437 Exam 2 Study Quiz Questions

Your client Han comes to see you, worried about his taxes. The stock market has risen sharply this year. In fact his portfolio has doubled from $250,000 to $500,000, with a basis of only $100,000. His capital gains tax rate is 20%. He will have no stock sales this year. How much will he owe this year on the gain?

$0 He will not owe any tax this year. No gain is taxed until there is a sale of the asset.

Justin comes to you for tax advice. He thinks he is eligible to itemize, but he is not sure it is worth the hassle to provide you with the information you would need to itemize his deductions on his tax return. He believes his itemized deductions would total $20,000 for 2019. He is age 65 and legally blind and single. He is in the 32% tax bracket.

$1,440 $20,000-$15,500 (standard deduction) = $4,500. $4,500 x 32% = $1,440

James sold a lathe that was used in his sole proprietorship for $5,000. The machine was orginally purchased for $12,500 and James had claimed $6,000 of depreciation on it over a 4-year period. What will James include on his tax return as a result of the sale?

$1,500 ordinary loss. This is Section 1231 property there was a loss on sale of $1,500, which will be treated as an ordinary loss. Amount realized: $5,000. Adjusted basis: ($12,500-$6,000) $6,500; Loss: $1,500 ($5,000 - $6,500).

Mr. and Mrs. Coyne paid medical bills of $17,500 during the year. The AGI is $100,000. How much of the medical expenses will count toward their itemized deductions?

$10,000 There is a 7.5% of AGI threshold for medical expenses. $17,500 - (10% * 100,000) = $10,000

Five year ago, Frederick purchased 1,000 shares of Ickingham Industries, Inc. for $10 per share. He signed an agreement with the company which allowed the company to use his dividend payments to purhcase additional shares for him. The dividends became the basis of the new stock purchased. Over the last 5 years, Frederick received a total of $1,200 in dividend payments, which purchased an additional 100 shares of stock. If Frederick sells all 1,100 of his shares for $24,000, what is his taxable gain?

$12,800 $10 x 1,000 = $10,000. Dividends reinvested = $1,200. Total basis = $11,200. Amount realized: $24,000 Less basis: $11,200 Gain: $12, 800

The Kelly's have paid a total of $15,000 this year for qualified child care expenses for 3 children, $5,000 each. Their AGI is $200,000. What will be the amount of the child and dependent care credit?

$1200 The max qualified child care expenses available for the credit is $3,000 each for two children. The credit will be $6,000 x 20%, which is the applicable percentage for their AGI.

Total qualified tuition and fees for Harry are $50,000. Harry's scholarship paid for $30,000. $5,000 came from a Coverdell account. Harry borrowed the rest. How much of the tuition and fees is potentially eligible for any education credit?

$15000 Qualified tuition and fees must be reduced by any amounts paid for by scholarships, Coverdells, or similar sources to find the amount potentially eligible for education credits. There is no double benefit.

Johna purchased a rental home for $150,000. She added a driveway and garage to the home at a cost of $20,000. To date, she has taken $12,000 depreciation on the home. What is her adjusted basis?

$158,000 The basis is adjusted upward for the capital infusion and downward for the depreciation.

Marvin runs a small financial planning firm with an office a few blocks from home. He placed $20,000 of new computers and office equipment into service in 2019. What is the maximum amount of Section 179 Expense he can take?

$20,000 The maximum Section 179 Expense that can be taken is 100% of personalty placed in service during the year up to a maximum of $1,040,000. This max amount decreases for personalty put into service costing above $2,590,000.Since Marvin only put $20,000 of property into service his max expense is $20,000.

Harry and Meghan purchase their first home, a cottage, for $1,000,000 in July 2019. The are financing with a mortgage. As of the end of the year, they had paid $36,000 in interest through their monthly mortgage payments. How much can they deduct as itemized home mortgage interest in 2019?

$27,000 Deductible mortgage interest is limited to the interest on $750,000 of acquisition indebtedness. $750,000 is 3/4 of $1,000,000, so 3/4 of the interest expense is deductible.

Twenty year ago, William purchased a desk, which he used in his law practice for $8,000. The desk has been fully depreciated, i.e., $8,000 of depreciation has been taken on it. William sold the desk to Harry for $3,000. Which of the following will William include on his tax return as a result of the sale?

$3,000 taxed at ordinary rates. There was a $3,000 gain on the sale. Amount realized: $3,000. Adjusted Basis: $0 ($8,000 - $8,000). The gain on the sale was all due to depreciation. In other words, if William had NOT taken depreciation, he would have had a loss on the sale and no gain at all. The property is Section 1245 property because is it personaly used for business. The gain to the extent of depreciaiton is taxed at the taxpayer's ordinary rate due to the depreciation recapture rule.

James is single and has an AGI of $300,000. As part of that, his investment income is $120,000. How much is his net investment income tax?

$3,800 $300,000 - $200,000 = $100,000. That is less than his $120,000 net investment income. $100,000 is subject to the 3.8% tax.

Jessica bought 100 shares of XYZ stock on May 1, x1 for $40,000. She sold it all on Nov 8, x1 for $30,000. She then bought 100 more shares of XYZ on December 3, x1 for $35,000. She sells this newest set of 100 shares of XYZ on February 14, x2 for $50,000. What is her gain or loss on sale in x2?

$5,000 The gain is $5,000 ($50,000-$45,000 basis). The original loss was $10,000 ($40-$30). However, the loss was disallowed due to the wash sale rules. Any disallowed loss is added to the basis of the substantially identical securities purchased. The new shares have a basis of $40,000 ($35,000+$10,000 disallowed loss.).

Uwe has a Section 1231 gain for the current year (xxx8) of $20,000. In prior years, Uwe had the following net Section 1231 transactions: xxx7 $5,000 Section 1231 Lossxxx6 $2,000 Section 1231 Gainxxx5 No transactions xxx4 No transactions xxx3 No transactions xxx2 $5,000 Section 1231 Gain How much gain does Uwe recognize as ordinary income, how much as Section 1231 Capital Gain?

$5,000 Orinary Income, $15,000 Section 1231 Capital Gains Uwe has to look back at the previous 5 years, so xxx2 doesn't matter. The only reason to look back is for losses, so xxx6 is also ignored. The $5,000 loss from xxx7 needs to be recaptured as ordinary income. The rest of the gain gets to be 1231 Capital Gain.

Ashraf and Oday are married filing joint. Their adjusted taxable income is $250,000. Ashraf has qualified business income from an S-Corp of $300,000, which sells widgets. What is their QBI?

$50,000 Take the lesser of adjusted taxable income or qualified business income x 20%. $250,000 x 20%

Max has had stock transactions which have resulted in the following: $30,000 of short term capital gains$20,000 of short term capital losses$6,000 of long term capital gains$10,000 of long term capital losses After all net capital gains and losses are netted, which statement is true?

$6,000 net short term capital gains $10,000 net short term capital gains (30-20) $4,000 net long term capital losses (6-10)Netting these two together: $6,000 net short term capital gains (10-4)

Brenda and Richard are married filing jointly. Their taxable income is $375,000. They have the following potential itemized deductions: Charitable contributions (cash to a public charity): $50,000Sales tax: $6,000Property taxes: $11,000Investment interest: $3,000 (less than investment income, so all is deductible)Mortgage interest on their remaining $500,000 of home acquisition indebtedness: $20,000 What will be their total itemized deductions shown on the tax return?

$83,000 All items are deductible as itemized deductions, BUT the tax deduction is limited to $10,000. They cannot deduct the $7,000 excess.

Your client, McKenna is upset that she had $40,000 of long-term capital losses this year, but she is happy that her losses will decrease her tax bill. She is in the 32% bracket. How much will the long-term capital losses decrease her tax liability this year?

$960 Only $3,000 can be deducted this year, so her tax liability this year will be reduced by $960. The remaining loss can be carried forward to future years.

Your client, Andrew, place a new rental real estate property into service last year, for which he paid $500,000, of which the land is valued at $87,500. What is the depreciation deduction for all but the first and last year of the life of the property?

15,000 Response Feedback: $500,000 - 87,500 = 412,500 / 27.5 = 15,000

Harry just sold a Honus Wagner baseball card for $1,000,000. He had no basis in it. Harry is in the 37% ordinary income tax bracket and the top capital gains bracket. He is married filing joint. At what rate will his capital gain be taxed?IMPORTANT: Look at p 460 of the text for the capital gains rate for collectibles. Also, don't forget the NIIT. Assume the entire $1,000,000 is subject to the NIIT

31.8% Collectibles are taxed at a rate of 28%. The NIIT is 3.8%.

Which statement is true regarding deductions and credits?

A deduction reduces taxable income. A credit reduces the tax liability. Deductions reduce taxable income. They can be above-the-line to reduce AGI or they can be below-the-line (itemized or standard), or QBI to reduce Taxable Income. Credits reduce the tax liability. Credits do not reduce taxable income. They are applied after the tax on taxable income is calculated.

Which of the following is disallowed any QBI Deduction?

A partner in a financial advisor firm with taxable income of $400,000. The Specified Service Trade or Business has a specific exclusion which allows architects and engineers to take the deduction with the reduced rules for being above the phase-out limits.But financial advisors are an SSTB that is excluded from the QBI deduction if taxable income is above the phase-out limit

What is the difference between a refundable and a nonrefundable credit?

A refundable credit can generate a refund. A nonrefundable credit can only lower the tax liability to zero.

Which of the following statements are true regarding Education Credits?

A taxpayer with an MAGI of $200,000 will not be able to take either credit. The two education credits are the American Opportunity Tax Credit and the Lifetime Learning Credit. A person with an AGI (MAGI) of $200,000 will be phased out of taking the credit. Qualifying expenses do not include athletic fees. A student is not required to be seeking a degree, certificate, or other educational credential to take the Lifetime Learning Credit.

Which of the following assets qualifies as a Section 1231 asset?

An apartment building held for rental to tenants The greeting cards in a card shop are inventory, ordinary income property. The bicycle and the artwork are capital assets. Sec 1231 property is depreciable real estate held for productive use in a trade or business or for the production of income.

Why does it matter whether an asset is categorized as an ordinary income asset, a capital asset, or a Sec 1231 asset?

Because the category determines the tax treatment of the gain or loss when the asset is sold, as well as whether depreciation can be taken. Response Feedback: Capital assets and ordinary income assets are not depreciable. Sec 1231 assets are depreciated. In addition, the treatment of the gain or loss upon sale of the asset is affected by the type of asset.

The Bacardi family has two children in college. Child A is a 5th year senior. Child B is a freshman. Qualified tuition and related expenses for A total $25,000. Qualified tuition and related expenses for B total $30,000. Their MAGI for education credit purposes is $128,000. They have taken the American Opportunity Credit for Child A each of the 4 college years in the past. They do not have any Sec 529 or Coverdell accounts. What education credits do you recommend that the Bacardi family take for their children?

Child A: LL Credit of $1,000 Child B: AOTC of $2,500 Response Feedback: Child A: The AOTC can only be used for 4 years, so the parents will have to take the Lifetime Learning Credit for Child A. That credit is 20% x $10,000 = $2,000 max. The parents income is in the phase-out range for this credit, so the credit allowed is only $1,000. Child B: The AOTC is the more beneficial credit, they also cannot take the LL Credit for a second child. 100% of the first $2,000 and 25% of the next $2,000 is eligible for the credit. The parents should take the American Opp credit for Child B, for a total credit of $2,500. Their income is below any phase-out range for the AOTC.

The Morgans have a 5 year old child who is their dependent. He goes to child care while both parents work. The Morgans have AGI of $350,000. What is the max amount of Child and Dependent Care Credit they can have? What is the max Child Tax Credit they can have?

Child and Dependent Care Credit: $600 Child Tax Credit: $2,000 Qualified child care expenses of $3,000 (max) x 20% = $600. The child tax credit is a $2,000 credit. The Morgans are below the phase-out threshold.

Christopher purchased the Quarry City Industrial Building, a commercial, industrial and office buidling, as an investment. It is currently being leased out as office space to businesses, and Christopher intends to continue using the property in this manner. Which of the following statements concerning the depreciation deductions that can be taken on the property is correct?

Christopher can depreciate the cost allocable to the building (but not the land) over a 39 year period. Response Feedback: Commercial real estate is depreciated over a 39 year period. Land is not depreciable, so the cost of the property must be allocated between the land and the building.

Which of the following assets classify as Section 1245 Assets?

Computers used solely for streaming by a paid Twitch Streamer Copiers used in an office Section 1245 property is personalty, which is non-real estate assets used in a trade or business. The storage shed and office building count as realty. The widgets are inventory and will be an ordinary asset. The copiers are used in normal business use, and since the Twitch Streamer is making money off the use of her computer, as long as she uses it 50% or more for business, it also counts.

Leroy has a piece of art that he bought at a garage sale for 50 cents. The Antique Road Show has valued it at $8,000. It is November 30. This year Leroy is in the 35% bracket. He anticipates being in the 15% bracket in the next year. For collectibles, gains are taxed at 28% UNLESS the regular tax rate in lower, so the gain would be taxed at only 15% next year. What might be a good strategy for Mr. Jenkins tax-wise?

Delay the sale of the artwork until January of the following year in order to get better capital gains rates. Leroy should delay the sale of the artwork until January. His capital gains rate on the collectible will be 15% in the next year. If he is in such a low tax bracket next year, he will certainly not be subject to the investment income tax surcharge. If he sells the artwork in December, he will be subject to a 28% capital gains rate, and perhaps a surcharge. If Leroy pays higher taxes on the gain to get Christmas money in December, he is NOT being being tax savy, he's letting his impatience get the better of him.

Which of the following is NOT a method of paying income taxes prior to the actual filing of the Form 1040?

Estimated payments Withholding on forms W-2 and 1099 Applying overpayment from the prior year All of the above Response Feedback: There is a requirement to pay income tax during the year equal to 90% of the tax liability (after credits). There are exceptions to the rule, but not many. If too little is paid in during the year, the taxpayer will incur an underpayment penalty.

Harvey hits that jackpot. His mother was a prolific painter, and she has gained some notoriety since her death. (Isn't that the way it goes.) He sells one of her paintings at a gain of $2,000. What do you advise him about the sale?

Gain on sale of personal assets is taxable. Personal losses are not deductible, but personal gains are taxable.

Which statement is true about charitable contributions of capital gain property?

Giving contributions of long-term appreciated stock result in an exclusion of the gain and an itemized deduction greater than the basis. Giving stock directly to charitable organizations will result in the exclusion of gain, which is good. It also excludes a LOSS, if the stock has depreciated. Generally you would want to show a loss on the return, so giving depreciated capital gain property is not a good idea. The charitable deduction for gifts of short-term capital gain property is the less of the adjusted basis or FMV. If the stock has appreciated, you will get a charitable deduction of LESS than the value of what you are donating. It's not a good idea to given short-term capital gain property. Donating long-term capital gain property excludes the gain from taxation AND gives a charitable deduction equal to the FMV

Which of the following terms was defined in an aside during the lecture?

Grok - to fully understand

Your clients Mr. and Mrs. Saenz have had considerable medical expenses throughout the year. They bring you a list of the following medical expenses they have paid. Which ones can they include as a itemized medial expense for 2019?

Health insurance premiums. Mr. Saenz's nursing home care after that loss of his leg. A handicap entrance to their home after Mr. Saenz lost a leg to diabetes. The doctor advised Mr. Saenz to travel in a wheelchair, rather than to get a prosthetic leg. Travel expenses to doctors and hospitals

On September 20 of Year 1, Henry purchased 1,000 shares of Tudor Enterprises, Inc. common stock for $25,000. He sold the shares for $35,000 on Sep 20 of Year 2. Which of the following statements correctly identifies the tax consequances of this transaction?

Henry will recognize a $10,000 short-term capital gain on the sale. Henry's holding period equals one year. Long-term gain treatment is only for property held more than one year, so the transaction generates a short-term capital gain.

Your MFJ clients have paid off their home, so they have no mortgage interest. Their property taxes each year are $13,000. They give $11,000 to charity. Their sale tax deduction is $3,000. They are healthy, under age 65. They have always itemized in the past. They come to you for tax advice. Which statement below is good advice for them about their itemized deductions?

If you cluster your charitable contributions, you will increase total tax deductions over a two-year period. Starting in 2018, property and sales taxes are limited to $10,000 per year, so clustering taxes won't help this couple. Clustering their charitable contributions would save them taxes over a two-year period.

Which of the following types of interest is generally deductible on Schedule A as an itemized deduction?

Investment interest paid on a margin loan. Credit card interest is not tax deductible. Student loan interest is a deduction for AGI. Business interest is deductible by the business, so that it is already deducted when gross income is determined.

Jerry made a big mistake and bought a new car he couldn't really afford. He decided to sell it after 7 months at a loss to try to get out from under the debt burden. Which statement is true? He doesn't use it for business in any way.

Jerry cannot deduct any of the loss Jerry cannot deduct any of the loss. Personal losses are not tax deductible.

Clarice has a $75,000 capital loss on sale of her home.Which statement is true?

Losses on personal assets are not deductible, so this loss should not enter into a decision to sell stock in order to offset a loss.

Margaret had net short-term capital losses of $5,000 and net long-term capital losses of $8,000. Which statement is true?

Margaret can deduct $3,000 currently. She will have $10,000 of capital loss carryovers. Capital loss deductions are limited to $3,000 per year. The remainder is carried over indefinitely. The $3,000 limit is per tax return, NOT per taxpayer. In fact, if the taxpayer is MFS, the loss deduction limit is $1,500 per year.

Which of the following transactions will generate a non-deductible loss under the wash sale rules?

Mark bought 300 shares of Target stock on June 1. He then bought 300 more shares of Target stock on Oct 31. He sold 300 shares of Target stock on November 3 at a loss. Mark sold his shares at a loss and he had purchased substantially identical shares within 30 days before or after the sale. George and Joseph bought the substantially identical stock more than 30 days before or after the sale resulting in a deductible loss. Jeanie didn't purchase any substantially identical stock.

Your MFJ clients have paid off their home, so they have no mortgage interest. Their property taxes each year are $13,000. They give $11,000 to charity. Their sale tax deduction is $3,000. They are healthy, under age 65. Assume their standard deduction is $24,400 for both years. Over a 2-year period, how much will their itemized/standard deductions total if they do not cluster charitable contributions? Over a 2-year period, how much will their itemized/standard deductions total if they DO cluster charitable contributions?

No clustering: $48,800; with clustering $56,400 check pic Remember that the SALT limit prevents more than $10,000 from being deducted for state or local taxes for a year, so even if these are clustered together there's no additional deduction for doing so.

Zea has two jobs in 2019. At one, she earns $80,000. At the other she earns $10,000. Will Zea have excess Social Security Withholding?

No, because her combined earnings are under the Social Security wage base. Whenever a client has two jobs, there is a possibility of excess social security that will be counted as a payment toward the income tax liability. The excess will arise when the combined earnings from all jobs exceeds the wage base.

Hansel and Gretel own a home together that is their personal primary residence. Is their home personalty?

No, the home is personal-use realty. Realty or real estate is land and buildings and other things attached to the land, such as a swimming pool. Personalty is property that can be moved, such as furniture or machinery. The home is personal use realty.

Bill sold Ted a piece of real estate in San Demas for $1,000,000. Bill bought the property for $200,000 a few years ago. He made capital improvements to the property for $50,000. So far he's depreciated $150,000 of his basis. Straight-line depreciation would have allowed him only $130,000 of depreciation so far. What is Bill's Ordinary Income Gain, Unrecaptured 1250 Depreciation, and Capital Gain from the sale?

Ordinary Income: $20,000 Unrecaptured 1250 Depreciation: $130,000 Capital Gain: $750,000 The ordinary income portion is the excess depreciation over straight-line. In this case $150,000 - 130,000 = $20,000 The Unrecaptured Section 1250 Depreciation is the rest of the depreciation taken (if it was sold for more than the basis in the property) = $130,000 The Capital Gain is the appreciation over the original basis before depreciation (1,000,000 - 250,000), or could be calculated as the total gain less the two items above. (850,000 - 20,000 - 130,000)

Mr. and Mrs. Culver are very politically active. They have given $50,000 to political candidates this year, so they believe they will be able to itemize or otherwise get a deduction. How do you advise them?

Political contributions are not tax deductible.

Noah needs to take some capital losses this year for tax purposes, but, as his financial advisor, you do not want to substantially change his portfolio allocation. You see that he has a loss position in an actively managed international stock fund. If he sells this fund at a loss, which of the items below would be the best replacement for this fund that does not cause the sale to be disallowed per the wash sales rules?

Purchase of an international index stock fund Response Feedback: You want the client to continue to have an international position. The replacement of an actively managed fund with an index fund is not considered to violate 'substantially identical' criterion. You wouldn't want to replace a fund with a single Japanese stock. The risk would be much greater.

What is clustering of itemized deductions?

Pushing itemized deductions into a particular tax year in order to maximize itemized deductions in one year and take the standard deduction in the next year.

Classify the following assets as ordinary assets, capital assets, or Section 1231 assets.

Question Correct Match Selected Match Business inventories B. Ordinary B. Ordinary A painting bought at auction D. Capital asset D. Capital asset Debt owed to a creditor C. This is not an asset. C. This is not an asset. Copy machines at Copy Center A. Section 1231 A. Section 1231

Match the following definitions.

Question Correct Match Selected Match Half-year convention B. For personalty, the practice of assuming assets were placed in service at the mid-point of the year, so 1/2 year depreciation is taken the first year. B. For personalty, the practice of assuming assets were placed in service at the mid-point of the year, so 1/2 year depreciation is taken the first year. Realty C. Real estate, such as buildings and land C. Real estate, such as buildings and land Personalty D. Items that are not realty; 'movable' items such as computers, cars, and office furniture for the most part. D. Items that are not realty; 'movable' items such as computers, cars, and office furniture for the most part. Personal assets A. Assets that are personal-use, not business use. Examples are the personal car and home, which are not used for business purposes A. Assets that are personal-use, not business use. Examples are the personal car and home, which are not used for business purposes

Which of the following are included in the basis of an asset? Check all that apply.

Sales tax, freight, and installation costs Recourse debt Non-recourse debt Property given in exchange for the asset Cash paid to purchase the asset

Your client has $20,000 of net long term capital loss carryovers and an extensive portfolio of stocks which have both appreciated and depreciated. What might be good advice?

Sell some stocks at a $20,000 gain to offset the loss carryovers. Selling some stocks at a $20,000 gain would allow the $20,000 loss carryover to be used. At a rate of $3,000 loss each year, it will take 7 years for the client to get all of the tax benefits from the loss carryover. The stocks in the portfolio could be replaced immediately, so that the desired asset allocation wouldn't be disrupted, BUT the new stocks would have a higher basis. Notice that the wash sales rules don't apply here. The wash sales rules apply to sales at a loss.

Which of the following statements are true?Check all that apply.

Tax considerations can play a role in decisions regarding the timing of asset sales. Taking gains on capital assets should be considered when clients have very large capital loss carryovers. If a client has large gains, selling capital assets to generate offsetting losses should be considered. If stocks are sold to generate gains which would be offset against large capital losses, it must result in a drastically changed portfolio allocation

Which statement is true regarding the child and dependent care credit?

The amount of the credit is reduced, but not completely phased out, based on AGI.

Rennie, a 12 year old middle school student, took over a paper route a year and half ago. At the time he took over the route, he purchased a new bike with a specially equipped basket to transport the papers each morning. How is the bike classified for income tax purposes?

The bike is a Section 1231 asset Since the bike is depreciable personalty used in a trade or business and held over a year, the bike is a Section 1231 asset. Even though it is used to generate ordinary income, the gain or loss upon sale or discposal will receive Section 1231 treatment.

Which of the following is true of the Saver's Credit?

The credit is available if elective contributions are made to a qualified retirement plan or an IRA, regardless of if the contributions are pre or after-tax, as long as the taxpayer has an MAGI under the phase-out amount. The Saver's Credit is the rare exception to the double benefit rule. If a taxpayer makes elective contributions to a qualified plan or IRA, even if to a Roth plan or IRA, the Saver's Credit is available. However, the taxpayer has to make under the phase-out limit to receive the credit.

Karl and Wendy, MFJ, purchased $100,000 of Karl's stock from ABC Co. as an initial investor in this small business start-up 3 years ago. At the time, ABC's capitalization was $800,000. They have recently sold it at a gain of $50,000. What is the tax treatment of this gain?

The gain will be treated as long-term capital gain. Response Feedback: Section 1244 allows the first $50,000 ($100,000 MFJ) of loss (on the sale of certain stock) to be taken as an ordinary loss rather than as a capital loss. This is advantageous because capital losses are more limited than are ordinary losses. Section 1244 does not affect the tax treatment of gains

The Flanders own a second home. They use the home 23 days out of the year. It is rented out 200 days out of the year. Which of the following is true about the taxation of the property?

The home is classified as "Mixed Use," all of the income is taxable, but only part of the expenses are deductible. The home is rented more than 14 days, so the home doesn't count as a non-taxable vacation home. Then we have to look at the number of use days. If they are more than the greater of 14 days or 10% of rental days then the property is mixed use. They are greater than 14, so we look at 10% of rental days. (200 * 10% = 20 days). Since the property is in personal use 23 days it counts as mixed use. Mixed use property is fully taxable on all income (though in this case it only has income from 200 days as a rental), and only a portion of the expenses will be deductible.

Lisa owns a second home. She uses the property 19 days out of the year. She rents the property out 14 days out of the year. The rest of the year it sits empty. Which of the following is true of the property?

The property counts as a "Vacation Home", the income is non-taxable. Since the property is rented for less than 15 days the rental activity is non-taxable, and the home can still receive the mortgage interest deduction for a second home.

Matthew and Mary are both aged 74. They give you the following information for 2019. Sales tax: $4,000. Mortgage Interest: $7,000. Property Taxes: $8,000; Required Minimum Distribution (RMD) from their IRA's: $20,000. Desired charitable contributions: $20,000. After discussing their tax situation with you, they decide to give their required minimum distribution directly to the charity, rather than taking the distribution and then giving money to the charity. What are the tax consequences?

The required minimum distribution is not included in gross income. Their itemized deductions will not include the charitable gift, so their total itemized deductions will be only $17,000. They will take the standard deduction. Notice that for this couple, donating the IRA directly to the charity decreases their taxable income by $27,000. In the prior question, the couple did not do the charitable IRA rollover. The net reduction in taxable income was only $17,000

Which of the following statements properly describes the income tax treatment of asset sales?

The sale of a typewriter used for 10 years in a trade or business at a gain (after recapturing any depreciation) will generate a capital gain. Response Feedback: A typewriter used in a trade or business is a Sec 1231 asset, and the sale of a Sec 1231 asset at a gain is treated as a capital gain. The DVDs are inventory. Their sale will generate ordinary income. Big Box Mart sock is a capital asset, which will generate a capital gain or loss upon sale. Short-term gains are taxed at ordinary rates, but they are still capital gains. The sale of the Sec 1231 dest at a loss will result in an ordinary loss.

Matthew and Mary are both aged 74. They give you the following information for 2019. Sales tax: $4,000. Mortgage Interest: $7,000. Property Taxes: $8,000; Required Minimum Distribution (RMD) from their IRA's: $20,000. Desired charitable contributions: $20,000. If they take the $20,000 required minimum distribution and also give $20,000 cash to charity, what are the tax consequences?

Their AGI will increase by $20,000 of ordinary income. Their itemized deductions will be $37,000, for a net taxable income reduction of $17,000. Required minimum distributions must be taken starting at age 72. Withdrawals are taxed at ordinary rates. The itemized deductions in this example are only $37,000 due to the $10,000 limit on tax deductions. The taxpayers will lower taxable income, net, by only $17,000 when these two transactions are done since the $20,000 RMD increases income and then is offset by the $20,000 charitable contribution. This is different than a Qualified Charitable Donation which goes to the charity directly from the IRA and is excluded from income.

You are going over Eddie's portfolio at year-end for tax planning. XYZ stock was purchased for $100/share, but now it is selling for $0.50/share. Eddie wants to know if there isn't some kind of tax break for a worthless security like this. You say:

This stock certainly isn't worth much at this point, but technically it is not worthless. We can't write it off as a worthless security for tax purposes, but we can sell it and you can take a loss. A worthless security is just that--completely worthless. If the client can sell it for even a penny, it is not a worthless security. No losses can be recognized on non-worthless securities until they are sold.

Georgie purchases a home in College Station which he plans to rent out to Aggies. Can Georgie take depreciation expenses on the home? If so, over how many years will it be depreciated?

Yes. It is property held for the production of income. 27 1/2 years Residential real estate that is held for the production of income (rental property) can be depreciated over 27 1/2 years using straightline depreciation. It is not subject to bonus depreciation. Bonus depreciation only applies to personalty.

On January 1, xxx1 Bruce gifts Barbara some shares of Wayne Enterprise stock. He's owned the stock for years and has a basis in the stock of $50,000, the value at the time of the gift is $10,000. If Barbara later sells the stock on January 1 xxx2 for $20,000 what is her gain?

Zero - there is no realized gain or loss Response Feedback: Since the gift was worth less at the date of the gift than the basis in the stock then the dual basis rules apply. If there's a loss below the lower basis then the lower basis is used and the holding period starts at the date of the gift. If there's a gain above the higher basis, the higher basis is used and the holding period continues from the original owner. If the asset is sold for anything in between the two basis values then there is no gain or loss to realize.

Namita owns a small business. After getting a few years use out of the desks she decides to buy new standing desks for her employees. She sells the old desks for $10,000. She'd originally bought the desks a little over six years ago for $70,000. Desks are 7 year property, and she was taking straight line depreciation Which of the following is the realized gain/(loss)?

Zero. There is no gain or loss Response Feedback: Namita has depreciated the desks to have a current basis of $10,000 (70,000 / 7 = 10,000 * 6 = 60,000 of depreciation). Since she sells the desks for the adjusted basis then there is no gain or loss to realize

Which of the following is a fully refundable credit?

earned credit income Only the Earned Income Credit is fully refundable. Only a portion of the Child Tax Credit is refundable. The Foreign Tax Credit and Child and Dependent Care Credit are nonrefundable.

Joaquin, a cash basis taxpayer, had an operation in December of x1. He received the bill for the operation in March x2. He paid the bill in February x3. When can he take the medical expense as an itemized deduction?

x3 As a cash basis taxpayer he is only able to take the medical expenses in x3 when he's actually paid the bill.