Tax Planning Test 2 Rabbani

Regis and Kelly, a married couple, have income of $50,000 and Social Security benefits of $20,000. What amount of their Social Security benefits must be included in their taxable income? $13,600 $14,000 $17,000 $19,600

Not 14000

In 2019, Colin, a single individual who is not in the Armed Forces, received a salary of $85,000 after making a contribution to his 401(k) plan. Colin had the following expenditures last year: Moving Expenses (due to change in employment) $5,000 Individual Retirement Account Contribution $6,000 Mortgage Interest $6,500 Charitable Gifts $2,000 What is Colin's adjusted gross income for 2019? $68,500. $75,000. $80,000. $85,000.

Not 75

TP recognizes imputed interest each year

OID is amortized Taxpayer basis Increases

Endowment Contracts

Payout before death = taxable income

Separated Spouse Relief

Personal service income reported by the earner if -couple lives apart at all times -don't file joint return -no earned community income is transferred between them

Savings Bond Interest Income Exclusion

Qualified US Savings Bond Must be EE bonds issued after Dec 31, 1989 Issued in the name of taxpayer and/or spouse Bond owner must be at least 24 years old on date of issue

Pass-Thru Entities

Reduces effects of double taxation Partnerships Limited Liability Companies S-Corporations

Income and IRA Tax Exceptions

Return of Basis (Exclusion Ratio) Roth IRA (excluded Income

Ron and Bonnie were divorced. Their only marital property was a personal residence with a value of $300,000 and cost of $125,000. Under the terms of the divorce agreement, which did not include the word "alimony," Bonnie would receive the house. She would pay Ron $20,000 each year for five years. If Ron died before the end of the five years, the payments were to be made to his estate. Bonnie and Ron lived apart when Ron received the payments. Ron must recognize a $87,500 [1/2 x ($300,000 - $125,000)] gain on the sale of his interest in the house. Bonnie can deduct $20,000 a year for alimony paid. Bonnie can deduct $25,000 as alimony paid. Ron does not recognize any income from the above transaction.

Ron does not recognize any income from the above transaction.

OID Exceptions

Series E and EE savings Bonds

Tax Equivalent Yield Equation

Tax Free Rate / 1 - Marginal Tax Rate

Qualified Dividends

Tax Rates 0% Rate: taxable income below the "15% breakpoint" 15% Rate: taxable income > "15% breakpoint" and less than "20% breakpoint" 20% Rate: taxable income > "20% breakpoint" Paid by U.S. corporation or qualified foreign corporation Not excluded from definition of qualified dividend Shareholder must meet holding period requirement

Tax Due or Refund Equation

Tax on Taxable Income - Tax Credits

Accelerated Death Benefits

Terminally Ill - death expected in 24 months Chronically Ill - proceeds must be used to pay medical expenses

All of the following requirements must be met for a payment to be treated as alimony EXCEPT: The payment must be required by a court decree. The payment must cease at the death of the payor. The parties may not live in the same household. The payment must not be a form of disguised child support.

The payment must cease at the death of the payor.

IRA Penalties

Too Early (Early Distribution - before 59½) - 10% Too Much - 6% Too Late - 50%

For Annuity Starting Dates after 12/31/86

Total exclusion cannot exceed investment in the contract Un-recovered investment is taken as a deduction on the annuitant's final income tax return

Above-the-line deduction are also known as adjustments to income. True False

True

Above-the-line deductions are usually considered to be more favorable than below-the-line deductions on a dollar-for-dollar basis. True False

True

Death Benefits paid by reason of the death of the insured are exempt from income tax Exception: Transfer for Value Rule

True

In 2019, a qualifying citizen or resident of the U.S. may exclude up to $105,900 of foreign-earned income from his U.S. gross income. True False

True

Some fringe benefits have nondiscrimination requirements, while others do not.

True

Death Benefit excluded from income

Unless transfer for value rule applies

Ralph receives stock options (ISOs) with an exercise price of $16 when the stock is trading at $16. Ralph exercises these options two years after the date of the grant when the stock price is $37 per share. Which of the following statements is correct? Upon exercise Ralph will have no income for regular tax purposes. Ralph will have W-2 income of $21 per share upon exercise. Ralph will have $16 of AMT income upon exercise. Ralph's adjusted basis for regular income tax will be $37 at exercise.

Upon exercise Ralph will have no income for regular tax purposes.

Which of the following is excluded from gross income? Damages received from a sexual harassment lawsuit. Unemployment compensation. Workers compensation benefits. Hobby income.

Workers compensation benefits.

Recognition of Income

any accretion to wealth is income except economic income that is not fixed and measurable. Congress has exclusions for tax purposes.

Business Entities tax on owners

based on percent ownership Depending on the type of business, adjustments may be necessary to calculate the amount of business income subject to tax in the owner's hands As income is recognized, owners basis increases.

Modified Endowment Contracts

life insurance policy whose premiums exceed federal tax law limits, FIFO basis taxable to extent of gain

Which of the following fringe benefits received by an employee would be excluded from the employee's gross income? 1. Employer-provided parking. 2. Dues to an athletic club paid for by the employer. 3. Tickets to the basketball game tonight. 4. Employer-provided interior decorating for a new personal residence. 2 and 4. 1, 3, and 4. 1 and 3. 1 and 2.

not 1 and 2

Harold is covered by a $180,000 group term life insurance policy and his daughter is the beneficiary. Harold's employer pays the entire cost of the policy for which the uniform annual premium is $8 per $1,000 of coverage. How much of this premium is taxable to Harold? $1,440. $0. $640. $1,040.

not 640

Freddie and Karen are married and had the following income and expenses for this year. 1. Freddie's salary of $60,000. 2. Freddie's employer provides him with a group term life insurance policy for 2 times his salary. The policy premium paid by the employer is $150 per year. The Uniform Premium Table amount is $0.10. 3. Karen had salary of $10,000 and unemployment compensation of $9,000. 4. Karen won $1,500 on a game show. What is Freddie and Karen's joint gross income? $71,584 $78,184 $78,250 $80,584

not 78184

Short Company allows a 20% discount to all non-officer employees. Officers, all highly compensated, are allowed a 30% discount on company products. Short's gross profit is 35%. Which of the following is true? An officer who takes a 30% discount must include the extra 10% (30%-20%) in gross income. None of the discounts are includible in income because the discount in all cases is less than the company's gross profit percentage. All discounts taken by employees are includible because the plan is discriminatory. All discounts taken by officers (30%) are includible because the plan is discriminatory.

not All discounts taken by employees are includible because the plan is discriminatory.

Realization

occurs when income is received or when a gain on a property transaction becomes fixed

Recognition

occurs when the income is reported on the tax return - all capital gains

Accrual Basis Taxpayers

recognize income when it is earned - Most businesses

Cash Basis Taxpayers

recognize income when it is received - individuals and some businesses

Standard Deduction

"Below-the-line-deduction"

AGI

"The Line"

Trish invested $100,000 in an annuity contract. Years later, she annuitized the contract. The insurance company agreed to pay her $1,666.67 per month for 20 year. How much of each payment is taxable? $466.67. $1,666.67. $0. $1,250.00.

$1,250.00.

Foreign Earned Income Exclusion - 2019

$105,900

Coverdell Education Savings Accounts

$2,000 maximum per year until beneficiary reaches age 18 Distributions are tax free if used to cover educational expenses, including Qualified elementary/secondary school expenses Special needs expenses Contributions to 529 plans Account must be used or rolled over by the time the beneficiary reaches age 30

Foreign Earned Income bona fide resident test

(1) qualify as a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire taxable year (bona fide resident test), or

Cate was recently diagnosed with lung cancer and has been certified by her doctor, on June 1st of the current year, as terminally ill. On July 1st of the current year, Cate sold her life insurance policy with a face value of $500,000 to a viatical settlement provider for $340,000. Assuming she paid $50,000 in premiums, how much of the $340,000 proceeds must she include in her gross income for the current year? $0. $34,000. $50,000. $290,000.

0

During this year, Jack was injured on his job. As a result of the injury, he received the following payments during this year: Workers compensation----------- $2,600 Reimbursement from his employer for medical expenses paid by Jack (medical plan) -----------$1,200 Damages for physical injuries -----------$10,000 What is the amount to be included in Jack's gross income for the current year? $0. $12,000. $10,000. $13,800.

0

Kasey is the three year old son of Randy. Since he was born, Kasey has received large gifts from family members, which have been invested for his benefit, and are now beginning to generate some investment income even though a majority of the funds are invested in growth-type investments. This year, Kasey will earn $2,000 in investment income, but due to his age, he does not have any earnings from employment. Randy recently attended a tax planning seminar sponsored by Fly-By- Nite Financial Services, and based on advice he received at the seminar, has decided to take Kasey's income and contribute it to an IRA for Kasey's benefit. Randy feels that the additional deferral of tax on the income would be beneficial from an income tax standpoint. How much can Kasey contribute to his IRA this year? $0 $2,000 $4,000 $5,000

0

Over the past 4 years, Annabelle, age 28, has contributed a total of $20,000 to a Roth IRA. The current balance is $25,000. She was tired of renting, so this year she took a distribution of $15,000 for a down payment on a home. What amount of the distribution should she include in her gross income this year? $15,000. $3,000. $0. $5,000.

0

Stacy is employed by a large corporation with 500 employees. The corporation has an exercise facility within its office for the exclusive use of the employees. A health club membership at a similar public facility would cost Stacy $1,200 per year. How much must Stacy include in her adjusted gross income? $1,200. $500. $0. $600.

0

Tom is the manager of a hotel. To be available in emergency situations, Tom's employer requires that he live in one of the hotel rooms (without charge). The value of the room is $1,500 per month if occupied each night. The hotel is ordinarily 70% occupied. If Tom did not live there, he would live in an apartment that would rent for $900 per month. Tom's inclusion is monthly gross income from living in the hotel room is: $1,350. $0. $900. $1,500.

0

Which of the following statements is correct regarding the taxation of fringe benefits? 1. The value of the fringe benefit is included in the employee's gross income unless the Code specifically excludes it from taxation. 2. The value of the fringe benefit is excluded from the employee's gross income unless the Code specifies otherwise. 3. The value of the fringe benefit is taxable if the benefit is only provided to employees owning more than 5% of the company and the fringe benefit has a nondiscrimination requirement. 4. The value of the fringe benefit is always taxable if someone other than the employee (e.g,, the employee's spouse) benefits from the fringe benefit provided by the employer. 1 and 2 1 and 3 2 and 4 3 and 4

1 and 3

Which of the following fringe benefits would be excluded from an employee's gross income? 1. Business magazine subscriptions paid for by an employer in the names of various employees. 2. Season tickets to basketball games. 3. Parking provided near its business by an employer for its employees. 4. On-premises athletic facilities provided by an employer to its employees. 1, 3, and 4. 2 and 4. 2 only. 1 only.

1, 3, and 4

Community property

1/2 of income earned belongs to each spouse = MFJ for income tax. MFS - community property income equally split, problem if spouses aren't cooperating

Tax Year

12 months, usually calendar year

Tim and Diane were divorced in 2016 (Year 1). Under the divorce agreement, Diane is to receive $100,000 in 2016, $60,000 in 2017 (Year 2) and nothing thereafter. The payments were to cease upon Diane's death or remarriage. How much, if any, should Tim have to claim as alimony recapture in Year 3? $0. $122,500. $115,000. $30,000.

122,500

Foreign Earned Income Physical Presence test

2) qualify by being present in a foreign country or countries for at least 330 full days during any period of twelve consecutive months (physical presence test).

Nick and Kim are married and are trying to calculate their gross income for the current year. Which of the following items should they include in gross income? 1. Child support payments in the amount of $15,000 received from Kim's ex-husband for the support of their minor child. 2. $1,200 in dividends received. 3. Unemployment benefits received in the amount of $800. 4. $3,000 that Kim earned selling homemade soaps. 4 only. All of the above. 1 and 2. 2, 3, and 4.

2, 3, and 4.

Tony and his wife Kate would like to make a contribution to a Coverdell Education Savings Account for their son, Jethro. Tony and Kate are married filing jointly and their AGI is $200,500. Because they are in the phase-out range, Tony and Kate will not be able to make the maximum contribution of $2,000. Instead, their contribution will be reduced by $700. The contribution limit is $1,300 ($2,000 - $700).

2000 X 200,500 - 190,000 / 220,000 - 190,000 = 700 Reduction 2,000 - $700 = $1,300 Contribution

Will sustained a serious injury in the course of his employment. As a result of this injury, he received the following payments: Workers Compensation -------$2,500 Reimbursement from his employer's accident and health plan for medical expenses paid by Will and not deducted by him -------$4,000 Compensatory damages for physical injuries -------$1,000 Punitive damages for physical injuries -------$6,000 The amount to be included in Will's gross income should be: $13,000 $2,500 $6,000 $4,000

6000

Which of the following is not a qualifying person for the purpose of employer-provided dependent care assistance? A child of the employee regardless of whether the child can be claimed as a dependent on the employee's tax return. A dependent of the employee who has not attained the age of 13. A dependent of the employee who is physically or mentally incapable of caring for himself and who has the same principal place of abode as the employee for more than one-half of the year. The employee's spouse who is physically or mentally incapable of caring for himself and who has the same principal place of abode as the employee for more than one-half of the year.

A child of the employee regardless of whether the child can be claimed as a dependent on the employee's tax return.

Income from Personal Activities

Alimony (unless suspended by TCJA 2017)

With regard to the alimony deduction related to a post-1984, pre-2019 divorce, which one of the following statements is correct? The divorced couple may be members of the same household at the time alimony is paid, provided that the persons do not live as husband and wife. Alimony is deductible by the payor spouse, and includible by the payee spouse, to the extent that payment is contingent on the status of the divorced couple's children. Alimony may be paid either in cash or in property. Alimony payments must terminate on the death of the payee spouse.

Alimony payments must terminate on the death of the payee spouse.

John, the majority shareholder in ABC, Inc., received an interest-free loan from the corporation. Which of the following is/are correct? If the loan is classified as a corporation-shareholder loan, the corporation's taxable income will increase as a result of the imputation of interest. All of the above. If the loan is classified as an employer-employee loan, the corporation's taxable income will not be affected by the imputation of interest. If John uses the funds to take a vacation, the imputation of interest will cause a net increase to his taxable income.

All of the above.

Surrender

Amount Realized - Basis = taxable income

Fiscal Year

Can be elected if adequate records are maintained 52-53 week year.

Effective Rate may be more than max

Capital Gains increase a taxpayers AGI Increased AGI may lead to phaseouts

Exceptions to Debt Forgiveness

Certain student loans Debt forgiven as a gift Debt discharged is qualified principal residence indebtedness which is discharged before January 1, 2018*

Capital Gaines Tax Rate Exceptions

Collectibles 28% Straight-line depreciation - 25%

Roth IRAs

Contributions are not deductible Distribution is tax free if qualified: must meet 5-year rule and be made After age 59½ After death or disability of the owner For first-time home purchase (up to $10,000) FIFO Treatment applies Basis distributions are always tax free

Assume the following payments meet the tax requirements for deductible alimony. Which of the following alimony payment streams will result in alimony recapture to the payor? Year 1 Year 2 Year 3 a. $100,000 $120,000 $150,000 b. $0 $10,000 $50,000 c. $50,000 $40,000 $30,000 d. $60,000 $45,000 $25,000

D

Discharge of Indebtedness

Debt forgiveness is an accretion to wealth To the extent the tax payer is solvent, must include debt forgiven as income.

Dividends

Distribution of earnings by corporation Taxable to shareholders to extent of earnings If distribution exceeds earnings, it is taxed First, as a return of basis Then, as capital gain

529 Plans

Distributions are tax free if used to cover qualified education expenses Sponsored by states or higher education institutions Can front-load with 5 annual exclusion gifts per donor per beneficiary $15,000 x 5 = $75,000 for 2019 per donor / per donee No income phase-outs apply

Original Issue Discount

Doctrine of Constructive Receipt

Investment Income

Doctrine of Fruit and Tree - income taxed to owner

On January 1, Donald loaned his daughter, Ivanka, $90,000 to purchase a new personal residence. There were no other loans outstanding between Donald and Ivanka. Ivanka's only income was $30,000 salary and $4,000 interest income. Donald had investment income of $200,000. Donald did not charge Ivanka interest. The relevant federal rate was 9%. For the current year: Ivanka must recognize $8,100 (0.09 x $90,000) imputed interest income on the loan. Ivanka is allowed a deduction for imputed interest of $8,100. Donald must recognize imputed interest income of $8,100. Donald must recognize imputed interest income of $4,000.

Donald must recognize imputed interest income of $4,000.

Annuity Withdrawals before age 59 1/2 have 10% early distribution penalty

Exceptions - Death and Disability

Which of the following expenses can a tax payer deduct as an adjustment to gross income (above-the-line)? Expenses incurred in conducting a sole proprietorship Real estate taxes paid on the taxpayer's principal residence. Charitable gifts made to the taxpayer's church Employee business expenses that are not reimbursed by the taxpayer's employer.

Expenses incurred in conducting a sole proprietorship

A person may assign the gross income that he earns to any other person for tax purposes. True False

False

An HSA must be established by an employer.

False

Fringe benefits are valuable to employees because they are always nontaxable. True False

False

Individuals who are enrolled in Medicare qualify to establish an HSA. True False

False

Taxpayers must deduct the lesser of their itemized deductions or the standard deduction. True False

False

Whenever expenses are associated with a business activity, they are below-the-line deductions. T/F

False

Recognition of Income

Follows realization principal from accounting. Income is recognized when realized unless exception.

Employment Income

Fruit and Tree - income taxed to earner Self-employment income

Prizes and Awards

General Rule: Included in Income If paid directly to charity at request of recipient, excluded from gross income if: The prize was given primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement The recipient must not apply for the award The recipient must not be required to render substantial future services

All of the following individuals are considered to be self-employed individuals EXCEPT: Sole Proprietors. Partners Greater than 2% owners of S corporations. Greater than 5% owners of C corporations.

Greater than 5% owners of C corporations.

Taxable Income

Gross Income - AGI Deductions - Itemized or standard deductions - Personal Exemptions - 20% for GBI

AGI Equation

Gross Income - Deductions for AGI

Which of the following benefits provided by an employer to its employees is taxable? Incidental personal use of the company car. Employees of the XYZ Department Store are allowed a 5% discount on store merchandise. XYZ's normal gross profit percentage is 20%. Undergraduate tuition is waived by ABC University for the dependent children of employees. B.J. Airline provides free standby flights to its employees.

Incidental personal use of the company car.

Gross Income

Income - Exclusions

Recognition of Income

Income is recognized if received (cash/barter) income does not include recovery of capital investment

Municipal Bond Interest

Interest is exempt for regular tax purposes Interest may also be excluded from state taxation Capital gains are taxable Tax Equivalent Yield

Exclusion Ratio

Investment in the Contract / Expected Return X Distributions Recieved

Distributions prior to annuitization are taxed on

LIFO basis

OID Equation

Maturity Value - Purchase Price

Innocent Spouse Relief

May exclude community income from the spouse if no joint return did not know of community income inequitable to include in taxpayers income

3.8%

Medicare tax imposed by Affordable Care Act

Investment Income Excluded From Gross Income

Municipal Bond Interest Some exceptions apply Life Insurance Death Benefits Accelerated Death Benefits Roth IRAs Education related exclusions Savings Bond Interest Qualified Tuition Programs/529 Plans Coverdell Savings Accounts Improvement by Tenant to Landlord's Property

OID Example On January 1st of this year Ivan purchases a 30 year zero coupon government bond at a market rate of 8% paying $99.38. How much interest income does Ivan report this year? Income = $99.38 x 0.08 = $7.95

New Basis = $99.38 + 7.95 = $107.33 (at year end)