Property Basis
A taxpayer's basis does not include which of the following:
Loan Origination Fees
The basis of property is usually its cost. Cost includes amounts paid in cash, debt obligations, other property or services. Cost basis also includes amounts paid for:
Do not include fees and costs for getting a loan on the property in the basis.
Mr. A dies on February 1, Year One when stock that he owned was worth $50,000. He had bought the stock three weeks before his death for $47,000. The stock was worth $54,000 on August 1, Year One (six months later). The shares were conveyed to his nephew on September 1, Year One when the investment was worth $56,000. He sold all the shares five weeks later for cash of $59,000. The executor of the estate did choose to use the alternative valuation date. What was the nephew’s taxable gain on the sale of this stock?
$5,000
Normally, the value at the date of death is used as the tax basis by the recipient of property. However, if the executor chooses the alternative valuation date, the value of the property six months after death or on the date of conveyance (whichever comes first) is used as the tax basis. In this problem, six months come first so the value at August 1 is the tax basis to the nephew. That is $54,000. When the property is sold for $59,000, a gain of $5,000 is recognized by the nephew for tax purposes.
Distributions are made from a qualified tuition program directly to a student beneficiary. If applicable, where does a taxpayer report the taxable earnings from a qualified tuition program (QTP) distribution?
On the student's 1040, as Other Income
A qualified tuition program (QTP) is a program set up to allow a taxpayer to either prepay, or contribute to an account established for paying, a student's qualified education expenses at an eligible educational institution. The designated beneficiary of a QTP is generally the student (or future student) for whom the QTP is intended to provide benefits. Consequently, when taxable distributions are made, they are income to the beneficiary when distributions are made either directly to the beneficiary, or to an eligible educational institution for their benefit. Otherwise, the account owner is the recipient. If the distribution taken exceeds the adjusted qualified education expenses of the year of the distribution, then the portion that is the excess is taxable income and should be reported on the student's 1040 as Other Income.
Which amount received for sickness or injury is NOT exempt from tax?
Punitive damages related to physical injury or sickness.
Include punitive damages (punishment) as ordinary income, it does not matter if related to a physical injury or sickness.
Do not include in income compensatory damages (compensation) for personal physical injury, physical sickness, or emotional distress.
Benefits under an accident or health insurance policy on which either a taxpayer paid the premiums, or the taxpayer’s employer paid the premiums and those premiums were included in income, are not taxable.
Reimbursements for medical care are generally not taxable. However, it may reduce the medical expense deduction.
The foreign housing exclusion is subject to limitations. In general, taxpayers cannot consider housing expenses in excess of
30% of the maximum foreign earned income exclusion (may vary by location)
For purposes of determining the foreign housing exclusion or deduction, a taxpayer cannot consider housing expenses that exceed a certain limit. The limit on housing expenses is generally 30% of the maximum foreign earned income exclusion, but it may vary depending upon the location in which you incur housing expenses.
A taxpayer purchases rental property for $160,000. She uses $25,000 cash and obtains a mortgage for $135,000. She pays closing costs of $10,000, which includes $5,000 in points on the mortgage and $5,000 for legal fees and title costs. Her initial basis in the property is:
$165,000
Cost basis for depreciation includes the purchase price (cash and mortgage $160,000) and the title search and legal fees ($5,000); for a total of $165,000. Points paid for the loan for this business property are business expenses that must be amortized over the life of the loan. The points are not added to basis.
Silas Wykowski receives 20 shares of stock from a friend as a gift. These shares had originally cost the friend $400 but were only worth $300 when the conveyance to Silas was made. The stock was held for some time and then sold for $280. What is the income tax effect recognized by Silas Wykowski?
No gain or loss at the time of gift and a $20 loss when sold.
There is no income tax effect when a gift is made. A gift tax might have to be paid if the amount is large but this is a small gift. If the value then goes down, the owner can recognize a loss when sold. That loss is the difference in what was received and the lower of the tax basis to the previous owner (usually original cost) and the fair value at the date of the gift. Here, that fair value when conveyed ($300) is less. So, the tax loss is this $300 less the $280 sales price or $20.
In December, Bubba Corporation provided a free turkey or ham to every employee who asked for one. Do the employees who received a turkey or ham have any tax consequence?
No, because these are holiday gifts of nominal value.
If an employer provides his employees with a turkey, ham, or other item of nominal value at Christmas or other holidays, the employee should not include the value of the gift in his income.
Ronnie received the following payments after an accident.
How much can Ronnie exclude from gross income?
$18,200
Compensatory damages for a physical injury or sickness are excluded from gross income ($12,000). The disability benefits under the no-fault car insurance policy are also excluded from income ($6,200).
$12,000 + $6,200 = $18,200
Punitive damages (for punishment), and damages awarded for non-physical injury or sickness (emotional stress, etc.), are included in gross income.
To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, a taxpayer must meet which of the following requirements:
All of the above!
Which of the following will decrease the basis of property?
Depreciation
The basis of property must be decreased by all items that represent a return of capital for the period during which the property was held. Depreciation represents a return of the capital investment in the asset and will decrease the basis of the property. Legal fees and capital improvements are costs which increase basis. Capital losses do not decrease the basis of property. IRS Pub. 551.
Patti inherited 100 shares of Superbubble Inc stock when her mother died on August 8, 20X1; the fair market value of the stock was $10 per share. Her mother paid $290 per share when she purchased the stock ten years prior. If Patti sells all 100 shares for $60 per share on July 3, 20X4, how should she report the sale on her return for 20X4?
$5,000 Long-term Capital Gain
In general, capital gains or losses from the sale of inherited property are treated as long-term. Patti's basis in the stock is the FMV of the stock on her mother's date of death (100 shares at $10 per share is $1,000). She sold the stock for $6,000 which means the gain was $5,000 and is a long-term capital gain. In this case, the opportunity to deduct a substantial loss on the stock was lost when her mother passed away.
Alexander is single. His salary is $100,000. In 2020, he contributed $19,500 as an elective deferral to his employer-sponsored 401(k) plan. His employer contributed an additional $1,000. What are Alex's 2020 social security wages from this job?
$100,000
An employer's contributions to an employee's account in an employer-sponsored qualified retirement plan are not included in income at the time contributed. Likewise, an employee's contribution to his own account is not included in income up to the annual deferral limit.
An elective deferral, other than a designated Roth contribution, is not included in wages subject to income tax at the time contributed. However, it is included in wages subject to Social Security and Medicare taxes.
Mark is an engineer for the Peterson LTD Partnership. Peterson has an accountable travel expense plan. Mark incurred $375 in travel expenses on a two-day business trip. When he returned to his tax home, he worked late and incurred $90 for meals. Mark gave his employer an adequate accounting for all of these expenses within a reasonable time and did not have any excess reimbursement. What amount, if any, must be included in Mark's W-2?
$90
Under an accountable plan, the amount paid as reimbursement for deductible expenses is not included on the employee's W-2.
In this case, Mark incurs $90 of nondeductible expenses, which his employer must treat as reimbursed under a nonaccountable plan and must be included in Mark's W-2. Meals are not deductible as a travel expense if a taxpayer is within his tax home. A tax home includes the entire city or general area in which a taxpayer's business or work is located.
A taxpayer may be reimbursed under an employer's accountable plan for expenses related to that employer's business, some of which are deductible by the company as employee business expenses and some of which are not deductible. The reimbursements for the nondeductible expenses do not meet the accountable plan rules, and they are treated as paid under a nonaccountable plan.
To be an accountable plan, the employer's reimbursement or allowance arrangement must include all of the following rules:
The foreign earned income exclusion and foreign housing exclusion provide some tax relief for US citizens living and working abroad. Which of the following is NOT a requirement to qualify for the foreign housing exclusion?
The taxpayer’s employer pays a housing stipend that is excluded from gross income.
This correct answer in this question is the one that is a false statement.
To qualify, housing must be paid for by employer-provided funds; however, the amounts paid for housing, whether as wages or designated housing allowance, must be included in gross income.
The other statements are true. Foreign housing expenses may not be more than foreign earned income and must be paid for qualified housing expenses in a foreign country. Form 2555 is used to claim the foreign housing exclusion.
Ben is a limited partner in three different partnerships. Two of the partnerships lost money in this tax year and one was profitable:
Ben has no other passive income during the tax year. What amount can Ben deduct as a loss on his individual income tax return in the current year?
$0
Passive activity losses are generally not deductible on an individual income tax return. They are carried over and used to offset passive income in the future until used up. A passive activity is a business in which the taxpayer serves as an owner but does not materially participate in the operation.
The net passive loss of $2,800 (– $2,000 + $3,300 – $4,100) would be disallowed and would be carried over.
If a business asset is sold but the seller agrees to finance the sale over five years, the seller must?
Record any depreciation recapture income in the year of sale.
Do not file Form 6252 for sales that do not result in a gain. If a taxpayer sells property on which a depreciation deduction was claimed or could have been claimed, the taxpayer must report the amount of the deduction (or amount which could have been claimed) as depreciation recapture income in the year of sale, whether or not an installment payment was received that year. Report the recapture income in full as ordinary income in the year of sale; report only the gain greater than the recapture income on the installment method.
Calculate this gross profit percentage by dividing the gross profit from the sale by the contract price.
When he first started working at the age of 22, Allen Jackson bought $25,000 in U.S. Series EE savings bonds. Three years later, he received a large bonus and bought another $10,000 of these bonds. During the current year, he cashed in all of these bonds. He received $33,000 for the first group and $15,000 for the second. As he had intended, he used this money to finance the qualifying education expenses of his dependent son Theodore. Mr. Jackson's only other income for the year was his salary of $54,000. What is the total amount of his income subject to taxation this year?
$62,000
Interest income collected from U.S. Series EE savings bonds is not taxable as long as the money is used for the college costs of the taxpayer, the taxpayer's spouse, or a dependent of the taxpayer. This benefit is lost if the taxpayer earns a very large amount of income.
The benefit is also lost if the taxpayer was not over 24 when the purchase was made.
The $25,000 bond was bought when Jackson was only 22. Therefore, the $8,000 in interest on that bond ($33,000 received less $25,000 cost) is taxable.
Interest from the second bond meets the requirements for exclusion.
Income for tax purposes is the $54,000 in salary plus this $8,000 in interest.
Amanda receives the following monthly amounts from her career in the military, and her work as a government employee:
What amount does Amanda include in her monthly income?
$1,000
Generally, if a taxpayer receives a disability pension based on years of service, the pension must be included in income.
Do not include disability payments in income if the taxpayer receives the disability payments for a combat-related injury or sickness that meets one of the following criteria:
Archie, a US citizen whose abode remains in Florida, takes a year-long sabbatical from his job as an aerospace engineer and spends 345 days living abroad. While away, he works various jobs to finance and enrich his stay. Identify the statement below about the foreign earned income exclusion that is correct?
Archie’s tax home is in Florida; Archie does not qualify for the foreign earned income exclusion
If you maintain an abode in the US, you will be ineligible to have a tax home in a foreign country. An abode is one's home, habitation, residence, domicile, or place of dwelling. Archie’s tax home remains in Florida, so he doesn’t qualify for the exclusion. The tax home must be in a foreign country. A tax home is a place where a taxpayer permanently or indefinitely engages to work as an employee or self-employed individual. The tax home is not in a foreign country for any period in which the taxpayer’s abode is in the United States.
Taxpayers can exclude up to $107,600 (per spouse) in 2020.
Archie meets the physical presence test (at least 330 full days) not the bona fide residence test (entire tax year).
On January 1, 20X1, Bob paid $11,000 for a bond including a premium of $1,000 when he purchased the $10,000 bond. Bob elected to amortize the bond premium. The amortization is $300 a year, Bob sold the bond on January 2, 20X2. What basis does Bob have in the bond on January 2, 20X2?
$10,700
Amortization decreases basis. Purchase price of $11,000 less $300 amortization (for one year, 20X1) results in a basis of $10,700 on January 2, 20X2.
Wilson bought three acres of land for a total price of $140,000. Several years later, the land was sold to Ammerson for $200,000. Ammerson paid $40,000 in that year and then an additional $80,000 payment each year until the debt was paid off. Wilson qualified to use the installment sales method on this sale for income tax purposes. Interest is calculated separately. In the year of the sale, what profit will Wilson recognize in computing taxable income?
$12,000
In computing the reported income for tax purposes using the installment sales method, the seller starts by computing the gross profit percentage. Here, that is the $60,000 profit on the sale divided by the sales price of $200,000 or 30 percent. That percentage is then multiplied by the amount of cash collected during the year or $40,000. In the year of sale, 30 percent of $40,000 cash is a taxable gain of $12,000. In this way, the taxpayer reports the gain incrementally as the cash is being collected so that money will be available to cover the related tax charge.
Sal Graziano began to buy US Series EE bonds when he got a new job at the age of 29. A number of years later, he cashed in bonds that had cost him $11,000 and received $17,000. He used this money to pay the tuition for his daughter when she started college as a freshman. His daughter was still his dependent for tax purposes. Without including these bonds, his income was $64,000. What amount of taxable income did Graziano have to report on his 2020 income tax return in connection with the redemption of these bonds?
Zero
When several requirements are met, interest earned on Series EE bonds is tax-free. Graziano has met these requirements. He was at least 24 years old before the bond’s issue date. When converted into cash, the money was used to pay the college costs for himself, his spouse, or a dependent. Finally, his income was under the modified adjusted gross income (MAGI) limits. The interest exclusion is phased-out at certain levels of MAGI. For 2020, MFJ $123,550 – $153,550 and S, HH, or QW $82,350 – $97,350.
This law was created primarily to encourage parents to save money to pay for the cost of college for their children.
Of the following amounts, which is considered compensation for sickness or injury that is exempt from tax?
$7,500 benefits paid to taxpayer from an accident policy, the premiums of which were paid by the employer and then included in the taxpayer’s gross income
When premiums are paid by the employer and not included in gross income, the benefits paid under the policy are included in income subject to tax. However, when the premiums paid are included in the recipient’s gross income (and subject to tax), benefits from that policy are exempt from income tax when paid.
Punitive damage awards are always taxable to the recipient. Punitive damages are assessed as punishment.
Benefits paid for the loss of use, or permanent disfigurement, of body parts are excluded from income, but not when the benefit is paid for the period of time lost at work to recover.
Jack was a resident of England. He may claim an exclusion from U.S. income tax on all his foreign source income under the following conditions, EXCEPT:
He was a resident of England for a period of 6 months.
To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, a taxpayer must meet all three of the following requirements: