Module 1 - Income Tax Fundamentals & Calculations|2023 LATEST UPDATE|GUARANTEED SUCCESS

Which of the following statements regarding the taxation of compensatory and punitive damages is CORRECT? I. Compensatory damages are generally subject to income tax. II. Punitive damages are generally received income tax-free. B) Neither I nor II Both statements are false. Susan's parents have gifted the children, Bill and Alice, age 9 and 12 respectively, various investments. Alice had investment income of $4,000 in 2021 and earned $1,000 babysitting. Bill's investments did not perform as well; he only earned $2,000, but his part-time job in Bobby's jewelry store paid him $6,000. Susan provides more than 50% of each child's support. Given their earnings, can Susan still list both children as dependents on her tax return this year? Yes, both children meet the requirement of a qualifying child under IRS regulations. Emilio sued a supplier two years ago for damages. The trial was last year, and the court awarded Emilio with a large cash award. Which of the following statements regarding the taxation of damages is CORRECT? I. Compensatory damages are generally income tax-free. II. Punitive damages are generally taxable. B) Both I and II Both statements are correct. Which of the following is least likely to qualify as a valid medical expense deduction? D) A medical expense that is reimbursed by insurance Qualifying medical expenses include those expended by the taxpayer, the taxpayer's spouse, and any dependents. To be deductible, the expenses must not be reimbursed by insurance coverage. Mary is an active participant in an employer-sponsored retirement plan, but her husband, Frank, is not. Their combined adjusted gross income (AGI) is $210,000 for 2021. They each contributed $6,000 to an IRA for the current year. Which of the following statements is CORRECT regarding the deductibility of the IRA? B) Neither Mary nor Frank may deduct the IRA contributions. If Parker was paid $7,200 in 2021 for working in a jewelry store and this is his only income for the year, what are the tax effects for him? B) Because of Parker's standard deduction for earned income, he will pay no taxes on the income this year. Which one of the following is the best description of itemized deductions? C) Personal expenses deductible from adjusted gross income Which one of the following items is NOT included in the computation of total income on the Form 1040? B) Penalty on early withdrawal of savings If Stewart and Hope file married filing separately and Hope has gross income of $300,000 and taxable income of $267,000, what is her marginal tax rate? Refer to the 2021 tax table provided in your course references. A) 35.00% If Rachel files single with gross income of $90,000 and taxable income of $76,000, what is her marginal tax rate based on the following tax information? A) 22.00% Which of the following is NOT a step in the tax calculation process? D) Subtract adjustments to income and standard or itemized deduction(s) then multiply by total income to get federal taxable income. Jack was divorced on March 30 of the current year and has not remarried as of the last day of the tax year. He lives alone in his condo. His ex-wife, Mary, has custody of their son Jack Jr. What is Jack's filing status for the current tax year? A) Single If Maria and Herman file married filing jointly, with gross income of $330,000 and taxable income of $303,000, what is their marginal tax rate? Refer to the 2021 tax table provided in your course references. A) 24.00% Which of the following are deductions against adjusted gross income (AGI) to arrive at taxable income? I. Additional standard deduction II. Itemized deductions III. Exclusions IV. Tax credits A) I and II Additional standard deduction & Itemized deductions Mary's husband died in March of the current year. Which filing status should Mary use in the current year? B) Married filing jointly If Leslie and Armando file married filing jointly, with gross income of $176,000 and taxable income of $158,000, what is their effective tax rate? Refer to the 2021 tax table provided in your course references. A) 16.62% Which of these statements is CORRECT regarding the credit for adoption expenses? A) All of these. A tax credit of $14,440 of qualified adoption expenses for each eligible adoptee is available in 2021. An eligible adoptee is an adoptee who is not yet age 18 at the time of adoption or who is physically or mentally incapable of caring for herself. The adoption credit is nonrefundable. Which one of the following steps occur in the tax calculation process? B) Tax liability minus tax credits equals refund or tax owed Which of the following statements regarding adjusted gross income (AGI) is CORRECT? C) It may result in a phaseout of certain deductions. Which one of the following reflects the CORRECT sequence of steps in the tax calculation process? A) AGI minus standard or itemized deduction(s) equals federal taxable income. Ron Phillips, age 43, and Sandy Phillips, age 41, are married with 2 children, Michael, age 12, and Victoria, age 8, who has been blind since her birth. Ron is an architect and general partner with XYZ partnership. Sandy is self-employed as an attorney and works out of a home office. Her home office is exclusively and regularly used for business, and the home office is her principal place of business. Their information for the tax year 2021 is as follows: Adjusted gross income $217,300 Itemized deductions (including qualified residential mortgage interest, taxes paid, and charitable contributions) $33,000 Early in the current year, Sandy's father died. Sandy is the sole beneficiary of her father's entire estate. The estate is presently in probate. Sandy's mother, Lisa, age 68, has moved in with them but provides her own support. She was married to Sandy's father when he died earlier this year. This is Ron's second marriage. He makes monthly support payments to his former wife and his daughter. Because both Ron and Sandy are considered self-employed, they make quarterly estimated tax payments each year to cover both their income tax and self-employment tax obligations. Based on the information provided in the case scenario, which of the following statements regarding Lisa's income tax filing status for 2021 is CORRECT? D) Lisa may file married filing jointly for 2021. If Jason files single with gross income of $180,000 and taxable income of $153,000, what is his effective tax rate? Refer to the 2021 tax table provided in your course references. D) 20.01% Carol, age 50, received a salary of $35,000 this year. In addition, she received a gift of $1,000 from her brother. She also made a contribution of $3,500 to her traditional IRA. She files as single, and in addition to her itemized deductions of $4,500, she had unreimbursed medical expenses from major surgery on her knees of $7,600. Which of the following best defines Carol's taxable income? B) Adjusted gross income less the greater of the standard deduction or the amount of itemized deductions All of the following statements regarding above-the-line deductions are CORRECT except A) these deductions are subtracted from adjusted gross income in determining taxable income. Claudia makes $5,000 a month, and has a disability policy that pays 60% of her salary. Her employer pays 60% of the premium and she pays the remaining 40%. She needed surgery last year and received disability benefits for 60 days. What amount of taxable disability benefits did she receive? B) $3,600 Todd is employed at Wow Industries as an accountant. His employer deducted $8,500 from his paycheck in 2021 for federal income taxes. Todd also has a side practice for which he paid another $4,300 to the IRS in estimated federal income taxes for 2021. When he filed his return, he had a tax liability of $11,600 before a child and dependent care credit of $400. Which of the following statements is CORRECT? D) Todd has an income tax refund of $1,600 for 2021. Cindy is the sole proprietor of Pickleball Court Rentals. She has the following items that affect her income tax return: Gross sales$100,000Operating expenses$46,000Capital loss$6,000Health insurance premiums$1,400Employer's share of self-employment taxes paid$3,815Mortgage interest on her home$4,500Traditional IRA contribution$5,000 What is Cindy's AGI? B) $40,785 Which one of the following is the best description of an exclusion? B) An exclusion is an item that is not taxable and is not included as income on the Form 1040. Larry and Pam West are married and will file a joint return for the 2021 tax year. Pam is an active participant in a company-maintained retirement plan, but Larry is not. They have provided you with the following information. Pam's divorce was finalized in 2017. Larry's salary$70,000Larry's IRA contribution$6,000Pam's salary$65,000Pam's IRA contribution$6,000Alimony payments to Pam's ex-husband$9,600Itemized deductions$15,000 Based on the information given, what is the Wests' taxable income for the 2021 tax year? C) $94,300 Which of the following is an incentive provision as it relates to federal income taxation? C) Residential solar energy credits Sally Franklin has AGI of $300,000. In addition, she currently has passive income of $150,000 and passive losses of $175,000—$150,000 of which she uses to offset the passive income and $25,000 of which is subject to disallowance. Which one of the following investments has the greatest potential for reducing Sally's tax liability? C) A working interest in an oil and gas general partnership Amanda Elder, a single taxpayer, has the following itemized deductions: Home mortgage interest (first mortgage)$10,925State income taxes$17,000Property taxes$6,000Charitable contributions$3,000Gambling losses$3,055 Amanda's AGI for 2021 is $376,800. Included in the AGI are gambling winnings of $1,500. What is the amount of allowable itemized deductions? D) $25,425 Which one of the following is not a social objective of the federal taxation system? A) Revenue raising Sharon and Oliver South are a married couple filing jointly, with one dependent child. For the 2021 tax year, they have the following items relevant to their income tax situation: Wages$100,000Sole proprietorship net income$10,000Alimony paid to Oliver's former spouse$18,000Child support paid$12,000IRA contribution$6,000Self-employment tax liability$1,413Net capital loss$4,200Child tax credit$2,000Unreimbursed medical expenses$17,000 Oliver's divorce decree was finalized in 2015. Neither spouse is an active participant in a company-maintained retirement plan. What is the amount of the Souths' AGI? D) $82,293 Personal expenses deductible from adjusted gross income most accurately describes which one of the following? C) Itemized deductions Which one of the following can be a qualifying relative? D) Only related persons living in the taxpayer's principal home during the year, and the taxpayer provided at least 50% of their income A qualifying relative is an individual who is not a qualifying child and bears a specified relationship to the taxpayer such as a parent, in-law, niece, nephew, aunt or uncle, or who is unrelated to the taxpayer but resided in the taxpayer's principal home during the tax year. The taxpayer must have provided more than half of the person's support for the tax year. The effective tax rate is obtained by A) dividing the calculated tax by taxable income. If Rachel files single with gross income of $90,000 and taxable income of $76,000, what is her effective tax rate? Refer to the 2021 tax table provided in your course references. D) 16.41% Sam Steelman, a 60-year-old single taxpayer, has wage income of $75,000 for the current tax year. Sam is an active participant in a company-maintained retirement plan. In addition, he has the following: Long-term capital gains$5,000Home mortgage interest$7,200Short-term capital losses$1,500Real estate tax paid$2,130Child support paid to ex-wife$5,200Charitable contributions (property)$2,335Gambling winnings$3,100Total medical expenses$5,512Gambling losses$5,100State and local income taxes$2,156Interest and dividends$2,400Interest on personal automobile note$1,120Schedule C net income$3,000Unreimbursed employee business expenses$2,558Self-employment tax liability$424IRA contribution$7,000 What is the amount of Sam's total income as reported on the Form 1040 for 2021? C) $87,000 Paul, who is covered by a qualified retirement plan, age 30 and single, provided the following information for his 2021 income tax return: Salary $36,000 Contribution to Roth IRA $3,000 Total itemized deductions $13,700 Using only this information and no standard deduction, what is Paul's taxable income for 2021? D) $22,300 Paul's taxable income for 2021 is $22,300, calculated as follows: $36,000 salary − $13,700 itemized deductions. All Roth IRA contributions are nondeductible, regardless of the amount of taxpayer income.