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2023
Income Tax
FUNDAMENTALS
G E R A L D E . W H I T T E N B U R G
S T E V E N L . G I L L
San Diego State University
Australia Brazil Canada Mexico Singapore United Kingdom United States
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Income Tax Fundamentals, 41st Edition Last three editions, as applicable: © 2022, © 2021, © 2020
Gerald E. Whittenburg and Steven L. Gill
Copyright © 2023, 2016 Cengage Learning, Inc. ALL RIGHTS RESERVED.
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Tax forms reproduced courtesy of the Internal Revenue Service (www.irs.gov).
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Library of Congress Control Number: 2022919508
Digital Project Manager: Steven McMillian
Student Edition:
Production Service: MPS Limited
ISBN: 978-0-357-71952-7
Designer: Chris Doughman Loose-leaf Edition:
ISBN: 978-0-357-71954-1
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Printed in the United States of America
Print Number: 01 Print Year: 2022
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Income Tax Fundamentals’
Winning Forms Approach Is Time-Tested
I ncome Tax Fundamentals 2023 Edition is designed as a self-contained book for an intro-
ductory course in individual income taxation. We take pride in the concise, current,
and practical coverage of the income tax return preparation process. Income Tax
Fundamentals continues to be the market-leading textbook with a tax forms-based approach
that is a reliable choice, with an experienced author team that offers a commitment to
accuracy. The workbook format of the textbook presents materials in practical sections with
multiple examples and review problems. The presentation of the material does not assume
that the reader has taken a course in accounting, making it appropriate for use as a self-
study guide to federal income tax. Income Tax Fundamentals adopters tell us:
Great text. I have used it for years mostly because of its simple and straightfor-
ward approach to the basic income tax elements.
— Jerold K. Braun, Daytona State College
This text provides an excellent overview for community tax classes. The software
gives these students good hands-on experience with the concepts.
— Jay Wright, New River Community College
I love this book with all its comprehensive problems that progress from easy to difficult.
— LoAnn Nelson, PhD, CPA, Lake Region State College
The layout of the chapters is well-thought out.
— James Hromadka, San Jacinto College
I enjoy using the Whittenburg text...it is the best I have found.
— Jana Hosmer, Blue Ridge Community College
Whittenburg and Gill’s hallmark “Forms Approach” allows students to practice filling out tax
returns right in the book while also having the option to download tax forms online. Income
Tax Fundamentals follows the Form 1040 and supporting Schedules 1 through 3 and A
through E. Every attempt to align the concepts with the schedules has been made so students
can follow from the detailed form or worksheet to the schedule and eventually to Form 1040.
Each individual tax form required to complete the problems
in the textbook is included within Income Tax Fundamentals
and within the complimentary ProConnect Tax software.
ProConnect Tax is an industry-leading tax preparation software that is hosted on the cloud
and provides robust tax content and easy navigation. The ProConnect Tax website offers
community and knowledge-based content, view alerts, and FAQ articles. All of the 2022
individual income tax return problems in the textbook may be solved using the ProConnect
Tax software, or students may prepare the tax returns by hand.
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Income Tax Fundamentals
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ew to his dition
Many Changes to Tax Law
A number of changes that applied to tax year 2021 expired (child tax credit, child and dependent care credit, economic
incentive payments, the recovery rebate credit, and virtually all COVID-related provisions). Most of these provisions returned to
the 2017 Tax Cuts and Jobs Act versions that are scheduled to expire after 2025. The Inflation Reduction Act of 2022 impacted
energy-related tax credits and brought back a form of the corporate alternative minimum tax to a limited number of very large
corporations. All of these changes are included in this edition.
Introduction of Additional Real-life Source Documents
We continue to include commonly used source documents in the exercises and tax return problems, such as Form W-2, a myriad
of forms 1099, Form 1095-A, payroll documents, and additional accounting schedules, such as trial balances and income state-
ments, in an effort to replicate the tax return preparation process. Information that is extraneous to the problem is included to
encourage students to use analytical and critical-thinking skills to deal with less-structured problems.
Additions to Content
This edition includes expanded coverage in a significant number of areas in an effort to create awareness of certain tax provisions:
● Head of household filing status requirements
● The electronic filing process
● A significant expansion of content surrounding fixed income investments such as bonds, including an overview of bond
discount and premium
● The basis of property acquired by gift or inheritance
● Prepaid rent and deposits on rental properties
● Limitations applied to charitable contributions, including a new worksheet designed to assist students
● O verviews of divorced and separated taxpayers, amended returns, deceased taxpayers, foreign bank account reporting require-
ments, and taxpayers involved in farming
● Updates for the latests credits expanded or created by the Inflation Reduction Act of 2022
● Significant increase in the discussion of the “property regulations” that cover the decisions to capitalize or deduct expenditures
● Expanded content on Forms W-4, W-9, and the computation of estimated tax payments
● Added content related to tax preparer regulations, including substantial authority and Circular 230
● Tax treatment of virtual currencies such as Bitcoin
u C s P
Pdated umulative oftware roblem
The cumulative software problem included as Group 5 questions at the end of Chapters 1–8 has been updated to include more
source documents (Forms W-2, 1099, etc.) and extraneous information to encourage students to think more critically about the
relevance of certain items when preparing tax returns.
a C l s —Cnow 2
omPlete earning ystem v
CNOWv2 for Taxation takes students from motivation to mastery. It elevates thinking by provid-
ing superior content designed with the entire student workflow in mind. Students learn more
efficiently with a variety of engaging assessments and learning tools. For instructors, CNOWv2
provides ultimate control and customization and a clear view into student performance that
allows for the opportunity to tailor the learning experience to improve outcomes.
Motivation
Many instructors find that students come to class unmotivated and unprepared. To help with engagement and preparedness,
CNOWv2 for Whittenburg offers the following feature:
Self-Study Questions based on the information presented in the textbook help students prepare for class lectures or review prior to an
exam. Self-Study Questions provide ample practice for the students as they read the chapters, while providing them with valuable feed-
back and checks along the way, as the solutions are provided conveniently in Appendix E of the textbook.
iv
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Application
Students need to learn problem-solving skills in order to complete taxation problems on their own. However, as students try to work
through homework problems, sometimes they become stuck and need guidance. To help reinforce concepts and keep students on the right
track, CNOWv2 for Whittenburg offers the following:
● End-of-chapter homework: Group 1 and 2 problems
● Algorithmic versions: End-of-chapter homework is available for at least 10–15 problems per chapter.
● Detailed feedback for each homework question: Homework questions include enhanced, immediate feedback so students can learn
as they go. Levels of feedback include an option for “check my work” prior to submission of an assignment. Then, after submitting
an assignment, students receive even more extensive feedback explaining why their answers were incorrect. Instructors can decide
how much feedback their students receive and when, including providing the full solution, if they wish.
● Built-in Test Bank: Provides online assessment.
● CNOWv2’s Adaptive Study Plan: Complete with quizzes, an eBook, and more, it is designed to provide assistance for students who
need additional support and prepare them for the exam.
Mastery
Finally, students need to make the leap from memorizing concepts to critical thinking. They need to be able to connect multiple
topics and master the material. To help students grasp the big picture of taxation, tax return preparation, and achieve the end goal of
mastery, CNOWv2 for Whittenburg offers the following:
● Comprehensive Problems: Allow students to complete the tax return problems by entering the relevant information on tax
forms and schedules in the ProConnect Tax software or by manually preparing the tax forms and schedules provided in an
online appendix.
Cengage Learning Testing Powered by Cognero®
Cognero® is a flexible, online system that allows instructors to:
● author, edit, and manage test bank content from multiple Cengage Learning solutions
● create multiple test versions in an instant
● deliver tests from your LMS, your classroom or wherever you want
Cognero® possesses the features necessary to make assessment fast, efficient, and effective:
● S implicity at every step: A desktop-inspired interface features drop-down menus and familiar, intuitive tools.
● Full-featured test generator: Choose from various question types. Multi-language support, an equation editor, and unlimited
metadata help ensure your tests are complete and compliant.
● Cross-compatible capability: Import and export content into other systems.
CL Testing Powered by Cognero® is accessible through the instructor companion site, www.cengage.com/login.
Key Terms
Key Terms with page references are located at the end of all of the chapters and reinforce the important tax terms introduced and
discussed in each chapter.
Key Points
Following the Key Terms is a brief summary of the learning objective highlights for each chapter to allow students to focus
quickly on the main points of each chapter.
r i r a C
eliable nstruCtor esourCes re onvenient
Solutions Manual
The manual, located on the instructor companion website: www.cengage.com/login, contains detailed solutions to the end-of-chapter prob-
lems in the textbook.
Comprehensive Instructor Companion Website
This password-protected site contains instructor resources: the Solutions Manual, the Test Bank, Cognero® testing tools, Solutions to the
Cumulative Tax Return Problems, ProConnect Tax software solutions and instructions, PowerPoints, and more: www.cengage.com/login.
a w g P
s e o to ress
To access tax law information after the publication of this textbook, please visit www.cengage.com. At the home page, input the ISBN of
your textbook (from the back cover of your book). This will take you to the product page where free companion resources are located.
v
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Step-by-Step Format
Builds Student Confidence
The practical, step-by-step format in Income Tax Fundamentals 2023
Edition builds from simple to complex topics. The authors are
careful to lead students down a path of understanding rather than
overwhelming them with excessive detail and multiple Internal
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6-6 Self-Employment Tax 6-19
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Income Tax Fundamentals
Delivers Proven End-of-Chapter Strengths
● The pages are perforated, allowing students to complete end-of-chapter problems and
submit them for homework. Students can also tear out tax forms as needed.
● Several question types ensure a variety of assignment options:
● Multiple-Choice Questions
● Problems
● Writing Assignments
● Comprehensive Problems
● The Cumulative Software Problem provided in Chapters 1–8 gives students the flexibility to
use multiple resources, such as the tax forms within the book, ProConnect Tax or alternative
tax preparation software. The problem evolves with each succeeding chapter’s content,
allowing students to build on their comprehension of various tax topics.
● Additional Comprehensive Tax Return Problems are located in Appendix D.
Digital Tools Enhance Student Understanding
CNOWv2 is a powerful online homework tool. This online resource
includes an interactive eBook, end-of-chapter homework, detailed
student feedback and interactive quizzing, that covers the most
challenging topics, a lab guide for using the ProConnect Tax software,
and much more. The student companion website offers—at no additional costs—study resources for
students. Go to www.cengage.com, and input the ISBN number of your textbook (from the back
cover of your book). This will take you to the product page where free companion resources are
located.
ProConnect Tax access is included with each textbook. A detailed
reference lab guide will help the student use the tax software for
solving end-of-chapter problems.
For students who are new to the ProConnect Tax software product, we have placed tips throughout
the textbook providing guidance to assist students with the transition from a paper form to using
the tax software.
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mages
Getty I Note to Students:
mages/
manelli/Tetra i Maximize Your
Ro Reading Experience
Marc
This textbook includes many examples to help illustrate learning objectives. After
reading each section, including the examples, answer the corresponding Self-Study
Problems. You can find the solutions to the Self-Study Problems at the end of the
textbook in Appendix E to check your accuracy. Use your performance to measure your
understanding, and re-read the Learning Objectives section if needed. Many key tax
terms are defined in each chapter, which will help improve your overall comprehension.
USING TAX SOFTWARE
Numerous tax return problems in the textbook can be solved using either the online tax preparation
software or hand preparation. The popular software, ProConnect Tax, is available with the textbook.
Helpful tips for using ProConnect Tax have been placed throughout the book so that students can
more easily train on the software and prepare the tax returns included in each of the first eleven
chapters. A student guide to ProConnect Tax is provided at the companion website. Your college may
offer additional tax preparation software, but remember that you can always prepare the solutions
manually on the textbook-provided tax forms, schedules and worksheets located conveniently in one
place in Appendix F which can be found online with student and instructor resources.
USING THE “WOULD YOU SIGN THIS TAX RETURN?” FEATURE
A practitioner who knows when to say “I cannot sign this tax return,” even if it means losing a client,
is exercising the most basic ethical wisdom. Most chapters contain a “Would You Sign This Tax Return?”
case reflecting a common client issue. Each issue corresponds to an obvious concept illustrated in the
previous section. However, the approach to advise the client is not always obvious nor easy. The art
of explaining tax rules to a client who does not understand them, or, worse, wants to break them,
requires not only a good understanding of the rules, but also good interpersonal skills and sometimes
the gift of persuasion. The news in the last several years has shown reports of respected CPA firms with
members who failed to say the simple words, “I cannot sign this tax return,” demonstrating that simple
ethical practice is not always easy. We hope instructors will use these cases to spark group discussions or
contemplation, and, perhaps, add examples from their own experience.
USING THE CUMULATIVE SOFTWARE PROBLEM
The Cumulative Software Problem can be found at the end of Chapters 1–8. The case information
provided in each chapter builds on the information presented in previous chapters, resulting in a
lengthy and complex tax return by the conclusion of the problem in Chapter 8. Your instructor may have
you work in groups to prepare each of the tax returns. The groups can follow the real-world accounting
firm model using a preparer, a reviewer, and a firm owner who takes responsibility for the accuracy of
the return and signs it. All of the issues in the problem are commonly seen by tax preparers and are
covered in the textbook. The full return is difficult to prepare by hand, so tax software is recommended.
If the problem is prepared using tax software, the data should be saved so the additional information in
the succeeding chapters can be added without duplicating input from previous chapters.
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