ACIS 4344 Exam 2
Cassie was an original investor in DEF LLC, a construction company. She owns a 30% interest in the company for which she paid $200,000. This year, DEF did poorly and had a taxable loss of $200,000. However, there was no need for additional contributions of capital. What is Cassie's basis in her interest in DEF at the end of this year? a. $200,000 b. $400,000 c. $0 d. $140,000
$140,000
On September 19, 2018, an investor purchases 5,000 shares of Baritone Corporation for $5,000. On March 31, 2019, the stock became worthless. The investor has no Capital Gains in the current year. What is the deductible gain or loss in 2019 and how is it classified? a) $3,000 STCL. b) $5,000 STCL. c) $3,000 LTCL. d) $5,000 LTCL.
$3,000 LTCL.
What is the maximum refundable Child Tax Credit for child under the age of 6 for tax year 2021?
$3,600
During the current year, Austin, a self-employed individual, paid the following amounts: • Federal income tax - $5,000 • State income tax - $3,000 • Real estate taxes on 2nd home - $800 • State sales taxes - $600 • State occupational license fee - $400. What amount can Austin deduct as taxes by itemizing his deductions? a. $3,000. b. $3,400. c. $3,800. d. $4,800.
$3,800
Three years ago, Derrick loaned Robin $5,000 (Year 1) with the understanding that the loan would be repaid in two years. Last year (Year 3) Robin filed for bankruptcy, and Derrick learned that he would receive $0.10 on the dollar. In the current year, Year 4, the final settlement was made, and Derrick received $300. Assuming the loan is a nonbusiness bad debt, how should Derrick account for the loan? a) $4,700 ordinary loss in the current year. b) $3,000 ordinary loss last year and $1,700 ordinary loss in the current year. c) $4,700 short-term capital loss in the current year. d) $3,000 short-term capital loss last year and $1,700 short-term capital loss in the current year.
$4,700 short-term capital loss in the current year.
Jennifer owns a business. Since demand is on the rise, she decided to purchase an upgraded machine that will produce four times as fast as the previous machine. The cost of the new machine is $400,000 and will be the only depreciable property that she places in service during 2020. The business has taxable income of $500,000 before the addition. What is the maximum amount of her Section 179 deduction for 2020? a. $200,000. b. $400,000. c. $500,000. d. $100,000.
$400,000.
On December 21st, 2020 Tara reviews her investment portfolio and discovers she had a very profitable year. To offset some of her gains, she sells 100 shares of ABC Corporation for $10,000. She had purchased those shares for $15,000 two years earlier. On January 5th of the next year, Tara reads a newspaper article indicating that the price of ABC Corporation is expected to substantially increase. Second-guessing the wisdom of previously selling her shares of ABC, she purchases an additional 100 shares of ABC for $8,000. What are the tax consequences to Tara in 2020? a) $5,000 realized but not recognized loss. b) $8,000 realized and recognized loss. c) $5,000 realized and recognized loss. d) $7,000 realized but not recognized loss.
$5,000 realized but not recognized loss.
Eric has realized several capital gains and losses this year: • $15,000 in short-term capital gains. • $10,000 in short-term capital losses. • $6,000 in long-term capital gains. • $18,000 in long-term capital losses. What is Eric's net gain or loss? a. $7,000 net short-term capital gain. b. $7,000 net long-term capital gain. c. $7,000 net long-term capital loss. d. $7,000 net short-term capital loss.
$7,000 net long-term capital loss.
In 2020, Jacques paid the following interest: • Interest on home mortgage: $7,300 • Interest on home equity loan used to purchase furniture for personal residence: $1,000 • Interest on loan used to purchase State of Louisiana general purpose bonds: $1,800 If Jacques itemizes his deductions for last year, what is the amount of deductible interest expense? a. $7,300. b. $8,300. c. $9,100. d. $10,100.
$7,300
For 2021 Sheila spent $16,000 in day care services for her four children (all under the age of 13) to allow her to go to work. The expenses per child are equal amounts. If her adjusted gross income is $125,000, how much is her dependent care credit? a. $4000. b. $1,200. c. $8,000. d. $16,000.
$8,000
Harry and Sally are married and together they have AGI of $60,000. They have no dependents, and they file a joint federal income tax return. Each pays $4,800 for medical insurance. The medical insurance is not paid via a reduction in taxable salary but paid directly to a 3rd party insurer. During the year, they paid the following amounts for medical care, for which they were not reimbursed by insurance: • Doctor and dentist bills and hospital expenses = $3,600 • Prescription drugs = $800 Determine the deduction allowable for medical expenses paid during the year (2021). a. $0. b. $3,600. c. $4,500. d. $9,500.
$9,500
Cayson has decided to make charitable contributions of property this year. She donates a picture that she had created to a local art museum (adjusted basis $900, fair market value $40,000). Her adjusted gross income is $90,000. What is her charitable deduction for this year? a. $0. b. $900. c. $36,000. d. $40,000
$900
Alana, a college student, had her car recently broken into. The perpetrators caused $800 in damage to her car, and stole a camera with a fair market value of $700 that was originally purchased for $1,500. Alana's AGI for the year is $8,000. How much can Alana claim as a casualty loss deduction on her income tax return this year? A) $0. B) $600. C) $700. D) $1,400.
*$0* Alana suffered a casualty loss. Casualty losses are only deductible if declared a national disaster by the President.
Two years ago, Belinda purchased 100 shares of Pennsylvania Railroad, Inc. for $15,000. Unfortunately, the value of the shares has dropped to $10,000. Belinda's daughter, Carli, was heading off to college, and Belinda was tired of waiting for a return on the stock. Belinda gave the stock to Carli when it was worth $10,000 to help fund Carli's education. If Carli sells the shares for $12,000 three months after the transfer, what is the amount and character of her gain or loss? A)$0. B)$2,000 short-term capital gain. C)$3,000 long-term capital loss. D)$3,000 short-term capital loss.
*$0* Belinda gave loss property to her daughter. When a taxpayer transfers property with a loss to someone else, and the recipient sells the property for an amount between the donor's adjusted basis and the fair market value of the stock on the date of the gift, no gain or loss is recognized. In this example, the no-gain, no-loss corridor is from $10,000 (the fair market value of the stock on the date of the gift) to $15,000 (the adjusted basis in the hands of the donor). If Carli sold the stock for any amount between $10 and $15 thousand dollars, she is not required to recognize any gain, and she is prohibited from recognizing any loss on the transaction. Since there is no gain or loss, there is no need to categorize the tax result as either long-term or short-term.
Clint is an avid fan of his alma-mater's football team. The team has had such a good record in the last six years that getting tickets to the games has proven difficult. Recently the school announced that those wishing to purchase football tickets could have their name placed on a waiting list once they made a $5,000 contribution to the University. Since Clint did not want to miss any of the games, he made the contribution, and also paid $1,000 for the season tickets. How much can Clint deduct as a charitable contribution on his income tax return? A) $0. B) $4,000. C) $5,000. D) $6,000.
*$0* When a contribution is made to a charity to obtain an option to purchase sporting tickets, there is no charitable deduction (TCJA 2017).
Uncle Phil died in 2021, he left his estate to his ungrateful cousin, Will. Uncle Phil's cost basis in his property was $2 million but, due to turbulent political and economic times, it was only worth $1 million at his death. Uncle Phil had reinvested approximately $250,000 of dividends during his holding period, and his estate paid $500,000 in transfer taxes at his death. What is Uncle Phil's basis in the property? A)$1,000,000. B)$2,000,000. C)$2,250,000. D)$2,750,000.
*$1,000,000* Section 1014 can result in a step-down in basis as well as a step-up in basis. Since the property was worth $1 million as of the date of Uncle Phil's death, that is the basis of the property in Will's hands despite the fact that Uncle Phil had $2,250,000 in after-tax capital invested in the property and his estate paid transfer taxes of $500,000.
Adele earns a salary of $150,000 from Hospitals, Inc. as a hospital administrator during 2021. Hospitals, Inc. withholds OASDI taxes in the amount of $8,853. She also earns $20,000 of wages from CPR Experts where she teaches CPR. CPR Experts withholds OASDI taxes in the amount of $1,240. What is Adele's available credit for excess Social Security taxes withheld, assuming Adele's tax due before application of the credit is $800? A)$0. B)$440. C)$800. D)$1,240.
*$1,240* Adele will be allowed to take a $1,240 refundable credit against income taxes for the excess Social Security taxes withheld from her compensation during the year. She is only required to pay Social Security tax on the first $142,800 (2021) which was withheld from Hospitals, Inc. The amount withheld from CPR Experts is the excess amount.
In June of this year, Wynonna purchased her first home. The price of the house was $260,000, and she financed the purchase with a 30-year, $200,000 mortgage. Since she plans on staying in the home for quite a while, and she expects interest rates to rise in the future, she paid $4,000 in points to receive a lower interest rate on the loan. As of the end of the year, Wynonna had paid $7,614 in interest on the loan by making her monthly installment payments. How much should she claim as mortgage interest on her itemized deductions this year? A)$7,614. B)$7,747. C)$9,614. D)$11,614.
*$11,614* In the year a home is acquired, the interest paid on a mortgage used to acquire the home, as well as the points paid to qualify for a lower interest rate on the loan are deductible as mortgage interest expense, subject to the overall limitations on acquisition indebtedness. Since Wynonna acquired her home this year, she can deduct the $4,000 she paid in points as well as the $7,614 paid in mortgage interest, for a total of $11,614.
Chapman owns a building in a blighted downtown area that, until recently, served as his principal residence. He originally purchased the building for $200,000. When he moved out and converted the building to an office building, the fair market value of the building was $150,000. What is Chapman's basis for purposes of determining his depreciation deductions on the building? A)$0. B)$100,000. C)$150,000. D)$200,000.
*$150,000* Chapman can claim the lower of his cost basis or the fair market value at the date of conversion as his basis for depreciation purposes.
As the end of the year was approaching, Trixie reviewed her stock portfolio and decided to sell her holdings in Windsor Industries on December 28th of Year 1. The shares were purchased two years ago. Her basis in the shares was $20,000 and the market value of the shares was $18,000. Trixie wanted to use the $2,000 loss to help her minimize taxes for Year 1. On January 10th, Year 2 Windsor Industries announced new initiatives, and Trixie has second guessed her decision to sell the shares in the company. She buys back the 1,000 shares for $17,000 on January 11th. What is Trixie's basis in the shares after she buys them back on January 11th? A)$0. B)$17,000. C)$19,000. D)$20,000.
*$19,000* Since Trixie purchased and sold the same security within a 30-day period, the sale is considered to be a washsale transaction, and the loss may not be claimed. The disallowed loss is added to Trixie's basis in the replacement shares. Trixie paid $17,000 for the replacement shares, and the disallowed loss was $2,000 so her basis in the shares is $19,000.
Andy gave 1,000 shares of Meade Productions, Inc. to his son, Woody. Andy paid $15,000 for the shares, and they were worth $12,000 at the time he transferred them to Woody. If Woody sells the shares for $13,000, how much capital has the family lost on a permanent basis? A)$1,000. B)$2,000. C)$13,000. D)$15,000.
*$2,000* 15,000 - 13,000 = 2,000 Since loss basis property was given away, and the asset was sold for less than the donor's cost basis, the difference between the donor's cost basis and the sales price represents a permanent loss of capital for the family. Andy should have sold the shares and given the proceeds to Woody. If he did this, he would have been able to recognize a loss, recouping capital for tax purposes, while still giving the same benefit to his son.
Nedra owns a vacant lot used in her business. She exchanges it for a property with a small storage facility on it owned by Annette. The basis of Nedra's vacant lot is $40,000. She gives Annette $20,000 cash plus the vacant lot in exchange for Annette's property, which is worth $36,000. Annette's basis in her original asset is $10,000.What is Annette's gain or loss? A)$20,000 gain recognized. B)$26,000 gain realized and recognized. C)$0 gain recognized. D)$0 loss recognized.
*$20,000 gain recognized.* Annette must recognize gain to the extent of boot paid to her ($20,000).
Nedra owns a vacant lot used in her business. She exchanges it for a property with a small storage facility on it owned by Annette. The basis of Nedra's vacant lot is $40,000. She gives Annette $20,000 cash plus the vacant lot in exchange for Annette's property, which is worth $36,000. Annette's basis in her original asset is $10,000.What is Nedra's gain or loss? A)No gain or loss. B)$24,000 loss realized and recognized. C)$24,000 loss realized, but not recognized. D)$44,000 loss realized and recognized.
*$24,000 loss realized, but not recognized.* The total value of all property (like-kind and boot) exchanged by the parties must be equal. The value of Annette's property is $36,000 and she receives Nedra's land plus $20,000 in exchange for it; therefore, Nedra's land must be valued at $16,000. Nedra will realize a $24,000 loss ($16,000 - $40,000). Losses are not recognized in a tax-free exchange; rather, they are deferred to the new asset and added to the basis.
Neil runs an extortion racket in his home neighborhood. He paid Patrick $100,000 to run the street operations, and incurred $30,000 for secretarial support and $20,000 in miscellaneous expenses, such as rent for his office and supplies. Neil had gross income from the extortion ring of $400,000. How much of the income is subject to income tax this year? A) $250,000. B) $270,000. C) $300,000. D) $400,000.
*$250,000* Even though Neil is running an illegal business, the income from the activity is subject to income tax. Neil is entitled to deduct all reasonable and necessary expenses associated with the production of the income, including salaries and costs incurred in business operations.
Two years ago, Dale purchased 100 shares of Stonewall, Inc., a start-up company, for $10,000. Unfortunately, Stonewall's business model did not perform as expected, and the value of the shares has dropped to $6,000. Dale's son, Brian, recently realized a large capital gain on an investment he held, so Dale gave his shares of Stonewall, Inc. to Brian when they were worth $6,000. If Brian sells the shares for $3,000 thirteen months after the transfer, what is the amount of his gain or loss? A)No gain or loss. B)$3,000 capital loss. C)$4,000 capital loss. D)$7,000 capital loss.
*$3,000 capital loss.* Dale gave loss property to his son. When a taxpayer transfers property with a loss to someone else, and the recipient sells the property for less than the fair market value as of the date of the gift, the basis in the hands of the donee for purposes of calculating loss is the fair market value of the property as of the date of the gift. This is referred to as the "loss basis" in the property. Since the fair market value of the property was $6,000 on the date of the gift, and Brian sold the property for $3,000, his loss is a $3,000 capital loss.
Twenty years ago, Larry purchased a desk, which he used in his law practice, for $8,000. The desk has been fully depreciated; and when he retired, Larry sold the desk to Sophia for $3,000. What will Larry include on his tax return as a result of the sale? A)$3,000 taxed at ordinary rates. B)$3,000 taxed at long-term capital gains rates. C)$5,000 ordinary loss. D)$5,000 long-term capital loss.
*$3,000 taxed at ordinary rates* The desk is a Section 1231 asset. The amount realized of $3,000 less the adjusted basis of $0 equals a gain of $3,000. Section 1231 gains are usually taxed as long-term capital gains, but before capital gains tax rates can apply the depreciation recapture rules of Section 1245 must be taken into consideration. Section 1245 requires the taxpayer to recognize the gain to the extent of the depreciation as ordinary income, resulting in a recapture of depreciation claimed over the years. In this case, the total depreciation claimed was $8,000 and the gain was $3,000. Since the gain was less than the depreciation taken, the full gain is taxed at ordinary rates due to the imposition of the Section 1245 depreciation recapture rule.
Elton is in the 32% marginal tax bracket. He recently sold a gold coin for $12,000 that he purchased six months ago for $2,000. How much federal income tax will Elton pay on this transaction? A)$1,000. B)$1,500. C)$2,800. D)$3,200.
*$3,200* While a coin is a collectible, and collectibles with long-term holding periods are taxed at a 28% capital gains tax rate, Elton had a short-term holding period for the coin, and therefore the transaction will be classified as a short-term capital gain to which his marginal tax bracket will apply. Elton will therefore pay $3,200 [32% x ($12,000 - $2,000)] on the gain.
Grant enters into a 1031 exchange with Cary. Grant's business building has a basis of $300,000 and he takes Cary's raw land worth $800,000 with an assumable mortgage of $250,000 and a basis of $430,000. Grant also pays Cary $50,000 in cash. What is Cary's recognized gain or loss? A)$50,000. B)$250,000 gain. C)$300,000 gain. D)$300,000 loss.
*$300,000 gain.* Cary must recognize boot as gain to extent of deferred gain ($250,000 + $50,000). Analysis: Get economics straight.$800,000 - $250,000 (mortgage) = $550,000 - $50,000 Cash = FMV of Grant's asset $500,000. *Additional notes
Cooper, a married filing jointly taxpayer, paid $10,000 of qualified tuition and related expenses for each of his twin daughters, Violet and Charlotte, during 2021. They started their freshman year of college during 2021. Cooper was very excited that both daughters excelled in the college environment; especially since Violet had a drug addiction during her senior year of high school (Cooper had a friend on the college admissions board that thankfully overlooked Violet's felony drug conviction). Cooper also paid $2,000 of qualified tuition and related expenses for his daughter Sloan's sophomore year of college, and $3,000 for his own master's degree program. Cooper claims all three of his daughters as dependents. His modified gross income for the year is $50,000. What is the available American Opportunity Tax Credit for 2021? A)$2,000. B)$2,500. C)$4,500. D)$7,500.
*$4,500* The credit is not available for Violet since she has a felony drug conviction. The maximum American Opportunity Tax Credit of $2,500 is available to Charlotte. The credit available for Sloan is $2,000 ($2,000 x 100%). Sloan would have needed $4,000 of expenses to get the maximum credit. The total of credits for Charlotte and Sloan is $4,500 for 2021.
Grant enters into a 1031 exchange with Cary. Grant's business building has a basis of $300,000 and he takes Cary's raw land worth $800,000 with an assumable mortgage of $250,000 and a basis of $430,000. Grant also pays Cary $50,000 in cash. What is Cary's basis in the new asset? A)$200,000. B)$250,000. C)$300,000. D)$430,000.
*$430,000* Cary has a carryover basis.Analysis: First get economics straight.$800,000 - $250,000 (mortgage) = $550,000 - $50,000 cash = FMV of Grant's asset $500,000 *Additional notes
Earlier this month, Marisol's apartment house in California was completely destroyed by a forest fire that found its way into the city. She had originally purchased the apartment house for $500,000, and had claimed $100,000 in straight-line depreciation deductions. At the time of the fire, the fair market value of the building was $750,000 and the insurance company gave Marisol a check for the full value. Instead of building on the same site, about six months after the fire, Marisol used the insurance proceeds to purchase a new apartment building for $800,000. Within two weeks of purchasing the new building, a real estate investor offered to purchase the new building from her for $1 million. If Marisol sells the new building to the investor, what is her long-term capital gain for income tax purposes? A)$0. B)$200,000. C)$450,000. D)$550,000.
*$450,000* The apartment building is Section 1231 property (real depreciable property used in a trade or business). When a nontaxable exchange occurs, the basis and recapture potential in the original property is carried over to the new property. Marisol's basis in the new property is $450,000 (her original cost basis of $500,000 less $100,000 in depreciation plus the $50,000 that she added in addition to the insurance proceeds). If she sold the building for $1 million, she would have realized a $550,000 gain. This gain, however, is subject to the depreciation recapture provisions of Section 1250, and un-recaptured Section 1250 depreciation. There was no accelerated depreciation on the property, so there will be no ordinary income triggered under Section 1250. The straight-line depreciation of $100,000 however will be subject to tax at 25%, leaving the remaining $450,000 gain available for long-term capital gains tax treatment.
During her working years, Lolly ran an antique sales and appraisal service that was very successful in the local community. When she retired, she kept some of the display cases in order to display her own collections in her home. The display cases were originally purchased for the business at a cost of $15,000 and were fully depreciated by the time Lolly retired. Lolly died last month, and the display cases were valued in her estate at $8,000. If Lolly's daughter, Polly, inherits the display cases, and sells them for $8,500 two months after Lolly's death, what is the income tax treatment on the sale? A)$500 ordinary income. B)$500 long-term capital gain. C)$500 short-term capital gain. D)$8,000 ordinary income.
*$500 long-term capital gain.* Even though the display cases were Section 1231 assets in Lolly's hands, and were subject to depreciation recapture, once they ran through Lolly's estate, they qualified for a Section 1014 step-to fair market value in basis, which eliminates the recapture potential. If Polly sells the cases for $8,500 two months after Lolly's death, her gain is $500 due to the step-up in basis. Since all assets passing through an estate and receiving a step-up in basis qualify for long-term capital gains treatment, the gain will be characterized as a long-term gain.
Owen is a tax attorney who specializes in intergenerational wealth transfer planning. He is also very charitably inclined, and sits on several charitable boards. A local animal shelter and Friends of Animals group recently decided to work together on joint goals, and decided to form a new charitable organization, which meets the definition of a public charity. Owen created the organization and received exempt determination status from the IRS. He usually charges $5,000 to perform this service, plus the exempt determination letter fee charged by the IRS of $500, but he volunteered for this activity since his wife will be on the board. Owen was not reimbursed for the expenses he incurred. Assuming that his AGI and contribution base is $150,000, how much can Owen deduct for income tax purposes? A)$0. B)$500. C)$2,750. D)$5,500.
*$500* In order to be deductible for federal income tax purposes, a taxpayer must make a gift of property, not services. While Owen provided a valuable service to the charitable organization, he cannot deduct the value of his services as a charitable deduction since he never included the value of his services in income. The actual expenses he incurred, however, are deductible. Since he paid $500 to obtain the exempt determination letter from the IRS, Owen is allowed to deduct $500 as a charitable deduction.
Ajamu, a single individual, was an investor in a company that became worthless this year, and suffered an $80,000 capital loss. He initially invested in the company five years ago when it was starting up, and the company had $500,000 in initial capitalization. Assuming that Ajamu had no other capital transactions this year and has $100,000 of ordinary income, how much will his AGI for this year decline as a result of this loss? A)$3,000. B)$50,000. C)$53,000. D)$80,000.
*$53,000* He has a 1244 loss of $50,000 plus a long-term capital loss of $30,000 of which he can take $3,000 this year. Thus, his AGI for this year will decline $53,000 as a result of this loss. The stock that generated the loss qualified as Section 1244 stock, since Ajamu was one of the original investors in a company that was initially capitalized with less than $1 million. Consequently, the first $50,000 of the loss is treated as an ordinary loss under Section 1244 and the remaining $30,000 loss is treated as a capital loss. The $50,000 ordinary loss can offset Ajamu's AGI in full, but the capital loss can only offset AGI by up to $3,000 per year. This year, therefore, the total reduction in Ajamu's AGI as a result of this transaction is $53,000, and he can carry forward the additional $27,000 loss and use that against income in future years.
J.J., a 45 year old professor, was speaking with his good friend, Evan, who is 53 years old. The topic of retirement savings came up, and Evan told J.J. that individuals age 50 and over could contribute $7,000 to an IRA. J.J. did not review the laws for those younger than 50 which indicates the deduction limit to be $6,000, but, instead, contributed $7,000 also. Assuming that J.J. does not correct his error, what is the amount of the tax penalty that J.J. must pay for making the $7,000 contribution for (the current tax year) to the IRA? A) $0. B) $60. C) $100. D) $500.
*$60* J.J. has made an excess contribution to his IRA of $1,000. Evan was permitted to make the contribution due to the catch-up provisions for taxpayers age 50 or over. The excess contribution penalty is 6%, so J.J. must pay a penalty tax of $60.
Jake's AGI for 2022 is $100,000. He inherited a large amount of money from the estate of his grandfather, and is very charitably inclined. A recent earthquake devastated several cities on the West Coast, and Jake wanted to assist in getting the people affected back on their feet. He gave a $75,000 donation to the Red Cross, which is spearheading relief efforts in the region. How much of the contribution can Jake deduct on his income tax return in 2022? A) $20,000. B) $30,000. C) $60,000. D) $75,000.
*$60,000* Jake made a contribution of cash to a public charity. His contribution base is his AGI, or $100,000. The maximum amount (the ceiling) that can be deducted in any one year for gifts of cash to a public charity (the Red Cross) is 60% of the taxpayer's contribution base. Jake can deduct, therefore, $60,000 of the $75,000 gift. The remaining $15,000 may be carried forward for up to five years and deducted against income from those years, subject to the ceiling limitations for charitable gifts.
Nedra owns a vacant lot used in her business. She exchanges it for a property with a small storage facility on it owned by Annette. The basis of Nedra's vacant lot is $40,000. She gives Annette $20,000 cash plus the vacant lot in exchange for Annette's property, which is worth $36,000. Annette's basis in her original asset is $10,000.What is Nedra's basis in the new asset? A)$24,000. B)$40,000. C)$44,000. D)$60,000.
*$60,000* Nedra's new basis equals her old basis ($40,000) plus the boot that she paid to Annette ($20,000).
Miranda is a single mom with 2 children, Alex and Bailey. Alex is 14 years old and Bailey is 3 years old. Miranda has AGI of $50,000. She paid the following expenses for child care in 2022: • $300 to Alex to care for Wendy so Miranda could go out to dinner with friends. • $1,000 for an after-school program for Alex. • $3,500 to Miranda's mother for the care of Wendy during the day. What is Miranda's available child and dependent care credit in 2022?
*$600* The payment to Alex does not qualify because he is a dependent child of Miranda under the age of 19 and because the expense was not employment related. The payment for Alex's after-school program does not qualify because Alex is not under the age of 13 (note that means there is only one qualifying dependent). The payment to Miranda's mother does count towards eligible expenses. However, the eligible expenses are limited to $3,000 since there is only one qualifying dependent. Since Miranda has AGI over $43,000 she is able to take a credit of 20% x $3,000 = $600.
Assume Liv and Tyler bought a ski condo 10 years ago for $100,000. They treated it as a vacation home for 8 years but used it as their personal residence for the last 2 years. They recently sold the condo for $450,000. How much gain can they exclude from the sale of their personal residence? A)$70,000. B)$210,000. C)$250,000. D)$350,000.
*$70,000* The gain must be allocated among qualified and nonqualified use. The gain allocated to nonqualified use is calculated by dividing the periods of nonqualified use during the time the taxpayer owned the property by the total periods of ownership (not including any periods prior to January 1, 2009). The gain allocated to nonqualified (vacation) use is 8 out of 10 years or 80%. Therefore, they can exclude 20% of the gain (up to the maximum exclusion of $500,000 for MFJ). $450,000 - $100,000 = $350,000 gain x 0.20 = $70,000. B)
Last year, Tim incurred the following tax expenses and related items: Federal income tax paid with return $2,150 State income tax withheld this year $4,500 State income tax paid with return this year $600 Real estate taxes paid on residence $6,500 Sewer and water tax $600 Car tax (flat rate for all car owners) $300 State income tax refund from prior year $400 How much can Randy claim as a deductible tax expense for his itemized deductions this year? A)$10,000. B)$11,600. C)$12,200. D)$13,750.
*10,000* Federal income taxes are never deductible as an itemized deduction. Generally, state and local income taxes are deductible as an itemized deduction. There are some limitations to this rule, however. Use taxes, such as sewer and water tax, are not deductible. Property taxes that are based on value (ad valorem taxes) are deductible, but flat rate property taxes, such as the car tax in this problem, are not deductible. Consequently, Tim can deduct the $4,500 of state income taxes withheld this year, the $600 of state income taxes paid with his return this year, and the $6,500 of real estate taxes on his personal residence. He may not deduct the car tax, sewer and water tax, or federal income tax. While his state income tax refund from a prior tax year is important in preparing his return, it is not factored into his itemized deductions - it is included in gross income pursuant to the tax benefit rule. The 2017 TCJA limited tax deductions to $10,000.
Christian owns a vacation home which he plans to rent for 190 days this year. He also plans to live in the house during the year. What is the maximum number of days he can live in the home without jeopardizing the property's status as a rental property? a. 14 days. b. 19 days. c. 95 days. d. 190 days.
*19 days* the greater of: 14 days or 10% of rental use
Gus purchased a home for $300,000 three years ago, and was recently transferred by his employer to an office located across the country. He made $20,000 of improvements to the residence, but if he sold the home today, he would only be able to receive $260,000 for the house due to a weak real estate market. Instead of selling the home and realizing a loss, Gus rents the home to a tenant. What is Gus's basis for depreciation purposes? A)$260,000. B)$270,000. C)$300,000. D)$320,000.
*260,000* When an asset is converted from a personal use to a production of income use, the basis for purposes of depreciationis the lower of the fair market value on the date of conversion or the taxpayer's adjusted basis in the home. Gus's adjusted basis in the home is $320,000 ($300,000 cost basis plus $20,000 in improvements), but the fair market value of the home on the date it was converted was $260,000. The difference of $60,000 is deemed to be a personal expense and will not qualify for depreciation deductions.
Adele engaged in several capital transactions this year. She had a short-term capital gain of $400; a short-term capital loss of $600; a long-term capital gain of $800 and a long-term capital loss of $500. How will Adele report these items on her income tax return? A)Adele will report a net short-term capital gain of $100. B)Adele will report a net long-term capital gain of $100. C)Adele will report a net short-term capital loss of $200 and a net long-term capital gain of $300. D)Adele will report ordinary income of $100.
*Adele will report a net long-term capital gain of $100.* Short-term capital losses can be netted against short-term capital gains, and long-term capital losses can be netted against long-term capital gains. Since there is a short-term loss of $200 and a long-term gain of $300, the short and long-term summary results can be netted together. In this case, since the long-term capital gain was larger on an absolute basis, the character of the resulting net gain is a long-term capital gain.
Christopher recently purchased Quarry City Industrial Park, a commercial, industrial and office community, as an investment. The complex is already rented out to tenants, and Christopher will continue to lease the property to industrial and office space tenants while he owns the property. Which of the following statements concerning the depreciation deductions that can be taken on the property is correct? A)Christopher cannot take depreciation deductions on real property, so the land and buildings are not eligible for depreciation. B)Christopher can depreciate the cost allocable to the buildings (but not the land) over a 20 year period. C)Christopher can depreciate the cost allocable to the buildings (but not the land) over a 27.5 year period. D)Christopher can depreciate the cost allocable to the buildings (but not the land) over a 39 year period.
*Christopher can depreciate the cost allocable to the buildings (but not the land) over a 39 year period.* Commercial rental property is depreciated on a straight-line basis over a 39 year period. Depreciation deductions are allowed for the structures, but not the land.
Which of the following statements concerning the tax deductibility of executive compensation is correct? A) Publicly traded companies may not deduct compensation payments made to any employees to the extent that the employee's compensation exceeds $1 million. B) The compensation cap applies to all compensation (cash and non-cash) received by the executive in the taxable year. C) Contributions to qualified retirement plans and benefits that would not otherwise be taxable are not considered to be compensation subject to the $1 million cap. D) Private companies may elect to apply the deductibility cap for compensation to only the top five officers of the company.
*Contributions to qualified retirement plans and benefits that would not otherwise be taxable are not considered to be compensation subject to the $1 million cap.* The limitation on deductibility of executive compensation only applies to the CEO, the CFO, and the three highest compensated executives (note: beginning in 2027 the limitation will also apply to the next 5 highest paid employees). It generally does not apply to private (non-publicly traded) companies. When applying the $1 million deduction cap, contributions to qualified retirement plans are not considered to be part of the executive's compensation.
Which of the following statements concerning the taxation of assets is correct? A)Ordinary income may qualify for a special 0% rate. B)Capital gains are always taxed at the taxpayers marginal tax rate. C)Gains on Section 1231 assets are taxed at ordinary rates, and losses are taxed at capital rates. D)Gains on Section 1231 assets are taxed at long-term capital gains tax rates, and losses are taxed at ordinary income tax rates.
*Gains on Section 1231 assets are taxed at long-term capital gains tax rates, and losses are taxed at ordinary income tax rates.* When an asset is classified as a Section 1231 asset, gains are capital (and are subject to the long-term capital gains rate due to the holding period requirement) and losses are ordinary. Ordinary income is taxed at ordinary rates, and capital gains can qualify for a special 0% capital gains tax rate if the taxpayer held the asset for more than one year, and the taxpayer's taxable income is below the threshold amount.
Which of the following miscellaneous itemized deductions is not subject to the 2 percent floor? A) Gambling losses. B) Investment expenses. C) Hobby activity expenses. D) Unreimbursed employee business expenses.
*Gambling losses* Gambling losses are not subject to the 2 percent floor that generally applies to miscellaneous itemized deductions. Investment expenses, hobby activity expenses, and other unreimbursed employee business expenses are subject to the 2 percent floor and thus not deductible.
Jackson, a U.S. Citizen, has always felt drawn to the town in Ireland that his family came from. The local church in that town is in dire need of repair, and Jackson would like to make a contribution to the restoration fund which is managed by the Archdiocese of Laois, Ireland. If Jackson makes a contribution, which of the following statements is correct? A) If Jackson makes the contribution directly to the Archdiocese, he qualifies for an income tax deduction, since the money will be used for one of the classic charitable purposes - support of a religious organization. B) Jackson's deduction will be subject to the 60% limit (or 100% limit if the election is made to treat the gift as a qualified cash contribution for 2021) if he makes the contribution to a church in Ireland. C) If Jackson donates the funds to his parish in the United States, and the parish sends the fund to the church in Ireland, Jackson will qualify for an income tax charitable deduction. D) If Jackson wants to get a charitable deduction for the gift, he must make the gift through his will when he dies, or no charitable deduction will be allowed.
*If Jackson donates the funds to his parish in the United States, and the parish sends the fund to the church in Ireland, Jackson will qualify for an income tax charitable deduction.* To be deductible for federal income tax purposes (unlike the rules that apply to the federal estate tax charitable deduction), a contribution must be made to a U.S. charity. Gifts to foreign charities are not deductible. One way to avoid this problem is to make a gift to a U.S.-based charity that will transfer the funds to the foreign charity
Which of the following statements concerning the earned income credit is correct? A) The taxpayer must have either wages or investment income. B) If a married couple files married filing separately only one can claim the credit. C) If the taxpayer does not have a qualifying child then the taxpayer must be at least 21 but under age 65. D) If the taxpayer has a qualifying child, the child must meet a relationship, age, and residency test.
*If the taxpayer has a qualifying child, the child must meet a relationship, age, and residency test.* The taxpayer must have earned income - investment income does not qualify. An individual filing married filing separately cannot claim the credit. If the taxpayer does not have a qualifying child then the taxpayer must be at least 25, but under age 65 (in tax years before or after 2021; for 2021, the taxpayer must be at least age 19 (with no maximum age limit).
Which of the following statements concerning the Section 199A qualified business income deduction is correct? A) It results in a lower adjusted gross income. B) It applies at the individual level, so one business owner may be able to take the deduction while another owner of the same business cannot. C) It is available for distributions from C corporations. D) It applies regardless of the taxpayer's income.
*It applies at the individual level, so one business owner may be able to take the deduction while another owner of the same business cannot.* The Section 199A deduction is a below-the-line deduction, so it does not reduce AGI. The deduction applies to income from pass-through business entities, including sole proprietorships, but does not apply to income from C corporations. The deduction is phased out based on the taxpayer's total taxable income (including the spouse's income if MFJ). It applies at the individual level, so one business owner may be able to take the deduction while another owner of the same business may have a deduction that is partially or fully phased out.
June and Ernest Carter have asked their financial planner for advice on minimizing overall income taxation. The Carter's AGI this year will be $120,000 and they expect it to remain the same next year. They expect to pay state and local income taxes of $5,900 and real property taxes of $2,500 both this year and next. They give $4,000 per year in offering to their church, and every three years they donate $11,000 to the children's hospital that treated their 3-year-old daughter for cancer just prior to her death 11 years ago. The contribution to the children's hospital will be made in February of next year. This year they will pay $8,000 in mortgage interest and will pay off the mortgage in December of the current year. Which of the following recommendations will result in the greatest tax savings for the Carters over the 2-year period? A) Prepay next year's real property taxes this year. B) Defer the current year's $4,000 church offering to next year. C) Prepay next year's real property taxes and Ernest's January state estimated income tax in the current year. D) Make the $11,000 contribution to the children's hospital and donate $1,000 of next year's offering to the church in December of the current year.
*Make the $11,000 contribution to the children's hospital and donate $1,000 of next year's offering to the church in December of the current year.* Total itemized deductions for the current year are $20,400 ($5,900 + $2,500 + $4,000 + $8,000) as stated. Since the standard deduction for 2021 is $25,100 (MFJ), the Carters will take the standard deduction. If no changes are made, the total itemized deductions for next year will be $23,400 ($5,900 + $2,500 + $4,000 + $11,000) and they will also take the standard deduction next year. If they were to make the $11,000 contribution to the children's hospital and donate $1,000 of next year's offering to the church in December of the current year, their total itemized deductions for the current year would be $32,400 and they would still take the standard deduction next year. This is an example of deduction clustering. The other answer choices would also cluster some of the deductions, but option d results in the greatest amount of tax savings by preserving the standard deduction next year and increasing the itemized deductions in the current year when the mortgage interest is still available as an additional itemized deduction.
Which of the following items is not included in the cost basis of an investment? A) Cash used to purchase the investment. B) Recourse debt incurred in purchasing the investment. C) Nonrecourse debt incurred in purchasing the investment. D) The fair market value of property transferred to acquire the investment.
*Nonrecourse debt incurred in purchasing the investment.* Non-recourse debt is generally not included in basis because a taxpayer is not personally obligated to repay the loan. All of the other items are included in the determination of a taxpayer's basis in their investment.
Ten years ago, Norm loaned his son, Cliff, $20,000 to start a business. The note required the payment of interest at a rate of nine percent for ten years, with a balloon payment of the principal at the end of the note term. Cliff has been making interest payments on the note for the past six years, but this year his business took a turn for the worse and he was not able to make the annual interest payment of $1,800. The business was closed down, and Cliff owed an amount greater than his net worth to secured creditors, so he informed his father that he would not be able to make the interest or principal payments on the note. How should Norm treat the default for income tax purposes? A) Norm may deduct $20,000 as a short-term capital loss. B) Norm may deduct $21,800 as a short-term capital loss. C) Norm may deduct $20,800 as a long-term capital loss. D) Norm may deduct $21,800 as a long-term capital loss.
*Norm may deduct $20,000 as a short-term capital loss.* Since Norm is not in the business of making loans, the debt is classified as a non-business bad debt. As an individual, Norm is a cash basis tax payer. While he did lose both the principal of the loan and the current year interest payment from an economic perspective, he never included the current year interest payment in his income (because he did not receive it), and therefore cannot take a deduction for that amount. All nonbusiness bad debts are treated as short-term capital losses regardless of the length of time the note has been outstanding, so Norm can deduct $20,000 as a short-term capital loss.
Zena worked at a company that had purchased a $100,000 key person policy on her life. When Zena left the company, the employer offered to sell her the policy. Zena purchased the policy from the employer for $17,000. Zena continued to make the premium payments which were a total of $7,000. When Zena died, her daughter Rochelle received the policy proceeds from the insurance company. What are the income tax consequences for Rochelle? A)Rochelle will receive the policy proceeds income tax-free. B)Rochelle must recognize ordinary income of $76,000. C)Rochelle must recognize capital gains of $76,000. D)Rochelle must recognize capital gains of $76,000 and ordinary income of $24,000.
*Rochelle will receive the policy proceeds income tax-free.* The sale of an existing life insurance policy is a transfer-for-value, which causes the death benefit is to be taxed (as ordinary income) to the extent that it exceeds the owner's cost basis in the policy. However, a sale to the insured is an exception to the transfer-for value rules, which allows the death benefit to remain income tax free.
Janae, a 12 year old middle school student, just agreed to take over a paper route to deliver Newsday to her extended neighborhood on a daily basis. To deliver the papers, she purchases a new bike with a specially equipped basket to transport the papers each morning. How is the bike classified for income tax purposes? A)The bike is an ordinary income asset. B)The bike is a capital asset. C)The bike is a Section 1231 asset. D)The bike is a personal asset.
*The bike is a Section 1231 asset* Since the bike is depreciable personal property used in the conduct of trade or business activity, the bike is considered a Section 1231 asset. Even though it is used to generate ordinary income, the fact that Janae could claim depreciation on the bike makes it a Section 1231 asset.
Which of the following statements concerning the Credit for the Elderly or Disabled is correct? A)The credit is available without regard to the individual's income if he/she is disabled. B)A qualified individual must be over 65 at the end of the tax year or be 65 or younger and meet one of the listed exceptions. C)The credit is a fixed amount for all individuals. D)The credit is available to U.S. citizens and residents who qualify.
*The credit is available to U.S. citizens and residents who qualify.* The credit for the elderly or disabled is available to a U.S. citizen or resident who is a qualified individual and has income below specified limits. A qualified individual must be 65 or older at the end of the tax year or under age 65 and (1) retired on total and permanent disability, (2) the recipient of taxable disability benefits from an employer's plan for the tax year, and (3) younger than the mandatory retirement age of the employer at the beginning of the tax year. The amount of the credit is a fixed base amount reduced by both (1) one-half of AGI in excess of $7,500 (single; $10,000 MFJ), and (2) nontaxable Social Security benefits and certain other nontaxable income, multiplied by a rate of 15 percent. For purposes of this credit, the taxpayer is considered to be age 65 on the day before his actual birthday.
All of the following statements regarding the Section 199A qualified business income deduction are correct, EXCEPT: A) The deduction is generally 20% of qualified business income. B) The deduction is not available for service businesses such as health and accounting. C) The deduction may be limited based on taxable income. D) The deduction may be phased out for high income taxpayers.
*The deduction is not available for service businesses such as health and accounting.* The Section 199A deduction is available for income from service businesses such as health and accounting if the taxpayer's taxable income is below $164,900 ($329,800 MFJ) in 2021. It is partially phased out for service businesses if taxable income is between $164,900 - $214,900 for single taxpayers or between $329,8000 - $429,800 for married taxpayers filing jointly. The deduction is fully phased out for service businesses if the taxpayer's taxable income is over the top threshold.
Twenty years ago Anne Marie purchased a life insurance policy to provide for her young children in the event of her death. Since the children are now grown, she would like to exchange the life insurance policy for an annuity that will provide her with additional income in her retirement years. Which of the following is true regarding the exchange of the life insurance policy for the annuity? A) The exchange will result in recognition of gain. B) The exchange of a life insurance policy for an annuity is not permitted. C) The exchange will be tax free. D) The exchange will be a transfer-for-value.
*The exchange will be tax free.* Under IRC Section 1035, a life insurance policy can be exchanged tax free for another life insurance policy, a modified endowment contract, or an annuity.
Meg wants to sell her rental beach home and purchase rental property in the mountains. Her friend, Ryan, tells her he can do a nonsimultaneous tax-free exchange as long as the fair market value of mountain property is equal to or greater than the fair market value of the beach property. How long after selling his beach property does Meg have to identify and purchase the mountain property? A)The mountain property must be identified within 45 days of the closing of the beach property and must be closed within 180 days of the closing of the beach property. B)The mountain property must be identified within 30 days of the closing of the beach property and must be closed within 120 days of the closing of the beach property. C)The mountain property must be identified within 60 days of the closing of the beach property and must be closed within 180 days of the closing of the beach property. D)The mountain property must be identified within 90 days of the closing of the beach property and must be closed within 180 days of the closing of the beach property.
*The mountain property must be identified within 45 days of the closing of the beach property and must be closed within 180 days of the closing of the beach property.* The taxpayer in a nonsimultaneous exchange must identify the replacement property within 45 days of the sale of the original property and close on the replacement property within 180 days of the closing of the original property.
As the end of the year was approaching, Trixie reviewed her stock portfolio and decided to sell her holdings in Windsor Industries on December 28th of Year 1. The shares were purchased two years ago. Her basis in the shares was $20,000 and the market value of the shares was $18,000. Trixie wanted to use the $2,000 loss to help her minimize taxes for Year 1. On January 10th, Year 2, Windsor Industries announced new initiatives, and Trixie has second guessed her decision to sell the shares in the company. She buys back the 1,000 shares for $17,000 on January 11th. Assuming that Trixie had no other capital transactions for Year 1, what is the impact of this transaction on Trixie's Year 1 income tax return? A)The sale of Windsor Enterprises will not impact Trixie's AGI for Year 1. B)The sale will generate a $2,000 short-term capital loss that will reduce Trixie's AGI. C)The sale will generate a $2,000 long-term capital loss that will reduce Trixie's AGI. D)The sale will trigger an ordinary loss deduction for $2,000.
*The sale of Windsor Enterprises will not impact Trixie's AGI for Year 1.* Since Trixie purchased and sold the same security within a 30-day period, the sale is considered to be a washsaletransaction, and the loss may not be claimed in the current period.
In which of the following circumstances would a taxpayer be able to get a partial exemption for the sale of a personal residence when the taxpayer did not meet the two year ownership and use test? A)The taxpayer decides to move from Florida to Arizona to possibly look for a new job. B)The taxpayer changes jobs to a town that is 10 miles away from the former house and 10 miles away from the former job. C)The taxpayer sold the house in Milwaukee because the grey days were affecting her sunny disposition and general health. D)The taxpayer suffered anxiety attacks after a home invasion where the taxpayer was held at gunpoint for 3 days.
*The taxpayer suffered anxiety attacks after a home invasion where the taxpayer was held at gunpoint for 3 days.* Option d is consistent with the unforeseen circumstances approved by the IRS (see Exhibit 13.6). Option a does not qualify because the taxpayer did not have a job when the residence was sold. Option b does not qualify because the move did not meet the distance requirement. Option c is not correct because general health does not qualify.
All of the following are included in the amount realized upon disposition of an asset EXCEPT: A)The cash received. B)The fair market value of property received in the exchange. C)A transfer of obligation to pay debt from the seller to the buyer. D)The taxpayer's adjusted basis.
*The taxpayer's adjusted basis.* The taxpayer's adjusted basis is subtracted from the amount realized to calculate gain or loss. The amount realized includes the cash received, plus the fair market value of property received in the exchange, plus any liabilities shed in the transaction.
Two years ago, Thelma purchased her dream home, paying $800,000 for the house. Unfortunately, the real estate market was at its height when she purchased the home, and has since "corrected" as interest rates began to climb. Thelma was transferred by her employer to an office across the country, and she put her home on the market, eventually selling it for $720,000. Assuming Thelma had no other capital transactions this year, which of the following statements correctly describes the income tax consequences of this transaction? A) Thelma can reduce her adjusted gross income by the amount of her loss, $80,000. B) Thelma can reduce her adjusted gross income by $3,000 this year. C) Thelma will carry forward a $77,000 short-term capital loss. D) Thelma's AGI will not be affected in any way by the loss.
*Thelma's AGI will not be affected in any way by the loss.* The home is a personal use asset. It was not purchased for investment or production of income. While Thelma did suffer an economic loss on the home, she is not entitled to take any part of the loss as a tax deduction since the home was a personal use asset.
Wilson runs an oil and gas operations consulting practice, and has had a very good year. Oil prices, as well as the demand for his services, have risen. Given the windfall profits his firm received this year, in December of 2021, Wilson decided to redecorate his office and upgrade the computer system used by himself and his employees. The cost of the office equipment is $40,000 and the computer upgrade cost $20,000. Assuming Wilson has purchased no other depreciable assets in 2021, the net income from his consulting practice was $500,000, and Wilson would like to minimize his exposure to income taxes, how should he treat the new purchases for income tax purposes? A)Wilson should deduct the entire cost of the office equipment and computer upgrades against this year's business income. B)Wilson must use the mid-month convention in determining depreciation deductions, since he placed the upgrades in service in December. C)Wilson must use the mid-quarter convention in determining depreciation deductions, since he placed the upgrades in service in December. D)Wilson must use the mid-year convention in determining depreciation deductions, since he placed the upgrades in service in the second half of the year.
*Wilson should deduct the entire cost of the office equipment and computer upgrades against this year's business income.* Wilson qualifies for the Section 179 election, allowing him to immediately expense the cost of up to $1,050,000 for 2021 (as indexed) against his business income. Since Wilson had business income to offset with the deduction, and he did not put more than $2,620,000 for 2021 of depreciable property in service this year, and he has expressed a desire to minimize his exposure to income tax this year, he qualifies for the immediate expense election. B)
What difference does it make if a taxpayer's expenses are classified as unreimbursed employee expenses rather than expenses from self-employment? 1. Unreimbursed employee expenses are not deductible. 2. Expenses from self-employment are deducted above the line and have no AGI floor. 3. Unreimbursed employee expenses are deducted above the line and have no AGI floor. a. 1 only. b. 2 only. c. 1 and 2. d. 1 and 3
1 and 2.
Which of the following types of credits are available to individual taxpayers? 1.Refundable. 2.Deductible. 3.Non-refundable. 4.Transferable. a. 1 and 2. b. 1 and 3. c. 2 and 4. d. 1, 3, and 4.
1 and 3
Which of the following are below-the-line income tax deductions? 1. Medical expenses. 2. Alimony paid. 3. Moving expenses. 4. Qualified business income. a. 1 and 3. b. 1 and 4. c. 1, 2, and 3. d. 1, 2, 3, and 4
1 and 4.
Seth gifts to Jordan stock in DDD Company. The value of the stock on the date of the gift was $14,000. Seth had acquired the stock 3 years earlier at a price of $9,000. What is the tax consequence to Jordan if Jordan immediately (on the date of the gift) sells the stock for $14,000? a. No gain or loss. b. A short-term capital gain of $5,000. c. A long-term capital gain of $5,000. d. The annual exclusion would not apply because this is a gift of a future interest.
A long-term capital gain of $5,000.
Gemma owns an investment asset with a FMV of $40,000. She acquired the asset three years earlier and her basis in the asset is $60,000. Gemma sells the asset to her son, Jax, for $40,000. What is Gemma's tax consequences from this sale? a. A permanently disallowed loss resulting in zero tax benefits. b. A taxable loss suspended of $20,000. c. A short term taxable loss of $20,000 but limited to $3,000. d. A taxable loss of $3000 usable against ordinary income and a suspended Long term Capital loss of $17,000.
A permanently disallowed loss resulting in zero tax benefits.
ACE Co. makes a taxable acquisition of assets owned by a competitor. The majority of the value of the assets purchased are intangible assets that are amortizable for tax purposes over 180 months. Unfortunately, after several years of owning these assets the financial return is well-short of projections. Consequently, ACE Co decides to dispose of these assets for $1. This is a complete disposal of the acquired intangible assets. What is the tax consequence on disposing of the intangible assets? a. ACE will have to recapture as income all amortization deducted. b. ACE will have a capital loss. c. There is no deduction allowed to ACE. d. ACE will have a Sec.1231 loss on the unamortized balance of the intangibles less $1 and receive ordinary treatment.
ACE will have a Sec.1231 loss on the unamortized balance of the intangibles less $1 and receive ordinary treatment.
An individual taxpayer who is a sole proprietor may choose to manage her taxable income by making various depreciation elections for property additions in the year of the property addition. Which of the following statements is true? a. The QBI deduction maybe impacted by the depreciation election. b. The amount of Self-employment tax maybe impacted by the depreciation election. c. The amount is eligible to be contributed to a qualified retirement account maybe impacted by the depreciation election. d. All of the above are true.
All of the above are true.
Hazel owns a downtown office building. She originally purchased the building for $600,000 and deducted straight-line depreciation deductions of $200,000. What are the tax consequences if she sells the building for $1,000,000? a. She will have ordinary income recapture of $0. b. She will have $200,000 of capital gain taxed at 25%. c. She will have 1231 gain of $400,000. d. All of the above.
All of the above.
Robin's daughter, Reese, completed her 4th year of college in the current year. Robin paid $5,000 in qualified education expenses for Reese in the current year. Robin is a Head of Household taxpayer and has an AGI of $60,000 for the current year. What, if any, education credit will provide Robin the highest credit and how much is that credit? a. Robin is not eligible to claim an education credit. b. American Opportunity Tax Credit in the amount of $2,500 c. Lifetime Learning Credit in the amount of $1,000 d. Lifetime Learning Credit in the amount of $2,000
American Opportunity Tax Credit in the amount of $2,500
Becky and Wayne are getting divorced. As part of the divorce settlement, Becky receives a vacation home worth $680,000. The couple purchased the vacation home jointly five years ago for $400,000. Which of the following statements is true? a. If Becky sells the vacation home six months after receiving it in the divorce settlement, any gain or loss that she has will be short term. b. If Becky sells the vacation home for $800,000, she will have a $120,000 gain. c. In any future sale of the vacation home, Becky and Wayne will each have a basis of $200,000. d. If Becky sells the house for $780,000, she will have gain of $380,000.
If Becky sells the house for $780,000, she will have gain of $380,000.
Clara pursued a hobby of selling antique furniture in her spare time. During the year she sold the furniture for $3,000. She purchased the sold furniture for $1800; thus, netting $1,200 of gross income. She incurred expenses as follows: Travel: $2,000 Supplies: $1,200 Interest on loan to get business started: $800 Advertising: $750 Assuming that the activity is a hobby, how should she report these items on her tax return? a) Include $3,000 in income and deduct $4,750 for AGI. b) Ignore both income and expenses since hobby losses are disallowed. c) Include $1,200 in income and deduct nothing from AGI. d) Include $1,200 in income and deduct interest of $800 for AGI.
Include $1,200 in income and deduct nothing from AGI.
Which of the following is a deduction from AGI? a. Maintenance expense for a rental property actively managed by the taxpayer. b. Moving expenses of a taxpayer who is an active-duty member of the U.S. Armed Forces. c. Real estate taxes on principal residence d. One-half of self-employment tax paid
Real estate taxes on principal residence
John Smith company purchased a cement truck 5 years ago costing $200,000. Since the purchase, they have taken $200,000 in depreciation. They now havean offer to sell the cement truck for $145,000. Assuming they sell the truck, what is the tax consequence? a. They have a $145,000 Section 1231 gain eligible for capital gain treatment. b. They have $145,000 of Section 1245 depreciation recapture taxed as ordinary income. c. They have a LTCL of $55,000. d. There are no tax consequences.
They have $145,000 of Section 1245 depreciation recapture taxed as ordinary income
Which of the following itemized deductions are currently suspended based on current law but become relevant again starting in 2026 if Congress does not pass change the law (with Presidential signature)? a. unreimbursed employee business expenses b. deduction for personal exemptions c. home office deductions for W-2 employees d. interest expense on Home Equity loans not in excess of $100K e. all of the above
all of the above
Which of the following statements is false? a. non-refundable credits are applied first against total tax liability and then refundable credits are next applied. b. some credits have elements of both refundable and non-refundable amounts c. deductions are worth more than credits d. some non-refundable credits maybe eligible to carryback and/or carryforward into other tax years and possibly can be used (i.e. converted into cash savings) depending on the facts.
deductions are worth more than credits
The deduction for Qualified Business Income (QBI) is: a. an alternative to itemizing deductions b. determined based on your W-2 wages c. reduces FICA taxes payable d. not subject to any phaseouts or limitations e. none of the above
none of the above
Which tax concept should taxpayers be aware of when evaluating the subsequent collection of a state income tax refund or an insurance recovery for medical claims? a. fruit and tree doctrine b. capital recovery c. tax benefit rule d. assignment of income doctrine
tax benefit rule
