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AWMA MODULE 5 QUIZ INCOME TAX PLANNING FOR HIGH NET WORTH CLIENTS
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AWMA MODULE 5 QUIZ INCOME TAX PLANNING FOR HIGHNET WORTH CLIENTS
Which of the following is not an allowed itemized deduction in calculating the
alternative minimum taxable income?
A) Charitable donation deduction.
B) State and municipal income taxes.
C) Qualified Housing Interest
D) Investment interest expense: ANSWER B.
State and local income taxes are not permitted itemized deductions under the AMT.
Clients in states with high-income taxes (and property taxes) are more likely to be
affected by the AMT than those in lower-taxed areas. Remember that itemized
deductions are limited to $10,000 in taxes.
Which of the following assertions is true about self-employment taxes?
A) A taxpayer may deduct half of his or her self-employment tax liability as an
adjustment to income.
B) The self-employment tax is the government's attempt to discourage enterprise
and innovation.
C) Net earnings from self-employment must be calculated using the accrual method
of accounting.
D) Once the wage basis is exceeded, there is no self-employment tax on the excess
earnings. - Answer A.
A taxpayer can deduct half of his or her self-employment tax liability as a "above
the line" deduction, which is an income adjustment.
Which of the following statements is wrong about investment interest expense?
,A) Investment interest expense is deductible to the extent of net investment income.
B) Excess investment interest expenses cannot be carried forward to subsequent tax
years.
C) Interest paid or accrued when purchasing or carrying tax-exempt investments is
not deductible.
D) Investment interest expenses can only be deducted if the taxpayer itemizes.
ANSWER B
Net investment income is the taxpayer's investment income, which typically
includes interest, nonqualified dividends, and short-term capital gains. Investment
interest is an itemized deduction. Excess investment interest expenses can be
carried forward to subsequent tax years.
For a taxpayer having an AGI of more than $150,000 for the previous tax year
($75,000 if married filing separately), the anticipated tax penalty safe harbour is
A) 90% of this year's tax liability or 100% of the previous year's tax liability.
B) 110% of this year's tax liability or 125% of the previous year's tax liability.
C) 80% of this year's tax liability or 120% of the previous year's tax liability.
D) 90% of this year's tax liability or 110% of the previous year's tax liability. -
Answer D.
The safe harbor is 90% of the current year's tax liability, or 110% of the previous
year's tax liability if the taxpayer's prior year AGI exceeds $150,000.
If the prior year's adjusted gross income was $150,000 or less, the safe harbour is
90% of the current year's tax liability or 110% of the prior year's tax liability.
, Jennifer sold her residential rental property in March 2020 for $925,000. Jennifer
purchased the property in May 2007 for $225,000 and has been depreciating it
using the straight-line approach for real estate. Assume the depreciation is $90,000.
Jennifer is in the 35% marginal tax rate.
What is the size and nature of the gain coming from the sale?
A) $0 unrecaptured Section 1250 income and $700,000 "regular" long-term capital
gain
B) $90,000 unrecaptured Section 1250 income; $700,000 "regular" long-term
capital gain.
C) $90,000 recovered Section 121 gain plus $700,000 unrecaptured Section 1250
gain.
D) $700,000 unrecaptured Section 1250 income, $90,000 "regular" long-term
capital gain (ANSWER B).
In this instance, the total benefit is $790,000. The initial $90,000 gain is caused by
straight-line depreciation. Unrecaptured Section 1250 revenue refers to the gain
resulting from straight-line depreciation on real estate. This is a Section 1231 gain,
which is considered as long-term capital gain and is taxed at a maximum rate of
25%. There is also a $700,000 gain from the actual appreciation of the property.
The gain resulting from property appreciation is a potential long-term capital gain
under Section 1231. This "regular" long-term capital gain will be taxed at rates of
15% or 20%. Section 121 only applies to personal residences, not to company
buildings.
In terms of the Medicare contribution tax, a sort of income that is specifically
excluded from net investment income is
A)Annuities generate money.
B) Net royalties.
C) passive business income.
D) Qualified Roth payouts. - Answer D.
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