E.42 Tax implications of special circumstances Flashcards
Learners will be able to understand the tax implications associated with special circumstances such as gifts, inheritance, divorce, and bankruptcy.
Which of the following tax credits reduces the amount of taxes owed on a dollar-for-dollar basis?
A. Tax deduction
B. Tax exemption
C. Tax credit
D. Tax shelter
C. Tax credit
E.42 Tax implications of special circumstances
John and Mary were married on December 31st, 2022. What is their marital status for tax purposes for the entire year?
A. Married filing jointly
B. Married filing separately
C. Single
D. Head of household
A. Married filing jointly
E.42 Tax implications of special circumstances
Which of the following is a requirement for an individual to be considered a qualifying child for tax purposes?
A. The child must be under age 21
B. The child must live with the taxpayer for more than half the year
C. The child must provide more than half of their own support
D. The child must be a US citizen
B. The child must live with the taxpayer for more than half the year
To be considered a qualifying child, the child must also be under age 19 (or under age 24 if a full-time student) and not provide more than half of their own support.
E.42 Tax implications of special circumstances
Which of the following is a requirement for an individual to be considered a qualifying relative for tax purposes?
A. The individual must be a US citizen
B. The individual must live with the taxpayer for more than half the year
C. The individual must provide more than half of their own support
D. The individual’s gross income must be less than the exemption amount
D. The individual’s gross income must be less than the exemption amount
E.42 Tax implications of special circumstances
Rachel is a self-employed consultant who works from home. What expenses related to her home office can she deduct on her tax return?
A. Rent and mortgage interest
B. Utilities and internet
C. Depreciation on the home
D. All of the above
D. All of the above
.
E.42 Tax implications of special circumstances
Which of the following retirement plans does not require mandatory withdrawals beginning at age 72?
A. Traditional IRA
B. Roth IRA
C. 401(k)
D. Pension plan
B. Roth IRA
E.42 Tax implications of special circumstances
John is a high-earning executive who is planning to retire in two years. He expects to receive a large severance package when he retires. What tax implications should John consider when planning for his retirement?
A. The severance package may be subject to both income tax and FICA taxes.
B. The severance package will be tax-free if he rolls it over into an IRA.
C. The severance package is exempt from income tax if he has worked for the company for more than 20 years.
D. The severance package is only subject to income tax if he receives it in installments over a period of more than one year.
A. The severance package may be subject to both income tax and FICA taxes
E.42 Tax implications of special circumstances
Michael is a high-earning executive who is planning to retire next year. He has a 401(k) account with a balance of $500,000. What tax implications should Michael consider when planning for his retirement?
A. Michael will be subject to income tax on the entire balance of his 401(k) account when he retires.
B. Michael will be subject to income tax on only the contributions he made to his 401(k) account.
C. Michael can withdraw money from his 401(k) account tax-free if he waits until he is 70½ years old.
D. Michael will be subject to income tax on the contributions and earnings in his 401(k) account when he retires.
D. Michael will be subject to income tax on the contributions and earnings in his 401(k) account when he retires.
E.42 Tax implications of special circumstances
Bob and Sue are a married couple who file a joint tax return. Sue is a full-time student and has no income. Can Bob claim a tax deduction for the tuition and fees paid for Sue’s education?
A. No, since Sue has no income, Bob cannot claim a deduction for her education expenses.
B. Yes, Bob can claim a deduction for the tuition and fees paid for Sue’s education.
C. No, since Bob’s income is too high, he cannot claim a deduction for education expenses.
D. Yes, Bob can claim a deduction for the tuition and fees paid for Sue’s education, but only if he itemizes his deductions.
B. Yes, Bob can claim a deduction for the tuition and fees paid for Sue’s education.
E.42 Tax implications of special circumstances
Sarah and Tom, a married couple filing a joint tax return, own a rental property that generates a net loss of $10,000 per year. Considering their situation, which of the following statements is correct regarding the deductibility of the rental property loss on their joint tax return?
A. Yes, Sarah and Tom can always deduct the full $10,000 loss on their tax return.
B. No, Sarah and Tom cannot deduct the $10,000 loss on their tax return.
C. Yes, Sarah and Tom can deduct the full $10,000 loss, but only if their Modified Adjusted Gross Income (MAGI) is below a certain threshold.
D. Sarah and Tom can deduct the loss only against other passive income.
C. Yes, Sarah and Tom can deduct the full $10,000 loss, but only if their Modified Adjusted Gross Income (MAGI) is below a certain threshold.
The ability for Sarah and Tom to deduct the full $10,000 loss from their rental property largely hinges on their Modified Adjusted Gross Income (MAGI). According to the IRS, if Sarah and Tom actively participate in the rental activity and their MAGI is less than $100,000, they can deduct up to $25,000 of loss against their other income. The ability to take this loss begins to phase out if their MAGI is between a certain threshold and and disappears entirely for MAGI above that (see IRS Rules). Therefore, the deductibility of the loss depends on their income, and other factors like their level of active participation in the rental activity.
E.42 Tax implications of special circumstances
