Question 1
Assume a tax system with a tax of $1,000 on taxable income of $10,000 and a $1,500 tax on taxable income of $20,000. Is the tax rate system:
a. Progressive
b. Proportional
c. Regressive
d. None of the above
Question 2
Amy makes the following gifts in the year 2016:
$25,000 cash gift to her husband:
a. $25,000 is taxable because you cannot gift money to your spouse
b. Only $11,000 is taxed due to the $14,000 annual gift exclusion
c. None is taxable due to $14,000 annual gift exclusion and $11,000 marital deduction
d. None is taxable as money transferred to a spouse is never subject to the gift tax
Question 3
Amy makes the following gifts in the year 2016:
$15,000 cash contribution to the Denver Rescue Mission
a. $15,000 is taxable as the Denver Rescue Mission is not a charity
b. $15,000 is non-taxable as the Denver Rescue Mission is a charity
c. The $15,000 donation will be limited to 30% of AGI
d. The $15,000 is a FOR AGI deduction
Question 4
Amy makes the following gifts in the year 2016:
Gift of a personal automobile valued at $40,000 to her adult son
a. $40,000 is taxable because you cannot gift money to your child
b. Only $26,000 is taxed due to the $14,000 annual gift exclusion
c. None is taxable due to $14,000 annual gift exclusion and $26,000 marital deduction
d. None is taxable s money transferred to a child is never taxable
Question 5
Determine Betty's adjusted gross income for the year given the following information:
Salary: $78,000
Child care credit: $1,000
Personal and Dependency Exemptions: $12,000
Investment interest: $4,000
IRA contribution: $5,500
Municipal bond interest: $500
Federal income taxes withheld: $6,000
Itemized Deductions: $15,300
a. $82,500
b. $82,000
c. $76,500
d. $77,000
Question 6
Determine Betty's taxable income for the year given the following information:
Salary: $78,000
Child care credit: $1,000
Personal and Dependency Exemptions: $12,000
Investment interest: $4,000
IRA contribution: $5,500
Municipal bond interest: $500
Federal income taxes withheld: $6,000
Itemized Deductions: $15,300
a. $55,200
b. $54,700
c. $49,700
d. $49,200
Question 7
In 2016, Joan is single and a homeowner who incurs property taxes on her home of $2,000, makes charitable contributions of $500, and pays mortgage interest of $6,000. Joan's adjusted gross income is $32,000. What is her taxable income?
a. $19,450
b. $23,500
c. $32,000
d. $25,700
Question 8
Remember the facts from the last question:
In 2016, Joan is single and a homeowner who incurs property taxes on her home of $2,000, makes charitable contributions of $500, and pays mortgage interest of $6,000. Joan's adjusted gross income is $32,000.
Assume the same facts as above, but Joan is not a homeowner, so she has no property tax or mortgage interest. Instead, she pays rent of $800 per month for her apartment. What is her taxable income now?
a. $21,900
b. $17,850
c. $25,700
d. $21,650
Question 9
Jesse supports three people, all of whom have gross income of less than $4,050; Tina, an unrelated child who lives with him; his cousin Judy, who lives in another state; and his daughter Vicki, who lives in her own home. Assume all other tests not mentioned are met. How many dependency exemptions, if any, may Jesse claim?
a. 0
b. 1
c. 2
d. 3
Question 10
Amy and Chris have three children and are unclear whether they can claim their children as dependents. Assume Amy and Chris provide all the support not provided by the children. Information on the children is as follows:
Peter, age 25, who served in the military immediately after high school, is a full-time college senior. He worked part-time earning $2,200 and provided 20% of his support.
a. Peter is a qualifying child dependent because he is in college full-time
b. Peter is not a dependent because he fails the age test
c. Peter is a qualifying relative dependent because he meets the qualifying tests
d. Peter is not a qualifying relative because he fails the gross income test
Question 11
Amy and Chris have three children and are unclear whether they can claim their children as dependents. Assume Amy and Chris provide all the support not provided by the children. Information on the children is as follows:
Mark, age 22, graduated from college in May (he was a full-time student for five months of the year), and accepted a job in June. He lived with his parents for the entire year, earned $28,000, and provided 70% of his support.
a. Mark is a dependent child because he was a full-time student, meets the age test and meets the residency test
b. Mark is a dependent relative because he meets the residency test
c. Mark is not a dependent relative because he fails the age test
d. Mark is not a dependent because he fails both the gross income and support tests.
Question 12
Amy and Chris have three children and are unclear whether they can claim their children as dependents. Assume Amy and Chris provide all the support not provided by the children. Information on the children is as follows:
Ruth, age 18, graduated from high school in May, and moved into an apartment immediately after graduation. She earned $5,500 from a job and provided 30% of her own support for the year.
a. Ruth is a dependent child because she meets all of the tests
b. Ruth is a dependent relative because she meets all of the tests
c. Ruth is not a dependent child because she fails the age test
d. Ruth is not a dependent because she fails the residency and gross income test
Question 13
In December 2016, Buddy rents an apartment to Gary. Buddy receives the first and last months' rent of $1,200 plus a security deposit of $500. How much income does Buddy, a cash basis taxpayer, report in 2016?
a. $0
b. $1,100
c. $1,200
d. $1,700
Question 14
Sherlock retired last year due to a lay-off. During the current year, he receives $10,000 in Social Security benefits. In addition, he receives $6,000 in cash dividends on stocks that he owned, $8,000 in interest on tax-exempt bonds and $11,000 in unemployment compensation. Assuming that Sherlock is single, how much of his social security benefits are taxable?
a. $0
b. $2,500
c. $5,000
d. $8,500
Question 15
Cooper was physically injured in a sailboat accident and received $100,000 in punitive damages. The entire $100,000 is taxable.
a. True
b. False
Question 16
Alice bought a small table at a garage sale for $100. While cleaning it she discovered a nameplate on the bottom. It actually belonged to Ronald Reagan and had a FMV of $1,500. She also found a letter from George H.W. Bush to Reagan that was wedged under the drawer in the table. This letter had a FMV of $300.
a. $1,800 is currently taxable because both the table and the note are considered a "treasure trove"
b. $1,700 is currently taxable because both the table and the note are considered a "treasure trove", but due to the capital recovery concept, the $100 paid for the table is not taxable
c. $0 is currently taxable as there has been no realized income as Alice has not sold the note or the small table.
d. $300 is currently taxable as only the note is considered a "treasure trove". The bargain purchase on the table will be taxed when Alice sells the table.
Question 17
Betty is a single taxpayer with AGI of $22,000 in 2016. She donated her shares of XYZ stock (acquired in 2002 for $2,000) on June 15, 2016 to the Metropolitan State University Scholarship Fund. At the time the FMV of the stock was $20,000. If this is her only charitable contribution for 2016, what is the correct, total amount to be reported for Betty's charitable contributions on Schedule A on her 2016 tax return?
a. $0
b. $6,600
c. $11,000
d. $18,000
Question 18
Jonathan purchases a block of 10 tickets to next Saturday's Nugget's game. The tickets cost $50 each. He keeps two tickets for himself and gives the remaining tickets to his business customers. Each customer receives two tickets, and Jonathan told all of them he would see them Saturday night. How much can Jonathan deduct as a business expense?
a. $200
b. $250
c. $400
d. $500
Question 19
Mike owns a condominium in the mountains and uses it himself for 25 days. This property and his residence are the only homes that he owns. It is rented out for a total of 50 days through a rental agency. His income and expenses for the year are:
Income $20,000
Property Taxes $6,000
Interest $9,000
Rental Agency fees $9,000
Utilities $3,000
Depreciation $6,000
Which of the following statements is NOT TRUE?
a. The amount of carry-over to potentially be used to offset next year's vacation home income is equal to $5,000
b. The amount of deferred category #2 expenses is $2,000
c. The rental of the vacation home cannot create a loss that can be utilized against Mike's wages.
d. All of the property taxes and interest expenses can be deducted in the current year, but the amounts will be split between personal and rental deductions.
Question 20
Which of the following is NOT TRUE regarding income tax credits?
a. Tax credits have the ability to protect a larger amount of income from taxation on individuals with lower taxable income than those with higher taxable income
b. Individual tax credits are generally phased out as adjustable gross income increases
c. Some tax credits perform the function of being a "negative income tax"
d. Deductions FOR AGI reduce a taxpayer's liability more than the same dollar amount claimed as a tax credit
Question 21
Kip is a druggist from 9::00 to 5:00, but enjoys auto racing on weekends. He occasionally wins a race or two from the 4 or 5 he enters out of a 20 race season. He purchased his new car for $200,000 this year. His income and expenses for the year he purchased the car are as follows:
Winnings from the races $10,000
Property taxes on his car (Cat #1) $1,000
Operating expenses (Cat #2) $11,000
Depreciation on his race car (Cat #3) $15,000
What are the tax consequences of this activity?
a. Since Kip was the driver, he was an active participant in the trade or business and can deduct all losses against his wages as a druggist
b. The basis in his car remains $200,000 at the end of the year since no depreciation can be claimed
c. Although the activity will be reported on his tax return, the amount of deductions are limited to gross income such that the activity will not show any net income or loss
d. Since this is a hobby and he did not make any net income, none of the income or expenses must be reported on his tax return
Question 22
Amy, Kara and Susan own and operate a catering company - Good Eats, Inc. - as a Partnership. Amy owns 40%, Kara owns 30% and Susan owns 30%. Good Eats reports the following for the current year:
Sales Revenue: $1,000,000
Long-term capital gains $10,000
Business expenses $(750,000)
Charitable contributions $(9,000)
Short Term Capital Loss $(15,000)
What is Susan's share of ordinary income
a. $70,800
b. $72,300
c. $75,000
d. $94,400
Question 23
Amy, Kara and Susan own and operate a catering company - Good Eats, Inc. - as a Partnership. Amy owns 40%, Kara owns 30% and Susan owns 30%. Good Eats reports the following for the current year:
Sales Revenue: $1,000,000
Long-term capital gains $10,000
Business expenses $(750,000)
Charitable contributions $(9,000)
Short Term Capital Loss $(15,000)
In addition to the income and deductions Amy receives from Good Eats, she has long term capital gains of $1,500 and other itemized deductions of $15,000. What are Amy's total itemized deductions when she includes her receipts from Good Eats?
a. $9,400
b. $18,600
c. $24,600
d. $29,000
Question 24
Penelope owes First Bank $100,000. The bank agrees to reduce the debt to $75,000. Prior to the debt reduction, Penelope's assets total $250,000 and her liabilities are $260,000. How much income must Penelope recognize, if any, due to this discharge of indebtedness?
a. $0
b. $10,000
c. $15,000
d. $20,000
e. None of the Above
Question 25
During 2016, Janet keeps the following record of her travel:
Home to office 800 miles
Office to home 800 miles
Home to local clients to home 10,000 miles
Office to second job 450 miles
Second job to home 300 miles
Home to out-of-town clients 2,000 miles
If Janet uses the standard mileage rate for 2016, what amount can she deduct as a business expense?
a. $6,723
b. $6,885
c. $7,158.75
d. $7331.25
Question 26
Chris is a junior at Metropolitan State University pursuing a degree in accounting. During 2016, he receives the following cash payments:
State allocated tuition waiver scholarship $2,200
A EKS&H scholarship (for fees and books) $800
Check from his grandmother $1,700
Loan proceeds from the college financial aid office $2,500
Prize won from a Colorado lottery scratch ticket $300
Loan from his roommate $100
Interest received from National Bank CD $400
How much must be included in Chris' gross income?
a. $0
b. $700
c. $1,500
d. $3,700
e. $8,000
Question 27
Which of the following constitutes a realization?
I. Amy prepares a past-due tax return for Will. He pays her by washing her car.
II. Doyle's horse gives birth. The foal will become a member of Doyle's Clydesdale team for Budweiser.
III. Leadville Mining Company's coal mine reserves were recently appraised at $4,000,000 more than last year's appraisal.
IV. Pam's employer gives her and all other salaried employees a weekend in Orlando in recognition of their efforts to make this a successful year
a. Only statement I is correct
b. Only statement II is correct
c. Only statements I and II are correct
d. Only statements I and IV are correct
e. Only statements I, II, and IV are correct.
Question 28
On April 1, Amanda is given $20,000 worth of City of Denver bonds for her 18th birthday. On June 30, Amanda receives the $800 annual interest payment on the bonds. How much income should Amanda recognize due to these two events? (Read this one closely!)
a. $0
b. $200
c. $800
d. $20,000
e. $20,800
Question 29
The ability-to-pay concept is fundamental to the income tax structure. Constructs used to implement this concept include
I. Deductions
II. Progressive tax rates
III. Exclusions
IV. Business losses
a. Only statement II is correct
b. Statements I, II and III are correct
c. Statements I, II and IV are correct
d. Statements I and III are correct
e. Statements I, II, III and IV are correct
Question 30
Please answer as if you are writing to your supervisor. Use complete sentences, proper grammar, and state the appropriate tax reasoning.
Question 1: 25 Points
Please explain why it is important for individual taxpayers to know the difference between deductions for adjusted gross income and deductions from adjusted gross income.
Question 31
Please answer as if you are writing to Andrew, your tax client. Use complete sentences, proper grammar, and state the appropriate tax reasoning.
Question 2: 30 Points
Andrew recently graduates with an MBA from a CU Denver and will be going to work as an employee of Merrill Lynch. Andrew is not sure whether or not the money he spends entertaining and dining with clients and prospective clients is deductible. Andrew estimates that he will spend approximately $5,000 per year on such activities. He will not be reimbursed from his company for these expenses, so he wants to know if he can at least get some type of tax benefit for these costs. Advise Andrew of the general rules in this area of the tax law. Include a brief discussion of substantiation requirements for such business expenses.
Question 32
Amy purchases a computer for $4,000 and uses it 60% of the time in an active trade or business and 40% for personal use. She claims depreciation on it in the amount of $1,000 and sells it for $800. What are tax consequences?
$920 loss
$2,200 loss
$1,320 loss
$1,280 loss
Question 33
Sam owns and manages a rental business where he spends 4 out of his 5 days working behind a desk at location "A". On the other day of the week, Sam stops off at office "A" to make sure everything is OK, and drives to a second store ("B") that he owns to oversee the activities at that location. From the "B" location, Sam drives home. A friend tells him that if he puts the name of the business on the side of his car, he can deduct his car expense. What portion of his auto expenses is deductible?
a. Since Sam has put the name on the door of his car, all of his auto expenses are deductible as an advertising expense.
b. Sam cannot deduct the trip from his home to the "A" office, but can deduct the costs of driving between "A" and "B" offices, and the additional mileage from location "B" to his home when this mileage is compared to the mileage between his home and the "A" location.
c. Only the mileage between the two offices is deductible.
d. If Sam uses the standard mileage rate, rather than the actual costs, it will relieve him of all record keeping.