Tax Ch 4

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A temporary absence from the taxpayer's home for full-time schoolwork by the child may cause the child to fail the qualifying child residence test. T/F

The personal exemption amount is greater than the dependency exemption amount. T/F

The IRS information matching program checks each tax return for mathematical mistakes. T/F

F - document perfection program

statute of limitations for a refund claim by taxpayer

generally 3 years from date return filed or 2 years from date tax paid (whatever is later)

Qualifying RELATIVE: Gross Income Test

Gross Income < Personal Exemption Amount ($4,050 in 2017)

exception to HOH requirements

HH may be claimed if taxpayer maintains a separate home for their parents but one parent must qualify as dependent

Which of the following suggests that a working taxpayer is an employee rather than an independent contractor?

Works for only one firm. Working hours set for taxpayer. Works on employer premises.

tax credits

reduce tax liability dollar for dollar

Christine has a regular tax liability of $222,500 and a tentative minimum tax of $200,000. Given just this information, what is her alternative minimum tax liability for the year?

$0 Because her regular tax liability exceeds the tentative minimum tax, she does not owe any alternative minimum tax.

Cara, who is 42 years old, had some unexpected medical expenses during 2018. To pay for these expenses (which were claimed as itemized deductions on her tax return), she received a $10,000 distribution from her traditional IRA (she has only made deductible contributions to the IRA). Assuming her marginal ordinary income tax rate is 10%, what amount of taxes and/or early distribution penalties will Cara be required to pay on this distribution?

$1,000 income tax; $0 early distribution penalty Because the IRA distribution was used for qualified medical expenses it is not subject to the 10 percent early distribution penalty but the full amount of the distribution is subject to the regular income tax ($10,000 × 10%).

Steven operates a landscaping service on the accrual method. In September of this year Steven received a payment of $18,000 for 24 months of landscape services ($750 per month commencing on November 1st of this year). When must Steven recognize the income if his accounting methods are selected to minimize income recognition?

$1,500 is recognized in this year, $16,500 next year. ($750 * 2) for this year and the remainder ($18,000 - $1,500) next year. Prepayments for services can be deferred for one year if the payments are also unearned for financial reporting purposes.

Ian earned $150,000 of salary as an employee in 2018. How much should his employer have withheld from his paycheck for FICA taxes?

$10,136 ($128,400 x 0.062) + ($150,000 x 0.0145)

Bonnie and Howard got divorced in 2018. Under the terms of the decree Bonnie will pay Howard $100,000 in cash in each of the next ten years (or until Howard's death or remarriage). In addition, Bonnie will transfer a residence worth $2,000,000 to Howard and pay $30,000 per year to support their daughter, Kristina, until she turns 19 years old. What amount (if any) is included in Howard's gross income this year?

$100,000 Property settlements and child support are not included in gross income, but alimony payments (cash) are includible.

Daniel is considering selling two stocks that have not fared well over the years. A friend recently informed Daniel that one of his stocks has a special designation, which allows him to treat a loss up to $72,000 on this stock as an ordinary loss rather than the typical capital loss. Daniel figures that he has a loss of $86,400 on each stock. If Daniel's marginal tax rate is 35% and he has $172,800 of other capital gains (taxed at 15%), what is the tax savings from the special treatment?

$14,400 Special Tax Savings: Ordinary Savings - $72,000 X 35% = 25,200 Capital Loss Savings - (86,400 - 72,000) X 15% = 2,160 25,200 + 2,160 = 27,360 Normal Tax Savings: Ordinary Savings - $0 Capital Loss Savings - $86,400 X 15% = 12,960 $27,360 - 12,960 = $14,400

James received $25,000 of compensation from his employer and he received $1,900 of interest from a municipal bond. What is the amount of James's gross income? $0 $1,900 $25,000 $26,900

$25,000 - The interest income is excluded from gross income because it is interest from a municipal (tax exempt) bond.

Chairs-R-Us, Inc. reported a net capital loss of $25,000 in year 4. It reported net capital gains of $10,000 in year 3 (before any capital loss carryback) and $20,000 of net capital gains in year 5 (before any capital loss carryovers). What is the amount and nature of the book-tax difference in year 5 related to the net capital loss carryover?

$15,000 favorable Chairs-R-Us carries back $10,000 of the loss to year 3, and then carries the remaining $15,000 forward to year 5. In year 5 it deducts $15,000 for tax purposes and $0 for book purposes.

Wildcat Corp. uses the annualized income method to determine its quarterly federal income tax payments. It had $50,000, $25,000, and $45,000 of taxable income for the first, second, and third quarters, respectively ($120,000 in total through the first three quarters). What is Wildcat's annual estimated taxable income as of the end of the third quarter?

$150,000 The annual estimated taxable income for the third quarter is determined by annualizing cumulative taxable income for the first half of the year. $150,000 = 2 × ($50,000 first quarter income + $25,000 second quarter income).

In 2018, Wilma (who files as a head of household) reported regular taxable income of $150,000. She itemized her deductions, deducting $10,000 in charitable contributions and $2,000 in state income taxes. What is Wilma's alternative minimum taxable income?

$152,000 $152,000 = $150,000 + $2,000.

Mitch, a single taxpayer, earns $100,000 in taxable income and $10,000 in interest from an investment in the city of Birmingham Bonds. Using the U.S. tax rate schedule for year 2018, how much federal tax will he owe? $22,000 $18,289.50 $13,879 $24,000 None of the choices are correct.

$18,289.50 $100,000 - 82,500 = 17,500 * 24% = 4,200 + 14,089.50 = $18,289.50

Curly donated inventory (ordinary income property) to a University. He purchased the inventory seven months ago for $10,000, and on the date of the gift, it had a fair market value of $2,000. What is his maximum charitable contribution deduction for this donation if his AGI is $80,000?

$2,000 The charitable deduction for ordinary income property is the lesser of FMV or basis limited to 50% of AGI.

Erika Corporation sold an office building that it used in its business for $600,000. Erika bought the building ten years ago for $400,000 and has claimed $100,000 of depreciation expense. What is the amount and character of Erika's gain or loss?

$20,000 ordinary and $280,000 section 1231 gain. For corporations, section 291 recapture 20 percent of the lesser of depreciation taken or the realized gain as ordinary income. The remaining gain is section 1231.

Kimberly sold equipment that she uses in her business for $50,000. Kimberly bought the equipment two years ago for $60,000 and has claimed $30,000 of depreciation expense. What is the amount and character of Kimberly's gain or loss?

$20,000 ordinary gain. Section 1245 recaptures the lesser of depreciation taken ($30,000) or gain ($20,000) as ordinary income.

Mitch, a single taxpayer, earns $100,000 in taxable income and $10,000 in interest from an investment in city of Birmingham Bonds. Using the U.S. tax rate schedule for year 2017, how much federal tax will he owe? (Tax rate schedule) $28,000 $20,981.75 $16,542.50 $25,000 None of the choices are correct.

$20,981.75

If John invested $20,000 in a stock paying annual qualifying dividends equal to 4% of his investment, what would the value of his investment by 5 years from now? Assume John's marginal ordinary tax rate is 15%. $23,400 $23,639 $24,000 $24,333 None

$24,333 After-tax rate of return = $20,000 X (1.04)^5 = $24,333

James received $25,000 of compensation from his employer and he received $1,900 of interest from a municipal bond. What is the amount of James's gross income? $0 $1,900 $25,000 $26,900

$25,000

James received $25,000 of compensation from his employer and he received $1,900 of interest from a municipal bond. What is the amount of James's gross income?

$25,000 compensation. The interest income is excluded from gross income because it is interest from a municipal (tax exempt) bond.

net capital losses

$3,000 deductible against ordinary income for year - losses in excess of $3,000 carried forward

Griff LLC purchased an office building and land during the current year for $500,000. The purchase price was allocated as follows: $350,000 to the building and $150,000 to the land. The property was placed in service on August 22. Calculate Griff's maximum depreciation: (Use MACRS Table 5.)

$3,371. The mid-month convention applies. Non-residential property has a 39 year recovery period. The depreciation is $3,371 ($350,000 x 0.963%).

Baker traded a building used in her business for some new land. Baker originally purchased the building for $50,000 and it had an adjusted basis of $30,000 at the time of the exchange. The new land had a fair market value of $35,000. Baker also gave $5,000 to the dealer in the transaction. What is Baker's adjusted basis in the land after the exchange?

$35,000. The exchange qualifies as a like-kind exchange. Since boot was given in the transaction, the fair market value of the boot given ($5,000) is added to the adjusted basis ($30,000) of the property given up.

If Rachel has a 40% tax rate and a 10% after-tax rate of return, a $100,000 tax deduction in one year will save how much tax in today's dollars? $100,000 $40,000 $37,040 $36,360 None

$36,360 Calculation: $100,000 X 40% = 40,000 40,000 X 0.909 = $36,360

Charley Inc is a large corporation that reported revenue of $80 million and income of $620,000 this year. Included in the calculation of income was $10,000 of interest income, depreciation deductions of $170,000, and interest expense deductions of $420,000. What is the maximum amount of interest expense deduction this year?

$370,000 ($620,000 - $10,000 + $420,000 + $170,000) = $1,200,000 adjusted taxable income. $1,200,000 x 30% = $360,000 + 10,000 interest income = $370,000 maximum interest deduction.

Trudy and Ben file a joint return. Trudy's reported income creates $200 of income tax and Be's reported income creates $180 of income tax. In addition to the reported income, Trudy has unreported income on which she owes $50 of income tax. How much of the $430 potential tax liability is Ben liable for? $50 $180 $380 $430

$430

Trudy and Ben file a joint return. Trudy's reported income creates $200 of income tax and Ben's reported income creates $180 of income tax. In addition to the reported income, Trudy has unreported income on which she owes $50 of income tax. How much of the $430 potential tax liability is Ben liable for?

$430 On joint returns, both spouses are jointly and severally liable for the entire tax liability.

$430 - On joint returns, both spouses are jointly and severally liable for the entire tax liability.

Bonnie purchased a camera (5 year property) for use in her sole proprietorship. The basis of the camera was $3,000. Bonnie used the camera in her business 80 percent of the time and used it for personal purposes the rest of the time during the first year. Calculate Bonnie's depreciation expense during the first year assuming the sole proprietorship had a loss during the year: (Use MACRS Table 1.)

$480. The asset's recovery period is 5 years and the half-year convention applies, the calculation is $3,000 x 0.2 x 80% = $480.

Boyd and Susan are married filing jointly in 2018. They have three children for whom they may claim the child tax credit. Their AGI was $415,000. What amount of child tax credit may they claim on their 2018 tax return?

$5,250 ($415,000 minus $400,000)/1,000 = 15. 15 x $50 = $750 phase out. $6,000 minus $750 = $5,250.

Dax purchased only one asset during the current year. It placed in service equipment (7-year property) on September 10 with a basis of $40,000. Calculate the maximum depreciation expense (ignoring any §179 or bonus depreciation): (Use MACRS Table 1.)

$5,716. The property is depreciated using the DDB method, half-year convention, and 7-year recovery period. The depreciation is $40,000 x 14.29 percent.

Dorn purchased the rights to extract turquoise on a tract of land over a five year period. Dorn paid $200,000 for extraction rights. A geologist estimates that Dorn will recover 10,000 pounds of turquoise. During the current year, Dorn extracted 2,500 pounds of turquoise, which it sold for $150,000. What is Dorn's cost depletion expense for the current year?

$50,000. The depletion expense is $50,000 (($200,000 / 10,000) x 2,500).

Amelia transfers property with a tax basis of $500 and a fair market value of $900 to a corporation in exchange for stock with a fair market value of $800 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

$500 The tax basis of the property to the corporation equals Amelia's tax basis (a carryover basis) without adjustment for the liability assumed. Alternatively, the tax basis equals the property's fair market value of $900 less the gain deferred of $400.

d. What would their taxable income be if they had $0 itemized deductions and $6,000 of FOR AGI deductions?

$57,000. See analysis below: Description Amount Computation 1. Gross Income 100,000 Salary 2. For AGI ded. 6,000 3. Adjusted G.I. 94,000 1-2 4. Standard ded. 12,700 Married filing jointly 5. Itemized ded. 0 6. Greater of 4 & 5 12,700 7. Personal & depend 24,300 6 exemp. x 4,050 exemptions 8.Total Ded.s from AGI 37,000 6+7 Taxable Income 57,000 3-8 Note that if the $6,000 expense is a for AGI deduction, the Jacksons are able to deduct all of the expense, but if it is a from AGI deduction and they are not able to itemize deductions, they don't get to deduct any of it.

On December 31, 2017, June Inc. issued 2,000 nonqualified stock options valued at $4,000 (in total--$2 each). The options vest on December 31, 2018. On the vesting date, the options were exercised with a bargain element of $5 per share. What is June's book-tax difference for 2018 associated with the stock options?

$6,000 favorable The tax deduction in 2018 is the difference between the $5 bargain element and the $2 valuation of the stock options for book purposes multiplied by the number of options exercised [($5 - $2) × 2,000 = $6,000]. The book-tax difference is favorable because the tax deduction exceeds the book deduction.

This year, Karl had the following capital gains (losses) from the sale of his investments: $6,000 LTCG, $30,000 STCG, ($12,000) LTCL, and ($18,000) STCL. What is the amount and nature of Karl's capital gains and losses?

$6,000 net short-term capital gain $6,000 (LTCG) + ($12,000) (LTCL) = ($6,000) (NLTCL); $30,000 (STCG) + ($18,000) (STCL) = $12,000 (NSTCG); ($6,000) (NLTCL) + $12,000 (NSTCG) = $6,000 (NSTCG).

c. What would their taxable income be if their itemized deductions totaled $6,000 instead of $16,500?

$63,000. See analysis below: Description Amount Computation 1. Gross Income 100,000 Salary. All gain from home sale is excluded from gross income. 2. For AGI Deductions 0 3. Adjusted Gross Income 100,000 1-2 4. Standard Ded. 12,700 Married filing jointly 5. Itemized ded. 6,000 6. Greater of Std. & 12,700 Greater of 4 and 5 Itemized ded. 7. Personal dependency 24,300 6 exemptions x exemptions 4,050 8. Total Ded. from AGI 37,000 6+7 Taxable Income 63,000 3-8

If Jack earns an 8% after-tax rate of return, $10,000 received in three years is worth how much today? $10,000 $11,664 $9,260 $8,570 $7,940

$7,940

Dependency Requirements

*Citizen of U.S. or resident of U.S., Canada, or Mexico. *Must NOT file joint return with spouse - exception: if no tax liability filing jointly or separately *Must be qualifying child or qualifying relative of taxpayer

Filing Status: Qualifying person

- Qualifying child - Qualifying relative who is taxpayer's mother or father (parent need not live with taxpayer; taxpayer must pay > 1/2 cost of maintaining separate household for taxpayer's mother or father; parent must qualify as taxpayer's dependent) - Qualifying relative who is not a parent (person must have lived with taxpayer for more than half the year; must qualify as taxpayer's dependent; must be related to taxpayer through qualified family relationship **if related only because lived with taxpayer for entire year, not a qualified person** )

Qualifying RELATIVE: Relationship Test

- a descendant or ancestor of the taxpayer - a sibling of the taxpayer or a stepmother, stepfather, stepbrother, stepsister, nephew, niece, aunt, uncle (cousins do NOT qualify) - an in-law (mother-in-law, father-in-law, etc.) of the taxpayer, or - unrelated person who lives in taxpayer's home ENTIRE year (cousin may qualify for this)

statute of limitations for a deficiency assessment by IRS

- generally 3 years from the later of the due date or filing date of return - for material (more than 25%) omissions of gross income, time period is 6 years - no statute if no return is filed or fraudulent return is filed

income broadly conceived

- includes all taxpayer's income (both taxable and non-taxable) - = to gross receipts - does not include a return of capital or receipt of borrowed funds

secondary sources of tax law

- legal periodicals - treatises - legal opinions - general counsel mems - written determinations (not authoritative)

types of final regulations

- procedural: housekeeping-type instructions - interpretive: rephrase what is in committee reports and the code - legislative: allow the treasury department to determine details of law (rare)

primary sources of tax law

- the constitution - legislative history materials - statutes - treaties - treasury regulations - IRS pronouncements - judicial decisions IRS considers only primary sources to constitute substantial authority

who is ineligible for the SD

--MFS when either spouse itemizes --nonresident aliens --individual filing return for tax year of less than 12 months because of change in annual accounting period

personal and dependency exemption

--from AGI deductions --a personal exemption is allowed for taxpayer and spouse --a dependency exemption is allowed for each person who qualifies as a dependent of the taxpayer

capital gain/loss

--from selling capital asset --all assets except A/R, inventory, assets used in trade or business (including supplies) --if help capital asset for more than year gain or loss is long-term (otherwise it is short-term) --net long-term gains taxed at preferential rates (short-term at ordinary) --gains in excess of losses are taxed at 0, 15, or 20% depending on taxpayer's taxable income

what is considered to be deferred income

--installment sales --like-kind exchanges

examples of deductions from AGI

--medical expenses in excess of 7.5 --state/local income/sales taxes --real estate taxes --personal property taxes --interest on home mortgages --investment interest --charitable contributions --casualty losses

what is considered to be excluded income

--municipal bond interest --gain on sale of personal residence

examples of for AGI deductions (7 - OSAIUIC)

--ordinary/necessary expenses/losses incurred in a trade or business --one-half of self-employment tax paid --alimony paid (not for divorces after 12/31/17) --certain payments to an IRA/health savings --unreimbursed moving expenses (not after 2017) --interest on student loans --capital loss deduction (max $3,000)

from AGI (below the line)

--subtracted from AGI --the greater of itemized deductions (sum) or the standard deduction AND personal and dependency exemptions

Filing Status: Qualifying Widow or Widower

-Available for two years following the year of spouse's death - Surviving spouse does not qualify if remarries during two-year period - Surviving spouse must maintain household for dependent child

Filing Status: Head of Household - married individuals treated as unmarried

-Is married at end of year (or is not legally separated from the other spouse) - does not file a joint tax return with the other spouse - pays > 1/2 the cost of maintaining a household that serves as principal abode for qualifying child for more than half the year - lived apart form the other spouse for the last six months of the year (other than temporary absences)

Filing Status: Head of Household - Unmarried or considered unmarried

-Unmarried or considered unmarried at end of year (see abandoned spouse) - Not a qualifying widow or widower - Pay more than half the costs of keeping up a home during the year - Lived in taxpayer's home with a "qualifying person" for more than half of the year (exception for parents)

property (ad valorem) taxes

-based on value of the asset -imposed on realty or personalty -deductible for federal income tax purposes

transaction taxes (3)

-excise taxes (don't have to pay unless you purchase it - cigarettes) -general sales tax -severance taxes (tax imposed to remove something - oil)

types of regulations (proposed, temporary, final)

-proposed: preview of final regulations (do not have force and effect of law) -temporary: issued when guidance is needed quickly (some authoritative value as final regulations) -final: force and effect of law

what are the objectives for having the federal tax law (3)

-raising revenue: major objective of the tax system -economic: regulate economy and encourage certain behavior -social: encourages socially desirable behavior that provides benefits that government might otherwise provide

Kimberly is divorced and the custodial parent of a 3-year-old girl named Bailey. Kimberly and Bailey live with Kimberly's parents, who pay all the costs of maintaining the household (such as mortgage, property taxes, and food). Kimberly pays for Bailey's clothing, entertainment, and health-insurance costs. These costs comprised only a small part of the total costs of maintaining the household. Kimberly does not qualify as her parent's dependent. Assume Kimberly qualifies as her parents' dependent. How many personal and dependency exemptions may Kimberly claim on her tax return?

0 - not allowed to claim one for herself since she is being claimed or one for her daughter

Henry is single. In 2018, he reported $30,000 of taxable income, including a long-term capital gain of $10,000. At what rate will his long-term capital gain be taxed? Use Tax Rate Schedule, Dividends and Capital Gains Tax Rates, Estates and Trusts for reference.

0% The 0% tax bracket for single taxpayer spans taxable income of $0 to $38,600.

Which of the following is considered a tax? Fees to register an automobile Speeding ticket Entrance fee for a national museum Local surcharge for a homeowner to connect to city sewer service 1% local surcharge on hotel rooms to pay for city government

1% local surcharge on hotel rooms to pay for city government

Which of the following is considered a tax? Fees to register an automobile. Speeding ticket. Entrance fee for a national museum. Local surcharge for a homeowner to connect to city sewer service. 1% local surcharge on hotel rooms to pay for city government.

1% local surcharge on hotel rooms to pay for city government.

Individual Income Tax - 2017 Standard Deduction Amounts 1. Married Filing Jointly - ? 2. Qualifying widow/widower - ? 3. Married filing separately - ? 4. Head of Household - ? 5. Single - ? 6. Exemption Amount for 2017 - ?

1. $12,700 2. $12,700 3. $6,350 4. $9,350 5. $6,350 6. $4,050

Marc, a single taxpayer, earns $100,000 in taxable income and $10,000 in interest from an investment in city of Birmingham Bonds. Using the U.S. tax rate schedule for year 2018, what is his effective tax rate (rounded)? 22.00% 24.00% 18.29% 16.63%

16.63% Total Tax -> $18,289.50 ÷ Total Income -> $110,000

Marc, a single taxpayer, earns $100,000 in taxable income and $10,000 in interest from an investment in city of Birmingham Bonds. Using the U.S. tax rate schedule for year 2018, what is his average tax rate (rounded)? 22.00% 13.88% 18.29% 24.00%

18.29% Total Tax -> $18,289.50 ÷ Taxable Income -> $100,000

what is the annual exclusion for federal gift tax for 2017 and 2018

2017: $14,000 2018: $15,000

Marc, a single taxpayer, earns $100,000 in taxable income and $10,000 in interest from an investment in city of Birmingham Bonds. If Marc earned an additional $80,000, what would his 2018 marginal tax rate be on the $80,000 (rounded)? 26.25% 24.00% 32.48% 32.00%

26.25% $57,500 (remaining in previous tax bracket) * 24% = $13,800 $22,500 (applying to next tax bracket) * 32% = $7,200 $13,800 + $7,200 = $21,000 $21,000 / 80,000 = 26.25%

What explicit tax rate would keep Orlando indifferent between purchasing a municipal bond with a 4.0% return and a taxable bond with a 5.5% before-tax return? 25% 27.3% 31.2% 33.5% None.

27.% After tax rate of return = before tax rate of return * ( 1 - Marginal Rate)

what qualifies as a tax

3 components: -payment required -payment imposed by government agency -payment not tied directly to benefit received by the taxpayer

Juanita, a Texas resident (5th Circuit), is researching a tax question and finds a 5th Circuit case ruling that is favorable and a 9th Circuit case that is unfavorable. Which circuit case has more "authoritative weight"? 9th Circuit. 6th Circuit. 5th Circuit. 11th Circuit.

5th Circuit

Latoya filed her tax return on February 10th this year. When will the statute of limitations expire for this tax return if Latoya understated her income by 40 percent? 6 years from February 10th 6 years from April 15th 3 years from April 15th 3 years from February 10th Indefinite period from April 15th Cannot be opened after April 15th

6 years from April 15th

Assume that Bill's marginal tax rate is 40%. If corporate bonds pay 10% interest, what interest rate would a municipal bond have to offer for Bill to be indifferent between the two bonds? 10.00% 16.67% 8.00% 6.00% None.

6.00% Corporate Bonds 10.00% interest taxed at 40.00% $10 of interest is taxed $4 which leaves you with an after-tax rate of return of $6 Since municipal bonds are not taxed you would have to have a rate of 6% in order for the bonds to be valued the same after tax.

What is the difference between a tax deduction and a tax credit? Is one more beneficial than the other? Explain.

A deduction generally reduces taxable income dollar for dollar (although AGI deductions may not reduce taxable income dollar for dollar). This translates into a tax savings in the amount of the deduction times the marginal tax rate. In contrast, credits reduce a taxpayer's taxes payable dollar for dollar. Thus, generally speaking, credits are more valuable than deductions.

Joanna received $60,000 compensation from her employer, the value of her stock in ABC company appreciated by $5,000 during the year (but she did not sell any of the stock), she received $30,000 of life insurance proceeds from the death of her husband. What is the amount of Joanna's gross income from these items? A) $60,000. B) $65,000. C) $95,000. D) $90,000.

A) $60,000. concept=Insurance proceeds are not taxable, expenses generated to incur taxable income is not deductible

Which of the following is not an itemized deduction? A) Alimony paid. B) Medical expenses. C) Real estate taxes. D) Charitable contributions.

A) Alimony paid. concept= alimony is no longer a deduction

Identify the rule that states that income has been realized when a taxpayer receives the income and there are no restrictions on the taxpayer's use of the income (e.g., no obligation to repay the amount): A) Claim of right. B) Constructive receipt. C) Return of capital principle. D) Wherewithal to pay. E) None of the choices are correct.

A) Claim of right

Dave is a plumber who uses the cash method of accounting. This year Dave requested that his clients make their checks payable to his son, Steve. This year Steve received checks in the amount of $62,000 for Dave's plumbing services. Which of the following is a true statement? A) Dave is taxed on $62,000 of plumbing income this year. B) Steve is taxed on $62,000 of plumbing income this year. C) Steve is taxed on $62,000 of income from gifts received this year. D) Dave may deduct the $62,000 received by Steve. E) None of the choices are correct.

A) Dave is taxed on $62,000 of plumbing income this year. concept= can't assign income to someone else

Which of the following series of inequalities is generally most accurate? A) Gross income ≥ adjusted gross income ≥ taxable income B) Adjusted gross income ≥ gross income ≥ taxable income C) Adjusted gross income ≥ taxable income ≥ gross income D) Gross income ≥ taxable income ≥ adjusted gross income

A) Gross income ≥ adjusted gross income ≥ taxable income concept=tax form

Which of the following statements regarding for AGI tax deductions is true? A) Taxpayers subtract for AGI deductions from gross income to determine AGI. B) A taxpayer may deduct for AGI deductions only if the deductions exceed the taxpayer's standard deduction amount. C) The deduction for qualified business income is a for AGI deduction. D) A taxpayer may deduct for AGI deductions only if the deductions exceed the taxpayer's itemized deductions.

A) Taxpayers subtract for AGI deductions from gross income to determine AGI.

Gross income includes: A) all income from whatever source derived unless excluded by law. B) excluded income. C) deferred income. D) all realized income. E) All of the choices are correct.

A) all income from whatever source derived unless excluded by law.

Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $44,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $44,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 40% this year and next year, and that she can earn an after-tax rate of return of 9% on her investments. A. What is the after-tax cost if Isabel pays the $44,000 bill in December? B. What is the after-tax cost if Isabel pays the $44,000 bill in January? C. Based on requirements a and b, should Isabel pay the $44,000 bill in December or January?

A. $26,400 $44,000 X 40% = 17,600 44,000 - 17,600 = 26,400 B. $27,861 $44,000 X 40% = 17,600 17,600 X 0.917 = 16,139.20 44,000 - 16,139.20 = 27,860.8 C. December

Reese, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December, she received a $14,000 bill from her accountant for consulting services related to her small business. Reese can pay the $14,000 bill anytime before January 30 of next year without penalty. Assume Reese's marginal tax rate is 32% this year and will be 37% next year, and that she can earn an after-tax rate of return of 8% on her investments. A. What is the after-tax cost if she pays the bill in December B. What is the after-tax cost if she pays the bill in January? C. Based on above, should Reese pay the $14,000 bill in December or January?

A. $9,520 B. $9,203 C. January

Hyundai is considering opening a plant in two neighboring states. Option 1: One state has a corporate tax rate of 10%. If operated in this state, the plant is expected to generate $1,125,000 pretax profit Option 2: The other state has a corporate tax rate of 2%. If operated in this state, the plant is expected to generate $1,080,000 of pretax profit. A. What is the after state taxes profit in the state with the 10% tax rate? B. What is the after state taxes profit in the state with the 2% tax rate? C. Which state should Hyundai choose?

A. 1,012,500 1,125,000 X 10% = 112,500 1,125,000 - 112,500 = 1,012,500 B. 1,058,400 1,080,000 X 2% = 21,600 1,080,000 - 21,600 = 1,058,400 C. Option 2

Sarah is the Colton family's 23 year old daughter. She is a full-time student at an out-of-state university (for 8 months of the year) but plans to return home when the school year ends. During the year, Sarah earned $4,500 of income working part-time. Her support totaled $20,000 for 2014. Of this amount, Sarah paid $7,000 with her own funds, her parents paid $12,000, and Sarah's grandparents $1,000. Which of the following statements most accurately describes whether Sarah's parents can claim a dependency exemption for her? A. Yes, Sarah is a qualifying child of her parents. B. No, Sarah fails the support test for both qualifying children and qualifying relatives C. No, Sarah does not pass the gross income test D. Yes, Sarah is a qualifying relative of her parents E. None of the Above

A. Because Sarah is a full-time student and under 24 she passes the relationship test of a qualifying child. Her time spend away from school is counted at time at home for the residence test. Also, Sarah did not provide more than half of her own support. There is no gross income test for qualifying children.

In May of year 1, David left his wife Juliette. While the couple was apart, they were not legally divorced. Juliette found herself having to financially provide for the couple's only child (6 years of age) and to pay all the cost of maintaining the household. When Juliette filed her tax return for year 1, she filed a return separate from David. What is Juliette's most favorable filing status for year 1? A. Head of Household B. Single C. Married filing separately D. Qualifying Widow E. None of the above

A. Because she has not lived with David for the last six months of the year, she is still legally married as of the end of the year, she provided more than half the costs of maintaining a household for her dependent daughter, and she filed separately from her husband, she can file using the head of household status under the abandoned spouse provision.

The Statements on Standards for Tax Services (SSTS) and Code of Professional Conduct provide professional standards for tax professionals and were issued by which of the following organizations? IRS AIPCA Congress U.S. Treasury

AICPA

Compare and contrast for and from AGI deductions. Why are for AGI deductions likely more valuable to taxpayers than from AGI deductions?

All deductions are classified as either "for AGI" or "from AGI" deductions. Gross income minus "for AGI" deductions equals AGI. AGI minus "from AGI" deductions equals taxable income. "For AGI" deductions are often referred to as deductions above the line, while deductions from AGI are referred to as deductions below the line. The line is AGI (the last line on the front page of the individual tax return). Though both types of deductions may reduce a taxpayer's taxable income, "for AGI" deductions are generally more valuable to taxpayers because they reduce AGI which may allow taxpayers to deduct more of their from AGI deductions (and other tax benefits) that are subject to AGI limitations. "From AGI" deductions do not affect AGI.

Which of the following is a true statement?

An employer can deduct the full cost of meals provided to employees as compensation.

Which of the following is an example of the conversion strategy? Accelerating deductions Deferring income An employer providing tax-free benefits to employees instead of salary A high-tax rate parent employing her low-tax-rate son in the family business

An employer providing tax-free benefits to employees instead of salary.

Which of the following is a type of common tax service used in tax research? Annotated tax service Antiquated tax service Analytical tax service Technical tax service All are correct

Annotated tax service

Jamison's gross tax liability is $7,000. Jamison had $2,000 of available credits and he had $4,000 of taxes withheld by his employer. What is Jamison's taxes due (or taxes refunded) with his tax return? A) $5,000 taxes due. B) $1,000 taxes due. C) $1,000 tax refund. D) $3,000 taxes due.

B) $1,000 taxes due. 7000-2000-4000

Which of the following statements regarding dependents is false? A) A taxpayer may be allowed to claim another as a dependent even if the taxpayer has no family relationship with the other person. B) To qualify as a dependent of another, an individual must be a resident of the United States. C) An individual who qualifies as a dependent of another taxpayer may not claim any dependents. D) An individual cannot qualify as a dependent of another as a qualifying relative taxpayer if the individual's gross income exceeds a certain amount.

B) To qualify as a dependent of another, an individual must be a resident of the United States. - false because your parents can be overseas and you can claim them as dependents concept= qualifying child- relationship- son, daughter, step, brother, sister or steps, NOT cousins age-under 19, under 24 and full time student, or permanently disabled. residence-lives with taxpayer more than 1/2 the year, exception= education support- does not provide more than 1/2 support, scholarships excluded qualifying relative= relationship-descendant, sibling, son or daughter of tp's brother or sister, not cousins, aunt, uncle, inlaw, unrelated person who lives with them entire year support-tp must pay >1/2 living expenses gross income- <4,150

Filing status determines all except which of the following? A. the AGI threshold for reductions in certain tax benefits B. the standard amount of each personal dependency exemption C. the appropriate tax rate schedule or tax table D. the applicable standard deduction amount E. none of the above

B. The standard amount of each personal and dependency exemption does not vary by filing status.

Isabella provides 30%of the support for her father Hastings, who lives in an apartment by himself and has no gross income. Is it possible for Isabella to claim a dependency exemption for her father? Explain.

Because her father meets the relationship and gross income test for a qualifying relative, the support test is the only obstacle for Isabella to claim a dependency exemption for her father. The basic support test requires that Isabella must have provided more than half of the support for her father in order to claim a dependency exemption for him. Because Isabella provides only 30% of her father's support, she does not meet the basic test. However, Isabella could potentially qualify to claim a dependency exemption for her father under a multiple support agreement. For Isabella to qualify, the following requirements must be met: 1. No other taxpayer paid over half of her father's support. 2. Isabella and at least one other person provided more than half the support of her father, and Isabella and the other person or persons would have been allowed to claim an exemption for Hastings except for the fact that neither met the support test. 3. Isabella provided over 10% of her father's support (she provided 30%) 4. The other person or persons who provided more than 10% of Hastings' support must provide a signed statement to Isabella agreeing not to claim Hastings as a dependent. Isabella would include the names, addresses, and social security numbers of each other person on an IRS Form 2120- which she would include with her tax return for the year.

14) Madison's gross tax liability is $9,000. Madison had $3,000 of tax credits available and she had $8,000 of taxes withheld by her employer. What is Madison's taxes due (or taxes refunded) with her tax return? A) $0 taxes due and $0 tax refund. B) $6,000 taxes due. C) $2,000 tax refund. D) $1,000 taxes due.

C) $2,000 tax refund. 9000-3000-8000

George purchased a life annuity for $3,200 that will provide him $80 monthly payments for as long as he lives. Based on IRS tables, George's life expectancy is 100 months. How much of the first $80 payment will George include in his gross income? A) $80 B) $72 C) $48 D) $32 E) None of the choices are correct.

C) $48 Fran purchased an annuity that provides $12,000 quarterly payments for the next 10 years. The annuity was purchased at a cost of $300,000. How much of the first quarterly payment will Fran include in her gross income? A) $7,500 B) $4,500 (300,000 /12,000 = C) $12,000 D) $32,400 E) None of the choices are correct.(80 * 100 = 8000)(3200 / 8,000 = 40% excluded, 60% included)($80 * .60 = $48)

Lebron received $50,000 of compensation from his employer and he received $400 of interest from a municipal bond. What is the amount of Lebron's gross income from these items? A) $0. B) $400. C) $50,000. D) $50,400.

C) $50,000. concept=municipal interest is NOT taxed

Which of the following statements regarding tax deductions is false? A) Taxpayers are not entitled to any deductions unless specific provisions in the tax code allow the deductions. B) Deductions can be labeled as deductions above the line or deductions below the line. C) From AGI deductions tend to be associated with business activities while for AGI deductions tend to be associated with personal activities. D) The standard deduction is a from AGI deduction.

C) From AGI deductions tend to be associated with business activities while for AGI deductions tend to be associated with personal activities.

Hillary is a cash-basis calendar-year taxpayer. During the last week of December she received a letter containing a $5,000 check for services rendered. Which of the following is a true statement? A) Hillary is taxed on the $5,000 of service income in the year she cashes the check. B) Hillary is taxed on the $5,000 of service income in the year the check was mailed. C) Hillary is taxed on the $5,000 of service income in the year she receives the check. D) Hillary is taxed on the $5,000 of service income in the year she provides the services. E) None of the choices are correct.

C) Hillary is taxed on the $5,000 of service income in the year she receives the check.

Which of the following shows the correct relationship among standard deduction amounts for the respective filing statuses? A) Single > Head of Household > Married Filing Jointly B) Married Filing Jointly > Married Filing Separately > Head of Household C) Married Filing Jointly > Head of Household > Single D) Head of Household > Married Filing Separately > Married Filing Jointly

C) Married Filing Jointly > Head of Household > Single concept=24,000 married filing jointly, 18,000 head of household, 12,00 single

Which of the following statements is true? A) Income character determines the tax year in which the income is taxed. B) Income character depends on the taxpayer's filing status. C) Qualified dividend income is taxed at a lower rate than an equal amount of ordinary income. D) A taxpayer selling a capital asset at a gain recognizes ordinary income.

C) Qualified dividend income is taxed at a lower rate than an equal amount of ordinary income.

Sally is a cash basis taxpayer and a member of the Valley Barter club. This year Sally provided 100 hours of sewing services to the barter club in exchange for two football playoff tickets. Which of the following is a true statement? A) Sally need not recognize any gross income unless she sells the football tickets. B) Sally's exchange does not result in taxable income. C) Sally is taxed on the value of the football tickets even if she cannot attend the game. D) Sally is taxed on the value of her sewing services only if she is a professional seamstress.

C) Sally is taxed on the value of the football tickets even if she cannot attend the game concept=taxed on the value of items given to you

Which of the following statements regarding tax credits is true? A) Tax credits reduce taxable income dollar for dollar. B) Tax credits provide a greater tax benefit the greater the taxpayer's marginal tax rate. C) Tax credits reduce taxes payable dollar for dollar. D) None of these statements is true.

C) Tax credits reduce taxes payable dollar for dollar

James received $25,000 of compensation from his employer and he received $1,900 of interest from a municipal bond. What is the amount of James' gross income? A. $0 B. $1,900 C. $25,000 D. $26,900 E. None of the above

C. $25,000 compensation. The interest income is excluded from gross income because it is interest from a municipal (tax exempt) bond.

Which of the following is a from AGI deduction? Moving expenses. Rental and royalty expenses. Business expenses for a self-employed taxpayer. Charitable contributions.

Charitable contributions

Qualifying CHILD: Support Test

Child must NOT provide more than half of his or her own support -scholarships of actual child (not grandchild, for example) are excluded from support computation

Qualifying CHILD: Age Test

Child must be younger than the individual claiming the child as a qualifying child and either: - under age 19 at end of year - under age 24 at end of year & a full-time student, or - permanently and totally disabled

Rank the following three single taxpayers in order of the magnitude of taxable income (from lowest to highest) and explain your results. Ahmed: Gross Income: $80,000 Deductions for AGI: $8,000 Itemized Deductions: $0 Baker: Gross Income: $80,000 Deductions for AGI: $4,000 Itemized deductions $4,000 Chin: Gross Income: $80,000 Deductions for AGI: $0 Itemized Deductions: $8,000

Chin has the highest taxable income, followed by Baker and then Ahmed. Chin's taxable income is highest because he had no for AGI deductions, and Ahmed has the lowest because he had the most for AGI deductions. Baker did not benefit from the itemized deductions because they did not exceed the standard deduction. Chin only benefited from the itemized deductions to the extent the deductions exceeded the standard deduction. See the following analysis: Description Ahmed Baker Chin Computation (1) Gross Income $80,000 $80,000 $80,000 (2) For AIG Deductions $(8,000) $(4,000) $- (3) Adjusted Gross Income$72,000 $76,000$80,000 (1) + (2) (4) Standard Deduction $(6,350)$(6,350)$(6,350) Single Taxpayer (5) Itemized deductions $- $(4,000) $(8,000) (6) Greater of standard deductions or itemized deductions $(6,350) $(6,350) $(8,000) Ahmed: (4) > (5) Baker: (4) > (5) Chin: (5) > (4) (7) Personal and dependency exemptions $(4,050) $(4,050) $(4,050) 4,050 x 1 (personal exemption) Taxable Income $61,600 $65,600 $67,950 (3) + (6) + (7)

Which of the following items is most commonly used to check the status of a court case? Private letter ruling Citator Revenue Ruling Tax digest Determination letter

Citator

Which of the following is a true statement?

Congress allows self-employed taxpayers to deduct the employer portion of their self-employment tax for AGI. Investment activities do not require a high level of taxpayer involvement.

Which of the following strategies exploits the fact that tax rates vary by activity (e.g., income type)? Timing Present Value Income Shifting Conversion Evasion

Conversion

Jack and Jill are married. This year Jack earned $72,000 and Jill earned $80,000 and they received $4,000 of interest income from a joint savings account. How much gross income would Jack report if he files married-filing-separate from Jill? A) $72,000 if they reside in a common law state. B) $74,000 if they reside in a community property law state. C) $76,000 if they reside in a common law state. D) $78,000 if they reside in a community property law state. E) None of the choices are correct.D) $78,000 if they reside in a community property law state.

D) $78,000 if they reside in a community property law state. concept= community prop law: (72,000+80,000/2)+(4,000/2)=78,000 common law: 74,000-->72k+(4k/2)

All of the following are for AGI deductions except: A) Contributions to qualified retirement accounts B) Rental and royalty expenses. C) Business expenses for a self-employed taxpayer. D) Charitable contributions.

D) Charitable contributions.

Which of the following is NOT a from AGI deduction? A) Standard deduction. B) Itemized deduction. C) Deduction for qualified business income. D) None of these. All of these are from AGI deductions.

D) None of these. All of these are from AGI deductions.

All of the following represents a type or character of income except: A) Tax exempt. B) Capital. C) Qualified dividend. D) Normal.

D) Normal.

Identify the rule that determines whether a taxpayer must include in income a refund of an amount deducted in a previous year: A) Tax refund rule. B) Constructive receipt. C) Return of capital principle. D) Tax benefit rule. E) None of the choices are correct.

D) Tax benefit rule

Which of the following is a from AGI deduction? A. Moving expenses B. Rental and royalty expenses C. Business expenses for a self-employed taxpayer D. Charitable contributions E. None of the above

D. Charitable contributions are from AGI deductions

Caroline and her husband Chris got divorced in May of this year. During the year, Caroline provided all the support for herself and her 23-year-old child Hans (not a full-time student) who lived in the same home as Caroline for the entire year. Hans earned $29,000 this year. What is Caroline's most favorable filing status for the year? A. Head of Household B. Married filing separately C. Surviving Spouse D. Single E. None of the above

D. Hans does not qualify as Caroline's dependent due to his age and his income so Caroline must file Single for the year

D. On joint returns, both spouses are jointly and severally liable for the entire tax liability.

In Year 1, Danny's wife died. Danny has no dependents. As of the end of year 2, Danny had not remarried. Which is the most advantageous filing status available to Danny in Year 2? A. Married filing jointly B. Surviving spouse C. Married filing separate D. Single E. Head of Household

D. Surviving spouse treatment is only available for the following two years if the taxpayer maintains a household for a dependent.

Francine's mother Donna and her father Darren separated and divorced in September of this year. Francine lived with both parents until the separation. Francine does not provide more than half of her own support. Francine is 15 years old at the end of the year. Assume Francine spends more time living with Darren than Donna after the separation. Who may claim Francine as a dependency exemption for tax purposes? Donna/Darren

Darren (spends more time)

Which of the following cannot be selected as a valid tax year end?

December 15th. December 15 will not qualify for a fiscal or a 52/53 week year.

Which of the following is not an itemized deduction? Deduction for qualified business income Medical expenses State income taxes Charitable contributions None

Deduction for qualified business income

How is depreciation expense on a residence with significant rental use (vacation home) allocated to rental use?

Depreciation expense × [number of rental days/(number of rental days + number of personal use days)] The expense is always allocated based on the number of days used (this is true for both the IRS and the Tax Court method of allocating expenses).

Francine's mother Donna and her father Darren separated and divorced in September of this year. Francine lived with both parents until the separation. Francine does not provide more than half of her own support. Francine is 15 years old at the end of the year. Assume Francine spends an equal number of days with her mother and her father and that Donna has AGI of $52,000 and Darren has AGI of $50,000. Who may claim a dependency exemption for Francine? Donna/Darren

Donna (higher AGI)

Kevin provided services to several clients this year who paid with different types of property. Which of the following payments is not included in Kevin's gross income? A) Cash. B) Shares of stock listed on the New York Stock Exchange. C) A used car. D) Gold coins. E) All of these are included in gross income.

E) All of these are included in gross income.

This year Barney purchased 500 shares of Bell common stock for $20 per share. At year-end the Bell shares were only worth $2 per share. What amount can Barney deduct as a loss this year? A) $10,000 B) $9,000 C) $1,000 D) Barney can deduct $10,000 only if he includes $1,000 in his taxable income E) None of the choices are correct - Barney is not entitled to a loss deduction.

E) None of the choices are correct - Barney is not entitled to a loss deduction. concept= can't deduct until he sells it

Which of the following is not an itemized deduction? A. Personal casualty losses B. Medical expenses C. Personal property taxes for a personal use automobile D. Charitable contributions E. None of the above

E. All answers are itemized deductions.

Through November, Cameron has received gross income of $95,000. For December, Cameron is considering whether to accept one more work engagement for the year. Engagement 1 will generate $8,580 of revenue at a cost to Cameron of $4,400, which is deductible for AGI. In contrast, engagement 2 will generate $9,750 of qualified business income which is eligible for the 20% QBI deduction. Cameron files as a single taxpayer Calculate Cameron's taxable income assuming he chooses engagement 1 and assuming he chooses engagement 2. Assume he has no itemized deductions.

Engagement 1: $95,000 + 8,580 (new income) - 4,400 (additional for AGI deduction) = $99,180 (AGI) 99,180 - 12,000 (standard deduction) = $87,180 (taxable income) Engagement 2: $95,000 + 9,750 (new income) = 104,750 (AGI) 104,750 - 12,000 (standard deduction) - 1,950 (QBI deduction) = $90,800 (taxable income)

Taxes are voluntary payments paid to a government for a specific benefit received by the specific taxpayer. T/F

F - key components of a tax are: payment required, payment imposed by government agency, and payment is not tied directly to benefit received by the taxpayer

The federal income tax is an example of a regressive tax system. T/F

F - progressive

A textbook is an example of a primary authority. T/F

F - secondary

Field examinations are conducted by the IRS at the local IRS field office. T/F

F - taxpayers place of business or the location where there records are kept

Income-related items are excluded from gross income unless specifically included by a provision in the tax code. T/F

F - they are included unless otherwise stated

Jerry recently paid $20 in tolls for the Florida turnpike. The $20 payment is considered a tax. T/F

F - this is a fee

Which of the following is used in the calculation of the amount realized?

Fair market value of other property received. The fair market value of other property received is included in amount realized.

A temporary absence from the taxpayer's home for full-time schoolwork by the child may cause the child to fail the qualifying child residence test.

False

Income-related items are excluded from gross income unless specifically included by a provision in the tax code.

False

The capital gains (losses) netting process for taxpayers without 25 or 28 percent capital gains requires them to (1) net short-term gains and losses, (2) net long-term gains and losses, and (3) net the outcome of steps (1) and (2) if they are of similar sign.

False

Which of the following taxes will not qualify as an itemized deduction?

Gasoline taxes on personal travel.

Head of Household

In May of year 1, David left his wife Juliette. While the couple was apart, they were not legally divorced. Juliette found herself having to financially provide for the couple's only child (6 years old) and to pay all the costs of maintaining the household. When Juliette filed her tax return for year 1, she filed a return separate from David. What is Juliette's most favorable filing status for year 1? Head of household Single Married filing separately Qualifying widow

Head of household

Lee is 30 years old and single. Lee paid all the costs of maintaining his household for the entire year. Determine Lee's filing status in each of the following alternative situations: Lee is Ashton's uncle. Ashton is 15 years old and has gross income of $5,000. Ashton lived in Lee's home from April 1 through the end of the year.

Head of household

In May of year 1, David left his wife Juliette. While the couple was apart, they were not legally divorced. Juliette found herself having to financially provide for the couple's only child (6 years of age) and to pay all the costs of maintaining the household. When Juliette filed her tax return for year 1, she filed a return separate from David. What is Juliette's most favorable filing status for year 1?

Head of household Because she has not lived with David for the last six months of the year, she is still legally married as of the end of the year, she provided more than half the costs of maintaining a household for her dependent child, and she filed separately from her husband, she can file using the head of household status under the abandoned spouse provision.

In May of year 1, David left his wife Juliette. While the couple was apart, they were not legally divorced. Juliette found herself having to financially provide for the couple's only child (6 years of age) and to pay all the costs of maintaining the household. When Juliette filed her tax return for year 1, she filed a return separate from David. What is Juliette's most favorable filing status for year 1? Multiple Choice Head of household Single Married filing separately Qualifying widow

Kimberly is divorced and the custodial parent of a 3-year-old girl named Bailey. Kimberly and Bailey live with Kimberly's parents, who pay all the costs of maintaining the household (such as mortgage, property taxes, and food). Kimberly pays for Bailey's clothing, entertainment, and health-insurance costs. These costs comprised only a small part of the total costs of maintaining the household. Kimberly does not qualify as her parent's dependent. What if Kimberly lived in her own home and provided all the costs of maintaining the household? Single Head of household Married filing single Married filing join

Head of household - pays over half the costs of the HH that the child lives in

Which of the following is a from AGI deduction? Contributions to qualified retirement accounts Rental and royalty expenses Business expenses for a self-employed taxpayer Business expenses for a self-employed taxpayer Home mortgage interest expense

Home mortgage interest expense

Which of the following committees is not involved in enacting tax legislation? House Ways and Means Committee House Tax Committee Senate Finance Committee Joint Conference Committee

House Tax Committee

Which of the following committees is not involved in enacting tax legislation? House Ways and Means Committee House Tax Committee Senate Finance Committee Joint Conference Committee

House Tax Committee

The assignment of income doctrine most likely limits which of the following strategies? Conversion Timing Income Shifting Tax Minimization None.

Income Shifting

In reviewing the tax rate schedule for a single taxpayer, Chuck notes that the tax on $75,000 is $5,226.25 plus 25 percent of the taxable income over $37,950. What does the $5,226.25 represent? Income tax on $20,735 Income tax on $37,950 Income tax on $75,000

Income tax on $37,950

How would your answer change if Latoya intentionally failed to report as taxable income any cash payments she received from her clients? 6 years from February 10th 6 years from April 15th 3 years from April 15th 3 years from February 10th Indefinite period from April 15th

Indefinite period from April 15th

e. Assume the original facts but now suppose they also incurred a loss of $5,000 on the sale of some of their investment assets. What effect does the $5,000 loss have on their taxable income?

Individual taxpayers' deductible losses on the disposition of investment (capital) assets is limited to $3,000. The Jacksons would be allowed to deduct $3,000 of the $5,000 loss against their taxable income. The remaining $2,000 loss would carry over to next year. Consequently, with the loss, their taxable income would be $56,200 ($59,200 from part a minus $3,000)

Jackie's return was selected for audit because she did not report her salary (from her Form W-2 from her employer) on her tax return. Which IRS program likely identified Jackie's oversight? DIF System Document perfection Information matching Mathematical correction None of these choices is correct.

Information Matching

Jackie's return was selected for audit because she did not report her salary (from her Form W-2 from her employer) on her tax return. Which IRS program likely identified Jackie's oversight? DIF System Document Perfection Information Matching Mathematical Correction None

Information Matching

Which of the following has the highest authoritative weight? Internal Revenue Code Regulation Revenue Ruling Revenue Procedure Private Letter Ruling

Internal Revenue Code

Jamarcus, a full-time student, earned $2,500 this year from a summer job. He had no other income this year and will have zero federal income tax liability this year. His employer withheld $300 of federal income tax from his summer pay. Is Jamarcus required to file a tax return? Should Jamarcus file a tax return? Jamarcus is required to file an income tax return regardless of income and should file a tax return. Jamarcus should compulsorily file a tax return because his gross income of $2,500 is well below the gross income threshold for a single taxpayer. Jamarcus is not required to file an income tax return because his gross income of $2,500 is well below the gross income threshold for a single taxpayer. However, he should file a tax return to receive a refund of the $300 previously withheld. Jamarcus is not required to file a tax return as the refund of $300 previously withheld will be automatically credited to his bank account.

Jamarcus is not required to file an income tax return because his gross income of $2,500 is well below the gross income threshold for a single taxpayer. However, he should file a tax return to receive a refund of the $300 previously withheld.

Jamarcus, a full-time student, earned $3,600 this year from a summer job. He had no other income this year and will have zero federal income tax liability this year. His employer withheld $396 of federal income tax from his summer pay. Is Jamarcus required to file a tax return? Should Jamarcus file a tax return? Jamarcus is not required to file a tax return as the refund of $396 previously withheld will be automatically credited to his bank account. Jamarcus is required to file an income tax return regardless of income and should file a tax return. Jamarcus should compulsorily file a tax return because his gross income of $3,600 is well below the gross income threshold for a single taxpayer. Jamarcus is not required to file an income tax return because his gross income of $3,600 is well below the gross income threshold for a single taxpayer. However, he should file a tax return to receive a refund of the $396 previously withheld.

Jamarcus is not required to file an income tax return because his gross income of $3,600 is well below the gross income threshold for a single taxpayer. However, he should file a tax return to receive a refund of the $396 previously withheld.

Filing Status: Married filing jointly

Must be married on the last day of the year; if one spouse dies the surviving spouse is considered to be married to decedent spouse at year end - exception: surviving spouse remarries before year end Joint and several liability for tax

The Samsons are trying to determine whether they can claim their 22-year-old adopted son, Jason, as a dependent. Jason is currently a full-time student at an out-of-state university. Jason lived in his parents' home for three months of the year and he was away at school for the rest of the year. He received $9,500 in scholarships this year for his outstanding academic performance and earned $4,800 of income working a part-time job during the year. The Samsons paid a total of $5,000 to support Jason while he was away at college. Jason used the scholarship, the earnings from the part-time job, and the money from the Samsons as his only sources of support. Assume the original facts except substitute Jason's grandparents for his parents. Determine whether Jason's grandparents can claim Jason as a dependent. Y/N

N everything but support test because the 9500 now counts since it isn't his parents that are the taxpayers

Aishwarya's husband passed away in 2016. She needs to determine whether Jasmine, her 17-year-old stepdaughter, who is single, qualifies as her dependent in 2017. Jasmine is a resident but not a citizen of the United States. She lived in Aishwarya's home from June 15 through December 31, 2017. Aishwarya provided more than half of Jasmine's support for 2017. Would Aishwarya be allowed to claim a dependency exemption for Jasmine for 2017 if Aishwarya provided more than half of Jasmine's support in 2017, Jasmine lived in Aishwarya's home from July 15 through December 31 of 2017, and Jasmine reported gross income of $5,000 in 2017? Y/N

N - No. Jasmine would fail the qualifying child test because she did not have the same principal residence as Aishwarya for more than half the year. Jasmine would fail the qualifying relative test because her gross income exceeds the $4,050 personal exemption amount for 2017.

The Samsons are trying to determine whether they can claim their 22-year-old adopted son, Jason, as a dependent. Jason is currently a full-time student at an out-of-state university. Jason lived in his parents' home for three months of the year and he was away at school for the rest of the year. He received $9,500 in scholarships this year for his outstanding academic performance and earned $4,800 of income working a part-time job during the year. The Samsons paid a total of $5,000 to support Jason while he was away at college. Jason used the scholarship, the earnings from the part-time job, and the money from the Samsons as his only sources of support. Assume the original facts except that Jason earned $5,500 while working part-time and used this amount for his support. Can the Samsons claim Jason as their dependent? Y/N

N - everything but support because he provided more than half

This year Bill purchased 1,000 shares of Cain common stock for $12 per share. At year-end the Cain shares were worth $32 per share. What amount must Bill include in income this year?

None of the choices are correct - Bill has not realized any gain. No realization occurs until the stock is sold.

The Samsons are trying to determine whether they can claim their 22-year-old adopted son, Jason, as a dependent. Jason is currently a full-time student at an out-of-state university. Jason lived in his parents' home for three months of the year and he was away at school for the rest of the year. He received $9,550 in scholarships and earned $4,830 of income working part time. The Samsons paid a total of $5,040 to support Jason while he was away at college. Jason used the scholarship, the earnings from his part-time job, and the money from the Samsons as his only sources of support. Assume the original facts except substitute Jason's grandparents for his parents. Determine whether Jason's grandparents can claim Jason as a dependent.

The Samsons are trying to determine whether they can claim their 22-year-old adopted son, Jason, as a dependent. Jason is currently a full-time student at an out-of-state university. Jason lived in his parents' home for three months of the year and he was away at school for the rest of the year. He received $9,550 in scholarships and earned $4,830 of income working part time. The Samsons paid a total of $5,040 to support Jason while he was away at college. Jason used the scholarship, the earnings from his part-time job, and the money from the Samsons as his only sources of support. Assume the original facts except that Jason earned $5,530 while working part-time and used this amount for his support. Can they claim as a dependent?

Are all capital gains (gains on the sale or disposition of capital assets) taxed at the same rate? Explain.

No, if a taxpayer holds a capital asset for a year or less the gain is taxed at ordinary tax rates. If the taxpayer holds the asset for more than a year before selling, the gain is generally taxed at a maximum 15% rate but could be taxed as high as 20% for high income taxpayers. If the taxpayer sells more than one capital asset during the year and recognizes both capital gains and capital losses, the gains and losses are netted together before determining the applicable tax rate.

Which of the following is not an itemized deduction? Personal casualty losses. Medical expenses. Personal property taxes for a personal use automobile. Charitable contributions. None of the choices are correct.

None of the choices are correct (all are itemized deductions)

Qualifying CHILD: Tie Breaking Rules

Parents first (Parents over uncle) Days living with each parent if parents living apart AGI - higher AGI gets exemption

Identify the rule that determine whether a married taxpayer must recognize income earned by their spouse:

Residence of the married couple in a community property law state. The residence of the couple in a community property state requires both spouses to recognize half of earned income.

Which of the following results in an ordinary gain or loss?

Sale of a machine held for six months at a gain. Business assets used for less than one year generate ordinary income or loss.

Which of the following realized gains results in a recognized gain?

Sale to a related party at a gain. Realized gains, but not losses, on sales to related party are recognized.

f. Assume the original facts but now suppose the Jacksons own investments that appreciated by $10,000 during the year. The Jacksons believe the investments will continue to appreciate, so they did not sell the investments during this year. What is the Jackson's taxable income?

Same as it is in part (a) $59,200. Though the assets have appreciated, they will not realize or recognize this gain for income tax purposes until they sell their investment assets, at which time they will increase their gross income (and corresponding taxable income) by the gain.

Qualifying CHILD: Residence Test

Same residence as taxpayer for more than half the year -exception for temporary absences such as education

A common income shifting strategy is to: Shift income from a high tax rate jurisdiction to a low tax rate jurisdiction Shift income from a low tax rate jurisdiction to a high tax rate jurisdiction Invest in tax-exempt bonds Defer income

Shift income from a high tax rate jurisdiction to a low tax rate jurisdiction

Caroline and her husband Chris got divorced in May of this year. During the year, Caroline provided all the support for herself and her 23-year-old child Hans (not a full-time student) who lived in the same home as Caroline for the entire year. Hans earned $29,000 this year. What is Caroline's most favorable filing status for the year? Head of Household Married filing separately Surviving spouse Single

Single

Elroy, who is single, has taken over the care of his mother Irene in her old age. Elroy pays the bills relating to Irene's home. He also buys all her groceries and provides the rest of her support. Irene has no gross income. Assume the original facts except that Elroy has taken over the care of his grandmother, Renae, instead of his mother. What is Elroy's filing status?

Single

In year 1, Danny's wife died. Danny has no dependents. As of the end of year 2, Danny had not remarried. Which is the most advantageous filing status available to Danny in year 2? Married filing jointly Surviving spouse Married filing separate Single Head of Household

Single

In year 1, Danny's wife died. Danny has no dependents. As of the end of year 2, Danny had not remarried. Which is the most advantageous filing status available to Danny in year 2? Married filing joint Surviving spouse Married filing separate Single Head of household

Single Surviving spouse treatment is only available for the following two years if the taxpayer maintains a household for a dependent.

Lee is 30 years old and single. Lee paid all the costs of maintaining his household for the entire year. Determine Lee's filing status in each of the following alternative situations: Lee and Ashton are cousins. Ashton is 18 years old, has gross income of $3,000, and is not a full-time student. Ashton lived in Lee's home for the entire year.

Single - Ashton is not a qualifying person for determining head of household status for Lee because he does not qualify as Lee's dependent. Ashton does not have a qualifying family relationship with Lee for either qualifying child or qualifying relative.

Caroline and her husband Chris got divorced in May of this year. During the year, Caroline provided all the support for herself and her 23-year-old child Hans (not a full-time student) who lived in the same home as Caroline for the entire year. Hans earned $29,000 this year. What is the Caroline's most favorable filing status for the year? Head of household Married filing separately Surviving spouse Single

Single - Hans does not qualify as Caroline's dependent due to his age and his income so Caroline must file Single for the year.

Lee is 30 years old and single. Lee paid all the costs of maintaining his household for the entire year. Determine Lee's filing status in each of the following alternative situations: Lee is Ashton's uncle. Ashton is 20 years old, not a full-time student, and has gross income of $7,000. Ashton lived in Lee's home from April 1 through the end of the year.

Single - ashton is too old for qualifying child and makes too much for qualifying relative

Lee is 30 years old and single. Lee paid all the costs of maintaining his household for the entire year. Determine Lee's filing status in each of the following alternative situations: Lee is Ashton's cousin. Ashton is 18 years old, has gross income of $3,000, and is not a full-time student. Ashton lived in Lee's home from April 1 through the end of the year.

Single - no qualifying relationship

Lee is 30 years old and single. Lee paid all the costs of maintaining his household for the entire year. Determine Lee's filing status in each of the following alternative situations: Lee is Ashton's uncle. Ashton is 22 years old and was a full-time student from January through April. Ashton's gross income was $5,000. Ashton lived in Lee's home from April 1 through the end of the year.

Single - no qualifying relationship

Kimberly is divorced and the custodial parent of a 3-year-old girl named Bailey. Kimberly and Bailey live with Kimberly's parents, who pay all the costs of maintaining the household (such as mortgage, property taxes, and food). Kimberly pays for Bailey's clothing, entertainment, and health-insurance costs. These costs comprised only a small part of the total costs of maintaining the household. Kimberly does not qualify as her parent's dependent. Determine the appropriate filing status for Kimberly. Single Head of household Married filing single Married filing joint

Single she doesn't pay more than half the costs of the household in which the child lives

taxpayer filing requirements

corporations: all must file regardless of taxable income estates/trusts: required to file if gross income exceeds $800 individuals: filing is determined by taxpayer's filing status, age, and gross income

In prior years, John was single and he was a qualifying child of his parents. This year John, age 23 and a full-time student, got married. John and his wife file a joint return. If they were to file separately, John would report a $0 tax liability. John's wife would report a $200 tax liability. John's parents cannot claim him as a dependent in the current year. T/F

Private Letter Rulings have less authoritative weight than Revenue Rulings. T/F

The tax return filing requirements for individual taxpayers depend on the taxpayer's gross income. T/F

U.S. District Courts appeal to U.S. Circuit Courts. T/F

Meeting which of the following standards for tax return positions would allow both taxpayers and tax practitioners to avoid a penalty with respect to a tax return position? Supreme authority Reasonably probable Significant authority Realistic possibility Substantial Authority

Substantial Authority

Substantial authority

For purposes of determining filing status, a taxpayer's marital status is determined on the last day of the tax year in question. T/F

If spouses are filing separate returns, both spouses must itemize their deductions even if the itemized deductions are less than the standard deduction for one of the spouses. T/F

Which of the following items is illegal under the tax law? Tax avoidance Tax evasion Accelerating deductions Deferring income All are illegal

Tax Evasion

Which of the following is not considered a primary authority? Supreme Court case Tax Law Review article Regulation Internal Revenue Code None of these choices is correct.

Tax Law Review article

Which of the following is not considered a primary authority? Supreme Court case Tax Law Review article Regulation Internal Revenue Code None

Tax Law Review article

Identify the rule that determines whether a taxpayer must include in income a refund of an amount deducted in a previous year:

Tax benefit rule.

Qualifying RELATIVE: Support Test

Taxpayer must pay > 1/2 of living expenses (support) - Scholarships of actual child excluded

Qualifying CHILD: Relationship Test

Taxpayer's son, daughter, stepchild, an eligible foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of these relatives

Filing Status: Married filing separately

Taxpayers are married but file separate returns -typically not beneficial from tax perspective -may be beneficial for non-tax reasons (no joint and several liability)

Which of the following is a true statement?

Taxpayers may deduct interest on up to $1,000,000 of acquisition indebtedness incurred before December 15, 2017.

Filing status determines all except which of the following? The AGI threshold for reductions in certain tax benefits. The amount used for the qualifying relative gross income test. The appropriate tax rate schedule or tax table. The applicable standard deduction amount.

The amount used for the qualifying relative gross income test

Filing status determines all except which of the following?

The amount used for the qualifying relative gross income test.

Ben is employed as a carpenter and his wife, Marilyn is a self-employed consultant. Besides Ben's salary, Ben and Marilyn own a condominium that they only rent to tourists. This year they paid $2,200 for utilities in the condo. Marilyn also paid self-employment tax of $4,200 and Ben had $3,000 of Social Security taxes withheld from his pay. Which of the following is a true statement?

The cost of the utilities is deductible for AGI. The entire cost of the utilities would be a for AGI deduction assuming no personal use of the condo. The employer portion of Marilyn's self-employment tax would be deductible as well.

James invests $100,000 in the city of Athens bond that pays 8% interest. Alternatively, James could have invested the $100,000 in a bond recently issued by HighTech, Inc. that pays 10% interest with similar risk as the city of Athens bond. Assume that James's marginal tax rate is 25%. Which bond should James choose and why? The HighTech, Inc. bond because it earns a higher pre-tax rate of return. The HighTech, Inc. bond because it earns a high after-tax rate of return. The city of Athens bond because it earns a high pre-tax rate of return. The city of Athens bond because it earns a higher after-tax rate of return. James should be indifferent between the two bonds.

The city of Athens bond because it earns a higher after-tax rate of return. City of Athens bond $100,000 * 8% interest = $8,000 No tax repercussions HighTech, Inc. bond $100,000 * 10% = $10,000 $10,000 * 24% tax = $2,400 tax $10,000 - 2,400 = 7,600 after tax return

Which of the following is a true statement?

The cost of business entertainment is not deductible.

Which of the following is true regarding §1245 depreciation recapture?

The lesser of accumulated depreciation or gain recognized becomes ordinary. Depreciation recapture changes the lesser of accumulated depreciation or the gain recognized from section 1231 to ordinary gain.

Why are some deductions called "above the line" deductions and others called "below the line" deductions? What is the "line"?

The line is adjusted gross income (AGI). AGI is considered the line because of the significance it plays in the amount of deductions allowed from AGI. "For AGI" deductions are called above-the-line deductions because they are deducted in determining AGI. "From AGI" deduction are called below-the-line deductions because they are deducted after AGI has been determined. They are deducted from AGI to arrive at taxable income. Below the line deductions may be subject to limitations based on the taxpayer's AGI.

Filing status determines all except which of the following? The AGI threshold for reductions in certain tax benefits. The standard amount of each personal and dependency exemption. The appropriate tax rate schedule or tax table. The applicable standard deduction amount.

The standard amount of each personal and dependency exemption. The standard amount of each personal and dependency exemption does not vary by filing status.

Shane has never filed a tax return despite earning excessive sums of money as a gambler. When does the statute of limitations expire for the years in which Shane has not filed a tax return? The statute of limitations does not apply since Shane has not filed a tax return. The statute of limitations expires 5 years from the due date of when the tax return should have been filed. The statute of limitations expires 3 years from the due date of when the tax return should have been filed. The statute of limitations remains open indefinitely for years in which the taxpayer fails to file a return.

The statute of limitations remains open indefinitely for years in which the taxpayer fails to file a return.

Dave and Jane file a joint return. They sell a capital asset at a $140,000 loss. Even though they have no capital gains, $3,000 of the loss can still be deducted in the current year if they have at least $3,000 of ordinary income.

True

For purposes of determining filing status, a taxpayer's marital status is determined on the last day of the tax year in question.

True

Generally, a portion of each payment from a purchased annuity represents a return of capital.

True

Gross income includes all realized income that is recognized during the year.

True

If spouses are filing separate returns, both spouses must itemize their deductions even if the itemized deductions are less than the standard deduction for one of the spouses.

True

Which of the following is an example of a progressive tax system? Social Security Tax A sales tax A proportional tax U.S. Federal Income Tax

U.S. Federal Income Tax

Which of the following is an example of a progressive tax system? Social security tax A sales tax A proportional tax U.S. Federal Income Tax

U.S. Federal Income Tax

Paula could not reach an agreement with the IRS at her appeals conference and has just received a 90-day letter. If she wants to litigate the issue but does not have sufficient cash to pay the proposed deficiency, what is her best court choice? U.S. Supreme Court U.S. Tax Court U.S. Court of Federal Claims U.S. District Court

U.S. Tax Court

what are the appellate courts

US court of appeals (regional), us court of appeals (federal), US supreme court

Filing Status: Single

Unmarried unless qualifying for head of household

The Samsons are trying to determine whether they can claim their 22-year-old adopted son, Jason, as a dependent. Jason is currently a full-time student at an out-of-state university. Jason lived in his parents' home for three months of the year and he was away at school for the rest of the year. He received $9,500 in scholarships this year for his outstanding academic performance and earned $4,800 of income working a part-time job during the year. The Samsons paid a total of $5,000 to support Jason while he was away at college. Jason used the scholarship, the earnings from the part-time job, and the money from the Samsons as his only sources of support. Assume the original facts except that Jason's grandparents, not the Samsons, provided him with the $5,000 worth of support. Can the Samsons (Jason's parents) claim Jason as their dependent? Y/N

Y R - adopted counts A - under 24 and FT student Res - temp absences count Sup - did not provide more than half of his support

The Samsons are trying to determine whether they can claim their 22-year-old adopted son, Jason, as a dependent. Jason is currently a full-time student at an out-of-state university. Jason lived in his parents' home for three months of the year and he was away at school for the rest of the year. He received $9,500 in scholarships this year for his outstanding academic performance and earned $4,800 of income working a part-time job during the year. The Samsons paid a total of $5,000 to support Jason while he was away at college. Jason used the scholarship, the earnings from the part-time job, and the money from the Samsons as his only sources of support. Can the Samsons claim Jason as their dependent? Y/N

Y R - adopted counts A - under 24 and full-time student Res - yes temp absences count Sup - he did not provide more than half of his own support

Y - Yes, Aishwarya may claim a dependency exemption for Jasmine in 2017. Jasmine meets the citizenship/residency test because she is a resident of the United States, and she meets the requirements to be considered Aishwarya's qualifying child as follows: R - stepdaughter counts A - under 19 Res - same residence more than 1/2 year S - does not provide more than 1/2 support

Y qualifying relative as follows: R - stepdaughter counts Sup - A provided more than half support GI - GI does not exclude 4,050

The Samsons are trying to determine whether they can claim their 22-year-old adopted son, Jason, as a dependent. Jason is currently a full-time student at an out-of-state university. Jason lived in his parents' home for three months of the year and he was away at school for the rest of the year. He received $9,550 in scholarships and earned $4,830 of income working part time. The Samsons paid a total of $5,040 to support Jason while he was away at college. Jason used the scholarship, the earnings from his part-time job, and the money from the Samsons as his only sources of support. Assume the original facts except that Jason's grandparents, not the Samsons, provided him with the $5,040 worth of support. Can the Samsons (Jason's parents) claim Jason as their dependent?

Yes

The Samsons are trying to determine whether they can claim their 22-year-old adopted son, Jason, as a dependent. Jason is currently a full-time student at an out-of-state university. Jason lived in his parents' home for three months of the year and he was away at school for the rest of the year. He received $9,550 in scholarships and earned $4,830 of income working part time. The Samsons paid a total of $5,040 to support Jason while he was away at college. Jason used the scholarship, the earnings from his part-time job, and the money from the Samsons as his only sources of support. Can Samsons claim Jason as their dependent?

Yes

Sarah is the Colton family's 23-year-old daughter. She is a full-time student at an out-of-state university (for 8 months of the year) but plans to return home when the school year ends. During the year, Sarah earned $4,500 of income working part-time. Her support totaled $20,000 for the year. Of this amount, Sarah paid $7,000 with her own funds, her parents paid $12,000, and Sarah's grandparents paid $1,000. Which of the following statements most accurately describes whether Sarah's parents can claim a dependency exemption for her? Yes, Sarah is a qualifying child of her parents. No, Sarah fails the support test for both qualifying children and qualifying relatives. No, Sarah does not pass the gross income test. Yes, Sarah is a qualifying relative of her parents.

Yes, Sarah is a qualifying child of her parents Because Sarah is a full-time student and under 24 she passes the relationship test of a qualifying child. Her time spent away from school is counted at time at home for the residence test. Also, Sarah did not provide more than half of her own support. There is no gross income test for qualifying children.

Sarah is the Colton family's 23 year old daughter. She is a full-time student at an out-of-state university (for 8 months of the year) but plans to return home when the school year ends. During the year, Sarah earned $4,500 of income working part-time. Her support totaled $20,000 for the year. of this amount, Sarah paid $7,000 with her own funds, her parents paid $12,000, and Sarah's grandparents paid $1,000. Which of the following statements most accurately describes whether Sarah's parents can claim a dependency exemption for her? Yes, Sarah is a qualifying child of her parents. No, Sarah fails the support test for both qualifying children and qualifying relatives. No, Sarah does not pass the gross income test. Yes, Sarah is a qualifying relative of her parents.

Yes, Sarah is a qualifying child of her parents.

Yes, Sarah is a qualifying child of her parents. Because Sarah is a full-time student and under 24 she passes the relationship test of a qualifying child. Her time spent away from school is counted at time at home for the residence test. Also, Sarah did not provide more than half of her own support. There is no gross income test for qualifying children.

The estate of Monique Chablis earned $850 of income this year. Is the state required to file an income tax return? No, the estate is exempt from filing an income tax return. Yes, the estate has to file an income tax return irrespective of its income. No, because the estate's gross income is less than $600 the estate is not required to file an income tax return. Yes, because the estate's gross income is more than $600 the estate is required to file an income tax return.

Yes, because the estate's gross income is more than $600 the estate is required to file an income tax return.

Shelly is a student who has received an academic scholarship to the University. The scholarship paid $4,000 for tuition, $500 for fees, and $400 for books. What amount must Shelly include in her gross income?

Zero - None of the benefits are includable in gross income College students seeking a degree are allowed to exclude from gross income scholarships that pay for tuition, fees, books, supplies, and other equipment required for the student's courses. Any excess scholarship amounts (such as for room or meals) are fully taxable. The scholarship exclusion applies only if the recipient is not required to perform services in exchange for receiving the scholarship.

other rules for dependency exemptions

a dependent must also meet the joint return and citizenship/residency tests

to qualify as a dependent of another, a person must be considered either

a qualifying child of taxpayer OR qualifying relative of taxpayer

Demarco and Janine Jackson have been married for 20 years and have four children who qualify as their dependents (Demarcus, Janine, Michael, and Candice). The couple received salary income of $100,000 and they sold their home this year. They initially purchased the home three years ago for $200,000 and they sold it for $250,000. The gain on the sale qualified for the exclusion from the sale of a principal residence. The Jacksons incurred $16,500 of itemized deductions and they had $6,250 withheld from their paychecks for federal taxes. They are also allowed to claim child tax credit for each of their children. a. What is the Jackson's taxable income and what is their tax liability or (refund)?

a. $59,200 taxable income and $2,302.50 refund. See analysis below: Description Amount Computation 1. Gross Income 100,000 Salary income. Gain home sale of $50,000 is excluded. 2. For AGI Deductions 0 3. Adjusted gross income $100,000 1-2 4. Standard Deduction 12,700 Married filing jointly 5. Itemized deductions 16,500 6. Greater of standard 16,500 4>5 or itemized deduction 7. Personal & dependency 24,300 6 exemptions x exemptions 4,050 8. Total deductions from 40,800 6+7 AGI 9. Taxable Income $59,200 3-8 10. Income Tax Liab. $7,947.50 (59,200 - 18,650) x 15% + 1,865 (Tax rate sched.) 11. Other Taxes 0 12. Total tax $7,947.50 10+11 13. Credits (4,000) Child credits for four children (4x1,000) 14. Prepayments (6,250) Tax (refund) w/Return (2,302.50) 12+13+14

Chuck, a single taxpayer, earns $58,500 in taxable income and $20,800 in interest from an investment in City of Heflin bonds. a. How much federal tax will he owe? b. What is his average tax rate? c. What is his effective tax rate? d. What is his current marginal tax rate?

a. $8,743.50 $4,453.50 (base tax) + 19,500 * 22% (in excess * marginal tax rate) = 8,743.50 b. $8,743.50 / 58,200 = 15.02% (total tax / taxable income) c.

In each of the following independent situations, determine the taxpayer's filing status and the number of personal and dependency exemptions the taxpayer is allowed to claim. a. Frank is single and supports his 17 year old brother, Bill. Bill earned $3,000 and did not live with Frank.

a. Single with two exemptions: one personal and one dependency exemption for Bill. Frank will file as single, not head of household. Bill is not a qualifying person for purposes of the head of household test because Bill did not live as member of Frank's household for more than half a year. Frank can claim an exemption for Bill because Bill qualifies as Frank's qualifying relative as follows: Test Bill Relationship Yes, Bill is the taxpayer's brother. Age N/A to qualifying relative Residence N/A to qualifying relative Support Yes, more than half of Bill's support is provided by Frank Gross Income Yes, Bill's gross income ($3,000) is less than the exemption amount

Gary and Lakesha were married on December 31 last year. They are now preparing their taxes for the April 15 deadline and are unsure of their filing status. a. What filing status options do Gary and Lakesha have for last year? b. Assume instead that Gary and Lakesha were married on January 1 of this year. What s their filing status for last year (neither has been married before and neither had any dependents last year)

a. To be married for filing status purposes, taxpayers must be married at the end of the year. Although Gary and Lakesha were married on the last day of the year, they are still considered married for the entire year for filing purposes. Gary and Lakesha may file as married filing jointly, or they may elect to file as married filing separately. b. Single. Gary and Lakesha were not marred at the end of the year; therefore they must both file single.

Aishwarya's husband passed away in 2016. She needs to determine whether Jasmine, her 17-year-old stepdaughter who is single, qualifies as her dependent in 2017. Jasmine is a resident but not a citizen of the United States. She lived in Aishwarya's home from June 15 through December 31, 2017. Aishwarya provded more than half of Jasmine's support for 2017. a. s Aishwarya allowed to claim a dependency exemption for Jasmine for 2017? b. Would Aishwarya be allowed to claim a dependency exemption for Jasmine for 2017 if Aishwarya provided more than half of Jasmine's support in 2017, Jasmine lived in Aishwarya's home from July 15 through December 31 of 2017, and Jasmine reported gross income of $5,000 in 2017? c. Would Aishwarya be allowed to claim a dependency exemption for Jasmine for 2017 if Aishwarya provided more than half of Jasmine's support in 2017, Jasmine lived in Aishwarya's home from July 15 through December 31 of 2017, and Jasmine reported gross income of $2,500 in 2017?

a. Yes, Aishwarya may claim a dependency exemption for Jasmine in 2017. Jasmine meets the citizenship/residency test because she is a resident of the United States, and she meets the requirements to be considered Aishwarya's qualifying child as follows: Test Jasmine Relationship Yes, stepdaughter qualifies Age Jasmine is under 19 at the end of year Residence Jasmine had the same principal residence as Aishwarya for more than half the year Support Jasmine does not provide more than half of her own support. b. No. Jasmine would fail the qualifying child test because she did not have the same principal residence as Aishwarya for more than half the year. Jasmine would fail the qualifying relative test because her gross income exceeds the $4,050 personal exemption amount for 2017. c. Yes, Jasmine would qualify as Aishwarya's qualifying relative as follows: Test Jasmine Relationship Yes, stepdaughter qualifies Support Aishwarya provided more than half of Jasmine's support Gross Income Jasmine's gross income does not exceed the dependency exemption amount.

exclusions from gross income

accident insurance proceeds annuities (cost element - not interest) bequests child support payments cost-of-living allowance (military) damages for personal injury or sickness gifts received group term life insurance, premium paid by employer (coverage up to 50,000) interest from state and local bonds life insurance paid on death meals and lodging military allowances minister's dwelling rental value allowance railroad retirement benefits scholarship grants SS benefits unemployment compensation veteran's benefits

abandoned spouse

allows married taxpayer to file as HOH if taxpayer: does not file joint return paid > half cost of maintaining home spouse did not live in home during last 6 months of tax year home was principal residence of taxpayer's child for > half of year can claim child as dependent

multiple support agreements

allows one member of a group providing > 50% of support to claim individual even though no one person provides > 50% support eligible parties must provide > 10% each eligible party must meet all other dependency requirements

occupational fees

applicable to various trades or businesses (liquor license, taxi permit)

additional standard deduction

available for taxpayers and/or spouse (not dependent) who are: --65 and older --blind --two additional SD are allowed for 65+ and blind (amount allowed depends on filing status)

b. Geneva and her spouse reside with their son, Steve, who is a 20-year-old undergraduate student at State University. Steve earned $13,100 at a part-time summer job, but he deposited the money in a savings account for graduate school. Geneva paid all of the $12,000 cost of supporting Steve.

b. Married filing jointly with two personal exemptions and one dependency exemption for Steve. Steve meets the test to be Geneva and her husband's qualifying child as follows: Test Steve Relationship Yes, Steve is the taxpayer's son. Age Yes, under age 24 and a full-time student. Residence Yes, temporary absences away at school count as time in the parent's home Support Yes, even though Steve earned $13,100, he did not use any of that

c. Hamish's spouse died last year, and Hamish has not remarried. Hamish supports his father Reggie, 78, who lives in a nursing home and had interest income this year of $2,500.

c. Head of household with two exemptions. Hamish is not a qualifying widower because he does not maintain a household for a dependent child. However, he does qualify for head of household because he is not married and he pays more than half the cost of maintaining a separate household that is the principal place of abode for his father, and his father also qualifies as his dependent as follows: Test Reggie Relationship Yes, Reggie is Hamish's father. Age N/A with qualifying relative Residence N/A with quaifying relative Support Yes, Hamish provides more than half of Reggie's support Gross Income Yes, Reggie's gross income of $2,500 is less than the exemption amount

types of audits

correspondence audit office audit: usually restricted in scope and conducted in facilities of IRS field audit: involves examination of numerous items reported on the retune and is conducted on premises of taper or taxpayer's representative

d. Irene is married but has not seen her spouse since February. She supports her spouse's 18-year-old child Dolores, who lives with Irene. Dolores earned $4,500 this year.

d. Head of household with two exemptions. Irene qualifies for being treated as unmarried for the year (abandoned spouse) as follows: Test Irene Married Yes, Irene is still married at the end of year. Separate Return Yes, Irene files a separate return from her spouse. Maintains Home Yes, Irene provides more than half the cost of maintaining a home for a qualifying child. Time Separated Yes, Irene has not lived with her spouse for the last six months of the year. Because she is treated as though she were unmarried, she may file as head of household because she pays more than half the costs (for mroe than half the taxable year) of maintaining a household that is the principal place of abode for a dependent who is her qualifying child. Dolores is Irene's qualifying child, as determine below: Test Dolores Relationship Yes, Delores is the taxpayer's stepchild. Age Yes, under age 19 Residence Yes, Dolores lived with taxpayer for more than half of the year. Support Yes, Dolores did not provide more than half of her own support. Irene may claim one personal exemption for herself and one dependency exemption for Dolores.

tax base

defines what is actually taxed and is usually expressed in monetary terms (for federal income tax, the base is taxable income)

joint return test

dependent cannot file joint return with spouse unless: filing solely for refund of tax withheld no tax liability exists for either spouse neither spouse required to file return

citizenship/residency test

dependent must be a US citizen or resident of US, Canada, Mexico for some part of calendar year in which the taxpayer's tax year begins (adopted child is exempt)

gross income test for QR

dependent's gross income must be less than exemption amount ($4,050)

e. Assume the same facts as in part (d). Also, assume that Craig is Irene's husband. Craig supports his 12-year-old son Ethan, who lives with Craig. Ethan did not earn any income.

e. Head of household with two exemptions. Craig qualifies for being treated as unmarried (abandoned spouse rules) as follows: Test Craig Married Yes, Craig is still married at the end of the year. Separate Return Yes, Craig files a separate return from his spouse Maintains Home Yes, Craig provides more than half the cost of maintaining a home for a qualifying child. Time Separated Yes, Craig has not lived with his spouse for the last six months Because he is treated as though he were unmarried, he may file as head of household because he pays more than half the costs (for more than half the taxable year) of maintaining a household that is the principal place of abode of a dependent who is his qualifying child. Ethan is Craig's qualifying child, as determine below: Test Ethan Relationship Yes, Ethan is taxpayer's child Age Yes, under age 19 Residence Yes, Ethan lived with taxpayer for more than half the year. Support Yes, Ethan did not provide more than half of his own support Craig may claim one personal exemption for himself and one dependency exemption for Ethan. Note that both Irene in part (d) and Craig may claim head of household filing status because they both qualify to be treated as unmarried for filing status purposes.

who are FICA taxes paid by

employer and employee

IRC defines gross income broadly as

except as otherwise provided..., all income from whatever source derived

A loss from a passive activity is fully deductible as long as the taxpayer has sufficient tax basis in the activity.

false

All reasonable moving expenses are generally deductible.

false

Based on the tax law effective for 2018, it is no longer important to determine who is a taxpayer's dependent because the deduction for dependency exemptions is zero.

false

Depreciation is currently computed under the Accelerated Cost Recovery System (ACRS).

false

Employees must pay the Social Security tax on all of their wages and Medicare tax on wages up to a fixed amount.

false

Federal income tax expense reported on a corporation's books generates an unfavorable temporary book-tax difference.

false

Highway speeding fines can be deducted as long as the speeding was done in the line of business.

false

In contrast to individuals, corporations are not allowed to use a preferential tax rate in computing the tax on long-term capital gains and they are not subject to any limitations relating to the deductibility of capital losses.

false

Nan realizes a $2,000 loss in a section 351 exchange but receives $500 of boot in the exchange. Nan can recognize $500 of the loss realized as a result of receiving the boot.

false

Property held for investment and inventory are examples of capital assets.

false

Self employed taxpayers can choose between claiming the employer portion of self employment taxes paid as an itemized deduction or a deduction for AGI.

false

Stock received in exchange for services provided to a corporation in the formation of the corporation can never be counted in determining whether the control test is met for section 351 purposes.

false

The convention for tax amortization is always the half-year convention.

false

The itemized deduction for taxes includes all types of federal taxes.

false

The objective of the medical expense deduction is to reduce the after-tax cost of medical treatment for all taxpayers, even for those taxpayers with little medical expense.

false

When a business mistakenly claims too little depreciation for the prior year, the business may elect to increase future depreciation to make up the difference allowable depreciation.

false

The deduction for cash charitable contributions is limited to twenty-five percent of the taxpayer's AGI whereas casualty losses on personal assets are only deductible to the extent the losses exceed ten percent of the taxpayer's AGI.

false 60% or 30% of AGI is the ceiling for cash donations.

All corporate deductions are deductions from AGI.

false Corporations do not report AGI.

what levels are income taxes imposed on

federal, most state, and some local levels

two categories of deductions

for AGI (above the line) from AGI (below the line)

Which convention is the general rule for intangible property?

full-month

SD limit for person claimed as dependent

has a SD limited to the greater or: --$1,050 OR --$350 plus earned income (but not exceeding normal SD)

proportional tax rate (flat tax)

imposes a constant tax rate throughout the tax base (income increases - tax rate stays constant)

regressive tax rate

imposes a decreasing marginal tax rate as the tax base increases (income increases - tax rate decreases)

progressive tax rate

imposes an increasing marginal tax rate as the tax base increases (income increases - tax rate increases)

single filing status

includes taxpayer who is unmarried and separated from spouse by a divorce decree or separate maintenance agreement and does not qualify for another filing status

who are income taxes imposed on

individuals, corporations, certain fiduciaries (estates and trusts)

tax return due dates

individuals: 15th day of the 4th month following of tax year (April 15) C corporations: generally 15th day of the 4th month following end of tax year partnerships & S corps: 15th day of 3rd month following end of tax year *due dates on sat/sun/holiday are extended to next business day *individuals, corporations, and partnerships are allowed to apply for automatic extensions (6 mo)

deductions

items that are subtracted from gross income to arrive at taxable income

revenue rulings carry ________ weight than regulations

less

tax rate

level of taxes imposed on the tax

franchise taxes

levied on the right to do business in the state

MFJ status

married as of last day of taxable year or spouse dies during taxable year

MFS status

married but not filing a return with spouse and not abandoned spouse

2 exceptions to support test

multiple support agreements and children of divorced parents

age test for QC

must be under 19, or under 24 in the case of a student (a student is a child who during any part of five months of the year is enrolled FT at a school) individuals who are disabled are not subject to age test QC must be younger than taxpayer

HOH status

must be unmarried as of end of year or an abandoned spouse must pay over half the cost of maintaining a HH which is the principal home of a dependent for over half of tax year (dependent must satisfy either QC or QR category)

abode test for QC

must live with taxpayer for more than half of the year - temporary absences don't count

tiebreaker rule - one person is the parent

parent wins dependency claim

tiebreaker rule - both persons are the parents and child lives longer with one parent

parent with longer period of residence wins dependency claim

tiebreaker rule - both persons are the parents and the child lives with each the same period of time

parent with the higher AGI wins dependency claim

which of the following constitutes as a tax? payment for drivers license payment for required (by government) house appraisal payment for hotel use of 1% of bill to pay for city projects payment for rental car use of 3% of bill to pay for roads

payment for hotel use of 1% of bill to pay for city projects and payment for rental car use of 3% of bill to pay for roads

none of the persons are the parent

person with the highest AGI wins dependency claim

personal/dependency exemption in year of death

personal exemption allowed on joint return for spouse who dies during the year

qualifying child tests (RAAS)

relationship abode age support

qualifying relative tests (RNGS)

relationship not be qualifying child gross income support

surviving spouse status

same tax rate bracket as MFJ file as surviving spouse for 2 years after death of spouse if taxpayer maintains a home in which a dependent child lives for entire year (maintains a home: provides 1/2 cost of maintaining HH) and must remain unmarried for the year of death, SS is treated as being married and joint return can be filed if the deceased spouse's executor agrees and can have 2 personal exemptions

adjusted gross income

serves as the bases for computing percentage limitations on certain itemized deductions such as: charitable contributions, certain casualty losses, medical expenses

tax treaties

signs tax treaties with foreign counties to avoid double taxation and render mutual assistance in tax enforcement

5 filing statuses

single married filing jointly surviving spouse (qualifying widow) head of household married filing separately filing status affects tax rate brackets, SD, and other amounts

what are the trial courts (original jurisdiction)

small claims division, US tax court, US district court, US court of federal claims

criteria for evaluating a tax structure (5 - SEECC)

sufficiency equality economy convenience certainty

standard deduction

sum of basic standard deduction and additional standard deduction

for AGI (above the line)

taken before the "line" designating AGI and do not have to exceed a minimum level before they can be deducted

federal custom duties

tariffs on certain imported goods

how to calculate a tax (formula)

tax = tax base * tax rate

tax avoidance vs tax evasion

tax avoidance is the legal minimization of tax liabilities and one goal of tax planning tax evasion is the illegal minimization of tax liabilities

federal gift tax (transfer tax)

tax on the right to transfer assets during a person's lifetime (applies only to transfers that are not supported by full and adequate consideration)

death taxes (transfer taxes)

tax on the right to transfer property or to receive property upon the death of the owner if imposed on right to pass property at death (classified as estate tax) if imposed on right to receive property from a decedent (classified as an inheritance tax - no federal inheritance tax)

marginal tax rate

tax rate that applies to the next additional increment of a taxpayer's taxable income = change in tax / change in taxable income

what is the federal income tax base

taxable income (income less allowable exclusions and deductions)

qualified dividends

taxed at 0, 15%, or 20% depending on taxpayer's income level

it an audit results in an assessment of additional tax, what can be done

taxpayer may attempt to negotiate a settlement (an appeal is available through the Appeals Division of the IRS) if a settlement is not reached, the taxpayer can litigate in tax court, federal district court, or court of federal claims

support test for QR

taxpayer must provide more than 50% of the qualifying relative's support only amounts expended are considered in support test include tax-exempt income, savings, and borrowed amounts used to support that person scholarships are not considered in support test for taxpayer's ACTUAL child

average tax rate

taxpayer's average level of taxation on each dollar of taxable income = total tax / taxable income

effective tax rate

taxpayer's average rate of taxation on each dollar of total income (both taxable and non-taxable) = total tax / total income

support test for QC

the individual (the dependent) must not be self-supporting - cannot provide more than one-half of their support in case of FT student and actual child, scholarships are not considered to be support

A short tax year can end on any day of any month.

true

An asset's capitalized cost basis includes the actual purchase price and all other expenses associated with placing the asset in service.

true

An asset's tax adjusted basis is usually less than its book adjusted basis.

true

Generally, losses from rental activities are considered to be passive activity losses.

true

In certain circumstances, in the current year, a taxpayer may need to pay in more than 100% of her prior year tax liability to avoid estimated tax penalties.

true

In general, total deductible home office expenses are limited to the gross income derived from the business minus business expenses unrelated to the home (this is net Schedule C income before home office expenses).

true

Martin defers $500 of gain realized in a section 351 exchange. The stock he receives in the exchange has a fair market value of $800. Martin's tax basis in the stock will be $300.

true

Reasonable in amount means that expenditures cannot be exorbitant even if the amount is motivated by profit.

true

Section 1239 recharacterizes gain on the sale of depreciable property to related person as ordinary income.

true

Self employed taxpayers can deduct the cost of health insurance as long as they are not eligible to participate in their spouses' employer-provided health plan.

true

Taxpayers are allowed to deduct an exemption for alternative minimum tax purposes.

true

Taxpayers traveling for the primary purpose of receiving essential and deductible medical care can deduct the cost of travel.

true

The "all-events" test for income determines the amount of income will be included in taxable income for accrual method taxpayers.

true

The American Opportunity Credit applies to qualifying education expenses for the first four years of post secondary education.

true

The full-inclusion method requires accrual method taxpayers to include prepayments for goods or services into realized income.

true

Unreimbursed employee business expenses and hobby expenses are generally nondeductible.

true

When applicable, all taxpayers may use bonus depreciation for qualifying property.

Tax Ch 4

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