CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning Final Review Questions ©2014, College for Financial Planning, all rights reserved. Information Provided (2014) • Personal exemptions are $3,950. • Standard deduction amounts are: Single: $6,200 Head of household: $9,100 Married filing jointly: $12,400 Married filing separately: $6,200 Individuals eligible to be claimed as dependent: $1,000 AOTC, Lifetime, and Coverdell phaseouts Individual & Corporate Tax rate schedules MACRS table o o o o o • • • Review Question 1 Taxable income is the amount a. remaining after adjustments to income are subtracted. b. from which allowable itemized deductions are subtracted. c. used to determine the tax liability. d. to which tax credits are applied. e. remaining after capital losses are deducted. Review Question 2 Fred and April Johnson are married and file a joint income tax return. During the current tax year, Fred and April will make deductible IRA contributions of $3,000. They are in a 28% marginal income tax bracket. What amount of tax savings will be generated by this deduction? a. $840 b. $2,160 c. $3,000 d. $4,167 Review Question 3 The following summarizes several financial events in the life of James Grant during the current tax year: • He received a $100,000 inheritance. • He had gambling winnings of $50,000. • He had itemized deductions of $10,000. • Received $4,000 of workers’ compensation proceeds. What is his total (gross) income for the current tax year? a. $40,000 b. $50,000 c. $100,000 d. $144,000 Review Question 4 Lowell and Thelma Jordan are married and will file a joint return for the current tax year. They have provided you with the following information: • Lowell’s salary: $60,000 • Thelma’s salary: $25,000 • Unemployment compensation: $10,000 • Net capital loss: $8,000 • Limited partnership loss: $5,000 Based on the information given, what is Lowell and Thelma’s adjusted gross income for the current tax year? a. $77,000 b. $82,000 c. $87,000 d. $92,000 e. $95,000 Review Question 5 John and Mary West, ages 42 and 38, respectively, are married taxpayers filing jointly. They have itemized deductions consisting of the following: • Home mortgage interest: $17,000 • State income taxes: $2,400 • Property taxes: $1,600 • Charitable contributions: $2,200 • Tax preparation fees: $550 • Medical expenses $5,000 John and Mary’s AGI for 2014 is $341,850. What is the amount of allowable itemized deductions? a. $22,096 b. $23,200 c. $27,596 d. $28,700 Review Question 6 Which one of the following may be allowed as a like-kind exchange? a. a heifer exchanged for a bull b. an apartment building located in Miami exchanged for an apartment building located in Mexico City c. farming equipment exchanged for farmland d. a shopping center exchanged for farmland Review Question 7 Which of the following are characteristics of a C corporation? I. The number of shareholders is limited. II. The bankruptcy of shareholders has no effect on the business form. III. Shareholder liability is limited. IV. Capital structure is dependent upon the resources of the shareholders. a. I and II only b. I and IV only c. II and III only d. II and IV only e. III and IV only Review Question 8 Three years ago, Jack Martin purchased a duplex for investment purposes at a cost of $185,000. Legal fees for acquisition and capital improvements before renting the property totaled $15,000. He has since taken cost recovery deductions in the amount of $21,500 and paid $5,500 in property taxes. He also paid $850 for repairs last year. What is Jack’s current adjusted basis in the duplex? a. $163,500 b. $178,500 c. $179,350 d. $184,000 e. $184,850 Review Question 9 Sal Boyd has AGI of $300,000. Included in the AGI is $33,000 of passive income from a publicly-traded limited partnership. Sal is considering several investment alternatives. He would prefer an investment that will help to reduce his income tax liability. Which one of the following investments has the greatest potential for reducing Sal’s tax liability? a. an oil and gas limited partnership (not publicly traded) that is generating losses b. a publicly-traded limited partnership producing passive losses c. a historic rehabilitation limited partnership producing tax credits d. a low-income housing activity placed in service in 2005 that is producing credits Review Question 10 Edgar Hammond, a commissioned salesperson and single taxpayer, has provided the following information for the current tax year. • Edgar’s sales commissions $60,000 • Keogh contribution $ 6,000 • Alimony paid to Edgar’s former wife $12,000 • Qualified moving expenses $ 3,000 • Self-employment tax $ 8,478 • Property taxes $ 3,500 What is Edgar’s adjusted gross income for the current tax year? a. $30,522 b. $34,761 c. $37,761 d. $54,000 Review Question 11 Frank Farmer owns a warehouse that has a fair market value of $150,000 and an adjusted basis of $60,000. He wants to acquire Mary Pierce’s apartment building, which has a fair market value of $200,000 and an adjusted basis of $180,000. In the contemplated exchange, Frank will pay Mary $50,000. What is the amount of gain or loss, if any, realized by Frank in the exchange? a. ($20,000) b. $0 c. $30,000 d. $70,000 e. $90,000 Review Question 12 Frank Farmer owns a warehouse that has a fair market value of $150,000 and an adjusted basis of $60,000. He wants to acquire Mary Pierce’s apartment building, which has a fair market value of $200,000 and an adjusted basis of $180,000. In the contemplated exchange, Frank will pay Mary $50,000. What is the amount of gain or loss, if any, recognized by Frank in the exchange? a. ($20,000) b. $0 c. $30,000 d. $70,000 e. $90,000 Review Question 13 Frank Farmer owns a warehouse that has a fair market value of $150,000 and an adjusted basis of $60,000. He wants to acquire Mary Pierce’s apartment building, which has a fair market value of $200,000 and an adjusted basis of $180,000. In the contemplated exchange, Frank will pay Mary $50,000. What is Frank’s substitute basis in the acquired apartment building? a. $60,000 b. $110,000 c. $150,000 d. $160,000 e. $200,000 Review Question 14 Warren Peace owns and operates a bookstore as a sole proprietorship. During January of the current year, he purchased and placed into service office equipment (7year property) with a cost of $13,300 plus sales tax of $700. The equipment will be used exclusively in the business. Assume Warren chooses to use the straight-line option under MACRS. What is the cost recovery deduction for the current year? a. $950 b. $1,000 c. $1,330 d. $1,900 e. $2,000 Review Question 15 Warren Peace owns and operates a bookstore as a sole proprietorship. During January of the current year, he purchased and placed into service office equipment (7year property) with a cost of $13,300 plus sales tax of $700. The equipment will be used exclusively in the business. What is Warren’s adjusted basis in the equipment after year 1? a. $11,400 b. $11,970 c. $12,000 d. $12,350 e. $13,000 Review Question 16 Warren Peace owns and operates a bookstore as a sole proprietorship. During January of the current year, he purchased and placed into service office equipment (7-year property) with a cost of $13,300 plus sales tax of $700. The equipment will be used exclusively in the business. Assume that Warren sells the office equipment for $15,500 after claiming $6,000 of cost recovery deductions. What is the amount, if any, of cost recovery deductions that must be recaptured under Section 1245? a. $0 b. $1,500 c. $6,000 d. $7,500 e. $8,000 Review Question 17 Warren Peace owns and operates a bookstore as a sole proprietorship. During January of the current year, he purchased and placed into service office equipment (7-year property) with a cost of $13,300 plus sales tax of $700. The equipment will be used exclusively in the business. Assume that Warren sells the office equipment for $15,500 after claiming $6,000 of cost recovery deductions. What amount, if any, would be considered a Section 1231 gain? a. $0 b. $1,500 c. $2,200 d. $6,000 e. $7,500 Review Question 18 Steve and Allison Parker, a married couple in their 40s, file a joint return. • They earned combined salaries of $85,000. • They received dividend and interest income of $460 from mutual funds. • They have itemized deductions of $9,750. • They have net capital losses of $5,200. • They have two children, ages 12 and 14. What is their taxable income for the 2014 tax year? a. $52,060 b. $52,660 c. $54,260 d. $56,910 Review Question 19 Which one of the following best describes the role of the substantial economic effect doctrine? a. It allows the IRS to tax certain partnerships as if they were corporations. b. It limits the ability to use special allocations. c. It limits the ability to deduct limited partnership losses. d. It limits the advantage gained through leverage. e. It requires that the at-risk rules be satisfied. Review Question 20 During the current tax year, Jim Vale has $10,000 of passive income from a publicly traded limited partnership. He also has a nonpublicly traded limited partnership that will generate a $10,000 passive loss. How much of this passive loss, if any, is deductible by Jim during the current tax year? a. $0 b. $1,000 c. $3,000 d. $10,000 Review Question 21 Which one of the following is not an advantage of the cash basis method of accounting? a. Taxes are not paid until income is received. b. Taxpayers can keep simple records. c. Taxpayers can control each year’s receipts and payouts. d. Constructive receipt serves to defer income. Review Question 22 In the current tax year, Ken Bush sold several securities that left him with the following types of gains and losses: • long-term capital gain—$8,000 • short-term capital gain—$800 • long-term capital loss—$2,200 • short-term capital loss—$1,200 What is the net capital gain or loss on Ken’s security sales? a. net short-term loss of $5,400 b. net long-term gain of $5,400 c. net long-term gain of $5,800 and net short-term loss of $400 d. net long-term gain of $6,800 and net short-term gain of $3,400 e. net long-term gain of $8,800 and net long-term loss of $3,400 Review Question 23 Kris Swenson anticipates adjusted gross income of $100,000 during the current tax year. She is considering making a gift of appreciated real estate to the university she attended, Sinton Tech, a qualified charitable institution. Kris’s adjusted basis in this real estate is $40,000. The real estate has a current fair market value of $50,000. Kris has owned the real estate for six months. If Kris does gift the real estate to Sinton this year, what is the maximum allowable charitable deduction Kris can receive for the current tax year? a. $20,000 b. $30,000 c. $40,000 d. $50,000 e. $100,000 Review Question 24 Which of the following are preference items or adjustments for purposes of the individual alternative minimum tax? I. Interest on a qualified private-activity municipal bond issued in 2008 II. the excess of percentage depletion over the property’s adjusted basis III. investment interest expense in excess of net investment income IV. qualified housing interest a. I only b. II only c. I and II only d. II and III only e. I, II, III, and IV Review Question 25 Sam Smith had the following items of income during the current tax year: • Sole proprietorship net income $25,000 • General partnership flow-through $5,000 • Interest income $2,000 • Flow-through of S corporation income $10,000 What is the amount of self-employment tax Sam owes? a. $4,239 b. $4,590 c. $5,652 d. $6,426 Review Question 26 Keith Pierce recently was divorced from his wife, Barbara. Barbara received custody of their two children. Keith was ordered to pay $1,000 per month to Barbara until the youngest child reaches age 18. At that time, the payments are to decrease to $400 per month. What portion, if any, is deductible by Keith as qualifying alimony? a. $0 b. $400 c. $500 d. $600 e. $1,000 Review Question 27 MNO Corporation has the following items of income and expense: • Taxable income $330,000 • Federal income tax $100,000 • Dividends paid in current year $20,000 • Accumulated earnings and profits at the end of the preceding tax year $60,000 • Assume MNO is not a service corporation and cannot establish a valid business purpose for its excess accumulations. What is the amount of accumulated earnings tax payable? a. $0 b. $4,000 c. $24,000 d. $42,000 Review Question 28 This year, Ryan Nolan sold a classic automobile to his neighbor, Kevin Kennedy, on the following terms: • The price was $18,000, equal to the fair market value. • Ryan’s basis in the automobile was $9,000. • Kevin will make a $3,000 down payment this year. • Kevin will pay in six annual installments of $2,500 plus accrued interest. Kevin made the first installment payment this year. Ignoring interest income, what amount of gain will Ryan recognize for the current year? a. $1,250 b. $2,750 c. $9,000 d. $18,000 Review Question 29 During the current tax year, Jim Johnson purchased a warehouse for exclusive use in his manufacturing business. The cost of the property was $170,000, of which $40,000 was attributable to the land. Which of the following statements identify the proper treatment of the expenditure? I. A portion of the $130,000 attributable to the building may be deducted under Section 179. II. The $40,000 attributable to the land must be capitalized and may not be depreciated. III. The $130,000 attributable to the building must be capitalized and depreciated. IV. The entire $170,000 must be capitalized and depreciated. a. II only b. III only c. IV only d. I and II only e. II and III only Review Question 30 During the current tax year, Paul Hall has the following items from his four investments: Passive income from a publicly traded limited partnership $15,000 Passive loss from a publicly traded limited partnership $10,000 Passive income from a nonpublicly traded limited partnership Passive loss from a nonpublicly traded limited partnership $8,000 $16,000 What is the total amount, if any, of passive losses that may be deducted during the current year? a. $0 b. $8,000 c. $10,000 d. $16,000 e. $26,000 Review Question 31 During June of 2014, Judy Hall, a sole proprietor, purchased new equipment (7-year property) for her offices at a cost of $30,000. She also paid sales taxes and setup charges of $2,000. Assume she elects and qualifies for the maximum Section 179 deduction and uses MACRS. What is the maximum first-year deduction that Judy may claim with respect to the equipment? a. $25,000 b. $26,000 c. $30,000 d. $32,000 Review Question 32 Maxwell Gates is about to begin receiving payments from a deferred fixed annuity that he purchased many years ago. His investment in the annuity contract was $30,000. He is to receive $375 per month for the rest of his life. His current life expectancy, based on IRS tables, is 10 years. What amount, if any, of each monthly payment is excludible by Maxwell? a. $0 b. $125 c. $150 d. $250 e. $375 Review Question 33 Tom Bell has investment income (interest) of $8,000 in the current year. He paid $1,200 in commissions and had $7,000 of investment interest expense. His AGI is $35,000. What amount of investment interest expense may be deducted in the current year as an itemized deduction? a. $6,500 b. $6,800 c. $7,000 d. $7,500 e. $8,000 Review Question 34 In March of the current year, Susan Sharp sold her principal residence for a total price of $408,000. Susan purchased the home 14 years ago for $50,000. She made $20,000 of improvements to the house. She paid Realtor commissions of $23,000 on the sale. What amount, if any, must be recognized on the sale of Susan’s residence? a. $65,000 b. $85,000 c. $108,000 d. $315,000 Review Question 35 Which one of the following statements is accurate with respect to a like-kind exchange? a. Gain recognized is equal to the gain realized on the exchange plus the boot received. b. The amount of gain recognized will reduce the taxpayer’s basis in the property received. c. No gain will be recognized on the exchange of inventory. d. No gain will be recognized unless the taxpayer receives boot. Review Question 36 Assume a taxpayer is faced with a tax deficiency of $8,000, along with interest on the deficiency of $3,000. The entire deficiency resulted from intentional concealment of her income. What is the amount of the penalty? a. $1,600 b. $2,200 c. $6,000 d. $8,250 Review Question 37-40 For questions 37 through 40, match the expenditures with the descriptions. Use only one answer per blank. Each answer may be used more than once or not at all. a. deduction from AGI b. deduction for AGI c. no tax benefit d. tax credit 37. 38. 39. 40. interest paid on personal credit card child support paid gambling losses to extent of gambling winnings qualified historic rehabilitation expenditures Review Question 41-44 For questions 41 through 44, match the potential tax benefits with the rules or doctrines that may limit those benefits. Use only one answer per blank. Each answer may be used more than once or not at all. a. active participation standards b. substantial economic effect doctrine c. at-risk rules d. alternative minimum tax 41. 42. 43. 44. leverage tax credits special allocations accelerated cost recovery deductions Review Question 45 Francine and Marshall Wild have three children; Bill, Curt, and Rachel. For 2014: • Bill, age 11, has $1,800 of interest income • Curt, age 13, has $2,950 of salary from a part-time job • Rachel, age 19 and not a full-time student, has $5,100 of dividends and capital gains Whose income is subject to the kiddie tax? a. Bill only b. Curt only c. Bill and Rachel only d. none of the children Review Question 46 Matthew Brady, age 47, purchased a deferred annuity in January 1981 for $50,000. In the current year, when the surrender value was $125,000, Matthew received a nonperiodic payment of $75,000. The payment was prior to the annuity starting date. Which of the following statements correctly describe the income tax consequences of the distribution? a. $75,000 is tax free. b. $75,000 is taxable income. c. $50,000 is tax free, $25,000 is taxable. d. $50,000 is taxable, $25,000 is tax free. Review Question 47 Which one of the following is a characteristic of an S corporation? a. There may be no more than 25 shareholders. b. There may be no more than two classes of stock. c. A simple majority of shareholders must consent to the election. d. All shareholders must be U.S. citizens or residents or be one of certain qualifying trusts. Review Question 48 Frank Johnson operates a sole proprietorship from his apartment. His gross income for the current tax year is $24,000. Business expenses not associated with his home office total $22,000. Expenses associated with the home office total $2,750. How much of the home-office expense, if any, may Frank deduct for the current year? a. $0 b. $275 c. $2,000 d. $2,750 Review Question 49 During 2014, Bill Jeffers purchased several items of depreciable, tangible personalty, with a total cost of $175,000, for use in his sole proprietorship. Bill has taxable (earned) income from his business of $11,000 (without regard to the Section 179 expense). He also has wages from a part-time job of $5,000. What is the maximum amount of Section 179 expense that Bill may deduct in the current year? a. $11,000 b. $16,000 c. $25,000 d. $175,000 Review Question 50 Two years ago, Morton Andreson purchased equipment (seven-year property) for use in his business at a cost of $12,000. Cost recovery deductions total $7,392. The equipment was sold for $13,000. What is the amount of cost recovery deductions, if any, that must be recaptured? a. $0 b. $1,392 c. $4,608 d. $6,000 e. $7,392 Review Question 51 During the current year, Chuck Langston has Section 1231 gains totaling $14,000. He also has $3,000 of Section 1231 losses. Four years ago, Chuck reported a net Section 1231 loss of $7,000. These are the only two years in which Chuck has had Section 1231 gains or losses. What is the character of the current year’s Section 1231 gains and losses? a. $4,000 long-term capital gain b. $4,000 ordinary income, $7,000 long-term capital gain c. $7,000 ordinary income, $4,000 long-term capital gain d. $7,000 long-term capital gain e. $11,000 long-term capital gain Review Question 52 Phillip Hunter’s personal automobile was almost destroyed in an accident. The insurance company paid $6,000 on the claim. The auto’s fair market value before the accident was $16,000, and the value after the accident is $1,000. His basis in the automobile is $12,000. Phillip’s AGI is $42,500. What is the amount of Phillip’s deductible casualty loss? a. $1,650 b. $1,750 c. $6,000 d. $15,000 Review Question 53 Edward Coleman had the following capital transactions during the current year: • long-term capital gain: $3,200 • long-term capital loss: ($3,600) • short-term capital gain: $4,500 • short-term capital loss: ($3,400) Which one of the following describes the net capital gain or loss reportable by Edward for the current tax year? a. $700 net short-term capital gain b. $1,100 net short-term capital gain, $400 net long-term capital loss c. $900 net short-term capital gain, $200 net short-term capital loss d. $7,700 net capital gain, $7,000 net capital loss Review Question 54 Which one of the following is not a requirement to be met in order to deduct alimony payments? a. Payments must be in cash. b. The parties must not live together or file a joint tax return at the time of payment. c. The legal document or state law must require that payments will stop after the recipient spouse dies. d. Payments must be received by or for the benefit of the payee spouse. e. Payments must be equal in each year of the agreement. Review Question 55 Which of the following are considered advantages of direct participation programs? I. leverage II. tax conduit III. special allocations IV. substantial economic effect a. I only b. I and II only c. II and IV only d. I, II, and III only e. I, II, III, and IV Review Question 56 Melanie MacMillin owns and operates a retail appliance store with annual sales of approximately $800,000. The store also specializes in repairing appliances. Approximately 80% of her sales are with extended credit terms. What method of tax accounting may be used for Melanie’s business? I. the accrual method, because inventory is such a large component of the business II. the cash method, because it provides flexibility in the timing of income and expenses III. the hybrid method, because the business involves both inventory and service IV. the installment sale method, to spread the gain over a longer time frame a. I only b. III only c. I, II, and III only d. I, II, III, and IV Review Question 57 Which one of the following is a correct statement regarding the LIFO method of accounting for inventory? a. During periods of declining inventory prices, lower taxable income will result. b. During periods of declining inventory prices, the cost of goods sold (COGS) will be higher. c. During periods of increasing inventory prices, lower taxable income will result. Review Question 58 Kris Swenson anticipates adjusted gross income of $100,000 during the current tax year. She is considering making a gift of a coin collection to her church. Kris’s adjusted basis in this coin collection is $10,000. The collection has a current fair market value of $60,000. Kris has owned collection for six years. What is the maximum allowable charitable deduction Kris can receive for the current tax year? a. $10,000 b. $18,000 c. $30,000 d. $60,000 Review Question 59 Which one of the following is correct regarding the amount of estimated tax payments and withholding a taxpayer must pay to avoid an "underpayment of estimated tax" penalty? Assume that the prior year AGI was less than $150,000. a. the lesser of 80% of the current year's tax liability or 90% of the prior year's total tax b. the lesser of 90% of the current year's tax liability or 90% of the prior year's total tax c. the lesser of 90% of the current year's tax liability or 100% of the prior year's total tax d. the lesser of 90% of the current year's tax liability or 110% of the prior year's total tax Review Question 60 A Treasury regulation is a. a general administrative interpretation of statutory tax law. b. the source of statutory tax law. c. an administrative interpretation of statutory tax law that is generally related to specific circumstances of fact. d. an administrative interpretation of statutory tax law that is generally related to compliance issues. Review Question 61 Which one of the following is not a relief provision that applies to federal income taxation? a. exclusion for life insurance proceeds received b. Section 179 expense election c. child care credit d. additional standard deduction for the elderly or blind Review Question 62 Which of the following is not a step in the tax calculation process? a. determine gross income b. subtract adjustments to income from gross income to get adjusted gross income c. deduct the greater of itemized deductions or the standard deduction d. determine the personal exemption amount that can be deducted e. subtract exclusions from the adjusted gross income Review Question 63 Three years ago, John McDougal received a gift of 100 shares of common stock from his uncle. The fair market value of the stock on the date of the gift was $12 per share. His uncle had purchased the stock four years earlier at $5 per share. John sold this stock for $17 per share last week. What was John’s per share basis in the stock when it was sold? a. $5 b. $12 c. $17 Review Question 64 Mary is an active participant in an employersponsored retirement plan. Her AGI for 2014 is $72,000. She contributed $5,500 to an IRA this year. Which one of the following statements is correct regarding the deductibility of her IRA contribution? a. All of the contribution is deductible. b. A portion of the contribution is deductible. c. None of the contribution is deductible. Review Question 65 Duane and Charla Mock, married taxpayers filing jointly, have one dependent child. Their AGI for 2014 is $327,805. What is the amount of personal and dependency exemptions that the Mocks may deduct? a. $9,480 b. $9,717 c. $10,772 d. $11,850 CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning Final Review Questions End of Slides ©2014, College for Financial Planning, all rights reserved.