Income Tax Exam Questions & Answers

Question 1

Given: Couple (MFJ), one son age 9 and neither spouse participate in employer-provided retirement plan.
T’s Salary: $63,250
IRA Contribution (T & P): $10,000 (Deductible)
Child Support Payment to T’s ex-Spouse: $4800
Home Mortgage Interest/Taxes: $10000
What is the Baker’s AGI for the current tax year?

Answer 1

T’s Salary ($63,250) - IRA Contribution ($10,000) = $53,250 AGI

Child Support Payments are nondeductible
Home Mortgage interest is an itemized deduction not affecting AGI

Question 2

Which of the following are allowable deductions FOR AGI?
I. Net Business Losses
II. Real estate taxes paid
III. Net Capital losses
IV. Alimony received from a divorce that was finalized in 2008
V. Casualty losses not reimbursed by insurance

Answer 2

I & III

The question asked for deductions FOR AGI. Alimony received is income; alimony paid may be deductible. There are items in the gross income lists that are deductions, such as answers I & II. Alimony paid is an adjustment from gross income to arrive at AGI.

Question 3

Sue is a regional sales manager. When she entertains customers, the agency reimburses her 100% of the cost. However, when she entertains prospective clients, the company does not reimburse her. How does this situation impact her personal income tax exposure?

Answer 3

Entertainment costs for prospective clients are not a deductible expense.

“Entertainment expenses are no longer deductible “

Question 4

Sam will declare the following items of income during the current year:

Sole Proprietorship net income: $30,000
Interest Income from CDs: $2,000
Flow-through of S corporation income $10,000

What is the amount of Self-employment tax that Sam owes for the current year?

Answer 4

$30,000 * .1413 = $4,239

S-Corp not considered SE income.

Interest income is investment income

Question 5

Dr. J is retired. He is considering purchasing an antique refurbishing business. The business experienced marginal profits in the past. He has a knowledge of antiques and plans to upgrade the equipment and building. He feels that after losing money (due to upgrades), the business will be profitable. Dr. J plans to put up all the capital. Which of the following business forms is the most appropriate?

Answer 5

S-Corporation

Dr. J needs limited liability associated with the corporate form. With an S-corp he can take losses up to his investment (basis)

Question 6

Mr. A owns a house that he rents to tenants. Mr. B owns a personal residence. Mr. A and Mr. B want to exchange properties. Under IRC section 1031 rules, which of the following statements is true?

Answer 6

Mr. A can make a like-kind exchange if he uses the transferred property as rental property

Question 7

Gloria, age 45 has owned and lived in her home for the past 10 years. She paid $100,000 for the house 10 years ago and recently sold it for $375,000. She immediately purchased a new home for $500,000. She incurred a broker’s commission of $9000 on the sale of her home. Calculate Gloria’s recognized Gain.

Answer 7

$375,000 - ($100,000 + $9,000)
= $266,000
- $250,000 (singles exclusion)
=$16,000 Gain

Question 8

Sally Franklin will report AGI $250,000. In addition, she currently has passive income of $30,000 and passive losses of $48,000, $30,000 of which she uses to offset the passive income and $18,000 of which is subject to disallowance (carry forward). Which of the following activities offers the greatest potential for reducing Sally’s income tax liability?

Answer 8

Investing in a newly created limited partnership involved in low-income housing that is producing passive losses and tax credits.

The “active participation” deduction is eliminated at $150,000 of AGI. The oil and gas Limited partnership and the equipment leasing limited partnership would produce more passive losses that are nondeductible. Equipment leasing partnerships are only effective for C-corporations.

Question 9

Casualty Loss for federally declared disaster:

Purchased the furniture for $16,000 (basis)
Insured it for $8,000
Appraised recently for $13000 (FMV)

What is the amount of deductible casualty loss if her AGI is $40,000?

Answer 9

Casualty Loss Calculation:

Lessor of Basis or FMV: $13,000
- Insurance Coverage: ($8,000)
- $100 (Floor): ($100)
- 10% of AGI: ($4,000)
= Deductible Casualty Loss $900

Question 10

For this year, R.J. Received the following K-1s in the mail:
Arizona LP. $5,000 loss
Deep hole Oil and Gas (GP) $30,000 Loss

What amount of the loss can be deducted against his other income?

Answer 10

Because the oil and gas is a general partnership (GP), the loss is deductible in full. ($30,000)

The Arizona LP loss is a passive loss.

Question 11

While the kiddie tax certainly reduces the benefits of income shifts to young children, investment advisors can counsel clients on investments that defer or avoid the unearned income. Which of the following is least suitable for a child, age 11 if $10,000 is contributed to the child’s UTMA account each year?

Answer 11

STRIPS are zero coupon treasury bonds. They would generate phantom income. The child would be subject to the kiddie tax in about 4 years. EEs produce deferred income.

Question 12

Sally age 18, sells a stock realizing a $3300 short term capital gain (her only income). Her parents are in a 35% tax bracket. What is Sally’s tax liability if she is a dependent of her parents? ($1300 is current year child’s standard deduction)

Answer 12

STCG: 3300
- Stndrd deduction $1300
= $2000
Next $1300 (10% kid tax rate) = $130
= $700 (* parents 35% tax rate) = $245

= $375

Question 13

Ms. Hale donated 1000 shares of stock to a public charity. She purchased the stock for $20 per share 5 years ago. The FMV on the date of gift was $80 per share. Her AGI is $200,000. What is the max deductible amount of this year’s charitable donation relative to the donated stock?

Answer 13

Valuating the gift at FMV, LTCG - Max deduction is 30% of AGI (30% of $200k = $60,000)
Ms. Hale will then have $20,000 to carry forward to next year.

Question 14

Adjustments for AGI

Answer 14

AGI = Gross Income - Adjustments

IRA Contributions
SE Tax (.1413)
Keogh or SEP
Alimony Paid (pre 2019 divorce)
SE Health Insurance (100%)
Student loan interest (deductible on Sch 1) (limit $2500)

Question 15

What type of planning shown below can D and G implement to reduce their taxes?
1. Donate more to charity
2. Buy more municipal bonds
3. Contribute to a deductible IRA for Dan
4. Buy and hold growth stocks rather than high dividend paying stocks
5. Buy a variable annuity for D and G as joint annuitants

Answer 15

1, 2, 4, 5
Private activity (muni bond) bonds may trigger AMT tax. The tax-free income lowers their tax liability. An IRA contribution by Dan will be nondeductible due to active participation and phase out rules. A non-deductible IRA is not an answer. Buying and holding growth stocks will reduce investment income. In a variable annuity the gain is deferred until they surrender or annuitize the annuity.

Question 16

When Dan retires, he plans to annuitize his annuity. Based on the facts in the case, how much of the monthly payments ($4,000 estimated) will be taxable?

Answer 16

Basis/**Payout x monthly payments = Exclusion

200k/960k * $4000 = $833.33 excluded

$4000 - $833.33 = $3166.67 taxable amount

** Calculate Payout = $960,000
$4,000 * 12 months * 20 years (given retirement life expectancy)

Question 17

Virginia is considering canceling her personal life insurance policy. She believes the cash values can be used for her portion of Jeffrey’s college expenses. If she is in a 25% tax bracket, what would be the tax consequence associated with surrender?

Answer 17

$7,000

The policy is a MEC. The policy was purchased for a lump sum. Virginia would pay ordinary income tax on $20,000 at 25% or $5,000 ($50,000 FMV less $30,000 basis) plus a 10% penalty on $20,000 ($2000)