CFP Tax

In January of this year, Adam, a sole proprietor, purchases equipment (5-year property) for $1,600,000 for use in his business. Assume he elects and qualifies for the maximum Section 179 deduction and uses straight-line. What is the maximum current-year deduction that Adam can claim with respect to the equipment?

$1,000,000 for the 179 deduction 20% of the remaining $600,000 equals $120,000 Total deduction is $1,120,000

To avoid an underpayment penalty, the estimated tax payments and withholdings for the year must be equal to or exceed any one of the following:

90% of the tax liability shown on the return for the current year, or • 100% of the tax liability shown on the return for the prior year (110% if AGI for the prior year exceeds $150,000), or • 90% of the tax liability shown on the return for the current year computed on an annualized basis. Underpayment penalty is not deductible

After a tax bill is introduced in Congress, who is the first to consider the bill?

House Ways and Means Committee

Under the U.S. Constitution, who is responsible for introducing new tax legislation?

House of Representatives

Which of the following should be considered to avoid or soften the impact of the AMT tax? I. Spread out the exercise of ISOS over more than one year II. Pay yourself a large bonus if you are the owner of a small corporation III. Defer paying property taxes until next year IV. Buy private activity municipal bonds rather than public purpose municipal bonds

I, II, III Buy public purpose municipal bonds because the interest is not a preference item rather than private purpose bonds because the interest is a preference item

Which of the following are preference items or adjustments for purposes of the alternative minimum tax? I. Qualified housing interest II. Investment interest expense in excess of net investment income III. Qualified private activity municipal bond interest IV. The excess of depletion over the properties adjusted basis

III, IV Private activity municipal bond interest and percentage depletion are preference items. Answer IV describes percentage depletion. Answer I is neither a preference item nor an add back item. The same is true with answer II

An incentive stock option (ISO) must meet the following plan or employer requirements:

• The option price must be equal to or greater than the stock's FMV on the option's grant date. • The option must be granted within ten years of the date the plan is adopted, and the employee must exercise the option within ten years of the grant date. • The option must be both exercisable only by the employee and non-transferable except in the event of death. • The employee cannot own more than 10% of the voting power of the employer corporation's stock immediately before the option's grant date. • The total FMV of the stock options that become exercisable to an employee in any given year must not exceed $100,000 (for example, an employee can be granted ISOS to acquire $200,000 of stock in one year, provided that no more than $100,000 is exercisable in any given year). • Other procedural requirements must be met (for example, shareholder approval of the plan). ISOS can be a valuable tax planning tool because the earliest that they are generally taxed is when they are exercised. Also, when an employee realizes profits from stock options those profits in certain cases may qualify as capital gains.

Lamar and Barbara Williams are getting a divorce. As part of the divorce decree, Lamar is ordered to make payments of $2,000 per month. The divorce instrument provides that the payments will be reduced by $800 when Lamar Jr. turns age eighteen. How much of the payment is considered alimony?

$1,200

Sara purchases new office equipment for $9,500. Sara pays $500 in sales tax. Assuming she uses MACRS, what is the cost recovery deduction for the first year?

$10,000 x 14.29% (seven-year property)

A taxpayer is faced with a tax deficiency of $10,000, along with an interest deficiency of $4,200; the entire deficiency is the result of fraud from the taxpayer's 2018 return. What is the amount of the penalty?

$10,000 x 75% $7,500 (75% of the tax deficiency only, not the interest deficiency).

Mrs. Kale has stock worth $40,000 that she purchased many years ago for $10,000. She wants to give it to a public charity. If her AGI is $40,000, what is the maximum charitable deduction she can take this year for this stock?

$12,000. The maximum is 30% of AGI for LTCG property.

Harvey divorced Stella in 2018. He is required to pay alimony to Stella. If Harry pays $100,000 in the first year, $50,000 in the second year, and then nothing, how much of the alimony that Harry pays would be subject to recapture?

$150,000 $37,500 = $112,500

Mrs. Thomas contributed $20,000 cash and $50,000 in LTCG stock (basis $10,000) to a public charity. Her AGI is $120,000. What is the charitable deduction she can take this year?

$20,000 cash and $36,000 LTGC property (30% of AGI) does not exceed the overall 60% of AGI.

AMT Exemption

$25,000

Mrs. Richie (unmarried) has purchased various municipal bonds and tax-free mutual funds from you. She owns an expensive home (paid for) and gives to charity. At year end, her regular tax is $16,381. She asks you to review her tax return, and you have calculated that her AMT is $41,892. What is her AMT payable?

$41,892 $16,381 = $25,511

Harry divorces Gloria. Harry's mother gave him IBM shares 60+ years ago. His 10,000 shares are worth $1,000,000 with a basis of $5,000. Gloria sues to get the shares as part of the property settlement and is granted the stock. What is Gloria's basis if she sells them?

$5,000 Gloria assumes the original cost basis of the stock. No step up in basis applies in a divorce related transfer.

Kate ($200,000 of AGI) is considering giving a painting to a private university. Kate's mother bought the painting for $10,000 many years ago. When Kate's mother died, Kate inherited the painting which was then worth $50,000. It is now worth $100,000. What is the maximum allowable charitable deduction Kate can take in the current year?

$50,000 Art objects - FMV can be used only if the charity can use the art object in its charitable activity. Otherwise, use basis (the inherited value). There is no implication that the art is use related.

An estate is entitled to an income tax exemption amount of how much?

$600

Mrs. Ball has stock worth $100,000 that she purchased many years ago for $25,000. She wants to give it to a public charity. If her AGI is $250,000, what is the maximum charitable deduction she can take this year for this stock?

$75,000 The maximum is 30% of AGI for LTCG property.

Jim Corley is planning to make a charitable contribution to a local university, a qualifying charitable organization. He is going to contribute a piece of real estate that he has owned for six years. The fair market value of the property is $80,000, and the basis is $35,000. He has an AGI of $120,000. What amount of the gift is carried forward until next year?

$80,000 (FMV) less $36,000 deduction this year.

Amt phaseout

$83,500

Tony Carter filed a federal tax return on which he reported self-employment income ($80,000) as dividends and crossed off "penalty of perjury" language above the signature line. He will be subject to which of the following penalties? 1. Frivolous return II. Negligence III. Fraud IV. Estimated tax

1 and 3 The crossing off of "penalty of perjury" constitutes a frivolous return. It is also both frivolous and fraud when he shows that self-employment income is unearned-income (dividends). Not enough information is given to determine whether he will be responsible for an estimated penalty.

Amended tax return uses which form

1040x

How many years can a NOL be carried forward?

20

Which of the following is (are) subject to self-employment tax? I. Distributive share of limited partnership operating income. II. Wages from an S corporation. III. Distributive share of general partnership operating income. IV. Interest and dividends from investments.

3 The general partnership operating income is self-employment income. By definition, the other items of income are not subject to the self- employment tax. They are forms of unearned income. S corporation wages are subject to FICA, not self-employment taxes.

Which of the following person and/or income is/are subject to self-employment tax? I. Wages from an S corporation II. K-1 distributions from an S corporation III. K-1 distributions from a general partnership IV. Board of directors fees

3 and 4 Any distribution from an S corporations is not self reported income.

Jim Corley is planning to make a charitable contribution to a local university, a qualifying charitable organization. He is going to contribute a piece of real estate that he has owned for six years. The fair market value of the property is $80,000, and the basis is $35,000. He has an AGI of $120,000. What is the maximum charitable contribution deduction that Jim may claim in the current year for the gift of real estate?

30% of $120,000 is $36,000. If he used basis, the deduction would have been $35,000. It is rarely to the individual's advantage to use basis except when the basis is very close to the FMV. property contributed to a 50% organization involves a 30% of AGI limitation. The gift of long-term capital gains (LTCG) property is based on the fair market value of the property. The university is a 50% organization. LTCG

Lifetime Learning Credit

A nonrefundable credit equal to 20% of the first $10,000 of qualified higher education tuition and fees paid during the year on behalf of the taxpayer, his spouse, or his dependents. Phased out at AGI $136,000

A grandfather creates a trust to benefit his grandson. He transfers a million dollars into the trust. The trust pays the grandson income for eleven years, and then the trust corpus is returned to the grandfather's wife (the grandson's grandmother). This arrangement is which of the following?

A reversionary interest

standard deduction

A stated amount that you may subtract from adjusted gross income instead of itemizing your deductions For 2019 $12,200 single $24,400 married $1,300 higher per person over age 65 $1,300 higher if blind

Ruth finalized her divorce in 2018. She has custody of her daughter, age 14. Ruth is in a 22% federal income tax marginal tax bracket filing as single. Under the terms of her divorce decree, Ruth receives $2,000 per month alimony for 7 years and $1,000 per month child support until her daughter attains age 18. What will be Ruth's net after-tax total amount received over the next 7 years?

Alimony under a divorce finalized prior to January 1, 2019, is taxable to the recipient. Child support is not taxable. Ruth is in a 22% marginal tax bracket for federal income taxes. Her net is 1-22% = 78%. (78% x $2000) x 12 month x 7 years = $131,040 Total tax-free child support of $1,000 x 12 months x 4 years $48,000 Total after-tax amount received over 7 years: $131,040 + $48,000 = $179,040.

Who can represent the taxpayer at an IRS audit? I. Attorney II. CPA III. Enrolled agent IV. Enrolled actuary V. Any permissible designee

All of the above

Non qualified stock options

Employers receive a tax deduction for the compensation deferred

Child Care Credit

Allows a credit of 20% to 30% of actual expenses. 20% is applied once a taxpayer AGO exceeds $43,000 $3,000 individual or $6,000 family

Who may rely on a letter ruling as authority?

An individual taxpayer or corporation who has requested an answer from the IRS regarding a regulation may rely on the ruling as authority.. Nevertheless, letter rulings are significant to other taxpayers and to tax advisors because they offer insights into the IRS's position concerning the tax treatment of transactions.

AMT

Applies to trusts

Which itemized deduction is not added back to calculate the AMT?

Charitable giving

Which type of trust does not have to use a calendar year to file tax returns?

Charitable trust

Betsy divorced Arthur in 2018. She is required to pay alimony to him. Arthur wants the majority of the alimony quickly. He asks for $70,000 the first year, $50,000 in the second year, and $10,000 the third year. How much of the alimony that Betsy pays is subject to recapture?

Double the 3rd year Alimony 10,000*2=20,000 then Add it to the constant. The Constant becomes $57,500. Only use the first TWo years and subtract the constant 1st year alimony $ 70,000 2nd year alimony 50,000 Total $120,000 less constant $57,500 Recapture $ 62,500

Phantom Income

Income that must be taxed in a year even if the income is not distributed from the company. Reinvested dividends are also phantom income. Imputed interest from zero coupon bonds is phantom income. A life policy with a taxable gain and a maximum loan that lapses is phantom income. K-1 income from a S Corp with no check issued is phantom income. Limited partnership income that arises from debt restructuring creating tax ability without generating cash flow is phantom income.

Which of the following is considered the highest legislative authority for tax research, planning, and compliance activities?

Internal Revenue Code

Distributable net income (DNI) is a concept that has not been developed for which of the following purposes?

It advises beneficiaries of the amount of income the trust has earned.

A district court is the only forum in which the taxpayer may have this group decide questions of fact

Jury

If a publicly held company wanted to reduce taxes in an inflationary period, which type of inventory method would they use?

LIFO

Sara filed an extension on April 15. On June 1, she filed her tax return and owed an additional $400 on a tax liability of $4,100. Which of the following will apply?

No penalty because of prepayment of over 90% of liability. 90% of $4,100 is $3,690. She actually paid $3,700. The $3,700 comes from the data given ($4,100 - $400). There is no failure to pay the total amount due because she fulfilled the 90% rule by paying slightly more than 90%. There is no penalty, but interest may be due.

ABC Corporation had an unprofitable year in 2017, losing $5 million. Prior to 2017, the company was marginally profitable. In 2018, the corporation broke even. With the development of a new product in 2019, the company made $10 million. How much NOL can the company use?

O $5 million this year. Presuming ABC is a regular corporation, 2017 NOL rules allow a company to carry back a loss 2 years or it can be carried forward for 20 years. The 2015 loss of $5 million can be used in 2017 against the $10 million gain.

A company buys a light duty truck for $25,000. Under straight line method of depreciation, how much can the company take in cost-recovery deductions in the first year?

O $5,000 Automobiles depreciated over the course of five years under straight line. $25,000 x 20% = $5,000

A client had a tax liability last year of $150,000. What is the required minimum annual tax payment to avoid an underpayment penalty tax?

O 90% of this year's return The question says $150,000 of tax liability. The other correct answer would have been 110% of the prior year.

Carol MacMillan owns and operates a group of retail appliance stores with combined sales of $40M. The stores have an extensive selection of appliances. She uses FIFO. What method of tax accounting is most appropriate for Carol's business?

O Accrual

On average, Compuchat produces $15 million in annual revenues. Identify the easiest accounting method it may elect.

O Cash The cash method is now available with annual revenues not exceeding $25 million. It is the easiest accounting method to maintain.

Tina Adams owns a consignment shop. She operates her business as an S Corporation. Typical annual revenues are $750,000. She takes in all kinds of inventory and the turnover based on good pricing and sales keeps her profitable month after month. What type of tax accounting does she use?

O Cash Tina's S Corporation may implement the cash method of accounting. The cash method would be the easiest to maintain.

Which one of the following helps a taxpayer avoid paying AMT?

O Exercise nonqualified stock options this year. Exercising nonqualified stock options (NsOs) increases taxable income. Any tax item that increases the regular tax is correct for minimizing the AMT. Answers A, C, and D decrease regular taxable income and thus increase the exposure to paying AMT.

Which of the following are preference items or add-back items for purposes of the individual alternative minimum tax? I. Qualified private-activity municipal bond interest II. Property tax itemized deduction III. The excess of percentage depletion over the property's adjusted basis IV. Cost depletion deductions

O I, II, III Cost depletion is not a preference item. Property tax is not a deduction. It is added back to calculate the AMT (an adjustment).

Which of the following items qualify as alimony payments to a spouse if pursuant to a divorce instrument? I. Mortgage payments for property owned by the payor spouse but used by the payee spouse. II. Payment of the payee spouse's rent by payor spouse. III. Life insurance premiums on payee spouse. IV. Payments which continue beyond the payee spouse's death with the children as named beneficiaries. V. Payment of payee spouse's tuition to State College to become a CFP® practitioner per divorce decree.

O II, V Tuition payments can qualify if made pursuant to the divorce instrument. Payment of the payee's rent by the payor spouse is clearly alimony. Payments made to maintain property owned by the payor are not alimony. Only life insurance on the payor spouse qualifies as alimony. The policy must be owned by the payee spouse. Payments that continue beyond the payee spouse's death are considered child support.

Interest on which of the following bonds is (are) a preference item? I. Municipal bonds II. GO municipal bonds III. Private activity municipal bonds IV. 30-year Treasury bonds V. AAA corporate bonds

O III GO are general obligation bonds (public purpose). Municipal bonds could be private activity. Answer I could be correct. However, there was no Answer I and III. The Treasuries and corporate bond trigger more ordinary income, not a preference item.

Which of the following businesses or entities cannot use the cash method of accounting? I. A CPA firm doing business as a partnership II. A trust III. A large department store chain IV. A C corporation with $35 million of annual gross receipts for more than 3 years

O III, IV The limit on C corporations is $25 million. A large department store chain uses the accrual method because of inventory.

Mr. and Mrs. Lein want to lower their federal income tax exposure. Both of them work and their earned income is close to $200,000 after their 401(k) contributions. To reduce their tax liability they bought a large house with a substantial mortgage. They pay real estate taxes and local taxes. They donate generously to various charities. They cannot deduct for medical or dental expenses because of their AGI. As a result, their marginal tax bracket is 24%. When they got their 1040, they had an AMT hit of extra taxes at 26%: Most likely, what caused the AMT? I. Real estate taxes II. Mortgage interest III. Local taxes IV. Exercise of ISOS

O IV AMT tax because they reduce the regular tax. Some items are added back (taxes). The answer to AMT reduction is generally to pay more regular AMT is calculated based on AGI. The itemized deductions reduce the regular taxes (interest and charitable donations). Indirectly, they trigger an tax.

During an inflationary period, Company A is using the LIFO form of inventory control. If it changes to FIFO, which of the following will be true?

O Net business income will be higher. FIFO indicates that Company A sell its lowest cost goods first. Thus its income would increase. If Company A went from FIFO to LIFO its inventory cost would be understated and both its net business income and tax liability would be lower.

Harry and Bev Latel both are earning high levels of compensation. As a result, they are high up in the 37% bracket. They pay a regular tax of around $325,000. They save regularly because they want to retire early. They currently rent a 1,500 square foot condo in downtown building. They drive their cars for 6-7 years. They only give a limited amount to various charities. However, they are not itemizing. They are claiming a standard deduction. They say they are aggressive investors, but mainly invest in low turnover growth funds. Do they appear to have an AMT problem?

O No, without being able to itemize their AMT will not be a factor. Because they are not itemizing and there are no AMT preference or add-back items, they would have an AMT problem when they are in the 37% bracket. The AMT maximum tax is 28%.

Which of the following business transactions will trigger an immediate tax deduction for a business?

O Repair to 1250 property Repairs are treated as expenses which are fully deductible in the current tax year. 1245 property is equipment and has a shorter depreciation schedule. But, it is not expensed immediately. 1245 property could be expensed immediately under Section 179.

If the President vetoes a tax bill, is it possible for the veto to be overturned without rewriting the proposed legislation?

O Yes. A presidential veto may be overturned with two-thirds majority votes in both the House of Representatives and the Senate.

Section 179 expense election is available to which type of property

Only 1245 property (furniture, fixtures & equipment, carpet, decorative light fixtures and electric costs that serve telephones and data outlets)

Which of the following items will qualify as alimony payments to a spouse? I. The payer spouse owns a life policy, names the payee spouse the beneficiary, and pays the premium on the policy (by decree). II. The divorce decree gives the payee spouse and children rent-free occupancy of the family home. III. Payment of child support (by decree). IV. The payer spouse pays $5,000 into the payee spouse's IRA each year (by decree).

Only IV The payor also owns the home (gives them rent-free occupancy), so there is no alimony deduction. The payer owns the policy. Therefore, the payer owns the cash value. Any premium paid increases the cash value. There is no alimony

Mr. Davis owns 100% of Davis, Inc. The business operates as an S corporation. It is profitable. Mr. Davis took about $100,000 in salary, but he will get another tax-related form from the company, a K-1. He expects the K-1 to report an additional $250,000 (unearned income from an S corporation). He expects the additional taxes due will amount to $60,000 to $70,000. What should he do?

Pay the tax when due If he does not file that will cost him 5% per month with a maximum of 25%. Whereas failing to pay will only cost him .5% per month. Directing the K1 to hos son is assignment of income.

A NOL cant be used by which of the following entities?

Scorps and partnerships cannot use NOLs.

Mr. and Mrs. Patrick purchased a home some years ago for $100,000. They sold the home in the current year for $750,000. They used the money to buy a smaller home for $250,000. What is the maximum amount of gain they must recognize?

Selling price $750,000 Less basis - 100,000 Realized gain 650,000 Less exclusion (married)- 500,000 Recognized gain $150,000

Edie bought a home for $150,000. What will the tax result be when she sells the home for $200,000 after living in it for six months?

She is single. $250,000 x 0.25* = $62,500 *6 months divided by 24 months

Mrs. Bell, a grandmother, transferred $1.5 million to an irrevocable trust seventeen years ago. She died this year. Under what circumstance will this trust not be part of her gross estate?

She received income from the trust for 15 years. Now the income goes to her children.

XYZ Corporation generates a loss of $1,000,000 in 2019. How much of the loss may be carried back to prior years?

Starting in 2018, NOLS are no longer allowed to be carried back to prior years.

In addition to understanding taxes are but one cost of doing business, which of the following items should a tax professional keep in mind when conducting research in a tax-planning context?

Tax ramifications for all parties to the transaction are relevant.

Five years ago, Jackie Martin purchased a warehouse for her business at a cost of $190,000. She paid $4,000 in legal fees associated with the acquisition. She paid $12,500 to improve the dock area. She has taken $25,000 in cost recovery deductions. She has paid $13,000 for property taxes and $17,000 for utilities over the five years. What is Jackie's current adjusted basis in the warehouse?

The $190,000 basis is increased by the capitalized costs: legal fees of $4,000 and improvements of $12,500 (cost basis $206,500). The cost recovery deductions ($25,000) reduce the adjusted basis to $181,500. Property taxes and utilities are currently deductible and, therefore, do not affect basis.

In 2016, Keith Pierce was divorced from his wife, Barbara. Barbara received custody of their two children. Keith was ordered to pay $1,000 per month to Barbara until the youngest child reaches age 18. At that time, the payments are to decrease to $400 per month. What portion, if any, is deductible by Keith as qualifying alimony?

The $600 is tied to an occurrence related to Minor child (the child reaching age 18). Only $400 is treated as alimony.

A client has an AGI of $200,000. What choice does he or she have to avoid the underpayment penalty?

The AGI exceeds $150,000. The client's best,choice is to deposit the lesser of 90% of this year's tax liability or 110% of last year's.

The Smith's have two children currently enrolled in their fifth and final year of college. Each student has $25,000 of qualified education expenses. The Smith's AGI is below the applicable phase-out thresholds. What is the maximum the Smith's can şave using tax credits for education?

The AOTC is not available beyond four years of college. Using the Lifetime Learning tax credit, the Smith's can claim a $2,000 tax credit.

Who issues a revenue ruling, and what is its purpose?

The IRS issues revenue rulings to indicate the tax consequences of a particular transaction in which taxpayers might engage.

Margaret donates stock she bought six months ago to the State University. She purchased the stock for $50,000. The current fair market value is $60,000. Margaret's AGI is $150,000. What is her maximum allowable charitable deduction in the current year?

The charitable deduction for gifts of short-term Capital gains property is limited to basis and 50% of AGI. $50,000

net investment income

The difference between inward and outward flows of investment income. Common expenses are advisory fees, subscription to journals, investment research, safe deposit box, and custodial fees.

Mr. and Mrs. Littletown purchased a house together for $100,000 many years ago in a community property state. When Mr. Littletown died, the house was worth $600,000. Mrs. Littletown sold the home for $700,000 three years later. How much gain must she realize?

The house would get a full step-up to $600,000. Her realized gain would be $100,000. The recognized gain is $0

Mr. Lowe (single taxpayer) died this year. He has a $9,000 carryforward capital loss from the prior year. How will his carryforward loss be treated?

The loss can be used in the year of death. However, any unused carryforward losses are lost after the year of death.

Cheryl purchases new office furniture. She pays $10,000 for the furniture. The sales tax is $700, and the shipping cost is $300. She spends $3,000 to improve her office. What is the cost recovery deduction she can claim for the new furniture in the first year?

The office furniture is seven-year property. $11,000 x 14.29% = $1,571.90. The question asks only about the furniture - nothing else!

Which of the following can use the installment method of tax recognition?

The only answer that can use the installment method is undeveloped land.

Mr. and Mrs. Owens want to make a gift to a private university. Their AGI is $300,000. They own a variety of assets. Which asset would produce the largest income tax deduction this year? O A painting bought five yea3 ago for $50,000, now worth $150,000. O Stock bought six years ago for $30,000, now worth $150,000. •Stock bought two years ago for $180,000, now worth $100,000. O Stock bought two years ago for $130,000 now worth $150,000.

The question is asking for the largest income tax deduction this year. If they value the donated stock at basis, they can deduct $130,000. With regard to the painting, they must valuate at basis ($50,000 use unrelated). Stock bought six years ago for $30,000, now worth $150,000 produces a deduction of $90,000 (30% of AGI). Stock bought two years ago for $180,000, now worth $100,000 is loss property. They should sell it and take the loss.

Two years ago, Maxine purchased a computer for use in her business at a cost of $10,000. She took cost recovery deductions of $5,200. Due to her business expanding, she needs a faster more powerful computer. She sells the original computer for $4,000. What is her gain or loss on the sale of the computer?

The sale creates an ordinary loss. Her basis is $4,800. The $4,000 in sales proceeds less $4,800 basis eqyals an $800 loss. NOTE: When the amount realized is less than the adjusted basis, the resulting loss is treated as an ordinary loss.

the section 179 deduction is limited to:

the net income from the business

her university (a private university). They are presently worth $40,000. Her AGI is $145,000. What is the Debbie Sutton purchased some securities for $50,000 some years ago. She wants to donate them to maximum charitable deduction she can take this year for the donation of the stock?

This is "loss" property. The deduction is limited to fair market value ($40,000). Debbie should have sold the stock for $40,000. Then she could take a $10,000 LTCL. Then she could have donated the sale proceeds (approximately $40,000).

Mrs. P establishes an irrevocable trust for her son. She transfers $500,000 to the trust. The trust principal is placed with a money manager generating 6% taxable income. The trust applied for a whole life policy on her life. The trust will own and be the beneficiary of the policy. The premium of the whole life policy is $13,000 per year. The trust will pay the premium. The remaining income will accumulate in the trust. How will the income be taxed?

This is a tainted irrevocable trust. Only the life insurance premium is taxable to Mrs. P (the grantor). The remaining income is taxable to the trust.

In which court may a taxpayer have a jury trial to settle a tax dispute with the IRS?

U.S. District Court

In which court is the taxpayer not required to pay a tax deficiency prior to commencement of litigation?

US Tax Court

ISOs generally taxed

When exercised

Tom Jones owns TJ, Inc. The company typically sells unwanted inventory of other stores. TJ is very popular due to its low prices. Business profits should total $600,000 after all expenses. Tom feels the business computer cannot handle the increasing volume of transactions effectively. What should he do if he buys a new piece of computer equipment for $25,000?

With a Section 179 election Tom, can now expense up to $600,000 the cost of the computer directly against the profits of the company this year. Under MACRS, he could depreciate it over 5+ years, but future depreciation is not as cost-effective as a current deduction.

What do the first two digits in a letter ruling indicate?

Year the letter ruling was made public

Margin interest deductible

Yes but only up to net investment income

American Opportunity Tax Credit

a partially refundable tax credit of up to $2500 a year to help defray college expenses for the first four years of postsecondary education

Child Tax Credit

a tax credit given for each qualifying child under 17 Maximum credit per child is $2,000 AGI phaseout starts at $400,000 for MFJointly and $200,000 for single and married filing separately. Reduced by $500 for college students

Incentive stock option (ISO) plans

corporate programs in which a company grants an employee the opportunity to purchase its stock at some future time at a specified price Preferred by employees when LTCG rates are low compared to ordinary income rates. No tax deduction to Employer

Investment Interest Expense

interest paid by an individual on debt incurred to purchase or carry investment property -Deductible ONLY up to the amount of net investment income.

This year, Frank Phillips purchased several items of depreciable, tangible personal property with a total cost of $41,000 (5-year property) for use in his business. Frank has taxable (earned) income from his business of $11,000 (without regard to the Section 179 expense). He also has 1099 income from a part- time job of $13,000. What is the maximum amount of Section 179 expense that Frank may deduct in the current year?

personal The Section 179 election is subject to a taxable (earned) income limitation. For this purpose, part-time wages received are considered to be from the active conduct of a trade or business. Frank's business income $11,000 plus part-time income of $13,000 equals $24,000 of taxable income. The 179 deduction may not create a net operating loss (NOL).