Income Tax Review Questions COPY

Question 1

Which is the best source for obtaining information about the intent of a very recent change in the tax law?
A. RIA Federal Tax Coordinator
B. Congressional Committee Reports
C. Treasury Regulations
D. Tax Court Reports

Answer 1

B

Question 2

If a court disallows a loss on the sale of an asset because the sale was not bona fide and was made for the sole purpose of realizing a loss, the court is applying the doctrine of which of the following?
A. Sham transaction
B. Tax Benefit rule
C. Step transaction
D. Assignment of income

Answer 2

A

Question 3

Robert is the sole shareholder, director, and president of a small but profitable corporation.  Rather than take a salary, Robert arranges to have the corporation lend him money. Robert does not intend to repay the debt.  Since he borrowed the money, he reports no income. Identify the potential tax trap.
A. Sham transaction
B. Substance over form
C. Step transaction
D. Assignment of income

Answer 3

B

Question 4

John is found guilty of fraud in a substance over form violation. What is the penalty?
A. The taxpayer must pay 75% of the deficiency amount attributable to fraud.
B. The taxpayer must pay 50% of the deficiency amount attributable to fraud plus 75% of the interest or the underpayment.
C. The penalty is 20% of the deficiency due to fraud.
D. The taxpayer must pay 75% of the deficiency amount attributable to fraud plus 50% of late interest due.

Answer 4

A

Question 5

Mike owns income-producing property.  Mike retains ownership of the property but directs that the income be paid to his son.  Mike does not report the income on his tax return. Identify the potential tax trap.
A. Sham transaction
B. Substance over form
C. Step transaction
D. Assignment of income

Answer 5

D

Question 6

A client had a tax liability last year of $150,000.  What is the required minimum annual tax payment to avoid an underpayment penalty tax?
A. 90% of last year's return
B. 100% of last year's return
C. 90% of this year's return
D. 100% of the prior year's return

Answer 6

C - The question says $150,000 of tax liability or an AGI of around $400,000. The other correct answer would have been 110% of the prior year.

Question 7

Which of the following is not true about the medical expense deduction for a client under age 65?
A. It is not deductible if it has been reimbursed.
B. It is subject to a 10%floor.
C. It is subject to a 10% of AGL
D. It is not deductible unless you itemize.
E. It includes medical insurance premiums.

Answer 7

B - The others are true. If Answer B would have said subject to a 10% AGI floor, it would have been correct. The 7?% still applies to clients age 65 and older.

Question 8

Which of the following is excluded from income?
A. Alimony paid to you
B. Unemployment income
C. IRA distribution
D. Child support payments received
E. Interest income

Answer 8

D - Child support is not included in income. Unemployment income with no limited would not be excluded.

Question 9

Lenny has provided you with the following 2014 tax information.
Salary
$60,000
Alimony received
1$12,000
Municipal bond interest
$4,000
Deductible IRA
$4,000
Dividends
$1,000
Based on the information given, what is Lenny's adjusted gross income?
A. $57,000
B. $61,000
C. $69,000
D. $72,000
E. $73,000

Answer 9

C - Salary
$60,000
Dividends
$ 1,000
Alimony received
$12,000
Less IRA
- $4,000
AGI
$69,000

Question 10

Which of the following is a deduction from AGI?
A. Business Joss
B. Capital loss
C. Alimony  paid
D. Standard deduction
E. IRA distribution

Answer 10

D - Itemized deductions or the standard deduction is a deduction from AGI.

Question 11

Mr. and Mrs. Patton have three dependent children.  Mrs. Patton is blind. They have been thinking about adopting another child.  How many exemptions do they get?
A. 5
B. 6
C. 7
D. 8

Answer 11

A - Mr. and Mrs. Patton (2) plus 3 children = 5. Blind counts for the standard deduction. They are thinking of adopting.

Question 12

Mr. and Mrs. Tate have three children, ages 2-4. Their day-care expenses are $10,000. Both Mr. and Mrs. Tate
work.
What amount of child-care credit will they get?
A. $1,000
B. $1,200
C. $3,000
D. $6,000

Answer 12

B - It asked for child-care credit, not the child-tax credit. ( $6,000 x 20% = $1,200)

Question 13

Troy and Myrna Lord are married and file a joint income tax return. Their adjusted gross income is $150,000 per year.  On last year's tax  return, the Lords claimed a $650.00 credit for child-care expenses.  The Lords are in the 28% marginal income tax bracket.  What amount of deductions for AGI would be required to equal the tax benefit of the $650 child-care  credit?
A. $182.00
B. $364.00
C. $2,119.42
D. $2,321.43

Answer 13

D - $650 divided by the 28% marginal income tax bracket equals $2,321.43.

Question 14

Which of the following is taxable income?
I. Sick pay
II. Workers’ Compensation Disability Income
III. Use of the company condo on the beach
IV. A gift of $28,000
V. Compensatory damages
A. I, III, IV
B. I, III
C. II, IV
D. IV, V

Answer 14

B - Even if you do not know that sick pay is taxable, Answer III is taxable because it does not say occasional.A gift is subject to gift tax. Workers’ compensation and compensatory damages are tax-free.

Question 15

Tim and Darcy, married filing jointly, have provided more than 50% of the support for two minor children and Darcy's mother (age 67). The children each had interest and dividend income of $1,600. Darcy's mother received a table pension of $200 per month, dividends of $1,500 and CD interest of $900. How many exemptions can Tim and Darcy claim?
A. 2
B. 3
C. 4
D. 5
E. 6

Answer 15

C - Darcy’s mother has taxable income in excess of $3,950 (2014) ($2,400 + $1,500 + $900 = $4,800). She cannot be claimed as an exemption. It is just Tim, Darcy and the 2 minor children.

Question 16

Tommy had the following income and expenses:
Ordinary dividend income
$8,000
Short-term capital gains
$4,000
Margin interest paid
$19,000
Mortgage interest received
$6,000
Interest received on a personal note
$5,000
Credit card interest
$3,000
How much margin interest expense can Tommy deduct on Schedule A?
A. $6,000
B. $16,000
C. $18,000
D. $19,000
E. $35,000

Answer 16

D - Margin interest is only deductible up to investment income [interest ($6,000 + $5,000), ordinary dividends ($8,000), and STCG ($4,000)]. Investment income totals $23,000. Margin interest paid was $19,000. Interest received is income. Credit card interest is consumer interest (not deductible).

Question 17

Mary Moore is a self-employed financial planner. She reported $90,000 on her Schedule C.  She paid the following during the year:
Alimony
$12,000.00
Child support
$10,000.00
Medical insurance premiums
$6,000.00
Self-employment tax deduction
$6,358.30 (This is the deduction not the tax.)
IRA contribution (deductible)
$4,000.00
What amount is deductible in arriving at her AGI?
A. $22,000.00
B. $22,358.30
C. $28,358.30
D. $34,717.00
E. $44,717.00

Answer 17

C -

The dollar amount is given.

Question 18

Which of the following is (are) subject to self-employment tax?
I. Distributive share of limited partnership operating income.
II. Wages from an S corporation.
III. Distributive share of general partnership operating income.
IV. Interest and dividends from investments.
A. III
B. I, III
C. II, III
D. I, IV

Answer 18

A - The general partnership operating income is self-employment income. By definition, the other items of income are not subject to the self-employment tax. They are forms of unearned income. S corporation wages are subject to FICA, not self-employment taxes.

Question 19

Tim Thomas has the following income for 2014. What amount of self-employment tax must he pay?
Sole proprietorship net income
$50,000
Reimbursed entertainment expenses
$ 5,000
Subsidized parking for the year
$ 2,000
Wages from an S corporation
$20,000
A. $6,140
B. $7,065
C. $6,359
D. $9,891

Answer 19

B - $50,000 x .1413 = $7,065 Reimbursed entertainment expenses and subsidized parking are not self-employment income.

Question 20

Which of the following would not entitle a taxpayer to a casualty loss deduction?
A. Sonic  boom
B. Vandalism
C. Termite damage
D. Hurricane
E. Earthquake

Answer 20

C - Damage is gradual, not unexpected or sudden.

Question 21

Which of the following is (are) true about a personal casualty loss?
I. If it is not fully insured, it’s not deductible.
II. It’s deducted on the Schedule A.
III. If you have more than one personal casualty loss, reduce the aggregate loss by 10% AGI.
IV. The $100 floor applies separately to the loss from each single casualty or loss.
V. You use basis when determining the value of calculation of loss.
A. I
B. II, III, IV, V
C. II, III, IV
D. III, IV, V
E. III, IV

Answer 21

C - The insurance diminishes the loss, but the loss is still deductible with limitations. The value is based on the tower of basis or FMV. The 10% of adjusted gross limitation is applied to all losses in one year.

Question 22

Alex, age eight, has an UTMA account set up for him by his grandfather (27% marginal tax bracket). This year, the account generated $1,500 of interest and $2,000 of short-term capital gains. Alex's father (30% marginal tax bracket) is the custodian of the UTMA. What is Alex's tax liability in 2014?
A. $425
B. $450
C. $550
D. $575
E. $600

Answer 22

C - Income
$3,500 ($1,500 of interest plus $2,000 STCG)
less standard
-1,000
less tax at his tax rate
-1 000 @10%
=   $100
$1,500 @30%
=  $450
$550

Question 23

For the current tax year, Bob Pearson, an individual taxpayer with a $100,000 AGI, has $12,000 of investment interest expense and $8,500 of investment income. He has deductible financial advisor fees (after application of the 2% of AGI limitation) of $1,500. How much investment interest expense, if any, may Bob deduct in the current tax year?
A. $7,000
B. $8,500
C. $10,000
D. $11,300
E. $12,000

Answer 23

A - Investment interest expense is deductible up to the amount of net investment income. Net investment income is investment income ($8,500) reduced by deductible financial adviser fees after the 2% of AGI limitation ($1,500). The 2% calculation is already done. The $100,000 is just to throw you off. Please refer to page 2-9.

Question 24

Mr. and Mrs. Pell have active income of $250,000. They have portfolio income of $15,000 (interest), $15,000 (dividends from their margin account treated as ordinary income), $30,000 (short-term gains) and $40,000 (long- term gains). They have been margining their portfolio and have incurred $50,000 of investment interest expenses. How much can they deduct?
A. $45,000
B. $50,000
C. $55,000
D. $60,000

Answer 24

B - Dividends are ordinary income. It does not say they are qualified dividends. Therefore, they count as investment income. They only have $50,000 of investment expense-not $60,000.

Question 25

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 25

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.

Question 26

Tom Slade has an AGI well over $300,000. He has itemized deductions from property tax, mortgage interest, and charitable gifts. By what amount can his itemized deductions be reduced in 2014?
A. Zero
B. 2% of AGI
C. 7.5% of AGI
D. 3% of AG I or 80% otherwise allowable

Answer 26

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

Question 27

Mr. and Mrs. Black have earned income of $100,000, qualified dividends of $2,000, and long-term gains of $3,000. For itemized deductions, they have $4,000 of real estate taxes and mortgage interest of $10,000. What is the amount of their taxable income for 2014 ? Hint: They can itemize with two exemptions.
A. $83,200
B. $89,000
C. $91,000
D. $96,000

Answer 27

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.

Question 28

Carol MacMillan owns and operates a retail appliance store. The store has an extensive selection of appliances. She uses FIFO.  What method of tax accounting is most appropriate for Carol's business?
A. Cash
B. Accrual
C. Hybrid
D. FIFO
E. LIFO

Answer 28

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

Question 29

If a company elects the FIFO method of inventory control, how will the inventory be reflected on the balance sheet?
A. It will be understated.
B. It will reflect current cost.
C. It will be based on the accrual method.
D. It will be based on the cash method.

Answer 29

B

Question 30

Mr. Dell sells land that he purchased for $125,000.  The sale price is $508,000.  He receives $25,000 as a down payment this year.  He will be paid $4,025 per month for 10 years. In addition to the down payment, he receives 10 monthly payments this year. Calculate his taxable gain for the current year.
A. $30,345
B. $36,325
C. $49,192
D. $55,260

Answer 30

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

Question 31

XYZ Corporation generates a loss of $1,000,000 in 2014. How much of the loss may be carried back to prior years?
Tax year
2009
Taxable income
$500,000
2010
$750,000
2011
$250,000
2012
$0
2013
$750,000
A. $0
B. $250,000
C. $750,000
D. $1,000,000

Answer 31

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

Question 32

Which of the following businesses or entities cannot use the cash method of accounting?
I. A CPA firm doing business as a partnership
II. A trust
III. A department store
IV. A C corporation with $10 million of annual gross receipts for more than 3 years
A. All of the above
B. I
C. II, IV
D. III, IV
E. III

Answer 32

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

Question 33

Mr. Stall sells land with a basis of $50,000 to his daughter for $500,000. His daughter paid $100,000 as part of a 5-year installment sale. In year 1, after she pays the first payment, she sells the land for $1,000,000. What is the tax effect to Mr. Stall?
A. He has to report a gain of $50,000.
B. He has to report a gain of $90,000.
C. He has to report a gain of $450,000.
D. She has to report a gain of $500,000.

Answer 33

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.

Question 34

Which of the following is not an accounting method?
A. Last-in, first out
B. Cash
C. Hybrid
D. Accrual

Answer 34

A - LIFO is an inventory method.

Question 35

Which of the following can use the installment method of tax recognition?
A. The property is sold at a loss.
B. The property is sold to a son, who in turn sells the property within one year of the original purchase date.
C. The property sold is undeveloped land.
D. The property sold is publicly traded securities.

Answer 35

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

Question 36

Which type of business entity cannot use NOL?
A. Regular corporations
B. S corporations
C. Estates
D. Trusts

Answer 36

B

Question 37

How many years can a NOL be carried forward?
A. 2
B. 18
C. 20
D. Lifetime

Answer 37

C

Question 38

If a publicly-held company wanted to reduce taxes in an inflationary period, which type of inventory method would they use?
A. UFO
B. FIFO
C. LILO
D. Cash
Income Tax Planning Quiz - Lesson 3

Answer 38

A - There is no LILO method.

Income Tax Planning Quiz - Lesson 4

Question 39

Your client Pete operates as a sole proprietorship with net earnings of $400,000. Pete reads an article in the Sunday paper about incorporating to limit the owner’s liability. He comes to you for advice. Which of the following statements would be proper advice for you to tell Pete?
I. He should not incorporate because the top corporate income tax bracket is 34%.
II. A limited partnership also protects him from liability.
III. An S corporation would save him money because it does not have to file income tax returns.
IV. He can reduce his current income tax liability by splitting his income between himself and a C corporation.
V. An S corporation could allow him to shift income to his children if he gives them stock.
A. II, III
B. I
C. II, V
D. IV, V
E. III, IV

Answer 39

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.

Question 40

During the year, Freddy’s business generated $13,000 of income. Unfortunately, he had $23,000 of expenses. He is a sole proprietor. Which of the following is true?
A. The losses will be suspended until he makes a profit.
B. If he had taxable income in the prior two years, he can carry back any excess losses against prior income.
C. Schedule C losses can only be applied against income in the same year.
D. Sole proprietors cannot take losses. They have no basis.

Answer 40

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

Question 41

Which of the following forms of business organization can pass losses through to the owner(s)?
I. S corporation
II. C corporation
III. Sole proprietorship
IV. General partnership
V. Limited partnership
A. All of the above
B. I, III, IV, V
C. II, IV, V
D. I, III, V
E. I, IV

Answer 41

B - Basic conduit question

Question 42

Which of the following businesses must file federal tax returns?
I. S corporation
II. C corporation
III. General partnership
IV. Limited partnership
A. II
B. I, II
C. IV
D. III, IV
E. All of the above

Answer 42

E - Some entity returns are for informational purposes only.

Question 43

Walter owns an S corporation. He starts it with $50,000 of cash. After a few months, business is expanding, so he lends the S corporation $100,000. As the year progresses, he needs more capital. The S corporation applies for a
$100,000 loan. Before the bank will lend the money to the S corporation, it requires Walter to personally guarantee the debt. What is Walter’s basis for tax purposes?
A. $0
B. $50,000
C. $100,000
D. $150,000
E. $250,000

Answer 43

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

Question 44

Bob and Fred, brothers, want to start a new restaurant. They will materially participate. They anticipate losses for the first three years due to competition. If one of the brothers dies, they want the survivor to be able to continue the business. They anticipate that they may have to raise additional capital through the sale of interests or have the business borrow funds. Which one of the following business forms is most appropriate?
A. LLC
B. S corporation
C. C corporation
D. General partnership

Answer 44

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.

Question 45

Dr. K, Dr. L, and Dr. M own a corporation-type entity. At year-end, a profit of $10,000 is left in the corporation. How will the earnings be taxed?
A. To the individual doctors at their tax rate.
B. At the corporate graduated rates.
C. At a flat 35%.
D. At a flat 15%.

Answer 45

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

Question 46

How can a business owner reduce his/her taxes?
A. File as a self-employed person.
B. File as an S corporation (1120s).
C. File as a regular corporation (1120).
D. File as a LLC.

Answer 46

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.

Question 47

The OKA Corporation owns 25% of the stock of DEC Corporation.   For the year, OKA receives $10,000 in dividends from DEC. What is OKA's dividend-received deduction?
A. $0
B. $2,000
C. $2,500
D. $8,000
E. $10,000

Answer 47

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.

Question 48

On what forms would the owner-employee of a regular corporation receive notice of distributed taxable income?
I. Schedule K-1 of the 1120
II. W-2
III. 1099
IV. Schedule C
A. I, III
B. I, IV
C. II, III
D. III, IV
Income Tax Planning Quiz - Lesson 4

Answer 48

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

Question 49

Lance creates an irrevocable life insurance trust that will pay income to his ex-wife for life and then to his children. Lance transfers a $1,000,000 term policy and $100,000 of high yield bonds to the trust. The income from the bonds will be used to pay the premiums on the policy, and all remaining income will be paid to family members. Which of the following is correct?
A. During Lance’s lifetime, the income of the trust will be taxable to Lance.
B. During Lance’s lifetime, income from the trust will be taxable at the trust rates.
C. During Lance’s lifetime, the income of the trust will be split with the amount paid for insurance premiums taxable to the trust and the amount paid to the family members taxable to Lance.

Answer 49

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).

Question 50

Sara Jane set up a revocable living trust. She placed all her income producing assets in the trust. How will the income be treated for tax purposes?
A. Conduit to her
B. Accumulated in the trust
C. Taxed at trust income tax rules
D. Deferred until distribution to the ultimate (remainder) beneficiaries

Answer 50

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

Question 51

Distributable net income (DNI) is a concept that has not been developed for which of the following purposes?
A. It limits the amount of distributions that may be taxable to the beneficiaries.
B. It advises beneficiaries of the amount of income the trust has earned.
C. It establishes the character of the amount taxable to the beneficiaries.
D. It limits the deduction a trust may receive for amounts distributed to beneficiaries.

Answer 51

B - DNI accounts for the income to the beneficiary.

Question 52

Mr. Mark Thomas dies owning a business MT, Inc. After Mark dies, the personal representative manages MT, Inc. and she incurs business expenses. Is the estate entitled to take a deduction for those expenses?
A. Yes, but up to a limit of $600.
B. Yes, as long as they are normal business expenses.
C. No, only complex accumulating trusts can take expenses.
D. No, only the beneficiaries can deduct the expenses.

Answer 52

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

Question 53

Mr. O’Toole as part of his divorce instrument establishes a trust to provide support for his minor children. The income generated by the trust will be taxed to which of the following?
A. Mr. O’Toole
B. The trust
C. Mr. O’Toole’s children
D. Mrs. O’Toole as child support payments
Income Tax Planning Quiz - Lesson 5

Answer 53

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

Question 54

Lamar, a sole proprietor, purchases a light duty truck for $201,000. He pays sales tax of $1,000. To use in his business, he has it modified. The modification cost is $10,000. What is the cost recovery deduction for the first year?
A. $4,000
B. $4,200
C. $6,200
D. $24,000
E. $25,400

Answer 54

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

Question 55

Jack purchases a small office building for $500,000. He pays $25,000 in legal fees associated with the acquisition. After he purchases the building, he makes $100,000 of renovations. Jack pays $100,000 in property taxes over the years. He takes $125,000 in cost recovery deductions. What is Jack's adjusted basis in the building?
A. $400,000
B. $500,000
C. $525,000
D. $625,000

Answer 55

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

Question 56

What would be an example of a commercial property improvement?
A. Renovating the property
B. Fixing a pot hole in the driveway
C. Paying for monthly air-conditioning maintenance
D. Paying in advance for accounting fees

Answer 56

A - A renovation is an improvement.

Question 57

How do you define adjusted basis?
A. A taxpayer’s investment in any asset or property right.
B. Cost basis less cost recovery.
C. Cost basis increased by incidental costs.
D. Cost basis less business expenses.

Answer 57

B

Question 58

Mrs. Tower purchased stock X for $100,000. When Mrs. Tower died, her daughter, Pamela, inherited the stock with a FMV of $200,000. Pamela sold the stock for $250,000. What will be Pamela’s taxable gain?
A. $50,000 STCG B. $50,000 LTCG C. $150,000 STCG D. $150,000 LTCG

Answer 58

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.

Question 59

Lana and Tommy Andrews bought stock (JTWROS) for $100,000. A year later Tommy died when the stock was worth $150,000. IF Lana sells the stock for $200,000, what amount of capital gain will she have to pay?
A. $75,000 LTCG B. $50,000 STCG C. $100,000 LTCG D. $75,000 STCG

Answer 59

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

Question 60

Shelia owns $100,000 of office furniture. She uses the straight-line option under MACRS. What is the cost recovery deduction for the first year?
A. $7,145
B. $10,000
C. $14,290
D. $20,000

Answer 60

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

Question 61

The Section 179 expense election is available to which of the following properties?
A. 1245 property
B. 1250 property
C. A  franchise
D. A strip shopping center

Answer 61

A - Only 1245 property qualifies under Section 179.

Question 62

A regular corporation buys new furniture worth $100,000. The corporation at year end has taxable income of
$75,000. What is the maximum the corporation can expense under Section 179 at year end 2014?
Use 2013 numbers. Congress hasn’t decided on 2014.
A. $0, not enough information known to answer the question
B. $25,000
C. $75,000
D. $100,000
E. $139,000

Answer 62

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

Question 63

A company buys a light duty truck for $25,000. Under straight line method of depreciation, how much can the company take in cost-recovery deductions in the first year?
A. $1,785
B. $2,500
C. $3,573
D. $5,000
E. $25,000
Income Tax Planning Quiz - Lesson 6

Answer 63

B - $25,000 x 10% = $2,500

Income Tax Planning Quiz - Lesson 7

Question 64

Bart owns a warehouse that has a fair market value of $200,000 and an adjusted basis of $50,000. He wants to acquire Denny’s strip shopping center which has a fair market value of $300,000 and adjusted basis of
$100,000. In the exchange, Bart will pay Denny $75,000. What is the amount of gain realized by Bart in the exchange?
HINT: It really helps to use the flow chart concept developed in this lesson to do question 1-3.
A. $75,000
B. $125,000
C. $175,000
D. $300,000

Answer 64

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

Question 65

What is the amount of gain recognized by Bart in the exchange?
A. $0
B. $50,000
C. $75,000
D. $100,000

Answer 65

A

Question 66

What is Bart's adjusted basis in the acquired shopping center?
A. $75,000
B. $100,000
C. $125,000
D. $175,000

Answer 66

C

Question 67

Tim and Maggie Butler sell their residence in June. The realized gain over the eight years they owned it is
$350,000. Instead of buying a new home, they decide to rent a condo. Which of the following is true?
A. The gain must be reported on the year-end tax return.
B. There is no taxable gain; therefore, no tax forms need to be filed.
C. The amount of the gain is more than exclusion. No tax forms need to be filed.
D. A Schedule D and form 2119 must be filed.

Answer 67

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.

Question 68

John Matthews, a married taxpayer filing a joint return, sells Section 1244 stock during the current year. Which of the following correctly identify the tax treatment of the sale?
I. Up to $50,000 of loss is treated as an ordinary loss.
II. Up to $100,000 of loss is treated as an ordinary loss.
III. Any loss in excess of the maximum annual ordinary loss is treated as a capital loss.
IV. A gain on the sale is considered ordinary income.
A. I, III
B. II, III
C. II, IV
D. I, III, IV
E. II, III IV

Answer 68

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)

Question 69

In the current year, Tim sells several securities that leave him with the following gains and losses: long-term capital gain Ð $10,000; long-term capital loss Ð $3,000; short-term capital gain Ð $7,000; short-term capital loss Ð $6,000. What is the net capital gain or loss on Tim’s security sales?
A. Net long-term gain of $6,000.
B. Net long-term gain of $8,000.
C. Net long-term gain of $7,000 and net short-term gain of $1,000.
D. Net long-term gain of $7,000 and net short-term loss of $1,000.

Answer 69

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

Question 70

Mr. A wants to exchange his twenty acres of land worth $250,000 with a basis of $100,000 for Mr. Z's land. Mr. Z's 30 acres are worth $250,000 but have a basis of $300,000. What will be the basis of the 30 acres after the exchange?
A. $100,000
B. $150,000
C. $250,000
D. $300,000
E. -$50,000

Answer 70

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.

Question 71

A client buys the following from ABC mutual fund:
Year
Amount
Cost of Shares
2010
$10,000
$21.938
2011
$12,000
$25.492
2012
$ 8,000
$27.381
2013
$10,000
$22.132
What is his average cost per share?
A. $22.573
B. $23.074
C. $23.944
D. $24.237

Answer 71

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

Question 72

Tommy completes several security transactions this year:
Long-term capital gain of $10,000 Long-term capital loss of $5,000 Short-term capital gain of $5,000 Short-term capital loss of $20,000
What is the net capital gain or loss on Tommy’s security sales?
A. Net STCL of $15,000
B. A loss of $3,000 can be taken against ordinary income
C. Net STCL of $10,000
D. Net loss of $10,000

Answer 72

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

Question 73

Bob and Alice Smithson exchange (1031) their rental property with a FMV of $1,000,000 and a basis of
$250,000 for another rental property worth $1,000,000 with a basis of $350,000 (a swap). The new property was rented for 100 days, and then the Smithson’s used it as a residence for 60 days until Bob died last week. What is Alice’s basis in the property if they live in a community property state?
A. $250,000
B. $350,000
C. $500,000
D. $750,000
E. $1,000,000

Answer 73

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.

Question 74

Mr. Able owns rental property with a FMV of $500,000 and a basis of $150,000. He wants to exchange his property for a property owned by Mr. Pate. The Pate property only has a FMV of $400,000 and a basis of
$200,000. The Pate property needs to be upgraded. Mr. Able wants $100,000 in cash from Mr. Pate. How much gain will Mr. Able have to recognize?
A. $0
B. $50,000
C. $100,000
D. $150,000
E. $350,000

Answer 74

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)

Question 75

What is Mr. Able's adjusted basis after the swap?
A. $0
B. $100,000
C. $150,000
D. $250,000
E. $350,000

Answer 75

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

Question 76

Todd is in the 28% marginal tax bracket and has the following invested assets:

• IRA of $50,000 earning 8%
• Life Insurance Cash Value of $30,000 growing at 5%
  
  • Growth mutual fund worth $20,000 and growing at 5% What is Todd’s overall estimated rate of return?

Answer 76

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%

Question 77

Harry owns and operates a business as a sole proprietor. He purchased antique office furniture a few years ago at a cost of $8,000 to use in his business. Harry claimed $5,858 of cost-recovery deductions. This year he sold the office furniture for $11,500. What are the amount and nature (character) of the gain or loss resulting from this disposition?
A. $2,142 of 1245 gain and $3,500 of 1231 gain B. $2,142 of 1245 gain and $5,858 of 1231 gain C. $3,500 of 1245 gain and $5,858 of 1231 gain D. $5,858 of 1245 gain and $3,500 of 1231 gain

Answer 77

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)

Question 78

X. Ray believes he sees the perfect stock purchase (ABC, Inc.). ABC, Inc. fails and completely shuts down a year and a half later. X. Ray’s loss is $50,000. How can he deduct his loss?
A. He can deduct up to $3,000 as LTCL and carry forward the remainder indefinitely.
B. He can deduct up to $3,000 as LTCL but only has a five-year window to deduct the remainder.
C. He can carry back losses for two years and carry forward losses for 20 years.
D. He can take the $50,000 as ordinary income loss under section 1244.

Answer 78

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.

Question 79

A partnership trades an old piece of equipment having an adjusted basis of $10,000 plus cash of $2,000 for a new machine with a fair market value of $15,000. What is the recognized gain, and what is the basis of the new machine?
A. Gain $0; Basis: $12,000
B. Gain $0; Basis: $10,000
C. Gain $2,000; Basis: $15,000 D. Gain $3,000; Basis: $12,000

Answer 79

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.

Question 80

Mr. Pate has an expensive rental home (FMV $600,000). He has taken depreciation on the home of
$100,000. He originally paid $300,000 for it. He agrees to exchange it for a parcel of land worth $500,000 and $100,000 in cash. He plans to develop the land. What will his realized and recognized gain be?
A. $300,000 realized/$400,000 recognized
B. $300,000 realized/$300,000 recognized
C. $400,000 realized/$200,000 recognized
D. $400,000 realized/$100,000 recognized
Income Tax Planning Quiz - Lesson 7

Answer 80

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

Question 81

Which of the following are preference items or add-back items for purposes of the individual alternative minimum tax?
I. Qualified private-activity municipal bond interest
II. Property tax itemized deduction
III. The excess of percentage depletion over the property’s adjusted basis
IV. Cost depletion deductions
A. I, III
B. I, IV
C. I, II, III
D. II, III, IV
E. All of the above

Answer 81

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

Question 82

Mrs. Richie (unmarried) has purchased various municipal bonds and tax-free mutual funds from you. She owns an expensive home (paid for) and gives to charity. At year end, her regular tax is $16,381. She asks you to review her tax return, and you have calculated that her AMT is $41,892. What is her AMT payable?
A. $16,381
B. $25,511
C. $41,892
D. $58,793

Answer 82

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

Question 83

Which of the following life insurance policies may affect corporate AMT?
A. Group life insurance
B. Discriminatory group life insurance (for key employees only)
C. Entity purchase life Insurance
D. Payroll deduction life insurance

Answer 83

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.

Question 84

Mr. Smith leaves $50,000 in his C corporation to keep his taxes low (28%). As a result, Mr. Smith is subject to AMT. Which of the following can reduce his AMT payable?
I. Increasing his taxable income
II. Selling his home (with a large mortgage) and renting a home
III. Purchasing more municipal bonds (private activity)
IV. Buying an oil and gas partnership
V. Paying off his existing large mortgage
A. I, II, V
B. I, V
C. III, IV
D. II, V

Answer 84

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%.

Question 85

Which of the following should be considered to avoid or soften the impact of the AMT tax?
I. Spread out the exercise of ISOs over more than one year
II. Pay yourself a large bonus if you are the owner of a small corporation
III. Defer paying property taxes until next year
IV. Buy private activity municipal bonds rather than public purpose municipal bonds
A. All of the above
B. I, II, III
C. II, IV
D. III, IV
E. IV

Answer 85

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).

Question 86

Interest on which of the following bonds is (are) a preference item?
I. Municipal bonds
II. GO municipal bonds
III. Private activity municipal bonds
IV. 30-year Treasury bonds
V. AAA corporate bonds
A. I, II, III
B. I, III, IV, V
C. II, III
D. IV, V
E. III

Answer 86

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.

Question 87

Mr. Snow doesn’t understand AMT. The AMT is which of the following?
A. Double taxation
B. A separate method of calculating income tax liability
C. A substitute for calculating the regular tax
D. A method of avoiding calculation of the regular tax

Answer 87

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

Question 88

A preference item for calculation of the AMT is which of the following?
A. Straight line depreciation
B. Medical expenses
C. Personal exemptions
D. Depreciation

Answer 88

D - Straight-line is not a preference item.

Question 89

The AMT exemption is which of the following?
A. Subject to phaseout
B. Usable by corporations only
C. Deductible
D. Always deductible

Answer 89

A

Question 90

If the alternative minimum tax is $102,000 and the regular tax is $1,00,000, then the AMT payable is which of the following?
A. -$2,000
B. $2,000
C. $100,000
D. $102,000

Answer 90

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

Question 91

Paul owns the following partnerships that generated income and losses for the past year:
$10,000
loss from partnership #1
publicly traded
$5,000
loss from partnership #2
non-publicly traded
$20,000
income from partnership #3
non-publicly traded
What is the total amount of passive losses that may be deducted during the current year?
A. $5,000
B. $10,000
C. $15,000
D. $20,000

Answer 91

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

Question 92

Your client, Joe Silver, has active income of $300,000 per year and substantial unused passive losses from a non-publicly traded limited partnership. He would like to find an investment that would allow him to utilize his passive losses. Which of the following are the most appropriate investments for Joe?
I. An active participation rental real estate activity generating income on the schedule E
II. A master limited partnership (MLP) generating income
III. Certificates of deposit generating portfolio income
IV. A non-publicly traded limited partnership generating income
A. I, II
B. I, IV
C. III, IV
D. I, II, IV
E. I, II, III, IV

Answer 92

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.

Question 93

Tim owns a triplex and rents the units. The triplex generated $35,000 of losses. His AGI is $95,000.  How much of the losses can he use against his AGI?
A. $0
B. $12,500
C. $25,000
D. $35,000
E. $70,000

Answer 93

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.

Question 94

Dr. Sarah Mills is a successful doctor with a PSC. Her AGI exceeds $500,000. Which of the following represents a workable opportunity for Sarah to shelter some of this income?
A. Actively participating in rental real estate
B. Investing in a historic rehabilitation project
C. Investing in an equipment leasing program
D. Investing as a general partner in an oil and gas working interest
E. Materially participating in real estate

Answer 94

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

Question 95

Which of the following will result in a passive loss?
A. A loss from a partnership (material participation)
B. A loss from a non-publicly traded partnership
C. A loss from rental real estate (active participation)
D. A loss from an equipment leasing program owned by a closely held C corporation

Answer 95

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.

Question 96

Darcy has employment income of $200,000. In addition, she owns a half-empty strip shopping center that generated a $30,000 loss for the year. What is her AGI?
A. $150,000
B. $170,000
C. $175,000
D. $200,000

Answer 96

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.

Question 97

Which of the following result in a taxable transaction for the taxpayer?
A. Ten-day rental of his/her home for $10,000
B. Sale of his or her home for $500,000 gain
C. Exchange of shopping center for 10,000 acres of land
D. Exchange of high-speed fax machine for copy machine

Answer 97

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

Question 98

Which of the following investments would produce phantom income for income tax purposes?
I. Series I bonds
II. STRIPS
III. GNMAs
IV. Private activity municipal bonds
V. T-Bills
A. II
B. I, II, IV
C. I, II
D. III, IV, V
E. IV, V

Answer 98

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.)

Question 99

Tommy Thomas has the following income and losses for the year:
$5,000 loss from ownership (1%) in a limited partnership
$10,000 loss from active participation in a strip shopping center (100% ownership)
$8,000 loss from a 10% interest in an 5-corporation in which he is a manager
$75,000 of salary as the manager of the 5-corporation What is his adjusted gross income?

Answer 99

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.

Question 100

Which of the following items will qualify as alimony payments to a spouse?
I. The payer spouse owns a life policy, names the payee spouse the beneficiary, and pays the premium on the policy (by decree)
II. The divorce decree gives the payee spouse and children rent-free occupancy of the family home
III. Payment of child support (by decree)
IV. The payer spouse pays $5,000 into the payee spouse’s IRA each year (by decree)
A. All of the above
B. I, II, IV
C. I, II
D. II, IV
E. IV

Answer 100

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.

Question 101

Harvey divorces Stella. He is required to pay alimony to Stella.  Stella asks for $100,000 in the first year,
$50,000 in the second year, and then nothing. How much of the alimony that Harry pays would be subject to recapture?
I.
$37,500
II.
$50,000
III.
$100,000
IV.
$112,500
V.
$150,000

Answer 101

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

Question 102

Which of the following statements is/are true?
I. Property transferred pursuant to a divorce provides a step-up in basis for the payee spouse
II. Child support payments cannot extend beyond tile death of the payee spouse
III. Alimony payments cannot extend beyond the death of the payee spouse
IV. The divorced payer and payee spouse can live together at the time alimony payment begins
A. I, IV
B. II, III, IV
C. I, III
D. III
E. IV

Answer 102

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

Question 103

Lamar and Barbara Williams are getting a divorce. After the property settlements, Lamar will make alimony payments of $2,000 per month. The divorce instrument provides that alimony payments will be reduced by
$800 when Lamar Jr. turns age eighteen. How much of the payment is alimony?
A. $0
B. $800
C. $1,200
D. $2,000

Answer 103

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

Question 104

Abby’s earned income is $200,000 (AGI $225,000). She is looking for an investment that will allow her to take losses against her income. Which of the following investments will allow her to take the losses?
A. Her brother develops duplexes, and he will let her buy a 25% limited partnership interest in some duplexes. Losses will total $25,000 or less in the first year.
B. She can buy into a historic rehab and get a $25,000 credit.
C. She could purchase one or two duplexes and take losses up to $25,000 in income.
D. Abby can buy and manage a rental property outright and take any losses the property would develop.
E. She can buy into XYZ Wildcat Oil and Gas Drilling Program as a general partner.
Income Tax Planning Quiz - Lesson 9

Answer 104

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

Question 105

Luke donates a painting to the art museum (public charity). He paid $30,000 for the painting six months ago. The appraisal valued the painting at $40,000. He has an AGI of $50,000. What is the amount of this year's charitable deduction?
A. $15,000
B. $25,000
C. $30,000
D. $40,000

Answer 105

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.

Question 106

Mrs. Frank, age 66, gives generously to her church ($5,000 per year). Her only other possible deduction is the $1,500 sales ta x on a car purchase. She has very little earned income but a substantial amount of unearned income (from public-purpose municipal bonds Ð $10,000 and Social Security Ð $10,000).  Should she itemize, and if so, what amount of this year's charitable deduction can she use on this year's tax return if she is in the 15% tax bracket in 2013?
I. Yes, she should itemize.
II. No, she should take the standard deduction.
III. No, she cannot itemize.
IV. $0
V.   $5,000
VI.  50% of her AGI
A. I, IV
B. I, V
C. I, VI
D. II
E. III

Answer 106

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.

Question 107

Mrs. Kale has stock worth $40,000 that she purchased many years ago for $10,000. She wants to give it to a public charity.  If her AGI is $40,000, what is the maximum charitable deduction she can take this year for this stock?
A. $10,000
B. $12,000
C. $20,000
D. $40,000

Answer 107

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

Question 108

Mrs. Ball has stock worth $100,000 that she purchased many years ago for $25,000. She wants to give it to a public charity.  If tier AGI is $250,000, what is the maximum charitable deduction she can take this year for this stock?
A. $25,000
B. $75,000
C. $100,000
D. $125,000

Answer 108

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

Question 109

Debbie Sutton purchased some securities for $50,000 some years ago. She wants to donate them to her university (a private university). They are presently worth $40,000. Her AGI is $145,000. What is the maximum charitable deduction she can take this year for the donation of the stock?
A. $40,000
B. $43,500
C. $45,000
D. $50,000

Answer 109

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).

Question 110

XXCEL Corporation has earnings on $100 million and only $100,000 of taxable income due to start-up costs. How much can XXCEL contribute and deduct to a 50% public charity?
A. $5,000 on a Form 1120
B. $10,000 on a Schedule C
C. $5,000 on a Schedule C D. $10,000 on a Form 1120
Income Tax Planning Quiz - Lesson 10

Answer 110

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

Question 111

Which of the following is excluded from income?
A. Interest earned on a gift received this year
B. Interest earned on an inheritance received this year
C. Child support payment received
D. IRA distributions

Answer 111

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

Question 112

Tony and Paulette Baker are married and will file a joint return for the current tax year. They have one dependent son.  Neither spouse is an active participant in a company-maintained retirement plan. They have provided you with the following information for the current year.
Tony's salary
$63,250
IRA contribution (Tony and Paulette)
10,000 (deductible)
Child support  payment to Tony' s ex-wife
4,800
Home mortgage interest/taxes
10,000
Based on the information given, what is the Bakers' adjusted gross income for the current tax year?
A. $38,450
B. $44,450
C. $48,450
D. $53,250
E. $61,250

Answer 112

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

Question 113

Peggy is divorced. She has three children living with her.
Alice age 14
Todd age 20 (working) Billy age 21 (working)
She files as a head of household. How many exemptions may she claim?
A. 2
B. 3
C. 4
D. 5

Answer 113

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.

Question 114

Which of the following are allowable deductions for AGI?
I. Business losses
II. Real estate taxes
III. Capital losses
IV. Alimony received
V. Casualty losses
A. All of the above
B. I, II, III, V
C. I, III
D. II, V
E. IV

Answer 114

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.

Question 115

Harry receives the following payments during the year. What items are generally included in his gross income in the current year?
I. Workers’ compensation benefits
II. Medical expenses reimbursement
III. Damages - personal injuries (compensatory)
IV. Active participation income of $30,000
A. All of the above
B. I, II
C. II, III, IV
D. IV

Answer 115

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.

Question 116

Sue is a sales manager. When she entertains company clients, the company reimburses her 100%. However, when she entertains prospective clients, the company does not reimburse her. How does this impact her personal business expenses?
A. Entertainment costs for prospective clients are not a deductible expense.
B. 100% of the entertainment expenses for prospective clients are deductible on Sue’s Schedule C.
C. 50% of the entertainment expenses for prospective clients are deductible on Sue’s Schedule A.
D. 50% of the entertainment expenses for prospective clients are deductible on Sue’s Schedule C.
E. 50% of the entertainment expenses for prospective clients are deductible on Sue’s Schedule A subject to 2%
F. AGI floors.

Answer 116

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.

Question 117

Sam Smith has the following items of income during the current year:
Sole proprietorship net income
$30,000
Interest Income
$ 2,000
Flow-through of S corporation income
$10,000
What is the amount of self-employment tax Sam owes for the current year?
A. $4,239
B. $4,522
C. $7,065
D. $7,348
E. $7,884

Answer 117

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

Question 118

Which one of the following is true about S corporation eligibility?
A. There may be no more than two classes of stock.
B. There can be no more than seventy-five shareholders.
C. A trust cannot be a shareholder.
D. There can be voting or nonvoting common stock issued.

Answer 118

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.

Question 119

Tony and Ellen are contemplating purchasing an existing business.  Control and ownership will be divided equally. They feel the business will be liability risk-free.  Initially, the business will require the owners to guarantee debt and make capital contributions. Both Tony and Ellen are independently wealthy (39.6% bracket). They expect to actively participate in the business and to produce sporadic profits and losses over the next year or so.  However, they expect the business to succeed. Which one of the following business forms would be most appropriate?
A. Partnership
B. Personal Service corporation
C. C corporation
D. Limited partnership

Answer 119

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.

Question 120

Dr. Jeffrey is retired but bored. He is considering purchasing an antique refurbishing business. The business had marginal profits in the past. He has aknowledge of antiques and plans to upgrade the equipment and building.  He feels that after losing money (due to upgrades), the business will be profitable. He plans to put up all the capital. Which of the following business forms is the most appropriate?
A. Sole proprietorship
B. Limited partnership
C. Personal Service Corp.
D. S corporation
E. C corporation

Answer 120

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.

Question 121

Ken is considering starting a manufacturing facility to make a laser wrinkle remover.  Ken anticipates contributing a limited amount of capital to start the business.   He anticipates incurring losses for several years due to substantial MACRS deductions generated by manufacturing equipment purchases. He is lending the business money to purchase the manufacturing equipment and finance the losses. He can purchase a one million dollar business owner's policy with a one million dollar umbrella. Which of the following business forms would be most appropriate for Ken to use at this time?
A. Sole proprietorship
B. Limited partnership
C. S corporation
D. C  corporation

Answer 121

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.

Question 122

Mr. Gray owns and operates a business as a sole proprietor.  He purchased antique office furniture a few years ago at a cost of $6,000 to use in his business. He claimed $3,795 in cost recovery deductions. This year he sold the furniture for $9,000.  What amount of cost recovery deductions must be recaptured as 1245 (ordinary income)?
A. $3,000
B. $3,795
C. $6,000
D. $2,205
E. $9,000

Answer 122

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)

Question 123

Mr. A has a rental house. Mr. B has a personal residence. Mr. A and Mr. B want to exchange properties. Which of the following is true?
A. The properties don’t qualify as a like-kind exchange.
B. Mr. A can do a like-kind exchange if he uses the transferred property as rental property.
C. Mr. B can do a like-kind exchange if he uses the transferred property as rental property.
D. Both Mr. A’s and Mr. B’s houses must meet the requirements of qualifying property.

Answer 123

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).

Question 124

Mrs. G, age 45, has owned and lived in her home for 10 years. She paid $100,000 for the house 10 years ago and recently sold the house for $375,000. She just purchased a new home for $500,000.  She incurred a broker's commission of $9,000 on the sale of her home. Calculate Mrs. G's recognized gain.
A. $0
B. $16,000
C. $25,000
D. $266,000

Answer 124

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.

Question 125

Sally Franklin has AGI of $250,000. In addition, she currently has passive income of $30,000 and passive losses of $48,000, $30,000 of which she uses to offset the passive income and $18,000 of which is subject to disallowance. Which of the following activities has the greatest potential for reducing Sally’s tax liability?
A. Investing in active participationrental real estate that is producing a loss.
B. Investing in an equipment leasing limited partnership producing passive losses.
C. Investing in a newly created limited partnership involved in low-income housing that is producing passive losses and credits.
D. Investing in an oil and gas limited partnership that is generating losses.

Answer 125

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.

Question 126

Mrs. Simm’s diamond ring is stolen. She bought the ring for $16,000. She insured it a few years ago for
$8,000. She recently got an appraisal for $13,000, but she did not change her insurance coverage. What is the amount of Mrs. Simm’s deductible casualty loss if her AGI is $40,000?
A. $500
B. $900
C. $2,000
D. $3,500

Answer 126

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

Question 127

For this year, R.J. got the following K-1s: Arizona LP $5,000 loss
Deep Hole Oil and Gas (GP) $30,000 loss
What amount of loss can be deducted against his income?
A. $3,000 maximum B. $5,000
C. $30,000 D. $35,000
E. $0 These are passive losses

Answer 127

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.

Question 128

Ann Hamilton owns 500 shares in the XYZ Growth Mutual Fund. The basis in this fund is $3, 700 while the fair market value is only $1,200. She wants to sell her shares to lock inthe $2,500 loss but is considering buying 500 shares of the same fund the following week because she believes the value ls going to increase significantly over a period of years. As her planner, what can you accurately tell her about this scenario?
A. The loss would be a fully deductible capital loss.
B. The basis in the newly acquired shares will be the amount paid for those shares, increased by the
$2,500 disallowed loss.
C. She should wait a minimum of sixty days after the sale to repurchase the shares so that the loss may be recognized.
D. If she purchases shares in ABC Growth Mutual Fund within thirty days after sale of the old shares, the $2,500 loss will be disallowed.

Answer 128

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.

Question 129

While the kiddie taxcertainly reduces the benefits of income shifts to young children, investment advisors can counsel clients on investments that defer or avoid the unearned income. Which of the following is least suitable for a child, age 81 if $10,000 is contributed to the UTMA account each year?
A. EE bonds
B. Individual municipal bonds
C. Municipal bond mutual funds
D. STRIPS
E. Growth corporation stock

Answer 129

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.

Question 130

Sally, age 18, has a stock account. She sells a stock that makes $3,000 in short-term capital gains (her only income for 2014). Her parents are in a 35% tax bracket. What is Sally's tax liability if she is a dependent of her parents?  NOTE: Assume $1,000 is the standard deduction.
A. $100.00
B. $350.00
C. $400.00
D. $450.00

Answer 130

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.

Question 131

Mrs. Hale donated 1,000 shares of a stock she purchased for $20 per share five years ago to a public charity. The FMV on the date of gift was $80 per share. Her AGI is $200,000. What is the maximum deductible amount of this year's charitable donation?
A. $20,000
B. $60,000
C. $80,000
D. $100,000

Answer 131

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.

Question 132

Henry and Betty were recently divorced. Which of the following aspects of the divorce settlement have immediate tax consequences for either Henry or Betty?
I. Henry will pay child support of $1,000 until each child finishes schooling.
II. Betty transferred stock worth $100,000 with a basis of $10,000 to Henry. III. Henry kept his IRA, and Betty kept her IRA.
III. The residence (home) was transferred to Henry’s name.
IV. Henry will pay Betty alimony of $2,000/month for the next 10 years or until death if sooner.
A. I, III, IV, V
B. II, IV, V
C. II, III
D. II, IV
E. V

Answer 132

E - The other answers have no immediate tax consequences.

Question 133

Luke inherits a parcel of land. His parents purchased the land for $10,000. At the time of his inheritance, it was worth $100,000. It is now worth $200,000. The costs of insurance, taxes, and maintenance are costing him more than the land is appreciating. He is considering various alternatives. Which of the following is true?
A. The local university wants to hold various activities (fairs, etc.) on the land (rent free). Luke feels that he could write off the use of the land as a charitable deduction.
B. If he gifts the land to the university, he can deduct its value ($200,000) up to 50% AGI.
C. If he gifts the land to the university, he can deduct its value ($200,000) up to 30% AGI.
D. If he gifts the land to the university, it is use-unrelated limited to the basis $100,000 and 50% AGI.

Answer 133

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.

Question 134

Dr. Hill made alimony payments of $50,000 in the first post-separation year, $20,000 in the second year, and nothing in the third year. Which of the following is true?
A. These payments don’t qualify as alimony. Dr. Hill needed to pay three full years.
B. The payment of $50,000 is part of the divorce settlement, and only $20,000 would be considered alimony.
C. Dr. Hill would have to recapture $32,500 and report it as income at the end of the third year.
D. If part of the first $50,000 payment went directly to a building contractor to remodel Mrs. Hill’s new condo, that portion is part of a property settlement, not alimony.
E. Dr. Hill would have to recapture $20,000 of the first year payment and would not get any deduction in the second year.

Answer 134

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

Question 135

John and Jody paid tax of $17,000 last year (AGI $80,000). For this year, they paid taxes of $20,000. You calculated John and Jody's income tax due this year. Even after subtracting all their allowable itemized deductions, exemptions, and child care credits, the tax due was $22,532. You tell them the following.
A. There is no penalty because they paid in more than 100% of the prior year's return.
B. They should have paid 90% of $22,532 or $20,278.80. The penalty is 20% of the underpayment ($2,532).
C. They should have paid 100% of $22,532. The penalty is 20% of the underpayment ($4,532).
D. They should have paid.110% of the prior year's return ( $18,700). The penalty is 20% of the underpayment ($340).
Dan and Gail Goodrich Case (questions 26 - 38)
Dan
- 50 years old
- Dentist, employee/sole shareholder of the Dental Clinic, Inc.
- Last year's annual salary Ð  $200,000 [net of 401(k) contribution]
- He personally owns dental equipment, which he leases to the dental clinic. The leased equipment has been fully MACRS depreciated.
- Divorced previous spouse in 2002
- One child by previous marriage, James - age 26
- Pays alimony of $3,000 per month to his ex-spouse's mortgage company (by decree)
Gail
- Married Dan 10 years ago
- 48 years old, no prior marriage
- Sales manager for medical company
- Last year's annual salary - $85,000
- No pension plan is available at her employer
James
- 26 years old
- Completing last year of dental school
- Plans to set up his own dental practice upon graduation
- Currently has no taxable income
Dan and Gail
- Provide over 50% of James's support
- Married 10 years
- Both plan to retire when Dan is 60 years old (life expectancy at 60 is 20 years).
- Own a five-bedroom house
- Had a 2013 AGI of $258, 100 (almost triggered AMT)
Dental Clinic, Inc.
- Provides a wide range of dental services to the community
- Generally has no taxable income
- Employs 14 persons, including four other dentists
- Offers a 401(k) plan with a 2% match for employees
- Leases dental equipment from Dan. The lease terminates in 2014. The lease will not be renewed.
Dan and Gail Goodrich Statement of Financial Position For year end December 31, 20XX
ASSETS1
LIABILITIES AND NET WORTH
CASH/CASH EQUIVALENTS
LIABILITIES
Cash and checking account
$ 7,000
Credit card balance
$5,000
Money market fund
18,000
Auto note balance
25,000
Total
$ 25,000
Home mortgage
170,000
TOTAL LIABILITIES
$200,000
INVESTED ASSETS
lRAs2
$10,000
Dental equipment3
20,000
Mutual Fund4
40,000
Annuity5
360,000
Dental Clinic, Inc.6
400,000
401(k)
100,000
Pension plan
200,000
Apartment building7
120,000
TOTAL
$1,250,000
NET WORTH
$1,625,000
USE ASSETS
Personal property
$100,000
Automobiles
40,000
Personal  residence8
410,000
TOTAL
$550,000
TOTAL ASSETS
$1,825,000
TOTAL LIABILITIES AND NET WORTH
$1,825,000
1Assets are presented at fair market value, unless otherwise specified
2Contributions made by Gail
3Fully depreciated; remaining useful life of five years
4Basis $35,000
5Basis $200,000
6Value of stock in dental clinic
7Adjusted cash basis $55,000
8Cost basis plus improvement - $300,000
Investment Data
- Consider $30,000 adequate for emergency fund
- Indicate a moderate level of risk tolerance
- Consider diversification important in portfolio construction
- Willing to use equity in Dental Clinic, Inc. to attain financial objectives
- Have $50,000 for savings/investments on an annual basis (end of year)
- Own a triplex apartment building; net income in 2013 was $20,000
Dan and Gail rank their financial objectives by priority as follows:
1. Reduce their tax liability immediately
2. Establish a new consulting medical business for Gail
3. Help Dan's son, James, establish his dental practice
4. Maintain current standard of living at retirement
Estimated Cash Flow Items Ð 2014
Dan's salary [net of 401(k) deferral]
$200,000
Gail's salary
85,000
Interest income
1,100
Municipal bond (private purpose)
10,000
Dividend income
8,000
IRA contribution (Gail)
5,000
State and local income taxes
20,000
Real estate ta xes
2,700
Cash charitable contribution
11,500
Home mortgage interest
14,000
Consumer Interest
6,000
Income from apartment building
20,000
Alimony  payments
36,000
Tax return preparation fee
1,000
Financial Advisor fee
2,000

Answer 135

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

Question 136

What amount will be Dan and Gail's 2014 AGI?
HINT: The IRA is not deductible.
A. $255,100
B. $258,100
C. $275,100
D. $278,100
E. $292,100

Answer 136

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.

Question 137

Which of the following is/are deductions from AGI (2014)?
I. Alimony
II. Real estate taxes
III. Consumer interest
IV. Charitable  contributions
V. Dividend income
A. I, III,IV
B. I, III, V
C. II, III,IV
D. II,IV
E. V

Answer 137

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

Question 138

Will the 2% miscellaneous itemized deductions produce any tax effect?
A. Yes, they are deductible in full.
B. No, they are subject to 2% AGI and will be completely phased out.
C. Yes, they will exceed 2% of AGI. The excess will be deductible.

Answer 138

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.

Question 139

What type of planning can Dan and Gall do to reduce their taxes?
I. Give more to charity
II. Buy more municipal bonds (private activity)
III. Do a deductible IRA for Dan
IV. Buy and hold growth stocks rather than high dividend paying stocks
V. Buy a variable annuity for Dan and Gail
A. All of the above
B. I, II, IV, V
C. I, IV, V
D. I, II
E. III, IV

Answer 139

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.

Question 140

For which of the following credit programs will Dan and Gail qualify?
A. Child credit
B. Child care credit
C. Historical Rehabilitation Credit program
D. Low-income housing credit program

Answer 140

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.

Question 141

Gail plans to start her own medical consulting firm. She is confident of her ability to succeed, and she has many potential clients. She anticipates a marginal profit but probably losses due to first-year start-up expenses. Due to the medical exposure of the business, there is some liability risk. What is the most appropriate business form for Gail?
A. Sole proprietorship
B. Limited partnership
C. S corporation
D. C  corporation

Answer 141

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

Question 142

What method of tax accounting is most appropriate for Gail's business?
A. Cash
B. Accrual
C. Hybrid
D. LIFO

Answer 142

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.

Question 143

Dan owns an apartment building. Ted, a friend, has offered to exchange a small office building (FMV $150,000 / basis $50,000) for Dan's apartment building. Ted wants $25,000 in cash. If Dan does this like-kind exchange, how much gain must he recognize?
A. 0
B. $25,000
C. $50,000
D. $70,000

Answer 143

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.

Question 144

When Dan retires, he plans to annuitize his annuity. Based on the facts in the case, how much of the monthly payments ($4,000 estimated) will be taxable?
A. $1,500
B. $1,833.20
C. $2,333.33
D. $3,166.67

Answer 144

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.

Question 145

Dan pays alimony to his ex-spouse’s mortgage company. Is this a tax-deductible payment?
A. No, payments must be in cash to the ex-spouse.
B. No, the divorce decree cannot alter the tax treatment.
C. Yes, the ex-spouse owns the property.
D. Yes, he owns the property.

Answer 145

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

Question 146

Gail plans to net $48,000 ($4,000/month) from her new medical consulting business. If she forms the company as a sole proprietorship, how much self-employment tax must she pay?
A. $5,651.82
B. $5,895.00
C. $6,782.00
D. $7,344.00
E. -0-

Answer 146

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

Question 147

Dan wants to help James when he graduates from dental school.  Which property would make the most sense to gift to James?
A. Cash
B. Mutual fund
C. Dental equipment
D. Apartment building

Answer 147

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.

Question 148

If Dan and Gail sell their house for $850,000 in 10 years when Dan retires, what is the amount of their recognized gain (based on current tax law)?
A. $0
B. $50,000
C. $190,000
D. $300,000
E. $440,000
Richard and Virginia Croft Case (Questions 39 - 52)
Richard
- Age 45, has various medical problems
- 100% owner of RC, Inc., a small manufacturing plant
- Takes a salary of $7,500 per month
- RC, Inc. has no pension plan
Virginia
- Age 43, is in good health
- Works as an office manager for a medical clinic
- Is paid $36,000 plus various benefits
Richard and Virginia
- Have been married five years (second marriage for both)
- Richard pays alimony of $3,000 per month
- Virginia receives alimony of $1,000 per month plus $2,000 per month child support
- File taxes married filing jointly claiming Virginia’s children
Richard’s children
Richard has two children from his prior marriage. Per the divorce decree, Richard has to pay child support and provide college educational funding. Both children have completed college and are now on their own. Neither is interested in becoming involved in Richard’s business.
Virginia’s children
Virginia has custody of her two children from her prior marriage. Jeffrey, age 18, is in his first year of college. Diane, age 10, is still in elementary school. She is interested in attending college. She has a UTMA account. Virginia i s the custodian. Virginia and her ex-husband contribute $2,000 each to the account every year. It has the following.
- $10,000 in EEs earning 4% per year
- $50,000 in CDs earning 4% per year
Other income
- Richard received $100,000 of death benefit proceeds as beneficiary of his mother’s life insurance policy.
- Richard received $1,000 of interest from various CDs and a money market mutual fund account.
- Virginia received $500 of dividends and $2,000 of long-term capital gains from a mutual fund.
Other Information
- Richard, Virginia, and her two children incurred $1,000 of dental expenses during the year.
- Richard incurred $4,000 in medical expenses this year.
- Virginia had a casualty loss of $10,000 (FMV). Her uninsured jewelry was stolen. She purchased the items for $9,000.
- Richard had business entertainment expenses of $2,000.
- Richard and Virginia have a $10,000 carryover capital loss from last year.
- Residential property tax of $3,000 and home mortgage interest of $11,000
- Rental property tax of $2,000 and mortgage interest of $3,000
- Charitable gifts of $2,000
- Paid $500 for tax preparation by a CPA
Taxes
Richard and Virginia have withheld $11,000 for taxes this year.
RC, Inc.
Richard’s business (with $5,000,000 in gross receipts this year) has been marginally profitable in past years. Richard believes this will improve, and he wants to offer some benefits for himself and his twenty-five employees. He is especially concerned about his health. He is working too many hours, not eating right, and not exercising.
Business Insurance Key-person policy
Coverage $500,000 on Richard
Type 15-year term
Owner RC, Inc.
Beneficiary RC, Inc.
Premium $1,200 per year (rated Table 2)
Group medical policy
Coverage Employees of RC, Inc.
Deductible $500 per calendar year
Coinsurance 80%/20% of the next $5,000; 100% thereafter
Premium RC, Inc. only pays the employee’s premium,; family coverage is charged to the employee
Personal insurance Group Life policy
Covered person Virginia
Type Group (All employees receive three times salary.)
Owner Medical clinic
Beneficiary Paid by the medical clinic.
Premium She pays $6.00 per month
Group PPO policy
Covered person Virginia and her two children Owner Medical clinic
Premium Virginia’s premium is paid by the clinic. She pays $200 per month for her children.
NOTE: Miscellaneous co-payments and deductibles (for non-PPO providers) totaled $1,200 for the year.
Life policy
Covered person Virginia
Type Variable life Ð Option B
Coverage $200,000
Owner Virginia
Beneficiary Virginia’s children equally
Premium None
This policy was purchased as part of her divorce settlement six years ago for $30,000 (lump sum).
Virginia and Richard Croft Statement of Financial Positions
Assets
Liabilities
Cash/cash equivalents
Cash {JT}
$25,000
Rental Property3
$60,000
Money market (Richard)
20,000
Residence6
160,000
CDs (Richad)
25,000
Liabilitie
s $220,000
$70,000
Investments
Mutual funds1 (Virginia)
$75,000
IRA2 (Richard)
115,000
Rental property3
150,000
Variable life4
50,000
Net Worth
$1,125,000
RC, Inc5 (Richard)
500,000
401(k)6 (Virginia)
110,000
$1,000,000
Use Assets
Residence7 (JT)
$200,000
Personal property (JT)
75,00
$275,000
Total Assets
$1,345,000
Total Liabilities and Net Worth $1,345,000
1 Virginia received these mutual funds as part of her divorce settlement. The basis of the funds is $25,000.
2 Richard contributes $5,000 to his IRA each year.
3 Virginia received this property as part of her divorce settlement. The basis of the property is $50,000. Virginia rents the property. The property produces a yearly loss of $3,000 due to expenses, taxes, property upkeep, interest, and depreciation.
4 Current fair market value
5 Richard started RC, Inc. with a $100,000 inheritance from an uncle. He has left $10,000 - $20,000 of profit in the business each year. He expects a profit of $15,000 above his expenses this year. His basis in RC, Inc. is $20,000.
He normally has $100,000 in his business checking account at all times.
6 Virginia defers 6% of her salary into the 401(k) plan (Company matches 50%).
7 Richard sold his house from his previous marriage during the year for $400,000. Richard and his ex-wife purchased the house for $70,000 many years ago. Richard received it as part of the divorce settlement. The house had a large mortgage of $325,000. He and Virginia bought a smaller, more comfortable house together this year for $200,000.

Answer 148

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

Question 149

What is Richard and Virginia's adjusted gross income for this year?
A. $83,340
B. $90,340
C. $78,500
D. $85,500
E. $87,500

Answer 149

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.

Question 150

If RC, Inc. purchases $40,000 of new equipment (5-year property) this year (2014), how much can it expense using Section 179?  Hint: Review corporate income.
A. $8,000
B. $15,000
C. $40,000
D. $139,000
E. $500,000

Answer 150

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.

Question 151

How much of Richard's entertainment expenses can RC, Inc. deduct?
A. -0-
B. $500
C. $1,000
D. $2,000

Answer 151

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

Question 152

If Richard dies this year, will RC, Inc. have a corporate AMT problem?
A. No, he is only marginally profitable.
B. No, a small life policy of $500,000 cannot create a corporate AMT problem.
C. No, corporate AMT doesn’t affect S corporations.
D. No, his gross receipts are less than $7,500,000.
E. Yes, corporate owned life insurance always triggers corporate AMT.

Answer 152

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.

Question 153

What type of benefit plans can Richard install at RC, Inc. that
1. will not cost RC,Inc. very much money and
2. will help retain employees?
I. Nonqualified deferred compensation
II. Section 125 plan
III. Endorsement method split-dollar life insurance
IV. Group life insurance up to $50,000 of death benefits
V. Group dental plan
A. I, II, IV, V
B. II, III, JV, V
C. I, III
D. II, IV, V
E. II

Answer 153

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.

Question 154

What amount of itemized deductions can Richard and Virginia claim?
A. $16,000
B. $19,000
C. $21,000
D. $25,000
E. $30,000

Answer 154

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 ***,

Question 155

Which type of credit program are Richard and Virginia eligible to receive?
A. Child care credit
B. Child tax credit
C. Foreign tax credit
D. Low -income housing credit
E. Adoption credit

Answer 155

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 +/-.

Question 156

Virginia is considering canceling her personal life insurance policy. She believes the cash values can be used for her portion of Jeffrey's college expenses. If she is i n a 25% tax bracket, what would be the tax consequence?
A. -0-
B. $5,000
C. $7,000
D. $12,500
E. $17,500

Answer 156

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).

Question 157

How much income is Virginia charged for her group life insurance for a full year of coverage?  (Table I rate is $.17 per $1,000 per month).  NOTE: This answer does not affect Question 45.
A. -0-
B. $33.12
C. $46.32
D. $105.12
E. $118.32

Answer 157

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).

Question 158

If Virginia is in a 25% tax bracket, how much income tax is due on Diane's UTMA account in 2014?
A. $0
B. $50.00
C. $100.00
D. $110.00

Answer 158

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.

Question 159

Richard and Virginia paid $12,000 in income tax last year. This year they estimate their taxes will be $13,200. How much more must they set aside to avoid any underpayment penalty?
A. $880
B. $10,880
C. $11,880
D. $12,000
E. -0-

Answer 159

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)

Question 160

Can Richard and Virginia deduct any of the unpaid medical expenses?
A. Yes, 100% of the insurance premiums are deductible on the front of the 1040 as an adjustment to income.
B. No, the medical and dental expenses plus insurance premiums are less than 10% of AGI
C. Yes, a portion of the medical and dental expenses plus insurance premiums exceed 10% of AGI
D. Yes, they can be deducted in full using a Section 125 plan.

Answer 160

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.

Question 161

How many exemptions will Richard and Virginia get this year?
A. 2
B. 4
C. 5
D. 7

Answer 161

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

Question 162

Richard needs to purchase an individual disability income policy. If RC, Inc. pays the premium but charges Richard with the premium cost, which of the following is true?
A. The company cannot do this. The plan is discriminatory. All company employees would have to be included.
B. The premium would be taxable income subject to FICA and FUTA, but the benefits would be tax-free.
C. The benefits would be taxable.
D. The insurance company would never issue the policy. Richard is uninsurable.
E. Only S corporations can charge insurance premiums to an employee.
Ray and Kim Wiley Case (Questions 53 - 63)
Ray Wiley is forty-two years old and married. He is a well-known photographer for a national sports magazine. In 2011, he made $105,000. He is an active participant in his company’s retirement plan (80% vested). Kim Wiley, his wife, is forty years old. She is a sports announcer for a local talk radio station. Her gross annual salary was
$51,000 for 2011. No pension plan is available at the radio station. They are in the 30% marginal income tax bracket.
Ray and Kim have a daughter, Addison. She is age twelve. One of Ray and Kim’s goals is to fund Addison’s education at a public university.
Ray and Kim plan to open a sports memorabilia shop. They are confident in their ability to succeed due to their collective backgrounds in sports-related activities. They are going to contribute $50,000 of their own money. They anticipate they will have to borrow another $100,000 to build sufficient inventory. They will purchase some of the memorabilia outright, but some will be on consignment from sports personalities. For their business, they will be leasing a building in a shopping center. They will be buying equipment (counters, display cases, cash registers, and a computer) outright.
The Wileys feel there will be a fair amount of risk associated with this business since they have no experience operating a business of their own. Kim will be quitting her job to oversee the operation. Ray will assist as time permits. They have been interviewing applicants who are experienced with memorabilia sales.
Besides paying employees, Kim will take a token salary as will Addison. They expect to lose money for at least the first year, but they plan to continue the business for a period of years because they think they will enjoy it.
Life Insurance
Ten years ago, Ray purchased a $250,000 variable life insurance policy. The agent told Ray that he could pay up to
$5,000 per year and not violate the seven-pay test. In the seventh year, Ray mistakenly made the seventh ($5,000) and eighth ($5,000) payments. The current cash value of the policy is $100,000.
Mutual funds (all held long-term)
1. 250 shares of AAA purchased at $23 per share - current value of $9,150
2. 250 shares of BBB purchased at $21 per share - current value of $6,606
3. 300 shares of CCC purchased at $36 per share - current value of $14,000
Variable annuity
Ten years ago Kim purchased a variable annuity with $100,000 of inherited money. The current value of the annuity is $310,000.

Answer 162

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

Question 163

Ray took a distribution (rather than a loan) of $50,000 from his variable life policy. Which of the following is true?
A. The policy fails to meet the Internal Revenue Code definition of life insurance.
B. The contract has passed seven years, so the policy no longer has to meet the requirement of the seven- pay test.
C. He can take a distribution $50,000 tax-free because he paid premiums of $50,000 (return of principal).
D. The contract is a Modified Endowment Contract.
E. The $50,000 will be subject to ordinary income tax.

Answer 163

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).

Question 164

Ray and Kim have decided to sell 500 shares of their various mutual funds.  What combination of shares will produce the lowest possible gain?
A. 100 of AAA, 100 of BBB, 300 CCC
B. 100 of AAA, 200 of BBB, 200 of CCC
C. 250 of AAA, 250 of BBB, 0 of CCC
D. 0 of AAA, 250 of BBB, 250 of CCC
E. 0 of AAA, 200 of BBB, 300 of CCC

Answer 164

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.

Question 165

If Ray and Kim form an S corporation for the sports memorabilia business, they estimate they may lose $80,000 in the first year. Which of the following is an option for them?
A. Take the $80,000 in losses against their income
B. Lend the company an additional $30,000 and take $80,000 in losses against their income
C. Capitalize $30,000 of the loss
D. Personally endorse the S corporation loan to increase their basis and then take the full $80,000 loss

Answer 165

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.

Question 166

If Ray and Kim start a regular C corporation (issued 1244 stock) and it fails totally this year, how much of the loss ($50,000) can they take?
A. $50,000 as a capital loss
B. $50,000 as an ordinary loss
C. $3,000 as a capital loss
D. Zero because regular C corporations can’t pass losses through to shareholders
E. $47,000 as an ordinary loss and $3,000 as a capital loss

Answer 166

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.

Question 167

The choice of accounting method is an important decision for Ray and Kim. Which form is best for them?
A. Cash
B. Accrual
C. Hybrid
D. FIFO
E. LIFO

Answer 167

C - They have both inventory and consignment.

Question 168

One of Ray’s friends wants to exchange a variety of equipment that could be used in the shop for some of the inventory of mounted photos owned by the business. Would this qualify as a like-kindexchange?
A. No, the consignment photos are not property owned by the business.
B. Yes, both the photos and the equipment will be used for productive use in a trade or business.
C. If Ray sold the photos to the business, then the exchange would qualify.
D. No, the photos are not qualifying property.
E. No, the assets are not the same asset class; therefore, they will not qualify.

Answer 168

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

Question 169

Ray and Kim heard that if they paid Addison a salary, the salary would avoid the kiddie tax. They plan to pay her
$50 per week for a total of $2,600 for the year. Which statement is correct?
A. Addison is a twelve-year old and is subject to the kiddie tax. The tax would be $280 based on her parents’ bracket.
B. Addison can use her exemption of $3,950 and pay no tax.
C. Addison can use her standard deduction and pay no income tax.
D. Either Ray and Kim get the standard deduction or Addison does but not both. Because Ray and Kim are in the 30% tax bracket, they should take the deduction.

Answer 169

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

Question 170

Ray and Kim expect to personally buy memorabilia that will become worthless due to oversupply or lack of interest. They expect that at least $60,000 (FMV) will become worthless per year. They plan to give it to the Boy Scouts, Girl Scouts, and civic organizations that would be able to sell it for half its value. Ray and Kim are entitled to which of the following charitable deductions for the year?
A. $30,000
B. 30% of AGI ($36,535) C. 50% of AGI ($60,892) D. $60,000

Answer 170

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.

Question 171

Ray and Kim have interviewed a former high school all-star pitcher, John Big KKent. Big K has sold memorabilia at traveling trade shows for years and wants to quit the road. He will consign all his memorabilia. Ray and Kim want to make Big K an offer, but Big K wants benefits. Which of the following benefits would be tax-free to Big K and tax deductible by the business?
I. Key man life insurance on Big K
II. Split-dollar life insurance on Big K
III. Unfunded deferred comp program using life insurance on Big K - Owner is business.
IV. Life insurance on Big K for a redemption-type buy-sell arrangement
V. $100,000 of group life on Big K
A. I, IV, V
B. II, III, V
C. I, V
D. None of the above

Answer 171

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.

Question 172

Ray and Kim are very concerned about their monthly cash flow. They are considering annuitizing Kim’s annuity. Kim’s annuity carrier has quoted the following: $21,700 per year for forty years (life expectancy). What will be the taxable portion (inclusion) for this year?
A. There is no taxable portion until Kim is paid back her principal (FIFO).
B. $19,200 is taxable as ordinary income.
C. $19,200 is taxable as capital gain.
D. $13,951 is taxable as ordinary income plus a 10% penalty.
E. $13,951 is taxable as capital gain plus a 10% penalty.

Answer 172

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

Question 173

If Ray and Kim do an S corporation and Kim takes a salary of $20,000 and a $10,000 distribution of income, what amount of self-employment tax will Kim owe?
A. -0-
B. $1,413
C. $2,456
D. $2,826

Answer 173

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.