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Smith and Jones formed a partnership. Smith contributed a building with an original cost of $80,000, a fair market value of $100,000, and an adjusted basis of $40,000. Jones contributed $100,000 cash. Each partner is a material participant in partnership business. How much can Smith currently deduct if his share of the partnership’s first-year operating loss is $45,000?
The distributive share of a partnership’s operating loss that is deductible by an individual partner is limited to the adjusted basis of his or her partnership interest. Hence Smith’s adjusted basis in his partnership interest is $40,000, determined by his adjusted basis for the property he has contributed
What are four features concerning the taxation of capital gains and losses of individual taxpayers?
- -The maximum rate is generally 15%
- -Up to $3,000 of net capital losses ($1,500 if married filing separately) may be used to offset ordinary income in any given year.
- -collectibles gain is subject to a 28 percent maximum rate.
- -unrecaptured depreciation is subject to a 25 percent maximum rate
Michael and Mary, a married couple filing jointly, sell their home this year for $650,000. Their basis in the home, including cost and improvements, is $200,000. Mary purchased the home in her name many years ago and the couple has lived together there since that time. What amount of gain must Michael and Mary recognize from the sale
The couple is eligible for the full $500,000 exclusion under the rules for married couples. Their realized gain is $450,000 ($650,000 - $200,000). Therefore, no gain is taxable
What are the issues concerning the conventions used for calculating depreciation in the year an asset is placed in service
- -A "midquarter" convention applies if more than 40 percent of all property placed in service by a taxpayer during the year and otherwise qualifying for the "half-year" convention is placed in service during the last 3 months of the taxable year.
- -5-year property is subject to a "half-year" convention.
- -the convention does apply in the year in which the property is disposed of.
- -real estate is generally subject to a "mid-month" convention.
Johnson makes a $500,000 building available five nights a week at no charge to the local Boy Scout Council. Which of the following statements correctly describes how the use of Johnson's property will be treated for purposes of the charitable contribution deduction?
Johnson has no deduction for the rent-free occupancy.
Allowing a charitable, religious, educational, or similar organization to use property on a rent-free basis does not give rise to a charitable deduction.
Five years ago John purchased a portfolio of public-purpose municipal bonds for $85,000. During the current year he received $8,000 interest on these bonds. At the end of the current year he sold these bonds for $95,000. How much taxable income must John report for the current year as a consequence of owning and disposing of these bonds?
Any gain from the sale of tax-exempt securities is subject to federal income taxation. Since the bonds are public-purpose bonds, the interest is tax exempt.
What are the 4 features concerning elements of personal income taxation?
- -the personal exemption amount is indexed for inflation.
- -the kiddie tax is applicable to the net unearned income of children under a specified age.
- -The range of taxable income over which specific tax brackets will be applied depends on the filing status of the particular taxpayer(s).
- -married taxpayers filing jointly receive the highest standard deduction amount.
What is an ordinary and necessary deductible business expense for Bob, a life insurance agent?
- -the tuition fee for the two CLU courses he is taking toward his CLU designation
- -his primary office is not at home, and the basic cost of his first line is nondeductible.
- -personal insurance premiums are generally nondeductible.
- -commuting expenses are nondeductible.
What are 4 issues concerning a taxpayer who wishes to contest a statutory notice of deficiency assessed against him?
He may petition the U.S. Tax Court to hear his case without prepaying the deficiency but is not entitled to a jury trial. The Tax Court is the only court that will hear a tax case without prior payment of the assessed deficiency.
there are no jury trials in the Court of Federal Claims.
prepayment of the assessed deficiency is required in the District Court.
the Tax Court does not have jury trials.
An employer maintains a group term life insurance plan for its employees. A nonkey employee, aged 60, is provided with $100,000 worth of coverage. Using the Uniform Premium Table I, the cost of $1,000 of protection per month in his age bracket is $.66. If the employee contributes $200 annually toward the cost of the coverage, what amount will be included in the employee's gross income?
Premiums for the first $50,000 of coverage are tax free to the employee. The Table I cost for the excess coverage ($50,000) is taxable to the extent that it exceeds the employee's contribution. Here, this Table I cost is $396 per year (.66 x 12 x 50). Therefore $196 is taxable to the employee ($396 - $200).
Faith Forrester has the following selected information concerning her interest expenses and investment income for this year:
Interest income from corporate bonds = $5,000
Dividend income not eligible for the lower maximum tax rates on qualifying dividends = $10,000
Interest paid to acquire common stock portfolio = $18,000
Interest income from public-purpose municipal bonds = $4,000
Interest paid to acquire the municipal bonds = $2,000
Qualified residence interest paid on principal residence = $10,000
Based on the above information, the total amount of all of
Faith’s interest deductions for this year is:
-Faith can deduct investment interest up to the limit of her net investment income. However, municipal bond interest income or the interest paid to acquire municipal bonds does not qualify as investment income or interest. Thus, the only investment interest that qualifies is the $18,000 paid to acquire the common stocks. Since Faith has only $15,000 of net investment income, she is limited to a $15,000 investment interest deduction. The $10,000 mortgage interest on the home is fully deductible. Faith has total interest deductions this year of $25,000.
The Magic Missile Corporation has two shareholders. Past earnings and profits totaled $100,000. This year the corporation had earnings and profits of $200,000 and distributed $175,000 to each shareholder.
How much of the distribution is taxable as a dividend to each shareholder?
The distribution to each shareholder is taxed as a dividend to the extent of the pro rata earnings and profits of the corporation, both accumulated and current. The combined earnings and profits in this case totaled $300,000.
Therefore $150,000 of the distribution to each of the two shareholders is a dividend.
Sally Snow is the beneficiary of her husband's $120,000 life insurance policy. Sally's husband died in September 2000. She elected to receive $7,800 annually under a life income option. Her life expectancy was 20 years when the life income option was chosen.
How much of each annual annuity payment is included in her gross income?
Under the settlement option chosen, Sally receives $7,800 annually; $6,000 represents the death benefit that is nontaxable to her. The remaining portion, $1,800, represents payment of interest, which is taxable as ordinary income.
What are 4 issues concerning the deductibility of bad debts?
A nonbusiness bad debt can be deductible only as a short-term capital loss.
in a family situation the guarantor of a loan is not acting in the course of his or her trade or business.
a legal (enforceable) debt is a prerequisite to the deduction.
a taxpayer may take a deduction for partial worthlessness if the debt is a business bad debt and the circumstances warrant it.
In order to be treated as a "qualifying child" of the taxpayer for dependency exemption purposes, an individual must generally meet which test?
The individual must have the same principal place of abode as the taxpayer for more than half of the taxable year.
the gross income test applies for purposes of determining whether an individual is a "qualifying relative," not a "qualifying child."
a qualifying child must generally be below the age of 19, not 17. (Different rules apply for full-time students and disabled individuals.)
the support test for a qualifying child requires only that the individual not provide more than half of his or her own support.
What is an example of educational expenses would be deductible as a business expense by an individual taxpayer?
A filing clerk pays for a night course in computer-based filing because his supervisor suggested he learn the more modern system since the office will be converting to it soon.
Educational expenses are deductible as business expenses if the education is to improve skills in the taxpayer's current job or is required by the taxpayer's employer. However, education leading to a career change does not give rise to a business expense deduction, even though a different tax deduction or credit might be available for the expense.
Concerning the rules for taxation of capital gains for individual taxpayers, what must apply?
There must generally be a sale or exchange of a capital asset in order for the capital gain or loss rules to apply.
This year Joe Carlton gave rental real estate worth $50,000 to his daughter Susan as a wedding present. Joe’s adjusted basis in the property was $10,000. After Susan received the property, it generated $5,000 in income this year. Which of the following amounts will Susan have to include as income this year?
Only the $5,000 of income generated by the gifted property is includible in Susan’s gross income.
How many personal exemptions is a blind, unmarried taxpayer, aged 65 or older, who is not subject to the exemption phaseout rules, entitled to?
The taxpayer is entitled to one personal exemption.
Older or blind taxpayers receive an additional amount in the determination of their standard deduction. However, they do not receive additional personal exemptions.
An executive bought 100 shares of his employer's stock for $2,000 on July 1 of this year. These shares are nontransferable and he must return them if he leaves the corporation. However, for each year he remains, 20 shares do not have to be returned. If the fair market value is $40 per share on July 1 of next year, the executive will have ordinary income next year of ...
The executive has a basis of $20 per share ($2,000 / 100). Their value when the restriction lapses is $40 per share. Therefore the executive has income of $20 per share ($40 - $20), for a total of $400 ($20 x 20 shares).
For the current year an individual taxpayer will have the following income and medical expenses:
Adjusted gross income = $100,000
Medical expense insurance = $3,000
Unreimbursed hospital and doctor bills = $2,000
Unreimbursed prescription drug expenses = $1,000
The individual taxpayer will have a medical expense deduction for the current year of...
The total medical expenses ($6,000) are less than 7.5 percent of adjusted gross income ($7,500).
A C corporation in the manufacturing business having $50,000 of taxable income for the year will pay federal income taxes in the amount of...
The 15 percent tax bracket applies to the first $50,000 of corporate taxable income. Therefore the tax is $7,500 ($50,000 x .15).
Robert and Susan were just divorced. In accordance with the decree, he is paying her $1,000 per month as alimony and $600 per month for support of their twins, aged 5. How much of each monthly payment of $1,600 is allowed as a deduction from Robert's gross income?
Only the $1,000 alimony portion of Robert's payments is deductible.
An independent sales representative purchased a business car 3 years ago for $12,000. This year he exchanged the old business car now worth $6,000 with an adjusted basis of $5,000 plus $5,000 cash for a new business car with a selling price of $11,000. As a result of this exchange the sales representative recognized...
The taxpayer has realized no taxable gain on the exchange, so there is no recognized gain. The exchange would appear to qualify as a like-kind exchange even if gain were realized. Also, the taxpayer paid cash boot in the exchange, but did not receive boot that would cause the recognition of gain.
No gain or loss.
Which of the court may a taxpayer petition for redetermination of an assessed income tax deficiency and receive a jury trial?
The U.S. District Court is the only court in which a taxpayer can have a jury trial in a civil tax case.
Under the tax rules governing depreciation, the cost of residential rental property placed in business service this year will generally be recovered over what period of time?
-The cost recovery period for residential rental property is 27.5 years.
An individual taxpayer received an inheritance of $20,000 in cash, which he donated to a public charity. His adjusted gross income for the year is $30,000. The maximum charitable deduction that the taxpayer will be allowed for the current year is ...
The current deduction is limited to one-half of adjusted gross income, or $15,000 in this case.
In determining his individual income tax, each partner reports his distributive share of the partnership income. Subject to certain restrictions, a partner's distributive share is generally determined by...
the partnership agreement
Salary, capital accounts, and basis are not necessarily related to the partner's distributive share, which is determined under the partnership agreement.
This year an individual taxpayer (other than a married individual filing a separate return) has $30,000 of investment interest expense and $1,000 of net investment income. The maximum amount of investment interest expense this taxpayer may deduct this year is...
The deduction is limited to the taxpayer's net investment income for the year, or $1,000.
Which of the following statements correctly describes the option available to an annuitant if, in a given year, the annual payment from a variable annuity is $400 less than the annuitant's annual excludible amount?
The annuitant may recalculate his excludible amount beginning with payments to be received in the year following the one in which the above annuity payment was received.
-In the case of a variable annuity, the annuitant may recalculate the exclusion ratio with respect to future payments if he or she receives a payment that is less than the currently excludible amount.
A woman purchased a $100,000 whole life insurance policy on her life and designated her husband as beneficiary. Several years later the woman surrendered the policy for its cash value of $50,000. At the time of surrender, the woman had paid gross premiums of $45,000 and had received policy dividends of $10,000.
What were the income tax consequences to the woman upon receipt of the cash surrender value?
The woman's basis in the policy is $35,000 ($45,000 premiums - $10,000 dividends received). Therefore the taxable amount is $15,000 ($50,000 received - $35,000 basis).
She received $35,000 tax free and $15,000 as ordinary income.
What 4 features concerning the exclusion of gain on the sale of a principal residence is correct?
There is no requirement that the taxpayer purchase a replacement residence to be eligible for the exclusion.
the occupancy requirement is 2 out of 5 years.
the maximum exclusion is $500,000.
the maximum exclusion for single taxpayers is $250,000.
A corporation purchased a $50,000 whole life insurance policy on a man who was a key employee. Several years later the man terminated employment and his wife purchased the policy from the corporation with her own funds for $10,000. The wife designated herself as beneficiary and started paying the premiums.
If the man were to die after his wife had paid net premiums amounting to $5,000, what would be the income tax consequences to the wife upon receipt of the policy death proceeds?
She would receive $15,000 tax free and $35,000 as ordinary income.
This is a transfer-for-value situation. The wife paid $10,000 for the policy and $5,000 in subsequent premiums, a total basis of $15,000. She must pay tax on the proceeds in excess of $15,000.
The alternative minimum tax (AMT) is imposed on alternative minimum taxable income (AMTI) in excess of any applicable exemption amount.
What tax rate is applied to the first $175,000 of the AMT base (or tentative minimum taxable income) of individual taxpayers?
The individual AMT rate is 26 percent on the first $175,000.
Ben and John formed a corporation. John transferred $60,000 in cash to the corporation. Ben transferred property with a basis of $30,000 and a fair market value of $80,000. The corporation paid him $20,000 in cash. They each received back 50 percent of the stock of the corporation.
How much gain will Ben recognize?
When property is transferred in a tax-free incorporation, there is no recognition of gain or loss to the transferor if only stock is received in exchange. However, gain will be recognized to Ben to the extent of money or other property received ($20,000).
Which of the following statements concerning the deductibility of business expenses is (are) correct?
I. Entertainment expenses are fully deductible if recorded by the taxpayer when incurred.
II. Fines for the violation of a state law are deductible if they are incurred in the ordinary course of business.
Neither I nor II
I is incorrect because with few exceptions, only 50 percent of entertainment expenses are deductible.
II is incorrect because fines for violation of law are not deductible, even if they are incurred in the ordinary course of business.
Which of the following statements concerning dividends from a corporation to its shareholders is (are) correct?
I. Cash dividends are generally taxed at a maximum rate of 15 percent under current law.
II. Dividends of property other than money are considered capital transactions for income tax purposes.
II is incorrect because a distribution of any type of property in the form of a dividend can be taxed as a dividend and not as a capital transaction.
Under which of the following circumstances will a corporation's payment of premiums on a life insurance policy be taxable to an insured employee?
I. The corporation purchases group term life insurance of $10,000 payable to the insured employee's personal beneficiary under a nondiscriminatory plan.
II. The insured employee is the owner of an individual policy and the proceeds are payable to the employee's personal beneficiary.
The insured employee is taxed on the coverage because the employee is the owner of the policy.
I is incorrect because the insurance premiums would not be taxable. These premiums will qualify for the exclusion under IRC Sec. 79.
Which of the following statements concerning the tax implications of a divorce is (are) correct?
I. Excess alimony payments are fully taxable to the recipient.
II. Cash payments for child support provided in the divorce decree are tax deductible.
Neither I or II
I is incorrect because the recipient of excess alimony payments receives a deduction for such payments in the third postseparation year.
II is incorrect because child support payments are not deductible.
Which of the following statements correctly describe(s) a function of the federal income tax system?
I. It can be used to reduce inflationary trends.
II. It can be used to encourage economic activity at the taxpayer level.
Both I and II
Which of the following statements concerning S corporations is (are) correct?
I. An S corporation may have only two classes of stock-preferred and common.
II. The electing corporation must be a domestic corporation with no more than 50 shareholders.
Neither I or II
I is incorrect because an S corporation may not have preferred stock.
II is incorrect because an S corporation may have up to 100 shareholders.
Which of the following statements concerning sources of tax law is (are) correct?
I. The IRS is bound to follow a decision of the Tax Court in subsequent cases involving the same issue.
II. A two-thirds majority of both houses of Congress is needed to override the President's veto of a tax bill.
I is incorrect because the IRS is not bound to follow Tax Court decisions.
Which of the following statements concerning the small corporation exemption under the alternative minimum tax is (are) correct?
I. To qualify for the exemption, the corporation must have no more than five shareholders.
II. To qualify for the exemption, a new corporation must have average annual gross receipts of $5 million or less for its first 3 taxable years.
I is incorrect because there is no requirement concerning the number of shareholders in the corporation.
Which of the following items would be considered constructively received in the current year by a cash-basis taxpayer?
I. interest earned from reinvestment of insurance policy dividends that are left with the insurance company
II. income from work performed that has been billed but will not be received until next year
II is incorrect because a cash-basis taxpayer reports income when received, not when he or she has completed the work and submitted a bill for services.
Which of the following statements concerning the itemized deduction for medical expenses is (are) correct?
I. Any expenses for cosmetic surgery will qualify for the medical expense deduction.
II. Physicians' fees are deductible at 50 percent of the cost.
I is incorrect because expenses for cosmetic surgery are subject to strict rules regarding deductibility under current law.
II is incorrect because allowable medical expenses, including physicians' fees, are fully deductible as itemized deductions, but only to the extent that they exceed 7.5 percent of the taxpayer's adjusted gross income.
Which of the following statements concerning capital cost recovery (depreciation) for assets placed in service this year is (are) correct?
I. When the tax law specifies a particular type of depreciation method such as 150 percent declining balance, the taxpayer is precluded from using the straight-line method for that class of property.
II. Automobiles are depreciated over a 3-year recovery period.
I is incorrect because the law permits taxpayers the option to elect straight-line depreciation for any asset class placed in service during the year.
II is incorrect because automobiles currently placed in service are depreciated over a 5-year recovery period
Which of the following statements concerning taxation of an annuity purchased this year is (are) correct?
I. A portion of annuity payments received will be tax free as a return of capital for as long as the annuitant lives, regardless of how long.
II. A gift of an annuity contract can result in a taxable event for the donor at the time of the gift.
I is incorrect because the tax-free amount recoverable for an annuity purchased this year is limited to the individual's investment in the contract. Once the investment in the contract is fully recovered, the full amount of each annuity payment is taxable.
Which of the following statements concerning the retirement of a general partner in a service partnership is (are) correct?
I. Payments attributed to inventory and unrealized receivables will be treated as ordinary income to the retiring partner.
II. Payment for goodwill will be treated as capital gain to the retiring partner if the partnership agreement provides for payments for goodwill.
Which of the following statements concerning the income tax treatment of disability income insurance benefits is (are) correct?
I. Benefits received from policies paid for by an employer are generally included in the employee's gross income.
II. Benefits from policies owned and paid for by the insured are taxable income to him or her when received.
II is incorrect because benefits on disability policies personally owned and paid for by the insured are not taxable.
Which of the following legal expenses of an individual taxpayer is (are) deductible in full for a single tax year as a nonbusiness expense?
I. legal expenses paid or incurred in connection with being represented at a tax audit
II. legal expenses paid or incurred in defending or perfecting title to real property
II is incorrect because legal expenses paid to defend or perfect title to property are generally not deductible in full for a single tax year. Those legal expenses may be capitalized and will be recovered when the property is depreciated or sold.
At the time of occurrence, which of the following events will require recognition of $1,000 of gross income by the taxpayer?
I. The taxpayer receives $1,000 in cash from his mother for his birthday.
II. A creditor cancels the taxpayer's debt of $1,000.
I is incorrect because the $1,000 in this situation is a gift, and gifts are not includible in the gross income of the recipient.
Which of the following statements concerning the income taxation of corporations is (are) correct?
I. Any corporation can fully deduct the dividends it receives each year from other corporations.
II. A corporation can only use capital losses to offset capital gains.
I is incorrect because the dividends-received deduction, if available, is generally less than 100 percent.
Which of the following statements concerning the doctrine of constructive receipt is (are) correct?
I. The taxpayer has constructively received income when it is credited to his account without restrictions.
II. It is inapplicable to individual taxpayers who report income on a cash basis.
II is incorrect because the doctrine of constructive receipt applies specifically to cash-basis taxpayers.
A shareholder sells a portion of his stock in a corporation that he purchased at various prices and times. In this situation, which of the following statements concerning the method he may use to determine the basis of these shares is (are) correct?
I. If he can adequately identify the shares sold, he can use the basis of those specific shares.
II. If he is unable to identify the shares sold, he must use a "first-in, first-out" (FIFO) method to determine the basis.
Both I and II
A corporation pays the premiums on a life insurance policy on the life of its president. In which of the following situations may the corporation deduct the premiums as an expense?
I. The corporation is the absolute owner and beneficiary of the policy.
II. The president is the absolute owner of all rights under the policy and the corporation makes the premium payments pursuant to the president's compensation package.
I is incorrect because a corporation cannot deduct premiums paid on a policy if the corporation is a beneficiary.
Which of the following statements concerning the tax credit for qualified adoption expenses is (are) correct?
I. The allowable amount of the credit is phased out for taxpayers whose adjusted gross income exceeds a specified amount.
II. In the case of a foreign adoption, the credit is not allowable until the year in which the adoption becomes final.
Both I and II
Which of the following statements concerning the income tax treatment of qualified long-term care insurance contracts is (are) correct?
I. Premiums paid for such contracts are deductible as medical expenses subject to annual limitations based on the covered individual’s age.
II. Premiums paid for such contracts are not eligible for the "above-the-line" deduction for health insurance premiums of self-employed taxpayers.
II is incorrect because premiums for qualified long-term care insurance contracts are eligible for the "above-the-line" deduction.
A newly formed corporation will have gross income in the current taxable year of $100,000. Which of the following would be fully deductible by the corporation for the current taxable year?
I. All of the organizational expenses incurred in forming the corporation
II. the payment of common stock dividends out of current earnings and profits
I is incorrect because organizational expenses in excess of the deductible limit permitted under section 195 of the Internal Revenue Code must be amortized over a 180-month period.
II is incorrect because dividends paid are not deductible regardless of the amount of the corporation's earnings and profits.
An individual taxpayer irrevocably assigns a level premium whole life insurance policy on his life to a qualified public charity. Which of the following statements concerning the charitable contribution deduction treatment of this policy gift is (are) correct?
I. The taxpayer will receive a charitable deduction in the current year equal to the lesser of the premiums paid or the value of the policy.
II. The taxpayer will receive a charitable deduction in the year of his death equal to the net policy proceeds.
II is incorrect because there is no income tax charitable deduction for policy proceeds. The deduction is taken in the year of contribution and is not based upon the death proceeds.
Which of the following transactions between a corporation and its shareholders could result in a taxable distribution to the shareholders?
I. The corporation sells property to the shareholders at a price equivalent to the fair market value.
II. The corporation cancels debts that several shareholders owed to it.
-I is incorrect because a sale of property at fair market value by a corporation to its shareholders is not treated as a dividend or other taxable distribution made with respect to stock ownership.
A U.S. Supreme Court interpretation of tax law is the law of the land until which of the following happen(s)?
I. Congress enacts a new statute, tantamount to overturning a Court decision.
II. The Court overrides its own prior decision.
Both I and II are correct.
Which of the following statements concerning the personal-holding-company tax is (are) correct?
I. One requirement to be treated as a personal holding company is that more than 50 percent of the value of the company's stock must be held by five or fewer individuals.
II. The personal-holding-company tax can be avoided by the payment of dividends by the company.
Both I and II are correct.
Which of the following is (are) included in the gross income of an individual taxpayer?
I. damages other than punitive damages received on account of a physical personal injury suffered by the taxpayer
II. property received by the taxpayer as an inheritance
I is incorrect because damages (other than punitive damages) received on account of a physical personal injury are generally not taxable.
II is incorrect because property received by inheritance is generally not taxable.
Concerning the limitations on passive activity losses, how do they work? (2)
I. The limitations are generally designed to limit tax benefits with respect to activities in which the taxpayer does not materially participate.
II. Excess passive losses disallowed under the limitations are allowed in the year the taxpayer disposes of his or her entire interest in the passive activity in a taxable disposition.
To substantiate entertainment deductions for business purposes, a record must be kept of what? (2)
I. the business relationship to the taxpayer of the person entertained
II. the date and place of the entertainment
A shareholder do not have to meet what requirements to avoid having the family attribution rules applied to an IRC Sec. 302 complete redemption? (2)
I. It is immaterial under the attribution rules whether the shareholder receives cash at the time of the redemption.
II There is no requirement that the shareholder repay debts to the corporation in order to avoid family attribution.
What feature is important concerning stock redemptions under IRC Sec. 303?
The value of the stock used to qualify for a Sec. 303 redemption must generally exceed 35 percent of the decedent's adjusted gross estate.
-proceeds of a Sec. 303 redemption are treated as made in exchange for a capital asset and are therefore eligible for capital gains treatment.
What requirement does NOT need be met for a corporation to obtain a deduction for payment of its president's salary?
There is no requirement that salaries be earned within the US or it's territories.
All the following statements concerning the tax credit for children are correct EXCEPT
(A) The amount of the credit is currently $1,000 per child.
(B) The credit is phased out for upper-income taxpayers.
(C) The taxpayer must be entitled to claim a dependency exemption for the child with respect to whom the credit is claimed.
(D) The credit is available with respect to children under the age of 21.
- (D) The credit is available with respect to children under the age of 21.
- The credit is available with respect to children under age 17.
An individual may typically deduct all the following expenses from adjusted gross income... (3)
state and local income taxes
state and local personal property taxes
interest expense for a mortgage loan on his or her principal residence
-While attorneys' fees are deductible as they relate to business, profit making, or tax matters, the drafting of a simple will is a personal expenditure that is nondeductible.
What are 4 features concerning the accumulated-earnings tax?
It applies to accumulated earnings and profits retained by a corporation that are in excess of a specified amount and for which there is no reasonable business purpose.
Its purpose is to prevent corporations from being used as devices to avoid personal income tax through the accumulation of corporate earnings.
Retention of earnings to purchase key person insurance is generally considered a reasonable need of the business.
The accumulated-earnings tax credit (or exemption) is $250,000 ($150,000 for professional service corporations).
What are 4 features concerning personal and dependency exemptions?
A person who is the dependent of another taxpayer may not claim a personal exemption on his or her own return.
Married taxpayers filing jointly are allowed a personal exemption for each spouse.
In order to be claimed as a dependent under the dependency exemption rules, the dependent person must generally not file a joint return with his or her spouse.
For 2011 and 2012, exemptions are not subject to a phaseout.
What are 4 features concerning benefits paid from dependent care assistance programs?
sale of the policy to the insured
sale of the policy to a partner of the insured
sale of the policy to a corporation in which the insured is a shareholder
This sale of a policy to another shareholder is not an exception to the transfer-for-value rules.
What are 4 features concerning benefits paid from dependent care assistance programs?
The dollar limit is $5,000.
The amount excludible from gross income cannot exceed the earned income of the taxpayer for the year.
To fully qualify for the income tax exclusion, the plan must meet certain nondiscrimination requirements.
A payment to the employee's child under age 19 may not be excluded from the employee's gross income.
What kinds of property used in a trade or business or held for the production of income are depreciable or amortizable for tax purposes? (3)
rental apartment buildings
-Land may not be depreciated for tax purposes.
What are 4 issues concerning the tax consequences of forming a partnership?
As a general rule no gain or loss is recognized on the transfer of property or money to a partnership in exchange for a partnership interest.
The contributing partner's basis with respect to contributed property subject to indebtedness is reduced to the extent the indebtedness is taken over by the other partners.
When a partner receives a partnership interest in exchange for services, the value of the interest may be taxable to the partner as compensation.
A partnership generally retains the same basis in contributed property as the property had in the hands of the contributing partner.
What are 4 features concerning like-kind exchanges of property?
Real estate and trucks are not like-kind property under IRC Sec. 1031. A business may NOT exchange real estate for a truck without recognition of gain or loss.
Recognition of gain or loss in a like-kind exchange is postponed to a future taxable sale or exchange.
In a like-kind exchange, gain is recognized to the extent of boot received in the exchange.
A typical nontaxable exchange is one where a taxpayer trades in his or her old business truck plus cash for a new business truck.
What are 4 issues concerning the deductibility of casualty losses?
To be deductible, a casualty loss must arise from an identifiable event.
For personal losses of individuals the amount deductible cannot be greater than the adjusted basis of the property.
A deduction for nonbusiness casualty losses covered by insurance is allowable only if a timely claim had been filed with the insurer.
Mislaid property generally does not give rise to a deductible loss.
What are 4 issues concerning the alternative minimum tax (AMT)?
Interest on nongovernmental-purpose municipal bonds issued last year is considered a preference item for AMT purposes.
The foreign tax credit may be used to offset the AMT.
Certain C corporations may be liable for AMT as a result of owning life insurance.
The amount of an individual taxpayer's exemption is reduced when a taxpayer's AMTI reaches a specified dollar amount.
To determine adjusted gross income, all the following are potentially deductible, in whole or in part, from gross income EXCEPT
(A) business expenses of self-employed taxpayers
(B) charitable contributions of individuals
(C) losses from the sale or exchange of property
(D) alimony payments
The answer is (B).
Charitable contributions are deductible, with certain limitations, from adjusted gross income (not gross income) in determining taxable income. The other expenses listed are deductible from gross income in determining adjusted gross income.
Mrs. Morris sells all or some of her shares in the QT Corporation at a price in excess of her basis. The corporation has only one class of voting common stock. All the following qualify as capital transactions for Mrs. Morris EXCEPT
(A) Mrs. Morris sells 25 percent of her shares to Mr. Smith, a stranger, in order to raise capital.
(B) The QT Corporation redeems 200 of Mrs. Morris's 500 shares, and the remaining 500 outstanding shares are owned by her brother.
(C) The corporation redeems all Mrs. Morris's shares in the corporation and none of the remaining shareholders is related to her.
(D) The corporation redeems the shares that belong to Mrs. Morris, her son is the sole remaining stockholder, and she will be a director of QT.
The answer is (D).
Although the corporation redeems all of Mrs. Morris's shares, she is constructively deemed to own the shares belonging to her son and will therefore be denied capital transaction tax treatment on the redemption. She cannot claim a waiver of the family attribution rules because of her status as a director of QT Corporation.
All the following statements concerning the recovery periods and methods for determining cost recovery deductions for property placed in service this year are correct EXCEPT
(A) There are prescribed recovery periods for all types of depreciable assets.
(B) The applicable recovery periods for qualified recovery property range from 3 years to 39 years, depending on the type of property acquired.
(C) The 5-year property class consists of tangible personal property, such as automobiles.
(D) The depreciation method applicable to all property is the double-declining-balance method.
The answer is (D).
Only property in the 3-year, 5-year, 7-year, and 10-year classes can use the double-declining-balance method. Classes of 15 years and 20 years use 150 percent declining balance. Both residential and nonresidential real estate use the straight-line method.
All the following statements concerning the income tax treatment of benefits received by an employee under an employer-financed nondiscriminatory accident and health plan are correct EXCEPT
(A) Medical expense reimbursement benefits paid directly by the employer to the employee are excludible from the employee's gross income.
(B) Benefits received in excess of the amount of expenses actually incurred for medical treatment are excludible from the employee's gross income.
(C) Medical expense reimbursement benefits paid through an insurance company are excludible from the employee's gross income.
(D) Benefits received for permanent disfigurement in an amount computed without regard to the period the employee is away from work are excludible from the employee's gross income.
The answer is (B).
Benefits received in excess of medical expenses incurred will be includible in gross income.
All the following statements concerning the income tax status of a family partnership are correct EXCEPT
(A) The IRS may ignore the partnership agreement and reallocate income for tax purposes to properly reflect the economic reality of the partnership arrangement.
(B) A family partnership is generally structured to shift income within the family so that the total income taxes of family members are less than if the business were a sole proprietorship.
(C) If a family member is to be considered a partner in a family partnership in which capital is a material income-producing factor, the family member must have acquired his capital interest through a bona fide transaction.
(D) Without contributing services to the partnership, a family member can be treated as a partner in a family partnership whose income consists primarily of fees or commissions.
The answer is (D).
A family member in a partnership which is in the business of performing services must contribute services to the partnership to be treated as a partner for tax purposes.
Individual taxpayers can deduct all the following types of losses EXCEPT
(A) losses incurred in a trade or business
(B) losses incurred in a transaction entered into for profit
(C) personal losses that arise from a fire, storm, shipwreck, or other casualty, or from a theft
(D) personal losses that arise from the gradual wearing out of property held for personal use
The answer is (D).
The wearing out of property held for personal use does not give rise to a tax deduction.
All the following statements concerning the deductibility of various expenses in connection with a taxpayer's trade or business are correct EXCEPT
(A) Living expenses at a temporary residence while away from home for 6 months are generally deductible.
(B) Deductions for bribes paid to public officials are disallowed.
(C) The expenses of commuting are deductible if the taxpayer lives more than 50 miles away from his place of business.
(D) A bonus paid to an employee is subject to the same test of reasonableness applicable to other salary payments in determining its deductibility.
The answer is (C).
Commuting expenses are nondeductible regardless of the distance involved.
An individual sold his interest in a partnership to another individual. All the following statements concerning the income taxation of the sale proceeds to the individual are correct EXCEPT
(A) That portion of the proceeds which represents his share of the potential gain on partnership inventory is taxable to him as ordinary income.
(B) That portion of the proceeds which represents specified goodwill is taxable to him as a capital gain.
(C) That portion of the proceeds which represents his share of depreciable partnership property with a fair market value in excess of basis is received by him on a tax-free basis.
(D) That portion of the proceeds which represents his share of unrealized receivables is taxable to him as ordinary income.
The answer is (C).
Proceeds received for the fair market value of property in excess of its basis are taxable.
All of the following statements concerning the Hope scholarship and American opportunity credits for higher education expenses are correct EXCEPT
(A) To claim the credit, the student on whose behalf the expenses are paid must be at least a "half-time" student.
(B) The credit cannot be claimed with respect to the same expenses for which the taxpayer elects to claim the Lifetime learning credit.
(C) The credit is phased out for taxpayers with modified adjusted gross income above specified levels.
(D) A credit of up to $ 5,000 per year may be claimed with respect to the expenses of each eligible student.
The answer is (D).
The maximum credit is subject to annual indexing adjustments for inflation, but is considerably less than $5,000.
All the following are considered to be nondeductible personal, living, or family expenses EXCEPT
(A) rent, water, and utility payments made by the taxpayer on his residence
(B) life insurance premiums paid by the taxpayer on the life of his mother
(C) interest on a $ 250,000 first mortgage secured by the taxpayer's residence
(D) fire and casualty insurance premiums for the taxpayer's residence
The answer is (C).
Interest on a first mortgage of up to $1 million of principal secured by the taxpayer's residence will generally qualify as deductible qualified residence interest.
All the following statements concerning the calculation of an individual taxpayer's alternative minimum taxable income (AMTI) are correct EXCEPT
(A) State and local taxes deducted in determining the regular income tax are added back to taxable income in calculating AMTI.
(B) Charitable contributions deducted in determining the regular income tax are added back to taxable income in calculating AMTI.
(C) Personal and dependency exemptions are added back to taxable income in calculating AMTI.
(D) The standard deduction is added back to taxable income in calculating AMTI if the taxpayer uses the standard deduction.
The answer is (B).
Charitable contributions are deductible in computing AMTI.
All the following taxes may generally be deducted by an individual taxpayer who itemizes his deductions EXCEPT
(A) state income taxes
(B) local real property taxes
(C) federal income taxes
(D) local income taxes
The answer is (C).
Federal income taxes are not deductible.
All the following statements concerning the attribution rules for determining constructive ownership of stock are correct EXCEPT
(A) Shares of stock owned by a father are considered as being owned by his daughter's husband.
(B) Shares of stock owned by an estate are considered as being owned proportionately by its beneficiaries having a direct present interest in the estate.
(C) Shares of stock owned by a trust are considered as being owned by its beneficiaries in proportion to their actuarial interests in the trust.
(D) Shares of stock owned by a partnership are considered as being owned proportionately by the partners.
The answer is (A).
The attribution rules apply from parent to child and between spouses, but not from a parent to the spouse of a child because the family attribution rules cannot be applied twice in succession.
All the following statements concerning IRS revenue rulings are correct EXCEPT
(A) They are issued when the IRS wishes to resolve unclear points of law.
(B) They have the force and effect of law and must be followed by the courts.
(C) They are issued if a stated set of facts involving a problem common to many taxpayers is recognized.
(D) They are binding on IRS revenue agents in their handling of issues in current taxpayer cases.
The answer is (B).
The courts are not bound to follow revenue rulings, which represent only the position of the IRS on a given issue.
Julie is a partner in a partnership. All the following statements concerning adjustments to Julie's interest in the partnership are correct EXCEPT
(A) Basis is decreased by Julie's share of the partnership's liability to her to the extent that she loaned money to the partnership as an outsider.
(B) Basis is decreased by distributions made to Julie.
(C) Basis is decreased by Julie's share of any partnership losses.
(D) Basis is increased by Julie's share of increased partnership liabilities.
The answer is (A).
Any liability to the partner by the partnership will increase, not decrease, basis.
All the following statements concerning the tax aspects of withdrawals from universal life policies are correct EXCEPT
(A) Withdrawals will be taxable only if the policy is a modified endowment contract (MEC).
(B) Withdrawals associated with a reduction in the policy's death benefit may be subject to "last-in, first-out" (LIFO) tax treatment.
(C) Special rules apply to withdrawals occurring during the first 15 policy years.
(D) Withdrawals during the first 5 policy years may have a higher taxable portion than withdrawals made during years 6 through 15.
The answer is (A).
Withdrawals from such policies may be taxable even if the policy is not a MEC.
All the following statements concerning the private rulings issued by the IRS are correct EXCEPT
(A) They are published and made available to the public.
(B) They are issued at the request of an individual taxpayer.
(C) They are binding upon the IRS only for the particular case in point.
(D) They can be used as precedents by taxpayers in general.
The answer is (D).
Private rulings cannot be used as legal precedents.
All the following statements concerning the time for filing tax returns are correct EXCEPT
(A) Individual tax returns are generally due on or before April 15 of the year following a given tax year.
(B) An automatic extension can be obtained by individuals by filing Form 4868 on or before the due date.
(C) Some corporations may have a tax year that operates on a 12-month period beginning on a day other than January 1.
(D) A corporation's tax return is generally due on the fifteenth day of the fourth month following the close of the tax year.
The answer is (D).
A corporation's return is generally due on the fifteenth day of the third month following the close of its tax year, not the fourth month.
All the following statements concerning the use of life insurance in the context of a divorce settlement are correct EXCEPT
(A) An existing cash value policy transferred by one spouse to the other results in taxable income to the recipient spouse.
(B) If one spouse owns a policy and the other spouse pays the premiums after the divorce, the premium payments are generally treated as alimony.
(C) If one spouse owns the policy, pays the premiums, and names the other spouse as beneficiary, the premiums are not deductible.
(D) Death benefits paid under policies used in divorce settlements will generally be free of income tax.
The answer is (A).
Such a transfer will not result in a taxable event.
All the following are basic requirements for the allowance of a depreciation deduction EXCEPT
(A) the taxpayer generally must have an ownership interest in the asset
(B) the asset's useful life must be limited
(C) the asset must be used only in the taxpayer's trade or business
(D) the taxpayer must have a tax basis in the asset
The answer is (C).
Assets held for the production of income as well as assets used in a trade or business may qualify for depreciation deductions.
All the following statements concerning the alternative minimum tax (AMT) are correct EXCEPT
(A) Medical expenses in excess of 7.5 percent of adjusted gross income are deductible in computing alternative minimum taxable income.
(B) The AMT is imposed upon certain corporations at a rate of 20 percent.
(C) The adoption credit is allowable in computing AMT liability.
(D) The AMT is imposed only if it exceeds the taxpayer's regular income tax.
The answer is (A).
The medical expense "floor" for AMT purposes is 10 percent.
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