Income Tax Accounting Problems

(1) A single taxpayer provided the following information for 2006:

Salary $40,000
Interest on local government bonds $4,000
(qualifies as a tax exclusion)
Allowable itemized deductions $8,000

What is taxable income?

a. $28,700
b. $31,700
c. $32,700
d. $32,000

(2) This year, Alan purchased property from Scott by assuming an existing mortgage of $20,000 and agreed to pay an additional $30,000, plus interest, in the 3 years following the year of sale (i.e. $10,000 annual payments for three years, plus interest). Scott had an adjusted basis of $22,000 in the building. What are the sales price and contract price in this transaction?

Sales Price Contract Price
a. $50,000 $50,000
b. $20,000 $30,000
c. $50,000 $30,000
d. $50,000 $20,000

(3) Mark has a $16,000 Section 1231 loss, a $12,000 Section 1231 gain, and a salary of $50,000. What is the treatment of these items in Mark's AGI?

a. Mark has a LTCG of $12,000 and a net ordinary income of $34,000.
b. Mark has net LTCG of $9,000 and $37,000 of net ordinary income.
c. Mark has a $3,000 LTCL which is deductible for AGI making AGI $47,000. He also has a $1,000 LTCL carryover.
d. The 1231 gains and losses are treated as ordinary gains and losses making Mark's AGI for the year $46,000.

(4) In 2006, Carol, who is single, finished graduate school and began paying on her student loan. The proceeds of the loan were used to pay her qualified higher education expenses, and she never had any type of educational assistance or scholarships excluded from her income in the past. The amount of interest paid during the year amounted to $3,800. What is the amount and classification of her student loan interest education deduction if her modified AGI is $40,000?

a. $2,500 for AGI
b. $2,500 from AGI
c. $3,800 from AGI
d. $3,800 for AGI

(5) Ann's tentative minimum tax is computed by multiplying the AMT tax rates by her

a. alternative minimum taxable income.
b. taxable income.
c. tentative alternative taxable income.
d. alternative minimum tax base.

(6) On July 31 of the current year, Brian borrows $120,000 to purchase a new fishing boat. The loan is secured by his personal residence. On the date of the loan, the outstanding balance on the original debt incurred to purchase the residence is $300,000 and the FMV of the home is $450,000. Interest on what total amount is deductible by Brian in the current year?

a. $450,000
b. $400,000
c. $420,000
d. $300,000

(7) In 2006, Wanda, a single taxpayer who is age 40, reports the following items of income and expense:

Adjusted gross income $40,000
Medical expenses (before percentage limit) $5,000
Itemized deductions other than medical $4,000

In 2007, Wanda receives a reimbursement for last year's medical expenses of $1,200. As a result, Wanda must

a. include $850 in gross income for 2007.
b. amend the 2006 return and reduce 2007's medical expenses by $1,200.
c. include $2,000 in gross income for 2007.
d. include $1,200 in gross income for 2007.

(8) In 2006, Tammy filed her 2005 state income tax return and paid taxes of $800. Also in 2006, Tammy's employer withheld state income tax of $750 from Tammy's salary. In 2007, Tammy filed her 2006 state income tax return and paid an additional $600 of state income tax. How much state income tax can Tammy deduct on her 2006 federal income tax return for state income tax?

a. $1,400
b. $1,550
c. $2,150
d. $1,350

(9) During the year, Joe and Laura Davis, cash basis taxpayers, paid the following taxes:

State gift tax $1,000
Property tax on home in the US $2,100
State income tax $1,000
Estimated federal income tax $500
Estimated state income tax $1,800
Sales tax on new auto (60% for business) $2,000

What amount can Joe and Laura claim as an itemized deduction for taxes on their federal income tax return for the year?

a. $5,900
b. $6,400
c. $5,700
d. $4,900

(10) Michelle recognizes $35,000 of Section 1231 gains and $25,000 of Section 1231 losses during the current year. The only other Section 1231 item was a $4,000 loss three years ago. This year, Michelle must report

NLTCG Ordinary Income
a. $6,000 $4,000
b. $4,000 $6,000
c. $10,000 $0.00
d. $4,000 $10,000

(11) In a nontaxable exchange, Jeffrey traded in a truck having an adjusted basis of $4,500 and a FMV of $10,000, for a new truck having a FMV of $15,000. In addition, Henry paid cash of $5,000. What is Jeffrey's basis in the new truck?

a. $9,500
b. $15,000
c. $4,500
d. $5,500

(12) Lucy exchanges business equipment with a $50,000 adjusted basis for $5,000 cash and business equipment with a $48,000 FMV. What is the amount of gain recognized on the exchange?

a. $3,000
b. $5,000
c. $2,000
d. $0.00

(13) In August of 2006, Shelly acquires and places into service business equipment costing $200,000. The equipment is classified as 5-year recovery property. No other acquisitions are made during the year. Shelly elects to expense the maximum amount under Section 179. Shelly's total deductions for the year are

a. $108,000
b. $126,400
c. $40,000
d. $148,000

(14) In April of this year, Susan acquired a machine for $50,000 for use in her business. The machine is classified as 7-year property. Susan makes no elections with regard to the property. Susan's depreciation on the machine this year is

a. $10,000
b. $5,000
c. $50,000
d. $7,145

(15) During the year, Andrew, an attorney, reports $140,000 of active business income from his law practice. He also owns two passive activities. From Activity X, he earns $20,000 of income, and from Activity Y, he incurs a $30,000 loss. As a result, Andrew

a. reports AGI of $160,000 with a $30,000 loss carryover
b. reports AGI of $140,000 with a $30,000 loss carryover
c. reports AGI of $130,000
d. reports AGI of $140,000 with a $10,000 loss carryover

(16) Noel, a single individual, owns stock with a FMV of $18,000 and a basis of $12,000. Noel wants to gift the stock to Hanna. Which of the following statements is correct?

a. Hanna's basis will be $12,000 for the purposes of determining a loss on the sale or exchange of the stock.
b. Noel will have to recognize gain of $6,000.
c. Noel's gift will not be a taxable gift (subject to gift tax).
d. Hanna's basis will be $18,000 for purposes of determining a loss on the sale or exchange of the stock.

(17) Emily, who is single, incurred $3,500 for unreimbursed employee expenses, $6,500 for mortgage interest and real estate taxes on her home, and $500 for investment counseling fees. Emily's AGI is $80,000. Allison's allowable deductions from AGI are:

a. $6,500
b. $10,500
c. $8,400
d. $8,900