Regulation-Part 4-Part I

Banks Corp., a calendar year corporation, reimburses employees for properly substantiated qualifying business meal expenses. The employees are present at the meals, which are neither lavish nor extravagant, and the reimbursement is not treated as wages subject to withholdings. For 2019, what percentage of the meal expense may Banks deduct? 0% 50% 80% 100%

50% Meal expenses are limited to 50% of their total amount. For Meal expenses that an employee is reimbursed for by his/her employer, the percentage limit applies to the employer. However, if the reimbursement is included in the employee's income, the percentage limits apply to the employee and not the employer. Food and beverage expenses are only deductible if: (1) the expenses are not lavish or extravagant; (2) the taxpayer (or one of his employees) is present when the food or beverages were provided; and (3) the expenses relate directly to the conduct of business. Assuming that a Banks Corp.'s employee was present when the meals were provided and that the expenses were for a bona fide business purpose, the meal expenses can be deducted because they were not lavish or extravagant. Since the corporation reimbursed its employees, Banks Corp. may deduct 50% of the meal expenses.

In the current year, an unmarried individual with modified adjusted gross income of $25,000 paid $1,000 interest on a qualified education loan entered into on July 1. How may the individual treat the interest for income tax purposes? As a $500 deduction to arrive at AGI for the year. As a $1,000 deduction to arrive at AGI for the year. As a $1,000 itemized deduction. As a nondeductible item of personal interest.

As a $1,000 deduction to arrive at AGI for the year. This answer is correct. The interest expense on a qualified education loan is deductible in the computation of an individual's adjusted gross income. A qualified education loan is a loan whose proceeds are used to pay the qualified education expenses (e.g., tuition, fees, room and board, books, supplies) of the taxpayer, spouse, or anyone who was a dependent when the loan was taken out. The maximum annual deduction is limited to $2,500 and is reduced by modified adjusted gross income in excess of $60,000 if single, head of household, or a qualifying widow(er); $120,000 if married filing jointly. Here, since the unmarried individual's adjusted gross income is only $25,000, all $1,000 of interest is deductible to arrive at adjusted gross income.

Sanderson has made deductible contributions to his traditional IRA for many years. Sanderson recently retired at age 60 and received a distribution of $150,000. In which way, if any, will the distribution be taxed? As a capital gain. As ordinary income. Subject to a 10% penalty. It will not be taxed.

As ordinary income. Correct! Distributions from traditional IRAs are taxed as ordinary income.

For the year ended December 31, 2019, Elmer Shaw earned $3,000 interest at Prestige Savings Bank, on a time savings account scheduled to mature in 2022. In March 2020, before filing his 2019 income tax return, Shaw incurred an interest forfeiture penalty of $1,500 for premature withdrawal of the funds from his account. Shaw should treat this $1,500 forfeiture penalty as a Penalty not deductible for tax purposes. Deduction from gross income in arriving at 2020 adjusted gross income. Deduction from 2020 adjusted gross income, deductible only if Shaw itemizes his deductions for 2020. Reduction of interest earned in 2019, so that only $1,500 of such interest is taxable on Shaw's 2019 return.

Deduction from gross income in arriving at 2020 adjusted gross income. This answer is correct. An interest forfeiture penalty for making a premature withdrawal from a time savings account should be deducted from gross income in arriving at adjusted gross income in the year in which the penalty is incurred.

An individual starts paying student loan interest in the current year. How many years may the individual deduct a portion of the student loan interest? Current year only. Five years. Ten years. Duration of time that interest is paid.

Duration of time that interest is paid. This answer is correct. An individual is allowed to annually deduct up to $2,500 for interest on qualified education loans. Qualified education expenses include tuition, fees, room, board, and related expenses. Although the deduction is subject to a phaseout based on income, there is no limitation on the number of years for which a deduction can be taken.

Magda Micale, a public school teacher with adjusted gross income of $10,000, paid the following items in 2019 for which she received no reimbursement: Initiation fee for membership in teachers' union $100 Dues to teachers' union 180 Voluntary unemployment benefit fund contributions to union-established fund 72 How much can Magda claim in 2019 as allowable miscellaneous deductions on Schedule A of Form 1040? $ 0 $80 $280 $352

$ 0 Beginning in 2019, unreimbursed employee business expenses are not deductible.

Abe Architect owns his own architectural consulting firm. During the current year he incurred the following expenses related to meetings with clients and potential clients: Meal expenses $2,000 Dues to Five-Star Country Club $5,000 Greens fee for playing golf with clients $1,500 Tickets to Super Bowl (face value = $1,000) $3,500 What is the amount of deductible expenses for the current year related to these expenditures? $ 1,000 $ 2,250 $ 3,500 $ 12,000

$ 1,000 Correct! Dues are not deductible. The meal expenses are deductible but subject to the 50% limitation. The other expenses are entertainment expenses and are not deductible.

Jensen reported the following items during the current year: Fair rent value of a condominium owned by Jensen's employer $ 1,400 Cash found in a desk purchased for $30 at a flea market 400 Inheritance 11,000 The employer allowed Jensen to use the condominium for free in recognition of outstanding achievement. Based on this information, what is Jensen's gross income for the year? $ 1,400 $ 1,770 $ 1,800 $12,400

$ 1,800 Correct! The fair value of the condominium is included in income since this was received in return for services rendered to her employer. The $400 cash is also included in income under the treasure trove principle. The $400 is not offset by the $30 used to purchase the desk, but she does have a basis of $30 for the desk. Inheritances are never included in gross income.

For the year ended December 31, 2019, Sanchez had a net operating loss of $100,000. Taxable income for the earlier years, computed without reference to the net operating loss, was as follows: Taxable income 2015 $90,000 2016 $80,000 2017 $50,000 2018 $40,000 What amount of net operating loss will be available to Sanchez for 2020? $ 0 $ 10,000 $ 60,000 $ 100,000

$ 100,000 Correct! Beginning in 2018, an NOL may not be carried back and may be carried forward indefinitely. $100,000 is available to carry forward to 2020.

Max and Karin were divorced in January 2018. In accordance with the divorce decree, Max transferred the title in their home to Karin in 2018. The home, which had a fair market value of $250,000, was subject to a $100,000 mortgage that had 10 more years to run. Monthly mortgage payments amount to $1,000. Under the terms of settlement, Max is obligated to make the mortgage payments on the home, but his obligation to make the payments will cease if Karin dies. Max made 12 mortgage payments in 2019. What amount is taxable as alimony in Karin's 2019 return? $0 $ 12,000 $150,000 $162,000

$ 12,000 This answer is correct. In order to be treated as alimony, a payment must be made in cash and be received by or on behalf of the payee spouse. Furthermore, cash payments must be required to terminate upon the death of the payee spouse to be treated as alimony. The mortgage payments are cash payments made on behalf of Karin, and are treated as alimony because the payments will terminate in the event of Karin's death.

On July 1, 2013, Lila Perl paid $90,000 for 450 shares of Janis Corp. common stock. Lila received a nontaxable stock dividend of 50 new common shares in August 2019. On December 20, 2019, Lila sold the 50 new shares for $11,000. How much should Lila report in her 2019 return as long-term capital gain? $0 $ 1,000 $ 2,000 $11,000

$ 2,000 After the stock dividend, the basis of each share would be determined as follows: $ 90 , 000 450 + 50 = $ 180 per share Since the holding period of the new shares includes the holding period of the old shares, the sale of the 50 new shares for $11,000 results in a LTCG of $2,000 [$11,000 − (50 shares × $180)].

Tana's divorce decree requires Tana to make the following transfers to Tana's former spouse during the current year for a divorce finalized before 2019: Alimony payments of $3,000 Child support of $2,000 Property division of stock with a basis of $4,000 and a fair market value of $6,500 What is the amount of Tana's alimony deduction for 2019? $ 3,000 $ 7,000 $ 9,500 $11,500

$ 3,000 This answer is correct. Alimony is a cash payment to (or on behalf of) a spouse or former spouse that is required by a divorce decree or written separation agreement. Alimony does not include child support, nor any noncash property settlements. Here, Tana's alimony deduction is limited to the alimony payments of $3,000.

John Budd files a joint return with his wife. Budd's employer pays 100% of the cost of all employees' group-term life insurance under a qualified plan. Under this plan, the maximum amount of tax-free coverage that may be provided for Budd by his employer is $100,000. $ 50,000. $ 10,000. $ 5,000.

$ 50,000. The cost of the first $50,000 of group-term life insurance coverage provided by an employer will be excluded from an employee's income.

Allison sold a building for $600,000. Allison received a down payment of $120,000 as well as annual principal payments of $120,000 for each of the subsequent four years. Allison purchased the building for $500,000 and claimed depreciation of $80,000. What amount of gain should Allison report in the year of sale using the installment method? $180,000 $120,000 $ 54,000 $ 36,000

$ 36,000 This answer is correct. Under the installment method, gain from the sale is prorated and recognized over the years in which payments are received. The amount of gain recognized for a tax year is calculated by multiplying the payment received in that year by the gross profit ratio. The gross profit ratio is equal to the gross profit divided by the payments that are to be received from the sale. Here, property with a basis of $500,000 − $80,000 = $420,000 was sold for $600,000, resulting in a gross profit of $180,000. Since only $120,000 of the $600,000 selling price was received in the year of sale, the amount of gain to be reported under the installment method for the year of sale would be $120,000 × ($180,000/$600,000) = $36,000.

Emil Gow owns a two-family house that has two identical apartments. Gow lives in one apartment and rents out the other. In 2019, the rental apartment was fully occupied and Gow received $7,200 in rent. During the year ended December 31, 2019, Gow paid the following: Real estate taxes $6,400 Painting of rental apartment 800 Annual fire insurance premium 600 In 2019, depreciation for the entire house was determined to be $5,000. What amount should Gow include in his adjusted gross income for 2019? $2,900 $ 800 $ 400 $ 100

$ 400 Since Gow lives in one of two identical apartments, only 50% of the expenses relating to both apartments can be allocated to the rental unit. Rent $7,200 Less: Real estate taxes (50% × $6,400) (3,200) Painting of rental apartment (800) Fire insurance (50% × $600) (300) Depreciation (50% × $5,000) (2,500) Net rental income $ 400

Klein, a master's degree candidate at Briar University, was awarded a $12,000 scholarship from Briar. The scholarship was used to pay Klein's university tuition and fees. Klein also received $5,000 for teaching two courses at a nearby college. What amount is includible in Klein's gross income? $0 $ 5,000 $12,000 $17,000

$ 5,000 Since the scholarship was used to pay tuition and fees, none of it is taxable. For purposes of this section, a qualified scholarship is any amount received by an individual as a scholarship or fellowship grant (as defined in paragraph (c)(3) of this section), to the extent the individual establishes that, in accordance with the conditions of the grant, such amount was used for qualified tuition and related expenses Amounts receive for teaching are taxable. Inclusion of qualified scholarships and qualified tuition reductions representing payment for services are taxable.

In the current year, Essex sold land with a basis of $80,000 to Yarrow for $100,000. Yarrow paid $25,000 down and agreed to pay $15,000 per year, plus interest, for the next five years, beginning in the second year. Under the installment method, what gain should Essex include in gross income for the year of sale? $25,000 $20,000 $15,000 $ 5,000

$ 5,000 The total recognized gain from the sale is $20,000 ($100,000 selling price - $80,000 basis). Under the installment method, recognized income = cash collected × (gross profit/contract price). Therefore, $25,000 × ($20,000/$100,000) = $25,000 × 20% = $5,000.

Roger Burrows, age 19, is a full-time student at Marshall College and a candidate for a bachelor's degree. During the current year he received the following payments: State scholarship covering tuition for 10 months $ 3,600 Loan from college financial aid office 5,500 Cash support from parents 8,000 Cash dividends on qualified investments 700 Cash prize awarded in contest 5,000 $22,800 What is Burrows's gross income for the current year? $ 700 $ 5,700 $13,700 $17,300

$ 5,700 This answer is correct. Roger Burrows's gross income is $5,700, consisting of $700 of dividends and the $5,000 prize. Scholarships awarded for tuition to candidates for a degree are excluded from gross income unless provided as compensation for services. Loans and cash support from parents are also excluded from gross income.

Cassidy, an individual, reported the following items of income and expense during 2018: Salary $50,000 Alimony paid to former spouse (Divorce finalized in 2019) 10,000 Inheritance from a grandparent 25,000 Proceeds of a lawsuit for personal physical injuries 50,000 What is the amount of Cassidy's adjusted gross income? $ 40,000 $ 50,000 $115,000 $125,000

$ 50,000 This answer is correct. Cassidy's AGI consists of the $50,000 salary received. The receipt of an inheritance and the proceeds of a lawsuit for personal physical injuries are excluded from Cassidy's gross income. Alimony paid in 2019 is not deductible on a divorce finalized in 2019.

On December 15, 2019, Donald Calder made a contribution of $500 to a qualified charitable organization, by charging the contribution on his bank credit card. Calder paid the $500 on January 20, 2020, upon receipt of the bill from the bank. In addition, Calder issued and delivered a promissory note for $1,000 to another qualified charitable organization on November 1, 2019, which he paid upon maturity four months later. If Calder itemizes his deductions, what portion of these contributions is deductible in 2019? $0 $ 500 $1,000 $1,500

$ 500 Charitable contributions are generally deductible in the year actually paid. The $500 charge to his bank credit card made on December 15, 2019, is considered a payment, and is deductible for 2019. The $1,000 promissory note delivered on November 1, 2019, is not considered a contribution until payment of the note upon maturity in 2020.

Robin Moore, a self-employed taxpayer, reported the following information for 2019: Income: Dividends from investments $ 500 Net short-term capital gain on sale of investment 1,000 Deductions: Net loss from business (6,000) Standard deduction (12,200) What is the amount of Moore's net operating loss for 2019? $ 4,500 $ 5,000 $ 6,000 $16,500

$ 6,000 A NOL generally represents a loss from the conduct of a trade or business and can generally be carried forward indefinitely to offset income in the carryforward years. Since a NOL generally represents a business loss, an excess of nonbusiness deductions over nonbusiness income cannot be subtracted in computing the NOL. Nonbusiness deductions generally include itemized deductions as well as the standard deduction if the taxpayer does not itemize. In this case, the $12,200 standard deduction offsets the $1,500 of nonbusiness income received in the form of dividends and short-term capital gain, but the excess ($10,700) cannot be included in the NOL computation. Thus, the taxpayer's NOL simply consists of the $6,000 business loss. The taxable loss is ($16,700). When the excess standard deduction ($10,700) is added to the loss, that produces the NOL of ($6,000).

Dan Farley leased a building to Robert Shelter for a period of fifteen years at a monthly rental of $1,000 with no option to renew. At that time the building had a remaining estimated useful life of twenty years. Prior to taking possession of the building, Shelter made improvements at a cost of $18,000. These improvements had an estimated useful life of twenty years at the commencement of the lease period. The lease expired on June 30, 2019, at which point the improvements had a fair market value of $2,000. The amount that Farley, the landlord, should include in his gross income for 2019 is $ 6,000 $ 8,000 $10,000 $18,500

$ 6,000 A lessor excludes from income any increase in the value of property caused by improvements made by the lessee, unless the improvements were made in lieu of rent. In this case, there is no indication that the improvements were made in lieu of rent. Therefore, for 2019, Farley should only include the six rent payments in income: 6 × $1,000 = $6,000.

Destry, a single taxpayer, reported the following on his 2019 U.S. Individual Income Tax Return Form 1040: Income: Wages $ 5,000 Interest on savings account 1,000 Net rental income 4,000 Deductions: Standard deduction 12,200 Net business loss 16,000 Net short-term capital loss 2,000 What is Destry's net operating loss that is available for carryforward? $ 7,000 $ 9,000 $15,100 $16,000

$ 7,000 $7,000 is correct. Wages $ 5,000 Interest on savings account 1,000 Net rental income 4,000 Net business loss (16,000) Net short-term capital loss ( 2,000) AGI ( 8,000) Deductions: Standard deduction 12,200 Taxable loss (20,200) Adjustments to arrive at NOL carry forward (use Form 1045, Schedule A for calculation purposes): $20,200 TAXABLE LOSS Plus $11,200 Adjustment for deductions that are not connected to a trade or business or employment, such as the standard deduction of $12,200 reduced by the non-business income of $1,000 interest from savings. Plus $ 2,000 Short-term capital loss as adjusted by business capital gains and losses (-0-). ($ 7,000) Correct carryforward

Richard Brown, who retired on May 31, 2019, receives a monthly pension benefit of $700 payable for life. His life expectancy at the date of retirement is 10 years. The first pension check was received on June 15, 2019. During his years of employment, Brown contributed $12,000 to the cost of his company's pension plan. How much of the pension amounts received may Brown exclude from taxable income for the years 2019, 2020, and 2021? 2019 2020 2021 $0 $0 $0 $4,900 $4,900 $4,900 $ 700 $1,200 $1,200 $4,900 $8,400 $8,400

$ 700 $1,200 $1,200 Brown's contribution of $12,000 will be recovered pro rata over the life of the annuity. Under this rule, $100 per month (12,000 ÷ 120 months) is excluded from income. Received Excluded Included 2019 $4,900 $ 700 $4,200 2020 8,400 1,200 7,200 2021 8,400 1,200 7,200

Moseley, a cash method taxpayer, billed Dolphi $1,000 for medical services. Dolphi paid Moseley $500 cash and did some landscaping for Moseley's office in full settlement of the bill. Dolphi does comparable landscaping for $350. What amount should Moseley include in gross income as a result of this transaction? $0 $ 500 $ 850 $1,000

$ 850 This answer is correct. An exchange of services for property or services is sometimes called bartering. A taxpayer must include in income the amount of cash and the fair market value of property or services received in exchange for the performance of services. Here Moseley's gross income should include the $500 cash and the landscaping with a comparable value of $350, a total of $850.

Amy Finch had the following cash receipts during 2019: Dividend from a mutual insurance company on a life insurance policy $500 Dividend on listed corporation stock; payment date by corporation was 12/30/18, but Amy received the dividend in the mail on 1/2/19 875 Total dividends received to date on the life insurance policy do not exceed the aggregated premiums paid by Amy. How much should Amy report for dividend income for 2019? $1,375 $ 875 $ 500 $0

$ 875 Dividends are included in income at earlier of actual or constructive receipt. When corporate dividends are paid by mail, they are included in income for the year in which received. Thus, the $875 dividend received 1/2/19 is included in income for 2019. The $500 dividend on a life insurance policy from a mutual insurance company is treated as a reduction of the cost of insurance and is excluded from gross income.

Mr. and Mrs. Alvin Charak took a foster child, Robert, into their home in 2019. A state welfare agency paid the Charaks $3,900 during the year for related expenses. Actual expenses incurred by the Charaks during 2019 in caring for Robert amounted to $3,000. The remaining $900 was spent by the Charaks in 2019 towards their own personal expenses. How much of the foster child payments is taxable income to the Charaks in 2019? $0 $ 900 $2,900 $3,900

$ 900 Foster child payments are excluded from income to the extent they represent reimbursement for expenses incurred for care of the foster child. Since the payments ($3,900) exceeded the expenses ($3,000), the $900 excess used for the Charaks' personal expenses must be included in their gross income.

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their 2019 adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A for 2019. The following unreimbursed cash expenditures were among those made by the Burgs during 2019: Repair of glass vase accidentally broken in home by dog; vase cost $500 in 2014; fair value $600 before accident and $200 after accident $90 Without regard to the $100 "floor" and the adjusted gross income percentage threshold, what amount should the Burgs deduct for the casualty loss in their itemized deductions on Schedule A for 2019? $0 $ 90 $300 $400

$0 A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Deductible casualty losses may result from earthquakes, tornadoes, floods, fires, vandalism, auto accidents, etc. However, a loss due to the accidental breakage of household articles such as glassware or china under normal conditions is not a casualty loss. Neither is a loss due to damage caused by a family pet.

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their 2019 adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A for 2019. The following unreimbursed cash expenditures were among those made by the Burgs during 2019: Repair and maintenance of motorized wheelchair for physically handicapped dependent child $ 300 Tuition, meals and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care 1,200 Self-employment tax 7,650 Four tickets to a theater party sponsored by a qualified charitable organization; not considered a business expense; similar tickets would cost $25 each at the box office 160 Repair of glass vase accidentally broken in home by dog; vase cost $500 in 2014; fair value $600 before accident and $200 after accident 90 Fee for breaking lease on prior apartment residence located 20 miles from new residence 500 Security deposit placed on apartment at new location 900 What amount should the Burgs deduct for self-employment tax in their itemized deductions on Schedule A for 2019? $0 $500 $3,825 $7,650

$0 A self-employed person may deduct one-half of the self-employment taxes paid as a deduction for AGI, not as an itemized deduction.

Ronald Birch, who is single and age 28, earned a salary of $70,000 in 2019 as a plumber employed by Lupo Company. Birch was covered for the entire year 2019 under Lupo's qualified pension plan for employees. In addition, Birch had a net income of $15,000 from self-employment in 2019. What is the maximum amount that Birch can deduct in 2019 for contributions to an individual retirement account (IRA)? $5,000 $4,000 $3,000 $0

$0 A single individual with AGI over $74,000 for 2019 would only be entitled to an IRA deduction if the taxpayer is not covered by a qualified employee pension plan

Martin Dawson, who resided in Detroit, was unemployed for the last 6 months of 2018. In January 2019, he moved to Houston to seek employment, and obtained a full-time job there in February. He kept this job for the balance of the year. Martin paid the following expenses in 2019 in connection with his move: Rental of truck to move his personal belongings to Houston $ 800 Penalty for breaking the lease on his Detroit apartment 300 Total $1,100 How much can Martin deduct in 2019 for moving expenses? $0 $300 $800 $1,100

$0 Correct! Beginning in 2018, moving expenses are not deductible.

Frank Lyon was held up and robbed of $800 cash in June 2019. One month later, Frank had $2,000 cash stolen from him by his housekeeper. Frank's adjusted gross income for 2019 was $10,000. How much was deductible by Frank for theft losses in 2019? $0 $1,600 $1,700 $1,800

$0 Beginning in 2018, theft losses are not deductible for individuals because they are not attributable to a federally declared disaster.

Robert Hall served in the U.S Army and received a full medical discharge and was declared 100% disabled in 2019. Robert had accrued $35,000 in student loans prior to his service in the military. During 2019, the student loan was completely forgiven. The loan has an applicable federal interest rate of 5.9%. How much of the loan and interest must Robert include in gross income? $0 $2,065 $35,000 $37,065

$0 CORRECT! Gross income does not include debt forgiveness for student loans that are forgiven because of the death or disability of the creditor.

Hall, a divorced person and custodian of her 12-year old child, filed her 2019 federal income tax return as head of a household. She submitted the following information to the CPA who prepared her 2019 return: The divorce agreement, executed in 2017, provides for Hall to receive $3,000 per month, of which $600 is designated as child support. After the child reaches 18, the monthly payments are to be reduced to $2,400 and are to be continued until remarriage or death. However, for the year 2019, Hall received a total of only $5,000 from her former husband. Hall paid an attorney $2,000 in 2019 in a suit to collect the alimony owed. In June 2018, Hall's mother gifted her 100 shares of a listed stock. The donor's basis for this stock, which she bought in 2002, was $4,000, and market value on the date of the gift was $3,000. Hall sold her stock in July 2019 for $3,500. The donor paid no gift tax. During 2019, Hall spent a total of $1,000 for state lottery tickets. Her lottery winnings in 2019 totaled $200. Hall earned a salary of $25,000 in 2019. Hall was not covered by any type of retirement plan, but contributed $2,000 to an IRA in 2019. In 2019, Hall sold an antique that she bought in 1996 to display in her home. Hall paid $800 for the antique and sold it for $1,400, using the proceeds to pay a court-ordered judgment. Hall paid the following expenses in 2019 pertaining to the home that she owns: realty taxes, $3,400; mortgage interest, $7,000; casualty insurance, $490; assessment by city for construction of a sewer system, $910; interest of $1,000 on a personal, unsecured bank loan, the proceeds of which were used for home improvements. Hall does not rent out any portion of the home. What amount should be reported in Hall's 2019 return as alimony income? $36,000 $28,800 $5,000 $0

$0 Alimony paid under a divorce or a separation agreement is included as taxable income by the payee spouse and deductible by the payor spouse for divorce agreements settled prior to 2019. Payments that are fixed as child support are not treated as alimony. Thus, these payments are not included as taxable income by the payee spouse nor deductible by the payor spouse. If the payor spouse pays less than the amount specified as child support payments, the entire amount is treated as child support payments. Hall's divorce agreement provides for $3,000 per month, of which $600 is designated as child support. Hence, Hall should have received $28,800 in alimony and $7,200 in child support. However, she only received $5,000, which is less than the $7,200 she should have received in child support. Therefore, the entire $5,000 would be considered child support and Hall would not report any alimony.

Christopher Ryan, a calendar-year taxpayer, was employed and resided in Illinois. On January 15, 2019, Ryan was permanently transferred to Florida by his employer. Ryan worked full time for the entire year. In 2019, Ryan incurred and paid the following unreimbursed expenses in relocating: Lodging and travel expenses while moving $1,000 Meals while en route to Florida 200 Cost of insuring household goods and personal effects during move 150 Cost of shipping motorcycle to new home 300 Cost of moving household furnishings and personal effects 2,000 What amount was deductible as moving expenses on Ryan's 2019 tax return? $3,000 $3,150 $3,450 $0

$0 Correct! Beginning in 2018, moving expenses are not deductible.

David Waldman, a calendar-year taxpayer, was employed and resided in Philadelphia. On February 1, 2019, Waldman was permanently transferred to Dallas by his employer. Waldman worked for 20 weeks before being laid off for other than willful misconduct. In 2019, Waldman incurred and paid the following unreimbursed expenses in connection with his move: Cost of moving household furnishings and personal effects $ 1,500 Lodging expenses while moving 500 Penalty for breaking the lease on his Philadelphia apartment 600 What amount can Waldman deduct in 2019 for moving expenses? $0 $1,026 $2,000 $2,600

$0 Correct! Beginning in 2018, moving expenses are not deductible.

Davidson was transferred from Chicago to Atlanta. In connection with the transfer, Davidson incurred the following moving expenses: Moving the household goods $2,000 Temporary living expenses in Atlanta 400 Lodging on the way to Atlanta 100 Meals 40 What amount may Davidson deduct if the employer reimbursed Davidson $2,000 (not included in form W-2) for moving expenses? $0 $100 $120 $500

$0 Correct! Beginning in 2018, moving expenses are not deductible.

James, a calendar-year taxpayer, was employed and resided in Boston. On February 4, 2019, James was permanently transferred to Florida by his employer. James worked full-time for the entire year. In 2019, James incurred and paid the following unreimbursed expenses in relocating: Lodging and travel expenses while moving $1,000 Meals while in route to Florida 300 Cost of insuring household goods and personal effects during move 200 Cost of shipping household pets to new home 100 Costs of moving household furnishings and personal effects 3,000 What amount was deductible as moving expenses on James's 2019 tax return? $0 $4,500 $4,300 $4,000

$0 Correct! Beginning in 2018, moving expenses are not deductible.

Ram Corp.'s operating income for the current year amounted to $100,000. Included in Ram's current year operating expenses is a $6,000 insurance premium on a policy insuring the life of Ram's president. Ram is beneficiary of this policy. In Ram's current year tax return, what amount should be deducted for the $6,000 life insurance premium? $6,000 $5,000 $1,000 $0

$0 Generally, no deduction is allowed for expenditures that produce tax-exempt income. Here, no deduction is allowed for the $6,000 life insurance premium because Ram is the beneficiary of the policy, and the proceeds of the policy will be excluded from Ram's income when the officer dies.

Charles Gilbert, a corporate executive, incurred business-related unreimbursed expenses for 2019 as follows: Entertainment $900 Travel 700 Education 400 Assuming that Gilbert does not itemize deductions, how much of these expenses should he deduct on his 2019 tax return? $0 $700 $1,300 $1,600

$0 Gilbert cannot deduct any of the expenses listed if he does not itemize deductions. Additionally, unreimbursed employee business expenses are not deductible beginning in 2019.

Ed and Ann Ross were divorced in January 2018. In accordance with the divorce decree, Ed transferred the title in their home to Ann. The home, which had a fair market value of $150,000, was subject to a $50,000 mortgage that had twenty more years to run. Monthly mortgage payments amount to $1,000. Under the terms of settlement, Ed is obligated to make the mortgage payments on the home for the full remaining 20-year term of the indebtedness, regardless of how long Ann lives. Ed made 12 mortgage payments during the current-year. What amount is taxable as alimony in Ann's 2019 return? $0 $ 12,000 $100,000 $112,000

$0 In order to be treated as alimony, a payment must be made in cash and be received by or on behalf of the payee spouse. Furthermore, cash payments must be required to terminate upon the death of the payee spouse to be treated as alimony. In this case, the transfer of title in the home to Ann is not a cash payment and cannot be treated as alimony. Although the mortgage payments are cash payments made on behalf of Ann, the payments are not treated as alimony because they will be made throughout the full 20-year mortgage period and will not terminate in the event of Ann's death.

Cobb, an unmarried individual, had an adjusted gross income of $200,000 in 2019 before any IRA deduction, taxable Social Security benefits, or passive activity losses. Cobb incurred a loss of $30,000 in 2019 from rental real estate in which he actively participated. What amount of loss attributable to this rental real estate can be used in 2019 as an offset against income from nonpassive sources? $0 $12,500 $25,000 $30,000

$0 Passive activity losses normally only may be used to offset passive activity income. Rental activities are considered passive activities, regardless of the level of participation by the taxpayer. However, a natural person is allowed an allowance for offsetting up to $25,000 of nonpassive income with passive losses resulting from rental activities, provided certain conditions are met. The person must own at least 10% of the rental activity and must have actively participated. Hence, Cobb's $30,000 loss from his rental real estate activities would be considered a passive loss, initially indicating that Cobb would be limited to the $25,000 allowance. However, the $25,000 allowance is reduced by 50 percent of the amount that the taxpayer's adjusted gross income exceeds $100,000. Thus, Cobb's potential $25,000 allowance for rental real estate is reduced to zero, so none of the $30,000 passive loss is deductible. Therefore, Cobb may not use any of his loss attributable to the rental real estate to offset against income from nonpassive sources.

Jason Budd, CPA, reports on the cash basis. In April 2018, Budd billed a client $3,500 for the following professional services: Personal estate planning $2,000 Personal tax return preparation 1,000 Compilation of business financial statements 500 No part of the $3,500 was ever paid. In April 2019, the client declared bankruptcy, and the $3,500 obligation became totally uncollectible. What loss can Budd deduct on his tax return for this bad debt? $0 $ 500 $ 1,500 $3,500

$0 Since Budd reports on the cash basis he did not recognize income when the client was billed. Therefore, he has no basis in the receivable to deduct when it becomes uncollectible.

Barkley owns a vacation cabin that was rented to unrelated parties for 10 days during the year for $2,500. The cabin was used personally by Barkley for 3 months and left vacant for the rest of the year. Expenses for the cabin were as follows: Real Estate Taxes $1,000 Maintenance and Utilities $2,000 How much rental income (loss) is included in Barkley's adjusted gross income? $0 $ 500 $ (500) $(1,500)

$0 Special rules apply to realty that is used for both personal and rental purposes. If the number of rental days is less than 14 then the property is treated as if it was used 100% for personal use. In that case, the rental revenue is ignored (i.e., does not have to be recognized). The only items that can be deducted are real estate taxes and mortgage and these items must be reported on Schedule A. Therefore, there is no rental income and no rental expenses.

Jon and Kim Moseley, married and filing a joint income tax return, derive their entire income from the operation of their gun shop. The Moseleys itemized their deductions on Schedule A for 2019. The following unreimbursed cash expenditure was among those made by the Moseleys during 2019: Repair of glass vase accidentally broken by dog (vase cost $550 in 2013; fair value $650 before accident and $150 after accident) $70 Without regard to the $100 "floor" and the adjusted gross income percentage threshold, what amount should the Moseleys deduct for the casualty loss in their itemized deductions on Schedule A for 2019? $0 $ 70 $400 $500

$0 This answer is correct. A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Deductible casualty losses may result from earthquakes, tornadoes, floods, fires, vandalism, auto accident, etc. However, a loss due to the accidental breakage of household articles such as glassware or china under normal conditions is not a casualty loss. Neither is a loss due to damage caused by a family pet.

Harold Brodsky is an electrician employed by a contracting firm. His adjusted gross income is $25,000. During 2019 he incurred and paid the following expenses: Use of personal auto for company business (reimbursed by employer for $200) $300 Specialized work clothes 550 Union dues 600 Cost of income tax preparation 150 Preparation of will 100 If Brodsky were to itemize his personal deductions, what amount should he claim as a deduction for miscellaneous itemized deductions? $ 800 $ 900 $1,500 $0

$0 This answer is correct. Beginning in 2018, miscellaneous itemized deductions subject to 2% of AGI phase-out are not deductible.

Nicole Sandler, a public school teacher with adjusted gross income of $20,000, paid the following items during 2019 for which she received no reimbursement: Initiation fee for membership in teachers' union $300 Dues to teachers' union 250 Voluntary unemployment benefit fund contributions to union-established fund 85 How much can Nicole claim as allowable miscellaneous deductions on Schedule A of Form 1040? $150 $335 $550 $0

$0 This answer is correct. Beginning in 2018, miscellaneous itemized deductions subject to 2% of AGI phase-out are not deductible.

An individual received $50,000 during the current year pursuant to a 2019 divorce decree. A check for $25,000 was identified as annual alimony, checks totaling $10,000 as annual child support, and a check for $15,000 as a property settlement. What amount should be included in the individual's gross income? $50,000 $40,000 $25,000 $0

$0 This answer is correct. For divorce agreements settled on or after 1/1/2019, alimony is not included in the recipient's income.

Jones, a divorced person and custodian of her 10-year-old child, filed her 2019 federal income tax return as head of a household. She submitted the following information to the CPA who prepared her 2018 return: • The divorce agreement, executed in 2013, provides for Jones to receive $5,000 per month, of which $2,000 is designated as child support. After the child reaches age 18, the monthly payments are to be reduced to $3,000 and are to continue until remarriage or death. However, for the year 2019, Jones received a total of only $12,000 from her former husband. Jones paid an attorney $4,000 in 2019 in a suit to collect the alimony owed. What amount should be included in Jones's 2019 return as alimony income? $0 $8,000 $12,000 $36,000

$0 This answer is correct. If a divorce agreement specifies both alimony and child support, but less is paid than required, then payments are first allocated to child support, with only the remainder in excess of required child support to be treated as alimony. Pursuant to Jones's divorce agreement, $5,000 was to be paid each month, of which $2,000 was designated as child support, leaving a balance of $3,000 a month to be treated as alimony. However, during 2019, only $12,000 was paid to Jones by her former husband which was less than the $60,000 required by the divorce agreement. Since required child support payments totaled $2,000 × 12 = $24,000 for 2019, all $12,000 of the payments actually received by Jones during 2019 is treated as child support, with nothing remaining to be reported as alimony.

Richard Putney, who lived in Idaho for 5 years, moved to Texas in 2019 to accept a new position. His employer reimbursed him in full for all direct moving costs, but did not pay for any part of the following indirect moving expenses incurred by Putney: House hunting trips to Texas $800 Temporary housing in Texas 900 How much of the expenses can be deducted by Putney as moving expenses? $0 $900 $1,500 $1,700

$0 This answer is correct. No deduction is allowed for moving expenses.

Pat, a single taxpayer, has adjusted gross income of $40,000 in the current year. During 2019, a hurricane causes $4,100 damage to Pat's personal use car on which Pat has no insurance. Pat purchased the car for $20,000. Immediately before the hurricane, the car's fair market value was $11,000 and immediately after the hurricane its fair market value was $6,900. The area was declared a federal disaster area. What amount should Pat deduct as a casualty loss for the current year after all threshold limitations are applied? $4,100 $4,000 $100 $0

$0 This answer is correct. The amount of Pat's personal casualty loss is computed as the lesser of (1) the basis of the car ($20,000), or (2) the decline in the car's FMV resulting from the casualty ($11,000 − $6,900 = $4,100); reduced by a $100 floor and 10% of AGI. Here, Pat's deductible loss is $4,100 − [$100 + (10% of $40,000)] = $0.

Barkley owns a vacation cabin that was rented to unrelated parties for 10 days during the year for $2,500. The cabin was used personally by Barkley for three months and left vacant for the rest of the year. Expenses for the cabin were as follows. Real estate taxes $1,000 Maintenance and utilities $2,000 How much rental income (loss) is included in Barkley's adjusted gross income? $0 $ 500 $ (500) $(1,500)

$0 This answer is correct. The treatment of rental income and expenses for a dwelling unit that is also used for personal purposes depends on whether the taxpayer uses it as a home. A dwelling unit is used as a home if personal use exceeds the greater of 14 days, or 10% of the number of days rented. If a dwelling unit is used as a home and it is rented for less than 15 days during the tax year, rental income is excluded from gross income and expenses are not deductible as rental expenses. Here, since the cabin was used as a home and was rented for only 10 days, the rental income is excluded from Barkley's gross income, and the real estate taxes and maintenance and utilities are not deductible as rental expenses. Of course the real estate taxes will be deductible as an itemized deduction from AGI if Barkley itemizes deductions.

During 2019, Vincent Tally gave to the municipal art museum title to his private collection of rare books that was assessed and valued at $60,000. However, he reserved the right to the collection's use and possession during his lifetime. For the current year, he reported an adjusted gross income of $100,000. Assuming that this was his only contribution during the year, and that there were no carryovers from prior years, what amount can he deduct as contributions for 2019? $0 $30,000 $50,000 $60,000

$0 Vincent Tally is not entitled to a charitable deduction for the current year because he did not give up his entire interest in the book collection. By reserving the right to use and possess the book collection for his lifetime, Vincent Tally has not made a completed gift. Therefore, no deduction is available. The contribution will be deductible when his entire interest in the books is transferred to the art museum.

Joel Rich is an outside salesman, deriving his income solely from commissions, and personally bearing all expenses without reimbursement of any kind. During the current year, Joel paid the following expenses pertaining directly to his activities as an outside salesman: Travel $10,000 Secretarial 7,000 Telephone 1,000 How should these expenses be deducted in Joel's current-year return? From gross income, in arriving at adjusted gross income As itemized deductions $18,000 $0 $11,000 $ 7,000 $0 $18,000 $0 $0

$0 $0 An outside salesman is an employee who principally solicits business for his employer while away from the employer's place of business. All unreimbursed business expenses of an outside salesman are miscellaneous itemized deductions and are not deductible.

In 2019, Joan accepted and received a $10,000 award for outstanding civic achievement. Joan was selected without any action on her part, and no future services are expected of her as a condition of receiving the award. What amount should Joan include in her 2019 adjusted gross income in connection with this award? $0 $ 4,000 $ 5,000 $10,000

$10,000 Joan meets all of the requirements to exclude the gift from income, except that she accepted the award and received payment. Therefore, the FMV of the award, $10,000, is included in her income.

Baker, a sole proprietor CPA, has several clients that do business in Spain. While on a four-week vacation in Spain, Baker took a five-day seminar on Spanish business practices that cost $700. Baker's round-trip airfare to Spain was $600. While in Spain, Baker spent an average of $100 per day on accommodations, local travel, and other incidental expenses, for total expenses of $2,800. What amount of educational expense can Baker deduct on Form 1040 Schedule C, Profit or Loss From Business? $ 700 $1,200 $1,800 $4,100

$1,200 When traveling outside the U.S. primarily for vacation (4 weeks total versus 1 week seminar), the cost of the trip is a nondeductible personal expense. Baker can deduct the registration fees for the business seminar and deduct the out of pocket expenses for the time that was directly related to the business seminar (1 week). 5 days × $100 per day plus $700 registration = $1200 of deductible education expense.

Blake, a single individual age 67, had a 2019 adjusted gross income of $60,000 exclusive of social security benefits. Blake received social security benefits of $8,400 and interest of $1,000 on tax-exempt obligations during 2019. What amount of social security benefits is excludable from Blake's 2019 taxable income? $0 $1,260 $4,200 $8,400

$1,260 PI = AGI + tax-exempt interest + 50% (SSB) PI = $60,000 + $1,000 + 50% (8,400) = $65,200. Since PI ($65,200) exceeds Base Amount 2 ($34,000), then the taxable amount of SSB is the lesser of: .85 × SSB ($8,400) = $7,140, or .85 × [PI - BA2; $65,200 − $34,000) = $26,520, plus the lesser of amount included based on the 50% formula (50% × $8,400) = $4,200, or $4,500 (unless married filing joint, then $6,000), which provides $26,520 + $4,200 = $30,720 for part b of the formula. Thus, the amount included in income is the lower of $7,140 or $30,720, so the amount excluded is $1,260 ($8,400 − $7,140).

The following is 2019 information pertaining to Sam and Ann Hoyt, who filed a joint federal income tax return for the calendar year 2019. The Hoyts had adjusted gross income of $34,000 and itemized their deductions for 2019. Among the Hoyts' cash expenditures during 2019 were the following: $2,500 repairs in connection with 2019 fire damage to the Hoyt residence. This property has a basis of $50,000. Fair market value was $60,000 before the fire and $55,000 after the fire. Insurance on the property had lapsed in 2018 for nonpayment of premium. The area was declared a federal disaster area. $800 appraisal fee to determine amount of fire loss. What amount of fire loss were the Hoyts entitled to deduct as an itemized deduction on their 2019 return? $5,000 $2,500 $1,600 $1,500

$1,500 The amount of a nonbusiness casualty loss is computed as the lesser of (1) the adjusted basis of the property, or (2) the property's decline in FMV; reduced by any insurance recovery, and a $100 floor. If an individual has a net casualty loss for the year, it is then deductible as an itemized deduction to the extent that it exceeds 10% of adjusted gross income. Lesser of: Adjusted basis = $50,000 Decline in FMV ($60,000 − $55,000) = $ 5,000 $ 5,000 Reduce by: Insurance recovery (0) $100 floor (100) 10% of $34,000 AGI (3,400) Casualty loss itemized deduction $ 1,500 Note that the $2,500 spent for repairs is not included in the computation of the loss.

Bill McDonald, a cash-basis taxpayer, is the owner of a house with two identical apartments. He resides in one apartment and rents the other apartment to a tenant under a 5-year lease dated March 1, 2017, and expiring on February 28, 2022. The tenant made timely monthly rental payments of $500 for the months of January through November 2019. Rents for December 2019 and January 2020 were paid by the tenant on January 5, 2020. The following additional information for 2019 was available: Fuel and utilities $3,600 Depreciation of building 3,000 Maintenance and repairs (rental apartment) 400 Insurance on building 600 What amount should McDonald report as net rental income for 2019? $2,200 $2,000 $1,700 $1,500

$1,500 This answer is correct. Since McDonald is a cash-basis taxpayer, his rental income consists of the 11 payments received. Since he resides in one apartment, only 50% of the expenses relating to both apartments can be allocated to the rental unit. Rents (11 × $500) $5,500 Less: Fuel and utilities (50% × $3,600) (1,800) Depreciation (50% × $3,000) (1,500) Repairs to rental unit (400) Insurance (50% × $600) (300) Net rental income $1,500

In 2019, Uriah Stone received the following interest payments: Interest of $400 on refund of federal income tax for 2017 Interest of $300 on award for personal injuries sustained in an automobile accident during 2016 Interest of $1,500 on municipal bonds Interest of $1,000 on United States savings bonds (Series HH) What amount, if any, should Stone report as interest income on his 2019 tax return? $0 $ 700 $1,700 $3,200

$1,700 Stone will report $1,700 of interest income. Interest on FIT refunds, personal injury awards, U.S. savings bonds, and most other sources is fully taxable. However, interest on state or municipal bonds is generally not taxable.

In a 2018 divorce settlement, the ex-husband was required by court order to pay his ex-wife $36,000 in alimony in 2019. She received $25,000 in cash, a painting valued at $10,000, and the use of his beach house, valued at $3,000. What amount of gross income should she report as alimony? $25,000 $35,000 $36,000 $38,000

$25,000 CORRECT! Alimony must be received in cash so the painting and beach house do not qualify. The cash is included in income since the divorce was finalized before 2019.

Charles and Marcia are married cash-basis taxpayers. In 2019, they had interest income as follows: $500 interest on federal income tax refund $600 interest on state income tax refund $800 interest on federal government obligations $1,000 interest on state government obligations What amount of interest income is taxable on Charles and Marcia's 2019 joint income tax return? $500 $1,100 $1,900 $2,900

$1,900 Refunds and recoveries attributable to a prior tax year are excluded from income to the extent that the amount does not reduce the amount of tax imposed for the earlier year. However, interest received on these refunds and recoveries is taxable interest income. Thus, Charles and Marcia should include the interest received on the state and federal income tax refunds as interest income on their income tax return. In addition, Charles and Marcia should include the interest received on federal government obligations as taxable interest income on their income tax return because interest on these obligations is taxable. However, interest on state government obligations is tax-exempt income and, as a result, Charles and Marcia should not include interest income from these obligations on their income tax return. Hence, Charles and Marcia should report $1,900 of interest income, the sum of the $500 interest on federal income tax refund, $600 interest on state income tax refund and $800 interest on federal government obligations.

In 2020, Clark filed Form 1040 for the 2019 taxable year. Clark did not itemize his deductions. In 2020, Clark received a state income tax refund of $900 plus interest of $10 for overpayment of 2019 state income tax. What amount of the state tax refund and interest is taxable in Clark's 2020 federal income tax return? $0 $10 $900 $910

$10 Federal and state income tax refunds are excluded from a taxpayer's taxable income to the extent that the refund did not reduce the amount of tax for the earlier year. However, any interest earned on these refunds is considered taxable income. Thus, Clark's state income tax refund is excluded from taxable income. However, the $10 in interest income from the refund is taxable income and, therefore, included on Clark's 2020 federal income tax return.

Donald and Daisy created a 529 Educational Savings Plan when their first child, Duke, was born. Duke attends Mallard Private School and is in the second grade. To help with the tuition costs, how much may Donald and Daisy withdraw from the 529 plan in 2019? $0 $1,000 $10,000 $15,000

$10,000 CORRECT! For distributions after 2017, qualified expenses include tuition at elementary or secondary public, private, or religious schools. Exclusion is limited to $10,000 per year.

Rachel Mroz, a self-employed taxpayer, reported the following information for 2019: Income: Dividends from investments $ 300 Net short-term capital gain on sale of investment 1,400 Deductions: Net loss from business (10,000) Standard deduction (12,200) What is the amount of Rachel's net operating loss for 2019? $8,300 $10,000 $18,600 $20,300

$10,000 Correct! A 2019 NOL generally represents a loss from the conduct of a trade or business and can be carried forward indefinitely to offset income in the carryforward years. Since a NOL generally represents a business loss, an individual taxpayer's excess of nonbusiness deductions over nonbusiness income cannot be subtracted in computing the NOL. Nonbusiness deductions generally include itemized deductions as well as the standard deduction if the taxpayer does not itemize. In this case, the $12,200 standard deduction offsets the $1,700 of nonbusiness income received in the form of dividends and short-term capital gain, but the excess ($10,500) cannot be included in the NOL computation. Thus the taxpayer's NOL simply consists of the $10,000 business loss. The taxable loss is ($20,500). When the excess of standard deduction over investment income ($12,200 − $1,700 = $10,500) is added back to the loss, this gives the NOL of ($10,000).

Moss Corp.'s income statement for the current year showed the following expenses for life insurance premiums: Group-term life insurance premiums paid on employees' lives with the employees' dependents as beneficiaries $10,000 Term life insurance premiums paid on life of Moss' president with Moss Corp. as beneficiary 7,000 On its current year tax return, how much should Moss deduct for life insurance premiums? $0 $ 7,000 $10,000 $17,000

$10,000 This answer is correct. Group-term life insurance premiums paid by an employer for policies on the lives of its employees, with the employees' dependents as beneficiaries are always deductible by the employer. Life insurance premiums on the life of a corporate officer are nondeductible when the corporation is the beneficiary. The premiums are nondeductible because the proceeds paid to the corporation upon the death of the officer will be nontaxable. Therefore, deductible life insurance premiums total $10,000.

Howard O'Brien, an employee of Ogden Corporation, died on June 30, 2019. During July, Ogden made employee death payments (which do not represent the proceeds of life insurance) of $10,000 to his widow, and $10,000 to his 15-year-old son. What amounts should be included in gross income by the widow and son in their respective tax returns for 2019? Widow Son $ 5,000 $ 5,000 $ 5,000 $10,000 $ 7,500 $ 7,500 $10,000 $10,000

$10,000 $10,000 Employee death benefits must be included in income.

Mosh, a sole proprietor, uses the cash method of accounting. At the beginning of the current year, accounts receivable were $25,000. During the year, Mosh collected $100,000 from customers. At the end of the year, accounts receivable were $15,000. What was Mosh's gross taxable income for the current year? $ 75,000 $ 90,000 $100,000 $110,000

$100,000 This answer is correct. Under the cash method, income is recognized when it is actually or constructively received, whether in cash or in property. Here, Mosh's gross taxable income for the current year would include the $100,000 cash collected from customers. Mosh's accounts receivable at the beginning and end of the year are not relevant.

During the current year, Jay Walker was hit by a reckless driver and sustained serious injuries. Walker sued the driver and received the following payments during the year: Damages for personal physical injury $80,000 Punitive damages 100,000 The amount to be included in Walker's gross income for the current year should be $0. $80,000. $100,000. $180,000.

$100,000. This answer is correct. If an action has its origin in a personal physical injury, then all resulting damages (other than punitive damages) can be excluded from gross income.

Johnson worked for ABC Co. and earned a salary of $100,000. Johnson also received, as a fringe benefit, group term-life insurance at twice Johnson's salary. The annual IRS-established uniform cost of insurance is $2.76 per $1,000. What amount must Johnson include in gross income? $100,000 $100,276 $100,414 $100,552

$100,414 The first $50,000 of group-term life insurance provided by an employer is a tax-free fringe benefit. Johnson receives $200,000 of group-term life insurance, so $150,000 of this coverage is taxable. There are 150 units of $1,000 each of excess coverage, included in income at $2.76 for each unit. The income from the insurance coverage is $414 ($2.76 × $150). When the $414 is included with the $100,000 salary, gross income is $100,414.

On December 1, 2018, Michaels, a self-employed cash-basis taxpayer, borrowed $100,000 to use in her business. The loan was to be repaid on November 30, 2019. Michaels paid the entire interest of $12,000 on December 31, 2018. What amount of interest was deductible on Michaels's 2019 income tax return? $12,000 $11,000 $1,000 $0

$11,000 Cash-basis taxpayers report income when cash or property is actually or constructively received. There is no constructive receipt for deductions. Deductions for cash-basis taxpayers generally are taken when actually paid. However, for expenses covering 12 months or more, the deduction must be spread over the period for which the expenses apply. Thus, since the loan was to be repaid in 12 months, the deduction for the interest must be spread over the 12-month period. Thus, to account for the period of December 1, 2018, to December 31, 2018, Michaels would have deducted $1,000 of the interest on her 2018 income tax return and $11,000 on her 2019 income tax return to account for the period January 1, 2019, to November 30, 2019. This response is correct.

Don and Cynthia Wallace filed a joint return for 2019 in which they reported adjusted gross income of $35,000. During 2019, they made the following contributions to qualified organizations: Land held 3 years (stated at fair market value) donated to church for new building site $22,000 Cash contributions to church 300 Cash contributions to the local community college 200 Assuming that the Wallaces did not elect to reduce the deductible amount of the land contribution by the property's appreciation in value, how much can they claim as a deduction for charitable contributions in 2019? $10,800 $11,000 $17,500 $22,500

$11,000 This answer is correct. Since the cash gifts of $300 to church and $200 to the community college are only subject to the 60% of AGI limitation, they are fully deductible. The deduction for the gift of land is limited to 30% of AGI (30% × $35,000 = $10,500) because the land is appreciated capital gain property. Therefore, the total deduction for charitable contributions is $11,000.

For the year 2019, Fred and Wilma Todd reported the following items of income: Fred Wilma Salary $40,000 $200 Interest income 1,000 8,800 Cash prize won on TV game show $41,000 $9,000 Neither Fred nor Wilma is a participant in a qualified retirement plan and both established traditional individual retirement accounts during the year. Assuming a joint return will be filed for 2019 and that Fred and Wilma are under age 50, what is the maximum amount of deduction that they will be allowed for contributions to their individual retirement accounts? $5,500 $6,000 $11,000 $12,000

$12,000 This answer is correct. Because neither Fred nor Wilma is a participant in a qualified retirement plan, they are eligible to make deductible contributions to their IRAs. The Todds may contribute and deduct a total of $12,000 to their individual retirement accounts. Up to $6,000 can be deducted for contributions to the IRA of each spouse (even if one spouse is not working), provided that the combined earned income of both spouses is at least equal to the amounts contributed to the IRAs. In this case, $12,000 is less than 100% of $40,000. The prize won on the TV game show does not qualify Wilma as a working spouse, nor is it compensation for purposes of computing the limit.

Nichols, an unmarried individual, had an adjusted gross income of $125,000 in 2019 before any IRA deduction, taxable Social Security benefits, or passive activity losses. Nichols incurred a loss of $30,000 in 2019 from rental real estate in which he actively participated. What amount of loss attributable to this rental real estate can be used in 2019 as an offset against income from nonpassive sources? $0 $12,500 $25,000 $30,000

$12,500 This answer is correct. Losses from passive sources may generally only be used to offset income from other passive activities. Although a rental activity is defined as a passive activity regardless of the owner's participation in the operation of the rental property, a special rule permits an individual to offset up to $25,000 of income that is not from passive activities by losses from a rental real estate activity if the individual actively participates in the rental real estate activity. However, this special $25,000 allowance is reduced by 50% of the taxpayer's AGI in excess of $100,000 and is fully phased out when AGI exceeds $150,000. Since Nichols's AGI is $125,000, the special $25,000 allowance is reduced by $12,500 [($125,000 − $100,000) × 50%]. Thus, $12,500 ($25,000 − $12,500) of the rental loss can be offset against income from nonpassive sources.

A 33-year-old taxpayer withdrew $30,000 (pretax) from a traditional IRA. The taxpayer has a 33% effective tax rate and a 35% marginal tax rate. What is the total tax liability associated with the withdrawal? $10,000 $10,500 $13,000 $13,500

$13,500 This answer is correct. If an individual never made a nondeductible contribution to a traditional IRA, then any distributions from the IRA are fully taxable as ordinary income. Also, if the individual is under age 59½, the distribution is generally subject to the 10% penalty tax for early distributions. Here, the $30,000 distribution would be taxed at the taxpayer's marginal rate of 35% resulting in a tax of $10,500. Additionally, there will be a penalty tax of 10% × $30,000 = $3,000, because of having received the distribution before age 59½, resulting in a total tax liability of $13,500.

Fuller was the owner and beneficiary of a $200,000 life insurance policy on a parent. Fuller sold the policy to Decker, for $25,000. Decker paid a total of $40,000 in premiums. Upon the death of the parent, what amount must Decker include in gross income? $0 $135,000 $160,000 $200,000

$135,000 Decker's cost basis is the $25,000 he paid for the policy plus the $40,000 he paid in premiums. $200,000 less $65,000 = $135,000.

Paul and Lois Lee, both age 53, are married and will file a joint return for 2019. Their 2019 adjusted gross income is expected to be $85,000, including Paul's $75,000 salary. Lois has no income of her own. Neither spouse is covered by an employer-sponsored pension plan. What amount can the Lees contribute to IRAs for 2019 to take advantage of their maximum allowable IRA deduction in their 2019 return? $6,000 $11,000 $12,000 $14,000

$14,000 Since neither taxpayer is covered by an employer-sponsored pension plan, there is no phase-out of the maximum deduction due to the level of their adjusted gross income. For married taxpayers filing a joint return, up to $6,000 can be deducted for contributions to the IRA of each spouse (even if one spouse is not working), provided that the combined earned income of both spouses is at least equal to the amounts contributed to the IRAs. Additionally, an individual at least age 50 can make a special catch-up contribution of $1,000 for 2019, resulting in an increased maximum contribution and deduction of $7,000 for 2019. Thus, the Lees may contribute and deduct a maximum of $14,000 to their individual retirement accounts for 2019, with a maximum of $7,000 placed into each account.

Saints Inc. has had more than $25 million in average gross receipts for the last three years. In 2019, Saints, Inc. reported the following information: Gross receipts $30,000,000 COGS $18,000,000 Advertising $25,000 Business interest expense $150,000 Depreciation expense $1,250,000 Other operating expenses $11,500,000 How much can Saints Inc. deduct for business interest expense? $0 $118,750 $142,500 $150,000

$142,500 Correct! Business interest expense is limited to 30% of the business's adjusted taxable income. The allowable business interest expense deduction is calculated as follows: Gross receipts $30,000,000 COGS (18,000,000) Advertising (25,000) Other operating expenses (11,500,000) Adjusted taxable income $ 475,000 x 30% Business interest expense limit $ 142,500 The remaining $7,500 is business interest is carried forward to 2020. Depreciation expense is not included in computing adjusted taxable income.

Ram Corp.'s operating income for the year ended December 31, 2019, amounted to $100,000. Also in 2019, a machine owned by Ram was completely destroyed in an accident. This machine's adjusted basis immediately before the casualty was $15,000. The machine was not insured and had no salvage value. In Ram's 2019 tax return, what amount should be deducted for the casualty loss? $ 5,000 $ 5,400 $14,900 $15,000

$15,000 If business property is completely destroyed, the amount of casualty loss deduction is the property's adjusted basis immediately before the casualty. Note that the "$100 floor" and "10% of adjusted gross income" limitations that apply to personal casualty losses, do not apply to business casualty losses. Business casualty losses do not have to be part of a federal disaster area to be deductible.

Lane, a single taxpayer, received $160,000 in salary, $15,000 in income from an S Corporation in which Lane does not materially participate, and a $35,000 passive loss from a real estate rental activity in which Lane materially participated. Lane's modified adjusted gross income was $165,000. What amount of the real estate rental activity loss was deductible? $0 $15,000 $25,000 $35,000

$15,000 Lane has $160,000 in active income, $15,000 of passive income, and $35,000 of passive losses. Note that the exception that allows deduction for up to $25,000 of rental real estate losses does not apply since Lane's modified AGI exceeds $150,000. The passive losses can only be deducted to the extent of passive income, so $15,000 is correct.

Smith has an adjusted gross income (AGI) of $120,000 without taking into consideration $40,000 of losses from rental real estate activities. Smith actively participates in the rental real estate activities. What amount of the rental losses may Smith deduct in determining taxable income? $0 $15,000 $20,000 $40,000

$15,000 Since Smith actively participates in the rental real estate activity he can deduct up to $25,000 of rental losses. However, this deduction is reduced once modified AGI exceeds $100,000. Smith has $20,000 of excess AGI ($120,000 − $100,000) so he loses $10,000 ($20,000 × 50%) of the deduction. Of the $40,000 of losses, he can deduct $15,000 ($25,000 − $10,000). The remaining $25,000 of losses is suspended.

Lane, a single taxpayer, received $160,000 in salary, $15,000 in income from an S corporation in which Lane does not materially participate, and a $35,000 passive loss from a real estate rental activity in which Lane materially participated. Lane's modified adjusted gross income was $165,000. What amount of the real estate rental activity loss was deductible? $0 $15,000 $25,000 $35,000

$15,000 This answer is correct. A real estate rental activity is generally considered to be a passive activity, even though the taxpayer materially participates in the rental activity. That is important because losses from passive activities can only be used to offset income from other passive activities. Here, since Lane did not materially participate in the S corporation, the S corporation income of $15,000 is treated as passive activity income and is offset by $15,000 of the rental real estate passive loss. Although a special rule permits up to $25,000 of income that is not from passive activities to be offset by losses from a rental real estate activity, that special $25,000 allowance is reduced by 50% of a taxpayer's modified AGI in excess of $100,000 and is fully phased out when modified AGI exceeds $150,000. Since Lane's modified AGI is $165,000, the $25,000 allowance is not available. As a result, Lane's rental real estate loss is deductible in the current year only to the extent that it offsets the $15,000 of passive activity income.

The Jacksons, who file a joint return, actively participate in a solely-owned rental real estate activity that produces a $30,000 loss during the current year. Their adjusted gross income was $120,000 before considering the rental activity. How much of the rental loss, if any, are the Jacksons entitled to deduct? $0 $15,000 $25,000 $30,000

$15,000 This answer is correct. Generally, up to $25,000 of a rental real estate loss can be deducted against income that is not from passive activities if the taxpayer actively participates in the rental real estate activity. However, the $25,000 allowance is reduced by 50% of the taxpayer's AGI in excess of $100,000. Here, the Jacksons can deduct $25,000 − (50%)($120,000 − $100,000) = $15,000.

Frank Zimmerman became a partner in Monahan Associates on January 1, 2019, with a 10% interest in Monahan's profits, losses, and capital. Monahan Associates manufactures sports equipment. Zimmerman does not materially participate in the partnership business. For the year ended December 31, 2019, Monahan had an operating loss of $150,000. In addition, Monahan earned interest of $12,000 on a temporary investment. Monahan has kept the principal temporarily invested while awaiting delivery of equipment that is presently on order. The principal will be used to pay for this equipment. Zimmerman's passive loss for 2019 is $0. $13,800. $15,000. $16,200.

$15,000. This answer is correct. A partnership is a pass-through entity and its items of income and loss pass through to partners to be included on their tax returns. Since Zimmerman does not materially participate in the partnership's sports equipment business, Zimmerman's distributive share of the loss from the partnership's sports equipment business is classified as a passive activity loss. Portfolio income or loss must be excluded from the computation of the income or loss resulting from a passive activity and must be separately passed through to partners. Portfolio income includes all interest income, other than interest income derived in the ordinary course of a trade or business. Interest income derived in the ordinary course of a trade or business includes only interest income on loans and investments made in the ordinary course of a trade or business of lending money, and interest income on accounts receivable arising in the ordinary course of a trade or business. Since the $12,000 of interest income derived by the partnership resulted from a temporary investment, the interest income must be classified as portfolio income and cannot be netted against the $150,000 operating loss from the sports equipment business. Thus, Zimmerman will report a passive activity loss of $150,000 × 10% = $15,000 and will report portfolio income of $12,000 × 10% = $1,200.

Lake Corp., an accrual-basis calendar year corporation, had the following 2019 receipts: 2020 advanced rental payments where the lease ends in 2020 $125,000 Lease cancellation payment from a 5-year lease tenant 50,000 Lake had no restrictions on the use of the advanced rental payments and renders no services. What amount of income should Lake report on its 2019 tax return? $0 $50,000 $125,000 $175,000

$175,000 For accrual-based taxpayers, items generally are included in gross income for the year in which the income is earned. However, for tax purposes, income is earned when (1) all the events have occurred to attach the taxpayer's right to receive the income and (2) the amount of income can be determined with reasonable accuracy. Cash based taxpayers report income when it is actually received or constructively received (i.e., in the taxpayer's control). Since there are no restrictions on the advance lease payments or the lease cancellation payment and no services need to be rendered, Lake Corp. has a right to receive the advance lease payments and the lease cancellation payments in the current year. The payments also can be determined with reasonable accuracy. Hence, both the advance lease payments and the lease cancellation payments should be reported on Lake Corp.'s tax return. This response includes both the advance lease payments and the lease cancellation payments in Lake Corp.'s taxable income.

Dr. Berger, a physician, reports on the cash basis. The following items pertain to Dr. Berger's medical practice in 2019: Cash received from patients in 2019 $200,000 Cash received in 2019 from third-party reimbursers for services provided by Dr. Berger in 2018 30,000 Salaries paid to employees in 2019 20,000 Year-end 2019 bonuses paid to employees in 2020 1,000 Other expenses paid in 2019 24,000 What is Dr. Berger's net income for 2019 from his medical practice? $155,000 $156,000 $185,000 $186,000

$186,000 This answer is correct. Dr. Berger's (a cash-basis taxpayer) income consists of the $200,000 received from patients and the $30,000 received from third-party reimbursers during 2019. His 2019 deductions include the $20,000 of salaries and $24,000 of other expenses paid in 2019. The year-end bonuses will be deductible for 2020, the year in which they were paid.

During the current year, Adler had the following cash receipts: Wages $18,000 Interest income from investments in municipal bonds 400 Unemployment compensation 1,500 What is the total amount that must be included in gross income on Adler's current-year income tax return? $18,000 $18,400 $19,500 $19,900

$19,500 This answer is correct. Adler's $18,000 of wages and $1,500 of unemployment compensation must be included in gross income. The municipal bond interest is tax-exempt.

A retiree invested $100,000 in an annuity that pays $12,000 annually for 10 years. What portion of the first payment should be included in the retiree's gross income? $0 $2,000 $10,000 $12,000

$2,000 Correct! The $100,000 cost basis in the annuity is recovered over the 10-year annuity period, which is $10,000 per year. $12,000 proceeds less $10,000 basis equals $2,000 income.

Cathy qualified to itemize deductions on her calendar year 2019 tax return. Cathy's 2019 adjusted gross income was $25,000 and she made a $1,500 cash donation directly to a needy family. Also during 2019, Cathy donated stock, valued at $5,000, to her church. Cathy had purchased the stock ten months earlier for $2,000. What was the maximum amount of charitable contribution allowable as an itemized deduction on Cathy's 2019 income tax return? $1,500 $2,000 $3,500 $5,000

$2,000 This answer is correct. The amount of contribution for appreciated property is generally the property's FMV if the property would result in a long-term capital gain if sold. If not, the amount of contribution for appreciated property is generally limited to the property's basis. Here, the stock worth $5,000 was purchased for $2,000 just 10 months earlier. Since its holding period does not exceed 12 months, a sale of the stock would result in a short-term capital gain, and the amount of allowable charitable contribution deduction is limited to the stock's basis of $2,000. Additionally, to be deductible, a contribution must be made to a qualifying organization. As a result, the $1,500 cash given to a needy family is not deductible.

Pierre, a headwaiter, received tips totaling $2,000 in December 2019. On January 5, 2020, Pierre reported this tip income to his employer in the required written statement. At what amount, and in which year, should this tip income be included in Pierre's gross income? $2,000 in 2019 $2,000 in 2020 $1,000 in 2019, and $1,000 in 2020 $ 167 in 2019, and $1,833 in 2020

$2,000 in 2020 If an individual receives less than $20 in tips during one month while working for one employer, the tips do not have to be reported to the employer and the tips are included in the individual's gross income when received. However, if an individual receives $20 or more in tips during one month while working for one employer, the individual must report the total amount of tips to that employer by the tenth day of the next month. Then the tips are included in gross income for the month in which they are reported to the employer. Here, Pierre received $2,000 in tips during December 2019 that he reported to his employer in January 2020. Thus, the $2,000 of tips will be included in Pierre's gross income for 2020.

John Budd is single, with no dependents. During 2019, John received wages of $11,000 and state unemployment compensation benefits of $2,000. He had no other source of income. The amount of state unemployment compensation benefits that should be included in John's 2019 adjusted gross income is $2,000. $1,000. $ 500. $0.

$2,000. Unemployment compensation benefits received must generally be included in gross income.

Atlas Corporation is a publicly traded corporation selling technology equipment that is recruiting for a new CEO. Jason was hired in 2019 as the new CEO and will be paid $1,500,000 in salary and a performance-based bonus of $1,000,000 upon reaching certain performance objectives. If Jason meets the performance-based objectives and Atlas has a 21% tax rate, what is Atlas's after-tax cost of paying Jason? $2,500,000 $2,290,000 $1,975,000 $1,185,000

$2,290,000 Correct! Atlas's salary cost for Jason is $2,500,000, but its deductible amount is limited to $1,000,000. The tax savings from the salary deduction is $210,000 ($1,000,000 x 21%). The after-tax cost of Jason's pay is $2,290,000 ($2,500,000 - $210,000). For taxable years beginning on or after January 1, 2019, the deduction for compensation with respect to a covered employee of a publicly traded corporation is limited to $1,000,000 per year per covered employee. For this purpose, compensation includes all compensation paid to an employee. Covered employees include the company's CEO.

Cole earned $3,000 in wages, incurred $1,000 in unreimbursed employee business expenses, paid $400 as interest on a student loan, and contributed $100 to a charity. What is Cole's adjusted gross income? $3,000 $2,600 $2,500 $1,600

$2,600 The itemized deduction for unreimbursed employee business expenses has been suspended for years 2018-2025. The charitable contribution is an itemized deduction and does not affect the computation of adjusted gross income. AGI equals the $3,000 of wages less student loan interest of $400, or $2,600.

Daniel Kelly received interest income from the following sources during the current year: New York Port Authority bonds $1,000 Puerto Rico Commonwealth bonds 1,800 What portion of such interest is tax exempt? $0 $1,000 $1,800 $2,800

$2,800 Interest on obligations of a state or one of its political subdivisions (e.g., New York Port Authority bonds), or a possession of the U.S. (e.g., Puerto Rico Commonwealth bonds) is tax-exempt.

Ross is single and operates two businesses. In 2019, his Schedule C consulting business generated a ($300,000) business loss, and his partnership distributive share is $30,000. What is Ross's excess business loss for 2019? $20,000 $30,000 $250,000 $270,000

$20,000 Correct! The Tax Cuts and Jobs Act provides a new limitation on excess business losses. This limitation applies to noncorporate taxpayers. The limitation applies only to aggregate excess business losses exceeding a threshold amount of $500,000 (married filing jointly taxpayers) or $250,000 (all other taxpayers). Ross's aggregate loss is ($270,000). The aggregate loss in excess of $250,000 ($270,000 - $250,000 = $20,000) is disallowed and carried forward as an NOL.

A review of Bearing's year 2 records disclosed the following tax information: Wages $ 18,000 Taxable interest and qualifying dividends 4,000 Schedule C trucking business net income 32,000 Rental (loss) from residential property (35,000) Limited partnership (loss) (5,000) Bearing actively participated in the rental property and was a limited partner in the partnership. Bearing had sufficient amounts at risk for the rental property and the partnership. What is Bearing's year 2 adjusted gross income? $14,000 $19,000 $29,000 $54,000

$29,000 Wages, interest, dividends, and Schedule C income are all taxable for a total of $54,000. $25,000 of the rental loss is allowed since Bearing actively participates in the rental real estate activity and his modified AGI does not exceed $100,000. However, the $5,000 passive loss from the partnership cannot reduce other income. Therefore, AGI is $29,000.

The following information pertains to Cole's personal residence, which sustained casualty tornado damage during 2019: Adjusted basis $150,000 Fair market value immediately before the tornado 200,000 Fair market value immediately after the tornado 180,000 Tornado damage repairs paid for by Cole during the year 10,000 The house was uninsured and located in a federal disaster area. Before consideration of any "floor" or other limitation on tax deductibility, the amount of this current year casualty loss was $30,000 $20,000 $10,000 $0

$20,000 This answer is correct. The amount of a personal casualty loss is the lesser of (1) the adjusted basis of the property ($150,000), or (2) the decline in the property's fair market value resulting from the casualty ($200,000 − $180,000 = $20,000). Thus, Cole's casualty loss before consideration of the "$100 floor" or the 10% of adjusted gross income limitation is $20,000.

Genetic Corp.'s operating income for the year ended December 31, 2019, amounted to $100,000. Also in 2019, a machine owned by Genetic was completely destroyed in an accident. This machine's adjusted basis immediately before the casualty was $20,000. The machine was not insured and had no salvage value. In Genetic's 2019 tax return, what amount should be deducted for the casualty loss? $ 9,900 $10,000 $19,900 $20,000

$20,000 This answer is correct. The requirement is to determine the amount of casualty loss deduction available to Genetic Corp. due to the complete destruction of its machine. If business property is completely destroyed, the amount of casualty loss deduction is the property's adjusted basis immediately before the casualty, less any insurance reimbursement. Note that the "$100 floor" and "10% of adjusted gross income" limitations that apply to nonbusiness casualty losses of individuals do not apply to business casualty losses. Casualty losses for business property also do not have to be attributed to a federal disaster area.

Ryan Landerholm, an employee of Wendler Corporation, died on June 30, 2019. During July, Wendler Corporation made employee death payments (which do not represent the proceeds of life insurance) of $20,000 to his widow, and $20,000 to his 15-year-old son. What amounts should be included in gross income by the widow and son in their respective tax returns for 2019? $15,000 for the widow, $20,000 for the son $17,500 for the widow, $17,500 for the son $20,000 for the widow, $20,000 for the son $15,000 for the widow, $15,000 for the son

$20,000 for the widow, $20,000 for the son This answer is correct. The entire amount of employee death payments must be included in gross income by the widow and son. The $5,000 employee death benefit exclusion was repealed for decedents dying after August 20, 1996.

Hall, a divorced person and custodian of her 12-year-old child, submitted the following information to the CPA who prepared her 2019 return: During 2019, Hall spent a total of $1,000 for state lottery tickets. Her lottery winnings in 2019 totaled $200. Hall's lottery transactions should be reported as follows: Schedule A—itemized deductions Other miscellaneous deductions Other income on page 1 Subject to 2% AGI floor Not subject to 2% AGI floor $0 $0 $0 $200 $0 $200 $200 $200 $0 $200 $0 $0

$200 $0 $200 Hall's lottery winnings of $200 must be reported as other income on page 1 of Hall's Form 1040. Hall's $1,000 expenditure for state lottery tickets is deductible as a miscellaneous itemized deduction not subject to the 2% of AGI floor, but is limited in amount to the $200 of lottery winnings included in Hall's gross income.

Jon Moseley, who retired on October 31, 2019, receives a monthly pension benefit of $900 payable for life. His life expectancy at the date of retirement is 20 years. The first payment was received on November 15, 2019. During his years of employment, Moseley contributed $24,000 of after-tax funds to the cost of his company's pension plan. How much of the pension amounts received may Moseley exclude from taxable income for the years 2019, 2020, and 2021? $0 in 2019, $0 in 2020, and $0 in 2021. $1,800 in 2019, $10,800 in 2020, and $10,800 in 2021. $1,800 in 2019, $1,800 in 2020, and $1,800 in 2021. $200 in 2019, $1,200 in 2020, and $1,200 in 2021.

$200 in 2019, $1,200 in 2020, and $1,200 in 2021. This answer is correct. Annuities and pensions are excluded from taxable income to the extent that they represent a return of capital. Moseley's contribution of $24,000 will be recovered pro rata over the life of the annuity. Under this rule, $100 per month ($24,000/240 months) is excluded from income. Received Excluded Included 2019 $ 1,800 $ 200 $1,600 2020 $10,800 $1,200 $9,600 2021 $10,800 $1,200 $9,600

Dietz is a passive investor in three activities which have been profitable in previous years. The profit and losses for the current year are as follows: Gain/(Loss) Activity X ($30,000) Activity Y (50,000) Activity Z 20,000 Total ($60,000) What amount of suspended loss should Dietz allocate to Activity X? $18,000 $20,000 $22,500 $30,000

$22,500 This answer is correct. Passive activity losses are generally only deductible against passive activity income. If there is a net passive loss and multiple loss activities, the suspended net passive loss must be allocated to loss activities in proportion to the amount of loss generated by each activity. Since activities X and Y generated $80,000 of passive losses, the amount of the $60,000 suspended loss allocated to Activity X would be ($30,000 / $80,000) × $60,000 = $22,500.

In January 2019, Joan Hill bought one share of Orban Corp. stock for $300. On March 1, 2019, Orban distributed one share of preferred stock for each share of common stock held. This distribution was nontaxable. On March 1, 2019, Joan's one share of common stock had a fair market value of $450, while the preferred stock had a fair market value of $150. After the distribution of the preferred stock, Joan's bases for her Orban stocks are Common Preferred $300 $0 $225 $ 75 $200 $100 $150 $150

$225 $ 75 Joan's original common stock basis must be allocated between the common stock and the preferred stock according to their relative fair market value. Common stock (FMV) $450 Preferred stock (FMV) 150 Total value $ 600 The ratio of the common stock to total value is $450/$600 or 3/4. This ratio multiplied by the original common stock basis of $300 results in a basis for the common stock of $225. The basis of the preferred stock would be ($150/$600 × $300) = $75.

Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for 2019. During 2019, Taylor donated land to a church and made no other contributions. Taylor purchased the land in 2004 as an investment for $14,000. The land's fair market value was $25,000 on the day of the donation. What is the maximum amount of charitable contribution that Taylor may deduct as an itemized deduction for the land donation for 2019? $25,000 $14,000 $11,000 $0

$25,000 The donation of appreciated land purchased for investment and held for more than twelve months is a contribution of real capital gain property (property that would result in long-term capital gain if sold). The amount of contribution is the land's FMV of $25,000, limited in deductibility for the current year to 30% of AGI. In this case, since 30% of AGI would be 30% × $90,000 = $27,000, the full amount of the land contribution ($25,000) is deductible for 2019.

Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for year 13. During year 13, Taylor donated land to a church and made no other contributions. Taylor purchased the land in year 1 as an investment for $14,000. The land's fair market value was $25,000 on the day of the donation. What is the maximum amount of charitable contribution that Taylor may deduct as an itemized deduction for the land donation for year 13? $25,000 $14,000 $11,000 $0

$25,000 This answer is correct. If appreciated property is contributed to charity, the amount of contribution is generally the property's FMV if the property would have resulted in a long-term capital gain if sold. Since the land was purchased as an investment for $14,000 in year 1, a sale in year 13 would have resulted in a LTCG. As a result, the amount of Taylor's charitable contribution is the land's FMV of $25,000, which would then be subject to a 30% of AGI limitation. However, since Taylor had $90,000 of AGI, all $25,000 of land contribution would be allowed as an itemized deduction for year 13.

John Budd is the sole stockholder of Ral Corp., an accrual basis taxpayer engaged in wholesaling operations. Ral's retained earnings at January 1, 2019 amounted to $1,000,000. For the year ended December 31, 2019, Ral's book income, before federal income tax, was $300,000. Included in the computation of this $300,000 were the following: Dividends received on 500 shares of stock of a taxable domestic corporation that had 1,000,000 shares of stock outstanding (Ral had no portfolio indebtedness) $1,000 Loss on sale of investment in stock of unaffiliated corporation (this stock had been held for two years; Ral had no other capital gains or losses) (5,000) Keyman insurance premiums paid on Budd's life (Ral is the beneficiary of this policy) 3,000 Group term insurance premiums paid on $10,000 life insurance policies for each of Ral's four employees (the employees' spouses are the beneficiaries) 4,000 Amortization of cost of acquiring a perpetual dealer's franchise (Ral paid $48,000 for this franchise on July 1, 2019, and is amortizing it over a 48-month period) 6,000 Contribution to a recognized, qualified charity (this contribution was authorized by Ral's board of directors in December 2019, to be paid on January 31, 2020) 75,000 On December 1, 2019, Ral received advance rental of $27,000 from a tenant for a three-year lease commencing January 1, 2020 to cover rents for the years 2020, 2021, and 2022. In conformity with GAAP, Ral did not include any part of this rental in its income statement for the year ended December 31, 2019. What amount should Ral include in its 2019 taxable income for rent revenue? $0 $750 $9,000 $27,000

$27,000 For accrual-based taxpayers, items generally are included in gross income for the year in which the income is earned. However, for tax purposes, income is earned when (1) all the events have occurred to attach the taxpayer's right to receive the income and (2) the amount of income can be determined with reasonable accuracy. Cash based taxpayers report income when it is actually received or constructively received (i.e., in the taxpayer's control). Since all the events have occurred to attach Ral Corp.'s right to receive the income and the amount of income can be determined with reasonable accuracy, the corporation must report $27,000 in rental revenue for 2019. It is irrelevant that the rental revenue covers the following years.

Judy Bishop had adjusted gross income of $35,000 in 2019 and itemizes her deductions. Additional information is available for 2019 as follows: Cash contribution to church $2,500 Purchase of an art object at her church bazaar (with a fair market value of $500 on date of purchase) 800 Donation of used clothes to Goodwill Charities (fair value evidenced by receipt received) 400 What is the maximum amount Bishop can claim as a deduction for charitable contributions in 2019? $2,800 $3,200 $3,300 $3,400

$3,200 This answer is correct. The cash contribution of $2,500 and the $400 FMV of used clothing are deductible. The deduction for the art object is limited to the $300 excess of its cost ($800) over its FMV ($500). Therefore, the total deduction is $3,200 ($2,500 + $400 + $300).

Ruth Lewis has adjusted gross income of $100,000 for 2019 and itemizes her deductions. On September 1, 2019, she made a contribution to her church of stock held for investment for two years that cost $10,000 and had a fair market value of $70,000. The church sold the stock for $70,000 on the same date. Assume that Lewis made no other contributions during 2019 and made no special election in regard to this contribution on her 2019 tax return. How much should Lewis claim as a charitable contribution deduction for 2019? $50,000 $30,000 $20,000 $10,000

$30,000 The donation of appreciated stock held more than 12 months is a contribution of intangible, long-term capital gain appreciated property. The amount of contribution is the stock's FMV of $70,000, but is limited in deductibility for 2019 to 30% of AGI. Thus, the 2019 deduction is $100,000 × 30% = $30,000. The amount of contribution in excess of the 30% limitation ($70,000 − $30,000 = $40,000) can be carried forward for up to five years, subject to the 30% limitation in the carryforward years.

On January 1, 2019, James Davis was awarded a postdoctorate fellowship grant of $30,000 by a tax-exempt educational organization. Davis is not a candidate for a degree and was awarded the grant to continue his research. The grant was awarded for the period March 1, 2019 through May 31, 2020. On March 1, 2019, Davis elected to receive the full amount of the grant. What amount should be included in his gross income for 2019? $0 $10,000 $20,000 $30,000

$30,000 This answer is correct. A degree candidate can exclude scholarships and fellowships that are used for tuition and course-related fees, books, supplies, and equipment. Since Davis is not a candidate for a degree, the entire amount of fellowship grant must be included in gross income in the year received.

Ola Associates is a limited partnership engaged in real estate development. Hoff, a civil engineer, billed Ola $40,000 in 2019 for consulting services rendered. In full settlement of this invoice, Hoff accepted a $15,000 cash payment plus the following: Fair market value Carrying amount on Ola's books 3% limited partnership interest in Ola $10,000 N/A Surveying equipment 7,000 $3,000 What amount should Hoff, a cash-basis taxpayer, report in his 2019 return as income for the services rendered to Ola? $15,000 $28,000 $32,000 $40,000

$32,000 A cash-basis taxpayer generally reports income when received, unless constructively received at an earlier date. The amount of income to be reported is the amount of money, plus the fair market value of other property received. In this case, Hoff must report a total of $32,000, which includes the $15,000 cash, the $10,000 FMV of the limited partnership interest, and the $7,000 FMV of the surveying equipment received. Note that since Hoff is a cash-basis taxpayer, he would not report income at the time that he billed Ola $40,000, nor would he be entitled to a bad debt deduction when he accepts $32,000 of consideration in full settlement of his $40,000 invoice.

Randolph is a single individual who always claims the standard deduction. Randolph received the following in the current year: Wages $22,000 Unemployment compensation 6,000 Pension distribution (100% taxable) 4,000 A state tax refund from the previous year 425 What is Randolph's gross income? $22,000 $28,425 $32,000 $32,425

$32,000 All of the items received are included in gross income except for the state income tax refund. Since Randolph always uses the standard deduction, no tax benefit is received when the state income taxes are paid. Therefore, the refund is not taxable.

Bob and Sue Stewart were divorced in 2017. Under the terms of their divorce decree, Bob paid alimony to Sue at the rate of $50,000 in 2017, $20,000 in 2018, and nothing in 2019. What amount of alimony recapture must be included in Bob's gross income for 2019? $0 $23,283 $30,000 $32,500

$32,500 Alimony recapture may occur if alimony payments sharply decline in the second and third years that payments are made. The payor must report the recaptured alimony as gross income in the third year, and the payee is allowed a deduction for the same amount. Recapture for the second year (2018) occurs to the extent that the alimony paid in the second year ($20,000) exceeds the alimony paid in the third year ($0) by more than $15,000 [i.e., $20,000 − ($0 + $15,000) = $5,000 of recapture]. Recapture for the first year (2017) occurs to the extent that the alimony paid in the first year ($50,000) exceeds the average alimony paid in the second and third years by more than $15,000. For this purpose, the alimony paid in the second year ($20,000) must be reduced by the amount of recapture for that year ($5,000). First year (2017) payment $50,000 Second year (2018) payment ($20,000 − $5,000) $15,000 Third year (2019) payment + 0 Total $15,000 ÷ 2 (7,500) (15,000) Recapture for first year (2017) $ 27,500 Thus, the total recapture to be included in Bob's gross income for 2019 is $5,000 + $27,500 = $32,500.

Nichol Corp. gave gifts to 15 individuals who were customers of the business. The gifts were not in the nature of advertising. The market values of the gifts were as follows: 5 gifts @ $15 each 9 gifts @ $30 each 1 gift @ $100 What amount is deductible as business gifts? $0 $75 $325 $445

$325 The deduction for business gifts is limited to $25 per individual/customer who receives a gift. The total deduction is computed as follows: 5 × $15 = $ 75 9 × $25 = $225 1 × $25 = $ 25 Total $325

Olive Corporation borrowed $1,000,000 to provide cash for its start-up business in 2019. The business paid $35,000 in interest expense, reported $125,000 of revenues, and had $26,000 of other operating expenses. What amount of business interest expense is deductible for Olive Corporation? $35,000 $29,700 $19,200 $0

$35,000 Correct! Business interest expense is limited to 30% of the business's adjusted taxable income. However, Olive Corporation is not subject to the business interest expense limitation because Olive Corporation's gross receipts do not exceed the $25,000,000 average receipts test.

John invested $2,000 a year into his retirement plan from his before tax earnings (that is, he received a deduction for these contributions and was not taxed on the income). His employer contributed $3,000 a year to John's retirement fund. After 30 years of contributions, John retires and receives a distribution, which is not tax-free, of $350,000, the balance in his retirement fund. John must include what amount in gross income? $0 $200,000 $260,000 $350,000

$350,000 John does not have any basis in his retirement account. He did not receive basis for his contributions because they were made from earnings that were not taxed. He did not receive basis for his employer's contributions since they were made from employer funds. Therefore, the entire $350,000 distribution is included in John's gross income.

Willard, a single taxpayer, had $60,000 in adjusted gross income for 2019. During 2019, he contributed $25,000 to his church. He had a $15,000 charitable contribution carryover from his 2018 church contributions. What was the maximum amount of properly substantiated charitable contributions that Willard could claim as an itemized deduction for 2019? $15,000 $25,000 $36,000 $40,000

$36,000 Correct! Willard gave $25,000 to his church during 2019 and had a $15,000 charitable contribution carryover from 2018, resulting in a total of $40,000 of contributions. Since an individual's deduction for cash charitable contributions cannot exceed an overall limitation of 60% of adjusted gross income, Willard's charitable contribution deduction for 2019 is limited to ($60,000 AGI × 60%) = $36,000. Since Willard's 2019 contributions will be deducted before his carryforward from 2018, Willard will carry over $4,000 of his 2018 contributions to 2020.

During the 2019 holiday season, Palo Corp. gave business gifts to 17 customers. These gifts, which were not of an advertising nature, had the following fair market values: 4 at $ 10 4 at $ 25 4 at $ 50 5 at $100 How much of these gifts was deductible as a business expense for 2019? $840 $365 $140 $0

$365 The deduction for business gifts is limited to $25 per donee per year. The deduction is computed as follows: 4 at $ 10 $ 40 4 at $ 25 100 4 at $ 50 limited to $25 100 5 at $ 100 limited to $25 125 Total $365

John Budd is the sole stockholder of Ral Corp., an accrual-basis taxpayer engaged in wholesaling operations. Ral's retained earnings at January 1, 2020, amounted to $1,000,000. For the year ended December 31, 2019, Ral's book income, before federal income tax, was $300,000. Included in the computation of this $300,000 were the following: Dividends received on 500 shares of stock of a taxable domestic corporation that had 1,000,000 shares of stock outstanding (Ral had no portfolio indebtedness) $1,000 Loss on sale of investment in stock of unaffiliated corporation (this stock had been held for two years; Ral had no other capital gains or losses) (5,000) Keyman insurance premiums paid on Budd's life (Ral is the beneficiary of this policy) 3,000 Group term insurance premiums paid on $10,000 life insurance policies for each of Ral's four employees (the employees' spouses are the beneficiaries) 4,000 Amortization of cost of acquiring a perpetual dealer's franchise (Ral paid $48,000 for this franchise on July 1, 2019, and is amortizing it over a 48-month period) 6,000 Contribution to a recognized, qualified charity (this contribution was authorized by Ral's board of directors in December 2019, to be paid on January 31, 2020) 75,000 On December 1, 2019, Ral received advance rental of $27,000 from a tenant for a three-year lease commencing January 1, 2019, to cover rents for the years 2020, 2021, and 2022. In conformity with GAAP, Ral did not include any part of this rental in its income statement for the year ended December 31, 2019. What amount should Ral deduct for keyman and group life insurance premiums in computing taxable income for 2019? $0 $3,000 $4,000 $7,000

$4,000 A taxpayer may not deduct life insurance premiums in which the taxpayer is directly or indirectly the beneficiary. Hence, Ral Corp. may not deduct the $3,000 in keyman insurance premiums that it paid on Budd's life because the corporation is the beneficiary. However, a taxpayer may deduct the group term life insurance premiums if the insured employee or his/her beneficiaries would get the insurance proceeds. Thus, Ral Corp. may deduct the $4,000 in group term insurance premiums paid on the $10,000 life insurance policies for each of Ral Corp.'s four employees.

Blair, CPA, uses the cash receipts and disbursements method of reporting. In 2019, a client gave Blair 100 shares of a listed corporation's stock in full satisfaction of a $5,000 accounting fee the client owed Blair. This stock had a fair market value of $4,000 on the date it was given to Blair. The client's basis for this stock was $3,000. Blair sold the stock for cash in January 2020. In Blair's 2019 return, what amount of income should be reported in connection with the receipt of the stock? $0 $3,000 $4,000 $5,000

$4,000 Since Blair is a cash method taxpayer, the amount of income to be recognized equals the $4,000 fair market value of the stock on date of receipt. Note that the $4,000 of income is reported by Blair in 2019 when the stock is received, not in 2020 when the stock is sold.

During 2019, Kay received interest income as follows: On U.S. Treasury certificates $4,000 On refund of the prior year's federal income tax $500 The total amount of interest subject to tax in Kay's 2019 tax return is $4,500. $4,000. $500. $0.

$4,500. Interest income received on U.S. Treasury certificates is not exempt from federal income tax. In addition, while federal income tax refunds are nontaxable, the interest received on the refund is taxable income. Hence, the interest income on the U.S. Treasury certificates and on the refund of prior year's federal income tax is reported on Kay's 2019 tax return, putting the total amount of interest subject to tax in Kay's 2019 tax return at $4,500.

Easel Co. has elected to reimburse employees for business expenses under a nonaccountable plan. Easel does not require employees to provide proof of expenses and allows employees to keep any amount not spent. Under the plan, Mel, an Easel employee for a full year, gets $400 per month for business automobile expenses. At the end of the year Mel informs Easel that the only business expense incurred was for business mileage of 12,000 at a rate of 30 cents per mile, the IRS standard mileage rate at the time. Mel encloses a check for $1,200 to refund the overpayment to Easel. What amounts should be reported in Mel's gross income for the year? $0 $1,200 $3,600 $4,800

$4,800 Since this is not an accountable plan, all reimbursements are included in the employee's income ($400 x 12 months = $4,800). The employee business expenses of $3600 are no longer deductible.

David Hetnar is covered by a $90,000 group-term life insurance policy of which his wife is the beneficiary. Hetnar's employer pays the entire cost of the policy, for which the uniform annual premium is $1 per $1,000 of coverage. How much of this premium is taxable to Hetnar? $0 $40 $50 $90

$40 This answer is correct. The cost of group-term life insurance provided by an employer must be included in an employee's income to the extent of the cost of life insurance coverage in excess of $50,000. The excess coverage is $90,000 − $50,000 = $40,000. At a cost of $1 per thousand, the amount taxable to Hetnar is $1 × 40 = $40.

In 2019, William and Mary had an excess business loss of $(440,000). In 2020, the couple's taxable income before any NOL deduction is $500,000. How much of the 2019 loss carryforward may William and Mary use on their 2020 income tax return? $440,000 $400,000 $352,000 $250,000

$400,000 Correct! Excess business losses are not deductible in the current year and are carried over and treated as part of the taxpayer's NOL carryforward in future years. The amount deductible in the carryforward years is limited to 80% of taxable income before such deduction ($500,000 × 80% = $400,000). The remaining $(40,000) will carry forward to 2021.

Porter was unemployed for part of the year. Porter received $35,000 of wages, $4,000 from a state unemployment compensation plan, and $2,000 from his former employer's company-paid supplemental unemployment benefit plan. What is the amount of Porter's gross income? $35,000 $37,000 $39,000 $41,000

$41,000 This answer is correct. Porter's gross income includes the $35,000 of wages, $4,000 from a state unemployment compensation plan, and $2,000 from his former employer's company-paid supplemental unemployment benefit plan. Benefits received from an employer-financed unemployment fund (to which the employee did not contribute) are taxable as wages and are subject to withholding for income tax.

Porter was unemployed for part of the year in 2019. Porter received $35,000 in wages, $4,000 from a state unemployment compensation plan, and $2,000 from his former employer's company-paid supplemental unemployment benefit plan. What is the amount of Porter's gross income in 2019? $35,000 $37,000 $39,000 $41,000

$41,000 Wages are included in gross income for the year in which they are received. Unemployment compensation is also included in gross income since it replaces income that would have been received if working. Therefore, the total amount included in gross income is $41,000.

U Co. had cash purchases and payments on account during the current year totaling $455,000. U's beginning and ending accounts payable balances for the year were $64,000 and $50,000, respectively. What amount represents U's accrual-basis purchases for the year? $441,000 $469,000 $505,000 $519,000

$441,000 This answer is correct. To get the accrual-basis purchases, you must adjust cash payments for the beginning and ending balance of accounts payable. Since the beginning balance of accounts payable represents purchases for the prior period paid for in this period, it must be deducted from cash payments. The ending balance of accounts payable represents purchases for this period that will be paid for next period. Accordingly, the ending balance must be added. This answer is correct because the balance of accrual-basis purchases is equal to $441,000 ($455,000 − 64,000 + 50,000).

Nare, an accrual-basis taxpayer, owns a building which was rented to Mott under a 10-year lease expiring August 31, 2023. On January 2, 2019, Mott paid $30,000 as consideration for canceling the lease. On November 1, 2019, Nare leased the building to Pine under a 5-year lease. Pine paid Nare $10,000 rent for the 2 months of November and December, and an additional $5,000 for the last month's rent. What amount of rental income should Nare report in its 2019 income tax return? $10,000 $15,000 $40,000 $45,000

$45,000 This answer is correct. Nare's rental income includes the $30,000 lease cancellation payment, the $10,000 rent for the months of November and December, and the $5,000 rent paid in advance for the last month of the lease. Prepaid rent must be included in income in the year received regardless of the period covered or the accounting method used.

A self-employed taxpayer had gross income of $57,000. The taxpayer paid self-employment tax of $8,000, health insurance of $6,000, and $5,000 of alimony from a divorce finalized after 2018. The taxpayer also contributed $2,000 to a traditional IRA. What is the taxpayer's adjusted gross income for 2019? $55,000 $50,000 $45,000 $40,000

$45,000 This answer is correct. The self-employed taxpayer's gross income of $57,000 would be reduced by a deduction for 50% of self-employment taxes paid (50% × $8,000 = $4,000), a deduction for 100% of health insurance premiums ($6,000), and the $2,000 contributed to a traditional IRA, resulting in AGI of $40,000. Alimony paid for divorces finalized after 2018 is not deductible.

Tim and Nicole Wendler were divorced in 2017. Under the terms of their divorce decree, Tim paid alimony to Nicole at the rate of $60,000 in 2017, $25,000 in 2018, and nothing in 2019. What amount of alimony recapture must be included in Tim's gross income for 2019? $0 $10,000 $47,500 $37,500

$47,500 This answer is correct. Special rules require recapture of deductions and income if alimony payments decline more than $15,000 over the first three years after the divorce. The excess of the 2018 payments over 2019 payments is $25,000, which is above $15,000 by $10,000. This is the first recapture amount. Next, reduce the 2018 payments by the $10,000 recapture from the first step, resulting in $15,000 ($25,000 − $10,000). The $15,000 for 2018 plus the 2019 payments of $0 equals $15,000. Divide by 2 to obtain $7,500. The excess of 2017 payments of $60,000 over $7,500 equals $52,500 which is $37,500 over $15,000. This is the second recapture. The total recapture is $10,000 + $37,500 = $47,500.

Spencer, who itemizes deductions, had adjusted gross income of $60,000 in 2019. The following additional information is available for 2019: Cash contribution to church $4,000 Purchase of art object at church bazaar (with a fair market value of $800 on the date of purchase) 1,200 Donation of used clothing to Salvation Army (fair value evidenced by receipt received) 600 What is the maximum amount Spencer can claim as a deduction for charitable contributions for 2019? $5,400 $5,200 $5,000 $4,400

$5,000 The cash contribution of $4,000 to church and the $600 fair market value of the used clothing donated to Salvation Army are fully deductible. However, the deduction for the art object is limited to the $400 excess of its cost ($1,200) over its fair market value ($800).

Julie, who is single, had the following items of income and deduction included on her 2019 Form 1040 income tax return: Salary $40,000 Net capital loss deduction 3,000 Itemized deduction (all attributable to a qualified personal casualty loss when a tornado destroyed her vacation home) 45,000 What is the amount of Julie's net operating loss for 2019? $5,000 $8,000 $11,700 $45,000

$5,000 This answer is correct. Julie's personal casualty loss of $45,000 incurred as a result of the tornado damage to her vacation home is allowed as a deduction in the computation of her NOL and is subtracted from her salary income of $40,000, to arrive at a NOL of $5,000. In the computation of a NOL, no deduction is allowed for a net capital loss. Her NOL could also be computed by adjusting her taxable loss: Salary $40,000 Capital loss (3,000) Itemized deductions (45,000) Taxable loss ($8,000) + Capital loss 3,000 + Itemized deductions not due to a casualty loss 0 Net operating loss ($5,000)

In 2019, Emil Gow won $5,000 in a state lottery. Also in 2019, Emil spent $400 for the purchase of lottery tickets. Emil elected the standard deduction on his 2019 income tax return. The amount of lottery winnings that should be included in Emil's 2019 taxable income is $0. $2,000. $4,600. $5,000.

$5,000. Lottery winnings are gambling winnings and must be included in gross income. Gambling losses are deductible from AGI as a miscellaneous deduction (to the extent of winnings) if a taxpayer itemizes deductions. Since Gow elected the standard deduction for 2019, the $400 spent on lottery tickets is not deductible. Thus, all $5,000 of Gow's lottery winnings are included in his taxable income.

Paul Bristol, a cash-basis taxpayer, owns an apartment building. The following information was available for 2019: • An analysis of the 2019 bank deposit slips showed recurring monthly rents received totaling $50,000. • On March 1, 2019, the tenant in apartment 2B paid Bristol $2,000 to cancel the lease expiring on December 31, 2020. • The lease of the tenant in apartment 3A expired on December 31, 2019, and the tenant left improvements valued at $1,000. The improvements were not in lieu of any rent required to have been paid. In computing net rental income for 2019, Bristol should report gross rents of $50,000 $51,000 $52,000 $53,000

$52,000 This answer is correct. Gross rents include the $50,000 of recurring rents plus the $2,000 lease cancellation payment. The $1,000 of lease improvements are excluded from income since they were not required in lieu of rent.

Robin Byrd is a self-employed accountant with Schedule C profit of $320,000. Her business does not pay any W-2 wages. Robin is married filing a joint return and has taxable income of $275,000, prior to the Section 199A deduction. What is the amount of Robin's qualified business income deduction, if any? $0 $55,000 $64,000 $100,000

$55,000 CORRECT! The QBI deduction is computed separately for each trade or business and is 20% of the qualified business income. The QBI deduction cannot exceed the greater of: 50% of the taxpayer's share of the W-2 wages paid by the business, or 25% of the taxpayer's share of the W-2 wages paid by the business, plus 2.5% of the unadjusted basis of qualified property. The wages/property limitation does not apply to taxpayers with taxable income not exceeding $321,400 (married filing joint), $160,725 (married filing separately) or $160,700 (others). Since Robin's taxable income is $275,000 and she is married filing joint, her QBI deduction is $64,000. However, the deduction is limited to 20% of the excess of the taxpayer's taxable income over the taxpayer's net capital gains (including qualified dividends), which is 20% × $275,000 = $55,000.

Kant, a cash-basis individual, owns and operates an office building. Kant received the following payments during the current year: Current rents $30,000 Advance rents for the next year 10,000 Security deposits held in a segregated account 5,000 Lease cancellation payments 15,000 What amount is included in gross income? $30,000 $40,000 $55,000 $60,000

$55,000 This answer is correct. Gross income includes the $30,000 of current rents, $10,000 of advance rents, and $15,000 lease cancellation payments. Advance rents must be included in gross income when received regardless of the period covered or the accounting method used. The security deposits held in a segregated account will be included in gross income at a later date if not returned to tenants.

A painter and an accountant agree to trade their services. The painter provides services valued at $550, and the accountant provides services worth $500. What amount should the accountant report as income or expense? $50 expense $50 income $500 income $550 income

$550 income Correct! Since the accountant renders services to the painter, the accountant must recognize income equal to the fair market value of the assets or services received. The painter's services are valued at $550, so the accountant recognizes income of $550.

In the year 2018, Jensen had the following items: Salary $50,000 Inheritance 25,000 Alimony from ex-spouse (divorce finalized in 2018) 12,000 Child support from ex-spouse 9,000 Capital loss on investment stock sale (6,000) What is Jensen's AGI for the current year? $44,000 $59,000 $62,000 $84,000

$59,000 This answer is correct. Jensen's AGI consists of the $50,000 salary plus the $12,000 alimony received, less a deduction for a net capital loss which is limited to $3,000. The inheritance and child support that Jensen received are excluded from gross income.

Sol and Julia Crane (both age 43) are married and will file a joint return for 2019. Sol earned a salary of $140,000 in 2019 from his job at Troy Corp., where Sol is covered by his employer's pension plan. In addition, Sol and Julia earned interest of $3,000 in 2019 on their joint savings account. Julia is not employed, and the couple had no other income. On July 15, 2019, Sol contributed $6,000 to an IRA for himself and $6,000 to an IRA for his spouse. The allowable IRA deduction in the Cranes' 2019 joint return is $0. $3,000. $6,000. $12,000.

$6,000. Since Sol is covered by his employer's pension plan, Sol's contribution of $6,000 is proportionately phased out as a deduction by AGI between $103,000 and $123,000. Since the Cranes' AGI exceeded $123,000, no deduction is allowed for Sol's contribution. Although Julia is not employed, $6,000 can be contributed to her IRA because the combined earned income on the Cranes' return is at least $12,000. The maximum IRA deduction for an individual who is not covered by an employer plan, but whose spouse is, is proportionately phased out for AGI between $193,000 and $203,000 for 2019. Since Julia is not covered by an employer plan and the Cranes' AGI is below $193,000, the $6,000 contribution to Julia's IRA is fully deductible for 2019.

In 2019, Jeff Sippy won $6,000 in a state lottery. Also in 2019, Jeff spent $1,400 for the purchase of lottery tickets. Jeff elected to take the standard deduction on his 2019 income tax return. The amount of lottery winnings that should be included in Jeff's 2019 taxable income is $6,000. $4,600. $3,000. $0.

$6,000. This answer is correct. Lottery winnings are gambling winnings and must be included in gross income. Gambling losses are deductible from AGI as a miscellaneous deduction (to the extent of winnings) if a taxpayer itemizes deduction. Since Jeff elected to take the standard deduction for 2019, the $1,400 spent on lottery tickets is not deductible. All $6,000 of Jeff's lottery winnings are included in his taxable income.

During 2017, Karen purchased 100 shares of preferred stock of Boling Corp. for $5,500. During 2019, Karen received a stock dividend of ten additional shares of Boling Corp. preferred stock. On the date the preferred stock was distributed, it had a fair market value of $60 per share. What is Karen's basis in the ten shares of preferred stock that she received as a dividend? $0 $500 $550 $600

$600 Generally, stock dividends are nontaxable, and a taxpayer's basis for original stock is allocated to the dividend stock in proportion to fair market values. However, any stock that is distributed on preferred stock results in a taxable stock dividend. The amount to be included in the shareholder's income is the stock's fair market value on date of distribution. Similarly, the shareholder's basis for the dividend shares will be equal to their fair market value on date of distribution (10 × $60 = $600).

Ace Rentals Inc., an accrual-basis taxpayer, reported rent receivable of $35,000 and $25,000 in its 2019 and 2018 balance sheets, respectively. During 2019, Ace received $50,000 in rent payments and $5,000 in nonrefundable rent deposits. In Ace's 2019 corporate income tax return, what amount should Ace include as rent revenue? $50,000 $55,000 $60,000 $65,000

$65,000 Ace Corp. would report rent revenue of $65,000. Of this amount, $55,000 (the sum of $50,000 in rental payments and $5,000 in nonrefundable rent deposits) would be cash receipts. Ace Corp. is an accrual based taxpayer. Therefore, for tax purposes, income is earned when (1) all the events have occurred to attach the taxpayer's right to receive the income and (2) the amount of income can be determined with reasonable accuracy. With respect to rent receivable, the income must have been earned to record it as a receivable. Hence, in calculating rent revenue, the $10,000 increase in rent receivable from 2018 to 2019 would have to be added to the corporation's cash receipts.

James Martin received the following compensation and fringe benefits from his employer during the current year. Salary $50,000 Year-end bonus 10,000 Medical insurance premiums paid by employer 1,000 Reimbursement of qualified moving expenses 5,000 What is James Martin's gross income? $60,000 $61,000 $65,000 $66,000

$65,000 CORRECT! Medical insurance premiums paid by an employer are excluded from an employee's gross income. Beginning in 2018, an employee can no longer deduct moving expenses nor can an employer pay or reimburse an employee's moving expenses on a tax-free basis. Salary $50,000 Bonus 10,000 Reimbursed Moving Expenses $5,000 Total $65,000

Amy Finch had the following cash receipts during 2019: Net rent on vacant lot used by a car dealer (lessee pays all taxes, insurance, and other expenses on the lot) $6,000 Advance rent from lessee of above vacant lot, such advance to be applied against rent for the last two months of the five-year lease in 2023 1,000 How much should Amy include in her 2019 taxable income for rent? $7,000 $6,800 $6,200 $6,000

$7,000 Both the $6,000 of rent received for 2019, and the $1,000 of advance rent received in 2019 for the last two months of the lease must be included in income for 2019. Advance rent must be included in income in the year received regardless of the period covered or the accounting method used.

Stockley, a candidate for an undergraduate college degree, received a $20,000 scholarship from the university in 2019. Stockley had the following expenses relating to his attendance in 2019: Tuition and fees $12,000 Room and board 6,000 Books and supplies 500 Spring break in Cancun 1,500 What amount of the scholarship should Stockley include as taxable income in 2019? $0 $1,500 $7,500 $20,000

$7,500 This answer is correct. A degree candidate can exclude the amount of a scholarship or fellowship that is used for tuition and course-related fees, books, supplies, and equipment. Amounts used for other purposes including room and board are included in gross income.

An individual taxpayer reports the following items for the current year: Ordinary income from partnership A, operating a movie theater in which the taxpayer materially participates $70,000 Net loss from partnership B, operating an equipment rental business in which the taxpayer does not materially participate (9,000) Rental income from building rented to a third party 7,000 Short-term capital gain from sale of stock 4,000 What is the taxpayer's adjusted gross income for the year? $70,000 $72,000 $74,000 $77,000

$74,000 The loss from partnership B and the rental income are passive. Passive losses can only offset passive income, so the $9,000 loss offsets the $7,000 of rental income, but the net passive loss of $2,000 is not deductible. The ordinary income of $70,000 from partnership A and the $4,000 capital gain are taxable to produce a total AGI of $74,000.

Jack and Joan Mitchell, married taxpayers and residents of a separate property state, elect to file a joint return for 2019 during which they received the following dividends: Received by Jack Joan Alert Corporation (a qualified, domestic corporation) $400 $50 Canadian Mines, Inc. (a Canadian company) 300 Eternal Life Mutual Insurance Company (dividends on life insurance policy) 200 Total dividends received to date on the life insurance policy do not exceed cumulative premiums paid. For 2019, what amount should the Mitchells report on their joint return as dividend income? $550 $600 $750 $800

$750 The amount of dividends would be ($400 + $50 + $300) = $750. The $200 dividend on the life insurance policy is not gross income, but is considered a reduction of the cost of the policy.

John and Mary were divorced in 2017. The divorce decree provides that John pay alimony of $10,000 per year, to be reduced by 20% on their child's 18th birthday. During 2019, John paid $7,000 directly to Mary and $3,000 to Spring College for Mary's tuition. What amount of these payments should be reported as income in Mary's 2019 income tax return? $5,600 $8,000 $8,600 $10,000

$8,000 Alimony received by a taxpayer is included in that taxpayer's gross income and alimony paid by a taxpayer is deductible from that taxpayer's gross income for divorce agreements settled prior to 2019. To be considered alimony, the payments must be made under a divorce or separation agreement. Payments to third parties (such as tuition, rent and mortgage) by the spouse paying alimony for the spouse receiving alimony receive the same treatment as cash payments. John and Mary have a divorce decree stipulating $10,000 per year payments from John to Mary, but the amount decreases to $8,000 when their child reaches the age of 18 years. Due to this decrease, $2,000 of the $10,000 payment would be considered child support and, as a result, would not be reported by Mary as income. The remaining $8,000 would be considered alimony and, therefore, reported as income by Mary.

Alex Burg, a cash-basis taxpayer, earned an annual salary of $80,000 at Ace Corp. in 2019, but elected to take only $50,000. Ace, which was financially able to pay Burg's full salary, credited the unpaid balance of $30,000 to Burg's account on the corporate books in 2019, and actually paid this $30,000 to Burg on January 30, 2020. How much of the salary is taxable to Burg in 2019? $50,000 $60,000 $65,000 $80,000

$80,000 Since Burg is a cash-basis taxpayer, salary is taxable to Burg when actually or constructively received, whichever is earlier. Since the $30,000 of unpaid salary was unqualifiedly available to Burg during 2019, Burg is considered to have constructively received it. Thus, Burg must report a total of $80,000 of salary for 2019; the $50,000 actually received plus $30,000 constructively received.

During the current year, Gail Judd received the following dividends from Benefit Life Insurance Co., on Gail's life insurance policy (Total dividends received have not yet exceeded cumulative premiums paid) $100 Safe National Bank, on bank's common stock 300 Roe Mfg. Corp., a Delaware corporation, on preferred stock 500 What amount of dividend income should Gail report in her current year income tax return? $900 $800 $500 $300

$800 This answer is correct. The $100 dividend on Gail's life insurance policy is treated as a reduction of the cost of insurance (because total dividends have not yet exceeded cumulative premiums paid) and is excluded from gross income. Thus, Gail will report the $300 dividend on common stock and the $500 dividend on preferred stock, a total of $800 as dividend income for the current year.

Jamie and Lucas are a married filing jointly couple. Jamie is the sole proprietor of Jamie's Pizza who pays no W-2 wages. Jamie's Schedule C profit is $72,000, and their taxable income before the qualified business income deduction is $325,000. What is Jamie and Lucas's taxable income? $0 $325,000 324,482 $310,600

324,482 CORRECT! The QBI deduction is computed separately for each trade or business and is 20% of the qualified business income. The QBI deduction cannot exceed the greater of: 50% of the taxpayer's share of the W-2 wages paid by the business, or 25% of the taxpayer's share of the W-2 wages paid by the business, plus 2.5% of the unadjusted basis of qualified property. The wages/property limitation does not apply to taxpayers with taxable income not exceeding $321,400 (married filing joint) or $160,700 (others). If taxable income exceeds these thresholds, the limitation is phased in over a $100,000 (joint)/$50,000 (others) range. Since modified taxable income is in the phase-in range for the limitation (Column 2 of Table 1), then: The full QBI deduction (determine without any limitation) is $14,400 ($72,000 × 20%). The QBI deduction once the phase-in is completed (Column 3) is $0 since W-2 wages paid is zero and no information is given for the basis of the assets. The full QBI deduction of $14,400 is reduced by: ( $ 14,400 − $ 0 ) × ( $ 325,000 − $ 321,400 $ 100,000 ) = $ 14,400 × 3.6 % = $ 518 The QBI deduction is $13,882 ($14,400 − $518). Taxable income is $325,000 − $13,882 = $311,118.

Which of the following statements is correct regarding the deductibility of donations made to qualifying charities by a cash-basis individual taxpayer? A contemporaneous written acknowledgement is required for donations of $100. A charitable contribution deduction is not allowed for the value of services rendered to a charity. A qualified appraisal for real property donations is not required to be attached to the tax return unless the property value exceeds $10,000. The charitable contribution deduction for long-term appreciated stock is limited to 50% of adjusted gross income.

A charitable contribution deduction is not allowed for the value of services rendered to a charity. This answer is correct. A charitable contribution deduction is not allowed for the value of services performed for a charity.

Which one of the following statements concerning Roth IRAs is not correct? The maximum annual contribution to a Roth IRA is reduced if adjusted gross income exceeds certain thresholds. Contributions to a Roth IRA are not deductible. An individual is allowed to make contributions to a Roth IRA even after age 70½. A contribution to a Roth IRA must be made by the due date for filing the individual's tax return for the year (including extensions).

A contribution to a Roth IRA must be made by the due date for filing the individual's tax return for the year (including extensions). The maximum annual contribution to a Roth IRA is subject to reduction if the taxpayer's adjusted gross income exceeds certain thresholds. Unlike a traditional IRA, contributions are not deductible and can be made even after the taxpayer reaches age 70½. The contribution must be made by the due date of the taxpayer's tax return (not including extensions).

In the case of a corporation that is not a financial institution, which of the following statements is correct with regard to the deduction for bad debts? Either the reserve method or the direct charge-off method may be used, if the election is made in the corporation's first taxable year. On approval from the IRS, a corporation may change its method from direct charge-off to reserve. If the reserve method was consistently used in prior years, the corporation may take a deduction for a reasonable addition to the reserve for bad debts. A corporation is required to use the direct charge-off method rather than the reserve method.

A corporation is required to use the direct charge-off method rather than the reserve method. Corporations other than certain financial institutions are required to use the direct charge-off method in accounting for bad debts. Certain financial institutions are allowed to use the reserve method. Under the direct charge-off method, corporations may claim a deduction once a specific business debt becomes partially or wholly worthless and a specific nonbusiness debt becomes wholly worthless.

Hall, a divorced person and custodian of her 12-year-old child, filed her 2019 federal income tax return as head of a household. Hall earned a salary of $75,000 in 2019. Hall was not covered by any type of retirement plan, but contributed $6,000 to an IRA in 2019. Hall's $6,000 contribution to an IRA should be treated as A deduction from income in arriving at adjusted gross income. A deduction from adjusted gross income subject to the 2% of adjusted gross income floor. A deduction from adjusted gross income not subject to the 2% of adjusted gross income floor. Nondeductible, with the interest income on the $6,000 to be deferred until withdrawal.

A deduction from income in arriving at adjusted gross income. This answer is correct. Since Hall was not a participant in a qualified pension plan, there is no phase-out of the $6,000 maximum IRA deduction. Therefore, Hall's maximum contribution and deduction to an IRA would be limited to the lesser of (1) $6,000, or (2) 100% of her compensation. Since Hall earned a salary of $75,000, Hall's maximum deduction for contributions to an IRA is $6,000. If IRA contributions are deductible, they are always deductible from gross income in arriving at adjusted gross income.

Which one of the following statements concerning Roth IRAs is correct? A distribution from a Roth IRA is treated as first made from contributions (return of capital). The maximum contribution to a Roth IRA is limited to $5,000, for 2019. An individual cannot make contributions to a Roth IRA and a traditional IRA during the same tax year. A contribution to a Roth IRA must be made by the due date for filing the individual's tax return for the year (including extensions).

A distribution from a Roth IRA is treated as first made from contributions (return of capital). This answer is correct. A distribution from a Roth IRA is treated as first made from contributions, and to that extent, will be a nontaxable return of capital. An individual, under age 50, can make a contribution to both a traditional IRA and a Roth IRA for the same tax year as long as the total amounts contributed do not exceed an overall maximum of $6,000. Contributions to a Roth IRA must be made by the due date for filing the individual's tax return for the year (not including extensions).

What is the maximum amount of adjusted gross income that a taxpayer may have for 2019 and still qualify to roll over the balance from a traditional individual retirement account (IRA) into a Roth IRA? $150,000 $100,000 $75,000 A rollover to a Roth IRA is not subject to an adjusted gross income limitation.

A rollover to a Roth IRA is not subject to an adjusted gross income limitation. This answer is correct. For tax years beginning after December 31, 2009, the adjusted gross income and filing status limitations have been eliminated for rollovers from a traditional IRA to a Roth IRA. Even high-income taxpayers can convert a traditional IRA to a Roth IRA.

Bud Ace, a self-employed carpenter, reports his income on the cash basis. During the current year he completed a job for a customer and sent him a bill for $3,000. The customer was not satisfied with the work and indicated that he would only pay $1,500. Ace agreed to reduce the bill to $2,000 but before payment was made the customer died. Ace could not collect from the customer's estate and should treat this loss as An ordinary business deduction of $3,000. An ordinary business deduction of $2,000. A short-term capital loss of $1,500. A nondeductible loss as no income was reported.

A nondeductible loss as no income was reported. This answer is correct. Accounts receivable for services rendered by a cash-basis taxpayer have no basis for tax purposes. Since a cash-basis taxpayer does not include accounts receivable in income until payment is received, failure to collect accounts receivable results in a nondeductible loss.

Hall, a divorced person and custodian of her twelve-year-old child, submitted the following information to the CPA who prepared her 2019 return: The divorce agreement, executed in 2017, provides for Hall to receive $3,000 per month, of which $600 is designated as child support. After the child reaches eighteen, the monthly payments are to be reduced to $2,400 and are to continue until remarriage or death. However, for the year 2019, Hall received a total of only $5,000 from her former husband. Hall paid an attorney $2,000 in 2019 in a suit to collect the alimony owed. The $2,000 legal fee that Hall paid to collect alimony should be treated as A deduction in arriving at adjusted gross income. An itemized deduction subject to the 2% of adjusted gross income floor. An itemized deduction not subject to the 2% of adjusted gross income floor. A nondeductible personal expense.

A nondeductible personal expense. The $2,000 legal fee is considered an expenditure incurred in the production of income. Expenses incurred in the production of income are 2% miscellaneous itemized deductions which are not deductible beginning in 2018.

Which one of the following statements concerning traditional IRAs for individuals under the age of 50 is not correct for 2019? If neither the taxpayer nor the taxpayer's spouse is an active participant in an employer-sponsored retirement plan or a Keogh plan, there is no phase-out of IRA deductions. Total IRA contributions are subject to the $6,000 or 100% of compensation limit. A taxpayer whose AGI is not above the applicable phase-out range can make a $500 deductible contribution regardless of the proportional phase-out rule. A taxpayer who is partially or totally prevented from making deductible IRA contributions can make nondeductible IRA contributions.

A taxpayer whose AGI is not above the applicable phase-out range can make a $500 deductible contribution regardless of the proportional phase-out rule. This answer is correct. A taxpayer whose AGI is not above the applicable phase-out range can make a $200 (not $500) deductible contribution regardless of the proportional phase-out rule. This $200 minimum applies separately to taxpayer and taxpayer's spouse.

With regard to the alimony deduction in connection with a 2018 divorce, which one of the following statements is correct? Alimony is deductible by the payor spouse, and includible by the payee spouse, to the extent that payment is contingent on the status of the divorced couple's children. The divorced couple may be members of the same household at the time alimony is paid, provided that the persons do not live as husband and wife. Alimony payments must terminate on the death of the payee spouse. Alimony may be paid either in cash or in property.

Alimony payments must terminate on the death of the payee spouse. This answer is correct. To be considered alimony, cash payments must terminate on the death of the payee spouse.

An applicable financial statement is a statement that conforms to GAAP and is Reported in a 10 K. Filed with a federal agency (but not for tax purposes). Conforms to International Financial Reporting Standards (IFRS). All of the above.

All of the above. CORRECT! An applicable financial statement is a statement that conforms to GAAP and is Reported in a 10-K An audited financial statement used for a nontax purpose, or Filed with a federal agency (but not for tax purposes). An applicable financial statement also includes a financial statement that conforms to IFRS.

Hall, a divorced person and custodian of her 12-year-old child, filed her 2019 federal income tax return as head of a household. She submitted the following information to the CPA who prepared her 2019 return: The divorce agreement, executed in 2018, provides for Hall to receive $3,000 per month, of which $600 is designated as child support. After the child reaches 18, the monthly payments are to be reduced to $2,400 and are to be continued until remarriage or death. However, for the year 2019, Hall received a total of only $5,000 from her former husband. Hall paid an attorney $2,000 in 2019 in a suit to collect the alimony owed. In June 2019, Hall's mother gifted her 100 shares of a listed stock. The donor's basis for this stock, which she bought in 1987, was $4,000, and market value on the date of the gift was $3,000. Hall sold her stock in July 2019 for $3,500. The donor paid no gift tax. During 2019, Hall spent a total of $1,000 for state lottery tickets. Her lottery winnings in 2019 totaled $200. Hall earned a salary of $25,000 in 2019. Hall was not covered by any type of retirement plan, but contributed $2,000 to an IRA in 2019. In 2019, Hall sold an antique that she bought in 1997 to display in her home. Hall paid $800 for the antique and sold it for $1,400, using the proceeds to pay a court-ordered judgment. Hall paid the following expenses in 2019 pertaining to the home that she owns: realty taxes, $3,400; mortgage interest, $7,000; casualty insurance, $490; assessment by city for construction of a sewer system, $910; interest of $1,000 on a personal, unsecured bank loan, the proceeds of which were used for home improvements. Hall does not rent out any portion of the home. Hall's $2,000 contribution to an IRA should be treated as An adjustment to income in arriving at adjusted gross income. A deduction from adjusted gross income subject to the 2% of adjusted gross income floor. A deduction from adjusted gross income not subject to the 2% of adjusted gross income floor. Nondeductible, with the interest income on the $2,000 to be deferred until withdrawal.

An adjustment to income in arriving at adjusted gross income. Individual taxpayers not active in certain employer-sponsored retirement plans may deduct cash contributions to individual retirement accounts to the extent of the lesser of $6,000 or 100% of the taxpayer's gross income in 2019. Those taxpayers covered by employer-sponsored retirement plans may still take individual retirement account deductions subject to a phase-out based on their adjusted gross income. No taxes are paid on the interest income earned on individual retirement accounts until the retirement savings are distributed. The individual retirement account deduction is an adjustment to income in arriving at adjusted gross income.

In calculating the tax of a corporation for a short period, which of the following processes is correct? Divide current-year income by prior-year income, then multiply the result by prior-year tax. Compute tax on short-period income, then multiply the result by 12 divided by the number of months in the short period. Determine the average taxable income for the past three years, then multiply the result by the number of months in the short period divided by 12. Annualize income and calculate the tax on annualized income, then multiply the computed tax by the number of months in the short period divided by 12.

Annualize income and calculate the tax on annualized income, then multiply the computed tax by the number of months in the short period divided by 12. If a corporation filed a short-year return for 3 months, the income for that period is first multiplied by 4 (12 months/3 months) to annualize the income for 12 months. The corporate tax liability is then computed on this amount for the full 12 months. That amount is then multiplied by 3/12 to prorate for the short tax year.

A calendar-year individual is eligible to contribute to a deductible IRA. The taxpayer obtained a six-month extension to file until October 15 but did not file the return until November 1. What is the latest date that an IRA contribution can be made in order to qualify as a deduction on the prior year's return? October 15 April 15 August 15 November 1

April 15 IRA contributions must be made by the original due date of the return (April 15) even if the return is extended.

A calendar-year individual is eligible to contribute to a deductible IRA. The taxpayer obtained a six-month extension to file until October 15 but did not file the return until November 1. What is the latest date that an IRA contribution can be made in order to qualify as a deduction on the prior year's return? October 15 April 15 August 15 November 1

April 15 This answer is correct. Contributions can be made to a traditional IRA for a year at any time during the year, and must be made no later than the due date for filing the return for that year, not including extensions. Even though a taxpayer obtains an extension for filing the return for a prior year, the return filing extension does not extend the date for making IRA contributions. For a calendar-year individual, IRA contributions must generally be made on or before April 15 of the current year to be deductible for the prior year.

Bartlet owns a manufacturing business and participates in the business. Which of the following conditions would cause the business to be considered a nonpassive activity for Bartlet? Bartlet participates in the business for more than 500 hours during a year. The business made a profit in any three of the last five years that preceded the current year. The business has at least 10 employees who, individually or collectively, work for the business more than 1,000 hours in a year. Bartlet files an election with the IRS postponing nonpassive activity classification.

Bartlet participates in the business for more than 500 hours during a year. Correct! For the business to be nonpassive Barltet must materially participate in the business. One method to materially participate is to work in the business more than 500 hours for a year.

Which of the following conditions must be present for a payment to qualify as deductible alimony for divorces finalized before 2019? I. Payments must be in cash. II. The payments must end no later than the recipient's death. I only. II only. Both I and II. Neither I nor II.

Both I and II. Alimony payments you make under a divorce or separation instrument, such as a divorce decree or a written agreement incident thereto, are deductible if all of the following requirements are met: You and your spouse or former spouse do not file a joint return with each other; You pay in cash (including checks or money orders); The divorce or separation instrument does not say that the payment is not alimony; If legally separated under a decree of divorce or separate maintenance, you and your former spouse are not members of the same household when you make the payment; You have no liability to make any payment (in cash or property) after the death of your spouse or former spouse; and Your payment is not treated as child support.

Which payment(s) is(are) included in a recipient's gross income? I. Payment to a graduate assistant for a part-time teaching assignment at a university. Teaching is not a requirement toward obtaining the degree. II. A grant to a Ph.D. candidate for his participation in a university-sponsored research project for the benefit of the university. I only. II only. Both I and II. Neither I nor II.

Both I and II. Gross income is the starting point in determining a taxpayer's tax liability. As a result, it is broadly defined. Gross income encompasses all income from all sources, including compensation for services, business income, interests, dividends, rents, and ordinary and capital gains. Hence, both a payment to a graduate assistant for a part-time teaching assignment at a university and a grant to a Ph.D. candidate for his participation in a university-sponsored research project for the benefit of the university would be included in a taxpayer's gross income.

Micro Corp., a calendar year, accrual basis corporation, purchased a 5-year, 8%, $100,000 taxable corporate bond for $108,530, on July 1, 2019, the date the bond was issued. The bond paid interest semiannually. Micro elected to amortize the bond premium. For Micro's 2019 tax return, the bond premium amortization for 2019 should be I. Computed under the constant yield to maturity method. II. Treated as an offset to the interest income on the bond. I only. II only. Both I and II. Neither I nor II.

Both I and II. Taxpayers may elect to amortize taxable bonds purchased at a premium. Nontaxable bonds purchased at a premium generally are required to be amortized. The amortized bond premium is based on the constant yield to maturity. The amount amortized usually reduces the taxpayer's basis in the bonds and, for taxable bonds, results in an offsetting deduction for interest received from the bond. This response correctly states that the bond premium amortization should be computed under the constant yield to maturity method. In addition, this response correctly indicates that the bond premium amortization would be treated as an offset to the interest income from the bond.

In a tax year where the taxpayer pays qualified education expenses, interest income on the redemption of qualified U.S. Series EE Bonds may be excluded from gross income. The exclusion is subject to a modified gross income limitation and a limit of aggregate bond proceeds in excess of qualified higher education expenses. Which of the following is (are) true? I. The exclusion applies for education expenses incurred by the taxpayer, the taxpayer's spouse, or any person whom the taxpayer may claim as a dependent for the year. II. "Otherwise qualified higher education expenses" must be reduced by qualified scholarships not includible in gross income. I only. II only. Both I and II. Neither I nor II.

Both I and II. Taxpayers redeeming qualified U.S. Series EE Bonds in the same year that qualified higher education expenses are paid may exclude the interest income on the bonds from gross income. Qualified higher education expenses are tuition and fees required to enroll and attend a eligible educational institution. The exclusion applies only to education expenses incurred by the taxpayer, the taxpayer's spouse, or any person whom the taxpayer may claim as a dependent for the year. Otherwise qualified higher education expenses are decreased by: qualified scholarships that are not includible in gross income; payment of educational expenses to an institution that is an exempt organization; reimbursement, payment, or waiver of qualified educational expenses through a state tuition program; and any educational allowance allowable under U.S. Tax Code. This response correctly indicates that both statements in this question are true. The exclusion applies for education expenses incurred by the taxpayer, the taxpayer's spouse, or any person whom the taxpayer may claim as a dependent for the year. In addition, otherwise qualified higher education expenses must be reduced by qualified scholarships not includible in gross income.

DAC Foundation awarded Kent $75,000 in recognition of lifelong literary achievement. Kent was not required to render future services as a condition to receive the $75,000. What condition(s) must have been met for the award to be excluded from Kent's gross income? I. Kent was selected for the award by DAC without any action on Kent's part. II. Pursuant to Kent's designation, DAC paid the amount of the award either to a governmental unit or to a charitable organization. I only. II only. Both I and II. Neither I nor II.

Both I and II. This answer is correct. A prize or award must generally be included in a recipient's gross income. It can be excluded if the prize or award is made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if the recipient was selected without action on his or her part to enter the contest, the recipient is not required to render substantial future services as a condition to receiving the prize or award, and the prize or award is transferred by the payor to a governmental unit or tax-exempt charitable organization.

One of the elections a new corporation must make is its choice of an accounting period. Which of the following entities has the most flexibility in choosing an accounting period? C corporation S corporation Partnership Personal service corporation

C corporation This answer is correct. The requirement is to determine which entity has the most flexibility in choosing an accounting period. A C corporation has the most flexibility since it can elect to use a calendar year or any fiscal year. In contrast, a partnership generally must use the same tax year as used by its partners in order to prevent the deferral of income to partners that would otherwise result. Similarly, S corporations and personal service corporations must generally adopt a calendar year unless the entities can establish a business purpose for having a different tax year.

Charitable contributions subject to the 60% limit that are not fully deductible in the year made may be Neither carried back nor carried forward. Carried back 2 years or carried forward 20 years. Carried forward 5 years. Carried forward indefinitely until fully deducted.

Carried forward 5 years. This answer is correct. Cash charitable contributions in excess of the 60% limitation are carried forward for up to 5 years, and are deductible in a carry forward year to the extent that the contributions of a carry forward year are below any applicable percentage limitations.

Which one of the following statements concerning an education IRA (Coverdell Education Savings Account) is correct in 2019? A taxpayer may contribute up to $2,500 to an education IRA (Coverdell Education Savings Account) to pay the costs of the designated beneficiary's higher education. Eligibility for an education IRA is not subject to income phaseout. Contributions can be made to an education IRA on behalf of a beneficiary until the beneficiary reaches age 21. Contributions to an education IRA are not deductible.

Contributions to an education IRA are not deductible. This answer is correct. Contributions to an education IRA are not deductible, but withdrawals of earnings will be tax-free if used to pay the qualified education expenses of the designated beneficiary. The maximum annual amount that can be contributed to an education IRA is limited to $2,000, but the annual contribution is phased out for single taxpayers with modified AGI between $95,000 and $110,000, and for married taxpayers with modified AGI between $190,000 and $220,000. Contributions cannot be made to an education IRA after the date on which the designated beneficiary reaches age 18.

Nan, a cash basis taxpayer, borrowed money from a bank and signed a 10-year interest-bearing note on business property on January 1 of the current year. The cash flow from Nan's business enabled Nan to prepay the first three years of interest attributable to the note on December 31 of the current year. How should Nan treat the prepayment of interest for tax purposes? Deduct the entire amount as a current expense. Deduct the current year's interest and amortize the balance over the next two years. Capitalize the interest and amortize the balance over the 10-year loan period. Capitalize the interest as part of the basis of the business property.

Deduct the current year's interest and amortize the balance over the next two years. This answer is correct. No advance deduction for interest expense is allowed. Instead, interest expense must be amortized over the period to which it relates. Here, Nan can deduct the current year's interest expense, but the remainder must be amortized over the following two years.

Dale received $1,000 in 2019 for jury duty. In exchange for regular compensation from her employer during the period of jury service, Dale was required to remit the entire $1,000 to her employer in 2019. In Dale's 2019 income tax return, the $1,000 jury duty fee should be Claimed in full as an itemized deduction. Claimed as an itemized deduction to the extent exceeding 2% of adjusted gross income. Deducted from gross income in arriving at adjusted gross income. Included in taxable income without a corresponding offset against other income.

Deducted from gross income in arriving at adjusted gross income. If an employer requires jury pay to be remitted in exchange for regular compensation for the period the employee was performing jury duty, the employee may deduct the jury duty pay from her gross income as an adjustment arriving at adjusted gross income. As Dale was required by her employer to remit the $1,000 in jury duty pay in exchange for regular compensation for the period the employee was performing jury duty, Dale should deduct the jury duty pay from her gross income in arriving at adjusted gross income.

Dale received $1,000 in 2019 for jury duty. In exchange for regular compensation from her employer during the period of jury service, Dale was required to remit the entire $1,000 to her employer in 2019. In Dale's 2019 income tax return, the $1,000 jury duty fee should be Claimed in full as an itemized deduction. Claimed as an itemized deduction to the extent exceeding 2% of adjusted gross income. Deducted from gross income in arriving at adjusted gross income. Included in taxable income without a corresponding offset against other income.

Deducted from gross income in arriving at adjusted gross income. If an employer requires jury pay to be remitted in exchange for regular compensation for the period the employee was performing jury duty, the employee may deduct the jury duty pay from her gross income as an adjustment arriving at adjusted gross income. As Dale was required by her employer to remit the $1,000 in jury duty pay in exchange for regular compensation for the period the employee was performing jury duty, Dale should deduct the jury duty pay from her gross income in arriving at adjusted gross income.

Jon received $500 in 2019 for jury duty. In exchange for regular compensation from his employer during the period of jury service, Jon was required to remit the entire $500 to his employer in 2019. In Jon's 2019 income tax return, the entire $500 jury duty fee should be Claimed in full as an itemized deduction. Claimed as an itemized deduction to the extent exceeding 2% of adjusted gross income. Deducted from gross income in arriving at adjusted gross income. Included in taxable income without a corresponding offset against other income.

Deducted from gross income in arriving at adjusted gross income. This answer is correct. Fees received for serving on a jury must be included in gross income. If the recipient is required to remit the jury duty fees to an employer in exchange for regular compensation, the remitted jury fees are allowed as a deduction from gross income in arriving at adjusted gross income.

Which one of the following characteristics/requirements differs across traditional IRAs and Roth IRAs? Due date for contributions Deductibility of contributions The maximum amount allowed as a contribution None of the above.

Deductibility of contributions Contributions to Roth IRAs are never deductible whereas contributions to traditional IRAs are deductible if certain requirements are met.

Davis, a sole proprietor with no employees, has a Keogh profit-sharing plan to which he may contribute 25% of his annual earned income. For this purpose, "earned income" is defined as net self-employment earnings reduced by the Deductible Keogh contribution. Self-employment tax. Self-employment tax and one-half of the deductible Keogh contribution. Deductible Keogh contribution and one-half of the self-employment tax.

Deductible Keogh contribution and one-half of the self-employment tax. For determining the amount of income that a self-employed individual may contribute to a Keogh profit-sharing plan, earned income is defined as net self-employed earnings less the deductible Keogh contribution and one-half of the self-employment tax.

Cobrin, a sole proprietor with no employees, has a Keogh profit-sharing plan to which he may contribute 15% of his annual earned income. For this purpose, "earned income" is defined as net self-employment earnings reduced by the Deductible Keogh contribution. Self-employment tax. Self-employment tax and one-half of the deductible Keogh contribution. Deductible Keogh contribution and one-half of the self-employment tax.

Deductible Keogh contribution and one-half of the self-employment tax. This answer is correct. A self-employed individual may contribute to a qualified retirement plan called a Keogh plan. The maximum contribution to a Keogh profit-sharing plan is the lesser of $56,000 (for 2019) or 25% of earned income. For this purpose, "earned income" is defined as net earnings from self-employment (i.e., business gross income minus allowable business deductions) reduced by the deduction for one-half of the self-employment tax, and the deductible Keogh contribution itself.

The 20% of Qualified Business income deduction under the new Section 199A is: Deductible as an Itemized Deduction. Deductible from AGI when calculating taxable income. Deductible for AGI when calculating taxable income. Not deductible.

Deductible from AGI when calculating taxable income. CORRECT! The QBI deduction is not a deduction for Adjusted Gross Income (page 1 of Form 1040) nor an itemized deduction. Rather, the QBI deduction is deducted FROM adjusted gross income but is not an itemized deduction.

For the year ended December 31, 2019, Don Raff earned $1,000 interest at Ridge Savings Bank on a certificate of deposit scheduled to mature in 2020. In January 2020, before filing his 2019 income tax return, Raff incurred a forfeiture penalty of $500 for premature withdrawal of the funds. Raff should treat this $500 forfeiture penalty as a Reduction of interest earned in 2019, so that only $500 of such interest is taxable on Raff's 2019 return. Deduction from 2020 adjusted gross income, deductible only if Raff itemizes his deductions for 2020. Penalty not deductible for tax purposes. Deduction from gross income in arriving at 2020 adjusted gross income.

Deduction from gross income in arriving at 2020 adjusted gross income. An interest forfeiture penalty for making a premature withdrawal from a certificate of deposit should be deducted from gross income in arriving at adjusted gross income in the year in which the penalty is incurred, which in this case is 2020.

Which of the following is not a deductible itemized deduction? Gambling losses up to the amount of gambling winnings Medical expenses Real estate tax Employee business expenses

Employee business expenses This answer is correct. Unreimbursed employee business expenses are no longer deductible beginning in 2018.

In 2019, Farb, a cash-basis individual taxpayer, received an $8,000 invoice for personal property taxes. Believing the amount to be overstated by $5,000, Farb paid the invoiced amount under protest and immediately started legal action to recover the overstatement. In November 2020, the matter was resolved in Farb's favor, and he received a $5,000 refund. Farb itemizes his deductions on his tax returns. Which of the following statements is correct regarding the deductibility of the property taxes? Farb should deduct $8,000 in his 2019 income tax return and should report the $5,000 refund as income in his 2020 income tax return. Farb should not deduct any amount in his 2019 income tax return and should deduct $3,000 in his 2020 income tax return. Farb should deduct $3,000 in his 2019 income tax return. Farb should not deduct any amount in his 2019 income tax return when originally filed, and should file an amended 2019 income tax return in 2020.

Farb should deduct $8,000 in his 2019 income tax return and should report the $5,000 refund as income in his 2020 income tax return. Under the tax benefit rule, recoveries of taxes previously deducted by a taxpayer that were overpaid should be reported as income by the taxpayer in the year of recovery. The taxes subject to the tax benefit rule are: state income taxes; personal property taxes; real property taxes; state sales and use taxes; state corporation franchise taxes; stamp taxes; federal excise taxes; customs duties; and farmland preservation credits. Farb's overstatement arose from personal property taxes, a tax subject to the tax benefit rule. Thus, Farb should deduct $8,000 in his 2019 income tax return and should report the $5,000 refund as income in his 2020 income tax return when the case is settled.

Under the cash method of reporting, an individual should report gross income Only for the year in which income is actually received in cash. Only for the year in which income is actually received either in cash or in property. For the year in which income is either actually or constructively received in cash only. For the year in which income is either actually or constructively received either in cash or in property.

For the year in which income is either actually or constructively received either in cash or in property. This answer is correct. Under the cash method of tax accounting, income is reported (i.e., recognized) when first actually received or constructively received either in cash or in property. In the case of property, the FMV of the property received is the amount to be reported. Constructive receipt means that an item of income is unqualifiedly available without restriction (e.g., interest resulting from a savings account is reported as income for the year in which the interest is credited to the account).

A cash-basis taxpayer should report gross income For the year in which income is either actually or constructively received, whether in cash or in property. For the year in which income is either actually or constructively received in cash only. Only for the year in which income is actually received whether in cash or in property. Only for the year in which income is actually received in cash.

For the year in which income is either actually or constructively received, whether in cash or in property. A cash-basis taxpayer should report gross income for the year in which income is either actually or constructively received, whether in cash or in property.

If an individual taxpayer's passive losses relating to rental real estate activities cannot be used in the current year, then they may be carried Back two years, but they cannot be carried forward. Forward up to a maximum period of twenty years, but they cannot be carried back. Back two years or forward up to twenty years, at the taxpayer's election. Forward indefinitely or until the property is disposed of in a taxable transaction.

Forward indefinitely or until the property is disposed of in a taxable transaction. Generally, losses from passive activities can only be used to offset income from passive activities. If there is insufficient passive activity income to absorb passive activity losses, the unused losses are carried forward indefinitely or until the property is disposed of in a taxable transaction.

If an individual taxpayer's passive losses and credits relating to rental real estate activities cannot be used in the current year, then they may be carried Back 3 years, but they cannot be carried forward. Forward up to a maximum period of 20 years, but they cannot be carried back. Back 2 years or forward up to 20 years, at the taxpayer's election. Forward indefinitely or until the property is disposed of in a taxable transaction.

Forward indefinitely or until the property is disposed of in a taxable transaction. This answer is correct. Generally, losses and credits from passive activities can only be used to offset income from (or tax allocable to) passive activities. If there is insufficient passive-activity income (or tax) to absorb passive-activity losses and credits, the unused losses and credits are carried forward indefinitely or until the property is disposed of in a taxable transaction.

Mock operates a retail business selling illegal narcotic substances. Which of the following item(s) may Mock deduct in calculating business income? I. Cost of merchandise II. Business expenses other than the cost of merchandise I only. II only. Both I and II. Neither I nor II.

I only. No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by federal law or the law of any state in which such trade or business is conducted. However, a deduction is allowed for the cost of merchandise purchased.

The uniform capitalization method must be used by I. Manufacturers of tangible personal property. II. Retailers of personal property with $2 million in average annual gross receipts for the three preceding years. I only. II only. Both I and II. Neither I nor II.

I only. Uniform capitalization rules generally require that all costs incurred (both direct and indirect) in manufacturing or constructing real or personal property, or in purchasing or holding property for sale, must be capitalized as part of the cost of the property. However, these rules do not apply to a "small retailer or wholesaler" who acquires personal property for resale if the retailer's or wholesaler's average annual gross receipts for the three preceding taxable years do not exceed $25 million.

In January 2019, Joan Hill bought one share of Orban Corp. stock for $300. On March 1, 2019, Orban distributed one share of preferred stock for each share of common stock held. This distribution was nontaxable. On March 1, 2019, Joan's one share of common stock had a fair market value of $450, while the preferred stock had a fair market value of $150. The holding period for the preferred stock starts in January 2019. March 2019. September 2019. December 2019.

January 2019. Since the tax basis of the preferred stock is determined in part by the basis of the common stock, the holding period of the preferred stock includes the holding period of the common stock (i.e., the holding period of the common stock tacks on to the preferred stock). Thus, the holding period of the preferred stock starts when the common stock was acquired, January 2019.

The 20% of Qualified Business income deduction typically applies to which of the following types of business? Accounting Consulting Manufacturing Financial services

Manufacturing CORRECT! A qualified trade or business for the QBI deduction does not include specified service trades or businesses. These are defined as performance in the services of health, law, accounting, actuarial sciences, performing arts, consulting, athletics, financial services, brokerage services, or any business where the principal asset is the reputation of an employee or owner.

A corporation's penalty for underpaying federal estimated taxes is Not deductible. Fully deductible in the year paid. Fully deductible if reasonable cause can be established for the underpayment. Partially deductible.

Not deductible. Fines and penalties generally may not be deducted as a business expense, including those paid to the federal government. Hence, a corporation's penalty for underpaying federal estimated taxes is not deductible.

Unless the Internal Revenue Service consents to a change of method, the accrual method of tax reporting is mandatory in 2019 for a sole proprietor when there are Accounts receivable for services rendered Year-end merchandise inventories Yes Yes Yes No No No No Yes

No Yes CORRECT! Beginning in 2018, the accrual method is never required for a taxpayer with inventory or accounts receivable unless the average gross receipts for the preceding three tax years exceeds $25 million.

Under the uniform capitalization rules applicable to property acquired for resale, which of the following costs should be capitalized with respect to inventory if no exceptions are met? Marketing costs Off-site storage costs Yes Yes Yes No No No No Yes

No Yes Manufacturers and certain retailers and wholesalers are required to use the uniform capitalization rules to capitalize direct and indirect costs allocable to property they produce and for property they purchase for resale. Marketing, selling, advertising, and distribution expenses are not required to be capitalized. Storage costs are required to be capitalized to the extent that they can be traced to an off-site storage or warehouse facility. Those storage costs attributed to an on-site facility are not required to be capitalized. This response correctly indicates that marketing costs are not required to be capitalized and that costs attributable to off-site storage facilities are required to be capitalized.

Harold Brodsky is an electrician employed by a contracting firm. During the current year, he incurred and paid the following expenses: Use of personal auto for company business (reimbursed under an accountable plan by employer for $200) $300 Specialized work clothes 550 Union dues 600 Cost of income tax preparation 150 Preparation of will 100 How do these items impact his taxable income? Increase to taxable income of $300 Decrease to taxable income of $1,700 Decrease to taxable income of $1,400 No impact on his taxable income

No impact on his taxable income Correct! The $300 reimbursement under the accountable plan is not included in income, nor is it deductible. Costs for preparation of a will and unreimbursed employee business expenses are not deductible.

Hall, a divorced person and custodian of her 12-year-old child, filed her 2019 federal income tax return as Head of a Household. During 2019, Hall paid a $490 casualty insurance premium on her personal residence. Hall does not rent out any portion of the home, nor use it for business. The casualty insurance premium of $490 is Allowed as an itemized deduction subject to the $100 floor and the 10% of adjusted gross income floor. Allowed as an itemized deduction subject to the 2% of adjusted gross income floor. Deductible in arriving at adjusted gross income. Not deductible in 2019.

Not deductible in 2019. Casualty insurance premiums on an individual's personal residence are considered nondeductible personal expenses. Even though a casualty is actually incurred during the year, no deduction is available for personal casualty insurance premiums.

Marc Clay was unemployed for the entire year 2018. In January 2019, Clay obtained full-time employment 60 miles away from the city where he had resided during the 10 years preceding 2019. Clay kept his new job for the entire year 2019. In January 2019, Clay paid direct moving expenses of $1,300 in relocating to his new city of residence, but he received no reimbursement for these expenses. In his 2019 income tax return, Clay's direct moving expenses are Not deductible. Fully deductible only if Clay itemizes his deductions. Fully deductible from gross income in arriving at adjusted gross income. Deductible subject to a 2% threshold if Clay itemizes his deductions.

Not deductible. Correct! Beginning in 2018, moving expenses are not deductible unless the taxpayer is a member of the military on active duty pursuant to a military order.

The following is 2019 information pertaining to Sam and Ann Hoyt, who filed a joint federal income tax return for the calendar year 2019. The Hoyts had adjusted gross income of $34,000 and itemized their deductions for 2019. Among the Hoyts' cash expenditures during 2019 were the following: $2,500 repairs in connection with 2019 fire damage to the Hoyt residence. This property has a basis of $50,000. Fair market value was $60,000 before the fire and $55,000 after the fire. Insurance on the property had lapsed in 2018 for nonpayment of premium. $800 appraisal fee to determine amount of fire loss. The appraisal fee to determine the amount of the Hoyts' fire loss was Deductible from gross income in arriving at adjusted gross income. Subject to the 2% of adjusted gross income floor for miscellaneous itemized deductions. Deductible after reducing the amount by $100. Not deductible.

Not deductible. The appraisal fee is considered an expense of determining the Hoyts' tax liability; it is not a part of the casualty loss itself. It is classfied as a 2% miscellaneous itemized deduction, which is no longer deductible after 2017.

A corporation's penalty for underpaying federal estimated taxes is Fully deductible in the year paid. Fully deductible if reasonable cause can be established for the underpayment. Partially deductible. Not deductible.

Not deductible. This answer is correct. Even though a corporation's penalty for underpaying federal estimated taxes is in the nature of interest, it is treated as an addition to tax, and as such, the penalty is not deductible.

Murd Corporation, a domestic corporation, acquired a 90% interest in the Drum Company in 2015 for $30,000. During 2019, the stock of Drum was declared worthless. What type and amount of deduction should Murd take for 2019? Long-term capital loss of $1,000 Long-term capital loss of $15,000 Ordinary loss of $30,000 Long-term capital loss of $30,000

Ordinary loss of $30,000 Worthless securities generally receive capital loss treatment. However, if the loss is incurred by a corporation on its investment in an affiliated corporation (80% or more ownership), the loss is generally treated as an ordinary loss.

Under a "cafeteria plan" maintained by an employer, Participation must be restricted to employees, and their spouses and minor children. At least three years of service are required before an employee can participate in the plan. Participants may select their own menu of benefits. Provision may be made for deferred compensation other than 401(k) plans.

Participants may select their own menu of benefits. Cafeteria plans allow employees to select from a menu of fringe benefits and cash and not include the value of the nontaxable benefits in their gross income. The requirements of cafeteria plans are: 1) all participants must be employees; 2) participants may choose between two or more benefits composed of cash or qualified benefits; 3) participants are required to make elections among the benefits; 4) the plan must be in writing and have certain specified information; 5) the plan may not provide participants with deferred income, except for under 401(k) plans. This response states that under cafeteria plans participants may select their own menu of benefits.

The rule limiting the deductibility of passive activity losses and credits applies to Partnerships. S corporations. Personal service corporations. Widely held C corporations.

Personal service corporations. The passive activity limitations apply to individuals, estates, trusts, closely held C corporations, and personal service corporations. Application of the passive activity loss limitations to personal service corporations is intended to prevent taxpayers from sheltering personal service income by creating personal service corporations and acquiring passive activity losses at the corporate level. A personal service corporation is a corporation (1) whose principal activity is the performance of personal services, and (2) such services are substantially performed by owner-employees. Since passive activity income, losses, and credits from partnerships and S corporations flow through to be reported on the tax returns of the owners of such entities, the passive activity limitations are applied at the partner and shareholder level, rather than to partnerships and S corporations themselves.

Which expense, both incurred and paid during the current year, can be claimed as an itemized deduction? Property taxes on a personal residence One-half of the self-employment tax Employee's unreimbursed moving expense Self-employed health insurance

Property taxes on a personal residence This answer is correct. Property taxes are a deductible itemized deduction limited to $10,000 when combined with the greater of state and local income taxes or sales tax.

Clark bought series EE U.S. Savings Bonds in 2019. Redemption proceeds will be used for payment of college tuition for Clark's dependent child. One of the conditions that must be met for tax exemption of accumulated interest on these bonds is that the Purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse). Bonds must be bought by a parent (or both parents) and put in the name of the dependent child. Bonds must be bought by the owner of the bonds before the owner reaches the age of 24. Bonds must be transferred to the college for redemption by the college rather than by the owner of the bonds.

Purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse). Taxpayers redeeming qualified U.S. Series EE Bonds in the same year that qualified higher education expenses are paid may exclude the interest income on the bonds from gross income. The conditions that must be met for tax exemption of accumulated interest on these bonds is that the purchaser of the bond must have made the purchase after reaching the age of 24 and be the sole owner of the bonds (or joint owner with his or her spouse). As this response states that one of the conditions that must be met for tax exemption of accumulated interest on these bonds is that the purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse), it is correct.

Which expense listed below would be subject to the Uniform Capitalization Rules of Code Section 263A? Quality control Research and development Advertising Selling

Quality control CORRECT! Quality control expenses are directly related to the manufacturing process so the costs are included in the basis of the inventory per the uniform capitalization rules.

The term active participation for a passive activity loss is relevant in relation to Rental real estate activities. Working interests in oil and gas properties. Passive activities in which the taxpayer materially participates. Passive activities in which the taxpayer does not materially participate.

Rental real estate activities. Correct! An owner of rental real estate can deduct up to $25,000 of rental real estate losses against other income if he actively participates in managing the real estate.

Brenda, employed full time, makes beaded jewelry as a hobby. In year 2, Brenda's hobby generated $2,000 of sales, and she incurred $3,000 of travel expenses. What is the proper reporting of the income and expenses related to the activity? Sales of $2,000 are reported in gross income, and $2,000 of expenses are reported as an itemized deduction subject to the 2% limitation. Sales of $2,000 are reported in gross income, and none of the expenses is allowed as a deduction. Sales and expenses are netted, and the net loss of $1,000 is reported as an itemized deduction. Sales and expenses are netted and deducted for AGI.

Sales of $2,000 are reported in gross income, and none of the expenses is allowed as a deduction. Correct! Income from a hobby is reported as other income on the front page of Form 1040. Beginning in 2018, hobby expenses are not allowed as a deduction.

Which allowable deduction can be claimed in arriving at an individual's 2019 adjusted gross income? Charitable contribution Foreign income taxes Tax return preparation fees Self-employed health insurance deduction

Self-employed health insurance deduction One hundred percent of a self-employed individual's health insurance premiums are deductible in arriving at an individual's adjusted gross income for 2019.

In 2014, Ross was granted an incentive stock option (ISO) by her employer as part of an executive compensation package. Ross exercised the ISO in 2017 and sold the stock in 2019 at a gain. Ross was subject to regular tax for the year in which the ISO was granted. ISO was exercised. Stock was sold. Employer claimed a compensation deduction for the ISO.

Stock was sold. There are no tax consequences when an incentive stock option is granted to an employee. When the option is exercised, any excess of the stock's FMV over the option price is a tax preference item for purposes of the employee's alternative minimum tax. However, an employee is not subject to regular tax until the stock acquired through exercise of the option is sold. If the employee holds the stock acquired through exercise of the option at least two years from the date the option was granted (and holds the stock itself at least one year), the employee's realized gain is treated as long-term capital gain in the year of sale, and the employer receives no compensation deduction. If the preceding holding period rules are not met at the time the stock is sold, the employee must report ordinary income to the extent that the stock's FMV at date of exercise exceeded the option price, with any remaining gain reported as long-term or short-term capital gain. As a result, the employer receives a compensation deduction equal to the amount of ordinary income reported by the employee.

Which of the following statements regarding an individual's suspended passive activity losses is correct? $3,000 of suspended losses can be utilized each year against portfolio income. Suspended losses can be carried forward, but not back, until utilized. Suspended losses must be carried back three years and forward seven years. A maximum of 50% of the suspended losses can be used each year when an election is made to forgo the carryback period.

Suspended losses can be carried forward, but not back, until utilized. Suspended passive losses can be carried forward indefinitely, but they cannot be carried back.

In 2018, Stewart Corp. properly accrued $5,000 for an income item on the basis of a reasonable estimate. In 2019, after filing its 2018 federal income tax return, Stewart determined that the exact amount was $6,000. Which of the following statements is correct? No further inclusion of income is required in 2019 as the difference is less than 25% of the original amount reported and the estimate had been made in good faith. The $1,000 difference is includible in Stewart's income tax return. Stewart is required to notify the IRS within 30 days of the determination of the exact amount of the item. Stewart is required to file an amended return to report the additional $1,000 of income.

The $1,000 difference is includible in Stewart's income tax return. Under the accrual method of accounting, income is reported once all events to establish a taxpayer's right to receive the income have occurred and the amount can be determined with reasonable accuracy. If an amount of income has been accrued on the basis of a reasonable estimate with the exact amount to be determined at a later date, any difference between the estimate and exact amount is to be included in income or deducted in the year when the exact amount can be determined.

In 2018, Brun Corp. properly accrued $10,000 for an income item on the basis of a reasonable estimate. In 2019, Brun determined that the exact amount was $12,000. Which of the following statements is correct? Brun is required to file an amended return to report the additional $2,000 of income. Brun is required to notify the IRS within 30 days of the determination of the exact amount of the item. The $2,000 difference is includible in Brun's 2019 income tax return. No further inclusion of income is required as the difference is less than 25% of the original amount reported and the estimate had been made in good faith.

The $2,000 difference is includible in Brun's 2019 income tax return. This answer is correct. Under the accrual method, income generally is reported in the year earned. If an amount is included in gross income on the basis of a reasonable estimate, and it is later determined that the exact amount is more, then the additional amount is included in income in the tax year in which the determination of the exact amount is made. Here, Brun properly accrued $10,000 of income for 2018, and discovered that the exact amount was $12,000 in 2019. Therefore, the additional $2,000 of income is properly includible in Brun's 2019 income tax return.

Which of the following statements is correct with regard to an individual taxpayer who has elected to amortize the premium on a bond that yields taxable interest? The amortization is treated as an itemized deduction. The amortization is not treated as a reduction of taxable income. The bond's basis is reduced by the amortization. The bond's basis is increased by the amortization.

The bond's basis is reduced by the amortization. An individual taxpayer who has elected to amortize the premium on a bond that yields taxable interest may reduce the bond's basis by the amortization of the premium. In addition, the amount of bond premium attributable to the tax year may be used to offset interest received on the bond in computing the taxpayer's taxable income. This response correctly states that the bond's basis is reduced by the amortization.

Which one of the following statements concerning the deduction for interest on qualified education loans is correct? The deduction is available to a married taxpayer filing separately. Qualified education expenses do not include room and board. The educational expenses must relate to a period when the student was enrolled on a full-time basis. The deduction is subject to reduction if adjusted gross income exceeds specified levels.

The deduction is subject to reduction if adjusted gross income exceeds specified levels. This answer is correct. An individual is allowed to deduct up to $2,500 for interest on qualified education loans in arriving at AGI. The deduction is reduced by adjusted gross income in excess of specified levels and loan proceeds must have been used to pay for the qualified higher education expenses (e.g., tuition, fees, room, board) of the taxpayer, spouse, or a dependent (at the time the debt was incurred). The education expenses must relate to a period when the student was enrolled on at least a half-time basis. Married taxpayers must file a joint return to qualify for the deduction.

Which one of the following statements concerning the deduction for interest on qualified education loans is not correct? The deduction is available even if the taxpayer does not itemize deductions. The deduction only applies to the first sixty months of interest payments. Qualified education expenses include tuition fees, room, and board. The educational expenses must relate to a period when the student was enrolled on at least a half-time basis.

The deduction only applies to the first sixty months of interest payments. For 2019, an individual is allowed to deduct up to $2,500 for interest on qualified education loans in arriving at AGI. The deduction is subject to an income phase-out and the loan proceeds must have been used to pay for the qualified higher education expenses (e.g., tuition, fees, room, board) of the taxpayer, spouse, or a dependent (at the time the debt was incurred). The education expenses must relate to a period when the student was enrolled on at least a half-time basis. There is no 60 month limitation.

Which of the following would be included in a taxpayer's gross income? Employer provided medical insurance coverage under a health plan. A $10,000 gift from the taxpayer's grandparents. The fair market value of land that the taxpayer inherited from an uncle. The dividend income on shares of stock that the taxpayer received for services rendered.

The dividend income on shares of stock that the taxpayer received for services rendered. Dividend income is taxable income.

An individual's losses on transactions entered into for personal purposes are deductible only if The losses qualify as casualty losses in a federal disaster area. The losses can be characterized as hobby losses. The losses do not exceed $3,000 ($6,000 on a joint return). No part of the transactions was entered into for profit.

The losses qualify as casualty losses in a federal disaster area. An individual's losses on transactions entered into for personal purposes are only deductible if the losses qualify as casualty losses in a federal disaster area. If the losses originated due to a trade or business, individuals also may deduct losses originating from transactions entered into for profit.

An S corporation engaged in manufacturing has a year-end of June 30, 2019. Revenue consistently has been more than $30 million under both cash and accrual basis of accounting. The stockholders would like to change the tax status of the corporation to a C corporation using the cash basis with the same year-end. Which of the following statements is correct if it changes to a C corporation? The year-end will be December 31, using the cash basis of accounting. The year-end will be December 31, using the accrual basis of accounting. The year-end will be June 30, using the accrual basis of accounting. The year-end will be June 30, using the cash basis of accounting.

The year-end will be June 30, using the accrual basis of accounting. This answer is correct. Although an S corporation generally must use a calendar year, it may request permission from the IRS to have a fiscal year if it can establish a valid business purpose. Here, the S corporation already has a fiscal year ending June 30, and the corporation will be allowed to continue that June 30 fiscal year when it switches to a C corporation. That is because a C corporation may elect to use either a calendar year or a fiscal year as its annual accounting period. In contrast, C corporations are generally not allowed to use the cash method of accounting. A limited exception that permits the use of the cash method is available if the C corporation is a qualified personal service corporation, or if the C corporation for every year has average gross receipts of $25 million or less for any prior three-year period and does not have inventories. Since this S corporation is engaged in manufacturing and has annual revenues in excess of $30 million, it does not qualify for either exception and will be required to use the accrual method of accounting if it changes to a C corporation.

What is the maximum amount of adjusted gross income that a taxpayer may have for 2019 and still qualify to roll over the balance from a traditional individual retirement account (IRA) into a Roth IRA? $ 50,000 $ 80,000 $100,000 There is no maximum AGI limitation.

There is no maximum AGI limitation. For tax years beginning before 2010, a conversion or rollover of a traditional IRA to a Roth IRA could occur if the taxpayer's AGI did not exceed $100,000 and the taxpayer was not married filing a separate return. The IRA conversion or rollover amount was not taken into account in determining the $100,000 AGI ceiling. However, both the AGI limit and the joint filing requirement have been eliminated for tax years beginning after 2009.

Senator Dennis Citizen incurred various expenses in 2019. The Senator and his family reside in Texas. Which of the following is deductible for the Senator? Entertainment expenses Payment for attorney fees related to a sexual harassment claim that is subject to a nondisclosure agreement Hotel expenses paid while staying in D.C. Travel to and from Washington D.C.

Travel to and from Washington D.C. Correct!. Travel expenses incurred while traveling for business are deductible.

Which of the following is not a deduction to arrive at adjusted gross income? IRA contributions. Trade or business expenses. Capital losses in excess of capital gains. Unreimbursed employee business expenses.

Unreimbursed employee business expenses. This answer is correct. IRA contributions trade or business expenses, and a net capital loss are deductible in arriving at AGI. In contrast, unreimbursed employee business expenses are not deductible.

Adams owns a second residence that is used for both personal and rental purposes. During the current year, Adams used the second residence for 50 days and rented the residence for 200 days. Which of the following statements is correct? Depreciation may not be deducted on the property under any circumstances. A rental loss may be deducted if rental-related expenses exceed rental income. Utilities and maintenance on the property must be divided between personal and rental use. All mortgage interest and taxes on the property will be deducted to determine the property's net income or loss.

Utilities and maintenance on the property must be divided between personal and rental use. Deductions for expenses related to a dwelling that is also used as a residence by the taxpayer may be limited. If the taxpayer's personal use exceeds the greater of 14 days, or 10% of the number of days rented, deductions allocable to rental use are limited to rental income. Here, since Adams used the second residence for 50 days and rented the residence for 200 days, no rental loss can be deducted. All expenses related to the property, including utilities and maintenance, must be allocated between personal use and rental use.

Tom owns a fast-food restaurant which he reports as a sole proprietorship for tax purposes. Which of the following expenses is allowed as a deduction on Tom's Schedule C for the current year? Wages of $20 per week to his 14-year-old daughter who cleans the restaurant on Saturdays. Speeding ticket of $75 that he incurred while picking up supplies to bring to the restaurant. A bribe of $200 to the city inspector charged with inspecting whether restaurants have met all city health requirements. State income taxes paid during the year of $1,650.

Wages of $20 per week to his 14-year-old daughter who cleans the restaurant on Saturdays. It is an ordinary and necessary expense to have the restaurant cleaned, and the $20 is reasonable.

Which of the following types of costs are required to be capitalized under the Uniform Capitalization Rules of Code Sec. 263A? Marketing. Distribution. Warehousing. Office maintenance.

Warehousing. This answer is correct. The UNICAP rules require that all costs incurred in purchasing or holding inventory for resale must be capitalized as part of the cost of the inventory. These costs include the costs of purchasing, handling, processing, repackaging, assembly, and warehousing. Service costs such as marketing, selling, distribution, and office maintenance are immediately deductible and need not be capitalized as part of the cost of inventory.

An accrual-basis taxpayer should report gross income When income is either actually or constructively received, whether in cash or in property. When "all events" have occurred that fix the taxpayer's right to receive the item of income, and the amount can be determined with reasonable accuracy. When income is either actually or constructively received in cash only. When "all events" have occurred that fix the taxpayer's right to receive the item of income, and the amount can be determined with absolute certainty.

When "all events" have occurred that fix the taxpayer's right to receive the item of income, and the amount can be determined with reasonable accuracy. This answer is correct. Under the accrual method, an item is generally included in gross income for the year in which it is earned, regardless of when income is collected. An item of income is earned when all the events have occurred to fix the taxpayer's right to receive the income, and the amount of income can be determined with reasonable accuracy.

Under the uniform capitalization rules applicable to taxpayers with property acquired for resale, which of the following costs should be capitalized with respect to inventory if no exceptions have been met? Repackaging costs Off-site storage costs Yes Yes Yes No No Yes No No

Yes Yes This answer is correct. The uniform capitalization rules generally require that all costs incurred in acquiring property for resale must be capitalized as part of the cost of inventory. The costs that must be capitalized include the costs of purchasing, handling, processing, repackaging and assembly, as well as the costs of off-site storage. An off-site storage facility is one that is not physically attached to, nor an integral part of, a retail sales facility.

Seymour Thomas named his wife, Penelope, the beneficiary of a $100,000 (face amount) insurance policy on his life. The policy provided that upon his death, the proceeds would be paid to Penelope with interest over her present life expectancy, which was calculated at 25 years. Seymour died during 2019 and Penelope received a payment of $5,200 from the insurance company. What amount should she include in her gross income for 2019? $ 200 $1,200 $4,200 $5,200

$1,200 This answer is correct. Life insurance proceeds paid by reason of death are excluded from income if paid in a lump sum or in installments. If the payments are received in installments, the principal amount of the policy divided by the number of payments is excluded each year. Therefore, only $1,200 of the $5,200 insurance payment is included in Penelope's gross income. Annual installment $ 5,200 Principal amount ($100,000/25) (4,000) Amount included in gross income $ 1,200

Benjamin is currently employed at Seaside Fish Company, a privately owned company. Benjamin owns less than 1% of Seaside, and he received a Qualified Equity Grant as compensation for services in 2019. Assuming he makes the appropriate election, what is the latest date that Benjamin may be able to report income from the grant? 2019 2021 2022 2023

2023 CORRECT! Private company employees can elect to defer for up to five years the recognition of income from private company stock acquired due to the exercise of a stock option or the settlement of a Restricted Stock Unit, provided the employee received the stock as part of a qualified equity grant. If election is made, income taxes are due upon the earliest of: When the stock becomes transferable, including to the employer; Five years after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier (2023 for Benjamin); or The date the employee revokes his or her election.

Which of the following is correct concerning the LIFO method (as compared to the FIFO method) in a period when prices are rising? Deferred tax and cost of goods sold are lower. Current tax liability and ending inventory are higher. Current tax liability is lower and ending inventory is higher. Current tax liability is lower and cost of goods sold is higher.

Current tax liability is lower and cost of goods sold is higher. This answer is correct. LIFO (last-in, first out) benefits a taxpayer in periods of rising prices because recently incurred high costs flow through cost of goods sold while previously incurred low costs remain in ending inventory. Compared to FIFO, LIFO increases the cost of goods sold and decreases ending inventory, thereby decreasing gross profit, taxable income, and current tax liability.

Dart, a C corporation, distributes software over the Internet and has had average revenues in excess of $30 million dollars per year for the past three years. To purchase software, customers key-in their credit card number to a secure Web site and receive a password that allows the customer to immediately download the software. As a result, Dart doesn't record accounts receivable or inventory on its books. Which of the following statements is correct? Dart may use either the cash or accrual method of accounting as long as Dart elects a calendar year-end. Dart may utilize any method of accounting Dart chooses as long as Dart consistently applies the method it chooses. Dart must use the accrual method of accounting. Dart may utilize the cash basis method of accounting until it incurs an additional $10 million to develop additional software.

Dart must use the accrual method of accounting. This answer is correct. Although taxpayers may generally choose to use either the cash or the accrual method, the cash method cannot generally be used if inventories are necessary to clearly reflect income, and cannot generally be used by C corporations. Taxpayers permitted to use the cash method include a qualified personal service corporation, and an entity (other than a tax shelter) if for every year it has average gross receipts of $25 million or less for any prior three-year period and does not have inventories. Here, Dart does not qualify for the exceptions that would permit it to use the cash method since it is not a personal service corporation, and Dart has average revenues in excess of $30 million per year. Dart must use the accrual method of accounting.

Quail, Inc. manufactures consumer products and sells them to distributors. Quail advertises its products to increase sales and enhance the value of its trade name. What is the appropriate tax treatment of the advertising costs? Amortize the costs over 15 years. Amortize the costs over 36 months. Amortize the costs over 60 months. Deduct the costs currently as ordinary and necessary business expenses.

Deduct the costs currently as ordinary and necessary business expenses. This answer is correct. Advertising costs are deductible as an ordinary and necessary business expense if they are reasonable in amount and bear a reasonable relation to the business. Deductible expenses may be for the purpose of gaining immediate sales or developing goodwill. Advertising costs are deductible even though the advertising program is expected to result in benefits extending over a period of years.

Lyle Corp. is a distributor of pharmaceuticals and sells only to retail drugstores. During 2019, Lyle received unsolicited samples of nonprescription drugs from a manufacturer. Lyle donated these drugs in 2019 to a qualified exempt organization and deducted their fair market value as a charitable contribution. What should be included as gross income in Lyle's 2019 return for receipt of these samples? $0 $25 nominal value assigned to gifts Net discounted wholesale price Fair market value

Fair market value This answer is correct. The requirement is to determine the amount to be included as gross income in Lyle Corp.'s 2019 return for the receipt of nonprescription drug samples that were later donated to an exempt organization. When unsolicited samples of items that are normally inventoried and sold in the ordinary course of business are received from a supplier, and later donated as a charitable contribution, the fair market value of the items received must be included in gross income. The taxpayer is then allowed a charitable contribution equal to the fair market value of the items donated.

Robbe, a cash-basis single taxpayer, reported $50,000 of adjusted gross income last year and claimed itemized deductions of $13,350, consisting solely of $10,000 of state income taxes paid last year and $3,350 of charitable contributions. Robbe's itemized deduction amount, which exceeded the standard deduction available to single taxpayers for last year by $1,150, was fully deductible and it was not subject to any limitations or phase-outs. In the current year, Robbe received a $1,500 state tax refund relating to the prior year. What is the proper treatment of the state tax refund? Include none of the refund in income in the current year. Include $1,150 in income in the current year. Include $1,500 in income in the current year. Amend the prior year's return and reduce the claimed itemized deductions for that year.

Include $1,150 in income in the current year. This answer is correct. A state income tax refund must be included in gross income for the current year under the tax benefit rule to the extent that the refunded amount was deducted in a prior year and the deduction provided a benefit by reducing the taxpayer's federal income tax for the prior year. Here, Robbe's $10,000 itemized deduction for state income tax provided a benefit only to the extent that it exceeded the standard deduction that was otherwise available to him. As a result, only $1,150 of the $1,500 refund must be included in gross income for the current year.

Parents lend $2,000,000 to their child to start a business. The loan is interest-free and is payable on demand. The imputed interest is subject to The gift tax only in the year the parents lend the money. The generation-skipping transfer tax, but not the gift tax. The gift tax each year the loan is outstanding. An excise tax.

The gift tax each year the loan is outstanding. Correct! Generally, interest-free loans are subject to the imputed interest rules if they exceed $10,000. The interest that is not being paid by the child to the parents is considered a gift from the parents each year that the loan is outstanding.