Applying the IRS Code Rules

Applying the IRS Code Rules
Applying the IRS Code Rules

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Applying the IRS Code Rules

Complete 6 problems that require you to apply research and knowledge of the rules and laws associated with at-risk or passive activity losses, as well as the individual alternative minimum tax (AMT).

Note: The assessments in this course are presented in sequence and must be completed in order. Do not complete Assessment 6 until you have submitted and received faculty feedback for Assessment 5.

Tax regulations are in a state of constant change. Being able to locate and correctly interpret and apply the information to a problem is a highly valued skill.

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

  • Competency 1: Analyze the background of the federal income tax system.
    • Correctly explain the tax effect in a specified scenario for the last year and the current year.
  • Competency 2: Analyze the basics of individual income tax return preparation. 
    • Correctly calculate the initial basis, allowed losses, and ending at-risk amounts.
    • Correctly explain how to treat a loss on a federal income tax return.
    • Correctly calculate what can be deducted on a final income tax return.
    • Correctly calculate the loss disallowed by at-risk rules and how much of the loss is disallowed by the passive loss rules.
    • Correctly calculate itemized deductions for AMT purposes and identify the amount of the AMT adjustment.

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Context

There is a separate tax system from the one you have been studying. The goal of this second system is to identify individual and corporate taxpayers who might escape paying taxes by using the Internal Revenue Code’s advanced tax incentives and programs. This alternative minimum tax (AMT) system employs rules based on a taxpayer’s AMT income. As you will learn, little income escapes the IRS.

Over the coming decade, a growing number of taxpayers will become liable for the AMT. Rather than affecting only high-income taxpayers who would otherwise pay no tax, the AMT has extended its reach to many upper-middle-income households. As more taxpayers incur the AMT, there will likely be increased pressure to reduce or eliminate the tax (CBO, 2010).

Questions to Consider

epen your understanding, you are encouraged to consider the questions below and discuss them with a fellow learner, a work associate, an interested friend, or a member of the business community.

  • What are some advantageous rules individual taxpayers can employ to avoid the AMT?
  • How far in advance should a taxpayer develop a tax strategy?
  • Is developing a tax strategy something only high-income people should do?

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Resources 

Required Resources

The following resources are required to complete the assessment.

Assessment 6 Problems: Applying the IRS Code In a Word document, provide complete answers with explanations to the problems below.

Problem 1

In 2014, Matthew contributes equipment with an adjusted basis of $40,000 and a FMV of $36,000 to Construction Limited Partnership (CLP) in return for a 3% limited partnership interest. Matthew’s share of CLP income and losses for the year were as follows:

Interest $ 1,000

 Dividends 600

Capital gains 1,800

Ordinary loss (8,650)

CLP had no liabilities. What are Matthew’s initial basis, allowed losses, and ending at-risk amount?

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Problem 2

 During the current year, Ben worked 1,500 hours as a tax consultant and 500 hours as a real estate agent. His one other employee (his wife) worked 350 hours in the real estate business. Ben earned $60,000 as a tax consultant, and together the couple lost $18,000 in the real estate business. How should Ben treat the loss on his federal income tax return?

Problem 3

Chrystal died owning an interest in a passive activity property. The property had an adjusted basis of $270,000, a fair market value of $284,000, and suspended losses of $25,000. What can be deducted on her final income tax return?

Problem 4

Howard has a $76,000 loss from an investment in a partnership in which he does not participate. His basis in the interest is $70,000.

a. How much of the loss is disallowed by the at-risk rules?

 b. How much of the loss is disallowed by the passive loss rules?

Problem 5

Roberta gave her daughter a passive activity last year that had an adjusted basis of $37,500. The activity had suspended losses of $17,500 and a fair market value of $60,000. In the current year, her daughter realized income of $9,000 from the passive activity. What is the tax effect on Roberta and her daughter last year and in the current year?

Problems are continued on the next page

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Problem 6

Create a table for the answer to this problem. Include these categories: AMT; Regular Tax: Adjustment.

Charles had the following itemized deductions in 2014:

State income taxes                                           $3,000

Charitable contributions                                     4,900

Mortgage interest (personal residence)              14,000

Medical expenses [$8,000-(7.5% ×$75,000)]       2,375

Miscellaneous [$3,200-(2%×$75,000)]                1,700

  1.  What are Charles’ itemized deductions for AMT purposes?
  2. What is the amount of the AMT adjustment?
Internet Resources

Access the following resources by clicking the links provided. Please note that URLs change frequently. Permissions for the following links have been either granted or deemed appropriate for educational use at the time of course publication.

IRS.gov is the homepage for the federal IRS Web site. Use the tabs at the top of the page to navigate the site. The Interactive Tax Assistant and Tax Trails are tools that walk you through a series of questions to find answers to tax questions.

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Internet Resources

Access the following resources by clicking the links provided. Please note that URLs change frequently. Permissions for the following links have been either granted or deemed appropriate for educational use at the time of course publication.

  • lynda.com. (n.d.). Income tax fundamentals: Accounting tutorials. Retrieved from http://www.lynda.com/Business-Accounting-tutorials/Income-Tax-Fundamentals/188210-2.html
  • IRS. (n.d.). IRS videos. https://www.youtube.com/user/irsvideos.
    • The IRS has a channel on YouTube devoted to income tax information in a video format. There are numerous videos available to help you with the course assessments. Videos are available with closed captions and in ASL and multilingual versions. You can search this channel by topic.

Cruz, A., Deschamps, M., Niswander, F., Prendergast, D., Schisler, D., & Trone, J. (2016). Fundamentals of taxation 2016 [with taxation software] (9th ed.). New York, NY: McGraw-Hill.

  • Chapter 13, “At-Risk/Passive Activity Loss Rules and the Individual Alternative Minimum Tax.”

Assessment Instructions

Note: The assessments in this course are presented in sequence and must be completed in order. Do not complete Assessment 6 until you have submitted and received faculty feedback for Assessment 5.

For this assessment, complete the following: 

  • Download the Assessment 6 Problems document, linked in the Resources under the Required Resources heading.
  • Using the primary source of IRS.gov and the IRS Interactive Tax Assistant and Tax Trails (linked in the Resources under the Required Resources heading), locate and interpret regulations and publications that relate to each problem.
  • Record your answers to the problems in a Word document.
  • Provide an explanation for each answer.
  • Submit the Word document containing your answers to the problems and the explanations for your answers.

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