated with tax evasion. Write a memo to Jayanna explaining tax evasion and the risks associated with her actions.
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Using an available tax service or the Internet, identify three basic tax planning ideas or tax tips suggested for year-end tax planning. Which basic tax strategy from this chapter does each planning idea employ?
Using the facts from the previous problem, how would your answer change if instead, Duff adopted the cash method of accounting to allow him to better control the timing of his cash receipts and disbursements?
This is not tax planning. Instead, this strategy is tax evasion. The rewards of tax evasion include stiff monetary penalties and imprisonment.
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{Planning} Alan inherited $100,000 with the stipulation that he “invest it to financially benefit his family.” Alan and Alice decided they would invest the inheritance to help them accomplish two financial goals: purchasing a Park City vacation home and saving for their son Cooper’s education.
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| \r\n \r\n | \r\n\r\n Vacation Home \r\n | \r\n\r\n Cooper’s Education \r\n | \r\n
| \r\n Initial Investment \r\n | \r\n\r\n $50,000 \r\n | \r\n\r\n $50,000 \r\n | \r\n
| \r\n Investment Horizon \r\n | \r\n\r\n 5 years \r\n | \r\n\r\n 18 years \r\n | \r\n
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Alan and Alice have a marginal income tax rate of 30 percent (capital gains rate of 15 percent), and have decided to investigate the following investment opportunities.
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| \r\n \r\n | \r\n\r\n 5 Years \r\n | \r\n\r\n Annual After-Tax Rate of Return \r\n | \r\n\r\n 18 Years \r\n | \r\n\r\n Annual After-Tax Rate of Return \r\n | \r\n
| \r\n Corporate bonds (ordinary interest taxed annually) \r\n | \r\n\r\n 5.75% \r\n | \r\n\r\n \r\n | \r\n\r\n 4.75% \r\n | \r\n\r\n \r\n | \r\n
| \r\n Dividend-paying stock \r\n(no appreciation and dividends are taxed at 15%) \r\n | \r\n\r\n \r\n 3.50% \r\n | \r\n\r\n \r\n | \r\n\r\n \r\n 3.50% \r\n | \r\n\r\n \r\n | \r\n
| \r\n Growth stock \r\n | \r\n\r\n Future Value is $65,000 \r\n | \r\n\r\n \r\n | \r\n\r\n Future Value is $140,000 \r\n | \r\n\r\n \r\n | \r\n
| \r\n Municipal bond (tax-exempt) \r\n | \r\n\r\n 3.20% \r\n | \r\n\r\n \r\n | \r\n\r\n 3.10% \r\n | \r\n\r\n \r\n | \r\n
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Complete the two annual after-tax rates of return columns for each investment and provide investment recommendations for Alan and Alice.
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