Individual Taxation Flashcards Preview

CPA - REG > Individual Taxation > Flashcards

Flashcards in Individual Taxation Deck (140):
1

The 2015 deduction by an individual taxpayer for interest on investment indebtedness is

  1. Limited to the investment interest paid in 2015.
  2. Limited to the taxpayer's 2015 interest income.
  3. Limited to the taxpayer's 2015 net investment income.
  4. Not limited.

Limited to the taxpayer's 2015 net investment income.

A noncorporate taxpayer's deduction for interest on investment indebtedness is limited to the taxpayer's net investment income. Interest on investment indebtedness is interest paid or accrued that is allocable to property held for investment.

2

John and Mary were divorced in 2014. The divorce decree provides that John pay alimony of $10,000 per year, to be reduced by 20% on their child's 18th birthday. During 2015, John paid $7,000 directly to Mary and $3,000 to Spring College for Mary's tuition.

What amount of these payments should be reported as income in Mary's 2015 income tax return?

  1. $5,600
  2. $8,000
  3. $8,600
  4. $10,000

$8,000

Alimony received by a taxpayer is included in that taxpayer's gross income and alimony paid by a taxpayer is deductible from that taxpayer's gross income. To be considered alimony, the payments must be made under a divorce or separation agreement. Payments to third parties (such as tuition, rent and mortgage) by the spouse paying alimony for the spouse receiving alimony receive the same treatment as cash payments.

John and Mary have a divorce decree stipulating $10,000 per year payments from John to Mary, but the amount decreases to $8,000 when their child reaches the age of 18 years. Due to this decrease, $2,000 of the $10,000 payment would be considered child support and, as a result, would not be reported by Mary as income. The remaining $8,000 would be considered alimony and, therefore, reported as income by Mary.

3

An individual received $50,000 during the current year pursuant to a divorce decree. A check for $25,000 was identified as annual alimony, checks totaling $10,000 as annual child support, and a check for $15,000 as a property settlement. What amount should be included in the individual's gross income?

  1. $50,000
  2. $40,000
  3. $25,000
  4. $0

$25,000

Alimony is included in the recipient's income, but child support payments and property settlements are not.

Also, remember that if the person shorts the alimony payments, for tax ordering rules, the payments are considered child support to the recipient first and thus not taxable. 

4

Porter was unemployed for part of the year in 2015. Porter received $35,000 in wages, $4,000 from a state unemployment compensation plan, and $2,000 from his former employer's company-paid supplemental unemployment benefit plan. What is the amount of Porter's gross income in 2015?

  1. $35,000
  2. $37,000
  3. $39,000
  4. $41,000

$41,000

Wages are included in gross income for the year in which they are received. Unemployment compensation is also included in gross income since it replaces income that would have been received if working. Therefore, the total amount included in gross income is $41,000.

5

Rental Income - Tax Treatment

  1. Advanced Deposit for last month of rent on lease
  2. Leasehold improvements

  1. Advanced Deposit for last month of rent on lease - taxable only if received without condition, i.e. will not be returned to lesses at end of the lease
  2. Leasehold improvements - only taxable income if received in lieu of rent.  

6

Under a "cafeteria plan" maintained by an employer,

  1. Participation must be restricted to employees, and their spouses and minor children.
  2. At least three years of service are required before an employee can participate in the plan.
  3. Participants may select their own menu of benefits.
  4. Provision may be made for deferred compensation other than 401(k) plans.

Participants may select their own menu of benefits.

Cafeteria plans allow employees to select from a menu of fringe benefits and cash and not include the value of the nontaxable benefits in their gross income. The requirements of cafeteria plans are: 

  1. all participants must be employees; 
  2. participants may choose between two or more benefits composed of cash or qualified benefits; 
  3. participants are required to make elections among the benefits; 
  4. the plan must be in writing and have certain specified information; 
  5. the plan may not provide participants with deferred income, except for under 401(k) plans.

7

Easel Co. has elected to reimburse employees for business expenses under a nonaccountable plan. Easel does not require employees to provide proof of expenses and allows employees to keep any amount not spent. Under the plan, Mel, an Easel employee for a full year, gets $400 per month for business automobile expenses. At the end of the year Mel informs Easel that the only business expense incurred was for business mileage of 12,000 at a rate of 30 cents per mile, the IRS standard mileage rate at the time. Mel encloses a check for $1,200 to refund the overpayment to Easel. What amounts should be reported in Mel's gross income for the year?

  1. $0
  2. $1,200
  3. $3,600
  4. $4,800

$4,800

Since this is not an accountable plan, all reimbursements are included in the employee's income ($400 x 12 months = $4,800) and all employee deductions will be 2% miscellaneous itemized deductions.

8

Johnson worked for ABC Co. and earned a salary of $100,000. Johnson also received, as a fringe benefit, group term-life insurance at twice Johnson's salary. The annual IRS-established uniform cost of insurance is $2.76 per $1,000. What amount must Johnson include in gross income?

  1. $100,000
  2. $100,276
  3. $100,414
  4. $100,552

$100,414

The first $50,000 of group-term life insurance provided by an employer is a tax-free fringe benefit. Johnson receives $200,000 of group-term life insurance, so $150,000 of this coverage is taxable. There are 150 units of $1,000 each of excess coverage, included in income at $2.76 for each unit. The income from the insurance coverage is $414 ($2.76 × $150). When the $414 is included with the $100,000 salary, gross income is $100,414.

9

Davidson was transferred from Chicago to Atlanta. In connection with the transfer, Davidson incurred the following moving expenses:

  • Moving the household goods $2,000
  • Temporary living expenses in Atlanta $400
  • Lodging on the way to Atlanta $100
  • Meals $40

What amount may Davidson deduct if the employer reimbursed Davidson $2,000 (not included in form W-2) for moving expenses?

  1. $100
  2. $120
  3. $500
  4. $520

$100

Qualified moving expenses are limited to the expenses for moving the household goods ($2,000) and lodging ($100). Meals are not deductible during a move and temporary living expenses are never deductible. The $2,100 of qualified expenses is reduced by the $2,000 reimbursement from the employer.

10

Which of the following conditions must be present for a payment to qualify as deductible alimony?

  1. Payments must be in cash.
  2. The payments must end no later than the recipient's death.

 

Both I and II

Alimony payments you make under a divorce or separation instrument, such as a divorce decree or a written agreement incident thereto, are deductible if all of the following requirements are met:

  • You and your spouse or former spouse do not file a joint return with each other,
  • You pay in cash (including checks or money orders),
  • The divorce or separation instrument does not say that the payment is not alimony,
  • If legally separated under a decree of divorce or separate maintenance, you and your former spouse are not members of the same household when you make the payment,
  • You have no liability to make any payment (in cash or property) after the death of your spouse or former spouse; and
  • Your payment is not treated as child support.

11

An individual taxpayer earned $10,000 in investment income, $8,000 in noninterest investment expenses, and $5,000 in investment interest expense. How much is the taxpayer allowed to deduct on the current-year's tax return for investment interest expenses?

  1. $0
  2. $2,000
  3. $3,000
  4. $5,000

$2,000

Investment interest expense is deductible to the extent of net investment income. Net investment income is defined as investment income ($10,000) less noninterest investment expenses ($8,000), or $2,000. So, $2,000 of the $5,000 of investment interest expense is deductible as an itemized deduction. The remaining $3,000 is carried over, indefinitely, and deducted in a year that has sufficient net investment income.

12

Carroll, an unmarried taxpayer with an adjusted gross income of $100,000, incurred and paid the following unreimbursed medical expenses for the year:

  • Doctor bills resulting from a serious fall$ $5,000
  • Cosmetic surgery that was necessary to correct a congenital deformity $15,000

Carroll had no medical insurance and is 60 years old. For regular income tax purposes, what was Carroll's maximum allowable medical expense deduction, after the applicable threshold limitation, for the year?

$10,000

Total allowable medical expenses is $20,000. Only medical expenses in excess of 10% of AGI are allowable as a deduction. Carrol's AGI is $100,000 x .010 = $10,000. Total expenses of $20,000 - $10,000 = $10,000 deductible expenses.

13

Stein, an unmarried taxpayer, had adjusted gross income of $80,000 for the year, and qualified to itemize deductions. Stein had no charitable contribution carryovers and only made one contribution during the year.

Stein donated stock, purchased seven years earlier for $17,000, to a tax-exempt educational organization. The stock was valued at $25,000 when it was contributed.

What is the amount of charitable contributions deductible on Stein's current year income tax return?

  1. $17,000
  2. $21,000
  3. $24,000
  4. $25,000

$24,000

Although Stein can deduct the fair market value (FMV) of $25,000 for the stock contributed, the deduction is limited to 30% of his AGI, $80,000.

Remember if property donated is LTCG property, the deduction is FMV, however the charitable contribution limit is lowered from the original 50% limitation of AGI to 30% of AGI

14

During the 2015 holiday season, Palo Corp. gave business gifts to 17 customers. These gifts, which were not of an advertising nature, had the following fair market values:

  • 4 at$ 10
  • 4 at$ 25
  • 4 at$ 50
  • 5 at$100

How much of these gifts was deductible as a business expense for 2015?

$365

The deduction for business gifts is limited to $25 per donee per year.

15

Abe Architect owns his own architectural consulting firm. During the current year he incurred the following expenses related to meetings with clients and potential clients:

  • Meal expenses $2,000
  • Dues to Five-Star Country Club $5,000
  • Greens fee for playing golf with clients $1,500
  • Tickets to Super Bowl (face value = $1,000) $3,500

What is the amount of deductible expenses for the current year related to these expenditures?

$2,250

Dues are not deductible. All of the other expenses are deductible but subject to the 50% limitation for meals and entertainment. Note that the deduction for the Super Bowl tickets is limited to the face value of the tickets, before the 50% limitation. The allowable deduction is $2,250 (($2,000 + $1,500 + $1,000) x 50%).

16

Baker, a sole proprietor CPA, has several clients that do business in Spain. While on a four-week vacation in Spain, Baker took a five-day seminar on Spanish business practices that cost $700. Baker's round-trip airfare to Spain was $600. While in Spain, Baker spent an average of $100 per day on accommodations, local travel, and other incidental expenses, for total expenses of $2,800.

What amount of educational expense can Baker deduct on Form 1040 Schedule C, "Profit or Loss From Business"?

$1,200

When traveling outside the U.S. primarily for vacation (4 weeks total versus 1 week seminar), the cost of the trip is a nondeductible personal expense. Baker can deduct the registration fees for the business seminar and deduct the out of pocket expenses for the time that was directly related to the business seminar (1 week). 5 days x $100 per day plus $700 registration = $1200 of deductible education expense.

17

Sara Hance, who is single and lives alone in Idaho, has no income of her own and is supported in full by the following persons:

  • Alma (unrelated friend) $2,400, 48%
  • Ben (Sara's brother) $2,150, 43%
  • Carl (Sara's son) $450, 9%

Under a multiple support agreement, Sara's dependency exemption can be claimed by:

  1. No one
  2. Alma
  3. Ben
  4. Carl

Ben

Ben has provided over 10% of Sara's support and all of the qualifying relative tests are met (gross income, joint return, citizen) except for the support test, but it is met through the multiple support agreement. The individuals as a group have provided over 50% of Sara's support.

Note that Alma is NOT a QR and Carl supports less than 10%.  You must be between 10-49%.

18

Joe and Barb are married, but Barb refuses to sign a 2015 joint return. On Joe's separate 2015 return, an exemption may be claimed for Barb if

  1. Barb was a full-time student for the entire 2015 school year.
  2. Barb attaches a written statement to Joe's income tax return, agreeing to be claimed as an exemption by Joe for 2015.
  3. Barb was under the age of 19.
  4. Barb had no gross income and was not claimed as another person's dependent in 2015.

Barb had no gross income and was not claimed as another person's dependent in 2015.

When a joint return has been filed, personal exemptions may be taken for the taxpayer and spouse. However, when the taxpayer and spouse file separate returns, the taxpayer only may take an exemption for the spouse when the spouse has no gross income and was not claimed as a dependent on another taxpayer's income tax return.

19

In which of the following situations may taxpayers file as married filing jointly?

  1. Taxpayers who were married but lived apart during the year.
  2. Taxpayers who were married but lived under a legal separation agreement at the end of the year.
  3. Taxpayers who were divorced during the year.
  4. Taxpayers who were legally separated but lived together for the entire year.

Taxpayers who were married but lived apart during the year.

Whether taxpayers live together does not impact filing status. Marital status is determined on the last day of the tax year. Since the taxpayers were married as of the end of the tax year they may file married filing joint (note that they could also file married filing separately).

20

A taxpayer's spouse dies in August of the current year. Which of the following is the taxpayer's filing status for the current year?

  1. Single.
  2. Qualifying widow(er).
  3. Head of household.
  4. Married filing jointly.

Married filing jointly.

In the year of death, the surviving spouse may always file as married filing jointly.

21

Parker, whose spouse died during the preceding year, has not remarried. Parker maintains a home for a dependent child. What is Parker's most advantageous filing status?

  1. Single
  2. Head of household
  3. Married filing separately.
  4. Qualifying widow(er) with dependent child.

Qualifying widow(er) with dependent child.

In the year that an individual's spouse dies, the spouse's filing status is married filing joint. For the two years after the year of death, the qualifying widow can continue to file as married filing joint if the taxpayer provides more than half of the cost of maintaining the household (rent, mortgage interest, taxes, home insurance, repairs, food, utilities, etc.) for a dependent child(step, adopted, foster also).

22

For head of household filing status, which of the following costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household?

  1. Food consumed in the home    
  2. Value of services rendered in the home by the taxpayer

1 ONLY.  

For head of household filing status, the following costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household: rent; mortgage interest; taxes; insurance on the home; repairs; utilities; and food eaten in the home. The following costs may not be considered: clothing; education; medical treatment; vacations; life insurance; transportation; rental value of home owned by taxpayer; and the value of services provided by the taxpayer or a member of the taxpayer's household.

This response correctly indicates that the food consumed may be considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household and that value of services provided by the taxpayer may not be considered.

23

What is the most advantageous filing status's for the situation below?

  • Daryl is divorced and maintains a household for himself and Jared, his 8-year old son. Daryl has custody of Jared, but has provided that Joanne, his former spouse, can claim the exemption for Jared.
  • Anthony's spouse, Giselle, left him in March of 2015. Anthony has not had contact with her since that time. Anthony has maintained a household for his son, Trey (age 5), during 2015.

Head of household

  • Daryl can file as head of household since he provides more than 50% of the cost of maintaining a household for an unmarried qualifying child. This is an exception to the general head of household rule, which provides that the home must be provided for a dependent.
  • Anthony meets the definition of an abandoned spouse, so he can file as head of household.

24

Jon and Kim Moseley, married and filing a joint income tax return, derive their entire income from the operation of their gun shop.  The Moseleys itemized their deductions on Schedule A for 2015.  The following unreimbursed cash expenditure was among those made by the Moseleys during 2015:

  • Repair of glass vase accidentally broken by dog (vase cost $550 in 2010; fair value $650 before accident and $150 after accident)$70

Without regard to the $100 “floor” and the adjusted gross income percentage threshold, what amount should the Moseleys deduct for the casualty loss in their itemized deductions on Schedule A for 2015?

  1. $0
  2. $  70
  3. $400
  4. $500

$0

A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Deductible casualty losses may result from earthquakes, tornadoes, floods, fires, vandalism, auto accident, etc. However, a loss due to the accidental breakage of household articles such as glassware or china under normal conditions is not a casualty loss. Neither is a loss due to damage caused by a family pet.

25

Moseley, a cash method taxpayer, billed Dolphi $1,000 for medical services.  Dolphi paid Moseley $500 cash and did some landscaping for Moseley’s office in full settlement of the bill.  Dolphi does comparable landscaping for $350.  What amount should Moseley include in gross income as a result of this transaction?

  1. $0
  2. $ 500
  3. $ 850
  4. $1,000

$850

An exchange of services for property or services is sometimes called bartering. A taxpayer must include in income the amount of cash and the fair market value of property or services received in exchange for the performance of services. Here Moseley’s gross income should include the $500 cash and the landscaping with a comparable value of $350, a total of $850.

Items to be included in Gross Income:

  • Compensation for services, including wages, salaries, bonuses, commissions, fees, and tips
  1. Property received as compensation is included in income at FMV on date of receipt.
  2. Bargain purchases by an employee from an employer are included in income at FMV less price paid.
  3. Life insurance premiums paid by employer must be included in an employee’s gross income except for group-term life insurance coverage of $50,000 or less.
  4. Employee expenses paid or reimbursed by the employer unless the employee has to account to the employer for these expenses and they would qualify as deductible business expenses for employee.
  5. Tips must be included in gross income

26

During 2015, Matt Johnson was assessed a deficiency on his 2013 federal income tax return.  As a result of this assessment he was required to pay $970, determined as follows:

  • Additional tax $600
  • Late filing penalty $50
  • Negligence penalty $200
  • Interest $120

What portion of the $970 would qualify as itemized deductions for 2015?

  1. $0
  2. $30
  3. $250
  4. $370

$0

None of the items listed relating to the tax deficiency for 2013 are deductible. The interest on the tax deficiency is considered personal interest and is not deductible. The additional federal income tax, the late filing penalty, and the negligence penalty are also not deductible.

The following taxes are not deductible:

  1. Federal income taxes
  2. Federal, state, or local estate or gift taxes
  3. Social security and other federal employment taxes paid by employee (including self-employment taxes)
  4. Social security and other employment taxes paid by an employer on the wages of an employee who only performed domestic services (i.e., maid, etc.)

27

Which of the following credits can result in a refund, even if the individual had no income tax liability?

  1. Credit for prior year minimum tax.
  2. Elderly and permanently and totally disabled credit.
  3. Earned income credit.
  4. Child and dependent care credit.

Earned income credit.

EIC is a "refundable" credit.  Certain tax credits can result in a refund, even if the individual had no income tax liability. Tax credits resulting in a refund are credits for earned income, tax withheld, excess social security tax withheld, and excise tax for certain nontaxable uses of fuels and light weight diesel vehicles.

28

In 2015, to qualify for the child care credit on a joint return, at least one spouse must?

  1. Have an adjusted gross income of $15,000 or less    
  2. Be gainfully employed/looking for work or a student when related expenses are incurred  

2 Only...

Individual taxpayers with adjusted gross income of $15,000 or less may claim a child care credit for 35 percent of employment related expenses. The credit is reduced by one percent of the expenses for each $2,000 of adjusted gross income over $15,000, but is not reduced to less than 20 percent of the expenses.

This response correctly indicates at least one spouse does not need to earn $15,000 or less to claim the credit. Earning more than $15,000 does not make a taxpayer ineligible for the credit, it reduces the amount of the credit by decreasing the percentage of the expenses that may be claimed.

This response also correctly indicates that at least one spouse must be gainfully employed or looking for work to claim the credit.

29

Which of the following statements is false with regard to the child and dependent care credit?

  1. The caregiver cannot be a dependent relative or child of the taxpayer.
  2. The credit percentage begins at 35% and phases out once AGI exceeds a certain threshold. As income increases the credit percentage is eventually reduced to zero.
  3. The maximum amount of expense eligible for the credit is $3,000 ($6,000 if more than one individual qualifies for care).
  4. A qualifying child or dependent under the age of 13 who lives with the taxpayer more than one-half of the tax year is a qualifying individual for purposes of claiming the credit.

The credit percentage begins at 35% and phases out once AGI exceeds a certain threshold. As income increases the credit percentage is eventually reduced to zero.

The credit percentage begins at 35% if AGI is less than $15,000, and is reduced by 1% for each $2,000 increment (or part) in AGI above $15,000. The minimum dependent care credit is 20%. Therefore, this statement is false.

30

Mr. and Mrs. Alexander have two dependent children, one of whom (Cal) is a freshman in college during 2015. Tuition and fees paid for Cal during 2015 total $15,000. The Alexanders also paid $10,000 in 2015 for their 14 year old daughter, Kaitlin, to attend a private high school. The Alexanders file a joint tax return for 2015 and report adjusted gross income of $150,000. Cal is a full-time student and enrolled in a degree program. What is the Alexander's Hope/American Opportunity Tax Credit for 2015?

  1. $0
  2. $2,500
  3. $5,000
  4. $15,000

$2,500

The credit is computed as 100% of the first $2,000 and 25% of the next $2,000 of qualified educational expenses, for a total of $2,500. This credit does not begin phasing out in 2015 for married filing joint returns until AGI reaches $160,000. The credit applies only to post-secondary expenses so the tuition for Kaitlin does not qualify.

31

Which of the following disqualifies an individual from the earned income credit?

  1. The taxpayer's qualifying child is a 17-year-old grandchild.
  2. The taxpayer has earned income of $5,000.
  3. The taxpayer's five-year-old child lived in the taxpayer's home for only eight months.
  4. The taxpayer has a filing status of married filing separately.

The taxpayer has a filing status of married filing separately.

A married taxpayer must file as married filing jointly to qualify for the earned income credit.

A qualifying child must be a descendent of the taxpayer under the age of 19 (i.e., the definition of a "qualifying child" for the dependency rules). Therefore, a grandchild meets the definition of a qualifying child.

32

Which of the following statements concerning tax credits is true?

  1. The foreign tax credit is available for business entities, such as corporations, but not for individuals.
  2. Unused general business credits are carried back two years and forward 20 years.
  3. For the rehabilitation credit, expenditures to rehabilitate property placed in service before 1936 are eligible for a 20% credit.
  4. The work opportunity tax credit is calculated on the amount of wages paid per eligible employee during the first year of employment. The maximum credit is $2,400 per eligible employee.

The work opportunity tax credit is calculated on the amount of wages paid per eligible employee during the first year of employment. The maximum credit is $2,400 per eligible employee.

The work opportunity tax credit is 40% of the first $6,000 of wages per employee, so the maximum credit is $2,400.

33

Which of the following credits is a combination of several tax credits to provide uniform rules for the current and carryback-carryover years?

  1. General business credit.
  2. Foreign tax credit.
  3. Minimum tax credit.
  4. Enhanced oil recovery credit.

General business credit.

The general business credit is a combination of several tax credits that are computed separately under each under its own set of rules. The purpose of the general business credit is to combine these credits into a single amount to provide uniform rules for the current credits that may be taken to offset a taxpayer's tax liability.

In addition, the credit provides uniform rules for carryback-carryover years. The general business credit may be carried back for 1 year, then forward for 20 years. The general business credits are composed of the: investment credit; work opportunity credit; alcohol fuel credit; incremental research credit; low-income housing credit; disabled access credit; credit for producing electricity from specified renewable resources; enhanced oil recovery credit; Indian employment credit; employer Social Security credit; empowerment zone employment credit; orphan drug credit; and excise tax payments to the Trans-Alaska Pipeline Liability Fund credit.

34

The following information pertains to Wald Corp.'s operations:

  • Worldwide taxable income $300,000
  • U.S. source taxable income $180,000
  • U.S. income tax before foreign tax credit $96,000
  • Foreign source taxable income $120,000
  • Foreign income taxes paid on foreign source taxable income $39,000

What amount of foreign tax credit may Wald claim?

  1. $28,800
  2. $36,600
  3. $38,400
  4. $39,000

$38,400

The foreign tax credit is the lower of:

1) foreign tax paid ($39,000), or

2) U.S. tax x foreign taxable income / worldwide taxable income

$96,000 x $120,000 / $300,000 = $38,400

35

Foreign income taxes paid by a corporation

  1. May be claimed either as a deduction or as a credit, at the option of the corporation.
  2. May be claimed only as a deduction.
  3. May be claimed only as a credit.
  4. Do not qualify either as a deduction or as a credit.

May be claimed either as a deduction or as a credit, at the option of the corporation.

Foreign income taxes paid by a corporation may be claimed either as a deduction or as a credit, at the option of the corporation. To minimize a corporation's tax liability, it is better to claim the credit for the foreign income taxes than to deduct the taxes.

The foreign tax credit allows for a dollar-for-dollar deduction from the corporation's tax liability, whereas the deduction is from taxable income.

36

John Wolf, who is 45 years old and unmarried, contributed $2,000 monthly in 2015 to the support of his parents’ household, which paid for more than 50% of of the costs of maintaining that household. . The parents lived alone and their income for 2015 consisted of $2,400 from dividends and interest, and $9,600 from Social Security.  Based on the above information, what is Wolf’s filing status for 2015, and how many exemptions should he claim on his tax return?

  1. Single and 1 exemption.
  2. Head of household and 1 exemption.
  3. Single and 3 exemptions.
  4. Head of household and 3 exemptions.

Head of household and 3 exemptions.

Wolf qualifies as a "head of household" because he is unmarried and provides more than half of the cost of maintaining a household for his parents, who must also qualify as his dependents. Both his parents qualify as dependents because Wolf provides more than half of their support, and their gross income (which excludes nontaxable Social Security) is less than $4,000.

37

Rockford Corp., a calendar-year taxpayer, purchased used furniture and fixtures for use in its business and placed the property in service on December 1, 2015.  The furniture and fixtures cost $112,000 and represented Rockford’s only acquisition of depreciable property during the year.  Rockford did not make any special elections with regard to depreciation and did not elect to expense any part of the cost of the property under Sec. 179.  What is the amount of Rockford Corp.’s depreciation deduction for the furniture and fixtures under the Modified Accelerated Cost Recovery System (MACRS) for 2015?

  1. $4,000
  2. $8,000
  3. $16,000
  4. $32,000

$4,000

The furniture and fixtures qualify as 7-year property and under MACRS will be depreciated using the 200% declining balance method. Regular MACRS depreciation would be computed under which a half-year convention normally applies to the year of acquisition. However, the mid-quarter convention must be used if more than 40% of all personal property is placed in service during the last quarter of the taxpayer’s taxable year. Since this was Rockford’s only acquisition of personal property and the property was placed in service during the last quarter of Rockford’s calendar year, the mid-quarter convention must be used. Under this convention, property is treated as placed in service during the middle of the quarter in which placed in service. Since the furniture and fixtures were placed in service in December the amount of allowable MACRS depreciation is limited to ($112,000) × 2/7 × 1/8 = $4,000.

38

Which one of the following statements is correct regarding the credit for adoption expenses?

  1. The credit for adoption expenses is a nonrefundable credit for 2015.
  2. The maximum credit is $5,000 for the adoption of a child with special needs.
  3. For purposes of computing the credit, qualified adoption expenses are always taken into account in the year the adoption is finalized.
  4. An eligible child is an individual who has not attained the age of 17 as of the time of adoption.

The credit for adoption expenses is a nonrefundable credit for 2015.

The adoption expenses credit is a nonrefundable credit for up to $13,400 (for 2015) of expenses incurred to adopt an eligible child. An eligible child is one who is under 18 years of age at time of adoption, or physically or mentally incapable of self-care. Generally, adoption expenses incurred or paid during a tax year prior to the year in which the adoption is finalized may be claimed as a credit in the tax year following the year the expense was incurred. Adoption expenses incurred during the year the adoption becomes final or in the year following the finalization of the adoption are claimed in the year they were incurred.

39

In evaluating the hierarchy of authority in tax law, which of the following carries the greatest authoritative value for tax planning of transactions?

  1. Internal Revenue Code.
  2. IRS regulations.
  3. Tax court decisions.
  4. IRS agents' reports.

The Internal Revenue Code (IRC) is the basic foundation of federal tax laws, and represents a codification of the federal tax laws of the United States. Since it is law, it has greater authority than IRS interpretations (e.g., regulations, revenue rulings, revenue procedures, IRS agents’ reports) and judicial interpretations such as Tax Court decisions.

40

Jim Planter, who reached age 65 on January 1, 2016, filed a joint return for 2015 with his wife, Rita, age 50. Mary, their 23-year-old daughter, was a full-time student at a college until her graduation on June 2, 2015. The daughter had $6,500 of income and provided 25% of her own support during 2015. In addition, during 2015 the Planters were the sole support of Rita's niece, age 28, who had no income. How many exemptions should the Planters claim on their 2015 tax return?

  1. 2
  2. 3
  3. 4
  4. 5

4

There is one exemption for Mr. Planter, and one exemption for his spouse. In addition, there is one dependency exemption for their daughter who is a qualifying child (i.e., she did not provide more than half of her own support, and she is a full-time student under age 24). There is also one dependency exemption for their niece who is a qualifying relative (i.e., they provided more than half of her support, and her gross income was less than $4,000). However, there is no additional exemption for being age sixty-five or older.

41

Leslie Monahan, a corporate executive, incurred business-related unreimbursed expenses during the current year as follows:

  • Entertainment $1,200
  • Travel $600
  • Professional society dues $500

Assuming that Monahan does not itemize deductions, how much of these expenses should she deduct on her current year tax return?

  1. $0
  2. $600
  3. $1,100
  4. $1,700

$0

Monahan cannot deduct any of the listed expenses if she does not itemize deductions. These unreimbursed employee expenses are deductible only as itemized deductions, subject to the 2% of AGI floor.

42

A husband and wife can file a joint return even if

  1. The spouses have different tax years, provided that both spouses are alive at the end of the year.
  2. The spouses have different accounting methods.
  3. Either spouse was a nonresident alien at any time during the tax year, provided that at least one spouse makes the proper election.
  4. They were divorced before the end of the tax year.

The spouses have different accounting methods.

If either spouse was a nonresident alien at any time during the tax year, both spouses must elect to be taxed as US citizens or residents for the entire tax year. If divorced before the end of the year, taxpayers cannot file a joint return.

43

Robbe, a cash-basis single taxpayer, reported $50,000 of adjusted gross income last year and claimed itemized deductions of $7,250, consisting solely of $7,250 of state income taxes paid last year.  Robbe’s itemized deduction amount, which exceeded the standard deduction available to single taxpayers for last year by $1,150, was fully deductible and it was not subject to any limitations or phase-outs.  In the current year, Robbe received a $1,500 state tax refund relating to the prior year.  What is the proper treatment of the state tax refund?

  1. Include none of the refund in income in the current year.
  2. Include $1,150 in income in the current year.
  3. Include $1,500 in income in the current year.
  4. Amend the prior year's return and reduce the claimed itemized deductions for that year.

Include $1,150 in income in the current year.

A state income tax refund must be included in gross income for the current year under the tax benefit rule to the extent that the refunded amount was deducted in a prior year and the deduction provided a benefit by reducing the taxpayer's federal income tax for the prior year. Here, Robbe's $7,250 itemized deduction for state income tax provided a benefit only to the extent that it exceeded the standard deduction that was otherwise available to him. As a result, only $1,150 of the $1,500 refund must be included in gross income for the current year.

44

David Waldman, a calendar-year taxpayer, was employed and resided in Philadelphia.  On February 1, 2015, Waldman was permanently transferred to Dallas by his employer.  Waldman worked for 20 weeks before being laid off for other than willful misconduct.  In 2015 Waldman incurred and paid the following unreimbursed expenses in connection with his move:

  • Cost of moving household furnishings and personal effects $1,500
  • Lodging expenses while moving $500
  • Penalty for breaking the lease on his Philadelphia apartment $600

What amount can Waldman deduct in 2015 for moving expenses?

  1. $0
  2. $1,026
  3. $2,000
  4. $2,600

$2,000

Direct moving expenses are deductible if closely related to the start of work at a new location and a distance (i.e., new job must be at least 50 miles further from former residence than old job) and time (i.e., employed at least 39 weeks out of 12 months following move) tests are met. However, the time test does not have to be met in case of death, taxpayer’s job at new location ends because of disability, or taxpayer is laid off for other than willful misconduct. Since the distance test is met and the time test is not met due to the taxpayer being laid off for other than willful misconduct, Waldman’s cost of moving household furnishings and personal effects ($1,500) and cost of lodging and travel expenses while moving ($500) are deductible. The penalty for breaking the lease is an indirect moving expense and is not deductible.

45

Charles and Tasha Taylor began the process of adopting 5-year-old Joey in 2014.  The Taylors incurred $2,000 in attorney and adoption fees in 2014.  The adoption became final in 2015.  The Taylors incurred an additional $3,500 in attorney fees and $1,000 in court costs in 2015 that were directly related to the adoption of Joey.  Ignoring any AGI limitation, what is the maximum adoption credit that the Taylors can take in 2015?

  1. $3,500
  2. $4,500
  3. $5,500
  4. $6,500

$6,500

The credit for adoption expenses is a nonrefundable credit of up to $13,400 (for 2015) for qualified adoption expenses incurred for each eligible child. The Taylors’ qualified adoption expenses will be taken into account in the year the adoption becomes final and include all reasonable and necessary adoption fees, court costs, attorney fees, and other expenses that are directly related to the legal adoption by the taxpayer of an eligible child. As the Taylors’ adoption of Joey became final in 2015, and the Taylors had $6,500 of qualified adoption expenses, the Taylors can take a $6,500 adoption credit in 2015.

46

Parker, whose spouse died during the preceding year, has not remarried.  Parker maintains a home for her dependent child.  What is Parker’s most advantageous filing status?

  1. Single.
  2. Head of household.
  3. Married filing separately.
  4. Qualifying widow(er) with dependent child.

Qualifying widow(er) with dependent child.

Parker should file as a "Qualifying widow(er) with dependent child" since it will enable her to use the joint return standard deduction and joint return tax rate schedule. This filing status is available for the two taxable years following the year of a spouse’s death if (1) the surviving spouse was eligible to file a joint return in the year of the spouse’s death, (2) does not remarry before the end of the current tax year, and (3) the surviving spouse pays over 50% of the cost of maintaining a household that is the principal home for the entire year of the surviving spouse’s dependent child.

47

Stockley, a candidate for an undergraduate college degree, received a $20,000 scholarship from the university in 2014.  Stockley had the following expenses relating to his attendance in 2015:

  • Tuition and fees$12,000
  • Room and board6,000
  • Books and supplies500
  • Spring break in Cancun1,500

What amount of the scholarship should Stockley include as taxable income in 2015?

  1. $0
  2. $1,500
  3. $7,500
  4. $20,000

$7,500

A degree candidate can exclude the amount of a scholarship or fellowship that is used for tuition and course-related fees, books, supplies, and equipment. Amounts used for other purposes including room and board are included in gross income.

48

Willard, a single taxpayer, had $60,000 in adjusted gross income for 2015.  During 2015 he contributed $25,000 to his church.  He had a $15,000 charitable contribution carryover from his 2014 church contributions.  What was the maximum amount of properly substantiated charitable contributions that Willard could claim as an itemized deduction for 2015?

  1. $15,000
  2. $25,000
  3. $30,000
  4. $40,000

$30,000

Willard gave $25,000 to his church during 2015 and had a $15,000 charitable contribution carryover from 2014, resulting in a total of $40,000 of contributions. Since an individual's deduction for charitable contributions cannot exceed an overall limitation of 50% of adjusted gross income, Willard's charitable contribution deduction for 2015 is limited to ($60,000 AGI × 50%) = $30,000. Since Willard's 2015 contributions will be deducted before his carry forward from 2014, Willard will carry over $10,000 of his 2014 contributions to 2016.

49

On January 1, 2015, James Davis was awarded a post-doctorate fellowship grant of $30,000 by a tax-exempt educational organization.  Davis is not a candidate for a degree and was awarded the grant to continue his research.  The grant was awarded for the period March 1, 2015 through May 31, 2016.

On March 1, 2015, Davis elected to receive the full amount of the grant.  What amount should be included in his gross income for 2015?

  1. $0
  2. $10,000
  3. $20,000
  4. $30,000

$30,000

A degree candidate can exclude scholarships and fellowships that are used for tuition and course-related fees, books, supplies, and equipment. Since Davis is not a candidate for a degree, the entire amount of fellowship grant must be included in gross income in the year received.

50

On August 1, 2015, Graham purchased and placed into service an office building costing $264,000 including $30,000 for the land.  If Graham is a calendar-year taxpayer, what is Graham’s MACRS deduction for the office building for 2015?

  1. $9,600
  2. $6,000
  3. $3,600
  4. $2,250

$2,250

The MACRS deduction for nonresidential real property must be determined using the midmonth convention (i.e., property is treated as placed in service at the midpoint of the month placed in service) and the straight-line method of depreciation over a 39-year recovery period. Here, the $264,000 cost of the office building must first be reduced by the $30,000 allocated to the land, to arrive at a basis for depreciation of $234,000. Since the building was placed in service on August 1, the midmonth convention results in 4.5 months of depreciation for 2015. The MACRS deduction for 2015 is [$234,000 × (4.5 months) / (39 × 12 months)] = $2,250.

51

For the year ended December 31, 2014, Elmer Shaw earned $3,000 interest at Prestige Savings Bank, on a time savings account scheduled to mature in 2017. In March 2015, before filing his 2014 income tax return, Shaw incurred an interest forfeiture penalty of $1,500 for premature withdrawal of the funds from his account. Shaw should treat this $1,500 forfeiture penalty as a

  1. Penalty not deductible for tax purposes.
  2. Deduction from gross income in arriving at 2015 adjusted gross income.
  3. Deduction from 2015 adjusted gross income, deductible only if Shaw itemizes his deductions for 2015.
  4. Reduction of interest earned in 2014, so that only $1,500 of such interest is taxable on Shaw’s 2014 return.

Deduction from gross income in arriving at 2015 adjusted gross income.

An interest forfeiture penalty for making a premature withdrawal from a time savings account should be deducted from gross income in arriving at adjusted gross income in the year in which the penalty is incurred.

Penalties for Premature Withdrawals from Time Deposits

  1. Full amount of interest is included in gross income.
  2. Forfeited interest is then subtracted from gross income in arriving at adjusted gross income.

52

DAC Foundation awarded Kent $75,000 in recognition of lifelong literary achievement.  Kent was not required to render future services as a condition to receive the $75,000.  What condition(s) must have been met for the award to be excluded from Kent’s gross income?

  • I.Kent was selected for the award by DAC without any action on Kent’s part.
  • II.Pursuant to Kent’s designation, DAC paid the amount of the award either to a governmental unit or to a charitable organization.

BOTH.

A prize or award must generally be included in a recipient’s gross income. It can be excluded if the prize or award is made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if the recipient was selected without action on his or her part to enter the contest, the recipient is not required to render substantial future services as a condition to receiving the prize or award, and the prize or award is transferred by the payor to a governmental unit or tax-exempt charitable organization.

53

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop.  Their 2015 adjusted gross income was $50,000.  The Burgs itemized their deductions on Schedule A for 2015. The following unreimbursed cash expenditures were among those made by the Burgs during 2015:

  • Repair and maintenance of motorized wheelchair for physically handicapped dependent child$ 300
  • Tuition, meals, and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care4,000

Without regard to the adjusted gross income percentage threshold, what amount may the Burgs claim in their 2015 return as qualifying medical expenses?

  1. $0
  2. $300
  3. $4,000
  4. $4,300

$4,300

The Burgs’ deductible medical expenses include the $300 spent on repair and maintenance of the motorized wheelchair for their physically handicapped dependent child, and the $4,000 spent for tuition, meals, and lodging at the special school for the physically handicapped. Payment for meals and lodging provided by an institution as a necessary part of medical care is deductible as a medical expense if the main reason for being in the institution is to receive medical care. Here, the item indicates that the Burg’s physically handicapped dependent child was in the institution primarily for the availability of medical care, and that meals and lodging were furnished as necessary incidents to that care.

54

When determining his federal income tax, Curt had the following items for 2015:

  • Personal exemption$4,000
  • Itemized deduction for personal property taxes2,500
  • Charitable contribution of capital gain property1,500
  • Net long-term capital gain1,000
  • Excess of MACRS depreciation on personal property over depreciation computed using the 150% declining-balance method600
  • Tax-exempt interest from City of Chicago general obligation bonds400

What is the total amount of adjustments to taxable income for purposes of computing Curt’s alternative minimum tax for 2015?

  1. $3,100
  2. $7,100
  3. $7,200
  4. $7,800

$7,100

Curt’s adjustments consist of the $600 of excess depreciation, the $4,000 personal exemption and the personal property taxes of $2,500, a total of $7,100.

Adjustments. In determining AMTI, taxable income must be computed with various adjustments.  Example of adjustments include

  • For real property placed in service after 1986 and before 1999, the difference between regular tax depreciation and straight-line depreciation over 40 years.
  • For personal property placed in service after 1986, the difference between regular tax depreciation using the 200% declining balance method and depreciation using the 150% declining balance method (switching to straight-line when necessary to maximize the deduction)
  • For long-term contracts, the excess of income under the percentage-of-completion method over the amount reported using the completed-contract method
  • The installment method cannot be used for sales of dealer property
  • The medical expense deduction is computed using a 10% floor (instead of the 7.5% floor that might have been used for regular tax)
  • No deduction is allowed for home mortgage interest if the loan proceeds were not used to buy, build, or improve the home
  • No deduction is allowed for personal, state, and local taxes, and for miscellaneous itemized deductions subject to the 2% floor for regular tax purposes
  • No deduction is allowed for personal exemptions and the standard deduction

55

Ed and Ann Ross were divorced in January 2015.  In accordance with the divorce decree, Ed transferred the title in their home to Ann in 2015.  The home, which had a fair market value of $150,000, was subject to a $50,000 mortgage that had 20 more years to run. Monthly mortgage payments amount to $1,000. Under the terms of settlement, Ed is obligated to make the mortgage payments on the home for the full remaining 20-year term of the indebtedness, regardless of how long Ann lives. Ed made 12 mortgage payments in 2015. What amount is taxable as alimony in Ann’s 2015 return?

  1. $0
  2. $12,000
  3. $100,000
  4. $112,000

$0

In order to be treated as alimony, a payment must be made in cash and be received by, or on behalf of, the payee spouse. Furthermore, cash payments must be required to terminate upon the death of the payee spouse to be treated as alimony. In this case, the transfer of title in the home to Ann is not a cash payment and cannot be treated as alimony. Although the mortgage payments are cash payments made on behalf of Ann, the payments are not treated as alimony because they will be made throughout the full 20-year mortgage period and will not terminate in the event of Ann’s death.

56

Tana’s divorce decree requires Tana to make the following transfers to Tana’s former spouse during the current year:

  • Alimony payments of $3,000 
  • Child support of $2,000 
  • Property division of stock with a basis of $4,000 and a fair market value of $6,500 

What is the amount of Tana’s alimony deduction?

  1. $3,000
  2. $7,000
  3. $9,500
  4. $11,500

$3,000

Alimony is a cash payment to (or on behalf of) a spouse or former spouse that is required by a divorce decree or written separation agreement. Alimony does not include child support, nor any noncash property settlements. Here, Tana’s alimony deduction is limited to the alimony payments of $3,000.

57

In 2015, Jeff Sippy won $6,000 in a state lottery. Also in 2015, Jeff spent $1,400 for the purchase of lottery tickets.  Jeff elected to take the standard deduction on his 2015 income tax return.  The amount of lottery winnings that should be included in Jeff’s 2015 taxable income is

  1. $6,000
  2. $4,600
  3. $3,000
  4. $0

$6,000

Lottery winnings are gambling winnings and must be included in gross income. Gambling losses are deductible from AGI as a miscellaneous deduction (to the extent of winnings) not subject to the 2% of AGI floor if a taxpayer itemizes deduction. Since Jeff elected to take the standard deduction for 2015, the $1,400 spent on lottery tickets is not deductible. All $6,000 of Jeff’s lottery winnings are included in his taxable income.

58

Which one of the following statements concerning an education IRA (Coverdell Education Savings Account) is correct?

  1. A taxpayer may contribute up to $2,500 to an education IRA (Coverdell Education Savings Account) to pay the costs of the designated beneficiary’s higher education.
  2. Eligibility for an education IRA is not subject to income phaseout.
  3. Contributions can be made to an education IRA on behalf of a beneficiary until the beneficiary reaches age 21.
  4. Contributions to an education IRA are not deductible.

Contributions to an education IRA are not deductible. 

But withdrawals of earnings will be tax-free if used to pay the qualified education expenses of the designated beneficiary. The maximum annual amount that can be contributed to an education IRA is limited to $2,000, but the annual contribution is phased out for single taxpayers with modified AGI between $95,000 and $110,000, and for married taxpayers with modified AGI between $190,000 and $220,000. Contributions cannot be made to an education IRA after the date on which the designated beneficiary reaches age 18.

 

59

Jerry and Ann Parsell paid the following expenses during 2015:

  • Interest on automobile loan $1,500
  • Interest on bank loan (loan proceeds were used to purchase municipal bonds) $5,000
  • Interest on home mortgage for period January 1 to June 29, 2015 $1,800
  • Penalty payment for prepayment of home mortgage on June 29, 2015 $1,200

What is the maximum amount that the Parsells can utilize as interest expense in calculating itemized deductions for 2015?

  1. $3,000
  2. $3,150
  3. $3,650
  4. $4,500

$3,000

Interest paid on debt incurred to purchase tax exempt obligations is nondeductible. Similarly, interest on the automobile loan is considered personal interest and not deductible. The $1,800 interest on the home mortgage and the home mortgage prepayment penalty of $1,200 are qualified residence interest and will give the Parsells a total interest deduction of $3,000.

60

Smith paid the following unreimbursed medical expenses:

  • Dentist and eye doctor fees $5,000
  • Contact lenses $500
  • Facial cosmetic surgery to improve Smith’s personal appearance (surgery is unrelated to personal injury or congenital deformity) $10,000
  • Premium on disability insurance policy to pay him if he is injured and unable to work $2,000

What is the total amount of Smith’s tax-deductible medical expenses before the adjusted gross income limitation?

  1. $17,500
  2. $15,500
  3. $7,500
  4. $5,500

$5,500

Smith’s tax-deductible medical expenses include the dentist and eye doctor fees of $5,000 and the $500 cost of contact lenses. No deduction is allowed for the cosmetic surgery since it was unrelated to personal injury and did not correct a congenital deformity. Similarly, no deduction is allowed for the premiums on the disability income policy. A disability income policy is not considered medical insurance because payments are not based on the amount of medical expenses incurred.

61

In the current year, Drake, a disabled taxpayer, made the following improvements:

  • $100,000 - Pool installation, which qualified as a medical expense and increased the value of the home by $25,000
  • $10,000 - Widening doorways to accommodate Drake’s wheelchair. The improvement did not increase the value of his home

For regular income tax purposes and without regard to the adjusted gross income percentage threshold limitation, what maximum would be allowable as a medical expense deduction in the current year?

  1. $110,000
  2. $85,000
  3. $75,000
  4. $10,000

$85,000

The installation of the pool qualifies as a deductible medical expense to the extent that it does not increase the value of the home, $100,000 − $25,000 = $75,000.  Additionally, the $10,000 cost of widening doorways to accommodate Drake’s wheelchair is deductible as a medical expense since expenses incurred by a physically handicapped individual for the removal of structural barriers in a residence to accommodate a handicapped condition is deductible as a medical expense.

62

Chris, age five, has $3,000 of interest income and no earned income this year.  Assume the current applicable standard deduction is $1,000; how much of Chris’s income will be taxed at Chris’s parents’ maximum tax rate?

  • $0
  • $1,000
  • $1,100
  • $3,000

$1,000

The earned income of a child of any age and the unearned income of a child 18 years or older as of the end of the tax year is taxed at the child’s own tax rates. However, the unearned income of a child under age 18 in excess of a threshold amount is generally taxed at the rates of the child’s parents. The threshold amount is subject to change because it is indexed for inflation, but it is normally twice the amount of the applicable standard deduction for a dependent who has only unearned income. Since the multiple-choice item assumes the applicable standard deduction for the child is $1,000, the applicable threshold would be $1,000 × 2 = $2,000. As a result, $3,000 interest income − $2,000 threshold = $1,000 of the child’s interest income would be taxed using the rates of the child’s parents.

63

Under the modified accelerated cost recovery system (MACRS) the mid-quarter convention applies if

  1. Used tangible personal property is placed in service.
  2. Real property is placed in service.
  3. Alternate straight-line depreciation is elected by the taxpayer.
  4. More than 40% of all personal property is placed in service during the last quarter of the taxpayer’s tax year.

More than 40% of all personal property is placed in service during the last quarter of the taxpayer’s tax year.

The general rule is that personal property is treated as placed in service or disposed of at the midpoint of the taxable year, resulting in a half-year of depreciation for the year in which the property is placed in service or disposed of. A mid-quarter convention applies if more than 40% of all personal property is placed in service during the last quarter of the taxpayer’s year. Under this convention, property is treated as placed in service (or disposed of) in the middle of the quarter in which placed in service (or disposed of).

64

Lane, a single taxpayer, received $160,000 in salary, $15,000 in income from an S corporation in which Lane does not materially participate, and a $35,000 passive loss from a real estate rental activity in which Lane materially participated.  Lane’s modified adjusted gross income was $165,000.  What amount of the real estate rental activity loss was deductible?

  1. $0
  2. $15,000
  3. $25,000
  4. $35,000

$15,000

A real estate rental activity is generally considered to be a passive activity, even though the taxpayer materially participates in the rental activity. That is important because losses from passive activities can only be used to offset income from other passive activities. Here, since Lane did not materially participate in the S corporation, the S corporation income of $15,000 is treated as passive activity income and is offset by $15,000 of the rental real estate passive loss. Although a special rule permits up to $25,000 of income that is not from passive activities to be offset by losses from a rental real estate activity, that special $25,000 allowance is reduced by 50% of a taxpayer's modified AGI in excess of $100,000 and is fully phased out when modified AGI exceeds $150,000. Since Lane's modified AGI is $165,000, the $25,000 allowance is not available. As a result, Lane's rental real estate loss is deductible in the current year only to the extent that it offsets the $15,000 of passive activity income.

65

An individual starts paying student loan interest in the current year.  How many years may the individual deduct a portion of the student loan interest?

  1. Current year only.
  2. Five years.
  3. Ten years.
  4. Duration of time that interest is paid.

Duration of time that interest is paid.

An individual is allowed to annually deduct up to $2,500 for interest on qualified education loans. Qualified education expenses include tuition, fees, room, board, and related expenses. Although the deduction is subject to a phaseout based on income, there is no limitation on the number of years for which a deduction can be taken.

66

Which expense, both incurred and paid during the current year, can be claimed as an itemized deduction subject to the 2% of adjusted gross income floor?

  1. Employee’s unreimbursed business auto expense.
  2. One-half of the self-employment tax.
  3. Employee’s unreimbursed moving expense.
  4. Self-employed health insurance.

Employee’s unreimbursed business auto expense

  1. Outside salesman expenses include all business expenses of an employee who principally solicits business for his/her employer while away from the employer’s place of business.
  2. All unreimbursed employee expenses 
  3. Tax counsel, assistance, and tax return preparation fees
  4. Expenses for the production of income other than those incurred in a trade or business or for production of rents and royalties (e.g., investment counsel fees, clerical help, safe-deposit box rent, legal fees to collect alimony, etc.)

 

67

Mr. and Mrs. Donald Curry’s real property tax year is on a calendar-year basis, with payments due annually on August 1.  The realty taxes on their home amounted to $1,200 in 2015, but the Currys did not pay any portion of that amount since they sold the house on April 1, 2015, four months before payment was due.  However, realty taxes were prorated on the closing statement.  Assuming that they owned no other real property during the year, how much can the Currys deduct on Schedule A of Form 1040 for real estate taxes in 2015?

  1. $0
  2. $296
  3. $800
  4. $1,200

$296

When real estate is sold, the real estate tax deduction is apportioned between the seller and the buyer according to the number of days in the real property tax year that each holds the property. Since Curry sold his home on April 1, 2015, the deduction allocated to Curry would be

90/365 × $1,200 = $296

68

Roger Burrows, age 19, is a full-time student at Marshall College and a candidate for a bachelor’s degree.  During the current year he received the following payments:

  • State scholarship covering tuition for 10 months $3,600
  • Loan from college financial aid office $5,500
  • Cash support from parents $8,000
  • Cash dividends on qualified investments $700
  • Cash prize awarded in contest $5,000

What is Burrows’ gross income for the current year?

  1. $700
  2. $5,700
  3. $13,700
  4. $17,300

$5,700

Roger Burrows’ gross income is $5,700, consisting of $700 of dividends and the $5,000 prize. Scholarships awarded for tuition to candidates for a degree are excluded from gross income unless provided as compensation for services. Loans and cash support from parents are also excluded from gross income.

69

With regard to the alimony deduction in connection with a 2015 divorce, which one of the following statements is correct?

  1. Alimony is deductible by the payor spouse, and includible by the payee spouse, to the extent that payment is contingent on the status of the divorced couple’s children.
  2. The divorced couple may be members of the same household at the time alimony is paid, provided that the persons do not live as husband and wife.
  3. Alimony payments must terminate on the death of the payee spouse.
  4. Alimony may be paid either in cash or in property.

Alimony payments must terminate on the death of the payee spouse.

To be considered alimony, cash payments must terminate on the death of the payee spouse. To be classified as alimony a payment can only be made in cash.

70

A calendar-year individual filed an income tax return on April 1.  This return can be amended no later than

  1. Four months and 15 days after the end of the calendar year.
  2. Ten months and 15 days after the end of the calendar year.
  3. Three years, three months, and 15 days after the end of the calendar year.
  4. Three years after the return was filed.

Three years, three months, and 15 days after the end of the calendar year.

An individual taxpayer must file an amended return within three years from the date a return was filed, or two years from the date of payment of tax, whichever is later. If a return is filed before its due date, it is treated as filed on its due date. Thus, an individual's calendar-year return filed on April 1 is treated as filed on April 15. As a result, the last date an amended return can be filed would be three years, three months, and 15 days after the end of the calendar year (e.g., April 15, 2018, for a 2014 calendar-year return).

71

Which of the following is subject to the Uniform Capitalization Rules of Code Sec. 263A?

  1. Editorial costs incurred by a freelance writer.
  2. Research and experimental expenditures.
  3. Mine development and exploration costs.
  4. Warehousing costs incurred by a manufacturing company with $12 million in annual gross receipts.

Warehousing costs incurred by a manufacturing company with $12 million in annual gross receipts.

Uniform capitalization (UNICAP) rules generally require that all costs incurred in manufacturing or constructing real or personal property, or in purchasing or holding property for sale, must be capitalized as part of the cost of the property. Among the costs that are excepted from the UNICAP rules are research and experimental expenditures, mine development and exploration costs, and the costs incurred by a freelance writer, photographer, or artist whose personal efforts create the product. Also excepted from the UNICAP rules are the costs of small retailers and wholesalers who acquire personal property for resale if the retailer’s or wholesaler’s average gross receipts for the preceding three tax years do not exceed $10 million. However, the warehousing costs incurred by a manufacturing company with $12 million in annual gross receipts do not fall within any of the exceptions and are subject to the UNICAP rules.

72

Seymour Thomas named his wife, Penelope, the beneficiary of a $100,000 (face amount) insurance policy on his life.  The policy provided that upon his death, the proceeds would be paid to Penelope with interest over her present life expectancy, which was calculated at 25 years.  Seymour died during 2015 and Penelope received a payment of $5,200 from the insurance company.  What amount should she include in her gross income for 2015?

  1. $200
  2. $1,200
  3. $4,200
  4. $5,200

$1,200

This answer is correct.  Life insurance proceeds paid by reason of death are excluded from income if paid in a lump sum or in installments.  If the payments are received in installments, the principal amount of the policy divided by the number of payments is excluded each year. Therefore, only $1,200 of the $5,200 insurance payment is included in Penelope’s gross income.

  • Annual installment - $5,200
  • Principal amount ($100,000/25) - ($4,000)
  • Amount included in gross income - $1,200

73

An S corporation engaged in manufacturing has a year-end of June 30.  Revenue consistently has been more than $10 million under both cash and accrual basis of accounting. The stockholders would like to change the tax status of the corporation to a C corporation using the cash basis with the same year-end.  Which of the following statements is correct if it changes to a C corporation?

  1. The year-end will be December 31, using the cash basis of accounting.
  2. The year-end will be December 31, using the accrual basis of accounting.
  3. The year-end will be June 30, using the accrual basis of accounting.
  4. The year-end will be June 30, using the cash basis of accounting.

The year-end will be June 30, using the accrual basis of accounting.

Although an S corporation generally must use a calendar year, it may request permission from the IRS to have a fiscal year if it can establish a valid business purpose. Here, the S corporation already has a fiscal year ending June 30, and the corporation will be allowed to continue that June 30 fiscal year when it switches to a C corporation. That is because a C corporation may elect to use either a calendar year or a fiscal year as its annual accounting period. In contrast, C corporations are generally not allowed to use the cash method of accounting. A limited exception that permits the use of the cash method is available if the C corporation is a qualified personal service corporation, or if the C corporation for every year has average gross receipts of $5 million or less for any prior three-year period and does not have inventories. Since this S corporation is engaged in manufacturing and has annual revenues in excess of $10 million, it does not qualify for either exception and will be required to use the accrual method of accounting if it changes to a C corporation.

74

Rockford Corp., a calendar-year taxpayer, purchased used furniture and fixtures for use in its business and placed the property in service on December 1, 2015.  The furniture and fixtures cost $112,000 and represented Rockford’s only acquisition of depreciable property during the year.  Rockford did not make any special elections with regard to depreciation and did not elect to expense any part of the cost of the property under Sec. 179.  What is the amount of Rockford Corp.’s depreciation deduction for the furniture and fixtures under the Modified Accelerated Cost Recovery System (MACRS) for 2015?

  1. $4,000
  2. $8,000
  3. $16,000
  4. $32,000

$4,000

The furniture and fixtures qualify as 7-year property and under MACRS will be depreciated using the 200% declining balance method. Regular MACRS depreciation would be computed under which a half-year convention normally applies to the year of acquisition. However, the mid-quarter convention must be used if more than 40% of all personal property is placed in service during the last quarter of the taxpayer’s taxable year. Since this was Rockford’s only acquisition of personal property and the property was placed in service during the last quarter of Rockford’s calendar year, the mid-quarter convention must be used. Under this convention, property is treated as placed in service during the middle of the quarter in which placed in service. Since the furniture and fixtures were placed in service in December the amount of allowable MACRS depreciation is limited to ($112,000) × 2/7 × 1/8 = $4,000.

75

Julie, who is single, had the following items of income and deduction included on her 2015 Form 1040 income tax return:

  • Salary $40,000
  • Net capital loss deduction $3,000
  • Itemized deduction (all attributable to a personal casualty loss when a tornado destroyed her vacation home) $45,000
  • Personal exemption $3,950

What is the amount of Julie’s net operating loss for 2015?

  1. $5,000
  2. $8,000
  3. $11,700
  4. $45,000

$5,000

Julie’s personal casualty loss of $45,000 incurred as a result of the tornado damage to her vacation home is allowed as a deduction in the computation of her NOL and is subtracted from her salary income of $40,000, to arrive at a NOL of $5,000. In the computation of a NOL, no deduction is allowed for personal and dependency exemptions, and no deduction is allowed for a net capital loss.

76

How is the depreciation deduction for nonresidential real property, placed in service in 2015, determined for regular tax purposes using MACRS?

  1. Straight-line method over 40 years.
  2. Straight-line method over 27.5 years.
  3. 150% declining balance method with a switch to the straight-line method over 39 years.
  4. Straight-line method over 39 years.

Straight-line method over 39 years.

The straight-line method of depreciation over a period of 39 years must be used for regular tax purposes to determine the MACRS depreciation deduction for nonresidential real property placed in service after 1986.

77

The credit for prior year alternative minimum tax liability may be carried

  1. Forward indefinitely.
  2. Forward for a maximum of 20 years.
  3. Back to the 2 preceding years and/or carried forward for a maximum of 20 years.
  4. Back to the 3 preceding years and carried forward for a maximum of 5 years.

Forward indefinitely.

Minimum tax credit. The amount of AMT paid (net of exclusion preferences) is allowed as a credit against regular tax liability in future years.

  • The amount of the AMT credit to be carried forward is the excess of the AMT paid over the AMT that would be paid if AMTI included only exclusion preferences (e.g., disallowed itemized deductions and the preferences for excess percentage of depletion, tax-exempt interest, and charitable contributions).
  • The credit can be carried forward indefinitely, but not carried back.
  • The AMT credit can only be used to reduce regular tax liability, not future AMT liability.

78

For 2014, Robert had adjusted gross income of $100,000 and potential itemized deductions as follows:

  • Medical expenses (before percentage limitations) $12,000
  • State income taxes $4,000
  • Real estate taxes $3,500
  • Qualified housing and residence mortgage interest $10,000
  • Home equity mortgage interest (used to consolidate personal debts) $4,500
  • Charitable contributions (cash) $5,000

What are Robert’s itemized deductions that are allowable for alternative minimum tax purposes?

  1. $17,000
  2. $19,500
  3. $21,500
  4. $25,500

$17,000

For purposes of computing an individual’s AMT, no deduction is allowed for personal, state, and local taxes, and home mortgage interest if the loan proceeds were not used to buy, build, or substantially improve the home. Additionally, unreimbursed medical expenses are allowed only to the extent in excess of 10% of adjusted gross income. Here, Robert’s allowable itemized deductions for AMT purposes consist of medical expenses of $12,000 − (10% × $100,000) = $2,000, qualified mortgage interest of $10,000, and charitable contributions of $5,000, resulting in a total of $17,000.

79

Barkley owns a vacation cabin that was rented to unrelated parties for 10 days during the year for $2,500. The cabin was used personally by Barkley for three months and left vacant for the rest of the year. Expenses for the cabin were as follows.

  • Real estate taxes $1,000
  • Maintenance and utilities $2,000

How much rental income (loss) is included in Barkley’s adjusted gross income?

  1. $0
  2. $500
  3. $(500)
  4. $(1,500)

$0

The treatment of rental income and expenses for a dwelling unit that is also used for personal purposes depends on whether the taxpayer uses it as a home. A dwelling unit is used as a home if personal use exceeds the greater of 14 days, or 10% of the number of days rented. If a dwelling unit is used as a home and it is rented for less than 15 days during the tax year, rental income is excluded from gross income and expenses are not deductible as rental expenses. Here, since the cabin was used as a home and was rented for only 10 days, the rental income is excluded from Barkley’s gross income, and the real estate taxes and maintenance and utilities are not deductible as rental expenses. Of course the real estate taxes will be deductible as an itemized deduction from AGI if Barkley itemizes deductions.

80

In the current year, an unmarried individual with modified adjusted gross income of $25,000 paid $1,000 interest on a qualified education loan entered into on July 1.  How may the individual treat the interest for income tax purposes?

  1. As a $500 deduction to arrive at AGI for the year.
  2. As a $1,000 deduction to arrive at AGI for the year.
  3. As a $1,000 itemized deduction.
  4. As a nondeductible item of personal interest.

As a $1,000 deduction to arrive at AGI for the year.

The interest expense on a qualified education loan is deductible in the computation of an individual’s adjusted gross income. A qualified education loan is a loan whose proceeds are used to pay the qualified education expenses (e.g., tuition, fees, room and board, books, supplies) of the taxpayer, spouse, or anyone who was a dependent when the loan was taken out. The maximum annual deduction is limited to $2,500 and is reduced by modified adjusted gross income in excess of $60,000 if single, head of household, or a qualifying widow(er); $120,000 if married filing jointly. Here, since the unmarried individual’s adjusted gross income is only $25,000, all $1,000 of interest is deductible to arrive at adjusted gross income.

81

Which one of the following statements concerning the American Opportunity Credit (modified Hope scholarship credit) is correct?

  1. A taxpayer may claim the American Opportunity credit in addition to the lifetime learning credit for one dependent.
  2. The credit is available for the first four years of a postsecondary education program.
  3. The credit is available on a per taxpayer basis.
  4. Expenses incurred for room, board, and books qualify for the credit.

The credit is available for the first four years of a postsecondary education program.

The American Opportunity credit provides for a maximum credit of $2,500 per year (100% of the first $2,000, plus 25% of the next $2,000 of tuition expenses) for the first four years of postsecondary education. The credit is available on a per student basis and covers tuition for the taxpayer, spouse, and dependents. To be eligible, the student must be enrolled on at least a half-time basis for one academic period during the year. The American Opportunity credit is available for an individual only if the lifetime learning credit is not claimed for that individual during the same tax year.

82

Which of the following should be included when determining adjusted gross income?

  1. Alimony received.
  2. Compensation for injuries or sickness.
  3. Rental value of parsonages.
  4. Tuition scholarship.

Alimony received

The term gross income means income from whatever source derived and specifically includes alimony and separate maintenance payments. Compensation for injuries and sickness, the rental value of parsonages furnished to ministers of the gospel, and tuition scholarships are generally excluded from gross income as well as adjusted gross income.

83

Which one of the following statements concerning traditional IRAs for individuals under the age of 50 is not correct for 2015?

  1. If neither the taxpayer nor the taxpayer’s spouse is an active participant in an employer-sponsored retirement plan or a Keogh plan, there is no phase-out of IRA deductions.
  2. Total IRA contributions are subject to the $5,500 or 100% of compensation limit.
  3. A taxpayer whose AGI is not above the applicable phase-out range can make a $500 deductible contribution regardless of the proportional phaseout rule.
  4. A taxpayer who is partially or totally prevented from making deductible IRA contributions can make nondeductible IRA contributions.

A taxpayer whose AGI is not above the applicable phase-out range can make a $500 deductible contribution regardless of the proportional phaseout rule.

A taxpayer whose AGI is not above the applicable phaseout range can make a $200 (not $500) deductible contribution regardless of the proportional phase-out rule. This $200 minimum applies separately to taxpayer and taxpayer’s spouse.

84

Jon Stenger, a cash-basis taxpayer and age 28, had adjusted gross income of $35,000 for 2015. During the year he incurred and paid the following medical expenses:

  • Drugs and medicines prescribed by doctors - $300
  • Health insurance premiums - $1,500
  • Doctors’ fees - $2,250
  • Eyeglasses - $75
  •  = $4,125

Stenger received $500 in 2015 as reimbursement for a portion of the doctors’ fees.  If Stenger were to itemize his deductions, what would be his allowable net medical expense deduction?

  1. $0
  2. $125
  3. $900
  4. $1,425

$125

  • Drugs and medicines prescribed by doctors - $300 - Medical insurance premiums - $1,500 
  • Doctors’ fees ($2,250 − $500 reimbursement) - $1,750 
  • Eyeglasses - $75 
  • Total - $3,625 
  • Less 10% of AGI ($35,000) - ($3,500)
  • Medical expense deduction for 2014 - $125 

85

Richard Putney, who lived in Idaho for 5 years, moved to Texas in 2015 to accept a new position.  His employer reimbursed him in full for all direct moving costs, but did not pay for any part of the following indirect moving expenses incurred by Putney:

  • House hunting trips to Texas - $800
  • Temporary housing in Texas - $900

How much of the indirect expenses can be deducted by Putney as moving expenses?

  1. $0
  2. $900
  3. $1,500
  4. $1,700

$0

No deduction is allowed for indirect moving expenses.

Moving Expenses

  1. The distance between the former residence and new job (d 2) must be at least 50 miles farther than from the former residence to the former job (d 1) (i.e., d 2 − d 1  >50 miles).  If no former job, new job must be at least 50 miles from former residence.
  2. Employee must be employed at least 39 weeks out of the 12 months following the move.  Self-employed individual must be employed 78 weeks out of the 24 months following the move (in addition to 39 weeks out of first 12 months).  Time test does not have to be met in case of death, taxpayer’s job at new location ends because of disability, or taxpayer is laid off for other than willful misconduct.
  3. Deductible moving expenses include the costs of moving household goods and personal effects from the old to the new residence, and the costs of traveling (including lodging) from the old residence to the new residence.
  4. Nondeductible moving expenses include the costs of meals, househunting trips, temporary lodging in the general location of the new work site, expenses incurred in selling an old house or buying a new house, and expenses in settling a lease on an old residence or acquiring a lease on a new residence.

86

Nicole Sandler, a public school teacher with adjusted gross income of $20,000, paid the following items during the current year for which she received no reimbursement:

  • Initiation fee for membership in teachers’ union - $300
  • Dues to teachers’ union - $250
  • Voluntary unemployment benefit fund contributions to union-established fund - $85

How much can Nicole claim as allowable miscellaneous deductions on Schedule A of Form 1040?

  1. $150
  2. $335
  3. $550
  4. $635

$150

Both the initiation fee and the union dues are deductible. The voluntary benefit fund contribution is not deductible. Miscellaneous itemized deductions are generally deductible only to the extent that they exceed 2% of AGI. In this case the deductible amount is $150 [$550 − (.02 × $20,000)].

87

In 2015, Joe Buron, a single taxpayer, had $80,000 in taxable income before personal exemptions. Buron had no tax preferences, and his itemized deductions were as follows:

  • Real property taxes$4,000
  • Home mortgage interest on loan to purchase residence6,000
  • Miscellaneous deductions in excess of 2% of adjusted gross income2,000

What amount must Buron report as alternative minimum taxable income before the AMT exemption for 2015?

  1. $84,000
  2. $86,000
  3. $88,000
  4. $92,000

$86,000

Certain itemized deductions are not deductible in computing an individual’s AMTI. Specifically, no AMT deduction is allowed for:

  • state, local, and foreign income taxes,
  • real and personal property taxes, and
  • miscellaneous itemized deductions subject to the 2% of AGI floor.

Here, Buron’s $4,000 of real property taxes and $2,000 of miscellaneous itemized deductions must be added back to his $80,000 of regular taxable income before personal exemption to arrive at Buron’s AMTI before AMT exemption of ($80,000 + $4,000 + $2,000) = $86,000.

88

During the current year Alfred Allen sustained a serious injury in the course of his employment.  As a result of this injury, Allen received the following amounts during the same year:

  • Workers’ compensation - $2,400
  • Reimbursement from employer’s accident and health plan for medical expenses paid by Allen - $1,800
  • Damages for personal physical injuries - $8,000

How much of the above amounts should Allen include in his gross income for the current year?

  1. $12,200
  2. $8,000
  3. $1,800
  4. $0

$0

All three amounts that Allen received as a result of his injury are excluded from gross income. Benefits received as workers’ compensation and compensation for damages for personal physical injuries are always excluded from gross income. Amounts received from an employer’s accident and health plan as reimbursement for medical expenses are excluded provided the medical expenses were not previously deducted as itemized deductions.

89

During 2015, Jay charged $5,000 on his credit card for his dependent daughter's medical expenses. Payment to the credit card company had not been made by the time Jay filed his income tax return for 2015. However, in 2015, Jay paid a physician $3,200 for the medical expenses of his wife, who died in 2014. Disregarding the adjusted gross income percentage threshold, what amount could Jay claim in his 2015 income tax return for medical expenses?

  1. $0
  2. $3,200
  3. $5,000
  4. $8,200

$8,200

The medical expenses incurred by a taxpayer for himself, spouse, or a dependent are deductible when paid or charged to a credit card. The $5,000 of medical expenses for his dependent daughter is deductible by Jay for 2015 when charged on Jay's credit card. It doesn't matter that payment to the credit card issuer had not been made when Jay filed his return. Expenses paid for the medical care of a decedent by the decedent's spouse are deductible as medical expenses in the year they are paid, whether the expenses are paid before or after the decedent's death. Thus, the $3,200 of medical expenses for his deceased spouse is deductible by Jay when paid in 2015, even though his spouse died in 2014.

90

Jon received $500 in 2015 for jury duty.  In exchange for regular compensation from his employer during the period of jury service, Jon was required to remit the entire $500 to his employer in 2015.  In Jon’s 2015 income tax return the entire $500 jury duty fee should be

  1. Claimed in full as an itemized deduction.
  2. Claimed as an itemized deduction to the extent exceeding 2% of adjusted gross income.
  3. Deducted from gross income in arriving at adjusted gross income.
  4. Included in taxable income without a corresponding offset against other income.

Deducted from gross income in arriving at adjusted gross income.

Fees received for serving on a jury must be included in gross income. If the recipient is required to remit the jury duty fees to an employer in exchange for regular compensation, the remitted jury fees are allowed as a deduction from gross income in arriving at adjusted gross income.

91

Which one of the following statements concerning Roth IRAs is correct?

  1. A distribution from a Roth IRA is treated as first made from contributions (return of capital).
  2. The maximum contribution to a Roth IRA is limited to $5,000, for 2015.
  3. An individual cannot make contributions to a Roth IRA and a traditional IRA during the same tax year.
  4. A contribution to a Roth IRA must be made by the due date for filing the individual’s tax return for the year (including extensions).

A distribution from a Roth IRA is treated as first made from contributions (return of capital).

A distribution from a Roth IRA is treated as first made from contributions, and to that extent, will be a nontaxable return of capital. An individual, under age 50, can make a contribution to both a traditional IRA and a Roth IRA for the same tax year as long as the total amounts contributed do not exceed an overall maximum of $5,500. Contributions to a Roth IRA must be made by the due date for filing the individual’s tax return for the year (not including extensions).

92

Which one of the following statements concerning the deduction for interest on qualified education loans is correct?

  1. The deduction is available to a married taxpayer filing separately.
  2. Qualified education expenses do not include room and board.
  3. The educational expenses must relate to a period when the student was enrolled on a full-time basis.
  4. The deduction is subject to reduction if adjusted gross income exceeds specified levels.

The deduction is subject to reduction if adjusted gross income exceeds specified levels.

An individual is allowed to deduct up to $2,500 for interest on qualified education loans in arriving at AGI. The deduction is reduced by adjusted gross income in excess of specified levels and loan proceeds must have been used to pay for the qualified higher education expenses (e.g., tuition, fees, room, board) of the taxpayer, spouse, or a dependent (at the time the debt was incurred). The education expenses must relate to a period when the student was enrolled on at least a half-time basis. Married taxpayers must file a joint return to qualify for the deduction.

93

Martinsen, a calendar-year individual, files a year 1 tax return on March 31, year 2.  Martinsen reports $20,000 of gross income and he inadvertently omits $500 interest income. The IRS may assess additional tax up until which of the following dates?

  1. March 31, year 5.
  2. April 15, year 5.
  3. March 31, year 8.
  4. April 15, year 8.

April 15, year 5.

Generally, any tax imposed must be assessed within three years of the filing of the return, or if later, the due date of the return. Since Martinsen’s year 1 return was filed on March 31, of year 2, and the return was due on April 15, year 2, the statute of limitations expires on April 15, year 5. Note that a six-year statute of limitations would apply if the gross income inadvertently omitted from a return exceeds 25% of the gross income reported on the return. In this case, since the $500 omitted does not exceed 25% of the $20,000 of gross income reported on the return, the normal three-year statute of limitations applies.

94

During the current year, Gail Judd received the following dividends from

  • Benefit Life Insurance Co., on Gail’s life insurance policy (Total dividends received have not yet exceeded cumulative premiums paid) - $100
  • Safe National Bank, on bank’s common stock - $300
  • Roe Mfg. Corp., a Delaware corporation, on preferred stock - $500

What amount of dividend income should Gail report in her current year income tax return?

  1. $900
  2. $800
  3. $500
  4. $300

$800

The $100 dividend on Gail’s life insurance policy is treated as a reduction of the cost of insurance (because total dividends have not yet exceeded cumulative premiums paid) and is excluded from gross income. Thus, Gail will report the $300 dividend on common stock and the $500 dividend on preferred stock, a total of $800 as dividend income for the current year.

95

A self-employed taxpayer had gross income of $57,000.  The taxpayer paid self-employment tax of $8,000, health insurance of $6,000, and $5,000 of alimony.  The taxpayer also contributed $2,000 to a traditional IRA.  What is the taxpayer’s adjusted gross income for 2015?

  1. $55,000
  2. $50,000
  3. $46,000
  4. $40,000

$40,000

The self-employed taxpayer’s gross income of $57,000 would be reduced by a deduction for 50% of self-employment taxes paid (50% × $8,000 = $4,000), a deduction for 100% of health insurance premiums ($6,000), alimony paid to a former spouse ($5,000), and the $2,000 contributed to a traditional IRA, resulting in AGI of $40,000.

96

A couple filed a joint return in prior tax years. During the current tax year, one spouse died.  The couple has no dependent children.  What is the filing status available to the surviving spouse for the first subsequent tax year?

  1. Surviving spouse.
  2. Married filing separately.
  3. Single.
  4. Head of household.

Single. - note that surviving spouse and qualifying widower are the same thing.  

Since the couple was married at the date of death of one spouse, a joint return can be filed for tax year during which the spouse died. However, since the couple had no dependent children and assuming that the surviving spouse did not remarry, the only filing status available for the first year subsequent to the tax year in which the spouse died would be that of a single taxpayer.

97

Gilda Bach is a cash-basis self-employed consultant.  For the year 2015, she determined that her net income from self-employment was $80,000.  In reviewing her books you determine that the following items were included as business expenses in arriving at the net income of $80,000:

  • Salary drawn by Gilda Bach $20,000
  • Estimated federal income taxes paid $6,000
  • Malpractice insurance premiums $4,000
  • Cost of attending professional seminar $1,000

Based upon the above information, what should Gilda Bach report as her self-employment income for 2015?

  1. $91,000
  2. $105,000
  3. $106,000
  4. $110,000

$106,000

 

The $20,000 salary drawn by Gilda is not deductible since she is not an employee.  Also, federal income taxes are not deductible.  Malpractice insurance premiums and professional seminar expenses are deductible.  Therefore, Gilda’s self-employment income is computed by adding back the nondeductible expenses to her previously computed income of $80,000.

  • Previously computed income - $80,000
  • Gilda’s salary - $20,000
  • Federal income tax - $6,000
  •  $106,000

98

During 2015 Mary Culbert paid the following expenses:

  • Prescription drugs - $470
  • Aspirin and over-the-counter cold capsules - $130
  • Hospitals and doctors (net of insurance reimbursements under plan paid for by her employer) - $700
  • Premiums for a policy to reimburse her for lost income due to illness - $350

What is the total amount of deductible medical expenses (before application of any limitation rules that would enter into the calculation of itemized deductions) on Culbert’s 2015 tax return?

  1. $1,170
  2. $1,300
  3. $1,520
  4. $1,650

$1,170

This answer is correct.  Culbert’s total deductible medical expenses would be calculated as follows:

  • Prescription drugs - $470
  • Hospitals and doctors - $700
  • Total - $1,170

The lost-income policy does not qualify as medical insurance, and the nonprescription drugs do not qualify as deductible medical expenses.

99

Dr. Berger, a physician, reports on the cash basis.  The following items pertain to Dr. Berger’s medical practice in 2015:

  • Cash received from patients in 2015 - $200,000
  • Cash received in 2015 from third-party reimbursers for services provided by Dr. Berger in 2014 - $30,000
  • Salaries paid to employees in 2015 - $20,000
  • Year-end 2015 bonuses paid to employees in 2016 - $1,000
  • Other expenses paid in 2015 - $24,000

What is Dr. Berger’s net income for 2015 from his medical practice?

  1. $155,000
  2. $156,000
  3. $185,000
  4. $186,000

$186,000

Dr. Berger's (a cash-basis taxpayer) income consists of the $200,000 received from patients and the $30,000 received from third-party reimbursers during 2015. His 2015 deductions include the $20,000 of salaries and $24,000 of other expenses paid in 2015. The year-end bonuses will be deductible for 2016, the year in which they were paid.

100

During 2015 Robert Moore, who is 50 years old and unmarried, maintained his home in which he and his widower father, age 75, resided.  His father had $5,100 interest income from a savings account and also received $9,700 from Social Security during 2015. Robert provided 60% of his father’s total support for 2015.  What is Robert’s filing status for 2015, and how many exemptions should he claim on his tax return?

  1. Head of household and 2 exemptions.
  2. Single and 2 exemptions.
  3. Head of household and 1 exemption.
  4. Single and 1 exemption.

Single and 1 exemption.

Although the social security of $9,700 is excluded from gross income, Robert’s father does not qualify as Robert’s dependent because his father’s gross income (interest income of $5,100) was not less than $4,000. Since his father does not qualify as his dependent, Robert does not qualify for head-of-household filing status. Thus, Robert will file as single with one exemption.

101

A 33-year-old taxpayer withdrew $30,000 (pretax) from a traditional IRA.  The taxpayer has a 33% effective tax rate and a 35% marginal tax rate.  What is the total tax liability associated with the withdrawal?

  1. $10,000
  2. $10,500
  3. $13,000
  4. $13,500

$13,500

If an individual never made a nondeductible contribution to a traditional IRA, then any distributions from the IRA are fully taxable as ordinary income. Also, if the individual is under age 59 1/2, the distribution is generally subject to the 10% penalty tax for early distributions. Here, the $30,000 distribution would be taxed at the taxpayer’s marginal rate of 35% resulting in a tax of $10,500. Additionally, there will be a penalty tax of 10% × $30,000 = $3,000, because of having received the distribution before age 59 1/2, resulting in a total tax liability of $13,500.

102

Frank Lyon was held up and robbed of $800 cash in June 2015.  One month later, Frank had $2,000 cash stolen from him by his housekeeper.  Frank’s adjusted gross income for 2015 was $10,000.  How much was deductible by Frank for theft losses in 2015?

  1. $900
  2. $1,600
  3. $1,700
  4. $1,800

$1,600

Nonbusiness theft losses are deductible to the extent that each loss is in excess of $100, and the taxpayer’s net nonbusiness casualty and theft losses exceed 10% of AGI. Thus, Frank can deduct $1,600 [($800 − $100) + ($2,000 − $100) − (10% × $10,000)].

103

A taxpayer’s spouse dies in August of the current year.  Which of the following is the taxpayer’s filing status for the current year?

  1. Single.
  2. Qualified widow(er).
  3. Head of household.
  4. Married filing jointly.

Married filing jointly.

A taxpayer may file a joint return with his or her deceased spouse for the year in which the spouse died, assuming that the surviving spouse does not remarry before the close of the tax year. When a joint return is filed, it is treated as if the tax years of both spouses ended on the closing date of the surviving spouse's tax year.

104

What is the maximum amount of adjusted gross income that a taxpayer may have for 2015 and still qualify to roll over the balance from a traditional individual retirement account (IRA) into a Roth IRA?

  1. $150,000
  2. $100,000
  3. $ 75,000
  4. A rollover to a Roth IRA is not subject to an adjusted gross income limitation. 

A rollover to a Roth IRA is not subject to an adjusted gross income limitation. 

For tax years beginning after December 31, 2009, the adjusted gross income and filing status limitations have been eliminated for rollovers from a traditional IRA to a Roth IRA.  Even high income taxpayers can convert a traditional IRA to a Roth IRA. 

105

Jones, a divorced person and custodian of her 10-year-old child, filed her 2015 federal income tax return as head of a household.  She submitted the following information to the CPA who prepared her 2015 return:

  • The divorce agreement, executed in 2009, provides for Jones to receive $5,000 per month, of which $2,000 is designated as child support. After the child reaches age 18, the monthly payments are to be reduced to $3,000 and are to continue until remarriage or death. However, for the year 2015, Jones received a total of only $12,000 from her former husband.  Jones paid an attorney $4,000 in 2015 in a suit to collect the alimony owed.

What amount should be included in Jones’s 2015 return as alimony income?

  1. $0
  2. $8,000
  3. $12,000
  4. $36,000

$0

If a divorce agreement specifies both alimony and child support, but less is paid then required, then payments are first allocated to child support, with only the remainder in excess of required child support to be treated as alimony. Pursuant to Jones’s divorce agreement, $5,000 was to be paid each month, of which $2,000 was designated as child support, leaving a balance of $3,000 a month to be treated as alimony. However, during 2015, only $12,000 was paid to Jones by her former husband which was less than the $60,000 required by the divorce agreement. Since required child support payments totaled $2,000 × 12 = $24,000 for 2015, all $12,000 of the payments actually received by Jones during 2015 is treated as child support, with nothing remaining to be reported as alimony.

Question 15:

106

Nare, an accrual-basis taxpayer, owns a building which was rented to Mott under a 10-year lease expiring August 31, 2019.  On January 2, 2015, Mott paid $30,000 as consideration for canceling the lease. On November 1, 2015, Nare leased the building to Pine under a 5-year lease.  Pine paid Nare $10,000 rent for the 2 months of November and December, and an additional $5,000 for the last month’s rent.  What amount of rental income should Nare report in its 2015 income tax return?

  1. $10,000
  2. $15,000.
  3. $40,000
  4. $45,000

$45,000

Nare’s rental income includes the $30,000 lease cancellation payment, the $10,000 rent for the months of November and December, and the $5,000 rent paid in advance for the last month of the lease. Prepaid rent must be included in income in the year received regardless of the period covered or the accounting method used.

107

Don and Cynthia Wallace filed a joint return for 2015 in which they reported adjusted gross income of $35,000. During 2015 they made the following contributions to qualified organizations:

  • Land held 3 years (stated at fair market value) donated to church for new building site - $22,000
  • Cash contributions to church - $300
  • Cash contributions to the local community college - $200

Assuming that the Wallaces did not elect to reduce the deductible amount of the land contribution by the property’s appreciation in value, how much can they claim as a deduction for charitable contributions in 2015?

  1. $10,800
  2. $11,000
  3. $17,500
  4. $22,500

$11,000

Since the cash gifts of $300 to church and $200 to the community college are only subject to the 50% of AGI limitation, they are fully deductible. The deduction for the gift of land is limited to 30% of AGI (30% ITAX-007 $35,000 = $10,500) because the land is appreciated capital gain property. Therefore, the total deduction for charitable contributions is $11,000.

108

A calendar-year individual is eligible to contribute to a deductible IRA.  The taxpayer obtained a six-month extension to file until October 15 but did not file the return until November 1.  What is the latest date that an IRA contribution can be made in order to qualify as a deduction on the prior year’s return?

  1. October 15.
  2. April 15.
  3. August 15.
  4. November 1.

April 15.

Contributions can be made to a traditional IRA for a year at any time during the year, and must be made no later than the due date for filing the return for that year, not including extensions. Even though a taxpayer obtains an extension for filing the return for a prior year, the return filing extension does not extend the date for making IRA contributions. For a calendar-year individual, IRA contributions must generally be made on or before April 15 of the current year to be deductible for the prior year.

109

Judy Bishop had adjusted gross income of $35,000 in 2015 and itemizes her deductions.  Additional information is available for 2015 as follows:

  • Cash contribution to church - $2,500
  • Purchase of an art object at her church bazaar (with a fair market value of $500 on date of purchase) - $800
  • Donation of used clothes to Goodwill Charities (fair value evidenced by receipt received) - $400

What is the maximum amount Bishop can claim as a deduction for charitable contributions in 2015?

  1. $2,800
  2. $3,200
  3. $3,300
  4. $3,400

$3,200

The cash contribution of $2,500 and the $400 FMV of used clothing are deductible. The deduction for the art object is limited to the $300 excess of its cost ($800) over its FMV ($500). Therefore, the total deduction is $3,200 ($2,500 + $400 + $300).

110

Cassidy, an individual, reported the following items of income and expense during the current year:

  1. Salary$50,000
  2. Alimony paid to former spouse10,000
  3. Inheritance from a grandparent25,000
  4. Proceeds of a lawsuit for personal physical injuries50,000

What is the amount of Cassidy’s adjusted gross income?

  1. $40,000
  2. $50,000
  3. $115,000
  4. $125,000

$40,000

Cassidy’s AGI consists of the $50,000 salary received less the $10,000 of alimony paid to a former spouse, or $40,000. The receipt of an inheritance and the proceeds of a lawsuit for personal physical injuries are excluded from Cassidy’s gross income.

111

Which of the following statements about the child and dependent care credit is correct?

  1. The credit is nonrefundable.
  2. The child must be under the age of 18 years.
  3. The child must be a direct descendant of the taxpayer.
  4. The maximum credit is $600.

The credit is nonrefundable.

The child and dependent care credit is a nonrefundable credit that may vary from 20% to 35% of the amount paid for qualifying household and dependent care expenses incurred to enable a taxpayer to be gainfully employed or look for work. Expenses must be incurred on behalf of a qualifying individual. A qualifying individual includes a taxpayer’s child (e.g., taxpayer’s child, stepchild, sibling, stepsibling, or descendant of any of these) under age 13, as well as a dependent or spouse who is physically or mentally incapable of self-care. Since the maximum amount of qualifying expenses is limited to $3,000 for one, or $6,000 for two or more qualifying individuals, the maximum credit would be 35% × $3,000 = $1,050 for one qualifying individual, and 35% × $6,000 = $2,100 for two or more qualifying individuals.

112

The following information pertains to Cole’s personal residence, which sustained casualty fire damage during the current year:

  • Adjusted basis - $150,000
  • Fair market value immediately before the fire - $200,000
  • Fair market value immediately after the fire - $180,000
  • Fire damage repairs paid for by Cole during the year - $10,000

The house was uninsured.  Before consideration of any “floor” or other limitation on tax deductibility, the amount of this current year casualty loss was

  1. $30,000
  2. $20,000
  3. $10,000
  4. $0

$20,000

The amount of a personal casualty loss is the lesser of (1) the adjusted basis of the property ($150,000), or (2) the decline in the property’s fair market value resulting from the casualty ($200,000 − $180,000 = $20,000). Thus, Cole’s casualty loss before consideration of the "$100 floor" or the 10% of adjusted gross income limitation is $20,000.

113

Ben Carr, a calendar-year taxpayer, was 65 years old on December 30, 2014. Ben filed his 2014 individual income tax return on April 1, 2015, and attached a check for the balance of tax due as shown on the return. On July 15, 2015, Ben realized that he had inadvertently failed to claim the additional standard deduction to which he was entitled by virtue of having attained age 65 in 2014. In order for Ben to recover the tax that he would have saved by claiming the additional standard deduction, he must file a refund claim no later than

  1. December 31, 2015.
  2. April 1, 2018.
  3. April 15, 2018.
  4. August 15, 2018.

April 15, 2018.

A taxpayer must file a claim for refund within 3 years from the date a return was filed, or 2 years from the date of payment of tax, whichever is later. If a return is filed before its due date, it is treated as filed on its due date. Thus, the taxpayer’s 2014 calendar-year return that was filed on April 1, 2015 is treated as filed on April 15, 2015. Therefore, a claim for refund must be filed no later than April 15, 2018.

114

A claim for refund of erroneously paid income taxes, filed by an individual before the statute of limitations expires, must be submitted on Form

  1. 843
  2. 1040X
  3. 1045
  4. 1139

1040X

An income tax refund claim is made on Form 1040X.  Form 843 should be used to file a refund claim for taxes other than income taxes.  Form 1045 may be used to file for a tentative adjustment or refund of taxes when an overpayment of taxes for a prior year results from the carryback of a current year’s net operating loss.

115

When determining his federal income tax, Curt had the following items for 2015:

  • Personal exemption - $4,000
  • Itemized deduction for personal property taxes - $2,500
  • Charitable contribution of capital gain property - $1,500
  • Net long-term capital gain - $1,000
  • Excess of MACRS depreciation on personal property over depreciation computed using the 150% declining-balance method - $600
  • Tax-exempt interest from City of Chicago general obligation bonds - $400

What is the total amount of adjustments to taxable income for purposes of computing Curt’s alternative minimum tax for 2015?

  1. $3,100
  2. $7,100
  3. $7,200
  4. $7,800

$7,100

Curt’s adjustments consist of the $600 of excess depreciation, the $4,000 personal exemption and the personal property taxes of $2,500, a total of $7,100.

116

If an individual taxpayer’s passive losses and credits relating to rental real estate activities cannot be used in the current year, then they may be carried

  1. Back 3 years, but they cannot be carried forward.
  2. Forward up to a maximum period of 20 years, but they cannot be carried back.
  3. Back 2 years or forward up to 20 years, at the taxpayer’s election.
  4. Forward indefinitely or until the property is disposed of in a taxable transaction.

Forward indefinitely or until the property is disposed of in a taxable transaction.

Generally, losses and credits from passive activities can only be used to offset income from (or tax allocable to) passive activities. If there is insufficient passive-activity income (or tax) to absorb passive-activity losses and credits, the unused losses and credits are carried forward indefinitely or until the property is disposed of in a taxable transaction.

117

Which of the following is not included in determining the total support of a dependent?

  1. Clothing purchased for the dependent.
  2. Tuition payments paid on behalf of the dependent.
  3. Life insurance premiums paid on behalf of the dependent.
  4. Birthday presents given to the dependent.

Life insurance premiums paid on behalf of the dependent.

Support includes food, clothing, FMV of lodging, medical, recreational, educational, and certain capital expenditures made on behalf of a dependent. Excluded from support are life insurance premiums, funeral expenses, nontaxable scholarships, and income and Social Security taxes paid from a dependent’s own income.

118

An accrual-basis taxpayer should report gross income

  1. When income is either actually or constructively received, whether in cash or in property.
  2. When "all events" have occurred that fix the taxpayer’s right to receive the item of income, and the amount can be determined with reasonable accuracy.
  3. When income is either actually or constructively received in cash only.
  4. When "all events" have occurred that fix the taxpayer’s right to receive the item of income, and the amount can be determined with absolute certainty.

When "all events" have occurred that fix the taxpayer’s right to receive the item of income, and the amount can be determined with reasonable accuracy.

Under the accrual method, an item is generally included in gross income for the year in which it is earned, regardless of when income is collected. An item of income is earned when all the events have occurred to fix the taxpayer’s right to receive the income, and the amount of income can be determined with reasonable accuracy.

119

Frank Lanier is a resident of a state that imposes a tax on income. The following information pertaining to Lanier’s state income taxes is available:

  • Taxes withheld in 2015 - $3,500
  • Refund received in 2015 of 2014 tax - $400
  • Deficiency assessed and paid in 2015 for 2013: 
  •       Tax - $600
  •       Interest - $100

What amount should Lanier utilize as state and local income taxes in calculating itemized deductions for his 2015 federal tax return?

  • $3,500
  • $3,700
  • $4,100
  • $4,200

$4,100

The $3,500 of taxes withheld is deductible as is the $600 of tax paid during 2015 for 2013. The $400 refund of 2014 taxes does not reduce the 2015 deduction, but may be includable in income.

120

Which of the following disqualifies an individual from the earned income credit?

  1. The taxpayer's qualifying child is a 17-year-old grandchild.
  2. The taxpayer has earned income of $5,000.
  3. The taxpayer's five-year-old child lived in the taxpayer's home for only eight months.
  4. The taxpayer has a filing status of married filing separately.

The taxpayer has a filing status of married filing separately.

The earned income credit is a refundable tax credit for eligible low-income taxpayers. To be eligible, an individual must have earned income and generally must maintain a household for more than half the year for a qualifying child. A qualifying child includes the taxpayer's child or grandchild who lives with the taxpayer for more than half of the taxable year, and is under age 19, or a full-time student under age 24, or permanently or totally disabled. The earned income credit is not available to married taxpayers filing separately.

121

In the current year Jensen had the following items:

  • Salary - $50,000
  • Inheritance - $25,000
  • Alimony from ex-spouse - $12,000
  • Child support from ex-spouse - $9,000
  • Capital loss on investment stock sale - ($6,000)

What is Jensen’s AGI for the current year?

  1. $44,000
  2. $59,000
  3. $62,000
  4. $84,000

$59,000

Jensen’s AGI consists of the $50,000 salary plus the $12,000 alimony received, less a deduction for a net capital loss which is limited to $3,000. The inheritance and child support that Jensen received are excluded from gross income.

122

Bud Ace, a self-employed carpenter, reports his income on the cash basis. During the current year he completed a job for a customer and sent him a bill for $3,000.  The customer was not satisfied with the work and indicated that he would only pay $1,500.  Ace agreed to reduce the bill to $2,000 but before payment was made the customer died.  Ace could not collect from the customer’s estate and should treat this loss as

  1. An ordinary business deduction of $3,000.
  2. An ordinary business deduction of $2,000.
  3. A short-term capital loss of $1,500.
  4. A nondeductible loss as no income was reported.

A nondeductible loss as no income was reported.

Accounts receivable for services rendered by a cash-basis taxpayer have no basis for tax purposes. Since a cash-basis taxpayer does not include accounts receivable in income until payment is received, failure to collect accounts receivable results in a nondeductible loss.

123

Martin filed a timely return on April 15.  Martin inadvertently omitted income that amounted to 30% of his gross income stated on the return.  The statute of limitations for Martin’s return would end after how many years?

  1. 3 years.
  2. 6 years.
  3. 7 years.
  4. Unlimited.

6 years.

The normal period for the statute of limitations is three years after the return is filed, or if later, the due date of the return. However, a six-year statute of limitations applies if the gross income omitted from the return exceeds 25% of the gross income reported on the return.

124

Which of the following is a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor?

  1. Gambling losses up to the amount of gambling winnings.
  2. Medical expenses.
  3. Real estate tax.
  4. Employee business expenses.

Employee business expenses.

Unreimbursed employee business expenses are deductible as a miscellaneous itemized deduction subject to the 2% of AGI floor. In contrast, real estate taxes are fully deductible as an itemized deduction, while gambling losses up to the amount of gambling winnings are deductible as a miscellaneous itemized deduction not subject to the 2% of AGI floor. Unreimbursed medical expenses are deductible as an itemized deduction subject to a 10% AGI floor.

125

A general business credit in excess of the limitation amount is carried

  1. Forward indefinitely.
  2. Back 2 years and forward up to 20 years, at the taxpayer’s election.
  3. Back 1 year and forward 20 years.
  4. Forward up to a maximum of 20 years, but they cannot be carried back.

Back 1 year and forward 20 years.

General Business Credit

1.It is comprised of numerous credits including the

  1. investment credit (energy and rehabilitation),
  2. work opportunity credit,
  3. small employer health insurance credit,
  4. alcohol fuels credit,
  5. research credit,
  6. low-income housing credit,
  7. enhanced oil recovery credit,
  8. disabled access credit,
  9. renewable resources electricity production credit,
  10. empowerment zone employment credit,
  11. Indian employment credit,
  12. employer social security credit,
  13. orphan drug credit,
  14. new markets tax credit,
  15. small-employer pension plan startup cost credit,
  16. the employer-provided child care credit, and
  17. the energy efficient home credit.

The general business credit is allowed to the extent of “net income tax” less the greater of (1) the tentative minimum tax or (2) 25% of “net regular tax liability” above $25,000.

A general business credit in excess of the limitation amount is carried back 1 year and forward 20 years.

126

Rock Crab, Inc. purchases the following assets during the year:

  • Computer - $3,000
  • Computer desk - $1,000
  • Office furniture - $4,000
  • Delivery van - $25,000

What should be reported as the cost basis for MACRS five-year property?

  1. $3,000
  2. $25,000
  3. $28,000
  4. $33,000

$28,000

The MACRS five-year property classification includes autos and taxis, light and heavy general-purpose trucks, calculators, copiers, computers, and peripheral equipment. The MACRS seven-year property classification includes office furniture, fixtures, and equipment, as well as agricultural machinery and equipment. Here, the $3,000 computer and $25,000 delivery van fall within the five-year property classification, while the computer desk and office furniture would be classified as seven-year property.

127

Kant, a cash-basis individual, owns and operates an office building. Kant received the following payments during the current year:

  • Current rents - $30,000
  • Advance rents for the next year - $10,000
  • Security deposits held in a segregated account - $5,000
  • Lease cancellation payments - $15,000

What amount is included in gross income?

  1. $30,000
  2. $40,000
  3. $55,000
  4. $60,000

$55,000

Gross income includes the $30,000 of current rents, $10,000 of advance rents, and $15,000 lease cancellation payments. Advance rents must be included in gross income when received regardless of the period covered or the accounting method used. The security deposits held in a segregated account will be included in gross income at a later date if not returned to tenants.

128

Which one of the following statements is correct with regard to the child tax credit?

  1. The credit is $500 per qualifying child for tax years beginning in 2015.
  2. The credit is not subject to income phaseout.
  3. To qualify for the credit, a dependent child must be less than 14 years old.
  4. A qualifying child must be the taxpayer’s dependent.

A qualifying child must be the taxpayer’s dependent.

Individual taxpayers are permitted to take a tax credit based solely on the number of their dependent children under age 17. The amount of credit is $1,000 per qualifying child. The credit phases out when modified adjusted gross income exceeds specified thresholds.

129

Allison sold a building for $600,000.  Allison received a down payment of $120,000 as well as annual principal payments of $120,000 for each of the subsequent four years. Allison purchased the building for $500,000 and claimed depreciation of $80,000.  What amount of gain should Allison report in the year of sale using the installment method?

  1. $180,000
  2. $120,000
  3. $54,000
  4. $36,000

$36,000

Under the installment method, gain from the sale is prorated and recognized over the years in which payments are received. The amount of gain recognized for a tax year is calculated by multiplying the payment received in that year by the gross profit ratio. The gross profit ratio is equal to the gross profit divided by the payments that are to be received from the sale. Here, property with a basis of $500,000 − $80,000 = $420,000 was sold for $600,000, resulting in a gross profit of $180,000. Since only $120,000 of the $600,000 selling price was received in the year of sale, the amount of gain to be reported under the installment method for the year of sale would be $120,000 × ($180,000/$600,000) = $36,000.

130

Cathy qualified to itemize deductions on her calendar year 2015 tax return.  Cathy’s 2015 adjusted gross income was $25,000 and she made a $1,500 cash donation directly to a needy family.  Also during 2015, Cathy donated stock, valued at $5,000, to her church.  Cathy had purchased the stock ten months earlier for $2,000.  What was the maximum amount of charitable contribution allowable as an itemized deduction on Cathy’s 2015 income tax return?

  1. $1,500
  2. $2,000
  3. $3,500
  4. $5,000

$2,000

The amount of contribution for appreciated property is generally the property’s FMV if the property would result in a long-term capital gain if sold. If not, the amount of contribution for appreciated property is generally limited to the property’s basis. Here, the stock worth $5,000 was purchased for $2,000 just 10 months earlier. Since its holding period does not exceed 12 months, a sale of the stock would result in a short-term capital gain, and the amount of allowable charitable contribution deduction is limited to the stock’s basis of $2,000. Additionally, to be deductible, a contribution must be made to a qualifying organization. As a result, the $1,500 cash given to a needy family is not deductible.

131

David Hetnar is covered by a $90,000 group-term life insurance policy of which his wife is the beneficiary. Hetnar’s employer pays the entire cost of the policy, for which the uniform annual premium is $1 per $1,000 of coverage. How much of this premium is taxable to Hetnar?

  1. $0
  2. $40
  3. $50
  4. $90

$40

The cost of group-term life insurance provided by an employer must be included in an employee’s income to the extent of the cost of life insurance coverage in excess of $50,000. The excess coverage is $90,000 − $50,000 = $40,000. At a cost of $1 per thousand, the amount taxable to Hetnar is $1 × 40 = $40.

132

On April 15, 2015, a married couple filed their joint 2014 calendar-year return showing gross income of $120,000.  Their return had been prepared by a professional tax preparer who mistakenly omitted $45,000 of income, which the preparer in good faith considered to be nontaxable.  No information with regard to this omitted income was disclosed on the return or attached statements.  By what date must the Internal Revenue Service assert a notice of deficiency before the statute of limitations expires?

  1. April 15, 2021.
  2. December 31, 2019.
  3. April 15, 2018.
  4. December 31, 2016.

April 15, 2021.

The normal period for assessment is the later of 3 years after the return is filed, or 3 years after the due date of the return. The assessment period is extended to 6 years if the gross income omitted from the return exceeds 25% of the gross income reported on the return. In this case, since the $45,000 of gross income inadvertently omitted from the return exceeds 25% of the $120,000 of gross income reported on the return, the 6-year period for assessment applies. Since the return was due and also filed on April 15, 2015, a notice of deficiency must be assessed by April 15, 2021.

133

Albert and Lois Stoner, age 66 and 64, respectively, filed a joint tax return for 2015.  They provided all of the support for their blind 19-year-old son, who has no gross income.  Their 22-year-old daughter, a full-time student until her graduation on June 14, 2015, earned $8,000, which was 40% of her total support during 2015.  Her parents provided the remaining support.  The Stoners also provided the total support of Lois’ father, who is a citizen and life-long resident of Peru. How many exemptions can the Stoners claim on their 2015 income tax return?

  1. 3
  2. 4
  3. 5
  4. 6

4

Mr. and Mrs. Stoner are entitled to one exemption each. They are entitled to one exemption for their daughter since she is a qualifying child (i.e., she did not provide more than half of her own support, and she is a full-time student under age 24). An exemption can be claimed for their son because he is a qualifying relative (i.e., they provided more than half of his support, and his gross income was less than $4,000). No exemption is allowable for Mrs. Stoner’s father since he was neither a US citizen nor resident of US, Canada, or Mexico. There is no additional exemption for being age sixty-five or older. Thus, the Stoners can claim a total of 4 exemptions on their 2015 return.

134

Ed and Ann Ross were divorced in January 2015.  In accordance with the divorce decree, Ed transferred the title in their home to Ann in 2015.  The home, which had a fair market value of $150,000, was subject to a $50,000 mortgage that had 20 more years to run. Monthly mortgage payments amount to $1,000. Under the terms of settlement, Ed is obligated to make the mortgage payments on the home for the full remaining 20-year term of the indebtedness, regardless of how long Ann lives. Ed made 12 mortgage payments in 2015. What amount is taxable as alimony in Ann’s 2015 return?

  1. $0
  2. $12,000
  3. $100,000
  4. $112,000

$0

In order to be treated as alimony, a payment must be made in cash and be received by, or on behalf of, the payee spouse. Furthermore, cash payments must be required to terminate upon the death of the payee spouse to be treated as alimony. In this case, the transfer of title in the home to Ann is not a cash payment and cannot be treated as alimony. Although the mortgage payments are cash payments made on behalf of Ann, the payments are not treated as alimony because they will be made throughout the full 20-year mortgage period and will not terminate in the event of Ann’s death.

135

A CPA’s adjusted gross income (AGI) for the preceding twelve-month tax year exceeds $150,000.  Which of the following methods is(are) available to the CPA to compute the required annual payment of estimated tax for the current year in order to make timely estimated tax payments and avoid the underpayment of estimated tax penalty?

  •  I.The annualization method.
  • II.The seasonal method.
  1. I only.
  2. II only.
  3. Both I and II.
  4. Neither I nor II.

I only. - the seasonal method applies to corporations only.

An individual whose tax liability is not sufficiently covered by withholding must pay estimated tax in quarterly installments or be subject to penalty. Generally, there will be no underpayment penalty if amounts withheld plus estimated payments are at least equal to the lesser of 90% of the individual’s current year’s tax (determined on the basis of actual income or annualized income), or 100% of the preceding year’s tax. An individual whose AGI for the preceding year exceeds $150,000 must use 110% (instead of 100%) if s/he wishes to base his or her current year’s estimated tax payments on the preceding year’s tax liability. The use of the adjusted seasonal installment method is available to corporations, but is not available for individuals.

136

Terry, a taxpayer, purchased stock for $12,000.  Later, Terry sold the stock to a relative for $8,000, when the stock’s fair market value was still $12,000.  What amount is the relative’s gain or loss resulting from the purchase of the stock from Terry?

  1. $2,000 loss.
  2. $0
  3. $2,000 gain.
  4. $4,000 gain.

$0

Here, Terry purchased stock for $12,000 and later sold the stock for $8,000 to a relative, when the stock's FMV was $12,000. A sale of property to a relative for less than FMV is considered in part a sale and in part a gift. Terry is not allowed to recognize any loss resulting from the sale and is deemed to have made a gift to the relative to the extent that the selling price was less than FMV ($12,000 − $8,000 = $4,000 gift). The receipt of the gift is excluded from the relative's gross income, and the relative's basis for the stock would be $12,000.

137

Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for year 13. During year 13, Taylor donated land to a church and made no other contributions.  Taylor purchased the land in year 1 as an investment for $14,000.  The land’s fair market value was $25,000 on the day of the donation.  What is the maximum amount of charitable contribution that Taylor may deduct as an itemized deduction for the land donation for year 13?

  1. $25,000
  2. $14,000
  3. $11,000
  4. $0

$25,000

If appreciated property is contributed to charity, the amount of contribution is generally the property’s FMV if the property would have resulted in a long-term capital gain if sold. Since the land was purchased as an investment for $14,000 in year 1, a sale in year 13 would have resulted in a LTCG. As a result, the amount of Taylor’s charitable contribution is the land’s FMV of $25,000, which would then be subject to a 30% of AGI limitation. However, since Taylor had $90,000 of AGI, all $25,000 of land contribution would be allowed as an itemized deduction for year 13.

138

Ryan Landerholm, an employee of Wendler Corporation, died on June 30, 2015.  During July, Wendler Corporation made employee death payments (which do not represent the proceeds of life insurance) of $20,000 to his widow, and $20,000 to his 15-year-old son.  What amounts should be included in gross income by the widow and son in their respective tax returns for 2015?

  1. $15,000 for the widow, $20,000 for the son.
  2. $17,500 for the widow, $17,500 for the son.
  3. $20,000 for the widow, $20,000 for the son.
  4. $15,000 for the widow, $15,000 for the son.

$20,000 for the widow, $20,000 for the son.

The entire amount of employee death payments must be included in gross income by the widow and son. The $5,000 employee death benefit exclusion was repealed for decedents dying after August 20, 1996.

139

Nichols, an unmarried individual, had an adjusted gross income of $125,000 in 2015 before any IRA deduction, taxable social security benefits, or passive activity losses.  Nichols incurred a loss of $30,000 in 2015 from rental real estate in which he actively participated.  What amount of loss attributable to this rental real estate can be used in 2015 as an offset against income from nonpassive sources?

  1. $0
  2. $12,500
  3. $25,000
  4. $30,000

$12,500

Losses from passive sources may generally only be used to offset income from other passive activities. Although a rental activity is defined as a passive activity regardless of the owner’s participation in the operation of the rental property, a special rule permits an individual to offset up to $25,000 of income that is not from passive activities by losses from a rental real estate activity if the individual actively participates in the rental real estate activity. However, this special $25,000 allowance is reduced by 50% of the taxpayer’s AGI in excess of $100,000 and is fully phased out when AGI exceeds $150,000. Since Nichols’ AGI is $125,000, the special $25,000 allowance is reduced by $12,500 [($125,000 − $100,000) × 50%]. Thus, $12,500 ($25,000 − $12,500) of the rental loss can be offset against income from nonpassive sources.

140

Frank Zimmerman became a partner in Monahan Associates on January 1, 2015, with a 10% interest in Monahan’s profits, losses, and capital.  Monahan Associates manufactures sports equipment. Zimmerman does not materially participate in the partnership business.  For the year ended December 31, 2015, Monahan had an operating loss of $150,000.  In addition, Monahan earned interest of $12,000 on a temporary investment.  Monahan has kept the principal temporarily invested while awaiting delivery of equipment that is presently on order. The principal will be used to pay for this equipment. Zimmerman’s passive loss for 2015 is

  1. $0
  2. $13,800
  3. $15,000
  4. $16,200

$15,000

A partnership is a pass-through entity and its items of income and loss pass through to partners to be included on their tax returns. Since Zimmerman does not materially participate in the partnership’s sports equipment business, Zimmerman’s distributive share of the loss from the partnership’s sports equipment business is classified as a passive activity loss. Portfolio income or loss must be excluded from the computation of the income or loss resulting from a passive activity and must be separately passed through to partners.
Portfolio income includes all interest income, other than interest income derived in the ordinary course of a trade or business. Interest income derived in the ordinary course of a trade or business includes only interest income on loans and investments made in the ordinary course of a trade or business of lending money, and interest income on accounts receivable arising in the ordinary course of a trade or business. Since the $12,000 of interest income derived by the partnership resulted from a temporary investment, the interest income must be classified as portfolio income and cannot be netted against the $150,000 operating loss from the sports equipment business. Thus, Zimmerman will report a passive activity loss of $150,000 × 10% = $15,000 and will report portfolio income of $12,000 × 10% = $1,200.