Income Tax Planning

Question 1

Which of the following conversations regarding non-criminal income tax return matters would not be privileged?
-CPA – Client
-CFP® Certificant – Client
-Enrolled Agent – Client
-Attorney – Client

Answer 1

CFP® Certificant – Client

A conversation between a CFP® Certificant and a client is not a privileged conversation in regard to tax matters.

Question 2

From the following list, who is not eligible to practice before the IRS?
-CPA
-Enrolled Agent
-Enrolled Actuary
-CERTIFIED FINANCIAL PLANNER TM Certificant

Answer 2

CERTIFIED FINANCIAL PLANNER TM Certificant

Question 3

Bill has a client who would like to take a deduction for the interest on his auto loan. Where would the best place be for Bill to look for guidance on the consequences for both himself and his client in this situation?
-The CFP Board Ethical guidelines
-Treasury Regulations
-Internal Revenue Code
-Circular 230

Answer 3

Circular 230

Circular 230 sets forth the regulations that govern practice before the Internal Revenue Service.

Question 4

A CPA may endorse a taxpayer’s refund check ONLY if the CPA prepared the return for the taxpayer.
-True
-False

Answer 4

False

The tax return preparer is prohibited from endorsing their clients’ refund checks.

Question 5

Jerry’s Year 1 income return was due April 15, Year 2. He filed the return on October 10, Year 2 and paid his tax due of $3,000 on December 29, Year 2. Would Jerry be subject to a failure to file and failure to pay penalty? If so, what is the combined amount of the penalties?
-No. Jerry is not subject to a penalty because he paid within one year.
-Yes. Jerry’s penalty would be $810.
-Yes. Jerry’s penalty would be $960.
-Yes. Jerry’s penalty would be $1,050.

Answer 5

Yes. Jerry’s penalty would be $810.

Failure to File: .045 x 5 x 3,000 = $675.00
Failure to Pay: .005 x 9 x 3,000 = $135.00

Total $810.00

Question 6

Your client would like to challenge a tax bill assessed by the IRS. The client would like the case to be heard by a jury and does not want to pay the fine before the case is heard. Which court should hear the case?
-District Court
-Court of Federal Claims
-U.S. Tax Court
-Small Claims Division of U.S. Tax Court
-None of the above

Answer 6

None of the above

Both of these requests cannot be satisfied.

Question 7

Which of the following can a taxpayer not specifically request?
-A Revenue Ruling
-Private Letter Rulings
-Determination Letters
-A Letter of Clarification
-All of the above

Answer 7

A Revenue Ruling

Revenue Rulings are official pronouncements of the IRS that set national pronouncements.

Question 8

Tara is considering the investment of $5,000,000 into a tax shelter being promoted by a prominent Hollywood actor. She would like to know if the tax shelter is compliant with IRS regulations before she invests. Which of the following is her most reliable course of action?
-Consult the Internal Revenue Code
-Read the Revenue Procedures
-Request a Determination Letter
-Request a Private Letter Ruling
-Request a Technical Advice Memorandum

Answer 8

Request a Private Letter Ruling

A Private Letter Ruling would be the best course of action here because Tara has not yet taken action, and it will provide her written proof of the decision by the IRS.

Question 9

Terry has IRS agents in his office going over his tax return with him. Which of the following is most likely to be occurring?
-A correspondence audit
-An office audit
-A field audit
-None of the above

Answer 9

A field audit

When IRS agents are at the taxpayer’s place of business, this is the sign of a field audit. This is not good.

Question 10

Three neighbors have been selected for audits. Which of the following is the most likely reason?
-They were all selected by the random audit selection process.
-Two of the neighbors were selected randomly, and the other was a valet.
-Neighbor #1 is a waiter at the best steak house in the city. Neighbor #2 had previously been audited for understating their income two years prior. And neighbor #3 was self-employed.
-All three neighbors were selected via computer matching.

Answer 10

Neighbor #1 is a waiter at the best steak house in the city. Neighbor #2 had previously been audited for understating their income two years prior. And neighbor #3 was self-employed.

Waiters work in a high-tip industry, which is prone to target audits. Taxpayers who have been audited in the past are likely to be audited again. And self-employed individuals with substantial business income and deductions can trigger audits.

Question 11

Jim, filing his tax returns for the first time since graduating college, understates his income by one-third. How long will the IRS have to assess a penalty?
-Three years
-Four years
-Six years
-Unlimited
-None of the above

Answer 11

Six years

Because Jim understated his income by more than 25%, the IRS will have 6 years to penalize him.

Question 12

The final calculation in the basic tax formula is deducting any tax credits from an individual’s adjusted gross income.
-True
-False

Answer 12

False

The final calculation for figuring an individual’s tax liability is deducting any tax credits from the individual’s tentative tax.

Question 13

Adjusted gross income is total income less deductions for adjusted gross income.
-True
-False

Answer 13

True

Question 14

Which of the following statements is correct?

-For an individual in the 37% tax bracket, a deduction of $540 would be equal to a tax credit of $200.
-For individuals in the 32% tax bracket, all income is taxed at 32%.
-A tax credit of $100 will generally reduce a taxpayer’s total tax bill according to their marginal tax rate.
-For individuals in the lowest tax bracket, any tax deduction would equal the same tax savings as a tax credit.

Answer 14

For an individual in the 37% tax bracket, a deduction of $540 would be equal to a tax credit of $200.

A tax deduction of $540 would equal a tax credit of $200.

Question 15

The Watsons are a family of three living in Wisconsin. Bob and Susan are married and have one son, Billy (17).

Billy qualifies as a dependent child in Year 1.
Billy earned $3,000 delivering newspapers in Year 1.
Billy had no unearned income in Year 1.
In January of Year 2, Susan and Billy died in a car accident.
Which of the following statements indicate correct decisions regarding the filing of income tax returns?

-In Year 1, a portion of Billy’s $3,000 (earned income) will be taxed at his parent’s top marginal rate.
-In Year 2, Bob can file as Married Filed Jointly (MFJ).
-In Year 3, Bob can file as Surviving Spouse and use the MFJ tax tables.
-In Year 4, Bob can file as Head of Household.

Answer 15

In Year 2, Bob can file as Married Filed Jointly (MFJ).

A surviving spouse can claim MFJ status for the year the decedent spouse died.

Question 16

Adjusted Gross Income (AGI) is the amount to determine Tentative Tax of the taxpayer:
-True
-False

Answer 16

False

Taxable income is the amount used to calculate Tentative Tax, not Adjusted Gross Income.

Question 17

Which of the following most completely explains how the dependent’s standard deduction amount was determined in Scenario 4 of the Kiddie Tax Example chart below?
Current Year Scenario 1 2 3 4
Unearned Income $2,000 $2,000 $4,000 $4,000
Plus Earned Income $0 $2,000 $10,000 $15,000
Total Income: $2,000 $4,000 $14,000 $19,000
Less Standard Deduction $1,350 $2,450 $10,450 $15,000
Taxable Income: $650 $ 1,550 $3,550 $4,000
Taxation of Taxable Income
Taxed at top parental rate $ 0 $ 0 $1,300 $ 1,300
Taxed at Jane’s rates: $650 $ 1,550 $2,250 $ 2,700

-Unearned income plus an annually indexed amount
-Earned income plus an annually indexed amount
-Earned income plus an annually indexed amount, not to exceed the standard deduction for a taxpayer filing as “single”
-Unearned income plus an annually indexed amount, not to exceed the standard deduction for a taxpayer filing as “single”

Answer 17

Earned income plus an annually indexed amount, not to exceed the standard deduction for a taxpayer filing as “single”

Standard deduction = earned income plus an indexed amount, but the standard deduction is limited to the standard deduction of a taxpayer filing as “single.”

Question 18

Sam owns 25 shares of stock in ABC Corp worth $550. The total value of the stock was $300 when he purchased the shares. Sam has $250 of:
-Economic income
-Realized capital gain income
-Accounting income
-Retroactive income

Answer 18

Economic income

Economic income is income that can be produced without a tax consequence.

Question 19

In which of the following situations would Ted, a mechanic on a cash basis, most likely NOT be required to report income?
-Ted installs brake pads on his dentist’s car free of charge. In exchange, the dentist does not charge Ted for his daughter’s semi-annual cleanings.
-Ted replaced the transmission on one of his oldest client’s car 6 months ago, for which he has not received payment. Since the customer has been with Ted for 20 years, Ted decides to forgive the payment.
-Ted provides services to his lawyer free of charge in exchange for representation in a case involving a customer who did not pay.
-Ted borrowed $3,000 from his doctor to pay off loans. His doctor has told Ted that he will not need to repay the loan if he can get his old car running again.
-Ted would report income in all of the above situations.

Answer 19

Ted replaced the transmission on one of his oldest client’s car 6 months ago, for which he has not received payment. Since the customer has been with Ted for 20 years, Ted decides to forgive the payment.

Ted never received any income, nor did he receive anything for forgiving the payment. Ted’s customer would be the one that would have to report income.

Question 20

Which of the following was not identified as a source of income?
-Earned income
-Unearned income
-Alimony payments
-All of the above are sources of income

Answer 20

All of the above are sources of income

Question 21

A fiscal year taxpayer always has a December 31 year-end date.
-True
-False

Answer 21

False

This would be a calendar year taxpayer.

Question 22

Identify which of the following are elements of accrual basis accounting.
I. Recognize income as it is received
II. Expenses recognized as they are incurred
III. Expenses recognized as they are paid
IV. Income recognized when work is substantially complete and payment is reasonably assured

Answer 22

II and IV

Question 23

Tom is a carpenter. In November of the current year, he signs a contract to redo Tim and Susan’s basement but won’t do the work until March, which is when he will be paid. Assuming Tom uses the cash basis method of accounting, how much income will he include in the current year?
-Full amount
-Half
-One-quarter
-None

Answer 23

None

Using the cash basis method, Tom would wait until he received income to recognize it.

Question 24

Which of the following is not a distinguishing element of alimony?
-Payments must be in cash
-The payments must cease no later than the death of the payee spouse
-The couple cannot live together
-Payments cannot exceed 10% of the payee’s income

Answer 24

Payments cannot exceed 10% of the payee’s income

Question 25

Larry has been making monthly payments to Lisa in the amount of $500 for the past 2 years under a divorce agreement executed before December 31, 2018. Next month, Larry will begin paying Lisa only $200 per month because their one and only child turns 18. Given these facts, which of the following statements would be correct? -Larry was paying $300 per month in alimony -Larry will not be paying alimony next month -Larry’s child support payments were $300 per month -Larry’s child support payments were $200 per month

Answer 25

Larry’s child support payments were $300 per month Beginning next month, Larry will not make any more child support payments of $300. He will continue to make alimony payments of $200.per month.

Question 26

Which of the following statements is/are incorrect? -Regarding property settlements in divorce, there is no recognition of gain or loss. -In order to pay out retirement benefits between parties of a divorced couple, a qualified domestic relations order must be in place. -CFP® Certificants can draft QDROs even if they are not licensed to practice law. -For assets transferred in a property settlement, their tax character is retained from the prior owner.

Answer 26

CFP® Certificants can draft QDROs even if they are not licensed to practice law. It is illegal to practice law without a license.

Question 27

Grace is the daughter of Elisabeth and David, who divorced last year. David was granted custody, but Grace lives with Elisabeth in the summers. David has given Elisabeth a written agreement (Form 8332) that allows Elisabeth to claim Grace as a dependent. David and Elisabeth provide all of Grace's support. In the current year, Grace lived with her mother for 4 months and with David for 8 months. However, David sent Grace to live with David's mother for 4 months while he was in China on a business trip. Who gets to claim Grace as a dependent for the current year? -Elisabeth -David -David’s mom -No one can claim a deduction

Answer 27

Elisabeth Elisabeth and David provide all of Grace's support, Grace lives with David or Elisabeth at least 6 months out of the year and Elisabeth has a Form 8332 from David. Remember that there is no deduction for the dependency exemption from 2018 – 2025 but other tax benefits may apply.

Question 28

Dylan’s son, Connor, is informed of a hot stock tip but needs $8,000 to buy the requisite shares. Dylan decides to make an interest-free loan to Connor of $8,000 so that Connor can buy the shares. The current year’s annual Applicable Federal Rate is 5%. After 6 months, Connor sells the shares at a $900 gain and writes a check for $8,000 to Dylan in repayment of the loan. Connor’s net investment income for the year is $700. All transactions occur in the current tax year. Does Dylan have any imputed interest and if so, how much? -No. Dylan will have no imputed interest because of the size of the loan and the amount of Connor’s net investment income. -No. Dylan will have no imputed interest because the loan was for investment purposes. -No. Connor, not Dylan, will have imputed interest income of $200. -Yes. Since Connor earned $900 on the investment, Dylan will have imputed interest of $200. -Yes. Since Connor earned $900 on the investment, Dylan will have imputed interest of $400.

Answer 28

No. Dylan will have no imputed interest because of the size of the loan and the amount of Connor’s net investment income. No interest income is imputed to the lender if the below-market interest rate loan is less than $10,000 and the borrower’s net investment income is less than $1,000.

Question 29

Brenda Hill, age 56, is covered by a $180,000 group term life insurance policy on which her daughter is the beneficiary. Brenda’s employer pays the entire cost of the coverage. The Table I rate for Brenda is $0.43 per month per thousand. How much of the premium is taxable to Brenda for the year? -$0 -$51.60 -$430.00 -$670.80 -$928.80

Answer 29

$670.80

Question 30

Jim owns a qualified life annuity that will begin paying $2,000 monthly to him, beginning next month. He made no after-tax contributions to the annuity. The annuity is expected to return a cumulative 35% over Jim’s remaining lifetime. How much of each $2,000 payment must be included in Jim’s total (gross) income? -$0 -$700 -$1,300 -$2,000

Answer 30

$2,000 He has no income tax basis to recover so all of the payment is included in his total income

Question 31

The beneficiary of a life insurance policy may generally exclude the death benefit from gross income. -True -False

Answer 31

True Life insurance proceeds are generally excludable from gross income.

Question 32

Which of the following would result in taxable income? -Diane purchases the life insurance contract her father had taken out on her when she was 5 years old. -Tom’s neighbor dies, and unbeknownst to Tom, he was the beneficiary. -Shannon receives dividends from her life insurance policy. She paid more in premiums than cumulative dividends received. -Ryan buys the policy of the partner in his business for its cash value. He then pays annual premiums of $3,000 for the next five years until his partner dies. -None of the above

Answer 32

None of the above

Question 33

Shane, a client of yours, tells you his brother, Sam, can no longer afford to make the premium payments on a life insurance policy Sam took out on his wife. Shane would like to know what the immediate tax impact would be if he purchased the policy from Sam and assumed the premium payments. Shane would purchase the $500,000 policy for its cash value of $125,000 and pick up the premium payments of $3,000 annually. You tell Shane: -He would have no tax impact at any point because the policy was purchased from an immediate family member. -He would pay income taxes on the cash value now, and at the time of his sister-in-law’s death he would pay income taxes on the benefits. -He would have no immediate income tax liability but would most likely have to pay income taxes at the time of his sister-in-law’s death. -He would have to pay income taxes on the cash value now, and at the time of his sister-in-law’s, he would pay income taxes on the difference between his total premium payments and the $500,000 proceeds.

Answer 33

He would have no immediate income tax liability but would most likely have to pay income taxes at the time of his sister-in-law’s death. When his sister-in-law dies, Shane will have to pay income taxes on the benefits, less the amount paid to Sam to purchase the policy plus any subsequent premiums he paid after purchasing the policy. Therefore, if his sister-in-law had lived for 10 more years, Shane would include $345,000 ($500,000 - $125,000 - $30,000) as gross income.

Question 34

Megan is a terminally ill patient with increasing medical costs. She decides to purchase the $1 million life insurance policy her father owned on her life for its cash value of $200,000 and sell it to ABC Viaticals for $750,000. Which of the following is true? -There are no income tax consequences for any party because it is a viatical settlement. -Megan will have no income tax consequences, but upon her death, ABC Viaticals will pay income taxes on $250,000 ($1 million minus $750,000) less any subsequent premiums paid by ABC Viaticals. -Megan will have no income tax consequences, but upon her death, ABC Viaticals will pay income taxes on the full $1 million. -Megan will have to pay income taxes on the difference between the price she paid her father for the policy and the amount she received from ABC Viaticals.

Answer 34

Megan will have no income tax consequences, but upon her death, ABC Viaticals will pay income taxes on $250,000 ($1 million minus $750,000) less any subsequent premiums paid by ABC Viaticals. First, Megan can purchase the policy from her father tax-free (although her father may have a taxable gain). Second, Megan will not pay income taxes on the $750,000 she received from ABC Viaticals, but ABC will have to pay taxes on the death benefit they receive in excess of the amount they paid for Megan for the policy plus any subsequent premiums paid.

Question 35

Matt purchases his father’s $300,000 life insurance policy for the cash value of $120,000 and will assume the $2,000 annual premiums. Matt’s father dies ten years later. If Matt decides to take payment in the form of an annuity of $35,000 for 10 years, how much will be INCLUDED in gross income each year? -$5,000 -$14,000 -$15,000 -$21,000 -$30,000

Answer 35

$21,000 Matt bought the policy of his father and would therefore have to pay taxes on any amount exceeding his investment in the policy. His investment was the $120,000 he paid for the policy plus the ten years of premiums totaling $20,000. Therefore, the calculation for Matt’s exclusion ratio is: ($140,000 / $350,000) x $35,000 = $14,000. With $14,000 excluded from taxable income, Matt would have to include $21,000 each year as gross income.

Question 36

A client tells you he excluded from gross income the value of a computer his neighbor gave to him since the neighbor no longer needed it. Did your client make a mistake? -Yes -No

Answer 36

No Gifts are excluded from gross income.

Question 37

Which offers a better after-tax return for an individual with a 30% marginal tax rate? -3.5% Corporate bond -2.3% Municipal bond

Answer 37

3.5% Corporate bond The municipal bond offers a tax-equivalent yield of 3.3% (2.3/.70), so the corporate bond is still the better choice.

Question 38

Which of the following would be included in gross income? -A reimbursement for which an individual took a deduction in the previous year. -Reimbursement of actual long-term care expenses from a long-term care insurance contract -Payments of worker’s compensation -None of the above

Answer 38

A reimbursement for which an individual took a deduction in the previous year.

Question 39

A renter makes improvements with a fair market value of $15,000 to a home. The property owner accepts the improvements in lieu of rent from the renter. How much will the property owner include as taxable income when the house is sold in 3 years? -$0 -$5,000 -$10,000 -$15,000 -The value of the rent normally charged

Answer 39

$0 The property owner would have to include the $15,000 as gross rental income in the year the improvements are made because they were in lieu of rent.

Question 40

Any amount received by a student as a qualified scholarship or tuition reduction is excluded from gross income, provided it is not received as a payment for the student teaching, doing research, or providing other services. -True -False

Answer 40

True

Question 41

Which of the following would negate the excludability of interest used for qualified education expenses on a Series EE savings bond? -The owner of the bond is 31 years old -A married couple files separate returns -The bond is in the name of the adult -All of the above -None of the above

Answer 41

A married couple files separate returns Married couples must file joint returns.

Question 42

Individually-owned health insurance policies generally have no restrictions on the excludability of benefits from the beneficiary’s total income. -True -False

Answer 42

True

Question 43

Sherry’s job requires that, when she is at work, she must be at her desk the entire time. If her employer provides meals for her, does she include this amount as taxable income? -Yes -No

Answer 43

No Sherry would not need to include the cost of the meals because they are for the convenience of her employer.

Question 44

Continuing the previous question, Sherry’s job sometimes requires that she stay at a hotel next to the office in case there is a problem. Would she have to include the amount of the hotel in total income, assuming her company pays for it? -Yes -No

Answer 44

No Because her company requires that she stay at the hotel, Sherry does not have to include the value of the hotel room as total income.

Question 45

From his cafeteria plan, Jason selects the following: $2,000 in qualified benefits $1,750 in cash How much will Jason include as taxable income? -$1,750 -$2,000 -$3,750 -None of the above

Answer 45

$1,750 Jason must include only the cash benefits as taxable income.

Question 46

Which of the following, if any, must be included in total income? -Educational costs of less than $5,250 paid by an employer -Qualified expenses of $10,000 paid by an employer for an employee to adopt a child -Health insurance premiums paid by an employer -A 20% discount for all employees on entry to the amusement park at which they work -None of the above

Answer 46

None of the above These are all exclusions

Question 47

Tanya is the secretary at a spa where she can get massages free of charge that normally cost $100. How much should Tanya include as total income for each massage? -$0 -$20 -$80 -$100

Answer 47

$80 For services, the non-taxable amount is 20%.

Question 48

Which of the following statements is correct? -A $1,000 deduction from AGI benefits a taxpayer more than a $1,000 deduction for AGI. -The deductibility of contributions to a Traditional IRA is phased out based solely on a person’s filing status and modified AGI. -It is possible to make contributions to a Traditional IRA as long as the taxpayer has earned income.

Answer 48

It is possible to make contributions to a Traditional IRA as long as the taxpayer has earned income. There is no longer an age 70½ end date for contributions.

Question 49

A married couple, filing jointly, has modified AGI of $74,000 for the indexed year. All of their income is earned income. Both are active participants in an employer-sponsored retirement plan. They each make a $7,000 contribution to their respective Traditional IRAs. Their contributions are: -Fully Deductible -Partially Deductible -Nondeductible

Answer 49

Fully Deductible Their modified AGI is below the phase-out range.

Question 50

Your married clients Samson and Delilah file married filing jointly. Their modified AGI is $200,000 for the indexed year. All of their income is earned income. Delilah is an active participant in an employer-sponsored retirement plan, but Samson is not. They each make a $7,000 contribution to their respective Traditional IRAs. Which of the following best describes the deductibility of their Traditional IRA contributions? -Samson’s contribution is deductible, but Delilah’s is not. -Neither Samson’s nor Delilah’s contribution is deductible. -Delilah’s contribution is deductible, but Samson’s is not.

Answer 50

Samson’s contribution is deductible, but Delilah’s is not. Their married-filing-jointly modified AGI is too high for Delilah to deduct her contribution but not so high as to affect Samson’s deduction.

Question 51

Jarrod recently finished his second year at State University. His parents paid $4,000 in qualified student loan interest in the indexed year. All of the loan proceeds were used for Jarrod’s tuition, room, and board. The parents’ modified AGI is $100,000. What amount will Jarrod’s parents enter as their deduction for student loan interest? -$0 -$2,000 -$2,500 -$3,500 -$4,000

Answer 51

$2,500

Question 52

Which of the following statements regarding the self-employment tax is correct? -None of the self-employment tax paid is deductible for Federal income tax purposes. -The Medicare portion of the self-employment tax is 2.9% and is payable on net earnings from self-employment up to the Social Security Taxable Wage Base. -The Social Security portion of the self-employment tax is 12.4% and is payable on net earnings from self-employment up to the Social Security Taxable Wage Base. -The 0.9% Medicare Surtax must be paid on 100% of net earnings from self-employment. -All of the above are correct.

Answer 52

The Social Security portion of the self-employment tax is 12.4% and is payable on net earnings from self-employment up to the Social Security Taxable Wage Base. The Social Security portion of the self-employment tax is 12.4% of net earnings from self-employment up to the Social Security Taxable Wage Base.

Question 53

Employees are generally allowed a 100% deduction for adjusted gross income (AGI) for any health insurance premiums they pay. -True -False

Answer 53

False Only self-employed taxpayers may take this deduction for AGI.

Question 54

From the following list, identify the nondeductible items. I. Payment of alimony (divorce decree executed in 2017) II. Interest paid on a qualified student loan up to a limit III. Self-employed health insurance premiums paid IV. Child support payments V. Contributions to a traditional IRA (assume the taxpayer is not an active participant in an employer-sponsored retirement plan)

Answer 54

IV only Child support payments are never deductible.

Question 55

From the basic tax formula, put the following list in the correct order of when each is calculated. I. Adjusted gross income II. Tentative tax III. Tax liability IV. Total income V. Taxable income

Answer 55

IV, I, V, II, III

Question 56

When calculating a taxpayer’s taxable income, the taxpayer will deduct the standard deduction before deducting any itemized deductions. -True -False

Answer 56

False Neither one comes before the other. Taxpayers will deduct either the standard deduction or itemized deductions.

Question 57

Jim’s AGI is $200,000 for the 2022 tax year in which he had $9,000 of unreimbursed qualifying medical expenses. How much will Jim (age 50) be able to deduct as an itemized medical deduction? -$0 -$900 -$4,500 -$9,000

Answer 57

$0 Medical expenses must exceed 7.5% of AGI (2022) before they may be deductible.

Question 58

Which of the following would NOT be a possible itemized deduction? I. State income taxes II. Real estate taxes III. Personal interest IV. Personal property assessments V. Personal property taxes

Answer 58

III and IV Both personal interest and assessments are not deductible.

Question 59

There are two types of deductible interest. Points are deductible in which type? -Investment interest -Home mortgage interest -Personal interest -Business interest

Answer 59

Home mortgage interest Points are included in the deductibility of home mortgage interest.

Question 60

Jeremy is currently filing his tax return for the current year but is not sure which deductions he can take. He executed a binding contract to purchase a primary residence on April 10, 2018. In June 2018, Jeremy took out a $1,000,000 mortgage to buy the home. Jeremy took out a $45,000 home equity loan on his home to purchase a car for his wife in September 2018. Which of the following most correctly states the deductibility of Jeremy’s home mortgage interest for the current year? -Interest on $1,045,000 in home acquisition debt. -Interest on $1,000,000 in home acquisition debt. -Interest on $750,000 in home acquisition debt. -Interest on $705,000 in home acquisition debt.

Answer 60

Interest on $750,000 in home acquisition debt.

Question 61

Your client Jane Deaux owns a qualified business for purposes of §199A. Her QBI is $100,000. She received $12,500 in PTP income and $7,500 in REIT dividends. What is her QBI component? -$100,000 -$110,000 -$118,000 -$120,000

Answer 61

$120,000 The QBI component is QBI + REIT dividends + PTP interest income.

Question 62

Jane Deaux’s taxable income is $175,000 before the QBI deduction. Her taxable income includes net capital gains of $12,000, interest income of $6,000 and dividends from common stocks of $4,000. Her adjusted taxable income is

Answer 62

$153,000 Adjusted taxable income = taxable income before QBI deduction less the sum of net capital gains, interest income, and dividends).

Question 63

Contributions to which of the following would NOT be considered a charitable contribution? -The First Church of Denver -Parks and Recreation of Atlanta -The Nashville Public Library -The Governor’s Re-Election Campaign -Nonprofit hospitals

Answer 63

The Governor’s Re-Election Campaign Contributions to candidates for public office are not charitable contributions because the donation is not made with the intention of use for public purposes only.

Question 64

Sarah needs to know what she can deduct from the following list of charitable activities this year. What would be her deductible amount for each of the following? *A $5,000 contribution to her alma mater for which she received the right to purchase reserved tickets to football games. *$300 to attend a dinner to raise money for children’s sports. The dinner was valued at $35. *$50 per month in gas to drive to the homeless shelter where she volunteers (she does not take a charitable mileage deduction). -All $5,000 for the contribution to her alma mater, all $300 for the dinner, and the entire $50 for gas -$4,000 for her contribution to her alma mater, all $300 for the dinner, and all $50 for the gas -$4,000 for her contribution to her alma mater, $265 for the dinner, and $40 for the gas -$0 for her contribution to her alma mater, $265 for the dinner, and $50 for the gas -$5,000 for her contribution to her alma mater, $300 for the dinner, and $40 for the gas

Answer 64

$0 for her contribution to her alma mater, $265 for the dinner, and $50 for the gas Contributions that give the donor the right to purchase sporting event tickets may not be deducted after December 31, 2017.

Question 65

Terry donates $40,000 cash to the public library’s Future Needs Foundation, a private charity. Terry’s AGI is $130,000. How much of the $40,000 donation can Terry deduct from his taxable income for the year? -$0 -$12,000 -$28,000 -$39,000 -$40,000

Answer 65

$39,000 30% of $130,000 is $39,000.

Question 66

Jennifer donated $30,000 to charity this year; however, she was only able to deduct $15,000 of it. How long does she have to deduct the remaining $15,000? -Charitable contributions are only deductible in the year the contribution is made. -3 years -5 years -10 years

Answer 66

5 Years Taxpayers may carry over unused deductions for up to 5 years.

Question 67

Cynthia’s uninsured diamond earrings and necklace were stolen from her while on vacation this year. Their vacation was not in a qualified federally declared disaster area. The diamond jewelry was valued at $20,000. How much can she claim as an itemized deduction? -$0 -$17,000 -$17,500 -$17,900 -$20,000

Answer 67

$0 Theft of personal-use property is not deductible in tax years 2018 through 2025.

Question 68

Which of the following is partially or fully deductible for an individual with an AGI of $30,000 this year? The $30,000 includes $250 in gambling winnings. Assume all income, fees, expenses, losses, and damage occurred this year. -$750 for tax preparation fees -$800 in unreimbursed employee expenses -$250 in gambling losses -$4,000 of unreimbursed damage to the roof of the individual’s residence from a tornado (a federal disaster was not declared)

Answer 68

$250 in gambling losses Gambling losses can be claimed as a miscellaneous itemized deduction not subject to the 2% AGI floor but only to the extent of gambling winnings.

Question 69

Jill and Jack, two unrelated taxpayers, each own an LLC that is taxed as a sole proprietorship. Assume the following: *Each business generated qualified business income of $500,000 in the current year *Jill’s LLC manufactures products, and Jack’s LLC provides financial planning services *Each LLC paid $1,000,000 in compensation to non-owner employees *Each LLC owned assets with an unadjusted basis immediately after acquisition (UBIA) of $5,000,000 *Both Jill and Jack have adjusted taxable income above the upper limit of the QBI taxable income phase-out range Which of the following is true with respect to the QBI deduction? -Only Jack will be entitled to a QBI deduction. -Only Jill will be entitled to a QBI deduction. -Neither Jill nor Jack will be entitled to a QBI deduction. -Both Jill and Jack will be entitled to a QBI deduction.

Answer 69

Only Jill will be entitled to a QBI deduction. Jill is eligible for the QBI deduction despite having a taxable income greater than the upper limit of the phase-out range. Her business is not an SSTB, and her QBI deduction will be the lesser of 20% of QBI or an amount calculated based upon a percentage of compensation paid to non-owner employees and, potentially, a percentage of UBIA.

Question 70

How many general partners are required in a limited partnership? -There are no general partners in a limited partnership -One -Two or more

Answer 70

One Only one general partner is required for a limited partnership.

Question 71

General partnerships are not taxed as a separate entity but must file an informational Form 1065 with the IRS. -True -False

Answer 71

True

Question 72

Income from pass-through entities will flow through to the partners/owners via (the) __________. -K-1 statement -W-2 -Form 1175 -B-4 statement

Answer 72

K-1 statement The K-1 statement is where the income each partner or owner is due will appear.

Question 73

Which of the following business structures is taxed as a separate entity? -Sole proprietorship -General partnership -Limited partnership -C Corporation

Answer 73

C Corporation

Question 74

Derrick makes the following contributions in exchange for $10,000 of stock from ABC Corp. Select the answer that correctly lists Derrick’s tax treatment for each. I. $10,000 cash II. $10,000 in stock, valued at $6,000 when he purchased it III. A $10,000 truck with an outstanding loan of $3,000 IV. His services as an electrician – I- No immediate tax consequence; II - $4,000 in capital gains; III - $3,000 in capital gains; IV - $10,000 of income – I- No immediate tax consequences; II - $4,000 of ordinary income; III - $3,000 of capital gains; IV - $10,000 of income – I- No immediate tax consequence; II - $4,000 in capital gains; III - $3,000 of income; IV - $10,000 of income -I– No immediate tax consequence; II - $6,000 in capital gains; III - $7,000 of income; $10,000 of income

Answer 74

I- No immediate tax consequence; II - $4,000 in capital gains; III - $3,000 of income; IV - $10,000 of income

Question 75

Brian and Jamie purchased stock in XYZ Corp last year when it was worth $45,000. They sold the stock this year for $15,000. They have a taxable income of $120,000 before any capital loss deductions. Assume they had no other capital gains or losses. How much could they deduct in capital losses this year if the stock was ordinary stock? What if it was 1244 stock? -$3,000; $30,000 -$0; $3,000 -$3,000; $0 -$0; $30,000 -$0; $15,000

Answer 75

$3,000; $30,000 Up to $3,000 of capital losses may be used as a deduction against ordinary income. For a married couple, losses on up to $100,000 of 1244 stock may be deductible from ordinary income. Therefore, assuming Brian and Jamie had not previously deducted the $100,000, they could deduct $30,000 from their ordinary income.

Question 76

Dividends that do not exceed the company’s current or retained earnings are treated either as an ordinary or qualified dividend. -True -False

Answer 76

True

Question 77

Accumulated earnings not reinvested and not held for a valid business purpose are subject to an accumulated earnings tax penalty. -True -False

Answer 77

True The accumulated earnings tax is a tax on accumulated earnings above a specified limit held by a company.

Question 78

C Corporations are characterized by which of the following? -Perpetual life -Limited liability of shareholders -Separate taxable entity -None of the above -All of the above

Answer 78

All of the above

Question 79

Which of the following cannot qualify for pass-through taxation? -Sole proprietorship -General partnership -Limited liability company -C Corporation -Limited partnership

Answer 79

C Corporation

Question 80

Which of the following combinations would generally have the owner(s) subject to unlimited personal liability? I. Sole proprietor of a Sole Proprietorship II. General partner(s) of a Limited Partnership III. General partner(s) of a General Partnership IV. Shareholder(s) of a C Corporation V. Shareholder(s) of an S Corporation VI. Member(s) of Limited Liability Company -I, II, V, and VI -I, II, and III -II, III, and VI -IV, V, and VI

Answer 80

I, II, and III Sole proprietors and general partners in both general partnerships and limited partnerships have unlimited personal liability.

Question 81

Ryan’s company has 25 shareholders, all of whom have equal rights on liquidation and distribution of the company and are all citizens of the United States. All income is passed through to the owners of the company. What type of business entity does Ryan work for? -C Corporation -Sole Proprietorship -S Corporation -Limited liability company

Answer 81

S Corporation These are all identifying characteristics of an S Corporation.

Question 82

An LLC must be taxed as a separate entity for income tax purposes. -True -False

Answer 82

LLCs may choose either a pass-through form or a non-pass-through form.

Question 83

Personal holding companies are subject to a second penalty tax while personal service corporations must be 50% employee-owned and are taxed at a flat 21% rate on income. -True -False

Answer 83

True

Question 84

Which of the following is/are characterized by unlimited personal liability? I. Sole Proprietorship II. General Partnership III. S Corporation IV. LLC -I only -I and II only -I, II, and IV -I and III

Answer 84

I and II only

Question 85

A client has come to you for advice on starting a business. The client is looking to be protected from personal liability but also to pay company income taxes separate from his personal income taxes. From this information only, which of the following forms of ownership would you suggest? -C Corporation -S Corporation -Limited Liability Company -Limited partner in a limited partnership

Answer 85

C Corporation

Question 86

Identify the key differences between a C Corporation and an S Corporation by selecting the correct form of ownership from the drop-down boxes. Can have more than one class of stock

Answer 86

C Corporation

Question 87

Identify the key differences between a C Corporation and an S Corporation by selecting the correct form of ownership from the drop-down boxes. May have more than 100 shareholders

Answer 87

C Corporation

Question 88

Identify the key differences between a C Corporation and an S Corporation by selecting the correct form of ownership from the drop-down boxes. May have non-resident shareholders

Answer 88

C Corporation

Question 89

Identify the key differences between a C Corporation and an S Corporation by selecting the correct form of ownership from the drop-down boxes. Pays corporate income taxes

Answer 89

C Corporation

Question 90

Identify the key differences between a C Corporation and an S Corporation by selecting the correct form of ownership from the drop-down boxes. Has passive investment income restrictions

Answer 90

S Corporation

Question 91

Identify the key differences between a C Corporation and an S Corporation by selecting the correct form of ownership from the drop-down boxes. Losses of the company are not reflected on personal income statement of shareholders

Answer 91

C Corporation

Question 92

Browne Consulting is an LLC with 5 members and 13 total employees. In a Cross-Purchase Agreement, how many insurance policies are necessary? -5 -13 -20 -156

Answer 92

20 Because each member must buy a policy on the other, 20 policies (5 x (5-1)) are necessary.

Question 93

A Stock-Redemption Agreement is made simple by the fact that: -Each owner purchases the shares of a deceased owner -Each owner has to purchase a life insurance policy on every other owner -The company purchases one life insurance policy on each of the owners -Capital gains taxes are potentially reduced when compared to a Cross-Purchase Agreement.

Answer 93

The company purchases one life insurance policy on each of the owners This is a distinct advantage, especially in businesses with many owners.

Question 94

For which method of accounting would the deduction of bad business debts from taxable income not be applicable? -Cash method -Accrual method

Answer 94

Cash Method If income is never recognized, no deduction is necessary.

Question 95

Moe’s Carpentry charges Dale $500 to replace his bathroom floor. Per the terms of their agreement, Dale will pay $250 when the work is initiated and the remaining $250 when the work is finished. If Moe reports all $500 as income when the contract was signed, how will he report the loss of $250 if Dale does not make the second payment? -As a short-term capital loss -As a long-term capital loss -As a deduction against ordinary income -As a deduction against total tax liability

Answer 95

As a deduction against ordinary income Business bad debts are treated as a deduction against ordinary income. In this case, Moe would deduct the $250 he previously recognized.

Question 96

Continuing the previous example, assume the contract was initiated in December of Year 1 but was not supposed to be finished until early Year 2. Could Moe take a deduction on his Year 1 tax return for the $250 he has yet to receive from Dale? -No. Because the obligation for Dale to pay had not yet been breached by the end of Year 1. -No. Because he received partial payment, he could not deduct any amount. -Yes. But only if Dale had already informed Moe that he would not be paying the remaining $250. -Yes. If Dale had recognized the $250 as income, it does not matter when he is expecting to receive payment. Any time income is reported but not received, a deduction is allowed.

Answer 96

No. Because the obligation for Dale to pay had not yet been breached by the end of Year 1. The year of worthlessness, identified as the point when the debtor-creditor obligation is breached, would be Year 2 in this example. Dale has not broken his obligation to pay Moe by the end of Year 1 and, therefore, Moe cannot take a deduction.

Question 97

Martin purchased 50 shares of Jimbo Corporation in June of Year 1 for $33 per share. On March 2, Year 2, Jimbo Corp went out of business, rendering the stock worthless. On what date is the worthlessness of the stock recognized and how is Martin’s loss treated? -March 2, Year 2; Short-term capital loss -March 31, Year 2; Short-term capital loss -December 31, Year 1; Deduction against ordinary income -December 31, Year 2; Long-term capital loss

Answer 97

December 31, Year 2; Long-term capital loss

Question 98

Which of the following expenses would NOT be considered a fully deductible business expense? -An expense other similar businesses would not normally incur -$3,000 paid for an ink pen -The purchase of a keyboard ten years prior -All of the above

Answer 98

All of the above

Question 99

The CEO of Branyan Corporation, a publicly traded corporation, is paid a $3 million salary in the current year. How much of this is deductible by Branyan as a business expense? -All $3 million. Salaries are a deductible expense. -None. Salaries for senior executives are never deductible. -$1 million. Annual compensation paid to the CEO of $1,000,000 or less is generally deductible. -$1.5 million. One-half of employee compensation is deductible.

Answer 99

$1 million. Annual compensation paid to the CEO of $1,000,000 or less is generally deductible. A $1 million limitation is placed on the deductibility of compensation paid to a covered person, including the CEO, of a publicly traded corporation.

Question 100

Which of the following was not acknowledged as one of the key elements identifying a business or trade? -Total income exceeds deductions for 3 out of 5 years -Intent to make a profit -Regularity and continuity in activity -Business structure

Answer 100

Business structure

Question 101

Gil runs an accounting firm out of his home. A few years ago he purchased a copier for the business. It just recently started having problems printing color copies. It will cost $200 to fix the copier. Gil decides it’s time for a new copier and purchases one for $1,800. How is the $1,800 expenditure treated? -Because the copier was broken, Gil can deduct the entire $1,800 expenditure this year. -Because Gil purchased a new copier, the $1,800 expenditure would be treated as a capital expenditure and he must depreciate the expenditure over the life of the copier. -Because the first copier was still working, Gil can only deduct the expense greater than the cost to repair it. Therefore, Gil can deduct $1,600 but must do so over the life of the copier. -Because the copier was still working, Gil couldn’t deduct any of the expense.

Answer 101

Because Gil purchased a new copier, the $1,800 expenditure would be treated as a capital expenditure and he must depreciate the expenditure over the life of the copier. Capital expenditures are those outlays to acquire or improve property that will have a useful life greater than one year. In this case, Gil is purchasing a copier that will have a useful life greater than one year.

Question 102

Weiss Enterprises signs a $3 million contract in June Year 1 to construct a new office building. The project is scheduled to be completed in March of Year 4 at a cost to Weiss of $2,100,000. Actual costs resulted as follows: Year 1: $400,000 Year 2: $650,000 Year 3: $700,000 Year 4: $350,000 Using the percentage of completion method, how much gross profit will Weiss Enterprises report in Year 3? -$0 -$50,000 -$300,000 -$400,000 -Weiss Enterprise cannot use the percentage of completion method

Answer 102

$300,000 With one-third of the estimated costs being incurred in Year 3, one-third of the revenue would be reported in Year 3, which is $1 million. Subtracting $700,000 from $1 million results in $300,000.

Question 103

How much gross profit would Weiss Enterprises report in Year 3 if they elected instead to use the completed contract method? -$0 -$50,000 -$300,000 -$400,000 -Weiss Enterprises cannot use the completed contract method.

Answer 103

Weiss Enterprises cannot use the completed contract method. His contract is for greater than 2 years. The percentage of completion method must be used.

Question 104

Which inventory cost flow assumption would result in lower taxable income for an accrual basis taxpayer when the price of inventories is falling? -LIFO -FIFO

Answer 104

FIFO

Question 105

Mike sells tiki dolls to tourists for $15 each. This last period he bought 50 tiki dolls from his supplier at a cost of $7, which was $2 higher than he had previously paid for them. If Mike uses accrual basis tax accounting and accounts for his inventories at the end of each period using FIFO, how much taxable income would he report this last period if he sold 55 tiki dolls and had an ending inventory of 25? -$450 -$490 -$500 -$600

Answer 105

$500 After purchasing 50 tiki dolls, selling 55, and having an ending inventory of 25, we can deduce that Mike had a beginning inventory of 30 tiki dolls. We can also establish that Mike’s beginning inventory was acquired for $5 each. With all this information, we can do the math. Mike had $825 in revenue, from which the cost of 30 tiki dolls at $5 each and the cost of 25 tiki dolls at $7 each is subtracted, leaving us with $500 in taxable income.

Question 106

For the following terms, indicate the letter corresponding to the type of property involved: A. Tangible property B. Intangible property C. Natural Resources -Amortization -Depreciation -Depletion

Answer 106

Intangible Property- Amortization Tangible Property-Depreciation Natural Resources- Depletion

Question 107

To qualify for depreciation, property must meet all of the following conditions EXCEPT: -It must have a limited life -The taxpayer must own the property -The taxpayer must have an adjusted basis in the property -The property must be used in the taxpayer’s business or be used for the production of income -No exception listed

Answer 107

No exception listed All the conditions listed must be met.

Question 108

A business owner purchases a truck for his business at a price of $30,000. It has a life of 5 years, with a salvage value of $5,000. Using straight-line depreciation, what is the adjusted basis in the property after three years? Assume the taxpayer chose not to take a Section 179 immediate expense or bonus depreciation. -$30,000 -$25,000 -$20,000 -$15,000 -$5,000

Answer 108

$15,000 $30,000 - 5,000 salvage value = $25,000 depreciable basis. Since $25,000 is to be depreciated over 5 years, the owner depreciates $5,000 per year. 3 x $5,000 = $15,000. $30,000 - $15,000 = $15,000.

Question 109

A business purchases a warehouse ($500,000 of depreciable real property) on the first of March Year 1. The business operates on a fiscal year ending 6/30/Year 1. How much depreciation will the business be able to deduct for the fiscal year ending 6/30/Year 1? -$4,274 -$3,205 -$3,744 -$12,821 -No partial year depreciation can be taken in the year of purchase

Answer 109

$3,744 3½ months of depreciation = $500,000 divided by 39 = $12,821 of depreciation per year. 3½ (mid-month convention) divided by 12 = .292 or 29.2%. .292 x $12,821 = $3,744

Question 110

Your client’s business has taxable income before depreciation deductions of $3,000,000 in 2024. Code Section 179 allows a maximum immediate expensing in the current year of: -Up to $1,220,000 of business use real property acquired during the year, such as commercial buildings -Up to $1,220,000 of business use tangible personal property acquired during the year, such as bulldozers -Up to $3,050,000 of business use tangible personal property acquired during the year, such as bulldozers

Answer 110

Up to $1,220,000 of business use tangible personal property acquired during the year, such as bulldozers

Question 111

Typically, any depreciation that is recovered on Section 1245 property upon sale is taxed as ordinary income. -True -False

Answer 111

True

Question 112

Goodwill can be amortized only if it is purchased, not if it is self-created. -True -False

Answer 112

True

Question 113

Between the cost depletion method and the percentage depletion method, taxpayers must use the method that results in the smallest depletion amount for a given year. -True -False

Answer 113

False Actually, taxpayers are to use the method resulting in the highest depletion.

Question 114

Jerry is an employee of a computer consulting company. A client hired Jerry in the current year to be available for a 24-hour period to fix the client’s computers. Assuming the client allows Jerry to stay at an adjacent hotel for 6 of the 24 hours, would the hotel cost be a deductible unreimbursed employee expense for Jerry if he was not reimbursed by his company? Select the most correct answer. -No. It is not deductible because Jerry’s company did not offer reimbursement. -Yes. It is deductible because Jerry will not be away from home for more than 24 hours. -Yes. It is deductible because he will be on call for longer than 12 hours. -No. It is not deductible because the 2% Miscellaneous Itemized Deduction category is repealed from 2018 through 2025.

Answer 114

No. It is not deductible because the 2% Miscellaneous Itemized Deduction category is repealed from 2018 through 2025. While it would most certainly be reasonable to expect Jerry to need some time to rest and/or sleep over a 24-hour period, the 2% Miscellaneous Itemized Deduction is repealed from 2018 through 2025.

Question 115

Richard, from Florida, is planning a trip to Las Vegas in the current year to attend a work-related conference. All of his time will be spent on business-related activities. His employer will reimburse him for 75% of the expenses. Which of the following, if any, unreimbursed expenses will Rick be able to deduct as a 2% Miscellaneous Itemized Deduction in the current year? -25% of cost of the airfare -25% of the total cost of the hotel room -25% of cost of a rental car -None of the above

Answer 115

None of the above 2% Miscellaneous Itemized Deductions such as unreimbursed employee travel expenses are not deductible from 2018 through 2025.

Question 116

Steve is an Emergency Medical Technician and is required to attend a class every year to continue to be certified as such. Steve may deduct the unreimbursed costs of the class in the current year. -True -False

Answer 116

False 2% Miscellaneous Itemized Deductions such as unreimbursed employee education expenses are not deductible from 2018 through 2025.

Question 117

Trey, an employee, takes two customers of his firm to lunch during the current year to discuss a possible business deal. After lunch, Trey gives both customers a ticket to the basketball game that evening but doesn’t go with them. Trey paid for the lunch and the tickets with his own money and his employer did not reimburse him. Given the following costs, how much can Trey deduct as an itemized deduction? $50 total for the lunch $200 total for tickets with a face value of $70 each -$0 -$50 -$95 -$190 -$250

Answer 117

0% 2% Miscellaneous Itemized Deductions such as unreimbursed client entertainment expenses are not deductible from 2018 through 2025.

Question 118

Which of the following is NOT one of the tests for “material participation” found in the regulations dealing with passive activities? -500-Hour Test -100-Hour Test -Five Out of Seven Years Test -Personal Services Activity Test -“Substantially All Activity” Test

Answer 118

Five Out of Seven Years Test It is a “five out of ten years test,” not a “five out of seven years test.”

Question 119

An architect agreed to contribute all the architectural plans for a real estate investment as his investment in the project. The architect spent a total of 600 hours in year 1 providing the plans, with no other activity in subsequent years. Based on this information, the architect would be considered as materially participating in the project and exempt from the passive income rules, for which years: -Year 1 only -Year 1, Year 2, and Year 3 only -Year 1 and Year 2 only -Year 1 and all subsequent years

Answer 119

Year 1 only The architect materially participated in Year 1 by providing 600 hours of activity.

Question 120

Your client Drew invested $25,000 into a limited partnership (LP) interest in Omega, LP. He receives an allocated loss of $40,000 from Omega, LP. Given that Drew has $50,000 of passive income from other passive investments and no other passive losses, how much of the loss can Drew deduct in the first year? -$0 -$25,000 -$40,000

Answer 120

$25,000 The deduction is limited to the lower of the amount at risk or the amount of passive income. His deduction is limited to the amount at risk in this question. Unless directed otherwise, assume that an investor in a passive interest is not personally active in the business.

Question 121

Ray invests $75,000 into a limited partnership (LP) interest in Gamma, LP, and $50,000 into a limited partnership interest in Alpha, LP. In the first year, Gamma LP allocates $50,000 in losses to Ray and Alpha LP allocates $20,000 of income to Ray. How much of the $50,000 loss is deductible in the first year? -$0 -$20,000 -$50,000

Answer 121

$20,000 The deduction is limited to the lower of the amount at risk or the amount of passive income. His deduction is limited to the amount of passive income in this question. Unless directed otherwise, assume that an investor in a passive interest is not personally active in the business.

Question 122

Warren owns a piece of rental property and is not a real estate professional. He and his wife file as married filing jointly. During the year, he had rental income of $10,000 and expenses associated with the property of $40,000. There was no other rental income or passive income during the year. How much can be deducted on Warren’s tax return for the year if his AGI is $95,000? -$0 -$10,000 -$25,000 -$30,000 -$40,000

Answer 122

$25,000 Warren must first net the loss against rental income, leaving a balance of $30,000. Since $25,000 is exempt from the passive income rules, he may then deduct $25,000 from other income. The deduction does not begin to phase out until Warren’s AGI reaches $100,000.

Question 123

AMT applies to individuals, trusts, and estates but not to C corporations. -True -False

Answer 123

True

Question 124

If the AMT calculation is higher than the regular income tax calculation, then the taxpayer must pay the difference in addition to the regular income tax. If the AMT calculation is less than the regular income tax calculation, then the taxpayer receives an immediate credit against the regular income tax by the amount of the difference. -True -False

Answer 124

False The AMT calculation may cause the tax payment to increase but will not decrease it.

Question 125

Unlike the regular income tax, the AMT exclusion and phase-out ranges are not indexed for inflation. -True -False

Answer 125

False These AMT factors are indexed for inflation.

Question 126

How many tax rates are there for calculating AMT? -One -Two -Three -Four -Five

Answer 126

Two

Question 127

Which of the following could reduce AMTI? -Tax-exempt interest on private activity bonds -Intangible drilling costs in excess of a percentage of net income from the wells -Exercise of incentive stock options -State income tax refund from the prior year

Answer 127

State income tax refund from the prior year

Question 128

In the current year, a couple filing jointly with $85,000 of AGI paid $5,000 in state income taxes. They are able to deduct $5,000 of state income tax expenses for regular income tax purposes on Schedule A of form 1040. This will result in an adjustment when calculating AMTI of: -$7,000 -$5,000 -$3,000 -$2,000 -$0

Answer 128

$5,000 State and local taxes are not deductible for AMT purposes.

Question 129

Tax credits are dollar-for-dollar reductions of a taxpayer’s tax liability. -True -False

Answer 129

True

Question 130

Which of the following tax credits, if any, could possibly reduce a taxpayer’s total tax liability below zero? -Credit for the Elderly or Disabled -Adoption Tax Credit -Lifetime Learning Credit -Foreign Tax Credit -None of the above

Answer 130

None of the above These are non-refundable credits. Only refundable tax credits can reduce a taxpayer’s total tax liability below zero.

Question 131

Emily’s job requires that she put her three children, all under the age of 10, in daycare. She is unmarried and files as Head of Household. Emily paid qualifying childcare expenses of $4,000 for each child in the current year. She earns annual compensation of $55,000. Her Child Care Credit rate is 35% based on her adjusted gross income. Her employer does not offer a dependent care assistance plan or dependent care flexible spending account. How much may she claim as a Child Care Credit for the current year ? -$19,250 -$4,200 -$2,100 -None of the above

Answer 131

$2,100 She may take a 35% credit on the lesser of her compensation ($55,000), a statutory amount ($6,000), or actual qualifying expenses paid ($12,000). Her credit is 35% x $6,000.

Question 132

Which of the following credits, if any, is available to persons at every level of income? -Earned Income Tax Credit -Credit for the Elderly or Disabled -Adoption Expense Credit -None of the above

Answer 132

None of the above

Question 133

Which of the following forms is used by employers to inform the IRS of their employees’ salaries for the year? -W-2 -SS-4 -W-3 -W-4

Answer 133

W-3

Question 134

Madden Incorporated purchased a furnished office building at a total cost of $350,000. The fair market value of the building and furniture is $300,000 and $75,000, respectively. What is Madden Incorporated’s cost basis for each? -$275,000 / $75,000 -$280,000 / $70,000 -$300,000 / $50,000 -$300,000 / $75,000 -$350,000 / $75,000

Answer 134

$280,000 / $70,000 Here is the calculation. $300,000 + $75,000 = $375,000 $300,000 / $375,000 = .80 .80 x $350,000 = $280,000 .20 x $350,000 = $70,000

Question 135

Madden Incorporated owned the building for five years, during which time the following occurred: *The building (not the furniture) was depreciated $8,000 per year. *The fair market value of the building increased by $30,000. *A $2,500 security system was installed. *The elevator was repaired annually at a total cost of $5,000. At the end of the five-year period, what is Madden Inc.’s adjusted basis in the building? -$242,500 -$247,500 -$272,500 -$274,500 -$317,500

Answer 135

$242,500 Here is the calculation: Cost basis: $280,000 Capital additions: + $2,500 Capital returns: - $40,000 ($8,000 x 5) Adjusted basis: $242,500

Question 136

If Madden Incorporated sold the building at its fair market value, what would its realized gain be? Hint: The furniture was not included in the sale. -$30,000 -$45,500 -$65,500 -$87,500

Answer 136

$87,500 The realized gain is equal to the fair market value ($300,000 + $30,000) minus the adjusted basis ($242,500). Therefore, Madden Incorporated would have realized a gain on the sale of the building of $87,500.

Question 137

When gifting gain property (fair market value > donor’s basis at gift date), the donee generally takes a carryover basis from the donor. -True -False

Answer 137

True Carryover basis applies to gifts of gain property.

Question 138

Ted paid $5,000 for a diamond necklace. Ten years later, it was valued at $15,000 when he gave it to his niece as a college graduation present. She in turn, sells the necklace five years later for $13,000. What is her gain or loss? -No gain or loss -$2,000 loss -$2,000 gain -$8,000 gain

Answer 138

$8,000 gain The gifted property is gain property. Ted’s basis is $5,000, which transfers to his niece as a carryover basis. She sells the necklace for $13,000; thus, she has an $8,000 gain.

Question 139

Whatif the FMV of the necklace in Question 2 had been $3,000 when he gave it to her and she later sold it for $2,500? What is her gain or loss? -No gain or loss -$500 loss -$2,500 loss -$500 gain

Answer 139

$500 loss The FMV at the gift date would be the basis for calculating the loss. The property is loss property.

Question 140

Warren, an unmarried taxpayer, owned a vacation home in Florida for 40 years. He gifted the home to his grandson Eric in the current year and, at the date of the gift, had no Basic Exclusion Amount remaining. He made no other gifts during the current year that would have qualified for annual gift tax exclusion treatment. Assuming the following facts, what is Eric’s basis in the home immediately after the gift? Warren’s adjusted basis at the date of the gift = $125,000 Fair market value on the date of the gift = $471,000 Current year annual gift tax exclusion = $19,000 Gift tax paid = $180,800 -$471,000 -$346,000 -$263,400 -$180,800

Answer 140

$263,400 2024 Calculation Unrealized appreciation = $346,000 (calculated as 471,000 – 125,000) Taxable gift = $452,000 (calculated as 471,000 – 19,000) Gift tax = $180,800 (40% of taxable gift) Calculation: (346,000 / 452,000) x 180,800= 138,400 138,400 + 125,000 = $263,400

Question 141

Myles owns property valued at $130,000 that he gifts to his friend Gilmore. Gilmore’s basis in the property becomes Myles’ previous basis of $55,000. Unfortunately, within a year of the gift, Gilmore passes away. In his will, Gilmore returns the property to Myles. The property is still valued at $130,000 when Gilmore dies, but increases in value to $140,000 by six months later. If Gilmore’s attorney decides to value Gilmore’s estate using the alternative valuation date, what is Myles’ new basis in the property? -$75,000 -$130,000 -$140,000 -None of the above

Answer 141

None of the above Myles’ new basis would be the same as his original basis because this would be a deathbed transfer back to the owner within one year.

Question 142

Personal use property valued at $250,000 is converted to business use. The basis in the property was $130,000. If the property is later sold for more than $250,000, what will the basis for calculating the gain be? -$120,000 -$130,000 -$250,000 -There will be no reported gain -None of the above

Answer 142

$130,000 The basis for determining a gain will be the adjusted basis on the date of conversion.

Question 143

Barry purchases a $15 option to purchase stock but sells it prior to the exercise date for $25. What would Barry report for this transaction? -$10 capital gain -$10 ordinary gain -$25 capital gain -$25 ordinary gain

Answer 143

$10 capital gain

Question 144

The sale of a patent generally results in long-term capital gains treatment for the seller. -True -False

Answer 144

True

Question 145

Happy Burger is a national franchise. Matt eats there every day for lunch and thinks there is potential for one in his neighborhood. Matt inquires with Happy Burger about the cost of opening and operating a restaurant and is informed that Happy Burger charges a one-time fee of $450,000 plus annual fees of $30,000. If Matt decides to open a Happy Burger, how much will he be able to deduct in year 1 as a business expense? -$30,000 -$60,000 -$480,000 -None of the above

Answer 145

$60,000 Each year Matt would be able to deduct the $30,000 he must pay as an annual fee. In addition, Matt would amortize the $450,000 payment over 15 years, which equals $30,000 per year for the first 15 years.

Question 146

Devon owns a home that he rents to students throughout the year. His current tenants have three months remaining on their $1,000 per month lease. Devon has been approached to sell the home but must sell it immediately. He offers the tenants $4,000 to break the lease. If the students agreed, who would report the $4,000 as ordinary income? -Devon -Students -Neither

Answer 146

Neither The students would report $4,000 as a capital gain since the lease was a nondepreciable leasehold and therefore considered a capital asset.

Question 147

A married couple sells their home for $35,000 less than their basis. What will be reported? -No gain or loss -$35,000 deduction -$35,000 gain

Answer 147

No gain or loss The loss on the sale of a personal residence is not deductible; therefore, no deduction will take place.

Question 148

A married couple may exclude up to $_________ on the sale of a personal residence, provided it is their principal residence. -$125,000 -$250,000 -$500,000 -$1,000,000

Answer 148

$500,000

Question 149

Don owns land that is going to be used to build the new sports stadium. The city pays Don $225,000 for the land. For his involuntary conversion, Don has received: -Qualified replacement property -Compensation

Answer 149

Compensation

Question 150

The President declares the town of Springfield a disaster area after a hurricane destroyed most of the town. Marilyn was given a check by her insurance company in the amount of $300,000 to replace the vacation home she had bought there 15 years prior. Her basis in the home was $180,000. The next year, Marilyn purchases a new vacation home for $350,000. If she makes the involuntary conversion election, Marilyn will have to recognize a gain of how much in the year she purchases the home? -$170,000 -$120,000 -$50,000 -$0

Answer 150

$0 Because Marilyn took the involuntary conversion election, she will not have to recognize a gain when she purchases her new home, provided she does so within four years.

Question 151

Had Marilyn kept the money, or had she been given qualified replacement property, Marilyn would have had to recognize the gain immediately. -True -False

Answer 151

False If Marilyn kept the cash and did not buy replacement property, she would have to recognize the gain. However, if she was given qualified replacement property, Marilyn would have to defer the gain.

Question 152

Ted owns a home that has been condemned. He has no insurance on the home. For the loss to be deductible, would it matter if the home was his personal residence versus being used solely as a place of business? -Yes -No

Answer 152

Yes The loss of property used in a trade or business, or held for the production of income, is deductible. However, the loss of personal property as a result of condemnation is not deductible.

Question 153

An exchange of like-class stock between two persons is considered a like-kind exchange and, therefore, gains may be deferred. -True -False

Answer 153

False Only real property qualifies for like-kind exchange treatment.

Question 154

Scott owns a building with an adjusted basis of $50,000 and a fair market value of $120,000. Jason owns a similar building with an adjusted basis of $45,000 and a fair market value of $135,000. The two exchange properties and Scott gives Jason $15,000 in cash. Which of the following is correct? -Jason has a recognized gain of $90,000 -Scott realizes a gain of $70,000 -Scott recognizes a gain of $70,000 -Jason realizes a gain of $15,000 -All of the above are correct

Answer 154

Scott realizes a gain of $70,000 Scott exchanged a building with a basis of $50,000 for a building with a fair market value of $135,000. In addition, he gave up cash in the amount of $15,000. Therefore, Scott has realized a gain of $70,000 ($135,000 - $50,000 - $15,000).

Question 155

While married, exchanges between U.S. citizen spouses will not result in the recognition of a gain. However, when property is exchanged in a divorce, recognition is required. -True -False

Answer 155

False When property is exchanged pursuant to a divorce, recognition of gain or loss is not necessary. The recognition is deferred.