Issuu

CHAPTER 1 THE INDIVIDUAL INCOME TAX RETURN Group 1 – Multiple Choice Questions 1. D The income tax includes elements of social and economic policy (LO 1.1) 2. C The income tax was authorized by the 16th Amendment in 1913 (LO 1.1) 3. C The 1040A and 1040-EZ no longer exist and the 1120 is for corporations (LO 1.2) 4. D Partnerships use Form 1065 to report income tax information. A partner will report their share of income from a partnership on a Form1040 (LO 1.2) 5. D Capital gains and losses are reported directly on the face of the Form 1040 (from Schedule D) (LO 1.2) 6. D A partnership is not generally a tax-paying entity (LO 1.2) 7. C Student loan interest is a for AGI deduction. The other responses are all itemized (from AGI) deductions (LO 1.3) 8. B The deduction for IRA contributions is a for AGI deduction (LO 1.3) 9. D $98,000 – $13,000 (standard deduction is less than itemized deductions) (LO 1.3) 10. D For AGI adjustments are deducted to get to AGI (LO 1.3) 11. B The larger of the two may be deducted (LO 1.3) 12. A An exclusion reduces gross income (LO 1.3) 13. B Filing thresholds generally are the same as the standard deduction amount (LO 1.4) 14. D Ben’s income would need to exceed the standard deduction to require filing a tax return (LO 1.4) 15. D $25,900 + $1,400 (LO 1.4) 16. C Single dependent over 65 and blind threshold is $4,500 for unearned income (LO 1.4) 17. C Joan qualifies as either single or head of household; however, head of household is more advantageous (LO 1.5) 18. D Although Dorothy does not live with Glenda, since Dorothy is a parent that Glenda supports, Glenda may file as head of household (LO 1.5) 19. D Taxpayer may file married filing jointly in year of spouse’s death (LO 1.5)

20. C Surviving spouse is preferred to head of household (LO 1.5) 21. E Either Margaret or her sister (but not both) may claim the mother as a dependent under a multiple support agreement (LO 1.6) 22. D The daughter fails the age test to be a qualifying child and she fails the gross income test ($4,400 in 2022) to be a qualifying relative (LO 1.6) 23. D The child tax credit in 2022 is $2,000 (LO 1.6) 24. B The child tax credit for the 13-year-old child is $2,000. The mother does not meet the support test and cannot be claimed (LO 1.6) 25. B Must be age 16 or under for child tax credit (LO 1.6) 26. A Head of household standard deduction plus additional standard deduction for age 65 ($19,400 + $1,750) (LO 1.7) 27. B Taxpayers age 65 or older are eligible for an additional standard deduction amount (LO 1.7) 28. B Taxpayers that are blind are eligible for an additional standard deduction amount (LO 1.7) 29. D Earned income plus $400 (LO 1.7) 30. E Standard deduction may not exceed typical amount (LO 1.7) 31. D Business inventory is not considered a capital asset (LO 1.8) 32. A Gain of $15,000 ($25,000 amount realized less $10,000 adjusted basis) has been held for more than 12 months and is long-term (LO 1.8) 33. C $10,000 = $240,000 – ($270,000 – $40,000) (LO 1.8) 34. A $43,000 – $3,000. Net capital losses of up to $3,000 may be deducted from ordinary income for individual taxpayers (LO 1.8) 35. C Line 7 is capital gain or (loss) (LO 1.9) 36. B Preparers must get a signed authorization to e-file from the taxpayer. (LO 1.10) 37. B About 90% of returns are filed electronically (LO 1.10) 1-1

1-2

Chapter 1 – The Individual Income Tax Return

Group 2 – Problems 1. a. Raising revenue to operate the government. b. Furthering economic goals such as reducing unemployment. c. Furthering social goals such as encouraging contributions to charities. (LO 1.1) 2. a. b. c. d. e. f. g. h. i.

Form 1040 Schedule B Schedule D Schedule A Schedule 2 Schedule E Schedule 3 Schedule C Schedule 1 (LO 1.2)

3. a. $36,300 = $42,000 + $300 – $6,000. b. $25,900, the greater of itemized deductions or the standard deduction of $25,900. c. $10,400 = $36,300 – $25,900. (LO 1.3) 4. a. $25,000. b. $12,950, the greater of total itemized deductions or the standard deduction amount. c. $12,050 = $25,000 – $12,950. (LO 1.3) 5. a. $53,800 = $54,000 + $2,800 – $3,000 ($7,000 capital loss limited to $3,000). b. $12,950 c. $40,850 = $53,800 – $12,950. (LO 1.3 and 1.8) 6. a. b. c. d.

$47,500 = $48,000 + $2,500 – $3,000. $25,900, the greater of itemized deductions or the standard deduction of $25,900. $21,600 = $47,500 – $25,900. $2,184 (Tax Table) (LO 1.3, 1.5, and 1.7)

7. Adjusted gross income $18,000 Less: Itemized deductions –2,400 Taxable income $15,600 Marco’s tax liability from the Tax Table is $1,670. Note: because they are married and filing separately and Marco’s spouse Tatiana itemizes her deductions, Marco must also itemize his deductions, even though the itemized deductions total is less than the standard deduction he would be otherwise entitled to. (LO 1.3, 1.5, and 1.7) 8. Adjusted gross income ($13,200 + $1,450) $ 14,650 Less: Standard deduction –12,950 Taxable income $ 1,700 (LO 1.3, 1.5, and 1.7) (Note: See Chapter 6 for the tax credit computation for dependent college students under age 24.) 9. a. $34,050 = $47,000 – $12,950. b. Tax tables. Taxpayers with income up to $100,000 must use the tax tables. c. $3,884. (LO 1.3, 1.5, and 1.7) 10. a. b. c. d. e.

$66,000 = $50,000 + $8,000 + $5,000 + $3,000. $63,500 = $66,000 – $2,500. $27,000, the greater of itemized deductions or the standard deduction of $25,900. $36,500 = $63,500 – $27,000. $3,972 (LO 1.3, 1.5, and 1.7)

Solutions for Questions and Problems – Chapter 1

1-3

11. a. $89,400 = $85,400 + $4,000. b. $0. c. $63,500 = $89,400 – $25,900 (standard deduction). (LO 1.3, 1.5, 1.6, and 1.7) 12. Taxable income is: $28,050 = $41,000 – $12,950. Tax liability from the tax tables not the tax rate schedules: $3,164. (LO 1.3, 1.5, and 1.7) 13. Yes.

Since Griffin owes Social Security taxes on the unreported tips (greater than $400), he must file an income tax return. (LO 1.4)

14. a. No. b. Yes. c. No. d. Yes. e. Yes. 15. a. b. c. d. e.

Income is less than the $19,400 standard deduction. Although not required to file, Helen is likely to be eligible for refundable credits and should. Unearned income was more than $1,150. Also, gross income is more than the larger of $1,150 or $1,950 (earned income of $1,550 plus $400). Their income is under the $27,300 standard deduction [$25,900 + $1,400 (over 65 years old)]. Gross income is greater than $25,900, the 2022 standard deduction. His earnings exceeded the $400 limit for self-employed persons. (Note: All answers can be found in the figures in LO 1.4.)

Allen Boyd Caldwell Dell Evans

$2,396. $34,600 – $12,950 = $21,650 $2,702. $37,175 – $12,950 = $24,225 $4,008. $62,710 – $25,900 = $36,810 $3,322. $49,513 – $19,400 = $30,113 $5,391. $57,397 – $12,950 = $44,447 (LO 1.5)

16. a. D b. A

The mother is a qualifying person for head of household. The significant other is not a qualifying person as this individual is not one of the relatives that can be considered a qualifying person for head of household. c. A The brother does not qualify as a dependent (support test). d. B or C MFJ can be claimed in the year of the spouse’s death and is probably preferable. e. A, D or E. Surviving spouse is likely to be preferable but single or head of household are also possible. (LO 1.5 and 1.6)

17. a. Because their income exceeds $100,000, the tax rate schedules must be used. b. $14,554 = $9,615 + 22% x ($106,000 – $83,550). (LO 1.5) 18. Jonas could qualify as either a qualifying child or qualifying relative. The qualifying child tests should be applied first: 1. Relationship test: Confirm Jonas’ relationship to Karl. 2. Domicile test: Where did Jonas live during the tax year? Was it more than one-half of the year with Karl? 3. Age test: What is Jonas’ age and is he a full-time student? 4. Joint return test: What type of tax return does Jonas file (if any)? If MFJ, is this only to obtain a refund? 5. Citizenship test: Is Jonas a US citizen or a tax resident of the US, Canada, or Mexico? 6. Support test: How much of Jonas’ support is provided by Jonas? Is it more than one-half? If Jonas is a qualifying child, then he need not meet the citizenship test to be a qualifying person for head of household filing status. If Jonas is not a qualifying child, he might be a qualifying relative which would prompt the following questions: 1. Relationship or member of household test: If Jonas is Karl’s brother, this test has been confirmed in the qualifying child questions. If Jonas is not one of the qualifying relatives, the remaining tests need not apply since a person that is a qualifying relative by living in the taxpayer’s household is not a qualifying person for purpose of the head of household test.

1-4

Chapter 1 – The Individual Income Tax Return

The following test need only be applied if Jonas is not Karl’s brother but is a qualifying relative for reasons other than living in Karl’s home. 2. Gross income test: What is Jonas’ 2022 income? Is it less than $4,400? 3. Support test: Does Karl provide more than one-half of Jonas’ support? The other two tests (joint return and citizenship) were subject to inquiry under qualifying child. Karl should also be asked if he is unmarried at year end. (LO 1.5 and 1.6) 19. Head of household. Maggie’s parents meet the tests to qualify as her dependents. Maggie is single. Additionally, she provides a home for her parents. Parents are an exception to the requirement that dependents must live in the same household as the taxpayer to qualify the taxpayer for head of household status. (LO 1.5 and 1.6) 20. Single. Unmarried with no dependent. Head of household. Single or abandoned spouse, with qualifying dependent. Surviving spouse [qualified widow(er)]. Spouse died within the past 2 years and has a qualifying dependent. (LO 1.5) 21. a. Yes, his son qualifies as a dependent, meeting the tests of a qualifying relative. b. No. To be a qualifying person, his son must live in the same household as Marquez, so Marquez cannot use the head of household filing status. (LO 1.5 and 1.6) 22. a. Yes b. No (must be below $4,400 gross income test) c. Yes d. Yes e. No

$500 other dependent credit $0 $2,000 child tax credit $500 other dependent credit $0 (LO 1.6)

23. $0. Exemptions were suspended for tax years 2018–2025. $2,500. The 11-year-old child qualifies for the $2,000 child tax credit (under age 17). The 17-year-old qualifies for the other dependent credit of $500. (LO 1.6) 24. No. Because Charles is self-supporting, his parents may not claim him as a dependent. The self-support test is applied to both children and relatives who otherwise qualify, so Charles is disqualified either way. (LO 1.6) 25. No. Phillip cannot be claimed as a dependent because he is not a U.S. citizen or a resident of the U.S., Canada, or Mexico. (LO 1.6) 26. The standard deduction is a specific dollar amount that varies with filing status, age and vision, but not by type of individual deduction. Total itemized deductions depend on the amount and type of items, with some items having limitations based on AGI. They include medical expenses, certain taxes, certain interest expenses, charitable contributions and miscellaneous deductions. A taxpayer should claim the larger of the standard deduction or the total allowed itemized deductions to reduce the taxpayer’s income subject to tax as much as possible. (LO 1.7) 27. i. The “statutory” amount of $1,150. ii. The earned income of the dependent plus $400 iii. The “typical” standard deduction for a taxpayer of that filing status (e.g., $12,950 for a single taxpayer that is under age 65 and not blind) (LO 1.7) 28. A spouse in a married filing separate situation when the other spouse is itemizing; most nonresident aliens; an individual filing a short-year return. (LO 1.7)

Solutions for Questions and Problems – Chapter 1

29. a. b. c.

Gain/(loss) Realized $5,000 ($5,000) ($7,000)

Gain/(loss) Recognized $5,000 ($3,000) ($3,000)

($4,000)

$4,000

1-5

Long-term/ Short-term Long-term. Short-term. The excess $2,000 loss can be carried forward. Long-term. The net capital loss deduction is $3,000 regardless of filing status. The excess $4,000 loss can be carried forward. Short-term. Losses on the sale of personal use property are not deductible. Long-term. Gains on the sale of personal use property are taxable.

(LO 1.8) 30. The answer will vary depending on the date the problem is assigned and completed. The purpose of the problem is to familiarize the student with the IRS website. (LO 1.9) 31. Form 8949 is Sales and Other Dispositions of Capital Assets. (LO 1.9) 32. A number of articles in the blog indicate the limit for student loan interest deduction is $2,500. (LO 1.9) 33. Tax returns are electronically signed through the use of a PIN. PINs can be generated by either the taxpayer or by the ERO. Self-selected PINs require the prior year AGI or PIN to authenticate the taxpayer. Before a PIN can be created by the ERO, the preparer must obtain a signed copy of an IRS E-file signature authorization (Form 8878 or 8879). (LO 1.10) 34. Form 8453, copies of Forms W-2, W-2G, and 1099-R, a copy of the consent to disclose tax information form, a copy of the electronic return that could be retransmitted, an acknowledgment file for IRS accepted returns, Forms 8878 and 8879. (LO 1.10)

Group 3 – Writing Assignments 1. Research Solution: Whittenburg and Gill, CPAs San Diego, CA February 20, 20xx Mr. and Mrs. William Carson 3276 Lakeline Drive San Diego, CA Dear William and Sheila, Thank you for requesting my advice concerning the tax treatment of your brother Jerry. I have researched your question and am sorry to say that you cannot claim Jerry as a qualifying child. Although Jerry meets the domicile, age, joint return, citizenship, and self-support test, he does not meet the relationship test. Even though he is William’s brother, in order to be your qualifying child, he must be younger than at least one of you. Although you cannot claim Jerry as a qualifying child, there is a possibility that you could claim him as a qualifying relative if he earns less than $4,400.

1-6

Chapter 1 – The Individual Income Tax Return

My conclusion is based upon the facts that you have provided me. I’m sorry that the news was not more favorable. If you have any questions or would like further explanation, please do not hesitate to call me. Sincerely, Trevor Malcolm for Whittenburg and Gill, CPAs 2. Ethics Solution: To: JasonandMary@email.com Subject: Inquiry on filing status: single v. married filing jointly Jason and Mary, Thank you for your e-mail regarding your filing status for 2022. Let me also say, I really enjoyed your wedding ceremony and reception. Thank you for inviting me. Your e-mail stated that you had prepared your 2022 taxes as both single and married filing jointly and found that your refund would be larger if both of you filed as single. Unfortunately, the tax law is very clear on this issue. Individuals who are married as of the last day of the tax year are considered to be married. Married taxpayers have only two filing status options: married filing jointly or married filing separately. In order to file as single, taxpayers must be unmarried or legally separated from their spouse as of the last day of the tax year. Not only would it be unethical for you to file as single, it would be against the law. The additional tax that married couples sometimes encounter is known as the “marriage penalty.” Hopefully you are finding that your wedded bliss outweighs the tax penalty! If you have any questions or would like further explanation, please do not hesitate to call me. Your friend, Trevor Malcolm For Whittenburg and Gill, CPAs Group 4 – Comprehensive Problems 1A. See Pages 1-7 and 1-8. 1B. See Pages 1-9 to 1-11. 2A. See Pages 1-12 and 1-13. 2B. See Pages 1-14 and 1-15. Group 5 – Cumulative Software Problem The solution to the Cumulative Software Problem is posted on the website for the textbook at www.cengage.com/login.

Solutions for Questions and Problems – Chapter 1

Form

Comprehensive Problem 1A

1040 U.S. Individual Income Tax Return 2022 Department of the Treasury—Internal Revenue Service

Filing Status X Single Check only one box.

Married filing jointly

OMB No. 1545-0074

Married filing separately (MFS)

IRS Use Only—Do not write or staple in this space.

Head of household (HOH)

Qualifying surviving spouse (QSS) If you checked the MFS box, enter the name of your spouse. If you checked the HOH or QSS box, enter the child’s name if the qualifying person is a child but not your dependent:

Your first name and middle initial

Last name

Maria

Your social security number

Tallchief

466 33 1234

DRAFT AS OF September 1, 2022 DO NOT FILE

If joint return, spouse’s first name and middle initial

Last name

Spouse’s social security number

Home address (number and street). If you have a P.O. box, see instructions.

Apt. no.

Presidential Election Campaign Check here if you, or your spouse if filing jointly, want $3 ZIP code to go to this fund. Checking a box below will not change Foreign postal code your tax or refund.

543 Space Drive

City, town, or post office. If you have a foreign address, also complete spaces below.

State

Houston

Foreign country name

77099

Foreign province/state/county

You

Digital Assets Standard Deduction

Were born before January 2, 1958

Are blind

Dependents (see instructions): (1) First name If more than four dependents, see instructions and check here . .

Attach Form(s) W-2 here. Also attach Forms W-2G and 1099-R if tax was withheld.

Standard Deduction for— • Single or Married filing separately, $12,950 • Married filing jointly or Qualifying surviving spouse, $25,900 • Head of household, $19,400 • If you checked any box under Standard Deduction, see instructions.

Spouse:

(2) Social security number

Last name

. . .

Credit for other dependents

. . .

1a 1b 1c

d e f

Medicaid waiver payments not reported on Form(s) W-2 (see instructions) . Taxable dependent care benefits from Form 2441, line 26 . . . . . Employer-provided adoption benefits from Form 8839, line 29 . . . .

. . .

1d 1e 1f

g h i

Wages from Form 8919, line 6 . . . . . . . Other earned income (see instructions) . . . . Nontaxable combat pay election (see instructions) .

. . .

. . . . 1i

. .

1g 1h

z 2a 3a

Add lines 1a through 1h Tax-exempt interest . . Qualified dividends . .

. . .

. . . . . . . b Taxable interest . b Ordinary dividends .

. . .

1z 2b 3b

4a 5a 6a

IRA distributions . . . Pensions and annuities . Social security benefits .

. . .

b Taxable amount . b Taxable amount . b Taxable amount .

. . .

4b 5b 6b

c 7 8

If you elect to use the lump-sum election method, check here (see instructions) Capital gain or (loss). Attach Schedule D if required. If not required, check here Other income from Schedule 1, line 10 . . . . . . . . . . . .

. . .

7 8

9 10 11

Add lines 1z, 2b, 3b, 4b, 5b, 6b, 7, and 8. This is your total income . Adjustments to income from Schedule 1, line 26 . . . . . . Subtract line 10 from line 9. This is your adjusted gross income .

. . .

9 10 11

12 13 14 15

Standard deduction or itemized deductions (from Schedule A) . . . . . Qualified business income deduction from Form 8995 or Form 8995-A . . . . Add lines 12 and 13 . . . . . . . . . . . . . . . . . . . Subtract line 14 from line 11. If zero or less, enter -0-. This is your taxable income

. . . .

12 13 14

4a 5a 6a

. . .

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions.

. . .

Child tax credit

. . .

. . 2a 3a

. . .

Is blind

(4) Check the box if qualifies for (see instructions):

Total amount from Form(s) W-2, box 1 (see instructions) . Household employee wages not reported on Form(s) W-2 . Tip income not reported on line 1a (see instructions) . .

. . .

Was born before January 2, 1958

(3) Relationship to you

1a b c

If you did not get a Form W-2, see instructions. Attach Sch. B if required.

X No

Someone can claim: You as a dependent Your spouse as a dependent Spouse itemizes on a separate return or you were a dual-status alien

Age/Blindness You:

Income

Yes

Spouse

. . .

. .

. . .

Cat. No. 11320B

22,114

22,114 22,114 12,950 12,950 9,164 Form 1040 (2022)

1-7

1-8

Chapter 1 – The Individual Income Tax Return

Comprehensive Problem 1A, cont. Page 2

Form 1040 (2022)

Tax and Credits

16 17

Tax (see instructions). Check if any from Form(s): 1 8814 Amount from Schedule 2, line 3 . . . . . . . .

18 19 20

Add lines 16 and 17 . . . . . . . . . . . . . . . Child tax credit or credit for other dependents from Schedule 8812 . Amount from Schedule 3, line 8 . . . . . . . . . . .

. . .

21 22 23

Add lines 19 and 20 . . . . . . . . . . . . . . . Subtract line 21 from line 18. If zero or less, enter -0- . . . . . Other taxes, including self-employment tax, from Schedule 2, line 21

. . .

24 25

Add lines 22 and 23. This is your total tax Federal income tax withheld from:

Form(s) W-2

25a

b c d

Form(s) 1099 . . . . . . Other forms (see instructions) . Add lines 25a through 25c . .

. . .

25b 25c . . .

26 27 28

2022 estimated tax payments and amount applied from 2021 return . Earned income credit (EIC) . . . . . . . . . . . . . Additional child tax credit from Schedule 8812 . . . . . . .

. . .

29 30 31

American opportunity credit from Form 8863, line 8 . Reserved for future use . . . . . . . . . Amount from Schedule 3, line 15 . . . . . .

. . .

32 33

Add lines 27, 28, 29, and 31. These are your total other payments and refundable credits Add lines 25d, 26, and 32. These are your total payments . . . . . . . . . .

If line 33 is more than line 24, subtract line 24 from line 33. This is the amount you overpaid

35a b d 36

Amount of line 34 you want refunded to you. If Form 8888 is attached, check here . Routing number c Type: Checking Account number Amount of line 34 you want applied to your 2023 estimated tax . . . 36

Subtract line 33 from line 24. This is the amount you owe. For details on how to pay, go to www.irs.gov/Payments or see instructions .

Estimated tax penalty (see instructions)

4972 3 . . . .

918

16 17

. . .

18 19 20

. . .

21 22 23

918

25d

1,199

. .

32 33 34

918

DRAFT AS OF September 1, 2022 DO NOT FILE

Payments

If you have a qualifying child, attach Sch. EIC.

Refund

Direct deposit? See instructions.

Amount You Owe Third Party Designee

Joint return? See instructions. Keep a copy for your records.

Paid Preparer Use Only

. . .

. . 27 28 29 30 31

Do you want to allow another person to discuss this return with the IRS? See instructions . . . . . . . . . . . . . . . . . . . . . Designee’s name

Sign Here

. . .

1,199

Phone no.

. Savings

35a

Yes. Complete below.

1,199 281 281

Personal identification number (PIN)

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. Your signature

Date

If the IRS sent you an Identity Protection PIN, enter it here (see inst.)

Your occupation

Cashier Spouse’s signature. If a joint return, both must sign.

Date

Phone no.

Email address

Preparer’s name

Preparer’s signature

Spouse’s occupation

Date

If the IRS sent your spouse an Identity Protection PIN, enter it here (see inst.)

PTIN

Check if: Self-employed

Firm’s name

Phone no.

Firm’s address

Firm’s EIN

Go to www.irs.gov/Form1040 for instructions and the latest information.

Form 1040 (2022)

Solutions for Questions and Problems – Chapter 1

Form

Comprehensive Problem 1B

1040-SR U.S. Tax Return for Seniors

2022

Department of the Treasury—Internal Revenue Service

Filing Status Check only one box.

OMB No. 1545-0074

IRS Use Only—Do not write or staple in this space.

X Single

Married filing jointly Married filing separately (MFS) Head of household (HOH) Qualifying surviving spouse (QSS) If you checked the MFS box, enter the name of your spouse. If you checked the HOH or QSS box, enter the child’s name if the qualifying person is a child but not your dependent:

Your first name and middle initial

Last name

Your social security number

DRAFT AS OF September 21, 2022 DO NOT FILE { Maria

Tallchief

If joint return, spouse’s first name and middle initial

466 33 1234

Last name

Spouse’s social security number

Home address (number and street). If you have a P.O. box, see instructions.

Apt. no.

543 Space Drive

City, town, or post office. If you have a foreign address, also complete spaces below.

Houston

Check here if you, or your spouse if filing jointly, want $3 to go to this fund. Checking a box below will not change Foreign postal code your tax or refund.

State

ZIP code

77099

Foreign province/state/county

Foreign country name

Presidential Election Campaign

You

At any time during 2022, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)? (See instructions.) . . . . . . You as a dependent Your spouse as a dependent Standard Someone can claim: Spouse itemizes on a separate return or you were a dual-status alien Deduction

Digital Assets

Age/Blindness

X Were born before January 2, 1958

You: Spouse:

X No

Are blind Is blind

Was born before January 2, 1958

(2) Social security number (3) Relationship to (4) Check the box if qualifies for (see instructions): you Child tax credit Credit for other dependents

Dependents (see instructions): (1) First name

Yes

Spouse

Last name

If more than four dependents, see instructions and check here

Income

1a Total amount from Form(s) W-2, box 1 (see instructions) . . . . . . .

Attach Form(s) W-2 here. Also attach Forms W-2G and 1099-R if tax was withheld. If you did not get a Form W-2, see instructions.

b Household employee wages not reported on Form(s) W-2 . . . . . .

c Tip income not reported on line 1a (see instructions)

. . . . . . . .

d Medicaid waiver payments not reported on Form(s) W-2 (see instructions)

e Taxable dependent care benefits from Form 2441, line 26

f Employer-provided adoption benefits from Form 8839, line 29

. . . .

. . . . . . . . . . . . . . . . .

h Other earned income (see instructions) . . . . . . . . . . . . . .

g Wages from Form 8919, line 6 i

Attach Schedule B if required.

. . . . . .

Nontaxable combat pay election (see instructions)

22,114

z Add lines 1a through 1h . . . . . . . . . . . . . . . . . . . .

2a Tax-exempt interest

b Taxable interest

. .

3a Qualified dividends . .

b Ordinary dividends .

4a IRA distributions . . .

b Taxable amount

. .

5a Pensions and annuities

b Taxable amount

. .

6a Social security benefits .

b Taxable amount

. .

22,114

c If you elect to use the lump-sum election method, check here (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . 7

Capital gain or (loss). Attach Schedule D if required. If not required, check here . . . . . . . . . . . . . . . . . . . . . . . .

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions.

Cat. No. 71930F

7 Form 1040-SR (2022)

1-9

1-10

Chapter 1 – The Individual Income Tax Return

Comprehensive Problem 1B, cont. Page 2

Form 1040-SR (2022)

Other income from Schedule 1, line 10 . . . . . . . . . . . . . .

Add lines 1z, 2b, 3b, 4b, 5b, 6b, 7, and 8. This is your total income . .

Adjustments to income from Schedule 1, line 26 . . . . . . . . . .

Subtract line 10 from line 9. This is your adjusted gross income

Standard Deduction 12

. . .

22,114 22,114 14,700

DRAFT AS OF September 21, 2022 DO NOT FILE See Standard Deduction Chart on the last page of this form.

Tax and Credits

. . .

Qualified business income deduction from Form 8995 or Form 8995-A .

Add lines 12 and 13

. . . . . . . . . . . . . . . . . . . . .

Subtract line 14 from line 11. If zero or less, enter -0-. This is your taxable income . . . . . . . . . . . . . . . . . . . . . . .

7,414

. . . . . . .

743

Amount from Schedule 2, line 3 . . . . . . . . . . . . . . . . .

Add lines 16 and 17

Child tax credit or credit for other dependents from Schedule 8812

. .

Amount from Schedule 3, line 8 . . . . . . . . . . . . . . . . .

Add lines 19 and 20 . . . . . . . . . . . . . . . . . . . . . .

Subtract line 21 from line 18. If zero or less, enter -0- . . . . . . . .

Other taxes, including self-employment tax, from Schedule 2, line 21 . .

Add lines 22 and 23. This is your total tax

743

d Add lines 25a through 25c . . . . . . . . . . . . . . . . . . .

25d

1,199

2022 estimated tax payments and amount applied from 2021 return . .

Earned income credit (EIC) . . . . . . . . . . .

Additional child tax credit from Schedule 8812 . . .

American opportunity credit from Form 8863, line 8 .

Reserved for future use . . . . . . . . . . . .

Amount from Schedule 3, line 15

Add lines 27, 28, 29, and 31. These are your total other payments and refundable credits . . . . . . . . . . . . . . . . . . . . . .

Add lines 25d, 26, and 32. These are your total payments . . . . . .

Tax (see instructions). Check if any from: 1

Payments 25

If you have a qualifying child, attach Sch. EIC.

Standard deduction or itemized deductions (from Schedule A)

Form(s) 8814

Form(s) 4972

. . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . .

743

Federal income tax withheld from: 25a

b Form(s) 1099

. . . . . . . . . . . . . . . .

25b

c Other forms (see instructions) . . . . . . . . . .

25c

a Form(s) W-2 . . . . . . . . . . . . . . . . .

. . . . . . . .

Go to www.irs.gov/Form1040SR for instructions and the latest information.

1,199

Form 1040-SR (2022)

Solutions for Questions and Problems – Chapter 1

Comprehensive Problem 1B, cont. Page 3

Form 1040-SR (2022)

Refund 34

If line 33 is more than line 24, subtract line 24 from line 33. This is the amount you overpaid . . . . . . . . . . . . . . . . . . . . .

456

35a Amount of line 34 you want refunded to you. If Form 8888 is attached, check here . . . . . . . . . . . . . . . . . . . . . . . . 35a

456

b Routing number

Direct deposit? See instructions.

c Type:

Checking

Savings

DRAFT AS OF September 21, 2022 DO NOT FILE d Account number

Amount 37 You Owe 38

Third Party Designee

Sign Here

Joint return? See instructions. Keep a copy for your records.

Paid Preparer Use Only

Amount of line 34 you want applied to your 2023 estimated tax . . . . . . . . . . . . . . . .

Subtract line 33 from line 24. This is the amount you owe. For details on how to pay, go to www.irs.gov/Payments or see instructions

Estimated tax penalty (see instructions) . . . . . .

Do you want to allow another person to discuss this return with the IRS? See instructions . . . . . . . . . . . . . . . . . . . . .

Yes. Complete below.

Personal identification Designee’s Phone number (PIN) name no. Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. If the IRS sent you an Identity Your signature Date Your occupation Protection PIN, enter it here (see inst.)

Cashier Spouse’s signature. If a joint return, both must sign.

Date

Phone no.

Email address

Preparer’s name

Preparer’s signature

Spouse’s occupation

Date

If the IRS sent your spouse an Identity Protection PIN, enter it here (see inst.)

Check if:

PTIN

Self-employed Firm’s name

Phone no.

Firm’s address

Firm’s EIN

Go to www.irs.gov/Form1040SR for instructions and the latest information.

Form 1040-SR (2022)

1-11

1-12

Chapter 1 – The Individual Income Tax Return

Form

Comprehensive Problem 2A

1040 U.S. Individual Income Tax Return 2022 Department of the Treasury—Internal Revenue Service

Filing Status Check only one box.

Single

X Married filing jointly

OMB No. 1545-0074

Married filing separately (MFS)

IRS Use Only—Do not write or staple in this space.

Head of household (HOH)

Your first name and middle initial

Last name

Dora

Your social security number

Knox

467 74 4451

DRAFT AS OF September 1, 2022 DO NOT FILE

If joint return, spouse’s first name and middle initial

Last name

Hardy

Spouse’s social security number

Knox

466 47 3311

Home address (number and street). If you have a P.O. box, see instructions.

Apt. no.

Presidential Election Campaign Check here if you, or your spouse if filing jointly, want $3 ZIP code to go to this fund. Checking a box below will not change Foreign postal code your tax or refund.

143 Maple Street

City, town, or post office. If you have a foreign address, also complete spaces below.

State

Knoxville

Foreign country name

37932

Foreign province/state/county

You

Digital Assets Standard Deduction

Were born before January 2, 1958

Are blind

Dependents (see instructions): (1) First name If more than four Fort Knox dependents, see instructions and check here . .

Attach Form(s) W-2 here. Also attach Forms W-2G and 1099-R if tax was withheld.

Spouse:

(2) Social security number

Last name

Was born before January 2, 1958

552 52 5552

Child tax credit

Credit for other dependents

Son

Total amount from Form(s) W-2, box 1 (see instructions) . Household employee wages not reported on Form(s) W-2 . Tip income not reported on line 1a (see instructions) . .

. . .

1a 1b 1c

d e f

. . .

1d 1e 1f

g h i

Wages from Form 8919, line 6 . . . . . . . Other earned income (see instructions) . . . . Nontaxable combat pay election (see instructions) .

. . .

. . . . 1i

. .

1g 1h

z 2a 3a

Add lines 1a through 1h Tax-exempt interest . . Qualified dividends . .

. . .

. . . . . . . b Taxable interest . b Ordinary dividends .

. . .

1z 2b 3b

4a 5a 6a

IRA distributions . . . Pensions and annuities . Social security benefits .

. . .

b Taxable amount . b Taxable amount . b Taxable amount .

. . .

4b 5b 6b

c 7 8

. . .

7 8

9 10 11

Add lines 1z, 2b, 3b, 4b, 5b, 6b, 7, and 8. This is your total income . Adjustments to income from Schedule 1, line 26 . . . . . . Subtract line 10 from line 9. This is your adjusted gross income .

. . .

9 10 11

12 13 14 15

. . . .

12 13 14

. . 2a 3a 4a 5a 6a

. . .

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions.

. . .

Is blind

(4) Check the box if qualifies for (see instructions):

(3) Relationship to you

1a b c

If you did not get a Form W-2, see instructions. Attach Sch. B if required.

X No

Yes

Someone can claim: You as a dependent Your spouse as a dependent Spouse itemizes on a separate return or you were a dual-status alien

Age/Blindness You:

Income

Spouse

. .

. . .

Cat. No. 11320B

52,300

52,300 52,300 25,900 25,900 26,400 Form 1040 (2022)

Solutions for Questions and Problems – Chapter 1

Comprehensive Problem 2A, cont. Page 2

Form 1040 (2022)

Tax and Credits

16 17

Tax (see instructions). Check if any from Form(s): 1 8814 Amount from Schedule 2, line 3 . . . . . . . .

18 19 20

Add lines 16 and 17 . . . . . . . . . . . . . . . Child tax credit or credit for other dependents from Schedule 8812 . Amount from Schedule 3, line 8 . . . . . . . . . . .

. . .

21 22 23

Add lines 19 and 20 . . . . . . . . . . . . . . . Subtract line 21 from line 18. If zero or less, enter -0- . . . . . Other taxes, including self-employment tax, from Schedule 2, line 21

. . .

24 25

Add lines 22 and 23. This is your total tax Federal income tax withheld from:

Form(s) W-2

25a

b c d

Form(s) 1099 . . . . . . Other forms (see instructions) . Add lines 25a through 25c . .

. . .

25b 25c . . .

26 27 28

2022 estimated tax payments and amount applied from 2021 return . Earned income credit (EIC) . . . . . . . . . . . . . Additional child tax credit from Schedule 8812 . . . . . . .

. . .

29 30 31

American opportunity credit from Form 8863, line 8 . Reserved for future use . . . . . . . . . Amount from Schedule 3, line 15 . . . . . .

. . .

32 33

Add lines 27, 28, 29, and 31. These are your total other payments and refundable credits Add lines 25d, 26, and 32. These are your total payments . . . . . . . . . .

. .

If line 33 is more than line 24, subtract line 24 from line 33. This is the amount you overpaid

32 33 34

35a b d 36

Subtract line 33 from line 24. This is the amount you owe. For details on how to pay, go to www.irs.gov/Payments or see instructions .

Estimated tax penalty (see instructions)

4972 3 . . . .

2,760

16 17

. . .

18 19 20

. . .

21 22 23

2,260

25d

3,155

2,760 500 500 2,260

DRAFT AS OF September 1, 2022 DO NOT FILE

Payments

If you have a qualifying child, attach Sch. EIC.

Refund

Direct deposit? See instructions.

Amount You Owe Third Party Designee

Joint return? See instructions. Keep a copy for your records.

Paid Preparer Use Only

. . .

. . 27 28 29 30 31

Do you want to allow another person to discuss this return with the IRS? See instructions . . . . . . . . . . . . . . . . . . . . . Designee’s name

Sign Here

. . .

3,155

Phone no.

. Savings

35a

Yes. Complete below.

3,155 895 895

Personal identification number (PIN)

Date

If the IRS sent you an Identity Protection PIN, enter it here (see inst.)

Your occupation

Teacher Spouse’s signature. If a joint return, both must sign.

Date

Phone no.

Email address

Spouse’s occupation

Unemployed Preparer’s name

Preparer’s signature

Date

If the IRS sent your spouse an Identity Protection PIN, enter it here (see inst.)

PTIN

Check if: Self-employed

Firm’s name

Phone no.

Firm’s address

Firm’s EIN

Go to www.irs.gov/Form1040 for instructions and the latest information.

Form 1040 (2022)

1-13

1-14

Chapter 1 – The Individual Income Tax Return

Form

Comprehensive Problem 2B

1040 U.S. Individual Income Tax Return 2022 Department of the Treasury—Internal Revenue Service

Filing Status Check only one box.

Single

Married filing jointly

OMB No. 1545-0074

IRS Use Only—Do not write or staple in this space.

X Head of household (HOH)

Married filing separately (MFS)

Your first name and middle initial

Last name

Abigail

Your social security number

Boxer

676 73 3311

DRAFT AS OF September 1, 2022 DO NOT FILE

If joint return, spouse’s first name and middle initial

Last name

Spouse’s social security number

Home address (number and street). If you have a P.O. box, see instructions.

Apt. no.

Presidential Election Campaign Check here if you, or your spouse if filing jointly, want $3 ZIP code to go to this fund. Checking a box below will not change Foreign postal code your tax or refund.

3456 S Career Avenue

City, town, or post office. If you have a foreign address, also complete spaces below.

State

Sioux Falls

Foreign country name

57107

Foreign province/state/county

You

Digital Assets Standard Deduction

Were born before January 2, 1958

Are blind

Dependents (see instructions):

(1) First name If more than four Helen Boxer dependents, see instructions and check here . .

Attach Form(s) W-2 here. Also attach Forms W-2G and 1099-R if tax was withheld.

Spouse:

Was born before January 2, 1958

(2) Social security number

(3) Relationship to you

676 73 3312

Daughter

Last name

. . .

1a 1b 1c

d e f

. . .

1d 1e 1f

g h i

Wages from Form 8919, line 6 . . . . . . . Other earned income (see instructions) . . . . Nontaxable combat pay election (see instructions) .

. . .

. . . . 1i

. .

1g 1h

z 2a 3a

Add lines 1a through 1h Tax-exempt interest . . Qualified dividends . .

. . .

. . . . . . . b Taxable interest . b Ordinary dividends .

. . .

1z 2b 3b

4a 5a 6a

IRA distributions . . . Pensions and annuities . Social security benefits .

. . .

b Taxable amount . b Taxable amount . b Taxable amount .

. . .

4b 5b 6b

c 7 8

. . .

7 8

9 10 11

Add lines 1z, 2b, 3b, 4b, 5b, 6b, 7, and 8. This is your total income . Adjustments to income from Schedule 1, line 26 . . . . . . Subtract line 10 from line 9. This is your adjusted gross income .

. . .

9 10 11

12 13 14 15

. . . .

12 13 14

4a 5a 6a

140

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions.

. . .

Credit for other dependents

. . .

. . 2a 3a

. . .

Child tax credit

Total amount from Form(s) W-2, box 1 (see instructions) . Household employee wages not reported on Form(s) W-2 . Tip income not reported on line 1a (see instructions) . .

. . .

. .

. . .

Is blind

(4) Check the box if qualifies for (see instructions):

1a b c

If you did not get a Form W-2, see instructions. Attach Sch. B if required.

X No

Yes

Someone can claim: You as a dependent Your spouse as a dependent Spouse itemizes on a separate return or you were a dual-status alien

Age/Blindness You:

Income

Spouse

Cat. No. 11320B

60,403

60,403 250

60,653 60,653 19,400 19,400 41,253 Form 1040 (2022)

Solutions for Questions and Problems – Chapter 1

Comprehensive Problem 2B, cont. Page 2

Form 1040 (2022)

Tax and Credits

16 17

Tax (see instructions). Check if any from Form(s): 1 8814 Amount from Schedule 2, line 3 . . . . . . . .

18 19 20

Add lines 16 and 17 . . . . . . . . . . . . . . . Child tax credit or credit for other dependents from Schedule 8812 . Amount from Schedule 3, line 8 . . . . . . . . . . .

. . .

21 22 23

Add lines 19 and 20 . . . . . . . . . . . . . . . Subtract line 21 from line 18. If zero or less, enter -0- . . . . . Other taxes, including self-employment tax, from Schedule 2, line 21

. . .

24 25

Add lines 22 and 23. This is your total tax Federal income tax withheld from:

Form(s) W-2

25a

b c d

Form(s) 1099 . . . . . . Other forms (see instructions) . Add lines 25a through 25c . .

. . .

25b 25c . . .

26 27 28

2022 estimated tax payments and amount applied from 2021 return . Earned income credit (EIC) . . . . . . . . . . . . . Additional child tax credit from Schedule 8812 . . . . . . .

. . .

29 30 31

American opportunity credit from Form 8863, line 8 . Reserved for future use . . . . . . . . . Amount from Schedule 3, line 15 . . . . . .

. . .

32 33

Add lines 27, 28, 29, and 31. These are your total other payments and refundable credits Add lines 25d, 26, and 32. These are your total payments . . . . . . . . . .

. .

If line 33 is more than line 24, subtract line 24 from line 33. This is the amount you overpaid

32 33 34

35a b d 36

Subtract line 33 from line 24. This is the amount you owe. For details on how to pay, go to www.irs.gov/Payments or see instructions .

Estimated tax penalty (see instructions)

4972 3 . . . .

4,660

16 17

. . .

18 19 20

. . .

21 22 23

500 4,160

4,160

25d

4,589

4,660 500

DRAFT AS OF September 1, 2022 DO NOT FILE

Payments

If you have a qualifying child, attach Sch. EIC.

Refund

Direct deposit? See instructions.

Amount You Owe Third Party Designee

Joint return? See instructions. Keep a copy for your records.

Paid Preparer Use Only

. . .

. . 27 28 29 30 31

Do you want to allow another person to discuss this return with the IRS? See instructions . . . . . . . . . . . . . . . . . . . . . Designee’s name

Sign Here

. . .

4,589

Phone no.

. Savings

35a

Yes. Complete below.

4,589 429 429

Personal identification number (PIN)

Your signature

Date

Your occupation

Spouse’s signature. If a joint return, both must sign.

Date

Spouse’s occupation

Phone no.

Email address

Accountant

Preparer’s name

Preparer’s signature

Date

If the IRS sent your spouse an Identity Protection PIN, enter it here (see inst.)

PTIN

Check if: Self-employed

Firm’s name

Phone no.

Firm’s address

Firm’s EIN

Go to www.irs.gov/Form1040 for instructions and the latest information.

Form 1040 (2022)

1-15

1-16

Chapter 1 – The Individual Income Tax Return

Key Number Tax Return Summary Chapter 1 Comprehensive Problem 1A Adjusted Gross Income (Line 11)

22,114

Taxable Income (Line 15)

9,164

Total Tax (Line 24)

918

Tax Refund (Line 35a)

281

Comprehensive Problem 1B Adjusted Gross Income (Line 11)

22,114

Standard Deduction or Itemized Deductions (Line 12)

14,700

Total Tax (Line 24)

743

Tax Refund (Line 35a)

456

Comprehensive Problem 2A Adjusted Gross Income (Line 11)

52,300

Standard Deduction or Itemized Deductions (Line 12)

25,900

Total Tax (Line 24)

2,260

Amount Overpaid (Line 34)

895

Comprehensive Problem 2B Adjusted Gross Income (Line 11)

60,653

Standard Deduction or Itemized Deductions (Line 12)

19,400

Credit for Other Dependents (Line 19)

500

Total Tax (Line 24)

4,160

Amount Overpaid (Line 34)

429

CHAPTER 2 GROSS INCOME AND EXCLUSIONS Group 1 – Multiple Choice Questions 1. C The definition of gross income is very broad and is designed to include all income not specifically excluded (LO 2.1) 2. E Proceeds from a life insurance policy paid to the beneficiary are generally excluded from gross income (LO 2.1) 3. A Damages paid for physical injury are not generally gross income (LO 2.1) 4. E Scholarships used for tuition are excluded from gross income (LO 2.1) 5. B Scholarships used to pay for room and board are not considered excludable. (LO 2.1) 6. B Box 1 of Form W-2 is used to report wages for income tax (LO 2.2) 7. D Classification is based on the law and is not intended to be a choice for an employer or employee to make (LO 2.2) 8. C Benefits are often reserved for employees making the provision of health care to a worker increase the chance of classification as an employee (LO 2.2) 9. D State income tax withheld is reported in Box 17 of Form W-2 (LO 2.2) 10. A Employer-paid health insurance (including dental) is excluded from gross income (LO 2.3) 11. A Payments for health care are generally excludable (LO 2.3) 12. E The meals appear to be provided for the convenience of the employer and thus are excludable (LO 2.4) 13. E All of these meals are either for the convenience or de minimis (LO 2.4) 14. D A graduate student may exclude a tuition reduction as long as they are teaching or researching for the school (LO 2.5) 15. C The transportation fringe benefit is excludable only to $280 per month. The excess is gross income (LO 2.5) 16. C 2022 limit is $2,850 (LO 2.5) 17. C $5,000 limit in total (LO 2.5) 18. D The bicycle transportation fringe is suspended through 2025 (LO 2.5) 19. B Group-term life up to $50,000 is excluded (LO 2.5)

20. A Parking can be offered to only highly compensated employees (LO 2.5) 21. A Service awards of less than $400 can be excluded (LO 2.6) 22. A Service awards given in cash and a number of other forms including tickets to sporting events are not excludable (LO 2.6) 23. C $94,500/210 = $450 x 4 = $1,800 (LO 2.7) 24. D Once the entire investment is recovered, the remaining payments are treated as income (LO 2.7) 25. C The sale of a life insurance policy for consideration is likely to generate income to the individual selling the policy (LO 2.8) 26. A Life insurance proceeds are generally not taxable to the beneficiary (LO 2.8) 27. A Series I bonds are generally not taxable until redeemed or maturity unless an election is made (LO 2.9) 28. D Interest from U.S. obligations is taxable for federal income tax (LO 2.9) 29. C U.S. government interest is taxable federally but exempt for state income taxes (LO 2.9) 30. D None of the redemption value is taxable (LO 2.9) 31. D Jerry can reduce the interest payment by interest accrued and paid to the seller (LO 2.9) 32. A The price of the bond will decrease creating discount (LO 2.9) 33. B The below market loan creates deemed interest income for the lender (LO 2.9) 34. D $375 x 20% (LO 2.10) 35. C Qualified dividends enjoy preferential rates (LO 2.10) 36. C Transfers from employers to employees are almost always taxable (LO 2.11) 37. B Scholarships used for room and board are not excludable (LO 2.12) 38. A Alimony related to divorces after 2018 is not deductible or includable (LO 2.13) 39. D Transfers of property incident to a divorce do not generally result in income (LO 2.13) 40. B $2,000/$5,000 x $1,400 (LO 2.14)

2-1

2-2

Chapter 2 – Gross Income and Exclusions

41. B

Contributions to 529 plans are not deductible. If distributions are used to pay qualified higher education expenses, they are not taxable (LO 2.14) If distributions from a 529 plan are used to pay qualified higher education expenses, they are not taxable (LO 2.14) Unlike Coverdell accounts, there is no income threshold for contributions to a 529 plan (LO 2.14) Unlike Coverdell accounts, there is no income threshold for contributions to a 529 plan (LO 2.14) [$110,000 – ($91,500 + $11,000)/$15,000] x $2,000 (LO 2.14) $15,450 + $1,600 + $1,400 Unemployment is taxable (LO 2.15)

42. A

43. D

44. D

45. C 46. D

47. E

The maximum percentage of Social Security benefits that are taxable is 85% (LO 2.16) 48. A Tax-exempt income is added back to compute modified AGI for determining the taxability of Social Security benefits (LO 2.16) 49. E ($45,000 + $25,000)/2 (LO 2.17) 50. B A minor child’s home does not impact the allocation of income for a married couple in a community property state (LO 2.17) 51. B $12,000 loan balance before cancellation less $11,500 after cancellation (LO 2.18) 52. A Cancellation of debt income on a primary residence is excludable from gross income (LO 2.18) 53. A Student loan forgiveness is excluded from gross income through 2025 (LO 2.18)

Group 2 – Problems 1. a. b. c. d.

Excluded Included Included Included

e. f. g. h.

Excluded Included Included Excluded

i. Excluded j. Excluded k. Included

(LO 2.1)

2. The non-cash payment of a truck for services performed is includable income to Jane. The tax law states that gross income is “all income from whatever source derived.” There is no exception in the law for non-cash items received in exchange for services. The amount of gross income is the market value on the date of the payment which is $6,000. Jane may be able to recognize the $800 loss on the sale of the truck since it was business property. (LO 2.1) 3. a. $300. Gross income includes “all income from whatever source derived.” The value of the hair styling is income to Larry for the performance of services. There is no gross income exception in the tax law for “barter” income. b. $300. Gross income includes “all income from whatever source derived.” The value of the tax return is income to Sheila for the performance of services. There is no gross income exception in the tax law for “barter” income. (LO 2.1) 4. Illegal income is still taxable since there is no exception excluding it in the tax code. When there is not an explicit exception, gross income is “all income from whatever source derived.” (LO 2.1) 5. a. $61,700. Taxable wages are taken from Box 1. b. It would appear that Kristen made $3,500 of contributions toward her employer’s 401(k) plan. The health care and group term life insurance benefits do not create a difference between Box 1 and wages taxable for Social Security and Medicare in Boxes 3 and 5. (LO 2.2) 6. Student responses are likely to vary. The 10 behavioral factors and an example are: 1. Instruction. When a worker is told when, where, and how work is to be completed, that is indicative of an employee.

Solutions for Questions and Problems – Chapter 2

2-3

2. Training. An employee receives training on how to perform the job to company standards. 3. Personally rendered. An employee does not generally have the ability to hire subcontractors for their own work. 4. Hiring and supervising assistants. An employee does not generally have the authority to hire additional assistance to increase the likelihood of completing a job on time. 5. Continuing relationship. An employee works for the same business for a long period of time, whereas an independent contractor works on a contract or project basis. 6. Work hours. Employees generally work during hours set by their supervisor whereas independent contractors can complete work at a time suitable to them. 7. Time required. An employee works for the business full-time, 40 hours per week. 8. Workplace. An employee is required to report to the workplace each day to complete the work. 9. Sequence of work. Employees generally have a structure and order to workflow while independent contractors can complete a project in the order that suits them. 10. Reports. An employee provides frequent reports of progress and performance. (LO 2.2) 7. None of the cost of the insurance or amounts paid by the insurance company for surgery or treatment are taxable to Skyler. These amounts are specifically excluded from taxable income under the tax law. (LO 2.3) 8. $0. Taxpayers may exclude the total amount received for payment or reimbursement of medical expenses. Premiums for health insurance paid by the taxpayer’s employer are also excluded from the taxpayer’s gross income. (LO 2.3) 9. a. No. b. No. c. Yes. d. $0.

The meals are furnished by the employer on the business premises of the employer during working hours because the employer limits the employee to short meal periods. The meals are furnished by the employer on the business premises of the employer during working hours because the taxpayer must be available for emergency calls. The meals are not furnished for the convenience of the employer. Because Karrie’s employer provides meals for the convenience of the employer to more than one-half of the employees, all the employees are eligible for the benefit. (LO 2.4)

10. $4,850 = $850 + $4,000. The value of the airline tickets is excluded from gross income under the noadditional-cost services rule for employees and their families. The $30 of personal typing is excluded under the de minimis fringe benefits rule. The $850 worth of employee discount coupons for hotel rooms is included in gross income since the hotel division is a different line of business than that in which Linda is employed. The $4,000 tuition payment must be included in gross income since Richard is working on a graduate degree and not providing teaching or research activities. (LO 2.5) 11. Yes. Tom will be better off reducing his taxable income by $2,850 by using the health care flexible spending account. Since his income will be $2,850 less, he will pay less tax than he would otherwise. (LO 2.5) 12. a. b. c. d.

$7,600. $300. A non-qualified plan award may only be excluded up to $400; thus, $300 is taxable. $1,000,000. $30,000. (LO 2.6)

13. a. $4,000. b. $14,500. c. $0. (LO 2.6, 2.12)

2-4

14.

Chapter 2 – Gross Income and Exclusions

SIMPLIFIED METHOD WORKSHEET 1) Enter total amount received this year. 2) Enter cost in the plan at the annuity starting date. 3) Age at annuity starting date Enter 55 and under 360 56–60 310 61–65 260 66–70 210 71 and older 160 4) Divide line 2 by line 3. 5) Multiply line 4 by the number of monthly payments this year. If the annuity starting date was before 1987, also enter this amount on line 8; and skip lines 6 and 7. Otherwise go to line 6. 6) Enter the amount, if any, recovered tax free in prior years. 7) Subtract line 6 from line 2. 8) Enter the smaller of line 5 or 7. 9) Taxable amount this year: Subtract line 8 from line 1. Do not enter less than zero. (LO 2.7)

1) $ 7,000 2) $48,300

210

4) $

230

5) $ 1,610 6) $ 0 7) $48,300 8) $ 1,610 9) $ 5,390

15. $58,000 = $100,000 – $30,000 – $12,000. Since the policy was transferred for valuable consideration, the proceeds are taxable to the extent that they exceed the sum of the cash value at the time of transfer plus the premiums paid. (LO 2.8) 16. $500. A beneficiary, must include the entire amount of interest received with respect to the policy proceeds in gross income. The $9,000 principal amount may be excluded from gross income. (LO 2.8) 17. None. David has received an accelerated death benefit or viatical settlement which is excluded from taxable income. (LO 2.8) 18. None of the payment is taxable. Life insurance proceeds are generally considered to be tax-free and specifically excluded from taxable income. (LO 2.8) 19. The taxpayer can either (1) report the interest in the year the bonds are cashed or in the year they mature, whichever is earlier (no election is required to use this method), or (2) the taxpayer may elect to report the increase in redemption value each year. (LO 2.9) 20. Yorick’s purchase price is affected by two items: (1) Yorick pays Hamlet for his share of accrued interest at the time of sale between interest payments. This is $123 ($10,000 x 5% ÷ 365 x 90 days since last interest payment). Yorick will report the entire interest payment he receives and also report an offsetting reduction of $123. The price of the bond without the interest is therefore $9,438 ($9,561 – $123). Because of the change in interest rates, the bond is now subject to market discount of $562 ($10,000 – $9,438). The discount can be either included in gross income ratably each year or included when sold or matured. (LO 2.9) 21. 5.77% = 4.5% ÷ (100% – 22%). (LO 2.9) 22. The tax-exempt municipal bond has the same 5% before and after-tax rate of return. The corporate bond has an after-tax return of 4.55% [7% x (1 – 35%)]. Karen should invest in the tax-exempt municipal bond due to the higher after-tax rate of return. (LO 2.9)

Solutions for Questions and Problems – Chapter 2

2-5

23. Qualified dividends are taxed at either 0%, 15%, or 20% depending on income and filing status. For example, a single taxpayer with income below $41,675 has a capital gain rate of 0%. Income over $41,675 but below $459,750 pays at 15% and the capital gains rate is 20% for income above that. A 3.8% Medicare tax on net investment income will be added to the rates for certain high-income taxpayers. (LO 2.10) 24. a. See Schedule B on Page 2-6. b. Line 2a is $400, Line 2b is $1,900 c. Line 3a is $6,094, Line 3b is $6,100 (LO 2.10) 25. $5,600. Inheritances are excluded from taxable income; however, subsequent earnings on inherited property must be included in income. (LO 2.11) 26. $10,000 is taxable. This gift is clearly bonus income in a business setting so it does not qualify for tax-free gift treatment, even if Gwen’s client calls the payment a gift. (LO 2.11) 27. None of the gift is taxable. Gifts are excluded from the taxable income of the person receiving the gift. (LO 2.11) 28. $8,000 is taxable since there is no exclusion for payments made for room and board. $12,000 is not taxable, since scholarships for tuition are specifically excluded from taxable income. (LO 2.12) 29. a. (1) $450. (2) $450. (3) $0.

b. (1) $0. (2) $425,000. (LO 2.13)

30. Arlen does not deduct the alimony or child support. Jane does not report the alimony or child support as income. (LO 2.13) 31. No gain is taxable to Cindy on the transfer of the house since it is part of a property settlement related to a divorce. Allen has a basis of $90,000 in the house for calculating tax on any future sale of the house. (LO 2.13) 32. $11,172; Tuition, reasonable room and board, and books. (LO 2.14) 33. $0; All distributions are used for qualifying expenses. (LO 2.14) 34. $3,250. Unemployment benefits received are included in gross income. (LO 2.15) 35. $6,460. See calculation on the worksheet on Page 2-7. (LO 2.16) 36. a. Yes. Tax-free municipal bond income is added to AGI in the formula to determine the amount of taxable Social Security benefits. b. Zero. The taxpayer’s income is below the threshold amount used in the formula to determine whether Social Security is taxable. c. 85%. High-income taxpayers must include 85% of Social Security benefits in taxable income. (LO 2.16) 37. a. Kelly $43,800. One half of total wages and joint investment income and all of the inherited investment income. Kerry $35,800. b. $39,800. Kelly and Kerry both report one-half of all income (LO 2.17) 38. Son will not recognize any cancellation of debt income. This is cancellation of qualified principle residence debt and thus can be excluded. He will need to reduce his basis in the home by the amount of excluded income. (LO 2.18)

2-6

Chapter 2 – Gross Income and Exclusions

Group 2: Problem 24 SCHEDULE B

OMB No. 1545-0074

Interest and Ordinary Dividends

(Form 1040) Department of the Treasury Internal Revenue Service

2022

Go to www.irs.gov/ScheduleB for instructions and the latest information. Attach to Form 1040 or 1040-SR.

Name(s) shown on return

Attachment Sequence No. 08 Your social security number

Sally and Charles Colonel Part I Interest (See instructions and the Instructions for Form 1040, line 2b.) Note: If you received a Form 1099-INT, Form 1099-OID, or substitute statement from a brokerage firm, list the firm’s name as the payer and enter the total interest shown on that form.

313-13-1313

DRAFT AS OF July 7, 2022 DO NOT FILE Porcine Bank River Bank

1,200 700

2 3

Part II Ordinary Dividends

Amount

List name of payer. If any interest is from a seller-financed mortgage and the buyer used the property as a personal residence, see the instructions and list this interest first. Also, show that buyer’s social security number and address:

Add the amounts on line 1 . . . . . . . . . . . . . . . . . . . Excludable interest on series EE and I U.S. savings bonds issued after 1989. Attach Form 8815 . . . . . . . . . . . . . . . . . . . . . 4 Subtract line 3 from line 2. Enter the result here and on Form 1040 or 1040-SR, line 2b Note: If line 4 is over $1,500, you must complete Part III. List name of payer: 5

1,900

2 3 4

1,900 Amount

Kentucky East Corp Altus, Inc. Buller Corporation Gene Corporation

(See instructions and the Instructions for Form 1040, line 3b.)

700 2,000 400 3,000 5

Note: If you received a Form 1099-DIV or substitute statement from a brokerage firm, list the firm’s name as the payer and enter the ordinary 6 Add the amounts on line 5. Enter the total here and on Form 1040 or 1040-SR, line 3b dividends shown on that form. Note: If line 6 is over $1,500, you must complete Part III.

6,100

Part III You must complete this part if you (a) had over $1,500 of taxable interest or ordinary dividends; (b) had a foreign account; or (c) received a distribution from, or were a grantor of, or a transferor to, a foreign trust. Foreign Accounts Yes No and Trusts 7a At any time during 2022, did you have a financial interest in or signature authority over a financial Caution: If required, failure to file FinCEN Form 114 may result in substantial penalties. Additionally, you may be required to file Form 8938, Statement of Specified Foreign Financial Assets. See instructions.

account (such as a bank account, securities account, or brokerage account) located in a foreign country? See instructions . . . . . . . . . . . . . . . . . . . . . . . . If “Yes,” are you required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), to report that financial interest or signature authority? See FinCEN Form 114 and its instructions for filing requirements and exceptions to those requirements . . . . . .

b If you are required to file FinCEN Form 114, list the name(s) of the foreign country(-ies) where the financial account(s) are located: 8

During 2022, did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust? If “Yes,” you may have to file Form 3520. See instructions . . . . . . . . .

For Paperwork Reduction Act Notice, see your tax return instructions.

Cat. No. 17146N

Schedule B (Form 1040) 2022

Solutions for Questions and Problems – Chapter 2

2-7

Group 2: Problem 35 1.

Enter the total amount of social security income

$7,600

Enter one-half of line 1

3,800

Enter the total of taxable income items on Form 1040 except social security income

14,700

Enter the amount of tax exempt interest income

30,000

Add lines 2, 3, and 4

48,500

Enter all adjustments for AGI except for student loan interest and the tuition and fees deduction

-0-

Subtract line 6 from line 5. If zero or less, stop here, none of the social security benefits are taxable

48,500

Enter $25,000 ($32,000 if married filing jointly; $0 if married filing separately and living with spouse at any time during the year)

25,000

Subtract line 8 from line 7. If zero or less, enter -0-

23,500

10. Enter $9,000 ($12,000 if married filing jointly; $0 if married filing separately and living with spouse at any time during the year)

10.

9,000

11. Subtract line 10 from line 9. If zero or less, enter -0-

11.

14,500

12. Enter the smaller of line 9 or line 10

12.

9,000

13. Enter one-half of line 12

13.

4,500

14. Enter the smaller of line 2 or line 13

14.

3,800

15. Multiply line 11 by 85% (.85). If line 11 is zero, enter -0-

15.

12,325

16. Add lines 14 and 15

16.

16,125

17. Multiply line 1 by 85% (.85)

17.

6,460

18. Taxable benefits. Enter the smaller of line 16 or line 17

18.

$6,460

Note: If line 9 is zero or less, stop here; none of your benefits are taxable. Otherwise, go on to line 10.

2-8

Chapter 2 – Gross Income and Exclusions

Group 3 – Writing Assignment Research Solution: Whittenburg and Gill, CPAs San Diego, CA 92111 August 3, 20xx Ms. Vanessa Lazo 1550 Mesa Rosa Drive San Diego, CA 92182 Dear Ms. Lazo, Thank you for requesting my advice concerning the tax treatment of your scholarship and employment at Prestige Private University (PPU). I have researched your question and have determined that a portion of your scholarship is taxable, but a portion is excluded from gross income. The tuition reduction from $43,000 to $13,000 is not considered gross income that you must report as taxable. The reduction simply represents a lower negotiated price for tuition in much the same way you may negotiate a price below the sticker price for a new car. That purchase price reduction is not income. PPU is providing you with a $20,000 scholarship. The portion you use for tuition ($13,000) is excluded from gross income as a qualified scholarship; however, the additional $7,000 being used for room and board is taxable and must be included in gross income. Lastly, a payment for services such as the $1,500 you are receiving for serving as a lab assistant, is compensation and is included in gross income. As a result, your total gross income from PPU will be $8,500 and the excludable scholarship is $13,000. My conclusion is based upon the facts that you have provided me. If you have any questions or would like further explanation, please do not hesitate to call. Sincerely, Trevor Malcolm for Whittenburg and Gill, CPAs Group 4 – Comprehensive Problems 1. See Pages 2-9 through 2-12. 2A. See Pages 2-13 through 2-18. 2B. See Pages 2-19 through 2-22. Group 5 – Cumulative Software Problem The solution to the Cumulative Software Problem is posted on the website for the textbook at www.cengage.com/login.

Solutions for Questions and Problems – Chapter 2

Form

Comprehensive Problem 1

1040 U.S. Individual Income Tax Return 2022 Department of the Treasury—Internal Revenue Service

Filing Status Check only one box.

OMB No. 1545-0074

IRS Use Only—Do not write or staple in this space.

Single X Married filing jointly Married filing separately (MFS) Head of household (HOH) Qualifying surviving spouse (QSS) If you checked the MFS box, enter the name of your spouse. If you checked the HOH or QSS box, enter the child’s name if the qualifying person is a child but not your dependent:

Your first name and middle initial

Last name

Donna

Your social security number

Hoser

465 74 3322

DRAFT AS OF September 1, 2022 DO NOT FILE

If joint return, spouse’s first name and middle initial

Last name

Chris

Spouse’s social security number

Hoser

465 57 9935

Home address (number and street). If you have a P.O. box, see instructions.

Apt. no.

Presidential Election Campaign Check here if you, or your spouse if filing jointly, want $3 ZIP code to go to this fund. Checking a box below will not change Foreign postal code your tax or refund.

1313 W. Washington Street

City, town, or post office. If you have a foreign address, also complete spaces below.

State

Stephenville

Foreign country name

76401

Foreign province/state/county

You

Digital Assets Standard Deduction

Were born before January 2, 1958

Are blind

Dependents (see instructions): (1) First name If more than four dependents, see instructions and check here . .

Attach Form(s) W-2 here. Also attach Forms W-2G and 1099-R if tax was withheld.

Spouse:

(2) Social security number

Last name

. . .

Credit for other dependents

. . .

1a 1b 1c

d e f

. . .

1d 1e 1f

g h i

Wages from Form 8919, line 6 . . . . . . . Other earned income (see instructions) . . . . Nontaxable combat pay election (see instructions) .

. . .

. . . . 1i

. .

1g 1h

z 2a 3a

Add lines 1a through 1h Tax-exempt interest . . Qualified dividends . .

. . .

. . . . . . . b Taxable interest . b Ordinary dividends .

. . .

1z 2b 3b

4a 5a 6a

IRA distributions . . . Pensions and annuities . Social security benefits .

. . .

b Taxable amount . b Taxable amount . b Taxable amount .

. . .

4b 5b 6b

c 7 8

. . .

7 8

9 10 11

Add lines 1z, 2b, 3b, 4b, 5b, 6b, 7, and 8. This is your total income . Adjustments to income from Schedule 1, line 26 . . . . . . Subtract line 10 from line 9. This is your adjusted gross income .

. . .

9 10 11

12 13 14 15

. . . .

12 13 14

4a 5a 6a

122 320

. . .

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions.

. . .

Child tax credit

. . .

. . 2a 3a

. . .

Is blind

(4) Check the box if qualifies for (see instructions):

Total amount from Form(s) W-2, box 1 (see instructions) . Household employee wages not reported on Form(s) W-2 . Tip income not reported on line 1a (see instructions) . .

. . .

Was born before January 2, 1958

(3) Relationship to you

1a b c

If you did not get a Form W-2, see instructions. Attach Sch. B if required.

X No

Someone can claim: You as a dependent Your spouse as a dependent Spouse itemizes on a separate return or you were a dual-status alien

Age/Blindness You:

Income

Yes

Spouse

. . .

. .

. . .

Cat. No. 11320B

53,398

53,398 624 320

10,000 64,342 64,342 25,900 25,900 38,442 Form 1040 (2022)

2-9

2-10

Chapter 2 – Gross Income and Exclusions

Comprehensive Problem 1, cont. Page 2

Form 1040 (2022)

Tax and Credits

16 17

Tax (see instructions). Check if any from Form(s): 1 8814 Amount from Schedule 2, line 3 . . . . . . . .

18 19 20

Add lines 16 and 17 . . . . . . . . . . . . . . . Child tax credit or credit for other dependents from Schedule 8812 . Amount from Schedule 3, line 8 . . . . . . . . . . .

. . .

21 22 23

Add lines 19 and 20 . . . . . . . . . . . . . . . Subtract line 21 from line 18. If zero or less, enter -0- . . . . . Other taxes, including self-employment tax, from Schedule 2, line 21

. . .

24 25

Add lines 22 and 23. This is your total tax Federal income tax withheld from:

Form(s) W-2

25a

b c d

Form(s) 1099 . . . . . . Other forms (see instructions) . Add lines 25a through 25c . .

. . .

25b 25c . . .

26 27 28

2022 estimated tax payments and amount applied from 2021 return . Earned income credit (EIC) . . . . . . . . . . . . . Additional child tax credit from Schedule 8812 . . . . . . .

. . .

29 30 31

American opportunity credit from Form 8863, line 8 . Reserved for future use . . . . . . . . . Amount from Schedule 3, line 15 . . . . . .

. . .

32 33

Add lines 27, 28, 29, and 31. These are your total other payments and refundable credits Add lines 25d, 26, and 32. These are your total payments . . . . . . . . . .

. .

If line 33 is more than line 24, subtract line 24 from line 33. This is the amount you overpaid

32 33 34

35a b d 36

Subtract line 33 from line 24. This is the amount you owe. For details on how to pay, go to www.irs.gov/Payments or see instructions .

Estimated tax penalty (see instructions)

4972 3 . . . .

4,164

16 17

. . .

18 19 20

. . .

21 22 23

4,164

25d

4,170

4,164

DRAFT AS OF September 1, 2022 DO NOT FILE

Payments

If you have a qualifying child, attach Sch. EIC.

Refund

Direct deposit? See instructions.

Amount You Owe Third Party Designee

Joint return? See instructions. Keep a copy for your records.

. . .

29 30 31

Phone no.

. Savings

35a

Yes. Complete below.

4,170 6 6

Personal identification number (PIN)

Date

If the IRS sent you an Identity Protection PIN, enter it here (see inst.)

Your occupation

Nurse Spouse’s signature. If a joint return, both must sign.

Date

Spouse’s occupation

Student Phone no.

Paid Preparer Use Only

. . .

. . 27 28

Do you want to allow another person to discuss this return with the IRS? See instructions . . . . . . . . . . . . . . . . . . . . . Designee’s name

Sign Here

. . .

4,170

Preparer’s name

If the IRS sent your spouse an Identity Protection PIN, enter it here (see inst.)

Email address Preparer’s signature

Date

PTIN

Check if: Self-employed

Firm’s name

Phone no.

Firm’s address

Firm’s EIN

Go to www.irs.gov/Form1040 for instructions and the latest information.

Form 1040 (2022)

Solutions for Questions and Problems – Chapter 2

Comprehensive Problem 1, cont. SCHEDULE 1 Department of the Treasury Internal Revenue Service

2022

Attach to Form 1040, 1040-SR, or 1040-NR. Go to www.irs.gov/Form1040 for instructions and the latest information.

Name(s) shown on Form 1040, 1040-SR, or 1040-NR

Attachment Sequence No. 01

Your social security number

Donna and Chris Hoser Part I Additional Income 1 2a b 3 4 5 6 7 8 a b c d e f g h i j k l

OMB No. 1545-0074

Additional Income and Adjustments to Income

(Form 1040)

465-74-3322

DRAFT AS OF July 27, 2022 DO NOT FILE

Taxable refunds, credits, or offsets of state and local income taxes . . . . . . . . . 1 2a Alimony received . . . . . . . . . . . . . . . . . . . . . . . . . . . Date of original divorce or separation agreement (see instructions): Business income or (loss). Attach Schedule C . . . . . . . . . . . . . . . . . 3 Other gains or (losses). Attach Form 4797 . . . . . . . . . . . . . . . . . . 4 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E . 5 Farm income or (loss). Attach Schedule F . . . . . . . . . . . . . . . . . . . 6 7 Unemployment compensation . . . . . . . . . . . . . . . . . . . . . . . Other income: ) 8a ( Net operating loss . . . . . . . . . . . . . . . . . . . Gambling . . . . . . . . . . . . . . . . . . . . . . 8b Cancellation of debt . . . . . . . . . . . . . . . . . . 8c ) Foreign earned income exclusion from Form 2555 . . . . . . . 8d ( Income from Form 8853 . . . . . . . . . . . . . . . . . 8e Income from Form 8889 . . . . . . . . . . . . . . . . . 8f Alaska Permanent Fund dividends . . . . . . . . . . . . . 8g Jury duty pay . . . . . . . . . . . . . . . . . . . . . 8h Prizes and awards . . . . . . . . . . . . . . . . . . . 8i 10,000 Activity not engaged in for profit income . . . . . . . . . . . 8j Stock options . . . . . . . . . . . . . . . . . . . . . 8k Income from the rental of personal property if you engaged in the rental for profit but were not in the business of renting such property . . . 8l m Olympic and Paralympic medals and USOC prize money (see instructions) . . . . . . . . . . . . . . . . . . . . . 8m n Section 951(a) inclusion (see instructions) . . . . . . . . . . 8n o Section 951A(a) inclusion (see instructions) . . . . . . . . . . 8o p Section 461(l) excess business loss adjustment . . . . . . . . 8p q Taxable distributions from an ABLE account (see instructions) . . . 8q r Scholarship and fellowship grants not reported on Form W-2 . . . 8r s Nontaxable amount of Medicaid waiver payments included on Form ) 1040, line 1a or 1d . . . . . . . . . . . . . . . . . . . 8s ( t Pension or annuity from a nonqualifed deferred compensation plan or a nongovernmental section 457 plan . . . . . . . . . . . . 8t u Wages earned while incarcerated . . . . . . . . . . . . . 8u z Other income. List type and amount: 8z 9 Total other income. Add lines 8a through 8z . . . . . . . . . . . . . . . . . . 9 10 Combine lines 1 through 7 and 9. Enter here and on Form 1040, 1040-SR, or 1040-NR, line 8 10 For Paperwork Reduction Act Notice, see your tax return instructions.

Cat. No. 71479F

* Calculated on Qualified Dividends and Capital Gains Worksheet.

10,000 10,000

Schedule 1 (Form 1040) 2022

2-11

2-12

Chapter 2 – Gross Income and Exclusions

Comprehensive Problem 1, cont. Donna and Chris Hoser

38,442 320

0 X 320 38,122 $41,675 $83,350 $55,800

$459,750 $258,600 $517,200 $488,500

83,350 38,442 38,122 320 320 320 0 517,200 38,442 38,442 0 0 0 320 0 0 4,164 4,164 4,200 4,164

This worksheet adapted from the 2021 worksheet.

Solutions for Questions and Problems – Chapter 2

Form

Comprehensive Problem 2A

1040 U.S. Individual Income Tax Return 2022 Department of the Treasury—Internal Revenue Service

Filing Status Check only one box.

Single

X Married filing jointly

OMB No. 1545-0074

Married filing separately (MFS)

IRS Use Only—Do not write or staple in this space.

Head of household (HOH)

Your first name and middle initial

Last name

Ray

Your social security number

Gomez

469 21 5523

DRAFT AS OF September 1, 2022 DO NOT FILE

If joint return, spouse’s first name and middle initial

Last name

Maria

Spouse’s social security number

Gomez

444 65 9912

Home address (number and street). If you have a P.O. box, see instructions.

Apt. no.

Presidential Election Campaign Check here if you, or your spouse if filing jointly, want $3 ZIP code to go to this fund. Checking a box below will not change Foreign postal code your tax or refund.

1610 Sonora Avenue

City, town, or post office. If you have a foreign address, also complete spaces below.

State

McAllen

Foreign country name

78503

Foreign province/state/county

You

Digital Assets Standard Deduction

Were born before January 2, 1958

Are blind

Dependents (see instructions): (1) First name If more than four Jaime dependents, see instructions and check here . .

Attach Form(s) W-2 here. Also attach Forms W-2G and 1099-R if tax was withheld.

Spouse:

Last name

(2) Social security number

Gomez

721 34 1134

Was born before January 2, 1958 Child tax credit

. . .

1a 1b 1c

d e f

. . .

1d 1e 1f

g h i

Wages from Form 8919, line 6 . . . . . . . Other earned income (see instructions) . . . . Nontaxable combat pay election (see instructions) .

. . .

. . . . 1i

. .

1g 1h

z 2a 3a

Add lines 1a through 1h Tax-exempt interest . . Qualified dividends . .

. . .

. . . . . . . b Taxable interest . b Ordinary dividends .

. . .

1z 2b 3b

4a 5a 6a

IRA distributions . . . Pensions and annuities . Social security benefits .

. . .

b Taxable amount . b Taxable amount . b Taxable amount .

. . .

4b 5b 6b

c 7 8

. . .

x .

7 8

9 10 11

Add lines 1z, 2b, 3b, 4b, 5b, 6b, 7, and 8. This is your total income . Adjustments to income from Schedule 1, line 26 . . . . . . Subtract line 10 from line 9. This is your adjusted gross income .

. . .

9 10 11

12 13 14 15

. . . .

12 13 14

. . 2a 3a 4a 5a 6a

400 1,000

. . .

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions.

. . .

Credit for other dependents

Son

Total amount from Form(s) W-2, box 1 (see instructions) . Household employee wages not reported on Form(s) W-2 . Tip income not reported on line 1a (see instructions) . .

. . .

Is blind

(4) Check the box if qualifies for (see instructions):

(3) Relationship to you

1a b c

If you did not get a Form W-2, see instructions. Attach Sch. B if required.

X No

Someone can claim: You as a dependent Your spouse as a dependent Spouse itemizes on a separate return or you were a dual-status alien

Age/Blindness You:

Income

Yes

Spouse

. .

. . .

Cat. No. 11320B

75,980

75,980 1,348 1,000

60 1,000 79,388 2,400 76,988 25,900 25,900 51,088 Form 1040 (2022)

2-13

2-14

Chapter 2 – Gross Income and Exclusions

Comprehensive Problem 2A, cont. Page 2

Form 1040 (2022)

Tax and Credits

16 17

Tax (see instructions). Check if any from Form(s): 1 8814 Amount from Schedule 2, line 3 . . . . . . . .

18 19 20

Add lines 16 and 17 . . . . . . . . . . . . . . . Child tax credit or credit for other dependents from Schedule 8812 . Amount from Schedule 3, line 8 . . . . . . . . . . .

. . .

21 22 23

Add lines 19 and 20 . . . . . . . . . . . . . . . Subtract line 21 from line 18. If zero or less, enter -0- . . . . . Other taxes, including self-employment tax, from Schedule 2, line 21

. . .

24 25

Add lines 22 and 23. This is your total tax Federal income tax withheld from:

Form(s) W-2

25a

b c d

Form(s) 1099 . . . . . . Other forms (see instructions) . Add lines 25a through 25c . .

. . .

25b 25c . . .

26 27 28

2022 estimated tax payments and amount applied from 2021 return . Earned income credit (EIC) . . . . . . . . . . . . . Additional child tax credit from Schedule 8812 . . . . . . .

. . .

29 30 31

American opportunity credit from Form 8863, line 8 . Reserved for future use . . . . . . . . . Amount from Schedule 3, line 15 . . . . . .

. . .

32 33

Add lines 27, 28, 29, and 31. These are your total other payments and refundable credits Add lines 25d, 26, and 32. These are your total payments . . . . . . . . . .

If line 33 is more than line 24, subtract line 24 from line 33. This is the amount you overpaid

35a b d 36

Subtract line 33 from line 24. This is the amount you owe. For details on how to pay, go to www.irs.gov/Payments or see instructions .

Estimated tax penalty (see instructions)

4972 3 . . . .

5,592

16 17

. . .

18 19 20

. . .

21 22 23

3,592

25d

7,651

. .

32 33 34

5,592 2,000 2,000 3,592

DRAFT AS OF September 1, 2022 DO NOT FILE

Payments

If you have a qualifying child, attach Sch. EIC.

Refund

Direct deposit? See instructions.

Amount You Owe Third Party Designee

Joint return? See instructions. Keep a copy for your records.

. . .

29 30 31

Phone no.

. Savings

35a

Yes. Complete below.

7,651 4,059 4,059

Personal identification number (PIN)

Date

Your occupation

Spouse’s signature. If a joint return, both must sign.

Date

Spouse’s occupation

Maintenance Supervisor Cashier Phone no.

Paid Preparer Use Only

. . .

. . 27 28

Do you want to allow another person to discuss this return with the IRS? See instructions . . . . . . . . . . . . . . . . . . . . . Designee’s name

Sign Here

. . .

7,651

Preparer’s name

If the IRS sent you an Identity Protection PIN, enter it here (see inst.) If the IRS sent your spouse an Identity Protection PIN, enter it here (see inst.)

Email address Preparer’s signature

Date

PTIN

Check if: Self-employed

Firm’s name

Phone no.

Firm’s address

Firm’s EIN

Go to www.irs.gov/Form1040 for instructions and the latest information.

Form 1040 (2022)

Solutions for Questions and Problems – Chapter 2

Comprehensive Problem 2A, cont. SCHEDULE 1 Department of the Treasury Internal Revenue Service

2022

Attach to Form 1040, 1040-SR, or 1040-NR. Go to www.irs.gov/Form1040 for instructions and the latest information.

Name(s) shown on Form 1040, 1040-SR, or 1040-NR

Attachment Sequence No. 01

Your social security number

Ray and Maria Gomez Part I Additional Income 1 2a b 3 4 5 6 7 8 a b c d e f g h i j k l

OMB No. 1545-0074

Additional Income and Adjustments to Income

(Form 1040)

469-21-5523

DRAFT AS OF July 27, 2022 DO NOT FILE

Taxable refunds, credits, or offsets of state and local income taxes . . . . . . . . . 1 2a Alimony received . . . . . . . . . . . . . . . . . . . . . . . . . . . Date of original divorce or separation agreement (see instructions): Business income or (loss). Attach Schedule C . . . . . . . . . . . . . . . . . 3 Other gains or (losses). Attach Form 4797 . . . . . . . . . . . . . . . . . . 4 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E . 5 Farm income or (loss). Attach Schedule F . . . . . . . . . . . . . . . . . . . 6 7 Unemployment compensation . . . . . . . . . . . . . . . . . . . . . . . Other income: ) 8a ( Net operating loss . . . . . . . . . . . . . . . . . . . Gambling . . . . . . . . . . . . . . . . . . . . . . 8b 1,000 Cancellation of debt . . . . . . . . . . . . . . . . . . 8c ) Foreign earned income exclusion from Form 2555 . . . . . . . 8d ( Income from Form 8853 . . . . . . . . . . . . . . . . . 8e Income from Form 8889 . . . . . . . . . . . . . . . . . 8f Alaska Permanent Fund dividends . . . . . . . . . . . . . 8g Jury duty pay . . . . . . . . . . . . . . . . . . . . . 8h Prizes and awards . . . . . . . . . . . . . . . . . . . 8i Activity not engaged in for profit income . . . . . . . . . . . 8j Stock options . . . . . . . . . . . . . . . . . . . . . 8k Income from the rental of personal property if you engaged in the rental for profit but were not in the business of renting such property . . . 8l m Olympic and Paralympic medals and USOC prize money (see instructions) . . . . . . . . . . . . . . . . . . . . . 8m n Section 951(a) inclusion (see instructions) . . . . . . . . . . 8n o Section 951A(a) inclusion (see instructions) . . . . . . . . . . 8o p Section 461(l) excess business loss adjustment . . . . . . . . 8p q Taxable distributions from an ABLE account (see instructions) . . . 8q r Scholarship and fellowship grants not reported on Form W-2 . . . 8r s Nontaxable amount of Medicaid waiver payments included on Form ) 1040, line 1a or 1d . . . . . . . . . . . . . . . . . . . 8s ( t Pension or annuity from a nonqualifed deferred compensation plan or a nongovernmental section 457 plan . . . . . . . . . . . . 8t u Wages earned while incarcerated . . . . . . . . . . . . . 8u z Other income. List type and amount: 8z 9 Total other income. Add lines 8a through 8z . . . . . . . . . . . . . . . . . . 9 10 Combine lines 1 through 7 and 9. Enter here and on Form 1040, 1040-SR, or 1040-NR, line 8 10 For Paperwork Reduction Act Notice, see your tax return instructions.

Cat. No. 71479F

1,000 1,000

Schedule 1 (Form 1040) 2022

2-15

2-16

Chapter 2 – Gross Income and Exclusions

Comprehensive Problem 2A, cont. Page 2

Schedule 1 (Form 1040) 2022

Part II Adjustments to Income 11 12 13 14 15 16 17 18 19a b c 20 21 22 23 24 a b c d e f g h i

j k z 25 26

Educator expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Certain business expenses of reservists, performing artists, and fee-basis government officials. Attach Form 2106 . . . . . . . . . . . . . . . . . . . . . . . . 12 Health savings account deduction. Attach Form 8889 . . . . . . . . . . . . . . 13 Moving expenses for members of the Armed Forces. Attach Form 3903 . . . . . . . 14 Deductible part of self-employment tax. Attach Schedule SE . . . . . . . . . . . 15 Self-employed SEP, SIMPLE, and qualified plans . . . . . . . . . . . . . . . . 16 Self-employed health insurance deduction . . . . . . . . . . . . . . . . . . 17 Penalty on early withdrawal of savings . . . . . . . . . . . . . . . . . . . . 18 Alimony paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19a Recipient’s SSN . . . . . . . . . . . . . . . . . . . . . . 566 74 8765 Date of original divorce or separation agreement (see instructions): 1/27/2016 IRA deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Student loan interest deduction . . . . . . . . . . . . . . . . . . . . . . 21 22 Reserved for future use . . . . . . . . . . . . . . . . . . . . . . . . . Archer MSA deduction . . . . . . . . . . . . . . . . . . . . . . . . . 23 Other adjustments: Jury duty pay (see instructions) . . . . . . . . . . . . . . 24a Deductible expenses related to income reported on line 8l from the rental of personal property engaged in for profit . . . . . . . . 24b Nontaxable amount of the value of Olympic and Paralympic medals and USOC prize money reported on line 8m . . . . . . . . . . 24c Reforestation amortization and expenses . . . . . . . . . . . 24d Repayment of supplemental unemployment benefits under the Trade Act of 1974 . . . . . . . . . . . . . . . . . . . . . . 24e Contributions to section 501(c)(18)(D) pension plans . . . . . . . 24f Contributions by certain chaplains to section 403(b) plans . . . . 24g Attorney fees and court costs for actions involving certain unlawful discrimination claims (see instructions) . . . . . . . . . . . . 24h Attorney fees and court costs you paid in connection with an award from the IRS for information you provided that helped the IRS detect tax law violations . . . . . . . . . . . . . . . . . . . 24i Housing deduction from Form 2555 . . . . . . . . . . . . . 24j Excess deductions of section 67(e) expenses from Schedule K-1 (Form 1041) . . . . . . . . . . . . . . . . . . . . . . . . 24k Other adjustments. List type and amount: 24z Total other adjustments. Add lines 24a through 24z . . . . . . . . . . . . . . . 25 Add lines 11 through 23 and 25. These are your adjustments to income. Enter here and on Form 1040 or 1040-SR, line 10, or Form 1040-NR, line 10a . . . . . . . . . . . . 26

DRAFT AS OF July 27, 2022 DO NOT FILE

2,400

Schedule 1 (Form 1040) 2022

Solutions for Questions and Problems – Chapter 2

Comprehensive Problem 2A, cont. SCHEDULE B

OMB No. 1545-0074

Interest and Ordinary Dividends

(Form 1040) Department of the Treasury Internal Revenue Service

2022

Go to www.irs.gov/ScheduleB for instructions and the latest information. Attach to Form 1040 or 1040-SR.

Name(s) shown on return

Attachment Sequence No. 08 Your social security number

Ray and Maria Gomez Part I Interest (See instructions and the Instructions for Form 1040, line 2b.) Note: If you received a Form 1099-INT, Form 1099-OID, or substitute statement from a brokerage firm, list the firm’s name as the payer and enter the total interest shown on that form.

469-21-5523

DRAFT AS OF July 7, 2022 DO NOT FILE McAllen State Bank Friar Tuck Investments

724 24

Friar Tuck US Govt

600

2 3

Part II Ordinary Dividends

Amount

1,348

2 3 4

1,348 Amount

Friar Tuck Investments

1,000

(See instructions and the Instructions for Form 1040, line 3b.)

1,000

b If you are required to file FinCEN Form 114, list the name(s) of the foreign country(-ies) where the financial account(s) are located: 8

During 2022, did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust? If “Yes,” you may have to file Form 3520. See instructions . . . . . . . . .

For Paperwork Reduction Act Notice, see your tax return instructions.

Cat. No. 17146N

Schedule B (Form 1040) 2022

Note: Form B is not required since neither Interest nor Dividend income exceeds $1,500. Provided for informational purposes only.

2-17

2-18

Chapter 2 – Gross Income and Exclusions

Comprehensive Problem 2A, cont. Ray and Maria Gomez

51,088 1,000

60 X 1,060 50,028 $41,675 $83,350 $55,800

$459,750 $258,600 $517,200 $488,500

83,350 51,088 50,028 1,060 1,060 1,060 0 517,200 51,088 51,088 0 0 0 1,060 0 0 5,592 5,592 5,718 5,592

This worksheet adapted from the 2021 worksheet.

Solutions for Questions and Problems – Chapter 2

Form

Comprehensive Problem 2B

Note: Carl is age 65 or over and thus can file using Form 1040-SR also.

1040 U.S. Individual Income Tax Return 2022 Department of the Treasury—Internal Revenue Service

Filing Status Check only one box.

Single

X Married filing jointly

OMB No. 1545-0074

Married filing separately (MFS)

IRS Use Only—Do not write or staple in this space.

Head of household (HOH)

Your first name and middle initial

Last name

Carl

Your social security number

Conch

835 21 5423

Last name

Spouse’s social security number

DRAFT AS OF September 1, 2022 DO NOT FILE

If joint return, spouse’s first name and middle initial

Mary

Duval

633 65 7912

Home address (number and street). If you have a P.O. box, see instructions.

Apt. no.

Presidential Election Campaign Check here if you, or your spouse if filing jointly, want $3 ZIP code to go to this fund. Checking a box below will not change Foreign postal code your tax or refund.

1234 Mallory Square

City, town, or post office. If you have a foreign address, also complete spaces below.

State

Key West

Foreign country name

33040

Foreign province/state/county

You

Digital Assets Standard Deduction

X Were born before January 2, 1958

Are blind

Dependents (see instructions): (1) First name If more than four dependents, see instructions and check here . .

Attach Form(s) W-2 here. Also attach Forms W-2G and 1099-R if tax was withheld.

Spouse:

(2) Social security number

Last name

. . .

Credit for other dependents

. . .

1a 1b 1c

d e f

. . .

1d 1e 1f

g h i

Wages from Form 8919, line 6 . . . . . . . Other earned income (see instructions) . . . . Nontaxable combat pay election (see instructions) .

. . .

. . . . 1i

. .

1g 1h

z 2a 3a

Add lines 1a through 1h Tax-exempt interest . . Qualified dividends . .

. . .

. . . . . . . b Taxable interest . b Ordinary dividends .

. . .

1z 2b 3b

4a 5a 6a

IRA distributions . . . Pensions and annuities . Social security benefits .

. . .

b Taxable amount . b Taxable amount . b Taxable amount .

. . .

4b 5b 6b

c 7 8

. . .

7 8

9 10 11

Add lines 1z, 2b, 3b, 4b, 5b, 6b, 7, and 8. This is your total income . Adjustments to income from Schedule 1, line 26 . . . . . . Subtract line 10 from line 9. This is your adjusted gross income .

. . .

9 10 11

12 13 14 15

. . . .

12 13 14

4a 5a 6a

13,400 7,600

. . .

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions.

. . .

Child tax credit

. . .

. . 2a 3a

. . .

Is blind

(4) Check the box if qualifies for (see instructions):

Total amount from Form(s) W-2, box 1 (see instructions) . Household employee wages not reported on Form(s) W-2 . Tip income not reported on line 1a (see instructions) . .

. . .

Was born before January 2, 1958

(3) Relationship to you

1a b c

If you did not get a Form W-2, see instructions. Attach Sch. B if required.

X No

Someone can claim: You as a dependent Your spouse as a dependent Spouse itemizes on a separate return or you were a dual-status alien

Age/Blindness You:

Income

Yes

Spouse

. . .

. .

. . .

Cat. No. 11320B

23,000

13,400 5,926 6,301 48,627 48,627 27,300 27,300 21,327 Form 1040 (2022)

2-19

2-20

Chapter 2 – Gross Income and Exclusions

Comprehensive Problem 2B, cont. Page 2

Form 1040 (2022)

Tax and Credits

2,148

. . . .

18 19 20

2,148

. . .

21 22 23

2,148

25d

4,300

Tax (see instructions). Check if any from Form(s): 1 8814 Amount from Schedule 2, line 3 . . . . . . . .

18 19 20

Add lines 16 and 17 . . . . . . . . . . . . . . . Child tax credit or credit for other dependents from Schedule 8812 . Amount from Schedule 3, line 8 . . . . . . . . . . .

. . .

21 22 23

Add lines 19 and 20 . . . . . . . . . . . . . . . Subtract line 21 from line 18. If zero or less, enter -0- . . . . . Other taxes, including self-employment tax, from Schedule 2, line 21

. . .

24 25

Add lines 22 and 23. This is your total tax Federal income tax withheld from:

Form(s) W-2

25a

b c d

Form(s) 1099 . . . . . . Other forms (see instructions) . Add lines 25a through 25c . .

. . .

25b 25c . . .

26 27 28

2022 estimated tax payments and amount applied from 2021 return . Earned income credit (EIC) . . . . . . . . . . . . . Additional child tax credit from Schedule 8812 . . . . . . .

. . .

29 30 31

American opportunity credit from Form 8863, line 8 . Reserved for future use . . . . . . . . . Amount from Schedule 3, line 15 . . . . . .

. . .

32 33

Add lines 27, 28, 29, and 31. These are your total other payments and refundable credits Add lines 25d, 26, and 32. These are your total payments . . . . . . . . . .

. .

If line 33 is more than line 24, subtract line 24 from line 33. This is the amount you overpaid

32 33 34

35a b d 36

Subtract line 33 from line 24. This is the amount you owe. For details on how to pay, go to www.irs.gov/Payments or see instructions .

Estimated tax penalty (see instructions)

4972 3 . . . .

16 17

. . .

DRAFT AS OF September 1, 2022 DO NOT FILE

Payments

If you have a qualifying child, attach Sch. EIC.

Refund

Direct deposit? See instructions.

Amount You Owe Third Party Designee

Joint return? See instructions. Keep a copy for your records.

. . .

29 30 31

Phone no.

. Savings

35a

Yes. Complete below.

4,300 2,152 2,152

Personal identification number (PIN)

Your signature

Date

Your occupation

Spouse’s signature. If a joint return, both must sign.

Date

Spouse’s occupation

Baker Unemployed Phone no.

Paid Preparer Use Only

. . .

Do you want to allow another person to discuss this return with the IRS? See instructions . . . . . . . . . . . . . . . . . . . . . Designee’s name

Sign Here

. . .

. . 27 28

2,400 1,900

Preparer’s name

If the IRS sent your spouse an Identity Protection PIN, enter it here (see inst.)

Email address Preparer’s signature

Date

PTIN

Check if: Self-employed

Firm’s name

Phone no.

Firm’s address

Firm’s EIN

Go to www.irs.gov/Form1040 for instructions and the latest information.

Form 1040 (2022)

Solutions for Questions and Problems – Chapter 2

Comprehensive Problem 2B, cont. SCHEDULE 1 Department of the Treasury Internal Revenue Service

2022

Attach to Form 1040, 1040-SR, or 1040-NR. Go to www.irs.gov/Form1040 for instructions and the latest information.

Name(s) shown on Form 1040, 1040-SR, or 1040-NR

Attachment Sequence No. 01

Your social security number

Carl Conch and Mary Duval Part I Additional Income 1 2a b 3 4 5 6 7 8 a b c d e f g h i j k l

OMB No. 1545-0074

Additional Income and Adjustments to Income

(Form 1040)

835-21-5423

DRAFT AS OF July 27, 2022 DO NOT FILE

Taxable refunds, credits, or offsets of state and local income taxes . . . . . . . . . 1 2a Alimony received . . . . . . . . . . . . . . . . . . . . . . . . . . . Date of original divorce or separation agreement (see instructions): Business income or (loss). Attach Schedule C . . . . . . . . . . . . . . . . . 3 Other gains or (losses). Attach Form 4797 . . . . . . . . . . . . . . . . . . 4 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E . 5 Farm income or (loss). Attach Schedule F . . . . . . . . . . . . . . . . . . . 6 7 Unemployment compensation . . . . . . . . . . . . . . . . . . . . . . . Other income: ) 8a ( Net operating loss . . . . . . . . . . . . . . . . . . . Gambling . . . . . . . . . . . . . . . . . . . . . . 8b 4,000 Cancellation of debt . . . . . . . . . . . . . . . . . . 8c ) Foreign earned income exclusion from Form 2555 . . . . . . . 8d ( Income from Form 8853 . . . . . . . . . . . . . . . . . 8e Income from Form 8889 . . . . . . . . . . . . . . . . . 8f Alaska Permanent Fund dividends . . . . . . . . . . . . . 8g Jury duty pay . . . . . . . . . . . . . . . . . . . . . 8h Prizes and awards . . . . . . . . . . . . . . . . . . . 8i Activity not engaged in for profit income . . . . . . . . . . . 8j Stock options . . . . . . . . . . . . . . . . . . . . . 8k Income from the rental of personal property if you engaged in the rental for profit but were not in the business of renting such property . . . 8l m Olympic and Paralympic medals and USOC prize money (see instructions) . . . . . . . . . . . . . . . . . . . . . 8m n Section 951(a) inclusion (see instructions) . . . . . . . . . . 8n o Section 951A(a) inclusion (see instructions) . . . . . . . . . . 8o p Section 461(l) excess business loss adjustment . . . . . . . . 8p q Taxable distributions from an ABLE account (see instructions) . . . 8q r Scholarship and fellowship grants not reported on Form W-2 . . . 8r s Nontaxable amount of Medicaid waiver payments included on Form ) 1040, line 1a or 1d . . . . . . . . . . . . . . . . . . . 8s ( t Pension or annuity from a nonqualifed deferred compensation plan or a nongovernmental section 457 plan . . . . . . . . . . . . 8t u Wages earned while incarcerated . . . . . . . . . . . . . 8u z Other income. List type and amount: 8z 9 Total other income. Add lines 8a through 8z . . . . . . . . . . . . . . . . . . 9 10 Combine lines 1 through 7 and 9. Enter here and on Form 1040, 1040-SR, or 1040-NR, line 8 10 For Paperwork Reduction Act Notice, see your tax return instructions.

Cat. No. 71479F

2,301

4,000 6,301

Schedule 1 (Form 1040) 2022

2-21

2-22

Chapter 2 – Gross Income and Exclusions

Comprehensive Problem 2B, cont.

SIMPLIFIED TAXABLE SOCIAL SECURITY WORKSHEET (FOR MOST PEOPLE) 1. Enter the total amount of Social Security income.

7,600

2. Enter one-half of line 1.

3,800

3. Enter the total of taxable income items on Form 1040 except Social Security income.

42,701

4. Enter the amount of tax-exempt interest income.

5. Add lines 2, 3, and 4.

46,501

6. Enter all adjustments for AGI except for student loan interest deduction.

7. Subtract line 6 from line 5. If zero or less, stop here, none of the Social Security benefits are taxable.

46,501

8. Enter $25,000 ($32,000 if married filing jointly; $0 if married filing separately and living with spouse at any time during the year).

32,000

9. Subtract line 8 from line 7. If zero or less, enter –0–.

14,501

10. Enter $9,000 ($12,000 if married filing jointly; $0 if married filing separately and living with spouse at any time during the year).

10.

12,000

11. Subtract line 10 from line 9. If zero or less, enter –0–.

11.

2,501

12. Enter the smaller of line 9 or line 10.

12.

12,000

13. Enter one-half of line 12.

13.

6,000

14. Enter the smaller of line 2 or line 13.

14.

3,800

15. Multiply line 11 by 85% (.85). If line 11 is zero, enter –0–.

15.

2,126

16. Add lines 14 and 15.

16.

5,926

17. Multiply line 1 by 85% (.85).

17.

6,460

18. Taxable benefits. Enter the smaller of line 16 or line 17.

18.

5,926

Note: If line 9 is zero or less, stop here; none of your benefits are taxable. Otherwise, go on to line 10.

Solutions for Questions and Problems – Chapter 2

2-23

Key Number Tax Return Summary Chapter 2 Comprehensive Problem 1 Adjusted Gross Income (Line 11)

64,342

Taxable Income (Line 15)

38,442

Total Tax (Line 24)

4,164

Amount Overpaid (Line 34)

Comprehensive Problem 2A Adjusted Gross Income (Line 11)

76,988

Taxable Income (Line 15)

51,088

Total Tax (Line 24)

3,592

Amount Overpaid (Line 34)

4,059

Comprehensive Problem 2B Adjusted Gross Income (Line 11)

48,627

Taxable Income (Line 15)

21,327

Total Tax (Line 24)

2,148

Amount Overpaid (Line 34)

2,152

2-24

Chapter 2 – Gross Income and Exclusions

CHAPTER 3 BUSINESS INCOME AND EXPENSES Group 1 – Multiple Choice Questions 1. B Deductible business expenses must be ordinary, necessary, and reasonable but need not lead to a sale (LO 3.1) 2. D A profitable sole proprietor will need to complete a Schedule SE to report self-employment taxes (LO 3.1) 3. E Each of these are important tax considerations for a small business (LO 3.1, 3.3, 3.4, 3.5) 4. C Professional training is generally deductible (LO 3.1) 5. A Expenses to bring a business into compliance are generally deductible (LO 3.1) 6. E All of these are acceptable methods to account for inventory for a cash-basis taxpayer (LO 3.2) 7. D $45,000 + $175,000 – $25,000 (LO 3.2) 8. D Standard mileage method is not available for fleets, or when depreciation is claimed (LO 3.3) 9. E (450 x $0.585) + (475 x $0.625) (LO 3.3) 10. C Travel from a main job site to a temporary job site is generally deductible work travel (LO 3.3) 11. C Travel costs are generally those in which the employee travels away from their tax home for business purposes (LO 3.4) 12. D Business gifts are not considered a travel expense (LO 3.4) The high-low method assigns a per diem for 13. C all locations except high cost locations (LO 3.4) 14. C If the trip has a greater than 50% business purpose, travel may be deducted for the business portion of the trip (LO 3.4) 15. E Entertainment costs are not deductible (LO 3.5) 16. A Tickets to a play are non-deductible entertainment (LO 3.5) 17. C The bagels and the travel snacks are limited to 50%. All others can be deducted in full (LO 3.5)

18. A A real estate course for a CPA is preparing the CPA for a new job and is not deductible (LO 3.6) 19. A The additional training is required by law and does not prepare the taxpayer for a new job (LO 3.6) 20. E Subscriptions for journals related to the business of the taxpayer are generally deductible (LO 3.7) 21. D Uniforms that can be worn for ordinary use are not generally deductible but specialized safety equipment is deductible (LO 3.8) 22. B A gift to an employee is likely to be treated as compensation unless a safety or service award. Under both circumstances, the cost is deductible up to $400 (LO 3.9) 23. A The annual limit is $25 per donee. (LO 3.9) 24. C Bad debts cannot be deducted until worthless (LO 3.10) 25. C A nonbusiness bad debt is treated as shortterm capital loss. Net capital losses may only be deducted up to $3,000 for an individual taxpayer (LO 3.10) 26. C The home office deduction may not create a loss (except for interest and taxes) and any excess can be carried forward (LO 3.11) 27. C Employees may not deduct a home office and the home office must be used regularly for performing work (LO 3.11) 28. D Home office deduction limited to income before the home office deduction ($4,000 – $1,300) (LO 3.11) 29. E All of these are factors to consider in classifying an activity as a hobby (LO 3.12) 30. B Hobby expenses are not deductible whereas the business can report a loss. Brian can report a loss of $1,000 whereas Stewie must report his hobby income only (LO 3.12)

Group 2 – Problems 1. See Pages 3-2 through 3-4. (LO 3.1, 3.3, 3.5, 3.7)

3-1

3-2

Chapter 3 – Business Income and Expenses

Group 2: Problem 1 SCHEDULE C (Form 1040)

Profit or Loss From Business

Department of the Treasury Internal Revenue Service

OMB No. 1545-0074

2022

(Sole Proprietorship) Go to www.irs.gov/ScheduleC for instructions and the latest information.

Attachment Sequence No. 09

Attach to Form 1040, 1040-SR, 1040-NR, or 1041; partnerships must generally file Form 1065.

Name of proprietor

Social security number (SSN)

Principal business or profession, including product or service (see instructions)

B Enter code from instructions

Business name. If no separate business name, leave blank.

Business address (including suite or room no.)

F G

City, town or post office, state, and ZIP code Riverside, CA 92860 (2) Accrual (3) Other (specify) Accounting method: (1) x Cash Did you “materially participate” in the operation of this business during 2022? If “No,” see instructions for limit on losses

x Yes

H I J

If you started or acquired this business during 2022, check here . . . . . . . . . . . Did you make any payments in 2022 that would require you to file Form(s) 1099? See instructions . If “Yes,” did you or will you file required Form(s) 1099? . . . . . . . . . . . . . .

. . .

Yes Yes

Scott Butterfield

644-47-7833

Accounting Services

Part I 1

5 4 1 2 1 1

DRAFT AS OF July 15, 2022 DO NOT FILE

D Employer ID number (EIN) (see instr.)

678 Third Street

. . .

x No No

Income

2 3 4

Gross receipts or sales. See instructions for line 1 and check the box if this income was reported to you on Form W-2 and the “Statutory employee” box on that form was checked . . . . . . . . . Returns and allowances . . . . . . . . . . . . . . . . . . . . . . . . . Subtract line 2 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . Cost of goods sold (from line 42) . . . . . . . . . . . . . . . . . . . . . .

1 2 3 4

5 6 7

Gross profit. Subtract line 4 from line 3 . . . . . . . . . . . . . . . . . Other income, including federal and state gasoline or fuel tax credit or refund (see instructions) . Gross income. Add lines 5 and 6 . . . . . . . . . . . . . . . . . . .

. . .

5 6 7

Office expense (see instructions) . Pension and profit-sharing plans .

18 19

Rent or lease (see instructions): Vehicles, machinery, and equipment Other business property . . .

20a 20b

12,000

Repairs and maintenance . . . Supplies (not included in Part III) . Taxes and licenses . . . . .

21 22 23

1,302 3,398

Travel and meals: Travel . . . .

24a

900

Deductible meals (see instructions) . . . . . . . Utilities . . . . . . . . Wages (less employment credits)

24b 25 26

Part II

Advertising .

Car and truck expenses (see instructions) . . . Commissions and fees . Contract labor (see instructions)

12 13

Depletion . . . . . Depreciation and section 179 expense deduction (not included in Part III) (see instructions) . . . .

Employee benefit programs (other than on line 19) . Insurance (other than health) Interest (see instructions): Mortgage (paid to banks, etc.)

15 16 a b

. . .

135,300 135,300 135,300

Expenses. Enter expenses for business use of your home only on line 30.

10 11

. . .

135,300

250

8 9 10 11

18 19

2,420

20 a b

21 22 23

24 a

14 15

900 25 26

16a

17 28

Other . . . . . . 16b 27a Other expenses (from line 48) . Legal and professional services 17 b Reserved for future use . . Total expenses before expenses for business use of home. Add lines 8 through 27a . . . . . .

. . .

27a 27b 28

Tentative profit or (loss). Subtract line 28 from line 7 .

Expenses for business use of your home. Do not report these expenses elsewhere. Attach Form 8829 unless using the simplified method. See instructions. Simplified method filers only: Enter the total square footage of (a) your home:

and (b) the part of your home used for business: Method Worksheet in the instructions to figure the amount to enter on line 30

Net profit or (loss). Subtract line 30 from line 29.

• If a profit, enter on both Schedule 1 (Form 1040), line 3, and on Schedule SE, line 2. (If you checked the box on line 1, see instructions.) Estates and trusts, enter on Form 1041, line 3. • If a loss, you must go to line 32. If you have a loss, check the box that describes your investment in this activity. See instructions. • If you checked 32a, enter the loss on both Schedule 1 (Form 1040), line 3, and on Schedule SE, line 2. (If you checked the box on line 1, see the line 31 instructions.) Estates and trusts, enter on Form 1041, line 3. • If you checked 32b, you must attach Form 6198. Your loss may be limited.

Note: See Page 3-4 for details of solution.

. Use the Simplified . . . . . . .

For Paperwork Reduction Act Notice, see the separate instructions.

Cat. No. 11334P

}

300

1,450 3,000 35,000 550 61,470 73,830

32a 32b

73,830

All investment is at risk. Some investment is not at risk. Schedule C (Form 1040) 2022

Solutions for Questions and Problems – Chapter 3

Group 2: Problem 1 (continued) Page 2

Schedule C (Form 1040) 2022

Part III

Cost of Goods Sold (see instructions)

Method(s) used to value closing inventory:

Was there any change in determining quantities, costs, or valuations between opening and closing inventory? If “Yes,” attach explanation . . . . . . . . . . . . . . . . . . . . . . . . .

Cost

Lower of cost or market

Other (attach explanation) Yes

DRAFT AS OF July 15, 2022 DO NOT FILE

Inventory at beginning of year. If different from last year’s closing inventory, attach explanation .

Purchases less cost of items withdrawn for personal use

Cost of labor. Do not include any amounts paid to yourself .

Materials and supplies

Other costs .

Add lines 35 through 39 .

Inventory at end of year .

Cost of goods sold. Subtract line 41 from line 40. Enter the result here and on line 4 .

Part IV

Information on Your Vehicle. Complete this part only if you are claiming car or truck expenses on line 9 and are not required to file Form 4562 for this business. See the instructions for line 13 to find out if you must file Form 4562.

01 / 01 /2019

When did you place your vehicle in service for business purposes? (month/day/year)

Of the total number of miles you drove your vehicle during 2022, enter the number of miles you used your vehicle for: a

Business

4,000

3,250

b Commuting (see instructions)

4,500

c Other

x Yes 46 Do you (or your spouse) have another vehicle available for personal use?. . . . . . . . . . . . . . x Yes 47a Do you have evidence to support your deduction? . . . . . . . . . . . . . . . . . . . . x Yes b If “Yes,” is the evidence written? . . . . . . . . . . . . . . . . . . . . . . . . . x Yes

Was your vehicle available for personal use during off-duty hours?

Part V

No No No No

Other Expenses. List below business expenses not included on lines 8–26 or line 30.

Continuing education

500

Printing

Total other expenses. Enter here and on line 27a

550 Schedule C (Form 1040) 2022

Note: See Page 3-4 for details of solution.

3-3

3-4

Chapter 3 – Business Income and Expenses

Group 2: Problem 1 (continued)

Income Statement Scott Butterfield, CPA Income Statement 12/31/2022 Current Period 1/1/2022 to 12/31/2022

Prior Period 1/1/2021 to 12/31/2021

REVENUES Tax Services Accounting Services Other Consulting Services TOTAL REVENUES

$ 76,124 49,081 10,095 135,300

$ 75,067 48,860 10,115 134,042

COST OF SERVICES Salaries Payroll Taxes Supplies TOTAL COST OF SERVICES

35,000 3,098 a 1,302 39,400

30,100 2,387 1,548 34,035

GROSS PROFIT (LOSS)

95,900

100,007

OPERATING EXPENSES Advertising and Promotion Business Licenses and Permits Charitable Contributions Continuing Education Dues and Subscriptions Insurance Meals and Entertainment Office Expense Postage and Delivery Printing and Reproduction Office Rent Travel Utilities TOTAL OPERATING EXPENSES

250 300 400 500 2,800 900 4,400 200 100 50 12,000 900 3,000 25,800

NET INCOME (LOSS)

$ 70,100

a b c d e e

350 250 275 300 3,500 875 5,500 150 50 100 14,000 865 2,978 29,193 $ 70,814

a - Combined into Taxes and Licenses Line 23 b - Nondeductible political contribution c - Nondeductible country club membership (entertainment) d - Greens fees ($2,500) and 50% of bagels and doughnuts ($450) are nondeductible e - Combined into Office Expense Line 18 Reconcilation of book income to taxable income: Book income $70,100 Nondeductible dues 2,800 Nondeduct. political contrib. 400 Mileage deduction (2,420) Nondeduct. entertainment 2,500 Nondeduct. meals 450 Taxable income $73,830

Solutions for Questions and Problems – Chapter 3

2. Gross income Expenses: Travel Political contribution Transportation: 2,650 miles x $0.585 2,650 miles x $0.625 Entertainment in total 9 gifts at $50 each, limited to $25 each Rent and utilities allocated to home office 25% x $10,500 Total expenses Taxable business income

$45,000 $ 1,000 0 1,550 1,656 0 225 2,625 7,056 $37,944 (LO 3.1, 3.3, 3.4, 3.5, 3.9, 3.11)

3. a. FIFO inventory valuation: 10,000 boxes at $1.70 per box 6,000 boxes at $1.65 per box Ending inventory Cost of goods sold: Beginning inventory Add: Purchases ($15,500 + $33,000 + $17,000) Cost of goods available for sale Less: Ending inventory Cost of goods sold b. LIFO inventory valuation: 10,000 boxes at $1.50 per box 6,000 boxes at $1.55 per box Ending inventory Cost of goods sold: Beginning inventory Add: Purchases ($15,500 + $33,000 + $17,000) Cost of goods available for sale Less: Ending inventory Cost of goods sold 4. Part III

$ 17,000 9,900 $ 26,900 $ 15,000 65,500 $ 80,500 –26,900 $ 53,600 $ 15,000 9,300 $ 24,300 $ 15,000 65,500 $ 80,500 –24,300 $ 56,200 (LO 3.2)

Cost of Goods Sold (see instructions)

Method(s) used to value closing inventory:

Was there any change in determining quantities, costs, or valuations between opening and closing inventory? If “Yes,” attach explanation . . . . . . . . . . . . . . . . . . . . . . . . .

x Cost

Lower of cost or market

Other (attach explanation) .

Yes

DRAFT AS OF July 15, 2022 DO NOT FILE

x No

Inventory at beginning of year. If different from last year’s closing inventory, attach explanation .

60,000

Purchases less cost of items withdrawn for personal use

579,000

Cost of labor. Do not include any amounts paid to yourself .

Materials and supplies

Other costs .

Add lines 35 through 39 .

639,000

Inventory at end of year .

80,000

Cost of goods sold. Subtract line 41 from line 40. Enter the result here and on line 4 .

559,000

(LO 3.2)

3-5

3-6

Chapter 3 – Business Income and Expenses

5. Frank has three options: 1. He can use the accrual method for inventory in which he takes a year-end physical inventory to confirm ending inventory. 2. He can treat inventory as non-incidental materials and supplies and deduct the cost of the filters when they are sold. 3. He can treat the inventory the same as he does for books and records and deduct the cost as paid. Since Frank does not have applicable financial statements, he may not conform to those. (LO 3.2) 6. a. Standard mileage method: $5,776. (5,600 x $0.585) + (4,000 x $0.625) b. Actual automobile costs $6,400 Business percentage (9,600/12,000) x 80% Actual cost method $5,120 c. Since the standard mileage method yields the larger deduction, Teresa should use the standard mileage method to determine her deduction. Teresa is eligible to use either the standard mileage if used previously or change to the actual expense method this year. (LO 3.3) 7. $7,500 (15,000 miles/20,000 miles x $10,000 = $7,500). Since Art has always used the actual cost method, he must continue to use the actual cost method this year. (LO 3.3) 8. The business auto expense is $2,380 (3,000 x $0.585 + 1,000 x $0.625). The expense should be deducted on Martha’s Schedule C, Part II (Line 9, Car and Truck Expenses) and Part IV. (LO 3.3) 9. Round trip airfare to San Diego Hotel charges while on business Restaurant meals while on business ($260 x 100%) Car rental while on business Total travel expense deduction

$ 480 440 260 110 $1,290 (LO 3.4)

10. September 2022 per diem rates are as follows: Flagstaff, AZ $138 Palm Springs, CA $114 Atlanta, GA $163 Current rates can be found at https://www.gsa.gov/travel/plan-book/per-diem-rates. (LO 3.4) 11. $2,205. $1,400 + $500 + $300 + $5. 100% of all the costs except the snacks from the airport, which are 50% deductible. (LO 3.4, 3.5, 3.6) 12. $5,000. Grace may deduct 100% of the business meals, provided by restaurants. The remaining entertainment expenses are not deductible. Since Grace is self-employed, the deduction is claimed on Schedule C. (LO 3.5) 13. a. Business meals at the country club Business meals at various restaurants Total meals deduction

$1,400 1,900 $3,300

b. The dues to the country club and tennis club are not deductible. The tennis fees are a personal expense and are not deductible. (LO 3.5) 14. a. No. Law school prepares him to enter a new profession.