Tax Quiz 2 Flashcards
Joel, a self-employed individual, has the following items related to his tax return in 2017:
Gross receipts from his business $50,000 Operating expenses for business $30,000 Self-employment tax paid $2,826 Medical insurance premiums $1,200 Mortgage interest $5,000 What is Joel's adjusted gross income (AGI)?
A) $17,174. B) $15,974. C) $17,630. D) $17,387.
D
You are a CFP® professional and your clients, Bob and Teddi, own a house at the beach. The couple has provided you with the records regarding the rental of the beach house. The house was rented to unrelated parties for 8 full weeks during the current year. Bob and Teddi used the house 16 days for their vacation during the year. After properly dividing the expenses between rental and personal use, it was determined that a loss was incurred as follows:
Gross rental income $6,400
Less: Allocated mortgage interest and property taxes ($7,000)
Other allocated expenses (1,000)
Net rental loss ($1,600)
At the meeting to review their financial transactions for the tax year, you present you findings to Bob and Teddi. Which of the following statements you make to the couple regarding the treatment of the rental income and expenses on Bob and Teddi’s joint income tax return for the current year is CORRECT?
A)
A $1,600 loss should be reported.
B)
Because the house was used only 20% personally by Bob and Teddi, all expenses allocated to personal use may be deducted.
C)
The $7,000 rental portion of mortgage interest and taxes can be deducted.
D)
Because Bob and Teddi used the house for 16 days, the mortgage interest and property taxes are deductible as a rental expense to the extent of the gross rental income of the property.
D
A vacation home can be classified as a personal residence, a rental property, or a mixed-use property. A personal residence is a property that is rented out for less than 15 days per year. Because the beach house was rented for 8 weeks, it will be classified as either a rental property or a mixed-use property. The determination is based on the number of days the taxpayer used the residence for personal use. To qualify as rental property, the personal use cannot exceed the greater of 14 days per year or 10% of rental days. The property was used for personal use for 16 days, so the beach house will be considered a mixed-use property. Expenses incurred on a mixed-use property must be allocated between rental use and personal use. The rental expenses on a mixed-use property are only deductible to the extent of rental income received (that is, the taxpayer cannot claim a loss). The expenses not deducted in the current year may be carried forward.(Domain 7: Monitoring the Recommendations)
Jack purchases a $100,000 machine for his clothing factory. The machine has a useful life of 20 years. The expected salvage value of the machine is $3,000 at the end of its useful life. How much of a tax deduction is Jack entitled to take during the first year the asset is in use, if he is using the straight-line method of depreciation?
A) $4,850. B) $2,425. C) $5,000. D) $3,750.
B
The annual depreciation deduction under the straight-line method is the adjusted basis of the property at the beginning of the taxable year, less the salvage value divided by the remaining useful life of the asset. In this case, the adjusted basis for the first year is $100,000 and the salvage value is $3,000, for a total of $97,000 to be apportioned over 20 years, or $4,850 per year; however you must remember to use the half-year convention. This results in a deduction of $2,425.
Dion is an owner in a partnership (not real estate) in which he participates during the current year. He has one partner in the business. Which of these statements does NOT indicate that Dion is a material participant in this activity for the current year?
A)
Dion was a material participant for the past 6 years.
B)
He participated for 450 hours during the year.
C)
His partner participated for 10 hours and Dion participated for 200 hours.
D)
Dion participated for 400 hours, and his partner participated for 390 hours.
B
If Dion has only participated for 450 hours during the year, he is not a material participant because he has not participated for more than 500 hours. If Dion was a material participant for the past 6 years, he will be considered a material participant for the current year because he was a material participant for 5 of the last 10 years. If Dion participated for 400 hours, and his partner participated for 390 hours, Dion would be a material participant for the current year because he has participated more than 100 hours and he has participated more than the number of hours participated by his partner. If Dion’s participation is for 200 hours, and his partner participates for ten hours, Dion is considered a material participant as his participation constituted substantially all of the participation.
Ward is a stock broker who is also a CFP© professional. Ted comes to him to discuss possible investments and ways to reduce his taxes on the income from those investments. Ted is interested in tax-exempt municipal bonds but Ward is discouraging. His commission will be much less on the bonds Ted is interested in than on other stock offerings Ward would like Ted to choose. Ward persuades Ted to buy stock and put the shares with a potential dividend payout this year of $10,000 in his 4-year-old son’s name. Ward explains that the stock dividends would be taxed at the son’s 0% rate and not Ted’s 15% income tax rate for qualified dividends. What is the effect of Ward’s advice to Ted?
A)
Both Ward and Ted have achieved their goals in this transaction.
B)
The gift of the stock shares would be subject to the kiddie tax rules.
C)
A portion of the stock dividends would be taxed at Ted’s 15% tax rate.
D)
Ward has violated the Principle of Integrity but not the Principle of Fairness.
C
Mary Sue and Bob are married and file a joint return. They provided over 50% of the support for Becky, Rachel, and Vicki during the current year. Their daughter, Becky, a full-time college student, earned $4,100 during the year. Mary Sue and Bob’s married daughter, Rachel, filed a joint return with her husband. Vicki, who is Mary Sue’s mother, lives in a retirement community for which Mary Sue and Bob pay $18,000 per year. Vicki’s only income during the year was $5,200 of Social Security benefits, and she used that entire amount for her own support. Which of the following statements with respect to Mary Sue and Bob’s options is(are) NOT correct?
- Mary Sue and Bob can claim Becky as a dependent only if she is younger than 19 or is a full-time college student younger than 24.
- Mary Sue and Bob may claim Rachel as a dependent if neither Rachel nor her husband was required to file a return.
- Mary Sue and Bob may not claim Vicki as a dependent because Vicki’s gross income is too high.
3 only
While Vicki’s Social Security benefits are not included in her gross income, if she used any amount for her own support, it is used to decide whether or not the taxpayer provided more than 50% of her support. The $18,000 in payments by the taxpayers for her home in the retirement community satisfies this test. Therefore, she does not fail the gross income test and may be claimed by Mary Sue and Bob as a dependent. Statement 1 is correct because Becky does not fail the gross income test if she is a student and under age 24. She would be a qualifying child. Statement 2 is correct because Rachel may file a joint return and qualify as long as neither Rachel nor her husband is required to file a return.
During the current year, Abe incurred and paid the following expenses:
Psychiatrist bills for Alex (Abe’s stepson) $1,400
Tuition, room, and board for Alex at the Dalton School $12,000
Doctor bills for Cynthia (Alex’s mother, Abe’s spouse) $2,000
Charges at Memorial Nursing Home for Cynthia $24,000
Alex qualifies as Abe’s tax dependent. Alex’s psychiatrist recommended the Dalton School because of its small class sizes and rigorous discipline control. The school provides no special medical facilities or care. Cynthia has been diagnosed as having deteriorating brain disease. Memorial Nursing Home offers the proper care that Cynthia needs. What amount is a qualified medical deduction subject to the medical deduction AGI floor?
A) $39,400. B) $1,400. C) $38,000. D) $27,400.
D
The charge for tuition, room, and board to the Dalton School does not qualify, because the school does not provide qualified medical treatment. Thus, ($24,000 + $2,000 + $1,400) = $27,400 subject to the 10%of AGI floor.
Betty and Wilma are friends and business associates. Betty gives Wilma a piano that has a FMV of $10,000. In exchange, Wilma excuses a $15,000 debt that Betty owes her. If Betty's original purchase price of the piano was $4,000, what is her realized gain in this transaction? A) $10,000. B) $15,000. C) $11,000. D) $6,000.
C
The gain realized is the difference between the amount realized and the adjusted basis. Betty had a total cost basis in the piano of $4,000. The FMV of the piano when she gave it to Wilma was $10,000. If Betty had instead sold the piano at that time, she would have had a net gain of $6,000. In addition to this gain, she had a $15,000 debt excused for the price of the $10,000 piano. She not only earned the $6,000, but also received an additional $5,000 in non-cash consideration for a total gain of $11,000.
Last year, John purchased the following lots of FinPlan, Inc., stock:
Purchased Date No. of Shares Basis April 24 100 $5,000 June 25 100 $6,000 August 3 200 $13,000 On December 15 of the current year, John sold 100 shares for $5,500. John did not specifically identify the shares of stock sold. What is his recognized gain or loss?
A) No gain or loss. B) $500 short-term capital loss. C) $500 long-term capital gain. D) $500 short-term capital gain.
C
Because John did not specifically identify the shares of stock sold, a FIFO presumption is made.
Mark is forming a new business and is seeking investors. He is considering using either an S corporation or a limited liability company. He would like to limit the investors’ liability to creditors. His father, Eric, who has a grantor retained annuity trust, has agreed to buy shares of the S corporation stock and contribute the shares to his GRAT as a good income generator for the trust. Mark’s cousin, Karl, is citizen and resident of Germany and is also interested in investing in shares of the business. Mark’s sister, Sara, would like to buy shares through her partnership, Road Crew, to support her brother’s business venture. Candace is Mark’s friend who is also interested in buying shares in the business. Mark has discussed this list of potential investors with his planner and his planner sees some potential problems. What should Mark’s planner tell him?
A)
Sara and Karl may be investors if the entity form is an S corporation but not in a partnership.
B)
Because GRATs can only hold regular corporation shares, Eric cannot use it to invest in the S corporation.
C)
Only Mark, Candace and Eric (through his GRAT) may be investors in the business, no matter which entity form Mark chooses.
D)
Mark should choose the limited liability company entity form form to accommodate all of his investors.
D
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, $0. 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)
$5,000 $10,000 D)
$5,000 $5,000
B
Calculation: FMV new machine $10,000 − Boot given 0 \+ Boot received 0 = FMV old machine $10,000 − Adjusted basis (old) (5,000) = Potential gain (PG) $5,000 − Boot received 0 = Remaining gain $5,000
FMV new machine $10,000
− Unrecognized gain (5,000)
= New basis $5,000
Harry purchased 6,000 shares of IBM common stock 18 years ago for $8.75 per share. The stock split 3 times and is now valued at $75.00 per share. The broker's commission on the purchase was 3%. What is Harry's adjusted basis? A) $3,601,575. B) $52,500. C) $3,600,000. D) $54,075.
D
In the current year, George invested $100,000 for a 20% partnership interest in an activity in which he is a material participant. The partnership reported a loss of $400,000 in the current year and a loss of $200,000 in the following year. George’s share of the partnership’s loss was $80,000 in the current year and $40,000 in the following year. How much of the loss from the partnership can George deduct for the current and following years, respectively?
Current Year Following Year
A)
$0 $0
B)
$80,000 $0
C)
$80,000 $20,000
D)
$80,000 $40,000
C
David owns a cabinet refinishing shop and bought a lathe for $15,000 to use in the business. Eight years later, David sold the lathe for $4,000 and had claimed depreciation of $5,000 on the machine. How much, if any, must David recapture as ordinary income?
A) $10,000. B) $4,000. C) $6,000. D) $0.
D
David has a realized loss on the sale of his equipment. This is calculated as follows: purchase price − depreciation claimed = adjusted basis or $15,000 − $5,000 = $10,000. Next, the sales price is deducted from the adjusted basis to give the gain(loss) realized ($10,000 − $4,000 = $6,000). Therefore, there is a Section 1231 loss on this Section 1245 property of $6,000 and no ordinary income recapture.
When monitoring the financial news, Gary, a CFP® professional, is alerted to possible loss issues for one of his clients, Gordon. Gordon has multiple investments in shares of companies that as an industry is suffering losses in sales. Gordon has resisted Gary’s recommendations to diversify his holdings in this industry. Gordon’s income and his overall invested assets could be affected if the share values decrease substantially and dividend income is reduced. In one company, Gary feels Gordon’s investment could become worthless in a few months. Gary’s next regularly scheduled appointment with Gordon is in 4 months to review his financial situation. Regarding Gordon’s circumstances, what should Gary do next?
A)
Gary should make a note to Gordon’s file, reminding Gary to ask Gordon during their next meeting whether the adverse financial news in Gordon’s preferred industry affected Gordon’s circumstances.
B)
Gary should assume the shares will decline in value and, for their next meeting, develop new recommendations to accommodate the change in Gordon’s circumstances.
C)
Gary need not do anything because it stands to reason that Gordon will notify Gary if Gordon is adversely affected.
D)
Gary should call Gordon and ask for an appointment to discuss the potential losses in Gordon’s investments.
D
