Income Tax Wrong Answers

Question 1

FMV Deduction?

Answer 1

FMV = up to 30% of AGI
rest can be carried forward

MT: FMV (3) 30% of AGI

Question 2

What’s the best source for obtaining info about the INTENT of a recent change in tax law?

Answer 2

Congressional Committee Reports

Question 3

John is found guilty of substance over form tax violation - what is the penalty?

Answer 3

John must pay 75% of deficiency amount attributable to fraud.

Question 4

Last year a client had a tax liability of $125,000. What is the minimum annual tax payment to avoid an underpayment penalty tax?

Answer 4

Question says $125,000 tax liability. AKA AGI over $150,000.*

90% of this years taxes to be paid OR 110% of prior tax year

Question 5

Credit for Child and Dependent Care Expense

Answer 5

1 Kid = $3,000 on test use 20% = $600
2+ Kids = $6,000 CAP 20% = $1,200

remember 20%! (credit available until age 13)

Question 6

Child Tax Credit

Answer 6

$2,000 p kid under 17

phases out single MAGI $200K
MFJ MAGI $400K

MT: CTC = Can’t Take Contraceptives ($$$ p kid)

Question 7

Margin Interest Deductible up to…

Answer 7

Investment Income + Dividends + Capital Gains + Interest Received

CANNOT CREATE A LOSS

Question 8

Unearned Income not subject to self-employment tax

Answer 8

S Corp Wages = FICA
General Partnership = Self Employment Tax

Limited Partnership Income is PASSIVE
(Limited(7) Passive(7))

Question 9

Self Employment Tax

Answer 9

INCOME x 0.1413

(NOT WAGES)

Question 10

Key to a Casualty Loss

Answer 10

Under TCJA - to claim a casualty loss the cause of the loss must be from a federally declared disaster.

Question 11

What is no longer phased out under TCJA?

Answer 11

ITEMIZED DEDUCTIONS no longer phased out under TCJA

Question 12

Income Tax Test Tip

Answer 12

When asked about taxable income don’t forget to reduce income by the standard deduction!

Question 13

What are FIFO and LIFO?

Answer 13

Inventory Methods

Exam will try to conflate with account methods they are not

Question 14

If declares more than $25M in revenue + carries inventory what kind of accounting method do you need to use?

Answer 14

ACCRUAL METHOD

MT: A is for $25M Revenue AND Inventory =Accrual

Question 15

What does the FIFO inventory method of valuation reflect?

Answer 15

Current Cost

Question 16

How do you calculate gain in an installment sale?

Answer 16

Step 1. Profit/Contract Price = %
Step 2. % x Installment = GAIN

Question 17

What is the limit for cash reporting for a C Corp?

Answer 17

$29M ($25M indexed for inflation)

Question 18

What are the accounting methods?

Answer 18

Accrual
Cash
Hybrid

MT: ACH

Question 19

Test Tip on NOL:

Answer 19

MT: NOLs (NO Looking back)

May now be carried forward indefinitely

Question 20

What is the Dividend Deduction for Corporations?

Answer 20

more than 20% ownership 65% of dividends are excluded

less than 20% ownership 50% of dividends excluded

MT: MORE = MORE excluded

Question 21

Regular Corporation Reports earned income for employees on _____ and dividends on ______?

Answer 21

W-2 and 1099

Question 22

Distributable Net Income (DNI)

Answer 22

• trust claims deduction for amount distributed
• limits the amount that the trust or estate beneficiaries must report as gross income.

Question 23

If the the trust income is used to satisfy a grantors legal support obligation that then trust income will be taxed to____

Answer 23

the Grantor

Question 24

MACRs Table

Answer 24

******MACRS Straight Line
Recovery Year 5 7 5 7

        1               20%   14.29%                10%         7.14%

         2              32%    24.49%                20%        14.29%

MT: Straight Line 10% in Year 1
1 in year and 10% are straight lines

Question 25

How do you figure out the realized gain on a 1031?

Answer 25

Total Value Received (FMV of Property + Boot if any) LESS Adjusted Basis of Property = Realized Gain

Question 26

What tax forms do you file if there is no taxable gain?

Answer 26

NO tax forms need to be filed if there is no taxable gain!! (1031)

Question 27

Section 1244 Stock

Answer 27

Small Business Stock
- Up to $100,000 of loss treated as an ordinary loss
-Any loss in excess of $100,000 treated as capital loss

Question 28

Adjusted Basis After Swap (1031)

Answer 28

Step 1 Realized Gain $350,000 Step 4 $400,000
Step 2 Recognized Gain - 100K Step 3 -$250K
___________________________________________________________
$250,000 $150,000

Question 29

What is the amount and nature or character of gain or loss from disposition?

Answer 29

Original $8000 Sells $11,500
Cost
- CRD -5858 less basis -2142
Basis $2142 GAIN = $9,358

Recapture 1245 $5858 (OI) from CRD

Excess (if any) 1231 $3500 (CG)
9358-5858=3500^

Question 30

1031 is ONLY for Real Property NOT FOR EQUIPMENT!

Answer 30

Old Basis + Cash = New Basis

Ex. Old Equipment Trade In

Adj Basis $10K
+ Cash $ 2K

New Basis = $12,000

Question 31

What are add back items for individual AMT?

Answer 31

1. Qualified private activity muni bond interest
2. Property tax itemized deduction
3. Excess % depletion over property’s adjusted basis

Question 32

Calculate the AMT Payable

Answer 32

AMT - Regular Tax = AMT Payable

Question 33

To Avoid or Reduce exposure to AMT you should? (think of rock in the river)

Answer 33

• increase 1040 income
• buy public purpose muni bonds

Question 34

Publicly Traded v Non Publicly Traded Income and Losses

Answer 34

NET ONLY like to like.
Non Public to Non Public
Publicly Traded to Publicly Traded

MT: Think of the circles
This is Brett and Jennifer Aniston

Question 35

AGI Under $100,000 may deduct up to ________ in losses from active participation in real estate. Any remaining losses carry forward.

Answer 35

$25,000.

Question 36

What is Material Participation?

Answer 36

Material Participation describes tax payers work in principal trade or business.

Question 37

What is a passive activity?

Answer 37

An investment in a trade or business in which the tax payer does NOT materially participate.

*active participation is exception the the passive loss rules.

Question 38

Income Tax Exam Tip

Answer 38

Closely held C Corporations CAN own an equipment leasing program and deduct the losses. These are NOT treaded as passive losses, They are deductible on the 1120 Return

Question 39

What is an exception to the active rule?

Answer 39

Active participation in real estate

Question 40

What triggers alimony recapture and how do you calculate it?

Answer 40

Alimony decrease or end within 3 years you may be subject to recapture.

Step 1. Add Y1 + Y2 = X
-Step 2. X - $37,500 = Alimony Recapture Amount

MT: Average age of divorce is 37.5

Question 41

Income Tax Exam Tip

Answer 41

SHORT (Term Capital Gain) must be valued at BASIS.

SHORT (5) BASIS(5)

Max deduction is 50% of AGI

anymore is a carryforward

Question 42

What’s the income tax penalty for negligence?

Answer 42

20%