Book 4 page 1-60 Flashcards
this doctrine stipulates that a transaction will not be effective for income tax purposes unless it is intended to achieve a genuine business purpose other than tax avoidance
business purpose doctrine
prohibits an individual to form an entity just to potentially receive favorable tax treatment ; requires actual business purpose to be present
business purpose doctrine
this doctrine allows the IRS to look through the legal formalities of a transaction to determine its actual economic substance
substance-over-form doctrine
give an example of when the substance-over-form doctrine becomes relevant
a corporate executive who is in need of income decides to have the corp lend her money from the business, the IRS could declare that this loan should be reclassified as salary
this doctrine states that the person who earns the income cannot assign the income to someone else just for tax purposes ; also known as the fruit and the tree doctrine
assignment-of-income doctrine
this doctrine converts otherwise nontaxable income into taxable income
tax benefit rule/doctrine
give an example of the tax benefit doctrine
a taxpayer is reimbursed in a subsequent year for medical expenses paid and deducted in a previous year
states that if there is no substantial limitation or restriction on a taxpayer’s right to bring the funds under personal control, the income will be taxed as if already received
constructive receipt doctrine
if a taxpayer sells stock after a dividend has been declared but before the record date, who will pay tax on the dividend?
the purchaser
taxable income that has not yet been received in cash
phantom income
true or false?
A client is in the 28% bracket. Because of this the client instructed the tenant of his rental property to make payments to his (the CFP client) daughter. The daughter is in the 15% bracket so the client wants the rental income to be taxed at lower rates. This is a valid strategy to use
false, this will be classified as assignment of income. Because the client owns the rental property he is the one that is required to recognize income
true or false?
income from partnerships is taxed at the partners’ own individual rates
true
what return must a partnership file?
Form 1065
which form indicates each partner’s share of the partnership income?
K-1
true or false?
income from a general partnership on the K-1 is usually self employment income
true
true or false?
income from a limited partnership is passive activity income for the limited partner
true
who pays the tax on a S corps income?
the shareholders
what form does a S corp file?
1120S
true or false?
each shareholder of a S corp will receive a K-1
true
true or false?
the income from the S corp is considered passive activity income
true
income generated by assets of an estate that is distributed from the estate to the beneficiaries
income in respect of a decedent (IRD)
true or false?
IRD income is usually not taxable
false, it is taxable
when the taxpayer obtains possession of the income but is not legally entitled to the receipt of the income because the taxpayer is required to turn over the income to its rightful owner
Conduit for others
true or false?
gift loans may only occur between individuals
true
On January 1, Richie loaned his daughter, Beth, $90k to purchase a new home. There were no other loans outstanding between the two. Beth’s only income was $30k salary and $4k interest income. Richie had investment income of $200k. Richie did not charge Beth interest. The relevant federal rate was 9%. How much imputed interest must Richie recognize and how much imputed interest expense must Beth recognize?
$4,000
the $100k exemption applies and thus Richie’s imputed interest income and Beth’s imputed interest expense is limited to Beth’s net investment income.
employee achievement awards of less than $_____ per year and based on length of service are excluded from an employee’s gross income
$400
true or false?
cash and the FMV of prizes and awards are included in gross income
true
true or false?
if an annuitant dies before life expectancy and has not completely recovered the basis, the un-recovered basis is deductible on the annuitant’s final income tax return as a miscellaneous itemized deduction not subject to the 2% of AGI floor
true
true or false?
annuity payments beyond projected life expectancy are fully taxable if the annuity was issued after 1986
true
Wendy a 55 year old taxpayer has begun receiving an annuity over her life expectancy of 25.5 years. She receives $1,500 per month. Her contributions to the annuity were after tax and amounted to $91,800. Payments began April 1 of this year. How much of the payments can she exclude this year?
$2,700
($1,500 x 9) = $13,500
exclusion ratio = $91,800 / $459,000 = 20%
$13,500 x 20% = $2,700
employees can exclude premiums paid by their employers on the first $_____ of group term life coverage
$50k
Tom is 51 years old and works for Employer A. Tom’s life insurance coverage with employer A is $80,000. Tom pays a premium of $50 per year for the coverage, how much should Tom include in his gross income?
$32.80
excess coverage = $30,000 excess coverage / $1,000 = 30 30 x .23 cents = $6.90 (.23 cents comes from a table) $6.90 x 12 = $82.80 $82.80 - $50 = $32.80
includes AGI from all sources plus 50% of SSI benefits, foreign income previously excluded, and any tax exempt interest income
provisional income
FICA is made up of ____ and ____
OASDI and HI
social security and medicare
what is the tax rate for OASDI? Is it for employers or employees?
it is 6.2% and it is for both
at what point does OASDI stop getting applied to your wages?
$127,200 for 2017
true or false?
the medicare tax has no ceiling for taxable earnings
true
what is the HI (medicare tax) rate? Is it for employers or employees?
1.45% and its for both
what is the medicare tax rate for self employed individuals?
2.9%
self employment tax rates are ____%
15.3%
when calculating self employment tax, the taxpayer reduces net earnings by _____%
7.65%
the additional medicare tax of ____% also applies to self employed individuals who have a combined income greater than $_____ if single and $_______ if MFJ
.9% ; $200k ; $250k
true or false?
amounts paid by an employer upon an employee’s death to the employee’s beneficiaries are fully includable in the beneficiaries income
true
true or false?
a death benefit from an employer is taxable income to the beneficiaries
true
true or false?
social security benefits are taxable to the parent if the child is receiving the benefits
false
true or false?
if you choose an annuity payout option after winning the lottery you are not required to recognize income right away assuming there is no qualified prize option
false
allows you to declare annuity payments as income in the year they are received from winning a prize rather than immediately
qualified prize option
act that allows payments from a personal injury lawsuit to be paid out periodically most often in an annuity form for the remainder of the injured party’s life
Periodic Payment Settlement Act
damages arising out of the personal injury lawsuit considered to only make the injured party whole
compensatory damages
true or false?
compensatory damages are taxable to the injured party
false, they are tax free
true or false?
damages received in age, sex, or racial cases are generally taxable
true
damages arising out of a personal injury intended to punish the offender for their acts
punitive damages
are punitive damages taxable?
yes, generally
when does scholarship money in excess of the qualified education expenses have to be realized on a tax return?
not until all expenses are paid, could be more than one year after receipt of scholarship
true or false?
you can exclude scholarship money that is used for room and board from your tax return
false
true or false?
you can exclude scholarship money that is used for books from your tax return
true
true or false?
if you choose to receive installment payments as a death benefit option to a life insurance policy, you must pay tax on the interest that you receive each year
true
when do dividends received from a life insurance policy become taxable?
when the aggregate of the dividends exceeds your basis in the contract
can businesses deduct life insurance premiums for their employees or officers if the business is listed as a beneficiary under the policy?
no
true or false?
if you are terminally ill you can use a viatical agreement and receive some of your death benefit tax free while living
true
true or false?
if you are chronically ill you can use a viatical agreement and receive your death benefit tax free regardless of what you use the proceeds for
false, proceeds must be used for LTC and any that are not are subject to taxation
Jack surrendered to the insurer a whole life insurance policy with a cash value of $80k (there was no policy loans or distributions prior to the surrender). Jack made $70k in aggregate premium payments. The original cost of the insurance was $11k. How much will Jack include as ordinary income on his tax return?
$10k
(80 - 70)
the cost of insurance does not affect this
Jack sold his whole life insurance policy to Martin. Martin is unrelated to Jack and will not suffer an economic lost upon Jack’s death. Jack sold the policy for $95k and the policy had a $80k cash surrender value at the time. Jack had paid $70k in aggregate premium payments. The cost of insurance was $11k. what is the total gain and what is the long term capital gain that Jack must realize?
total gain = $95k - $70k - $11k = $36k
long term cap gain = $36k - ($80k - $70k) = $26k
true or false?
if selling a term life insurance policy all the gain is considered capital gain instead of some of it being ordinary income
true
a contract where if the premiums paid during the first seven years of the contract exceed the total of the net level premiums that would have been paid if the policy provided for paid up benefits after the seventh year
modified endowment contract
do modified endowment contracts use LIFO or FIFO on their withdrawals and loans?
LIFO
is there any penalty and if so how much, on withdrawals or loans under MEC if under age 59.5?
10% penalty on any taxable portion
true or false?
the death benefit under a MEC is taxable
false
true or false?
health insurance premiums paid by the employer are deductible for the employer but taxable to the employee
false, they are deductible and excludable
true or false?
disability premiums paid by the employer are deductible for the employer and tax excludable for the employee
true
true or false?
if the employer pays the disability premiums for the employee and then the employee collects disability benefits, the benefits will not be taxable
false, the benefits are taxable to the employee
true or false?
contributions made by an employer to a medical savings account or health savings account are not taxable to the employee
true
how much of child and dependent care services paid by the employer can an employee exclude from income?
$5,000
true or false?
the value of a health facility or gymnasium provided by the employer on the premises solely for the use of employees and the employee’s dependents is excluded from the employee’s gross income
true
true or false?
employer paid health club dues (public gyms or health facility) for an employee are taxable
true
how much of qualified educational assistance provided by an employer can an employee exclude from income?
$5,250
does the qualified educational assistance provided by an employer cover undergrad, grad, or both?
both
when can an employee exclude from income an employee discount?
when the property is not real property or investment property
the property or services are offered in the same line of business in which the employee works
the benefits are so small that account for them is impractical
de minimis fringes
when an employer offers goods or services to an employee at a discount and they can be excluded from income
qualified employee discounts
when an employer provides property or services to an employee that an employee could have deducted had they paid for the expense themselves
working condition fringes
true or false?
personal use of an employer-provided car is usually a taxable fringe benefit
true
qualified employee discounts for services can be excluded but the exclusion is limited to ____% of the customer’s cost
20%
adoption assistance can be excluded up to $_____ for 2017 per child with an AGI phaseout of $____ to $____
$13,570 ; $203,540 - $243,540
noncorporate investors can exclude ____% of the gain they realize on qualified small business stock. Any remaining gain is taxed at the ____% cap gains rate
50% ; 28%
section 1202 stock must be held for ____ years to qualify for the exclusion
5
if 1202 stock was required after 9/27/2010 then ____% of the gain is excluded from a noncorporate taxpayer’s income
100
true or false?
generally if a lender forgives a borrower’s debt. the borrower does not report the forgiven debt as income
false, they do report the forgiven debt as income
how much of foreign income can a taxpayer exclude from US gross income for 2017? Are there any requirements to meet this exclusion, if so what are they?
$102,100
yes, must be a bona fide resident of the foreign country or be present in a foreign country for at least 330 days during and 12 consecutive months
how much can you contribute to a Coverdell Education Savings Account per beneficiary?
$2,000
true or false?
distributions from Coverdell Education Savings Account are excluded from income if used for room and board and the student attends less than half time
false, must be half time
when must the funds in a Coverdell Education Savings Account be distributed by?
age 30
what if the funds in a Coverdell Education Savings Account aren’t distributed by the required date?
they must be distributed and the accumulated earnings are taxable and they are subject to a 10% penalty
are unreimbursed business expenses deductible as above the line deductions or below the line (itemized) deductions?
itemized
can self employed individuals deduct self employment tax paid for OASDI and Medicare?
yes
Paul has net Schedule C income of $40k. what is his self employment tax and deductible portion of self employment tax?
self employment tax = ($40k x (100%-7.65%) x 15.3% =$5,651.82
deductible portion = ($40k x (100%-7.65%) x (6.2% + 1.45%) = $2,825.91
true or false?
alimony paid to an ex spouse is an itemized deduction for the person who is paying the alimony
false, it is an above the line deduction for the person who is paying the alimony
the distance between the new job and the old residence must be at least _____ miles greater than the old job and the old residence
50 miles
to qualify for the moving expense deduction you must work ______ weeks out of the next _______ weeks
39 ; 52
to qualify for the moving expense deduction and are self employed you must work _______ weeks out of the next ________ weeks
78 ; 104
are qualified unreimbursed moving expenditures treated as above the line deductions or itemized deductions?
above the line
true or false?
any forfeited interest on withdrawals from a CD is deductible for AGI
true
true or false?
if a person dies with a capital loss carry forward on their last tax return the beneficiaries can continue to use the loss carry forward in following years
false, they capital loss carry forward goes away
distributions under an Archer Medical Savings Account
and a HSA that are not used for medical expenses are subject to tax and a _____% penalty unless made after age ____ or upon ____ or ________
20% ; 65 ; death ; disability
is student loan interest an above the line or an itemized deduction?
above the line
true or false?
the taxpayer claiming a student loan interest deduction can claim the deduction even if someone else claims them as a dependent
false, they cannot be claimed a dependent
what is the maximum student loan interest deduction allowed?
$2,500
charitable gifts are limited to _____% of AGI and are itemized deductions
50%
medical expenses that exceed ____% of AGI are deductible
10%
casualty losses must exceed _____% of AGI to be deductible
10%
miscellaneous itemized deductions such as unreimbursed job expenses must exceed _____% of AGI to be deductible
2%
true or false?
a corporation can only use capital losses as an offset against capital gains
true
a corporations capital losses may be carried forward for ____ years or carried back to each of the preceding ____ tax years
5 years ; 3 tax years
true or false?
alimony received is included in gross income
true
if there is more than a $____ decrease in alimony payments between any of the first _______ years, there may be alimony recapture
$15,000 ; 3
in order for a property transfer as a result of a divorce to have no tax consequences, the transfer must be made within _____ year(s) after the marriage ceases
1 year
true or false?
child support is taxable to the receiver
false
true or false?
child support is tax deductible to the payor
false
who does the Kiddie tax apply to?
any child who has not attained age 19 by end of tax year or a full time student who has not attained age 24 by end of tax year
Ann is age 14 and earned $5,600 from babysitting in 2017. She also had interest of $2,200 from her savings account. What is Ann’s net unearned income and how much of her income will be taxed at her parent’s marginal rate and her own rate?
net unearned income = $100
taxed at parent’s rate = $100
taxed at her own rate = $1,750
$1,750 = gross income of $7,800 - earned income plus $350 of $5,950 - income taxed at parent’s rate of $100
allows deductions for expenses incurred in a trade or business
section 162
allows deductions for expenses incurred in connection with investment activities
section 212
true or false?
most expenses incurred in a trade or business are below the line (itemized) deductions
false, they are above the line
true or false?
investment expenses are itemized (below the line) deductions
true
deductions from AGI are also known as _______ deductions
itemized
deducions for AGI are also known as ____ deductions
above the line
deductions from AGI (itemized) are reported on schedule ____
A
True or false?
if a distribution from a C corp is classified as a dividend the distribution will be double taxed. Once by the corporation as earnings and once as a dividend to shareholders
true
a distribution to a shareholder is generally treated as a tax-free return in regards to S-corps
true
a(n) ____ taxpayer generally receives a deduction when the expense has been paid
cash basis
a(n) ____ taxpayer generally receives a deduction when the expense is incurred
accrual basis
which items are deductible for Fred if he pays them for his son?
principal payment on automobile
payment of interest on loan
payment for medical expenses
payment for son’s property taxes
medical expenses only
if income is tax exempt, can the tax payer deduct expenses and interest related to that income?
no
if a taxpayer investigates a business that is a new line of business and acquires the business, up to $_____ of expenses can be deducted immediately
Any expenses over $50,000 reduce the $5,000 deduction by what amount?
$5,000
dollar for dollar
true or false?
if a taxpayer investigates a business that is similar to the one he is already in, the expenses are deductible whether or not he acquires the business
true
true or false?
if a taxpayer investigates a business that is not already similar to the business he is in, the expenses are deductible whether or not he acquires the business
false, they are not deductible if he does not acquire the business that is not similar to his already existing business
when can a taxpayer deduct his expenses related to investigating a similar business regardless if he acquires it or not?
the expenses are currently deductible
true or false?
if an activity is deemed to be a hobby, then losses incurred are always fully deductible
false, they may not be fully deductible
hobby expenses are reported as ____ deductions
itemized
which type of itemized deduction do hobby expenses fall under?
miscellaneous
hobby income is reduced by ____ and ____ first then by ____ and then by_______
taxes and interest
other non capital related expenses
expenses that affect basis
Assume Sara earns $3,000 from a hobby of selling antique furniture and incurs the following expenses:
cost of goods sold = $2,000
Supplies = $1,200
interest on loan to get business started = $800
advertising = $750
If Sara is unable to itemize her deductions how much of the hobby income should be included in her gross income for tax purposes?
all $3,000 should be included
if you rent out property for less than _____ days then you can exclude the income from your gross income, this is known as ____
15 ; primarily personal use
if you rent out a property for less than 15 day, what expenses are deductible?
mortgage interest
taxes
casualty losses
if the rental property is rented at least ____ days per year and is not used for personal use more than the greater of ____ days per year or ____% of rental days, then the property is classified as ___________
15 ; 14 ; 10 ; primarily rental use
if a property is classified as a primary rental property then you can deduct losses up to $____ with an AGI between $____ and $_____
$25k ; $100k ; $150k
if the rental property is rented at least _____ days per year and is used for personal use for more than the greater of ____ days or ____^ of rental days, this is known as ____
15 ; 14 ; 10 ; mixed use
if property is classified as mixed use, can you deduct losses in the current tax year?
no, they can be carry forward though
true or false?
legal fees incurred for personal purposes are nondeductible
true
are legal fees in connection with trade or business or for the production of rents and royalties tax deductible?
yes
true or false?
legal fees in connection with trade or business or for the production of rents and royalties are an itemized deduction
false, they are an above the line deduction
what happens to legal fees that are incurred when acquiring a new asset?
the legal fees get added to the basis of the asset
section 1244 losses are limited to ____ for single filers and ______ for joint filers
$50,000 ; $100,000
net operating losses may be carried back ___ years preceding the loss year and carried forward ____ years following the loss year
2 ; 20
true or false?
the election to forego net operating loss carry back is irrevocable
true
why would a taxpayer select to forego the option of net operating loss carry back?
taxpayer expects to be in a higher tax bracket moving forward than previous years
true or false?
the oldest net operating loss must be used before using any of the more recent net operating losses
true
what type of deduction, above the line or itemized, do unreimbursed transportation expenses while on company business get classified as?
they are itemized deductions
miscellaneous subject to 2% AGI floor
uses a fixed dollar amount of money per business mile plus tolls and parking
automatic mileage method
uses depreciation, gas, licenses, maintenance, and insurance costs to determine the amount of deduction you can receive for unreimbursed transportation expenses
actual operating cost method
a taxpayer’s main location of work
tax home
meals while traveling are subject to a ___% limit on the deduction
50%
true or false?
unreimbursed travel expenses are an itemized deduction
true
Allison took a trip from Alabama to England. She was away from home for 10 days. She spent two days vacationing and eight days on business (including two travel days). Her expenses are as follows:
Airfare = $1,200
Lodging = $1,500
Meals = $900
how much is Allison allowed to deduct?
$1,200 + ($150 x 8) + ($90 x 8 x 50%) = $2,760
what are the general requirements for you to be able to deduct education expenses (not your child’s but your own)?
- to maintain or improve existing skills in the present job
2. To meet legally imposed or employer requirements to retain current job, such as continuing education requirements
true or false?
taking education classes to meet the minimum requirements of your present job is a deductible expense
false
true or false?
taking education classes to meet requirements for a new job is a deductible expense
false
Dawn who holds a bachelor's degree in art history, is a middle school teacher in New Orleans. She wants to further her education in art history, believing this will allow her to become a better teacher. Dawn spent her summer break attending the University of Hawaii taking art history classes. Her expenses are as follows: books and tuition = $2,000 Meals = $1,000 Lodging = $700 Laundry while in travel status = $200 Transportation = $700 Total = $4,600
What is Dawn’s education expense deduction?
$4,100
she can only deduct 50% of meals but 100% of everything else
true or false?
books are allowable education expenditures that can be deducted for a taxpayer
true
true or false?
tuition expenses are deductible for a taxpayer trying to improve their job skills
true
true or false?
transportation, lodging, and laundry while in travel status are deductible for a taxpayer trying to improve their job skills
true
business gifts are limited to $___ per donee per year
$25
Kay entertains one of her clients and incurs the following expenses: Taxi = $30 Door Cover Fee = $25 Dinner = $128 Tips to server = $25 Total = $208
how much is Kay’s allowable deduction?
$119
$30 + 50% ($25 + $128 + $25)
Elizabeth made the following gifts during the current year:
To Candace, a key client ($4 of amount listed is for gift wrapping) = $104
To secretary = $24
To boss = $28
how much of these gifts are deductible to Elizabeth?
$53
$25 limit per donee and gifts to superiors do no count
(the $4 wrapping fee can be deducted according to IRS rules)
