Questions and Answers of Income Tax Fundamentals

Harold and Wanda (married filing jointly) have $30,000 of ordinary income after the standard deduction and personal exemptions, and $50,000 in unrecaptured depreciation on the sale of rental
In November 2016, Ben and Betty (married, filing jointly) have a long-term capital gain of $54,000 on the sale of stock. They have no other capital gains and losses for the year. Their ordinary
In 2016, the top tax rates are percent on individual long-term capital gains on sale of stock, and percent on capital gains on sales of collectible items, assuming the ACA Medicare surtax does not
Bob sells a stock investment for $35,000 cash, and the purchaser assumes Bob’s $32,500 debt on the investment. The basis of Bob’s stock investment is $55,000. What is the gain or loss realized on
Vijay sells land and receives $5,000 cash, a motorcycle worth $2,000, two tickets to the Super Bowl with a total face value (cost) of $800 but worth $1,200, and the buyer assumes the mortgage on the
Yasmeen purchases stock on January 30, 2015. If she wishes to achieve a long-term holding period, she will have to wait until at least to sell the stock.a. January 20, 2016b. January 31, 2016c.
Which of the following is a capital asset?a. Account receivableb. Copyright created by the taxpayerc. Copyright (held by the writer)d. Business inventorye. A taxpayer’s residence
All of the following assets are capital assets, except:a. A personal automobileb. IBM stockc. A child’s bicycled. Personal furnituree. Used car inventory held by a car dealer
The following information is available for the Albert and Allison Gaytor family in addition to that provided in Chapters 1–6.On September 14, Allison purchased the building where her store is
The following information is available for the Albert and Allison Gaytor family in addition to that provided in Chapters 1–6.On September 14, Allison purchased the building where her store is
Warner and Augustine Robins, both 33 years old, have been married for 9 years. They live at 638 Russell Parkway, Macon, GA 31207. Augustine’s Social Security number is 445-81-1423 and Warner’s is
Sherry Hopson owns a retail family clothing store. Her store is located at 4321 Heather Drive, Henderson, NV 89002. Her employer identification number is 95-1234321 and her Social Security number is
Charlie’s Green Lawn Care is a cash basis taxpayer. Charlie Adame, the sole proprietor, is considering delaying some of his December 2016 customer billings for lawn care into the next year. In
Go to the IRS website (www.irs.gov) and assuming bonus depreciation is used, redo Problem 15, using the most recent interactive Form 4562, Depreciation and Amortization. Print out the completed Form
Explain the use of the mid-quarter convention for MACRS depreciation.
Is it possible to depreciate a residential rental building when it is actually increasing in value? Why?
Is land allowed to be depreciated? Why or why not?
Geraldine is an accrual basis taxpayer who has the following transactions during the current calendar tax year:Calculate Geraldine’s net income from her business for the current year.
Yolanda is a cash basis taxpayer with the following transactions during the year:Calculate Yolanda’s income from her business for this calendar year.
The Au Natural Clothing Factory has changed its year-end from a calendar year-end to March 31, with permission from the IRS. The income for its short period from January 1 to March 31 is $24,000.
The Au Natural Clothing Factory has changed its year-end from a calendar year-end to March 31, with permission from the IRS. The income for its short period from January 1 to March 31 is $24,000.
BJT Corporation is owned 40 percent by Bill, 35 percent by Jack, and 25 percent by Teresa. Bill and Jack are father and son. What is Jack’s total direct and indirect ownership under Section 267?a.
Using the same facts as in Question 17, how much can B Corporation deduct on its 20X2 tax return?a. $0b. $4,000c. $15,000d. $19,000e. $12,000Data From Question 17:B Corporation, an accrual basis
B Corporation, an accrual basis taxpayer, is owned 75 percent by Bonnie, a cash basis taxpayer. On December 31, 20X1, the corporation accrues interest of $4,000 on a loan from Bonnie and also accrues
B Corporation, an accrual basis taxpayer, is owned 75 percent by Bonnie, a cash basis taxpayer. On December 31, 20X1, the corporation accrues interest of $4,000 on a loan from Bonnie and also accrues
Pekoe sold stock to Rose for $12,000, its fair market value. The stock cost Pekoe $16,000 5 years ago. Also, Pekoe sold Earl (an unrelated party) stock for $6,500 that cost $8,500 3 years ago. Rose
Which of the following intangibles is defined as a Section 197 intangible asset?a. An interest in landb. A partnership interestc. An interest in a corporationd. A covenant not to compete acquired as
The amortization period for Section 197 intangibles is:a. 5 yearsb. 7 yearsc. 10 yearsd. 15 yearse. 40 years
Which of the following is not considered listed property for purposes of determining the taxpayer’s depreciation deduction?a. A computer used exclusively by the taxpayer in managing his investment
On July 20, 2016, Kelli purchases office equipment at a cost of $12,000. Kelli elects out of bonus depreciation but makes the election to expense for 2016. She is self-employed as an attorney, and,
Assume that a taxpayer purchases a computer in 2016 that has an estimated useful life of 10 years. If the computer is used 100 percent for business and no election to expense was made, what is the
Which of the following is not true about the MACRS depreciation system:a. A salvage value must be determined before depreciation percentages are applied to depreciable real estate.b. Residential
Which of the following statements with respect to the depreciation of property under MACRS is incorrect?a. Under the half-year convention, one-half year of depreciation is allowed in the year the
James purchased office equipment for his business. The equipment has a depreciable basis of $14,000 and was put in service on June 1, 2016. James decides to elect straight-line depreciation under
An asset (not an automobile) put in service in June 2016 has a depreciable basis of $40,000 and a recovery period of 5 years. Assuming bonus depreciation is used, half-year convention and no election
An asset (not an automobile) put in service in June 2016 has a depreciable basis of $40,000 and a recovery period of 5 years. Assuming bonus depreciation is used, half-year convention and no election
An asset (not an automobile) put in service in June 2016 has a depreciable basis of $34,990 and a recovery period of 5 years. Assuming half-year convention, no bonus depreciation, and no election to
An asset (not an automobile) put in service in June 2016 has a depreciable basis of $34,990 and a recovery period of 5 years. Assuming half-year convention, no bonus depreciation, and no election to
Alice purchases a rental house on June 22, 2016, for a cost of $174,000. Of this amount, $100,000 is considered to be allocable to the cost of the home, with the remaining $74,000 allocable to the
Which of the following entities is required to report on the accrual basis?a. An accounting firm operating as a Personal Service Corporation.b. A manufacturing business with $15 million of gross
Which of the following entities is required to report on the accrual basis?a. An accounting firm operating as a Personal Service Corporation.b. A manufacturing business with $15 million of gross
Which of the following is an acceptable method of accounting under the tax law?a. The accrual methodb. The hybrid methodc. The cash methodd. All of the above are acceptablee. None of the above
Income and loss from which of the following entities is passed through and taxed on the individual’s personal tax returns?a. S corporationb. Partnershipc. Sole proprietord. All of the above
E Corporation is a subchapter S corporation owned by three individuals with calendar year-ends. The corporation sells a sports drink as its principal product and has similar sales each month. What
The following information is available for the Albert and Allison Gaytor family in addition to that provided in Chapters 1–5.Albert’s grandfather died and left a portfolio of municipal bonds. In
Richard McCarthy is a single taxpayer living at 169 Trendie Street, Apartment 6B, La Jolla, CA 92037. His Social Security number is 865-68-9635 and his birthdate is September 18, 1971.In 2016,
Steve Jackson (birthdate December 13, 1965) is a single taxpayer living at 3215 Pacific Dr., Del Mar, CA 92014. His Social Security number is 465-88-9415. In 2016, Steve’s earnings and income tax
David and Darlene Jasper have one child, Sam, who is 6 years old (birthdate July 1, 2010). The Jaspers reside at 4639 Honeysuckle Lane, Los Angeles, CA 90248. David’s Social Security number is
Go to the IRS website (www.irs.gov) and redo Problem 10 above using the most recent interactive Form 2441, Child and Dependent Care Expenses. Print out the completed Form 2441.Data From Problem
Which of the following conditions need not be satisfied in order for a married taxpayer, residing in a community property state, to be taxed only on his or her separate salary?a. The husband and wife
Dana and Larry are married and live in Texas. Dana earns a salary of $45,000 and Larry has $25,000 of rental income from his separate property. If Dana and Larry file separate tax returns, what
Which of the following is not a tax preference or adjustment item for the individual alternative minimum tax computation?a. Miscellaneous itemized deductionsb. State income taxesc. State income tax
If a taxpayer does not have enough tax liability to use all the available adoption credit, the unused portion may be carried forward for how many years?a. Twob. Threec. Fived. There is no
In 2016, Irene, an unmarried individual, pays $6,500 in qualified adoption expenses to an adoption agency for the final adoption of an eligible child who is not a child with special needs. In the
In connection with the adoption of an eligible child who is a U.S. citizen and who is not a child with special needs, Sean pays $4,000 of qualified adoption expenses in 2015 and $3,000 of qualified
John and Joan pay $16,500 of qualified adoption expenses in 2016 to finalize the adoption of a qualified child. Their AGI is $197,000 for 2016. What is their adoption credit for 2016?a. $0b. $1,650c.
Taxpayer L has income of $55,000 from Norway, which imposes a 40 percent income tax, and income of $45,000 from France, which imposes a 30 percent income tax. L has taxable income from U.S. sources
Becky, a college freshman, works part-time and pays $1,650 of her college tuition expenses. Although Becky files her own tax return, her parents claim her as a dependent on their tax return.
Joan, a single mother, has AGI of $85,000 in 2016. In September 2016, she pays $5,000 in qualified tuition for her dependent son who just started at Big University. What is Joan’s American
John, a single father, has AGI of $51,000 in 2016. During the year, he pays $4,000 in qualified tuition for his dependent son, who just started attending Small University. What is John’s American
In November 2016, Simon pays $6,200 to take a course to improve his job skills to qualify for a new position at work. Simon’s employer reimbursed him for the cost of the course. For 2016, Simon’s
In September 2016, Sam pays $2,200 to take a course to improve his job skills to qualify for a new position at work. Assuming there is no phase-out of the credit, his lifetime learning credit for
Jane graduates from high school in June 2016. In the fall, she enrolls for twelve units at Big State University. Big State University considers students who take twelve or more units to be full-time.
The American Opportunity tax credit is 100 percent of the first of tuition and fees paid and 25 percent of the next .a. $600; $1,200b. $1,100; $550c. $2,000; $2,000d. $1,100; $5,500e. None of the
For purposes of determining shared responsibility, household AGI isa. AGI for the taxpayer and spouseb. AGI for the taxpayer, spouse and any other household members required to file a tax returnc.
Taxpayers without minimum essential coverage for part of the year that are not eligible for an exemption musta. Purchase double health insurance for the following tax yearb. Buy a catastrophic
Taxpayers with minimum essential coverage for the entire year for all members of their household willa. Pay any unpaid health care insurance premiums with their tax returnb. Check a box indicating
Which of the following is not an acceptable cause for claiming an exemption from minimum essential coverage?a. Religious oppositionb. Income below the filing status threshold to filec. A one-month
James did not have minimum essential coverage for any part of 2016. If James is single and has 2016 adjusted gross income of $40,950, what is his individual shared responsibility payment?a. $0b.
Which of the following taxpayers will require a payment for the individual shared responsibility?a. Jim’s income was only $2,000 for the year, his employer did not provide health insurance, and the
Which of the following payments does not qualify as a child care expense for purposes of the child and dependent care credit?a. Payments to a day care centerb. Payments to the taxpayer’s sister (21
Assuming they all meet the income requirements, which of the following taxpayers qualify for the earned income credit in 2016?a. A married taxpayer who files a separate tax return and has a dependent
Jennifer is divorced and files a head of household tax return claiming her children, ages 4, 7, and 17, as dependents. Her adjusted gross income for 2016 is $91,300.What is Jennifer’s total child
Russ and Linda are married and file a joint tax return claiming their three children, ages 4, 7, and 18, as dependents. Their adjusted gross income for 2016 is $105,300. What is Russ and Linda’s
Which of the following is deductible as interest on Schedule A?a. Loan fees that are not “points”b. Fees for having a new home inspected prior to purchasec. Interest on a loan for a 90-foot yacht
The cost of which of the following expenses is not deductible as a medical expense on Schedule A, before the 10 percent of adjusted gross income limitation?a. A psychiatristb. Botox treatment to
The following information is available for the Albert and Allison Gaytor family in addition to that provided in Chapters 1– 4.Albert and Allison received the following form:Albert and Allison paid
John Fuji (birthdate June 6, 1979) moved from California to Washington in December 2015. He lives at 468 Cameo Street, Yakima, WA 98901. John’s Social Security number is 571-78-5974 and he is
Bea Jones (birthdate March 27, 1984) moved from Texas to Florida in December 2015. She lives at 654 Ocean Way, Gulfport, FL 33707. Bea’s Social Security number is 466-78-7359 and she is single. Her
John Williams (birthdate August 2, 1974) is a single taxpayer, and he lives at 1324 Forest Dr., Reno, NV 89501. His Social Security number is 555-94-9358. John’s earnings and withholdings as the
In 2016, Gale and Cathy Alexander hosted an exchange student, Axel Muller, for 9 months. Axel was part of International Student Exchange Programs (a qualified organization). Axel attended tenth grade
While preparing Massie Miller’s 2016 Schedule A, you review the following list of possible charitable deductions provided by Massie:What would you say to Massie regarding her listed deductions? How
Dan has a 20-year-old vintage car behind his residence. He has rarely used it. This year he discovers that it has been completely destroyed by rust. The car originally cost $5,000 and had a fair
Go to the IRS website (www.irs.gov) and print out a copy of the most recent Instructions for Form 4684, Casualties and Thefts.Form 4684:
Wilbur DuVal has an apartment full of antique furniture. A fire in the apartment destroys a large part of his furnishings. The destroyed furnishings had a fair market value of $40,000, and Wilbur’s
Three years ago, Barbara donates a painting that cost $8,000, to a university for display in the president’s office. The fair market value of the painting on the date of the gift is $14,000. If
Mark owns his home and has a $250,000 mortgage related to his purchase of the residence. When his daughter went to college in the fall of 2016, he borrowed $20,000 through a home equity loan on his
Jim and Martha are married taxpayers with $404,000 of adjusted gross income in 2016. They are allowed two personal exemptions. What is the amount of each of their $4,050 exemption deductions after
Ramon, a single taxpayer, has adjusted gross income for 2016 of $350,100. His itemized deductions total $50,000 consisting of $30,000 of state income taxes and $20,000 of charitable contributions.
George receives a $1,500 distribution from his educational savings account. He uses $1,200 to pay for qualified higher education expenses. Immediately prior to the distribution, George’s account
During 2016, Carl (a single taxpayer) has a salary of $91,500 and interest income of $15,500. Calculate the maximum contribution Carl is allowed for an educational savings account.a. $0b. $400c.
Which of the following is not true with respect to education incentives?a. The contributions to qualified tuition programs (Section 529 plans) are not deductible.b. The contributions to educational
For married taxpayers filing a joint return in 2016, at what AGI level does the phase-out limit for contributions to Qualified Tuition Programs start?a. $110,000b. $190,000c. $220,000d. There is no
In 2016, Amy receives $8,000 (of which $3,000 is earnings) from a qualified tuition program. She does not use the funds to pay for tuition or other qualified higher education expenses. What amount is
Which of the following is correct for Qualified Tuition Programs?a. Contributions are deductible, and qualified educational expense distributions are tax free.b. Contributions are not deductible, and
Gina receives a $3,000 distribution from her educational savings account. She uses $1,600 to pay for qualified higher education expenses and $1,400 on a vacation. Immediately prior to the
What form does an employee use to report expenses that are fully reimbursed by an employer under an accountable plan?a. Schedule Db. Schedule A, Miscellaneous Itemized Deductionsc. Schedule Cd. Form
Which of the following statements is true with regard to the classification of employment-related expenses?a. A self-employed taxpayer’s business travel expenses are deductible as itemized
Which of the following items is not deductible as a miscellaneous deduction on Schedule A?a. Investment expensesb. Gambling losses to the extent of gambling winningsc. Unreimbursed business
Which of the following is not a miscellaneous itemized deduction?a. Tax preparation feesb. Professional duesc. Investment interest expensed. Job-hunting expenses

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