Federal Tax Law & Process

Question 1

Elijah and Anastasia are married and have five married children and fifteen minor grandchildren.

For 2021, what is the maximum amount they can give to their family (including the sons- and daughters-in-law) without using any of their unified transfer tax credit?

Answer 1

$15,000 per person per taxpayers

=($15,000 x 5 children x 2 taxpayers) + ($15,000 x 5 children-in-law x 2 taxpayers) + ($15,000 x 15 minor grandchildren)
=$750,000

Question 2

Rita files her income tax return 60 days after the due date of the return without obtaining an extension from the IRS. Along with the return, she remits a check for $74,000 which is the balance of the tax she owes.

Disregarding the interest elements, enter Rita’s failure to file penalty and failure to pay penalty. Assume there are 30 days in a month.

Answer 2

a. Failure to pay penalty
=Tax payment x Months late x 0.5%
= $74,000 x 2 x 0.5%
=$740

b. Failure to file penalty
=(Tax payment x Months late x 5%) - Failure to pay penalty
=($74,000 x 2 x 5%) - 740
=$6,660

Question 3

For the tax year 2019, the IRS assesses a deficiency against David for $35,000.

a. Disregarding the interest component, enter David’s penalty if the deficiency is attributable to negligence.
b. Disregarding the interest component, enter Davi’s penalty if the deficiency is attributable to civil fraud.

Answer 3

a. Negligence penalty
=Assessed deficiency x 20%
=$35,000 x 20%
=$7,000

b. Civil fraud penalty
=Assessed deficiency x 75%
=$35,000 x 75%
=$26,250

Question 4

Interpret the following citation:

Temp.Reg. § 1.930–8T.

Answer 4

Type of regulation: 1
Related code section: 930
Regulation section no: 8
Temporary: T

Question 5

Interpret the following citation:

Rev.Rul. 2012–8, 2012–42 I.R.B. 671.

Answer 5

Revenue ruling no: 8
Page: 671
Issue week: 42

Question 6

Interpret the following citation:

Ltr.Rul. 20083923.

Answer 6

Letter ruling: 23
Issue week: 39
Year: 2008

Question 7

Interpret the following citation:

13 T.C. 26 (1962).

Answer 7

This citation is to a Regular decision of the U.S. Tax Court that was issued in 1962. The decision can be found in Volume 13, page 26, of the Tax Court of the United States Reports, published by the U.S. Government Printing Office.

Question 8

Interpret the following citation:

475 F. 2d 1050 (CA–5, 1979).

Answer 8

This citation is for a decision of the U.S. Fifth Circuit Court of Appeals that was rendered in 1979. The decision can be found Volume 475, page 1050 of the Federal Reporter, Second Series, published by West Publishing Company.

Question 9

Interpret the following citation:

85–1 USTC ¶ 50,38532 (CA–6, 1985).

Answer 9

This citation is for a decision of the U.S. Sixth Circuit Court of Appeals that was rendered in 1985. The decision can be found in Volume 1 for 1985 paragraph 50,38532 of U.S. Tax Cases, published by Commerce Clearing House.

Question 10

Interpret the following citation:

71 AFTR 2d 95–122 (CA–6, 1995).

Answer 10

This citation is for a decision of the U.S. Sixth Circuit Court of Appeals that was rendered in 1995. The decision can be found in Volume 71, page 122 of the Second Series of American Federal Tax Reports published by RIA.

Question 11

Interpret the following citation:

177 F.Supp. 320 (W.D. Tex., 1974).

Answer 11

This citation is for a decision of the U.S. District Court of Texas that was rendered in 1974. The decision can be found in Volume 177, page 320 of the Federal Supplement Series, published by West Publishing Company.

Question 12

Interpret the following citation:

197 F.3d 119 (CA–1, 2007).

Answer 12

This citation is to a decision of the U.S. First Circuit Court of Appeals that was rendered in 2007. The decision can be found in Volume 197, page 119 of the Federal Reporter, Third Series, published by West Publishing Company.

Question 13

Interpret the following citation:

36 F.Supp.2d 361 (D.Ct. V.I., 2011).

Answer 13

This citation is to a decision of the U.S. District Court of the Virgin Islands that was rendered in 2011. The decision can be found in Volume 36, page 361 of the Federal Supplement Second Series, published by West Publishing Company.

Question 14

Compute the 2021 standard deduction for the following taxpayer(s).

Ellie is 15 and claimed as a dependent by her parents. She has $1,350 in dividends income and $1,680 in wages from a part-time job.

Answer 14

=Earned wages + $350
=$1,680 + 350
=$2,030

Question 15

Compute the 2021 standard deduction for the following taxpayer(s).

Ruby and Woody are married and file a joint tax return. Ruby is age 66, and Woody is 69. Their taxable retirement income is $11,065.

Answer 15

Standard deduction for married filing jointly is $25,100 with an additional exception of $1,350 per spouse for taxpayers over 65 years old or blind.

Use the higher of income or standard deduction.
$11,065 is less than $25,100, so we use $25,100 plus $1,350 x 2 taxpayers to arrive at $27,800.

Question 16

Compute the 2021 standard deduction for the following taxpayer(s).

Shonda is age 68 and single. She is claimed by her daughter as a dependent. Her earned income is $270, and her interest income is $560.

Answer 16

Use the greater of $1,100 OR (earned income + interest income)

=Income + 1,700
$270 + 560 = $830
$830 is less than $1,100, therefore…

=$1,100 + 1,700
=$2,800

Question 17

Compute the 2021 standard deduction for the following taxpayer(s).

Frazier, age 60, is married but is filing a separate return. His wife itemizes her deductions.

Answer 17

If one spouse itemizes their deductions, the other spouse is required to itemize theirs as well. Therefore, Frazier is unable to claim the standard deduction and must itemize them.

Question 18

Paul and Sonja, who are married, had itemized deductions of $13,150, respectively, during 2021. Paul suggests that they file separately - he will itemize his deductions from AGI, and she will claim the standard deduction.

a. Is Paul’s suggestion correct?
b. What should they do to ensure the maximum tax benefit?

Answer 18

a. No. Sonja is ineligible to use the standard deduction and must itemize.
b. Sonja and Paul should take the standard deduction.

Question 19

In 2021, Jack, age 12, has interest income of $6,060 on funds he inherited from his aunt and no earned income. He has no investment expenses. Christian and Danielle (his parents) have taxable income of $82,250 and file a joint return. Assume that no parental election is made.

a. What is Jack’s net unearned income?
b. What is Jack’s allocable parental tax?
c. What is Jack’s total tax?

Answer 19

a. Interest income - 1,100 x 2
=$6,060 - 1,100 x 2 = $3,860 net unearned income

b. Net unearned income x 22%
=$3,860 x 22% = $849 parental tax

c. Parental tax + (1,100 x 10%)
=$849 + (1,100 x 10%) = $959

Question 20

Taylor, age 15, is claimed as a dependent by her parents. For 2021, she has the following income: $3,600 wages from a summer job, $1,300 interest from a money market account, and $2,100 interest from City of Chicago bonds.

a. What is Taylor’s standard deduction for 2021?
b. What is Taylor’s taxable income for 2021?
c. Compute Taylor’s “net unearned income” for the purpose of the kiddie tax.
d. Computer Taylor’s tax liability. [Her parents file a joint return and have taxable income of $135,000 (no dividends or capital gains).]

Answer 20

Higher of earned income or $1,100 + $350

a. Is $3,600 earned income > $1,100? Yes, then:
$3,600 + 350 = $3,950 standard deduction

b. Total income - standard deduction
=$3,600 + 1,300 - 3,950
=$950 taxable income

c. Municipal bond interest is. exempt. Since the money market interest of $1,300 is less than the $2,200 threshold , the answer is $0 net unearned income.

d. Taxable income x tax rate
=$950 x 10%
=$95 tax liability

Question 21

Preston and Anna are engaged and plan to get married. During 2021, Preston is a full-time student and earns $6,700 from a part-time job. With this income, student loans, savings, and nontaxable scholarships, he is self-supporting. For the year, Anna is employed and has wages of $55,000.

Compute the following for Preston and Anna both filing single.

a. Gross income and AGI
b. Standard deduction
c. Taxable income
d. Income tax

Answer 21

Preston
Gross income and AGI: $6,700
Standard deduction: $12,550
Taxable income is $0 because gross income < standard deduction

Anna
Gross income and AGI: $55,000
Standard deduction: $12,550
Taxable income:
$55,000 - 12,500 = $42,450

Tax rate is $4,664 plus 22% above $40,525

Tax liability:
$4,664 + (($42,450 - 40,525) x 22%) = $5,088

Question 22

Preston and Anna are engaged and plan to get married. During 2021, Preston is a full-time student and earns $6,700 from a part-time job. With this income, student loans, savings, and nontaxable scholarships, he is self-supporting. For the year, Anna is employed and has wages of $55,000.

Compute the following for Preston and Anna both filing married jointly.

a. Gross income and AGI
b. Standard deduction
c. Taxable income
d. Income tax

Answer 22

Gross income and AGI:
$6,700 + 55,000 = $61,700

Standard deduction: $25,100

Taxable income: $61,700 - 25,100 = $36,600

Tax rate: $1,990 and 12% above $19,990

Tax liability:
$1,990 + ((36,600 - 19,990) x 12%) = $3,994

Question 23

Which, if any, of the following taxes are regressive (rather than progressive)?

a. State general sales tax
b. Federal individual income tax
c. Federal estate tax
d. Federal gift tax

Answer 23

State general sales tax

Question 24

Gabriele and Lisa are married and live in a common law state. They want to make gifts to their four children in 2021. What is the maximum amount of the annual exclusion they will be allowed for these gifts?

a. $30,000
b. $60,000
c. $15,000
d. $120,000

Answer 24

$120,000

2021 annual exclusion is $15k per recipient, thus $15,000 x 4 children = $60,000 x 2 taxpayers = $120,000

Question 25

A characteristic of FICA tax is that:

a. It is imposed only on the employer
b. It does not apply when one spouse works for the other spouse
c. It provides a modest source of income in the event of loss of employment
d. None of these choices are correct

Answer 25

None of the above

Question 26

In § 212(1), the number (1) stands for the:

a. Section number
b. Subparagraph designation
c. Subsection number
d. Paragraph designation

Answer 26

Paragraph designation

Question 27

A taxpayer who loses in a U.S. District Court may appeal directly to the:

a. U.S. Circuit Cout of Appeals
b. U.S. Court of Federal Claims
c. U.S. Supreme Court
d. U.S. Tax Court

Answer 27

U.S. Circuit Court of Appeals

Question 28

During 2021, Enrique had the following transactions:

Salary	$70,000
Interest income on Xerox bonds	2,000
Inheritance from uncle	40,000
Contribution to traditional IRA	5,500
Capital losses	2,500

Enrique’s AGI is:

a. $62,000
b. $64,000
c. $67,000
d. $102,000

Answer 28

$64,000

Question 29

Kyle, whose spouse died in December 2018, filed a joint tax return for 2018. He did not remarry but has continued to maintain his home in which his two dependent children live. What is Kyle’s filing status in 2021?

a. Surviving spouse
b. Head of household
c. Single
d. Married filing separately

Answer 29

Head of household

Question 30

Harpreet, whose spouse died in December 2020, maintains a household in which her dependent mother lives. Which (if any) of the following is her filing status for the tax year 2021? (Note: Harpreet is the executor of her spouse’s estate.)

a. Head of household
b. Single
c. Surviving spouse
d. Married, filing separately

Answer 30

Head of household because Harpreet must have dependent children to use the Surviving spouse filing status and she did not remarry to file as Single either.

Question 31

In which of the following situations, if any, will the kiddie tax not apply?

a. The child has unearned income of $2,200 or less
b. The child is under age 24 and a full-time student
c. The child has unearned income that exceeds more than half of his (or her) support
d. The child is married but does not file a joint return

Answer 31

Child’s unearned income must be more than $2,200

Question 32

For the current year, David has wages of $80,000 and the following property transactions:

Stock investment sales—
$9,000 Long-term capital gain
(12,000) Short-term capital loss
(2,000) Loss on sale of camper (purchased four years ago and used for family vacations)

What is David’s AGI for the current year?

a. $89,000
b. $78,000
c. $76,000
d. $77,000

Answer 32

$77,000