Tax

Question 1

What are Capital Assets?

Answer 1

Most personal use assets and most investment assets are capital assets. - Depreciable property used in a trade or business is generally a Section 1231 asset, not a capital asset. - Assets that are not capital assets or Section 1231 assets are ordinary income assets.
* Section 1221(a) of the IRC defines what is not a capital asset, including: -Inventory, - Depreciable property used in a trade or business, - Copyrights and creative works (if held by the creator of such works), and - Accounts and notes receivable,

Remember, all assets are capital assets except ACID (Accounts/notes
receivable, Copyrights and creative works, Inventory, and Depreciable property used in a trade or business).

Question 2

What are ordinary income assets?

Answer 2

• Ordinary assets are those assets that, when sold, result in ordinary income to the owner of the asset.
• Some of the assets listed in Section 1221(a) that are not capital assets are actually ordinary income assets, including inventory, accounts receivable, creations in the hands of the creator, and copyrights in the hands of the creator.

Question 3

What are section 1231 assets?

Answer 3

• Section 1231 assets are assets used in a trade or business.
• In addition to being used in a trade or business, Section 1231 assets are either (1) depreciable property or (2) real property.
• Section 1231 assets do not include: -Inventory, - Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or
• Copyrights or creative works.
• Section 1231 specifically includes certain property, such as: -Timber, -Coal, - Iron Ore, - Certain Livestock, and - Unharvested crops (under certain conditions)

Question 4

What increases/decreases basis?

Answer 4

Question 5

Three rules for basis of gifted property

Answer 5

• There are three rules related to the basis of gifted property: the general rule and two exceptions. - The general rule is that the donee’s basis in the gifted property is the same as the donor’s basis in the gifted property.
• The first exception occurs when the FMV of the gifted asset is less than the donor’s basis (loss property). When the FMV of the gifted asset is less than the donor’s basis, the Double Basis Rule must be used. (see example with Alex and Beth) * For gains only, the basis of the donor is also the adjusted basis of the donee. * For losses only, the basis to the donee is the FMV of the property on the date of the gift. * If the asset is later sold by the donee and the amount realized is between the fair market value at the time of the gift and the adjusted basis of the donor, no gain or loss is recognized.
• The second exception occurs when gift tax has been paid. In the event that gift tax has been paid and the asset had appreciated in the hands of the donor, then the portion of the tax which is associated with the appreciation is added to the donor’s basis to determine the donee’s basis.

Question 6

Calculation of gain or loss formula

Answer 6

Question 7

Treatment of gains/losses for different assets summary

Answer 7

Question 8

Net capital gains/losses steps

Answer 8

• The steps below should be followed to determine the net capital gain or loss.
• First, net long-term capital gains and long-term capital losses.
• Second, net short-term capital gains and short-term capital losses.
• If the taxpayer has both long-term net gains and short-term net gains, do not proceed to the next step. Both the net long-term gain and the net short-term gain should be recognized.
• Third, if the taxpayer has a net loss in one category and a net gain in the other category, then the net long-term gain/loss should be netted against the net short-term gain/loss. * In other words, if the taxpayer has a net long-term capital gain and a net short-term capital loss, the net short-term capital loss reduces the net long-term capital gain.
• Similarly, if the taxpayer has a net long-term capital loss and a net short-term capital gain, the net short-term capital gain reduces the net long-term capital loss.

Question 9

Limitations on capital losses

Answer 9

if a series of transactions results in a net capital loss, the amount of the loss that may be recognized in the current tax year is limited. - Under current law, up to $3,000 of capital losses (either short or long-term) may be recognized against other forms of income in any one tax year.
- If a capital loss is realized in a given tax year, but is not recognized due to the imposition of the loss limitation rule, the remaining loss is carried forward indefinitely, and may be used to offset future capital gains, or, alternatively, generate a $3,000 loss deduction each year against other income until the loss is used up.

Question 10

Recharacterization of some capital losses on small business stock into ordinary losses

Answer 10

Under IRC Sec. 1244, a single taxpayer can deduct up to $50,000 ($100,000 for married individuals filing jointly) of the loss on small business stock as an ordinary loss in any given year if the following requirements are met: - The stock represents ownership in a domestic corporation. - The corporation was a small business corporation (less than $1 million in total capital contributions plus paid-in capital) at the time the stock was issued.
- The company was incorporated after November 6, 1978. - The loss was sustained by the original owner of the stock (the person to whom the stock was issued by the corporation), who is not a corporation, trust, or estate.
- The stock was issued to the original owner in exchange for money or property. Stock issued in return for services or other stock does not qualify.
- For the five years prior to the loss, the corporation must have earned more than 50% of its gross receipts from sources other than royalties, rents, dividends, interest, annuities, and capital gains. * Note that any loss in excess of the per year limit is treated as capital loss. Furthermore, Section 1244 does not apply to gains. Any gains associated with Section 1244 stock are treated as capital gains.

Question 11

Section 1244 allows taxpayer to deduct up to how much loss?

Answer 11

Section 1244 allows the taxpayer to deduct up to $50,000 of loss on 1244 stock against ordinary income

Question 12

Faith owned ABC securities. She paid $5,000 for her shares and sold them for $7,000. Twenty days later, she purchased identical shares for $6,500. Which of the following is true?
a) The wash sale rules will apply.
b) The stock will receive Section 1244 treatment.
c) The stock will receive like-kind treatment.
d) Faith’s basis in the new shares is $6,500

Answer 12

Answer: D The wash sale rules will not apply because the stock was not sold for a loss. The stock does not receive Sec-tion 1244 treatment because there is no indication that this is Section 1244 stock, and the stock was not sold for a loss. Securities are not, by statute, like-kind assets. Faith’s basis will be what she paid for the new share ($6,500).

Question 13

Gifted property/basis calculation

Answer 13

Savannah’s basis = Cindy’s basis + ((Unrealized appreciation/taxable gift) x gift tax paid)

Question 14

Destiny’s business property was destroyed by fire. The original basis was $250,000. She received insurance proceeds of $600,000. She acquired replacement property two months later and paid $620,000 for the new property. What is Destiny’s basis in the new property?

Answer 14

In an involuntary conversion, the basis of the new property is generally a carryover basis. The basis is adjusted up if additional dollars are invested, and adjusted down if the replacement asset fair market value is less then the asset’s adjusted basis. $250,000 + $20,000 additional investment. ($270k total)

Question 15

What is the gain that will be recognized on the sale of the home?

Answer 15

Each spouse is entitled to a $250,000 exclusion of gain if they meet the ownership and use rules. Only one spouse is required to own the home for 2 of the last 5 years, however each is required to use the home for 2 out of the last five years. If the time frame is not met, a partial exclusion is available if the move was due to job change or other unforeseen circumstances. In this case, Kevin qualifies for the full $250,000 exclusion. Sydney is entitled to 9/24 of the exclusion = $93,750. The gain is $1,000,000 – $400,000 basis – $250,000 Kevin’s exclusion - $93,750 Sydney’s exclusion = $256,250.

Question 16

Ginger’s grandmother bequeathed stock to Ginger at her death 5 years ago. The grandmother paid $100 for the stock, and it was valued at $5,000 when the grandmother died. Ginger gave the stock to her daughter Emily 2 years ago. The stock was valued at $4,000 at the date of transfer. Emily sold the stock today for $4,500. What is the gain or loss on the sale?

Answer 16

$0… When Ginger’s grandmother died, Ginger inherited the stock with a basis of $5,000. When Ginger gave the stock to Emily, the stock had a double basis because the stock was in a loss position. Emily had a gain basis of $5,000 and a loss basis of $4,000. Since Emily sold the stock between those two values, Emily will not recognize any gain or loss.

Question 17

When to use MACRS?

Answer 17

allow the client to depreciate over the equipment’s life expectancy. because it is an acceptable method of tax depreciation as well as one which will yield the greatest expense in the early portion of the asset’s life.

Question 18

Can married filing seperate itemize and standard deduct?

Answer 18

No, one cannot standard deduct and the other itemize

Question 19

5 year property under MACRS

Answer 19

automobiles & cattle

Question 20

7 year property under MACRS

Answer 20

office furniture

Question 21

Kids’ income taxed @ parents rate?

Answer 21

unearned income over $2,500 is subject to tax at the parent’s tax rates

Question 22

With accrural accounting, when does taxpayer (seller) recognize income?

Answer 22

The accrual accounting method recognizes income when the taxpayer has a right to collect. This occurs usually after the completion of a job and in no case later than when the invoice is prepared and sent.

Question 23

Are moving expenses deductible?

Answer 23

NO. For years after 12/31/17, qualified moving costs are not deductible and if reimbursed by employer, they must be included in income.

Question 24

Tax/gift tax implications of tuition paid directly to university?

Answer 24

A payment directly to a university is considered a qualified transfer and is therefore not considered a gift for gift tax and generation-skipping tax purposes. Therefore, there are no filing requirements for the payment.

Question 25

When does seller recognize income under cash basis accounting?

Answer 25

Cash accounting recognizes income upon either actual or constructive receipt. Actual receipt is where the taxpayer has received the cash directly. Constructive receipt occurs when, though not having received the money in hand, the taxpayer has immediate access to the money (i.e., lock box receipt).

Question 26

Kiddie tax standard deduction for earned income

Answer 26

Earned income is not subject to kiddie-tax. His standard deduction is the greater of $1,250 or his earned income plus $400, not to exceed $13,850 in 2023.

Question 27

Under current rules, the Section 179 deduction for expensing qualifying business property in 2023 is:

Answer 27

Section 179 deduction is $1,160,000 for 2023. However, the amount is reduced dollar for dollar for acquisition amounts above $2,890,000 placed into service during 2023.

Question 28

Which of the following represents an addback for alternative minimum tax that would potentially result in a minimum tax credit?

Answer 28

The bargain element of an incentive stock option is an addback for alternative minimum tax purposes. In addition, since the addback is considered a deferral item for AMT, it would be eligible for the minimum tax credit in subsequent years.

Question 29

Employee lodging includible as income?

Answer 29

An employee is allowed to exclude from gross income the value of lodging furnished by an employer to the employee if the lodging is furnished (1) on the employer's business premises, (2) for the convenience of the employer, and (3) the employee is required to accept the lodging as a condition of employment. It does not matter that Hansel and Gretel were paid a housing allowance, which they were then required to pay back to the employer for rent. Hansel and Gretel can exclude the entire value of their housing from their gross income.

Question 30

What is depreciation cost recovery

Answer 30

Cost recovery is a periodic expensing of tangible property, including real and personal property used in business. Amortization is a periodic expensing of the cost of intangible assets. Depletion is the expensing of natural resources as they are being used up. This expense will fluctuate with the actual taking of the resource from the land.

Question 31

What expenses are capitalized by a business?

Answer 31

Costs to improve, better, or extend the life of an asset are capitalized. Tune-ups are a maintenance activity. Maintenance and repairs (roof and windshield) are period costs deductible in the period in which they were incurred.

Question 32

Misc. itemized deduction?

Answer 32

Gambling losses and all deductions incurred in carrying out wagering transactions are limited to gambling winnings for 2018 - 2025. Miscellaneous itemized deductions not subject to the 2% floor: 1. Gambling losses (to the extent of gambling income) 2. Credit for estate taxes imposed on IRD (income in respect of a decedent’s assets) 3. Loss on the disposition of an annuity contract 4. Repayments of income (such as repayments of Social Security income when the taxpayer fails the earnings test) TCJA of 20177 suspended itemized deductions that are subject to the 2% floor have been suspended after Dec 31, 2017 - before Jan 1 2026.

Question 33

Non refundable tax credits

Answer 33

Foreign tax credit. Tax credit for rehabilitation expenses. Disabled access credit. (Earned Income Tax Credit IS refundable)

Question 34

Assuming an asset is sold for a gain, when would Section 1250 ordinary income occur?

Answer 34

Real property subject to ACRS and accelerated depreciation was used. Section 1250 gain applies to the realized gain on real property where the accelerated method was used. The gain is the excess of accelerated over straight line (ACRS). Section 1250 gain is taxed as ordinary income. Under current law (MACRS), only straight line depreciation of real property is used.

Question 35

Under the First in First Out (FIFO) inventory system:

Answer 35

The cost of goods sold is based on the costs of the first goods purchased. The FIFO method is concerned with movement of costs through inventory, not goods. The cost of the first units purchased are the first costs to be transferred to cost of goods sold when the goods are sold.

Question 36

four main categories of itemized deductions?

Answer 36

Medical Expenses, Taxes, Interest, Charitable Contributions. TCJA suspended miscellaneous itemized deductions (subject to the 2% floor) and personal casualty losses (other than Federal Disasters).

Question 37

Which of the following taxes generates the largest percentage of gross collections for the Internal Revenue Service?

Answer 37

Individual income taxes make up nearly 50% of the gross collections by the Internal Revenue Service.

Question 38

Can money paid for child support be structured in a divorce as to be deductible to the payor spouse for divorces prior to 2019?

Answer 38

If an agreement is reached (prior to 12/31/2018) between former spouses where the decreed amount of alimony is increased to include child support, then the additional alimony would be taxable to the recipient and deductible to the payor. The additional money cannot be based on any contingency such as with the child reaching the age of majority or death.

Question 39

Alimony note

Answer 39

Note: alimony received from a contract dated by or prior to 12/31/18 remains includible income for the payee and deductible for the payor. Divorces finalized after 12/31/2018 will follow the new rules (not deductible or includable in income).

Question 40

Taxation of dividends?

Answer 40

The dividend distributions are taxable each year, so in year 6 the taxable dividends are $2,500. Nondividend distributions are taxable to the extent they exceed basis. The total nondividend distributions at the end of year 6 are $22,000, basis was $20,000, so only $2,000 is taxable gain. Dividends of $2,500 plus gain of $2,000 = $4,500.

Question 41

Selling something to charity/bargain sale capital treatment?

Answer 41

For tax purposes, bargain sale transactions (selling to an unrelated party at a price well below FMV) cannot generate capital losses.

Question 42

Personal holding company penalty?

Answer 42

If the business is deemed to be a PHC by the IRS, then a penalty tax of 20% can be imposed on the undistributed personal holding company income.

Question 43

Which of the following would be required to make federal estimated tax payments, assuming each had earnings in excess of $200,000? I. Estate. II. Partnership. III. C corporation. IV. Sole proprietor.

Answer 43

I, III, and IV. Partnerships are flow-through entities that never pay income tax. Therefore, partnerships would never be required to pay estimated taxes. A partnership is reported on form 1065 (an informational tax form) that flows through to the owner's 1040. A sole prop is reported directly on the 1040 (schedule C), making the individual and the business one and the same. Instructor Note: the $200,000 here is just a random number to indicate a tax liability that would need to use estimates, it could have been $100k or $300k here as well. CFP Board will often provide excess information as a distractor when testing concepts.

Question 44

community property states note

Answer 44

If asked a general question about community property states, it is best to stick to some states. The exam typically states which state the client lives in. They most often use California and Texas, which are true community property states. Arizona is one of the quasi community property states. Meaning transferring in individual assets would mean keeping them individual instead of making them automatically community property.

Question 45

Maximum allowable gift/expense per customer?

Answer 45

The maximum allowable expense for business related gifts is $25 per customer.

Question 46

Can you Carryback NOL?

Answer 46

NOL losses currently cannot be carried back but they can be carried forward, (except for select agricultural or insurance filers). However, the NOL can only offset 80% of the current year's income for years after 12/31/17. From irs.gov: Most taxpayers no longer have the option to carryback a net operating loss (NOL). For most taxpayers, NOLs arising in tax years ending after 2020 can only be carried forward. The 2-year carryback rule in effect before 2018, generally, does not apply to NOLs arising in tax years ending after December 31, 2017. The CARES Act provided for a special 5-year carryback for taxable years beginning in 2018, 2019 and 2020. Exceptions apply to certain farming losses and NOLs of insurance companies other than a life insurance company. Also, for losses arising in taxable years beginning after Dec. 31, 2020, the net operating loss deduction is limited to 80% of the excess (if any) of taxable income (determined without regard to the deduction, QBID, and Section 250 deduction over the total NOLD from NOLs arising in taxable years beginning before January 1, 2018.

Question 47

Do cousins meet the relationship dependent test?

Answer 47

No. Because Fran is from the same generation as Gee (even though she is presumably much younger than Gee), she does not meet the relationship test. A qualifying child must be from a lower generation than the taxpayer. All of the other options do meet the relationship test for being a qualifying child for the purpose of the dependency exemption.

Question 48

Carl Borden is a contractor who has just purchased a tractor for use in his business. Carl paid $25,000 plus $1,250 in sales tax for the tractor. The local municipality also imposes an annual personal property tax of $500. The tractor has an expected useful life of 5 years. What is Carl's basis in the tractor for depreciation purposes?

Answer 48

C. $26,250 Carl Borden is a contractor who has just purchased a tractor for use in his business. Carl paid $25,000 plus $1,250 in sales tax for the tractor. The local municipality also imposes an annual personal property tax of $500. The tractor has an expected useful life of 5 years. What is Carl's basis in the tractor for depreciation purposes?

Question 49

Are punitive damages received as result of personal injury taxable?

Answer 49

Yes. Punitive damages are always included in income. They may be excludible if they are the only recovery in a wrongful death case (The Alabama Rule).

Question 50

How would the realization requirement influence an investor's decision to purchase stocks expected to appreciate in value but not paying dividends versus stocks paying dividends but not expected to appreciate in value?

Answer 50

Dividends paid in cash are recognized as income in the year the dividends were paid. A dividend paid in shares of stock is not taxed upon receipt and will appreciate in value until the stock is sold. A cash based taxpayer recognizes income when received either actually or constructively. Realization is an economic concept, recognition is a tax concept.

Question 51

Jacob is divorced and has full custody of his two children although they spend every other weekend with their mother. How many personal exemptions is Jacob permitted on his Form 1040?

Answer 51

Zero Per the TCJA, personal exemptions are suspended from 1/1/18 through 12/31/2025.

Question 52

Under the accrual method of accounting, the taxpayer (buyer) recognizes expenses when:

Answer 52

The buyer receives the seller's invoice The accrual accounting method recognizes expenses when the legal liability to pay arises. This usually occurs when the invoice is received.

Question 53

Substantially equal periodic distributions

Answer 53

greater of 5 years or until 59.5

Question 54

Can a GRAT own stock in an s corp?

Answer 54

LLCs, partnerships, and other corporations are prohibited from becoming S corporation shareholders. Additionally, nonresident aliens and most trusts may not be S corporation shareholders. But a GRAT can

Question 55

In which of the following venues is a jury trial available for tax controversies?

Answer 55

A U. S. District Court.

Question 56

What difference does it make if a taxpayer's expenses are classified as un-reimbursed employee expenses rather than expenses from self-employment?

Answer 56

-Expenses from self-employment are deducted above the line and have no AGI floor. -Un-reimbursed employee expenses are not deductible.

Question 57

The constructive receipt doctrine:

Answer 57

The cash method of accounting recognizes income when received. Receipt may be either actual or constructive. Constructive receipt is when the taxpayer has the right to the money although they are not in possession thereof. A secular trust constructively belongs to the beneficiary therefore constructive receipt applies.

Question 58

the five tests which must be met to qualify as a dependent

Answer 58

1) Gross Income Test, 2) Support Test, 3) Member of Household or Family Member Test, 4) Citizenship Test (U.S., Canada or Mexico), and 5) Joint Filing Test.

Question 59

Diane purchased a hotel on November 15, five and 1/4 years ago for $5,000,000. Determine the cost recovery deduction for one month.

Answer 59

To depreciate real property, the mid-month convention is used. In addition, a hotel is not considered residential real property and is therefore depreciated using straight line depreciation over 39 years 1 ÷ 39 = .02564 $5,000,000 × 2.564% = $128,200 of annual depreciation expense $128,200 ÷ 12 = $10,683 for one month's depreciation in the current year

Question 60

Adoption expense credit

Answer 60

$15,950

Question 61

Rudy bought 10 shares of Fat Cat, Inc. stock on January 1 of the current year. Rudy paid $20 for each share. At first, it appeared that Rudy had made a good investment, as the price of Fat Cat stock rose to $50 per share on March 1 of the current year. However, rumors of corporate wrongdoing soon started to circulate and the price of Fat Cat began to fall. On August 1 of the current year, Fat Cat, Inc. declared bankruptcy and announced that the stockholders should not expect to receive anything on the liquidation of the corporation. What type of loss does Rudy have in the current year if any?

Answer 61

Short-term capital loss of $200. Section 165 creates an artificial sale date of December 31 for worthless securities. Therefore, Rudy is deemed to have sold the stock for $0 on December 31. Because Rudy's holding period was less than one year and one day, his loss will be a short-term capital loss. The amount of Rudy's loss is equal to his basis in the investment.

Question 62

Kent earned a salary of $175,000 during 2023. Assuming the Social Security wage base was $160,200, what is the amount of FICA taxes paid by Kent (rounded to the nearest dollar)?

Answer 62

The first $160,200 (for 2023) of Kent’s salary will be taxed at the partial employee FICA rate of 6.2%. All earnings will be taxed at the remaining FICA Medicare rate of 1.45%. The total FICA due is: $160,200 x 6.2% = $9,932.40 $175,000 x 1.45% = $2,537.50 Total FICA = $12,469.90

Question 63

Child Care credit question

Answer 63

Sue and Tom will be able to take a credit of $1,200 ($6,000 × 20%). Although not normally allowable as deductible child care, education expenses for children preschool through kindergarten are qualified expenses. The amount of costs that qualify is the lesser of actual costs or $3,000 for one qualified individual, and $6,000 for two or more qualified individuals (2021). If AGI is greater than $43,000 the allowed credit is 20%.

Question 64

To what extent may the rental losses of an active participant be deducted against active and passive income?

Answer 64

$25,000 of losses from rental property income may be deducted against ordinary income. The taxpayer must be considered "active" in that they participate in the general management and decision making of the property. Also, the $25,000 is reduced $1 for every $2 over an AGI limit of $100,000. When the AGI reaches $150,000, the deduction is lost and must be treated as regular passive income.

Question 65

Which of the following statements is/are correct regarding the tax consequences of the purchase of this investment?

Answer 65

I. Losses from the MLP will be considered passive losses. III. Interest income earned by the partnership will be included in the net investment income tax calculation on Gene’s individual income tax return. IV. If the MLP is profitable, none of the losses from the limited partnership can be used to offset the MLP income.

Question 66

Select one item which may be added to (or subtracted from) regular taxable income in calculating the AMT.

Answer 66

State income taxes deducted as an itemized deduction will be added back into regular income to calculate Alternative Minimum Taxable Income.

Question 67

taxes on dividends?

Answer 67

If Home Depot paid a dividend of $10 on Julian’s 100 shares, what are the tax consequences to Julian if Julian earns 150,000 a year and is in the 24% tax bracket? It is asking about the dividend. Home Depot dividends will qualify for qualified dividend treatment if the individual meets the requisite holding period, which is more than 60 days in the 121 days surrounding the ex-dividend date. Since he only held the stock for 39 days, he does not meet the holding period. Therefore, the tax rate applied against the dividend is his ordinary income tax rate of 24%.

Question 68

Martha gives her niece a machine to use in her business with a fair market value of $4,200 and a basis of $4,400. What is the niece's basis for depreciation (cost recovery)?

Answer 68

4200 Your basis for depreciation is the lower of FMV or adjusted basis for depreciation.

Question 69

How much of the self-employment tax can be deducted from gross income?

Answer 69

One half (50%) of self-employment tax is deductible from the taxpayer's gross income.

Question 70

Section 1245 recapture does not apply to business equipment held for 17 months or longer if:

Answer 70

The property was abandoned as worthless. Property sold or abandoned below the basis adjusted by depreciation is not subject to Section 1245 recapture because either not all depreciation was taken or there was more likely a loss rather than a gain. For 1245 recapture to occur there must be a gain over the basis.

Question 71

For tax purposes, a deduction is allowed for the consumption of the cost of an intangible asset through:

Answer 71

Cost recovery of an intangible asset is allowed through amortization. Cost recovery and depreciation (one in the same) are applied to tangible assets. The costs of natural resources are recovered through depletion.

Question 72

Which of the following tests must be satisfied by a qualifying child? Relationship Test. Gross Income Test. Abode Test. Citizenship Test.

Answer 72

The Gross Income Test is a requirement for a qualifying relative, not a qualifying child. All of the other tests must be satisfied by a qualifying child. In addition to either the qualifying child or relative test, a dependent must be a citizen and must not be required to file a joint tax return (unless to claim a refund).