R1/R2 Missed Problems Flashcards
Freeman, a single individual, reported the following income in the current year:
Guaranteed payment from services rendered to a partnership $ 50,000
Ordinary income from an S corporation 20,000
What amount of Freeman’s income is subject to self-employment tax?
a. $70,000
b. $20,000
c. $0
d. $50,000
D. Guaranteed payments are reasonable compensation paid to a partner for services rendered (or use of capital) without regard to his ratio of income. Earned compensation is subject to self-employment tax. Payments not guaranteed are merely another way to distribute partnership profits. The ordinary income reported from an S corporation is taxable income to the individual or their own individual tax return but is not subject to self-employment tax. The ordinary income reported from a partnership may be subject to self-employment tax (if to a general partner).
Capital assets include:
a. A corporation's accounts receivable from the sale of its inventory. b. Seven-year MACRS property used in a corporation's trade or business. c. A manufacturing company's investment in U.S. Treasury bonds. d. A corporate real estate developer's unimproved land that is to be subdivided to build homes, which will be sold to customers.
C. Don’t get confused with the treatment of treasury STOCK, which relate to a corp buying their own stock, which is a action in the trade/business. Land is usually a capital asset, unless it is used in the trade or business as it is in this case.
A cash basis taxpayer should report gross income:
a. For the year in which income is either actually or constructively received in cash only. b. Only for the year in which income is actually received in cash. c. Only for the year in which income is actually received whether in cash or in property. d. For the year in which income is either actually or constructively received, whether in cash or in property.
D
A CPA's adjusted gross income (AGI) for the preceding 12-month tax year exceeds $150,000. Which of the following methods is (are) available to the CPA to compute the required annual payment of estimated tax for the current year in order to make timely estimated tax payments and avoid the underpayment of estimated tax penalty? I.The annualization method. II.The seasonal method. a. Both I and II. b. II only. c. I only. d. Neither I nor II.
C. Individuals can only choose from the prior year method or the annualization method
Robert had current-year adjusted gross income of $100,000 and potential itemized deductions as follows:
Medical expenses (before percentage limitations)
$12,000
State income taxes
4,000
Real estate taxes
3,500
Qualified housing and residence mortgage interest
10,000
Home equity mortgage interest (used to consolidate personal debts)
4,500
Charitable contributions (cash)
5,000
What are Robert’s itemized deductions for alternative minimum tax?
a. $19,500
b. $25,500
c. $17,000
d. $21,500
PANICTIMME
-Itemized are TIMME
T: Tax deductions
I: Interest deduction on some home equity loans.
Home mortgage interest is okay to deduct
M: Medical deductions (between 7.5%-10% are added back. In excess of 10% are allowed for AGI
M: Miscellaneous
E: Exemptions (personal) & Standard deduction
Charitable contributions are allowed to be deducted for AMT.
Krete, an unmarried taxpayer with income exclusively from wages, filed her initial income tax return for Year 8. By December 31, Year 8, Krete’s employer had withheld $16,000 in federal income taxes and Krete had made no estimated tax payments. On April 15, Year 9, Krete timely filed an extension request to file her individual tax return and paid $300 of additional taxes. Krete’s Year 8 income tax liability was $16,500 when she timely filed her return on April 30, Year 9, and paid the remaining income tax liability balance. What amount would be subject to the penalty for the underpayment of estimated taxes?
a. $0 b. $200 c. $16,500 d. $500
A. Not subject to the underpayment of estimated taxes because she wasn’t off by $1,000. However, she would be eligible for the failure to pay tax of 1/2 of 1% of unpaid tax/month on the $200.
The Rites are married, file a joint income tax return, and qualify to itemize their deductions in the current year. Their adjusted gross income for the year was $55,000, and during the year they paid the following taxes:
Real estate tax on personal residence $ 2,000
Ad valorem tax on personal automobile 500
Current-year state and city income taxes withheld from paycheck 1,000
What total amount of the expense should the Rites claim as an itemized deduction on their current-year joint income tax return?
a. $3,000
b. $1,000
c. $3,500
d. $2,500
C. All of these taxes are deductible as itemized deductions. Personal property taxes (state/local taxes), real estate etc.
Ad valorem: Tax imposed on the value of property
A taxpayer lived in an apartment building and had a two-year lease that began 16 months ago. The taxpayer’s landlord wanted to sell the building and offered the taxpayer $10,000 to vacate the apartment immediately. The taxpayer’s lease on the apartment was a capital asset but had no tax basis. If the taxpayer accepted the landlord’s offer, the gain or loss would be which of the following?
a. A short-term capital loss. b. An ordinary gain. c. A short-term capital gain. d. A long-term capital gain.
D. A capital asset which is sold or exchanged more than one year after the date of acquisition will generate either a long-term capital gain (if the capital asset is sold at a price greater than acquisition cost) or a long-term capital loss (if the capital asset is sold at a price less than the acquisition cost). In this question, the lease-hold interest, which is a capital asset, was acquired more than a year ago, and the basis (acquisition cost) in that capital asset is -0-. So, the receipt of $10,000 to vacate the apartment will generate a $10,000 long-term capital gain.
Wade Inc. granted a nonqualified stock option for 100 shares at $50 per share to Mary, an employee, on May 1, Year 12. On that date, the option was selling on an established market for $4 per share. Mary exercised the option on August 2, Year 13, when the FMV was $80 per share. She sold the stock on September 2, Year 14, for $100 per share. How much gross income and what type did Mary recognize in Year 12?
a. $5,000 ordinary income b. $400 ordinary income c. $5,000 capital gain d. $400 capital gain
B. I chose A. It’s important to realize that with nonqualified stock options, they are included in ORDINARY INCOME at the grant date IF THEY HAVE AN ASCERTAINABLE VALUE. This value is not the amount that the employer gave the stocks at, but it is the price on the market. If it doesn’t have an ascertainable value, it is taxable when exercised.
When do you not get to exclude like-kind exchange gains from income?
When they are exchanges of inventory, stock, securities, partnership interest and real property in different countries.
A taxpayer is trading in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $18,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is only worth $16,500. The other party agrees to give the taxpayer a trailer worth $3,500 in addition to the new auto. What is the gain or loss recognized by the taxpayer on this transaction?
a. $3,500 gain. b. $3,500 loss. c. $0 d. $3,000 gain.
D. I chose C. It’s important to realize that the trailer was a nonlike kind exchange, bc it is in a different asset class than the automobile, so it is considered boot (AKA not deductible)
In Year 1, Smith, a divorced person, provided over one half the support for his widowed mother, Ruth, and his son, Clay, both of whom are U.S. citizens. During Year 1, Ruth did not live with Smith. She received $9,000 in Social Security benefits. Clay, a 25-year-old full-time graduate student, and his wife lived with Smith. Clay had no income but filed a joint return for Year 1, owing an additional $500 in taxes on his wife’s income. How many exemptions was Smith entitled to claim on his Year 1 tax return?
a. 3 b. 1 c. 2 d. 4
C. I chose D. It’s important to realize that under the SUPORT test, P=Precludes dependent filing a JOINT RETURN.
- It says that a taxpayer will lose the exemption for a married dependent who files a joint return unless the joint return is filed solely for a refund of all taxes paid or withheld for the taxable year.
- In this case, they are not filing jointly just to get a refund.
Johnson worked for ABC Co. and earned a salary of $100,000. Johnson also received, as a fringe benefit, group term-life insurance at twice Johnson’s salary. The annual IRS-established uniform cost of insurance is $2.76 per $1,000. What amount must Johnson include in gross income?
a. $100,552 b. $100,414 c. $100,276 d. $100,000
B. I chose D.
It’s important to remember the $50,000 of group life insurance BENEFITS is deductible from gross income. After that amount, the excess of fringe benefit is included in the gross income up to the amount of cost to your employer.
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).
Which of the following is not an adjustment or preference to arrive at alternative minimum taxable income?
a. Deductible medical expenses. b. Individual taxpayer net operating losses. c. Deductible contributions to individual retirement accounts. d. Passive activity losses.
C. I chose B. It’s important to realize that contributions to an individual retirement account are deductions FOR AGI and don’t need to be added back.
PANICTIMME PANIC: adjust for timing differences P=Passive activity losses N=Net operating loss of the individual taxpayer M=Medical expenses NOT in excess of 10%
A self-employed taxpayer had gross income of $57,000. The taxpayer paid self-employment tax of $8,000, health insurance of $6,000, and $5,000 of alimony. The taxpayer also contributed $2,000 to a traditional IRA. What is the taxpayer’s adjusted gross income?
a. $46,000 b. $40,000 c. $50,000 d. $55,000
B. I chose A. Deductions FOR AGI include:
1/2 SE tax
SE health insurance paid
Up to $5,000 of Traditional IRA Contributions (not deductible if rich AND active retirement plan) The rich threshold is 58,000-68,000 for S and 92,000-112,000 for MFJ
Alimony paid
A 33-year-old taxpayer withdrew $30,000 (pretax) from a traditional IRA. The taxpayer has a 33% effective tax rate and a 35% marginal tax rate. What is the total tax liability associated with the withdrawal?
a. $13,000 b. $10,500 c. $13,500 d. $10,000
C. I chose B on a guess. Here you use the marginal tax rate. It’s also important to realize that the 10% penalty tax is not taxed again–it’s just a one time tax.
Remember the HIMDIE pnemonic for reasons to withdraw the money out early.
A taxpayer is trading in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $18,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is worth $22,000. The taxpayer has agreed to assume a liability of $2,000 in addition to the trade-in. What is the taxpayer’s basis in the new automobile received?
a. $22,000 b. $17,000 c. $19,000 d. $15,000
C. I chose B. It’s important to realize that the amount of boot recognized is only the amount that is less than the realized gain on the transaction. The realized gain is $0, so no boot was recognized.
Formula: basis of old property + boot paid + gain recognized
Mosh, a sole proprietor, uses the cash basis of accounting. At the beginning of the current year, accounts receivable were $25,000. During the year, Mosh collected $100,000 from customers. At the end of the year, accounts receivable were $15,000. What was Mosh’s gross taxable income for the current year?
a. $75,000 b. $90,000 c. $100,000 d. $110,000
C. I chose B. It’s important to realize that this is a CASH BASIS ACCOUNTING. So, the amount of cash he actually received this year was the $100,000
An individual’s losses on transactions entered into for personal purposes are deductible only if:
a.
The losses qualify as casualty or theft losses.
b.
The losses do not exceed $3,000 ($6,000 on a joint return).
c.
The losses can be characterized as hobby losses.
d.
No part of the transactions was entered into for profit.
A I chose D. 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.
The Browns borrowed $20,000, secured by their home, to pay their son’s college tuition. At the time of the loan, the fair market value of their home was $400,000, and it was unencumbered by other debt. The interest on the loan qualifies as:
A Deductible personal expense
B investment interest expense
C. Deductible qualified residence interest
D. Non deductible interest
C. I chose A. Interest paid on a debt secured by a home mortgage is classified as deductible qualified residence interest. The Browns would be able to deduct the interest paid as an itemized deduction. The limit is $100,000 of mortgage interest since the loan was not to buy, build, or improve the home.
It’s important to know that qualified residence interest is deductible and there is two types–acquisition indebtedness or home equity indebtedness
What is the rule for the Child and Dependent Care Credit
3,000 max per child under 13. Then the COMBINED INCOME determines the amount of their threshold. The credit is computed by using the lowest of the 1.the earned income of the spouse with the lowest or 2) $3000 max per child
$15,000 or less AGI 35%
$15,000-43,000 20%-35% (for each $2,000 subtract 1%)
Greater than $43,000 20%
What is the rule for the Child and Dependent Care Credit
3,000 max per child under 13. Then the threshold amount is the lower of the two spouses.
$15,000 or less AGI 35%
$15,000-43,000 20%-35% (for each $2,000 subtract 1%)
Greater than $43,000 20^
What is the rule for filing a form 1040x for a refund for individual ?
2 year from the date the tax was paid and not filed
3 years if did file
During 2012, George (age nine and claimed as a dependency exemption by his parents) received dividend income of $3,700, and had wages from an after-school job of $1,700. What is the amount that will be reported as George’s taxable income for 2012?
a. $ 250
b. $3,400
c. $3,450
d. $5,400
B. I guessed. It’s important to understand that it’s asking for his taxable income, not the amount that will be taxed at his parent’s higher tax rate (kiddie tax). So we take his income (earned and unearned)-standard deduction and no personal exemption bc his parents took his.
The standard deduction is the greater of:
1. $950
2. Earned income + $300
-FYI any amount of the unearned income (3,700) in excess of $1900 is taxed at the parent’s tax rate.
0-$950=0% taxed
$950-$1900=Childs
Exceed $1900=Parents
