ACCT467/ACCT567 Fall 2015

Sample Quiz 2

Washington University
Olin School of Business
Instructor: Amy Choy
(34 points, 35 minutes)
Multiple Choice (please circle the best answer) and short questions (please show your
calculations) (2 points for each correct answer unless otherwise stated).
1. Karen works at OK's grocery. This year Karen was paid $43,000 in salary but she was
allowed to purchase her groceries at 10% below OKs cost. This year Karen spent $3,600 to
purchase groceries costing OK $4,000 and worth $6,000. What amount must Karen include
in her gross income?
Here is the code: Gross income does not include the value of a qualified employee discount.
A qualified employee discount is any employee discount with respect to qualified property
or services provided by an employer to an employee for use by the employee to the extent the
discount does not exceed
(i)
The gross profit percentage multiplied by the price at which the property is offered to
customers in the ordinary course of the employer's line of business, for discounts on
property, or
(ii)
Twenty percent of the price at which the service is offered to customers, for discounts
on services.)
Answers: Employees must recognize gross income to the extent they are allowed to
purchase goods from their employer at a price below the employer's cost. [($43,000 +
($4,000 .10)] = $43,400.
2. Jane, aged 45, needed some cash so she received a $50,000 distribution from her Roth IRA.
At the time of the distribution, the balance in the Roth IRA was $80,000. Jane established the
Roth IRA 10 years ago. Over the years, she has contributed $45,000 to her account. What
amount of the distribution is taxable and subject to early distribution penalty?
Answers: $5,000. Because this is a nonqualifying distribution, Jane is taxed and
penalized to the extent the distribution exceeds her contributions to the account. In this
case, the excess is $5,000 ($50,000 distribution minus $45,000 contributions).
3. This year June purchased 500 shares of Bell common stock for $20 per share. At year-end
the Bell shares were only worth $2 per share. What amount can June deduct as a loss this
year? Why?
Answers: June is not entitled to a loss deduction because no realization occurs until the
stock is sold or becomes worthless.
4. Jane borrowed some money to pay tuition several years ago when she attended State
University (a qualified educational institution). This year she paid $2,400 of interest on the
loan. Jane files single and reports $70,000 of income no other income or deduction, how
much of the interest can she deduct? Note that up to $2,500 of interest on qualified

ACCT467/ACCT567 Fall 2015

Sample Quiz 2

educational loans is deductible for AGI subject to phase-out for a taxpayer filing as single
and with AGI > $65,000 and is completely eliminated with AGI > $80,000.
Answers: Jane may deduct $1,600 ($2,400 - $800 = $1,600) due to the phase-out amount
calculated as follows: ($2,400 * [($70,000 - 65,000)/$15,000]] = $800).
5. In 2015 John, a 20 year old full-time student, earned $4,500 in the summer. He was not
eligible to participate in an employer-sponsored retirement plan. He also received $500 of
interest income. How much tax-deductible contribution can Jacob make to an IRA account?
Note that the general limit for deductible contributions in 2015 is $5,500.
Answers: $4,500. Tax deductible contributions are limited to the lesser of $5,500 or the
amount of earned income.
6. Casey currently commutes 35 miles to work in the city. He is considering a new assignment
in the suburbs on the other side of the city that would increase his commute considerably. He
would like to accept the assignment, but he thinks it might require that he move to the other
side of the city. He is seeking advice from you and you know that to satisfy the distance
test, the distance from his old residence to the new place of work must be at least 50
miles more than the distance from the old residence to the old place of work. Which of
the following is a true statement?
A. Casey can deduct moving expenses if the distance between his current residence and his
new assignment is at least 50 miles.
B. If Casey's move qualifies for the moving expense deduction, he can deduct the cost of
meals while en route to his new residence.
C. To qualify for a moving expense deduction the new commute from Casey's current
residence would need to be a minimum of 85 miles.
D. If Casey's move qualifies for the moving expense deduction, he can deduct half the cost
of meals while en route to his new residence.
E. All of these are false.
The new assignment needs to lengthen the existing commute (35 miles) by at least 50
miles. Hence, the distance must be 85 miles.
7. In July 2014, Jane came to St. Louis from Canada to study at Washington University (on an
F1 visa). In the summer of 2015, she got a paid internship in St. Louis and earned $6,000. In
2015, while continuing her studies at Washington University, she also worked as a teaching
assistant and earned $1,200. Based on the substantial presence test (she was in the United
States for the entire year in 2015), she could be taxed as a US resident if she does not have a
closer tie to Canada.
___________ True
___________ False
The substantial presence test does not apply to people who are in the United States on
F1 or on J1 visa.

ACCT467/ACCT567 Fall 2015

Sample Quiz 2

8. In 2015, Joe, single, has $50,000 ordinary income. He also has a net short term capital loss
(NSTCL) of $10,000 and a net long term capital gain (NLTCG) of $2,800. Joe will report
$_$47,000 ordinary income and $0 capital gain income.
$2,800 NLTCG -$10,000 NSTCL = $7,200 NSTCL; Use $3,000 NSTCL to reduce
ordinary income leaving $4,200 as a NSTCL carryforward.
9. You purchased 100 shares of ABC stock for $45 per share on June 30, 2010. On March 30,
2015, you decided to sell the shares for $30, generating a loss of $15 per share. On April 15,
2015, you realized you made a mistake and repurchased 100 shares for $35 per share. Can
you deduct a long-term or short-term capital loss from the sale on March 30, 2015? Explain
your answers.
Answers: No. You will have a ($1,500) capital loss. Since you held the original stock for
over a year, the loss would be categorized as long-term. However, the loss cannot be
deducted on the 2015 tax return. The wash sale rules disallow the deduction because
you sold and purchased similar stock within 30 days of selling the original shares.
However, the loss is added to the basis of the newly acquired stock. Thus, the basis of
the new stock is $5,000 = $3,500 (100 shares $35) +$1,500 (the disallowed loss).
10. A taxpayer with single filing status could claim at least one dependent exemption when
there is a qualifying relative who is not a qualifying person.
11. Jane has difficulties repaying her loans. The bank decided to forgive part of her loans, in the
amount of $45,000. After part of her loan was discharged, Jane had total assets of $222,000
and an outstanding loan amount of $217,000. What amount must Jane include in her gross
income?
A.
B.
C.
D.
E.

$5,000
$45,000
$30,000
$28,000
Zero - Jane was not solvent when the loan was discharged

A discharge of indebtedness is not taxable if the taxpayer is insolvent before and after
the debt forgiveness. If the discharge of indebtedness makes the taxpayer solvent, the
taxpayer recognizes taxable income to the extent of his solvency.
12. In 2015, Daniel, single, received $250,000 in pension payments and $10,000 of social
security payments. What amount must Daniel include in his gross income?
Note that for a taxpayer filing as single, Social security benefits are not taxable if modified
AGI + 50% of Social Security benefits <= $25,000; however, social Security benefits are
taxable if:
1. $25,000 < modified AGI + 50% of Social Security benefits < = $34,000, then taxable
Social Security benefits are the lesser of (a) 50 percent of the Social Security benefits or

ACCT467/ACCT567 Fall 2015

Sample Quiz 2

(b) 50 percent of (modified AGI + 50% of Social Security benefits - $25,000).

2. modified AGI + 50% of Social Security benefits > $34,000, taxable Social Security
benefits are the lesser of (a) 85 percent of Social Security benefits or (b) 85 percent of
(modified AGI + 50% of Social Security benefits - $34,000), plus the lesser of (1) $4,500
or (2) 50 percent of Social Security benefits.
A.
B.
C.
D.
E.

$250,000
$255,000
$258,500
$260,000
Zero

High income individuals include 85% of their social security benefits in gross income.
13. John won a $1 million prize for his contribution on cancer research. This prize is awarded for
scientific achievement, and John directed the awarding organization to transfer $400,000 of
the award to the St. Louis Symphony (an official 501.c non-profit organization). How much
of the prize should John include in his gross income?
A.
B.
C.
D.

$400,000
$600,000
$1 million
None of these because all prizes are excludible

14. Brad was disabled for part of the year. He received $11,500 of benefits from a disability plan.
Brad paid 40% of the insurance premium while his employer paid for the remaining amount.
Brad must include $__6,900__ of benefits in his gross income.
$11,500 60% = $6,900
15. Taylor had the following transactions for 2015:
Salary
Moving expenses incurred to change jobs
Inheritance received from deceased uncle
Life insurance proceeds from policy on uncles life (Taylor was named the
beneficiary)
Cash prize from church raffle
Payment of church pledge
Calculate Taylors 2015 AGI.

$ 85,000
(12,000)
300,000
200,000
3,000
(4,500)

Answers: $76,000. $85,000 (salary) + $3,000 (raffle prize) $12,000 (moving expenses). The
inheritance and life insurance proceeds are exclusions from gross income. The payment by
Taylor of a church pledge is a deduction from AGI. Thus, it does not enter into the
determination of AGI.

ACCT467/ACCT567 Fall 2015

Sample Quiz 2

16. John is self-employed. This year he asked one of his clients to make the check in the amount
of $22,000 payable to Jane. Who should include the $22,000 as gross income this year if
a. Jane is Johns ex-wife and the $22,000 is alimony to Jane?
Answers: Both John and Jane
b. Jane is Johns younger sister and the money is for her support?
Answers: John.
17. In which of the following situations is the individual an independent contractor rather than an
employee?
A. a nurse who is directly supervised by doctors in an office
B. a computer programmer who is instructed as to what projects to undertake, programming
language and format, and hours of work
C. a nurse who travels to several different patients. She sets her own hours and is
responsible for the delivery of nursing care and end result
D. a teacher whose hours, class schedule, and the subject taught are established by the
school.
This nurse is not under supervision of an employer. She sets her own hours and is
responsible for the delivery of care and the end result.
Notes:
FILING STATUS DECISION TREE (most cases)

Yes

Were you married on the last day of the year?

No
Did your spouse die
during the year?

MARRIED FILING
JOINTLY OR
MARRIED FILING
SEPARATELY

Yes

No

Did you and your

spouse live apart
during the last 6
months of the year?

No
Do ALL of the following apply?
Your spouse died in last two years.
You did not remarry in the last two
years
You paid more than 1/2 the cost of
keeping up your home for the year.
Your dependent child or step child
lived in your home all year. A foster
child or grandchild does not meet
this test.

No
Do all of the following apply?

Yes

QUALIFYING
WINDOW(ER)
WITH A
DEPENDENT
CHILD

No

Do BOTH of the following apply?

You paid more than 50% of the cost of

keeping up your home for the year.
A qualifying person lived with you in
your home for more than half of the
year (not applicable to parents) AND
qualifies as your dependent.

No
Yes

SINGLE

You file a separate return

from your spouse
You paid more than 50% of
the cost of keeping up your
home for the year.
Your home is the main
home for your child,
stepchild or foster child for
more than half of the year.
You claim an exemption for
the child.

Yes

HEAD OF HOUSEHOLD

ACCT467/ACCT567 Fall 2015

Sample Quiz 2

Terms

Dependent child: own child, adopted child, or stepchild, also meets other requirements of a
qualifying child

Qualifying person = qualifying child or qualifying relative who is related to the taxpayer
through a qualifying family relationship

Qualifying child: must meet ALL of the following:
Relationship test (see below)
Age test: age <19, <24 for a full time student, or permanently & totally disabled (must be
younger than the taxpayer)
Residence test : live with taxpayer for > of the year (except for temporary absences)
Support test: the child cannot provide > of his/her own support

Qualifying relative: must meet ALL of the following:
Relationship test (see below)
Support test: taxpayer provides > 50% of the support
Gross income test: gross income < personal exemption amount
Relationship test
Qualifying child:

The child is the taxpayers son, daughter, stepchild, an eligible foster child, brother, sister,
half brother, half sister, stepbrother, stepsister or a descendant of any of these relatives
Qualifying relative:

a descendant or ancestor of the taxpayer (e.g., child, grandchild, parent, or grandparent),

a sibling of the taxpayer, including a stepbrother or stepsister

a son or daughter of the taxpayers brother or sister (not cousins)

a sibling of the taxpayers mother or father

in-law (mother-in law, father-in-law, sister-in-law, and brother-in-law) of the taxpayer, or

unrelated person who lives in taxpayers home entire year
Dependency exemption
Dependency requirements
Citizen or resident of U.S., Canada, or Mexico (exception for an adopted child)
Must not file joint return with spouse
Exception: if no tax liability filing jointly or separately
Must be a qualifying child or qualifying relative of taxpayer
Tie breaking rules (specify who has priority in claiming the dependency exemption):
Parents have priority
Days living with each parent (if parents live apart)
Adjusted Gross Income (AGI): higher AGI gets the exemption
Multiple support agreement
Must contribute at less 10% of the dependents support
Must file Multiple Support Declaration (Form 2120)
Children of divorced parents (custodial parent issues a waiver)

ACCT467/ACCT567 Fall 2015

Sample Quiz 2

Substantial presence test physically present in the U.S. at least:

31 days during the current year, and
183 days during the 3-year period that includes the current year and the two years immediately
before, counting:
All days in current year
1/3 of days in previous year
1/6 of days in second year before current year
An individual who meets these requirement is, for tax purposes, a resident alien unless s/he can
show that in the tax year s/he has a tax home in a foreign country and has a closer connection to
that country than to the United States.

Substantial presence test does not apply to people who are in the United States under J1
or F1 visa

For tax purposes, a person on J1 (F1) visa will be taxed as a U.S. resident in year 3 (year
6)