Tax Accounting Exam #2 (Chapters 5-7)

Assignment of Income

A taxpayer attempts to avoid the recognition of income by assigning to another the property that generates the income. Such a procedure will not avoid income recognition by the taxpayer making the assignment if the income was earned at the point of the transfer. In this case, the income is taxed to the person who earns it.

This year Amanda paid $749 in Federal gift taxes on a gratuitous transfer to her nephew. Amanda lives in Texas and does not pay any state or local income taxes. Which of the following is a true statement? A. Amanda cannot deduct Federal gift taxes. B. Amanda can deduct Federal gift taxes for AGI. C. Amanda can deduct Federal gift taxes paid as an itemized deduction. D. Amanda must include Federal gift taxes with other miscellaneous itemized deductions. E. None of these is true.

A) Amanda cannot deduct Federal gift taxes

Which of the following is a true statement? A) A casualty loss on personal-use assets is generally not deductible B) A casualty loss on investment property is generally not deductible C) All casualty losses are deductible D) A casualty loss on personal-use asset is deductible for AGI E) None are correct

A) a casualty loss on personal-use assets is generally not deductible

Economic Benefit

"received an item of value", must be received in order to have gross income; commonly includes compensation for services, proceeds from property sales, and income from investments or business activities

Ms. Crocker bought 1,000 shares of EMO Corporation stock for $10,000 on January 20, 2018. On December 28, 2020 she sold all 1,000 shares of her EMO stock for $9,000. Based on a hot tip from her friend, she bought 1,000 shares of EMO stock on January 15, 2021 for $7,000. What is Ms. Crocker's recognized loss on her 2020 sale and what is her basis in her 1,000 shares purchased in 2021?

$0 LTCL and $8,000 basis

Curly donated inventory (ordinary income property) to a university. He purchased the inventory seven months ago for $10,000 and on the date of the gift, it had a fair market value of $2,000. What is his maximum charitable contribution deduction for this donation if his AGI is $80,000?

$2,000; the charitable deduction for ordinary income property is the lesser of FMV or basis limited to 50% of AGI.

Ethan competed in the annual Austin Marathon this year and won $25,000 prize for fastest wheelchair entrant. Ethan indicated that he would transfer the prize to a local hospital, How much of the prize should be include in gross income?

$25,000

This year, Barney and Betty sold their home (sale price $750,000; cost $200,000) All closing costs were paid by the buyer. Barney and Betty owned and lived in their home for 18 months. Assuming no unusual or hardship circumstances apply, how much of the gain is included in gross income?

$550,000

This year, Karl had the following capital gains (losses) from the sale of his investments: $6,000 LTCG, $30,000 STCG, ($12,000) LTCL, and ($18,000) STCL. What is the amount and nature of Karl's capital gains and losses?

$6,000 net short term capital gain

Wash Sale Rules

- Occurs 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 (61 day window) - When they apply to a sale stock, realized losses are not recognized and the amount is added to the basis of the newly acquired stock

Advantages of Realization Principle

1) Transactions must agree to the value of the exchanged property rights, so the transaction allows the income to be measured objectively. 2) The transaction often provides the taxpayer with the wherewithal to pay taxes (when they receive cash)

Bonnie and Howard got divorced in 2018. Under the terms of the decree Bonnie will pay Howard $100,000 in cash in each of the ten years (or until Howard's death or remarriage). In addition, Bonnie pays $30,000 per year to support their daughter, Kristina, until she turns 19 years old. What amount (if any) is included in Howard's gross income this year?

100,000; Child support is not included in gross income, but alimony payments (cash) are includible if paid pursuant to a divorce decree executed before January 1, 2019.

Which of the following is a true statement? 1. A taxpayer cannot deduct medical expenses incurred for others unless they are members of his immediate family. 2. A taxpayer can deduct medical expenses incurred for a qualified relative even if the relative does not meet the gross income test. 3. Deductible medical expenses typically include Botox treatments and other cosmetic procedures incurred to enhance a taxpayer's appearance. 4. Deductible medical expenses do not include long-term care services for disabled spouses and dependents. 5. All of the choices are true.

2; a dependent need not meet the gross income test for purposes of the medical expense deduction.

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 Joe use when calculating the tax on these two items?

37%

Which of the following is a true statement? 1. The deduction for interest on educational loan is claimed as an itemized deduction. 2. The deduction for the employer portion of self-employment taxes is subject to phase-out limitation. 3. The deduction for interest on educational loans is subject to a phase-out limitation. 4. Taxpayers are allowed to deduct reasonable moving If the expense are not reimbursed by their employers. 5. All of the choices are false.

3; the deduction of educational interest is subject to a proportional phase-out limitation.

Which of the following is true statement? 1. A taxpayer's standard deduction varies based on her medical expenses and charitable contributions. 2. The standard deduction requires all taxpayers to substantiate and collect information regarding itemized deductions. 3. A taxpayer's standard deduction amount may vary with her age. 4. Bunching itemized deductions is an example of tax planning by income shifting. 5. None of the choices are true.

3; the standard deduction amount caries with a taxpayer's filing status, age, and eyesight.

Which of the following will not qualify as an itemized deduction? 1. None of the choices 2. Personal property taxes assessed on the value of specific property. 3. State income taxes withheld from salary. 4. Foreign income taxes paid this year. 5. Gasoline taxes on personal travel.

5; Gasoline taxes on personal travel are not deductible.

Which of the following types of interest income is NOT taxed as it is earned? A) interest from savings accounts B) Original issue discounts on corporate bonds C) Accrued market discounts on bonds D) Interest from money market accounts E) All of the above

Accrued market discounts on corporate bonds

Claim of Right Doctrine

Addresses the Timing of Income Recognition; this doctrine addresses when a taxpayer receives

Taxability of Prizes Received

All included in Gross Income Except: - awards for scientific, literary, or charitable achievement such as the Nobel Peace Prize are excluded from gross income, but only if - the recipient was selected without any action on his part to enter the contest or proceeding - the recipient is not required to render substantial future services as a condition to receive the prize or award - the payor of the prize transfers the prize to a federal, state, or local government unit or qualified charity (same effect as claiming the transfer as a deduction for AGI) - Claiming the prize, recognizing income, and then contributing funds to charity is the same as a deduction from AGI - Employee awards for length of service or safety achievement (not excluded if circumstances suggest it is disguised compensation) - value of any awards and prize money received by Team USA athletes (does not apply to any year the taxpayer's AGI (after excluding the award) is more than $1 million) - losses and related expenses are deductible as itemized deductions

Gross Income

All income from whatever source derived, unless excluded by law; includes income realized in any form, whether money, property, or services

Kevin bought 200 shares of Intel stock on January 1, 2013 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 2018 tax return?

Amount Realized (200 x 25) - 150 = 14,850 Basis (200 x 50) + 100 = 10,100 14,850 - 10,100 = 4,750

Material Participation Tests

An activity is treated as active rather than passive (thus, not subject to the passive loss limits) if taxpayer meets one of 7 material participation tests: - participates in 500 hours of activity - participates the most out of others - participates more than 100 hours and is not less than other individuals - the activity qualifies as "significant participation activity" ( over 100 hours a year) and the aggregate of all "significant participation activities" ( greater than 500 hours for the year) - participated in any 5 of preceding 10 taxable years - materially participated in any three personal service activity including health, law, engineering, etc. - taking into account all the facts and circumstances, the individual participates on a regular, continuous, and substantial basis during the year

What is the definition of an annuity and what are the two basic types of annuities?

An annuity is an investment that pays a stream of equal payments over time and is often purchased as a means of generating a fixed income stream during retirement. Annuities paid over a fixed period and annuities paid over a person's life

Taxability of Employer- Provided Benefits (Fringe Benefits)

An employer may provide an employee with an automobile to use for personal purposes, pay for an employee to join a health club, pay for an employee's moving expenses, or pay for an employee's home security system. Value of these benefits is included in gross income as compensation for services. The employer's reimbursement plan qualifies as an accountable plan if an employee is required to submit documentation supporting expenses to receive reimbursement and the employer reimburses only legitimate business expenses. - Under the accountable plan, employees exclude expense reimbursements and do not deduct the expenses. - If the employee does not have to submit documentation, then the reimbursement is considered taxable and they are not allowed to deduct expenses.

If an individual taxpayer's marginal tax rate is 35% and he holds the following assets for more than one year, which gain will be txed at the highest rate at the time of sale? A) a gain from investment land B) gain from personal-use property C) gain from a coin collection D) gain from the sale of qualified small business stock held for 3 years E) gain attributable to tax depreciation taken on real property

C) gain from a coin collection

Constructive Receipt Doctrine

a cash method taxpayer realizes and recognizes income when it is actually received; deemed to occur when the income has been credited to the taxpayer's account or when the income is unconditionally available to the taxpayer. No restrictions on the taxpayer's control over the income.

Shelly is a student who has received an academic scholarship to the University. The scholarship paid $4,000 for tuition, $500 fees, and $400 for books. What amount must Shelly include in her gross income?

a. Zero - none of the above benefits are included in gross income. b. Any excess scholarship amounts (such as for room or meals) are fully taxable. The scholarship exclusion applies only if the recipient is not required to perform services in exchange for receiving the scholarship.

Which of the following statements about alimony payments is true for divorce agreements executed before 2019? a) to qualify alimony, payments must be made in cash b) alimony payments are includible in the gross income of the recipient c)to qualify as alimony, payments cannot continue after the death of the recipient d) to qualify as alimony, payments must be made under a written agreement or divorce decree that does not designate the payments as "nonalimony" or child support e) all are correct

all are correct

Gross income includes

all income from whatever source derived unless excluded by law

Madeoff donated stock (capital gain property) to a public charity. He purchased the stock 3 years ago for $100,000, and on the date of the gift, it had a fair market value of $200,000. What is his maximum charitable contribution deduction for the year if his AGI is $500,000 (before considering the itemized deduction phase-out)? A. $100,000. B. $200,000. C. $150,000. D. $250,000. E. None of these.

C. $150,000 Limit of 30% of AGI for capital gain property

Taxability of Scholarship and Tuition Benefits

College students can exclude scholarships that pay for tuition, fees, books, supplies, and other equipment required for the students' courses from gross income, but the scholarship exclusion applies if the recipient is not required to perform services in exchange, otherwise they are fully taxable. Tuition waivers are not taxable. Any excess amounts are taxable. Athletic Scholarships are excludable from gross income if it - is awarded to students by a university that expects but does not require the students to participate in a particular sport - requires no particular activity in lieu of participation, and - is not cancelled if the student cannot participate Room and Board are still taxable under these scholarships.

Charitable Contribution Deduction Rules

Contributions of Money and Other Property to qualified domestic charitable organizations that include places that engage with educational, religious, scientific, governmental, and other public activities (Political and campaigns are not deductible). Cash Contributions: - deductible in the year paid, including donations of cash or by check, electronic funds transfers, credit card charges, and payroll deductions - standard mileage allowance for each mile driven for charitable transportation purposes Other than Money Contributions: - depends if the property is considered a capital gain or ordinary income - capital gain = Fair Market Value but has to be tangible, personal property, and unrelated to charity's operations - Ordinary Income = Lesser of Property's FMV or the adjusted basis

Medical Expenses

Deductible Medical Expenses: - prescription medication, insulin, and medical aids such as glasses, contacts, and wheelchairs - Payments to medical care providers such as doctors, dentists, and nurses, and medical care facilities - transportation for medical purposes (17 cents per mile) - long-term care facilities (meals and lodging) - health insurance premiums (if not deducted FOR AGI by self-employed taxpayers) and insurance for long-term care services Nondeductible Medical Expenses: - over the counter medicines - cosmetic surgery (Not related to injury or disease) Deductions are limited to the amount of unreimbursed qualified medical expenses paid during the year reduced by 7.5% of the taxpayer's AGI. Qualified Medical Expenses = Total qualifying medical expenses - insurance reimbursement

What items are Deductible FOR AGI?

Deductions directly related to business activities - Trade or Business Expenses - Congress limits business deductions to expenses directly related and those that are ordinary and necessary for the activity. - Rental and Royalty Expenses - Losses on Dispositions - Flow-Through Entities Deductions indirectly related to business activities - Moving expenses ( only for armed forces) - Health Insurance - IRAs - Penalty for Early Withdrawl of Savings Deductions subsidizing specific activities - Alimony payments executed before 2019 - Interest expense on qualified educational loans - Qualified Education expenses Business Activities = Self-employed business expenses Investment Activities = Rental and Royalty Expenses

Which of the following is a true statement? A) Unreimbursed employee business expenses are not deductible B) Investment advisory expenses are not deductible C) Business deductions are one of the most common deductions for AGI but they are not readily visible on the front of Form 1040. D) The distinction between business and investment expenses is critical for determining whether a deduction is claimed above the line or below the line. E) All are correct

E) All are correct

T or F: An investment's time horizon affects the after-tax rate of return on investments taxed annually.

False

T or F: Gambling winnings are excluded from gross income.

False

T or F: The capital gains (losses) netting process for taxpayers without 25 or 28 percent capital gains requires them to (1) net short-term gains and losses, (2) net long-term gains and losses, and (3) net the outcome of steps (1) and (2) if they are of similar sign.

False

T or F: Worker's compensation benefits received from a state-sponsored workers' compensation plan are taxable.

False

T or F: All business expense deductions are claimed as itemized deductions.

False; business expenses are generally for AGI deductions, if they are deductible.

T or F: The deduction for cash charitable contributions is limited to 25% of the taxpayer's AGI.

False; cash contributions are limited to 60% or 30% of AGI.

T or F: A taxpayer who receives money when taking out a bank loan will include the amount borrowed in their gross income under the all-inclusive definition of income.

False; debt does not generate a net economic benefit because the amounts received are completely offset by the liability the taxpayer is required to pay from borrowing the funds.

T or F: The objective of the medical expense deduction is to reduce the after-tax cost of medical treatment for all taxpayers, even for those taxpayers with little medical expense.

False; the medical expense deduction is designed to reduce the after-tax cost of medical treatment for taxpayers who incur substantial medical expenses and are likely under-insured.

If a single taxpayer's marginal tax rate is 32 percent and he holds the following assets for more than a year, which gains will be taxed at the lowest rate at the time of sale?

Gains from personal-use property

Taxability of Gifts & Inheritances

Gift = transferor is alive at the time of the transfer Inheritance = transferor is dead Generally subject to federal gift taxes and estate taxes, but not income taxes. Gift and Estate Taxes are imposed on the transfer of property and not included in income by the recipient.

When does Congress elect to include Preferentially taxed Capital gains and Qualified Dividends in Investment Income?

If they are willing to subject this income to tax at the ordinary (not preferential) tax rates. Those that make the election benefit from increasing their investment income and thus increasing their current year investment interest expense deduction.

How Sole Proprietorship and Partnership Income and Expenses flow through and is reported

Income deductions from a Flow-Through Entity (Partnerships and S Corporations) flow through to the owners of the entity (partners or shareholders) Owners Report income or deductions as though they operated a portion of the business personally. Generally in terms of his or her ownership percentage. Corporate dividend income paid to a partnership is reported and taxed as dividend income on the partners' individual tax returns. Owners of Flow-Through Entities are taxed on their share of the entity's income whether or not cash is distributed to them. Cash Distributions are treated as Return of Capital and are not included in owners' gross income.

Realization Principle

Income is realized when 1) a taxpayer engages in a transaction with another party and 2) the transaction results in a measurable change in property rights

Deductibility of Taxes

Individuals may deduct as itemized deductions the payments they made during the year for: - State, local, and foreign taxes, including state and local taxes paid during the year through employer withholding, estimated tax payments, and overpayments on the prior year return that the taxpayer applies to the current year - State and local real estate taxes on property held for personal or investment purposes - State and local personal property taxes that are assessed on the value of the specific property The total itemized deduction for state and local taxes is limited to $10,000 ($5,000 for MFS), but foreign taxes are not limited.

Which of the following types of interest income is taxed as it is earned? Accrued market premium on taxable bonds. Interest from money market accounts. All of the choices are correct. Accrued market discount on taxable bonds. Interest from U.S. Savings Bonds issued at a discount.

Interest from money market accounts

Limitations for Deductions of Net Capital Losses

Limits: taxpayer can deduct Capital losses against capital gains in the netting process up to $3,000 for individuals and $1,500 for MFJ Losses on the Sale of Personal-Use Assets: - Gains are taxable even though they are not purchased for its appreciation potential - Losses are not deductible and not apart of the netting process Losses on Sales to Related Persons - not deductible

Which of the following costs are deductible as an itemized medical expense? The cost of prescription medicine and over the counter drugs. Medical expenses incurred to prevent disease the cost of elective cosmetic surgery Medical expenses reimbursed by health insurance none of the above

Medical expenses incurred to prevent disease.

Is the economic benefit criterion met when a taxpayer borrows money?

No; the economic benefit received (cash) is completely offset by the liability the taxpayer is required to pay in return for borrowing the funds (debt + interest)

This year Barney purchased 500 shares of Bell common stock for $20 per share. At year-end the Bell shares were only worth $2 per share. What amount can Barney deduct as a loss this year?

None of the choices are correct - Barney is not entitled to a loss deduction

This year Bill purchased 1,000 shares of Cain common stock for $12 per share. At year-end, the Cain shares were worth $32 per share. What amount must Bill include in income this year?

None of the choices are correct - Bill has not realized any gain because the stock has not been sold yet.

Annuity Exclusion for A Person's Life Return

Number of payments is uncertain, so IRS tables have to be used to determine the life expectancy 68 - 17.6 69 - 16.8 70 - 16.0 71 - 15.3 72 - 14.6

Joint Life Annuity

Payments continue to two annuitants for only as long as both live. On the death of either one, payments stop. A taxpayer receiving annuity who lives longer than his or her estimated life expectancy will ultimately receive more than the expected number of payments. "Extra payments" are included in gross income. If the taxpayer dies before receiving the expected number of payments, the amount of the unrecovered investment is deducted on the taxpayer's final income tax return.

Types of Income

Portfolio - income from investments including capital gains and losses, dividends, interest, annuities, and royalties Investment - interest payments, dividends, capital gains collected upon the sale of a security or other assets, and any other profit made through an investment vehicle. Passive - income or loss from an activity in which the taxpayer is not a material participant Active - income from sources in which the taxpayer is a material participant including salary and self-employment

Taxability of Refunds From Item for Which the Taxpayer previously received a deduction

Refunds are usually not included in gross income because they usually represent a return of capital or reduction in expense. Example: A refund of $1,000 on an auto purchased for $12,000 simply reduces the net cost to $11,000. If the refund is made for an expenditure deducted in the PREVIOUS year, then under the tax benefit rule, the refund is included in gross income to the extent that the prior deduction produced a tax benefit. If Individuals Itemize deductions: - An itemized deduction produces a tax benefit only to the extent that total itemized deductions exceed standard deductions. Example: If Standard Deduction is $100 and ID refund is $150: - if the refund occurs in the same year as the expense, recognize the standard deduction and Taxable income will increase by $100 - if the refund occurs the year after the deduction is claimed, on $100 of the $150 would be included in Gross income

Tax Benefit Rule

Refunds of expenditures deducted in a prior year are included in gross income to the extent that the refund reduced taxes in year of the deduction. Itemized Deductions are subject to various limitations and only produce a _____ ____________ to the extent that total itemized deductions exceed the standard deduction.

Calculating a Gain/Loss on a Sale of Asset

Sales Proceeds - selling expenses = amount realized - tax basis (investment) in property sold = Gain (loss) on Sale

Self-Employed v. Employee Taxpayer Deductions FOR AGI

Self-employed Health Insurance: Does not qualify for health insurance fringe benefit, but Congress allows them to claim person health insurance premiums for the taxpayer, the taxpayer's spouse, dependents, and children under 27. This is only to the extent of the self-employment income derived from the specific trade or business, and are not allowed to deduct health care insurance premiums if the taxpayer is eligible to participate in an employer-provided health plan. Self-employed Tax Deduction: Are required to pay self-employment tax that represents both the employee and the employer's share of the Social Security and Medicare taxes, and are not considered business expenses. Allowed to deduct the employer portion of the tax they pay. Employed Health Insurance and Tax Deduction: - Employers are allowed to deduct health insurance premiums as compensation expense and employees can exclude these from gross income. - Employees and employers pay Social Security and Medicare taxes based on employee salaries.

Netting procedures for capital gains and losses of individuals

Step 1: Net Short Term Capital Gains and Losses - Net + = STCG - Net - = STCL - If no long term G or L, then process in complete. Step 2: Separate LTCG and LTCL into 28%, 25% and 0/15/20% - Any LTCL carried forward into 28% - Outcome = Net 28% G or L, 25% G, and/or Net 0/15/20% G or L Step 3: If 0/15/20 nor 28% nets to a gain, transfer any loss in 0/15/20 into 28%, combine with loss in that group, proceed to step 4. - If none of the long term rate groups net a loss, proceed to step 6. Step 4: If there is no STCG or L, the process is complete. - Apply capital loss deduction limitation ($3,000 or $1,500 if MFJ) Step 5: If Step 1 produces a NSTCG and Step 3 produces a NLTCL, combine both. - if a loss, the process is complete. - if a gain, taxed at ordinary rates Step 6: If there are no STCG or L from Step 1, the process is complete. Step 7: If Step 1 produces a NSTCG and Step 3 produces a NLTCG, the process is complete.

Loss Limitations

Tax Basis: - hurdle that limits a taxpayer's deductible operating losses to the taxpayer's tax basis in the business or rental activity At-Risk: - Meant to limit the ability of investors to deduct "artificial" ordinary losses produced with certain types of debt - A taxpayer is considered to be at risk in an activity to the extent of any cash personally contributed to the activity and certain other adjustments similar (not identical) to those for tax basis (If different than tax basis, then at risk < tax basis) - Losses that do not clear this hurdle are suspended until the taxpayer generates more at-risk amount to absorb the loss or until it is sold Passive: - applied to any losses remaining after applying the prior two - includes participants in rental activities like rental real estate and limited partnerships

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

Tax Benefit Rule

What is the correct order of the loss limitation rules?

Tax basis, at risk amount, and passive loss limits

Which of the following is NOT a tax advantage of a Series EE Savings Bond? A) Taxes are paid as the original issue discount on the bond is amortized B) Interest earned is exempt from state taxation C) taxes are deferred until the bond is cashed in at maturity D) Interest is exempt from federal taxation when used for qualifying educational expenses E) None of the above

Taxes are paid as the original issue discount on the bond is amortized

Taxability of Gain on Sale of Home

Taxpayers meeting certain requirements can permanently exclude up to $250,000 ($500,000 for married filing jointly) of realized gain on the sale of their principal residence. The taxpayer must have owned the residence for a total of 2 years or more during the 5 year period ending on the date of sale, and must have used the property as their principal residence for a total of 2 or more years during the 5 year period ending on the date of sale. Tax law limits each taxpayer to one exclusion every two years. Married filing jointly can exclude the full $500,000 if one spouse meets the ownership test and both meet the use test. Reduced to $250,000 if either spouse has used their exclusion during the two years before the date of the current sale.

Student Loan Interest

The deduction for interest expense on qualified education loans is the amount of interest paid up to $2,500. The deduction is reduced for taxpayer's depending on the taxpayer's filing status and modified AGI. Modified AGI level: - $70,000 ($140,000 MFJ) = $2,500 - Above $70,000 ($140,000) Below $85,000 ($170,000) = up to $2,500 reduced by phase out - Equal or above $85,000 ($170,000) = $0 Phase Out Percentage: - Single or Head = (Modified AGI - 70,000)/15,000 - MFJ = (Modified AGI - 140,000)/30,000

Annuity Exclusion for a Fixed Return

The expected value is the number of payments x the amount of the payment. The return of capital is simply the original investment/number of payments

T or F: Dave and Jane file a joint return. They sell a capital asset at a $140,000 loss. Even though they have no capital gains, $3,000 of the loss can still be deducted in the current year if they have at least $3,000 of ordinary income.

True

T or F: Generally, interest income is taxed at ordinary rates and dividend income is taxed at capital gains rates.

True

T or F: Generally, losses from rental activities are considered to be passive activity losses.

True

T or F: Gross Income includes all realized income that is recognized during the year.

True

T or F: 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

T or F: Qualified dividends received by individuals are taxed at either a 0 percent, a 15 percent, or a 20 percent preferential rate.

True

T or F: The cash method of accounting requires taxpayers to recognize income when they receive it in the form of cash, property, or services.

True

T or F: The exclusion amount for purchased fixed-term annuity can be calculated by dividing the cost of the annuity by the total number of payments.

True

T or F: Self-employed taxpayers can deduct for AGI the cost of health insurance as long as they are not eligible to participate in their spouses' employer-provided health plan

True, a self-employed individual cannot be eligible to participate in a plan.

T or F: Taxpayers traveling for the primary purpose of receiving essential and deductible medical care can deduct the cost of travel.

True; Medical travel is deductible if the expense is not extravagant and the travel has no significant element of personal pleasure.

Taxability of Life Insurance Proceeds

When the owner of the life insurance policy dies, the beneficiary receives the death benefit proceeds. Tax law allows the beneficiary to exclude proceeds in gross income to avoid double taxation, but if the proceeds are paid over a period of time, the portion that is interest must be included. The exclusion does not apply when a policy is transferred to another party for valuable consideration. If a taxpayer cancels a life insurance contract and is paid the policy's cash surrender value, they would recognize ordinary income to the extent the proceeds received exceed previous premiums paid. - If the premiums paid exceed proceeds received, then the loss is not deductible - If the taxpayer is terminally ill (death in 24 months), early receipt in life insurance proceeds in the form of accelerated death benefits are not taxable

When do taxpayers recognize gross income?

When they receive an economic benefit, they realize income, and no tax provision allows them to exclude or defer the income from _______ for that year.

Wilma has a $25,000 certificate of deposit (CD) at the local bank. The interest on this certificate, $1,000, was credited to her account this year but she must pay an early withdrawal penalty if she cashes in the CD before next year. Which of the following is a true statement? a) Wilma must include the $1,000 of interest in her income this year. b) Wilma must include the $1,000 of interest in her income when she cashes the CD. c) Wilma must include the $1,000 of interest in her income this year only if the bank waives the early withdrawal penalty. d) Wilma must include the $1,000 of interest in her income next year if she does not pay the early withdrawal penalty. e) All of these.

Wilma must include the $1,000 interest in her income this year.

Which of the following is a deductible miscellaneous itemized deduction? tax preparation fees fees for investment advice employee business expenses gambling losses to the extent of gambling winnings all are correct

gambling losses to the extent of gambling winnings

Annuity Exclusion Ratio

original investment / expected value of annuity = return of capital percentage

Wherewithal to Pay

the transaction itself provides the taxpayer with the funds to pay taxes on income generated by the transaction, thus reducing the possibility that the taxpayer will be required to sell other assets to pay the taxes on the income from the transaction.

What Items are Deductible FROM AGI?

Itemized Deductions: - Medical Expenses - Taxes - Interest - Charitable Contributions - Casualty and Theft Losses on Personal-Use Assets Standard Deduction: - Only if greater than itemized deductions Qualified Business Income: May deduct the lesser of - 20% of the taxpayer's QBI from a qualified trade or business + 20% of the taxpayer's qualified real estate investment trust dividends and qualified publicly traded partnership income if any or - 20% of the excess, if any, of taxable income over the taxpayer's net capital gains Cannot Exceed the Greater of: - 50% of wages paid with respect to the qualified business or - sum of 25% of the wages + 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property