Income

Question 1

What amount of group-term life insurance provided by an employer must be included in an employee’s income?

Answer 1

The amount which must be included is the extent of the cost of life insurance coverage in excess of $50k

Question 2

When will a lessor exclude amounts received from the lessee in income?

Answer 2

A lessor excludes from income any increase in the value of property caused by improvements made by the lessee, unless the improvements were made in lieu of rent

Question 3

Under the tax benefit rule, how much of a state income tax refund should be included in gross income?

Answer 3

Income should be included to the extent that the refunded amount was deducted in a PY and the deduction provided a benefit by reducing the taxpayer’s federal income tax of the prior year

not necessarily the full amount of the refund

Question 4

When calculating gross income, what amount is included in gross income?

For example, Jay was hit by a reckless driver and sustained injuries. Jay sued the driver and received the following:
1) Damages for personal physical injury - $80k
2) Punitive damages - $100k

What amt is to be included in Jay’s gross income?

Answer 4

If an action has its origin in a personal physical injury, then all resulting damages (other than punitive damages) can be excluded from gross income

Only the $100k punitive damages would be included as the ‘Damages for personal physical injury’ are specifically excluded

Question 5

What is the maximum amount an individual can deduct in 2022 for IRA contributions when the individual is covered by a qualified employee pension plan?

For example, Ron earned $70k salary as a plumber and an additional $15k from self-employment in 2022. The plumbing company covered Ron under their qualified pension plan for employees. What’s the maximum amount Ron can deduct for IRA contributions in 2022?

Answer 5

Ron can deduct $0 since he is covered by the company’s qualified pension plan.

A single individual with AGI over $78k for 2022 would ONLY BE ENTITLED TO AN IRA DEDUCTION if the taxpayer is NOT covered by a qualified employee pension plan.

Question 6

Corbin, a sole proprietor had a Keogh profit sharing plan where he can contribute 15% of his annual earned income. For this purpose “earned income” is defined as a net self-employment earnings reduced by the:

Answer 6

Deductible Keogh contribution and 1/s the self employment tax

The max contribution to a Keogh profit sharing plan is $61k in 2022.

Question 7

Which of the following is correct concerning the LIFO method (as compared to the FIFO method) in a period when prices are rising?

A) Deferred tax and COGS are lower
B) Current tax liability and ending inventory are higher
C) Current tax liability is lower and ending inventory is higher
D) Current tax liability is lower and COGS is higher

Answer 7

D = Correct. LIFO Benefits a taxpayer in periods of rising prices b/c recently incurred high costs flow through COGS while previously incurred low costs remain in ending inventory.

Compared to FIFO, LIFO increases COGS and decrease Ending Inv, thus decreasing GP, TI, and Current Tax Liability

Question 8

For a taxpayer whose AGI is not above the applicable phase-out range, what amount is a deductible contribution regardless of the proportional phase-out rule?

Answer 8

$200. This $200 applies separately to taxpayer and taxpayer’s spouse

Question 9

Are medical insurance premiums paid by an employer included or excluded from gross income?

Answer 9

Medical insurance premiums paid by an employer are EXCLUDED from and employee’s gross income

Question 10

Which of the following items would be included in gross income?

A) Scholarship (tuition and fees)
B) Loan from college financial aid office
C) Cash support from parents
D) Dividends on investment
E) Cash prize from contest

Answer 10

A - Excluded
B - Excluded
C - Excluded
D - Included
E - Included

Question 11

Some facts about the education IRA (aka Coverdell Education Savings Account) include:

Answer 11

1) COntributions to an education IRA are not deductibly, but withdrawals of earnings will be tax-free if used to pay the qualified deucation expenses of the designated beneficiary
2) Max contribution amt is $2k, there is a phase out (single - $95k-$110k; MFJ $190k-$220k)
3) Contributions can be made on behalf of a beneficiary until they reach 18

Question 12

What amount of payments received on behalf of a foster child are included in gross income?

For example, Mr. & Mrs. Dunn took in a foster child named Robert. A state welfare agency paid them $3,900 for related expenses. Actual expenses incurred for Robert (foster child) amounted to $3k. The remaining $900 was spend by the Dunn’s toward their own personal expenses. What amount of this foster child payment is taxable to the Dunn’s?

Answer 12

Foster child payments are excluded from gross income to the extent they represent reimbursement for expenses incurred for the care of the foster child.

Since payments exceeded expenses, the $900 excess should be included in the Dunn’s gross income.

Question 13

For an individual over the age of 50 and in tax year 2022, what is the maximum amount that can be deducted for contributions to an IRA?

Answer 13

Individuals at least the age of 50 can make a catch-up payment of $1k on top of the $6k IRA deduction (Not considering any phase out). $7k total per person at/over 50 years old

Question 14

When is alimony included in gross income for the recipient?

Answer 14

For divorces settled prior to 12/31/2018 - alimony is included in income

For divorces settled ON OR AFTER 1/1/2019 - alimony is NOT included in the recipients income

Question 15

A corp’s income tax return for Y8 shows deductions exceeding gross incoem by $56,800. Included in the tax return are the following items:

NOL Carryover from Y7: $15k
DRD: $6,800

What is the Corp’s NOL for Y8?

Answer 15

In computing the NOL for Y8, the DRD of $6,800 would be fully allowed, but the $15k NOL carryover would not be allowed.

$56,800 - $15k = $41,800

Question 16

Pierre, a headwaiter, received tips totaling $2k in December Y5. on January 5, Y6, Pierre reported his tip income to his employer in the required written statement. At what amount, and in which year, should this tip income be included in Pierre’s gross income?

Answer 16

$2k in Y6. If an individual receives $20 or more in tips during one month while working for one employer, the individual must report the total amount of tips to the employer by the end of the tenth day of the next month.

Then the tips are included in gross income for the month in which they are reported to the employer.

Question 17

A Corp calculated the following taxes for the Current year:

Regular Tax Liability: $240k
Accumulated Earnings Tax: $40k
PHC Tax: $65k

What is the total tax liability for the year?

Answer 17

Personal holding companies cannot be subject to the accumulated earnings tax. So if both penalty taxes could apply, only the PHC tax must be paid.

Total Tax Liab = $204k + $65k = $305k

Question 18

Which types of interest income is includable on a tax return?

For example:
Interest on federal tax refund
Interest on state tax refund
Interest on state government obligations
Interest on federal government obligations

Answer 18

Interest received on federal and state tax refunds = include as taxable interest income on TR.

Interest received on federal government obligations = include as taxable interest income as interest on these obligations is taxable

Interest on state government bonds = tax-exempt income

Question 19

In Y9, Kara Corp. incurred the following expenditures in connection with the repurchase of its stock from shareholders to avert a hostile takeover:

Interest on borrowings used to repurchase stock: $100k

Legal and accounting fees in connection with the repurchase: $400k

The total of the above expenditures deductible in Y9 is:

Answer 19

Answer = $100k

Generally, no deduction is allowed for any amount paid or incurred by a corporation in connection with the redemption of its stock, EXCEPT FOR INTEREST EXPENSE ON LOANS TO REPURCHASE STOCK

Question 20

Which one of the following statements concerning the deduction for interest on qualified education loans is correct?

a) The deduction is available to a married taxpayer filing separately
b) Qualified education expenses do not include room and board
c) The educational expenses must relate to a period when the student was enrolled on a full-time basis
d) The deduction is subject to reduction if AGI exceeds specified levels

Answer 20

d) = correct.

An individual is allowed to deduct up to $2,500 for interest on qualified education loans in arriving at AGI.

Loan proceeds must be used to pay for higher education expense (tuition, fees, room, board) of taxpayer, spouse, or dependent.

Education expenses must relate to a period when the student was enrolled on at least a half-time basis. Married taxpayers MUST file a joint return to qualify for the deduction

Question 21

Are amounts received for room and board included or excluded from gross income?

Answer 21

included in gross income

Question 22

How much of business interest expense is allowable as an itemized deduction?

For example, Olive Corporation borrowed $1 mil to provide cash for its start-up business. For 2022 the business paid $35k in interest expense, reported $125k of revenues, and had $26k of other operating expenses. What amount of business interest expense is deductible for Olive Corporation?

Answer 22

Business interest expense is limited to 50% of the businesses’ adjusted taxable income UNLESS the corporations gross receipts do not exceed $27 mil (2022) average receipts test

Answer - $35k

Question 23

A self-employed taxpayer reported the following infomration in 2022:

Income:
Dividend - $500
ST Cap Gain - $1k

Deductions:
Loss from business: ($6k)
Standard deduction: ($12,950)

What is the amount of his NOL for 2022?

Answer 23

Since a NOL generally represents a business loss, an excess of nonbusiness deductions over nonbusiness income cannot be subtracted in computing the NOL.

Nonbusiness deductions generally include ITEMIZED and STANDARD Deductions

Answer - $6k (this is the NOL)

The taxable loss would be the sum of everything, but the NOL is limited to the business loss

Question 24

Which of the following can be used to calculate interest expense in calculating itemized deductions for the year?

a) Interest on automobile loan
b) Interest on bank loan (loan proceeds were used to purchase municipal bonds)
c) Interest on home mortgage
d) Penalty prepayment of home mortgage

Answer 24

Only C + D are deductible.

Interest paid on debt incurred to purchase tax exempt organization is nondeductible

Auto loan - personal interest (not deductible)

Question 25

For Individual/MFJ taxpayers, what items are subject to the 60% AGI limit? Which are subject to the 30% AGI limit?

Answer 25

60% - cash gifts & donations to universities
30% - deduction for the gift of appreciated capital gain property

Question 26

What is the QBI income threshold for individuals and MFJ taxpayers?

Answer 26

$340,100 (MFJ) and $100k window
$170,050 (Individuals/others) and $50k window

Question 27

When are group term life insurance premiums deductible?

Answer 27

Group term life insurance premiums paid by an employer for policies on the lives of its employees, with the employees’ dependents as beneficiaries, are ALWAYS DEDUCTIBLE by the employer

Life insurance premiums on the life of a corporate officer are NONDEDUCTIBLE when the corporation is the beneficiary. The premiums are nondeductible b/c the proceeds paid to the corporation upon the death of the officer will be nontaxable.