Individual Taxation question

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Business Finance

University of Maryland University College


This taxation question includes 20 Multichoice questions and 5 other questions on individual taxation that requires workings to be shown.

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ACCT 613 Mid-Term Exam Individual Tax Issues Type Name _____________________________ 1)Carin, a widow, elected to receive the proceeds of a $150,000 life insurance policy on the life of her deceased husband in 10 installments of $17,500 each. Her husband had paid premiums of $60,000 on the policy. In the first year, Carin collected $17,500 from the insurance company. She must include in gross income: a. $0. b. $2,500. c. $10,000. d. $25,000. e. None of these. 2)Stuart owns 300 shares of Turquoise Corporation stock and 2,000 shares of Blue Corporation stock. During the year, Stuart received 150 shares of Turquoise as a result of a 1-for-2 stock split. The value of the shares received was $4,800. Stuart also received 100 shares of Blue Corporation stock as a result of a 5% stock dividend. Stuart did not have the option of receiving cash from Blue. The additional shares he received had a value of $7,200. Stuart’s gross income from the receipt of the additional Turquoise and Blue shares is: a. $0. b. $4,800. c. $7,200. d. $12,000. e. None of these. 3)Harold bought land from Jewel for $150,000. Harold paid $50,000 cash and gave Jewel an 8% note for $100,000. The note was to be paid over a five-year period. When the balance on the note was $80,000, Jewel began having financial 1 difficulties. To accelerate her cash inflows, Jewel agreed to accept $60,000 cash from Harold in final payment of the note principal. a. Harold must recognize $20,000 ($80,000 – $60,000) of gross income. b. Harold is not required to recognize gross income but must reduce his cost basis in the land to $130,000. c. Harold is not required to recognize gross income since he paid the debt before it was due. d. Jewel must recognize gross income of $20,000 ($80,000 – $60,000) from discharge of the debt. e. None of these. 4)A U.S. citizen worked in a foreign country for the period July 1, 2018 through August 1, 2019. Her salary was $10,000 per month. Also, in 2018 she received $5,000 in dividends from foreign corporations (not qualified dividends). No dividends were received in 2019. Which of the following is correct? a. The taxpayer cannot exclude any of the income because she was not present in the foreign country more than 330 days in either 2018 or 2019. b. The taxpayer can exclude a portion of the salary from U.S. gross income in 2018 and 2019, and all of the dividend income. c. The taxpayer can exclude from U.S. gross income $60,000 salary in 2018, but in 2019 she will exceed the 12-month limitation and, therefore, all of the 2019 compensation must be included in gross income. All of the dividends must be included in 2018 gross income. d. The taxpayer must include the dividend income of $5,000 in 2018 gross income, but she can exclude a portion of the compensation income from U.S. gross income in 2018 and 2019. e. None of these. 5) Grape Corporation purchased a machine in December of the current year. This was the only asset purchased during the current year. The machine was placed in service in January of the following year. No assets were purchased in the following year. Grape's cost recovery would begin: a. In the current year using a mid-quarter convention. 2 b. In the current year using a half-year convention. c. In the following year using a mid-quarter convention. d. In the following year using a half-year convention. 6)Hazel purchased a new business asset (five-year asset) on September 30, 2019, at a cost of $100,000. On October 4, 2019, she placed the asset in service. This was the only asset she placed in service in 2019. Hazel did not elect § 179 or additional first-year depreciation. On August 20, 2020, Hazel sold the asset. Determine the cost recovery for 2020 for the asset. a. $14,250 b. $19,000 c. $23,750 d. $38,000 7)On June 1, 2018, Irene places in service a new automobile that cost $21,000. The car is used 70% for business and 30% for personal use. (Assume this percentage is maintained for the life of the car.) She does not take additional first-year depreciation. Determine the cost recovery deduction for 2019. a. $3,290 b. $3,570 c. $4,704 d. $10,000 8)White Company acquires a new machine (seven-year property) on January 10, 2019, at a cost of $620,000. White makes the election to expense the maximum amount under § 179 and wants to take any additional first-year depreciation allowed. No election is made to use the straight-line method. Determine the total deductions in calculating taxable income related to the machine for 2019 assuming White has taxable income of $800,000. a. $88,598 b. $301,159 3 c. $568,574 d. $620,000 9)The § 222 deduction for tuition and related expenses is available: a. Regardless of the amount of a taxpayer’s MAGI. b. To cover room and board expenses to attend college. c. To a married taxpayer filing a separate return. d. Even if a taxpayer does claim the standard deduction. e. None of these. 10)Which of the following miscellaneous expenses is deductible? a. Unreimbursed employee business expenses. b. Job-hunting expenses. c. Union dues. d. Losses from Ponzi-type investment schemes. e. All of these expenses are miscellaneous itemized deductions. 11)Tammy has $200,000 of QBI from her neighborhood clothing store (a sole proprietorship). Her proprietorship paid $30,000 in W-2 wages and has $20,000 of qualified property. Tammy’s spouse earned $50,000 of wages as an employee, they earned $20,000 of interest income during the year, and they will be filing jointly. What is their QBI deduction for 2019? a. $-0-. b. $40,000. c. $50,000. d. $54,000. e. None of these. 12)Refundable tax credits include the: 4 a. Foreign tax credit. b. Tax credit for rehabilitation expenses. c. Credit for certain retirement plan contributions. d. Earned income credit. e. None of these credits are refundable. 13)Hiram is a computer engineer and, while unemployed, invents a switching device for computer networks. He patents the device but does not reduce it to practice. Hiram has a zero-tax basis for the patent. In consideration of $800,000 plus a $1 royalty per device sold, Hiram assigns the patent to a computer manufacturing company. He assigns all substantial rights in the patent. Which of the following is correct? a. Hiram automatically has long-term capital gain from the lump-sum payment, but not from the royalty payments. b. Hiram automatically has long-term capital gain from the royalty payments but not from the lump-sum payment. c. Hiram automatically has long-term capital gain from both the lump-sum payment and the royalty payments. d. Hiram does not have automatic long-term capital gain from either the lumpsum payment or the royalty payments. e. None of these. 14)On June 10, 2018, Ebon, Inc. acquired an office building as a result of a likekind exchange. Ebon had given up a factory building that it had owned for 26 months as part of the like-kind exchange. Which of the following statements is correct? a. The holding period of the factory building includes the holding period of the office building. b. The holding period of the office building starts on June 11, 2018. c. The holding period of the office building starts on June 10, 2018. d. The holding period of the office building includes the holding period of the factory building. e. None of these. 5 15)In 2019, Mark has $18,000 short-term capital loss, $7,000 28% gain, and $6,000 0%/15%/20% gain. Which of the following statements is correct? a. Mark has a $5,000 capital loss deduction. b. Mark has a $3,000 capital loss deduction. c. Mark has a $13,000 net capital gain. d. Mark has a $5,000 net capital gain. e. Mark has a $18,000 net capital loss. 16)The tax concept and economic concept of income are in agreement on which of the following: a. The fair rental value of an owner-occupied home should be included in income. b. The increase in value of assets held for the entire year should be included in income for the year. c. Rent income for 2020 collected in 2019 is income for 2019. d. All of these. 17)Debbie is age 67 and unmarried and her only sources of income are $200,000 in taxable interest and $20,000 of Social Security benefits. Debbie’s adjusted gross income for the year is: a. $220,000. b. $217,000. c. $203,000. d. $200,000. e. None of these. 18)Which of the following items would be an itemized deduction on Schedule A of Form 1040? 6 a. Professional dues paid by an accountant (employed by Ford Motor Co.) to the National Association of Accountants. b. Gambling losses to the extent of gambling winnings. c. Job-hunting costs. d. Subscription to the Wall Street Journal. e. None of these. 19)Kyle, whose wife died in December 2016, filed a joint tax return for 2016. He did not remarry but has continued to maintain his home in which his two dependent children live. What is Kyle’s filing status in 2019? a. Head of household b. Surviving spouse c. Single d. Married filing separately e. None of these 20)Last year, Lucy purchased a $100,000 account receivable for $90,000. During the current year, Lucy collected $97,000 on the account. What are the tax consequences to Lucy associated with the collection of the account receivable? No subsequent collections are expected. a. $0 b. $2,000 gain c. $3,000 loss d. $13,000 loss e. None of these. 7 PROBLEMS – PLEASE SHOW YOUR WORK! 1. June is a cash basis taxpayer, and is a fashion and makeup consultant in a high fashion company, Curlylocks, Inc. She earned a salary of $60,000. She also was provided a disability income protection policy for which Curlylocks paid a $1,500 premium for June's insurance. The company also provided health insurance for her which cost the company $15,000, and long term care insurance for her which Curlylocks paid a $1,000 premium. Her salary would have been $65,000, but she was paying off her school loan at $5,000/year and Curlylocks agreed to reduce her salary by $5,000 and to pay $5,000/year amount toward her school loan for her. The long-term care insurance policy was provided for all employees, to help to pay for future nursing home costs if needed, the health care and disability insurance were likewise provided for all. While her salary was $60,000, Curlylocks Inc. had a 401(k) plan and June voluntarily put $3,000 of her $60,000 salary, 5% of it, into her 401(k). Her employer Curlylocks matched that with a $3,000 contribution of its own money into her 401(k). What is June's taxable income from Curlylocks this year? 2. Lynn and Bruce own a vacation cottage on the lakeside. They rented the cottage last year for 60 days, and used it for themselves and their family for 30 days. They had the following income and expenses for the cottage. Rental Income $22,000 Real Estate Taxes $6,000 Mortgage Interest Paid $9,000 Mortgage Principal Repaid $5,000 Electric, Phone, gas $4,000 8 Repairs $1,000 Insurance $1,000 Depreciation $8,000 Homeowners Assn. Fees $1,000 For real estate taxes and mortgage interest, there are two alternative approaches on how to allocate these, the "tax court approach" and the "IRS approach". Using the "IRS approach", what are the total expenses that they can deduct related to the lakeside cottage rental? Show your calculations! 3. Dana, who around the city is generally referred to simply as "The Dane", runs an illegal gambling joint. Here are her income and expenses. Calculate her net taxable income from the gambling joint. Gross Income/Sales Expenses Rent Maintenance and Cleaning Bribes to police and inspectors Supplies Food and drink costs Accounting and Legal Fines and penalties paid Depreciation $300,000 $30,000 $6,000 $20,000 $4,000 $15,000 $10,000 $8,000 $10,000 9 4. Gabe and Dana are married and file jointly. For 2019, Gabe earned $150,000 and Dana earned $20,000 working part time as a party planner. They had two young children, a 4-year old son, Mike, and a 6-year old daughter, Chrissy. In order to work, they paid the following for day care to have their children watched and cared for: Best Beginning Day Care $4,000 Bay Child Care & 2,000 Housekeeping Mrs. Goetz (Dana's’s 1,000 mother) How much was their child and dependent care tax credit for 2019? 5. BeBe is an attorney. She has a regular job for a large nonprofit agency for which she was paid $100,000 salary for 2019, which was subject to FICA (social security) withholding. She also worked on the side in a legal consulting practice, self-employed, and earned $30,000 net income from this. How much is her selfemployment tax for 2019? 10
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