ACC 455 Practice: Week 2 Knowledge Check

Complete the Week 2 Knowledge Check in McGraw-Hill Connect.

Kathy is 60 years of age and self-employed. During 2018, she reported $500,000 of revenues and $100,000 of expenses relating to her self-employment activities. If Kathy has no other retirement accounts in her name, what is the maximum amount she can contribute to an individual 401(k) for 2018? (Round your final answer to the nearest whole number)

Multiple Choice

$55,000.

$61,000.

$95,837.

$77,337.

Which of the following statements regarding IRAs is false?

Multiple Choice

Taxpayers who participate in an employer-sponsored retirement plan may be allowed to make deductible contributions to a traditional IRA.

The ability to make deductible contributions to a traditional IRA and nondeductible contributions to a Roth IRA may be subject to phase-out based on modified AGI.

A taxpayer may contribute to a traditional IRA in 2018 but deduct the contribution on her 2017 tax return.

Taxpayers who have made nondeductible contributions to a traditional IRA are taxed on the full proceeds when they receive distributions from the IRA.

Which of the following statements is true regarding employer-provided qualified retirement plans?

Multiple Choice

May discriminate against rank and file employees.

Deductible contributions are generally phased-out based on AGI.

Executives are generally ineligible to participate in these plans.

They are generally referred to as defined benefit plans or defined contribution plans.

Kathy is 60 years of age and self-employed. During 2018 she reported $500,000 of revenues and $100,000 of expenses relating to her self-employment activities. If Kathy has no other retirement accounts in her name, what is the maximum amount she can contribute to a simplified employee pension (SEP) IRA for 2018? (Round your final answer to the nearest whole number)

Multiple Choice

$55,000.

$61,000.

$77,337.

$369,400.

Which of the following is a true statement regarding saving for retirement?

Multiple Choice

In a given year, a taxpayer may participate in either an employer-sponsored defined benefit plan or defined contribution plan but not both.

In a given year, a taxpayer who receives salary as an employee and also receives self-employment income may participate in an employer-sponsored defined contribution plan or may contribute to a self-employed retirement account but not both.

In a given year, a taxpayer may contribute to an IRA (either traditional or Roth) or contribute to a self-employment retirement account but not both.

None of the choices is a true statement.

Riley participates in his employer’s 401(k) plan. He turns 69 years of age on February 15, 2018, and he plans on retiring on July 1, 2018. When must Riley receive his first distribution from the plan to avoid minimum distribution penalties?

Multiple Choice

By April 1, 2018.

By April 1, 2019.

By April 1, 2020.

By April 1, 2021.

Which of the following best describes distributions from a traditional defined contribution plan?

Multiple Choice

Distributions from defined contribution plans are fully taxable to the recipient as ordinary income.

Distributions from defined contribution plans are partially taxable to the recipient as ordinary income and partially nontaxable as a return of capital.

Distributions from defined contribution plans are fully taxable to the recipient as long-term capital gains.

Distributions from defined contribution plans are partially taxable to the recipient as capital gains and partially nontaxable as a return of capital.

Which of the following statements describes how a traditional 401(k) account is similar to a Roth 401(k) account?

Multiple Choice

Employees contribute before-tax dollars to both types of accounts.

Distributions from a traditional 401(k) account and a Roth 401(k) account are both subject to minimum distribution penalties.

Both accounts can receive matching contributions from employers.

Employers generally choose how funds in these accounts will be invested.

Kathy is 60 years of age and self-employed. During 2018 she reported $100,000 of revenues and $40,000 of expenses relating to her self-employment activities. If Kathy has no other retirement accounts in her name, what is the maximum amount she can contribute to a simplified employee pension (SEP) IRA for 2018? (Round your final answer to the nearest whole number)

Multiple Choice

$11,152.

$17,152.

$61,000.

$55,000.

Which of the following statements concerning traditional IRAs and Roth IRAs is true?

Multiple Choice

A taxpayer may contribute to a Roth IRA at any age but a taxpayer is not allowed to contribute to a traditional IRA after reaching 70½ years of age.

The annual contribution limits for a traditional IRA and Roth IRA are the same.

Taxpayers with high income are allowed to contribute to traditional IRAs but not to Roth IRAs.

All of the choices are true.

Which of the following statements regarding defined contribution plans is false?

Multiple Choice

Employers bear investment risk relating to the plan.

Employees immediately vest in their contributions to the plan.

Employers typically match employee contributions to the plan to some extent.

An employer’s vesting schedule is used for employers’ contributions in determining the amount of the plan benefits the employee is entitled to receive on retirement.

Amy is single. During 2018, she determined her adjusted gross income was $12,000. During the year, Amy also contributed $1,500 to a Roth IRA. What is the maximum saver’s credit she may claim for the year?

Multiple Choice

$750.

$1,000.

$1,500.

$0.

Which of the following best describes distributions from a defined benefit plan?

Multiple Choice

Distributions from defined benefit plans are taxable as ordinary income.

Distributions from defined benefit plans are partially taxable as ordinary income and partially nontaxable as a return of capital.

Distributions from defined benefit plans are taxable as capital gains.

Distributions from defined benefit plans are partially taxable as capital gains and partially nontaxable as a return of capital.

During 2018, Jacob, a 19 year old full-time student, earned $4,500 during the year and was not eligible to participate in an employer-sponsored retirement plan. The general limit for deductible contributions to an IRA during 2018 is $5,500. How much of a tax-deductible contribution can Jacob make to an IRA?

Multiple Choice

$0 (Full-time students are not allowed to participate in IRAs).

$500.

$4,500.

$5,500.

Kathy is 48 years of age and self-employed. During 2018 she reported $100,000 of revenues and $40,000 of expenses relating to her self-employment activities. If Kathy has no other retirement accounts in her name, what is the maximum amount she can contribute to a simplified employee pension (SEP) IRA for 2018? (Round your final answer to the nearest whole number)

Multiple Choice

$11,152.

$17,152.

$61,000.

$55,000.

Which of the following statements regarding contributions to defined contribution plans is true?

Multiple Choice

Employer contributions to a defined contribution plan are not limited by the tax law.

Employee contributions to a defined contribution plan are not limited by the tax law.

An employee who is at least 60 years of age as of the end of the year may contribute more to a defined contribution plan than an employee who has not reached age 60 by year-end.

The tax laws limit the sum of the employer and employee contributions to a defined contribution plan.

Which of the following describes a defined contribution plan?

Multiple Choice

Provides guaranteed income on retirement to plan participants.

Employers and employees generally may contribute to the plan.

Generally set up to defer income for executives and highly compensated employees but not other employees.

Retirement account set up to provide an individual a fixed amount of income on retirement.

Riley participates in his employer’s 401(k) plan. He turns 70 years of age on February 15, 2017 and he plans on retiring on July 1, 2019. When must Riley receive his first distribution from the plan to avoid minimum distribution penalties?

Multiple Choice

By April 1, 2017.

By April 1, 2018.

By April 1, 2019.

By April 1, 2020.

Amy files as a head of household. She determined her 2018 adjusted gross income was $70,000. During the year, she contributed $2,500 to a Roth IRA. What is the maximum saver’s credit she may claim for 2018?

Multiple Choice

$1,000.

$2,000.

$2,500.

$1,250.

$0.

Daniela retired at the age of 65. The current balance in her Roth IRA is $200,000. Daniela established the Roth IRA 10 years ago. Through a rollover and annual contributions Daniela has contributed $80,000 to her account. If Daniela receives a $50,000 distribution from the Roth IRA, what amount of the distribution is taxable?

Multiple Choice

$0.

$20,000.

$30,000.

$50,000.

In general, which of the following statements regarding self-employed retirement accounts is true?

Multiple Choice

In general, SEP IRAs have higher contribution limits than individual 401(k)s if the contributing taxpayer is at least 50 years of age at year end.

In general, SEP IRAs have higher contribution limits than individual 401(k)s no matter the age of the contributing taxpayer.

In general, Individual 401(k)s have higher contribution limits than SEP IRAs.

None of the choices are true. In general, both SEP IRAs and individual 401(k)s have exactly the same annual contribution limits.

Shauna received a $100,000 distribution from her 401(k) account this year. Assuming Shauna’s marginal tax rate is 25%, what is the total amount of tax and penalty Shauna will be required to pay if she receives the distribution on her 59th birthday and she has not yet retired?

Multiple Choice

$0.

$10,000.

$25,000.

$35,000.

None of the choices are correct.

Which of the following describes a defined benefit plan?

Multiple Choice

Provides fixed income to the plan participants based on a formula.

Distribution amounts determined by employee and employer contributions.

Allows executives to defer income for a period of years.

Retirement account set up by an individual.

Which of the following statements concerning nonqualified deferred compensation plans is true?

Multiple Choice

If an employer doesn’t have the funds to pay the employee, the employee becomes an unsecured creditor of the employer.

These plans can be an important tax planning tool for employers if they expect their marginal tax rate to decrease over time.

These plans can be an important tax planning tool for employees who expect their marginal tax rate to increase over time.

Distributions are taxed at the same tax rate as long-term capital gains.

Which of the following statements regarding vesting in a defined benefit plan is correct?

Multiple Choice

Under a cliff vesting schedule, a portion of an employee’s benefits vest each year.

Under a graded vesting schedule, an employee’s entire benefit vests all at the same time.

When an employee’s benefits vest, she is entitled to participate in the employer’s defined benefit plan.

When an employee’s benefits vest, she is legally entitled to receive the vested benefits.

In year 1, Abby purchased a new home for $200,000 by making a down payment of $150,000 and financing the remaining $50,000 with a loan, secured by the residence, at 6 percent. As of January 1, year 4 the outstanding balance on the loan was $40,000. On January 1, year 4, when her home was worth $300,000, Abby refinanced the home by taking out a $120,000 mortgage at 5 percent. With the loan proceeds, she paid off the $40,000 balance of the existing mortgage and used the remaining $80,000 for purposes unrelated to the home. During year 4, she made interest-only payments on the new loan of $6,000. What amount of the $6,000 interest expense on the new loan can Abby deduct in year 4 on the new mortgage as home related interest expense?

Multiple Choice

$0.

$2,000.

$5,000.

$6,000.

Which of the following statements regarding the break-even point for paying discount points in order to get a lower interest rate on the loan is correct?

Multiple Choice

All else equal, the break-even point for paying points on an original mortgage is longer than the break-even point for paying points on a refinance.

All else equal, the break-even point for paying points on an original mortgage is longer for a taxpayer who does not make extra principal payments each year on the loan than for a taxpayer who does make additional principal payments each year on the loan.

All else equal, the break-even point for a taxpayer paying points on an original mortgage is longer when the taxpayer’s marginal income tax rate increases in the years subsequent to the original financing compared to a taxpayer whose marginal tax rate does not change in the years subsequent to the year in which the loan is executed.

None of these statements are correct.

Which of the following statements regarding deductions for real property taxes is incorrect?

Multiple Choice

A taxpayer is allowed to immediately deduct property taxes as the taxpayer makes monthly mortgage payments to an escrow account held by her mortgage company.

Taxpayers are not allowed to deduct payments made for setting up water and sewer services.

An individual deducts real property taxes on her principal residence as a from AGI deduction.

Taxpayers are not allowed to deduct payments made for repairs to neighborhood sidewalks.

Which of the following statements regarding the tax deductibility of points related to a home mortgage is correct?

Multiple Choice

Points paid in the form of a loan origination fee on an original home loan are deductible over the life of the loan.

Points paid in the form of prepaid interest on an original home loan are deductible over the life of the loan.

Points paid in the form of prepaid interest on a refinance are deductible over the life of the loan.

None of these statements are correct.

Which of the following statements regarding limitations on the deductibility of home office expenses of employees is correct?

Multiple Choice

Deductible home office expenses of employees are not deductible.

Deductible home office expenses of employees are miscellaneous itemized deductions subject to the 2 percent floor.

Deductible home office expenses of employees are for AGI deductions limited to gross income from the business.

Deductible home office expenses of employees are for AGI deductions not limited to gross income from the business.

Which of the following statements regarding home-related transactions is correct?

Multiple Choice

If a taxpayer converts a home from personal use to rental use, the basis of the rental property is the greater of the basis of the property at the time of the conversion or the fair market value of the property at the time of the conversion.

If a taxpayer uses a residence as a rental property (and deducts depreciation expense against the basis of the property) and as a personal residence the taxpayer will not be allowed to exclude the entire amount of gain even if the taxpayer otherwise meets the ownership and use tests and the amount of the gain is less than the limit on excludable gain.

If a taxpayer converts a rental home to a principal residence, the taxpayer’s basis in the principal residence is the greater of the basis of the home at the time of the conversion or the fair market value at the time of the conversion.

None of these statements are correct.

Which of the following statements regarding the home mortgage interest expense deduction is false for a single taxpayer?

rev: 02_14_2019_QC_CS-140338

Multiple Choice

Taxpayers may deduct all of the interest paid on up to $1,000,000 of acquisition debt if the debt occurred in January of 2017.

Taxpayers may deduct all of the interest paid on up to $750,000 of acquisition debt if the debt occurred in January of 2018.

If, in 2018, a taxpayer refinances acquisition debt that was originally incurred in January of 2017, the taxpayer may deduct the interest on up to only $750,000 of the refinanced loan.

None of the choices is false.

Ilene rented her second home for the entire year. During the year, Ilene reported a net loss of $15,000 from the rental. If Ilene is an active participant in the rental and her AGI is $140,000, how much of the loss can she deduct against ordinary income in the year?

rev: 12_13_2018_QC_CS-151352

Multiple Choice

$15,000.

$10,000.

$5,000.

$0.

Which of the following statements regarding the IRS and/or Tax Court approaches to allocating home-related expenses between rental use and personal use is correct?

Multiple Choice

The Tax Court approach allocates more property tax and interest expense to rental use than does the IRS approach.

The Tax Court and the IRS approaches allocate the same amount of expenses other than interest expense and property taxes to rental use.

The IRS approach allocates interest expense and property taxes to rental use based on the ratio of the number of days of rental use to the total days of the year.

None of these statements are correct.

Which of the following statements regarding the home mortgage interest expense deduction is correct?

Multiple Choice

Taxpayers may deduct interest expense on a limited amount of home equity indebtedness but they may deduct interest expense on an unlimited amount of home acquisition indebtedness.

Taxpayers may deduct interest expense on a limited amount of acquisition indebtedness but an unlimited amount of home equity indebtedness.

Taxpayers may deduct interest expense on a limited amount of acquisition indebtedness but may not deduct interest on home equity indebtedness.

None of these statements are correct.

Brady owns a second home that he rents to others. During the year, he used the second home for 50 days for personal use and for 100 days for rental use. Brady collected $20,000 of rental receipts during the year. Brady allocated $7,000 of interest expense and property taxes, $10,000 of other expenses, and $4,000 of depreciation expense to the rental use. What is Brady’s net income from the property and what type and amount of expenses will he carry forward to next year, if any?

Multiple Choice

$0 net income. $1,000 depreciation expense carried forward to next year.

($1,000) net loss. $0 expenses carried over to next year.

$0 net income. $1,000 of other expense carried over to next year.

$0 net income. $1,000 of interest expense and property taxes carried over to next year.

Which of the following statements regarding the home mortgage interest expense deduction is correct?

Multiple Choice

The limit on acquisition indebtedness depends on filing status.

The limit on acquisition indebtedness applies to one (not multiple) loans.

The limit on acquisition indebtedness applies only in the year of acquisition.

Taxpayers who do not itemize deductions can still deduct home mortgage interest as a from AGI deduction.

Ethan (single) purchased his home on July 1, 2008. He lived in the home as his principal residence until July 1, 2015 when he moved out of the home and rented it out until July 1, 2017 when he moved back into the home. On July 1, 2018 he sold the home and realized a $210,000 gain. What amount of the gain is Ethan allowed to exclude from his 2018 gross income?

Multiple Choice

$0.

$168,000.

$200,000.

$210,000.

Dawn (single) purchased her home on July 1, 2008. On July 1, 2017 Dawn moved out of the home. She rented out the home until July 1, 2018 when she sold the home and realized a $230,000 gain (assume none of the gain was attributable to depreciation). What amount of the gain is Dawn allowed to exclude from her 2018 gross income?

Multiple Choice

$0.

$23,000.

$207,000.

$230,000.

Michael (single) purchased his home on July 1, 2008. He lived in the home as his principal residence until July 1, 2016 when he moved out of the home and rented it out until July 1, 2017 when he moved back into the home. On July 1, 2018 he sold the home and realized a $300,000 gain. What amount of the gain is Michael allowed to exclude from his 2018 gross income?

Multiple Choice

$0.

$225,000.

$250,000.

$300,000.

Which of the following statements regarding personal and/or rental use of a home is false?

Multiple Choice

A day for which a taxpayer rents a home to an unrelated party for less than the property’s fair market value is considered to be a personal use day.

A day for which a taxpayer rents a home to a relative for full fair market value is considered to be a rental use day (home is not the relative’s principal residence).

A day for which an unrelated non-owner stays in the home under a vacation exchange arrangement is considered to be a personal use day.

A day for which the home is available for rent but is not occupied does not count as a personal use or a rental use day.

On February 1, 2018 Stephen (who is single) sold his principal residence (home 1) at a $100,000 gain. He was able to exclude the entire gain on his 2018 tax return. Stephen purchased and moved into home 2 on the same day. Assuming Stephen lives in home 2 as his principal residence until he sells it, which of the following statements is true?

Multiple Choice

Under no circumstance will Stephen be allowed to exclude gain on home 2 if he sells home 2 in 2019.

Stephen will be eligible to exclude gain on home 2 only if he waits until 2023 to sell it.

In certain circumstances, Stephen may be able to exclude gain on home 2 even if he sells home 2 in 2018.

None of these is a true statement.

When a taxpayer experiences a net loss from a nonresidence (rental property):

Multiple Choice

the taxpayer will not be allowed to deduct the loss under any circumstance if the taxpayer does not have passive income from other sources.

the loss is fully deductible against the taxpayer’s ordinary income no matter the circumstances.

if the taxpayer is not an active participant in the rental, the taxpayer may be allowed to deduct the loss even if the taxpayer does not have any sources of passive income.

if the taxpayer is not allowed to deduct the loss due to the passive activity loss limitations, the loss is suspended and carried forward until the taxpayer generates passive income or until the taxpayer sells the property.

When a taxpayer rents a residence for part of the year, the residence is not eligible as a qualified residence for the home mortgage interest expense deduction unless the taxpayer’s:

Multiple Choice

personal use of the home exceeds the taxpayer’s rental use of the home.

personal use of the home exceeds half of the taxpayer’s rental use of the home.

personal use of the home exceeds the lesser of 14 days or 10 percent of the taxpayer’s rental use of the home.

personal use of the home exceeds the greater of 14 days or 10 percent of the taxpayer’s rental use of the home.

On March 31, year 1, Mary borrowed $200,000 to buy her principal residence. Mary paid 3 points to reduce her interest rate from 6 percent to 5 percent. The loan is for a 30-year period. What is Mary’s year 1 deduction for her points paid?

Multiple Choice

$50.

$150.

$4,500.

$6,000.

For a home to be considered a rental (nonresidence) property, a taxpayer must:

Multiple Choice

rent the property for 15 days or more during the year.

use the property for personal purposes for no more than the greater of (a) 14 days or (b) 10 percent of the total days rented.

use the property for personal purposes for no more than the lesser of (a) 14 days or (b) 10 percent of the total days rented.

rent the property for 1 day or more during the year and use the property for personal purposes for no more than the greater of (a) 14 days or (b) 10 percent of the total days rented.

rent the property for 15 days or more during the year and use the property for personal purposes for no more than the lesser of (a) 14 days or (b) 10 percent of the total days rented.

Katy owns a second home. During the year, she used the home for 20 personal use days and 50 rental days. Katy allocates expenses associated with the home between rental use and personal use. Katy did not incur any expenses to obtain tenants. Which of the following statements is correct regarding the tax treatment of Katy’s income and expenses from the home?

Multiple Choice

Katy includes the rental receipts in gross income and deducts the expenses allocated to the rental use of the home for AGI.

Katy deducts from AGI interest expense and property taxes associated with the home not allocated to the rental use of the home.

Assuming Katy’s rental receipts exceed the interest expense and property taxes allocated to the rental use, Katy’s deductible expenses for the year may not exceed the amount of her rental receipts (she may not report a loss from the rental property).

All of these statements are correct.

On July 1 of year 1, Elaine purchased a new home for $400,000. At the time of the purchase, it was estimated that the property tax bill on the home for the year would be $8,000 ($400,000 × 2%). On the settlement statement, Elaine was charged $4,000 for the year in property taxes and the seller was charged $4,000. On December 31, year 1 Elaine discovered that the real property taxes on the home for the year were actually $9,000. Elaine wrote a $9,000 check to the local government to pay the taxes for that calendar year (Elaine was liable for the taxes because she owned the property when they became due). What amount of real property taxes is Elaine allowed to deduct for year 1? (Assume not married filing separately.)

Multiple Choice

$0.

$4,000.

$4,500.

$5,000.

$9,000.

Which of the following statements regarding limitations on the deductibility of home office expenses of self-employed taxpayers is correct?

rev: 02_14_2019_QC_CS-140338

Multiple Choice

Deductible home office expenses are miscellaneous itemized deductions subject to the 2 percent of AGI floor.

Deductible home office expenses are miscellaneous itemized deductions not subject to the 2 percent floor.

Deductible home office expenses are for AGI deductions limited to gross income from the business minus non-home office related expenses.

Deductible home office expenses are for AGI deductions and may be deducted without limitation.

Larry owned and lived in a home for five years before marrying Darlene. Larry and Darlene lived in the home for one year before selling it at a $600,000 gain. Larry was the sole owner of the residence until it was sold. How much of the gain may Larry and Darlene exclude?

Multiple Choice

$0.

$250,000.

$500,000.

$600,000.