Income Tax- Wrong Answer Flashcards
1
Q
IRS ignores legal formalities to determine the economic outcome of a transaction
A
Substance over form
2
Q
Transactions are independent. Parties involved will not complete the first transaction without anticipating that the whole series of transactions will take place. “Tax the ultimate transaction”
A
Step Transaction
Ignore-ignore-ignore- tax final
3
Q
Coupon interest received by father, he assigns to so .
A
Assignment of income
4
Q
Client receives dividends from life insurance policy but keeps them in the policy.
A
Constructive receipt
5
Q
Owner of company pays $500 to 1099 employee (no other income)
A
Employee needs to file because net earnings are greater then $400
6
Q
If you messed up your taxes what needs to happen
A
File 1040x
7
Q
Fraud. Tax liability was 10k principal and 4,200 interest. Whats the penalty
A
75% of principle
8
Q
Max student loan interest deductible and where?
A
Up to $2,500. Above the line on form 1040. Deductible on schedule 2 (check this)
9
Q
Income 100k, portfolio income 5k, qualified dividends 7,500. Short term cap gains 22,500, margin interest expense 40k
What can they deduct?
A
27,500. Qualified dividends do not count as ordinary income
10
Q
Ch. 2 oh 2-9
60k earned income, 2k interest from cd, 3k LTCG, 4K Margin Interest
How much of margin interest is deductible?
A
2k
11
Q
Tax ch 2-11
Baseball card federally declared disaster
Basis 30k, FMV 50k, insurance 17k, AGI 80k
Deductible casualty loss
A
4,900
Lesser basis or FMV= 30k-insurance-floor (100)- 10% of AGI
12
Q
Tax Ch 2
Medicare tax rates
A
1.45% <200k single, 250k MFJ
2.35% > 200k single, 250k MFJ
13
Q
Tax 2-16
Age 12 receives $800 dividend income and $4,350 earned income
Standard deduction?
A
4,800
Greater of 1,300 or earned income +$450
14
Q
Tax 2-18
How is self employment tax paid?
A
Added to income tax liability, then 1/2 is subtracted on the front of the form 1040.
15
Q
Tax 2-19
Self employed person 61
3,600 Medical Insurance
1,200 Dental
2,000 LTC Qualified Insurance
90,000 Net Schedule C Income.
What is his AGI?
A
76,841.50
Net Sch. C -$6,358.50*
Less premiums $6,800
*90k x .07065 = 6,358
** max LTC at age 61 is over 4K. 2k LTC premium is under the phaseout/threshold).
16
Q
How much is the child care tax credit?
A
Max is 6,000x20% = 1200
17
Q
Per TCJA how much of the child tax credit may be treated as a refundable credit?
A
1,700/child
18
Q
What is the childcare tax credit if dependent care spent is 3k and corporate dependent care benefits are 2k?
A
3k-2k=1k x 20%= $200
19
Q
What are the 4 principles supporting indemnity? (One party will pay another party for loss occurred)
A
- Insurance interest
- The concept of actual cash value
- Other insurance (limit the ability to profit from a loss)
- Subrogation
20
Q
What happens in a cross purchase agreement?
A
Stock holder buys other stockholders interest. No insurable interest for a company.
21
Q
Collateral source rule
A
In tort liability, the plaintiffs measure of damage should not be mitigated by payments received from sources other than the negligent party/tortfeasor.
22
Q
Notice of loss requirement would be found I which part of the insurance contract?
A
Conditions
23
Q
Childcare tax credit
A
Max is $6,000 expense x 20%
24
Q
2-21 Tax What is the MAGI limit for a single parent in regards to child tax credit?
A
200k
25
2-23 Tax. Which doesn’t produce income tax coming from business to top exec? $10k in excess group life, $10k into IRA, $10k in deferred comp plan. $10 into annuity owned by business
$10k deferred comp
26
Which scenario would a son of a business owner be able to make more money?
A. Working part time make $10/ hr (5k/yr)
B. Be a 1099 employee at $12/hr (about 500 hrs per year)
A. 5,000 - (5k x 7.65%)= 4,617.50
B. 6,000 - (6k x .1413) = 5,252.20
27
Easiest accounting method
Cash
28
Paid 150k for land. Sold it for 600k under installment method. Received 60k first year. What amount of capital must you recognize for the current year?
45k
Gross profit percentage 450k/600k=75%
60k x 75%= 45k
29
When to use specific identification?
A business can specifically identify what to sell and create a gain, loss, or neutralize a gain or loss. Can use it to show high profits…
30
What does a NOL accomplish?
Corporations can utilize losses from prior years to offset current year income.
31
Company X has annual revenues of 750k. Takes in all kinds of inventory and the turnover based on good pricing and sales keeps profitability month after month. What type of accounting?
Cash- Always the easiest
32
Dad sold property to son (50k cost basis) sale price 500k. Son sold property less than a year son sells the property for 1.5million. Whats the tax outcome?
Dad will report 450k LTCG
Son realizes 1million STCG
33
Can a C Corp utilize a tax deduction under QBI-199A?
No, not a pass through entity
34
What is QBI?
Qualified business income. Can be used by pass through entities and may qualify up to 20% deduction for each QBI they own.
Mostly rental, publicly traded partnerships and reits
35
Tax 4-4 What can claim the 65% dividend exclusion?
C Corp.
own 20% or less= 50% exclusion
Own 20-80% = 65% exclusion
Own 80%= 100% exclusion
36
Tax 4-5 Dr. Smith makes his professional association as a regular Corp. What happens to income retained by the PSC?
Flat taxes at 21% (flat corporate income tax rate)
37
Tax 4-6What are some differences between S and C Corp?
Stock? Salary? Retirement plans?
Owner of S Corp could take high salary and not have it count as dividends (conduit theory). S Corp can’t issue preferred stock. They both can offer pension plans and offer voting and non voting shares
38
Tax 4-8 A sole proprietor is taking a salary. She anticipates marginal profits or losses for the next several years. She does want it to be a family business so her kids can join. What is the most appropriate business for for her practice?
Change to an S Corp and issue both voting and non voting stock.
Limited partner/ kids can’t actively participate
Regular Corp- can’t take losses on her personal 1040
Sole prop- unlimited liability
39
Benefits of an S Corp for liability
Limited liability on the owner and has pass through losses
40
Tax 4-9 successful CPAs are merging. Whats the most appropriate business form?
An LLP- offers limited liability, no liability for the professional acts of the other partner. A regular C Corp would be classified as a PSC and subject to 21% tax rate. A straight up partnership would subject both parties to the liability of the other. S corp would be the next best answer.
41
Tax 4-9 what is deductible without limit on a business owners tax return?
Business investment interest paid (or expensed)
42
Tax 4-11 what is the corporate accumulated earnings tax? And what is it trying to accomplish?
20% of accumulated earnings (on top of regular corporate tax. The tax is designed to coerce corporations to pay dividends. Tax is only on amount above 250 (150k for PSC)
43
Tax 4-12 On what tax form are the S Corp distributions normally received by individuals?
Schedule K-1 of I 120S
44
Tax 4-12 what form are partnership distributions normally received by individuals?
K-1 of the 1065
45
Tax 4-14 why would an accountant that expects to double her profits not want to move away from being an S Corp?
If she became a C Corp, she would be a PSC and subject to 21% flat tax on profits. As an S owner the excess income exceeding her salary flows through to her at her personal tax bracket (unearned K-1 income). Limited partner wouldn’t be an option because she participates.
46
Tax 4-14 why would 2 ppl want to do business inside an LLC together and not a partnership?
Liability is extreme in the partnership. LLC offers same pass through losses
47
Tax 5-2 Which trust does not have to use a calendar year to file tax return?
Charitable trust (501a or charitable)
48
Tax 5-4 give an example of Grantor trust rules regarding an ILIT
Trust income is or may be used to pay premiums on life insurance on the life of either the grantor or the grantors spouse. The income from the trust is taxable to the grantor (not the trust)
49
Tax 5-6 Are beneficiaries taxed on distributed income from a simple trust?
Yes
50
Tax 5-7 how much is the income tax exemption on a trust that’s required to distribute all income? Not required to distribute all income?
$300, $100
51
Tax 5-8 If person A transfers assets to a trust for his own benefit, how is it classified for income tax purposes?
Grantor Trust
52
Tax 5-8 is a grantor trust tainted?
Yes, because trust does not pay the tax on its own income.
53
Tax 5-8 what does DNI allow the trust or estate to do?
1. Claim a deduction for the amount that is taxable to the bene
2. Limit the portion of distribution that is taxable to the bene
3. Ensure the character of the distribution remains the same for the bene as it was to the trust
54
Tax 5-9 In a tainted irrevocable trust, who pays the tax on the trust paying a premium for a life insurance policy?
The grantor pays
55
Tax 6-1 what does “the original investment plus improvements” describe?
Cost basis
56
Tax 6-2 What is the adjusted basis?
Cost 190k, 4K paid legal fees, paid 12,500 to improve dock, claimed 25k in cost recover deductions, paid 13k prop taxes, paid 17k for utilities.
181,500
190+4+12,500-25k
57
Tax 6-6
MACRS/ Straight Line 5 year?
Computers, autos, and light duty trucks (1245 property)
Recover year 1,2 MACRS 20%,32%
Straight Line 10%, 20%
58
Tax 6-6 Property class 7 yr MACRS, Straight Line
Office furniture and fixtures (1245 property)
Recover year 1,2 for MACRS 14.29%,24.49%
Straight line 7.14%, 14.29%
59
Tax 6-8 TCJA allows a business to expense up to 1,220,000 of qualifying property in the year of acquisition. Must be 1245 prop.
What is this called?
179 deduction
60
Tax 6-9 Can a section 179 election cause a loss?
No, it can’t create a NOL. Its limitation is up to taxable income.
61
Tax 6-9 What type of property is allowed under section 179?
1245 property
62
Tax 6-11 For gift tax purposes, what is the value of property given? Cost basis or FMV?
FMV
63
Tax 7-6 purchased stock 1,000 shares at 20/share. Dividends are 600 at 22/share, 660 at 24/share, 720 at 26/share, 780 at 28/share, 900 at 30/share, 990 at 32/ share. Years 1,3,5 were reinvested. O there’s were paid out. Sold at the end of year 6. What’s the IRR?
11.13%
Dividends paid in cash is positive cash flow (received) the others are phantom income, enter 0 for years of phantom.
20k +/- Cfj, 0cfj, 660 cfj, 0 cfj, 780 cfj, 35,708.88 cfj, gold IRR/yr
64
Tax 7-7 Client died with 9k carry forward cap loss. What happens with the cap loss for taxes?
Can use 3k the year he died on 1041 tax return. Any unused carry forward is lost after year of death.
65
Tax 7-8 Does various treasuries, GNMAs, and zeros allow for investment interest tax deductions?
Yes
66
Tax 7-11 What is the primary home exclusion for MFJ?
500k
67
Tax 7-12 How long must you live in a house to get the home exclusion?
2 years
68
Tax 7-12 How do you calculate the home exclusion if you only lived in the house for 6 months?
25% of 250k or 500k MFJ
69
Tax 7-12 couple purchased house for 100k many years ago. Husband dies FMV house 600k. Wife sells home 3 years later at 700k. What is the recognized gain? Realized gain? What if she sold within two years of the death?
Realized- 350k
Recognized gain-100k
Within 2 years? Full exclusion of 500k
70
Tax 7-13 What must a business do with sold 1245 property?
Look back and recapture the lesser of total CRDs taken or the gain realized as 1245 gain.
Recover any excess gain as 1231 gain (capital gain). If gain is less than CRD than there is no 1231 recovery.
71
Tax 7-14 Office equip purchased 4500. Claimed 3,295 in CRD. Sells equip for 3k. What’s the amount and nature of gain/loss?
$1795 of 1245 gain.
Cost 4500-3295 CRD= adjusted basis of 1205
Sale price 3k- 1205 basis= gain 1795
*gain is less than CRD so the 1795 is the 1245 gain. No 1231 gain because less than CRD.
72
Tax 7-16 what needs to happen in an installment sale that includes CRD?
The recapture up to amount of the cost recovery deductions applies up to the gain realized. So if you have a 3k profit, but had 15k in CRD. The 3k must be recognized the first year in an installment sale. This is a disadvantage.
73
Tax 7-19 Client owns a building FMV 1mill. Adjust basis 200k. Has 500k loan on prop. Wants to exchange for land that has 100k. Other person accepts and takes over loan. (They exchanged)
How much will first client recognize?
400k
FMV of prop acquired 100k + liability assumes 500k = 600k - adjust basis 200k
74
Tax 8-2 What are the AMT preference items?
IPOD
Private activity muni bonds
Oil and gas percentage depletion/excess intangible drilling costs
Depreciation (ACRS/MACRS)
75
Tax 8-4 Estimated tax is 23,500 for the year. What is the AMT payable?
Income 150k, excess intangible drilling costs 22k, percentage depletion in excess 14,700, home mortgage 11,500. AMT 33,384
9,884
33,384- 23,500
76
Tax 8-5 how would selling NSO (non qualified stock option) help avoid paying AMT?
It increases taxable income. Anything that increases taxable income helps avoid paying AMT
77
Tax 9-4 Can a S Corp be classified as passive activity?
Yes, can produce income to investors who do not materially participate.
78
Tax 9-6 Discuss EE bond interest and how it’s taxed.
Bond interest is deferred unless the owner elected to have the interest taxed each year. Imputed interest is still taxable.
79
Tax 9-6 How much in losses can an investor deduct due to real estate activity?
25k each year phased out 100k-150k AGI. Deduction can offset current portfolio or income.
80
Tax 9-8 How long can you rent out a residence without a tax consequence?
Up to 15 days
81
Tax 9-8 How long can you stay in your own rental without a tax consequence?
14days or 10% of the days it was rented
82
Tax 9-13 how much is used for the recapture of front loading alimony on the 3rd year? What happens if 10k was given the 3rd year?
37,500
Double the 10k, add it to 37,500 and then subtract from years 1 and 2 to get the recapture.
83
Tax 10-1 what is the max percentage you can deduct for cash gifts to a public charity?
60% of AGI
84
Tax 10-2 What is an individuals deduction ceiling for gifts of appreciated long term cap gains property to 50% organizations?
30% of AGI or use the basis and it can be 50% of AGI
85
Tax 10-3 How is charitable deductions treated for short term capital gain property’s and use unrelated properties?
Deduction is limited to Basis
86
Tax 10-4 If property donated is use related do you use FMV or Basis for charitable deduction?
You can use FMV
87
Tax 10-6 How is donated short term capital gains property handled?
Limited to property’s basis and 50% of AGI
88
Tax quiz 2. How much of qualified medical expenses allowed to be deducted?
Must exceed 7.5% of AGI floor
89
Tax quiz 2. Where is the standard deduction located on taxes?
Form 1040 coming from AGI
90
Tax quiz 2 Kid UTMA account generates 1900 of interest and 2000 of STCG. Father is in 24% tax bracket. Whats the kids tax liability?
$442
Income 3900- standard deduction of 1300- (his tax rate 1300x10%) $130- (dads tax rate) 1300x 24% ($312)
91
Tax Quiz 2 what is the taxable income? MFJ 100k, 2k qualified dividends, 3k LTCG, 4K real estate taxes, 10k mortgage interest.
$75,800
Total income - standard deduction.
92
Tax quiz 3 What type of accounting must a business use if they have more than 25mm in revenues and carries inventory?
Accrual
93
Tax quiz 3 How does FIFO look on the balance sheet regarding inventory?
Reflects current costs
94
Tax quiz 3 if a C corp has 80mm of annual gross receipts, can it use cash accounting method? Why?
No, because it has more than 29million (25mm indexed) and that is the limit for cash accounting.
95
Tax quiz 3 Can installment sale method be used for undeveloped land?
Yes
96
Tax Quiz 3 Can S corps adjust future years income to prior years NOL?
No, S corps can’t utilize NOL because S corps are already pass through for annual losses.
97
Tax Ch 4 Quiz
Is an S Corp a good way to shift income to kids?
Yes, as an S Corp you could give kids stock.
98
Tax Ch 4 Quiz
Walter owns an S Corp. starts with 50k cash. Lends the S Corp 100k. S Corp applies for a loan, bank makes Walter guarantee it personally. What’s the basis for tax purposes?
150k bank loan won’t increase basis
99
Tax Ch 4 Quiz
Walter owns an S Corp. starts with 50k cash. Lends the S Corp 100k. S Corp applies for a loan, bank makes Walter guarantee it personally. What’s the basis for tax purposes?
150k bank loan won’t increase basis
100
Tax Quiz 4
What’s most appropriate for a business that anticipates losses and will need to borrow to rasie additional capital? LLC, S Corp, C Corp, general partnership
LLC same basis as parternship. LLC takes more losses than an S corp.
101
Tax Quiz 4 How does a C Corp help a business owner lower taxes?
Owner has a separate tax entity. Money left in corporation is taxed at 21%
102
Tax quiz 6 Purchased light duty truck for 20k. Paid 1k taxes. Modified for business 10k. What is the the cost recovery deduction year 1?
6,200
31kx 20%
103
Tax quiz 6 Owns 100k of office furniture. Business elected straight line MACRE. What is it first year?
7,145
100kx .07145
104
Tax Quiz 6 How much cost recovery can be claimed on the first year purchase of a truck?
Only 10%
105
Tax Quiz 7 Nick owns a warehouse FMV 200k and adjust basis of 50k. He wants to acquire Jim’s shopping center which has a FMV of 300k and adjusted basis of 100k. In exchange, Nick will pay Jim 75k. What is the amount of gain realized by Nick?
175k
106
Tax Quiz 7 if a married couple sells their home for profit but it’s under the 500k conclusion. What tax forms do they need to fill out?
None, no taxable gain.
107
Tax quiz 7 if you’re the owner of a small corp and you pay yourself a large bonus. How does that affect amt?
Decreases amt exposure
108
Tax quiz 9 Client income is 200k. Owns half empty strip shopping center generating 30k in losses. What is the amount of her current year AGI?
200k. AGI above 150 and above is subject to phaseout.
109
Tax Quiz 9 Do series I bonds produce phantom income?
Yes
110
Tax Quiz 10 How do you calculate short term cap gain property for charitable deductions?
Must be valued at basis. 50% of AGI
111
Tax Quiz 10 How do you calculate short term cap gain property for charitable deductions?
Must be valued at basis. 50% of AGI
112
Rev Tax 4. What’s on Schedule A, B,C, D and E?
A- itemized deductions (medical, dental, LTC (7.5%), Casualty losses federal declared, real estate-state-local taxes (10k limit), Mortgage interest, charitable gifts, investment interest expense.
B- Taxable interest and ordinary dividends
C- Business income or losses
D- Capital gains or losses
E- Real Estate
113
Rev. Tax 4 What are some of the main adjustments for AGI?
Ira contributions, Keogh or SEP, 1/2 Self Employment tax, Alimony paid (divorce prior to 2019), Self employment Health insurance.
Common question is to calculate a self employed persons AGI.
114
Rev Tax 5 What is the extra standard deduction for people MFJ or single, 65 or older or blind?
1,550 for MFJ
1950 for single filers
115
Rev. Tax 11. When calculating self employment tax, what number should I not go over? What percentage do I use?
Don’t go over 168,600. If you do, you did something wrong.
.1413
116
Rev Tax 12. How much do the employer and employee pay FICA taxes?
Each pay 6.2%+ 1.45% for a total of 15.3% of w-2 earnings up to 168,600. After that each pays Medicare taxes of 1.45% or a total of 2.9%
117
Tax Above or Below?
Ira/keogh/sep contributions?
Above
118
Tax Above or Below?
Medical Dental & qualified LTC expense (>7.5% AGI)
Below
119
Tax Above or Below?
Student Loan Interest
Above
120
Tax Above or Below?
SALT 10k limit
Below
121
Tax Above or Below?
SE tax .07065
Above
122
Tax Above or Below?
Charitable gifts
Below
123
Tax Above or Below?
Federally declared casualty losses
Below
124
Tax Above or Below?
SE health insurance premium
Above
125
Tax Above or Below?
HSA contribution
Above
126
Tax Above or Below?
Education expense 4K
Above
127
Tax Above or Below?
Investment interest
Below
128
Tax Above or Below?
Home mortgage interest
Below
129
Rev tax 1 Which of the following is not a source of federal tax law?
A. IrS
B Treasury Regulation
C. Revenue rulings
D CCH
D CCH
Commerce clearing house is a major reporting service in the area of federal income.
130
Rev Tax 5 what is the clients AGI?
W2 150,000
Roth contribution 6k
Ira contribution 5k
Qualified dividend 3k
LTCG 10k
158k
W2+ Qualified Div + LTCG 10k - IRA contribution
131
Rev Tax 5 What is the standard deduction for a married couple when both spouses are over age 65?
32,300 (29,200 + 1550 + 1550)
132
Rev tax 11 client has the following income and expenses.
1. Net schedule C 40k
2. Rents received from owning a property outright. 10k
3. Travel, meals and entertainment 10k
4. K1 from GP 5,858
5. K1 from S Corp distribution 20k
6479.74
133
Rev tax 11 Sole prop, how much self employment tax should he pay?
1. Gross income 50k
2. Meals 1k
3. Depreciation expenses 3k
4. Health insurance premium 4K
5. Office expenses 500
6,499.8
134
Rev tax 12 does fix a tax apply on earned income above 168,600?
Yes at 1.45% for the employee
135
Rev tax 26 what is the AGI?
Salary 75k
LTCG 5k
STCL carry forward 9k
Real estate active participation 2k
70k with a 1k stcl carry forward
136
If client has a recognized gain of 16k from the sale of the house and had 30k in carryover loss. What can she do?
Use the 30k to offset the 16k gain on the sale
137
Rev tax 27 if client bought a house, 6 months later sells it for a 50k gain. MFJ. Needed to move more than 50miles because of a new job. What amount is the taxable gain?
50k
500k x .5 years = 125k
138
Rev tax 31 File taxes and you have 3k passive losses left over. Can you apply to current year?
No, not capital loss. Can be carry forward tho
139
Rev 32 Can a 30% ownership in an S Corp be considered a passive activity?
Yes, S corps can produce unearned income or losses.
140
Rev tax 33 if client makes more than 150k can they deduct any amount from general income because of their real estate losses?
No, if they made under 150k then they could deduct up to 25k of real estate losses.
141
Rev tax 40 7 What is the IRS fair market value doctrine say?
FMV is whatever someone is willing to pay for it.
142
Rev Tax What can be amortized using 197?
Assets that represent a valuable right or economic attribute. Like a business with goodwill or a franchise
143
Tax exam 42 What type of benefit plans can a client install that 1. Will not cost the company very much money and 2. Will help retain employees?
A. Non qual deferred comp
B. Section 125
C. Endorsement method split dollar life insurance
D. Group life insurance up to 50k of death benefits
E. Group dental plan (basic benefits)
B, D, E…relatively inexpensive
144
Tax exam How much is a client charged for group life insurance for a full year of coverage? Table 1 rate is $.17 per 1000 per month. She also pays $6/mo.
108k coverage
46.32
Table 1 cost is $118.32 - 72$ (what she paid)
