Lecture one Flashcards

Question

Prepaid rent

Answer 1

Prepaid rent is income when received even for an accrual-basis taxpayer. The $30,000 received as consideration for cancelling the lease is in substitution for rental payments and is thus rental income. The $5,000 prepaid for the last month's rent is also rental income.

Answer 2

Alimony would be income to Mary while child support would not. Funds qualify as child support only if 1) a specific amount is fixed or is contingent on the child's status (e.g., reaching a certain age), 2) it is paid solely for the support of minor children, and 3) it is payable by decree, instrument or agreement. The actual use of the funds is irrelevant to the issue. In this case, $2,000 (20% × $10,000) qualifies as child support. The other $8,000 is alimony, which would be income to Mary.

Answer 3

Filing Form 1040EZ means that Clark did not itemize in the prior year, and therefore, did not deduct any state income taxes last year. Under the tax benefit rule, the refund is not taxable this year since Clark did not deduct the tax last year.

Answer 4

The wages of $18,000 and unemployment compensation are both includable in gross income on Adler's current year income tax return.Municipal bond interest income is excluded from gross income

Answer 5

Generally, the fair market value of prizes and awards is taxable income. However, an exclusion from income for certain prizes and awards applies where the winner is selected for the award without entering into a contest (i.e., without any action on their part) and then assigns the award directly to a governmental unit or charitable organization. Therefore, conditions "I" and "II" must be met in order for Kent to exclude the award from his gross income.

Answer 6

RULE: Gross income includes all income unless it is specifically excluded in the tax code.

Answer 7

ULE: An accruable expense is one is which the services have been received/performed but have not been paid for by the end of the reporting period.

Answer 8

only 50% of this loss is deductible

Answer 9

Uniform capitalization rules apply to the following: (1) real or tangible personal property produced by the taxpayer for use in his or her trade or business; (2) real or tangible personal property produced by the taxpayer for sale to his or her customers; and (3) real or tangible personal property acquired by the taxpayer for resale, provided the taxpayer's annual average gross receipts for the preceding three years exceeds $10,000,000.

Answer 10

Direct material, direct labor, and factory overhead (applicable indirect costs) are capitalized with respect to inventory under the uniform capitalization rules for property acquired for resale. Applicable indirect costs include depreciation and amortization, insurance, supervisory wages, utilities, spoilage and scrap, design expenses, repair and maintenance and rental of equipment and facilities (including offsite storage), some administrative costs, costs of bonus and other incentive plans, and indirect supplies and other materials (including repackaging costs).

Answer 11

The amount of income for a child under 18 that is taxable at the parents' maximum tax rate is deemed the "kiddie tax." To calculate the amount that is taxed at the parents' highest rate, take the child's total interest income ($3,000 in this question) and reduce it by the child's standard deduction ($950 in this case). The next $950 is then taxed at the child's rate, and the balance of $1,100 ($3,000 - $950 - $950 = $1,100) is taxed at the parents' highest rate. (Note that although $950 is not the current standard deduction for a dependent, the question tells us to use it.)

Answer 12

RULE: If a vacation residence is rented for less than 15 days per year, it is treated as a personal residence. The rental income is excluded from income, and mortgage interest (first or second home) and real estate taxes are allowed as itemized deductions. Depreciation, utilities, and repairs are not deductible.

Answer 13

If security deposits are held separately and not available to be applied to last month's rent (as in a segregated account), they are a liability of the taxpayer and not included in income in the year received

Answer 14

Rules: Payments for the support of a spouse are income to the spouse receiving the payments and are deductible to arrive at adjusted gross income by the contributing spouse. Child support is not taxable. Property settlements are not taxable.

Answer 15

The bond's basis is reduced by the amortization of the premium. For bonds acquired after 12/31/87, the amortization of the premium is an offset to interest income on the bond rather than a separate interest deduction. The amortization of the premium will reduce taxable income. The bond's basis will be decreased by the amortization.

Answer 16

Rule: Whether on the cash or accrual method of accounting taxpayers who sell stock or securities on an established securities market must recognize gains and losses on the trade date, rather than on the settlement date.

Answer 17

Rule: Passive activity is any activity in which the taxpayer does not materially participate. A net passive activity loss generally may not be deducted against other types of income (e.g., wages, other ordinary or active income, portfolio income (interest and dividends), or capital gains). In other words, passive losses may generally only offset passive income for a tax year-the remaining net loss is generally "suspended" and carried forward to a year when it may be used to offset passive income (or when the final disposition of the property occurs). However, there is an exception (the "mom and pop exception," as we refer to it in the textbooks) to this general rule. Taxpayers who own more than 10% of the rental activity, have modified AGI under $100,000, and have active participation (managing the property qualifies), may deduct up to $25,000 annually of net passive losses attributable to real estate. There is a phase-out provision for modified AGI from $100,000 − $150,000, and the deduction is completely phased-out for modified AGI in excess of $150,000.

Answer 18

Rule: Generally, unless an exception applies, retirement money cannot be withdrawn until the individual reaches the age of 59 ½. If retirement money (without an exception) is withdrawn before the age of 59 ½, the premature distribution is subject to a 10% penalty tax (in addition to the applicable regular income tax that applies to all distributions of traditional IRA money).

Answer 19

Typically, passive activity losses, whether in the current or prior years, may only be used to offset passive activity income. The exception to this is in the year the passive activity is disposed of (sold), if still unused, passive activity losses are fully deductible in the year of disposal:

Answer 20

Taxable interest includes amounts received from general investment accounts as well as interest on federal obligations. Interest received from state and municipal bonds is not taxable.

Answer 21

Note: Sharlene's salary is not included as income as 100% of the net self-employment activity is taxable to her. Her salary is considered a draw and is not an allowable business deduction against the gross income of the self-employment activity.

Answer 22

A rule of thumb is that personal expenses are not allowed as deductions on the Schedule C. For instance, personal use of an automobile is considered a personal expense, not a deductible expense on Schedule C. Schedule C items should be only those related to the operation of the business itself. Health insurance for himself and his family is actually an adjustment to arrive at adjusted gross income.

Answer 23

limony is an item of gross income; child support is not. Joe was to receive $3,000 per month in alimony for the remaining six months of the year (July - December), for a total of $18,000. Child support is non-taxable as are lump-sum property settlements made pursuant to a divorce. When total payments received do not equal the total due, the amounts are first allocated to child support. Thus, of the $15,000 paid by Merrill, $6,000 is first allocated to child support. The remaining $9,000 would constitute alimony and would be taxable.

Answer 24

Generally, a premature distribution (prior to retirement or other allowable age) from an individual retirement account is subject to a 10% penalty tax. Certain exceptions to this tax are available and are contained in the mnemonic "HIM DEAD." Home buyer (1st time) $10,000 max if used toward first home Insurance (medical) Medical expenses in excess of 10% of AGI (or 7.5% if 65 or over) Disability Education And Death

Answer 25

Short-term capital gain from sale of stock (fully taxable)

Answer 26

The first $50,000 of group term life insurance is a nontaxable fringe benefit. Amounts exceeding this are taxable based on IRS tables. The total group term life insurance here is $200,000 (twice the salary of $100,000). The amount exceeding $50,000 is $150,000. The cost given here is $2.76 per $1,000 of insurance. 150 × $2.76 = $414. So the total amount included in gross income is $100,414 ($100,000 + $414).

Answer 27

Tax rules allow suspended passive losses to be carried forward, but not back, until utilized.

Answer 28

Generally, none of the passive losses from real estate are deductible against nonpassive income. However, Smith actively participates, which means that the "mom and pop" exception of up to $25,000 will apply. This exception is phased out over AGI of $100,000 through $150,000. That is 50 cents on the dollar. Smith's AGI is $120,000. That is $20,000 into the phaseout range. So $10,000 of the $25,000 is phased out and Smith may deduct $15,000 of the $40,000 passive loss.

Answer 29

Passive activity losses (PALs) can only be deducted up to passive activity income. There is no passive activity income indicated. Therefore, the passive loss from the partnership is not deductible. $25,000 of the $35,000 rental real estate loss is deductible under the "mom and pop" exception because Bearing actively participates in the rental property and the AGI is below the phaseout amounts

Answer 30

Interest paid in advance by a cash basis taxpayer on business loans cannot be deducted until the tax period to which the interest relates. In other words, the interest must be both paid and incurred in order to be deducted.

Answer 31

loss/total loss

Answer 32

Choice "c" is correct. Generally, passive losses are only deductible against other passive income, and there is no passive income in the facts of this question. However, the "mom and pop" exception will apply because the Jacksons actively participate in the activity. This exception allows up to $25,000 of passive losses to be deducted against other nonpassive income. There is a phase-out over an adjusted gross income (AGI) range of $100,000 to $150,000. The Jacksons' AGI is $120,000, and that is 40% into the phase-out range. Therefore, 40% of the $25,000 exception amount is phased out, and the deduction is $15,000 [$25,000 – ($25,000 × 40%)].

Answer 33

The general rule is that product costs are capitalized, such as direct materials, indirect materials, and factory overhead. Period expenses are not capitalized, including G&A, selling, and R&D. Marketing is a period expense that is not capitalized.

Answer 34

Solvency is based on the FMV of all assets less the value of all liabilities. Here that is $155,000 – $175,000 = ($20,000).

Answer 35

The employer may recognize a deductible expense for a nonqualified stock option in the same year that the employee will recognize ordinary income. For an Incentive Stock Option, once exercised, the stock must be held at least two years after the grant date and at least one year after the exercise date. Employee Stock Purchase Plans are a type of qualified stock option plan.

Answer 36

Qualified mortgage interest paid is deductible on Schedule A as an itemized deduction.

Answer 37

The costs associated with breaking an existing lease are not deductible as moving expenses.

Answer 38

In 2016, taxpayers can contribute and deduct up to $5,500 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 2016 begins at $98,000. For a spouse who is not an active participant, but is married to someone who is, the phase-out range in 2016 begins at $184,000. The Smith's income is below both phase-out ranges, so they can each deduct the full $5,000 contributed, or $10,000 in total.

Answer 39

Any amount of "alimony" that is dependent on a child reaching the age of 18, will be considered child support (which is not deductible) for tax purposes. Accordingly, only the $7,000 is deductible as alimony.

Answer 40

. Because both Bob and Nancy are 65 or older, they are entitled to the additional standard deduction of $1,250 each in addition to the regular amount.

Answer 41

Interest on mortgages of up to $1,000,000 to buy, build, or substantially improve a home (the first loan) are fully deductible. Interest on home equity loans of up to $100,000 in principal are fully deductible. Note, provided the loan is secured by the home, it does not matter what the proceeds are used for. Interest on auto loans is not deductible. Note that if the money borrowed for the auto had been borrowed from a home equity line of credit and the total principal of that revolving credit line had been less than $100,000, the related interest for the auto purchase could have qualified for a deduction; however, in this case, the auto loan was a separate loan. The total deduction is $21,500 ($19,000 + $2,500)

Answer 42

subtract the 10% limitation from the final loss

Answer 43

Subscriptions to professional journals are miscellaneous itemized deductions subject to the 2% of AGI limitation.

Answer 44

Rule: IRC Section 221 allows the deduction of student loan interest (above-the-line for AGI) paid on qualified education loans up to a maximum of $2,500 for the tax year. There is a phase-out for the deduction in 2016, and there are other minor restrictions, such as a married couple must file joint returns to take the deduction.

Answer 45

Miscellaneous itemized deductions are deductible to the extent that such miscellaneous itemized deductions exceed 2% of Adjusted Gross Income (AGI).

Answer 46

Adjusted Gross Income (AGI) is gross income less adjustments or deductions to arrive at AGI. $3,000 in wages is part of gross income. The only adjustment listed is $400 in student loan interest, resulting in an AGI of $2,600.

Answer 47

Gambling losses are miscellaneous itemized deductions not subject to the 2% AGI limitation. The deduction for gambling losses are, however, limited to gambling winnings.

Answer 48

Home equity indebtedness is limited to $100,000 on a joint income tax return (or single return), but only $50,000 if married filing separately.

Answer 49

An individual's losses on transactions entered into for personal purposes are deductible only if the losses qualify as casualty or theft losses. In addition, the individual must itemize deductions and the loss must exceed 10% of AGI plus $100 per casualty.

Answer 50

Rules: Medical expenses charged to a credit card is expensed in the year the charge is made. It does not matter when the amount charged is actually paid. Expenses paid for the medical care of a decedent by the decedent's spouse are included as medical expenses in the year paid, whether they are paid before or after the decedent's death.

Answer 51

tax deduction for state income tax.

Answer 52

Payment to a charitible contribution- fair value of tickets= deduction

Answer 53

casualty loss deduction on Schedule A because damage caused in home by dog is controllable, and avoidable, and, thus, is not unexpected and does not qualify as a "casualty."

Answer 54

Rule: Interest that is prepaid is deductible in the tax year to which, and to the extent that the interest is allocable―i.e., as it accrues. This allocation is required even by cash basis taxpayers.

Answer 55

Rule: Contributions of long-term property are generally deductible at fair market value at the date of the gift. Contributions of short-term property are generally deductible at the lower of cost or fair market value.

Answer 56

The moving expense deduction is allowable only for direct moving expenses: (i) travel and along-the-way lodging of the taxpayer and the taxpayer's family and (ii) transportation, to the new location, of the taxpayer's household goods and personal effects. Deductible expenses must be reduced by the amount of employer reimbursements not properly included on IRS form W-2. No longer is there a deduction for either (i) temporary living expenses at the new location or (ii) along-the-way meal expenses.

Answer 57

A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years. . A medical expense paid by credit card is deductible in the year the amount is charged to credit card (rather than in a subsequent year when the credit card bill is paid). Medical expenses, net of insurance reimbursements, are not disregarded 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 (for regular tax purposes, the allowable amount is the net amount in excess of 10% of adjusted gross income or 7.5% of adjusted gross income for taxpayers age 65 and older). A medical expense deduction is allowed for Medicare insurance premiums.

Answer 58

Based upon the facts presented ("Brenda makes jewelry as a hobby..."), this activity is not a trade or business activity but is an activity not engaged in for profit. As such, the taxpayer can only deduct as itemized deductions on Schedule A of IRS form 1040 the following: (i) expenses, such as state and local income taxes and property taxes, which would be allowed regardless of whether or not the activity were engaged in for profit and (ii) all other expenses that would be allowed if such activity were engaged in for profit. However, the amount of these "other expenses" cannot exceed gross income reduced by the expenses described in "(i)," above. Furthermore, the allowable "other expenses" are subject to the "2% of AGI" limitation.

Answer 59

A charitable contribution is not allowed for the value of services rendered to a charity. A contemporaneous written acknowledgement is required for donations of $250 or more. A qualified appraisal for real property donations is not required to be attached to the tax return unless the property value exceeds $5,000. Choice "d" is incorrect. The charitable contribution deduction for long-term appreciated stock is limited to 30% of adjusted gross income.

Answer 60

The calculation starts with the lesser of adjusted basis or decrease in FMV. That is $4,100. This amount is then reduced by $4,000 (10% of AGI) and the $100 per casualty. The result is zero ($4,100 – $4,000 – $100).

Answer 61

Unreimbursed employee business expenses are not a deduction to arrive at adjusted gross income. They are an itemized deduction from adjusted gross income. Choice "c" is incorrect. Alimony payments are an adjustment, which is a deduction to arrive at adjusted gross income. Choice "a" is incorrect. Trade or business expenses are deducted on Schedule C. This is before the calculation of adjusted gross income. Accordingly, this is a deduction to arrive at adjusted gross income. Choice "d" is incorrect. Capital losses in excess of capital gains are deducted (up to $3,000) on Form 1040 before the calculation of adjusted gross income. Accordingly, this is a deduction to arrive at adjusted gross income.

Answer 62

Choice “d” is incorrect. $300 incorrectly includes the tax-exempt municipal bond interest. Choice “a” is incorrect. $800 incorrectly includes the tax-exempt municipal bond interest and the rental income. Choice “b” is incorrect. $1,000 would be correct if all of the interest qualified for deduction without limitati

Answer 63

his is a casualty and theft loss. The loss starts at the lesser of decrease in FMV or adjusted basis. That is $200. There is no insurance recovery by which to reduce the loss. However, the tax code requires a reduction of $100 per event. This brings the $200 loss down to $100.

Answer 64

The earned income credit is refundable. Eligible taxpayers can get advance payments from their employers because the credit is assured.

Answer 65

The adoption fees would be qualifying expenses for the tax credit (medical expenses do not qualify).

Answer 66

A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. There is a limitation on the amount of the credit an individual can obtain. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction (NOT subject to the 2% floor) instead. Note that the only correct response to this question is choice "a"; however, also note that the other option for treating the taxes paid to the foreign country is not included as an answer option.

Answer 67

The child and dependent care credit is nonrefundable. The only refundable credits are the child tax credit (which is a different credit with a similar name), the earned income credit, withholding taxes, portions of the Hope Scholarship credit, and excess Social Security taxes paid. The child and dependent care credit is a "personal" tax credit.

Answer 68

Rules: Earned income tax credit is a refundable tax credit. It is designed to encourage low-income workers (i.e., those with earned income) to offset the burden of U.S. tax. A claimant can have one qualifying child or two or more qualifying children for this credit. There is a maximum credit available for this purpose. Further: 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.

Answer 69

The Retirement savings contribution credit is a non-refundable credit. The EIC and child tax credit could result in a refunded amount beyond the actual tax liability, depending upon the taxpayer's income levels. In addition, if excess social security is paid, the taxpayer can receive a refund of those amounts regardless of the income tax liability being reduced to zero.

Lecture one Flashcards

(93 cards)