Missed questions on tax planning course

d, Gain realized equals $80,000, and gain recognized equals $10,000 ($200,000 amount realized − $190,000 amount reinvested). This is a net postponed gain of $70,000 ($80,000 − $10,000). The basis of the new building equals $120,000 ($190,000 − $70,000).

An office building with an adjusted tax basis of $120,000 was destroyed by fire on January 2 of last year. On January 15 of the current year, the insurance company paid the owner $200,000. The owner reinvested $190,000 in a new office building. What is the basis of the new building under Section 1033 (the involuntary conversion rules)? A) $180,000 B) $190,000 C) $110,000 D) $120,000

c, The maximum amount of charitable deduction the couple may take would be for a $42,000 donation to a 50% charity (allowing a donation of up to 60% of AGI for a cash donation in a given tax year).

Andrew and Olivia want to maximize their charitable deduction for this year. They are interested in several charities. The couple's AGI is $70,000. They have received an inheritance of $100,000 in cash they wish to use to further their charitable interests. What amount may the couple donate to maximize their charitable deduction this year, without using the carry forward option? A) $35,000 to either a 30% or 50% charity B) $21,000 to a 30% charity C) $42,000 to a 50% charity D) $100,000 to a 50% charity

d, The S corporation income will flow through to Bill and be taxed at his marginal rate. The flow-through is not subject to the self-employment tax. However, Bill must receive reasonable wages or salary, or the IRS will reclassify part of the net income as salary and impose penalties.

Bill, an engineer, is contemplating forming an S corporation for his practice. He will be the sole employee of the corporation. Which of the following statements accurately describe the income tax consequences of such an arrangement? All of the flow-through of net income from his S corporation is subject to the self-employment tax. Bill must draw a reasonable salary as an employee of the S corporation. The net income of the corporation will be taxed at Bill's individual tax rate. The net income of the corporation will be subject to a flat 21% tax rate. A) I, II, and IV B) I and IV C) II and IV D) II and III

d, The gross profit percentage is the profit on the sale ($12,000) divided by the contract, or sale, price of $18,000, or 66.67%. The gross profit percentage is multiplied by the payment received in the current year ($3,000) to give a gain recognized of $2,000.

Cara has a basis of $6,000 in a classic Mercedes that she purchased several years ago. This year, she sold the Mercedes to a business associate for $18,000. The buyer made the first of six annual installments of $3,000 this year. What is the amount of gain recognized in the current year? A) $2,000 B) $1,000 C) $12,000 D) $3,000

b, The 50% election would provide Carl with the maximum current-year deduction. If Carl makes a 50% election, he must utilize the basis of the property but may deduct up to 50% of AGI. This yields a $100,000 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 $60,000 with a $70,000 carryforward.

Carl Taylor has an AGI of $200,000. He donated vacant land valued at $130,000 that was purchased eight years ago to the local church. His basis in this land was $110,000. What is Carl's maximum allowable charitable contribution for the current year? A) $100,000 B) $33,000 C) $39,000 D) $60,000

c, The 50% election would provide Carl with the maximum current-year deduction. If Carl makes a 50% election, he must utilize the basis of the property but may deduct up to 50% of AGI. This yields a $100,000 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 $60,000 with a $70,000 carryforward.

Carl Taylor has an AGI of $200,000. He donated vacant land valued at $130,000 that was purchased eight years ago to the local church. His basis in this land was $110,000. What is Carl's maximum allowable charitable contribution for the current year? A) $33,000 B) $39,000 C) $100,000 D) $60,000

d, The 50% election would provide Carl with the maximum current-year deduction. If Carl makes a 50% election, he must utilize the basis of the property but may deduct up to 50% of AGI. This yields a $100,000 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 $60,000 with a $70,000 carryforward.

Carl Taylor has an AGI of $200,000. He donated vacant land valued at $130,000 that was purchased eight years ago to the local church. His basis in this land was $110,000. What is Carl's maximum allowable charitable contribution for the current year? A) $33,000 B) $39,000 C) $60,000 D) $100,000

b, The gift of long-term capital gain property to a 50% organization is limited to 30% of AGI, which is $27,000. The deduction is based on the FMV of the property contributed. There would be a five-year carryforward of $28,000. The use-related or use-unrelated provisions do not apply here, as the distinction is relevant only with respect to tangible personalty, not realty.

Carla anticipates adjusted gross income of $90,000 during the current tax year. She is considering making a gift of real estate to the United Way. Carla's adjusted basis in this real estate is $20,000. The real estate has a current fair market value of $55,000. Carla has owned the real estate for three years. If Carla gifts the real estate to the United Way this year, what is the maximum allowable charitable deduction she can receive for the current tax year? A) $20,000 B) $27,000 C) $55,000 D) $45,000

a, Statements II and III are correct. Any qualified dividends on the stock will be taxed at LTCG rates. A sale of the stock or the investment painting after the 18-month holding period will generate either a LTCG or a LTCL depending on the sale price. Rental income is taxed at the ordinary income tax rate. A speedboat for personal use will not generate any income and will likely decrease in FMV 18 months later.

Charles wants to invest $20,000 to generate income taxable at the capital gain rates and not at ordinary income tax rates. He will hold any investment for at least 18 months. Which of the following investments would achieve Charles's goal? Buy an office building and rent space to others. Buy stock in a Fortune 500 company. Purchase a quality artwork with appreciation potential. Purchase a speedboat for personal use only. A) II and III B) II and IV C) I and III D) I, II, III, and IV

d, In the exchange, Dave received new equipment with a fair market value of $60,000 and cash of $15,000. He gave up an adjusted basis in his property of $10,000. The difference between $75,000 and $10,000 is the gain realized, $65,000. Because this is not realty, it is not eligible for 1031 exchange treatment. Thus, the transaction is treated as a sale and subsequent purchase. The entire gain of $65,000 is recognized and taxable.

Dave owns equipment that has an adjusted basis of $10,000 and a fair market value of $75,000. Through an exchange, he acquires new equipment from Rachel that has a fair market value of $60,000 and an adjusted basis of $35,000. In the exchange, Dave receives $15,000 from Rachel. What is the amount of gain or loss, if any, recognized by Dave in the exchange? A) $10,000 B) $15,000 C) $50,000 D) $65,000

d, The fact pattern indicates that Judy is in the lowest marginal bracket for three years, and will be in the highest marginal bracket after that. It makes no sense to maximize the depreciation deduction in years when Judy is in the lowest marginal brackets. By forgoing bonus depreciation and using straight-line, more deductions are pushed into the last five years of the depreciation schedule, when Judy will be in the highest marginal bracket. Remember that because of the half-year convention, seven-year property is depreciated over eight years. Under TCJA, 100% bonus depreciation is allowed for all personalty. In other words, 100% of the cost is deducted in the first year.

During 2022, Judy, a sole proprietor, purchased new equipment (seven-year property) for her manufacturing business at a cost of $600,000. Judy is in a 12% marginal income tax bracket this year, and expects to be in that bracket for two more years. She is extremely confident that she will be in the highest marginal bracket after that. What advice would you give Judy regarding the use of bonus depreciation and cost recovery deductions? A) Forgo bonus depreciation and use the Modified Accelerated Cost Recovery System (MACRS) table. B) Use the maximum bonus depreciation and elect the straight-line method. C) Use the maximum bonus depreciation and use the Modified Accelerated Cost Recovery System (MACRS) table. D) Forgo bonus depreciation and elect the straight-line method.

a, The cost associated with the land must be capitalized (establishes basis) and may not be depreciated. Only so-called wasting assets may be depreciated; thus, the land is not depreciable. Because the warehouse has a useful life of greater than one year, it must be depreciated. Section 179 is not an option for the warehouse, because Section 179 generally applies primarily to personalty, not realty.

During the current tax year, Jim purchased a fully finished small warehouse for exclusive use in his manufacturing business. The cost of the property was $122,000, of which $32,000 was attributable to the land. Which of the following statements identifies the proper treatment of the expenditure? A) The $32,000 must be capitalized and may not be depreciated. B) The $90,000 attributable to the building may be deducted under Section 179. C) The $90,000 attributable to the building may be currently deductible. D) The entire $122,000 is currently deductible.

d, Of the current year's $11,000 Section 1231 gain, $7,000 is treated as ordinary income. This is due to the $7,000 of unrecaptured Section 1231 losses during the five-year lookback period. The remaining $4,000 of current Section 1231 gain is treated as long-term capital gain.

During the current year, Chuck has Section 1231 gains totaling $14,000. He also has $3,000 of Section 1231 losses. Four years ago, Chuck reported a net Section 1231 loss of $7,000. These are the only two years in which Chuck has had Section 1231 gains or losses. What is the amount and character of the current year's Section 1231 gains and losses? A) $4,000 long-term capital gain B) $11,000 long-term capital gain C) $4,000 ordinary income, $7,000 long-term capital gain D) $7,000 ordinary income, $4,000 long-term capital gain

c, Because this is not loss property, a portion of the gift tax paid out of pocket by the donor can be added to the donor's basis of $45,000 to compute the basis in the hands of the donee. The percentage of the gift tax paid that can be added to the basis is the unrealized appreciation divided by the fair market value of the asset at the time of gift reduced by the gift tax annual exclusion taken. This percentage is multiplied by the gift tax paid out of pocket. In this situation, the appreciation of $55,000 is divided by the taxable value of the gift ($85,000—the $100,000 FMV reduced by the gift tax annual exclusion of $15,000) to give us 65%. This percentage is multiplied by the gift tax paid of $41,000 to equal $26,650. This is added to the original basis of $45,000 to give us $71,650. The formula is shown as follows: donor's basis+appreciationFMV−gift tax exclusion×gift tax paid=donee's basis

During the current year, Sarah gave her daughter, Carol, 1,000 shares of publicly traded stock that Sarah purchased five years ago for $45,000. The stock was worth $100,000 at the time of gift. Sarah paid $41,000 in gift tax out of pocket as a result of this gift. What is Carol's basis in the stock? A) $72,850 B) $71,240 C) $71,650 D) $45,000

b, Amounts tied to a contingency or the occurrence of an event relating to the child are presumed to be nondeductible child support. Thus, $1,500 is tied to the child's reaching age 18 and would not be deductible. The remaining $1,000 per month is deductible alimony.

Ed was divorced from his spouse, Julie, in 2018. Julie received custody of their only child, Sally, age 5. Ed was ordered to pay $2,500 of alimony and child support per month to Julie until Sally reaches age 18. At that time, the payments are to decrease to $1,000 per month. What portion of each payment is deductible by Ed as qualifying alimony? A) $0 B) $1,000 of each payment C) $2,500 of each payment D) $1,500 of each payment

c, Both statements are correct.

Emilio sued a supplier two years ago for damages. The trial was last year, and the court awarded Emilio with a large cash award. Which of the following statements regarding the taxation of damages is CORRECT? Compensatory damages are generally income tax free. Punitive damages are generally taxable. A) II only B) I only C) Both I and II D) Neither I nor II

a, The basis of property acquired by inheritance where the administrator elects the alternate valuation date is the fair market value on that alternate valuation date. Thus, in this situation, the fair market value of $10 as of the alternate valuation date would be Frank's basis in the inherited property.

Frank inherited 100 shares of stock from his uncle, Jesse. Jesse purchased the stock eight years ago for $12 per share. The fair market value on the date of Jesse's death was $9 per share, and the fair market value six months after the date of death was $10 per share. Assume the administrator elected the alternate valuation date. What is Frank's per-share basis in the acquired stock? A) $9.00 B) $10.00 C) $12.00 D) $9.50

D, $25,000 Even though taxpayers who file as married filing jointly do not incur the additional Medicare tax until their income exceeds $250,000, employers are required to begin withholding the tax when an employee first has compensation exceeding $200,000, disregarding the employee's filing status. The 0.9% tax is withheld on the excess above $200,000, in this case $25,000.

Gabe files as married filing jointly with his wife, Monica. It is September of the current year and his year- to-date compensation working at Jack Sprat, Inc., is $225,000 for this last payroll period. How much of his compensation is subject to payroll tax withholding for the additional Medicare tax so far this year? A) $0 B) $200,000 C) $225,000 D) $25,000

c, Even though taxpayers who file as married filing jointly do not incur the additional Medicare tax until their income exceeds $250,000, employers are required to begin withholding the tax when an employee first has compensation exceeding $200,000, disregarding the employee's filing status. The 0.9% tax is withheld on the excess above $200,000, in this case $25,000.

Gabe files as married filing jointly with his wife, Monica. It is September of the current year and his year- to-date compensation working at Jack Sprat, Inc., is $225,000 for this last payroll period. How much of his compensation is subject to payroll tax withholding for the additional Medicare tax so far this year? A) $200,000 B) $225,000 C) $0 D) $25,000

c, The fact that Gil retains ownership of the property and merely assigns the income to someone else is a potential tax trap for him. The assignment of income doctrine serves to tax the person who actually owns the property producing the income. The income cannot merely be assigned to another to generate tax advantages.

Gil owns a portfolio of income-producing real estate. Gil retains ownership of the real estate but directs that the rental income be paid to his son, Kevin. The income is paid directly to Kevin, who reports it as part of his taxable income. Gil does not report the income on his tax return. With which of the following potential tax traps should Gil be most concerned? A) Ownership attribution rules B) Constructive receipt C) Assignment of income D) Substance over form

a, The S corporation (and the partnership entities) are conduits, and would cause the income to be added to their other significant individual income. The use of the C corporation would allow for protection from lawsuits or business failure. Also, the general partnership and the limited partnership both would cause a flow-through of the income, and the general partnership would not provide protection from personal liability. There is no indication that either party wants to be a general partner in a limited partnership. The use of a C corporation would be appropriate since it is a separate taxable entity, and the profits would not flow through. They could receive a reasonable salary, and the qualified dividends that are paid out would be subject to long-term capital gain rates.

Glen and Debbie both have significant net worth and are currently in the highest marginal income tax bracket. They have developed a process that allows them to neutralize toxic chemical waste. They want to form a business that will protect their net worth in case the business fails or it becomes involved in lawsuits. They expect the business to produce significant profits immediately, as they have agreements in the works with several large chemical companies. Also, they would like to share ownership with other family members as they get closer to retirement. Which business form would be most appropriate for Glen and Debbie at this time? A) C corporation B) General partnership C) S corporation D) Limited partnership

D, Only statement I is correct. If she split the donation and gave $7,500 to each one, her entire donation would be deductible this year. The Hebert Family Foundation is a 30% organization and her maximum available deductible donation this year would be $12,000. If she donated only to it, she would have to carry forward $3,000 until next year. The American Cancer Society is a 50% organization, and she could donate up to $24,000 (60% of AGI for cash) to it in a cash contribution this year. Halving the donation will still allow her to deduct the full $15,000 this year.

Gwen is discussing her charitable contribution plans with her financial advisor, Rick. Her AGI is $40,000, and she has two charities to which she is considering making a cash donation of $15,000: The Hebert Family Foundation, established by her grandfather, or the American Cancer Society. A donation to either would be in honor of her aunt who succumbed to cancer this year. Gwen would like to maximize her charitable deduction this year. Which of the following statements Rick makes is CORRECT? A donation split 50/50 between the two charities would allow Gwen to deduct the entire $15,000 this year. Donating to The Hebert Foundation would allow Gwen a donation of up to 50% AGI and please her grandfather. A) Neither I nor II B) Both I and II C) I only D) II only

c, If the trust income is, or may be, used to purchase insurance on the life of the grantor or the grantor's spouse, then the trust is a grantor trust.

Hal and Jody created an irrevocable trust for the benefit of their dependent children. They named their attorney as trustee of the trust and authorized him to invest in stocks, bonds, and certificates of deposit. Included in the investment authority is the right to use trust income to purchase insurance on Hal and Jody's lives. All funds are currently invested in high-yielding bonds paying 4% semiannual interest on a par value of $50,000. Which taxpayer must pay tax on the income of the trust? A) The attorney, because of his broad authority as trustee B) Hal and Jody, because the income is (or may be) used to purchase insurance on their lives C) The trust, because it is irrevocable with no benefits to the grantor D) The children, because they are the designated beneficiaries

a, The deductible casualty loss computation begins with the lesser of the decrease in fair market value or the adjusted basis in the property. In this situation, the decrease in fair market value of $65,000 must be reduced by the insurance recovery of $25,000 and by the $100 floor. This is further reduced by 10% of the adjusted gross income. Thus, $65,000 reduced by the insurance of $25,000, reduced by the $100 floor per occurrence, and further reduced by $20,000 equals $19,900.

Helen's personal residence was damaged by a severe storm. The area affected by the storm was declared a federal disaster area. The fair market value of the home prior to the storm was $365,000. The fair market value of the home after the storm was $300,000. Her insurance paid $25,000. The basis in the home was $290,000. Helen's AGI is $200,000. What is the amount, if any, of Helen's deductible casualty loss? A) $19,900 B) $20,000 C) $245,000 D) $0

c, 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.

In 1992, 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 be required to report the amount borrowed as income, but he will not be allowed a medical expense deduction. B) John will not be required to report the amount borrowed as income and will not be allowed a medical expense deduction. C) John will be required to report the amount borrowed as income and will be allowed a medical expense deduction. D) John will not be required to report the amount borrowed as income, but he will be allowed a medical expense deduction.

d, The child care credit is based on qualifying expenditures of up to $3,000 per child, up to $6,000 for two or more children. The qualifying expenditures are multiplied by an applicable percentage of 20% (for taxpayers with an AGI of $43,000 or more). For the student, it is important to remember the $3,000 for one child, $6,000 for two or more children, and the 20%. It is highly unlikely that the CFP Board would test a child care credit calculation where the AGI is less than $43,000.

Jan and Martha have one child, age 8, who is in day care while they work outside of the home. During the current year, they spent $3,900 on qualifying child care expenses. Their AGI is $44,908. What is the amount of the child care credit that they may claim? A) $1,050 B) $780 C) $200 D) $600

b, The accrual method of accounting generally is mandatory when inventory constitutes a significant income-producing factor. Thus, the cash method is incorrect. The hybrid method is incorrect because there is no indication that service constitutes a significant portion of the business. Also, the installment sale method is not available for sales of inventory, or sales with revolving credit terms. With annual sales of $30 million, the accrual method exception does not apply. If she had annual sales of under $27 million (2022), she could still use the cash method, even though she has inventory.

Jena owns and operates a string of retail electronics stores with approximately $30 million of sales annually. Approximately 20% of her sales are with extended credit terms. What method of tax accounting is most appropriate for Jena's business? A) The cash method, because it provides flexibility in the timing of income and expenses B) The accrual method, because inventory is such a large component of the business C) The installment sale method, to spread the gain over a longer time frame D) The hybrid method, because the business involves both inventory and service

b, The fact pattern indicates that Jerry is in the highest marginal bracket for three years, and then will be in the lowest marginal bracket after that. It makes sense to maximize the depreciation deduction this year when Jerry is in the highest marginal bracket. By using the bonus depreciation provision, the entire $730,000 may be deducted in the year of acquisition.

Jerry owns a dry-cleaning business. During the current year, Jerry purchased and placed into service $730,000 of equipment. He had taxable income of $745,000. Jerry is in the highest marginal income tax bracket this year, and expects to be in that bracket for two more years. After that, he plans to semi-retire, but keep the business open for another five years. He expects to drop into the lowest marginal bracket when he semi-retires. What advice would you give Jerry regarding the use of Section 179, bonus depreciation, and cost recovery deductions? A) Forgo Section 179 and bonus depreciation and elect the straight-line method. B) Use the bonus depreciation provision. C) Elect the maximum Section 179 and elect the straight-line method. D) Forgo Section 179 and bonus depreciation and use the Modified Accelerated Cost Recovery System (MACRS) table.

a, No deduction is allowed because the office is not used regularly and exclusively as a principal place of business for Jessica's insurance business, as required by the Internal Revenue Code to qualify as a deductible office expense.

Jessica is self-employed selling insurance. She uses a bedroom in her apartment as an office about 60% of the time. The square footage of the bedroom represents 15% of the overall space in the apartment. She also uses the bedroom to store personal items and, occasionally, as a bedroom for guests. Jessica's annual rental payments this calendar year were $7,500 and the annual utility costs were $1,200. How much of a deduction can Jessica take as an office expense for this tax year? A) $0 B) $567 C) $1,125 D) $675

d, No deduction is allowed because the office is not used regularly and exclusively as a principal place of business for Jessica's insurance business, as required by the Internal Revenue Code to qualify as a deductible office expense.

Jessica is self-employed selling insurance. She uses a bedroom in her apartment as an office about 60% of the time. The square footage of the bedroom represents 15% of the overall space in the apartment. She also uses the bedroom to store personal items and, occasionally, as a bedroom for guests. Jessica's annual rental payments this calendar year were $7,500 and the annual utility costs were $1,200. How much of a deduction can Jessica take as an office expense for this tax year? A) $567 B) $1,125 C) $675 D) $0

d, A 50% election allows a deduction based on the property's basis with a 50% of AGI limitation. Remember that the election applies to gifts of long-term capital gain property to a 50% organization only.

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. What can you accurately tell Jim about the effect of a 50% election? A) The current-year deduction is $60,000 with a $20,000 carryforward. B) The current-year deduction is $55,000 with a $25,000 carryforward. C) The current-year deduction is $40,000 with a $15,000 carryforward. D) The current-year deduction is $55,000 with no carryforward.

b, Gifts of cash to a 50% organization are limited to 60% of AGI under TCJA. Sixty percent of the $120,000 AGI equals $72,000. Jim would also have an $8,000 carryforward.

Jim made charitable contributions of cash to a local university, a qualifying charitable organization. Jim's cash contributions for the current year totaled $80,000. Jim has an AGI of $120,000. What is the amount of charitable contribution deduction that Jim may claim in the current year? A) $36,000 B) $72,000 C) $24,000 D) $60,000

a, Loss on the sale, exchange, or worthlessness of Section 1244 stock is deductible as an ordinary loss up to $50,000 per year, and $100,000 per year on a jointly filed return. Any excess loss in a given year is treated as a capital loss. In this case, the capital loss is long term, due to the more than one-year holding period.

Jim, a married taxpayer filing a joint return, owns Section 1244 stock. Jim paid $195,000 for the stock many years ago. This year, the corporation filed for bankruptcy and the stock became worthless. What is the nature and character of the loss on the stock? A) $50,000 ordinary loss; $145,000 long-term capital loss B) $195,000 ordinary loss C) $0 loss, as worthlessness of the stock is not a recognition event D) $100,000 ordinary loss; $95,000 long-term capital loss

d, The $25,000 cost is increased by the capitalized cost (the sales tax) of $1,250. The payment of a personal property tax has no impact on the basis.

John is a contractor who has just purchased a tractor for use in his business. John paid $25,000 plus $1,250 in sales tax for the tractor. The local municipality also imposes an annual personal property tax of $500 per year. The tractor has an expected useful life of five years. What is John's basis in the tractor for depreciation purposes? A) $25,000 B) $26,750 C) $25,500 D) $26,250

c, The personal service corporation (PSC) classification for a C corporation was effectively repealed with the Tax Cuts and Jobs Act (TCJA). S corporations do not have corporate income tax rates. As an S corporation, all income would flow through to John to be taxed at his individual rates.

John, an accountant, is considering forming an S corporation for his practice. He will be the sole employee of the corporation. Which of the following statements accurately describes the income tax consequences of the proposed arrangement? A) The corporation would not be considered a PSC; therefore, the income would be subject to the graduated corporate income tax rates. B) The corporation would be considered a PSC, subject to graduated tax rates. C) The corporation would not be considered a personal service corporation (PSC), and the income would be subject to John's personal income tax rates. D) The corporation would be considered a PSC, subject to a flat 21% tax rate.

b, When the fair market value on the date of the gift is less than the donor's basis in the asset, the donee's basis in the asset for purposes of determining a loss is the asset's fair market value on the date of the gift. In this situation, the $8-per-share value on the date of the gift would be Laci's basis. When the stock sold at $6 per share, this was a $2-per-share loss. When the recipient of the gift takes the FMV on the date of the gift as her basis, there is no tacking of the holding period. The holding period begins on the day the asset is received.

Laci received 100 shares of stock from her grandfather, Richard. Richard purchased the stock eight years ago for $12 per share. Laci received the stock as a gift from her grandfather two months ago when the fair market value was $8 per share, and she sold the stock this week for $6 per share. What is Laci's gain or loss from the sale of the stock? A) $400 long-term capital loss B) $200 short-term capital loss C) $600 short-term capital loss D) $600 long-term capital loss

d, They will pay the 3.8% Medicare contribution tax on $88,000. This is the lesser of the net investment income ($100,000) or the AGI in excess of the threshold amount ($360,000 - $250,000, or $110,000). The net investment income is the investment income of $100,000, reduced by the allowable investment expenses of $12,000. In this situation, all $88,000 of the net investment income is subject to the Medicare contribution tax. Larry and Mary will pay a $3,344 Medicare contribution tax (3.8% on $88,000).

Larry and Mary are married taxpayers filing a joint tax return. In 2022, their AGI is $360,000, and their investment income (included in the AGI) is $100,000. They have investment interest expense of $7,000 and state income taxes attributable to the investment income of $5,000. What is the amount of Medicare contribution tax that they must pay? A) $3,534 B) $4,180 C) $3,800 D) $3,344

c, The accumulated earnings tax rate of 20% applied to the accumulated taxable income of $20,000 equals $4,000. The taxable income is reduced by the income tax and dividends paid, and further reduced by the $190,000 accumulated earnings tax credit ($250,000 accumulation limit less the $60,000 accumulated earnings and profits). The 20% rate is tied to the highest tax rate that may apply to qualified dividends.

MNO Corporation has the following items of income and expense: Taxable income: $330,000 Federal income tax: $100,000 Dividends paid in current year: $20,000 Accumulated earnings and profits at the end of the preceding tax year: $60,000 Assume MNO is not a service corporation and cannot establish a valid business purpose for its excess accumulations. What is the amount of accumulated earnings tax payable? A) $13,057 B) $2,176 C) $4,000 D) $18,000

d, Neither Mary nor Frank may deduct their IRA contributions. The active participant spouse is subject to a MAGI (AGI without the IRA) phaseout between $109,000 and $129,000 in 2022. The spouse who is not an active participant but whose spouse is an active participant may take a deduction for the contribution, subject to a phaseout between $204,000 and $214,000. Because the AGI exceeds $214,000, neither spouse may deduct the IRA contribution. Remember that those phaseouts apply only if the taxpayer (and/or spouse, if married) is an active participant in a company-maintained retirement plan. These phaseouts will be provided on the exam.

Mary is an active participant in an employer-sponsored retirement plan, but her husband, Frank, is not. Their combined adjusted gross income (AGI) is $230,000 for 2022. They each contributed $6,000 to an IRA for the current year. Which of the following statements is CORRECT regarding the deductibility of the IRA? A) Mary may deduct her IRA contribution, but Frank may not. B) Frank may deduct his IRA contribution, but Mary may not. C) Both Frank and Mary may deduct the IRA contributions. D) Neither Mary nor Frank may deduct the IRA contributions.

a, The distribution from a corporation is determined in a three-step manner. To the extent of current and accumulated earnings and profits, the distribution is an ordinary dividend, subject to short-term capital gain rates. Next, the distribution is treated as a nontaxable return of capital until the basis in the stock is exhausted. Any distribution after that is considered long-term capital gain.

Miguel, a shareholder in ABC Corporation, received a cash distribution from the corporation in the amount of $22,000. The corporation had $8,000 of accumulated earnings and profits and $5,000 and current earnings and profits. Miguel had basis in the stock of $6,000. Which one of the following correctly identifies the proper treatment of the distribution from the corporation? A) $13,000 ordinary dividend; $6,000 return of capital; $3,000 capital gain B) $13,000 ordinary dividend; $6,000 capital gain; $3,000 return of capital C) $7,000 ordinary dividend; $6,000 return of capital; $9,000 capital gain D) $5,000 ordinary dividend; $6,000 return of capital; $11,000 capital gain

c, The answer is computed as follows: Gain realized: Amount realized:Sale price$501,000Selling expenses(31,000)Total amount realized$470,000Less adjusted basis(80,000)Gain realized$390,000 Note that the repairs do not impact the basis in the residence. Also, the mortgage assumption by the buyer is part of the sales price.

On April 1 of the current tax year, Susan sold her principal residence for a total price of $501,000: $301,000 was in cash, with the buyer assuming a $200,000 mortgage on the house. Susan purchased the house 15 years ago for $290,000, but she has an adjusted basis of $80,000. She has not made any improvements to the house. To assist in the sale of the residence, she incurred costs of $1,500 for repairs three weeks before the sale occurred. Realtor commissions of $31,000 resulted from the sale. On May 1 of the current tax year, Susan bought a new residence for $260,000. What amount, if any, must be realized on the sale of Susan Sharp's residence? A) $421,000 B) $180,000 C) $390,000 D) $169,000

a, In a compensation-related below-market loan of $10,000 or less, no interest is imputed and no compensation results.

Sam has had persistent car trouble and decided to buy a new truck to make certain he gets to work on time. He received an interest-free loan of $5,000 for the needed down payment from his employer this year on January 1. The federal interest rate was 4% this year. Sam's only income this year was his salary of $40,000 and interest income of $75. Which of the following statements regarding this loan is CORRECT? A) Sam has no compensation income this year from interest imputed on the loan. B) Sam has nondeductible interest expense of $200. C) Because this is a compensation-related loan, it results in compensation expense for Sam's employer and compensation income for Sam of $200. D) Sam's employer must recognize $75 of interest income this year because of the loan to Sam.

b, 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.

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) A portion of the interest may be excluded. B) All accrued interest is taxable in the current year. C) All the interest may be excluded. D) The income on the bonds is generally subject to state income taxe

b, The qualified dividends straddle the $459,750 breakpoint (for 2022). Thus, a portion fall into the $41,675 to $459,750 range and are taxed at 15%. The dividends above the $459,750 breakpoint are taxed at 20%.

Sheila, a single taxpayer, has taxable income of $480,000. Included in the taxable income is $50,000 of qualified dividends. At what rate(s) will her qualified dividends be taxed? A) 15% only B) 15% and 20% C) 25% D) 20% only

d, In an installment sale, any cost recovery recapture, $10,000 in this situation, is recognized in the year of disposition. All gain in this situation is cost recovery recapture. Remember that with Section 1245 property (predominantly personalty), it does not matter whether straight-line, Section 179, or accelerated depreciation was used. All depreciation is subject to recapture as ordinary income. In this scenario, all future payments received are essentially tax free because all $10,000 of gain has been recognized in the year of disposition.

Skip sold an automobile for $10,000 during the current tax year. The automobile had been used exclusively for business purposes. The cost basis was $18,000, which had been fully recovered through straight-line cost recovery deductions. The automobile was sold on an installment agreement, with a down payment of $1,000 and $2,000 principal payments beginning in the current year. What amount of gain must be recognized in the current year and next year, respectively? A) $0 and $2,000 B) $3,000 and $2,000 C) $1,000 and $2,000 D) $10,000 and $0

c, In the case of an asset received as a gift, where the fair market value on the date of the gift is greater than the donor's adjusted basis, the recipient has a carryover basis. In this case, Uncle Carl had purchased the stock for $12 per share and had gifted it to Susan when the fair market value was $15 per share. Susan subsequently sold the stock for $19 per share. Thus, the carryover basis from Uncle Carl would be $12 per share. In a situation where the recipient of the gift takes the donor's basis, the holding period is tacked. In other words, the donor's holding period is added to the donee's holding period. Thus, Susan is treated as holding the stock for over 15 years.

Susan received 100 shares of stock as a gift from her uncle, Carl. Carl purchased the stock 15 years ago for $12 per share. Susan received the stock from Carl two months ago, when the fair market value of the stock was $15 per share, and she sold the stock this week for $19 per share. What is the amount and character of Susan's gain from the sale of the stock? A) $700 short-term capital gain B) $400 short-term capital gain C) $700 long-term capital gain D) $400 long-term capital gain

d, There is $114,000 of unrecaptured Section 1250 income, creating 25% long-term capital gain; and $100,000 of regular long-term capital gain (at taxable income of $190,000, it is 15% rate). Calculate the gain realized and recognized: Amount realized$400,000Less adjusted basis(186,000)Gain realized and recognized$214,000 Calculate the unrecaptured Section 1250 (25% LTCG) income: Lesser of:(a) Straight-line depreciation taken$114,000(b) Gain realized and recognized$214,000Lesser of these two amounts$114,000 Calculate the regular long-term capital gain: Gain recognized$214,000Less unrecaptured Section 1250 income (25% long-term capital gain)(114,000)Regular long-term capital gain$100,000 In this example, we have total gain recognized (Section 1231 gain) of $214,000, comprised of $114,000 of unrecaptured Section 1250 income and taxed at a maximum rate of 25%, and $100,000 of regular long-term capital gain, eligible for the maximum 15% or 20% long-term capital gain rates. The gain created by the straight-line depreciation on realty is unrecaptured Section 1250 income, subject to a maximum rate of 25%. The gain created by actual appreciation of the asset is regular long-term capital gain under Section 1231.

Suzy, a single taxpayer, sells her residential rental property in the current year for $400,000. Suzy acquired the property in ten years ago for $300,000 and has been depreciating it using the straight-line method for realty under MACRS. Assume the amount of depreciation taken is $114,000. Suzy has taxable income of $190,000 and is in the 32% marginal income tax bracket. What is the amount and character of the gain recognized as a result of the sale? A) $214,000 gain taxed at 15% B) $214,000 gain taxed at 25% C) $114,000 gain taxed at 28%, $100,000 gain taxed at 15% D) $114,000 gain taxed at 25%, $100,000 gain taxed at 15%

c, Because one of the partners is a C corporation and the partnership's average annual gross receipts for any three-year preceding period do not exceed $26 million, the partnership must use the accrual method of accounting.

The Make Work Partnership has four partners; three partners are individuals and one is a C corporation. The partnership's annual gross receipts for any three-year preceding period do not exceed $26 million. The partnership can use which method of accounting? Cash method Accrual method A) Neither I nor II B) I only C) II only D) Both I and II

c, Charitable contributions are not added back to regular taxable income when determining AMTI

The Taylors are concerned they may be subject to an alternative minimum tax liability for last year. Which of the following is NOT an adjustment added back to regular taxable income for calculating alternative minimum taxable income (AMTI)? A) Exclusion of gain from Section 1202 qualified small business stock (QSBS) purchased in August 2009 B) Standard deduction C) Charitable contributions D) Itemized deduction

B, charitable contributions

The Taylors are concerned they may be subject to an alternative minimum tax liability for last year. Which of the following is NOT an adjustment added back to regular taxable income for calculating alternative minimum taxable income (AMTI)? A) Standard deduction B) Charitable contributions C) Exclusion of gain from Section 1202 qualified small business stock (QSBS) purchased in August 2009 D) Itemized deduction

d, Charitable contributions are not added back to regular taxable income when determining AMTI.

The Taylors are concerned they may be subject to an alternative minimum tax liability for last year. Which of the following is NOT an adjustment added back to regular taxable income for calculating alternative minimum taxable income (AMTI)? A) Standard deduction B) Exclusion of gain from Section 1202 qualified small business stock (QSBS) purchased in August 2009 C) Itemized deduction D) Charitable contributions

a, Of the itemized deductions listed, only the qualifying home mortgage interest of $7,950, the charitable contributions of $2,600, and the gambling losses to the extent of winnings of $1,200 are allowable for purposes of the alternative minimum tax. For both regular income tax and AMT purposes, the interest on the home equity loan is only deductible if used for acquisition or renovation of the principal residence and/or one other residence. The taxes are not deductible for AMT purposes.

The home equity loan was incurred to purchase what Glen describes as a "midlife crisis" sports car. What amount of itemized deductions, if any, would be allowed for purposes of the AMT? A) $11,750 B) $17,750 C) $7,950 D) $16,100

d, Hugh's gross profit percentage is 37.5%. This is multiplied by the $12,000 of payments received during the year. The profit on the sale was $15,000 divided by the $40,000 contract price, which equals a 37.5% gross profit percentage

This year, Hugh sold a classic automobile to his friend, Doug, on the following terms: The price was $40,000, equal to the fair market value. Hugh's basis in the automobile was $25,000. Starting this year, Doug will pay in five annual installments of $7,000 plus accrued interest. Doug will make a $5,000 down payment. Ignoring interest income, what amount of gain will Hugh recognize for the current year? A) $8,571 B) $4,500 C) $5,000 D) $7,500

c, The cost basis of the property, $26,000, would be reduced by the Section 179 and cost recovery deductions taken, $17,604. This leaves an adjusted basis of $8,396. When the property is subsequently sold for $18,000, the difference between the sales price ($18,000) and the adjusted basis of $8,396 is the gain realized of $9,604. The recapture is the lesser of the gain realized of $9,604 or the cost recovery deductions taken of $17,604.

Three years ago, Mort purchased equipment for use in his business at a cost of $26,000. He claimed a Section 179 deduction in the year of acquisition of $10,000, and has since claimed cost recovery deductions totaling $7,604. The equipment was sold for $18,000. What is the amount of cost recovery deductions that must be recaptured? A) $0 B) $7,604 C) $9,604 D) $8,396

d, 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.

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 may redeem the EE bonds potentially tax free if the proceeds are used for his qualifying education expenses. B) Tim could use both the American Opportunity Tax Credit and the Lifetime Learning Credit in the same year. C) Tim qualifies for the American Opportunity Tax Credit. D) Tim qualifies for the Lifetime Learning Credit.

b, IRS Form 2553—Election by a Small Business Corporation has to be filed by the 15th day of the 3rd month of the tax year. The shareholders must secure the consent of the IRS to be taxed as an S corporation. In general, only one class of stock is allowed in an S corporation.

To elect S corporation status for the current calendar year, which of the following must be done for a newly incorporated business? Secure the consent of the board of directors of the corporation. File the election (IRS Form 2553) before the 15th day of the 3rd month of the tax year the election is to take place. Issue two classes of stock. File the election (IRS Form 2553) at any time before the end of the corporation's tax year. Elect S corporation status when filing the corporation's initial tax return. A) I, III, and IV B) II only C) V only D) I, II, and IV

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.

Todd is employed at Wow Industries as an accountant. His employer deducted $8,500 from his paycheck in 2022 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 2022. 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 2022. B) Todd's refund is $5,200 for 2022. 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 2022.

d, Tom can deduct 10% of all the expenses. The calculation is $9,000 × 10% = $900. A 10% depreciation deduction is also allowed based on the cost of the home. It should be noted that in order to take this deduction, Tom's gross income from the business must be sufficient to cover all of his other operating expenses in addition to the home office deduction. The deduction for home office expenses cannot create a loss from the business for the taxpayer.

Tom is a self-employed accountant. He uses one room of his house exclusively and regularly as an office for the business. The square footage of the room comprises 10% of the total square footage of the home. Tom incurred the following expenses related to the home during the tax year: Utilities$1,500Property tax$600Mortgage interest$4,000Insurance on home$750Maid service$1,200Misc. repairs$950 If Tom's office meets the tax law requirements of a qualified home office and the gross income from the business limitations on the deduction are ignored, what is the maximum business deduction Tom can take? A) $900 B) $805 plus a depreciation deduction based on 10% of the cost of the home C) $780 plus a depreciation deduction based on 10% of the cost of the home D) $900 plus a depreciation deduction based on 10% of the cost of the home

b, In order to determine taxable income, the taxpayer reduces gross income by any adjustments, such as qualified student loan interest, qualified college expense deductions, IRAs, and then subtracts allowable deductions (standard or itemized).

When calculating income tax liability, the individual taxpayer arrives at taxable income by A) consulting the tax tables accompanying IRS Form 1040. B) reducing gross income by allowable adjustments to arrive at adjusted gross income and then deducting the greater of the standard deduction or itemized deductions. C) deducting the greater of itemized deductions or the standard deduction from gross income and then reducing that result by allowable adjustments. D) none of these.

d, Partnerships are never subject to federal income tax. They are pass-through entities. C corporations and individuals are separately taxed, and certain S corporation transactions are taxed at the entity level.

Which business entity is never subject to federal income taxation? A) S corporation B) C corporation C) Individual D) Partnership

d, Only Statement II is treated as a rental activity according to IRS regulations. If a rental is 30 days or less and significant personal services are provided, the activity is a service rather than a rental activity.

Which of the following activities is treated as a rental activity under the passive activity rules? Property rental where average customer use is 6 days Property rental where average customer use is more than 30 days and no significant services are provided Property rental where extraordinary services are provided on behalf of the owners Property rental where the property is customarily made available during defined business hours for the nonexclusive use of customers A) I only B) II and III C) II, III, and IV D) II only

c, By definition, the percentage depletion in excess of adjusted basis and the tax-exempt interest on qualified private-activity bonds are preference items for purposes of the AMT. Remember that interest on private-activity municipal bonds issued in 2009 and 2010 is not a preference item for the AMT. The medical expenses in excess of 7.5% of adjusted gross income and the gambling losses to the extent of gambling income are both treated as allowable itemized deductions / adjustments for AMT purposes.

Which of the following are items of tax adjustments for the individual alternative minimum tax? Medical expenses in excess of 7.5% of adjusted gross income Percentage depletion deduction in excess of adjusted basis Deduction for gambling losses to the extent of gambling income Tax-exempt interest on qualified private-activity bonds issued in 2011 A) I and III B) II and IV C) I, III, and IV D) II, III, and IV

c, Only item I, student loan interest, is deductible in arriving at an individual's AGI. Statements II and IV are incorrect and are deductions from AGI. Statement III is not a deductible expense. Home equity loan interest is not deductible for AGI and is only deductible from AGI to the extent the proceeds are used for home acquisition or improvement and not personal expenses.

Which of the following are qualified interest expense deductible in arriving at an individual's AGI? Student loan interest Mortgage interest on a loan acquired for a personal residence in 2022 for $600,000 Interest on home equity loan indebtedness to buy an automobile Investment interest expense A) IV only B) II and III C) I only D) I, II, III, and IV

b, Qualified housing interest, charitable contributions, investment interest expense, casualty losses, and gambling losses (to the extent of gambling winnings) are among the allowable itemized deductions for AMT purposes. State and local income taxes and property taxes are not allowed for AMT purposes. Net capital gains (by definition—long-term capital gains) and qualified dividends are subject to the preferential rates (15% or 20%) even for AMT purposes. The preference item for the bargain element on the exercise of an ISO may be avoided by utilizing a disqualifying disposition of stock acquired with the ISO. A disqualifying disposition is a sale of the stock in the same year as exercise of the option.

Which of the following is CORRECT with respect to the alternative minimum tax? A) The exercise of an incentive stock option always causes an AMT preference item to be added into the AMT calculation. B) Charitable contributions, investment interest expense, and casualty losses are allowable itemized deductions for AMT purposes. C) All itemized deductions except home mortgage interest and property taxes are added back in the AMT computation. D) Net capital gains are subject to the AMT rates of 26% or 28%.

c, Qualified housing interest, charitable contributions, investment interest expense, casualty losses, and gambling losses (to the extent of gambling winnings) are among the allowable itemized deductions for AMT purposes. State and local income taxes and property taxes are not allowed for AMT purposes. Net capital gains (by definition—long-term capital gains) and qualified dividends are subject to the preferential rates (15% or 20%) even for AMT purposes. The preference item for the bargain element on the exercise of an ISO may be avoided by utilizing a disqualifying disposition of stock acquired with the ISO. A disqualifying disposition is a sale of the stock in the same year as exercise of the option.

Which of the following is CORRECT with respect to the alternative minimum tax? A) The exercise of an incentive stock option always causes an AMT preference item to be added into the AMT calculation. B) Net capital gains are subject to the AMT rates of 26% or 28%. C) Charitable contributions, investment interest expense, and casualty losses are allowable itemized deductions for AMT purposes. D) All itemized deductions except home mortgage interest and property taxes are added back in the AMT computation.

b, Constructive receipt, which serves to accelerate income, is not considered an advantage of the cash method of accounting.

Which of the following is NOT an advantage of the cash basis method of accounting? A) Taxpayers can keep simple records. B) Constructive receipt serves to defer income. C) Income is reported when it is received. D) Taxpayers have more control over each year's income and expenses.

c, State and local income taxes, as well as property taxes, are not allowable itemized deductions. A deduction is allowed for medical expenses in excess of 7.5% of adjusted gross income. A deduction is allowed for charitable contributions. A deduction is allowed for qualified housing interest.

Which of the following is NOT an allowable itemized deduction against alternative minimum taxable income? A) Charitable contributions B) Medical expenses greater than 7.5% of adjusted gross income C) State and local income taxes D) Qualified housing interest

C, Tax-exempt interest on a private-activity bond issued in 2006 is a preference item.

Which of the following is a tax preference item for the purpose of calculating individual AMT? Tax-exempt interest from a private-activity bond issued in 2006 Cash contributions to charitable organizations Cash flows from limited partnerships Capital losses A) III and IV B) II only C) I only D) II, III, and IV

b, Items II, III, and IV are not tax preference items. However, other AMT tax preference items include the part of the deduction for certain depletion that is more than the adjusted basis of the property and the excluded gain on the sale of certain small business stock (Section 1202).

Which of the following is a tax preference item for the purpose of calculating the alternative minimum tax? Tax-exempt interest from a private-activity bond issued in 2008 Cash contributions to charitable organizations Cash flows from limited partnerships Personal-service income in excess of tax losses A) I and II B) I only C) II only D) I, III, and IV

c, Net income from the rental of realty and flow-through S corporation income are both excluded from the self-employment tax. Less than $400 of self-employment income is not subject to the self-employment tax.

Which of the following is subject to the self-employment tax? Net income from rental of personalty Net income from the rental of realty $350 net income from a sole proprietorship Flow-through of income from an S corporation A) I and III B) II and III C) I only D) I, II, III, and IV

a,An exchange of U.S. realty for foreign realty is not considered like-kind. The like-kind requirements were changed under TCJA and now limits exchanges to realty for realty. The like-kind requirement does not mean that the property transferred must be identical to the property received; it merely requires that realty be exchanged for realty.

Which of the following may be allowed as a like-kind exchange? A) A parking lot exchanged for a shopping center B) A heifer exchanged for a bull C) An apartment building located in San Diego exchanged for an apartment building located in Acapulco, Mexico D) Farmland exchanged for farming equipment

b, An exchange of U.S. realty for foreign realty is not considered like-kind. The like-kind requirements were changed under TCJA and now limits exchanges to realty for realty. The like-kind requirement does not mean that the property transferred must be identical to the property received; it merely requires that realty be exchanged for realty.

Which of the following may be allowed as a like-kind exchange? A) An apartment building located in San Diego exchanged for an apartment building located in Acapulco, Mexico B) A parking lot exchanged for a shopping center C) Farmland exchanged for farming equipment D) A heifer exchanged for a bull

c, All of the statements are correct. The fact that the shareholder has a minority interest in the corporation has no bearing on the correct answers. The flow-through of a proportionate share of net income is reported on the K-1. The shareholder is allowed to vote for the board.

Which of the following statements is CORRECT regarding a minority non-employee shareholder in an S corporation? Reports income when the corporation has net income for a tax year Votes for the board of directors at the annual shareholders meeting Receives a K-1 annually to prepare a personal income tax return Reports on a personal income tax return a pro rata share of corporate profit or loss A) I, II, and III B) I and III C) I, II, III, and IV D) II and IV

a, Statement II is incorrect. The taxpayer use test provides more flexibility than the functional use test.

Which of the following statements regarding Section 1033 involuntary conversions is CORRECT? For an owner-user, the replacement property must pass the functional use test. The taxpayer use test provides less flexibility than the functional use test. A) I only B) II only C) Both I and II D) Neither I nor II

c, Amounts in excess of the percentage of AGI limitation may be carried forward for only five years. The percentage of AGI limitation depends on both the type of organization to which the donation is made and the type of property donated. The limit applicable to the amount of a charitable deduction allowed for gifts of appreciated property is applied before applying the percentage of AGI limitation.

Which of the following statements regarding charitable contributions is CORRECT? The amount deductible in a tax year is limited to a percentage of the individual taxpayer's adjusted gross income (AGI). Any amount in excess of the percentage of AGI limitation for the tax year may be carried back for two years and forward for five years. The percentage of AGI limitation depends solely on the type of organization to which the donation is made. A limit is imposed after applying the percentage of AGI limitation for the amount of a charitable deduction allowed for gifts of appreciated property. A) II and III B) I and IV C) I only D) II and IV

d, During a period of declining prices, the last-in, first-out (LIFO) method treats the later-purchased, lower-priced inventory items as those first sold. This, therefore, decreases the cost of goods sold (COGS). Conversely, during a period of rising prices, the first-in, first-out (FIFO) method matches the earlier-purchased, lower-priced inventory items against income. This naturally decreases the COGS.

Which of the following statements regarding inventory valuation techniques and Cost of Goods Sold (COGS) is CORRECT? During a period of declining prices, LIFO decreases the COGS. During a period of rising prices, LIFO decreases the COGS. During a period of declining prices, FIFO decreases the COGS. During a period of rising prices, FIFO decreases the COGS. A) II and III B) I and III C) II and IV D) I and IV

c, Both statements are false

Which of the following statements regarding the taxation of compensatory and punitive damages is CORRECT? Compensatory damages are generally subject to income tax. Punitive damages are generally received income tax free. A) Both I and II B) I only C) Neither I nor II D) II only

c, 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 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 employer. B) The premiums paid are NOT a taxable benefit to the employee. C) The premiums paid are a taxable benefit to the employee. D) If the employee dies prematurely, the survivors will receive no benefits

d, Statement I is correct. Taxpayers should time the recognition of certain AMT adjustments and tax preference items. For example, a taxpayer should avoid the purchase of most private-activity bonds unless the bonds were issued in 2009 and 2010. Deductions should be moved into a non-AMT year and income to an AMT year, if possible.

Which of the following would be a planning strategy to limit the imposition of the alternative minimum tax in a given tax year? Avoid purchasing most private-activity bonds. Move deductions into an AMT year. Move income into a non-AMT year. A) II and III B) I and III C) II only D) I only

a, Qualified education interest, alimony payments, and self-employed health insurance deductions are all adjustments to income. Qualified adoption expenses generate a tax credit.

Which one of the following is NOT an adjustment to income? A) Qualified adoption expenses B) Qualified education interest C) Alimony payments applicable to pre-12/31/18 decrees D) Self-employed health insurance deductions

b, Qualified education interest, alimony payments, and self-employed health insurance deductions are all adjustments to income. Qualified adoption expenses generate a tax credit.

Which one of the following is NOT an adjustment to income? A) Qualified education interest B) Qualified adoption expenses C) Self-employed health insurance deductions D) Alimony payments applicable to pre-12/31/18 decrees

d, 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.

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

c, An immediate annuity is one that is purchased by a single payment (premium), where payments commence no later than one year from the contract date, and which provides for a series of substantially equal periodic payments (paid at least annually). As such, immediate annuities avoid the 10% premature withdrawal penalty. Death benefit tax status of a MEC is the same as for any other non-MEC contract. Non-death-benefit distributions from a MEC will most likely be taxable as ordinary income to the extent that the cash surrender value exceeds the investment in the contract. With some exceptions, annuity contracts owned by a corporation are not treated as an annuity for tax purposes; thus the annual increase in value is subject to income tax. Part of the death benefit paid from life insurance owned by a pension may be taxable. Normally, any amount in excess of the cash value will be treated as death proceeds from a life insurance policy, and amounts equal to the cash value will be treated as a pension plan distribution. Nonperiodic (lump-sum) distributions from deferred annuity contracts issued after August 14, 1982, are treated on a last-in, first-out (LIFO) basis—taxable earnings are first distributed.

Which one of the following statements about life insurance products and their tax attributes is CORRECT? A) Deferred annuities owned by a corporation are eligible for tax-deferred accumulation. B) Permanent life insurance owned by a pension plan is 100% income tax free to the beneficiary of the plan. C) If a person purchased a life and 20-year term-certain immediate annuity at age 50, there would be no premature distribution penalty. D) Modified endowment contracts (MEC) do not provide a tax-free death benefit if the policyholder dies before age 59½.

d, An immediate annuity is one that is purchased by a single payment (premium), where payments commence no later than one year from the contract date, and which provides for a series of substantially equal periodic payments (paid at least annually). As such, immediate annuities avoid the 10% premature withdrawal penalty. Death benefit tax status of a MEC is the same as for any other non-MEC contract. Non-death-benefit distributions from a MEC will most likely be taxable as ordinary income to the extent that the cash surrender value exceeds the investment in the contract. With some exceptions, annuity contracts owned by a corporation are not treated as an annuity for tax purposes; thus the annual increase in value is subject to income tax. Part of the death benefit paid from life insurance owned by a pension may be taxable. Normally, any amount in excess of the cash value will be treated as death proceeds from a life insurance policy, and amounts equal to the cash value will be treated as a pension plan distribution. Nonperiodic (lump-sum) distributions from deferred annuity contracts issued after August 14, 1982, are treated on a last-in, first-out (LIFO) basis—taxable earnings are first distributed.

Which one of the following statements about life insurance products and their tax attributes is CORRECT? A) Deferred annuities owned by a corporation are eligible for tax-deferred accumulation. B) Permanent life insurance owned by a pension plan is 100% income tax free to the beneficiary of the plan. C) Modified endowment contracts (MEC) do not provide a tax-free death benefit if the policyholder dies before age 59½. D) If a person purchased a life and 20-year term-certain immediate annuity at age 50, there would be no premature distribution penalty.

d, Qualifying expenses for the AOTC do not include room and board. The AOTC may only be used for the first four years of undergraduate or vocational courses. Qualified higher-education expenses for Section 529 purposes include tuition, books, fees, and equipment for enrollment at an eligible educational institution; expenses for special needs services; and room and board costs for students who are at least half-time. In addition, expenses for the purchase of computer or peripheral equipment (printer, modem, etc.), computer software, or internet access and related services may be treated as qualifying expenses if the equipment, software, or services are to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution. The annual contributions to a Coverdell account may not exceed $2,000 per beneficiary.

Which one of the following statements regarding education provisions is CORRECT? A) Qualifying expenses for the American Opportunity Tax Credit (AOTC) include tuition, books, supplies, and room and board. B) The annual contributions to a Coverdell account may not exceed $2,000 per donor. C) The American Opportunity Tax Credit applies to undergraduate and graduate courses at an accredited, Title IV institution. D) Higher-education expenses for the Section 529 plan may include expenses for a computer, software, and internet access.

c, To minimize the taxable gain, we would choose the shares with the highest cost basis. Thus we would sell the 200 shares that have a basis of $20 each, 200 of the $18 basis shares, and 100 of the $12 basis shares. This gives an aggregate basis of $8,800, resulting in a (long-term capital) gain of $3,700. The ability to use specific identification was not impacted by the Tax Cuts and Jobs Act (TCJA).

Your client is contemplating the sale of some of her holdings in her employer's stock. The stock was acquired in four separate purchases as follows: Purchase DateSharesCost Per ShareCostJune 1, 1996200$10$2,000June 1, 1998200$18$3,600June 1, 2000200$12$2,400June 1, 2006200$20$4,000Total800$12,000 What is the least amount of gain she would be required to report if she sold 500 shares for $12,500? A) $4,300 B) $500 C) $3,700 D) $5,000

c, 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.

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 zero coupon bond B) A corporate bond fund C) A utility stock with a high dividend yield D) A certificate of deposit

d, Dividends retained by the insurer to pay premiums are not treated as distributions from a MEC.

Under the modified endowment contract (MEC) rules, which of the following is NOT considered a distribution from the MEC? A) Withdrawals from the contract B) Loans taken as cash or used to pay premiums C) Dividends received as cash D) Dividends retained by an insurer to pay premiums

d, The bargain element on exercised incentive stock options is a preference (deferral) item for AMT purposes and is not an exclusion item for calculating AMTI.

All of the following are exclusion items for the purposes of calculating alternative minimum taxable income (AMTI) except A) taxes taken as itemized deductions. B) miscellaneous itemized deductions. C) the standard deduction amount. D) the bargain element on exercised incentive stock options.

b, 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).

Clare is a single taxpayer. In 2022, 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) $570 B) $1,330 C) $0 D) $1,900

a, Amounts tied to a contingency or the occurrence of an event relating to the child are presumed to be nondeductible child support. Thus, $1,500 is tied to the child's reaching age 18 and would not be deductible. The remaining $1,000 per month is deductible alimony.

Ed was divorced from his spouse, Julie, in 2018. Julie received custody of their only child, Sally, age 5. Ed was ordered to pay $2,500 of alimony and child support per month to Julie until Sally reaches age 18. At that time, the payments are to decrease to $1,000 per month. What portion of each payment is deductible by Ed as qualifying alimony? A) $1,000 of each payment B) $2,500 of each payment C) $0 D) $1,500 of each payment

a, Some trust documents do not allow the beneficiary to be removed. In this case, the original grantor may be able to create a new trust. The trustee of the old trust could then decant the assets to the new trust. However, this arrangement presupposes the agreement of the disinherited spouse.

If Gloria, after divorce, wants to change the beneficiary of a trust that names her spouse as beneficiary to her daughter, which of the following is true? If the trust document does not allow the beneficiary to be removed, a new trust must be created. If a new trust is created, a new beneficiary can be easily named. Assets in an original trust can be decanted to a new trust. A) I and III B) I only C) II and III D) I, II, and III

b, The replacement period for condemned real estate used in a trade or business or held for investment purposes ends on the last day of the third taxable year following the year in which any part of the gain on the condemnation is realized.

In November 2020, George's rental real estate was condemned by the city under the eminent domain statute to allow for a new overpass to be built. He received the condemnation payment from the city later that month. If there were a gain on the conversion, when would the replacement period end? A) November 30, 2023 B) November 30, 2022 C) December 31, 2023 D) December 31, 2022

b, The investment in the contract ($48,000) is divided by the life expectancy (20 years) to equal the amount of the variable annuity excluded ($2,400 per year). Thus, of the $5,400 received, $2,400 is excluded, and the remaining $3,000 is taxable.

Jim Jannsen purchased a deferred variable annuity several years ago. His investment in the annuity contract was $48,000. His current life expectancy, based on IRS tables, is 20 years. During the current year, he received annuity payments totaling $5,400. What amount of the annuity payments is taxable to Jim? A) $5,400 B) $3,000 C) $2,400 D) $0

b, The home office expense deduction is limited to the earned income from the business. In other words, the home office expense deduction can generally neither create nor add to a loss. In this situation, the $61,000 of gross income is reduced by the $63,000 of business expenses not associated with the home office, to leave no earned income. Thus, of the $4,200 of home office expenses, none would be deductible in the current year. Note that the entire $4,200 of home office expenses would be subject to a carryforward.

Mark operates a sole proprietorship from his apartment. His gross income for the current tax year is $61,000. Business expenses not associated with his home office total $63,000. Expenses associated with the home office total $4,200. How much of the home office expense, if any, may Mark deduct for the current year? A) $275 B) $0 C) $4,200 D) $2,000

c, The basis of a partnership interest is measured by the amount of cash contributed, increased by the adjusted basis of property contributed, and further increased by the partner's share of both recourse and nonrecourse financing.

Paul and Mary form an equal partnership to produce hammers for the military. They each have a 50% profit and loss sharing agreement. Paul contributes cash of $50,000 and property with a fair market value of $50,000 and an adjusted basis of $20,000. Mary contributes cash of $25,000 and property with a fair market value of $75,000 and an adjusted basis of $40,000. A bank gives the partnership a recourse loan of $30,000 and a nonrecourse loan of $25,000. What is the amount of Paul and Mary's basis in the partnership, respectively? A) $70,000 for Paul, $65,000 for Mary B) $85,000 for Paul, $80,000 for Mary C) $97,500 for Paul, $92,500 for Mary D) $127,500 for Paul, $127,500 for Mary

d, The deduction is based on the lesser of basis or the decrease in FMV—reduced by the insurance, the $100 floor per occurrence, and 10% of AGI. Lesser of decrease in FMV ($22,000) or adjusted basis ($17,000) $17,000Less insurance coverage(12,000)$5,000Less $100 floor(100)$4,900Less 10% of AGI(3,500)Deductible loss on Schedule A$1,400

Phillip's classic automobile was completely destroyed in an earthquake that was declared a federal disaster. Unfortunately, his insurance paid only $12,000, while the fair market value was $22,000. His basis in the automobile was $17,000. Phillip's AGI is $35,000. What is the amount, if any, of Phillip's deductible casualty loss? A) $0 B) $6,000 C) $1,500 D) $1,400

c, The total income of $156,850 is reduced by the deductible IRA contribution of $6,000 to give an AGI of $150,850. The IRA is deductible because Ron is not an active participant in a company-maintained retirement plan. The AGI is reduced by the greater of the allowable itemized deductions of $14,000 or the standard deduction of $12,950 in 2022. This leaves a taxable income of $136,850. The interest income from a qualified private activity municipal bond is excluded from income; however, remember that it is generally a preference item for purposes of the AMT. Also, the workers' compensation received is tax exempt. Taxable income$136,850Less (from tax rate schedule)(89,075)Amount over $89,075$47,775Times (marginal tax bracket)24%Tax on amount over $89,075$11,466Plus (from tax rate schedule)15,214Total tax$26,680

Ron Bates is a single taxpayer with no dependents. His wage income is $156,850, and he has allowable itemized deductions of $14,000. Ron received $1,000 in interest income from a qualified private activity municipal bond and made an IRA contribution of $6,000. He also received workers' compensation of $4,000 during the year. Ron is not an active participant in a company-maintained retirement plan. Using the tax rate schedule provided in your course, what is the amount of Ron's tax liability for 2022 (round your answer to the nearest dollar)? A) $29,299 B) $27,259 C) $26,680 D) $28,339

c, 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.

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) An equipment-leasing limited partnership producing passive losses B) "Active participation" rental real estate that is producing a loss C) A working interest in an oil and gas general partnership D) A limited partnership involved in a historic rehabilitation project that is producing passive losses and credits

d, The realized gain in Parcel A is $50,000 and the recognized gain (the lesser of the gain realized or the boot received) is $20,000. The realized loss in Parcel B is $15,000. However, there is no loss recognized (deducted) in a like-kind exchange.

Your client is contemplating the exchange of two parcels of investment land for two similar parcels. Given the following details of the proposed transactions, compute the amount of recognized gain and loss, if any, on both parcels if your client does the exchanges. Parcel A: There were 10 acres of land acquired 15 years ago with a current basis of $50,000. In exchange, your client will receive 8 acres of land (FMV $80,000) and $20,000 of cash. Parcel B: There were 20 acres of land acquired 2 years ago with a current basis of $100,000. In exchange, your client will receive 12 acres of land (FMV $75,000) and $10,000 of cash. A) Parcel A recognized gain: $20,000; Parcel B recognized loss: $10,000 B) Parcel A recognized gain: $20,000; Parcel B recognized loss: $15,000 C) Parcel A recognized gain: $50,000; Parcel B recognized loss: $10,000 D) Parcel A recognized gain: $20,000; Parcel B recognized loss: $0