Chapter 4

Question 1

Is interest expense taxable?

Answer 1

interest income is taxable except for municipal interest (interest paid on bonds owned by state and local gov)

Question 2

Examples of taxable interest

Answer 2

• US treasury noted and bonds
• federal and state tax refunds
• mortgages

Question 3

n interest on Series EE savings bonds be excluded?

Answer 3

• when the TP incurs college expenses in the year the bonds are cashed in.
• must be at least 24 years old

Question 4

Alimoney recapture

Answer 4

Alimony recapture may occur if alimony payments sharply decline in the second and third years that payments are made. The payor must report the recaptured alimony as gross income in the third year, and the payee is allowed a deduction for the same amount. Recapture for the second year (2016) occurs to the extent that the alimony paid in the second year ($20,000) exceeds the alimony paid in the third year ($0) by more than $15,000 [i.e., $20,000 − ($0 + $15,000) = $5,000 of recapture].

Question 5

Which type of entity is limited to a calendar year end?

Answer 5

S Corps

Question 6

What is the hybrid method of accounting?

Answer 6

Cash basis for all income and expense items, but sales and purchases of inventory must be accounted for under the accrual method

Question 7

Uniform Capitalization Rule

Answer 7

Uniform capitalization rules generally require that all costs incurred (both direct and indirect) in manufacturing or constructing real or personal property, or in purchasing or holding property for sale, must be capitalized as part of the cost of the property. However, these rules do not apply to a “small retailer or wholesaler” who acquires personal property for resale if the retailer’s or wholesaler’s average annual gross receipts for the three preceding taxable years do not exceed $10 million.

Question 8

Are medical insurance premiums paid by the employer taxable to the TP?

Answer 8

no

Question 9

are reimbursements of qualified moving expenses taxable to the TP?

Answer 9

no

Question 10

Coverdell Education Savings Account

Answer 10

• contributions are not tax deductible
• contributions cannot be made to an edu IRA if the beneficiary is 18 or older
• A taxpayer may contribute up to $2,000 in 2016 to an education IRA to pay the costs of the designated beneficiary’s higher education.
• Eligibility for an education IRA is phased out if adjusted gross income exceeds certain threshold levels.

Question 11

Who can receive an IRA deduction?

Answer 11

A single individual with AGI over $72,000 for 2017 would only be entitled to an IRA deduction if the taxpayer is not covered by a qualified employee pension plan.

Question 12

What is the phaseout range for IRA deductions?

Answer 12

$99,000 and $119,000

Question 13

What is the max amount contribution and deduction a TP can take for contributing to an IRA, over age 50

Answer 13

$5,500 plus catch up over 50 of an additional $1,000

Question 14

Can a corp deduct the life insurance premiums on a policy for the president of which the corp is a beneficiary

Answer 14

no

Question 15

Common deductions for AGI

Answer 15

• alimony
• rent or royalty expense
• losses
• trade or biz
• 50% of self-employment tax
• 100% of medical insurance for self-employed
• IRA and Keogh contrbutions
• moving expenses
• student loan interest up to $2,500
• higher edu tuition
• classroom exp for certain teachers

Question 16

what is considered profit seeking for a hobby?

Answer 16

if profit in 3 of last 5 years

Question 17

what happens to a net passive loss?

Answer 17

carried forward indefinitely to offset net passive gains. or deducted in the year that the passive activity is entirely disposed of by the TP

Question 18

what is the maximum amount of contributions to defined contribution self-employed retirement plan is limited to:

Answer 18

the lesser of:

• $54,000 or
• 100% of self-employment income

Question 19

is a corp’s penalty for underpayment of federal estimated taxes deductible?

Answer 19

no

Question 20

once a person has been adjudicated incompetent by a court with proper jurisdiction all future contracts with that person are

Answer 20

Void

Question 21

On a dependents return, what is their standard deduction limited to?

Answer 21

the greater of: $1,050 or earned income plus $350

Question 22

is Self employment tax deductible?

Answer 22

The self-employment tax is imposed at a rate of 15.3% on individuals who work for themselves (e.g., sole proprietor, independent contractor, partner). Generally, one-half of an individual’s self-employment tax is deductible from gross income in arriving at adjusted gross income.

Question 23

what tax rate should be used for decision making?

Answer 23

the marginal tax rate

Question 24

What are the Personal tax credits

Answer 24

Child Tax
IRA credit
Education Tax credits
Dependent Care
Adoption Expense Credit
Elderly Credit
Alternative Motor Vehicle Credit
Residential Energy Efficient Property Credit
Foreign Tax Credit

Question 25

General Business Credit

Answer 25

R & D
Rehab
Misc

Question 26

Refundable Credits

Answer 26

Earned Income
Child Credit (partially refundable)
American Opp/Hope Credit (partially refundable)
Health Coverage Tax credit

Question 27

American Opp Credit

Answer 27

Max of $2,500 per year for EACH eligible student.
calc as 100% of the first $2,000 and 25% of the next $2,000 of edu exp.
Must be during first 4 years and must be degree program
Can be claimed against the AMT, and 40% of the credit is refundable.
Phased out for AGI in excess of $80k ($160k) over $10k range (completely gone at $90k).

Question 28

Lifetime Learning

Answer 28

Allowed up to a max of $2,000 per TP
calc as 20% of the first $10,000 of edu exp.
Phased out over $56k over $10k range
Need not relate to degree program

Question 29

Savers credit

Answer 29

max of $1,000 and is based on Roth or Traditional IRA deductions.
No credit allowed for AGI over $62k

Question 30

Adoption Credit

Answer 30

Reasonable exp up to $13,570 (full amt for special needs)
Phased out between $203,540 and $243,540
Credit limited to the regular tax liability, but excess carried forward 5 years

Question 31

Elderly credit

Answer 31

$5,000 where only one spouse if 65 or older
$7,500 if both spouses are 65 or older
Reduced by 50% of the amount that is in excess of AGI over $7,500 single ($10k)

Question 32

Motor Vehicle Credit

Answer 32

$5,000

Question 33

Refundable credits

Answer 33

-Earned income

Question 34

Non-refundable credits

Answer 34

• adoption credit

- elderly

Question 35

what is a marital deduction in regards to an estate

Answer 35

In computing the taxable estate of a decedent, an unlimited marital deduction is allowed for the portion of the decedent’s estate that passes to the decedent’s surviving spouse.

Question 36

when must a federal estate tax return be filed?

Answer 36

if the decedents estate exceeds $5,490,000. If the person had taxable lifetime gifts, the $5,490,000 is reduced by the amount of taxable lifetime gifts ie. $5.49M - $400,000 gifts = 5.09M which is greater than estate of $4M, therefore TP doesnt have to have fed estate tax return filed.

Question 37

How many years can an alternative minimum tax be carried forward/back?

Answer 37

forward indefinitely

Question 38

if one spouse dies, how much of the jointly owned property is included in the estate of the deceased?

Answer 38

Includes half of the value of all the property jointly owned regardless of which spouse furnished the original consideration.

Question 39

What credits may be offset against the gross estate tax to determine the net estate tax of a U.S. citizen.

Answer 39

• Foreign death tax
• unified credit
• prior transfers and gift taxes paid on pre-1977 gifts