Income Tax Planning

Qualifying Child

Under age 19 at the close of the tax year or A full-time student and under age 24 at the close of the tax year or Totally and permanently disabled at any time during the tax year

Additional Medicare Tax of 0.9%

also applies to self-employed individuals who have a combined income greater than $200,000 if single and $250,000 if MFJ. The tax is levied on the net earnings from self-employment of the sole proprietor or partner and consists of the gross income derived from any trade or business, less allowable deductions attributable to this trade or business (generally Schedule C); or the taxpayer's distributive share of the ordinary income or loss of a partnership (not an S corporation) engaged in a trade or business (Schedule K -1).

Three years ago, Myla received a gift of 100 shares of public utility stock from her aunt. The fair market value of the stock on the date of the gift was $20 per share. Her aunt had purchased the stock six years earlier at $6 per share. Myla sold this stock for $24 per share last week. What was Myla's basis in the stock when she sold it?

$6 per share. The only time that the gifted asset takes the sale price as the basis is when the fair market value on the date of the gift is less than the donor's basis and the asset is sold at a price between the fair market value on the date of the gift and the donor's basis.

Jane owns a printing business. She wants to trade her old copiers for new fax machines. In the contemplated exchange, Jane will pay $750 in cash. Additional information related to the transaction is given as follows: The copiers have an adjusted basis of $1,500. The copiers have a fair market value of $1,000. The fax machines have a fair market value of $1,750. What is Jane's recognized gain or loss in this exchange?

($500). Jane is paying $750 plus the adjusted basis of $1,500 ($2,250); compared to the fair market value of the property received of $1,750, thus yielding a $500 loss. There is no loss recognized in a like-kind exchange. This exchange is simply treated as a sale of the asset. A loss on a Section 1231 asset may be recognized in the year of the loss. The Tax Cuts and Jobs Act (TCJA) restricted the like-kind exchange rules to real estate only. Personalty no longer qualifies for like-kind exchange treatment.

Which of the following dispositions of Section 1245 recapture property would result in the immediate recapture of some or all of previous depreciation deductions? A)A gift of the property B)A sale for cash and an interest-bearing note C)A distribution by a partnership to its partners D)A transfer at death

A sale for cash and an interest-bearing note. A sale of Section 1245 property at a gain will result in Section 1245 recapture. None of the other choices are considered taxable dispositions that would trigger recapture of depreciation (cost recovery) deductions.

Which one of the following statements is true regarding self-employment taxes? A)Self-employed taxpayers are subject to employer withholding. B)Net earnings from self-employment must be calculated under the accrual method of accounting. C)The wage base is not adjusted annually for cost of living increases. D)A taxpayer is allowed to deduct one-half of his self-employment tax liability as an adjustment to income.

A taxpayer is allowed to deduct one-half of his self-employment tax liability as an adjustment to income. A taxpayer may deduct one-half of his self-employment tax liability as an "above the line" adjustment to income. The wage base is adjusted annually for cost of living increases. Net earnings from self-employment are determined under the same accounting method as that used for income tax purposes. Self-employed taxpayers are not subject to employer withholding.

Which of the following is a form of an annuity? 1. Selective annuity 2. Sustained annuity 3. Quick annuity 4. Fixed annuity

Fixed annuity. Selective, quick, or sustained annuities are not recognized categories of annuities. Fixed, variable, immediate, and deferred are all categories of annuities.

Which one of the following is NOT subject to the Medicare contribution tax? A)Qualified dividends B)Long-term capital gains C)Qualified Roth distributions D)Income from a nonperiodic distribution from an annuity

Qualified Roth distributions. Qualified Roth distributions are not subject to the Medicare contribution tax. Only taxable items, such as net capital gains, net rental income, annuity income and dividends, for example, are subject to the Medicare contribution tax.

Kiddie Tax Rules

Under the kiddie tax rules, unearned income in excess of $2,500 (2023) will be taxed at his parents' marginal tax rate.

The effective tax rate is obtained by dividing the amount of tax paid by A)the amount of deductions and credits. B)the average tax rate. C)the correct tax bracket. D)taxable income

taxable income. The effective tax rate is found by dividing total tax by taxable income.

During the current tax year, Jim purchased a warehouse for exclusive use in his manufacturing business. The cost of the property was $620,000, of which $100,000 was attributable to the land. Which of the following statements identify the proper treatment of the expenditure? 1. A portion of the cost attributable to the building may be deducted under Section 179. 2. The $100,000 attributable to the land must be capitalized and may not be depreciated. 3. The $520,000 attributable to the building must be capitalized and depreciated. 4. The entire $620,000 must be capitalized and depreciated.

II and III. Land is not a depreciable asset—only "wasting" assets are subject to depreciation. The building must be capitalized and depreciated over a period of 39 years. Section 179 generally does not apply to realty; it applies to tangible personalty used in the active conduct of a trade or business.

Alternate Valuation Date

The alternate valuation date is 6 months from the date of death. When using the alternate valuation date, the election applies to all assets, with 2 exceptions. One exception is for wasting assets, such as patents, annuities, and installment notes, which must be valued at the date of death. The second exception is for assets disposed of after the date of death, but before the alternate valuation date. These assets are valued as of the date of disposal.

Kurt and Allison Long are married and file a joint income tax return. Their adjusted gross income (AGI) is $180,000 per year. On last year's tax return, the Longs claimed a $1,200 credit for child care expenses. The Longs are in the 22% marginal income tax bracket. What amount of deductions for AGI would be required to equal the tax benefit of the $1,200 child care credit?

$5,455. $1,200 divided by the 22% marginal income tax bracket gives us $5,455.

Janet has carryover losses of $25,000 from a RELP. Her AGI is $200,000 in the current year. She still owns her interest in the RELP. What can Janet do to use her RELP losses against her other income in the current year? I. Sell her entire interest in the RELP to an unrelated party. II. Buy an MLP that generates income. A. I only B. II only C. Both I and II D. Neither I no

A. Losses from a non-publicly traded partnership may only offset income from another non-publicly traded partnership. Her only option is to attempt to sell her entire interest in the RELP to an unrelated party.

Which of the following statements regarding the full or partial sale of a passive activity interest in a particular parcel of real estate is or are CORRECT I. Suspended amounts and credits cannot be used when there is a partial sale. II. Suspended amounts and credits may only be used to offset income for the current passive activity. A. I only B. II only C. Both I and II D. Neither I nor II

A. Only a full sale of a passive activity allows the taxpayer to deduct any suspended losses against passive or portfolio income. The gains must first be applied against income or gain from the passive activity, second, against income from all passive activities, and third, against all other income or gain. Regarding a partial disposition, no suspended losses or credits may be used until the entire activity is sold or disposed of.

imputed interest rules

Gift Loans, Compensation-related loans, Tax-avoidance loans

George, whose wife died last November, filed a joint tax return for last year. He did not remarry after his wife's death and has continued to maintain his home for his two dependent children. In the preparation of his tax return for this year, what is George's filing status?

Qualifying widower. George filed a joint return in the year of his wife's death. He can file as a qualifying widower (also known as surviving spouse) for the two years following his wife's death if he continues to maintain a home for his dependent children.

Under the modified endowment contract (MEC) rules, which of the following is NOT considered a distribution from the MEC? 1. Loans taken as cash or used to pay premiums 2. Dividends received as cash 3. Dividends retained by an insurer to pay premiums 4. Withdrawals from the contract

Dividends retained by an insurer to pay premiums. Dividends retained by the insurer to pay premiums are not treated as distributions from a MEC.

Which of the following taxpayers may owe the additional Medicare tax in 2020? 1. Brad and Jane file jointly and have combined wages of $288,000. 2. Terry's only income in 2020 is from his investments and totals $290,000. 3. Jack has earned $150,000 in compensation from his employment at Bland Foods Inc. 4. Lisa, whose filing status is head of household, is self-employed and has self-employment income of $225,000.

I and IV. Statements I and IV are correct. The additional Medicare tax rate is .9%. An individual is liable for the additional Medicare tax if the individual taxpayer's wages, other compensation, or self-employment income (combined with a spouse if filing as married filing jointly) exceeds the thresholds for the taxpayer's filing status of a combined income greater than $200,000 if single and $250,000 if married filing jointly.

Which of the following is a CORRECT statement regarding the wash sale rules? 1. Small differences in the maturity dates of bonds will not cause them to be classified as substantially identical. 2. The wash sale rules do not apply to dealers. 3. The wash sale rules do not apply to sales and investments in mutual funds. 4. Basis is generally decreased by the amount of the loss that is disallowed on a wash sale.

The wash sale rules do not apply to dealers.

The basic income tax formula is

income (broadly conceived) less exclusions from gross income, less adjustments for AGI and the greater of the standard deduction or the itemized deduction to equal taxable income.

All of the following statements regarding the installment method of reporting gain from a disposition of property are correct except A)an installment sale is a sale of property in which the seller receives at least one payment after the year of sale. B)the installment method permits the seller to spread out the taxable gain over more than one year. C)the payments received under an installment sale may each include capital gains, return of capital, and interest. D)the installment sale method may be used for securities sold in the secondary market.

the installment sale method may be used for securities sold in the secondary market. The installment sale method cannot be used for inventory or securities traded in the secondary market.

Kerri, a single taxpayer who itemizes deductions, incurred $5,000 in management fees relating to her taxable investments. Her AGI is $100,000, which includes $20,000 of investment income. How much investment expense (Section 212 expense) can she deduct for this year?

$0 Investment expenses other than investment interest expenses are not deductible.

Phillip's personal automobile was almost destroyed in an accident. The insurance company paid $6,000 on the claim. The auto's fair market value before the accident was $16,000, and the value after the accident was $1,000. His basis in the automobile was $12,000. Phillip's AGI is $42,500. What is the amount of Phillip's deductible casualty loss?

$0. As a result of the Tax Cuts and Jobs Act (TCJA), casualty losses are only allowed for damages sustained within a federally declared disaster area. Thus, there is no deduction for this loss. If the loss had been incurred in a federally declared disaster area (as a result of the disaster), the deductible casualty loss computation would begin with the lesser of the decrease in fair market value ($15,000 decrease in FMV) or the adjusted basis in the property. In this situation, the adjusted basis of $12,000 must be reduced by a $100 floor, the insurance of $6,000, and further reduced by 10% of the adjusted gross income. Thus, $12,000 reduced by $100, $6,000 insurance, and further reduced by $4,250, equals $1,650.

In the current tax year, Fay has short-term capital loss carryovers of $5,000 and long-term capital loss carryovers of $40,000, both carried over from the previous year. Her net short-term gain for this year is $6,000, and her net long-term gain for this year is $5,000. How much of her gain for this year will be taxable?

$0. Fay can apply her short-term capital loss carryover to all current short-term capital gains, which results in a net short-term capital gain for this year of $1,000 ($6,000 gain − $5,000 carryover). She is then left with a net long-term capital loss of $35,000 ($5,000 gain − $40,000 carryover). To calculate net capital gains for the year, aggregate the long-term and short-term gains or losses, which in this case equals $35,000 long-term loss − $1,000 short-term gain, or a $34,000 net capital loss. She has no net gain and, as such, pays no taxes on any of the capital transactions she made this year.

Lindsey is age 2 and her total income was $6,000 in qualified dividends in 2020. What is the tax on the dividends at Lindsey's rate? A)$30 B)$95 C)$0 D)$143

$0. Lindsey is in the 10% marginal income tax bracket. She can use the long-term capital gains tax rate on qualified dividends received. At her income and filing status, that capital gain tax rate is 0%.

Lindsey is age 2 and she received $6,000 in municipal bond interest income and $900 in other interest income in 2020. What is the total federal income tax due on her income in 2020?

$0. Lindsey owes no federal income taxes in 2020. Municipal bond interest income is not taxable. The $900 in other interest income is less than Lindsey's $1,100 standard deduction amount.

Clare is a single taxpayer. In 2020, her AGI is $235,000, including a net long-term capital gain of $50,000. What is the amount, if any, of Medicare contribution tax that she must pay? A)$1,330 B)$570 C)$1,900 D)$0

$0. She will pay the 3.8% Medicare contribution tax on $35,000. This is the lesser of the net investment income ($50,000) or the AGI in excess of the threshold amount ($235,000 - $200,000, or $35,000). In this situation, only $35,000 of the net investment income is subject to the Medicare contribution tax. Clare will pay a $1,330 Medicare contribution tax (3.8% on $35,000).

Ethel had the following from securities transactions during the current year: Long-term capital gain: $6,400 Long-term capital loss: $2,200 Short-term capital gain: $2,300 Short-term capital loss: $5,500 Which of the following describes the net capital gain or loss reportable by Ethel for the current tax year?

$1,000 net long-term capital gain. Long-term transactions are netted together, as are short-term transactions. The net long-term capital gain is $4,200 ($6,400 - $2,200). The net short-term capital loss is $3,200 ($2,300 - $5,500). The net short-term capital loss is netted with the net long-term capital gain ($4,200 - $3,200) to result in a net long-term capital gain of $1,000.

In February, Bryan purchased a new high-speed copier for use in his printing business. The cost of the copier was $8,250, sales taxes were $550, and installation charges totaled $1,200. Assume that Bryan opts out of the bonus depreciation provision. What is the first-year cost recovery deduction using the straight-line method? A)$880 B)$945 C)$1,000 D)$2,000

$1,000. The installation charges of $1,200 and the sales taxes of $550 must be capitalized—that is, added to the cost of the copier to give a total basis of $10,000. A copier is five-year property. (Copiers, cars, computers, and computer peripherals are five-year properties; furniture and other equipment are seven-year properties.) The straight-line rate for five-year property is 20% (100% divided by five), but the half-year convention limits the deduction to half of a full year's depreciation in the year of acquisition. Thus, $10,000 times 10% equals $1,000. If Bryan had not opted out of bonus depreciation, the entire $10,000 would be depreciated in the first year.

John and Karen Postman will spend a total of $5,000 on day care for their two children (ages 9 and 10) in the current tax year. These expenses were incurred to allow both John and Karen to work outside the home. Their adjusted gross income is estimated at $138,000. What is the amount of child and dependent care credit, if any, to which they are entitled?

$1,000. The maximum amount of qualifying expenditures on which the credit may be based is $3,000 per child, or $6,000 for two or more children. In this situation, they spent $5,000. This is multiplied by 20% for taxpayers with an AGI greater than $43,000. Thus, $5,000 × 20% = $1,000.

Jim owns an apartment building with a fair market value of $225,000 and an adjusted basis of $85,000. He wants to acquire Frank's duplex, which has a fair market value of $240,000 and an adjusted basis of $130,000. In the exchange, Jim will pay Frank $15,000 in cash. What is Jim's substitute basis in the acquired duplex? A)$140,000 B)$225,000 C)$100,000 D)$240,000

$100,000. Jim is receiving an FMV of $240,000 for the duplex. He is giving up an adjusted basis of $85,000 plus $15,000 cash. The difference between the $240,000 received and the $100,000 given up is the realized gain of $140,000. The gain recognized (the taxable amount reported on the income tax return) in a like-kind exchange is the lesser of gain realized ($140,000) or boot received ($0). The substitute basis in an asset acquired in a like-kind exchange is the FMV of the qualifying property received ($240,000) reduced by the gain realized, but not recognized ($140,000 - $0 = $140,000). Thus, $240,000 - $140,000 = $100,000.

John owns a classic automobile that had a cost basis of $32,000. John paid $38,000 to have the automobile fully restored. John sells the automobile through an installment sale for $100,000. John is to receive a $25,000 down payment in the current year, and $15,000 per year for five years, beginning this year. What amount of gain must John recognize during the current year?

$12,000. The profit on the sale was $30,000 divided by the $100,000 contract price, which equals a 30% gross profit percentage. This is multiplied by the $40,000 of payments received during the year to calculate the amount of gain recognized, $12,000. The $38,000 of restoration costs are capitalized, added to basis, to give us the $70,000 basis.

During 2020, your client, Bob, purchased several items of equipment with a total cost of $265,000 for use in his sole proprietorship. Bob has taxable (earned) income from his Schedule C business of $112,000 (without regard to the Section 179 expense). He also has wages from a part-time job of $10,000. What is the maximum amount of Section 179 expense that Bob may deduct in the current year?

$122,000. The Section 179 expense election is limited to the taxable (earned) income of the taxpayer. For purposes of Section 179, salary or wages received as an employee, even from a completely unrelated source, are also considered to be from the active conduct of the trade or business. Thus, the total taxable (earned) income in this situation is $122,000. The maximum Section 179 expense election is $1.04 million (for 2020), but for Bob, it is limited to his earned or taxable income of $122,000 (increased by the Tax Cuts and Jobs Act, or TCJA).

Jeff Munroe has an annual salary of $140,000 and is not an active participant in a company-maintained retirement plan. He had the following financial transactions during the current tax year: Received a $100,000 cash inheritance due to the death of his brother Received unemployment compensation of $2,000 Had a Schedule C loss of $10,000 (assume material participation) Made an IRA contribution of $6,000 Paid qualified student loan interest of $2,000 What is Jeff's total income for the current tax year?

$132,000. The $140,000 salary is reduced by the $10,000 self-employment loss and increased by the unemployment compensation of $2,000. The inheritance is excluded. The IRA contribution is a potential adjustment to income, as is the student loan interest. Thus, those items do not affect the total income. Remember that total income is the figure approximately two-thirds of the way down the front of the 1040. It is the figure from which allowable adjustments to income are subtracted.

Several years ago, Allison Colbert purchased a deferred fixed annuity. The cost of the annuity was a single payment of $40,000. The annuity will provide monthly payments of $275. At the time the annuitized distributions are to begin, Allison's life expectancy will be 25 years. How much of each payment will be excluded from taxation?

$133 Allison is expected to receive $82,500 ($275 × 12 × 25). Her investment in the contract ($40,000) is then divided by the total expected return ($82,500) to determine the excludable portion of each payment. The exclusion ratio is the $40,000 divided by $82,500, which equals 48.48%. 48.48% of $275 = $133 excludable from each payment.

Steve and Allison Parker, a married couple in their 40s, file a joint return. They earned combined salaries of $185,000. They received dividend and interest income of $860 from mutual funds. They have allowable itemized deductions of $14,000. They have net capital losses of $5,200. They have two children, ages 12 and 14. What is their taxable income for the 2020 tax year?

$158,060. The salaries combined with the income from the investments total $185,860. This is reduced by the $3,000 net capital loss to leave an AGI of $182,860. Remember that only $3,000 of net capital loss may be deducted in a given tax year. The AGI is then reduced by the greater of the itemized deductions ($14,000) or the standard deduction ($24,800 in 2020). The deduction for personal and dependency exemptions was repealed by Tax Cuts and Jobs Act (TCJA).

Marcus purchased a diamond ring for $15,000 10 years ago. It was stolen in March this year. The ring was purchased to celebrate achieving a significant promotion at work. The FMV at the time of the theft was $20,000. The ring was insured, and after the deductible, Marcus received $19,000 from the insurance company. Marcus replaced the ring with a new one for $20,000. Under Section 1033, what is Marcus's new basis in the replacement ring?

$16,000. Marcus's deferred gain on the new ring is $4,000. His new basis is the FMV of the property at acquisition minus the deferred gain ($20,000 − $4,000 = $16,000).

Terry and Jan are married taxpayers filing a joint tax return. In 2020, their AGI is $310,000, and their net investment income (included in the AGI) is $90,000. What is the amount of their Medicare contribution tax for 2020? A)$0 B)$4,180 C)$2,280 D)$3,420

$2,280. Terry and Jan will pay the 3.8% Medicare contribution tax on $60,000. This is the lesser of the net investment income ($90,000) or the AGI in excess of the threshold amount ($310,000 - $250,000, or $60,000). In this situation, only $60,000 of the net investment income is subject to the Medicare contribution tax and calculates to $2,280 (60,000 × 0.038).

For the current tax year, Bob Phillips, an individual taxpayer filing a joint return, has $50,000 of investment interest expense and $20,000 of net investment income (interest and dividends). Bob's AGI is $200,000. How much investment interest expense, if any, may Bob deduct in the current tax year? A)$50,000 B)$0 C)$20,000 D)$21,000

$20,000. Investment interest expense is deductible up to the amount of net investment income. The problem tells us that the net investment income is $20,000; thus that is the maximum deduction. The fact that the dividends are included in the net investment income indicates that the taxpayer elected to include them in investment income and is forgoing the preferential rates associated with qualified dividends. The AGI has no bearing on the answer.

Marge had net earnings from self-employment of $150,000 in 2020. What is her total self-employment tax?

$21,092. Self-employment income$150,000.00 Less $150,000 × 0.0765($11,475.00) Equals net earnings $138,525.00 Less 2020 taxable wage base($137,700) Equals SE income subject to Medicare tax$825 Multiplied by 0.029 Equals Medicare portion of SE tax $24 Add $137,700 × 0.153= $21,068 + SE Tax ($24)= Total self-employment tax$21,092

Michelle Will has interest income of $23,000 in the current tax year. She paid brokers' commissions of $2,000 on stock purchases and had $40,000 of investment interest expense. What amount, if any, of investment interest expense may be deducted as an itemized deduction? A)$0 B)$21,000 C)$23,000 D)$33,000

$23,000

John and Mary West, married taxpayers filing jointly, have itemized deductions consisting of the following: Home mortgage interest$12,000 State income taxes$18,000 Property taxes$5,150 Charitable contributions$2,250 Unreimbursed employee business expenses$3,200 Medical expenses$14,000 Sales taxes paid$2,650 The Wests' AGI for 2020 is $400,000. What is the amount of allowable itemized deductions?

$24,250. Unreimbursed employee expenses are no longer deductible since the Tax Cuts and Jobs Act (TCJA). The medical expenses are deductible only to the extent that they exceed 7.5% of AGI (for 2020), which they do not. The sales taxes would only be deductible in lieu of state income taxes. The overall deduction for taxes (state, local, and property) is limited to $10,000 as a result of TCJA. Home mortgage interest$12,000 State, local, and property taxes$10,000 Charitable contributions$2,250 Total itemized deductions$24,250

Bruce and Melissa Parish, married taxpayers filing jointly, have the following items related to their investments during the current tax year: Investment interest expense $5,000 Interest income $2,500 Short-term capital gains $1,000 Investment adviser's fees $1,250 Commissions paid on stock purchase $200 Adjusted gross income $60,000 What is the Parishes' allowable investment interest expense deduction for the current year?

$3,500. Investment interest expense is limited to the taxpayer's net investment income of $3,500.

Assume that married taxpayers filing jointly have a taxable income of $175,000. Using the following tax rate schedule, what is the amount of federal income tax? Round your answer to the nearest dollar.

$30,159. Taxable income$175,000 Less (from tax rate schedule)(171,050) Amount over $171,050$3,950 Times (marginal rate, from tax rate schedule) 24%Tax on amount over $171,050$948 Plus (from tax rate schedule)$29,211 Total Tax$30,159

Four years ago, Mark received a gift of 500 shares of common stock from his grandfather. The fair market value of the stock on the date of the gift was $335 per share. His grandfather had purchased the stock three years earlier at $425 per share. Mark sold this stock for $200 per share last week. What was Mark's basis in the stock when he sold it?

$335 per share. When the fair market value on the date of the gift is less than the donor's basis in the asset and the sale price is less than the fair market value on the date of the gift, then the fair market value on the date of the gift is used as the donee's basis.

Frank, a single taxpayer, owned a warehouse that he rented as commercial property. He acquired the property several years ago for $196,000. He used the straight-line method of cost recovery, which totaled $35,000. Frank sold the property in February of the current year for $230,000. Frank is single, and has taxable income (not including the real estate gain) of $475,000. What is the amount and nature of the gain on the sale? A)$7,000 ordinary income B)$34,000 Section 1231 gain; $35,000 ordinary income C)$69,000 ordinary income D)$35,000 unrecaptured Section 1250 gain; $34,000 long-term capital gain

$35,000 unrecaptured Section 1250 gain; $34,000 long-term capital gain. The entire gain of $69,000 is treated as Section 1231 gain, because there is no excess depreciation on the use of the straight-line method. So, $35,000 of the gain is subject to a maximum rate of 25%, as unrecaptured Section 1250 income, and the remaining $34,000 of gain is subject to the maximum regular long-term rate of 20%. The 20% long-term capital gain rate applies, as his taxable income is over the $425,800 breakpoint for the 20% rate. Note that Section 1250 recapture (ordinary income treatment) applies only to excess depreciation—in other words, the excess of an accelerated method over what would have been deducted if straight-line had been used. All realty placed in service after 1986 is depreciated using straight-line, and there is NO recapture (ordinary income) where straight-line depreciation was used.

Janet and Bruce Robinson, both age 43, are married taxpayers filing jointly. They have itemized deductions consisting of the following: Home mortgage interest$19,500 State income taxes$8,700 Property taxes$5,200 Charitable contributions$6,200 Tax return preparation fee$895 Unreimbursed employee business expenses$2,100 Unreimbursed medical expenses$18,460 Their AGI for 2020 is $466,000. What is the amount of their allowable itemized deductions?

$35,700. The total itemized deduction amount is $35,700. Note that the tax preparation fee and the unreimbursed employee business expenses are not deductible. The medical expenses are deductible only to the extent that they exceed 7.5% of AGI for 2020, which they do not. The deduction for the state income taxes and the property taxes is capped at $10,000. Taxes of $10,000, mortgage interest of $19,500, and charitable contributions of $6,200 total $35,700.

Eleven months ago, Lynnette received 1,000 shares of stock from her uncle, Joseph. Joseph purchased the stock eight years ago for $12 per share. The fair market value on the date of the gift to Lynnette was $9 per share, and she sold the stock today for $5 per share. What is the amount and character of Lynnette's loss from the sale of the stock? A)$7,000 long-term capital loss B)$4,000 short-term capital loss C)$3,000 short-term capital loss D)$3,000 long-term capital loss

$4,000 short-term capital loss. There are two components to this question. What is the basis, and is there tacking of the holding period? When the fair market value on the date of the gift is less than the donor's basis in the asset, the donee's basis in the asset for purposes of determining a loss is the asset's FMV on the date of the gift. In this situation, the $9 per-share value on the date of the gift would be Lynnette's basis. The next issue is the "tacking" of the holding period. In a situation where the donee uses the FMV as the basis, there is no tacking of the holding period. In this situation, Lynnette used the FMV; thus, she uses her own holding period of 11 months. If the donee uses the donor's basis, then the holding period is tacked. In other words, the donor's holding period is added to ("tacked") the donee's holding period.

A client sold an apartment building last year for $100,000, paying a sales commission of $5,000 plus $2,500 in closing costs. The building originally cost $80,000 20 years ago. Total straight-line depreciation of $40,000 had been taken. The building had a mortgage of $60,000 that was assumed by the buyer. The client is in the 24% marginal income tax bracket. What is the seller's adjusted cost basis? A)$37,500 B)$40,000 C)$32,500 D)$52,500

$40,000. The seller's adjusted basis is the $80,000 purchase price, decreased by the $40,000 of straight-line depreciation. The mortgage has no bearing on the basis of the property.

Susan received 100 shares of stock as a gift from her uncle, Carl. Carl purchased the stock 15 years ago for $12 per share. Susan received the stock from Carl two months ago, when the fair market value of the stock was $15 per share, and she sold the stock this week for $19 per share. What is the amount and character of Susan's gain from the sale of the stock? A)$400 long-term capital gain B)$400 short-term capital gain C)$700 long-term capital gain D)$700 short-term capital gain

$400 short-term capital gain. In the case of an asset received as a gift, where the fair market value on the date of the gift is greater than the donor's adjusted basis, the recipient has a carryover basis. In this case, Uncle Carl had purchased the stock for $12 per share and had gifted it to Susan when the fair market value was $15 per share. Susan subsequently sold the stock for $19 per share. Thus, the carryover basis from Uncle Carl would be $12 per share. In a situation where the recipient of the gift takes the donor's basis, the holding period is tacked. In other words, the donor's holding period is added to the donee's holding period. Thus, Susan is treated as holding the stock for over 15 years.

Helen purchased an antique cabinet as an investment for $30,000 a few years ago. On January 15 of this year, she sold the cabinet to an art museum for $120,000 in an installment sale. She received a down payment of $12,000 and a note requiring monthly principal payments (to begin in March of this year) of $5,000. What amount of gain must Helen recognize for the current year? A)$42,500 B)$46,500 C)$50,000 D)$62,000

$46,500. Step 1: Calculate gross profit percentage: profit divided by sale price. $90,000/ $120,000=75% Step 2: Calculate payments received in current year. $12,000 down payment + (10 × $5,000) = $12,000 + $50,000 = $62,000 (payments received) Step 3: Calculate gain recognized for current year. gross profit percentage × payments received = gain recognized 75% × $62,000 = $46,500

Which of the following benefits that Claudia has received from her employer can be excluded from taxation? A) A company car that she uses for personal vacations. B) A year-end bonus. C) $5,000 of graduate education assistance. D) An athletic membership at a local club valued at $1,500 per year.

$5,000 of graduate education assistance. Undergraduate and graduate education assistance is excluded from an employee's income in any one year period, up to a maximum of $5,250. The other options are fully taxable.

Three years ago, Sam received a gift of 100 shares of common stock from his uncle. The fair market value of the stock on the date of the gift was $12 per share. His uncle had purchased the stock four years earlier at $5 per share. Sam sold this stock for $17 per share last week. What was Sam's per-share basis in the stock when it was sold? A)$17 B)$5 C)$12 D)$22

$5. If the fair market value on the date of the gift is greater than the donor's adjusted basis, the donor's adjusted basis is used as the recipient's basis. Note that the donor's holding period would be tacked to the donee's holding period.

Matthew Brady, age 47, purchased a deferred annuity in January 1982 for $50,000. In the current year, when the surrender value was $125,000, Matthew took a nonperiodic distribution of $75,000. Which one of the following statements correctly describes the income tax consequences of the distribution? A) $50,000 is tax free, $25,000 is taxable. B) $75,000 is taxable income. C) $50,000 is taxable, $25,000 is tax free. D) $75,000 is tax free.

$50,000 is tax free, $25,000 is taxable. The pre-August 14, 1982, annuity retains first-in, first-out (FIFO) treatment. Thus, the basis of $50,000 is treated as being withdrawn first and is tax free. The remaining $25,000 is taxable. If this were a post-August 13, 1982, contract, it would be treated on a last-in, first-out (LIFO) basis.

Jane, age 35, whose filing status is single, earned a salary of $55,000 in 2020. She also made a $2,000 contribution to her Roth IRA for 2020. Jane had a capital loss of $3,000 during the year. Her uncle, Charles, gave her $100,000 in municipal bonds for which she earned interest of $3,500. In her employment as a sales representative for her company, Jane incurred $650 of unreimbursed business expenses. What is Jane's adjusted gross income (AGI)?

$52,000. Jane's AGI is $52,000 ($55,000 ‒ $3,000). Jane's $3,000 capital loss is a deduction for calculating AGI. Roth IRA contributions are never deductible from gross income. Municipal bond interest is not included in income. The unreimbursed business expenses are not deductible.

On December 20, 2003, Jody moved into a condominium that she owns and had rented to tenants since July 1, 1996. Her cost basis in the condo was $238,440. Jody took depreciation deductions totaling $54,000 for the period that she rented the property. After moving in, she used the residence as her principal residence. Jody sells the property on August 1, 2020, for $538,000. Jody is in the highest marginal income tax bracket for the current year. What is the amount and character of the recognized gain resulting from the sale? A)$54,000 of unrecaptured Section 1250 income; $49,560 of "regular" long-term capital gain B)$54,000 of unrecaptured Section 1250 income; $299,560 of "regular" long-term capital gain C)$353,560 "regular" long-term capital gain D)$54,000 of ordinary income; $49,560 of "regular" long-term capital gain

$54,000 of unrecaptured Section 1250 income; $49,560 of "regular" long-term capital gain. Jody's gain realized (the actual economic gain) from the sale is $353,560 ($538,000 of sales proceeds reduced by the adjusted basis of $184,400). Of this $353,560 of gain, the first $54,000 is recognized as unrecaptured Section 1250 gain, taxed at 25%. Unrecaptured Section 1250 gain is the gain created by the straight-line depreciation. This leaves $299,560 of gain to account for. Jody used the condo as her principal residence for two full years—thus, she is eligible to exclude $250,000 under Section 121. This leaves $49,560 of long-term capital gain to be recognized at a 20% rate (because she is in the highest marginal income tax bracket, her taxable income exceeds the $425,800 breakpoint for the 20% LTCG rate). The recognized gain is the gain on which Jody will pay taxes. Note that the nonqualified use provision does not come into play here as there was no nonqualified use after 2008.

Tom Bell has investment income (interest) of $8,000 in the current year. He paid $1,200 in investment adviser fees and had $7,000 of investment interest expense. His AGI is $35,000. What amount of investment interest expense may be deducted in the current year as an itemized deduction?

$7,000. Investment interest expense is deductible up to the amount of investment income. The investment income is the interest income of $8,000. However, the deduction cannot exceed the actual investment interest expense of $7,000. Historically, the adviser fees would impact the calculation, but the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated the Tier II miscellaneous itemized deductions.

Mike has interest and short-term capital gain income of $9,000 in the current tax year. He paid broker commissions on security purchases of $1,000, paid $1,800 for investment adviser fees, and had $8,500 of investment interest expense. His AGI is $225,000. What amount of investment interest expense may be deducted as an itemized deduction?

$8,500. Investment interest expense is deductible up to the amount of net investment income, which is $9,000. The net investment income is simply the investment income (interest and short-term capital gains) of $9,000. Remember that the investment adviser fees were a Tier II miscellaneous itemized deduction, which are no longer deductible under the TCJA. The commissions are not a deductible item. The commissions increase the basis of the securities upon purchase and reduce the gain realized upon sale.

All of the following deductions are allowable in arriving at adjusted gross income except 1. 100% of self-employment tax paid. 2. alimony paid. 3. qualifying contributions to Keogh-qualified and self-employed tax-advantaged plans. 4. student loan interest (limited).

100% of self-employment tax paid. The deduction for self-employment tax paid is generally limited to the calculated employer share, or 50%, not 100%.

Sheila, a single taxpayer, has taxable income of $460,000. Included in the taxable income is $50,000 of qualified dividends. At what rate(s) will her qualified dividends be taxed? A)25% B)20% only C)15% only D)15% and 20%

15% and 20%. The qualified dividends straddle the $441,450 breakpoint (for 2020). Thus, a portion fall into the $40,001 to $441,450 range and are taxed at 15%. The dividends above the $441,450 breakpoint are taxed at 20%.

Which of the following are adjustments to gross income (above-the-line deductions)? 1. Medical expenses 2. Capital losses 3. Deductible IRA contributions

2 and 3. Medical expenses are an itemized (below-the-line) deduction.

If Jason files single with gross income of $110,000 and taxable income of $91,000, what is his effective tax rate based on the following tax information?

24%(91,000 ‒ 85,525) + 14,605 = $1,314 + 14,605 = $15,919 ÷ $91,000 = 17.49%.

Neil McElroy is an engineer for Causley Computer Inc. In addition, Neil operates a janitorial service that cleans several local office buildings. Neil was divorced in 2019, and his wife received custody of their two children. He has assembled the following information for preparation of his tax return for the current tax year. Neil's salary$71,500 Interest income$9,500 Monthly alimony paid to ex-spouse $1,500 Monthly child support$500 Purchase of equipment for use in janitorial service$10,000 IRA contribution$6,000 Based on the information given, which of the following are fundamental methods of managing Neil's tax liability? 1. Tax credit: Neil could take an investment tax credit for purchases of qualifying business equipment. 2.Deductions for AGI: Neil may deduct alimony payments of $18,000 made to ex-spouse. 3. Deductions for AGI: Neil may deduct child support payments of $6,000. 4. Exclusions: Neil could have invested in municipal bonds to receive tax-free income.

4 Only. Neil may not deduct alimony paid to his former spouse because the deduction is disallowed for alimony under divorce decrees in 2019 and thereafter. He may invest in municipal bonds to receive tax-free income. There is no investment tax credit for equipment purposes. Some students confuse this with the Section 179 expense election, but that provision provides a deduction, not a credit. Child support payments are specifically nondeductible.

Gift loans

A gift loan can only occur between individuals. The lender has interest income, and the borrower has interest expense to the extent of the imputed interest. In addition, a gift has been made to the borrower (subject to federal gift tax) in the amount of imputed interest. However, there are several exceptions to the application of the rule. - No interest is imputed on total outstanding gift loans in the aggregate of $10,000 or less between individuals, unless the proceeds from the loan are used to purchase income-producing property. - For loans between individuals in an amount greater than $10,000 and less than or equal to $100,000, the imputed interest cannot exceed the borrower's NII for the year. - If the borrower's NII for the

In the current year, Bob invested $50,000 for a 20% interest in a partnership in which he was a material participant. The partnership incurred a loss, and Bob's share was $75,000. Which of the following statements regarding Bob's investment is NOT correct? A. Because Bob has only $50,000 of capital at risk, he cannot deduct more than $50,000 against his other income. B. Bob's nondeductible loss of $25,000 may be carried forward and used when the at-risk rules permit the claiming of such amount. C. If Bob has taxable income of $30,000 from the partnership in the following year (and no other transactions that affect his at-risk amount), he can use all of the $25,000 loss carried forward from this year. D. Bob's $75,000 loss is nondeductible in the current year and in the following year under the passive activity loss rules.

A. The correct analysis of the tax treatment of Bob's income is that he is limited to a $50,000 deduction against his other income because that is his at-risk amount. The remaining $25,000 is a loss carryforward. If he has taxable income of $25,000 or more in subsequent years, Bob's disallowed loss may be taken. Because Bob is a material participant in the partnership, the PAL rules do not come into play.

Seven years ago, Karen Price purchased U.S. EE savings bonds for $5,000. During the current year, when Karen was 27 years old, she redeemed the bonds to help pay for her graduate school tuition. The accrued value at the time of redemption was $7,000. Assume Karen incurs $11,000 of tuition expenses in the year. What are the tax consequences upon the redemption of the bonds?

All accrued interest is taxable in the current year. The exclusion for EE bond interest redeemed to pay for qualifying higher-education expenses applies only to bonds purchased by an individual age 24 or older, and held in that person's name, or jointly with a spouse. Karen is 27 years old; the bonds were purchased 7 years ago, when Karen was approximately 20. Because Karen does not qualify for the exclusion of the interest income because she was not age 24 or older at the time of purchase. All the interest is taxable in the year the bonds are redeemed. Remember that the interest of EE bonds is deferred until maturity, unless an election has been made to have the interest taxed each year as it accrues. Also, the interest income from EE bonds (and other federal government obligations) is generally not subject to state income tax.

Eight years ago, Joan Allen, a married taxpayer filing jointly, purchased U.S. Series EE savings bonds for $6,000. She titled the bonds jointly with her husband, Hank. During the current year, when Joan was 35 years old, they redeemed the bonds to help pay for Joan's graduate school tuition. The accrued value at the time of redemption was $8,000. Their AGI for 2020 is estimated to be $100,000. Assume Joan incurs $8,000 of tuition expenses during the year. What are the tax consequences upon the redemption of the bonds? A) All accrued interest is taxable in the current year. B) A portion of the interest may be excluded. C) The interest is taxable at both state and federal levels. D) All the interest may be excluded

All the interest may be excluded. The EE bond exclusion (for educational purposes) is phased out (for married couples filing jointly) between $123,550 and $153,550 of AGI in 2020. There is no exclusion available when AGI exceeds $153,550. It is not necessary to memorize the exact phaseout amounts because they will be provided on the exam. To qualify for the exclusion, the bonds must be purchased by an individual age 24 or older and held in that person's name, or jointly with a spouse. EE bonds are not taxable at the state level.

Carter, an unmarried individual, had an AGI of $180,000 in the current year before any other above-the-line deductions. He incurred a loss of $30,000 from rental real estate in which he actively participated. What amount of loss, if any, may be used in the current year as an offset against Carter's active or portfolio income?

An exception to passive loss limits regarding rental real estate allows a small investor to deduct annually up to $25,000 of losses against other income. However, this annual deduction is reduced by 50% of the taxpayer's AGI in excess of $100,000. Thus, the deduction is entirely phased out at $150,000 of AGI. Carter's AGI is more than this, so he cannot deduct any of his $30,000 loss

Qualified Dividends

Are taxed at the rates applicable to long-term capital gains. A 0% rate applies to qualified dividends if the taxpayer's taxable income is less than $80,000 (for married couples filing jointly); a 15% rate applies for qualified dividends if they fall between the taxable income breakpoints of $80,000-$496,600 (for married couples filing jointly). A 20% rate applies to qualified dividends above the $496,600 breakpoint (for married taxpayers filing jointly). There are different breakpoint figures for different filing statuses. These rates apply for both the regular tax and the alternative minimum tax (AMT).These figures are for 2020 and are indexed for inflation.

Double Basis Rule

Because the fair market value (FMV) on the date of the gift was less than the donor's (Joan's) adjusted tax basis, the double basis rule applies. Under the double basis rule, no gain or loss is recognized if the donee sells the property at a price that is between the donor's adjusted basis and the FMV on the date of the gift.

Your client, Elaine Dell, is near the highest tax bracket and is contemplating several investments. She is, however, concerned about minimization of her federal income tax liability on the income from the investment. Which of the following investments would produce income that would be taxed at the lowest potential tax rate? A) A corporate bond fund B) A certificate of deposit C) A utility stock with a high dividend yield D) A zero coupon bond

C) A utility stock with a high dividend yield. Qualified dividends are generally taxed at a 15% rate (or 20% for taxpayers with higher income levels). All of the other options produce interest income, which is taxable as ordinary income, at the marginal rate of the taxpayer.

Joel just purchased an interest in a partnership. As a limited partner, he will not participate in management decisions of the partnership. Which of the following statements regarding the tax implications of this arrangement is CORRECT? I. Joel must take into consideration the at-risk rules. II. Joel is subject to the passive activity loss rules. A. I only B. II only C. Both I and II D. Neither I nor II

C. Joel will be subject to both the at-risk rules and the passive activity loss rules when determining the deductibility of any losses on the rental activity.

Joseph, age 54 and single, earns a salary of $190,000 working for a manufacturing company. He is an avid saver and over the years has amassed an investment portfolio of $2 million. He expects the portfolio to appreciate in value at an average rate of 8% per year. Last year, he received dividends and interest from the portfolio of $40,000. After speaking with a financial planner, Joseph decided to invest $50,000 of his portfolio to purchase a 15% interest in a passive activity. Operations of the activity have now resulted in a loss of $400,000, of which Joseph's share is $60,000. How is Joseph's loss for the current year characterized for income tax purposes? A. $60,000 is suspended under the passive activity loss rules. B. $60,000 is suspended under the at-risk rules. C. $10,000 is suspended under the at-risk rules, and $50,000 is suspended under the passive activity loss rules. D. $50,000 is suspended under the at-risk rules, and $10,000 is suspended under the passive activity loss rules.

C. The at-risk rules must be applied before the passive loss rules. Joseph invested $50,000 in the passive activity. Therefore, his at-risk amount is $50,000. Because his share of the loss from the activity is $60,000, Joseph will be allowed to deduct only $50,000, his amount at risk. In addition, $10,000 of the loss ($60,000 total less $50,000 deductible under at-risk rules) has been suspended because of the at-risk rules and must be carried forward. Even though Joseph has a $50,000 loss after applying the at-risk rules, he is still not permitted a deduction for the loss because he has no passive income. Through application of both rules, the entire loss of $60,000 is suspended for the current tax year.

Which of the following is NOT a step in the tax calculation process? A)Claim allowable tax credits. B)Deduct the greater of itemized deductions or the standard deduction from AGI to arrive at taxable income. C)Subtract adjustments to income from total income to get adjusted gross income. D)Calculate federal tax on total income.

Calculate federal tax on total income. The following are involved in the income tax computation: subtracting adjustments to income from total income to get adjusted gross income, subtracting tax withholdings from total tax liability, and deducting the greater of itemized deductions or the standard deduction from AGI to arrive at taxable income. Credits are applied to tax liability. The calculation of federal tax is on federal taxable income.

During 2020, Judy, a sole proprietor, purchased new equipment (seven-year property) for her manufacturing business at a cost of $600,000. Judy is in a 12% marginal income tax bracket this year, and expects to be in that bracket for two more years. She is extremely confident that she will be in the highest marginal bracket after that. What advice would you give Judy regarding the use of bonus depreciation and cost recovery deductions? A)Use the maximum bonus depreciation and use the Modified Accelerated Cost Recovery System (MACRS) table. B)Forgo bonus depreciation and use the Modified Accelerated Cost Recovery System (MACRS) table. C)Use the maximum bonus depreciation and elect the straight-line method. D)Forgo bonus depreciation and elect the straight-line method.

D. The fact pattern indicates that Judy is in the lowest marginal bracket for three years, and will be in the highest marginal bracket after that. It makes no sense to maximize the depreciation deduction in years when Judy is in the lowest marginal brackets. By forgoing bonus depreciation and using straight-line, more deductions are pushed into the last five years of the depreciation schedule, when Judy will be in the highest marginal bracket. Remember that because of the half-year convention, seven-year property is depreciated over eight years. Under TCJA, 100% bonus depreciation is allowed for all personalty. In other words, 100% of the cost is deducted in the first year.

Which one of the following is CORRECT regarding the Coverdell Education Savings Account? A)Distributions may be tax free only if made for a full-time student. B)Deductible contributions of up to $2,000 may be made per beneficiary. C)Distributions may be tax free even if made for K-12 expenses. D)Room and board may be covered with a tax-free distribution only if the student is full-time.

Distributions may be tax free even if made for K-12 expenses. The predominant benefit of the Coverdell ESA is distributions may also be used to pay for K-12 expenses. This is unlike the 529 plan which is designed primarily to pay for college expenses (Note: a limited amount of $10,000 may now be withdrawn from a 529 for K-12 expenses per the TCJA).

Which of the following statements correctly defines inside buildup as it refers to life insurance? A) During the insured's lifetime, the accumulations of cash value within a policy grow on a tax-free basis. B) During the insured's lifetime, the accumulations of cash value within a policy grow on a tax-preferred basis. C) During the insured's lifetime, the accumulations of cash value within a policy grow on a tax-annuitized basis. D) During the insured's lifetime, the accumulations of cash value within a policy grow on a tax-deferred basis.

During the insured's lifetime, the accumulations of cash value within a policy grow on a tax-deferred basis. Accumulations of cash value within a life insurance policy grow on a tax-deferred basis during the insured's lifetime.

Which one of the following statements is incorrect regarding investment interest expense? A) Excess investment interest expense cannot be carried forward into succeeding tax years. B) Interest paid or accrued to purchase or carry tax-exempt investments is not deductible. C) Investment interest expense is deductible up to the amount of the net investment income. D) Net investment income is the taxpayer's investment income—typically interest, nonqualified dividends, and short-term capital gains.

Excess investment interest expense cannot be carried forward into succeeding tax years. Excess investment interest expense can be carried forward into succeeding tax years. Investment interest expense is deductible up to the amount of net investment income. The interest on funds borrowed to purchase tax-exempt investments is not deductible. The net investment income is typically interest, nonqualified dividends, and short-term capital gains. Long-term capital gains and qualified dividends may be included at the taxpayer's election, but the taxpayer must forgo the preferential tax rates on these items.

Adrian Brown owned 500 shares of XYZ growth and income fund. She has become increasingly dissatisfied with the performance of the fund and, upon the advice of a friend, decided to execute a "telephone transfer" and switch the balance in the fund to the XYZ intermediate bond fund. Which one of the following describes the tax effect of such a strategy? A) No gain or loss will be recognized by the taxpayer, but the basis of the new fund will be reduced by any deferred gain or increased by any unrecognized loss. B) Any loss will be recognized by the taxpayer, but any gain will be deferred through a reduction in the basis of the new fund. C) Gain or loss will be recognized by the taxpayer on the redemption of the old fund. D) No gain or loss will be recognized by the taxpayer, and the basis in the new fund will be the same as that of the old fund.

Gain or loss will be recognized by the taxpayer on the redemption of the old fund. A telephone transfer is the same as a sale or other taxable redemption of the fund. Therefore, gain or loss will be recognized based on the difference in the redemption proceeds and the basis in the shares redeemed. This is true even if the transfer is made between two funds in the same fund family.

Which of the following are includible in an individual's gross income for income tax purposes? 1. Gambling winnings 2. Inheritances 3. Interest collected by the taxpayer on federal obligations 4. Scholarships and fellowships in degree programs

I and III. Gambling winnings and interest on federal obligations are includible in an individual's gross income for income tax purposes. The other items are not subject to income taxation.

Max is selling a truck that he uses in his business. He has taken $5,000 of depreciation on the truck and wants to use the installment sale method to sell the truck to Jerry for a down payment and an installment note over 36 months. He paid $40,000 for the truck and is selling it for $38,000. What are the tax consequences of this transaction? 1. Max must recapture $3,000 of the Section 1245 depreciation taken as ordinary income in the year of the sale. 2. Max has $5,000 of depreciation recapture taxed at the 25% tax rate.

I only. Statement I is correct. Gain recaptured under Section 1245 (depreciable personal property used in a trade or business) is taxed as ordinary income and is not eligible for installment sale treatment. Therefore, these amounts are fully recognized (taxable) as ordinary income in the year of sale. Unrecaptured Section 1250 depreciation occurs only on depreciable real property (real estate) used in a trade or business.

Which of the following statements regarding Section 1033 involuntary conversions is CORRECT? For an owner-user, the replacement property must pass the functional use test. The taxpayer use test provides less flexibility than the functional use test.

I only. Statement II is incorrect. The taxpayer use test provides more flexibility than the functional use test.

Which of the following rules regarding the sale of Section 1231 property is CORRECT? 1. When Section 1231 property is sold for more than the purchase price, the gain is afforded capital gain treatment and taxed using capital gain tax rates. 2. When Section 1231 property is sold at a loss, the loss is treated as a capital loss.

I only. Statement II is incorrect. When Section 1231 property is sold at a loss, the loss is treated as an ordinary loss, not a capital loss.

Your client, Albert, purchased a life insurance policy. He wants you to determine if it is a modified endowment contract (MEC) for tax purposes. To be classified as a MEC, a policy must have which of the following qualities? 1. Be a life insurance policy under state law 2. Meet either the cash value accumulation test or the guideline premium and cash value corridor test 3. Be a contract that was entered into on or after June 21, 1988 4. Fail to meet the seven-pay test

I, II, III, and IV. To be classified as a MEC, a policy must encompass all of the choices: be a life insurance policy under state law; meet either the cash value accumulation test or the guideline premium and cash value corridor test; be a contract that was entered into on or after June 21, 1988; and fail to meet the seven-pay test.

Charles wants to invest $20,000 to generate income taxable at the capital gain rates and not at ordinary income tax rates. He will hold any investment for at least 18 months. Which of the following investments would achieve Charles's goal? 1. Buy an office building and rent space to others. 2. Buy stock in a Fortune 500 company. 3. Purchase a quality artwork with appreciation potential. 4. Purchase a speedboat for personal use only.

II and III. Statements II and III are correct. Any qualified dividends on the stock will be taxed at LTCG rates. A sale of the stock or the investment painting after the 18-month holding period will generate either a LTCG or a LTCL depending on the sale price. Rental income is taxed at the ordinary income tax rate. A speedboat for personal use will not generate any income and will likely decrease in FMV 18 months later.

Your client Sally, age 30, is designing an educational investment program for her 8-year-old son. She expects to need the funds in about 10 years when her AGI will be approximately $70,000. She wants to invest at least part of the funds in tax-exempt securities. Which of the following investment(s) may yield tax-exempt interest on her federal return if the proceeds were used to finance her son's education? 1. Treasury bills 2. EE bonds 3. GNMA funds 4. Zero coupon Treasury bonds

II only. Proceeds from EE savings bonds may be exempt if the proceeds are used for qualified higher-education expenses of the taxpayer, spouse, or dependent. There is an AGI phaseout, which for 2020 is approximately $82,350‒$97,350 (2020) for a single taxpayer. (The actual phaseouts are provided on the exam.) All the other options generate currently taxable income. The Treasury bills and GNMA funds both produce taxable income on the federal return (Treasury bill interest would typically be tax exempt on her state return). The zero Treasury also produces taxable income each year as the amortized discount is added to taxable income, even though no cash income is received.

Samantha received the following dividends in 2020 from her portfolio: 1. Ordinary dividends from HOT stock, a publicly traded company 2. Dividends from Sky High Realty and Trust, a publicly traded REIT 3. Life insurance dividends from her whole life policy 4. Qualified dividends from BET stock, a publicly traded company Which of the above is NOT considered taxable?

III only. Life insurance dividends are considered a return of premium paid (provided the cumulative dividends received over the life of the policy do not exceed the basis in the policy) and thus are not taxable. The other choices listed are taxable. Qualified dividends are eligible for long term capital gains rates. REIT dividends may qualify for a QBI deduction but nonetheless will still be taxable.

Which one of the following is a characteristic of a fixed annuity contract? A) If a corporation owns the annuity contract, the earnings are not tax deferred. B) The buyer may choose among a handful of investment options. C) The annuitant pays now for future fixed or variable payments. D) Fixed annuity contracts are not tax advantaged, unlike other annuity contracts.

If a corporation owns the annuity contract, the earnings are not tax deferred. With a fixed annuity contract, there is no ability to select the investment options; the payments are fixed. Fixed annuity contracts are generally tax advantaged (tax deferred), unless a corporation owns the annuity contract, in which case the earnings are currently taxable. Such is also the case with a variable annuity.

Real Estate Loss Deductibility

Individuals can deduct up to $25,000 of rental real estate losses against active and portfolio income. However, 2 tests must be met to qualify for this exception. One test is active participation in the activity (participates in management decisions). The second test is ownership of 10% or more (in value) of all interests in the activity during the taxable year. In addition, the $25,000 offset allowance is reduced by 50% of AGI in excess of $100,000 with a complete phaseout at $150,000 AGI. Therefore, there is a loss of $1 for every $2 of AGI greater than $100,000. The loss is deducted from the $25,000 maximum available. In this situation, Beth meets both of the qualification tests and her AGI is below $100,000.

Garret has the following items of income: $1,500 of interest income, $2,800 of qualified dividend income (he has not decided whether to have it taxed at the ordinary or capital gain rate), and a salary of $100,000. Which of these are classified as portfolio income? 1. Interest income and dividend income 2. Salary only 3. Interest income, dividend income, and salary 4. Interest income only

Interest income and dividend income. Interest and dividends are portfolio income. Salary is active income.

applicable federal rate

It is the minimum interest rate that the IRS allows for private loans.

In 1991, John Idler purchased a single premium whole life insurance policy. In the current year his medical expenses are $15,000 and his AGI is $75,000. What is the tax implication to John if he borrows the interest from the policy's accumulated cash value to pay his current year's medical expenses? A) John will not be required to report the amount borrowed as income, but he will be allowed a medical expense deduction. B) John will be required to report the amount borrowed as income, but he will not be allowed a medical expense deduction. C) John will be required to report the amount borrowed as income and will be allowed a medical expense deduction. D) John will not be required to report the amount borrowed as income and will not be allowed a medical expense deduction.

John will be required to report the amount borrowed as income and will be allowed a medical expense deduction. Amounts borrowed on a single premium whole life policy issued on or after June 21, 1988 (a MEC), are taxable on a last-in, first-out basis; thus, the earnings would be taxable. A medical expense deduction will be allowed regardless of the source of the funds, since the payment would be for a valid medical expense.

exclusions

Life insurance proceeds received by reason of death of the insured (excluding policies transferred-for-value or owned by a qualified retirement plan), a gift or most inheritances received, interest received from municipal bonds, child support payments received, workers' compensation insurance proceeds, and many employee fringe benefits are common examples of items that are excluded from income. Some of these excluded fringe benefits include employer-provided health insurance coverage, group term life insurance coverage up to $50,000, qualified employee discounts, and employee educational assistance

Which one of the following is allowable in the computation of total income? A)Tax credits B)Charitable contributions C)Net capital losses of up to $5,000 D)Loss from a sole proprietorship

Loss from a sole proprietorship. Remember that the total income is the amount shown about two-thirds of the way down the front of the Form 1040. It is the amount before the deduction for adjustments to income. Certain deductions are allowed in the computation of total income, such as the deduction for sole proprietorship losses or net capital losses up to $3,000. Charitable contributions are an itemized deduction.

Paula purchased an interest in an MLP with a current loss of $7,000. If she purchased a RELP with $10,000 of passive income generated this year, how much, if any, of the passive loss from the MLP could be used to offset Paula's income in the current year?

Losses from MLPs cannot be used to offset income from RELPs in any given year. MLP losses may only be used to offset income from the same MLP.

Martha borrowed $40,000 from a bank, using the money for investment purposes. Of that $40,000, she invested $20,000 in tax-exempt municipal bonds and $20,000 in taxable corporate bonds. Which of the following statements regarding Martha is CORRECT? 1. Martha can deduct the interest on $20,000 of the loan for tax purposes. 2. Martha can deduct none of the interest on the loan for tax purposes. 3. Martha can deduct the interest on $40,000 of the loan for tax purposes. 4. Martha is engaging in an illegal activity.

Martha can deduct the interest on $20,000 of the loan for tax purposes. The IRS does not allow taxpayers to deduct interest on borrowed funds when those funds are used to generate tax-exempt income. Because Martha used $20,000 of the loan to purchase taxable securities, the interest on that $20,000 is deductible as an investment interest expense.

Hardship withdrawals are only allowed from Section 401(k) plans if specifically stated in the plan document and typically for expenses including which of the following? Vacation costs Medical expenses College tuition costs Insurance premiums

Medical Expenses, College tuition Hardship withdrawals are typically allowed for medical expenses, college tuition and fees, the purchase of a principal residence, burial expenses for a spouse or dependents, and to prevent eviction from one's principal residence or foreclosure on the mortgage of such residence.

Which one of the following statements is CORRECT with respect to capital gains and losses? A)Excess capital losses are carried forward for up to five years. B)Net capital losses are deductible up to $3,000 annually. C)Net capital gains are always taxed at a maximum rate of 28%. D)Net capital gains are always taxed at a flat rate of 15%.

Net capital losses are deductible up to $3,000 annually. Net long-term capital gains (LTCG) (from other than unrecaptured Section 1250 income and collectibles) are taxed at rates of 0%, 15%, or 20%. For married couples filing jointly, the 0% long-term capital gain rate ends at $80,000 of taxable income. For long-term capital gains falling between the $80,000 breakpoint and $496,600 of taxable income (again, for married couples filing jointly), the rate is 15%. For long-term capital gains falling into taxable income levels above $496,600 (MFJ), the rate is 20%. The table shows the breakpoints for LTCG and qualified dividend preferential rates.

This year, Ken sold several securities that left him with the following types of gains and losses: Long-term capital gain: $8,000 Short-term capital gain: $1,800 Long-term capital loss: $2,200 Short-term capital loss: $1,000 What is the net capital gain or loss on Ken's security sales?

Net long-term gain of $5,800 and net short-term gain of $800. The long-term gain and loss are netted, leaving a long-term gain of $5,800. Short-term gains and losses are netted, leaving a short-term gain of $800. These are left separate due to the disparate tax treatment of short-term versus long-term gains.

During the current tax year, Jamie sold several securities that resulted in the following types of gains and losses: a long-term capital loss of $6,700; a short-term capital loss of $7,000; a long-term capital gain of $1,900; and a short-term capital gain of $9,200. What is the net capital gain or loss on Jamie's security sales? A)Net short-term gain of $7,300; net long-term loss of $300 B)Net long-term loss of $2,600 C)Net short term loss of $3,800 D)Net long-term loss of $4,800; net short-term gain of $2,200

Net long-term loss of $2,600. The long-term items are netted, leaving a long-term capital loss of $4,800. The short-term items are netted, leaving a short-term capital gain of $2,200. These are netted, leaving a net long-term capital loss of $2,600.

Which of the following statements is accurate with respect to a like-kind exchange? A) No gain will be recognized on the exchange of inventory. B) The amount of gain recognized will reduce the taxpayer's basis in the property received. C) No gain will be recognized unless the taxpayer receives boot. D) Gain recognized is equal to the gain realized on the exchange plus the boot received.

No gain will be recognized unless the taxpayer receives boot. In a like-kind exchange, the gain recognized is always the lesser of the gain realized or the boot received. If there is no boot received, there is no gain recognized. Inventory is not eligible for like-kind exchange treatment—thus, gain would be recognized. The basis in the acquired property is the FMV of the acquired property, reduced by the gain realized but not recognized (the deferred gain).

Your client is contemplating the exchange of two parcels of investment land for two similar parcels. Given the following details of the proposed transactions, compute the amount of recognized gain and loss, if any, on both parcels if your client does the exchanges. Parcel A: There were 10 acres of land acquired 15 years ago with a current basis of $50,000. In exchange, your client will receive 8 acres of land (FMV $80,000) and $20,000 of cash. Parcel B: There were 20 acres of land acquired 2 years ago with a current basis of $100,000. In exchange, your client will receive 12 acres of land (FMV $75,000) and $10,000 of cash.

Parcel A recognized gain: $20,000; Parcel B recognized loss: $15,000. The realized gain in Parcel A is $50,000 and the recognized gain (the lesser of the gain realized or the boot received) is $20,000. The realized loss in Parcel B is $15,000. However, there is no loss recognized (deducted) in a like-kind exchange.

Ethan is reviewing the file for his client, Landon, whose wife died in March of last year. Landon filed a joint income tax return for last year, and Ethan is reviewing scenarios that could impact this year's income tax return filing—particularly those regarding Landon's filing status. Landon has not remarried and continues to maintain a home for his two dependent children. Which of the following filing statuses would be best for the year after the death of Landon's wife? A. Single. He is no longer married.

Qualifying widower. He did not remarry and has continued to maintain a home for his two dependent children

Which of the following statements is CORRECT? 1. A general partner reports the income from the Schedule K-1 form provided by the partnership on Schedule C of Form 1040. 2. Self-employed individuals, such as a sole proprietor or general partner in a partnership, generate self-employment income and must pay both portions of the FICA (Federal Insurance Contributions Act) payroll tax. 3. A shareholder who receives a Schedule K-1 from an S corporation must calculate and pay self-employment tax on the income. 4. A sole proprietor must pay the 0.9% Additional Medicare Tax on all net self-employment income.

Self-employed individuals, such as a sole proprietor or general partner in a partnership, generate self-employment income and must pay both portions of the FICA (Federal Insurance Contributions Act) payroll tax. Self-employed individuals, such as a sole proprietor or general partner in a partnership, generate self-employment income. In turn, such individuals must pay both portions of the FICA (Federal Insurance Contributions Act) payroll tax. A general partner reports the income from the Schedule K-1 form provided by the partnership on Schedule E of Form 1040. A shareholder who receives a Schedule K-1 from an S corporation does not pay self-employment tax on the income. The Additional Medicare Tax of 0.9% also applies to self-employed individuals who have a combined income greater than $200,000 if single and $250,000 if MFJ. The tax is levied on the net earnings from self-employment of the sole proprietor or partner and consists of 1. the gross income derived from any trade or business, less allowable deductions attributable to this trade or business (generally Schedule C); 2.the taxpayer's distributive share of the ordinary income or loss of a partnership (not an S corporation) engaged in a trade or business (Schedule K-1).

Which of the following is NOT a step in the tax calculation process? A)Calculate federal tax on federal taxable income. B)Subtract exclusions from AGI. C)Subtract adjustments to income from total income to get adjusted gross income. D)Deduct the greater of itemized deductions or the standard deduction

Subtract exclusions from AGI. The following are involved in the income tax computation: subtracting adjustments to income from total income to get AGI, and deducting the greater of itemized deductions or the standard deduction from AGI to arrive at taxable income. Subtracting exclusions from AGI is not a step in the tax calculation process. Excluded amounts simply do not show up as income on the return.

Which one of the following steps occurs in the tax calculation process? A)Tax liability minus tax credits equals refund or tax owed B)Total withholding is adjusted on Form I-9 C)Total tax liability minus itemized deductions plus additional taxes owed, equals total tax liability D)Total tax liability equals refund or tax owed

Tax liability minus tax credits equals refund or tax owed

During the current tax year, Rod purchased a building for exclusive use in his manufacturing business. The cost of the property was $422,000, of which $122,000 was attributable to the land. Which of the following statements identifies the proper treatment of the expenditure? A) The $122,000 must be capitalized and may not be depreciated. B) The $300,000 attributable to the building may be currently deductible. C) The cost attributable to the building may be deducted under Section 179. D) The $122,000 must be capitalized and may be depreciated.

The $122,000 must be capitalized and may not be depreciated. The land may not be depreciated, as only "wasting" assets are subject to depreciation. The Section 179 expense election generally applies to personalty only, and is not available for most real estate. The cost of the building may not be currently deducted; it must be capitalized and depreciated because it has a useful life of over one year.

Blake, a sole proprietor, is selling several business assets. He has been told by a friend that the items he is selling are not capital assets and are subject to the ordinary income tax rate. You are his financial planner and tell him that the gains on Section 1231 assets can be treated as capital gains for income tax purposes subject to certain rules. Which of the assets Blake sold are Section 1231 assets? A)A copyright on the theme song Blake's company uses in its advertising that Blake wrote B)The building and land sold when Blake's business moved to a new location C)Blake's inventory of electric guitars his business manufactures D)Accounts receivable

The building and land sold when Blake's business moved to a new location. The building and land sold when Blake's business moved to a new location qualify under Section 1231 as depreciable personal or real property used in business or for the production of income. The building portion of the property was depreciable property. While they are not considered capital assets, under Section 1231 they are taxed using capital gain rates, subject to the Section 1245 and 1250 rules for depreciation recapture rules. Losses are always ordinary and not subject to the $3,000 ($1,500 for MFS) ordinary loss limitation. Accounts receivable, inventory, and copyrights and other creative works held by the creator are all ordinary assets that would result in ordinary income tax (not capital gain) if sold at a gain.

For two years, Lisa Carson was able to pay the premiums on her whole life policy without borrowing. For the past two years, she has borrowed from the cash value of her whole life policy to pay the premiums. Last year, she paid $95 of interest on the funds she borrowed. What are the tax implications in this situation? A)The interest is deductible because Lisa is in the business of continuing her insurance and the interest is deductible business interest expense. B)The interest expense is tax deductible because it does not exceed $100. C)The interest expense is not tax deductible because it does not exceed $100. D)The interest expense is not tax deductible.

The interest expense is not tax deductible. The interest expense is not tax deductible because interest on a loan incurred to purchase personal life insurance protection is considered personal interest, which is not deductible. Personal loan interest is not tax deductible, regardless of whether the lender is a bank or a life insurance company.

A taxpayer intends to use a home equity loan to obtain funds to purchase municipal bonds. Which of the following is CORRECT regarding the income tax implications of this scenario? 1. The municipal bond interest becomes taxable. 2. The interest on the home equity loan is not deductible. 3. The interest on the home equity loan is fully deductible. 4. None of these choices apply.

The interest on the home equity loan is not deductible. The interest on the municipal bond continues to be tax exempt. There is no deduction allowed for the interest on funds borrowed to purchase tax-exempt securities.

Which of the following statements correctly describes the method for calculating the exclusion amount for variable annuity payments? 1. The investment in the annuity contract is divided by the total expected return. 2. The total expected return is divided by the investment in the annuity contract. 3. The investment in the annuity contract is divided by the number of expected payments. 4. The number of expected payments is divided by the investment in the annuity contract.

The investment in the annuity contract is divided by the number of expected payments. The exclusion ratio for a fixed annuity contract is calculated by dividing the investment in the contract by the total expected return. For a variable annuity, the exclusion amount is calculated by dividing the investment in the contract by the number of expected payments.

Which of the following statements correctly describes the method for calculating the exclusion ratio for a fixed annuity? 1. The total expected return is divided by the investment in the annuity contract. 2. The investment in the annuity contract is divided by the total expected return. 3. The investment in the annuity contract is divided by the number of expected payments. 4. The number of expected payments is divided by the investment in the annuity contract.

The investment in the annuity contract is divided by the total expected return. The exclusion ratio for a fixed annuity contract is not calculated by dividing the total expected return by the investment in the contract. It is calculated by dividing the investment in the contract by the total expected return.

Ann Hamilton owns 500 shares in the XYZ S&P 500 Index Fund. The basis of her investment in this fund is $4,500, while the fair market value is only $2,000. She wants to sell her shares to "lock in" the $2,500 loss, but she is considering buying 500 shares of the GRC Small-Cap Index ETF the following week because she believes that the value is going to increase significantly over a longer period. As her planner, what can you accurately tell Ann about this scenario? A) The loss would be a fully deductible capital loss. B) The basis in the newly acquired shares would be the amount paid for those shares, increased by the $2,500 disallowed loss. C) She should wait a minimum of 61 days after the sale to repurchase the shares so that the loss may be recognized. D) If the loss were disallowed, the basis in the newly acquired shares would be decreased by the disallowed loss.

The loss would be a fully deductible capital loss. The wash sale rule disallows a loss if substantially identical securities are purchased prior to 30 days after the sale that resulted in the loss. The basis of the acquired securities is increased by the amount of the disallowed loss. The S&P 500 mutual fund should not be substantially identical to the small-cap ETF because the funds track very different indices and because of the difference in the way ETFs trade compared with mutual funds.

Mary has owned her principal residence for over six years. Two years ago, she married John, who immediately moved into the residence. John has never used the Section 121 exclusion. If Mary sells the residence this year and John and Mary file a joint return, which of the following statements is CORRECT with respect to the availability of the Section 121 exclusion?

The maximum exclusion is $500,000 because Mary has at least two years of ownership, and both spouses meet the use requirement. Currently, Section 121 allows for a gain exclusion, of up to $500,000 for taxpayers married filing jointly, to any taxpayer who satisfies certain tests, known as the ownership test and the use test. To satisfy the ownership test, the home must have been owned and used as a principal residence for at least two of the five years preceding the date of sale. (Note: These years do not have to be consecutive; they only have to add up to at least two years.) Either spouse can meet the ownership test, but both must meet the use (two-out-of-five-year) test. This is likely not difficult for most married couples (applies even to those living in the house and then getting married), but it can be burdensome for individuals who are divorced or in the process of a divorce.

Cash value life insurance is often structured like an investment vehicle. However cash value life insurance contains important features that shelter the inside buildup from taxation. Which of the following will NOT be considered when determining whether a policy can maintain its tax favored status? A) The death benefit B) The premium value test C) The cash guideline premium test and corridor test D) The cash value accumulation test

The premium value test. Without a death benefit, a contract does not meet the legal definition of life insurance. There are currently two tests—only one of which must be met—in order to classify a product as life insurance for federal income tax purposes: (1) the cash value accumulation test and (2) the cash guideline premium test and corridor test. There is no premium value test.

Which of the following statements regarding the use of life insurance inside a retirement plan is CORRECT? A) The premiums paid are a taxable benefit to the employee. B) The premiums paid are NOT a taxable benefit to the employee. C) If the employee dies prematurely, the survivors will receive no benefits. D) The premiums paid are a taxable benefit to the employer.

The premiums paid are a taxable benefit to the employee. The main benefit to the employee is in the event of their premature demise, their survivors will still receive ample retirement benefits.

Federal Insurance Contributions Act (FICA) payroll tax

This tax consists of two separate taxes: an Old Age, Survivors, and Disability Insurance (OASDI)—also called Social Security—tax that is levied on earnings up to the taxable wage base ($137,700 in 2020) of generally 12.4%, and a Medicare tax of 2.9% that is levied on all earnings with no income limit.

Tim Jones is single, 21 years old, and in his third year of college. He has an AGI of $35,000 and receives no support from his parents. The college is a Title IV institution where students are eligible to receive federal financial aid, and Tim is pursuing an undergraduate degree in criminal justice. When Tim was 13, his parents established a Uniform Transfers to Minors Act (UTMA) for him, and funded it with EE savings bonds. When Tim was a freshman, he was convicted of a felony drug possession charge. Which one of the following is CORRECT regarding Tim's situation? A) Tim qualifies for the American Opportunity Tax Credit. B) Tim may redeem the EE bonds potentially tax free if the proceeds are used for his qualifying education expenses. C) Tim could use both the American Opportunity Tax Credit and the Lifetime Learning Credit in the same year. D) Tim qualifies for the Lifetime Learning Credit.

Tim may redeem the EE bonds potentially tax free if the proceeds are used for his qualifying education expenses. Tim qualifies for the Lifetime Learning Credit. His AGI is under the phaseout range. He is pursuing a degree at an eligible institution. The felony drug conviction would preclude the use of the American Opportunity Tax Credit but not the Lifetime Learning Credit. There is no exclusion available for EE bonds unless they are held by the individual who purchases the bonds or unless they are held jointly with a spouse. A bond that has been gifted to another taxpayer does not qualify for the exclusion. The American Opportunity Tax Credit and the Lifetime Learning Credit may not be claimed in the same year for the same student.

Which one of the following reflects the CORRECT sequence of steps in the tax calculation process? A)Calculate federal tax on total income. B)Total income minus standard or itemized deduction(s) equals AGI. C)AGI minus adjustments to income equals federal taxable income. D)Total income minus adjustments to income equals AGI.

Total income minus adjustments to income equals AGI. Total (gross) income minus adjustments to income equals adjusted gross income (AGI). AGI minus standard or itemized deduction(s) equals federal taxable income.

Jerry owns a dry-cleaning business. During the current year, Jerry purchased and placed into service $730,000 of equipment. He had taxable income of $745,000. Jerry is in the highest marginal income tax bracket this year, and expects to be in that bracket for two more years. After that, he plans to semi-retire, but keep the business open for another five years. He expects to drop into the lowest marginal bracket when he semi-retires. What advice would you give Jerry regarding the use of Section 179, bonus depreciation, and cost recovery deductions? A)Forgo Section 179 and bonus depreciation and use the Modified Accelerated Cost Recovery System (MACRS) table. B)Use the bonus depreciation provision. C)Forgo Section 179 and bonus depreciation and elect the straight-line method. D)Elect the maximum Section 179 and elect the straight-line method.

Use the bonus depreciation provision. The fact pattern indicates that Jerry is in the highest marginal bracket for three years, and then will be in the lowest marginal bracket after that. It makes sense to maximize the depreciation deduction this year when Jerry is in the highest marginal bracket. By using the bonus depreciation provision, the entire $730,000 may be deducted in the year of acquisition.

filing status

Used by a taxpayer when filing an individual tax return (as opposed to a tax return for a business entity) greatly impacts the ultimate income tax liability on the income tax return. Filing status affects phaseout limitations for certain items that can provide deductions to reduce taxable income and determines the tax table used. Single, Married filing Jointly, Married filing separately, Head of Household (unmarried with a qualifying child), Surviving spouse.

The marginal tax rate is obtained by: A)dividing the calculated tax by total income. B)dividing the calculated tax by taxable income. C)finding the tax bracket of the taxable income amount. D)finding the tax bracket of total income.

finding the tax bracket of the taxable income amount. The marginal tax rate is found by finding the tax bracket that contains the taxable income amount; it is the amount at which all subsequent taxable amounts will be taxed (until entering the next tax bracket). The effective tax rate is calculated by dividing the calculated tax by total (gross) income, not taxable income.

Beth's husband died in Year 1. Assume that Beth does not remarry and continues to maintain a home for herself and her dependent child during Year 2, Year 3, and Year 4, providing full support for her child throughout those years. For Year 4, Beth's filing status will be

head of household. Beth's Year 4 filing status is head of household. Qualifying widow filing status is only available for 2 years following the death of a spouse (Year 2 and Year 3).

qualifying relative

is an individual who is not a qualifying child and bears a specified relationship to the taxpayer such as a parent, in-law, niece, nephew, aunt, uncle, or is unrelated to the taxpayer but resided in the taxpayer's principal home during the tax year. The taxpayer must have provided more than half of the person's support for the tax year.