Questions and Answers of Income Tax Fundamentals

Linda and Richard are married and file a joint return for 2020. During the year, Linda, who works as an accountant for a national airline, used $2,100 worth of free passes for travel on the airline;
For each of the following independent cases, indicate the amount of gross income that must be included on the taxpayer’s 2020 income tax return. a. Malchia won a $4,000 humanitarian award. b. Rob
How much of each of the following is taxable?a. Cheline, an actress, received a $6,400 gift bag for attending the Academy Awards Ceremony during 2020.b. Jon received a gold watch worth $660 for 25
Huihana receives 4 tickets to the local professional football game for achieving 20 years of employment with her employer. The tickets cost the employer $390 and have a market value of the same on
Sally and Charles Heck received the following Form 1099-DIV in 2020:The Hecks also received the following dividends and interest in 2020 (Forms 1099-DIV not shown): CORRECTED (if checked) PAYER'S
A 67-year-old taxpayer retires this year and receives the first payment on an annuity that was purchased several years ago. The taxpayer’s investment in the annuity is $94,500, and the annuity pays
Russell (birthdate February 2, 1969) and Linda (birthdate August 30, 1974) Long have brought you the following information regarding their income and expenses for the current year. Russell owns and
Greg died on July 1, 2020, and left Lea, his wife, a $45,000 life insurance policy which she elects to receive at $9,000 per year plus interest for 5 years. In the current year, Lea receives $9,500.
Lupita dies in 2020 but has a $1 million life insurance policy that lists her spouse, M’Baku as the beneficiary. M’Baku elects to receive all $1 million in a lump sum and spends $200,000
Nomi is in the highest individual tax bracket and receives $375 in qualified dividends from Omega Corp. Nomi’s tax liability (not including any net investment income tax) with respect to these
How are qualified dividends taxed in 2020? Please give the rates of tax which apply to qualified dividends, and specify when each of these rates applies._____________________________________
Vandell is a taxpayer in the 22 percent tax bracket. He invests in Otay Mesa Water District Bonds that pay 4.5 percent interest. What interest on a taxable bond would provide the same after-tax
Kelly receives a $40,000 scholarship to Ivy University. She uses $35,000 on tuition and books and $5,000 for rent while at school. Kelly will recognize _______ gross income.a. $0b. $5,000c. $10,000d.
Hillary gets divorced in 2019 and is required to pay her ex-spouse $200 per month until her son reaches 18 years of age in 7 years and $120 per month thereafter. How much of her 2020 payments are
In June of 2020, Kevin inherits stock worth $125,000. During the year, he collects $5,600 in dividends from the stock. How much of these amounts, if any, should Kevin include in his gross income for
Jose paid the following amounts for his son to attend Big State University in 2020:How much of the above is a qualified higher education expense for purposes of his Section 529 plan? Tuition Room and
Arlen is required by his 2020 divorce agreement to pay alimony of $2,000 a month and child support of $2,000 a month to his ex-wife Jane. What is the tax treatment of these two payments for Arlen?
Donald and Michelle are divorced in the current year. As part of the divorce settlement, Michelle transfers a plot of land in Long Island, NY to Donald. Michelle’s basis in the property was $20,000
In 2020, Amy receives $8,000 (of which $3,000 is earnings) from a qualified tuition program. She uses the funds to pay for tuition and other qualified higher education expenses. What amount is
During 2020, Carl (a single taxpayer) has a salary of $91,500 and interest income of $11,000. Calculate the maximum contribution Carl is allowed for an educational savings account.a. $0b. $400c.
In 2020, Van receives $20,000 (of which $4,000 is earnings) from a Section 529 plan. He uses the funds to pay for his college tuition and other qualified higher education expenses. How much of the
Wendy is a single taxpayer and pays tuition of $7,800 in 2020. Her 2020 AGI is $66,000. What is the amount of Wendy’s tuition deduction?a. $0b. $7,800c. $4,000d. $2,000e. $3,733.33
Lydia, a married individual, was unemployed for a few months during 2020. During the year, she received $3,250 in unemployment compensation payments. How much of her unemployment compensation
During the 2020 tax year, Brian, a single taxpayer, received $7,400 in Social Security benefits. His adjusted gross income for the year was $14,500 (not including the Social Security benefits) and he
Alicia loses her job part way through 2020. Her employer pays her wages of $15,450 up through her date of termination. After that, she received $1,600 of unemployment compensation from the state
For 2020, the maximum percentage of Social Security benefits that could be included in a taxpayer’s gross income is:a. 0%b. 25%c. 50%d. 75%e. 85%
In 2020, Son loses his job and becomes insolvent. His debts are worked out in bankruptcy and he is able to reduce his mortgage debt by $30,000. Explain how much cancellation of debt income Son will
Kate acquires a principal residence in 2016 for $200,000 secured by a $180,000 mortgage. In 2020, Kate catches the coronavirus and misses work for 3 months. Her employer stops paying her after 10
Bobby Reynolds, a new client of yours, is a selfemployed caterer in Santa Fe, New Mexico. Bobby drives his personal van when delivering catered meals to customers. You have asked him to provide the
Your supervisor has asked you to research a potential tax deduction for a client, Randall Stevens. Randall is a selfemployed loan agent that lives in Portland, Maine. His specialty is marine loans;
Heather drives her minivan 903 miles for business purposes in 2020. She elects to use the standard mileage rate for her auto expense deduction. Her deduction will bea. $510b. $515c. $519d. $553e. $953
Charu Khanna received a Form 1099-B showing the following stock transactions and basis during 2020:None of the stock is qualified small business stock. The stock basis was reported to the IRS.
Skylar and Walter Black have been married for 25 years. They live at 883 Scrub Brush Street, Apt. 52B, Las Vegas, NV 89125. Skylar is a stay-at-home parent and Walt is a high school teacher.
Martin sells a stock investment for $26,000 on August 2, 2020. Martin’s adjusted basis in the stock is $15,000.a. If Martin acquired the stock on November 15, 2018, calculate the amount and the
Carey opens a law office in Chicago on January 1, 2020. On January 1, 2020, Carey purchases an annual subscription to a law journal for $170 and a 1year legal reference service for $1,500. Carey also
During 2020, Tom sold GM 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.
Dr. George E. Beeper is a single taxpayer born on September 22, 1972. He lives at 45 Mountain View Dr., Apt. 321, Spokane, WA 99210. Dr. Beeper’s Social Security number is 775-88-9531. Dr. Beeper
In 2020, Professor Patricia (Patty) Pâté retired from the Palm Springs Culinary Arts Academy (PSCAA). She is a single taxpayer and is 62 years old. Patty lives at 98 Colander Street, Apt. 206D,
Yasmeen purchases stock on January 30, 2019. 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, 2020b. January
Jocasta owns an apartment complex that she purchased 6 years ago for $700,000. Jocasta has made $75,000 of capital improvements on the complex, and her depreciation claimed on the building to date is
In 2020, 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 deduction
In 2020, 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. 10;
Larry Gaines, a single taxpayer, age 42, sells his personal residence on November 12, 2020, for $160,000. He lived in the house for 7 years. The expenses of the sale are $9,100, and he has made
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 2020, she sells her home for $200,000. What is Susan’s taxable
Walter, a single taxpayer, purchased a limited partnership interest in a tax shelter in 1994. He also acquired a rental house in 2020, which he actively manages. During 2020, Walter’s share of the
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 2020, he sells his home for $300,000. What is Jim’s taxable gain on
Oscar, a single taxpayer, sells his residence of the last 10 years in January of 2020 for $190,000. Oscar’s basis in the residence is $45,000, and his selling expenses are $11,000. If Oscar does
In 2020, Tim, a single taxpayer, has ordinary income of $30,000. 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.
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 2020, single taxpayers pay 0
On July 1, 2020, Ted, age 73 and single, sells his personal residence of the last 30 years for $368,000. Ted’s basis in his residence is $49,000. The expenses associated with the sale of his home
In November 2020, 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
Julie, a single taxpayer, has completed her 2020 Schedule C and her net loss is $40,000. Her only other income is wages of $30,000. Julie takes the standard deduction of $12,400 in 2020. a. Calculate
Clifford Johnson has a limited partnership investment and a rental condominium. Clifford actively manages the rental condominium. During 2020, his share of the loss from the limited partnership was
Tyler, a single taxpayer, generates business income of $3,000 in 2016. In 2017, he generates an NOL of $2,000. In 2018, he incurs another NOL of $5,000. In 2019, he generates a modest business income
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
Rob Wriggle operates a small plumbing supplies business as a sole proprietor. In 2020, the plumbing business has gross business income of $421,000 and business expenses of $267,000, including wages
Jim has a net operating loss in 2020. If he does not make any special elections, what is the first year to which Jim carries the net operating loss?a. 2015b. 2016c. 2017d. 2018e. 2020
Gregory R. and Lulu B. Clifden live with their family at the Rock Glen House Bed & Breakfast, which Gregory operates. The Bed & Breakfast (B&B) is located at 33333 Fume Blanc Way,
Noah and Joan Arc live with their family at 4342 Josie Jo, Santee, CA 92071. Noah’s Social Security number is 434-11-3311; Joan’s is 456-87-5432. Both are in their mid-30s and enjoy good health
The IRS maintains a section called “News and Events.” Locate this website and print out the first page of the first item appearing on “News and Events.”
Go to the IRS website (www.irs.gov) and answer the following questions:a. Who is the commissioner of the IRS?b. When did he or she take office?c. What was his or her background before becoming
Jim has a house payment of $2,000 per month of which $1,700 is deductible interest and real estate taxes with the remaining $300 representing a repayment of the principal balance of the note. Jim’s
Melodie’s taxable income is $40,000 and she pays income tax of $5,800. If Melodie’s taxable income increases to $41,000, she would pay income taxes of $6,050. What is Melodie’s marginal tax
Glen’s taxable income is $50,000 and he pays income tax of $8,300. If his income were $60,000, he would pay taxes of $10,800. What is Glen’s marginal tax rate?a. 18.23%b. 17.87%c. 15.00%d.
If the IRS owes a taxpayer a refund, the law generally provides that the IRS must pay interest on the refund if it is not paid within _____ days of the date the taxpayer filed his or her tax return
If a U.S. Tax Court agrees with the taxpayer on appeal that the IRS position was largely unjustified, which of the following is correct?a. The taxpayer must still pay administrative and litigation
Taxpayers have the right to have an IRS examination take place at:a. The IRS officeb. Any city of the taxpayer’s choosingc. A neutral sited. A reasonable time and placee. None of the above
A taxpayer’s rights are explained in:a. Publication 5b. Publication 17c. Publication 556d. Publication 1e. None of the above
Both spouses are responsible, jointly and individually, for paying the full amount of any tax, interest, or penalties due on a joint return.a. This does not apply to spouses who have divorced after
The IRS does not have to furnish the taxpayer with information concerning which of the following items?a. The way the taxpayer’s return was selected for auditb. The procedures for appealing an IRS
The burden of proof remains on the taxpayer for corporations, trusts, and partnerships with net worth exceeding:a. $1 millionb. $3 millionc. $5 milliond. $7 millione. Some other amount
Which of the following have privileged communication with a client in a noncriminal tax matter?a. CPAsb. Enrolled agentsc. Attorneysd. a and ce. a, b, and c
In which of the following situations does the burden of proof in a tax matter not automatically shift to the IRS?a. The IRS uses statistics to reconstruct an individual’s income.b. A court
Which of the following does not result in a minimum $50 fine for an income tax preparer?a. Failure to provide a tax preparer identification numberb. Cashing a refund check from a customerc. Failing
Which of the following is not required to participate in the Annual Filing Season Program?a. 18 total hours of continuing education from an approved providerb. An annual federal tax refresher course
Which of the following tax preparers may not represent their clients in all IRS proceedings?a. An enrolled agentb. A certified public accountantc. An attorneyd. All of the above may represent their
Which of the following deductions has a 6-year statute of limitations?a. Depreciationb. Salariesc. Travel and entertainmentd. A return in which the taxpayer omitted gross income in excess of 25
If a taxpayer’s 2016 individual income tax return was filed on March 3, 2017, the statute of limitations would normally run out on:a. April 15, 2019b. March 3, 2016c. April 15, 2020d. March 3,
Which of the following is not a penalty that may be imposed by the IRS?a. Failure-to-file penaltyb. Failure-to-pay penaltyc. Penalty for negligenced. Fraud penaltye. All of the above may be imposed
In which of the following ways are tax returns selected for most audits?a. Through the Discriminant Function Systemb. Through informantsc. Through news sourcesd. Through information matching
Which of the following is the most common type of audit for an individual taxpayer who conducts no significant business activities?a. Office auditb. Correspondence auditc. Telephone auditd. Field
Which of the following is a responsibility of a local office of the IRS?a. Advising the Treasury Department on legislationb. Intelligence operationsc. Appellate proceduresd. Developing IRS rules and
Assume that Olive Corporation, in Comprehensive Problem 1, is an S corporation owned 50 percent by Linda Holiday and 50 percent by Ralph Winston. The corporation is not subject to any special taxes.
Olive Corporation was formed and began operations on January 1, 2016. The corporation’s income statement for the year and the balance sheet at year-end are presented below.The corporation made
Go to the IRS website (www.irs.gov) and print out a copy of the most recent Schedule K-1 of Form 1120S.
Cypress Corporation has regular taxable income of $170,000 (assume annual gross receipts are greater than $7.5 million) and a regular tax liability of $49,550 for 2016. The corporation also has tax
The Loquat Corporation has book net income of $50,000 for the current year. Included in this figure are the following items, which are reported on the corporation’s Schedule M-1, Reconciliation of
Fisafolia Corporation has gross income from operations of $220,000 and operating expenses of $160,000 for the current year. The corporation also has $20,000 in dividends from publicly traded domestic
Quince Corporation has taxable income of $450,000 for its calendar tax year. Calculate the corporation’s income tax liability for the year before tax credits
Which of the following statements is true about the corporate alternative minimum tax?a. The corporate alternative minimum tax only applies to small corporations.b. The corporate alternative minimum
Which of the following statements regarding personal holding companies is false?a. A personal holding company is one which has few shareholders.b. A personal holding company has income primarily from
What is the shareholder’s basis in stock of a corporation received as a result of the transfer of property to the corporation and as a result of which gain was recognized by the stockholder?a. The
Carl transfers land with a fair market value of $120,000 and basis of $30,000, to a new corporation in exchange for 85 percent of the corporation’s stock. The land is subject to a $40,000
Travis transfers land with a fair market value of $125,000 and basis of $25,000, to a corporation in exchange for 100 percent of the corporation’s stock. What amount of gain must Travis recognize
Which of the following is true about S corporations?a. S corporations pay corporate taxes like other corporations.b. S corporations pay the alternative minimum tax for all income.c. S corporations
Which of the following items are passed through and separately stated on Schedule K-1 to shareholders of an S corporation?a. Wages paidb. Accelerated depreciationc. Net long-term capital gainsd.
Which of the following is not required for a corporation to be eligible to make an S corporation election in 2016?a. The corporation must have 100 or fewer shareholders.b. The corporation must be a
Which of the following statements is false regarding corporate tax return due dates?a. Corporate tax returns for 2016 calendar-year corporations are due April 17.b. Corporate tax returns may receive
The purpose of Schedule M-1 on the corporate tax return is to:a. Reconcile accounting (book) income to taxable income.b. Summarize the dividends received deduction calculation.c. List the officers of
Which of the following is not a corporate organizational expenditure that may be amortized?a. The cost of organizational meetingsb. Fees paid to the state for incorporationc. Accounting fees incident

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