Dalton Quizzes Flashcards
Tony Scarponi has come to you asking about the basis of property that his brother Calvin gave to him. The property had a market value of $75,000 and Calvin’s adjusted basis in the property was $18,000 at the time of the gift. Calvin paid gift tax of $3,500 on the gift. Tony wants to know what his adjusted basis in the property is. Assume Calvin had utilized his annual gift tax exclusion for gifts previously given to Tony that year. What will you tell him?
A)Tony’s new basis is $18,000, the same as Calvin’s basis was at the time the gift was made.
B)Tony’s new basis is the fair market value of the gift at the time of the gift.
C)The adjusted basis for Tony is $20,660.
Rationale
The correct answer is “C.”
Increase in Donee’s Basis = (Appreciation of the Property/ Taxable Gift) x Gift Tax Paid FMV of Property at Date of Gift
[($57,000 ÷ $75,000 = .76) x $3,500] + $18,000 = $20,660
D)The adjusted basis for Tony is $21,500.
As a direct result of the rules under TCJA 2017, qualifying dividends will be treated in which manner:
Under TCJA the capital gain breakpoints are at set dollar amounts not corresponding to the current tax brackets. See provided tax tables in Helpful Documents within Blackboard.
What kind of tests of corporation must meet to be considered a personal holding company?
a.) Ownership test—During the last half of the taxable year, more than 50% of the value of the outstanding stock of the corporation is owned by five or fewer individuals.
b.) Passive income test—At least 60% of the corporation’s adjusted ordinary gross income consists of personal holding company income.
■ Adjusted ordinary gross income is the company’s gross income, with several adjustments. Adjustments include reductions for property taxes, depreciation, and interest expense.
■ Personal holding company income is generally defined as passive income and certain income from services.
c.) Undistributed personal holding company income is the corporation’s adjusted taxable income, less the dividends paid deduction.
What are the Itemized deductions that are deductions from AGI?
These include charitable contributions, medical expenses, mortgage interest, taxes paid, and casualty losses in a federally declared disaster area. c. These deductions are also known as Schedule A itemized deductions.
What is the maximum capital loss for individuals?
Capital losses can offset capital gains without limit. a. Capital losses are deductible against a taxpayer’s ordinary income up to $3,000 ($1,500 for taxpayers filing as MFS) annually, with an unlimited carry-forward amount. b. Any capital losses unused after filing a taxpayer’s final federal income tax return are lost and may not be used by the estate or a beneficiary. c. A corporation can use capital losses only as an offset against capital gains. 1.) Capital losses in excess of a year’s capital gains may be carried forward for five years or carried back to each of the preceding three tax years. 2.) The loss is treated as a short-term capital loss for the year in which it is carried forward or back. 3.) Remaining capital losses that cannot be fully utilized in the carryover periods (three years back and five years forward) are not deductible.
cost recovery
成本回收
Which of the following appropriately describes senior worker’s social security benefit situation?
Her benefits would have been reduced $1 for every $3 she earned in excess $48,600 (2020) in the year in which she attained full retirement and there is no penalty after normal age retirement
Factors affected the money purchase plan are:
Forfeitures may reduce employer contributions due to contribution offsets or Section 415 limitation on annual additions. Increased compensation will result in increased contributions by the employer, subject to Section 415 limitations. Returns on portfolio assets and actuary funding are a concern in defined benefit plans. A money purchase plan is defined contribution plan.
A rabbi trust
A rabbi trust is a irrevocable trust but, unlike a funded deferred compensation plan, the assets are subject to the claims of the employer’s creditors. This avoids constructive receipt by the employee and delays income taxation until distribution.
Which of the following statement(s) concerning Unrelated Business Taxable Income (UBTI) is/are accurate?
I. Dividends, interest, and other types of income derived from investments in a business are not subject to UBTI.
II. A partnership interest in an investment enterprise, whether active or passive, is subject to UBTI.
III. A direct business activity carried on for the production of income is considered a trade or business for UBTI purposes.
IV. Securities of the employer purchased with loan proceeds by an Employee Stock Ownership Plan (ESOP) are not subject to UBTI.
A)I only. B)I, II and III only. C)II, III and IV only. D)I, III and IV only. Rationale The correct answer is "D." Direct investment in a business generates income which is UBTI. Any investment which is purchased with "leverage" or borrowed funds generate UBTI except for a qualifying ESOP or LESOP.
ERISA
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans.
5144Question 19 of 24Retirement and EE Benefits Quiz 4
An employer has made a contribution equal to 5% of each plan participants income into a profit sharing plan. The plan with a one-year service requirement is found to be top heavy. Which of the following statements is true?
A)The top-heavy condition must be corrected before the end of the plan year or the plan will be disqualified.
B)The plan must use a 2-6 or shorter vesting schedule.
C)An additional contribution of 3% to Non-Highly Compensated Employee (NHCE) accounts is mandated.
D)Highly compensated employees must have their contributions reduced so the plan is no longer top-heavy.
Rationale
The correct answer is “B.” A top heavy plan mandates a 3-year cliff vesting or 2-6 graded vesting schedule (or faster if elected by sponsor.) Top heavy plans must make a minimum contribution of 3% to non-key employees. This PSP had already made a 5% contribution so no additional contribution is required. Top heavy plans are still qualified as long as minimum vesting and contribution requirements are met.
Which of the following penalties are assessed when prohibited transactions occur?
I. 10% of the amount involved unless shown that ERISA fiduciary standards were satisfied.
II. Penalties can continue when ongoing transactions carry over to subsequent years.
III. The plan must be restored to a financial position no worse than if the transaction had never occurred.
IV. Income tax will be assessed against those plan participants who were party to the transaction by the courts.
A)I and III only.
B)II and III only.
C)III and IV only.
D)I and II only.
Rationale
The correct answer is “B.” The first tier excise tax for prohibited transactions is 15% of the amount involved and is automatic even if the violation was inadvertent. The second tier excise tax is 100% of the amount involved and is assessed if the prohibited transaction is not remedied. There are no income taxes applied; all remedies are made through restitution and excise taxes.
Gia, age 45, is married and has two children. Her employer, Print, Inc sponsors a target benefit plan in which she is currently covered under. Which of the following statements is true regarding her plan?
A)She can name anyone she wishes as her beneficiary.
B)A target benefit plan favors younger employees.
C)A target benefit plan is covered under PBGC.
D)The investment risk is on the employee.
Rationale
The correct answer is “D.” The investment risk is on the employee because this is a defined contribution plan. She can only name someone other than her spouse if she has a valid waiver signed by the spouse. This applies to all pension plans. A target benefit plan favors older entrants. A target benefit is not covered under PBGC.
an “incidental benefit” if offered through a defined contribution plan?
Life insurance in a qualified plan is limited, under the incidental benefit rule, to 25% of aggregate contributions to the participant’s account for Term and Universal life plans. Whole life plans may constitute 50% of the contribution.
QJSA？
A qualified joint and survivor annuity (QJSA) provides a lifetime payment to an annuitant and spouse, child, or dependent from a qualified plan.
Pension plans are required to offer a QJSA to participants， including：
I. Cash balance plan.
II. Target benefit plan.
III. Defined benefit plan.
IV. Money purchase plan.
A profit sharing plan is not subject to QJSA requirements.
QJSA rules apply to money-purchase pension plans, defined benefit plans, and target benefits. They can also apply to profit-sharing and 401(k) and 403(b) plans, but only if so elected under the plan.
A supplemental deferred compensation plan that pays retirement benefits on salary, above the Section 415 limits, at the same level as the underlying retirement plan is known as:
A)A Supplemental Executive Retirement Plan (SERP).
B)A funded deferred compensation plan.
C)An excess benefit plan.
D)A Rabbi trust.
Rationale
The correct answer is “C.” An excess benefit plan extends the same benefits to employees whose contributions to the plan are limited by Section 415 (e.g., employee earns $285,000 yet receives $57,000 contribution instead of $70,000 contribution due to Section 415 limitation on a 25% money purchase plan). An excess benefit plan would put additional $13,000 into non-qualified retirement plan. Do not confuse with a SERP which provides benefits in excess of the Section 415 limits AND ignores the covered compensation limits (i.e., $285,000 in 2020) applied to qualified plans.
which of the following components must be factored into the calculation of the maximum annual addition limit?
Employer and employee contributions to all defined contribution plans.
Annual additions are defined as new money contributed into the individual account of a participant. Because forfeitures reduce employer contributions and are not added directly to employee’s individual accounts, the forfeitures are not included in annual additions. Annual earnings and rollover contributions are not included in annual additions.
The rule of withdraw and rollover the IRA
Once an individual has participated in a rollover where funds have been withdrawn and held and then reinvested, he or she is ineligible for such a transaction again for one year from the date of receipt of the amount withdrawn.
Pension Benefit Guaranty Corporation (PBGC),
while PBGC insures CB Cash Balance Plans, it does not insure 401(k) plans.
How do cash balance plans differ from 401(k) plans?
The employer bears the risks and rewards of the investments in a Cash Balance Plan, while under 401(k) plans, participant bear the risks and rewards of investment choices.
qualified profit-sharing plans
Profit-sharing plans should make contributions that are “substantial and recurring.
While contributions to profit sharing plans are generally discretionary, meaning a plan sponsor can decide from year to year whether to make a contribution or not, the IRS expects that contributions will be “recurring and substantial” over time in order for a plan to be considered ongoing and remain viable
In a profit sharing plan, if the plan sponsor has failed to make substantial contributions in three out of five years, there may be a discontinuance of contributions
IRA investment
Most investments are permitted in an IRA.
- ) Stocks, bonds, mutual funds, and limited partnerships are examples of investments that are permitted within an IRA.
- ) Prohibited investments are the following:
a. ) Collectibles—includes art, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages, and certain other tangible personal property. (Certain U.S. coins are permitted.)
b. ) Life insurance
What are the prohibited transactions for a defined benefit plan?
Prohibited transactions
- ) Sale, exchange, or lease of any property between the plan and a party in interest
- ) Loan between the plan and any party in interest
- ) Transfer of plan assets to or use of plan assets for the benefit of a party in interest
- ) Acquisition of employer securities or real property in excess of legal limits
What’s the hardship test of withdraw from 401K?
- ) Financial needs test: The hardship must be due to an immediate and heavy financial need of the participant-employee.
- ) Resources test: The participant must not have other financial sources sufficient to satisfy the need.
- ) In addition to meeting both of these tests, the money may only be withdrawn for the following reasons:
a. ) Payment of unreimbursed medical expenses for employee, spouse, or dependents
b. ) Purchase of a primary residence or repair of casualty loss damages of a pri-mary residence
c. ) Payment for up to the next 12 months of higher education expenses for the participant, the participant’s spouse, or dependent children
d. ) Payment necessary to prevent foreclosure on the participant’s primary residence
e. ) Burial or funeral expenses for an employee’s deceased parents, spouse, children, and dependents
f. ) Safe harbor: Plan may identify a distribution to satisfy a financial need without the requirement that all other employee resources be exhausted if certain requirements are met. - ) When a hardship withdrawal is taken, the participant’s right to make elective deferrals must be suspended. 5.) Finally, if a hardship withdrawal is approved and made, the distribution is tax-able, and a possible 10% penalty applies.
401k distributions are subject to:
- ) Distributions from 401(k) plans are subject to qualified plan distribution rules.
- ) 401(k) plans often allow participants to make in-service withdrawals (withdrawals before termination of employment).
- ) 401(k) accounts based on elective deferrals cannot be distributed before occurrence of one of the following events: a.) Retirement b.) Death c.) Disability d.) Separation from service with the employer e.) Attainment of age 591⁄2 by the participant f.) Plan termination g.) Hardship
- ) Many preretirement distributions will not only be taxable but may also be subject to the 10% early withdrawal penalty tax.
What is the pass-through entity?
The S corporation, LLC and Partnership are considered “pass through” entities. “Pass through” means that the entity is not taxed separately from its owners, but passes its profits and losses through to the owners in their pro rata share of ownership.
describes the tax benefits of premiums paid on a long term care policy?
The IRS provides guidelines for the amount of premiums that are deductible based upon the insured’s age. The amount of premiums paid is included in the medical expense deduction for total expenditures exceeding 7.5% of AGI (SECURE Act 2019) and is from AGI. The policy must be guaranteed renewable or non-cancelable to be qualified.
Which of the following credits are fully refundable?
"I. The Earned Income credit. II. The American Opportunity credit. III. Lifetime Learning credit. IV. Child Tax credit. V. Adoption credit. A)I, IV and V only. B)I only. Rationale The correct answer is ""B."" The Earned Income credit is refundable; able to create a negative tax liability. The American Opportunity credit and Child tax credit may be partially refundable. C)I and V only. D)None of the choices."
How to calculate the loss on small business stock?
The loss on small business stock Section 1244 is recognized as an ordinary loss not subject to the capital loss rules.
What’s the amount of high deductible healthy plan for a family in 2020?
HDHP is $2,800 for family and $1,400 for a single person
Ginger, age 21 and a full-time student for a degree at State University, qualifies as a dependent on her parents’ return. During the summer, she earned $5,500 from a part-time job. Her only other income consisted of $950 interest on a savings account. What is Ginger’s taxable income for the current year?
The standard deduction for Ginger is the greater of $1,100 or $350 plus earned income but not to exceed the normal standard deduction. Therefore $350 + $5,500 = $5,850 so it is not limited in 2020. The total income is $5,500 + $950 = $6,450. Taxable income is $6,450 - $5,850 = $600.
insured
被保险人
Lifetime Learning credit
In order to qualify for the Lifetime Learning credit, you must have made tuition and fee payments to a post-secondary school (after high school) during the year.
The maximum credit you can claim is 20% of up to $10,000 in eligible costs or $2,000.
You can include the cost of tuition, fees and any books or supplies you are required to purchase directly from the school, so long as it's a condition of enrollment. For example, if your professor recommends that you purchase a textbook but you can still enroll in the class without one, then you cannot include the cost of the textbook in the credit.
American Opportunity Tax Credit
The American opportunity tax credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student.
deficiency
n. 缺乏；不足；缺陷；缺点
Which age is the cut-off age for child credit?
Under 17; not including 17 year old
reckless
adj. 鲁莽的；不计后果的；大意的
willful
adj. 任性的；故意的；有意的
eviction
n. 逐出；赶出；收回（租房或租地等）eviction process 驱逐过程
What’s the additional standard deduction for senior or blindness people?
Taxpayers who are at least 65 years old or blind can claim an additional 2020 standard deduction of $1,300 (joined filling).
$1,650 if using the single or head of household filing status.
For anyone who is both 65 and blind, the additional deduction amount is doubled.
what’s the rule of the deductions for the night entertainment?
The cab fair is deductible as a transportation expense at the full cost. The business meal and tip are subject to a 50% limitation. The entertainment expenses are not allowed deductions.
For purposes of determining taxable income, what rule should follow?
A person who rents their home for less than 15 days is not required to include the income as it is considered personal property, not rental or mixed use. However, no deducations related to the expense of renting out the home are allowed other than taxes and interest associated with the property that would normally be deductible as an itemized deduction.
AGI for this tax year is
Child support payments are neither deductible from nor includible in income. Note: alimony received from a contract dated prior to 12/31/18 remains includible income.
Which of the following is incorrect?
A)All business deductions are classified as deductions FOR AGI.
B)Some personal deductions are classified as deductions FROM AGI.
C)Some business and some personal deductions are classified as deductions FOR AGI.
D)Some business and some personal deductions are classified as deductions FROM AGI.
Rationale
The correct answer is “D.” Deductions occur above the line (for) AGI and below the line (from) AGI. All business deductions are for AGI (above the line).
All business expenses (taken by their owners, i.e. sole proprietor or partner) are taken above the line or FOR AGI.
A “business deduction” is tied to the business or owners. These are reported on the sole proprietor’s schedule C, or a partner’s K-1 (which flows onto the Schedule E of Form 1040), for example. Business deductions are all above the line (FOR AGI).
“Personal deductions” are not tied to a business. For example, mortgage interest is a personal deduction below the line (FROM AGI). An HSA contribution is a personal deduction above the line (FOR AGI).
“Job-related employee expenses” used to be deductible as a miscellaneous itemized deductions subject to the 2% floor, a below the line deduction (FROM AGI). Those are no longer available for tax years 2018-2025.
Capital recoveries include:
Amortization of bond premium.
Capital recovery is the expensing of certain acquisition costs. Bonds purchased at a premium are amortized over their life to expense the premium paid. The theory is that when they mature, their basis will be equal to their face value and not the face plus premium. Bond expenditures are, therefore, a recovery of capital.
business expenditures for the tax purpose:
The cab fair is deductible as a transportation expense at the full cost. The business meal and tip are subject to a 50% limitation. The entertainment expenses are not allowed deductions.
A person who rents their home for less than 15 days is not required to include the income as it is considered personal property, not rental or mixed use.
However, no deducations related to the expense of renting out the home are allowed other than taxes and interest associated with the property that would normally be deductible as an itemized deduction.
Child support payments are neither deductible from nor includible in income. Note: alimony received from a contract dated prior to 12/31/18 remains includible income.
C)
Deductions occur above the line (for) AGI and below the line (from) AGI. All business deductions are for AGI (above the line).
All business expenses (taken by their owners, i.e. sole proprietor or partner) are taken above the line or FOR AGI.
A “business deduction” is tied to the business or owners. These are reported on the sole proprietor’s schedule C, or a partner’s K-1 (which flows onto the Schedule E of Form 1040), for example. Business deductions are all above the line (FOR AGI).
“Personal deductions” are not tied to a business. For example, mortgage interest is a personal deduction below the line (FROM AGI). An HSA contribution is a personal deduction above the line (FOR AGI).
“Job-related employee expenses” used to be deductible as a miscellaneous itemized deductions subject to the 2% floor, a below the line deduction (FROM AGI). Those are no longer available for tax years 2018-2025.
4051-RQuestion 8 of 50Tax 3/28/21
In which of the following situations, if any, may the individual NOT be deemed a dependent of the taxpayer:
A)A cousin who does not live with the taxpayer.
B)A former brother-in-law who does not live with the taxpayer. The taxpayer is divorced.
C)A nephew who does not live with the taxpayer.
D)A legally adopted child who does not live with taxpayer.
Rationale
The correct answer is “A.” All other parties either satisfy the relationship or member of the household test.
IRS Publication 501: Relatives who don’t have to live with you. A person related to you in any of the following ways doesn’t have to live with you all year as a member of your household to meet this test.
Your child, stepchild, foster child, or a descendant of any of them (for example, your grandchild). (A legally adopted child is considered your child.)
Your brother, sister, half brother, half sister, stepbrother, or stepsister.
Your father, mother, grandparent, or other direct ancestor, but not foster parent. Your stepfather or stepmother.
A son or daughter of your brother or sister. A son or daughter of your half brother or half sister.
A brother or sister of your father or mother.
Your son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
Any of these relationships that were established by marriage aren’t ended by death or divorce.
4063-RQuestion 11 of 50Tax 3/28/21
Saul was divorced in 1996 and is now single, age 63. He has gross income of $50,000. His bona fide deductible expenses are as follows:
Alimony = $8,000;
Charitable contributions = $2,000;
Contribution to an IRA = $2,000;
Net expenses paid on rental property = $5,000;
Interest and taxes on personal residence = $7,000;
State income tax = $1,200.
What is Saul’s AGI?
A)$28,000
B)$33,000
C)$35,000
D)$40,000
Rationale
The correct answer is “C.”
Saul’s AGI is calculated as follows:
Gross income of $50,000
minus deductions for AGI (above the line) of $15,000 (Alimony* of $8,000, IRA of $2,000, and expenses on rental of $5,000)
= $35,000.
The others are deductions from AGI or below-the-line deductions.
*Alimony due to a divorce finalized by 12/31/18 will remain under the old rules, deductible to payor and included in income for the recipient. Divorces finalized after 12/31/18 will follow the new rules; not deductible and not includable in income.
I. ($1,000) loss from a 30% interest in Laminate Partnership in which she does NOT materially participate.
II. ($1,500) loss from a 2% limited partnership interest in Venture, a limited partnership.
III. ($3,000) loss from a 12% interest in an S corporation in which she manages one of the departments.
IV. $40,000 salary as manager with an S corporation.
Option “I” - A loss from a limited partnership in which there is no material participation is governed under the passive activity loss rules. Since there is no other passive activity income to offset the loss, the loss is not currently deductible. Option “II” - The same passive activity loss rules apply, and therefore, the loss is not currently deductible. Option “III” - Because she is a material participant in managing the S corporation, the losses are deductible. Option “IV” - Wages are always included in AGI. Option “V” - Dividend income unless excluded is included in AGI. $40,000 (wages) minus $3,000 (S corp loss) plus $1,200 (dividends) = $38,200.
Section 179 deduction carryover
Section 179 carryover to subsequent years will be limited by the business income before the deduction and the year’s Section 179 limitation. In 2020, the limit for Section 179 is $1,050,000. Therefore, the entire amount of $17,800 ($7,800 carryover + $10,000 current year’s deduction) is allowable.
Lauren has purchased a home worth $1.5 million with an interest-only mortgage of $1.2 million on 12/20/17. She is currently only paying interest on the mortgage in the amount of $60,000 per year. What amount may she deduct as home mortgage interest on Schedule A of her individual income tax return?
The calculation is calculated by dividing the qualified mortgage over the total mortgage times the interest paid.
(750,000/1,200,000) X 60,000 = 37,500
Per TCJA, home mortgages are limited to qualified residential interest and a maximum indebtedness of $750,000 if financed after 12/15/17. (For debt prior to 12/15/17, the $1 million limit applies.)
C)
Student loan interest
Student loan interest is an “above-the-line” deduction. The amount that can be taken is limited to $2,500 of interest paid.
When reviewing a client’s income tax return from the prior year you notice that they had adjusted gross income of $175,000 and paid federal income tax of $31,500. Assuming that the client’s income for this year will closely approximate that of last year, what is the minimum amount to pay in estimates to meet safe harbor?
Your primary choices are (A) = 90% of current year, (B) = 100% of prior year, and (C) = 110% of prior year. Since the client’s AGI from last year is greater than $150,000 the safe harbor is 90% of current year tax or 110% of prior year tax. Since the client’s income “closely approximates that of last year” we can utilize the 90% of current year amount. If the client’s income varies widely then we would use 110% of prior year.
$31,500*0.9 =28,350
Dakota qualifies as a dependent of his parents. This year, he earned $500 from a part-time job and $1,500 in interest from a savings account. Dakota’s taxable income for this year is:
The calculation is as follows: $1,500 (interest) + $500 (wage) = $2,000 (gross income) - $1,100 (greater of standard deduction of $1,100 or $350 plus earned income) = $900 of taxable income, taxed at Dakota’s tax rate.
at-risk-rule
In other words, you may deduct the loss up to amount you actually stand to lose.
Passive Activity Rules
In other words, passive activity losses may only be deducted from passive activity income.
Sarah is a 10 percent owner in Canine Connection, LLC, a day-care center for dogs. She is also a 15 percent owner in Little Laughter, LLC, a successful children’s clothing store. She does not materially participate in either business. Her at-risk and loss/income for the current year is as follows:
Canine Connection-At-risk = $175,000; Loss of $275,000
Little Laughter-At-risk = $25,000; Income of $125,000
She also has wage income of $80,000 and capital gain income of $30,000. Which of the following statements is true?
Loss suspended because of the at risk rules: $275,000 loss - $175,000 at risk = $100,000 suspended.
We can net the $125,000 of income against the loss of $275,000, which equals $150,000, minus $100,000 suspended because of the at risk rules, which leaves $50,000 suspended because of the passive activity rules.
thus: The loss suspended because of the at-risk rules is $100,000 and the loss suspended because of the passive activity loss rules is $50,000.
Time Worked: materially participate in the business
Time Worked. You can be considered to materially participate in the business if you work on a regular, continuous, and substantial basis during the year, at least 100 hours in the activity, if no one else works more hours than the taxpayer in the activity, and no one else receives compensation for managing the activity.
The replacement property must meet the taxpayer use test, not the functional use test, since Britney did not use the property directly. (fired destroyed her rented out building)
The taxpayer use test requires replacement property to be used by the taxpayer in an activity which is treated the same for tax purposes in order to qualify for nontaxable exchange treatment. All of the other statements regarding the nontaxable exchange treatment of Britney’s transaction are correct.
B)Britney must invest the proceeds in a replacement property that has a similar use to the property that was destroyed in the fire.
C)Britney must reinvest the insurance proceeds within two years from the end of the year in which she received the insurance proceeds.
D)Since Britney received cash as a result of the involuntary conversion, nonrecognition treatment is not mandatory even if she meets all of the requirements.
Donee’s gifted basis:
if the sale price is greater than the original price, then use the gain basis;
if the sale price is less than the FMV price, then use the loss basis;
if the sale price is between the original price and FMV, then use 0 basis.
a taxpayer be subject to an accuracy-related penalty?
A taxpayer will be subject to an accuracy-related penalty if he makes a substantial understatement of his tax liability, generally more than 10 percent of the correct tax liability and at least a $5,000 tax deficiency.
a taxpayer may use a fiscal year tax period and have a tax year of less than 12 months in the first year.
If the taxpayer does not keep books or accounting records. taxpayer required to use a calendar year tax period
Which of the following tests must be satisfied by a qualifying child?
I. Relationship Test.
II. Gross Income Test.
III. Abode Test.
IV. Citizenship Test.
A)I and II only.
B)III and IV only.
C)I, II and III only.
D)I, III, and IV only.
Rationale
The correct answer is “D”. The Gross Income Test is a requirement for a qualifying relative, not a qualifying child. All of the other tests must be satisfied by a qualifying child.
A taxpayer will be subject to an accuracy-related penalty
- if he makes a substantial understatement of his tax liability,
- generally more than 10 percent of the correct tax liability and at least a $5,000 tax deficiency.
Treasury regulation includes:
There are three types of tax regulations—legislative, interpretive and procedural. Details on each type of regulation are discussed below.
Treasury regulation classified by the function of the regulation:
There are three types of tax regulations—legislative, interpretive and procedural. Details on each type of regulation are discussed below.
Treasury regulations classified by stage of adoption include:
- Proposed Regulations.
- Temporary Regulations.
- Final Regulations.
Does the blind people have to report the tax?
They may benefit from an additional $1,300 additional standard deduction for blindness upon filing. A return must be filed to claim the ASD for blindness.
Which of the following statements regarding the deduction of costs associated with investigating the purchase of a new line of business is not correct?
A)If the new line of business is not purchased, no deduction is permissible.
B)If the new line of business is purchased and it is in the same line of business as the current trade or business operation, the cost of investigating the new business is fully deductible.
C)The ability to deduct the cost of investigating a new line of business is often overlooked by taxpayers.
D)If the new line of business is purchased and it is in a different line of business as the current trade or business operation, there is no way to recoup the costs of investigation.
Rationale
The correct answer is “D”. If the new line of business is purchased and it is in a different line of business as the current trade or business operation, the costs of investigation are recouped by capitalizing the expenses and amortizing it ratably over a 60-month period.
Eric's daughter Emilie is attending a local university. Listed below are the items that Eric has paid for this year related to Emilie's education. What are Eric's total qualified tuition and related expenses for the purpose of claiming the American Opportunity credit? $12,000 tuition paid directly to the university. $400 student activity fee which is required by the university for enrollment. $600 in textbooks purchased from an off-campus bookstore. $100 lab fee for a required science course. A)$12,000. B)$12,500. C)$12,700. D)$13,100.
Rationale The correct answer is "D". Item "I" is a qualified tuition and related expense. Item "II" is a qualified tuition and related expense because it is required by the university for enrollment. Item "III" is a qualified tuition and related expense because textbooks can be purchased directly from the school or another off campus source and still qualify as a qualified education expense. Item "IV" is a qualified tuition and related expense because the class is required as part of Emilie's degree program.
embezzle
vt. 盗用；挪用
impute
v. 归罪于；负责任；嫁祸; I impute his failure to laziness.
我把他的失败归咎于他的懒惰。
constitutional federal income tax
宪法联邦所得税
disposition
常用词汇
英 [ˌdɪspə’zɪʃn] 美 [ˌdɪspə’zɪʃn]
n. 性情；倾向；安排；处置；控制；[计算机] 配置情况
Partnerships with corporations as owners must use the accrual method.
S corporations are not required to use the accrual method of accounting
Section 1231: is applied to gains recognized after recapture.
Section 1245: The sale of tangible personalty used in a trade or business at a gain.
The rules for material participation are: 1. More than 500 hours of participation 2. Taxpayer is the only one who substantially participates 3. Taxpayer spends greater than 100 hours in the tax year and no one else spends more
- Taxpayer has materially participated in any 5 of the previous 10 years 5. The activity is a personal services activity and the individual has materially participated in any 3 prior years 6. Taxpayer participates 100 or more hours in this activity and total participation in all such activities exceeds 500 hours
Taxpayers who donate short term gain property are required to use the lesser of fair market value or adjusted basis for the determination of the charitable income tax deduction.
In this case, Matt only owned the stock for 2 months, therefore it will be short term. The basis ($3,500) in less than the FMV ($4,600).
A person who rents their home for less than 15 days is not required to include the income as it is considered personal property, not rental or mixed use.
However, no deducations related to the expense of renting out the home are allowed other than taxes and interest associated with the property that would normally be deductible as an itemized deduction.
Costs to improve, better, or extend the life of an asset are capitalized.
Tune-ups are a maintenance activity. Maintenance and repairs (roof and windshield) are period costs deductible in the period in which they were incurred.
Deductions occur above the line (for) AGI and below the line (from) AGI. All business deductions are for AGI (above the line).
The capital loss deduction is limited to $3,000 per year. $50,000 salary and interest income - $3,000 capital loss = $47,000 AGI.
Head of Household required that the taxpayer pay for more than 50% of the upkeep of the home in which the qualifying individuals reside.
The qualifying individuals need not be dependents of the taxpayer.
Which of the following is a condition for receiving a dependent care credit?
A)The taxpayer must provide over 1/2 cost of maintaining the household, which is also the principal residence of the child.
B)The child must be a dependent.
C)If married, both parents must work or go to school.
D)All of the above.
The correct answer is “D.” These are all conditions for claiming the dependent care credit.
Un-reimbursed employee expenses are not deductible after 1/1/18 per the TCJA.
Expenses from self-employment are deducted above the line and have no AGI floor.
Because of the double basis rule, Aaron’s basis is $12,000 for gain and $9,000 for loss. So he has no gain or loss. Because Jason gifted the shares to a related party, he has no recognizable loss. Double basis simply refers to the two transactions, high and low.
The donee uses the FMV of the date of gift ($9,000) as the ‘loss basis,’ and the donor’s adjusted taxable basis ($12,000) as the ‘gain basis.’ When the shares are sold between the FMV (date of gift) $9,000, and the adjusted taxable basis $12,000, the donee uses that value ($10,000) as his adjusted taxable basis.
The appreciated property will cause a capital gain to be recognized. Because the property realizing a loss was for personal use, it will not be deductible. Capital gain on personal use property is taxable, but losses on personal use property (property not used in business) are not deductible.
Therefore, the $3,000 in gains will be taxed at the appropriate capital gains rates but the $3,000 loss can not be used as a deduction to income or to capital gains.
Medical expenses are an itemized deduction subject to a floor of 7.5% above AGI (SECURE Act 2019 made 7.5% effective 2019 and 2020)
The uncollected income cannot deduct from ordinary income an amount that was never included in taxable income. Therefore, Sara and Bill will not receive any deduction for the uncollected rents.
Matt is a participant in a profit sharing plan which is integrated with Social Security. The base benefit percentage is 6%. Which of the following statements is/are true?
I. The maximum permitted disparity is 100% of the base benefit level or 5.7%, whichever is lower.
II. The excess benefit percentage can range between 0% and 11.7%.
III. Elective deferrals may be increased in excess of the base income amount.
IV. The plan is considered discriminatory because it gives greater contributions to the HCEs.
A)I and II only.
B)I, II and IV only.
C)II only.
D)I, II, III and IV.
Rationale
The correct answer is “A.” His base rate is 6% and the social security maximum disparity is 5.7% for 11.7% as the top of his range.
Statement “III” is incorrect because integration does not affect voluntary deferrals by employees. Statement “IV” is incorrect because, done properly, integration is NOT considered discriminatory.
A hybrid plan that uses a discretionary contribution but adjusts for age is a form of a: A)Profit sharing plan. B)Money purchase plan. C)Cash balance plan. D)Defined benefit plan.
Rationale
The correct answer is “A.” Answers “B,” “C” and “D” all require minimum contribution levels. Answer “A” - Profit sharing plan only requires that contributions be “substantial and recurring.” More specifically, an age-based profit sharing plan would be correct.
Match the following statement with the type of retirement plan which it most completely describes: “This plan can provide for voluntary participant contributions which must be matched by the employer.”
A)Profit sharing plan with a 401(k) component.
B)Money purchase plan.
C)SIMPLE IRA.
D)Defined benefit plan.
Rationale
The correct answer is “C.” Answers “B” and “D” do not permit employee elective deferrals. The profit sharing plan “A” with 401(k) provisions do not require an employer match.The SIMPLE plan has a mandatory match.
forfeited 扩展词汇
英 [‘fɔːfɪt] 美 [‘fɔːrfət]
n. 没收物；罚金；丧失
vt. 没收；丧失
adj. 丧失了的
A SEP-IRA is a form of defined contribution plan (although not a qualified plan). Which of the following apply to BOTH the SEP-IRA and a traditional defined contribution plan?
I. Employer deductions limited to 15% of covered payroll.
II. Requires a definite, written, non-discriminatory contribution allocation formula.
III. Contributions cannot discriminate in favor of highly compensated employees.
IV. Employer contributions subject to Medicare and Social Security taxes.
V. Affiliated service group rules apply.
VI. Top-heavy rules do NOT apply.
VII. Permissible disparity or integration is NOT allowed.
A)I, II, VI, and VII only.
B)II, III, IV and VI only.
C)II, III and V only.
D)I, II, III, V and VII only.
Rationale
The correct answer is “C.” Defined contribution plans have an employer deductibility limit of 25% of covered payroll. All defined contribution plans must have a written allocation formula so assets can be distributed in the mandated individual accounts. Employer contributions must bear uniform resemblance to compensation and cannot discriminate in favor of highly compensated. Employer contributions are not subject to any payroll related taxes. Top-heavy rules do apply to both. Both plans can integrate with Social Security (sometimes called permissible disparity). (Note: 5305-SEP does not allow permissible disparity.)
Which of the following accurately describes a qualified group life insurance plan?
I. The plan must benefit 70% of all employees, or a group consisting of 85% non-key employees, or a non-discriminatory class, or meet the non-discrimination rules of Section 125.
II. Employees who can be excluded are: those with fewer than 3 years service, part-time / seasonal, non-resident aliens, or those covered under a collective bargaining unit.
III. A non-discriminatory classification is one which has a bottom tier with benefits no less than 10% of the top tier and no more than 200% increase between tiers.
IV. The minimum group size is 10.
A)I, II and III only.
B)I, II and IV only.
C)I and III only.
D)I and II only.
Rationale
The correct answer is “B.”
For statement III to be a correct choice, it should state: A qualified group life insurance plan, if using a non-discriminatory classification, will have a bottom tier with benefits no less than 10% of the top tier and no more than 250% increase between tiers.
PBGC insures Cash Balance Plans
PBGC does not insure 401(k) plans.
The security holding period in the case of a non-qualified options begins on the date the option is exercised.
Hardship withdrawals are considered premature withdrawals and are subject to income tax and the 10% early withdrawal penalty if the employee is under age 59 1/2.
he taxable portion of any lump sum distribution may be rolled over into an IRA.
SIMPLE IRAs require a 25% penalty for early withdraws in the first two years if the participant does not meet any of the early withdrawal exceptions. (Traditional IRA and Roth IRA are 10% penalty)
Which statement(s) is/are true for a target benefit plan?
I. It favors older participants.
II. It requires actuarial assumptions.
III. The employer’s maximum deductible contribution is 25% of employee’s salary.
IV. The maximum individual annual additions is the lesser of 100% of pay or $57,000.
A)I and IV only.
B)II and III only.
C)I, II and IV only.
D)IV only.
Rationale
The correct answer is “C.” Statement “III” is incorrect. The employer limit is 25% of covered compensation.
Your client, Sue, age 35, is covered by a pension plan at work, but her spouse, age 37, is not covered by a pension plan. Her salary is $45,000 and his salary is $50,000. How much will go into his account if he contributes the maximum amount to a maximum funded, matching SIMPLE IRA?
A)$13,500
B)$19,000
C)$14,500
D)$19,500
Rationale
The correct answer is “C.” He can contribute $13,500 (2020) and his employer will match $1 for $1 up to 3% of salary ($50,000 x .03 = $1,500). Therefore, maximum contribution is $13,000 + $1,500 = $14,500.
Your client, Sue, age 35, is covered by a pension plan at work, but her spouse, age 37, is not covered by a pension plan. Her salary is $45,000 and his salary is $50,000. How much will go into his account if he contributes the maximum amount to a maximum funded, matching SIMPLE IRA? A)$13,500 B)$19,000 C)$14,500 D)$19,500
Rationale
The correct answer is “C.” He can contribute $13,500 (2020) and his employer will match $1 for $1 up to 3% of salary ($50,000 x .03 = $1,500). Therefore, maximum contribution is $13,000 + $1,500 = $14,500.
Your client is the sole shareholder of a closely-held corporation. In the current year, the IRS has deemed the operation to be a Personal Holding Company (PHC) because of involvement in a number of investments other than the stated business purpose. It has cited the business as having undistributed holding company income. What are the possible implications of this decision for your client?
A)A penalty of 35% can be imposed on the value of the assets of the PHC because of potential fraud.
B)A penalty tax of 20% can be imposed on the undistributed PHC income.
C)A penalty tax of 35% can be imposed on the undistributed PHC income.
D)Because the corporation is a PHC, there is no penalty tax, but the PHC will be required to pay tax at the 20% corporate level.
Rationale
The correct answer is “B.” If the business is deemed to be a PHC by the IRS, then a penalty tax of 20% can be imposed on the undistributed personal holding company income.
Alice owns land "A" with an adjusted basis of $250,000, subject to a mortgage of $50,000. On July 1st, Alice exchanges land "A" and its mortgage for $300,000 in cash, a promissory note for $300,000, and property "B" that has a fair market value of $75,000 with Betty. What is the amount realized by Alice? A)$675,000 B)$725,000 C)$925,000 D)$975,000
Rationale
The correct answer is “B.” The realized amount not only includes the monies and fair market value of property “B” received (and any indebtedness the buyer has to the seller), but also any liabilities for the seller is relieved. In this case, the seller received $675,000 in cash, property, and notes (buyers indebtedness to the seller) as well as relief from $50,000 in mortgage. The total amount realized is $725,000.
Two years ago, Green Corporation, a cash basis taxpayer, sold services to Albert for $25,000. During the prior year, Green collected $10,000 from Albert. In the current year, Green collected $5,000 from Albert in final settlement of the debt. The proper treatment for the bad debt deduction is:
A)$0 for the prior year and $0 for the current year.
B)$0 for the prior year and $10,000 for the current year.
C)$15,000 for the prior year and $0 for the current year.
D)$15,000 for the prior year and $5,000 income for the current year.
Rationale
The correct answer is “A.” A cash basis taxpayer does not recognize income not received. Since the bad debt was never recognized as income, it cannot be recognized as a loss or a bad debt expense.
Brody has set up a dividend reinvestment plan at Coca-Cola Enterprises, Inc. where all dividends are automatically reinvested into more Coca-Cola Enterprises stock. Brody never receives a check for the dividends. His initial stock ownership was 100 shares at a cost of $2,000. The total dividends for the year equaled $60. The administrative fee to convert into new shares was $5. How much, if any, of the dividends are included in Brody’s gross income? A)None B)$9 C)$55 D)$60
Rationale
All of the dividends are included in Brody’s gross income for the year. These dividends, while not received by Brody in the form of cash, could be taken as cash upon his election to end the dividend reinvestment plan. He has “constructively” received the dividends and decided to reinvest them in stock of Coca-Cola Enterprises, Inc. The administrative fee may be deducted but all the dividends must be reported as income.
A fiscal year ends on the last day of a month other than December. A calendar year ends on the last day of December. A partial-year is for a time span less than 1 year.
A 52-53 week year ends on a specified day of the week (such as Friday) that occurs in the last week of the last month of the tax year.
Veronica has determined that she needs to make a 4th quarter federal estimated income tax payment. When is this payment due? A)January 15th of next year. B)December 31st of this year. C)December 15th of this year. D)September 15th of this year.
Rationale
The 4th quarter federal income tax estimated payment is due by January 15th of the year following the year the payment is being made for.
Which of the following is not a requirement for the deferral of gain in a nonsimultaneous exchange under Section 1031?
A)The replacement property must be like-kind property with respect to the original property.
B)The proceeds from the sale of the original property must be held by an escrow agent.
C)A replacement property must be identified within 90 days of the sale of the original property.
D)The closing on the replacement property must take place by the earlier of 180 days from the sale of the original property or the due date (including extensions) of the tax return for the year the original property was sold.
Rationale
The correct answer is “C”. A replacement property must be identified within 45 days, not 90 days, of the sale of the original property.
Which of the following statements concerning the Alternative Minimum Tax (AMT) system is correct?
A)Deferral items for AMT purposes result in a permanent increase in tax.
B)Exclusion items for AMT purposes may be reversed in future tax years.
C)There is an unlimited carryforward for AMT credit generated in a year the taxpayer becomes an AMT taxpayer.
D)The AMT credit can be carried back for up to two years, provided that use of the credit does not force the taxpayer to become an AMT taxpayer in those years.
Rationale
The correct answer is “C”. The AMT credit that is generated from deferral items in the AMT calcuation may be carried forward indefinitely. The AMT credit may not be carried back. Deferral items may be reversed in future years through the use of the AMT credit, while exclusion items result in a permanent increase in tax.
Which of the following taxpayers can use the standard deduction?
A)Zeke, who files a separate return from his wife Yasmine. Yasmine itemizes deductions on her return.
B)Xavier, who is a nonresident alien.
C)William, who files a tax return for less than 12 months because he changed his annual accounting period.
D)Violet, who is a non-citizen spouse but files MFJ.
Rationale
The correct answer is “D”. Only answer D describes a taxpayer who is permitted to use the standard deduction. All of the other taxpayers are required to itemize their deductions.
After 1989, Donna purchased series EE savings bonds for $2,500 at the age of 25. This year she redeemed the bonds for $5,000 and paid qualified higher education expenses for her daughter in the amount of $3,000. How much interest will Donna be required to include in her gross income this year? A)$0. B)$1,000. C)$1,500. D)$2,500.
Rationale
The correct answer is “B”. Because Donna did not use all of the proceeds from the bond redemption to pay for qualified education expenses, she will be required to include part of the interest income from the bonds in her gross income. Donna may exclude $1,500 of interest income from her gross income [($3,000 / $5,000) x $2,500]. Therefore, Donna must include $1,000 in her gross income ($2,500 - $1,500).
Karen and Tom are married filing jointly taxpayers with 3 children. Their MAGI is $85,000. What is the maximum amount of the child tax credit that could be refundable to Karen and Tom? A)$0. B)$2,000. C)$4,200. D)$6,000.
Rationale
The correct answer is “C”. They have 3 children. The child tax credit is $2,000 per child against their tax obligation, up to $1,400 ($4,200 for the three children) per child can be refundable if there is no tax obligation due.
The holding period of property acquired by gift may begin on:
A)The date the property was acquired by the donor only.
B)The date of gift only.
C)Either the date the property was acquired by the donor or the date of the gift.
D)Some other date.
Rationale
The correct answer is “C.” A person receiving a gift has a holding period of the donor plus the donee if at disposition he uses the gain basis. However, the holding period for a gift utilizing the loss basis (where a double basis rule applies) starts the holding period at the date of the gift.
Under the terms of a divorce agreement dated 1/3/18, Larry is required to pay his wife Joyce $2,100 per month in alimony for a minimum period of 10 years and $300 per month in child support. For a twelve-month period, Larry can deduct from gross income (and Joyce must include in gross income):
A)$0
B)$25,200
C)$3,600
D)$28,800
Rationale
The correct answer is “A.” The $300 per month for child support is not deductible by Larry. Child support payments are not deductible to the payor nor includable to the payee. Larry’s $300 per month in child support will remain part of his gross income. The $2,100 is not alimony since it could extend beyond her death as the required payment is for a minimum of 10 years.
****Ginger, age 21 and a full-time student for a degree at State University, qualifies as a dependent on her parents' return. During the summer, she earned $5,500 from a part-time job. Her only other income consisted of $950 interest on a savings account. What is Ginger's taxable income for the current year? A)$0 B)$600 C)$1,100 D)$5,500
Rationale
The correct answer is “B.” The standard deduction for Ginger is the greater of $1,100 or $350 plus earned income but not to exceed the normal standard deduction. Therefore $350 + $5,500 = $5,850 so it is not limited in 2020. The total income is $5,500 + $950 = $6,450. Taxable income is $6,450 - $5,850 = $600.
Punitive damages received as a result of personal injury:
A)Are not taxable because the damages are intended to punish the other party.
B)Will be non-taxable if the payments were received on account of a physical personal injury.
C)Are taxable.
D)Are not taxable if the personal injury was to one’s business reputation.
Rationale
The correct answer is “C.” Punitive damages are always included in income. They may be excludible if they are the only recovery in a wrongful death case (The Alabama Rule).
For the purposes of Earned Income Credit, which loss/losses are disregarded?
I. Net losses from estate and trusts.
II. Net losses from non-business rents.
III. Net capital losses
IV. Taxable interest on U.S. government issue securities.
A)I, II and III only.
B)I, II, III and IV.
C)II and III only.
D)IV only.
Rationale
The correct answer is “A.” Tax has already been paid on federally issued securities, while the rest are all disregarded.
Which is the best source for obtaining a plain language understanding about the current tax law?
A)Commerce Clearing House Federal Tax Guide.
B)Congressional Tax Committee Reports.
C)Treasury Regulations.
D)Tax Court Reports.
Rationale
The correct answer is “A.” Option “A” is correct because Commerce Clearing House (CCH) provides plain language interpretation of tax law. Option “B” is incorrect as the Congressional Committee Reports (sometimes known as the Blue Book) provides congressional reasoning for enacting tax law. This language is often very technical and difficult to understand. Option “D” is incorrect because Tax Court Reports provide rulings of the U.S. Tax Court in the form of case law.
Commerce Clearing House (CCH) provides plain language interpretation of tax law. Option “B” is incorrect as the Congressional Committee Reports (sometimes known as the Blue Book) provides congressional reasoning for enacting tax law. This language is often very technical and difficult to understand.
Option “D” is incorrect because Tax Court Reports provide rulings of the U.S. Tax Court in the form of case law.
Section 1250 gain applies to the realized gain on real property where the accelerated method was used. The gain is the excess of accelerated over straight line (ACRS).
Section 1250 gain is taxed as ordinary income. Under current law (MACRS), only straight line depreciation of real property is used.
James received an academic scholarship to State University. He is a candidate for a degree. Under the scholarship agreement he received:
1) Tuition ($1,500)
2) Books ($400)
3) Room and board ($5,000)
What is James’ gross income, if any, from the scholarship?
A)None
B)$5,000
C)$5,400
D)$6,900
Rationale
The correct answer is “B.” James’ gross income is $5,000. Tuition and books are not included in income, but living expenses such as room and board are included in taxable income.
Sara was the victim of sexual harassment and collected the following monies from her employer: $15,000 for lost wages and $50,000 in punitive damages. How much of the damage award must Sara include in her gross income? A)None B)$15,000 C)$50,000 D)$65,000
Rationale
The correct answer is “D.” Sara must include all $65,000. Lost wages are nothing more than recovery of wages which would have been taxable. Punitive damages are always included as taxable income. Other than damages awarded for personal injury, other damages, including punitive damages and recovery of lost wages, are taxable.
As a direct result of the rules under TCJA 2017, qualifying dividends will be treated in which manner:
Qualifying dividends are taxed at set dollar breakpoints.
Under prior law, the capital gain breakpoints were related to the tax breakpoints. Under TCJA the capital gain breakpoints are at set dollar amounts not corresponding to the current tax brackets. See provided tax tables in Helpful Documents within Blackboard.
If the business is deemed to be a PHC by the IRS, then a penalty tax of 20% can be imposed on the undistributed personal holding company income
Personal Holding Company (PHC) —a penalty tax of 20%
Isaac is a middle school teacher with gross income this year of $35,000. Based on the following, what is Isaac’s adjusted gross income?
(1) $4,000 qualified education interest expense
(2) $2,000 alimony received under a pre-2018 agreement
(3) $1,000 contribution to a traditional IRA
A)$30,000
B)$31,500
C)$32,000
D)$33,500
Rationale
The answer is B. Isaac’s adjusted gross income is his total gross income of $35,000 - $2,500 in qualified education interest expense (the deductible amount is limited to $2,500) - $1,000 contribution to a traditional IRA = $31,500. The alimony is RECEIVED, which is included in determining his gross income of $35,000. If it was paid then there would be a deduction but that’s not the case.
In this case, both parents are eligible to claim Caroline as a dependent because she is a qualifying child for both of them. However, an individual cannot be claimed as a dependent by more than one person. Because Caroline lives with each parent for the same amount of time, the parent with the higher AGI is allowed to claim the dependency exemption.
the Revenue Act of 1913 imposed the first constitutional income tax.
Mixed-use activity because a person rented out the apartment for more than 14 days and personally used the apartment for the greater of 14 days or 10% of the rental days.
Cash basis is recognized as income when received.
The preparer penalty for willful or reckless conduct is the greater of $5,000 or 50% of the income derived by the preparer for the return. In this case, he charged his brother $1,000.
willful 畅通词汇
英 [‘wɪlfəl] 美 [‘wɪlfəl]
adj. 任性的；故意的；有意的
reckless 常用词汇
英 [‘rekləs] 美 [‘rekləs]
adj. 鲁莽的；不计后果的；大意的
Jason has three capital transactions for the current year:
Short-term capital loss of $5,000
Short-term capital gain of $3,000
Long-term capital loss of $2,000
What is the net effect on Jason’s taxes if he is in the 35% tax bracket?
A)$1,400 tax reduction
B)$1,050 tax reduction
C)$850 tax reduction
D)$450 tax reduction
Rationale
The correct answer is “B.”
Net the STCG and STCL = $2,000 STCL.
The $2,000 LTCL plus the $2,000 STCL = Total Loss of $4,000.
He can only utilize $3,000 to offset ordinary income at 35% = $3,000 X 0.35 = $1,050. The remaining $1,000 is a long-term capital loss carryover.
Dakota qualifies as a dependent of his parents. This year, he earned $500 from a part-time job and $1,500 in interest from a savings account. Dakota's taxable income for this year is: A)$2,000 B)$1,100 C)$900 D)$600
Rationale
The correct answer is “C.” The calculation is as follows: $1,500 (interest) + $500 (wage) = $2,000 (gross income) - $1,100 (greater of standard deduction of $1,100 or $350 plus earned income) = $900 of taxable income, taxed at Dakota’s tax rate.
If the calculated tax due is greater under the AMT, the taxpayer must pay the higher amount. The AMT is not a voluntary alternative to the regular tax system. It is a mandatory alternative, and applies only when the AMT tax exceeds the regular tax imposed on the taxpayer.
The statute of limitations for the collection of a deficiency by the IRS is 10 years.
There is no statute of limitations for fraud.
The general statute of limitations under Section 6501 is 3 years.
The statute of limitations for a substantial understatement of income greater than 25% is 6 years.
Harvey works for Ice Cream Dream, a company that sells commercial ice cream makers. Ice Cream Dream normally has a gross profit percentage of 30%. Harvey's wife loves ice cream, so he decides to buy her a commercial ice cream maker for her birthday. Harvey paid $650 for a machine that would have normally retailed for $1,000. What, if any, amount must be included in Harvey's gross income? A)$0. B)$50. C)$350. D)$400.
Rationale
The correct answer is “B”. Ice Cream Dream’s normal gross profit percentage is 30%. Therefore, Harvey must have paid at least $700 for the machine in order to avoid inclusion in his gross income. However, Harvey’s discount was 35%. Therefore, Harvey must include 5% of the discount, or $50, in his gross income.
Section 1245: The sale of tangible personalty used in a trade or business at a gain.
a Section 1231 is applied to gains recognized after recapture.
D)
Alimony is deductible even when paid to a third party on behalf of the receiving ex-spouse as long as agreed.
Child support is never included in income or deductible from income of the payor ex-spouse.
The maximum allowable expense for business related gifts is $25 per customer.
The five dependency tests are: 1) Gross Income Test, 2) Support Test, 3) Not a qualifying child, 4) Citizenship Test (U.S., Canada or Mexico), and 5) Joint Filing Test.
IRAs and cash value insurance both involve deferral techniques.
One half (50%) of self-employment tax is deductible from the taxpayer’s gross income.
What is margin interest deductible on tax return assuming no special elections? It include portfolio income in interest, ordinary dividends, and short-term capital gains.
It does not include the qualified dividend and long-term capital gains.
If she elected to treat the long-term capital gains and qualified dividends as ordinary income she could deduct it all
Per TCJA, home mortgages are limited to qualified residential interest and a maximum indebtedness of $750,000 if financed after 12/15/17. (For debt prior to 12/15/17, the $1 million limit applies.)
first constitutional federal income tax:
Revenue Act of 1913 imposed the first constitutional income tax
Largest charitable deduction items upon AGI 100,000:
A cash gift to a public charity such as the state university provides for a deduction of up to 60% of the donors AGI.
this stock gift is limited to 30% of AGI.
the gift of inventory only provides Ron with a $25,000 deduction, limited to basis. This is ordinary income property.
the real estate only allows Ron to deduct $30,000 since it is limited to 30% of his AGI because like A, it is long term capital gain property.
Largest charitable deduction items upon AGI 100,000:
A cash gift to a public charity such as the state university provides for a deduction of up to 60% of the donors AGI.
this stock gift is limited to 30% of AGI.
the gift of inventory only provides Ron with a $25,000 deduction, limited to basis. This is ordinary income property.
the real estate only allows Ron to deduct $30,000 since it is limited to 30% of his AGI because it is long term capital gain property.
For 1245 recapture to occur there must be a gain over the basis.
Property sold or abandoned below the basis adjusted by depreciation is not subject to Section 1245 recapture because either not all depreciation was taken or there was more likely a loss rather than a gain.
There is no depreciation allowed for inventories, stock in trade or land apart from its improvements. Tangible personalty used in a trade or business is section 1245 property and is depreciable.
Neither income from rental real estate nor S corporation distributions are subject to self-employment taxes.
Income from rental real estate is not subject to self-employment taxes.
This implies there is no employee status, and therefore, if services are being provided then the individual’s income from those services will be subject to self-employment taxes.
A shareholder’s distributive share of S corporation profits is recognized as ordinary income and not subject to self-employment taxes.
Income from work as an independent contractor is subject to self-employment tax.
property transfer will result in the transferor’s basis in the property being carried over to the transferee as if the property is acquired by gift.” Transfers between divorcing spouses ALWAYS transfer their basis and their holding period, regardless of FMV at date of transfer.
$25,000 of losses from rental property income may be deducted against ordinary income. The taxpayer must be considered “active” in that they participate in the general management and decision making of the property. Also, the $25,000 is reduced $1 for every $2 over an AGI limit of $100,000. When the AGI reaches $150,000, the deduction is lost and must be treated as regular passive income.
Dividends paid in cash are recognized as income in the year the dividends were paid. A dividend paid in shares of stock is not taxed upon receipt and will appreciate in value until the stock is sold.
A cash based taxpayer recognizes income when received either actually or constructively. Realization is an economic concept, recognition is a tax concept.
P1 + P2 - 2P3 - $37,500 = Recapture of alimony recapture
The marginal tax rate is the tax rate applied to the last dollar earned.
B)
The dependent care credit is not phased out and provides a credit of 20% on up to $3,000 per qualifying child with a maximum of $6,000 for two or more children. Therefore her credit is $1,200 = $6,000 X 0.20.
Karen gets the standard deduction for a single person of $12,400 + $1,650 for being blind + $1,650 for being 65 or older.
Student loan interest is an “above-the-line” deduction. The amount that can be taken is limited to $2,500 of interest paid.
The rule is that a taxpayer must file if he has greater than or equal to $400 of net earnings from self-employment. If the taxpayer does not have self-employment income there is no requirements to filing unless your income exceeds the standard deduction and personal exemption ($0 for 2018 - 2025) for that year.
Determination letters are issued at the request of a taxpayer by the district director of the IRS when the taxpayer has already engaged in a transaction and would like to know how to report the transaction for tax purposes.
A jury trial is only available in tax controversies adjudicated by the U.S. District Court. Only bench trials are available in the other venues.
Linus and Karen’s standard deduction is $24,800. They are not age 65 or older so they don’t receive an additional standard deduction.
However, if a tax return is filed more than 60 days late (as it is in Ford’s case), the minimum failure to file penalty is the lower of $215 or 100% of the tax due.
The failure to file penalty is 5% of the unpaid tax balance for each month or part thereof that the tax return is late (up to 25% of the unpaid tax balance). Therefore, Ford’s failure to file penalty is $60 (3 months x $400 x 5%).
Therefore, Ford’s failure to file penalty is actually $215. Ford is also subject to a failure to pay penalty of 0.5% per month or part thereof. Therefore, Ford’s failure to pay penalty is $6 (3 months x $400 x 0.5%). Note that the failure to file penalty is reduced by the failure to pay penalty. Therefore, Ford’s total penalty is $215 ($215 failure to file penalty - failure to pay= $209, plus $6 failure to pay penalty).
Leon, age 32, is an active participant in his employer's defined benefit plan, but he would also like to make a deductible contribution to a traditional IRA this year. Leon is married, files a joint return with his wife, and has an AGI of $111,000 in the current year. What is the maximum deductible contribution that they each can make to a traditional IRA, assuming his wife is also an active participant? A)$0. B)$2,100 C)$3,900. D)$6,000.
Rationale
The correct answer is “C”. The phase-out range for taxpayers who are active participants and use the married filing jointly filing status is $104,000 - $124,000 for 2020. Since Leon’s AGI is within this range, he may not make a full $6,000 deductible contribution to a traditional IRA, but may make a reduced deductible contribution, as calculated by the following formula: Reduction = Contribution Limit x AGI-Lower Limit ÷ $20,000 Therefore, Leon’s deductible contribution is reduced to $3,900 which is calculated as follows: [$6,000 x (111 - 104) / 20)]. Therefore, the maximum deductible contribution that Leon can make to a traditional IRA is (6,000 - 2,100) = $3,900.
realized losses on personal use assets are not recognized.
In an involuntary conversion, the date of realization, not the payment date, determines the date of recognition
Capital recovery is the expensing of certain acquisition costs. Bonds purchased at a premium are amortized over their life to expense the premium paid. The theory is that when they mature, their basis will be equal to their face value and not the face plus premium.
Bond expenditures are, therefore, a recovery of capital.
Cost recovery of an intangible asset is allowed through amortization.
Cost recovery and depreciation (one in the same) are applied to tangible assets. The costs of natural resources are recovered through depletion.
Net expenses paid on rental property - above line (AGI)
Section 179: an upfront business deduction, now at $ 1,040,000 (2020) that can be used by businesses to reduce tax liabilities. It’s possible to reduce Section 179 deduction to zero, depending how much is placed into service. If too much is placed into service, Section 179 would not have any advantages over other methods of depreciation.
By deducting more currently, total tax liability is reduced and the present value of cash flows is increased.
The deduction on PASSIVE the equipment leasing investment is equal to the limited partnership income at risk. The maximum investment deduction may not exceed the cumulative investment income.
II. Expenses from self-employment are deducted above the line and have no AGI floor.
III. Un-reimbursed employee expenses are not deductible.
the double basis rule is for the tax treatment of stock gift
Section 179 carryover to subsequent years will be limited by the business income before the deduction and the year’s Section 179 limitation.
In 2020, the limit for Section 179 is $1,050,000.
RIA provides plain language interpretation of tax law
The five elements of the Qualified Dependent Test are:
Gross income, support, member of household or family, citizenship or residence, and joint return.
The penalty for filing a fraudulent income tax return is 75% of the deficiency
Olive may deduct $0.17 (2020) cents per mile for the travel associated with Polly’s medical care and may deduct up to $50 per night per person for lodging.
QNEC, qualified non-elective contributions, to a 401K plan to maintain qualification is an ordinary/necessary business expense.
NOL losses currently cannot be carried back but they can be carried forward, (except for select agricultural or insurance filers). However, the NOL can only offset 80% of the current year’s income for years after 12/31/17.
Tax planning fees may no longer be deducted against a taxpayer’s itemized deduction, Schedule A
A TAX CREDIT that reduces the tax due on taxable income includes:
- The “Qualified dependent credit” is new under TCJA and applies to qualified dependents and/or qualifying children 17 and over. It is limited to $500.
- The “child tax credit” applies to qualifying children under age 17 and was expanded under TCJA to $2,000 per child, with the possibility of up to $1,400 per child being refundable.
- The “earned income credit” is a credit against the calculated tax, available to those with very low income, predominantly from earnings (wages) and it is a refundable credit.
- The CFP exam considers the prepayment of tax, through withholding and/or estimated tax payments, as credits as well since they also reduce the balance due.
The preparer penalty for willful or reckless conduct is the greater of $5,000 or 50% of the income derived by the preparer for the return.
The penalty for filing a fraudulent income tax return is 75% of the deficiency.
A taxpayer who uses the cash method for reporting most items may use a different method for reporting self-employment income.
the accrual method of accounting:
Income is reported as it is earned and expenses are reported as they are incurred.
Reporting of income and expenses is subject to the all events test.
Claim someone as dependent: Either Gertrude or Henry may claim Eloise as a dependent because they each provided more than 10% of Eloise’s support.
Irene may not claim Eloise as a dependent because she does not meet the relationship test as a qualifying relative
Henry can claim Eloise as a dependent, but only if Gertrude signs an appropriate statement.
When tangible personal property donated to a charity will not be used by the charity to carry out its tax-exempt purpose, the deduction available to the donor is limited to the donor’s cost basis and will be subject to the 50 percent limitation. Redecorating the lobby is not part of the hospital’s tax-exempt purpose. In this case, Mortimer’s cost basis is $300 and since 50% of his AGI is $25,000, Mortimer may take his entire charitable deduction this year.
Section 179 deduction cannot exceed net business income in a given year. The rest of the Section 179 deduction can be carried over, but a 179 deduction cannot be used to create a business loss.
For long-term care insurance, The IRS provides guidelines for the amount of premiums that are deductible based upon the insured’s age.
The amount of premiums paid is included in the medical expense deduction for total expenditures exceeding 7.5% of AGI (SECURE Act 2019) and is from AGI. The policy must be guaranteed renewable or non-cancelable to be qualified.
The basis of the home is increased by the addition of the room and pool. No increase is realized nor recognized at the time of sale for repairs made to the roof or for the painting prior to the sale.
The inclusion amount is designed to help to smooth the lease expense vs. the depreciation expense.
The lease is front loaded
Linda has 1) owned and 2) lived in her home for two years. Under Section 121, Linda, a taxpayer filing single, will be allowed up to $250,000 in excluded gain. Linda’s income due to gain was less than the maximum, therefore, she will have no tax liability.
B)
Up to $3,000 of capital losses may be recognized against forms of income other than capital gains in any one tax year. However, if a taxpayer has capital losses in excess of $3,000, these losses are not disallowed, but are carried over indefinitely to future tax years.
Assuming there were no capital gains that year, a person would have taken the maximum capital loss of $3,000 leaving the remaining $600 (long term loss) to be deducted in the following year’s return.
Short term losses are taken ahead of long term losses.
Deductible losses do not result from willful or negligent loss.
Erosion of land is a normal event which is not an allowable loss.
Your new business car being stolen would constitute a business casualty loss if uninsured for comprehensive. A personal casualty loss would not be deductible.
Section 179 recapture rules apply when the business use of an asset drops below 50% for a given year or when the asset is disposed of before it would have been fully depreciated.
To depreciate real property, the mid-month convention is used. In addition, a hotel is not considered residential real property and is therefore :
depreciated using straight line depreciation over 39 years
the value of the improvements on the land can be depreciated.
The value of the land itself cannot be depreciated.
A mid-month, not a mid-year convention is used in the depreciation of real property.
The replacement property must meet the taxpayer use test, not the functional use test, since Britney did not use the property directly. The taxpayer use test requires replacement property to be used by the taxpayer in an activity which is treated the same for tax purposes in order to qualify for nontaxable exchange treatment
A taxpayer will be subject to an accuracy-related penalty if he makes a substantial understatement of his tax liability, generally more than 10 percent of the correct tax liability and at least a $5,000 tax deficiency.
Blindness must fill tax report:
Lou may benefit from an additional $1,300 additional standard deduction for blindness upon filing. A return must be filed to claim the ASD for blindness.
C Corporations must use the accrual method. Therefore, any entity where a C corporation is a partner or owner must use the accrual method.
Partnerships with corporations as owners must use the accrual method.
S corporations are not required to use the accrual method of accounting.
For 1245 recapture to occur there must be a gain over the basis.
State income or sales tax (whichever is higher) and real estate taxes are deductible as itemized deductions but for years after 12/31/17, they are capped at $10,000 (total). Federal income taxes paid are deductible from the tax liability, but are not an itemized deduction. Occupational license fees are deductible as a direct business cost in which they are deducted for AGI not as itemized deductions.
The cash method of accounting recognizes income when received. Receipt may be either actual or constructive. Constructive receipt is when the taxpayer has the right to the money although they are not in possession thereof. A secular trust constructively belongs to the beneficiary therefore constructive receipt applies.
Because a person gifted the shares to a RELATED party, he has no recognizable loss on tax transaction
Although available as a tax depreciation method, straight line will provide the least depreciation expense for a given period.
MACRS provides the most depreciation, as well as one which will yield the greatest expense in the early portion of the asset’s life.
The accrual accounting method recognizes income when the taxpayer has a right to collect. This occurs usually after the completion of a job and in no case later than when the invoice is prepared and sent.
In 2020 the standard deduction for a married couple is $24,800. Since they are both 65 years of age or older they may also take an additional standard deduction of $1,300 each. Lastly, since Susan is blind, she may take an additional standard deduction of $1,300. $24,800 + ($1,300 × 3) = $28,700.
Kevin’s 12 year old daughter, Angel, has a brokerage account that generates $13,000 of interest income and $2,000 of qualified dividends for the current year. Angel also has earned income of $13,000 from modelling that she is saving for college. How much will be taxed at Angel's tax rate? A)$1,100 B)$2,800 C)$12,400 D)$12,800
Rationale
The correct answer is “B.” The calculation is as follows:
Start with figuring the standard deduction, earned income + 350 not to exceed 12,400 in 2020.
Unearned Income
13,000 + 2,000 =15,000
15,000 - 1,100 (standard deduction) = 13,900
13,900 - 1,100 (at the child’s rate) = 12,800
The remaining 12,800 will be taxed at the parent’s rate (SECURE Act 2019).
Earned income
13,000 - 11,300 (remaining standard deduction: 12,400 - 1,100) = 1,700 at the child rate.
Summary:
Standard deduction is 1,100 + 11,300 = 12,400
At the parent’s rate 12,800
At the child’s rate is 1,100 + 1,700 = 2,800
What is the medical expense deduction that will actually be utilized for the current year?
$0
Solution: Wages $60,000 Interest $1,200 less Alimony AGI $51,200 Medical expenses = $7,500 - ($51,200 x 7.5%) = $3,660
Medical expenses + taxes paid ($3,660 + $2,000) is less than $12,400 therefore, you will use the standard deduction.
The minimum amount to pay the federal income tax to maintain the safe harbor rate rule is:
Your primary choices are (A) = 90% of current year,
(B) = 100% of prior year,
and (C) = 110% of prior year.
Since the client’s AGI from last year is greater than $150,000 the safe harbor is 90% of current year tax or 110% of prior year tax.
Individual income taxes make up nearly 50% of the gross collections by the Internal Revenue Service.
Procedural regulations are a type of Treasury regulation classified by the function of the regulation. All of the other types of regulations are classified by their stage of adoption INCLUDE:
1) Proposed Regulations.
2) Temporary Regulations.
3) Final Regulations.
Kate owns a downtown office building. Kate originally purchased the building for $900,000 and took depreciation deductions of $400,000. Kate is in the 37% tax bracket. Straight-line depreciation would have been $400,000. What are the tax consequences if Kate sells the building for $2,100,000?
A)Kate will have ordinary income of $0.
B)Kate will have $400,000 of gain taxed at 25%.
C)Kate will have 1231 gains of $1,200,000 taxed at 20%.
D)All of the above.
Rationale
The correct answer is “D”.
Sale Price $2,100,000
Less Adjusted Basis $500,000 ($900,000 - $400,000)
Equals Gain $1,600,000
Breakdown of Gain
$400,000 Straightline Depreciation Recapture (25%)
$0 Excess Depreciation (Ordinary Income)
$1,200,000 Gain (Capital Gain)
The capital rate in this case will be 20% because she is in the 37% tax bracket.
Section 179 deductions are limited to $2,590,000 of equipment placed into service. Placing the full 2.59 million would give you 1.04 million in deductions. Amounts over the 2.59 million will reduce the maximum deduction dollar for dollar.
Kelly’s Potato Chip manufacturing business’ taxable income was $750,000. Kelly CANNOT deduct more than her taxable INCOME.
Charitable contribution deduction:
When tangible personal property donated to a charity will not be used by the charity to carry out its tax-exempt purpose, the deduction available to the donor is limited to the donor’s cost basis and will be subject to the 50 percent limitation. Redecorating the lobby is not part of the hospital’s tax-exempt purpose. In this case, Mortimer’s cost basis is $300 and since 50% of his AGI is $25,000, Mortimer may take his entire charitable deduction this year.
A like-kind exchange:
Substitute basis is the fair market value of an asset, reduced by gain realized, but not recognized.
Alimony and penalties for early withdrawal are above the line deductions found in the Adjustment section of the 1040.
The appreciated property will cause a capital gain to be recognized. Because the property realizing a loss was for personal use, it will not be deductible. Capital gain on personal use property is taxable, but losses on personal use property (property not used in business) are not deductible.
§179 deduction amount?
Since he placed into service more assets than allowed under the limitation you must calculate the phase-out.
2,594,000 placed into service less 2,590,000 placed into service limit = 4,000
$1,040,000 - $4,000 = $1,036,000.
Since this is below the net income of the business there are no further limitations.
A cafeteria plan must offer at least one taxable benefit, usually cash, and one qualified nontaxable benefit.
A bargain sale to a charitable organization is the sale of a good or service to a charitable organization for less than the fair market value of the good or service received.
For tax purposes, bargain sale transactions cannot generate capital losses.
Costs to improve, better, or extend the life of an asset are capitalized.
from AGI - below the line:
Interest and taxes on personal residence
Which of the following tests must be satisfied by a qualifying child?
I. Relationship Test.
II. Gross Income Test.
III. Abode Test.
IV. Citizenship Test.
A)I and II only.
B)III and IV only.
C)I, II and III only.
D)I, III, and IV only.
Rationale
The correct answer is “D”. The Gross Income Test is a requirement for a qualifying relative, not a qualifying child. All of the other tests must be satisfied by a qualifying child.
