Tax Quiz 1 Flashcards
Which property listed below, if sold in 2017, would produce the greatest amount of cash received by the seller after taxes? Assume the property was held for 2 years, was sold for $10,000, and had basis of $1,000.(For the purposes of this question, disregard the taxpayer’s AGI and the possible effect of the 3.8% net investment income surtax.)
A) IBM stock. B) Commercial building (fully depreciated). C) All of these would result in the same after-tax cash amount. D) Baseball card collection.
A
The IBM stock would result in the greatest amount of cash received because it is taxed at a maximum 15%/20% capital gain tax rate, depending on the taxpayer’s AGI. The commercial building would have a 25% rate and a portion of the gain may even be taxed at ordinary income tax rates. The baseball cards are taxed at 28% because they are a collectible.
Bob owns an apartment building which he uses for business purposes. He paid $170,000 for the building several years ago. He sold the building in the current year for $300,000. During the time he owned the building, he took total straight-line depreciation of $30,000. What is his realized gain on the sale of the building? A) $160,000. B) $270,000. C) $100,000. D) $130,000.
A
Morgan, who is in the 35% marginal income tax bracket, has just sold an office building which was fully depreciated at the date of sale. Of the $150,000 in depreciation taken, $50,000 was attributed to accelerated depreciation. The basis in the land is $50,000. Morgan’s sale price was $500,000 and he is allowing the buyer to pay him using an installment sale. The buyer, Taylor, will make a 20% down payment and finance the building with annual installments over the next 10 years, with the first payment due on March 1 of next year. What is the tax treatment of the capital gain recognized in the year of the sale?
A)
The gain is taxed at the 20% rate.
B)
All gain recognized in the year of the sale is 35% gain.
C)
Capital gain included in the down payment in the year of the sale is recognized at the 25% rate.
D)
Because Morgan is in the highest marginal income tax bracket, the capital gain is taxed at 15%.
C
Because Morgan must recapture the accelerated depreciation of $50,000 in the year of the sale, the $50,000 is added to his basis, making his new basis in the sale $100,000. His gross profit percentage is 80% ($500,000 − $100,000 = $400,000; $400,000 ÷ $500,000 = 80% gross profit percentage). Each payment will consist of a 20% return of basis and 80% capital gain. Of the down payment of $100,000 ($500,000 × 20%), $80,000 is capital gain. Because Morgan must recapture $100,000 in straight-line depreciation taken in prior years, the $80,000 capital gain is taxed at the 25% rate for real estate depreciation recapture.
During the year, Jack, a sole proprietor of a dog shampoo factory, had the following capital transactions:
Sold a mixing machine for $13,000. He had purchased the machine 5 years ago, and the machine had an adjusted basis of $10,000.
Sold a bottling machine that he had owned for 11 years for $42,000. The machine had an adjusted basis of $50,000.
What is his net loss on this property and how will it be treated for tax purposes?
A)
$8,000 loss; treated as an ordinary loss.
B)
$5,000 loss; treated as a long-term capital loss.
C)
$8,000 loss; treated as a long-term capital loss.
D)
$5,000 loss; treated as an ordinary loss.
D
Fred buys a straight life annuity contract for $400,000. The contract will pay him $40,000 annually for life. Fred is expected to live 20 more years. How much of each year's annuity payment can Fred exclude from his annual gross income? A) $40,000. B) $30,000. C) $20,000. D) $0.
C
Lydia plans to gift assets to family and friends as part of her tax and estate planning. She is concerned about the income tax effect the transfers will have on the recipients. Some of the assets she is considering are income-producing assets and others are simply investments which will yield cash only upon disposal by the recipient. She has asked her financial planner for recommendations on transferring the assets with a minimum impact on the recipients’ income tax situations while also providing tax advantages for herself. Which of the following is(are) appropriate recommendation(s) her planner can suggest to her?
- Lydia should gift loss property immediately to her best friend, Carol.
- An office building for which Lydia’s basis is $100,000 and the FMV is $175,000 should be transferred via her will to her designated heir.
- Appreciated stock should be gifted immediately so the recipient will receive a stepped-up basis.
2 only
Statement 1 is incorrect because Lydia should sell the loss property so she can take advantage of the loss on her tax return. She may gift the cash realized. Statement 2 is correct because inherited property generally receives a step-up in basis to FMV at the date of death, increasing the basis to the heir. If it were gifted instead, the donee would have the same basis as Lydia and an increased capital gain upon disposal. Statement 3 is incorrect because the donee receives a carryover basis in gifted property, not a step-up.
On June 12 of the current year, Bob, a single taxpayer, age 55, sold his principal residence for $400,000. He purchased the residence 4 years ago and had an adjusted tax basis of $90,000. This house has been his principal residence since he purchased it. On October 27 of the current year, he purchased a new residence for $500,000. How much should Bob recognize as a capital gain on the sale of his residence? A) $0. B) $310,000. C) $110,000. D) $60,000.
D
Martha owns stock for which she paid $10,000 at the time of purchase 3 years ago. She is considering selling the stock this month for a gain of $5,000. This year, she has also sold her personal residence which she has owned and lived in for 10 years for a gain of $75,000 over the purchase price. She is concerned about her current tax situation and the fact she has $80,000 of realized income in addition to her salary of $100,000 in the same tax year. Martha has consulted you, a CFP® professional, for advice. Which of the following are recommendations you should make to Martha?
- Before the tax year ends Martha should pay the estimated taxes on the $80,000 of additional income.
- Martha should review her tax deposits for the year to insure she will not be assessed a penalty for underpayment.
- If the stock sold was Section 1244 stock, the gain does not receive special treatment for income tax purposes.
- Martha will not have to recognize all of the combined gain she realized on the sale of her stock and the personal residence and plan her tax deposits accordingly.
2 and 4
Melinda owns a vacation home in Florida. She rents the home for 80 days per year and occupies it herself for 20 days per year. Melinda receives gross annual rental income of $15,000. Her other rental expenses total $2,000 per year. The annual real estate mortgage interest and taxes cost $12,000. How much of a deduction can Melinda take on her tax return as a result of this house rental? A) $11,200. B) $12,000. C) $13,600. D) $14,000.
C
Melinda can deduct the cost of renting the home, if she occupies it for no more than 14 days per year or 10% of the number of days the property is rented. Because Melinda occupies the house for 20 days during the year and rents it out for only 80 days, this test is not met. Her gross rental income is $15,000. Because the house is used 20% of the time by Melinda (20 days out of the 100 days), she can only deduct 80% of the expenses, which equals $11,200 [80% × ($12,000 interest and taxes + $2,000 rental expenses). However, Melinda can deduct the remaining mortgage interest and real estate taxes as itemized deductions unrelated to the house rental. Her total allowed deduction is $13,600 ($12,000 interest and taxes + $1,600 other rental expenses).
On October 15, 2016, Erin purchased stock in Glennan Irish Ale Corporation for $2,000 (the stock is not small business stock). On June 15, 2017, the stock became worthless. How should Erin treat the loss in 2017?
A) $1,000 short-term capital loss. B) $1,000 long-term capital loss. C) $2,000 short-term capital loss. D) $2,000 long-term capital loss.
D
Worthless securities are treated as becoming worthless at year end. Therefore, the loss is a long-term capital loss even though the stock became worthless after only 8 months.
Mike exchanged an old machine in a like-kind exchange: adjusted basis of old machine, $5,000; fair market value (FMV) of new machine, $10,000; FMV of boot received, $0; FMV of boot given, $4,000. What gain must be recognized by Mike, and what is his adjusted tax basis in the new asset, respectively?
Recognized gain Adjusted tax basis A)
$0 $10,000 B)
$0 $5,000 C)
$4,000 $5,000 D)
$0 $9,000
D
Calculation: FMV new machine $10,000 − Boot given (4,000) \+ Boot received 0 = FMV old machine $6,000 − Adjusted basis (old) (5,000) = Potential gain (PG) $1,000 − Boot received 0 = Remaining gain $1,000
FMV new machine $10,000
− Unrecognized gain (1,000)
= New basis $9,000
Suzanne has an adjusted gross income of $120,000. She has $3,000 in non-reimbursed employee travel expenses (net of 50% of the meal expenses), $200 in safe deposit box rental expenses, $500 in professional and magazine dues expenses, and $2,000 in job-hunting expenses. How much of these expenses can she deduct as miscellaneous itemized deductions?
A) $3,300. B) $114. C) $2,400. D) $5,700.
A
Daniel gave Mike securities in the current year. Daniel's adjusted basis for the securities is $48,000, and the fair market value on the date of the gift was $40,000. Gift tax of $2,000 was paid by Daniel. What is Mike's basis for the stock for gain and for loss? A) $48,000 for gain; $40,000 for loss. B) $40,000 for gain; $40,000 for loss. C) $0 for gain; $0 for loss. D) $50,000 for gain; $42,000 for loss.
A
Ralph and Debbie are married and file a joint income tax return. Ralph’s salary for the year is $32,000. Debbie’s salary for the year is $58,000. Annual interest earned on investments is $4,000. Ralph has $16,200 of net earnings from self-employment income and paid $2,290 in self-employment taxes. He contributed $750 to a qualified retirement plan. During the year, the couple had $4,000 of unreimbursed qualified moving expenses. What is their adjusted gross income in 2017?
A) $106,200. B) $104,306. C) $105,450. D) $103,460.
B
The calculation for the Ralph and Debbie’s adjusted gross income is ($32,000 Ralph’s salary + $58,000 Debbie’s salary + $4,000 interest + $16,200 self-employment income − $750 qualified plan contribution − $4,000 unreimbursed qualified moving expenses − $1,144 deductible of self-employment taxes) = $104,306. Qualified unreimbursed moving expenses and qualified retirement plan contributions for a self-employed individual are deducted from gross income as an adjustment for AGI. A taxpayer is allowed to deduct the employer share of the self-employment tax. In this instance it can be calculated as: $16,200 × 0.9235 × 0.0765 = $1,144.49; or = $1,144 (rounded) deductible SE tax. (Domain 3: Analyzing and Evaluating a Client’s Current Financial Status)
Bobby made the following expenditures on a building that he owns and rents to others:
Original cost of building $275,000
New air conditioning system $11,300
Substantial repairs to roof $21,000
Miscellaneous repairs $2,500
Costs to convert unused space to rental space $16,700
Cleaning service $1,100
Lawn service $2,300
Costs incurred to make the building handicap accessible $23,800
Based on the above expenditures, how much will be added to the cost of the building and depreciated?
A) $72,800. B) $77,700. C) $51,800. D) $28,000.
A
Expenditures that materially extend the life of an asset or adapt it to a new use are considered improvements. Improvements to an asset are added to the basis of the asset and depreciated in accordance with the Internal Revenue Code. Expenditures that simply maintain an asset in working condition are considered repairs and are expensed when made. The expenditures that are considered improvements include the new air conditioning system, repairs to the roof, costs to convert unused space to rental space, and the costs to make the building handicap accessible. Therefore, $11,300 + $21,000 + $16,700 + $23,800 = $72,800.
Tom, a self-employed individual, had income transactions for last year reported on his return filed in April of this year as follows:
Gross receipts $320,000
Less cost of goods sold and deductions (256,000)
Net business income $64,000
Capital gains 20,000
Net Income $84,000
Suppose that in February of next year, Tom discovers he had inadvertently omitted income on the return filed in April last year and retains a CPA to determine his position under the statute of limitations. The CPA should advise Tom that the 6-year statute of limitations would apply to his return only if he omitted from gross income an amount in excess of:
A) $80,000. B) $85,000. C) $16,000. D) $21,000.
B
25% of ($320,000 gross receipts + $20,000 capital gains) = $85,000. IRC Section 6501(e) states that if the taxpayer omits from gross income (total receipts, without reduction for cost) an amount in excess of 25% of gross income as stated in the return, a 6-year limitation period on the assessment applies. The normal statute of limitations is 3 years from the filing date.
Rick has been a night watchman at INVEST, Inc. for 10 years. During the current year, he received the following payments and benefits from his employer:
Salary $20,000
Hospitalization insurance premiums paid directly to provider $3,660
Value of lodging on company premises as a condition to Rick’s employment $3,000
Cash reward for discovering and preventing burglary $1,000
What amount is includable in Rick’s gross income for the current year?
A) $21,000. B) $23,660. C) $27,660. D) $23,000.
A
Calculation: $20,000 (salary) + $1,000 (reward) = $21,000. The hospitalization insurance premiums and lodging are nontaxable fringe benefits to Rick. The lodging is on the employer’s premises, and it is a condition of employment, making it excludible from an employee’s gross income.
Marie has a paid-up whole life insurance policy with a $500,000 death benefit. Marie’s financial situation is deteriorating and she needs the money prior to death to pay her current medical bills. The cash value of the policy is $250,000, but her friend, Loni, agrees to buy the policy from Marie for $300,000. Six months later, Marie dies and Loni receives the $500,000 death benefit. How much of the death benefit of $500,000 is taxable to Loni this year?
A) $500,000. B) $250,000. C) $200,000. D) $0.
C
An individual who purchases life insurance from the insured in anticipation of realizing a gain when the insured dies must pay taxes on the death benefit received, less the valuable consideration paid for the policy. Loni received a $500,000 death benefit and paid $300,000 for the policy, resulting in net taxable income of $200,000. This is an example of the transfer-for-value rule.
