tax midterm

a. no deduction b.FROM AGI c.AGI d.FOR AGI e.FOR AGI f. FOR AGI

Classify each of the following expenditures as a deduction for AGI, a deduction from AGI, or not deductible: a. Sam gives cash to his father as a birthday gift. b. Sandra gives cash to her church. c. Albert pays Dr. Dafashy for medical services rendered. d. Mia pays alimony to Bill. e. Rex, who is self-employed, contributes to his pension plan. f. April pays expenses associated with her rental property.

there would be capital loss, which would offset the gains. By contributing to IRA it deducts AGI. With AGI reducing it will increase their medical deduction

Late in the tax year, the Polks come to you for tax advice. They are considering selling some stock investments for a loss and making a contribution to a traditional IRA. In reviewing their situation, you note that they have large medical expenses and a casualty loss, with neither being covered by insurance. What advice would you give to the Polks?

Since the check is cash equivalent the income must be recognized when the employee collected it in 2015.

On December 29, 2015, an employee received a $5,000 check from her employer's client. The check was payable to the employer. The employee did not remit the funds to the employer until December 30, 2015. The employer deposited the check on December 31, 2015, but the bank did not credit the employer's bank account until January 2, 2016. When is the cash basis employer required to include the $5,000 in gross income?

The attorney's fees are not deductible because legal fees that are connected with a criminal defense are only deductible if it's associated with the client's business. Stuart robbing a bank was not associated with his business so the fees are not deductible.

Stuart, an insurance salesperson, is arrested for allegedly robbing a convenience store. He hires an attorney who is successful in getting the charges dropped. Is the attorney's fee deductible? Explain.

taxable

TV giveaway prizes, magazine publisher prizes, door prizes, and awards from an employer to an employee

The employees that incur the expenses for the childcare and gym then it will reduce their salary by the cost of the benefits.

The Sage Company has the opportunity to purchase a building located next to its office. Sage would use the building as a day care center for the children of its employees and an exercise facility for the employees. Occasionally, portions of the building could be used for employees' family events such as reunions, birthday parties, and anniversaries. The company would like to know if the planned uses of the building would fit into a beneficially taxed employee compensation plan.

Points that are paid by a seller are treated as an adjustment to the selling price of the residence. The buyer can deduct points if several conditions are met in the Rev Proc. 94-27.

Thomas purchased a personal residence from Rachel. To sell the residence,Rachel agreed to pay $5,500 in points related to Thomas's mortgage. Discuss the deductibility of the points.

The first is $32,000 for taxpayers who are married filing jointly, $0 for those married but file separate returns, and $25,000 for all other taxpayers. The second formula is $44,000 for taxpayers married filing jointly, $0 for taxpayers who are married filing separately and $34,000 for all other taxpayers. These formulas analyze the modified adjusted gross income.

For a person who receives Social Security benefits, what effect, if any, can an increase in other income have on that person's taxable income?

Fred can't exclude the $10,000 from the gross income. He is being paid to perform a service and being paid for performing this service. If he were not the executor he would be able to receive it as a gift and not report it as gross income.

Fred specified in his will that his nephew John should serve as executor of Fred's estate. John received $10,000 for serving as executor. Can John exclude the $10,000 from his gross income? Explain.

Howard can assume that all of his sales are a recovery of capital until he receives the $400 and all the others go to gross income.

Howard buys wrecked cars and stores them on his property. Recently, he purchased a 1990 Ford Taurus for $400. If he can sell all of the usable parts, his total proceeds from the Taurus will be over $2,500. As of the end of the year, he has sold only the radio for $75 and he does not know how many, if any, of the remaining parts will ever be sold. What are Howard's income recognition issues?

a. john his capital is now regular income b. self employment tax c. property tax for personal residence

In the following independent situations, is the tax position of the taxpayer likely to change? Explain why or why not. a. John used to make casual purchases and sales of real estate as an investor. Currently, he does so on a regular basis and has obtained a license as a dealer. b. Theresa quit her job as a staff accountant and has established her own practice as a CPA. c. After saving enough for a down payment, Paul has purchased a personal residence.

golsen rule

a new policy that makes it so now the Tax Court will decide a case, based on the how they believe the law should be applied but only if the Court of Appeals has not yet passed on the issue in agreement with the Tax Court's decision.

Home equity loans

can be used for personal purposes. The interest paid on the qualified residence loan is deductible as an itemized deduction of Sch A. However, interest paid on consumer loans is not deductible.

actually paid requirement

cannot be fulfilled by a promise to pay or an issued note but borrowed money can fulfill the payment. However, this doesn't guarantee a deduction. Expenditures, depreciation, amortization, or depletion must occur first

all can claim her as dependent mother takes precedence in claiming

. Heather, age 12, lives in the same household with her mother, grandmother, and uncle. a. Who can claim Heather as a dependent on a Federal income tax return? b. Which of Heather's relatives takes precedence in claiming the exemption?

alimony

1. The payments are in cash 2. The agreement or decree does not specify that the payments are not alimony. 3. The payor and payee are not members of the same household at the time the payments are made. 4. There is no liability to make the payments for any period after the death of the payee

child support

A taxpayer does not realize income from the receipt of child support payments made by his or her former spouse. This result occurs because the money is received subject to the duty to use the money for the child's benefit. The payor is not allowed to deduct the child support payments because the payments are made to satisfy the payor's legal obligation to support the child.

Rick's basis in the residence is $300,000, his purchase price, minus the $2,220 property taxes that were allocated to Rick.

Alicia sold her personal residence to Rick on June 30 for $300,000. Before the sale, Alicia paid the real estate tax of $4,380 for the calendar year. For income tax purposes, the deduction is apportioned as follows: $2,160 to Alicia and $2,220 to Rick. What is Rick's basis in the residence?

MAGI

AGI from all sources plus foreign earned income exclusion and any tax exempt interest income

According to the Supreme Court, financial accounting provides useful information to shareholders, creditors and others to help protect them. While the main goal for the tax system is to collect revenue.

According to the Supreme Court, would it be good tax policy to use income as computed by financial accounting principles as the correct measure of income for Federal income tax purposes? Explain.

total gross income $1800

Ben lost his job when his employer moved its plant. During the year, he collected unemployment benefits for three months, a total of $1,800. While he was waiting to hear from prospective employers, he painted his house. If Ben had paid someone else to paint his house, the cost would have been $3,000. The cost of the paint Ben used was $800. What is Ben's gross income for tax purposes from the above events?

The money Amber collected is taxable because she was under an insurance policy that was purchased by an employer. All of the money Billy received is nontaxable due to his injury he gets the settlement, compensatory damages and the policy he purchased.

Billy fell off a bar stool and hurt his back. As a result, he was unable to work for three months. He sued the bar owner and collected $100,000 for the physical injury and $50,000 for the loss of income. Billy also collected $15,000 from an income replacement insurance policy he purchased. Amber was away from work for three months following heart bypass surgery. Amber collected $30,000 under an income replacement insurance policy purchased by her employer. Are the amounts received by Billy and Amber treated the same under the tax law? Explain

The tax benefit rule applies when a taxpayer receives a deduction for an item in one year and within that year recovers all or some of the deduction; this recovery is then included in gross income. In Dolly and Molly's situations the tax benefit rule applies because no income is recognized upon recovering the deduction that didn't have a tax benefit in the year it was taken.

Dolly is a cash basis taxpayer. In 2015, she filed her 2014 South Carolina income tax return and received a $2,200 refund. Dolly took the standard deduction on her 2014 Federal income tax return, but will itemize her deductions in 2015. Molly, a cash basis taxpayer, also filed her 2014 South Carolina income tax return in 2015 and received a $600 refund. Molly had $12,000 in itemized deductions on her 2014 Federal income tax return, but will take the standard deduction in 2015. How does the tax benefit rule apply to Dolly's and Molly's situations? Explain.

-short term tax so taxed at ordinary income -sale of land and houseboat be combined and subject to tax rates - non deductible bc its a loss of personal item

During the year, Hernando recorded the following transactions. How should Hernando treat these transactions for income tax purposes? •Gain on the sale of stock held as an investment for 10 months. •Gain on the sale of land held as an investment for 4 years. •Gain on the sale of a houseboat owned for 2 years and used for family vacations. •Loss on the sale of a reconditioned motorcycle owned for 3 years and used for recreational purposes.

Dwain must come up with an alternative settlement and effectively communicate it with the officer. He can also make an appeal to the Supreme Court.

Dwain receives a 90-day letter after his discussion with an appeals officer. He is not satisfied with the $101,000 settlement offer. Identify the relevant tax research issues facing Dwain.

If the loan was made to an employee than it must be recognized as interest income and will also allow it to be deducted as imputed compensation. This will not affect the corporation's income that has to be taxed. However, if the interest income were on loan to a shareholder this would be taxable income and a non-deductible. John's deduction depends on how he used the borrowed funds.

In the current year, the Rose Corporation made a $400,000 interest-free loan to John Rose, the corporation's controlling shareholder. Mr. Rose is also the corporation's chief executive officer and receives a salary of $300,000 a year. What are the tax consequences of classifying the loan as a compensation-related loan rather than as a corporation-shareholder loan?

multiple support agreement

Jacob tells his sisters that they should split the dependency exemptions among themselves. which permits one person in a group who support a qualifying relation to claims dependent exemption the group must provide 50 percent of support

Jake should give it to her as a gift while he is alive because gifts to spouses are not taxed. If he gives it after he dies then it will be taxed

Jake (age 72) and Jessica (age 28) were recently married. To avoid any transfer taxes, Jake has promised to leave Jessica all of his wealth when he dies. Is Jake under some misconception about the operation of the Federal gift and estate taxes? Explain.

Municipal bond interest is not taxable. funds used to buy the bonds were nontaxable.

Jarret owns City of Charleston bonds with an adjusted basis of $190,000. During the year, he receives interest payments of $3,800. Jarret partially financed the purchase of the bonds by borrowing $100,000 at 5% interest. Jarret's interest payments on the loan this year are $4,900, and his principal payments are $1,100. a. Should Jarret report any interest income this year? Explain. b. Can Jarret deduct any interest expense this year? Explain.

Medical expenses that are paid for the care of the taxpayer, spouse or dependent is allowed as an itemized deduction to the extent the expenses are not reimbursed. Ernie most likely did not meet the 10% threshold percentage of AGI because if he does not meet the threshold he can't claim the expenses.

Jerry and Ernie are comparing their tax situations. Both are paying all of the nursing home expenses of their parents. Jerry can include the expenses in computing his medical expense deduction, but Ernie cannot. What explanation can you offer for the difference?

Cosmetic surgery is necessary if there is a deformity, personal injury, or disfiguring disease. Expenses connected with these surgeries are deductible but amounts paid for unnecessary surgery are not deductible such as reconstruction. Joe's nose would be qualified as a medical expense but the reshaping of his chin will not.

Joe was in an accident and required cosmetic surgery for injuries to his nose. He also had the doctor do additional surgery to reshape his chin, which had not been injured. Will the cosmetic surgery to Joe's nose qualify as a medical expense?Will the cosmetic surgery to Joe's chin qualify as a medical expense? Explain.

bad to rent 14 days or over 10% for personal use because loss can't be deducted

Karen and Andy own a beach house. They have an agreement with a rental agent to rent it up to 200 days per year. For the past three years, the agent has been successful in renting it for 200 days. Karen and Andy use the beach house for one week during the summer and one week during Thanksgiving. Their daughter, Sarah, a college student, has asked if she and some friends can use the beach house for the week of spring break. Advise Karen and Andy how they should respond, and identify any relevant tax issues.

cash receipts method

property or services received are included in the taxpayer's gross income in the year of actual or constructive receipt by the taxpayer or agent, regardless of whether income was earned in that year

support test

qualifying child can't be self supporting

Leonard would include the $2500 that he received from his employer. The other amounts he received would not be included.

Leonard's home was damaged by a fire. He also had to be absent from work for several days to make his home habitable. Leonard's employer paid Leonard his regular salary, $2,500, while he was absent from work. In Leonard's pay envelope was the following note from the employer: To help you in your time of need. Leonard's fellow employees also took up a collection and gave him $900.Leonard spent over $4,000 repairing the fire damage. Based on the above information, how much is Leonard required to include in his gross income?

advantagedon't have to pay the disputed tax before trial disavtangae only tax related problems

List an advantage and a disadvantage of using the U.S. Tax Court as the trial court for Federal tax litigation.

the person who has custody of the child can claim as dependent if a tie then who ever provides more support

Mark and Lisa were divorced in 2014. In 2015, Lisa has custody of their children, but Mark provides nearly all of their support. Who is entitled to claim the children as dependents?

schedule E

Mary Kate owns a building that she leases to an individual who operates a grocery store. Rent income is $10,000, and rental expenses are $6,000. On what Form 1040 schedule or schedules are the income and expenses reported?

The creditor offer to reduce the debt owed by Ralph is debt foregiveness and is reportable income to Ralph on his tax return . Unless the creditor treats it as a gift to ralph, then no income has to be reported. Charging 7% when the market rate is 8% can also be a gift for the amount of lower interest paid each yr by Ralph to the creditor

Ralph has experienced financial difficulties as a result of his struggling business. He has been behind on his mortgage payments for the last six months. The mortgage holder, who is a friend of Ralph's, has offered to accept $80,000 in full payment of the $100,000 owed on the mortgage and payable over the next 10 years. The interest rate of the mortgage is 7%, and the market rate is now 8%. What tax issues are raised by the creditor's offer?

adobe test

qualifying child must live with taxpayer for more than one year

must be child, sibling, half, step or grandchild, nephew, niece no uncle or aunts or inlaws

relationship test dependent

exception to prize excluded from gross income

religious, charitable, educational, artistic, literary achievement

pay as you go

requires employers to withhold for taxes a specified portion of employee's wage -for people with income from other wages may make 1/4 payments

FROM AGI

results in tax benefit only if they exceed taxpayer's standard deduction

head of household

unmarried individual who maintain a household for one or more dependents -must pay for than half household costs -dependent must be qualifying child ore relation who meets relationship test and leave at least half year

abandoned spouse rule

rule allows married taxpayer to file as not married and head of household if -person doesn't file joint return, paid more than one-half cost of home, spouse didn't live in home for half the year, home is resident for their child and claimed as dependent

have no appeals and only under $50,000

small case division

secondary authority

tax journals can't rely on

sunset provision

tax reduction can be limited to a period of years, when this period expires the prior law is reinstated

FOR AGI

whether or not the taxpayer itemizes

To qualify for alimony the payments must be in cash, the agreement doesn't give a specified amount and the members are not in the same household. Since there is a specified amount this payment would not qualify as alimony.

The divorce agreement requires Alice to pay her former spouse $50,000 a year for the next ten years. Will the payments qualify as alimony? Why or why not?

flexible spending plan

the employee accepts lower cash compensation in return that the employer pays certain costs without the employee recognizing gross income.

tax research

the method used to determine the best available solution to a situation that possesses tax consequences

its own cases, the US Circuit Court of Appeals and the Supreme Court

US Tax court precedence US court of federal claims US district courts

Wes would receive $10 million of gross income. Sam would receive $4 million of punitive damages, but would not receive the $6 million of compensatory damages because that is excluded from gross income.

Wes was a major league baseball pitcher who earned $10 million for his 20 wins this year. Sam was also a major league baseball pitcher before a careerending injury caused by a negligent driver. Sam sued the driver and collected $6 million as compensation for lost estimated future income as a pitcher and $4 million as punitive damages. Do the amounts that Wes and Sam receive have the same effect on their gross income? Explain.

The appropriate circuit for the appeal depends on where the losing party's litigation originated.

What determines the appropriate Circuit Court of Appeals for a particular taxpayer?

William should donate in 2015 because if he does it in 2016, the deductible part of the contribution is subject to 10% of his AGI.

William, a high school teacher, earns about $50,000 each year. In December 2015, he won $1 million in the state lottery. William plans to donate $100,000 to his church. He has asked you, his tax adviser, whether he should donate the $100,000 in 2015 or 2016. Identify the tax issues related to William's decision.

for is ABOVE THE LINE

two types of deductions deductions FOR adj GI and FROM

a. FOR AGI b. NOT DEDUCTIBLE c FROM AGI d FROM AGI e FOR AGI fno deduction

a. Amos contributes to his H.R. 10 plan b. Keith pays child support to his former wife, Renee, for the support of their son, Chris. c. Judy pays professional dues that are reimbursed by her employer. d. Ted pays $500 as the monthly mortgage payment on his personal residence. Of this amount, $100 represents a payment on principal, and $400 represents an interest payment. e. Lynn pays a moving company for moving her household goods to Detroit, where she is starting a new job. She is not reimbursed by her employer. f. Ralph pays property taxes on his personal residence

property rax

ad valoreum, based on value, tax on wealth or capital

revenue neutrality

also pay as you go every new law that lowers taxes must include a revenue offset that makes up for the loss

Punitive damages

amounts the person who caused the harm must pay to the victim as punishment for outrageous conduct

indextion

based on the rise of consumer price index over the prior year this adjusts various income tax components

limitations for deductibility of executive compensation

one limit is shareholder-employees of closely help corporations and the other limitation is publicly held corporations. The millionaire's provision doesn't limit the amount of compensation paid to an employee but limits the amount an employer can deduct.

no benefit for any except gain is taxable -dependency exemption for aunt, pay full amount

federal income tax effects on these transactions: -lost money gambling -helped pay neighbor's dental bills -received IRS refund due to overpayment -paid traffic ticket for business meeting -contributed to mayor's reelection campaign -borrowed money from bank for down payment on car -sold houseboat and camper both for personal use. gain offset the loss -dependent died, paid funeral expenses -paid premiums on dependent son's insurance policy

qualifying relative relationship test

parents, grandparents, uncles, aunts, in laws also unrelated if living for entire tax year

cafeteria plan

plan the employee is able to choose between cash and nontaxable benefits

a. the taxpayer must have contributed more than $62,000 of support. In order to claim head of household if one of his parents are his dependent. b. If the father can return home then Bree can be head of household but if he permanently stays in the facility she would need to pay more than one-half of the nursing facility costs. c. Chloe can be head of household because her son is a dependent and qualifying child. d. The son is not a qualifying child because of his age along with the gross income test so head of household isn't available. e. Chee can only qualify if he is an abandoned spouse otherwise as a married taxpayer he does not qualify f. Evie does not qualify because her daughter is a not a member of Evie's household g. Frank does not qualify because the friend does not meet the relationship test because they are unrelated.

head of household filing statuses : a. Al lives alone but maintains the household of his parents. In July, the parents use their savings to purchase a Lexus automobile for $62,000. b. Bree maintains a home in which she and her father live. The father then enters a nursing facility for treatment for a mental illness. c. Chloe a single parent, maintains a home in which she and Dean, Chloe's unmarried son, live. Dean, age 18, earns $5,000 from a part-time job. d. Assume the same facts as in (c), except that Dean is age 19, not 18. e. Chee is married and maintains a household in which he and his dependent stepson live. f. Evie lives alone but maintains the household where her dependent daughter Zoe lives. g. Frank maintains a household that includes Georgia, an unrelated friend who qualifies as his dependent.

progressive

if a higher rate of tax applies as the tax base increase

correspondence audit

if a minor issue ex audit resolved in the mail can also have office audit or if fraud suspected special agent comes int

general rule is irs can access any tax liability against taxpayer if it is within 3 years of return filed. but if large amount in excess of 25% of GI now 6 years

if someone inadvertantley leaves a large amount of gross income out

proportional tax

if the rate of tax remains constant for an given income level ex FICA, sales tax

b,c,f,g,h,i

inclusions in gross income a. During the year, shares of stock that the taxpayer had purchased as an investment doubled in value. b. Amount an off-duty motorcycle police officer received for escorting a funeral procession. c. While his mother Shirley was in the hospital, the taxpayer sold Shirley's jewelry and gave the money to his girlfriend, Serena. d. Child support payments received. e. A damage deposit the taxpayer recovered when he vacated the apartment he had rented. f. Interest received by the taxpayer on an investment in school bonds issued by IBM. g. Amounts received by the taxpayer, a baseball "Hall of Famer," for autographing sports equipment (e.g., balls and gloves). h. Tips received by Matt, a bartender, from patrons. (Matt is paid a regular salary by the cocktail lounge that employs him.) i. Sherri sells her Super Bowl tickets for three times what she paid for them. j. Jefferson receives a new BMW from his grandmother when he passes the CPA exam

Compensatory damages

intended to compensate the taxpayer for the damages incurred, physical personal injury or physical sickness can be excluded from gross income

first authority

internal revenue code, from government, case law rely on definitive answers

accrual method

item included in gross income for the year it's earned, regardless of when collected include is earned when all events occurred and amount received can be determined

letter ruling proposed revenue interpretive internal revenue legislative

lowest to highest authority a. Interpretive Regulation. b. Legislative Regulation. c. Letter ruling. d. Revenue Ruling. e. Internal Revenue Code. f. Proposed Regulation

age test

must be under 19 or 24 if attending school

constructive receipt doctrine

not allowing the taxpayer to postpone the income recognition if the income is available.

statue of limitations

offers a party a defense against a suit brought on by another party after the expiration of a specified period of time. For tax purposes it gives the IRS access to additional tax liability against the taxpayer if it is within three years of filing the income tax return.