CFP tax planning quizzes

Kurt and Allison Long are married and file a joint income tax return. Their adjusted gross income (AGI) is $180,000 per year. On last year's tax return, the Longs claimed a $1,200 credit for child care expenses. The Longs are in the 22% marginal income tax bracket. What amount of deductions for AGI would be required to equal the tax benefit of the $1,200 child care credit?

$1,200 divided by the 22% marginal income tax bracket gives us $5,455.

Which one of the following is the best description of an exclusion?

An exclusion is an item, such as a qualified Roth distribution or interest from a municipal bond, that is not subject to regular income tax and is not part of income on the Form 1040.

Larry and Paula are a married couple who file their federal income tax returns separately. They are both over 65 and still provide full support for a son who has been blind since birth. They live together and do not itemize. They alternate listing their son as a dependent, and it is Paula's turn this year. Paula will be required to file a federal income tax return if her gross income is at least which of the following amounts in 2020?

B) 12400 The normal filing threshold for the MFS filing status is $12,400 in 2020. For married taxpayers over age 65, the threshold is raised by $1,300 per spouse. The additional blind deduction applies only to the taxpayers themselves, not their dependents. Tangentially, if the other MFS spouse itemizes, the filing threshold is reduced to $5. (IRS pub 501, 2020) Because Larry and Paula still live together, neither can file as head-of-household with a dependent.

Don and Paul are married. They adopted an infant daughter in December of last year. They have consulted you, a CFP® professional, for advice on how to proceed when filing their federal income tax return this year. What should you recommend as their filing status this year for their federal return?

B)Married filing jointly Explanation Having a dependent does not change the filing status for a married couple. LO 1.1.1

Which of the following are adjustments to gross income (above-the-line deductions)? Medical expenses Capital losses Deductible IRA contributions

II and III Medical expenses are an itemized (below-the-line) deduction.

Your client, Hal Meyer, will receive a deductible loss of $15,100 from a working oil and gas interest. Hal is in a 35% marginal income tax bracket and has asked you the approximate amount of tax savings that this will generate. What is the approximate amount, if any, of tax savings generated by this loss?

In a 35% tax bracket, a $15,100 loss deduction will save $5,285. Thus, $5,200 is the closest answer.

Which one of the following reflects the CORRECT sequence of steps in the tax calculation process?

Total (gross) income minus adjustments to income equals adjusted gross income (AGI). AGI minus standard or itemized deduction(s) equals federal taxable income.

Beth's husband died in Year 1. Assume that Beth does not remarry and continues to maintain a home for herself and her dependent child during Year 2, Year 3, and Year 4, providing full support for her child throughout those years. For Year 4, Beth's filing status will be

head of household Beth's Year 4 filing status is head of household. Qualifying widow filing status is only available for 2 years following the death of a spouse (Year 2 and Year 3).

George, whose wife died last November, filed a joint tax return for last year. He did not remarry after his wife's death and has continued to maintain his home for his two dependent children. In the preparation of his tax return for this year, what is George's filing status?

qualifying widower George filed a joint return in the year of his wife's death. He can file as a qualifying widower (also known as surviving spouse) for the two years following his wife's death if he continues to maintain a home for his dependent children.

Lindsey is age 2 and she received $6,000 in municipal bond interest income and $900 in other interest income in 2020. What is the total federal income tax due on her income in 2020?

A) $1,400 B) $1,495 C) $90 D) $0 ans: d Explanation Lindsey owes no federal income taxes in 2020. Municipal bond interest income is not taxable. The $900 in other interest income is less than Lindsey's $1,100 standard deduction amount.

Jeff Munroe has an annual salary of $140,000 and is not an active participant in a company-maintained retirement plan. He had the following financial transactions during the current tax year: Received a $100,000 cash inheritance due to the death of his brother Received unemployment compensation of $2,000 Had a Schedule C loss of $10,000 (assume material participation) Made an IRA contribution of $6,000 Paid qualified student loan interest of $2,000 What is Jeff's total income for the current tax year?

A) $126,500 B) $142,000 C) $132,000 D) $124,500 ans: c Explanation The $140,000 salary is reduced by the $10,000 self-employment loss and increased by the unemployment compensation of $2,000. The inheritance is excluded. The IRA contribution is a potential adjustment to income, as is the student loan interest. Thus, those items do not affect the total income. Remember that total income is the figure approximately two-thirds of the way down the front of the 1040. It is the figure from which allowable adjustments to income are subtracted.

John and Mary West, married taxpayers filing jointly, have itemized deductions consisting of the following: Home mortgage interest$12,000 State income taxes$18,000 Property taxes$5,150 Charitable contributions$2,250 Unreimbursed employee business expenses$3,200 Medical expenses$14,000 Sales taxes paid$2,650 The Wests' AGI for 2020 is $400,000. What is the amount of allowable itemized deductions?

A) $14,250 B) $54,600 C) $37,400 D) $24,250 ans: d Explanation Unreimbursed employee expenses are no longer deductible since the Tax Cuts and Jobs Act (TCJA). The medical expenses are deductible only to the extent that they exceed 7.5% of AGI (for 2020), which they do not. The sales taxes would only be deductible in lieu of state income taxes. The overall deduction for taxes (state, local, and property) is limited to $10,000 as a result of TCJA. Home mortgage interest$12,000State, local, and property taxes$10,000Charitable contributions$2,250Total itemized deductions$24,250

Steve and Allison Parker, a married couple in their 40s, file a joint return. They earned combined salaries of $185,000. They received dividend and interest income of $860 from mutual funds. They have allowable itemized deductions of $14,000. They have net capital losses of $5,200. They have two children, ages 12 and 14. What is their taxable income for the 2020 tax year?

A) $168,860 B) $182,860 C) $156,660 D) $158,060 ans: d Explanation The salaries combined with the income from the investments total $185,860. This is reduced by the $3,000 net capital loss to leave an AGI of $182,860. Remember that only $3,000 of net capital loss may be deducted in a given tax year. The AGI is then reduced by the greater of the itemized deductions ($14,000) or the standard deduction ($24,800 in 2020). The deduction for personal and dependency exemptions was repealed by Tax Cuts and Jobs Act (TCJA).

Jane, age 35, whose filing status is single, earned a salary of $55,000 in 2020. She also made a $2,000 contribution to her Roth IRA for 2020. Jane had a capital loss of $3,000 during the year. Her uncle, Charles, gave her $100,000 in municipal bonds for which she earned interest of $3,500. In her employment as a sales representative for her company, Jane incurred $650 of unreimbursed business expenses. What is Jane's adjusted gross income (AGI)?

A) $56,800 B) $53,800 C) $52,000 D) $53,300 ans: c Explanation Jane's AGI is $52,000 ($55,000 ‒ $3,000). Jane's $3,000 capital loss is a deduction for calculating AGI. Roth IRA contributions are never deductible from gross income. Municipal bond interest is not included in income. The unreimbursed business expenses are not deductible.

Which of the following is NOT a step in the tax calculation process?

A) Calculate federal tax on federal taxable income. B) Subtract adjustments to income from total income to get adjusted gross income. C) Subtract exclusions from AGI. D) Deduct the greater of itemized deductions or the standard deduction. ans: C Explanation The following are involved in the income tax computation: subtracting adjustments to income from total income to get AGI, and deducting the greater of itemized deductions or the standard deduction from AGI to arrive at taxable income. Subtracting exclusions from AGI is not a step in the tax calculation process. Excluded amounts simply do not show up as income on the return.

Which one of the following reflects the CORRECT sequence of steps in the tax calculation process?

A) Calculate federal tax on total income. B) AGI minus adjustments to income equals federal taxable income. C) Total income minus adjustments to income equals AGI. D) Total income minus standard or itemized deduction(s) equals AGI. ans: c Explanation Total (gross) income minus adjustments to income equals adjusted gross income (AGI). AGI minus standard or itemized deduction(s) equals federal taxable income

Which of the following is NOT a step in the tax calculation process?

A) Claim allowable tax credits. B) Calculate federal tax on total income. C) Deduct the greater of itemized deductions or the standard deduction from AGI to arrive at taxable income. D) Subtract adjustments to income from total income to get adjusted gross income. ans: b Explanation The following are involved in the income tax computation: subtracting adjustments to income from total income to get adjusted gross income, subtracting tax withholdings from total tax liability, and deducting the greater of itemized deductions or the standard deduction from AGI to arrive at taxable income. Credits are applied to tax liability. The calculation of federal tax is on federal taxable income.

Jack was divorced on March 30 of the current year and has not remarried as of the last day of the tax year. He lives alone in his condo. His ex-wife, Mary, has custody of their son Jack Jr. What is Jack's filing status for the current tax year?

A) Head of household B) Married filing jointly C) Single D) Married filing separately ans: c Explanation A taxpayer who is unmarried, legally separated, or divorced and does not qualify for any other filing status must use the single filing status. Jack does not have custody of his son and does not qualify for head of household status.

Which one of the following is allowable in the computation of total income?

A) Net capital losses of up to $5,000 B) Charitable contributions C) Loss from a sole proprietorship D) Tax credits ans: c Explanation Remember that the total income is the amount shown about two-thirds of the way down the front of the Form 1040. It is the amount before the deduction for adjustments to income. Certain deductions are allowed in the computation of total income, such as the deduction for sole proprietorship losses or net capital losses up to $3,000. Charitable contributions are an itemized deduction.

Which one of the following statements is true regarding self-employment taxes?

A) Net earnings from self-employment must be calculated under the accrual method of accounting. B) A taxpayer is allowed to deduct one-half of his self-employment tax liability as an adjustment to income. C) Self-employed taxpayers are subject to employer withholding. D) The wage base is not adjusted annually for cost of living increases. ans: b Explanation A taxpayer may deduct one-half of his self-employment tax liability as an "above the line" adjustment to income. The wage base is adjusted annually for cost of living increases. Net earnings from self-employment are determined under the same accounting method as that used for income tax purposes. Self-employed taxpayers are not subject to employer withholding.

For two years, Lisa Carson was able to pay the premiums on her whole life policy without borrowing. For the past two years, she has borrowed from the cash value of her whole life policy to pay the premiums. Last year, she paid $95 of interest on the funds she borrowed. What are the tax implications in this situation?

A) The interest expense is not tax deductible because it does not exceed $100. B) The interest expense is not tax deductible. C) The interest expense is tax deductible because it does not exceed $100. D) The interest is deductible because Lisa is in the business of continuing her insurance and the interest is deductible business interest expense. ans: b Explanation The interest expense is not tax deductible because interest on a loan incurred to purchase personal life insurance protection is considered personal interest, which is not deductible. Personal loan interest is not tax deductible, regardless of whether the lender is a bank or a life insurance company.

Which one of the following steps occurs in the tax calculation process?

A) Total tax liability equals refund or tax owed B) Total tax liability minus itemized deductions plus additional taxes owed, equals total tax liability C) Total withholding is adjusted on Form I-9 D) Tax liability minus tax credits equals refund or tax owed ans: d Explanation Tax liability minus tax credits equals total tax liability or refund.

All of the following statements regarding income tax filing status are CORRECT except

A) unmarried people who maintain a household for a qualifying child or relative may be eligible for head of household status. B) spouses may not file a joint return if one spouse has no income or deductions. C) it is usually advantageous for married couples to file a joint return. D) if a spouse dies during the tax year, the surviving spouse may use married filing jointly status for that year. ans: b Explanation Spouses may file a joint return even if one spouse has no income or deductions.

Which of the following who do not maintain a household for a dependent must use the single filing status?

A)Legally separated taxpayer B)Divorced taxpayer C)All of these D)Unmarried taxpayer answer: c Explanation A taxpayer who is an unmarried, legally separated, or divorced individual and does not maintain a household for a dependent must use the single filing status.

Which of the following statements correctly defines inside buildup as it refers to life insurance?

Accumulations of cash value within a life insurance policy grow on a tax-deferred basis during the insured's lifetime.

Which of the following are includible in an individual's gross income for income tax purposes? Gambling winnings Inheritances Interest collected by the taxpayer on federal obligations Scholarships and fellowships in degree programs

Gambling winnings and interest on federal obligations are includible in an individual's gross income for income tax purposes. The other items are not subject to income taxation.

Mary's husband died in March of the current year. What filing status should Mary use in the current year?

Married filing jointly is allowed for a surviving spouse in the year of death. This filing status has the most favorable tax brackets and features the largest standard deduction. The surviving spouse should coordinate this election with the executor of the estate of the deceased spouse.

Neil McElroy is an engineer for Causley Computer Inc. In addition, Neil operates a janitorial service that cleans several local office buildings. Neil was divorced in 2019, and his wife received custody of their two children. He has assembled the following information for preparation of his tax return for the current tax year. Neil's salary$71,500Interest income$9,500Monthly alimony paid to ex-spouse$1,500Monthly child support$500Purchase of equipment for use in janitorial service$10,000IRA contribution$6,000 Based on the information given, which of the following are fundamental methods of managing Neil's tax liability? Tax credit: Neil could take an investment tax credit for purchases of qualifying business equipment. Deductions for AGI: Neil may deduct alimony payments of $18,000 made to ex-spouse. Deductions for AGI: Neil may deduct child support payments of $6,000. Exclusions: Neil could have invested in municipal bonds to receive tax-free income.

Neil may not deduct alimony paid to his former spouse because the deduction is disallowed for alimony under divorce decrees in 2019 and thereafter. He may invest in municipal bonds to receive tax-free income. There is no investment tax credit for equipment purposes. Some students confuse this with the Section 179 expense election, but that provision provides a deduction, not a credit. Child support payments are specifically nondeductible.

A taxpayer in a 35% marginal income tax bracket holds a limited partnership interest in a low-income housing activity. A deduction-equivalent tax credit of $22,000 flows through to the taxpayer. What is the amount of income tax that may be offset by this deduction-equivalent tax credit?

The deduction-equivalent tax credit of $22,000 may be used to offset the income tax on $22,000 of income. For a taxpayer in a 35% marginal income tax bracket (MITB), the credit may offset $7,700 ($22,000 × 35%).

The effective tax rate is obtained by dividing the amount of tax paid by

The effective tax rate is found by dividing total tax by taxable income.

Which of the following is NOT a step in the tax calculation process?

The following are involved in the income tax computation: subtracting adjustments to income from total income to get adjusted gross income, and deducting the greater of itemized deductions or the standard deduction from AGI to arrive at taxable income. The calculation of federal tax is on federal taxable income.

The marginal tax rate is obtained by

The marginal tax rate is found by finding the tax bracket that contains the taxable income amount; it is the amount at which all subsequent taxable amounts will be taxed (until entering the next tax bracket). The effective tax rate is calculated by dividing the calculated tax by total (gross) income, not taxable income.

John and Karen Postman will spend a total of $5,000 on day care for their two children (ages 9 and 10) in the current tax year. These expenses were incurred to allow both John and Karen to work outside the home. Their adjusted gross income is estimated at $138,000. What is the amount of child and dependent care credit, if any, to which they are entitled?

The maximum amount of qualifying expenditures on which the credit may be based is $3,000 per child, or $6,000 for two or more children. In this situation, they spent $5,000. This is multiplied by 20% for taxpayers with an AGI greater than $43,000. Thus, $5,000 × 20% = $1,000.

Janet and Bruce Robinson, both age 43, are married taxpayers filing jointly. They have itemized deductions consisting of the following: Home mortgage interest$19,500 State income taxes$8,700 Property taxes$5,200 Charitable contributions$6,200 Tax return preparation fee$895 Unreimbursed employee business expenses$2,100 Unreimbursed medical expenses$18,460 Their AGI for 2020 is $466,000. What is the amount of their allowable itemized deductions?

The total itemized deduction amount is $35,700. Note that the tax preparation fee and the unreimbursed employee business expenses are not deductible. The medical expenses are deductible only to the extent that they exceed 7.5% of AGI for 2020, which they do not. The deduction for the state income taxes and the property taxes is capped at $10,000. Taxes of $10,000, mortgage interest of $19,500, and charitable contributions of $6,200 total $35,700.

Which of the following are allowable itemized deductions for purposes of computing the alternative minimum tax? Charitable deductions Qualified housing interest Gambling losses to the extent of gambling winnings Property taxes A) II, III, and IV B) I, II, and III C) I and II D) I and III

and b Statement IV, property taxes, is the only itemized deduction listed that is not allowed for AMT purposes. State and local income taxes are also disallowed.

Ann Hamilton owns 500 shares in the XYZ S&P 500 Index Fund. The basis of her investment in this fund is $4,500, while the fair market value is only $2,000. She wants to sell her shares to "lock in" the $2,500 loss, but she is considering buying 500 shares of the GRC Small-Cap Index ETF the following week because she believes that the value is going to increase significantly over a longer period. As her planner, what can you accurately tell Ann about this scenario? A) If the loss were disallowed, the basis in the newly acquired shares would be decreased by the disallowed loss. B) The loss would be a fully deductible capital loss. C) She should wait a minimum of 61 days after the sale to repurchase the shares so that the loss may be recognized. D) The basis in the newly acquired shares would be the amount paid for those shares, increased by the $2,500 disallowed loss.

and b The wash sale rule disallows a loss if substantially identical securities are purchased prior to 30 days after the sale that resulted in the loss. The basis of the acquired securities is increased by the amount of the disallowed loss. The S&P 500 mutual fund should not be substantially identical to the small-cap ETF because the funds track very different indices and because of the difference in the way ETFs trade compared with mutual funds.

Tim Jones is single, 21 years old, and in his third year of college. He has an AGI of $35,000 and receives no support from his parents. The college is a Title IV institution where students are eligible to receive federal financial aid, and Tim is pursuing an undergraduate degree in criminal justice. When Tim was 13, his parents established a Uniform Transfers to Minors Act (UTMA) for him, and funded it with EE savings bonds. When Tim was a freshman, he was convicted of a felony drug possession charge. Which one of the following is CORRECT regarding Tim's situation? A) Tim qualifies for the American Opportunity Tax Credit. B) Tim qualifies for the Lifetime Learning Credit. C) Tim could use both the American Opportunity Tax Credit and the Lifetime Learning Credit in the same year. D) Tim may redeem the EE bonds potentially tax free if the proceeds are used for his qualifying education expenses.

and b Tim qualifies for the Lifetime Learning Credit. His AGI is under the phaseout range. He is pursuing a degree at an eligible institution. The felony drug conviction would preclude the use of the American Opportunity Tax Credit but not the Lifetime Learning Credit. There is no exclusion available for EE bonds unless they are held by the individual who purchases the bonds or unless they are held jointly with a spouse. A bond that has been gifted to another taxpayer does not qualify for the exclusion. The American Opportunity Tax Credit and the Lifetime Learning Credit may not be claimed in the same year for the same student.

In 1991, John Idler purchased a single premium whole life insurance policy. In the current year his medical expenses are $15,000 and his AGI is $75,000. What is the tax implication to John if he borrows the interest from the policy's accumulated cash value to pay his current year's medical expenses? A) John will not be required to report the amount borrowed as income and will not be allowed a medical expense deduction. B) John will not be required to report the amount borrowed as income, but he will be allowed a medical expense deduction. C) John will be required to report the amount borrowed as income, but he will not be allowed a medical expense deduction. D) John will be required to report the amount borrowed as income and will be allowed a medical expense deduction.

ans D Amounts borrowed on a single premium whole life policy issued on or after June 21, 1988 (a MEC), are taxable on a last-in, first-out basis; thus, the earnings would be taxable. A medical expense deduction will be allowed regardless of the source of the funds, since the payment would be for a valid medical expense.

Michelle Will has interest income of $23,000 in the current tax year. She paid brokers' commissions of $2,000 on stock purchases and had $40,000 of investment interest expense. What amount, if any, of investment interest expense may be deducted as an itemized deduction? A) $23,000 B) $33,000 C) $21,000 D) $0

ans a

Alicia is age 16 and she received $6,000 in municipal bond interest income and $900 in other interest income in 2020. Her parents' marginal tax rate is 28%. What is the total federal income tax due on her income in 2020? A) $0 B) $1,472 C) $90 D) $735

ans a Alicia owes no federal income taxes in 2020. Municipal bond interest income is not taxable. The $900 in other interest income is less than Alicia's $1,100 standard deduction amount (for 2020).

Which of the following statements regarding the kiddie tax is CORRECT? The kiddie tax provision limits income shifting by preventing families from transferring large amounts of unearned income to children and making the shift effective for income tax purposes. If a child under the age of 19 has unearned income above a specified amount, the excess is taxed at the parents' marginal tax rates for the year, rather than at the child's marginal rate. A) Both I and II B) I only C) II only D) Neither I nor II

ans a Both statements are correct. The kiddie tax applies to unearned income for children under the age of 19 and full-time students until they reach age 24.

Which of the following are preference items or adjustments for purposes of the individual alternative minimum tax? Interest on qualified private-activity municipal bonds issued in 2008 Excess of percentage depletion over the property's adjusted basis Investment interest expense in excess of net investment income Qualified housing interest A) I and II B) I only C) I, II, III, and IV D) II and III

ans a By definition, investment interest expense in excess of net investment income and qualified housing interest are not preference items or adjustments for purposes of the alternative minimum tax. Remember that interest on qualified private-activity municipal bonds issued in 2009 and 2010 is not a preference item.

In 2020, Floyd, age 15, is a dependent on his parents' income tax return. When Floyd was born, his parents established an UGMA with corporate bonds and have contributed a little to it every year since. This year, the account generated $5,000 of interest income. There were no distributions from the account this year. Floyd's parents file jointly and have taxable income of $175,000 and are in the 24% MFJ tax bracket. What is Floyd's income tax liability for the current year? A) $782 B) $1,029 C) $110 D) $260

ans a Floyd's liability is $782. This is computed as follows: $5,000($1,100)limited standard deduction($1,100)taxed at child's rate of 10%$1,100×10%=$110.00$2,800taxed at parents' rate of 24%=$672.00$782.00

Tom Bell has investment income (interest) of $8,000 in the current year. He paid $1,200 in investment adviser fees and had $7,000 of investment interest expense. His AGI is $35,000. What amount of investment interest expense may be deducted in the current year as an itemized deduction? A) $7,000 B) $6,500 C) $6,800 D) $8,000

ans a Investment interest expense is deductible up to the amount of investment income. The investment income is the interest income of $8,000. However, the deduction cannot exceed the actual investment interest expense of $7,000. Historically, the adviser fees would impact the calculation, but the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated the Tier II miscellaneous itemized deductions.

Samantha received the following dividends in 2020 from her portfolio: Ordinary dividends from HOT stock, a publicly traded company Dividends from Sky High Realty and Trust, a publicly traded REIT Life insurance dividends from her whole life policy Qualified dividends from BET stock, a publicly traded company Which of the above is NOT considered taxable? A) III only. B) IV only. C) II and IV. D) I and II.

ans a Life insurance dividends are considered a return of premium paid (provided the cumulative dividends received over the life of the policy do not exceed the basis in the policy) and thus are not taxable. The other choices listed are taxable. Qualified dividends are eligible for long term capital gains rates. REIT dividends may qualify for a QBI deduction but nonetheless will still be taxable.

Lindsey is age 2 and her total income was $6,000 in qualified dividends in 2020. What is the tax on the dividends at Lindsey's rate? A) $0 B) $30 C) $143 D) $95

ans a Lindsey is in the 10% marginal income tax bracket. She can use the long-term capital gains tax rate on qualified dividends received. At her income and filing status, that capital gain tax rate is 0%.

Your client Sally, age 30, is designing an educational investment program for her 8-year-old son. She expects to need the funds in about 10 years when her AGI will be approximately $70,000. She wants to invest at least part of the funds in tax-exempt securities. Which of the following investment(s) may yield tax-exempt interest on her federal return if the proceeds were used to finance her son's education? Treasury bills EE bonds GNMA funds Zero coupon Treasury bonds A) II only B) I, III, and IV C) III and IV D) II and III

ans a Proceeds from EE savings bonds may be exempt if the proceeds are used for qualified higher-education expenses of the taxpayer, spouse, or dependent. There is an AGI phaseout, which for 2020 is approximately $82,350‒$97,350 (2020) for a single taxpayer. (The actual phaseouts are provided on the exam.) All the other options generate currently taxable income. The Treasury bills and GNMA funds both produce taxable income on the federal return (Treasury bill interest would typically be tax exempt on her state return). The zero Treasury also produces taxable income each year as the amortized discount is added to taxable income, even though no cash income is received.

Which one of the following is NOT subject to the Medicare contribution tax? A) Qualified Roth distributions B) Income from a nonperiodic distribution from an annuity C) Qualified dividends D) Long-term capital gains

ans a Qualified Roth distributions are not subject to the Medicare contribution tax. Only taxable items, such as net capital gains, net rental income, annuity income and dividends, for example, are subject to the Medicare contribution tax.

Which of the following statements regarding charitable deductions by corporations is CORRECT? The corporate statutes of most states permit corporations to make charitable contributions, and the Tax Code permits a charitable deduction for contributions by a corporation. The charitable deduction is limited to a maximum of 20% of the corporation's adjusted taxable income. In the event the contribution is in excess of 20% of the corporation's adjusted taxable income, the balance can be carried forward for up to five years. A) I only B) Both I and II C) Neither I nor II D) II only

ans a Statement II is incorrect because the charitable deduction is limited to a maximum of 10% of the corporation's adjusted taxable income.

Terry and Jan are married taxpayers filing a joint tax return. In 2020, their AGI is $310,000, and their net investment income (included in the AGI) is $90,000. What is the amount of their Medicare contribution tax for 2020? A) $2,280 B) $4,180 C) $0 D) $3,420

ans a Terry and Jan will pay the 3.8% Medicare contribution tax on $60,000. This is the lesser of the net investment income ($90,000) or the AGI in excess of the threshold amount ($310,000 - $250,000, or $60,000). In this situation, only $60,000 of the net investment income is subject to the Medicare contribution tax and calculates to $2,280 (60,000 × 0.038).

Seven years ago, Karen Price purchased U.S. EE savings bonds for $5,000. During the current year, when Karen was 27 years old, she redeemed the bonds to help pay for her graduate school tuition. The accrued value at the time of redemption was $7,000. Assume Karen incurs $11,000 of tuition expenses in the year. What are the tax consequences upon the redemption of the bonds? A) All accrued interest is taxable in the current year. B) All the interest may be excluded. C) A portion of the interest may be excluded. D) The income on the bonds is generally subject to state income taxes.

ans a The exclusion for EE bond interest redeemed to pay for qualifying higher-education expenses applies only to bonds purchased by an individual age 24 or older, and held in that person's name, or jointly with a spouse. Karen is 27 years old; the bonds were purchased 7 years ago, when Karen was approximately 20. Because Karen does not qualify for the exclusion of the interest income because she was not age 24 or older at the time of purchase. All the interest is taxable in the year the bonds are redeemed. Remember that the interest of EE bonds is deferred until maturity, unless an election has been made to have the interest taxed each year as it accrues. Also, the interest income from EE bonds (and other federal government obligations) is generally not subject to state income tax.

Claudia, who has an AGI of $40,000, wants to donate a portrait of an ancestor who served in the American Revolution to the museum in her town that houses a collection of Revolution Era items. Her basis in the portrait is $1,750, and it has a fair market value of $2,000. How much can she potentially deduct as a charitable contribution this year, assuming it is her only donation? A) $2,000 (It is related-use capital gain property.) B) $1,750 (It is related-use capital gain property, so she must use basis.) C) $600 (The museum is a 30% organization, so she must use FMV.) D) None (It is the portrait of a relative.)

ans a The portrait is related-use, capital gain property. Claudia may deduct an amount up to 50% of her AGI if she uses the basis of the painting and 30% of AGI if she uses FMV. As long as Claudia's AGI is greater than $6,667, she can deduct the FMV of the portrait.

Which of the following statements regarding the use of life insurance inside a retirement plan is CORRECT? A) The premiums paid are a taxable benefit to the employee. B) The premiums paid are NOT a taxable benefit to the employee. C) The premiums paid are a taxable benefit to the employer. D) If the employee dies prematurely, the survivors will receive no benefits.

ans a The premiums paid are a taxable benefit to the employee. The main benefit to the employee is in the event of their premature demise, their survivors will still receive ample retirement benefits.

Which one of the following is a characteristic of a fixed annuity contract? A) If a corporation owns the annuity contract, the earnings are not tax deferred. B) The buyer may choose among a handful of investment options. C) Fixed annuity contracts are not tax advantaged, unlike other annuity contracts. D) The annuitant pays now for future fixed or variable payments.

ans a With a fixed annuity contract, there is no ability to select the investment options; the payments are fixed. Fixed annuity contracts are generally tax advantaged (tax deferred), unless a corporation owns the annuity contract, in which case the earnings are currently taxable. Such is also the case with a variable annuity.

Frank Swanson anticipates adjusted gross income of $80,000 during the current tax year. He is considering making a gift of real estate to the public university he attended. Frank's adjusted basis in this real estate is $50,000. The real estate has a current fair market value of $70,000. Frank has owned the real estate for 19 months. If Frank donates the real estate, what is the maximum allowable charitable deduction Frank can receive for the current tax year? A) $24,000 B) $40,000 C) $50,000 D) $70,000

ans b If Frank makes a 50% election, he must utilize the basis of the property but may deduct up to 50% of AGI. This yields a $40,000 current-year deduction with a $10,000 carryforward. If no 50% election were made, the deduction would be based on the fair market value of the property but would be limited to 30% of AGI, which is $24,000, with a $46,000 carryforward.

Charley lent his friend, Richard, $17,000 for a down payment on a home in a no-interest loan early in the current year. Charley had investment income of $750, and Richard had investment income of $1,200 in the same year. The federal interest rate is 3.5%. Richard has been making payments each month. What recommendations do you make for accounting for the loan made to Richard by Charley? A) Because this is a gift loan greater than $10,000 but less than or equal to $100,000, no interest will be imputed to the loan. B) Imputed interest is calculated on the loan to Richard and is considered a gift to Richard from Charley. C) Charley must develop an amortization schedule using the federal rate of 3.5% to account for Richard's payments of principal and interest. D) Because Charley's investment income is less than $1,000 this year, no interest is imputed to the loan.

ans b In a gift loan, the amount of the imputed interest constitutes a gift from the lender to the borrower. For gift loans greater than $10,000 and less than or equal to $100,000, no interest is imputed if the borrower's investment income for the year does not exceed $1,000. For a gift loan of more than $100,000, the prevailing federal rate of interest will be imputed. For this loan, Richard's investment income exceeds $1,000 and interest will be imputed.

Bruce and Melissa Parish, married taxpayers filing jointly, have the following items related to their investments during the current tax year: Investment interest expense $5,000 Interest income $2,500 Short-term capital gains $1,000 Investment adviser's fees $1,250 Commissions paid on stock purchase $200 Adjusted gross income $60,000 What is the Parishes' allowable investment interest expense deduction for the current year? A) $3,250 B) $3,500 C) $3,450 D) $5,000

ans b Investment interest expense is limited to the taxpayer's net investment income of $3,500.

In the current year, Jeff makes the following charitable donations: BasisFMV Inventory used in Jeff's business (sole proprietor):$8,000, $6,000 Stock in ABC Co. (acquired 2 years ago):$10,000, $40,000 Personal coin collection (acquired 10 years ago):$1,000$7,000 The ABC stock was given to Jeff's church, and the coin collection was given to the Boy Scouts of America. Both donees promptly sold the property for the stated FMV. Ignoring percentage limitations on AGI, Jeff's maximum charitable contribution valuation for deduction purposes available for the current year is A) $55,000. B) $47,000. C) $19,000. D) $53,000.

ans b Jeff's maximum valuation for deduction purposes available for the current year is $47,000 as follows: Inventory: $6,000 (as ordinary income property, limited to lesser of basis or FMV) Stock in ABC Co.: $40,000 (the maximum possible deduction is FMV for this long-term capital gain property) Personal coin collection: $1,000 (tangible personal property depends on dedicated use of property from standpoint of the charity; this is use-unrelated property because it was given to the Boy Scouts also limited to the lesser of basis or FMV)

Nancy is a single taxpayer and 67 years old. She has the following itemized deductions: Home mortgage interest (first mortgage)$15,950State income taxes$3,120Property taxes$1,480Charitable contributions$2,000Gambling losses$1,500Unreimbursed employee business expenses$4,600Tax return preparation fee$400Medical expenses$18,980 Nancy's AGI for 2020 is $250,000. Included in the AGI is $500 of gambling winnings. What amount of Nancy's itemized deductions would be allowed for purposes of the AMT? A) $34,950 B) $18,680 C) $17,950 D) $18,950

ans b Of the itemized deductions listed, only the qualifying home mortgage interest of $15,950, the charitable contributions of $2,000, and the gambling losses to the extent of winnings of $500, and the $230 of medical expenses are allowable for purposes of the AMT. The medical expenses are deductible to the extent they exceed 7.5% of AGI for both regular and AMT purposes.

Eight years ago, Joan Allen, a married taxpayer filing jointly, purchased U.S. Series EE savings bonds for $6,000. She titled the bonds jointly with her husband, Hank. During the current year, when Joan was 35 years old, they redeemed the bonds to help pay for Joan's graduate school tuition. The accrued value at the time of redemption was $8,000. Their AGI for 2020 is estimated to be $100,000. Assume Joan incurs $8,000 of tuition expenses during the year. What are the tax consequences upon the redemption of the bonds? A) The interest is taxable at both state and federal levels. B) All the interest may be excluded. C) A portion of the interest may be excluded. D) All accrued interest is taxable in the current year.

ans b The EE bond exclusion (for educational purposes) is phased out (for married couples filing jointly) between $123,550 and $153,550 of AGI in 2020. There is no exclusion available when AGI exceeds $153,550. It is not necessary to memorize the exact phaseout amounts because they will be provided on the exam. To qualify for the exclusion, the bonds must be purchased by an individual age 24 or older and held in that person's name, or jointly with a spouse. EE bonds are not taxable at the state level.

Sheila, a single taxpayer, has taxable income of $460,000. Included in the taxable income is $50,000 of qualified dividends. At what rate(s) will her qualified dividends be taxed? A) 25% B) 15% and 20% C) 15% only D) 20% only

ans b The qualified dividends straddle the $441,450 breakpoint (for 2020). Thus, a portion fall into the $40,001 to $441,450 range and are taxed at 15%. The dividends above the $441,450 breakpoint are taxed at 20%.

Teddy, age 12, has interest income of $1,275. He also has earned income from an after-school job that totals $12,500. Teddy is eligible to be treated as a dependent on his parents' return. What is the amount of Teddy's standard deduction for 2020? A) $12,850 B) $12,400 C) $1,275 D) $1,100

ans b The standard deduction for an individual eligible to be claimed, or treated, as a dependent is the greater of the limited standard deduction of $1,100 or the amount of earned income plus $350, not to exceed the full standard deduction amount of $12,400 (for 2020). $12,500 + $350 = $12,850, but the deduction is limited to the full standard deduction amount of $12,400.

Chris Burdick anticipates adjusted gross income of $200,000 for the current tax year. He contributed appreciated stock to the United Way. Chris's adjusted basis in this stock is $50,000. The stock has a current fair market value of $140,000. Chris has owned the stock for 12 years. If Chris does gift the stock to the United Way, what is the maximum allowable charitable deduction he can receive in the current tax year? A) $140,000 B) $100,000 C) $60,000 D) $50,000

ans c A gift of long-term capital gain property to a 50% organization is based on the FMV of the property, with the deduction for the current year limited to 30% of AGI.

Adrian Brown owned 500 shares of XYZ growth and income fund. She has become increasingly dissatisfied with the performance of the fund and, upon the advice of a friend, decided to execute a "telephone transfer" and switch the balance in the fund to the XYZ intermediate bond fund. Which one of the following describes the tax effect of such a strategy? A) No gain or loss will be recognized by the taxpayer, and the basis in the new fund will be the same as that of the old fund. B) Any loss will be recognized by the taxpayer, but any gain will be deferred through a reduction in the basis of the new fund. C) Gain or loss will be recognized by the taxpayer on the redemption of the old fund. D) No gain or loss will be recognized by the taxpayer, but the basis of the new fund will be reduced by any deferred gain or increased by any unrecognized loss.

ans c A telephone transfer is the same as a sale or other taxable redemption of the fund. Therefore, gain or loss will be recognized based on the difference in the redemption proceeds and the basis in the shares redeemed. This is true even if the transfer is made between two funds in the same fund family.

Alex established a 2503(c) trust for his daughter, Julie, when she entered college four years ago. Alex decided to name his attorney as trustee and give Julie the right to revoke the trust at age 23, when she finished college. Julie did not revoke the trust and chose to allow the trust to continue until she is age 30. Which of the following correctly identifies the taxpayer, if any, who must pay tax on the trust income? A) Alex, because this is required by law B) The attorney as trustee C) The trust, because it is irrevocable and a separate taxable entity D) Julie, because she allowed the trust to continue past age 23

ans c Because Julie waited past age 23 when she had the right to revoke the trust, she is responsible for taxes on the trust given to her.

Which one of the following statements is incorrect regarding investment interest expense? A) Interest paid or accrued to purchase or carry tax-exempt investments is not deductible. B) Investment interest expense is deductible up to the amount of the net investment income. C) Excess investment interest expense cannot be carried forward into succeeding tax years. D) Net investment income is the taxpayer's investment income—typically interest, nonqualified dividends, and short-term capital gains.

ans c Excess investment interest expense can be carried forward into succeeding tax years. Investment interest expense is deductible up to the amount of net investment income. The interest on funds borrowed to purchase tax-exempt investments is not deductible. The net investment income is typically interest, nonqualified dividends, and short-term capital gains. Long-term capital gains and qualified dividends may be included at the taxpayer's election, but the taxpayer must forgo the preferential tax rates on these items.

Imputed interest on a below-market loan (with the IRS providing accepted loan rates) will be paid, unless the gift loan is A) from a corporation to a shareholder. B) between friends. C) less than $10,000 and the gift loan recipient has less than $1,000 in interest income. D) less than $5,000 and the loan recipient has no interest income.

ans c In a gift loan, the amount of the imputed interest constitutes a gift from the lender to the borrower. For gift loans greater than $10,000 and less than or equal to $100,000, no interest is imputed if the borrower's investment income for the year does not exceed $1,000. For a gift loan of more than $100,000, the prevailing federal rate of interest will be imputed.

Jeffrey and Karen have given cash gifts to their children over the years. In addition, in 2020 Mark, age 13, earns $2,500 in salary. Jennifer, age 19, who attends community college for approximately three months per year, earns $2,200 in dividends and capital gains. Nancy, age 12, earns $2,950 in dividends and interest. Steven, age 10, earns $900 in dividends and interest. Whose income is subject to the tax at the parents' marginal rate? A) Nancy's and Mark's B) Steven's C) Nancy's D) Jennifer's and Nancy's

ans c Nancy is the only child up to and including age 18 with unearned income in excess of $2,200 for 2020. Earned income is not subject to taxation at the parental rate. Jennifer is not subject because she is not a full-time student. The kiddie tax applies to children under 19 years of age. It also applies to children under age 24 if they are full-time students. The kiddie tax does not apply if the child's earned income exceeds one-half of the child's support. A full-time student is an individual who is a full-time student for at least five calendar months during the tax year.

For the current tax year, Bob Phillips, an individual taxpayer filing a joint return, has $50,000 of investment interest expense and $20,000 of net investment income (interest and dividends). Bob's AGI is $200,000. How much investment interest expense, if any, may Bob deduct in the current tax year? A) $0 B) $50,000 C) $21,000 D) $20,000

ans d Investment interest expense is deductible up to the amount of net investment income. The problem tells us that the net investment income is $20,000; thus that is the maximum deduction. The fact that the dividends are included in the net investment income indicates that the taxpayer elected to include them in investment income and is forgoing the preferential rates associated with qualified dividends. The AGI has no bearing on the answer.

Which of the following taxpayers may owe the additional Medicare tax in 2020? Brad and Jane file jointly and have combined wages of $288,000. Terry's only income in 2020 is from his investments and totals $290,000. Jack has earned $150,000 in compensation from his employment at Bland Foods Inc. Lisa, whose filing status is head of household, is self-employed and has self-employment income of $225,000. A) IV only B) I only C) I and IV D) I, II, and III

ans c Statements I and IV are correct. The additional Medicare tax rate is .9%. An individual is liable for the additional Medicare tax if the individual taxpayer's wages, other compensation, or self-employment income (combined with a spouse if filing as married filing jointly) exceeds the thresholds for the taxpayer's filing status of a combined income greater than $200,000 if single and $250,000 if married filing jointly.

Marion donated a truck to the local food bank to use for picking up food donations. Marion had purchased the truck several years ago for $15,000, and it currently has a value of $3,400. Which of the following statements regarding the documentation Marion must have to support his charitable contribution of the truck is CORRECT? A) A noncash contribution under $5,000 needs no documentation to support the donation. B) An appraisal must be attached to Marion's income tax return for the year of the donation. C) The documentation must have the description of the property, the name of the receiving charitable organization, the date of the contribution, and the amount of the donation. D) A letter from the food bank thanking him for the donation of the truck is sufficient documentation.

ans c The donor-taxpayer must have a canceled check, bank record, or a receipt from the donee organization to substantiate the deduction. The documentation must have the amount of cash or description of property, the name of the receiving charitable organization, the date of the contribution, and the amount of the donation. An appraisal is not required for noncash property over $500 and less than or equal to $5,000. However, taxpayers may wish to get an independent appraisal to support the deduction claimed.

Jim is planning to make a charitable contribution to a local university, a qualifying charitable organization. He is going to contribute a piece of real estate that he has owned for six years. The fair market value of the property is $80,000, and his basis in it is $55,000. He has an AGI of $120,000. Jim wants to maximize the amount of charitable contribution deductions from the donation of the real estate. What is the amount of charitable contribution deduction that Jim may claim in the current year? A) $55,000 B) $60,000 C) $36,000 D) $40,000

ans c The gift of long-term capital gain (LTCG) property is generally based on the fair market value of the property. The university is a 50% organization, a public charity. LTCG property contributed to a 50% organization involves a 30% of AGI limitation, and 30% of $120,000 is $36,000. There is also a $44,000 carryforward for up to five years. Jim could have made a 50% election to maximize the current-year deduction, but that would have reduced his overall deductions. If Jim had made a 50% election, he could have deducted $55,000 in the current year. By forgoing the 50% election, he is allowed to deduct the full $80,000 fair market value—$36,000 this year and $44,000 over the next several years.

Matthew Brady, age 47, purchased a deferred annuity in January 1982 for $50,000. In the current year, when the surrender value was $125,000, Matthew took a nonperiodic distribution of $75,000. Which one of the following statements correctly describes the income tax consequences of the distribution? A) $75,000 is tax free. B) $75,000 is taxable income. C) $50,000 is tax free, $25,000 is taxable. D) $50,000 is taxable, $25,000 is tax free.

ans c The pre-August 14, 1982, annuity retains first-in, first-out (FIFO) treatment. Thus, the basis of $50,000 is treated as being withdrawn first and is tax free. The remaining $25,000 is taxable. If this were a post-August 13, 1982, contract, it would be treated on a last-in, first-out (LIFO) basis.

Paul, age 16, is listed as a dependent on his parents' income tax return. During 2020, he earned $2,600 from a summer job. He also earned $2,600 in interest and dividends from investments that were given to him by his uncle five years ago. How much of Paul's income, if any, will be taxed to him in 2020 using his uncle's marginal tax rate of 32%? A) $2,600 B) $400 C) $0 D) $2,000

ans c When applying the kiddie tax, the parents' marginal tax rate is always used (regardless of the source of the property generating the unearned income). Therefore, none of the income is taxed to Paul using the uncle's tax rate. The $400 of income ($2,600 − $2,200) is taxed to Paul at his parents' marginal tax.

Which one of the following statements is CORRECT with respect to capital gains and losses? A) Net capital gains are always taxed at a maximum rate of 28%. B) Excess capital losses are carried forward for up to five years. C) Net capital gains are always taxed at a flat rate of 15%. D) Net capital losses are deductible up to $3,000 annually.

ans d

Several years ago, Allison Colbert purchased a deferred fixed annuity. The cost of the annuity was a single payment of $40,000. The annuity will provide monthly payments of $275. At the time the annuitized distributions are to begin, Allison's life expectancy will be 25 years. How much of each payment will be excluded from taxation? A) $57 B) $142 C) $206 D) $133

ans d Allison is expected to receive $82,500 ($275 × 12 × 25). Her investment in the contract ($40,000) is then divided by the total expected return ($82,500) to determine the excludable portion of each payment. The exclusion ratio is the $40,000 divided by $82,500, which equals 48.48%. 48.48% of $275 = $133 excludable from each payment.

Your clients, Joseph and Jane, have read many articles in financial publications about the alternative minimum tax (AMT) and are concerned that some of their investments and activities may cause AMT problems. Which of the following are preference items or adjustments for purposes of the individual AMT? Interest from qualified private-activity municipal bonds issued in 2008 Bargain element on the exercise of an incentive stock option Excess of percentage depletion over the property's adjusted basis Cost depletion deductions A) I and IV B) II, III, and IV C) I, II, III, and IV D) I, II, and III

ans d By definition, the only listed item that is not an AMT preference item or adjustment is the cost depletion deduction. Note that interest on private-activity municipal bonds issued in 2009 and 2010 is not a preference item for the AMT.

Which one of the following is the best description of itemized deductions? A) Personal expenses deductible in arriving at total income B) Trade or business expenses deductible in arriving at total income C) Trade or business expenses deductible from adjusted gross income D) Personal expenses deductible from adjusted gross income

ans d Itemized deductions are generally personal expenses (e.g., home mortgage interest, medical expenses) that are specifically allowed as a deduction from AGI in arriving at taxable income. They are not deductible in arriving at total income.

Your client, Elaine Dell, is near the highest tax bracket and is contemplating several investments. She is, however, concerned about minimization of her federal income tax liability on the income from the investment. Which of the following investments would produce income that would be taxed at the lowest potential tax rate? A) A corporate bond fund B) A zero coupon bond C) A certificate of deposit D) A utility stock with a high dividend yield

ans d Qualified dividends are generally taxed at a 15% rate (or 20% for taxpayers with higher income levels). All of the other options produce interest income, which is taxable as ordinary income, at the marginal rate of the taxpayer. LO 2.1.3

Clare is a single taxpayer. In 2020, her AGI is $235,000, including a net long-term capital gain of $50,000. What is the amount, if any, of Medicare contribution tax that she must pay? A) $0 B) $570 C) $1,900 D) $1,330

ans d She will pay the 3.8% Medicare contribution tax on $35,000. This is the lesser of the net investment income ($50,000) or the AGI in excess of the threshold amount ($235,000 - $200,000, or $35,000). In this situation, only $35,000 of the net investment income is subject to the Medicare contribution tax. Clare will pay a $1,330 Medicare contribution tax (3.8% on $35,000).

Molly's grandparents gifted her with substantial securities at her birth eight years ago. In 2020, she has dividends of $10,000 and brokers' fees of $800 on the activity in the account her parents manage for her. What is her net unearned income taxed at her parents' rate? A) $10,000 B) $9,200 C) $8,950 D) $7,800

ans d Some of Molly's unearned income is taxed at her parents' rate and is calculated as follows: $10,000 UI - $1,100 (standard deduction) - $1,100 (greater of $1,100 for 2020 or amount of allowable itemized deductions directly connected with the production of the unearned income) = $7,800

Five years ago, Tom bought 10,000 shares at $10 per share in an intermediate-term bond fund. Today, the shares are worth $200,000 and are paying a nonqualified dividend of $8,000 per year. Tom feels that the stock will continue to appreciate at a rate of 5% per year, including the dividend. Tom wants to establish a college education fund for his two daughters, ages 18 and 9. Neither child has any earned income. Which of the following statements is true? If Tom gives 2,500 shares to his 18-year-old daughter, all income from the 2,500 shares will be taxed in her income tax bracket. If Tom gives 2,500 shares to his 9-year-old daughter, all dividends from the 2,500 shares will be taxed at her marginal rate. Two years from now, if Tom's older daughter sells her 2,500 shares at $30 per share, Tom will need to report the gain as a long-term capital gain on his personal income tax return. All interest income received by his 9-year-old daughter that exceeds $2,200 in 2020 will be taxed at the parents' marginal tax rate. A) I and IV B) II and III C) I and II D) IV only

ans d Statement IV is the only correct statement. The kiddie tax applies to children under 19 years of age. It also applies to children under age 24 if they are full-time students. The kiddie tax does not apply if the child's earned income exceeds one-half of the child's support. Thus, I and II are incorrect. There is no requirement that the proceeds of a future sale be reported on the donor's return. As a result of TCJA, the net unearned income is taxed at the parents' marginal tax rates.

Kevin Riley anticipates adjusted gross income of $120,000 for the current tax year. He has made no charitable gifts during the year, but now he wants to give his church a stamp collection with a fair market value of $70,000. Kevin paid $38,000 for the collection five years ago. The collection is appreciated tangible personal property that is unrelated to the church's exempt function. What is the maximum allowable charitable deduction Kevin can receive during the current year if he makes an immediate gift of the stamp collection? A) $36,000 B) $60,000 C) $24,000 D) $38,000

ans d The answer is $38,000. Since this is use-unrelated property, the allowable deduction is limited to his basis.

Kris Swenson anticipates adjusted gross income of $100,000 for the current tax year. She is considering making a gift of a painting to the American Red Cross in the current tax year. Kris's basis in the painting is $35,000. The painting has a current fair market value of $50,000. Kris has owned the painting for 15 years. If Kris does gift the painting to the American Red Cross this year, what is the maximum allowable charitable deduction she can receive in the current tax year? A) $50,000 B) $20,000 C) $30,000 D) $35,000

ans d The painting would be considered use-unrelated tangible personalty. The deduction for use-unrelated tangible personalty is limited to basis, with a 50% of AGI limitation. Thus, the current-year deduction is $35,000. If the painting had been donated to an art museum, for example, the contribution would be of use-related tangible personalty. Since the painting had been held for the long-term holding period, the deduction would have been $30,000 (long-term capital gain property to a 50% organization uses FMV with a 30% of AGI limitation) with a $20,000 carryforward.

Which one of the following is CORRECT regarding the Coverdell Education Savings Account? A) Distributions may be tax free only if made for a full-time student. B) Room and board may be covered with a tax-free distribution only if the student is full-time. C) Deductible contributions of up to $2,000 may be made per beneficiary. D) Distributions may be tax free even if made for K-12 expenses.

ans d The predominant benefit of the Coverdell ESA is distributions may also be used to pay for K-12 expenses. This is unlike the 529 plan which is designed primarily to pay for college expenses (Note: a limited amount of $10,000 may now be withdrawn from a 529 for K-12 expenses per the TCJA).

Danielle created a revocable trust for her two minor sons. She named her bank as trustee. The trust property earned $30,000 in the first year and had taxable income of $28,000 after deducting expenses. This income was left to accumulate for future distributions to be made to each son equally when the youngest son attains age 18. To which of the following will the income of the trust be taxable? A) The oldest son after attaining age 18, then the sons equally after the youngest son attains age 18 B) The trust C) Both sons equally D) Danielle

ans d The trust income will be taxed to the grantor, as the trust is revocable. A revocable trust is treated as a grantor trust.

Which of the following benefits that Claudia has received from her employer can be excluded from taxation? A) A company car that she uses for personal vacations. B) A year-end bonus. C) An athletic membership at a local club valued at $1,500 per year. D) $5,000 of graduate education assistance.

ans d Undergraduate and graduate education assistance is excluded from an employee's income in any one year period, up to a maximum of $5,250. The other options are fully taxable.

Which of the following statements is CORRECT regarding the credit for adoption expenses? A) All of these. B) The adoption credit is a nonrefundable credit. C) An eligible adoptee is an adoptee who is not yet age 18 at the time of adoption or who is physically or mentally incapable of caring for herself. D) A tax credit of $14,300 of qualified adoption expenses (for 2020) for each eligible adoptee is available.

ans: a A tax credit of $14,300 of qualified adoption expenses for each eligible adoptee is available in 2020. An eligible adoptee is an adoptee who is not yet age 18 at the time of adoption or who is physically or mentally incapable of caring for herself. The adoption credit is nonrefundable. LO 1.5.1

Caroline, age 48, has a filing status of single and she earned a salary of $55,000 in 2020. Her employer also paid $6,000 for health insurance premiums for Caroline. Caroline had a $3,000 capital loss during the year. What is Caroline's adjusted gross income (AGI) in 2020? A) $52,000 B) $49,000 C) $55,000 D) $61,000

ans: a Caroline's adjusted gross income (AGI) is $52,000 ($55,000 - $3,000). Caroline's $3,000 capital loss reduces her gross income by $3,000 to $52,000. The health insurance premiums were never included in her income, thus cannot be deducted.

Which one of the following steps occur in the tax calculation process? A) Tax liability minus tax credits equals refund or tax owed B) Total withholding is adjusted on Form I-9 C) Total tax liability equals refund or tax owed D) Total tax liability minus tax credits and plus additional taxes owed, equals total tax liability

ans: a Tax liability minus tax credits plus additional taxes owed equals total tax liability. Then, total tax liability minus withholding and/or estimated tax payments made equals refund or tax amount owed. Witholding is adjusted on form W4 and is not considered part of the 1040 calculation.

Todd is employed at Wow Industries as an accountant. His employer deducted $8,500 from his paycheck in 2020 for federal income taxes. Todd also has a side practice for which he paid another $4,300 to the IRS in estimated federal income taxes for 2020. When he filed his return, he had a tax liability of $11,600 before a child and dependent care credit of $400. Which of the following statements is CORRECT? A) Todd has an income tax refund of $1,600 for 2020. B) Todd's refund is $5,200 for 2020. C) Because the child and dependent care credit is a nonrefundable credit, Todd's refund is $1,200. D) He cannot receive a refund in 2020.

ans: a Todd's refund is $1,600 [$12,800 in total tax deposits - ($11,600 tax liability - $400 child and dependent care credit)]. The child and dependent care credit only reduces Todd's tax liability to $11,200 and he has deposited $12,800. This entitles him to a refund of his excess tax payments of $1,600.

Cash value life insurance is often structured like an investment vehicle. However cash value life insurance contains important features that shelter the inside buildup from taxation. Which of the following will NOT be considered when determining whether a policy can maintain its tax favored status? A) The premium value test B) The cash guideline premium test and corridor test C) The cash value accumulation test D) The death benefit

ans: a Without a death benefit, a contract does not meet the legal definition of life insurance. There are currently two tests—only one of which must be met—in order to classify a product as life insurance for federal income tax purposes: (1) the cash value accumulation test and (2) the cash guideline premium test and corridor test. There is no premium value test.

Which of the following is an incentive provision as it relates to federal income taxation? A) Exclusion for life insurance death benefits B) Residential solar energy credits C) Casualty loss deduction D) Capital loss deduction

ans: b Congress has deemed it socially desirable to provide solar energy, so there is a credit provided to taxpayers who invest in such activities.

Which one of the following is NOT deductible as a miscellaneous itemized deduction? A) Gambling losses to the extent of gambling winnings B) Appraisal fee for a charitable contribution C) Deduction for unrecovered basis in a commercial annuity D) Impairment-related work expense of a handicapped individual

ans: b The appraisal fee to determine the value of a piece of artwork being donated to charity is not a deductible miscellaneous itemized deduction. An expense related to the determination of, or collection of, a tax liability is no longer deductible. Impairment-related work expenses of a handicapped individual, gambling losses to the extent of gambling winnings, and the deduction for unrecovered basis in a commercial annuity are deductible miscellaneous itemized deductions.

All of the following statements regarding above-the-line deductions are CORRECT except A) these deductions are subtracted from gross income in determining adjusted gross income. B) these deductions are allowable regardless of whether the taxpayer claims itemized deductions. C) these deductions are subtracted from adjusted gross income in determining taxable income. D) some above-the-line deductions include deductible contributions to IRAs.

ans: c Deductions that are subtracted from adjusted gross income in determining taxable income are below-the-line deductions.

Lowell and Thelma Jordan are married and will file a joint return for the current tax year. They have provided you with the following information: Lowell's salary$140,000Thelma's salary$25,000Unemployment compensation$10,000Net capital loss$8,000 Based on the information given, what is Lowell and Thelma's adjusted gross income for the current tax year? A) $157,000 B) $162,000 C) $172,000 D) $175,000

ans: c The total salaries of $165,000 plus the unemployment compensation of $10,000 equals $175,000. Net capital losses of $3,000 per year are deductible, leaving $172,000.

Which one of the following is NOT a deduction for adjusted gross income? A) Self-employed retirement plan (Keogh) contribution B) Sole proprietorship loss C) Standard deduction

ans: c Deductions for AGI are items deducted on the front page of the Form 1040. The standard deduction is taken on the back of the 1040, as a deduction from AGI. LO 1.3.1

Which one of the following items is NOT included in the computation of total income on the Form 1040? A) Tips received B) Partnership income C) Penalty on early withdrawal of savings D) Sole proprietorship loss

ans: c Tips received, partnership income, and a sole proprietorship loss are all included in arriving at total income. The penalty on an early withdrawal of savings is an adjustment to income.

Personal expenses deductible from adjusted gross income most accurately describes which one of the following? A) Adjustments to income B) Schedule C expenses C) Standard deduction D) Itemized deductions

ans: d Itemized deductions are generally personal expenses (e.g., home mortgage interest, medical expenses) that are specifically allowed as a deduction from AGI. Schedule C (sole proprietorship) expenses and adjustments to income are both deductions for AGI, or above-the-line deductions.

Sally Franklin has AGI of $300,000. In addition, she currently has passive income of $150,000 and passive losses of $175,000—$150,000 of which she uses to offset the passive income and $25,000 of which is subject to disallowance. Which one of the following investments has the greatest potential for reducing Sally's tax liability? A) A limited partnership involved in a historic rehabilitation project that is producing passive losses and credits B) An equipment-leasing limited partnership producing passive losses C) "Active participation" rental real estate that is producing a loss D) A working interest in an oil and gas general partnership

ans: d A working interest in an oil and gas partnership can provide unlimited loss deductions against other income. Congress considers this socially desirable to encourage investment in the industry. The caveat is investors in these instruments must also assume unlimited liability. Therefore, a working interest must be a general partnership rather than a limited partnership. The other answer choices cannot offset passive income.