Income Tax Planning 2022 Midterm
If an income tax return is not filed by a taxpayer, there is no statute of limitations on assessments of tax by the IRS. A. True B. False
The correct answer is A.
Which of the following statements regarding cafeteria plans is not correct? A. A cafeteria plan must offer at least three nontaxable benefits. B. A cafeteria plan is a written plan under which the employee may choose to receive either cash or taxable benefits as compensation or qualified fringe benefits that are excludable from wages. C. Cafeteria plans are authorized by Section 125 of the Internal Revenue Code. D. A cafeteria plan is appropriate when employee benefit needs vary within the employee group.
The correct answer is A. A cafeteria plan must offer at least one taxable benefit, usually cash, and one qualified nontaxable benefit. All of the other statements regarding cafeteria plans are correct.
The Tax Reform Act of 1986 was roughly revenue neutral because: 1. It was supported by both Republicans and Democrats. 2. It was not intended to raise or lower tax revenues. 3. It divided the tax burden evenly between individuals and businesses. 4. It made the tax rates equal across all tax brackets. A. 2 only B. 1 and 3 C. 2 and 3 D. 1, 2, and 4
The correct answer is A. A piece of tax legislation is considered revenue neutral when it is expected to neither raise nor lower the total amount of taxes to be collected.
Which statement is true with respect to private letter rulings? A. They cover facts applicable to a particular taxpayer. B. They deal with completed transactions. C. They are not binding on the IRS. D. They are issued at the request of the IRS.
The correct answer is A. All of the statements except A are false regarding letter rulings. Private letter rulings cover facts applicable to a particular taxpayer (option A), are issued at the request of the taxpayer (option D), deal with proposed transactions (option B), and binding on the IRS with respect to the requesting taxpayer and the particular transaction (option C).
Hansel and Gretel, a married couple, manage apartments and they are required to live in the managers' apartment as a condition of their employment. Instead of providing the apartment to Hansel and Gretel rent-free, the owner of the apartment building gives Hansel and Gretel a housing allowance of $600, which they use to pay rent on the managers' apartment. Hansel and Gretel pay $600 per month in rent. If they did not live in the managers' apartment, Hansel and Gretel could live in another apartment building where they would only pay $500 in rent. What amount, if any, must be included in Hansel and Gretel's gross income? A. $0 B. $100 C. $500 D. $600
The correct answer is A. An employee is allowed to exclude from gross income the value of lodging furnished by an employer to the employee if the lodging is furnished (1) on the employer's business premises, (2) for the convenience of the employer, and (3) the employee is required to accept the lodging as a condition of employment. It does not matter that Hansel and Gretel were paid a housing allowance, which they were then required to pay back to the employer for rent. Hansel and Gretel can exclude the entire value of their housing from their gross income.
Ted cashed in his life insurance policy when he found out he had a terminal illness. He had paid $15,000 in premiums and collected $50,000 from the insurance company. Ted is required to include the proceeds in gross income. A. True B. False
The correct answer is A. Because Ted cashed in (surrendered) his policy, rather than electing the nontaxable accelerated death benefit he will receive the insurance proceeds of $50,000 as taxable income.
Under what circumstances is a taxpayer required to use a calendar year tax period? A. If the taxpayer does not keep books or accounting records. B. If the taxpayer just opened a new business. C. If the taxpayer has a tax year of less than 12 months. D. If the taxpayer receives reporting documents such as Forms W-2 and 1099.
The correct answer is A. Option B is incorrect because there is no requirement for new businesses to use a calendar year tax period. Option C is incorrect; a taxpayer may use a fiscal year tax period and have a tax year of less than 12 months in the first year. Option D is incorrect; although most taxpayers who receive such documents use the calendar year tax period, the receipt of such documents does not in and of itself require them to do so.
Ian, a single taxpayer, received $15,000 of Social Security retirement benefits this year. He also received $16,000 of interest income. How much of Ian's Social Security benefits must be included in his gross income? A. $0 B. $7,500 C. $12,750 D. $15,000
The correct answer is A. Since the total of Ian's MAGI ($16,000) and one-half of his Social Security benefits (0.50 × $15,000 = $7,500) is less than the base amount ($25,000), none of his Social Security benefits are included in gross income.
Expenses incurred in a trade or business are deductible for AGI. A. True B. False
The correct answer is A. Such expenses are deductible for AGI.
In the case of a gift loan of greater than $10,000 but less than $100,000, the imputed interest rules apply if the donee has net investment income of over $1,000. A. True B. False
The correct answer is A. The imputed interest rules apply to gift loans. However, if the amount of the loan is for $100,000 or less, the imputed interest cannot exceed the borrower's net investment income for the tax year. If net investment is $1,000 or less, it is considered to be $0.
Ridge is the manager of a motel. As a condition of his employment, Ridge is required to live in a room on the premises so that he would be there in case of emergencies. Ridge considered this a fringe benefit, since he would otherwise be required to pay $600 per month rent. The room that Ridge occupied normally rented for $60 per night, or $1,500 per month. On the average, 90% of the motel rooms were occupied. As a result of this rent-free use of a room, Ridge is required to include in gross income: A. $0 B. $600 per month C. $1,500 per month D. $1,350 ($1,500 × .90 = $1,350)
The correct answer is A. The room qualifies for the § 119 lodging exclusion.
Toby, age 15, qualifies as a dependent of his grandmother. During 2022, Toby had interest income in the amount of $200 and earnings from a part-time job of $750. Toby's taxable income is: A. $0 B. $100 C. $650 D. $850
The correct answer is A. Toby's standard deduction of $1,150 ($750 + $400*) completely negates his gross income of $950 ($750 earned income + $200 interest income). * 2022 Tax law change for kiddie tax - standard deduction is either $1,150 or earned income ($750) plus $400 (not to exceed the standard deduction for a single tax filer).
Elton and Elsie are husband and wife and file a joint return for this year. Both are under 65 years of age. They provide more than half of the support of their two daughters, Karen (age 17) and Kristie (age 25). Kristie is a full-time medical student. Kristie receives a $5,400 scholarship covering her room and board at college. They furnish all of the support of Hattie (Elton's grandmother), who is age 70 and lives in a nursing home. How many qualified dependent credits ($500) are Elton and Elsie potentially entitled to receive? A. Two B. Three C. Four D. Five
The correct answer is A. Two: One for Karen, she is a qualifying child but has aged out at 17, and one for Hattie. Kristie is not a qualifying child—although a full-time student, she is not under age 24 and she does not meet the qualifying relative category due to the gross income test—the type of scholarship aid she receives is taxable. Hattie is not a member of the household but satisfies the relationship test.
Sammy owned a home in south Florida that was severely damaged by a small hurricane, no Federal disaster was declared. Sammy had purchased the home for $150,000, and the fair market value of the home prior to the hurricane was $500,000. His homeowners insurance policy had lapsed one month before the hurricane hit and Sammy had not obtained any other insurance. After the hurricane, the property had a fair market value of $0. Assuming that Sammy's AGI was $115,000 this year, what is Sammy's casualty loss deduction? A. $0 B. $138,400 C. $138,500 D. $388,400
The correct answer is A. Under TCJA, personal casualty losses unless located in a federally declared disaster area, are not deductible. Business casualty losses are unchanged. Personal casualty losses in federally declared disaster areas are still subject to the calculation below unless the government grants relief. Prior to the TCJA: Sammy's casualty loss is valued at $150,000 which is his adjusted basis less insurance proceeds received (insurance proceeds in this case are zero). His economic loss (the fair market value before the event, $500,000 less the fair market value after the event, $0) is $500,000. Since Sammy had never paid tax on the $350,000 gain in the property, however, he cannot take a tax deduction for the economic loss. If Sammy had the property fully insured, he would have received the full $500,000 (less his deductible) from the insurance company. Sammy's casualty loss of $150,000 must be reduced by $100 and the result is only deductible to the extent it exceeds 10% of AGI. The deductible portion of Sammy's casualty loss is $138,400 ($150,000 - $100 - $11,500 [10% of AGI]).
During the year, Rick had the following insured personal casualty losses (arising from a tornado, a Federally declared disaster). Rick also had $18,000 AGI for the year. Asset: Adjusted Basis: FMV Before: FMV After: Insurance Recovery: A $500 $700 $300 $100 B $3,000 $2,000 $0 $500 C $700 $900 $0 $200 Rick's casualty loss deduction is: A. $400 B. $600 C. $1,000 D. $1,400
The correct answer is A. Asset A: Change in FMV is 700 - 300 = 400. The lesser of ATB or decline in FMVterm-47 is $400 - insurance = $300 Asset B: Change in FMV is 2,000 - 0 = 2,000. The lesser of ATB or decline in FMV is $2,000 - insurance = $1,500 Asset C: Change in FMV is 900 - 0 = 900. The lesser of ATB or decline is $700 - insurance = $500. Total: $2,300 Less: Statutory floor (100) Less: AGI limitation (10% × $18,000) (1,800) Casualty loss deduction 400 Remember the deduction is the lesser of ATB, or decline in FMV, less insurance proceeds. Reminder, ONLY Federally declared disasters are eligible for casualty loss treatment after 12/31/17.
In the case of a below-market loan between family members, if the imputed interest rules apply: 1. The borrower must recognize interest income. 2. The lender has interest income. 3. The lender is deemed to have made a gift. 4. The borrower has interest expense. A. Only I is true. B. II, III, and IV are true but I is false. C. I and II are false but III and IV are true. D. All of the above are true.
The correct answer is B.
Which is the only court that allows a jury trial? A. Appropriate U.S. Circuit Court of Appeals B. U.S. District Court C. U.S. Tax Court D. U.S. Court of Federal Claims
The correct answer is B.
In September of this year, Rudolph refinanced his home. Prior to refinancing, his only outstanding debt was the balance due on his original mortgage of $110,000. Rudolph needed some additional money to pay for his child's college education and to take advantage of an investment opportunity, so upon refinancing, Rudolph took out a 30-year mortgage for $250,000. To reduce the interest rate on the mortgage, down to 5%, Rudolph paid $2,500 in points on refinance. Which of the following statements is correct? A. Rudolph can deduct all of the mortgage interest paid on the note. B. Rudolph can deduct the mortgage interest incurred on $110,000, plus a pro rata portion of the points paid on refinancing. The remaining interest is not deductible. C. Rudolph can only deduct the mortgage interest incurred on $210,000. D. Rudolph can only deduct the mortgage interest paid on $210,000 plus a pro rata portion of the points paid on refinancing.
The correct answer is B. $110,000 of the refinanced amount continues to be treated as acquisition indebtedness since that was the previous balance of Rudolph's mortgage. Post TCJA, if you refinance under the amount of original indebtedness, you can continue the pre-TCJA rules, if you refinance more (as in this case) you need to follow the new rules. You can deduct the original indebtedness (110k) up to $750,000. A home equity can only be included if it is used to better the property. So under these rules, they can deduct interest on $110,000, the home equity was not used for a qualified reason and will not be deductible. The pre TCJA would allow up to $100,000 in home equity for interest deductions, 40,000 would have not been deductible, leaving 210k that could have been deducted under the old rules Since not all of the new mortgage is considered acquisition indebtedness, only a portion of the points paid on the refinance will be deductible.
Roger, age 19, is a full-time student at State College and a candidate for a bachelor's degree. During the year, he received the following payments: State scholarship for ten months (tuition and books) $3,600 Loan from college financial aid office $1,500 Cash support from parents $3,000 Interest on CDs $1,700 Cash prize awarded in contest $500 = $10,300 What is Roger's adjusted gross income for this year? A. $1,700 B. $2,200 C. $5,800 D. $10,300
The correct answer is B. $2,200 ($1,700 interest + $500 prize).
Which of the following authorized the first constitutional federal income tax? A. Revenue Act of 1861 B. 16th Amendment C. Revenue Act of 1916 D. None of the above
The correct answer is B. Answer A is incorrect because although the Revenue Act of 1861 did impose a federal income tax, it was later found to be unconstitutional because Congress did not have the power to levy an individual income tax at that time. Answer B is correct because the 16th Amendment gave Congress the power to impose an individual income tax, but did not itself impose that tax. Answer C is incorrect because the Revenue Act of 1916 raised the rates previously imposed under the Revenue Act of 1913.
Linwood files his tax return 65 days after the due date. Along with the return, Linwood remits a check for $6,000 which is the balance of the tax owed. Disregarding the interest element, Linwood's total failure to file penalty is: A. $90 B. $810 C. $900 D. $990
The correct answer is B. Following the procedure set forth in Chapter 2, the penalty is determined as follows: Failure to pay penalty [1/2% × $6,000 × 3 (three months violation)] $90 Plus: Failure to file penalty [5% × $6,000 × 3 (three months violation)] $900 Less: Failure to pay penalty (90) Total Failure to file Penalty $810 Total Penalties (failure to file plus failure to pay - if it had asked for it) $900 Watch these questions, this one ONLY asks for the FTF penalty! NOTE: 3 months is from April 15 - May 15 (30 days) May 16 - June 15 (30 days) June 15 - June 20 (5 days) Total 65 days (April 15 - June 20)
Which of the following taxes generates the largest percentage of gross collections for the Internal Revenue Service? A. Corporate income tax. B. Individual income tax. C. Estate tax. D. Employment tax.
The correct answer is B. Individual income taxes make up nearly 50% of the gross collections by the Internal Revenue Service.
Kenny would like to make a deductible contribution to a Health Savings Account. Which of the following is/are a requirement in order for Kenny to be able to make such a contribution? 1. Kenny must be eligible to establish a Health Savings Account. 2. Kenny must have a high deductible health plan. 3. Kenny must meet the deductible of his HDHP. 1 only 1 and 2 2 and 3 1 and 3
The correct answer is B. Kenny is not required to meet the deductible of his high deductible health plan in order to make a deductible contribution to his HSA. However, he is required to be eligible to establish an HSA and to have a high deductible health plan.
Olive's daughter Polly suffers from a rare illness. During the current year, Olive drove Polly to see a specialist in another state 15 times. Each trip was 300 miles each way and required an overnight stay in a hotel that costs $70 per night. Olive's AGI is $24,000. What is her medical expense deduction for the current year (assume the mileage rate is 16¢ per mile and she itemizes)? A. $0 B. $690 C. $1,800 D. $2,490
The correct answer is B. Olive may deduct 16¢ per mile (2021) for the travel associated with Polly's medical care and may deduct up to $70 per night for lodging (limited to the lesser of $50 per eligible person or actual expense incurred). Therefore, the total medical expenses are $2,490 [(300 × 2 × 15 × $.16) + (15 × $70)]. However, Olive may only deduct the amount that exceeds 7.5% of her AGI in 2021. 7.5% of Olive's AGI is $1,800, making her deductible amount (2,490 - 1,800) $690. SECURE Act 2019 made the 7.5% medical expense floor retroactive for 2019 and extended it to 2020. Taxpayer Certainty and Disaster Tax Relief Act of 2020 extends 7.5% of AGI to taxable years beginning after December 31, 2020.
Proposed Regulations carry more weight than Temporary Regulations. A. True B. False
The correct answer is B. Proposed Regulations have no legal precedence and are not binding on taxpayers until the regulation becomes final.
Tad is eligible for a qualified dependent credit for his 70-year-old mother. In calculating her taxes, his mother may not claim an additional standard deduction for her age. A. True B. False
The correct answer is B. The mother can claim the additional standard deduction for her age.
During the current year, Harrison sustained a serious injury in the course of his employment. As a result of the injury sustained, he received the following payments during the year: Unemployment compensation $5,000 Worker's compensation $6,500 Damages for physical personal injuries $5,000 Reimbursement from his employer's accident and health plan for medical expenses paid by Harrison $2,000 What is the amount to be included in Harrison's gross income for the current year? A. $2,000 B. $5,000 C. $6,500 D. $11,500
The correct answer is B. The only item included in Harrison's gross income is the unemployment compensation. All other payments received are specifically excluded from gross income.
Cecilia and Landon DeFee purchased their primary residence in North Carolina this year, but still maintain a vacation property in the Smokey Mountains. Their home in N. Carolina was purchased for $450,000, and they paid $22,349 in interest the first year. The vacation property was purchased 5 years ago for $300,000 and they paid $14,795 in interest this year. The couple has no other itemized deductions. What is the mortgage interest deduction for Cecilia and Landon? A. $10,000 B. $37,144 C. $25,100 D. $22,349
The correct answer is B. Their itemized deductions exceed the standard deduction of $25,900 for 2022. Their housing acquisition costs are under the $750,000 cap from TCJA of 2017, and no additional equity loans or credit has been taken. They can deduct their full mortgage interest. SALT (State and Local Taxes) is limited to $10,000
Keith, age 12, has $10,000 in unearned income and $20,000 in earned income in 2022. How much will be taxed at the parent's rate? A. $0 B. $7,700 C. $9,350 D. $17,050
The correct answer is B. Unearned $10,000 Earned Income $20,000 Total $30,000 Less SD (2022) ($12,950) $17,050 At parent Rate $7,700 $10,000 unearned income - $2,300* At kid's rate $9,350 SECURE Act 2019 reverted the TCJA 2017 back to the pre-TJCA calculation. Amounts above the unearned income standard deduction will be taxed at the parent's tax rate (no longer at the trust and estate rate). *2022 standard deduction as applies to unearned income of $1,150 and the amount of $1,150 taxed at the child's rate
For the year 2022, personal casualty loss deductions are never allowed on Form 1040. A. True B. False
The correct answer is B. Watch the use of absolutes. NEVER is an absolute. TCJA provides for the use of the casualty loss rules if the area is deemed a federal disaster, making the fact pattern a false statement.
Which of the following is not an administrative source of tax law? A. Revenue Ruling. B. Treasury Regulations. C. Decisions by the U.S. Tax Court. D. Technical Advice Memoranda.
The correct answer is C.
Which of the following events would produce a deductible loss? A. Erosion of personal use land due to rain or wind. B. Termite infestation of a personal residence over a several year period. C. A delivery van used for business and destroyed in an auto accident. D. A stolen diamond ring.
The correct answer is C. A casualty loss may be taken for business assets.
Under which of the following circumstances is a trip outside the United States considered to be purely for business? 1. The taxpayer does not have control over the timing or arrangements for the trip. 2. The trip outside the United States lasts for less than seven days. 3. Less than 50 percent of the time spent on the trip was personal. 4. Vacation was not a primary consideration for the trip. 1 only 2 and 3 1, 2, and 4 1, 2, 3, and 4
The correct answer is C. A trip outside the United States is considered to be purely for business when less than 25 percent of the time spent on the trip was personal. All of the other statements regarding travel outside the United States are correct.
Which of the following is a deduction from AGI (itemized deduction)? A. Contribution to a traditional IRA B. Roof repairs to a rental home C. Mortgage Interest D. Alimony payment made under a contract dated 12/1/13
The correct answer is C. A, B, and D are deductions FOR AGI.
Fiona is a highly compensated employee of GreatWorks, Inc. Which of the following fringe benefits would be taxable to Fiona? A. Health insurance provided by GreatWorks to all employees. B. Group term life insurance in the amount of $40,000 paid for by GreatWorks. C. Dependent care assistance for the highly compensated employees of GreatWorks. D. On-premises athletic facilities that may only be used by the managers and vice-presidents of GreatWorks.
The correct answer is C. Dependent care assistance can only be excluded from a highly compensated employee's gross income if it is provided on a nondiscriminatory basis. Answer d is not correct because access to athletic facilities can be provided on a discriminatory basis without causing inclusion in the employee's gross income.
Which of the following can be claimed as a deduction for AGI? A. Personal casualty losses B. Investment interest expenses C. Self-employment tax D. Property taxes on personal use real estate
The correct answer is C. One half of the self-employment is an adjustment to gross income.
Claude and Daphne are trying to calculate their gross income for this year. Which of the following items should they include in their gross income? 1. Child support payments in the amount of $15,000 received by Daphne from her ex-husband for the support of Daphne's minor child Emile. 2. $1,200 of dividends received by Claude and Daphne from Mudbugs, Inc., a corporation in which they own 200 shares of stock. 3. Unemployment benefits in the amount of $800 received by Claude from the state of Louisiana. 4. $3,000 that Daphne earned selling her homemade andouille sausage. A. 4 only B. 1 and 2 C. 2, 3, and 4 D. 1, 2, 3, and 4
The correct answer is C. Option 1 is not correct because child support is not includible in gross income. All of the other options are included in gross income (dividend income, unemployment compensation benefits, and gross income from self-employment).
Ursula and her husband Boris were legally separated in January 2022, and their divorce became final on December 30, 2022. Ursula's children lived with her for the first four months of 2022, but moved in with their father after Ursula was declared legally blind in April. Ursula did not contribute anything to the cost of maintaining the household when the children were living with her husband. Ursula is 40 years old. What filing status can Ursula use for her 2022 tax filing and what is her standard deduction? A. Married Filing Jointly; $27,300 B. Head of Household; $21,150 C. Single; $14,700 D. Head of Household; $21,500
The correct answer is C. Option C is correct; Ursula must use the Single filing status. In addition, she is entitled to one additional standard deduction because of her blindness. Therefore, her standard deduction for 2022 is $14,700 ($12,950 + $1,750). Option A is incorrect because even though Ursula was married during 2022, she was not married as of the end of the year. Options B and D are incorrect because Ursula does not qualify for the Head of Household filing status. Ursula did not maintain a household for a qualifying child for more than half of the year. Her children only lived with her for four months of the year and she did not pay for the cost of maintaining a household for them for the remainder of the year.
Abner owned bonds that paid $750 of interest on the first day of January each year. Exactly one-third of the way through the current year, Abner gave the bonds to his brother, Brody. When Brody receives the $750 of interest on the first day of January next year, what amount will be included in Brody's gross income next year? A. $0 B. $250 C. $500 D. $750
The correct answer is C. Remember, interest is paid after it is earned, so the amount received by Brody includes interest earned while the bonds were owed by Abner. Brody owned the bonds for two-thirds of the year. Therefore, he must report two-thirds of the interest in his gross income for the year in which the interest is received.
Jessie, an unmarried taxpayer using the single filing status, received $16,000 of Social Security retirement benefits this year. Jessie also received $5,000 of interest income and $45,000 of income from her retirement plan during the year. How much of Jessie's Social Security benefits must be included in her gross income? A. $0 B. $8,000 C. $13,600 D. $16,000
The correct answer is C. Since her MAGI ($50,000) plus one-half of her Social Security benefits (0.5 × $16,000 = $8,000) exceeds her adjusted base amount ($34,000), she must calculate her includible Social Security benefits using the formula 3 or 4 below. 3. 0.85 × $16,000 = $13,600 4. 0.85 × [$50,000 + (0.50 × $16,000) - $34,000] = $20,400 plus the lesser of the amount calculated using 1 and 2 below: 1. 0.50 × $16,000 = $8,000 2. 0.50 × [$50,000 + (0.50 × $16,000) - $25,000] = $16,500 The lesser amount is $8,000 The formula 4 total is $28,400 ($20,400 + $8,000) The lesser of the formula 3 or 4 amounts is $13,600. Therefore, $13,600 of the Social Security benefits must be included in Jessie's gross income.
Tim and Janet were divorced. Their only marital property was a personal residence with a value of $100,000 and cost of $40,000. Under the terms of the divorce agreement, Janet would receive the house and Janet would pay Tim $10,000 each year for 5 years, or until Tim's death, whichever should occur first. Tim and Janet lived apart when the payments were made to Tim. The divorce agreement, dated December 15, 2017 did not contain the word "alimony." Which of the following is true? A. Tim must recognize a $30,000 [$50,000 - 1/2($40,000)] gain on the sale of his interest in the house. B. Tim does not recognize any income from the above transactions. C. Janet is allowed to deduct $10,000 each year for alimony paid. D. Janet is not allowed any alimony deductions.
The correct answer is C. The $10,000 cash meets all of the requirements for alimony treatment. Although the circumstances suggest that Janet is paying Tim for his share of the marital property, the agreement must specify that the payments are not alimony to avoid alimony treatment.
Leon, age 71, is an active participant in his employer's defined benefit plan, but he would also like to make a deductible contribution to a traditional IRA this year. Leon is married, files a joint return with his wife, and has an AGI of $111,000 in 2022. What is the maximum deductible contribution that Leon can make to his traditional IRA? A. $700 B. $5,300 C. $6,300 D. $7,000
The correct answer is C. The phaseout range for taxpayers who are active participants and use the married filing jointly filing status is $109,000 - $129,000 for 2022. Since Leon's AGI is within this range, he may not make a full deductible contribution to a traditional IRA, but may make a reduced deductible contribution. Leon can contribute $6,000 plus $1,000 catch up. Therefore, Leon's deductible contribution is reduced by $700 [$7,000 × (($111,000 - $109,000)/$20,000]. The maximum deductible contribution that Leon can make to a traditional IRA is $6,300. SECURE Act 2019 removed the age maximum on contributions to Traditional IRAs. Leon can continue to contribute if he has sufficient earned income.
Which statement is false with respect to the U.S. Tax Court? A. Appeals from the Tax Court are brought to the U.S. Court of Appeals. B. The Court is located in Washington, D.C., but the judges hear cases around the country. C. A taxpayer must pay the deficiency before litigating here. D. The Court hears only tax cases.
The correct answer is C. The taxpayer does not have to pay the tax before litigating in the U.S. Tax Court. The other options are true.
Under which of the following circumstances will a taxpayer be subject to an accuracy-related penalty? 1. If the taxpayer files an incorrect return and has failed to make a good faith effort to comply with the tax law. 2. If the taxpayer understates his tax liability by more than 5 percent of the correct tax liability. 3. If the taxpayer makes a substantial understatement associated with an estate or gift tax valuation. A. 1 only B. 1 and 2 C. 2 and 3 D. 1 and 3
The correct answer is D. A taxpayer will be subject to an accuracy-related penalty if he makes a substantial understatement of his tax liability, generally more than 10 percent of the correct tax liability and at least a $5,000 deficiency.
Which of the following statements regarding the deduction of costs associated with investigating the purchase of a new line of business is not correct? A. Assuming the taxpayer is not currently engaged in business, if the new line of business is not purchased, no deduction is permissible. B. If the new line of business is purchased and it is in the same line of business as the current trade or business operation, the cost of investigating the new business is fully deductible. C. The ability to deduct the cost of investigating a new line of business is often overlooked by taxpayers. D. If the new line of business is purchased and it is in a different line of business as the current trade or business operation, there is no way to recoup the costs of investigation.
The correct answer is D. If the new line of business is purchased and it is in a different line of business as the current trade or business operation, the costs of investigation are recouped by capitalizing the expenses and amortizing it ratably over a 60-month period.
Which of the following are requirements for satisfying the bona fide resident test necessary for excluding foreign earned income? 1. The taxpayer must establish permanent quarters in the foreign country for himself and his family. 2. The taxpayer may not return to the United States during the year. 3. The taxpayer must intend to work in the foreign country for an indefinite period of time. I only. I and II only. II and III only. I and III only.
The correct answer is D. Occasional trips back to the United States for vacation or other purposes will not usually prevent a taxpayer from meeting the bona fide resident test.
Emily, whose husband died in December of this year, maintains a household in which her dependent daughter lives. Which of the following is most likely to be her filing status for this year? A. Single B. Surviving spouse C. Head of household D. Married, filing jointly
The correct answer is D. Since she is deemed married in the year of her husband's death, she cannot file as single (choice A) or head of household (choice D). She does not qualify for surviving spouse status until the next year. Therefore, she is most likely to use the married filing jointly filing status.
Marge made a $60,000 interest-free loan to her son, Steve, who used the money to buy an automobile. Steve's only sources of income were $25,000 from wages and $250 of interest on his checking account. The relevant Federal interest rate was 5%. Based on the above information: A. Marge must recognize $250 of imputed interest income on the below market loan. B. Marge must recognize $1,000 of imputed interest income on the below market loan. C. Marge must recognize $3,000 of imputed interest income on the below market loan. D. Marge is not required to impute any interest.
The correct answer is D. The $100,000 exception would apply, so interest will need to be imputed to the lender if the Borrower's net investment income exceeds $1,000. The lender will only impute the lesser of the Borrower's net investment income or the AFR. Marge is not required to recognize imputed interest income because Steve's investment income is less than $1,000.
In Year 1, Ted purchased an annuity for $60,000. The annuity is to pay him $1,500 per month for the rest of his life. His life expectancy is 120 months. Which of the following is true? A. Ted is not required to recognize any income until he has collected 40 payments (40 × $1,500 = $60,000). B. If Ted collects 24 payments and then dies in Year 3, Ted's estate should amend his tax returns for Year 1 and Year 2 and eliminate all of the reported income from the annuity for those years. C. If Ted lives and collects on the annuity for 130 months, the amounts received in the last 10 months are excludible from his gross income. D. For each $1,500 payment received in the first year, Ted must include $1,000 in gross income.
The correct answer is D. The annuity exclusion formula is investment/expected return = $60,000/($1,500 × 120) = $60,000/$180,000 = .333. Therefore, when Ted collects $1,500, he must recognize $1,500 × (1 - .333) = $1,000 gross income. Answer b. is incorrect. Instead of amending prior returns, Ted will be allowed to deduct a loss on his final return for the cost of the annuity less the amount previously excluded as a return of capital.
Iris, a widow, elected to receive the proceeds of a $100,000 face value life insurance policy on the life of her deceased husband in annual installments of $12,500 over the remainder of her life, estimated to be 10 years. Which of the following is true? A. None of the payments received are included in gross income because their source is the life insurance policy. B. All of the payments are included in Iris's gross income because she paid nothing for the right to receive the payments. C. Iris will not recognize income until the 9th year, after she has recovered her investment. D. Iris must include $2,500 in gross income each year for the first 10 years she collects on the policy.
The correct answer is D. The income portion of the first annuity payment received is $2,500 ($12,500 - $10,000 exclusion). The exclusion is calculated as follows: ($100,000/125,000) × $12,500 = $10,000