Individual Taxation

Question 1

A taxpayer’s spouse dies in the current year. What is the taxpayer’s filing status for the current year?

Answer 1

Married filing jointly. The surviving spouse is considered to be married (and thus able to file as married filing jointly) for the entire current year even if the spouse dies earlier in the year.

Question 2

In order to file HOH filing status when claiming a parent as a dependent, how long does the parent have to have lived in the assisted living home for during the taxable year?

Answer 2

Parent would have to live in the assisted living home for the entire year

Question 3

Where is the deduction for qualifying business income (QBI) applied in the individual tax formula?

Answer 3

As a deduction from adjusted gross income separate from the standard deduction and itemized deductions

Question 4

How does a self-employed cash basis taxpayer report interest on the income tax return?

Answer 4

Cash basis taxpayers deduct interest in the year paid or the year to which the interest relates, whichever is later.

Question 5

Which costs are required to be capitalized under the uniform capitalization rules?
(Name 13 IC)

Answer 5

Direct materials, direct labor, and applicable indirect costs. Applicable indirect costs include utilities, warehousing costs, repairs & maintenance, indirect labor, rents, storage, depreciation and amortization, insurance, pension contributions, engineering and design, repackaging, spoilage and scrap, and administrative supplies.

Question 6

The Uniform Capitalization Rules apply to retailers whose average gross receipts for the preceding three years exceeds what amount?

Answer 6

25 Million

Question 7

What are the treatment options for a net operating loss occurring in tax years after December 31, 2017?

Answer 7

Net operating losses may not be carried back (for tax years beginning after December 31, 2017), but can be carried forward indefinitely. Also, note that the net operating loss utilized in one tax year is limited to 80 percent of taxable income.

Question 8

How does each shareholder in an S corporation report gross income?

Answer 8

Each shareholder reports his/her pro rate share of the S corporation’s taxable income (non-separately stated) in his or her gross income. The distributions are not taxable to the extent the shareholders’ basis exceeds the distribution (and increased for any income reported by them during the year).

Question 9

What is the 2019 dollar limit phase out amount for the qualifying business income deduction for a specified service trade or business?

Answer 9

A specified service trade or business with taxable income over the $210,700 for 2019 is not eligible for the QBI deduction.

Question 10

How are expenses reported under a nonaccountable plan?

Answer 10

Under a non accountable plan (i.e. expenses are not reported to the employer), any amounts received by an employee from the employer must be reported by the employer as part of wages on the employee’s W-2 for the year (and subject to income tax withholding requirements). The gross amount received is reported as income.

Question 11

Is group term life insurance a taxable or nontaxable fringe benefit? Is there a limitation?

Answer 11

The first $50,000 of group term life insurance is a nontaxable fringe benefit.

Question 12

If two individuals agree to trade their services, how is the amount reported as? At what amount and as income or expense?

Answer 12

In the case of non cash income, the amount of income to be reported is the FMV of the property or services RECEIVED not the FMV of services rendered.

Question 13

A cash basis taxpayer should report gross income for the year in which income is…

Answer 13

A cash basis taxpayer should report gross income for the year in which income is either actually or constructively received, whether in cash or in property

Question 14

What type of life insurance proceeds are nontaxable to the corporation?

Answer 14

Life insurance proceeds on the life of an officer when the corporation is the owner and beneficiary are not reported as taxable income of the corporation. Also note that any expense related to the premiums would not have been tax deductible for the corporation.

Question 15

What is the IRA deduction on a CY joint tax return? What is the phase-out?

Answer 15

In 2019, taxpayers can contribute and deduct up to $6,000 to an IRA. For couples filing a joint return, where at least one spouse is an active participant in a retirement plan, the deductible portion is phased out. For a spouse who is an active participant, the phase-out range in 2019 begins at $103,000. For a spouse who is not an active participant, but is married to someone who is, the phase-out range in 2019 begins at $193,000.

Question 16

What is the maximum amount of charitable contribution that may be deducted as an itemized deduction for long-term capital gain appreciated property (ex. land donation, donated stocks) in the CY? And at what amount? How long is the carryforward period?

Answer 16

The taxpayer can deduct long-term (i.e. held longer than 12 months) capital gain appreciated property at the higher FMV (higher than cost basis) without paying capital gains tax on the appreciated property. The deduction is limited to 30 percent of adjusted gross income (AGI). A five-year carry forward period applies.

Question 17

What is the maximum amount of charitable contribution that may be deducted as an itemized deduction for a charitable contribution in the CY?

Answer 17

The contribution limit for a church or charity is 60% of the contribution base (adjusted gross income in this case). The individual can take their CY contribution plus the PY carryover if it is under the current year limit.

Question 18

How is allowable casualty loss calculated? (4 steps)

Answer 18

Step 1: Start with LESSER of decrease in FMV or adjusted basis
Step 2: Reduce amount by insurance proceeds
Step 3: Less $100 floor (applied to each separate casualty loss)
Step 4: Less: AGI threshold applied to all casualty losses in the aggregate

Question 19

What is the amount and limitation for interest on a qualified education loan?

Answer 19

The adjustment for education loan interest is limited to the amount paid or $2,500 (whichever is lower), and all qualified education loan interest is allowed as part of the adjustment.
The adjustment is phased-out for single taxpayers with modified AGI between $65,000 and $80,000 (2018) and MFJ between $135,000 and $165,000 (2018).

Question 20

Charitable contributions subject to the 60-percent limit that are not fully deductible in the year made may be…

Answer 20

carried forward 5 years

Question 21

What is the additional standard deduction available for individuals age 65 or older?

Answer 21

$1,300 per person over age 65

Question 22

For a taxpayer who itemized deductions, what is the deductibility of interest on a construction loan?

Answer 22

Mortgages of up to $750,000 to buy, build, or substantially improve a home allow for the full deduction of interest.

Question 23

How is estimated tax for the current year computed in order to make timely estimated tax payments and avoid the underpayment of estimated tax penalty?

Answer 23

To avoid penalties, if a taxpayer owes $1,000 or more in tax payments beyond withholdings, such taxpayer will need to have paid in for taxes the lesser of: 90% of current year’s tax (the annualized method), or 100% of last year’s tax (the prior year method). However, if the taxpayer had adjusted gross income in excess of $150,000 in the prior year, 110% of the prior year’s tax liability is used to compute the safe harbor for estimated payments.These payments would have had to be made in 4 equal installments.

Question 24

What is the maximum annual deductible amount for self-employed individuals to a Keogh Plan?

Answer 24

The maximum annual deductible amount for self-employed individuals to a Keogh Plan is the lesser of $56,000 or 25% of net earnings. “Net earnings” is defined as business income minus business expenses minus 50% of self-employment taxes minus the Keogh deduction. Because the Keogh deduction is part of the equation to obtain the “net earnings” amount, the mathematical equivalent of 25% of net earnings is to multiply 20% [25% / 125%] by the self-employment earnings before the Keogh deduction.

Question 25

A qualified appraisal for real property donations is NOT required to be attached to the tax return UNLESS the property value exceeds

Answer 25

$5,000

Question 26

A contemporaneous written acknowledgement is required for donations of $XX or more.

Answer 26

$250

Question 27

Is a medical expense deduction allowed for Medicare insurance premiums?

Answer 27

Yes

Question 28

How are medical expenses treated in regards to the alternative minimum tax?

Answer 28

Medical expenses, net of insurance reimbursements, are included in the alternative minimum tax calculation. However, the allowable amount for AMT purposes is the net amount in excess of 10% of adjusted gross income.

Question 29

What expenses are qualifying expenses for the adoption credit?

Answer 29

Adoption fees (legal fees and agency fees) would be qualifying expenses for the tax credit (medical expenses do not qualify)

Question 30

How does the Child and Dependent Care Credit work?

Answer 30

• Dependent has to be under 13 years of age
• The maximum eligible for one dependent is $3,000
• Then, the eligible amount is further limited to the lowest earned income of either spouse.
• Then they are in the 20% range if their combined income is low.
• And the credit is nonrefundable.
• The maximum child and dependent care credit is 35% of eligible expenses, which a phase-out for excessive AGI.
• The child need not be a direct descendant of the taxpayer for there to be a credit. To be a qualifying child, the child must merely be a dependent of the taxpayer.

Question 31

How does the child tax credit work?

Answer 31

The child tax credit is available fully for taxpayers with AGI up to $400,000 for a joint return (2019). The eligible children must be under the age of 17. The amount of the child tax credit is $2,000 each.

Question 32

How is the refundable portion of the child tax credit computed?

Answer 32

The refundable portion of the child tax credit for 2018 is the lesser of:
1. the excess child tax credit over tax liability
2. earned income less $2,500 x 15%, or
$1,400 per qualifying child

Question 33

How long can a passive activity loss be carried forward?

Answer 33

Indefinitely

Question 34

What is the Mom and Pop exception, does it apply to MFS and when is the phaseout?

Answer 34

Rental real estate activities are passive activities, and losses from them are generally not allowed to be used as an offset against income from any non-passive activities. However, there is a limited exception to this general rule in the case where a taxpayer actively participates in rental real estate. Under this exception, up to $25,000 of passive losses may be used to offset income from non-passive sources. This $25,000 allowance is reduced (not below zero) by an amount equal to 50% of the amount by which the taxpayer’s modified AGI exceeds $100,000 (becoming fully phased-out at modified AGI of $150,000). In this case, modified AGI of $125,000 is $25,000 higher than the $100,000 floor. The allowance of the $25,000 exception is reduced by 50% of the difference (or $12,500). Therefore, the amount allowable to be used to offset against non-passive sources is $12,500. Note that MFS filers are not allowed any loss deduction amount unless they lived apart the entire year. If MFS filers do live apart for the entire year, they each can claim a maximum deduction of $12,500 before the phase-out, which begins when MAGI exceeds $50,000.

Question 35

When a gift is sold for less than the FMV at time of gift and less than the original basis, what basis is used and what is the holding period?

Answer 35

The basis of the painting depended upon what Diana eventually sold the painting for. The gain basis of $7,000 would have applied if Diana had sold the painting above $7,000, but that did not happen in this case. The basis of $5,000 (FMV at the date of gift) applied because Diana sold the painting for less than the FMV at the date of gift and at the date of the gift the FMV of the gift was less than the donor’s basis in the gift. Further, although the holding period for the donee typically includes the donor’s holding period, this case is an exception to the rule. The holding period starts with the gift date when the FMV at the date of gift is used as the basis. Therefore, the sale resulted in a short-term capital loss of $500.

Question 36

What itemized deductions are NOT allowed under AMT. In other words, what ARE AMT adjustments for itemized deductions?

Answer 36

State income taxes and real estate taxes

Question 37

What are the rules around a multiple support agreement?

Answer 37

In a multiple support agreement, all must be qualifying relatives who together contribute more than 50% of the support of the dependent. In addition, a contributor must have provided more than 10% of the individual’s support to claim the individual as a dependent.

Question 38

What are the rules for related party losses?

Answer 38

Losses are disallowed on sales between related parties. “Related” includes brothers and sisters, husband-wife, lineal descendants (father, son, grandfather), and entities that are more than 50% owned by individuals, corporations, trusts and/or partnerships.

Losses from sales and exchanges are recognized for all “in-laws.”

Question 39

What are the rules around Section 179 expense? What is the maximum amount and what is the limit on the amount allowed to be placed into service during the year to qualify?

Answer 39

The question asks the candidate to isolate the Section 179 expense election from other applicable depreciation (e.g., MACRS) and respond only to the amount expensed under Section 179. For 2019, the maximum amount that can be expensed under Section 179 is $1,020,000, but that amount is reduced, dollar for dollar, for the amount the total related property placed into service in the year exceeds $2,550,000. In this case, the total amount of equipment placed into service is $3,570,000, and the excess is $1,020,000. Therefore, the maximum allowable expense under Section 179 for the year is $0 [$1,020,000 − $1,020,000 = $0].

The Section 179 deduction is reduced dollar for dollar by the amount of property placed in service over $2,550,000.

Question 40

How is the failure-to-pay penalty computed?

Answer 40

The failure-to-pay penalty is generally 0.5% of the tax due for each month (or any fraction thereof) the tax is not paid, up to a maximum of 25% of the unpaid tax.

Question 41

How is the failure-to-file penalty computed?

Answer 41

The failure-to-file penalty is generally 5% of the tax due for each month (or any fraction thereof), not year, the return is not filed, up to a maximum of 25% of the unpaid tax.

Question 42

What happens if someone owes both the failure-to-pay penalty and the failure-to-file penalty?

Answer 42

If both the failure-to-file penalty and the failure-to-pay penalty apply, the failure-to-file penalty is reduced by the amount of the failure-to-pay penalty. The penalty is thus not the total of the two penalties.

Question 43

What are the requirements to get the Earned Income Credit?

Answer 43

• The taxpayer must meet certain earned low-income thresholds.
• The taxpayer must not have more than the specified amount of disqualified income.
• The taxpayer must be over age 25 and less than 65 if there are no qualifying children.
• If married, the taxpayer must generally file a joint return with his/her spouse (i.e., the married filing separate status disqualifies a taxpayer from claiming the earned income credit).
• A qualifying child can be up to and including age 18 at the end of the tax year, provided the child shared a residence with the taxpayer for 6 months or more.
• The taxpayer must be related to the qualifying child (or children) through blood, marriage, or law.
• The child must be either in the same generation or a later generation of the taxpayer.
• A foster child qualifies if officially placed with the taxpayer by an agency.

Question 44

What are 3 requirements to be eligible for Incentive Stock Options?

Answer 44

1) Employee is not more than 10% shareholder
2) The option price is not less than the FMV of the stock on the date of grant
3) The stock was held at least two years from the date of grant and at least one year from the exercise date

Question 45

What are 3 requirements to be eligible for Employee Stock Purchase Plan (ESPP)?

Answer 45

1) Employee is not more than 5% shareholder
2) The option price is not less than the lesser of 85% of the stock price when granted or exercised
3) The stock was held at least two years from the date of grant and at least one year from the exercise date
Step 1: Determine 85% of stock price
Step 2: Compare this to Option Price
Step 3: Option Price should be GREATER