Income Tax Planning Flashcards
The rules for material participation are
- More than 500 hours of participation
- Taxpayer is the only one who substantially participates
- Taxpayer spends greater than 100 hours in the tax year and no one else spends more
- Taxpayer has materially participated in any 5 of the previous 10 years
- The activity is a personal services activity and the individual has materially participated in any 3 prior years
- Taxpayer participates 100 or more hours in this activity and total participation in all such activities exceeds 500 hours
Cost recovery of an intangible asset is allowed through
amortization
example:
Goodwill
Cost recovery and depreciation (one in the same) are applied to
tangible assets
The costs of natural resources are recovered through
depletion
Maria Blue spent $12,000 in day care services for her 4 children to allow her to work. If her adjusted gross income is $100,000, how much is her dependent care credit?
$1,200
$2,400
$6,000
$12,000
Solution: The correct answer is A.
The dependent care credit is not phased out and provides a credit of 20% on up to $3,000 per qualifying child with a maximum of $6,000 for two or more children. Therefore her credit is $1,200 = $6,000 × 0.20.
To what extent may the rental losses of an active participant be deducted against active and passive income?
- $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.
- 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.
Deductibility Rules
Domestic: If primarily business then deduct all airfare. Prorata meals and lodging.
Foreign: Prorata meals and lodging. Prorata airfare unless (then you can deduct all): < 7 days <25% on personal
No control; vacation not a deciding factor
Remember that meals are only 50% deductible
Section 1245
The sale of tangible personalty used in a trade or business at a gain
if the insurance proceeds exceed the property’s adjusted basis, the excess is considered a sale and any portion of gain attributable to depreciation will be subject to Section 1245 recapture.
occurs any time a gain results from the reduction of basis due to depreciation.
applies to gain resulting from a reduced basis due to depreciation
Property sold or abandoned below the basis adjusted by depreciation is not subject to Section 1245 recapture because either not all depreciation was taken or there was more likely a loss rather than a gain. For 1245 recapture to occur there must be a gain over the basis
MACRS depreciation life
Computers
Residential real property
Office furniture
Autos
Computers, Autos, and Trucks are 5 year
Office furniture is 7 year
Residential real property (rental houses) is 27.5 year
Nonresidential real property (commercial buildings) is 39 year.
Methods of Depreciation
MACRS
CAT - Computers Auto Trucks - 5 years - 1245 recapture
O - Office furniture and Fixture - 7 years - 1245 recapture
R - Residential -27.5 years - 1250 recapture
N - Non residential Comm’l - 39 years -1250 recapture
RIA Federal Tax Coordinator.
RIA provides plain language interpretation of tax law
Congressional Committee Reports
The best source for gathering information about the intent of recent changes in the tax law
(sometimes known as the Blue Book) provides congressional reasoning for enacting tax law.
Treasury Regulations
it is the highest level of tax regulations, but does not indicate the intent of Congress in enacting tax law.
Tax Court Cases
provides ruling of the U.S. Tax Court in the form of case law
Commerce Clearing House Federal Tax Guide
the best source for obtaining a plain language understanding about the current tax law
Commerce Clearing House (CCH) provides plain language interpretation of tax law.
Revenue Act of 1861
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
16th Amendment
the 16th Amendment gave Congress the power to impose an individual income tax, but did not itself impose that tax
Revenue Act of 1916
the Revenue Act of 1916 raised the rates previously imposed under the Revenue Act of 1913
Revenue Act of 1913
imposed the first constitutional federal income tax
TCJA, home mortgages are limited to qualified residential interest and a maximum indebtedness of
if financed after 12/15/17 $750,000
For debt prior to 12/15/17, the $1 million limit applies
mixed-use activity
That is, the property is rented out for 15 days or more, but the owner personally uses it for the greater of 14 days or 10% of the rental days
The classifications of income are:
The classifications of income are
active,
passive
portfolio.
Earned income is a subset of active income while unearned income may be either a passive or portfolio income.
FOR AGI
All business deductions are classified as deductions FOR AGI
Some business and some personal deductions are classified as deductions FOR AGI
All business expenses (taken by their owners, i.e. sole proprietor or partner) are taken above the line or FOR AGI.
A “business deduction” is tied to the business or owners. These are reported on the sole proprietor’s schedule C, or a partner’s K-1 (which flows onto the Schedule E of Form 1040), for example. Business deductions are all above the line (FOR AGI).
An HSA contribution is a personal deduction above the line (FOR AGI).
FROM AGI
Some personal deductions are classified as deductions FROM AGI
“Personal deductions” are not tied to a business. For example, mortgage interest is a personal deduction below the line (FROM AGI). An HSA contribution is a personal deduction above the line (FOR AGI).
“Job-related employee expenses” used to be deductible as a miscellaneous itemized deductions subject to the 2% floor, a below the line deduction (FROM AGI). Those are no longer available for tax years 2018-2025.
Karen and Tom are married filing jointly taxpayers with 3 children. Their MAGI is $85,000. What is the maximum amount of the child tax credit that could be refundable to Karen and Tom?
They have 3 children. The child tax credit is $2,000 per child against their tax obligation, up to $1,400 ($4,200 for the three children) per child can be refundable if there is no tax obligation due.
cash receipts and disbursements method of accounting?
The cash receipts method is the easiest accounting method to understand.
A taxpayer who uses the cash method for reporting most items may use a different method for reporting self-employment income.
accrual method of accounting
Income is reported as it is earned and expenses are reported as they are incurred
Reporting of income and expenses is subject to the all events test
Tax preparer penalty for willful or reckless conduct
Blake is a CFP® professional and prepares tax returns for his clients. He prepared his brother’s income tax return for $1,000 and he willfully neglects to include $30,000 of income since his brother did not receive a 1099 for consulting work. Blake is aware that his brother earned the $30,000 but fails to report it since he doesn’t believe the IRS will catch the understatement of income. The additional tax on this $30,000 of income would have been $7,500. How much of a penalty may Blake be subject to for the understatement of income?
None, but his brother will be subject to penalties.
$3,750
$5,000
$7,500
The preparer penalty for willful or reckless conduct is the greater of $5,000 or 50% of the income derived by the preparer for the return.
Answer $5000
kiddie tax applies
a person under the age of 19 or under the age of 24 and a full-time student at the end of the tax year, would pay tax at their parent’s tax rate if they had more than $2,200 in unearned income.
For dependent children, unearned income over $2,200 is subject to tax at the parent’s tax rates.
Earned income is not subject to kiddie-tax. His standard deduction is the greater of $1,100 or his earned income plus $350, not to exceed $12,400 in 2020
4th quarter federal estimated income tax payment. When is this payment due?
The 4th quarter federal income tax estimated payment is due by January 15th of the year following the year the payment is being made for.
above-the-line deduction
A contribution to an HSA.
A contribution to a traditional IRA.
Student loan interest.
below-the-line deduction
Medical expenses.
Social Security benefits
The earnings test only applies to earned income received by the Social Security recipient.
Royalties from a published novel.
EXCLUDED
Dividends received from investments are considered unearned income.
Distributions from retirement plans are considered unearned income.
Distributions from retirement plans are considered unearned income.
S corporation.
flow-through taxation.
would like to be able to easily sell interests in the business,
Does not expect to have more than 20 investors.
does not want to pay self-employment taxes on all income
Receives income when the corporation declares and pays a dividend.
Votes for the Board of Directors at the annual shareholders’ meeting.
Receives a K-1 annually in order to prepare a personal income tax return.
Reports on a personal income tax return a pro rata share of the corporate profit or loss.
partnership would not provide limited liability and Danny would have to pay self-employment taxes on the business net income
Ownership of S corporation stock is restricted to individuals who are either US citizens OR US residents, estates, certain trusts, and charitable organizations. A shareholder in an S corporation may vote to retain or revoke S corporate status, votes, receives an annual K-1 and reports their pro rata share of profit or loss on their personal income tax return.
maximum investment interest deduction
The taxpayer’s investment interest deduction is limited to the investment income.
The excess investment interest can be carried over to next year.
Dakota qualifies as a dependent of his parents. This year, he earned $500 from a part-time job and $1,500 in interest from a savings account. Dakota’s taxable income for this year is:
The calculation is as follows: $1,500 (interest) + $500 (wage) = $2,000 (gross income) - $1,100 (greater of standard deduction of $1,100 or $350 plus earned income) = $900 of taxable income, taxed at Dakota’s tax rate.
personal exemptions
Per the TCJA, personal exemptions are suspended from 1/1/18 through 12/31/2025.
following tests must be satisfied by a qualifying child
Relationship Test.
Abode Test.
Citizenship Test
The Gross Income Test is a requirement for a qualifying relative, not a qualifying child. All of the other tests must be satisfied by a qualifying child.
Albacore, Inc., an accrual method taxpayer, was incorporated on January 2 this year but did not begin business operations until July 1. Albacore adopted a calendar year tax year and incurred the following expenses during its first tax year:
Incorporation fees paid to State: $150
Expenses in connection with issuing and selling stock: $1,800
Legal fees incident to incorporation: $1,650
If Albacore, Inc. makes an appropriate and timely election, the maximum organizational expenditures that it can properly deduct for the current year would be:
Expenses incurred in connection with issuing and selling stock are not deductible. The rule is the lesser of expenditures or $5,000. Therefore, $1,650 + 150 = $1,800.
the deduction of costs associated with investigating the purchase of a new line of business is
If the new line of business is not purchased, no deduction is permissible.
If the new line of business is purchased and it is in the same line of business as the current trade or business operation, the cost of investigating the new business is fully deductible.
The ability to deduct the cost of investigating a new line of business is often overlooked by taxpayers.
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.
the types of credits available to individual taxpayers
Refundable.
Non-refundable.
There are many non-refundable credits including, but not limited to, child care. EIC is the only fully refundable credit. The IRS recognizes two categories of credits; refundable and non-refundable. The term refundable does not necessarily imply that it is fully refundable, it may be fully or partially refundable. AOTC and child tax credit are partially refundable.
Kevin’s 12 year old daughter, Angel, has a brokerage account that generates $13,000 of interest income and $2,000 of qualified dividends for the current year. Angel also has earned income of $13,000 from modelling that she is saving for college. How much will be taxed at Angel’s tax rate?
The calculation is as follows:
Start with figuring the standard deduction, earned income +350 not to exceed 12,400 in 2020.
Unearned Income:
13,000 + 2,000 = 15,000
15,000 - 1,100 (standard deduction) = 13,900
13,900 - 1,100 (at the child’s rate) = 12,800
The remaining 12,800 will be taxed at the parent’s rate.
Earned Income:
13,000 - 11,300 (remaining standard deduction: 12,400 - 1,100) = 1,700 at the child’s rate.
Summary:
Standard deduction is 1,100 + 11,300 = 12,400
At the parent’s rate 12,800.
At the child’s rate (1,100 + 1,700) = 2,800.
Two years ago, Bill purchased stock in Pinkley Corporation (the stock is not small business stock) for $1,000. In the current year, the stock became worthless. During the current year, Bill also had an $8,000 loss on small business stock (Section 1244) purchased two years ago, a $9,000 loss on a non-business bad debt, and a $5,000 long-term capital gain. What should Bill report this year?
8,000 ordinary loss; $3,000 short-term capital loss and a $2,000 short-term capital loss carryover.
The non-business bad debt is treated as a short-term capital loss. The loss on worthless stock held for more than one year is a long-term capital loss. The loss on small business stock Section 1244 is recognized as an ordinary loss not subject to the capital loss rules. Note the following calculation: $5,000 (long-term capital gain) - $1,000 (long-term capital loss worthless stock) = $4,000. From this amount, subtract $9,000 (non-business bad debt expense - short-term capital loss) to obtain a net short-term loss of ($5,000.) However, the maximum annual capital loss deduction is net $3,000.
master limited partnership (MLP)
Losses from the MLP will be considered passive losses.
The losses from the limited partnership cannot be used offset income from the MLP
Interest income earned by the partnership will be included in the net investment income tax calculation on Gene’s individual income tax return.
If the MLP is profitable, none of the losses from the limited partnership can be used to offset the MLP income.
The penalty for filing a fraudulent income tax return is
The penalty for filing a fraudulent income tax return is 75% of the deficiency.
deemed a dependent of the taxpayer
NOT- Cousin
IRS Publication 501: Relatives who don’t have to live with you. A person related to you in any of the following ways doesn’t have to live with you all year as a member of your household to meet this test.
Your child, stepchild, foster child, or a descendant of any of them (for example, your grandchild). (A legally adopted child is considered your child.)
Your brother, sister, half brother, half sister, stepbrother, or stepsister.
Your father, mother, grandparent, or other direct ancestor, but not foster parent. Your stepfather or stepmother.
A son or daughter of your brother or sister. A son or daughter of your half brother or half sister.
A brother or sister of your father or mother.
Your son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
Any of these relationships that were established by marriage aren’t ended by death or divorce.
Payments for employment-related care that are made to relatives of the taxpayer may qualify for the credit for child and dependent care expenses.
Payments for employment-related care made to the taxpayer’s aunt.
Payments for employment-related care made to the taxpayer’s 21-year-old daughter (who is not a dependent of the taxpayer).
Payments for employment-related care made to taxpayer’s 17-year-old niece.
Do not Qualify:
Payments for employment-related care made to a dependent of the taxpayer do not qualify for the credit for child and dependent care expenses
treated as an appropriate economic unit for the grouping of passive activities?
The similarities and differences in types of business.
The extent of common control.
The extent of common ownership
five tests which must be met to qualify as a dependent for a qualifying relative is
1) Gross Income Test,
2) Support Test,
3) Not a qualifying child,
4) Citizenship Test (U.S., Canada or Mexico), and
5) Joint Filing Test.
Advance rent
Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use.
Mackenzie has two apartment units that are occupied by tenants all year long. In December, the tenants in unit 2 paid him in advance for the next January’s rent. The regular rent is $1,000 per month for each of the units. How much rental income must Mackenzie include in taxable income this year?
$25,000
recapture rules for Section 179
When the asset is sold before it would have been fully depreciated.
When the business use drops below 50%.
Refundable tax credits include
Earned income credit.
The Earned Income credit is refundable; able to create a negative tax liability. The American Opportunity credit and Child tax credit may be partially refundable.
Elaine incurred $26,000 of margin interest on her $600,000 investment portfolio. Her portfolio income consists of $10,000 in interest, $15,000 in qualified dividends, $3,000 in ordinary dividends, $6,000 in short-term capital gains, and $11,000 in long-term capital gains. How much of the margin interest is deductible on Elaine’s tax return assuming no special elections?
She can deduct up to her net investment income which = $10,000 + 3,000 + 6,000 = $19,000 without making a special election. If she elected to treat the long-term capital gains and qualified dividends as ordinary income she could deduct it all. However, DO NOT assume that the election is made. The question would have to specify that information or ask “what is the maximum she can deduct?”
items not allowed when figuring an NOL
Any deduction for personal exemptions. ·
Capital losses in excess of capital gains. ·
The section 1202 exclusion… ·
Nonbusiness deductions in excess of nonbusiness income. ·
Net operating loss deduction. ·
The domestic production activities deduction.
Kevin was ordered to pay his ex-wife Janet $12,500 per year for support for 10 years. Kevin simply decided to pay her $50,000 the first and second year and then $25,000 in the third year, and Janet agreed. What will you tell him that the implications of this might be?
P1 + P2 - 2P3 - $37,500 = Recapture, therefore $50,000 + $50,000 - 2($25,000) - $37,500 = $12,500 of alimony recapture.
NUA
Julie Marks retires at age 65 and receives a lump-sum distribution worth $575,000. The market value of employer securities is $125,000, and the cost basis for the securities is $65,000. Julie is in the 32% income tax bracket. She has chosen to roll the company securities separately from the remainder of her retirement plan going to an IRA, based on her financial planner’s advice. What are her tax consequences for this transaction?
Julie would roll $125,000 of employer stock to a brokerage account following NUA (Net Unrealized Appreciation) rules. The basis in the stock of $65,000 would be taxable to her at the rollover. $65,000 at 32% is $20,800. When she sells the stock, the remainder up to $125,000 will be taxed at LTCG rates. Any gain above that would be subject to her holding period. Had she rolled the entire balance to an IRA, all distributions in retirement would be at ordinary tax rates. The balance of $450,000 will roll tax-deferred to an IRA.
Account balance: $575,000
Employer securities: $125,000, basis is $65,000.
575,000 - 125,000 = 450,000 rolls to the IRA
ER stock:
65,000 is taxed at ordinary income (32% for Julie) = tax due of 20,800
The difference between 125,000 - 65,000 = 60,000 is locked in at LTCG rates when she sells the stock.
If she sold today 125,000 - 65,000 already taxed = 60,000 subject to LTCG tax.
If she sold 6 months from today and the stock was worth 130,000, it would be taxed as follows:
65,000 already taxed
60,000 at LTCG
5,000 is based on holding period, which is STCG
Ella received nonqualified stock options (NQSOs) with an exercise price equal to the FMV at the date of the grant of $20. Ella executes a cashless exercise when the FMV of the stock was $30. Which of the following statements are true?
Ella will receive less than $10 due to withholding and transaction costs.
Ryan and his wife, Talley, are retired and living off several sources of income. He receives $2,000 per month from Social Security while Talley receives $1,750 per month from Social Security. They also have minimum distributions of $10,000 per year. What percent of their Social Security is subject to tax – pick the closest percentage?
To determine whether Social Security benefit payments are subject to income tax, you must first calculate the combined (f.k.a. provisional) income. Combined income = AGI + tax exempt interest + foreign income + ½ of the Social Security benefit. Ryan and Talley’s total Social Security income is $45,000, and ½ of that amount is $22,500. Their combined income is $10,000 RMD + $22,500 = $32,500.
The next step is to compare the combined income to the appropriate threshold. For married taxpayers filing jointly, the thresholds to determine the amount of Social Security benefits subject to tax are $32,000 and $44,000. Since their income is between the thresholds, the amount of Social Security subject to tax is the lesser of 1) 50% of Social Security benefits, or 2) 50% of the amount of combined income above the lower threshold. Ryan and Talley’s combined income exceeds the threshold by $500, and 50% of that amount is $250. This amount is lower than 50% of their Social Security benefits, so $250 is the amount subject to tax. $250/$45,000 = .55% that is subject to tax. This is closest to 0%.
On January 1, two years ago, Robin bought Machine X for $100,000. The machine is classified as 5 year property under MACRS. Machine X has a salvage value of $10,000. What is the amount of the third year depreciation for Machine X?
$19,200
The convention is double declining balance (DDB) half year first year and switch to straight line when straight line would be preferable to DDB. 1st Year is 100% / 5 × 2 = 40% × ½ = 20%
2nd Year is (100% - 20%) × 40% = 32%
3rd Year is (100% - 52%) × 40% = 19.2%
Salvage is ignored in the calculation but the taxpayer cannot depreciate more than a total of $90,000 when the salvage value is $10,000.
Section 179 expense deduction
Section 179 expense is only available for property used in a trade or business. Property used for the production of income, such as rental property furniture, is not eligible for the Section 179 expensing deduction.
Answer = 0
Julio is a 48-year-old advertising executive with a current salary of $125,000. He owns a condo in Colorado that he rents out to tourists for six months each year, generating a net rental profit of $20,000. He lives in the condo the other six months of the year. Assuming Julio purchased $50,000 of new furniture for the condo, what is the amount of Section 179 expense deduction he could take on his personal income tax return this year?
Which of the following statements regarding the alternative minimum tax (AMT) credit is correct?
A. The AMT credit for an individual is only available to the extent the alternative minimum tax liability was created by exclusion items.
B. The AMT credit for a corporation is only available to the extent the alternative minimum tax liability was created by exclusion items.
C. The AMT credit cannot be used to offset a taxpayer’s future alternative minimum tax liability.
D. The AMT credit can be carried forward up to five years, but cannot be carried back.
Solution: The correct answer is C.
A is incorrect. The credit is only available for AMT liabilities created due to deferral items.
B is incorrect. The credit is available to a corporation regardless of whether the AMT liability arose from a deferral or exclusion item.
D is incorrect. The credit can be carried forward indefinitely.
Mariette’s church sponsored a dinner, which included a raffle for a new computer. Mariette paid $50 for the dinner, and paid $25 to purchase a raffle ticket. Assuming the actual value of the dinner was $30, how much can Mariette claim as a charitable contribution deduction on her personal income tax return?
$20
The purchase of a raffle ticket would not be considered a charitable contribution, even if the ticket was purchased from a church or other qualified charity. The raffle ticket would be considered a gambling loss.
With respect to the dinner, Mariette would only be allowed to claim a deduction for the excess of the amount she paid over the value of the dinner. Therefore, her deduction is $20 ($50 paid for the dinner less $30 value of the dinner).
An individual invested in a limited partnership. Under the at-risk rules, the investor’s deduction for losses incurred by the partnership is limited to:
The investor’s share of recourse debt plus the amount invested.
Under the at-risk rules, the investor’s at-risk amount is the amount invested, plus the investor’s share of recourse debt.
Ralph is a widower living in a separate property state. In February 2020, he gifted $8,000 cash to his adult daughter and paid for her $5,000 cosmetic surgery by writing a check directly to the hospital. How much more this year can Ralph gift to his daughter without having to file a gift tax return?
A. $0.
B. $2,000.
C. $7,000.
D. $10,000.
The correct answer is B.
A donor does not need to file a gift tax return if the gift is less than the annual exclusion. For 2020, the annual exclusion is $15,000. The $8,000 cash gift counts as a gift, because it was given directly to the daughter, and therefore, counts against the annual exclusion.
A direct transfer to a medical services provider (such as a hospital) is typically considered a qualified transfer that does not count as a gift for gift tax purposes. However, for a transfer to be considered a “qualified transfer,” the medical expense must be deductible for income tax purposes. Cosmetic surgery is not deductible for income tax purposes. Therefore, the amount paid to the hospital is considered a gift for gift tax purposes.
Ralph is treated as giving gifts to his daughter in the amount of $13,000 ($8,000 + $5,000). He can still give an additional gift of $2,000 ($15,000 - $13,000) this year without filing a gift tax return.
Ford’s federal income tax return was due on April 15 of the current year, but Ford did not file his return or pay his taxes until June 30 of the current year. Ford’s unpaid tax balance during this period was $400. What is the total penalty that will be imposed on Ford for his failure to file and failure to pay?
$60.
$215
$400.
$435.
The correct answer is C.
The failure to file penalty is 5% of the unpaid tax balance for each month or part thereof that the tax return is late (up to 25% of the unpaid tax balance). Therefore, Ford’s failure to file penalty is $60 (3 months × $400 × 5%). However, if a tax return is filed more than 60 days late (as it is in Ford’s case), the minimum failure to file penalty is the lower of $435 or 100% of the tax due.
Therefore, Ford’s failure to file penalty is actually $400 (100% of taxes due) Ford is also subject to a failure to pay penalty of 0.5% per month or part thereof. Therefore, Ford’s failure to pay penalty is $6 (3 months × $400 × 0.5%). Note that the failure to file penalty is reduced by the failure to pay penalty. Therefore, Ford’s total penalty is $400 ($400 failure to file penalty - failure to pay= $394, plus $6 failure to pay penalty).
Tax Formula
Gross income
- Above the line deductions
= AGI
- Below the line deductions (standard deduction or itemized)
- Personal and dependency exemptions (after TCJA expires)
= Taxable Income
Calculate tax based on filing status
- Credits
+ Other taxes
- Prepayments
= refund or additional tax due
Qualified Dividend
Non Qualified
dividends will qualify for qualified dividend treatment if the individual meets the requisite holding period, which is more than 60 days in the 121 days surrounding the ex-dividend date. Since he only held the stock for 39 days, he does not meet the holding period. Therefore, the tax rate applied against the dividend is his ordinary income tax rate of 25%
qualified dividend rate is 15% for individuals in the 25% bracket.
Ginger, age 21 and a full-time student for a degree at State University, qualifies as a dependent on her parents’ return. During the summer, she earned $5,500 from a part-time job. Her only other income consisted of $950 interest on a savings account. What is Ginger’s taxable income for the current year?
$0
$600
$1,100
$5,500
The correct answer is B.
The standard deduction for Ginger is the greater of $1,100 or $350 plus earned income but not to exceed the normal standard deduction. Therefore $350 + $5,500 = $5,850 so it is not limited in 2020. The total income is $5,500 + $950 = $6,450. Taxable income is $6,450 - $5,850 = $600.
What is the marginal income tax rate
The marginal tax rate is the tax rate applied to the last dollar earned.
The tax rate applied to the last dollar of taxable income earned
Ford’s federal income tax return was due on April 15 of the current year, but Ford did not file his return or pay his taxes until June 30 of the current year. Ford’s unpaid tax balance during this period was $400. What is the total penalty that will be imposed on Ford for his failure to file and failure to pay?
$60.
$215
$400.
$435.
The correct answer is C.
The failure to file penalty is 5% of the unpaid tax balance for each month or part thereof that the tax return is late (up to 25% of the unpaid tax balance). Therefore, Ford’s failure to file penalty is $60 (3 months × $400 × 5%). However, if a tax return is filed more than 60 days late (as it is in Ford’s case), the minimum failure to file penalty is the lower of $435 or 100% of the tax due.
Therefore, Ford’s failure to file penalty is actually $400 (100% of taxes due) Ford is also subject to a failure to pay penalty of 0.5% per month or part thereof. Therefore, Ford’s failure to pay penalty is $6 (3 months × $400 × 0.5%). Note that the failure to file penalty is reduced by the failure to pay penalty. Therefore, Ford’s total penalty is $400 ($400 failure to file penalty - failure to pay= $394, plus $6 failure to pay penalty).
4th quarter federal estimated income tax payment. When is this payment due?
The 4th quarter federal income tax estimated payment is due by January 15th of the year following the year the payment is being made for.
January 15th of next year.
Kelly and Terry are separated and in the process of divorce so they are going to file their income tax return for last year separately. Kelly made a large number of charitable contributions from her own separate checking account at the end of last year so she wants to file using itemized deductions. What are Terry’s options assuming Kelly files using itemized deductions?
A) Terry may utilize the standard deduction or itemized deduction, whichever is less.
B) Terry may utilize the standard deduction or itemized deduction, whichever is greater.
C) Terry must utilize the standard deduction.
D) Terry must utilize itemized deductions.
The correct answer is D.
A married individual who files a separate return (married filing separately filing status) cannot use a standard deduction if that person’s spouse itemizes deductions.
Blake is a CFP® professional and prepares tax returns for his clients. He prepared his brother’s income tax return for $1,000 and he willfully neglects to include $30,000 of income since his brother did not receive a 1099 for consulting work. Blake is aware that his brother earned the $30,000 but fails to report it since he doesn’t believe the IRS will catch the understatement of income. The additional tax on this $30,000 of income would have been $7,500. How much of a penalty may Blake be subject to for the understatement of income?
None, but his brother will be subject to penalties.
$3,750
$5,000
$7,500
The correct answer is C.
The preparer penalty for willful or reckless conduct is the greater of $5,000 or 50% of the income derived by the preparer for the return. In this case, he charged his brother $1,000.
Mr. Rangel files a fraudulent income tax return (again) and has a $10,000 income tax deficiency because of it. What is the amount of his penalty?
$10,000
$8,000
$7,500
$5,000
The correct answer is C.
The penalty for filing a fraudulent income tax return is 75% of the deficiency.
- AMT
- Regular Taxable Income
- +- Adjustments
- Preferences
- Less AMT Exemptions (2020):
- $113,400 for married taxpayers, filing jointly.
- $72,900 for single and unmarried head of household.
$56,700 for married filing separately
Adjustments (examples)
- Accelerated depreciation for real and personal property that is allowable for regular tax purposes.
- The standard deduction if itemized deductions are not used
- Taxes (State, Local, Property)
- Incentive Stock Option bargain element
- Positive at Exercise
Negative at Sale
Preference Items
- Percentage depletion
- Intangible drilling costs
- Interest on private activity bonds
All of the following statements about the Alternative Minimum Tax (AMT) are correct, EXCEPT:
A taxpayer may elect to pay tax based on the AMT calculation if it produces a lower tax result.
The AMT is designed primarily to change the timing of tax payments to more current tax payments.
The AMT frustrates efforts by taxpayers to participate in activities that reduce or eliminate their current tax liability.
Some adjustments made for AMT purposes result in a permanent increase in tax.
The correct answer is A.
If the calculated tax due is greater under the AMT, the taxpayer must pay the higher amount. The AMT is not a voluntary alternative to the regular tax system. It is a mandatory alternative, and applies only when the AMT tax exceeds the regular tax imposed on the taxpayer.
Edward told his nephew that if the nephew would care for Edward in his old age, the nephew could have all of Edward’s securities when he died. At the time of the promise, the securities had a fair market value of $50,000. The nephew took good care of Edward, whose will left the securities to the nephew. The fair market value of the securities at the time of Edward’s death was $80,000. Edward could have gone to a nursing home and obtained the same services as provided by the nephew for $40,000. The nephew’s gross income from the above is:
$0; this is an inheritance.
$40,000; this is earned income at the fair market value.
$50,000; this is earned income as of the time of the promise.
$80,000; this is earned income equal to the date of death value.
The correct answer is D.
Because the agreement was to compensate Edward’s nephew for his services, even though the transfer occurred following death, it is not a gift or bequest. It is compensation for services performed. Compensation of property has a value equal to its fair market value on the date of transfer. The fact that Edward died and a step up in basis would ordinarily occur is immaterial.
Alice owns land “A” with an adjusted basis of $250,000, subject to a mortgage of $50,000. On July 1st, Alice exchanges land “A” and its mortgage for $300,000 in cash, a promissory note for $300,000, and property “B” that has a fair market value of $75,000 with Betty. What is the amount realized by Alice?
$675,000
$725,000
$925,000
$975,000
Alice owns land “A” with an adjusted basis of $250,000, subject to a mortgage of $50,000. On July 1st, Alice exchanges land “A” and its mortgage for $300,000 in cash, a promissory note for $300,000, and property “B” that has a fair market value of $75,000 with Betty. What is the amount realized by Alice?
$675,000
$725,000
$925,000
$975,000
he correct answer is B.
The realized amount not only includes the monies and fair market value of property “B” received (and any indebtedness the buyer has to the seller), but also any liabilities for the seller is relieved. In this case, the seller received $675,000 in cash, property, and notes (buyers indebtedness to the seller) as well as relief from $50,000 in mortgage. The total amount realized is $725,000.
Summary:
When dealing with an exchange, there are two things to note: realized and recognized. Realized is a transaction happening. Recognized is when a realized transaction has not met an exception and must have tax calculated. A like kind exchange is an exception to realized transactions to not be recognized. This question asked the realized amount which is the value received plus debt relief totaling 725k. There is no recognized amount, which is what you were trying to calculate.
Alice is getting:
Relief from mortgage $ 50,000
+ Cash $300,000
+ note $300,000
+ property $ 75,000
= total received $725,000 this is her “amount realized”
safe harbor rules - tax withholding need to be met
Noah has been working part-time through college and earned $20,000 last year with a total federal income tax liability of $1,200. This year he will earn $100,000 with an expected income tax liability of $15,000. What is the lowest amount of tax withholding Noah should have to meet the safe harbor rules?
A) $1,200
B) $12,000
C) $13,500
D) $15,000
The correct answer is A
For prior year AGI < $150,000
He has two choices: lesser of 90% of this year’s tax liability or 100% of last year’s tax liability . Last year’s income tax liability was $1,200 and 90% of this year is $13,500. Therefore, the lowest amount that of tax withholding that needs to be met is $1,200.
For prior year AGI > $150,000
Lesser of 90% of current year tax liabiliyt or 110% of the prior year’s tax liability
Which of the following is not a requirement that must be satisfied in order for a legally married taxpayer to use the head of household filing status?
A) The taxpayer must file a separate tax return from the spouse.
B) The taxpayer must furnish over one-half of the cost of maintaining the household.
C) The spouse must not be a member of the household during the last six months of the tax year.
D) The taxpayer must be legally separated from the spouse
The correct answer is D
The taxpayer is not required to be legally separated from the spouse in order to qualify as an abandoned spouse and use the head of household filing status. All of the other options are requirements for qualifying as an abandoned spouse.
Dependent
NOT Cousin - not relationship unless live with you
five dependency tests are:
1) Gross Income Test, must be less than $4,300 (2020)
2) Support Test, > 50%
3) Member of Household or Family Member Test,
4) Citizenship Test (U.S., Canada or Mexico), and
5) Joint Filing Test.
Either Gertrude or Henry may claim Eloise as a dependent because they each provided more than 10% of Eloise’s support and together they provided more than 50% of her support. In order for one of them to claim Eloise as a dependent, however, the other must sign a statement agreeing not to claim an exemption for Eloise for this year.
Cousin is from the same generation as Tax payorr Gee (even though she is presumably much younger than Gee), she does not meet the relationship test. A qualifying child must be from a lower generation than the taxpayer.
Income received but not spent is applicable to the gross income test but not the support test.
To claim someone as a dependent you have to provide at least 50% of their support. If the child has income that just goes into savings or spent on miscellaneous fun items instead of being used toward paying their bills (housing, clothing, food, etc.), while you are paying their bills, then you are supporting them. The income counts as gross income for the child, but it is not support unless they use it to support themselves.
qualifying child
Relationship Test.
Abode Test.
Citizenship Test.
Karen and Tom are married filing jointly taxpayers with 3 children. Their MAGI is $85,000. What is the maximum amount of the child tax credit that could be refundable to Karen and Tom?
$0.
$2,000.
$4,200.
$6,000.
The correct answer is C.
They have 3 children. The child tax credit is $2,000 per child against their tax obligation, up to $1,400 ($4,200 for the three children) per child can be refundable if there is no tax obligation due.
Payments for employment-related care that are made to relatives of the taxpayer may qualify for the credit for child and dependent care expenses. Which of the following payments does not qualify?
A) Payments for employment-related care made to the taxpayer’s aunt.
B) Payments for employment-related care made to the taxpayer’s 21-year-old daughter (who is not a dependent of the taxpayer).
C) Payments for employment-related care made to a dependent of the taxpayer.
D) Payments for employment-related care made to taxpayer’s 17-year-old niece.
The correct answer is C.
Payments for employment-related care made to a dependent of the taxpayer do not qualify for the credit for child and dependent care expenses. All of the other options are qualifying payments.
Qualified dependent credit
The “Qualified dependent credit” is new under TCJA and applies to qualified dependents and/or qualifying children 17 and over. It is limited to $500.
child tax credit
The “child tax credit” applies to qualifying children under age 17 and was expanded under TCJA to $2,000 per child, with the possibility of up to $1,400 per child being refundable.
earned income credit
The “earned income credit” is a credit against the calculated tax, available to those with very low income, predominantly from earnings (wages) and it is a refundable credit.
American Opportunity Tax credit.
designed for the first four years of a post secondary degree program and offers the highest maximum credit of $2,500 versus $2,000 for the Lifetime Learning credit. Also, a taxpayer cannot take both the Lifetime and American Opportunity credits in the same year for the same student.
100% first $2000 + 25% next $2000 = max $2,500
Refundable credit 40% X or $1000
Not eligible if student already have 4 year degree
AGI
MFJ $160,000 - $180,000
S $80,000 - $90,000
Which of the following is a condition for receiving a dependent care credit?
The taxpayer must provide over 1/2 cost of maintaining the household, which is also the principal residence of the child.
The child must be a dependent.
If married, both parents must work or go to school.
All of the above.
The correct answer is D.
These are all conditions for claiming the dependent care credit.
Kent earned a salary of $175,000 during 2020. Assuming the Social Security wage base was $137,700, what is the amount of FICA taxes paid by Kent (rounded to the nearest dollar)?
A. $9,730.
B. $11,075
C. $13,388.
D. $26,775.
The correct answer is B.
The first $137,700 (for 2020) of Kent’s salary will be taxed at the full employee FICA rate of 7.65%. Amounts earned over $137,700 will be taxed at the Medicare rate of 1.45%.
The total FICA due is:
$137,700 x 7.65% = $10,534.05
$37,300 x 1.45% = $540.85
Total FICA = $11,074.90
For purposes of the Social Security earnings test, which of the following types of income would potentially cause a reduction in Social Security benefits?
A. Dividends received from a global mutual fund.
B. Royalties from a published novel.
C. Distribution from a defined benefit plan.
D. Required minimum distribution received from a traditional IRA.
The correct answer is B.
The earnings test only applies to earned income received by the Social Security recipient.
A is incorrect. Dividends received from investments are considered unearned income.
C is incorrect. Distributions from retirement plans are considered unearned income.
D is incorrect. Distributions from retirement plans are considered unearned income.
AMT result in Minimum Tax Credit
Which of the following represents an addback for alternative minimum tax that would potentially result in a minimum tax credit?
A. Bargain element of Incentive Stock Options.
B. Casualty loss deduction.
C. Interest income from a private activity bond.
D. Real estate tax deduction.
The correct answer is A.
The bargain element of an incentive stock option is an addback for alternative minimum tax purposes. In addition, since the addback is considered a deferral item for AMT, it would be eligible for the minimum tax credit in subsequent years.
B is incorrect. Casualty loss deductions are not added back for alternative minimum tax purposes. C is incorrect. Although interest income from a private activity bond is an addback for alternative minimum tax purposes, it is considered an exclusion item. Exclusion items are not eligible for the minimum tax credit. D is incorrect. Although real estate taxes are added back for alternative minimum tax purposes, they are considered an exclusion item. Exclusion items are not eligible for the minimum tax credit.
Georgia recently rolled over her traditional IRA from one institution to another. When preparing Georgia’s tax return for the year, which combination of IRS forms would be used by her CPA to obtain necessary information relating to the rollover?
A. Form 8606 and Form 1040.
B. Form 8606 and Form 5498.
C. Form 1099-R and Form 5498.
D. Form 1099-R and Form 1040.
The correct answer is C.
Form 1099-R is used to report the amount of the rollover. Form 5498 reflects contributions to the IRA.
A is incorrect. Form 8606 is used to determine the tax consequences of certain taxable distributions from IRAs.
B is incorrect. Form 8606 is used to determine the tax consequences of certain taxable distributions from IRAs.
D is incorrect. Form 1040 would be used to report the rollover but not to gather information relating to the rollover.
The correct answer is C.
Form 1099-R is used to report the amount of the rollover. Form 5498 reflects contributions to the IRA.
A is incorrect. Form 8606 is used to determine the tax consequences of certain taxable distributions from IRAs.
B is incorrect. Form 8606 is used to determine the tax consequences of certain taxable distributions from IRAs.
D is incorrect. Form 1040 would be used to report the rollover but not to gather information relating to the rollover.
Which of the following entities would be required to adopt a calendar year for federal income tax purposes?
A. Estate.
B. Irrevocable life insurance trust.
C. Partnership.
D. S Corporation.
The correct answer is B.
A trust must adopt a calendar year for federal income tax purposes.
A is incorrect. The executor of an estate can elect a fiscal year end for the estate.
C is incorrect. A partnership must adopt the tax year end of its partners. If the partners have a fiscal year, the partnership can have a fiscal year. For example, if a partnership has two corporations as its partners, and the corporations have June 30 year ends, the partnership would have a June 30 year end.
D is incorrect. An S corporation can have a fiscal year end for tax purposes.
Five years ago, Jordan was granted a nonqualified stock option giving him the right to purchase 1,000 shares of employer stock at $8 per share. He exercised the option three years ago, when the value of the stock was $10 per share. He sold the shares today at a price of $15 per share. Which of the following statements is correct regarding this series of events?
A. Jordan reported $8,000 of ordinary income upon exercise.
B. Jordan will have a capital gain of $7,000 as a result of selling the stock today.
C. Jordan reported an alternative minimum tax adjustment of $2,000 when he exercised the options.
D. Jordan’s employer received an income tax deduction of $2,000 when Jordan exercised the option.
The correct answer is D.
When Jordan exercised the option, the bargain element was $2,000 [($10 Fair Market Value less $8 cost) x 1,000 shares]. The $2,000 will be reported as ordinary income by Jordan, and his employer will receive a $2,000 deduction.
A is incorrect. Jordan was only required to report $2,000 of income.
B is incorrect. Jordan’s basis in the stock is $10,000 ($10 Fair Market Value x 1,000 shares). Therefore, his capital gain would be $5,000 ($15,000 sales price less $10,000 basis).
C is incorrect. Alternative minimum tax does not apply to nonqualified stock options.
Nell sold a passive activity with an adjusted basis of $50,000 for $90,000. Suspended losses attributable to this property were $30,000. Her taxable gain is:
A) $70,000 taxable gain.
B) $40,000 taxable gain.
C) $60,000 taxable gain.
D) $10,000 taxable gain.
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).
Marsha has the following income and losses for the current year:
I. ($1,000) loss from a 30% interest in Laminate Partnership in which she does NOT materially participate.
II. ($1,500) loss from a 2% limited partnership interest in Venture, a limited partnership.
III. ($3,000) loss from a 12% interest in an S corporation in which she manages one of the departments.
IV. $40,000 salary as manager with an S corporation.
V. $1,200 of dividend income from Higher Mutual Funds
Assuming Marsha has sufficient at risk basis in each of the entities, what is Marsha’s adjusted gross income?
A) $35,700
B) $41,200
C) $38,200
D) $36,700
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.
A CFP® professional has reviewed information provided by a client during data gathering on investments, income tax returns, and retirement accounts. The client is 50 years of age, married, and has two children. The client and wife have a modified AGI of $130,000 and file a joint income tax return. The CFP® professional observed that the client has invested in a real estate limited partnership that has generated losses of $8,000 last year, and the client has not taken any deduction for the losses. The client also owns an investment in residential real estate that the client manages and rents out. This investment produced losses of $12,000 last year. The client did not deduct those losses. What action should the CFP® professional recommend for the client?
A) File an amended return and seek a refund for an additional $20,000 in deductions for losses.
B) File an amended return and seek a refund for an additional $12,000 in deductions for losses.
C) File an amended return and seek a refund for an additional $10,000 in deductions for losses.
D) File an amended return and seek a refund for an additional $8,000 in deductions for losses.
Solution: The correct answer is C.
Losses from the real estate limited partnership are passive losses that cannot be deducted against the client’s active income. The losses from the residential real estate rented by the client can be deducted in part due to the real estate exception for active participation. The maximum deduction is $25,000 but this maximum is reduced by one dollar for every two dollars that the client’s modified AGI exceeds $100,000. Since the client’s modified AGI is $130,000, the maximum deduction is reduced by ½ × $30,000 = $15,000. The client can deduct $25,000 - $15,000 = $10,000.
Two years ago, James Johnson was granted 5,000 non-qualified stock options by his employer. The options will expire in 10 years and have a strike price of $12 per share. Currently, the stock is selling for $30 per share. Johnson would like advice as to what to do with the options. Which of the following statements is appropriate in connection with a recommendation for Johnson?
A) Johnson can elect to be taxed this year on the options even though he will wait to exercise them in a later year.
B) Johnson can exercise the options and sell them this year and will report both long-term capital gains and ordinary income from the sale.
C) Johnson can exercise the options and wait a year to sell them in order to get capital gains treatment on the appreciation above $12 per share.
D) If Johnson exercises the options this year, he will have to report ordinary income even if he does not sell any of the shares.
he correct answer is D.
If Johnson exercises the options this year, he will have to report ordinary income even if he does not sell any of the shares. Under Section 83(b), Johnson could have elected to be taxed on the options in the year they were granted, but he cannot elect to be taxed two years later on the options. If Johnson exercises the options and sells them this year, he will report ordinary income to the extent of the bargain element from the sale. Johnson can exercise the options and wait a year to sell them in order to get capital gains treatment on the appreciation above $30 per share
Mark Hassim is 64 years of age and has built up an importing business that he would like to see pass to his family members. He believes that he has ample wealth without the business interest for his retirement income needs and would like to get his family involved in the company by giving them interests in the business. Mark wants to retain management control over the business but provide the family members with income. He would like to reduce his income taxes by reducing his income from the business as much as possible. Mark would also like to give interests to family members to reduce the size of his estate. Mark has run his business as a sole proprietorship but has been considering the adoption of a different business form. The CFP® professional has gathered data on Mark’s business interest and other assets and liabilities and has confirmed that Mark does not need the income from the business to provide the retirement income that he wants. Which of the following alternatives should the CFP® professional recommend to Mark for his business entity and plan of asset transfer?
A) S corporation with Mark owning 51% of the shares and family members owning the rest
B) LLC with Mark as manager and family members owning the financial shares
C) Limited partnership with Mark as the general partner and family members as limited partners
D) C corporation with Mark owning the voting shares and family members owning non-voting shares
The correct answer is B.
The limited liability company can be set up with Mark as the manager so he can continue to control the operation of the business, but the family members will own the financial shares. The financial shares can be designated as the ownership shares that entitle family members to all of the income (and losses) from the business. Mark would only be paid for his work as the manager and not receive profits from the company. The other forms of business would provide for Mark to continue in some kind of ownership capacity, so he would continue to receive a share of the profits. With the S corporation, Mark would have control of the entity by virtue of his owning 51% of the stock, but he would also have to report 51% of the income from the business. As the general partner in a limited partnership, Mark would also receive a share of the profits as income. The C corporation would probably not be recommended due to the double taxation of profits and the added expense and work of maintaining a corporate entity. Topics 44 and 70; Domain 4
Joyce has a gross estate of $16,000,000. Her funeral costs were $16,000. She leaves $20,000 to a charity and $14,000 to a 501(c)(3) community hospital. Her home mortgage (owned in JTWROS with spouse) was $100,000. The home was valued at $200,000. She had consumer debt of $15,000. Her spouse was her personal representative and waived his fees. She left $260,000 in total to her spouse. What is the dollar value of the net taxable estate for Joyce?
$0
$15,919,000
$15,725,000
$15,625,000
$15,625,000
The $5,919,000 adjusted gross estate (arrived at by combining 1/2 the mortgage on the home or $50,000 with the funeral expenses of $16,000 and the consumer debt of $15,000; totaling $81,000; subtracted from the gross estate to equal a $15,919,000 adjusted gross estate) minus the $294,000 total deductions ($260,000 to spouse; $20,000 to charity; plus $14,000 to the hospital), leaves $15,625,000 taxable estate (see calculation below).
16,000,000
16,000 Funeral
15,000 Debts-C
50,000 Debts-M
15,919,000 AGE
34,000 UL
260,000 UM
15,625,000
Gross Estate
JTWROS
Tenants in Common
50% of the fair market value must be included in Rick’s estate because of the deemed contribution rule because his joint tenant Amber is his spouse. If he titled JTWROS with anyone but a spouse we would use the “actual contribution rule” in which case he would have $400,000 included in his gross estate
Note that is he had titled the property tenants in common, he would have had $400,000 inclusion.
A bequest to which of the following organizations would NOT be included in the gross estate?
A) The United States of America.
B) The University of Phoenix.
C) Mothers Against Drunk Driving.
D) The Society for the Protection of Wild Birds.
E) None of the choices.
The correct answer is E.
All bequests are included in the gross estate. Although not relevant to the question, all of the bequests except for the one to the University of Phoenix qualify for the unlimited charitable deduction. The University of Phoenix is a for-profit institution and is therefore, not a charity.
All of the following are included in the gross estate except:
A) Proceeds from a life insurance policy owned by the decedent insured that was assigned to an ILIT two years before death of the insured.
B) A CRAT where the income beneficiary was the decedent.
C) Property where the decedent had a reversionary interest of less than 10% of the value.
D) Gift taxes paid two years prior to the decedent’s date of death for gifts made four years earlier.
The correct answer is D.
Incidence of ownership of life insurance policies assigned within three years of death are includible in the decedent’s estate, as are CRATs and CRUTs. Any amount subject to the gross up rule is includible in the taxable estate but must be for gifts made within three years of death.
Which of the following applies to the marital deduction:
A) In 2020 it is limited to $11,580,000 or 1/2 of the gross estate, whichever is lesser.
B) The spouse may be of any citizenship.
C) The property may be in the form of an incomplete transfer.
D) The marital deduction may be applied to terminable interest property.
The correct answer is D.
Answer “A” is incorrect because in 2020, it is the applicable exclusion amount not the marital deduction that is $11,580,000. The spouse must be a U.S. citizen unless a QDOT is utilized and property must be a complete transfer to qualify for the marital deduction. The terminal interest property that will qualify are those items which are the exception to the terminal interest rule such as (1) GPOA trusts (2) QTIP trust and (3) charitable trusts where the surviving spouse is the only non-charitable beneficiary.
SS Benefits for surviving spouse with child
fully insured
Spouse with child care will receive benefits until child reaches 16, if disabled lifetime
child will receive benefits until age 18 or 19 if still in high school
Jason has three capital transactions for the current year:
Short-term capital loss of $5,000
Short-term capital gain of $3,000
Long-term capital loss of $2,000
What is the net effect on Jason’s taxes if he is in the 35% tax bracket?
$1,400 tax reduction
$1,050 tax reduction
$850 tax reduction
$450 tax reduction
The correct answer is B.
Net the STCG and STCL = $2,000 STCL.
The $2,000 LTCL plus the $2,000 STCL = Total Loss of $4,000.
He can only utilize $3,000 to offset ordinary income at 35% = $3,000 × 0.35 = $1,050. The remaining $1,000 is a long-term capital loss carryover.
5-year Lookback Rule:
In the current year Harold had a Section 1231 gain of $13,000. In the prior years, Harold had the following Section 1231 transactions:
YearNet Section 1231 Transaction
2019 $4, 000 Loss
2018 $2,000 Loss
2017 None
2016 None
2015 None
2014 $8,000 Gain
2013 $2,000 Gain
2012 $2,000 Gain
How will Harold’s Section 1231 gain be taxed in the current year?
A) $12,000 will be taxed as ordinary income.
B) $6,000 will be taxed as ordinary income and $7,000 will be taxed as a Section 1231 capital gain.
C) $12,000 will be taxed as a Section 1231 capital gain.
D) None of the above.
The correct answer is B.
5-year Lookback Rule:
Harold would have to recognize $6,000 of his 2020 gain as ordinary income since in 2019 and 2018 he had Section 1231 losses. The remaining $7,000 of Harold’s Section 1231 gain ($13,000 - $6,000) would be treated as a Section 1231 capital gain.
Which of the following is incorrect?
A) All business deductions are classified as deductions FOR AGI.
B) Some personal deductions are classified as deductions FROM AGI.
C) Some business and some personal deductions are classified as deductions FOR AGI.
D) Some business and some personal deductions are classified as deductions FROM AGI.
The correct answer is D.
Deductions occur above the line (for) AGI and below the line (from) AGI. All business deductions are for AGI (above the line).
All business expenses (taken by their owners, i.e. sole proprietor or partner) are taken above the line or FOR AGI.
A “business deduction” is tied to the business or owners. These are reported on the sole proprietor’s schedule C, or a partner’s K-1 (which flows onto the Schedule E of Form 1040), for example. Business deductions are all above the line (FOR AGI).
“Personal deductions” are not tied to a business. For example, mortgage interest is a personal deduction below the line (FROM AGI). An HSA contribution is a personal deduction above the line (FOR AGI).
“Job-related employee expenses” used to be deductible as a miscellaneous itemized deductions subject to the 2% floor, a below the line deduction (FROM AGI). Those are no longer available for tax years 2018-2025.
Olive’s daughter Polly suffers from a rare illness. During the current year, Olive drove Polly to see a specialist in another state 15 times, while her husband remained home running their software company. Each trip was 300 miles each way and required an overnight stay in a hotel that costs $140 per night. The unreimbursed treatments totaled $10,000. Olive’s joint AGI is $124,000. How much can they deduct in relation to Polly’s medical expenses for 2020?
A) $9,300
B) $3,730
C) $300
D) $0
The correct answer is B.
Olive may deduct $0.17 (2020) cents per mile for the travel associated with Polly’s medical care and may deduct up to $50 per night per person for lodging. Therefore, the total medical expenses are $13,030 which is calculated as follows: [(300 x 2 x 15 x $0.17=1,530) + (15 x ($50 x 2)=1,500) + $10,000]. The trip mileage is stated as 300 miles each way, you will need to multiply by 2 and use round trip mileage.
However, Olive may only deduct the amount that exceeds 7.5% of their AGI (SECURE Act 2019). 7.5% of Olive’s AGI is $9,300. Therefore, medical expenses deductions for Polly’s treatment is $3,730. Note, $100 is allowed because the rule is $50 per person per night.
at-risk rules, passive loss rules.
Pat invests $150,000 for a 10% interest in a limited partnership. He receives a K-1 with his loss at $80,000. How much of his loss is suspended?
A) $0.
B) $8,000.
C) $15,000.
D) $80,000.
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.
Ned, a college professor, owns a separate business in which he participates during the current year. He has one employee who works part-time in the business. Which of the following statements is correct?
A) If Ned participates for 120 hours and the employee participates for 120 hours during the year, Ned does not qualify as a material participant.
B) If Ned participates for 95 hours and the employee participates for 5 hours during the year, Ned probably does not qualify as a material participant.
C) If Ned participates for 500 hours and the part-time employee participates for 520 hours during the year, Ned still qualifies as a material participant.
D) If Ned participates for 600 hours and the part-time employee participates for 1,000 hours during the year, Ned nevertheless qualifies as a material participant.
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)
Which of the following is not a requirement of the individual real estate investor exception to the passive activity loss rules?
A) The taxpayer must materially participate in the activity.
B) The taxpayer must own at least 10% of the value of the real estate.
C) The taxpayer must have an AGI of less than $150,000.
D) The taxpayer must actively participate in the activity.
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.
Mid- Month Convention
Mid- Quarter Convention
Half Year Convention
Mid- Month Convention - Non-residential real prop and residential rental property
Mid- Quarter Convention - more than 40% of the equipment is placed in service during the last quarter of the tax year. (exclude Non-residential real prop and residential rental property). Business uses equipment from Nov-Dec of last year - will be required to use mid quarte to determine deduction
Half Year Convention - property disposed of at midpoint of the year.
Wash Sale
On December 1, Andrea reviews her investment portfolio and finds out that she has had a very profitable year. To offset some of her gains, Andrea sells 100 shares of Big Bear Corporation for $10,000. She purchased those shares for $15,000 two years earlier. On December 25 of the same year, Andrea reads a newspaper article indicating that the price of Big Bear Corporation is expected to increase substantially. Second-guessing the wisdom of selling her previous shares of Big Bear stock, she purchases 100 shares of Big Bear Corporation for $8,000. What are the tax consequences to Andrea this year?
A) A $5,000 realized, but not recognized loss.
B) An $8,000 realized and recognized loss.
C) A $5,000 realized and recognized loss.
D) A $7,000 realized, but not recognized loss.
The correct answer is A.
Since Andrea purchased and sold substantially identical securities within 30 days, a wash sale occurs. Her realized loss on the sale of the original shares is calculated as follows: Amount Realized: $10,000 Less: Adjusted Basis -$15,000 Equals: Gain or (Loss) ($5,000) Due to the wash sale transaction, however, Andrea will not be permitted to recognize the loss in the year it was incurred. Instead, the realized but unrecognized loss of $5,000 will be added to the basis of the replacement securities. Andrea purchased the replacement securities for $8,000 so adding the unrecognized loss increases her basis to $13,000. By increasing basis in the amount of the unrecognized loss, Andrea will receive that back tax free when she ultimately sells the stock.
Penny had $44,000 of ordinary income. In addition, she had the following capital transactions during the last tax year: $1,800 net long-term capital loss, $1,800 net short-term capital loss. What is Penny’s capital loss carryover to the current tax year?
A) $0
B) $600 short-term.
C) $600 long-term.
D) $300 short-term and $300 long-term.
The correct answer is C.
Penny’s total capital loss for the previous tax year was $3,600. Assuming there were no capital gains that year, Penny would have taken the maximum capital loss of $3,000 leaving the remaining $600 to be deducted in the following year’s return. Short term losses are taken ahead of long term losses.
Lifetime Learning Credit
Max 20% of $10,000 expenses = $2,000
cannot be claimed same year as AOTC
AGI
MFJ $118,000 - $138,000
S $59,000 - $69,000
Convention for depreciation
Mid- Month = Real Porperty and Residential Rental Property
