Quiz Questions

Question 1

What is the percent penalty for negligence?

Answer 1

20%

Question 2

What is the best source for obtaining information on a very recent change in tax law?

Answer 2

Congressional Committee reports

Question 3

What carries the “full force and effect of the law?”

Answer 3

Treasury regulations

Question 4

What is the penalty for failure to file a tax return?

Answer 4

5% a month up to 25%

Question 5

Best way to describe sham transaction

Answer 5

IRS will ignore the transaction and no gain or loss will be recognized for tax purposes

Question 6

This % penalty may also apply to misstatement of valuation or substantial understatement of income tax

Answer 6

20%

Question 7

Assignment of income doctrine explained how

Answer 7

Income is taxed to the tree that grows the fruit, even though the income is assigned to another prior to receipt

Question 8

Susan is insolvent and at this point, has not sought bankruptcy protection. Her assets total $65,000, while her debt amounts to $185,000. She has just learned that the lender who is owed the $185,000 has forgiven her debt. How much will Susan be taxed on the debt forgiveness?

Answer 8

$65,000
If the amount forgiven in debt is more than what you own outside of bankruptcy, you’re only taxed on the excess amount.

Question 9

Sales where payments are due within how many months are exempted from imputed interest rule?

Answer 9

6 months

Question 10

Client has $40k in gambling winnings and $22k in expenses directly related to those winnings. Assuming client is not a professional gambler, how much must Joel report as his gambling winnings?

Answer 10

$40k - they’re asking for the gross income number. Since he is not a professional gambler he can’t deduct his expenses from the winnings.

Question 11

Is child support received by the custodial parent included in gross income?

Answer 11

No - think about yourself, you don’t include it in your gross income

Question 12

Two years ago, Sam went to town’s recycling center and brought home several books from the “take it or leave it” section. Recently, Sam discovered that one of the hardcover book’s pages was cut out in the center and $7,000 was in its place. He spent $50 advertising in the local newspaper that he found money in a book but no one could claim the title of the book or amount. What are the tax ramifications to Sam?

Answer 12

Sam must report $7,000 in the current year

Question 13

John lent his son $50,000 for the purchase of a new house, with the understanding that in five years, his son would re-pay the loan at face value. For the current tax year, John’s son had net investment income of $1,400. Assume that the Applicable Federal Rate (AFR) for mid-term loans is 3%. Calculate the imputed interest for the first year.

Answer 13

$1400

In the $10,001-$100,000 range the lender must impute the lesser of the borrower’s net investment income or the AFR times the loan amount $50,000 X .03 = $1,500 vs $1,400

Question 14

Client wants to know the diff between deduction and credit. She just received a $600 credit and wants to know what thats worth as a deduction if she were to itemize deductions. Calculate the equivalent for a deduction if her marginal tax rate is 24%.

Answer 14

TC/MTB

600/.24 = $2500

Question 15

Clients are married filing jointly. 2 kids age 7 & 10. What is their total gross income before any adjustments?

Answer 15

Total gross income before any deductions for Jack and Jill:
$50,000 (Jack’s W-2 wages) + $130,000 (Jack’s net income from sole proprietorship) + $1,400 (dividends) + $30,000 (Jack’s gambling winnings) + $70,000 (Jill’s W-2 wages) = $281,400.

Question 16

Clients are married filing jointly. 2 kids age 7 & 10. What is their total itemized deductions?

Answer 16

$20k mortgage interest + 10k taxed paid + 18k gambling losses = $48k
Remember taxes are limited to 10k total
NOT alimony

Question 17

Marcia Washington, a single taxpayer, has the following itemized deductions:

Marcia’s AGI is $204,350. Under the regular tax method, she is allowed final itemized deductions of $51,920. What amount of deductions, if any, would be allowed for the purposes of AMT?

Answer 17

$41,920

State tax and property tax are disallowed under AMT.

$29,920 (Mortgage interest) + $7,000 (charity) + $1,900 (gambling losses) + $3,100 (margin interest) = $41,920

Question 18

Bill and Diana are MFJ w 2 kids 9 & 12
What are their allowable itemized deductions under the AMT method?

Answer 18

$24,200

$22,000 (mortgage interest) + $2,200 (charity) = $24,200

Question 19

Bill and Diana are MFJ w 2 kids 9 & 12. How much is the AMT taxable income?

Answer 19

$233,201

$221,401 (AGI) + $36,000 (ISO) - $24,200 (mort. interest 22k + 2.2k charity) = 233,201

Question 20

If it’s asking about AMT what are you thinking for itemized deductions?

Answer 20

Think mortgage interest, charitable contributions, gambling losses, margin interest - not taxes

Question 21

Last month, client’s Aunt gave him 65k of MSFT, which she purchased 19 yrs ago for 17k. Aunt paid gift tax of 10k on the transaction, even after utilizing 15k annual gift tax exemption. What is Robert’s basis and what is his holding period?

Answer 21

$26,600 long term
You’re trying to figure out how much of the tax the aunt paid can be added to the basis.
Aunt’s basis + gift tax adjustment which is appreciation/taxable amount of the gift.
$65k - 17k = 48k appreciation
Taxable amount of gift is FMV - annual exclusion if applicable. So
65k - 15k = 50k
48k/50k = 96%
10k * .96 = $9,600 + 17k = $26,600

Question 22

For the donee to receive the benefit of gift taxes paid by the donor, what must take place?

Answer 22

There must be appreciation, FMV is greater than basis

Question 23

Client inherited 1,000 shares of stock from uncle. Uncle purchased 7 years ago for $59. FMV on date of uncle’s death $45. FMV 6 months later $43.
If the executor of uncle’s estate did not select the alternate valuation date, what is client’s basis?

Answer 23

$45,000 - price on date of uncle’s death - price is lower than when originally purchased

Question 24

Client inherited 1,000 shares of stock from uncle. Uncle purchased 7 years ago for $59. FMV on date of uncle’s death $45. FMV 6 months later $43.
If the executor of uncle’s estate DID select the alternate valuation date, what is client’s basis?

Answer 24

$43,000 - $43 per share 6 months after death

Question 25

Client received 1,0000 shares of stock from uncle which uncle purchased 7 yrs ago for $59. Client received as gift 2 years ago when price was $70. Uncle utilized annl exclusion of 15k but still had to pay $25k in gift tax. What is client's basis per share?

Answer 25

Appreciation/Taxable amount of gift * taxes paid / shares = gift tax adjustment per share. Then add to donor's purchase basis. (70-59)/(70-15) = .20 .20 * 25,000 / 1000 = 5 + 59 = $64 per share

Question 26

Client received 1,0000 shares of stock from uncle which uncle purchased 7 yrs ago for $59. Client received as gift 2 years ago when FMV was $55. Uncle utilized gift tax exclusion of $15,000 but still had to pay gift tax of $21,000. Assuming client sold this year for $60, what was his basis?

Answer 26

His basis is $59. Client takes over uncle's purchase price bc FMV was lower than purchase price. Gift tax doesn't apply bc there was no appreciation.

Question 27

Client received stock from Uncle as gift 8 months ago. Uncle purchased several years ago for $59. FMV at time of gift was $55 and client sold it soon after for $57. What are tax ramifications?

Answer 27

If client sells for more than FMV at time of transfer BUT less than original basis, there is no gain or loss recognized. RECOGNIZED for tax purposes

Question 28

What income determines eligibility of tax credits and deductions?

Answer 28

Modified Adjusted Gross income determines eligibility of tax credits and deductions.

Question 29

Modified adjusted gross income tax taxpayers AGI and adds back what?

Answer 29

tax exempt items such as municipal bond interest and NON TAXABLE SOCIAL SECURITY BENEFIT

Question 30

What determines a taxpayers rate on the last dollar they earn? AKA one's marginal tax bracket?

Answer 30

Taxable Income is used to determine the marginal tax bracket of a taxpayer. Meaning that either the standard or itemized deductions are factored in. Results in major $$ savings vs using AGI or MAGI

Question 31

What is above the line?

Answer 31

Schedules - C, E, F, etc Gross Wages - W2s Adjustments - HSAs, Self employ. health ins., self employ tax ______________________________________

Question 32

What is below the line?

Answer 32

-------------------------------------- Itemized deduction - SALT, Mort Int, Charitable Cont. QBI - Net income sched C, REITS Credits - refundable, nonrefundable

Question 33

Tom has gross rev of 65k from his 1st calendar yr of his financial planning practice. He incurred the following expenses: Advertising: 1,100 Office Rent: 21,000 Legal fees: 1,200 Software licenses: 8,000 Health ins Premiums: 6,000 Error and Omission Ins: 1,200 What net profit would he report on line 31 of Sched C?

Answer 33

Everything but the Health Ins. Health insurance is not a Sched. C item, it's an adjustment to AGI 65,000 - 32,500 = 32,500 Sched. C income

Question 34

Where would you look on a W-2 for the info for adjusted gross income?

Answer 34

Line 1

Question 35

As a self employed individual you have to pay the full 15.3%, however you can

Answer 35

claim 1/2 the self employment tax as an adjustment to gross income

Question 36

Client is freelance graphic designer and generated $90,000 gross revenues. Incurred $40,000 in schedule C expenses. What is her self employment income?

Answer 36

$50,000 90,000 - 40,000 = 50,000 schedule C income

Question 37

Client has W2 earnings of $150,000. He also has landscaping LLC which generates $80,000 in net profit. What is his self employment tax?

Answer 37

150k + 80k is over the threshold of $168,600 80,000 * .9235 * .029 = $2,143 168,600 - 150,000 * .124 = $2306 $2143 + $2306 = $4,449

Question 38

Client has gross W2 earnings of $150,000 but maxes out his 401k contributions. He also has LLC with $80k net profits. Wife is freelance graphic designer and generated $90,000 gross revenues. Incurred $40,000 in schedule C expenses. Client earned $1500 in stock dividends of which $1400 are qualified dividends. 50k gambling winnings but lost $30k. What is their gross income before adjustments to gross income?

Answer 38

150,000 gross - 22,500 (401k) = $127,500 90,000 - 40,000 = 50,000 net sched C 80,000 LLC Total Dividends $1500 $50,000 gambling winnings $309,000 NOTE the question is asking gross income before adjustments to income. Notice that 401k comes out of the gross. Think about how 401k comes out before you receive your paycheck to remember its at the top. Also remember that Sched C expenses reduce the gross and happen up here.

Question 39

Say someone has $1500 in dividends, of which $1400 are qualified. What is the total dividends you include on gross income?

Answer 39

$1500

Question 40

Client has gross income of $309,000, assuming QBI of $21,324, what is their AGI?

Answer 40

309,000 gross Adjustments = 8,300 max HSA contrib THEN subtract 1/2 SE tax from both Husband was $,449 / 2 = $2,225 Wife was under threshold so 50,000 * .9235 * .153 = 7065 / 2 = 3,533 309,000 - 8300 - 2,225 - 3,533 = $294,942

Question 41

Above the line deductions are used for

Answer 41

calculating AGI

Question 42

Below the line deductions are deducted

Answer 42

from AGI

Question 43

Question 44

Above the line adjustments: CASH

Answer 44

"C" for "Contributions" (IRA, HSA, FSA) "A" for "Adjusted" (Adjustments to income, alimony pre 2019) "S" for "Student" (Student loan interest) "H" for "Home and Health" (1/2 self employment tax, SE health insurance)

Question 45

Below the line deductions SCMM

Answer 45

"S" for "Salt" (State and local taxes) "C" for "Charitable" (Charitable contributions) "M" for "Mortgage" (Mortgage interest) "M" for "Medical" (Medical expenses)

Question 46

Above is ADJUSTMENTS Below is DEDUCTIONS

Answer 46

OK??

Question 47

Which is the best source for obtaining information about the intent of a very recent change in the tax law? A. Congressional Committee Reports B.Treasury Regulations C.Tax Court Reports D.U.S. Master Tax Guide

Answer 47

Congressional Committee Reports: These reports, produced during the legislative process, provide valuable insight into the lawmakers' intentions behind specific provisions in a tax bill. They delve into the "legislative history" and often explain the reasoning behind changes.

Question 48

Which one of the following best describes the Sham Transaction Doctrine? A.IRS will ignore the transaction and no gain or loss will be recognized for tax purposes. B.Income is taxed to the tree that grows the fruit, even though the income is assigned to another prior to receipt. C. A solvent taxpayer may have to realize income upon the forgiveness of a debt by a creditor. D.Nontaxable receipts may be converted into taxable income.

Answer 48

(A) IRS will ignore the transaction and no gain or loss will be recognized for tax purposes. Here's why: Sham Transaction Doctrine: This doctrine allows the IRS to disregard transactions that have no valid business purpose and are solely designed to avoid taxes. Essentially, the transaction is treated as if it never happened.

Question 49

Which one of the following is not an exemption from the imputed interest rules? A. Debt subject to the original issue discount (OID) provisions. B. Sales of patents to the extent the payment is contingent on the use or disposition of the patent. C. Sales of property for $3,000 or less. D. Any sales where all the payments are due within 12 months.

Answer 49

D is incorrect. It's sales where the payments are due within 6 months

Question 50

Is found money considered taxable?

Answer 50

Found Money is Taxable Income: Even though Sam found the money unexpectedly, it is considered taxable income in the year it is found. No Legal Claim by Others: Since no one came forward to claim the money, Sam has clear ownership and is responsible for the tax liability.

Question 51

Joel had $40,000 of gambling winnings this year and had $22,000 of expenses directly related to those winnings. Assuming that Joel is not a professional gambler, how much will Joel report as gross income from his gambling activities? A. $0 - this activity is specifically excluded from income because it is viewed in the tax code as a negative entertainment expense. B. Joel only needs to report the income if he receives a 1099. In that case, he will be allowed to net his expenses to reduce the income. C. $18,000 which is $40,000 less his $22,000 of expenses. D. $40,000.

Answer 51

D. 40,000 because he is not a professional gambler he can't write off the expenses

Question 52

If you are insolvent and debt is forgiven, but you have say $50,000 in assets, how much would you be taxed on debt forgiveness?

Answer 52

Only up to the amount of your assets so $50,000 in this case

Question 53

Child Standard Deduction for unearned income and earned income

Answer 53

Earned income plus $450 up to a maximum of $14,600 OR $1300 for unearned income whichever is greater

Question 54

Jill and Jay have a 12-year-old son who has earned $5,000 in taxable bond interest this year. They would like to know how much of their son's interest income will be taxed at their marginal tax rate?

Answer 54

Under the "kiddie tax" rules, the first $1,300 of a child's unearned income is not taxed, the next $1,300 is taxed at the child's tax rate, and any unearned income above $2,600 is taxed at the parents' marginal tax rate. Therefore, of the $5,000 total, $2,400 ($5,000 - $2,600) will be taxed at the parents' rate.

Question 55

Your client, Jane, wants you to explain the difference between a tax credit and a tax deduction. She just received a $600 tax credit and wants to know what that worth as a deduction if she were to itemize her deductions. Calculate the equivalent deduction for Jane's credit if Jane's marginal tax bracket is 24%.

Answer 55

They're asking for the EQUIVALENT so it would be 600/.24 = 2500

Question 56

Jack and Jill will file as Married Filing Jointly. They have two children, ages 7 and 10. Jack's W2 wages = $50,000 Jill's W2 wages = $62,000 Jack's sole proprietorship (net) = $160,000 Total Taxable Dividends = $1,400 Taxable Dividends that are Qualifying = $1,300 Jack's alimony payments to ex-wife Divorced in 2018 = $6,000 Qualified Business Income Deduction = $30,369 Mortgage Interest = $20,000 State Income Tax = $12,000 Gambling winnings = $30,000 Gambling losses = $(18,000) What is their gross income?

Answer 56

$50,000 + $62,000 + $160,000 + $1400 + $30,000 = $306,400 You include Jack's W2 wages = $50,000 Jill's W2 Wages $62,000 Jack's Sole Proprietorship net = $160,000 Taxable dividends = $1,400 Gambling Winnings = $30,000 $303,400

Question 57

Jack and Jill will file as Married Filing Jointly. They have two children, ages 7 and 10. Jack's W2 wages = $50,000 Jill's W2 wages = $62,000 Jack's sole proprietorship (net) = $160,000 Total Taxable Dividends = $1,400 Taxable Dividends that are Qualifying = $1,300 Jack's alimony payments to ex-wife Divorced in 2018 = $6,000 Qualified Business Income Deduction = $30,369 Mortgage Interest = $20,000 State Income Tax = $12,000 Gambling winnings = $30,000 Gambling losses = $(18,000) What is their AGI?

Answer 57

Gross is $303,400 Above the line need to figure out the self employment for Jack He is over threshold so would use 2 step method 160,000 * .9235 * .029 = 4,285.04 ($168,600 - $50,000) x .124 = $14,706 is the $4,285.04 + $14,706 = $18,991 $18,991 * .5 = $9,496 306,400 - $9,496 - 6000 = $287,904 ABOVE THE LINE JUST DEDUCTING 1/2 SE AND ALIMONY PRE-2019

Question 58

Jack and Jill will file as Married Filing Jointly. They have two children, ages 7 and 10. Jack's W2 wages = $50,000 Jill's W2 wages = $62,000 Jack's sole proprietorship (net) = $160,000 Total Taxable Dividends = $1,400 Taxable Dividends that are Qualifying = $1,300 Jack's alimony payments to ex-wife Divorced in 2018 = $6,000 Qualified Business Income Deduction = $30,369 Mortgage Interest = $20,000 State Income Tax = $12,000 Gambling winnings = $30,000 Gambling losses = $(18,000) What are their total itemized deductions?

Answer 58

$20,000 + $10,000 + $18,000 = $48,000 Mortgage interest + SALT + Gambling Losses Their AGI was $290,904 - $48,000 = 242,904 After itemized they're at 242,904

Question 59

Jack and Jill will file as Married Filing Jointly. They have two children, ages 7 and 10. Jack's W2 wages = $50,000 Jill's W2 wages = $62,000 Jack's sole proprietorship (net) = $160,000 Total Taxable Dividends = $1,400 Taxable Dividends that are Qualifying = $1,300 Jack's alimony payments to ex-wife Divorced in 2018 = $6,000 Qualified Business Income Deduction = $30,369 Mortgage Interest = $20,000 State Income Tax = $12,000 Gambling winnings = $30,000 Gambling losses = $(18,000) What is their taxable income?

Answer 59

Their AGI was $290,904 - $48,000 = 242,904 After itemized they're at 242,904 Subtract the QBI of 30,369 $242,904 - 30,369 = $212,535

Question 60

Bill and Diana are married and will file as Married Filing Jointly. Bill's W-2 wages $180,000 Diana's W-2 wages $90,000 Total Taxable Dividends $2,400 Bill's ISO exercise (Bargain element) $36,000 Mortgage Interest $22,000 Property Tax $8,100 State Income Tax $1,900 Charitable contributions $2,200 Bill and Diana's AGI $272,400 Regular Income Tax Liability $44,839 Calculate their AMT exemption.

Answer 60

$133,300 This is the standard AMT exemption amount for married couples filing jointly in a given tax year. The phase-out of the AMT does not begin until AMT exceeds $1,218,700.

Question 61

Last month, Robert's Aunt Sue gave him $68,000 of Microsoft stock that she purchased 19 years ago at a cost of $19,000. Aunt Sue paid gift taxes of $10,000 on the transaction, even after utilizing the $18,000 gift tax annual exclusion. How much is Robert's basis in the stock and what is his holding period? A. $16,000 Long-Term B. $22,800 Long-Term C. $28,800 Long-Term D. $64,000 Short-Term

Answer 61

C. 28,800 long term

Question 62

Which of the following statements is incorrect? A. If the donor's basis is less than the FMV at the time of the transfer, the donee will take over the donor's holding period. B. If the donor's basis is less than the FMV at the time of transfer, and no gift taxes were paid, the donee simply takes over the donor's basis and holding period. C. If the donor's basis is less than the FMV at the time of the gift, and the donor paid gift taxes, the donee will be allowed to include a portion of the gift taxes paid by the donor. D. If the donor's basis is more than the FMV at the time of transfer, and gift taxes were paid, the donee will be allowed to include a portion of the gift taxes paid by the donor.

Answer 62

D is incorrect In order for the donee to get the benefit of gift taxes paid by the donor, there must have been appreciation in the gift, that is FMV must be greater than the donor’s basis. Compare the basis with the FMV using greater than or less than to make it more clear

Question 63

Max had purchased 1,000 shares of stock seven years ago for $61 per share. He gifted the stock to his nephew Rex two years ago when the FMV of the stock was $55 per share. Max was able to utilize an annual exclusion but he still had to pay $21,000 in gift taxes. If Rex sells the stock for $63 per share this year, how much is Rex's basis in the stock? A. $61 B. $55 C. $63 D. Basis cannot be determined

Answer 63

$61 Rex takes over the Uncle’s purchase price as basis because the FMV of the gift ($55) was less than the donor's adjusted basis ($61) and Rex sold the stock for a gain ($63). Note that gift taxes, even though they were paid, do not apply since the FMV at the time of the gift was less than the donor’s basis.

Question 64

Marcia Washington, a single taxpayer, has the following itemized deductions: Home mortgage interest (first mortgage) $29,920 Charitable contributions $7,000 Property taxes $9,715 Deductible gambling losses $1,900 Deductible State Income taxes $285 Deductible Margin Interest $3,100 Marcia's AGI for the current year is $204,350. Under the regular tax method, Marcia is allowed final itemized deductions of $51,920. What amount of itemized deductions, if any, would be allowed for purposes of the AMT?

Answer 64

Property Tax and State income tax are disallowed under AMT $29,920 mortgage interest + $7,000 charity + $1,900 gambling losses + $3,100 margin interest = $41,920.

Question 65

Which of the following statements is incorrect? A. Exclusions permanently increase the alternative minimum taxable income (AMTI)? B. Deferrals are AMT items that form the basis of an AMT credit. C. Deferrals cause a temporary increase in AMT liability and the increased liability will reverse over time. D. An exercise without the sale of an ISO (Incentive Stock Option) in the same tax year is an example of an AMT exclusion.

Answer 65

D is a deferral An exercise without the sale of an ISO (Incentive Stock Option) in the same tax year is an example of an AMT deferral not exclusion.

Question 66

Deferrals are AMT items that form the basis of an AMT credit true or false

Answer 66

True

Question 67

Deferrals cause a temporary increase in AMT liability and the increased liability will reverse over time true or false

Answer 67

True

Question 68

What is the standard AMT exemption amount for married couples filing jointly

Answer 68

$133,300

Question 69

Bill and Diana are married and will file as Married Filing Jointly. Bill's W-2 wages $180,000 Diana's W-2 wages $90,000 Total Taxable Dividends $2,400 Bill's ISO exercise (Bargain element) $36,000 Mortgage Interest $22,000 Property Tax $8,100 State Income Tax $1,900 Charitable contributions $2,200 Bill and Diana's AGI $272,400 Regular Income Tax Liability $44,839 What is their AMT liability

Answer 69

$272,400 + $36,000 - $22,000 - $2,200 = $284,200 $284,200 - $133,300 = $150,900 AMT Base. $150,900 X .26 = $39,234 AMTI less AMT exemption equals AMT base. AMT base times 26% equals AMT liability

Question 70

Bill and Diana are married and will file as Married Filing Jointly. Bill's W-2 wages $180,000 Diana's W-2 wages $90,000 Total Taxable Dividends $2,400 Bill's ISO exercise (Bargain element) $36,000 Mortgage Interest $22,000 Property Tax $8,100 State Income Tax $1,900 Charitable contributions $2,200 Bill and Diana's AGI $272,400 Regular Income Tax Liability $44,839 How much is Bill's and Diana's AMT payable?

Answer 70

AMT payable is the AMT liability less the regular liability. However, regular tax exceeds AMT so AMT payable is zero. 44,839 > amt payable

Question 71

On January 20th 2024, Barbara was paid $400,000 from her insurance company for an office building that was destroyed by a tornado on June 28, 2023. Barbara's basis in the destroyed property was $230,000. How much must she reinvest at a minimum to avoid gain recognition and how long does she have to replace the property?

Answer 71

$400,000 December 31, 2026 In order to avoid recognition of gain, you must reinvest the entire proceeds from the insurance. The mandatory latest date to replace the property is two full years after the end of the year in which you realize the gain (get insurance money).

Question 72

On January 31, 2024, Dave sold an oriental carpet that he had inherited from his Grandfather. The FMV at the time of the inheritance was $15,000. The terms of the sale were a price of $60,000, with a 20% down payment and the balance to be paid monthly over the next four years. The loan bears an interest rate of 8%. The first payment is scheduled to begin at the end of February, and will continue to be due on the last day of all subsequent months. How much must Dave report as ordinary income, and how much must he report as capital gain income for 2024?

Answer 72

Ordinary Income $3,201 Capital Gain $16,267 Taxation of installment sales can be broken down into 5 steps: Calculate the gross profit percentage (GPP) Calculate the down payment Calculate the loan payments, then using the amortization function, calculate the principal and interest (P&I) received the first year The interest (from P&I) is taxed as ordinary income The sum of the down payment and the principal (from P&I) times the GPP is the reported capital gain Putting in this question's specifics: Calculate the GPP ($45,000/$60,000) = 75% = .75 Calculate the down payment ($60,000 X .20) = $12,000 Calculate the loan payments and amortize 11 payments to determine principal and interest: 48 n 48000 CHS PV 8 g I PMT Calculator returns $1,171.82 (monthly payment) 11 f AMORT Calculator returns $3,201.34 (Interest received for 11 months) X > < Y Calculator returns $9,688.68 (principal received for 11 months) The interest received of $3,201 is taxed as ordinary income. The sum of the down payment and the principal received times the GPP ($12,000+$9,689) x .75 = $16,267 is the capital gain income

Question 73

John, a single taxpayer, was a very successful commodities dealer who works and lives in Chicago. Last year, he purchased a penthouse that overlooked Lake Michigan for 1.8 million dollars. John recently had a nervous breakdown and nearly entered a catatonic state. After months of intensive therapy, it was determined that John's job was causing him so much stress it led to his current mental state. His doctor recommended that he work in an environment with dramatically less stress. John subsequently quit the commodities business and accepted a job at McDonalds as a food preparer. He is much happier now but has found it difficult to keep up with his mortgage payments and condominium fees for the penthouse. John sold the property and cleared 2.2 million dollars, net of transaction costs, and moved into a small studio apartment on the South End. He lived in the penthouse for 18 months and he has asked you to determine how much of the $400,000 gain is taxable. You told him

Answer 73

$212,500 will be taxable and $187,500 excluded. Changing jobs and not being able to pay your expenses is a valid reason to earn a prorated exclusion for the sale of a personal residence. (18/24) X $250,000 = $187,500 exclusion.

Question 74

Don owned and lived in his house 10 years before he met and married Stephanie. She had lived in an apartment but after the marriage she moved into Don's house and continued to consult as a rocket scientist, working from a home office. Six months later, she was offered a job by NASA and they had to immediately move to Florida. The property deed was never changed and Don sold the house realizing a gain of $550,000. They will be filing jointly. How much of the gain will be excluded under section 121 of the IRC?

Answer 74

They are married filing jointly so they can prorate her $250,000 ($62,500) and add it to his $250,000 for a total exclusion of $312,500.

Question 75

You had purchased equipment for your business that was being depreciated over a 7-year life. The original cost of the equipment was $42,000 and $18,000 had been taken as cost recovery. You changed your manufacturing process and no longer required the equipment. Today, you managed to sell the equipment for $30,000. How much must be recaptured under Section 1245 as ordinary income?

Answer 75

$6,000 The difference between the selling price and the adjusted basis must be recaptured.

Question 76

Which of the following are true statements describing Section 1244 stock? A. Code allows special treatment for losses; and has nothing to do with special treatment for gains B. Pertains to only the first $1 million of stock sold C. ¤ 1244 stock may be issues by either a C or an S Corporation D. Single taxpayer may deduct up to $50,000 as an ordinary loss E. Taxpayers filing as married filing jointly may deduct up to $100,000 as an ordinary loss F. Once the stock is sold, donated, or gifted, it loses its Section 1244 status

Answer 76

A. Code allows special treatment for losses; and has nothing to do with special treatment for gains B. Pertains to only the first $1 million of stock sold C. ¤ 1244 stock may be issues by either a C or an S Corporation D. Single taxpayer may deduct up to $50,000 as an ordinary loss E. Taxpayers filing as married filing jointly may deduct up to $100,000 as an ordinary loss F. Once the stock is sold, donated, or gifted, it loses its Section 1244 status

Question 77

John Appleton wants to exchange his farm for a Bed and Breakfast owned by Martha Shelby. John's farm has a FMV of $680,000, an adjusted basis of $200,000, and is subject to a $120,000 mortgage. Martha's B&B has a FMV of $800,000, with an adjusted basis of $400,000, and is debt-free. In the exchange, Martha will assume John's mortgage. To help equalize the exchange, John is including farm equipment worth $150,000, and will also pay Martha $90,000 in cash. What is his amount realized?

Answer 77

Amount realized = FMV of qualifying property received plus (or minus) net boot =$800,000+($120,000 - $150,000 - $90,000) = $680,000.

Question 78

John Appleton wants to exchange his farm for a Bed and Breakfast owned by Martha Shelby. John's farm has a FMV of $680,000, an adjusted basis of $200,000, and is subject to a $120,000 mortgage. Martha's B&B has a FMV of $800,000, with an adjusted basis of $400,000, and is debt-free. In the exchange, Martha will assume John's mortgage. To help equalize the exchange, John is including farm equipment worth $150,000, and will also pay Martha $90,000 in cash. What is John’s realized gain ?

Answer 78

$480,000 Gain realized = amount realized minus the basis of the property transferred = $680,000 - $200,000 = $480,000.

Question 79

John Appleton wants to exchange his farm for a Bed and Breakfast owned by Martha Shelby. John's farm has a FMV of $680,000, an adjusted basis of $200,000, and is subject to a $120,000 mortgage. Martha's B&B has a FMV of $800,000, with an adjusted basis of $400,000, and is debt-free. In the exchange, Martha will assume John's mortgage. To help equalize the exchange, John is including farm equipment worth $150,000, and will also pay Martha $90,000 in cash. How much is John's recognized gain?

Answer 79

Recognized gain is the lesser of realized gain or net boot received = lesser of ($480,000, $0) = $0

Question 80

John Appleton wants to exchange his farm for a Bed and Breakfast owned by Martha Shelby. John's farm has a FMV of $680,000, an adjusted basis of $200,000, and is subject to a $120,000 mortgage. Martha's B&B has a FMV of $800,000, with an adjusted basis of $400,000, and is debt-free. In the exchange, Martha will assume John's mortgage. To help equalize the exchange, John is including farm equipment worth $150,000, and will also pay Martha $90,000 in cash. What is Johns deferred gain

Answer 80

$480,000 Deferred gain is the realized gain minus recognized gain $480,000 – $0 = $480,000.

Question 81

John Appleton wants to exchange his farm for a Bed and Breakfast owned by Martha Shelby. John's farm has a FMV of $680,000, an adjusted basis of $200,000, and is subject to a $120,000 mortgage. Martha's B&B has a FMV of $800,000, with an adjusted basis of $400,000, and is debt-free. In the exchange, Martha will assume John's mortgage. To help equalize the exchange, John is including farm equipment worth $150,000, and will also pay Martha $90,000 in cash How much is John's substituted basis in the replacement property?

Answer 81

Substituted basis = FMV of qualifying property received minus the deferred gain. $800,000 - $480,000 = $320,000.

Question 82

Under Section 267, related parties can complete like-kind exchanges with one another, provided they each hold their newly acquired properties for:

Answer 82

Two full years

Question 83

I would naturally place the three parties in a trust in which order:

Answer 83

Grantor - Trustee - Beneficiary The grantor creates, the Trustee holds title, the beneficiary benefits.

Question 84

What is not considered to be part of trust accounting income? A. Dividends B. Interest Income C. Rental Income D. Capital Gain Transactions

Answer 84

Capital Gain Transactions

Question 85

A complex trust is allowed an exemption of?

Answer 85

$100 C note - c for c note

Question 86

A calendar year trust has a filing date of _______and a fiscal year trust must be filed by the 15th of the _______ month following year end.

Answer 86

April 15th, Fourth month

Question 87

A simple trust is allowed an exemption of?

Answer 87

$300

Question 88

For Federal tax purposes, a single member LLC A. Will file Form 1065 and via a K-1, have income and expenses items passed through to its member B. Will be considered a disregarded entity and treated as a sole proprietorship. C. Will still have special allocations available as an option. D. Will not be subject to self-employment tax.

Answer 88

Will be considered a disregarded entity and treated as a sole proprietorship

Question 89

A Personal Service Corporation (PSC) gets charged a flat rate of?

Answer 89

21%

Question 90

Pathway Inc., is a C Corporation which is 75% owned by 3 shareholders. 65% of its adjusted gross income is from royalties, dividends, and interest. Pathways received $40,000 in dividends for which a $28,000 dividend-received deduction is claimed and pays out $20,000 of dividends to its shareholders. Pathways had $182,000 of taxable income and $54,230 of regular tax liability. How much will they pay as a penalty for undistributed personal holding company income?

Answer 90

Taxable income less income tax liability less dividends paid add back dividend-received deduction = PHC income subject to a 20% penalty. $182,000-$54,230-$20,000+$28,000 = $135,770. Times 20% = $27,154.

Question 91

Delta Neutral Hedging is a non-personal service C corporation. It had $140,000 of accumulated earnings coming into this year and detailed below is the current year activity. Taxable Income: $426,000 Income Taxes Payable: $76,000 Dividends paid to s/h: $25,000 How much is Delta Neutral Hedging's penalty for accumulated earnings?

Answer 91

$43,000 The accumulated earnings for the current year ($426,000-$76,000-$25,000) = $325,000 added to beginning accumulated earnings ($325,000 + $140,000) = $465,000 less the threshold for a non-personal service company ($465,000 - $250,000) = $215,000. The penalty rate is 20% so $215,000 X .20 = $43,000.

Question 92

Your friend has asked you to help them understand a recent investment they made. They just received their first K-1 from a limited partnership in which they had made a $50,000 investment. The K-1 showed a pass-through loss of $52,000. Your friend has no other passive activity from any other source. How much of their loss will be suspended due to the at-risk rules and how much will be suspended due to the passive activity rules?

Answer 92

At risk suspension: $2,000 Passive Activity Suspension: $50,000 With only having an initial basis of $50,000, only $50,000 will be allowed as a loss under the at-risk rules with $2,000 being suspended. With no other source of passive income, the $50,000 (that is allowed under the at-risk rules) will then be suspended due to the passive activity rules.

Question 93

Jack is a well-diversified investor with several interests in business entities, all of which are considered to be passive interests. Detailed below is his current year K-1 information: Income/(Loss) ABC S-Corporation $15,000 DEF Limited Partnership ($11,000) GHI LLC ($8,000) Additionally, Jack has investments in Publicly Traded Partnerships (PTPs). Detailed below is current K-1 information: ncome/(Loss) RST PTP $14,000 XYZ PTP ($7,000) How much of the passive losses will Jack be able to use this year?

Answer 93

$15,000 The loss in XYZ PTP, because it is a publicly traded partnership, cannot be used in the current year and must be automatically suspended. Of the private interest losses ($11,000 + $8,000) only $15,000 can be used which will neutralize the income from ABC S-Corporation. The remaining $4,000 of loss must be suspended.

Question 94

Robert has biz that is sold on July 1 of current yr for 1mil. Terms require down payment of 30% with a 7 year note at 6%. Adjusted basis in the business is $125k and was purchased 12 years ago. What is the monthly installment payment?

Answer 94

N = 84 (7, 12x) I = .5 (6, 12divide) PV = 700,000 CHS PMT = $10,225.99 $10,225.00

Question 95

Robert has biz that is sold on July 1 of current yr for 1mil. Terms require down payment of 30% with a 7 year note at 6%. Adjusted basis in the business is $125k and was purchased 12 years ago. What is the cashflow in year 1?

Answer 95

$300,000 (down payment) N = 84 (7, 12x) I = .5 (6, 12divide) PV = 700,000 CHS PMT = $10,225.99 Then 6 months of payments which were $10,225 * 6 $300,000 + $61,355.93 = 361,355.93 first year cashflow

Question 96

Robert has biz that is sold on July 1 of current yr for 1mil. Terms require down payment of 30% with a 7 year note at 6%. Adjusted basis in the business is $125k and was purchased 12 years ago. How is the down payment taxed?

Answer 96

$300,000 downpayment received minus $37,500 return of basis ($125,000 basis/$1,000,000 sales price) * 300,000 = $37,500 300,0000 - 37,500 = 262,500 long term gain

Question 97

Robert has biz that is sold on July 1 of current yr for 1mil. Terms require down payment of 30% with a 7 year note at 6%. Adjusted basis in the business is $125k and was purchased 12 years ago. What is the value of the installment receivable as of 12/31 of the current year?

Answer 97

When you amortize the six installment payments you determine the interest on the payments received is 6 f amort $20,492.18 X>

Question 98

Robert has biz that is sold on July 1 of current yr for 1mil. Terms require down payment of 30% with a 7 year note at 6%. Adjusted basis in the business is $125k and was purchased 12 years ago. How are the 6 installment payments received in the first year taxed?

Answer 98

First determine the interest received N = 84 (7, 12x) I = .5 (6, 12divide) PV = 700,000 CHS PMT = $10,225.99 THEN 6 f Amort = $20,492.18 interest X>

Question 99

Which of the following is not a special tax that is paid by the S-Corporations (thus not passed through to shareholders) that were once C-Corporations? A. Built in gains tax B. Corporate conversion tax C. Excess net passive income tax (sting tax) D. LIFO recapture

Answer 99

B. Corporate conversion tax All the others, if they apply, are paid by the S-Corporation.

Question 100

Which one of the following is not an exception to tax-free formation of a business entity? A. Appreciated Securities B. Debt relief C. Service partner D. Substantial economic effect

Answer 100

D. Substantial economic effect

Question 101

Jack is a well-diversified investor with several interests in business entities, all of which are considered to be passive interests. Detailed below is his current year k-1 information: Income/(Loss) ABC S-Corporation $15,000 DEF Limited Partnership ($11,000) GHI LLC ($8,000) Additionally, Jack has investments in Publicly Traded Partnerships (PTPs). Detailed below is current K-1 information: Income/(Loss) RST PTP $14,000 XYZ PTP ($7,000) What is the net passive income that must be reported in the current year?

Answer 101

. $14,000 Because it is a publicly traded partnership, the income from RST PTP must be automatically reported and cannot be offset with any other type of loss. The sole exception to this statement is if RST PTP happened to have a suspended loss from a prior year.

Question 102

Jack is a well-diversified investor with several interests in business entities, all of which are considered to be passive interests. Detailed below is his current year k-1 information: Income/(Loss) ABC S-Corporation $15,000 DEF Limited Partnership ($11,000) GHI LLC ($8,000) Additionally, Jack has investments in Publicly Traded Partnerships (PTPs). Detailed below is current K-1 information: Income/(Loss) RST PTP $14,000 XYZ PTP ($7,000) How much of the passive losses will be suspended?

Answer 102

$11,000 Of the total $26,000 of losses, $15,000 was used and therefore $11,000 will be suspended. The $11,000 is made up of $4,000 from private interests and $7,000 from XYZ PTP.

Question 103

Jack is a well-diversified investor with several interests in business entities, all of which are considered to be passive interests. Detailed below is his current year k-1 information: Income/(Loss) ABC S-Corporation $15,000 DEF Limited Partnership ($11,000) GHI LLC ($8,000) Additionally, Jack has investments in Publicly Traded Partnerships (PTPs). Detailed below is current K-1 information: Income/(Loss) RST PTP $14,000 XYZ PTP ($7,000) If XYZ PTP were not a PTP but rather private interest, how much passive loss can be used? (All other items remain as presented.)

Answer 103

B. $15,000 Does not change the fact that there was only $15,000 of passive income from private interests.

Question 104

Jack is a well-diversified investor with several interests in business entities, all of which are considered to be passive interests. Detailed below is his current year k-1 information: Income/(Loss) ABC S-Corporation $15,000 DEF Limited Partnership ($11,000) GHI LLC ($8,000) Additionally, Jack has investments in Publicly Traded Partnerships (PTPs). Detailed below is current K-1 information: Income/(Loss) RST PTP $14,000 XYZ PTP ($7,000) If RST PTP were not a PTP but rather private interest, how much would the net passive income be instead? (All other items remain as presented.)

Answer 104

C. $10,000 There would be a total of $29,000 or private interest, passive income. That, combined with $19,000 of private interest, passive loss would net to $10,000 or passive income.

Question 105

Your client, Janice, just contributed $100,000 (FMV) to HHH, Healing and Helping Hands, a private non-operating foundation. She had inherited the stock on June 27, 1997 and the FMV of the stock at that time was $149. What do you tell her is the value of the charitable contribution and the AGI tax limitation for the deduction, assuming she can take an income tax deduction this year?

Answer 105

Valuation Of contribution: $100,000 AGI Limit Of deduction : 30% basis, 20% FMV When donating to a private foundation, the charitable deduction is limited to 30% of AGI if using basis, and 20% of AGI when using FMV

Question 106

Joe Banks has an AGI of $270,000. In the current tax year, he has made the following gifts all of which went to 50% organizations: $10,000 in cash to American Cancer Society $75,000 (FMV) Civil War oil painting - Joe had inherited it from his Grandfather several years ago and at the time of his Grandfather's death the painting had a FMV of $70,000. Joe decided to donate it to an Art Museum with the hope it could be better appreciated. They have assured him they will display it in the lobby. $48,000 (FMV) of ADP stock. Joe was gifted the stock from his Aunt several years ago. At the time of the transfer, the stock had a FMV of $15,000, although the Aunt had purchased it for $1,000 10 years or so before the gift to her Nephew. In addition to those contributions, Joe gave the following to Helping Hand, a private non-operating foundation (30% Organization). $16,000 (FMV) of Google stock. Joe just purchased this stock 4 months ago for $12,000. If Joe does not opt for the basis election on either the oil painting or the ADP stock, what is the valuation amount for those two items and what is the AGI limit that they are subject to?

Answer 106

Valuation: $123,000 AGI Limit: $81,000 30% For long-term capital gain property and use related tangible property, the code allows a choice of the basis election or the FMV. If the FMV is used, the AGI limit is 30% of AGI.

Question 107

Joe Banks has an AGI of $270,000. In the current tax year, he has made the following gifts all of which went to 50% organizations: $10,000 in cash to American Cancer Society $75,000 (FMV) Civil War oil painting - Joe had inherited it from his Grandfather several years ago and at the time of his Grandfather's death the painting had a FMV of $70,000. Joe decided to donate it to an Art Museum with the hope it could be better appreciated. They have assured him they will display it in the lobby. $48,000 (FMV) of ADP stock. Joe was gifted the stock from his Aunt several years ago. At the time of the transfer, the stock had a FMV of $15,000, although the Aunt had purchased it for $1,000 10 years or so before the gift to her Nephew. In addition to those contributions, Joe gave the following to Helping Hand, a private non-operating foundation (30% Organization). $16,000 (FMV) of Google stock. Joe just purchased this stock 4 months ago for $12,000. What is the AGI limit opposed on the $10,000 cash contribution made to the American Cancer Society?

Answer 107

$162,000 (60%- since it is a cash contribution) Cash donated to a 50% organization is allowed an overall limit of 60% of AGI.

Question 108

Joe Banks has an AGI of $270,000. In the current tax year, he has made the following gifts all of which went to 50% organizations: $10,000 in cash to American Cancer Society $75,000 (FMV) Civil War oil painting - Joe had inherited it from his Grandfather several years ago and at the time of his Grandfather's death the painting had a FMV of $70,000. Joe decided to donate it to an Art Museum with the hope it could be better appreciated. They have assured him they will display it in the lobby. $48,000 (FMV) of ADP stock. Joe was gifted the stock from his Aunt several years ago. At the time of the transfer, the stock had a FMV of $15,000, although the Aunt had purchased it for $1,000 10 years or so before the gift to her Nephew. In addition to those contributions, Joe gave the following to Helping Hand, a private non-operating foundation (30% Organization). $16,000 (FMV) of Google stock. Joe just purchased this stock 4 months ago for $12,000. What is the valuation amount and AGI limit for the Google stock that was given to the 30% organization?

Answer 108

Valuation $12,000 AGI Limit: $81,000 30% Since this is ordinary income property, the valuation is the lesser of FMV or basis. Also, ordinary income property that goes to a 30% organization is allowed a limit of 30% of AGI.

Question 109

Joe Banks has an AGI of $270,000. In the current tax year, he has made the following gifts all of which went to 50% organizations: $10,000 in cash to American Cancer Society $75,000 (FMV) Civil War oil painting - Joe had inherited it from his Grandfather several years ago and at the time of his Grandfather's death the painting had a FMV of $70,000. Joe decided to donate it to an Art Museum with the hope it could be better appreciated. They have assured him they will display it in the lobby. $48,000 (FMV) of ADP stock. Joe was gifted the stock from his Aunt several years ago. At the time of the transfer, the stock had a FMV of $15,000, although the Aunt had purchased it for $1,000 10 years or so before the gift to her Nephew. In addition to those contributions, Joe gave the following to Helping Hand, a private non-operating foundation (30% Organization). $16,000 (FMV) of Google stock. Joe just purchased this stock 4 months ago for $12,000. If Joe does not make any basis elections, how much is the total deduction in the current year and how much will be carried over to next year?

Answer 109

Deduction: $91,000 Carryover: $54,000 Besides the cash, the 3 gifted items are restricted to 30% of AGI, but the FMV of the painting $75,000 and the ADP stock $48,000 can be deducted. The Google stock was purchased less than one year ago, so only $12,000 of basis is used. The 3 gifted items total $135,000 but the deduction is limited to 30% of AGI or $81,000 for all 3 items. Cash is $10,000 and can be taken up to 60% of AGI, so the full $10,000 can be deducted. So, $81,000 for 3 items plus $10,000 for cash equal a deduction of $91,000. Cash is not carried forward since a full deduction was taken. The remaining amount of the 3 items that could not be deducted is $135,000 – $81,000 =$54,000.

Question 110

Joe Banks has an AGI of $270,000. In the current tax year, he has made the following gifts all of which went to 50% organizations: $10,000 in cash to American Cancer Society $75,000 (FMV) Civil War oil painting - Joe had inherited it from his Grandfather several years ago and at the time of his Grandfather's death the painting had a FMV of $70,000. Joe decided to donate it to an Art Museum with the hope it could be better appreciated. They have assured him they will display it in the lobby. $48,000 (FMV) of ADP stock. Joe was gifted the stock from his Aunt several years ago. At the time of the transfer, the stock had a FMV of $15,000, although the Aunt had purchased it for $1,000 10 years or so before the gift to her Nephew. In addition to those contributions, Joe gave the following to Helping Hand, a private non-operating foundation (30% Organization). $16,000 (FMV) of Google stock. Joe just purchased this stock 4 months ago for $12,000. If Joe elects to use the basis election ($70,000) for the valuation of the oil painting, how much is the total deduction in the current year and how much will be carried over to next year?

Answer 110

Deduction: $135,000 Carryover: $5,000 By using the basis election on the painting, $5,000 of valuation is lost ($70,000 versus $75,000). However, now the $70,000 painting contribution is no longer limited to 30% of AGI. The only 30% AGI limits are the $12,000 basis in Google stock and the $48,000 FMV of ADP stock. Now the only pertinent limit is Joe's overall 50% limit of his contribution base (50% of AGI of $270,000 or $135,000). This was first reduced by Joe's cash contribution, then by the 50% gift (painting) then by the 30% gifts (stocks). The total valuation of $140,000 gifts will be limited to a $135,000 deduction this year with a $5,000 carryover.

Question 111

Under contract law, which one of the following is not a requirement that a premarital agreement must meet to be held enforceable by a court of law? A. It must be in writing and signed by both affected parties. B. It must be shown to have been executed willingly by both parties without duress or coercion. C. According to the court, it must be equitable in the opinion of a reasonable person. D. It must provide full and complete disclosure of each party's net worth.

Answer 111

According to the court, it must be equitable in the opinion of a reasonable person. All of the other statements are true.

Question 112

Hal Linden and Jill are getting divorced. He offered Jill her choice of one of the following alimony payment plans. $4,000 per month (starting 1 month from today) for 36 months, or $2,500 per month (starting 1 month from today) for 60 months. If Jill has an opportunity cost of 4.2%, what is her best choice? A. Choice 1 because it has a higher present value. B. Either choice because the present values of each one are less than $10 different. C. Choice 2 since the total amount received ($150,000) is greater than choice one ($144,000). D. Choice 2 because its present value is significantly greater than Choice 1.

Answer 112

. Either choice because the present values of each one are less than $10 different. The present value of Choice 1 is $135,076 and Choice 2 is $135,085. With these amounts so close Jill should be indifferent based on the pure monetary aspect, but other intangible factors such as risk should be taken into account.

Question 113

Which of the following statements about the Head of Household (HOH) filing status is not correct? In order to claim HOH... A. a taxpayer must be unmarried as of the last day of the year. B. a taxpayer must not be a surviving spouse. C. a taxpayer must live with the dependent for more than 1/2 the tax year. D. a taxpayer must be a citizen or a resident.

Answer 113

C. a taxpayer must live with the dependent for more than 1/2 the tax year. It is not necessary that the dependent live with the taxpayer (i.e. Parent)

Question 114

In the event of a divorce, which parent gets the benefit of reporting the child as a dependent? A. Depending on what the divorce decree says, no tax forms are necessary. B. If the divorce decree does not specify, the parent with the higher marginal tax bracket and/or higher tax liability is entitled to claim the child as a dependent. C. Whichever spouse pays child support is entitled to claim the child as a dependent. D. If the divorce decree does not specify, the parent with the longer period of custody during the tax year is entitled to claim the child as a dependent.

Answer 114

D. If the divorce decree does not specify, the parent with the longer period of custody during the tax year is entitled to claim the child as a dependent.

Question 115

Jason Yond and his wife, Paula, divorced in 2018. Under the terms of the divorce decree, Jason is required to pay Paula $3,000 per month for five consecutive years. The divorce was finalized on December 15th of last year, with the first alimony payment to be made on January 15th this year, and on the 15th of each month thereafter. There is no provision in the divorce decree that payments terminate upon the death of the payee spouse, Paula. How much of each payment, if any, is deductible? A. $0, because the excess front-loading rules are violated. B. $0, because the payments do not terminate at death. C. $1,500, because of the limitation applied by the front-loading rules. D. $3,000, because the payments are qualifying alimony.

Answer 115

B. $0, because the payments do not terminate at death. Since there is no provision in the divorce decree that payments terminate upon the death of the payee spouse, the payments are not qualifying alimony.

Question 116

Which of the following is not a classification of payments pursuant to a divorce? A. Liability rebalancing B. Child Support C. Property settlement D. Alimony

Answer 116

. Liability rebalancing The others are the three classifications.

Question 117

The following statements about SCINs (Self-canceling Installment Notes) versus regular installment sales are true except: A. The use of a SCIN is usually implemented with family members versus non-relatives. B. When a SCIN is used, a premium price or higher interest rate must be used. C. A SCIN means that the property is immediately out of the seller’s estate and the present value of future payments will not affect the value of the estate when the seller meets their demise. D. With a SCIN versus an installment sale, there is an advantage of reduced capital gain recognition should the seller die before the scheduled payments are completed

Answer 117

With a SCIN versus an installment sale, there is an advantage of reduced capital gain recognition should the seller die before the scheduled payments are completed. With a SCIN, even though no value is put back into the estate, the unrealized capital gains will be recognized on the seller's final income tax return.

Question 118

Which one of the following is not a tax-advantaged strategy using an intra-family transfer? A. A gift of property generating investment income to a 15-year-old child of the taxpayer who has other properties generating $15,000 of investment income already. B. Valid employment of a 12-year-old child of the taxpayer in the family business who has other property generating $3,000 of investment income in the current year. C. Valid employment of a 17-year-old child of the taxpayer in the family business who has other earned income of $8,000 in the current year. D. An installment sale of property from the taxpayer to the taxpayer's child

Answer 118

A gift of property generating investment income to a 15-year-old child of the taxpayer who has other properties generating $15,000 of investment income already. Kiddie tax already triggered.

Question 119

Which of the following statements are correct? Select all that apply. For both a gift-leaseback and a sale-leaseback, the lease payments must be realistic. The seller in a sale-leaseback transaction may have to recognize ordinary income due to the recapture provisions of business property. The buyer in a sale-leaseback of fully depreciated property may depreciate the newly acquired property. The acquirer's basis in a gift-leaseback will be the donor's adjusted basis.

Answer 119

All correct

Question 120

A private annuity has the same estate and income tax characteristics as a(an): A. Installment sale B. MEC - Modified Endowment Contract C. SCIN- Self-canceling Installment Note D. Sale lease-back

Answer 120

. SCIN- Self-canceling Installment Note Like a private annuity, a SCIN involves payments that are contingent on the seller's (or another individual's) lifespan, with the obligation ending upon the seller's death.

Question 121

Betsy Whitmore is a 44-year-old physician and Betsy's husband, Jonathan, is a self-employed actuary. They are in the 35% tax bracket for the current tax year. Betsy and Jonathan own the office building and all of the equipment where Betsy works. They have three children in high school that will be attending college very soon. Betsy and Jonathan are interested in paying for the children's education using a tax-advantaged method. Which one of the following is the most appropriate form of intra-family transfer for the Whitmores? A. an installment sale of the office building and equipment to the children B. an outright gift of the office building and equipment to the children C. a gift-leaseback arrangement of the office building and equipment to a trust established for the children D. payment of a management fee to the children for managing the office building

Answer 121

gift-leaseback arrangement of the office building and equipment to a trust established for the children This choice makes the most sense and offers a very quick transfer of wealth to the children.

Question 122

You had purchased equipment for your business that was being depreciated over a 7-year life. The original cost of the equipment was $80,000 and $38,000 had been taken as cost recovery. Today, you sold the equipment for $50.000. How much must be recaptured under Section 1245 as ordinary income?

Answer 122

$8000 80,000 - 38,000 = 42,000 50,000 - 42,000 = 8000

Question 123

How is DNI calculated?

Answer 123

DNI is calculated by taking the total income of the trust, then subtracting certain allowable deductions that are directly related to the production of that income.

Question 124

The amount beneficiaries receive from a trust is determined by DNI true or false

Answer 124

The amount a beneficiary is entitled to receive is typically determined by the terms of the trust agreement, not by the DNI. While DNI does include items of income and expense, it does not determine the amount beneficiaries are entitled to receive from the trust each year. The DNI is used to determine the maximum amount that could be taxed to the beneficiaries, not the distribution amount.

Question 125

Jim bought a warehouse for his business. The cost was $576,000 and he also spent $60,000 renovating the truck docking area. During the first year, he also paid $40,000 for a new roof, paid $32,000 in property taxes, and took $17,000 of depreciation expense. What is Jim's adjusted cost basis after the first year?

Answer 125

Adjusted basis= Cost + Renovation costs + new roof - Depreciation costs = $576,000 + $60,000 + $40000 - $17000 =$659,000 The taxes have nothing to do with it! Taxes don't go into basis they would relate to income.

Question 126

If the amount of an interest free loan to a friend is $150,000, and the expected payback date is in two years, what is the amount of imputed interest the lender will have to impute on their tax return?

Answer 126

Whatever the Applicable Federal Rate (AFR) is for short-term loans times the loan principal.

Question 127

In tax court or before the IRS, only primary sources of authority carry any weight. Match these primary sources of authority to the correct branch of the Government.The executive branch is abbreviated as (EB), the legislative branch as (LB), and the judicial branch as (JB). Treasury Congress Tax Court

Answer 127

Treasury is executive branch via IRS Congress is Legislative Branch Tax court is Judicial Branch

Question 128

A taxpayer, who is in the 10% tax bracket, received a tax credit of $2,000 for their child who is 12 years old. How much is an equivalent deduction?

Answer 128

2000/.1 = 20000

Question 129

How much is the penalty for fraud?

Answer 129

15% of the net tax due for each month up to five months, with maximum penalty of 75%

Question 130

What is the tax rate that C Corps pay?

Answer 130

21%

Question 131

Sheila, a single taxpayer, has an AGI of $245,000 and has the following itemized deductions: Mortgage interest $27,350 Property tax $12,500 Income taxes $11,500 Charitable donations (all 50% orgs) $16,400 Using the regular tax method, calculate Sheila's deductible itemized deductions

Answer 131

27,350 + 10,000 + 16,400 = 53,750

Question 132

Your client, who is in the 35% tax bracket, has a mortgage interest deduction of $16,000. For this tax payer, what is an equivalent tax credit?

Answer 132

16,0000 * .35 = 5,600

Question 133

Brooke (single, age 35) is a national account director. She earns $125,000 in W-2 salary and another $10,000 in dividends and interest from her brokerage account.She also contributes $20,000 to her Traditional 401(k), another $3,600 to her health savings account, and pays $1,000 per month in alimony to her ex-husband (divorced 2018). She elects the standard deduction. What is her AGI?

Answer 133

125,000 W2 10,000 Dividends $20,000 to 401k 3,600 to HSA 1000 Alimony divorced 2018 She elects standard deduction what is her AGI? Subtracting these adjustments from her gross income ($135,000 - $23,600), we get an AGI of $111,400. It's important to note that the alimony payments Brooke makes to her ex-husband are not considered an adjustment to income for divorces finalized after 2018, so they do not affect her AGI.

Question 134

Threshold for Personal Service accumulated earnings for personal service and non personal service

Answer 134

Personal Service Corps can save up to 150k Non PSCs can save up to 250k Think, I'm a person I can't hold as much its just me

Question 135

Two years ago, Susan Smith and Jane Jones formed an S-corporation, in which they each owned a 50% interest. Susan contributed $50,000 in cash, while Jane contributed $30,000 in cash, as well as $20,000 of appreciated securities. At the time of the transfer to the business, Jane's basis in those securities was $12,000. After the first year, the S-corporation generated $40,000 of profit. Each shareholder received a $16,000 cash distribution at that time. The business then suffered a loss of $6,000 in the second year of operation. Because of the firm's poor cash position,each shareholder received a nominal cash distribution of $1,000 at the end of the second year. How much was Jane's basis in the S-Corporation after the second year?

Answer 135

Jane's initial basis in the S-Corporation was $50,000 ($30,000 cash + $20,000 securities). In the first year, the S-Corporation made a profit of $40,000, which increased Jane's basis by her share of the profit (50% of $40,000 = $20,000). So, at the end of the first year, her basis was $70,000. She then received a distribution of $16,000, which reduced her basis to $54,000 ($70,000 - $16,000). In the second year, the S-Corporation had a loss of $6,000. Jane's share of the loss (50% of $6,000 = $3,000) further reduced her basis to $51,000 ($54,000 - $3,000). Finally, she received a distribution of $1,000 at the end of the second year, which brought her basis down to $50,000 ($51,000 - $1,000).

Question 136

Ken Dawson has the following passive activity items: Prior-year passive loss carryforward amounts:($3,000) from ABC PTP ($9,000) from XYZ PTP Current-year passive income and loss amounts: $5,000 ABC PTP $2,000 DEF PTP $4,000 XYZ PTP Note: PTP denotes Publicly Traded Partnership, all other activity is private interest.What is the net income reported this year for the PTP activity?

Answer 136

5000 - 3000 = 2000 ABC DEF = 2000 XYZ = 4000 - 9000 = -5000 Answer should be $4000

Question 137

John is a sole proprietor with $90,000 in net earnings. Additionally, John received a $40,000 dividend from an S-corp in which he has a 10% interest. He is considered tobe a material participant in the S-Corporation business. How much is his self-employment tax in 2023?

Answer 137

90000 * .9235 * .153 = 12,716 The $40,000 dividend from the S-corp is not subject to self-employment tax as it is considered an investment income, not earned income.

Question 138

What amount is the IRS written acknowledgement requirement for cash contributions to charity?

Answer 138

$250 or any contribution of $250 or more (including contributions of cash or property), you must obtain and keep in your records a contemporaneous written acknowledgment from the qualified organization indicating the amount of the cash and a description of any property other than cash contributed.

Question 139

What is the IRS's default position on which divorcing spouse is entitled to the dependency exemption for their children?

Answer 139

Spouse with the longer period of custody during the year

Question 140

Stan Rockford has the following passive activity items: Current-year passive income and loss amounts: $10,000 CHI ($7,000) JKL ($8,000) RST What is the net income reported this year for the private interest activity?

Answer 140

Income is Zero with a $5000 carryforward

Question 141

What is the IRS form that a trust files?

Answer 141

1041 Trust Trust41

Question 142

Kassidy has owned stock for three years and is looking to donate it to her favorite animal shelter (a public charity). The stock's FMV is $42,000 and she has a $40,000 basis in the stock. Kassidy's adjusted gross income (AGI) is $90,000, she itemizes deductions and she wants to maximize current year deductions.What is her income tax charitable deduction and any carry-forward this year?

Answer 142

Long Term cap gain. It's a 50% org because its a public charity. If she uses FMV she gets 30% if she uses basis she gets 50%. 90,000 * .5 = 45,000 $40,000 deduction and 0 carryforward

Question 143

which of the following entities is never subject to federal tax at the entity level?

Answer 143

Partnership Partnerships are "flow-through" entities. Flow-through taxation means that the entity does not pay taxes on its income. Instead, the owners of the entity pay tax on their "distributive share" of the entity's taxable income, even if no funds are distributed by the partnership to the owners.

Question 144

On June 20th 2023, Brent was paid $600,000 from the municipality where he owned a building used in his business. The property was being seized due to a railroad line which would need to cut directly across his property. His adjusted basis in the property is $374,000. How much must he reinvest at a minimum to avoid gain recognition and how long does he have to replace the property?

Answer 144

Reinvest $600,000 Last date - 2 years after the year when the transaction happened so Dec 31st 2026

Question 145

In a family-limited partnership, a parent, as general partner, cannot transfer limited partnership shares to children without relinquishing some control of the business. True or False?

Answer 145

False - they can transfer shares to the child without relinquishing control - think about it you're not going to have your kid making decisions about the business

Question 146

Stacey Kessler has the following current-year passive income and loss amounts: $10,000 ABC ($18,000) XYZ What is the net income reported this year for the private interest activity if XYZ was disposed of and her at-risk basis is $14,000?

Answer 146

Step 1/5 Identify the passive income and loss amounts for the current year: - Passive income from ABC: 18,000) Step 2/5 Determine the impact of the disposal of XYZ on the passive loss. Since XYZ was disposed of, the passive loss can be fully recognized in the current year. Step 3/5 Calculate the net passive income or loss by combining the passive income and the fully recognized passive loss: Step 4/5 Consider Stacey's at-risk basis for XYZ, which is $14,000. Since the at-risk basis is greater than the passive loss from XYZ, the entire loss can be recognized.

Question 147

Your client donated their Chevron stock to their church. The stock, which was purchased 10 years ago, had a FMV of $10,000 and a cost basis of $4,000. What is the maximum value of the deduction and what is the AGI threshold that it is subject to?

Answer 147

$10,000 30%

Question 148

What is the carryforward for unused charitable contributions?

Answer 148

5 years

Question 149

Paul passed away recently and left his nephew a large cap stock fund. The fair market value (FMV) on the date of Paul's death was $515,000. The FMV 3 months after Paul's death was $512,000, and the FMV 6 months after Paul's death was$509,000. If the administrator of the estate selects the alternate valuation date, what will the nephew's basis be, and will it be considered a short-term or long-term holding period?

Answer 149

509k long term

Question 150

Are all trusts complex in the year terminated?

Answer 150

If a trust distributes corpus during a year, as in the year it terminates, the trust becomes a complex trust for that year.

Question 151

Is a complex trust required to do annual distributions?

Answer 151

In order for a trust to be complex, it must do one of the following each year: Refrain from distributing all of its income to trust beneficiaries. Distribute some or all of the principal assets in the trust to beneficiaries. Make distributions to charitable organizations.

Question 152

Dave purchased a piece of equipment needed for his bottling and packaging business for $25,000. The sales tax was $1,250 (5%) and shipping costs were $450.Dave had trouble with the installation, and in order to install it correctly, he ended up paying a plumber $700 and an electrician $400. What is Dave's original cost basis that will be subject to depreciation?

Answer 152

The original cost basis of an asset includes the purchase price and all costs necessary to get the asset ready for its intended use.

Question 153

AMT tax credits are created when:

Answer 153

you pay amt tax because of a derral

Question 154

Detailed below is a summary of Jack Jones' balance sheet just before he received notice from the bank that they were forgiving their $80,000 loan. Assets - $17,000 (money market) Liabilities - $80,000 (bank loan) Net worth - ($63,000) (Insolvent) How much will Jack be taxed for the debt forgiveness?

Answer 154

$17000 which essentially solidifies his assets You're taxed on the amount of assets you current have

Question 155

Joe Baxter is a college professor who has a consulting business on the side that he runs as a C corporation. He lives entirely off his teaching salary and has never withdrawn any salary or dividend from the consulting business, preferring to save the money within the corporation (from which it will be withdrawn upon retirement). The corporation currently has retained earnings and profits of $760,000. With which one of the following should Joe be most concerned?

Answer 155

Joe should be concerned about the status of his corporation as a Personal Holding Company (PHC). A PHC is a corporation that is owned by a small number of shareholders and derives a large portion of its income from certain types of passive income, such as dividends, interest, rents, royalties, and annuities. The IRS imposes a special tax on PHCs that do not distribute a certain amount of their income to shareholders. Since Joe has not withdrawn any salary or dividends from his consulting business, his corporation may be subject to this PHC tax. This could significantly impact his retirement plans, as the tax could reduce the amount of money available for withdrawal upon retirement.

Question 156

Stella bought some Amex stock in 2015 for $5,000. Including commission, the stock cost a total of $5,100. She recently gave the stock to her friend Jane who is suffering financially and can really use the financial help. At the time of the transfer, the stockwas worth $3,000. Jane subsequently sells the stock six months later for $7,000.What is Jane's basis in the stock?

Answer 156

$5100 When property is given as a gift, the recipient (in this case, Jane) generally assumes the donor's (Stella's) cost basis. This is known as a "carryover" or "transferred" basis. The cost basis of the stock for Stella was $5,100, which includes the purchase price of $5,000 and the commission of $100. Therefore, when Stella gave the stock to Jane, Jane's basis in the stock also became $5,100, regardless of the stock's fair market value at the time of the gift. This basis will be used to calculate capital gains or losses when Jane sells the stock.

Question 157

83b election

Answer 157

enables recipients of restricted securities (including stock options) to potentially lower their tax burden by paying taxes on the total fair market value (FMV) of the award at the time of issuance (early exercising)

Question 158

What type of employee benefit plan would use an 83b election?

Answer 158

Restricted stock

Question 159

Dawn owned and lived in her house 3 years before she met and married Steve. He had lived in an apartment but after the marriage he moved into Dawn’s house. Three months later, Steve was offered a job out of state and they had to immediately move.The property deed was never changed and Dawn sold the house realizing a gain of $370,000. They will be filing jointly. How much of the gain will be excluded under Section 121 of the IRC?

Answer 159

3/24 * 250000 = 31250 250,000 + 31,250 = 281,250