Tax Exam 2 Questions With Complete Solutions
3.8% tax imposed on lesser of: Correct Answers Net
investment income (e.g., interest, dividends, annuities, royalties,
rents, passive activity income, net gains from disposing of
property, less related allowed deductions) or
Excess of modified AGI over $250,000 (MFJ), $125,000 (MFS),
and $200,000 (all others).
a 3.8% tax is levied on net investment income for Correct
Answers higher-income taxpayers. The tax imposed is 3.8
percent of the lesser of (1) net investment income or (2) the
excess of modified adjusted gross income over $250,000 for
married joint filers and surviving spouses, $125,000 for married
separate filers, and $200,000 for other taxpayers. net investment
income equals the sum of:
Gross income from interest, dividends, annuities, royalties, and
rents (unless these items are derived in a trade or business to
which the net investment income tax does not apply). Income
from a trade or business that is a passive activity or a trade or
business of trading financial instruments or commodities. Net
gain from disposing of property (other than property held in a
trade or business in which the net investment income tax does
not apply).3
Less the allowable deductions that are allocable to items 1, 2,
and 3. Tax-exempt interest, veterans' benefits, excluded gain
from the sale of a principal residence, distributions from
qualified retirement plans, and any amounts subject to self-
employment tax are not subject to the net investment income
tax.
,A passive activity Correct Answers is a trade, business, or
rental activity in which the taxpayer does not materially
participate.
-Participants in rental real estate and limited partners are
generally considered to be passive participants.
-All other participants are considered to be passive unless their
involvement is "regular, continuous, and substantial."
-Seven factors for testing material participation
a rental real estate exception allows taxpayers to Correct
Answers deduct up to 25k of operating losses from rental real
estate annually provided they are actively involved in managing
the rental real estate and have adjusted gross income of less than
150k
a taxpayer's capital gains and losses for the yr are reported on
Correct Answers form 8949 and schedule D of form 1040
a taxpayer's operating losses from rental activities are, with
limited exceptions, deemed to be Correct Answers passive
regardless of the taxpayer's activity level
a taxpayer's ordinary losses from flow-through entities and other
trade or business activities may be classified as passive if
Correct Answers the taxpayer's involvement is not regular,
continuous, and substantial
a taxpayer's passive losses from an activity are limited to passive
income from all other sources until disposition of the activity. on
disposition, Correct Answers current and prior passive losses
,from an activity can be used but may be subject to the excess
business loss limitations
a taxpayer's share of operating losses from passive flow-through
entities and other trade or business activities are Correct
Answers deductible to the extent they clear the tax-basis, at
risk, and passive activity loss hurdles
accrued mkt discount on bonds and interest earned on US
savings bonds is Correct Answers taxed at sale or maturity,
while original issue discount bonds is taxed annually
after-tax rate of return on investment Correct Answers Depends
on when investment income is taxed
Relates to timing tax planning strategy
Depends on the rate at which the income is taxed
Relates to the conversion tax planning strategy
Alimony payments Correct Answers are deductible for AGI to
maintain equity if paid pursuant to a divorce or separation
agreement executed before 2019.
Although both are motivated primarily by profit, business
activities are distinguished from investment activities. Correct
Answers Trade or business activities require a relatively high
involvement or effort from the taxpayer whereas investment
activities do not.
Investment activities involve investing in property for
appreciation or for income payments.
, america opportunity credit provides Correct Answers a credit
for a percentage of the costs of the first 4 yrs of a student's
college education. 40% of the credit is refundable
American opportunity credit (formerly Hope scholarship credit)
Correct Answers credit for percentage of costs of first four
years of postsecondary (college) education
For eligible expenses (tuition, fees, and course material) and
institutions only
Applied per student (good for large families)
-Taxpayer, spouse, taxpayer's dependents
-Amounts paid by dependents treated as paid by taxpayer.
100% of first $2,000 of eligible expenses and 25% of next
$2,000 (maximum credit is $2,500)
Phase-out based on AGI (single=80k-90k agi. Mfj=160k-180k
agi)
40% of credit is refundable (subject to restrictions).
AMT is a tax based on an alternative more inclusive tax base
than regular taxable income. Correct Answers Meant to ensure
that taxpayers are paying some minimum level of tax
Who is most likely to pay it and why?
Taxpayers with large amounts of capital gains.
Assume Courtney filed her tax return on April 10 and included a
check with the return for $4,072 made payable to the United
States Treasury. The $4,072 consisted of her underpaid tax
liability of $4,000 and her $72 underpayment penalty. If
Courtney had waited until May 1 to file her return and pay her
taxes, what late filing and late payment penalties would she
owe? Correct Answers Her combined late filing penalty and
3.8% tax imposed on lesser of: Correct Answers Net
investment income (e.g., interest, dividends, annuities, royalties,
rents, passive activity income, net gains from disposing of
property, less related allowed deductions) or
Excess of modified AGI over $250,000 (MFJ), $125,000 (MFS),
and $200,000 (all others).
a 3.8% tax is levied on net investment income for Correct
Answers higher-income taxpayers. The tax imposed is 3.8
percent of the lesser of (1) net investment income or (2) the
excess of modified adjusted gross income over $250,000 for
married joint filers and surviving spouses, $125,000 for married
separate filers, and $200,000 for other taxpayers. net investment
income equals the sum of:
Gross income from interest, dividends, annuities, royalties, and
rents (unless these items are derived in a trade or business to
which the net investment income tax does not apply). Income
from a trade or business that is a passive activity or a trade or
business of trading financial instruments or commodities. Net
gain from disposing of property (other than property held in a
trade or business in which the net investment income tax does
not apply).3
Less the allowable deductions that are allocable to items 1, 2,
and 3. Tax-exempt interest, veterans' benefits, excluded gain
from the sale of a principal residence, distributions from
qualified retirement plans, and any amounts subject to self-
employment tax are not subject to the net investment income
tax.
,A passive activity Correct Answers is a trade, business, or
rental activity in which the taxpayer does not materially
participate.
-Participants in rental real estate and limited partners are
generally considered to be passive participants.
-All other participants are considered to be passive unless their
involvement is "regular, continuous, and substantial."
-Seven factors for testing material participation
a rental real estate exception allows taxpayers to Correct
Answers deduct up to 25k of operating losses from rental real
estate annually provided they are actively involved in managing
the rental real estate and have adjusted gross income of less than
150k
a taxpayer's capital gains and losses for the yr are reported on
Correct Answers form 8949 and schedule D of form 1040
a taxpayer's operating losses from rental activities are, with
limited exceptions, deemed to be Correct Answers passive
regardless of the taxpayer's activity level
a taxpayer's ordinary losses from flow-through entities and other
trade or business activities may be classified as passive if
Correct Answers the taxpayer's involvement is not regular,
continuous, and substantial
a taxpayer's passive losses from an activity are limited to passive
income from all other sources until disposition of the activity. on
disposition, Correct Answers current and prior passive losses
,from an activity can be used but may be subject to the excess
business loss limitations
a taxpayer's share of operating losses from passive flow-through
entities and other trade or business activities are Correct
Answers deductible to the extent they clear the tax-basis, at
risk, and passive activity loss hurdles
accrued mkt discount on bonds and interest earned on US
savings bonds is Correct Answers taxed at sale or maturity,
while original issue discount bonds is taxed annually
after-tax rate of return on investment Correct Answers Depends
on when investment income is taxed
Relates to timing tax planning strategy
Depends on the rate at which the income is taxed
Relates to the conversion tax planning strategy
Alimony payments Correct Answers are deductible for AGI to
maintain equity if paid pursuant to a divorce or separation
agreement executed before 2019.
Although both are motivated primarily by profit, business
activities are distinguished from investment activities. Correct
Answers Trade or business activities require a relatively high
involvement or effort from the taxpayer whereas investment
activities do not.
Investment activities involve investing in property for
appreciation or for income payments.
, america opportunity credit provides Correct Answers a credit
for a percentage of the costs of the first 4 yrs of a student's
college education. 40% of the credit is refundable
American opportunity credit (formerly Hope scholarship credit)
Correct Answers credit for percentage of costs of first four
years of postsecondary (college) education
For eligible expenses (tuition, fees, and course material) and
institutions only
Applied per student (good for large families)
-Taxpayer, spouse, taxpayer's dependents
-Amounts paid by dependents treated as paid by taxpayer.
100% of first $2,000 of eligible expenses and 25% of next
$2,000 (maximum credit is $2,500)
Phase-out based on AGI (single=80k-90k agi. Mfj=160k-180k
agi)
40% of credit is refundable (subject to restrictions).
AMT is a tax based on an alternative more inclusive tax base
than regular taxable income. Correct Answers Meant to ensure
that taxpayers are paying some minimum level of tax
Who is most likely to pay it and why?
Taxpayers with large amounts of capital gains.
Assume Courtney filed her tax return on April 10 and included a
check with the return for $4,072 made payable to the United
States Treasury. The $4,072 consisted of her underpaid tax
liability of $4,000 and her $72 underpayment penalty. If
Courtney had waited until May 1 to file her return and pay her
taxes, what late filing and late payment penalties would she
owe? Correct Answers Her combined late filing penalty and
