C237 Taxation I Practice Questions Guide With Complete Answers.

Define each component of the individual income tax formula - correct answer income from whatever source derived exclusions=any item of income that the tax laws says is not taxable gross income=all income received in cash, property, and services from whatever source derived and from which the taxpayer derives a direct economic benefit deductions for AGI=expense one would see on an income statement (wages, repairs, depreciation) and some nonbusiness deductions (alimony, moving expenses, IRA contributions) AGI=measure of taxable income that falls between gross income and taxable income deductions from AGI=itemized deductions, standard deductions, personal/dependent exemptions taxable income=for individuals, taxable income is adjusted gross income reduced by deductions from adjusted gross income tax rate (from table)=rate applied to taxable income to determine gross tax gross tax=tax due before tax credits or prepayments tax credits=amounts that can be deducted from the gross tax to arrive at net tax due or refund due prepayments net tax payable or refund due Calculate an individual's income tax when provided with monetary amounts for each component of the tax formula - correct answer income from whatever source derived - exclusions = gross income - deductions for AGI = AGI - deductions from AGI (exemptions & deductions) = taxable income x tax rate (from table) = gross tax - credits - prepayments = net tax payable or refund due Identify three conditions that must be met for income to be taxable - correct answer there must be economic benefit income must be realized (when earning process is complete) income must be recognized (special tax provisions allow for exclusion of some income items) Identify the primary accounting methods for individual tax purposes - correct answer cash method (income is reported in the year the taxpayer actually receives the cash not the year it was earned) accrual method (report income in the year it was earned) Define gross income in accordance with IRC Section 61(a) - correct answer General Definition.—Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: Compensation for services, including fees, commissions, fringe benefits, and similar items Gross income derived from business Gains derived from dealings in property Interest Rents Royalties Dividends Alimony and separate maintenance payments Annuities Income from life insurance and endowment contracts Pensions Income from discharge of indebtedness Distributive share of partnership gross income Income in respect of a decedent Income from an interest in an estate or trust Explain tax planning strategies individuals can use to minimize their tax liability - correct answer shifting income (from one family member in a higher tax bracket to one in a lower tax bracket) splitting income maximizing itemized deductions filing joint or separate returns Identify items that the IRS does not define as income. - correct answer unrealized income self-help income rental value of personal-use property gross selling price of property Identify various types of major statutory exclusions from gross income. - correct answer Gifts and inheritances (Sec. 102) Life insurance proceeds (Sec. 101) Public assistance payments Qualified adoption expenses (Sec. 137) Payments for personal physical sickness and injury (Sec. 104) Discharge of indebtedness during bankruptcy or insolvency (Sec. 108) Gain on sale of personal residence (Sec. 121) Partial exclusions for Social Security benefits (Sec. 86) Identify the difference between a realized gain (or loss) and a recognized gain (or loss) - correct answer realized gain (loss)=the amount realized from the sale of property is compared with the adjusted basis of that property; amount realized is the sum of FMV plus any debt received by the buyer recognized gain (loss)=amount of gain or loss reported on tax return (may not be recognized due to special tax provisions) Calculate property basis. - correct answer initial basis plus capital additions minus capital recoveries=adjusted basis Cost is the amount paid in cash or FMV of property received in exchange if gift - basis is usually the same as the donor's basis (gift tax paid by donor may increase basis) if inheritance - FMV on date of death or AVD (6 months after death) Differentiate between capital assets and non-capital assets. - correct answer Sec 1221 provides a list of properties that are not capital assets, so a capital asset is any property owned by a taxpayer other than types specifically listed in 1221. Items that are not capital assets: Inventory or property held primarily for sale to customers in the ordinary course of a trade or business. Property used in the trade or business and subject to the allowance for depreciation provided in Sec. 167 or real property used in a trade or business Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of property described in item 1. Supplies of a type regularly used or consumed in the ordinary course of a trade or business. Other assets including A letter, memorandum, or similar property held by a taxpayer for whom such property was prepared or produced. A copyright; a literary, musical, or artistic composition; a letter or memorandum; or similar property held by a taxpayer whose personal efforts created such property or whose basis in the property for determining a gain is determined by reference to the basis of such property in the hands of one who created the property or one for whom such property was prepared or produced. A U.S. government publication held by a taxpayer who receives the publication by any means other than a purchase at the price the publication is offered for sale to the public. A U.S. government publication held by a taxpayer whose basis in the property for determining a gain is determined by reference to the basis of such property in the hands of a taxpayer in item 5c (e.g., certain property received by gift). Calculate the tax treatment of capital gains and losses. - correct answer 1. calculate net capital gains (excess of net long-term capital gain over net short-term capital loss); calculate STCG, STCL, NTCL, NTCG to find Net Capital Gains if STCG exceeds total STCL for that year, the excess is defined as Net Short-Term Capital Gain (NSTCG); these may be offset to NLTCL) if LTCG exceed total LTCL for that year, the excess is deffined as Net Long-Term Capital Gain (NLTCG); Adjusted Net Capital Gain (ANCG) 4 types: collectible gains, qualified small business stock, unrecaptured Sec 1250 Gain; All other LTCG's ANCG tax rates 0%, 15% , or 20% depending on marginal rate for ordinary income and ANCG category. additional 3.8% medicare tax on investments (on lesser of net investment income or excess of modified AGI over $200,000 S and $250,000 Married) Determine the holding period for an asset when a sale or exchange occurs. - correct answer GIFT:the donors holding period is added to the donee's holding period, if donee's basis is the FMV, holding period starts on the day after the date of the gift; if takes donors basis holding period is included FROM DECEDENT:always deemed to be long-term LIKE KIND EXCHANGES:basis of property received is determined by taking into account the basis of the property exchanged; holding period of the property given up is tacked on to the holding period of the property received NONTAXABLE STOCK: includes the holding period of the stock owned by owner; if stock rights are exercised, the holding period for the stock purchased as of the date of exercise Distinguish between deductions for AGI and deductions from AGI. - correct answer Deductions fall into two categories for individual taxpayers: deductions for adjusted gross income and deductions from adjusted gross income. In general, deductions FOR adjusted gross income are expenses connected with a trade or business. For the most part, deductions FROM adjusted gross income are personal expenses that Congress has chosen to allow. This classification scheme, however, is not always followed. For example, alimony paid, which is not a business expense, is a deduction for adjusted gross income. Identify examples of business and investment expense deductions. - correct answer related to a profit-motivated activity of the taxpayer ordinary necessary reasonable in amount properly documented an expense of the taxpayer Explain the restrictions put on expense deductions. - correct answer capitalization vs. expense deduction election to deduct currently capitalization of deduction items expenses related to exempt income expenditures contrary to public policy bribes/kickbacks fines/penalties expenses relating to an illegal activities other specifically disallowed political contributions/lobbying expenses business investigation/preopening expenses Determine deductions from Adjusted Gross Income. - correct answer Identify the types of medical expenses that qualify as itemized deductions. - correct answer Describe the limits on the amount of qualified medical expenses that can be deducted. - correct answer Identify the types of taxes and interest that qualify as itemized deductions. - correct answer Identify examples of deductible charitable contributions. - correct answer Describe the limits on the amount of qualified charitable contributions that can be deducted. - correct answer