Income Tax - All Quizzes and Test Questions Flashcards

Question

Cecilia and Landon DeFee purchased their primary residence in North Carolina this year, but still maintain a vacation property in the Smokey Mountains. Their home in N. Carolina was purchased for $450,000, and they paid $22,349 in interest the first year. The vacation property was purchased 5 years ago for $300,000 and they paid $14,795 in interest this year. The couple has no other itemized deductions. What is the mortgage interest deduction for Cecilia and Landon? A. $10,000 B. $37,144 C. $24,800 D. $22,349

Answer 1

**Solution:** The correct answer is B. Their itemized deductions exceed the standard deduction of $25,900 for 2022. Their housing acquisition costs are under the $750,000 cap from TCJA of 2017, and no additional equity loans or credit has been taken. They can deduct their full mortgage interest. SALT (State and Local Taxes) is capped at $10,000 If the second home is considered a personal residence, you must file Form 1040 or 1040-SR and itemize deductions on Schedule A to claim the mortgage interest deduction. In most cases, single filers and those [_married filing jointly_](https://www.investopedia.com/terms/m/mfj.asp) can deduct all of their mortgage interest on up to $750,000 of mortgage debt. This rule applies to any personal residence, whether it's your first or second home, or both

Answer 2

**Solution:** The correct answer is D. Since she is deemed married in the year of her husband’s death, she cannot file as single (choice A) or head of household (choice D). She does not qualify for surviving spouse status until the next year. Therefore, she is most likely to use the married filing jointly filing status.

Answer 3

**Solution:** The correct answer is B. Unearned $10,000 Earned Income $20,000 Total $30,000 Less SD (2022) ($12,950) $17,050 At parent Rate $7,700 $10,000 unearned income – $2,300\* At kid’s rate $9,350 SECURE Act 2019 reverted the TCJA 2017 back to the pre-TJCA calculation. Amounts above the unearned income standard deduction will be taxed at the parent's tax rate (no longer at the trust and estate rate). \* 2022 standard deduction as applies to unearned income of $1,150 and the amount of $1,150 taxed at the child's rate

Answer 4

**Solution:** The correct answer is A. Option B is incorrect because there is no requirement for new businesses to use a calendar year tax period. Option C is incorrect; a taxpayer may use a fiscal year tax period and have a tax year of less than 12 months in the first year. Option D is incorrect; although most taxpayers who receive such documents use the calendar year tax period, the receipt of such documents does not in and of itself require them to do so.

Answer 5

**Solution:** The correct answer is C. Remember, interest is paid after it is earned, so the amount received by Brody includes interest earned while the bonds were owed by Abner. Brody owned the bonds for two-thirds of the year. Therefore, he must report two-thirds of the interest in his gross income for the year in which the interest is received.

Answer 6

**Solution:** The correct answer is A. A cafeteria plan must offer at least one taxable benefit, usually cash, and one qualified nontaxable benefit. All of the other statements regarding cafeteria plans are correct.

Answer 7

**Solution:** The correct answer is A. An employee is allowed to exclude from gross income the value of lodging furnished by an employer to the employee if the lodging is furnished (1) on the employer’s business premises, (2) for the convenience of the employer, and (3) the employee is required to accept the lodging as a condition of employment. It does not matter that Hansel and Gretel were paid a housing allowance, which they were then required to pay back to the employer for rent. Hansel and Gretel can exclude the entire value of their housing from their gross income.

Answer 8

**Solution:** The correct answer is A. Since the total of Ian’s MAGI ($16,000) and one-half of his Social Security benefits (0.50 × $15,000 = $7,500) is less than the base amount ($25,000), none of his Social Security benefits are included in gross income.

Answer 9

**Solution:** The correct answer is C. Since her MAGI ($50,000) plus one-half of her Social Security benefits (0.5 × $16,000 = $8,000) exceeds her adjusted base amount ($34,000), she must calculate her includible Social Security benefits using the formula 3 or 4 below. 1. 0.85 × $16,000 = $13,600 2. 0.85 × [$50,000 + (0.50 × $16,000) - $34,000] = $20,400 plus the lesser of the amount calculated using 1 and 2 below: 3. 0.50 × $16,000 = $8,000 4. 0.50 × [$50,000 + (0.50 × $16,000) - $25,000] = $16,500 The lesser amount is $8,000 The formula 4 total is $28,400 ($20,400 + $8,000) The lesser of the formula 3 or 4 amounts is $13,600. Therefore, $13,600 of the Social Security benefits must be included in Jessie’s gross income.

Answer 10

**Solution:** The correct answer is C. Dependent care assistance can only be excluded from a highly compensated employee’s gross income if it is provided on a nondiscriminatory basis. Answer d is not correct because access to athletic facilities can be provided on a discriminatory basis without causing inclusion in the employee’s gross income.

Answer 11

**Solution:** The correct answer is B. Kenny is not required to meet the deductible of his high deductible health plan in order to make a deductible contribution to his HSA. However, he is required to be eligible to establish an HSA and to have a high deductible health plan.

Answer 12

**Solution:** The correct answer is C. The phaseout range for taxpayers who are active participants and use the married filing jointly filing status is $109,000 - $129,000 for 2022. Since Leon’s AGI is within this range, he may not make a full deductible contribution to a traditional IRA, but may make a reduced deductible contribution. Leon can contribute $6,000 plus $1,000 catch up. Therefore, Leon’s deductible contribution is reduced by $700 [$7,000 × (($111,000 - $109,000)/$20,000]. The maximum deductible contribution that Leon can make to a traditional IRA is $6,300. SECURE Act 2019 removed the age maximum on contributions to Traditional IRAs. Leon can continue to contribute if he has sufficient earned income.

Answer 13

**Solution:** The correct answer is C. The $10,000 cash meets all of the requirements for alimony treatment. Although the circumstances suggest that Janet is paying Tim for his share of the marital property, the agreement must specify that the payments are not alimony to avoid alimony treatment.

Answer 14

**Solution:** The correct answer is D. The $100,000 exception would apply, so interest will need to be imputed to the lender if the Borrower's net investment income exceeds $1,000*.* The lender will only impute the lesser of the Borrower's net investment income *or* the AFR. Marge is not required to recognize imputed interest income because Steve’s investment income is less than $1,000.

Answer 15

**Solution:** The correct answer is D. The annuity exclusion formula is investment/expected return = $60,000/($1,500 × 120) = $60,000/$180,000 = .333. Therefore, when Ted collects $1,500, he must recognize $1,500 × (1 – .333) = $1,000 gross income. Answer b. is incorrect. Instead of amending prior returns, Ted will be allowed to deduct a loss on his final return for the cost of the annuity less the amount previously excluded as a return of capital.

Answer 16

**Solution:** The correct answer is D. The income portion of the first annuity payment received is $2,500 ($12,500 – $10,000 exclusion). The exclusion is calculated as follows: ($100,000/125,000) × $12,500 = $10,000

Answer 17

**Solution:** The correct answer is B. $2,200 ($1,700 interest + $500 prize).

Answer 18

**Solution:** The correct answer is B. The only item included in Harrison’s gross income is the unemployment compensation. All other payments received are specifically excluded from gross income.

Answer 19

**Solution:** The correct answer is A. The room qualifies for the § 119 lodging exclusion.

Answer 20

**Solution:** The correct answer is A.

Answer 21

**Solution:** The correct answer is C. A, B, and D are deductions for AGI.

Answer 22

**Solution:** 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.

Answer 23

**Solution:** The correct answer is B. Olive may deduct 16¢ per mile (2021) for the travel associated with Polly’s medical care and may deduct up to $70 per night for lodging (limited to the lesser of $50 per eligible person or actual expense incurred). Therefore, the total medical expenses are $2,490 [(300 × 2 × 15 × $.16) + (15 × $70)]. However, Olive may only deduct the amount that exceeds 7.5% of her AGI in 2021. 7.5% of Olive’s AGI is $1,800, making her deductible amount (2,490 – 1,800) $690. Taxpayer Certainty and Disaster Tax Relief Act of 2020 extends 7.5% of AGI to taxable years beginning after December 31, 2020.

Answer 24

**Solution:** The correct answer is B. $110,000 of the refinanced amount continues to be treated as acquisition indebtedness since that was the previous balance of Rudolph’s mortgage. Post TCJA, if you refinance under the amount of original indebtedness, you can continue the pre-TCJA rules, if you refinance more (as in this case) you need to follow the new rules. You can deduct the original indebtedness (110k) up to $750,000. A home equity can only be included if it is used to better the property. So under these rules, they can deduct interest on $110,000, the home equity was not used for a qualified reason and will not be deductible. The pre TCJA would allow up to $100,000 in home equity for interest deductions, 40,000 would have not been deductible, leaving 210k that could have been deducted under the old rules Since not all of the new mortgage is considered acquisition indebtedness, only a portion of the points paid on the refinance will be deductible.

Answer 25

**Solution:** The correct answer is A. Under TCJA, personal casualty losses unless located in a federally declared disaster area are not deductible. Business casualty losses are unchanged. Personal casualty losses in federally declared disaster areas are still subject to the calculation below unless the government grants relief. Prior to the TCJA: Sammy’s casualty loss is valued at $150,000 which is his adjusted basis less insurance proceeds received (insurance proceeds in this case are zero). His economic loss (the fair market value before the event, $500,000 less the fair market value after the event, $0) is $500,000. Since Sammy had never paid tax on the $350,000 gain in the property, however, he cannot take a tax deduction for the economic loss. If Sammy had the property fully insured, he would have received the full $500,000 (less his deductible) from the insurance company. Sammy’s casualty loss of $150,000 must be reduced by $100 and the result is only deductible to the extent it exceeds 10% of AGI. The deductible portion of Sammy’s casualty loss is $138,400 ($150,000 - $100 - $11,500[10% of AGI]).

Answer 26

**Solution:** The correct answer is A. The imputed interest rules apply to gift loans. However, if the amount of the loan is for $100,000 or less, the imputed interest cannot exceed the borrower’s net investment income for the tax year. If net investment is $1,000 or less, it is considered to be $0.

Answer 27

**Solution:** The correct answer is C. A casualty loss may be taken for business assets.

Answer 28

**Solution:** The correct answer is B. Answer A is incorrect because although the Revenue Act of 1861 did impose a federal income tax, it was later found to be unconstitutional because Congress did not have the power to levy an individual income tax at that time. Answer B is correct because the 16th Amendment gave Congress the power to impose an individual income tax, but did not itself impose that tax. Answer C is incorrect because the Revenue Act of 1916 raised the rates previously imposed under the Revenue Act of 1913.

Answer 29

**Solution:** The correct answer is A. Asset A $300 Asset B $1,500 Asset C $500 $2,300 Less: Statutory floor (100) Less: AGI limitation (10% × $18,000) (1,800) Casualty loss deduction 400 Remember the deduction is the lesser of ATB or decline in FMV less insurance proceeds. Reminder, ONLY Federally declared disasters are eligible for casualty loss treatment after 12/31/17. Note: $100 comes from ‘The limitations on the deduction for personal casualty losses do not end there. Two additional restrictions apply. First, a $100 floor must be deducted from each occurrence (Statuotory floor). Second, the loss is only deductible to the extent it exceeds 10% of AGI.’

Answer 30

**Solution:** The correct answer is C. A trip outside the United States is considered to be purely for business when less than 25 percent of the time spent on the trip was personal. All of the other statements regarding travel outside the United States are correct.

Answer 31

**Solution:** The correct answer is B. Proposed Regulations have no legal precedence and are not binding on taxpayers until the regulation becomes final.

Answer 32

The self-employment tax rate is 15.3%: 12.4% of that part goes to Social Security and 2.9% for Medicare. This rate applies to 92.35% of self-employment income within the SS wage base. You can deduct half of the SE tax on your 1040 ex: **You can deduct half of your self-employment tax on your income taxes**. So, for example, if your Schedule SE says you owe $2,000 in self-employment tax for the year, you'll need to pay that money when it's due during the year, but at tax time $1,000 would be deductible on your 1040.

Answer 33

How property is held: personal use, investment/production of income, trade or business Or is prop a capital asset, ordinary income asset or 1231 asset (depreciable personal prop or real prop used for productive use in trade or biz or production of income)

Answer 34

Section 1231 Assets * Section 1231 assets are (1) depreciable personal property or (2) real property used for productive use in a trade or business * In addition to being depreciable property or real property used in a trade or business, the owner of the asset must have **a long-term holding period for the asset** (the owner must have held the asset for more than one year). Technically, Section 1231 assets include: * Depreciable personal property or real property used for productive use in a trade or business or for the production of income, * Timber, coal, and Iron * Livestock held for draft, breeding, dairy or sporting purposes, * Un-harvested crops on land used in business, and * Purchased intangible assets eligible for amortization (such as Goodwill). Section 1231 assets (depreciable property held longer than one year)is sometimes subject to recapture IF that property is sold at a gain. There are two types of recapture - **1245** (peronsalty items like patents, copyrights, PCs, desks, machines, trucks, etc) and **1250** (real estate items - buildings.structures attached to lands) Lands are never depreciated, so its not subjec to recapture. **1245 recapture is subject to the depreciation taken.** On the gain, the extent of Depreciation taken is subject to ordinary income rates, and the rest is taxed at (1231) capital rates. **1250 (real estate) -** first recognize any accelerated depreciation as ordinary income (any depreciation taken greater than SL), 25% straightline depreciation, remaining is 1231 taxed at capital rates. **Remember “1245 comes before 1250, P (peronslaty) comes before R (real estate)” also the 1250 gain has the special 25% tax rate in there for SL depreciation** * Section 1231 assets are potentially subject to 1245 or 1250 recapture. * Section 1245 depreciable tangible personalty property used in a trade or business or held for production of income is subject to recapture. * Depreciable real property used in a trade or business or held for the production of income is subject to 1250 recapture. when a TP disposes of depreciable real property (either 1245 or 1250) at a gain, the TP may have to recognize all or part of the gain as ordinary income under the deprecation recapture rules. Any reamined gain is a 1231 gain (preferential rates)

Answer 35

-most personal use assets and move investment assets are capital assets Section 1221 of the IRC defrines what is NOT a capital asset including: - inventory - depreciable property used in trade or biz (1231) - copyrights and creative works - accounts and notes receiveable “All assets are capital assets except ACID”

Answer 36

* assets that when sold, result in ordinary income to the owner of the asset * Some 1221 listed asets that are not capital assets are ordinary income assets: * -inventory * -accounts receivable * -creations in the hand of the creator * copyrights in the hands of the creator

Answer 37

allows taxpayers to recover the value of the assets used to purchase or aqcuire property

Answer 38

-amount paid in cash, debt obligations, other property, or services. Also includes amounts paid for sales tax, freight, installaation, excist taxes, legal and accounting fees, revenue stamps, recording fees and real estate taxes

Answer 39

-when property is acquired in an exchange, the newly acquired property will have a carry over basis if the property ix excnahged for property of equal value (no boot is paid) * if prop is exchanged for a more valuable asset (and thus boot is paid) the new asset wil have a carryover basis plus any boot aid * if opposite, (and boot is received) the new asset will havea carryover basis reduced by an boot received

Answer 40

Answer: Long term

Answer 41

General rule -donee's basis in the gifted property is same as donor's basis (carried over) **First exception:** FMV of gifted asset is less than the donor's basis (loss property). Double Basis Rule applies Gains - basis is still same as donor's Losses only - basis to the donee is the FMV of the property on date of gift If sold at later and the amount realized is b/w the FMV of the date of the gift and the adjusted basis of the donor, no gain/loss is recognized. **Second Exception:** when gift tax has been paid.If gift tax had been paid and an aset had appreciated in hands of the donor, then the portion of tax which is associated with cap appreciation is added to donor's basis to determining the donee's basis Formula: {(Net Appreciation in Value of Gift/Value of Taxable Gift) x Gift Tax Paid] Ex: Cathy rec'd gift from Darren on June 15 of this year (Darren had already transferred cash equal to annual exclusion to Cathy). The FMV of the gift on June 15 was $20K. Darren had a basis in the asset of $16K and paid gift tax of $800. Cathy's basis in the gifted property is now $16,160. [

Answer 42

-Determingin Loss on the Sale of Gifed Property * the basis of the property in the hands of the donee iw the lower of: * -the donor's basis, or * the FMV of the property at the time of the gift Holding Period: General rule: donee's holding period includes holding period of donor. Exception: if double basis asset (FMV of gift is less than the donor's basis) is sold for a loss, then the HP for donee starts on the date of the gift

Answer 43

transfers b/w spouses incident to divorce are treated the same as gifts - in other words, carryover basis applies. no gain or loss is recognized on a transfer bw spouses or former spouses incident to divorce (must occur within one year on date marriage legally ended).

Answer 44

Can only exclude if its used as your PRIMARY RESIDENCE for at least 2 of the last five years

Answer 45

- only affects transactions when there is a loss - tranferor's loss is forever lost, transferee takes asset with double basis rule (FMV for losses, transferor's basis for gains). Holding period = date of the sale Ex: Melanie purchased 100 shares of Lawncare inc. for $5,000 three years ago. Last week, she sold those shares to her sibling, Isaish, for $4,200. Isaish sells shares today for $4,300. Which of the following represents Isaidhs' sale? Answer:

Answer 46

* for stocks held 60 days or longer * get preferential tax treatment

Answer 47

* collectaibles are taxed at 28% * unrecaptured Sectioj 1250 gain (straight line depreciation) is taxed at 25% * Qualifying Small Biz Stock.

Answer 48

Gains must be realized before they are recognized for income tax purposes Realized = sold Recognized = taxed

Answer 49

Capital gains and losses are subject to special tax treatment

Answer 50

cash rec'd pluys FMV of property rec'd in the exchange, plus liabilites shed

Answer 51

- when debt is relieved - when money is “taken out of” an investmetn as a loan when they individual is not personally liable for the money * net gifts ( transfers where donee agrees to pay gift tax In general, if you have cancellation of debt income because your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt is taxable and you must report the canceled debt on your tax return for the year the cancellation occurs. The canceled debt isn't taxable, however, if the law specifically allows you to exclude it from gross income. These specific exclusions will be discussed later. (IRS website)

Answer 52

- like-kind exchanges of real property held for productive use or investment - certain exchanges where cash received is quickly reinvested in similar property - transfer of property to controlled corporation - exchange for plans of coporate reorg - transfer to, or distributions from, partnerships * Losses generated on the sale or exchange of property that is used for personal purposes is disallowed for income tax purposes. Results in permanent loss of capital for tax payer. * Loses are wash sales are disallowed (occurs when TP sells securities at a loss and acquires substantially similar securities with 30days before or after the date of the loss sale. * * Exam Tip: Index fund for index fund - wash sale rule applies. * Index Fund for Managed Large cap fund - wash sale rules do not apply

Answer 53

* Loses are wash sales are disallowed (occurs when TP sells securities at a loss and acquires substantially similar securities with 30days before or after the date of the loss sale. * * Exam Tip: Index fund for index fund - wash sale rule applies. * Index Fund for Managed Large cap fund - wash sale rules do not apply * If there is a wash sale, the entire loss is disallowed. But the new basis will be the disallowed loss + mkt price stock was bought again at * Wash sale rules don't apply to commodity futures contracts and foreign currencies

Answer 54

you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. [_Publication 523, Selling Your Home_](https://www.irs.gov/publications/p523) provides rules and worksheets. [_Topic No. 409_](https://www.irs.gov/taxtopics/tc409) covers general capital gain and loss information. **Qualifying for the Exclusion** In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You're eligible for the exclusion if you have **owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale**. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you're not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Refer to [_Publication 523_](https://www.irs.gov/publications/p523) for the complete eligibility requirements, limitations on the exclusion amount, and exceptions to the two-year rule. Reduced exlucsion may be availible even if TP didn't meet the ownership/used rule: * change in employment (qualifed move for you and your spouse) * change of health * other unforeseen circumstances if reduced exclusion is available, the amount excluded is based on the period of ownership between the last sale and the current sale (pro rate). (If joint owners owned for 18 months calc is (18/24 = .75 and then .75 x 500K = 375K) \*only qualified use qualies for exclusion - if you rent it out, you must do a calculation to exclude that from the exlusion. Pg./ 15 of book)

Answer 55

Answer: became completely worthless.

Answer 56

* gains and losses from capital asset transactions must be netted against each other by holding period * if excess losses result, they are shifted to category carrying teh highest tax rate * net capital losses are FOR AGI to the extend of $3K/yr. (excess losses are carried over to the next yr indefinetly * Can I use passive losses to offset capital gains? Passive losses on the property that you still have are not "unsuspended" until you dispose of the property. You can use these losses to offset other passive income (i.e. Schedule E income, perhaps some Partnership income), but **you cannot use it to offset the capital gain**.

Answer 57

Section 1244: Single TP can deduct $50K ($100K if MFJ) must be small biz coporation (less than $1 mln in total capital contributions plus paid-in capital) Ex: In Yr 1, Sam invests in XYZ Corp, stock costing $150K. (Total XYZ stock outstanding is $800K). In Yr. 1, Sam sells all the stock for $65K. The stock is a Section 1244 stock. Sam has following tax consequences: $50K ordinary loss in YR 1. $35K ST Capital loss ($3K deductible in YR 1) $32K ST capital loss carry forward

Answer 58

ONLY APPLIES TO LOSSES. Related parties include: siblings, lineal descendants, ancestors, spouse does not include: aunts/uncles, cousins, in-laws. Losses disallowed reduce gains on subsequent disposition to an unrelated third party\ Ex: Colin sells to his son Briscoe 100 shares of XYZ stock for $8K. Collin's basis was $10K. What are taxable consequences? * Colin cannot recognize a realized loss of $2K * Briscoes basis is $10K for gains and $8K for losses. Exam Tip: Never gift or sell an asset to a related party when the donor's basis is greater than the FMV of the asset

Answer 59

Bill has no gain or loss, Jack has no gain or loss. This is Section 267.If the FMV is below the transerors's basis, the transferees basis is FMV for losses and the transferors basis for gains. Jack had no gain or loss because he had a dual basis and sold the stock at a price between the gain and loss basis.

Answer 60

- gains from sale of 1231 asset are LTCG for tax purposes - losses from sale of 1231 asset are ORDINARY LOSSES for income tax purposes However, C Corps pay same rate of tax on ordinary income and cap gains. So generation of a 1231 gain will not restult in a tax benefit for the corporation.

Answer 61

If TP disposes of depreciable prop at a gain, TP may have to treat all or some of the gain as ordinary income due to depre. recapture Sole purpose of deprecation recapture is to ensure that, when an asset is sold, the TP receives his initial capital capital back tax free - no more, no less. Section 1231 assets (depreciable property held longer than one year)is sometimes subject to recapture IF that property is sold at a gain. There are two types of recapture - **1245** (peronsalty items like patents, copyrights, PCs, desks, equipment, machines, trucks, etc) and **1250** (real estate items - buildings. structures attached to lands) Lands are never depreciated, so its not subject to recapture. **1245 recapture is subject to the depreciation taken.** On the gain, the extent of Depreciation taken is subject to ordinary income rates, and the rest is taxed at (1231) capital rates. If propety sold for amount equal to adjusted basis, no gain/loss realized, no depreciation recapture. Thus no tax consequences If sold at a loss, ordinary loss\*\*\* and no deprecation recapture. Exam Tip: THe only way to have a Section 1231 gain on a Section 1245 property is to sell it for more than it was originally purchased for. Exam Tip: Any sale amount in excess of the original purchase prices of a Section 1245 asset is a Section 1231 gain. Ex: Roscoe sells equipment used in his business for $18K. He had originaly purchased the equipment for $15K and had taken $7K of deprecation. What is the Section 1231 gain for Roscoe? Answer: $3K. 7k = ordinary income (section 1245 recap) 3k = 1231 gain **1250 (real estate) -** first recognize any accelerated depreciation as ordinary income (any depreciation taken greater than SL), 25% straightline depreciation, remaining is 1231 taxed at capital rates. \*currently all depreciation on real estate is taken on a straighe line basis. **Remember “1245 comes before 1250, P (peronslaty) comes before R (real estate)” also the 1250 gain has the special 25% tax rate in there for SL depreciation** * Section 1231 assets are potentially subject to 1245 or 1250 recapture. * Section 1245 depreciable tangible personalty property used in a trade or business or held for production of income is subject to recapture. * Depreciable real property used in a trade or business or held for the production of income is subject to 1250 recapture. Note: land buildings are NOT 1245 property \*All 1245 and 1250 losses are ordinary losses

Answer 62

Nonrecognition Transactions * “realized but not recognized” income * like-kind exchanges * principal residence * investement real estae * life insurance policies Nontaxable vs. Tax-Free Transacations * nontaxable transaction: realied gain/loss not currently recognized, recognition is postponed to a future date (carryover basis), holding period for new asset, depreciation recapture * Tax Free Transaction: nonrecognition of gain is premanent

Answer 63

* 1031 Exchange.- provides for deferred taxation of gains associated with certain exchange trasnactions. Only real prop transacation will receive 1031 treatment. *

Answer 64

The IRS defines a dependent as **a qualifying child under age 19 (or under 24 if a full-time student) or a qualifying relative who makes less than $4,300 a year (tax year 2021)**. A qualifying dependent may have a job, but you must provide more than half of their annual support

Answer 65

If you can be claimed as a dependent on another person's tax return, your 2022 standard deduction is limited to the greater of **$1,150 or your earned income plus $400** (again, the total can't be more than the basic standard deduction for your filing status). If a child has earned income, their standard deduction is the greater of earned income plus $400 (not to exceed the single tax filers standard deduction amount) or $1,150. If the earned income plus $400 is greater than $1,150 and the child has unearned income, up to $1,150 of the standard deduction can apply to the unearned income, and the remainder applies to the earned income * The **net unearned income** of a child under the age of 19 or a full-time student under the age of 24 may be subject to income tax at the parent's tax rates. * The amount of unearned income subject to tax at the parent's rate is called net unearned income (NUI). * NUI is equal to unearned income less the sum of $2,300. ( NUI must exceed $2,300 to have a taxable consequence for the parents) * The first $2,300 for 2022 of unearned income of a child is not taxed at the parent's rate. If it is taxed, it will be at the child’s rate. Ex: Steven, age 13 has earned income = $15,000 and $13,000 unearned income. How much will be taxed at parent's rate? Kid’s rate? Answer: Taxable amount = $15,000 + $13,000 – $12,950 (2022) = **$15,050** Parent's Rate = $13,000 – $2,300 = **$10,700** (under **SECURE Act 2019** will be taxed at the parents tax rate) Kid’s Rate = $15,000 – $11,800 = **$3,200 plus $1,150 from unearned income (2300 less 1150) = $4,350** **(Note: 11800 comes from the STD less the $1,150 that will be applied to unearned income of 2,300)**

Answer 66

If you can be claimed as a dependent on another person's tax return, your 2022 standard deduction is limited to the greater of $1,150 or your earned income plus $400 (again, the total can't be more than the basic standard deduction for your filing status).

Answer 67

Solution: The correct answer is B. No income shifting occurs when the income is nontaxable (municipals). Choice A is incorrect. The child may be under age 24 and a full time student and still be subject to the Kiddie Tax. Choice C is incorrect. Unearned income must exceed $2,300. Choice D is incorrect. Unless the parent(s) elect to include the unearned income on their own return, the child will have to file a return.

Answer 68

**Annuities - taking distributions** **_Before Scheduled Start Date_ (take out payment before we annuitize)** **\*Key: remember, this is not as beneficial tax wise so we have the two rules** * **Issued Pre-8**2 FIFO (First In First Out) * FIFO looks at basis first. Ex: assume $50K in basis with earnings/growth of $100K. (Total balance of $150K. Distribution of $75K = 25K would be taxable to me * **Issued Post-82** LIFO (Last In First Out) * LIFO looks at earnings first . Ex: assume $50K in basis with earnings/growth of $100K. (Total balance of $150K. Distribution of $75K = 75K would be taxable to me * May be subject to 10% early withdrawal penalty. **_On/After Annuitization_** The exclusion ratio calculates how much of each annuity payment should be excluded from taxable income * Exclusion Ratio/Exclusion Amt = (Investment/Exp return) * Exlucsion Ratio applies until the term runs out (if term is for 15 years and he lives longer, the entire payment is taxable after that 15th year) \*\*If client fails to live untli end of term, they can eligible to receive a deduction FROM AGI that represnets the rmaining principle balance. (principal - (exluclded value x years lived). Pg. 57 Example: Thomas invested $100,000 in an annuity contract. Many years later, he annuitized the contract. The insurance company agreed to pay him $1,388.89 per month for 15 years. His expected return is $250,000.20 (15 years x 12 months x $1,388.89 per month). The exclusion ratio is 0.40 ($100,000/$250,000) and the excluded amount is $555.56 for each payment received.

Answer 69

Only employer can deduct life insurance premiums, EE have to include prem. in TI AFTER $50K in benefits. An employer can deduct the total cost of Group Term Insurance provided to an employee. Up to $50,000 (face or death benefit amount) of group term life insurance for each employee may be excluded by the employee Ex: Edward’s employer provides him with $80,000 of group term life insurance for which Edward pays none of the premiums. Edward is 56 years old at the end of the year. He can exclude the cost of the first $50,000 of coverage. He must include $154.80 ($30 thousand x $0.43 per thousand per month x 12 months) in his gross income. This amount is generally reported as part of the employee’s W-2 income. If Edward pays any amount toward the cost of the insurance coverage, the taxable amount will be reduced by the amount of the employee payment. \*.43 comes from the imputed income premium table where for age 55-59 the taxable amount is .43/1,000 in coverage

Answer 70

* Rate is 15.3%, base is net self-employment income, and deduction (FOR AGI) is allowed for 1/2 of self-employment tax. * **The IRS allows you to deduct 50% of your total self-employment tax on your tax return. (you can deduct 50% of the payroll taxes you paid on your TR)** **SE Tax: 12.4 % OASDI, 2.9% Medicare** **Remember there is an additional 0.9% medicare tax for high income self employed taxpayers on** A 0.9% Additional Medicare Tax applies to Medicare wages, self-employment income, and railroad retirement (RRTA) compensation that exceed the following threshold amounts based on filing status: * $250,000 for married filing jointly; * $125,000 for married filing separately; and * $200,000 for all other taxpayers. Example of the Self-Employment Tax Contrary to what you may think, individuals typically pay self-employment tax on 92.35% of their net earnings—not on 100% of their full earnings.¹ Here's how it works. Let's say an individual runs a human resource consulting business and calculates their total net income for 2021 as $200,000 after [_business expenses_](https://www.investopedia.com/terms/b/businessexpenses.asp) are deducted. Their self-employment tax will be assessed on 92.35% of this amount $200,000 for a total of $184,700. This amount is above the capped limit for the Social Security portion of the self-employment tax. Therefore, Robin's self-employment tax bill will be $23,063.50. We arrive at this figure as: > *($142,800 x 12.4%) + ($184,700 x 2.9%)* > *$17,707.20 + $5,356.30* When filing their 2021 income tax return, they can claim an [_above-the-line deduction_](https://www.investopedia.com/terms/a/above-the-line-deduction.asp) for half of their self-employment tax, or $23,063.50 ÷ 2 = $11,531.75. In effect, they get a deduction on the "employer" portion (6.2% Social Security + 1.45% Medicare = 7.65%) of their self-employment tax.

Answer 71

* An individual is liable for Additional Medicare Tax o**f .9%** if the individual’s wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual’s filing status: **Filing Status** **Threshold Amount** Married filing jointly$250,000Married filing separate$125,000Single$200,000Head of household (with qualifying person)$200,000Qualifying widow(er) with dependent child$200,000 * Additional Medicar Tax on investment income of **3.8%** according to the same table above. In general, net investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, and non-qualified annuities. The Net Investment Income Tax is separate from the Additional Medicare Tax, which also went into effect on January 1, 2013. You may be subject to both taxes, but not on the same type of income. The 0.9 percent Additional Medicare Tax applies to individuals’ wages, compensation, and self-employment income over certain thresholds, but it does not apply to income items included in Net Investment Income.

Answer 72

Remember QBI is a deduction from AGI (20% deduction) The qualified business income deduction (QBI) is a tax deduction that **allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes**. In general, total taxable income in 2021 must be under $164,900 for single filers or $329,800 for joint filers to qualify. Self-employment tax (SE) is added to your income tax, **after** your income tax is calculated. [https://kb.drakesoftware.com/Site/Browse/15919/QBI-Deduction-Frequently-Asked-Questions?Keywords=ubi](https://kb.drakesoftware.com/Site/Browse/15919/QBI-Deduction-Frequently-Asked-Questions?Keywords=ubi) If you are self-employed, only **92.35% of your earnings are subject to Social Security and Medicare taxes**. So if you report $100,000 in income, you will only pay FICA (Federal Insurance Contributions Act) tax on $92,350 of it. This is referred to as the “self-employed multiplier of .9235.” Example of the Self-Employment Tax Contrary to what you may think, individuals typically pay self-employment tax on 92.35% of their net earnings—not on 100% of their full earnings.¹ Here's how it works. Let's say an individual runs a human resource consulting business and calculates their total net income for 2021 as $200,000 after [_business expenses_](https://www.investopedia.com/terms/b/businessexpenses.asp) are deducted. Their self-employment tax will be assessed on 92.35% of this amount $200,000 for a total of $184,700. This amount is above the capped limit for the Social Security portion of the self-employment tax. Therefore, Robin's self-employment tax bill will be $23,063.50. We arrive at this figure as: > *($142,800 x 12.4%) + ($184,700 x 2.9%)* > *$17,707.20 + $5,356.30* When filing their 2021 income tax return, they can claim an [_above-the-line deduction_](https://www.investopedia.com/terms/a/above-the-line-deduction.asp) for half of their self-employment tax, or $23,063.50 ÷ 2 = $11,531.75. In effect, they get a deduction on the "employer" portion (6.2% Social Security + 1.45% Medicare = 7.65%) of their self-employment tax.

Answer 73

**Property (ad valorem) Taxes** * Property taxes are based on the value of the asset and are generally on realty or personalty. **Excise Taxes** * Restricted to specific items * Examples: gasoline, tobacco, liquor (discourages bad behavior) * Hotel occupancy tax * Rental car surcharge * Tax is levied on visitors who cannot vote and used to fund special projects. General Sales Taxes * Currently the jurisdiction of states and localities. **Severance Taxes** * Tax on natural resources extracted. * Important revenue source for states rich in natural resources * Oil, natural gas, etc. * * **Death Taxes - Federal Estate Tax**

Answer 74

* **FICA taxes** * Paid by both an employee and employer. * In 2022, Social Security rate for employees is 6.2% on a maximum of $147,000 of wages (and a matching 6.2% for employers). In addition, the employee Medicare rate is 1.45% on all wages (also a matching 1.45% for employers). * There is an excess Medicare tax of 0.9% on income over $200,000 ($250,000 MFJ). * **Self-employment tax serves as FICA tax for self-employed taxpayers.** Rate is 15.3%, base is net self-employment income, and deduction (FOR AGI) is allowed for 1/2 of self-employment tax. * **FUTA (unemployment) taxes** * Provides funds for state unemployment benefits. * Is administered jointly by states & Fed govt. * Credit is allowed (up to 5.4%) for FUTA paid to the state. * The tax is only paid by employer.

Answer 75

Failure to to file - five % per month up to 25% (F) Failure to pay - .5% per month (up to 25%) FTF is reduced by FTP Round up on months (45 days late = 2 months)

Answer 76

Statue of Limitations * Later of: 3 years form due date of return or filing date for IRS audit, whichever is later and 10 years SOL for IRS to collect tax * 6 years if there was a material omission (25% of income not stated) * SOL does not apply to a false of fraduelntly filed TR. Unlimited SOL. Only an ACE (Attorney, CPA or enolled agent) can represent a client during an IRS audit

Answer 77

Which does not allow you to appeal the decison? Answer: Small Claims Division Does not require the TP to pay the tax before filing suit.. Answer: Small Claims Division, Tax Court Which allows a trial by jury? U.S. District Court **US Tax Court** - no prepayment of tax is necessary to bring claim to U.S Tax Court. Trial by jury is not available. Appeals are available **Small Tax Division of US Tax Court** case dis for deficiencies under $50K (no appeal rights). **U.S. Court of Federals** claims - sits only in Washington D.C. Only hears claims against the U.S. Tax deficiencies must be paid. Appeals are to U.S\> Court of appea.s US District Court - tax deficiencies must be paid. Only court that allows a jury trial US Court of Appeals- 12 Circuit Court through the U.S.

Answer 78

Cash - recognize income when it is RECIEVED. Most individuals and some businesses. Constuction receipt doctrine: when income is readily availbable to thte TP, and that income is not subject to substantial limitations or restrictions, that income is deemed rec'd and should be taxed. Accural - recognized income when it is EARNED.

Answer 79

* Taxable Year - usually 12 month calendar period during the year. Most TP use this * Fiscal Year - can be elected if adequate records are maintained. File Form 1128.

Answer 80

* **Single** * **MFJ** * TP and his/her spouse must be married on the last day of the year. Treated as if they were married the whole year. * If TP spouse died during the yr and they did not remarry, TP can still file a joint return for that year of death * the year when your divorce decree becomes final that you lose the option to file as married joint or married separate. In other words, your marital status as of December 31 of each year controls your filing status for that entire year. * **MFS** * **HOH** * individual who are unmarried (or considered unmarried - abandoned by spouse) as of last day of taxable year. * must have paid more than half the costs of keeping up his home, TP home was main home to children for more than half the year and the TP is eligible ot claim a credit children * **Qualifying Widow with Qualified Child** * can file for two years following death of spouse * child must live in house the whole year * cannot be remarried

Answer 81

**This deduction has been suspended for the years 2018-2025.** The dependency exemption continues to be indexed each year for various income tests. **In 2022, the amount is $4,400. (see below)** What Are the Tests for a Qualifying Relative? Likewise, a [_qualifying relative_](https://www.investopedia.com/terms/q/qualifying-relative.asp) isn't simply someone to whom you're related. Instead, the person must satisfy four tests to be a qualifying relative:⁶ 1. **Not a qualifying child test**. To meet this test, the person can't be your qualifying child or another taxpayer's qualifying child. 2. **Member of household or relationship test**. The person must live with you all year as a household member. Otherwise, they must be related to you as your child, stepchild, foster child, or a descendent of any of them; your sibling, including half-siblings and stepsiblings; your parent, stepparent, grandparent, or another direct ancestor (but not a foster parent); your aunt, uncle, niece, or nephew; or your daughter-in-law, son-in-law, mother-in-law, father-in-law, sister-in-law, or brother-in-law.⁶ 3. **Gross income test**. The person's gross income for the year must be less than $4,300 ($4,400 for 2022). An exception applies if the person is disabled and has income from a sheltered workshop. 4. **Support test**. You must provide more than half of the person's total support for the year.

Answer 82

1. **Not a qualifying child test**. To meet this test, the person can't be your qualifying child or another taxpayer's qualifying child. 2. **Member of household or relationship test**. The person must live with you all year as a household member. Otherwise, they must be related to you as your child, stepchild, foster child, or a descendent of any of them; your sibling, including half-siblings and stepsiblings; your parent, stepparent, grandparent, or another direct ancestor (but not a foster parent); your aunt, uncle, niece, or nephew; or your daughter-in-law, son-in-law, mother-in-law, father-in-law, sister-in-law, or brother-in-law.⁶ 3. **Gross income test**. The person's gross income for the year must be less than $4,300 ($4,400 for 2022). An exception applies if the person is disabled and has income from a sheltered workshop. 4. **Support test**. You must provide more than half of the person's total support for the year. 5. **Joint return.** The person must not file a joint return for the year (unless they file only to claim a refund of income tax withheld or estimated tax paid). 6. Must be U.S\> citizen or resident

Answer 83

Someone can't simply be a kid to be considered a qualifying child. According to the IRS, a person must satisfy ALL five tests to be your qualifying child:⁵ 1. **Relationship test.** To meet this test, the person must be your child or stepchild (whether by blood or adoption), foster child, sibling or stepsibling, or a descendant of any of them. Foster children count 2. **Age test.** The person must be (a) under age 19 at the end of the tax year, (b) under 24 if they're a full-time student and younger than you, **or** (c) any age if they're permanently and totally disabled. 3. **Residency test.** The person must share a principal residence with you for more than half the tax year. Exceptions apply for circumstances like temporary absences (e.g., for illness, education, or vacation) or the birth or death of a child during the year. 4. **Support test.** The person must provide less than half of their own support for the year. 5. **Joint return.** The person must not file a joint return for the year (unless they file only to claim a refund of income tax withheld or estimated tax paid).

Answer 84

`1\*additional standard deduction amounts: **_TP age 65 OR_ _older or blind are entitled to an increased SD_** $1,750 for individuals not married and not filing as qualifying widower $1,400 for all other TP s3aew04 **_TP who are blind must file to receive the additional SD. IRS has age on file, but not blindness._** **_Ex: Albert is single, blind and Age 67. His SD is $16,450._** Ex: Martha is 72 years old and can be claimed as a dependent by her daughter. * She has $3,000 of interest income during the current year. * Her basic standard deduction is $1,150. * Her total standard deduction is $2,900 ($1,150 basic standard deduction + $1,750 additional standard deduction for age).

Answer 85

For 2022, the standard deduction amount for an individual who may be claimed as a dependent by another taxpayer **cannot exceed the _greater_ of (1) $1,150 or (2) the sum of $400 plus the individual's earned income** (not to exceed the regular standard deduction amount Ex: Martha is 72 years old and can be claimed as a dependent by her daughter. * She has $3,000 of interest income during the current year. * Her basic standard deduction is $1,150. * Her total standard deduction is $2,900 ($1,150 basic standard deduction + $1,750 additional standard deduction for age). What is her taxable income? $3,000 Interest Income (1,150) Less Basic Standard Deduction (1,750) Less Additional Standard Deduction (0) Less Personal Exemption **$100** **Taxable Income**

Answer 86

- MFS when other spouse itemized deductions. If spouse itemizes, you must itemize too. - nonresident aliens - indigvidual filing returns for TY of less than 12 months

Answer 87

- MFS when other spouse itemized deductions. If spouse itemizes, you must itemize too. - nonresident aliens - indigvidual filing returns for TY of less than 12 months

Answer 88

(1) have a lower SD amount AND (2) is retuiwed to file a TR based on different gross income tests used by TPs who are not dependents. Personal and depdencey exemptions were repealed for 2018 through 2025. Replaced by the Child Tax Credit and Child Tax Credit (CTC) The [_child tax credit (CTC)_](https://www.investopedia.com/terms/c/childtaxcredit.asp) is a tax benefit granted to taxpayers for each qualifying dependent child. The [_American Rescue Plan_](https://www.investopedia.com/american-rescue-plan-definition-5095694) increased the child tax credit for 2021 from $2,000. It has probably reverted back to $,2000. Starting in 2018, under the new tax package passed by the Republicans at the end of 2017, known as the [Tax Cuts and Jobs Act](https://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT-466.pdf), the personal exemption is completely eliminated. However, the standard deduction is nearly doubled, the [child tax credit](https://thismatter.com/money/tax/tax-credits/child-tax-credit.htm) is doubled to $2,000 (half is refunadable)

Answer 89

Payment of Estimated Taxes **Who Pays Quarterly Taxes?** Freelancers, independent contractors and small-business owners who expect to **owe** ***at least*** **$1,000 in taxes** from their self-employed income are required by the IRS to make estimated tax payments. Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If the amount of income tax withheld from your salary or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, you may have to make estimated tax payments. You don’t have to pay estimated tax for the current year if you **meet all three** of the following conditions. * **You had no tax liability for the prior year** * **You were a U.S. citizen or resident for the whole year** * **Your prior tax year covered a 12-month period** You had no tax liability for the prior year if your total tax was zero or you didn’t have to file an income tax return. -If TP is required to estimate, payments will be due quarterly on April 15th, June 15th, September 15th, and January 15th of the following year. If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return. If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. **Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller**. There are special rules for farmers, fishermen, and certain higher income taxpayers. Please refer to [_Publication 505, Tax Withholding and Estimated Tax_](https://www.irs.gov/publications/p505)_,_ for additional information

Answer 90

Answer: net

Answer 91

True. For 2022 the wage limit for Social security is $142,800 and there is no cap for Medicare. Medicare (1.45%) can be applied to all wages. If you are self-employed, remember these rules apply too when you go to figure out FICA taxes Example of the Self-Employment Tax Contrary to what you may think, individuals typically pay self-employment tax on 92.35% of their net earnings—not on 100% of their full earnings.¹ Here's how it works. Let's say an individual runs a human resource consulting business and calculates their total net income for 2021 as $200,000 after [_business expenses_](https://www.investopedia.com/terms/b/businessexpenses.asp) are deducted. Their self-employment tax will be assessed on 92.35% of this amount $200,000 for a total of $184,700. This amount is above the capped limit for the Social Security portion of the self-employment tax. Therefore, Robin's self-employment tax bill will be $23,063.50. We arrive at this figure as: > *($142,800 x 12.4%) + ($184,700 x 2.9%)* > *$17,707.20 + $5,356.30* When filing their 2021 income tax return, they can claim an [_above-the-line deduction_](https://www.investopedia.com/terms/a/above-the-line-deduction.asp) for half of their self-employment tax, or $23,063.50 ÷ 2 = $11,531.75. In effect, they get a deduction on the "employer" portion (6.2% Social Security + 1.45% Medicare = 7.65%) of their self-employment tax.

Answer 92

“all income from whatever source derived” Includes both earned and unearned income, regardles of whether or not it is taxable incl. annuity payments,comp for services, rents/royalties,pensions, discharge of indebtedness, IRD, gross income dervied from business, income from life insurance and endowment contgracts Answer: Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, **aren't includable in gross income** and you don't have to report them. However, any interest you receive is taxable and you should report it as interest received

Answer 93

Generally taxable to the beneficiary (gets k-1), unless the income is distributed in which case it will be taxable to the trust or estate

Answer 94

one half of he earnings of each spouse is considered owned by the other spouse.

Answer 95

**Deductions Not Subject to the 2% Floor** (STILL Deductible): * Gambling losses (to the extent of gambling income), * Deduction for estate taxes imposed on IRD (income in respect of a decedent assets), * Loss on the disposition of an annuity contract, * Repayments of income (such as repayments of Social Security income when the taxpayer fails the earnings test). **Deductions Subject to the 2% Floor** (NOT Deductible Under TCJA after 12/31/17): * Unreimbursed employee business expenses (travel, journals, uniforms, union dues). * Appraisal fees. * Hobby expenses (to the extent of hobby income). * Investment expenses (e.g., fees). * Tax advice and preparation. * Losses on terminated IRAs.

Answer 96

* Always a below the line (FROM AGI) deduction * Several are subject to AGI floors/ceilings Medical Expenses Deductible * Prescription Drugs * Expenses Related to Diagnosis, Cure, & Treatment * Health Insurance Premiums (after tax payouts) * Capital Expenditures * Nursing Home and Special Schools * Travel and Lodging Nondeductible * Elective Cosmetic Surgery * Dance Lessons * Health Club Dues * Marijuana * Over-the-Counter Drugs * General Health Items (e.g., vitamins) Can deduct their total qualified unreimbursed medical care expenses that exceed 7.5% of the AGI if they itemize * If reimbursed in the **same year** as the expense is paid: * Reimbursement offsets medical expense. * Amount deductible is excess of expenses over reimbursement. * If reimbursed in the year after the medical expenses were paid: * Reimbursement is income only to extent medical deduction was taken by taxpayer (tax benefit rule).

Answer 97

Taxability based on TP's MAGI (AGI not included SS benefits plus tax exempt int, int earned on savings bonds used for higher head, income earned in foreign country/PR \*memorize hurdle rates * **MAGI + one half SS benefit** = below first hurdle, not taxable * **MAGI + one-half SS benefit** = b/w two hurdles * lesser of: * 50% of ss benefit OR * 50% [MAGI + .50 (SS Benefits) - Hurdle 1] * **Greater than second hurdle** = leser of 85% of SS benefit OR * 85%[MAGI +.5(SS benfit) - Hurdle 2], plus lesser of * $6K for MFJ or $4,500 for all other TP, or * taxable amount under the 50% formula and only considering hurdle 1 Ex: Uli and Violet are married and have $30K of income. In addition the have SS benefits of $20K. What amount of their SS benefit must be included in their taxable income? Answer: $4K. Lesser of: 50% of SS benefit OR **50% [30,000 +.5(20,000) - $32,000] = $4,000** **Ex: Yanni and Zelda, a married couple have income of $45K and social security benefits of $20K. What amount of their benefits must be included in their taxable income?** **Answer: $15,350** **Lesser of:** **85% of benefits = $17K:** **Or** **.85[MAGI +.5(20,000) - 44,000] = $9,350 plus lesser of:** * $6K MFJ OR * .5 (45K + 10K -32000) = $11,500 Must include $15,350 in TI

Answer 98

* **Gifts and Inheritances -** exclusion only applies to property, not income that is later generated on that property Elements of a gift: - must be voluntary transfer - must be competent to make the gift - donee must be capable of receiving the gift - donee must take delivery amounts transferd by by an employer to an employee will not he treated as gifts Property receive by gift or bequest is not taxed **Life Insurance Proceeds** Life insurance proceeds paid on account of death of the insured are not included in the gross income of the beneficiary \*if rec'd in installments, the interest component would be taxable to the bene if insurance poliocy is cashed in prior to insured's death, owner of policy must recognize received in excess of premiums paid Losses are not deductible The transfer-for-value rule stipulates that if a life insurance policy (or any interest in that policy) is transferred for something of value (e.g., money, property, etc.), **a portion of the death benefit is subject to taxation as ordinary income** amounts rec'd as part of a viatical settlement (sale of policy by terminally ill policy owner) are excluded from gross income * Modified Endowment Contracts (MECs) are not treated the same as other insurance policies MEC is a life insurance contract that fails to meet the 7 pay test A modified endowment contract (MEC) is **a designation given to cash value life insurance contracts that have exceeded legal tax limits**. When the IRS relabels your life insurance policy as an MEC, it removes the tax benefits of withdrawals you can make from the policy Loans/withdrawls from MECs are subjecto to LIFO treatment (basis recovered last) **Scholarships** **Gross income does not include any amount rec'd as a qualified scholarship by an individual who is a candidate for a degree at an education organization.** **Gain on Sale of Personal Residence** Gross income does not include gain (up to $250K) from the sale or exchange or property if property has been owned and used by the TP as the TP principal residence for at least two of the last five years For MFJ the exclusion is increased to $500K Reduced exclusion may be available if sale is due to: change in employment, change of health, other unforeseen cirumcusatnces. If exclusion is available amount excluded is pro rata of (250K/500K joint) between last sale and current sale of house **Distributions from Roth IRA and Roth 401k/403b Plans** if qualified, are tax-exempt and are not included in gross income Qualified Distribution = account held at least 5 years AND distribution must be made on account of a first time home purchase, disability, death or on/after age 59 ½. **Compensation for Injuries' and Sickness** -workers comp, compensatory damages rec'd due to physical injuries or sickness, payments from accident or health insurance that is personally owned by the TP \*\*only compensatory damages due to Bodily Harm are excluded from GI; if slander/libel they ARE INncluded in GI punitive damages are NOT excludable from income. Punitive damages in Texas are awarded for conduct constituting malice or gross negligence damages from emotional distress - ARE included in gross income unless damages are attributable to physical injury or sickness Employer Sponsored Accident and Health Plans Medical - contributions by an employer to an accident or health plan to provide comp are excluded from gross income Gross Term Life Insurance - premiums are deductble for employer, $50K and above in coverage is taxable to the EE **Section 79 Requirements** * death benefit is excluded from federal income tax when it is provided to a group of employees thjrough a policy carried by the employer **Meals and Lodging** Cost of meals and lodging are not included in the employee's gross income if they are for convenience of employer and on employer's business premises Other Employee Fringe Benefits **-Dependent Care.** Up to $5K of dependec care costs paid for by EE can be excluded from GI **athletic facilities** - use of on site athletic facilities are excludable from GI **EE provided education loan assistance** - up to $5,250/yr. is excluded from GI **Adoption Assistance programs** - EE expense paid by ER are excludable from GI (limited to 14K and MAGI phase out) **Cafeteria plans** - allows employees to choose between cash and certain non-taxable benefits. If cash is chosen, amount rec'd is taxable. If nontaaxable benfits are chosen, benefit remains untaxable **Classes of non-taxable EE benefits** - non taxable if ER incurs no substanial additional cos tin providing the service. Qualified EE discounts (nontaxable) can't exceed 20% on services de minimis fringe benefits (so small that accounting for them is impractical Qualified transportation fringes - commuter/transit passes **qualified moving expense reimbursement** - are no longer excluded from an EE's gross income (unless you're in armed forces) Foreign Earned Income - to claim income exclusion ($112K for 2022) you must have foreign earned income, your tax hjome must be in a foreign country and you must be a u.s. citizen who is a bona fide resident of another country for at least one tax year, physicallt present in foreign country for at least 330 full days out of year. Interest on Certain State and Local Government Obligations int on certain state and local govt obligation is exempt under Section 103 **Discharge of Indebtedness** when a creditor cancels a debt, the discharge creates income for the debtor

Answer 99

Answer: C. Gift loans do not qualify for the annual exclusion. Answer B is incorrect, loans of less than $10K are exempt from both income and gift tax consequences. Answer D is incorrect because whether interest is imputed on this loan on this loan is based on Avril's level or unearned income, not earned income.

Answer 100

below market returns apply to term or demand loans that are gift loans, or tax avoidance loans. * have special tax treatment - requires lender to impute the interest income that would have been earned had the lender made a bona fide interest-bearing market loan (called **phantom income**) * -lender is considered to have made a gift to the borrower in the amt of the imputed int * amt lender (donor) must impute as income for income tax purposes = amount of gift from the donor to the donee (borrower)

Answer 101

To satisfy the Safe Harbor requirements, the plan must commit to make a nonelective contribution of at least 3% to all eligible employees regardless of whether or not they elect to make deferrals under the plan. These contributions must be immediately 100% vested. Such a Safe Harbor plan is exempt from the ADP test. It will also be exempt from the Top-Heavy test if no employer contributions other than safe harbor nonelective contributions are made for the applicable plan year.

Answer 102

Answer: $275K. Onlyt compensatory damages for BODILY INJURY are excludable from gross income. Compensatory damanges without bodliy injury are includedable as are punitive damages

Answer 103

* Alimony paid * Alimony received under an Agreement dated after 12/31/18 is not deductible by the payor, nor includable by the payee. * , Contributions to Traditional IRAs, pension, profit sharing plans, annuity plans * Charitable contributions of cash to qualified charities ($300 or $600 MFJ)\* * **Interest paid on student loans subject to limitations** * **½ self employment tax** * **trade or business expenses** * Rental or royalty income expenses * Losses from the sale of business property * Qualified moving expenses * Suspended for years 2018-2025 * Only deductible for Armed Forces moving to a permanent post. * Self Employed Health Insurance and Retirement contributions * health savings accounts \* TCDTR Act of 2020 for taxpayers that do not itemize in tax years 2020 and 2021

Answer 104

Determine if the following are included or excluded from income. Wages INCLUDED Unemployment Compensation (Generally) INCLUDED Life Insurance Proceeds (Generally) EXCLUDED Damages for Slander INCLUDED Gift Received EXCLUDED Child Support Received EXCLUDED Alimony Received INCLUDED for contracts dated on or prior to 12/31/2018 EXCLUDED for contracts dated after 12/31/2018 Municipal Bond Interest EXCLUDED

Answer 105

In order to be deductible, must be: ordinary necessary reasonable incurred in conduct of business

Answer 106

alimony rec'd is longer income to payee nor deductible by payor for divorce decrees written or modified after 12.31.2018.

Answer 107

- education expenses (to maintain or improve existing skill - business gifts: limited to $25 each plus wrapping Entertainment expenses - no deduction for entertainment, 50% deduction for meals Home office expenses

Answer 108

* Deductions from AGI are those deductions that are subtracted from the AGI subtotal. * These deductions are sometimes called below-the-line deductions. * They consist of the greater of the standard deduction or certain allowable itemized deductions and the deduction for personal and dependency exemptions. * _Itemized Deductions FROM AGI include:_ * Medical expenses **(in excess of 7.5% percent of AGI)** * certain state and local taxes (**capped at $10K\*\***) * incl. prop taxes (both real estate and ad valorem) * incl. state income tax paid, and state/local sales tax * Contributions to qualified charitable org * overall limit is limited to either 20%, 30%, 50%, or 60% of the donor's AGI. * Overall, total deductible contributions for TY cannot exceed 50% of the donor's AGI * Casualty Losses - deductible in hte year in which loss is sustained. Only deductible if national disaster declared * net disaster loss (qualified disaster related personal casualty loss minus personal casulaty gains) can be deducted as an additional SD subject to a $100 per casualty floor. After the $100 floor, the loss must exceed the 10% of the AGI floor * business casualty losses are deductible to the business * Losses caused by fire, storm, shipwreck, other casualty, or by theft * to be deductible, loss must be from an event that is identifiable, and damaging to taxpayer, as well as unusual * Certain personal interest expense (e.g. mortgage interest on a personal residence)

Answer 109

Overall, just remember usually 50% of AGI

Answer 110

higher SD has led to less people itemizing deductions' Clustering allows TP to “cluster” itemized deduction together in one year and take the SD in the following year. _Able to be clustered:_ early payment of state income or property taxes early payment of mortgage interest medical expenses charitable donations

Answer 111

Qualified charitable distributions, or QCDs, are direct gifts from an IRA to an eligible charity. **Investors age 70½ and older may donate up to $100,000 per year**, and it may count as their required minimum distribution once they turn 72.D Tax results: the contributions are not treated as income to the IRA owner the contribution is not treated as a charitable contribution (cannot deduct it from your income)

Answer 112

Business and production of income losses (no insurance proceeds received). Not subject to $100 and 10% AGI floor. \*A business casualty, unlike a personal casualty, allows the taxpayer to take a deduction equal to the adjusted basis if there is a complete loss of property. Ex: Beau owned a home in New Orleans that was severely damaged by a hurricane, declared a federal disaster. Beau had purchased the home for $200,000, and the fair market value of the home prior to the hurricane was $400,000. His homeowners insurance policy had lapsed one month before the hurricane hit and Beau had not obtained any other insurance. After the hurricane, the property had a fair market value of $90,000. Beau’s casualty loss is valued at $200,000 which is his adjusted basis less insurance proceeds received (insurance proceeds in this case are zero). His economic loss (the fair market value before the event, $400,000 less the fair market value after the event, $90,000) is $310,000, but Beau’s casualty loss is limited to his adjusted basis because his adjusted basis is less than the decline in the fair market value of the property. If Beau had the property fully insured, he would have received the full $310,000 (less his deductible) from the insurance company. 1. Determine Loss 1. The loss will always be the lesser of the decline in value AKA economic value ($400K - 0 = $400K) or the adjusted taxable basis AKA loss on casualty($350K - $300K from insure. = $50K) 2. Adjusted for 10% of AGI. 3. Adjust for $100 for old tax law 2. Total deduction = $39,900

Answer 113

**You can only take a deduction for investment interest expenses that is lesser than or equal to your net investment income**. For example, if you have $3,000 in margin interest but net investment income of only $1,000, you can only deduct the $1,000 in investment interest in the current year ## Footnote **What is the investment interest expense deduction?** If you borrow money to finance investments, the interest you pay is considered investment interest. Examples include margin interest your broker charges you on loans to buy stocks, and interest you pay on money you borrowed to buy raw land for speculation. If you have investment interest expense, you can deduct it up to the amount of your net investment income. **Do I qualify for the investment interest expense deduction?** Eligibility requirements - You must be an investor who borrows money to buy investments, and receives interest, dividends, capital gains, royalties, or other investment income. - You must itemize your deductions on Schedule A. **Limitations of this deduction** You can deduct interest expense only up to the amount of your net investment income. Your net investment income is your investment income minus investment expenses (other than interest expense)

Answer 114

Limited to $750K of mortgage indebtedness Limited to two houses (primary and secondary residences) No home equity interest

Answer 115

New deduction TCJA for pass thru entities: sole-proprietorships parternshups, llcs, s corps, reits, MLPs. * Reduces taxable income but does not reduce AGI. * TP who qualify for the deduction are premited to take the deduction regardless of if they itemize or take SD. * Deduction is 20% of the TP's Qualified Business Income * Net result: reduce tax rate on the business income by 20% * FOr ex: a TP in highest marginal brakcer (37%), the tax on the business income is effectively reduced to 29.6%. * Must pick lesser of “combined QBI” or 20% of total taxable income (less capital gains) * Pg. 79 of Income Tax Pre-study

Answer 116

- Earned Income Credit - Adoption Expenses Credit - Child Tax Credit - Family Credit (qualifying dependent credit) - Child & Dependent Care Credit - Education Tax Credits * **Earned Income Credit** * must have earned income + qualifying child (sometimes not child) * QC must meet relationship, resident and age test * credit amt = appl. % rate x Earned income (dependd on # of children) * No children credit: TP age 25-64 * * **Adoption Expenses Credit** * credit for qualified adoption expenses incurred in adoption of eligible child * Max credit: 14K Phase out ( MAGI) * Child must be less than 18 yrs. of age or mentally handicapped * **Child Tax Credit** * $2K for each dependent child **under Age 17** (2022)\*\* * **_incl. stepchildren and foster children\*\*_** * married - must file MFJ to claim * child must be under age 17 and claimed as dependent on your return * up to $1,400 may be refundable * * **Family Credit (Qualifying Dependent Credit)** * $500 credit for those who would qualify as a dependent ( QC 17 and over and QP) * * **Child & Dependent Care Credit** * Must have employment related care costs for either * dependent under age 13 or * handicapped dependent or spouse * Credit Amt: * Eligible care costs x applicable percentage * \*\*remember 20% x elgible care costs (expenditures that qualify are lesser of actual costs or $3K for one child, $6k for two) * * **Education Tax Credits** * (2) Available Credits * _American Opportunity Tax Credit_ * max credit per student is $2,500/yr. for first 4 years of post-secondary education * 100% of first $2K in expenses * 25% of next $2K * (Max credit is $2,500) * Refundable up to 40% ($1K) * Not eligible if already have four year degree * must be enrolled at least half time * TP claiming full credit (not necessarily the student) is subject to MAGI limits * * _Lifetime Learning Credit_ * Max credit per TP is 20% of qual. expense (up to $10K/yr.)) * phaseouts are provided on exam * Cannot be claimed in same year as the AOTC * * Of the two education tax credits, the American Opportunity Tax Credit is the more valuable, but it's also the tougher one to qualify for.

Answer 117

Net unearned income of a child under 19 is taxed at the parent's rate and at age 24 if the child is a full time student First $2,300 on NUI is taxed at kid's rate, then rest is taxed at parent's rate (kiddie tax doesn't apply unless the child has NUI greater than $2,300) NUI does not include SD of $1,150 (2022) for unearned income (SD for kid) NUI: int.div. cap gains. royalties. rents. pension/annuity income. unearned income from trust. \*For 2022 9(if youre a dependent on some eles's return) , the limit is **$1,150 or your earned income plus $400, whichever is greater**. Again, it can never be greater than the normal standard deduction available for your filing status (single =12,950). Ex: Steven, age 13 has earned income = $15,000 and $13,000 unearned income. How much will be taxed at parent's rate? Kid’s rate? Answer: Taxable amount = $15,000 + $13,000 – $12,950 (2022) = **$15,050** Parent's Rate = $13,000 – $2,300 = **$10,700** (under **SECURE Act 2019** will be taxed at the parents tax rate) Kid’s Rate = $15,000 – $11,800 = **$3,200 plus $1,150 from unearned income (2300 less 1150) = $4,350** **(Note: 11800 comes from the STD less the $1,150 that will be applied to unearned income of 2,300)**

Answer 118

applies to TP who take advantage of “items of tax preference” TP is liable for the greater of his regular tax liability or the AMT Designed primarily to temporarily change the timing of tax payments, although in some cases, imposition of the AMT results in a permanent increase in tax. *questions usually relate to calculating AMTI* For purposes of exam , we will Usually be adding in preference and adjustment items. \*AMT formula starts with regular taxable income. If AMT tax number is higher than regular tax number, you use the higher number. A portion of that number will be considered regular tax, and the other AMT tax.

Answer 119

Summary: State and Local Taxes - not deductible under AMT Itemmized Deduciton Subject to 2% not deductible under AMT For AMT purposes, **you generally must depreciate (deduct) business assets over a longer period of time than you can for regular tax purposes**. This creates a difference between regular tax depreciation and AMT depreciation Itemized Deductions not allowed under AMT : -SALT taxes (considerd an adjustment) **_-preferences items_** \*percentage depletion \*intangible drilling costs \*int. on private activity bonds

Answer 120

Deductions Not Subject to the 2% Floor (STILL Deductible): * Gambling losses (to the extent of gambling income), * Deduction for estate taxes imposed on IRD (income in respect of a decedent assets), * Loss on the disposition of an annuity contract, * Repayments of income (such as repayments of Social Security income when the taxpayer fails the earnings test). Deductions Subject to the 2% Floor (NOT Deductible Under TCJA after 12/31/17): * Unreimbursed employee business expenses (travel, journals, uniforms, union dues). * Appraisal fees. * Hobby expenses (to the extent of hobby income). * Investment expenses (e.g., fees). * Tax advice and preparation. * Losses on terminated IRAs.

Answer 121

Rental Losses - subject to passive loss rules **Personal Use** - AKA diminimus use * Rented for less than 15 days (AKA 14 days or less) * Income is not taxable (rental expenses are not deductible) * Mortgage interest and property taxes are 100% allowed on Schedule A **Rental Use Property -** * Rented for 15 days or more, and used personally **less than** or equal to the greater of 10% of rental or 14 days * Include Income * Expenses can be deducted * Apportion expenses between personal use and rental use * Rental use expenses are deductible beyond income (can deduct loss up to $25K, phased out at $150K) * The personal apportionment of mortgage int. And property taxes are deductible on Schedule A, other personal expenses are non-deductible **Mixed Use** * Rented for 15 days or more, and used personally **more than** or equal to the greater of 10% of rental or 14 days * Include Income * Expenses can be deducted * Apportion expenses between personal use and rental use * Rental use expenses are NOT deductible beyond income - no loss for mixed use property * The personal apportionment of mortgage int. And property taxes are deductible on Schedule A, other personal expenses are non-deductible

Answer 122

\*IRS requires allocation based on total days used tax treatment of income and expenses of a primariuly rental vacastion hjome: * rental income is included in gross income * rental expenses are deductible FOR AGI * -Rental income and expenses are reported on Schedule E Schedule E A Schedule E form is used as a supplement document that's filed alongside a 1040 tax form to report any income or loss that you have incurred from rental real estate, royalties, partnerships, S corporations, estates or trusts.

Answer 123

Schedule E A Schedule E form is used as a supplement document that's filed alongside a 1040 tax form to report any income or loss that you have incurred from rental real estate, royalties, partnerships, S corporations, estates or trusts.

Answer 124

a hobby is an activity NOT entered into for profit 'Ex: raising dogs, sailboat racing, gardening Profit activity: if entered into for a proift, TP can deduct expenses FOR AGI even in excess of income from the activity. If activity shows profit 3 out of 5 years it is presumed TP has profit motive IRS collects taxes on hobby income and the TP could potentially pay less tax on a FOR PROFIT venture due to allowed deductions (above reqwuirements). IRS goal is to prove its a hobby, TP goal is to prove its a business hobby loses are no longer allowable

Answer 125

(3) Types of Income: - active - passive (at-risk rules apply BEFORE passive activity rules) - portfolio At-RIsk RUles: losses can only be deducted to the extent of the property/money at risk. Ex: Mike invests $30K for a 40% int. in a GP. THe partnership produces $250K in losses. How much can Mike deduct? Answer: $30K can deduct. $70K is suspended. What Is a Suspended Loss? A suspended loss is a [_capital loss_](https://www.investopedia.com/terms/c/capitalloss.asp) that cannot be realized in a given tax year due to passive activity limitations. These losses are, therefore, "suspended" until they can be netted against passive income in a future tax year. Suspended losses are incurred as a result of passive activities, and can only be carried forward, known as a [_capital loss carryover_](https://www.investopedia.com/terms/c/capital-loss-carryover.asp) For example, assume an investor invests $15,000 in [_limited partnership (LP) units_](https://www.investopedia.com/terms/l/limitedpartnershipunit.asp) (a type of flow-through entity). The business structure of an LP is such that this investor shares the profits or losses of the business pro-rata with other partners and owners, as is characteristic of investing in flow-through entities. Assume that the business goes downhill, and the investor’s share of the loss incurred is $19,000. Since they are only able to deduct their initial investment in the first year, they will have an excess amount of loss which will be suspended and carried forward. In this situation, their excess loss is their share in the limited partnership’s loss minus their initial investment (or $4,000). If this investor decided to put an additional $10,000 towards this investment the following year, this investor's at-risk limit will be $6,000, because the [_suspended loss_](https://www.investopedia.com/terms/s/suspended-loss.asp) is then subtracted from the amount of the additional investment. **\*\*Disposition of Passive Activities - after entire int. in a passive activity is disposed of, suspended losses from previous eyars are fully deductible against other income** **\*publicly traded partnerships cannot net against one another, but privately traded partnerships can (P. 89)** David invests in a LP and pays $250K for a 10% interest in the partnership. David receives a K-1 showing his share of the losses is $75K. This is his only investment. How much of the loss is suspended under the **at-risk rules?** Answer: $0. He has $250K at risk. He does not need to suspend any of the $75K loss. How much of the loss is suspended under the passive activity rules? Answer: $75K. David's losses will be suspended under passive activity rules because he has no passive activity gains to offset. Understanding Suspended Losses While many losses incurred in a given tax year can be deducted in the same year they occur, losses generated from [_passive activities_](https://www.investopedia.com/terms/p/passiveactivity.asp) can only be used to offset income or gains generated from other passive activities. These rules, set forth by the Internal Revenue Service (IRS), are known as the [_Passive Activity Loss (PAL) rules_](https://www.investopedia.com/terms/p/passive-activity-loss-rules.asp). Investors are prevented from using losses incurred from income-producing activities in which they are not materially involved to offset [_ordinary income_](https://www.investopedia.com/terms/o/ordinaryincome.asp). Income from rental properties is generally considered passive, even if you materially participated in their management. However, if you qualify as a real estate professional, then your participation isn't classified as passive.

Answer 126

**The IRS Typically Has Three Years.** The overarching federal tax statute of limitations runs three years after you file your tax return. If your tax return is due April 15, but you file early, the statute runs exactly three years after the *due* date, not the filing date. If you get an extension to October 15, your three years runs from then. On the other hand, if you file late and do *not* have an extension, the statute runs three years following your actual (late) filing date. There are many exceptions discussed below that give the IRS six years or longer, however. **Six Years for Large Understatements of Income.** The statute of limitations is six years if your return includes a “substantial understatement of income.” Generally, this means that you have left off more than 25 percent of your gross income. Suppose that you earned $200,000 but only reported $140,000. Given that you omitted more than 25 percent, you can be audited for up to six years. Maybe this understatement was unintentional or you reported in reliance on a good argument that the extra $60,000 was not your income. The six-year statute applies, but be aware that the IRS *could* argue that your $60,000 omission was fraudulent. If so, the IRS gets an unlimited number of years to audit. What about not an omission of income, but overstated deductions on your return? The six-year statute of limitations does not apply if the underpayment of tax was due to the overstatement of deductions or credits. **Six Years for Basis Overstatements.** The IRS has argued in court that other items on your tax return that have the *effect* of more than a 25-percent understatement of gross income give it an extra three years. There was litigation for years over what it means to *omit* income from your return. Taxpayers and some courts said “omit” means to leave off, as in do not report, but the IRS said it was much broader. **No Return or Fraudulent Return.** What if you never file a return or file a fraudulent one? The IRS has no time limit if you never file a return or if it can prove civil or criminal fraud. If you file a return, can the IRS ever claim that your return didn’t count so that the statute of limitations never starts to run? The answer is “yes.” If you don’t sign your return, the IRS does not consider it a valid tax return. That means the three years can never start to run.

Answer 127

**8. Claiming a Refund.** s. Getting money back from the IRS is difficult. If you pay estimated taxes, or have tax withholding on your paycheck but fail to file a return, you generally have only two years (not three) to try to get it back. Suppose you make tax payments (by withholding or estimated tax payments), but you have not filed tax returns for five years. When you file those long-past-due returns, you may find that overpayments in one year may not offset underpayments in another. The resulting lost tax money is painful, and it catches many taxpayers unaware.

Answer 128

Key Takeaways. If you owe money after the federal tax filing date, you'll pay 0.5% for each month the payment is late, up to 25% of the remainder due. **Failing to file at all accumulates a higher rate of 5%, so it always pays to file on time**.

Answer 129

The Internal Revenue Code was initially created by the Revenue Act of 1913 1939 - the entire federal tax law was codified and renamed the Internal Revenue Code 1954 - new codification of the “code” was issued Tax Reform Act of 1986 - resulted in the present code

Answer 130

Regulations - Official Interpretations of Internal Revenue Code. There are three types: 1. Proposed Regulations: Have been drafted by the Treasury, but have not yet been adopted. Preview of final regs * Are not binding! 2. Temporary Regulations: Issued when the Treasury feels that guidance must be provided quickly to taxpayers. * Have the **same authority (full force and effect) as final regulations** and are binding until a final regulation is issued. 3. Final Regulations: Began as proposed or temporary regulations. Final regulations have the **full force and effect of law** provided that they are consistent with the Internal Revenue Code provisions they interpret.

Answer 131

* Revenue Rulings: Based on a set of facts that are common to many taxpayers to give taxpayers insight into how the IRS will treat certain transactions. **DO NOT HAVE FULL FORCE AND EFFECT OF LAW**. Do have precedential value. * Private Letter Rulings: Issued at the request of an **individual taxpayer** to know how the IRS would treat an individual transaction. DO NOT HAVE FULL FORCE AND EFFECT OF LAW. Do have precedential value. * Determination Letter: Requested from a **district director** of the IRS when the taxpayer has already engaged in a transaction and would like to know how to report it for tax purposes. Revenue Procedures: Detail internal practices and procedures within the IRS.

Answer 132

* judicial decisions are the third primary source of tax law

Answer 133

* return not filed = **3 year window** of opportunity for claiming a refund. If no return is filed to claim the refund within the three years, the money becomes the property of the US Treasury * return filed = **3 year** statue of limitations for the IRS to **audit** a TR and **10 year** statues of limitation to collect tax * if filed and major omit of gross income in excess of 25%, statue of limitation is 6 years to audit Unlimied statue of limitations for false tax return or fradulent with intent to evade tax

Answer 134

Interest accrues from the original due date of the return even if TP obtained an exension Int. is compounded daily. Generally, ***interest*** accrues on any unpaid tax from the due date of the ***return*** until the date of ***payment*** in full **Penalties** - FTF =5%/mo up to 25%. The IRS' penalty for not filing is 5% of the amount of tax owed, imposed every month the tax return is late. "If a return is filed more than 60 days after the due date, the **minimum penalty** is either $450 or 100% of the unpaid tax, whichever is less," the IRS notes. FTP = .5%/mo. up to 25%. FTF is reduced by FTP.

Answer 135

-Most people can avoid having to pay estimated tax if their w/h and credits= 100% of last years tax due or 90% of current tax due or $0 if you had a $0 tax liability last year AGI of $110K and above (MFJ) have to pay taxes based on 110% of prior year or 90% of currenty year by Jan. 15th of the following year even though the full tax liability is due April 15th

Answer 136

CPA Attorney Enrolled Agent

Answer 137

-cost recovery or depreciation for tangible assets * amortization for intangible assets * -depletion for natural resources Depreciation - annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. Purpose of deppreciation is to match the cost of a productive asset (that has a useful life of more than one year) to the revenues earned from using the asset **the basis in an asset is reduced by the amount of cost recovery that is allowed or allowable**

Answer 138

* must be property you own * must be used in your business or income producing activity * must have a determinable useful life * it must be expected to last more than one year You cannot depreciate property that you u8se solely for personal activities Depreciation begins when you place the depreciable property in service for use in your trade or business. It stops when the TP has fully recovered his cost or other basis Cannot be disposed: - property placed in service and disposed of in the same year - equipment used to build capital improvements * Section 197 certain intangibles

Answer 139

MACRS must be used to depreciate most property

Answer 140

* Under current law, if the real estate is used for residential rental purposes, the property is depreciated according to the straight-line depreciation method over 27½ years. * If the real estate is used for commercial purposes, depreciation occurs on a straight-line basis over 39 years. * Of course, the value of land cannot be depreciated; only the value of improvements to land qualify for depreciation.

Answer 141

Adjusted Basis _Less: Salvage Value_ Equals: Depreciable Amount _Divided by: Estimated Useful Life_ Equals: Annual Depreciation Deduction Use SL for real estate depreciation If you can depreciate the cost of a patent or copyright, use the SL time method

Answer 142

3 Year: Tractors, rent-to-own property \*\*5 Year: Autos, computers, office equipment \*\*7 Year: office furniture and fixtures 27.5: rental home 39 year: office building

Answer 143

Can elect to immediatly expense up to $1,080,000 (2022) of business tangible property placed in service during the year cannot use Section 179 for realty of production of income property Section 179 deduction is lesser of: * Property Placed in Service (PPS) * Taxable Income (TI) or * Threashold of $1,080,000 phased out for PPS \> $2,700,000

Answer 144

* -sole proprietorship - administrative requires are the least burdensome with this entitiy - transferability of ownership interest is easiest with proprietorship and becomes more difficult as we get along to c corp easily dissolved by owner * partnership * limited liability partnership * corporation * limited liability company Entities are almost always formed under state law proprietorship and general partnerships are less complex, inexpensive and easiest to form compared to the others If liability protection is available, the investors in such biz ventures/entities will not have their personal assets exposed to business (entity) debts or obligations * liability protection is not available to proprietorships or general partnerships, not to the GPs of a limited partnership and only to a limited extent for limited liability partnerships partnerships, LPs, LLPS, FLPs LLCs S corps and smaller C corps have limited or restricted transferability

Answer 145

* owned and operated by a single individual * business for profit * No transfer of assets to the entity because the entity is considered a legal extension of the proprietor Formation is easy and inexpensive easy to sell business assets limited sources of capital Any trade names or assets are owned by the individual proprietor Proprietor has a 100% interest in the proprietorship assets and income Relatively easy to sell assets of proprietorship (requires finding a buyer) easily dissolved by discontinuing business operations Major disadvantage: unlimited liability for debts and torts of the SP business Tax compliance costs are low - just add a Schedule C to Form 1040 Pays SE tax (15.3 %) on his oen earnings and ½ SS taxes for employees. Remeber only 92.35% of earnings are subject to SE tax Can deduct all ordinary and necessary business expenses from gross income. Business deductions are in Part II of Schedule C. Net profit/loss from Schedule C is carried over to Form 1040.

Answer 146

(25%/1+ 25%) or use whatever rate employee is defering at (must contribute equally )

Answer 147

-joint ventures between two or more persons/entities to conduct a business as co owners under a trade or fictitious name unlimited liability not subject to entity level taxation. partners file a form 1065 including a k-1. Income and losses are passed down to partners accordoing to their interest holding All business net income is subject to SE tax must have its own federal tax ID when partner contributse capital to the entity, there is no gain/loss. The partners basis in the partnership is adjusted partners can deduct losses against other ordinary income to the extent of their investment (at-risk). Passive parters cannot deduct (those not active in the biz) due to passive activity rules * automatically created when 2+ people individuals conduct business for profit * difficult to sell assets (usually requires other partner's approval) * disolution is volunatry or done by a court

Answer 148

Passive activity rules prevent investors from deducting passive activity losses from their non passive sources of income. In other words, passive losses may only be deducted from passive income. For example, a loss from a partnership in which you're a limited partner may not be deducted from your salary earned at a company in which you are an employee. If passive activity losses exceed passive activity income in a given year, the excess amount of the loss is carried over to future tax years indefinitely until such loss may be deducted from passive activity income of a future year. At-Risk Rules The Tax Reform Act of 1986 also extended the at-risk rules to property placed in service after 1986. At-risk rules deal with your **investment** in a business and **not** your participation. This means, your share of a businesss loss in a given year, which is passed through the entity to you and which you may deduct on you individual income tax return, is **limited to the amount of your investment** in the business. In other words, you may deduct a business loss from a passive activity up to amount of your investment in the acitivity you stand to lose. The nondeductible portion of the loss, is called a ***suspended loss*** and may be carried over to future years indefinitely, until you have is sufficient basis to absorb the loss.

Answer 149

associations of 2+ persons as co-owners to carry on a forprofit business venture (one or more partners have limited participation and thefore limited liability) - if lps participate in the mgmt of the enterprise they become GPs for liability purposes - disolution and transfer of an interest is same as in GP. LP interest hard to transfer since they have little say in mgmt of partnetship easier to raise capital in LP rather than GP because of the ltd liability feature Ltd partners are not usually subject to SE tax. GPs have SE tax Entity files a form 1065 and issues k-1s. losses for limited partners are generally passive losses

Answer 150

hybrid entity that provides partial liability protection to its members. Usually comprised of licensed professionals (doctors, accountants, etc). Partners enjoy ltd protection from the acts of their other partners but each partner remains personally liable for his/her own acts with respect to malpractice Dissolution/transfer of entity and assets same as GP. Transfer usually more difficult because must find a willing buyer to a similarly licensed professional Amount of capital contributed usually determines the ownership interst in the partnership (like GP and LP) Principal disadvantage: all general partners in a partnership are subject to joint and individual liability for the debts and obligations of the partnership. exception: if parner acted poorly and was no under supervision of first partner, you are not liable is a flow through entity and not taxed at entity level unlimited liability for acts of own malpractice

Answer 151

special type of limited partnership created under state law with the primary purpose of transferring assets to younger generattions using annual exclusions and valuatin discounts for minority interests and lack of marketability * one or more family members transfers highly appreciated property expected to increase in value to a LP in return for both a small (1%, for ex) general and a large (99% for ex) limited partnership interest * GP has unlimited liability and sole mgmt right and LP are passive interest holders with limited liability and no managment rights * upon creation of FLP, there are neither income nor gift tax consequences b.c entity created is owner by the same person, or persons who owned it before the transfer * once LP is created, owner values the LP interests. * transfers (by grantor/owner) begins annual gifting program utilizing the discounts, gift tax exclusions and gift splitting * Benefit: original owner transferor can maintain control of the property transferred to the LP by only retaining a small general parnetship interest * Also provides for protection of family assets. ny placing assets only associated with LP interests to heirs, judgements against donee (limited partner) will not jepordize asests of the partneship. Credito cannot force donee to liquidate, sincne the LP does not have right to force partnership liquidation * Can also protect assets from divorce * FLP is taxed as a partnership (form 1065 and schedule k-1s)

Answer 152

special type of limited partnership created under state law with the primary purpose of transferring assets to younger generattions using annual exclusions and valuatin discounts for minority interests and lack of marketability * one or more family members transfers highly appreciated property expected to increase in value to a LP in return for both a small (1%, for ex) general and a large (99% for ex) limited partnership interest * GP has unlimited liability and sole mgmt right and LP are passive interest holders with limited liability and no managment rights * upon creation of FLP, there are neither income nor gift tax consequences b.c entity created is owner by the same person, or persons who owned it before the transfer * once LP is created, owner values the LP interests. * transfers (by grantor/owner) begins annual gifting program utilizing the discounts, gift tax exclusions and gift splitting * Benefit: original owner transferor can maintain control of the property transferred to the LP by only retaining a small general parnetship interest * Also provides for protection of family assets. ny placing assets only associated with LP interests to heirs, judgements against donee (limited partner) will not jepordize asests of the partneship. Credito cannot force donee to liquidate, sincne the LP does not have right to force partnership liquidation * Can also protect assets from divorce * FLP is taxed as a partnership (form 1065 and schedule k-1s)

Answer 153

separate legal entities formed by one or more individuals by meeting state statutory requirements necessary for the formation of an LLC - owner's contributions determine the onwership perscentage of an LLC (usually) - disposal/transferability of interests difficuly. Capital is easier to raise than in a SP. Ease of capital raise similar to partnership. No limitation on number of memebrs \*\*LLC's individual owners are protected from personal liability for the LLC's debts and obligations unless they persoanlly guaratntee such obligations General Taxation:. Single member/owner = diregardged entity for tax purposes. Owner files Schedule C of Form 1040 for the LLC (same as for proprietorship) pays SE tax for his own income and on ½ SE tax for any employees 2+ memebrs: can elect to be taxed as a partnership FOrm 1065 with k-1). or an S corp ( Form 1120S with K-1) or a C corp (Form 1120 with w-2 income to ownerss) Is a pass thorugh entity - income taxed to members at their personal tax rates. LLC losses are deductible on personal income tax returns to exten of basis and may be limited by the passive activity rules. \*No gain/loss is recognized upon distribution of appreciated prop from an LLC to an LLC member. LLCs are usually taxed as partnerships.

Answer 154

* chartered legal entities formed by one or more individual by meeting state statutory requirements necesary for the formation of a corporation * Two types of corps: C corp and S corp (s corp are C corps with a special tax election) * interests are held by a shareholders and evidenced by shares of stock. Easy to transfer if there is a marker, but some restrict transfer * easy to raise capital (compared to partnership/llc) * sharehlders have limited liability * taxed as a c corp unless S corp status is slected. * C Corp Tax: * must file Form 1120 and pay taxes on their own income * entity witholds 7.65% for SS * employee/owner income is not treated as self-employment income * distributions of cash and other assets to a shareholder/employee rather than as a employee are treated as divdiends (must include in gross income) * c corp cannot take dividends distributed as a deduction Remmeber: The dividends received deduction (DRD) is **a federal tax deduction in the United States that is given to certain corporations that get dividends from related entities**. The amount of the dividend that a company can deduct from its income tax is tied to how much ownership the company has in the dividend-paying company. Memorize: (p. 144) Ownership: less than 20% deduction rec'd deduction = 50% 20-80% DRD =65% 80%+ DRD = 100% If a corp incurs a NOL after tax year 2017 and the loss is not fully utilized it can carry it forward indefintely

Answer 155

significant ways in that S corp differs from C Corp: File Form 1120S and do Schedule K-1 income of an S corp is passed through to SH and NOT taxed at corp level distributions(dividends) to SH are not taxable to SH (since income was alrady distribtued to them) S corp cannot have more than 100 eligible shareholders ownership restricted to US citizens or US residents, estates, certain trusts corp must be an eligible corp created under laws of U.S. or of any state insurance companies, Domestic Internatl'l Sales Corps and financials institutions cannot be S corps S is allowed to only have one class of outstanding stock ( can have one class with voting and non-voting shares) Similar to c corp, ownership interests are shown by share holdings Easier to raise capitla than a partnership or SP becuase of limited liability aspect for sharehodlers Limited number of sharesholders may mean limited means to raise capital Taxation of

Answer 156

Total 15.3% 12.4% for OASDI (SS) an 2.9% for Medicare

Answer 157

Boot is reported on line 15 of Form 8824 Like-Kind Exchanges (below) and taxed at your **ordinary tax rates**. Ordinary income under recapture rules is reported on line 21 of Form 8824 and line 16 of Form 4797 Sales of Business Property. This includes §1245 personal property subject to depreciation recapture taxation

Answer 158

60% of AGI deduction - cash 30% of AGI deduciton -LTCG stocks

Answer 159

cannot be personal use property

Answer 160

**Solution:** 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.

Answer 161

**Solution:** The correct answer is B.I and II only. 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. * Revenue Rulings: Based on a set of facts that are common to many taxpayers to give taxpayers insight into how the IRS will treat certain transactions. DO NOT HAVE FULL FORCE AND EFFECT OF LAW. Do have precedential value. * Private Letter Rulings: Issued at the request of an **individual taxpayer** to know how the IRS would treat an individual transaction. DO NOT HAVE FULL FORCE AND EFFECT OF LAW. Do have precedential value. * Determination Letter: Requested from a **district director** of the IRS when the taxpayer has already engaged in a transaction and would like to know how to report it for tax purposes. Revenue Procedures: Detail internal practices and procedures within the IRS.

Answer 162

**Solution:** The correct answer is C. 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

Answer 163

**Solution:** The correct answer is B. Option "A" is incorrect because RIA provides plain language interpretation of tax law. Option "C" is incorrect because it is the highest level of tax regulations, but does not indicate the intent of Congress in enacting tax law. Option "D" is incorrect because it provides ruling of the U.S. Tax Court in the form of case law. Option "B" is correct because the Congressional Committee Reports (sometimes known as the Blue Book) provides congressional reasoning for enacting tax law.

Answer 164

**Solution:** The correct answer is C. Substantial authority is official words and rulings which can be relied on to support a tax opinion or position. All of these can be relied on by someone.

Answer 165

**Solution:** The correct answer is B. Marge may file as Married Filing Jointly as long as she would have qualified to file jointly had Jack survived.

Answer 166

**Solution:** The correct answer is B. Nancy cannot file MFJ on two returns. She is married to Paul currently and will file MFJ with him. Oliver's final tax return will be filed as MFS. Option "A" is incorrect because Nancy is eligible to use the married filing jointly status with Paul. Option "C" is incorrect; Oliver cannot use the married filing jointly status because Nancy was married to someone else at the end of the year. Option "D" is incorrect because Nancy is not eligible to use the surviving spouse filing status. Therefore, Option "B" is the best choice.

Answer 167

**Solution:** The correct answer is C. (I) Since Michelle’s spouse died during the year she is considered married for the year. (II) and (III) Since Michelle is considered married for the full year (she was married but her spouse died during the year and she did not remarry) she may file MFS or MFJ. (IV) She does not currently qualify for filing qualifying widower since this status applies for the 2 years following the year of a spouse’s death.

Answer 168

**Solution:** The correct answer is C. You are able to file as a head of household if you are considered to be abandoned by your spouse and are claiming dependent children. An individual is required to live apart from his or her spouse for the entire last six months of the tax year to file under abandoned spouse status. Wilma meets the "abandoned spouse" rules. Therefore, she can file as a head of household. Otherwise, her filing status would be married, filing separately. 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.

Answer 169

**Solution:** The correct answer is C. Because Ralph provides more than half of the cost of maintaining his mother's apartment and necessary expenses, he is eligible to use the Head of Household filing status if he qualifies his mother as a dependent. Options "A" and "B" are incorrect; since Ralph is eligible to use the Head of Household filing status, he should use that filing status rather than the less advantageous single filing status. Option "D" is incorrect because Ralph's mother is a qualifying relative, not a qualifying child. Note: Don't confuse qualifying child with qualifying relative. Qualifying relative test is relationship, gross income, support and not a qualifying child test. Living in the household is not a requirement. Many adult children pay the living expenses of their elderly parents; could be a retirement home, assisted living facility or nursing home.

Answer 170

**Solution:** The correct answer is B. In this case, more losses are not required at all. Rather, credits only are needed to improve the client’s tax position.

Answer 171

**Solution:** The correct answer is D. Suspended losses for a passive activity (passive losses carried forward) are expensed when the passive activity either has a passive income for that year or the activity is disposed. If passive income is available for a year in which there are suspended losses, then loss to the extent (but not more than) the passive income, are used to offset income and thus reduce the total suspended loss. When an activity is disposed, the total suspended losses are applied to the disposition resulting in a gain or loss on disposition. $90,000 (sale price) - $50,000 (adjusted basis without application of suspended loss) = $40,000 of gain on disposition before application of suspended loss. $40,000 - $30,000 (suspended losses from prior years) = $10,000 (adjusted gain on disposition).

Answer 172

**Solution:** The correct answer is A. Sam will not be able to deduct the loss in the current tax year. Passive Income from a publicly traded limited partnership may not be offset by any other passive losses. The Passive Income from a publicly traded LP would need to be offset by a prior suspended loss from the publicly traded LP.

Answer 173

**Solution:** The correct answer is D. To determine whether any of the losses are suspended you must first apply the at-risk rules, then the passive loss rules. The amount at risk is the basis of $150,000. Since the loss is less than the amount at risk, none of the loss is suspended due to the at-risk rules. **In applying the passive loss rules, the passive loss is limited to the amount of passive income for the year.** Since there is **no passive income** for the year, none of the loss may be recognized and the $80,000 loss is suspended. Note for the exam: If it does not state something in the question fact pattern, it does not apply. By definition, a limited partner is NOT an active participant. By definition, as general partner IS an active participant.

Answer 174

**Solution:** The correct answer is C. The IRS has three classifications of income; **active, passive and portfolio.** Earned income is a subset of active income while unearned income may be either passive or portfolio income

Answer 175

**Solution:** The correct answer is B. Option "B" is correct because the taxpayer must provide significant personal services in concert with the rental activity and must materially participate in the activity in order to classify the activity as an active trade or business.

Answer 176

**Solution:** The correct answer is D. All of the above. $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.

Answer 177

**Solution:** The correct answer is C.I and III only. Jay has not materially participated. Although Jay devoted more than 100 hours to the activity, he did not devote more hours than anyone else because John worked at Three Guys Burgers for more than 500 hours. Jeff is also a material participant because he devoted more than 100 hours to the activity and also devoted more than 100 hours to several other similar activities, for a total of more than 500 hours in all of the activities combined. Note: To be considered material we have to meet a specific set of rules among them is 1) the Taxpayer dedicated more than 500 hours to the activity or 2) the Taxpayer dedicated more than 100 hours and the most of anyone. Part of the rules for PAL allows a Taxpayer to make an annual election to join similar activities to achieve the \> than 500 hours for materiality, which is what III is outlining.

Answer 178

**Solution:** The correct answer is D. Passive Activity rules are for taking deductions based on loss in a passive activity. Think of passive activity loss in terms of filters. Filter one you look at the At Risk Amount. Filter two, you look at the Passive Income Amount. She has 175k invested (at risk) in Canine Connection, she can take up to that in losses for the first filter (at risk) Of the 275k loss, only 175k of the loss can go through to the second filter (passive income offset), and the remaining 100k of loss is suspended for this year under the at-risk rules. Next we look for passive income to offset loss. Little Laughter has 125k of income we can offset with the 175k of loss that made it through the first filter. We cannot take more passive loss than passive income, so the175k loss – 125k of passive income leaves 50k of loss we cannot take and will be suspended under passive activity rules. Play Video

Answer 179

**Solution:** The correct answer is D. 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 4. 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 A is incorrect because he would be a material participant. The rule is \> 100 hours and no one spends more. They can spend the same, but not more. (#3) B is incorrect because he is the only one who substantially participates (#2) C is incorrect because he needs to spend more than 500 hours or at least the same as the highest working person to be a material participant. (#1, #3) D is correct because he spent more than 500 hours (#1)

Answer 180

**Solution:** The correct answer is C. 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.

Answer 181

**Solution:** The correct answer is D. Options "A," "B" and "C" all increase the at risk amounts. Remember, when taking passive losses, the first step is looking at the at risk amount. If there are $75,000 in loss and only $50,000 at risk, $25,000 is suspended and all the at risk amount was used up. Unless there is an increase to the at risk amount, it is reduced to zero.

Answer 182

**Solution:** The correct answer is A. The taxpayer is not required to materially participate in the activity, but the taxpayer must actively participate in the activity. Material participation requires substantial, continuous involvement in the operation of the activity. Active participation means that the taxpayer participates in making management decisions concerning the property, but is not substantially and continuously involved in the operation of the activity. _Summary of Rental Property Exceptions to Passive Categorization_ 1. Customer use less than or equal to 7 days 2. Customer use less than or equal to 30 days and significant personal services provided 3. Extraordinary personal services are provided 4. Rental activities incidental to non-rental activity 5. Rental activity available during business hours for nonexclusive use of customers 6. Rental property used in an activity conducted by partnership, etc. where the taxpayer is the owner and an active participant

Answer 183

**Solution:** The correct answer is B. **Joel is a general partner which signifies he is a material participant.** Joel's loss is limited to $25,000 due to the at-risk rules. He will also have a suspended loss of [($180,000 × 30%) - $25,000] = $29,000. The passive activity rules for income do not apply.

Answer 184

**Solution:** The correct answer is A. Section 121 requires that to qualify for the exemption she must have 1) owned and 2) used as principal residence for two years out of the past 5 years. An exception to the rules exists where a taxpayer moved because of employment transfer. In this case, Cindy owned and lived in the home for 18 of the 24 months. Cindy is entitled to 75% of the allowable $250,000 gain exemption or $187,500. Note: The Section 121 amount is what is pro-rated, not the amount of the gain from the sale of the property. A single taxpayer has a $250,000 exemption, MFJ has a $500,000.

Answer 185

**Solution:** The correct answer is C. The health of a pet is not considered a change in health that justifies a partial exclusion under Section 121. All of the other options are reasons that would justify a partial exclusion under Section 121.

Answer 186

**Solution:** The correct answer is B. 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. Therefore, they would only be allowed to deduct $15,000 for the current year and carry forward $135,000. What Is Section 179? Section 179 of the U.S. [_internal revenue code_](https://www.investopedia.com/terms/i/internal-revenue-code.asp) is an immediate expense [_deduction_](https://www.investopedia.com/terms/d/deduction.asp) that business owners can take for purchases of [_depreciable_](https://www.investopedia.com/terms/d/depreciation.asp) business equipment instead of capitalizing and depreciating the asset over a period of time. The Section 179 deduction can be taken if the piece of equipment is purchased or financed and the full amount of the purchase price is eligible for the deduction. KEY TAKEAWAYS * Section 179 of the IRC allows businesses to take an immediate deduction for business expenses related to depreciable assets such as equipment, vehicles, and software. * This allows businesses to lower their current-year tax liability rather than capitalizing an asset and depreciating it over time in future tax years. * Section 179 is limited to a maximum deduction of $1,050,000 and a value of property purchased to $2,620,000 for the year 2021. Example Imagine that a company has purchased a new piece of machinery used 100% for business purposes at a cost of $50,000 and zero salvage value. The company could take that asset and depreciate over the course of 5 years as $10,000 each year. Section 179 would instead allow the company to [_write off_](https://www.investopedia.com/terms/w/write-off.asp) the entire $50,000 in the current year.

Answer 187

**Solution:** The correct answer is B. 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.

Answer 188

**Solution:** The correct answer is A. Section 179 is an upfront business deduction, now at $1,080,000 (2022) that can be used by businesses to reduce tax liabilities. B is incorrect. 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. Any asset value placed into service over $2,700,000 reduces the deductible maximum of $1,080,000 dollar for dollar. C is incorrect. Section 179 is one year deduction. D is incorrect. Section 179 does not apply to personal assets.

Answer 189

**Solution:** The correct answer is B. Section 179 carryover to subsequent years will be limited by the business income before the deduction and the year's Section 179 limitation. In 2022, the limit for Section 179 is $1,080,000. Therefore, the entire amount of $17,800 ($7,800 carryover + $10,000 current year's deduction) is allowable.

Answer 190

**Solution:** The correct answer is C. Painting, inside or out, is considered a repair, which is immediately expensed. The roof replacement is an improvement that substantially prolongs the asset’s life, which is capitalized and depreciated over the useful life.

Answer 191

**The 2022 Section 179 deduction limit for businesses is $1,080,000** (a $30,000 increase from 2021). Your business can deduct the full price of qualified equipment with a "total equipment purchase" limit of $2.7 million.

Answer 192

**Solution:** The correct answer is B. Section 179 deduction is $1,080,000 for 2022. However, the amount is reduced dollar for dollar for acquisition amounts above $2,700,000 placed into service during 2022.

Answer 193

**Solution:** The correct answer is D. Below the line deductions include all itemized deductions. Medical expenses are a below the line deduction for itemized taxpayers in the amount exceeding 7.5% of their AGI. Alimony paid is an above the line deductions found in the Adjustment section of the 1040. Moving expenses are not deductible (itemized miscellaneous deduction subject to the 2% floor are suspended based on TCJA). Penalties for early withdrawal of savings are above the line deductions found in the Adjustment section of the 1040. Tax preparation fees are not deductible for the individual taxpayer (suspended based on TCJA). Self-employed can deduct as a business expense, but it will be above the line on their schedule C.

Answer 194

he 2% rule referred to the limitation on certain miscellaneous itemized deductions, which included things like unreimbursed job expenses, tax prep, investment, advisory fees, and safe deposit box rentals. In 2017 and earlier tax years, wage-earners and other taxpayers who weren’t able to write these off as business expenses were allowed to deduct the portion of these miscellaneous expenses that exceeded 2% of their AGI, provided they took the itemized deduction. These miscellaneous expenses were reported on Form 2106. Under the Tax Cuts and Jobs Act (TCJA) that Congress signed into law on December 22, 2017, the deduction for these 2% miscellaneous expenses has been suspended in tax years 2018 through 2025. However, this doesn’t affect: One of the greatest changes brought about by the Tax Cuts and Jobs Act (TCJA) is the elimination of many personal itemized deductions. Starting in 2018 and continuing through 2025, taxpayers will not be able to deduct expenses such as union dues, investment fees, or hobby expenses. However, gambling losses remain deductible. **Personal Expenses that Remain Deductible** A few miscellaneous itemized expenses remain deductible during 2018 though 2025 for taxpayers who itemize. **Gambling losses.** The deduction for gambling losses has not been affected by the TCJA. These remain deductible up to the amount of your gambling winnings for the year. You cannot simply reduce your gambling winnings by your gambling losses and report the difference. You must report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as an itemized deduction. These losses are not subject to the 2% limit on miscellaneous itemized deductions. **Investment interest.** If you borrow money to purchase an investment, the interest you pay on the loan is called investment interest. Investment interest remains deductible for taxpayers who itemize. However, the deduction is limited to the amount of taxable investment income you earn each year, such as dividends, royalties, or interest. Any disallowed investment interest is carried over to deduct in future years. Ordinarily, investment income does not include any capital gains or qualifying dividends that enjoy favorable tax treatment. However, you can make an election to include long term capital gain and qualifying dividends in your investment income. This can allow you to deduct a larger amount of investment interest. When you do this, however, your long-term capital gain and qualifying dividends must be taxed at your ordinary income tax rates, not the usually lower capital gains rates.

Answer 195

**Solution:** 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.

Answer 196

If you are age **65 or older**, your standard deduction increases by $1,750 if you file as Single or Head of Household. If you are legally blind, your standard deduction increases by $1,750 as well. If you are Married Filing Jointly and you OR your spouse is 65 or older, your standard deduction increases by $1,400.

Answer 197

**Solution:** The correct answer is B. In 2022 the standard deduction for a married couple is $25,900. Since Alberto is 65 years of age or older he may also take an additional standard deduction of $1,400. $25,900 + $1,400 = $27,300. Their grandson’s blindness or being a dependent has no bearing on their standard deduction.

Answer 198

Not to be confused with a qualifying child for the ‘Child Tax Credit' who must be Age 17 or under **Top 7 Requirements for the 2021 Child Tax Credit:** **1) Age test** - To qualify, a child must have been under age 18 at the end of the year. Increased credit amounts are available for children under age 6 if certain family income tests are met. **2) Relationship test** - The child must be your own child, a stepchild, or a foster child placed with you by a court or authorized agency. An adopted child is always treated as your own child. ("An adopted child" includes a child lawfully placed with you for legal adoption, even if that adoption is not final by the end of the tax year.) You can also claim your brother or sister, stepbrother, stepsister. And you can claim descendants of any of these qualifying people—such as your nieces, nephews and grandchildren—if they meet all the other tests. **3) Support test** - To qualify, the child cannot have provided more than half of his or her own financial support during the tax year. **4) Dependent test** - You must [claim the child as a dependent](https://turbotax.intuit.com/tax-tips/family/rules-for-claiming-a-dependent-on-your-tax-return/L8LODbx94) on your tax return. Bear in mind that in order for you to claim a child as a dependent, he or she must: * be your child (or adoptive or foster child), sibling, niece, nephew or grandchild; * be under age 19, or under age 24 and a full-time student for at least five months of the year; or be permanently disabled, regardless of age; * have lived with you for more than half the year; and * have provided no more than half his or her own support for the year. **5) Citizenship test -** The child must be a U.S. citizen, a U.S. national or a U.S. resident alien. (For tax purposes, the term "U.S. national" refers to individuals who were born in American Samoa or in the Commonwealth of the Northern Mariana Islands.) **6) Residence test** - The child must have lived with you for more than half of the tax year for which you claim the credit. There are important exceptions, however: * A child who was born (or died) during the tax year is considered to have lived with you for the entire year. * Temporary absences by you or the child for special circumstances, such as school, vacation, business, medical care, military services or detention in a juvenile facility, are counted as time the child lived with you. * There are also some exceptions to the residency test for children of divorced or separated parents. For details, see the instructions for [Form 1040](https://turbotax.intuit.com/tax-tips/irs-tax-return/what-is-an-irs-1040-form/L4aOys6cI). **7) Family income test** _Income Limitation on the 2021 Child Tax Credit_ The 2021 Child Tax Credit is reduced if your 2021 [modified adjusted gross income](https://turbotax.intuit.com/tax-tips/irs-tax-return/what-is-the-difference-between-agi-and-magi-on-your-taxes/L7kHckNS3) (MAGI) is above certain amounts which are determined by your tax-filing status. * Qualifying families with incomes less than $75,000 for single, $112,500 for head of household, or $150,000 for joint returns are eligible for the temporarily increased credit of $3,600 for children under 6 and $3,000 for children under 18. Above these income amounts, the credit is reduced by $50 for each $1,000 over these limits. * For families with MAGI greater than the amounts eligible for the increased credit, the phaseout of the credit begins with $200,000 in income ($400,000 for married filing jointly) and the credit amount is $2,000 for all children under 18 at the end of the tax year. * Your greatest available credit is based on the above method that provides you with the largest

Answer 199

For 2022, the limit is **$1,150 or your earned income plus $400, whichever is greater**. Again, it can never be greater than the normal standard deduction available for your filing status

Answer 200

**Solution:** 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.

Answer 201

**Solution:** The correct answer is C. Accrual taxpayers who receive prepaid revenues do not recognize taxable income until the revenue is actually earned. Kathy has earned 6 out of 48 classes or 12.5% (6 / 48) of the revenue collected; 12.5% × $480 = $60

Answer 202

**Annuities - taking distributions** _Before Scheduled Start Date_ (take out payment before we annuitize) * Issued Pre-82 FIFO (First In First Out) * FIFO looks at basis first. Ex: assume $50K in basis with earnings/growth of $100K. (Total balance of $150K. Distribution of $75K = 25K would be taxable to me * Issued Post-82 LIFO (Last In First Out) * LIFO looks at earnings first . Ex: assume $50K in basis with earnings/growth of $100K. (Total balance of $150K. Distribution of $75K = 75K would be taxable to me * May be subject to 10% early withdrawal penalty. **Types of Annuities** Annuities are classified in a number of different ways. For federal tax purposes, annuities are classified as either qualified or non-qualified. A qualified annuity is purchased as part of, or in conjunction with, an employer provided [retirement](https://www.immediateannuities.com/retirement/) plan or an individual retirement arrangement (such as an Individual Retirement Annuity or a Simplified Employee Pension Plan). If certain requirements are satisfied, contributions made to qualified annuities may be wholly or partially deductible from the taxable income of the individual or employer making the contributions. A non-qualified annuity is not part of an employer provided retirement program and may be purchased by any individual or entity. Contributions to non-qualified annuities are made with after-tax dollars and are not deductible from gross income for income tax purposes. For the purposes of this article, we will limit further discussion to non-qualified annuities

Answer 203

**Children must be aged 16 or younger to be eligible for the support**, and the [_household income_](https://www.childtaxcredit.gov/eligibility/) cannot exceed $112,500 (single filer) or $150,000 (couple filing jointly) to receive the full amount.

Answer 204

**Solution:** The correct answer is A. The process of portfolio immunization entails not maturity of a security, but its duration. Duration is based on coupon rate. The larger the coupon payment, the shorter the duration. This being the case, a bond generally pays higher interest than a note, and a note pays higher than short-term Treasury bills. Given this information, one could reasonably expect a shorter duration (than time to maturity), while receiving better immunization from the bond.

Answer 205

Answer: all of the above

Answer 206

**Solution:** The correct answer is D. Duration, not maturity is used to immunize a portfolio. The average weighted duration rather than the duration of each specific bond is used for successful portfolio immunization.

Answer 207

**Solution:** The correct answer is D. You may use the "rule of thumb", that is, multiply the percent increase (or decrease) by the years of duration and this will give you the percent change in price of the bond. It is best, however, to calculate this with the appropriate change of the price of a bond's formula. Change in Price = -5 [1 / (1 + .12)] = -4.5

Answer 208

**Solution:** The correct answer is C.

Answer 209

**The American opportunity tax credit is:** * Worth a maximum benefit of up to $2,500 per eligible student. * Only available for the first four years at an eligible college or vocational school. * For students pursuing a degree or other recognized education credential. * Partially refundable. People could get up to $1,000 back. **The lifetime learning credit is:** * Worth a maximum benefit of up to $2,000 per tax return, per year, no matter how many students qualify. * Available for all years of postsecondary education and for courses to acquire or improve job skills. * Available for an unlimited number of tax years. * * There are several differences and some similarities between the American Opportunity Tax Credit (AOTC), the Lifetime Learning Credit (LLC) and the deduction for tuition and fees. You can claim all three benefits on the same return but not for the same student or the same qualified expenses. See "[_No Double Benefits Allowed_](https://www.irs.gov/credits-deductions/individuals/education-benefits-no-double-benefits-allowed)" for more information on claiming one or more education benefits. * There is no limit on the number of years ***you can claim*** the credit. The credit is worth up to $2,000 per tax return. The ***LLC*** is a nonrefundable credit,

Answer 210

credit for adoptions expenses incurred up to $14K. phase out for agi between $223K-$263K non refundable credit

Answer 211

partially refundable taxable credit of $2K available for individual foe each qualifying child under the age of 17, Up to $1,400 is refundable child cannot provide more than half his support for the tax year and had to have lived with TP for more than half the year

Answer 212

$500 nonfundable credit will be allowed for qualifying dependents. includes dependents as defined under preesent law excep for qualiyfying children under age 17

Answer 213

credit of up tyo 20% of expenses paid for care of depedent under age 13 or spouse or dependent with handicap Expenses limited to lesser of $3K for one qualified individual and $6K for two or more qualified individuals and earned income of the lower earning sposue

Answer 214

child must be under age 17 for you to claim the child tax credit for child care or dependet care credit: ou may be able to claim the credit if you pay someone to care for your dependent who is under age 13 or for your spouse or dependent who isn't able to care for himself or herself.

Answer 215

included inteterst, dividends, capital gains (taxed at preferentail cap gains rates) Other sources of unearned income include: * Retirement accounts—for example, [_401(k)s_](https://www.investopedia.com/terms/1/401kplan.asp), pensions, and [_annuities_](https://www.investopedia.com/ask/answers/12/what-is-an-annuity.asp) * [_Inheritances_](https://www.investopedia.com/terms/i/inheritance.asp) * [_Alimony_](https://www.investopedia.com/terms/a/alimony.asp) * Gifts * Lottery winnings * Veterans Affairs (VA) benefits * Social Security benefits * Welfare benefits * Unemployment compensation * Property income taxed at ordinaru income rates \*\*only unearned income will be subject to kiddie tax. no earnned income will be subject to parent's rate - it will always be at kid's rate

Answer 216

preference items are all positive add backs. Ex: percentage depletion, intangible drilling costs, interest on private activity bonds (ex: builiding a stadium)

Answer 217

What Is Section 179? Section 179 of the U.S. internal revenue code is **an immediate expense deduction that business owners can take for purchases of depreciable business equipment instead of capitalizing and depreciating the asset over a period of time**. What Is Section 179? Section 179 of the U.S. [_internal revenue code_](https://www.investopedia.com/terms/i/internal-revenue-code.asp) is an immediate expense [_deduction_](https://www.investopedia.com/terms/d/deduction.asp) that business owners can take for purchases of [_depreciable_](https://www.investopedia.com/terms/d/depreciation.asp) business equipment instead of capitalizing and depreciating the asset over a period of time. The Section 179 deduction can be taken if the piece of equipment is purchased or financed and the full amount of the purchase price is eligible for the deduction. KEY TAKEAWAYS * Section 179 of the IRC allows businesses to take an immediate deduction for business expenses related to depreciable assets such as equipment, vehicles, and software. * This allows businesses to lower their current-year tax liability rather than capitalizing an asset and depreciating it over time in future tax years. * Section 179 is limited to a maximum deduction of $1,080,000 and a value of property purchased to $2,70,000 for the year 2022.

Answer 218

By 2009, the income thresholds for the child tax credit and earned income tax credit no longer aligned. The American Taxpayer Relief Act of 2012 increased the value of the federal child tax credit to $1,000 and increased the income threshold to correspond with the earned income tax credit. The Tax Cuts and Jobs Act of 2017 doubled the tax credit to **_$2,000**_ and made limits to the refundable amount of up to _**$1,400 per child_**. It also introduced phase out thresholds and rates for higher-income taxpayers. The act is temporary and will expire on Dec. 31, 2025.

Answer 219

**The basic difference between the two credits:** * The American Opportunity Credit covers only the first FOUR years of post-secondary education, while the Lifetime Learning Credit can apply all the way through grad school (and even for qualifying courses that do not lead to any kind of a degree or certificate). * The American Opportunity Credit requires that the student attend at least "half time" (as defined by the school) and is studying toward a degree or recognized certification. (There are no such restrictions in the Lifetime Learning Credit. Elective courses to improve one's job skills will qualify.) * The American Opportunity Credit limitations apply per STUDENT, while the Lifetime Learning Credit limits apply per TAXPAYER. The amount of the American Opportunity tax credit is: * 100% of the first $2,000 in qualifying education expenses, plus * 25% of the next $2,000 in qualifying expenses. For a maximum credit of $2,500 based on $4,000 in qualifying expenses. Up to 40% of the American Opportunity credit is refundable. That means up to $1,000 of the American Opportunity credit can be refunded to you, even if your tax liability is zero. The Lifetime Learning credit is 20% of the first $10,000 in qualified educational expenses that you paid for eligible students. American Opportunity Tax Credit Amount$2,500 tax credit per student (100% first $2,000, 25% second $2,000) 40% refundable (up to $1,000)Eligible Expenses: Tuition, Fees, Course Materials Eligible StudentsEnrolled at least half time, seeking a degree or certificate, no felony drug convictions

Answer 220

**The federal government allows you to claim dependent children until they are 19**. This age limit is extended to 24 if they attend college. If your child is over 24 but not earning much income, they can be claimed as a qualifying relative if they meet the income limits and/or if they are permanently disabled. What is credit for other dependents? There is a $500 credit for other dependents who do not qualify for the $2,000 child tax credit. The dependent must be a U.S citizen, U.S. national, or resident of the U.S. The dependent must have a valid identification number (ATIN, ITIN, or SSN). The $500 non-refundable credit covers dependents who don’t qualify for the child tax credit, such as children who are age 17 and above or dependents who meet the relationship test (such as elderly parents). Taxpayers cannot claim the credit for themselves (or a spouse if Married Filing Jointly). **Why am I getting the Credit for Other Dependents instead of the Child Tax Credit?** SOLVED•**by TurboTax**•136•Updated December 17, 2021 There are a few reasons why you might get the Credit for Other Dependents instead of the Child Tax Credit. Common reasons include: * Your child is now 18 years or older. * Your child is no longer considered a qualifying child, but is considered a qualifying relative dependent. * Your child has an Individual Tax Identification Number (ITIN), but doesn't have a Social Security number.

Answer 221

SD child = $1,1,00 of earned income + $400