M2

Question 1

Gifts and inheritences

Answer 1

Gifts and inheritences are both tax free to the recepient ( Tax is often paid by the person giving the gift or the estate upon death)

Question 2

Damages for personal injury-workers comp

Answer 2

specifically excludede from gross income

Question 3

Payment for university sponsored research

Answer 3

no exclusion under tax law even if for benefit of university

Question 4

Social security benefits

Answer 4

85% of the social security benefits is the maxium amount to be included in gross income

Question 5

Interest

Answer 5

State and local obligations are not taxable . However federal obligations and interest on state and federal tax are taxable

Question 6

Unemployment compensation

Answer 6

Included in Gross income

Question 7

prizes and awards

Answer 7

Generally the fair market value of prizes and awards is taxable income. However there is an inclusion when the following conditions are met . When the winner is selected for the award without any action on the winenrs part and than assigns the award to a government unit or charitible organization

Question 8

accruable expenses

Answer 8

one which the services have been received/performed but have not been paid for by the end of the reporting period

Question 9

Individual capital loss maximum

Answer 9

$3000

Question 10

Scholarships

Answer 10

are non-taxable to degree seeking students to the extent that all the proceeds are spent on tuition , fees, books and supplies.

Question 11

property settlements out of divorce

Answer 11

Are not taxable

Question 12

Amortization of premium of a bond

Answer 12

The bonds basis is reduced by amortization

Question 13

Stock trade

Answer 13

Whether on the cash or accrual method of accounting the sale of stock, must recognize gains and losses on the trade date rather than the settlement date

Question 14

IRA Penalty

Answer 14

Amount withdrawn * Marginal tax rate+ Amount withdrawn *10% penalty rate

Question 15

Taxable interest

Answer 15

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

Question 16

HIM dead

Answer 16

It is important to note that if amounts removed have been previously deducted on the TP tax return, there that amount is taxable

Question 17

if question says paid alimony of $10K to be reduced by 20% on childs 18 bday

Answer 17

this means that 20% is child support and the remaining 80% is alimoney

Question 18

state tax refund from prior year

Answer 18

if TP claimed standard deduction, this means that the state tax was not deduction in the year paid therefore it is not taxable

Question 19

Group term life insurance

Answer 19

the first $50 K is a non taxable fringe benefit. Amounts exceeding this are taxable based on tax tables

Question 20

Annuity

Answer 20

Only prorated amount of cost recovery is not taxable. Total purchase amount/ months of life expectancy =Y
Y* number of months in the current year receiving payments

Question 21

Alimony

Answer 21

Includes only payments received in cash or cash equivalents ( payment if bills on behalf of ex spouse

Question 22

Life insurance policy

Answer 22

Total amount/total yers = non taxable portion

Question 23

Jury duty fees

Answer 23

Adjustment to AGI

Question 24

Interest income on EE bonds

Answer 24

tax exempt is using for higher education if purchaser of bonds is sole owner of bonds or joint owner with his or her spouse, TP is over 24 when issued,, reduced by tax free scholarships of the tax payer, spouse or dependant childen

Question 25

Cash basis tax payer

Answer 25

should report income for the year in which income is either actually or constructively received whether in cash or property

Question 26

1040ez

Answer 26

means that clark did not itemize in the prior year and therefore did deduct any sales income taxes last year. Under the tax rule the refund is not taxable this year because the TP did not deduct the tax last year

Question 27

Life insurace proceeds

Answer 27

Life insurance proceeds on the life of an officer when the corp is the owner and beneficiary are not reported as taxable income of the corporation. Also any expense related to the premiums would not have been deduction by the corp

Question 28

State and local tax refunds

Answer 28

The receipt of a state or local income tax refund in a subsequent year is not taxable if the taxes paid did not result in a tax benefit in the prior year. If itemized in prior year = state or local refund is taxable . If standard deduction used = non taxable

Question 29

Accountable plan vs non accountable plan

Answer 29

non - accountable - any amt received from employer is part of gross income

Question 30

rental property

Answer 30

if used personally more than 14 days any net loss from the rental property will be disallowed. All related expense must be prorated between the personal use portion and the rental activity portion

Question 31

Uniform capitalization rules

Answer 31

Purchases of inventory for resale may deduct their marketings costs but must capitilize their offsite storage costs

Question 32

Deductions to arrive to self employment income

Answer 32

All neccesary and ordinary expenses connected with the business. Estimted federal income tax is not an expense

Question 33

taxable income

Answer 33

value of money or fair value of property, not amount billed

Question 34

AR formula

Answer 34

Begin R+ sales-CC= ending AR . Accrual basis taxable income in sales

Question 35

Uniform cap rules application

Answer 35

real or tangible property produced by TP for use in his trade of business or for sales to his customers or for resale

Question 36

Prepaid rent

Answer 36

Prepaid rent is income when received even for an accrual based tax payer

Question 37

Uniform cap rules

Answer 37

DM, DL and factory overhead are capitalized

Question 38

Vacation residence

Answer 38

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. Depreciation, utilities and repaids are not deductible

Question 39

Net rental income

Answer 39

Gross rental income +prepaid rental income+rent cancellation payments+ improvement in lie of rent - rental expenses. If security deposits are not held sep than include as rental income otherwise liability

Question 40

net self employment income

Answer 40

Owner or spouse salary is considered a draw and not a deduction. Also if owner gets paid a salary he is paying taxes on net income, therefore his salary will not be included in his tax return as taxable income

Question 41

Schedule C

Answer 41

no personal deductions allowed. Onlt those items related to operations and business itself.

Question 42

Uniform capitilzation rules

Answer 42

do not apply to inventory acquired for resale if TP average gross receipts for the preceeding three tax years do not exceed $10m