TAXATION Final Exam Questions With
Already Passed Solutions.
Average Rate - Answer Total Tax / Taxable Income
Effective Rate - Answer Total Tax / Total Income
Marginal Rate - Answer Change in Tax / Change in Taxable Income
Goal of Tax Planning - Answer To maximize after-tax wealth while also meeting non-tax goals
Gross Income - Answer Calculated from whatever source derived unless specifically excluded
by law
Adjusted Gross Income (AGI) - Answer Gross Income - For AGI Deductions
Taxable Income - Answer AGI - From AGI Deductions
Tax Liability - Answer Taxable Income x Tax Rates
Itemized Deductions - Answer Expenses you can subtract from adjusted gross income to
determine your taxable income. Includes medical expenses, taxes, interest, charitable
contributions, miscellaneous deductions, & qualified business deductions
Deductions for Medical Expenses - Answer Deductible for care, prevention, diagnosis, or
treatment only. Co-pay can be included in the potential deduction. Can deduct only if they
exceed 7.5% of AGI (Big medical expenses are deductible). Mileage expenses are 18 cents per
mile.
Deductions for Taxes - Answer Limited to $10,000 (MFJ). Can Deduct:
-State, local, foreign income taxes
-Real estate tax on personal/investment property
-Tax assessed on the value of the property
, -Needs to be less than $1,000,000 if prior to 2017 and $750,000 if later than 2017
Investment Loan interest is deductible
-take a loan from brokerage for investment purposes
-Limited to net investment income
Deductions for Charitable Contributions - Answer Must be made to qualified Charity
-Cash: deducted immediately
-Capital Gains Property: Stocks, bonds, land. If the charity uses it, deduct the FMV. If they don't
use it, you tax it on deductible basis. Can deduct up to
Deductions for Miscellaneous Losses - Answer For gambling, can only deduct losses equal to
your earnings
Qualified Business Income Deductions - Answer -Taxpayers who participate/receive income
from a sole proprietorship, partnership, or S Corp (flow-through entities) can deduct a portion
of their income
-Must be a qualified business- any business other than a specified service business
-Specified service business- business based on skills or reputation (lawyers, accountants,
financial planners, athletes)
-Does not include engineers and architects
Exceptions to Qualified Business Deductions - Answer -Cannot use the deduction unless the
specified service business with taxable income is less than $157,000 for Single or HoH filers or
less than $315,000 for MFJ
-Qualified businesses can deduct the lesser of either 20%, of qualified income or 20% excess of
taxable income over net capital gains
-Can only use US income, not foreign income
-Deduction cannot exceed 50% of W2 wages or 25% of W2 wages + 2.5% of unadjusted basis
(property price before depreciation) of qualified property. Qualified property is tangible,
depreciable property
Annuity Exclusion Ratio - Answer original investment $$ / expected value of the annuity
Expected value = annual income x expected return principle
The answer you get from the ratio is the amount EXCLUDED. To find the amount included, you
subtract the excluded from the annuity income
Already Passed Solutions.
Average Rate - Answer Total Tax / Taxable Income
Effective Rate - Answer Total Tax / Total Income
Marginal Rate - Answer Change in Tax / Change in Taxable Income
Goal of Tax Planning - Answer To maximize after-tax wealth while also meeting non-tax goals
Gross Income - Answer Calculated from whatever source derived unless specifically excluded
by law
Adjusted Gross Income (AGI) - Answer Gross Income - For AGI Deductions
Taxable Income - Answer AGI - From AGI Deductions
Tax Liability - Answer Taxable Income x Tax Rates
Itemized Deductions - Answer Expenses you can subtract from adjusted gross income to
determine your taxable income. Includes medical expenses, taxes, interest, charitable
contributions, miscellaneous deductions, & qualified business deductions
Deductions for Medical Expenses - Answer Deductible for care, prevention, diagnosis, or
treatment only. Co-pay can be included in the potential deduction. Can deduct only if they
exceed 7.5% of AGI (Big medical expenses are deductible). Mileage expenses are 18 cents per
mile.
Deductions for Taxes - Answer Limited to $10,000 (MFJ). Can Deduct:
-State, local, foreign income taxes
-Real estate tax on personal/investment property
-Tax assessed on the value of the property
, -Needs to be less than $1,000,000 if prior to 2017 and $750,000 if later than 2017
Investment Loan interest is deductible
-take a loan from brokerage for investment purposes
-Limited to net investment income
Deductions for Charitable Contributions - Answer Must be made to qualified Charity
-Cash: deducted immediately
-Capital Gains Property: Stocks, bonds, land. If the charity uses it, deduct the FMV. If they don't
use it, you tax it on deductible basis. Can deduct up to
Deductions for Miscellaneous Losses - Answer For gambling, can only deduct losses equal to
your earnings
Qualified Business Income Deductions - Answer -Taxpayers who participate/receive income
from a sole proprietorship, partnership, or S Corp (flow-through entities) can deduct a portion
of their income
-Must be a qualified business- any business other than a specified service business
-Specified service business- business based on skills or reputation (lawyers, accountants,
financial planners, athletes)
-Does not include engineers and architects
Exceptions to Qualified Business Deductions - Answer -Cannot use the deduction unless the
specified service business with taxable income is less than $157,000 for Single or HoH filers or
less than $315,000 for MFJ
-Qualified businesses can deduct the lesser of either 20%, of qualified income or 20% excess of
taxable income over net capital gains
-Can only use US income, not foreign income
-Deduction cannot exceed 50% of W2 wages or 25% of W2 wages + 2.5% of unadjusted basis
(property price before depreciation) of qualified property. Qualified property is tangible,
depreciable property
Annuity Exclusion Ratio - Answer original investment $$ / expected value of the annuity
Expected value = annual income x expected return principle
The answer you get from the ratio is the amount EXCLUDED. To find the amount included, you
subtract the excluded from the annuity income
