income tax exam 2

selling expenses

To calculate the amount realized on the sale of an asset, the proceeds are reduced by which of the following?

EDUCATION; FOR

A taxpayer may deduct interest expense paid on qualified______ loans where the proceeds were used for tuition, fees, books, and other necessary expenses. The interest is deductible______ (for/from) AGI.

Reason: $18,000 - $1,200 - $14,500 = $2,300

Abby sold a parcel of land for $18,000. She paid a real estate agent a commission of $1,200 for assisting with the sale. Abby had purchased the land several years earlier for $14,500. What is the gain on the sale of the land?

All of these benefits are included in gross income

Acme published a story about Paul, and as a result Paul sued Acme for damage to his reputation, emotional distress, and punitive damages. Paul won an award of $28,000 for damages, $8,250 for emotional distress, and $70,250 for punitive damages. What amount must Paul include in his gross income?

INVESTMENT

Activities which are profit-motivated, but do NOT require a relatively high level of involvement from the taxpayer are referred to as ____ activities

Because Allison does not itemize, she will not be able to deduct any of the losses.

Allison won $3,200 betting on a long-shot in the Kentucky Derby. Unfortunately, she lost her lucky streak and ended up losing $5,000 on her next (and last) trip to the racetrack. Allison heard that she will be able to deduct her gambling losses, so she is feeling a little better. Assuming that Allison is not a professional gambler and does not itemize deductions, how much of the $5,000 loss will she be able to deduct?

annuity

An investment that pays a stream of equal payments over time is a(n) _____

Reason: By forgiving $12,000 in debt, Andrea will be solvent by $7,000, so she should include $7,000 in gross income.

Andrea owed $12,000 on a medical bill to University Hospital. The hospital agreed to discharge the debt due to Andrea's financial situation. Immediately prior to the discharge of the debt, Andrea's debts exceeded her assets by $5,000. How much of the debt forgiveness will Andrea need to include in her gross income?

capital

Assets that are held for investment or personal use assets are referred to as _______ assets

Bailey has a taxable short-term capital gain of $350, but no deductible loss for the car.

Bailey stood in line for hours and purchased the new game system the day it became available for $600. Knowing that there was a high demand for the game system and a limited supply, she decided to put the item on E-bay rather than keep it. She sold it for $950. She also sold her five-year old car for $5,000. She had purchased the car for $13,000. What is the taxable nature of these transactions?

Reason: $21,000 - $1,500 - $20,000 = ($500)

Bart sold a parcel of land for $21,000. He paid a real estate agent a commission of $1,500 for assisting with the sale. Bart had purchased the land several years earlier for $20,000. What is the gain or loss on the sale of the land?

15000

Deb has found it very difficult to repay her loans. Because of these difficulties, the bank decided to forgive one of her most recent loans, an amount of $45,000. After the loan was discharged, Deb had total assets of $232,000 and her remaining loans totaled $217,000. What amount must Deb include in her gross income?

C; 1040

Deductions for business expenses are reported on Schedule _____ of the individual's Form _____ , the main document of the individual tax return.

FLOW THROUGH; FOR

Entities such as partnerships, LLCs, and S corporations are known as_______ entities because their income is reported on the owners' tax returns. Any expenses or losses from these entities are typically deductible ______ AGI

5

Excess charitable contributions can be carried forward ______ year(s) before expiring.

FOR

Expenses associated with generating rental or royalty income are deductible _____- AGI

nondeductible

For all divorce agreements executed after December 31, 2018, ________payments are excluded from gross income of the recipient and ________ for the spouse making the payment.

750,000

For mortgages obtained after 2017, MFJ homeowners may deduct interest on up to $ ______ of acquisition indebtedness.

1450

Gary incurred $5,200 in qualified medical expenses in 2022. His AGI for the year is $50,000. Gary will be able to deduct $_____ itemized deduction for medical expenses.

120,000 bc In 2023, the maximum exclusion is $120,000.

Helena is a U.S. citizen and a CPA who moved to London, England, three years ago to work for a British company. This year, she spent the entire year in London and earned a salary of $130,000. How much of her salary will she be allowed to exclude from gross income in the United States?

First-in, first-out method

Holly has worked for Ford Motor Company for several years. Each year, she purchases 50 - 100 shares of the company's stock for her investment portfolio. During the current year, Holly sold 25% of her stock to purchase a new home. She has not maintained records to track the basis of the shares as they were purchased for her stock portfolio. What method should she use to calculate her tax basis?

The employer portion of self-employment tax is deductible.

How much of a self-employed taxpayer's self-employment tax may be deducted for AGI?

Tax benefit rule.

Identify the rule that determines whether a taxpayer must include in income a refund of an amount deducted in a previous year:

claim of rights

Identify the rule that states that income has been realized when a taxpayer receives the income and there are no restrictions on the taxpayer's use of the income (e.g., no obligation to repay the amount).

long term care

If a taxpayer cashes out a life insurance policy before death due to a chronic illness, she may exclude from income the amount used to pay for her ________

will; will not

If a taxpayer sells a personal-use asset at a gain, the taxpayer _____ recognize a capital gain. If a taxpayer sells a personal-use asset at a loss, the taxpayer ______ recognize a capital loss.

170

Opal deducted $2,400 of state income taxes on her tax return last year. This year she received a state income tax refund of $170. What amount of the refund, if any, should Opal include in her gross income if last year her total itemized deductions exceeded the standard deduction by $350?

FOR; INCLUDES

Penalties for early-withdrawal of savings are deductible ______ AGI, and interest reported in gross income _______ (includes/excludes) the interest forfeited for the penalty.

business activities

Profit-motivated and requiring a high level of effort from the taxpayer

qualified; nonqualified

Regarding portfolio investments, _________ dividends generally are taxed at capital gains rates and _______ dividends are taxed at ordinary rates.

51200

Sandy earned a salary of $50,000 last year. Her parents gave her a car valued at $23,000 for her birthday. In addition, she earned $1,200 in interest income on a savings account and inherited $75,000 from her grandmother's estate. What is the amount of Sandy's gross income for the year?

gross

Sec. 61 of the Internal Revenue Code defines _____ income as "all income, from whatever source derived."

8500

Shaun is a student who has received an academic scholarship to State University. The scholarship paid $14,000 for tuition, $2,500 for fees, and $1,000 for books. In addition, Shaun's dormitory fees of $8,500 were paid by the university when he agreed to counsel freshman on campus living. What amount must Shaun include in his gross income?

capital gains; 3000

Taxpayers can completely offset ________ with capital losses. If an excess capital loss remains, married filing jointly taxpayers can deduct up to $ ________ per year against ordinary income. The loss exceeding that amount is carried forward indefinitely.

ordinary income

Taxpayers can only deduct the lesser of (1) the property's fair market value or (2) the property's adjusted basis when making a charitable donation of ________ property

include ; exclude

Taxpayers must_____ (include/exclude) gains but______ (include/exclude) losses on the disposal of personal use assets from gross income.

Schedule E Form 1040

The income and deductions that result from rental property and royalties are reported on:

physical injur; physical sickness

The tax laws specify that only payments on account of a _____or ______ are nontaxable.

assignment of income

The taxpayer who earns income from services must recognize the income, and the income from property is taxed to the person who owns the property under the ______ doctrine

alimony

The term used when one former spouse is required to provide financial support to the other spouse pursuant to a legal separation or divorce is ______

FALSE

True or false: A self-employed individual may deduct the cost of his self-employed health insurance premiums even if his spouse's employer offers family coverage to him.

FALSE

True or false: Business expenses are deducted for AGI and reported directly on Form 1040.

true

True or false: Capital losses retain their character as short-term or long-term when they are carried forward to subsequent years.

F

True or false: Darlene owns stock in several different companies. When she received a dividend check from her Avatar stock, she endorsed the checks and deposited the money in her daughter's checking account. Consequently, her daughter will be assessed the tax on the dividends.

t

True or false: Gambling expenses and losses to the extent of gambling winnings are reported as miscellaneous itemized deductions.

F

True or false: Gross income only includes income received in cash because cash is a measurable change in wealth.

T

True or false: Income and deductions from a partnership or S corporation are taxed on the owners' tax returns rather than the entity tax return.

false

True or false: Interest income is generally taxed at lower capital gains rates.

T

True or false: Punitive damages are generally fully taxable to the recipient.

F

True or false: Scholarships received by college students qualify as gifts and are, therefore, nontaxable. The actual use of the money (tuition, fees, housing, meals, and any other expenses) does not affect the taxable status of the scholarship. F

false

True or false: Short-term capital gains are subject to preferential tax treatment when the capital gains rates are lower than the taxpayer's marginal income tax rate.

receive ; earn

Under the cash method, taxpayers recognize income in the period they _______it, rather than when they actually ________`

gift; nontaxable

When an individual transfers property to another taxpayer during their life, without receiving or expecting to receive value in return, the property transferred is a(n) ________ and is _______ to the person receiving the property.

wash sale

When an investor sells or trades stock or securities at a loss and within 30 days either before or after the day of sale buys substantially identical stocks or securities a(n) _______ occurs

Constructive Receipt

When income has been credited to the taxpayer's account or when the income is unconditionally available to the taxpayer, the taxpayer is aware of the availability and there are no restrictions on the income, _________ is deemed to have occurred.

return of capital principal

When taxpayers sell assets, they must determine the extent to which they include the sale proceeds in gross income.

Unearned income

Which of the following terms is used to refer to income from property?

Assets used in a trade or business

Which of the following types of assets does NOT qualify as a capital asset?

Corporate stock Mutual fund investments

Which of the following types of investments generate dividend income? 2

Certificates of deposit Corporate bonds Savings accounts Government bonds

Which of the following types of investments generate interest income? 4

Sales of personal-use assets Sales to related parties Wash sales

Which of the following types of transactions result in capital losses that are NOT deductible for tax purposes? 3

Claim of right doctrine

Which one of the following choices states that income is realized if a taxpayer receives income and there are no restrictions on the taxpayer's use of the income?

claim of rights

_______ doctrine states that income has been realized if a taxpayer receives income and there are no restrictions on the taxpayer's use of the income.

Reason: $250,000 ÷ (20 × $2,500 × 12 mos.) = 41.67% answer: 41.67% or $12,500 per year

jerry receives an annuity payment of $2,500 per month. Jerry purchased the 20-year annuity for $250,000. What is the amount of the annuity that represents a return of capital and is, therefore, nontaxable?

true

true or false. A taxpayer generally includes in gross income the amount of debt forgiven by a lender.

true

true or false. Capital loss carryovers for individuals are carried forward indefinitely.

False

true or false. Consulting services are generally considered a qualified trade or business for purposes of the deduction for qualified business income.

false

true or false. Gambling winnings are excluded from gross income.

true

true or false. Generally, 85 percent of Social Security benefits are included in income of high-income taxpayers.

true

true or false. Generally, a portion of each payment from a purchased annuity represents a return of capital.

true

true or false. Generally, interest income is taxed at ordinary rates and dividend income is taxed at capital gains rates.

true

true or false. Larry received $4,250 from disability insurance that he purchased earlier this year from an insurance provider. Larry is allowed to exclude the $4,250 from his gross income.

true

true or false. Losses associated with personal-use assets, sales to related parties, and wash sales are not currently deductible.

false

true or false. Qualified dividends are always taxed at a 15 percent preferential rate.

true

true or false. Qualified dividends received by individuals are taxed at either a 0 percent, a 15 percent, or a 20 percent preferential rate.

false

true or false. Self-employed taxpayers can choose between claiming the employer portion of self employment taxes paid as an itemized deduction or a deduction for AGI.

false

true or false. The deduction for cash charitable contributions for individual taxpayers in 2023 is limited to twenty-five percent of the taxpayer's AGI.

true

true or false. U.S. citizens generally are subject to tax on all income whether it is generated in the United States or in foreign countries.

false

true or false. Unemployment benefits are excluded from gross income in 2023.

terminuity

what is an annuity paid over a fixed term called

perpetuity

what is an annuity paid over a lifetime called

nontaxable

In general, life insurance proceeds are _______ to the beneficiary of the policy.

chronically; terminally

In general, when a taxpayer cashes out a life insurance policy before death, taxable income may result. However, if the taxpayer is _______ ill, the portion of the proceeds used for long-term care is excluded from gross income. If the taxpayer is _______ ill, the proceeds are NOT taxable.

include

In general, when a taxpayer's debt is discharged by a lender, the taxpayer's gross income will _______ the amount forgiven.

ordinary and necessary

In order to be deductible, business expenses must be _______ AND _______ for the business activity.

physical

In personal injury cases, any damages awarded due to _______ injury are exempt from taxation

property

Income from _______takes different forms, such as dividends, interest, rents, royalties, and annuities.

unearned

Income from property is referred to as_______ property

earned

Income received as a result of services provided by the taxpayer, including business income, is referred to as _____ income

ordinary

Interest income is typically taxed at______ rates

municipal

Interest income on ______ bonds is excluded from federal taxation.

$0—none of these benefits are included in gross income.

Irene's husband passed away this year. After his death, Irene received $250,000 of proceeds from life insurance on her husband, and she inherited her husband's stock portfolio, worth $750,000. What amount must Irene include in her gross income?

Izzy can deduct the $50 for AGI.

Izzy ran into a cash shortfall and had to cash in a certificate of deposit early. She incurred a $50 penalty for early withdrawal. How should Izzy treat the penalty for tax purposes?

0

Jamarcus injured his hand playing softball which prevented him from being able to work. He had purchased a disability policy for himself earlier in the year. and received $1,300 in disability benefits while he was away from work. Jamarcus should include $

1300

Jamarcus injured his hand playing softball which prevented him from being able to work. His employer provides disability insurance as a nontaxable fringe benefit to all employees. Jamarcus received $1,300 in disability benefits while he was away from work. Jamarcus should include $ __

10000

Married filing joint taxpayers may deduct no more than $ ______ in total state and local taxes.

standard deduction

is a flat amount that most individuals can elect to deduct instead of deducting their itemized deductions.