Tax Flashcards
Karen and Tom are married filing jointly taxpayers with 3 children. Their MAGI is $195,000. What is the maximum amount of the child tax credit that could be refundable to Karen and Tom?
$0.
$2,000.
$4,200.
$6,000.
Solution: The correct answer is C.
They have 3 children. The child tax credit is $2,000 per child against their tax obligation, up to $1,400 ($4,200 for the three children) per child can be refundable if there is no tax obligation due.
The couple is phased out of the temporary enhanced child tax credit for 2021.
The carrybacks and carryforwards associated with the general business credit must be used in a specific order. Which of the following correctly describes that order?
I. The business credit carryforwards to the current year
II. The amount of the current year business credit
III. The business credit carrybacks to the current year
III, II, I
II, III, I
I, III, II
I, II, III
Solution: The correct answer is D.
Answer “D” correctly describes the sequence in which the carrybacks and carryforwards associated with the general business credit must be used.
Brody has set up a dividend reinvestment plan at Coca-Cola Enterprises, Inc. where all dividends are automatically reinvested into more Coca-Cola Enterprises stock. Brody never receives a check for the dividends. His initial stock ownership was 100 shares at a cost of $2,000. The total dividends for the year equaled $60. The administrative fee to convert into new shares was $5. How much, if any, of the dividends are included in Brody’s gross income?
None
$9
$55
$60
Solution: The correct answer is D.
All of the dividends are included in Brody’s gross income for the year. These dividends, while not received by Brody in the form of cash, could be taken as cash upon his election to end the dividend reinvestment plan. He has “constructively” received the dividends and decided to reinvest them in stock of Coca-Cola Enterprises, Inc. The administrative fee may be deducted but all the dividends must be reported as income.
Your client Bebe Rebozo is contemplating the exchange of two parcels of investment land for two similar parcels in two separate transactions. Given the following details of the proposed transaction, compute the amount of recognized gain and loss (if any) on both parcels if your client completes the exchanges: Parcel A: Ten acres of land acquired 15 years ago with a current basis of $50,000. In exchange your client will receive eight acres of land (FMV = $80,000) and $20,000 in cash. Parcel B: Twenty acres of land acquired two years ago with a current basis of $100,000. In exchange, your client will receive twelve acres of land (FMV = $75,000) and $10,000 in cash.
Parcel A Recognized Gain = $20,000; Parcel B Recognized Loss = $0
Parcel A Recognized Gain = $20,000; Parcel B Recognized Loss = $10,000
Parcel A Recognized Gain = $50,000; Parcel B Recognized Loss = $10,000
Parcel A Recognized Gain = $20,000; Parcel B Recognized Loss = $15,000
Solution: The correct answer is A.
This question pertains to like kind exchanges where boot is involved. The rule is that any realized gain will be recognized to the extent of the lesser of realized gain or boot received. In this case, there was a realized gain of $50,000 ($50,000 basis for $100,000 market value). The boot of $20,000 is recognized as gain since it is the lesser of boot or realized gain. Parcel B will have no gain in that there is no realized gain between the basis of the property given up and the fair market value of the property received. There is a realization but it is not recognized. Losses in like kind exchanges are not recognized.
Note: A gain or loss is realized when an asset is disposed of, or sold.
Recognition is what a like kind exchange is trying to avoid (payment of tax).
Payton owns farm land in west Texas where he raises cattle. In March of this year Austin approaches Payton about renting 25% of Payton’s land for purposes of growing wheat. Payton and Austin agree that Austin will only pay 3 months of rent at an amount of $8,000 per month if Austin will build a barn on the land, which is the equivalent to 6 months of rent. How much will Payton recognize as rental income this year?
$8,000
$24,000
$72,000
$96,000
Solution: The correct answer is C.
Payton’s rental income is the cash received of $24,000 ($8,000 × 3) plus the fair market value of any property received. Since they agreed that 6 months of rent would equal the fair market value of the barn, the additional value is $48,000 ($8,000 × 6).
Craig and Mallory got married and bought a house 15 months ago. Mallory’s job recently transferred her to an office in a different state, so Craig and Mallory sold their house. What is the maximum amount of gain from the sale of the personal residence that Craig and Mallory can exclude from income taxation?
$0.
$250,000.
$312,500.
$500,000.
Solution: The correct answer is C.
Although they did not live in their house for a full two years, Craig and Mallory are eligible for a prorated exclusion because of Mallory’s change in employment. Therefore, they are eligible for a maximum exclusion of [(15 / 24) × $500,000]=$312,500.
Petra Walenski purchased a personal 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 fair market value after the fire was $140,000, and Petra received insurance proceeds of $15,000. What is the net amount of casualty loss that Petra can deduct if her adjusted gross income is $78,000?
$0 $1,000 $17,100 $24,500 Solution
Solution: The correct answer is A.
After 12/31/17, TCJA eliminated deductions for personal casualty losses except where Federal disaster’s were declared, so the deduction here is $0.
Had it been a federal disaster, the calculation would be as follows: The loss is the $40,000 decline in value, reduced by the $15,000 of insurance proceeds, $500 non-included amount for a total reduction of $24,500.
$180,000 - 140,000 = 40,000 - 15,000 (insurance) = 25,000
$25,000 - 500 = 24,500 deduction
TCDTR Act of 2020 changed the casualty loss formula. It still only applies to federally declared disasters.
Noah has been working part-time through college and earned $20,000 last year with a total federal income tax liability of $1,200. This year he will earn $100,000 with an expected income tax liability of $15,000. What is the lowest amount of tax withholding Noah should have to meet the safe harbor rules?
$1,200
$12,000
$13,500
$15,000
Solution: The correct answer is A.
He has two choices: 100% of last year’s tax liability or 90% of this year’s tax liability. Last year’s income tax liability was $1,200 and 90% of this year is $13,500. Therefore, the lowest amount that of tax withholding that needs to be met is $1,200.
During the current year, Martin, an unmarried taxpayer residing in Montgomery County, collected $200 interest on U.S. government bonds, $600 on Montgomery County school bonds, and $500 interest on a state condemnation award. He also received $60 in dividends on Ford Co. Common stock. His gross taxable income from the above is:
$1,360
$760
$560
$260
Solution: The correct answer is B.
Interest on Montgomery County school bonds is excluded under Section 103. Gross income is $200 + $500 + $60 = $760.
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?
$675,000
$725,000
$925,000
$975,000
Solution: The correct answer is B.
The realized amount not only includes the monies and fair market value of the beach house received (and any indebtedness the buyer has to the seller), but also any liabilities for the seller is relieved. In this case, the seller received $675,000 in cash, property, and notes (buyers indebtedness to the seller) as well as relief from $50,000 in mortgage. The total amount realized is $725,000.
Summary:
When dealing with an exchange, there are two things to note: realized and recognized. Realized is a transaction happening. Recognized is when a realized transaction has not met an exception and must have tax calculated. A like kind exchange is an exception to realized transactions to not be recognized. This question asked the realized amount which is the value received plus debt relief totaling 725k. There is no recognized amount, which is what you were trying to calculate.
Andres is getting:
Relief from mortgage $ 50,000
+ Cash $300,000
+ note $300,000
+ property $ 75,000
= total received $725,000 this is Andres’ “amount realized”
Jim died last year. Which of the following gifts, made by Jim before his death, will be included as an adjusted taxable gift when calculating his tentative tax base for estate tax purposes?
A. Publicly-traded common stock worth $80,000 gifted to Tom in 1975.
B. A $400,000 life insurance policy on his life gifted to Mary three years before Jim’s death. The policy was worth $30,000 on the date of the gift.
C. $50,000 cash gifted to Jim’s cousin in 1997 to help him start a new business.
D. Tuition payment of $30,000 made in 2005 for the benefit of Jim’s grandson. The payment was made directly to the university.
Solution: The correct answer is C.
The question is asking about the taxable estate, not the gross estate. To calculate the taxable estate, you must know what is left of the lifetime exclusion and credit. Any gift that used any of the exclusion (gifts above the annual gift tax exclusion where gift tax was not paid) needs to be pulled back in to calculate the remaining amount for the estate.
A is incorrect. Only post-1976 taxable gifts are included in the determination of adjusted taxable gifts.
B is incorrect. Since the life insurance policy was gifted three years prior of Jim’s death, the policy death benefit will be included in Jim’s gross estate. Property included in the gross estate is excluded from treatment as an adjusted taxable gift.
D is incorrect. Tuition payments made directly to the education provider are not considered gifts (they are qualified transfers), and therefore are excluded from treatment as an adjusted taxable gift.
There is a simplified form 706 in the estate planning pre-study book for reference, and a pre-study lecture available.
