Tax Flashcards
Bobby had the following expenses this year:
Salary 30k State of Nevada Bond int of 4K Gift from uncle - FMV 30k, uncle basis is 3K Student loan int 5K Medical Expenses 6K Roth IRA contribution 2K
What is the AGI this year?
The answer is 27,500
The bond int is tax fee because its muni
Gift would not be taxable
Student Loan - ONLY ALLOWED TO DEDUCT 2,500 as the max
Medical Expenses would be 7.5 of AGi but that is FROM AGI
Roth IRA is not deductible only a traditional and that is subject to phase limits
What Act Imposed the first constitutional federal income tax?
The revenue act of 1913.
Couple Notes:
16th amendment gave congress the power to impose an individual income tax
Act of 1916 raised the rates imposed by 1913.
Only 1 court with a jury trial available, which one is it?
U.S District Court for tax controversies
Bench trials are available in the others
You entertain one of your clients in Jan 2, 2021. Expenses paid are as follows:
Cab Fare: 22
Dinner at x: 190
Tips to water: 38
Covercharge at night club: 40
What would your deductions for the night be?
Answer: $250
Alright so we have a few rules to remember here.
First, Disaster Tax relief act of 2020 allows meals provided by restaurants to be fully deductible when paid or incurred after Dec 31, 2020 and before Jan 1, 2023
So we have the meal of 190, the tip of 38 and the cab fare is deductible as a transportation expense at the full cost(22). entertainment is not an allowed deductions
During the year, you furnished more than 50% of the support for the following persons: Dob, Bob your husband with no income and does not file a return. Dobby, your cousin who does not live with you, Randy, your father in law that does not live with you. Your 18 year old daughter Amanda who is a full time student. Presuming all other requirements have been met for qualified dependent. How many qualified dependent credits may you take?
Two
The father in law still counts even though he does not live with you. If you meet all the other qualifying relative requirements that were stated. You can claim the dependent credit for him.
The daughter is over 17 years old and is ineligible for the qualifying child credit of 2K. BUT as a full time student she will qualify as a relative for the $500 credit.
All the others are not qualified .
Remember cousins don’t meet the relationship test. Husband can’t be treated as a qualified dependent (1 unit!)
Dobby purchased a residence for 166,000, and insured it for full replacement value. It had a fair market value of 180,000 when it was damaged by fire. The FMV after the fire was 140,000, and Dobby received insurance proceeds of 15,000. What is the net amount of casualty loss that Dobby can deduct if his AGI is 78K?
$0
Tricky Tricky! After 12/31/17, TCJA eliminated deductions for personal casualty losses except where the fed declares a disaster.
IF it was a disaster, totally had this question right. The loss is the 40K decline in value. We reduce this by the payout of 15K with the insurance proceeds. I DONT GET THIS PART, $500 non-included amount for a total reduction of 17,100.
!80-140= 40-15=25K 25000-500= 24,500 deduction
Andres owns ski cabin with an adjusted basis of $350,000, subject to a mortgage of $50,000. On July 1st, Andres exchanges the cabin and its mortgage for $300,000 in cash, a promissory note for $300,000, and a beach house that has a fair market value of $75,000 with Bart. What is the amount realized by Andres?
725,000 is the amount that is realized.
Remember the difference between realized and recognized. With a like kind exchange we have an exception to the recognized gain. It makes it become realized for the purpose of trading the property.
Recognized is when we have an exchange that must be reported for tax calc.
Realized is just a transaction happening but we don’t have to calculate.
For this question, we must include the cash values being exchanged and the FMV of the home. NOTE for a debt, thats a relief to the individual so we must add that into our realized gain.
What is the substitute basis?
It is the assets FMV reduced by the gain realized in an exchange. Note for like kind exchanges we don’t have a recognized transaction.
Reese and Jake engage in a like-kind exchange. Reese transfers real estate with a fair market value of $500,000 and an adjusted basis of $200,000 to Jake. Jake transfers real estate worth $700,000 and an adjusted basis of $250,000, plus a $200,000 mortgage on the property, to Reese. What is Jake’s potential or deferred gain before and after the transaction?
450,000 potential gain b4 transaction, 250,000 gain after transaction
Reese
FMV $ 500,000
ATB $ 200,000
Deferred Gain $ 300,000
New Asset $ 700,000
New Basis $ 400,000 (Old basis & mtg)
Deferred Gain $ 300,000
Jake
FMV $ 700,000
ATB $ 250,000
Deferred Gain $ 450,000
Recognized by Jake $ 200,000 $200,000 Assumption of Mortgage is boot
New Asset $ 500,000
New Basis $ 250,000
Deferred Gain $ 250,000
Nancy and Oliver had been married for 25 years when Oliver died suddenly in February of the current year. Although Nancy was deeply depressed about Oliver’s death, she knew that Oliver would want her to move on with her life and she began dating again. It wasn’t long before Nancy was swept off of her feet by Paul. After a romantic weekend in the Catskills, Paul and Nancy got married in November of the current year. What filing status will be used for Nancy and Oliver for the current year?
Nancy will file MFJ and Oliver will file MFS. Nancy will not be allowed to file MFJ on two returns so for Oliver the last return will be MFS due to the new status under Nancy.
Michelle’s husband passed away in January this year. She does not remarry and still maintains a residence for herself and her son who is 10 years old. When she is filing her tax return for this year she may file as:
Single
Married filing jointly
Married filing separately
Qualifying widower
So only MFJ and MFS will count in this example. Because the husband died this year she counts for MJJ, which will last for 2 years. This is why qualifying widower won’t apply here. Also can fie for MFS bc she counts as being married for the entire year
Billy, single (he was divorced in 2010) and age 42, has the following items of income and expense for the current tax year.
Wages: $60,000
Interest: $1,200
Inheritance: $50,000
Alimony paid: $10,000
Child support paid: $8,000
Federal taxes paid: $5,000
State taxes paid: $2,000
Medical expenses: $7,500
Tickets from his employer for one basketball game: $100
What is his adjusted gross income?
The answer will be 51,200.
First, remember what income is. You must include the interest before you can make your deductions FOR AGI. The only deduction will be the alimony bc the divorce was in 2010. So, we add income and take out the 10K
Isaac is a middle school teacher with gross income this year of $35,000. Based on the following, what is Isaac’s adjusted gross income?
$4,000 qualified education interest expense
$2,000 alimony received under a pre-2018 agreement
$1,000 contribution to a traditional IRA
31,500 TRICKY TRICKY!!
First, notice the question already gave us gross income. So that means we would not add in the alimony payments bc it’s already been accounted for!
Next, the int of a qualified education expense is capped at 2,500. So our 4,000 would be limited to that.
What is the minimum deduction that a family and a single tax [ayer can take for a HDHP?
Family - 2,800
Single - 1,400
Saul was divorced in 1996 and is now single, age 63. He has gross income of $50,000. His bona fide deductible expenses are as follows:
Alimony = $8,000;
Charitable contributions = $2,000;
Contribution to an IRA = $2,000;
Net expenses paid on rental property = $5,000;
Interest and taxes on personal residence = $7,000;
State income tax = $1,200.
What is Saul’s AGI?
Answer is 35,000
So the question states that these are bona fide expenses, meaning they are business and deductible in nature. Don’t get confused though, bc most of these would be counted as deductible FROM AGI.
The expenses that can be deducted:
Alimony bc it’s pre 2018 so that’s our grandfathered deduction.
IRA contribution
The expenses paid for the rental property.
We know that moving expenses are no longer deductible for your job but what happens if the employer pays you a bonus to cover the cost. For example, lets say you moved it costs you 2,000 for the moving company, 600 for the meals 400 for gas. Your employer says here is 10,000 to cover some of those costs?
As we stated you will not be able to deduct any of those expenses. To make it worse, you will need to include that 10,000 on your W2 as income.
Data dumb for/from AGI deductions. Note how business expenses are taken, how a QBI is taken, and finally a personal deduction
I’m going to reword this question but for now here is the breakdown provided by dalton:
Deductions occur above the line (for) AGI and below the line (from) AGI. All business deductions are for AGI (above the line).
All business expenses (taken by their owners, i.e. sole proprietor or partner) are taken above the line or FOR AGI.
“Business deductions” are deductible directly against the business income, and will be reported on Schedule C or Schedule E (flow through from a K-1 is reported on Schedule E, and rental income and expenses are reported on Schedule E as well). On those forms, the business income and business deductions are netted, and the net amount is reported on the Form 1040 above-the-line.
QBI is not a business expense against revenue. It is a deduction based on pass through income of the owners.
The QBI deduction is at the individual level and is taken below-the-line. It is not a direct deduction against business income, it is a deduction against the individual owner’s share of income. Due to the phaseouts being based on each owner’s adjusted taxable income, it could be available for one owner, but not for another owner of the same business.
“Personal deductions” are not tied to a business. For example, mortgage interest is a personal deduction below the line (FROM AGI). An HSA contribution is a personal deduction above the line (FOR AGI).
“Job-related employee expenses” used to be deductible as a miscellaneous itemized deductions subject to the 2% floor, a below the line deduction (FROM AGI). Those are no longer available for tax years 2018-2025.
Paul (age 35) and his wife Stacey (age 33) are married with three young children. They both work outside the home. Paul is a corporate executive with Wellstar and Stacey is an executive assistant with a small local company. Paul fully participates in his company’s qualified retirement plan by contributing $19,500 of his salary, which is matched 100% up to 3% of compensation. Stacey’s employer does not offer a retirement plan. In addition, during the year they had the following items of income and expense:
Paul’s gross salary: $150,000
Stacey’s gross salary: $32,000
Stacey’s cash gift to her mother: $5,000
Interest from a joint savings account: $100
Federal income taxes withheld from paychecks: $30,000
State income taxes withheld from paychecks: $12,000
Charitable contributions made: $3,400
Rent paid for apartment: $24,000
Contribution to Paul’s traditional IRA: $6,000
Contribution to Stacey’s traditional IRA: $6,000
What is Paul and Stacey’s adjusted gross income?
150,000 Paul’s gross salary
+32,000 Stacey’s gross salary
182,000
+ 100 Interest
182,100
-19,500 His 401K
162,600
-6,000 Her IRAs
156,600 AGI
Note: states gross salary anddddd only 1 IRA deduction is made.
Janice, who is single, had gross income of $38,000, and incurred the following expenses:
Charitable contributions = $2,500
Taxes and interest on home = $9,000
Legal fees incurred in a tax dispute = $1,000
Medical expenses = $4,000
Penalty on early withdrawal of savings = $200
Her AGI is:
37,800 is the answer. Everything but the expense of the savings would be a below the line deduction.
Leon, age 32, is an active participant in his employer’s defined benefit plan, but he would also like to make a deductible contribution to a traditional IRA this year. Leon is married, files a joint return with his wife, and they have an AGI of $112,000 in the current year. What is the maximum deductible contribution that they each can make to a traditional IRA, assuming his wife is also an active participant?
Answer will be 3,900
So for this we look at our phaseout and can see they are allowed to make a contribution but it will be used. The formula would be this:
Max contribution * (AGI-floor/difference)
Max contribution in IRA would be 6K(notice they are not over 50) * (112,000-105,000)/20K = 2,100
Next, deduct that from 6K. The max deductible contribution that both can make would be 3,900
Vince, a single individual, is one of the founders and original shareholders of Security Consulting, Inc., a corporate security consulting firm. The company was initially capitalized with $200,000, and Vince was a 50 percent owner. The company was structured as a C corporation and filing requirements and permissible tax elections that could benefit the owners were made at the time the company was created. After several years of successful operations, Security Consulting lost market share to large national firms, and eventually closed down operations. Since it had no assets other than the goodwill of the business, there was nothing left to distribute to the shareholders. Assuming that there were no changes to Vince’s ownership interest over the period of his ownership, and that Vince has no capital transactions in the current year, by how much can Vince reduce his adjusted gross income this year due to the company becoming worthless?
53,000
This would qualify as a 1244 deduction. The stock was reduced to nothing so Vince would be entilted to deduct 50,000 as a capital loss. Additionally, 3K would count towards a long term capital loss for the year. The remaining 47,000 would be carried forward for future years.
Can money paid for child support be structured in a divorce as to be deductible to the payor spouse for divorces prior to 2019?
Yes, if an agreement was made b4 2019 stating that they both agree to include child support in the annual alimony payments. This would be counted as a deduction from income. Otherwise, it would not be included.
NOTE: it can not be called child support. This is only allowed if the payments increase to include this amount. But if it is stated as child support it will never be deductible
Under the terms of a divorce agreement dated 1/3/18, Larry is required to pay his wife Joyce $2,100 per month in alimony for a minimum period of 10 years and $300 per month in child support. For a twelve-month period, Larry can deduct from gross income (and Joyce must include in gross income):
The $300 per month for child support is not deductible by Larry. Child support payments are not deductible to the payor nor includable to the payee. Larry’s $300 per month in child support will remain part of his gross income.
The $2,100 is not alimony since it could extend beyond her death as the required payment is for a minimum of 10 years.
As a requirement for alimony, it can’t extend beyond the life of the payor or payee. Here, it stated is a minimum of 10 years, but what if the payor or payee died in year 4, then the agreement would still require payment, rendering it non-deductible.
Note: As planners, your client may state a payment is alimony, it is up to you to know what qualifies and what does not qualify as alimony to properly advise your clients.
Lucy and Lou are married and normally file a joint return. Under which of the following circumstances are they required to file a tax return for 2021?
If Lucy is 64 and Lou is 66 and their gross income is $26,200.
If Lucy and Lou are both 35 and have one dependent and their gross income is $24,800.
If Lucy is 64 and Lou is 64, Lou is blind, and their gross income is $26,300.
None of the above.
Answer is C
Even if you couldn’t remember these rules, tax tables give us the answer.
The standard deduction for both would be 25,100. Age 65 or blind is when you can take the additional amounts (also stated on tax table)
Tricky part is that you need to know in order to claim the additional amount for being blind you must file bc the IRS will not know. That’s why choice C is the correct answer.
Frank is considering selling a parcel of raw land located in South Dakota that he owns. If Frank sells the land, he would like to invest the proceeds in another piece of real property and would like to qualify for like-kind exchange treatment. Which of the following assets would not qualify as like-kind property for the sale of raw land?
Raw land located in Florida.
Raw land located in Canada.
New land located in South Dakota.
An industrial warehouse located in California.
Answer is Canada.
You had this rule correct, remember that like kind exchanges will not count if trading U.s property outside the U.S. As soon as you go to exchange for Canada the status is lost.
Which of the following is not a requirement for the deferral of gain in a nonsimultaneous exchange under Section 1031?
The replacement property must be like-kind property with respect to the original property.
The proceeds from the sale of the original property must be held by an escrow agent.
A replacement property must be identified within 90 days of the sale of the original property.
The closing on the replacement property must take place by the earlier of 180 days from the sale of the original property or the due date (including extensions) of the tax return for the year the original property was sold.
Put this entire question in here to help hammer in the point of like kind exchanges. The answer is 90 days. What that should say is that the replacement property should be identified within 45 days after selling the asset. NOT 90
Everything else is correct. Reread the question after looking at this answer.
Donna sells stock in Martin Corporation to her brother David for $1,800. Donna purchased the stock four years ago for $3,000 and the current fair market value of the stock is $1,800. David paid Donna $1,800 for the stock. Which of the following statements is correct regarding the tax consequences of this transaction?
ALSO I WANT YOU TO TELL ME WHY FOR EACH
If David subsequently sells the stock to an unrelated party for $3,500, he will realize a gain of $1,700.
Donna has a recognized loss of $1,200.
If David subsequently sells the stock to an unrelated party for $2,200, he will have no gain or loss.
If David subsequently sells the stock to an unrelated party for $3,500, he will have no gain or loss.
Answer C
I wish I didn’t have to give the choices here. But what we need to remember that this creates the double basis rule when you sell depreciating assets.
So for Donna her basis for 3K but she sold the stock to David for 1,800. Because of this loss what matters is what price David sells the stock.
If he sells it below 1800 we have a loss using the basis of 1800
If he sells it between 1800-3000 no gain and no loss
If he sells it above 3K the gain will be based on the basis of 3K
Which of the following is a “trade or business” expense?
QNEC contribution to 401K plans to retain qualification.
Charitable contributions by a partnership.
Gifts to contract; letting officials get preferential treatment in contracts.
Prepaid parking fines paid at a discount to the city to avoid ticketing in high traffic areas.
A is the correct answer.
This question becomes easier when we know what QNEC stands for, qualified non elective contribution.
With that we know that is a requirement for the 401k plan so it is deductible.
Also, look at the other options and laugh that you got this wrong. First, a charity contribution is not deductible bc its a personal expense.
Gifts are never deductible especially being that its a bribe. Finally, parking tickets/fines are never deductible
What are not allowed when calculating Net operating Loss
Any deduction for personal exemptions. · Capital losses in excess of capital gains. · The section 1202 exclusion… · Nonbusiness deductions in excess of nonbusiness income. · Net operating loss deduction. · The domestic production activities deduction.
For purposes of the Social Security earnings test, which of the following types of income would potentially cause a reduction in Social Security benefits?
Before you answer this question tell me what the earnings test is…
Dividends received from a global mutual fund.
B. Royalties from a published novel.
C. Distribution from a defined benefit plan.
D. Required minimum distribution received from a traditional IRA.
So the earnings test applies to earned income by the participant. The earned income would reduce the social security benefit.
For this, the only source that is not unearned income would be the royalties received from a published novel.
