Tax (Review) Flashcards
Sources of “substantial authority” available for tax research include:
Internal Revenue Code. Congressional Committee Reports (Blue Book). Treasury Regulations. Private Letter Rulings. I and II only. I, II, and III only. I, II, III and IV. I, III and IV only.
Solution: The correct answer is C.
Substantial authority is official words and rulings which can be relied on to support a tax opinion or position. All of these can be relied on by someone.
Valerie sued her former employer for a physical injury she sustained at work. Valerie was awarded $100,000 to compensate her for the injury and $25,000 in punitive damages. Valerie must include how much in her gross income:
$0
$25,000
$100,000
$125,000
Solution: The correct answer is B.
Compensation for damages for personal bodily injury are not included in taxable income. Punitive damages are included as taxable income.
IRC § 104(a)(2) excludes from gross income “the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness.”
functional use test
the taxpayer’s use of the replacement property and of the involuntarily converted property must be the same
taxpayer use test
the owner investor’s properties must be used in similar endeavors as the previously held properties
are loan proceeds and child support counted towards gross income?
no
are losses in LIKE KIND EXCHANGE realized or recognized?
losses in like kind exchanges are not recognized
**a gain or loss is realized when an asset is disposed of or sold
What are the SS hurdles for 50% and 85%?
and what is the formula?
Single
On December 31 of last year, Uli purchased 100 shares of Runway, Inc. (a publicly held company) for $5,000. On March 1 of this year, Runway, Inc. declared that it was bankrupt, that it will wrap up operations, and that all of its assets will be used to satisfy secured creditor claims so there will be no residual equity left for the stockholders. Which of the following statements describes the tax treatment of this transaction?
Uli may deduct the $5,000 as an ordinary loss.
Uli may deduct the $5,000 investment as a short-term capital loss.
Uli may deduct the $5,000 investment as a long-term capital loss.
No loss deduction is permitted.
Solution: The correct answer is B.
Since the company became worthless during the year, a constructive sale of the stock occurs on December 31 of this year. Therefore, Uli has a short-term holding period because she is deemed to have held the stock for exactly one year (long-term holding period requires at least one year and one day). Therefore, Uli will be able to deduct the full $5,000 investment as a short-term capital loss in the year the company becomes worthless.
An advantage of a SIMPLE IRA over a safe harbor 401(k) plan is that a SIMPLE IRA:
A. Doesn’t have an actual deferral percentage (ADP) test.
B. Has lower administrative costs.
C. Permits participants to take loans from the plan, within limits.
D. Offers higher pre-tax elective deferral limits.
Solution: The correct answer is B.
A is incorrect. Although a SIMPLE IRA does not have an ADP test, neither does a safe harbor 401(k). Therefore, this is not an advantage of a SIMPLE IRA over a safe harbor 401(k) plan. C is incorrect. IRAs, including the SIMPLE IRA, do not permit loans. D is incorrect. Safe harbor 401(k) plans offer higher elective deferral contributions than SIMPLE IRAs.
When is a direct transfer to a medical service provider considered a QUALIFIED transfer and does not count as a gift for gift tax purposes
for a transfer to be considered a QUALIFIED TRANSFER the medical expense must be deductible for income tax purposes
example of a direct transfer to a medical provider that cannot be deducted for income tax purposes -> cosmetic surgery
Which of the following is a deduction for federal income tax purposes?
A. Underpayment penalty taxes.
B. Federal estate tax.
C. Self-employment tax.
D. Excess FICA taxes.
Solution: The correct answer is C.
One-half of self-employment taxes are deductible for income tax purposes.
A is incorrect. Penalty taxes are not deductible for federal income tax purposes. B is incorrect. Federal gift and estate taxes are not deductible for income tax purposes. D is incorrect. Excess FICA taxes paid are eligible for a credit for income tax purposes, but are not deductible.
Which is the best source for obtaining a plain language understanding about the current tax law?
Commerce Clearing House Federal Tax Guide.
Congressional Tax Committee Reports.
Treasury Regulations.
Tax Court Reports.
Solution: The correct answer is A.
Option “A” is correct because Commerce Clearing House (CCH) provides plain language interpretation of tax law. Option “B” is incorrect as the Congressional Committee Reports (sometimes known as the Blue Book) provides congressional reasoning for enacting tax law. This language is often very technical and difficult to understand. Option “D” is incorrect because Tax Court Reports provide rulings of the U.S. Tax Court in the form of case law.
Charitable contribution from IRAs
how old must you be?
is there a limit to how much you can donate?
results?
must be 70.5
cannot exceed 100,000
contribution is not treated as income to the IRA owner
contribution is not treated as a charitable contribution
can count as the owner’s RMD
A CFP® professional is reviewing tax documents provided by a client for her various business interests. The CFP® professional would expect to find estimated tax payments reported for all of the following, EXCEPT:
Partnership Sole proprietor Corporation Trust Solution
Solution: The correct answer is A.
Partnerships are not taxpaying entities and pass through their income and losses to the partners. The partnership files an informational tax form (Form 1065). The partners file individual estimated tax reports and make individual estimated payments as part of their 1040 filing. Sole proprietors file individual estimated taxes, and corporations, trusts, and estates must pay estimated taxes.
