Question 1

Jonathon, age 50 and in good health, withdrew $6,000 from his pension plan during the current year. The withdrawal was not eligible for any exception to the 10% penalty. Jonathon had made $40,000 of after- tax contributions to the plan while his employer had contributed $80,000. In addition to relevant income taxes, how much penalty must Jonathon pay?

Accepted Answer

The answer of Jonathon, age 50 and in good health,...

Question 2

Carolyn, who earns $400,000, is required to pay John, her ex- husband, $200,000 as part of the property settlement as a result of their divorce agreement which was executed in 2018. In turn, John transfers stock worth $50,000 to Carolyn. What is the amount of Carolyn's adjusted gross income in 2018?

Accepted Answer

The property settlement is not considered income, so Carolyn's adjusted gross income remains her earnings of $400,000. The transfer of stock is part of the property settlement and does not affect her income.

Question 3

Under the terms of their divorce agreement, Humphrey transferred Corporation H stock to his former wife, Greta, as a property settlement. At the time of the transfer, the stock had a basis to Humphrey of $40,000 and a fair market value of $55,000. What is the tax consequence of this transaction to Humphrey, and what is Greta's basis in the Corporation H stock?

Accepted Answer

Under IRS rules, transfers of property between spouses or incident to divorce are generally not taxable events. Therefore, Humphrey has no gain or loss. Greta's basis in the stock is the same as Humphrey's adjusted basis, which is $40,000.

Question 4

Thomas purchased an annuity for $20,000 that will pay him $500 per month for ten years. What amount should Thomas include in his income each year?

Accepted Answer

The total amount Thomas will receive over ten years is $500 x 12 months x 10 years = $60,000. The taxable portion is the total received minus the initial investment: $60,000 - $20,000 = $40,000. Spread over ten years, this is $4,000 per year.

Question 5

Eva and Lisa each retired this year and started receiving distributions from their respective retirement plans. Eva's plan was funded with all pre- tax contributions, whereas Lisa's plan was funded with only after- tax contributions (Roth plan). With respect to the tax treatment of their retirement plan distributions,

Accepted Answer

Eva's distributions are fully taxable because they were funded with pre-tax contributions, while Lisa's Roth plan distributions are not taxable since they were funded with after-tax contributions.

Question 6

Mark purchased 2,000 shares of Darcy Corporation for $13,200. This year, Darcy declared a 10% nontaxable stock dividend, and Mark received 200 shares. After the dividend Mark's per share basis will be

Accepted Answer

The original cost of the shares was $13,200 for 2,000 shares, making the original per share basis $6.60. After receiving a 10% stock dividend, Mark now has 2,200 shares. The total cost basis remains $13,200, so the new per share basis is $13,200 / 2,200 = $6.00.

Question 7

Under the terms of their divorce agreement executed in August of this year, Clint transferred Beta, Inc. stock to his former wife, Rosa, as a property settlement. At the time of the transfer, the stock had a basis to Clint of $55,000 and a fair market value of $68,000. Rosa subsequently sold the stock for $75,000. What is the tax consequence of first the stock transfer and then the stock sale to Rosa?

Accepted Answer

The answer of Under the terms of their divorce agreement...

Question 8

Natasha, age 58, purchases an annuity for $40,000. Natasha will receive $400 per month for the rest of her life. The expected return multiple is 20.0. At age 65, the amount that Natasha may exclude from income is

Accepted Answer

The exclusion ratio is calculated as the investment in the contract ($40,000) divided by the expected return ($400/month * 12 months/year * 20 years = $96,000), which equals 0.4167. Therefore, $400 * 0.4167 = $166.68 is excluded per month. Over a year, this is $166.68 * 12 = $2,000.

Question 9

As a result of a divorce agreement executed in 2018, Michael pays Judy $75,000 in year one and $25,000 per year in subsequent years. How much of the $75,000 in year one is properly characterized as alimony and will not be recaptured later?

Accepted Answer

The answer of As a result of a divorce agreement...

Question 10

Julia, age 57, purchases an annuity for $33,600. Julia will receive $400 per month for the rest of her life. The expected return multiple is 20.0. At age 88, the amount that Julia may exclude from income is

Accepted Answer

The answer of Julia, age 57, purchases an annuity for...

Question 11

With respect to property settlements in a divorce or separation, all of the following are true with the exception of

Accepted Answer

Statement D is incorrect because not all the statements are correct; they are true except for the statement that all of them are correct.

Question 12

Which of the following is least likely to result in a constructive dividend?

Accepted Answer

A sale of a corporation's asset to a shareholder at fair market value is a legitimate transaction and does not confer any undue benefit to the shareholder, thus it is least likely to be considered a constructive dividend.

Question 13

A couple was divorced in 2016, resulting in the payment of alimony. Alimony paid in 2018 is

Accepted Answer

Alimony paid under divorce agreements finalized before 2019 is deductible by the payor and must be included in the income of the payee.

Question 14

Jan purchased an antique desk at auction. For two years, the desk sat in Jan's garage until she decided to restore it. This year, while cleaning and restoring the desk, Jan discovered $1,500 in a hidden compartment inside one drawer. With respect to the $1,500, Jan must

Accepted Answer

The $1,500 found is considered taxable income in the year it was discovered, so Jan must report it on this year's tax return.

Question 15

Julia owns 1,000 shares of Orange Corporation. This year, Orange declared a 10% stock dividend. There was no option for shareholders to receive cash. When Julia received 100 shares of Orange stock, it had a fair market value of $50 a share. How much income does Julia have from the dividend?

Accepted Answer

Stock dividends are generally not taxable unless the shareholder has the option to receive cash or other property. Since Julia did not have the option to receive cash, the stock dividend is not considered taxable income.

Question 16

The requirements for a payment to be considered as alimony include all of the following except

Accepted Answer

For a payment to be considered alimony, it must be made in cash, not property.

Question 17

David, age 62, retires and receives $1,000 per month annuity from his employer's qualified pension plan. David made $65,000 of after- tax contributions to the plan prior to his retirement. Under the simplified method, David's number of anticipated payments is 260. What is the amount includible in income in the first year of withdrawals assuming 12 monthly payments?

Accepted Answer

David receives $12,000 annually ($1,000 x 12). Under the simplified method, the exclusion ratio is calculated as the after-tax contributions divided by the number of anticipated payments: $65,000 / 260 = $250 per payment. Therefore, $250 x 12 = $3,000 is excluded from income, making $9,000 ($12,000 - $3,000) includible in income.

Question 18

A couple will be getting divorced in 2019, resulting in the payment of alimony. Alimony paid in 2019 will be

Accepted Answer

The answer of A couple will be getting divorced in...

Question 19

Child support is

Accepted Answer

Child support payments are neither deductible by the payor nor taxable to the payee. They do not affect the tax reporting of either party.

Question 20

While using a metal detector at the beach during spring break, Toni uncovered some rare coins with a current fair market value of $9,000. What are her tax consequences regarding this find?

Accepted Answer

The IRS requires that found property, such as coins, be reported as income at its fair market value in the year it is discovered.

Quiz 16: Tax Deductions and Travel Expenses for Employees and Self-Employed Individuals