Taxation of Assets

Question 1

A married couple abandoned their principal residence in May. They had purchased the house five years ago for $350,000. The house had a current fair market value of $300,000. What is the maximum loss, if any, that they are allowed to deduct on the current-year’s tax return for the abandoned property?

Answer 1

$0

Losses on the sale or disposition of assets utilized for personal use are not deductible. The realized loss is $350,000 but it is not recognized.

Question 2

Which of the following sales should be reported as a capital gain?

Answer 2

Government bonds sold by an individual investor

Question 3

Upon her grandfather’s death, Jordan inherited 10 shares of Universal Corp. stock that had a fair market value of $5,000. Her grandfather acquired the shares in 1995 for $2,500. Four months after her grandfather’s death, Jordan sold all her shares of Universal for $7,500. What was Jordan’s recognized gain in the year of sale?

Answer 3

$2,500 long-term capital gain

Question 4

For an individual business owner, which of the following would typically be classified as a capital asset for federal income tax purposes?

Answer 4

Marketable securities

Question 5

On February 1, year 1, a taxpayer purchased an option to buy 1,000 shares of XYZ Co. for $200 per share. The taxpayer purchased the option for $50,000, which was to remain in effect for six months. The market declined, and the taxpayer let the option lapse on August 1, year 1. The taxpayer would report which of the following as a capital loss on the year 1 income tax return?

Answer 5

The taxpayer has a loss of $50,000 on the option since it lapsed. The character is capital since the underlying asset, the XYZ stock, is a capital asset. The loss is short term since the option was owned for only six months.

Question 6

For a cash-basis taxpayer, gain or loss on a year-end sale of listed stock arises on the

Answer 6

Trade date

The holding period for stocks and securities acquired by purchase begins on the trade date that the stock or security was acquired and ends on the trade date on which the stock or security was sold or exchanged.

Question 7

A corporation’s capital losses are

Answer 7

Deductible only to the extent of the corporation’s capital gains.

Question 8

A C corporation’s net capital losses are

Answer 8

Carried back three years and forward five years.

Question 9

A married individual invested in Section 1244 small business stock in year 1. In year 7, the individual sold the stock at a loss of $157,000. There were no other stock transactions during year 7. If the taxpayer files a joint return, how much loss can the taxpayer deduct in year 7?

Answer 9

A married taxpayer can deduct up to $100,000 of losses for Section 1244 stock. The other $57,000 loss is a long-term capital loss, and $3,000 of the capital loss is deductible.

Question 10

On January 2, 2013, Bates Corp. purchases and places into service seven-year MACRS tangible property costing $100,000. On December 31, 2017, Bates sells the property for $102,000, after having taken $47,525 in MACRS depreciation deductions.

What amount of the gain should Bates recapture as ordinary income?

Answer 10

$47,525

Question 11

Jared purchases an apartment building on January 1, 2005, for $500,000. The building is depreciated using Modified Accelerated Cost-Recovery System (MACRS) straight-line depreciation. The apartment building is sold on December 31, 2017, for $620,000, when its adjusted tax basis is $320,000 (assume that $180,000 of depreciation has been claimed). How much gain from the sale of the building is subject to the 25% rate?

Answer 11

$180,000

Total gain on the sale is $300,000 ($620,000 − $320,000). Gain on the sale of realty is taxed at a 25% rate to the extent of the straight-line depreciation claimed on the asset. (Note that there is no Section 1250 recapture since straight-line depreciation was used for the asset.) The straight-line depreciation was $180,000 so the first $180,000 of gain is taxed at 25%. The remaining gain of $120,000 is taxed as Section 1231 gain.

Question 12

What should be reported as the cost basis for a MACRS seven-year property?

Answer 12

The computer desks ($22,000) and office furniture ($4,000) are MACRS seven-year property. 7 year property includes office furniture, large equipment and machinery)

Question 13

A calendar-year taxpayer purchases a new business on July 1. The contract provides the following price allocation: customer list, $100,000; trade name, $50,000; goodwill, $90,000. What is the amortization deduction for the current year?

Answer 13

Correct! Customer lists, trade names, and goodwill are intangible assets that are amortized over 180 months. For the current year the assets are amortized for six months since the business began July 1. ($240,000/180 months × 6 months = $8,000).

Question 14

Kaitlin owns a computer that she uses for business, investment, and personal use, as follows:

Personal use. 25%
Investment use. 30%
Business use. 45%

Will Kaitlin’s use qualify her to use accelerated or straight-line depreciation, and what percentage of the asset’s basis qualifies to be depreciated?

Answer 14

Straight-line, 75%.

Question 15

Sands purchased 100 shares of Eastern Corp. stock for $18,000 on April 1 of the prior year. On February 1 of the current year, Sands sold 50 shares of Eastern for $7,000. Fifteen days later, Sands purchased 25 shares of Eastern for $3,750. What is the amount of Sands’s recognized gain or loss?

Answer 15

$1,000 loss

Sand’s basis per share is $180 ($18,000/100 shares). Sand’s realized loss on the 50 shares sold is $2,000 ($7,000 amount realized – $9,000 basis ($180 × 50 shares). This loss is not recognized under the wash sale rule if the same stock is repurchased within 30 days. Since only 25 shares were repurchased during the 30 day period, 50% (25 shares/50 shares) of the loss is not recognized. Therefore, $1,000 of the realized loss is recognized.

Question 16

In the current year, Essex sold land with a basis of $80,000 to Yarrow for $100,000. Yarrow paid $25,000 down and agreed to pay $15,000 per year, plus interest, for the next five years, beginning in the second year. Under the installment method, what gain should Essex include in gross income for the year of sale?

Answer 16

The total recognized gain from the sale is $20,000 ($100,000 selling price – $80,000 basis). Under the installment method, recognized income = cash collected × (gross profit/contract price). Therefore, $25,000 × ($20,000/$100,000) = $25,000 × 20% = $5,000.

Question 17

In a “like-kind” exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of

Answer 17

Exchanges involving property held primarily for sale; stocks, bonds, notes and other securities; partnership interests; certificates trusts or beneficial interest; and evidences of indebtedness are not considered “like-kind” exchanges and, as a result, do not qualify for the non-recognition of gains or losses.

Question 18

A heavy equipment dealer would like to trade some business assets in a nontaxable exchange. Which of the following exchanges would qualify as nontaxable?

Answer 18

A corporate office building for a vacant lot

An exchange will be non-taxable if it qualifies under the like-kind exchange rules. All realty is considered like-kind property. Since the building and the land are both realty, this qualifies as a non-taxable like-kind exchange.

Question 19

Parents lend $2,000,000 to their child to start a business. The loan is interest-free and is payable on demand. The imputed interest is subject to

Answer 19

The gift tax each year the loan is outstanding.

Generally, interest-free loans are subject to the imputed interest rules if they exceed $10,000. The interest that is not being paid by the child to the parents is considered a gift from the parents each year that the loan is outstanding.

Question 20

Which of the following statements is correct with regard to an individual taxpayer who has elected in 2015 to amortize the premium on a bond that yields taxable interest?

Answer 20

The bond’s basis is reduced by the amortization

An individual taxpayer who has elected to amortize the premium on a bond that yields taxable interest may reduce the bond’s basis by the amortization of the premium. In addition, the amount of bond premium attributable to the tax year may be used to offset interest received on the bond in computing the taxpayer’s taxable income.

Question 21

Clark bought series EE U.S. Savings Bonds in 2017. Redemption proceeds will be used for payment of college tuition for Clark’s dependent child. One of the conditions that must be met for tax exemption of accumulated interest on these bonds is that the

Answer 21

Taxpayers redeeming qualified U.S. Series EE Bonds in the same year that qualified higher education expenses are paid may exclude the interest income on the bonds from gross income. The conditions that must be met for tax exemption of accumulated interest on these bonds is that the purchaser of the bond must have made the purchase after reaching the age of 24 and be the sole owner of the bonds (or joint owner with his or her spouse).

Exclusion in proportion to educational expenses.

Question 22

Lyle Corp. is a distributor of pharmaceuticals and sells only to retail drug stores. Lyle received unsolicited samples of nonprescription drugs from a manufacturer.

Lyle donated these drugs to a qualified exempt organization and deducted their fair market value as a charitable contribution.

What should be included as gross income in Lyle’s return for receipt of these samples?

Answer 22

FMV

A corporation may deduct the fair market value of the contributed property but must add the same amount to its gross income for the receipt of the gift.

Question 23

Income=

Answer 23

Cash received + FMV of property or services recieved

Question 24

In 2017, Clark filed Form 1040EZ for the 2016 taxable year. In 2017, Clark received a state income tax refund of $900 plus interest of $10, for overpayment of 2016 state income tax.

What amount of the state tax refund and interest is taxable in Clark’s 2017 federal income tax return?

Answer 24

$10

Federal and state income tax refunds are excluded from a taxpayer’s taxable income to the extent that the refund did not reduce the amount of tax for the earlier year. However, any interest earned on these refunds is considered taxable income.

Question 25

Constructive receipt

Answer 25

Requires a cash basis taxpayer to include the value of property in income in the period in which the right to (or control of) the property is acquired. The income is not constructively received if substantial restrictions exist on the taxpayer’s use of the funds

Question 26

Tax Benefit Rule

Answer 26

Requires a taxpayer to include an expense reimbursement in income if the expense was deducted in a prior period and the deduction reduced the taxpayer’s taxable income

Question 27

Claim of Right Doctrine

Answer 27

Requires the taxpayer to include property in income in the period in which an apparent claim to the property materializes.

A later repayment of the property (because the claim was not valid) generates a deduction, but does not influence the earlier recognition of the income.

Question 28

Series EE Bonds

Answer 28

• Interest on Series EE bonds is not paid annually but when the bond matures. The interest is not included in income until maturity
• Interest on series EE savings bonds can be excluded at maturity or when redeemed if the taxpayer uses the proceeds to pay higher education expenses in the year of redemption.

Question 29

Taxable interest rules:

Answer 29

Interest is included in income when received (cash basis) or accrued (accrual basis).
Common sources of taxable interest that individuals often have are:
-United States Treasury notes and bonds
-Federal and state tax refunds
-Mortgages

Question 30

Bond premium amortization

Answer 30

• The amortization offsets the interest income from the bond.
• The amortized bond premium is computed using the constant yield to maturity method.

Question 31

Bond discount amortization

Answer 31

• Individuals amortize bond discounts (as interest income)=increases interest income
• Original issue discounts must be amortized using the effective interest rate method.

Question 32

Short-Term Discounts

Answer 32

Interest is taxed at maturity as ordinary income

Question 33

Series EE Bonds

Answer 33

-Interest on Series EE bonds is not paid annually but when the bond matures. The interest is not included in income until maturity

Question 34

Municipal Interest

Answer 34

Interest on state or local governmental obligations and obligations of a possession of the United States is excluded

Question 35

Interest-Free and Below-Market Loans

Answer 35

• In general, it is assumed that the borrower pays the current market rate of interest to the lender.
• The borrower will have interest expense and the lender interest income for this hypothetical payment.
• The lender is then assumed to make a payment to the borrower equal to the hypothetical payment. Tax consequences for borrower:

Compensation income if borrower is EE
Dividend income if borrower is SH
Gift tax if given as gift

Exemptions:
1. Loans

Question 36

Interest reporting

Answer 36

1099-INT to taxpayer

Schedule B if above $1500 and Part III for foreign accts

Question 37

State income tax refunds

Answer 37

If you received a refund of state or local income taxes from last year’s tax return, you may receive a Form 1099-G reporting this refund as income. If you itemized deductions on your federal return in the same year that you received the state or local refund, the refund may be considered taxable income. If you take the standard deduction, it is NOT included.

Federal refunds are NOT taxable

Question 38

An individual received $50,000 during the current year pursuant to a divorce decree. A check for $25,000 was identified as annual alimony, checks totaling $10,000 as annual child support, and a check for $15,000 as a property settlement. What amount should be included in the individual’s gross income?

Answer 38

Alimony is included in the recipient’s income, but child support payments and property settlements are not.

Question 39

In a divorce settlement, the ex-husband was required by court order to pay his ex-wife $36,000 in alimony. She received $25,000 in cash, a painting valued at $10,000, and the use of his beach house, valued at $3,000. What amount of gross income should she report as alimony?

Answer 39

$25,000

Alimony must be received in cash so the painting and beach house do not qualify.

Question 40

Tips and taxes

Answer 40

Only tips received as cash, or on debit and charge cards, must be reported to the employer for purposes of paying and withholding payroll taxes. Tips only have to be reported to the employer if they are greater than or equal to $20 for a month

Question 41

Alimony

Answer 41

• Required by decree or written agreement and not characterized as something other than alimony;
• Made in cash;
• Paid to or on behalf of former spouse;
• Terminate upon death of recipient; and
• Payor and payee cannot be members of the same household.

If the required amount of child support and alimony are not received, payments are first assumed to be child support.

Question 42

Property Transfers

Answer 42

to a former spouse under a divorce decree are not a taxable event. The transferor’s basis in the property transfers to the transferee.

Question 43

Allocation of Income for community property for spouses.

Answer 43

If community property, each spouse is taxed on 50% of the income. If separate property, the income is reported by the spouse who owns the property.

Question 44

Personal injury taxation

Answer 44

Any payment that compensates for damages due to a physical injury or illness. As long as the action generating a payment is due to a physical injury or illness, then all damage payments received, except for punitive damages, are excludible from income. This is the case even if the injured party is being reimbursed for lost wages.

Question 45

Income in Respect of a Decedent (IRD)

Answer 45

• IRD is income that the decedent had earned before his death, but had not yet recognized as income because of his method of accounting.
• IRD must be included in the gross income of the person who receives it, and it has the same character as it would have had if the decedent had recognized it.

Question 46

Taxable income items:

Answer 46

• Jury duty pay (if remitted to employer, deducted for AGI to offset income since employer takes taxes out)
• Punitive damages
• Unemployment

Question 47

Fuller was the owner and beneficiary of a $200,000 life insurance policy on a parent. Fuller sold the policy to Decker, for $25,000. Decker paid a total of $40,000 in premiums.

Upon the death of the parent, what amount must Decker include in gross income?

Answer 47

Decker’s cost basis is the $25,000 he paid for the policy plus the $40,000 he paid in premiums. $200,000 less $65,000 = $135,000.

Question 48

In 2017, Joan accepted and received a $10,000 award for outstanding civic achievement. Joan was selected without any action on her part, and no future services are expected of her as a condition of receiving the award. What amount should Joan include in her 2017 adjusted gross income in connection with this award?

Answer 48

Joan meets all of the requirements to exclude the gift from income, except that she accepted the award and received payment. Therefore, the FMV of the award, $10,000, is included in her income.

Question 49

Which payment(s) is(are) included in a recipient’s gross income?

I. Payment to a graduate assistant for a part-time teaching assignment at a university. Teaching is not a requirement toward obtaining the degree.

II. A grant to a Ph.D. candidate for his participation in a university-sponsored research project for the benefit of the university.

Answer 49

BOTH

Gross income is the starting point in determining a taxpayer’s tax liability. As a result, it is broadly defined. Gross income encompasses all income from all sources, including compensation for services, business income, interests, dividends, rents, and ordinary and capital gains.

Question 50

Prizes and Awards

Answer 50

The fair market value of these items must be included in income.

Question 51

Life Insurance Proceeds

Answer 51

Proceeds of life insurance received due to the death of the insured are excluded from income. Life insurance proceeds are generally subject to estate tax at the time of the decedent’s death.

Question 52

Gifts and Inheritances

Answer 52

Gifts and inheritances are taxed under the Federal Estate and Gift Tax law. To avoid the double taxation of these transfers, their value is excluded from the income of the recipient.

Question 53

Forgiveness of Debt

Answer 53

Generally, the forgiveness of debt results in income to the borrower unless the forgiveness is a gift, or the forgiveness is related to a bankruptcy proceeding (which is not taxable).

For cancellation of debt on real property used in a trade or business, no income is recognized even if the taxpayer is not bankrupt or insolvent. However, the taxpayer must reduce the basis of the property by the amount of forgiven debt.

Question 54

Social Security Benefits

Answer 54

Generally, SSB are not included in income. However, if the taxpayer’s provisional income (PI) exceeds a specified amount, up to 85% of the benefits may be included in income.

PI = AGI + Tax-exempt interest + 50% (SSB)

Thresholds:
Single: 25K and 34K
Married: 32K and 44K

Meets lower threshold, tax included is lesser of:
50% × SSB
50% × (PI − BA1)

Meets upper threshold, tax included is lesser of:
.85 × SSB, or
.85 × (PI − BA2)

Question 55

Non-taxable items:

Answer 55

• Foster child payments
• Worker’s compensation
• Welfare payments
• Child support
• Dividends on life insurance policy (not income, reduces cost of policy)

Question 56

During 2015, Karen purchased 100 shares of preferred stock of Boling Corp. for $5,500. During 2018, Karen received a stock dividend of ten additional shares of Boling Corp. preferred stock. On the date the preferred stock was distributed, it had a fair market value of $60 per share. What is Karen’s basis in the ten shares of preferred stock that she received as a dividend?

Answer 56

Generally, stock dividends are nontaxable, and a taxpayer’s basis for original stock is allocated to the dividend stock in proportion to fair market values. However, any stock that is distributed on preferred stock results in a taxable stock dividend. The amount to be included in the shareholder’s income is the stock’s fair market value on date of distribution. Similarly, the shareholder’s basis for the dividend shares will be equal to their fair market value on date of distribution (10 × $60 = $600).

Question 57

Marc Clay was unemployed for the entire year 2016. In January 2017, Clay obtained full-time employment 60 miles away from the city where he had resided during the 10 years preceding 2017. Clay kept his new job for the entire year 2017. In January 2017, Clay paid direct moving expenses of $1,300 in relocating to his new city of residence, but he received no reimbursement for these expenses. In his 2017 income tax return, Clay’s direct moving expenses are

Answer 57

Fully deductible from gross income in arriving at adjusted gross income.

Moving expenses are deductible if closely related to the start of work at a new location and a distance test (i.e., distance from new job to former residence is at least 50 miles further than distance from old job to former residence) and a time test (i.e., employed at least 39 weeks out of 12 months following move) are met.

Question 58

Unless the Internal Revenue Service consents to a change of method, the accrual method of tax reporting is mandatory for a sole proprietor when there are

Answer 58

Year-end merchandise inventories

Question 59

Darr, an employee of Sorce C corporation, is not a shareholder.

Which of the following would be included in a taxpayer’s gross income?

Answer 59

The dividend income on shares of stock that the taxpayer received for services rendered.

Question 60

What to include in gross income for the year?

Answer 60

FV of rent for condo paid for by employer
Cash found

NOT inheritance, inheritance never included in gross income

Question 61

A calendar-year individual is eligible to contribute to a deductible IRA. The taxpayer obtained a six-month extension to file until October 15 but did not file the return until November 1. What is the latest date that an IRA contribution can be made in order to qualify as a deduction on the prior year’s return?

Answer 61

IRA contributions must be made by the original due date of the return (April 15) even if the return is extended.

Question 62

Which one of the following characteristics/requirements differs across traditional IRAs and Roth IRAs?

Answer 62

Deductibility of contributions

Question 63

Davis, a sole proprietor with no employees, has a Keogh profit-sharing plan to which he may contribute 100% of his annual earned income.

For this purpose, “earned income” is defined as net self-employment earnings reduced by the

Answer 63

Deductible Keogh contribution and one-half of the self-employment tax.

Question 64

Sanderson has made deductible contributions to his traditional IRA for many years. Sanderson recently retired at age 60 and received a distribution of $150,000. In which way, if any, will the distribution be taxed?

Answer 64

As ordinary income.

Question 65

On December 1, 2016, Michaels, a self-employed cash-basis taxpayer, borrowed $100,000 to use in her business. The loan was to be repaid on November 30, 2017. Michaels paid the entire interest of $12,000 on December 31, 2016.

What amount of interest was deductible on Michaels’s 2017 income tax return?

Answer 65

$11,000

Cash-basis taxpayers report income when cash or property is actually or constructively received. There is no constructive receipt for deductions. Deductions for cash-basis taxpayers generally are taken when actually paid. However, for expenses covering 12 months or more, the deduction must be spread over the period for which the expenses apply. Thus, since the loan was to be repaid in 12 months, the deduction for the interest must be spread over the 12-month period.

Question 66

Mock operates a retail business selling illegal narcotic substances. Which of the following item(s) may Mock deduct in calculating business income?

Answer 66

I. Cost of merchandise

Question 67

An individual taxpayer earned $10,000 in investment income, $8,000 in noninterest investment expenses, and $5,000 in investment interest expense. How much is the taxpayer allowed to deduct on the current-year’s tax return for investment interest expenses?

Answer 67

$2000

Investment interest expense is deductible to the extent of net investment income. Net investment income is defined as investment income ($10,000) less noninterest investment expenses ($8,000), or $2,000.

Question 68

The 2017 deduction by an individual taxpayer for interest on investment indebtedness is

Answer 68

Limited to the taxpayer’s 2017 net investment income

Question 69

Which of the following statements is correct regarding the deductibility of an individual’s medical expenses?

Answer 69

Medical expenses paid by an individual are deductible in the year paid.

Question 70

Miscellaneous itemized deductions.

Answer 70

These expenses only may be deducted if they exceed 2% of the taxpayer’s adjusted gross income. Miscellaneous itemized deductions include:

• an individual’s tax return preparation fee;
• investment expenses deductible under Code Section 212, including custodial fees for a brokerage account; -job related educational expenses, including subscription to professional journals;
• unreimbursed employee expenses

Question 71

An individual’s losses on transactions entered into for personal purposes are deductible only if

Answer 71

The losses qualify as casualty or theft losses.

If the losses originated due to a trade or business, individuals also may deduct losses originating from transactions entered into for profit.

Question 72

Jason Budd, CPA, reports on the cash basis. In April 2016, Budd billed a client $3,500 for the following professional services:

Personal estate planning $2,000
Personal tax return preparation 1,000
Compilation of business financial statements 500
No part of the $3,500 was ever paid. In April 2017, the client declared bankruptcy, and the $3,500 obligation became totally uncollectible. What loss can Budd deduct on his tax return for this bad debt?

Answer 72

$0

Since Budd reports on the cash basis he did not recognize income when the client was billed. Therefore, he has no basis in the receivable to deduct when it becomes uncollectible.

Question 73

In the case of a corporation that is not a financial institution, which of the following statements is correct with regard to the deduction for bad debts?

Answer 73

A corporation is required to use the direct charge-off method rather than the reserve method.

Under the direct charge-off method, corporations may claim a deduction once a specific business debt becomes partially or wholly worthless and a specific nonbusiness debt becomes wholly worthless.

Question 74

Bartlet owns a manufacturing business and participates in the business. Which of the following conditions would cause the business to be considered a nonpassive activity for Bartlet?

Answer 74

Bartlet participates in the business for more than 500 hours during a year.

Question 75

The term active participation for a passive activity loss is relevant in relation to

Answer 75

Rental real estate activities.

An owner of rental real estate can deduct up to $25,000 of rental real estate losses against other income if he actively participates in managing the real estate.

Question 76

Brenda, employed full time, makes beaded jewelry as a hobby. In year 2, Brenda’s hobby generated $2,000 of sales, and she incurred $3,000 of travel expenses. What is the proper reporting of the income and expenses related to the activity?

Answer 76

Sales of $2,000 are reported in gross income, and $2,000 of expenses are reported as an itemized deduction subject to the 2% limitation.

Income from a hobby is reported as other income on the front page of Form 1040. Deductions such as travel expenses are 2% miscellaneous itemized deductions, and expenses can be deducted only to the extent of revenues.

Question 77

Which of the following statements regarding an individual’s suspended passive activity losses is correct?

Answer 77

Suspended losses can be carried forward, but not back, until utilized.

Question 78

Smith has an adjusted gross income (AGI) of $120,000 without taking into consideration $40,000 of losses from rental real estate activities. Smith actively participates in the rental real estate activities. What amount of the rental losses may Smith deduct in determining taxable income?

Answer 78

Since Smith actively participates in the rental real estate activity he can deduct up to $25,000 of rental losses. However, this deduction is reduced once modified AGI exceeds $100,000. Smith has $20,000 of excess AGI ($120,000 − $100,000) so he loses $10,000 ($20,000 × 50%) of the deduction. Of the $40,000 of losses, he can deduct $15,000 ($25,000 − $10,000). The remaining $25,000 of losses is suspended.

Question 79

Salary $36,000
Premiums per IRS table on group-term life insurance in excess of $50,000 500
Proceeds from state lottery 5,000

How much should Drury report as gross income on her current-year tax return?

Answer 79

Drury’s gross income includes the $36,000 salary, the $500 of premiums paid by her employer for group-term life insurance coverage in excess of $50,000, and the $5,000 proceeds received from a state lottery.

Question 80

In 2017, contributions to a defined contribution qualified retirement plan on behalf of a self-employed individual whose income from self-employment is $55,000 are limited to

Answer 80

The maximum amount of contributions to a defined contribution self-employed retirement plan is limited to the lesser of $54,000, or 100% of self-employment income for 2017.

Question 81

In January 2017, Joan Hill bought one share of Orban Corp. stock for $300. On March 1, 2017, Orban distributed one share of preferred stock for each share of common stock held. This distribution was nontaxable. On March 1, 2017, Joan’s one share of common stock had a fair market value of $450, while the preferred stock had a fair market value of $150. The holding period for the preferred stock starts in

Answer 81

January 2017

Since the tax basis of the preferred stock is determined in part by the basis of the common stock, the holding period of the preferred stock includes the holding period of the common stock.

Question 82

Johnson worked for ABC Co. and earned a salary of $100,000. Johnson also received, as a fringe benefit, group term-life insurance at twice Johnson’s salary. The annual IRS-established uniform cost of insurance is $2.76 per $1,000. What amount must Johnson include in gross income?

Answer 82

The first $50,000 of group-term life insurance provided by an employer is a tax-free fringe benefit. Johnson receives $200,000 of group-term life insurance, so $150,000 of this coverage is taxable. There are 150 units of $1,000 each of excess coverage, included in income at $2.76 for each unit. The income from the insurance coverage is $414 ($2.76 × $150). When the $414 is included with the $100,000 salary, gross income is $100,414.

Question 83

Joe and Barb are married, but Barb refuses to sign a 2017 joint return. On Joe’s separate 2017 return, an exemption may be claimed for Barb if

Answer 83

Barb had no gross income and was not claimed as another person’s dependent in 2017.

Question 84

An employee who has Social Security tax withheld in an amount greater than the maximum for a particular year, may claim

Answer 84

The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.

An employee who has Social Security tax withheld in an amount greater than the maximum for a particular year, may claim the excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers. An employee who had excess Social Security tax withheld from one employer should be reimbursed by the employer.

Question 85

Alternative minimum tax preferences include

Answer 85

1. Tax-exempt interest from private activity bonds issued after August 7, 1986
2. Excess of accelerated over SL depreciation on rental/lease property purchased before 1987

Question 86

Jose has owned stock for eight years that has a basis of $20,000 and fair market value of $100,000. Jose contributes the stock to a qualified charity. Which of the following is a proper tax consequence from this transaction?

Answer 86

Jose has a charitable contribution of $100,000.

When long-term capital gain property is contributed to a qualified charity, the fair market value of the property can be deducted as a charitable contribution.

Question 87

In 2017, to qualify for the child care credit on a joint return, the spouses must

Answer 87

Be gainfully employed/looking for work or a student when related expenses are incurred

Question 88

Which of the following disqualifies an individual from the earned income credit?

Answer 88

A married taxpayer must file as married filing jointly to qualify for the earned income credit.

Question 89

Mr. and Mrs. Alexander have two dependent children, one of whom (Cal) is a freshman in college during 2017. Tuition and fees paid for Cal during 2017 total $15,000. The Alexanders also paid $10,000 in 2017 for their 14-year-old daughter, Kaitlin, to attend a private high school. The Alexanders file a joint tax return for 2017 and report adjusted gross income of $150,000. Cal is a full-time student and enrolled in a degree program. What is the Alexanders’ Hope/American Opportunity Tax Credit for 2017?

Answer 89

The credit is computed as 100% of the first $2,000 and 25% of the next $2,000 of qualified educational expenses, for a total of $2,500. This credit does not begin phasing out in 2017 for married filing joint returns until AGI reaches $160,000. The credit applies only to postsecondary expenses so the tuition for Kaitlin does not qualify

Question 90

This year, Beck gave $5,000 cash to a nephew, canceled $3,000 of the same nephew’s indebtedness, donated $1,500 to a political party, and gave $1,200 of municipal bonds to a parent. What is the amount of Beck’s gifts before considering the gift tax annual exclusion?

Answer 90

The $5,000 cash, $3,000 debt cancellation, and $1,200 municipal bonds are all subject to the gift tax. Donations to political parties are not subject to the gift tax.

Question 91

When Jim and Nina became engaged in April 2017, Jim gave Nina a ring that had a fair market value of $50,000. After their wedding in July 2017, Jim gave Nina $75,000 in cash so that Nina could have her own bank account. Both Jim and Nina are U.S. citizens.

What was the amount of Jim’s 2017 marital deduction?

Answer 91

For gift tax purposes, a taxpayer may claim a marital deduction for all gifts given to a spouse provided:

(1) the taxpayer and the spouse were married at the date of the gift;
(2) the spouse is a U.S. citizen; and
(3) the property transferred is not a terminable interest (rights do not terminate upon death).

Question 92

The federal estate tax may not be reduced by a credit of

Answer 92

State death taxes paid.

Question 93

Ordinary and necessary administration expenses of an estate are deductible:

Answer 93

On the fiduciary income tax return if the estate tax deduction is waived.

Question 94

Fred and Amy Kehl, both U.S. citizens, are married. All of their real and personal property is owned by them as tenants by the entirety or as joint tenants with right of survivorship. The gross estate of the first spouse to die

Answer 94

Includes 50% of the value of all property owned by the couple, regardless of which spouse furnished the original consideration.

Question 95

In connection with a “buy-sell” agreement funded by a cross-purchase insurance arrangement, business associate Adam bought a policy on Burr’s life to finance the purchase of Burr’s interest. Adam, the beneficiary, paid the premiums and retained all incidents of ownership.

On the death of Burr, the insurance proceeds will be

Answer 95

“Buy-sell” agreements are excludable from a decedent’s estate provided the agreement:

(1) is a bona fide business agreement;
(2) is not a device to transfer property to the decedents family for less than full and adequate consideration; and
(3) has terms similar to those entered into by persons in arm’s length transactions.

Question 96

Which of the following credits may be offset against the gross estate tax to determine the net estate tax of a U.S. citizen?

Answer 96

Certain credits may be offset against the gross estate tax to determine the net estate tax of a U.S. citizen. These credits are the unified credit, foreign death taxes, prior transfers and gift taxes paid on pre-1977 gifts.