REG 2 - Individual Tax Part 2

Question 1

What is the AGI for the following taxpayer:

• Self-employed gross income $57K
• Self employment tax $8K
• Self employed health insurance $6K
• Alimony paid $5k (divorce finalized before Jan 1, 2019)
• $2K contribution to traditional IRA

Answer 1

Gross Income $57K
Minus: one half of self employment tax $4K
Minus: self employed health insurance $6K
Minus: $2K traditional IRA contr.
Minus: Alimony $5K

AGI is $40K

Question 2

How much can an individual deduct each year for the traditional IRA?

Answer 2

up to $6K

Question 3

Are moving expenses deductible?

Answer 3

they are only deductible by members of the US armed forces on ACTIVE duty

Question 4

How much student loan interest can be deducted to arrive at AGI?

Answer 4

Student loan interest paid is deductible up to $2.5K a year

Question 5

What is the max a taxpayer can deducted for charitable contributions?

Cash Donation

Ordinary income property

LT Capital gain property

Answer 5

Cash - the limit is 60% of a taxpayers AGI.

Ordinary income property - the limit is 50% of AGI

LT capital gain property - the limit is 30% of AGI

All are ITEMIZED deductions

Question 6

If a taxpayer (gross income $10K) donates $4K of stock to a church that was purchased in the same year for $2K, what is the max charitable contribution deduction?

Answer 6

it would be $2K. Since the stock was purchased and donated in the same year it is considered ordinary income property. As such, the deduction for the donation is the lesser of the adjusted basis ($2K) or the FMV ($4K).

Question 7

What is the child tax credit per child?

Answer 7

it is $2K as long as the kids are under 17 and AGI is less than $400K (MFJ)

Question 8

What is the kiddie tax?

Answer 8

this is a tax on unearned income for the child. If a dependent child under 18 or under 24 AND does not provide over half his support AND is a full-time student, is taxed at the parent’s tax rate

Only for interest income and dividend income

Question 9

To avoid an underpayment penalty for current year taxes, estimated payments must be?

Answer 9

90% of the tax on the return for the current year, OR 100% of last year tax return (110% if AGI is over $150k)

Question 10

Can charitable contributions be carried forward?

Answer 10

yes, they can be carried forward 5 yrs.

Question 11

Greg’s home was totally destroyed by a hurricane. It was located in the federally declared disaster area. The property had an adjusted basis and FMV of $130K before the hurricane. During the year, Greg received an insurance reimbursement of $120K for the destroyed home. Greg’s current AGI is $70K. What amount of the loss was Greg entitled to claim as an itemized deduction?

Answer 11

Greg is able to claim $2.9K as an itemized deduction.

The casualty loss is measured by the difference in FMV before and after the casualty ($130 - $0) so $130K. The insurance recovery is $120K so $10K. Then you need to subtract $0.1K per casualty, $9.9K. This number is further reduced by 10% of the TP’s AGI so $70K x 10% - $7K.

Question 12

In 2021, Welch paid the following expenses:

• Premiums on an insurance policy against loss of earnings due to sickness or accident $3,000
• Physical therapy after spinal surgery $2,000

-Premium on an insurance policy that covers reimbursement for the cost of prescription drugs
500

In 2021, Welch recovered $1,500 of the $2,000 that she paid for physical therapy through insurance reimbursement from a group medical policy paid for by her employer. Disregarding the adjusted gross income percentage threshold, what amount could be claimed on Welch’s 2021 income tax return for medical expenses?

Answer 12

$1000.

only can deduct $500 of the $2000 for physical therapy as insurance covered $1500

can deduction $500 for the premium on the insurance policy that covers cost of prescriptions

the premiums on insurance for sickness or accident are not deductible bc they are not for medical care

Question 13

Charles Wolfe purchased the following long-term investments at par during 2021:

• $20,000 general obligation bonds of Burlington County (wholly tax-exempt)
• $10,000 debentures of Arrow Corporation

Wolfe financed these purchases by obtaining a
$30,000 loan from Union National Bank. For 2021, Wolfe made the following interest payments:

Union National Bank - $3,600
Qualified residence interest on home mortgage - $3,000
Credit card interest - $500

Wolfe’s net investment income for the year was $10,000. What amount can Wolfe utilize as interest expense in calculating itemized deductions for 2021?

Answer 13

$4200.

The credit card interest is never deductible

The qualified residence interest on the home mortgage is deductible (up to $750K loan)

Only 1/3 of the loan from Union National Bank is deductible bc tax exempt interest is NOT eligible for the interest expense deduction. Therefore $1200 is eligible.

Question 14

During 2021, student D, who is single, was claimed as a dependent by his parents. D earned $1,500 from a part-time job at a gas station. How much interest or other unearned income would D have to receive at a minimum to require him to file an income tax return for 2021?

Answer 14

$351;

in general a person must file an income tax return if his gross income equals or exceeds his standard deduction. BUT in the case where an individual who is claimed as a dependent on another’s tax return, he must file if unearned income exceeds $1,100 or total income exceeds the standard deduction.

for such a person, the standard deduction is limited to the greater of: 1,100 or the individual’s earned income plus $350.

Since D was claimed as a dependent by his parents, his standard deduction is limited to his earned income of $1,500 plus $350. Therefore if D receives $351 or unearned income his total income will exceed his standard deduction

Question 15

Are nonresident aliens who file a US tax return eligible for the standard deduction?

Answer 15

no they are not.

Question 16

An individual taxpayer earned $10,000 in investment income, $8,000 in noninterest investment expenses, and $5,000 in investment interest expense. How much is the taxpayer allowed to deduct on the current year’s tax return for investment interest expenses?

Answer 16

$2000

Investment interest may be deducted only to the extent of net investment income, which is any excess of investment income over investment expense. Net investment income equals $2,000 ($10,000 investment income – $8,000 noninterest investment expenses), therefore, only $2,000 of interest expense may be deducted.

Question 17

During the current year, Father made the following gifts to Son:

1. A painting with an adjusted basis of $16K, and a FMV of $45K
2. An interest free loan of $8K on Jan 1 to be repaid on Dec 31 in the current year. Federal rate was 11% per annum

What is the gross amount of gifts included in Father’s gift tax return?

Answer 17

$45K.

The loan would not be included bc Section 7872 excludes gift loans between individuals if the principal is less than $10K

Question 18

Joe is contemplating retirement and decided to simplify his financial situation by disposing of some assets. He had the following transactions during 2021:

• Sold his business to his son for $100,000. The fair market value of the business at the time of the sale was $175,000.
• Paid college tuition of $20,000 for his brother’s child.
• Gave stock valued at $15,000 to his alma mater.
• Paid $25,000 of the medical expenses of his sister who had no insurance.

What is the total amount of taxable gifts (before exclusion) that should be reported on his gift tax return for 2021?

Answer 18

$75K

Section 6019 provides that a gift tax return must be filed for almost all taxable gifts. Specifically excluded from the requirement for filing are transfers that qualify for and do not exceed the $15,000 annual exclusion of Sec. 2503(b), the Sec. 2503(e) exclusion for educational or medical expenses, or the charitable gifts provision of Sec. 6019(3). The $75,000 gift on the sale of the business is the only gift that is not excluded from the filing requirement.

Also gifts to political organizations are excluded from the gift tax

Question 19

Nancy made a $50,000 interest-free demand loan to her nephew James last year. The loan is still outstanding at the end of the current year. The applicable federal interest rate during the current year remained constant at 10%. What amount of this is considered a taxable gift in the current year?

Answer 19

0, the interest will end up being $5K which is under the $15K ($16K in 2022) gift tax exclusion

An interest-free loan generally results in a deemed transfer of interest between the borrower and the lender [Sec. 7872(a)]. The lender is deemed to have made a gift of the forgone interest to the borrower. The amount of Nancy’s gift to her nephew James is deemed to be $5,000. Because the amount of deemed interest is less than the $15,000 exclusion, it is not a taxable gift.

Question 20

JoAnn Veiga is a widow with two dependent children. Her current year AGI is $50K for which the applicable child and dependent care credit rate is 20%. Her work-related expenses for a home caregiver for the children are $3.6K and $3.8K for childcare at a nursery school. What is the amount of child and dependent care credit for JoAnn

Answer 20

$7400 Total Qualifying Expense ($3600 Work related expense + $3800 Nursery school expense)

Max allowable for 2 children is $6000 therefore the credit will be $1200 ($6000 x 20%)

Question 21

Relating to the child and dependent care credit, what who is considered a qualifying person?

Answer 21

1. dependent qualifying child under age of 13
2. disabled dependent of any age (must meet support test)
3. spouse who is disabled

Question 22

The list non refundable and refundable tax credits?

Answer 22

Non refundable

1. Child and dependent care credit
2. Elderly and permanently disabled credit
3. Education credits (lifetime learning & American opportunity (60% non refundable))
4. Retirement savings credit
5. Foreign Tax Credit
6. General business credit
7. Adoption credit

Refundable Credits

1. Child tax credit (partially)
2. earned income credit
3. Federal income tax withheld (W2)
4. Excess Social Security tax paid
5. American opportunity credit (40% refundable)

Question 23

Peter is single and 68 years old. He received the following:

$3120 social security received
$215 taxable interest
$3600 taxable retirement distributions
$4245 Wages from part time job

What is Peter’s credit for the elderly and or permanently disabled?

Answer 23

Peter’s AGI is $8060 ($4245 + $3600 + $215)

Base Amount $5000

Social security ($3120)
Excess AGI ($8060 - $7500) = $560 x 50% = $280
= $3400

$5000 - $3400 = $1,600
multiplied by 15% = $240

Question 24

When does a taxpayer need to make estimated tax payments.

Answer 24

When both of the following conditions are met:

1. if the amount of taxes owed is expected to be $1K or more
2. Inadequate Tax Estimates: 90% of current year’s tax or 100% of last year ($150K AGI then 110%)

Question 25

A taxpayer can be eligible for the Earned Income Credit by having a qualifying child or meeting what three qualifications?

Answer 25

1. The individual must have his or her principal place of abode in the United States for more than one-half of the taxable year;
2. (S)he must be at least 19 years old at the end of the taxable year; and
3. The individual can’t be claimed as a dependent of another taxpayer for any tax year beginning in the year the credit is being claimed.