a. What is Mike’s amount realized?
b. What is Mike’s adjusted basis?
c. What is Mike’s realized gain or loss?
d. What is Mike’s recognized gain or loss?
e. How much of the gain or loss can Mike report in his tax return?
ANSWER:
a. Amount realized: $12,400 = $12,650 − $250
b. Adjusted basis: $15,500
c. Realized loss: $12,650 − $250 − $15,500 = $3,100
d. Recognized loss: $12,650 − $250 − $15,500 = $3,100
e. $3,000. Up to $3,000 of capital loss can be deducted against ordinary income each year
121. Fran bought stock in the FCM Corporation 4 years ago at a price of $18,000. She sold it this year for $22,225 and paid her broker $225 from the proceeds of the sale.
a. What is Fran’s amount realized?
b. What is Fran’s adjusted basis?
c. What is Fran’s realized gain or loss?
d. What is Fran’s recognized gain or loss?
e. How much of the gain or loss should be included in her tax return?
ANSWER:
a. Amount realized: $22,000 = $22,225 − $225
b. Adjusted basis: $18,000
c. Realized gain: $22,225 − $225 − $18,000 = $4,000
d. Recognized gain: $22,225 − $225 − $18,000 = $4,000
e. $4,000. There is no limit on the amount of capital gain to be included in tax returns; however, it may be taxed at preferential rates.
122. Mark a “Yes” to each of the following that can be found on the IRS Web site. If not, mark with a “No.”
a. A list of IRS forms.
b. A search function.
c. Advice on how to avoid paying taxes.
d. Ways to contact the IRS.
ANSWER:
a. Yes
b. Yes
c. No
d. Yes
123. State two reasons why a person would want to e-file their return instead of mailing it.
ANSWER:
A return that is e-filed has a smaller error rate than paper-filed returns. (Less than 1 percent versus more than 20 percent). E-filing also offers a faster refund because the IRS is able to process the return more quickly.
Essay
124. Distinguish between reporting entities and taxable entities and give examples of each.
ANSWER:
A partnership is an example of a reporting entity. It pays no tax but must report partnership income or loss and the allocation of income or loss to partners. Individuals, corporations, estates, and certain trusts are examples of taxable entities whose income is subject to federal income taxation.
125. What is the difference between the standard deduction and itemized deductions?
ANSWER:
The standard deduction is a flat amount, varying based on a taxpayer’s filing status (single, married, head of household, etc.), age, and vision, which is deducted from adjusted gross income (AGI) along with qualified business income deductions to arrive at taxable income.
Itemized deductions are expenses paid by a taxpayer including medical expenses (over the 7.5 percent of AGI limit), various taxes (up to $10,000), home mortgage interest and investment interest, charitable contributions, certain personal casualty losses and miscellaneous deductions (not subject to the 2 percent of AGI limit). If the total itemized deductions are larger than the taxpayer’s standard deduction, the taxpayer should complete Schedule A, listing all itemized deductions, and use this amount instead of the standard deduction. By itemizing deductions when they are larger than the standard deduction, taxpayers may reduce their taxable income and pay less tax.