Correct B
A transfer of funds in a taxpayer’s traditional IRA from one trustee directly to
another, either at the taxpayer’s request or at the trustee’s request, is a trustee to
trustee transfer. Because there is no distribution to the taxpayer, the transfer is tax
free. A rollover is a tax-free distribution to the taxpayer of cash or other assets
from one retirement plan that he contributes (i.e., rolls over) to another retirement
plan. The contribution to the second retirement plan is called a “rollover
contribution.” A taxpayer can use either method to move his own retirement assets
from one tax-preferred account to another. But if a taxpayer inherits a traditional
IRA from someone other than his spouse, he can neither roll it over nor allow it to
receive a rollover contribution. He must withdraw the IRA assets within a certain
period or move them to an account where he is a beneficiary, not an owner.
Ethel is 65 years old. She receives money from her two investment accounts to
supplement her retirement income. She withdraws $25,000 from her IRA and
$10,000 from her annuity. She received a 1099-R reflecting the amount of the
distributions, including $2,500 withheld for taxes by the custodian of her IRA. She
is filing a paper Form 1040 return. What should Ethel do with the Form 1099-R?
The recipient of an informational return does not send copies to the IRS unless
required. A taxpayer must attach (or transmit if filing electronically) Form W-2 to
the front of a Form 1040 series tax return. A taxpayer should also attach (or
transmit if filing electronically) Forms W-2G and 1099-R, but only if federal income
tax was withheld.
When a taxpayer receives a qualified distribution from his Roth IRA, what sort of
income has he received?
A taxpayer does not include in his gross income qualified distributions or
distributions that are a return of his regular contributions from his Roth IRA. (Note
that distributions from traditional IRAs that a taxpayer includes in income are taxed
as ordinary income.)
John is a cash basis taxpayer. He received the following items of income in Dec.
20X1:
1. The loan on his truck was forgiven because he performed some accounting
work for the dealer. He owed $2,000 at the time.
2. He received a retainer of $500 from a new client to guarantee that his services would be available in February when the client would need help preparing
financial statements.
3. He finally received the $800 for work he completed in Nov. 20X0. How much of this income must John include on his 20X1 tax return?
The cancellation of the truck loan is in return for services provided to the lender
and is considered income (payment for services). The retainer for future services is
considered income in the year received, as is the money received in 20X1 for work
completed in 20X0 (both under the constructive receipt rule). $2,000 + $500 + $800
= $3,300
Sam received a total distribution of $40,000 from his employer’s 401(K) plan consisting of $25,000 in cash, and land with a fair market value of $15,000. If Sam
decides to keep the land, what is the total amount that he can roll over to his IRA?
If you receive both property and cash in an eligible rollover distribution, you can
roll over part or all of the property, part or all of the cash, or any combination of
the two that you choose. The same property (or sales proceeds) must be rolled
over. If you receive property in a distribution from a qualified retirement plan you
cannot keep the property and contribute cash to a traditional IRA in place of the
property. You must sell it and roll over the entire proceeds of the sale. C is the
correct answer. Note that if he sells the land within 60 days of the distribution, he
must put the ENTIRE proceeds from the sale into the IRA to avoid reporting the
$15,000 as taxable income in the year received.
Elden is 78 years of age and single. He received Social Security benefits of $15,000, which includes $500 for Medicare premiums. His pension income was $57,000. He
also had received $1,500 dollars of interest income, $700 of rental income and $1,600 of dividends. How much is Elden’s adjusted gross income?
Elden’s provisional income of $68,300 is the sum of 1/2 of his social security
benefits or $7,500, $57,000 of pension income, interest income of $1,500, dividends
of $1,600, and rental income of $700. His provisional income of $68,300 is
compared to the upper base amount for single taxpayers of $34,000. The amount of
his social security benefits included in income is limited to a maximum of 85% of his
social security amount. This question asks for the amount of Elden’s adjusted gross
income. His adjusted gross income is the sum of 85% of his social security benefits
$12,750 (85% × $15,000), pension income of $57,000, interest income of $1,500,
gross rental income of $700, and $1,600 of dividends for adjusted gross income of
$73,550
A 62-year-old, married taxpayer files Married Filing Separately, and lives apart from the spouse for an entire taxable year. What is the taxpayer’s beginning base
amount for computing taxable Social Security benefits?
The base amount for a taxpayer who is married filing separately and lives apart
from a spouse the entire tax year is $25,000.
Threshold to determine maximum percentage of benefits subject to tax.
Filing Status
50%
Lower Base
85%
Upper Base
Single $25,000 $34,000
Head of Household $25,000 $34,000
Qualifying Widow(er) $25,000 $34,000
Married Filing Separately* $25,000 $34,000
Married Filing Jointly $32,000 $44,000
*This table does not apply to a taxpayer who is married filing separately and lives
with a spouse at any time during the year. This taxpayer must include in income
85% of provisional income or 85% of social security benefits, whichever is lower.
§ 86(c)(1); IRS Publication 915
Sandy received the following income this year:
Wages (Box 1 of W-2) $50,000
Money won at weekly poker games $1,000
Christmas ham (fair market value) $22
Dependent care benefits (Box 10 of W-2) $2,000 (spent $3,000 for childcare)
Group term life insurance ($40,000 death benefit) $50
How much gross income must be reported by Sandy?
Sandy has a reportable income of $51,000, which includes her wages of $50,000 and
poker game winnings of $1,000.
If an employer gives employees turkeys, hams, or other items of nominal value at
Christmas or other holidays, the value of the gift should not be included in income.
Generally, up to $5,000 received from an employer’s dependent care assistance
program may be excluded from income provided it is used to pay for eligible
dependent care expenses.
If the face value of a life insurance policy is $50,000 or less none of the premiums
paid by the employer are taxable income to the employee.
Rev. William Wilson is a full-time minister. The church allows him to use a parsonage that has an annual fair rental value of $24,000. The church pays him an annual salary of $67,000, of which $7,500 is designated for utility costs. His actual utility costs during the year were $7,000.
What is his income for income tax purposes?
For income tax purposes, Rev. Wilson excludes $31,000 from gross income ($24,000
fair rental value of the parsonage plus $7,000 for utility costs). The portion of salary
not designated for utility costs is $59,500. Out of the $7,500 for utility costs he only
spends $7,000, and must include the $500 difference in income. For income tax
purposes, he reports $60,000 ($59,500 salary plus $500 of unused utility allowance).
His income for SE tax purposes is $91,000 ($67,000 + $24,000 fair rental value of the
parsonage.)
Randy Lee is an ordained minister of a tax-exempt church. Randy receives a salary plus a housing allowance for rent and utilities. Which of the following statements is correct?
Members of the clergy must include in income any salary and fees received for
masses, marriages, baptisms, funerals, etc. Payments to the religious institution are
not taxable. The rental value of a home (including utilities) or any designated
housing allowance provided is not income. However, the exclusion cannot be more
than the reasonable pay for services rendered. Exclude an allowance designated for
utility cost only up to the actual utility cost. The home or allowance must be
compensation for services rendered as an ordained, licensed, or commissioned
minister. However, the rental value of the home or the housing allowance must be
included as earnings from self-employment (on Schedule SE) if self-employment tax
is applicable.
Trish Durwood works for a small retail clothing store. She earned $26,000 in wages
during the year. Because of a cash flow problem in April, Trish did not receive her $500 weekly check but instead was given a credit of $500 on the outstanding balance of her account with the store where she had purchased clothing for her
family. How much income should be shown on her Form W-2 and reported on her Form 1040?
Treat the amount credited to her outstanding balance as wages on Form W-2. The
question indicates her wages as $26,000, which already includes the $500 credit.
In most cases, the taxpayer must include in gross income everything received in
payment for personal services. In addition to wages, salaries, commissions, fees,
and tips, this includes other forms of compensation such as fringe benefits and
stock options. The taxpayer should receive a Form W-2 from his employer showing
the pay the taxpayer received services. The taxpayer should include all his pay on
his tax return, even he doesn’t receive Form W-2, or he receives a Form W-2 that
doesn’t include all pay that should be included on the Form W-2.
The main point is that the employer should be reporting the amount paid to the
employee as substitute wages (ie the credit of $500 on her store account) on her
Form W-2. The correct answer is $26,000.
Kelly started working at Jimmy’s Tavern on May 29 and received $10,000 in wages during the year. During the month of May, Kelly made $19 in tips. Her tips for the rest of the year totaled $6,500. Is Kelly obligated to report the $19 she made in May on her tax return?
Municipality X issues a bond with a face value of $10,000. Municipality X will redeem the bond at face value in five years. In order to obtain the bond from
Municipality X, an investor must pay $8,000. What is the original issue discount in this case?
OID is defined as the difference between the stated redemption price at maturity
and the issue price.
$10,000 – $8,000 = $2,000
For 2021, payments of alimony under an unmodified pre-2019 divorce decree are:
Payments of alimony and separate maintenance during 2021 from a divorce prior to
2019 that hasn’t been modified are deductible by the payor spouse and includible in
income by the recipient's spouse.
TCJA: The payment of alimony and separate maintenance under a divorce or
separate maintenance agreement (or modifications to prior agreements that
account for the new TCJA provision) executed after December 31, 2018, will no
longer be deductible by the payor spouse and will no longer be includible in income
by the payee's spouse.
Alimony is deductible by the payor and includible in the recipient’s income for a
divorce or separation instrument executed on or before 12/31/2018, even when
payments are made after 2018. A modification after 12/31/2018 of such an
instrument could have implications for the tax treatment of future payments.
Adam, a single taxpayer, converts $50,000 from his traditional IRA into a Roth IRA in 2021. His AGI for 2021, including the conversion income was $320,000. There
were no additions to be taken into account to arrive at his modified AGI. Is the entire conversion allowed?
The income limitation for Roth conversions no longer applies.
Fred received the following from his employer during 2020: $25,000 regular wages,
$5,000 cash bonus, trip valued at $1,000, and parking valued at $100 per month at a lot adjacent to the office building. His employer contributed $200 per month to a
401(k) plan for Fred. Fred chose not to set aside any of his pay for the retirement plan. How much income should Fred report?
The wages, the bonus, and the trip are all taxable income to Fred. The parking
benefit, up to $270 per month for qualified parking for 2021, is a nontaxable fringe
benefit. Employer contributions to a 401(k) are not income to the employee and are
deductible for the employer.
Fred should report an income of $31,000 ($25,000 regular wages + $5,000 cash bonus +
trip valued at $1,000)
Becky is single and works for a small magazine publisher. She was not covered by a qualified plan at her place of employment during the tax year. She establishes an IRA for the tax year and contributes $5,000. Which of the following can she NOT
purchase as an investment within her IRA?
Investing IRA funds in collectibles is a prohibited transaction. Artwork is specifically
listed as a collectible.
Mr. and Mrs. Apple received the following income during the current year:
$200 in interest credited to their bank account but not withdrawn or used by
them during the year $2,000 in interest received as a beneficiary in a trust established by Mr. Apple’s
father and included on Schedule K-1 from the trust $100 in interest on a bond issued by the state of Georgia
$1,000 bond interest on the City of Atlanta municipal bond
How much taxable interest income must Mr. and Mrs. Apple report on their current year tax return?
Interest received on an obligation issued by a state or local government is generally
not taxable. Therefore, the City of Atlanta municipal bond and the State of Georgia
bond interest amounts are non-taxable. The $200 interest income from the bank is
considered received in the current year even though it was not withdrawn in the
current year, making it taxable in the current year. The taxable interest income Mr.
and Mrs. Apple must report on their current year tax return as $2,200 ($200 interest
from bank + $2,000 interest on trust Schedule K-1).
Michael, an active duty member of the US Army, incurs the following expenses
when he moves duty stations from Texas to Georgia.
$140.80 in mileage (880 miles x 16 cents)
$75 tolls
$300 for lodging
$200 meals
If Michael is reimbursed for 100% of the above expenses, how much of the reimbursement can be excluded from gross income?
Because Michael is an active member of the US Armed Forces, reimbursements for
moving expenses when he changes duty stations are excluded from gross income,
except for the cost of meals. No deduction or tax-free reimbursement is allowed for
the cost of meals
Miriam Wallesto has come to Wilma Randolph to do her federal income taxes. Ms. Wallesto has a gross income for the year of $40,000. She spent $100 this year and wants to know if that amount can be used to reduce her adjusted gross income.
Under which of the following will she NOT be able to use that amount to reduce the amount reported as her adjusted gross income?
Helen Hayward pays the following amounts. Which of these expenditures will she be able to use to reduce the amount that she reports as adjusted gross income
(AGI)?
One-half of self-employment tax is a deduction in arriving at adjusted gross income.
Casualty losses and gambling losses are both included with itemized deductions.
The TCJA suspends the deduction for moving expenses for the taxable year 2018
through 2025 for taxpayers other than members of the Armed Forces. The TCJA
retains the deduction for moving expenses for members of the Armed Forces (or
their spouse or dependents) on active duty who move pursuant to a military order
and incident to a permanent change of station. Therefore, since she is not a
member of the Armed Forces, she can not deduct her moving expenses.
Alice and Mike filed a joint return for 2021 on April 15, 2022. Alice, who is a nonworking spouse, is 49. Both Alice and Mike contributed $4,000 each to a traditional
IRA although they qualified to contribute the maximum amount. They filed their return timely. On June 1st, 2022, Mike’s mother gave each of them $1,000.
What additional amount of the gift may Alice and Mike contribute to each of their IRAs for the year 2021?
Contributions to a traditional IRA must be made by the due date of the return, not
including an extension. Their due date was April 15, 2022. A contribution for 2021
cannot be made on June 1, 2022.
Can a 75-year-old taxpayer convert all of the funds in a traditional IRA to a Roth IRA account?
This question asks whether a taxpayer (75 years old) can convert all of the funds in
a traditional IRA to a Roth IRA account. As the taxpayer is 75 years old, he must take
all required distributions. A taxpayer cannot convert amounts that must be
distributed from his traditional IRA for a particular year under the required
distribution rules. He must include in his gross income distributions from a
traditional IRA that he would have had to include in his income if he had not converted
them into a Roth IRA. These amounts are included in income on his return for the
year that he converted them from a traditional IRA to a Roth IRA. He does not
include in gross income any part of a distribution from a traditional IRA that is a
return of his basis
