test tax 1
Which of the following constitutes constructive receipt A salary check received at 6:00 p.m. on December 31, after all the banks have closed.
Yes
Are items of income not listed in Sec. 61 taxable? Explain.
Yes. Although Sec. 61 lists several different types of taxable income, it also says any item of income not listed is taxable unless it is specifically excluded. Therefore, a taxpayer must be able to identify a specific exclusion in order to avoid being taxed on an item of income.
Are partners and proprietors at a disadvantage with respect to fringe benefits? Explain.
Yes. Partners and proprietors are ineligible for the favorable tax treatment for many fringe benefits such as group term life insurance. Although they can deduct medical insurance premiums and retirement plan contributions paid on their behalf for AGI, the amounts remain subject to self employment tax.
certain individuals must file even if they have less than the specified gross income amounts
1) taxpayers with $ 400$400 or more of the self-employment income, (2) dependent individuals whose unearned income exceeds $1 comma 1001,100 or whose total gross income exceeds the standard deduction, and (3) taxpayers who owe the 0.9% Additional Medicare Tax or the 3.83.8% Net Investment Income Tax.
What are the seven major types of fringe benefits covered by Sec. 132? Are such benefits available to employees only or may the benefits also be offered to spouses, dependents, and retirees?
1. No additional cost benefits Employees, spouses, dependents, and retirees 2. Qualified employee discounts Employees, spouses, dependents, and retirees 3. Working condition benefits Employees only 4. De minimis benefits Employees only 5. Qualified transportation and parking fringes Employees only 6. Athletic facilities Employees, spouses, dependents, and retirees 7. Educational assistance Employees and former employees
Under what conditions is the discharge of indebtedness not taxable?
1.Bankruptcy 2.Some discharges relating to student loans 3.Limited exclusions for debt cancellation related to real property used in a business by taxpayers other than C corporations. 4.Discharges that occur when the taxpayer is insolvent
Federal estate tax type
progressive
State income taxes tax type
progressive
A qualifying relative must:
receive more than half of his or her support from the taxpayer. have gross income less than 4200 in (2019) be related to the taxpayer or reside in the taxpayer's household for the entire year.
flowthrough entitys
sole proprietorships, partnerships, S corporations, LLCs, LLPs, and certain trusts,
propotional tax
tax in which percentage of income paid in tax is the same regardless of the level of income
difficult to design a "fair" tax structure
Fairness is relative in nature
What is the first day that an individual could sell a capital asset purchased on March 31, 20192019 and have a holding period of more than one year?
04/01/20
Explain the distinction between a deduction and a credit.
A deduction is an amount that is subtracted from gross income (or adjusted gross income), while a credit is an amount that is subtracted from the tax itself.
If a loan is repaid, the lender does not have to include the principal portion of the payment in gross income.
A loan repayment is not consistent with the normal meaning given to the word income. A taxpayer is no better off because a loan is repaid. There has been no economic benefit. As a result the repayment of a loan is not taxable simply because it is not income.
Under what circumstances, if any, can a married person file as a head of household?
A married person, if otherwise qualified, can claim head-of-household status if he or she is married to a nonresident alien or if he or she qualifies as an abandoned spouse. To be an abandoned spouse, the person must have lived apart from his or spouse for the last six months of the year and maintain a household for a qualifying child in which they both live.
Define the term scholarship as it is used in Sec. 117.
A scholarship is an amount paid or allowed to a degree candidate to aid the individual in pursuing his or her studies.
What is the statute of limitations for transactions involving: The omission of rental income that is equal to greater than 25% of the taxpayer's reported gross income
A six year statute of limitations applies if the taxpayer omits an item of gross income that is in excess of 25% of the gross income that is reported on the return.
progressive tax
A tax for which the percentage of income paid in taxes increases as income increases
Carry, an accountant, sued a client in order to collect her fee for doing tax work. Would Carry's accounting method make any difference?
Accounting fees are taxable. The fact that she had to sue is not relevant. A cash basis taxpayer would report the fee when it is collected. An accrual basis taxpayer would report the fee when the services are rendered. An accrual basis taxpayer would not have to report the fee a second time when collected unless it had been written off as a bad debt.
Why does the tax concept of income more closely resemble the accounting concept of income than the economic concept?
Administering the tax law based on the accounting concept of income is easier and wherewithal-to-pay is greater when income is taxed as it is realized.
What recent change has been made to the tax treatment of alimony?
Alimony payments covered by prior law are deductible for AGI by the payor and are included in the gross income of the recipient. Alimony payments covered by the new law are neither taxable to the recipient nor deductible by the payor.
Sometimes taxpayers may not be able to file their tax returns by the normal due date. Do extensions enable taxpayers to delay paying the tax they owe?
Any tax that may be owed must be paid with the application for an extension.
Sometimes taxpayers may not be able to file their tax returns by the normal due date. Are extensions available?
Automatic extensions of six months are generally available.
If a father forgives a daughter's debt to him, is she required to include such amount in her gross income?
A father's forgiveness of a daughter's debt may be motivated by reasons such as love and affection. As a result the forgiveness may be a gift and excluded from gross income.
A landlord who receives prepaid rent is required to report that amount as gross income when the payment is received. Why would Congress choose to do this?
Congress taxes prepaid rental income due to the concern that taxpayers who spend the money will be unable to pay the tax when it comes due.
Why is it important to distinguish debt cancellation from a gift, bequest, or renegotiation of a purchase price?
Debt cancellation results in taxable income while gifts, bequests, and renegotiations of purchase price are not taxable.
Is discrimination prohibited relative to Sec. 132 benefits?
Discrimination is prohibited relative to most Sec. 132 benefits. Discrimination is permitted relative to working condition benefits, parking and transportation and de minimis benefits other than eating facilities.
Difference between flow through and taxpaying entities
Flow through entities generally do not directly pay income taxes on their taxable income but merely pass the income on to a taxpaying entity.
Why is a thorough knowledge of sources of tax law so important for a professional person who works in the tax area?
Due to the vast volume of tax law sources, it is impossible for any person to have recall knowledge of the tax law. Thus, the ability to understand what the relevant sources of tax law are, their relative importance, and where to find the sources are vital to a person working in the tax area.
Most exclusions exist for one of two reasons. Give examples of exclusions that exist for each.
Exclusions for employee death benefits, life insurance benefits, and public assistance exist because of reasons of benevolence while the foreign earned income exclusions and the exclusions for certain employee benefits are intended to be economic incentives.
Sometimes taxpayers may not be able to file their tax returns by the normal due date. How long are the extensions?
For a C corporation, the extension is six or seven months, depending on fiscal year-end.
Estates are not subject to federal estate tasks why
Generous credit of 11,400,000
Gross income refers to
Gross income refers only to income from taxable sources.
Explain the difference between refundable and nonrefundable credits.
If a refundable credit exceeds the taxpayer's tax liability the taxpayer will receive a refund equal to the excess. If a nonrefundable credit exceeds the taxpayer's tax liability the taxpayer will not receive a refund, but may be entitled to a carryover or carry back.
How might the current treatment of capital losses discourage an individual investor from purchasing stock of a high-risk, start-up company?
If the individual taxpayer does not have capital gains, only $3,000 of capital losses may be deducted annually. It may take many years before an investor with a large capital loss is allowed to deduct all of the losses.
What happens to the basis of an asset if the taxpayer renegotiates its purchase price?
In most cases, the taxpayer must reduce the basis of the property by the amount of the debt reduction.
If a gift of property is made, who is taxed on income produced by the property?
Income earned prior to the gift is taxable to the donor. Income earned after the gift is taxable to the donee.
Select the types of taxpayers are more likely to be audited by the IRS.
Individuals who are sole proprietors and incur significant expenses in connection with the trade or business. Itemized deductions in excess of an average amount for the person's income level. Filing of a refund claim by a taxpayer who has been previously audited and the audit resulted in a substantial tax deficiency. Individuals who are self-employed with substantial business income or income from a profession such as a medical doctor.
Is an individual required to file a tax return if he or she owes no tax?
Individuals who owe no tax because of deductions or other reasons must still file a return if they have gross income in excess of the filing requirement amounts.
Which is worth more, a $10 deduction or a $10 credit?
In general, a $10 credit is worth more than a $10 deduction because the credit results in a $10 tax savings. The savings from a deduction is less than 100% of $10, depending on the tax bracket that applies to the taxpayer.
Summarize the rules that explain which parent claims their children as dependents in cases of divorce.
In general, the parent with custody for the greater part of the year may claim the children as dependents. The noncustodial parent may claim them as dependents only if required documentation provides for it.
If an employer provides a scholarship to an employee who is on leave of absence, is that scholarship taxable?
It is likely that such a scholarship will be viewed as compensation for future services, and will, therefore, be taxable. The expenses incurred by the employee may be deductible education expenses.
Most exclusions exist for one of two reasons. What are those reasons?
Most exclusions exist for either reasons of benevolence or incentive.
What role would a tax advisor play in a divorce?
Representatives of individuals involved in a divorce must make sure that the participants understand the after tax implications of alimony payments.
Are the same fringe benefits that are available to employees also available to self-employed individuals?
Most fringe benefits are tax favored for employees, but not self-employed individuals. A few items that self-employed individuals may participate in are health insurance premiums, travel, and Keogh plans.
What role does intent play in determining whether a transfer is a gift and therefore not subject to the income tax?
Motive does play an important role. For a transfer to be a gift, it must be made for reasons such as love, affection, kindness, sympathy, generosity, or admiration.
What are the seven major types of fringe benefits covered by Sec. 132?
No additional cost benefits Qualified employee discounts Working condition benefits Employees only De minimis benefits Qualified transportation and parking fringes Athletic facilities Educational assistance
If a taxpayer files his or her tax return and receives a tax refund from the IRS, does this mean that the IRS feels that the return is correct and will not be subject to a future audit?
No. It only means the taxpayer has filed a return and received a refund, the IRS may still audit a taxpayer.
Is the amount paid by a university to students for services excludable from the students' gross income?
No. The amounts will normally be taxable compensation.
Does the fact that an item of income is paid in a form other than cash mean it is nontaxable? Explain
No. The form of payment is usually unimportant. The important question is whether the taxpayer receives economic benefit.
Dave has incurred $6,000 of medical expenses so far this year. He paid $400 of the expenses himself. His insurance company paid $4,000 of the expenses. The hospital is suing Dave and the insurance company for the balance, $1,600.
None of the amounts represent income. There is a possibility that forgiveness of debt could become an issue, but that does not yet appear to be the case.
Ann received $2,000 from her insurance company when her automobile which cost $3,000 was stolen.
None. The amount received is a recovery of capital.
Barry received $3,000 from his brother. Barry had initiated a lawsuit against his brother in an effort to recover $3,000 he had previously loaned to him. The brother paid Barry back before the case was tried, and Barry dropped the lawsuit.
None. The repayment of a loan is nontaxable. The fact that the taxpayer had to initiate a lawsuit is irrelevant.
Corporate state franchise tax type
Proportional
Property taxes type
Proportional
State and local sales taxes type
Proportional
Andy owns an appliance store where he has merchandise such as refrigerators for sale. Roger, a bachelor, owns a refrigerator, which he uses in his apartment for personal use. For which individual is the refrigerator a capital asset?
Roger's refrigerator is a capital asset since it is not included in the list of properties that are not capital assets.
Explain the meaning of the term wherewithal to pay as it applies to taxation.
The concept of wherewithal-to-pay means that a tax should be imposed when the taxpayer can most easily pay. A taxpayer who owns property that has increased in value does not necessarily have the funds needed to pay any tax. Taxing the gain when it is realized often means that the tax becomes due at the same time the taxpayer collects the sales price.
Is the personal injury exclusion found in Sec. 104 limited to physical injury? Explain.
Section 104 limits the exclusion to personal physical injury.
Should most estates be subject to the federal estate tax? Why or why not?
Some people say "no" because it is considered a double tax. Others say "yes" because they believe in the "ability to pay" principle
Why wouldn't the tax researcher just consult the Code since it is the highest authority? Similarly, why is there a need for administrative rulings and court decisions?
The Code contains general language and does not address the many specific situations and transactions that occur. To resolve tax questions concerning specific situations, administrative rulings and court decisions are an integral part of the income tax law.
Because there is no specific exclusion for unrealized income, why is it not taxable?
The Supreme Court has held that unrealized amounts are not income, The Supreme Court has held that unrealized amounts are not income, the sixteenth amendment to the Constitution.
If Pam transfers an asset to Fred and the asset is subject to a liability that is assumed by Fred, how does Fred's assumption of the liability affect the amount realized by Pam? How does Fred's assumption of the liability affect his basis for the property?
The amount realized by Pam is increased by the amount of the liability assumed by Fred. Fred's basis is increased by the amount of the assumed liability.
If a scholarship covers room and board, is it excludable?
The exclusion is limited to amounts awarded for tuition, books, fees, supplies, and equipment. As a result, if a scholarship either exceeds the total amount of qualifying expenses or, alternatively, the scholarship is specified as being for nonqualifying expenses, the scholarship will be at least partially taxable.
What is the statute of limitations for transactions involving: Disallowance of tax deduction items
The general rule for the disallowance of tax deduction items is that an assessment may be made against the taxpayer within three years from the later of the date the tax return was filed or its due date.
For each of the following items, indicate whether the individual taxpayer must include any amount in gross income. Employees of Eastside Bookstore are given their birthdays off with pay.
Yes
What is the normal due date for the tax return of calendar-year taxpayers? What happens to the due date if it falls on a Saturday, Sunday, or holiday?
The normal due date for calendar-year individuals and C corporations is April 15. The normal due date for calendar-year partnerships and S corporations is March 15. If the normal due date is a Saturday, Sunday, or holiday, the normal due date is delayed to the next day that is not a Saturday, Sunday, or holiday.
A landlord who receives prepaid rent is required to report that amount as gross income when the payment is received,What problem does this create for the taxpayer?
The problem created for taxpayers is that they are taxed before they incur related expenses, such as repairs, insurance, and depreciation. Therefore, there is a mismatching of revenue and expense.
Which of the following constitutes constructive receipt
Yes
What is the statute of limitations for transactions involving: Fraud
The statute of limitations remains open indefinitely if a fraudulent return is filed or if no return is filed at all.
constructive receipt. Explain its importance.
The taxpayer cannot defer the tax by refusing to accept payment.
How can interfamily gifts reduce a family's total tax liability?
The total tax liability can be reduced if the donee is in a lower income tax bracket than the donor.
Are tips received by employees from customers excludable from gross income as gifts? Explain.
Tips are considered to be compensation for services and therefore are not excludable from gross income. If other motives are present, a tip may not be considered a gift and excluded from income.
Why are cafeteria plans helpful in the design of an employee benefit plan that provides nontaxable fringe benefits?
Under a cafeteria plan, employees may select which benefits they wish to receive, and select the items that they feel are most beneficial. For example, single employees are often not interested in life insurance coverage.
Define the term constructive receipt.
Under the concept of constructive receipt, income is taxed when it becomes available to the taxpayer.
flat tax
a tax system with a constant marginal rate, usually applied to individual or corporate income
Income includes
all income from whatever source derived
income from whatever source derived is based on
based on principles of economics and/or accounting.
Tax paying Entities
individuals and C corporations
What determines if an individual must file a tax return?
in general, it is an individual's gross income that determines whether he or she must file a return when their gross income is in excess of the filing requirement amounts.
For each of the following items, indicate whether the individual taxpayer must include any amount in gross income. Westside Hardware, Inc., gave each employee 10 shares of Westside stock worth $100 per share in lieu of a cash bonus.
yes
Qualifying children must:
live with the taxpayer more than half of the year. be under age 19, a full-time student under age 24, or disabled. be the taxpayer's child or sibling or a descendant of the taxpayer's child or sibling. not provide more than half of his or her own support.
requirements applicable to all dependents :
must meet a citizenship test. cannot normally file a joint return. cannot claim others as dependents.
Which of the following constitutes constructive receipt
no
under sec 104 would recovery via lawsuit of 40000 of wages be taxable
no indication of physical injury or medical expenses
when calculating basis
only addition apply
horizontal equity principle
people in the same economic situation should be treated equally
ability to pay
principle of taxation based on belief that taxes should be paid according to level of income regardless of benefits received
Explain three restrictions on the concept of constructive receipt.
the amount is unavailable to the taxpayer. the payor does not have the funds necessary to make payment. the receipt is subject to substantial limitations or restrictions.
verticle equity
the idea that taxpayers with a greater ability to pay taxes should pay larger amounts
Can income be realized even when a cash-method taxpayer does not receive cash?
yes
Does a cash basis taxpayer realize income upon the receipt of a note?
yes
For each of the following items, indicate whether the individual taxpayer must include any amount in gross income. Employees of Northside Manufacturing were allowed to take home the company's old computers when the company purchased new ones.
yes
For each of the following, indicate whether the amount is taxable: a. Peggy won $4,000 in the state lottery. b. Jane won a $500 prize for her entry in a poetry contest. c. Linda was awarded $2,000 when she was selected as "Teacher of the Year" by the local school district.
yes yes yes
Which of the following would be includable in gross income? a. Alice appeared on a TV quiz show and received a prize of $5,000. b. Bart received $500 from his employer because he developed an idea that reduced the employer's production costs. c. Chuck borrowed $500 from his mother in order to finance his last year in college. Upon his graduation, Chuck's mother told him he did not have to repay the $500. She intended the $500 to be a graduation present.
yes yes yes