Questions and Answers of Income Tax Fundamentals

All of the following assets are capital assets, except: a. A personal automobile. b. IBM stock.c. A child’s bicycle.d. Personal furniture. e. Used car inventory held by a car dealer.
You recently received the following e-mail from a client and friend: Hey Great Student, I cannot believe it is almost year end! Only a few days before it’s 2019. As you recall, I was lucky enough
Gail’s employer contributes $2,000 (5% of her $40,000 salary) to a qualified retirement plan for Gail. This pension plan is what kind of plan? a. Defined benefit planb. Defined contribution
Wei has four employees: Anna, Kenny, Stan, and Seth, who were paid $12,000, $5,000, $6,000, and $3,000, respectively. Assuming a full state credit, Wei’s FUTA taxable wages for the year
Vijay sells land and receives $5,000 cash, a motorcycle worth $1,600, and two tickets to the Super Bowl with a total face value (cost) of $800 but worth $1,200. In addition, the buyer assumes the
Telly, age 38, has a $140,000 IRA with Blue Mutual Fund. He has read good things about the management of Green Mutual Fund, so he opens a Green Fund IRA. Telly asked for and received his balance from
The FUTA tax is: a. An unemployment tax with a rate of 2.9 percent up to $128,400 of salary per employee. b. A disability tax with a rate of 2.9 percent up to $7,000 of salary per
Donald, a wealthy banker, has a 24-year-old son, Junior, that has struggled to keep a job. In 2018, Junior generated wage income of $17,000. Junior is not a dependent of Donald and Junior’s 2018
Which of the following forms is used to report government payments such as a state income tax refund? a. Form W-2G b. Form 1099-Casino c. Form 1099-G d. Form 1099-Lottery e.
Yasmeen purchases stock on January 30, 2017. If she wishes to achieve a long-term holding period, what is the first date that she can sell the stock as a long-term gain? a. January 20,
Adam Grisly, a single taxpayer, retired from a long career in coal mining in 2017 when he was only 58 years of age. In 2018, his only source of income is wages of $17,500 from a part-time job. Adam
Charu Khanna received a Form 1099-B showing the following stock transactions and basis during 2018: None of the stock is qualified small business stock. The stock basis was reported to the IRS.
During 2018, Tom sold Sears stock for $10,000. The stock was purchased 4 years ago for $13,000. Tom also sold Ford Motor Company bonds for $35,000. The bonds were purchased 2 months ago for $30,000.
In 2018, what is the top tax rate for individual long-term capital gains and the top tax rate for long-term capital gains of collectible items assuming that the Medicare tax does not apply. a.
Chrissy receives 200 shares of Chevron stock as a gift from her father. The stock cost her father $9,000 10 years ago and is worth $10,500 at the date of the gift. a. If Chrissy sells the stock
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
In 2018, Michael has net short-term capital losses of $1,500, a net long-term capital loss of $27,000, and other ordinary taxable income of $45,000. a. Calculate the amount of Michael’s
Harold, a single taxpayer, has $30,000 of ordinary income after the standard deduction, and $10,000 in long-term capital gains, for total taxable income of $40,000. For 2018, single taxpayers pay 0
In November 2018, 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
Larry Gaines, a single taxpayer, age 42, sells his personal residence on November 12, 2018, for $148,000. He lived in the house for 7 years. The expenses of the sale are $9,000, and he has made
On July 1, 2018, Ted, age 73 and single, sells his personal residence of the last 30 years for $368,000. Ted’s basis in his residence is $42,000. The expenses associated with the sale of his home
In 2018, Tim, a single taxpayer, has ordinary income of $29,000. In addition, he has $2,000 in short-term capital gains, long-term capital losses of $10,000, and long-term capital gains of $4,000.
Dick owns a house that he rents to college students. Dick receives $800 per month rent and incurs the following expenses during the year: Real estate taxes.................. $1,250 Mortgage
Which of the following forms is used to report wages, tips and other compensation paid to employees? a. Form W-4 b. Form W-2G c. Form W-2 d. Form 1099-R e. Form 1099-MISC
Oscar, a single taxpayer, sells his residence of the last 10 years in January of 2018 for $190,000. Oscar’s basis in the residence is $45,000, and his selling expenses are $11,000. If Oscar does
Sherry rents her vacation home for 6 months and lives in it for 6 months during the year. Her gross rental income during the year is $6,000. Total real estate taxes for the home are $950, and
Thomas is an employer with two employees, Patty and Selma. Patty’s wages are $12,450 and Selma’s wages are $1,275. The state unemployment tax rate is 5.4 percent. Calculate the following amounts
Jim, a single taxpayer, bought his home 20 years ago for $25,000. He has lived in the home continuously since he purchased it. In 2018, he sells his home for $300,000. What is Jim’s taxable gain on
Walter, a single taxpayer, purchased a limited partnership interest in a tax shelter in 1992. He also acquired a rental house in 2018, which he actively manages. During 2018, Walter’s share of the
Susan, a single taxpayer, bought her home 25 years ago for $30,000. She has lived in the home continuously since she purchased it. In 2018, she sells her home for $200,000. What is Susan’s taxable
Yamin operates a small business with a few part-time employees. Her annual employment tax withholding in 2018 is $467.80. Yamin should file which employment tax reporting form? a. Form
Fly-By-Night (P.O. Box 1234, Dallas, TX 75221, EIN 12-9876543) paid George Smith, an employee who lives at 432 Second Street, Garland, TX 75040, wages of $25,400. Based on George’s final 2018 pay
Kevin purchased a house 20 years ago for $100,000 and he has always lived in the house. Three years ago Kevin married Karen, and she has lived in the house since their marriage. If they sell
Philcon Corporation created the following 2018 employee payroll report for one of its employees. a. Complete the following Form W-2 for Louise Chugach from Philcon Corporation. b. Philcon
Tyler, a single taxpayer, generates a net operating loss of $12,000 in 2017. He also generates a net operating loss of $6,000 in 2018. Finally, in 2019, Tyler’s business turns a corner and he
Julie, a single taxpayer, has completed her 2018 Schedule C and her net loss is $40,000. Her only other income is wages of $30,000. Julie takes the standard deduction of $12,000 in 2018. a.
Sanjay is a single taxpayer that operates a curry cart on the streets of Baltimore. The business is operated as a sole proprietorship with no employees (Sanjay does everything). Sanjay’s Schedule C
Ran’s wage income is $47,350 in 2018. The combined employer and employee FICA tax rates that apply to Ran’s wages are: a. 15.3% for Social Security and Medicare. b. 6.2% for Social
John owns a second home in Palm Springs, CA. During the year, he rented the house for $5,000 for 56 days and used the house for 14 days during the summer. The house remained vacant during the
Terry worked for two employers during 2018. The amount of wages paid to Terry by both employers totaled $168,400 and the employers properly withheld both income and employment taxes. As a result of
Drew Freeman operates a small business and his payroll records for the first quarter of 2018 reflect the following:Drew’s employee identification number is 34-4321321 and his business is located at
Martin sells a stock investment for $26,000 on August 2, 2018. Martin’s adjusted basis in the stock is $15,000. a. If Martin acquired the stock on November 15, 2017, calculate the amount and
Thuy worked as the assistant manager at Burger Crown through August 2018 and received wages of $87,000. Thuy then worked at Up and Down Burger starting in September of 2018 and received wages of
Helen, a single taxpayer, has modified adjusted gross income (before passive losses) of $126,000. During the tax year, Helen’s rental house generated a loss of $15,000. Assuming Helen is actively
Which of the following is not true about FICA taxes? a. The FICA tax has two parts, Social Security (Old Age, Survivors, and Disability Insurance) and Medicare. b. In 2018, the maximum wage
Fidicuary Investments paid its employee, Yolanda, wages of $137,000 in 2018. Calculate the FICA tax: Withheld from Yolanda's wages: Social Security Medicare Paid by Fiduciary: Social Security
Which of the following is not classified as portfolio income for tax purposes? a. Interest income on savings accounts.b. Dividends paid from a credit union.c. Net rental income from real estate
Which of the following types of income is passive income? a. Net rental income from real estate limited partnership investment. b. Dividends from domestic corporations. c.
Which of the following is classified as active income? a. Self-employment income from a small business. b. Interest income. c. Limited partnership income. d. Dividend income from
Nancy has active modified adjusted gross income before passive losses of $75,000. She has a loss of $5,000 on a rental property she actively manages. How much of the loss is she allowed to take
Jim has a net operating loss in 2018. If he does not make any special elections, what is the first year to which Jim carries the net operating loss? a. 2015 b. 2016 c. 2017 d.
The qualified business income deduction is unavailable to which of the following businesses: a. A sole proprietor dental practice that generates about $70,000 in income each year.b. An
Qualified business income does not include which of the following: a. Income from sales of goods.b. Deductions related to cost of goods sold. c. Deductions for business expenses such as
In 2018, Tracy generates a $10,000 loss from an otherwise qualified business activity. Fortunately, she also works as an employee and has taxable income of $40,000. Tracy’s 2018 QBI deduction
Which of the following is a false statement about Health Savings Accounts (HSAs)? a. Taxpayers who contribute to an HSA must carry qualifying high-deductible health insurance. b. HSAs are
Evan participates in an HSA carrying family coverage for himself, his spouse, and two children. In 2018, Evan has $100 per month deducted from his paycheck and contributed to the HSA. In addition,
While preparing Massie Miller’s 2018 Schedule A, you review the following list of possible charitable deductions provided by Massie: Cash contribution to a family whose house burned
John Williams (birthdate August 2, 1975) is a single taxpayer. John’s earnings and withholdings as the manager of a local casino for 2018 are reported on his Form W-2: John’s other income
Charlene has self-only coverage in a qualifying high-deductible health insurance plan. She is 47 years old and wishes to contribute the maximum amount to her HSA. How much is she allowed to
Jane is a single taxpayer with a current year AGI of $181,000 and current year income tax liability of $39,610. Her AGI in the prior year was $150,400 and prior year tax liability was $32,182. Jane
Lamden Company paid its employee, Trudy, wages of $47,000 in 2018. Calculate the FICA tax: Withheld from Trudy's wages: Social Security Medicare Paid by Lamden: Social Security $. Medicare
Amy is a single taxpayer. Her income tax liability in the prior year was $5,178. Amy earns $50,000 of income ratably during the current year and her tax liability is $4,372. In order to avoid
Kana is a single wage earner with no dependents and taxable income of $205,000 in 2018. Her 2017 taxable income was $155,000 and tax liability was $36,382. Calculate the following Kana’s 2018
Sherina Smith (Social Security number 785-23-9873) lives at 536 West Lapham Street, Milwaukee, WI 53204, and is self-employed for 2018. She estimates her required annual estimated tax payment for
The process for employee withholding involves: a. The employee computes the number of allowances on Form W-4 and the employer uses the W-4 information to calculate income tax
Cassie works at Capital Bank and is in charge of issuing Form 1099s to bank customers. Please describe for Cassie the 4 possible situations that require the bank to implement backup withholding on a
Flo is a server at a diner in Phoenix and earns a significant portion of her pay through tips from customers. Some of these tips are paid via credit card and others are paid in cash. Flo’s employer
Sophie is a single taxpayer. For the first payroll period in July 2018, she is paid wages of $3,900 monthly. Sophie claims one allowance on her Form W-4. a. Use the percentage method to
Ralph and Kathy Gump are married with one 20-year-old dependent child. Ralph earns a total of $98,000 and estimates their itemized deductions to be $28,500 for the year. Kathy is not employed. Use
Abbe, age 56, is married and has two dependent children, one age 14, and the other a 21 year-old full-time student. Abbe has one job, and her husband, age 58, is not employed. If she expects to earn
Phan Mai is single with two dependent children under age 17. Phan estimates her wages for the year will be $42,000, her dependent care expenses will be $6,300, and her itemized deductions will be
Eric, your friend, received his Form W-2 from his employer (below) and has asked for your help. Eric’s 2018 salary was $145,000 and he does not understand why the amounts in Boxes 1, 3 and 5 are
Using the information from Question 21, what is Oscar’s basis on his new building? a. $130,000 b. $132,000 c. $140,000 d. $142,000Data from Problem 22. Oscar owns a
Teresa’s manufacturing plant is destroyed by fire. The plant has an adjusted basis of $270,000, and Teresa receives insurance proceeds of $410,000 for the loss. Teresa reinvests $420,000 in a
Oscar owns a building that is destroyed in a hurricane. His adjusted basis in the building before the hurricane is $130,000. His insurance company pays him $140,000 and he immediately invests in a
Carey exchanges real estate for other real estate in a qualifying likekind exchange. Carey’s basis in the real estate given up is $120,000, and the property has a fair market value of $165,000.
Fred and Sarajane exchanged land in a qualifying likekind exchange. Fred gives up land with an adjusted basis of $12,000 (fair market value of $15,000) in exchange for Sarajane’s land with a fair
William sold Section 1245 property for $25,000 in 2018. The property cost $37,000 when it was purchased 5 years ago. The depreciation claimed on the property was $17,000. a. Calculate the
Pat sells real estate for $30,000 cash and a $90,000 5year note. If her basis in the property is $90,000 and she receives only the $30,000 down payment in the year of sale, how much is Pat’s
Steve Drake sells a rental house on January 1, 2018, and receives $120,000 cash and a note for $45,000 at 10 percent interest. The purchaser also assumes the mortgage on the property of $35,000.
Virginia has business property that is stolen and partially destroyed by the time it was recovered. She receives an insurance reimbursement of $6,000 on property that had a $14,000 basis and a
Nadia Shalom has the following transactions during the year: Sale of office equipment on March 15 that cost $19,000 when purchased on July 1, 2016. Nadia has claimed $3,000 in depreciation and sells
Jeanie acquires an apartment building in 2007 for $250,000 and sells it for $500,000 in 2018. At the time of sale there is $75,400 of accumulated straightline depreciation on the apartment
During 2018, Paul sells residential rental property for $290,000, which he acquired in 1997 for $145,000. Paul has claimed straightline depreciation on the building of $54,500. What is the amount
Derek purchases a small business from Art on July 1, 2018. He paid the following amounts for the business: Fixed
In 2018, Mary sells for $14,000 a machine used in her business. The machine was purchased on May 1, 2016, at a cost of $13,000. Mary has claimed depreciation on the machine of $8,000. What is the
Tom has a successful business with $100,000 of taxable income before the election to expense in 2018. He purchases one new asset in 2018, a new machine which is 7year MACRS property and costs
Which of the following is Section 1231 property? a. Land held for investment purposes.b. A machine used in a business.c. Accounts receivable.d. Inventor. e. Paintings owned by the artist.
Go to the IRS website (www.irs.gov) and assuming bonus depreciation is used, redo Problem 11, using the most recent interactive Form 4562, Depreciation and Amortization. Print out the completed Form
During 2018, Palo Fiero purchases the following property for use in his calendar yearend manufacturing business: Palo uses the accelerated depreciation method under MACRS, if available, and
Serena is a 40-year-old single taxpayer. She operates a small business on the side as a sole proprietorship. Her 2018 Schedule C reports net profits of $5,624. Her employer does not offer health
In 2018, 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
On September 14, 2018, Jay purchased a passenger automobile that is used 75 percent in his accounting business. The automobile has a basis for depreciation purposes of $43,000, and Jay uses the
A. Bea Jones (birthdate March 27, 1984) moved from Texas to Florida in December 2017. She lives at 654 Ocean Way, Gulfport, FL 33707. Bea’s Social Security number is 466-78-7359 and she is single.
In 2018, Ben purchases and places in service a new auto for his business. The auto costs $57,000 and will be used 100% for business. Assuming the halfyear convention applies and Ben does not elect
On February 2, 2018, Alexandra purchases a personal computer for her home. The computer cost $2,800. Alexandra uses the computer 80 percent of the time in her accounting business, and the remaining
In 2018, Ben purchases and places in service a new auto for his business. The auto costs $57,000 and will be used 60% for business. Assuming the halfyear convention applies and Ben elects out of
During 2018, William purchases the following capital assets for use in his catering business: New passenger automobile (September 30).............$51,500 Baking equipment (June
Which of the following is not considered a limit on the immediate expensing election of Section 179? a. Fifty percent of qualified improvement property.b. Total Section 179eligible property
Calculate the following: a. The first year of depreciation on a residential rental building costing $200,000 purchased July 2, 2018. b. The second year (2019) of depreciation on a computer

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