Income Tax Final

For purposes of computing the deduction for qualified residence interest, a qualified residence includes only the taxpayer's principal residence.

False A qualified residence includes the taxpayer's principal residence and one other residence of the taxpayer or spouse.

The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes but is not allowed for a cash method taxpayer.

False A reserve for estimated expenses (e.g., bad debt) is not allowed to an accrual method taxpayer for tax purposes because the economic performance test cannot be satisfied. For a cash method taxpayer, there is no addition to the reserve for bad debts because income that would have generated a debt has not been recognized.

Jake performs services for Maude. If Maude provides a helper and tools, this is indicative of independent contractor (rather than employee) status.

False Because Jake does not provide his own helper and tools, this indicates that he is probably not an independent contractor.

Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a trade or business.

False In this circumstance, the legal fees are deductible.

The value added tax (VAT) has not had wide acceptance in the international community.

False Its use in about 140 countries represents fairly wide acceptance.

Several years ago, John purchased 2,000 shares of Red Corporation's § 1244 stock from Mark for $40,000. Last year, John sold one-half of his Red Corporation stock to Mike for $12,000. During the current year, John sold the remaining Red Corporation stock for $3,000. John has a $17,000 ($3,000 - $20,000) ordinary loss for the current year.

False John did not buy the stock from Red Corporation; therefore, it is not § 1244 stock to him. He has a $17,000 long-term capital loss.

Marge sells land to her adult son, Jason, for its $20,000 appraised value. Her adjusted basis for the land is $25,000. Marge's recognized loss is $5,000, and Jason's adjusted basis for the land is $25,000 ($20,000 cost + $5,000 recognized lossof Marge).

False Marge's recognized loss is $0; Jason's adjusted basis for the land is his cost of $20,000.

All of a taxpayer's tax credits relating to a passive activity can be utilized when the activity is sold at a loss.

False Tax credits associated with a passive investment are lost if the investment is disposed of at a loss.

Sherri owns an interest in a business that is not a passive activity and in which she has $20,000 at risk. If the business incurs a loss from operations during the year and her share of the loss is $32,000, this loss will be fully deductible.

False The at-risk provisions limit the deductibility of losses from business and income-producing activities for individuals and closely held corporations. The deductible $20,000 loss reduces Sherri's at-risk amount to $0 and results in a suspended loss of $12,000 under the at-risk rules.

A letter ruling applies only to the taxpayer who asks for and obtains a letter ruling.

True

A purchased trademark is a § 197 intangible.

True

If an individual is subject to the direction or control of another only to the extent of the end result but not as to the means of accomplishment, an employer-employee relationship does not exist.

True

If more than 40% of the value of property other than real property is placed in service during the last quarter, all of the property placed in service in the second quarter will be allowed 7.5 months of cost recovery.

True

In 2019, a child who has unearned income of $2,200 or less cannot be subject to the kiddie tax.

True

The amount of a loss on insured personal use property is reduced by the insurance coverage if no claim is made against the insurer.

True

The cost recovery period for three-year class property is four years.

True

Under the regular (actual expense) method, the portion of the office in the home deduction that exceeds the income from the business can be carried over to future years.

True

When a business is operated as an S corporation, a disadvantage is that the shareholder must pay the tax on his or her share of the S corporation's income even though the S corporation did not distribute the income to the shareholder.

True A shareholder is required to recognize his or her share of S corporation income even if it is not distributed to the shareholder.

When determining whether an individual is a material participant, participation by an owner's spouse generally counts.

True A spouse's participation is counted in applying the material participation tests.

A statutory employee is not a common law employee but is subject to Social Security tax.

True A statutory employee is subject to Social Security tax.

A taxpayer can carry an NOL forward indefinitely.

True A taxpayer can only carry an NOL forward.

A theft loss of investment property is an itemized deduction not subject to the 2%-of-AGI floor.

True A theft loss is a separately stated item on Schedule A of Form 1040. It is not subject to the 2%-of-AGI floor.

Assets that do not have a determinable useful life are not eligible for cost recovery under MACRS.

True Assets that do not decline in value on a predictable basis or that do not have a determinable useful life (e.g., land, stock, and antiques) are not eligible for cost recovery.

The constructive receipt doctrine requires that income be recognized when it is made available to the cash basis taxpayer, although it has not been actually received. The constructive receipt doctrine does not apply to accrual basis taxpayers.

True Cash basis taxpayers must recognize income when it is actually or constructively received. The income is constructively received when it is made available to the taxpayer. Accrual basis taxpayers generally report income when they have earned the right to receive it.

Eileen lives and works in Mobile. She travels to Rome for an eight-day business meeting after which she spends two days touring Italy. All of Eileen's airfare is deductible.

True Eileen meets the less-than-25%-personal-time exception.

Melody works for a company with only 22 employees. Her employer contributed $2,000 to her health savings account (HSA), and the account earned $100 in interest during the year. Melody withdrew only $1,200 to pay medical expenses during the year. Melody is not required to recognize any gross income from the HSA for the year.

True For an HSA, the employer's contributions, earnings on the account, and withdrawals to pay medical expenses can all be excluded from Melody's gross income.

Under the 12-month rule for the current-period deduction of prepaid expenses of cash basis taxpayers, the asset must expire or be consumed by the end of the tax year following the year of payment.

True If the one-year rule is not satisfied, the prepayment is prorated and deducted over the benefit period.

A hobby activity results in all of the hobby income being included in AGI and no deductions being allowed for hobby-related expenses.

True Income from a hobby activity is included in income. The TCJA of 2017 disallows the deduction of miscellaneous itemized deductions subject to the 2%-of-AGI floor, which includes hobby-related expenses.

Percentage depletion enables the taxpayer to recover more than the cost of an asset in the form of tax deductions.

True Percentage depletion can be taken even though the basis in the asset has been reduced to zero by depletion deductions.

On the recommendation of a physician, Ed has a swimming pool installed at his residence because of a heart condition. If he is allowed to deduct all or part of the cost of the pool, Ed's increase in utility bills due to the operation of the pool qualifies as a medical expense.

True Such expense does qualify as a medical expense.

On transfers by death, the Federal government relies on an estate tax, while states impose an estate tax, an inheritance tax, both taxes, or neither tax.

True The Federal government relies on an estate tax while states impose an estate tax, an inheritance tax, both taxes, or neither tax.

The filing status of a taxpayer (e.g., single, head of household) must be identified before the applicable standard deduction is determined.

True The filing status is relevant in determining the amount of the standard deduction available.

Gray Company, a closely held C corporation, incurs a $50,000 loss on a passive activity during the year. The company has active income of $34,000 and portfolio income of $24,000. If Gray is not a personal service corporation, it may deduct $34,000 of the passive activity loss.

True The passive activity loss rules apply to individuals, estates, trusts, personal service corporations, and closely held C corporations. Only closely held C corporations that are not personal service corporations are allowed to offset passive activity losses against active income.

Georgia contributed $2,000 to a qualifying Health Savings Account in the current year. The entire amount qualifies as an expense deductible for AGI.

True The payment to the HSA is a deduction for AGI, not an itemized medical expense deduction.

Al contributed a painting to the Metropolitan Art Museum of St. Louis, MO. The painting, purchased six years earlier, was worth $40,000 when donated, and Al's basis was $25,000. If this painting is immediately sold by the museum and the proceeds are placed in the general fund, Al's charitable contribution deduction is $25,000 (subject to percentage limitations).

True The property was put to an unrelated use by the charitable organization. Al is allowed a deduction for the contribution based on the $25,000 basis, not the $40,000 FMV.

Mary purchased an annuity that pays her $500 per month for the rest of her life. She paid $70,000 for the annuity. Based on IRS annuity tables, Mary's life expectancy is 16 years. How much of the first payment will Mary include in her in gross income (rounded to two decimals)? a) $135.42 b) $500.00 c) $304.58 d) $0

a) $135.42

With respect to income from services, which of the following is true? a) If an accrual basis taxpayer sells a 36-month service contract on July 1, 2019 for $3,600, the taxpayer's 2019 gross income from the contract is $600. b) An accrual basis taxpayer will always recognize the income over the period the services will be rendered. c) A cash basis taxpayer can spread the income from a 24-month service contract over the contract period. d) None of these. e) If an accrual basis taxpayer sells a 24-month service contract on July 1, 2019, one-half (12/24) the income is recognized in 2020.

a) Answer b. is incorrect because the special method for deferral of prepaid income does not apply to cash basis taxpayers. Answers a. and d. are incorrect because they are not in accordance with § 451(c) (previously Rev.Proc. 2004-34).

This year, Carol, a single taxpayer, purchased a vacation home for $400,000 using a home equity loan of $350,000 on her principal residence. She has no other debt on her principal residence. Carol paid $16,000 of interest on the debt this year. How much of this interest is deductible assuming that Carol itemizes her deductions? a) $0 b) $10,000 c) $16,000 d) $125,000 e) None of these

a) Because the debt is not secured by the vacation home, it is home equity debt on the principal residence, which is not deductible. If, instead, the debt was secured by the vacation home, it would be acquisition debt and if total acquisition debt does not exceed $750,000, the interest would be deductible.

Taxes not imposed by the Federal government include: a) Tobacco excise tax. b) Customs duties (tariffs on imports). c) Tax on rental cars. d) Gas guzzler tax. e) None of these.

c) The Federal government imposes an excise tax on tobacco (choice a.), customs duties (choice b.), and a gas guzzler tax (choice d.). It does not impose a tax on rental cars (choice c.).

Jack received a court award in a civil libel and slander suit against National Gossip. He received $120,000 for damages to his professional reputation, $100,000 for damages to his personal reputation, and $50,000 in punitive damages. Jack must include in his gross income as a damage award: a) $270,000. b) $0. c) $100,000. d) None of these. e) $120,000.

a) None of the damages received were the result of a physical personal injury or sickness and therefore the total amount received must be included in gross income. Even if the damages were the result of physical personal injury, the punitive damages would be included in his gross income.

Peggy is in the business of factoring accounts receivable. Last year, she purchased a $30,000 account receivable for $25,000. This year, the account was settled for $25,000. How much loss can Peggy deduct and in which year? a) None of these. b) $5,000 for the prior year and $5,000 for the current year. c) $5,000 for the prior year. d) $10,000 for the current year. e) $5,000 for the current year.

a) Peggy's basis in the debt is $25,000. Therefore, her loss for the current year is $0 ($25,000 - $25,000).

Which, if any, of the following taxes are proportional (rather than progressive)? a) State general sales tax b) Federal individual income tax c) Federal gift tax d) All of these e) Federal estate tax

a) Sales taxes are applied at a constant rate that does not progress.

Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida and wants to expand to other states. During 2019, she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to investigate TV rental stores in Georgia. She acquires the South Carolina operations but not the outlets in Georgia. As to these expenses, Iris should: a) Expense $23,000 for 2019. b) Capitalize $14,000 and not deduct $9,000. c) Capitalize $23,000. d) Expense $9,000 for 2019 and capitalize $14,000. e) None of these.

a) Since Iris owns and operates TV rental outlets, all of the investigation expenses can be deducted regardless of whether she acquires the businesses.

Hugh, a self-employed individual, paid the following amounts during the year: Real estate tax on Iowa residence $3,800 State income tax 1,700 Real estate taxes on a vacation home 2,100 Gift tax paid on gift to daughter 1,200 State sales taxes 1,750 State occupational license fee 300 Property tax on value of his automobile (used 100% for business) 475 ​ What is the maximum amount Hugh can claim as taxes in itemizing deductions from AGI? a) $7,650 b) $8,850 c) $9,625 d) $10,000 e) None of these

a) State sales taxes ($1,750) are more than the state income tax ($1,700), so Hugh should choose to deduct the sales tax rather than the state income tax. The state occupational license fee ($300) and the tax on his business use auto ($475) are deductible for AGI as business expenses. The state sales tax ($1,750) and the real estate taxes ($3,800 + $2,100) are deductible as itemized deductions. The gift tax is not deductible. The total itemized deductions are $7,650 ($3,800 + $2,100 + $1,750).

Josh has investments in two passive activities. Activity A, acquired three years ago, produces income in the current year of $60,000. Activity B, acquired last year, produces a loss of $100,000 in the current year. At the beginning of this year, Josh's at-risk amounts in Activities A and B are $10,000 and $100,000, respectively. What is the amount of Josh's suspended passive activity loss with respect to these activities at the end of the current year? a) $40,000 b) $36,000 c) None of these d) $100,000 e) $0

a) The $60,000 of passive activity income from Activity A is offset by $60,000 of the passive activity loss from Activity B, leaving a net passive activity loss of $40,000. None of the $40,000 net passive activity loss is deductible in the current year. The $40,000 net passive activity loss is suspended.

Under the deemed substantiation method of accounting for expenses, what is the maximum amount taxpayers are allowed as a deduction without being required to substantiate the amount of the expenses? a) The appropriate Federal per diem amount. b) $75 per day. c) The per diem rate established by the state in which they live. d) None of these. e) All expenses up to $25 per day.

a) The Federal per diem rate is the amount deemed substantiated.

Grape Corporation purchased a machine in December of the current year. This was the only asset purchased during the current year. The machine was placed in service in January of the following year. No assets were purchased in the following year. Grape's cost recovery would begin: a) In the following year using a half-year convention. b) In the current year using a half-year convention. c) In the following year using a mid-quarter convention. d) In the current year using a mid-quarter convention.

a) In the following year using a half-year convention.

Linda is an employee of JRH Corporation. Which of the following would be included in Linda's gross income? a) Premiums paid by JRH Corporation for a group term life insurance policy for $50,000 of coverage for Linda. b) $1000 of tuition paid by JRH Corporation to State University for Linda's master's degree program. c) A $2000 trip given to Linda by JRH Corporation for meeting sales goals. d) $1200 paid by JRH Corporation for an annual parking pass for Linda.

b) $1000 of tuition paid by JRH Corporation to State University for Linda's master's degree program.

In Lawrence County, the real property tax year is the calendar year. The real property tax becomes a personal liability of the owner of real property on January 1 in the current real property tax year (assume that this year is not a leap year). The tax is payable on June 1. On May 1, Reggie sells his house to Dana for $350,000. On June 1, Dana pays the entire real estate tax of $7,950 for the year ending December 31. Assuming that Reggie itemizes his deductions and the $10,000 limit on state and local taxes does not apply, how much of the property taxes may Reggie deduct? a) $0 b) $2,614 c) $2,625 d) $7,950 e) None of these

b) $2,614. Under § 164(d), 120/365 (January 1 - April 30) × $7,950 = $2,614 is apportioned to Reggie.

During 2019, Lisa (age 66) furnished more than 50% of the support of the following persons: ∙ Her current husband who has no income and is not claimed by anyone else as a dependent. ∙ ​ Her stepson (age 19) who lives with her and earns $6,000 as a dance instructor. He dropped out of school a year ago. ∙ Her ex-husband who does not live with her. The divorce occurred two years ago. ∙ Her former brother-in-law who does not live with her. ​ Presuming that all other dependency tests are met, on a separate return how many dependents may Lisa claim? a) Two b) Three c) Four d) Five e) None of these

b) All of the persons listed except the ex-husband meet either the relationship or member of the household tests. The current husband qualifies because he has no income and is not claimed as a dependent by anyone else. The stepson does not avoid the gross income limitation of a qualifying relative. He is not a qualifying child under 19 years of age.

Which of the following expenses, if any, qualify as deductible? a) Contributions to a qualified tuition program (§ 529 plan). b) Contribution to a traditional IRA. c) Job-hunting expense of FBI agent who applies for the job of city manager of Beaumont, TX. d) None of these. e) Contributions to a Coverdell Education Savings Account (CESA).

b) Although the benefits paid out are nontaxable, neither the contribution to CESAs (choice a.) nor § 529 plans (choice b.) are deductible. Since being an FBI agent and a city manager do not appear to be in the same trade or business (law enforcement), the job-hunting expense does not qualify (choice c.). Further, even if allowed, the job-hunting expenses would be a miscellaneous itemized deduction (and not allowed from 2018 through 2025).

Zeke made the following donations to qualified charitable organizations during the year: Basis. Fair Market Value Used clothing of taxpayer and his family (all acquired more than a year ago) $ 1,350 $ 375 Stock in ABC, Inc., held as an investment for 15 months 12,000 10,875 Stock in MNO, Inc., held as an investment for 11 months 15,000 18,000 Real estate held as an investment for two years 15,000 30,000 ​The used clothing was donated to the Salvation Army; the other items of property were donated to Eastern State University. Both are qualified charitable organizations. Disregarding percentage limitations, Zeke's charitable contribution deduction for the year is:

b) For the used clothing and the ABC stock, fair market value controls in determining the amount of the deduction. The ABC stock was held long term, but it was not appreciated property. The MNO stock would not yield a long-term capital gain if sold because of the holding period. Consequently, it is ordinary income property for charitable contribution purposes and the appreciation cannot be claimed. The real estate meets the definition of capital gain property. Thus, $56,250 ($375 + $10,875 + $15,000 + $30,000) is the amount qualifying as a charitable contribution.

Mary incurred a $20,000 nonbusiness bad debt last year. She also had an $18,000 long-term capital gain last year. Her taxable income for last year was $25,000. During the current year, she unexpectedly collected $12,000 on the debt. How should Mary account for the collection? a) $11,000 income b) $12,000 income c) $0 income d) $8,000 income e) None of these.

b) Nonbusiness bad debts are treated as short-term capital losses. Hence, the $20,000 bad debt can offset the $18,000 of long-term capital gains. And, she can use the remaining $2,000 capital loss to offset any ordinary income. Therefore, the tax benefit was $20,000 and $12,000 would be recognized as income.

Bob provides more than half of his mother's support. His mother earns $6000 per year as a hairdresser. She lives in an apartment across town. Bob is unmarried and has no children. What is Bob's most advantageous filing status? a) Supporting Single b) Single c) Qualifying Single d) Head of Household

b) Single

The taxpayer's marginal federal and state tax rate is 25%. Which would the taxpayer prefer? a) $1.00 taxable income rather than $.75 tax-exempt income. b) $1.40 taxable income rather than $1.00 tax-exempt income. c) None of these. d) $1.00 taxable income rather than $1.25 tax-exempt income. e) $1.25 taxable income rather than $1.00 tax-exempt income.

b) The $1.40 of taxable income is greater after-tax than $1.00 in taxable income [(1.00 - 0.25)($1.40) = $1.05]. Choice b. is incorrect because the $1.00 of taxable income and $0.75 of tax-exempt income are equal on an after-tax basis (1.00 - 0.25) × $1.00 = $0.75. Choice c. is incorrect because (1.00 - 0.25) × $1.25 = $0.9375.

Blue Corporation incurred the following expenses in connection with the development of a new product: Salaries $100,000 Utilities 18,000 Materials 25,000 Advertising 5,000 Market survey 3,000 Depreciation on machine 9,000 ​ Blue expects to begin selling the product next year. If Blue elects to amortize research and experimental expenditures over 60 months, determine the amount of the deduction for research and experimental expenditures for the current year. a) $143,000 b) $0 c) $152,000 d) $118,000 e) $160,000

b) The qualified research expenditures are $152,000 ($100,000 + $18,000 + $25,000 + $9,000). Under the election to amortize, the monthly amortization is $2,533 ($152,000 ÷ 60 months). However, since sales will not start until next year, there is no deduction for the current year.

Which of the following would preclude a taxpayer from deducting student loan interest expense? a) The taxpayer is single with AGI of $55,000. b) The taxpayer is taken as a dependent of another taxpayer. c) The total amount paid is $1,000 d) The taxpayer is married filing jointly with AGI of $120,000.

b) The taxpayer is taken as a dependent of another taxpayer.

White Company acquires a new machine (seven-year property) on January 10, 2019, at a cost of $620,000. White makes the election to expense the maximum amount under § 179, and wants to take any additional first-year depreciation allowed. No election is made to use the straight-line method. Determine the total deductions in calculating taxable income related to the machine for 2019 assuming White has taxable income of $800,000. a) $301,159 b) $620,000 c) $568,574 d) $88,598

b) § 179 expense $620,000

Aaron is a self-employed practical nurse who works from his home. He provides nursing care for disabled persons living in their residences. During the day he drives his car as follows: Aaron's home to Patient Louise = 12 miles Patient Louise to patient Carl = 4 miles Patient Carl to patient Betty = 6 miles Patient Betty to Aaron's home = 10 miles Aaron deductible mileage for each workday is: a) 22 miles b) 32 miles c) 20 miles d) 12 miles

b) 32 miles

Which of the following is not a factor that should be considered in determining whether an activity is treated as an appropriate economic unit? a) The extent of common control. b) All of these. c) The extent of common ownership. d) The interdependencies between the activities. e) The geographical location.

b) All of these.

Which statement below is correct? a) Salvage value is considered in MACRS depreciation. b) Real property is depreciated using the half-year convention. c) One-half month of depreciation is taken for the month real property is disposed of. d) Residential real estate is depreciated over a 39-year life.

c) One-half month of depreciation is taken for the month real property is disposed of.

A qualifying child cannot include: a) A brother who is 28 years of age and disabled. b) A daughter who is away at college. c) A grandmother. d) A married son who files a joint return. e) A nonresident alien.

c) A grandmother does not meet the relationship test (choice e.). A qualifying child can be a nonresident alien under the adopted child exception (choice a.). The filing of a joint return is not fatal if filing is not required and its purpose is to obtain a tax refund (choice b.). A temporary absence is permissible under the domicile test (choice c.). A brother meets the relationship test, and disability waives the age test (choice d.).

Al is single, age 60, and has gross income of $140,000. His deductible expenses are as follows: Alimony(divorce finalized in 2017) $20,000 Charitable contributions 4,000 Contribution to a traditional IRA 5,500 Expenses paid on rental property 7,500 Interest on home mortgage and property taxes on personal residence 7,200 State income tax 2,200 ​What is Al's AGI? a) $103,000. b) None of these. c) $107,000. d) $127,000. e) $94,100.

c) Al's AGI is calculated as follows: ​ Gross income $140,000 Deductions for AGI: Alimony $20,000 IRA 5,500 Expenses on rental property 7,500. (33,000) AGI $107,000

Regarding the Tax Tables related to the Federal income tax, which of the following statements is correct? a) The Tax Tables will always yield the same amount of tax as the Tax Rate Schedules. b) Taxpayers can elect as to whether the use the Tax Tables or the Tax Rate Schedules. c) For any one year, the Tax Tables are issued by the IRS after the Tax Rate Schedules. d) No correct answer is given. e) The Tax Tables can be used by an estate but not by a trust.

c) In any one year, the Tax Rate Schedules are issued after the Tax Tables (choice a.). Because of the way the Tables are structured, a minor variation in the tax can occur (choice b.). When applicable, the Schedules must be used and taxpayers do not have an election (choice c.). The Tax Tables cannot be used by either an estate or trust (choice d.).

Tammy has $200,000 of QBI from her neighborhood clothing store (a sole proprietorship). Her proprietorship paid $30,000 in W-2 wages and has $20,000 of qualified property. Tammy's spouse earned $50,000 of wages as an employee, they earned $20,000 of interest income during the year, and they will be filing jointly. What is their QBI deduction for 2019? a) $54,000. b) $-0-. c) $40,000. d) None of these. e) $50,000.

c) Tammy and her spouse have taxable income before the QBI deduction of $270,000 (this is also their modified taxable income). Because their taxable income before the QBI deduction is less than the threshold amount for married taxpayers filing a joint return ($321,400), the W-2 Wages/Capital Investment limit does not apply. Their QBI deduction is $40,000, the lesser of: 1. 20% of qualified business income ($200,000 x 20%), or $40,000 2. 20% of modified taxable income ($270,000 x 20%) $54,000

Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2019. Copper Company is a publicly held company that has declared a $2.00 per share dividend on September 30th every year for the last 20 years. Just as Darryl had expected, Copper Company declared a $2.00 per share dividend on September 30th, payable on October 15th, to stockholders of record as of October 10th. The daughter received the $2,000 dividend on October 18, 2019. a) Darryl must recognize the income of $2,000 because the purpose of the gift was to avoid taxes. b) Darryl must recognize the $2,000 dividend as his income because he constructively received the dividend. c) The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $2,000. d) Darryl must recognize $1,500 of the dividend because he owned the stock for three-fourths of the year. e) None of these.

c) The gift of the stock is made prior to the declaration date.

The annual increase in the cash surrender value of a life insurance policy: a) None of these. b) Reduces the deduction for life insurance expense. c) Is not included in gross income each year because of the substantial restrictions on gaining access to the policy's value. d) Must be included in gross income each year under the original issue discount rules. e) Is taxed when the individual dies and the heirs collect the insurance proceeds.

c) The income has not been actually received and, because of the restrictions, is not constructively received.

Which of the following is correct? a) Only a. and b. are correct. b) A personal casualty loss incurred from a presidentially declared disaster is classified as a deduction from AGI. c) Choices a., b., and c., are correct. d) Real estate taxes on a taxpayer's personal residence are classified as deductions from AGI. e) An expense associated with rental property is classified as a deduction for AGI.

c) Choices a., b., and c., are correct.

During 2018, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees have earned salaries of $20,000, which are not paid by Silver until early in 2019. What is the amount of the deduction for salary expense? a) If Silver uses the cash method, $0 in 2018 and $195,000 in 2019. b) If Silver uses the cash method, $175,000 in 2018 and $0 in 2019. c) If Silver uses the accrual method, $195,000 in 2018 and $0 in 2019. d) None of these is correct. e) If Silver uses the accrual method, $175,000 in 2018 and $20,000 in 2019.

c) If Silver uses the accrual method, $195,000 in 2018 and $0 in 2019.

Which court decision would probably carry more weight? a) Regular U.S. Tax Court decision b) Tax Court Memorandum decision c) Reviewed U.S. Tax Court decision d) U.S. District Court decision e) U.S. Court of Federal Claims

c) Reviewed U.S. Tax Court decision

If a taxpayer decides not to pay a tax deficiency, he or she must go to which court? a) U.S. Court of Federal Claims b) Appropriate U.S. Circuit Court of Appeals c) U.S. Tax Court d) U.S. District Court e) None of these

c) U.S. Tax Court

Carlos purchased an apartment building on November 16, 2019, for $3,000,000. Determine the cost recovery for 2019. a) $9,630 b) $13,950 c) $11,910 d) $22,740

d) $3,000,000 × 0.00455 = $13,650.

Which of the following statements regarding passive activity losses is true? a) Expenses related to passive activities may be deducted from passive activity income and portfolio income. b) A net passive activity loss may be deducted against wages. c) Losses on rental property are always considered passive. d) A passive activity is one in which the taxpayer does not materially participate.

d) A passive activity is one in which the taxpayer does not materially participate.

In terms of the tax formula applicable to individual taxpayers, which of the following statements, if any, is correct? a) If a taxpayer has deductions for AGI, the standard deduction is not available. b) In arriving at taxable income, a taxpayer must elect between claiming deductions for AGI and deductions from AGI. c) In arriving at AGI, a taxpayer must elect between claiming deductions for AGI and deductions from AGI. d) None of these. e) In arriving at taxable income, a taxpayer must elect between deductions for AGI and the standard deduction.

d) AGI is computed by claiming deductions for and no election is required (choice a.). In arriving at taxable income, deductions for AGI are allowed (choice b.) and the election is between deductions from AGI and the standard deduction (choices c. and d.).

In 2019, Boris pays a $3,800 premium for high-deductible medical insurance for himself and his family. In addition, he contributes $3,400 to a Health Savings Account. Which of the following statements is true? a) If Boris is an employee, he may deduct $7,200 as a deduction for AGI. b) If Boris is an employee, he may include $7,200 when calculating his itemized medical expense deduction. c) If Boris is self-employed, he may deduct $3,400 as a deduction for AGI and may include the $3,800 premium when calculating his itemized medical expense deduction. d) If Boris is self-employed, he may deduct $7,200 as a deduction for AGI. e) None of these.

d) Boris, who is self-employed, may deduct 100% of the premium ($3,800) as a deduction for AGI. He may also deduct the $3,400 HSA contribution as a deduction for AGI.

A U.S. citizen worked in a foreign country for the period July 1, 2018 through August 1, 2019. Her salary was $10,000 per month. Also, in 2018 she received $5,000 in dividends from foreign corporations (not qualified dividends). No dividends were received in 2019. Which of the following is correct? a) The taxpayer cannot exclude any of the income because she was not present in the foreign country more than 330 days in either 2018 or 2019. b) The taxpayer can exclude a portion of the salary from U.S. gross income in 2018 and 2019, and all of the dividend income. c) The taxpayer can exclude from U.S. gross income $60,000 salary in 2018, but in 2019 she will exceed the 12-month limitation and, therefore, all of the 2019 compensation must be included in gross income. All of the dividends must be included in 2018 gross income. d) The taxpayer must include the dividend income of $5,000 in 2018 gross income, but she can exclude a portion of the compensation income from U.S. gross income in 2018 and 2019. e) None of these.

d) Choice a. is incorrect because the taxpayer was in the foreign country more than 330 days in a 12-month period. The annual statutory limit on the foreign earned income exclusion is $103,900 in 2018 and $105,900 in 2019, and the exclusion is prorated on a daily basis; therefore, choice c., is incorrect. Choice b. is incorrect with regard to the dividends received because they cannot be excluded from gross income.

Identify from the following list the type of disposition of a passive activity where the taxpayer keeps the suspended losses of the disposed activity and utilizes them on a subsequent taxable disposition. a) Disposition of a passive activity by gift. b) Installment sale of a passive activity. c) All of these apply here. d) None of these applies here. e) Disposition of a passive activity at death.

d) Each of the situations identified results in either the losses being used or lost.

Ned, a college professor, owns a separate business (not real estate) in which he participates in the current year. He has one employee who works part-time in the business. a) If Ned participates for 120 hours and the employee participates for 120 hours during the year, Ned does not qualify as a material participant. b) If Ned participates for 95 hours and the employee participates for 5 hours during the year, Ned probably does not qualify as material participant. c) If Ned participates for 500 hours and the employee participates for 520 hours during the year, Ned qualifies as material participant. d) If Ned participates for 600 hours and the employee participates for 2,000 hours during the year, Ned qualifies as a material participant. e) None of these applies.

d) Option a. is incorrect; Ned participates for more than 100 hours and this is not less than the participation of any other individual (Test 3). Option b. is incorrect; Ned's participation constitutes substantially all of the participation even though Ned's participation is less than 100 hours (Test 2). Option c. is incorrect; Ned would have to participate for more than 500 hours for statement c. to be correct (Test 1). Option d. is correct; an individual who participates for more than 500 hours is a material participant regardless of how much others participate (Test 1).

Under MACRS, which one of the following is not considered in determining depreciation for tax purposes? a) Cost of asset. b) Property recovery class. c) Half-year convention. d) Salvage (or residual) value.

d) Salvage value is ignored under MACRS.

Hazel purchased a new business asset (five-year asset) on September 30, 2019, at a cost of $100,000. On October 4, 2019, she placed the asset in service. This was the only asset she placed in service in 2019. Hazel did not elect § 179 or additional first-year depreciation. On August 20, 2020, Hazel sold the asset. Determine the cost recovery for 2020 for the asset. a) $38,000 b) $14,250 c) $19,000 d) $23,750

d) The asset was placed in service in October 2019; as a result, the mid-quarter convention is used. 2020 is the second year of cost recovery. [$100,000 × 0.38 × (2.5/4) = $23,750.]

Chen incurred $58,500 of interest expense this year related to his investments. His investment income includes $15,000 of interest, $9,000 of qualified dividends, and a $22,500 net capital gain on the sale of securities. The maximum amount of Chen's investment interest expense deduction for the year is: a) $15,000. b) $37,500. c) None of these. d) $46,500. e) $24,000.

d) The deduction for investment interest is limited to the amount of net investment income reported. If Chen elects to treat the capital gain and qualified dividends as investment income, the deduction is $46,500 ($15,000 interest + $9,000 qualified dividends + $22,500 net capital gain). However, if he so elects, his capital gain and qualified dividends will not be eligible for beneficial capital gains tax rate treatment.

Bob and April own a house at the beach. The house was rented to unrelated parties for eight weeks during the year. April and the children used the house 12 days for their vacation during the year. After properly dividing the expenses between rental and personal use, it was determined that a loss was incurred as follows: Gross rental income $4,000 Less: Mortgage interest and property tax. $3,500 Other allocated expenses. 2,000 (5,500) Net rental loss ($1,500) ​What is the correct treatment of the rental income and expenses on Bob and April's joint income tax return for the current year assuming the IRS approach is used if applicable? a) Bob and April should include none of the rental income or expenses related to the beach house in their current year income tax return. b) Since the house was used less than 50% personally by Bob and April, all expenses allocated to personal use may be deducted. c) Only the mortgage interest and property taxes should be deducted. d) A $1,500 loss should be reported. e) Since the house was used more than 10 days personally by Bob and April, the rental expenses (other than mortgage interest and property taxes) are limited to the gross rental income in excess of deductions for interest and taxes allocated to the rental use.

d) A $1,500 loss should be reported.

Which, if any, of the following transactions will decrease a taxing jurisdiction's ad valorem tax revenue imposed on real estate? a) A public school is razed and turned into a city park. b) A local university sells a dormitory that will be converted for use as an apartment building. c) None of these. d) An abandoned church is converted to a restaurant. e) A tax holiday is granted to an out-of-state business that is searching for a new factory site.

e) Choice a. will decrease it after the tax holiday is granted. Choice b. will increase taxes because the church was abandoned and previously exempt. Choice c. converts one tax-exempt property (i.e., school) into another (i.e., public park). Choice d. probably places the building on the tax rolls because it is no longer owned by a tax-exempt institution.

The amount of Social Security benefits received by an individual that he or she must include in gross income: a) None of these. b) Is computed in the same manner as an annuity [exclusion = (cost/expected return) × amount received]. c) May not exceed the portion contributed by the employer. d) May not exceed 50% of the Social Security benefits received. e) May be zero or as much as 85% of the Social Security benefits received, depending upon the taxpayer's Social Security benefits and other income.

e) The taxable Social Security benefits are based on a formula intended to ensure that low income taxpayers are not taxed on the Social Security benefits, but higher income taxpayers are taxed under the theory that, on the average, the taxpayer will collect more from the Social Security program than he or she paid into the program.

The § 222 deduction for tuition and related expenses is available: a) To deduct that portion of the tuition in excess of that allowed under the lifetime learning credit. b) Only if it is job related. c) To cover the tuition of a son who does not qualify as the taxpayer's dependent. d) Only if the taxpayer itemizes deductions from AGI. e) None of these.

e) The § 222 deduction is a deduction for AGI (choice a.). The deduction is not available when the lifetime learning credit is used (choice b.). The student involved is not a dependent of the taxpayer (choice c.). The education need not be job related (choice d.).

In 2019, Theo, a single taxpayer, operates a sole proprietorship in which he materially participates. His proprietorship generates gross income of $320,000 and deductions of $600,000, resulting is a loss of $280,000. The large deductions are due to the acquisition of equipment and the use of immediate expense and additional first-year depreciation to deduct all of the acquisitions. What is Theo's excess business loss for the year? a) $-0-. b) $280,000 c) $250,000. d) None of these. e) $25,000.

e) Theo's excess business loss is $25,000 computed as follows: Aggregate business deductions $600,000 Less: Aggregate business gross income and gains (320,000) Less: Threshold amount (255,000) Excess business loss $ 25,000 ​ So, of Theo's $280,000 proprietorship loss, $255,000 can be used to offset nonbusiness income. The $25,000 excess business loss is treated as part of Theo's net operating loss carryfoward in subsequent years. ​

Federal tax legislation generally originates in which of the following? a) Senate Floor b) Internal Revenue Service c) Senate Finance Committee d) None of these e) House Ways and Means Committee

e) House Ways and Means Committee

Which of the following sources has the highest tax validity? a) Revenue Procedure b) Revenue Ruling c) None of these d) Regulations e) Internal Revenue Code section

e) Internal Revenue Code section

An employee can exclude from gross income the value of meals provided by his or her employer whenever: a) The meals are provided for the convenience of the employee. b) The meal is not extravagant. c) There are no places to eat near the work location. d) None of these. e) The meals are provided on the employer's premises for the employer's convenience.

e) The meals are provided on the employer's premises for the employer's convenience.

Alicia was involved in an automobile accident in 2019. Her car was used 60% for business and 40% for personal use. The car had originally cost $40,000. At the time of the accident, the car was worth $20,000 and Alicia had taken $8,000 of depreciation. The car was totally destroyed and Alicia had let her car insurance expire. If her AGI is $50,000 (before considering the loss), determine her AGI and itemized deduction for the casualty loss. a) $34,000; $4,500. b) $34,000; $-0-. c) None of these. d) $50,000; $-0-. e) $26,000; $5,700.

​b) $34,000; $-0-.