Individual Taxation Flashcards
The 2015 deduction by an individual taxpayer for interest on investment indebtedness is
- Limited to the investment interest paid in 2015.
- Limited to the taxpayer’s 2015 interest income.
- Limited to the taxpayer’s 2015 net investment income.
- Not limited.
Limited to the taxpayer’s 2015 net investment income.
A noncorporate taxpayer’s deduction for interest on investment indebtedness is limited to the taxpayer’s net investment income. Interest on investment indebtedness is interest paid or accrued that is allocable to property held for investment.
John and Mary were divorced in 2014. The divorce decree provides that John pay alimony of $10,000 per year, to be reduced by 20% on their child’s 18th birthday. During 2015, John paid $7,000 directly to Mary and $3,000 to Spring College for Mary’s tuition.
What amount of these payments should be reported as income in Mary’s 2015 income tax return?
- $5,600
- $8,000
- $8,600
- $10,000
$8,000
Alimony received by a taxpayer is included in that taxpayer’s gross income and alimony paid by a taxpayer is deductible from that taxpayer’s gross income. To be considered alimony, the payments must be made under a divorce or separation agreement. Payments to third parties (such as tuition, rent and mortgage) by the spouse paying alimony for the spouse receiving alimony receive the same treatment as cash payments.
John and Mary have a divorce decree stipulating $10,000 per year payments from John to Mary, but the amount decreases to $8,000 when their child reaches the age of 18 years. Due to this decrease, $2,000 of the $10,000 payment would be considered child support and, as a result, would not be reported by Mary as income. The remaining $8,000 would be considered alimony and, therefore, reported as income by Mary.
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?
- $50,000
- $40,000
- $25,000
- $0
$25,000
Alimony is included in the recipient’s income, but child support payments and property settlements are not.
Also, remember that if the person shorts the alimony payments, for tax ordering rules, the payments are considered child support to the recipient first and thus not taxable.
Porter was unemployed for part of the year in 2015. Porter received $35,000 in wages, $4,000 from a state unemployment compensation plan, and $2,000 from his former employer’s company-paid supplemental unemployment benefit plan. What is the amount of Porter’s gross income in 2015?
- $35,000
- $37,000
- $39,000
- $41,000
$41,000
Wages are included in gross income for the year in which they are received. Unemployment compensation is also included in gross income since it replaces income that would have been received if working. Therefore, the total amount included in gross income is $41,000.
Rental Income - Tax Treatment
- Advanced Deposit for last month of rent on lease
- Leasehold improvements
- Advanced Deposit for last month of rent on lease - taxable only if received without condition, i.e. will not be returned to lesses at end of the lease
- Leasehold improvements - only taxable income if received in lieu of rent.
Under a “cafeteria plan” maintained by an employer,
- Participation must be restricted to employees, and their spouses and minor children.
- At least three years of service are required before an employee can participate in the plan.
- Participants may select their own menu of benefits.
- Provision may be made for deferred compensation other than 401(k) plans.
Participants may select their own menu of benefits.
Cafeteria plans allow employees to select from a menu of fringe benefits and cash and not include the value of the nontaxable benefits in their gross income. The requirements of cafeteria plans are:
- all participants must be employees;
- participants may choose between two or more benefits composed of cash or qualified benefits;
- participants are required to make elections among the benefits;
- the plan must be in writing and have certain specified information;
- the plan may not provide participants with deferred income, except for under 401(k) plans.
Easel Co. has elected to reimburse employees for business expenses under a nonaccountable plan. Easel does not require employees to provide proof of expenses and allows employees to keep any amount not spent. Under the plan, Mel, an Easel employee for a full year, gets $400 per month for business automobile expenses. At the end of the year Mel informs Easel that the only business expense incurred was for business mileage of 12,000 at a rate of 30 cents per mile, the IRS standard mileage rate at the time. Mel encloses a check for $1,200 to refund the overpayment to Easel. What amounts should be reported in Mel’s gross income for the year?
- $0
- $1,200
- $3,600
- $4,800
$4,800
Since this is not an accountable plan, all reimbursements are included in the employee’s income ($400 x 12 months = $4,800) and all employee deductions will be 2% miscellaneous itemized deductions.
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?
- $100,000
- $100,276
- $100,414
- $100,552
$100,414
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.
Davidson was transferred from Chicago to Atlanta. In connection with the transfer, Davidson incurred the following moving expenses:
- Moving the household goods $2,000
- Temporary living expenses in Atlanta $400
- Lodging on the way to Atlanta $100
- Meals $40
What amount may Davidson deduct if the employer reimbursed Davidson $2,000 (not included in form W-2) for moving expenses?
- $100
- $120
- $500
- $520
$100
Qualified moving expenses are limited to the expenses for moving the household goods ($2,000) and lodging ($100). Meals are not deductible during a move and temporary living expenses are never deductible. The $2,100 of qualified expenses is reduced by the $2,000 reimbursement from the employer.
Which of the following conditions must be present for a payment to qualify as deductible alimony?
- Payments must be in cash.
- The payments must end no later than the recipient’s death.
Both I and II
Alimony payments you make under a divorce or separation instrument, such as a divorce decree or a written agreement incident thereto, are deductible if all of the following requirements are met:
- You and your spouse or former spouse do not file a joint return with each other,
- You pay in cash (including checks or money orders),
- The divorce or separation instrument does not say that the payment is not alimony,
- If legally separated under a decree of divorce or separate maintenance, you and your former spouse are not members of the same household when you make the payment,
- You have no liability to make any payment (in cash or property) after the death of your spouse or former spouse; and
- Your payment is not treated as child support.
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?
- $0
- $2,000
- $3,000
- $5,000
$2,000
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. So, $2,000 of the $5,000 of investment interest expense is deductible as an itemized deduction. The remaining $3,000 is carried over, indefinitely, and deducted in a year that has sufficient net investment income.
Carroll, an unmarried taxpayer with an adjusted gross income of $100,000, incurred and paid the following unreimbursed medical expenses for the year:
- Doctor bills resulting from a serious fall$ $5,000
- Cosmetic surgery that was necessary to correct a congenital deformity $15,000
Carroll had no medical insurance and is 60 years old. For regular income tax purposes, what was Carroll’s maximum allowable medical expense deduction, after the applicable threshold limitation, for the year?
$10,000
Total allowable medical expenses is $20,000. Only medical expenses in excess of 10% of AGI are allowable as a deduction. Carrol’s AGI is $100,000 x .010 = $10,000. Total expenses of $20,000 - $10,000 = $10,000 deductible expenses.
Stein, an unmarried taxpayer, had adjusted gross income of $80,000 for the year, and qualified to itemize deductions. Stein had no charitable contribution carryovers and only made one contribution during the year.
Stein donated stock, purchased seven years earlier for $17,000, to a tax-exempt educational organization. The stock was valued at $25,000 when it was contributed.
What is the amount of charitable contributions deductible on Stein’s current year income tax return?
- $17,000
- $21,000
- $24,000
- $25,000
$24,000
Although Stein can deduct the fair market value (FMV) of $25,000 for the stock contributed, the deduction is limited to 30% of his AGI, $80,000.
Remember if property donated is LTCG property, the deduction is FMV, however the charitable contribution limit is lowered from the original 50% limitation of AGI to 30% of AGI.
During the 2015 holiday season, Palo Corp. gave business gifts to 17 customers. These gifts, which were not of an advertising nature, had the following fair market values:
- 4 at$ 10
- 4 at$ 25
- 4 at$ 50
- 5 at$100
How much of these gifts was deductible as a business expense for 2015?
$365
The deduction for business gifts is limited to $25 per donee per year.
Abe Architect owns his own architectural consulting firm. During the current year he incurred the following expenses related to meetings with clients and potential clients:
- Meal expenses $2,000
- Dues to Five-Star Country Club $5,000
- Greens fee for playing golf with clients $1,500
- Tickets to Super Bowl (face value = $1,000) $3,500
What is the amount of deductible expenses for the current year related to these expenditures?
$2,250
Dues are not deductible. All of the other expenses are deductible but subject to the 50% limitation for meals and entertainment. Note that the deduction for the Super Bowl tickets is limited to the face value of the tickets, before the 50% limitation. The allowable deduction is $2,250 (($2,000 + $1,500 + $1,000) x 50%).
Baker, a sole proprietor CPA, has several clients that do business in Spain. While on a four-week vacation in Spain, Baker took a five-day seminar on Spanish business practices that cost $700. Baker’s round-trip airfare to Spain was $600. While in Spain, Baker spent an average of $100 per day on accommodations, local travel, and other incidental expenses, for total expenses of $2,800.
What amount of educational expense can Baker deduct on Form 1040 Schedule C, “Profit or Loss From Business”?
$1,200
When traveling outside the U.S. primarily for vacation (4 weeks total versus 1 week seminar), the cost of the trip is a nondeductible personal expense. Baker can deduct the registration fees for the business seminar and deduct the out of pocket expenses for the time that was directly related to the business seminar (1 week). 5 days x $100 per day plus $700 registration = $1200 of deductible education expense.
Sara Hance, who is single and lives alone in Idaho, has no income of her own and is supported in full by the following persons:
- Alma (unrelated friend) $2,400, 48%
- Ben (Sara’s brother) $2,150, 43%
- Carl (Sara’s son) $450, 9%
Under a multiple support agreement, Sara’s dependency exemption can be claimed by:
- No one
- Alma
- Ben
- Carl
Ben
Ben has provided over 10% of Sara’s support and all of the qualifying relative tests are met (gross income, joint return, citizen) except for the support test, but it is met through the multiple support agreement. The individuals as a group have provided over 50% of Sara’s support.
Note that Alma is NOT a QR and Carl supports less than 10%. You must be between 10-49%.
Joe and Barb are married, but Barb refuses to sign a 2015 joint return. On Joe’s separate 2015 return, an exemption may be claimed for Barb if
- Barb was a full-time student for the entire 2015 school year.
- Barb attaches a written statement to Joe’s income tax return, agreeing to be claimed as an exemption by Joe for 2015.
- Barb was under the age of 19.
- Barb had no gross income and was not claimed as another person’s dependent in 2015.
Barb had no gross income and was not claimed as another person’s dependent in 2015.
When a joint return has been filed, personal exemptions may be taken for the taxpayer and spouse. However, when the taxpayer and spouse file separate returns, the taxpayer only may take an exemption for the spouse when the spouse has no gross income and was not claimed as a dependent on another taxpayer’s income tax return.
In which of the following situations may taxpayers file as married filing jointly?
- Taxpayers who were married but lived apart during the year.
- Taxpayers who were married but lived under a legal separation agreement at the end of the year.
- Taxpayers who were divorced during the year.
- Taxpayers who were legally separated but lived together for the entire year.
Taxpayers who were married but lived apart during the year.
Whether taxpayers live together does not impact filing status. Marital status is determined on the last day of the tax year. Since the taxpayers were married as of the end of the tax year they may file married filing joint (note that they could also file married filing separately).
A taxpayer’s spouse dies in August of the current year. Which of the following is the taxpayer’s filing status for the current year?
- Single.
- Qualifying widow(er).
- Head of household.
- Married filing jointly.
Married filing jointly.
In the year of death, the surviving spouse may always file as married filing jointly.
Parker, whose spouse died during the preceding year, has not remarried. Parker maintains a home for a dependent child. What is Parker’s most advantageous filing status?
- Single
- Head of household
- Married filing separately.
- Qualifying widow(er) with dependent child.
Qualifying widow(er) with dependent child.
In the year that an individual’s spouse dies, the spouse’s filing status is married filing joint. For the two years after the year of death, the qualifying widow can continue to file as married filing joint if the taxpayer provides more than half of the cost of maintaining the household (rent, mortgage interest, taxes, home insurance, repairs, food, utilities, etc.) for a dependent child(step, adopted, foster also).
For head of household filing status, which of the following costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household?
- Food consumed in the home
- Value of services rendered in the home by the taxpayer
1 ONLY.
For head of household filing status, the following costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household: rent; mortgage interest; taxes; insurance on the home; repairs; utilities; and food eaten in the home. The following costs may not be considered: clothing; education; medical treatment; vacations; life insurance; transportation; rental value of home owned by taxpayer; and the value of services provided by the taxpayer or a member of the taxpayer’s household.
This response correctly indicates that the food consumed may be considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household and that value of services provided by the taxpayer may not be considered.
What is the most advantageous filing status’s for the situation below?
- Daryl is divorced and maintains a household for himself and Jared, his 8-year old son. Daryl has custody of Jared, but has provided that Joanne, his former spouse, can claim the exemption for Jared.
- Anthony’s spouse, Giselle, left him in March of 2015. Anthony has not had contact with her since that time. Anthony has maintained a household for his son, Trey (age 5), during 2015.
Head of household
- Daryl can file as head of household since he provides more than 50% of the cost of maintaining a household for an unmarried qualifying child. This is an exception to the general head of household rule, which provides that the home must be provided for a dependent.
- Anthony meets the definition of an abandoned spouse, so he can file as head of household.
Jon and Kim Moseley, married and filing a joint income tax return, derive their entire income from the operation of their gun shop. The Moseleys itemized their deductions on Schedule A for 2015. The following unreimbursed cash expenditure was among those made by the Moseleys during 2015:
- Repair of glass vase accidentally broken by dog (vase cost $550 in 2010; fair value $650 before accident and $150 after accident)$70
Without regard to the $100 “floor” and the adjusted gross income percentage threshold, what amount should the Moseleys deduct for the casualty loss in their itemized deductions on Schedule A for 2015?
- $0
- $ 70
- $400
- $500
$0
A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Deductible casualty losses may result from earthquakes, tornadoes, floods, fires, vandalism, auto accident, etc. However, a loss due to the accidental breakage of household articles such as glassware or china under normal conditions is not a casualty loss. Neither is a loss due to damage caused by a family pet.
Moseley, a cash method taxpayer, billed Dolphi $1,000 for medical services. Dolphi paid Moseley $500 cash and did some landscaping for Moseley’s office in full settlement of the bill. Dolphi does comparable landscaping for $350. What amount should Moseley include in gross income as a result of this transaction?
- $0
- $ 500
- $ 850
- $1,000
$850
An exchange of services for property or services is sometimes called bartering. A taxpayer must include in income the amount of cash and the fair market value of property or services received in exchange for the performance of services. Here Moseley’s gross income should include the $500 cash and the landscaping with a comparable value of $350, a total of $850.
Items to be included in Gross Income:
- Compensation for services, including wages, salaries, bonuses, commissions, fees, and tips
- Property received as compensation is included in income at FMV on date of receipt.
- Bargain purchases by an employee from an employer are included in income at FMV less price paid.
- Life insurance premiums paid by employer must be included in an employee’s gross income except for group-term life insurance coverage of $50,000 or less.
- Employee expenses paid or reimbursed by the employer unless the employee has to account to the employer for these expenses and they would qualify as deductible business expenses for employee.
- Tips must be included in gross income
During 2015, Matt Johnson was assessed a deficiency on his 2013 federal income tax return. As a result of this assessment he was required to pay $970, determined as follows:
- Additional tax $600
- Late filing penalty $50
- Negligence penalty $200
- Interest $120
What portion of the $970 would qualify as itemized deductions for 2015?
- $0
- $30
- $250
- $370
$0
None of the items listed relating to the tax deficiency for 2013 are deductible. The interest on the tax deficiency is considered personal interest and is not deductible. The additional federal income tax, the late filing penalty, and the negligence penalty are also not deductible.
The following taxes are not deductible:
- Federal income taxes
- Federal, state, or local estate or gift taxes
- Social security and other federal employment taxes paid by employee (including self-employment taxes)
- Social security and other employment taxes paid by an employer on the wages of an employee who only performed domestic services (i.e., maid, etc.)
Which of the following credits can result in a refund, even if the individual had no income tax liability?
- Credit for prior year minimum tax.
- Elderly and permanently and totally disabled credit.
- Earned income credit.
- Child and dependent care credit.
Earned income credit.
EIC is a “refundable” credit. Certain tax credits can result in a refund, even if the individual had no income tax liability. Tax credits resulting in a refund are credits for earned income, tax withheld, excess social security tax withheld, and excise tax for certain nontaxable uses of fuels and light weight diesel vehicles.
In 2015, to qualify for the child care credit on a joint return, at least one spouse must?
- Have an adjusted gross income of $15,000 or less
- Be gainfully employed/looking for work or a student when related expenses are incurred
2 Only…
Individual taxpayers with adjusted gross income of $15,000 or less may claim a child care credit for 35 percent of employment related expenses. The credit is reduced by one percent of the expenses for each $2,000 of adjusted gross income over $15,000, but is not reduced to less than 20 percent of the expenses.
This response correctly indicates at least one spouse does not need to earn $15,000 or less to claim the credit. Earning more than $15,000 does not make a taxpayer ineligible for the credit, it reduces the amount of the credit by decreasing the percentage of the expenses that may be claimed.
This response also correctly indicates that at least one spouse must be gainfully employed or looking for work to claim the credit.
Which of the following statements is false with regard to the child and dependent care credit?
- The caregiver cannot be a dependent relative or child of the taxpayer.
- The credit percentage begins at 35% and phases out once AGI exceeds a certain threshold. As income increases the credit percentage is eventually reduced to zero.
- The maximum amount of expense eligible for the credit is $3,000 ($6,000 if more than one individual qualifies for care).
- A qualifying child or dependent under the age of 13 who lives with the taxpayer more than one-half of the tax year is a qualifying individual for purposes of claiming the credit.
The credit percentage begins at 35% and phases out once AGI exceeds a certain threshold. As income increases the credit percentage is eventually reduced to zero.
The credit percentage begins at 35% if AGI is less than $15,000, and is reduced by 1% for each $2,000 increment (or part) in AGI above $15,000. The minimum dependent care credit is 20%. Therefore, this statement is false.
Mr. and Mrs. Alexander have two dependent children, one of whom (Cal) is a freshman in college during 2015. Tuition and fees paid for Cal during 2015 total $15,000. The Alexanders also paid $10,000 in 2015 for their 14 year old daughter, Kaitlin, to attend a private high school. The Alexanders file a joint tax return for 2015 and report adjusted gross income of $150,000. Cal is a full-time student and enrolled in a degree program. What is the Alexander’s Hope/American Opportunity Tax Credit for 2015?
- $0
- $2,500
- $5,000
- $15,000
$2,500
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 2015 for married filing joint returns until AGI reaches $160,000. The credit applies only to post-secondary expenses so the tuition for Kaitlin does not qualify.
Which of the following disqualifies an individual from the earned income credit?
- The taxpayer’s qualifying child is a 17-year-old grandchild.
- The taxpayer has earned income of $5,000.
- The taxpayer’s five-year-old child lived in the taxpayer’s home for only eight months.
- The taxpayer has a filing status of married filing separately.
The taxpayer has a filing status of married filing separately.
A married taxpayer must file as married filing jointly to qualify for the earned income credit.
A qualifying child must be a descendent of the taxpayer under the age of 19 (i.e., the definition of a “qualifying child” for the dependency rules). Therefore, a grandchild meets the definition of a qualifying child.
Which of the following statements concerning tax credits is true?
- The foreign tax credit is available for business entities, such as corporations, but not for individuals.
- Unused general business credits are carried back two years and forward 20 years.
- For the rehabilitation credit, expenditures to rehabilitate property placed in service before 1936 are eligible for a 20% credit.
- The work opportunity tax credit is calculated on the amount of wages paid per eligible employee during the first year of employment. The maximum credit is $2,400 per eligible employee.
The work opportunity tax credit is calculated on the amount of wages paid per eligible employee during the first year of employment. The maximum credit is $2,400 per eligible employee.
The work opportunity tax credit is 40% of the first $6,000 of wages per employee, so the maximum credit is $2,400.
Which of the following credits is a combination of several tax credits to provide uniform rules for the current and carryback-carryover years?
- General business credit.
- Foreign tax credit.
- Minimum tax credit.
- Enhanced oil recovery credit.
General business credit.
The general business credit is a combination of several tax credits that are computed separately under each under its own set of rules. The purpose of the general business credit is to combine these credits into a single amount to provide uniform rules for the current credits that may be taken to offset a taxpayer’s tax liability.
In addition, the credit provides uniform rules for carryback-carryover years. The general business credit may be carried back for 1 year, then forward for 20 years. The general business credits are composed of the: investment credit; work opportunity credit; alcohol fuel credit; incremental research credit; low-income housing credit; disabled access credit; credit for producing electricity from specified renewable resources; enhanced oil recovery credit; Indian employment credit; employer Social Security credit; empowerment zone employment credit; orphan drug credit; and excise tax payments to the Trans-Alaska Pipeline Liability Fund credit.
The following information pertains to Wald Corp.’s operations:
- Worldwide taxable income $300,000
- U.S. source taxable income $180,000
- U.S. income tax before foreign tax credit $96,000
- Foreign source taxable income $120,000
- Foreign income taxes paid on foreign source taxable income $39,000
What amount of foreign tax credit may Wald claim?
- $28,800
- $36,600
- $38,400
- $39,000
$38,400
The foreign tax credit is the lower of:
1) foreign tax paid ($39,000), or
2) U.S. tax x foreign taxable income / worldwide taxable income
$96,000 x $120,000 / $300,000 = $38,400
Foreign income taxes paid by a corporation
- May be claimed either as a deduction or as a credit, at the option of the corporation.
- May be claimed only as a deduction.
- May be claimed only as a credit.
- Do not qualify either as a deduction or as a credit.
May be claimed either as a deduction or as a credit, at the option of the corporation.
Foreign income taxes paid by a corporation may be claimed either as a deduction or as a credit, at the option of the corporation. To minimize a corporation’s tax liability, it is better to claim the credit for the foreign income taxes than to deduct the taxes.
The foreign tax credit allows for a dollar-for-dollar deduction from the corporation’s tax liability, whereas the deduction is from taxable income.
John Wolf, who is 45 years old and unmarried, contributed $2,000 monthly in 2015 to the support of his parents’ household, which paid for more than 50% of of the costs of maintaining that household. . The parents lived alone and their income for 2015 consisted of $2,400 from dividends and interest, and $9,600 from Social Security. Based on the above information, what is Wolf’s filing status for 2015, and how many exemptions should he claim on his tax return?
- Single and 1 exemption.
- Head of household and 1 exemption.
- Single and 3 exemptions.
- Head of household and 3 exemptions.
Head of household and 3 exemptions.
Wolf qualifies as a “head of household” because he is unmarried and provides more than half of the cost of maintaining a household for his parents, who must also qualify as his dependents. Both his parents qualify as dependents because Wolf provides more than half of their support, and their gross income (which excludes nontaxable Social Security) is less than $4,000.
Rockford Corp., a calendar-year taxpayer, purchased used furniture and fixtures for use in its business and placed the property in service on December 1, 2015. The furniture and fixtures cost $112,000 and represented Rockford’s only acquisition of depreciable property during the year. Rockford did not make any special elections with regard to depreciation and did not elect to expense any part of the cost of the property under Sec. 179. What is the amount of Rockford Corp.’s depreciation deduction for the furniture and fixtures under the Modified Accelerated Cost Recovery System (MACRS) for 2015?
- $4,000
- $8,000
- $16,000
- $32,000
$4,000
The furniture and fixtures qualify as 7-year property and under MACRS will be depreciated using the 200% declining balance method. Regular MACRS depreciation would be computed under which a half-year convention normally applies to the year of acquisition. However, the mid-quarter convention must be used if more than 40% of all personal property is placed in service during the last quarter of the taxpayer’s taxable year. Since this was Rockford’s only acquisition of personal property and the property was placed in service during the last quarter of Rockford’s calendar year, the mid-quarter convention must be used. Under this convention, property is treated as placed in service during the middle of the quarter in which placed in service. Since the furniture and fixtures were placed in service in December the amount of allowable MACRS depreciation is limited to ($112,000) × 2/7 × 1/8 = $4,000.
Which one of the following statements is correct regarding the credit for adoption expenses?
- The credit for adoption expenses is a nonrefundable credit for 2015.
- The maximum credit is $5,000 for the adoption of a child with special needs.
- For purposes of computing the credit, qualified adoption expenses are always taken into account in the year the adoption is finalized.
- An eligible child is an individual who has not attained the age of 17 as of the time of adoption.
The credit for adoption expenses is a nonrefundable credit for 2015.
The adoption expenses credit is a nonrefundable credit for up to $13,400 (for 2015) of expenses incurred to adopt an eligible child. An eligible child is one who is under 18 years of age at time of adoption, or physically or mentally incapable of self-care. Generally, adoption expenses incurred or paid during a tax year prior to the year in which the adoption is finalized may be claimed as a credit in the tax year following the year the expense was incurred. Adoption expenses incurred during the year the adoption becomes final or in the year following the finalization of the adoption are claimed in the year they were incurred.
In evaluating the hierarchy of authority in tax law, which of the following carries the greatest authoritative value for tax planning of transactions?
- Internal Revenue Code.
- IRS regulations.
- Tax court decisions.
- IRS agents’ reports.
The Internal Revenue Code (IRC) is the basic foundation of federal tax laws, and represents a codification of the federal tax laws of the United States. Since it is law, it has greater authority than IRS interpretations (e.g., regulations, revenue rulings, revenue procedures, IRS agents’ reports) and judicial interpretations such as Tax Court decisions.
Jim Planter, who reached age 65 on January 1, 2016, filed a joint return for 2015 with his wife, Rita, age 50. Mary, their 23-year-old daughter, was a full-time student at a college until her graduation on June 2, 2015. The daughter had $6,500 of income and provided 25% of her own support during 2015. In addition, during 2015 the Planters were the sole support of Rita’s niece, age 28, who had no income. How many exemptions should the Planters claim on their 2015 tax return?
- 2
- 3
- 4
- 5
4
There is one exemption for Mr. Planter, and one exemption for his spouse. In addition, there is one dependency exemption for their daughter who is a qualifying child (i.e., she did not provide more than half of her own support, and she is a full-time student under age 24). There is also one dependency exemption for their niece who is a qualifying relative (i.e., they provided more than half of her support, and her gross income was less than $4,000). However, there is no additional exemption for being age sixty-five or older.
Leslie Monahan, a corporate executive, incurred business-related unreimbursed expenses during the current year as follows:
- Entertainment $1,200
- Travel $600
- Professional society dues $500
Assuming that Monahan does not itemize deductions, how much of these expenses should she deduct on her current year tax return?
- $0
- $600
- $1,100
- $1,700
$0
Monahan cannot deduct any of the listed expenses if she does not itemize deductions. These unreimbursed employee expenses are deductible only as itemized deductions, subject to the 2% of AGI floor.
A husband and wife can file a joint return even if
- The spouses have different tax years, provided that both spouses are alive at the end of the year.
- The spouses have different accounting methods.
- Either spouse was a nonresident alien at any time during the tax year, provided that at least one spouse makes the proper election.
- They were divorced before the end of the tax year.
The spouses have different accounting methods.
If either spouse was a nonresident alien at any time during the tax year, both spouses must elect to be taxed as US citizens or residents for the entire tax year. If divorced before the end of the year, taxpayers cannot file a joint return.
Robbe, a cash-basis single taxpayer, reported $50,000 of adjusted gross income last year and claimed itemized deductions of $7,250, consisting solely of $7,250 of state income taxes paid last year. Robbe’s itemized deduction amount, which exceeded the standard deduction available to single taxpayers for last year by $1,150, was fully deductible and it was not subject to any limitations or phase-outs. In the current year, Robbe received a $1,500 state tax refund relating to the prior year. What is the proper treatment of the state tax refund?
- Include none of the refund in income in the current year.
- Include $1,150 in income in the current year.
- Include $1,500 in income in the current year.
- Amend the prior year’s return and reduce the claimed itemized deductions for that year.
Include $1,150 in income in the current year.
A state income tax refund must be included in gross income for the current year under the tax benefit rule to the extent that the refunded amount was deducted in a prior year and the deduction provided a benefit by reducing the taxpayer’s federal income tax for the prior year. Here, Robbe’s $7,250 itemized deduction for state income tax provided a benefit only to the extent that it exceeded the standard deduction that was otherwise available to him. As a result, only $1,150 of the $1,500 refund must be included in gross income for the current year.
David Waldman, a calendar-year taxpayer, was employed and resided in Philadelphia. On February 1, 2015, Waldman was permanently transferred to Dallas by his employer. Waldman worked for 20 weeks before being laid off for other than willful misconduct. In 2015 Waldman incurred and paid the following unreimbursed expenses in connection with his move:
- Cost of moving household furnishings and personal effects $1,500
- Lodging expenses while moving $500
- Penalty for breaking the lease on his Philadelphia apartment $600
What amount can Waldman deduct in 2015 for moving expenses?
- $0
- $1,026
- $2,000
- $2,600
$2,000
Direct moving expenses are deductible if closely related to the start of work at a new location and a distance (i.e., new job must be at least 50 miles further from former residence than old job) and time (i.e., employed at least 39 weeks out of 12 months following move) tests are met. However, the time test does not have to be met in case of death, taxpayer’s job at new location ends because of disability, or taxpayer is laid off for other than willful misconduct. Since the distance test is met and the time test is not met due to the taxpayer being laid off for other than willful misconduct, Waldman’s cost of moving household furnishings and personal effects ($1,500) and cost of lodging and travel expenses while moving ($500) are deductible. The penalty for breaking the lease is an indirect moving expense and is not deductible.
Charles and Tasha Taylor began the process of adopting 5-year-old Joey in 2014. The Taylors incurred $2,000 in attorney and adoption fees in 2014. The adoption became final in 2015. The Taylors incurred an additional $3,500 in attorney fees and $1,000 in court costs in 2015 that were directly related to the adoption of Joey. Ignoring any AGI limitation, what is the maximum adoption credit that the Taylors can take in 2015?
- $3,500
- $4,500
- $5,500
- $6,500
$6,500
The credit for adoption expenses is a nonrefundable credit of up to $13,400 (for 2015) for qualified adoption expenses incurred for each eligible child. The Taylors’ qualified adoption expenses will be taken into account in the year the adoption becomes final and include all reasonable and necessary adoption fees, court costs, attorney fees, and other expenses that are directly related to the legal adoption by the taxpayer of an eligible child. As the Taylors’ adoption of Joey became final in 2015, and the Taylors had $6,500 of qualified adoption expenses, the Taylors can take a $6,500 adoption credit in 2015.
Parker, whose spouse died during the preceding year, has not remarried. Parker maintains a home for her dependent child. What is Parker’s most advantageous filing status?
- Single.
- Head of household.
- Married filing separately.
- Qualifying widow(er) with dependent child.
Qualifying widow(er) with dependent child.
Parker should file as a “Qualifying widow(er) with dependent child” since it will enable her to use the joint return standard deduction and joint return tax rate schedule. This filing status is available for the two taxable years following the year of a spouse’s death if (1) the surviving spouse was eligible to file a joint return in the year of the spouse’s death, (2) does not remarry before the end of the current tax year, and (3) the surviving spouse pays over 50% of the cost of maintaining a household that is the principal home for the entire year of the surviving spouse’s dependent child.
Stockley, a candidate for an undergraduate college degree, received a $20,000 scholarship from the university in 2014. Stockley had the following expenses relating to his attendance in 2015:
- Tuition and fees$12,000
- Room and board6,000
- Books and supplies500
- Spring break in Cancun1,500
What amount of the scholarship should Stockley include as taxable income in 2015?
- $0
- $1,500
- $7,500
- $20,000
$7,500
A degree candidate can exclude the amount of a scholarship or fellowship that is used for tuition and course-related fees, books, supplies, and equipment. Amounts used for other purposes including room and board are included in gross income.
Willard, a single taxpayer, had $60,000 in adjusted gross income for 2015. During 2015 he contributed $25,000 to his church. He had a $15,000 charitable contribution carryover from his 2014 church contributions. What was the maximum amount of properly substantiated charitable contributions that Willard could claim as an itemized deduction for 2015?
- $15,000
- $25,000
- $30,000
- $40,000
$30,000
Willard gave $25,000 to his church during 2015 and had a $15,000 charitable contribution carryover from 2014, resulting in a total of $40,000 of contributions. Since an individual’s deduction for charitable contributions cannot exceed an overall limitation of 50% of adjusted gross income, Willard’s charitable contribution deduction for 2015 is limited to ($60,000 AGI × 50%) = $30,000. Since Willard’s 2015 contributions will be deducted before his carry forward from 2014, Willard will carry over $10,000 of his 2014 contributions to 2016.
On January 1, 2015, James Davis was awarded a post-doctorate fellowship grant of $30,000 by a tax-exempt educational organization. Davis is not a candidate for a degree and was awarded the grant to continue his research. The grant was awarded for the period March 1, 2015 through May 31, 2016.
On March 1, 2015, Davis elected to receive the full amount of the grant. What amount should be included in his gross income for 2015?
- $0
- $10,000
- $20,000
- $30,000
$30,000
A degree candidate can exclude scholarships and fellowships that are used for tuition and course-related fees, books, supplies, and equipment. Since Davis is not a candidate for a degree, the entire amount of fellowship grant must be included in gross income in the year received.
On August 1, 2015, Graham purchased and placed into service an office building costing $264,000 including $30,000 for the land. If Graham is a calendar-year taxpayer, what is Graham’s MACRS deduction for the office building for 2015?
- $9,600
- $6,000
- $3,600
- $2,250
$2,250
The MACRS deduction for nonresidential real property must be determined using the midmonth convention (i.e., property is treated as placed in service at the midpoint of the month placed in service) and the straight-line method of depreciation over a 39-year recovery period. Here, the $264,000 cost of the office building must first be reduced by the $30,000 allocated to the land, to arrive at a basis for depreciation of $234,000. Since the building was placed in service on August 1, the midmonth convention results in 4.5 months of depreciation for 2015. The MACRS deduction for 2015 is [$234,000 × (4.5 months) / (39 × 12 months)] = $2,250.
For the year ended December 31, 2014, Elmer Shaw earned $3,000 interest at Prestige Savings Bank, on a time savings account scheduled to mature in 2017. In March 2015, before filing his 2014 income tax return, Shaw incurred an interest forfeiture penalty of $1,500 for premature withdrawal of the funds from his account. Shaw should treat this $1,500 forfeiture penalty as a
- Penalty not deductible for tax purposes.
- Deduction from gross income in arriving at 2015 adjusted gross income.
- Deduction from 2015 adjusted gross income, deductible only if Shaw itemizes his deductions for 2015.
- Reduction of interest earned in 2014, so that only $1,500 of such interest is taxable on Shaw’s 2014 return.
Deduction from gross income in arriving at 2015 adjusted gross income.
An interest forfeiture penalty for making a premature withdrawal from a time savings account should be deducted from gross income in arriving at adjusted gross income in the year in which the penalty is incurred.
Penalties for Premature Withdrawals from Time Deposits
- Full amount of interest is included in gross income.
- Forfeited interest is then subtracted from gross income in arriving at adjusted gross income.
DAC Foundation awarded Kent $75,000 in recognition of lifelong literary achievement. Kent was not required to render future services as a condition to receive the $75,000. What condition(s) must have been met for the award to be excluded from Kent’s gross income?
- I.Kent was selected for the award by DAC without any action on Kent’s part.
- II.Pursuant to Kent’s designation, DAC paid the amount of the award either to a governmental unit or to a charitable organization.
BOTH.
A prize or award must generally be included in a recipient’s gross income. It can be excluded if the prize or award is made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if the recipient was selected without action on his or her part to enter the contest, the recipient is not required to render substantial future services as a condition to receiving the prize or award, and the prize or award is transferred by the payor to a governmental unit or tax-exempt charitable organization.
Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their 2015 adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A for 2015. The following unreimbursed cash expenditures were among those made by the Burgs during 2015:
- Repair and maintenance of motorized wheelchair for physically handicapped dependent child$ 300
- Tuition, meals, and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care4,000
Without regard to the adjusted gross income percentage threshold, what amount may the Burgs claim in their 2015 return as qualifying medical expenses?
- $0
- $300
- $4,000
- $4,300
$4,300
The Burgs’ deductible medical expenses include the $300 spent on repair and maintenance of the motorized wheelchair for their physically handicapped dependent child, and the $4,000 spent for tuition, meals, and lodging at the special school for the physically handicapped. Payment for meals and lodging provided by an institution as a necessary part of medical care is deductible as a medical expense if the main reason for being in the institution is to receive medical care. Here, the item indicates that the Burg’s physically handicapped dependent child was in the institution primarily for the availability of medical care, and that meals and lodging were furnished as necessary incidents to that care.
When determining his federal income tax, Curt had the following items for 2015:
- Personal exemption$4,000
- Itemized deduction for personal property taxes2,500
- Charitable contribution of capital gain property1,500
- Net long-term capital gain1,000
- Excess of MACRS depreciation on personal property over depreciation computed using the 150% declining-balance method600
- Tax-exempt interest from City of Chicago general obligation bonds400
What is the total amount of adjustments to taxable income for purposes of computing Curt’s alternative minimum tax for 2015?
- $3,100
- $7,100
- $7,200
- $7,800
$7,100
Curt’s adjustments consist of the $600 of excess depreciation, the $4,000 personal exemption and the personal property taxes of $2,500, a total of $7,100.
Adjustments. In determining AMTI, taxable income must be computed with various adjustments. Example of adjustments include
- For real property placed in service after 1986 and before 1999, the difference between regular tax depreciation and straight-line depreciation over 40 years.
- For personal property placed in service after 1986, the difference between regular tax depreciation using the 200% declining balance method and depreciation using the 150% declining balance method (switching to straight-line when necessary to maximize the deduction)
- For long-term contracts, the excess of income under the percentage-of-completion method over the amount reported using the completed-contract method
- The installment method cannot be used for sales of dealer property
- The medical expense deduction is computed using a 10% floor (instead of the 7.5% floor that might have been used for regular tax)
- No deduction is allowed for home mortgage interest if the loan proceeds were not used to buy, build, or improve the home
- No deduction is allowed for personal, state, and local taxes, and for miscellaneous itemized deductions subject to the 2% floor for regular tax purposes
- No deduction is allowed for personal exemptions and the standard deduction
Ed and Ann Ross were divorced in January 2015. In accordance with the divorce decree, Ed transferred the title in their home to Ann in 2015. The home, which had a fair market value of $150,000, was subject to a $50,000 mortgage that had 20 more years to run. Monthly mortgage payments amount to $1,000. Under the terms of settlement, Ed is obligated to make the mortgage payments on the home for the full remaining 20-year term of the indebtedness, regardless of how long Ann lives. Ed made 12 mortgage payments in 2015. What amount is taxable as alimony in Ann’s 2015 return?
- $0
- $12,000
- $100,000
- $112,000
$0
In order to be treated as alimony, a payment must be made in cash and be received by, or on behalf of, the payee spouse. Furthermore, cash payments must be required to terminate upon the death of the payee spouse to be treated as alimony. In this case, the transfer of title in the home to Ann is not a cash payment and cannot be treated as alimony. Although the mortgage payments are cash payments made on behalf of Ann, the payments are not treated as alimony because they will be made throughout the full 20-year mortgage period and will not terminate in the event of Ann’s death.
Tana’s divorce decree requires Tana to make the following transfers to Tana’s former spouse during the current year:
- Alimony payments of $3,000
- Child support of $2,000
- Property division of stock with a basis of $4,000 and a fair market value of $6,500
What is the amount of Tana’s alimony deduction?
- $3,000
- $7,000
- $9,500
- $11,500
$3,000
Alimony is a cash payment to (or on behalf of) a spouse or former spouse that is required by a divorce decree or written separation agreement. Alimony does not include child support, nor any noncash property settlements. Here, Tana’s alimony deduction is limited to the alimony payments of $3,000.
