FFPN Module 8 Tax Implications of Financial Decisions

Which one of the following statements is true regarding the filing process? (LO 8-2) The first step in the filing process is determining a taxpayer's proper filing status. The first step in the filing process is determining a taxpayer's AGI. The first step in the filing process is determining a taxpayer's gross income.

(ANSWER) The first step in the filing process is determining a taxpayer's proper filing status. Determining a taxpayer's proper filing status is the first step in the filing process. The first step in the filing process is determining a taxpayer's AGI. The first step in the filing process is determining a taxpayer's gross income.

John and Mary, a married couple filing jointly, are planning on buying a home in 2019. What is the maximum mortgage amount that they can have and fully deduct the mortgage interest? (LO 8-2) $750,000 $1 million $1.5 million

(ANSWER) $750,000 The mortgage interest (for a home purchased in 2019) is deductible on up to $750,000 of principal. $1 million $1.5 million

Under which of the following scenarios would a 55-year-old individual not be subject to the 10% penalty tax regarding an annuity? (LO 8-3) If the individual begins receiving annuity payments for life. If the individual takes a partial lump sum distribution. If the individual closes out the annuity and takes a full distribution.

(ANSWER) If the individual begins receiving annuity payments for life. There is no 10% penalty tax with annuitization. The 10% penalty tax would apply on earnings for a lump sum distribution, which includes a full distribution. If the individual takes a partial lump sum distribution. There is no 10% penalty tax with annuitization. The 10% penalty tax would apply on earnings for a full or partial lump sum distribution. If the individual closes out the annuity and takes a full distribution. There is no 10% penalty tax with annuitization. The 10% penalty tax would apply on earnings for a full or partial lump sum distribution.

Itemized deductions are reported on which one of the following schedules? (LO 8-2) Schedule A Schedule B Schedule C Schedule D

(ANSWER) Schedule A Itemized deductions are reported on Schedule A of Form 1040. Schedule B Interest earned and dividends received are reported on Schedule B; itemized deductions are reported on Schedule A of Form 1040. Schedule C Sole proprietorship income and expenses are reported on Schedule C; itemized deductions are reported on Schedule A of Form 1040. Schedule D Capital gains are reported on Schedule D; itemized deductions are reported on Schedule A of Form 1040.

Which of the following statements is correct about the Lifetime Learning and American Opportunity education tax credits? (LO 8-2) The Lifetime Learning and American Opportunity educational tax credits will reduce any tax liability, dollar for dollar. Only the Lifetime Learning credit, and not the American Opportunity credit, is phased out if a taxpayer's income is too high. Both the American Opportunity and Lifetime Learning tax credits are available for life.

(ANSWER) The Lifetime Learning and American Opportunity educational tax credits will reduce any tax liability, dollar for dollar. This is true statement. Tax credits offset tax liability dollar for dollar. Only the Lifetime Learning credit, and not the American Opportunity credit, is phased out if a taxpayer's income is too high. Both the American Opportunity and Lifetime Learning tax credits are completely phased-out (eliminated) once a taxpayer reaches a certain level of AGI. Both the American Opportunity and Lifetime Learning tax credits are available for life. The Lifetime Learning credit is available for life; however, the American Opportunity credit is only available for the first four years of postsecondary education.

Which of the following statements about potential tax credits for filers with children in day care is correct? (LO 8-3) The child and dependent care tax qualification is available to families whose income is not too high, and is $3,000 for each dependent child, though only 20% of that can be claimed ($600 credit). The child and dependent care tax credit is available to whose income is not too high, and is $1,500 for each child under the age of 17. The child and dependent care credit is available to help offset day care costs, and is capped at $1,000 for one child, and $2,000 for two or more children.

(ANSWER) The child and dependent care tax qualification is available to families whose income is not too high, and is $3,000 for each dependent child, though only 20% of that can be claimed ($600 credit). Families with children under age 17 and under the income limit, may receive a $3,000 tax qualification for one child ($6,000 for two or more children), though only $600 (20% of $3,000) can be claimed as the credit. The child and dependent care tax credit is available to whose income is not too high, and is $1,500 for each child under the age of 17. The child and dependent care credit is available to help offset day care costs, and is capped at $1,000 for one child, and $2,000 for two or more children.

Which one of the following circumstances would require most taxpayers to file a federal income tax return? (LO 8-2) The taxpayer's gross income exceeds the standard deduction. The taxpayer has dependent children. The taxpayer earned any amount of unearned income.

(ANSWER) The taxpayer's gross income exceeds the standard deduction. A taxpayer is generally required to file a federal income tax return if his or her gross income exceeds the standard deduction amount. The taxpayer has dependent children. Dependent children have no impact on the necessity to file an income tax return. The taxpayer earned any amount of unearned income. A taxpayer is generally required to file a federal tax return if his or her gross income exceeds the current amount of the standard deduction.

Which of the following is not one of the three main types of income? (LO 8-1) deducted portfolio active passive

(ANSWER) deducted Deducted is not one of the three main types. The three main categories are active, portfolio, and passive. The ability to deduct net losses on Form 1040 are limited if they come from either the portfolio or passive area. portfolio This is one of the three, the others are active and passive. The ability to deduct net losses on Form 1040 are limited if they come from either the portfolio or passive area. active This is one of the three, the others are portfolio and passive. The ability to deduct net losses on Form 1040 are limited if they come from either the portfolio or passive area. passive This is one of the three, the others are active and portfolio. The ability to deduct net losses on Form 1040 are limited if they come from either the portfolio or passive area.

Which one of the following is an "above the line" deduction? (LO 8-2) deductible IRA contributions state taxes paid by the individual medical expenses gifts to charities

(ANSWER) deductible IRA contributions Deductible IRA contributions are one of the above-the-line deductions. state taxes paid by the individual State taxes paid are a "below the line" (or itemized) deduction. medical expenses Medical expenses above 10% of AGI are itemized deductions, not adjustments to income. gifts to charities Gifts to charities are itemized deductions, not adjustments to income.

Which one of the following is a common nonrecognition transaction? (LO 8-3) gain from the sale of a principal residence property transferred after a divorce property transferred as a gift

(ANSWER) gain from the sale of a principal residence Common nonrecognition transactions include the gain from the sale of a principal residence. property transferred after a divorce Common nonrecognition transactions include property transferred when ex-spouses divide marital property pursuant to a divorce settlement, not after. property transferred as a gift Common nonrecognition transactions do not include property transferred as a gift. Generally, there would be a carryover of the donor's basis to the individual receiving the gift.

A tax planning strategy that shifts taxes to other individuals would include all of the following except (LO 8-6) nontaxable property exchanges. utilization of a trust to transfer assets within a family. gifting of income-producing assets. employing a family member.

(ANSWER) nontaxable property exchanges. Nontaxable property exchanges are an example of a tax planning strategy that eliminates or reduces taxes, not shifts taxes, to other individuals. utilization of a trust to transfer assets within a family. Utilizing a trust to transfer assets within a family is an example of a tax planning strategy that may shift the payment of taxes to others. gifting of income-producing assets. Gifting an income-producing asset is an example of a tax planning strategy that shifts the payment of taxes to others. employing a family member. Employing a family member allows a portion of the business profits to be paid to the family member as wages or salary. This is an example of a tax planning strategy that shifts the payment of taxes to others.

All of the following are potential long-term capital gain tax rates except (LO 8-3) 0% 20% 28% 35%

0% A 0% long-term capital gains tax rate applies to taxpayers who have relatively low taxable incomes—$78,750 for joint returns, or $39,375 for single taxpayers (for 2019). 20% 20% is the highest long-term capital gains tax rate. 28% 28% is the maximum long-term capital gains tax rate, and it applies to collectibles. (ANSWER) 35% There is no 35% capital gains tax rate. 28% is the maximum long-term capital gains tax rate, and it applies to collectibles.

What is the maximum amount of Social Security benefits that can be taxed? (LO 8-4) 25% 50% 85%

25% 50% (ANSWER) 85% Up to 85% of Social Security benefits may be taxed.

What is the maximum current year deduction for a cash contribution to a public charity? (LO 8-2) 30% of AGI 50% of AGI 60% of AGI

30% of AGI 30% of AGI is the maximum deduction for a gift to a so-called 30% organization—private foundations, veterans' groups, and fraternal organizations, for example. 50% of AGI 50% of AGI is not the maximum deduction for a gift to a public charity. (ANSWER) 60% of AGI 60% of AGI is the maximum annual deduction for a contribution to a public charity.

Which one of the following statements is correct? (LO 8-2) A standard deduction may be taken to arrive at adjusted gross income (AGI). A standard deduction may be taken from adjusted gross income. A standard deduction may be taken from taxable income.

A standard deduction may be taken to arrive at adjusted gross income (AGI). The standard deduction may be deducted from adjusted gross income. (ANSWER) A standard deduction may be taken from adjusted gross income. A standard deduction may be deducted from adjusted gross income. A standard deduction may be taken from taxable income. The standard deduction is deducted from adjusted gross income to arrive at taxable income.

Which one of the following statements is correct regarding the basis of a gift received by a taxpayer? (LO 8-3) A taxpayer's basis in property received as a gift is generally its fair market value on the day the gift is completed. A taxpayer's basis in property received as a gift is generally the same basis as that of the person who gave the taxpayer the gift. A taxpayer's basis in property received as a gift is not relevant since there are no tax consequences involved.

A taxpayer's basis in property received as a gift is generally its fair market value on the day the gift is completed. A taxpayer's basis in property received as a gift is generally the same as that of the person who gave the taxpayer the gift, not its fair market value. (ANSWER) A taxpayer's basis in property received as a gift is generally the same basis as that of the person who gave the taxpayer the gift. Generally, a taxpayer's basis in a gift received is the same basis as that of the individual who gave the taxpayer the gift. A taxpayer's basis in property received as a gift is not relevant since there are no tax consequences involved. There are potential tax consequences to a gift. Generally, a taxpayer's basis in a gift received is the same basis as that of the individual who gave the taxpayer the gift.

Which one of the following statements regarding the taxation of annuities is correct? (LO 8-3) Any lump sum distributions from an annuity are taxed on a first in first out (FIFO) basis. If an annuity is annuitized, any annuity payments will be fully taxable. If annuitized, both fixed rate and variable annuities will be partially taxable. Only fixed rate annuities can be annuitized.

Any lump sum distributions from an annuity are taxed on a first in first out (FIFO) basis. Annuities are taxed LIFO not FIFO, meaning any distributions will be considered earnings first, then return of principal. If an annuity is annuitized, any annuity payments will be fully taxable. If an annuity is annuitized then an exclusion ratio will be calculated, whereby part of each payment will be taxable, and part of each payment will be excluded from income (return of principal). (ANSWER) If annuitized, both fixed rate and variable annuities will be partially taxable. If an annuity is annuitized then an exclusion ratio (or exclusion amount) will be calculated, whereby part of each payment will be taxable, and part of each payment will be excluded from income (return of principal). Only fixed rate annuities can be annuitized. Both fixed rate and variable annuities can be annuitized.

Which one of the following correctly describes the tax consequences of tax credits? (LO 8-2) Tax credits have a significantly smaller impact on a taxpayer's tax liability than tax deductions do. Tax credits reduce a taxpayer's actual tax liability on a dollar-for-dollar basis. Tax credits reduce a taxpayer's actual tax liability based on his or her marginal tax bracket. Tax deductions and tax credits have the same tax significance.

Tax credits have a significantly smaller impact on a taxpayer's tax liability than tax deductions do. Tax credits have a significantly greater impact on a taxpayer's tax liability than deductions do. (ANSWER) Tax credits reduce a taxpayer's actual tax liability on a dollar-for-dollar basis. Tax credits have the impact of reducing a taxpayer's tax liability on a dollar-for-dollar basis. Tax credits reduce a taxpayer's actual tax liability based on his or her marginal tax bracket. Tax credits reduce a taxpayer's actual tax liability on a dollar-for-dollar basis. Tax deductions and tax credits have the same tax significance. Tax deductions and tax credits do not have the same tax significance; tax credits reduce a taxpayer's actual tax liability on a dollar-for-dollar basis.

Which one of the following statements correctly describes an asset's adjusted basis? (LO 8-5) The adjusted basis of an asset is always its cost basis. Capital improvements generally do not increase an asset's basis. Adjusted basis is the original cost basis of an asset plus or minus certain adjustments. Depreciation increases an asset's adjusted basis.

The adjusted basis of an asset is always its cost basis. The adjusted basis of an asset is its cost plus or minus certain adjustments. Capital improvements generally do not increase an asset's basis. Capital improvements generally do increase an asset's basis. (ANSWER) Adjusted basis is the original cost basis of an asset plus or minus certain adjustments. The original cost of an asset plus or minus certain adjustments (such as improvements or depreciation, respectively) is its adjusted basis. Depreciation increases an asset's adjusted basis. Depreciation taken on an asset decreases, not increases, its adjusted basis.

Which one of the following correctly describes the holding period for a capital gain or loss to be classified as long term? (LO 8-3) The property must be held for more than 18 months. The property must be held for more than 12 months. The property must be held for more than six months. The property must be held for more than three months.

The property must be held for more than 18 months. The minimum holding period for a capital asset to be considered long-term is more than 12 months, not more than 18 months. (ANSWER) The property must be held for more than 12 months. A capital asset must be held for more than 12 months in order for its gain or loss to be classified as long-term. The property must be held for more than six months. Capital assets held for 12 months or less are classified as short-term. The property must be held for more than three months. Capital assets held for three months are classified as short-term; a capital asset must have been held for more than 12 months in order for its gain or loss to be classified as long-term.

What is the significance of a taxpayer supporting a minor child as a dependent for federal income tax purposes? (LO 8-2) The taxpayer receives a larger standard deduction. The taxpayer receives an additional standard deduction. The taxpayer may claim a tax credit for each dependent child under the age of 17.

The taxpayer receives a larger standard deduction. A taxpayer does not receive a larger standard deduction if he or she has a dependent. The taxpayer receives an additional standard deduction. A taxpayer does not receive an additional standard deduction for a dependent. (ANSWER) The taxpayer may claim a tax credit for each dependent child under the age of 17. A taxpayer is allowed to claim for a tax credit each person who is a dependent.

Assuming the client has only $2,500 of discretionary income available to divert to employee benefits, which one of the following benefits offered by an employer to employees would result in the greatest amount of tax savings from current income? (LO 8-4) ability to make employee contributions to a 401(k) plan ability to make contributions to a flexible spending account (FSA) ability to purchase company merchandise at a discount ability to purchase additional group life insurance

ability to make employee contributions to a 401(k) plan Contributions to a 401(k) plan are pretax, which would save paying income taxes on current income. However not only are contributions to a flexible spending account (FSA) pre-income tax, there is also no Social Security tax. (ANSWER) ability to make contributions to a flexible spending account (FSA) There are no income taxes nor Social Security taxes due on contributions made to a flexible spending account. ability to purchase company merchandise at a discount A company discount will save an employee money if they make a purchase, but it will not result in any tax savings (or possibly just a marginal amount of savings on sales tax). ability to purchase additional group life insurance Ability to purchase additional group life insurance will not result in any tax savings.

Which one of the following would be included in calculating a client's gross income? (LO 8-2) child support received lottery prize money inheritances received life insurance proceeds paid upon a person's death

child support received Child support received is generally excluded from a taxpayer's gross income. (ANSWER) lottery prize money Money from lottery prize winnings is taxable and would be included in a taxpayer's gross income. inheritances received Inheritances received are generally excluded from a taxpayer's gross income. life insurance proceeds paid upon a person's death Life insurance proceeds paid upon the death of an insured are generally excluded from a taxpayer's gross income.

Which one of the following is a characteristic of Section 529 plans? (LO 8-6) low contribution amounts allowed no tax deferral of earnings account beneficiary can be changed high phaseout amounts

low contribution amounts allowed Section 529 plans allow for large amounts to be contributed. For example, the Colorado plan (CollegeInvest) allows for contributions up to $400,000. no tax deferral of earnings There is tax deferral of earnings with Section 529 plans. (ANSWER) account beneficiary can be changed Changing the account beneficiary is a beneficial characteristic of Section 529 plans. high phaseout amounts This is an incorrect statement since there are no contribution phaseout thresholds for high-income individuals.

Which of the following taxpayer scenarios is possible? (LO 8-2) marginal tax rate of 24% and effective tax rate of 28% marginal tax rate of 32% and effective tax rate of 23% marginal tax rate of 37% and effective tax rate of 39%

marginal tax rate of 24% and effective tax rate of 28% This is not possible. The effective tax rate is the amount paid in taxes divided by gross income. The marginal tax rate is the rate at which the last dollar was taxed. The marginal rate will always be higher. (ANSWER) marginal tax rate of 32% and effective tax rate of 23% The effective tax rate is the amount paid in taxes divided by gross income. The marginal tax rate is the rate at which the last dollar was taxed. The marginal rate will always be higher. marginal tax rate of 37% and effective tax rate of 39% This is not possible. The effective tax rate is the amount paid in taxes divided by gross income. The marginal tax rate is the rate at which the last dollar was taxed. The marginal rate will always be higher. In addition, 37% is the highest tax rate, so an average tax rate could not be higher than that.

Which one of the following is not allowed as an itemized deduction? (LO 8-2) qualified medical expenses rent paid for an apartment qualified real estate taxes qualified home mortgage interest

qualified medical expenses Qualified medical expenses are allowed as itemized deductions. (ANSWER) rent paid for an apartment Rent payments are not allowed as itemized deductions. qualified real estate taxes Qualified real estate taxes paid are allowed as itemized deductions. qualified home mortgage interest Qualified home mortgage interest is allowed as an itemized deduction.

Which one of the following is not a filing status for Federal income tax purposes? (LO 8-2) single qualified disabled married filing jointly married filing separately

single Single is a proper filing status. (ANSWER) qualified disabled Qualified disabled is not a recognized filing status. married filing jointly Married filing jointly is a proper filing status. married filing separately Married filing separately is a proper filing status.

Which one of the following taxes is not allowed as an itemized deduction? (LO 8-2) state income taxes property taxes local income taxes FICA taxes

state income taxes State income taxes are an itemized deduction. The maximum deduction for all state and local taxes, including property taxes, is $10,000 per year. property taxes Property taxes are allowed as an itemized deduction. The maximum deduction for all state and local taxes, including property taxes, is $10,000 per year. local income taxes Local income taxes are allowed as an itemized deduction. The maximum deduction for all state and local taxes, including property taxes, is $10,000 per year. (ANSWER) FICA taxes FICA (Social Security) taxes are not allowed as an itemized deduction.

Which one of the following is a type of additional tax that applies only to higher income taxpayers? (LO 8-2) the withholding tax the Social Security tax on wages the earned income credit tax Medicare contribution tax

the withholding tax There is no such thing as a withholding tax; income and Social Security taxes are withheld and paid to the IRS. the Social Security tax on wages The Social Security tax on wages is not a type of additional tax. the earned income credit tax The earned income credit tax is not a type of additional tax, it is a refundable tax credit. (ANSWER) Medicare contribution tax The Medicare contribution tax is imposed on taxpayers with AGIs of over $250,000 (if married filing jointly) who also have net investment income. The tax is 3.8% on the lesser of the net investment income amount or the excess of modified AGI over the threshold amount, which for married filing jointly is $250,000.

Gross income includes all of the following types of income except (LO 8-2) tips. taxable interest. dividends received. child support received.

tips. Gross income does include tips received. taxable interest. Gross income does include taxable interest received. dividends received. Gross income does include dividends received. Qualified dividends are subject to preferential tax rates. (ANSWER) child support received. Gross income does not include child support received. Child support received is an exclusion.