R1-1 Wrong Problem lesson Record
Federal taxation of Individuals R1
Note :
*) Interest income from U.S. obligations is generally taxable. Interest income on a federal tax refund is taxable, even though the federal refund itself is not taxed.
*) Self-Employment Tax calculation : not include Interest,dividen,rental,captial and other income, only include general(ordinary)income
*) Form 1040, Schedule 1, Part I, Additional Income:Gambling winning are included in taxable gross income and should be shown on line 8b of Schedule 1, Part I .
*) Itemized Dudctions
- Medical Expenses : over <7.5%AGI> Qualified medical expenses, minus insurance reimbursement = Qulified medical expenses "Paid" minus 7.5% of AGI = Deductible medical expenses.
- Taxes: [Limited $10,000] Real Estate and Personal property state and local Taxes ; Income Taxes(state,local and foreign Taxes),Sales Tax.
Nondeductible Taxes : Federal taxes including Social Security,Inheritance taxes for states, Business (on Schedule.C) and Rental property taxes (on Schedule E).
- Casulalty Losses (10% AGI floor and $100 floor to each and each disaster)
- Gambling Losses : Limited gambling winnings.
- Interest Expense : (Home mortgage:limited $750,000 principal and Investment:Limited net taxable investment income) interest expense, not deductible carryforward indefinitely.
- Charitable Contributions: Limite, Carryover 5 years.
to Public and private operating foundations : Cash 60% AGI, Ordinary income property 50%, Long-term Capital gain property 30%.
to private nonoperating foundations : Cash 30% AGI, Ordinary income property 30%, Long-term Capital gain property 20%.
1.
Which of the following taxpayers would not qualify for the filing status of head of household?
| A. | ||
| B. | ||
| C. | ||
| D. |
2.
The spouse of a married taxpayer died on January 15, Year 1. The taxpayer's qualifying child moved to live with grandparents in their home on August 30, Year 2. If the taxpayer did not remarry before the end of Year 2, then which filing status should the taxpayer choose for Year 2? (Note: QW qualifying child must live the whole year. )
| A. | ||
| B. | ||
| C. | ||
| D. |
3.
Anderson, a computer engineer, and spouse, who is unemployed, provide more than half of the support for their younger child, age 23, who is a full-time student and who earns $7,000. They also provide more than half of the support for their older child, age 33, who earns $2,000 during the year. Both children are U.S. citizens and live in their parents' home for most of the year. How many dependents meet qualifying relative or qualifying child rules for the Andersons?
| A. | ||
| B. | ||
| C. | ||
| D. |
Answer : The older child earning only $2,000( QR Income test $5,200 2025) , Anderson suppport more than 0ne-half support.
4.
Nicole and Andrew Harris contribute to more than half of the support of their three children, Travis, Luke, and John. Travis, age 20, worked full time at the local deli and earned $20,000. Luke, 18, is a part-time college student who earned $5,000 working as a resident assistant in the student dormitory where he lived half of the year. John, age 25, is an aspiring actor who lives at home with Nicole and Andrew. John earned $2,500 for the three commercials he starred in. Who qualifies as a dependent for Nicole and Andrew under either the rules of qualifying child or qualifying relative?
| A. | ||
| B. | ||
| C. | ||
| D. |
Answer : Travis age over 19 not full-time student , and income over $5,200 limited so Not QC or QR ; Luke less 19 ; John as QR income test is approvel and any test is approved . So Luke QC and John QR.
5. Fill tax return Status ：
Sam and his spouse divorced in December of the current year. Sam's 12-year-old son lived with his mother during the school year and lived with Sam in the summer. Sam provided most of their son's support. 【Single】
Tiana and her spouse divorced in January of the current year. Tiana's 9-year-old daughter lived with her during the school year and lived with her father in the summer. Her father provided most of their daughter's support. 【House of Hold】
Carey and Donald, became engaged in January of the current year. They lived together for the entire year and got married on January 2 of the following year. Carey and Donald each had taxable wages of $50,000 during the current year. Carey and Donald do not have children or other dependents. 【Single】
Edgar is unmarried and provides most of the support for his elderly aunt. Edgar paid more than half of the costs of his aunt's nursing home, where she lived the entire year. Edgar's aunt did not have any taxable income in the current year. 【Single】
Kevin's spouse, Louise, died five years ago. Louise and Kevin do not have children or other dependents. 【Single】
Quinn's spouse, Robert, died five years ago. Quinn paid most of the costs of maintaining a home where her 17-year-old daughter lived until May of the current year, when her daughter went to live with her grandmother.【Single】
Yvonne and her spouse married three years ago. In October of the current year they moved into separate homes. They obtained a legal separation in November of the current year. They do not have children or other dependents. 【Single】
Xavier is unmarried and provided most of the support for his 25-year-old girlfriend, who lived in Xavier's home for the entire year. Xavier's girlfriend did not have any taxable income in the current year. 【Single】
Note: Head of Household "HOH" the taxpayer maintains as his/her a household that ,for more than half the taxpable year,is the principal residence of a quanlifiing person,including a dependent child,parent or relative.
The individual is unmarried ,legally seperated, or married and has lived apart from his or her spouse for the last six months of the year as of the close of the taxable year.
The individual is not a"qualifiying surving spouse".
The individual is not a nonresident alien.
6.
John and Mary were divorced in 2017. The divorce decree (executed June 30, 2017) provides that John pay alimony of $10,000 per year, to be reduced by 20 percent on their child's 18th birthday. During the current year, the $10,000 was paid in the following way: 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 current year income tax return?
| A. | ||
| B. | ||
| C. | ||
| D. |
7.
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. |
Answer: Both I and II
8.
Klein, a master's degree candidate at Blair University, was awarded a $12,000 scholarship from Blair in Year 8. The scholarship was used to pay Klein's Year 8 university tuition and fees. Also in Year 8, Klein received $5,000 for teaching two courses at a nearby college. What amount is includable in Klein's Year 8 gross income?
Answer : $5,000 , Scholarships are nontaxable for degree-seeking students to the extent that the proceeds are spent on tuition, fees, books, and supplies. The $5,000 for teaching courses is taxable compensation for services delivered.
9.
Which one of the following will result in an accruable expense for an accrual-basis taxpayer?
| A. | ||
| B. | ||
| C. | ||
| D. |
10.
A cash basis taxpayer should report gross income: For the year in which income is either actually or constructively received, whether in cash or in property.
11.
Jensen reported the following items during the current year:
Fair rent value of a condominium owned by Jensen's employer | 1,400 |
Cash found in a desk purchased for $30 at a flea market | 400 |
Inheritance | 11,000 |
The employer allowed Jensen to use the condominium for free in recognition of outstanding achievement. Based on this information, what is Jensen's gross income for the year?
Answer : $1,800 Gross income includes employee achievement awards not in the form of tangible personal property. Tangible personal property does not include lodging. Gross income also includes treasure troves to the extent of its value in United States currency.
12.
In Year 2, Carson was hired as an employee of Barton Co. As part of his employment contract, Barton provided a company car for Carson's spouse, Mary, who is not employed. The value for the use of the automobile in Year 2 was $8,000. Carson does not use the automobile. Carson and Mary file separate individual income tax returns. What amounts, if any, should be reported as a taxable fringe benefit on Carson and Mary's Year 2 income tax returns for the personal use of the automobile?
| A. | ||
| B. | ||
| C. | ||
| D. |
13.
In a tax year where the taxpayer pays qualified education expenses, interest income on the redemption of qualified U.S. Series EE Bonds may be excluded from gross income. The exclusion is subject to a modified gross income limitation and a limit of aggregate bond proceeds in excess of qualified higher-education expenses. Which of the following is (are) true? Answer : Both 1and 2
1. | The exclusion applies for education expenses incurred by the taxpayer, the taxpayer's spouse, or any person whom the taxpayer may claim as a dependent for the year. |
2. | "Otherwise qualified higher-education expenses" must be reduced by qualified scholarships not includible in gross income. |
Explanation : Interest earned on Series EE bonds issued after 1989 may qualify for exclusion. One requirement is that the interest is used to pay tuition and fees for the taxpayer, spouse, or dependent enrolled in higher education. The interest exclusion is reduced by qualified scholarships that are exempt from tax and other nontaxable payments received for educational expenses (other than gifts and inheritances).
14.
Clark bought Series EE U.S. Savings Bonds after 1989. Redemption proceeds will be used for payment of college tuition for Clark's dependent child. One of the conditions that must be met for tax exemption of accumulated interest on these bonds is that the:
| A. | ||
| B. | ||
| C. | ||
| D. |
15.
Terry received an ordinary dividend of $5,000 and capital gain distributions of $7,000 from a mutual fund company. Terry took no cash out of the account, but reinvested all of the dividends and capital gain distributions. What is Terry's gross income? Answer : [$12,000]
16.
Robbe, a cash-basis single taxpayer, reported $50,000 of adjusted gross income last year and claimed itemized deductions of $13,550, which included $5,500 of state income taxes paid last year. Robbe's itemized deduction amount exceeded the standard deduction available to single taxpayers for last year by $1,150. 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?
| A. | ||
| B. | ||
| C. | ||
| D. |
Choice "B" is correct. Under the tax benefit rule, an itemized deduction recovered in a subsequent year is included in income in the year recovered. In this situation, the taxpayer only received a tax benefit of $1,150, the amount by which total itemized deductions exceeded the standard deduction in the prior year. Therefore only $1,150 of the $1,500 state tax refund is included in taxable income for the current year.
17.
Kurstie received a $800 state income tax refund this year. Kurstie deducted $3,000 of state income taxes paid in the prior year as part of her itemized deductions. Which of the following statements regarding the taxability of Kurstie’s refund is true?
| A. | ||
| B. | ||
| C. | ||
| D. |
18.
Which of the following should be included when determining adjusted gross income?
| A. | ||
| B. | ||
| C. | ||
| D. |
Rule: Payments for the support of a spouse (alimony) are income to the spouse receiving the payments and are deductible to arrive at adjusted gross income (AGI) by the spouse making the payments on any divorce agreement executed on or before December 31, 2018. Alimony paid according to a divorce agreement executed after December 31, 2018, is neither taxable to the recipient nor deductible by the payor. To be alimony:
Payments must be legally required pursuant to a written divorce or separation agreement,
Payments must be in cash or its equivalent.
Payments cannot extend beyond the death of the payee-spouse,
Payments cannot be made to members of the same household.
Payments must not be designated as anything other than alimony, and
The spouses may not file a joint tax return.
Opition C The rental value of parsonages (furnished by churches or synagogues) is excluded from the gross income of a minister and the minister's adjusted gross income.
19.
An individual received $50,000 during the current year pursuant to a divorce decree executed in 2015. 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?
| A. | ||
| B. | ||
| C. | ||
| D. |
20.
For a cash basis taxpayer, gain or loss on a year-end sale of listed stock arises on the:
| A. | ||
| B. | ||
| C. | ||
| D. |
21.
With regard to the inclusion of Social Security benefits in gross income for the tax year, which of the following statements is correct?
| A. | ||
| B. | ||
| C. | ||
| D. |
The maximum amount of taxable Social Security benefits is 85 percent of Social Security benefits received. The amount of Social Security benefits that is taxed depends on whether modified adjusted gross income (AGI plus tax-exempt interest plus 50 percent of the Social Security benefits) is greater than a threshold amount. For higher income taxpayers with modified AGI of more than $34,000 ($44,000 MFJ), up to 85 percent of Social Security benefits received for the year are taxable.
No Social Security benefits are taxable for lower income taxpayers with modified AGI of $25,000 or less ($32,000 MFJ). However, up to 50 percent of Social Security benefits are taxable for middle-income taxpayers, and up to 85 percent of Social Security benefits are taxable for higher income taxpayers.
22.
Daisy Dunn, a single calendar-year taxpayer with no dependents, died on March 1, Year 1. Daisy earned $20,000 from her job in Year 1 before she died and had interest income from bank accounts of $500. Her estate received another $1,500 of interest from her bank accounts in Year 1 after her death.
What is the due date for Daisy's Year 1 final federal income tax return?
| A. | ||
| B. | ||
| C. | ||
| D. |
Choice "D" is correct. The final income tax return of a decedent for the year of death is due at the same time the decedent's return would have been due if the taxpayer was still alive. For a calendar-year taxpayer, the final return is due on April 15 following the year of death, regardless of when during that year the death occurred. Daisy was a calendar-year taxpayer and died in Year 1, so her final income tax return for Year 1 is due by April 15, Year 2.
Note: Daisy's taxable gross income $20,500 , The $1,500 of interest income received after Daisy's death by her estate should be included on the estate's Year 1 federal income tax return.
23.
Which payment(s) is (are) included in a recipient's gross income? Anser : Both I and II
I. | Payment to a graduate assistant for a part-time teaching assignment at a university. Teaching is not a requirement toward obtaining the degree. |
II. | A grant to a Ph.D. candidate for his participation in a university-sponsored research project for the benefit of the university. |
24.
Sandy received $200 for serving as a juror in a state court proceeding. Include as Ordinary income (Generally, all items of income are included in gross income unless specifically excluded. Jury duty payments are compensation for services provided and therefore are includable in gross income.)
25.
The nondividend distribution of $5,525 reported on Form 1099-DIV is not taxable income. A nondividend distribution is a reduction of stock basis and is not taxable.
1099-INT
26.
Tom and Sharlene had the following items of income and expense during the taxable year:
Self-Employment Activity | |
Gross income | $35,000 |
Business license fees | 500 |
Marketing Expenses | 2,000 |
Salary paid to Sharlene | 10,000 |
| ------------------------------------------------------ | --------- |
Tom's wages from his Job | 67,000 |
Interest from money market | 1,500 |
Gain from sale of securities owned for 3 months | 15,000 |
What is Tom & Sharlene's gross income before adjustments?
| A. | ||
| B. | ||
| C. | ||
| D. |
Choice "B" is correct. Tom & Sharlene's gross income is calculated as follows:
Net self-employment income | 32,500 |
Tom's wages | 67,000 |
Interest | 1,500 |
Gain from sale | 15,000 |
Total gross Income | 116,000 |
Note: Sharlene's salary is not included as income as 100% of the net self-employment activity is taxable to her. Her salary is considered a draw and is not an allowable business deduction against the gross income of the self-employment activity.
27.
Beny Woody, attorney at law, is a sole proprietor and files Schedule C with his federal Form 1040. Which of the following is not a deductible expense on Schedule C?
| A. | ||
| B. | ||
| C. | ||
| D. |
28.
Kant, a cash-basis individual, owns and operates an office building. Kant received the following payments during the current year:
Current rents | 30,000 |
Advance rents for the next year | 10,000 |
Security deposits held in a segregated account | 5,000 |
Lease cancellation payments | 15,000 |
What amount is included in gross income?
| A. | ||
| B. | ||
| C. | ||
| D. |
Rule: The basic formula for determination of net rental income or loss follows:
Gross rental income |
Prepaid rental income |
Rent cancellation payments |
Improvements in lieu of rent |
(Rental expenses) |
Net rental income (loss) |
If security deposits are held separately and not available to be applied to last month's rent (as in a segregated account), they are a liability of the taxpayer and not included in income in the year received.
29.
Carson owned 40% of the outstanding stock of a C corporation. During a tax year, the corporation reported $400,000 in taxable income and distributed a total of $70,000 in cash dividends to its shareholders. Carson accurately reported $28,000 in gross income on Carson's individual tax return. If the corporation had been an S corporation and the distributions to the owners had been proportionate, how much income would Carson have reported on Carson's individual return?
| A. | ||
| B. | ||
| C. | ||
| D. |
Choice "C" is correct. In an S corporation, the income is passed through to the shareholder and included in taxable income whether or not it is actually distributed. Therefore, Carson will report 40% of the $400,000 taxable income, or $160,000. The $28,000 distribution will not affect the taxable income, but will reduce Carson's basis in the S Corporation stock.
30.
Aston and Becker are equal partners in AB Partnership. In the tax year, the ordinary income of the partnership is $20,000, and the partnership has a long-term capital gain of $12,000. Aston's basis in AB was $40,000, and he received distributions of $5,000 during the year. What is Aston's share of AB's ordinary income?
| A. | ||
| B. | ||
| C. | ||
| D. |
Explaination :
Aston's share of ordinary income is $10,000 (50 percent partnership percentage × $20,000 partnership ordinary income).
Ordinary income does not include long-term capital gains allocation $6,000.
31.
A taxpayer reported the following in a tax year:
| Salary | $122,000 |
| Capital gain dividends | 3,700 |
| Partnership short-term capital loss | (6,300) |
The taxpayer acquired the partnership interest during the year in exchange for a capital contribution of $2,750, and there were no additional items affecting the taxpayer's basis in the partnership. What is the taxpayer's adjusted gross income for the year?
| A. | ||
| B. | ||
| C. | ||
| D. |
Choice "D" is correct. The taxpayer's adjusted gross income (AGI) for the year is $122,950. The short-term capital loss (STCL) from the partnership can only be flowed through for deduction on the partner's individual income tax return to the extent of the partner's tax basis in the partnership interest. In this case, the partner's basis is the amount of his capital contribution of $2,750, so only $2,750 of the STCL is flowed through for deduction on his individual tax return. The remaining $3,550 loss ($6,300 − $2,750) is suspended until the partner's basis is reinstated in future years.
Individual taxpayers are allowed to deduct up to $3,000 of net capital losses each year, after netting all the capital gains and losses for the year together. The $2,750 STCL from the partnership is offset against the LTCG dividends of $3,700, so the taxpayer has a net LTCG for the year of $950.
| Salary | $122,000 | |
| Capital gain dividends (LTCG) | $3,700 | |
| STCL from partnership | (2,750) | |
| Net LTCG | 950 | |
| AGI | 122,950 |
32.
A real estate broker reported the following business income and expenses for the current year:
| Commission income | $100,000 |
| Expenses: | |
| Auto rentals | 2,000 |
| Referral fees to other brokers (legal under state law) | 20,000 |
| Referral fees to nonbrokers (illegal under state law) | 8,000 |
| Parking fines | 200 |
What amount should be reported as net profit on Schedule C, Profit or Loss from Business?
| A. | ||
| B. | ||
| C. | ||
| D. |
Expaination : The taxpayer may deduct ordinary and necessary business expenses, which include the auto rentals and referral fees to other brokers that are legal under state law. The illegal referral fees to nonbrokers and parking fines are nondeductible.
33.
Richard Norton is required to pay self-employment tax based on the net profits of his Schedule C business. For purposes of this task, assume that Richard had a net profit of $105,000 from the business for Year 3 and $1,000 of interest income from the business bank account. Also assume that the maximum earnings from self-employment for the Social Security tax are $176,100 for Year 3. Assume the following rates: 12.4 percent for Social Security and 2.9 percent for Medicare.
Complete the following items in the table below. Enter amounts as positive whole numbers. If the value is zero, enter a zero (0).
| A | B | |
|---|---|---|
| 1 | $105,000 | |
| 2 | $96,968 | |
| 3 | $14,836 | |
| 4 |
34.
Which of the following is not a deduction to arrive at adjusted gross income?
| A. | ||
| B. | ||
| C. | ||
| D. |
Choice "D" is correct. Mortgage interest is an itemized deduction, not a deduction to arrive at adjusted gross income.
Choice "A" is incorrect. Alimony payments (on divorce agreements finalized on or before December 31, 2018) are an adjustment, which is a deduction to arrive at adjusted gross income. Alimony paid on divorce settlements finalized after December 31, 2018, is not deductible.
Choice "B" is incorrect. Trade or business expenses are deducted on Schedule C. This is before the calculation of adjusted gross income. Accordingly, this is a deduction to arrive at adjusted gross income.
Choice "C" is incorrect. Capital losses in excess of capital gains are deducted (up to $3,000) on Form 1040 before the calculation of adjusted gross income. Accordingly, this is a deduction to arrive at adjusted gross income.
35.
In the current year, a self-employed taxpayer had gross income of $57,000. The taxpayer paid self-employment tax of $8,000, self-employed health insurance of $6,000, and $5,000 of alimony pursuant to divorce finalized in 2007. The taxpayer also contributed $2,000 to a traditional IRA. What is the taxpayer's adjusted gross income for the year?
Answer : $57,000-[(8,000x50%)+$6,000+$5,000+$$2,000]= $40,000
Self-employment tax 50%, Self-empoyment health insurance 100%, Dec 31,2017 alimnoy payment 100%,Traditional IRA 100%.
36.
In the current year, Mike and Jane Smith, both 35 years old, are filing a joint income tax return. Mike earned $40,000 in wages and was covered by his employer's qualified retirement plan. Jane was employed part-time and received $10,000 in wages. The couple had no other income. Each contributed $5,000 to a traditional IRA account. The allowable IRA deduction on their current year joint income tax return is:
| A. | ||
| B. | ||
| C. | ||
| D. |
In 2025, taxpayers can contribute and deduct up to $7,000 to a traditional IRA. For couples filing a joint return, where at least one spouse is an active participant in an employer-sponsored retirement plan, the deductible portion of a traditional IRA contribution is phased out. For a spouse who is an active participant, the AGI phase-out range in 2025 begins at $126,000. For a spouse who is not an active participant, but is married to someone who is, the AGI phase-out range in 2025 begins at $236,000. The Smiths' income of $50,000 (Mike $40,000 + Jane $10,000) is below both AGI phase-out thresholds, so they can each deduct the full $5,000 contributed, or $10,000 in total.
37.
In the current year, an unmarried individual with modified adjusted gross income of $25,000 paid $1,000 interest on a qualified education loan entered into on July 1. How may the individual treat the interest for income tax purposes?
| A. | ||
| B. | ||
| C. | ||
| D. |
The adjustment for education loan interest (an above-the-line deduction to arrive at AGI) is limited to the amount paid or $2,500 (whichever is lower), and all qualified education loan interest is allowed as part of the adjustment. Therefore, the total amount paid of $1,000 is an allowable adjustment.
38.
For the current year, Jennifer has self-employment net income of $50,000 before any SEP IRA deduction and no other earned income for the year. The total amount of self-employment tax related to Jennifer's earnings was $7,064. What is the maximum amount Jennifer may deduct for contributions to her SEP IRA for the year?
Explaination : Answer $9,294
The max. annual deductible amount for self-employed individuals to a SEP IRA is the lesser of :
$70,000 (2025) or 20% of net earnings. "Net earnings" is defined as net self-employment income minus 50% of self-employment (S/E) taxes.
| Net self-employment income | 50,000 | |
| 50% of self-employment taxes | (3,532) | [$7,064 × 50%] |
| Self-employment earnings before SEP IRA | 46,468 | |
| Times 20% | × .20 | |
Calculated SEP IRA Deduction | 9,294 |
The 20% of self-employment earnings is less than the maximum of $70,000 (2025), so the SEP IRA deduction is $9,294.
39.
(1) The Romans received a $200 state income tax refund of the prior year's tax. The Romans had deducted $2,000 of state income taxes in the prior year, all of which resulted in federal tax savings. Include current Income $200
(2) The Romans received a $1,000 federal tax refund of the prior year's tax. The Romans had paid $4,000 of federal income tax in the prior year. (Not including as current year income )
Explaination:
(1) $200 including the current year income , (2) $1,000 exclusive as current year income .
The $200 refund of state and local income taxes should be included in gross income. Refunds of state income tax are includable in gross income if during the prior year the taxpayer itemized deductions. The Romans itemized their deductions in the prior year, deducting $2,000 in state and local taxes. Because the Romans received a benefit from the entire $2,000 deduction, the entire $200 refund received during the current year will be included in their gross income. A federal income tax refund is not includable in gross income as there is no allowed deduction for federal income taxes paid.
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