Chapter 6 Federal Income Taxes

Elton has W-2 income of $103,000 and director's fees subject to self-employment tax of $300. What is his self-employment (SE) tax?

$0

Jane sells to her brother, John, her shares in ABC Corporation for $55,000. She had purchased the shares several years ago for $80,000. How much loss can Jane claim on her tax return?

$0

Which statement is correct regarding methods of accounting?

The business must make an election for its overall method of accounting when filing its first tax return.

With regard to tax years, which statement is true?

The choice to file on a fiscal-year basis must be made with an initial tax return or later requested and approved by the IRS.

Which of the following is true if a loss from sale or exchange of property between related parties is disallowed and the property is subsequently sold to an unrelated party?

The disallowed loss may be used to offset a gain on the subsequent sale.

John arranges through Merry Maids, Inc. to have Teresa come to his house to do the cleaning every week for the entire year. He pays Merry Maids, Inc. $50 every week. At the end of the year, what is John's liability for FICA and FUTA on Teresa's wages? Assume he paid no state unemployment tax and he did not withhold anything from the $50 a week he pays.

$0

Linda has a tax preparation practice which she conducts as a sole-proprietor. Her net income from her Schedule C in 2019 is $80,000. What is her self-employment tax?

$11,304

Stan and Myra are married and file a joint return. They have no children. Their regular taxable income is $100,000. The deductions on their Schedule A are as follows: home mortgage interest $9,000; interest on a home equity loan used to purchase a car $2,000; state income tax $10,000; real estate tax $3,500; and charitable contributions $8,050. What is Stan and Myra's alternative minimum taxable income (AMTI) before the AMT exemption?

$113,500 Taxable income $100,000 Add back state income tax 10,000 Add back real estate tax 3,500 AMTI $113,500

MNO Corporation is an accrual basis taxpayer with a December 31 year-end. It has gross income of $200,000, general expenses of $100,000, and the following dealings in rent and interest: 6 months of rental income received on December 1, 2019, $12,000; prepaid interest income on a note receivable received on December 15, 2019, $6,000; and rent paid by MNO Corporation on December 31, 2019 for 2020 office rental, $14,000. What is MNO's taxable income for 2019?

$118,000 Gross income $200,000 General expenses (100,000) Prepaid rent received 12,000 Prepaid interest received 6,000 Taxable income $118,000

From the records of Ted, a cash basis sole proprietor, the following information was available: Gross receipts $45,000 Interest income on personal investments $600 Cost of sales $25,000 Other operating expenses including rent on office $5,000 State business license $300 Property taxes on home $1,200 Ted keeps an inventory and reports on the accrual basis. What amount should Ted report as net earnings from self-employment?

$14,700

Claire is a single child under 18 with $12,500 of interest income and $12,100 of earned income. What is Claire's earned taxable income?

$2,100

Andrea is a single child under 18 with $3,500 of interest income and no earned income. Her standard deduction is $1,100 (the greater of $1,100 or earned income of $0 + $350). What is Andrea's taxable income?

$2,400

Lance, a single taxpayer, is a teaching assistant at Big State University and has W-2 income of $71,000 in 2019. He also works evenings and weekends as a computer consultant and over the course of the year earned $62,000 net self-employment income. What is Lance's self-employment (SE) tax?

$8,760

ABC Corporation has been on a September 30 year-end and requests to change its year-end to December 31. The request is granted and ABC has net income for its short period, from October 1 through December 31, of $45,000. What is ABC's short period tax liability?

$9,450

Which of the following children would have income taxed at the trust and estate tax rate?

A child, 13 years old, who has unearned income of $2,300

Under Section 267, which of the following would not be related parties?

A corporation and an individual who owns 10 percent of the stock

Which of the following entities is restricted from using cash basis accounting in 2019?

A manufacturing corporation with average annual gross receipts of $26,500,000

Which answer best completes the following statement? A parent may elect to include a child's unearned income in his own return if: a. The amount of the unearned income is between $1,100 and $11,000. b. No estimated tax has been paid in the child's name. c. The unearned income is from interest and dividends only. d. All three of the listed requirements are met.

All three

The Big Bang Corporation is owned 25 percent by Bill, 30 percent by Anthony, 20 percent by Neville, and 25 percent by George Corporation. George Corporation is owned 80 percent by Bill and 20 percent by Neville. Bill and Anthony are brothers. If Bill, Anthony, and Neville each sell property to Big Bang Corporation at a $7,500 loss, how much may each recognize on his tax return?

Bill $0, Anthony $0, Neville $7,500

Which of the following is not a common adjustment or preference item for alternative minimum tax (AMT)?

Charitable contributions

Which of these statements concerning the alternative minimum tax (AMT) is correct?

For married taxpayers, the AMT rate is 26 percent of the first $194,800.

Which of the following is not subject to self-employment tax (assume all income amounts exceed $400)?

Gain from the sale of a property owned by the individual

Tim owns and operates a corner newspaper and candy store. He reports income when received, makes no sales on credit, and deducts expenses when he pays them. However, when accounting for inventory and cost of sales he uses an accrual method. On his first tax return, Tim should indicate what accounting method?

Hybrid

Which of the following statements is correct regarding cash basis accounting for tax purposes?

Income is generally recognized when received or constructively received, and expenses are generally deductible when paid.

Which of the following usually file tax returns on a calendar-year basis?

Individuals, partnerships, and S corporations

The Affordable Care Act (ACA) imposes a 3.8% Medicare tax on which of the following?

Interest and dividends

HIJ Corporation is owned 30 percent by Harry, 30 percent by Izzy, 20 percent by James, and 20 percent by Small Corporation. Small Corporation is owned 90 percent by James and 10 percent by an unrelated party. Harry and Izzy are brothers. What is James' constructive ownership of HIJ and what is Izzy's?

James owns 38% and Izzy owns 60%

Which of the following individuals could have their income included on their parent's return?

Josh is 13 years old and claimed as a dependent by his parents. Josh has $437 of interest income from a savings account.

Which of the following types of income is subject to the Affordable Care Act (ACA) 3.8 percent Medicare tax on net investment income?

Long-term capital gains.

Which of the following statements is correct? a. The tax rates are applied to the income from a corporation's short period and then the tax is annualized. b. The tax liability for a short period is calculated by applying the tax rates to the income from the short period. c. The income from the short period is annualized and the corporation's tax liability is the full amount calculated on the annualized income. d. Once the tax on the annualized income is calculated, the tax must be prorated back to the short period.

Once the tax on the annualized income is calculated, the tax must be prorated back to the short period.

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

Self-employment taxes result in a partial deduction for adjusted gross income.

Allison is a sole proprietor on a calendar year-end reporting on the cash basis. Which of the following should not be included in her return for 2019?

She pays January and February's 2020 interest on her mortgage in December, 2019, and deducts the interest in 2019.

Which of the following is a true statement concerning the alternative minimum tax (AMT)? a. To calculate AMT, a taxpayer can only use the standard deduction. b. The alternative minimum tax uses the same tax rates as the regular income taxes. c. A taxpayer may choose to calculate AMT instead of using the regular tax rates. d. State income tax refunds are not considered income since state income taxes are not allowed as a deduction for AMT.

State income tax refunds are not considered income since state income taxes are not allowed as a deduction for AMT.

Which of the following is a true statement regarding a taxpayer who employs household employees?

The taxpayer is required to pay federal unemployment taxes if he or she pays more than $1,000 in cash wages to household employees during any calendar quarter.

Emily is an elderly retiree who hires a young person as a companion and for doing the house cleaning and other chores. Emily pays her $100 a week for an entire year. Is Emily required to pay FUTA tax and, if so, how does she remit the payment to the IRS?

Yes. She completes Schedule H and pays the tax with her Form 1040.

John and Marcia are married and file a joint return. John earns $200,000 at his job and Marcia earns $100,000 at her place of employment. Will John and Marcia be subject to the 0.9% Medicare tax when they file their tax return and, if so, how much must they pay?

Yes. They will pay $450.