Advanced Individual Income Tax Test No. 1. Test No. ______
Summer, 2013. The University of North Carolina at Charlotte. Night Class
Name______Row In Class______
INSTRUCTIONS: You may use your Code Book, (but not your textbook) during thetest. You may also use sample questions and notes provided by the instructor, and your own class notes. A question may cover material from more than one chapter. Avoid all appearances of impropriety. If you see any sign of impropriety, please prepare an anonymous note and slide it under the instructor's office door.
Multiple Choice- 25 questions count 4 points each for a total of 100 Points.
1. Use a soft-lead pencil
2. Enter name in appropriate space above. Write clearly.
3. Enter above the row number for your seat in class.
On the Opscan Sheet
4. Enter name (last name first) in the area for “NAME.”
6. Enter test number (found in upper right hand corner of this page) in the special codes area.
7. Blacken the area in the circle containing the appropriate letter for each question.
8. Please complete the form below.
1.A single, wealthy investor earns net rental income of about $400,000 per year. She does not have significant itemized deductions. She is considering giving some rental property (that generates net rental income of $20,000 per year) to her elderly mother so that her mother will have income she needs for her living expenses. The investor expects to save federal income taxes with this plan. Which tax planning concept applies here?
a. / Step transaction doctrine / b. / Timing of incomeb. / Changing character of income / d. / Income shifting
2.Mary will buy a machine for her proprietorship on December 31, 2012, and claim a corresponding $10,000 deduction for 2012, or buy the machine on January 1, 2013. With the new machinery, business income will rise and the marginal rate will increase from 20% in 2012 to 28% in 2013. Her after-tax rate of return is 10%. What is the PV of the after-tax cost of the machine if she buys the machine on January 1, 2013? [Tax saving is realized on first day of the tax year in which the applicable tax return is filed.]
a. / $7,407 / b. / $7,500 / c. / $8,100 / d. / $7,455 / e. / Other3.Julie operates Charlotte Corporation as a cash-basis C corporation. There is no state income tax. Julie projects that her corporation will have taxable income of $40,000 in 2013 and $40,000 in 2014.
These projections do not include a consultant’s chargeof $10,000 for removing viruses from its computer system. The virus removal project was completed last week, on December 5, 2013. She can send the check for $10,000 to the client immediately. Alternatively, she can wait and mail the check in the first week of the 2014. Assume her cost of capital is 10%. You may ignore the requirement for payment of estimated income taxes. Assume the corporation will pay the entire amount of its federal income tax for 2013 on March 15, 2014. The corporation will pay the entire amount of its federal income tax for 2014 on March 15, 2015. How much is the difference in the present value of the tax saving from this payment between: (1) paying the bill in December, or (2) paying the bill in January?
a. / $0 / b. / $136.50 / c. / $201.50 / d. / $300 / e. / Other4.Corp. X, a calendar year cash basis taxpayer, projected its taxable income to
be $40,000 for 2013, and $120,000 for 2014. After making these projections for 2013 and 2014,
the company decided to have a local advertising campaign for the 2013 winter holidays costing $10,000.
This cost was not included in the income projections above.
The company has a choice of paying the advertising bill in late December or in early January.
Ignoring time value of money, will the company save more taxes, less taxes, or the same amount of taxes-- by paying January 2, 2014 (instead of December 30, 2013)? The company will save:
5.An investor now owns corporate bonds that pay 8% interest.
The investor is considering selling the corporate bonds and buying City of Charlotte bonds.
What interest rate would he need to earn on City of Charlotte bond in order to realize the same after-tax income?[Assume that Bill's marginal federal income tax rate is 35%, and there is no state income tax.]
a. / 5.2% / b. / 10.4% / c. / 8% / d. / 5.6% / e. / Other6.An executive named Jim (widower) has no dependent, earns a salary of $250,000 per year. Jim has deductions (deductions for AGI, itemized deductions and exemption) of $40,000, resulting in taxable income of $210,000 for 2012. On January 4, 2012, Jim bought 1,000 shares of Big Corporation stock at a net cost of $30 per share ($30,000). Jim’s daughter (Ann, who is single, with no dependent) has gross salary income of $60,000, and total deductions of $10,000, resulting in taxable income of $50,000, before considering the sale of the stock. On December 30, 2012, Jim gave the Big Corporation stock (1,000 shares, with value of $20 per share) to Ann. On December 30, 2012, Ann sold the Big Corporation stock (1,000 shares) for a net price of $20,000.Ann had not made any purchases or sales of investments before 2012. What will be Ann’s after-tax cash flow related to this sale of Big Corp.stock?
a. / $21,500. / b. / $20,000 / c. / $22,500 / d. / $25,000 / e. / Other7.Use information in the preceding question for Jim and Ann. Assume Jim paid $10 per share, not $30 per share for the stock. How much additional federal income tax will Ann pay as a result of selling this stock?
a. / $1,500 / b. / $2,500 / c. / $3,500 / d. / $0 / e. / Other8.Which of the following is not a from AGI deduction?
a. / Standard deduction / b. / Medical expense / c. / Personal exemption / d. / Moving expense9.Rhonda is the 22-year-old daughter of John and Joan Smith. Rhonda is a full-time student at an out-of-state university but plans to return home when the school year ends. During the year, Rhonda earned $4,000 of income working part-time. Her support totaled $30,000 for the year. Of this amount, Rhonda paid $7,000 with her own funds ($4,000 from earnings and $3,000 from her savings), her parents paid $14,000, and Rhonda's grandparents paid $9,000. Which of the following statements most accurately describes whether Rhonda's parents can claim a dependency exemption for Rhonda?
a. / Yes, Rhonda is a qualifying relative of her parents.b. / No, Rhonda fails the support test for both qualifying children and qualifying relatives.
c. / No, Rhonda does not pass the gross income test.
d. / Yes, Rhonda is a qualifying child of her parents.
10.Jane is unmarried and has no children, but provides more than half of her mother's financial support.
Jane's mother lives in an apartment across town and has a part-time job earning $5,000 a year.
Which is the most advantageous filing status available to Jane?
11.June John are married with three small children who live with them. June John have combined salaries of $320,000. They have no deductions “for AGI.” The amount of each exemption is $3,900 for 2013.What is the amount of their deduction for exemptions on the 2013 federal income tax return?
a. / $19,500 / b. / $11,700 / c. / $16,380 / d. / $9,82812.Robertson seeks to claim a dependency exemption for Wayne, based on the position that the individual is qualifying relative. In order for Wayne to be a qualifying relative, Wayne's gross income must be less than:
a. / the applicable standard deduction amount / b. / one-half of the individual's supportc. / the personal exemption amount / d. / None of the above
13.Edgar and Cathy were married and filed a joint return in all years since their marriage in 2001. They did not have children or other dependents.In June of year 1, Edgar's wife Cathy died and Edgar did not remarry during the year. What is Edgar’s filing status for year 1?
a. / Married filing jointly / b. / Single / c. / Qualifying widower / d. / Head of household14.In year 1, Harold Weston's wife died. Since her death, he has maintained a household for their two-year-old son Frank, his qualifying child. Which is the most advantageous filing status available to Harold in year 4?
a. / Married filing jointly / b. / Single / c. / Qualifying widower / d. / Head of household15. Carla paid $300,000 for a house that she owned and lived in a home for five years before marrying Cecil. Cecil had lived in a nearby rental apartment for the past 15 years. Six months after their marriage, Carla sold the home. Carla sold her home for $1,000,000. Carla was the sole owner of the residence until it was sold. She sold it so they could buy a home with access to a golf club.
How much gain may Carla and Cecil exclude on a joint return?
16.On January 1, 2008, ProfessorMichael Jordan (single) bought a home in Raleigh, North Carolina.
Later, he decided to leave his position on the faculty of NC State and join the faculty at UNC Charlotte.
On January 1, 2010, he moved to Charlotte.
He rented the Raleigh home to a visiting NC State professor from January 1, 2010until January 1, 2012, when he retired and moved back to the Raleigh home.
On January 1, 2013, he sold the Raleigh home and realized a $300,000 gain.
What amount of gain is Michael may exclude from gross income on his 2013 federal income tax return?
17.Margaret (who was single) bought a primary home on December 31, 2006 at a cost of $500,000.
She borrowed 100% of the cost. She made “interest only” payments on the loan.
The loan balance was $500,000 and the home value was $600,000 on January 1, 2012.
She does not have a second home.
On January 1, 2012, Margaret borrowed $30,000 on the home, giving a second mortgage to the Bank.
This increased the loan balance to $530,000. She used the loan proceeds to add a room to her home. Unfortunately, the value of the home fell to $430,000 in 2012. The bank allowed her to sell the home for $430,000, and the bank accepted the proceeds of $430,000 in full payment of the debt. She was forgiven of the remaining $100,000 balance.
How much income does she report on her 2012 federal income tax return related to debt forgiveness?
18.Margaret (who was single) bought a primary home on December 31, 2006 at a cost of $800,000.
She borrowed 100% of the cost. She made “interest only” payments on the loan.
The loan balance was $800,000 and the home value was $1,400,000 on January 1, 2012.
She does not have a second home.
On January 1, 2012, she borrowed $110,000 on the home, giving a second mortgage to the lending institution. This increased the loan balance to $910,000.
She used the loan proceeds to buy a sports car and take an extended vacation.
The interest rate on both loans is 10%
How much is mortgage interest may she deduct on her 2012 federal income tax return?
19.Rhonda (who is married with no dependent) purchased a home for $2,000,000 on January 1, 2012.
She paid $400,000 cash and borrowed the remaining $1,600,000. The interest rate is 10%. She made “interest only” loan payments. This is Rhonda's only residence. [Current loan balance is $1,600,000.] She and her husband file a joint return. What is her mortgage interest deduction for 2013 on her return?
a. / $50,000 / b. / $55,000 / c. / $100,000 / d. / $110,000 / e. / Other20.Rhonda (who is married with no dependent) purchased a home for $2,000,000 on January 1, 2012.
She paid $400,000 cash and borrowed the remaining $1,600,000. The interest rate is 10%. She made “interest only” loan payments. This is Rhonda's only residence. [The balance of the loan continues to be $1,600,000.] She and her husband file separate returns. What is Rhonda mortgage interest deduction for 2013 on her return?
a. / $50,000 / b. / $55,000 / c. / $100,000 / d. / $110,000 / e. / Other21.Maria and Matt purchase a new residence on November 30, 2012. The seller had already paid the property taxes of $7,200 for the year. Property taxes for the calendar year are due on November 1. What amount of the taxes will be deducted byMaria and Matt deduct on their 2012 federal income tax return?
a. / Zero / b. / $600 / c. / $1,200 / d. / $6,600 / e. / Other22.Sue rents her vacation home for 60 days at a fair rental rate of $100 per day. She lives in the home 20 days per year. She has provided this information about income and expenses for the vacation home for the year.
Total Income and Expenses / TotalSue's gross rental income (60 days) / $6,000
Real estate taxes (total) / $3,650
Mortgage interest expense (total) / $7,300
Utilities & maintenance expense (total) / $4,500
Depreciation / $9,000
How much depreciation can be deducted on her tax return, using any approved methods most favorable for the taxpayer?
a. / $0 / b. / $2,200 / c. / $1,871 / d. / $825 / e. / $90123.Continue the preceding question. Assume the recession caused fewer families to take vacations in this area. She was only able to rent the home for 10 days (at $100 per day). Other facts are unchanged.
How much gross rental income would she report on her 2012 federal income tax return?
24.Barton uses 1 room in his home as primary location for his (Schedule C) business in 2012.
Her business was $23,000 and expenses (other than home office expenses) of $18,000.
How much is his allowable depreciation expense deduction on his 2012 income tax return?
a. / $0 / b. / $240 / c. / $440 / d. / $400 / e. / Other25.Which would you prefer? (a) A good grade on this test? (b) toothache
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