MCQ's Subunits 5 - 7 Aug 2023 Flashcards
In the current year, Essex sold land with a basis of $80,000 to Yarrow for $100,000. Yarrow paid $25,000 down and agreed to pay $15,000 per year, plus interest, for the next 5 years, beginning in the second year. Under the installment method, what gain should Essex include in gross income for the year of sale?
A. $20,000
B. $15,000
C. $25,000
D. $5,000
D. $5,000
Under the installment sales method, current-year installment income equals current-year receipts multiplied by the gross profit percentage. The gross profit percentage is the gross profit divided by the sales price. The gross profit of $20,000 is the sales prices less the AB of the land. Thus, the gross profit percentage is equal to 20% ($20,000 gross profit ÷ $100,000 sales price). The only receipt this period is the down payment of $25,000, which is multiplied by the gross profit percentage (20%) for a reported gain of $5,000 currently.
Which of the following activities regularly conducted by a tax-exempt organization will result in unrelated business income?
A. Both I and II.
B. I only.
C. Neither I nor II.
D. II only.
C. Neither I nor II.
Unrelated business income (UBI) is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose constituting the basis for an organization’s tax-exempt status. Both situations represent sales of items resulting directly from the conduct of the tax-exempt status, the rehabilitation of persons with handicaps.
Which of the following statements is true with respect to tax-exempt organizations?
A. In order to qualify as an exempt organization, the organization must be a corporation.
B. An individual can qualify as an organization exempt from federal income tax.
C. A foundation may qualify for exemption from federal income tax if it is organized for the prevention of cruelty to animals.
D. A partnership may qualify as an organization exempt from federal income tax if it is organized and operated exclusively for one or more of the purposes found in Sec. 501(c)(3).
C. A foundation may qualify for exemption from federal income tax if it is organized for the prevention of cruelty to animals.
Exempt status generally depends on the nature and purpose of an organization. Among the types of organizations that may qualify as exempt are corporations, trusts, foundations, funds, community funds, etc. A more complete list can be found in Sec. 501(c) along with the permitted stated purposes and requirements.
In 2023, John created a simple trust which provides that the income from the trust will be payable to his son Joey (age 16) for 12 years. At the end of the 12 years, the principal will revert back to John. Which of the following statements is false regarding this trust?
A. The income distribution deduction does not include the capital gains.
B. None of the answers are correct.
C. The income from the trust is taxed to Joey.
D. Any capital gains are taxed to John.
C. The income from the trust is taxed to Joey.
John’s reversionary interest is greater than 5%; thus the trust is a grantor trust. All the income is taxable to John, not Joey.
Dart, a C corporation, distributes software over the Internet and has had average revenues in excess of $40 million per year for the past 3 years. To purchase software, customers enter their credit card number to a secure website and receive a password that allows the customer to immediately download the software. As a result, Dart does not record accounts receivable or inventory on its books. Which of the following statements is correct?
A. Dart must use the accrual method of accounting.
B. Dart may use the cash basis method of accounting until it incurs an additional $30 million to develop additional software.
C. Dart may use either the cash or accrual method of accounting as long as Dart elects a calendar year end.
D. Dart may use any method of accounting Dart chooses as long as Dart consistently applies the method it chooses.
A. Dart must use the accrual method of accounting.
The accrual method of accounting must be used for C corporations unless they have less than $29 million average annual gross receipts in the preceding 3 years. If average revenues exceeded $40 million, the gross receipts must have been at least this amount.
Individuals may claim a charitable deduction for a contribution to which of the following?
A. Civic leagues or organizations operated exclusively for the promotion of social welfare.
B. Civic leagues or organizations operated exclusively for the promotion of social welfare and organizations operated exclusively for scientific or educational purposes.
C. Cemetery companies operated exclusively for the benefit of their members.
D. Organizations operated exclusively for scientific or educational purposes.
B. Civic leagues or organizations operated exclusively for the promotion of social welfare and organizations operated exclusively for scientific or educational purposes.
Solicitations for contributions or other payments by tax-exempt organizations must include a statement if payments to that organization are not deductible as charitable contributions for federal income tax purposes. Donations to the following organizations are tax deductible:
- Corporations organized under an Act of Congress
- All 501(c)(3) organizations except those testing for public safety
- Cemetery companies
- Cooperative hospital service organizations
- Cooperative service organizations of operating educational organizations
- Child-care organizations
Although contributions to cemetery companies are generally tax deductible, a cemetery company that operates exclusively for the benefit of its members is not a tax-exempt organization.
In Year 1, a taxpayer sold real property for $200,000, receiving $100,000 at closing and $100,000 plus accrued interest at the prime rate in the next year. The buyer also assumed a $50,000 mortgage on the property. The taxpayer’s adjusted basis was $75,000, and the taxpayer incurred $10,000 of selling expenses. If this transaction qualifies for installment sale treatment, what is the gross profit on the sale?
A. $165,000
B. $125,000
C. $115,000
D. $175,000
A. $165,000
Gross profit equals the contract price minus the cost of goods sold. The contract price equals $250,000 ($200,000 for the property + $50,000 assumed mortgage), and the cost of goods sold equals $85,000 ($75,000 adjusted basis + $10,000 selling expenses). Therefore, the gross profit on the installment sale equals $165,000 ($250,000 – $85,000).
Soma Corp. had $600,000 in compensation expense for book purposes in Year 1. Included in this amount was a $50,000 accrual for Year 1 nonshareholder bonuses. Soma paid the actual Year 1 bonus of $60,000 on March 1, Year 2. In its Year 1 tax return, what amount should Soma deduct as compensation expense?
A. $600,000
B. $610,000
C. $550,000
D. $540,000
B. $610,000
The additional $10,000, although paid in Year 2, was attributable to services rendered in a prior tax year to an accrual-method taxpayer.
Unless the Internal Revenue Service consents to a change of method, the accrual method of tax reporting is mandatory for a non-small business sole proprietor when there are
Accounts Receivable for Services Rendered = No
Year-End MerchandiseI nventories = Yes
A person must generally use the method of accounting regularly used to compute income in keeping books and records. But a taxpayer that maintains inventory must use the accrual method with regard to purchases and sales. The accrual method is not mandatory when there are accounts receivable.
During Year 3, Scott charged $4,000 on his credit card for his dependent son’s medical expenses. Payment to the credit card company had not been made by the time Scott filed his income tax return in Year 4. However, in Year 3, Scott paid a physician $2,800 for the medical expenses of his wife, who died in Year 1. Disregarding the adjusted gross income percentage threshold, what amount could Scott claim in his Year 3 income tax return for medical expenses?
A. $0
B. $2,800
C. $4,000
D. $6,800
D. $6,800
Generally, only qualified medical expenses paid during the year on behalf of the taxpayer, his or her spouse, or a dependent are deductible. Charging to a third-party credit card is treated as a current payment. Thus, Scott is treated as having paid $6,800 of deductible medical expense in Year 3.
Pierre, a pizza delivery person, received tips totaling $1,000 in December Year 1. On January 5, Year 2, Pierre reported this tip income to his employer in the required written statement. At what amount, and in which year, should this tip income be included in Pierre’s gross income?
A. $1,000 in Year 1.
B. $1,000 in Year 2.
C. $500 in Year 1 and $500 in Year 2.
D. $83 in Year 1 and $917 in Year 2.
B. $1,000 in Year 2.
Normally, a cash-basis taxpayer includes income when received. However, tips receive special treatment. An employee who receives $20 or more in tips in a month (as a result of working for one employer, and not combined from several jobs) must report the total tips to the employer by the 10th day of the next month. These tips are treated as paid when the report is made to the employer. Since Pierre properly reported his December Year 1 tips to his employer in January Year 2, the tips are not included in gross income until Year 2.
Which of the following is not an exempt organization?
A. American Society for Prevention of Cruelty to Animals.
B. Red Cross.
C. State-chartered credit unions.
D. Privately owned nursing home.
D. Privately owned nursing home.
Exempt status generally depends on the nature and purpose of an organization. Among the types of organizations that may qualify as exempt are corporations, trusts, foundations, funds, community funds, etc. A more complete list can be found in Sec. 501(c) along with the permitted stated purposes and requirements.
Of the organizations listed below, which organization could not receive approval for tax-exempt status under Internal Revenue Code Sec. 501(c)(3)?
A. A partnership for scientific research.
B. A local boys club.
C. A local chapter of the Salvation Army.
D. A college alumni association.
A. A partnership for scientific research.
Organizations formed and operated exclusively for religious, charitable, scientific, educational, literary, or similar purposes are a broad class of exempt organizations. A partnership cannot qualify as an exempt organization, and no part of the net earnings may accrue to the benefit of any private shareholder or individual.
Which of the following statements with respect to tax-exempt organizations is false?
A. A trust established as an athletic club may qualify for tax-exempt status.
B. A foundation set up for testing for public safety may qualify for tax-exempt status.
C. A foundation may qualify for exemption from federal income tax if it is organized for the prevention of cruelty to animals.
D. In order to qualify as an exempt organization, the organization must be a corporation, partnership, foundation, or community chest.
D. In order to qualify as an exempt organization, the organization must be a corporation, partnership, foundation, or community chest.
Exempt status depends, generally, on the nature and purpose of an organization. Among the types of organizations that may qualify as exempt are corporations, trusts, foundations, funds, community funds, etc. A more complete list can be found in Sec. 501(c) along with the permitted stated purposes and requirements. A partnership cannot qualify.
Of the following contributions, which one is deductible as a charitable contribution?
A. Time and services to the Boy Scouts of America.
B. Equipment to a cemetery company.
C. Funds to a political action committee.
D. Tuition to a university.
B. Equipment to a cemetery company.
Donations to the following organizations are tax deductible:
*Corporations organized under an Act of Congress
*All 501(c)(3) organizations except those testing for public safety
*Cemetery companies (for the general care of the cemetery, not a specific plot)
*Cooperative hospital service organizations
*Cooperative service organizations of operating educational organizations
*Child-care organizations
Brown transfers property to a trust. A local bank was named trustee. Brown retained no powers over the trust. The trust instrument provides that current income and $6,000 of principal must be distributed annually to the beneficiary. What type of trust was created?
A. Complex.
B. Simple.
C. Grantor.
D. Revocable.
A. Complex.
A complex trust can accumulate income, provide for charitable contributions, and distribute amounts other than income. The trust created by Brown distributes principal so it is a complex trust.
Which of the following statements is true regarding the unrelated business income of exempt organizations?
A. If an exempt organization has any unrelated business income, it may result in the loss of the organization’s exempt status.
B. Unrelated business income relates to the performance of services but not to the sale of goods.
C. Unrelated business income tax will not be imposed if profits from the unrelated business are used to support the exempt organization’s charitable activities.
D. An unrelated business does not include any activity performed for the organization entirely by unpaid volunteers.
D. An unrelated business does not include any activity performed for the organization entirely by unpaid volunteers.
Unrelated business income (UBI) is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose constituting the basis for an organization’s tax-exempt status. But income is not subject to tax as UBI if substantially all the work is performed for the organization by unpaid volunteers.
Which of the following best describes a for-profit organization that pays all profits to exempt organizations?
A. Private foundation, not qualified for exempt status.
B. Private foundation, qualified for exempt status.
C. Feeder organization, not qualified for exempt status.
D. Feeder organization, qualified for exempt status.
C. Feeder organization, not qualified for exempt status.
An organization must independently qualify for exempt status. It is not enough that all of its profits are paid to exempt organizations. The organization described in the question stem is a feeder organization because it “feeds” its profits to another organization. Relying on the limited information provided, it is not known if the organization is disqualified for exempt status; however, it is known that the organization is not qualified for exempt status simply because all profits are paid to exempt organizations.
A cash-basis individual taxpayer owns 55% of Stone, a C corporation. Stone uses the accrual method of accounting and owes the taxpayer $4,500 for rent incurred during Year 1. In Year 2, one-half of this expense was paid and reported as income by the taxpayer. What amount of this expense may Stone deduct for Year 2?
A. $0
B. $2,250
C. $4,500
D. $2,475
B. $2,250
The cash-basis individual taxpayer is a related party to Stone. Deduction of an amount payable to a related party is allowed only when includible in gross income of the related party. Stone may deduct rent expense of $2,250 ($4,500 × 50%) in Year 2, when the amount was reported as income by the taxpayer.
Paul Wallace, a cash-basis taxpayer, owns an apartment house. In computing net rental income for Year 1, the following data are obtained:
In computing his Year 1 taxable income, Mr. Wallace will report gross rents of
A. $15,550
B. $15,725
C. $16,225
D. $15,775
B. $15,725
A taxpayer who uses the cash method of accounting includes an item in gross income when it is actually or constructively received. The bank deposits and the promissory note were income actually received. However, only the FMV of the note is included in income in Year 1, because that is all Wallace could realize on it (cash equivalency). Prepaid rent (January) is included in income when received. Upon collection of the note in Year 2, an additional $50 will be recognized. The rent check of $175 was constructively received since Wallace’s agent received it. Improvements left by a tenant (not in lieu of rent) are excluded from gross income.
A corporate taxpayer plans to switch from the FIFO method to the LIFO method of valuing inventory. Which of the following statements is accurate regarding the use of the LIFO method?
A. Under the LIFO method, the inventory on hand at the end of the year is treated as being composed of the earliest acquired goods.
B. The taxpayer is required to receive permission each year from the Internal Revenue Service to continue the use of the LIFO method.
C. The LIFO method can be used for tax purposes even if the FIFO method is used for financial statement purposes.
D. In periods of rising prices, the LIFO method results in a lower cost of sales and higher taxable income when compared to the FIFO method.
A. Under the LIFO method, the inventory on hand at the end of the year is treated as being composed of the earliest acquired goods.
The LIFO method of accounting assumes that the most recently purchased inventory is sold first. Accordingly, ending inventory (goods on hand at the end of the year) would be composed of the earliest acquired goods.
The Enduro Hunting Club, an exempt organization, made the following disbursements of its net earnings during the current year:
Enduro will lose exempt status for
A. $3,000 disbursement to Hoot.
B. $6,000 disbursement to Geronimo.
C. $5,000 disbursement to Island Park.
D. $10,000 disbursement to Fountain of Youth.
B. $6,000 disbursement to Geronimo.
Social clubs organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes, are an exempt class. However, no part of net earnings may inure to the benefit of any private shareholder. Geronimo is the only private shareholder Enduro made a distribution to.
Ruby Diaz is a commissioned salesperson. She is a cash-method taxpayer. At the end of 2023, her earnings for the year were $75,000. During the year, she also received $10,000 in advances on future commissions and repaid $8,000. How much income should Ruby report for 2023?
A. $85,000
B. $87,000
C. $77,000
D. $75,000
C. $77,000
Both cash- and accrual-basis taxpayers must include amounts in gross income upon actual or constructive receipt if the taxpayer has an unrestricted claim to such amounts. All commissions received should be included in the current year’s gross income. The $8,000 repaid reduces gross income. Ruby should report $77,000 ($75,000 + $10,000 – $8,000).
An exempt scientific research organization elected a $30,000 lobbying expenditure limit for 2023. During 2023, $40,000 was spent on political lobbying. What is the consequence of the 2023 expenditure?
A. A $10,000 excise tax.
B. Loss of exempt status.
C. No loss of exemption or excise tax liability.
D. A $2,500 excise tax.
D. A $2,500 excise tax.
No substantial part of activities of an exempt organization operated exclusively for scientific purposes may be attempts to influence legislation or a political candidacy. However, most organizations can elect to replace the substantial part of activities with a lobbying expenditure limit. An organization that exceeds the lobbying expenditure limit will be subject to an excise tax of 25% of the excess amount. This scientific organization exceeded its $30,000 limit by $10,000 and is therefore subject to a $2,500 excise tax ($10,000 × 25%).
The Securities and Exchange Commission (SEC) may discipline accountants. Under its disciplinary powers, the SEC may suspend an accountant’s right to practice before it. What is a basis for suspension?
A. Conviction of any misdemeanor.
B. Intentional or unintentional violation of SEC regulations.
C. Being subject to a temporary restraining order regarding securities practice.
D. Conviction of a felony.
D. Conviction of a felony.
The SEC may suspend or permanently revoke the right to practice before the SEC, including the right to sign any document filed by a registrant, if the accountant (1) does not have the qualifications to represent others; (2) lacks character or integrity; (3) has engaged in unethical or unprofessional conduct; or (4) has willfully violated, or willfully aided and abetted the violation of, the federal securities laws or their rules and regulations. Suspension by the SEC also may result from (1) conviction of a felony, or a misdemeanor involving moral turpitude; (2) revocation or suspension of a license to practice; or (3) being permanently enjoined from violation of the federal securities acts.
Max Miser formed a trust to provide income for himself in his twilight years. The trustee is required to distribute all of the trust’s current income, but he is strictly forbidden to distribute any of the trust principal. Max has also stipulated that he wants no charitable contributions to be made by the trust. This trust is best described as a
A. Grantor trust.
B. Complex trust.
C. Simple trust.
D. Simple grantor trust.
D. Simple grantor trust.
A simple trust requires current distribution of all its income, requires no distribution of the res (i.e., principal, corpus), and provides for no charitable contributions by the trust. A grantor trust is any trust to the extent the grantor is the effective beneficiary. Since Max Miser’s trust meets the characteristics of both a simple trust and a grantor trust, it may be classified as a simple grantor trust.
A penalty may be assessed on any preparer or
A. Any person who prepares and signs a tax return or claim for refund and the individual with overall supervisory responsibility for the advice given by the firm with respect to the return or claim.
B. Any member of a firm who gives advice (written or oral) to a taxpayer or to a preparer not associated with the same firm.
C. Any person who prepares and signs a tax return or claim for refund.
D. The individual with overall supervisory responsibility for the advice given by the firm with respect to the return or claim.
A. Any person who prepares and signs a tax return or claim for refund and the individual with overall supervisory responsibility for the advice given by the firm with respect to the return or claim.
A penalty may be assessed on any individual who prepares and signs a tax return or claim for a refund. Additionally, an individual with overall supervisory responsibility for advice given by the firm with respect to the return or claim may also be assessed the penalty.
In which of the following situations may the tax return preparer disclose the tax return information requested without first obtaining the consent of the taxpayer/client?
A. The preparer receives a state grand jury subpoena requesting copies of federal and state income tax returns.
B. All of the answers are correct.
C. A partner in a partnership, who was not involved with the return preparation or partnership records, requests a copy of the partnership return, including the Schedule K-1s for all partners.
D. An IRS agent, in his or her official capacity, visits the preparer and requests copies of state and federal income tax returns, related returns, schedules, and records of the taxpayer used in the preparation of the tax returns.
B. All of the answers are correct.
Generally, a preparer is prohibited from disclosing a taxpayer’s information without the client’s consent. However, several exceptions exist, including a disclosure made pursuant to a court order, pursuant to an IRS inquiry, or among partners in a partnership.
In accordance with Treasury Department Circular 230, a practitioner who has committed a willful violation may be
A. Suspended from practice before the IRS for suspension from practice as a CPA by a federal court.
B. Censured for being shown to be incompetent or disreputable.
C. Disbarred from practice before the IRS for negotiating a client’s refund check.
D. All of the answers are correct.
D. All of the answers are correct.
Practitioners may be censured (publicly reprimanded), suspended, or disbarred from practice before the IRS for willful violations of any of the regulations contained in Circular 230.
Which of the following represent the official interpretation of the Internal Revenue Code (IRC) and are (1) a primary authoritative source when conducting tax research and (2) binding on a court (as long as they do not conflict with the IRC)?
A. Revenue procedures.
B. Revenue rulings.
C. Treasury regulations.
D. Private letter rulings.
C. Treasury regulations.
Treasury regulations are interpretations of the IRC that allow the Treasury Department to implement the IRC. The regulations are authorized and allowed under law by the IRC, making them a primary authoritative source when conducting tax research. The IRS is bound by the regulations because it is a bureau within the Treasury Department. Courts are bound to follow them to the extent that the court does not find they conflict with the IRC.
During an interview conducted by the tax return preparer, the client stated that he had paid $1,500 for deductible travel expenses and $3,000 for charitable contributions. The preparer asked if documentation existed in support of the deductions and was assured by the client that adequate documentation did exist. When the client’s return was later examined by the IRS, a tax deficiency resulted due to the client’s lack of supporting documentation for the travel expenses. Which of the following statements best describes this situation?
A. The preparer is not subject to a penalty because the understatement was not substantial.
B. The preparer is not subject to a penalty because she is not required to examine or review the client’s books and records in order to verify the client’s information.
C. The preparer is subject to a penalty because she did not verify the existence of the documentation and a tax deficiency resulted from the examination.
D. The preparer is subject to a penalty because she did not verify that her client had supporting documentation.
B. The preparer is not subject to a penalty because she is not required to examine or review the client’s books and records in order to verify the client’s information.
A preparer may generally rely in good faith without verification on information furnished by the taxpayer, although the preparer may not ignore the implications of information furnished to the preparer or actually known to the preparer. Furthermore, the preparer must make appropriate inquiries to determine the existence of facts required by a Code section or regulation as a condition to claiming a deduction.
Vance, a U.S. citizen and the sole income beneficiary of a simple trust, is entitled to receive current distributions of the trust income. During the current year, the trust reported the following:
What amount of tax is imposed on the beneficiary of the trust, assuming an applicable tax rate of 10%?
A. $430
B. $350
C. $150
D. $230
D. $230
Interest income from corporate bonds is a fiduciary receipt of income, and 20% of the fiduciary fees that are allocable to income are considered fiduciary disbursements. Therefore, the trust income equals $2,500 of interest income less $200 of fiduciary fees, for a total of $2,300. The applicable tax rate is stated as 10%, resulting in a $230 tax. Trust income is taxed to the beneficiary of the trust.
Easel Co. has elected to reimburse employees for business expenses under a nonaccountable plan. Easel does not require employees to provide proof of expenses and allows employees to keep any amount not spent. Under the plan, Mel, an Easel employee for a full year, gets $400 per month for business automobile expenses. At the end of the year, Mel informs Easel that the only business expense incurred was for business mileage of 6,870 at a rate of 65.5 cents per mile, the IRS standard mileage rate at the time of travel. Mel encloses a check for $300 to refund the overpayment to Easel. What amount should be reported in Mel’s gross income for the year?
A. $4,500
B. $300
C. $4,800
D. $0
C. $4,800
In a nonaccountable plan, the reimbursements are included in the employee’s gross income. These expenses are not deductible from 2018 to 2025. Since the employee accounted to the employer and returned the excess reimbursement, this could have qualified as an “accountable plan.” Under an accountable plan, the employee would include nothing in income. However, the company uses a nonaccountable plan, and Mel must include $4,800 ($400 × 12 months) in his gross income.
Mr. and Mrs. B file a joint income tax return. Mr. B owns and operates a grocery store that had a net income of $15,000 in 2023. Mrs. B is a self-employed physical therapist, and her net income was $42,900. What is the total amount of self-employment tax Mr. and Mrs. B must report on their joint return for 2023?
A. $6,630
B. $8,181
C. $4,090
D. $8,859
B. $8,181
The tax on self-employment income is imposed by Sec. 1401 on all taxpayers whose net earnings from self-employment exceed $400 [Sec. 1402(b)]. For 2023, the tax is divided into two components: the Social Security and Medicare taxes, which are based on the net earnings from self-employment. The Social Security tax is imposed at a 12.4% rate up to a $160,200 maximum. The Medicare tax is imposed at a 2.9% rate, and there is no maximum. Taxpayers may reduce their net income from self-employment by the product of the employer’s portion of the self-employment tax rate (7.65%) times the net income from self-employment [Sec. 1402(a)(12)]. The self-employment tax is computed separately for each spouse. Their taxes are
The total self-employment tax for Mr. and Mrs. B is $8,181 ($2,119 + $6,062).
Frank Fronton decided to become a professional jai alai player. In January, Fronton joined a jai alai club where he could train to become a jai alai player. After training for the first 7 months of the year, Fronton received a contract and began to play professionally as an independent contractor; however, he continued to use the club for ongoing training and practice. Fronton paid $12,000 for the use of the club during the year ($1,000 per month). He purchased equipment in January costing $1,500. Replacement equipment after receiving the contract cost $500, and transportation to out-of-town games cost $800 for the remainder of the year. How much can Fronton deduct as business expenses?
A. $7,800
B. $12,800
C. $6,300
D. $800
C. $6,300
The playing of professional jai alai would be considered a trade or business; however, the preparation for entering that business is not conducting that trade or business.
Therefore, the $1,000 monthly club dues for the first 7 months are not deductible, whereas the dues for the last 5 months are deductible. The $1,500 initially spent for equipment is also not deductible since it is a depreciable asset. Replacement equipment is deductible assuming it does not have a life substantially longer than the current year. Transportation expenses are also deductible provided there is adequate documentation.
The federal Social Security Act
A. Applies to self-employed persons.
B. Applies to professionals at their option.
C. Provides for a deduction for Social Security taxes paid by the employee against his or her federal income tax.
D. Excludes professionals such as accountants, lawyers, and doctors.
A. Applies to self-employed persons.
The Social Security Act applies to self-employed persons who must pay taxes (SS and Medicare) on self-employment income (15.3% on the first $160,200 and 2.90% on all wages above that threshold in 2023). An additional Medicare tax of 0.9% applies to self-employment income above $200,000 ($250,000 if MFJ).
Flora Corporation made the following awards of tangible personal property to employees during the current year under a written, qualified, nondiscriminatory plan:
No other safety awards were awarded during the current year. The amount Flora can deduct related to these awards is
A. $1,500
B. $1,300
C. $1,700
D. $400
C. $1,700
Section 274(j) limits the deduction for employment achievement awards (tangible personal property awarded to an employee by reason of length of service or safety achievement) to $400 per employee per year or $1,600 per employee per year if it is a qualified plan award. A qualified plan award is an item awarded as part of a permanent, written plan or program that does not discriminate in favor of highly compensated employees. An item may not be treated as a qualified plan award if the average cost of all items awarded exceeds $400. Under Sec. 274(j)(4), further limitations on employee awards are provided whereby length-of-service awards must not be awarded until after the recipient has worked over 5 years. Also, the recipient must not have received any such award during the applicable year or any of the 4 prior years. Safety achievement awards are also not deductible if, during the taxable year, such awards have previously been awarded to more than 10% of the other employees or to a manager, clerical employee, or other professional employee. Here, since all the requirements of a qualified plan award are met, the full amount of each award, or a total of $1,700, is deductible.
Bobby is a sole proprietor. During 2023, he incurred the following expenses:
What is the amount of Bobby’s expenses that are deductible for 2023?
A. $9,000
B. $7,500
C. $750
D. $3,750
C. $750
A 50% deduction from gross income is allowed for meals. However entertainment expenses are not deductible, and generally advance rental payments may be deducted by the lessee only during the tax periods to which the payments apply. Accordingly, Bobby is entitled to a deduction in 2023 of $750 (meal expenses).
Gilda Bach is a cash-basis, self-employed consultant. For the year 2023, she determined that her net income from self-employment was $80,000. In reviewing her books, you determine that the following items were deducted in arriving at the net income of $80,000:
Based upon the above information, what should Gilda Bach report as her net earnings from self-employment for 2023?
A. $110,000
B. $97,891
C. $106,000
D. $89,782
B. $97,891
The net income per books amounted to $80,000. It is necessary to add back the salary that was drawn ($20,000) since an individual may not claim a deduction for salary that is paid to himself or herself. In addition, the estimated federal income taxes paid of $6,000 are not deductible. The malpractice insurance premium and the cost of attending the seminar are deductible business expenses. Bach’s tentative net self-employment income is $106,000.
The net earnings from self-employment for Gilda Bach equals $97,891 ($106,000 – $8,109).
On April 1 of the current year, Sam, a cash-basis taxpayer, leased office space from Executive Plaza for 5 years, beginning May 1 of the current year, for $700 per month. During the year, he paid $7,000, of which $1,400 was for advance rent, to Executive Plaza. What is the amount Sam can deduct for the current year?
A. $6,300
B. $7,000
C. $5,600
D. $8,400
C. $5,600
Prepaid rent generally may not be deducted by either a cash-basis or accrual-basis taxpayer. To do so would violate the requirement that the taxpayer’s method of accounting must clearly reflect income [Sec. 446(b)]. Furthermore, an expenditure that creates an asset having a useful life extending substantially beyond the close of the taxable year is not deductible [Reg. 1.461-1(a)]. Because the prepayment extends beyond the tax year following the prepayment, the exception in Reg. 1.263(a)-4(f)(8) (i.e., the 12-month rule) does not apply. Only the $5,600 of rental expense allocable to the current year ($7,000 – $1,400) is deductible in the current year.
In January 2023, Mr. D, who is self-employed, purchased a new automobile, which he uses 100% for business. During 2023, he drove the car 14,000 miles. Mr. D also owns another automobile, which he uses occasionally for business but primarily for personal purposes. During 2023, he drove the second car 2,000 business miles. The second car is not fully depreciated. Assume both vehicles were driven uniformly throughout the year. What is the amount of Mr. D’s automobile expense deduction using the standard mileage rate?
A. $10,480
B. $9,360
C. $7,840
D. $9,170
A. $10,480
Automobile expenses pertaining to a trade or business are deductible under Sec. 162 as ordinary and necessary business expenses. The taxpayer may either deduct the portion of actual operating cost of the automobile attributed to business use or compute the deduction based on the standard mileage rate. For 2023, the standard mileage rate is $0.655 per mile for all miles of business use. Mr. D’s deduction for 2023 is $10,480 ($16,000 miles x $0.655). The standard mileage rate is adjusted annually by the IRS to the extent warranted.
Gary Judd is an individual proprietor trading as Lake Stores, an accrual basis enterprise that had been using the allowance method for determining bad debt expense for book purposes (referred to as credit loss expense on the financial statements). At December 31, 2022, Lake’s allowance for doubtful accounts (“bad debt reserve”) was $20,000. In Lake’s 2023 budget, it was estimated that $3,000 of trade accounts receivable would become worthless in 2023. However, actual bad debts amounted to $4,000 in 2023. In Lake’s 2023 Schedule C of Form 1040, Lake is allowed
A. No deduction for bad debts since these bad debts should be charged against the “reserve.”
B. A $4,000 deduction for bad debts and does not have to include any portion of the “reserve” in taxable income.
C. A $1,000 deduction for bad debts, which is the excess of actual bad debts over the amount estimated.
D. A $4,000 deduction for bad debts but must also include $5,000 of the “reserve” in taxable income.
B. A $4,000 deduction for bad debts and does not have to include any portion of the “reserve” in taxable income.
An accrual-basis taxpayer includes trade receivables in gross income, and a trade receivable is deductible as a business bad debt to the extent it is worthless. The allowance method of deducting bad debts is not allowed for tax purposes, so Gary must use the specific write-off method.
Mr. Hawk, a factory assembly line worker, received the following benefits from his employer:
How much is includible in Mr. Hawk’s income for the current year?
A. $675
B. $925
C. $1,125
D. $1,050
A. $675
Benefits received from an employer are compensation for services and included in gross income under Sec. 61 unless provided otherwise. Section 106 excludes from gross income contributions to accident or health plans (a medical insurance plan) made by an employer on behalf of the employee. Section 79 provides for the inclusion in gross income of the cost of group term life insurance paid by the employer but only to the extent that such cost exceeds the cost of $50,000 of such insurance provided the plan is not discriminatory. Hence, the cost of Mr. Hawk’s group term life insurance is not included in gross income.
Section 127, which provides an exclusion of payments up to $5,250 per year made to reimburse an employee for educational expenses, was made permanent by the American Taxpayer Relief Act of 2012 including coverage of expenses for both undergraduate and graduate courses. Therefore, the reimbursement for the physics course is excluded. There is no provision excluding Christmas bonuses or memberships in off-premises health clubs, so $675 ($125 bonus + $550 membership) is includible in gross income.
On December 1, 2023, Krest, a self-employed cash-basis taxpayer, borrowed $200,000 to use in her business. The loan was to be repaid on November 30, 2024. Krest paid the entire interest amount of $24,000 on December 1, 2023. What amount of interest was deductible on Krest’s 2023 income tax return?
A. $24,000
B. $22,000
C. $0
D. $2,000
D. $2,000
Costs of business borrowing are generally deductible, but prepaid interest in any form must be amortized over the period of the loan. Only 1 month of the loan has expired, so $2,000 [$24,000 × (1 ÷ 12)] is deductible.
Alt Partnership, a cash-basis, calendar-year entity, began business on October 1, 2023. Alt incurred and paid the following in 2023:
Alt elected to amortize costs. What was the maximum amount (ignoring any immediate expensing allowed) of organizational expenses that Alt may deduct on the 2023 partnership return?
A. $3,000
B. $200
C. $0
D. $6,750
B. $200
Organizational expenses are incurred in the formation of the partnership. The partnership may elect to amortize organizational expenses over a period of not less than 180 months. The fees related to preparing the partnership agreement are organizational expenses, but the expenses related to the issuance or sale of partnership interests (syndication fees) are specifically excluded. The partnership may recognize a maximum of 3 months of organizational expenses this year, or $200 ($12,000 ÷ 180 × 3).
Michael operates his health food store as a sole proprietorship out of a building he owns. Based on the following information regarding Year 6, compute his net self-employment income (for SE tax purposes) for Year 6.
A. $29,000
B. $28,000
C. $24,000
D. $31,000
D. $31,000
Net earnings from self employment are gross income derived from a trade or business, less allowable deductions attributable to the trade or business. Capital gains and losses and contributions to retirement plans are not considered income or expenses for self-employment purposes. Also, net operating losses are not considered for self-employment purposes. Michael’s net self-employment income is computed as follows:
The self-employment tax is
A. Fully deductible as an itemized deduction.
B. Fully deductible in determining net income from self-employment.
C. Partially deductible from gross income in arriving at adjusted gross income.
D. Not deductible.
C. Partially deductible from gross income in arriving at adjusted gross income.
To arrive at AGI, a self-employed person may deduct the employer’s portion of the self-employment tax paid. This is an above-the-line deduction.
Juan recently started operating a flower shop as a proprietorship. In its first year of operations, the shop had a taxable income of $60,000. Assuming that Juan had no other employment-related earnings,
A. The flower shop must withhold FICA taxes from Juan’s earnings.
B. Juan must pay self-employment tax on the earnings of the business.
C. Juan will be exempt from self-employment taxes for the first 3 years of operations.
D. Juan will be exempt from the Medicare tax because the business earnings are below the threshold amount.
B. Juan must pay self-employment tax on the earnings of the business.
Self-employed taxpayers must pay a self-employment tax on the earnings of their business. The FICA tax liability is imposed on net earnings from self-employment at the employer rate plus the employee rate.
Rich is a cash-basis, self-employed air-conditioning repair technician with current-year gross business receipts of $20,000. Rich’s cash disbursements were as follows:
What amount should Rich report as net earnings from self-employment?
A. $15,100
B. $14,900
C. $14,100
D. $13,945
D. $13,945
The $20,000 gross receipts would be reduced by the $2,500 for parts, the $2,000 in advertising expense, and the $400 in telecommunication expense. This $15,100 is net income from self-employment. Net earnings from self-employment is net income from self-employment reduced by the employer’s portion of FICA taxes (0.0765) times the taxpayer’s net income from self-employment. Thus, the $15,100 should be reduced by an additional $1,155 ($15,100 × 0.0765), resulting in net earnings from self-employment of $13,945.
Which of the following acts, if any, constitute grounds for a tax preparer penalty?
A. Without the taxpayer’s consent, the tax preparer disclosed taxpayer income tax return information to a CPA firm conducting a peer review.
B. At the taxpayer’s suggestion, the tax preparer deducted the expenses of the taxpayer’s personal domestic help as a business expense on the taxpayer’s individual tax return.
C. Without the taxpayer expressly prohibiting it, the tax preparer used information from the taxpayer’s return in a related taxpayer’s return.
D. Without the taxpayer’s consent, the tax preparer disclosed taxpayer income tax return information under an order from a state court.
B. At the taxpayer’s suggestion, the tax preparer deducted the expenses of the taxpayer’s personal domestic help as a business expense on the taxpayer’s individual tax return.
A penalty is imposed on a tax return preparer if any part of an understatement of tax liability resulted from a willful attempt to understate the liability or from an intentional disregard of rules or regulations. A penalty for disclosure will not be imposed if client information is disclosed under a court order.
ABC Corp. leases two buildings. The first lease started January 1, 2023, and was for 3 years at $10,000 per year rent. ABC paid $30,000 in January for the entire 3-year term. The second lease started July 1, 2023, and was for 5 years at $6,000 per year rent. ABC paid $30,000 in June for the entire 5-year term. What is the total rent expense ABC Corp. may deduct in 2023?
A. $13,000
B. $13,500
C. None of the answers are correct.
D $60,000
A. $13,000
Advance rental payments made by a cash-basis taxpayer-lessee are generally not deductible in the tax year in which they are made but must be allocated over the period of time for which the premises may be used as a result of such payments. ABC will deduct $13,000 as rent expense in the current year [($10,000 × 1 year) + ($6,000 × 1/2 year)]. Because the prepayment extends beyond the tax year following the prepayment, the exception in Reg. 1.263(a)-4(f)(8) (i.e., the 12-month rule) does not apply.
For a downtown redevelopment project, the city of Macon turned a 10-block area into an outdoor mall, including trees, fountains, benches, gardens, and brick walkways. Local merchants were assessed a 10% property tax based on the value of their property prior to improvements. The tax treatment of the property tax for the property owners is
A. Added to the property’s adjusted basis.
B. Fully deductible as a business expense.
C. An itemized deduction for individuals.
D. Expensed over the next 3 years.
A. Added to the property’s adjusted basis.
Taxes assessed for local benefit that tend to increase the value of real property are added to the property’s adjusted basis and are not currently deductible as tax expense.
Tax on business property, if expensed, would be on Schedule C, not Schedule A.
Clyde operated a food distribution business. He leased a small warehouse in 2021 for $60,000 per year for a 3-year term. The lease was to start on July 1, 2021. Clyde paid the first 2 years’ rent in advance in May 2021. Clyde then began to make monthly payments of $5,000 starting on July 1, 2023, and continuing on the first of the month for the balance of 2023. What rent expense may Clyde claim in 2023?
A. $50,000
B. None of the answers are correct.
C. $30,000
D. $60,000
D. $60,000
Advance rental payments made by a cash-basis taxpayer-lessee are generally not deductible in the tax year in which they are made but must be allocated over the period of time for which the premises may be used as a result of such payments. Clyde will be able to deduct $60,000 of rent because he can deduct the allocated portion of the $30,000 prepaid rent and the $30,000 of current rent expenses paid. Because the prepayment extends beyond the tax year following prepayment, the exception in Reg. 1.263(a)-4(f)(8) (i.e., the 12-month rule) does not apply.
Clyde may deduct the allocated share of prepaid rent he paid in the previous year.
Carl’s business insurance costs $3,000 per year. Carl paid for and purchased a 12-month insurance policy on October 1, Year 1. On October 1, Year 2, Carl’s insurance increased to $3,300 per year. A building contract Carl was working on was delayed when they had to obtain additional permitting. Because cash flow was tight, Carl delayed renewing the insurance policy. Instead of making the payment due on October 1, Year 2, Carl paid 3 months of insurance in arrears on January 1, Year 3. Carl is a cash-method taxpayer and took advantage of the 12-month rule in Year 1 for prepayments. What is Carl’s insurance expense deduction for Year 2?
A. $3,000
B. $0
C. $2,250
D. $825
B. $0
Prepaid insurance must be apportioned over the period of coverage. However, a cash-method taxpayer can deduct prepaid premiums if the 12-month rule applies (the contract is for 12 months or less and does not extend beyond the next taxable year). Thus, the $3,000 premium is recognized as insurance expense in Year 1, and $0 is recognized in Year 2.
Carl is not able to deduct the insurance paid in arrears for Year 2. A cash-method taxpayer may not deduct a premium before it is paid.
Ernesto was an employee of Med-Tech Corporation for all of 2023. He earned $162,200 in salary. What is the amount of FICA tax paid by Med-Tech Corporation with respect to Ernesto?
A. $12,408
B. $12,255
C. $12,284
D. $9,932
C. $12,284
Only the OASDI (old-age, survivors, and disability insurance) component of the FICA tax has a wage ceiling. The OASDI rate is 6.20% for employers up to a maximum of $160,200 (in 2023). For the Medicare component, which has no wage ceiling, the rate is 1.45% for employers and employees. The employment taxes paid by Med-Tech with respect to Ernesto in 2023 are as follows:
On New Year’s Eve, Hal sent three bottles of champagne to the three owners of the Day & Night Cleaners to thank them for their business during the year. Each bottle of champagne cost $75. Each of the owners took the champagne home. Earlier in the year, Hal had given a video game to the 10-year-old son of one of the owners. The value of the game was $50. To show his appreciation to another customer for his business, Hal gave the customer tickets to a football game. The value of the tickets for the customer was $100. What is the total amount Hal can deduct as business gifts?
A. $375
B. $75
C. $100
D. $125
B. $75
Expenditures for business gifts are deductible. The deduction is limited to $25 per recipient per year. Hal may deduct $75 ($25 × 3 recipients) for business gifts. The gift to the son of one of the owners is considered given to the owner; therefore, the total gift of both the champagne and the video game is limited to $25. The football tickets are considered entertainment and, therefore, cannot be deducted.
As a benefit for all of their employees, Company A has a qualified medical reimbursement plan. The cost of the plan is deductible by
A. Both the employee and the employer.
B. Neither the employee nor the employer.
C. The employee.
D. The employer.
D. The employer.
The cost of a medical reimbursement plan for employees is deductible by the employer. Any reimbursement in excess of medical expenses is included in the income of the employee.
Sarah owns and operates a retail sporting goods business as a sole proprietor. Her store is located on the ground floor of a two-story building that she owns. Based on the following information regarding 2023, compute her net self-employment income to be put onto Schedule C for that year.
A. $73,500
B. $64,500
C. $66,000
D. $70,000
D. $70,000
Net income from self-employment are gross income derived from a trade or business, less allowable deductions attributable to the trade or business. The rental income is not self-employment income since rental property is not Sarah’s ordinary course of business and she is not a real estate broker. Therefore, any rental expenses do not offset the self-employment income from the sporting goods business. Also, 100% of the health insurance premiums are deductible on Form 1040 as an adjustment but are not deducted against self-employment income. Capital gains and losses and contributions to retirement plans are not considered income or expenses for self-employment purposes. Sarah’s net self-employment income is computed as follows:
Frank Clarke, an employee, was covered under a noncontributory pension plan. Frank died on April 15, 2023, at age 64 and, pursuant to the plan, his surviving spouse received monthly pension payments of $500 beginning May 1, 2023. Mrs. Clarke also received an employee death payment of $10,000 in May 2023. How much should she include in her gross income for 2023?
A. $10,000
B. $9,000
C. $5,000
D. $14,000
D. $14,000
All death benefits received by the beneficiaries or the estate of an employee from, or on behalf of, an employer are included in gross income. The pension payments must be included unless Frank made contributions to the pension plan.
A real estate broker reported the following business income and expenses for the current year:
What amount should be reported as net profit on Schedule C, Profit or Loss from Business?
A. $77,800
B. $69,800
C. $70,000
D. $78,000
D. $78,000
A deduction from gross income is allowed for all ordinary and necessary expenses paid or incurred during a tax year in carrying on a trade or business. An expenditure may be nondeductible if allowing the deduction would frustrate public policy. No amount can be deducted from gross income unless allowed by the Internal Revenue Code. Fines and penalties paid to a governmental entity and fees incurred that are deemed illegal by state laws are not deductible. Thus, net profit is $78,000 ($100,000 commission income – $2,000 auto rentals – $20,000 referral fees to other brokers).
On December 1, 2022, Michael, a self-employed cash-basis taxpayer, borrowed $100,000 to use in his business. The loan was to be repaid on November 30, 2023. Michael paid the entire interest of $12,000 on December 1, 2022. What amount of interest was deductible on Michael’s 2023 income tax return?
A. $12,000
B. $11,000
C. $1,000
D. $0
B. $11,000
Deductions are allowed under the cash method of accounting in the taxable year when paid. However, prepaid interest must be capitalized. Thus, $11,000 of interest attributable to the 2023 tax year may be deducted on Michael’s 2023 income tax return and not earlier.
Mr. Pine, a self-employed engineer in Boston, traveled to Chicago in order to attend a course on new engineering techniques. He spent 2 weeks attending the course and remained in Chicago for an additional 6 weeks on personal matters. The air flight cost $200, hotel $600, meals $320, and the tuition for the course $500. How much of these expenses may Mr. Pine deduct on his return?
A. $500
B. $714
C. $690
D. $890
C. $690
A deduction for adjusted gross income is allowed for travel expenses while away from home in connection with a trade or business [Sec. 162(a)]. However, transportation is deductible only if the trip is primarily related to the taxpayer’s trade or business (Reg. 1.162-2). If more days are spent for personal purposes than for business purposes, none of the transportation is deductible. Since Mr. Pine spent 6 out of his 8 weeks in Chicago on personal matters, the cost of the flight to Chicago is not deductible. Meals and lodging must always be allocated between personal and business. Under Sec. 274(n), business meals are deductible at only 50% of their cost. The expenses for 2 weeks out of 8 weeks are deductible. Educational expenses are deductible if the education maintains or improves skills required in the taxpayer’s business (Reg. 1.162-5).
The federal Social Security Act
A. Excludes professionals such as accountants, lawyers, and doctors.
B. Does not apply to self-employed persons.
C. Provides that bonuses and commissions paid as compensation are included as wages in the calculation of employer-employee contributions.
D. Provides for a deduction for Social Security taxes paid by the employee that is available against his or her federal income tax.
C. Provides that bonuses and commissions paid as compensation are included as wages in the calculation of employer-employee contributions.
The definition of wages on which contributions are based includes all remuneration for employment [Sec. 3121(a)]. Bonuses and commissions are wages and are used in the calculation of the employer-employee contributions.
Partiers Unlimited sent one of its employees to attend an association meeting on behalf of the company. It is customary, and good for business, for spouses to attend these meetings and participate in the social activities in the evenings. The employee took her spouse along for this purpose. Airfare for the employee was $200, food was $100, and lodging was $200. Airfare for the spouse was $200, food was $100, and lodging was $150. Partiers reimbursed its employee for these amounts but included $450 on the employee’s W-2 as compensation at the end of the year. How much and in what manner should Partiers deduct for these expenses?
A. $950 as travel expense.
B. $450 as travel expense and $450 as compensation.
C. $700 as travel expense and $250 as compensation.
D. $450 as travel expense.
B. $450 as travel expense and $450 as compensation.
An employer may deduct reimbursements to an employee for business travel under Sec. 162(a) subject to the restrictions in Sec. 274, with a limitation of 50% for meals. However, the expenses of an employee’s spouse on a trip are not deductible unless the spouse is an employee of the taxpayer, the travel of the spouse is for a bona fide purpose, and such expenses would otherwise be deductible by the spouse [Sec. 274(m)(3)]. It is not sufficient that the spouse is along for customary social activities. Therefore, the expenses relating to the spouse in this question are not deductible as travel expenses.
Under Sec. 274(e), if an employer treats the nondeductible travel expenses as compensation to the employee, they may be fully deducted as compensation. Treating them as compensation requires withholding income tax, including the amounts on the employee’s W-2, and deducting them in the employer’s tax return as compensation. When the employee is reimbursed for the cost of meals, the 50% limitation applies to the party making the reimbursement. Therefore, Partiers may deduct the following:
Willy, a self-employed laboratory consultant, flew to Buffalo where he stayed 3 days (2 days were on business). Airfare was $300, meals were $20 per day, and lodging was $20 per day. From Buffalo, Willy flew to Vancouver, Canada, where he spent 2 weeks on business and 1 week with relatives. Airfare to Vancouver and back home was $600. In Vancouver, food was $100 per week, and lodging was $200 per week. What is Willy’s deductible travel expense for the trip?
A. $1,332
B. $680
C. $1,260
D. $1,920
C. $1,260
Under Reg. 1.162-2(b), on a trip made primarily for business, the entire amount for transportation may be deducted, but the food and lodging must be allocated between business and personal time. However, under Sec. 274(c) and Reg. 1.274-4, travel outside the United States must be allocated between business and personal (including the transportation) if the travel is in excess of 1 week when more than 25% of the time is for nonbusiness activity.
The airfare on the trip to Buffalo is entirely deductible, while food and lodging are deductible for only 2 days. On the trip to Vancouver, the airfare must be apportioned (2/3 business) as well as the food and lodging. Under Sec.162, meals are only 50% deductible. Assuming Willy’s meals met the requirements for business meals, his business deduction is
Oscar Cinema Studios rewards its retiring officers with miniature gold statuettes if the officers complete at least 10 years of service. Each statuette costs Oscar $400 and is worth $600. Rank-and-file employees receive plastic replicas of the studio’s back lot when they retire and have completed 30 years of devoted service. These plastic replicas cost $50 a piece and are each worth $70. In the current year, Oscar gave two retiring officers each a miniature statuette during a meaningful presentation. How much can Oscar deduct for these gifts?
A. $100
B. $50
C. $1,200
D. $800
D. $800
Section 274(j) limits the deduction for employee achievement awards. These are items of tangible personal property awarded to an employee by reason of length of service or safety achievement, and the award is given as part of a meaningful presentation and under circumstances that do not create a significant likelihood that the payment is disguised compensation. The deduction limit is $1,600 per employee per year if it is a qualified plan award (which requires a permanent written plan or program that does not discriminate in favor of highly compensated employees).
In this case, the plan does discriminate in favor of officers, so the deduction is limited to $400 per recipient. Since each statuette costs the company $400, the amount is deductible in its entirety. The total deduction is $800.
The Social Security Act provides for the imposition of taxes and the disbursement of benefits. Which of the following is a true statement regarding these taxes and disbursements in the current year?
A. Social Security benefits are fully includible in gross income for federal income tax purposes unless they are disability benefits.
B. As between an employer and its employee, the tax rates are the same.
C. A deduction for federal income tax purposes is allowed the employee for Social Security taxes paid.
D. Only those who have contributed to Social Security are eligible for benefits.
B. As between an employer and its employee, the tax rates are the same.
Under the Federal Insurance Contributions Act (FICA), the tax rate for employers and employees is the same (7.65% for 2023). This requirement of shared responsibility has been followed since the Social Security Act was enacted in 1935.
You are the accountant for Company R, and you are requested to file Form 941, Employer’s Quarterly Federal Tax Return for Federal Income Tax Withheld from Wages and for Federal Insurance Contributions Act Taxes, for the third quarter of 2023. Given the following information, what is the total FICA tax due for the third quarter (rounded to the nearest dollar)?
A. $4,590
B. $3,596
C. $4,466
D. $3,720
C. $4,466
The two components of the FICA tax [Social Security (SS) and Medicare] must be reported separately on Form 941. The rate for SS is 6.2% for employers and employees on wages up to $160,200 (in 2023). The rate for Medicare is 1.45% each for employers and employees, with no wage ceiling. With respect to the SS component, the tax is paid until the wage ceiling is reached. Then no SS tax is paid for the rest of the year; i.e., it is not paid ratably over the year. The total wages subject to the SS component in the third quarter of 2023 amount to $29,000 since Y’s wages exceed the SS limitation before the end of the quarter. The total FICA tax is 7.65% in 2023. However, the employee and the employer are each required to pay the 7.65%, and the combined percentage of 15.3% is reported on Form 941, separated into its two components.
Per Form 941 SS Wages are multiplied by .124 and Medicare Wages are multiplied by .029 (.124+.029 = 15.3%)
AMJ Enterprises is a small book publisher. It incurred the following as its miscellaneous expenses:
How much of the above may AMJ Enterprises deduct for the current year?
A. $770
B. $3,570
C. $5,670
D. $3,670
D. $3,670
Professional fees are deductible under Sec. 162, the same as compensation to an employee, provided they are reasonable in amount. Advertising and bank service charges are deductible as general expenses. Office supplies are also deductible under Reg. 1.162-3. Sec. 461(g) requires prepaid interest to be capitalized and allocated to the periods to which it relates. Since the interest was prepaid for 5 years, only one-fifth of the interest may be deducted in the current year.
Given the following wage information, what are the total gross wages subject to Federal Unemployment Tax for the current year?
A. $17,000
B. $7,000
C. $32,900
D. $12,000
A. $17,000
Under Sec. 3306(b)(1), wages are taxed for federal unemployment taxes up to $7,000 for each employee. Wages earned in excess of $7,000 are not subject to federal unemployment taxes. The full amount of wages paid during the current year to employee T and employee E is taxable. Only $7,000 of the wages paid to M is subject to federal unemployment taxes. Thus, the total amount of wages paid in the current year that is subject to federal unemployment taxes is $17,000.
If a CPA recklessly departs from the standards of due care when preparing a tax return, the CPA will be liable to third parties who are unknown to the CPA based on common law
A. Gross negligence.
B. Strict liability.
C. Negligence.
D. Criminal deceit.
A. Gross negligence.
In some states, if the CPA has not contracted to perform for the third party, (s)he is not liable to that third party for negligence. Lack of privity is a defense. However, reckless departure from the standards of due care is treated as a form of constructive fraud and results in liability to foreseeable third parties that may be unknown to the CPA.
Johnson worked for ABC Co. and earned a salary of $100,000. Johnson also received, as a fringe benefit, group term life insurance at twice Johnson’s salary. The annual IRS-established uniform cost of insurance is $2.76 per $1,000. What amount must Johnson include in gross income?
A. $100,276
B. $100,000
C. $100,414
D. $100,552
C. $100,414
The cost of group term life insurance up to a coverage amount of $50,000 is excluded from the employee’s gross income. Premiums paid by the employer for coverage in excess of $50,000 are included in gross income. As a result, $150,000 ($200,000 life insurance coverage – $50,000 exemption) of the coverage is taxable. Since Johnson must also include his salary in gross income, Johnson has gross income of $100,414 {$100,000 + [($150,000 ÷ $1,000) × $2.76]}.
Which one of the following, if present, would support a finding of constructive common law fraud on the part of a CPA?
A. Privity of contract.
B. Intent to deceive.
C. Reckless disregard.
D. Ordinary negligence.
C. Reckless disregard.
The following four elements are necessary to prove constructive fraud: (1) misrepresentation of a material fact, (2) reckless disregard for the truth, (3) reasonable reliance by the injured party, and (4) injury. Thus, the presence of reckless disregard for the truth would support a finding of constructive fraud on the part of a CPA.
Intent to deceive is a necessary element of actual fraud.
Alayna is a voice and singing coach. She is a calendar-year taxpayer using the accrual method of accounting. On November 2, 2022, she received $3,200 for a 2-year contract for 64 one-hour voice and singing lessons beginning on that date. The contract provided that Alayna give 8 lessons in 2022 and 48 lessons in 2023, with the remaining lessons to be given in 2024. What is the amount that Alayna should report on her 2023 return?
A. $3,200
B. $2,400
C. $2,800
D. $0
C. $2,800
Amounts that are paid for future services are required to be included in the year of receipt. This rule applies whether the taxpayer is on the cash or accrual method of accounting. There is an exception that allows accrual taxpayers a limited 1-year deferral of income for services performed in subsequent years. Payment for the 8 lessons in 2022 is included in income on the 2022 return. The remaining payment of $2,800 ($3,200 – $400) may be deferred to 2023.
Which of the following conditions must be present in a post-1984 but pre-2019 divorce agreement for a payment to qualify as deductible alimony?
A. Both I and II.
B. Neither I nor II.
C. I only.
D. II only.
A. Both I and II.
In order for payments to qualify as deductible alimony, they must meet all of the following requirements in a post-1984 but pre-2019 divorce agreement:
- Paid in cash
- Paid pursuant to a written divorce or separation instrument
- Not designated as other than alimony
- Terminated at death of recipient
- Not paid to a member of the same household
- Not paid to a spouse with whom the taxpayer is filing a joint return
Midwest Department Stores allows all its employees to purchase goods worth up to $1,000 in retail value each year at a 50% discount. Mark, an employee of Midwest, took full advantage of this policy one year and received a $500 discount. Midwest’s gross profit percentage on sales to customers is 45%. The normal industry discount was only 30%. How much must Mark include in gross income?
A. $50
B. $200
C. $0
D. $500
A. $50
Section 132(a)(2) provides an exclusion from gross income for qualified discounts provided by an employer to an employee. The amount of the discount must not exceed the employer’s gross profit percentage based on the price normally sold to customers. Since Midwest’s gross profit percentage is normally 45%, any discount in excess of 45% must be included in the employee’s gross income. Here the excess discount is 5% (50% – 45%). Accordingly, Mark must include $50 in his gross income ($1,000 × 5%).
Taxpayer B filed a declaration of estimated tax for the current year and paid $2,000 in four equal installments of $500. He had $6,000 withheld from his salary during the current year. The actual tax for the year was $12,000. B’s current-year adjusted gross income decreased by $4,000 from the previous year. Taxpayer B had no other credits or payments. What is his underpayment of tax for each installment?
A. $0
B. $400
C. $1,000
D. $700
D. $700
A penalty is provided in Sec. 6654(a) for the underpayment of estimated taxes. The amount of underpayment of each installment is the excess of the installment due if the estimated tax was 90% of that shown on the return over the amount of the installment timely paid. The estimated tax is due in four installments. Income tax withheld is considered paid equally on each installment date [Sec. 6654(g)(1)]. Therefore, the taxpayer is considered to have made estimated payments of $2,000 in each quarterly installment ($500 + 1/4 of $6,000). The amount of each installment payment should have been $2,700 (1/4 × 90% × $12,000 actual tax). B’s underpayment of tax for each installment is $700 ($2,700 – $2,000).
Which of the following would qualify as a deductible charitable contribution in Year 1 for an individual taxpayer?
A. A $1,000 contribution to a foreign charity on December 31, Year 1.
B. A $200 contribution to the taxpayer’s church charged by credit card on December 31, Year 1.
C. A $450 contribution to a senator’s campaign on December 31, Year 1.
D. A contribution on December 31, Year 1, of $500 worth of clothing to the Salvation Army for which substantiation was not obtained.
B. A $200 contribution to the taxpayer’s church charged by credit card on December 31, Year 1.
A church is a qualified charitable organization. Once the rights of the donation have been transferred to the qualified organization, the charitable contribution is considered complete. A deduction is generally allowed in the year the contribution is paid, including the amount charged to a credit card.
Tana’s divorce decree (finalized in 2018) requires Tana to make the following transfers to her former spouse during the current year:
What is the amount of Tana’s alimony deduction?
A. $9,500
B. $7,000
C. $3,000
D. $11,500
C. $3,000
Alimony paid pursuant to a pre-2019 divorce is gross income to the recipient and deductible by the payor. Alimony is payment in cash, paid pursuant to a written divorce decree, not designated as other than alimony (e.g., child support), terminated at death of recipient, not paid to a member of the same household, and not paid to a spouse with whom the taxpayer is filing a joint return. The $3,000 alimony payment is the only amount included in Tana’s alimony deduction.
Jimet, an unmarried taxpayer, qualified to itemize 2023 deductions. Jimet’s 2023 adjusted gross income was $30,000, and he made a $2,000 cash donation directly to a needy family. In 2023, Jimet also donated stock, valued at $3,000, to his church. Jimet had purchased the stock 4 months earlier for $1,500. What was the maximum amount of the charitable contribution allowable as an itemized deduction on Jimet’s 2023 income tax return?
A. $0
B. $1,500
C. $2,000
D. $5,000
B. $1,500
A deduction is allowed for contributions to a qualified organization. Therefore, no deduction is allowed for the contribution to the family. However, a deduction is available for the donation of stock in the amount of $1,500. Since the stock has not been held long term, it is ordinary income property, and the deduction is equal to the lesser of FMV or AB.
Dale received $1,000 in 2023 for jury duty. In exchange for regular compensation from her employer during the period of jury service, Dale was required to remit the entire $1,000 to her employer in 2023. In Dale’s 2023 income tax return, the $1,000 jury duty fee should be
A. Deducted from gross income in arriving at adjusted gross income.
B. Claimed as an other itemized deduction.
C. Claimed in full as an itemized deduction.
D. Included in taxable income without a corresponding offset against other income.
A. Deducted from gross income in arriving at adjusted gross income.
Pay for jury duty is compensation gross income. Jury duty pay remitted to an employer (in return for being paid during the duty) is deductible for AGI.
Shirley, a single taxpayer, has taxable income of $160,000. She has qualified business income (QBI) of $50,000 and no qualified property. The qualified business paid a total of $15,000 in wages. Under Sec. 199A, what is Shirley’s deductible amount for the qualified business?
A. $10,000
B. $7,500
C. $9,975
D. $15,000
A. $10,000
Because Shirley’s taxable income of $160,000 is less than $182,100, the W-2 wages/qualified property limit does not apply. Therefore, the deductible amount equals 20% of QBI, or $10,000.
Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their 2023 adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A for 2023. The following unreimbursed cash expenditures were among those made by the Burgs during 2023:
What amount should the Burgs deduct for taxes in their itemized deductions on Schedule A for 2023?
A. $5,025
B. $7,650
C. $1,200
D. $3,825
C. $1,200
State income taxes are deductible as an itemized deduction and are reported on Schedule A. Self-employed individuals may deduct half of the self-employment taxes paid as an above-the-line business deduction, which is not on Schedule A.
Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for Year 12. During Year 12, Taylor donated land to a church and made no other contributions. Taylor purchased the land in Year 1 as an investment for $14,000. The land’s fair market value was $25,000 on the day of the donation. What is the maximum amount of charitable contribution that Taylor may deduct as an itemized deduction for the land donation for Year 12?
A. $14,000
B. $0
C. $11,000
D. $25,000
D. $25,000
Charitable deductions at FMV of capital assets to a church are limited to 30% of AGI. However, the FMV ($25,000) of the land is less than 30% ($27,000) of Taylor’s AGI. Therefore, Taylor’s maximum deductible charitable contribution is equal to 100% of the FMV of the donated land.
Which one of the following expenditures qualifies as a deductible medical expense for tax purposes?
A. Vitamins for general health not prescribed by a physician.
B. Health club dues.
C. Transportation to physician’s office for required medical care.
D. Mandatory employment taxes for basic coverage under Medicare A.
C. Transportation to physician’s office for required medical care.
The IRC defines medical care as including transportation for needed medical care.
An individual taxpayer reports the following information:
What amount of investment interest can the taxpayer deduct in the current year?
A. $100
B. $1,000
C. $300
D. $800
A. $100
Investment interest expense is only deductible to the extent of taxable investment income. Taxable investment income does not include tax-exempt municipal bond interest or rental income (which is accounted for separately). Because the $100 from U.S. Treasury bond income is the only taxable investment income, only $100 of the investment interest expense may be deducted in the current year.
For the year ended December 31, 2023, Don Raff earned $1,000 interest at Ridge Savings Bank on a certificate of deposit scheduled to mature in 2025. In January 2024, before filing his 2023 income tax return, Raff incurred a forfeiture penalty of $500 for premature withdrawal of the funds. Raff should treat this $500 forfeiture penalty as a
A. Reduction of interest earned in 2023 so that only $500 of such interest is taxable on Raff’s 2023 return.
B. Penalty not deductible for tax purposes.
C. Deduction from 2024 adjusted gross income, deductible only if Raff itemizes his deductions for 2024.
D. Deduction from gross income in arriving at 2024 adjusted gross income.
D. Deduction from gross income in arriving at 2024 adjusted gross income.
A penalty charged for early withdrawal from a time savings account is a deduction for AGI. The deduction is taken on the return for the tax year the funds are withdrawn (January 2024).
Mr. and Mrs. X plan to file a joint return for 2023. Neither is over 65 or blind, nor do they have any dependents. What is the amount of gross income required before they must file a return?
A. $13,850
B. $30,700
C. $27,700
D. $29,200
C. $27,700
In general, a return must be filed if a taxpayer’s gross income equals or exceeds the standard deduction amount applicable to the taxpayer’s filing status. For a joint return, the standard deduction is $27,700 in 2023, and no additional standard deductions are allowed for taxpayers who are not over age 65 or blind. The couple must file a return if their gross income equals or exceeds $27,700.
Poole, 45 years old and single, is in the 12% tax bracket. He had 2023 adjusted gross income of $52,000. The following information applies to Poole:
Poole wishes to minimize his income tax. What is Poole’s 2023 total income tax rounded to the nearest dollar?
A. $4,208
B. $4,358
C. $3,740
D. $6,020
A. $4,208
Taxable income is defined as adjusted gross income minus the standard deduction (or total itemized deductions, if greater). For a single taxpayer in 2023, the basic standard deduction is $13,850. Qualifying medical expenses in excess of 7.5% of AGI may be deducted as an itemized deduction. Poole’s income tax is computed as follows:
Sol and Julia Crane, both age 48, are married and filed a joint return for 2023. Sol received a distribution of $80,000 from his employer’s pension plan. In addition, Sol and Julia earned interest of $3,000 in 2023 on their joint savings account. Julia is not employed, and the couple had no other income. On January 15, 2023, Sol contributed $3,000 to an IRA for himself and $3,250 to an IRA for his spouse. The allowable IRA deduction in the Cranes’ 2023 joint return is
A. $0
B. $6,250
C. $3,000
D. $3,250
A. $0
The allowable deduction for contributions to an IRA is limited to the lesser of $6,500 or compensation. Compensation represents earned income and does not include distributions from pension plans or interest income. Therefore, since compensation is $0, the allowable IRA deduction is limited to $0. Note that the maximum amount otherwise deductible is $6,500 for Sol and another $6,500 for the contribution for his spouse.
Smith paid the following unreimbursed medical expenses:
What is the total amount of Smith’s tax-deductible medical expenses before the adjusted gross income limitation?
A. $5,500
B. $7,500
C. $17,500
D. $15,500
A. $5,500
Medical expenses are deductible to the extent they exceed 7.5% of AGI. Medical care expenses include amounts paid for the diagnosis, cure, medication, treatment, or prevention of a disease or physical handicap or for the purpose of affecting any structure or function of the body. Therefore, $5,500 ($5,000 dentist and eye doctor fees + $500 contact lenses) qualifies for the deduction before the AGI limitation.
During 2023, Jack and Mary Bronson paid the following taxes:
The Bronsons sold their house on June 30, 2023, under an agreement in which the real estate taxes were not prorated between the buyer and sellers. What amount should the Bronsons deduct as taxes in calculating itemized deductions for 2023?
A. $2,160
B. $3,060
C. $1,800
D. $2,700
A. $2,160
A deduction is allowed for state and local real property taxes and for state and local personal property taxes. Real estate taxes must be apportioned between the buyer and seller on the basis of the number of days the property was held by each in the year of sale, regardless of an agreement not to prorate them. The taxpayers held the property for 6 months of the 9-month period the taxes covered. The amount of the taxes apportioned to the Bronsons is $1,800 [$2,700 × (6 months ÷ 9 months)]. The state motor vehicle tax on the value of the car is a tax on the value of personal property, so the $360 may also be deducted. The taxpayers may deduct a total of $2,160 as taxes in calculating their itemized deductions.
Which of the following comments is not correct regarding the QBI deduction?
A. For the most part, the deduction is 21% of a taxpayer’s QBI from a partnership, S corporation, or sole proprietorship.
B. Taxpayers with taxable income above the lower threshold are subject to limitations based on W-2 wages and/or the unadjusted basis in acquired qualified property.
C. The QBI deduction is available to taxpayers who elect the standard deduction.
D. The W-2 wage limit begins to phase in if the taxpayer’s taxable income exceeds the threshold amount of $182,100 ($364,200 for a joint return).
A. For the most part, the deduction is 21% of a taxpayer’s QBI from a partnership, S corporation, or sole proprietorship.
Generally, the deduction is 20%, not 21%, of a taxpayer’s QBI from a partnership, S corporation, or sole proprietorship. The deduction is intended to reduce the tax rate on QBI to a rate that is closer to the corporate tax rate of 21%.
Hannah, a single taxpayer, owns 50% of a partnership and has taxable income of $105,000. She has qualified business income of $70,000 from the partnership. The partnership paid a total of $27,500 in W-2 wages and does not have any qualified property. Under Sec. 199A, what is Hannah’s deductible amount for the partnership (i.e., before applying overall limitation)?
A. $13,750
B. $35,000
C. $6,875
D. $14,000
D. $14,000
Because Hannah’s taxable income is less than the $182,100 threshold amount, the W-2 wages/qualified property limit does not apply. Thus, Hannah takes a deduction equal to 20% of qualified business income ($70,000), $14,000.
Wilson, CPA, uses a commercial tax software package to prepare clients’ individual income tax returns. Upon reviewing a client’s computer-generated Year 1 itemized deductions, Wilson discovers that the schedule’s deductible investment interest expense is less than the amount paid by the taxpayer and the amount that Wilson entered into the computer. After analyzing the entire tax return, Wilson determines that the computer-generated investment interest expense deduction is correct. Why is the computer-generated investment interest expense deduction correct?
A. I only.
B. Neither I nor II.
C. Both I and II.
D. II only.
A. I only.
The IRC allows the deduction of a limited amount of investment interest as an itemized deduction. The limit is to the extent of net investment income.
Alan Curtis, who is single, had an adjusted gross income of $40,000 in 2023, and he used the standard deduction in his 2023 return. During 2023, Alan contributed $500 cash to a nonprofit charter school. What amount was deductible for contributions in Alan’s 2023 return?
A. $300
B. $0
C. $100
D. $500
B. $0
For the 2023 tax year, there is no charitable contribution deduction for taxpayers who claim the standard deduction.
Which of the following items are included in qualified business income (QBI)?
A. Unreasonable compensation earned from a qualified trade or business.
B. Allocable losses associated with a qualified trade or business.
C. Guaranteed payments paid for services rendered with respect to a qualified trade or business.
D. Short-term capital losses.
B. Allocable losses associated with a qualified trade or business.
QBI includes any items of income, gain, deduction, and loss to the extent that such items are effectively connected with the conduct of a trade or business within the United States and are included or allowed in determining taxable income for the taxable year.
For 2023, Val and Pat White, both age 30, filed a joint return. Val earned $45,000 in wages and was covered by his employer’s qualified pension plan. Pat was unemployed and received $8,000 in alimony payments (pursuant to a pre-2019 divorce) for the first 4 months of the year before remarrying. The couple had no other income. Each contributed $6,500 to an IRA account. The allowable IRA deduction on their 2023 joint tax return is
A. $6,750
B. $6,500
C. $13,000
D. $0
C. $13,000
The maximum amount that any taxpayer under the age of 50 may deduct for a contribution to an IRA is limited to the lesser of $6,500 ($7,500 if qualified for a catch-up contribution) or the taxpayer’s compensation gross income for the year. The limit is applied separately to each spouse who has compensation and makes a contribution to a separate IRA account. Taxable alimony is treated as compensation for this purpose. The deduction is for AGI. If one spouse is covered by an employer’s retirement plan, the deduction is proportionately reduced once earned income exceeds $116,000 in 2023. Thus, Val and Pat may deduct $13,000.
A 33-year-old taxpayer withdrew $30,000 (pretax) from a traditional IRA. The taxpayer has a 28% effective tax rate and a 35% marginal tax rate. What is the total tax liability associated with the withdrawal?
A. $10,000
B. $10,500
C. $13,000
D. $13,500
D. $13,500
IRA distributions made before age 59 1/2 are subject to taxation as well as a 10% penalty. Each amount is calculated based on the distribution. No penalty is applied if the distribution is used for death or disability, medical expenses in excess of the percent limitation, the purchase of a first home (up to $10,000), higher education expenses, terminal illness, or the birth or adoption of a child (up to $5,000). None of these circumstances are applicable; therefore, the tax and penalty apply to the entire $30,000. The applicable tax rate is 35% for a tax liability of $10,500 ($30,000 × 35%), which is added to the penalty of $3,000 ($30,000 × 10%), for a total of $13,500.
With regard to tax recognition of alimony paid in 2023 per a 2018 divorce, which one of the following statements is true?
A. The divorced couple may be members of the same household when payments are made.
B. Payments may be made in cash or property.
C. If the payor spouse pays premiums for insurance on his life as a requirement under the divorce agreement, the premiums are alimony if the payor spouse owns the policy.
D. Payments must terminate at the death of the payee spouse.
D. Payments must terminate at the death of the payee spouse.
Only amounts that are required to be included as gross income of the recipient as alimony are deductible by the payor in calculating AGI. A component of the alimony definition is that the payor has no liability to make the payment for any period after the death of the payee spouse.
Alimony payments must be made in cash.
Which of the following requirements must be met in order for a single individual to qualify for an additional standard deduction?
Must Be Age 65 or Older or Blind = Yes
Must Support Dependent Child or Aged Parent = No
An additional standard deduction is allowed for a taxpayer if, during the year, the taxpayer is age 65 or over or blind. The respective amounts are doubled if the taxpayer is both elderly and blind. Support of a dependent is not a condition for an increase to the standard deduction.
In 2023, Moore, a single taxpayer, had $50,000 in adjusted gross income. During 2023, she contributed $23,000 in cash to her church. She had a $10,000 charitable contribution carryover from her 2022 church contribution. What was the maximum amount of properly substantiated charitable contributions that Moore could claim as an itemized deduction for 2023?
A. $10,000
B. $23,000
C. $30,000
D. $33,000
C. $30,000
Properly substantiated cash contributions by individuals to qualified charities are limited to 60% of the taxpayer’s AGI, or $30,000 in this case. The carryover is deductible this year to the extent that the total deduction does not exceed the 60%-of-AGI limit, or $7,000 ($30,000 – $23,000).
In 2023, the Browns borrowed $20,000, secured by their home, to pay their son’s college tuition. At the time of the loan, the fair market value of their home was $400,000, and it was unencumbered by other debt. The interest on the loan qualifies as
A. Deductible personal interest.
B. Deductible qualified residence interest.
C. Nondeductible interest.
D. Investment interest expense.
C. Nondeductible interest.
Qualified residence interest is deductible. It is interest paid or accrued during the tax year on home acquisition or home equity indebtedness. Home equity indebtedness is all debt other than acquisition debt that is secured by a qualified residence to the extent it does not exceed the fair market value of the residence, reduced by any acquisition indebtedness. However, for tax years 2018-2025, the home equity debt must be used to buy, build, or substantially improve a qualified residence. Therefore, the Browns may not deduct the interest.
In 2023, Welch paid the following expenses:
In 2023, Welch recovered $1,500 of the $2,000 that she paid for physical therapy through insurance reimbursement from a group medical policy paid for by her employer. Disregarding the adjusted gross income percentage threshold, what amount could be claimed on Welch’s 2023 income tax return for medical expenses?
A. $4,000
B. $3,500
C. $1,000
D. $500
C. $1,000
Medical expenses are deductible to the extent they exceed 7.5% of AGI. Medical care expenses include amounts paid for the diagnosis, cure, medication, treatment, or prevention of a disease or physical handicap or for the purpose of affecting any structure or function of the body. The term medical care also includes amounts paid for insurance covering medical care. However, the amount deductible for expenses incurred for medical care is reduced by the amount of reimbursements. The cost of insurance against loss of earnings is not deductible. Therefore, deductible medical expenses are $1,000 [($2,000 – $1,500 reimbursement) + $500].
Tom and Sally White, married and filing joint income tax returns, derive their entire income from the operation of their retail stationery shop. Their 2023 adjusted gross income was $100,000. The Whites itemized their deductions on Schedule A for 2023. The following unreimbursed cash expenditures were among those made by the Whites during 2023:
Without regard to the adjusted gross income percentage threshold, what amount may the Whites claim in their 2023 return as qualifying medical expenses?
A. $600
B. $0
C. $8,000
D. $8,600
D. $8,600
The repair and maintenance of the wheelchair for a handicapped, dependent child is a qualifying medical expense. In addition, the expenses for tuition, meals, and lodging at a residence primarily for medical care for the child are qualifying medical expenses because the meals and lodging are necessary incidents to the medical care.
During 2023, William Clark was assessed a deficiency on his 2022 federal income tax return. As a result of this assessment, he was required to pay $1,120, determined as follows:
What portion of the $1,120 qualifies as itemized deductions for 2023?
A. $70
B. $914
C. $14
D. $0
D. $0
Federal income taxes and penalties are not deductible. The $70 of interest paid on the amounts owed to the IRS is considered personal interest and is not deductible. Therefore, none of the amount is deductible in 2023.
Matthews was a cash-basis taxpayer whose records showed the following:
What total amount was Matthews entitled to claim for taxes on her 2023 Schedule A of Form 1040?
A. $2,200
B. $1,500
C. $4,700
D. $1,900
D. $1,900
For a cash-basis, calendar-year taxpayer, state and local income taxes paid or withheld during the year are fully deductible as itemized deductions. Federal income taxes are not deductible. State and local income taxes paid in the next calendar year are deductible in the next year.
Kirk Bennett, a cash-basis taxpayer, is a self-employed accountant. During 2023, he established a qualified defined contribution retirement plan of which he will be the only beneficiary. In examining his records for 2023, the following information is available:
Kirk deducted $5,049 of self-employment tax on his tax return. What is the maximum amount that Kirk can deduct as a contribution to his qualified retirement plan for 2023?
A. $16,500
B. $66,000
C. $12,190
D. $13,200
C. $12,190
Under IRC, the maximum amount that can be deducted for a contribution on behalf of a self-employed individual is the lesser of $66,000 or 25% of the self-employed individual’s earned income from the trade or business. Kirk’s only income which qualifies as earned income is $66,000. The employer portion of payroll tax rate times the net earnings from self-employment reduces the earned income amount. The income is further reduced by the contribution deduction based on a 20% rate used for sole owners.
The maximum deduction allowed is calculated as follows:
Phil and Joan Crawley made the following payments during 2023:
The Crawleys had net investment income of $3,000 for the year. What is the maximum amount that the Crawleys can deduct as interest expense in calculating itemized deductions for 2023?
A. $7,100
B. $3,600
C. $6,600
D. $7,600
C. $6,600
The interest on U.S. savings bonds is taxable, and interest is deductible on the loan to purchase them. Investment interest expense is deductible only to the extent of net investment income. The interest on the credit card is personal interest, none of which is deductible. The home mortgage interest is deductible assuming it is qualified residence interest. The points on a conventional mortgage loan are deductible even though the points represent prepaid interest. The Crawleys’ maximum interest deduction is
Jackson owns two residences. The second residence, which has never been used for rental purposes, is the only residence that is subject to a mortgage. The following expenses were incurred for the second residence in the current year:
For regular income tax purposes, what is the maximum amount allowable as a deduction for Jackson’s second residence in the current year?
A. $11,000 in determining adjusted gross income.
B. $5,000 as an itemized deduction.
C. $12,200 as an itemized deduction.
D. $6,200 in determining adjusted gross income.
B. $5,000 as an itemized deduction.
Mortgage interest (qualified residence interest) is deductible in full from adjusted gross income (AGI) as an itemized deduction. A qualified residence is the principal residence of the taxpayer and any one other residence owned by the taxpayer. Insurance is allowable as a deduction only if it is a business expense, as long as it is ordinary and necessary. Here, however, the expense is for a second residence. The utilities are not deductible as well. Therefore, only the $5,000 mortgage interest is allowed as an itemized deduction.
Mark established a Roth IRA at age 40 and contributed $6,500 per year to the account for 20 years. He met the income limits for contributing to the account and was therefore eligible to hold a Roth IRA. Mark now wishes to withdraw the $200,000 of accumulated funds from his Roth IRA. What is the amount of the distribution that is included in Mark’s gross income?
A. $130,000
B. $200,000
C. $70,000
D. $0
D. $0
Qualified distributions from a Roth IRA are not included in the taxpayer’s gross income. To be a qualified distribution, the distribution must satisfy a 5-year holding period and must be (1) made on or after the date an individual attains age 59 1/2; (2) made to a beneficiary (or the individual’s estate) on or after the individual’s death; (3) attributed to the individual being disabled; or (4) used to pay ($10,000) qualified first-time homebuyer expenses. Since Mark has held the funds over 5 years and is over age 59 1/2, he may withdraw the funds tax-free.
In the current year, Drake, a disabled taxpayer, made the following home improvements:
For regular income tax purposes and without regard to the adjusted gross income percentage threshold limitation, what maximum amount would be allowable as a medical expense deduction in the current year?
A. $110,000
B. $75,000
C. $85,000
D. $10,000
C. $85,000
Amounts paid for qualified medical expenses that exceed 7.5% of AGI may be deducted. The deduction must be paid during the taxable year for the taxpayer, the taxpayer’s spouse, or a dependent and must not be compensated for by insurance or otherwise during the taxable year. Deductible medical expenses are amounts paid for (1) diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body; (2) transportation primarily for and essential to medical care; (3) medical insurance; and (4) qualified long-term care premiums and services. Expenditures for new building construction or for permanent improvements to existing structures may also be deductible in part. The excess of the cost of a permanent improvement over the increase in value of the property is a deductible medical expense. Therefore, $75,000 ($100,000 – $25,000 increase in FMV) is deductible. Construction of handicap entrance/exit ramps, installation of elevators, or widening of doorways also qualify.
Ernesto was an employee of Med-Tech Corporation for all of 2023. He earned $162,200 in salary. What is the amount of FICA tax paid by Med-Tech Corporation with respect to Ernesto?
A. $9,932
B. $12,284
C. $12,408
D. $12,255
B. $12,284
Only the OASDI (old-age, survivors, and disability insurance) component of the FICA tax has a wage ceiling. The OASDI rate is 6.20% for employers up to a maximum of $160,200 (in 2023). For the Medicare component, which has no wage ceiling, the rate is 1.45% for employers and employees. The employment taxes paid by Med-Tech with respect to Ernesto in 2023 are as follows:
Jefferson’s investment income consisted of $2,000 in interest from a U.S. Treasury bond and $1,000 interest from a municipal bond. Jefferson also paid $4,000 in investment interest expense. Assuming that Jefferson itemizes, what amount can Jefferson deduct for investment interest expense?
A. $1,000
B. $3,000
C. $4,000
D. $2,000
D. $2,000
Investment interest expense is only deductible to the extent of net investment income. Taxable investment income does not include tax-exempt municipal bond interest. Because the $2,000 U.S. Treasury bond interest income is the only taxable investment income, only $2,000 of the investment interest expense may be deducted in the current year.
Jim and Nancy Walton, both age 55, had adjusted gross income of $25,000 in 2023. During the year, they paid the following medical-related expenses:
How much may the Waltons use as medical expenses in calculating itemized deductions for 2023?
A. $1,410
B. $465
C. $0
D. $735
C. $0
The cost of the health club membership is not included in the computation of the medical expense deduction since the cost is incurred for the purpose of improving the taxpayers’ general health, not for curing a specific ailment or disease. Only prescription drugs and insulin are deductible, so the over-the-counter medicines are not included.
Mr. Z, the sole proprietor of Z’s Wholesale, transferred an automobile used in his business to Mr. Y, an employee of Z’s Wholesale, for business related services rendered during the current year. Z’s adjusted basis in the automobile was $6,000 and the fair market value was $8,000 at the time of the transfer. Z had purchased the automobile 2 years ago for $11,000. During the current year, Z paid $80,000 in employee salaries, not including the automobile given to Mr. Y. Z is a cash-basis taxpayer. What is his total salary and wage deduction for the current year?
A. $80,000
B. $86,000
C. $88,000
D. $48,000
C. $88,000
Section 162(a)(1) allows a deduction for reasonable compensation for personal services actually rendered. Section 83(a) allows the deduction to an employer equal to the fair market value of property given to the employee when the property is transferable or is not subject to a substantial risk of forfeiture. Therefore, Mr. Z’s salary and wage deduction is $88,000 ($80,000 + $8,000 FMV of car).
Which of the following is treated as personal interest of Individual A?
A. Interest incurred to purchase bonds as an investment.
B. Interest incurred on an ordinary bank loan if the funds are used to provide medical care for a dependent of A.
C. Interest incurred by a limited partnership in which A is a limited partner.
D. Interest incurred on refinancing A’s home if the funds are used to add on a garage.
B. Interest incurred on an ordinary bank loan if the funds are used to provide medical care for a dependent of A.
Personal interest is not deductible and is any interest other than qualified residence interest, investment interest, interest taken into account in computing income or loss from a passive activity, interest in connection with a business, and interest during certain extensions of time to pay the estate tax. Interest on an ordinary bank loan incurred for medical care is personal interest.
Carroll, a 40 year old unmarried taxpayer with an adjusted gross income of $75,000, incurred and paid the following unreimbursed medical expenses for the current year:
Carroll had no medical insurance. For regular income tax purposes, what was Carroll’s maximum allowable medical expense deduction, after the applicable threshold limitation, for the year?
A. $0
B. $20,000
C. $19,375
D. $25,000
C. $19,375
Amounts paid for qualified medical expenses that exceed 7.5% of AGI may be deducted for regular income tax purposes if unreimbursed. The doctor bills resulting from the serious fall are deductible to the extent they exceed 7.5% of AGI. In addition, the cosmetic surgery to correct the congenital deformity is also deductible to the extent it exceeds the threshold. The cost of cosmetic surgery is generally not deductible unless it is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease. Therefore, Carroll’s qualifying medical expenses are $25,000. The deductible expenses are those in excess of $5,625 ($75,000 × 7.5%) or $19,375.
A 33-year-old taxpayer withdrew $30,000 (pretax) from a traditional IRA. The taxpayer has a 28% effective tax rate and a 35% marginal tax rate. What is the total tax liability associated with the withdrawal?
A. $13,000
B. $10,000
C. $13,500
D. $10,500
C. $13,500
IRA distributions made before age 59 1/2 are subject to taxation as well as a 10% penalty. Each amount is calculated based on the distribution. No penalty is applied if the distribution is used for death or disability, medical expenses in excess of the percent limitation, the purchase of a first home (up to $10,000), higher education expenses, terminal illness, or the birth or adoption of a child (up to $5,000). None of these circumstances are applicable; therefore, the tax and penalty apply to the entire $30,000. The applicable tax rate is 35% for a tax liability of $10,500 ($30,000 × 35%), which is added to the penalty of $3,000 ($30,000 × 10%), for a total of $13,500.
Anna is a 22-year-old student with earned income of $11,300 from a summer job and dividend income of $1,250. Her parents claim her as a dependent on their tax return. What is Anna’s basic standard deduction amount?
A. $13,850
B. $11,700
C. $12,550
D. $1,250
B. $11,700
The basic standard deduction amount of a student under age 24 who is claimed as a dependent on another individual’s income tax return is limited to the greater of either $1,250 or the dependent’s earned income for the year plus $400 up to the otherwise applicable basic standard deduction amount. Earned income does not include either dividends or capital gains from the sale of stock. Since Anna’s earned income of $11,300 exceeds $1,250 and is less than the otherwise applicable standard deduction amount of $13,850, Anna’s applicable standard deduction is $11,700 ($11,300 earned income + $400).
Walters & Whitlow, CPAs, failed to discover a fraudulent scheme used by Davis Corporation’s head cashier to embezzle corporate funds during the past 5 years. Walters & Whitlow would have discovered the embezzlements promptly if they had not been negligent in their annual preparation of tax returns. The information provided by Davis for this purpose was incorrect on its face, but the CPAs made no inquiries. Under the circumstances, Walters & Whitlow will normally not be liable in a common law action for
A. Losses occurring prior to the time the fraudulent scheme should have been detected that could have been recovered had it been so detected.
B. Punitive damages.
C. The fees charged for the years in question.
D. Losses occurring after the time the fraudulent scheme should have been detected.
B. Punitive damages.
If the CPAs have merely been negligent, they will not be liable for punitive damages. Punitive damages are awarded only when the circumstances are extreme or aggravated.
One of a CPA’s major concerns regarding contractual questions resulting from the preparation of a client’s tax returns is
A. The proper court in which to initiate a lawsuit.
B. The question of who has the burden of proof.
C. The admissibility of evidence in court.
D. Whether the parties involved have a clear understanding of the procedures and services to be performed.
D. Whether the parties involved have a clear understanding of the procedures and services to be performed.
The basis of a CPA’s duty (performance) to a client is their contract. Thus, the parties should have a clear understanding of the procedures and services to be performed. The contract may be oral or written. Its terms are commonly included in an engagement letter sent by the CPA to the client and agreed to by the client.
Mr. Todd, who is 43 years old, has lived apart from his wife since May 2023. For 2023, his two children, whom he can claim as dependents, lived with him the entire year, and he paid the entire cost of maintaining the household. Assuming that Mr. Todd cannot qualify to file a joint return for 2023, he must, nevertheless, file a return if his gross income is at least
A. $20,800
B. $27,700
C. $1,850
D. $13,850
A. $20,800
Generally, a taxpayer must file a tax return if the taxpayer’s gross income equals or exceeds his or her standard deduction [Sec. 6012(a)]. Standard deductions in 2023 are $27,700 for married filing jointly, $20,800 for heads of household, and $13,850 for single individuals (Publication 501). A taxpayer who has two children and files as a head of household must file a return if his or her gross income equals or exceeds $20,800.
Jim and Carolyn, who are married, establish a Coverdell Education Savings Account to pay for the future college expenses of their infant son. They file jointly and have a modified AGI of $100,000. What is the maximum contribution they can make to a CESA in the current year?
A. $3,000
B. $4,000
C. $2,000
D. $8,000
C. $2,000
Joint filers with modified AGI below $190,000 may contribute up to $2,000 per beneficiary (child) per year. The amount a taxpayer is able to contribute to a CESA is limited if modified AGI exceeds certain threshold amounts. In 2023, the limit is phased out for joint filers with modified AGI at or greater than $190,000 and less than $220,000, and for single filers with modified AGI at or greater than $95,000 and less than $110,000.
Paul and Lois Lee, both age 50, are married and filed a joint return for 2023. Their 2023 adjusted gross income was $138,000, including Paul’s $133,000 salary. Lois had no income of her own. Neither spouse was covered by an employer-sponsored pension plan. What amount could the Lees contribute to IRAs for 2023 to take advantage of their maximum allowable IRA deduction in their 2023 return?
A. $15,000
B. $0
C. $14,000
D. $6,500
A. $15,000
The maximum amount that any taxpayer may deduct for a contribution to an IRA is limited to the lesser of $6,500 or the taxpayer’s compensation gross income for the year. If the taxpayer is age 50 or older, a $1,000 catch-up contribution is allowed in addition to the $6,500 per year IRA contribution limit. If one spouse is eligible to make deductible IRA contributions, that spouse may contribute up to $15,000 if a joint return is filed and both taxpayers are age 50 or over. Furthermore, the Lees may deduct their IRA contribution for AGI.
On January 2, 2018, the Philips paid $50,000 cash and obtained a $200,000 mortgage to purchase a home. In 2023, they borrowed $15,000 secured by their home and used the cash to add a new room to their residence. That same year, they took out a $5,000 auto loan.
The following pertains to interest paid in 2023:
For 2023, how much interest is deductible prior to any itemized deduction limitations?
A. $17,500
B. $18,500
C. $17,000
D. $19,000
B. $18,500
The $500 of personal interest paid on the auto loan is not deductible. Qualified residence interest is deductible and includes home acquisition or equity indebtedness used for buying, building, or improving a qualified residence secured by a qualified residence to the extent it does not exceed the fair market value of the residence. Thus, the interest on the room construction loan is deductible. This is based on the assumption that the fair market value of the home is at least $215,000.
Tyler and Ross are married, have taxable income of $470,000, and own a partnership together. They have a qualified business income (QBI) of $334,600 from the partnership and do not have any qualified property. The partnership pays a total of $127,500 in W-2 wages. Under Sec. 199A, what is Tyler and Ross’s QBID allowed for the partnership?
A. $33,460
B. $66,920
C. $63,750
D. $94,000
C. $63,750
Because Tyler and Ross do not have any qualified property, the QBI allowed amount for this qualified trade or business is limited to the lesser of 20% of the taxpayer’s QBI with respect to the qualified trade or business or 50% of the W-2 wages with respect to the qualified trade or business. Because their taxable income of $470,000 is greater than $464,200, the W-2 wages/qualified property limit needs to be considered. Thus, the partnership’s allowed QBI is limited to the lesser of 20% of QBI ($66,920) or 50% of W-2 wages with respect to the partnership ($63,750). The QBI allowed from the partnership is only $63,750. In addition to being the allowed QBI from the partnership, since there is no indication of other qualified businesses or net capital gains, the allowed QBI from the partnership is also the QBID after considering the overall limit (i.e., 20% × Taxable income – Net capital gains).
An individual taxpayer received a Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc. from a small partnership, in which the taxpayer owns a 50% interest. The qualified business income amount attributable to the taxpayer is $70,000. That is the taxpayer’s only qualified business income, and the taxpayer has no capital gains or other investments. Ignoring the W-2 limitation, what is the net amount of increase to taxable income from the partnership income?
A. $56,000
B. $70,000
C. $0
D. $14,000
A. $56,000
The QBID is available to noncorporate taxpayers when the income is from a flow-through entity, such as a sole proprietorship, partnership, or S corporation. The deduction is generally equal to 20% of qualified business income. Thus, the net amount of increase to the taxpayer’s taxable income is $56,000 [$70,000 – (20% × $70,000)].
Sol and Julia Crane, both age 48, are married and filed a joint return for 2023. Sol received a distribution of $80,000 from his employer’s pension plan. In addition, Sol and Julia earned interest of $3,000 in 2023 on their joint savings account. Julia is not employed, and the couple had no other income. On January 15, 2023, Sol contributed $3,000 to an IRA for himself and $3,250 to an IRA for his spouse. The allowable IRA deduction in the Cranes’ 2023 joint return is
A. $3,250
B. $3,000
C. $6,250
D. $0
D. $0
The allowable deduction for contributions to an IRA is limited to the lesser of $6,500 or compensation. Compensation represents earned income and does not include distributions from pension plans or interest income. Therefore, since compensation is $0, the allowable IRA deduction is limited to $0. Note that the maximum amount otherwise deductible is $6,500 for Sol and another $6,500 for the contribution for his spouse.
Mr. and Mrs. Jones, both over age 65, elect joint return status. They must file a return for 2023 if their combined gross income equals or exceeds
A. $27,700
B. $1
C. $29,200
D. $30,700
D. $30,700
In general, a return must be filed if the taxpayer’s gross income equals or exceeds his or her standard deduction [Sec. 6012(a)]. For a joint return, the basic standard deduction is $27,700 in 2023. In addition, Mr. and Mrs. Jones are allowed two additional standard deductions of $1,500 each for being age 65 or over [Sec. 63(f)]. The couple must file a return if their gross income equals or exceeds $30,700 ($27,700 + $1,500 + $1,500).
Emil Gow owns a two-family house that has two identical apartments. Gow lives in one apartment and rents out the other. In 2023, the rental apartment was fully occupied, and Gow received $7,200 in rent. During the year ended December 31, 2023, Gow paid the following:
In 2023, depreciation for the entire house was determined to be $5,000. What amount should Gow include in his adjusted gross income for 2023?
A. $100
B. $800
C. $400
D. $2,900
C. $400
Ordinary and necessary expenses paid or incurred during the tax year for the production of income are deductible for AGI. This includes deduction for depreciation on property held for production of income. Personal expenses are not deductible as rental expense. Insurance, taxes, and depreciation must be allocated between rental and personal expense.
The taxes attributable to the apartment Emil occupies are deductible as an itemized deduction.
Fred Harvey, a cash-basis taxpayer, elected to itemize his deductions on his 2022 income tax return. Harvey plans to itemize again in 2023, and the following information relating to his state income taxes is available:
The above information should be reported by Harvey in his 2023 tax return as
A. State and local income taxes of $2,700.
B. State and local income taxes of $2,500.
C. State and local income taxes of $3,200.
D. State and local income taxes of $3,200 and gross income from state and local income tax refund of $500.
D. State and local income taxes of $3,200 and gross income from state and local income tax refund of $500.
State and local income taxes are deductible. A cash-basis taxpayer is entitled to deduct state income taxes withheld by his or her employer in the year such amounts are withheld. Assessments of state income taxes are deductible in the year of payment by a cash-basis taxpayer even if the payments relate to prior years. A refund of a prior year’s tax payment must be included in the taxpayer’s gross income in the year received if the taxpayer deducted the taxes in an earlier year. In 2023, Harvey should deduct the taxes withheld of $2,500 and the assessment paid of $700. He should include the $500 refund he received in gross income.
Ruth Lewis has adjusted gross income of $100,000 for 2023 and itemizes her deductions. On September 1, 2023, she made a contribution to a private nonoperating foundation (not a 50% charity) of stock held for investment for 2 years that cost $25,000 and had a fair market value of $70,000. The foundation sold the stock for $70,000 on the same date. Assume that Lewis made no other contributions during 2023. How much should Lewis claim as a charitable contribution deduction for 2023?
A. $30,000
B. $20,000
C. $50,000
D. $25,000
B. $20,000
Generally, contributions to private operating foundations are limited to 30% of the taxpayer’s AGI. But contributions of long-term capital gain property to private nonoperating foundations are limited to 20% of the taxpayer’s AGI. Lewis’s charitable contribution deduction should be limited to $20,000 ($100,000 × 20%). The total charitable contribution is equal to $25,000 (lower of FMV or AB) because it is being made to a private nonoperating foundation. The amount of $20,000 can be deducted in 2023 because of the 20% limit. The remaining $5,000 can be carried forward for up to 5 years.
Spencer, who itemizes deductions, had adjusted gross income of $60,000 in 2023. The following additional information is available for 2023:
What is the maximum amount Spencer can claim as a deduction for charitable contributions in 2023?
A. $5,000
B. $4,400
C. $5,200
D. $5,400
A. $5,000
The cash contribution to the church is fully deductible. The clothing donation is $600. The amount of the contribution with respect to the art object is the excess of what was given over what was received, or $400.
Baker, an unmarried individual, sold a personal residence, which has an adjusted basis of $70,000, for $165,000. Baker owned and lived in the residence for 7 years. Selling expenses were $10,000. Four weeks prior to the sale, Baker paid a handyman $1,000 to paint and fix-up the residence. What is the amount of Baker’s recognized gain?
A. $85,000
B. $95,000
C. $0
D. $84,000
C. $0
While the correct amount of realized gain is $85,000, Sec. 121 excludes the gain on the sale of a principal residence, up to $250,000 per taxpayer, subject to certain rules and limitations. As none of the facts would lead us to reduce this exclusion, no gain is recognized on the disposition of the home.
Charles Wolfe purchased the following long-term investments at par during 2023:
Wolfe’s net investment income for the year was $10,000. What amount can Wolfe utilize as interest expense in calculating itemized deductions for 2023?
A. $4,700
B. $7,100
C. $4,200
D. $6,600
C. $4,200
The IRC allows a deduction for certain interest paid or accrued during the year on indebtednesses. Investment interest is deductible up to the taxpayer’s net investment income for the year. Personal or consumer interest is disallowed. Qualified residence interest is deductible. The IRC disallows a deduction for interest on debt incurred to purchase or carry tax-exempt securities. Since Wolfe used two-thirds of the loan from Union National Bank to purchase tax-exempt securities, two-thirds of the interest on this loan is disallowed as a deduction. Wolfe may deduct
Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their 2023 adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A for 2023. The following unreimbursed cash expenditures were among those made by the Burgs during 2023:
Without regard to the adjusted gross income percentage threshold, what amount may the Burgs claim in their 2023 return as qualifying medical expenses?
A. $0
B. $300
C. $4,000
D. $4,300
D. $4,300
Medical care expenses of a taxpayer, a spouse, or a dependent are deductible only to the extent they exceed 7.5% of AGI. Supplies purchased to alleviate a physical defect or provide relief from an ailment qualify as medical expense. Capital expenditures for qualified medical costs are also deductible. If so, the cost of repair and maintenance is also deductible. If the principal reason an individual is in an institution other than a hospital, such as a special school for the handicapped, is the need for, and availability of, the medical care furnished by the institution, the full costs of meals, lodging, and other services necessary for furnishing the medical care are all qualified medical expenditures.
In 2023, Smith paid $6,000 to the tax collector of Big City for realty taxes on a two-family house owned by Smith’s mother. Of this amount, $2,800 covered back taxes for 2022, and $3,200 covered 2023 taxes. Smith resides on the second floor of the house, and his mother resides on the first floor. In Smith’s itemized deductions on his 2023 return, what amount was Smith entitled to claim for realty taxes?
A. $0
B. $6,000
C. $3,000
D. $3,200
A. $0
Taxes may be deducted only by the person on whom they are legally levied or by someone with a legally recognized interest in the property. Smith does not own the house, therefore none of the taxes paid can be deducted on his tax return and the payment is treated as a gift to Smith’s mother. Smith’s mother is entitled to the deduction only if she pays the taxes.
Which of the following taxpayers must file a return for 2023?
A. Married taxpayers filing jointly who have income of $22,500 for the year and one child who is a dependent.
B. A single taxpayer, age 67, with interest and dividend income of $13,850.
C. A single taxpayer, claimed as a dependent by his parents, who earns $2,000 from a part-time job and has no unearned income.
D. A taxpayer who files as a head of household with one dependent child and who earns $21,800.
D. A taxpayer who files as a head of household with one dependent child and who earns $21,800.
Generally, a taxpayer must file a tax return if the taxpayer’s gross income equals or exceeds his or her standard deduction [Sec. 6012(a)]. Standard deductions in 2023 are $27,700 for married filing jointly, $20,800 for heads of household, and $13,850 for unmarried individuals. A taxpayer who files as a head of household must file a return if his or her gross income equals or exceeds $20,800.
Which of the following statements is correct regarding the deductibility of an individual’s medical expenses?
A. A medical expense paid by credit card is deductible in the year the credit card bill is paid.
B. Medical expenses are only deductible to the extent they exceed 10% of AGI.
C. A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years.
D. A medical expense deduction is not allowed for Medicare insurance premiums.
C. A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years.
To qualify for deduction, a medical expense must be paid, not necessarily incurred, during the taxable year for the taxpayer, the taxpayer’s spouse, or a dependent and must not be compensated for by insurance or otherwise during the taxable year.
In 2023, the Browns borrowed $20,000, secured by their home, to pay their son’s college tuition. At the time of the loan, the fair market value of their home was $400,000, and it was unencumbered by other debt. The interest on the loan qualifies as
A. Investment interest expense.
B. Deductible qualified residence interest.
C. Deductible personal interest.
D. Nondeductible interest.
D. Nondeductible interest.
Qualified residence interest is deductible. It is interest paid or accrued during the tax year on home acquisition or home equity indebtedness. Home equity indebtedness is all debt other than acquisition debt that is secured by a qualified residence to the extent it does not exceed the fair market value of the residence, reduced by any acquisition indebtedness. However, for tax years 2018-2025, the home equity debt must be used to buy, build, or substantially improve a qualified residence. Therefore, the Browns may not deduct the interest.
In Year 1, Farb, a cash-basis individual taxpayer, received an $8,000 invoice for personal property taxes. Believing the amount to be overstated by $5,000, Farb paid the invoiced amount under protest and immediately started legal action to recover the overstatement. In November Year 2, the matter was resolved in Farb’s favor, and he received a $5,000 refund. Farb itemizes deductions on his tax returns. Which of the following statements is true regarding the deductibility of the property taxes?
A. Farb should deduct $3,000 in his Year 2 income tax return.
B. Farb should deduct $3,000 in his Year 1 income tax return.
C. Farb should not deduct any amount in his Year 1 income tax return when originally filed, and he should file an amended Year 1 income tax return in Year 2.
D. Farb should deduct $8,000 in his Year 1 income tax return and report the $5,000 refund as income in his Year 2 income tax return.
D. Farb should deduct $8,000 in his Year 1 income tax return and report the $5,000 refund as income in his Year 2 income tax return.
Property taxes are deductible when paid by a cash-basis taxpayer. Because Farb itemizes deductions, the taxes deducted reduce Year 1 tax liability. A taxpayer may exclude recovered items only to the extent that deduction of the item in a prior year did not produce a tax benefit. Thus, Farb should report as income that portion of the $5,000 recovered, the deduction of which resulted in lower Year 1 tax liability.
Ms. Maple, a single woman age 65, retired in 2023. Prior to her retirement, she received a $6,000 bonus plus $7,700 in wages. After her retirement, she received $9,000 in Social Security benefits. Which of the following is true?
A. Ms. Maple does not have to file a 2023 income tax return.
B. Ms. Maple has to file a 2023 income tax return but may exclude the $6,000 bonus.
C. Ms. Maple has to file a 2023 income tax return but may exclude the $9,000 in Social Security benefits from income.
D. Ms. Maple has to file a 2023 income tax return.
A. Ms. Maple does not have to file a 2023 income tax return.
In general, a taxpayer does not have to file a return if his or her gross income is less than his or her standard deduction [Publication 501 and Sec. 6012(a)]. For single individuals who are 65 or over, the standard deduction increases by $1,850. Therefore, the filing threshold will be $15,700 ($13,850 regular standard deduction + $1,850 additional standard deduction for being 65). Ms. Maple’s income does not qualify her Social Security benefits for gross income inclusion in determining her filing requirement.
