INCOME TAX FINAL EXAMINATION

Q1) If a taxpayer in the 28% tax bracket has the opportunity to invest in a taxable corporate bond that pays 6% interest or to invest in a tax-exempt municipal bond that pays 3.5% interest (assuming that all other elements of the two bonds, e.g., risk, are equal and that taxable interest would not put the taxpayer in a higher tax bracket), which investment (without considering any effect of state and local taxes) would generate the greater after-tax yield?

Q2) Jane, age 65, who lives with her unmarried son, Jack, received $7,000, which was used for her support during the year. Her sources of support were as follows:

a. Who is eligible to claim Jane as a dependent?

b. What must be done before Jack can claim the exemption?

c. Can anyone claim head-of-household status based on Jane's dependency exemption? Explain.

d. Can Jack claim an old age allowance for his mother? Explain.

Q3) On March 1 of the previous year, a parent sold stock with a cost of $9,000 to her child, for $6,000, its fair market value. On September 30 of the current year, the child sold the same stock for $7,500 to Jones, who is unrelated to the parent and child. What is the proper treatment for these transactions?

a. Parent has a $3,000 recognized loss and child has $1,500 recognized gain.

b. Parent has $3,000 recognized loss and child has $0 recognized gain.

c. Parent has $0 recognized loss and child has $0 recognized gain.

d. Parent has $0 recognized loss and child has $1,500 recognized gain.

Q4) Alonzo, a single taxpayer, has adjusted gross income of $30,000 in the current year. During the year, a hurricane causes $4,100 damage to Alonzo's personal use car on which he has no insurance. Alonzo purchased the car for $20,000. Immediately before the hurricane, the car's fair market value was $11,000 and immediately after the hurricane its fair market value was $6,900. What amount should Alonzo deduct as a casualty loss for the current year after all threshold limitations are applied?

Q5) In the current tax year, Boris earned $120,000 from his job as a master plumber. In addition, he received $40,000 of income from Activity A, and lost $30,000, and 25,000 from Activities B and C respectively. Activities A, B, and C are passive activities that Boris acquired in the current year. What amount of loss may Boris deduct on his current year taxes with respect to each activity? What amount of loss, if any, must be carried over to the subsequent year for each activity?

Q6) Wanda owns a non-depreciable capital asset she has held for investment. She purchased the asset for $200,000 six years ago, and it is now subject to a $54,000 liability. During the current year, Wanda sells the asset to Steve in exchange for $85,000 cash and a new automobile with a fair market value of $45,000 to be used by Wanda for personal use. Steve assumes the $54,000 liability. Calculate the amount of Wanda's Long Term Capital Gain or her Long Term Capital Loss on this sale.

Q7) A taxpayer purchased and placed in service a $690,000 piece equipment in 2016, and elected to expense the maximum allowable amount under IRC Sec. 179. This equipment was the only tangible depreciable personal property the taxpayer placed in service during 2016. The equipment is 7-year property. Before considering any depreciation deduction, the taxpayer had $700,000 of taxable income. The taxpayer elected out of bonus depreciation. What is the maximum allowable depreciation deduction in 2016?

a. $98,601

b. $500,000

c. $527,151

d. $690,000

Q8) Walter swaps his warehouse for Sally's office building, and the exchange qualifies as a like-kind exchange. Walter's adjusted basis for the warehouse is $500,000 and the warehouse is subject to a liability of $150,000. The FMV of Sally's office building is $740,000 and it is subject to a liability of $95,000. Each asset is transferred subject to the liability. What is Walter's recognized gain, if any, on the transaction; and what is his basis in the office building?

Q9) A taxpayer sold for $250,000 equipment that had an adjusted basis of $220,000. Through the date of the sale, the taxpayer had deducted $40,000 of depreciation. Of this amount, $27,000 was in excess of straight-line depreciation. What amount of gain would be recaptured under Section 1245 (Gain from Dispositions of Certain Depreciable Property)?

a. $40,000

b. $27,000

c. $13,000

d. $30,000

Q10) In 2016, David, a single 18-year old taxpayer, received a salary of $3,600 and interest income of $1,800. He had $600 in itemized deductions. Calculate David's taxable income assuming he is (a) self-supporting and (b) a dependent of his parents.

Q11) Jack and Jill are a married couple with one dependent child. In 2016, their salaries totaled $105,000, and they suffered a capital loss of $10,000. They also received $2,000 of tax-exempt interest. They paid home mortgage interest of $12,000, state income taxes of $5,000, and medical expenses of $3,500. They also contributed $5,000 to charity, and made a $10,000 deductible IRA contribution. On their 2016 Married Filing Joint tax return what is their (a) adjusted gross income; (b) their total itemized deductions; (c) the amount of their exemptions; and (d) their taxable income.

Q12) Wendy is a single taxpayer, whose salary was $62,000 in 2016. In that year, she also suffered a $6,000 short-term capital loss. Her itemized deductions for the year totaled $5,000. What are Wendy's 2016 (a) adjusted gross income; (b) taxable income; and (c) tax liability?

Q13) During 2016, Bertha incurred the following costs associated with her beachfront condominium in Myrtle Beach:

Bertha could also have deducted a total of $13,000 in depreciation if the property had been acquired and used only for investment purposes. However, during the year, Bertha used the condominium 28 days for a much needed vacation. She rented it out for 90 days during the year, which resulted in total gross income of $10,000. Bertha elected to use Tax Court (Bolton rule) method for allocating mortgage interest and property taxes to rental income.

(a) What total deduction amount (i) for AGI and (ii) from AGI may Bertha claim for the above condominium costs during 2016? Explain.

(b) What is the effect of the above costs on Bertha's basis in her condominium?

Q14) During 2016, Linda suffered serious injuries in an automobile accident. She incurred the following costs as a result:

Linda is single with no dependents. Her 2016 salary was $68,000. She paid $1,000 in medical and dental insurance premiums, which were withheld from her salary on an after tax basis, $4,250 in mortgage interest on her personal residence, and $1,500 in interest on her car loan. She was reimbursed for $15,000 in medical expenses by her health insurer. Calculate her 2016 taxable income.

Q15) Lucy owns 150 shares of Apex Corp., a publicly traded company, which Lucy purchased on January 1, Year 1, for $15,000. On January 1, Year 3, Apex declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $140 per share. Immediately following the split, the FMV of Apex stock was $65 per share. On February 1, Year 3, Lucy had her broker sell 120 shares of the Apex stock she received in the split when the FMV of the stock was $70 per share. What amount should Lucy recognize as long-term capital gain income on her Form 1040, U.S. Individual Income Tax Return, for Year 3?

Q16) In the current year, Cline sold land with a basis of $60,000 to Johnson for $100,000. Johnson paid $20,000 down and agreed to pay $16,000 per year, plus interest, for the next five years, beginning in the second year. Under the installment method, what gain should Cline include in gross income in the year following the year of sale?

Q17) Betty files as head of household in 2016. She had taxable income of $80,000, including the sale of stock she held for investment for two years for a $15,000 gain. Betty sold no other assets during the year, and she did not have any capital loss carryovers.

a. What is Betty's 2016 tax liability?

b. What would Betty's 2016 tax liability be if she had held the stock for 10 months?

Q18) Regina, a calendar-year taxpayer, purchased used furniture and fixtures for use in her business and placed the property in service on September 1, 2016. The furniture and fixtures cost $46,000 and represented Regina's only acquisition of depreciable property during the year. Regina did not elect to expense any part of the cost of the property under Sec. 179. What is the amount of Regina's depreciation deduction for the furniture and fixtures under the Modified Accelerated Cost Recovery System (MACRS) for 2016?

a. $ 2,667

b. $ 6,573

c. $ 8,000

d. $16,000

Q19) Baxley owned a parcel of investment real estate that had an adjusted basis of $35,000 and a fair market value of $50,000. During 2016, Baxley exchanged his investment real estate for the items of property listed below.

Land to be held for investment (fair market value) - $45,000

A used motorcycle Baxley will use for recreation (fair market value) - 3,500

Cash - 1,500

What is Baxley's recognized gain and basis in his new investment real estate?

Q20) Josephus, an unmarried taxpayer filing single with no dependents, has AGI of $200,000 and reports the following items in 2016:

What is Josephus's AMT liability for 2016?