Reg 1 Flashcards
The requirments that enable a taxpayer to be classified as a “qualifying widow(er)” are:
-The taxpayer’s spouse died in one of the 2 previous years and the taxpayer did not remarry in the current tax year
-The taxpayer has a child who can be claimed as a dependent
-This child lived in the taxpayer’s home for all of the current tax year
-The taxpayer paid over half of the cost of keeping up a home for the child
The taxpayer could have filed a joint return in the year the spouse died
A qualifying widow(er) is a taxpayer who may use the joint tax return standard deduction and rates (but not the exemption for the deceased spouse) for each of two taxable years following the year of the death of his or her spouse, unless he or she remarries.
The surviving spouse must maintain a household that, for the whole entire taxable year, was the principal place of abode of a son, stepson, daughter, or stepdaughter (whether by blood or adoption). The surviving spouse must also be entitled to a dependency exemption for such individual.
In which of the following situations may taxpayers file as married filing jointly?
RULE: In order to file a joint return, the parties must be MARRIED at the end of the year. Exception: If the parties are married but are LEGALLY SEPARATED under the laws of the state in which they reside, they cannot file a joint return (they will file either under the single or head of household filing status).
A couple filed a joint return in prior tax years. During the current tax year, one spouse died. The couple has no dependent children. What is the filing status available to the surviving spouse for the first subsequent tax year?
For the first subsequent tax year (and all other subsequent tax years) after the death of a spouse with no dependent children, filing status is single.
A taxpayer’s spouse dies in August of the current year. Which of the following is the taxpayer’s filing status for the current year?
Married filing jointly:
The joint return rates apply for two years following the death of a spouse, if the surviving spouse does not remarry and maintains a household for a dependent child. There is nothing in this question that says whether or not the surviving spouse maintains a household for a dependent child. However, since the question is asking about the current year, the surviving spouse is considered to be married (and thus able to file as married filing jointly) for the entire current year even if the spouse dies earlier in the year (in this case in August).
Joe and Barb are married, but Barb refuses to sign a Year 12 joint return. On Joe’s separate Year 12 return, an exemption may be claimed for Barb if:
Barb had no gross income and was not claimed as another person’s dependent in Year 12
RULE: If a married individual files a separate return, a personal exemption may be claimed for his or her spouse if the spouse has no gross income and is not claimed as a dependent of another taxpayer.
In Year 1, Smith, a divorced person, provided over one half the support for his widowed mother, Ruth, and his son, Clay, both of whom are U.S. citizens. During Year 1, Ruth did not live with Smith. She received $9,000 in Social Security benefits. Clay, a 25-year-old full-time graduate student, and his wife lived with Smith. Clay had no income but filed a joint return for Year 1, owing an additional $500 in taxes on his wife’s income. How many exemptions was Smith entitled to claim on his Year 1 tax return?
Smith is entitled to an exemption for himself. He is also entitled to an exemption for his mother Ruth (qualifying relative). Ruth has $9,000 in Social Security payments during Year 1, but because that is her only income, the Social Security is not taxable, and nontaxable income does not count in calculating whether an exemption can be taken for a dependent. Clay cannot be taken as a dependent because he filed a joint return with his wife. Because the joint return was filed for a purpose other than simply claiming a refund, the joint return prevents Smith from claiming an exemption for Clay. An exemption cannot be taken for Clay’s wife because she filed a joint return with Clay. Smith is entitled to two exemptions.
Jim and Kay Ross contributed to the support of their two children, Dale and Kim, and Jim’s widowed parent, Grant. For Year 27, Dale, a 19-year-old full-time college student, earned $4,500 as a babysitter. Kim, a 23-year-old bank teller, earned $12,000. Grant received $5,000 in dividend income and $4,000 in nontaxable Social Security benefits. Grant and Kim are U.S. citizens and were over one-half supported by Jim and Kay, but neither of the two currently reside with Jim and Kay. Dale’s main place of residence is with Jim and Kay, and he is currently on a temporary absence to attend school. How many exemptions can Jim and Kay claim on their Year 27 joint income tax return?
Taxpayers are now entitled to an exemption for each qualifying child and qualifying relative (two tests are “CARES” or “SUPORT”). For Dale, he does meet the residency requirement because there is an exception for a temporary absence while attending school. Therefore, he is a qualifying child under the CARES test. Kim does not qualify as a qualifying child (CARES test) because, although she is under age 24, she is not a full-time student. Therefore, the income limitations of the SUPORT test apply, and she does not qualify under that test either. Likewise, Grant’s taxable income of $5,000 exceeds the minimum. Thus, 3 total exemptions can be claimed (Jim, Kay, and Dale).
The qualifications to take an exemption for a qualifying relative are found in the “SUPORT” mnemonic.
- Support (over 50%) test
- Under a specific amount of (taxable) gross income test
- Precludes dependent filing a joint tax return test
- Only citizens (residents of US/Canada or Mexico) test
- Relative test OR
- Taxpayer lives with individual for whole year test
Darr, an employee of Sorce C Corporation, is not a shareholder. Which of the following would be included in a taxpayer’s gross income?
a.
Employer-provided medical insurance coverage under a health plan.
b.
The dividend income on shares of stock that the taxpayer received for services rendered.
c.
The fair market value of land that the taxpayer inherited from an uncle.
d.
A $10,000 gift from the taxpayer’s grandparents.
An individual receiving common stock for services rendered must recognize the fair market value as ordinary income. Any dividends received on that stock would also result in income recognition.
Because the second property was personally used more than 14 days, any net loss from the rental of the property will be disallowed.
All related expenses must be prorated between the personal use portion and the rental activity portion. Prorated depreciation is permitted for the rental activity.
Among the requirements for payments to be classified as alimony are the following:
- Payment must be in cash or its equivalent.
- Payments cannot extend beyond the death of the payee-spouse.
- Payments must be legally required pursuant to a written divorce (or separation) agreement.
- Payments cannot be made to members of the same household.
- Payments must not be designated as anything other than alimony.
- The spouses may not file a joint tax return.
Note: The requirements for payments to be considered alimony (income) are the same as for payments to be alimony (deductions).
Uniform Capitalization rules provide guidelines with respect to capitalizing or expensing certain costs. With regard to inventory:
direct materials, direct labor, and factory overhead should be capitalized as part of the cost of inventory. Warehousing costs, quality control and taxes, excluding income taxes, are all considered factory overhead items. The research should be expensed.
During Year 9, Ash had the following cash receipts:
Wages $ 13,000
Interest income from U.S. Treasury bonds $350
Workers’ compensation following a job-related injury $8,500
The total amount that must be included in gross income is $13,350 ($13,000 in wages plus $350 in interest income on U.S. Treasury bonds).
Rule: Wages and interest on U.S. Treasury bonds are includible in gross income and must be reported as part of gross income on a taxpayer’s income tax return.
Rule: Damages for personal injury (i.e., workers’ compensation for a job-related injury) are specifically excluded from gross income.
Rule: If foreign travel is primarily for personal in nature (e.g., a vacation), none of the travel expenses (e.g., round trip airfare) incurred will be allowable business deductions, even if the taxpayer was involved in business activities while in the foreign country.
Note: It does not appear that the examiners are attempting to trick candidates on the classification of the business expenses as travel or educational. It appears that the purpose of the question is to test the candidate’s ability to recognize when expenses are deductible and when they are not deductible business expenses.
On December 1 of the current taxable year, Krest, a self-employed cash basis taxpayer, borrowed $200,000 to use in her business. The loan was to be repaid on November 30 of the following year. Krest paid the entire interest amount of $24,000 on December 1 of the current year. What amount of interest was deductible on Krest's current year income tax return? a. $2,000 b. $22,000 c. $24,000 d. $0
Choice “a” is correct. Cash basis taxpayers deduct interest in the year paid or the year to which the interest relates, whichever is later. Even though all of the interest on this loan was paid on December 1, of the current year, only the interest relating to December of the current year can be deducted in the current year. The question does not give an interest rate, but because the loan is to be repaid in a lump sum at maturity, 1/12 of the interest, or $2,000 applies to each month.
Scholarships are nontaxable for degree seeking students to the extent that the proceeds are spent on tuition, fees, books and supplies.
The $5,000 for teaching courses is taxable compensation for services delivered.
Which payment(s) is (are) included in a recipient’s gross income?
I.
Payment to a graduate assistant for a part-time teaching assignment at a university. Teaching is not a requirement toward obtaining the degree.
II.
A grant to a Ph.D. candidate for his participation in a university-sponsored research project for the benefit of the university.
BOTH
Under the uniform capitalization rules…
Purchasers of inventory for resale may deduct their marketing costs but must capitalize their off-site storage costs.
Marketing costs are deductible, but off-site storage must be capitalized.
In a tax year where the taxpayer pays qualified education expenses, interest income on the redemption of qualified U.S. Series EE Bonds may be excluded from gross income. The exclusion is subject to a modified gross income limitation and a limit of aggregate bond proceeds in excess of qualified higher-education expenses. Which of the following is (are) true?
I.
The exclusion applies for education expenses incurred by the taxpayer, the taxpayer’s spouse, or any person whom the taxpayer may claim as a dependent for the year.
II.
“Otherwise qualified higher-education expenses” must be reduced by qualified scholarships not includible in gross income.
BOTH:
Interest earned on Series EE bonds issued after 1989 may qualify for exclusion. One requirement is that the interest is used to pay tuition and fees for the taxpayer, spouse, or dependent enrolled in higher education. The interest exclusion is reduced by qualified scholarships that are exempt from tax and other nontaxable payments received for educational expenses (other than gifts and inheritances).
During the year Kay received interest income as follows:
On U.S. Treasury certificates
$ 4,000
On refund of prior year’s federal income tax
500
The total amount of interest subject to tax in Kay’s current year tax return is:
a. $0 b. $4,500 c. $4,000 d. $500
Choice “b” is correct. Interest income from U.S. obligations is generally taxable. Interest income on a federal tax refund is taxable, even though the refund itself is not taxed.
With regard to the inclusion of social security benefits in gross income, for the Year 8 tax year, which of the following statements is correct?
a.
The social security benefits in excess of the modified adjusted gross income over a threshold amount are included in gross income.
b.
The social security benefits in excess of one half the modified adjusted gross income are included in gross income.
c.
The social security benefits in excess of modified adjusted gross income are included in gross income.
d.
Eighty-five percent of the social security benefits is the maximum amount of benefits to be included in gross income.
Choice “d” is correct. The amount of social security benefits that is taxed is dependent on whether the combined income (AGI plus interest on tax-exempt bonds and 50% of the social security benefits) is greater than a threshold amount. If the combined income is less than the threshold, the amount taxed is the lesser of 1) 50% of the benefits or 2) 50% of the excess of the combined income over the threshold. If the combined income is greater than the threshold, the amount taxed is the lesser of 1) amount calculated above plus 85% of the excess of the combined income over the threshold or 2) 85% of the benefits. Thus, 85% of the benefits is the maximum amount of benefits that may be included in gross income.
Rich is a cash basis self-employed air-conditioning repairman with current year gross business receipts of $20,000. Rich’s cash disbursements were as follows:
Air conditioning parts $ 2,500 Yellow Pages listing 2,000 Estimated federal income taxes on self-employment income 1,000 Business long-distance telephone calls 400 Charitable contributions 200
What amount should Rich report as net self-employment income? a. $14,900 b. $13,900 c. $14,100 d. $15,100
Deductions to arrive at net self-employed income include all necessary and ordinary expenses connected with the business. Estimated federal income tax payments are not an expense. Charitable contributions by an individual are only deductible as an itemized deduction on Schedule A. This assumes the contribution was not made with the "expectation of commensurate financial return." Receipts $ 20,000 Parts (2,500) Listing (2,000) Telephone (400) Net self-employment income $ 15,100
On December 1, Year 1, Michaels, a self-employed cash basis taxpayer, borrowed $100,000 to use in her business. The loan was to be repaid on November 30, Year 2. Michaels paid the entire interest of $12,000 on December 1, Year 1. What amount of interest was deductible on Michaels' Year 2 income tax return? a. $11,000 b. $1,000 c. $12,000 d. $0
Prepaid interest must be prorated over the time for which payment is made. This is true for both cash and accrual basis taxpayers. The loan is for 1 month in Year 1 and 11 months in Year 2. Therefore, 1/12 of the interest is deductible in Year 1 and 11/12, or $11,000 is deductible in Year 2.
