How Much Do You Know About Taxes? [ANSWERS]

True or False – no Googling, please! Link to the answers is at the end.

  1. True.
    1. See line 29, page 1, Form 1040.
  2. False
    1. Conversions and contributions do not affect one another
  3. False
    1. There is no limit to the amount you can convert annually to a Roth IRA.
  4. True
    1. However, you cannot contribute to a TIRA (Traditional IRA) after age 70 ½. This cuts off the ability of high earners to use the backdoor Roth tactic.
  5. True
    1. While many attorneys set up an LLC before electing to operate as an S-corporation, it is not necessary and really has no purpose.
  6. False
    1. You have until the extended due date of your tax return to both set up and contribute to a SEP IRA.
  7. True
    1. See IRS Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship
  8. False
    1. The corporate tax return extended due date has been moved up a month this year, matching the partnership extended due date of 9/15.
  9. False.
    1. One spouse can be a full-time student.
  10. True
    1. Tax benefits based upon Modified Adjusted Gross Income (MAGI) are affected by the amount of tax-exempt interest you received, which is added back to your AGI. A common example is the taxation of Social Security benefits.
  11. True
    1. HSAs are one of the few pure deductions afforded to taxpayers in all brackets, whether or not they had earned income.
  12. True
    1. Alimony you receive can be used as the basis for IRA contributions.
  13. True
    1. Filing a return can preserve carryovers such as a NOL and capital loss
  14. False
    1. You should always file a gift tax return if the gift involves a subjective valuation (ownership shares of a business, for example). This allows the Statute of Limitations (SOL) to run out. Otherwise, the SOL never closes and the IRS can pursue you indefinitely.
  15. True
    1. A storage space is an exception to the “Exclusive Use Test”. See IRS Publication 587.
  16. False
    1. But your child cannot claim herself if you are claiming her.
  17. False.
    1. That would be California. New York is only 8th on the list!
  18. True.
    1. They are TN, AR, and LA.
  19. True
    1. This isn’t a slam-dunk, but the cost of education that maintains or improves skills that are required in your employment or your current trade or business are deductible.
  20. False.
    1. The tax effect is that you have less income to be taxed on, but there is no deduction.
  21. False
    1. Unless you are driving a vehicle that is only suitable for business (i.e. a delivery truck), you still have to keep documentation of your business use for the IRS.
  22. False.
    1. Unused operating losses and capital loss carryovers on separately-owned property are lost after your final tax return is filed.
  23. False.
    1. A 1031 exchange can be used only for investment or business property. A vacation home is considered personal property unless also rented out to the public. [Rev. Proc 2008-16 articulates a safe harbor to use the 1031 rules for vacation homes, however.]
  24. True.
    1. The proceeds for renting your dwelling unit for less than 15 days per year are tax free. This means, for example, that your business can rent your home from you for board meetings, for housing visiting business associates, etc. for up to 14 days annually and deduct the rent on the business tax return, yielding tax-free income to you.
  25. True.
    1. While the normal deduction is 50%, expenses for recreational, social, or similar activities primarily for the benefit of employees are 100% deductible.

How did you do?

Score of 21 – 25: Pocket Protector status. You must be doing taxes for all of your friends.

Score of 16 – 20: Better than the Average American. Keep at it and you can sit for the EA exam one day.

Score of 10 – 15: Average American. Taxes hold a mild interest for you, kind of like the garbage disposal. A little knowledge can be a dangerous thing.

Score below 10: Still using Turbo Tax? A second opinion may be in order.

One thought on “How Much Do You Know About Taxes? [ANSWERS]

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