E.42 Tax implications of special circumstances Flashcards
(20 cards)
What is the maximum annual contribution allowed to an IRA in 2023?
A) $5,500
B) $6,000
C) $6,500
D) $7,000
$6,500
Explanation: This contribution limit is for those who are age 50 or older. For those under age 50, the limit is $7,500.
E.42 Tax implications of special circumstances
Which of the following tax credits reduces the amount of taxes owed on a dollar-for-dollar basis?
A) Tax deduction
B) Tax exemption
C) Tax credit
D) Tax shelter
Tax credit
Explanation: Tax credits reduce the amount of taxes owed on a dollar-for-dollar basis, while deductions and exemptions reduce the amount of income subject to tax.
E.42 Tax implications of special circumstances
John and Mary were married on December 31st, 2022. What is their marital status for tax purposes for the entire year?
A) Married filing jointly
B) Married filing separately
C) Single
D) Head of household
Married filing jointly
Explanation: For tax purposes, the IRS considers a couple to be married for the entire year if they are married on the last day of the year.
E.42 Tax implications of special circumstances
If a taxpayer sells an investment at a loss, how much of the loss can be deducted against ordinary income in a given year?
A) $1,000
B) $2,000
C) $3,000
D) $4,000
$3,000
Explanation: Taxpayers can deduct up to $3,000 of net capital losses against ordinary income in a given year. Any excess can be carried forward to future years.
E.42 Tax implications of special circumstances
Which of the following is a requirement for an individual to be considered a qualifying child for tax purposes?
A) The child must be under age 21
B) The child must live with the taxpayer for more than half the year
C) The child must provide more than half of their own support
D) The child must be a US citizen
The child must live with the taxpayer for more than half the year
Explanation: To be considered a qualifying child, the child must also be under age 19 (or under age 24 if a full-time student) and not provide more than half of their own support.
E.42 Tax implications of special circumstances
Which of the following is a requirement for an individual to be considered a qualifying relative for tax purposes?
A) The individual must be a US citizen
B) The individual must live with the taxpayer for more than half the year
C) The individual must provide more than half of their own support
D) The individual’s gross income must be less than the exemption amount
The individual’s gross income must be less than the exemption amount
Explanation: To be considered a qualifying relative, the individual must also not be a qualifying child and the taxpayer must provide more than half of their support.
E.42 Tax implications of special circumstances
Rachel is a self-employed consultant who works from home. What expenses related to her home office can she deduct on her tax return?
A) Rent and mortgage interest
B) Utilities and internet
C) Depreciation on the home
D) All of the above
All of the above
Explanation: Rachel can deduct a portion of her rent or mortgage interest, utilities, and internet expenses, as well as depreciation on the portion of her home used as an office.
E.42 Tax implications of special circumstances
Which of the following retirement plans does not require mandatory withdrawals beginning at age 72?
A) Traditional IRA
B) Roth IRA
C) 401(k)
D) Pension plan
Roth IRA. Roth IRAs do not require mandatory withdrawals at any age.
E.42 Tax implications of special circumstances
Which of the following is a true statement about the tax implications of gifting assets to another individual?
A) The gift tax applies to the recipient of the gift.
B) The donor can deduct the value of the gift on their tax return.
C) Gifts of up to $15,000 per year per recipient are excluded from gift tax.
D) Gifts of appreciated assets are never subject to capital gains tax.
Gifts of up to $15,000 per year per recipient are excluded from gift tax. The gift tax applies to the donor, not the recipient, and gifts of appreciated assets are subject to capital gains tax. Donors cannot deduct the value of the gift on their tax return, but gifts of up to $15,000 per year per recipient are excluded from gift tax.
E.42 Tax implications of special circumstances
John is a high-earning executive who is planning to retire in two years. He expects to receive a large severance package when he retires. What tax implications should John consider when planning for his retirement?
A) The severance package may be subject to both income tax and FICA taxes.
B) The severance package will be tax-free if he rolls it over into an IRA.
C) The severance package is exempt from income tax if he has worked for the company for more than 20 years.
D) The severance package is only subject to income tax if he receives it in installments over a period of more than one year.
The severance package may be subject to both income tax and FICA taxes. Severance packages are typically considered taxable income and are subject to both income tax and FICA taxes.
E.42 Tax implications of special circumstances
Mary is a self-employed graphic designer who uses her personal computer for work. She purchased the computer for $1,500 two years ago and it is now worth $1,000. Can Mary deduct the value of the computer on her tax return?
A) Yes, Mary can deduct $1,000 as a business expense.
B) No, Mary cannot deduct the value of the computer since it has depreciated in value.
C) Yes, Mary can deduct $1,500 as a business expense.
D) No, Mary cannot deduct the value of the computer since it is a personal asset.
Yes, Mary can deduct $1,000 as a business expense. Mary can deduct the current fair market value of the computer as a business expense, which in this case is $1,000.
E.42 Tax implications of special circumstances
Tom and Susan are a married couple who file a joint tax return. Susan has a significant amount of student loan debt that she is struggling to pay off. Can Tom and Susan deduct the interest paid on Susan’s student loans on their tax return?
A) No, since they file a joint tax return, they cannot deduct the interest paid on Susan’s student loans.
B) Yes, they can deduct up to $2,500 of the interest paid on Susan’s student loans on their tax return.
C) Yes, they can deduct the full amount of the interest paid on Susan’s student loans on their tax return.
D) No, since Susan is not the primary taxpayer, they cannot deduct the interest paid on her student loans.
Yes, they can deduct up to $2,500 of the interest paid on Susan’s student loans on their tax return. Tom and Susan can deduct up to $2,500 of the interest paid on qualifying student loans on their tax return, subject to income limits.
E.42 Tax implications of special circumstances
Sarah inherited a rental property from her grandmother, who passed away last year. The property was appraised at $500,000 at the time of her grandmother’s death and is now worth $550,000. What is Sarah’s basis in the property?
A) $500,000
B) $350,000
C) $525,000
D) $550,000
$500,000. Sarah’s basis in the rental property is the fair market value of the property at the time of her grandmother’s death, which was $500,000.
E.42 Tax implications of special circumstances
Michael is a high-earning executive who is planning to retire next year. He has a 401(k) account with a balance of $500,000. What tax implications should Michael consider when planning for his retirement?
A) Michael will be subject to income tax on the entire balance of his 401(k) account when he retires.
B) Michael will be subject to income tax on only the contributions he made to his 401(k) account.
C) Michael can withdraw money from his 401(k) account tax-free if he waits until he is 70½ years old.
D) Michael will be subject to income tax on the contributions and earnings in his 401(k) account when he retires.
Michael will be subject to income tax on the contributions and earnings in his 401(k) account when he retires. Withdrawals from a 401(k) account are generally subject to income tax, although there are certain exceptions and rules for timing of withdrawals.
E.42 Tax implications of special circumstances
Bob and Sue are a married couple who file a joint tax return. Sue is a full-time student and has no income. Can Bob claim a tax deduction for the tuition and fees paid for Sue’s education?
A) No, since Sue has no income, Bob cannot claim a deduction for her education expenses.
B) Yes, Bob can claim a deduction for the tuition and fees paid for Sue’s education.
C) No, since Bob’s income is too high, he cannot claim a deduction for education expenses.
D) Yes, Bob can claim a deduction for the tuition and fees paid for Sue’s education, but only if he itemizes his deductions.
Yes, Bob can claim a deduction for the tuition and fees paid for Sue’s education. Bob can claim a deduction for qualified education expenses paid for himself, his spouse, or his dependent, subject to income limits and other rules.
E.42 Tax implications of special circumstances
Steve and Rachel are a married couple who file a joint tax return. Rachel has a part-time job that pays $20,000 per year, and Steve is self-employed and earns $80,000 per year. Can Steve and Rachel contribute to a Roth IRA?
A) No, since their combined income is too high, they cannot contribute to a Roth IRA.
B) Yes, they can each contribute up to $6,000 to a Roth IRA.
C) Yes, they can each contribute up to $3,000 to a Roth IRA.
D) No, since Rachel has earned income, Steve cannot contribute to a Roth IRA.
Yes, they can each contribute up to $6,000 to a Roth IRA. Steve and Rachel can each contribute up to $6,000 to a Roth IRA, subject to income limits and other rules.
E.42 Tax implications of special circumstances
Jill is a single mother who has two children under the age of 18. She earns $30,000 per year and pays $5,000 per year in childcare expenses. Can Jill claim the Child and Dependent Care Credit?
A) Yes, Jill can claim the Child and Dependent Care Credit, but only for one child.
B) No, since Jill’s income is too low, she cannot claim the Child and Dependent Care Credit.
C) Yes, Jill can claim the Child and Dependent Care Credit for both of her children.
D) Yes, Jill can claim the Child and Dependent Care Credit, but the credit is limited to 20% of her childcare expenses.
Yes, Jill can claim the Child and Dependent Care Credit for both of her children. The credit is available for taxpayers who pay for the care of a dependent under age 13 or a disabled dependent of any age, subject to income limits and other rules. In this scenario, Jill meets the income and other requirements, and she can claim the credit for both of her children.
E.42 Tax implications of special circumstances
Emily is a single taxpayer who has a salary of $60,000 and a long-term capital gain of $10,000. What is Emily’s tax rate on the capital gain?
A) 0%
B) 15%
C) 20%
D) 25%
15%. The tax rate on long-term capital gains is generally 0%, 15%, or 20%, depending on the taxpayer’s income level.
E.42 Tax implications of special circumstances
Mark is a self-employed graphic designer who operates his business as a sole proprietorship. Mark’s business had a net profit of $100,000 last year. What is the maximum amount Mark can contribute to a SEP-IRA for the tax year?
A) $6,000
B) $19,500
C) $25,000
D) $56,000
$56,000. As a self-employed individual, Mark can contribute up to 25% of his net self-employment income to a SEP-IRA, subject to a maximum contribution of $56,000 for 2021.
E.42 Tax implications of special circumstances
Sarah and Tom, a married couple filing a joint tax return, own a rental property that generates a net loss of $10,000 per year. Considering their situation, which of the following statements is correct regarding the deductibility of the rental property loss on their joint tax return?
A. Yes, Sarah and Tom can always deduct the full $10,000 loss on their tax return.
B. No, Sarah and Tom cannot deduct the $10,000 loss on their tax return.
C. Yes, Sarah and Tom can deduct the full $10,000 loss, but only if their Modified Adjusted Gross Income (MAGI) is below a certain threshold.
D. Sarah and Tom can deduct the loss only against other passive income.
Yes, Sarah and Tom can deduct the full $10,000 loss, but only if their Modified Adjusted Gross Income (MAGI) is below a certain threshold.
Explanation: The ability for Sarah and Tom to deduct the full $10,000 loss from their rental property largely hinges on their Modified Adjusted Gross Income (MAGI). According to the IRS, if Sarah and Tom actively participate in the rental activity and their MAGI is less than $100,000, they can deduct up to $25,000 of loss against their other income. The ability to take this loss begins to phase out if their MAGI is between a certain threshold and and disappears entirely for MAGI above that (see IRS Rules). Therefore, the deductibility of the loss depends on their income, and other factors like their level of active participation in the rental activity.
E.42 Tax implications of special circumstances
