INDIVIDUAL Pre-Test Questions 200106

Question 1

Deductions are NOT allowed for Charitable Contributions to

• Foreign Orgs. or to a
• Chamber of Commerce.

True or False?

Answer 1

True.

Other than Israeli, Mexican, or Canadian orgs

Question 2

Remember a 50% limit orgs when giving Charity.

Answer 2

Like Churches.

Question 3

RE: Charitable Giving, a 30% (of AGI) limit applies to gifts of capital gain property if NO reduction is made to FMV.

Answer 3

Note: The 30% limit does NOT apply when using taxpayers cost in place of FMV!

Question 4

$1600 is the annual limit of all combined awards, with $400 max for non-qualified awards, which is included within the $1600.

Answer 4

True

Question 5

An elective deferral, other than a designated Roth contribution, is NOT included in wages subject to income tax at the time contributed.

Answer 5

It is included in wages subject to Social Security and Medicare taxes!

Question 6

Rental expenses that exceed rental income can be carried forward to the next year.

Answer 6

This includes

• Mortgage Interest
• Repairs
• Depreciation
• Etc

Question 7

Capital improvements to a rental property are NOT income.

Answer 7

They simply increase the value of the property.

Question 8

Parking benefits (up to $265/month) from work are a non-taxable fringe benefit.

Answer 8

Don’t include as income!

NOTE: Normally fringe benefits are taxable.

Question 9

A decedents gross estate includes ALL property in which the decedent had an interest at the time of death.

Answer 9

IRAs, Revocable Trusts, etc.

NOTE: A joint bank account that the decedent didn’t contribute to is NOT part of the estate.

Question 10

Revocable Grantor’s Trust is a trust in which the individual who creates the trust is the owner of the assets and property for income and estate tax purposes.

Answer 10

All grantor trusts are revocable living trusts, while the grantor is alive.

Question 11

A TP may claim a deduction for investment interest paid on money borrowed for investment.

Answer 11

The deduction is LIMITED to the amount of investment income.

Question 12

The basis for calculating gain or loss on real property includes land an generally anything built on or attached to it.

Answer 12

This is different from the basis for depreciation purposes, which includes only the structure.

Question 13

With property loss from a federally declared disaster, the loss is the SMALLER of ones Adjusted Basis, OR the decrease in FMV.

Answer 13

Ones casualty loss is the difference between their loss and the insurance reimbursement.

If loss is $100K and Ins Reimburs. is $85K, the casualty loss is $15K.

Question 14

The max contribution for a Traditional IRA is $6,000 ($7,000 if over 50) or equal to your taxable “compensation,” if smaller.

Compensation includes, wages, salaries, commissions, tips, bonuses, or net-income from Self-Employment. Also Taxable Alimony and other separate maintenance payments.

Answer 14

NOTE: Interest income is not considered Compensation for IRA contribution purposes.

Therefore, Interest Income is not included in compensation when considering how much you can contribute.

Question 15

ALL non-business bad debts are SHORT TERM Cap Losses claimed on Form 8949.

Answer 15

The time the money has been owed to you does NOT matter.

Question 16

A TP must file a claim for refund (or credit) by the later of 3 years after filing the original return, or 2 years after paying the tax.

Answer 16

Early payments are considered paid on the due date (without regard to extensions)

Question 17

Money received for granting an easement is generally not reportable income.

Answer 17

If the payment is more than the basis of the part of the property affected, the basis of that part must be dropped to $0 and the excess amount is treated as a Capital Gain.

Question 18

A long held coin collection that is sold is considered long-term capital gain. Because it is a Capital Asset.

Answer 18

Art and literary works that are created by the tax payer are not Capital Assets and therefore considered Ordinary Income at the sale.

Question 19

A Wash Sale disallows a Loss.

This is when substantially identical security is purchased by a spouse within 30 days of a sale. It is treated as if the transaction occurred between related parties.

Answer 19

The basis of the new securities increases by the amount of the disallowed loss.

Question 20

Distributions from Traditional IRAs consist partly of Basis. Until the basis has been distributed, each distribution is partly nontaxable and partly taxable!

Answer 20

To determine the non-taxable percentage of a distribution, divide the basis at the start of the year by the total value of the IRA at the end of the year.

That percentage is what needs to be applied to converted funds.

Question 21

A Related party (inter-family) Transaction does not allow a loss to be claimed.

Answer 21

So if a brother sells stock with a cost basis of $15K to a sister for $8K, that loss is lost to the family.

However, when the sister sells the stock, her recognized gain is the extent of the gain that is more than the previously disallowed loss of her brother.

Her realized gain is the difference between her purchase price and her sale price.

Question 22

Gain on the sale of property that is depreciable property in the hands of the person who receives it is Ordinary income!

Answer 22

This is true for these entity pairs

1. A person and that person’s controlled entity
2. A TP and a trust in which the TP is a beneficiary
3. An executor and a beneficiary of an estate
4. An employer and a welfare benefit fund controlled by the employer.

Question 23

Scholarship and Fellowship items are NOT taxable to the extent they are used for qualified educational expenses.

Answer 23

This includes, tuition, fees, books, etc.

Room and Board is NOT a qualified expense.

Question 24

Taxable Interest is NOT a preference or adjustment item for purposes of the AMT.

Answer 24

AMTI includes certain adjustments to the TP’s taxable income.

Add Standard Deduct or itemized Deduct

Subtract any Refund of SALT included in gross Income.

Question 25

AMT preference items include

Answer 25

1. Accelerated Depreciation
2. Diff between gain or loss on sale of prop. reported for reg and AMT purposes
3. Income from Incentive Stock Options
4. Change in certain passive activity loss deductions
5. Depletion that is greater than a property’s cost basis
6. part of the deduction for certain intangible drilling costs
7. Tax-exempt interest on certain private activity bonds.

Question 26

Alimony and Separate maintenance payments under a divorce, after Dec 31, 2018, is NOT deductible by the payor and not includible in income by the payee.

Answer 26

This is a TCJA provision

Question 27

To determine the portion of your basis in Common and Preferred stock, you need to determine the percentage of total value for both types of stock, and divvy up your basis by the percentages.

Answer 27

Yep

Question 28

To avoid penalties for excess contributions to a Traditional IRA is to withdraw the excess and any gains on the excess contribution by the due date of your Tax Return.

Answer 28

If you filed for an extension, the extended sate become the due date to make the withdrawal of the excess contribution.

Question 29

An excess contribution to a Traditional IRA garners a 6% penalty.

Answer 29

This is true for

• Traditional IRAs,
• Roth IRAs,
• Coverdell Education Savings Accounts (ESA),
• Archer medical Savings Accounts (MSA),
• Health Savings Accounts (HSA), and
• ABLE Accounts (ABLE)

Question 30

A Form 706 must be filed within 9 months after the date of the decedent’s death.

Answer 30

Unless you receive an extension.

the final Tax Return is due on April 15, following the year of death.

The due date for filing Form 1041 Estate Income Tax Return is generally April 15th (assuming calendar year accounting)

Question 31

The employer of a household employee is NOT required to withhold Federal Income Tax, but should if requested to do so by the employee.

Answer 31

The employee must provide a completed W-4, if they request the withholdings.

Question 32

For split gifts given by spouses, if they want to claim the full $30K, they both must file a Form 709.

Answer 32

This is even when filing MFJ.

Or, if both spouses aren’t filing the gift, than atleast one needs to fill out Form 709 for the $15,000 annual exclusion

Question 33

To determine the percentage of interest to exclude from using a portion of a Series EE Savings Bond proceeds, divide the qualified expenses by the total bond proceeds. Then apply that percentage to the total interest.

Answer 33

EXAMPLE:
EE Bond Proceeds = $7132
Education Expenses = $4000
$7,132 / $4,000 = 56.085%

Total Interest = $2,132
$2,132 x .56085 = $1,196

The difference of $936 is what must be reported on the TP return.

Question 34

Rental time prior to buying a property can be considered as period of use.

Answer 34

You must meet both the ownership and use tests (2 years within past 5 years) to exclude gain on the sale of a home.

Question 35

Credits that can reduce Estate Taxes:

1. The Unified Credit
2. Credit for Fed Gift Taxes on Pre-1977 gifts
3. Credit for Foreign Death Taxes Paid
4. Credit for Tax on Prior Transfers (with caveats)

Answer 35

Taxable gifts made after 1976 are added to the taxable estate.

Question 36

You MUST have a paper trail for charitable gifts of $250 or less.

For charitable gifts greater than $250, you must receive acknowledgement of the contribution from the Qualified Organization.

Answer 36

Either

Bank Records
A Receipt, or
Payroll Deduction Records

Question 37

Capital Gain Rates based on % breakpoints:

15% breakpoint = 0%
15%-20% breakpoint = 15%
20% and up = 20%

Answer 37

28% Gain on collectibles or qualified small business stock

25% Un-recaptured section 1250 gain

Question 38

If you report (as required by law) an expected amount of interest on a Tax Return, but end up not receiving all the interest as reported, you can make an adjustment to your gross income to reflect the difference.

Answer 38

This could happen if you end up withdrawing funds prematurely, due to premature withdrawal provisions.

Question 39

For purposes of the medical and dental expense deduction, a child of divorced or separated parents can be treated as a dependent of both parents.

Answer 39

Therefore both parents can claim medical expenses paid on behalf of the child.

Question 40

The deduction for personal exemptions is suspended for tax years 2018 through 2025 by the Tax Cuts and jobs Act.

Answer 40

However, eligibility to claim an exemption may make you eligible for other tax benefits, such as the child tax credit, the ACTC, and credit for other dependents, etc.

Question 41

Regarding Self-Employment Income, you can not reduce the income with contributions to a retirement plan or NOL carryovers.

Answer 41

Contributions to a retirement plan and NOL carryovers are deductions for AGI, which is reported on pg 1 of Form 1040.

Question 42

Regarding Self-Employment Income, you can not reduce the income with contributions to a retirement plan or NOL carryovers.

Answer 42

Contributions to a retirement plan and NOL carryovers are deductions for AGI, which is reported on pg 1 of Form 1040.

Question 43

If a received stock dividend is a non-taxable dividend, the shareholder must divide the basis for the old stock between the old and new stock

Answer 43

Most stock distributions (stock dividends) by a corp are generally tax free.

Eg. If stock holders receive different distributions, the dividends then are taxable.

Question 44

Gambling losses are deductible to the extent of gambling winnings as a MISC itemized deduction.

Answer 44

Note: The TCJA eliminated all misc deductions which were subject to the 2% limit.

Question 45

Adding an elevator is on of the very few modifications to a home made for medical reasons that might increase the value of the property. Any increase in property value is deducted from the cost before taking the item and a medical expense.

Answer 45

Other home modifications for medical reasons are reliably 100% deductible.

Question 46

Remember to confirm if you are being asked to calculate GROSS income verses Taxable Income.

Answer 46

For Dependency Test purposes, you always calculate the GROSS income.

Question 47

With bartering, you must include income at the time received.

Answer 47

An agreed on value of the services by both parties will be accepted as the FMV.

Question 48

With bartering, you must include income at the time received.

Answer 48

An agreed on value of the services by both parties will be accepted as the FMV.

Question 49

If you pay cash wages of $2100 or more (for 2019) to any one household employee, then you need to report and pay SS and Medicare taxes.

Answer 49

Do NOT count wages paid to your spouse, your child under 21, your parent, or any employee under the age of 18 at any time during the year.

If childcare is provided outside the TP’s home, they are NOT considered a household employee.

Question 50

All income the decedent would have received had death not occurred that was not properly includible on the final return is IRD (Income in Respect of a Decedent)

Answer 50

Rental income and dividends that are declared, but not paid are IRD.

A life Insurance Policy is NOT IRD, because it is not income the decedent would have received had death not occurred.

Question 51

Section 1244 relates to losses on the sale of small business stock. The amount a TP can deduct is limited to $50K each year, or $100K on a joint return.

Answer 51

Any remaining amount of loss from the sale of small business stock is eligible for Capital Loss Treatment.

Question 52

The Gross profit Percentage is:

Gross Profit divided by the Contract Price.

Reportable gains equals Installment Payments times the Gross profit Percentage.

Answer 52

The Gross profit is the Contract Price minus the Basis!

Question 53

Qualifying children for the Child Tax Credit must be younger than 17 during the entire tax year to be eligible for the CTC.

Answer 53

Duh!

NOT 19!

Question 54

There is NOT a total phase out for the Child and Dependent Care Credit.

TPs with an AGI greater than $43,000 are limited to 20% of the qualifying expenses.

Answer 54

Married TPs must file a MJF return to claim the Child and Dependent Care Credit.

A TP may claim the CDCC while in college, but they MUST be in school full-time for at least 5 months out of the year.

Question 55

Capital gains rates are lower than ordinary income rates and they are applied to net long-term capital gains (where the long-term gains are larger than any net short-term capital loss) as well as to qualified dividend revenue.

Answer 55

The government wants to encourage investors to hold bonds longer than one year. Thus, a net long-term capital gain is taxed at a lower rate but a net short-term gain is not.

Question 56

Capital assets normally encompass investment property and property held for personal use.

Answer 56

However, any depreciable property that is used in a trade or business (such as a refrigerator at a restaurant) is not a capital asset.

Question 57

The amount realized from the sale or trade of property is everything received for the property including money, FMV of property or services, and debt or other liabilities assumed by the buyer.

Answer 57

This is different than the amount RECOGNIZED

Question 58

The Related Persons Rule applies to transactions between The Grantor and a fiduciary of a Trust, etc.

Answer 58

The Code recognizes that transactions between related persons are subject to tax abuse. For instance, a child may sell property to her parent at a loss (i.e. cost basis exceeds amount realized) in order to offset income from another transaction. This transaction is deemed abusive because child claims a loss even though she retains ownership of the property. In this case, the losses in a transaction between a grantor and fiduciary will be disallowed because trust grantors and fiduciaries of such trusts fall within the list of related persons. Related persons include family members (but not in-laws), and individuals and entities in which the individual owns or controls more than 50% of the entity.

Question 59

Amortization decreases basis.

Answer 59

Example: Purchase price of $11,000 less $300 amortization (for one year, 20X1) results in a basis of $10,700 on January 2, 20X2.

Question 60

Gains from related party transactions are taxed, but losses are not deductible.

Answer 60

Because of the potential for abuse that would be available on transactions between related parties, gains are taxed but losses are not deductible. Thus, if you have a gain on the transaction with your son, it must be reported. However, if a loss occurs as a result of this transaction, no deduction is allowed. If you sold to your spouse or former spouse neither a gain nor loss would typically be recognized. In the case of a former spouse, the sale must be incident to divorce to avoid recognition.

Question 61

Cost basis for a new home purchase does NOT include Points Paid for a business property and are expenses that must be capitalized over the life of the loan.

Answer 61

You do include price paid, any assumed mortgage, and title and recording fees.

Question 62

For individual taxpayers filing a joint return, $3,000 in capital losses can be deducted each year. Short-term losses are deducted first. The remaining amounts can be carried forward indefinitely. In the carryover process, short-term losses remain short-term and long-term losses remain long-term.

Answer 62

Corporate rules are quite different for capital gains and losses.

Question 63

Qualified expenses for the Education Savings Bond Program DO NOT include books. Only tuition and fees are qualified expenses that result in exclusion of bond interest income.

Answer 63

ONLY Tuition and Fees

Question 64

An elective deferral, other than a designated Roth contribution, is not included in wages subject to income tax at the time contributed.

Answer 64

However, it is included in wages subject to Social Security and Medicare taxes.

Question 65

An elective deferral, other than a designated Roth contribution, is not included in wages subject to income tax at the time contributed.

Answer 65

However, it is included in wages subject to Social Security and Medicare taxes.

Question 66

A qualified taxpayer can exclude from gross income a discharge of qualified principal residence indebtedness.

Answer 66

If a taxpayer excludes this income he must reduce the basis of the principal residence by the amount excluded from gross income.

Question 67

An award for safety achievement will qualify as an achievement award and may be excluded from income within limits.

Answer 67

The amount you can exclude is limited to your employer’s cost and cannot be more than $1,600 ($400 for awards that are not qualified plan awards) for all such awards you receive during the year.

Question 68

Insurance reimbursements for property that is damaged or stolen are excluded from taxable income to the extent they do not exceed the value of the property stolen or damaged.

Answer 68

The $100 rule and 10% of AGI rule apply when calculating deductible casualty losses from a federally declared disaster.

Question 69

If a long-term capital asset is donated to a qualified charity, the itemized deduction is based on the fair value of the item. However, if there has been appreciation of value, no gain has to be reported for tax purposes.

Answer 69

The deduction is larger without the need for reporting any gain. This tax advantage is not available for these short-term capital assets. The deduction is the lesser of the cost or fair value of the gift.

Question 70

If a long-term capital asset is donated to a qualified charity, the itemized deduction is based on the fair value of the item. However, if there has been appreciation of value, no gain has to be reported for tax purposes.

Answer 70

The deduction is larger without the need for reporting any gain. This tax advantage is not available for these short-term capital assets. The deduction is the lesser of the cost or fair value of the gift.

Question 71

A taxpayer may deduct the following items as Other Itemized Deductions, not subject to the 2% limit:

Amortizable premium on taxable bonds.
Casualty and theft losses from income-producing property.
Federal estate tax on income in respect of a decedent.
Gambling losses up to the amount of gambling winnings.
Impairment-related work expenses of persons with disabilities.
Loss from other activities from Schedule K-1 (Form 1065-B), box 2.
Losses from Ponzi-type investment schemes.
Repayments of more than $3,000 under a claim of right.
Unrecovered investment in an annuity.

Answer 71

This includes casualty and theft losses from income-producing property.

Not Tax Prep Fees, work clothes, or Financial Adevisory Fees.

Question 72

A taxpayer may deduct the following items as Other Itemized Deductions, not subject to the 2% limit:

Amortizable premium on taxable bonds.
Casualty and theft losses from income-producing property.
Federal estate tax on income in respect of a decedent.
Gambling losses up to the amount of gambling winnings.
Impairment-related work expenses of persons with disabilities.
Loss from other activities from Schedule K-1 (Form 1065-B), box 2.
Losses from Ponzi-type investment schemes.
Repayments of more than $3,000 under a claim of right.
Unrecovered investment in an annuity.

Answer 72

This includes casualty and theft losses from income-producing property.

Not Tax Prep Fees, work clothes, or Financial Adevisory Fees.

Question 73

Deductible taxes include state and local income tax or general sales tax, foreign income tax, real estate tax, and certain personal property taxes.

Answer 73

Non-deductible taxes include real estate taxes which are for local benefits such as sidewalks, itemized charges for trash service, transfer taxes, HOA fees, employment taxes, estate tax, federal income tax, gift tax, license fees and per capita tax.

Question 74

Deductible taxes include state and local income tax or general sales tax, foreign income tax, real estate tax, and certain personal property taxes.

Answer 74

Non-deductible taxes include real estate taxes which are for local benefits such as sidewalks, itemized charges for trash service, transfer taxes, HOA fees, employment taxes, estate tax, federal income tax, gift tax, license fees and per capita tax.

Question 75

Resident aliens must file a tax return following the same rules that apply to U.S. citizens.

Answer 75

A resident of Puerto Rico is treated like a resident for tax purposes. Only nonresidents file a 1040NR return. A nonresident alien who is married to a U.S. citizen or resident at the end of the year can choose tax treatment as a U.S. resident. A lawful permanent resident (immigrant) of the United States, at any time during the current year, who took no steps to be treated as a resident of a foreign country under an income tax treaty is not treated as a nonresident for tax purposes.

Question 76

A nonresident taxpayer filing form 1040NR-EZ cannot claim the following:

1. Dependents
2. Tax credits
3. Itemized deductions other than for state and local income taxes
4. Adjustments to income other than exclusions for scholarship and fellowship grants

Answer 76

The Tax Cuts and Jobs Act repealed the deduction for exemptions. Beginning in 2018, and continuing through 2025, taxpayers can no longer deduct personal exemptions or exemptions for dependents. Taxpayers filing Form 1040NR-EZ could not claim them previously.

Question 77

TPs must file Schedule B to report foreign income. If their account balance exceeds $10,000 they’re required to file FBAR Form 114.

Answer 77

Generally, must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year.

Question 78

The FBAR is not filed with a federal tax return. When the IRS grants a filing extension for a taxpayer’s income tax return, it does not extend the time to file an FBAR. Prior to the passing of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, there was no provision for requesting an extension of time to file an FBAR. The Act mandates a maximum six-month extension of the filing deadline.

Answer 78

To implement the statute with minimal burden to the public, FinCEN will grant filers failing to meet the FBAR annual due date of April 15 an automatic extension to October 15 each year. Accordingly, specific requests for this extension are not required.

Question 79

Generally, a nonresident alien is subject to U.S. tax on U.S. source income. Most types of U.S. source income received by a foreign person are subject to U.S. tax at a rate of 30%

Answer 79

A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person’s country of residence and the United States. The tax is generally withheld from the payment made to the foreign person.