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TAX 4001 Final Exam: Key Concepts and Definitions, Exams of Accounting

Florida Gulf Coast University (FGCU)Accounting

A comprehensive overview of key concepts and definitions related to tax 4001, covering topics such as capital gains and losses, child and dependent care expenses, earned income credit, and at-risk limitations. It presents definitions, calculations, and examples to enhance understanding of these tax-related concepts.

Typology: Exams

2023/2024

Available from 12/17/2024

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tizian-kylan 🇺🇸

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TAX 4001 Final Exam
6 netting possibilities - ANS-Net long term gain (different signs with LT greater)
Net short term gain (different signs with ST greater)
Long term and short term gain (opposite signs)
Net long term loss (different signs with LT greater)
Net short term loss (different signs with ST greater)
Long term and short term loss (opposite signs)
Active income - ANS-- Wages/salary
- Profit from trade and business
- Gain from sale or disposition of asset used in active trade of business
- Income from intangible property created by the taxpayer
Adjusted basis - ANS-cost + addition + recovery
- Original basis adjusted to date of disposition
Alternate valuation - ANS-FMV 6 months after
- Tax return filed
- Not distributed before date
Amount realized - ANS-Money + FMV of the property
- Economic value received from property given up
- Selling expenses are deducted so it equals the net amount received
AMT is - ANS-An indirect calculation that starts with taxable income
At risk limitation reason - ANS-Designed to prevent deduction from loss in excess of
economic investment
- Limit the tax payer deduction to the amount they are "at risk"
- Created to limit loss in excess of investment
At risk limitation rules - ANS-Can deduct losses from activity only to extent the taxpayer
is at risk
- Any losses disallowed due to at risk limitation are carried forward and at risk amount
must increase in order to deduct later
- Previously allowed losses must be recaptured to extent they fall below zero
Basis for loss also = - ANS-Basis for depreciation
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TAX 4001 Final Exam

6 netting possibilities - ANS-Net long term gain (different signs with LT greater) Net short term gain (different signs with ST greater) Long term and short term gain (opposite signs) Net long term loss (different signs with LT greater) Net short term loss (different signs with ST greater) Long term and short term loss (opposite signs) Active income - ANS-- Wages/salary

  • Profit from trade and business
  • Gain from sale or disposition of asset used in active trade of business
  • Income from intangible property created by the taxpayer Adjusted basis - ANS-cost + addition + recovery
  • Original basis adjusted to date of disposition Alternate valuation - ANS-FMV 6 months after
  • Tax return filed
  • Not distributed before date Amount realized - ANS-Money + FMV of the property
  • Economic value received from property given up
  • Selling expenses are deducted so it equals the net amount received AMT is - ANS-An indirect calculation that starts with taxable income At risk limitation reason - ANS-Designed to prevent deduction from loss in excess of economic investment
  • Limit the tax payer deduction to the amount they are "at risk"
  • Created to limit loss in excess of investment At risk limitation rules - ANS-Can deduct losses from activity only to extent the taxpayer is at risk
  • Any losses disallowed due to at risk limitation are carried forward and at risk amount must increase in order to deduct later
  • Previously allowed losses must be recaptured to extent they fall below zero Basis for loss also = - ANS-Basis for depreciation
  • Prevent taxpayer from recovering loss indirectly
  • Adjust gain and loss basis for depreciation deductions from conversion date to disposition date By employers - ANS-Withholding - income taxes and employee FICA Paid - FICA match and FUTA Calculation of non corporate capital gain/loss - ANS-Net capital gains and losses
  • short term and long term seperate If opposite signs for each = stop, if same sign net again
  • 6 possibilities Capital gain - ANS-Full recognition Capital gains are - ANS-- Personal use assets
  • Investment assets Capital gains are not - ANS-- Inventory
  • A/R and N/R for goods and services
  • Depreciable property of real estate in business
  • Property for business
  • Copyrights
  • Government publications
  • Supplies Capital gains use _________ rates - ANS-Preferential Capital loss - ANS-3,000 max Change of employment - ANS-- Location of new employment is at least 50 miles further from old residence than old residence was to old job
  • Must become principal residence when move
  • Regradless of employer situation Child and dependent care expense - ANS-Mitigate inequality felt by working taxpayers who must pay child care to work outside the home
  • Specified percentage of expenses incurred to work or seek employment Child and dependent care expense calculation - ANS-Expense (%) - max being 3,
  • limited by individual earned income
  • Reductions of qualified non recourse debt Dependent care assistance program - ANS-Allowed exclusion for certain reimbursed expenses
  • Child and dependent care expense reduced $ for $ of reimbursement Earned income credit - ANS-Income tax equity to the working poor
  • Designed to eliminate the federal income tax and reimburse certain taxes (gas, social security, etc.)
  • Encourage them to contribute more to the working force
  • Refundable Earned income credit calculation - ANS-Max amount earned (credit percentage)
  • Include: compensation and net earnings (SE)
  • Exclude: dividends, retirement, employee comp, alimony, interest Children: # of children plays into credit percentage (max listed below) 1 - 3, 2 - 5, 3 - 6318 none - 510 No children - must be 25 - 64 and cant be claimed Employed rules for FICA - ANS-Spouse employed by spouse = FICA tax Child under 18 = exempt Estimated tax - ANS-What the individual expects to owe the year after subtracting tax credits and income tax withheld
  • Individuals with estimated tax for the year being 1,000 or more in excess of withholding pay quarterly estimated taxes
  • No penalty if the individual had no tax liability in preceding year (12 months) and is a US citizen Estimated tax payments - ANS-Estimated tax due on due date = annual payment minus the quarters withholdings
  • pay 25% on the date
  • 4/15, 6/15, 9/15, 1/15 (of following year) Exceptions to principal residence test - ANS-Partial exclusion
  • Change of employment
  • Health
  • Unforseen circumstances Guidance by treasury department Exclusion amount - ANS-Realized gain = selling price less selling expenses
  • Exclusion comes from this Single = 250, Filing joint = 500,
  • One pass ownership (2 years)
  • Both pass use (2 years)
  • Neither used exclusion in past two years Fewer shares acquired then previously sold in wash sale - ANS-Prorate between recognized and unrecognized loss on basis of the ratio of the number of shares acquired to the # of shares acquired to the # of shares sold FICA tax amount - ANS-2 components -Social security (6.2%) and medicare (1.45%)
  • Both employee and employer pay this rate
  • Social security has limit of 127,
  • Medicare has no limit Franchising - ANS-Transfer of franchise is not a transfer of capital asset
  • Franchisor retains power or rights Franchising payments - ANS-Initial fee and contingent fees
  • Upfront payment is amortized over 15 years (subject to recapture if sold)
  • Contingent payment are as made (based on sale and ordinary income/deduction) (annual or based on fixed formula FUTA and FICA - ANS-Federal Unemployment Tax Act (employee and employer) Federal Income Contribution Act
  • Apart of withholdings
  • Liabilities related to the employee wages for the period that are paid by employer Gain basis when dual basis - ANS-Donor's adjusted basis
  • Taxpayers share of amounts borrowed for use in the activity that are qualified non recourse financing
  • Taxpayer share of activity income Individual tax payment - ANS-Withholding from paycheck that is required
  • Employer directly transfers based on how you fill out W
  • Taxes on wages are remitted - "pay as you go" Inherited property basis - ANS-Generally the property's FMV at date of death
  • Holding = long term Initial at risk limitation amount usually equals... - ANS-- Cash and adjusted basis of property contributed
  • Amount borrowed for the investment in which personally liable Level for S corporation and partnerships - ANS-Owner level Loss basis when dual basis - ANS-FMV of property
  • Prevents tax benefit from property decline occurred while held property Loss basis with conversion of personal to business - ANS-Original basis for loss on personal to business is lesser of
  • Adj. basis
  • FMV on date of conversion Prevents sale of loss - convert to business when decrease in value to take loss
  • Personal use can not recognize loss Material participant - ANS-Requires a taxpayer to participate on a regular, continuous, and substantial basis to be a material participant
  • A significant nontax economic profit motive Material participation - ANS-If an individual taxpayer materially participates in a nonrental trade or business activity, any loss from that activity is treated as an active loss that can offset active or portfolio income New basis after 121 exclusion used - ANS-Cost of new residence New laws make investors focus on.... - ANS-The economics of investment instead of tax avoidance possibilities that an investment can generate

Non taxable stock dividend - ANS-Common on common = cost of original allocated to total Preferred on common = allocate between both (FMV and distribution) Non-refundable credit - ANS-Not paid if they exceed tax liability

  • Some can be carried over while others can't
  • If they are not carried over the credit is lost to the degree it exceeds limitation Not included in at risk limitation - ANS-- Non recourse debt
  • Debt in which the lender has interest Out of house expenses for older dependent/spouse - ANS-Must have 8 hours at home per day
  • Allows them to keep handicapped dependents rather than institutionalizing them PAL - ANS-Passive activity loss
  • Disallow deduction of passive activity losses against active or portfolio income even when taxpayer is at risk to the extent of the loss
  • This rule can cause at risk amounts to become disallowed under PAL Partial exclusion calculation - ANS-Exclusion amount (qualifying months/24)
  • Excluded gain Passive income - ANS-- Any trade or business in which taxpayer does not materially participate
  • Subject to certain exceptions (rental) Passive income questions - ANS-- What constitutes the activity?
  • Is there material participation?
  • Is it a rental property? Portfolio income - ANS-- Interest
  • Dividends
  • Annuities
  • Gains/losses from disposition of asset held for investment Principal residence - ANS-- "Spend most of time"
  • Ownership and use test

Recipient's gift basis when FMV of property < donor basis - ANS-Dual basis

  • Prevents the shifting of losses to individual with greatest benefit Recipient's gift basis when FMV of property > donor basis - ANS-The new basis is same as donor's Refundable credit - ANS-Paid to the taxpayer even if the amount of the credit exceeds tax liability
  • Prompts a refund Required Annual payment - ANS-The lesser of...
  1. 90% of the tax shown on current tax year
  2. 100% of the tax shown on the preceding year
  • Must be 12 months in the preceding year
  • AGI over 150,000 (75,000 married filing seperate) on the preceding tax return increases to 110% Requirements for 121 exclusion - ANS-At date of sale, the residence has been the individual's principal residence (owned and used) for two of the last 5 years
  • Does not have to continuous
  • Does not have to be principal residence on date of sale
  • Limited to be used once every two years Rules of passive activity loss - ANS-Limit the extent to which losses in the passive category can be used to offset the income in other categories
  • Passive losses can only offset passive income (can't reduce active and portfolio)
  • Disallowed losses are suspended and carried forward to offset future passive activity
  • Any remaining is used only when interest is disposed of entirely- in which case loss may offset active and portfolio as well (fully taxable disposition) Sale of residence - ANS-Personal Residence = personal asset = no loss recognized
  • Realized gain is taxable (recognizable)
  • If meet 121 exclusion can deduct 250,000 or 500,000 (joint)
  • Gain in excess = LT capital gain (pref tax rates) Self employed taxes - ANS-No withholding, but income and employment tax still paid
  • Quarterly estimated tax payments (in charge of own) Self employment tax - ANS-Individuals with net earning over 400
  • Net earning = gross income less allowable business deductions and expenses 12.4% of earnings and 2.9% of earnings
  • 12.4% limit to 127,
  • 2.9% no limit T/F: Order matters when calculating tax credits - ANS-True - can prompt different results due to refundable vs. nonrefundable and carryover rules T/F: Tax credits are affected by marginal tax rates - ANS-False
  • Credits occur after the taxable income is computed so the benefit is in full Tax Shelter - ANS-Wealthy taxpayers in high income tax bracket invest in opportunities where they can collect a loss and bring down their taxable income
  • focused around non recourse financing - obligation where borrower isn't personally liable
  • Previous investment strategy before laws put in place
  • Used to avoid/defer taxes = offset income from other source Tentative minimum in relation to regular tax - ANS-excess = amount none = zero Three categories on income - ANS-Active, Portfolio, Passive Unforeseen circumstances - ANS-Not anticipated before purchase or occupying Unusual, but is power of rights is not retained by franchisor... - ANS-Can be a gain or loss Used to determine classification - ANS-Judiciary interpretation Wash sale - ANS-Selling substantially same stock at a loss, recognizing a loss and buying back within 30 days (before and after)
  • Option to purchase substantially same stock is treated same as stock
  • Bonds and preferred is not considered substantially same as common Wash sale basis - ANS-The loss they had is not recognized and instead it is added to the basis
  • Added to the basis of substantially identical stock or security who result in non recognition