Federal Income Tax

In September of 2009, Amanda sold shares of qualified small business stock for $1,000,000 that had a basis of $200,000. She had held the stock for 7 months. Forty-five days after the sale she purchased other qualified small business stock for $1,100,000. How much of the gain will she recognize?

$ 0 If the proceeds from the sale of small business stock held more than 6 months are reinvested in other small business stock within 60 days of the sale, no gain is recognized.

In December 2009, Max, a cash basis taxpayer, rents an apartment to Charlie. Max receives both the first and last months' rent totaling $1,000 plus a security deposit of $400. The amount of income reported as taxable in 2009 is:

$1,000

Mr. and Mrs. Gere, who are filing a joint return, have adjusted gross income of $50,000. During the tax year, they paid the following medical expenses for themselves and for Mrs. Gere's mother, Mrs. Watson. The Gere's could claim Mrs. Watson as their dependent but she has too much gross income. Insulin for Mr. Gere $1,000 Health insurance premiums for Mrs. Gere $3,100 Long-term care insurance premiums for Mr. Gere, age 63 $1,500 Hospital bill for Mrs. Watson $5,200 Doctor bill for Mrs. Gere $4,000 Mr. and Mrs. Gere received no reimbursement for the above expenditures. What is the amount of their deductible itemized medical expenses?

$11,050 Insulin for Mr. Gere $1,000 Health insurance premiums for Mrs. Gere $3,100 Long-term care insurance premiums for Mr. Gere $1,500 Hospital bill for Mrs. Watson $5,200 Doctor bill for Mrs. Gere $4,000 Total expenses 14,800 Minus: 7.5% of AGI ($50,000 × 0.075) ( 3,750) Deduction $11,050 Page Ref.: I:7-7

In 2009 Brett and Lashana (both 50 years old) file a joint tax return claiming as a dependent their son who is blind. Their standard deduction is

$11,400

Lily had the following income and losses: Salary $75,000 Prize from quiz show 25,000 Unemployment compensation 8,000 Embezzled funds 30,000 Partnership Income 35,000 What is Lily's adjusted gross income (not taxable income)?

$173,000

Brandon, a single taxpayer, had a loss of $45,000 from a rental real estate activity A in which he actively participated. He also had $24,000 of income from rental real estate activity B in which he actively participated. He acquired both investments in 2005. If Brandon has no other passive income or losses and has adjusted gross income of $70,000 before considering passive activities, how much loss from rental activities can he use to offset his nonpassive income?

$21,000 , $24,000 of the loss offsets $24,000 income from the other passive activity, leaving a $21,000 loss. The $21,000 may offset nonpassive income using the special allowance of up to $25,000. Page Ref.: I:8-15

Charlotte pays $16,000 in tax deductible property taxes. Charlotte's marginal tax rate is 25%, effective tax rate is 20% and average rate is 22%. Assuming that Charlotte uses itemized deduction for other reasons anyways, her tax savings from paying the property tax is

$4,000 $16,000 × 0.25 = $4,000.

On July 31 of the current year, Marjorie borrows $120,000 to purchase a new fishing boat. The loan is secured by her personal residence. On the date of the loan, the outstanding balance on the original debt incurred to purchase the residence is $300,000 and the FMV of the home is $450,000. Interest on what total amount is deductible by Marjorie in the current year?

$400,000, Interest on $300,000 of acquisition indebtedness and $100,000 of home equity indebtedness. The home equity indebtedness is the lesser of home equity of $150,000 or $100,000. Page Ref.: I:7-17; Example I:7-18

All of the following statements are true except A) A tax deduction is allowed to a taxpayer for estimated warranty expense. B) A tax deduction is allowed in association with a warranty only in the year in which warranty work is performed. C) A tax deduction is allowed for a contested amount if the amount is paid prior to final settlement. D) No tax deduction is allowed to an accrual basis taxpayer for the amount of a down payment for a non-recurring expense when the work is to be performed in a subsequent period.

A) No tax deduction is allowed until warranty work is actually done. Page Ref.: I:6-21; Example I:6-25, I:6-26, and I:6-27

During 2009, Marla's employer withheld $2,000 from her wages for state income tax. Marla claimed the $2,000 as an itemized deduction on her 2009 federal income tax return. Her total itemized deductions for 2009 were $6,000. Marla's taxable income for 2009 was a negative $20,000. Marla received the $2,000 as a refund from the state during 2010. What amount must Marla include in income in 2010?

A) Since she would have owed no income tax even without the state tax deduction, the refund is not taxable. She received no tax benefit.

All of the following fringe benefits paid for by the employer may be excluded from an employee's gross income except A) discounts on services of 25 percent. B) membership fees in professional organizations. C) recreational facilities on employer's premises. 5 D) unused airline seats for airline employees where the employee is required to fly "standby."

A) The maximum discount for services is 20%.

Charlie owns 75% of Pet Foods, Inc. As CEO, Charlie must travel extensively and does so on the company jet. In addition, he also uses the jet to take several personal vacations. Charlie reports the value of the personal use of the jet, $100,000 as additional compensation. Which of the following is true in terms of the corporation? A) The corporation includes $100,000 as miscellaneous income. B) The $100,000 has no impact on the corporation's income tax. C) The corporation takes a deduction of $100,000 for compensation expense. D) The corporation takes a deduction of $100,000 for dividend expense.

C) Because the $100,000 is considered taxable compensation to Charlie, the corporation gets a related compensation expense deduction. Page Ref.: I:6-9; Example I:6-10

Interest paid on student loans up to $2,500 is deductible from AGI, subject to income limitations.

FALSE

Taxpayers may deduct all of the expenses attributable to the rental of a vacation home, regardless of the gross income generated by the property.

FALSE

A child credit is a fully refundable credit - no matter what your income level you can get it.

False

Kevin is the beneficiary on an annuity purchased by his mother in 2003. The annuity provided for payments totaling $100,000 over 10 years, beginning in 2008, whether or not the original purchaser was still alive. His mother had paid $70,000 for the annuity. His mother received $10,000 in each year from 2008-2012, and Kevin duly receives $10,000 in each year from 2013-2017. Kevin is not required to include any amount in income with respect to the $10,000 he receives in 2015.

False

The net income of an S corporation is subject to double taxation because it is taxed at the entity level and dividends paid from the S corporation to individual shareholders are also taxed.

False

The portion of a taxpayer's wages that are garnished by court order and forwarded to pay a delinquent bank loan are not taxable income to the taxpayer.

False

Unemployment compensation is exempt from federal income tax.

False

Expenses are deductible only if connected to trade or business or property held for the production of income.

False, Other expenses are allowed by the Code such as interest expense, taxes, bad debts, medical expenses, alimony, and moving, etc.

As a result of a divorce, Michael pays Judy $75,000 in year one and $25,000 per year in subsequent years. How much of the $75,000 in year one is properly characterized as alimony, and will not be recaptured later?

First year alimony $75,000 Minus: $15,000 change limit (15,000) Minus: Average 2nd and 3rd year alimony (25,000) Minus: Amount to be recaptured (35,000) Amount not subject to recapture $40,000

Anna is supported entirely by her three sons John, James, and Joseph who provide for her support in the following percentages: John: 10%, James: 40%, Joseph: 50% Assuming a multiple support declaration exists, which of the brothers may claim his mother as a dependent?

James or Joseph

Jamal, age 52, is a manager for Triple W Company. His annual salary is $100,000 and he receives the following fringe benefits during the current year: - Triple W pays for all employees' health and accident insurance. Triple W pays $4,000 for Jamal's health insurance during the year. - Triple W provides Jamal with group-term life insurance coverage of $200,000 during the year. The monthly inclusion amount per $1,000 of coverage is $.23. - Triple W has a flexible benefits plan in which employees may participate to pay any costs not reimbursed by their health insurance. Jamal has $3,600 withheld from his salary under the plan. During the year he receives reimbursements of $3,300. - Triple W pays for mass transit passes for all employees of $100 a month. - Triple W pays Jamal's annual membership dues of $450 to the Society of Human Resource Management Association. The company also subscribes to several management journals for Jamal costing $650 a year. - Jamal took a college class on employment law and Triple W reimbursed his tuition of $6,000. - Jamal's consumption of coffee provided by Triple W is valued at $700 a year. How much income must Jamal report from his job?

Salary $100,000 Excess life insurance coverage 414 [(200-50) × .23 × 12] Flexible benefits plan (3,600) Tuition assistance 750 ($6,000 - $5,250) Gross Income $97,564 The health insurance premiums are excluded. Mass transit passes provided by an employer of up to $130 a month are excludable. The membership dues and subscriptions are working condition fringe benefits and are not taxable. The maximum exclusion for tuition is $5,250. Coffee is a de minimis fringe benefit and is not taxable.

A loss must be both realized and recognized to be deductible.

TRUE

At the election of the taxpayer, a current deduction is allowed for the lesser of actual business start-up expenditures incurred or $5,000 with the remainder capitalized and amortized over 180 months.

TRUE

For individuals, all deductible expenses must be classified as deductions for AGI or deductions from AGI.

TRUE

In the case of foreign-earned income, U.S. citizens may avoid double taxation of income by both the U.S. and the host country by utilizing a foreign tax credit or by electing the foreign earned income exclusion.

TRUE

John, an employee of a manufacturing company, suffered a heart attack and was advised to not work for six months. He received $1,500 per month of disability benefits as a result of firmprovided group insurance policy. The benefits are includible in John's gross income.

TRUE

The fair value of lodging cannot be excluded from gross income unless the employee is required to accept the lodging as a condition of employment and the lodging is for the convenience of the employer.

TRUE

A business bad debt gives rise to an ordinary deduction while a nonbusiness bad debt is treated as a short-term capital loss.

True

Assessments or fees imposed for specific privileges or services are not deductible as taxes.

True

Gross income is income from whatever source derived less exclusions.

True

Interest credited to a bank savings account is taxed regardless of whether or not it is withdrawn.

True

Material participation by a taxpayer in a passive activity is satisfied if the individual participates in the activity for more than 500 hours during the year.

True

The federal income tax is the dominant form of taxation by the federal government.

True

While federal and state income taxes, as well as the federal gift and estate taxes, are generally progressive in nature, property taxes are proportional.

True

The filing status in which the rates increase most rapidly is:

married filing separately.