INCOME TAX PLANNING MIDTERM/ FINAL
Ian, a single taxpayer, received $15,000 of Social Security retirement benefits this year. He also received $16,000 of interest income. How much of Ian's Social Security benefits must be included in his gross income?
$0
Jacqui, single and age 45, sold her personal home for $176,000 in October of last year after living there for ten years. The selling expenses were $10,000 and her adjusted basis in that home was $132,000. She rented an apartment until May of this year when she bought and moved into a new personal residence. She paid $155,000 for the new home. What is the maximum gain that Jacqui must report in connection with sale of her principal residence?
$0
Ridge is the manager of a motel. As a condition of his employment, Ridge is required to live in a room on the premises so that he would be there in case of emergencies. Ridge considered this a fringe benefit, since he would otherwise be required to pay $600 per month rent. The room that Ridge occupied normally rented for $60 per night, or $1,500 per month. On the average, 90% of the motel rooms were occupied. As a result of this rent-free use of a room, Ridge is required to include in gross income:
$0
Sammy owned a home in south Florida that was severely damaged by a small hurricane, no Federal disaster was declared. Sammy had purchased the home for $150,000, and the fair market value of the home prior to the hurricane was $500,000. His homeowners insurance policy had lapsed one month before the hurricane hit and Sammy had not obtained any other insurance. After the hurricane, the property had a fair market value of $0. Assuming that Sammy's AGI was $115,000 this year, what is Sammy's casualty loss deduction?
$0
Under the terms of a divorce agreement dated 1/3/18, Larry is required to pay his wife Joyce $2,100 per month in alimony for a minimum period of 10 years and $300 per month in child support. For a twelve-month period, Larry can deduct from gross income (and Joyce must include in gross income):
$0
Under the terms of a divorce agreement in 2019, Larry is required to pay his wife Joyce $2,000 per month in alimony for a minimum period of 10 years or death of Joyce whichever occurs first and $500 per month in child support. For a twelve-month period, Larry can deduct from gross income (and Joyce must include in gross income):
$0
Hansel and Gretel, a married couple, manage apartments and they are required to live in the managers' apartment as a condition of their employment. Instead of providing the apartment to Hansel and Gretel rent-free, the owner of the apartment building gives Hansel and Gretel a housing allowance of $600, which they use to pay rent on the managers' apartment. Hansel and Gretel pay $600 per month in rent. If they did not live in the managers' apartment, Hansel and Gretel could live in another apartment building where they would only pay $500 in rent. What amount, if any, must be included in Hansel and Gretel's gross income?
$0 An employee is allowed to exclude from gross income the value of lodging furnished by an employer to the employee if the lodging is furnished (1) on the employer's business premises, (2) for the convenience of the employer, and (3) the employee is required to accept the lodging as a condition of employment. It does not matter that Hansel and Gretel were paid a housing allowance, which they were then required to pay back to the employer for rent. Hansel and Gretel can exclude the entire value of their housing from their gross income. Instructor note: The rental amount for area apartments is excess information to ensure the student understands it is the full amount of the allowance can be excluded, not just the amount of area rates.
Toby, age 15, qualifies as a dependent of his grandmother. During 2023, Toby had interest income in the amount of $200 and earnings from a part-time job of $875. Toby's taxable income is:
$0 Toby's standard deduction of $1,275 ($875 + $400*) completely negates his gross income of $1,075 ($875 earned income + $200 interest income). * 2023 Tax law change for kiddie tax - standard deduction is either $1,250 or earned income plus $400 (not to exceed the standard deduction for a single tax filer).
Steve has been adjusting his portfolio to meet his target asset allocation and has realized several capital gains and losses this year. $6,000 in short-term capital gains. $12,000 in short-term capital losses. $10,000 in long-term capital gains. $3,000 in long-term capital losses. What is Steve's net gain or loss?
$1,000 net long-term capital gain.
Steve has been adjusting his portfolio to meet his target asset allocation and has realized several capital gains and losses this year. $13,000 in short-term capital gains. $9,000 in short-term capital losses. $4,000 in long-term capital gains. $7,000 in long-term capital losses. What is Steve's net gain or loss?
$1,000 net short-term capital gain.
Olive's daughter Polly suffers from a rare illness. During the current year, Olive drove Polly to see a specialist in another state 15 times. Each trip was 300 miles each way and required an overnight stay in a hotel that costs $70 per night. Olive's AGI is $24,000. What is her medical expense deduction for the current year (assume the mileage rate is 22¢ per mile)?
$1,230
Mitch, who is single and has no dependents, had AGI of $150,000. His potential itemized deductions were as follows: Medical expenses (before percentage limitation) - $20,000 State income taxes - $3,000 Real estate taxes - $7,000 Mortgage (qualified housing and residence) interest - $9,000 Cash contributions to various charities - $4,000 Unreimbursed employee expenses (before percentage limitation) - $4,300 What is the amount of Mitch's AMT adjustment for itemized deductions?
$10,000 Mitch's adjustment for itemized deductions for AMT purposes are as follows: State income taxes 3,000 Real estate taxes 7,000 Total 10,000 Notes Unreimbursed employee expenses: no longer deductible
Pam exchanges a rental building, which has an adjusted basis of $520,000, for investment land which has a fair market value of $700,000. In addition, Pam receives $100,000 in cash. What is Pam's recognized gain or loss and her basis in the investment land?
$100,000 and $520,000 Amount realized ($700,000 + $100,000) $800,000 Adjusted basis (520,000) Realized gain $280,000 Recognized gain $100,000 The receipt of boot in a like-kind exchange triggers the recognition of realized gain, with the ceiling on recognition being the realized gain. Because the boot received of $100,000 is less than the ceiling, gain up to the amount of the boot received is recognized. The basis of the land is calculated as follows: FMV $700,000 Less: Postponed gain (180,000) Basis $520,000
Sandra acquired a passive activity several years ago. Until 20x1, the activity was profitable. The activity produced losses of $100,000 in 20x1 and $50,000 in 20x2. Sandra had no passive income in 20x1 or 20x2. How much is her suspended loss from the activity?
$100,000 from 20x1 and $50,000 from 20x2
In the current year, Tom and Tammy Williams, a married couple, file a joint federal income tax return. During the current tax year, the Williams made deductible IRA contributions of $1,000. They are in a 12% marginal income tax bracket. What amount of tax savings is generated by this deduction?
$120 1,000 multiplied by the 12% marginal income tax bracket equals $120.
Jessie, an unmarried taxpayer using the single filing status, received $16,000 of Social Security retirement benefits this year. Jessie also received $5,000 of interest income and $45,000 of income from her retirement plan during the year. How much of Jessie's Social Security benefits must be included in her gross income?
$13,600 Since her MAGI ($50,000) plus one-half of her Social Security benefits (0.5 × $16,000 = $8,000) exceeds her adjusted base amount ($34,000), she must calculate her includible Social Security benefits using the formula 3 or 4 below. 0.85 × $16,000 = $13,600 0.85 × [$50,000 + (0.50 × $16,000) - $34,000] = $20,400 plus the lesser of the amount calculated using 1 and 2 below: 0.50 × $16,000 = $8,000 0.50 × [$50,000 + (0.50 × $16,000) - $25,000] = $16,500 The lesser amount is $8,000 The formula 4 total is $28,400 ($20,400 + $8,000) The lesser of the formula 3 or 4 amounts is $13,600. Therefore, $13,600 of the Social Security benefits must be included in Jessie's gross income.
Bonnie and Manuel are married. He paid $100,000 for their home five years ago. Its fair market value was $150,000 when Manuel died. What is Bonnie's basis in the home after Manuel's death if the home was held as community property and Manuel left his half to Bonnie?
$150,000
Roger, age 19, is a full-time student at State College and a candidate for a bachelor's degree. During the year, he received the following payments: ItemAmountState scholarship for ten months (tuition and books) $3,600 Loan from college financial aid office $1,500 Cash support from parents $3,000 Interest on CDs $1,700 Cash prize awarded in contest$500 Total:$10,300 What is Roger's adjusted gross income for this year?
$2,200 $2,200 ($1,700 interest + $500 prize). Scholarships and Loans for qualified education expenses are not taxable. The amount from Roger's parents can be considered a gift and is tax-free since it is under the annual gift exclusion.
Sam's office building with an adjusted basis of $625,000 and a fair market value of $885,000 is condemned on December 30, 20x1. Sam is a calendar year taxpayer. He receives a condemnation award of $850,000 on March 1, 20x2. He builds a new office building at a cost of $830,000 which is completed and paid for on December 31, 20x4. What is Sam's recognized gain on receipt of the condemnation award and his basis for the new office building assuming his objective is to minimize gain recognition?
$20,000; $625,000
Bonnie and Manuel are married. He paid $200,000 for their home five years ago. Its fair market value was $400,000 when Manuel died. What is Bonnie's basis in the home after Manuel's death if the home was held as community property and Manuel left his half to his child in the will?
$200,000
Miriam, who is single and age 36, provides you with the following information from her financial records. Regular income tax liability - $44,342 AMT positive adjustments - $30,000 AMT preferences - $20,000 Taxable income - $175,000 Calculate her AMTI.
$225,000 Miriam's AMTI is calculated as follows: Taxable income $175,000+ AMT positive adjustments $30,000+ AMT preferences $20,000 = AMTI $225,000. Miriam's AMT exemption is not deducted in calculating AMTI. Rather, it is deducted from AMTI to calculate the AMT base. Likewise, the regular income tax liability does not affect the calculation of AMTI.
Joel has a 30 percent interest in a general partnership for which he paid $25,000. The partnership loss for the year is $180,000. How much can Joel deduct?
$25,000. Joel's proportional loss is $54,000 ($180,000 × 30%). However, Joel's loss is limited to $25,000 due to the at-risk rules. He will also have a suspended loss of $29,000 ($180,000 × 30%) - $25,000. The loss suspended is suspended under the at risk rules.
Isaac is a middle school teacher with gross income this year of $35,000. Based on the following, what is Isaac's adjusted gross income? (1) $4,000 qualified education interest expense (2) $2,000 alimony received under a pre-2018 agreement (3) $1,000 contribution to a traditional IRA
$31,500
Craig and Mallory got married and bought a house 15 months ago. Mallory's job recently transferred her to an office in a different state, so Craig and Mallory sold their house. What is the maximum amount of gain that Craig and Mallory can exclude from income taxation?
$312,500. Although they did not live in their house for a full two years, Craig and Mallory are eligible for a prorated exclusion because of Mallory's change in employment. Therefore, they are eligible for a maximum exclusion of $312,500 [(15/24) × $500,000].
Isaac is a middle school teacher with gross income this year of $40,000. His divorce was finalized in July 2018. Based on the following, what is Isaac's adjusted gross income? (1) $5,000 qualified education interest expense (2) $4,000 alimony received (3) $2,000 contribution to a traditional IRA
$35,500
Cecilia and Landon DeFee purchased their primary residence in North Carolina this year, but still maintain a vacation property in the Smokey Mountains. Their home in N. Carolina was purchased for $450,000, and they paid $22,349 in interest the first year. The vacation property was purchased 5 years ago for $300,000 and they paid $14,795 in interest this year. The couple has no other itemized deductions. What is the mortgage interest deduction for Cecilia and Landon?
$37,144
Amy and Steve are married. They sell their home in Texas because Amy was offered a job in Washington DC. Amy owned and used the home for 5 years. Steve moved in 1 year ago. If the basis in the home is $300,000 and the sale price is $700,000, what is the maximum exclusion?
$375,000
Jacqui, single and age 45, sold her personal home for $450,000 in October of last year after living there for ten years. The selling expenses were $10,000 and her adjusted basis in that home was $150,000. She rented an apartment until May of this year when she bought and moved into a new personal residence. She paid $380,000 for the new home. What is the maximum gain that Jacqui must report in connection with sale of her principal residence?
$40,000
During the year, Rick had the following insured personal casualty losses (arising from a tornado, a Federally declared disaster). Rick also had $18,000 AGI for the year.
$400 Asset A: Change in FMV is 700 - 300 = 400. The lesser of ATB or decline in FMV is $400 - insurance = $300 Asset B: Change in FMV is 2,000 - 0 = 2,000. The lesser of ATB or decline in FMV is $2,000 - insurance = $1,500 Asset C: Change in FMV is 900 - 0 = 900. The lesser of ATB or decline is $700 - insurance = $500. Total: $2,300 Less: Statutory floor (100) Less: AGI limitation (10% × $18,000) (1,800) Casualty loss deduction 400 Remember the deduction is the lesser of ATB, or decline in FMV, less insurance proceeds. Reminder, ONLY Federally declared disasters are eligible for casualty loss treatment after 12/31/17.
Reese and Jake engage in a like-kind exchange. Reese transfers real estate with a fair market value of $500,000 and an adjusted basis of $200,000 to Jake. Jake transfers real estate worth $700,000 and an adjusted basis of $250,000, plus a $200,000 mortgage on the property, to Reese. What is Jake's potential or deferred gain before and after the transaction?
$450,000 potential gain before the transaction; $250,000 potential gain after the transaction.
For the current year, Harry reported salary and taxable interest income of $50,000. His capital asset transactions during the year were as follows: Long-term capital loss = ($5,000); Long-term capital gain = $1,000; For the current year, what amount should Harry report as adjusted gross income?
$47,000
During the current year, Harrison sustained a serious injury in the course of his employment. As a result of the injury sustained, he received the following payments during the year: Unemployment compensation $5,000 Worker's compensation $6,500 Damages for physical personal injuries $5,000 Reimbursement from his employer's accident and health plan for medical expenses paid by Harrison $2,000 What is the amount to be included in Harrison's gross income for the current year?
$5,000
Abner owned bonds that paid $750 of interest on the first day of January each year. Exactly one-third of the way through the current year, Abner gave the bonds to his brother, Brody. When Brody receives the $750 of interest on the first day of January next year, what amount will be included in Brody's gross income next year?
$500
For the current year, Harry reported salary and taxable interest income of $60,000. His capital asset transactions during the year were as follows: Long-term capital loss = ($8,000); Long-term capital gain = $4,000; For the current year, what amount should Harry report as adjusted gross income?
$57,000 Harry has a net long-term capital loss of $4,000 [($8,000) LTCL + $4,000 LTCG]. The capital loss deduction is limited to $3,000 per year against Ordinary Income. $60,000 salary and interest income - $3,000 capital loss = $57,000 AGI.
Leon, age 71, is an active participant in his employer's defined benefit plan, but he would also like to make a deductible contribution to a traditional IRA this year. Leon is married, files a joint return with his wife, and has an AGI of $120,000 in 2023. What is the maximum deductible contribution that Leon can make to his traditional IRA?
$6,000
Keith, age 12, has $10,000 in unearned income and $20,000 in earned income in 2023. How much will be taxed at the parent's rate?
$7,500
In the current year, Tom and Tammy Williams, a married couple, file a joint federal income tax return. During the current tax year, the Williams made deductible IRA contributions of $3,000. They are in a 24% marginal income tax bracket. What amount of tax savings is generated by this deduction?
$720
Linwood files his tax return 65 days after the due date. Along with the return, Linwood remits a check for $6,000 which is the balance of the tax owed. Disregarding the interest element, Linwood's total failure to file penalty is:
$810
In 20x1, Cindy invested $100,000 for a 25% interest in a limited liability company (LLC) involved in an activity in which she is a material participant. The LLC reported losses of $340,000 in 20x1 and $180,000 in 20x2 with Cindy's share being $85,000 in 20x1 and $45,000 in 20x2. How much of the losses can Cindy deduct?
$85,000 in 20x1, $15,000 in 20x2 Cindy's losses are not subject to the passive activity loss rules in either year because she is a material participant. However, the at-risk rules limit her losses to $100,000 over the period ($85,000 in 20x1 and $15,000 in 20x2).
Which of the following is not a requirement of the individual investor exception to the passive activity loss rules?
The taxpayer must materially participate in the activity.
Which statement is true with respect to private letter rulings? They cover facts applicable to a particular taxpayer. They deal with completed transactions. They are not binding on the IRS. They are issued at the request of the IRS.
They cover facts applicable to a particular taxpayer.
Expenses incurred in a trade or business are deductible for AGI.
True
If an income tax return is not filed by a taxpayer, there is no statute of limitations on assessments of tax by the IRS.
True
In the case of a gift loan of greater than $10,000 but less than $100,000, the imputed interest rules apply if the donee has net investment income of over $1,000.
True
Ted cashed in his life insurance policy when he found out he had a terminal illness. He had paid $15,000 in premiums and collected $50,000 from the insurance company. Ted is required to include the proceeds in gross income
True Because Ted cashed in (surrendered) his policy, rather than electing the nontaxable accelerated death benefit he will receive the insurance proceeds of $50,000 as taxable income.
Elton and Elsie are husband and wife and file a joint return for this year. Both are under 65 years of age. They provide more than half of the support of their two daughters, Karen (age 17) and Kristie (age 25). Kristie is a full-time medical student. Kristie receives a $5,400 scholarship covering her room and board at college. They furnish all of the support of Hattie (Elton's grandmother), who is age 70 and lives in a nursing home. How many qualified dependent credits ($500) are Elton and Elsie potentially entitled to receive?
Two Two: One for Karen, she is a qualifying child but has aged out at 17, and one for Hattie. Kristie is not a qualifying child—although a full-time student, she is not under age 24 and she does not meet the qualifying relative category due to the gross income test—the type of scholarship aid she receives is taxable. Hattie is not a member of the household but satisfies the relationship test.
Which is the only court that allows a jury trial?
U.S. District Court
Jacob is divorced and has full custody of his two children although they spend every other weekend with their mother. How many personal exemptions is Jacob permitted on his Form 1040 in 2023?
0
Jacob is divorced and has full custody of his two children although they spend every other weekend with their mother. How many dependency exemptions is Jacob permitted on his Form 1040 for 2023?
0 There are no dependency exemptions for years after 2017 (TCJA 2017).
Kenny would like to make a deductible contribution to a Health Savings Account. Which of the following is/are a requirement in order for Kenny to be able to make such a contribution? I. Kenny must be eligible to establish a Health Savings Account. II. Kenny must have a high deductible health plan. III. Kenny must meet the deductible of his HDHP.
1 and 2
Under which of the following circumstances will a taxpayer be subject to an accuracy-related penalty? I. If the taxpayer files an incorrect return and has failed to make a good faith effort to comply with the tax law. II. If the taxpayer understates his tax liability by more than 5 percent of the correct tax liability. III. If the taxpayer makes a substantial understatement associated with an estate or gift tax valuation.
1 and 3 A taxpayer will be subject to an accuracy-related penalty if he makes a substantial understatement of his tax liability, generally more than 10 percent of the correct tax liability and at least a $5,000 deficiency.
Under which of the following circumstances is a trip outside the United States considered to be purely for business? I. The taxpayer does not have control over the timing or arrangements for the trip. II. The trip outside the United States lasts for less than seven days. III. Less than 50 percent of the time spent on the trip was personal. IV. Vacation was not a primary consideration for the trip.
1, 2, and 4
Which of the following authorized the first constitutional federal income tax?
16th Amendment
During the year, Myrna furnished more than 50% of the support for the following persons: Butch, Myrna's husband, who has no income and does not file a return. Wallace, Myrna's cousin, who does not live with her. Brad, Myrna's father-in-law, who does not live with her. Dawn, Myrna's 18 year old daughter who is a full time student. Presuming all other requirements for qualified dependent are met, on a separate return, how many qualified dependent credits may Myrna claim?
2
The Tax Reform Act of 1986 was roughly revenue neutral because: I. It was supported by both Republicans and Democrats. II. It was not intended to raise or lower tax revenues. III. It divided the tax burden evenly between individuals and businesses. IV. It made the tax rates equal across all tax brackets.
2 only The 1986 Tax Reform Act was roughly revenue neutral; that is, it was not intended to raise or lower overall tax revenues, but it shifted some of the tax burden from individuals to businesses. However, the act also created new personal and corporate alternative minimum taxes.
Claude and Daphne are trying to calculate their gross income for this year. Which of the following items should they include in their gross income? I. Child support payments in the amount of $15,000 received by Daphne from her ex-husband for the support of Daphne's minor child Emile. II. $1,200 of dividends received by Claude and Daphne from Mudbugs, Inc., a corporation in which they own 200 shares of stock. III. Unemployment benefits in the amount of $800 received by Claude from the state of Louisiana. IV. $3,000 that Daphne earned selling her homemade andouille sausage.
2, 3, and 4
Beau would like to invest in bonds and is considering either a taxable bond with an interest rate of 5% or a tax-exempt municipal bond of comparable risk and quality with an interest rate of 3%. Beau's marginal tax rate is 25%. In order to help Beau compare these two bonds, compute the equivalent tax-free rate for the taxable bond.
3.75%. The equivalent tax free rate for the taxable bond is [0.05 × (1 - 0.25)] = 3.75% Tip: When given the taXable rate, multiply (X) [solve for tax free equivalent]. When give the tax-free rate, divide [solve for the taxable equivalent].
Beau would like to invest in bonds and is considering either a taxable bond with an interest rate of 6% or a tax-exempt municipal bond of comparable risk and quality with an interest rate of 2%. Beau's marginal tax rate is 37%. In order to help Beau compare these two bonds, compute the equivalent tax-free rate for the taxable bond.
3.78% The equivalent tax free rate for the taxable bond is [0.06 × (1 - 0.37)] = 3.78%
Giselle became an AMT taxpayer last year. She had to add several items to her regular taxable income in arriving at alternative minimum taxable income. Which of the following items will result in an AMT credit that can be used to offset future regular tax liability?
A $75,000 difference between the fair market value of stock and the strike price in the incentive stock option used to purchase the stock.
Which of the following statements regarding cafeteria plans is not correct?
A cafeteria plan must offer at least three nontaxable benefits.
Ron wants to make a gift to a state university. Which of the following gifts would provide Ron with the largest charitable deduction for the current tax year if his AGI is $60,000 and he has not made any prior gifts?
A cash gift of $20,000.
Ron wants to make a gift to a state university. Which of the following gifts would provide Ron with the largest charitable deduction for the current tax year if his AGI is $100,000 and he has not made any prior gifts?
A cash gift of $55,000.
Which of the following events would produce a deductible loss?
A delivery van used for business and destroyed in an auto accident.
Which of the following, if any, correctly characterize the check-the-box Regulations?
A one-owner business becomes a sole proprietorship if default (no election is made) occurs.
Tommy Vasquez has taxable income of $200,000. He is concerned about being subject to the alternative minimum tax (AMT). The following income and deductions were included in computing his taxable income. Select one item which may be added to (or subtracted from) regular taxable income in calculating the AMT.
A state income tax deduction of $5,000.
Tommy Vasquez has taxable income of $200,000. He is concerned about being subject to the alternative minimum tax (AMT). The following income and deductions were included in computing his taxable income. Select one item which may be added to (or subtracted from) regular taxable income in calculating the AMT.
A state property tax deduction of $5,000. Options "A", "C" and "D" are incorrect as they are neither added nor subtracted from the regular income to calculate AMT. State property taxes deducted as an itemized deduction will be added back into regular income to calculate Alternative Minimum Taxable Income.
All of the following statements about the Alternative Minimum Tax (AMT) are correct, EXCEPT: A taxpayer may elect to pay tax based on the AMT calculation if it produces a lower tax result. The AMT is designed primarily to change the timing of tax payments to more current tax payments. The AMT frustrates efforts by taxpayers to participate in activities that reduce or eliminate their current tax liability. Some adjustments made for AMT purposes result in a permanent increase in tax.
A taxpayer may elect to pay tax based on the AMT calculation if it produces a lower tax result.
Which statement is false with respect to the U.S. Tax Court?
A taxpayer must pay the deficiency before litigating here.
Which income is subject to self-employment tax: A.Self-employment income. B.Income from an LLC when acting as a member-manager. C.Distributive share of a general partner's income regardless of the nature of the partnership. D.All of the above.
All of the above answers will subject a taxpayer to self-employment tax.
Sara's daughter Tara completed her senior year of college in the current year. Sara paid $3,000 in qualified education expenses for Tara in the current year. Sara is a MFJ taxpayer and has an AGI of $50,000 for the current year. What, if any, education credit will provide Sara the highest credit and how much is that credit?
American Opportunity Tax Credit in the amount of $2,250. Option "B" is correct because the American Opportunity Tax Credit will provide a credit of up to $2,500 = 100% of the first $2,000 of expenses and 25% of the next $2,000 of expenses. In this case the credit is 100% of $2,000 plus 25% of $1,000 = $2,250. Option "C" is incorrect, because although the LLC may provide Sara a credit equal to 20% of her qualified education expenses, or $600, she would choose the American Opportunity tax credit - she cannot claim both. Option "D" is incorrect because Sara would need to have paid $10,000 in qualified education expenses in order to claim the maximum Lifetime Learning Credit of $2,000.
Sara's daughter Tara completed her senior year of college in the current year. Sara paid $5,000 in qualified education expenses for Tara in the current year. Sara is a MFJ taxpayer and has an AGI of $50,000 for the current year. What, if any, education credit will provide Sara the highest credit and how much is that credit?
American Opportunity Tax Credit in the amount of $2,500.
Britney owned an office building in Los Angeles that she rented out to several production companies. The building was destroyed by a fire and was a complete loss. Britney received a settlement from her insurance company in the same year and would like to reinvest in a new property. Britney wants to make sure that she is eligible for like-kind exchange treatment. Which of the following is not correct regarding the requirements for like-kind exchange treatment on Britney's transaction?
Because Britney rented out the building instead of using the property directly, the replacement property must meet the functional use test.
During the year, Myrna furnished more than 50% of the support for the following persons: Butch, Myrna's husband, who has no income and does not file a return. Wallace, Myrna's cousin, who does not live with her. Brad, Myrna's father-in-law, who does not live with her. Dawn, Myrna's 17 year old niece who lives with her and is in high school. Presuming all other dependency requirements are met, on a separate return, who may Myrna claim a qualified dependent credit for?
Brad and Dawn only.
What is the primary advantage of using the Section 179 Deduction over other cost recovery methods?
By deducting more currently, total tax liability is reduced and the present value of cash flows is increased.
Which of the following personal income tax planning techniques are used to defer (postpone) taxation?
Contributing to an individual retirement account.
What difference does it make if a taxpayer's expenses are classified as un-reimbursed employee expenses rather than expenses from self-employment? Un-reimbursed employee expenses are subject to a hurdle of 2% of the taxpayer's AGI. They also require the taxpayer to itemize before the deduction can be taken. Expenses from self-employment are deducted above the line and have no AGI floor. Un-reimbursed employee expenses are not deductible. Expenses from self-employment are subject to a floor of 2% of the taxpayer's AGI. They also require the taxpayer to itemize before the deduction can be taken.
D.II and III only.
In 20x1, Dan exercised an incentive stock option, acquiring 150 shares of stock at an option price of $75 per share (fair market value at the date of exercise was $130 per share). Which of the following statements is incorrect? Dan has a positive AMT adjustment from the ISO in 20x1. Dan has no taxable income from the ISO in 20x1. Dan has an AMT basis of $19,500 in the stock. Dan has an income tax basis of $19,500 in the stock. If Dan sells the stock less than a year from exercise it will be a disqualifying disposition.
Dan has an income tax basis of $19,500 in the stock. The question is looking for the false statement. The transaction has no effect on taxable income but there is a positive alternative minimum tax adjustment in 20x1. Dan's AMT basis is equal to FMV at the date of exercise (19,500), and his regular income tax basis is equal to his cost (11,250). To ensure the best tax consequences for ISOs, the sale must be 1 year from exercise and 2 years from grant.
Which of the following is not an administrative source of tax law?
Decisions by the U.S. Tax Court.
Fiona is a highly compensated employee of GreatWorks, Inc. Which of the following fringe benefits would be taxable to Fiona?
Dependent care assistance for the highly compensated employees of GreatWorks.
What difference does it make if a taxpayer's expenses are classified as un-reimbursed employee expenses rather than expenses from self-employment?
Expenses from self-employment are deducted above the line and have no AGI floor.
For the year 2023, personal casualty loss deductions are never allowed on Form 1040.
False
Proposed Regulations carry more weight than Temporary Regulations.
False
Tad is eligible for a qualified dependent credit for his 70-year-old mother. In calculating her taxes, his mother may not claim an additional standard deduction for her age.
False
In Year 1, Ted purchased an annuity for $60,000. The annuity is to pay him $1,500 per month for the rest of his life. His life expectancy is 120 months. Which of the following is true?
For each $1,500 payment received in the first year, Ted must include $1,000 in gross income.
Which income is not subject to self-employment tax:
Gambling winnings.
Joyce, a farmer, has the following events occur during the tax year. Which of the events qualify as an involuntary conversion under § 1033 (non-recognition of gain from an involuntary conversion)?
Her personal residence, adjusted basis of $100,000, is condemned to make way for an interstate highway. She recovers condemnation proceeds of $175,000.
John, Jay and Jeff each have an ownership interest in Three Guys Burgers, Inc. Based on the following information, which of them is/are considered to have materially participated in the conduct of the Three Guys Burgers business this year? John dedicated more than 500 hours this year to Three Guys Burgers. Jay devoted 150 hours to Three Guys Burgers this year. Jeff devoted 115 hours to Three Guys Burgers this year, but also devoted more than 100 hours to several other activities, for a total of 520 hours in all of the activities combined.
I and III only.
Which of the following are requirements for satisfying the bona fide resident test necessary for excluding foreign earned income? I. The taxpayer must establish permanent quarters in the foreign country for himself and his family. II. The taxpayer may not return to the United States during the year. III. The taxpayer must intend to work in the foreign country for an indefinite period of time.
I and III only.
Income to U.S. taxpayers is taxed in the year it is derived in which of the following situations? Interest earned but reinvested in a savings account in an FDIC savings bank. Unrealized long-term capital gains on stocks. Income earned on most municipal bonds. Short-term gains realized within a qualified plan. Increased value of personal residence.
I only.
Which of the following personal income tax planning techniques are used to defer (postpone) taxation? Itemizing deductions. Contributing to an individual retirement account. Using the child care credit. Owning cash value life insurance.
II and IV only.
In the case of a below-market loan between family members, if the imputed interest rules apply: I. The borrower must recognize interest income. II. The lender has interest income. III. The lender is deemed to have made a gift. IV. The borrower has interest expense.
II, III, and IV are true but I is false.
Which of the following is correct? Realized gains are always recognized and realized losses are never recognized. Realized gains and realized losses on the sale of personal use assets are not recognized. Realized gains and realized losses on the sale of personal use assets are recognized. Realized gains from the sale of a personal residence may be excluded.
IV only.
Kevin owns a modified endowment contract. Kevin recently reassessed his insurance needs and decided that he would like to exchange his current modified endowment contract for a different insurance product. Which of the following transactions might result in gain realization?
If Kevin trades his modified endowment contract for a life insurance policy.
Which of the following statements regarding the deduction of costs associated with investigating the purchase of a new line of business is not correct?
If the new line of business is purchased and it is in a different line of business as the current trade or business operation, there is no way to recoup the costs of investigation.
Under what circumstances is a taxpayer required to use a calendar year tax period?
If the taxpayer does not keep books or accounting records.
Which of the following is correct? A.Realized gains are always recognized and realized losses are never recognized. B.Realized gains and realized losses on the sale of personal use assets are not recognized. C.Realized gains and realized losses on the sale of personal use assets are recognized. D.In an involuntary conversion, the date of realization, not the payment date, determines the date of recognition.
In an involuntary conversion, the date of realization, not the payment date, determines the date of recognition.
Which of the following taxes generates the largest percentage of gross collections for the Internal Revenue Service?
Individual income tax.
Income to U.S. taxpayers is taxed in the year it is derived in which of the following situations?
Interest earned but reinvested in a savings account in an FDIC savings bank. All others are forms of legal tax deferral or tax exemption.
Iris, a widow, elected to receive the proceeds of a $100,000 face value life insurance policy on the life of her deceased husband in annual installments of $12,500 over the remainder of her life, estimated to be 10 years. Which of the following is true?
Iris must include $2,500 in gross income each year for the first 10 years she collects on the policy. The income portion of the first annuity payment received is $2,500 ($12,500 - $10,000 exclusion). The exclusion is calculated as follows: ($100,000/125,000) × $12,500 = $10,000
Tim and Janet were divorced. Their only marital property was a personal residence with a value of $100,000 and cost of $40,000. Under the terms of the divorce agreement, Janet would receive the house and Janet would pay Tim $10,000 each year for 5 years, or until Tim's death, whichever should occur first. Tim and Janet lived apart when the payments were made to Tim. The divorce agreement, dated December 15, 2017 did not contain the word "alimony." Which of the following is true?
Janet is allowed to deduct $10,000 each year for alimony paid.
Gary and Anthony are starting a new business. They are concerned about liability. They would like to have flow-through taxation. They will own the company 50/50 but want to allocate the profits 60/40. Which of the following entities would best suit their needs?
LLC
Kayci would like to establish a business with her business partner Nathan. They would like to have an entity that provides for limited liability. They would like the flexibility to allocate profits and losses in a percentage differing from their ownership interest. They expect losses in the first few years. Which entity should they establish?
LLC taxed as a partnership
If you meet all of the requirements of a 1031 tax-free exchange, which of the following is true?
Like-kind exchange treatment is mandatory.
Lisa owns the original copy of the Moaning Myrtle, one of the few paintings created by a renowned renaissance artist and inventor. The Moaning Myrtle has been in Lisa's family for years, but she is getting older and moving into a smaller house and none of her children want the painting. When Lisa inherited the Moaning Myrtle from her father's estate, the value was estimated to be $25,000, but an art expert recently appraised the painting at $750,000. Lisa wants the painting to be cared for, so she donates it to a local art museum, which has agreed to display the painting. Assuming that Lisa's AGI is $100,000 this year, which of the following statements is correct?
Lisa can deduct $30,000 this year and carry forward $720,000 for the next five years.
Lisa owns the original copy of the Moaning Myrtle, one of the few paintings created by a renowned renaissance artist and inventor. The Moaning Myrtle has been in Lisa's family for years, but she is getting older and moving into a smaller house and none of her children want the painting. When Lisa inherited the Moaning Myrtle from her father's estate, the value was estimated to be $30,000, but an art expert recently appraised the painting at $600,000. Lisa wants the painting to be cared for, so she donates it to a local art museum, which has agreed to display the painting. Assuming that Lisa's AGI is $150,000 this year, which of the following statements is correct?
Lisa can deduct $45,000 this year and carry forward $555,000 for the next five years.
Marge made a $60,000 interest-free loan to her son, Steve, who used the money to buy an automobile. Steve's only sources of income were $25,000 from wages and $250 of interest on his checking account. The relevant Federal interest rate was 5%. Based on the above information:
Marge is not required to impute any interest.
Emily, whose husband died in December of this year, maintains a household in which her dependent daughter lives. Which of the following is most likely to be her filing status for this year?
Married, filing jointly
Which of the following is a deduction from AGI (itemized deduction)?
Mortgage Interest
Which of the following decreases a taxpayer's at-risk amount?
None of the choices
Which of the following exchanges qualifies for non-recognition treatment as a § 1031 like-kind exchange?
None of the choices
Giselle became an AMT taxpayer last year. She gave you the following information for the year: $10,000 in property taxes paid on her principal residence is paid in advance. An $80,000 difference between the fair market value of stock and the strike price in the NQSO used to purchase the stock. $6,000 in interest on public activity municipal bonds. $10,000 in additional medical expenses (in excess of 7.5% of AGI). Which of the following statements is true?
Only the property taxes will be a positive adjustment for AMT.
Which of the following statements is/are NOT representative of the Federal income tax on individuals?
Persons who have earned income other than wages are subject to withholdings.
Frank is considering selling a parcel of raw land located in South Dakota that he owns. If Frank sells the land, he would like to invest the proceeds in another piece of real property and would like to qualify for like-kind exchange treatment. Which of the following assets would not qualify as like-kind property?
Raw land located in Canada.
Which of the following is true regarding real estate activities?
Real estate professionals may be allowed to consider their real estate activities as active in some circumstances.
In September of this year, Rudolph refinanced his home. Prior to refinancing, his only outstanding debt was the balance due on his original mortgage of $110,000. Rudolph needed some additional money to pay for his child's college education and to take advantage of an investment opportunity, so upon refinancing, Rudolph took out a 30-year mortgage for $250,000. To reduce the interest rate on the mortgage, down to 5%, Rudolph paid $2,500 in points on refinance. Which of the following statements is correct?
Rudolph can deduct the mortgage interest incurred on $110,000, plus a pro rata portion of the points paid on refinancing. The remaining interest is not deductible.
Danny is starting a new business. He is concerned about liability. He would like to have flow-through taxation. At some point, he would like to be able to easily sell interests in the business, but he does not expect to have more than 20 investors. Danny does not want to pay self-employment taxes on all income. Which of the following entities would best suit Danny's needs?
S corporation.
Which of the following statements is representative of the Federal income tax on individuals?
Self employed individuals must make estimated payments or face interest and penalties.
Which of the following can be claimed as a deduction for AGI?
Self-employment tax
Jared, a fiscal year taxpayer with a September 30th year end, owns an office building that was destroyed by a fire on September 12, 20x1. The adjusted basis was $715,000 and the insurance settlement was $950,000 (received on March 1, 20x2). What is the latest date that Jared can replace the office building in order to qualify for § 1033 (non-recognition of gain from an involuntary conversion)?
September 30, 20x4
Ursula and her husband Boris were legally separated in January 2023, and their divorce became final on December 30, 2023. Ursula's children lived with her for the first four months of 2023, but moved in with their father after Ursula was declared legally blind in April. Ursula did not contribute anything to the cost of maintaining the household when the children were living with her husband. Ursula is 40 years old. What filing status can Ursula use for her 2023 tax filing and what is her standard deduction?
Single; $15,700
All of the following statements about the Alternative Minimum Tax (AMT) are incorrect, EXCEPT:
Some adjustments made for AMT purposes result in a permanent increase in tax.
Which of the following, if any, do not describe the status or nature of limited liability companies?
Statutes creating these entities have been adopted by only a minority of the states.
What is the primary advantage of using the Section 179 Deduction over other cost recovery methods?
The Section 179 limit allows a business to deduct more up front.
Sarah is a 10 percent owner in Canine Connection, LLC, a day-care center for dogs. She is also a 15 percent owner in Little Laughter, LLC, a successful children's clothing store. She does not materially participate in either business. Her at-risk and loss/income for the current year is as follows: Canine Connection-At-risk = $175,000; Loss of $275,000 Little Laughter-At-risk = $25,000; Income of $125,000 She also has wage income of $80,000 and capital gain income of $30,000. Which of the following statements is true?
The loss suspended because of the at-risk rules is $100,000 and the loss suspended because of the passive activity loss rules is $50,000.
Sarah is a 10 percent owner in Canine Connection, LLC, a day-care center for dogs. She is also a 15 percent owner in Little Laughter, LLC, a successful children's clothing store. She does not materially participate in either business. Her at-risk and loss/income for the current year is as follows: Canine Connection-At-risk = $150,000; Loss of $200,000 Little Laughter-At-risk = $50,000; Income of $10,000 She also has wage income of $100,000 and capital gain income of $25,000. Which of the following statements is true?
The loss suspended because of the at-risk rules is $50,000 and the loss suspended because of the passive activity loss rules is $140,000.
