Question 1

Present a technique of computing capital gains and losses.

Accepted Answer

A capital gain is the profit realized from the sale of a capital asset, which is property owned by an individual for investment purposes or for personal use. Gains on property held for personal use must be reported as capital gains, but losses on these assets are not deductible. Gains on investment property must also be reported as capital gains. However, capital losses on investments can be offset in full against capital gains.
The current tax rules on capital gains and losses can best be understood by examining the following steps required for reporting gains and losses:
Step 1. Calculate the cost or tax basis of the capital asset. The basis is the purchase price of the asset plus expenses incurred in improving the asset minus depreciation (if applicable).
Step 2. Determine whether each transaction qualifies as a short- or long-term capital gain or loss by documenting the holding period. Then determine the net long-term or short-term capital gain or loss. The formula is:
Net Gain/Loss = Amount Realized - Adjusted Basis
Step 3. Calculate the net short-term capital gain or loss by subtracting short-term losses from short-term gains.
Step 4. Calculate the net long-term capital gain or loss by subtracting long-term losses from long-term gains.
Step 5. Determine the net long-term or short-term capital gain or loss by combining Steps 3 and 4.

Question 2

Your client, Tim Bailey, doesn't understand your investment strategy of favoring tax credit over tax deduction. How would you explain your recommendation to Tim?

Accepted Answer

It is easy to explain that a tax credit reduces the tax dollar for dollar, whereas a tax deduction reduces the tax only by the marginal tax rate (e.g., by 28 percent) of the taxpayer.

Question 3

Describe the rules governing passive income and passive losses.

Accepted Answer

The tax law generally provides that losses from passive activities such as tax shelters, in which an individual does not materially participate, may be used only to offset income from such activities. In general, the passive activity losses may not be used to offset the income from compensation, interest, dividends, royalties, nonbusiness capital gains, or active business income. Disallowed passive activity losses are carried forward and applied against income from passive activities in future years. These losses are deducted in the year in which the passive activity is entirely liquidated.
An exception to the passive loss rules applies to certain real estate activities with material participation. Individuals who own rental property, and whose adjusted gross income is less than $100,000 have the right to offset regular income with up to $25,000 of rental-related losses, provided they actively participated in the rental real estate activity. For individuals who are married but file separately, the amounts are $50,000 and $12,500 respectively. The maximum deduction is phased out between $100,000 and $150,000.

Question 4

At a recent seminar you have explained the concept of the marginal tax bracket. An attendee, Jeff Lions, wants to know why he should bother with that rate when he knows he is in the 25 percent tax bracket. Can you help?

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Question 5

Robert Stern is outraged by the high-handed approach of the IRS in raising his taxes by applying the AMT rule. Robert firmly believes that he has faithfully recorded all his income, claimed only allowable deductions, and has observed all the tax rules. Consequently, he is upset by the IRS's decision to increase his taxes. Can you help?

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Question 6

Do S corporations face certain tax liabilities?

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Question 7

Robin Hugh, a psychiatrist, needs sophisticated tax planning. And yet, he refuses to ask for assistance because, as he puts it as, "the TRA, the RA, and the TAMRA, and the EGTRRA have eliminated the opportunities for tax planning." Do you have any ideas to help Robin?

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The answer of Robin Hugh, a psychiatrist, needs sophisticated tax...

Question 8

Summarize the deductions that are allowed to be made from adjusted gross income to arrive at the taxable income.

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Question 9

What special rules apply to the capital gains realized from the sale of a residence?

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Question 10

Explain the basic steps of calculating gross income.

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Question 11

What are tax credits? Are there several forms of tax credits?

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Question 12

What is meant by wash sales? Why is it important to know about them?

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Question 13

Describe the key features of taxation of C corporations.

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Question 14

Describe some of the drawbacks of S corporations.

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Question 15

What is the purpose of federal income tax? Why is the goal of a fair income tax system so hard to achieve?

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Question 16

Explain the concept of alternative minimum tax. How is it calculated?

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Question 17

Mr and Mrs Jordan of ages 66 and 64 respectively, file a joint return. How much can they deduct if they elect to use standard deduction? Use the 2015 tax rates.

Accepted Answer

According to the 2015 tax rates, the standard deduction for a married couple filing jointly who are both over 65 is $12,600.

Question 18

Patty Wise, who prepares her own tax returns, has taken "several nondeductible" deductions to minimize her adjusted gross income because she hates to pay taxes. Do you have any advice for Patty?

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Question 19

Contrast alternative minimum tax with regular tax.

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Question 20

Comment on the following statement: "Before the taxable income is computed, adjustments to gross income must be made."

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Quiz 11: Basic Federal Income Tax Structure