Question 1

The maximum deduction on interest paid during the current year on a qualified education loan is: A. $2,500. B. $2,000. C. $1,000. D. 50% of the interest paid during the current year.

Accepted Answer

A. $2,500. The maximum deduction on interest paid during the current year on a qualified education loan is $2,500. A taxpayer with a qualified education loan can deduct the loan’s interest, provided the student loan was taken out solely to pay qualified education expenses and was not from a person related to the taxpayer or made under a qualified employer plan. The student must be the taxpayer, taxpayer’s spouse, or taxpayer’s dependent, and the student must be enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential at an eligible educational institution.

Question 2

When computing alternative minimum tax, the individual taxpayer may take a deduction for which of the following items? A. State income taxes B. Personal and dependency exemptions C. Miscellaneous itemized deductions in excess of 2%-of-adjusted-gross-income floor D. Casualty losses

Accepted Answer

D. Casualty losses Personal and dependency exemptions, and most itemized deductions such as state income taxes and miscellaneous itemized deductions in excess of 2% of AGI floor are not deductible in calculating the alternative minimum tax.

Question 3

Alice bought a home in May of Year 5 and lived there with her husband Jeff until Alice moved out in May of Year 6. They divorced in July of Year 7. Jeff continued to reside in the home under the terms of the divorce decree until Alice sold it in July of Year 10 for a $200,000 gain. How much of this gain may Alice exclude from her income? A. $0 B. $100,000 C. $150,000 D. $200,000

Accepted Answer

D. $200,000 Alice qualifies for the full exclusion because she can tack on the period Jeff lived in the home. Alice needs to have owned and used the residence for two of the last five years. She meets the ownership requirement because she has owned it continuously from May of Year 5 to July of Year 10. She can meet the use test by using the special tacking provisions. She used it personally from May of Year 5 to May of Year 6, so she has one year of use. Her former husband used it under a divorce decree from July of Year 7 to July of Year 10. Alice is able to tack these years of use onto her own so she has the required two years of use.

Question 4

Tom Lewis, a single taxpayer, had the following income and expense items for 2016: Wages $ 55,000 Long-Term Capital Loss (4,000) Deductible IRA Contribution (Tom is not covered by a retirement plan at work) 2,000 Mortgage Interest on personal residence 5,000 Medical expenses not covered by insurance 4,000 Tom's personal exemption amount for 2016 4,050 Tom's standard deduction amount for 2016 6,300 What is Tom's adjusted gross income for the year? A. $55,000 B. $51,000 C. $52,000 D. $50,000

Accepted Answer

D. $50,000 The key points here are: all long-term capital losses may be offset against capital gains. If the loss exceeds the gains, a maximum of $3,000 may be included on the tax return, so only $3,000 of the $4,000 capital loss is deductible in the current year, and the IRA contribution is an adjustment in determining adjusted gross income. Thus, Tom's adjusted gross income is calculated as follows: Wages $55,000 Capital loss (3,000) max IRA contribution (2,000) Adjusted gross income $50,000 Tom's remaining unused loss of $1,000 is carried forward to be used the following year. The mortgage interest on personal residence and unreimbursed medical expenses are from AGI deductions taken as itemized deductions, or the taxpayer may elect to take the standard deduction if it is greater than all of their itemized deductions.

Question 5

Tom Lewis, an individual taxpayer, paid the following expenses in Year 4: 1. Credit card interest of $1,000 2. Real estate taxes of $3,000 on behalf of his mother, on property owned by his mother Which of the amounts is deductible as an itemized deduction on Tom's Year 4 tax return? A. I only B. II only C. Both I and II D. Neither I nor II

Accepted Answer

D. Neither I nor II Credit card interest is considered personal interest and is not deductible on an individual's tax return. In order to be deductible, real estate taxes must be levied against the taxpayer and not someone else (among other requirements). A taxpayer cannot create a deduction for himself by paying someone else's real estate taxes. In addition, the person whom the taxes were actually levied against also may not deduct the taxes since they did not pay the taxes from their own funds. Had Tom gifted the money to his mother and she had used the money to pay her taxes, she would then be entitled to claim the deduction.

Question 6

Moore, a single taxpayer, had $50,000 in adjusted gross income for Year 5. During Year 5, she contributed $18,000 to her church. She had a $10,000 charitable contribution carryover from her Year 4 church contribution. What was the maximum amount of properly substantiated charitable contributions that Moore could claim as an itemized deduction for Year 5? A. $10,000 B. $18,000 C. $25,000 D. $28,000

Accepted Answer

C. $25,000 The maximum cash contribution a taxpayer may deduct in each tax year is limited to 50% of the taxpayer's AGI so long as the recipient charities are qualified for this ceiling. See additional limits discussed as follows: 50% × $50,000 AGI = $25,000 $10,000 carryover from Year 4 + $18,000 for Year 5 = $28,000 $28,000 − $25,000 = $3,000 carryover to Year 6 Regulation Section 1.170A-10 There is a ceiling on the amount an individual may deduct each year as a charitable contribution based both on the type of property contributed and the type of charity to which the contribution is made. The ceilings are as follows (based on adjusted gross income (AGI)): “50% charities” (where charitable contributions are limited to 50% of an individual's AGI) include churches (or church conventions or associations); tax-exempt educational organizations; tax-exempt hospitals and certain medical research organizations; certain organizations holding property for state and local colleges and universities; certain governmental units and subdivisions; certain exempt religious, charitable, scientific, literary, or educational organizations. (IRC Section 170(b)(1)(A)) “30% charities” are qualifying charitable organizations that are not “50% charities” such as war veterans organizations, fraternal orders, cemetery companies, and certain private non-operating foundations. (Regulation Section 1.170A-8; IRC Section 170(b)(1)(B)) 30% ceiling generally applies to gifts of appreciated long-term capital gain property to a 50% charity. 20% ceiling applies to gifts of appreciated long-term capital gain property to a 30% charity. If an individual's charitable gifts for a tax year exceed the percentage ceilings for the year, the excess may be carried forward and deducted for up to five years (subject to the later year's ceiling). (IRC Section 170(d)(1))

Question 7

Which of the following credits can result in a refund even if the individual had no income tax liability? A. Credit for prior-year minimum tax B. Elderly and permanently and totally disabled credit C. Earned income credit D. Child and dependent care credit

Accepted Answer

C. Earned income credit The earned income credit (EIC or EITC) is a refundable tax credit, which means the taxpayer could be eligible for a tax refund even if the taxpayer did not have any federal income tax withheld during the tax year. The prior-year minimum tax credit, the elderly and permanently and totally disabled credit, and the child and dependent care credit all help to reduce the tax liability to zero but are not refundable in cases where the tax liability is zero.

Question 8

Green is self-employed as a human resources consultant and reports on the cash basis for income tax purposes. Select the appropriate tax treatment on Form 1040 (U.S. Individual Income Tax Return) for interest expense on a loan for an auto used 75% for business. A. Fully deductible on Form 1040 to arrive at adjusted gross income B. 50% deductible on Form 1040 to arrive at adjusted gross income C. Fully deductible in Schedule C—Profit or Loss From Business D. Partially deductible in Schedule C—Profit or Loss From Business

Accepted Answer

D. Partially deductible in Schedule C—Profit or Loss From Business Interest expense on a loan for an auto used 75% for business is partially deductible in Schedule C—Profit or Loss From Business. Since the auto was used 75% for business, Green can deduct 75% of costs (for example, gas and maintenance) including 75% of the allowable depreciation.

Question 9

Four years ago, an individual taxpayer purchased silver coins at face value for $200. The coins were stolen in the current year, when their fair market value was $1,000. The coins were not covered by insurance. Without considering the limit based on AGI, what is the maximum amount of loss that the taxpayer can deduct on the current year's tax return? A. $100 B. $200 C. $900 D. $1,000

Accepted Answer

A. $100 In the case of nonbusiness casualty and theft losses, a taxpayer is able to deduct the loss as an itemized deduction, which is computed as follows: Determine the adjusted basis in the property before the casualty or theft. Determine the decrease in fair market value of the property as a result of the casualty or theft. From the smaller of the amounts determined in the two prior calculations, subtract any insurance or other reimbursement received or expected to receive. In this case, the taxpayer has an adjusted basis of $200 and a decrease in the fair market value of $1,000 ($1,000 − $0). Since the smaller of the two calculations is $200, this amount is compared to the insurance coverage, which is $0. The result is that Jack has a loss of $200 from the theft loss. However, individuals must deduct $100 per incident before considering the 10%-of-AGI limit base. Therefore, this taxpayer has a deductible loss of $100, which is the $200 loss less the $100 per-incident deduction.

Question 10

Which of the following assets generally will be distributed outside of the probate estate and regardless of intestacy laws, provided the estate is not the named beneficiary? A. Totten trusts B. Proceeds from insurance policies A. Both A and B B. A Only C. B Only D. Neither A nor B

Accepted Answer

A. Both A and B A Totten trust is not actually a trust; it is an account that is payable on demand. Individuals may style financial instruments such as a bank account or an asset as “Owner A in trust for Beneficiary B.” Owner A has control of the asset during his life, but upon death, the asset passes to Beneficiary B without having to go through probate or a will. Proceeds from an insurance policy are payable to whomever the owner of the policy designates. A will or probate is not required to pay the amount to the beneficiary. Based on the above, the only correct answer would be both Totten trusts and life insurance proceeds.

Question 11

Lane, Inc., an S corporation, pays single coverage health insurance premiums of $4,800 per year and family coverage premiums of $7,200 per year for each eligible employee. Mill is a 10% shareholder-employee in Lane. On Mill's behalf, Lane pays Mill's family coverage under the health insurance plan. What amount of insurance premium is includible in Mill's gross income? A. $0 B. $720 C. $4,800 D. $7,200

Accepted Answer

D. $7,200 If Mill owned less than 2% of the company, the correct answer would be zero. Since Mill owns more than 2% of the company, the insurance premiums paid by the S corporation are fully taxable. Mill received family benefits of $7,200, which are taxable. Revenue Ruling 91-26

Question 12

What percentage of a self-employed person's medical insurance premiums is deductible above the line in the year 2016? A. None B. 60% C. 70% D. 100%

Accepted Answer

D. 100% The Tax and Trade Relief Extension Act of 1998 (P.L. 105-277) phased in the deduction for a self-employed person's medical insurance premiums over several years and now permits a full deduction. The percentage limits on the medical insurance premium deduction for self-employed persons has been: ``` Tax Years Allowable Beginning In: Percentage 1999-2001 60% 2002 70% 2003 and later 100% ```

Question 13

Which one of the following types of itemized deductions is included in the category of unreimbursed expenses deductible only if the aggregate of such expenses exceeds 2% of the taxpayer’s adjusted gross income? A. Interest expense B. Medical expenses C. Employee moving D. Tax return preparation fees

Accepted Answer

D. Tax return preparation fees Tax return preparation fees are considered miscellaneous itemized deductions to be included on IRS Form 1040, Schedule A, Itemized Deductions. The total of all miscellaneous itemized deductions must exceed 2% of the taxpayer’s adjusted gross income. Other miscellaneous itemized deductions include unreimbursed employee expenses, educator expenses, safe deposit box rental, and job search expenses. Interest expense and medical expenses are itemized deductions but are not subject to the 2% floor. Employee moving expenses are a deduction from gross income to reach adjusted gross income and are reflected on the first page of IRS Form 1040.

Question 14

On January 2, Year 1, the Philips paid $50,000 cash and obtained a $200,000 mortgage to purchase a home. In Year 3, they borrowed $15,000 secured by their home, and used the cash to add a new room to their residence. That same year they took out a $5,000 auto loan. The following information pertains to interest paid in Year 7: Mortgage interest $17,000 Interest on room construction loan 1,500 Auto loan interest 500 For Year 7, how much interest is deductible, prior to any itemized deduction limitations? A. $17,000 B. $17,500 C. $18,500 D. $19,000

Accepted Answer

C. $18,500 The Philips can deduct the mortgage interest on the first mortgage of $17,000 and the second mortgage of $1,500, as both of these loans are secured by their main home, for a total of $18,500. Consumer loan interest is not an allowed deduction; therefore, the auto loan interest of $500 is not deductible.

Question 15

Which of the following credits is a combination of several tax credits to provide uniform rules for the current and carryback/carryover years? A. General business credit B. Foreign tax credit C. Minimum tax credit D. Enhanced oil recovery credit

Accepted Answer

A. General business credit The General Business Credit (IRC Section 38(b)) is a combination of the following credits: Investment tax credit (which includes the rehabilitation credit, the energy credit, and the reforestation credit) (IRC Section 46) Work opportunity credit (formerly targeted jobs credit) (IRC Section 51(a)) Alcohol fuels credit (IRC Section 40(a)) Incremental research credit (IRC Section 41(a)) The low-income housing credit (IRC Section 42(a)) The enhanced oil recovery credit (IRC Section 43(a)) The disabled access credit for eligible small businesses (IRC Section 44(a)) The credit for producing electricity from certain renewable resources (IRC Section 45(a)) The empowerment zone employment credit (IRC Section 1396(a)) The Indian employment credit (IRC Section 45A(a)) The employer Social Security credit (IRC Section 45B(a)) The orphan drug credit (IRC Section 45C(a)) The new markets tax credit (IRC Section 45D(a)) The small employer pension plan start-up cost credit (IRC Section 45E(a)) The employer-provided child care credit (IRC Section 45F(a)) The railroad track maintenance credit (IRC Section 45G(a)) The biodiesel fuels credit (IRC Section 40A(a)) The low-sulfur diesel fuel production credit (IRC Section 45H(a)) The marginal oil and gas well production credit (IRC Section 45I(a)) The distilled spirits credit (IRC Section 5011(a)) The advanced nuclear power facility production credit (IRC Section 45J(a)) The nonconventional source production credit (IRC Section 45K(a)) The new energy efficient home credit (IRC Section 45L(a)) The energy efficient appliance credit (IRC Section 45M(a)) The portion of the alternative motor vehicle credit to which IRC Section 30B(g)(1) applies The portion of the alternative fuel vehicle refueling property credit to which IRC Section 30C(d)(1) applies The mine rescue team training credit (IRC Section 45N(a)) The differential wage payment credit (IRC Section 45P(a)) The carbon dioxide sequestration credit (IRC Section 450(a)) The qualified plug-in electric drive motor vehicle credit (IRC Section 38(b)(35)) The qualified plug-in electric vehicle credit (IRC Section 30D(c)(1)) The small employer health insurance credit (IRC Section 45R)

Question 16

Nare, an accrual-basis taxpayer, owns a building which was rented to Mott under a 10-year lease expiring August 31, Year 7. On January 2, Year 5, Mott paid $30,000 as consideration for cancelling the lease. On November 1, Year 5, Nare leased the building to Pine under a 5-year lease. Pine paid Nare $10,000 rent for the two months of November and December and an additional $5,000 for the last month's rent. What amount of rental income should Nare report in its Year 5 income tax return? A. $10,000 B. $15,000 C. $40,000 D. $45,000

Accepted Answer

D. $45,000 01/02/Yr. 5 payment from Mott for lease cancellation $30,000 11/01/Yr. 5 November and December rent payment from Pine 10,000 11/01/Yr. 5 additional payment from Pine 5,000 Total rental income for Year 5 $45,000 Any amount received as rent must be included in income in the year of receipt whether the taxpayer is accrual or cash basis. In general, any payment to or made on the behalf of a landlord of any kind is additional rent income. Any amounts received by a landlord in consideration for cancellation of a lease are additional rent revenue (and not capitalized).

Question 17

Mike and Jane Lewis, a married couple, file a joint 2016 federal income tax return. They have one child, age 15, whom they support 100%. Both are under age 65. They have the following income and expenses for the year: Mike's wages $50,000 Jane's wages 40,000 Total allowable itemized deductions 12,000 Mike's contribution to an IRA 4,000 Jane's contribution to an IRA 4,000 Mike is not covered by a pension plan at work, while Jane is covered by a plan at her employer. The exemption amount (per exemption) for 2016 is $4,050. The standard deduction amount for married filing jointly is $12,600. What is the Lewises' total exemption amount for 2016? A. $4,000 B. $4,050 C. $12,000 D. $12,150

Accepted Answer

D. $12,150 The Lewises have a total of three exemptions: one for Mike, one for Jane, and one for their dependent child. Thus, their total exemption amount is $4,050 × 3 = $12,150.

Question 18

On August 1, 2016, Graham purchased and placed into service an office building costing $264,000, including $30,000 for the land. What was Graham's MACRS deduction for the office building in 2016? A. $9,600 B. $6,000 C. $3,600 D. $2,250

Accepted Answer

D. $2,250 Total cost $264,000 Less: Cost of land - 30,000 Depreciable basis $234,000 Commercial buildings placed in service after May 12, 1993, are depreciated over 39 years using straight-line depreciation and mid-month convention. While the depreciation is $6,000 per year, since it was placed in service in August, Graham can only take 4.5 months of depreciation in 2016. That is half the month of August (mid-month) and all of September, October, November, and December. $234,000 / 39 years = $6,000 per year 4.5 $6,000 x ----- months = $2,250 12

Question 19

An individual taxpayer earned $10,000 in investment income, $8,000 in noninterest investment expenses, and $5,000 in investment interest expense. How much is the taxpayer allowed to deduct on the current year's tax return for investment interest expenses? A. $0 B. $2,000 C. $3,000 D. $5,000

Accepted Answer

B. $2,000 The amount allowed as a deduction for investment interest for a taxable year shall not exceed the net investment income. $10,000 investment income - $8,000 investment expense = $2,000 net investment income Investment interest not currently deductible because of this limitation is carried forward indefinitely.

Question 20

A taxpayer reports income from a state tax refund on his tax return for the current tax year. Match the phrase that best describes the status for alternative minimum tax (AMT) computations of this tax item. A. Not a preference or an adjustment for the AMT B. An AMT preference or adjustment which is a deferral item for the AMT C. An AMT preference or adjustment which is an exclusion item for the AMT D. An AMT preference or adjustment which is an exemption item for the AMT

Accepted Answer

C. An AMT preference or adjustment which is an exclusion item for the AMT A taxable state tax refund is an AMT adjustment which is an exclusion item. This adjustment will reduce AMT income because otherwise taxable income is excluded.

Question 21

Which of the following statements regarding an individual's suspended passive activity losses is correct? A. Suspended losses of $3,000 can be utilized each year against portfolio income. B. Suspended losses can be carried forward, but not back, until utilized. C. Suspended losses must be carried back three years and forward seven years. D. A maximum of 50% of the suspended losses can be used each year when an election is made to forgo the carryback period.

Accepted Answer

B. Suspended losses can be carried forward, but not back, until utilized. Passive activity losses not deductible in the current year can only be carried forward. The $3,000 per year utilization rule applies only to capital losses, not to passive activity losses.

Question 22

On their joint tax return, Sam and Joann had adjusted gross income (AGI) of $150,000 and claimed the following itemized deductions: Interest of $15,000 on a $100,000 home equity loan to purchase a motor home Real estate tax and state income taxes of $18,000 Miscellaneous itemized deductions of $5,000 (prior to AGI limitation) Based on these deductions, what would be the amount of AMT add-back adjustment in computing alternative minimum taxable income? A. $21,750 B. $23,750 C. $35,000 D. $38,750

Accepted Answer

C. $35,000 The interest, taxes, and miscellaneous itemized deductions are not deductible for AMT (alternative minimum tax). Miscellaneous itemized deductions are deductible for regular tax (not AMT) only to the extent that they exceed 2% of the individual's AGI. For this taxpayer, the miscellaneous itemized deduction for regular tax would be limited to the amount exceeding AGI of $150,000 × 2% (or 0.02) = $3,000. Therefore, the taxpayer would have as a miscellaneous itemized deduction $2,000 ($5,000 − $3,000). This deduction is not allowed for AMT and would be added back to taxable income to calculate the alternative minimum taxable income. Add back: Interest ($15,000) + Taxes ($18,000) + Miscellaneous itemized deductions ($5,000 − ($150,000 × 0.02)) = $35,000

Question 23

For 2016, Chris, age 5, has $3,000 of interest income and no earned income this year. How much of Chris’s income will be taxed at Chris’s parents’ maximum tax rate? A. $0 B. $900 C. $1,000 D. $1,050

Accepted Answer

B. $900 If a child has interest, dividends, and other unearned income of more than $2,000, part of that income may be taxed at the parent’s tax rate instead of the child’s tax rate. The “kiddie tax” is a tax on unearned income paid to minors. For 2016, the first $1,050 of such income is tax free, the second $1,050 is taxed to the child at his/her tax rate, and all unearned income over $2,100 is taxed at the parents’ tax rate. The kiddie tax rule now applies to children under age 19 and full-time college students under the age of 24. Since Chris has $3,000 of unearned income, the amount greater than $2,100, or $900, would be taxed at Chris’s parents’ maximum tax rate. The child must be required to file a tax return. The child’s tax is calculated on IRS Form 8615, Tax for Certain Children Who Have Unearned Income, and included with the child’s return.

Question 24

Davidson was transferred from Chicago to Atlanta. In connection with the transfer, Davidson incurred the following moving expenses: Moving the household goods $2,000 Temporary living expenses in Atlanta 400 Lodging on the way to Atlanta 100 Meals 40 What amount may Davidson deduct if the employer reimbursed Davidson $2,000 (not included in Form W-2) for moving expenses? A. $100 B. $120 C. $500 D. $520

Accepted Answer

A. $100 A deduction is allowed for certain moving expenses that are related to commencement of work as an employee at a new principal place of work. Moving of the household goods and lodging while traveling from the old location to the new location are qualified deductible expenses. Meals and temporary living expenses are not deductible. Therefore, $2,100 ($2,000 + $100) of the listed expenses are qualified deductions. The employer reimbursement is subtracted from this qualified expense: $2,100 - $2,000 = $100.

Question 25

If a landlord abates a portion of rent due under a lease as a contribution toward a retail tenant's construction work, how does the landlord handle the contribution on its tax return? A. Depreciate as nonresidential real property B. Deductible over seven years upon making an election for the tax year in which the lease was entered into C. A capital expense deductible over 20 years D. Depreciate as residential real property

Accepted Answer

A. Depreciate as nonresidential real property The landlord must treat the expense as a cost of nonresidential real property which has a MACRS life of 39 years. The landlord also recognizes rent income equal to the fair market value of the improvements.

Question 26

Green is self-employed as a human resources consultant and reports on the cash basis for income tax purposes. Select the appropriate tax treatment on Form 1040 (U.S. Individual Income Tax Return) for oil royalties received. A. Taxable as other income on Form 1040 B. Reported in Schedule B—Interest and Dividend Income C. Reported in Schedule C as trade or business income D. Reported in Schedule E—Supplemental Income and Loss

Accepted Answer

D. Reported in Schedule E—Supplemental Income and Loss Oil royalties received should be reported in Schedule E—Supplemental Income and Loss.

Question 27

Capital assets include: A. a corporation's accounts receivable from the sale of its inventory. B. 7-year MACRS property used in a corporation's trade or business. C. a manufacturing company's investment in U.S. Treasury bonds. D. a corporate real estate developer's unimproved land that is to be subdivided to build homes, which will be sold to customers.

Accepted Answer

D. a corporate real estate developer's unimproved land that is to be subdivided to build homes, which will be sold to customers. Capital assets include a manufacturing company's investment in U.S. Treasury bonds. IRC Section 1221 explains what a capital asset does not include. For example, it does not include: inventory, any depreciable property, a copyright, a literary, musical, or artistic composition, or accounts or notes receivable acquired in the ordinary course of trade or business for services.

Question 28

Robbe, a cash-basis single taxpayer, reported $50,000 of adjusted gross income last year and claimed itemized deductions of $5,500, consisting solely of $5,500 of state income taxes paid last year. Robbe's itemized deduction amount, which exceeded the standard deduction available to single taxpayers for last year by $1,150, was fully deductible and it was not subject to any limitations or phaseouts. In the current year, Robbe received a $1,500 state tax refund relating to the prior year. What is the proper treatment of the state tax refund? A. Include none of the refund in income in the current year B. Include $1,150 in income in the current year C. Include $1,500 in income in the current year D. Amend the prior year's return and reduce the claimed itemized deductions for that year

Accepted Answer

B. Include $1,150 in income in the current year Under the tax benefit rule, a refund or credit of prior-year state or local income taxes is taxable to the extent that the payment of that amount in the prior year reduced your taxable income. Thus, if you did not itemize your deductions or elected to deduct state and local general sales taxes instead of state and local income taxes in the year to which the refund or credit relates, there is no income to report. If you itemized in the year to which the refund or credit relates, the amount of income you have to report is the lesser of: the excess of your itemized deductions for the year the taxes were paid over the amount of your standard deduction in that year had you not itemized, or the lesser of your deduction for state taxes shown on that return or the amount of the refund. In this example, the standard deduction available to Robbe would have been $4,350 ($5,500 - $1,150) had he not itemized his deductions. Because he chose to itemize rather than claim the standard deduction, his AGI deduction was $1,150 in excess of the standard deduction. The deduction for state taxes was $5,500. Therefore, the lesser amount of $1,150 gave Robbe a tax benefit of the taxes that he was not required to pay on this amount.

Question 29

During Year 2, Adler had the following cash receipts: Wages $18,000 Interest income from investments in municipal bonds 400 Unemployment compensation 1,500 What is the total amount that must be included in gross income on Adler's Year 2 income tax return? A. $18,000 B. $18,400 C. $19,500 D. $19,900

Accepted Answer

C. $19,500 Interest income from municipal bonds is excluded from gross income. Wages are taxable; unemployment compensation is taxable. The amount that must be included in gross income is $19,500 (Wage of $18,000 + Unemployment compensation of $1,500). IRC Sections 61, 85, and 103

Question 30

Tom Lewis, an individual taxpayer, was assessed $250 in the current year for the construction of street lights in his neighborhood. It is thought that the street lights will reduce crime in the neighborhood. Tom's neighborhood is the only area of the city that is assessed the charges. Before the end of the year, Tom is assessed another $100 for repairing the street lights damaged in a storm. How much of the $350 paid by Tom is deductible as an itemized deduction in the current year? A. $0 B. $100 C. $250 D. $350

Accepted Answer

B. $100 Taxes assessed against local improvements are not deductible if they are of a nature that tends to increase the value of the property being assessed. Maintenance, repair, or interest charges related to such assessments are deductible. Thus, only the $100 for repairing the street lights is deductible.

Question 31

Smith (single filing status) has an adjusted gross income (AGI) of $120,000 without taking into consideration $40,000 of losses from rental real estate activities. Smith actively participates in the rental real estate activities. What amount of the rental losses may Smith deduct in determining taxable income? A. $0 B. $15,000 C. $20,000 D. $40,000

Accepted Answer

B. $15,000 Individuals may offset up to $25,000 ($50,000 if married filing jointly) of ordinary income with losses from rental real estate activities. This exemption is reduced (but not below zero) by 50% of the amount by which the adjusted gross income of the taxpayer for the year exceeds $100,000. Therefore, $25,000 - (($120,000 - $100,000) × 0.50) = $15,000 deduction allowed.

Question 32

Wilson, CPA, uses a commercial tax software package to prepare clients' individual income tax returns. Upon reviewing a client's computer-generated Year 1 itemized deductions, Wilson discovers that the schedule's deductible investment interest expense is less than the amount paid by the taxpayer and the amount that Wilson entered into the computer. After analyzing the entire tax return, Wilson determines that the computer-generated investment interest expense deduction is correct. Why is the computer-generated investment interest expense deduction correct? I. The client's investment interest expense exceeds net investment income. II.The client's qualified residence interest expense reduces the deductible amount of investment interest expense. A. I only B. II only C. Both I and II D. Neither I nor II

Accepted Answer

A. I only A non-corporate taxpayer's itemized deduction for investment interest is limited to the taxpayer's amount of net investment income for the year. This limitation would cause the client's investment interest expense deduction on the computer-generated return to differ from the amount paid by the taxpayer. A taxpayer's qualified residence interest expense has no bearing on the deductible amount of investment interest expense.

Question 33

To qualify for the child care credit on a joint return, at least one spouse must: A. have an adjusted gross income of $15,000 or less. B. be gainfully employed when related expenses are incurred. A. Both A and B B. Neither A nor B C. Only A D. Only B

Accepted Answer

D. Only B If filing a joint tax return, both spouses must have earned income from wages, salaries, tips, other taxable employee compensation, or net earnings from self-employment. The taxpayer or spouse can be considered as having earned income if they were a full-time student of physically or mentally disabled. The child care credit is available in full if the taxpayer’s adjusted gross income (AGI) is $15,000 or less. A reduced credit is still available if the taxpayer’s AGI is greater than $15,000. Generally, both spouses must work in order to qualify for the credit. However, if one spouse does not work but is a full-time student, or is physically or mentally incapable of taking care of him or herself, the credit is still available.

Question 34

The alternative minimum tax (AMT) is computed as the: A. excess of the regular tax over the tentative minimum tax. B. excess of the tentative minimum tax over the regular tax. C. the tentative minimum tax plus the regular tax. D. lesser of the tentative minimum tax or the regular tax.

Accepted Answer

B. excess of the tentative minimum tax over the regular tax. The alternative minimum tax (AMT) is computed as the excess of the tentative minimum tax over the regular tax. A taxpayer has the following: Tentative Minimum Tax (TMT) $65,000 - Regular Tax - 45,000 Alternative Minimum Tax (AMT) $20,000 The taxpayer must pay the IRS $65,000 (Regular Tax of $45,000 + AMT OF $20,000). Form 6251 must be used by individuals to compute the AMT, and Form 4626 must be used by corporations.

Question 35

Destry, a single taxpayer, reported the following on his U.S. Individual Income Tax Return (Form 1040): Income: Wages $5,000 Interest on savings account 1,000 Net rental income 4,000 ``` Deductions: Personal exemption $ 4,000 Standard deduction 6,300 Net business loss 16,000 Net short-term capital loss 2,000 ``` What is Destry's net operating loss that is available for carryback or carryforward? A. $7,000 B. $9,000 C. $15,700 D. $16,000

Accepted Answer

B. $9,000 (7000+2000) The interest income (nonbusiness income) is offset by nonbusiness expenses, up to the amount of nonbusiness income. The standard deduction is a nonbusiness expense for this purpose. The net capital loss (nonbusiness) is only deductible to the extent it is offset by nonbusiness capital gains. Personal exemptions and unused personal deductions are added back to taxable income in arriving at net operating losses so they do not increase the carryback or carryforward. The net business loss must be offset by wages and rental income for this year. Wages of $5,000 plus net rental income of $4,000 minus the loss of $16,000 equals a net operating loss carryback or carryforward of $7,000.

Question 36

Clark bought Series EE U.S. savings bonds after 1989. Redemption proceeds will be used for payment of college tuition for Clark’s dependent child. One of the conditions that must be met for tax exemption of accumulated interest on these bonds is that the: A. purchaser of the bonds must be the sole owner of the bonds (or joint owner with her or his spouse). B. bonds must be bought by a parent (or both parents) and put in the name of the dependent child. C. bonds must be bought by the owner of the bonds before the owner reaches the age of 24. D. bonds must be transferred to the college for redemption by the college rather than by the owner of the bonds.

Accepted Answer

A. purchaser of the bonds must be the sole owner of the bonds (or joint owner with her or his spouse). The Education Savings Bond Program permits taxpayers to exclude from their gross income a portion of all of the interest earned when redeeming eligible Series EE U.S. savings bonds after 1989. The purchased bonds should be registered in the name of the taxpayer, or taxpayer and spouse, with the child as beneficiary. IRS Form 8815 includes the necessary worksheet and instructions for taxpayers to use to exclude the interest income from gross income.

Question 37

Tom Lewis, a single taxpayer, received a stock dividend from ABC Corp. He had the option to receive either cash or ABC stock with a fair market value of $1,000 as of the date of distribution. The par value of the stock on the date of distribution was $600. Tom must include what amount in gross income as a result of the stock dividend? A. $0 B. $400 C. $600 D. $1,000

Accepted Answer

D. $1,000 Since Tom had the option to receive either cash or the ABC Corp. stock with a fair market value of $1,000, the fair market value of the stock received is included in income by Tom. The Internal Revenue Code states that if a distribution (or series of distributions) results in the receipt of cash or other property by some shareholders in the corporation's assets or earnings and profits, then stock or stock rights distributed to a shareholder on the common stock of the corporation must be treated as a taxable distribution. IRC Section 1(h)

Question 38

Gain on stock held for more than 12 months and sold on October 15, 2016, that would otherwise be taxed at a 15% rate if it were ordinary income is taxed at a rate of: A. 20%. B. 15%. C. 10%. D. 0%

Accepted Answer

D. 0% The following requirements must be met for the sale of property to be taxed at the 0% capital gains rate: The property must be held for more than 12 months. The taxpayer's marginal rate may not be more than 15%. The gain must be recognized after December 31, 2007. Long-term capital gains are taxed at the following favorable tax rates for 2016: General capital assets: Marginal tax rate of 15% 0% Marginal tax rate 25% through 35% 15% Marginal tax rate of 39.6% 20% Unrecaptured Section 1250 gain 25% Collectibles 28%

Question 39

A husband and wife can file a joint return even if: A. the spouses have different tax years, provided that both spouses are alive at the end of the year. B. the spouses have different accounting methods. C. either spouse was a nonresident alien at any time during the tax year, provided that at least one spouse makes the proper election. D. they were divorced before the end of the tax year.

Accepted Answer

B.the spouses have different accounting methods. No joint return shall be made if the husband and wife have different taxable years, except in cases where the taxable year ends on different days because of the death of either or both. A nonresident alien individual married to a citizen of the United States may file a joint return only if both make an election to file jointly. The determination of whether an individual is married shall be made as of the close of the taxable year. There is no exception for dis-allowance of filing jointly as a result of spouses using different accounting methods.

Question 40

Carter incurred the following expenses in the current year: $500 for the preparation of a personal income tax return, $100 for custodial fees on an IRA, $150 for professional publications, and $2,000 for union dues. Carter's current-year adjusted gross income is $75,000. Carter, who is not self-employed, itemizes deductions. What will Carter's deduction be for miscellaneous itemized deductions after any limitations in the current year? A. $0 B. $750 C. $1,250 D. $2,750

Accepted Answer

C. $1,250 Miscellaneous itemized deductions are only deductible to the point that they exceed 2% of AGI. Two percent of the $75,000 AGI is $1,500. The total of these expenses ($500 + $100 + $150 + $2,000) is $2,750; $2,750 - $1,500 = $1,250. Carter's income is below the phaseout level, so this limitation would not apply in this example.

Question 41

Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be: A. neither carried back nor carried forward. B. carried back 3 years or carried forward 15 years. C. carried forward 5 years. D. carried forward indefinitely until fully deducted.

Accepted Answer

C.carried forward 5 years. C. Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be carried forward five years. The amount of the excess that may be deducted in any carryover year is limited to the lesser of (1) the remaining portion of any excess contribution not already deducted, or (2) the amount equal to 50% (or 30% for capital gain carryover) of the taxpayer's AGI after first deducting the sum of the charitable contributions (to which the 50% or 30% limitation applies) paid in the carryover year and any excess contributions that have precedence in order of time over the present carryover. In other words, the charitable contributions carryovers follow the FIFO rules.

Question 42

A taxpayer reports a deduction for their personal exemptions for the current tax year. Which phrase best describes the status of this tax item for alternative minimum tax (AMT) computations? A. Not a preference or an adjustment for the AMT B. An AMT preference or adjustment which is a deferral item for the AMT C. An AMT preference or adjustment which is an exclusion item for the AMT D. An AMT preference or adjustment which is an exemption item for the AMT

Accepted Answer

C. An AMT preference or adjustment which is an exclusion item for the AMT The deduction for personal exemptions is an AMT adjustment which is an exclusion item. Generally, deferral items are those preferences and adjustments which can be expected to reverse in future years. When a taxpayer pays AMT that is due to deferral items, he or she is allowed an AMT credit in succeeding years against his or her regular tax. Exclusion items are those preferences and adjustments which will not reverse in future years. The deductions are permanently denied for AMT purposes.

Question 43

Mock operates a retail business selling illegal narcotic substances. Which of the following items may Mock deduct in calculating business income? I. Cost of merchandise II. Business expenses other than the cost of merchandise A. I only B. II only C. Both I and II D. Neither I nor II

Accepted Answer

A. I only A taxpayer is obligated to report all income, even the income earned from illegal activities. The taxpayer is only allowed to deduct the cost of goods sold (cost of merchandise) when illegal drugs are involved.

Question 44

Wages paid for domestic services are subject to special rules for determining whether they are subject to payroll taxes. When are domestic wages subject to federal unemployment tax? A. Over $1,500 to one employee in a year B. Over $2,000 total wages in a year C. Over $1,000 total wages in a quarter D. Only if requested by employee

Accepted Answer

C. Over $1,000 total wages in a quarter Wages paid for domestic services are subject to federal unemployment tax if they exceed $1,000 per quarter, aggregating wages paid to all employees.

Question 45

In Year 5, Joan Frazer's residence was totally destroyed by fire. The property (exclusive of land) had an adjusted basis and a fair market value of $130,000 before the fire. During Year 5, Frazer received an insurance reimbursement of $120,000 for the destruction of her home. Frazer's Year 5 adjusted gross income was $70,000. What amount of the fire loss was Frazer entitled to claim as an itemized deduction on her Year 5 tax return? A. $2,900 B. $8,500 C. $8,600 D. $10,000

Accepted Answer

A.$2,900 Joan Frazer's deductible loss is calculated as follows: Fair market value and basis $130,000 Less: Insurance reimbursement - 120,000 Total loss $ 10,000 Less: $100 per casualty - 100 $ 9,900 Less: 10% x $70,000 AGI 7,000 Amount of casualty $ 2,900 A taxpayer may deduct a casualty loss on property not used in business or held for production of income: by the lesser of the decrease in the fair market value or the basis, for each casualty loss that exceeds $100 (called “$100 floor”), and for all of the taxpayer's casualty losses for the tax year in excess of 10% of adjusted gross income for the year (called “percentage of income limitation”). IRC Section 165(h); Regulation Section 1.165-7

Question 46

A taxpayer reports a deduction for a long-term capital loss on his tax return for the current tax year. Match the phrase that best describes the status for alternative minimum tax (AMT) computations of this tax item. A. Not a preference or an adjustment for the AMT B. An AMT preference or adjustment which is a deferral item for the AMT C. An AMT preference or adjustment which is an exclusion item for the AMT D. An AMT preference or adjustment which is an exemption item for the AMT

Accepted Answer

A. Not a preference or an adjustment for the AMT A long-term capital loss deduction and tax-exempt interest paid by a state are neither preferences nor adjustments for AMT. Tax-exempt interest paid on private activity bonds issued after August 7, 1986, generally is a tax preference which is an exclusion item.

Question 47

hompson's spouse died in year 1. Thompson did not remarry in year 2 and lived alone the entire year. What is Thompson's year 2 filing status? A. Married filing jointly B. Surviving spouse C. Head of household D. Single

Accepted Answer

D.Single In the case where a spouse dies, the surviving spouse has a filing status of married joint for the year of death. For the two years following the death of the spouse, the surviving spouse may be eligible to use the qualifying widow(er) with a dependent child status. This filing status entitles the surviving spouse to use the joint return tax rates and the highest standard deduction amount (if the taxpayer elects not to itemize deductions). For year 2 following the death of his spouse, Thompson does not have a dependent child and did not remarry. Thus, as the surviving spouse, he would have a filing status of single. Hence, the correct filing status for Thompson is single.

Question 48

Carroll is 35 years old and an unmarried taxpayer with an adjusted gross income of $100,000. Carroll incurred and paid the following unreimbursed medical expenses for 2016: Doctor bills resulting from a serious fall: $5,000 Cosmetic surgery that was necessary to correct a congenital deformity: $15,000 Carroll had no medical insurance. For regular income tax purposes, what was Carroll’s maximum allowa­ble medical expense deduction, after the applicable threshold limitation, for 2016? A. $0 B. $10,000 C. $12,500 D. $20,000

Accepted Answer

B. $10,000 Carroll is only allowed to deduct the amount of medical expenses than exceed 10% of Carroll’s adjusted gross income. Carroll’s adjusted gross income is $100,000; therefore, Carroll has to exclude the first $10,000 ($100,000 × 0.10). Carroll should only deduct $10,000 on the return. If Carroll was 65 or older, only the first 7.5%, and not 10%, would need to be excluded from income. Also, note that cosmetic surgery is deductible only when it is necessary to correct a congenital abnormality (as in Carroll’s case), personal injury resulting from an accident or trauma, or disfiguring disease. (IRC Section 213(d)(9))

Question 49

Stein, an unmarried taxpayer, had adjusted gross income of $80,000 for the year and qualified to itemize deductions. Stein had no charitable contribution carryovers and only made one contribution during the year. Stein donated stock, purchased seven years earlier for $17,000, to a tax-exempt educational organization. The stock was valued at $25,000 when it was contributed. What is the maximum amount of charitable contributions deductible allowed on Stein's current-year income tax return? A. $17,000 B. $21,000 C. $24,000 D. $25,000

Accepted Answer

C. $24,000 Noncash contributions are generally deductible at their fair market value. For contributions of appreciated capital gain property, deductions are the lesser of the total fair market value or 30% of AGI for educational organizations. AGI of $80,000 × 0.30 limit = $24,000. The deduction is limited to only $24,000. The unused $1,000 of FMV can be carried forward to the following year. An election can be made to deduct appreciated capital gain property at cost, in which case a 50% of AGI limitation would apply. In this case, the 30% limitation using FMV results in a larger deduction. IRC Section 170(b)(1)(C)

Question 50

Tom Lewis, an individual taxpayer, had the following income items in Year 5: I. Unemployment compensation II. College scholarship in which funds were used exclusively for tuition and books Which of the items are included in Tom's gross income on Tom's Year 5 tax return? A. I only B. II only C. Both I and II D. Neither I nor II

Accepted Answer

A. I only Unemployment compensation is included in the gross income of the individual receiving the compensation. Amounts received as a college scholarship are typically not included in the gross income of the individual receiving the scholarship as long as the tuition amount was used for qualified tuition and related expenses such as fees, books, supplies, and equipment.

Question 51

Tom Lewis, a single taxpayer, received a $1,500 state tax refund in Year 5 for the prior-year overpayments. In Year 4, Tom was not subject to the alternative minimum tax and was not entitled to any credit against income tax. Tom's Year 4 taxable income was $40,000. Tom's total itemized deductions for Year 4 amounted to $6,400, which included $3,000 for state income tax withholding. Tom's standard deduction amount for Year 4 was $6,200. How much should Tom include in gross income for Year 5 as a result of the state tax refund? A. $0 B. $200 C. $300 D. $1,500

Accepted Answer

B. $200 The receipt of an amount that has formed the basis for an earlier year deduction or credit is considered a “recovery” and generally must be included (either partially or totally) in income in the year in which it is received (IRC Section 111). Recoveries of amounts that could be claimed as an itemized deduction (as in this question, a refund of state income taxes), are not included in income if the taxpayer did not itemize his or her deductions in the year in which the deduction could have been taken. Recoveries must be included (in full) in gross income if the recovery amount (i.e., the state tax refund amount as in this question) is equal to or less than the amount by which the taxpayer's itemized deduction amount exceeded his or her standard deduction amount in the prior year (assuming that the taxpayer had positive taxable income in the prior year). If the recovery amount exceeds the difference between the taxpayer's total itemized deduction amount and the standard deduction amount, only that smaller difference amount will be included in income. This is known as the “Tax Benefit” rule. In this case, Tom's total itemized deduction amount ($6,400) exceeded his standard deduction amount ($6,200) by only $200. Thus, only $200 of the $1,500 state refund amount will be included in income in the current year.

Question 52

In the current year, Drake, a disabled taxpayer, made the following home improvements: Cost Pool installation, which qualified as a medical expense and increased the value of the home by $25,000 $100,000 Widening doorways to accommodate Drake's wheelchair (The improvement did not increase the value of his home.) $10,000 For regular income tax purposes and without regard to the adjusted gross income percentage threshold limitation, what maximum amount would be allowable as a medical expense deduction in the current year? A. $110,000 B. $85,000 C. $75,000 D. $10,000

Accepted Answer

B.$85,000 Permanent capital improvements made primarily for medical reasons are deductible as medical expenses subject to certain limitations. If the capital improvement increases the value of the residence, only the excess of the cost over the increase in value is deductible as a medical expense. Drake installed a pool for medical reasons at a cost of $100,000, which increased the value of his residence by $25,000, so the medical deduction is limited to $75,000 ($100,000 - $25,000 = $75,000). Drake also widened doorways to accommodate his wheelchair at a cost of $10,000. Since this did not increase the value of his residence, it is deductible in full as a medical expense. Drake's medical deduction is computed as follows: Pool $75,000 Doorways 10,000 Total $85,000

Question 53

Cole earned $3,000 in wages, incurred $1,000 in unreimbursed employee business expenses, paid $400 as interest on a student loan, and contributed $100 to a charity. What is Cole's adjusted gross income? A. $3,000 B. $2,600 C. $2,500 D. $1,600

Accepted Answer

B. $2,600 Adjusted gross income is calculated by subtracting business expenses and other deductions from gross income. Unreimbursed employee business expenses are itemized deductions subject to the over-2%-of-AGI limitation that are subtracted to get to taxable income, not adjusted gross income. Cole's adjusted gross income is calculated as: Wages $3,000 Student loan interest (400) AGI $2,600 Student loan interest up to $2,500 can be deducted from gross income to determine AGI. Cole is not subject to the student loan phaseout limitations because of his relatively low level of income.

Question 54

A taxpayer reports a deduction for depreciation of business assets under the MACRS depreciation system on his tax return for the current tax year. Match the phrase that best describes the status for alternative minimum tax (AMT) computations of this tax item. A. Not a preference or an adjustment for the AMT B. An AMT preference or adjustment which is a deferral item for the AMT C. An AMT preference or adjustment which is an exclusion item for the AMT D. Will always be a preference or deferred item for AMT

Accepted Answer

B. An AMT preference or adjustment which is a deferral item for the AMT The difference between depreciation computed under the modified accelerated cost recovery system (MACRS) and the alternative depreciation system (ADS) is an adjustment which is a deferral item. This adjustment reverses when the depreciation computed under the ADS system becomes larger than MACRS depreciation in the later years. Deferral items are those preferences and adjustments which can be expected to reverse in future years. When a taxpayer pays AMT that is due to deferral items, he or she is allowed an AMT credit in succeeding years against his or her regular tax.

Question 55

Tom Lewis, a single taxpayer, had the following income and expense items for 2016: Wages $55,000 Long-term capital loss (4,000) Deductible IRA contribution (Tom is not covered by a retirement plan at work) 2,000 Mortgage interest on personal residence 5,000 Medical expenses not covered by insurance 6,000 Tom's personal exemption amount for 2016 4,050 Tom's standard deduction amount for 2016 6,300 If Tom’s adjusted gross income was $50,000, what is his taxable income for the year? A. $39,650 B. $39,700 C. $40,000 D. $43,700

Accepted Answer

A. $39,650 Tom's taxable income is calculated as follows: Adjusted gross income $50,000 Minus: Standard deduction 6,300 Minus: Personal exemption 4,050 Taxable income $39,650

Question 56

Tom Lewis, a single taxpayer, received a $3,200 state tax refund in Year 5 for prior-year overpayments. Tom's state withholding for Year 4 was $3,500. Tom's Year 4 taxable income was $35,000. Tom did not itemize deductions and instead took his standard deduction amount of $6,200 for Year 4. How much should Tom include in gross income for Year 5 as a result of the state tax refund? A. $0 B. $500 C. $300 D. $3,200

Accepted Answer

A. $0 The receipt of an amount that has formed the basis for an earlier year deduction or credit is considered a “recovery” and generally must be included (either partially or totally) in income in the year in which it is received (IRC Section 111). Recoveries of amounts that could be claimed as an itemized deduction (as in this question, a refund of state income taxes), are not included in income if the taxpayer did not itemize his or her deductions in the year in which the deduction could have been taken. Recoveries must be included (in full) in gross income if the recovery amount (i.e., the state tax refund amount as in this question) is equal to or less than the amount by which the taxpayer's itemized deduction amount exceeded his or her standard deduction amount in the prior year (assuming that the taxpayer had positive taxable income in the prior year). If the recovery amount exceeds the difference between the taxpayer's total itemized deduction amount and the standard deduction amount, only that smaller difference amount will be included in income. This is known as the “Tax Benefit” rule.

Question 57

Tom Lewis, an individual taxpayer, had an adjusted gross income of $40,000 on his current-year tax return. He incurred the following medical expenses this year: Doctor fees for various illnesses $5,000 Prescription medicine and drugs 1,000 Annual physical performed by MD 500 Eye exams 300 Eyeglasses and contact lenses 600 He received no insurance reimbursements on the amounts. What is the net medical expense deduction that Tom may take for the current year as an itemized deduction? A. $7,400 B. $3,400 C. $2,900 D. $2,500

Accepted Answer

B. $3,400 The doctor fees, the prescription drugs, the annual physical, the eye exams, and the eyeglasses/contact lenses are all deductible medical expenses (a total of $7,400) for Tom. His medical expense deduction is calculated as follows: Total expenses of $7,400 − (10% of $40,000 = $4,000) = $3,400

Question 58

If an individual paid income tax in Year 1 but did not file a Year 1 return because his income was in-sufficient to require the filing of a return, the deadline for filing a refund claim is: A. two years from the date the tax was paid. B. two years from the date a return would have been due. C. three years from the date the tax was paid. D. three years from the date a return would have been due.

Accepted Answer

A. two years from the date the tax was paid. To receive a refund for an over-payment of tax, a taxpayer must file a claim for refund within three years from the date on which the tax return that relates to the refund was filed, or within two years of actual payment of the tax if that date is later.

Question 59

Charles and Marcia are married, cash-basis taxpayers. In Year 2, they had interest income as follows: $500 interest on federal income tax refund $600 interest on state income tax refund $800 interest on federal government obligations $1,000 interest on state government obligations What amount of interest income is taxable on Charles and Marcia's Year 2 joint income tax return? A. $500 B. $1,100 C. $1,900 D. $2,900

Accepted Answer

C. $1,900 $ 500 interest from federal income tax refund 600 interest on state income tax refund 800 interest on federal government obligation $1,900 Total taxable interest income All interest received by any taxpayer is included in gross income unless specially exempt by law. Interest on all state and local bonds (sometimes called “municipal bond interest”) is exempt from federal income tax. The $1,000 interest on state government obligations which Charles and Marcia received is not taxable.

Question 60

Which of the following may not be deducted in the computation of alternative minimum taxable income of an individual? A. Traditional IRA account contribution B. One-half of the self-employment tax deduction C. Personal exemptions D. Charitable contributions

Accepted Answer

C. Personal exemptions Regular taxable income + / - AMT adjustments + Tax preferences = AMTI (alternative minimum taxable income) Personal exemptions are an adjustment item. Most AMT adjustments add deductions back to taxable income to arrive at AMTI. (There are a few adjustments that can be subtracted in some years. These relate mainly to items that may have timing differences between regular and AMT tax, such as some depreciation calculations, mining exploration and development costs, and NOL (net operating loss) deductions.) Traditional IRA contribution deductions, the deduction for half of the self-employment tax, and charitable contributions are not codified as adjustments in computing alternative minimum taxable income.

Question 61

Tom Lewis, a single taxpayer, received $8,400 in gross receipts from his rental property. The expenses for the residential rental property were: Bank mortgage interest $1,200 Real estate taxes 700 Insurance 500 MACRS depreciation 3,500 Tom's total income on his individual tax return will be increased by what amount as a result of the rental activities? A. $8,400 B. $7,200 C. $6,500 D. $2,500

Accepted Answer

D. $2,500 Rental income is included in gross income by individuals and the expenses used to generate the rental income are deductible by the individual as rental expenses. For this question, all the expense items shown are deductible rental expenses. Tom's net rental income is calculated as follows: Gross Receipts $8,400 less: mortgage interest (1,200) real estate taxes (700) insurance (500) depreciation (3,500) Net Rental Income $2,500

Question 62

Evan, an individual, has a 40% interest in EF, an S corporation. At the beginning of the year, Evan's basis in EF was $2,000. During the year, EF distributed $100,000 and reported operating income of $200,000. What amount should Evan include in gross income? A. $38,000 B. $40,000 C. $80,000 D. $118,000

Accepted Answer

C.$80,000 Shareholders of an S corporation include a pro-rata share of the corporation's non-separately and separately stated items of income or expense on their personal tax return. In this case, Evan includes 40% of EF's operating income or $80,000 ($200,000 × 0.40 = $80,000) on his personal tax return. None of Evan's $40,000 share of distributions ($100,000 × 0.40 = $40,000) would be taxable since his distributions did not exceed his new basis. ``` Beginning basis $ 2,000 Share of operating income 80,000 Share of distributions (40,000) Ending basis $42,000 In determining whether a distribution exceeds basis (and is taxable), the ordering rules allow basis to be increased by current-year income before reducing basis by distributions. ```

Question 63

Which payment(s) is (are) included in a recipient's gross income? I. Payment to a graduate assistant for a part-time teaching assignment at a university. Teaching is not a requirement toward obtaining the degree. II. A grant to a Ph.D. candidate for his or her participation in a university-sponsored research project for the benefit of the university A. I only B. II only C. Both I and II D. Neither I nor II

Accepted Answer

C. Both I and II Any payments made to students for teaching, research, or any other service must be included in gross income. Therefore, a payment made to a graduate assistant for a part-time teaching assignment at a university, when teaching is not a requirement toward obtaining the degree, must be included in his or her income. Also, when a Ph.D. candidate receives a grant for his or her participation in a university-sponsored research project for the benefit of the university, it must be included in his or her income.

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Ch 5 Federal Taxation of Individuals Flashcards

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