Course 3

Question 1

AGI

Answer 1

Adjusted Gross Income

Question 2

Eleanor loans $30,000 to her son James and does not charge any interest. James has investment income of $1,500 and investment expenses of $500. Assume that the applicable federal rate (AFR) is 1.1%. How much interest must be imputed on the loan?

Answer 2

James has net investment income of $1,000. Therefore, the amount of imputed interest is the lesser of net investment income and the AFR-calculated interest minus the interest based on the stated rate of the loan. Since the stated rate of interest on the loan is 0%, the amount of imputed interest is the lesser of $1,000 and $330 (that is, $30,000 × 0.011). Therefore, $330 of interest must be imputed on the loan.

Question 3

Bryan and Diane are trying to calculate their gross income. Which of the following items should they exclude from their gross income?

I. A $25,000 gift from Diane’s mother for the down payment of their new house
II. $30,000 borrowed by Bryan and Diane from First City Bank
III. A $10,000 increase in the value of Delta Airlines stock, which they own in their brokerage account
IV. $55,000-worth of home repair work that was exchanged for tax work by Bryan

Answer 3

I, II, and III

Question 4

Megan purchased series EE savings bonds for $4,000 in 1992 when she was 26. This year, she redeemed the bonds for $8,000 and paid qualified higher education expenses in the amount of $5,000 for her daughter. How much interest can Megan exclude from her gross income this year? 

Answer 4

$2500

Question 5

What is the usual federal income tax treatment of the employer’s premium payments under a group long-term disability income insurance plan?

Answer 5

The amount of the premium payments is excluded from the employee’s income, regardless of whether or not the plan is discriminatory.

Question 6

Helen is covered by a group term life insurance policy that provides coverage equal to three times her annual salary of $125,000. Helen’s employer pays the entire cost of the policy, for which the uniform premium is $0.15 per $1,000 of coverage per month. How much of this premium is taxable to Helen?

Answer 6

$ 585
The cost of up to $50,000 of coverage is nontaxable.
$375,000 − $50,000 = $325,000
[($325,000 ÷ $1,000) × $0.15] × 12 months = $585 taxable coverage

Question 7

Morgan receives nonqualified stock options (NQSOs) with an exercise price of $50 when the stock is trading at $50. Morgan exercises these options 2 years after the date of the grant when the stock price is $65 per share. Which of the following statements is correct?

Answer 7

Morgan will have W-2 income of $15 per share upon exercise.
$65 − $50 = $15

Question 8

Grace is single, and her share of qualified business income (QBI) from a partnership is $95,000. Her total taxable income from all sources before taking the 20% deduction for QBI is $102,000. What is the amount of the Section 199A QBI deduction that Grace can take this year?

Answer 8

$19,000

The deduction is the lesser of 20% of QBI and 20% of taxable income. Twenty percent of her QBI is $19,000. Twenty percent of her taxable income is $20,400. Her deduction is $19,000.

Question 9

ssume a taxpayer incurred business losses in Year 1 and generated an NOL of $20,000 that would be carried forward to offset income in future years. Assuming the taxpayer had $10,000 of taxable income and incurred no additional business income or loss in Year 2, what amount of NOLs can be recognized in Year 2?

Answer 9

$8,000

NOLs can only be carried forward and are limited to 80% of taxable income. In this case, 80% of taxable income ($10,000) is equal to $8,000. Therefore, only $8,000 of the NOL carryforward ($20,000) can be recognized in Year 2.

Question 11

What is the The dependent care credit

Answer 11

20% up to $3,000 pre qualifying child up to $6,000 for two or more children

Question 12

OPQ, Inc., has a net income of $650,000 before depreciation and has purchased one used piece of equipment during the year for $1,200,000. What Section 179 depreciation deduction is allowable? Assume the maximum Section 179 deduction allowable is $1,080,000 for the current year. 

Answer 12

$650,000
Section 179 is limited to the lesser of $1,080,000 or OPQ’s net income of $650,000.

Question 13

Section 1231

Answer 13

Depreciable real or business property held for more than 1 year

Question 14

Section 121

Answer 14

Home Sale Gain exclusion

Question 15

QBI deduction

Answer 15

20%