CFP Tax PLanning
hich of the following are allowable itemized deductions for purposes of computing the alternative minimum tax? I.Charitable deductions II.Qualified housing interest III.Gambling losses to the extent of gambling winnings IV. Property taxes
I, II, and III
In June of the current year, Mindy sold her principal residence for a total price of $185,000—she received $100,000 in cash and the buyer assumed an $85,000 mortgage on the house. Mindy purchased the house six years ago for $120,000 and has made $80,000 in improvements to the house. Real estate commissions of $9,200 resulted from the sale. What amount of gain or loss, if any, must be recognized on the sale of Mindy's residence?
$0
Ramone has no passive income. During January of 2020, he purchased an interest in a limited partnership that will generate a $10,000 passive loss during the current tax year. How much of this passive loss, if any, is deductible by Ramone during the current tax year?
$0
William and Lisa are divorced. Under the terms of the divorce decree, William is required to pay Lisa $2,000 per month for five consecutive years. The divorce was finalized on December 15, 2018, with the first alimony payment made on January 15, 2019, and on the 15th of each month thereafter. There is no provision in the decree (or under state law) that payments terminate upon the death of the payee spouse, Lisa. How much of each payment, if any, is deductible, and why?
$0, because the payments do not terminate at death
Alicia is age 16 and she received $6,000 in municipal bond interest income and $900 in other interest income in 2022. Her parents' marginal tax rate is 24%. What is the total federal income tax due on her income in 2022?
$0. Alicia owes no federal income taxes in 2022. Municipal bond interest income is not taxable. The $900 in other interest income is less than Alicia's $1,150 standard deduction amount (for 2022).
Paul, age 16, is listed as a dependent on his parents' income tax return. During 2022, he earned $2,700 from a summer job. He also earned $2,700 in interest and dividends from investments that were given to him by his uncle five years ago. How much of Paul's income, if any, will be taxed to him in 2022 using his uncle's marginal tax rate of 32%?
$0; When applying the kiddie tax, the parents' marginal tax rate is always used (regardless of the source of the property generating the unearned income). Therefore, none of the income is taxed to Paul using the uncle's tax rate. The $400 of income ($2,700 − $2,300) is taxed to Paul at his parents' marginal tax.
Lana filed her current income tax return three months late. The return showed a balance due of $10,000. What is Lana's penalty, if any, for late filing of her income tax return?
$1,500;The penalty for failing to file an income tax return is 5% of the amount due for each month, or part thereof, that the return is late. Lana has filed her return three months late, which results in a 15% penalty for late filing. In this case, $10,000 × 15% (5% per month for three months) results in a penalty of $1,500.
Alice is age 16 and is eligible to be claimed as a dependent on her parents' tax return. She has investment income of $4,150 and earned $1,000 babysitting in 2022. How much of Alice's income will be taxed at her individual tax rate?
$1,900; Unearned income (UI)$4,150Earned income (EI)1,000Gross income$5,150Standard deduction(1,400) (earned income plus $400)Taxable income$3,750UI taxed at parent's marginal rate (net unearned income)(1,850) ($4,150 - $2,300)Income taxed at child's rate$1,900
During the current tax year, Jamie has a $13,000 short-term capital loss and a $14,000 long-term capital gain, both from the sale of securities. Jamie also has a $10,000 long-term capital gain from the sale of collectibles. Jamie, a single taxpayer, is in the 32% marginal income tax bracket. Which of these accurately describes the result of these transactions?
$11,000 long-term capital gain taxed at 15%
David and Kristen are married taxpayers filing jointly. They lived in their principal residence for six months, and sold the residence because Kristen was transferred to a job out of state. They have a realized gain of $145,000 on the residence. They have not used the Section 121 exclusion in the past. What is the maximum Section 121 exclusion, if any, that they may claim?
$125,000; They are entitled to a partial exclusion as they failed to meet the two-year test due to health, job, or unforeseen circumstances. The partial exclusion is six months of ownership and use divided by the required 24-month ownership and use period, multiplied by the full exclusion amount of $500,000. Thus, 25% of $500,000 = $125,000.
Reese has the following items: Prior-year passive loss carryforward amounts: ($5,000) from XYZ limited partnership (publicly traded) ($8,000) from ABC limited partnership (nonpublicly traded) Current-year passive income and loss amounts: $2,000 from XYZ limited partnership (publicly traded) ($3,000) from GHI limited partnership (publicly traded) $12,000 from JKL limited partnership (nonpublicly traded) ($14,000) from RST limited partnership (nonpublicly traded) What is the total amount of passive losses that may be deducted during the current year?
$14,000; The general rule is that passive losses may only be deducted against passive income. The rules for publicly-traded partnerships are more restrictive—the passive income from a PTP may not be offset by passive losses arising from any other source. In addition, the passive losses from PTPs are not currently deductible—they may only be used to offset future income from that same activity. Of the $5,000 passive loss carryforward from the XYZ limited partnership, only $2,000 may be used in the current year due to the $2,000 of current-year passive income from that same PTP. A total of $12,000 in losses from the RST limited partnership may be used against the $12,000 of income from the JKL limited partnership in the current year because both are nonpublicly traded. Thus, the total of passive losses allowed for the current year is $14,000.
Three years ago, Lydia purchased specialized manufacturing equipment (seven-year property) at a cost of $66,000. She paid an additional $4,000 to have the equipment installed in her plant. She used the straight-line method, and cost recovery deductions total $30,000. Earlier this year, Lydia sold the equipment for $25,000. What is the amount and character of the gain or loss resulting from this sale?
$15,000 Section 1231 loss, treated as an ordinary loss
Bernie and Louise are married and will file a joint return for the current tax year. They each have 401(k) plans through their employers, but neither they, nor their employer, will contribute to the plan this year. They have provided you with the following information. Bernie's salary$96,000Louise's salary$74,000Child support payments to Lowell's ex-wife$18,000Net short-term capital loss$8,000Home mortgage interest$17,200IRA contribution—Bernie$6,000IRA contribution—Louise$6,000 Bernie's divorce was finalized in 2013. Based on the information given, what is the couple's adjusted gross income for the current tax year?
$155,000
Francisco operates a sole proprietorship from his apartment. His gross income for the current tax year is $24,000. Business expenses not associated with his home office total $22,000. Expenses associated with the home office total $2,750. How much of the home office expense, if any, may Francisco deduct for the current year?
$2,000
Claudia, who has an AGI of $40,000, wants to donate a painting of an ancestor who served in the American Revolution to the museum in her town that houses a collection of Revolution Era items. Her basis in the painting is $1,750, and it has a fair market value of $2,000. How much can she potentially deduct as a charitable contribution this year, assuming it is her only donation?
$2,000 (It is related-use capital gain property.)The painting is related-use, capital gain property. Claudia may deduct an amount up to 50% of her AGI if she uses the basis of the painting and 30% of AGI if she uses FMV. As long as Claudia's AGI is greater than $6,667, she can deduct the FMV of the portrait.
Assume a taxpayer is faced with a tax deficiency of $10,000, along with interest on the deficiency of $4,200; the entire deficiency is the result of negligence from the taxpayer's 2020 return. What is the amount of the penalty?
$2,000; The negligence penalty is 20% of the amount of the deficiency attributable to negligence. Twenty percent of $10,000 is $2,000. The interest does not enter into the computation.
Phillip's personal automobile was completely destroyed in a hurricane that was declared a federal disaster. Insurance paid $6,000 on the loss. The auto's fair market value was $16,000, and his basis in it was $23,500. Phillip's AGI is $72,500. What is the amount of Phillip's deductible casualty loss?
$2,650; The deductible casualty loss computation begins with the lesser of the decrease in fair market value or the adjusted basis in the property. In this situation, the decrease in fair market value of $16,000 must be used. This is reduced by the insurance coverage of $6,000, and the $100 floor per occurrence. Then it is further reduced by 10% of the AGI ($7,250). Thus, $16,000 - $6,000 - $100- $7,250 = $2,650. Lesser of decrease in FMV ($16,000) or adjusted basis ($23,500) $16,000Less insurance coverage(6,000)$10,000Less $100 floor(100)$9,900Less 10% of AGI(7,250)Deductible loss on Schedule A$2,650
John Wallace is the beneficiary of a $300,000 insurance policy on his wife's life. John elects to receive $25,000 per year for 15 years rather than receive a lump sum. Of the $25,000 received each year,
$20,000. The proceeds received under a settlement option are treated as an annuity for income tax purposes. We would thus calculate the exclusion amount for the annuity. The $300,000 death proceeds are divided by the 15-year payout to provide $20,000 per year that is tax free. The remaining $5,000 per year is taxable interest income
Dolores bought 200 shares in a mutual fund for $15 per share. Shortly after this purchase, the mutual fund went ex-distribution and declared a distribution of $.50 per share. Dolores elected to have dividend distributions from the fund reinvested to purchase additional shares at $15 per share. How much taxable gain will Dolores incur if she later sells all her shares for $16 per share?
$207; Gain is determined by the difference between the sales price of the shares held and the basis of the shares held. Basis is (200 × $15) + ($0.50 × 200), or $3,100. This represents the original cost of the 200 shares plus the reinvested dividends of $100. The number of shares owned must first be determined. The reinvested dividend of $100 is divided by the purchase price and added to the originally purchased shares. $100 ÷ $15 = 6.67 shares + 200 = 206.67 shares (these shares are then multiplied by the sales price of $16 to arrive at a total sales price of $3,307). $3,307 - $3,100 = $207 total gain on the sale.
Devonte had $175,000 of self-employment income and $25,000 in distributive share income from an S corporation. What is Devonte's self-employment tax for 2022? Round your answer to the nearest dollar.
$22,915; he distributive share of income from an S corporation is not subject to self-employment tax. (Answers may vary slightly due to rounding.) Actual earnings$175,000Less 7.65%(13,388)Net earnings from self-employment$161,612LESSMaximum amount of SE earnings subject to 15.3% tax (Social Security wage base)(147,000)Excess over wage base$14,612Medicare rate× 2.9%$424($147,000 × 15.3%)22,491Total$22,915
Fred, age 59, is a single taxpayer. He has wage income of $90,000 for the current tax year. Fred is not an active participant in a company-maintained retirement plan. In addition, he has the following: Long-term capital gains$4,000Short-term capital losses$9,000Loss from active participation rental real estate$3,700Alimony paid to ex-wife$5,200Gambling winnings$7,100Gambling losses$4,100Interest income$3,500Sole proprietorship (Schedule C) income$2,000Self-employment tax liability$283Qualified home mortgage interest$11,890Real estate tax paid$1,840Investment interest expense$4,925Charitable contributions (cash)$2,975Total medical expenses$4,217State and local income taxes$1,625Consumer interest$2,180Unreimbursed employee business expenses$1,560IRA contribution$6,000 Fred's divorce was finalized in 2017. What is the amount of Fred's allowable itemized deductions?
$25,930; The itemized deductions total $25,930. This is composed of the qualified home mortgage interest of $11,890, the real estate tax paid of $1,840, the investment interest expense of $3,500, the charitable contributions of $2,975, the state and local income taxes of $1,625, and the gambling losses to the extent of gambling winnings ($4,100). Note that the unreimbursed employee business expenses are not deductible. Also, the medical expenses are not deductible because they do not exceed 7.5% of adjusted gross income. Also note that the investment interest expense of $4,925 is deductible only up to the amount of net investment income, which in this situation is $3,500 (the interest income). Consumer interest (interest on personal auto loans, credit card debt, etc.) is nondeductible.
Carl and Janet are married taxpayers filing a joint tax return. In 2022, their AGI is $360,000, and their net short-term capital gain and dividend income (included in the AGI) is $90,000. They have investment interest expense of $4,000 and state and local income taxes attributable to the investment income of $6,000. What is the amount of Medicare contribution tax that they must pay?
$3,040; They will pay the 3.8% Medicare contribution tax on $80,000. This is the lesser of the net investment income ($80,000) or the AGI in excess of the threshold amount ($360,000 - $250,000, or $110,000). The net investment income is the investment income of $90,000, reduced by the investment expenses of $10,000. In this situation, the $80,000 of net investment income is subject to the Medicare contribution tax. Carl and Janet will pay a $3,040 Medicare contribution tax (3.8% on $80,000).
Jacinta, an investor, has the following items related to her investments during the current tax year: Investment interest expense$4,000Dividend and interest income$3,500Investment adviser's fees$1,750Adjusted gross income$50,000 What is Jacinta's maximum allowable investment interest expense deduction for the current year?
$3,500; The investment interest expense deduction is limited to the taxpayer's net investment income of $3,500. Net investment income is simply the investment income of $3,500. The inclusion of the dividend income results in the largest investment interest expense deduction. However, including the dividends in investment income results in forgoing the potential preferential rates on the dividends. The investment adviser's fees are not deductible and do not enter into the calculation.
Kris anticipates adjusted gross income of $100,000 for the current tax year. She is considering making a gift of appreciated real estate to her church, a qualified charitable institution. Kris's adjusted basis in this real estate is $20,000. The real estate has a current fair market value of $50,000. Kris has owned the real estate for 15 years. If Kris does gift the real estate to her church, what is the maximum allowable charitable deduction she can receive in the current tax year?
$30,000; The current deduction for a contribution of long-term capital gain property to a 50% organization is based on FMV but is limited to 30% of AGI. This results in a $30,000 current year deduction with a $20,000 carryforward.
Kris Swenson anticipates adjusted gross income of $100,000 for the current tax year. She is considering making a gift of a painting to the American Red Cross in the current tax year. Kris's basis in the painting is $35,000. The painting has a current fair market value of $50,000. Kris has owned the painting for 15 years. If Kris does gift the painting to the American Red Cross this year, what is the maximum allowable charitable deduction she can receive in the current tax year?
$35,000; The painting would be considered use-unrelated tangible personalty. The deduction for use-unrelated tangible personalty is limited to basis, with a 50% of AGI limitation. Thus, the current-year deduction is $35,000. If the painting had been donated to an art museum, for example, the contribution would be of use-related tangible personalty. Since the painting had been held for the long-term holding period, the deduction would have been $30,000 (long-term capital gain property to a 50% organization uses FMV with a 30% of AGI limitation) with a $20,000 carryforward.
Jim 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 his basis in it is $55,000. He has an AGI of $120,000. Jim wants to maximize the amount of charitable contribution deductions from the donation of the real estate. What is the amount of charitable contribution deduction that Jim may claim in the current year?
$36,000; The gift of long-term capital gain (LTCG) property is generally based on the fair market value of the property. The university is a 50% organization, a public charity. LTCG property contributed to a 50% organization involves a 30% of AGI limitation, and 30% of $120,000 is $36,000. There is also a $44,000 carryforward for up to five years. Jim could have made a 50% election to maximize the current-year deduction, but that would have reduced his overall deductions. If Jim had made a 50% election, he could have deducted $55,000 in the current year. By forgoing the 50% election, he is allowed to deduct the full $80,000 fair market value—$36,000 this year and $44,000 over the next several years.
Frank Swanson anticipates adjusted gross income of $80,000 during the current tax year. He is considering making a gift of real estate to the public university he attended. Frank's adjusted basis in this real estate is $50,000. The real estate has a current fair market value of $70,000. Frank has owned the real estate for 19 months. If Frank donates the real estate, what is the maximum allowable charitable deduction Frank can receive for the current tax year?
$40,000; If Frank makes a 50% election, he must utilize the basis of the property but may deduct up to 50% of AGI. This yields a $40,000 current-year deduction with a $10,000 carryforward. If no 50% election were made, the deduction would be based on the fair market value of the property but would be limited to 30% of AGI, which is $24,000, with a $46,000 carryforward.
Three years ago, Zhong purchased specialized manufacturing equipment (seven-year property) at a cost of $56,000. He paid an additional $4,000 to have the equipment installed in his plant. Cost recovery deductions total $40,935. This type of specialized equipment became more and more scarce, and this year, Zhong sold the equipment for $73,000. What is the amount and character of the gain resulting from this sale?
$40,935 Section 1245 gain, $13,000 Section 1231 gain
Sarah has two dependent children who attend Sun Valley Day Care while she is at work. She will claim a $1,200 credit for child and dependent care expenses in the current tax year. What amount of deduction would be necessary to provide a tax benefit that is equal to that provided by the child care credit if Sarah is in the 24% marginal income tax bracket?
$5,000; It would take $5,000 of deductions to equal the benefit of a $1,200 tax credit. This is determined by simply dividing the $1,200 of credit (savings) by the marginal income tax bracket of 24%.
During the current tax year, Cassandra has a long-term capital loss of $22,000 from the sale of securities. She also has a long-term capital gain from the sale of a coin collection of $10,000 and has unrecaptured Section 1250 income of $18,000. Cassandra is in the 35% marginal income tax bracket. What is the tax result of her capital transactions?
$6,000 unrecaptured Section 1250 income taxed at 25%
Sam has the following items of income: Self-employment earnings$45,000Interest income$ 4,000Gain on the sale of a capital asset$12,000 What is the amount of self-employment tax Sam owes? Round your answer to the nearest dollar.
$6,358; Self-employment income$45,000.00Less 7.65% of $45,000(3,442.50)$41,557.50Times tax rate15.3%Self-employment tax$6,358.30
The following summarizes several financial events in the life of George during the current tax year. Received $100,000 from a life insurance policy due to the death of his brother Had gambling winnings of $45,000, while incurring gambling losses of $20,000 Received net royalties of $10,000 from an oil and gas investment Received $5,000 of unemployment compensation Had job-related moving expenses of $4,000 Contributed $6,000 to an IRA Assuming George is NOT a professional gambler, what is his total income for the current tax year?
$60,000. Total income is basically the starting point of the income tax calculation. The gambling winnings of $45,000, the unemployment compensation of $5,000, and the royalties of $10,000 are all included in income. Gambling losses are an itemized deduction, to the extent of gambling winnings; thus, they do not affect the total income. The life insurance proceeds received by reason of death of the insured are excluded from income. The IRA contribution is a potential adjustment to income, and does not affect the total income. Job-related moving expenses are only deductible for active duty military personnel who are undergoing a change of station.
Chris Burdick anticipates adjusted gross income of $200,000 for the current tax year. He contributed appreciated stock to a public charity. Chris's adjusted basis in this stock is $50,000. The stock has a current fair market value of $140,000. Chris has owned the stock for 12 years. If Chris does gift the stock to the United Way, what is the maximum allowable charitable deduction he can receive in the current tax year?
$60,000; A gift of long-term capital gain property to a 50% organization is based on the FMV of the property, with the deduction for the current year limited to 30% of AGI.
Victoria Glass has $6,500 of investment interest expense and net investment income of $6,000 in the current tax year. She paid broker's commissions of $1,000 during the tax year. How much investment interest expense, if any, may Victoria deduct in the current tax year?
$6000
Michelle has interest and short-term capital gain income of $9,000 during the current tax year. She paid brokers' commissions of $1,000, investment advisers' fees of $2,200, and had $7,700 of interest expense on funds borrowed to purchase securities. Michelle has an AGI of $105,000. What amount of investment interest expense may be deducted as an itemized deduction?
$7,700
Molly's grandparents gifted her with substantial securities at her birth eight years ago. In 2022, she has dividends of $10,000 and brokers' fees of $800 on the activity in the account her parents manage for her. What is her net unearned income taxed at her parents' rate?
$7,700.Some of Molly's unearned income is taxed at her parents' rate and is calculated as follows: $10,000 UI - $1,150 (standard deduction) - $1,150 (greater of $1,150 for 2022 or amount of allowable itemized deductions directly connected with the production of the unearned income) = $7,700
Bobby owns a rental office building that he purchased in 2019 for $275,000. He placed the property in service later that year. Recently, Bobby incurred the cost of a new air conditioning system for $11,300, replacement of the roof for $21,000, other miscellaneous repairs for $2,500, conversion of unused space to rental space for $16,700, cleaning services of $1,100, lawn services for $2,300, and construction to make the building handicap accessible for $23,800. Based on these expenditures, how much will be added to the cost basis of his building (capitalized) and will be depreciated?
$72,800; Expenditures that materially extend the life of an asset or adapt it to a new use are considered improvements and are added to the cost basis of the asset and depreciated in accordance with the Internal Revenue Code. As a result, these expenditures include the new air conditioning system, replacement of the roof, costs to convert unused space to rental space, and the costs to make the building handicap accessible ($11,300 + $21,000 + $16,700 + $23,800 = $72,800).
In 2022, Floyd, age 15, is a dependent on his parents' income tax return. When Floyd was born, his parents established an UGMA with corporate bonds and have contributed a little to it every year since. This year, the account generated $5,000 of interest income. There were no distributions from the account this year. Floyd's parents file jointly and have taxable income of $175,000 and are in the 24% MFJ tax bracket. What is Floyd's income tax liability for the current year?
$763; $5,000 ($1,150)limited standard deduction($1,150)taxed at child's rate of 10%$1,150×10%=$115$2,700taxed at parents' rate of 24%=$648 $763
Mike has interest and short-term capital gain income of $9,000 in the current tax year. He paid broker commissions on security purchases of $1,000, paid $1,800 for investment adviser fees, and had $8,500 of investment interest expense. His AGI is $225,000. What amount of investment interest expense may be deducted as an itemized deduction?
$8500 Investment interest expense is deductible up to the amount of net investment income, which is $9,000. The net investment income is simply the investment income (interest and short-term capital gains) of $9,000. Remember that the investment adviser fees are not deductible. The commissions are not a deductible item. The commissions increase the basis of the securities upon purchase and reduce the gain realized upon sale.
Lowell and Thelma are married and will file a joint return for the current tax year. They are contributing to their respective 401(k) plans through their employers. They have provided you with the following information. Lowell's salary (after 401(k) contributions)$75,000Thelma's salary (after 401(k) contributions)$50,000Alimony payments to Lowell's ex-wife$24,000Net long-term capital loss$7,000Property taxes$2,000IRA contribution—Lowell$6,000IRA contribution—Thelma$6,000 Lowell's divorce was finalized in 2015. Based on the information given, what is the couple's adjusted gross income for the current tax year?
$86,000. The salaries of $125,000 reduced by the $24,000 of alimony payments equals $101,000. This is further reduced by $3,000 of net capital losses. Remember that only $3,000 of net capital losses are deductible in a given year, with an indefinite carryforward of the excess. The $12,000 of IRA contributions is also deductible. Even though both spouses are active participants in company-maintained retirement plans, their MAGI (AGI without the IRA contributions) is only $98,000. This is under $109,000 (for 2022)—the beginning of the phaseout range for married couples filing jointly, when both spouses are active participants. The property taxes are an itemized deduction, and do not affect the AGI.
Assume that married taxpayers filing jointly have a taxable income of $470,650. What is the taxpayers' effective tax rate? You will need to use the tax rate schedule found in your materials.
23.8%; The effective income tax rate is the amount of income tax ($112,234) divided by the taxable income of $470,650. This gives us 23.8% (rounded). Taxable income$470,650Less (from tax rate schedule)(431,900)Amount over $431,900$38,750Times (marginal rate, from tax rate schedule)35%Tax on amount over $431,900$13,563Plus (from tax rate schedule)98,671Total Tax$112,234
Nine years ago, Claire, age 55, purchased a deferred annuity that is estimated to pay her $850 per month for the rest of her life beginning at age 65. Her investment in the contract is a one-time payment of $50,000. The assumed rate of return on the contract is 3.5%. At this time, Claire is not sure whether she will need to withdraw any of her original investment prior to the starting date of the annuity. Which of these is an income tax implication of the deferred annuity for Claire?
A nonperiodic (lump-sum) distribution will be treated on a last-in, first-out (LIFO) basis. A nonperiodic distribution or withdrawal from a post-August 13, 1982 annuity contract is treated on a LIFO basis. In other words, to the extent that the cash surrender value exceeds the investment in the contract, taxable interest income is treated as being withdrawn first. The earnings on the investment in a commercial annuity are deferred—there is no current taxation on the earnings within the contract as long as an individual is the owner (or treated as an owner) of the contract.
Five years ago, Greg Young, age 55, purchased a deferred annuity that is estimated to pay him $900 per month for the rest of his life, beginning at age 65. His investment in the contract was a one-time payment of $150,000. The assumed rate of return on the contract is 4%. Which one of the following is an income tax implication of the deferred annuity for Greg?
A nonperiodic distribution or withdrawal from a post-August 13, 1982, annuity contract is treated on a last-in, first-out (LIFO) basis. In other words, to the extent that the cash surrender value exceeds the investment in the contract, taxable interest income is treated as being withdrawn first. There are no provisions that allow for a tax-free withdrawal for education or illness. The earnings on the investment in a commercial annuity are deferred—there is no current taxation on the earnings within the contract as long as an individual is the owner (or treated as an owner) of the contract. LO 2.1.2
Your client, Eva, has active income of $300,000 per year and substantial unused passive losses from a nonpublicly traded limited partnership. She would like to find an investment that would allow her to utilize her passive losses. Which of these is the most appropriate investment for Eva?
A nonpublicly traded limited partnership generating passive income
Your client, Yolanda, has active income of $300,000 per year and substantial unused passive losses from a nonpublicly traded limited partnership. She would like to find an investment that would allow her to utilize her passive losses. Which of these is the most appropriate investment for Yolanda?
A nonpublicly traded limited partnership generating passive income
Kevin is a college professor who has an accounting business on the side that he runs as a C corporation. He lives entirely off his teaching salary and has never withdrawn any salary or dividend from the accounting practice (a personal service corporation), preferring to save the money within the corporation (from which it will be withdrawn upon retirement). The corporation currently has retained earnings and profits of $500,000. With which of these should Kevin be most concerned?
Accumulated earnings tax
Which of the following statements regarding the kiddie tax is CORRECT? The kiddie tax provision limits income shifting by preventing families from transferring large amounts of unearned income to children and making the shift effective for income tax purposes. II.If a child under the age of 19 has unearned income above a specified amount, the excess is taxed at the parents' marginal tax rates for the year, rather than at the child's marginal rate.
Both statements are correct. The kiddie tax applies to unearned income for children under the age of 19 and full-time students until they reach age 24
Which of these types of investors derives the greatest tax benefit from investing in preferred stocks?
Corporate; Because 50% of the preferred dividends (and other dividends from stock) received by a corporation are exempt from federal income taxes, a corporation gains a tax advantage. The government and nonprofit organizations pay no income taxes. Mutual funds are also exempt from taxation.
Sally is a waitress who makes a significant amount of her income from tips. During the current year, Sally willfully underreported by 50% the amount of tips that she received. Which of these penalties, potentially applicable to Sally, would be the most costly?
Civil fraud
Danielle created a revocable trust for her two minor sons. She named her bank as trustee. The trust property earned $30,000 in the first year and had taxable income of $28,000 after deducting expenses. This income was left to accumulate for future distributions to be made to each son equally when the youngest son attains age 18. To which of the following will the income of the trust be taxable?
Danielle.The trust income will be taxed to the grantor, as the trust is revocable. A revocable trust is treated as a grantor trust.
Judy's rental real estate was completely destroyed by a fire in June of 2022, and she received the reimbursement check from the insurance company later that month. If there were a gain on the conversion, when would the replacement period end?
December 31, 2024
In an attempt to curb overzealous use of tax-sheltered investments, the government has developed rules including iat-risk requirements. iipassive-activity loss limitations. iiispecial certification requirements for real estate investors.
I and II
Which of the following are preference items or adjustments for purposes of the individual alternative minimum tax? I.Interest on qualified private-activity municipal bonds issued in 2008 II.Excess of percentage depletion over the property's adjusted basis III.Investment interest expense in excess of net investment income IV. Qualified housing interest
I and II
Your clients, Joseph and Jane, have read many articles in financial publications about the alternative minimum tax (AMT) and are concerned that some of their investments and activities may cause AMT problems. Which of the following are preference items or adjustments for purposes of the individual AMT? I.Interest from qualified private-activity municipal bonds issued in 2008 II.Bargain element on the exercise of an incentive stock option III.Excess of percentage depletion over the property's adjusted basis IVCost depletion deductions
I, II, and III
Sandra and Colby, a married couple, ask you to explain how taxable income is calculated after adjusted gross income has been determined. Which of the following is a deduction from adjusted gross income (AGI) to arrive at taxable income? Additional standard deduction Itemized deductions Exclusions Tax credits
I and II. To compute the taxable income, we subtract the greater of the standard deduction (including the additional standard deduction for elderly or blind) or the itemized deductions from AGI. We also subtract the qualified business income (QBI) deduction, if any, to arrive at the taxable income. Exclusions are not reported on the return, so they don't need to be subtracted. Tax credits are deducted from the tax liability.
Which of these are techniques of income shifting or splitting? An installment sale of an income-producing asset from a parent to a child Transfer of income-producing property from the grantor to a grantor trust Valid employment of a child in the parent's business
I and III
Which of these below-market-interest loans would result in imputed interest to the lender? An employee borrows $12,000 from his employer, New Media, Inc., to pay medical bills, and the employee has investment income of $330 in the same year. John lends his friend, Mel, $8,000 to buy a boat, and Mel has investment income of $2,200 for the year. Faith borrows $120,000 from her father for an addition to her home. Faith has $4,400 of investment income in the same year.
I and III
Yasamin has an apartment building that she would like to exchange. Which of the following assets could Yasamin receive in a like-kind exchange? iA shopping center iiAn interest in a real estate limited partnership iiiA vacant lot iv Land-grading equipment
I and III; In a like-kind exchange, real estate must be exchanged for other real estate. Thus, the shopping center and the vacant lot are the only assets that would be qualifying property in a like-kind exchange of realty. The land-grading equipment is personalty and thus cannot be considered like-kind property. The interest in a limited partnership is specifically not allowed as qualifying property. Remember that like-kind exchange tax treatment is limited to realty for realty.
Jack bought publicly traded stock seven years ago for $6,000. Its current value on the securities market is $11,000. He has donated this appreciated stock to a charity that provides housing for the homeless. What must Jack do to take the donation as a charitable deduction? I.Jack must have documentation from the charity substantiating the amount of the donation, the date donated, and the name of the charity. II.All donations of stock must have a qualified appraisal of the stock attached to the donor's income tax return.
I only; Statement I is correct. In additional, the taxpayer must be in receipt of this documentation by the due date of the return or when the return is filed. Statement II is incorrect because it reads "all" donations of stock must have a qualified appraisal. A qualified appraisal is not required for closely held stock if the amount donated is less than $10,000. The appraisal itself is not attached to the tax return.
Which of the following statements regarding charitable deductions by corporations is CORRECT? I.The corporate statutes of most states permit corporations to make charitable contributions, and the Tax Code permits a charitable deduction for contributions by a corporation. II. The charitable deduction is limited to a maximum of 20% of the corporation's adjusted taxable income. In the event the contribution is in excess of 20% of the corporation's adjusted taxable income, the balance can be carried forward for up to five years.
I only; Statement II is incorrect because the charitable deduction is limited to a maximum of 10% of the corporation's adjusted taxable income.
Which of the following are considered advantages of direct participation programs? i.Leverage iiTax conduit iiiSpecial allocations iv. Substantial economic effect
I, II, and III
Under Section 1221, which of the following is a noncapital asset? iAn office building that is rented to others iiA painting bought from the artist iiiAccounts receivable of a manufacturer iv Flowers for sale by a florist
I, III, and IV
Which of the following statements regarding the alternative minimum tax (AMT) or AMT planning are CORRECT? I.The AMT reduces the tax benefits from certain types of deductions and tax preferences allowable for regular income tax purposes. II.The starting point for determining alternative minimum taxable income (AMTI) is AGI as reported for regular income tax purposes. III.It is generally advantageous to defer the payment of real estate taxes to a future year when AMT will be paid in the current year. IV. It is generally advantageous to accelerate ordinary income into years when AMT will be paid.
I, III, and IV; The IRS notes that the starting point for determining AMTI is taxable income as reported for regular income tax purposes on a taxpayer's IRS Form 1040. Because real estate taxes are not deductible for AMT purposes, it is generally advantageous to defer the payment of such taxes to a year when AMT will probably not be payable. Also, if AMT will be payable in the current year, it is generally advantageous to increase the amount of regular taxable income (e.g., by accelerating ordinary income into the current year) because the total tax payable will likely not be affected by doing so.
Which of the following itemized deductions would be adjustments to regular taxable income in arriving at alternative minimum taxable income (AMTI)? I.Casualty losses II.State income taxes paid III.Standard deduction IV. Charitable donation made to the local university
II and III
Diana has asked Alfredo to sign a premarital agreement. Alfredo is a Canadian citizen. Which of the following are characteristics of a valid and enforceable premarital agreement? i.Once executed, it is binding in all 50 states and Canada. ii.It is not binding without proper disclosure. iii.It should be used with the intention of facilitating a divorce. iv. There should be a written agreement with the willingly executed signatures of both parties.
II and IV
Larry and Sherry reside in a common law property state and recently became engaged. Larry is a retired sports executive with a considerable fortune and a son from a previous marriage. Sherry has never been married. Larry has presented Sherry with a five-carat diamond ring, contingent upon her signing of a premarital agreement. The income tax consequences of the premarital agreement depend in large part upon which of the following? i.The original owner of the ring iiWhether the transfer under the agreement is treated as a gift iiiLocal and state law ivWhether the transfer under the agreement is treated as a transfer for consideration
II and IV
Which of the following tax preference items are used in calculating the alternative minimum tax (AMT) for an individual? I.Tax-exempt income from a State of Louisiana general obligation municipal bond II.Percentage depletion in excess of basis on a mining property III.Tax-exempt interest on a private-activity bond issued in 2012 IV. Exclusion of gain on the sale of certain qualified small business corporation stock
II, III, and IV
Charley lent his friend, Richard, $17,000 for a down payment on a home in a no-interest loan early in the current year. Charley had investment income of $750, and Richard had investment income of $1,200 in the same year. The federal interest rate is 3.5%. Richard has been making payments each month. What recommendations do you make for accounting for the loan made to Richard by Charley?
Imputed interest is calculated on the loan to Richard and is considered a gift to Richard from Charley.; In a gift loan, the amount of the imputed interest constitutes a gift from the lender to the borrower. For gift loans greater than $10,000 and less than or equal to $100,000, no interest is imputed if the borrower's investment income for the year does not exceed $1,000. For a gift loan of more than $100,000, the prevailing federal rate of interest will be imputed. For this loan, Richard's investment income exceeds $1,000 and interest will be imputed.
Alex established a 2503(c) trust for his daughter, Julie, when she entered college four years ago. Alex decided to name his attorney as trustee and give Julie the right to revoke the trust at age 23, when she finished college. Julie did not revoke the trust and chose to allow the trust to continue until she is age 30. Which of the following correctly identifies the taxpayer, if any, who must pay tax on the trust income?
Julie, because she allowed the trust to continue past age 23;Because Julie waited past age 23 when she had the right to revoke the trust, she is responsible for taxes on the trust given to her.
Jeffrey and Karen have given cash gifts to their children over the years. In addition, in 2022 Mark, age 13, earns $2,500 in salary. Jennifer, age 19, who attends community college for approximately three months per year, earns $2,300 in dividends and capital gains. Nancy, age 12, earns $2,950 in dividends and interest. Steven, age 10, earns $900 in dividends and interest. Whose income is subject to the tax at the parents' marginal rate?
Nancy is the only child up to and including age 18 with unearned income in excess of $2,300 for 2022. Earned income is not subject to taxation at the parental rate. Jennifer is not subject because she is not a full-time student. The kiddie tax applies to children under 19 years of age. It also applies to children under age 24 if they are full-time students. The kiddie tax does not apply if the child's earned income exceeds one-half of the child's support. A full-time student is an individual who is a full-time student for at least five calendar months during the tax year.
Which of these types of audits is conducted on a random basis?
National Research Program (NRP) audit
This year, Irwin sold several securities that left him with the following types of gains and losses: long-term capital gain—$18,000, short-term capital gain—$11,800, long-term capital loss—$12,200, and short-term capital loss—$12,000. What is the net capital gain or loss on Irwin's security sales?
Net long-term gain of $5,600
Philip, a professor, earned a salary of $140,000 from a university in the current year. He received $35,000 in dividends and interest during the year. In addition, he incurred a loss of $25,000 from an investment in a passive activity. Assuming Philip's at-risk amount in the activity at the beginning of the current year was $15,000, what is his AGI for the current year?
Philip's AGI, after considering the passive investment (and loss), is $175,000. This consists of $140,000 of active income and $35,000 of portfolio income. Philip cannot deduct the passive loss of $25,000 against either active or portfolio income. In addition, he is further restricted to a total possible loss of only $15,000 because of the at-risk rules.
Joe and Carter plan to combine their respective sole proprietorships to enable them to bid on a local automobile plant's contract to provide uniforms, shoes, and safety equipment to 2,300 employees. Joe currently operates a business that sells uniforms and safety equipment. Carter has a shoe store that specializes in work shoes for many occupations. Joe and his spouse have substantial assets and are in the 35% marginal income tax bracket. Carter is single and has a moderate net worth. His annual taxable income is $136,000, excluding the business income from the shoe store. Joe and Carter anticipate net operating losses over the first two years of $30,000, to be followed by substantial profits. They plan to share the management responsibilities equally. Both Joe and Carter admit that the business is risky, as neither one of them has had any experience with such large contracts. Which of these business forms would be most appropriate for Joe and Carter at this time?
S corporation; The S corporation is the best choice. This would allow the losses to flow through to the owners and would provide liability protection. The general partnership would not provide liability protection, and to form a limited partnership, there must be a general partner with unlimited liability, so neither of these options would be viable. The C corporation would not allow losses to flow through to the owners.
Rashida and Caroline both have significant net worth and are currently in the highest marginal income tax bracket. They have developed a process that allows them to neutralize toxic chemical waste. They want to form a business that will protect their net worth in case the business fails or it becomes involved in lawsuits, but they also would like to be able to offset income from other sources with the start-up losses. Furthermore, they want to share ownership with other family members if the business is successful. Which business form would be most appropriate for Rashida and Caroline at this time?
S corporation; The S corporation will allow the potential losses to flow through to offset other individual income. Also, the use of the S corporation would allow for protection from lawsuits or business failure. Although the general partnership and the limited partnership would both allow for the flow-through of losses, the general partnership would not provide protection from personal liability. There is no indication that either party wants to be a general partner in a limited partnership, so general partnership is not correct. The use of a C corporation would not be appropriate because it is a separate taxable entity, and start-up losses would not flow through.
Christopher's wife, Sarah, died last year and he has been living alone in their home since then. What filing status should he use when filing his income tax return for this year?
Single
Which of these is an economic objective of the federal tax system? Stabilizing prices B) Providing low-income housing C) Raising revenue D) Encouraging charitable contributions
Stabilizing prices
Five years ago, Tom bought 10,000 shares at $10 per share in an intermediate-term bond fund. Today, the shares are worth $200,000 and are paying a nonqualified dividend of $8,000 per year. Tom feels that the stock will continue to appreciate at a rate of 5% per year, including the dividend. Tom wants to establish a college education fund for his two daughters, ages 18 and 9. Neither child has any earned income. Which of the following statements is true? I.If Tom gives 2,500 shares to his 18-year-old daughter, all income from the 2,500 shares will be taxed in her income tax bracket. II.If Tom gives 2,500 shares to his 9-year-old daughter, all dividends from the 2,500 shares will be taxed at her marginal rate. III.Two years from now, if Tom's older daughter sells her 2,500 shares at $30 per share, Tom will need to report the gain as a long-term capital gain on his personal income tax return. IV. All interest income received by his 9-year-old daughter that exceeds $2,200 in 2021 will be taxed at the parents' marginal tax rate.
Statement IV is the only correct statement. The kiddie tax applies to children under 19 years of age. It also applies to children under age 24 if they are full-time students. The kiddie tax does not apply if the child's earned income exceeds one-half of the child's support. Thus, I and II are incorrect. There is no requirement that the proceeds of a future sale be reported on the donor's return.
Kevin Riley anticipates adjusted gross income of $120,000 for the current tax year. He has made no charitable gifts during the year, but now he wants to give his church a stamp collection with a fair market value of $70,000. Kevin paid $38,000 for the collection five years ago. The collection is appreciated tangible personal property that is unrelated to the church's exempt function. What is the maximum allowable charitable deduction Kevin can receive during the current year if he makes an immediate gift of the stamp collection?
The answer is $38,000. Since this is use-unrelated property, the allowable deduction is limited to his basis.
Carol owns and operates a retail appliance store with annual sales of approximately $12 million. The store has an extensive selection of appliances. Approximately 80% of her sales are with extended credit terms. What method of tax accounting is most appropriate for Carol's business?
The cash method, because it provides flexibility in the timing of income and expenses; The accrual method of accounting is often mandatory when inventory constitutes a significant income-producing factor. However, Carol's business qualifies for the small business exception, as average annual gross receipts are under $27 million (2022). The hybrid method is incorrect because there is no indication that service constitutes a significant portion of the business. Also, the installment sale method is not available for sales of inventory or sales with revolving credit terms. The accrual method may always be used, but it lacks any flexibility.
Marion donated a truck to the local food bank to use for picking up food donations. Marion had purchased the truck several years ago for $15,000, and it currently has a value of $3,400. Which of the following statements regarding the documentation Marion must have to support his charitable contribution of the truck is CORRECT?
The documentation must have the description of the property, the name of the receiving charitable organization, the date of the contribution, and the amount of the donation.The donor-taxpayer must have a canceled check, bank record, or a receipt from the donee organization to substantiate the deduction. The documentation must have the amount of cash or description of property, the name of the receiving charitable organization, the date of the contribution, and the amount of the donation. An appraisal is not required for noncash property over $500 and less than or equal to $5,000. However, taxpayers may wish to get an independent appraisal to support the deduction claimed.
John Prentice owns 100 shares of Quantum Inc., a publicly held corporation. He receives a stock dividend of 10 shares of Quantum Inc. when the fair market value (FMV) of the stock is $10 per share. John originally paid $20 per share for the 100 shares of stock. Approximately what is John's new basis in each share of stock after the stock dividend?
The effect of the stock dividend is to "dilute" the basis in the previously owned shares by establishing basis in the new shares. John now owns 110 shares with an aggregate basis of $2,000. This equals an approximate basis of $18 per share.
Policyholder dividends from a whole-life insurance policy are generally tax exempt. In which of these situations would the policyholder dividend be tax exempt?
The policyholder receives dividends that are less than the investment in the contract.
Rami, an Augusta, Georgia taxpayer, is considering renting out his home for one week (seven days) during a golf tournament in the summer. He is unsure of the income tax consequences related to this rental income. Which of these statements is CORRECT?
The rental income is not includible in income. Rentals for 14 days or less (fewer than 15 days) during the year are not required to be included in gross income. However, no deductions specific to the rental are allowed either. The mortgage interest and property tax deductions are unaffected—they are still deductible as itemized deductions.
Teddy, age 12, has interest income of $1,275. He also has earned income from an after-school job that totals $13,000. Teddy is eligible to be treated as a dependent on his parents' return. What is the amount of Teddy's standard deduction for 2022?
The standard deduction for an individual eligible to be claimed, or treated, as a dependent is the greater of the limited standard deduction of $1,150 or the amount of earned income plus $400, not to exceed the full standard deduction amount of $12,950 (for 2022). $13,000 + $400 = $13,400, but the deduction is limited to the full standard deduction amount of $12,950.
A taxpayer currently is being audited by the IRS, and the agent has proposed a tax deficiency with which the taxpayer does not agree. The client has asked you to research the issue. Which of these sources is considered to be the most authoritative and, accordingly, would have the highest precedential value in defending the taxpayer's position to the IRS?
Treasury Regulations
Fred owns a package delivery business. During the current year, he purchased and placed into service $1,150,000 of equipment. Fred is in the highest marginal income tax bracket this year, and expects to be in that bracket for two more years. After that, he plans to semi-retire, but keep the business open for another three to five years. He expects to drop into the lower marginal brackets when he semi-retires. What advice would you give Fred regarding the use of various cost recovery methods?
Utilize the bonus depreciation provision; The fact pattern indicates that Fred is in the highest marginal bracket for three years, and then will be in the lowest marginal bracket after that. It makes sense to maximize the depreciation deduction this year when he is in the highest marginal bracket. By utilizing the bonus depreciation provision, the entire $1,150,000 may be deducted in the year of acquisition. There is no 50% bonus depreciation provision in 2022 — a taxpayer may elect 100% bonus depreciation or forgo it entirely.
The gross profit percentage in an installment sale is calculated by
dividing the gross profit by the contract price.
Camille, a successful trial attorney, also races stock cars professionally. Camille has never won a race, but because she races the professional circuit she claims to be in the business of racing and thus has been deducting the cost of maintaining her cars and crew from her income from practicing law. If the IRS disallows this loss, it will most likely be because of the
hobby loss rules.
Imputed interest on a below-market loan (with the IRS providing accepted loan rates) will be paid, unless the gift loan is
less than $10,000 and the gift loan recipient has less than $1,000 in interest income.In a gift loan, the amount of the imputed interest constitutes a gift from the lender to the borrower. For gift loans greater than $10,000 and less than or equal to $100,000, no interest is imputed if the borrower's investment income for the year does not exceed $1,000. For a gift loan of more than $100,000, the prevailing federal rate of interest will be imputed.
