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Topic Outline 6 Questions/Homework

Opening Scenario:
Sue was head of household; Jason was single. Now they are Married filing jointly.

If spouse dies during the tax year: If a spouse dies during the tax year, they are still
considered married in the year of death. (See Whitt Chapter 1 under Single; before MFJ).
Otherwise when not death, look at status on December 31.

Review questions – See my notes in sheet.

Application Questions:
Jay Corp had sales of $6 million, CGS of $3,800,000 and deductible business expenses of
$900,000 taxable income
$306,000 tax (See pg 11-2 for Corporate tax chart)

2) Calculate gross tax liability, average tax rate and marginal tax rate of the following
a. $1,200 tax
b. $20,550 tax
c. $272,000 tax
d. $4,275,000 tax

How to use chart: See c above:

$800k – 335k base = 465k excess x .34 = $158,100 tax on excess + $113,900 tax on base
= $272,000 total taxes on $800,000 of corporate taxable income

3) Kathleen & John:

The official answer (verified by the Code--I placed a xerox of the Code in Topic Outline

3 years ago = married filing joint

2 years ago = MFJ since he actually died in Year 2
and 1 year ago [year after his death] = Head of Household. Per the IRC section the
grandson did not qualify under Code Section 2(a)(1)(B) the grandson did not qualify for
her to file as surviving spouse. The guidelines to qualify as surviving spouse are
VERY specific when you read the Code Section which is why I xeroxed it and placed it
in your course package.
Grandson DOES qualify as a dependent. He just does not qualify her for Surviving
spouse/qualifying widower tax rates (which are the same rates as MFJ). She does though
qualifying for the Head of Household rates, which are still better rates than SINGLE.
4) Mr. & Mrs. Knowlton
AGI $65,000 consists of wages & interest. 2 children 10 and 19 for whom they provided
more than 50% of support. Only the 10 year old attends school. The 19 yr old has a job
and earned $14,000 ... Mr K’s unmarried mother lives with them. Her only income is
$5,400 in social security (=NONtaxable) which she uses towards her support. The
Knowlton’s have determined that they provided $6,000 towards her support. They have
itemized deductions of $23,000 [=more than std dedn] and a child care credit of $100.

See Attached Sheet

5) M/M Garcia had AGI of $65,000 consisting of wages & interest income. Itemized
dedns of $25,000. 2 children ages 15 and 22 and both are full-time students (=2 dedns
for kids]. The 22 year old has a p-t job and earned $7,000 of wage income which he
saved. [He’s a full-time student less than 24 so not a problem].

a) net tax liability

b) average tax rate
c) marginal tax rate
d) How would it change if Mr. and Mrs. were age 66 and 64 respectively
e) What is Gerald’s net tax liability for the current tax year?

See attached sheet

6) Barbara and Mitch are married with no kids. They support his father who lives with
them and is not married. The father has a small part-time BUSINESS repairing clocks.
He had gross receipts from his business of $5,000 and expenses of $2,000. Barbara and
Mitch’s AGI is $84,000 consisting of wages and interest income. Their deductions were

See attached sheet

Progressive Exercise (OMIT part (e)—gets too confusing)

Lynn’s first year of doing business was quite successful. Her gross receipts were $25,000
and her expenses (supplies, training, travel) were $5,400. she had no other income this
year. Her itemized deductions are $2,300. Assume that Lynn is 22 years old, single and
has no dependents and provides over half of her own support.

a.What is Lynn’s gross income?

b.Tax Liability based on above?
c. AVERAGE tax rate?
d. MARGINAL tax rate?