Chapter 13, 14

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Liberty University *

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401

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Accounting

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Apr 3, 2024

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Chapter 13  Qualified ___ plans come in two forms. A defined ___ plan specifies the amount the employee will receive at retirement, while a defined ___ plan outlines the maximum annual amount that can be paid into the plan. – retirement; benefit; contribution  Which of the following statements is INCORRECT regarding defined benefit plans for 2023? – the level of benefits is a function of how well the funds were invested and the market growth over the employee’s working years  The process of becoming legally entitled to retirement benefits is known as ___. The most restrictive schedule for this process for defined benefit plans is either a ___- year "cliff" or a ___- year graded schedule. – vesting; five; seven  How are distributions from defined benefit plans treated for tax purposes? – the distributions are taxable as ordinary income  What type of retirement plan typically requires a significant amount of work to track employee benefits and to compute required contributions; is structured where the employer bears the investment risk; and combines the funds, rather than having each employee with a separate accounts. – a defined benefit plan  Qualified retirement plans can NOT ___ against non-executives. – discriminate  Which of the following characteristics describe defined benefit plans? – employers chose how the amounts in the retirement account are invested; the employer bears the investment risk and funding responsibility; the plan specifies the amount of the distribution at retirement, rather than the up-front payment the employer will make to the employee’s plan  Steve retired at the beginning of 2023. He worked for a company with a defined benefit plan. The plan provides for retirement benefits at a rate of 3% of the last three years' average compensation for every year of service. Steve had worked for this company for 30 years when he retired. His average salary for the last three years was $700,000. The maximum benefit Steve can receive from his retirement plan in 2023 is $___. – 265000  Mike just started working for a company that maintains a defined benefit retirement plan. If Mike terminates his employment within the first two years, he forfeits his retirement. If he stays for three years, he will be entitled to receive all of the funds provided to him in the account. What type of vesting schedule is used at Mike's company? – cliff  One nice feature of an account such as a 401(k) is that many employers will ___ the employee contributions at a stated percentage of the contribution. – match  Upon retirement, all distributions from defined benefit plans are taxable as ___ ___. – ordinary income  Which of the following issues are characteristic of defined benefit plans? – a significant amount of work is required to keep track of employee benefits and calculate required contributions; funding costs are typically more significant for defined benefit plans than other types of plans  The employee bears the investment risk and funding responsibility in a defined ___ plan. – contribution  In 2023, for taxpayers under age 50 at year-end, the sum of the employee and employer contributions to an employee's defined contribution account(s) is limited to the lesser of (1) $___ or (2) ___ percent of the employee's compensation for the year. Furthermore, the employee contributions to a 401(k) are limited to $___. – 66000; 100; 22500  Which of the following types of defined contribution plans will most likely involve an employer matching the employee contributions to some degree? – 401(k) plans  How are distributions from defined benefit plans treated for tax purposes? – the distributions are taxable as ordinary income

 For defined contribution plans, the employee is immediately vested in the ___ (employee/employer) contributions and any earnings on those contributions. The remaining funds may become vested over time. The most restrictive schedule for this process is either a ___-year "cliff" or a ___-year graded schedule. – employee; three; six  Contributions to traditional defined contribution plans can be made with ___-tax dollars, which reduces the overall cost because of the tax ___ on the contribution. – before; savings  Individuals participating in a defined contribution plan who are at least 50 years of age by the end of the year have contribution limits that are lower than individuals less than 50 years old. – false  In order to avoid a penalty for failure to receive a minimum distribution from a defined contribution plan in 2023, a taxpayer must take her first minimum distribution for the later of which of the following years? – the year after she retires if she is 74 when she retires; the year after she reaches 72 years of age  Wicker Rockers, Inc. is planning to offer a defined contribution plan for its employees. The company would like to incorporate a "cliff" vesting schedule for the employer contributions into the plan. What is the minimum vesting period the company can choose for a "cliff" vesting schedule? – 3 years  The after-tax rate of return on a contribution to a traditional defined contribution plan will decrease as compared to the before-tax rate of return the longer the taxpayer waits before taking distributions because deferring the distribution increases the present value of the taxes paid on the distribution. – false  Lauren contributed $7,200 before-tax to her 401(k). If Lauren has a 24 percent marginal rate, her after-tax cost of the contribution is $___. – 5472  Contributions to a traditional 401(k) are made with ___-tax dollars, while contributions to a Roth 401(k) are made with ___-tax dollars. Qualified distributions from a Roth 401(k) are ___. – pre; after; nontaxable  In order to avoid a penalty for early distributions of a defined contribution plan, an employee can NOT take a withdrawal from the account before he meets which of the following age requirements? – 55 years, if he has separated from employment; 59 ½ years of age  Kyle invested in a Roth 401(k) seven years ago when he was 39 years old. He terminated employment with his company this year and received a lump-sum distribution of his Roth 401(k). Kyle's contributions to the Roth account total $32,000 and accumulated earnings on the account total $18,000. He has decided NOT to roll over the funds into another retirement account. How much tax and penalty will Kyle owe on the distribution if he has a 24% marginal tax rate. – 6120  For a given before-tax rate of return, the longer the taxpayer defers distributions from a traditional defined contribution plan, the ___ (higher/lower) the taxpayer's after-tax rate of return because deferring the distribution ___ (increases/decreases) the present value of the taxes paid on the distribution. – higher; decreases  When an employee has a Roth 401(k) with an employer match, how are the employer's matching funds applied? – the matching funds must be put in a traditional 401(k) for the employee because employers can NOT make contributions to a Roth 401(k)  The nondeductible penalty for an early distribution is ___ percent of the amount of the distribution. The nondeductible penalty for failing to receive a required minimum distribution is ___ percent of the required minimum distribution. – 10; 25  Qualified distributions from Roth 401(k) accounts are those made after the account has been open for ______ taxable years and the employee is at least ______ years of age. – 5; 59 ½  Which type(s) of 401(k) will incur a 10% penalty on the entire distribution if the money is withdrawn early? – traditional

 For the employee, nonqualified deferred compensation plans receive the same tax treatment as traditional defined ___ plans. – contribution  Which of the following choices describe characteristics of a Roth 401(k)? – employers can NOT contribute matching funds to an employee’s Roth account; contributions to the account are made with after-tax dollars  When deciding whether or not to participate in a nonqualified deferred compensation plan, which of the factors below does NOT need to impact the employee's decision? – whether the cost of the plan is deductible on the employer’s tax return  Which of the following is a characteristic of employers of offering a nonqualified deferred compensation plan to the employees? – the employer does not have to fund the obligation in the current year since payment is deferred to a future year  Which type(s) of 401(k) will provide the taxpayer with nontaxable qualified distributions during his retirement years? – Roth  How are distributions from nonqualified deferred compensation plans taxed to the employee? – they are taxed as ordinary income  Which of the following statements is correct? – in order to contribute to an IRA, taxpayers must meet certain eligibility requirements  An important consideration for an employee trying to decide whether or not to participate in a nonqualified deferred compensation plan is whether the employee can financially afford to forgo the income currently in order to put it in the plan. – true  Which of the following choices is a benefit to the employers of offering a nonqualified deferred compensation plan to the employees? – employers may benefit if they are able to earn a better rate of return on the deferred compensation than the rate of return they are required to pay employees participating in the plan  Which type(s) of 401(k) will incur a 25% penalty on the amount of the minimum required distribution if the distribution does NOT occur? – traditional and Roth  The maximum of a deductible IRA in 2023 for a taxpayer under the age of 50 is $___, and it is a deduction ___ AGI. – 6500; for  An individually managed retirement plan with tax advantages similar to an employer provided defined contribution plan is known as a(n): - IRA Which of the following statements is correct regarding IRA contributions for married taxpayers who file a joint tax return? – a non-earning spouse’s deductible contribution is limited to total earned income of both spouses reduced by contributions to other spouse’s IRAs  Assuming a taxpayer has sufficient earned income to contribute the maximum allowed to a traditional IRA, the deductible IRA contribution may be phased out based on ___ and modified ___ ___. – filing; adjusted gross  Caden is 62 years old and has a traditional IRA with a balance of $220,000. Of that amount, $66,000 is from nondeductible contributions made while Caden was working. Earnings on the nondeductible contributions equal $20,600. If Caden withdraws $15,000 from his IRA this year, $___ will NOT be subject to taxation. – 4500  Matt and Sarah are selling their home and moving to a new neighborhood. Sarah is going to start college in the fall. She did NOT attend college after high school and is now embarking on her degree. Matt was injured recently in a motorcycle accident and the couple has some very high medical expenses that are coming due. They have considered liquidating their traditional IRAs in order to cover some of these costs. Which types of expenditures can they make from funds in their IRAs without incurring a 10% penalty for early withdrawal? – higher education and medical expenses

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 If only one spouse is an active participant in an employer sponsored retirement plan, the non- participating spouse can maximize his or her allowed IRA deduction by choosing the married filing separately status. – false  Distribution rules for ___ IRA accounts are similar to the rules for traditional ___ accounts. – traditional; 401k  The formula for determining how much of a distribution from a traditional IRA consisting of nondeductible and deductible contributions is nontaxable is ______. – nondeductible contributions/total account balance at the time of distribution  Which of the following situations involving an early distribution of an IRA would result in an exception where the taxpayer would NOT incur the 10% penalty? – funds are used for a first- time home purchase; funds are used for qualified higher education expenses; funds are used for qualifying medical expenses  The maximum contribution that a taxpayer can make into a Roth IRA is ______the allowable contribution for a traditional IRA. – equal to  The phase-out for contributions allowed to Roth IRAs is dependent upon the taxpayer's ___ ___ and MAGI. – filing status  Taxpayers must receive their first required minimum distribution from a traditional IRA by ___ 1st of the year following the year in which they reach ___ years of age. – April; 72  Assuming the taxpayer has owned a Roth IRA account for over 5 years, qualifying distributions include a $10,000 distribution ______. – used for a first-time home purchase; made when the taxpayer was 60 yrs old; made to a beneficiary after the death of the taxpayer; made because the taxpayer is disabled  Contributions are not deductible and qualified distributions are not taxable from a(n) ___ IRA. – Roth  One difference between traditional IRAs and Roth IRAs is that there is no phase-out based on AGI for contributions to a Roth IRA. – false  What are the tax and penalty effects of nonqualified distributions of Roth IRAs? – the account earnings are fully taxable and subject to the 10% penalty, but the account contributions are nontaxable  Which of the following statements regarding Roth IRAs is NOT correct? – Roth IRAs are NOT subject to phase-out rules that limit their contribution level  A 40-year old taxpayer has owned a Roth IRA for more than 5 years. A $10,000 distribution will be considered nonqualified if the distribution was ___ - was used to pay for higher education expenses  The maximum contribution that a taxpayer under age 50 at year end can make into a Roth IRA is $___ which is ___ ___ (equal to/higher than/lower than) the allowable contribution for a traditional IRA. – 6500; equal to  Why are individually managed retirement plans, such as traditional or Roth IRAs, not very attractive to small business owners? – the contribution levels are relatively low compared to employer-provided plans  When a nonqualified distribution is received from a Roth IRA, what is the deemed order of the funds distributed? – first from taxpayer contributions; second from account earnings  Carrie, age 38, is a florist who owns and manages a sole proprietorship. During 2023, the business generated a net income of $80,000. Carrie plans to invest in a SEP IRA before the due date of her tax return. What is the maximum amount she can contribute to the plan for the 2023 tax year? – 14870  Other than the taxation differences, what is another advantage of Roth IRAs over traditional IRAs? – unlike traditional IRAs, Roth IRAs do not have any minimum distribution requirements

 Two types of tax-advantaged retirement savings opportunities available to self-employment individuals are ___ IRAs and ___ 401(k)'s. – individual; individual  For 2023, the owner of a sole proprietorship can make annual contributions to his SEP IRA for the lesser of $___ or ___% of Schedule C income, after reducing the net income by the deduction for the employer's portion of self-employment taxes paid. – 66000; 20  Sole proprietors can contribute to their own SEP IRAs regardless of whether they contribute to their employee's accounts. – false  In 2023, a self-employed individual with sufficient income may contribute a maximum of $___ to an individual 401(k), and if at least 50 years old at year-end may contribute a maximum of $___. – 66000; 73500  For middle- to low-income taxpayers meeting eligibility requirements, a saver's credit of up to ___% of elective contributions of up to $___ to any qualified retirement plan may be deducted from their tax liability. – 50; 2000  Which of the following characteristics describe SEP IRAs? – the sole proprietor must contribute to employees’ SEP IRAs based on their respective compensation levels; SEP IRAs are easy to set up  An individual 401(k) is a popular retirement plan for sole proprietorships with several employees. – false  Which of the following statements is correct regarding the saver's credit? – the credit is provided in addition to any deduction taken on the contribution  Which of the following statements is INCORRECT regarding the saver's credit? – the credit is refundable Chapter 14  Which of the following choices can be considered a dwelling unit? – recreational vehicle (camper); mobile home; houseboat; condominium  Bob purchased a second home which he rented for 180 days this year. Assuming Bob does not plan to rent it the rest of the year, he must live in the home for at least ___ days during the remainder of the year in order for it to qualify as a residence. – 19  Which of the following days are counted as personal use days for a dwelling unit? – a friend of the taxpayer stays in the home and pays a below market rental rate; a relative of an owner stays in the home for free; a relative of an owner stays in the home and pays a fair market rental rate; the taxpayer or other owner resides in the unit  Jason owns a house and property in Ogden, Utah. He does NOT live in the home now, but plans to retire there. He is able to rent the house to sports enthusiasts and their families throughout most of the year. Skiers like to stay in the winter months and hikers like to rent the house in the summer months. Which type of dwelling unit is this house for Jason? – nonresidence  Which of the following rules for determining the basis of a personal residence is measured INCORRECTLY? – inheritance – the basis carries over from the deceased owner  In order for a place to be considered a(n) ___ ___, people must be able to live and sleep there. – dwelling unit  Drake purchased a second home this year. He lived in the home for 12 days and rented the home for 70 days. Which of the following statements is correct? – the home is not a residence. Drake did not use the residence for more than the greater of 14 days or 10% of rental days  Which of the following days are counted as rental days for a dwelling unit? – the home is being repaired for rental use; a friend of the taxpayer stays in the home and pays a fair market rental rate

 Julia owns a house and property in Salt Lake City, Utah and another house in Florida. She stays in Florida for about three months a year and stays in Utah the other nine months. Julia is a consultant. Her employer and office are located in Utah, but she is able to work remotely when she is in Florida. What type of dwelling unit is the Utah home to Julia? – principal residence  Which of the following rules for determining the basis of a personal residence is measured correctly? – gift – the donor’s basis  Daniel, a single taxpayer, was given a house by his parents several years ago. He has used the home as his principal residence since it was given to him. Daniel's basis in the home was only $65,000. Due to the expansion of the city, he was able to sell the house for $320,000. How will this transaction be treated for tax purposes? – the first 250000 of the gain can be excluded and the remaining 5000 gain will be treated as a long-term capital gain  To qualify for the exclusion on the sale of a personal residence, the taxpayer must have owned and used the property as his/her principal residence for a total of ___ or more years during the __ -year period ending on the date of sale. – two; five  Rachel owns a house and property in Ogden, Utah. She does NOT live in the home continuously, but she spends about 28 days there in the winter and another 28 days there in the summer. She is able to rent the house to sports enthusiasts and their families for 280 days of the year. Skiers like to stay in the winter months and hikers like to rent the house in the summer months. Which type of dwelling unit is this house for Rachel? – the property is a residence, but NOT her principal residence  Denis and Debbie sold their principal residence for $240,000. They had paid $255,000 four years earlier. How will this transaction be treated for tax purposes? – the 15000 loss is NOT deductible because it results from the sale of a personal use asset  Which of the following statements is INCORRECT concerning the ownership and use tests used to qualify for the exclusion of a gain on the sale of a personal residence? – the exclusion of the gain on the sale of a personal residence can only be used once every five years  Ed owned and used his home in Kentucky as his principal residence for 15 years. He moved to another state in the 16th year and rented the Kentucky home. Two years later he sold the Kentucky home. Ed's brother, Fred, had two houses. Fred owned and used his home in Tennessee as his principal residence for 10 years. He had another home in Florida. In the 11th year, he moved into his Florida home. He resided there for 3 years and then sold the Florida home. Which of the brothers has "nonqualified use" of his principal residence that will reduce the exclusion on the gain on a sale of a personal residence? – fred – because he moved into the home after a period of nonqualified use  Any debt secured by a qualified residence that is incurred in purchasing, constructing, or substantially improving the residence is called – acquisition debt  Jack and Susan sold their principal residence for $240,000. They had paid $200,000 four years earlier. How will this transaction be treated for tax purposes? – the 40000 gain is excluded from taxation because it results from the sale of a principal residence  Which of the following statements is INCORRECT concerning the ownership and use tests used to qualify for the exclusion of a gain on the sale of a personal residence? – the time of ownership and use must be a continuous two-year period  In each of the following scenarios, assume that the five-year period prior to the sale begins on January 1, 2018 and that Judy is using the home as her primary residence when she is living there. In which one of the following situations will Judy NOT be subject to the nonqualified use provisions that reduce the nontaxable portion of her gain? – Judy used the home as her primary residence in the first two years. She moved and rented the home for two and a half years before selling it

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 Points paid in connection with ___ of the taxpayer's principal residence are deductible immediately, but points paid to ___ the home are amortized and deducted over the life of the loan. – acquisition; refinancing  Which of the following statements are correct regarding the deductibility of home mortgage interest? – the loan must be secured by the residence; a taxpayer can deduct interest on up to two qualified residences; interest on home-equity indebtedness is only deductible if it is used for home improvements  Daniel and Debra have a principal residence in Ohio, but they also own residences in South Carolina and Colorado. None of the homes are rental property. For 2023, their total real property tax bills total $9,800. On how many of these homes can Daniel and Debra deduct the real property taxes? – 3  Richard makes monthly house payments that include a pro rated portion of real property taxes and insurance. The taxes and insurance are held in an escrow account until the mortgage company pays the taxing jurisdiction. During the current year, Richard paid $1,800 into the escrow account. The tax bill paid by the mortgage company totaled $1,600. The excess $200 will remain in the escrow account and accumulate toward taxes for the following year. What amount can Richard deduct as real property taxes for the current year? – 1600  Which of the following statements is INCORRECT regarding points charged on a home loan? – a point is 10 percent of the principal amount of the loan  What type of nonbusiness interest is deductible? – interest on acquisition indebtedness  When a taxpayer rents his residence to unrelated parties for 14 or fewer days and lives in the residence for at least 15 days, her or she ______. – does NOT report any rental income and is not allowed to deduct any rental expenses  Which of the following statements is correct regarding real property taxes? – the maximum real property tax amount that may be taken as an itemized deduction is 10000 for a married couple that files jointly; real property taxes are deductible either for or from AGI depending on the use of the real property  When are real property taxes deductible for the taxpayer? – when the tax payment is made from the escrow account to the taxing authority  What is the formula used by the Tax Court when allocating mortgage interest and property taxes for residences with significant rental activities? – expense *(total rental days/365)  When a taxpayer rents his residence to unrelated parties for 15 or more days, how is the rental activity treated? – the owner includes the income and deducts the rental expenses to the extent of the rent income. Losses are not allowed unless due to Tier 1 expenses  A taxpayer is NOT required to report rental income or deduct rental expenses on a residence that is only rented for ___ days or less, as long as the taxpayer lives in the home for at least ___ days. – 14; 15  Jack and Diane have their principal residence in Kansas. They operate a small retail business in town and they own the building that is used for their shop. In addition, they have an apartment building with 15 units. Jack and Diane paid real property taxes on each of these three buildings. The real property tax is a deduction ___ AGI on their principal residence, ___ AGI on their retail shop, and ___ AGI on their rental property. – from; for; for  Jacki owns a house that is considered a nonresidence for tax purposes. She lived in the house for 10 days and rented it out for 250 days during the year. Which of the following statements are correct? – any loss on the property is considered a passive loss; rental expense deductions for the property are NOT limited to gross income  What is the formula used by the IRS when allocating mortgage interest and property taxes for residences with significant rental activities? – expense *(total rental days/total days used)

 A taxpayer's principal place of business can also include the place of business used by the taxpayer for the management activities of the trade or business, if there is no other business location provided for that purpose. – true  Which of the following statements are CORRECT when referring to a home that qualifies as a residence with significant rental use? – the taxpayer rents the home for 15 days or more; all rental income is included in gross income; all direct rental expenses such ad advertising are fully deductible  Charlie and Lucy have a home in Louisville, Kentucky. During the week of the Kentucky Derby, Charlie and Lucy go on vacation and rent their home to a family who wants to attend the derby festivities and the races. Charlie and Lucy receive net rental income of $2,500 for the week. They spend about $500 to stock the bar and provide amenities for their tenants. Utilities, insurance, and interest expense for that week total $300. What is the amount of net rental income Charlie and Lucy will report from this transaction? – 0  When a taxpayer owns a home that he does not live in, the home is considered to be a(n) ___ property for tax purposes. If he rents the property at fair market value, any loss is ___ for tax purposes. – rental; deductible  When a taxpayer has more than one business location, including the home, how can he determine which location is the principal place of business? – the total time spent working at each location; the relative importance of the activities performed at each business; the effort spent on administrative or management activities if there is NOT another location for that purpose  Which of the following statements is INCORRECT regarding a residence with significant rental use? – direct rental expenses are allocated between personal and rental use  Sharon has a 2,800 square foot home with an additional 1,200 square foot basement. She is an artist and uses the basement exclusively as her painting studio. Sharon can deduct ___% of the direct expenses of her basement studio and ___% of the indirect costs from maintaining and using her home as a home office deduction – 100; 30  Travis has a 2,400 square foot home. He is a sales representative for a pharmaceutical company and uses one room of his home exclusively for his business. The area of the office is 240 square feet. During the past year, he painted his office and replaced the door at a cost of $500; paid for utilities for his home, $3,000; paid property taxes, $1,500; paid mortgage interest, $3,600; and replaced a door jamb and door for his patio, $600. Depreciation expense on the entire home would be $2,000 for the year. If Travis uses the simplified method for deducting home office expenses, which of the following choices are correct? – travis has a simplified method deduction of $5*240 square feet; travis is allowed to deduct 100% of his mortgage interest and property tax as itemized deductions  If a taxpayer stays in his rental property for even one day, the expenses must be allocated between rental and personal days. – true  Expenses included in the home office deduction, such as painting or repairs to the acutal area of the home used for business, are referred to as ___ expenses, while the costs that are incurred for the use of the home such as utilities, property taxes, and depreciation are referred to as ___ expenses. – direct; indirect  When using the simplified method, the deduction for home office expenses is $___ x business use square footage with a maximum deduction allowed of $___. In addition to this amount, taxpayers are allowed to deduct ___ percent of their mortgage interest and property tax as itemized deductions. – 5; 1500; 100

 Which of the following statements is INCORRECT regarding the home office deduction when using the actual expense method? – Tier 1 expenses are deductible to the extent to the Schedule C net income before considering the home office deduction  Which of the following statements are CORRECT when referring to a home that qualifies as a residence with significant rental use? – the taxpayer rents the home for 15 days or more; all rental income is included in gross income; all direct rental expense such as advertising are fully deductible  Travis has a 2,400 square foot home. He is a sales representative for a pharmaceutical company and uses one room of his home exclusively for his business. The area of the office is 240 square feet. During the past year, he painted his office and replaced the door at a cost of $500; paid for utilities for his home, $3,000; paid property taxes, $1,500; paid mortgage interest, $3,600; and replaced a door jam and door for his patio, $600. Travis has $___ in deductible direct expenses and $___ in deductible indirect expenses. – 500; 810  Which of the following statements regarding the simplified method of home office deduction is incorrect? – if a taxpayer has a prior year carryover and chooses to use this method, the carryover is lost forever  Tier 1 – generally, mortgage interest and real property tax allocated to the business  Tier 2 – generally, expenses allocated to the business use of the home, except for interest, taxes, and depreciation  Tier 3 – depreciation allocated to the business  Corey has a $1,200 home office deduction carryforward from the prior year. He has decided to use the simplified method for calculating the home office deduction in the current year. Which of the following statements is CORRECT regarding the home office deduction? – corey cannot use the actual expense carryforward as a deduction in the current year if he is using the simplified method

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