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TCP CPA Practice Questions: The Timing of Income and Expenses for Tax Planning
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May 20, 2024
In this video, we walk through 5 TCP CPA exam practice questions teaching about the timing of income and expenses for tax planning purposes, including the effects of changing tax rates and legislation. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/tcp-cpa-practice-questions-explained-the-timing-of-income-and-expenses-for-tax-planning/ See the other TCP walkthrough videos here: https://www.superfastcpa.com/free-tcp-cpa-practice-question-walkthroughs/ 00:00 Intro 00:54 Question 1: Calculating Greatest Tax Savings 03:05 Question 2: Changes in the Standard Deduction 05:04 Question 3: Deciding Whether to Increase Charitable Donations 06:52 Question 4: Deciding Whether to Increase Charitable Donations Continued 08:35 Question 5: Cash Basis Tax Payers and State Taxes 10:29 Pillar Topics
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Welcome to another TCP walk-through video. I'm Logan, and in today's video, we're going to be going over the timing of income and expenses for tax planning, including changing tax rates
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And we're going to be doing that, the Superfast CPA way, which is diving straight into questions to learn the material
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If you don't know much about our strategies, make sure you go check out our free one-hour webinar training on superfast cpa.com
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We go over the key ingredients to passing the CPA exam, and again, it's one hour, it's free, and it will save you so much
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time struggling with your CPA process. Make sure you go check it out. The link will be in the
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description. Also, just letting you know, this video will only be going over five questions. However
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super fast CPA members will have access to the full 10 question video when we post it in the
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members forum. So if you like this, you can get more of it by becoming a super fast CPA member
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All right, with all that said, let's dive straight into the questions. All right, here is question
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1. John and Mary, or Marie, a married couple filing jointly, are evaluating their tax planning
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strategies for the upcoming years in light of a new tax law. The new legislation will decrease
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the marginal tax rate applicable to their income bracket from 28% to 24% starting next year. The
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couple has the option to accelerate $20,000 in charitable donations from next year into the current
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year. Their expected taxable income for this year is $100,000, and it is expected to remain similar
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next year. Assuming no other changes to their income or deductions, which of the following
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strategies would result in the greatest tax savings for them? Okay. So if you don't really understand
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the concept of tax planning and accelerating income or expenses or different things like that
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or pushing them off to the next year, that's okay. That's what this video is about is kind of
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understanding how those things work together and what would be most advantageous. So let's go
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ahead and look at the answer together to learn more. Okay, and the answer is that they should
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accelerate the charitable donations into the current year to take advantage of the higher tax
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rate deduction. Okay, so let's learn about this. Accelerating deductions, such as charitable
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donations, to a year with a higher tax rate results in greater tax savings. Here's why. When John
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and Mary accelerate their $20,000 charitable donation to the current year, where the tax rate
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is 28%, they save on their taxes by reducing their taxable income by the amount of the donation
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multiplied by their tax rate. This calculates to $20,000 multiplied by 28%. Being
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$5,600 in tax savings, and then if they were to make the same donation next year, when the
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tax rate is only 24%, the tax savings would be 20,000 times 24%, equaling $4,800. Thus, they would
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save $800 less than if they made the donation this year. Given the decrease in the tax rate next year
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it makes financial sense to take larger deductions during years with higher tax rates. This maximizes
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the value of the deductions in terms of actual tax savings. Okay, so the main concept we learned
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there is that in a year when you have higher taxes it better to have more deductions which makes sense because that decreases your taxable income Alright that was the first question so let go ahead and go to the next question All right here is question two Fred and Jane a married couple filing jointly are planning their deductions for the upcoming year
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due to a scheduled surgery and their plan to support a new charity. They anticipate higher medical expenses and charitable contributions this year
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The government has recently announced that next year the tax deduction rules will change
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with the introduction of a higher standard deduction amount and lower deductible limits for medical
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expenses and charitable contributions. They are expecting $7,000 in medical expenses and $5,000 in
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charitable contributions. Given these changes and the expected lower deductible amounts next year
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of $3,000 for both categories next year, what should Fred and Jane consider for optimal tax
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savings? Okay, there's a lot going on there. So if you need to, pause the video, think about it
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kind of think through the different things that it's saying there, and when you're ready, come back, and we'll look at the answer to try to piece it together. Okay, so the answer is that they
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should itemize deductions this year to capitalize on the higher total deductions and take the
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standard deduction next year when their deductible expenses are expected to be lower, and the
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standard deduction amount is higher. So this is something called like a grouping strategy or
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bunching, like there's a whole bunch of different names for it, but basically it can be really
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effective. So let's read about this. A grouping strategy is particularly effective in light of
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upcoming tax legislation changes. By itemizing their deductions this year, Fred and Jane can take
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full advantage of the current higher limits and rates for deductions. Next year, when the standard
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deduction increases and limits on itemized deductions becomes less favorable, they can switch to the
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standard deduction. This approach maximizes their tax savings by adjusting their strategy based on
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the anticipated changes in tax policy. Okay, we learned a little bit more about changing tax
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legislation and how important it is to pay attention to the itemized deductions and the standard
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deductions for each year to see which would give you a bigger benefit. And we're actually
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going to look at that in the upcoming questions. So let's go ahead and go to the next question
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All right, here is question three. Alice, a single taxpayer, is considering whether to increase her
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charitable donations this year in anticipation of using the standard deduction next year due to
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expected lower personal costs. In year one, she has itemized deductions totaling $12,000
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including $4,000 in charitable contributions. The standard deduction for a single taxpayer in year
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one is $12,550, however. If Alice decides to contribute an additional $2,000 to charity in year
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one instead of year two, thereby increasing her itemized deductions, and plans to take the standard
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deduction in year two, which is expected to be $12,950, calculate the total impact on her taxable
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income over the two-year period. Okay, you've learned a pretty good amount up to this point
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I would say you could probably figure this out. So pause the video, take a second, see if you can get the correct calculation and when
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you're ready, come back, we'll look at the answer together to continue learning. Okay and the answer was So without contributing the extra she sticks with her planned deductions That would be her total deductions being just the standard deduction each year because in year one her itemized
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deductions are lower than the standard deduction. So that would give her a total of $25,500 of
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deductions over the two years. But with doing the $2,000 contribution in year one instead of year
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two, that makes it so she can itemize deductions in year one, which would be $14,000. And then
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she would still take the standard deduction in year two. When you add those together, that's $26,950
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Subtract the difference between the two, and that's $1,450 of tax savings
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because she has 1,450 more deductions than she would have the other way
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Okay, that made sense. So let's go ahead and go to the next question. Here's question four
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Thomas and Elaine are a married couple filing jointly. They anticipate incurring $24,000 anatomized deductions
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in both the current year and next year. Their standard deduction is projected to be $24,800 in the current year
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and $25,100 in the next year. They are considering shifting $3,000 of their charitable donations
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from next year to the current year. What is the effect on their combined taxable income
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over these two years if they decide to adjust their charitable donations as planned? Okay, very similar to before
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So go ahead, pause the video and see if you can get the correct answer and when you're ready, come back, we'll look together
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All right, and the answer is that there would be a $2,200, reduction. By shifting $3,000 of charitable donations from next year to the current year
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Thomas and Elaine can increase their itemized deductions in the current year to $27,000
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which exceeds the standard deduction of $24,800 in that year. If they do not adjust their donations
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their total deductions for the years would be their standard deductions, 24,800 plus 25,100
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equaling 49,900. And then with the adjusted donations, they, again, itemize for 27,000 plus
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the standard deduction of $25,100, giving them $52,100. So the comparison is $52,100, less $49,900, giving you $2,200 of extra tax deduction to their income
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So it's smarter to move those charitable contributions from one year when they weren't even helping them to get the itemized deductions instead of the standard deduction
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moving it to a year where they were going to take the standard deduction, but now they can take itemized deductions
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deductions, giving themselves higher deductions overall. All right, let's go to the next question
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All right, here is question five. Sarah Johnson, who files her taxes using the cash accounting method
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is organizing her records to itemize deductions on her tax return for this tax year
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She records $3,000 in state taxes withheld throughout the year, and an $800 payment towards last year's state tax assessment that she also made this year
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Additionally, she received a $600 refund this year for an overpayment on last year's state tax
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Sarah plans to itemize her deductions again next tax year. Which of the following correctly describes how Sarah should report these transactions on her tax return for the current year Alright this is a little bit different than what we looked at before So if you want you can still pause the video and see if you can figure it out
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But if not, that's okay. Let's go ahead and go to the answer for this question. All right, and the answer is that she can deduct state and local income taxes of $3,800
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and she has to include the $600 refund as part of her gross income. So let's learn about that
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As a cash basis taxpayer, Sarah is allowed to deduct state income taxes that are actually paid within the year
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Therefore, she can deduct $3,000 in taxes withheld and $800 in additional tax assessment for a total of $3,800
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However, she must also report the $600 refund she received for last year's tax as part of her gross income if she deducted those taxes in the previous year
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So what it's saying there is because she deducted these state taxes as an itemized deduction in the previous year, that means this refund from the state is also taxable
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This inclusion of the refund in her gross income is necessary because the refund offsets the tax benefits she previously claimed ensuring that her taxable income reflects the correct net tax benefit after the refund
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Okay, so that question was a little bit different than the previous ones, but it helped us understand a little bit the timing of state taxes and the refunds and what might need to be taxed or not
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And with that, we've done five questions. So before we go any further, let's go ahead and do one more part of the strategy, which is something called pillar topics
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Now, the idea behind pillar topics is, as you're going through the new material and afterwards
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you will have noticed topics, concepts, equations that kept popping up all throughout the questions
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These were the things that you saw in like three, four, five questions, and they were obviously
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important, and your review course was trying to teach you them so that you would know them for the exam
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So you write down these pillar topics so that you can remember them. So let's go ahead and look at the pillar topics for this video
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Okay, here are the pillar topics. First off, it's better to have more deductions in a year when the tax will be higher
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and it's also better to have more income in a year when the tax will be lower. And the opposite of those two statements is also true
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It's better to have less deductions in a year when the tax will be lower, and it's better to have less income in the year that the tax will be higher
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It's also important to compare the total value of itemized deductions against the standard deduction for a given year
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especially when considering changes to deduction rules or standard deduction amounts, because that could help you have bigger tax savings
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One last thing, it's important to remember that you need to include refunds as taxable income
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if the refund is from a tax year in which the taxpayer itemized deductions and deducted the state tax paid
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Okay, those are the pillar topics, and that is the end of this video. Just a reminder, make sure you go watch our free one-hour webinar training on superfast cpa.com
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We teach the key ingredients to passing the CPA exam. It's something you don't want to miss, so make sure you go check that out
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Also, if you liked going through these five questions, just a reminder that members of Superfast CPA will have access to the full video where we go over 10 questions when we post it on the forum
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If you like this video, make sure to like it and leave a comment. Thanks for watching
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I hope this was helpful and I will see you in the next video
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