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Wrong Answer Deck > Income Tax- Wrong Answer > Flashcards

Income Tax- Wrong Answer Flashcards

1
Q

IRS ignores legal formalities to determine the economic outcome of a transaction

A

Substance over form

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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

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3
Q

Coupon interest received by father, he assigns to so .

A

Assignment of income

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4
Q

Client receives dividends from life insurance policy but keeps them in the policy.

A

Constructive receipt

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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

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6
Q

If you messed up your taxes what needs to happen

A

File 1040x

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7
Q

Fraud. Tax liability was 10k principal and 4,200 interest. Whats the penalty

A

75% of principle

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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)

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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

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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

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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

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12
Q

Tax Ch 2
Medicare tax rates

A

1.45% <200k single, 250k MFJ
2.35% > 200k single, 250k MFJ

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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

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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.

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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).

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16
Q

How much is the child care tax credit?

A

Max is 6,000x20% = 1200

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17
Q

Per TCJA how much of the child tax credit may be treated as a refundable credit?

A

1,700/child

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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

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19
Q

What are the 4 principles supporting indemnity?

A
  1. Insurance interest
  2. The concept of actual cash value
  3. Other insurance (limit the ability to profit from a loss)
  4. Subrogation
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20
Q

What happens in a cross purchase agreement?

A

Stock holder buys other stockholders interest. No insurable interest for a company.

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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.

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22
Q

Notice of loss requirement would be found I which part of the insurance contract?

A

Conditions

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23
Q

Childcare tax credit

A

Max is $6,000 expense x 20%

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24
Q

2-21 Tax What is the MAGI limit for a single parent in regards to child tax credit?

A

200k

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25
Q

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

A

$10k deferred comp

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26
Q

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

A. 5,000 - (5k x 7.65%)= 4,617.50
B. 6,000 - (6k x .1413) = 5,252.20

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27
Q

Easiest accounting method

A

Cash

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28
Q

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?

A

45k
Gross profit percentage 450k/600k=75%
60k x 75%= 45k

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29
Q

When to use specific identification?

A

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…

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30
Q

What does a NOL accomplish?

A

Corporations can utilize losses from prior years to offset current year income.

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31
Q

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?

A

Cash- Always the easiest

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32
Q

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?

A

Dad will report 450k LTCG
Son realizes 1million STCG

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33
Q

Can a C Corp utilize a tax deduction under QBI-199A?

A

No, not a pass through entity

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34
Q

What is QBI?

A

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

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35
Q

Tax 4-4 What can claim the 65% dividend exclusion?

A

C Corp.
own 20% or less= 50% exclusion
Own 20-80% = 65% exclusion
Own 80%= 100% exclusion

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36
Q

Tax 4-5 Dr. Smith makes his professional association as a regular Corp. What happens to income retained by the PSC?

A

Flat taxes at 21% (flat corporate income tax rate)

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37
Q

Tax 4-6What are some differences between S and C Corp?
Stock? Salary? Retirement plans?

A

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

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38
Q

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?

A

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

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39
Q

Benefits of an S Corp for liability

A

Limited liability on the owner and has pass through losses

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40
Q

Tax 4-9 successful CPAs are merging. Whats the most appropriate business form?

A

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.

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41
Q

Tax 4-9 what is deductible without limit on a business owners tax return?

A

Business investment interest paid (or expensed)

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42
Q

Tax 4-11 what is the corporate accumulated earnings tax? And what is it trying to accomplish?

A

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)

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43
Q

Tax 4-12 On what tax form are the S Corp distributions normally received by individuals?

A

Schedule K-1 of I 120S

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44
Q

Tax 4-12 what form are partnership distributions normally received by individuals?

A

K-1 of the 1065

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45
Q

Tax 4-14 why would an accountant that expects to double her profits not want to move away from being an S Corp?

A

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
Q

Tax 4-14 why would 2 ppl want to do business inside an LLC together and not a partnership?

A

Liability is extreme in the partnership. LLC offers same pass through losses

47
Q

Tax 5-2 Which trust does not have to use a calendar year to file tax return?

A

Charitable trust (501a or charitable)

48
Q

Tax 5-4 give an example of Grantor trust rules regarding an ILIT

A

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
Q

Tax 5-6 Are beneficiaries taxed on distributed income from a simple trust?

A

No

50
Q

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?

A

$300, $100

51
Q

Tax 5-8 If person A transfers assets to a trust for his own benefit, how is it classified for income tax purposes?

A

Grantor Trust

52
Q

Tax 5-8 is a grantor trust tainted?

A

Yes, because trust does not pay the tax on its own income.

53
Q

Tax 5-8 what does DNI allow the trust or estate to do?

A
  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
Q

Tax 5-9 In a tainted irrevocable trust, who pays the tax on the trust paying a premium for a life insurance policy?

A

The grantor pays

55
Q

Tax 6-1 what does “the original investment plus improvements” describe?

A

Cost basis

56
Q

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.

A

181,500
190+4+12,500-25k

57
Q

Tax 6-6
MACRS/ Straight Line 5 year?

A

Computers, autos, and light duty trucks (1245 property)
Recover year 1,2 MACRS 20%,32%
Straight Line 10%, 20%

58
Q

Tax 6-6 Property class 7 yr MACRS, Straight Line

A

Office furniture and fixtures (1245 property)
Recover year 1,2 for MACRS 14.29%,24.49%
Straight line 7.14%, 14.29%

59
Q

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?

A

179 deduction

60
Q

Tax 6-9 Can a section 179 election cause a loss?

A

No, it can’t create a NOL. Its limitation is up to taxable income.

61
Q

Tax 6-9 What type of property is allowed under section 179?

A

1245 property

62
Q

Tax 6-11 For gift tax purposes, what is the value of property given? Cost basis or FMV?

A

FMV

63
Q

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?

A

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
Q

Tax 7-7 Client died with 9k carry forward cap loss. What happens with the cap loss for taxes?

A

Can use 3k the year he died on 1041 tax return. Any unused carry forward is lost after year of death.

65
Q

Tax 7-8 Does various treasuries, GNMAs, and zeros allow for investment interest tax deductions?

A

Yes

66
Q

Tax 7-11 What is the primary home exclusion for MFJ?

A

500k

67
Q

Tax 7-12 How long must you live in a house to get the home exclusion?

A

2 years

68
Q

Tax 7-12 How do you calculate the home exclusion if you only lived in the house for 6 months?

A

25% of 250k or 500k MFJ

69
Q

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?

A

Realized- 350k
Recognized gain-100k
Within 2 years? Full exclusion of 500k

70
Q

Tax 7-13 What must a business do with sold 1245 property?

A

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
Q

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?

A

$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
Q

Tax 7-16 what needs to happen in an installment sale that includes CRD?

A

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
Q

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?

A

400k
FMV of prop acquired 100k + liability assumes 500k = 600k - adjust basis 200k

74
Q

Tax 8-2 What are the AMT preference items?

A

IPOD
Private activity muni bonds
Oil and gas percentage depletion/excess intangible drilling costs
Depreciation (ACRS/MACRS)

75
Q

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

A

9,884
33,384- 23,500

76
Q

Tax 8-5 how would selling NSO (non qualified stock option) help avoid paying AMT?

A

It increases taxable income. Anything that increases taxable income helps avoid paying AMT

77
Q

Tax 9-4 Can a S Corp be classified as passive activity?

A

Yes, can produce income to investors who do not materially participate.

78
Q

Tax 9-6 Discuss EE bond interest and how it’s taxed.

A

Bond interest is deferred unless the owner elected to have the interest taxed each year. Imputed interest is still taxable.

79
Q

Tax 9-6 How much in losses can an investor deduct due to real estate activity?

A

25k each year phased out 100k-150k AGI. Deduction can offset current portfolio or income.

80
Q

Tax 9-8 How long can you rent out a residence without a tax consequence?

A

Up to 15 days

81
Q

Tax 9-8 How long can you stay in your own rental without a tax consequence?

A

14days or 10% of the days it was rented

82
Q

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?

A

37,500
Double the 10k, add it to 37,500 and then subtract from years 1 and 2 to get the recapture.

83
Q

Tax 10-1 what is the max percentage you can deduct for cash gifts to a public charity?

A

60% of AGI

84
Q

Tax 10-2 What is an individuals deduction ceiling for gifts of appreciated long term cap gains property to 50% organizations?

A

30% of AGI or use the basis and it can be 50% of AGI

85
Q

Tax 10-3 How is charitable deductions treated for short term capital gain property’s and use unrelated properties?

A

Deduction is limited to Basis

86
Q

Tax 10-4 If property donated is use related do you use FMV or Basis for charitable deduction?

A

You can use FMV

87
Q

Tax 10-6 How is donated short term capital gains property handled?

A

Limited to property’s basis and 50% of AGI

88
Q

Tax quiz 2. How much of qualified medical expenses allowed to be deducted?

A

Must exceed 7.5% of AGI floor

89
Q

Tax quiz 2. Where is the standard deduction located on taxes?

A

Form 1040 coming from AGI

90
Q

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?

A

$442
Income 3900- standard deduction of 1300- (his tax rate 1300x10%) $130- (dads tax rate) 1300x 24% ($312)

91
Q

Tax Quiz 2 what is the taxable income? MFJ 100k, 2k qualified dividends, 3k LTCG, 4K real estate taxes, 10k mortgage interest.

A

$75,800
Total income - standard deduction.

92
Q

Tax quiz 3 What type of accounting must a business use if they have more than 25mm in revenues and carries inventory?

A

Accrual

93
Q

Tax quiz 3 How does FIFO look on the balance sheet regarding inventory?

A

Reflects current costs

94
Q

Tax quiz 3 if a C corp has 80mm of annual gross receipts, can it use cash accounting method? Why?

A

No, because it has more than 29million (25mm indexed) and that is the limit for cash accounting.

95
Q

Tax quiz 3 Can installment sale method be used for undeveloped land?

A

Yes

96
Q

Tax Quiz 3 Can S corps adjust future years income to prior years NOL?

A

No, S corps can’t utilize NOL because S corps are already pass through for annual losses.

97
Q

Tax Ch 4 Quiz
Is an S Corp a good way to shift income to kids?

A

Yes, as an S Corp you could give kids stock.

98
Q

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?

A

150k bank loan won’t increase basis

99
Q

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?

A

150k bank loan won’t increase basis

100
Q

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

A

LLC same basis as parternship. LLC takes more losses than an S corp.

101
Q

Tax Quiz 4 How does a C Corp help a business owner lower taxes?

A

Owner has a separate tax entity. Money left in corporation is taxed at 21%

102
Q

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?

A

6,200
31kx 20%

103
Q

Tax quiz 6 Owns 100k of office furniture. Business elected straight line MACRE. What is it first year?

A

7,145
100kx .07145

104
Q

Tax Quiz 6 How much cost recovery can be claimed on the first year purchase of a truck?

A

Only 10%

105
Q

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?

A

175k

106
Q

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?

A

None, no taxable gain.

107
Q

Tax quiz 7 if you’re the owner of a small corp and you pay yourself a large bonus. How does that affect amt?

A

Decreases amt exposure

108
Q

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?

A

200k. AGI above 150 and above is subject to phaseout.

109
Q

Tax Quiz 9 Do series I bonds produce phantom income?

A

Yes

110
Q

Tax Quiz 10 How do you calculate short term cap gain property for charitable deductions?

A

Must be valued at basis. 50% of AGI

111
Q

Tax Quiz 10 How do you calculate short term cap gain property for charitable deductions?

A

Must be valued at basis. 50% of AGI

Wrong Answer Deck (6 decks)

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