Enrolled Agent "Income"

Question 1

Income reporting forms

Form 1099-MISC only when payments are made in the course of your trade or business. Personal payments are not reportable. You are engaged in a trade or business if you operate for gain or profit.

Answer 1

W2, 1099-C, 1099 G, 1099 NEC, 1099 R, Form 8606, 1099 S, 1099 INT, DIV or K1, SSA-1099, 1095-A

Question 2

Above the line Deduction (For AGI)

Answer 2

Self-employment health insurance, student loan interest and form 1098-E

Question 3

An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who worked in a school for at least 900 hours during a school year.

Answer 3

Leslie teaches in the local high school and Roger teaches in the local community college. During 2023, Leslie spent $425 on supplies that were used in her classes and Roger spent $150 on supplies that were used in his classes. What are the maximum educator expenses that the couple can claim on their tax return if the couple files jointly in 2023?

Roger is not a qualified teacher.

Question 4

A US Citizen living and working in Canada must report and pay all his or her income to the US.

Question 5

Ted and William agreed to trade apartment buildings with Ted agreeing to pay William $10,000 cash. Ted’s basis in his apartment building is $40,000. William’s basis in his apartment building is $50,000. What is Ted’s basis in his new apartment building?

Answer 5

$50,000

Publication 544, page 16, provides a discussion on the basis of property received in a like-kind exchange. If the taxpayer acquires property in a like-kind exchange, the basis of that property is the same as the basis of the property transferred by the taxpayer.

In this case, Ted’s basis in the new building is $50,000, which is the sum of the basis of the old building given by Ted to William ($40,000) and the cash given by Ted to William ($10,000).

Publication 544
Page 16

Question 6

When Amelia bought her first home in 2020, she paid $100,000 plus $1,000 closing costs. In 2021, she added a deck that cost $5,000. Then, in July 2023, a real estate dealer accepted her house as a trade-in and allowed her $125,000 (amount received as a trade-in) toward a new house priced at $200,000. How should Amelia report this transaction on her 2023 return?

Answer 6

The gain or loss on a sale or trade of property is found by comparing the amount realized with the adjusted basis of the property. In the case of a personal residence that is the primary one, a special rule applies whereby the taxpayer can exclude up to $250,000 per spouse of the gain on the sale of the main home if all of the following are true (see Publication 523, pages 2 and 3):

The taxpayer meets the ownership test (i.e., owned the home for at least 2 of the last 5 years).
The taxpayer meets the use test (i.e., lived in the main home for at least 2 of the last 5 years).
During the 2-year period ending on the date of the sale, the taxpayer did not exclude gain from the sale of another home.
Be aware that there are some exceptions in this area, which are covered more thoroughly in Publication 523, pages 3 through 6.

In this problem, the taxpayer satisfies the special rule for excluding $250,000. Thus, the gain from the sale is $19,000, which is the amount received as a trade-in of $125,000 less the property’s basis of $106,000 ($100,000 + $5,000 + $1,000). However, since the gain of $19,000 is less than the $250,000 exclusion amount, none of it is recognized. Furthermore, the sale of a taxpayer’s main home is not reported on the tax return unless the taxpayer has a gain and does not qualify to exclude all of it, the taxpayer has a gain and chooses not to exclude it, or the taxpayer received Form 1099-S (see Publication 523, page 15). Thus, Amelia does not report the sale of her main home.

Publication 523
Pages 2–6 and 15

Question 7

A taxpayer purchases rental property for $160,000. She uses $25,000 cash and obtains a mortgage for $135,000. She pays closing costs of $10,000, which includes $5,000 in points on the mortgage and $5,000 for bank fees and title costs. Her initial basis in the property is:

Answer 7

$165,000.

Given the information above, the taxpayer in this problem has a basis of $165,000 from the purchase of the property. This basis is the sum of the property cost ($160,000 consisting of $25,000 in cash and $135,000 mortgage) and bank and title costs ($5,000).

Publication 551
Pages 2–3

Question 8

Which of the following is true regarding a nonbusiness bad debt?

Answer 8

It is deductible as a short-term capital loss.

When a taxpayer lends money that afterwards cannot be collected, the taxpayer could have a bad debt, which may be deductible in the year the loan becomes uncollectible. For tax purposes there are two categories of bad debt: business and nonbusiness. Business bad debt is derived from the operations of the taxpayer’s trade or business and is deductible as a business loss. All other bad debts are regarded as nonbusiness and are deductible as short-term capital losses, regardless of how old the debt is.

Publication 550
Page 76

Question 9

Joe and Jean purchased their primary residence in 2007 for $100,000. While they lived there, they made renovations at a cost of $125,000. They lived there until July 1, 2020. On June 15, 2023, the residence was sold for $800,000. From July 1, 2020, until June 15, 2023, the home was unoccupied. Joe and Jean file a joint return, and they have never excluded a gain from the sale of another home. What is their maximum taxable gain?

Answer 9

$75,000

In this problem, the taxpayers satisfy the special rule for excluding $500,000 of gain from the sale of a taxpayer’s main home. Thus, the gain from the sale is $75,000, which is the amount received of $800,000 less the property’s basis of $225,000 ($100,000 + $125,000), less the exclusion amount of $500,000.

Publication 523
Pages 3–6

Question 10

Elton declared bankruptcy in the current year. Included in the liabilities discharged in the bankruptcy was a $15,000 personal loan Elton had received from his friend, Edward, 2 years ago. How would Edward treat this for tax purposes?

Answer 10

Short-term capital loss on Form 8949

Note: This is another example of a nonbusiness bad debt where it is unclear whether a genuine debtor-creditor relationship exists. Since there is no correct response if we assume there is no genuine debtor-creditor relationship, we are forced, in this case, to assume that one exists.

Publication 550
Pages 83 and 100

Form 8949

Question 11

John made the following transfers during tax year 2023:

To his neighbor in the amount of $18,000
To his nephew in the amount of $14,000
To his uncle in the amount $18,000
All of the transfers are gifts that qualify for the annual exclusion. John files one Form 709 for tax year-end December 31, 2023. What is the total annual exclusion amount for gifts that will be listed on John’s 2023 Form 709 filing?

Answer 11

Generally, the federal gift tax applies to any transfer by gift of real or personal property, whether tangible or intangible, that is made directly or indirectly, in trust, or by any other means to a donee. However, a taxpayer is allowed an exclusion for a gift of a present interest to each donee. For 2023, the annual exclusion is $17,000.

Therefore, John’s annual exclusion amount for gifts listed on his 2023 Form 709 is $34,000, which is the exclusion allowable for the gift to his neighbor of $18,000 (limited to $17,000) and $18,000 (limited to $17,000) gift to his uncle. All of the gifts made during the calendar year to a donee are fully excluded under the annual exclusion if they are gifts of present interest and they total $17,000 or less (i.e., are not reported on Form 709). The total of the exclusions permitted for the two gifts that are reported on Form 709 is $34,000 ($17,000 + $17,000). The gift to his nephew was not more than $17,000, and therefore it is not included in the exclusion.

Question 12

Mr. Smith and Mr. Jones own competing greenhouses. Mr. Smith has decided to focus exclusively on flower plants and Mr. Jones exclusively on vegetable plants. They agree to swap Mr. Smith’s inventory of vegetable plants for Mr. Jones’ inventory of flower plants. Which of the following statements is correct?

Answer 12

This transaction is not a like-kind exchange.

Beginning after December 31, 2017, section 1031 like-kind exchange treatment applies only to exchanges of real property held for use in a trade or business or for investment, other than real property held primarily for sale. (Instructions for Form 8824, page 1)

Generally, if you exchange business or investment real property solely for business or investment real property of a like kind, section 1031 provides that no gain or loss is recognized. If, as part of the exchange, you also receive other (not like-kind) property or money, gain is recognized to the extent of the other property and money received, but a loss isn’t recognized.

In this case, the investments of flower plants are stock in trade and as such are not real property and do not qualify for like-kind treatment.

Instructions for Form 8824
Page 1

Question 13

Pat is the 100% shareholder of a corporation. He did not pay himself any salary or any dividends during 2023 from the corporation, thus there may not be any taxable income for him from the corporation. However, which of the following transactions could result in a constructive distribution for Pat and thus taxable income to him from the corporation?

Answer 13

A loan from the corporation to Pat at a zero-interest rate

Publication 542, page 17, provides that a corporate distribution to a shareholder is generally treated as a distribution of earnings and profits. Any part of a distribution from either current or accumulated earnings and profits is reported to the shareholder as a dividend. Any part of a distribution that is not from earnings and profits is applied against and reduces the adjusted basis of the stock in the hands of the shareholder.

There are, however, certain transactions between corporations and shareholders that may be treated as distributions (also known as constructive distributions), hence taxable dividend income if there is enough earnings and profits (see page 17 of Publication 542):

Below-market loans
Corporation cancels shareholder’s debt
Transfers of property to shareholder for less than fair market value (FMV)
Unreasonable rents
Unreasonable salaries

Question 14

To recharacterize a contribution from a Roth IRA that was made in 2022 back to a traditional IRA in 2023, you must do the following:

Recharacterizing: A taxpayer may be able to treat a contribution made to 1 type of IRA as having been made to a different type of IRA

Answer 14

A trustee-to-trustee transfer by October 15, 2023, including the income earned, if any.

In order to recharacterize a contribution, the contribution and any net income allocable to the contribution must be transferred from the first IRA (the one to which it was made) to the second IRA in a trustee-to-trustee transfer. If the transfer is made by the due date (including extensions) for the taxpayer’s tax return for the year during which the contribution was made, an election to treat the contribution as having been originally made to the second IRA instead of to the first IRA can be made.

A conversion of a traditional IRA to a Roth IRA, and a rollover from any other eligible retirement plan to a Roth IRA, made in tax years beginning after December 31, 2017, cannot be recharacterized as having been made to a traditional IRA.

In this case, the contribution made to the Roth IRA is not a conversion; hence, it can be recharacterized by October 15, 2023.

Question 15

Karen, who is single, paid $150,000 for her residence in January 2018 and lived in it until January 2022. She then moved away and rented her home from February 2022 until she sold it in August 2023 for $240,000. While it was rental property, she deducted $20,000 of depreciation. What amount of gain on the sale of her residence is excludable from income?

Answer 15

$90,000

The gain or loss on a sale or trade of property is found by comparing the amount realized with the adjusted basis of the property. In the case of a personal residence that is the primary one, a special rule applies whereby the taxpayer can exclude up to $250,000 per spouse of the gain on the sale of the main home if all of the following are true.

The taxpayer meets the ownership test (i.e., own the home for at least 2 of the last 5 years).
The taxpayer meets the use test (i.e., lived in the main home for at least 2 of the last 5 years).
During the 2-year period ending on the date of the sale, the taxpayer did not exclude gain from the sale of another home. (Publication 523, page 3)

Question 16

Kiran bought stock in the Big Bang Corporation in 2019 for $2,000. In 2022, Kiran received a return of capital distribution of $100 as a partial return on her investment. In 2023, Kiran sold the stock for $3,000. Her basis in the stock is:

Answer 16

$1,900

The basis of stocks or bonds generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees.

The basis of the stock is adjusted for certain events that occur after purchase. For example, if the person receives additional stock from nontaxable stock dividends or stock splits, divide the adjusted basis of the old stock by the number of shares of old and new stock. This rule applies only when the additional stock received is identical to the stock held. Likewise, the basis is reduced when nontaxable distributions are received because they are a return of capital. (Publication 550, page 30)

Question 17

A married couple, who are both self-employed and work out of their home, purchased a new home in August 2021 for $420,000. In September 2021, they converted two bedrooms into office space where they meet clients in their home. In April 2023, they sold their home, on which they had taken $40,000 depreciation. Their home sold for $600,000. What amount of the gain is includible in their income on their joint return?

Answer 17

$220,000

In the case of a personal residence that is the primary one, a special rule applies whereby the taxpayer can exclude up to $250,000 per spouse of the gain on the sale of the main home if all of the following are true.

The taxpayer meets the ownership test (i.e., owned the home for at least 2 of the last 5 years).
The taxpayer meets the use test (i.e., lived in the main home for at least 2 of the last 5 years).
During the 2-year period ending on the date of the sale, the taxpayer did not exclude gain from the sale of another home. (Publication 523, page 3)
In this problem, the taxpayers do not satisfy the 2-year ownership test for excluding $250,000. Thus, the gain from the sale is $220,000, which is the amount received of $600,000 less the property’s basis of $380,000 ($420,000 less $40,000 of depreciation).

Question 18

In 2017, Joan sold land for $100,000 that had cost $50,000. She received a down payment of $30,000 with the balance to be amortized over 10 years with interest of 8%. In 2023, Joan had to repossess the property due to the failure of the buyer to make payments. Which of the following statements is correct?

Answer 18

Joan must figure the gain or loss as well as the basis as a result of the repossession.

Publication 537, pages 12–13, deals with repossessed property. In particular, the publication states that if a taxpayer repossesses his or her property after making an installment sale, the taxpayer must figure the gain (or loss) on the repossession and the basis in the repossessed property.

The rules for figuring these amounts depend on the kind of property that the taxpayer repossesses. That is, the rules for repossessions of personal property differ from those for real property. In addition, the repossession rules apply whether or not title to the property was ever transferred to the buyer.

Publication 537
Pages 12–13

Question 19

In 2019, Mr. Chang purchased 50 shares of common stock in Corporation D for $1,000. In 2021, Corporation D declared a stock dividend of 2 shares of its common stock for each 10 shares held. In 2023, D’s common stock split 2-for-1 at a time when the fair market value was $20 a share. What is Mr. Chang’s basis in each of his shares of D’s stock (rounded to the nearest dollar) if both distributions were tax-free and all the stock received was identical to the stock purchased?

Answer 19

$8 per share

In this problem, Mr. Chang’s basis in Corporation D stock prior to the stock dividend is $1,000 (50 shares × $20 per share). As a result of the first stock dividend of 2 shares for every 10 shares held, Mr. Chang receives 10 additional shares of stock (50 shares ÷ 10 = 5, which is multiplied by 2 for 10 additional shares). The basis of the stock after the stock dividend is reduced to $16.67 per share ($1,000 ÷ 60 shares). In 2019, the stock split doubles the number of shares held to 120 shares (60 × 2) and likewise splits the adjusted basis to $8.33 per share ($16.67 ÷ 2 or $1,000 ÷ 120 shares).

Distributions by a corporation of its own stock are commonly known as stock dividends. Stock rights (also known as stock options) are distributions by a corporation of rights to acquire the corporation’s stock. Generally, stock dividends and stock rights are not taxable and therefore are not reportable. (Publication 550, page 21)

The basis of stocks or bonds generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. The basis of the stock is adjusted for certain events that occur after purchase. For example, if the person receives additional stock from nontaxable stock dividends or stock splits, divide the adjusted basis of the old stock by the number of shares of old and new stock. This rule applies only when the additional stock received is identical to the stock held. Likewise, the basis is reduced when nontaxable distributions are received because they are a return of capital (Publication 550, pages 30–31).

Question 20

Which of the following is not necessary for a taxpayer to claim a nonbusiness bad debt deduction?

Answer 20

To go to court

If money owed to a taxpayer becomes uncollectible in a given tax year, the taxpayer may have an allowable deduction for bad debt. To be deductible, nonbusiness bad debts must be totally worthless. A person cannot deduct a partly worthless nonbusiness debt.

The bad debt must arise from a genuine debt, which is one that arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money.

In addition, the taxpayer must have a basis in the loan. That is, the taxpayer must have already included the amount in income or loaned-out cash.

It is not necessary, however, to go to court to show that a judgment from the court would be uncollectible. The taxpayer must only show that he or she has taken reasonable steps to collect the debt. Bankruptcy of the debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt.

Publicaton 550
Page 83

Question 21

Joe exchanged a building for another like-kind building. Joe had a basis of $16,000, plus he had made $10,000 in improvements prior to the exchange. He exchanged it for a building worth $36,000. Joe did not recognize any gain from the exchange on his 2023 individual tax return. What is Joe’s basis in the new property?

Answer 21

$26,000

Publication 544, page 17, provides a discussion on the basis of property received in a like-kind exchange. If the taxpayer acquires property in a like-kind exchange, the basis of that property is the same as the basis of the property transferred by the taxpayer.
If, in addition to giving up like-kind property, the taxpayer pays money in a like-kind exchange, the taxpayer still has no recognized gain or loss. The basis of the property received, on the other hand, is the basis of the property given up, increased by the money paid.

Be aware that an exchange of personal property for real property does not qualify as a like-kind exchang

Question 22

Ted and William agreed to trade apartment buildings with Ted agreeing to pay William $10,000 cash. Ted’s basis in his apartment building is $40,000. William’s basis in his apartment building is $50,000. What is Ted’s basis in his new apartment building?

Answer 22

$50,000

In this case, Ted’s basis in the new building is $50,000, which is the sum of the basis of the old building given by Ted to William ($40,000) and the cash given by Ted to William ($10,000).

Question 23

Eligibility Test for Real Property

Answer 23

Ownership Test: (i.e., owned the home for at least 2 of the last 5 years)

Residence Test: (i.e., lived in the main home for at least 2 of the last 5 years)

Look-Back: During the 2-year period ending on the date of the sale, the taxpayer did not exclude gain from the sale of another home.
“Determine whether you meet the look-back requirement. If you didn’t sell another home during the 2-year
period before the date of sale (or, if you did sell another
home during this period, but didn’t take an exclusion of the
gain earned from it), you meet the look-back requirement.
You may take the exclusion only once during a 2-year period.”

Question 24

The cost basis of rental property includes:

Answer 24

All of the answer choices are correct.

Publication 551, page 2, states, in part, that the cost basis of property purchased by a taxpayer usually is its cost. The cost, however, includes the amount the taxpayer pays in cash, debt obligations, other property, or services. In addition, the cost includes amounts the taxpayer pays for:

sales tax,
freight,
installation and testing,
excise taxes,
legal and accounting fees (when they must be capitalized),
revenue stamps,
recording fees, or
real estate taxes (if assumed for the seller).

Question 25

In 2023, Gene is 85 years of age and single. He received Social Security payments totaling $14,000 (this includes a Medicare premium of $600), dividend and interest income of $21,000, a pension of $30,000, and taxable IRA benefits of $16,000. What is Gene’s adjusted gross income for 2023?

Answer 25

$78,900.
85% of $14,000 is included in Gross Income because $74,000 exceeds the $34,000 threshold amount.

$34,000 ($44,000 if the taxpayer is married filing jointly) or
The taxpayer is married filing separately and lived with his or her spouse at any time during the tax year.

Modified Income = $21,000 + $30,000 + $16,000 + (1/2 of $14,000) = $74,000

Question 26

Kathy rented out her summer home for 80 days and used it personally for 20 days. She paid $1,000 for utilities and $2,000 for repairs. Rental income was $8,000. What was Kathy’s net rental income?

Answer 26

$5,600

Given that Kathy’s rental income was $8,000, her applicable deductions are limited to that extent. The rental property was used 100 days, which is the sum of 80 days (rental) and 20 days (personal use). All expenses are based on 80% (80 days rented ÷ 100 days used) and the deductible expense would be calculated as follows:

Utilities, etc. $ 800 of the $1,000
Repairs 1,600 of the $2,000
Maximum deductible $2,400 which does not exceed the rental income amount of $8,000

Question 27

Modified Income = Other Income + 1/2 social Security Benefit.

NB: Municipal Bond Interest is included in calculating SSB modified Income even though it’s not included in Gross Income

Question 28

To recharacterize a contribution from a Roth IRA that was made in 2022 back to a traditional IRA in 2023, you must do the following:

A taxpayer may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. This is called recharacterizing the contribution.

Answer 28

A trustee-to-trustee transfer by October 15, 2023, including the income earned, if any

In order to recharacterize a contribution, the contribution and any net income allocable to the contribution must be transferred from the first IRA (the one to which it was made) to the second IRA in a trustee-to-trustee transfer.

Question 29

Which of the following amounts may be converted directly to a Roth IRA, provided all requirements are met?

Answer 29

Amounts in a SIMPLE IRA, with the 2-year participation period having been met

Question 30

Which of the following investments, if made by a traditional IRA, is not a distribution?

Answer 30

One-ounce silver coins minted by the U.S. Treasury Department

A traditional IRA can invest in one, one-half, one-quarter, or 1/10th ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department, without the investment being a distribution.

Question 31

Joseph is a single taxpayer. His modified adjusted gross income in 2023 was $155,000, of which $126,000 was earned income. In 2023, he made a $2,000 contribution to his previously established Roth IRA. What is the penalty for excess contributions if he doesn’t withdraw the contribution (and all attributable earnings) by the due date of the return (including extensions), or recharacterize the contribution by the due date of the return (including extensions)?