Tax test 2
[LO 2] Sue has 5,000 shares of Sony that has an adjusted basis of $27,500. She sold the shares for cash of $10,000 and also received a piece of land which was valued at $20,000 and had an adjusted basis to the buyer of $12,000. What is Sue's gain/loss on the sale of the stock?
10,000 + 20,000 = 30,000 30,000 - 27,500 = 2,500 $2,500 is her gain on the sale
the maximum amount of net capital losses individual taxpayers may deduct against their ordinary income per year is: A) $3,000 B) $5,000 C) Zero, losses are not deductible D) There is no maximum. All losses are allowed to be deducted E) None of these are correct
A) $3,000
Ms. Fresh bought 1,000 shares of Ibis Corporation stock for $5,000 on January 15, 2016. On December 31, 2018 she sold all 1,000 shares of her Ibis stock for $4,500. Based on a hot tip from her friend, she bought 1,000 shares of Ibis stock on January 23, 2019 for $3,000. What is Ms. Fresh's recognized loss on her 2018 sale and what is her basis in her 1,000 shares purchased in 2018? A) $-0- LTCL and $3,500 basis B) $200 LTCL and $3,300 basis C) $300 LTCL and $3,200 basis D) $400 LTCL and $3,100 basis E) $500 LTCL and $3,000 basis
A) $-0- LTCL and $3,500 basis this is a wash sale, so no loss is recognized at the time of the sale, the loss is added to her basis normally would be a $500 loss . The $500 is added to the basis of the new purchase, so $3,000 + $500 = $3,500
Persephone has a regular tax liability of $12,475 and a tentative minimum tax of $11,500. Given just this information, what is her alternative minimum tax liability for the year? A) $0 B) $11,500 C) $975 D) $12,475
A) $0 because regular tax exceeds tentative min tax, she doesn't owe any AMT
In X8, Erin had the following capital gains (losses) from the sale of her investments: $2,000 LYCG, $25,000 STCG, ($9,000) LTCL, and ($15,000) STCL. What is the amount and nature of Erin's capital gains and losses? A) $3,000 net short-term capital gain B) $3,000 net long-term capital loss C) $4,000 net short-term capital gain D) $4,000 net long-term capital loss E) None of these
A) $3,000 net short-term capital gain 2,000 LTCG (9,000) LTCL = (7,000) NLTCL 25,000 STCG (15,000) STCL = 10,000 NSTCG (7,000) LTCL 10,000 STCG = 3,000 NSTCG
Long-term capital gains (depending on the type) for individual taxpayers can be taxed at a maximum rate of: A) 20% B) 25% C) 28% D) both 20% and 28% E) all of these choices are correct
A) 20%
Taxpayers are not required to file a tax return unless their gross income passes a certain threshold. This threshold is generally the ________. A) applicable standard deduction amount B) AMT exemption amount C) twice the applicable standard deduction amount D) applicable standard deduction amount plus the personal exemption amount
A) applicable standard deduction amount
Investment interest expense does not include: A) interest expense from loans to purchase municipal bonds B) interest expense from loans to purchase corporate bonds C) interest expense from loans to purchase stocks D) interest expense from loans to purchase US savings bonds and corporate bonds E) interest expense from loans to purchase corporate bonds and stocks
A) interest expense from loans to purchase municipal bonds
what is the correct order of the loss limitation rules? A) tax basis, at-risk amount, passive loss limits B) at-risk amount, tax basis, passive loss limits C) passive loss limits, at-risk amount, tax basis D) tax basis, passive loss limits, at-risk amount E) passive loss limits, tax basis, at-risk amount
A) tax basis, at-risk amount, passive loss limits
which of the following statements regarding the child tax credit is true? A) the child for whom the credit is claimed must be under 15 at the end of the year B) the credit is subject to phase-out based on the taxpayer's AGI C) the full credit for a child who qualifies is $2,000 D) the child for whom the full credit is claimed must meet the definition of a qualifying child
A) the child for whom the credit is claimed must be under 15 at the end of the year
Doug and Sue Click file a joint tax return and decide to itemize their deductions. The Click's income for the year consists of $90,000 in salary, $2,000 interest income, $800 long-term capital loss. The Click's expenses for the year consist of $1,500 investment interest expense. Assuming that the Click's marginal tax rate is 35%, what is the amount of their investment interest expense deduction for the year? A) $1,200 B) $1,500 C) $2,000 D) $2,300 E) None of these
B) $1,500
Sue invested $5,000 in the ABC Limited Partnership and received a 10 percent interest in the partnership. The partnership had $20,000 of qualified nonrecourse debt and $20,000 of debt she is not responsible to repay because she is a limited partner. Sue is allocated a 10 percent share of both types of debt resulting in a tax basis of $9,000 and an at risk amount of $7,000. During the year, ABC LP generated a ($90,000) loss. How much of Sue's loss is disallowed due to her tax basis or at-risk amount? A) zero; all of her loss is allowed to be deducted B) $2,000 disallowed because of her at-risk amount C) $2,000 disallowed because of her tax basis D) $4,000 disallowed because of her tax basis E) $4,000 disallowed because of her at risk amount
B) $2,000 disallowed because of her at-risk amount Sue is only responsible for 10% of the loss since that is he share amount so $90,000 x 10% = $9,000 $9,000 - $7,000 amount at risk = $2,000
Kevin bought 200 shares of Intel stock on January 1, 2018 for $50 per share with a brokerage fee of $100. Then, Kevin sells all 200 shares for $75 per share on December 12, 2018. The brokerage fee on the sale was $150. What is the amount of the gain/loss Kevin must report on his 2013 tax return? A) $4,500 B) $4,750 C) $5,000 D) $5,250 E) None of these
B) $4,750 Amount realized: (200 shares x $75) - $150 fee = $14,850 Adjusted basis: (200 shares x $50) + $100 fee = $10,100 $14,850 - $10,100 = $4,750 gain
Harmony reports a regular tax liability of 15,000 and tentative min tax of 17,000. Given just this information, what is her AMT liability for the year A) 0 B) 2,000 C) 15,000 D) 17,000
B) 2,000 because her tentative exceeds regular tax, the difference is the tax liability
the taxable income levels in the married filing jointly tax rate schedule are _____________ those married filing separately schedule A) the same as B) double C) half the amount of D) none of these
B) double
What is the underpayment penalty rate that taxpayers pay when they underpay their estimated taxes? A) federal short-term interest rate B) federal short-term interest rate plus 3 percentage points C) federal long-term interest rate plus 6 percentage points D) zero
B) federal short-term interest rate plus 3 percentage points
which of the following statements regarding the child and dependent care credit is false? A) taxpayers must claim a credit for only a portion of qualifying dependent care expenditures B) if a taxpayer's income is too high, she will be ineligible to claim any child and dependent care credit C) a single taxpayer must have earned income to claim an child and dependent care credit D) a taxpayer is not eligible to claim the dependent care credit is any dependent relative provides the care
B) if a taxpayer's income is too high, she will be ineligible to claim any child and dependent care credit
Why would a taxpayer file a tax return if not required to do so? A) to remain in favor with the IRS B) to claim a refund of taxes paid C) all taxpayers are required to file returns D) to claim the standard deduction
B) to claim a refund of taxes paid
Brandon and Jane Forte file a joint tax return and decide to itemize their deductions. The Forte's income for the year consists of $120,000 in salary, $1,000 interest income, $1,500 nonqualifying dividends, and $1,100 long-term capital gains. The Forte's expenses for the year consist of $3,000 investment interest expense and $900 tax preparation fees. Assuming that the Forte's marginal tax rate is 30%, what is the amount of investment interest expense deduction for the year? A) Zero B) $1,000 C) $2,500 D) $3,000 E) None of these
C) $2,500
which of the following best describes the manner in which self-employed taxpayers may deduct self-employment taxes? A) deduct employer portion from AGI B) deduct entire amount from AGI C) deduct employer portion for AGI D) deduct entire amount for AGI E) no deduction
C) deduct employer portion for AGI for AGI since it is considered a cost of doing business
which of the following tax credits is fully refundable? A) American opportunity credit B) dependent care credit C) earned income credit D) none of these
C) earned income credit
if an employer withholds taxes from an employee, in general, when are those taxes paid to the IRS? A) as withheld B) as the employee requests on their W-4 form C) evenly throughout the year D) on April 15
C) evenly throughout the year
which of the following statements regarding late filing penalties and/or late payment penalties is true? A) an extension of time to file the tax return protects a taxpayer from late payment penalties as long as the tax is paid by the extended due date of the return B) the penalty rate for late filing penalties is less than the penalty rate for late payment penalties C) if a taxpayer has not paid the full tax liability by the original due date of the return and the taxpayer has not filed a tax return by the due date of the return, the max late filing and late payment penalty will be no greater than the late filing penalty by itself D) none of these are correct
C) if a taxpayer has not paid the full tax liability by the original due date of the return and the taxpayer has not filed a tax return by the due date of the return, the max late filing and late payment penalty will be no greater than the late filing penalty by itself
which of the following is not true of the extension to file an individual tax return? A) it is granted automatically by the IRS is requested B) it must be requested by the original due date of the return C) it extends the due date for the return and associated tax payments beyond the original due date of the tax return D) the extension is for 6 months beyond the original due date
C) it extends the due date for the return and associated tax payments beyond the original due date of the tax return the extension is for filing the return, the taxes are still due on the original due date
the AMT base is typically ____________ the regular income tax base A) smaller than B) about the same as C) larger than D) exactly the same as
C) larger than
Assuming the kiddie tax applies, what amount of a child's income is subject to the kiddie tax? A) all of it B) all unearned income C) net unearned income D) taxable income less standard income
C) net unearned income
For taxpayers who receive both salary as an employee and self-employment income as an independent contractor in the same year, which of the following statements regarding FICA and self-employment taxes is most accurate? A) the SS limit applies to the salary but not to the self-employment income B) the SS limit applies to the self-employment income but not to the salary C) salary is first applied against the SS limit then self-employment is D) self-employment income is first applied against the S limit and then salary is
C) salary is first applied against the SS limit then self-employment is this is taxpayer favorable because self-employment income is taxed at a higher rate
which of the following statements about estimated tax payments and underpayment penalties is true for individual taxpayers? A) taxpayers who have paid their fill tax liability by the original tax return due date are protected from underpayment penalties B) taxpayers who have paid their fill tax liability by the extended tax return due date are protected from underpayment penalties C) taxpayers who have uneven income streams can pay estimated tax quarterly in uneven amounts and not be susceptible to underpayment penalties D) taxpayers who have paid their required amount of estimated tax, even though not on time, are protected from underpayment penalties
C) taxpayers who have uneven income streams can pay estimated tax quarterly in uneven amounts and not be susceptible to underpayment penalties
what happens if the taxpayer owes an underpayment penalty, but does not compute it on Form 2210? A) Nothing, unless the taxpayer is audited B) the taxpayer is immediately sent to the Tax Court C) the IRS will compute and assess the penalty D) the penalty is increased by 5 percentage points
C) the IRS will compute and assess the penalty
the amount of expenditures eligible for the child and dependent care credit is the least of three amounts. Which of the following is not one of those amounts? A) the total amount of child and dependent care expenditures for the year B) $3,000 for one qualifying person or $6,000 for two or more qualifying persons C) the dependent's earned income for the year D) the taxpayer's earned income for the year
C) the dependent's earned income for the year
the amonunt of interest income a taxpayer recognizes when he redeems a US savings bond is: A) the excess of the taxpayer's basis in the bonds over the bond proceeds B) the bond proceeds C) the excess of the bond proceeds over the taxpayer's basis in the bonds D) the taxpayer's basis in the bonds E) none of the choices are correct
C) the excess of the bond proceeds over the taxpayer's basis in the bonds
which of the following statements regarding the self-employment tax is most accurate? A) the self-employment tax base is generally the taxpayer's net income from self-employment (net income from schedule C) B) taxpayer's who report less than $600 of net income from self-employment are not required to pay self-employment taxes C) the self-employment tax base is net earnings from self-employment which is less than net income from self-employment D) the social security tax limit does not apply to self-employment taxes
C) the self-employment tax base is net earnings from self-employment which is less than net income from self-employment net income from self-employment x 92.35% = tax base
Tamara and Jacob are married filing jointly. Tamara received nearly 5 times the salary Jacob received. Which of the following is true? A) Tamara and Jacob likely pay no tax marriage penalty nor receive a tax marriage benefit B) They pay a marriage penalty C) they receive a marriage benefit D) they will pay a penalty and receive a benefit
C) they receive a marriage benefit
Cassy reports a gross tax liability of $1,000. She also claims $400 of nonrefundable personal credits, $700 of refundable personal credits, and $200 of business credits. What is Cassy's tax refund or tax liability due after applying the credits? A) $1,000 taxes payable B) $0 refund or taxes payable C) $700 refund D) $300 refund
D) $300 refund 1000 - 400 - 200 = 300
Assume that Joe (single) has a marginal tax rate of 37% and decides to make the election to include preferentially-taxed capital gains and qualified dividends as investment income. What rate must Jo use when calculating the tax on these two items? A) 20% B) 25% C) 28% D) 37% E) None of these are correct
D) 37%
which of the following is typical of taxpayers who are most likely affected by the AMT? A) pay high mortgage B) pay high state income C) pay high property tax D) have high capital gains
D) have high capital gains
John holds a taxable bond and a municipal bond. Which are considered part of John's deductible investment interest expense? A) Attorney and accounting fees on municipal bond B) safe deposit box rental fees on taxable bond C) interest expense on municipal bond D) interest expense on taxable bond E) interest expense on municipal bond and taxable bond
D) interest expense on taxable bond
Unused investment interest expense: A) expires after the current year B) is carried back two years C) is carried forward 20 years D) is carried forward indefinitely E) none of these
D) is carried forward indefinitely
Harrison received a qualified dividend. Without knowing any additional facts, which is true regarding the rate at which the dividend will be taxed? A) 15% B) 20% C) 15 or 20% depending on his marginal ordinary income rate D) none of these
D) none of these dividends are taxed at preferential rates (0, 15, or 20% or a combination) depending on taxable income
When the wash sale rules apply, the realized loss is: A) recognized at time of sale B) not recognized at time of sale and does not affect basis of newly acquired stock C) recognized at time of sale and added to basis of the newly acquired stock D) not recognized at time of sale and added to basis of the newly acquired stock E) not recognized at time of sale and subtracted from the basis of the newly acquired stock
D) not recognized at time of sale and added to basis of the newly acquired stock
which of the following is not one of the general tax credit categories? A) nonrefundable personal B) refundable personal C) business D) refundable business
D) refundable business
investment income includes: A) interest income B) net short-term capital gains C) non-qualified dividends D) royalty income E) All of these are correct
E) All of these are correct
Which of the following is not a taxpayer filing status for purposes for determining the appropriate tax rate schedule? A) Head of household B) qualifying widow/widower C) married filing separately D) single E) all of these
E) all of these
In the current year, Norris, an individual, has $50,000 of ordinary income, a Net Short Term Capital Loss (NSTCL) of $10,000 and a Net Long Term Capital Gain (NLTCG) of $2,800. From his capital gains and losses, Norris reports: A) an offset against ordinary income of $10,000 B) an offset against ordinary income of $3,000 and a NSTCL carryforward of $7,000 C) an offset against ordinary income of $2,800 and a NSTCL carryforward of $7,200 D) an offset against ordinary income of $3,000 and a NSTCL carryforward of $7,200 E) an offset against ordinary income of $3,000 and a NSTCL carryforward of $4,200
E) an offset against ordinary income of $3,000 and a NSTCL carryforward of $4,200 (10,000) NSTCL 2,800 NLTCG = (7,200) NSTCL $3,000 can be offset and the remainder $4,200 is carried forward indefintiely
non-tax factor investors should consider when choosing between investments include: A) before-tax rates of return B) after-tax rates of return C) liquidity needs D) before-tax rates of return and after-tax rates of return E) before-tax rates of return and liquidity needs
E) before-tax rates of return and liquidity needs
[LO 1] At the beginning of his current tax year, Eric bought a corporate bond with a maturity value of $50,000 from the secondary market for $45,000. The bond has a stated annual interest rate of 5% payable June 30 and December 31, and it matures in 5 years on December 31. Absent any special tax elections, how much interest income will Eric report from the bond this year and in the year the bond matures?
Eric will only report the interest he actually receives or $2,400 [($50,000 x .025) x 2]. In the year the bond matures, he will again report $2,500 of interest income related to the semiannual interest payments receives and an additional $5,000 of interest income related to the market discount of the bonds
[LO 2] Shaun bought 300 shares of Dental Equipment, Inc. several years ago for $10,000. Currently the stock is worth $8,000. Shaun's marginal tax rate this year is 24% and he has not other capital gains or losses. Shaun expects to have a marginal rate of 32% next year, but also expects to have a long-term capital gain of $10,000. To minimize taxes, should Shaun sell the stock on December 31 of this year of January 1 of next year?
If he sells in the current year, he can offset his $2,000 capital loss against his ordinary income. His tax rate is 24% in the current year, which produces a tax benefit of 2000 x 24% = 480. If he waits until next year, he must apply the loss against his capital gains which is taxed at 15%. This would produce a tax benefit of 2000 x 15% = 300. Therefore, he should sell in the current year.
[LO 2] John bought 1,000 shares of Intel on October 18, 2014 for $30 per share plus $750 commission he paid to his broker. On December 12, 2018, he sells the shares for $42.50 per share. He also incurs a $1,000 fee for this transaction a. What is John's adjusted basis in the 1,000 shares of Intel? b. What amount does John realize when he sells the 1,000 shares? c. What is the gain/loss for John on the sale of his Intel stock? What is the character of the gain/loss?
a. 30,000 + 750 = $30,750 b. 42.50 x 1,000 = 42,500 - 1,000 = $41,500 c. 41,500 - 30,750 = $10,750
[LO 3] when taxpayers borrow money to buy municipal bonds, are they allowed to deduct interest expense on the loan? why or why not?
interest expense incurred on loans used to purchase municipal bonds is not deductible. The interest income from the municipal bonds is not included in income; therefore, the interest expense incurred to produce the tax-exempt income is not deductible
[LO 1] Matt recently deposited $20,000 in a savings account paying a guaranteed interest rate of 4% for the next 10 years. If Matt expects his marginal tax rate to be 22% for the next 10 years, how much interest will he earn after-tax for the first year of his investment? how much interest will he earn after-tax for the second year of his investment is he withdraws cash every year to pay the tax on the interest he earns? how much will he have in the account after 4 years? 7 years?
after one year, Matt will have earned $624 or $20,000 x .04(1-.22) after tax. In the second year, Matt will earn $643 after tax or $20,624 x .04(1-.22) after tax. After 4 years, Matt will have $22,615 or $20,000 x (1 + .04(1-.22))^4. After 7 years, Matt will have $24,799 or $20,000 x (1 + .04(1-.22))^7
[LO 2] Christopher sold 100 shares of Cisco stock for $5,500 in the current year. He purchases the shares several years ago for $2,200. Assuming his marginal ordinary income tax rate is 24%, and he has no other capital gains and losses, how much tax will he pay on this gain?
he has a LTCL of $3,300. Since his marginal tax rate places his taxable income below the max 15% rate but above the max 0% rate, his gains are taxed at 15%. So $3,300 x 15% = $495
[LO 3] What limitations are placed on the deductibility of investment interest expense? what happens to investment interest expense that is not deductible because of the limitations?
investment interest expense is deductible as an itemized deduction, to the extend of net investment income (net investment income is equivalent to gross investment income because investment expenses are not deductible after 2017). Investment interest expense that is not deductible because of limitation is carried forward and treated as though it is incurred in the next year. Unused can be carried forward indefinitely
[LO 4] All else equal, would a taxpayer with passive losses prefer to have wage income or passive income?
passive income because the taxpayer's passive losses could be applied currently against the passive income to reduce the amount of tax paid currently. If the taxpayer received wage income, the passive losses would have been suspended, and the tax benefits associated with the passive losses would be deferred
[LO 1] Hayley recently investing $50,000 in a public utility stock paying 3% annual dividend. If Hayley reinvests the annual dividend she receives net of any taxes on the dividend, how much will her investment be worth in 4 years if the dividends paid are qualifies? ( her marginal income tax rate is 32% and preferential is 15%). What will her investment be worth in 4 years if the dividends are nonqualified?
qualified: after tax rate of return is 2.55% or 3% x (1-.15). So, 50,000 x (1 + .0255)^4 = $55,298 nonqualified: her after tax rate of return is 2.04% or 3% x (1-.32). So, 50,000 x (1 + .0204)^4 = $54,207
[LO 3] Are dividends and capital gains considered to be investment income for purposes of determining the amount of a taxpayer's deductible investment interest expense for the year?
they are not considered to be investment income for purposes of determining the investment interest expense deduction unless the taxpayer makes and election to tax this income at ordinary rates if this election is made, dividends and capital gains count as investment income for this purpose dividends and capital gains that are not eligible for the preferential rate are included in investment income in determining the deductibility of investment interest expense
