Income Flashcards
During 2015 Kay received interest income as follows:
On U.S. Treasury certificates
$4,000
On refund of the prior year’s federal income tax
$500
The total amount of interest subject to tax in Kay’s 2015 tax return is
$4,500 - Interest income received on U.S. Treasury certificates is not exempt from federal income tax. In addition, while federal income tax refunds are non-taxable, the interest received on the refund is taxable income.
Hence, the interest income on the U.S. Treasury certificates and on the refund of prior year’s federal income tax is reported on Kay’s 2015 tax return, putting the total amount of interest subject to tax in Kay’s 2015 tax return at $4,500
Charles and Marcia are married cash-basis taxpayers. In 2015, they had interest income as follows:
- $500 interest on federal income tax refund.
- $600 interest on state income tax refund.
- $800 interest on federal government obligations.
- $1,000 interest on state government obligations.
What amount of interest income is taxable on Charles and Marcia’s 2015 joint income tax return?
$1,900 - Refunds and recoveries attributable to a prior tax year are excluded from income to the extent that the amount does not reduce the amount of tax imposed for the earlier year. However, interest received on these refunds and recoveries is taxable interest income.
Thus, Charles and Marcia should include the interest received on the state and federal income tax refunds as interest income on their income tax return. In addition, Charles and Marcia should include the interest received on federal government obligations as taxable interest income on their income tax return because interest on these obligations is taxable. However, interest on state government obligations is tax-exempt income and, as a result, Charles and Marcia should not include interest income from these obligations on their income tax return.
Hence, Charles and Marcia should report $1,900 of interest income, the sum of the $500 interest on federal income tax refund, $600 interest on state income tax refund and $800 interest on federal government obligations
Micro Corp., a calendar year, accrual basis corporation, purchased a 5-year, 8%, $100,000 taxable corporate bond for $108,530, on July 1, 2015, the date the bond was issued.
The bond paid interest semiannually. Micro elected to amortize the bond premium. For Micro’s 2015 tax return, the bond premium amortization for 2015 should be
I. Computed under the constant yield to maturity method.
II. Treated as an offset to the interest income on the bond.
Both - Taxpayers may elect to amortize taxable bonds purchased at a premium. Non-taxable bonds purchased at a premium generally are required to be amortized. The amortized bond premium is based on the constant yield to maturity. The amount amortized usually reduces the taxpayer’s basis in the bonds and, for taxable bonds, results in an offsetting deduction for interest received from the bond.
This response correctly states that the bond premium amortization should be computed under the constant yield to maturity method. In addition, this response correctly indicates that the bond premium amortization would be treated as an offset to the interest income from the bond.
John and Mary were divorced in 2014. The divorce decree provides that John pay alimony of $10,000 per year, to be reduced by 20% on their child’s 18th birthday. During 2015, John paid $7,000 directly to Mary and $3,000 to Spring College for Mary’s tuition.
What amount of these payments should be reported as income in Mary's 2015 income tax return? A. $5,600 B. $8,000 C. $8,600 D. $10,000
B - Alimony received by a taxpayer is included in that taxpayer’s gross income and alimony paid by a taxpayer is deductible from that taxpayer’s gross income. To be considered alimony, the payments must be made under a divorce or separation agreement. Payments to third parties (such as tuition, rent and mortgage) by the spouse paying alimony for the spouse receiving alimony receive the same treatment as cash payments.
John and Mary have a divorce decree stipulating $10,000 per year payments from John to Mary, but the amount decreases to $8,000 when their child reaches the age of 18 years. Due to this decrease, $2,000 of the $10,000 payment would be considered child support and, as a result, would not be reported by Mary as income. The remaining $8,000 would be considered alimony and, therefore, reported as income by Mary
Blake, a single individual age 67, had a 2015 adjusted gross income of $60,000 exclusive of social security benefits. Blake received social security benefits of $8,400 and interest of $1,000 on tax-exempt obligations during 2015. What amount of social security benefits is excludable from Blake’s 2015 taxable income?
$1,260
Easiest way: SSB*.85=x
SSB-x=excludable amount
Long wiley explanation:
PI = AGI + tax-exempt interest + 50% (SSB)
PI = $60,000 + $1,000 + 50% (8,400) = $65,200.
Since PI ($65,200) exceeds Base Amount 2 ($34,000), then the taxable amount of SSB is the lesser of:
.85 x SSB ($8,400) = $7,140, or
.85 x [PI - BA2; $65,200 - $34,000) = $26,520, plus the lesser of
amount included based on the 50% formula (50% x $8,400) = $4,200, or
$4,500 (unless married filing joint, then $6,000), which provides $26,520 + $4,200 = $30,720 for part b of the formula.
Thus, the amount included in income is the lower of $7,140 or $30,720, so the amount excluded is $1,260 ($8,400 - $7,140)
Which of the following taxpayers may use the cash basis as its method of accounting for tax purposes?
A. Partnership that is designated as a tax shelter.
B. Retail store with $2 million in gross receipts.
C. An international accounting firm organized as a partnership.
D. Office cleaning corporation with average annual income of $8 million
C - Partnerships can use the cash method regardless of the amount of gross receipts as long as none of the partners are C corporations
Unless the Internal Revenue Service consents to a change of method, the accrual method of tax reporting is mandatory for a sole proprietor when there are
- Accounts receivable for services rendered
- Year-end merchandise inventories
2 only - Unless the IRS consents to a change of method, taxpayers are to use the accrual method of accounting for purchases and sales if inventories are used.
Accounts receivable for services rendered does not trigger the required use of the accrual method.
This response correctly indicates that accounts receivable for services rendered would not lead to the required use of the accrual method and that the use of inventories would trigger the required use of the accrual method.
Hall, a divorced person and custodian of her 12-year old child, filed her 2015 federal income tax return as head of a household. She submitted the following information to the CPA who prepared her 2015 return
Hall earned a salary of $25,000 in 2015. Hall was not covered by any type of retirement plan, but contributed $2,000 to an IRA in 2015
Hall’s $2,000 contribution to an IRA should be treated as
A. An adjustment to income in arriving at adjusted gross income.
B. A deduction from adjusted gross income subject to the 2% of adjusted gross income floor.
C. A deduction from adjusted gross income not subject to the 2% of adjusted gross income floor.
D. Nondeductible, with the interest income on the $2,000 to be deferred until withdrawal
D - Individual taxpayers not active in certain employer-sponsored retirement plans may deduct cash contributions to individual retirement accounts to the extent of the lesser of $5,500 or 100 percent of the taxpayer’s gross income in 2015. Those taxpayers covered by employer-sponsored retirement plans may still take individual retirement account deductions subject to a phase-out based on their adjusted gross income.
No taxes are paid on the interest income earned on individual retirement accounts until the retirement savings are distributed. The individual retirement account deduction is an adjustment to income in arriving at adjusted gross income.
Davis, a sole proprietor with no employees, has a Keogh profit-sharing plan to which he may contribute 100% of his annual earned income.
For this purpose, “earned income” is defined as net self-employment earnings reduced by the
A. Deductible Keogh contribution.
B. Self-employment tax.
C. Self-employment tax and one-half of the deductible Keogh contribution.
D. Deductible Keogh contribution and one-half of the self-employment tax
D - For determining the amount of income that a self-employed individual may contribute to a Keogh profit-sharing plan, earned income is defined as net self-employed earnings less the deductible Keogh contribution and one-half of the self-employment tax.
John invested $2,000 a year into his retirement plan from his before tax earnings (that is, he received a deduction for these contributions and was not taxed on the income). His employer contributed $3,000 a year to John's retirement fund. After 30 years of contributions, John retires and receives a distribution, which is not tax-free, of $350,000, the balance in his retirement fund. John must include what amount in gross income? A. $0 B. $200,000 C. $260,000 D. $350,000
D - John does not have any basis in his retirement account. He did not receive basis for his contributions because they were made from earnings that were not taxed. He did not receive basis for his employer’s contributions since they were made from employer funds. Therefore, the entire $350,000 distribution is included in John’s gross income.
Mr. Kitten purchased an annuity contract for $50,000 from the XYZ Company on March 31, 2015. He is to receive $1,000 per month starting April 1, 2015 and continuing for life. He has a life expectancy of 10 years as of March 31, 2015. Mr. Kitten’s reportable annuity income for 2015 is:
$5,250 - Mr. Kitten’s expected return is 120 months × $1,000, or $120,000. His basis in the annuity is $50,000, so his exclusion ratio is 41.67% ($50,000/$120,000). He received nine payments totaling $9,000 in 2015, and $3,750 is excluded from income. Therefore, $5,250 is included in income ($9,000 − $3,750)
How are proceeds of life insurance policy treated for person receiving them? (how much do they contribute to AGI?)
The proceeds of life insurance policies paid by reason of death of the insured are generally excluded from the beneficiary’s gross income.
stock dividends also excluded from agi
