test 2
Leigh pays the following legal and accounting fees during the year: Legal fees in connection with a contract dispute in her trade or business $8,800 Legal fees related to resolving a tax deficiency related to business 4,000 Tax return preparation fees: Allocable to Schedules A and B 1,000 Tax return preparation fees: Allocable to Schedule C 1,200 Legal fees incident to a divorce 5,000 What is the total amount of her for AGI deduction for these fees? A) $14,000 B) $20,000 C) $15,000 D) $10,800
A) $14,000 $8,800 + $4,000 + $1,200 = $14,000 6-7
Kathleen received land as a gift from her grandfather. At the time of the gift, the land had a FMV of $105,000 and an adjusted basis of $85,000 to Kathleen's grandfather. The grandfather did not have any gift taxes due. One year later, Kathleen sold the land for $110,000. What was her gain or (loss) on this transaction? A) $25,000 B) $20,000 C) ($5000) D) no gain or loss
A) $25,000 The donee normally assumes the donor's basis in gifted property. $110,000 amount realized - $85,000 gift basis = $25,000 gain. 4-5
Brad suffers from congestive heart failure and has been admitted to a nursing home where he is expected to spend the remainder of his life. His doctor has certified him as chronically ill. Brad receives $320 per day from his life insurance policy for 100 days ($32,000) as accelerated death benefits. Brad's nursing home care costs $300 per day ($30,000 for the 100 days of care). Brad will be allowed to exclude A) $32,000 B) $2,000 C) $0 D) $30,000
A) $32,000 The taxpayer can exclude the greater of a maximum daily amount provided by law ($330 in 2015) or the actual cost of care. The daily amount paid from the insurance policy is lower than the legal maximum so the entire $32,000 is excluded. 4-5
Which of the following benefits provided by an employer is subject to withholding and must be reported on the employee's W-2? A) $400 cash award for long-term service, awarded at a special employee awards event B) payment of an employee's professional dues C) meals provided on the premises for the employer's convenience D) none of the above
A) $400 cash award for long-term service, awarded at a special employee awards event Nontaxable benefits do not require withholding and are generally not reportable. The cash service award is taxable. 4-5
Wang, a licensed architect employed by Skye Architects, incurred the following unreimbursed expenses this year: Subscription to architectural journals $800 Dues to Professional Architecture Society 400 Tax return preparation 600 Investment advice 500 Wang's AGI is $75,000. What is his net deduction for miscellaneous itemized deductions? A) $800 B) $0 C) $1,900 D) $1,500
A) $800 ($800 + 400 + 600 + 500) - (.02 × 75,000) = $800 6-7
Ted pays $2,100 interest on his automobile loan, $120 interest on a loan to purchase a computer for personal use, $630 interest on credit cards, and $1,100 investment interest expense. Ted has net investment income of $850. Ted's deductible interest is A) $850 B) $2,950 C) $3,200 D) $1,100
A) $850 Only the investment interest expense, to the extent of net investment income of $850 is deductible. 6-7
Mark and his brother, Rick, each own farms. Rick is experiencing severe financial difficulties and cannot afford to buy feed for his cattle. Mark purchases $2,000 of feed and gives Rick one-half of the feed. Mark tells Rick that there is no need to repay him and to consider the feed a gift. Which of the following statements is true? A) Mark can deduct $1,000 for the feed B) Rick must report $1,000 as income C) Mark can deduct $2,000 for the feed D) None of the above is true
A) Mark can deduct $1,000 for the feed 6-7
For the years 2011 through 2015 (inclusive) Mary, a best-selling author, has been involved in operating an antique store. In 2011, 2012 and 2013 her revenue exceeded the expenses from the activity. In 2014 and 2015, the antique store generated a loss. Which statement is correct? A) The activity is presumed to be a business. However, the IRS may prove it is a hobby. B) The activity is a hobby. Mary cannot prove it is a business. C) The activity is a business. The IRS cannot prove it is a hobby. D) The activity is presumed to be a hobby. However, Mary may prove it is a business.
A) The activity is presumed to be a business. However, the IRS may prove it is a hobby. Under the presumption rule, if an activity results in income in 3 of 5 years, the burden of proof falls to the IRS to prove that the activity is a hobby rather than a trade or business. 6-7
Brent must substantiate his travel and entertainment expenses. Which of the following is not required for documentation? A) company expense report B) time and place of the travel or entertainment C) purpose of the expenditure D) business relationship to the taxpayer of the individuals entertained
A) company expense report 6-7
In 2014 Betty loaned her son, Juan, $10,000 to help him buy a car. In 2015, before he repaid the $10,000, Betty told Juan that she was "tearing up" the $10,000 note as a graduation present. How should Juan treat the amount forgiven? A) excludable gift in year of forgiveness B) excludable gift in year of loan C) taxable income in year of loan D) taxable income in year of forgiveness
A) excludable gift in year of forgiveness The amount forgiven is an excludable gift in the year of forgiveness. 4-5
Wayne and Maria purchase a home on April 1 of the current year. In order to obtain a thirty-year mortgage, they are required to pay $7,200 in points at closing. Charging points is a customary business practice in the area. In addition, they pay $4,400 of interest during the year. What is their current year deduction related to their home? A) $7,200 B) $11,600 C) $4,580 D) $4,400
B) $11,600 Points on the purchase of a home are deductible in the year paid, provided certain requirements are met. 6-7
Linda had a swimming pool constructed at her house. Her physician advised and prescribed to her that the pool would slow the effects of her degenerative disease. The pool was not suitable for recreational use. Prior to the construction of the pool, the fair market value of her house was $172,000. After the construction of the pool, the appraised fair market value of the house was $181,000. The cost of the pool was $13,000. What is the amount of Linda's qualified medical expense (before considering limits based on AGI)? A) $13,000 B) $4,000 C) $9,000 D) $0
B) $4,000 6-7
Ahmad's employer pays $10,000 in tuition this year for Ahmad to attend a graduate business program. How much of the employer-provided tuition is taxable to Ahmad? A) $0 B) $4,750 C) $5,250 D) $10,000
B) $4,750 $10,000-$5,250 = $4,750. The exclusion for employer-provided tuition is limited to $5,250. 4-5
For non-cash charitable donations, an appraisal will be required for donations valued at more than A) $250 B) $5,000 C) $50,000 D) $500
B) $5,000 6-7
Sanjay is single and has taxable income of $13,000 without considering the sale of a capital asset in November of 2015 for $15,000. That asset was purchased six years earlier and has a tax basis of $5,000. The tax liability applicable to only the capital gain is A) 500 B) 0 C) 1500 D) 1000
B) 0 *the top tax rate for this ANCG is zero since the tax payer's regular tax rate is 15% or lower (total taxable income is $28,000) 4-5
Rita died on January 1, 2015 owning an asset with a FMV of $730,000 that she purchased in 2010 for $600,000. Bert inherited the asset from Rita. When Bert sells the asset for $800,000 on August 20, 2015, he must recognize a A) LTCG $200,000 B) LTCG $70,000 C) STCG $200,000 D) STCG $70,000
B) LTCG $70,000 FMV: 730,000 Selling Price: 800,000 Gain: 70,000 4-5
Which one of the following is a capital asset? A) automobile held by car dealer for sale B) automobile used for personal purposes C) automobile used in taxpayer's trade or business D) B and C only
B) automobile used for personal purposes 4-5
How long must a capital asset be held to qualify for long-term treatment? A) one year B) one year and one day C) same trade date one year from purchase D) 6 months
B) one year and one day 4-5
In which of the following situations are points paid on a home mortgage loan not deductible in the year of payment? A) construction B) refinance C) purchase D) improvement
B) refinance The Code specifies that points paid to refinance a home must be capitalized and amortized over the life of the loan. 6-7
Britney is beneficiary of a $150,000 insurance policy on her father's life. Upon his death, she may elect to receive the proceeds in five yearly installments of $32,000 or may take the $150,000 lump sum. She elects to take the lump sum payment. What are the tax consequences in year one? A) $10,000 interest is taxable in the first year B) there is no taxable income C) all $32,000 each year is taxable D) the lump sum payment is taxable
B) there is no taxable income Life insurance proceeds paid by reason of death are not taxable. Exclusion: interest is taxable (if person elects to receive the payments in yearly installments) 4-5
Pat, an insurance executive, contributed $1,000,000 to the re-election campaign of Governor Stephens, in hopes that Stephens will appoint her to a coveted position on the State Board of Insurance. How much of the contribution can Pat deduct? A) $500,000 B) $1,000,000 C) $0 D) $100,000
C) $0 No deduction is allowed for a political contribution. 6-7
Abigail's hobby is sculpting. During the current year, Abigail sold three of her sculptures for a total of $3,200. Her related expenses include $1,500 in utilities, $1,200 in supplies and $900 in depreciation. Of the total expenses incurred, Abigail may deduct A) $0 B) $1,500 in utilities and $1,200 in supplies. C) $1,500 in utilities, $1,200 in supplies, and $500 in depreciation. D) $1,500 in utilities, $1,200 in supplies and $900 in depreciation.
C) $1,500 in utilities, $1,200 in supplies, and $500 in depreciation Since the activity is classified as a hobby, hobby expenses are deductible to the extent of hobby income of $3,200. Further, they are deducted in a specific order—those that are otherwise allowable such as property taxes and interest; those related to the activity other than those that decrease basis; and those that reduce basis (depreciation). 6-7
Tina purchases a personal residence for $278,000, but subsequently converts the property to rental property when its FMV is $275,000. Assume depreciation of $65,000 has been deducted after conversion to rental use. If Tina sells the property for $200,000, her realized gain or loss will be A) $78,000 loss B) $75,000 loss C) $10,000 loss D) $13,000 loss
C) $10,000 loss Lower of original basis or FMV: 275,000 Minus depreciation claimed: 65,000 Adjusted basis for loss: 210,000 Selling Price: 200,000 Loss: 10,000 4-5
Troy incurs the following expenses in his business, an illegal gambling establishment: Salaries to employees $200,000 Insurance expense 60,000 Utilities expense 70,000 Bribes to police 50,000 His deductible expenses are A) $200,000 B) $0 C) $330,000 D) $380,000
C) $330,000 salaries to employees: $200,000 Insurance expense: 60,000 utilities expense: 70,000 *bribes to police are not included
Matt paid the following taxes in 2015: Real estate taxes on rental property he owns $4,000 Real estate taxes on his own residence 3,600 Federal income taxes 8,000 State income taxes 3,400 Local city income taxes 500 State sales taxes 700 What amount can Matt deduct as an itemized deduction on his tax return? A) $11,500 B) $15,500 C) $7,500 D) $8,200
C) $7,500 Real estate taxes on his own residence-----$3,600 State income taxes-----3,400 Local city income taxes-----500 Total itemized deduction-----$7,500 Sales taxes are not deductible in 2015. 6-7
Dustin purchased 50 shares of Short Corporation for $500. During the current year, Short declared a nontaxable 10% stock dividend. What is the basis per share before and after the stock dividend is distributed? A) Before: $10 After: $10 B) Before: $9.09 After: $10 C) Before: $10 After: $9.09 D) Before: $10 After: $11
C) Before: $10 After: $9.09 500 original basis/ (50 original shares + 5 new shares) = $9.09 (.10*50 = 5) 4-5
All of the following payments for medical items are deductible with the exception of the payment for A) general appointment for teeth cleaning B) insulin C) nonprescription medicine for treatment of a specific medical condition D) acupuncture for specific medical purposes
C) nonprescription medicine for treatment of a specific medical condition. 6-7
Cafeteria plans are valuable to employers because A) they allow employees to eat their meals quickly and stay on the premises to be available for work. B) they allow employers to provide benefits for higher income employees only. C) they allow employers to avoid paying for benefits that are not needed or desired by employees. D) None of the above.
C) they allow employers to avoid paying for benefits that are not needed or desired by employees. 4-5
Miranda is not a key employee of AB Corporation. AB provides Miranda with group term life insurance coverage of $140,000. The premiums attributable to the excess coverage are $1,300. The uniform one-month group-term premium is one dollar per $1,000 of coverage. How much must Miranda include in income? A) $0 B) $1,300 C) $1,680 D) $1,080
D) $1,080 4-5
Carol contributes a painting to a local museum for display. Her AGI is $60,000. Carol paid $22,000 for the painting in 2006, but its market value at the date of the contribution is $25,000. With no special elections, Carol's deductible contribution this year is A) $22,000 B) $25,000 C) $7,000 D) $18,000
D) $18,000 the potential deduction is $25,000, the FMV as of the contribution, but it is limited by the percentage of AGI ceiling. $60,000 AGI × .30 Limitation on capital gain property to public charities $18,000 Charitable Contribution allowed for this year $ 7,000 Carryover 6-7
Alan, who is a security officer, is shot while on the job. As a result, Alan suffers from a chronic leg injury and must use a wheelchair and undergo therapy to regain and retain strength. Alan's physician recommends that he install a whirlpool bath in his home for therapy. During the year, Alan makes the following expenditures: Wheelchair $ 1,200 Whirlpool bath 2,000 Maintenance of the whirlpool 250 Increased utility bills associated with whirlpool 450 Entrance ramp, various home modifications 7,200 A professional appraiser tells Alan that the whirlpool has increased the value of his home by $1,000. Alan's deductible medical expenses (before considering limitations based on AGI) will be A) $7,700 B) $6,000 C) $7,000 D) $10,100
D) $10,100 Wheelchair-----$ 1,200 Whirlpool bath - increase in home value-----1,000 Maintenance of the whirlpool-----250 Increased utility bills associated with whirlpool-----450 Entrance ramp, various home modifications-----7,200 Total qualifying expenses-----$10,100 6-7
David gave property with a basis of $133,000 to Hannah when the property had a FMV of $100,000 and paid gift taxes of $8,000. If Hannah later sells the property for $140,000, Hannah's basis (to determine gain) in the property immediately before the sale is A) $108,000 B) $141,000 C) $100,000 D) $133,000
D) $133,000 There is a dual basis when the FMV is below the adjusted basis as of the date of gift. Because the property is sold at a gain, the adjusted basis as of the gift date is used, but there is no addition for gift taxes paid since the property has not appreciated at the date of gift. 4-5
Nate sold two securities in 2015: Purchased Sold Sales Price Basis MASH 1-1-2014 5-10-2015 $12,000 $10,000 KMZ 12-2-2014 9-22-2015 $4,000 $5,000 Nate has a 25% marginal tax rate. What is the additional tax resulting from the above sales? A) $200 B) $300 C) $400 D) $150
D) $150 NLTCG is $2000. NSTCL is ($1000). ANCG is $1000 taxed at 15%, resulting in a tax of $150. • The tax rate that applies to a taxpayer's ANCG depends on the taxpayer's tax bracket, and can be zero, 15%, or 20%. Taxpayers with a 10% or 15% marginal tax rate have a zero percent tax rate on their ANCG. Taxpayers with a marginal tax rate more than 15% and less than 39.6% have a preferential rate of 15%, and the preferential rate is 20% if one's marginal tax rate is 39.6%. 4-5
Amanda, who lost her modeling job, sued her employer for age discrimination. She was awarded $75,000 in lost wages, $25,000 for emotional distress, and $150,000 punitive damages. The amount taxable is A) $0 B) $150,000 C) $225,000 D) $250,000
D) $250,000 $75,000 + $25,000 + $150,000 = $250,000. Only compensatory damages related to physical injury can be excluded. 4-5
Dennis purchased a machine for use in his business. Mr. Dennis' costs in connection with this purchase were as follows: Note to seller $33,000 Cash paid to seller 5,000 State sales tax 2,400 Freight to place of business 1,500 Wages paid to workers to install machine 4,200 What is the amount of Mr. Dennis' basis in the machine? A) $40,400 B) $41,900 C) $33,000 D) $46,100
D) $46,100 Basis includes all costs associated with acquiring an asset and placing it in service. $33,000 + $5,000 + $2,400 + $1,500 + $4,200 = $46,100 4-5
Liz, who is single, lives in a single family home and owns a second single family home that she rented for the entire year at a fair rental rate. Liz had the following items of income and expense during the current year. Income: Gross salary and commissions from Ace Corporation $50,000 Rent received from tenant in Liz's rental house 13,000 Dividends received on her portfolio of stocks 5,000 Expenses: Unreimbursed professional dues 200 Subscriptions to newsletters recommending stocks 900 Taxes, interest and repair expenses on rental house 3,500 Depreciation expense on rental house 2,300 What is her adjusted gross income for the year? A) $52,700 B) $68,000 C) $61,100 D) $62,200
D) $62,200 Income: $68,000 Taxes, interest and repair expenses on rental house: 3,500 Depreciation expense on rental house: 2,300 68,000-3,500-2,300 = 62,200 6-7
During the year Jason and Kristi, cash basis taxpayers, paid the following taxes: State gift tax $1,000 Property tax on home in the United States 4,100 State income tax (withholdings) 3,000 Estimated federal income tax 4,500 Estimated state income tax (paid by check) 800 Special assessment by city for sidewalks and street lighting on their street 2,000 What amount can Kristi and Jason claim as an itemized deduction for taxes on their federal income tax return in the current year? A) $89,00 B) $10,900 C) $15,400 D) $7,900
D) $7,900 $4,100 + 3,000 + 800 = 7,900. Gift taxes, federal income taxes and assessments are not allowed as deduction by the IRC. 6-7
Mr. and Mrs. Gere, who are filing a joint return, have adjusted gross income of $50,000. During the tax year, they paid the following medical expenses for themselves and for Mrs. Gere's mother, Mrs. Williams. The Gere's could claim Mrs. Williams as their dependent, but she has too much gross income. Insulin for Mr. Gere $1,000 Health insurance premiums for Mrs. Gere $3,100 Hospital bill for Mrs. Williams $5,200 Doctor bill for Mrs. Gere $4,000 Mr. and Mrs. Gere received no reimbursement for the above expenditures. What is the amount of their deductible itemized medical expenses? A) $4,300 B) $13,300 C) $5,200 D) $8,300
D) $8,300 Insulin for Mr. Gere-----$1,000 Health insurance premiums for Mrs. Gere-----3,100 Hospital bill for Mrs. Williams-----5,200 Doctor bill for Mrs. Gere-----4,000 Total expenses-----$13,300 Minus: 10% of AGI ($50,000 × 0.10) ( 5,000) Deduction------$8,300 6-7
Coretta sold the following securities during 2015: Date Acquired Date Sold Sales Price Basis A 6-15-2011 3-30-2015 $ 6,500 $12,500 B 7-12-2015 10-1-2015 $ 2,000 $ 9,000 C 1-15-2015 6-21-2015 $14,000 $13,000 D 4-2-2012 12-29-2015 $36,000 $15,000 What is Coretta's net capital gain or loss result for the year? A) $12,000 ANCG B) $0 C) NSTCL of $15,000 D) $9,000 ANCG
D) $9,000 ANCG Sale of Security A results in a $6,000 LTCL. Sale of Security B results in a $7,000 STCL. Sale of Security C results in a $1,000 STCG. Sale of Security D results in a $21,000 LTCG. NSTCL of $6,000 and NLTCG of $15,000 net to attain $9,000 adjusted net capital gain. 4-5
Darla sold an antique clock in 2015 for $3,000. She had purchased the clock in 2009 for $2,000. If she is otherwise in the 33% marginal tax bracket, what is the maximum tax rate on the capital gain on the sale of the clock? A) 15% B) 33% C) 20% D) 28%
D) 28% Collectibles gains do not qualify as ANCG and are not eligible for the lowest capital gains rates. Collectibles are taxed at 28% for taxpayers in the 28% or higher marginal tax brackets. Gains resulting from the sale of collectibles such as artwork, rugs, antiques, stamps and most coins are taxed at a maximum rate of 28%. 4-5
Deductions for AGI may be located A) on Schedule C as a deduction B) on the front page of Form 1040 C) on Schedule E as a deduction D) All of the above are true
D) All of the above are true 6-7
Andrea died with an unused capital loss carryover of $3,300. The carryover A) may be carried back three years B) will be fully used on Andrea's final income tax return C) will be inherited by Andrea's heirs D) expires with death
D) expires with death If a taxpayer dies with an unused capital loss carryover, it expires. 4-5