Tax Planning

Question 1

Name the 16 Tax Exclusions from Income

Answer 1

MAFIAS PADDED MICS

Muni bond interest
Accident /health plan employer premiums
Fringe Benefits
Inheritance and gifts
Accident /health plan payouts/money received
Scholarships

Personal residence cap gains deduction of $250k/$500k (S/MFJ)
Adoption assistance up to $14890 subject to thresholds $223-$263k
Death Benefits
Dependent Care Assistance
Education assistance up to $5250
Debt Discharged

Meals and lodging for employees
Interest on Series EE and I education bonds
Compensatory damages compensation
Support payments received (child support + post 2018 alimony (pre=income)

Question 2

What are the 11 deductions For AGI - identifying 6 most prevalent

Answer 2

BESS IS SHAME
Business expenses for government officials
Educator expenses at $250/pp
Self Employment tax at 1/2 tax (SE
profits.9235*tax table) excludes 0.9% medicare
*Self Employment Health Insurance for family at 100% premiums up to SE
income, including dental and LTC

*IRA contributions: $6000/+$1,000 50+ to
thresholds if in employer plan
$68-78,000 S/$109- 129,000 MFJ/$204-
214,000 if not in plan
*SEP/SIMPLE/Qualified Plans:
SEP- $61000 or 25% SE Earnings (net SE-SE
tax)x20%
Simple- $14000 for employer(3% match)+employee contributions +$3000+50

Student loan interest of up to $2500 paid
*HSA after tax contributions: $3,650-S/$7300-MFJ/+$1000 55+ (excludes Medicare)
*Alimony paid if pre 2019 separation as income to recipient/deduction to
payor
Moving expenses for armed forces
Early Withdrawal penalties

Question 3

What are the primary deductions for AGI

Answer 3

IRA contributions: $6000/+$1,000 50+ to thresholds if in employer plan
$68-78,000 S/$109- 129,000 MFJ/$204-214,000 if not in plan
SEP/SIMPLE/Qualified Plans:
SEP- $61000 or 25% SE Earnings (net SE-SE tax)x20%
Simple- $14000 for employer+employee contributions +$3000 50+
Self Employment tax at 1/2 tax (SE profits.9235tax table) exclude 0.9%
medicare
HSA after tax contributions: $3,650-S/$7300-MFJ/+$1000 55+
Alimony paid if pre 2019 separation as income to recipient/deduction to
payor
Self Employment Health Insurance for family at 100% premiums, including
LTC and dental

Question 4

What are the below the line or From AGI deductions

Answer 4

Greater of
- Standardized deduction for individual plus charitable contributions
- Itemized deductions including (1) Medical at beyond 7.5% AGI (2) SALT
payments up to $10k, (3) Interest deductions on mortgage up to $750K
debt; Net investment income (4) Charitable contributions limited to 60%
AGI for qualified (public vs private @ xx%, (5) Casualty and Theft Losses
above 10% AGI threshold

Question 5

What is the Tax Formula

Answer 5

All Income
Minus Exclusions
Gross Income
Minus Deductions for AGI (Above the Line) MAFIA PADDED MICS
Adjusted Gross Income
Minus Deductions from AGI (Below the Line) of Standard or Itemized, plus
Qualified Business Deductions
Taxable Income
Tax Table value
Gross Tax
Minus Tax Credits
Final Tax Due
Minus prepayments of estimated taxes and /or federal with holding taxes
Net Income Tax Due/Refund

Question 6

What is form 1040

Answer 6

.

Individual Income Tax Filing

Question 7

What is form 1040x

Answer 7

.

Amended Individual Income Tax Filing

Question 8

What is form 1040ES

Answer 8

.

Estimated Tax Payments

Question 9

What is form 1041

Answer 9

.

Estates and Trusts

Question 10

What is W2

Answer 10

.

Wages and Taxes; Reported on line 1 of 1040

Question 11

What is Schedule 1

Answer 11

.

Additions and Adjustments to Income..reported on line 8 (additions) and line 10 (adjustments) to arrive at AGI, line 11

Includes Additions of Business profit/loss, Tax refunds, Pre 2019 Alimony, Rents and Royalties, Personal Rental property, and other income (debt cancel, gambling, options)

Also includes above the line of For AGI adjustments to income reported on line 10 before AGI on line 11

Question 12

What is Schedule A

Answer 12

.

Itemized Deductions - Below the line/From AGI deductions reported following AGI line which include:

• Unreimbursed Medical expenses above 7.5% AGI
• State and Local Taxes (SALT) at $10,000 max
• Mortgage interest on primary and secondary home loans used for buy or improve
• Charitable Contributions at xx% AGI based on type of gift (cash v prop) and type (public v private)
• Casualty and theft losses above 10% AGI for designated disaster areas

Question 13

What is Schedule B

Answer 13

.

Interest and Dividends Income - Included on 1040 as qualified/non qualified and reported on lines 2a and 3a

Question 14

What is Schedule C

Answer 14

.

Profit and Loss from Business - Included within Schedule 1, Part 1 additions to income, line 3

Question 15

What is Schedule D

Answer 15

.

Capital Gains and Losses - Attached to 1040, line 7 and reported if any net taxable gain or loss for the year.

Question 16

What is Schedule E

Answer 16

.

Rental and Royalty Income; Included as attachment to Schedule 1, Part 1, line 5

Question 17

What is Schedule H

Answer 17

.

Household Employment Taxes - taxes due on annual pay of household workers

Question 18

What is Schedule F

Answer 18

.

Farm Income; Included as attachment to Schedule 1, Part 1, line 6

Question 19

What is Schedule SE

Answer 19

.

Self Employment Taxes - taxes due and adjusted for proprietor payment of 1/2 taxes due as business owner (similiar to amount corporation pays / pay period for employees; Taxable amount is based on 93.25% (6.75% waived) of net income X tax table x 1/2

Question 20

What is Form 706

Answer 20

.

Estate and GSST taxes

Question 21

What is Form 709

Answer 21

.

Gifts and GSST taxes

Question 22

What is Form 1098

Answer 22

.

Mortgage Interest Deductions, reported for Itemized Deductions Schedule A, line 8A

Question 23

What is Form 1099-DIV

Answer 23

.

Dividend income, reported on 1040, lines 3a

Question 24

What is Form 1099-INT

Answer 24

.

Interest income, reported on 1040, lines 2a

Question 25

What is Form 1099-NEC

Answer 25

.

Non Employee Compensation for contractors, reported on schedule C as part of line 1 gross income

Question 26

What is Form 1099-MISC

Answer 26

.

Miscellaneous Income reported under Other Income lines 8 on Schedule 1

Question 27

What is Form 1099-R

Answer 27

.

Distributions - income from Qualified Retirement plans, reported on 1040 lines 4a and 5a

Question 28

What is Form 4868

Answer 28

.

Request for extension of time to file return; Must be filed before tax deadline and with anticipated amount of taxes due

Question 29

What is Schedule K1

Answer 29

.

Partnership Distributions - (1041/1120-S/165)

Question 30

What is Form 5498

Answer 30

.

IRA contributions made per individual; Reported as adjustment to AGI on Schedule 1 line 16 (along with SEP and SIMPLE contributions)

Question 31

What is Form 8606

Answer 31

.

Non Deductible IRA contributions made per individual; Amount above annual and/or above AGI thresholds as well as Roth conversions that do not qualify for tax deduction.

Question 32

What is Net Investment Income

Answer 32

Net investment income is the amount by which the sum of gross investment income and the capital gain net income exceeds the allowa­ble deductions.

investment income includes, but is not limited to:

interest,
dividends,
capital gains,
rental and royalty income,
non-qualified annuities,
income from businesses involved in trading of financial instruments or commodities, and
businesses that are passive activities to the taxpayer

Question 33

Paul and Megan file their taxes as married filing jointly (MFJ) and are in a 24% marginal income tax bracket. They are both age 33 and have MAGI of $200,000 in 2022. Megan is an active participant in her employer’s defined contribution plan, but Paul’s employer does not sponsor any type of retirement plan.

The couple contributed $12,000 ($6,000 each) to their traditional IRAs for 2022. How much is the tax savings from these contributions for regular income tax purposes?

Answer 33

$1,440 tax savings. When one spouse is an active participant and one spouse is not an active participant, each spouse has a different IRA deduction phaseout threshold. As MFJ, Megan’s threshold is $109,000 - $129,000 (2022).

The couple’s MAGI exceeds the maximum, so Megan’s IRA contribution is not deductible.

Paul’s threshold, not being an active participant, is $204,000 - $214,000 (2022), so Paul’s IRA contribution is fully deductible.

The resulting tax savings is the marginal tax bracket 24% x $6,000 = $1,440.

Question 34

Alicia, age 59, is transferring several retirement accounts to a new firm. She is in a 22% marginal federal tax bracket and a 15% average tax bracket. Alicia is transferring the following accounts using the traditional rollover method:

• Traditional IRA with a balance of $50,000 (100% deductible contributions)
• Rollover IRA holding her previous Section 401(k) funds with an account balance of $100,000
• Roth IRA with an account balance of $20,000
• Section 401(k) account still held at a previous employer with an account balance of $75,000

If she completes the rollover of the funds received within 60 days what will be the amount of tax owed pertaining to the rollovers this year?

Answer 34

A traditional rollover from the Section 401(k) account still held at a previous employer will require mandatory 20% withholding. This reduces the amount she will receive by $15,000. Alicia did not replace the $15,000 before redepositing the rollover into an IRA. Therefore, the $15,000 withheld will be deemed a distribution and subject to ordinary income tax and 10% early withdrawal penalty. The IRAs do not require mandatory withholding. Total tax due with penalty = $4800(15k x 0.22)+(15k x 0.1)

Question 35

Section 1031 Like Kind Exchanges

Definition of Amount Realized:

Answer 35

Amount Realized: FMV of qualifying property received plus (or minus) net boot.

Question 36

Section 1031 Like Kind Exchanges

Definition of Realized Gain:

Answer 36

Realized Gain: The amount realized minus the basis of the property transferred.

Question 37

Section 1031 Like Kind Exchanges

Definition of Recognized Gain:

Answer 37

Recognized Gain: The lesser of realized gain or net boot received.

Question 38

Section 1031 Like Kind Exchanges

Definition of Deferred Gain:

Answer 38

Deferred gain: The realized gain minus recognized gain.

Question 39

Section 1031 Like Kind Exchanges

Definition of Substitute Basis:

Answer 39

Substituted basis: FMV of qualifying property received minus the deferred gain.

Question 40

What are key elements for Section 179 depreciation:
1) Qualified Expense items
2) $ Limit
3) Depreciation schedule

Answer 40

1) Qualified Expense items - Business tangible property (excluding realty or income producing property) including vehicles used +50% in the business

2) $ Limit - $1.080M deduction on property up to $2.7M, but can not create a net operating loss

3) Depreciation schedule - 100 % expensed for year placed in service only

Question 41

How are At Risk and Passive activity rules applied
- Order of operation
- Who applies to
- What is included in determining amount at risk
- How are passive activity gains and losses identified

Answer 41

• Order of operation: At risk rules applied before passive activity rules
• Who applies to: All pass thru entities (S Corp, LLC, Partnership)
• What is included in determining amount at risk: Only deduct losses to extent there is enough basis (at risk amount) which includes initial amount invested; If loss greater than at risk, then difference is suspended until additional at risk amounts (basis) added.
• How are passive activity gains and losses identified: After passing at risk rules, then amount of any passive activity losses can only be used to offset passive activity income with any excess suspended;

Also, Private Interests (LLC, Partnership,S Corp) can be netted against each other for net gain/loss not to exceed income

Public Interest PTP cant be combined with Private nor with other PTP, only with same PTP

Question 42

What are reporting requirements by $ limits for Charitable Contributions

Answer 42

< $250 = receipt
> $250 = donor letter
> $500 = Form 8283
> $500 = Qualified Appraisal (usually, $500K for sure

Question 43

What are max annual charitable contribution limits for Public vs Private charity by
- Cash
- Capital Property subject to LTCG (stock, property, collectibles)
- Income property - ACID (Accounts Receivable, Copyrights Inventory, Depreciation, art, literary compositions, letters:) plus STCG,

Answer 43

Cash:
- Public = 60% AGI
- Private = 30% AGI

LTCG
- Use Related/Private
- FMV = 30% AGI or
- Basis = 50% AGI
Use Related/Public
- FMV = 20% AGI or
- Basis = 30% AG

Ordinary Income Property:
- Public = 50% AGI
- Private = 30% AGI

Question 44

How is imputed interest determined on personal loans

Answer 44

When loans are greater than $10,000 and up to and including $100,000, the imputed interest is the lesser of:

the AFR or
the borrower’s net investment income
If the borrower’s net investment income is $1,000 or less, imputed income will not apply.

Question 45

How are gains and losses treated for Personal Use Assets

Answer 45

Gains = Short or Long Term capital gains based on holding period

Losses = Are not recognized or deducted

Question 46

How are gains and losses treated for Capital Assets

Answer 46

Gains = Short or Long Term capital gains based on holding period

Losses = Capital loss deductible to extent of capital gains plus $3k ordinary loss

Question 47

How are gains and losses treated for Business or Trade Assets

Answer 47

Gains = Short or Long Term capital gains based on holding period

Losses = Ordinary loss deductible against ordinary income

Question 48

How are gains and losses treated for Trade Ordinary Income

Answer 48

Gains = Ordinary Income

Losses = Ordinary loss deductible against ordinary income

Question 49

How are gains and losses treated for Passive Income Assets

Answer 49

Passive investment income offset against Passive Income losses only and not carried over to net against other gains or losses

Question 50

Which of the following imposed the first constitutional federal income tax?

Revenue Act of 1861.
16th Amendment.
Revenue Act of 1916.
None of the above.

Answer 50

Solution: The correct answer is None of the Above

Answer “A” is incorrect because although the Revenue Act of 1861 did impose a federal income tax, it was later found to be unconstitutional because Congress did not have the power to levy an individual income tax at that time.

Answer “B” is incorrect because the 16th Amendment gave Congress the power to impose an individual income tax, but did not itself impose that tax.

Answer “C” is incorrect because the Revenue Act of 1916 raised the rates previously imposed under the Revenue Act of 1913.

Therefore, answer “D” is correct because the Revenue Act of 1913 imposed the first constitutional income tax.

Question 51

In year 1 Justin earns $700 from delivering papers for a newspaper company and he is treated as self-employed. In year 2 the newspaper company hires him as an employee and pays him $700 as W-2 income with no federal or state income tax withholding. Does Justin have to file a tax return in either year?

A-Year 1: Yes Year 2: Yes
B-Year 1: No Year 2: Yes
C-Year 1: Yes Year 2: No
D-Year 1: No Year 2: No

Answer 51

Solution: The correct answer is C.

The rule is that a taxpayer must file if he has greater than or equal to $400 of net earnings from self-employment. If the taxpayer does not have self-employment income there is no requirements to filing unless your income exceeds the standard deduction and personal exemption ($0 for 2018 - 2025) for that year.

Question 52

In calculating a net operating loss for an individual, which of the following items would not be added back to negative taxable income?

A-Net operating loss deduction
B- Long-term capital losses in excess of short-term capital gains.
C-Section 1202 exclusions
D-None of the above would be added back.

Answer 52

Solution: The correct answer is D.

In general, the following items are not allowed when figuring an NOL.

· 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.

Question 53

What are the qualifications necessary to be considered head of household under abandoned spouse

Answer 53

• The taxpayer must file a separate tax return from the spouse.
• The taxpayer must furnish over one-half of the cost of maintaining the household, not just dependents
• The spouse must not be a member of the household during the last six months of the tax year.

Question 54

What are refundable tax credits; What are other types of credits?

Answer 54

The Earned Income credit is refundable; able to create a negative tax liability.

The American Opportunity credit and Child tax credit may be partially refundable.

There are many non-refundable credits including, but not limited to, child care. EIC is the only fully refundable credit.

The IRS recognizes two categories of credits; refundable and non-refundable. The term refundable does not necessarily imply that it is fully refundable, it may be fully or partially refundable. AOTC and child tax credit are partially refundable, but the IRS will consider them in the refundable category.

Question 55

Under what conditions must a taxpayer file using itemized deductions (ie..not allowed to take standard deduction

Answer 55

In three situations, a taxpayer is not allowed to use the standard deduction and must itemize deductions:

1. A married individual who files a separate return (married filing separately filing status) cannot use a standard deduction if that person’s spouse itemizes deductions.
2. A nonresident alien and a dual-status alien is not allowed to use a standard deduction.
3. An individual who files a tax return for less than 12 months because of a change in annual accounting period is not allowed to use a standard deduction (not common for individual taxpayers).

Question 56

What are the 2 elements of Passive Activity rules

Answer 56

Passive Activity rules are for taking deductions based on loss in a passive activity. Think of passive activity loss in terms of filters. Filter one you look at the At Risk Amount. Filter two, you look at the Passive Income Amount.

Example:
Sarah is a 10 percent owner in Canine Connection, LLC, a day-care center for dogs. She is also a 15 percent owner in Little Laughter, LLC, a successful children’s clothing store. She does not materially participate in either business. Her at-risk and loss/income for the current year is as follows:

Canine Connection-At-risk = $175,000; Loss of $275,000

Little Laughter-At-risk = $25,000; Income of $125,000

She also has wage income of $80,000 and capital gain income of $30,000. Which of the following statements is true?

A: The loss suspended because of the at-risk rules is $100,000 and the loss suspended because of the passive activity loss rules is $50,000.

Solution:
She has 175k invested (at risk) in Canine Connection, she can take up to that in losses for the first filter (at risk)

Of the 275k loss, only 175k of the loss can go through to the second filter (passive income offset), and the remaining 100k of loss is suspended for this year under the at-risk rules.

Next we look for passive income to offset loss. Little Laughter has 125k of income we can offset with the 175k of loss that made it through the first filter. We cannot take more passive loss than passive income, so the175k loss – 125k of passive income leaves 50k of loss we cannot take and will be suspended under passive activity rules.

Question 57

What are the 6 specific requirements that must be met to qualify for an individual “real estate investor exception” to the passive activity loss rules.

Answer 57

Summary of Rental Property Exceptions to Passive Categorization

1. Customer use less than or equal to 7 days
2. Customer use less than or equal to 30 days and significant personal services provided
3. Extraordinary personal services are provided
4. Rental activities incidental to non-rental activity
5. Rental activity available during business hours for nonexclusive use of customers
6. Rental property used in an activity conducted by partnership, etc. where the taxpayer is the owner and an active participant

Question 58

The passive loss limitation rules apply to:

.

Answer 58

• Any closely held C corporation
• Any personal service corporation
• Individuals, estates, and trusts
• Certain publicly traded partnerships

Question 59

What is the IRS limit for categorizing Small Business Stock for accounting method purposes versus categorizing Small Business Stock losses under Sec 1244 Losses

Answer 59

Corporations with less than ~$27M are considered small business and can choose Cash or Accrual accounting methods

Sec 1244 that allows for deductions of $50K Single $100K MFJ are corporations that were less than $1M in total capital at time the stock was issued (and incorporate after 1978, loss incurred by original stock owner and corp earned +50% of gross income as active income 5 yrs prior to loss)

Question 60

What is the all events test under accrual method of accounting

Answer 60

The all-events test, under U.S. federal income tax law, is the requirement that all the events fixing an accrual-method taxpayer’s right to receive income or incur expense must occur before the taxpayer can report an item of income or expense.

Under Sec. 461(h), a three-prong-all-events test is met when (1) all events have occurred that establish the fact of the liability; (2) the amount of the liability can be determined with reasonable accuracy; and (3) economic performance has occurred such that economic performance occurs when the taxpayer receives services or property or uses property another party provided or when the taxpayer provides property or services to another party.

Question 61

What is a 52/53 week year for purposes of tax filing

Answer 61

The IRS does recognize 52-53 week if the year ends on a specified day of the week (such as Friday) that occurs in the last week of the last month of the tax year.

Question 62

What is the penalty for filing a fraudulent tax return

Answer 62

75% of income tax deficiency

Question 63

What is penalty for preparer who negligently or fraudulently mis-prepares a tax return

Answer 63

The preparer penalty for willful or reckless conduct is the greater of $5,000 or 50% of the income derived by the preparer for the return.

Question 64

What is the minimum penalty for failure to file and pay

Answer 64

$ The failure to file penalty is 5% of the unpaid tax balance for each month or part thereof that the tax return is late (up to 25% of the unpaid tax balance). Therefore, Ford’s failure to file penalty is $60 (3 months × $400 × 5%).

However, if a tax return is filed more than 60 days late (as it is in Ford’s case), the minimum failure to file penalty is the lower of $485 (in 2023) or 100% of the tax due. The penalty will not exceed 100% of the tax due.

Question 65

What is the IRS floor on a personal casualty loss within a federally declared disaster zone

Answer 65

$100 is min amount that must be deducted from difference in FMV before and after disaster, less insurance proceeds. After this floor the loss must exceed 10% of AGI floor

Question 66

What are rules for non personal casualty losses or theft (reportable against business income and expenses) if from declared national disaster

Answer 66

Complete Loss = Adjusted basis less insurance proceeds

Partial Loss =
(1) Decline in FMV after event vs before event less insurance proceeds OR
(2) Adjusted basis less insurance proceeds

WHICHEVER IS SMALLER

Question 67

What is carry over rule for excess charitable deductions?

Answer 67

There is a five-year carry-over provision for charitable deductions. The total years are 6: The initial year plus five carry-over years.

Question 68

What are distinctions between short term and long term charitable investment donations

Answer 68

A donation of short-term capital assets is recognized as a charitable expense at the lower of the FMV or basis.

Donations of appreciated long-term assets are recognized as a charitable expense at the fair market value unless basis is chosen

Question 69

What are common allowable Miscellaneous itemized deductions

Answer 69

Miscellaneous itemized deductions not subject to the 2% floor:

-Gambling losses to the extent of gambling income.

-Equity in an annuitized contract at the annuitants death; Loss on the disposition of an annuity contract

-Repayments of income (such as repayments of Social Security income when the taxpayer fails the earnings test)

-Credit for estate taxes imposed on IRD (income in respect of a decedent’s assets)

All miscellaneous itemized deductions subject to the 2% AGI limit were eliminated under TCJA.

Question 70

Elaine incurred $26,000 of margin interest on her $600,000 investment portfolio. Her portfolio income consists of $10,000 in interest, $15,000 in qualified dividends, $3,000 in ordinary dividends, $6,000 in short-term capital gains, and $11,000 in long-term capital gains.

How much of the margin interest is deductible on Elaine’s tax return assuming no special elections?

Answer 70

She can deduct up to her net investment income which = $10,000 + 3,000 + 6,000 = $19,000 without making a special election.

$10,000 in interest, taxed at ordinary income rates

$15,000 in qualified dividends, taxed at capital gains rates

$3,000 in ordinary dividends, taxed at ordinary income rates

$6,000 in short-term capital gains, taxed at ordinary income rates

$11,000 in long-term capital gains, taxed at capital gains rate

If she elected to treat the long-term capital gains and qualified dividends as ordinary income she could deduct it all. However, DO NOT assume that the election is made. The question would have to specify that information or ask “what is the maximum she can deduct?”

Question 71

Veronica borrowed $300,000 to acquire a parcel of land to be held for investment purposes. During the year, she paid interest of $30,000 on the loan. She had AGI of $70,000 for the year. Other items related to Veronica’s investments include the following:

Investment income = $15,200

Long-term gain on the sale of stock = $6,000

Investment counsel fees = $900

Veronica is unmarried and elected to itemize deductions. She had no miscellaneous deductions other than the investment counsel fees. Determine Veronica’s maximum investment interest deduction.

Answer 71

The correct answer is $21,200

The taxpayer’s investment interest deduction is limited to the investment income. The investment income is $15,200 plus she can add the capital gains of $6,000 and deduct $21,200. The excess investment interest ($30,000 - $21,200) can be carried over to next year.

Note: In order to treat the LTCG as ordinary income to allow for a greater deduction, it needs to state the special election was made or they would like to maximize the amount they can deduct.

Question 72

Olive’s daughter Polly suffers from a rare illness and is currently undergoing a 6 hour treatment on a fairly regular basis. During the current year, Olive drove Polly to see a specialist in another state 15 times, while her husband remained home running their software company. Each trip was 300 miles each way and required an overnight stay in a hotel that costs $140 per night. They used the hotel the night before the treatment and drove home after the treatment the next day. The unreimbursed treatments totaled $10,000. Olive’s joint AGI is $124,000.

How much could they deduct in relation to Polly’s medical expenses for 2023, assuming they itemize (mileage rates for medical are .22 per mile)?

Answer 72

Olive may deduct $0.22 (2023) cents per mile for the travel associated with Polly’s medical care and may deduct up to $50 per night per person for lodging. The trip mileage is stated as 300 miles each way, you will need to multiply by 2 and use round trip mileage.Therefore, the total medical expenses are $13,480 which is calculated as follows:

[(300 miles x 2 x 15 trips x $0.22 = 1,980) + (15 x ($50 x 2) = 1,500) + $10,000].

However, Olive may only deduct the amount that exceeds 7.5% of their AGI (TCTDR Act of 2020). 7.5% of Olive’s AGI is $9,300. Therefore, medical expenses deductions for Polly’s treatment is $4,180.

Note: $100 for lodging is allowed because the rule is $50 per person per night.

Question 73

What are no additional cost fringe benefits and how treated as income

Answer 73

Services provided by employer to employee at no additional cost to the employee and are within line of business in which employee works and available to all. These are non taxable employee benefits and not included in gross income

Question 74

What are rules for imputing interest on a below market loan

Answer 74

Loan = < 10K or NET investment income < $1k = $0;

Loan = $10.01K-$100k = lesser of NET investment income or difference of Applicable Federal Rate interest and below market loan interest (ie..interest calculated via AFR minus interest calculated using stated loan rate of interest)

Loan = > $100k = Difference of Applicable Federal Rate interest and below market loan interest;

Question 75

Income to U.S. taxpayers is taxed in the year it is derived in which of the following situations and why?

I Interest earned but reinvested in a savings account in an FDIC
savings bank.
II Unrealized long-term capital gains on stocks.
III Income earned on most municipal bonds.
IV Short-term gains realized within a qualified plan.
V Increased value of personal residence.

Answer 75

Option I. Interest earned but reinvested in a savings account in an FDIC savings bank would be taxable in the year it was derived and paid.

Option II. Unrealized gains are not taxed in the year they are derived, they are taxed when the position (or shares of the position) are sold.

III. Since bonds pay in arrears and that may split tax years, this statement does not match what the question is looking for. Bonds that pay in April include interest from the prior 6 months which includes income derived from the prior year.

IV. Gains in a QP are taxed as distribution.

V. Increased value of personal residence would be taxed in the year the residence was sold if the gain exceeded the section 121 exclusion.

Question 76

What is the income reporting requirement of property settlement/transfer at divorce

Answer 76

“Property transfer will result in the transferor’s basis in the property being carried over to the transferee as if the property is acquired by gift and therefor no deduction to transferor is available and no gain or loss is recognized by transferee

Transfers between divorcing spouses ALWAYS transfer their basis and their holding period, regardless of FMV at date of transfer and are therefore not included in income (pg 69)

Question 77

What is value of dependent care assistance that can be provided by employer that can be excluded from gross income

Answer 77

Up to $5,000

Question 78

Tom operates an illegal drug operation and incurred the following expenses: Salaries = $50,000; Illegal kickbacks = $20,000; Bribes to border guards = $25,000; Cost of goods sold = $150,000; Rent = $8,000; Interest = $10,000; Taxable income = $400,000. How much is his taxable income reduced by, based on the above expenses?

$-0-
$150,000
$218,000
$263,000

Answer 78

$150,000

Cost of goods sold is the only deduction allowed for illegal drug operation activities. This is an actual IRS rule and has popped up on the CFP Board exam from time to time.

Question 79

What entertainment expenses are deductible for business

Answer 79

100% of transportation costs

50% of meals (including tip)

Question 80

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?

Answer 80

$450,000 potential gain before the transaction; $250,000 potential gain after the 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

Question 81

Peyton has a warehouse used in his business. He exchanges it for a storage building owned by Eli. (Peyton and Eli are unrelated). The basis of Peyton’s asset is $40,000 and he gives Eli $20,000 cash plus the asset in exchange for Eli’s asset, which is worth $36,000. Eli’s basis in his original asset is $10,000.

What is Eli’s realized and potential gain or loss?

What is Peyton’s realized and potential gain or loss ?

Answer 81

Eli must recognize gain to the extent of the boot paid to him ($20,000) limited by his potential gain. Note: only real property is eligible for like kind treatment.

You need to calculate Peyton’s FMV. You can do this because you know that the values exchanged must be equal.

Peyton gives Eli $20k + property in exchange for a property worth $36,000:

$20,000 + x = $36,000

x = $16,000

Peyton
Before Exchange After Exchange
(Old Property) (New Property)
FMV $16,000 FMV $36,000
Basis 40,000 New Basis 60,000
Potential Loss $24,000 Potential Loss $24,000
Boot $20,000 to Eli
Peyton adds boot paid to old basis to get new basis.
Eli
Before Exchange After Exchange
(Old Property) (New Property)
FMV $36,000 FMV $16,000
Basis 10,000 Carryover Basis 10,000
Potential Gain $26,000 Potential Gain $6,000

Question 82

John owns a rental home in Arizona. He decided that he would like to acquire a rental home in Washington. Ted who lives in Washington has a rental home. For health purposes, Ted must relocate to Arizona. John and Ted decide to exchange properties under section 1031 of the code. The other facts pertaining to the exchange are: Ted’s Basis = $100,000 John’s Basis = $75,000 Ted and John exchange the two properties, but Ted has to give John an additional $25,000 in cash. The fair market value of Ted’s property is $100,000, and the fair market value of John’s property is $125,000.

What is John’s basis in the property received in the exchange?

Answer 82

Since John received boot and “traded down” his recognized gain equals the lesser of the realized gain or boot received, which is $25,000. John’s basis will be his original basis ($75,000) less the boot received ($25,000) plus the gain recognized ($25,000) or $75,000. Ted’s basis will increase by $25,000 because he is paying $25,000 in boot.

Question 83

What is section 165?

Answer 83

Section 165 creates an artificial sale date of December 31 for worthless securities.

Question 84

What is a bargain sale rule

Answer 84

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

Question 85

What are tax rules for gifted loss property between related parties

Answer 85

If a related party gives you property that is valued lower than what they paid for it, it is called loss property. If you then try to sell it, you can not take a loss. You must assume basis of FMV at time of gift

Question 86

What is a secular trust and relevance to constructive receipt

Answer 86

A secular trust is an irrevocable trust that you establish with a third party to hold assets for the exclusive purpose of funding your employees’ nonqualified deferred compensation (NQDC) plan benefits.

A secular trust constructively belongs to the beneficiary therefore constructive receipt applies.

Question 87

What are the statute of limitations for

• Collection of deficiency by the IRS.
• Fraud.
• General Statute of Limitations under Section 6501.
• Substantial Understatement of Income greater than 25%.

Answer 87

• The statute of limitations for the collection of a deficiency by the IRS is 10 years.
• There is no statute of limitations for fraud.
• The general statute of limitations under Section 6501 is 3 years. - The statute of limitations for a substantial understatement of income greater than 25% is 6 years.

Question 88

What are requirements of Section 121 as it relates to Personal Residence sale exemptions

Answer 88

Section 121 requires that to qualify for the exemption she must have 1) owned and 2) used as principal residence for two years out of the past 5 years. An exception to the rules exists where a taxpayer moved because of employment transfer.

Note: The Section 121 amount is what is pro-rated, not the amount of the gain from the sale of the property. A single taxpayer has a $250,000 exemption, MFJ has a $500,000.

Question 89

When and what is the taxpayer versus functional use test required for involuntary conversion of non taxable exchanges,

Answer 89

The replacement property must meet the taxpayer use test, not the functional use test, when a taxpayer does not use the property directly.

The taxpayer use test requires replacement property to be used by the taxpayer in an activity which is treated the same for tax purposes in order to qualify for nontaxable exchange treatment.

Question 90

What are tax implications of insurance proceeds exceeding basis of business property that is involuntarily converted (value to $0) due to complete insurable loss.ie..destroyed

Answer 90

Insurance proceeds which exceed the current basis of destroyed property will not be taxable if the taxpayer replaces that property with similar property within
- a two-year period from the end of the year in which realization resumed if a natural disaster (fire) or
- three years from the end of the year in which realization occurred in the event of a government taking (emminent domain).

Question 91

What is capital recovery and how is it related to a premium bond

Answer 91

Capital recovery is the expensing of certain acquisition costs. Bonds purchased at a premium are amortized over their life to expense the premium paid.

Question 92

What is depreciation basis for gifted property

Answer 92

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

Question 93

How is advance rent on a rental unit treated

Answer 93

According to Publication 17, “Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use.”

Question 94

When do the recapture rules for Section 179 apply:

Answer 94

Section 179 recapture rules apply when the business use of an asset drops below 50% for a given year or when the asset is disposed of before it would have been fully depreciated.

Question 95

Kevin’s 12 year old daughter, Angel, has a brokerage account that generates $13,000 of interest income and $2,000 of qualified dividends for the current year. Angel also has earned income of $14,000 from modeling that she is saving for college. How much will be taxed at Angel’s tax rate?

Answer 95

Solution: The correct answer is $2,650

The calculation is as follows:

Start with figuring out the standard deduction. She can use her earned income plus $400 not to exceed 13,850 in 2023.

Calculate Unearned Income first:

13,000 + 2,000 = 15,000

15,000 - 1,250 (standard deduction) = 13,750 remaining

13,750 - 1,250 (at the child’s rate) = 12,500 remaining

The remaining 12,500 will be taxed at the parent’s rate.

Then Calculate Earned Income:

14,000 - 12,600 (remaining standard deduction: 13,850 - 1,250 from the standard deduction used for unearned income) = $1,400 at the child’s rate.

Summary:

Standard deduction is 1,250 + 12,600 = 13,850

At the parent’s rate 12,500.

At the child’s rate (1,250 + 1,400) = 2,650.

Question 96

What are differences between Limited and Master Limited partnerships relative to taxable losses

Answer 96

losses from a limited partnership cannot be used to offset income from a master limited partnership.

Question 97

What are exclusion items to AMT and implications for AMT credit

Answer 97

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.

Interest income from a private activity bond is an addback for alternative minimum tax purposes, it is considered an exclusion item. Exclusion items are not eligible for the minimum tax credit.

Real estate taxes are added back for alternative minimum tax purposes, they are considered an exclusion item. Exclusion items are not eligible for the minimum tax credit.

Question 98

What are FICA and Medicare tax rates for individual and emppyer

Answer 98

The first $160,200 (for 2023) of employee 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%. Total Employee = 7.65% on first $160K Employer is same and for self employed or total amount paid on behalf of employee:

12.4% SS
2.9% Medicate
15.3% FICA

Question 99

Charlie purchased a 25% interest in a general partnership for $40,000. He is a material participant in the partnership’s activities. In the current year, the partnership borrowed $20,000 from a local bank. The loan is considered a recourse loan. Assuming the partnership incurred a total loss for the current year of $200,000, how much of the loss will Charlie be permitted to deduct on his federal income tax return? And why?

Answer 99

Charlie’s share of the loss is $50,000 ($200,000 total loss x 25% ownership interest). However, his deductible loss is limited to the amount Charlie has “at risk” because he is a general partner (material participant). Charlie’s “at risk” amount is equal to the amount he contributed to the partnership, plus his share of recourse loans incurred by the partnership. Recourse loans add to basis since the taxpayer is responsible for the loan, which is the opposite of a non-recourse loan.

Charlie’s share of recourse loans is $5,000 ($20,000 total loan x 25%). Therefore, the total amount at risk for Charlie is $45,000 ($40,000 contributed + $5,000 recourse loan). He can take the loss without having to offset income because this is a general partnership, not a limited partnership.

Question 100

What is accumulated earnings tax?

Question 101

What Expenses are eligible for the federal income tax adoption credit

Answer 101

Eligible expenses for the adoption credit include legal fees, court costs, attorney’s fees, and other fees associated with a taxpayer’s legal adoption of an eligible child or special needs child.

Legal fees and court costs associated with the adoption of a spouse’s child are not eligible for the adoption credit.
Costs related to a surrogate parenting arrangement are not eligible for the adoption credit.
If adoption expenses are paid by an employer under an adoption assistance program, the payments can be excluded from the taxpayer’s gross income. If the payments are excluded from gross income, the underlying expenses are not eligible for the adoption credit.

Question 102

What is advance rent?

Answer 102

“Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use.”

Question 103

Key characteristics of S Corp?

Answer 103

• Receives income when the corporation declares and pays a dividend.
• Votes for the Board of Directors at the annual shareholders’ meeting. A shareholder in an S corporation may vote to retain or revoke S corporate status, votes,
• Receives a K-1 annually in order to prepare a personal income tax return.
• Reports on a personal income tax return a pro rata share of the corporate profit or
  loss.
• Ownership of S corporation stock is restricted to individuals who are either US citizens OR US residents, estates, certain trusts (Grantor Trusts), and charitable organizations. (LLCs, partnerships, and other corporations are prohibited from becoming S corporation shareholders. Nonresident aliens and most trusts may not be S corporation shareholders.

Question 104

When do section 179 recapture rules apply

Answer 104

Section 179 recapture rules apply when the business use of an asset drops below 50% for a given year or when the asset is disposed of before it would have been fully depreciated.