Quiz Questions

Question 1

What is the percent penalty for negligence?

Answer 1

20%

Question 2

What is the best source for obtaining information on a very recent change in tax law?

Answer 2

Congressional Committee reports

Question 3

What carries the “full force and effect of the law?”

Answer 3

Treasury regulations

Question 4

What is the penalty for failure to file a tax return?

Answer 4

5% a month up to 25%

Question 5

Best way to describe sham transaction

Answer 5

IRS will ignore the transaction and no gain or loss will be recognized for tax purposes

Question 6

This % penalty may also apply to misstatement of valuation or substantial understatement of income tax

Answer 6

20%

Question 7

Assignment of income doctrine explained how

Answer 7

Income is taxed to the tree that grows the fruit, even though the income is assigned to another prior to receipt

Question 8

Susan is insolvent and at this point, has not sought bankruptcy protection. Her assets total $65,000, while her debt amounts to $185,000. She has just learned that the lender who is owed the $185,000 has forgiven her debt. How much will Susan be taxed on the debt forgiveness?

Answer 8

$65,000
If the amount forgiven in debt is more than what you own outside of bankruptcy, you’re only taxed on the excess amount.

Question 9

Sales where payments are due within how many months are exempted from imputed interest rule?

Answer 9

6 months

Question 10

Client has $40k in gambling winnings and $22k in expenses directly related to those winnings. Assuming client is not a professional gambler, how much must Joel report as his gambling winnings?

Answer 10

$40k - they’re asking for the gross income number. Since he is not a professional gambler he can’t deduct his expenses from the winnings.

Question 11

Is child support received by the custodial parent included in gross income?

Answer 11

No - think about yourself, you don’t include it in your gross income

Question 12

Two years ago, Sam went to town’s recycling center and brought home several books from the “take it or leave it” section. Recently, Sam discovered that one of the hardcover book’s pages was cut out in the center and $7,000 was in its place. He spent $50 advertising in the local newspaper that he found money in a book but no one could claim the title of the book or amount. What are the tax ramifications to Sam?

Answer 12

Sam must report $7,000 in the current year

Question 13

John lent his son $50,000 for the purchase of a new house, with the understanding that in five years, his son would re-pay the loan at face value. For the current tax year, John’s son had net investment income of $1,400. Assume that the Applicable Federal Rate (AFR) for mid-term loans is 3%. Calculate the imputed interest for the first year.

Answer 13

$1400

In the $10,001-$100,000 range the lender must impute the lesser of the borrower’s net investment income or the AFR times the loan amount $50,000 X .03 = $1,500 vs $1,400

Question 14

Client wants to know the diff between deduction and credit. She just received a $600 credit and wants to know what thats worth as a deduction if she were to itemize deductions. Calculate the equivalent for a deduction if her marginal tax rate is 24%.

Answer 14

TC/MTB

600/.24 = $2500

Question 15

Clients are married filing jointly. 2 kids age 7 & 10. What is their total gross income before any adjustments?

Answer 15

Total gross income before any deductions for Jack and Jill:
$50,000 (Jack’s W-2 wages) + $130,000 (Jack’s net income from sole proprietorship) + $1,400 (dividends) + $30,000 (Jack’s gambling winnings) + $70,000 (Jill’s W-2 wages) = $281,400.

Question 16

Clients are married filing jointly. 2 kids age 7 & 10. What is their total itemized deductions?

Answer 16

$20k mortgage interest + 10k taxed paid + 18k gambling losses = $48k
Remember taxes are limited to 10k total
NOT alimony

Question 17

Marcia Washington, a single taxpayer, has the following itemized deductions:

Marcia’s AGI is $204,350. Under the regular tax method, she is allowed final itemized deductions of $51,920. What amount of deductions, if any, would be allowed for the purposes of AMT?

Answer 17

$41,920

State tax and property tax are disallowed under AMT.

$29,920 (Mortgage interest) + $7,000 (charity) + $1,900 (gambling losses) + $3,100 (margin interest) = $41,920

Question 18

Bill and Diana are MFJ w 2 kids 9 & 12
What are their allowable itemized deductions under the AMT method?

Answer 18

$24,200

$22,000 (mortgage interest) + $2,200 (charity) = $24,200

Question 19

Bill and Diana are MFJ w 2 kids 9 & 12. How much is the AMT taxable income?

Answer 19

$233,201

$221,401 (AGI) + $36,000 (ISO) - $24,200 (mort. interest 22k + 2.2k charity) = 233,201

Question 20

If it’s asking about AMT what are you thinking for itemized deductions?

Answer 20

Think mortgage interest, charitable contributions, gambling losses, margin interest - not taxes

Question 21

Last month, client’s Aunt gave him 65k of MSFT, which she purchased 19 yrs ago for 17k. Aunt paid gift tax of 10k on the transaction, even after utilizing 15k annual gift tax exemption. What is Robert’s basis and what is his holding period?

Answer 21

$26,600 long term
You’re trying to figure out how much of the tax the aunt paid can be added to the basis.
Aunt’s basis + gift tax adjustment which is appreciation/taxable amount of the gift.
$65k - 17k = 48k appreciation
Taxable amount of gift is FMV - annual exclusion if applicable. So
65k - 15k = 50k
48k/50k = 96%
10k * .96 = $9,600 + 17k = $26,600

Question 22

For the donee to receive the benefit of gift taxes paid by the donor, what must take place?

Answer 22

There must be appreciation, FMV is greater than basis

Question 23

Client inherited 1,000 shares of stock from uncle. Uncle purchased 7 years ago for $59. FMV on date of uncle’s death $45. FMV 6 months later $43.
If the executor of uncle’s estate did not select the alternate valuation date, what is client’s basis?

Answer 23

$45,000 - price on date of uncle’s death - price is lower than when originally purchased

Question 24

Client inherited 1,000 shares of stock from uncle. Uncle purchased 7 years ago for $59. FMV on date of uncle’s death $45. FMV 6 months later $43.
If the executor of uncle’s estate DID select the alternate valuation date, what is client’s basis?

Answer 24

$43,000 - $43 per share 6 months after death

Question 25

Client received 1,0000 shares of stock from uncle which uncle purchased 7 yrs ago for $59. Client received as gift 2 years ago when price was $70. Uncle utilized annl exclusion of 15k but still had to pay $25k in gift tax. What is client’s basis per share?

Answer 25

Appreciation/Taxable amount of gift * taxes paid / shares = gift tax adjustment per share. Then add to donor’s purchase basis.

(70-59)/(70-15) = .20
.20 * 25,000 / 1000 = 5 + 59 = $64 per share

Question 26

Client received 1,0000 shares of stock from uncle which uncle purchased 7 yrs ago for $59. Client received as gift 2 years ago when FMV was $55. Uncle utilized gift tax exclusion of $15,000 but still had to pay gift tax of $21,000. Assuming client sold this year for $60, what was his basis?

Answer 26

His basis is $59. Client takes over uncle’s purchase price bc FMV was lower than purchase price. Gift tax doesn’t apply bc there was no appreciation.

Question 27

Client received stock from Uncle as gift 8 months ago. Uncle purchased several years ago for $59. FMV at time of gift was $55 and client sold it soon after for $57. What are tax ramifications?

Answer 27

If client sells for more than FMV at time of transfer BUT less than original basis, there is no gain or loss recognized. RECOGNIZED for tax purposes

Question 28

What income determines eligibility of tax credits and deductions?

Answer 28

Modified Adjusted Gross income determines eligibility of tax credits and deductions.

Question 29

Modified adjusted gross income tax taxpayers AGI and adds back what?

Answer 29

tax exempt items such as municipal bond interest and NON TAXABLE SOCIAL SECURITY BENEFIT

Question 30

What determines a taxpayers rate on the last dollar they earn? AKA one’s marginal tax bracket?

Answer 30

Taxable Income is used to determine the marginal tax bracket of a taxpayer. Meaning that either the standard or itemized deductions are factored in. Results in major $$ savings vs using AGI or MAGI

Question 31

What is above the line?

Answer 31

Schedules - C, E, F, etc
Gross Wages - W2s
Adjustments - HSAs, Self employ. health ins., self employ tax
______________________________________

Question 32

What is below the line?

Answer 32

Itemized deduction - SALT, Mort Int, Charitable Cont.
QBI - Net income sched C, REITS
Credits - refundable, nonrefundable

Question 33

Tom has gross rev of 65k from his 1st calendar yr of his financial planning practice. He incurred the following expenses:
Advertising: 1,100
Office Rent: 21,000
Legal fees: 1,200
Software licenses: 8,000
Health ins Premiums: 6,000
Error and Omission Ins: 1,200
What net profit would he report on line 31 of Sched C?

Answer 33

Everything but the Health Ins.
Health insurance is not a Sched. C item, it’s an adjustment to AGI

65,000 - 32,500 = 32,500 Sched. C income

Question 34

Where would you look on a W-2 for the info for adjusted gross income?

Answer 34

Line 1

Question 35

As a self employed individual you have to pay the full 15.3%, however you can

Answer 35

claim 1/2 the self employment tax as an adjustment to gross income

Question 36

Client is freelance graphic designer and generated $90,000 gross revenues. Incurred $40,000 in schedule C expenses. What is her self employment income?

Answer 36

$50,000

90,000 - 40,000 = 50,000 schedule C income

Question 37

Client has W2 earnings of $150,000. He also has landscaping LLC which generates $80,000 in net profit. What is his self employment tax?

Answer 37

150k + 80k is over the threshold of $168,600
80,000 * .9235 * .029 = $2,143

168,600 - 150,000 * .124 = $2306

$2143 + $2306 = $4,449

Question 38

Client has gross W2 earnings of $150,000 but maxes out his 401k contributions. He also has LLC with $80k net profits. Wife is freelance graphic designer and generated $90,000 gross revenues. Incurred $40,000 in schedule C expenses. Client earned $1500 in stock dividends of which $1400 are qualified dividends. 50k gambling winnings but lost $30k. What is their gross income before adjustments to gross income?

Answer 38

150,000 gross - 22,500 (401k) = $127,500
90,000 - 40,000 = 50,000 net sched C
80,000 LLC
Total Dividends $1500
$50,000 gambling winnings

$309,000

NOTE the question is asking gross income before adjustments to income. Notice that 401k comes out of the gross. Think about how 401k comes out before you receive your paycheck to remember its at the top.
Also remember that Sched C expenses reduce the gross and happen up here.

Question 39

Say someone has $1500 in dividends, of which $1400 are qualified. What is the total dividends you include on gross income?

Answer 39

$1500

Question 40

Client has gross income of $309,000, assuming QBI of $21,324, what is their AGI?

Answer 40

309,000 gross
Adjustments = 8,300 max HSA contrib
THEN subtract 1/2 SE tax from both
Husband was $,449 / 2 = $2,225
Wife was under threshold so
50,000 * .9235 * .153 = 7065 / 2 = 3,533

309,000 - 8300 - 2,225 - 3,533 = $294,942

Question 41

Above the line deductions are used for

Answer 41

calculating AGI

Question 42

Below the line deductions are deducted

Answer 42

from AGI

Question 43

Question 44

Above the line adjustments: CASH

Answer 44

“C” for “Contributions” (IRA, HSA, FSA)
“A” for “Adjusted” (Adjustments to income, alimony pre 2019)
“S” for “Student” (Student loan interest)
“H” for “Home and Health” (1/2 self employment tax, SE health insurance)

Question 45

Below the line deductions SCMM

Answer 45

“S” for “Salt” (State and local taxes)
“C” for “Charitable” (Charitable contributions)
“M” for “Mortgage” (Mortgage interest)
“M” for “Medical” (Medical expenses)

Question 46

Above is ADJUSTMENTS
Below is DEDUCTIONS

Answer 46

OK??

Question 47

Which is the best source for obtaining information about the intent of a very recent change in the tax law?

A. Congressional Committee Reports B.Treasury Regulations
C.Tax Court Reports
D.U.S. Master Tax Guide

Answer 47

Congressional Committee Reports: These reports, produced during the legislative process, provide valuable insight into the lawmakers’ intentions behind specific provisions in a tax bill. They delve into the “legislative history” and often explain the reasoning behind changes.

Question 48

Which one of the following best describes the Sham Transaction Doctrine?

A.IRS will ignore the transaction and no gain or loss will be recognized for tax purposes.
B.Income is taxed to the tree that grows the fruit, even though the income is assigned to another prior to receipt.
C. A solvent taxpayer may have to realize income upon the forgiveness of a debt by a creditor.
D.Nontaxable receipts may be converted into taxable income.

Answer 48

(A) IRS will ignore the transaction and no gain or loss will be recognized for tax purposes.

Here’s why:
Sham Transaction Doctrine: This doctrine allows the IRS to disregard transactions that have no valid business purpose and are solely designed to avoid taxes. Essentially, the transaction is treated as if it never happened.

Question 49

Which one of the following is not an exemption from the imputed interest rules?

A.	 Debt subject to the original issue discount (OID) provisions.

B.	 Sales of patents to the extent the payment is contingent on the use or disposition of the patent.

C.	 Sales of property for $3,000 or less.

D.	 Any sales where all the payments are due within 12 months.

Answer 49

D is incorrect.

It’s sales where the payments are due within 6 months

Question 50

Is found money considered taxable?

Answer 50

Found Money is Taxable Income: Even though Sam found the money unexpectedly, it is considered taxable income in the year it is found.
No Legal Claim by Others: Since no one came forward to claim the money, Sam has clear ownership and is responsible for the tax liability.

Question 51

Joel had $40,000 of gambling winnings this year and had $22,000 of expenses directly related to those winnings. Assuming that Joel is not a professional gambler, how much will Joel report as gross income from his gambling activities?

A.	 $0 - this activity is specifically excluded from income because it is viewed in the tax code as a negative entertainment expense.

B.	 Joel only needs to report the income if he receives a 1099. In that case, he will be allowed to net his expenses to reduce the income.

C.	 $18,000 which is $40,000 less his $22,000 of expenses.

D.	 $40,000.

Answer 51

D. 40,000 because he is not a professional gambler he can’t write off the expenses

Question 52

If you are insolvent and debt is forgiven, but you have say $50,000 in assets, how much would you be taxed on debt forgiveness?

Answer 52

Only up to the amount of your assets so $50,000 in this case

Question 53

Child Standard Deduction for unearned income and earned income

Answer 53

Earned income plus $450 up to a maximum of $14,600 OR $1300 for unearned income whichever is greater

Question 54

Jill and Jay have a 12-year-old son who has earned $5,000 in taxable bond interest this year. They would like to know how much of their son’s interest income will be taxed at their marginal tax rate?

Answer 54

Under the “kiddie tax” rules, the first $1,300 of a child’s unearned income is not taxed, the next $1,300 is taxed at the child’s tax rate, and any unearned income above $2,600 is taxed at the parents’ marginal tax rate. Therefore, of the $5,000 total, $2,400 ($5,000 - $2,600) will be taxed at the parents’ rate.

Question 55

Your client, Jane, wants you to explain the difference between a tax credit and a tax deduction. She just received a $600 tax credit and wants to know what that worth as a deduction if she were to itemize her deductions. Calculate the equivalent deduction for Jane’s credit if Jane’s marginal tax bracket is 24%.

Answer 55

They’re asking for the EQUIVALENT so it would be

600/.24 = 2500

Question 56

Jack and Jill will file as Married Filing Jointly. They have two children, ages 7 and 10.
Jack’s W2 wages = $50,000
Jill’s W2 wages = $62,000
Jack’s sole proprietorship (net) = $160,000
Total Taxable Dividends = $1,400
Taxable Dividends that are Qualifying = $1,300
Jack’s alimony payments to ex-wife Divorced in 2018 = $6,000
Qualified Business Income Deduction = $30,369
Mortgage Interest = $20,000
State Income Tax = $12,000
Gambling winnings = $30,000
Gambling losses = $(18,000)

What is their gross income?

Answer 56

$50,000 + $62,000 + $160,000 + $1400 + $30,000 = $306,400

You include Jack’s W2 wages = $50,000
Jill’s W2 Wages $62,000
Jack’s Sole Proprietorship net = $160,000
Taxable dividends = $1,400
Gambling Winnings = $30,000

$303,400

Question 57

Jack and Jill will file as Married Filing Jointly. They have two children, ages 7 and 10.
Jack’s W2 wages = $50,000
Jill’s W2 wages = $62,000
Jack’s sole proprietorship (net) = $160,000
Total Taxable Dividends = $1,400
Taxable Dividends that are Qualifying = $1,300
Jack’s alimony payments to ex-wife Divorced in 2018 = $6,000
Qualified Business Income Deduction = $30,369
Mortgage Interest = $20,000
State Income Tax = $12,000
Gambling winnings = $30,000
Gambling losses = $(18,000)

What is their AGI?

Answer 57

Gross is $303,400

Above the line need to figure out the self employment for Jack

He is over threshold so would use 2 step method

160,000 * .9235 * .029 = 4,285.04

($168,600 - $50,000) x .124 = $14,706 is the $4,285.04 + $14,706 = $18,991
$18,991 * .5 = $9,496

306,400 - $9,496 - 6000 = $287,904

ABOVE THE LINE JUST DEDUCTING 1/2 SE AND ALIMONY PRE-2019

Question 58

Jack and Jill will file as Married Filing Jointly. They have two children, ages 7 and 10.
Jack’s W2 wages = $50,000
Jill’s W2 wages = $62,000
Jack’s sole proprietorship (net) = $160,000
Total Taxable Dividends = $1,400
Taxable Dividends that are Qualifying = $1,300
Jack’s alimony payments to ex-wife Divorced in 2018 = $6,000
Qualified Business Income Deduction = $30,369
Mortgage Interest = $20,000
State Income Tax = $12,000
Gambling winnings = $30,000
Gambling losses = $(18,000)

What are their total itemized deductions?

Answer 58

$20,000 + $10,000 + $18,000 = $48,000

Mortgage interest + SALT + Gambling Losses

Their AGI was $290,904 - $48,000 = 242,904

After itemized they’re at 242,904

Question 59

Jack and Jill will file as Married Filing Jointly. They have two children, ages 7 and 10.
Jack’s W2 wages = $50,000
Jill’s W2 wages = $62,000
Jack’s sole proprietorship (net) = $160,000
Total Taxable Dividends = $1,400
Taxable Dividends that are Qualifying = $1,300
Jack’s alimony payments to ex-wife Divorced in 2018 = $6,000
Qualified Business Income Deduction = $30,369
Mortgage Interest = $20,000
State Income Tax = $12,000
Gambling winnings = $30,000
Gambling losses = $(18,000)

What is their taxable income?

Answer 59

Their AGI was $290,904 - $48,000 = 242,904

After itemized they’re at 242,904

Subtract the QBI of 30,369

$242,904 - 30,369 = $212,535

Question 60

Bill and Diana are married and will file as Married Filing Jointly.

Bill’s W-2 wages $180,000
Diana’s W-2 wages $90,000

Total Taxable Dividends $2,400
Bill’s ISO exercise (Bargain element) $36,000
Mortgage Interest $22,000
Property Tax $8,100
State Income Tax $1,900
Charitable contributions $2,200
Bill and Diana’s AGI $272,400
Regular Income Tax Liability $44,839

Calculate their AMT exemption.

Answer 60

$133,300

This is the standard AMT exemption amount for married couples filing jointly in a given tax year. The phase-out of the AMT does not begin until AMT exceeds $1,218,700.

Question 61

Last month, Robert’s Aunt Sue gave him $68,000 of Microsoft stock that she purchased 19 years ago at a cost of $19,000. Aunt Sue paid gift taxes of $10,000 on the transaction, even after utilizing the $18,000 gift tax annual exclusion. How much is Robert’s basis in the stock and what is his holding period?

A.	 $16,000 Long-Term

B.	 $22,800 Long-Term

C.	 $28,800 Long-Term

D.	 $64,000 Short-Term

Answer 61

C. 28,800 long term

Question 62

Which of the following statements is incorrect?

A.	 If the donor's basis is less than the FMV at the time of the transfer, the donee will take over the donor's holding period.

B.	 If the donor's basis is less than the FMV at the time of transfer, and no gift taxes were paid, the donee simply takes over the donor's basis and holding period.

C.	 If the donor's basis is less than the FMV at the time of the gift, and the donor paid gift taxes, the donee will be allowed to include a portion of the gift taxes paid by the donor.

D.	 If the donor's basis is more than the FMV at the time of transfer, and gift taxes were paid, the donee will be allowed to include a portion of the gift taxes paid by the donor.

Answer 62

D is incorrect

In order for the donee to get the benefit of gift taxes paid by the donor, there must have been appreciation in the gift, that is FMV must be greater than the donor’s basis.

Compare the basis with the FMV using greater than or less than to make it more clear

Question 63

Max had purchased 1,000 shares of stock seven years ago for $61 per share. He gifted the stock to his nephew Rex two years ago when the FMV of the stock was $55 per share. Max was able to utilize an annual exclusion but he still had to pay $21,000 in gift taxes. If Rex sells the stock for $63 per share this year, how much is Rex’s basis in the stock?

A.	 $61

B.	 $55

C.	 $63

D.	 Basis cannot be determined

Answer 63

$61

Rex takes over the Uncle’s purchase price as basis because the FMV of the gift ($55) was less than the donor’s adjusted basis ($61) and Rex sold the stock for a gain ($63). Note that gift taxes, even though they were paid, do not apply since the FMV at the time of the gift was less than the donor’s basis.

Question 64

Marcia Washington, a single taxpayer, has the following itemized deductions:

Home mortgage interest (first mortgage) $29,920
Charitable contributions $7,000
Property taxes $9,715
Deductible gambling losses $1,900
Deductible State Income taxes $285
Deductible Margin Interest $3,100
Marcia’s AGI for the current year is $204,350. Under the regular tax method, Marcia is allowed final itemized deductions of $51,920.

What amount of itemized deductions, if any, would be allowed for purposes of the AMT?

Answer 64

Property Tax and State income tax are disallowed under AMT

$29,920 mortgage interest + $7,000 charity + $1,900 gambling losses + $3,100 margin interest = $41,920.

Question 65

Which of the following statements is incorrect?
A.
Exclusions permanently increase the alternative minimum taxable income (AMTI)?
B.
Deferrals are AMT items that form the basis of an AMT credit.
C.
Deferrals cause a temporary increase in AMT liability and the increased liability will reverse over time.
D.
An exercise without the sale of an ISO (Incentive Stock Option) in the same tax year is an example of an AMT exclusion.

Answer 65

D is a deferral

An exercise without the sale of an ISO (Incentive Stock Option) in the same tax year is an example of an AMT deferral not exclusion.

Question 66

Deferrals are AMT items that form the basis of an AMT credit true or false

Answer 66

True

Question 67

Deferrals cause a temporary increase in AMT liability and the increased liability will reverse over time true or false

Answer 67

True

Question 68

What is the standard AMT exemption amount for married couples filing jointly

Answer 68

$133,300

Question 69

Bill and Diana are married and will file as Married Filing Jointly.

Bill’s W-2 wages $180,000
Diana’s W-2 wages $90,000

Total Taxable Dividends $2,400
Bill’s ISO exercise (Bargain element) $36,000
Mortgage Interest $22,000
Property Tax $8,100
State Income Tax $1,900
Charitable contributions $2,200
Bill and Diana’s AGI $272,400
Regular Income Tax Liability $44,839

Answer 69

$272,400 + $36,000 - $22,000 - $2,200 = $284,200

$284,200 - $133,300 = $150,900 AMT Base.

$150,900 X .26 = $39,234

AMTI less AMT exemption equals AMT base. AMT base times 26% equals AMT liability

Question 70

Bill and Diana are married and will file as Married Filing Jointly.

Bill’s W-2 wages $180,000
Diana’s W-2 wages $90,000

Total Taxable Dividends $2,400
Bill’s ISO exercise (Bargain element) $36,000
Mortgage Interest $22,000
Property Tax $8,100
State Income Tax $1,900
Charitable contributions $2,200
Bill and Diana’s AGI $272,400
Regular Income Tax Liability $44,839

How much is Bill’s and Diana’s AMT payable?

Answer 70

AMT payable is the AMT liability less the regular liability. However, regular tax exceeds AMT so AMT payable is zero.

44,839 > amt payable

Question 71

On January 20th 2024, Barbara was paid $400,000 from her insurance company for an office building that was destroyed by a tornado on June 28, 2023. Barbara’s basis in the destroyed property was $230,000. How much must she reinvest at a minimum to avoid gain recognition and how long does she have to replace the property?

Answer 71

$400,000 December 31, 2026

In order to avoid recognition of gain, you must reinvest the entire proceeds from the insurance. The mandatory latest date to replace the property is two full years after the end of the year in which you realize the gain (get insurance money).

Question 72

On January 31, 2024, Dave sold an oriental carpet that he had inherited from his Grandfather. The FMV at the time of the inheritance was $15,000. The terms of the sale were a price of $60,000, with a 20% down payment and the balance to be paid monthly over the next four years. The loan bears an interest rate of 8%. The first payment is scheduled to begin at the end of February, and will continue to be due on the last day of all subsequent months. How much must Dave report as ordinary income, and how much must he report as capital gain income for 2024?

Answer 72

Ordinary Income $3,201
Capital Gain $16,267

Taxation of installment sales can be broken down into 5 steps:

Calculate the gross profit percentage (GPP)
Calculate the down payment
Calculate the loan payments, then using the amortization function, calculate the principal and interest (P&I) received the first year
The interest (from P&I) is taxed as ordinary income
The sum of the down payment and the principal (from P&I) times the GPP is the reported capital gain
Putting in this question’s specifics:

Calculate the GPP ($45,000/$60,000) = 75% = .75

Calculate the down payment ($60,000 X .20) = $12,000

Calculate the loan payments and amortize 11 payments to determine principal and interest:

48 n 48000 CHS PV 8 g I PMT
Calculator returns $1,171.82 (monthly payment)

11 f AMORT
Calculator returns $3,201.34 (Interest received for 11 months)

X > < Y
Calculator returns $9,688.68 (principal received for 11 months)

The interest received of $3,201 is taxed as ordinary income.

The sum of the down payment and the principal received times the GPP ($12,000+$9,689) x .75 = $16,267 is the capital gain income

Question 73

John, a single taxpayer, was a very successful commodities dealer who works and lives in Chicago. Last year, he purchased a penthouse that overlooked Lake Michigan for 1.8 million dollars. John recently had a nervous breakdown and nearly entered a catatonic state. After months of intensive therapy, it was determined that John’s job was causing him so much stress it led to his current mental state. His doctor recommended that he work in an environment with dramatically less stress. John subsequently quit the commodities business and accepted a job at McDonalds as a food preparer. He is much happier now but has found it difficult to keep up with his mortgage payments and condominium fees for the penthouse. John sold the property and cleared 2.2 million dollars, net of transaction costs, and moved into a small studio apartment on the South End. He lived in the penthouse for 18 months and he has asked you to determine how much of the $400,000 gain is taxable. You told him

Answer 73

$212,500 will be taxable and $187,500 excluded.

Changing jobs and not being able to pay your expenses is a valid reason to earn a prorated exclusion for the sale of a personal residence. (18/24) X $250,000 = $187,500 exclusion.

Question 74

Don owned and lived in his house 10 years before he met and married Stephanie. She had lived in an apartment but after the marriage she moved into Don’s house and continued to consult as a rocket scientist, working from a home office. Six months later, she was offered a job by NASA and they had to immediately move to Florida. The property deed was never changed and Don sold the house realizing a gain of $550,000. They will be filing jointly. How much of the gain will be excluded under section 121 of the IRC?

Answer 74

They are married filing jointly so they can prorate her $250,000 ($62,500) and add it to his $250,000 for a total exclusion of $312,500.

Question 75

You had purchased equipment for your business that was being depreciated over a 7-year life. The original cost of the equipment was $42,000 and $18,000 had been taken as cost recovery. You changed your manufacturing process and no longer required the equipment. Today, you managed to sell the equipment for $30.000. How much must be recaptured under Section 1245 as ordinary income?

Answer 75

$6,000

The difference between the selling price and the adjusted basis must be recaptured.

Question 76

Which of the following are true statements describing Section 1244 stock?

A.
Code allows special treatment for losses; and has nothing to do with special treatment for gains
B.
Pertains to only the first $1 million of stock sold
C.
¤ 1244 stock may be issues by either a C or an S Corporation
D.
Single taxpayer may deduct up to $50,000 as an ordinary loss
E.
Taxpayers filing as married filing jointly may deduct up to $100,000 as an ordinary loss
F.
Once the stock is sold, donated, or

Answer 76

A.
Code allows special treatment for losses; and has nothing to do with special treatment for gains
B.
Pertains to only the first $1 million of stock sold
C.
¤ 1244 stock may be issues by either a C or an S Corporation
D.
Single taxpayer may deduct up to $50,000 as an ordinary loss
E.
Taxpayers filing as married filing jointly may deduct up to $100,000 as an ordinary loss
F.
Once the stock is sold, donated, or gifted, it loses its Section 1244 status

Question 77

John Appleton wants to exchange his farm for a Bed and Breakfast owned by Martha Shelby. John’s farm has a FMV of $680,000, an adjusted basis of $200,000, and is subject to a $120,000 mortgage. Martha’s B&B has a FMV of $800,000, with an adjusted basis of $400,000, and is debt-free. In the exchange, Martha will assume John’s mortgage. To help equalize the exchange, John is including farm equipment worth $150,000, and will also pay Martha $90,000 in cash.

Answer 77

Amount realized = FMV of qualifying property received plus (or minus) net boot =$800,000+($120,000 - $150,000 - $90,000) = $680,000.

Question 78

John Appleton wants to exchange his farm for a Bed and Breakfast owned by Martha Shelby. John’s farm has a FMV of $680,000, an adjusted basis of $200,000, and is subject to a $120,000 mortgage. Martha’s B&B has a FMV of $800,000, with an adjusted basis of $400,000, and is debt-free. In the exchange, Martha will assume John’s mortgage. To help equalize the exchange, John is including farm equipment worth $150,000, and will also pay Martha $90,000 in cash.

Answer 78

$480,000

Gain realized = amount realized minus the basis of the property transferred = $680,000 - $200,000 = $480,000.

Question 79

John Appleton wants to exchange his farm for a Bed and Breakfast owned by Martha Shelby. John’s farm has a FMV of $680,000, an adjusted basis of $200,000, and is subject to a $120,000 mortgage. Martha’s B&B has a FMV of $800,000, with an adjusted basis of $400,000, and is debt-free. In the exchange, Martha will assume John’s mortgage. To help equalize the exchange, John is including farm equipment worth $150,000, and will also pay Martha $90,000 in cash.

How much is John’s recognized gain?

Answer 79

Recognized gain is the lesser of realized gain or net boot received = lesser of ($480,000, $0) = $0