Quiz Questions Flashcards
What is the percent penalty for negligence?
20%
What is the best source for obtaining information on a very recent change in tax law?
Congressional Committee reports
What carries the “full force and effect of the law?”
Treasury regulations
What is the penalty for failure to file a tax return?
5% a month up to 25%
Best way to describe sham transaction
IRS will ignore the transaction and no gain or loss will be recognized for tax purposes
This % penalty may also apply to misstatement of valuation or substantial understatement of income tax
20%
Assignment of income doctrine explained how
Income is taxed to the tree that grows the fruit, even though the income is assigned to another prior to receipt
Susan is insolvent and at this point, has not sought bankruptcy protection. Her assets total $65,000, while her debt amounts to $185,000. She has just learned that the lender who is owed the $185,000 has forgiven her debt. How much will Susan be taxed on the debt forgiveness?
$65,000
If the amount forgiven in debt is more than what you own outside of bankruptcy, you’re only taxed on the excess amount.
Sales where payments are due within how many months are exempted from imputed interest rule?
6 months
Client has $40k in gambling winnings and $22k in expenses directly related to those winnings. Assuming client is not a professional gambler, how much must Joel report as his gambling winnings?
$40k - they’re asking for the gross income number. Since he is not a professional gambler he can’t deduct his expenses from the winnings.
Is child support received by the custodial parent included in gross income?
No - think about yourself, you don’t include it in your gross income
Two years ago, Sam went to town’s recycling center and brought home several books from the “take it or leave it” section. Recently, Sam discovered that one of the hardcover book’s pages was cut out in the center and $7,000 was in its place. He spent $50 advertising in the local newspaper that he found money in a book but no one could claim the title of the book or amount. What are the tax ramifications to Sam?
Sam must report $7,000 in the current year
John lent his son $50,000 for the purchase of a new house, with the understanding that in five years, his son would re-pay the loan at face value. For the current tax year, John’s son had net investment income of $1,400. Assume that the Applicable Federal Rate (AFR) for mid-term loans is 3%. Calculate the imputed interest for the first year.
$1400
In the $10,001-$100,000 range the lender must impute the lesser of the borrower’s net investment income or the AFR times the loan amount $50,000 X .03 = $1,500 vs $1,400
Client wants to know the diff between deduction and credit. She just received a $600 credit and wants to know what thats worth as a deduction if she were to itemize deductions. Calculate the equivalent for a deduction if her marginal tax rate is 24%.
TC/MTB
600/.24 = $2500
Clients are married filing jointly. 2 kids age 7 & 10. What is their total gross income before any adjustments?
Total gross income before any deductions for Jack and Jill:
$50,000 (Jack’s W-2 wages) + $130,000 (Jack’s net income from sole proprietorship) + $1,400 (dividends) + $30,000 (Jack’s gambling winnings) + $70,000 (Jill’s W-2 wages) = $281,400.
Clients are married filing jointly. 2 kids age 7 & 10. What is their total itemized deductions?
$20k mortgage interest + 10k taxed paid + 18k gambling losses = $48k
Remember taxes are limited to 10k total
NOT alimony
Marcia Washington, a single taxpayer, has the following itemized deductions:
Marcia’s AGI is $204,350. Under the regular tax method, she is allowed final itemized deductions of $51,920. What amount of deductions, if any, would be allowed for the purposes of AMT?
$41,920
State tax and property tax are disallowed under AMT.
$29,920 (Mortgage interest) + $7,000 (charity) + $1,900 (gambling losses) + $3,100 (margin interest) = $41,920
Bill and Diana are MFJ w 2 kids 9 & 12
What are their allowable itemized deductions under the AMT method?
$24,200
$22,000 (mortgage interest) + $2,200 (charity) = $24,200
Bill and Diana are MFJ w 2 kids 9 & 12. How much is the AMT taxable income?
$233,201
$221,401 (AGI) + $36,000 (ISO) - $24,200 (mort. interest 22k + 2.2k charity) = 233,201
If it’s asking about AMT what are you thinking for itemized deductions?
Think mortgage interest, charitable contributions, gambling losses, margin interest - not taxes
Last month, client’s Aunt gave him 65k of MSFT, which she purchased 19 yrs ago for 17k. Aunt paid gift tax of 10k on the transaction, even after utilizing 15k annual gift tax exemption. What is Robert’s basis and what is his holding period?
$26,600 long term
You’re trying to figure out how much of the tax the aunt paid can be added to the basis.
Aunt’s basis + gift tax adjustment which is appreciation/taxable amount of the gift.
$65k - 17k = 48k appreciation
Taxable amount of gift is FMV - annual exclusion if applicable. So
65k - 15k = 50k
48k/50k = 96%
10k * .96 = $9,600 + 17k = $26,600
For the donee to receive the benefit of gift taxes paid by the donor, what must take place?
There must be appreciation, FMV is greater than basis
Client inherited 1,000 shares of stock from uncle. Uncle purchased 7 years ago for $59. FMV on date of uncle’s death $45. FMV 6 months later $43.
If the executor of uncle’s estate did not select the alternate valuation date, what is client’s basis?
$45,000 - price on date of uncle’s death - price is lower than when originally purchased
Client inherited 1,000 shares of stock from uncle. Uncle purchased 7 years ago for $59. FMV on date of uncle’s death $45. FMV 6 months later $43.
If the executor of uncle’s estate DID select the alternate valuation date, what is client’s basis?
$43,000 - $43 per share 6 months after death
Client received 1,0000 shares of stock from uncle which uncle purchased 7 yrs ago for $59. Client received as gift 2 years ago when price was $70. Uncle utilized annl exclusion of 15k but still had to pay $25k in gift tax. What is client’s basis per share?
Appreciation/Taxable amount of gift * taxes paid / shares = gift tax adjustment per share. Then add to donor’s purchase basis.
(70-59)/(70-15) = .20
.20 * 25,000 / 1000 = 5 + 59 = $64 per share
Client received 1,0000 shares of stock from uncle which uncle purchased 7 yrs ago for $59. Client received as gift 2 years ago when FMV was $55. Uncle utilized gift tax exclusion of $15,000 but still had to pay gift tax of $21,000. Assuming client sold this year for $60, what was his basis?
His basis is $59. Client takes over uncle’s purchase price bc FMV was lower than purchase price. Gift tax doesn’t apply bc there was no appreciation.
Client received stock from Uncle as gift 8 months ago. Uncle purchased several years ago for $59. FMV at time of gift was $55 and client sold it soon after for $57. What are tax ramifications?
If client sells for more than FMV at time of transfer BUT less than original basis, there is no gain or loss recognized. RECOGNIZED for tax purposes
What income determines eligibility of tax credits and deductions?
Modified Adjusted Gross income determines eligibility of tax credits and deductions.
Modified adjusted gross income tax taxpayers AGI and adds back what?
tax exempt items such as municipal bond interest and NON TAXABLE SOCIAL SECURITY BENEFIT
What determines a taxpayers rate on the last dollar they earn? AKA one’s marginal tax bracket?
Taxable Income is used to determine the marginal tax bracket of a taxpayer. Meaning that either the standard or itemized deductions are factored in. Results in major $$ savings vs using AGI or MAGI
What is above the line?
Schedules - C, E, F, etc
Gross Wages - W2s
Adjustments - HSAs, Self employ. health ins., self employ tax
______________________________________
What is below the line?
Itemized deduction - SALT, Mort Int, Charitable Cont.
QBI - Net income sched C, REITS
Credits - refundable, nonrefundable
Tom has gross rev of 65k from his 1st calendar yr of his financial planning practice. He incurred the following expenses:
Advertising: 1,100
Office Rent: 21,000
Legal fees: 1,200
Software licenses: 8,000
Health ins Premiums: 6,000
Error and Omission Ins: 1,200
What net profit would he report on line 31 of Sched C?
Everything but the Health Ins.
Health insurance is not a Sched. C item, it’s an adjustment to AGI
65,000 - 32,500 = 32,500 Sched. C income
Where would you look on a W-2 for the info for adjusted gross income?
Line 1
As a self employed individual you have to pay the full 15.3%, however you can
claim 1/2 the self employment tax as an adjustment to gross income
Client is freelance graphic designer and generated $90,000 gross revenues. Incurred $40,000 in schedule C expenses. What is her self employment income?
$50,000
90,000 - 40,000 = 50,000 schedule C income
Client has W2 earnings of $150,000. He also has landscaping LLC which generates $80,000 in net profit. What is his self employment tax?
150k + 80k is over the threshold of $168,600
80,000 * .9235 * .029 = $2,143
168,600 - 150,000 * .124 = $2306
$2143 + $2306 = $4,449
Client has gross W2 earnings of $150,000 but maxes out his 401k contributions. He also has LLC with $80k net profits. Wife is freelance graphic designer and generated $90,000 gross revenues. Incurred $40,000 in schedule C expenses. Client earned $1500 in stock dividends of which $1400 are qualified dividends. 50k gambling winnings but lost $30k. What is their gross income before adjustments to gross income?
150,000 gross - 22,500 (401k) = $127,500
90,000 - 40,000 = 50,000 net sched C
80,000 LLC
Total Dividends $1500
$50,000 gambling winnings
$309,000
NOTE the question is asking gross income before adjustments to income. Notice that 401k comes out of the gross. Think about how 401k comes out before you receive your paycheck to remember its at the top.
Also remember that Sched C expenses reduce the gross and happen up here.
Say someone has $1500 in dividends, of which $1400 are qualified. What is the total dividends you include on gross income?
$1500
Client has gross income of $309,000, assuming QBI of $21,324, what is their AGI?
309,000 gross
Adjustments = 8,300 max HSA contrib
THEN subtract 1/2 SE tax from both
Husband was $,449 / 2 = $2,225
Wife was under threshold so
50,000 * .9235 * .153 = 7065 / 2 = 3,533
309,000 - 8300 - 2,225 - 3,533 = $294,942
Above the line deductions are used for
calculating AGI
Below the line deductions are deducted
from AGI
Above the line adjustments: CASH
“C” for “Contributions” (IRA, HSA, FSA)
“A” for “Adjusted” (Adjustments to income, alimony pre 2019)
“S” for “Student” (Student loan interest)
“H” for “Home and Health” (1/2 self employment tax, SE health insurance)
Below the line deductions SCMM
“S” for “Salt” (State and local taxes)
“C” for “Charitable” (Charitable contributions)
“M” for “Mortgage” (Mortgage interest)
“M” for “Medical” (Medical expenses)
Above is ADJUSTMENTS
Below is DEDUCTIONS
OK??
Which is the best source for obtaining information about the intent of a very recent change in the tax law?
A. Congressional Committee Reports B.Treasury Regulations
C.Tax Court Reports
D.U.S. Master Tax Guide
Congressional Committee Reports: These reports, produced during the legislative process, provide valuable insight into the lawmakers’ intentions behind specific provisions in a tax bill. They delve into the “legislative history” and often explain the reasoning behind changes.
Which one of the following best describes the Sham Transaction Doctrine?
A.IRS will ignore the transaction and no gain or loss will be recognized for tax purposes.
B.Income is taxed to the tree that grows the fruit, even though the income is assigned to another prior to receipt.
C. A solvent taxpayer may have to realize income upon the forgiveness of a debt by a creditor.
D.Nontaxable receipts may be converted into taxable income.
(A) IRS will ignore the transaction and no gain or loss will be recognized for tax purposes.
Here’s why:
Sham Transaction Doctrine: This doctrine allows the IRS to disregard transactions that have no valid business purpose and are solely designed to avoid taxes. Essentially, the transaction is treated as if it never happened.
Which one of the following is not an exemption from the imputed interest rules?
A. Debt subject to the original issue discount (OID) provisions. B. Sales of patents to the extent the payment is contingent on the use or disposition of the patent. C. Sales of property for $3,000 or less. D. Any sales where all the payments are due within 12 months.
D is incorrect.
It’s sales where the payments are due within 6 months
Is found money considered taxable?
Found Money is Taxable Income: Even though Sam found the money unexpectedly, it is considered taxable income in the year it is found.
No Legal Claim by Others: Since no one came forward to claim the money, Sam has clear ownership and is responsible for the tax liability.
Joel had $40,000 of gambling winnings this year and had $22,000 of expenses directly related to those winnings. Assuming that Joel is not a professional gambler, how much will Joel report as gross income from his gambling activities?
A. $0 - this activity is specifically excluded from income because it is viewed in the tax code as a negative entertainment expense. B. Joel only needs to report the income if he receives a 1099. In that case, he will be allowed to net his expenses to reduce the income. C. $18,000 which is $40,000 less his $22,000 of expenses. D. $40,000.
D. 40,000 because he is not a professional gambler he can’t write off the expenses
If you are insolvent and debt is forgiven, but you have say $50,000 in assets, how much would you be taxed on debt forgiveness?
Only up to the amount of your assets so $50,000 in this case
Child Standard Deduction for unearned income and earned income
Earned income plus $450 up to a maximum of $14,600 OR $1300 for unearned income whichever is greater
Jill and Jay have a 12-year-old son who has earned $5,000 in taxable bond interest this year. They would like to know how much of their son’s interest income will be taxed at their marginal tax rate?
Under the “kiddie tax” rules, the first $1,300 of a child’s unearned income is not taxed, the next $1,300 is taxed at the child’s tax rate, and any unearned income above $2,600 is taxed at the parents’ marginal tax rate. Therefore, of the $5,000 total, $2,400 ($5,000 - $2,600) will be taxed at the parents’ rate.
Your client, Jane, wants you to explain the difference between a tax credit and a tax deduction. She just received a $600 tax credit and wants to know what that worth as a deduction if she were to itemize her deductions. Calculate the equivalent deduction for Jane’s credit if Jane’s marginal tax bracket is 24%.
They’re asking for the EQUIVALENT so it would be
600/.24 = 2500
Jack and Jill will file as Married Filing Jointly. They have two children, ages 7 and 10.
Jack’s W2 wages = $50,000
Jill’s W2 wages = $62,000
Jack’s sole proprietorship (net) = $160,000
Total Taxable Dividends = $1,400
Taxable Dividends that are Qualifying = $1,300
Jack’s alimony payments to ex-wife Divorced in 2018 = $6,000
Qualified Business Income Deduction = $30,369
Mortgage Interest = $20,000
State Income Tax = $12,000
Gambling winnings = $30,000
Gambling losses = $(18,000)
What is their gross income?
$50,000 + $62,000 + $160,000 + $1400 + $30,000 = $306,400
You include Jack’s W2 wages = $50,000
Jill’s W2 Wages $62,000
Jack’s Sole Proprietorship net = $160,000
Taxable dividends = $1,400
Gambling Winnings = $30,000
$303,400
Jack and Jill will file as Married Filing Jointly. They have two children, ages 7 and 10.
Jack’s W2 wages = $50,000
Jill’s W2 wages = $62,000
Jack’s sole proprietorship (net) = $160,000
Total Taxable Dividends = $1,400
Taxable Dividends that are Qualifying = $1,300
Jack’s alimony payments to ex-wife Divorced in 2018 = $6,000
Qualified Business Income Deduction = $30,369
Mortgage Interest = $20,000
State Income Tax = $12,000
Gambling winnings = $30,000
Gambling losses = $(18,000)
What is their AGI?
Gross is $303,400
Above the line need to figure out the self employment for Jack
He is over threshold so would use 2 step method
160,000 * .9235 * .029 = 4,285.04
($168,600 - $50,000) x .124 = $14,706 is the $4,285.04 + $14,706 = $18,991
$18,991 * .5 = $9,496
306,400 - $9,496 - 6000 = $287,904
ABOVE THE LINE JUST DEDUCTING 1/2 SE AND ALIMONY PRE-2019
Jack and Jill will file as Married Filing Jointly. They have two children, ages 7 and 10.
Jack’s W2 wages = $50,000
Jill’s W2 wages = $62,000
Jack’s sole proprietorship (net) = $160,000
Total Taxable Dividends = $1,400
Taxable Dividends that are Qualifying = $1,300
Jack’s alimony payments to ex-wife Divorced in 2018 = $6,000
Qualified Business Income Deduction = $30,369
Mortgage Interest = $20,000
State Income Tax = $12,000
Gambling winnings = $30,000
Gambling losses = $(18,000)
What are their total itemized deductions?
$20,000 + $10,000 + $18,000 = $48,000
Mortgage interest + SALT + Gambling Losses
Their AGI was $290,904 - $48,000 = 242,904
After itemized they’re at 242,904
Jack and Jill will file as Married Filing Jointly. They have two children, ages 7 and 10.
Jack’s W2 wages = $50,000
Jill’s W2 wages = $62,000
Jack’s sole proprietorship (net) = $160,000
Total Taxable Dividends = $1,400
Taxable Dividends that are Qualifying = $1,300
Jack’s alimony payments to ex-wife Divorced in 2018 = $6,000
Qualified Business Income Deduction = $30,369
Mortgage Interest = $20,000
State Income Tax = $12,000
Gambling winnings = $30,000
Gambling losses = $(18,000)
What is their taxable income?
Their AGI was $290,904 - $48,000 = 242,904
After itemized they’re at 242,904
Subtract the QBI of 30,369
$242,904 - 30,369 = $212,535
Bill and Diana are married and will file as Married Filing Jointly.
Bill’s W-2 wages $180,000
Diana’s W-2 wages $90,000
Total Taxable Dividends $2,400
Bill’s ISO exercise (Bargain element) $36,000
Mortgage Interest $22,000
Property Tax $8,100
State Income Tax $1,900
Charitable contributions $2,200
Bill and Diana’s AGI $272,400
Regular Income Tax Liability $44,839
Calculate their AMT exemption.
$133,300
This is the standard AMT exemption amount for married couples filing jointly in a given tax year. The phase-out of the AMT does not begin until AMT exceeds $1,218,700.
Last month, Robert’s Aunt Sue gave him $68,000 of Microsoft stock that she purchased 19 years ago at a cost of $19,000. Aunt Sue paid gift taxes of $10,000 on the transaction, even after utilizing the $18,000 gift tax annual exclusion. How much is Robert’s basis in the stock and what is his holding period?
A. $16,000 Long-Term B. $22,800 Long-Term C. $28,800 Long-Term D. $64,000 Short-Term
C. 28,800 long term
Which of the following statements is incorrect?
A. If the donor's basis is less than the FMV at the time of the transfer, the donee will take over the donor's holding period. B. If the donor's basis is less than the FMV at the time of transfer, and no gift taxes were paid, the donee simply takes over the donor's basis and holding period. C. If the donor's basis is less than the FMV at the time of the gift, and the donor paid gift taxes, the donee will be allowed to include a portion of the gift taxes paid by the donor. D. If the donor's basis is more than the FMV at the time of transfer, and gift taxes were paid, the donee will be allowed to include a portion of the gift taxes paid by the donor.
D is incorrect
In order for the donee to get the benefit of gift taxes paid by the donor, there must have been appreciation in the gift, that is FMV must be greater than the donor’s basis.
Compare the basis with the FMV using greater than or less than to make it more clear
Max had purchased 1,000 shares of stock seven years ago for $61 per share. He gifted the stock to his nephew Rex two years ago when the FMV of the stock was $55 per share. Max was able to utilize an annual exclusion but he still had to pay $21,000 in gift taxes. If Rex sells the stock for $63 per share this year, how much is Rex’s basis in the stock?
A. $61 B. $55 C. $63 D. Basis cannot be determined
$61
Rex takes over the Uncle’s purchase price as basis because the FMV of the gift ($55) was less than the donor’s adjusted basis ($61) and Rex sold the stock for a gain ($63). Note that gift taxes, even though they were paid, do not apply since the FMV at the time of the gift was less than the donor’s basis.
