Taxes

Question 1

Qualifying Widow(er) Rules

Answer 1

If a widow(er) has lost their spouse in the current year, they are eligible to file under Married Filing Jointly (MFJ) in the year of the spouse’s death.

Then, for the following two years, if the widow(er) has provided more than half of the support to a qualifying dependent and has not remarried they can file as a Qualifying Widow(er) with a Dependent Child.

After two years, if not remarried, can file as Head of Household.

Question 2

Related Use Property
Charitable Deductions

Answer 2

FMV = 30% of AGI

Basis = 50% of AGI

Question 3

Unrelated Use Property
Charitable Deductions

Answer 3

Lesser of Cost Basis or FMV

Question 4

Net Investment Income (NII)

Answer 4

Individuals, estates, and trusts are subject to a 3.8% tax on net investment income

Tax applies to the lesser of NII or the excess of modified AGI over $250k for MFJ ($200k Single)

In Matilda’s case, the total Net Investment Income (NII) is $10,500 [$5,000 (LTCGs) + $2,500 (interest) + $3,000 (dividends)]. Note, alimony is not considered NII.

For a Single tax filer, the MAGI threshold is $200,000. Matilda’s MAGI exceeds the threshold by $10,000. The NIIT applies to the lesser of NII ($10,500) or excess MAGI ($10,000); The NIIT will be applied to $10,000.

$10,000 x 0.038 = $380 of NIIT

Question 5

Head of Household
Filing Status Requirements

Answer 5

In most cases, this status applies to taxpayers who are:
* not married
* the taxpayer must have paid more than half the cost of keeping up a home for themselves and a qualifying person

Question 6

The 3 Situations the IRS looks
at closely to determine if interest
must be imputed

Answer 6

1. Gift Loans: provided out of love, affection, or generosity
2. Corporate Shareholder Loans: from a corporation to its shareholder
3. Compensation-Related Loans: from employer to employee

Question 7

What does IRC Section 121 allow for personal residence sales?

Answer 7

Exclusion of gains on the sale of a personal residence for up to $250,000 (Single) or $500,000 (MFJ)

MFJ stands for Married Filing Jointly.

Question 8

Does the tax code allow for recognized loss on personal residences sold at a loss?

Answer 8

No, the tax code does not allow any recognized loss for personal residences sold at a loss.

Question 9

How often can the exclusion under IRC Section 121 be claimed?

Answer 9

Every two years (730 days).

Question 10

If married, what is required for both spouses regarding the usage test?

Answer 10

Both spouses must meet the usage test.

Question 11

If married, what is required for the ownership test?

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Answer 11

Only one spouse needs to meet the ownership test.

Question 12

What happens if a taxpayer does not meet the ownership or usage test?

Answer 12

They may qualify for a reduced exclusion.

Question 13

List some acceptable reasons for a reduced exclusion under IRC Section 121.

Answer 13

• Job relocation
• Employment change leaves you unable to pay your living expenses
• Qualifying for unemployment benefits
• Health issues
• Divorce or legal separation
• Birth of twins or other multiples
• Damage to home from disaster
• Condemnation or seizure of the property
• Other unforeseen circumstances

Question 14

What may taxpayers who do not meet their tax obligations owe?

Answer 14

Tax penalties

Tax penalties can arise from various failures related to tax filing and payment.

Question 15

What is the penalty for failing to file a tax return on time?

Answer 15

5% of unpaid taxes for each month late, up to a maximum of 25%

A minimum penalty of $510 applies if the return is more than 60 days late.

Question 16

What is the negligence penalty if there is no intent to defraud?

Answer 16

20% of the deficiency amount

This penalty applies when the taxpayer did not intend to defraud the IRS.

Question 17

What is the penalty for fraud in tax filings?

Answer 17

75% of the deficiency amount

This penalty is applied when the taxpayer intends to defraud the IRS.

Question 18

What constitutes a frivolous return and its penalty?

Answer 18

$5,000 for returns with phrases like ‘Go pound sand’ written on them

This penalty applies to returns deemed frivolous.

Question 19

What is the failure to pay penalty?

Answer 19

0.5% per month unpaid, up to a maximum of 25%

This penalty accumulates monthly until the tax is paid.

Question 20

What is the understatement of liability penalty based on?

Answer 20

The amount of underpayment, the period it was due, and the interest rate for underpayments

Underpayment occurs when withheld taxes are less than specified thresholds.

Question 21

What is the penalty for a tax preparer failing to furnish a copy of a tax return to a taxpayer?

Answer 21

$60 for each failure

Tax preparers have specific obligations for documentation.

Question 22

What is the penalty for a tax preparer failing to sign a tax return?

Answer 22

$60 for each failure

Signing is a requirement for tax preparers to validate the return.

Question 23

What is the penalty for a tax preparer failing to include a PTIN on a tax return?

Answer 23

$60 for each failure

The PTIN is necessary for tax preparers to properly identify themselves.

Question 24

What is the penalty for a tax preparer failing to be diligent in determining eligibility for certain tax benefits?

Answer 24

$600 per failure

This includes eligibility for credits like the Additional Child Tax Credit.

Question 25

True or False: If both a Failure to Pay Penalty and Failure to File Penalty are applied in the same month, the Failure to File Penalty is reduced by the amount of the Failure to Pay Penalty.

Answer 25

True This results in a combined penalty of 5% for that month.

Question 26

Fill in the blank: The penalty for failure to file is a minimum of _______ if the tax return is later than 60 days.

Answer 26

$510 This minimum penalty applies regardless of the amount owed.

Question 27

What types of income are not subject to withholding?

Answer 27

Investment income, rents, income from self-employment, capital gains These types of income may require quarterly estimated tax payments.

Question 28

How are estimated taxes calculated and submitted?

Answer 28

Using vouchers on Form 1040-ES

Question 29

When are the quarterly estimated tax payments due for calendar-year individuals?

Answer 29

April 15, June 15, September 15, January 15 of the following year These dates correspond to the payment periods: January 1 – March 31, April 1 – May 31, June 1 – August 31, September 1 – December 31.

Question 30

What is the penalty avoidance requirement for estimated quarterly payments?

Answer 30

25% of the lesser of: * 90% of the current year’s tax liability * 100% of the prior year’s tax liability if AGI was $150,000 or less

Question 31

What is the estimated tax AGI threshold for no penalty if greater than $150,000?

Answer 31

Taxpayer must pay estimated tax payments equal to: * 110% of the prior year’s tax, or * 90% of the current year’s tax

Question 32

What conditions lead to no penalty on estimated tax payments?

Answer 32

If: * Estimated tax for the current year is less than $1,000 * Individual had no tax liability for the prior year

Question 33

Fill in the blank: Estimated taxes must be submitted using _______.

Answer 33

Form 1040-ES

Question 34

True or False: All income types are subject to withholding.

Answer 34

False

Question 35

What is the due date for the second quarter estimated tax payment?

Answer 35

June 15

Question 36

What is the due date for the fourth quarter estimated tax payment?

Answer 36

January 15 of the following year

Question 37

What do tax credits do?

Answer 37

Reduce the tax liability on a dollar-to-dollar basis

Question 38

What are refundable credits?

Answer 38

Credits that offset a taxpayer’s tax liability, with excess refunded to the taxpayer

Question 39

What are nonrefundable credits?

Answer 39

Credits that may only be used to offset a taxpayer’s tax liability

Question 40

Name an example of a refundable credit

Answer 40

Earned Income Tax Credit Other examples include Additional Child Tax Credit, American Opportunity Credit, Premium Tax Credit

Question 41

Name an example of a nonrefundable credit

Answer 41

Child and Dependent Care Credit Other examples include Child Tax Credit, Retirement Savings Contribution Credit, Lifetime Learning Credit

Question 42

Who benefits more from tax deductions?

Answer 42

High-income taxpayers

Question 43

Who benefits equally from tax credits?

Answer 43

All taxpayers regardless of their marginal tax rate

Question 44

What are the 4 Refundable Tax Credits?

Answer 44

1. Earned Income Credit 2. Additional Child Tax Credit 3. American Opportunity Credit 4. Premium Tax Credit

Question 45

What are the 4 Nonrefundable Tax Credits?

Answer 45

1. Child and Dependent Care Credit 2. Child Tax Credit 3. Retirement Savings Contribution Credit 4. Lifetime Learning Credit

Question 46

**Maximum Annual Charitable Deductions** **Cash Gifts** - What % is Deductable Public Charity vs. Private Foundation?

Answer 46

**Cash Gifts** Public Charity = 60% of AGI Private Foundation = 30 % of AGI

Question 47

**Maximum Annual Charitable Deductions** **LTCGs w/FMV Election** - What % is Deductable Public Charity vs. Private Foundation?

Answer 47

**LTCGs w/FMV Election** Public Charity = 30% of AGI Private Foundation = 20 % of AGI

Question 48

**Maximum Annual Charitable Deductions** **LTCGs w/Basis Election** - What % is Deductable Public Charity vs. Private Foundation?

Answer 48

**LTCGs w/Basis Election** Public Charity = 50% of AGI Private Foundation = 30 % of AGI

Question 49

**Maximum Annual Charitable Deductions** **Ordinary Income Property (STCGs, Art, Invesntory** - What % is Deductable Public Charity vs. Private Foundation?

Answer 49

**Ordinary Income Property (STCGs, Art, Invesntory** Public Charity = 50% of AGI Private Foundation = 30 % of AGI

Question 50

Public Charity Deductions in Order of Category: 1. Cash 2. LTCGs FMV 3. LTCGs Basis 4. Ordinary Income (STCGs, Art, Inventory)

Answer 50

1. Cash = 60% 2. LTCGs FMV = 30% 3. LTCGs Basis = 50% 4. Ordinary Income (STCGs, Art, Inventory) = 50%

Question 51

Private Charity Deductions in Order of Category: 1. Cash 2. LTCGs FMV 3. LTCGs Basis 4. Ordinary Income (STCGs, Art, Inventory)

Answer 51

1. Cash = 30% 2. LTCGs FMV = 20% 3. LTCGs Basis = 30% 4. Ordinary Income (STCGs, Art, Inventory) = 30%

Question 52

What is the Medicare tax for a self-employed individual filing Single with $300,000 of net earnings from self-employment?

Answer 52

**$8,727** For a self-employed individual, the Medicare tax is 2.9%, payable on 92.35% of net earnings from self-employment without a maximum cap. In addition, a 0.9% Additional Medicare Surtax applies to 92.35% of net earnings from self-employment on the amounts for Single filers exceeding $200,000. **Step 1:** Net Earnings from SE x 0.9235 $300,000 x 0.9235 = $277,050 **Step 2:** Calculate Medicare Tax $277,050 x 0.029 = $8,034 **Step 3:** Calculate Additional Medicare Surtax The threshold for Single filers: $200,000 SE Earnings (post-0.9325): $277,050 Earnings to which the 0.9% tax will apply: $277,050 - $200,000 = $77,050 x 0.009 = $693 **Total Medicare Taxes = Step 2 result + Step 3 result = $8,034 + $693 = $8,727**

Question 53

Schedule K-1 is used to document each of the following four items:

Answer 53

The partnership uses Schedule K-1 to **report a partner’s share of the partnership's *income*, *deductions*, *credits*, and *other items*.** The partnership is **not responsible for keeping the information needed to figure out the basis of one’s partnership interest.** Although the partnership does provide an analysis of the changes to a partner’s capital account in item L of Schedule K-1, that information is based on the partnership's books and records and cannot be used to figure one’s basis.

Question 54

How much Education Reimbursements are allowed as tax exlusions and not taxable income?

Answer 54

$5,250 Education Assistance Program Different than Scholarships, which are 100% tax exclusions

Question 55

Taxable Estate + ____________ = Tentative Tax Base for Federal estate tax.

Answer 55

Taxable Estate + **Taxable Gifts** = Tentative Tax Base for Federal estate tax.

Question 56

A business can provide up to ***(BLANK)*** in childcare assistance to each employee and exclude it from their taxable wages reported on Form W-2.

Answer 56

A business can provide up to ​**$5,000**​ in childcare assistance to each employee and exclude it from their taxable wages reported on Form W-2.

Question 57

Identify the strategy that a financial planner can implement if a taxpayer is subject to AMT in the current tax year:

Answer 57

The optimal strategy would be to: 1. **accelerate income into the AMT year** or 2. **defer tax deductions to a regular tax year** until the AMT liability equals the regular liability.

Question 58

Josh is an unmarried U.S. Resident. He would meet the reporting threshold only if the total value of his specified foreign financial assets is more than ***(BLANK)*** on the last day of the tax year or more than ***(BLANK)*** at any time during the tax year.

Answer 58

As a single-filing U.S. Resident, Josh would meet the reporting threshold only if the total value of his specified foreign financial assets is more than **$50,000** on the last day of the tax year or more than **$75,000** at any time during the tax year.

Question 59

How much is the Standard Deduction for Minors? (Individuals who can be claimed as a dependent)

Answer 59

The standard deduction for an individual who can be claimed as a dependent on another person's tax return is generally limited to **the larger of**: **$1,300**, or The individual's **earned income plus $450**, but not more than the regular standard deduction (generally $14,600 in 2024). (Therefore, the **$14,600 serves as a ceiling**)

Question 60

What are the two requirement for Active Participation status in rental real estate?

Answer 60

Active participation requires that (1) the taxpayer owns at least 10% of the property and (2) has substantial involvement in managing the property.

Question 61

For a Viatical Settlement, **Terminally Ill** refers to an individual who has been certified by a physician as having an illness or condition that can reasonable be expected to result in death within how long?

Answer 61

24 months of the date of certification However, if the individual is only chronically ill, the benefits will only be excluded from income to the extent they are used for **L/T care services**. Recent federal legislation makes all proceeds of a viatical settlement income tax-free for **terminally ill** individuals, irrespective of subsequent use.

Question 62

For a Viatical Settlement, **Chronically Ill** refers to a person who is unable to perform **at least two activities of daily living** (e.g., eating, bathing, etc.) for a period of at least?

Answer 62

90 Days

Question 63

A viatical settlement provider must grant a ***(BLANK) *** cooling-off period during which the viator can rescind the viatical agreement.

Answer 63

A viatical settlement provider must grant a **15-day** cooling-off period during which the viator can rescind the viatical agreement.

Question 64

In a like-kind exchange the recognized gain is the lesser of:

Answer 64

In a like-kind exchange the recognized gain is the lesser of: * realized gain, or * net boot received.

Question 65

In general, investment income for Net Investment Income (NII) includes, but is not limited to:

Answer 65

In general, investment income includes, but is not limited to: * interest, * dividends, * capital gains, * rental and royalty income, * non-qualified annuities, * income from businesses involved in trading of financial instruments or commodities, and * businesses that are passive activities to the taxpayer

Question 66

In general, investment income for Net Investment Income (NII) DOES NOT include:

Answer 66

Items that are NOT investment income: * wages, * unemployment compensation, * operating income from a nonpassive business, * Social Security Benefits, * alimony, * tax-exempt interest, * self-employment income, * distributions from certain Qualified Plans, and * tax-exempt interest on governmental obligations and related expenses

Question 67

Justine purchased a computer for her online artisan business 6 months ago for $7,000. Since beginning to use the computer, its value has been depreciated to $4,500. Currently, Justine is experiencing cash flow issues and another business owner offered to purchase the computer for $1,000. Select the CORRECT tax treatment if Justine were to sell the computer.

Answer 67

The computer is ‘personalty’ that is being used in a trade or business to produce income. Therefore, it is considered Section 1245 property. The computer’s adjusted basis is $4,500 and its original cost basis was $7,000. Since the computer was sold at $1,000, there is a **$3,500 loss**. Since the computer was used in a business for the production of income, it is under the Section 1231 umbrella and, as a result, any losses below the depreciated basis will be treated as ordinary losses = **$3,500 ordinary loss**

Question 68

The termination by death, the lapse of time, release of power, or otherwise of an interest in property held in a trust resulting in skip persons holding all the interests in the trust is considered a 'taxable termination' for Generation-Skipping Transfer Tax (GSTT) purposes. If this occurs who is responsible for paying the GSTT?

Answer 68

The GSTT is required to be paid by **trustees** on taxable terminations.

Question 69

The federal estate tax is calculated in five steps: What are they?

Answer 69

1. Determining the value of the gross estate. 2. Arriving at the adjusted gross estate. 3. Determining the taxable estate. 4. Calculating the federal estate tax payable before credits. 5. Applying the allowable credits to arrive at the net federal estate tax.

Question 70

Net Investment Income Tax (NIIT) – 3.8%: Individuals will owe the tax if they have Net Investment Income AND have modified adjusted gross income over the following thresholds:

Answer 70

Question 71

The Net Investment Income Tax is what %?

Answer 71

3.8% NII = 3 letters, 8 is great for making a lot of money

Question 72

The default IRS method for determining cost basis is what?

Answer 72

The default IRS method for determining cost basis is **first-in, first-out (FIFO).**

Question 73

When personal loans are greater than $10,000 and up to and including $100,000, the imputed interest is? If the borrower’s net investment income is $1,000 or less, imputed income?

Answer 73

When loans are greater than $10,000 and up to and including $100,000, the imputed interest is the **lesser of the AFR or the borrower’s net investment income.** If the borrower’s net investment income is $1,000 or less, imputed income **will not apply**.

Question 74

A C Corporation income is taxed once or twice?

Answer 74

C Corporation income is taxed **twice**, at the entity level and again at the shareholder level. Sole Proprietorships, Limited Liability Companies (LLCs), and Partnerships all have **one level of income tax**.

Question 75

The basic needs that a Special Needs Trust can cover include what?

Answer 75

The basic needs that a Special Needs Trust can cover include **food, shelter, and clothing.** Medical care is categorized as a supplementary need.

Question 76

The standard deduction amount depends on which 3 facts?

Answer 76

The standard deduction amount depends on the 1. Taxpayer's filing status 2. Dependent status 3. And whether the taxpayer is blind or at least 65 NOT THEIR GROSS INCOME

Question 77

Are forgiven student loans from the Public Service Loan Forgiveness (PSLF) program taxed as income at the federal level?

Answer 77

NO, forgiven student loans from the Public Service Loan Forgiveness (PSLF) program are **not taxable income** at the federal level. Exclusion

Question 78

The IRS is authorized to impute an interest charge if the taxpayer charges less than?

Answer 78

The IRS is authorized to impute an interest charge if the taxpayer charges less than **an adequate rate of interest**.

Question 79

For separation agreements finalized after **? WHAT YEAR ?**, alimony paid is not deductible and alimony received is not considered gross income to the recipient.

Answer 79

For separation agreements finalized **after 2018**, alimony paid is not deductible and alimony received is not considered gross income to the recipient.

Question 80

A taxpayer can only use passive losses to the extent they have passive income. Any passive losses in excess of passive income are **(BLANK)**.

Answer 80

A taxpayer can only use passive losses to the extent they have passive income. Any passive losses in excess of passive income are **suspended**.

Question 81

What are the 4 common refundable tax credits?

Answer 81

**EAPA** R-EAPA! 1. Earned Income Credit 2. American Opportunity Credit 3. Premium Tax Credit 4. Additional Child Tax Credit

Question 82

What are the 4 common nonrefundable tax credits?

Answer 82

**CCRL** Carnival Cruises Royal Lines - Doesn't give refunds 1. Child and Dependent Care Credit 2. Child Tax Credit 3. Retirement Savings Contribution Credit 4. Lifetime Learning Credit

Question 83

If a taxpayer is subject to AMT in the current tax year, what are the 2 strategies a planner can implement?

Answer 83

1. Accelerate income into the AMT year to increase Regular AGI and pay less AMT at 26% or 28% rates 2. Defer tax deductions to the next regular tax year to increase Regular Taxable Income in AMT year, offsetting AMT The optimal strategy would be to do the 2 strategies above until the AMT liability equals th regular tax liability.

Question 84

Is the bargain element taxable for ISOs? (the difference between the exercise price and the fair market value of the stock at exercise)

Answer 84

**No**, the bargain element (the difference between the exercise price and the fair market value of the stock at exercise) for Incentive Stock Options (ISOs) is not immediately taxable for regular income tax purposes when the option is exercised. However, it may be subject to the Alternative Minimum Tax (AMT) in the year of exercise. Here’s how it works: Regular Tax Treatment: **No income tax at the time of exercise.** **If you hold the stock for at least two years from the grant date** and **one year from the exercise date**, the entire gain (sale price - exercise price) is taxed as a **long-term capital gain when you sell the stock.** If you sell before meeting the holding period, it becomes a **disqualifying disposition**, and the **bargain element is taxed as ordinary income in the year of sale.** **Alternative Minimum Tax (AMT):** The bargain element is included in AMT income in the year of exercise. If AMT applies, you may owe tax even though you haven’t sold the stock yet. You might be able to recover some AMT paid through an AMT credit in later years.

Question 85

The **Kiddie Tax** applies to who?

Answer 85

The Kiddie Tax applies to **children under age 19** or **full-time students under age 24**.

Question 86

The disabled child receives which of the following from a Special Needs Trust?

Answer 86

Special needs trusts preserve eligibility for government benefits and pay for extra services that are not covered by public assistance programs. The trust disburses **discretionary payments** to the disabled child.