Module 1 Income Tax Fundamentals and Calculations Flashcards
If Maria and Herman file married filing jointly, with gross income of $330,000 and taxable income of $303,000, what is their marginal tax rate? Refer to the 2023 tax table provided in your course references.
A)
18.45%
B)
32.00%
C)
19.97%
D)
24.00%
The marginal tax rate is 24%.
LO 1.4.2
Ron Bates is a single taxpayer with no dependents. His wage income is $156,850, and he has allowable itemized deductions of $14,000. Ron received $1,000 in interest income from a qualified private activity municipal bond and made an IRA contribution of $6,500. He also received workers’ compensation of $4,000 during the year. Ron is not an active participant in a company-maintained retirement plan.
Using the tax rate schedule provided in your course, what is the amount of Ron’s tax liability for 2023 (round your answer to the nearest dollar)?
A)
$27,259
B)
$26,124
C)
$28,339
D)
$29,299
The total income of $156,850 is reduced by the deductible IRA contribution of $6,500 to give an AGI of $150,350. The IRA is deductible because Ron is not an active participant in a company-maintained retirement plan. The AGI is reduced by the greater of the allowable itemized deductions of $14,000 or the standard deduction of $13,850 in 2023. This leaves a taxable income of $136,350. The interest income from a qualified private activity municipal bond is excluded from income; however, remember that it is generally a preference item for purposes of the AMT. Also, the workers’ compensation received is tax exempt.
Taxable income $136,350
Less (from tax rate schedule) (95,375 )
Amount over $95,375 $40,975
Times (marginal tax bracket) 24%
Tax on amount over $95,375 $9,834
Plus (from tax rate schedule) 16,290
Total tax $26,124
LO 1.5.1
The effective tax rate is obtained by dividing amount of tax by
A)
the amount of tax and total income.
B)
the marginal tax rate uses.
C)
the amount of tax and taxable income.
D)
the taxable income.
The marginal tax rate is found by finding the tax bracket that contains the taxable income amount; it is the amount at which all subsequent taxable amounts will be taxed (until entering the next tax bracket). The effective tax rate is calculated by dividing the calculated tax by taxable income.
LO 1.4.2
To qualify as a head of household, which of the following requirements must generally be met?
The taxpayer must usually be unmarried at the end of the taxable year.
The taxpayer must maintain her home as the principal residence of at least one qualified dependent, with the possible exception of dependent parents, for at least half of the taxable year.
The taxpayer must be a surviving spouse.
The taxpayer must be married at the end of the taxable year.
A)
II and III
B)
I and II
C)
I, II, and III
D)
II, III, and IV
Statements I and II are correct. Caution: Married persons living apart may be able to qualify as heads of household, and dependent parents may be maintained in a domicile other than the taxpayer’s residence. If the dependent is a parent and the taxpayer is entitled to list the parent as a dependent, a nursing home will qualify as the principal residence.
LO 1.1.1
Amanda Elder, a single taxpayer, has the following itemized deductions:
Home mortgage interest (first mortgage) $10,925
State income taxes $17,000
Property taxes $6,000
Charitable contributions $3,000
Gambling losses $3,055
Amanda’s AGI for 2023 is $376,800. Included in the AGI are gambling winnings of $1,500. What is the amount of allowable itemized deductions?
A)
$36,925
B)
$39,980
C)
$38,425
D)
$25,425
d
Itemized:
Mortgage Interest
SALT (State and local taxes, includes prop taxes, up to $10k)
Charitable contributions (learn specifics later)
Gambling losses (to extent of gambling winnings)
If Rachel files single with gross income of $90,000 and taxable income of $76,000, what is her effective tax rate? Refer to the 2023 tax table provided in your course references.
A)
24.00%
B)
15.83%
C)
22.00%
D)
15.41%
b
tax liability / taxable income
22%($76,000 ‒ $44,725) + $5,147 = $6,881 + $5,147 = $12,028 ÷ $76,000 = 15.83%.
LO 1.4.2
Jerry and Margaret Price, both 58 years old, are married and file a joint income tax return. They provide the total support for two dependent grandchildren (full-time students, ages 14 and 16), who have lived with them since their parents (Jerry and Margaret’s daughter and son-in-law) were killed in an automobile accident. In the current year, Jerry earned $140,000, and Margaret earned $80,000. The Prices will contribute a total of $15,000 to their IRAs and anticipate total itemized deductions of $15,000. Neither Jerry nor Margaret is covered by a company pension plan.
Refer to the 2023 tax table provided in your course references to calculate the tax due.
Based on the information given, what will be the Prices’ total tax due for 2023?
A)
$25,415
B)
$25,621
C)
$26,861
D)
$30,981
The salaries of $220,000 are reduced by the IRA deduction of $15,000, and the standard deduction of $27,700 (greater than the itemized deductions of $15,000). The tax liability should be calculated on a taxable income of $177,300. Note: The IRAs are fully deductible because neither spouse is covered by a company pension plan. They may each contribute $6,500 plus the $1,000 catch-up. There is a $4,000 child tax credit ($2,000 × 2) because both children are under age 17 at the close of the tax year, and the AGI is under $400,000.
Salaries $220,000
Less: IRA deductions (15,000)
AGI $205,000
Less: standard deduction (27,700)
Taxable income $177,300
Less (from tax rate schedule) (89,450)
Amount over $89,450 $87,850
Times (marginal tax bracket) 22%
Tax on amount over $89,450 $19,327
Plus (from tax rate schedule) 10,294
Total tax $29,621
Less: child tax credit 4,000
Income tax $25,621
LO 1.4.1
Which one of the following is not a social objective of the federal taxation system?
A)
Revenue raising
B)
Relief for certain child care expenses
C)
Preservation of our nation’s historical buildings
D)
Support of charitable organizations
a
Revenue raising is one of the three main purposes of the federal taxing system; it is not a social objective. Support of charitable organizations, preservation of our nation’s historical buildings, and relief for certain child care expenses (the child care credit) are social objectives of the federal taxation system.
LO 1.5.1
After arriving at adjusted gross income (AGI), which of the following is(are) deductible to arrive at taxable income?
Additional standard deduction
Standard deduction
Itemized deductions if greater than the combined standard deductions
A)
III only
B)
I, II, and III
C)
I only
D)
II and III
Statements I, II, and III are all deductible from AGI to arrive at taxable income.
LO 1.4.1
Which of the following is NOT a step in the tax calculation process?
A)
Reduce tax owed by allowable credits.
B)
Add in the greater of itemized deductions or the standard deduction.
C)
Subtract adjustments to income from total income to get adjusted gross income.
D)
From the final calculation of federal taxable income, find the federal tax owed or refundable.
b
The following are involved in the income tax computation: subtracting adjustments to income from total income to get adjusted gross income, and deducting the greater of itemized deductions or the standard deduction from AGI to arrive at taxable income. The calculation of federal tax is on federal taxable income.
LO 1.1.2
Which one of the following steps is CORRECT concerning the tax calculation process?
A)
Employment eligibility is submitted via Form W4.
B)
Tax liability plus tax credits equals refund or tax owed.
C)
Total tax liability plus additional taxes owed equals total tax liability.
D)
Total tax liability minus withholding and/or estimated tax payments equals refund or tax owed.
d
Notice: option B says “plus”. You don’t add tax credits you subtract them.
Tax liability minus tax credits plus additional taxes owed equals total tax liability. Then total tax liability minus withholding and/or estimated tax payments made equals refund or tax amount owed. Employment eligibility is submitted via Form I-9 and is not considered part of the 1040 calculation.
LO 1.1.2
Janice and Julian Davis, both age 66, are married taxpayers filing jointly. They have itemized deductions consisting of the following:
Home mortgage interest $21,200
State income taxes $9,800
Property taxes $6,300
Charitable contributions $7,700
Gambling losses $9,000
Tax return preparation fee $770
Unreimbursed medical expenses $14,630
Their AGI for 2023 is $413,800, including gambling winnings of $4,000. What is the amount of their allowable itemized deductions?
A)
$69,400
B)
$54,770
C)
$42,900
D)
$49,000
c
Mortgage interest
SALT (up to 10k)
Charitable contributions
Unreimbursed Med Exp (if more than 7.5% of AGI)
Gambling losses (to extent of winnings)
The total itemized deduction amount is $42,900. Note that the tax preparation fee is not deductible. The medical expenses are deductible only to the extent that they exceed 7.5% of AGI for 2023, which they do not. Remember that the deduction for taxes is limited to $10,000. The mortgage interest of $21,200, taxes of $10,000, charitable contributions of $7,700, and gambling losses to the extent of gambling winnings of $4,000 totals $42,900.
LO 1.3.2
Which of the following are deductions against adjusted gross income (AGI) to arrive at taxable income?
Additional standard deduction
Itemized deductions
Exclusions
Tax credits
A)
I, II, III, and IV
B)
III and IV
C)
II and III
D)
I and II
d
Statements I and II are correct. The portion of the formula referred to is:
AGI $xx,xxx
Less the greater of:
Total itemized deductions or standard deduction (including (x,xxx) any additional standard deductions allowed to the taxpayer)
Taxable income $xx,xxx
LO 1.3.1
Which one of the following items is included in the computation of total income on the Form 1040?
A)
Tax credit
B)
Life insurance beneficiary proceeds
C)
Sole proprietorship loss
D)
Penalty on early withdrawal of savings
c
The penalty on an early withdrawal of savings is an adjustment to income; a tax credit is taken from the calculated tax; and life insurance proceeds are not taxed.
LO 1.2.1
What is the lowest marginal income tax rate for a taxpayer in 2023?
A)
0%
B)
10%
C)
5%
D)
15%
b
The lowest marginal income tax rate is 10% for all taxpayers in 2023. The 0% rate is the rate at which it is possible for capital gains to be taxed, depending on the taxpayer’s income.
LO 1.4.2
Which of the following best describes the marginal tax rate?
A)
The effective tax rate used
B)
The rate which is paid on the last taxable dollar
C)
The amount of tax and total income
D)
The amount of tax and taxable income
b
The marginal tax rate is found by finding the tax bracket that contains the taxable income amount; it is the amount at which all subsequent taxable amounts will be taxed (until entering the next tax bracket). The effective tax rate is calculated by dividing the calculated tax by taxable income.
LO 1.4.2
Which of the following statements regarding filing status is CORRECT?
The single filing status is used by unmarried and divorced taxpayers, but not those who are legally separated and who do not qualify for any other filing status.
Taxpayers who file married filing jointly have joint and several liability for the payment of the income taxes due.
A)
Neither I nor II
B)
I only
C)
Both I and II
D)
II only
d
Statement I is incorrect. Taxpayers who are unmarried, legally separated, or divorced individuals who do not qualify for any other filing status generally use the single filing status. Statement II is correct.
LO 1.1.1
Mary and Josh are divorced and have two dependent children. Mary is the custodial parent. Josh is required to pay child support to Mary, who does not work outside of the home. At the beginning of this year, Josh became unemployed and has been unable to find a new job. Because he has not paid any child support this year, Mary and the children moved in with her sister who supported the three of them. By December of the same year, Josh returned to work and resumed child support payments. Who is entitled to list the two children as dependents on their income tax return in 2023?
A)
Mary, who supplied 10% of their support but has custody per the divorce agreement
B)
Josh, who provided 10% of their support this year
C)
No one this year
D)
Mary’s sister, who provided 80% of the children’s support
D
Mary’s sister provided more than 50% of the children’s support. As a result of divorce, the custodial parent can claim the children as dependents on their income tax return unless there is a written agreement to the contrary. In addition, two other requirements must be met:
The children must receive more than half of their support from both parents (combined) for more than half of the taxable year.
If the support requirement is not met, neither parent is allowed to claim the children as dependents.
LO 1.1.1
Sally Franklin has AGI of $300,000. In addition, she currently has passive income of $150,000 and passive losses of $175,000—$150,000 of which she uses to offset the passive income and $25,000 of which is subject to disallowance.
Which one of these investments has the greatest potential for reducing Sally’s tax liability?
A)
A working interest in an oil and gas general partnership
B)
An equipment-leasing limited partnership producing passive losses
C)
“Active participation” rental real estate that is producing a loss
D)
A limited partnership involved in a historic rehabilitation project that is producing passive losses and credits
a
A working interest in an oil and gas partnership can provide unlimited loss deductions against other income. Congress considers this socially desirable to encourage investment in the industry. The caveat is investors in these instruments must also assume unlimited liability. Therefore, a working interest must be a general partnership rather than a limited partnership. The other answer choices cannot offset passive income.
LO 7.1.2
Which one of the following can be a qualifying relative?
A)
Only lineal descendants living in the taxpayer’s principal home during the year, and the taxpayer provided at least 50% of their income
B)
Only a qualifying child
C)
Only related persons living in the taxpayer’s principal home during the year, and the taxpayer provided at least 50% of their income
D)
Anyone who lived in the taxpayer’s principal home during the year, and the taxpayer provided at least 50% of their income
c
A qualifying relative is an individual who is not a qualifying child and bears a specified relationship to the taxpayer such as a parent, in-law, niece, nephew, aunt or uncle, or who is unrelated to the taxpayer but resided in the taxpayer’s principal home during the tax year. The taxpayer must have provided more than half of the person’s support for the tax year.
LO 1.1.1
For a taxpayer with a health savings account (HSA),
A)
the contributions to the HSA are not deductible, but the premiums to the high-deductible health insurance plan are deductible.
B)
all withdrawals from an HSA are tax free.
C)
contributions to an HSA may be made in cash or other property.
D)
withdrawals from an HSA for qualifying medical expenses are not subject to income tax or penalties.
d
Contributions to an HSA are tax deductible and may only be made in cash. Withdrawals from an HSA for qualifying medical expenses are not subject to income tax or penalties; while those of other-than-qualifying medical expenses are subject to both income tax and a 20% penalty unless made after the taxpayer reaches age 65, dies, or becomes disabled.
Mary’s husband died in March of the current year. What filing status should Mary use in the current year?
A)
Single (if she has a dependent child)
B)
Head of household
C)
Married filing jointly (coordinated with the executor/administrator of husband’s estate)
D)
Married filing separately (if she has a dependent child)
Married filing jointly is allowed for a surviving spouse in the year of death. This filing status has the most favorable tax brackets and features the largest standard deduction. The surviving spouse should coordinate this election with the executor of the estate of the deceased spouse.
LO 1.1.1
Mary is an active participant in an employer-sponsored retirement plan, but her husband, Frank, is not. Their combined adjusted gross income (AGI) is $230,000 for 2023. They each contributed $6,500 to an IRA for the current year. Which of the following statements is CORRECT regarding the deductibility of the IRA?
A)
Both Frank and Mary may deduct the IRA contributions.
B)
Neither Mary nor Frank may deduct the IRA contributions.
C)
Frank may deduct his IRA contribution, but Mary may not.
D)
Mary may deduct her IRA contribution, but Frank may not.
b neither
Sparknotes for below section:
Combined income is 230k
They can each have separate pension plans and be active/inactive.
Active (agg) income limit is 116k-136k.
Inactive (agg) income limit is 218k-228k
Phaseouts will be provided on CFP exam.
Neither Mary nor Frank may deduct their IRA contributions. The active participant spouse is subject to a MAGI (AGI without the IRA) phaseout between $116,000 and $136,000 in 2023. The spouse who is not an active participant but whose spouse is an active participant may take a deduction for the contribution, subject to a phaseout between $218,000 and $228,000. Because the AGI exceeds $228,000, neither spouse may deduct the IRA contribution. Remember that those phaseouts apply only if the taxpayer (and/or spouse, if married) is an active participant in a company-maintained retirement plan. These phaseouts will be provided on the exam.
LO 1.1.1
Courtney and Della are considering obtaining a home equity line of credit of $50,000. They will use some of the proceeds to make needed improvements to their personal residence. Della is concerned about the deductibility of the interest. Which of the following statements is(are) CORRECT?
Home equity interest is not deductible to the extent used for other than home acquisition or improvements.
All of the home equity loan interest will be deductible for the couple.
A)
Both I and II
B)
II only
C)
Neither I nor II
D)
I only
I only
Sparknotes:
The question said it will use “some of the HELOC” for needed improvements. Statement I says that the interest for the portion of the HELOC that was used to pay for shit OTHER than the home improvements are not deductible. While the interest from the portion that was used for the improvements is deductible.
Statement I is correct. Home equity loan interest is not deductible on a taxpayer’s income tax return to the extent it is used for other than home acquisition or improvements for the home that secure the mortgage. The interest on the funds used for home improvements is deductible.
LO 1.3.2
Which one of the following is NOT an adjustment to income?
A)
Qualified education interest
B)
Qualified adoption expenses
C)
Alimony payments applicable to pre-12/31/18 decrees
D)
Self-employed health insurance deductions
b
Qualified education interest, alimony payments, and self-employed health insurance deductions are all adjustments to income. Qualified adoption expenses generate a tax credit.
LO 1.5.1
Mary’s husband died in March of the current year. Which filing status should Mary use in the current year?
A)
Head of household
B)
Married filing jointly
C)
Single, if she has a dependent child
D)
Married filing separately, if she has a dependent child
b
Married filing jointly is allowed for a surviving spouse in the year of death but should be coordinated with the executor of the deceased spouse’s estate. The married filing jointly status has the most favorable tax brackets and has the largest standard deduction, which is of the most advantage to Mary.
LO 1.1.1
Which one of the following is NOT deductible as a miscellaneous itemized deduction?
A)
Deduction for unrecovered basis in a commercial annuity
B)
Impairment-related work expense of a handicapped individual
C)
Appraisal fee for a charitable contribution
D)
Gambling losses to the extent of gambling winnings
c
The appraisal fee to determine the value of a piece of artwork being donated to charity is not a deductible miscellaneous itemized deduction. An expense related to the determination of, or collection of, a tax liability is no longer deductible. Impairment-related work expenses of a handicapped individual, gambling losses to the extent of gambling winnings, and the deduction for unrecovered basis in a commercial annuity are deductible miscellaneous itemized deductions.
LO 1.3.2
Which one of the following is the best description of itemized deductions?
A)
Personal expenses deductible from adjusted gross income
B)
Trade or business expenses deductible in arriving at total income
C)
Personal expenses deductible in arriving at total income
D)
Trade or business expenses deductible from adjusted gross income
a
Itemized deductions are generally personal expenses (e.g., home mortgage interest, medical expenses) that are specifically allowed as a deduction from AGI in arriving at taxable income. They are not deductible in arriving at total income.
LO 1.2.1
When calculating income tax liability, the individual taxpayer arrives at taxable income by
A)
none of these.
B)
deducting the greater of itemized deductions or the standard deduction from gross income and then reducing that result by allowable adjustments.
C)
consulting the tax tables accompanying IRS Form 1040.
D)
reducing gross income by allowable adjustments to arrive at adjusted gross income and then deducting the greater of the standard deduction or itemized deductions.
d
In order to determine taxable income, the taxpayer reduces gross income by any adjustments, such as qualified student loan interest, qualified college expense deductions, IRAs, and then subtracts allowable deductions (standard or itemized).
LO 1.1.2
Louisa’s 12-year-old son was killed in an auto accident on May 15, 2023. Louisa is single. If her AGI in 2023 is $113,000, how much of a child tax credit can she take in her tax return for her son?
A)
$2,000
B)
$500
C)
$0
D)
$1,000
a
As long as all other tests are met, a full child tax credit of $2,000 in 2023 (without reduction) can be taken for a person who dies during the year.
LO 1.5.1
If Jason files single with gross income of $110,000 and taxable income of $91,000, what is his marginal tax rate? Refer to the 2023 tax table provided in your course references.
A)
24.00%
B)
14.47%
C)
17.49%
D)
22.00%
d
Jason is in the 22% single tax bracket.
LO 1.4.2
If Leslie and Armando file married filing jointly, with gross income of $188,000 and taxable income of $158,000, what is their effective tax rate? Refer to the 2023 tax table provided in your course references.
A)
14.97%
B)
22.00%
C)
16.06%
D)
24.00%
c
tax liability / taxable income
22%($158,000 ‒ $89,450) + $10,294 = $15,081 + $10,294 = $25,375 ÷ $158,000 = 16.06%.
LO 1.4.2
Which of the following is NOT a step in the tax calculation process?
A)
Add adjustments to income to total income to get adjusted gross income.
B)
Total income minus adjustments to income and standard or itemized deduction(s) equals federal taxable income.
C)
Deduct the greater of itemized deductions or the standard deduction.
D)
From the final calculation of federal taxable income, find the federal tax owed or refundable.
a
The following are involved in the income tax computation: subtracting adjustments to income from total income to get adjusted gross income, and deducting the greater of itemized deductions or the standard deduction from AGI to arrive at taxable income. The calculation of federal tax is on federal taxable income.
LO 1.1.2
Which of the following is least likely to qualify as a valid medical expense deduction?
A)
A medical expense expended for the taxpayer’s dependent child
B)
A medical expense expended for the taxpayer
C)
A medical expense expended for the taxpayer’s spouse
D)
A medical expense that is reimbursed by insurance
d
If it gets reimbursed by medical expenses, it probably won’t be deductible.
Qualifying medical expenses include those expended by the taxpayer, the taxpayer’s spouse, and any dependents. To be deductible, the expenses must not be reimbursed by insurance coverage.
LO 1.3.1
All of the following statements regarding above-the-line deductions are CORRECT except
A)
some above-the-line deductions include deductible contributions to IRAs.
B)
these deductions are subtracted from gross income in determining adjusted gross income.
C)
these deductions are allowable regardless of whether the taxpayer claims itemized deductions.
D)
these deductions are subtracted from adjusted gross income in determining taxable income.
d
AGI is the line
Above the line gets you TO AGI
Below the line takes you away FROM AGI
Deductions that are subtracted from adjusted gross income in determining taxable income are below-the-line deductions.
LO 1.3.1
Kathy, age 70, is single and an employee of Expo Corporation. Her only sources of income this year are $80,000 of W-2 wages, $6,000 in capital gains, and $1,000 interest on State of Alabama bonds. Based on the above information, Kathy’s adjusted gross income (AGI) for the current year is
A)
$86,000.
B)
$80,000.
C)
$87,000.
D)
$83,000.
Kathy’s AGI is all income from whatever source derived except for those items specifically excluded by the Tax Code. The W-2 wages and capital gains total $86,000. The municipal bond interest is excluded by law.
Kathy’s adjusted gross income is as follows:
W-2 Income $80,000
Interest on State of Alabama bonds ($1,000 tax exempt) 0
Capital gains 6,000
AGI
$86,000
LO 1.3.1
Caroline, age 48, has a filing status of single and she earned a salary of $55,000. Her employer also paid $6,000 for health insurance premiums for Caroline. Caroline had a $3,000 capital loss during the year. What is Caroline’s adjusted gross income (AGI)?
A)
$55,000
B)
$49,000
C)
$52,000
D)
$61,000
52k
Caroline’s adjusted gross income (AGI) is $52,000 ($55,000 – $3,000). Caroline’s $3,000 capital loss reduces her gross income by $3,000 to $52,000. The health insurance premiums were never included in her income, thus cannot be deducted.
LO 1.3.1
Larry and Pam West are married and will file a joint return for the 2023 tax year. Pam is an active participant in a company-maintained retirement plan, but Larry is not. They have provided you with the following information. Pam’s divorce was finalized in 2017.
Larry’s salary $90,000 Larry’s IRA contribution $6,500
Pam’s salary $85,000 Pam’s IRA contribution $6,500
Alimony payments to Pam’s ex-husband $9,600
Itemized deductions $15,000
Based on the information given, what is the Wests’ taxable income for the 2023 tax year?
A)
$147,900
B)
$141,400
C)
$130,400
D)
$131,200
d
The $175,000 in salaries is reduced by the alimony payment of $9,600 and Larry’s IRA contribution of $6,500 to give an AGI of $158,900. The AGI is reduced by the greater of the itemized deductions ($15,000) or the standard deduction ($27,700 in 2023) to leave $131,200. Pam’s IRA contribution is nondeductible because the modified AGI (MAGI) exceeds the phaseout range of $116,000 to $136,000 (2023). Because the MAGI is less than $218,000, Larry may still deduct his full IRA contribution.
LO 1.4.1
If Jason files single with gross income of $180,000 and taxable income of $153,000, what is his effective tax rate? Refer to the 2023 tax table provided in your course references.
A)
24.19%
B)
32.00%
C)
19.69%
D)
35.00%
24%($153,000 ‒ $95,375 ) + $16,290 = $13,830 + $16,290 = $30,120 ÷ $153,000 = 19.69%.
LO 1.4.2
During early 2023, Bob, an individual taxpayer, purchased a principal residence, taking out a mortgage of $600,000. In late 2023, he utilizes a home equity loan to borrow $100,000 to pay off credit card balances and an automobile note.
Which of the following is CORRECT with respect to the deductibility of the interest on the home equity loan?
A)
None of the interest is deductible because it is not considered acquisition debt.
B)
None of the interest is deductible because the interest on a home equity loan is never deductible.
C)
All of the interest is deductible, as the total mortgage debt is under $750,000.
D)
All of the interest is deductible because the home equity loan is $100,000 or less.
None of the interest on the home equity loan is deductible. After 2017, only interest on acquisition debt is deductible. Acquisition debt is debt incurred to purchase or renovate (remodel) the residence.
LO 1.3.2
Which one of the following reflects the CORRECT sequence of steps in the tax calculation process?
A)
Add tax credits to tax liability to get total tax liability.
B)
AGI minus standard or itemized deduction(s) equals total income.
C)
Total income minus adjustments to income and standard or itemized deduction(s) equals federal taxable income.
D)
AGI minus adjustments to income equals federal taxable income.
c
Total (gross) income minus adjustments to income equals adjusted gross income (AGI). AGI minus standard or itemized deduction(s) equals federal taxable income.
LO 1.1.2
Parker, who files as Single, was paid $7,200 in 2023 for working in a jewelry store. This is his only income for the year. What are the tax effects for Parker?
A)
Parker will be taxed at the estates and trusts tax rate for all amounts in excess of $2,500.
B)
Because of Parker’s standard deduction for earned income, he will pay no taxes on the income this year.
C)
Parker will be taxed on $7,200 at the 10% tax rate.
D)
Parker will be taxed on $4,700 at the 10% tax rate.
B
because this is all earned income, Parker’s taxable income at the 10% tax rate will be $0 because his earned income is less than the maximum standard deduction of $13,850 in 2023.
LO 1.2.1
According to the Internal Revenue Code, which of the following statements regarding gross income is CORRECT?
A)
Gross income consists only of job wages earned that qualify for Social Security and any dividends earned from investments.
B)
Gross income does not include alimony payments.
C)
Gross income consists of all income except for those items that are specifically excluded by the Internal Revenue Code.
D)
Gross income includes child support payments.
c
All income is included in gross income unless the Internal Revenue Code specifically excludes that income from taxation.
LO 1.3.1
Cindy is the sole proprietor of Pickleball Court Rentals. She has the following items that affect her income tax return:
Gross sales $100,000
Operating expenses $46,000
Capital loss $6,000
Health insurance premiums $1,400
Employer’s share of self-employment taxes paid $3,815
Mortgage interest on her home $4,500
Traditional IRA contribution $6,500
What is Cindy’s AGI?
A)
$39,285
B)
$35,970
C)
$42,300
D)
$31,485
a
The employer share of self-employment taxes paid is a deduction when calculating a taxpayer’s AGI. Residential mortgage interest is an itemized deduction. The capital loss deduction is limited to $3,000 and the balance may be carried over to future years. The traditional IRA contribution, health insurance premiums, and the operating expenses are all deductible in calculating AGI.
$100,000 − $46,000 − $1,400 − $3,000 − $6,500 − $3,815 = $39,285 AGI
LO 1.1.2
The employer share of self-employment taxes paid is a deduction when calculating a taxpayer’s AGI. Residential mortgage interest is an itemized deduction. The capital loss deduction is limited to $3,000 and the balance may be carried over to future years. The traditional IRA contribution, health insurance premiums, and the operating expenses are all deductible in calculating AGI.
$100,000 − $46,000 − $1,400 − $3,000 − $6,500 − $3,815 = $39,285 AGI
LO 1.1.2
a
The effective tax rate is calculated by dividing the calculated tax by taxable income.
LO 1.4.2
Which one of the following reflects the CORRECT sequence of steps in the tax calculation process?
A)
Total income minus adjustments to income equals federal taxable income.
B)
Total income minus adjustments to income equals the calculated tax.
C)
AGI minus adjustments to income equals federal taxable income.
D)
AGI minus standard or itemized deduction(s) equals federal taxable income.
d
Total (gross) income minus adjustments to income equals adjusted gross income (AGI). AGI minus standard or itemized deduction(s) equals federal taxable income.
LO 1.1.2
Which of the following expenses would be tax deductible for a family this year?
A)
Child support payments
B)
Qualified dividends received
C)
Health insurance premiums for the family, paid by their family business
D)
A contribution to a Roth IRA
c
Health insurance premiums for a self-employed taxpayer are 100% deductible for AGI. Qualified dividends are included in income. Roth IRA contributions are never deductible. Child support is never deductible.
LO 1.5.1
Julie, age 63, is a single taxpayer. She has the following itemized deductions:
Home mortgage interest (first mortgage) $15,950
State income taxes $19,200
Property taxes $7,480
Charitable contributions $8,000
Unreimbursed employee business expenses $4,600
Tax return preparation fee $400
Medical expenses $16,200
Julie’s AGI is $369,500 for 2023. What is the amount of her allowable itemized deductions?
A)
$55,630
B)
$38,950
C)
$33,950
D)
$43,150
The allowable itemized deductions total $33,950.
The unreimbursed employee business expenses and tax return preparation fees are not deductible (TCJA). The medical expenses are deductible only to the extent that they exceed 7.5% of AGI, which they do not. The state and local taxes (SALT) and the property tax deduction are limited to a deduction of $10,000.
Home mortgage interest (first mortgage) $15,950
SALT deduction $10,000
Charitable contributions $8,000
Allowable itemized deductions $33,950
LO 1.3.2
Lowell and Thelma Jordan are married and will file a joint return for the current tax year. They have provided you with the following information:
Lowell’s salary $140,000
Thelma’s salary $25,000
Unemployment compensation $10,000
Net capital loss $8,000
Based on the information given, what is Lowell and Thelma’s adjusted gross income for the current tax year?
A)
$175,000
B)
$157,000
C)
$162,000
D)
$172,000
d
The total salaries of $165,000 plus the unemployment compensation of $10,000 equals $175,000. Net capital losses of $3,000 per year are deductible, leaving $172,000.
LO 1.2.1
Sam Steelman, a 60-year-old single taxpayer, has wage income of $75,000 for the current tax year. Sam is an active participant in a company-maintained retirement plan. In addition, he has the following:
Long-term capital gains $5,000 Home mortgage interest $7,200
Short-term capital losses $1,500 Real estate tax paid $2,130
Child support paid to ex-wife $5,200 Charitable contributions (property) $2,335
Gambling winnings $3,100 Total medical expenses $5,512
Gambling losses $5,100 State and local income taxes $2,156
Interest and dividends $2,400 Interest paid on personal automobile note $1,120
Schedule C net income $3,000 Unreimbursed employee business expenses $2,558
Self-employment tax liability $424 IRA contribution $7,500
What is the amount of Sam’s total income as reported on the Form 1040 for 2023?
A)
$97,000
B)
$90,500
C)
$79,800
D)
$87,000
d
The total income is computed by starting with the wage income of $75,000. To that $75,000 add the interest and dividends of $2,400, the self-employment income of $3,000, and the gambling winnings of $3,100. The $1,500 of short-term capital losses is offset against the long-term capital gains, leaving $3,500 net long-term capital gain to be included in the total income. Thus, the total income as reported on the Form 1040 is $87,000.
LO 1.2.1
George Wells made a $3,000 deductible contribution to his IRA in the current tax year. What amount of tax credit would be necessary to provide a tax benefit that is equal to that provided by the IRA contribution if George is in the 35% marginal income tax bracket?
A)
$1,050
B)
$1,950
C)
$8,571
D)
$3,000
The $3,000 deduction will generate tax savings of $1,050, which is simply the deduction amount multiplied by the marginal income tax bracket of 35%.
LO 1.5.1
usan’s parents have gifted various investments to her children, Bill and Alice, ages 15 and 10 respectively. Alice had investment income of $4,000 in 2023 and earned $1,000 babysitting. Bill earned only $2,000 from his investments, but his part-time job paid him $6,000. Susan provides more than 50% of each child’s support. Given their earnings, can Susan still list both children as dependents on her tax return this year?
A)
Yes, it doesn’t matter whether she provided 50% of their support because they are under age 19.
B)
No, she can claim Alice, but Bill is too old and earned too much money.
C)
No, she may not claim either child.
D)
Yes, both children meet the requirement of a qualifying child under IRS regulations.
Yes, both children meet the requirement of a qualifying child under IRS regulations. For a qualifying child, a taxpayer may claim an individual as a dependent if the individual satisfies all of the following requirements:
The individual must meet one of the following relationships:
Child, stepchild, foster child, or adopted child of the taxpayer
Brother, sister, stepbrother, or stepsister of the taxpayer
Descendant of any of the individuals listed above
The individual must live with the taxpayer for more than half of the taxable year.
The individual must pass an age test (i.e., meet one of the following):
Is under age 19 at the close of the tax year
Is a full-time student and under age 24 at the close of the tax year
Is totally and permanently disabled at any time during the tax year
The individual must not have provided more than half of her own support during the tax year.
The individual cannot claim any other individual as a dependent.
The individual may not file a joint return for the tax year (unless the only reason a return was filed was to obtain a refund of tax withheld).
The individual generally must also be a U.S. citizen, U.S. national, or a resident of the United States, Canada, or Mexico.
The child must be younger than the taxpayer.
LO 1.1.1
During the current year, Susan Snow received $8,000 of unemployment compensation, $4,500 of workers’ compensation benefits, and $10,000 compensation for lost wages in the settlement of a lawsuit against her former employer.
What amount, if any, must Susan report as income?
A)
$22,500
B)
$12,500
C)
$18,000
D)
$4,500
C)
$18,000
The $8,000 of unemployment compensation and $10,000 compensation for lost wages in the settlement of a lawsuit against her former employer are included in income. Both are essentially a replacement for wages. The workers’ compensation is nontaxable because it is received for injuries received on the job.
LO 1.2.1
If Rachel files as Single with gross income of $90,000 and taxable income of $76,000, what is her marginal tax rate based on the following tax information?
A)
14.47%
B)
24.00%
C)
17.49%
D)
22.00%
d
Rachel’s taxable amount of $76,000 puts her in the marginal tax rate of 22%.
LO 1.4.2
Ron Phillips, age 43, and Sandy Phillips, age 41, are married with 2 children, Michael, age 12, and Victoria, age 8, who has been blind since her birth. Ron is an architect and general partner with XYZ partnership. Sandy is self-employed as an attorney and works out of a home office. Her home office is exclusively and regularly used for business, and the home office is her principal place of business. Their information for the tax year 2023 is as follows:
Adjusted gross income $217,300
Itemized deductions (including qualified residential mortgage interest, taxes paid, and charitable contributions) $33,000
Early in the current year, Sandy’s father died. Sandy is the sole beneficiary of her father’s entire estate. The estate is presently in probate. Sandy’s mother, Lisa, age 68, has moved in with them but provides her own support. She was married to Sandy’s father when he died earlier this year.
This is Ron’s second marriage. He makes monthly support payments to his former wife and his daughter.
Because both Ron and Sandy are considered self-employed, they make quarterly estimated tax payments each year to cover both their income tax and self-employment tax obligations.
Based on the information provided in the case scenario, which of the following statements regarding Lisa’s income tax filing status for 2023 is CORRECT?
A)
Lisa may file married filing jointly.
B)
Lisa must file married filing separately.
C)
Lisa may file as head of household.
D)
Lisa must file a single return.
a
Because Lisa’s husband died earlier in the year, she may use married filing jointly status for 2023. She cannot use the head of household filing status because she does not maintain a household for a qualifying child or relative.
LO 1.1.1
If Stewart and Hope file married filing separately and Hope has gross income of $300,000 and taxable income of $267,000, what is her marginal tax rate? Refer to the 2023 tax table provided in your course references.
A)
22.75%
B)
37.00%
C)
25.56%
D)
35.00%
When using the MFS status, Hope is in the 35% marginal tax bracket.
LO 1.4.2
Assume that married taxpayers filing jointly have a taxable income of $185,000. Using the tax rate schedule found in your course references, what is the amount of federal income tax (round your answer to the nearest dollar)?
A)
$31,315
B)
$37,466
C)
$42,000
D)
$30,211
a
Taxable income $185,000
Less (from tax rate schedule) (89,450 )
Amount over $89,450 $95,550
Times (marginal rate, from tax rate schedule) 22%
Tax on amount over $89,450 $21,021
Plus (from tax rate schedule) $10,294
Total tax $31,315
LO 1.4.2
Claudia makes $5,000 a month, and has a disability policy that pays 60% of her salary. Her employer pays 60% of the premium and she pays the remaining 40%. She needed surgery last year and received disability benefits for 60 days. What amount of taxable disability benefits did she receive?
A)
$2,400
B)
$0
C)
$6,000
D)
$3,600
d Claudia received 60 days, or two months, of disability payments in the amount of 60% of her $5,000 monthly salary, or a total of $6,000. Claudia pays 40% of the premium and her employer pays 60%. The portion of the benefits received that was paid by Claudia’s employer was 60% of $6,000, or $3,600, and is taxable. The remaining $2,400 is not taxable to Claudia.
LO 1.2.1
Which of the following is NOT a step in the tax calculation process?
A)
Subtract adjustments to income and standard or itemized deduction(s) then multiply by total income to get federal taxable income.
B)
Apply tax credits to tax liability to get total tax liability.
C)
Deduct the greater of itemized deductions or the standard deduction.
D)
Subtract adjustments to income from total income to get adjusted gross income.
a The following are involved in the income tax computation: subtracting adjustments to income from total income to get adjusted gross income, and deducting the greater of itemized deductions or the standard deduction from AGI to arrive at taxable income. Subtracting exclusions from AGI is not a step in the tax calculation process. Excluded amounts simply do not show up as income on the return.
LO 1.1.2
Carol, age 50, received a salary of $35,000 this year. In addition, she received a gift of $1,000 from her brother. She also made a contribution of $3,500 to her traditional IRA. She files as single, and in addition to her itemized deductions of $4,500, she had unreimbursed medical expenses from major surgery on her knees of $7,600. Which of the following best defines Carol’s taxable income?
A)
All cash compensation received during the tax year less medical expenses in excess of 10% of AGI
B)
Adjusted gross income less the greater of the standard deduction or the amount of itemized deductions
C)
Adjusted gross income less the standard deduction and itemized deductions
D)
Gross income less adjustments to income, less long-term capital losses
b Carol’s taxable income is calculated by the greater of itemized deductions or the standard deduction, as well as other deductions from adjusted gross income.
LO 1.4.1
All of the following are itemized deductions except
A)
investment interest expense.
B)
qualified student loan interest.
C)
state and local income taxes.
D)
casualty losses.
b State and local income taxes, investment interest expense, and casualty losses are all itemized deductions. Qualified student loan interest is an adjustment to income—an above-the-line deduction.
LO 1.3.1
Which one of the following steps occur in the tax calculation process?
A)
Total withholding is adjusted on Form I-9
B)
Total tax liability equals refund or tax owed
C)
Tax liability minus tax credits equals refund or tax owed
D)
Total tax liability minus tax credits and plus additional taxes owed, equals total tax liability
c Tax liability minus tax credits plus additional taxes owed equals total tax liability. Then, total tax liability minus withholding and/or estimated tax payments made equals refund or tax amount owed. Witholding is adjusted on form W4 and is not considered part of the 1040 calculation.
LO 1.1.2
Which one of the following items is NOT included in the computation of total income on the Form 1040?
A)
Partnership income
B)
Tips received
C)
Penalty on early withdrawal of savings
D)
Sole proprietorship loss
c Tips received, partnership income, and a sole proprietorship loss are all included in arriving at total income. The penalty on an early withdrawal of savings is an adjustment to income.
LO 1.2.1
Kathy, age 70, is single, an employee of Expo Corporation, and lives in the state of Alabama. Her only sources of income this year are $80,000 of W-2 wages, $6,000 in capital gains, and $1,000 in interest on State of Alabama bonds. Based on this information, Kathy’s adjusted gross income (AGI) for the current year is
A)
$80,000.
B)
$83,000.
C)
$86,000.
D)
$87,000.
c Kathy’s AGI is all income from any source derived except for those items specifically excluded by the Tax Code. The W-2 wages and capital gains total $86,000. The municipal bond interest is excluded by law.
Kathy’s AGI is as follows:
W-2 income $80,000
Interest on State of Alabama bonds (tax exempt) 0
Capital gains 6,000
AGI $86,000
LO 1.3.1
All of the following statements regarding income tax filing status are CORRECT except
A)
if a spouse dies during the tax year, the surviving spouse may use married filing jointly status for that year.
B)
spouses may not file a joint return if one spouse has no income or deductions.
C)
it is usually advantageous for married couples to file a joint return.
D)
unmarried people who maintain a household for a qualifying child or relative may be eligible for head of household status.
b Spouses may file a joint return even if one spouse has no income or deductions.
LO 1.1.1
The adoption credit is
A)
a nonrefundable tax credit.
B)
most useful for expenses incurred when adopting a spouse’s child.
C)
a credit that can be taken in each year there are adoption expenses.
D)
a refundable tax credit.
The adoption credit is a nonrefundable tax credit for qualified adoption expenses and is taken in the year the adoption becomes final. The credit is not available for expenses involved in adopting a spouse’s child.
LO 1.5.1
Jack was divorced on March 30 of the current year and has not remarried as of the last day of the tax year. He lives alone in his condo. His ex-wife, Mary, has custody of their son Jack Jr. What is Jack’s filing status for the current tax year?
A)
Head of household
B)
Married filing jointly
C)
Married filing separately
D)
Single
d A taxpayer who is unmarried, legally separated, or divorced and does not qualify for any other filing status must use the single filing status. Jack does not have custody of his son and does not qualify for head of household status.
LO 1.1.1
Which one of the following is the best description of an exclusion?
A)
An exclusion is an item that is taxable but is deducted on the front of the Form 1040.
B)
An exclusion is an item that is taxable but is deducted on the back of the Form 1040.
C)
An exclusion is an item that is not taxable and is not included as income on the Form 1040.
D)
An exclusion is an item that is taxable but is deducted only on the Form 1041.
c An exclusion is an item, such as a qualified Roth distribution or interest from a municipal bond, that is not subject to regular income tax and is not part of income on the Form 1040.
LO 1.1.1
Personal expenses deductible from adjusted gross income most accurately describes which one of the following?
A)
Adjustments to income
B)
Standard deduction
C)
Schedule C expenses
D)
Itemized deductions
d Itemized deductions are generally personal expenses (e.g., home mortgage interest, medical expenses) that are specifically allowed as a deduction from AGI. Schedule C (sole proprietorship) expenses and adjustments to income are both deductions for AGI, or above-the-line deductions.
LO 1.3.2
Which of the following statements regarding the taxation of compensatory and punitive damages is CORRECT?
Compensatory damages are generally subject to income tax.
Punitive damages are generally received income tax free.
A)
I only
B)
II only
C)
Both I and II
D)
Neither I nor II
d
Which of these statements is CORRECT regarding the credit for adoption expenses?
A)
An eligible adoptee is an adoptee who is not yet age 18 at the time of adoption or who is physically or mentally incapable of caring for herself.
B)
A tax credit of $15,950 of qualified adoption expenses (for 2023) for each eligible adoptee is available.
C)
All of these.
D)
The adoption credit is a nonrefundable credit.
A tax credit of $15,950 of qualified adoption expenses for each eligible adoptee is available in 2023. An eligible adoptee is an adoptee who is not yet age 18 at the time of adoption or who is physically or mentally incapable of caring for herself. The adoption credit is nonrefundable.
LO 1.5.1
Which of the following statements regarding home equity loan interest paid by a couple who files an income tax return as married filing jointly is NOT correct?
A)
Interest paid on all debt secured by the residence, to the extent it does not exceed the fair market value of the residence minus any acquisition indebtedness, is deductible but limited to a maximum nonacquisition debt amount of $750,000 when used for either acquisition of the home or its substantial improvement.
B)
The home equity loan must be secured by a residence mortgage.
C)
Interest paid on up to $750,000 of a loan amount may be deductible depending on the indebtedness satisfying certain rules.
D)
Home equity loan interest is not deductible.
d Home equity loan interest may be deductible depending on certain rules and limitations.
LO 1.3.2
Paul, who is covered by a qualified retirement plan, age 30 and single, provided the following information for his 2023 income tax return:
Salary $36,000
Contribution to Roth IRA $3,000
Total itemized deductions $13,900
Using only this information and no standard deduction, what is Paul’s taxable income for 2023?
A)
$33,000
B)
$19,300
C)
$21,000
D)
$22,100
Paul’s taxable income for 2023 is $22,100, calculated as follows: $36,000 salary − $13,900 itemized deductions. All Roth IRA contributions are nondeductible, regardless of the amount of taxpayer income.
LO 1.4.1
The effective tax rate is obtained by
A)
dividing the calculated tax by taxable income.
B)
dividing taxable income by the marginal tax rate.
C)
finding the tax bracket of the taxable income amount.
D)
finding the tax bracket of total income.
The effective tax rate is calculated by dividing the calculated tax by taxable income. The marginal tax rate is found by finding the tax bracket that contains the taxable income amount; it is the amount at which all subsequent taxable amounts will be taxed (until entering the next tax bracket).
LO 1.4.2
Which one of the following is NOT a deduction for adjusted gross income?
A)
Standard deduction
B)
Sole proprietorship loss
C)
Self-employed retirement plan (Keogh) contribution
D)
Net capital loss up to $3,000
a
Deductions for AGI are items deducted “above the line.” The standard deduction is taken “below the line,” as a deduction from AGI.
LO 1.3.1
Which of the following statements regarding adjusted gross income (AGI) is CORRECT?
A)
It represents a ceiling for certain deductions, such as medical expenses and miscellaneous itemized deductions.
B)
It is the amount of income that is taxable.
C)
It may result in a phaseout of certain deductions.
D)
It is the first step in the process of calculating taxable income.
c AGI equals gross income less certain items that are specifically allowed as adjustments to income. Taxable income equals AGI less allowable deductions (itemized or standard). The level of AGI does impact the deductibility of certain items, such as medical expenses and miscellaneous deductions, by setting floors on the amount deductible.
LO 1.1.2
Which one of the following reflects the CORRECT sequence of steps in the tax calculation process?
A)
AGI minus adjustments plus deductions and credits equals taxable income.
B)
Total income minus adjustments to income and standard or itemized deduction(s) equals federal taxable income.
C)
AGI minus standard or itemized deduction(s) equals total income.
D)
AGI minus adjustments to income equals federal taxable income.
b Total (gross) income minus adjustments to income equals adjusted gross income (AGI). AGI minus standard or itemized deduction(s) equals federal taxable income.
LO 1.1.2
The following summarizes several financial events in the life of Jeff Garfield during the current tax year:
He received a $70,000 inheritance.
He had gambling winnings of $50,000.
He had itemized deductions of $17,000.
He received $4,000 of workers’ compensation proceeds.
He received $9,000 of unemployment compensation.
He paid $500 of student loan interest.
He paid $6,000 of alimony to his ex-wife persuant to a 2015 divorce decree.
What is his total income for the current tax year?
A)
$52,500
B)
$59,000
C)
$109,500
D)
$133,000
b The gambling winnings of $50,000 and the unemployment compensation are the only taxable items. Note that the itemized deductions do not factor into the calculation of total income. Total income is on the back of the Form 1040. The itemized deductions are subtracted on the back of the 1040. The inheritance is an exclusion. The workers’ compensation proceeds are also excluded. The alimony paid and the student loan interest paid are both adjustments to income, and do not enter into the computation of total income. The adjustments to income are subtracted from the total income to arrive at adjusted gross income.
LO 1.2.1
Caroline’s husband died in Year 1. Caroline does not remarry and continues to maintain a home for herself and her dependent children during Year 2, Year 3, and Year 4, providing full support for her children throughout those years. For Year 4, Caroline’s filing status will be
A)
head of household.
B)
qualifying widow.
C)
married filing separately.
D)
married filing jointly.
a Caroline’s Year 4 filing status is head of household. Qualifying widow(er) filing (surviving spouse) status is only available for 2 years following the death of a spouse (Year 2 and Year 3).
LO 1.1.1
Sharon and Oliver South are a married couple filing jointly, with one dependent child. For the 2023 tax year, they have the following items relevant to their income tax situation:
Wages $100,000
Sole proprietorship net income $10,000
Alimony paid to Oliver’s former spouse $18,000
Child support paid $12,000
IRA contribution $6,500
Self-employment tax liability $1,413
Net capital loss $4,200
Child tax credit $2,000
Unreimbursed medical expenses $17,000
Oliver’s divorce decree was finalized in 2015. Neither spouse is an active participant in a company-maintained retirement plan. What is the amount of the Souths’ AGI?
A)
$82,500
B)
$83,500
C)
$70,500
D)
$81,793
d Wages $100,000
Schedule C income 10,000
Net capital loss (3,000)
Total income $107,000
Alimony paid (18,000)
IRA contribution ($6,500)
½ self-employment tax (707)
AGI $81,793
Remember that net capital losses are only deductible up to $3,000 in a given year. Child support payments are neither deductible by the payor nor taxable to the recipient. The child tax credit is deducted after computing the income tax (a tax credit is a dollar-for-dollar reduction of the tax liability). Medical expenses are an itemized deduction, which are deducted after computing AGI (a below-the line deduction, or deduction from AGI).
LO 1.5.1
If Maria and Herman file married filing separately. Maria’s has gross income of $330,000 and taxable income of $303,000, what is her marginal tax rate? Refer to the 2023 tax table provided in your course references.
A)
18.45%
B)
35.00%
C)
32.00%
D)
20.09%
Her marginal tax rate is 35%.
LO 1.4.2
Wages $100,000
Schedule C income 10,000
Net capital loss (3,000)
Total income $107,000
Alimony paid (18,000)
IRA contribution ($6,500)
½ self-employment tax (707)
AGI $81,793
Remember that net capital losses are only deductible up to $3,000 in a given year. Child support payments are neither deductible by the payor nor taxable to the recipient. The child tax credit is deducted after computing the income tax (a tax credit is a dollar-for-dollar reduction of the tax liability). Medical expenses are an itemized deduction, which are deducted after computing AGI (a below-the line deduction, or deduction from AGI).
LO 1.5.1
d Form 1065 is for partnerships. 1120 is for C Corporations. Form 1041 is used by estates and trusts. Claudia may only use Form 1040.
LO 1.1.1
A taxpayer in a 35% marginal income tax bracket holds a limited partnership interest in a low-income housing activity. A deduction-equivalent tax credit of $22,000 flows through to the taxpayer. What is the amount of income tax that may be offset by this deduction-equivalent tax credit?
A)
$7,700
B)
$8,250
C)
$22,000
D)
$62,857
a
basically asking, how much of a tax credit would be needed to offset this much of a deduction?
The deduction-equivalent tax credit of $22,000 may be used to offset the income tax on $22,000 of income. For a taxpayer in a 35% marginal income tax bracket (MITB), the credit may offset $7,700 ($22,000 × 35%).
LO 1.5.1
Which of the following is an incentive provision as it relates to federal income taxation?
A)
Residential solar energy credits
B)
Casualty loss deduction
C)
Exclusion for life insurance death benefits
D)
Capital loss deduction
Congress has deemed it socially desirable to provide solar energy, so there is a credit provided to taxpayers who invest in such activities.
LO 1.5.1
Emilio sued a supplier two years ago for damages. The trial was last year, and the court awarded Emilio with a large cash award. Which of the following statements regarding the taxation of damages is CORRECT?
Compensatory damages are generally income tax free.
Punitive damages are generally taxable.
A)
I only
B)
Neither I nor II
C)
Both I and II
D)
II only
c
Todd is employed at Wow Industries as an accountant. His employer deducted $8,500 from his paycheck in 2023 for federal income taxes. Todd also has a side practice for which he paid another $4,300 to the IRS in estimated federal income taxes for 2023. When he filed his return, he had a tax liability of $11,600 before a child and dependent care credit of $400.
Which of the following statements is CORRECT?
A)
Because the child and dependent care credit is a nonrefundable credit, Todd’s refund is $1,200.
B)
He cannot receive a refund in 2023.
C)
Todd has an income tax refund of $1,600 for 2023.
D)
Todd’s refund is $5,200 for 2023.
c
Todd’s refund is $1,600 [$12,800 in total tax deposits – ($11,600 tax liability – $400 child and dependent care credit)]. The child and dependent care credit only reduces Todd’s tax liability to $11,200 and he has deposited $12,800. This entitles him to a refund of his excess tax payments of $1,600.
LO 1.4.1
Sam Steelman, a 60-year-old single taxpayer, has wage income of $77,000 for the current tax year. Sam is an active participant in a company-maintained retirement plan. In addition, he has the following:
Long-term capital gains $5,000
Home mortgage interest $7,200
Short-term capital losses $1,500
Real estate tax paid $2,130
Child support paid to ex-wife $5,200 Charitable contributions (property) $2,335
Gambling winnings $3,100
Total medical expenses $5,512
Gambling losses $5,100
State and local income taxes $2,156
Interest and dividends $2,400
Interest on personal automobile note $1,120
Schedule C net income $3,000 Unreimbursed employee business expenses $2,558
Self-employment tax liability $424
IRA contribution $7,500
What is the amount of Sam’s allowable itemized deductions for 2023?
A)
$17,825
B)
$16,921
C)
$19,851
D)
$19,479
c
To compute the itemized deductions, we need to know the adjusted gross income because the medical expenses are only deductible to the extent that they exceed 7.5% of AGI. The total income is computed by starting with the wage income of $77,000. To that $77,000 we would add the interest and dividends of $2,400, the self-employment income of $3,000, and the gambling winnings of $3,100. The $1,500 of short-term capital losses is offset against the long-term capital gains, leaving $3,500 net long-term capital gain to be included in total income. Thus, the total income is $89,000. From the total income we would subtract the adjustments to income. The adjustments to income total $212, which is one-half of the self-employment tax liability. The IRA contribution is nondeductible due to the active participant status and the modified AGI in excess of $83,000 (for 2023). The modified AGI is the AGI computed without including the IRA. The child support is not deductible.
The itemized deductions total $16,921. This is composed of the home mortgage interest of $7,200, the real estate tax paid of $2,130, the charitable contributions of $2,335, the state and local income taxes of $2,156, and the gambling losses to the extent of gambling winnings ($3,100). Note that the total medical expenses of $5,512 are deductible only to the extent that they exceed 7.5% of adjusted gross income, which they do not. Also note that interest on the personal automobile note (personal or consumer interest) is not deductible.
LO 1.4.1
Don and Paul are married. They adopted an infant daughter in December of last year. They have consulted you, a CFP® professional, for advice on how to proceed when filing their federal income tax return this year. What should you recommend as their filing status this year for their federal return?
A)
Married filing separately
B)
Married filing jointly
C)
Head of household
D)
Single
b Having a dependent does not change the filing status for a married couple.
Jeff Munroe has an annual salary of $140,000 and is not an active participant in a company-maintained retirement plan. He had the following financial transactions during the current tax year:
Received a $100,000 cash inheritance due to the death of his brother
Received unemployment compensation of $2,000
Had a Schedule C loss of $10,000 (assume material participation)
Made an IRA contribution of $6,500
Paid qualified student loan interest of $2,000
What is Jeff’s total income for the current tax year?
A)
$132,000
B)
$124,500
C)
$126,500
D)
$142,000
a The $140,000 salary is reduced by the $10,000 self-employment loss and increased by the unemployment compensation of $2,000. The inheritance is excluded. The IRA contribution is a potential adjustment to income, as is the student loan interest. Thus, those items do not affect the total income. Remember that total income is the figure from which allowable adjustments to income are subtracted.
LO 1.2.1
Assume that married taxpayers filing jointly have a taxable income of $200,000. Using the tax rate schedule provided in your course references, what is the amount of federal income tax? Round your answer to the nearest dollar.
A)
$34,800
B)
$48,000
C)
$37,466
D)
$42,750
a
Taxable income $200,000
Less (from tax rate schedule) (190,750)
Amount over $190,750 $9,250
Times (marginal rate, from tax rate schedule) 24%
Tax on amount over $190,750 $2,220
Plus (from tax rate schedule) $32,580
Total Tax $34,800
If you arrived at another answer, you likely did the calculation correctly but may have used the single filing status rather than the married filing joint return status or used a flat rate of 24%. While 24% is the marginal rate (the rate paid on the last dollar of income), there are dollars that are taxed at the 10%, 12%, and 22% rates as well.
LO 1.4.1
Jane, age 35, whose filing status is single, earned a salary of $55,000 in 2023. She also made a $2,000 contribution to her Roth IRA for 2023. Jane had a capital loss of $3,000 during the year. Her uncle, Charles, gave her $100,000 in municipal bonds for which she earned interest of $3,500. In her employment as a sales representative for her company, Jane incurred $650 of unreimbursed business expenses. What is Jane’s adjusted gross income (AGI)?
A)
$56,800
B)
$53,800
C)
$53,300
D)
$52,000
d Jane’s AGI is $52,000 ($55,000 ‒ $3,000). Her $3,000 capital loss is a deduction for calculating AGI. Roth IRA contributions are never deductible from gross income. Municipal bond interest is not included in income. The unreimbursed business expenses are not deductible.
Which of the following are includible in an individual’s gross income for income tax purposes?
Gambling winnings
Inheritances
Interest collected by the taxpayer on federal obligations
Scholarships and fellowships in degree programs
A)
I only
B)
I, III, and IV
C)
I and III
D)
III and IV
c Gambling winnings and interest on federal obligations are includible in an individual’s gross income for income tax purposes. The other items are not subject to income taxation.
LO 1.2.1
Neil McElroy is an engineer for Causley Computer Inc. In addition, Neil operates a janitorial service that cleans several local office buildings. Neil was divorced in 2019, and his wife received custody of their two children. He has assembled the following information for preparation of his tax return for the current tax year.
Neil’s salary $71,500
Interest income $9,500
Monthly alimony paid to ex-spouse $1,500
Monthly child support $500
Purchase of equipment for use in janitorial service $10,000
IRA contribution $6,500
Based on the information given, which of the following are fundamental methods of managing Neil’s tax liability?
Tax credit: Neil could take an investment tax credit for purchases of qualifying business equipment.
Deductions for AGI: Neil may deduct alimony payments of $18,000 made to ex-spouse.
Deductions for AGI: Neil may deduct child support payments of $6,000.
Exclusions: Neil could have invested in municipal bonds to receive tax-free income.
A)
I and II
B)
IV only
C)
I, II, and IV
D)
II, III, and IV
b Neil may not deduct alimony paid to his former spouse because the deduction is disallowed for alimony under divorce decrees in 2019 and thereafter. He may invest in municipal bonds to receive tax-free income. There is no investment tax credit for equipment purposes. Some students confuse this with the Section 179 expense election, but that provision provides a deduction, not a credit. Child support payments are specifically nondeductible.
LO 1.5.1
John and Karen Postman will spend a total of $5,000 on day care for their two children (ages 9 and 10) in the current tax year. These expenses were incurred to allow both John and Karen to work outside the home. Their adjusted gross income is estimated at $138,000.
What is the amount of child and dependent care credit, if any, to which they are entitled?
A)
$0
B)
$1,750
C)
$1,000
D)
$600
c The maximum amount of qualifying expenditures on which the credit may be based is $3,000 per child, or $6,000 for two or more children. In this situation, they spent $5,000. This is multiplied by 20% for taxpayers with an AGI greater than $43,000. Thus, $5,000 × 20% = $1,000.
LO 1.5.1
Which one of the following statements is true regarding self-employment taxes?
A)
Net earnings from self-employment must be calculated under the accrual method of accounting.
B)
The wage base is not adjusted annually for cost of living increases.
C)
Self-employed taxpayers are subject to employer withholding.
D)
A taxpayer is allowed to deduct one-half of his self-employment tax liability as an adjustment to income.
d A taxpayer may deduct one-half of his self-employment tax liability as an “above the line” adjustment to income. The wage base is adjusted annually for cost of living increases. Net earnings from self-employment are determined under the same accounting method as that used for income tax purposes. Self-employed taxpayers are not subject to employer withholding.
LO 1.3.1
Larry and Paula are a married couple who file their federal income tax returns separately. They are both over 65 and still provide full support for a son who has been blind since birth. They live together and do not itemize. They alternate listing their son as a dependent, and it is Paula’s turn this year. Paula will be required to file a federal income tax return if her gross income is at least which of the following amounts in 2023?
A)
$20,800
B)
$27,700
C)
$13,850
D)
$15,350
d The normal filing threshold for the MFS filing status is $13,850 in 2023. For married taxpayers over age 65, the threshold is raised by $1,500 per spouse. The additional blind deduction applies only to the taxpayers themselves, not their dependents. Tangentially, if the other MFS spouse itemizes, the filing threshold is reduced to $5 (IRS pub 501, 2023). Because Larry and Paula still live together, neither can file as head-of-household with a dependent.
LO 1.1.1
Lindsey is age 2 and she received $6,000 in municipal bond interest income and $900 in other interest income in 2023. What is the total federal income tax due on her income in 2023?
A)
$1,495
B)
$0
C)
$1,400
D)
$90
b Lindsey owes no federal income taxes in 2023. Municipal bond interest income is not taxable. The $900 in other interest income is less than Lindsey’s $1,250 standard deduction amount.
LO 1.2.1
Steve and Allison Parker, a married couple in their 40s, file a joint return.
They earned combined salaries of $185,000.
They received dividend and interest income of $860 from mutual funds.
They have allowable itemized deductions of $14,000.
They have net capital losses of $5,200.
They have two children, ages 12 and 14.
What is their taxable income for the 2023 tax year?
A)
$155,160
B)
$154,860
C)
$168,860
D)
$182,860
a The salaries combined with the income from the investments total $185,860. This is reduced by the $3,000 net capital loss to leave an AGI of $182,860. Remember that only $3,000 of net capital loss may be deducted in a given tax year. The AGI is then reduced by the greater of the itemized deductions ($14,000) or the standard deduction ($27,700 in 2023).
LO 1.4.1
Which of the following who do not maintain a household for a dependent must use the single filing status?
A)
Unmarried taxpayer
B)
Divorced taxpayer
C)
Legally separated taxpayer
D)
All of these
d A taxpayer who is an unmarried, legally separated, or divorced individual and does not maintain a household for a dependent must use the single filing status.
LO 1.1.1
A taxpayer who is an unmarried, legally separated, or divorced individual and does not maintain a household for a dependent must use the single filing status.
LO 1.1.1
c $1,200 divided by the 22% marginal income tax bracket gives us $5,455.
LO 1.5.1
If Jason files single with gross income of $110,000 and taxable income of $91,000, what is his effective tax rate based on the tax rate schedule provided in your course references?
A)
14.4%
B)
24.0%
C)
22.0%
D)
16.95%
d 22% x ($91,000 ‒ $44,275) + $5,147 = $10,279 + $5,147 = $15,426.50 ÷ $91,000 = 16.95%.
LO 1.4.2
Which of the following are adjustments to gross income (above-the-line deductions)?
Medical expenses
Capital losses
Deductible IRA contributions
A)
II and III
B)
I and III
C)
II only
D)
I and II
a Medical expenses are an itemized (below-the-line) deduction.
Your client, Hal Meyer, will receive a deductible loss of $15,100 from a working oil and gas interest. Hal is in a 35% marginal income tax bracket and has asked you the approximate amount of tax savings that this will generate.
What is the approximate amount, if any, of tax savings generated by this loss?
A)
$15,600
B)
$0
C)
$5,200
D)
$10,400
c In a 35% tax bracket, a $15,100 loss deduction will save $5,285. Thus, $5,200 is the closest answer.
LO 1.5.1
George, whose wife died last November, filed a joint tax return for last year. He did not remarry after his wife’s death and has continued to maintain his home for his two dependent children. In the preparation of his tax return for this year, what is George’s filing status?
A)
Single
B)
Qualifying widower
C)
Head of household
D)
Married filing separately
b George filed a joint return in the year of his wife’s death. He can file as a qualifying widower (also known as surviving spouse) for the two years following his wife’s death if he continues to maintain a home for his dependent children.
LO 1.1.1
24% x ($303,000 ‒ $190,750) + $32,580 = $26,940 + $32,580 = $59,520 ÷ $303,000 = 19.64%.
LO 1.4.2
b Beth’s Year 4 filing status is head of household. Qualifying widow filing status is only available for 2 years following the death of a spouse (Year 2 and Year 3).
LO 1.1.1
In a 35% tax bracket, a $15,100 loss deduction will save $5,285. Thus, $5,200 is the closest answer.
LO 1.5.1
d Remember that the total income is the amount shown on the front of the Form 1040. It is the amount before the deduction for adjustments to income. Certain deductions are allowed in the computation of total income, such as the deduction for sole proprietorship losses or net capital losses up to $3,000. Charitable contributions are an itemized deduction.
LO 1.2.1
If Maria and Herman use married filing jointly, with gross income of $350,000 and taxable income of $303,000, what is their effective tax rate? Refer to the 2023 tax table provided in your course references.
A)
22.45%
B)
32.00%
C)
19.64%
D)
24.00%
c 24% x ($303,000 ‒ $190,750) + $32,580 = $26,940 + $32,580 = $59,520 ÷ $303,000 = 19.64%.
LO 1.4.2
Janet and Bruce Robinson, both age 43, are married taxpayers filing jointly. They have itemized deductions consisting of the following:
Home mortgage interest $19,500
State income taxes $8,700
Property taxes $5,200
Charitable contributions $6,200
Tax return preparation fee $895
Unreimbursed employee business expenses $2,100
Unreimbursed medical expenses $18,460
Their AGI for 2023 is $466,000. What is the amount of their allowable itemized deductions?
A)
$39,600
B)
$42,595
C)
$37,800
D)
$35,700
d The total itemized deduction amount is $35,700. Note that the tax preparation fee and the unreimbursed employee business expenses are not deductible. The medical expenses are deductible only to the extent that they exceed 7.5% of AGI for 2023, which they do not. The deduction for the state income taxes and the property taxes is capped at $10,000. Taxes of $10,000, mortgage interest of $19,500, and charitable contributions of $6,200 total $35,700.
LO 1.3.2
John and Mary West, married taxpayers filing jointly, have itemized deductions consisting of the following:
Home mortgage interest $12,000
State income taxes $18,000
Property taxes $5,150
Charitable contributions $2,250
Unreimbursed employee business expenses $3,200
Medical expenses $14,000
Sales taxes paid $2,650
The Wests’ AGI for 2023 is $400,000. What is the amount of allowable itemized deductions?
A)
$37,400
B)
$54,600
C)
$24,250
D)
$14,250
c Unreimbursed employee expenses are not deductible (TCJA). The medical expenses are deductible only to the extent that they exceed 7.5% of AGI, which they do not. The sales taxes would only be deductible in lieu of state income taxes. The overall deduction for taxes (state, local, and property) is limited to $10,000.
Home mortgage interest $12,000
State, local, and property taxes $10,000
Charitable contributions $2,250
Total itemized deductions $24,250
LO 1.3.2
Which of the following is NOT a step in the tax calculation process?
A)
Calculate federal tax on federal taxable income.
B)
Deduct the greater of itemized deductions or the standard deduction.
C)
Subtract adjustments to income from total income to get adjusted gross income.
D)
Subtract exclusions from AGI.
d The following are involved in the income tax computation: subtracting adjustments to income from total income to get AGI, and deducting the greater of itemized deductions or the standard deduction from AGI to arrive at taxable income. Subtracting exclusions from AGI is not a step in the tax calculation process. Excluded amounts simply do not show up as income on the return.
LO 1.1.2
If Phoebe files single with gross income of $86,000 and taxable income of $75,000, what is her marginal tax rate? Refer to the 2023 tax table provided in your course references.
A)
17.49%
B)
14.47%
C)
24.00%
D)
22.00%
d
If Leslie and Armando file as married filing jointly, with gross income of $176,000 and taxable income of $158,000, what is their marginal tax rate based on the following tax information? Refer to the 2023 tax table provided in your course references.
A)
14.97%
B)
24.00%
C)
22.00%
D)
16.67%
c
The marginal tax rate is obtained by
A)
dividing the calculated tax by total income.
B)
dividing the calculated tax by taxable income.
C)
finding the tax bracket of the taxable income amount.
D)
finding the tax bracket of total income.
c The marginal tax rate is found by finding the tax bracket that contains the taxable income amount; it is the amount at which all subsequent taxable amounts will be taxed (until entering the next tax bracket). The effective tax rate is calculated by dividing the calculated tax by taxable income.
LO 1.4.2
Which one of the following reflects the CORRECT sequence of steps in the tax calculation process?
A)
AGI minus adjustments to income equals federal taxable income.
B)
Calculate federal tax on total income.
C)
Total income minus adjustments to income equals AGI.
D)
Total income minus standard or itemized deduction(s) equals AGI.
c Total (gross) income minus adjustments to income equals adjusted gross income (AGI). AGI minus standard or itemized deduction(s) equals federal taxable income.
LO 1.1.2
The effective tax rate is obtained by dividing the amount of tax paid by
A)
the amount of deductions and credits.
B)
taxable income
C)
the average tax rate.
D)
the correct tax bracket.
The effective tax rate is found by dividing total tax by taxable income.
LO 1.4.2
Which of the following is NOT a step in the tax calculation process?
A)
Subtract adjustments to income from total income to get adjusted gross income.
B)
Claim allowable tax credits.
C)
Deduct the greater of itemized deductions or the standard deduction from AGI to arrive at taxable income.
D)
Calculate federal tax on total income.
d The following are involved in the income tax computation: subtracting adjustments to income from total income to get adjusted gross income, subtracting tax withholdings from total tax liability, and deducting the greater of itemized deductions or the standard deduction from AGI to arrive at taxable income. Credits are applied to tax liability. The calculation of federal tax is on federal taxable income.
Which one of the following steps occurs in the tax calculation process?
A)
Total withholding is adjusted on Form I-9
B)
Tax liability minus tax credits equals refund or tax owed
C)
Total tax liability equals refund or tax owed
D)
Total tax liability minus itemized deductions plus additional taxes owed, equals total tax liability
Tax liability minus tax credits equals total tax liability or refund.
LO 1.1.2
