Quiz 5 - CHAPTERS 12 13 14

Tax Drill - Refundable and Nonrefundable Credits

Complete the following sentences regarding tax credits.

______REFUNDABLE_________credits are paid to the taxpayer even if the amount of the credits exceeds the
taxpayer’s tax liability.

__NON REFUNDABLE _____________credits are not paid if they exceed the taxpayer’s tax liability. Some __NON
REFUNDABLE__________ credits are subject to carryover provisions.

Certain credits are refundable while others are nonrefundable. Refundable credits are paid to the taxpayer even if the amount of the
credit (or credits) exceeds the taxpayer’s tax liability.

Some nonrefundable credits, such as the foreign tax credit, are subject to carryover provisions if they exceed the amount allowable
as a credit in a given year. Other nonrefundable credits, such as the tax credit for the elderly are lost if they exceed the limitations.
Because some credits are refundable and others are not and because some credits are subject to carryover provisions while others
are not, the order in which credits are offset against the tax liability can be important.

2. PR.12-31
eBook
Problem 12-31 (LO. 4)

Indicate for each the following individuals whether they are "Eligible" or "Not eligible" for the earned income
credit.

a. Thomas is single, 21 years old, with no qualifying children. His income consists of $9,000 in wages.
Not eligible.

Thomas is not eligible for the earned income credit, because he does not have a qualifying child and is not
between the ages of 25 and 64.

b. Shannon, who is 27 years old, maintains a household for a dependent 11-year-old son and is eligible
for head-of-household tax rates. Her income consists of $16,050 of salary and $50 of taxable interest
(Shannon's AGI is $16,100). Eligible.

Shannon is eligible for the earned income credit, because she has a qualifying child. As her earned income and
AGI are below the income level where the earned income credit begins to phase out ($18,190 in 2016),
Shannon will qualify for the maximum earned income credit.

c. Keith and Susan, both age 30, are married and file a joint return. Keith and Susan have no dependents.
Their combined income consists of $28,500 of salary and $100 of taxable interest (i.e., their AGI is $28,600).
Not eligible.

Keith and Susan are not eligible for the earned income credit, because they do not have a qualifying child, and
their income exceeds the disqualifying threshold for the credit that is available when there is not a qualifying
child ($20,430 in 2016).

d. Colin is a 26-year-old, self-supporting, single taxpayer. He has no qualifying children and generates
earnings of $9,000. Eligible. Even though Colin does not have a qualifying child, he is eligible for
the earned income credit, because he is between 25 and 64 years of age, cannot be claimed as a dependent
on another taxpayer's return, and has earnings below the level at which the credit is completely phased out
($14,880 in 2016).

3. PR.12-39
Quiz 5 - CHAPTERS 12 13 14

eBook
Problem 12-39 (LO. 4, 7)

Bernadette Rosen, a longtime client of yours, is an architect and president of the local Rotary chapter. To keep
up to date with the latest developments in her profession, she attends continuing education seminars offered
by the architecture school at State University. This year, Bernadette spends $2,000 on course tuition to attend
such seminars. She spends another $400 on architecture books during the year. Bernadette's dependent son
Colin is a senior majoring in engineering at the University of the Midwest. During the calendar year, Colin
incurs the following expenses: $8,200 for tuition ($4,100 per semester) and $750 for books and course
materials. Colin lives at home while attending school full-time. Bernadette is married, files a joint return, and
has a combined AGI with her husband Morrie of $113,000.

a. (1) Classify each of the following costs as "Eligible" or "Not Eligible" for an education tax credit through the
American Opportunity credit or the lifetime learning credit.

Answers: Eligible; Not Eligible; Eligible; Eligible.

• $2,000 for course tuition to attend seminars Eligible

• $400 for architecture books Not Eligible
• $8,200 for son's tuition Eligible
• $750 for son's books and course materials Eligible
a. (2) Bernadette's American Opportunity credit is $ , and her lifetime learning credit is $
2500

.
400

b. In her capacity as president of the local Rotary chapter, Bernadette has asked you to present a 20- to 30-
minute speech outlining the different ways the tax law helps defray (1) the cost of higher education and (2) the
cost of continuing education once someone is in the workforce. A tentative title for your presentation is "How
Can the Tax Law Help Pay for College and Continuing Professional Education?"

Classify each of the following as an item to "Include" or "Exclude" in the presentation.

Include /
Do not
include
• Complicated area of tax law, so planning ahead is important. I
• Participation in qualified tuition programs for tuition and room I
and board costs.
• Education tax credits-American Opportunity credit and lifetime I
learning credit.
• Available work opportunity credit. E
• Child credit available for educational expenses. E
• Scholarships exempt from taxation. I
• Employer-provided educational assistance programs. I
Quiz 5 - CHAPTERS 12 13 14

4. PR.13-49
eBook
Problem 13-49 (LO. 1, 2)

Indicate whether the following scenarios result in a recognized gain or loss.

If there is no gain or loss, enter "0".

a. Kay sells her vacation cabin (adjusted basis of $100,000) for $150,000.
There is realized gain of $ that is recognized.
50,000.00

The amount realized from a sale or other disposition of property is the sum of any money received plus the fair market
value of other property received. Recognized gain is the amount of the realized gain that is included in the taxpayer's gross income.
A recognized loss, on the other hand, is the amount of a realized loss that is deductible for tax purposes. As a general rule, the entire
amount of a realized gain or loss is recognized. A gain of $50,000 ($150,000 – $100,000) on the sale of a personal use asset is
recognized. Note: The vacation cabin is not Kay's personal residence so it does not meet the exception regarding recognition of gain.

b. Adam sells his personal residence (adjusted basis of $150,000) for $100,000.
There is A REALIZED LOSS of $ that NOT DEDUCTABLE
50,000

As a general rule, the entire amount of a realized gain or loss is recognized. In certain cases, a realized gain or loss is not recognized
upon the sale or other disposition of property. For example, losses realized on the sale, exchange, or condemnation of personal use
assets (as opposed to business or income-producing property), and gains realized upon the sale of a residence are disallowed and
not recognized for tax purposes.

The loss of $50,000 ($100,000 – $150,000) on the sale of a personal residence is not deductible.

c. Carl's personal residence (adjusted basis of $65,000) is condemned by the city. He receives condemnation
procceds of $55,000.
There is A REALIZED LOSS of $ that NOT RECOGNIZED.
1,000.00

A realized loss from the sale, exchange, or condemnation of personal use assets (e.g., a personal residence or an automobile not
used at all for business or income producing purposes) is not recognized for tax purposes. A condemnation loss of $10,000 ($55,000
– $65,000) on a personal residence is not recognized.

d Olga's land is worth $40,000 at the end of the year. She had purchased the land six months earlier for $25,000.
There is no gain or loss of $ .
0.00

No gain is realized or recognized, since neither a sale nor other disposition of the land has occurred
 Quiz 5 - CHAPTERS 12 13 14

e. e. Vera's personal vehicle (adjusted basis of $22,000) is stolen. She receives $23,000 from the insurance company and does not
plan to replace the automobile.
There is a realized gain of $ that is recognized .
1000.00

An exception exists for casualty or theft losses from personal use assets. Any gain realized from the sale or other disposition of
personal use assets is, generally, fully taxable.

A casualty or theft may result in the reduction of the adjusted basis of property. The adjusted basis is reduced by the amount of the
deductible loss. In addition, the adjusted basis is reduced by the amount of insurance proceeds received. However, the receipt of
insurance proceeds may result in a recognized gain rather than a deductible loss. The gain increases the adjusted basis of the
property.

Amount realized $23,000

Less: adjusted basis (22,000)
Realized and recognized gain $1,000

f. Jerry sells used clothing (adjusted basis of $500) to a thrift store for $50.
There is A REALIZED LOSS of $ that IS NOT RECOGNIXED .
450.00

5. PR.13-60
eBook
Problem 13-60 (LO. 3)

1. As sole heir, Dazie receives all of Mary's property (adjusted basis of $1,400,000 and fair market value
of $3,820,000). Six months after Mary's death in 2016, the fair market value is $3,835,000.

a. Assuming that the estate files a tax return, can the executor of Mary's estate elect the alternate valuation
date and amount?
No

Feedback

For inherited property, both unrealized appreciation and decline in value are taken into consideration in
determining the basis of the property for income tax purposes. Contrast this with the carryover basis rules for
property received by gift.

Answer: No.

The basis of property acquired from a decedent is generally the property's fair market value at the date of
death (referred to as the primary valuation amount). The property's basis is the fair market value six months
after the date of death if the executor or administrator of the estate elects the alternate valuation date for
estate tax purposes. This amount is referred to as the alternate valuation amount.

In this case, the executor cannot elect the alternate valuation date and amount. In order to do so, the following
requirements must be satisfied:

o The election must result in the reduction of the value of the gross estate.

o The election must result in the reduction of the estate tax liability.
Quiz 5 - CHAPTERS 12 13 14

This provision prevents the alternate valuation election from being used to increase the basis of the property
to the beneficiary for income tax purposes without simultaneously increasing the estate tax liability (because
of estate tax deductions or credits).

Note: The alternate valuation date and amount are only available to estates for which an estate tax return
must be filed (generally, estates with a valuation in excess of $5.45 million in 2016). Even if an estate tax
return is filed and the executor elects the alternate valuation date, the six months after death date is available
only for property the executor has not distributed before this date.

b. Dazie's basis for the property is $ .

Feedback

Correct

Answer: $3,820,000.

The basis of property acquired from a decedent is generally the property's fair market value at the date of
death (referred to as the "primary valuation amount"). The property's basis is the fair market value six months
after the date of death if the executor or administrator of the estate elects the alternate valuation date for
estate tax purposes.

Dazie's basis for the property is the fair market value of $3,820,000 on the date of Mary's death (primary
valuation date).

c. Assume instead that the fair market value six months after Mary's death is $3,800,000.

Assuming the estate files a tax return, can the executor of Mary's estate elect the alternate valuation date and
amount?
Yes
Dazie's basis for the property is $ .
3,820,000

Feedback

Correct

Answers: Yes; $3,800,000.

In this case, the fair market value at the alternate valuation date is less than at the primary valuation date.
Assuming that election also results in the reduction of the estate tax liability, it can be made. So, Dazie's basis
for the property now becomes $3,800,000.

Feedback

Correct

1
a. Assuming that the estate files a tax return, can the executor of Mary's estate elect the alternate
valuation date and amount?
 Quiz 5 - CHAPTERS 12 13 14

No

2 b. Dazie's basis for the property is $3820000 .

c. Assume instead that the fair market value six months after Mary's death is $3,800,000.

Assuming the estate files a tax return, can the executor of Mary's estate elect the alternate valuation date
3 and amount?
Yes

Dazie's basis for the property is $3800000 .

2.

3.

6. PR.13-68
eBook
Problem 13-68 (LO. 6)

Katrina owns undeveloped land with an adjusted basis of $300,000. She exchanges it for other undeveloped
land worth $750,000. Assume that Katrina holds the land as an investment.

If an amount is zero, enter "0".

a. Katrina's realized gain is $ and her recognized gain is $ .

450,000 000

A taxpayer who is going to replace a productive asset (e.g., machinery) used in a trade or business may structure the transactions as
a sale of the old asset and the purchase of a new asset. When this approach is used, any realized gain or loss on the asset sale is
recognized. The basis of the new asset is its cost.

Alternatively, the taxpayer may be able to trade the old asset for the new asset. This exchange of assets may produce beneficial tax
consequences by qualifying for nontaxable exchange treatment. The tax law recognizes that nontaxable exchanges result in a
change in the form but not in the substance of the taxpayer's relative economic position. The replacement property received in the
exchange is viewed as substantially a continuation of the old investment.

In a nontaxable exchange, realized gains or losses are not recognized. However, the nonrecognition is usually temporary. The
recognition of gain or loss is postponed (deferred) until the property received in the nontaxable exchange is subsequently disposed
of in a taxable transaction. This is accomplished by assigning a carryover basis to the replacement property.

Amount realized $750,000

Quiz 5 - CHAPTERS 12 13 14

Adjusted basis (300,000)

Realized gain $450,0000
Recognized gain $0

b. Katrina's basis in the undeveloped land she receives is $ .

300000

If the exchange qualifies for nonrecognition, the basis of property received must be adjusted to reflect any
postponed (deferred) gain or loss. The basis of like-kind property received in the exchange is the property's fair
market value less postponed gain or plus postponed loss. Because of the postponed gain, the basis in the land
is $300,000 ($750,000 fair market value – $450,000 postponed gain).

c. Would the answers for the above questions change if Katrina exchanged the undeveloped land for land and
a building? NO

Like-kind exchanges include business for business, business for investment, investment for business, or investment for investment
property. The developed property is like-kind property. So the transaction qualifies for § 1031 postponement treatment.

The phrase "like-kind" refers to the nature or character of the property and not to its grade or quality. One kind or class of property
may not be exchanged for property of a different kind or class. The term like-kind is intended to be interpreted very broadly.
However, three categories of exchanges are not included.

First, livestock of different sexes do not qualify as like-kind property.

Second, real estate can be exchanged only for other real estate, and personalty can be exchanged only for other personalty. For
example, the exchange of a machine (personalty) for an office building (realty) is not a like-kind exchange. Real estate (or realty)
includes principally rental buildings, office and store buildings, manufacturing plants, warehouses, and land. It is immaterial whether
real estate is improved or unimproved. Thus, unimproved land can be exchanged for an apartment house. Personalty includes
principally machines, equipment, trucks, automobiles, furniture, and fixtures.

Third, real property located in the United States exchanged for foreign real property (and vice versa) does not
qualify as like-kind property.

Exchanging the undeveloped land for land and a building qualifies as like-kind property.

7. DQ.14-01
eBook
Discussion Question 14-1 (LO. 2, 4, 5)

Sheila inherited 300 shares of stock, 100 shares of Magenta and 200 shares of Purple. She has a stockbroker sell
the shares for her, uses the proceeds for personal expenses, and thinks nothing further about the transactions.

Select from the list either "Yes, a tax issue" or "No, not a tax issue" to indicate whether the following questions
raise tax issues, regarding the sale of the stock, for Sheila when she prepares her Federal income tax return.

a. What is the gain or loss from disposition of the stock? Yes, a tax
issue
Quiz 5 - CHAPTERS 12 13 14

b What is the basis, holding period, and sales proceeds? Yes, a tax
. issue
c. Will netting of the gains and losses be required because any net long-term capital Yes, a tax
gain is eligible for an alternative tax calculation? issue
d Is a deduction for a capital loss in the current year allowed if she had a capital loss in No, not a tax
. any of the five previous tax years? issue

Stock is generally a capital asset and, therefore, the gain or loss from disposition of the stock is a capital gain or
loss. Such gains and losses must be separated from Sheila's other gains and losses. The basis, holding period, and
sales proceeds will determine whether a long-term or short-term gain or loss has occurred. Netting of the gains
and losses will be required because any net long-term capital gain is eligible for a beneficial alternative tax
calculation and any net capital loss may be only partially deductible.

a. What is the gain or loss from disposition of the stock? Yes, a tax issue. Stock is generally a
capital asset and, therefore, the gain or loss from disposition of the stock is a capital gain or loss. Such gains and
losses must be separated from Sheila's other gains and losses.
b. What is the basis, holding period, and sales proceeds? Yes, a tax issue. The basis and sales
proceeds will determine the amount of any gain or loss. The holding period will determine whether a long-term or
short-term gain or loss has occurred.
c. Will netting of the gains and losses be required because any net long-term capital gain is eligible for an
alternative tax calculation? Yes, a tax issue. Netting of the gains and losses will be required, because
any net long-term capital gain is eligible for an alternative tax calculation and any net capital loss may be only
partially deductible.
d. Is a deduction for a capital loss in the current year allowed if she had a capital loss in any of the five
previous tax years? No, not a tax issue. The only limit regarding a net capital loss is $3,000 per year.
Excess loss over the annual limit carries over and may be deductible in a future tax year.

8. DQ.14-02
eBook
Discussion Question 14-2 (LO. 2)

An individual taxpayer sells some used assets at a garage sale. Why are none of the proceeds taxable in most
situations?

These assets are personal-use assets. Losses on these assets are not deductible, and the proceeds of the
sale are a return of capital ; thus, the transactions are not taxable.

Feedback

The three possible tax statuses are capital asset, § 1231 asset, or ordinary asset.

Answers: personal-use; are not; a return of capital.

Capital gains and losses usually result from the disposition of a capital asset. Personal-use assets are the most
common capital assets owned by individual taxpayers. Personal-use assets usually include items such as
clothing, recreational equipment, a residence, and automobiles.

However, losses from the sale or exchange of personal-use assets are notrecognized. Most assets sold at a
garage sale are personal-use assets and, therefore, capital assets. However, most of these assets will be sold
Quiz 5 - CHAPTERS 12 13 14

for less than was paid for them, resulting in a loss on their sale. Since losses on personal-use assets are not
deductible, and the proceeds of the sale are a return of capital, the transactions are not taxable.

Discussion Question 14-2 (LO. 2)

An individual taxpayer sells some used assets at a garage sale. Why are none of the proceeds taxable in most
situations?

These assets are personal-use assets. Losses on these assets are not deductible, and the proceeds of the
sale are a return of capital ; thus, the transactions are not taxable.

These assets are assets. Losses on these assets deductible, and the proceeds of the sale are ; thus, the
transactions are not taxable.

Most assets sold at a garage sale are personal use assets and, therefore, capital assets.
However, most of these assets will be sold for less than was paid for them, resulting in a
loss on their sale. Since losses on personal use assets are not deductible and the
proceeds of the sale are a return of capital, the transactions are not taxable. pp. 8-2 to 8-
5