GSTTI-2020-FedTaxLaw (10 hours) Flashcards
(50 cards)
Generally, under the Tax Cuts and Jobs Act, which of the following major items cannot be subtracted from gross income?
A. Contributions to a traditional individual retirement arrangement (IRA)
B. Moving expenses
C. Qualified educator expenses
D. Student loan interest
B. Moving expenses
EXPLANATION
The Tax Cuts and Jobs Act provided that for tax years beginning after December 31, 2017 until January 1, 2026, the deduction for moving expenses is suspended, except for members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station.
For 2020, all of the following statements are true regarding the higher additional standard deduction under the Tax Cuts and Jobs Act except:
A. The additional standard deduction for married taxpayers 65 or over or blind is $1,300
B. The additional standard deduction for a single taxpayer or head of household who is 65 or over or blind is $1,650
C. The taxpayer can claim the higher standard deduction for a dependent
D. A person is considered to reach age 65 on the day before his or her 65th birthday
C. The taxpayer can claim the higher standard deduction for a dependent
EXPLANATION
For 2020, the additional standard deduction for married taxpayers 65 or over or blind will be $1,300 (same as for 2019). For a single taxpayer or head of household who is 65 or over or blind, the additional standard deduction for 2020 will be $1,650 (same as for 2019). A person is considered to reach age 65 on the day before his or her 65th birthday. The taxpayer cannot claim the higher standard deduction for an individual other than him or herself and his or her spouse. For 2020, the standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of $1,100 or the sum of $350 and the individual’s earned income.
Kevin and Jennifer are married and filing a joint tax return. They have a combined taxable income of $80,000. They have four children, whom they claim as dependents. When they file their 2020 income tax return, Kevin and Jennifer’s taxable income will be reduced by what amount for their personal exemption deduction?
A. $0
B. $12,150
C. $18,225
D. $24,900
A. $0
EXPLANATION
Under the Tax Cuts and Jobs Act, for tax years beginning after December 31, 2017 until January 1, 2026, the deduction
for personal exemptions was effectively suspended by reducing the exemption amount to zero. A number of
corresponding changes are made throughout the Tax Code where specific provisions contain references to the
personal exemption amount and, in each of these instances, the dollar amount to be used is $4,300 in 2020, as
adjusted by inflation
If the taxpayer obtains a court decree of annulment, which holds that no valid marriage ever existed, he or she is considered unmarried even if he or she filed joint returns for earlier years. The taxpayer must file amended returns (Form 1040X) claiming which of the following filing status for all tax years that are affected by the annulment and not closed by the statute of limitations for filing a tax return?
A. Single
B. Head of Household
C. Married Filing Separately
D. A or B
D. A or B
EXPLANATION
If the taxpayer obtains a court decree of annulment, which holds that no valid marriage ever existed, he or she is
considered unmarried even if he or she filed joint returns for earlier years. The taxpayer must file amended returns (Form 1040X) claiming single or head of household status for all tax years that are affected by the annulment and not closed by the statute of limitations for filing a tax return.
Oscar is divorced. His dependent son, Sam, lived with him all year. Property taxes of $1,000 and mortgage interest of $5,000 on the home where he and Sam live are divided equally with his ex-wife. Oscar also paid all the utilities of $150 per month. What amount of the yearly household expenses can Oscar use to determine if he qualifies for the head of household filing status?
A. $2,500
B. $3,500
C. $4,800
D. $6,000
C. $4,800
EXPLANATION
Head of household generally applies to taxpayers who are unmarried. The taxpayer must also have paid more than half the cost of maintaining a home for him or her and a qualifying person to qualify for this filing status.
Which of the following is not an advantage of filing a joint income tax return?
A. Joint filers can claim double the amount of the personal exemption deduction
B. The IRS gives joint filers one of the largest standard deductions each year, allowing them to deduct a significant amount of their income immediately
C. Married couples who file together qualify for multiple tax credits such as the Earned Income Tax Credit and the Child and Dependent Care Credit
D. Joint filers receive higher income thresholds for certain taxes and deductions which means they can earn a larger amount of income and still qualify for certain tax breaks
A. Joint filers can claim double the amount of the personal exemption deduction
EXPLANATION
There are many advantages to filing a joint tax return. The IRS gives joint filers one of the largest standard deductions each year, allowing them to deduct a significant amount of their income immediately. Also married couples who file together qualify for multiple tax credits such as the Earned Income Tax Credit, the American Opportunity and Lifetime Learning Credits, the exclusion or credit for adoption expenses, and the Child and Dependent Care Credit. Joint filers also receive higher income thresholds for certain taxes and deductions which means they can earn a larger amount of income and still qualify for certain tax breaks.
Bill and Karen Green filed a joint return showing Karen’s wages of $50,000 and Bill’s self-employment income of $10,000. The IRS audited their return and found that Bill did not report $20,000 of self-employment income. The additional income resulted in a $6,000 understated tax, plus interest and penalties. After obtaining a legal separation from Bill, Karen filed Form 8857 - Request for Innocent Spouse Relief to request separation of liability relief. The IRS proved that Karen actually knew about the $20,000 of additional income at the time she signed the joint return. Bill is liable for all of the understated tax, interest, and penalties because all of it was due to his unreported income. Which of the following is true regarding Karen’s liability for the understated tax, interest and penalties due for the unreported income of $20,000?
A. Karen is not liable for the understated tax, interest, and penalties due to the $20,000 of unreported income
B. The IRS cannot collect the entire $6,000 plus interest and penalties from Karen because she is not individually liable for it
C. The IRS can collect the entire $6,000 plus interest and penalties from either Karen or Bill because they are jointly and individually liable for it
D. Even though Karen knew that Bill received the income, relief is available for that income because she did not know it was taxable
C. The IRS can collect the entire $6,000 plus interest and penalties from either Karen or Bill because they are jointly and individually liable for it
EXPLANATION
The taxpayer’s actual knowledge of the proper tax treatment of an erroneous item is not relevant for purposes of demonstrating that he or she had actual knowledge of that item. Neither is the taxpayer’s actual knowledge of how the erroneous item was treated on the tax return. For example, if the taxpayer knew that his or her spouse received dividend income, relief is not available for that income even if he or she did not know it was taxable.
Captain Margaret Jones entered Afghanistan on December 1, 2018. She remained there through March 31, 2020, when she departed for the United States. She was not injured and did not return to the combat zone. What is the deadline for Captain Jones’ income tax return?
A. January 10, 2021
B. April 15, 2021
C. June 15, 2021
D. October 15, 2021
B. April 15, 2021
EXPLANATION
The taxpayer’s deadline for filing his or her return, paying his or her tax, claiming a refund, and taking other actions with the IRS is extended in two steps. First, his or her deadline is extended for 180 days after the later of the following:
➢ The last day the taxpayer is in a combat zone, have qualifying service outside of the combat zone, or serve in a contingency operation (or the last day the area qualifies as a combat zone or the operation qualifies as a contingency operation).
➢ The last day of any continuous qualified hospitalization for injury from service in the combat zone or contingency operation or while performing qualifying service outside of the combat zone. Second, in addition to the 180 days, the taxpayer’s deadline is extended by the number of days that were left for him or her to take the action with the IRS when he or she entered a combat zone (or began performing qualifying service outside the combat zone) or began serving in a contingency operation. If the taxpayer entered the combat zone or began serving in the contingency operation before the period of time to take the action began, his or her deadline is
extended by the entire period of time he or she has to take the action.
For example, the individual had 3½ months (January 1 - April 15, 2020) to file his or her 2019 tax return. Any days of this 3½ month period that were left when he or she entered the combat zone (or the entire 3½ months if he or she entered the combat zone by January 1, 2020) are added to the 180 days when determining the last day allowed for filing the 2019 tax return.
Some dividends may not be qualified dividends even if they are shown in Box 1b of Form 1099-DIV. Which of the following is a qualified dividend?
A. Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U.S. building and loan associations, U.S. savings and loan associations, Federal savings and loan associations, and similar financial institutions
B. Dividends from a corporation that is a tax-exempt organization or farmer’s cooperative during the corporation’s tax year in which the dividends were paid or during the corporation’s previous tax year
C. Dividends paid from a stock held for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date
D. Dividends paid by a corporation on employer securities held on the date of record by an employee stock ownership plan (ESOP) maintained by that corporation
C. Dividends paid from a stock held for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date
EXPLANATION
The following dividends are NOT QUALIFIED DIVIDENDS.
They are not qualified dividends even if they are shown in box 1b
of Form 1099-DIV:
➢ Capital gain distributions.
➢ Payments in lieu of dividends.
➢ Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U.S. building and loan associations, U.S. savings and loan associations, Federal savings and loan associations, and similar
financial institutions.
➢ Dividends from a corporation that is a tax-exempt organization or farmer’s cooperative during the corporation’s tax year in which the dividends were paid or during the corporation’s previous tax year.
➢ Dividends paid by a corporation on employer securities held on the date of record by an employee stock ownership plan (ESOP) maintained by that corporation.
➢ Dividends on any share of stock to the extent the taxpayer is obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property.
➢ Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent the taxpayer knows or has reason to know the payments are not qualified dividends.
Bruce owns XYZ Co. common stock, which he bought in 2018. He was paid a dividend of $500 for the current year. These qualified dividends are generally taxed at what tax rate?
A. Individual tax rate
B. Long-term capital gains tax rate
C. Short-term capital gains tax rate
D. Corporate tax rate
B. Long-term capital gains tax rate
EXPLANATION
Qualified dividends are eligible to be taxed at a lower tax rate than other ordinary income. Generally, qualified dividends are taxed at long-term capital gains rates. For 2020, this means that qualified dividends are subject to the same 0%, 15%, or 20% maximum tax rate that applies to net capital gains.
The 15% and 20% tax rates on long-term capital gains and qualified dividends have been retained in the
Tax Cuts and Jobs Act. Those in the 10% or 12% tax bracket pay zero tax on these gains and dividends. Also, there had been proposals to require the use of first-in, first-out (FIFO) in determining basis on the sale of stock and mutual fund shares rather than allowing investors to designate which shares are being sold when shares
were acquired at different times. This measure was not included in the final tax law.
A cafeteria plan provides participants an opportunity to receive qualified benefits on a pre-tax basis. It is a written plan that allows employees to choose between receiving cash or taxable benefits, instead of certain qualified benefits for which the law provides an exclusion from wages. A cafeteria plan can include all of the following benefits except:
A. Dependent care assistance
B. Educational assistance
C. Group-term life insurance coverage
D. Health savings accounts (HSA)
B. Educational assistance
EXPLANATION
A cafeteria plan can include the following benefits:
➢ Accident and health benefits (but not Archer medical savings accounts (Archer MSAs) or long-term care
insurance).
➢ Adoption assistance.
➢ Dependent care assistance.
➢ Group-term life insurance coverage (including costs that cannot be excluded from wages).
➢ Health savings accounts (HSAs). Distributions from an HS
A taxpayer goes to a casino and wins $10,000. The casino withholds $500 for Federal income taxes. What is the proper tax treatment by the taxpayer?
A. The taxpayer must report the winnings on Schedule 1 (Form 1040) and can claim the amount of Federal income tax withheld on page 2 of Form 1040
B. The taxpayer does not have to report the winnings because the taxpayer did not receive a Form 1099-G from the casino
C. The taxpayer is not required to report the winnings on his or her Schedule 1 (Form 1040) unless the taxpayer wants to claim the withheld amount on page 2 of Form 1040
D. The taxpayer must report the winnings on his or her Schedule 1 (Form 1040), but the taxpayer may not claim the amount of Federal income tax withheld unless the taxpayer itemizes deductions
A. The taxpayer must report the winnings on Schedule 1 (Form 1040) and can claim the amount of Federal income tax withheld on page 2 of Form 1040
EXPLANATION
If a payer withholds income tax from a taxpayer’s gambling winnings, he or she should receive a Form W-2G - Certain
Gambling Winnings, showing the amount he or she won and the amount withheld. The taxpayer should report the tax withheld on his or her 2020 Form 1040, along with all other Federal income tax withheld, as shown on Forms W-2 and
1099
Jean Knox received certain income benefits in 2020. She received $1,400 of state unemployment insurance benefits, $2,000 from a Federal Unemployment Trust Fund and $3,700 worker’s compensation received for an occupational injury. What amount of the payments must Jean include in her income?
A. $1,400
B. $2,000
C. $3,400
D. $3,700
C. $3,400
EXPLANATION
At present, Federal law requires that all unemployment compensation received from governmental units must be reported as income. If unemployment compensation was received during the year, the taxpayer should receive Form 1099-G - Certain Government Payments, showing the amount he or she was paid. Any unemployment compensation received must be included in his or her income.
UNEMPLOYMENT COMPENSATION: Any amounts received under the unemployment compensation laws of the United States or of a state. It includes state unemployment insurance benefits and benefits paid to a taxpayer by a state or the District of Columbia from the Federal Unemployment Trust Fund. It also includes railroad unemployment compensation benefits, but not worker’s compensation.
Jeremy and Martha have an adjusted gross income (AGI) of $28,000 (and no tax-exempt or foreign income) and receive combined Social Security benefits of $14,000. As a result, their combined income is $28,000 + $7,000 (half of Social Security benefits) = $35,000. Therefore, what amount of their Social Security benefits are subject to taxation?
A. $0
B. $1,500
C. $3,000
D. $7,000
B. $1,500
EXPLANATION
If the taxpayer has income in addition to his or her benefits, he or she may have to file a return even if none of his or her benefits are taxable. If any portion of the benefits is taxable, the taxpayer should file using Form 1040. The base amounts used to figure the tax on Social Security benefits are:
➢ $25,000 if the taxpayer is single, head of household or qualifying widow(er).
➢ $25,000 if the taxpayer is married filing separately and lived apart from his or her spouse for all of current
year.
➢ $32,000 if the taxpayer is married filing jointly.
➢ $0 if the taxpayer is married filing separately and lived with his or her spouse at any time during the current
year.
Which of the following statements is incorrect regarding the Annual Gift Tax Exemption?
A. In 2020, a taxpayer can give $15,000 per person, to any number of people, and none of the gifts will be taxable
B. A separate annual exclusion applies to each person and the exclusion is subject to cost-of-living increases
C. The exclusion applies to the transfer by gift of any property
D. The taxpayer gives a gift if he or she gives property and expects to receive something of at least equal value in return
D. The taxpayer gives a gift if he or she gives property and expects to receive something of at least equal value in return
Sophia sold a painting that she held as an investment on an online auction website for $100. She bought the painting for $20 at a garage sale years ago. Sophia should report what amount as a capital gain on her Schedule D (Form 1040)?
A. $0
B. $20
C. $80
D. $100
C. $80
In 2020, Kristen, a 45-year-old, single filing taxpayer has taxable compensation of $30,000. She chooses to contribute $3,500 to a traditional IRA. What is the maximum contribution Kristen can make to her Roth IRA during the year?
A. $0
B. $2,500
C. $6,000
D. $7,000
B. $2,500
EXPLANATION
For 2020, the most a taxpayer can contribute to an IRA is the smaller of either taxable compensation for the year or $6,000. If the taxpayer was 50 or older at the end of 2020 the maximum amount increases to $7,000
Jane is a single taxpayer with a modified adjusted gross income (MAGI) of $50,000. When her daughter, Soraya, was born in 2019 two separate Coverdell Education Savings Accounts (CESA) were set up for her, one by Jane and one by her daughter’s grandfather. In 2020, Jane contributed $1,000 and the grandfather contributed $600 to Soraya’s CESAs. Also, in 2020, Jane establishes one CESA account for her son, Edgar. During 2020, she can contribute what amount to her son Edgar’s CESA?
A. $0
B. $400
C. $1,000
D. $2,000
D. $2,000
EXPLANATION
For 2020, the maximum annual contribution that could be made to a CESA is $2,000 per beneficiary; and, the annual contribution is phased out for joint filers with modified adjusted gross income (MAGI) at or above $190,000 and less than $220,000 (at or above $95,000 and less than $110,000 for single filers).
The American Taxpayer Relief Act made permanent the $2,000 total contributions per year for the beneficiary of a Coverdell ESA. Low and middle-income taxpayers may open up a Coverdell Education Savings Account (CESA) for qualified higher education as well as elementary and secondary education expenses (i.e., grades kindergarten through 12).
In January 2020, Patricia takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000. In February 2020, she takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home. During 2020 Patricia paid interest of $7,000 on the loans and will therefore be able to deduct what amount of the interest paid on her income tax return?
A. $0
B. $3,500
C. $5,000
D. $7,000
D. $7,000
EXPLANATION
Mortgage interest is any interest that a person pays on a loan that is secured by his or her principal residence. Secured
debt, for purposes of the mortgage interest deduction, means that there is a signed written document:
1. That makes ownership in a qualified home security, or collateral for the mortgage debt.
2. That, in case of default on the loan, the home could be taken by the creditor to satisfy the debt.
3. That is recorded or otherwise protected under state or local law.
The Working Conditions Benefits exclusion applies to property and services an employer provides to an employee so that the employee can perform his or her job. Which of the following is not an example of working condition benefits?
A. An employee’s use of a company car for business
B. An employer-provided cell phone provided primarily for non-compensatory business purposes
C. Job-related education provided to an employee
D. A service or property provided under a flexible spending account in which the employer agrees to provide the employee, over a time-period, a certain level of unspecified noncash benefits with a predetermined cash value
D. A service or property provided under a flexible spending account in which the employer agrees to provide the employee, over a time-period, a certain level of unspecified noncash benefits with a predetermined cash value
EXPLANATION
This exclusion applies to property and services an employer provides to an employee so that the employee can perform his or her job. It applies to the extent the employee could deduct the cost of the property or services as a business expense or depreciation expense if he or she had paid for it. The employee must meet any substantiation requirements that apply to the deduction. Examples of working condition benefits include an employee’s use of a company car for business, an employer-provided cell phone provided primarily for non-compensatory business purposes, and job-related education provided to an employee.
Which of the following taxpayers is eligible to claim the standard deduction on his or her tax return?
A. A married individual filing separately, and his or her spouse itemizes deductions
B. An individual who claims the Earned Income Tax Credit and the Child Tax Credit
C. An individual filing a tax return for a short tax year because of a change in his or her annual accounting period
D. An unmarried nonresident alien
B. An individual who claims the Earned Income Tax Credit and the Child Tax Credit
The rule for involuntary conversions does not apply to which of the following?
A. Destruction of personal property
B. Like-kind exchanges
C. Insurance awards
D. Condemnation awards
B. Like-kind exchanges
In 2020, Anna and Matt earn $420,000 of adjusted gross income and figure $50,000 of total itemized deductions on their Schedule A, comprised entirely of qualified home mortgage interest and gifts to charity. They are married and are filing jointly. Anna and Matt can deduct what amount of itemized deductions on their income tax return?
A. $0
B. $25,000
C. $47,000
D. $50,000
D. $50,000
EXPLANATION
For taxpayers that do itemize their deductions, the CARES Act temporarily lifts the limits on charitable giving for 2020. After passage of the TCJA, cash contributions to public charities are generally limited to 60% of a taxpayer’s adjusted gross income (AGI). The CARES Act allows such contributions to be deducted up to 100% of adjusted gross income (AGI) for 2020, with any excess contributions available to be carried over to the next five years.
Nathan donated $100 to the American Red Cross, $200 to the Boy Scouts of America, and $300 to his neighbor whose home was destroyed by an earthquake. How much is Nathan’s deduction for charitable contributions?
A. $100
B. $300
C. $400
D. $500
B. $300
