Income Tax Review Questions COPY Flashcards

Question

``` Pat, age sixteen has earned income of $1,000 and interest income of $750. What is his standard deduction in 2014? A. $750 B. $1,050 C. $1,350 D. $1,750 ```

Answer 1

C - $1,000 + $350 = $1,350 earned is greater than $1,000 unearned. The $350 is the additional standard deduction for a child with earned income in 2014.

Answer 2

D - There is a phaseout of itemized deductions in 2014.

Answer 3

``` A - Total income $105,000 Total itemized deductions -14,000 2-exemption at $3950 -7,900 Taxable income $83,100 The qualified dividends and long-term capital gains are income. It is asking about taxable income, not taxes due. *The hint was there to remind you to use the exemptions. ```

Answer 4

B - FIFO and LIFO are inventory methods, not accounting methods.

Answer 5

C - $383.000 = 75.39% Gross Profit Percentage $508,000 Payments ($25,000 + $40,250) x 75.39% = $49,192

Answer 6

C - The loss can be carried back to 2012 ($0) and 2013 ($750,000). The remaining $250,000 can be carried forward.

Answer 7

D - The limit on C corporations is $5 million. A department store uses the accrual method because of inventory.

Answer 8

C - $450,000 = 90% Gross profit percentage $500,000 However, the related party rules apply. The whole gain must be reported in the first year even though his daughter made only one payment. $500,000 - $50,000 = $450,000. Answer D is true, but the question is asking about Mr. Stall not his daughter.

Answer 9

A - LIFO is an inventory method.

Answer 10

C - The best answer is Answer C. The other answers cannot use the installment method.

Answer 11

A - There is no LILO method. | Income Tax Planning Quiz - Lesson 4

Answer 12

D - The top corporate bracket is actually 39% (surtax), but for the exam, remember 35%. He cannot establish a limited partnership. He is an active participant. He will be considered a general partner. As a general partner, he has full exposure to liability. With a regular corporation, the client can leave up to $50,000 in the corporation at 15%. If he took a salary of $400,000, the client's marginal tax bracket is 35%. This way the client could reduce his/her income tax liability. An S corporation could shift income. Answer D is the best answer choice.

Answer 13

B - Sole proprietors can carry back losses (NOLs) just like corporations.

Answer 14

B - Basic conduit question

Answer 15

E - Some entity returns are for informational purposes only.

Answer 16

D - Cash ($50,000) plus direct loan ($100,000). The bank loan will not increase basis.

Answer 17

A - If they have an S corporation, their basis would be limited to cash invested in the business and direct loans, not corporate debt. The LLC would have the same basis as a partnership. This would allow the LLC to take more losses than an S corporation could take. This is an advantage over an S corporation.

Answer 18

C - HALE (Health) corporations are PSCs. PSC pays a flat 35% tax rate.

Answer 19

C - Answers A, B and D are conduit entities. A regular corporation will provide the owner with a separate tax entity. Money left in a corporation is taxed at 15% for the first $50,000.

Answer 20

D - 80% is excluded because OKA owns 20% or more of DEC. The deduction is limited to 70% of the dividend received when a company owns less than 20% of the paying company.

Answer 21

C - A regular corporation would report earned income to all employees on a W-2 and dividends to shareholders on a 1099. As long as you know the W-2 is true, the only answer is Answer C. Income Tax Planning Quiz - Lesson 5

Answer 22

A - This grantor trust is tainted by a combination of trust income used to pay premium, beneficial enjoyment and support. Per the question only a portion of the trust income is being used to pay the premiums on the policy. The remainer is being paid out to family members and will be taxable to them (DNI principle).

Answer 23

A - The trust is tax-neutral (conduit).

Answer 24

B - DNI accounts for the income to the beneficiary.

Answer 25

B - An estate is entitled to take as a deduction any ordinary and necessary business expense.

Answer 26

A - If the trust income is used to satisfy a grantor's legal support obligation, the trust income will be taxed to the grantor. Income Tax Planning Quiz - Lesson 6

Answer 27

C - $31,000 x 20% = $6,200 (MACRS table)

Answer 28

``` B Building $500,000 Legal Fees $25,000 Renovation $100,000 Cost basis $625,000 Less cost recovery deduction -125,000 Adjusted basis $500,000 ```

Answer 29

A - A renovation is an improvement.

Answer 30

B - Remember inheritance holding periods are always long-term no matter the time element. Pamela got a full step-up in basis when her mother died.

Answer 31

``` A - Original basis Lana $50,000 Tommy $50,000 Tommy's death Basis no step-up $50,000 + step-up $75,000 Lana's basis will be $125,000. She owned her half for more than one year. His half is always LTCG. $200,000 - $125,000 = $75,000 LTCG ```

Answer 32

A - $100,000 x .07145 = $7,145

Answer 33

A - Only 1245 property qualifies under Section 179.

Answer 34

C - The limit in 2013 is $500,000, but the deduction is limited to the corporation's taxable income ($75,000).

Answer 35

B - $25,000 x 10% = $2,500 | Income Tax Planning Quiz - Lesson 7

Answer 36

``` C - Always solve for Bart Received: $300,000 FMV Paid: $50k basis + $75k boot = $125k ------------------------------- Realized Gain: 300k - 125k = 175k ``` Lesser of boot or realized gain: 0 vs 175k = 175k Bart's new adjusted basis: 300k - 175k = 125k

Answer 37

B - The $350,000 realized gain is completely excluded by the $500,000 exclusion. No return needs to be filed. There is no recognized gain.

Answer 38

B - Statements II and III are accurate. A gain on sale is a capital gain. The $50,000 ordinary loss would apply to taxpayers other than married filing jointly. (See Income Tax Lesson 4)

Answer 39

``` C - LTCG $10,000 STCG $7,000 LTCL $3,000 STCL $6,000 LTCG $7,000 STCG $1,000 ```

Answer 40

A - Mr. A's basis remains unchanged. If there is no boot, Mr. Z's basis in the 20 acres will be $300,000. Remember, Step 1 is the realized $250,000 FMV (Z's) less $100,000 basis (A's) = $150,000. Step 2 is zero (no boot). Step 3 is $250,000 FMV (Z's) less Step 1 ($150,000) less Step 2 ($0) or $100,000. To get this please use the flow chart above.

Answer 41

``` C - Year 2010 Amount $10,000 Cost of Shares $21.938 # of shares 455.830 2011 $12,000 $25.492 470.736 2012 $ 8,000 $27.381 292.173 2013 $10,000 $22.132 451.834 $40,000 1,670.573 $40,000 $23.944 1,670.573 ```

Answer 42

``` C - Yes, the STCL is $15,0001 but the LTCG must be netted against the loss. Yes, answer B is true, but it does not answer the question. Answer D is wrong. The answer must say short-term or long-term gain or loss. LTCG $10,000 STCG $5,000 LTCL - 5,000 STCL -20,000 Net LTCG (+) $5,000 Net STCL (-) $15,000 ```

Answer 43

E - It doesn't matter if it is rental property or a residence. She gets a full step-up in basis. It is appreciated property either way.

Answer 44

C - Using a flow chart like the answer to question 1 - 3 helps. Only use the following three numbers: The recognized gain (Step 2) is a l ways the lesser of the boot ($100,000) or the realized gain ($350,000)

Answer 45

``` C - Realized gain (Step 1) $ 350,000 Step 4 $400,000 Recognized gain (Step 2) -100,000 Step 3 $250,000 Step 3 is $250,000 Adj, basis $150,000 ```

Answer 46

``` C - $50,000 .5 x 8% = 4.00% $30,000 .3 x 5% = 1.50% $20, 000 .2 x 5% = 1.00% $100,000 6.50% ```

Answer 47

``` D - Original cost $8,000 Sells $11,500 -CRD -5,858 -Basis - 2,142 Basis $2,142 Gain $9,358 look back 1245 $5,858 (0I) get number from -CRD above excess (if any) 1231 $3,500 (CG) ```

Answer 48

A - This is a capital loss limited to $3,000 per year. Unless he was issued 1244 stock, Answer D does not apply (see Income Tax Lesson 4). Answer C is for NOLs.

Answer 49

A - This is an exchange. The recognized gain is zero because he paid $2,000. He received no boot, the other party received the boot and will have the recognize gain. The old basis and the cash become the new basis.

Answer 50

D - His adjusted basis before the exchange was $200,000 ($300,000 - $100,000). The realized gain is $400,000 [($500,000 + $100,000 received) - $200,000 given up] = $400,000. The recognized is the lesser of the boot ($100,000 received) or the $400,000 realized gain. This also uses the flow chart concept of question 1-3. Income Tax Planning Quiz - Lesson 8

Answer 51

C - Cost depletion is not a preference item. Property tax is not a deduction. It is added back to calculate the AMT (an adjustment).

Answer 52

B - $41,892 - $16,381 = $25,511

Answer 53

C - Entity purchase (stock redemption) is a corporate-owned policy. The owner of the group policies is the company, but the beneficiary is the employee's spouse, not the company.

Answer 54

A - If Mr. Smith increases his taxable income, he will pay more regular taxes. Selling his home and paying off his mortgage increase his regular taxes (less itemized deductions) and his AMT (which may or may not decrease AMT payable - see note below). Renting will eliminate the property tax deduction, thereby increasing his taxable income. Answer V is correct if the marginal tax bracket is higher than the AMT bracket (This assumes he itemizes his deductions). Although reducing or eliminating mortgage interest for ordinary income tax increases the income tax liability, it also increases AMT income. However, if the AMT bracket is higher than the taxpayer's ordinary tax bracket, then AMT payable actually increases (making Answer V wrong). Answer I and II (together) are not an answer choice, so you must choose Answer A (I, II, and V). NOTE: Once you get well into the 39.6% bracket, it is difficult to trigger AMT. Why? Your regular tax rate is 39.6% versus the maximum AMT rate of 28%.

Answer 55

B - Buy public purpose municipal bonds (because the interest is not a preference item) rather than private purpose bonds (because the interest is a preference item).

Answer 56

E - GO are general obligation bonds (public purpose). Municipal bonds could be private activity. Answer I could be correct. However, there was no Answer I and III. The only answer is Answer E. The Treasuries and corporate bond trigger more ordinary income, not a preference item.

Answer 57

B - You might consider the AMT double taxation, but it is not. By definition, Answer B is the best choice.

Answer 58

D - Straight-line is not a preference item.

Answer 59

B - $102,000 AMTI less $100,000 regular tax

Answer 60

A - Only the $5,000 of losses from partnership #2 are deductible against the income from partnership #3 (the netting process).

Answer 61

B - Schedule E income from active participation rental activities can be used to offset other passive losses. The non-publicly traded limited partnership losses may not offset income from a publicly traded partnership (the MLP) or portfolio income. Note that you are forced into using answer I. Just knowing IV was right was enough.

Answer 62

C - Qualifying taxpayers (AGI under $100,000) can deduct up to $25,000 per year of tosses from active participation in real estate. The remaining losses are carried forward.

Answer 63

D - Material participation refers to the taxpayer's principal trade or business. Dr. Mills' principal business is medicine.

Answer 64

B - A passive activitymeans a trade or business in which the taxpayer does not materially participate. Active participation is an exception to the passive rules. Closely held C corporations can own an equipment leasing program and deduct the losses. These losses are not treated as passive losses, and are deductible on the corporation's 1120 tax return.

Answer 65

D - Darcy's AGI is above $150,000. All her losses are subject to phaseout. She is subject to active participation rules. She must have a regular occupation (not material participation) to earn $200,000 of income.

Answer 66

B - A single person will only get a $250,000 exclusion.

Answer 67

A - STRIPS produce taxable income that is accreted. That is, it is not received until the bond is sold. The inflation and fixed portions of I bond interest are tax-deferred until redemption or maturity (whichever comes first); it is not phantom income. Private activity municipal bonds may create an AMT tax liability, but the income is not phantom. (It is received. The question does not say the municipal bonds are zeros.)

Answer 68

B - Salary ($75,000) - [Active participation (-10,000) + S-Corp loss (-8,000)] = AGI ($57,000). The exception to the passive rules is active participationin real estate. The 5-Corp is active. He manages the business.

Answer 69

E - The payer owns the policy. Therefore, the payer owns the cash value. Any premium paid increases the cash value. There is no alimony deduction. The payor also owns the home (gives them rent-free occupancy), so there is no alimony deduction.

Answer 70

D - $150,000 - $37,500 = $112,500

Answer 71

D - The payee spouse assumes the payer spouse's basis. Child support can extend beyond the payee spouse's death.

Answer 72

C - $800 is child support; therefore, $1,200 is alimony.

Answer 73

E - Losses from her brother's business as a limited partner are passive {Answer A). The rehab credit is a deduction- equivalent tax credit (Answer B). She doesn't qualify for active participation with $225,000 of AGI (Answer C). She cannot qualify for material participation. She must have a full-time job to make $200,000 in earned income. Income Tax Planning Quiz - Lesson 10

Answer 74

B - Short-term capital gain property is basis ($30,000). Maximum deduction is 50% of AGI 50% of $50,000 = $25,000. He will have $5,000 to carry forward to next year.

Answer 75

D - She should take the standard deduction. Her standard deduction is $6,200 + $1,500 (total $7,700). She is single and over 65. This is greater than her charitable gift ($5,000). Her sales tax ($1,500) may be deductible in 2014. Total itemized is $6,500. Either way the answer is D. Non-itemizers get no charitable deduction. Taxpayers can choose to itemize (if they have deductible items) or use the standard deduction, even if it results in a smaller deduction.

Answer 76

B - The maximum is 30% of AGI for LTCG property.

Answer 77

B - The maximum is 30% of AGI for LTCG property. Note: I believe the alternative 50% rule using basis will never be an answer.

Answer 78

A - This is lossproperty. The deduction is limited to fair market value ($40,000). Debbie should have sold the stock for $40,000. Then she could take a $10,000 LTCL. Then she could have donated the sale proceeds (approximately $40,000).

Answer 79

D - Corporations file using a 1120, not a Schedule C. The limit is 10% of taxable income {$100,000 x 10% = $10,000).

Answer 80

C - Child support is not income for federal tax. The gift and inheritance are excluded but not income earned on the gift or inheritance.

Answer 81

D - The $63,250 salary is reduced by the IRA of $10,000 to $53,250. Child support payments are nondeductible, and the home mortgage interest is an itemized deduction, not affecting AGI

Answer 82

A - Unless Todd and Billy are full-time students, they don't become exemptions for the parents. The question must tell you if Todd was a full-time student at year end.

Answer 83

C - The questions asked for deductions for AGI. Alimony received is income; alimony paid is a deduction. There are items in the gross income lists that are deductions, such as answers I and II. Alimony paid is an adjustment from Gross Income to get AGI.

Answer 84

D - Active participation losses are limited to $25,000, but this is income not a loss. Compensatory damages are generally not included, but unemployment generally is included.

Answer 85

E - Sue is an employee. She is the sales manager, not a commissioned sales person. Employee un-reimbursed business expenses are limited to 2% AGI. Entertainment expenses have a limit of 50%. Employee reimbursed entertainment expenses are fully reimbursed by a corporation, but the corporation can only deduct 50%. Self- employed can only deduct 50% (Schedule C). Answer D is true if she is self-employed.

Answer 86

A - Short-cut $30,000 x .1413 = $4,239. The income from an S corporation is not considered to be self-employment income.

Answer 87

D - There can only be one class of stock (common), but it can be voting or nonvoting. It can have up to 100 shareholders. A qualified trust can be a shareholder.

Answer 88

A - The keys are that the business is risk-free, they would have to guarantee debt, and the business would have sporadic losses. There is nothing to indicate this is a PSC. Answers like an S corporation/LLC are not available.

Answer 89

D - He needs limited liability. At this point in life, he can't lose his nest egg. He can take losses up to his investment.

Answer 90

C - Basis for an S corporation is limited to capital and direct loans. It appears from the question that Ken would be able to take the losses (Basis equals cash plus direct loans). He would like the limited liability of the S corporation. One million of insurance won't go very far when one face jobdoesn't work out.

Answer 91

``` B - Original cost $6,000 Sells $ 9,000 - CRD - 3,795 -Basis - 2,205 Basis $2,205 Gain $6,795 look 1245 $3,795 (OI) back 1231 $3,000 (CG) ```

Answer 92

B - If Mr. A uses B's property as rental property, the property will qualify as a like-kind exchange for A. Mr. B has a personal residence, not rental property (Lesson 7).

Answer 93

``` B - Selling price of old home $375,000 Less selling expenses 9,000 Less basis Realized gain Less single exclusion (she is single) -100,000 $266,000* -250,000 Recognized gain $16,000 *There is nothing in the question that indicates Mrs. G is married. Everything written is in the singular. ```

Answer 94

C - The active participationis 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 good for C corporations.

Answer 95

``` B - Lesser of basis or FMV $13,000 (FMV) Less insurance coverage 8,000 Less floor 100 Less 10% of AGI -4,000 Casualty loss $ 900 ```

Answer 96

C - The oil and gas is a general partnership (GP), and the loss is deductible in full. It is subject to the AMT, but that's not the question here. The Arizona LP loss is a passive loss.

Answer 97

B - The wash sale rule disallows a loss if substantially identical securities are purchased prior to 30 days after the sale that resulted in the loss. The basis of the acquired securities is increased by the amount of the disallowed loss. Securities from a different issuer are not considered substantially identical.

Answer 98

D - STRIPS are zero coupon treasury bonds. They would throw off phantom income. She would be subject to the kiddie tax in about four years. EEs produce deferred income. The question asks least suitable.

Answer 99

``` D - She is in the 35% bracket (still a kiddie). STCGs $3,000 less standard -1,000 STCGs -1 000 x .10 = $100.00 STCGs $1,000 x .35 = + $350.00 $450.00 Short term capital gains are ordinary income. The first $1,000 is the standard deduction, then use 10% for the next $1,000. ```

Answer 100

B - Long-term capital gain - maximum deduction 30% of AGI (30% of $200,000 = $60,000). Mrs. Hale will have $20,000 to carry forward to next year.

Answer 101

E - The other answers have no immediate tax consequences.

Answer 102

C - Long-term capital gain property is limited to 30% of AGI. A gift to charity of rent-free use of space will not entitle the donor to charitable deduction for the value of that use. Stock and real estate don't have any usage rules.

Answer 103

``` C - Payment year # 1 and year #2 $70,000 minus constant -37,500 Recapture $32,500 ```

Answer 104

A - They paid $20,000 which is more than the prior year ($17,000) tax payment.

Answer 105

``` D - Salaries $285,000 Interest + 1,100 Dividends + 8,000 Income from apartment building + 20,000 Alimony - 36,000 AGI $278,000 The $5,000 IRA contribution is not deductible because Dan has a pension plan and their AGI is above $181,000 (2014). Even if you did not know if the IRA was deductible or not, $273,100 is not an answer. Consumer interest is not deductible since 1986. Private purpose muni bonds are tax-free. They affect AMT, but not AGI. ```

Answer 106

D - Itemized deductions are from.Alimony is a for.

Answer 107

B - 2% of $278, 100 ($5,562) exceeds $3,000 (tax preparation and advisor fees). Even if you got prior question wrong, $255, 100 (the smallest number) x 2% exceeds $3,000.

Answer 108

C - Private activity bonds may trigger an AMT tax. Client information indicates he almost triggered AMT last year. 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.

Answer 109

D - Their AGI is too high for the Historical Rehab credit program. Even if you got #30 wrong, $255, 100 exceeds the $250,000 phaseout for Historical Rehab credit.

Answer 110

C - S corporation will allow Gail to use the losses and limit her liability. She may need malpractice insurance more than anything else.

Answer 111

A - There is no indication that Gail has an inventory or that her annual gross receipts will exceed $5 million. Therefore, she would use the cash method of accounting.

Answer 112

A - Realized gain = FMV - adjusted basis ± cash = $150,000 (FMV) - [55,000 + 25,000 (adjusted basis)] = $70,000 Recognized gain = Lesser of realized gain or boot = 0 Simply: No boot received then no gain recognized In this question, the $25,000 is boot given. It is not recognizable gain. NOTE: The FMV is the property received. The basis is the property given up.

Answer 113

``` D - Basis $20,000 x $4,000 = $833.33 excluded Payout $960,000* $4,000 - 833.33 = $3,166.67 included *$4,000 x 12 months x 20 years = $960,000 The question says when he retires, he expects $4,000 per month. It says his life expectancy at age 60 is 20 years. Therefore, the payout is 20 years. But if you considered Dan is age so and he wants to retire in 10 years you got Answer C. The answer is correct. ```

Answer 114

C - His ex-spouse owns the property. It is the same as paying her cash.

Answer 115

C - Shortcut: 48,000 x 14.13% = $6,782.40

Answer 116

C - He can use his $20,000 (split gift) to transfer the dental equipment to James. His son is going to start a dental practice. Then Dan can buy more modern (new) dental equipment and depreciate it. This is the best choice.

Answer 117

``` B - Selling price $850,000 less basis -300,000 less exclusion -500,000 $ 50,000 ```

Answer 118

``` B - Richard's salary (not self-employed) $90,000 Virginia's salary (net of 6%) 33,840 * Virginia's alimony 12,000 Dividends 500 Interest 1,000 Capital gains - carryover losses -3,000 ** (maximum) Activ e participation (rental house) -3 000 *** Gross income $131,340 Alimony paid -36,000 IRA (Richard) -5 000 AGI $90,340 * $36,000 - ($36,000 x 6%) = $33,840; Footnote #6 states she is contributing 6% to her 401(k). ** The $10,000 of carryover loss is applied to this year's CGs ($2,000). Then $3,000 of the remaining $7,000 of carry over losses are taken for this year. *** You may have a question on whether the $3,000 could be taken. Again, all the answers to question # 45 have AGIs under $100,000. Under the active participation rules he can deduct up to $25,000. The footnote says that Virginia's rental property produces a yearly loss of $3,000 due to expenses, taxes, property upkeep, interest, and depreciation (Schedule E). NOTE: The $15,000 income remains in RC, Inc., a separate tax entity. ```

Answer 119

B - Section 179 is deductible up to income ($15,000). Section 179 cannot create a loss. RC, Inc. bought the equipment, not Richard. RC, Inc. expects a profit of $15,000. Go to the Statement of Financial Position Ð footnote #5. The maximum 179 in 2014 is unknown by at least $25,000, but the deduction is still based on profits.

Answer 120

C - Richard can charge the company 100%, but RC, Inc. can only expense 50% ($2,000 x 50% = $1,000).

Answer 121

D - RC, Inc. will not have a corporate AMT problem. Corporate AMTs do not affect businesses with less than $7.5 million average gross receipts for a three-year period. Yes, S corporations are not affected by AMT. The case information does not say RC, Inc. is an S corporation. It must say it is an S corporation; otherwise, you should presume it is a regular C corporation. Answer C may have confused you. It is true but not to this question.

Answer 122

D - Fringe benefits like a Section 125 plan, group life insurance up to $50,000 death benefit, and group dental are relatively inexpensive. NQDC is too expensive.

Answer 123

``` A - Residence property taxes $3,000 Residence mortgage interest 11,000 Charitable gifts (cash) 2,000 Casualty loss * -0- $16,000 *Lesser of basis or FMV $9,000 Less insurance coverage -- Less floor 100 Less 10% of AGI 9,034 Casualty loss -0- Why are the business entertainment expenses (1/2 of $2,000) not added to the itemized deductions? What about medical expenses ? - see question 57 Answer: If he is reimbursed in a previous question (Q47) the answer is zero. If he is not, the answer is still zero. He loses 50%, therefore he is down to $1,000. But then he loses 2% of AGI or another $1,800 +. So the answer is zero. CPA fees are subject to 2% of AGI. The 2% was greater than the fee. NOTE: The rental house taxes and interest are in Question 45 footnote ***, ```

Answer 124

B - The child tax credit is available (phaseout $110,000). There is no mention of a child care expense. You cannot use the expense of adopting your spouse's child. Low income housing could be another answer. But it doesn't fit their situation. Answer B is the best choice. If he is reimbursed under Q47 then the answer is zero. If he is not, the answer is still zero. He loses 50% therefore he is down to $1,000. But then he loses 2% of AGI or another $1,800 +/-.

Answer 125

C - The policy is a MEC. It says the policy was purchased for a lump sum (see top of page 14). She 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 ($2,000).

Answer 126

C - Her salary is $36,000. The group insurance cost is three times salary less $50,000. Excess coverage: $58,000 x $.17 per $1,000 x 12 months Table I cost = $118.32 She pays -72.00 She is charged $46.32 NOTE: The employer always pays the full cost of the group insurance premium, then the employer charges the table Irate less any payment to the employer by the employee (question 53).

Answer 127

C - *Richard and Virginia are in a 25% bracket. She gets the children's exemption; therefore, you must use Virginia's tax bracket if there was any excess. EE interest is deferred unless Virginia elects to declare it.

Answer 128

A - The case data says that they had $11,000 withheld; therefore, they need to deposit $880 more to avoid the underpayment penalty. They must deposit the lesser of 90% of the current year's estimated liability $11,800 100% of last year's liability $12,000 ($11,880 - 11,000 = $880)

Answer 129

B - No, medical expenses are less than 10% of AGI. Richard's un-reimbursed medical claims $1,200* Virginia's medical insurance premiums 2,400 Virginia's un-reimbursed medical claims 1,200 Unpaid dental claims 1,000 Total $5,800 Richard does not have an S corporation or a Section 125 plan. Again, even the smallest AGI ($78,500) from the first case question ($78,500 x 10% = $7,850) is greater than $5,800. *Richard's un-reimbursed medical claim is a claim of $4,000. The deductible is $500. Then he pays 20% of $3,500 or $700. His total unreimbursed is $500 deductible plus $700 (20% portion) or $1,200.

Answer 130

B - Richard, Virginia, and Virginia's two children.

Answer 131

B - RC, Inc. is paying the premium as bonus to Richard. The premium would also be subject to ordinary income taxation.

Answer 132

D - Once a policy fails to meet the seven-pay test,it is classified as a MEC. Making extra payments did not violate the 1984 Act (Answer A). Answer E is wrong because the $50,000 distribution will not only be subject to tax at ordinary income tax but also to a 10% penalty since Ray is not 59-1/2 (picky).

Answer 133

``` D - Shares Current price/share Current value Cost per share Gain per share 250 AAA $23 $9,150 $36.60 $13.60 250 BBB $21 $6,606 $26.42 $ 5.42 300 CCC $36 $14,000 $46.67 $10.67 The lowest gain per share is BBB, with CCC the next lowest gain per share. It is the dollar amount of the gain that the question asks you to solve for. You use all the BBB first ( 250) and then 250 of CCC. ```

Answer 134

B - Only direct loans will increase Ray and Kim's basis in an S corporation. Losses in an S corporation are allowed only up to basis.

Answer 135

B - 1244 stock qualifies for a write-off of up to $100,000 as an ordinary loss ($50,000 in this case). Any losses in excess of $100,000 would be treated as capital losses limited to $3,000 per year.

Answer 136

C - They have both inventory and consignment.

Answer 137

D - The key is that the property is inventory. Inventory is not qualifying property.

Answer 138

C - Addison gets her full standard deduction (2014 - $6,200) for earned income; therefore, she will pay no tax. Answer D is wrong because the statement refers to the standard deduction. It would be true if it referred to the personal exemption rather than the standard deduction. If the $2,600 were subject to kiddie tax, then Answer A would have been correct. NOTE: If she used her exemption, she would pay no tax, but then her parents cannot use exe1nption. The use of the standard deduction is better tax planning. The kiddie tax is just for information purposes, it was not the answer. Income $2,600 Std. deduction -1,000 Kiddie tax calculation Next -1,000 @ 10% = $100.00 Remainder $ 600 @ 30%* = +180.00 Tax $280.00 *Parents' marginal income tax bracket

Answer 139

A - Gifts are based on what they can be sold for, not the FMV of $60,000. They can sell the memorabilia for half its value ($30,000). This is similar to a gift of a car to a charity. Someone could dump worthless outdated inventory just to get an income tax deduction. Given the options, this is the best choice.

Answer 140

D - None of the premiums paid for the first four answers is deductible by a business. The group life insurance ls deductible by the business, but the $50,000 excess benefits would be taxable to Big K.

Answer 141

B - The expected return is $868,000 ($21,700 x 40) Basis -100,000 Taxable (inclusion) $768,000 ($768,000 + $868,000) x $21,700 = $19,200 This is ordinary income, not capital gains. Since the contract was annuitized, the 10% penalty does not apply. This is a different way to get the same answer as the method used in Question 39. Both work. Use the question 39 method to solve the answer. Basis = $100.000 = 11.52% Expected Return $868,000

Answer 142

A - Salary from an S corporation would be employment income subject to FICA (7.65%) not self-employment taxes. The excess earnings as flow through from an S corporation are treated as K-1 income not subject to self- employment tax.