Book 4 page 1-60

Question 1

this doctrine stipulates that a transaction will not be effective for income tax purposes unless it is intended to achieve a genuine business purpose other than tax avoidance

Answer 1

business purpose doctrine

Question 2

prohibits an individual to form an entity just to potentially receive favorable tax treatment ; requires actual business purpose to be present

Answer 2

business purpose doctrine

Question 3

this doctrine allows the IRS to look through the legal formalities of a transaction to determine its actual economic substance

Answer 3

substance-over-form doctrine

Question 4

give an example of when the substance-over-form doctrine becomes relevant

Answer 4

a corporate executive who is in need of income decides to have the corp lend her money from the business, the IRS could declare that this loan should be reclassified as salary

1. IAS 17 Leases requires the preparers of financial statements to consider the substance of lease arrangements when determining the type of lease for accounting purposes.
   
   1. For example, an asset may be leased to a lessee without the transfer of legal title at the end of the lease term. Such a lease may, in substance, be considered as a finance lease if for instance the lease term is substantially for entire useful life of the asset or the lease agreement entitles the lessee to purchase the asset at the end of the lease term at a very nominal price and it is very likely that such option will be exercised by the lessee in the given circumstances.
2. IAS 18 Revenue requires accountants to consider the economic substance of the sale agreements while determining whether a sale has occurred or not.
   
   1. For example, an entity may agree to sell inventory to someone and buy back the same inventory after a specified time at an inflated price that is planned to compensate the seller for the time value of money. On paper, the sale and buy back may be deemed as two different transactions which should be dealt with as such for accounting purposes i.e. recording the sale and (subsequently) purchase. However, the economic reality of the transactions is that no sale has in fact occurred. The sale and buy back, when considered in the context of both transactions, is actually a financing arrangement in which the seller has obtained a loan which is to be repaid with interest (via inflated price). Inventory acts as the security for the loan which will be returned to the ‘seller’ upon repayment. So instead of recognizing sale, the entity should recognize a liability for loan obtained which shall be reversed when the loan is repaid. The excess of loan received and the amount that is to be paid (i.e. inflated price) is recognized as finance cost in the income statement.

Question 5

this doctrine states that the person who earns the income cannot assign the income to someone else just for tax purposes ; also known as the fruit and the tree doctrine

Answer 5

assignment-of-income doctrine

Question 6

this doctrine converts otherwise nontaxable income into taxable income

Answer 6

tax benefit rule/doctrine

Question 7

give an example of the tax benefit doctrine

Answer 7

a taxpayer is reimbursed in a subsequent year for medical expenses paid and deducted in a previous year

Question 8

states that if there is no substantial limitation or restriction on a taxpayer’s right to bring the funds under personal control, the income will be taxed as if already received

Answer 8

constructive receipt doctrine

Question 9

if a taxpayer sells stock after a dividend has been declared but before the record date, who will pay tax on the dividend?

Answer 9

the purchaser

Question 10

taxable income that has not yet been received in cash

Answer 10

phantom income

Question 11

true or false? A client is in the 28% bracket. Because of this the client instructed the tenant of his rental property to make payments to his (the CFP client) daughter. The daughter is in the 15% bracket so the client wants the rental income to be taxed at lower rates. This is a valid strategy to use

Answer 11

false, this will be classified as assignment of income. Because the client owns the rental property he is the one that is required to recognize income

Question 12

true or false? income from partnerships is taxed at the partners’ own individual rates

Answer 12

true

Question 13

what return must a partnership file?

Answer 13

Form 1065

Question 14

which form indicates each partner’s share of the partnership income?

Answer 14

K-1

Question 15

true or false? income from a general partnership on the K-1 is usually self employment income

Answer 15

true

Unlike a general partner, who has unlimited liability for partnership debts, a limited partner is generally only liable up to the amount of his investment.

1. A general partner pays self-employment tax on earnings from self-employment.
2. A limited partner does not pay self-employment tax on his share of partnership income. However, if a limited partner receives guaranteed payments for services performed, such payments are subject to self-employment tax.

LLC Members:

1. LLC members owe self-employment tax when they-
   
   1. Provide services for their business,
   2. Participate in the management, and
   3. Are not passive investors.

Question 16

true or false? income from a limited partnership is passive activity income for the limited partner

Answer 16

true

Question 17

who pays the tax on a S corps income?

Answer 17

the shareholders

Question 18

what form does a S corp file?

Answer 18

1120S

Question 19

true or false? each shareholder of a S corp will receive a K-1

Answer 19

true

Question 20

true or false? the income from the S corp is considered passive activity income

Answer 20

true

Question 21

income generated by assets of an estate that is distributed from the estate to the beneficiaries

Answer 21

income in respect of a decedent (IRD)

Question 22

true or false? IRD income is usually not taxable

Answer 22

false, it is taxable

Question 23

when the taxpayer obtains possession of the income but is not legally entitled to the receipt of the income because the taxpayer is required to turn over the income to its rightful owner

Answer 23

Conduit for others

Question 24

true or false? gift loans may only occur between individuals

Answer 24

true

Question 25

On January 1, Richie loaned his daughter, Beth, $90k to purchase a new home. There were no other loans outstanding between the two. Beth’s only income was $30k salary and $4k interest income. Richie had investment income of $200k. Richie did not charge Beth interest. The relevant federal rate was 9%. How much imputed interest must Richie recognize and how much imputed interest expense must Beth recognize?

Answer 25

$4,000 the $100k exemption applies and thus Richie’s imputed interest income and Beth’s imputed interest expense is limited to Beth’s net investment income.

Question 26

employee achievement awards of less than $_____ per year and based on length of service are excluded from an employee’s gross income

Answer 26

$400

Question 27

true or false? cash and the FMV of prizes and awards are included in gross income

Answer 27

true

Question 28

true or false? if an annuitant dies before life expectancy and has not completely recovered the basis, the un-recovered basis is deductible on the annuitant’s final income tax return as a miscellaneous itemized deduction not subject to the 2% of AGI floor

Answer 28

true

Question 29

true or false? annuity payments beyond projected life expectancy are fully taxable if the annuity was issued after 1986

Answer 29

true

Question 30

Wendy a 55 year old taxpayer has begun receiving an annuity over her life expectancy of 25.5 years. She receives $1,500 per month. Her contributions to the annuity were after tax and amounted to $91,800. Payments began April 1 of this year. How much of the payments can she exclude this year?

Answer 30

$2,700 ($1,500 x 9) = $13,500 exclusion ratio = $91,800 / $459,000 = 20% $13,500 x 20% = $2,700

Question 31

employees can exclude premiums paid by their employers on the first $_____ of group term life coverage

Answer 31

$50k

Question 32

Tom is 51 years old and works for Employer A. Tom’s life insurance coverage with employer A is $80,000. Tom pays a premium of $50 per year for the coverage, how much should Tom include in his gross income?

Answer 32

$32.80 excess coverage = $30,000 excess coverage / $1,000 = 30 30 x .23 cents = $6.90 (.23 cents comes from a table) $6.90 x 12 = $82.80 $82.80 - $50 = $32.80

Question 33

includes AGI from all sources plus 50% of SSI benefits, foreign income previously excluded, and any tax exempt interest income

Answer 33

provisional income

Question 34

FICA is made up of ____ and ____

Answer 34

OASDI and HI (social security and medicare)

Question 35

what is the tax rate for OASDI? Is it for employers or employees?

Answer 35

it is 6.2% and it is for both

Question 36

at what point does OASDI stop getting applied to your wages?

Answer 36

$127,200 for 2017

Question 37

true or false? the medicare tax has no ceiling for taxable earnings

Answer 37

true

Question 38

what is the HI (medicare tax) rate? Is it for employers or employees?

Answer 38

1.45% and its for both

Question 39

what is the medicare tax rate for self employed individuals?

Answer 39

2.9%

An individual is liable for Additional Medicare Tax if the individual’s wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual’s filing status:

1. MFJ = $250,000
2. Single = $200,000
3. MFS = $125,000

Question 40

self employment tax rates are ____%

Answer 40

15.3%

Question 41

when calculating self employment tax, the taxpayer reduces net earnings by _____%

Answer 41

7.65%

Question 42

the additional medicare tax of ____% also applies to self employed individuals who have a combined income greater than $_____ if single and $_______ if MFJ

Answer 42

.9% ; $200k ; $250k

Question 43

true or false? amounts paid by an employer upon an employee’s death to the employee’s beneficiaries are fully includable in the beneficiaries income

Answer 43

true

Question 44

true or false? a death benefit from an employer is taxable income to the beneficiaries

Answer 44

true

Question 45

true or false? social security benefits are taxable to the parent if the child is receiving the benefits

Answer 45

false

Question 46

true or false? if you choose an annuity payout option after winning the lottery you are not required to recognize income right away assuming there is no qualified prize option

Answer 46

false

Question 47

allows you to declare annuity payments as income in the year they are received from winning a prize rather than immediately

Answer 47

qualified prize option

Question 48

act that allows payments from a personal injury lawsuit to be paid out periodically most often in an annuity form for the remainder of the injured party’s life

Answer 48

Periodic Payment Settlement Act

Personal Physical Injuries or Physical Sickness

1. If you receive a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is non-taxable. Do not include the settlement proceeds in your income.
2. BUT
   
   1. If you receive a settlement for personal physical injuries or physical sickness, you must include in income that portion of the settlement that is for medical expenses you deducted in any prior year(s) to the extent the deduction(s) provided a tax benefit. If part of the proceeds is for medical expenses you paid in more than one year, you must allocate on a pro rata basis the part of the proceeds for medical expenses to each of the years you paid medical expenses. See Recoveries in Publication 525 for details on how to calculate the amount to report. The tax benefit amount should be reported as “Other Income” on line 21 of Form 1040.

Question 49

damages arising out of the personal injury lawsuit considered to only make the injured party whole

Answer 49

compensatory damages

Question 50

true or false? compensatory damages are taxable to the injured party

Answer 50

false, they are tax free

Question 51

true or false? damages received in age, sex, or racial cases are generally taxable

Answer 51

true

Question 52

damages arising out of a personal injury intended to punish the offender for their acts

Answer 52

punitive damages

Question 53

are punitive damages taxable?

Answer 53

yes, generally

Question 54

when does scholarship money in excess of the qualified education expenses have to be realized on a tax return?

Answer 54

not until all expenses are paid, could be more than one year after receipt of scholarship

Question 55

true or false? you can exclude scholarship money that is used for room and board from your tax return

Answer 55

false

Question 56

true or false? you can exclude scholarship money that is used for books from your tax return

Answer 56

true

A scholarship or fellowship grant is tax free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution.

A scholarship or fellowship grant is tax free only to the extent:

1. It doesn’t exceed your qualified education expenses;
2. It isn’t designated or earmarked for other purposes (such as room and board), and doesn’t require (by its terms) that it can’t be used for qualified education expenses; and
3. It doesn’t represent payment for teaching, research, or other services required as a condition for receiving the scholarship.

Qualified education expenses.

1. For purposes of tax-free scholarships and fellowship grants, these are expenses for:
2. Tuition and fees required to enroll at or attend an eligible educational institution; and
3. Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.

Expenses that don’t qualify.

1. Room and board,
2. Travel,
3. Research,
4. Clerical help, or
5. Equipment and other expenses that aren’t required for enrollment in or attendance at an eligible educational institution.

Question 57

true or false? if you choose to receive installment payments as a death benefit option to a life insurance policy, you must pay tax on the interest that you receive each year

Answer 57

true

Question 58

when do dividends received from a life insurance policy become taxable?

Answer 58

when the aggregate of the dividends exceeds your basis in the contract

Question 59

can businesses deduct life insurance premiums for their employees or officers if the business is listed as a beneficiary under the policy?

Answer 59

no

Question 60

true or false? if you are terminally ill you can use a viatical agreement and receive some of your death benefit tax free while living

Answer 60

true

Question 61

true or false? if you are chronically ill you can use a viatical agreement and receive your death benefit tax free regardless of what you use the proceeds for

Answer 61

false, proceeds must be used for LTC and any that are not are subject to taxation

Question 62

Jack surrendered to the insurer a whole life insurance policy with a cash value of $80k (there was no policy loans or distributions prior to the surrender). Jack made $70k in aggregate premium payments. The original cost of the insurance was $11k. How much will Jack include as ordinary income on his tax return?

Answer 62

$10k (80 - 70) the cost of insurance does not affect this

Question 63

Jack sold his whole life insurance policy to Martin. Martin is unrelated to Jack and will not suffer an economic lost upon Jack’s death. Jack sold the policy for $95k and the policy had a $80k cash surrender value at the time. Jack had paid $70k in aggregate premium payments. The cost of insurance was $11k. what is the total gain and what is the long term capital gain that Jack must realize?

Answer 63

total gain = $95k - $70k - $11k = $36k long term cap gain = $36k - ($80k - $70k) = $26k

Question 64

true or false? if selling a term life insurance policy all the gain is considered capital gain instead of some of it being ordinary income

Answer 64

true

If the policyholder surrenders a cash value life insurance policy on his life for the cash surrender value, the excess of the cash surrender value of the policy over the tax basis (which equals what the policyholder has paid in premiums for the policy) equals ordinary income to the policyholder because the policy is not considered a capital asset. For these transactions, the insured’s tax basis is the full amount of the premiums he has paid on the policy up to the time of the surrender, reduced by any untaxed amounts that he had withdrawn from the policy.

The treatment of sale transactions is different.

1. First, the IRS said that the insured’s basis in the policy must also be reduced by the portion of the premiums paid that is attributable to the “cost of insurance” under the policy. Many tax experts believe this position on the part of the IRS is not correct. The portion of the insured’s gain that does not exceed the cash surrender value of the policy at the time of sale is taxed as ordinary income. Any gain above that amount is treated as long term capital gain.
2. The insured had paid total premiums of $64,000 on the policy, out of which the cost of insurance was $10,000.
3. He had not received any distributions. The cash surrender value was $78,000 and he sold the policy for $80,000.
4. The IRS said his tax basis was the premiums paid of $64,000 reduced by the cost of insurance of $10,000 leaving a tax basis of $54,000. This resulted in tax gain of $26,000.
   
   1. Of this amount, $14,000 was ordinary income, determined as the difference between the cash surrender value of $78,000 and the total premiums paid of $64,000.
   2. The remaining gain of $12,000 was capital gain.

Question 65

a contract where if the premiums paid during the first seven years of the contract exceed the total of the net level premiums that would have been paid if the policy provided for paid up benefits after the seventh year

Answer 65

modified endowment contract

Question 66

do modified endowment contracts use LIFO or FIFO on their withdrawals and loans?

Answer 66

LIFO

• Historically, life insurance withdrawals (with the exception of certain withdrawals during a policy’s first 15 years), were taxed on a first-in first-out, or FIFO, basis, which meant that all premiums paid into the contract were returned free of tax before any income was recognized
• This simply means that interest income will be recognized first and the recovery of premiums paid (basis) will occur last.

A modified endowment contract (MEC) is a tax qualification of a life insurance policy whose cumulative premiums exceed federal tax law limits. The taxation structure and IRS policy classification changes after a life insurance policy has morphed into a modified endowment contract.

Qualification as MEC results in LIFO and *potentially a 10% additional tax*.

• Distributions from modified endowments will suffer an additional 10% tax unless the taxpayer is over age 59-1/2, disabled or the distribution is taken as a life annuity

Specifically, a life insurance policy is considered a MEC by the IRS if it meets three criteria:

1. The policy is entered into on or after June 20, 1988.
2. It must meet the statutory definition of a life insurance policy.
3. The policy must fail to meet the Technical and Miscellaneous Revenue Act of 1988 (TAMRA) 7-pay test.

7-Pay Test:

1. The 7-pay test must be passed every year.
2. Once the test is failed, modified endowment treatment applies for the remaining life of the contract. Reformation of the policy is not possible.
3. EXAMPLE
   
   1. For example, Tom Sisney, a 45-year old male nonsmoker, wants to purchase a $1 million policy and pay a premium that does not violate the 7-year test since he wishes to make withdrawals to help finance his child’s education in ten years.
   2. We have identified the maximum rate as $41.016 per thousand.
   3. Cumulative Modified Endowment Limit
      
      1. Year 1 = $41,016
      2. Year 2 = $82,032
      3. Year 3 = $123,048
      4. Year 4 = $164,064
      5. Year 5 = $205,080
      6. Year 6 = $246,096
      7. Year 7 = $287,112

Question 67

is there any penalty and if so how much, on withdrawals or loans under MEC if under age 59.5?

Answer 67

10% penalty on any taxable portion

Question 68

true or false? the death benefit under a MEC is taxable

Answer 68

false

Question 69

true or false? health insurance premiums paid by the employer are deductible for the employer but taxable to the employee

Answer 69

false, they are deductible and excludable

Question 70

true or false? disability premiums paid by the employer are deductible for the employer and tax excludable for the employee

Answer 70

true

Question 71

true or false? if the employer pays the disability premiums for the employee and then the employee collects disability benefits, the benefits will not be taxable

Answer 71

false, the benefits are taxable to the employee

In the case of disability pay, whether it is taxed or not usually depends on who paid for the disability insurance coverage.

1. Individual disability income insurance
   
   1. The rules surrounding taxation of individual disability income insurance benefits are generally simple. Because you pay the premiums with after-tax dollars, the benefits you receive are tax free.
   2. Sometimes, your employer pays for an individual disability insurance policy on you. This may be the case if you are considered to be a key employee of the business. If so, different rules may apply. If the employer gets the benefit, then the premium is not deductible to the company, and the benefit is not taxable when received by the company.
2. Employer-sponsored group disability insurance
   
   1. If you are enrolled in a group disability insurance plan sponsored by your employer, the taxability of your benefits depends on who pays the premium. If you pay the total premium using after-tax income, then your benefits will be tax-free. On the other hand, if your employer pays the total premium and does not include the cost of coverage in your gross income, then your benefits will be taxable.
3. Benefits under a cafeteria plan
   
   1. An employer-sponsored cafeteria plan allows you to select among certain employee benefits, including health, life, and disability insurance. You normally pay for these benefits on a pretax basis. Sometimes, however, your employer pays the premium for the benefits you choose (up to a certain amount), and if you choose additional benefits, you pay for extra coverage using either pretax or after-tax dollars.
   2. If you pay your share of the premium with after-tax dollars, that portion of your disability benefits will be considered tax-free income; you’ll be taxed only on the portion of the benefit related to your employer’s contribution. However, if you pay your share with pretax dollars, that portion of your disability benefits will be considered taxable income, and you’ll have to pay income tax on all of your benefit.
4. Group association disability insurance
   
   1. Disability policies purchased through an association are called group policies because members of the association are offered special terms, conditions, and rates based on the characteristics of that group. Association policies function much like individual policies and have similar tax consequences. If you pay the premiums for an association policy, the benefits you receive are tax free, but you cannot deduct the cost of the premiums.
5. Government Disability Insurance
   
   1. All, part, or none of the disability benefits you receive through government disability insurance programs may be taxable. How much of the benefit is taxable (and under what circumstances) depends on the type of government disability benefit you are receiving:
      
      1. Social Security benefits: If the only income you had during the year was Social Security disability income, your benefit usually isn’t taxable. However, if your total income exceeds a certain base amount and you earned other income during the year (or had substantial investment income), then you might have to pay tax on part of your benefit. More specifically, your Social Security benefit is taxable if your modified adjusted gross income plus one-half of your Social Security benefit exceeds the base amount for your filing status.
      2. Medicare benefits: When you are disabled, you may be eligible to enroll in Medicare. If you pay premiums for the medical insurance portion of Medicare, you may deduct these premiums as a medical expense (provided, of course, that your medical expenses exceed 7.5 percent of your adjusted gross income). In addition, Medicare benefits you receive are not taxable.
      3. Workers Comp: Generally, if you receive a disability benefit from workers’ compensation, that benefit won’t be taxable. Any benefits paid to your survivors would also be tax exempt. However, in certain cases, you may be able to return to work and continue to receive payments. If this is the case, then your workers’ compensation benefit would be taxable. Note, though, that if part of your workers’ compensation benefit offsets (reduces) your Social Security benefit, then that part is considered to be a Social Security benefit. It may then be taxable according to the rules governing Social Security.

Question 72

true or false? contributions made by an employer to a medical savings account or health savings account are not taxable to the employee

What are the differences between HSA and FSA?

Answer 72

true

In this sense, the HSA resembles a Roth IRA, in that it grows tax-free, but you also get the benefit of a current deduction. We advise clients to keep growing the HSA as long as possible as a hedge against the risk of rising health care costs,”

1. Its first advantage is that contributions are tax-deductible, or if made through a payroll deduction, they are pretax
2. Second, the interest earned is tax-free
3. Third, account owners may make tax-free withdrawals for qualified medical expenses

HSA vs. FSA

1.

Question 73

how much of child and dependent care services paid by the employer can an employee exclude from income?

REDUCED DOLLAR LIMIT

1. George is a widower with one child and earns $24,000 a year. He pays work-related expenses of $2,900 for the care of his 4-year-old child and qualifies to claim the credit for child and dependent care expenses. His employer pays an additional $1,000 under a qualified dependent care benefit plan. This $1,000 is excluded from George’s income.

REDUCED DOLLAR LIMIT #2

1. Randall is married and both he and his wife are employed. Each has earned income in excess of $6,000. They have two children, Anne and Andy, ages 2 and 4, who attend a daycare facility licensed and regulated by the state. Randall’s work-related expenses are $6,000 for the year. Randall’s employer has a dependent care assistance program as part of its cafeteria plan, which allows employees to make pre-tax contributions to a dependent care flexible spending arrangement. Randall has elected to take the maximum $5,000 exclusion from his salary to cover dependent care expenses through this program.

Answer 73

$5,000

The amount you can exclude or deduct is limited to the smallest of:

1. The total amount of dependent care benefits you received during the year,
2. The total amount of qualified expenses you incurred during the year,
3. Your earned income,
4. Your spouse’s earned income; or
5. 5,000 ($2,500 if married filing separately).

Effect of exclusion on credit.

• If you exclude dependent care benefits from your income, the amount of the excluded benefits: 1. Isn’t included in your work-related expenses; and 2. Reduces the dollar limit, discussed later.

If your employer provides dependent care benefits under a qualified plan, you may be able to exclude these benefits from your income. Your employer can tell you whether your benefit plan qualifies. To claim the exclusion, you must complete Part III of Form 2441.

If you are self-employed and receive benefits from a qualified dependent care benefit plan, you are treated as both employer and employee. Therefore, you wouldn’t get an exclusion from wages. Instead, you would get a deduction on Schedule C (Form 1040), line 14; Schedule E (Form 1040), line 19 or 28; or Schedule F, line 15. To claim the deduction, you must use Form 2441.

REDUCED DOLLAR LIMIT

1. Although the dollar limit for his work-related expenses is $3,000 (one qualifying person), George figures his credit on only $2,000 of the $2,900 work-related expenses he paid. This is because his dollar limit is reduced as shown next. ($3,000 - $1,000 = $2,000)

REDUCED DOLLAR LIMIT #2

1. Although the dollar limit for his work-related expenses is $6,000 (two or more qualifying persons), Randall figures his credit on only $1,000 of the $6,000 work-related expense paid. This is because his dollar limit is reduced as shown next ($6,000 - $5,000 = $1,000)

Question 74

true or false? the value of a health facility or gymnasium provided by the employer on the premises solely for the use of employees and the employee’s dependents is excluded from the employee’s gross income

Answer 74

true

Question 75

true or false? employer paid health club dues (public gyms or health facility) for an employee are taxable

Answer 75

true

Athletic Facilities

1. You can exclude the value of an employee’s use of an on-premises gym or other athletic facility you operate from an employee’s wages if substantially all use of the facility during the calendar year is by your employees, their spouses, and their dependent children. For this purpose, an employee’s dependent child is a child or stepchild who is the employee’s dependent or who, if both parents are deceased, has not attained the age of 25.
2. On-Premises Facility
   
   1. The athletic facility must be located on premises you own or lease. It does not have to be located on your business premises. However, the exclusion does not apply to an athletic facility for residential use, such as athletic facilities that are part of a resort.
3. Employee -
   
   1. A current employee.
   2. A former employee who retired or left on disability.
   3. A widow or widower of an individual who died while an employee.
   4. A widow or widower of a former employee who retired or left on disability.
   5. A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control.
   6. A partner who performs services for a partnership.

Question 76

how much of qualified educational assistance provided by an employer can an employee exclude from income?

Answer 76

$5,250

Question 77

does the qualified educational assistance provided by an employer cover undergrad, grad, or both?

Answer 77

both

Amount = $5,250

• Reimbursements in excess of $5,250 will be considered taxable income to the employee, unless the reimbursement represents a working condition fringe benefit.

Eligible Expenses = Tuition, Fees, Course Materials

• Eligible expenses do not include the cost of a computer or other supplies that can be retained by the employee after completing the course of instruction
• Eligible expenses also do not include the cost of meals, lodging or transportation

Eligible Students = No restrictions

• The courses do not need to be provided by an accredited college or a college that is eligible for Title IV federal student aid. Undergraduate and graduate classes are eligible. Students are eligible even if they have a felony drug conviction, unlike the American Opportunity Tax Credit.

Number of Years = Unlimited

• There are no income phase-outs and the exclusion from income for employer-paid tuition assistance does not expire. The exclusion from income is available for an unlimited number of years.

Question 78

when can an employee exclude from income an employee discount?

Answer 78

when the property is not real property or investment property the property or services are offered in the same line of business in which the employee works

Question 79

the benefits are so small that account for them is impractical

Answer 79

de minimis fringes

Question 80

when an employer offers goods or services to an employee at a discount and they can be excluded from income

Answer 80

qualified employee discounts

Sec. 132(a)(2) allows employers to provide a qualified employee discount that is excludable from an employee’s taxable income. A qualified employee discount is defined under Sec. 132(c) as a discount with respect to qualified property or services that:

1. In the case of property, does not exceed the gross profit percentage of the price at which the property is offered to customers; or
2. In the case of services, does not exceed 20% of the price at which the services are offered to customers.

Question 81

when an employer provides property or services to an employee that an employee could have deducted had they paid for the expense themselves

Answer 81

working condition fringes

Question 82

true or false? personal use of an employer-provided car is usually a taxable fringe benefit

Answer 82

true

Question 83

qualified employee discounts for services can be excluded but the exclusion is limited to ____% of the customer’s cost

Answer 83

20%

Question 84

adoption assistance can be excluded up to $_____ for 2017 per child with an AGI phaseout of $____ to $____

Answer 84

$13,570 ; $203,540 - $243,540

Question 85

noncorporate investors can exclude ____% of the gain they realize on qualified small business stock. Any remaining gain is taxed at the ____% cap gains rate

Answer 85

50% ; 28%

Question 86

section 1202 stock must be held for ____ years to qualify for the exclusion

EXAMPLE

1. Consider a taxpayer who is single and has $410,000 in ordinary taxable income. This income places them in the highest tax bracket. They sell qualified small business stock acquired on September 30, 2010, and have a realized profit of $50,000.

Answer 86

5

Example

1. The taxpayer may exclude 100% of their capital gains, meaning the federal tax due on the gains is $0.
2. Assume the taxpayer purchased the stock on February 10, 2009, and after five years sells it for a $50,000 profit. Federal tax due on capital gains would be 28% x (50% x 50,000) = $7,000

Question 87

if 1202 stock was required after 9/27/2010 then ____% of the gain is excluded from a noncorporate taxpayer’s income

Answer 87

100

Section 1202, also called the Small Business Stock Gains Exclusion, is a portion of the Internal Revenue Code (IRC) that allows capital gains from select small business stock to be excluded from federal tax. Section 1202 of the IRS Code only applies to qualified small business stock acquired after September 27, 2010, that is held for more than five years.

Max Limit

1. The amount of gain that any investor can exclude under Section 1202 is limited to a maximum of the greater of $10 million or 10 times the adjusted basis of the stock. The taxable portion of a gain from selling a small business stock has an assessment at the maximum tax rate of 28%.

Before February 18, 2009 =

1. Before February 18, 2009, this provision of Section 1202 excluded 50% of capital gains from gross income.

Between Feb 18, 2009 - Sept 27, 2010 =

1. To stimulate the small business sector, the American Recovery and Reinvestment Act increased the exclusion rate from 50% to 75%
2. a portion of the excluded gain is taxed as a preference item that incurs an additional 7% tax called Alternative Minimum Tax (AMT).

After Sept 27, 2010 =

1. Also, the treatment of no portion of the excluded gain is a preference item for AMT purposes.
2. The capital gains that are exempt from tax under this section are also exempt from the 3.8% net investment income (NII) tax applied to most investment income.

Question 88

true or false? generally if a lender forgives a borrower’s debt. the borrower does not report the forgiven debt as income

Answer 88

false, they do report the forgiven debt as income

Question 89

how much of foreign income can a taxpayer exclude from US gross income for 2017? Are there any requirements to meet this exclusion, if so what are they?

Answer 89

$102,100 yes, must be a bona fide resident of the foreign country or be present in a foreign country for at least 330 days during and 12 consecutive months

Question 90

how much can you contribute to a Coverdell Education Savings Account per beneficiary?

Answer 90

$2,000

Question 91

true or false? distributions from Coverdell Education Savings Account are excluded from income if used for room and board and the student attends less than half time

Answer 91

false, must be half time

Question 92

when must the funds in a Coverdell Education Savings Account be distributed by?

Answer 92

age 30

Question 93

what if the funds in a Coverdell Education Savings Account aren’t distributed by the required date?

Answer 93

they must be distributed and the accumulated earnings are taxable and they are subject to a 10% penalty

Question 94

are unreimbursed business expenses deductible as above the line deductions or below the line (itemized) deductions?

Answer 94

itemized

Question 95

can self employed individuals deduct self employment tax paid for OASDI and Medicare?

Example

1. Let’s take two examples. In the simplest one, say you make $30,000 from self-employment income and have no other work.

Answer 95

yes

Schedule SE =

1. Take the Net Profit or Loss
2. Multiply the Net Profit by 92.35% (this this is less than $400 no SE Tax owed)
3. You then pay FULL Self Employment Tax on the 92.35% Net Profit
   
   1. Generally, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment.
4. You then get above the line deduction for 1/2 of the SE Tax applied to 92.35% of the self-employment income

Example

1. The calculator takes your gross income and then reduces it by 7.65%, coming up with taxable self-employment earnings of $27,705. It then takes 15.3% of that amount, which works out to $4,239. You’re allowed to deduct half that, or $2,119, against your income tax liability.

Question 96

Paul has net Schedule C income of $40k. what is his self employment tax and deductible portion of self employment tax?

Answer 96

self employment tax = ($40k x (100%-7.65%) x 15.3% =$5,651.82 deductible portion = ($40k x (100%-7.65%) x (6.2% + 1.45%) = $2,825.91

Question 97

true or false? alimony paid to an ex spouse is an itemized deduction for the person who is paying the alimony

Answer 97

false, it is an above the line deduction for the person who is paying the alimony

Question 98

the distance between the new job and the old residence must be at least _____ miles greater than the old job and the old residence

Answer 98

50 miles

Question 99

to qualify for the moving expense deduction you must work ______ weeks out of the next _______ weeks

Answer 99

39 ; 52

For tax years 2018 through 2025, the deduction of certain moving expenses is suspended for nonmilitary taxpayers. In order to deduct certain moving expenses, you must be an active member of the military and moving due to a permanent change of duty station. For more information, see Who Can Deduct Moving Expenses , later.

Question 100

to qualify for the moving expense deduction and are self employed you must work _______ weeks out of the next ________ weeks

Answer 100

78 ; 104

Moving Expenses

1. Suspension of moving expense deductions. For tax years 2018 through 2025, the deduction of certain moving expenses is suspended for nonmilitary taxpayers. In order to deduct certain moving expenses, you must be an active member of the military and moving due to a permanent change of duty station. For more information, see Who Can Deduct Moving Expenses , later.

Question 101

are qualified unreimbursed moving expenditures treated as above the line deductions or itemized deductions?

Answer 101

above the line

Question 102

true or false? any forfeited interest on withdrawals from a CD is deductible for AGI

Answer 102

true

Question 103

true or false? if a person dies with a capital loss carry forward on their last tax return the beneficiaries can continue to use the loss carry forward in following years

Answer 103

false, they capital loss carry forward goes away

Question 104

distributions under an Archer Medical Savings Account and a HSA that are not used for medical expenses are subject to tax and a _____% penalty unless made after age ____ or upon ____ or ________

Answer 104

20% ; 65 ; death ; disability

Question 105

is student loan interest an above the line or an itemized deduction?

Answer 105

above the line

• Student loan interest deduction is available to all qualifying taxpayers, regardless of whether they choose to itemize deductions or not. Technically, this is an “adjustment to income,” which is also known as an above-the-line deduction.

How much student loan interest can you deduct?

If you have qualifying student loan debt, you can deduct the interest you paid on the loan during the tax year. This is capped at $2,500 in total interest per return, not per person, each year. In other words, if you’re single, you can deduct as much as $2,500 of student loan interest. However, if you’re married and file a joint return, you and your spouse can only deduct a total of $2,500, even if both spouses have student loan debt.

2019 Phase-Outs / Elimination

1. Single - $70,000 / $85,000
2. MFJ - $140,000 / $170,000

Finally, “qualified education expenses” is a broad term, and refers to

1. tuition and fees,
2. room and board (with certain limitations),
3. books,
4. supplies,
5. equipment, and
6. other necessary expenses associated with attending and completing the coursework.

Question 106

true or false? the taxpayer claiming a student loan interest deduction can claim the deduction even if someone else claims them as a dependent

Answer 106

false, they cannot be claimed a dependent

Question 107

what is the maximum student loan interest deduction allowed?

Answer 107

$2,500

If you have qualifying student loan debt, you can deduct the interest you paid on the loan during the tax year. This is capped at $2,500 in total interest per return, not per person, each year. In other words, if you’re single, you can deduct as much as $2,500 of student loan interest. However, if you’re married and file a joint return, you and your spouse can only deduct a total of $2,500, even if both spouses have student loan debt

The student for whom the loan was taken out must have been enrolled at least halftime in a program that leads to a degree, certificate, or other credential. And the loan cannot have been from someone related to you.

Finally, “qualified education expenses” is a broad term, and refers to tuition and fees, room and board (with certain limitations), books, supplies, equipment, and other necessary expenses associated with attending and completing the coursework.

Phase Out / Elimination

1. Single = 70,000 / 85,000
2. MFJ = 140,000 / 170,000

Question 108

charitable gifts are limited to _____% of AGI and are itemized deductions

Answer 108

50%

Question 109

medical expenses that exceed ____% of AGI are deductible

Answer 109

10%

Question 110

casualty losses must exceed _____% of AGI to be deductible

Answer 110

10%

This deduction used to cover a pretty wide-ranging set of circumstances, but that changed with the passage of the Tax Cuts and Jobs Act (TCJA) in December 2017. Beginning with tax year 2018 and through tax year 2025, you can only deduct casualty and theft losses if they’re brought about due to an event that’s been declared a disaster by the U.S. president.

Question 111

miscellaneous itemized deductions such as unreimbursed job expenses must exceed _____% of AGI to be deductible

Answer 111

2%

Question 112

true or false? a corporation can only use capital losses as an offset against capital gains

Answer 112

true

Question 113

a corporations capital losses may be carried forward for ____ years or carried back to each of the preceding ____ tax years

Answer 113

5 years ; 3 tax years

Question 114

true or false? alimony received is included in gross income

Answer 114

true

You can’t deduct alimony or separate maintenance payments made under a divorce or separation agreement (1) executed after 2018, or (2) executed before 2019 but later modified if the modification expressly states the repeal of the deduction for alimony payments applies to the modification. Alimony and separate maintenance payments you receive under such an agreement are not included in your gross income.

Question 115

if there is more than a $____ decrease in alimony payments between any of the first _______ years, there may be alimony recapture

Answer 115

$15,000 ; 3

Question 116

in order for a property transfer as a result of a divorce to have no tax consequences, the transfer must be made within _____ year(s) after the marriage ceases

Answer 116

1 year

Question 117

true or false? child support is taxable to the receiver

Answer 117

false

Question 118

true or false? child support is tax deductible to the payor

Answer 118

false

Question 119

who does the Kiddie tax apply to?

Answer 119

any child who has not attained age 19 by end of tax year or a full time student who has not attained age 24 by end of tax year

Question 120

Ann is age 14 and earned $5,600 from babysitting in 2017. She also had interest of $2,200 from her savings account. What is Ann’s net unearned income and how much of her income will be taxed at her parent’s marginal rate and her own rate?

Answer 120

net unearned income = $100 taxed at parent’s rate = $100 taxed at her own rate = $1,750 $1,750 = gross income of $7,800 - earned income plus $350 of $5,950 - income taxed at parent’s rate of $100

Question 121

allows deductions for expenses incurred in a trade or business

Answer 121

section 162

Question 122

allows deductions for expenses incurred in connection with investment activities

Answer 122

section 212

Question 123

true or false? most expenses incurred in a trade or business are below the line (itemized) deductions

Answer 123

false, they are above the line

Question 124

true or false? investment expenses are itemized (below the line) deductions

Answer 124

true

Question 125

deductions from AGI are also known as _______ deductions

Answer 125

itemized

Question 126

deducions for AGI are also known as ____ deductions

Answer 126

above the line

Question 127

deductions from AGI (itemized) are reported on schedule ____

Answer 127

A

Question 128

True or false? if a distribution from a C corp is classified as a dividend the distribution will be double taxed. Once by the corporation as earnings and once as a dividend to shareholders

Answer 128

true

Question 129

a distribution to a shareholder is generally treated as a tax-free return in regards to S-corps

Answer 129

true

Question 130

a(n) ____ taxpayer generally receives a deduction when the expense has been paid

Answer 130

cash basis

Question 131

a(n) ____ taxpayer generally receives a deduction when the expense is incurred

Answer 131

accrual basis

Question 132

which items are deductible for Fred if he pays them for his son? principal payment on automobile payment of interest on loan payment for medical expenses payment for son’s property taxes

Answer 132

medical expenses only

Question 133

if income is tax exempt, can the tax payer deduct expenses and interest related to that income?

Answer 133

no

Question 134

if a taxpayer investigates a business that is a new line of business and acquires the business, up to $_____ of expenses can be deducted immediately Any expenses over $50,000 reduce the $5,000 deduction by what amount?

Answer 134

$5,000 dollar for dollar

Question 135

true or false? if a taxpayer investigates a business that is similar to the one he is already in, the expenses are deductible whether or not he acquires the business

Answer 135

true

Question 136

true or false? if a taxpayer investigates a business that is not already similar to the business he is in, the expenses are deductible whether or not he acquires the business

Answer 136

false, they are not deductible if he does not acquire the business that is not similar to his already existing business

Question 137

when can a taxpayer deduct his expenses related to investigating a similar business regardless if he acquires it or not?

Answer 137

the expenses are currently deductible

Question 138

true or false? if an activity is deemed to be a hobby, then losses incurred are always fully deductible

Answer 138

false, they may not be fully deductible

Question 139

hobby expenses are reported as ____ deductions

Answer 139

itemized

Question 140

which type of itemized deduction do hobby expenses fall under?

Answer 140

miscellaneous

Question 141

hobby income is reduced by ____ and ____ first then by ____ and then by_______

Answer 141

taxes and interest other non capital related expenses expenses that affect basis

For tax years after 2017, the IRS doesn’t allow you to deduct hobby expenses from hobby income. you must claim all hobby income and are not permitted to reduce that income by any expenses

For tax years prior to 2018, you can deduct expenses as an itemized deduction subject to 2% of your adjusted gross income. Also, the amount that you claim as an expense cannot be greater than your income from the hobby. In other words, your hobby cannot generate a loss. For example, if you’re a knitter and spent $300 on yarn and other supplies, and sold one sweater for $150, you can use only up to $150 in expenses ($300-$150 = $150). But, if you spent $300 on your knitting hobby and earned $300 from the sale of two sweaters, you can use the full amount of your expenses. The expenses you can deduct are called “ordinary expenses” and “necessary expenses.”

Finally, this statement from the IRS: “The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.” Note that the 3 out of 5 statement is a guideline, not a rule and that all other factors must be taken into consideration.

Question 142

Assume Sara earns $3,000 from a hobby of selling antique furniture and incurs the following expenses: cost of goods sold = $2,000 Supplies = $1,200 interest on loan to get business started = $800 advertising = $750 If Sara is unable to itemize her deductions how much of the hobby income should be included in her gross income for tax purposes?

Answer 142

all $3,000 should be included

Question 143

if you rent out property for less than _____ days then you can exclude the income from your gross income, this is known as ____

Answer 143

15 ; primarily personal use

Question 144

if you rent out a property for less than 15 day, what expenses are deductible?

Answer 144

mortgage interest taxes casualty losses

I.E. the normal homeowner deductions (i.e. mortgage interest)

1. Taxes = limited to 10,000
2. Casualty losses = limited in 2018 through 2025, the TCJA generally eliminates deductions for personal casualty losses, except for losses due to federally declared disasters.
   
   1. However, there’s an important exception: If you have personal casualty gains because your insurance proceeds exceeded the tax basis of the damaged or destroyed property, you can deduct personal casualty losses that aren’t due to a federally declared disaster up to the amount of your personal casualty gains.

Question 145

if the rental property is rented at least ____ days per year and is not used for personal use more than the greater of ____ days per year or ____% of rental days, then the property is classified as ___________

Answer 145

15 ; 14 ; 10 ; primarily rental use

Question 146

if a property is classified as a primary rental property then you can deduct losses up to $____ with an AGI between $____ and $_____

Answer 146

$25k ; $100k ; $150k

Question 147

if the rental property is rented at least _____ days per year and is used for personal use for more than the greater of ____ days or ____^ of rental days, this is known as ____

Answer 147

15 ; 14 ; 10 ; mixed use

Question 148

if property is classified as mixed use, can you deduct losses in the current tax year?

Answer 148

no, they can be carry forward though

Vacation

1. If the home is your main home and you rent it out for fewer than 15 days during the year, you don’t need to report income. However, you can’t deduct expenses associated with the rental. You can, however, claim the usual homeowner deductions

Mixed Use by Owner and Tenant

1. If you rent the home for 15 days or more, report the rental income on Schedule E. You can deduct expenses, but you must prorate them, and they might be limited.
2. Residence = If the home is considered a residence, the expenses you deduct can’t be more than the rental income.
3. Non-Residence = If the home isn’t a residence, the expenses you deduct can be more than rental income. However, your loss would be limited by the passive-activity rules.
4. Residence = Two Tests must both be passed:
   
   1. It must provide basic living accommodations. So, it must have a sleeping space, bathroom facilities, and cooking facilities
   2. It must pass the personal-use time test. A home is considered a residence if you use it for personal purposes for more than the greater of these:
      
      1. 14 days
      2. 10% of the total number of days you rent the home at fair rental value

Question 149

true or false? legal fees incurred for personal purposes are nondeductible

Answer 149

true

Question 150

are legal fees in connection with trade or business or for the production of rents and royalties tax deductible?

Answer 150

yes

Question 151

true or false? legal fees in connection with trade or business or for the production of rents and royalties are an itemized deduction

Answer 151

false, they are an above the line deduction

Question 152

what happens to legal fees that are incurred when acquiring a new asset?

Answer 152

the legal fees get added to the basis of the asset

Question 153

section 1244 losses are limited to ____ for single filers and ______ for joint filers

Answer 153

$50,000 ; $100,000

Question 154

net operating losses may be carried back ___ years preceding the loss year and carried forward ____ years following the loss year

Answer 154

2 ; 20

Question 155

true or false? the election to forego net operating loss carry back is irrevocable

Answer 155

true

Question 156

why would a taxpayer select to forego the option of net operating loss carry back?

Answer 156

taxpayer expects to be in a higher tax bracket moving forward than previous years

Question 157

true or false? the oldest net operating loss must be used before using any of the more recent net operating losses

Answer 157

true

Question 158

what type of deduction, above the line or itemized, do unreimbursed transportation expenses while on company business get classified as?

Answer 158

they are itemized deductions miscellaneous subject to 2% AGI floor

Question 159

uses a fixed dollar amount of money per business mile plus tolls and parking

Answer 159

automatic mileage method

Question 160

uses depreciation, gas, licenses, maintenance, and insurance costs to determine the amount of deduction you can receive for unreimbursed transportation expenses

Answer 160

actual operating cost method

Question 161

a taxpayer’s main location of work

Answer 161

tax home

Question 162

meals while traveling are subject to a ___% limit on the deduction

Answer 162

50%

The Tax Cuts and Jobs Act (TCJA) eliminated all business deductions for “entertainment, amusement, or recreation.” (IRC Sec. 274(a).) There was concern that this meant that all business-related meals with customers would no longer be deductible under the TCJA. However, the IRS clarified that business-related meals are still 50% deductible as long as the meal and beverage costs are:

1. “ordinary and necessary”
2. incurred in the course of your business, and
3. not lavish or extravagant under the circumstances. (IRS Notice 2018-76.)

The meal must be with current or potential customers, consultants, clients or similar business contacts and you (the business owner) or an employee must be present.

Question 163

true or false? unreimbursed travel expenses are an itemized deduction

Answer 163

true

Question 164

Allison took a trip from Alabama to England. She was away from home for 10 days. She spent two days vacationing and eight days on business (including two travel days). Her expenses are as follows: Airfare = $1,200 Lodging = $1,500 Meals = $900 how much is Allison allowed to deduct?

Answer 164

$1,200 + ($150 x 8) + ($90 x 8 x 50%) = $2,760

Question 165

what are the general requirements for you to be able to deduct education expenses (not your child’s but your own)?

Answer 165

1. to maintain or improve existing skills in the present job 2. To meet legally imposed or employer requirements to retain current job, such as continuing education requirements

Question 166

true or false? taking education classes to meet the minimum requirements of your present job is a deductible expense

Answer 166

false

Question 167

true or false? taking education classes to meet requirements for a new job is a deductible expense

Answer 167

false

You may be able to deduct work-related education expenses paid during the year. To be deductible, your expenses must be for education that

1. maintains or improves your job skills or
2. a law requires to keep your status or occupation.

However, even if the education meets either of these tests, the education can’t be part of a program that will qualify you for a new trade or business or that you need to meet the minimal educational requirements of your trade or business.

Question 168

Dawn who holds a bachelor’s degree in art history, is a middle school teacher in New Orleans. She wants to further her education in art history, believing this will allow her to become a better teacher. Dawn spent her summer break attending the University of Hawaii taking art history classes. Her expenses are as follows: books and tuition = $2,000 Meals = $1,000 Lodging = $700 Laundry while in travel status = $200 Transportation = $700 Total = $4,600 What is Dawn’s education expense deduction?

Answer 168

$4,100 she can only deduct 50% of meals but 100% of everything else

Question 169

true or false? books are allowable education expenditures that can be deducted for a taxpayer

Answer 169

true prior to 2017

For tax years after 2017, neither the Tuition and Fees deduction nor the deduction for unreimbursed employee expenses, is available.

Question 170

true or false? tuition expenses are deductible for a taxpayer trying to improve their job skills

Answer 170

true

Question 171

true or false? transportation, lodging, and laundry while in travel status are deductible for a taxpayer trying to improve their job skills

Answer 171

true

Question 172

business gifts are limited to $___ per donee per year

Answer 172

$25

Question 173

Kay entertains one of her clients and incurs the following expenses: Taxi = $30 Door Cover Fee = $25 Dinner = $128 Tips to server = $25 Total = $208 how much is Kay’s allowable deduction?

Answer 173

$119 $30 + 50% ($25 + $128 + $25)

Question 174

Elizabeth made the following gifts during the current year: To Candace, a key client ($4 of amount listed is for gift wrapping) = $104 To secretary = $24 To boss = $28 how much of these gifts are deductible to Elizabeth?

Answer 174

$53 ($25 limit per donee and gifts to superiors do no count) (the $4 wrapping fee can be deducted according to IRS rules)