REVIEW R1 & R2 Flashcards
Which statement below is correct?
One-half month of depreciation is taken for the month that real property is disposed of.
One-half month of depreciation is taken for the month that real property is disposed of.
Salvage value is not considered in MACRS depreciation.
Real property is depreciated using the mid-month convention.
A taxpayer wants to deduct the cost of a seven-year asset placed in service this year. The cost qualifies for the Section 179 election to expense assets. Which of the following statements is most accurate regarding the immediate expensing of this asset versus the depreciation of this asset over seven years?
There is no difference in the total amount that is deductible over the life of the asset.
The total amount that is deductible over time is the same for both cost recovery methods. The total cost of the asset is deducted in the first year under Section 179, subject to certain limitations. If the asset is depreciated, a portion of the total cost is deducted each year over the life of the asset, so that the total cost of the asset has been deducted by the end of the asset’s life.
An individual taxpayer had the following transactions during the current year:
Workers’ compensation payments $30,000
Damages received for slander 40,000
Loss on the sale of a personal residence 75,000
W-2 wages 80,000
What is the taxpayer’s adjusted gross income?
$120,000
The taxpayer’s adjusted gross income (AGI) is $120,000, which consists of the $80,000 wages and the $40,000 damages received for slander. Compensation for services and damages received for nonphysical injury, such as slander, are included in taxable gross income. Workers’ compensation payments are excluded from taxable gross income and the loss on the sale of a personal residence is a nondeductible personal loss.
Diana Kalyvas received a painting as a gift from her sister, Joanna, on April 1 of the current year. The painting had a fair market value of $5,000 at the date of gift, and Joanna had purchased the painting twenty years prior for an amount of $7,000. After holding the painting for three months, Diana realized that she would rather have the money for the value of the painting than the painting itself, so she sold the painting to her neighbor for $4,500 on July 4. On her current year income tax return, Diana should report:
A short-term capital loss of $500.
The basis of the painting depended upon what Diana eventually sold the painting for. The gain basis of $7,000 would have applied if Diana had sold the painting above $7,000, but that did not happen in this case. The basis of $5,000 (FMV at the date of gift) applied because Diana sold the painting for less than the FMV at the date of gift and at the date of the gift the FMV of the gift was less than the donor’s basis in the gift. Further, although the holding period for the donee typically includes the donor’s holding period, this case is an exception to the rule. The holding period starts with the gift date when the FMV at the date of gift is used as the basis. Therefore, the sale resulted in a short-term capital loss of $500.
Troy and Edie are married and under 65 years of age. During the current year, they furnish more than half of the support of their 20-year old daughter, Jobeth, who lives with them. Jobeth earns $15,000 from a part-time job, most of which she sets aside for future college expenses. Troy and Edie also provide more than half of the support of Troy’s cousin who does not live with them. Edie’s father is 80 years old and fully supported by Troy and Edie. He lives in an apartment down the street from Troy and Edie. How many individuals meet the definition of dependent for Troy and Edie?
One
One individual qualifies as a dependent: Edie’s father. An individual is a dependent of a taxpayer if he/she meets either the qualifying child or relatives rules. Jobeth does not meet either qualifying child or qualifying relative criteria. She fails the age requirement of qualifying child because she is over the age of 19 and not a full-time student. Her income is too high for the qualifying relative rules. Troy’s cousin does not meet the relationship test for either qualifying child or relative. Edie’s father meets the criteria for qualifying relative. A dependent parent is not required to live with the taxpayer to be deemed a dependent.
Rick purchased 100 shares of XYZ stock on April 4, Year 4, for $8,600. He sold 50 shares on February 8, Year 5, for $3,000. He then bought another 50 shares of XYZ on March 1, Year 5, for $3,200. What is Rick’s basis of the 50 shares purchased on March 1, Year 5?
$4,500
Rick sold half of the original shares for $3,000. The cost of those shares is $4,300, half of the original purchase price. The realized loss is $1,300 ($3,000 – $4,300). However, he bought back the shares less than 30 days later. Therefore, under the wash sale rules, none of the loss is recognized and it is all deferred. Rick’s cost of the shares purchased on March 1, Year 5, is $3,200. The cost is increased by the deferred loss of $1,300 to arrive at a basis of $4,500 ($3,200 + $1,300).
An employee who has had social security tax withheld in an amount greater than the maximum for a particular year may claim:
The excess as a credit against income tax, if that excess was correctly withheld by two or more employers.
An employee who has had social security tax withheld in an amount greater than the maximum for a particular year may claim the excess as a credit against income tax, if that excess was correctly withheld by two or more employers.
