The maximum deduction on interest paid during the current year on a qualified education loan is:
A.
$2,500.
B.
$2,000.
C.
$1,000.
D.
50% of the interest paid during the current year.
A.
$2,500.
The maximum deduction on interest paid during the current year on a qualified education loan is $2,500.
A taxpayer with a qualified education loan can deduct the loan’s interest, provided the student loan was taken out solely to pay qualified education expenses and was not from a person related to the taxpayer or made under a qualified employer plan. The student must be the taxpayer, taxpayer’s spouse, or taxpayer’s dependent, and the student must be enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential at an eligible educational institution.
When computing alternative minimum tax, the individual taxpayer may take a deduction for which of the following items?
A.
State income taxes
B.
Personal and dependency exemptions
C.
Miscellaneous itemized deductions in excess of 2%-of-adjusted-gross-income floor
D.
Casualty losses
D. Casualty losses
Personal and dependency exemptions, and most itemized deductions such as state income taxes and miscellaneous itemized deductions in excess of 2% of AGI floor are not deductible in calculating the alternative minimum tax.
Alice bought a home in May of Year 5 and lived there with her husband Jeff until Alice moved out in May of Year 6. They divorced in July of Year 7. Jeff continued to reside in the home under the terms of the divorce decree until Alice sold it in July of Year 10 for a $200,000 gain. How much of this gain may Alice exclude from her income?
A.
$0
B.
$100,000
C.
$150,000
D.
$200,000
D.
$200,000
Alice qualifies for the full exclusion because she can tack on the period Jeff lived in the home. Alice needs to have owned and used the residence for two of the last five years. She meets the ownership requirement because she has owned it continuously from May of Year 5 to July of Year 10. She can meet the use test by using the special tacking provisions. She used it personally from May of Year 5 to May of Year 6, so she has one year of use. Her former husband used it under a divorce decree from July of Year 7 to July of Year 10. Alice is able to tack these years of use onto her own so she has the required two years of use.
Tom Lewis, a single taxpayer, had the following income and expense items for 2016:
Wages $ 55,000
Long-Term Capital Loss (4,000)
Deductible IRA Contribution (Tom is not
covered by a retirement plan at work) 2,000
Mortgage Interest on personal residence 5,000
Medical expenses not covered by insurance 4,000
Tom’s personal exemption amount for 2016 4,050
Tom’s standard deduction amount for 2016 6,300
What is Tom’s adjusted gross income for the year?
A.
$55,000
B.
$51,000
C.
$52,000
D.
$50,000
D. $50,000
The key points here are:
all long-term capital losses may be offset against capital gains. If the loss exceeds the gains, a maximum of $3,000 may be included on the tax return, so only $3,000 of the $4,000 capital loss is deductible in the current year, and
the IRA contribution is an adjustment in determining adjusted gross income.
Thus, Tom’s adjusted gross income is calculated as follows:
Wages $55,000
Capital loss (3,000) max
IRA contribution (2,000)
Adjusted gross income $50,000
Tom’s remaining unused loss of $1,000 is carried forward to be used the following year.
The mortgage interest on personal residence and unreimbursed medical expenses are from AGI deductions taken as itemized deductions, or the taxpayer may elect to take the standard deduction if it is greater than all of their itemized deductions.
Tom Lewis, an individual taxpayer, paid the following expenses in Year 4:
- Credit card interest of $1,000
- Real estate taxes of $3,000 on behalf of his mother, on property owned by his mother
Which of the amounts is deductible as an itemized deduction on Tom’s Year 4 tax return?
A.
I only
B.
II only
C.
Both I and II
D.
Neither I nor II
D.
Neither I nor II
Credit card interest is considered personal interest and is not deductible on an individual’s tax return.
In order to be deductible, real estate taxes must be levied against the taxpayer and not someone else (among other requirements). A taxpayer cannot create a deduction for himself by paying someone else’s real estate taxes. In addition, the person whom the taxes were actually levied against also may not deduct the taxes since they did not pay the taxes from their own funds. Had Tom gifted the money to his mother and she had used the money to pay her taxes, she would then be entitled to claim the deduction.
Moore, a single taxpayer, had $50,000 in adjusted gross income for Year 5. During Year 5, she contributed $18,000 to her church. She had a $10,000 charitable contribution carryover from her Year 4 church contribution. What was the maximum amount of properly substantiated charitable contributions that Moore could claim as an itemized deduction for Year 5?
A.
$10,000
B.
$18,000
C.
$25,000
D.
$28,000
C. $25,000
The maximum cash contribution a taxpayer may deduct in each tax year is limited to 50% of the taxpayer’s AGI so long as the recipient charities are qualified for this ceiling. See additional limits discussed as follows:
50% × $50,000 AGI = $25,000
$10,000 carryover from Year 4 + $18,000 for Year 5 = $28,000
$28,000 − $25,000 = $3,000 carryover to Year 6
Regulation Section 1.170A-10
There is a ceiling on the amount an individual may deduct each year as a charitable contribution based both on the type of property contributed and the type of charity to which the contribution is made.
The ceilings are as follows (based on adjusted gross income (AGI)):
“50% charities” (where charitable contributions are limited to 50% of an individual’s AGI) include churches (or church conventions or associations); tax-exempt educational organizations; tax-exempt hospitals and certain medical research organizations; certain organizations holding property for state and local colleges and universities; certain governmental units and subdivisions; certain exempt religious, charitable, scientific, literary, or educational organizations. (IRC Section 170(b)(1)(A))
“30% charities” are qualifying charitable organizations that are not “50% charities” such as war veterans organizations, fraternal orders, cemetery companies, and certain private non-operating foundations. (Regulation Section 1.170A-8; IRC Section 170(b)(1)(B))
30% ceiling generally applies to gifts of appreciated long-term capital gain property to a 50% charity.
20% ceiling applies to gifts of appreciated long-term capital gain property to a 30% charity.
If an individual’s charitable gifts for a tax year exceed the percentage ceilings for the year, the excess may be carried forward and deducted for up to five years (subject to the later year’s ceiling). (IRC Section 170(d)(1))
Which of the following credits can result in a refund even if the individual had no income tax liability?
A.
Credit for prior-year minimum tax
B.
Elderly and permanently and totally disabled credit
C.
Earned income credit
D.
Child and dependent care credit
C. Earned income credit
The earned income credit (EIC or EITC) is a refundable tax credit, which means the taxpayer could be eligible for a tax refund even if the taxpayer did not have any federal income tax withheld during the tax year. The prior-year minimum tax credit, the elderly and permanently and totally disabled credit, and the child and dependent care credit all help to reduce the tax liability to zero but are not refundable in cases where the tax liability is zero.
Green is self-employed as a human resources consultant and reports on the cash basis for income tax purposes. Select the appropriate tax treatment on Form 1040 (U.S. Individual Income Tax Return) for interest expense on a loan for an auto used 75% for business.
A.
Fully deductible on Form 1040 to arrive at adjusted gross income
B.
50% deductible on Form 1040 to arrive at adjusted gross income
C.
Fully deductible in Schedule C—Profit or Loss From Business
D.
Partially deductible in Schedule C—Profit or Loss From Business
D.
Partially deductible in Schedule C—Profit or Loss From Business
Interest expense on a loan for an auto used 75% for business is partially deductible in Schedule C—Profit or Loss From Business.
Since the auto was used 75% for business, Green can deduct 75% of costs (for example, gas and maintenance) including 75% of the allowable depreciation.
Four years ago, an individual taxpayer purchased silver coins at face value for $200. The coins were stolen in the current year, when their fair market value was $1,000. The coins were not covered by insurance. Without considering the limit based on AGI, what is the maximum amount of loss that the taxpayer can deduct on the current year’s tax return?
A.
$100
B.
$200
C.
$900
D.
$1,000
A. $100
In the case of nonbusiness casualty and theft losses, a taxpayer is able to deduct the loss as an itemized deduction, which is computed as follows:
Determine the adjusted basis in the property before the casualty or theft.
Determine the decrease in fair market value of the property as a result of the casualty or theft.
From the smaller of the amounts determined in the two prior calculations, subtract any insurance or other reimbursement received or expected to receive.
In this case, the taxpayer has an adjusted basis of $200 and a decrease in the fair market value of $1,000 ($1,000 − $0). Since the smaller of the two calculations is $200, this amount is compared to the insurance coverage, which is $0. The result is that Jack has a loss of $200 from the theft loss. However, individuals must deduct $100 per incident before considering the 10%-of-AGI limit base. Therefore, this taxpayer has a deductible loss of $100, which is the $200 loss less the $100 per-incident deduction.
Which of the following assets generally will be distributed outside of the probate estate and regardless of intestacy laws, provided the estate is not the named beneficiary?
A. Totten trusts
B. Proceeds from insurance policies
A.
Both A and B
B.
A Only
C.
B Only
D.
Neither A nor B
A.
Both A and B
A Totten trust is not actually a trust; it is an account that is payable on demand. Individuals may style financial instruments such as a bank account or an asset as “Owner A in trust for Beneficiary B.” Owner A has control of the asset during his life, but upon death, the asset passes to Beneficiary B without having to go through probate or a will.
Proceeds from an insurance policy are payable to whomever the owner of the policy designates. A will or probate is not required to pay the amount to the beneficiary.
Based on the above, the only correct answer would be both Totten trusts and life insurance proceeds.
Lane, Inc., an S corporation, pays single coverage health insurance premiums of $4,800 per year and family coverage premiums of $7,200 per year for each eligible employee. Mill is a 10% shareholder-employee in Lane. On Mill’s behalf, Lane pays Mill’s family coverage under the health insurance plan. What amount of insurance premium is includible in Mill’s gross income?
A.
$0
B.
$720
C.
$4,800
D.
$7,200
D.
$7,200
If Mill owned less than 2% of the company, the correct answer would be zero.
Since Mill owns more than 2% of the company, the insurance premiums paid by the S corporation are fully taxable.
Mill received family benefits of $7,200, which are taxable.
Revenue Ruling 91-26
What percentage of a self-employed person’s medical insurance premiums is deductible above the line in the year 2016?
A.
None
B.
60%
C.
70%
D.
100%
D.
100%
The Tax and Trade Relief Extension Act of 1998 (P.L. 105-277) phased in the deduction for a self-employed person’s medical insurance premiums over several years and now permits a full deduction. The percentage limits on the medical insurance premium deduction for self-employed persons has been:
Tax Years Allowable Beginning In: Percentage 1999-2001 60% 2002 70% 2003 and later 100%
Which one of the following types of itemized deductions is included in the category of unreimbursed expenses deductible only if the aggregate of such expenses exceeds 2% of the taxpayer’s adjusted gross income?
A.
Interest expense
B.
Medical expenses
C.
Employee moving
D.
Tax return preparation fees
D.
Tax return preparation fees
Tax return preparation fees are considered miscellaneous itemized deductions to be included on IRS Form 1040, Schedule A, Itemized Deductions. The total of all miscellaneous itemized deductions must exceed 2% of the taxpayer’s adjusted gross income. Other miscellaneous itemized deductions include unreimbursed employee expenses, educator expenses, safe deposit box rental, and job search expenses.
Interest expense and medical expenses are itemized deductions but are not subject to the 2% floor. Employee moving expenses are a deduction from gross income to reach adjusted gross income and are reflected on the first page of IRS Form 1040.
On January 2, Year 1, the Philips paid $50,000 cash and obtained a $200,000 mortgage to purchase a home. In Year 3, they borrowed $15,000 secured by their home, and used the cash to add a new room to their residence. That same year they took out a $5,000 auto loan. The following information pertains to interest paid in Year 7:
Mortgage interest $17,000
Interest on room construction loan 1,500
Auto loan interest 500
For Year 7, how much interest is deductible, prior to any itemized deduction limitations?
A.
$17,000
B.
$17,500
C.
$18,500
D.
$19,000
C.
$18,500
The Philips can deduct the mortgage interest on the first mortgage of $17,000 and the second mortgage of $1,500, as both of these loans are secured by their main home, for a total of $18,500. Consumer loan interest is not an allowed deduction; therefore, the auto loan interest of $500 is not deductible.
Which of the following credits is a combination of several tax credits to provide uniform rules for the current and carryback/carryover years?
A.
General business credit
B.
Foreign tax credit
C.
Minimum tax credit
D.
Enhanced oil recovery credit
A.
General business credit
The General Business Credit (IRC Section 38(b)) is a combination of the following credits:
Investment tax credit (which includes the rehabilitation credit, the energy credit, and the reforestation credit) (IRC Section 46)
Work opportunity credit (formerly targeted jobs credit) (IRC Section 51(a))
Alcohol fuels credit (IRC Section 40(a))
Incremental research credit (IRC Section 41(a))
The low-income housing credit (IRC Section 42(a))
The enhanced oil recovery credit (IRC Section 43(a))
The disabled access credit for eligible small businesses (IRC Section 44(a))
The credit for producing electricity from certain renewable resources (IRC Section 45(a))
The empowerment zone employment credit (IRC Section 1396(a))
The Indian employment credit (IRC Section 45A(a))
The employer Social Security credit (IRC Section 45B(a))
The orphan drug credit (IRC Section 45C(a))
The new markets tax credit (IRC Section 45D(a))
The small employer pension plan start-up cost credit (IRC Section 45E(a))
The employer-provided child care credit (IRC Section 45F(a))
The railroad track maintenance credit (IRC Section 45G(a))
The biodiesel fuels credit (IRC Section 40A(a))
The low-sulfur diesel fuel production credit (IRC Section 45H(a))
The marginal oil and gas well production credit (IRC Section 45I(a))
The distilled spirits credit (IRC Section 5011(a))
The advanced nuclear power facility production credit (IRC Section 45J(a))
The nonconventional source production credit (IRC Section 45K(a))
The new energy efficient home credit (IRC Section 45L(a))
The energy efficient appliance credit (IRC Section 45M(a))
The portion of the alternative motor vehicle credit to which IRC Section 30B(g)(1) applies
The portion of the alternative fuel vehicle refueling property credit to which IRC Section 30C(d)(1) applies
The mine rescue team training credit (IRC Section 45N(a))
The differential wage payment credit (IRC Section 45P(a))
The carbon dioxide sequestration credit (IRC Section 450(a))
The qualified plug-in electric drive motor vehicle credit (IRC Section 38(b)(35))
The qualified plug-in electric vehicle credit (IRC Section 30D(c)(1))
The small employer health insurance credit (IRC Section 45R)
Nare, an accrual-basis taxpayer, owns a building which was rented to Mott under a 10-year lease expiring August 31, Year 7. On January 2, Year 5, Mott paid $30,000 as consideration for cancelling the lease. On November 1, Year 5, Nare leased the building to Pine under a 5-year lease. Pine paid Nare $10,000 rent for the two months of November and December and an additional $5,000 for the last month’s rent. What amount of rental income should Nare report in its Year 5 income tax return?
A.
$10,000
B.
$15,000
C.
$40,000
D.
$45,000
D.
$45,000
01/02/Yr. 5 payment from Mott for lease cancellation $30,000
11/01/Yr. 5 November and December rent payment from Pine 10,000
11/01/Yr. 5 additional payment from Pine 5,000
Total rental income for Year 5 $45,000
Any amount received as rent must be included in income in the year of receipt whether the taxpayer is accrual or cash basis. In general, any payment to or made on the behalf of a landlord of any kind is additional rent income.
Any amounts received by a landlord in consideration for cancellation of a lease are additional rent revenue (and not capitalized).
Mike and Jane Lewis, a married couple, file a joint 2016 federal income tax return. They have one child, age 15, whom they support 100%. Both are under age 65. They have the following income and expenses for the year:
Mike’s wages $50,000
Jane’s wages 40,000
Total allowable itemized deductions 12,000
Mike’s contribution to an IRA 4,000
Jane’s contribution to an IRA 4,000
Mike is not covered by a pension plan at work, while Jane is covered by a plan at her employer.
The exemption amount (per exemption) for 2016 is $4,050. The standard deduction amount for married filing jointly is $12,600.
What is the Lewises’ total exemption amount for 2016?
A.
$4,000
B.
$4,050
C.
$12,000
D.
$12,150
D.
$12,150
The Lewises have a total of three exemptions: one for Mike, one for Jane, and one for their dependent child.
Thus, their total exemption amount is $4,050 × 3 = $12,150.
On August 1, 2016, Graham purchased and placed into service an office building costing $264,000, including $30,000 for the land. What was Graham’s MACRS deduction for the office building in 2016?
A.
$9,600
B.
$6,000
C.
$3,600
D.
$2,250
D.
$2,250
Total cost $264,000
Less: Cost of land - 30,000
Depreciable basis $234,000
Commercial buildings placed in service after May 12, 1993, are depreciated over 39 years using straight-line depreciation and mid-month convention. While the depreciation is $6,000 per year, since it was placed in service in August, Graham can only take 4.5 months of depreciation in 2016. That is half the month of August (mid-month) and all of September, October, November, and December.
$234,000 / 39 years = $6,000 per year
4.5
$6,000 x ----- months = $2,250
12An individual taxpayer earned $10,000 in investment income, $8,000 in noninterest investment expenses, and $5,000 in investment interest expense. How much is the taxpayer allowed to deduct on the current year’s tax return for investment interest expenses?
A.
$0
B.
$2,000
C.
$3,000
D.
$5,000
B.
$2,000
The amount allowed as a deduction for investment interest for a taxable year shall not exceed the net investment income.
$10,000 investment income - $8,000 investment expense = $2,000 net investment income
Investment interest not currently deductible because of this limitation is carried forward indefinitely.
A taxpayer reports income from a state tax refund on his tax return for the current tax year. Match the phrase that best describes the status for alternative minimum tax (AMT) computations of this tax item.
A.
Not a preference or an adjustment for the AMT
B.
An AMT preference or adjustment which is a deferral item for the AMT
C.
An AMT preference or adjustment which is an exclusion item for the AMT
D.
An AMT preference or adjustment which is an exemption item for the AMT
C.
An AMT preference or adjustment which is an exclusion item for the AMT
A taxable state tax refund is an AMT adjustment which is an exclusion item. This adjustment will reduce AMT income because otherwise taxable income is excluded.
Which of the following statements regarding an individual’s suspended passive activity losses is correct?
A.
Suspended losses of $3,000 can be utilized each year against portfolio income.
B.
Suspended losses can be carried forward, but not back, until utilized.
C.
Suspended losses must be carried back three years and forward seven years.
D.
A maximum of 50% of the suspended losses can be used each year when an election is made to forgo the carryback period.
B.
Suspended losses can be carried forward, but not back, until utilized.
Passive activity losses not deductible in the current year can only be carried forward. The $3,000 per year utilization rule applies only to capital losses, not to passive activity losses.
On their joint tax return, Sam and Joann had adjusted gross income (AGI) of $150,000 and claimed the following itemized deductions:
Interest of $15,000 on a $100,000 home equity loan to purchase a motor home
Real estate tax and state income taxes of $18,000
Miscellaneous itemized deductions of $5,000 (prior to AGI limitation)
Based on these deductions, what would be the amount of AMT add-back adjustment in computing alternative minimum taxable income?
A.
$21,750
B.
$23,750
C.
$35,000
D.
$38,750
C.
$35,000
The interest, taxes, and miscellaneous itemized deductions are not deductible for AMT (alternative minimum tax). Miscellaneous itemized deductions are deductible for regular tax (not AMT) only to the extent that they exceed 2% of the individual’s AGI. For this taxpayer, the miscellaneous itemized deduction for regular tax would be limited to the amount exceeding AGI of $150,000 × 2% (or 0.02) = $3,000.
Therefore, the taxpayer would have as a miscellaneous itemized deduction $2,000 ($5,000 − $3,000). This deduction is not allowed for AMT and would be added back to taxable income to calculate the alternative minimum taxable income.
Add back:
Interest ($15,000) + Taxes ($18,000) + Miscellaneous itemized deductions ($5,000 − ($150,000 × 0.02)) = $35,000
For 2016, Chris, age 5, has $3,000 of interest income and no earned income this year. How much of Chris’s income will be taxed at Chris’s parents’ maximum tax rate?
A.
$0
B.
$900
C.
$1,000
D.
$1,050
B.
$900
If a child has interest, dividends, and other unearned income of more than $2,000, part of that income may be taxed at the parent’s tax rate instead of the child’s tax rate. The “kiddie tax” is a tax on unearned income paid to minors. For 2016, the first $1,050 of such income is tax free, the second $1,050 is taxed to the child at his/her tax rate, and all unearned income over $2,100 is taxed at the parents’ tax rate. The kiddie tax rule now applies to children under age 19 and full-time college students under the age of 24. Since Chris has $3,000 of unearned income, the amount greater than $2,100, or $900, would be taxed at Chris’s parents’ maximum tax rate. The child must be required to file a tax return. The child’s tax is calculated on IRS Form 8615, Tax for Certain Children Who Have Unearned Income, and included with the child’s return.
Davidson was transferred from Chicago to Atlanta. In connection with the transfer, Davidson incurred the following moving expenses:
Moving the household goods $2,000
Temporary living expenses in Atlanta 400
Lodging on the way to Atlanta 100
Meals 40
What amount may Davidson deduct if the employer reimbursed Davidson $2,000 (not included in Form W-2) for moving expenses?
A.
$100
B.
$120
C.
$500
D.
$520
A.
$100
A deduction is allowed for certain moving expenses that are related to commencement of work as an employee at a new principal place of work. Moving of the household goods and lodging while traveling from the old location to the new location are qualified deductible expenses. Meals and temporary living expenses are not deductible.
Therefore, $2,100 ($2,000 + $100) of the listed expenses are qualified deductions. The employer reimbursement is subtracted from this qualified expense: $2,100 - $2,000 = $100.
If a landlord abates a portion of rent due under a lease as a contribution toward a retail tenant’s construction work, how does the landlord handle the contribution on its tax return?
A.
Depreciate as nonresidential real property
B.
Deductible over seven years upon making an election for the tax year in which the lease was entered into
C.
A capital expense deductible over 20 years
D.
Depreciate as residential real property
A.
Depreciate as nonresidential real property
The landlord must treat the expense as a cost of nonresidential real property which has a MACRS life of 39 years. The landlord also recognizes rent income equal to the fair market value of the improvements.
Green is self-employed as a human resources consultant and reports on the cash basis for income tax purposes. Select the appropriate tax treatment on Form 1040 (U.S. Individual Income Tax Return) for oil royalties received.
A.
Taxable as other income on Form 1040
B.
Reported in Schedule B—Interest and Dividend Income
C.
Reported in Schedule C as trade or business income
D.
Reported in Schedule E—Supplemental Income and Loss
D.
Reported in Schedule E—Supplemental Income and Loss
Oil royalties received should be reported in Schedule E—Supplemental Income and Loss.
Capital assets include:
A.
a corporation’s accounts receivable from the sale of its inventory.
B.
7-year MACRS property used in a corporation’s trade or business.
C.
a manufacturing company’s investment in U.S. Treasury bonds.
D.
a corporate real estate developer’s unimproved land that is to be subdivided to build homes, which will be sold to customers.
D.
a corporate real estate developer’s unimproved land that is to be subdivided to build homes, which will be sold to customers.
Capital assets include a manufacturing company’s investment in U.S. Treasury bonds.
IRC Section 1221 explains what a capital asset does not include. For example, it does not include:
inventory,
any depreciable property,
a copyright, a literary, musical, or artistic composition, or
accounts or notes receivable acquired in the ordinary course of trade or business for services.
Robbe, a cash-basis single taxpayer, reported $50,000 of adjusted gross income last year and claimed itemized deductions of $5,500, consisting solely of $5,500 of state income taxes paid last year. Robbe’s itemized deduction amount, which exceeded the standard deduction available to single taxpayers for last year by $1,150, was fully deductible and it was not subject to any limitations or phaseouts. In the current year, Robbe received a $1,500 state tax refund relating to the prior year. What is the proper treatment of the state tax refund?
A.
Include none of the refund in income in the current year
B.
Include $1,150 in income in the current year
C.
Include $1,500 in income in the current year
D.
Amend the prior year’s return and reduce the claimed itemized deductions for that year
B.
Include $1,150 in income in the current year
Under the tax benefit rule, a refund or credit of prior-year state or local income taxes is taxable to the extent that the payment of that amount in the prior year reduced your taxable income. Thus, if you did not itemize your deductions or elected to deduct state and local general sales taxes instead of state and local income taxes in the year to which the refund or credit relates, there is no income to report. If you itemized in the year to which the refund or credit relates, the amount of income you have to report is the lesser of:
the excess of your itemized deductions for the year the taxes were paid over the amount of your standard deduction in that year had you not itemized, or
the lesser of your deduction for state taxes shown on that return or the amount of the refund.
In this example, the standard deduction available to Robbe would have been $4,350 ($5,500 - $1,150) had he not itemized his deductions. Because he chose to itemize rather than claim the standard deduction, his AGI deduction was $1,150 in excess of the standard deduction. The deduction for state taxes was $5,500. Therefore, the lesser amount of $1,150 gave Robbe a tax benefit of the taxes that he was not required to pay on this amount.
During Year 2, Adler had the following cash receipts:
Wages $18,000
Interest income from investments in municipal bonds 400
Unemployment compensation 1,500
What is the total amount that must be included in gross income on Adler’s Year 2 income tax return?
A.
$18,000
B.
$18,400
C.
$19,500
D.
$19,900
C.
$19,500
Interest income from municipal bonds is excluded from gross income. Wages are taxable; unemployment compensation is taxable. The amount that must be included in gross income is $19,500 (Wage of $18,000 + Unemployment compensation of $1,500).
IRC Sections 61, 85, and 103
Tom Lewis, an individual taxpayer, was assessed $250 in the current year for the construction of street lights in his neighborhood. It is thought that the street lights will reduce crime in the neighborhood. Tom’s neighborhood is the only area of the city that is assessed the charges. Before the end of the year, Tom is assessed another $100 for repairing the street lights damaged in a storm. How much of the $350 paid by Tom is deductible as an itemized deduction in the current year?
A.
$0
B.
$100
C.
$250
D.
$350
B.
$100
Taxes assessed against local improvements are not deductible if they are of a nature that tends to increase the value of the property being assessed. Maintenance, repair, or interest charges related to such assessments are deductible. Thus, only the $100 for repairing the street lights is deductible.
Smith (single filing status) has an adjusted gross income (AGI) of $120,000 without taking into consideration $40,000 of losses from rental real estate activities. Smith actively participates in the rental real estate activities. What amount of the rental losses may Smith deduct in determining taxable income?
A.
$0
B.
$15,000
C.
$20,000
D.
$40,000
B.
$15,000
Individuals may offset up to $25,000 ($50,000 if married filing jointly) of ordinary income with losses from rental real estate activities. This exemption is reduced (but not below zero) by 50% of the amount by which the adjusted gross income of the taxpayer for the year exceeds $100,000.
Therefore, $25,000 - (($120,000 - $100,000) × 0.50) = $15,000 deduction allowed.
Wilson, CPA, uses a commercial tax software package to prepare clients’ individual income tax returns. Upon reviewing a client’s computer-generated Year 1 itemized deductions, Wilson discovers that the schedule’s deductible investment interest expense is less than the amount paid by the taxpayer and the amount that Wilson entered into the computer. After analyzing the entire tax return, Wilson determines that the computer-generated investment interest expense deduction is correct. Why is the computer-generated investment interest expense deduction correct?
I. The client’s investment interest expense exceeds net investment income.
II.The client’s qualified residence interest expense reduces the deductible amount of investment interest expense.
A.
I only
B.
II only
C.
Both I and II
D.
Neither I nor II
A.
I only
A non-corporate taxpayer’s itemized deduction for investment interest is limited to the taxpayer’s amount of net investment income for the year. This limitation would cause the client’s investment interest expense deduction on the computer-generated return to differ from the amount paid by the taxpayer.
A taxpayer’s qualified residence interest expense has no bearing on the deductible amount of investment interest expense.
To qualify for the child care credit on a joint return, at least one spouse must:
A. have an adjusted gross income of $15,000 or less.
B. be gainfully employed when related expenses are incurred.
A.
Both A and B
B.
Neither A nor B
C.
Only A
D.
Only B
D.
Only B
If filing a joint tax return, both spouses must have earned income from wages, salaries, tips, other taxable employee compensation, or net earnings from self-employment. The taxpayer or spouse can be considered as having earned income if they were a full-time student of physically or mentally disabled.
The child care credit is available in full if the taxpayer’s adjusted gross income (AGI) is $15,000 or less. A reduced credit is still available if the taxpayer’s AGI is greater than $15,000. Generally, both spouses must work in order to qualify for the credit. However, if one spouse does not work but is a full-time student, or is physically or mentally incapable of taking care of him or herself, the credit is still available.
The alternative minimum tax (AMT) is computed as the:
A.
excess of the regular tax over the tentative minimum tax.
B.
excess of the tentative minimum tax over the regular tax.
C.
the tentative minimum tax plus the regular tax.
D.
lesser of the tentative minimum tax or the regular tax.
B.
excess of the tentative minimum tax over the regular tax.
The alternative minimum tax (AMT) is computed as the excess of the tentative minimum tax over the regular tax.
A taxpayer has the following:
Tentative Minimum Tax (TMT) $65,000
- Regular Tax - 45,000
Alternative Minimum Tax (AMT) $20,000
The taxpayer must pay the IRS $65,000 (Regular Tax of $45,000 + AMT OF $20,000).
Form 6251 must be used by individuals to compute the AMT, and Form 4626 must be used by corporations.
Destry, a single taxpayer, reported the following on his U.S. Individual Income Tax Return (Form 1040):
Income:
Wages $5,000
Interest on savings account 1,000
Net rental income 4,000
Deductions: Personal exemption $ 4,000 Standard deduction 6,300 Net business loss 16,000 Net short-term capital loss 2,000
What is Destry’s net operating loss that is available for carryback or carryforward?
A.
$7,000
B.
$9,000
C.
$15,700
D.
$16,000
B. $9,000 (7000+2000)
The interest income (nonbusiness income) is offset by nonbusiness expenses, up to the amount of nonbusiness income. The standard deduction is a nonbusiness expense for this purpose.
The net capital loss (nonbusiness) is only deductible to the extent it is offset by nonbusiness capital gains.
Personal exemptions and unused personal deductions are added back to taxable income in arriving at net operating losses so they do not increase the carryback or carryforward.
The net business loss must be offset by wages and rental income for this year.
Wages of $5,000 plus net rental income of $4,000 minus the loss of $16,000 equals a net operating loss carryback or carryforward of $7,000.
Clark bought Series EE U.S. savings bonds after 1989. Redemption proceeds will be used for payment of college tuition for Clark’s dependent child. One of the conditions that must be met for tax exemption of accumulated interest on these bonds is that the:
A.
purchaser of the bonds must be the sole owner of the bonds (or joint owner with her or his spouse).
B.
bonds must be bought by a parent (or both parents) and put in the name of the dependent child.
C.
bonds must be bought by the owner of the bonds before the owner reaches the age of 24.
D.
bonds must be transferred to the college for redemption by the college rather than by the owner of the bonds.
A.
purchaser of the bonds must be the sole owner of the bonds (or joint owner with her or his spouse).
The Education Savings Bond Program permits taxpayers to exclude from their gross income a portion of all of the interest earned when redeeming eligible Series EE U.S. savings bonds after 1989. The purchased bonds should be registered in the name of the taxpayer, or taxpayer and spouse, with the child as beneficiary. IRS Form 8815 includes the necessary worksheet and instructions for taxpayers to use to exclude the interest income from gross income.
Tom Lewis, a single taxpayer, received a stock dividend from ABC Corp. He had the option to receive either cash or ABC stock with a fair market value of $1,000 as of the date of distribution. The par value of the stock on the date of distribution was $600. Tom must include what amount in gross income as a result of the stock dividend?
A.
$0
B.
$400
C.
$600
D.
$1,000
D.
$1,000
Since Tom had the option to receive either cash or the ABC Corp. stock with a fair market value of $1,000, the fair market value of the stock received is included in income by Tom. The Internal Revenue Code states that if a distribution (or series of distributions) results in the receipt of cash or other property by some shareholders in the corporation’s assets or earnings and profits, then stock or stock rights distributed to a shareholder on the common stock of the corporation must be treated as a taxable distribution.
IRC Section 1(h)
Gain on stock held for more than 12 months and sold on October 15, 2016, that would otherwise be taxed at a 15% rate if it were ordinary income is taxed at a rate of:
A.
20%.
B.
15%.
C.
10%.
D.
0%
D.
0%
The following requirements must be met for the sale of property to be taxed at the 0% capital gains rate:
The property must be held for more than 12 months.
The taxpayer’s marginal rate may not be more than 15%.
The gain must be recognized after December 31, 2007.
Long-term capital gains are taxed at the following favorable tax rates for 2016:
General capital assets:
Marginal tax rate of 15% 0%
Marginal tax rate 25% through 35% 15%
Marginal tax rate of 39.6% 20%
Unrecaptured Section 1250 gain 25%
Collectibles 28%
A husband and wife can file a joint return even if:
A.
the spouses have different tax years, provided that both spouses are alive at the end of the year.
B.
the spouses have different accounting methods.
C.
either spouse was a nonresident alien at any time during the tax year, provided that at least one spouse makes the proper election.
D.
they were divorced before the end of the tax year.
B.the spouses have different accounting methods.
No joint return shall be made if the husband and wife have different taxable years, except in cases where the taxable year ends on different days because of the death of either or both.
A nonresident alien individual married to a citizen of the United States may file a joint return only if both make an election to file jointly.
The determination of whether an individual is married shall be made as of the close of the taxable year.
There is no exception for dis-allowance of filing jointly as a result of spouses using different accounting methods.
Carter incurred the following expenses in the current year: $500 for the preparation of a personal income tax return, $100 for custodial fees on an IRA, $150 for professional publications, and $2,000 for union dues. Carter’s current-year adjusted gross income is $75,000. Carter, who is not self-employed, itemizes deductions. What will Carter’s deduction be for miscellaneous itemized deductions after any limitations in the current year?
A.
$0
B.
$750
C.
$1,250
D.
$2,750
C.
$1,250
Miscellaneous itemized deductions are only deductible to the point that they exceed 2% of AGI. Two percent of the $75,000 AGI is $1,500. The total of these expenses ($500 + $100 + $150 + $2,000) is $2,750; $2,750 - $1,500 = $1,250.
Carter’s income is below the phaseout level, so this limitation would not apply in this example.
Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be:
A.
neither carried back nor carried forward.
B.
carried back 3 years or carried forward 15 years.
C.
carried forward 5 years.
D.
carried forward indefinitely until fully deducted.
C.carried forward 5 years.
C. Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be carried forward five years.
The amount of the excess that may be deducted in any carryover year is limited to the lesser of (1) the remaining portion of any excess contribution not already deducted, or (2) the amount equal to 50% (or 30% for capital gain carryover) of the taxpayer’s AGI after first deducting the sum of the charitable contributions (to which the 50% or 30% limitation applies) paid in the carryover year and any excess contributions that have precedence in order of time over the present carryover. In other words, the charitable contributions carryovers follow the FIFO rules.
A taxpayer reports a deduction for their personal exemptions for the current tax year. Which phrase best describes the status of this tax item for alternative minimum tax (AMT) computations?
A.
Not a preference or an adjustment for the AMT
B.
An AMT preference or adjustment which is a deferral item for the AMT
C.
An AMT preference or adjustment which is an exclusion item for the AMT
D.
An AMT preference or adjustment which is an exemption item for the AMT
C. An AMT preference or adjustment which is an exclusion item for the AMT
The deduction for personal exemptions is an AMT adjustment which is an exclusion item.
Generally, deferral items are those preferences and adjustments which can be expected to reverse in future years. When a taxpayer pays AMT that is due to deferral items, he or she is allowed an AMT credit in succeeding years against his or her regular tax.
Exclusion items are those preferences and adjustments which will not reverse in future years. The deductions are permanently denied for AMT purposes.
Mock operates a retail business selling illegal narcotic substances. Which of the following items may Mock deduct in calculating business income?
I. Cost of merchandise
II. Business expenses other than the cost of merchandise
A.
I only
B.
II only
C.
Both I and II
D.
Neither I nor II
A.
I only
A taxpayer is obligated to report all income, even the income earned from illegal activities. The taxpayer is only allowed to deduct the cost of goods sold (cost of merchandise) when illegal drugs are involved.
Wages paid for domestic services are subject to special rules for determining whether they are subject to payroll taxes. When are domestic wages subject to federal unemployment tax?
A.
Over $1,500 to one employee in a year
B.
Over $2,000 total wages in a year
C.
Over $1,000 total wages in a quarter
D.
Only if requested by employee
C.
Over $1,000 total wages in a quarter
Wages paid for domestic services are subject to federal unemployment tax if they exceed $1,000 per quarter, aggregating wages paid to all employees.
In Year 5, Joan Frazer’s residence was totally destroyed by fire. The property (exclusive of land) had an adjusted basis and a fair market value of $130,000 before the fire. During Year 5, Frazer received an insurance reimbursement of $120,000 for the destruction of her home. Frazer’s Year 5 adjusted gross income was $70,000. What amount of the fire loss was Frazer entitled to claim as an itemized deduction on her Year 5 tax return?
A.
$2,900
B.
$8,500
C.
$8,600
D.
$10,000
A.$2,900
Joan Frazer’s deductible loss is calculated as follows:
Fair market value and basis $130,000
Less: Insurance reimbursement - 120,000
Total loss $ 10,000
Less: $100 per casualty - 100
$ 9,900
Less: 10% x $70,000 AGI 7,000
Amount of casualty $ 2,900
A taxpayer may deduct a casualty loss on property not used in business or held for production of income:
by the lesser of the decrease in the fair market value or the basis, for each casualty loss that exceeds $100 (called “$100 floor”), and for all of the taxpayer’s casualty losses for the tax year in excess of 10% of adjusted gross income for the year (called “percentage of income limitation”).
IRC Section 165(h); Regulation Section 1.165-7
A taxpayer reports a deduction for a long-term capital loss on his tax return for the current tax year. Match the phrase that best describes the status for alternative minimum tax (AMT) computations of this tax item.
A.
Not a preference or an adjustment for the AMT
B.
An AMT preference or adjustment which is a deferral item for the AMT
C.
An AMT preference or adjustment which is an exclusion item for the AMT
D.
An AMT preference or adjustment which is an exemption item for the AMT
A.
Not a preference or an adjustment for the AMT
A long-term capital loss deduction and tax-exempt interest paid by a state are neither preferences nor adjustments for AMT. Tax-exempt interest paid on private activity bonds issued after August 7, 1986, generally is a tax preference which is an exclusion item.
hompson’s spouse died in year 1. Thompson did not remarry in year 2 and lived alone the entire year. What is Thompson’s year 2 filing status?
A.
Married filing jointly
B.
Surviving spouse
C.
Head of household
D.
Single
D.Single
In the case where a spouse dies, the surviving spouse has a filing status of married joint for the year of death.
For the two years following the death of the spouse, the surviving spouse may be eligible to use the qualifying widow(er) with a dependent child status. This filing status entitles the surviving spouse to use the joint return tax rates and the highest standard deduction amount (if the taxpayer elects not to itemize deductions).
For year 2 following the death of his spouse, Thompson does not have a dependent child and did not remarry. Thus, as the surviving spouse, he would have a filing status of single. Hence, the correct filing status for Thompson is single.
Carroll is 35 years old and an unmarried taxpayer with an adjusted gross income of $100,000. Carroll incurred and paid the following unreimbursed medical expenses for 2016:
Doctor bills resulting from a serious fall: $5,000
Cosmetic surgery that was necessary to correct a congenital deformity: $15,000
Carroll had no medical insurance. For regular income tax purposes, what was Carroll’s maximum allowable medical expense deduction, after the applicable threshold limitation, for 2016?
A.
$0
B.
$10,000
C.
$12,500
D.
$20,000
B. $10,000
Carroll is only allowed to deduct the amount of medical expenses than exceed 10% of Carroll’s adjusted gross income. Carroll’s adjusted gross income is $100,000; therefore, Carroll has to exclude the first $10,000 ($100,000 × 0.10). Carroll should only deduct $10,000 on the return.
If Carroll was 65 or older, only the first 7.5%, and not 10%, would need to be excluded from income. Also, note that cosmetic surgery is deductible only when it is necessary to correct a congenital abnormality (as in Carroll’s case), personal injury resulting from an accident or trauma, or disfiguring disease. (IRC Section 213(d)(9))
Stein, an unmarried taxpayer, had adjusted gross income of $80,000 for the year and qualified to itemize deductions. Stein had no charitable contribution carryovers and only made one contribution during the year. Stein donated stock, purchased seven years earlier for $17,000, to a tax-exempt educational organization. The stock was valued at $25,000 when it was contributed. What is the maximum amount of charitable contributions deductible allowed on Stein’s current-year income tax return?
A.
$17,000
B.
$21,000
C.
$24,000
D.
$25,000
C. $24,000
Noncash contributions are generally deductible at their fair market value.
For contributions of appreciated capital gain property, deductions are the lesser of the total fair market value or 30% of AGI for educational organizations. AGI of $80,000 × 0.30 limit = $24,000.
The deduction is limited to only $24,000. The unused $1,000 of FMV can be carried forward to the following year.
An election can be made to deduct appreciated capital gain property at cost, in which case a 50% of AGI limitation would apply. In this case, the 30% limitation using FMV results in a larger deduction.
IRC Section 170(b)(1)(C)
Tom Lewis, an individual taxpayer, had the following income items in Year 5:
I. Unemployment compensation
II. College scholarship in which funds were used exclusively for tuition and books
Which of the items are included in Tom’s gross income on Tom’s Year 5 tax return?
A.
I only
B.
II only
C.
Both I and II
D.
Neither I nor II
A. I only
Unemployment compensation is included in the gross income of the individual receiving the compensation.
Amounts received as a college scholarship are typically not included in the gross income of the individual receiving the scholarship as long as the tuition amount was used for qualified tuition and related expenses such as fees, books, supplies, and equipment.
Tom Lewis, a single taxpayer, received a $1,500 state tax refund in Year 5 for the prior-year overpayments. In Year 4, Tom was not subject to the alternative minimum tax and was not entitled to any credit against income tax. Tom’s Year 4 taxable income was $40,000. Tom’s total itemized deductions for Year 4 amounted to $6,400, which included $3,000 for state income tax withholding. Tom’s standard deduction amount for Year 4 was $6,200. How much should Tom include in gross income for Year 5 as a result of the state tax refund?
A.
$0
B.
$200
C.
$300
D.
$1,500
B. $200
The receipt of an amount that has formed the basis for an earlier year deduction or credit is considered a “recovery” and generally must be included (either partially or totally) in income in the year in which it is received (IRC Section 111).
Recoveries of amounts that could be claimed as an itemized deduction (as in this question, a refund of state income taxes), are not included in income if the taxpayer did not itemize his or her deductions in the year in which the deduction could have been taken.
Recoveries must be included (in full) in gross income if the recovery amount (i.e., the state tax refund amount as in this question) is equal to or less than the amount by which the taxpayer’s itemized deduction amount exceeded his or her standard deduction amount in the prior year (assuming that the taxpayer had positive taxable income in the prior year). If the recovery amount exceeds the difference between the taxpayer’s total itemized deduction amount and the standard deduction amount, only that smaller difference amount will be included in income. This is known as the “Tax Benefit” rule.
In this case, Tom’s total itemized deduction amount ($6,400) exceeded his standard deduction amount ($6,200) by only $200. Thus, only $200 of the $1,500 state refund amount will be included in income in the current year.
In the current year, Drake, a disabled taxpayer, made the following home improvements:
Cost
Pool installation, which qualified as a medical expense and increased the value of the home by $25,000 $100,000
Widening doorways to accommodate Drake’s wheelchair (The improvement did not increase the value of his home.) $10,000
For regular income tax purposes and without regard to the adjusted gross income percentage threshold limitation, what maximum amount would be allowable as a medical expense deduction in the current year?
A.
$110,000
B.
$85,000
C.
$75,000
D.
$10,000
B.$85,000
Permanent capital improvements made primarily for medical reasons are deductible as medical expenses subject to certain limitations. If the capital improvement increases the value of the residence, only the excess of the cost over the increase in value is deductible as a medical expense.
Drake installed a pool for medical reasons at a cost of $100,000, which increased the value of his residence by $25,000, so the medical deduction is limited to $75,000 ($100,000 - $25,000 = $75,000).
Drake also widened doorways to accommodate his wheelchair at a cost of $10,000. Since this did not increase the value of his residence, it is deductible in full as a medical expense.
Drake’s medical deduction is computed as follows:
Pool $75,000
Doorways 10,000
Total $85,000
Cole earned $3,000 in wages, incurred $1,000 in unreimbursed employee business expenses, paid $400 as interest on a student loan, and contributed $100 to a charity. What is Cole’s adjusted gross income?
A.
$3,000
B.
$2,600
C.
$2,500
D.
$1,600
B.
$2,600
Adjusted gross income is calculated by subtracting business expenses and other deductions from gross income. Unreimbursed employee business expenses are itemized deductions subject to the over-2%-of-AGI limitation that are subtracted to get to taxable income, not adjusted gross income. Cole’s adjusted gross income is calculated as:
Wages $3,000
Student loan interest (400)
AGI $2,600
Student loan interest up to $2,500 can be deducted from gross income to determine AGI. Cole is not subject to the student loan phaseout limitations because of his relatively low level of income.
A taxpayer reports a deduction for depreciation of business assets under the MACRS depreciation system on his tax return for the current tax year. Match the phrase that best describes the status for alternative minimum tax (AMT) computations of this tax item.
A.
Not a preference or an adjustment for the AMT
B.
An AMT preference or adjustment which is a deferral item for the AMT
C.
An AMT preference or adjustment which is an exclusion item for the AMT
D.
Will always be a preference or deferred item for AMT
B.
An AMT preference or adjustment which is a deferral item for the AMT
The difference between depreciation computed under the modified accelerated cost recovery system (MACRS) and the alternative depreciation system (ADS) is an adjustment which is a deferral item. This adjustment reverses when the depreciation computed under the ADS system becomes larger than MACRS depreciation in the later years.
Deferral items are those preferences and adjustments which can be expected to reverse in future years. When a taxpayer pays AMT that is due to deferral items, he or she is allowed an AMT credit in succeeding years against his or her regular tax.
Tom Lewis, a single taxpayer, had the following income and expense items for 2016:
Wages $55,000
Long-term capital loss (4,000)
Deductible IRA contribution (Tom is not
covered by a retirement plan at work) 2,000
Mortgage interest on personal residence 5,000
Medical expenses not covered by insurance 6,000
Tom’s personal exemption amount for 2016 4,050
Tom’s standard deduction amount for 2016 6,300
If Tom’s adjusted gross income was $50,000, what is his taxable income for the year?
A.
$39,650
B.
$39,700
C.
$40,000
D.
$43,700
A.
$39,650
Tom’s taxable income is calculated as follows:
Adjusted gross income $50,000
Minus: Standard deduction 6,300
Minus: Personal exemption 4,050
Taxable income $39,650
Tom Lewis, a single taxpayer, received a $3,200 state tax refund in Year 5 for prior-year overpayments. Tom’s state withholding for Year 4 was $3,500. Tom’s Year 4 taxable income was $35,000. Tom did not itemize deductions and instead took his standard deduction amount of $6,200 for Year 4. How much should Tom include in gross income for Year 5 as a result of the state tax refund?
A.
$0
B.
$500
C.
$300
D.
$3,200
A. $0
The receipt of an amount that has formed the basis for an earlier year deduction or credit is considered a “recovery” and generally must be included (either partially or totally) in income in the year in which it is received (IRC Section 111).
Recoveries of amounts that could be claimed as an itemized deduction (as in this question, a refund of state income taxes), are not included in income if the taxpayer did not itemize his or her deductions in the year in which the deduction could have been taken.
Recoveries must be included (in full) in gross income if the recovery amount (i.e., the state tax refund amount as in this question) is equal to or less than the amount by which the taxpayer’s itemized deduction amount exceeded his or her standard deduction amount in the prior year (assuming that the taxpayer had positive taxable income in the prior year). If the recovery amount exceeds the difference between the taxpayer’s total itemized deduction amount and the standard deduction amount, only that smaller difference amount will be included in income. This is known as the “Tax Benefit” rule.
Tom Lewis, an individual taxpayer, had an adjusted gross income of $40,000 on his current-year tax return. He incurred the following medical expenses this year:
Doctor fees for various illnesses $5,000 Prescription medicine and drugs 1,000 Annual physical performed by MD 500 Eye exams 300 Eyeglasses and contact lenses 600
He received no insurance reimbursements on the amounts. What is the net medical expense deduction that Tom may take for the current year as an itemized deduction?
A.
$7,400
B.
$3,400
C.
$2,900
D.
$2,500
B.
$3,400
The doctor fees, the prescription drugs, the annual physical, the eye exams, and the eyeglasses/contact lenses are all deductible medical expenses (a total of $7,400) for Tom. His medical expense deduction is calculated as follows:
Total expenses of $7,400 − (10% of $40,000 = $4,000) = $3,400
If an individual paid income tax in Year 1 but did not file a Year 1 return because his income was in-sufficient to require the filing of a return, the deadline for filing a refund claim is:
A.
two years from the date the tax was paid.
B.
two years from the date a return would have been due.
C.
three years from the date the tax was paid.
D.
three years from the date a return would have been due.
A.
two years from the date the tax was paid.
To receive a refund for an over-payment of tax, a taxpayer must file a claim for refund within three years from the date on which the tax return that relates to the refund was filed, or within two years of actual payment of the tax if that date is later.
Charles and Marcia are married, cash-basis taxpayers. In Year 2, they had interest income as follows:
$500 interest on federal income tax refund
$600 interest on state income tax refund
$800 interest on federal government obligations
$1,000 interest on state government obligations
What amount of interest income is taxable on Charles and Marcia’s Year 2 joint income tax return?
A.
$500
B.
$1,100
C.
$1,900
D.
$2,900
C.
$1,900
$ 500 interest from federal income tax refund
600 interest on state income tax refund
800 interest on federal government obligation
$1,900 Total taxable interest income
All interest received by any taxpayer is included in gross income unless specially exempt by law.
Interest on all state and local bonds (sometimes called “municipal bond interest”) is exempt from federal income tax. The $1,000 interest on state government obligations which Charles and Marcia received is not taxable.
Which of the following may not be deducted in the computation of alternative minimum taxable income of an individual?
A.
Traditional IRA account contribution
B.
One-half of the self-employment tax deduction
C.
Personal exemptions
D.
Charitable contributions
C. Personal exemptions
Regular taxable income + / - AMT adjustments + Tax preferences = AMTI (alternative minimum taxable income)
Personal exemptions are an adjustment item. Most AMT adjustments add deductions back to taxable income to arrive at AMTI. (There are a few adjustments that can be subtracted in some years. These relate mainly to items that may have timing differences between regular and AMT tax, such as some depreciation calculations, mining exploration and development costs, and NOL (net operating loss) deductions.)
Traditional IRA contribution deductions, the deduction for half of the self-employment tax, and charitable contributions are not codified as adjustments in computing alternative minimum taxable income.
Tom Lewis, a single taxpayer, received $8,400 in gross receipts from his rental property. The expenses for the residential rental property were:
Bank mortgage interest $1,200
Real estate taxes 700
Insurance 500
MACRS depreciation 3,500
Tom’s total income on his individual tax return will be increased by what amount as a result of the rental activities?
A. $8,400
B. $7,200
C. $6,500
D. $2,500
D. $2,500
Rental income is included in gross income by individuals and the expenses used to generate the rental income are deductible by the individual as rental expenses. For this question, all the expense items shown are deductible rental expenses. Tom’s net rental income is calculated as follows:
Gross Receipts $8,400
less:
mortgage interest (1,200)
real estate taxes (700)
insurance (500)
depreciation (3,500)
Net Rental Income $2,500
Evan, an individual, has a 40% interest in EF, an S corporation. At the beginning of the year, Evan’s basis in EF was $2,000. During the year, EF distributed $100,000 and reported operating income of $200,000. What amount should Evan include in gross income?
A.
$38,000
B.
$40,000
C.
$80,000
D.
$118,000
C.$80,000
Shareholders of an S corporation include a pro-rata share of the corporation’s non-separately and separately stated items of income or expense on their personal tax return. In this case, Evan includes 40% of EF’s operating income or $80,000 ($200,000 × 0.40 = $80,000) on his personal tax return. None of Evan’s $40,000 share of distributions ($100,000 × 0.40 = $40,000) would be taxable since his distributions did not exceed his new basis.
Beginning basis $ 2,000 Share of operating income 80,000 Share of distributions (40,000) Ending basis $42,000 In determining whether a distribution exceeds basis (and is taxable), the ordering rules allow basis to be increased by current-year income before reducing basis by distributions.
Which payment(s) is (are) included in a recipient’s gross income?
I. Payment to a graduate assistant for a part-time teaching assignment at a university. Teaching is not a requirement toward obtaining the degree.
II. A grant to a Ph.D. candidate for his or her participation in a university-sponsored research project for the benefit of the university
A.
I only
B.
II only
C.
Both I and II
D.
Neither I nor II
C.
Both I and II
Any payments made to students for teaching, research, or any other service must be included in gross income.
Therefore, a payment made to a graduate assistant for a part-time teaching assignment at a university, when teaching is not a requirement toward obtaining the degree, must be included in his or her income.
Also, when a Ph.D. candidate receives a grant for his or her participation in a university-sponsored research project for the benefit of the university, it must be included in his or her income.
Tom Lewis’s employer provides group-term life insurance on Tom’s life. What is the maximum amount of insurance coverage that the employer may provide on Tom’s life without Tom having to include a portion of the cost of the policy in gross income for 2016?
A.
$25,000
B.
$50,000
C.
$75,000
D.
$100,000
B.
$50,000
An employee must include in income the cost (based on an IRS uniform premium cost table) of more than $50,000 of group-term life insurance provided by his employer.
IRC Section 79(a)
Wood’s residence had an adjusted basis of $150,000 and it was destroyed by a tornado. An appraiser valued the decline in market value at $175,000. Later that same year, Wood received $130,000 from his insurance company for the property loss and did not elect to deduct the casualty loss in an earlier year. Wood’s adjusted gross income was $60,000 and he did not have any casualty gains.
What total amount can Wood deduct as an itemized deduction for the casualty loss, after the application of the threshold limitations?
A.
$39,000
B.
$38,900
C.
$19,900
D.
$13,900
D.
$13,900
Taxpayers can deduct a casualty loss subject to certain limitations. The casualty loss is the lesser of the reduction in the property’s fair market value or the basis in the property. The loss deduction is reduced by any insurance proceeds. This amount is further reduced by $100 per casualty and 10% of adjusted gross income.
In this case, the deduction would be calculated as follows:
Decline in FMV $175,000
Basis 150,000
Lesser of these two $150,000
Less insurance proceeds (130,000)
20,000
Less $100 (100)
Less 10% of AGI
$60,000 x 0.10 (6,000)
Casualty loss deduction $ 13,900Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for the current year. During the year, Taylor donated land to a church and made no other contributions. Taylor purchased the land 10 years ago as an investment for $14,000. The land’s fair market value was $25,000 on the day of the donation. What is the maximum amount of charitable contribution that Taylor may deduct as an itemized deduction for the land donation for the current year?
A.
$25,000
B.
$14,000
C.
$11,000
D.
$0
A.
$25,000
Taylor can deduct $25,000 as an itemized deduction for the donation. Land purchased and held for more than one year as an investment is a long-term capital asset. A special 30% limit applies to contributions of capital gain property to 50%-limit organizations; since 30% of Taylor’s AGI is $27,000 ($90,000 × 30% = $27,000), the limit has not been exceeded. Note that the special 30% limit does not apply when the taxpayer chooses to reduce the fair market value of the property by the amount that would have been long-term capital gain if the property had been sold; in that case, a 50% limit applies.
Ace Rentals, Inc., an accrual-basis taxpayer, reported rent receivable of $35,000 and $25,000 in its Year 5 and Year 4 balance sheets, respectively. During Year 5, Ace received $50,000 in rent payments and $5,000 in nonrefundable rent deposits. In Ace’s Year 5 corporate income tax return, what amount should Ace include as rent revenue?
A.
$50,000
B.
$55,000
C.
$60,000
D.
$65,000
D. $65,000
Ace Rental Inc. received $50,000 cash
Also the receivables INCREASE
from Year 4 to Year 5 +10,000 (Rent earned but not collected)
$60,000
Add: Nonrefundable rent deposit 5,000
Total rent revenue on the
accrual basis $65,000
Since the taxpayer is an accrual-basis taxpayer, any increase in receivables also increases the revenue:
Dr. Accounts Receivable $10,000
Cr. Rent Revenue $10,000
Also, a nonrefundable deposit is considered rent revenue in the year collected.
Tom Lewis, a single taxpayer, had the following income and expense items for Year 5:
Wages $55,000
Alimony paid to former spouse 5,000
Child support paid to former spouse 4,000
Deductible moving expenses 2,000
Mortgage interest on personal residence 6,000
Credit card interest 1,000
Tom’s personal exemption amount for Year 5 4,000
Tom’s standard deduction amount for Year 5 6,300
What is Tom’s adjusted gross income for Year 5?
A.
$55,000
B.
$50,000
C.
$48,000
D.
$46,000
C.
$48,000
The key points for this question are:
alimony paid to former spouse is an adjustment to gross income.
child support is not an adjustment to gross income (child support is not deductible on an individual tax return).
moving expenses are an adjustment to gross income.
Thus, adjusted gross income for this question is calculated as follows:
Wages $55,000 Minus Alimony (5,000) Minus Moving expenses (2,000) Adjusted gross income $48,000
Cassidy, an individual, reported the following items of income and expense during the current year:
Salary $50,000
Alimony paid to a former spouse 10,000
Inheritance from a grandparent 25,000
Proceeds of a lawsuit for physical injuries 50,000
What is the amount of Cassidy’s adjusted gross income?
A.
$40,000
B.
$50,000
C.
$115,000
D.
$125,000
A.
$40,000
Cassidy’s adjusted gross income is calculated as follows:
Salary $50,000
Alimony paid (10,000)
Adjusted gross income $40,000
The Internal Revenue Code (IRC) excludes inheritances and proceeds of lawsuits for physical injuries from income.
D owned a 25% interest in the ABCD partnership. ABCD had operating income of $60,000 before guaranteed payments to partners. The only guaranteed payment made during the year was $10,000 to D. ABCD also had a net capital gain of $10,000. D should report income from the partnership of:
A.
$20,000.
B.
$25,000.
C.
$27,500.
D.
$40,000.
B.
$25,000.
D should report 25% of ABCD operating income after deducting the guaranteed payment (($60,000 - $10,000) × 25% = $12,500). D reports the $10,000 guaranteed payment and 25% of the $10,000 net capital gain ($25,000 = $12,500 + $10,000 + (0.25 × $10,000)).
Conner purchased 300 shares of Zinco stock for $30,000 in Year 1. On May 23, Year 10, Conner sold all the stock to his daughter, Alice, for $20,000, its then fair market value. Conner realized no other gain or loss during Year 10. Two months later, in Year 10, Alice sold the 300 shares of Zinco for $25,000.
What amount of the loss from the sale of Zinco stock can Conner deduct in Year 10?
A.
$0
B.
$3,000
C.
$5,000
D.
$10,000
A.
$0
When Conner sold Zinco stock to his daughter, Alice, at a loss of $10,000 ($30,000 basis − $20,000 fair market value), the loss is disallowed because Alice is a “related party.”
No deduction is allowed for losses from sales between related taxpayers. A related party is a spouse, all ancestors and all lineal descendants, and brothers and sisters (whole and half blood); in-laws are not considered related parties. When Alice sells the Zinco stock, she will be allowed to reduce any gain by the loss which was disallowed to her father.
George sold stock on December 31, 2016, creating a $5,000 capital gain. He had owned the stock for three years. George is in the 33% tax bracket. At what rate would this capital gain be taxed?
A.
5%
B.
10%
C.
15%
D.
20%
C. 15%
Long-term capital gains are taxed at the following favorable tax rates for 2016:
General capital assets:
Marginal tax rate of 15% 0%
Marginal tax rate 25% through 35% 15%
Marginal tax rate of 39.6% 20%
Unrecaptured Section 1250 gain 25%
Collectibles 28%
IRC Section 1(h)
Doyle has gambling losses totaling $7,000 during the current year. Doyle’s adjusted gross income is $60,000, including $3,000 in gambling winnings. Doyle can itemize the deductions. What amount of gambling losses is deductible?
A.
$0
B.
$3,000
C.
$5,800
D.
$7,000
B.
$3,000
Losses from gambling may be deducted as itemized deductions to the extent of gambling winnings. Gambling winnings must be shown at the gross amount, and allowable gambling losses are shown as itemized deductions. Since Doyle won $3,000 from gambling, he may only deduct $3,000 in gambling losses.
Which of the following would be considered a tax-deferred transaction?
A.
A tract of U.S. real property for a piece of foreign real property
B.
An airplane for a Hummer
C.
A statutory merger or consolidation (Type A)
D.
An automobile for a light truck
C.
A statutory merger or consolidation (Type A)
A Type A statutory merger is usually completed as a stock-for-stock swap without a payment of cash, qualifying as a like-kind exchange.
The like-kind exchange rules (IRC Section 1031) do not allow an exchange of foreign property for U.S. property. No tax-deferred exchange is allowed for autos and trucks, or airplanes and Hummers.
Which of the following statements is correct regarding the deductibility of an individual’s medical expenses?
A.
A medical expense paid by credit card is deductible in the year the credit card bill is paid.
B.
A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years.
C.
Medical expenses, net of insurance reimbursements, are disregarded in the alternative minimum tax calculation.
D.
A medical expense deduction is not allowed for Medicare insurance premiums.
B.
A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years.
Expenses are considered as paid at the time of the credit card transaction regardless of the timing of the payment of the credit card by the taxpayer. The expenditure and the borrowing of the funds occur simultaneously. These shall be allowed as a deduction of the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care. The definition of “medical care” includes amounts paid for insurance premiums under the Social Security Act (Title XVIII, Part B). Medical expenses are deductible under the alternative minimum tax as an itemized deduction for amounts that exceed 10% of AGI.
Tom Lewis, a single taxpayer, had the following income and expense items for 2016:
Wages $ 55,000
Long-Term Capital Loss (4,000)
Deductible IRA Contribution (Tom is not
covered by a retirement plan at work) 2,000
Mortgage Interest on personal residence 5,000
Medical expenses not covered by insurance 6,000
Tom’s personal exemption amount for 2016 4,050
Tom’s standard deduction amount for 2016 6,300
What is Tom’s total deductible itemized deduction amount for the year?
A.
$5,000
B.
$7,000
C.
$6,000
D.
$6,250
C. $6,000
A maximum of $3,000 in capital loss may offset ordinary income in the tax year. The remaining $1,000 of loss is carried forward. Tom’s adjusted gross income is calculated as follows:
Wages $55,000
Capital Loss (3,000)
IRA Contributions (2,000)
AGI $50,000
Tom’s medical expenses are deductible to the extent that they exceed 10% of Tom’s adjusted gross income. Deductible medical expenses are calculated as follows:
$6,000 − ($50,000 × 0.10 = $5,000) = $1,000
Thus, total itemized deductions equal:
Mortgage interest on personal residence $5,000
Deductible medical expenses 1,000
Total itemized deductions $6,000
The eligibility to participate standard means that a group term life insurance plan is not discriminatory if:
A.
the plan benefits 70% of all employees.
B.
the plan benefits 70% of all rank and file employees.
C.
the plan benefits 70% of only key employees.
D.
the plan benefits 50% of all employees.
A.
the plan benefits 70% of all employees.
The eligibility to participate standard means that a group term life insurance plan is not discriminatory if the plan benefits 70% of all employees.
Under the Affordable Care Act, for 2016, what is the amount for the “shared responsibility payment” on one uninsured adult?
A.
$325
B.
$695
C.
$975
D.
$2,085
C.
$975
Under the Affordable Care Act, taxpayers who do not have health insurance are now required to pay a “shared responsibility payment.” The fee is calculated two different ways, and taxpayers must pay the higher amount: 2.5% of household income; or $695 per adult and $347.50 per child under 18, with a family maximum of $2,085.
Green is self-employed as a human resources consultant and reports on the cash basis for income tax purposes. Select the appropriate tax treatment on Form 1040 (U.S. Individual Income Tax Return) for a prize won as a contestant on a TV quiz show.
A.
Taxable as other income on Form 1040
B.
Reported in Schedule B—Interest and Dividend Income
C.
Reported in Schedule E—Supplemental Income and Loss
D.
Not taxable
A.
Taxable as other income on Form 1040
Any prizes won must be reported as taxable income. It is reported on Form 1040 as other income.
Don Wolf became a general partner in Gata Associates on January 1, Year 1, with a 5% interest in Gata’s profits, losses, and capital. Gata is a distributor of auto parts. Wolf does not materially participate in the partnership business. For Year 1, Gata had an operating loss of $100,000. In addition, Gata earned interest of $20,000 on a temporary investment. Gata has kept the principal temporarily invested while awaiting delivery of equipment that is presently on order. The principal will be used to pay for this equipment. Wolf’s passive loss for Year 1 is:
A.
$0.
B.
$4,000.
C.
$5,000.
D.
$6,000.
C. $5,000. Passive loss is the $ operating loss *% of interest profit
Don Wolf’s passive loss is $5,000, or 5% of Gata Associates’ $100,000 loss. Interest earned on the temporary investment is not considered in determining Gata Associates’ passive loss.
Blake, a single individual age 67, had a 2016 adjusted gross income of $60,000 exclusive of Social Security benefits. Blake received Social Security benefits of $8,400 and interest of $1,000 on tax-exempt obligations during 2016. What amount of Social Security benefits is excludable from Blake’s 2016 taxable income?
A.
$0
B.
$4,200
C.
$4,700
D.
$1,260
D.$1,260
A portion of a taxpayer’s Social Security benefits may be taxable.
For single taxpayers with provisional income above $34,000, gross income includes the lesser of:
85% of Social Security benefits received or
85% of excess of provisional income (defined as modified AGI + 1/2 Social Security benefit) over $34,000, plus the smaller of: the amount includible under the old law (1/2 of Social Security) or $4,500.
- 0.85 x $8,400 = $7,140
- $60,000 AGI
+ 1,000 Interest on tax-exempt obligations
$61,000 Modified AGI
+ 4,200 1/2 of Social Security
$65,200 Provisional income
- 34,000 Threshold amount
$31,200 x .85 = $26,520
+ 4,200 Lesser of $4,200 or $4,500
$30,720
LESSER OF (1) OR (2) = $7,140 (This is the INCLUDIBLE amount)
$8,400 total Social Security benefits
- 7,140 includible amount
$1,260 is EXCLUDABLE from taxable income
Mike and Jane Lewis, a married couple, file a joint federal income tax return showing $80,000 in gross income without regard to the following capital transactions:
Capital Loss Carryover from Prior Years: $0
Current-Year Net Long-Term Capital Gain or Loss: $5,000 loss
Current-Year Net Short-Term Capital Gain or Loss: $1,000 gain
Mike and Jane’s total income will be increased/decreased by what amount as a result of the listed capital gains and losses?
A.
$1,000 increase
B.
$5,000 decrease
C.
$4,000 decrease
D.
$3,000 decrease
D.
$3,000 decrease
There is a limit of $3,000 that can be taken for capital losses in excess of capital gains. Capital losses are deductible only to the extent of any capital gain plus, in the case of noncorporate taxpayers, ordinary income of up to $3,000 in the current year. In this case, there is a $4,000 overall capital loss after the capital gain and loss are netted. Since only $3,000 is allowed for deduction of losses in excess of gains, the remaining $1,000 is carried over to future tax years. There is no limit to the number of years that a net capital loss can be carried forward for an individual taxpayer.
IRC Section 1211(b)
For alternative minimum tax purposes, which of the following is an allowed deduction for the determination of alternative minimum taxable income (assuming that both are fully allowed for regular tax purposes on the individual’s tax return)?
I. Standard deduction of taxpayer
II. Personal exemption of taxpayer
A.
I only
B.
II only
C.
Neither I nor II
D.
Both I and II
C.
Neither I nor II
Neither an individual’s standard deduction nor his personal exemption is an allowed deduction in the calculation of his or her alternative minimum taxable income.
Don Mills, a single taxpayer, had $70,000 in taxable income before personal exemptions. Mills had no tax preferences. His itemized deductions were as follows:
State and local income taxes $5,000
Home mortgage interest on loan to
acquire residence 6,000
Miscellaneous deductions that exceed
2% of adjusted gross income 2,000
What amount did Mills report as alternative minimum taxable income before the AMT exemption?
A.
$72,000
B.
$75,000
C.
$77,000
D.
$83,000
C. $77,000
Taxable income before personal exemptions $70,000
State and local income taxes 5,000
Miscellaneous deductions that exceed 2%
of adjusted gross income 2,000
$77,000
Itemized deductions for AMT purposes are computed the same as for regular tax purposes, with the following exceptions:
Property and income taxes are not deductible unless they are deductible in computing adjusted gross income. (IRC Section 56(b)(1)(A)(ii))
No deduction is allowed for miscellaneous itemized deductions. (IRC Section 56(b)(1)(A)(i))
Medical expenses are deductible only to the extent they exceed 10% of the payer’s adjusted gross income. (IRC Section 56(b)(1)(B))
Qualified housing interest, rather than qualified residence interest is deductible. Qualified housing interest deductible for AMT does not include interest on home equity debt and has a narrower definition of residence which, for example, excludes boats and recreational vehicles. (IRC Section 56(e))
Net investment income (the limit on the deduction for investment interest) for AMT purposes equals the sum of the taxpayer’s interest on tax-exempt bonds that is includable in alternative minimum taxable income, net of expenses associated with that interest, plus his net investment income for regular tax purposes. (IRC Section 56(b)(1)(c))
Smith, a single individual, made the following charitable contributions during the current year. Smith’s adjusted gross income is $60,000.
Donation to Smith’s church $5,000
Artwork donated to the local art museum–
Smith purchased it for $2,000 four months ago;
a local art dealer appraised it for: 3,000
Contribution to a needy family 1,000
What amount should Smith deduct as a charitable contribution?
A.
$5,000
B.
$7,000
C.
$8,000
D.
$9,000
B. $7,000
This problem requires you to recognize that a donation of appreciated property is limited to its basis if the holding period required for long-term capital gain treatment is not met. In this case, the taxpayer purchased art work only four months prior to the donation so it does not meet the one year holding requirement.
Smith’s charitable contribution deduction is computed as follows:
Donation to church $5,000
Donation of artwork (limited to basis) 2,000
Deduction $7,000
The donation to the needy family is not allowed as a deduction because it is not made to a qualifying organization.
The taxpayer’s AGI is high enough relative to the contributions in question that the income limitations are not an issue in this problem.
Which of the following statements related to a traditional IRA is not correct?
A.
The maximum deduction is generally $5,500 per individual.
B.
An individual at least age 50 may deduct up to $6,500.
C.
A 10% penalty tax applies to any withdrawal made prior to age 59-1/2.
D.
The $5,500 maximum deduction is phased out for taxpayers with adjusted gross income over certain amounts.
C.
A 10% penalty tax applies to any withdrawal made prior to age 59-1/2.
The 10% penalty does not apply to all withdrawals made prior to age 59-1/2. Withdrawals may be made for qualified education expenses and by first-time homebuyers with no penalty.
Mike and Jane Lewis, a married couple filing a joint return, paid funeral expenses of $10,000 for their dependent child in the current year. Select the appropriate tax treatment of the funeral expenses.
A.
Not deductible on Form 1040
B.
Deductible in full on Schedule A—Itemized Deductions
C.
Deductible on Schedule A—Itemized Deductions, subject to a threshold amount of 2% of adjusted gross income
D.
Deductible on Schedule A—Itemized Deductions, subject to a limitation of 50% of adjusted gross income
A.
Not deductible on Form 1040
Funeral expenses are not deductible on an individual’s income tax return.
Which of the following is a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income floor?
A.
Gambling losses up to the amount of gambling winnings
B.
Medical expenses
C.
Real estate tax
D.
Employee business expenses
D.
Employee business expenses
Business-related expenses of an employee not reimbursed by the employer are deductible from adjusted gross income (AGI) as miscellaneous itemized deductions. These expenses are subject to a floor of 2% of AGI.
Real estate taxes are deductible in full in the tax section of Form 1040, Schedule A. Medical expenses are deductible on Schedule A subject to a floor of 7.5% of AGI if the taxpayer is 65 or older, 10% for all other taxpayers.
Gambling losses may be deducted up to the amount of reported gambling income and are not subject to the 2%-of-AGI floor for miscellaneous itemized deductions.
Lane, a single taxpayer, received $160,000 in salary, $15,000 in income from an S corporation in which Lane does not materially participate, and a $35,000 passive loss from a real estate rental activity in which Lane materially participated. Lane’s modified adjusted gross income was $165,000. What amount of the real estate rental activity loss was deductible?
A.
$0
B.
$15,000
C.
$25,000
D.
$35,000
B.$15,000
Individuals may offset up to $25,000 ($50,000 if married filing jointly) of ordinary income with rental real estate activities. This deductible loss is reduced (but not below zero) by 50% of the amount by which the modified adjusted gross income of the taxpayer for the year exceeds $100, 000.
First, the passive activities were netted $15,000 from the S corporation - $35,000 from the rental = $(20,000).
Second, the salary of $160,000 is decreased by the net $20,000 passive activity loss for a modified AGI before limitation of $140,000.
Third, the amount of $140,000 that exceeds $100,000 is multiplied by 50%, equaling $20,000.
Fourth, the rental loss of $35,000 is decreased by the $20,000 limitation, leaving an allowable deduction of $15,000.
Which of the following statements about the child and dependent care credit is correct?
A.
The credit is nonrefundable.
B.
The child must be under the age of 18 years.
C.
The child must be a direct descendant of the taxpayer.
D.
The maximum credit is $600.
A.
The credit is nonrefundable.
The child and dependent care credit is nonrefundable. In order to use the credit, the taxpayer must report more taxable income than the amount of the credit.
A qualifying child must be under the age of 13. The child must be a dependent of the taxpayer but is not required to be a direct descendant.
The amount of the employment-related expenses incurred during any taxable year shall not exceed $3,000 if there is one qualifying individual or $6,000 if there are two or more qualifying individuals.
Smith, a divorced person, provided over one-half the support for his widowed mother, Ruth, and his son, Clay, both of whom are U.S. citizens. During this year, Ruth did not live with Smith. She received $9,000 in Social Security benefits—none of which was taxable. Clay, a full-time graduate student, and his wife lived with Smith. Clay had no income but filed a joint return, owing an additional $500 in taxes on his wife’s income. How many exemptions was Smith entitled to claim on his tax return?
A.
4
B.
3
C.
2
D.
1
C.2
Smith is entitled to claim only two exemptions (himself and his mother) on his tax return.
Beginning in 2005, the term “dependent” means:
a qualifying child or a qualifying relative.
Both a qualifying child and a qualifying relative must pass three general tests:
Dependent taxpayer test—Taxpayers who can be claimed as a dependent by another person cannot claim anyone else as a dependent.
Joint return test—Taxpayers who file a joint return cannot be a dependent of anyone else unless neither the dependent nor spouse has a filing requirement, they file jointly only to get a refund of taxes withheld, and neither would have a tax liability if they filed separate returns.
Citizen or resident test—A dependent must be a U.S. citizen, U.S. national, U.S. resident, or resident of Canada or Mexico.
A qualifying child must pass the three general tests and pass five additional tests:
Relationship test—The child must be a child of the taxpayer or a descendant of such child or a brother, sister, stepbrother, stepsister, or descendant of any such relative.
Age test—The child must be under age 19 at year-end or a full-time student under age 24 at year-end, or permanently and totally disabled at any time during the year regardless of age.
Residency test—The child must live with the taxpayer for more than half the year. There are exceptions for temporary absences, children who were born or died during the year, kidnapped children, and children of divorced or separated parents.
Support test—The child cannot provide more than half of their own support for the year.
Special test for qualifying child of more than one person—A child can only be claimed as a dependent by one taxpayer. If a child is a qualifying child for more than one taxpayer, they can agree who takes the exemption. If they do not agree and more than one taxpayer takes the exemption, the IRS will apply a tie-breaker test to determine which taxpayer will prevail.
A qualifying relative must pass the three general tests and pass four additional tests:
Qualifying child test—A child is not a qualifying relative if the child is a qualifying child for any taxpayer.
Member of household or relationship test—A qualifying relative must be related to the taxpayer or a member of the taxpayer’s household.
Gross income test—A qualifying relative cannot have gross income equal to or greater than the personal exemption amount.
Support test—In order to take an exemption for a qualifying relative, a taxpayer must provide over half of the qualifying relative’s support.
The reason Clay (his son) does not qualify is because Clay filed a joint return and owed taxes as opposed to just filing to have all withholding refunded.
Smith’s mother Ruth does not have to count the $9,000 in Social Security benefits as gross income since it is not taxable, so she meets the gross income test. The $9,000 has to be counted as support, but the problem states that Smith provides more than half her support. Smith’s mother may be counted as an exemption even though she did not live in his house.
Which expense, both incurred and paid in the current year, can be claimed as an itemized deduction subject to the 2%-of-adjusted-gross-income floor?
A.
Employee’s unreimbursed business car expense
B.
One-half of the self-employment tax
C.
Employee’s unreimbursed moving expense
D.
Self-employed health insurance
A.
Employee’s unreimbursed business car expense
Some itemized deductions are subject to a nondeductible “2%-of-adjusted-gross-income floor.” The only example given in this multiple-choice question is the employee’s unreimbursed business car expense.
IRC Sections 67(a) and (b)
The following items are deductible “above the line” to arrive at “adjusted gross income” (AGI):
IRA deduction (IRC Section 408)
Interest deduction allowed on qualified student loans (IRC Section 221)
Archer Medical Savings Account deduction (IRC Section 220)
Employee’s unreimbursed moving expense (IRC Section 217)
One-half of the self-employment tax (IRC Section 164(f))
Self-employed health insurance premiums (IRC Section 162(l))
Self-employed SEP, SIMPLE, and qualified plans (IRC Section 219)
Penalty on early withdrawal of savings (IRC Section 62(a)(9))
Alimony (IRC Section 215)
Tuition deduction (IRC Section 222)
Health savings accounts (IRC Section 223)
An individual taxpayer reports the following items for the current year:
Ordinary income from Partnership A, operating a movie theater in which the taxpayer materially participates: $70,000
Net loss from Partnership B, operating an equipment rentaL business in which the taxpayer does not materially Participate: (9,000)
Rental income from building rented to a third party: 7,000
Short-term capital gain from sale of stock: 4,000
What is the taxpayer’s adjusted gross income for the year?
A.
$70,000
B.
$72,000
C.
$74,000
D.
$77,000
C. $74,000
Items included in AGI: Ordinary income from Partnership A ($70,000) + Short-term capital gain from sale of stock ($4,000) = $74,000 AGI.
The passive activity amounts of $(9,000) and $7,000 are netted for a result of $(2,000). There can be no deduction for losses as a result of passive activities.
A calendar-year individual is eligible to contribute to a deductible IRA. The taxpayer obtained a 6-month extension to file until October 15 but did not file the return until November 1. What is the latest date that an IRA contribution can be made in order to qualify as a deduction on the prior year’s return?
A.
October 15
B.
April 15
C.
August 15
D.
November 1
C.
August 15
An individual has until the due date of their return, excluding extensions, to make a deductible IRA or Roth IRA contribution for the preceding year. A calendar-year taxpayer, therefore, has until April 15 of the following year to make an IRA contribution.
Which allowable deduction can be claimed in arriving at an individual’s adjusted gross income?
A.
Alimony payment
B.
Charitable contribution
C.
Personal casualty loss
D.
Unreimbursed business expense of an outside salesperson
A.
Alimony payment
Of the four choices in this problem, only alimony is allowed as a deduction to arrive at adjusted gross income (AGI). Alimony and separate maintenance payments are income to the recipient and deductible from gross income by the payor (to arrive at AGI).
Charitable contributions, personal casualty losses, and unreimbursed business expenses of an outside salesperson can only be deducted if the taxpayer itemized his or her deductions on Schedule A, Form 1040.
Any contributions of $250 or more must be substantiated with written acknowledgment from the donee or organization. The acknowledgment must include the following information: (1) description, but not the value of any property other than cash contributed, and (2) whether the donee organization provided any goods or services in consideration, in whole or in part, for any property contributed. The substantiation must be in the taxpayer’s records on or before the earlier of (1) the date the taxpayer files a return for the taxable year in which the contribution was made, or (2) the due date, including extensions, for filing the return. Contributions greater than $5,000 require a qualified appraisal to be attached to the tax return. (IRC Section 170(f)(11))
The standard mileage rate for charitable use of a car in 2016 is:
A.
57.5 cents per mile.
B.
54 cents per mile.
C.
14 cents per mile.
D.
19 cents per mile.
A.
57.5 cents per mile.
Beginning on January 1, 2016, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) is:
54 cents per mile for business miles driven,
19 cents per mile driven for medical or moving purposes, and
14 cents per mile driven in service of charitable organizations.
Which of the following taxes can be withheld from a domestic service employee’s wages (i.e., paid by the employee)?
I. A portion of total federal unemployment tax owed
II. A portion of total Medicare tax owed
III. A portion of total Social Security tax owed
A.
I and II only
B.
II and III only
C.
I, II, and III
D.
Neither I, II, nor III
B.
II and III only
The employer’s required payment for federal unemployment (FUTA) tax cannot be withheld from the employee’s wages. This must be paid from the employer’s own funds.
The employee’s share of the Medicare tax can be withheld from the domestic service employee’s wages.
The employee’s share of the Social Security tax can be withheld from the domestic service employee’s wages.
Regulation Section 31.3301-1
Alex, single, incorporated his business by investing $80,000 for which he received Section 1244 stock. Alex also loaned the corporation $20,000. The corporation became bankrupt and Alex lost the entire $100,000. What should Alex report as a result of the bankruptcy?
A.
$80,000 capital loss, $20,000 ordinary loss
B.
$50,000 capital loss, $50,000 ordinary loss
C.
$100,000 ordinary loss
D.
$100,000 capital loss
B.
$50,000 capital loss, $50,000 ordinary loss
A loss from Section 1244 stock is treated as an ordinary loss (up to $50,000 if single). Any loss in excess of $50,000 is treated as a capital loss.
Wolfram’s qualified tuition expenses were $10,000. $1,000 of this amount was paid from a distribution from a Coverdell education savings account set up by his parents. Wolfram’s parents, who claim Wolfram as a dependent, now want to take a Lifetime Learning credit. Which of the following statements is correct?
A.
In calculating the credit, the $10,000 maximum must be reduced by the $1,000 Coverdell education savings account distribution.
B.
A Lifetime Learning credit cannot be claimed by a taxpayer for any year in which there has been a tax-free distribution from a Coverdell education savings account for that student.
C.
If Wolfram’s parents want to take the learning credit, he must waive tax-free treatment for the Coverdell education savings account distribution.
D.
The Coverdell education savings account and the Lifetime Learning credit are separate programs. No adjustment needs to be made to the learning credit amount.
A.
In calculating the credit, the $10,000 maximum must be reduced by the $1,000 Coverdell education savings account distribution.
Individuals may elect to take a nonrefundable tax credit equal to 20% of as much as $10,000 ($5,000 before 2003) of qualified tuition and related expenses for themselves, spouses, and tax dependents.
The Lifetime Learning credit may not be claimed by a taxpayer for expenses of a student for any tax year for which a Hope credit is “allowed” for the same student.
To be “allowed,” the Hope credit and the Lifetime Learning credit must be elected by the taxpayer. Thus, a taxpayer has a choice as to which credit he wants to claim. Similarly, a taxpayer can elect to have an otherwise tax-free distribution from a Coverdell education savings account not excluded from income.
Beginning in 2002, taxpayers may claim the Lifetime Learning credit (or Hope credit) for a taxable year and exclude from gross income distributions from a Coverdell education savings account as long as the distribution is not used for the same expenses for which the credit is claimed.
Gene and Olive Olson are married and file a joint return in 2016. The Olsons are both active participants in qualified retirement plans. The Olsons have adjusted gross income of $108,000 for 2016 and each contributed $5,500 to a traditional IRA. What is the deduction for IRA contributions for the Olsons in 2016?
A.
$0
B.
$5,000
C.
$5,500
D.
$11,000
C.
$5,500
In 2016, the phaseout of the IRA deduction for married taxpayers participating in another pension plan filing jointly exists for AGI between $98,000 and $118,000. Since their AGI is halfway between $98,000 and $118,000, only half of the $11,000 is deductible.
Tom Lewis, an individual taxpayer, had his personal residence damaged by a severe thunderstorm. This same thunderstorm also caused damage to Tom’s car that was parked in his driveway. Six months later (and in the same tax year), a windstorm uprooted three trees in Tom’s front yard. Total casualty losses (after insurance reimbursements) are as follows:
Residence damage due to thunderstorm $2,000
Car damage due to thunderstorm 500
Tree damage due to windstorm 600
Select the appropriate tax treatment for the casualty losses.
A.
As an adjustment to gross income
B.
Deductible in full on Schedule A—Itemized Deductions
C.
Deductible on Schedule A—Itemized Deductions, subject to a threshold amount of 2% of adjusted gross income
D.
Deductible on Schedule A—Itemized Deductions, subject to a threshold amount of 10% of adjusted gross income
D.
Deductible on Schedule A—Itemized Deductions, subject to a threshold amount of 10% of adjusted gross income
A casualty loss (after deducting insurance reimbursements and a $100 per event reduction) is subject to a threshold amount of 10% of adjusted gross income and is deductible on Schedule A as an itemized deduction.
During Year 4, Ash had the following cash receipts:
Wages $13,000
Interest income from U.S. Treasury bonds 350
Workers’ compensation following a job-related injury 8,500
What is the total amount that must be included in gross income on Ash’s income tax return?
A.
$13,000
B.
$13,350
C.
$21,500
D.
$21,850
B.
$13,350
Interest on state or local governmental bonds is tax exempt. However, interest income from federal government bonds is taxable.
Workers’ compensation is excluded from income because it represents insurance proceeds received for physical injury.
Wages ($13,000) and interest ($350) are included in gross income ($13,350).
IRC Sections 103 and 104(a)(1); Regulation Section 1.61-7(b)(3)
Tom Lewis, an individual taxpayer, paid an annual personal property tax amount based on the value of his car. Select the appropriate tax treatment on Tom’s tax return.
A.
Not deductible on Form 1040
B.
Deductible in full on Schedule A—Itemized Deductions
C.
Deductible on Schedule A—Itemized Deductions, subject to a threshold amount of 2% of adjusted gross income
D.
Deductible on Schedule A—Itemized Deductions, subject to a $500 floor and a threshold of 10% of adjusted gross income
B.
Deductible in full on Schedule A—Itemized Deductions
Payment for registration and licensing of a car may be deductible as a personal property tax only if it is imposed annually and assessed in proportion to the value of the car.
Deductible taxes (such as personal property tax) that are not directly connected with a trade or business (or with property held for the production of rents and royalties) may be deducted in full as an itemized deduction.
Jackson owns two residences. The second residence, which has never been used for rental purposes, is the only residence that is subject to a mortgage. The following expenses were incurred for the second residence:
Mortgage interest $5,000
Utilities 1,200
Insurance 6,000
For regular income tax purposes, what is the maximum amount allowable as a deduction for Jackson’s second residence?
A.
$6,200 in determining adjusted gross income
B.
$11,000 in determining adjusted gross income
C.
$5,000 as an itemized deduction
D.
$12,200 as an itemized deduction
C.
$5,000 as an itemized deduction
Home mortgage interest is deductible for two personal residences subject to certain limits. However, utilities and insurance on a personal residence are not deductible.
If the second residence had been rented part of the year, the utilities and insurance may have been deductible, subject to the vacation home rules.
Flowers, a married taxpayer, purchased an annuity for $64,400 that will pay $700 per month over the life of Flowers and Flowers’ spouse. At the time of purchase the couple’s joint life expectancy was 23 years. Flowers received payment beginning April 1, year 1, amounting to $6,300 in the first year of the annuity contract. How much is includible in Flowers’ gross income in the first year?
A.
$0
B.
$2,100
C.
$4,200
D.
$6,300
C.
$4,200
If a taxpayer has a cost to recover from their pension or annuity plan, the taxpayer can exclude part of each annuity payment from income as a recovery of their cost. This tax-free part of the payment is figured when the annuity starts and remains the same each year, even if the amount of the payment changes. The tax-free part of the payment is determined by one of two methods: simplified in the case of a qualified plan, or general rules in the case of a nonqualified plan.
In this case, the annuity is subject to the general rules, which state the tax-free part of each annuity payment is based on the ratio of the cost of the contract to the total expected return. Expected return is the total amount the taxpayer and other eligible annuitants can expect to receive under the contract.
Flowers has an expected return of $193,200 ($700 per month × (23 years × 12 months per year)) and a cost recovery of 33.33% per payment ($64,400 ÷ $193,200). Thus, each payment is reduced by $233 ($700 × 0.3333).
In year 1, Flowers would include $4,203 (($700 − $233) × 9 months), which is rounded to $4,200 (or $4,200 (rounded) = $6,300 × 2/3).
Mike and Jane Lewis, a married couple, file a joint 2016 federal income tax return. They have one child, age 15, whom they support 100%. Both are under age 65. They have the following income and expenses for the year:
Mike’s wages $65,000
Jane’s wages 60,000
Total allowable itemized deductions 13,000
Mike’s contribution to an IRA 4,000
Jane’s contribution to an IRA 4,000
Mike is not covered by a pension plan at work, while Jane is covered by a plan at her employer.
The exemption amount (per exemption) for 2016 is $4,050. The standard deduction amount for married filing jointly is $12,600.
What is the Lewises’ taxable income amount for 2016?
A.
$95,850
B.
$96,000
C.
$96,400
D.
$100,000
The Lewises’ taxable income amount is calculated as follows:
Mike’s wages $ 65,000
Jane’s wages 60,000
Mike’s contribution to an IRA (4,000)
Adjusted gross income $121,000
Less: Itemized deductions (13,000)
Less: Exemption amount (12,150)*
Taxable income $ 95,850
The Lewises could not deduct their standard deduction amount since they itemized their deductions. Taxpayers cannot take the standard deduction amount if they itemize their deductions. Taxpayers can elect each year to itemize deductions or take the standard deduction.
Since only Jane is covered by a pension plan at work, Mike may take an IRA deduction in 2016 because they are below the threshold in AGI. Jane’s IRA contribution is not deductible since they are above the threshold of $118,000 in AGI and she is covered by a pension plan at work.
Johnson worked for ABC Co. and earned a salary of $100,000. Johnson also received, as a fringe benefit, group term-life insurance at twice Johnson’s salary. The annual IRS-established uniform cost of insurance is $2.76 per $1,000. What amount must Johnson include in gross income?
A.
$100,000
B.
$100,276
C.
$100,414
D.
$100,552
C.
$100,414
Gross income includes group-term life insurance premiums carried by his or her employer to the extent that the cost exceeds the sum of the cost of $50,000 of such insurance.
Johnson received a $200,000 ($100,000 × 2) policy. This is $150,000 above the tax-exempt amount.
Therefore, $150,000 ÷ $1,000 × the $2.76 factor = $414 of taxable income as a result of the benefit from the employer.
In Year 1, Farb, a cash-basis individual taxpayer, received an $8,000 invoice for personal property taxes. Believing the amount to be overstated by $5,000, Farb paid the invoiced amount under protest and immediately started legal action to recover the overstatement. In November, Year 2, the matter was resolved in Farb’s favor, and he received a $5,000 refund. Farb itemizes his deductions on his tax returns. Assuming that Farb has itemized deductions in excess of his standardized deductions before the property tax deduction, which of the following statements is correct regarding the deductibility of the property taxes?
A.
Farb should deduct $8,000 in his Year 1 income tax return and should report the $5,000 refund as income in his Year 2 income tax return.
B.
Farb should not deduct any amount in his Year 1 income tax return and should deduct $3,000 in his Year 2 income tax return.
C.
Farb should deduct $3,000 in his Year 1 income tax return.
D.
Farb should not deduct any amount in his Year 1 income tax return when originally filed, and should file an amended Year 1 income tax return in Year 2.
A.
Farb should deduct $8,000 in his Year 1 income tax return and should report the $5,000 refund as income in his Year 2 income tax return.
If an income tax benefit was obtained by deducting an item on a previous tax return, any amount recovered must be included in current gross income. A refund is not usually gross income as it is considered a return of capital. But, if the refund is made for an expense deducted in a previous year, the tax benefit rule states the refund is included in income if it produced a tax deduction in a prior year. The $8,000 deduction produced a tax benefit in year one, therefore, the $5,000 refund must be included in income in year 2 to offset the previous year’s tax benefit.
Dietz is a passive investor in three activities which have been profitable in previous years. The profit and losses for the current year are as follows:
Gain (Loss)
Activity X $(30,000)
Activity Y (50,000)
Activity Z 20,000
Total $(60,000)What amount of suspended loss should Dietz allocate to Activity X?
A.
$18,000
B.
$20,000
C.
$22,500
D.
$30,000
C.
$22,500(30/80)*60
Allocation of disallowed passive activity loss among activities. The general rule is that if all or any portion of the taxpayer’s passive activity loss is disallowed for the taxable year, a ratable portion of the loss from each passive activity of the taxpayer is disallowed. For purposes of the preceding sentence, the ratable portion of a loss from an activity is computed by multiplying the passive activity loss that is disallowed for the taxable year by the fraction obtained by dividing:
the loss from the activity for the taxable year by
the sum of the losses for the taxable year from all activities having losses for such year.
(Activity X loss of $30,000 ÷ Total loss of $80,000) × Current net passive investment loss of $60,000 = $22,500
In the current year, an unmarried individual with modified adjusted gross income of $25,000 paid $1,000 interest on a qualified education loan entered into on July 1. How may the individual treat the interest for income tax purposes?
A.
As a $500 deduction to arrive at AGI for the year
B.
As a $1,000 deduction to arrive at AGI for the year
C.
As a $1,000 itemized deduction
D.
As a nondeductible item of personal interest
B.
As a $1,000 deduction to arrive at AGI for the year
Individual taxpayers may deduct up to $2,500 of qualified student loan interest as an above-the-line deduction to arrive at AGI. This amount is phased out for higher-income taxpayers. The deduction is not available for taxpayers who are dependents of others or for taxpayers using the married filing separately filing status. The phaseout does not apply to this taxpayer.
IRC Section 221
Which of the following disqualifies an individual from the earned income credit?
Incorrect A.
The taxpayer’s qualifying child is a 17-year-old grandchild.
B.
The taxpayer has earned income of $5,000.
C.
The taxpayer’s 5-year-old child lived in the taxpayer’s home for only eight months.
D.
The taxpayer has a filing status of married filing separately.
D. The taxpayer has a filing status of married filing separately.
In the case of an individual who is married, the earned income credit (EIC) only applies if a joint return is filed.
A qualifying child for purposes of the earned income credit must meet several tests:
Relationship test: The child must be a child of the taxpayer or a descendent of such a child, or a brother, sister, stepbrother, or stepsister or descendant of any such relative.
Residency test: the child must have the same principal place of abode as the taxpayer for more than one-half of the taxable year.
Age test: The qualifying child must be younger than the taxpayer and have not obtained the age of 19 at the end of the year (unless the child is a student, and then the age is 19).
Filing status: The qualifying child must not have filed a joint return (other than to claim a refund).
Therefore, neither being a 17-year-old nor being a grandson disqualify the child from being a qualifying child as the age limit of 19 is not met and the relationship of a grandchild is also within the requirements. The support test used for the dependency requirements does not apply to the qualifying child for purposes of the earned income credit. The 5-year-old is not disqualified by age or by having only lived with the taxpayer for 8 months as the age limit is 19 and the residency requirement is more than 6 months.
Green is self-employed as a human resources consultant and reports on the cash basis for income tax purposes. Select the appropriate tax treatment on Form 1040 (U.S. Individual Income Tax Return) for death benefits received from term life insurance policy on parent.
A.
Taxable as other income on Form 1040
B.
Reported in Schedule B, Interest and Dividend Income
C.
Reported in Schedule E, Supplemental Income and Loss
D.
Not taxable
D.
Not taxable
Gross income does not include amounts received (whether in a single sum or otherwise) by the beneficiary (child in this case) of death benefits (life insurance proceeds) from a term life insurance policy on the parent.
Which of the following is not a deduction to arrive at adjusted gross income?
A.
Alimony payments
B.
Trade or business expenses
C.
Capital losses in excess of capital gains
D.
Unreimbursed employee business expenses
D.
Unreimbursed employee business expenses
Unreimbursed employee business expenses are a miscellaneous itemized deduction (a deduction from AGI), not a deduction to arrive at AGI.
Alimony payments, trade or business expenses, and excess capital losses over capital gains (limited to $3,000 per year) are deductions to arrive at AGI.
Which items are subject to the phaseout of the amount of certain itemized deductions that may be claimed by high-income individuals?
A.
Charitable contributions
B.
Medical costs
Incorrect C.
Nonbusiness casualty losses
D.
Investment interest deductions
A.
Charitable contributions
Higher-income taxpayers are subject to the phaseout of certain itemized deductions. Those itemized deductions not subject to phaseout are medical expenses, investment interest, casualty losses, and gambling losses. Higher-income taxpayers may have to reduce their remaining itemized deductions, including charitable contributions, by the lesser of 3% of the excess of adjusted gross income over a certain amount or 80% of the amount otherwise allowable for the taxable year.
n the current year, Jensen had the following items:
Salary $50,000
Inheritance 25,000
Alimony from ex-spouse 12,000
Child support from ex-spouse 9,000
Capital loss on investment stock sale (6,000)
What is Jensen’s AGI for the current year?
A.
$44,000
B.
$59,000
C.
$62,000
D.
$84,000
B.
$59,000
Gross income includes all sources of income unless specifically excluded. Inheritances and child support are both specifically excluded from income (IRC Sections 102 and 71(c)). A net capital loss for individuals is limited to $3,000 for any taxable year (IRC Section 1211). In this question, both total gross income and adjusted gross income (AGI) are the same since there are no deductions from gross income. Jensen’s AGI is calculated as follows:
Salary $50,000
Alimony 12,000
Capital loss (3,000)
Adjusted gross income (AGI) $59,000
A couple filed a joint return in prior tax years. During the current tax year, one spouse died. The couple has no dependent children. What is the filing status available to the surviving spouse for the first subsequent tax year?
A.
Surviving spouse
B.
Married filing separately
C.
Single
D.
Head of household
C.
Single
The status of surviving spouse or head of household is available to the widow or widower only if he or she has a dependent child living with him or her. Since the spouse has died, the surviving spouse cannot claim married filing separately in subsequent years.
Single is the only status available to this surviving spouse.
Smith is a member of the U.S. Armed Forces (an enlisted person) and is assigned to service in Iraq (a designated combat zone) for a period that begins on January 20 of the current year and ends on May 5 of the current year. How many months of military pay may Smith exclude from gross income for the current year?
A.
3
B.
4
C.
5
D.
12
C.
5
Smith may exclude from gross income his monthly military pay received for any month or portion of a month that he was a member of the U.S. Armed Forces and serving in Iraq. Thus, even though he only served a portion of a month in both January and May, he may still exclude the full month’s pay for these months. Smith may exclude his military pay received from January to May (five months).
Dale received $1,000 in the current year for jury duty. In exchange for regular compensation from her employer during the period of jury service, Dale was required to remit the entire $1,000 to her employer. In Dale’s income tax return, the $1,000 jury duty fee should be:
A.
claimed in full as an itemized deduction.
B.
claimed as an itemized deduction to the extent exceeding 2% of adjusted gross income.
C.
deducted from gross income in arriving at adjusted gross income.
D.
included in taxable income without a corresponding offset against other income.
C.
deducted from gross income in arriving at adjusted gross income.
Generally, jury duty pay must be included as other income on IRS Form 1040. However, the taxpayer can deduct the amount of jury duty pay remitted to an employer in exchange for continued regular compensation. The deduction from gross income can be entered on line 36 on the Form 1040.
IRS Publication 17
Jones, an individual taxpayer, must include $1,000 in gross income resulting from a state tax refund he received in the current year. Jones is in an alternative minimum tax situation for the year. Which of the following is the correct statement in regards to the tax refund received by Jones?
A.
The $1,000 tax refund is a positive adjustment in the calculation of alternative minimum taxable income (i.e., will increase alternative minimum taxable income).
B.
The $1,000 tax refund is a negative adjustment in the calculation of alternative minimum taxable income (i.e., will decrease alternative minimum taxable income).
C.
The $1,000 tax refund is not an adjustment in the calculation of alternative minimum taxable income.
D.
There is not sufficient information to tell if it is or is not an adjustment to taxable income.
B.
The $1,000 tax refund is a negative adjustment in the calculation of alternative minimum taxable income (i.e., will decrease alternative minimum taxable income).
The $1,000 tax refund is a negative adjustment in the calculation of alternative minimum taxable income.
The state tax refund is not included in income for AMT purposes. Also, state and local taxes are not deductible for AMTI purposes.
Which of the following individuals are eligible for the earned income credit in 2016?
Tom and Jane Smith, both age 55, are a married couple and are filing a joint return. Their modified adjusted gross income for the year is below the threshold amount to be eligible for the earned income credit. Their only source of income for the year is their retirement pension.
Mike and Ann Jones, both age 50, are a married couple and are filing a joint return. Their modified adjusted gross income for the year is below the threshold amount to be eligible for the earned income credit. Mike and Ann’s sources of income for the year are wages for both and $10,000 of tax-exempt interest.
A.
I only
B.
II only
C.
Both I and II
D.
Neither I nor II
D.
Neither I nor II
Tom and Jane are not eligible for the earned income credit in 2016 since their only source of income is their retirement pension. A pension is not considered to be “earned income.” An individual must have at least some “earned income” in order to be eligible for the earned income credit.
Mike and Ann are not eligible for the earned income credit in 2016. Tax-exempt interest is considered “disqualified income” under IRC Section 32(a). Individuals are allowed to have only up to $3,350 in 2016 of “disqualified income” in order to be eligible for the earned income credit. Disqualified income in post-1995 tax years includes an individual’s capital gain net income and net passive income in addition to interest, dividends, tax-exempt interest, and nonbusiness rents or royalties.
The Jacksons, who file a joint return, actively participate in a solely-owned rental real estate activity that produces a $30,000 loss during the current year. Their adjusted gross income was $120,000 before considering the rental activity. How much of the rental loss, if any, are the Jacksons entitled to deduct?
A.
$0
B.
$15,000
C.
$25,000
D.
$30,000
B.
$15,000
Certain taxpayers may deduct real estate rental losses from active and portfolio income. This treatment applies to taxpayers who materially participate in a real property trade or business. Both individuals and closely held C corporations may qualify.
Other taxpayers who qualify as active participants in a rental real estate activity may also deduct losses from such activities against active and portfolio income.
Generally, up to $25,000 of losses from such activities may be deducted against active income and portfolio income ($12,500 for married taxpayers filing separately).
This $25,000 deduction limit is reduced by 50% of the taxpayer’s AGI in excess of $100,000.
Step 1: Calculate the amount in excess of $100,000:
$120,000 (AGI) − $100,000 = $20,000
Step 2: multiply the amount in excess of step 1 by 50%:
$20,000 × 50% = $10,000
Step 3: Subtract the maximum by the excess calculated in step 2:
$25,000 − $10,000 = $15,000
Green is self-employed as a human resources consultant and reports on the cash basis for income tax purposes. Select the appropriate tax treatment on Form 1040 (U.S. Individual Income Tax Return) for personal life insurance premiums paid by Green.
A.
Fully deductible on Form 1040 to arrive at adjusted gross income
B.
Reported in Schedule A, Itemized Deductions (deductibility subject to threshold of 7.5% of adjusted gross income)
C.
Reported in Schedule A, Itemized Deductions (deductibility subject to threshold of 2% of adjusted gross income)
D.
Not deductible
D.
Not deductible
No deduction is allowed for premiums paid by an insured for personal life insurance.
Regulation Section 1.262-1(b)(1)
Spencer, who itemizes deductions, had adjusted gross income of $60,000 this year. The following additional information is available:
Cash contribution to church $4,000
Purchase of art object at church bazaar
(with a fair market value of $800 on
the date of purchase) 1,200
Donation of used clothing to Salvation
Army (fair value evidenced by receipt
received) 500
What is the maximum amount Spencer can claim as a deduction for charitable contributions this year?
A.
$5,400
B.
$5,200
C.
$4,900
D.
$4,400
C. $4,900
Spencer can deduct the following charitable contributions in the current year:
Cash to church $4,000
FMV of clothing donated to the Salvation Army 500
Purchase of an art object ($1,200 amount paid lesS $800 FMV of the work of art) 400
Maximum charitable contribution $4,900
Regulation Section 1.170A-1(h)
Any deduction for noncash contributions that exceeds $500 (total of all noncash contributions) triggers a requirement for the filing of Form 8283. This form requires the name and address of the donee and an itemization of the articles donated plus an estimate of the fair market value of the item. The estimate of the value is the responsibility of the donor taxpayer and not the charity. For any donation of personal property exceeding $5,000 in total value, an independent qualified appraisal is required.
Any contributions made on or after January 1, 1994, of $250 or more must be substantiated with written acknowledgment from the donee or organization. The acknowledgment must include the following information: (1) the amount of cash and a description, but not the value of any property other than cash contributed, (2) whether the donee organization provided any goods or services in consideration, in whole or in part, for any property contributed, and (3) a description and good faith estimate of the value of any goods or services provided by the donee organization or, if such goods or services consist solely of intangible religious benefits, a statement to that effect. The substantiation must be in the taxpayer’s records on or before the earlier of (1) the date the taxpayer files a return for the taxable year in which the contribution was made, or (2) the due date, including extensions, for filing the return.
The Pension Protection Act of 2006 strengthened the substantiation requirements for cash gifts of less than $250. Effective for contributions made in tax years beginning after August 17, 2006, a charitable contribution deduction is not allowed for any contribution of cash, a check, or other monetary gift unless the donor maintains as a record of such contribution a bank record or a written communication from the donee showing the donee’s name and the date and amount of the contribution.
Green is self-employed as a human resources consultant and reports on the cash basis for income tax purposes. Select the appropriate tax treatment on Form 1040 (U.S. Individual Income Tax Return) for interest expense on a home-equity line of credit for an amount borrowed to finance Green’s business.
A.
Not deductible as a business expense
B.
50% deductible on Form 1040 to arrive at adjusted gross income
C.
Fully deductible in Schedule C—Profit or Loss From Business
D.
Partially deductible in Schedule C—Profit or Loss From Business
C.
Fully deductible in Schedule C—Profit or Loss From Business
Interest expense on a home equity line of credit for an amount borrowed to finance Green’s business is fully deductible in Schedule C, Profit or Loss From Business.
Even though the home was used as equity for the loan, the interest is fully deductible as a business expense on Green’s Schedule C.
(This is possible by electing under Regulation 1.163-10T(o)(5) to not treat it as home mortgage interest but instead to use the tracing rules under Regulation 1.163-8T(c) to treat it as business expense since the proceeds were used for this business.)
What is the tax treatment of net losses in excess of the at-risk amount for an activity?
A.
Any loss in excess of the at-risk amount is suspended and is deductible in the year in which the activity is disposed of in full.
B.
Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity.
C.
Any losses in excess of the at-risk amount are deducted currently against income from other activities; the remaining loss, if any, is carried forward without expiration.
D.
Any losses in excess of the at-risk amount are carried back 2 years against activities with income and then carried forward for 20 years.
B.
Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity.
Any current losses are allowed only to the extent of the amount to which the taxpayer is at risk. Excesses are carried forward until such time they may be deducted from a gain that has adequate at-risk amounts.
Tom Lewis, a single taxpayer, had the following income and expense items for Year 2:
Wages $55,000
Alimony paid to former spouse 5,000
Child support paid to former spouse 4,000
Deductible moving expenses 2,000
Mortgage interest on personal residence 6,400
Credit card interest 1,000
Tom’s personal exemption amount 4,000
Tom’s standard deduction amount 6,300
What is Tom’s taxable income amount for Year 2?
A.
$41,600
B.
$36,000
C.
$37,600
D.
$39,600
C. $37,600
Tom’s taxable income is calculated as follows:
Tom’s wages $55,000
Less Alimony 5,000
Less Moving expenses 2,000
Adjusted gross income $48,000
Less Itemized deductions
(mortgage interest) 6,400
Less Personal exemption 4,000
Taxable income $37,600
Bast, a self-employed taxpayer, had gross income of $60,000 in 2016. Bast paid self-employment tax of $9,180 and $5,000 of alimony. Bast also contributed $2,000 to an individual 401(k) retirement plan. Bast has no current spouse or employer. What is Bast’s 2016 adjusted gross income?
A.
$55,000
B.
$53,000
C.
$49,010
D.
$48,410
D.
$48,410
Bast is allowed to reduce his gross income of $60,000 by one-half of the self-employment tax (i.e., this is considered the employer’s portion) of $4,590 ($9,180 ÷ 2), the alimony of $5,000, and the retirement plan contribution of $2,000, resulting in Bast’s adjusted gross income of $48,410.
Which of the following requirements must be met in order for a single individual to qualify for the additional standard deduction amount?
Must be age 65 or older or blind
Must support dependent child or aged parent
A.
Both A and B
B.
Neither A nor B
C.
A Only
D.
B Only
C.
A Only
If a single taxpayer does not itemize deductions, the standard deduction increases at age 65 and for the legally blind. A taxpayer is considered age 65 on the day before their 65th birthday. A taxpayer is considered legally blind if they cannot see better than 20/200 in the better eye with glasses or contact lenses or their field of vision is 20 degrees or less.
IRS Publication 17
Tom Lewis, an individual taxpayer, had his diamond ring stolen. The event qualified as a casualty loss. The total casualty loss (i.e., the fair market value of the ring) was $10,000. Tom received no insurance reimbursement for the loss. Tom’s adjusted gross income for the year was $30,000. What is the net casualty loss deduction that Tom may take as an itemized deduction on his tax return?
A.
$3,000
B.
$10,000
C.
$9,900
D.
$6,900
D. $6,900
The deduction for a casualty loss is calculated as follows:
After the total loss is calculated, the loss must then be reduced by three amounts:
insurance or other reimbursements received,
a $100 per event reduction, and
a 10%-of-AGI aggregate reduction.
The remaining loss (if any) after the reductions is the taxpayer’s itemized deduction for casualty losses.
Tom’s casualty loss deduction is calculated as follows:
Total loss $10,000 Less insurance reimbursement 0 Less $100 reduction (100) Less 10% of AGI (3,000) Total deductible loss $ 6,900
Tom Lewis, an individual taxpayer and employee of ABC Corp. (where he works as a CPA), paid for subscriptions to various accounting journals in the current year. Select the appropriate tax treatment for the payment of these subscriptions.
A.
Not deductible on Form 1040
B.
Deductible in full on Schedule A—Itemized Deductions
C.
Deductible on Schedule A—Itemized Deductions, subject to a threshold amount of 2% of adjusted gross income
D.
Deductible on Schedule A—Itemized Deductions, subject to a limitation of 50% of adjusted gross income
C.
Deductible on Schedule A—Itemized Deductions, subject to a threshold amount of 2% of adjusted gross income
The subscriptions paid for by Tom are an employment-related expense and are deductible on Schedule A as an itemized deduction subject to a threshold of 2% of adjusted gross income.
A taxpayer reports a deduction for contributions to an Individual Retirement Account (IRA) for the current tax year. Which phrase best describes the status of this tax item for alternative minimum tax (AMT) computations?
A.
Not a preference or an adjustment for the AMT
B.
An AMT preference or adjustment which is a deferral item for the AMT
C.
An AMT preference or adjustment which is an exclusion item for the AMT
D.
An AMT preference or adjustment which is an exemption item for the AMT
A.
Not a preference or an adjustment for the AMT
Deductions for IRA contributions are not preferences or adjustments for AMT.
Smith, an individual calendar-year taxpayer, purchased 100 shares of Core Co. common stock for $15,000 on December 15, Year 1, and an additional 100 shares for $13,000 on December 30, Year 1. On January 3, Year 2, Smith sold the shares purchased on December 15, Year 1, for $13,000. What amount of loss from the sale of Core’s stock is deductible on Smith’s Year 1 and Year 2 income tax returns?
A.
$0 in Year 1 and $0 in Year 2
B.
$0 in Year 1 and $2,000 in Year 2
C.
$1,000 in Year 1 and $1,000 in Year 2
D.
$2,000 in Year 1 and $0 in Year 2
A.
$0 in Year 1 and $0 in Year 2
Since Smith bought and sold (at a loss) 100 shares of Core Co. common stock within 30 days, the wash sale rules apply. This means the loss is not allowed in Year 1 or Year 2. A loss sustained when stock or securities are sold is not allowed if, within a period beginning 30 days before the date of the sale and ending 30 days after the date of the sale, the taxpayer acquires substantially identical stock or securities. The “wash sale rules” do not apply to gains—only losses.
The basis of the stock that Smith acquired on December 30, Year 1, needs to be addressed: Since Smith sold the stock on January 3, Year 2, (for $13,000) which was acquired December 15, Year 1, (for $15,000) and the $2,000 loss was not allowed, the basis of the stock which he acquired on December 30, Year 1, is calculated as follows:
Cost on 12/30/Yr. 1 $13,000
Loss not allowed 2,000
Basis of stock $15,000
In a tax year where the taxpayer pays qualified education expenses, interest income on the redemption of qualified U.S. Series EE bonds may be excluded from gross income. The exclusion is subject to a modified gross income limitation and a limit of aggregate bond proceeds in excess of qualified higher education expenses. Which of the following is true?
The exclusion applies for education expenses incurred by the taxpayer, the taxpayer’s spouse, or any person whom the taxpayer may claim as a dependent for the year.
“Otherwise qualified higher education expenses” must be reduced by qualified scholarships not includible in gross income.
A.
I only
B.
II only
C.
Both I and II
D.
Neither I nor II
C.
Both I and II
Typically, a taxpayer must pay tax on interest earned on U.S. savings bonds. However, interest income may be excluded from gross income if qualified education expenses were paid for the taxpayer, spouse, or any dependent claimed as an exemption on the return. The taxpayer’s filing status cannot be married filing separate. Qualified education expenses must be reduced by any tax-free benefits received such as scholarships or fellowships.
Tom Lewis, a single taxpayer, had the following income and expense items for 2016:
Wages $ 55,000
Long-term capital loss (4,000)
Deductible IRA contribution (Tom is not
covered by a retirement plan at work) 2,000
Mortgage interest on personal residence 6,000
Medical expenses not covered by insurance 4,000
Tom’s personal exemption amount for 2016 4,050
Tom’s standard deduction amount for 2016 6,300
If Tom has adjusted gross income in 2016 of $50,000, what is the maximum amount that he can contribute to his local church and the full amount be deductible in 2016?
A.
$4,000
B.
$14,000
C.
$25,000
D.
There is no limit.
C.
$25,000
A contribution to a church or conventions or associations of churches is considered to be a contribution to a “50% organization.” This means that the charitable deduction is limited to 50% of an individual’s adjusted gross income.
In this question, the maximum amount that can be deducted is:
$50,000 (AGI amount) × 0.50 = $25,000
IRC Section 170(b)
Taxpayers who actively participate in the rental of residential real estate may deduct losses to arrive at AGI up to an annual limit of:
A.
$10,000.
B.
$17,000.
C.
$25,000.
D.
$42,000.
C.
$25,000.
Rental losses of up to $25,000 annually may be deducted to arrive at AGI of the individuals who own at least 10% of the property.
What is the minimum employment period for a worker’s wages to qualify for the Work Opportunity Credit?
A.
200 hours
B.
210 hours
C.
120 hours
D.
320 hours
C.
120 hours
The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers who hire and retain veterans and individuals from other target groups with significant barriers to employment. The tax credit employers can claim depends upon the target group of the individual hired, the wages paid to that individual in the first year of employment, and the number of hours that individual worked. There is also a maximum tax credit that can be earned. The credit is available to employers who hire members of these groups, based on the individual’s hours worked and wages earned in the first year. For all target groups besides the long-term Temporary Assistance target group, the employer may claim a tax credit equal to 25% of the individual’s first-year wages, provided the individual works at least 120 hours. If the individual works at least 400 hours, the employer may claim a tax credit equal to 40% of the individual’s first-year wages.
Easel Co. has elected to reimburse employees for business expenses under a nonaccountable plan. Easel does not require employees to provide proof of expenses and allows employees to keep any amount not spent. Under the plan, Mel, an Easel employee for a full year, gets $400 per month for business automobile expenses. At the end of the year, Mel informs Easel that the only business expense incurred was for business mileage of 12,000 at a rate of 57.5 cents per mile, the IRS standard mileage rate at the time. Mel encloses a check for $480 to refund the overpayment to Easel. What amount should be reported in Mel’s gross income for the year?
A.
$0
B.
$480
C.
$4,320
D.
$4,800
D.
$4,800
Had this been an accountable plan, none of the money would be included in the employee’s income. However, no accountability is required by the employer for these expenses.
Under a nonaccountable plan, all expense payments received are reported in Box 1 of the employee’s W-2. See IRS Publication 17.
So, the entire $4,800 ($400 × 12) is reported on the W-2. The employee can deduct allowable business expenses on Schedule A, if the employee itemizes deductions.
Regulation Sections 1.62-2(c)(5) and (c)(3)(i)
When a corporation has a group term life insurance plan available for employees, the following is considered to be discriminatory:
A.
the plan can exclude employees who have worked for the corporation less than two years.
B.
the plan will offer $3,000 of group term life insurance, up to a maximum of $50,000, for each $10,000 of salary earned by the employee.
C.
the plan will offer $50,000 of group term life insurance to officers and $10,000 of group-term life insurance to all nonofficers.
D.
the plan can exclude part-time employees.
C.
the plan will offer $50,000 of group term life insurance to officers and $10,000 of group-term life insurance to all nonofficers.
Since the plan offers $50,000 of group term life insurance to officers and $10,000 of group term life insurance to nonofficers, this plan would discriminate in favor of key employees.
When a corporation has a group term life insurance plan, it is not discriminatory to exclude employees who have worked for the corporation less than three years, to offer group term insurance which varies with the amount of compensation, or to exclude part-time employees.
For regular tax purposes, with regard to the itemized deduction for qualified residence interest, home equity indebtedness incurred:
A.
includes acquisition indebtedness secured by a qualified residence.
B.
may exceed the fair market value of the residence.
C.
must exceed the taxpayer’s net equity in the residence.
D.
is limited to $100,000 on a joint income tax return.
D.
is limited to $100,000 on a joint income tax return.
Home equity debt is limited to $100,000 on a joint tax return. A debt is considered a home equity debt if the homeowner borrowed funds for reasons other than to buy, build, or substantially improve the primary residence.
Bearing is an individual taxpayer who uses the filing status of single. A review of Bearing’s Year 2 records disclosed the following tax information:
Wages $ 18,000
Taxable interest and qualifying dividends 4,000
Schedule C trucking business net income 32,000
Rental (loss) from residential property (35,000)
Limited partnership (loss) (5,000)
Bearing actively participated in the rental property and was a limited partner in the partnership. Bearing had sufficient amounts at risk for the rental property and the partnership. What is Bearing’s Year 2 adjusted gross income?
A.
$14,000
B.
$19,000
C.
$29,000
D.
$54,000
C.
$29,000 （18+4+32-25）
Items included in AGI: Wages ($18,000) + Taxable interest and qualified dividends ($4,000) + Schedule C income from business ($32,000) - Maximum allowed deduction for residential rental property ($25,000) = $29,000 AGI.
The limited partnership loss is not deductible as it is a passive activity. The rental loss may be deducted up to a maximum of $25,000 for a single taxpayer. All other income items are taxable.
Wages paid for domestic services are subject to special rules for determining whether they are subject to payroll taxes. When are domestic wages subject to federal income tax withholding?
A.
Over $1,500 to one employee in a year
B.
Over $2,000 total wages in a year
C.
Over $1,000 total wages in a quarter
D.
Only if requested by employee
D.
Only if requested by employee
Withholding federal income taxes for household employees is required only if requested by the employee and agreed to by the employer. Such withholding would be reported on Schedule H and filed with Form 1040.
Fuller was the owner and beneficiary of a $200,000 life insurance policy on a parent. Fuller sold the policy to Decker, for $25,000. Decker paid a total of $40,000 in premiums. Upon the death of the parent, what amount must Decker include in gross income?
A.
$0
B.
$135,000
C.
$160,000
D.
$200,000
B. $135,000
Although life insurance death proceeds are generally not taxable to the recipient, there are special rules if the policy is transferred for value. In that case the death proceeds are taxable, except to the extent of basis.
Basis in such a policy consists of: consideration paid for the policy, premiums paid under the policy, and interest expense on debt incurred to finance the policy which would not have been allowed as a deduction previously.
The transfer for value rule does not apply:
when basis is determined by reference to the basis in the hands of the transferor, to transfers to the insured, or
to transfers to a partner of the insured, transfers to a partnership in which the insured is a partner, or transfers to a corporation in which the insured is a shareholder or officer.
In this case, Fuller’s taxable amount from the death proceeds is computed as follows:
Death proceeds $200,000
Less basis in policy:
Consideration paid for policy - 25,000
Premiums paid - 40,000
Interest disallowed 0
Taxable amount $135,000
Taxpayers using a flexible spending account are allowed:
A.
a “use it or lose it” policy.
B.
a $500 carryover balance to the following year only.
C.
a grace period for the unused balance through March 15 of the following year only.
D.
a $500 carryover balance to the following year or a grace period for the unused balance through March 15 of the following year.
D.
a $500 carryover balance to the following year or a grace period for the unused balance through March 15 of the following year.
A taxpayer’s company is able to choose an allowance of either a $500 carryover balance or a grace period through March 15 of the following year on flexible spending accounts. Previous to 2014, there was a “use it or lose it” policy.
Conner purchased 300 shares of Zinco stock for $30,000 in Year 1. On May 23, Year 10, Conner sold all the stock to his daughter, Alice, for $20,000, its then fair market value. Conner realized no other gain or loss during Year 10. On July 26, Year 10, Alice sold the 300 shares of Zinco for $25,000.
What was Alice’s recognized gain or loss on her sale?
A.
$0
B.
$5,000 long-term gain
C.
$5,000 short-term loss
D.
$5,000 long-term loss
A.
$0
When Alice bought Zinco stock from her father (Conner) she paid him $20,000. Conner had a disallowed loss of $10,000 ($30,000 cost − $20,000 paid) when he sold it to his daughter, Alice. When Alice resold the stock for $25,000, she is allowed to reduce her gain by any amount of the loss that her father could not deduct ($25,000 − $20,000 = $5,000 gain − $5,000 loss disallowed = $0).
She is allowed to use $5,000 of his disallowed loss to offset her $5,000 gain on a sale to a third party.
An individual taxpayer reports the following information:
U.S. Treasury bond income $ 100 Municipal bond income 200 Rental income 500 Investment interest expense 1,000 What amount of investment interest can the taxpayer deduct in the current year?
A.
$100
B.
$300
C.
$800
D.
$1,000
A.
$100
In general, in the case where a taxpayer borrows money to buy property that is held for investment, the interest that the taxpayer pays is investment interest and it can be deducted up to the amount of investment income. However, a person cannot deduct interest incurred to produce tax-exempt income (municipal bonds) and passive activity or rental real estate activity (rental income). Investment income generally includes gross income from property held for investment such as interest, dividends, annuities, and royalties.
In this case, the maximum deductible interest expense is limited to the $100 of income included in gross income from the U.S. Treasury bonds.
In Year 6, Amanda set up Coverdell education savings accounts for each of her four grandchildren, aged 7, 9, 14, and 16. She would like to contribute the annual maximum to each savings account when she usually makes other annual-election gifts every year on December 31. The annual maximum for Year 6 is $2,000. How much can she contribute in total to the Coverdell education savings accounts in Year 6 and each of the next four years?
A.
$2,000
B.
$8,000
C.
$32,000
D.
$40,000
C.
$32,000
Contributions to Coverdell education savings accounts must be made before the account beneficiaries are 18 years old. Only two years’ contributions to the 16-year-old (age 16 and 17) qualify, and four years’ contributions to the 14-year-old qualify (age 14, 15, 16, 17). Therefore, a total of $32,000 would be contributed over five years, as follows:
7-year-old (5 x $2,000) = $10,000
9-year-old (5 x $2,000) = $10,000
14-year-old (4 x $2,000) = $ 8,000
16-year-old (2 x $2,000) = $ 4,000
$32,000
The partnership of R and S had an ordinary loss during the current year of $10,000. R and S are general partners who actively and materially participate in the daily operations of the partnership. R and S share profits and losses equally. R had an adjusted basis of $4,000 for his interest before taking into account the current-year loss. On his personal tax return R may deduct:
A.
$5,000 ordinary loss.
B.
$5,000 capital loss.
C.
$4,000 ordinary loss and $1,000 capital loss.
D.
$4,000 ordinary loss.
D.
$4,000 ordinary loss.
A partner’s share of a partnership loss is limited to the partner’s basis in the partnership. It is then limited by passive activity rules and at-risk rules under IRC Sections 469 and 465. The excess of the loss over the basis is carried forward.
Mike Smith received $10,000 (consisting of $6,000 principal and $4,000 interest) when he redeemed a Series EE savings bond in Year 6. The bond was issued in his name in Year 1 and the proceeds were used to pay for Mike’s 21-year-old daughter’s college tuition. Mike had not elected to report the yearly increases in the value of the bond. Mike must include what amount in gross income for Year 6 as a result of the bond redemption?
A.
$0
B.
$4,000
C.
$6,000
D.
$10,000
B.
$4,000
A cash-basis taxpayer, unless he elects otherwise, is required to report the total increment in value of noninterest-bearing U.S. savings bonds issued at a discount (i.e., Series E and EE) at the time the bonds are surrendered. Thus, the increment in value from the date of purchase to the date of surrender at or before maturity is to be reported as income when the bond is surrendered.
As a result, when Mike redeems the Series EE bond, $4,000 in interest is taxable.
The exclusion for U.S. Savings Bond Income Used for Higher Education (IRC Section 135) does not apply for this question because the bonds must be qualified U.S. Savings Bonds issued after 1989 to an individual who has reached age 24 before the date of issuance.
Matthews was a cash-basis taxpayer whose records showed the following:
Year 5 state and local income taxes withheld $1,500
Year 5 state estimated income taxes paid
December 30, Year 5 400
Year 5 federal income taxes withheld 2,500
Year 5 state and local income taxes paid
April 15, Year 6 300
What total amount was Matthews entitled to claim for taxes on her Year 5 Schedule A of Form 1040?
A.
$4,700
B.
$2,200
C.
$1,900
D.
$1,500
C.
$1,900
Schedule A of Form 1040 is the “itemized deductions” schedule for an individual. Since Matthews is a cash-basis taxpayer, she is allowed to deduct all state income taxes paid in Year 5. These are:
Year 5 state and local income taxes withheld $1,500
Year 5 state estimated income taxes paid
December 30, Year 5 400
Total $1,900
No deduction is allowed for federal income tax. The Year 5 state and local income taxes paid on April 15, Year 6, of $300 can be deducted in Year 6.
Tom Lewis, an individual taxpayer, donated used clothes and various household items to his local church during the current year. Select the appropriate tax treatment for the current year.
A.
Not deductible on Form 1040
B.
Deductible in full on Schedule A—Itemized Deductions
C.
Deductible on Schedule A—Itemized Deductions, subject to a threshold amount of 2% of adjusted gross income
D.
Deductible on Schedule A—Itemized Deductions, subject to a limitation of 50% of adjusted gross income
D.
Deductible on Schedule A—Itemized Deductions, subject to a limitation of 50% of adjusted gross income
A contribution to a church or a convention or association of churches is considered to be a contribution to a “50% organization.” This means that the charitable deduction is limited to 50% of an individual’s adjusted gross income. If the charitable contribution is made in property other than money, the amount of the contribution is generally the fair market value of the property at the time of the contribution. For contributions of clothing or household items, no deduction is allowed unless the items are in good used condition or better.
IRC Section 170(b)(1)
Mary From, single, owned rental real estate which generated a tax loss of $60,000. Mary materially participated in the rental activity. Mary’s adjusted gross income before considering the $60,000 loss was $130,000. What amount of the loss can offset income from nonpassive sources?
A.
$15,000
B.
$10,000
C.
$0
D.
$60,000
B.
$10,000
Rental activities are considered passive activities even if the taxpayer materially participates. However, for rental real estate activities, a loss up to $25,000 may be deducted. However, the $25,000 loss must be reduced by half of the adjusted gross income (before the loss) in excess of $100,000. Thus, the deduction is $10,000 ($25,000 − (0.50 × $30,000)).
Brenda, employed full time, makes beaded jewelry as a hobby. In Year 2, Brenda’s hobby generated $2,000 of sales, and she incurred $3,000 of travel expenses. What is the proper reporting of the income and expenses related to the activity?
A.
Sales of $2,000 are reported in gross income, and $2,000 of expenses is reported as a miscellaneous itemized deduction subject to the 2% limitation.
B.
Sales of $2,000 are reported in gross income, and $3,000 of expenses is reported as a miscellaneous itemized deduction subject to the 2% limitation.
C.
Sales and expenses are netted, and the net loss of $1,000 is reported as a miscellaneous itemized deduction not subject to the 2% limitation.
D.
Sales and expenses are netted and deducted for AGI.
A.
Sales of $2,000 are reported in gross income, and $2,000 of expenses is reported as a miscellaneous itemized deduction subject to the 2% limitation.
Hobbies are activities that are engaged in primarily for personal enjoyment rather than to produce profit. If an activity is not engaged in for profit, deductions are allowable only to the extent of the gross income of the activity. Therefore, the expenses of $3,000 may only be deducted to the extent of the income of $2,000. Hobbies never generate a loss for tax purposes; however, any gain is taxable. Since expenses incurred for hobby activities are personal expenses rather than business expenses, they are reported on Schedule A as an itemized deduction. Miscellaneous itemized deductions, with few exceptions, are only deductible to the extent that they exceed 2% of the individual’s AGI.
Munch has used his residence, which he bought 10 years ago, for business purposes. He has taken depreciation deductions since he bought the home. When he sells his home in May of Year 12, his profit is $150,000, $5,000 of which is attributable to depreciation for the period after May 6, 1998. Which of the following is a true statement?
A.
The depreciation deductions do not affect his exclusion.
B. Fifty percent (50%) of the depreciation deductions reduce the amount of his gain eligible for the exclusion.
C.
Only depreciation deductions attributable to post-August 5, 1997, reduce the portion of his gain eligible for the exclusion.
D.
$5,000 of his gain does not qualify for the home sale exclusion.
D.
$5,000 of his gain does not qualify for the home sale exclusion.
A homeowner can claim depreciation deductions if he or she rents out part of the principal residence to others or uses part of it as a qualifying home office. These depreciation deductions reduce the owner’s basis in the home and thereby increase the gain realized when the home is sold. Under ‘97 TRA, the home sale exclusion is not available for that part of the home sale profit created through depreciation deductions. However, this rule only applies to the extent of depreciation claimed for post-May 6, 1997, periods. In other words, any depreciation taken after May 6, 1997, will be taxed upon the sale of the residence.
Tom Lewis, an individual taxpayer, paid interest on a $10,000 home-equity line of credit that was secured by his personal residence. Tom used the proceeds of the $10,000 loan to purchase a sailboat. At the time of the $10,000 loan, Tom’s outstanding mortgage on the residence was $78,000, and the fair market value of the residence was $80,000. On how much of the $10,000 loan amount may Tom deduct interest charges for on his tax return (assuming that he can fully itemize and deduct all such charges)?
A.
$0
B.
$2,000
C.
$8,000
D.
$10,000
B.
$2,000
In general, home equity indebtedness is any indebtedness, other than acquisition indebtedness, that is secured by a qualified residence of the taxpayer. The proceeds of the loan may be used for any purpose (with one exception), as long as the loan is secured by the taxpayer’s qualified residence. The one exception is that the taxpayer cannot deduct home mortgage interest if he or she uses the proceeds of the mortgage to purchase securities or certificates that produce tax-free income.
Home equity indebtedness is limited to the lesser of:
the FMV of the qualified residence, in excess of the acquisition indebtedness with respect to that residence, or
$100,000 ($50,000 if married filing separate).
For this question, Tom is limited to deducting interest on indebtedness of $2,000 (i.e., the amount the fair market value of the property exceeds the outstanding mortgage (acquisition indebtedness)).
Pat, a single taxpayer, has adjusted gross income of $40,000 in the current year. During the year, a hurricane causes $4,100 damage to Pat’s personal-use car on which Pat has no insurance. Pat purchased the car for $20,000. Immediately before the hurricane, the car’s fair market value was $11,000 and immediately after the hurricane its fair market value was $6,900. What amount should Pat deduct as a casualty loss for the current year after all threshold limitations are applied?
A.
$4,100
B.
$4,000
C.
$100
D.
$0
D. $0
Step 1: The loss is limited to the decline in the fair market value immediately before and immediately after the event or the adjusted basis of the property, whichever is smaller.
Fair market value before $11,000 – Fair market value after $6,900 = $4,100
Or
Adjusted Basis: $20,000
Step 2: The deduction for casualty and theft losses on nonbusiness property is further limited to:
the excess of the loss $4,100 (from step 1) over
10% of the adjusted gross income ($40,000 × 10% = $4,000 AGI)
= $100
Step 3: If non-income-producing property, the loss is recognized only to the extent that the casualty or theft (but not a condemnation) exceeds $100 for each event.
$100 (from step 2) − $100 = 0
For head of household filing status, which of the following costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household?
A. Food consumed in the home
B. Value of services rendered in the home by the taxpayer
A.
Both A and B
B.
Neither A nor B
C.
Only A
D.
Only B
C.
Only A
In determining the cost for maintaining a household, only paid costs should be considered. Those costs can include mortgage or rent expense, utility charges, food consumed in the home, and repair and maintenance costs. Any unpaid costs (such as the value of services) are not considered when determining the cost of maintaining the home.
