Income Tax I - Exam 2
Grady received $8,200 of Social Security benefits this year. Grady also reported salary and interest income this year. What amount of the benefits must Grady include in his gross income under the following five independent situations? a. Grady files single and reports salary of $12,100 and interest income of $250
Amount to be included: $0 Grady excludes the entire $8,200 because the sum of his modified AGI plus 50 percent of his Social Security benefits ($12,100 + $250 + $4,100 (50% of Social Security benefits) = $16,450) is below the minimum amount ($25,000 or less for single taxpayers) for including Social Security benefits.
c. Al Bore won the Nobel Peace Prize of $500,000 this year. Rather than take the prize, Al designated that the entire award should go to Weatherhead Charity, a tax-exempt organization.
Amount to be included: $0 The entire award is excluded and therefore tax exempt. The award is excluded because it was for scientific, literary, or charitable achievement, and the taxpayer immediately transferred the award to a qualified charity.
e. Ellen won a $1,000 cash prize in a school essay contest. The school is a tax-exempt entity, and Ellen plans to use the funds to pay her college education.
Amount to be included: $1,000 All $1,000 is economic income realized this year and is, therefore, included in gross income.
b. Ted won a compact car worth $17,000 in a TV game show. Ted plans to sell the car next year.
Amount to be included: $17,000 The value of the car, $17,000, is economic income realized this year and is, therefore, included in gross income.
d. Jerry was awarded $2,500 from his employer, Acme Toons, when he was selected most handsome employee for Valentine's Day this year.
Amount to be included: $2,500 All $2,500 is economic income realized this year and is, therefore, included in gross income.
f. Gene won $400 in the office March Madness pool.
Amount to be included: $400 Gene should include $400 in his gross income.
For each of the following independent situations, indicate the amount the taxpayer must include in gross income: a. Phil won $500 in the scratch-off state lottery. There is no state income tax.
Amount to be included: $500 All $500 is economic income realized this year and is, therefore, included in gross income.
e. Grady files married separate and reports salary of $22,000 and interest income of $600
Amount to be included: $6,970 $6,970. Because Grady files married separate, his taxable Social Security benefits are the lesser of (a) 85 percent of the Social Security benefits (85% × $8,200 = $6,970) or (b) 85 percent of the taxpayer's modified AGI plus 50 percent of his Social Security benefits (85% × ($22,000 + 600 + $4,100 (50% of Social Security benefits) = $22,695). Thus, his taxable Social Security benefits are $6,970.
How are the employee's FICA tax liabilities paid?
Employers withhold the amounts from the employee's paychecks.
barter clubs
facilitate the exchange of rights to goods and services between members, many of whom have the mistaken belief that they need not recognize income on exchanges
Stacy is unmarried and has three children that qualify for the child tax credit. She uses the head of household filing status. Her AGI for the current year is $97,000. What is the amount of her child tax credit?
$1,900 3 children x $1,000 = $3,000; Phase out: $97,000 - $75,000 = 22; 22 x $50 = $1,100; Credit: $3,000 - $1,100 = $1,900
b. Last year Louis had itemized deductions of $4,800 and he chose to claim the standard deduction. Louis's itemized deductions included state income taxes paid of $1,750.
Refund to be included: $0 Because he didn't itemize his deductions, Louis received no tax benefit from the $900 tax overpayment. Hence, none of the refund is included in his gross income.
Homeowners may deduct interest on up to _______ of acquisition indebtedness and interest on up to _______ of home-equity indebtedness on two personal residences so long as the loan value does not _____ the fair market value of the home(s).
$1,000,000 $100,000 exceed
Yvette had the following miscellaneous itemized deductions: tax preparation fees-$800, job-related educational expenses-$1,200 and, unreimbursed employee business expenses-$820. Yvette's adjusted gross income for the year was $82,000. The deductible amount of her miscellaneous deductions after the floor limitations is $____.
$1,180 ($800+$1,200+$820) - ($82,000 x .02) = $1,180
Arnold has a tax liability of $700. He has a refundable tax credit of $1,000, and his employer withheld $900 in federal income tax from Arnold's pay. What is the amount of Arnold's tax refund?
$1,200 refund
Randy had an adjusted gross income of $70,000 in the current year. He had a car accident during the year. His basis in the car was $25,000, but its fair market value prior to the accident was only $18,000. The car was a total loss. He did not have collision coverage, so he did NOT receive any insurance reimbursement for the accident. Randy's deductible tax loss for the casualty after all applicable floor limitations is
$10,900
The total loss from each separate casualty or theft during the year is reduced by a $___ floor and the combined losses from all casualties for the year is reduced by __% of AGI.
$100 10%
Arnold and Annie have 3 children in 2013 when the exemption amount is $3,900. Their filing status is married filing jointly and the tax return shows an AGI of $380,000. Their total exemption amount will be reduced by $_____ in 2013.
$12,480 ($380,000-$300,000)/2500=32; 32 x 2% = 64% 64% x (3,900x 5) = $12,480
Andrea is single. Her AGI is $260,000. During the current year, her itemized deductions consisted of state income tax of $12,500, real property tax of $5,400, personal property tax of $700, charitable contributions of $26,000, and investment interest expense of $12,000. What is the amount of the REDUCTION in her total itemized deductions due to the phase-out?
$174 3% x ($260,000 - $254,000) = $174
Patrick has an adjusted gross income of $160,000 in current year. He donated $30,000 is cash to a public charity; capital gain property with a basis of $15,000 but a fair market value of $40,000 to a public charity; and capital gain property with a basis of $20,000 and a fair market value of $35,000 to a private non operating foundation. What is deductible as a charitable contribution for the current year?
$30,000 in cash to the public charity, $40,000 in property to public charity, and $8,000 in property to the private non operating foundation
The kiddie tax will NOT apply to a child whose net unearned income is equal to or less than
$2,000
Allie's only source of income for the year is wages from a part-time job of $9,000. She is not married and has one dependent child. Allie has no tax liability and she had no income tax withheld by her employer. After applying the earned income credit, what is the amount of Allie's refund?
$3,060 ($9,000 x.34) even though she has no tax liability and no withholdings
c. Last year Louis claimed itemized deductions of $7,540. Louis's itemized deductions included state income taxes paid of $2,750.
Refund to be included: $900 Louis received a tax benefit for the lesser of the refund ($900) or the excess of the itemized deductions above the standard deduction ($7,540 − $5,950 = $1,590). Hence, Louis must include the entire $900 refund in gross income.
Kyle is 16 years old and a dependent of his parents. He has $3,000 is unearned income and $900 is earned income. Kyle is in the 10% tax bracket and Kyle's parents are in the 25% tax bracket. What is Kyle's total tax liability?
$415 Tac Inc= $2,650 (3,000 unearned income + 900 earned income - 1,250 std ded); Net Unearned = (3,000 - 2,000). The unearned income is taxed at his parents' rate (1000 x .25 = 250). The taxable income in excess of $1,000 is taxed at Kyle's rate (1650 x .10 = 165); $250 + $165 = $415
Gary, age 67, incurred $4,200 in qualified medical expenses last year. His AGI was $50,000. Gary will be able to deduct $___ as an itemized deduction for medical expenses.
$450 $4,200 - ($50,000 x .075). Since Gary is 67 (65 or older), his floor limitation is 7.5%
Carol's AMT base is $240,000. Of the amount $35,000 represents long-term capital gain income from investments. Carol is in the 28% marginal tax bracket for regular tax. Calculate the tentative tax resulting from AMT calculations.
$59,060
Bart is single. His AGI is $460,000. During the current year, his itemized deductions consisted of real property tax of $15,400, personal property tax of $2,700, charitable contributions of $56,000, and gambling losses of $18,000. He is subject to a phase-out of itemized deductions equal to the lesser of $_____ or $______
$6,300 $59,280
Owen is considering giving a large charitable contribution to an organization in the current year. Owen's adjusted gross income for the year will be $150,000. He wants to contribute $80,000 in either cash or property. If he contributes cash to a public charity, he can deduct _______ this year. If he contributes capital gain property that is worth $80,000 to a public charity, he can deduct _______. Or, if he contributes the capital gain property to a private non operating foundation, he can deduct _______ this year.
$75,000 $45,000 $30,000
Nancy donated an antique desk to her church. Nancy paid $800 for the desk six years ago. An appraisal of the desk reported the fair market value to be $1,000. The church officers decided to donate the desk to a family whose home had been destroyed in a fire. Nancy will be able to deduct $___ for her contribution.
$800 Since the church did not use the desk, and it is tangible personal property, the deduction is the lesser of adjusted basis or FMV.
Brooklyn files as a head of household for 2013 and claims a total of three exemptions (3 × $3,900 = $11,700). She claimed the standard deduction of $8,950 for regular tax purposes. Her regular taxable income was $129,000. What is Brooklyn's AMTI?
(1) Regular taxable income $129,000 (2) Exemptions $11,700 (3) Standard Deduction $8,950 AMTI $149,650
Alex and Alecia used the married filing jointly status when they prepared their tax return. During the current year, their joint tax liability totaled $9,300. If they were not married and has both filed as single. Alex would have had a $3,900 tax liability, and Alecia would have have a $5000 tax liability. What is the term used for the $400 difference in their tax liability?
...
To the extent long-term capital gain income would have been taxed at 15 percent or below if it were ordinary income, it is taxed a _ percent. To the extent long-term capital gain income would have been taxed at 39.6 percent, it is taxed at __ percent. All other long term capital gains are taxed at __ percent.
0 20 15
List the order in which taxpayers with multiple credits should apply them against their gross tax.
1 Personal nonrefundable credits 2 Business Credits 3 Refundable credits
To eliminate any tax advantages of below-market loans, the tax law generally requires the lender and borrower to treat the transaction as if:
1 The borrower paid the lender the difference between the applicable federal interest rate (compounded semiannually) and the actual interest paid (this difference is called imputed interest 2 The lender then returned the imputed interest to the borrower
Which of the following factors suggests that a person is an independent contractor rather than an employee?
Sets her own working hours Provides her own tools Realizes a profit or loss from the activities
For federal income tax purposes, the community property system has the following consequences
1. Half of the income earned from the services of one spouse is included in the gross income of the other spouse 1. Half of the income from property held as community property by the married couple is included in the gross income of each spouse
3 requirements for recognizing gross income
1. economic benefit 2. realization principle 3. recognition
Based on 61(a), reg 1.61-(a) and various judicial rulings taxpayers recognize gross income when
1. they receive an economic benefit 2. they realize the income 3. no tax provision allows them to exclude or defer the income from gross income for that year
In order to meet the safe harbor provisions, a taxpayer's withholdings and estimated tax payments must equal or exceed which of the following measures?
100 percent of their previous year tax liability 90 percent of their current ax liability
The lifetime learning credit is equal to __ percent of eligible expenses up to an annual maximum of _____ of eligible expenses in one year.
20 10,000
For certain taxpayers, a tax of ___% may be assessed on net investment income.
3.8%
Cash and property donations to public charities are limited to __% of a taxpayer's AGI. Donations of capital gain property to public charities are generally limited to __% of taxpayer's AGI. And, donations of capital gain property to private non operating foundations are limited to __% of AGI.
50 30 20
Which of the following individuals would NOT be subject to the kiddle tax assuming they have unearned income?
A child who is 19 at year end, a part time student, and claimed as a dependent on his parent's return
Which of the following statements is a characteristic of personal and dependency exemptions?
A taxpayer can deduct personal and dependency exemptions for himself, his spouse, and his dependents.
Olga is married and files a joint tax return with her husband. What amount of AMT exemption may she deduct under each of the following alternative circumstances? (Use 2013 AMT exemption amounts.) a. Her AMTI is $112,250.
Amount of AMT exemption $80,800 a. Because Olga's AMTI does not exceed $153,900 (the threshold amount for MFJ), her AMT exemption is not phased-out, and she is entitled to the full exemption amount of $80,800.
Mike and Stacy are married and have five children aged 8, 11, 15, 17 and 20. The children are all full-time students and live at home. How many personal and dependency exemptions will they report on their tax return?
Seven all five children plus Mike and Stacy
c. Leron and Sheena bought the home five years ago for $500,000. They lived in the home for three years until they decided to buy a smaller home. Their home has been vacant for the past two years.
Taxable gain: $0
c. Her AMTI is $544,000.
Amount of AMT exemption $0 c.Olga is not allowed to deduct any exemption amount because it is entirely phased out as follows: $80,800 − [(544,000 − 153,900) × 25%] = −16,725, limited to $0.
b. Her AMTI is $202,000.
Amount of AMT exemption $68,775 b. Because Olga's AMTI exceeds $153,900, she must phase-out her exemption and is entitled to an exemption of $68,775. Olga's exemption is calculated as follows: $80,800 − [(202,000 - 153,900) × 25%] = $68,775
This year, Leron and Sheena sold their home for $750,000 after all selling costs. Under the following scenarios, how much taxable gain does the home sale generate for Leron and Sheena? a. Leron and Sheena bought the home three years ago for $150,000 and lived in the home until it sold.
Taxable gain: $100,000
d. Grady files married joint and reports salary of $44,000 and interest income of $700.
Amount to be included: $6,970 $6,970. Grady files married joint and his modified AGI plus 50 percent of his Social Security benefits ($44,000 + $700 + $4,100 (50% of Social Security benefits) = $48,800) exceeds $44,000. His taxable Social Security benefits are the lesser of (a) 85 percent of Social Security benefits (85% × $8,200 = $6,970) or (b) 85 percent of [$44,700 modified AGI + $4,100 (50% of Social Security benefits) − $44,000] = $4,080), plus the lesser of (1) $6,000 or (2) 50 percent of Social Security benefits ($4,100). This simplifies to the lesser of $6,970 or $8,180 ($4,080+$4,100). Thus, his taxable Social Security benefits are $6,970.
c. Grady files married joint and reports salary of $75,000 and interest income of $500.
Amount to be included: $6,970 Grady includes 85 percent of the benefits or $6,970 ($8,200 × 85 percent) because his modified AGI is well above the maximum amount ($44,000 for married joint) for including Social Security benefits.
b. Grady files single and reports salary of $22,000 and interest income of $600.
Amount to be included: $850 $850. Grady is single and his modified AGI plus 50 percent of his Social Security benefits ($22,000 + $600 + $4,100 (50% of Social Security benefits) = $26,700) falls between $25,000 and $34,000. His taxable Social Security benefits are the lesser of (a) 50 percent of the Social Security benefits ($8,200 × 50% = $4,100) or (b) 50 percent of [$22,600 modified AGI + $4,100 (50 percent of Social Security benefits) − $25,000] = $850). Thus, his taxable Social Security benefits are $850.
b. Leron and Sheena bought the home one year ago for $600,000 and lived in the home until it sold.
Taxable gain: $150,000
Taxpayers who realize an economic benefit must include the benefit in gross income unless a specific provision of the tax code says otherwise
Taxpayers are generally required to recognize all realized income by reporting it as gross income on their tax returns
How can taxpayers protect themselves from incurring an underpayment penalty?
Taxpayers should meet one of the safe harbor provisions
Chris has taxable income of $123,000. A portion of this income is from capital gains and should receive preferential tax treatment. List the steps below in the order in which they should occur for Chris to be able to determine his overall tax liability.
C Step 1 Split taxable income into the portion taxed at preferential rates versus the portion taxed at ordinary rates. A Step 2 Compute the tax separately on each type of income, using the tax rate schedule on the portion taxed at ordinary rates. B Step 3 Add the tax on the income subject to preferential rates to the tax on the income subject to ordinary rates.
Read the following letter and help Shady Slim with his tax situation. Please assume that his gross income is $172,900 (which consists only of salary) for purposes of this problem. December 31, 2013 To the friendly student tax preparer: Hi, it's Shady Slim again. I just got back from my 55th birthday party, and I'm told that you need some more information from me in order to complete my tax return. I'm an open book! I'll tell you whatever I think you need to know. Let me tell you a few more things about my life. As you may recall, I am divorced from my wife, Alice. I know that it's unusual, but I have custody of my son, Shady, Jr. The judge owed me a few favors and I really love the kid. He lives with me full-time and my wife gets him every other weekend. I pay the vast majority of my son's expenses. I think Alice should have to pay some child support, but she doesn't have to pay a dime. The judge didn't owe me that much, I guess. I had to move this year after getting my job at Roca Cola. We moved on February 3 of this year, and I worked my job at Roca Cola for the rest of the year. I still live in the same state, but I moved 500 miles away from my old house. I left a little bit early to go on a house-hunting trip that cost me a total of $450. I hired a moving company to move our stuff at a cost of $2,300. Junior and I got a hotel room along the way that cost us $40 (I love Super 8!). We spent $35 on meals on the way to our new home. Oh yeah, I took Junior to a movie on the way and that cost $20. Can you believe I'm still paying off my student loans, even after 15 years? I paid a total of $900 in interest on my old student loans this year. Remember when I told you about that guy that hit me with his car? I had a bunch of medical expenses that were not reimbursed by the lawsuit or by my insurance. I incurred a total of $20,000 in medical expenses, and I was only reimbursed for $11,000. Good thing I can write off medical expenses, right? I contributed a lot of money to charity this year. I'm such a nice guy! I gave $1,000 in cash to the March of Dimes. I contributed some of my old furniture to the church. It was some good stuff! I contributed a red velvet couch and my old recliner. The furniture is considered vintage and is worth $5,000 today (the appraiser surprised me!), even though I only paid $1,000 for it back in the day. When I contributed the furniture, the pastor said he didn't like the fabric and was going to sell the furniture to pay for some more pews in the church. Oh well, some people just have no taste, right? Roca Cola had a charity drive for the United Way this year and I contributed $90. Turns out, I don't even miss it, because Roca Cola takes it right off my paycheck every month . . . $15 a month starting in July. My pay stub verifies that I contributed the $90 to the United Way. Oh, one other bit of charity from me this year. An old buddy of mine was down on his luck. He lost his job and his house. I gave him $500 to help him out. I paid a lot of money in interest this year. I paid a total of $950 in personal credit card interest. I also paid $13,000 in interest on my home mortgage. I also paid $2,000 in real estate taxes for my new house. A few other things I want to tell you about last year. Someone broke into my house and stole my kid's brand new bicycle and my set of golf clubs. The total loss from theft was $900. I paid $100 in union dues this year. I had to pay $1,000 for new suits for my job. Roca Cola requires its managers to wear suits every day on the job. I spent a total of $1,300 to pay for gas to commute to my job this year. Oh, this is pretty cool. I've always wanted to be a firefighter. I spent $1,000 in tuition to go to the local firefighter's school. I did this because someone told me that I can deduct the tuition as an itemized deduction, so the money would be coming back to me. That should be all the information you need right now.
Calculate the taxable income. Explanation: Notes: 1. House-hunting trip, meals, and movie are not deductible moving expenses. 2. Student loan interest is not deductible because Slim's AGI exceeds the threshold amount of income. 3. Medical expenses do not exceed the floor limitation of 10 percent of AGI so are non-deductible. 4. Personal credit card interest is not deductible. 5. Slim can deduct the $1,000 cash donation, the $90 payroll deduction and the basis of the furniture he contributed (capital gain property put to unrelated use). 6. Casualty losses do not exceed floor limitations ($100 and 10 percent of AGI) thus, they are not deductible. 7. Miscellaneous itemized deductions: union dues of $100 don't exceed the 2% threshold. 8. Other non-deductible items: clothing for work, commuting expenses, firefighter education expenses. Gross Income $172,900 Less Moving Expenses: Mileage (500 x 24¢) $120 Moving company 2,300 Lodging 40 $2,460 AGI $170,440 Itemized Deductions: Medical Expenses 0 Mortgage Interest 13,000 Real Estate Taxes 2,000 Charitable Contributions 2,090 Misc. Itemized Deductions 0 $17,090 Taxable income before exemptions $153,350 Personal & Dependency exemptions $7,800 Taxable Income $145,550
Choose the deductions that reduce both regular taxable income and AMTI.
Casualty and theft losses Charitable contributions Home equity interest - loan used to improve the house Gambling losses
Which of the following expenses are classified as miscellaneous itemized deductions that are NOT subject to the 2% of AGI floor?
Casualty and theft losses on property held for investment Gambling losses The unrecovered cost of a life annuity when the taxpayer dies
Which of the following statements is correct regarding itemized deductions?
Charitable contributions, real estate taxes, and qualified mortgage interest are among the itemized deductions that are subject to phase-out.
Which of the following tax-related expenses can NOT be deducted as a miscellaneous itemized deduction subject to the 2% of AGI floor?
Cost of commuting to a tax preparation office
c. Lionel's AGI before deducting interest on higher education loans is $90,000.
Deductible interest expense $0 Deductible education expenses $0 Lionel is not allowed to deduct any qualified educational interest expense computed as follows: (1) Modified AGI $90,000 (2) Amount of interest paid up to $2,500 1,440 - Lesser of amount paid or $2,500 (3) Phase-out (reduction) percentage: 100% [(1) − 60,000]/15,000, limited to 100 percent (4) Phase-out amount (reduction in maximum): 1,440 (2) × (3) Deductible interest expense $0 (2) − (4) Lionel is also not allowed to deduct any qualified education expenses because his modified AGI ($90,000) exceeds $80,000
Lionel is an unmarried law student at State University Law School, a qualified educational institution. This year Lionel borrowed $24,000 from Counti Bank and paid interest of $1,440. Lionel used the loan proceeds to pay his law school tuition. Calculate the amounts Lionel can deduct for higher education expenses and interest on higher education loans under the following circumstances: a. Lionel's AGI before deducting interest on higher education loans is $50,000.
Deductible interest expense $1,440 Deductible education expenses $4,000 a. The maximum interest deduction is the amount paid up to $2,500. The deduction is phased out as AGI exceeds $60,000 (before applying the interest deduction). Consequently, because his AGI is below the trigger amount for the phase-out, Lionel can deduct $1,440, which is the lesser of (1) $2,500 or (2) $1,440 (the amount of interest expense he paid). Lionel paid $24,000 of qualified educational expenses. Because his modified AGI ($50,000 − $1,440 deduction for interest on higher education loan = $48,560) is less than the trigger for the deduction for qualified education expense phase-out ($65,000), Lionel can deduct $4,000 for qualified education expenses, which is the lesser of (1) $4,000 or (2) $24,000 (qualified education expenses paid).
b. Lionel's AGI before deducting interest on higher education loans is $69,000.
Deductible interest expense $576 Deductible education expenses $2,000 b. Lionel can deduct $576 of qualified educational interest expense computed as follows: (1) AGI: $69,000 (2) Amount of interest paid up to $2,500: 1,440 - Lesser of amount paid or $2,500 (3) Phase-out (reduction) percentage: 60% [(1) − 60,000]/15,000, limited to 100 percent (4) Phase-out amount (reduction in maximum): 864 (2) × (3) Deductible interest expense: $576 (2) − (4) Since Lionel's modified AGI (($69,000 − $576 deduction for interest on higher education loan = $68,424) exceeds $65,000 but is less than or equal to $80,000, Lionel can also deduct $2,000 of qualified education expenses, which is the lesser of (1) $2,000 or (2) $24,000 (qualified education expenses paid).
Which of the following characteristics are required for a business expense to be deductible?
Directly related to the business Ordinary Necessary
Choose the types of income that qualify as net investment income for the purposes of assessing the Medicare contributions tax.
Dividend income Long-term capital gains Interest income
True or False: Activities classified as hobbies can generate tax deductible losses that can be used against other types of income.
False Hobby expenses are deductible only to the extent of the revenue generated by the hobby
True or False: High income taxpayers may be subject to a phase-out of itemized deductions which will require them to take the standard deduction, rather than their itemized deductions.
False When AGI exceeds a certain threshold, specific itemized deductions are reduced, but there is no requirement that these taxpayers take the standard deduction.
True or false: Self-employment tax is deductible as an itemized deduction along with real estate taxes and state income tax.
False The employer portion of SE tax is deductible FOR AGI
When calculating a tax liability, the taxpayer will use the tax rate schedule that is determined by which of the following?
Filing status
How many years can excess charitable contributions be carried over before expiring?
Five
How do self-employed independent contractors deduct their business expenses?
For AGI against business income
There is one tax infraction that incurs a penalty calculated as 15 percent of the amount of tax owed per month with a maximum penalty of 75 percent. What violation incurs this level of penalty?
Fraudulent failure to file
How do employees deduct their unreimbursed business expenses?
From AGI as miscellaneous itemized deductions subject to the 2 percent of AGI floor
c. A gift of $50,000 of Ford Motor Bonds. Grady received the bonds on October 31, and he received $1,500 of semiannual interest from the bonds on December 31.
Gift of Ford Motor Bonds: Is this payment realized income? Yes Amount to be included: $0 Interest from the Bonds: Is this payment realized income? Yes Amount to be included: $500 The gift of the bonds is realized income that is entirely excluded from gross income. The interest accrued up to October 31st is excluded because it was accrued at the time of the gift. Hence, the accrued income was part of the gift. Grady is taxed on $500 of interest that accrued after the date of the gift (he is taxed on it when he receives it).
Medicare Tax
Helps pay medical costs for qualifying individuals
Shonda is currently in the 28 percent tax bracket. She reports a $400 tax credit. How will this credit affect her tax liability?
Her tax liability will decrease by $400
Choose the deductions that reduce both regular taxable income and AMTI
Home mortgage interest Charitable contributions Casualty losses
Louis files as a single taxpayer. In April of this year he received a $900 refund of state income taxes that he paid last year. How much of the refund, if any, must Louis include in gross income under the following independent scenarios? Assume the standard deduction last year was $5,950. a. Last year Louis claimed itemized deductions of $6,200. Louis's itemized deductions included state income taxes paid of $1,750.
Refund to be included: $250 Louis received a tax benefit for the lesser of the refund ($900) or the excess of the itemized deductions above the standard deduction ($6,200 − $5,950 = $250). Hence, Louis must include $250 of the $900 refund in gross income.
Izzy ran into a cash shortfall and had to cash in a certificate of deposit early. She incurred a $50 penalty for early withdrawal. How should Izzy treat the penalty for tax purposes?
Izzy can deduct the $50 for AGI.
inheritance
If the property is transferred from the decedent's estate (transferor is deceased) it is called an a transfer of property when the owner is deceased (the transfer is made by the decedent's estate)
Which of the following are acceptable methods for treating income taxes paid to foreign countries?
Include the foreign income in gross income and deduct the foreign taxes paid as itemized deductions Include foreign income in gross income and claim a foreign tax credit for the foreign taxes paid. Exclude the foreign earned income from gross income
When is an individual required to file a tax return?
Individuals must file a tax return when their gross income exceeds certain amounts based on their filing status and age.
Which of the following are true regarding the earned income credit?
Individuals who are dependents of other taxpayers are not eligible for the credit. Individuals with at least one qualifying child are eligible for the credit regardless of age. The credit is designed to offset the effect of employment taxes on compensation paid to low-income taxpayers.
Which of the following expenses is NOT considered a deductible investment expense subject to the 2 percent of AGI floor?
Interest expense on rental property
d. A loan of $5,000 for school expenses from Grady's aunt.
Is this payment realized income? No Amount to be included: $0 A bona fide loan is not realized income. If the loan is actually a disguised gift, the gift would be realized income but the value is excluded from gross income.
Grady is a member of a large family and received the following payments this year. For each payment, determine whether the payment constitutes realized income and determine the amount of each payment Grady must include in his gross income. a. A gift of $20,000 from Grady's grandfather.
Is this payment realized income? Yes Amount to be included: $0 a. The gift is realized income that is entirely excluded from gross income.
b. 1,000 shares of GM stock worth $120 per share inherited from Grady's uncle. The uncle purchased the shares for $25 each, and the shares are worth $125 at year-end.
Is this payment realized income? Yes Amount to be included: $0 b. Inheritances are realized income but are entirely excluded from gross income. The increase in the value of the shares during the year has not yet been realized.
Which of the following expenses are deductible FOR AGI?
Most expenses generated by business activities Expenses generated by rental and royalty activities
Which of the following individuals is eligible to receive (or qualify their parents to receive) the American Opportunity Credit?
Kim is single, works full time, and goes to college half time at LSU
Which of the following donations will qualify as a deductible charitable contribution?
Land donated to a public university
Which of the following statements is INCORRECT regarding a loss that is generated from the disposal or sale of assets?
Losses from personal use assets are deductible for AGI
Andrew volunteered for the American Red Cross after a recent hurricane. He traveled 200 miles and helped the victims of the disaster in the clean up for five days. He also donated $1,500 to the American Red Cross, but charged the amount of the donation on his credit card. He plans to pay $300 plus interest each month on the credit card charge, so he will pay $900 of the $1,500 charge by the end of the year. What amounts will Andrew be able to deduct for his charitable contributions?
Mileage for the 200 miles he drove to the ravaged area $1,500 charged to the credit card during the year The cost of lodging while he is volunterring
Which of the following expenses qualify for deductible moving expenses?
Mileage while in route to new home Moving personal possessions Lodging while in route to new home
Which of the following types of taxes may be deducted from AGI as itemized deductions?
Personal property tax on the value of a boat Real estate taxes on property held for investment State and local income taxes Personal property tax on the value of a car Real estate taxes on a primary residence
Which of the following medical costs would be deductible as qualified medical expenses?
Prescription medications Plastic surgery to reduce scarring after a dog bite Chiropractic services Health insurance premiums Dental work Eyeglasses Lasik eye surgery
Social Security Tax
Provides basic pension coverage for the retired and disabled
Which of the following types of income may be taxed at rates lower than the tax rate schedule would dictate?
Qualified dividend income Long-term capital gain income Long-term capital gains are taxed at rates below the tax rate schedule
In 2013, Carson is claimed as a dependent on his parent's tax return. His parents' ordinary income marginal tax rate is 28 percent. Carson's parents provided most of his support. What is Carson's tax liability for the year in each of the following alternative circumstances? a. Carson is 17 years old at year-end and earned $9,550 from his summer job and part-time job after school. This was his only source of income.
Tax liability $345 a. Carson's tax liability is $345. Note that Carson has no unearned income and is not subject to the kiddie tax. (1) Gross income/AGI $9,550 - wages All earned income (2) Standard deduction ($6,100) Not subject to kiddie tax, limitations—no unearned income (3) Personal exemption 0 Claimed as dependent on parents' return (4) Taxable income $3,450 (1) + (2) + (3) Total tax $345 =3,450 × 10% (see rate schedule for Single individuals)
b. Carson is 23 years old at year-end. He is a full-time student and earned $9,550 from his summer internship and part-time job. He also received $3,400 of qualified dividend income.
Tax liability $555 b. Carson's tax liability is $555. Carson is subject to the kiddie tax because he is a full-time student under age 24 and has unearned income greater than $2,000. (1) Gross income/AGI (all unearned income) $12,950 ($9,550 is earned income and $3,400 is unearned income from qualified dividends) (2) Minimum standard deduction $1,000 Minimum for taxpayer claimed as dependent on another return (3) $350 + earned income + $6,100 350 + 9,550 earned income (not to exceed $6,100 regular standard deduction) (4) Standard deduction for dependent on another tax return $6,100 Greater of (2) and (3) (5) Personal exemption 0 Claimed as dependent on parents' return (6) Taxable income $6,850 (1) − (4) − (5) (7) Gross unearned income minus $2,000 1,400 $3,400 dividends − $2,000 (8) Net unearned income $1,400 Lesser of (6) or (7) (9) Parents' preferential rate 15% Because his parents' marginal tax rate on ordinary income is 28%, their rate on preferential income is 15% (10) Kiddie tax $210 (8) × (9) (11) Taxable income taxed at Carson's rate $5,450 (6) − (8) (12) Preferential income taxed at Carson's tax rates $2,000 $3,400 Dividends − (8) (13) Tax on preferential income $0 (12) × 0% (Carson's tax rate would be 10 percent if it were ordinary income, so he qualifies for 0 percent rate on dividends). (14) Taxable income tax at Carson's ordinary tax rates $3,450 (11) − (12) (15) Tax on ordinary income $345 (14) × 10% Total tax $555 (10) + (13) + (15)
Which of the following deductions are classified as miscellaneous itemized deductions subject to the 2% of AGI floor?
Tax return preparation fees Unreimbursed employee expenses Investment expenses Hobby expenses
Gary moved his family from Indiana to Utah due to a job transfer. They rented a moving van for $120. Gary's wife, Glenda, drove their car and followed the moving van the 1,500 miles to Utah. They spent two nights along the way and stopped to eat several times. Prior to the move, Gary and Glenda had flown to Utah twice to check out the area and find a place to live. Their tips did result in them purchasing a home prior to the relocation. Which of the expenses incurred in the move will be deductible for Gary and Glenda?
The cost of lodging The cost of the moving van The mileage rate for the distance between Indiana and Utah
Which of the following statements is INCORRECT regarding travel for medical reasons?
The cost of meals is deductible if required to be away from home overnight.
Harli is taking her 6-month-old daughter to the doctor to receive vaccinations. Which of the following statements is correct regarding the deductibility of the vaccinations?
The cost of vaccinations is deductible because it is for the prevention of a disease.
Which of the following statements is INCORRECT regarding the child and dependent care credit?
The credit completely phases out for high income taxpayers.
How are business tax credits, except for the foreign tax credit, handled when they exceed the taxpayer's gross tax for the year?
The credits are carried back one year and forward 20 years.
How much of a self-employed taxpayer's self-employment tax may be deducted for AGI?
The employer portion of self-employment tax is deductible
Which of the following factors may help determine if an activity is a hobby or a business?
The expertise of the taxpayer or her advisors. The manner in which the taxpayer carries on the activity. The time and effort expended by the taxpayer in carrying on the activity.
Which of the following statements is NOT accurate regarding the deduction for qualified education loan interest?
The full amount of interest paid on qualified educational loans is deductible.
Which of the following criteria are characteristic of the child tax credit?
The individual must be under age 17 at year-end The individual must be a qualifying child for dependent purposes The credit is subject to phase-out based on taxpayer's AGI
When can a taxpayer deduct moving expenses?
The individual must meet a distance test and a time test associated with the move.
Your friend, Deron, is confused about where to report business expenses on his tax return. He knows they are deducted FOR AGI, but he does not see them on the Form 1040. Which of the following answers should you give Deron?
The revenues and expenses from a business are reported on a separate schedule and the resulting profit or loss is transferred to the Form 1040.
When is the standard deduction NOT added back to regular taxable income to arrive at alternative minimum taxable income?
The standard deduction is not added back when the taxpayer deducted itemized deductions rather than the standard deduction
Markita donated stock that she has held for less than a year to a qualified charitable organization. Her basis in the stock is $1,000 and the fair market value of the stock is $1,200. Which of the following statements is true regarding Markita's donation?
The stock is ordinary income property. She will deduct $1,000, since her basis is less than fair market value.
Which one of the following situations is NOT likely to cause a taxpayer to become subject to the alternative minimum tax?
The taxpayer donates large amounts to charity.
Regarding charitable contributions, which of the following statements is INCORRECT when referring to donations of capital gain property?
The taxpayer must include the appreciation of the asset in gross income
How is it possible for a taxpayer to have a loss on her hobby activities, but be required to pay tax on the activities?
The taxpayer's itemized deductions do NOT exceed the standard deduction.
Other than the safe harbor provisions, what other tax due circumstances will prevent a taxpayer from incurring an underpayment payment penalty?
The taxpayer's tax payable after subtracting withheld taxes is less than $1,000. The taxpayer had no tax liability in the previous year
Which of the following expenses are included in deductible travel expenses?
Transportation 50% of meals cost Lodging
True or false: The lifetime learning credit is available for any course of instruction and is NOT limited to courses taken at postsecondary educational institutions.
True The lifetime learning credit promotes the improvement of job skills throughout one's lifetime. So, it is available for any course of instruction.
True or false: In order to deduct meals and lodging as travel expenses, the taxpayer must be away from home overnight on a trip related to his/her business or employment.
True The taxpayer must be away from home overnight or for a period of time that would require rest.
Which of the following expenses qualify for the American Opportunity Credit?
Tuition Textbooks Required fees
Which of the following types of income may be taxed at rates higher than the tax rate schedule would dictate?
Unearned income when the taxpayer is a dependent child
Which of the following statements is correct regarding the phase-out of exemption amounts?
Unlike itemized deductions, the exemption amounts may be completely phased-out for high-income taxpayers.
Which of the following items is NOT a qualified medical expense?
Vitamins for promoting good health
all-inclusive definition of income
a definition of income that says that gross income means all income from whatever source derived
tax basis
a portion of the proceeds from a sale represented a return of the cost or capital investment in the underlying property
installment sale
a sale for which the taxpayer receives payment in more than one period
Gross income includes all income unless
a tax provision says otherwise
gift
a transfer of property where no consideration (or inadequate consideration) is paid for the property If the transferor is alive at the time of the transfer, the property is called a
John and Sandy Ferguson got married eight years ago and have a seven-year old daughter Samantha. In 2013, John worked as a computer technician at a local university earning a salary of $52,000, and Sandy worked part-time as a receptionist for a law firm earning a salary of $29,000. John also does some Web design work on the side and reported revenues of $4,000 and associated expenses of $750. The Fergusons received $800 in qualified dividends and a $200 refund of their state income taxes. The Fergusons always itemize their deductions and their itemized deductions were well over the standard deduction amount last year. The Fergusons reported making the following payments during the year: • State income taxes of $4,400. Federal tax withholding of $4,000. • Alimony payments to John's former wife of $10,000. • Child support payments for John's child with his former wife of $4,100. • $3,200 of real property taxes. • Sandy was reimbursed $600 for employee business expenses she incurred. She was required to provide documentation for her expenses to her employer. • In addition to the $750 of Web design expenses, John attended a conference to improve his skills associated with his Web design work. His trip was for three days and he incurred the following expenses: airfare $370, total taxi fares for trip $180, meals $80, and conference fee of $200. • $3,600 to Kid Care day care center for Samantha's care while John and Sandy worked. • $14,000 interest on their home mortgage. • $3,000 interest on a $40,000 home-equity loan. They used the loan to pay for family vacation and new car. • $6,000 cash charitable contributions to qualified charities. • Donation of used furniture to Goodwill. The furniture had a fair market value of $400 and cost $2,000.
a. What is the Fergusons' 2013 federal income taxes payable or refund, including any self-employment tax and AMT, if applicable? (Use the 2013 AMT exemptions.) Tax refund $1,526.60
When an employee is required to submit documentation supporting business expenses to receive reimbursement, the employer's reimbursement plan qualifies as a(n) _______ plan. Under this type of plan, the employee will only be able to deduct the _______ expenses.
accountable unreimbursed
When an employee is required to submit documentation supporting business expenses to receive reimbursement, the employer's reimbursement plan qualifies as an _______ plan. Under this type of plan, the employee will only be able to deduct the unreimbursed expenses.
accountable unreimbursed
A taxpayer is subject to the _____ _____ ___ when the tax on its base is higher than his regular tax liability
alternative minimum tax
gain (or loss) on a sale
amount realized - basis (investment) in property sold
annuity
an investment that pays a stream of equal payments over time 2 types: 1. annuities paid over a fixed period 2. annuities paid over a person's life
claim of right doctrine
another judicial doctrine create to address the timing of income recognition conceived when a taxpayer received income in one period but was required to return the payment in a subsequent period
The late filing penalty equals ____ percent of the amount of tax owed for each month that the tax return is late, with a maximum penalty of __ percent.
five 25
Entities such as partnerships, LLCs, and S corporations are known as
flow-through entities because their income is reported on the owner's tax returns. Any expenses or losses from these entities are generally deducted FOR AGI
Expenses associated with generating rental or royal income are deductible
for AGI These expenses are treated similar to business expenses and reported on a separate schedule with the profit or loss added into AGI
With the exception of rent/royalty expenses, investment expenses are deducted ____ AGI while business expenses, except for unreimbursed employee business expenses, are deducted ___ AGI.
from for
Employees can deduct their unreimbursed business expenses _____ AGI while self employed individuals deduct their business expenses _____ AGI.
from for
61(a)
general definition - except as otherwise provided in this subtitle, gross income means all income from whatever source derived (emphasis added).
assignment of income doctrine
to prevent taxpayers from arbitrarily transferring the taxation on their income to others
Taxpayers may be subject to an _____ _____ if they have taxes due and have NOT met the safe harbor provisions
underpayment penalty
The kiddie tax provision taxes a certain amount of a child's ______ income at the parent's rate.
unearned
disability insurance
wage replacement insurance pays the insured individual wages lost when the individual misses work due to injury or disability may also be purchased on an individual's behalf by an employer
alimony
when couples legally separate or divorce, one spouse may be required to provide financial support to the other
The income tax is paid on a pay-as-you-go basis through _____ or _____ tax payments
withholdings estimated
nonrecognition provisions
because taxpayers are not required to recognize income that is excluded or deferred, we refer to tax laws allowing exclusions or deferrals as
imputed income
besides realizing direct economic benefits like wages and interest, taxpayers sometimes realize indirect economic benefits that they must include in gross income
Activities which are profit-motivated and require a relatively high level of involvement from the taxpayer are referred to as
business activities
In general, taxpayers are allowed to deduct the fair market value of _____ _____ property on the date of the donation.
capital gain
Even though the tax rate on _____ _____ is the same for taxpayers paying regular tax as it is for taxpayers subject to AMT, this type of income increases AMTI which may lead to a decrease in the exemption amount and thus expose more income to the AMT
capital gains
examples of gross income
compensation for services, business income, rents, royalties, interest and dividends.
discharge of indebtedness
debt forgiveness
accelerated death benefits
early receipt of life insurance proceeds the taxpayer is terminally ill (medically certified with an illness expected to cause death within 24 months) - not taxable
The alternative minimum tax base more accurately reflects _____ income than the regular income tax base. This base ensures that the taxpayer pays some level of income tax, despite the disproportionate use of tax preference items to reduce regular taxable income
economic
Taxpayers must receive an ______ ______ to have gross income
economic benefit
Self-employed taxpayers may deduct the _____ portion of their self-employment taxes ___ AGI
employer FOR
To help ensure that low-income taxpayers are NOT required to pay the alternative minimum tax, AMTI is reduced by an _____ to determine the alternative minimum tax base.
exemption
The child and dependent care credit
helps taxpayers pay the cost of providing care for dependents, so that taxpayers can work.
Self employment tax
includes the employer and employee portion of FICA taxes
unearned income
income from property gain or losses from the sale of property dividends interest rents royalties annuities
earned income
income from services generated by the efforts of the taxpayer
Types of income
income from services income from property annuities property dispositions
accural method
income is generally recognized when earned, and expenses are generally deducted in the period when liabilities are incurred
Realization Principle
income is realized when 1. a taxpayer engages in a transaction with another party 2. the transaction results in a measurable change in property rights Assets or services are exchanged for cash, claims to cash, or other assets with determinable value
gross income
income that taxpayers realize, recognize and report on their tax returns for the year
Activities which are profit-motivated, but do NOT require a relatively high level of involvement from the taxpayer are referred to as
investment activities
The standard deduction
is a flat amount that most individuals can elect to deduct instead of deducting their itemized deductions
The lifetime learning credit
is a maximum credit of $2,000 per taxpayer, while the American Opportunity credit is a maximum credit of $2,500 per qualifying student.
The foreign tax credit
is claimed by taxpayers for the income taxes they pay in foreign countries. This credit may be restricted is the effective foreign tax rate is higher than the effective U.S. tax rate on the foreign earnings.
A casualty loss
is defined as a loss from a sudden, unexpected, or unusual event such as a fire, storm or shipwreck.
flow-through entity
legal entities like partnerships, limited liability companies, and S corporations that do not pay income tax
The phase-out of the itemized deductions is the _____ of (1) _% x [AGI minus the threshold amount] or (2) __% of the total itemized deductions subject to phase-out.
lesser 3% 80%
When a married couple's tax liability is smaller using the married filing jointly status than it would have been if both individuals were unmarried and filed as single, the difference in the tax liability is called a
marriage benefit
Taxpayers are allowed to deduct contributions of _____ and _____ to qualified domestic charitable organizations.
money property
a taxpayer receiving a life annuity who lives longer than his or her estimated life expectancy will ultimately receive _____ than the expected number of payments.
more
cash method
most individuals use this taxpayers recognize income in the period they receive it (in the form of cash, property, or services), rather than when they earn it
The deduction of investment interest is limited to a taxpayer's
net investment income
fringe benefits
noncash benefit provided to an employee as a form of compensation. As a general rule, fringe benefits are taxable. However, certain fringe benefits are excluded from gross income.
To satisfy the distance test, the distance from the taxpayer's ___ residence to the ___ place of work must be at least 50 miles more than the distance from the ___ residence to the ___ place of work.
old new old old
An itemized deduction
only produces a tax benefit to the extent that total itemized deductions exceed the standard deduction
annuity exclusion ratio =
original investment / expected value of annuity = return of capital percentage
The basis for requiring employers to withhold taxes from employees' pay and requiring periodic estimated tax payments from taxpayers with income not subject to withholding is known as the
pay-as-you-go basis
Taxpayers are generally allowed to deduct _______ and _______ exemption amounts for themselves, their spouses and dependents.
personal dependency
qualified retirement accounts
plans meeting certain requirements that allow compensation placed in the account to be tax deferred until the taxpayer withdraws money from the account
A tax credit
reduces a taxpayer's tax liability dollar for dollar.
A tax deduction
reduces taxable income, resulting in a tax savings that is dependent on the taxpayer's marginal tax bracket
clawback provision
requires repayment if the company has an earnings restatement
There are two types of interest expense that may be deductible as itemized deductions: 1 interest on indebtedness secured by a qualified _______ and 2 _______ interest.
residence investment
amount realized
sales proceeds - selling expenses
Self-employed taxpayers pay ___________ taxes on their net profit (i.e. self-employment earnings) which represents both the employee and employer component of FICA and Medicare.
self-employment
Taxpayers who are unable to file by the due date can request an automatic ______ extension
six-month
In general, the gross income threshold that requires an individual to file a tax return is the sum of the _____ _____ amount for the taxpayer's filing status plus the _____ _____ amount.
standard deduction personal exemption
constructive receipt doctrine
states that a taxpayer realizes and recognizes income when it is actually or constructively received
Each separate range of income subject to a different tax rate is referred to as a
tax bracket
The concept of realization for tax purposes closely parallels
the concept of realization for financial accounting purposes
community property systems
the income earned by services from one spouse is treated as though it was earned equally by both spouses
municipal bonds
the most common example of an exclusion provision is the exclusion interest on include bonds issued by state and local governments located in the United States the exclusion is generally recognized as a subsidy to state and local governments (the exclusion allows state and local governments to offer bonds at a lower before-tax interest rate)
return of capital
the portion of proceeds from a sale (or distributing) representing a return of the original cost of the underlying property
tax benefit rule
the refund is included in gross income to the extent that the prior deduction produced a tax benefit
wherewithal to pay
the transition itself provides the taxpayer with the funds to pay taxes on income generated by the transaction