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Exam 11: Individuals As Employees and Proprietors

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Question 61

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Sonja is a United States citizen who has worked in Spain for the past 10 months. She received $8,000 a month as compensation. Her employer has offered to extend Sonja's contract to work in Spain for another 6 months at the same rate of pay. If she rejects the offer, she can return to the United States and receive a salary of $10,000 per month. While working in Spain, she is subject to the Spain income tax, which is approximately 11% of her gross pay. The marginal tax rate on her income taxed in the United States is 25%. Compare Sonja's after-tax income assuming she remains in Spain with her after-tax income if she returns to the United States.

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If Sonja returns to the United States, s...

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Question 62

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Once the actual cost method is used, a taxpayer cannot change to the automatic mileage method in a later year.

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B) False

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Question 63

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All employees of United Company are covered by a group hospitalization insurance plan, but the employees must pay the premiums ($8,000 for each employee) . None of the employees has sufficient medical expenses to deduct the premiums. Instead of giving raises next year, United is considering paying the employee's hospitalization insurance premiums. If the change is made, the employee's after-tax and insurance pay will:

On February 1, 2016, Tuan withdrew $15,000 from his IRA #1. He deposited the funds back into IRA #1 within 60 days (a"rollover"). Tuan may do one more nontaxable rollover distribution from either IRA #1 or IRA #2 starting in April 2016.

Susan is a self-employed accountant with a qualified defined contribution plan (a Keogh plan) . She has the following income items for the year: ​ What is the maximum amount Susan can deduct as a contribution to her retirement plan in 2016, assuming the self-employment tax rate is 15.3%?

George is employed by the Quality Appliance Company. All the full time employees are allowed to purchase appliances at the company's cost plus 10%. The employee also is given, at no cost, a 1-year service contract on all the goods purchased from the company. George purchased a refrigerator for $500. The company's normal selling price for the refrigerator is $800. George also received a service contract, at no charge, that had a value of $150. During the year, George was required to have his refrigerator serviced once. The cost of the call would have been $75 if he had not had the service contract. Is George required to recognize any income from the purchase of the refrigerator, the receipt of the service contract, and the service call?

Sue performs services for Lynn. Regarding this arrangement, use the legend provided to classify each statement. -Sue files a Form 2106 with her Form 1040.

Margaret is trying to decide whether to place funds in a qualified tuition program. Her son will be attending college in 4 years. She is in the 35% marginal tax bracket and she believes she can earn an 7% before tax return on alternative investments. Thus, $10,000 will accumulate to $11,948 (after-tax) in 4 years. Margaret expects tuition to increase at the rate of 5% each year to $12,155 in 4 years. Her son will be in the 15% marginal tax bracket in all relevant years. Given these assumptions, should Margaret participate in the qualified tuition program?

Contributions to a Roth IRA can be made up to the due date (excluding extensions) of the taxpayer's income tax return.

Meg teaches the fifth grade at a local school. During the year, she spends $1,200 for school supplies for use in her classroom. On her income tax return, some of this expense is not reported and the balance is deducted in two different places. Explain what has probably happened.

Sue performs services for Lynn. Regarding this arrangement, use the legend provided to classify each statement. -Sue files a Schedule SE with her Form 1040.

The base amount for the Social Security portion (old age, survivors, and disability insurance) is different from that for the Medicare portion of FICA.

A participant has an adjusted basis of $0 in any nondeductible contributions to a traditional IRA.

Sue performs services for Lynn. Regarding this arrangement, use the legend provided to classify each statement. -The services are performed at Sue's premises.

Robert entertains several of his key clients on January 1 of the current year. Expenses paid by Robert are as follows: ​ Presuming proper substantiation, Robert's deduction is:

The § 222 deduction for tuition and related expenses is available:

Allowing for the cutback adjustment (50% reduction for meals and entertainment) , which of the following trips, if any, will qualify for the travel expense deduction?

Mary establishes a Roth IRA at age 50 and contributes the maximum amount per year to the Roth IRA for 15 years. The account is now worth $199,000, consisting of $75,000 in contributions plus $124,000 in accumulated earnings. How much can Mary withdraw tax-free?

Sue performs services for Lynn. Regarding this arrangement, use the legend provided to classify each statement. -Lynn determines when the services are to be performed.

Madison and Christopher are staff accountants at a major public accounting firm. Both are pursuing a law degree in a night program at local law school. Madison contends that the cost of the program is a deduction for income tax purposes, while Christopher maintains that it is not. Who is correct and why?