Final Review Flashcards
Question ID: EA1 M2 026 (Topic: EA Part 1 Mock Exams)
Leilani has lived apart from her husband for several years. Leilani and her husband are not legally separated and neither spouse has filed for divorce. She does not have any children or other dependents. She files separately from her husband. In 2023, Leilani earned $49,000 in wages (which is her only income for the year). She also incurs $25,400 of passive losses from a rental duplex in which she actively participated. She owns the rental property outright (it is not jointly owned with her husband). She is not a real estate professional, but she actively participated in the rental activity by choosing her own tenants and collecting the rent herself. How much of her rental losses are allowable on Schedule E, on her MFS return?
A. $25,000 B. $25,400 C. $12,500 D. $0
Correct Answer Explanation for C:
Leilani is allowed to take a portion of the rental losses based on her income, but her deduction is limited. The special allowance is limited to $12,500 for married individuals who file MFS, but only if they lived apart from their spouses during the entire tax year. For married taxpayers who live together for any portion of the year and file separately, the rental losses are completely disallowed in the current year and must be carried forward. Since Leilani lives apart from her spouse, she is allowed 50% of the “special rental loss allowance,” which is generally $25,000.
Question ID: EA1 M2 022 (Topic: EA Part 1 Mock Exams)
For the purposes of determining the residency for a qualifying child, who is deemed the custodial parent?
A. The parent who has legal custody under a divorce or separation agreement. B. The parent who financially supports the child. C. The parent with whom the child lived for the greater number of nights during the year. D. The parent who decides to claim the child first.
Correct Answer Explanation for C:
The custodial parent is the parent with whom the child lived for the greater number of nights during the year. The other parent is the noncustodial parent. If the parents divorced or separated during the year and the child lived with both parents before the separation, the custodial parent is the one with whom the child lived for the greater number of nights during the rest of the year. If the child lived with each parent for an equal number of nights during the year, the custodial parent is the parent with the higher adjusted gross income.
Note: If a child is emancipated under state law, the child is treated as independent and not having lived with either parent.
Question ID: EA1 M2 046 (Topic: EA Part 1 Mock Exams)
Yousef is married, but files separately from his wife (MFS). In 2023, Yousef had $185,000 in self-employment income from his sole proprietorship. He also received $15,000 in taxable income from a residential rental that he solely owns. He is not a real estate professional. How much Additional Medicare Tax will Yousef owe in 2023 (the threshold for MFS is $125,000)?
A. $1,251 B. $675 C. $540 D. $940
Correct Answer Explanation for C:
Yousef’s self-employment income is $185,000 for the year. The threshold amount for MFS filers is $125,000 for the calculation of the Additional Medicare Tax. Because Yousef’s self-employment earnings exceed $125,000, (the threshold for MFS), Yousef will owe the additional 0.9% Medicare tax on $60,000 ($185,000 - $125,000). The Additional Medicare Tax due is $540 ($60,000 × 0.9%). The rental income is not subject to the Additional Medicare Tax, so that income is not included in the calculation. Yousef will be required to remit the additional tax when he files his individual tax return. Yousef must file Form 8959, Additional Medicare Tax, to compute any Additional Medicare Tax due. A taxpayer is liable for Additional Medicare Tax if the taxpayer’s wages or self-employment income (together with that of his or her spouse if filing a joint return) exceeds the threshold amount for the individual’s filing status:
Filing Status Threshold Amount
Married filing jointly $250,000
Married filing separate $125,000
Single, HOH, Qualifying Surviving Spouse (QSS) $200,000
Question ID: EA1 M2 064 (Topic: EA Part 1 Mock Exams)
Edwina’s main home in Florida was destroyed by a hurricane in 2023. The county where the home was located was later declared a federal disaster area. Edwina’s basis in the home was $110,000, which is how much she paid for it over ten years ago. She receives an insurance reimbursement of $185,000, which exceeds her basis in the home by $75,000. How many years does Edwina have to replace the home before she has to pay tax on the gain?
A. She must pay tax on the gain because it is not her primary residence and does not qualify for an exclusion. B. Three years. C. Two years. D. Four years.
Correct Answer Explanation for D:
Edwina has up to four years to replace the property under the section 1033 rules for involuntary conversions. For an involuntary conversion in a federally declared disaster area, the taxpayer has up to four years after the end of the tax year in which any gain is realized to replace her principal residence (rather than the normal two-year replacement period) or to pay tax on any gain. Real property that is held for investment or used in a trade or business (such as a residential rental property or a commercial building) is allowed a three-year replacement period. The replacement period is generally four years for livestock involuntarily converted because of weather-related conditions.
Question ID: EA1 M2 035 (Topic: EA Part 1 Mock Exams)
On the one-year anniversary at her new job, Faith’s employer gave her restricted stock in the company with the condition that it would be forfeited if she did not complete three years of service with the company. The stock’s FMV is $30,000. How much should she include in her income for the current year, and what would be her basis in the stock?
A. No income; no basis. B. No income; basis of $30,000. C. Income of $30,000; basis of $30,000. D. Income of $30,000; no basis.
Correct Answer Explanation for A:
The stock is restricted, so Faith does not have constructive receipt of it. She should not report any taxable income until she receives the stock without restrictions. “Constructive receipt” does not require physical possession of the item of income. However, there are substantial restrictions on the stock’s disposition, because Faith must complete another two years of service before she can sell or otherwise dispose of the stock.
Question ID: EA1 M2 058 (Topic: EA Part 1 Mock Exams)
Three years ago, Lenny bought 500 shares of Belker Systems, Inc. stock for $1,500, including his broker’s commission. On April 6, 2023, Belker Systems distributed a 2% nontaxable stock dividend (10 shares). Three months later, on July 6, 2023, Lenny sold all 510 shares of his stock in Belker Systems for $2,030. What is the nature and the amount of Lenny’s gain?
A. $530 long-term capital gain. B. $530 short-term capital gain. C. $510 short-term capital gain. D. $510 Long-term capital gain.
Correct Answer Explanation for A:
Although Lenny owned the ten shares he received as a nontaxable stock dividend for only three months, all the stock has a long-term holding period. Stock acquired as a stock dividend has the same holding period as the original stock owned. Because he bought the stock for $1,500 three years ago, his holding period is long-term. Lenny has a long-term capital gain of $530 on the sale of the 510 shares.
Question ID: EA1 M2 012 (Topic: EA Part 1 Mock Exams)
Wilson rents a two-bedroom apartment from his landlord. He does not own the apartment. Wilson is a self-employed bookkeeper and works exclusively out of a home office. In 2023, Wilson paid $1,000 a month in rent for his apartment. He also spent $50 a month in utilities. His home office is 240 square feet. The total square footage of his apartment is 1,200 square feet. He decides to deduct “actual expenses” for his home office. Ignoring any income limitations, what is Wilson’s maximum allowable deduction for home office expenses?
A. $2,520 B. $0 C. $1,200 D. $12,600
Correct Answer Explanation for A:
Wilson’s office is 20% (240 ÷ 1,200) of the total area of his home. Therefore, his business percentage is 20%. His year-end expenses were $12,000 in rent ($1,000 per month × 12 months) and $600 in utilities ($50 × 12 months). The answer is calculated as follows:
$12,000 total rent
$600 total utilities
$12,600 total expenses for the year × 20% (business-use percentage) = $2,520.
Note: The amount above, using the “actual expense” method, is more than the $1,200 amount using the simplified safe harbor method of $5.00 per square foot of office space. In this case, using actual costs will generate a larger deduction for Wilson. The home office deduction is figured on Form 8829, Expenses for Business Use of Your Home.
Question ID: EA1 M2 002 (Topic: EA Part 1 Mock Exams)
Victoria and Colton divorced in 2017. Under their divorce settlement, Victoria must pay her ex-husband $15,000 in alimony per year, which she pays in equal installments each month. She is also required to pay his ongoing medical expenses for a heart condition he acquired during their marriage. In 2023, Colton’s medical expenses were $11,400. She paid $10,000 of the medical expenses directly to the hospital. The other $1,400 she gave directly to Colton after getting a copy of the doctor’s bill. How much of these payments can be properly deducted by Victoria as alimony?
A. $25,000 B. $16,400 C. $15,000 D. $26,400
Correct Answer Explanation for D:
Victoria can claim $26,400 in alimony paid as an adjustment to income on her Form 1040, the total of the medical expenses, and the regular alimony paid ($15,000 + $11,400). The payer can deduct the full amount if it is required by the divorce agreement or divorce decree. Since Victoria’s divorce decree included a written stipulation that she was required to pay her ex-spouse’s ongoing medical expenses, then those payments would also qualify as alimony. Alimony is a payment to or for a former spouse under a divorce or separation agreement. Alimony does not include voluntary payments that are not made under a divorce or separation decree. Payments to a third party (such as the payment directly to the hospital) on behalf of an ex-spouse under the terms of a divorce agreement can qualify as alimony. These include payments for an ex-spouse’s medical expenses, housing costs (rent, utilities, etc.), taxes, and tuition. The payments are treated as received by the spouse and then paid to the third party.
Note: The Tax Cuts and Jobs Act (TCJA) permanently eliminated the deduction for alimony payments starting in 2019. However, divorce judgments that were finalized before 2019 (December 31, 2018, and earlier) are considered “grandfathered,” and the old rules (which allowed for a deduction for the payor and required the recipient to recognize taxable income) normally apply.
Question ID: EA1 M2 100 (Topic: EA Part 1 Mock Exams)
Tobias is a U.S. citizen serving in the Navy. He is stationed in the Philippines. His wife and children live with him, and his children, ages 6 and 10, are U.S. citizens and have valid Social Security numbers. Tobias is able to claim his children as dependents. Tobias’s wife, Mayumi, is a citizen of the Philippines. She does not want to file jointly with Tobias and does not wish to be treated as a U.S. resident alien for tax purposes. Mayumi owns a successful business in the Philippines, and she does not want to report her worldwide income and pay tax on it. Which of the following statements is correct?
A. Tobias can still file jointly with his wife and sign on her behalf since his wife is a nonresident alien. B. Since Tobias is married and living with his spouse, he cannot claim head of household status. He must file as married filing separately. C. Tobias can file as head of household and claim his children as dependents. D. Tobias does not have to file a return until he comes back to the United States.
Correct Answer Explanation for C:
Tobias can claim head of household status since his wife is a nonresident alien who will not file a joint return with him, and he meets all the other qualifications for head of household. There is a special exception that allows U.S. citizens and U.S. resident aliens who live with their nonresident alien spouses to file as head of household. In order to qualify for this exception, all of the following requirements must be met:
The taxpayer is a U.S. citizen or resident alien for the entire year and meets all the rules for head of household except for living with the nonresident alien spouse. The nonresident alien spouse does not meet the substantial presence test. The nonresident alien spouse does not choose to file a joint return with the taxpayer.
Question ID: EA1 M2 053 (Topic: EA Part 1 Mock Exams)
Kenzie is a beneficiary of her deceased uncle’s estate. In 2023, she receives a $1,500 distribution of nonpassive income from the estate. How will this distribution be reported to Kenzie, and how should she report the income on her own individual tax return?
A. The distribution from the estate would be reported to Kenzie on Schedule K-1 (Form 1041). The amounts would be reported on Schedule D (Form 1040). B. A distribution from an estate is never taxable to the beneficiary, only to the estate. C. The distribution from the estate would be reported to Kenzie on Schedule K-1 (Form 1041). The amounts would be reported on her Schedule E (Form 1040). D. The distribution from the estate would be reported to Kenzie on Schedule K-1 (Form 1041). The amounts would be reported as other income on Schedule 1.
Correct Answer Explanation for C:
The distribution from the estate would be reported to Kenzie on Schedule K-1 (Form 1041). Nonpassive distributions would be reported on Kenzie’s Schedule E (Form 1040). How a taxpayer reports distributions from an estate depends on the character of the income in the hands of the estate. Each item of income retains the same character as it passes through to the individual. For example, if the income distributed includes dividends, tax-exempt interest, or capital gains, it would retain the same character in the hands of the beneficiary. Business income and other nonpassive income that is distributed from an estate would be reported on Part III of the taxpayer’s Schedule E (Form 1040). The estate’s personal representative (executor) should provide a Schedule K-1 (Form 1041) to each beneficiary who receives a distribution from the estate. The executor must furnish Schedule K-1 to each beneficiary by the date on which Form 1041 is due (including extensions).
Question ID: EA1 M2 062 (Topic: EA Part 1 Mock Exams)
In the prior year, Easton paid $1,700 for medical expenses. Easton itemizes his deductions, and after figuring out his allowable deductions, he claimed a $200 medical deduction on his prior-year Schedule A. On February 5, 2023, Easton received an unexpected $500 reimbursement from his medical insurance company for his prior-year expenses. How should this reimbursement be reported by Easton in 2023?
A. Easton should amend his prior-year return and adjust his medical deduction amounts. B. Easton must include $500 in his 2023 taxable income. C. The recovery is not taxable and does not have to be reported. D. Easton must include $200 in his 2023 taxable income.
Correct Answer Explanation for D:
Easton must include $200 in his 2023 taxable income. Although the reimbursement amount was $500, the only amount that has to be included in Easton’s 2023 taxable income is $200—the amount he actually deducted (this question is based on an example in Publication 17, in the section on “itemized deduction recoveries”).
Question ID: EA1 M2 071 (Topic: EA Part 1 Mock Exams)
Rhett is unmarried and files as head of household. He has sole custody of his 7-year-old son Jimmy, who he claims as his dependent. Rhett had the following items of income and loss in 2023:
Form W-2 wage income $42,000
Gambling winnings $2,000
Gambling losses ($4,000)
Dependent care FSA benefits from his employer $3,000
Capital loss carryover from the prior year ($7,500)
Rhett spent $3,200 on Jimmy’s daycare during the year. He does not plan to itemize his deductions. Based on the information above, how much gross income must Rhett report on his tax return?
A. $36,500 B. $39,000 C. $41,000 D. $58,500
Correct Answer Explanation for C:
Rhett’s gross income is calculated as follows:
Wages reported on Form W-2 $42,000
Gambling winnings $2,000
Gambling losses NO DEDUCTION
Dependent care benefits (spent $3,200 on childcare) n/a
The deductible portion of capital loss carryover from the prior year ($3,000)
Gross income shown on the return $41,000
The dependent care benefits are not taxable because Rhett’s daycare expenses exceeded the benefit payments. The gross gambling winnings must be included in income. The gambling losses are only deductible as an itemized deduction and only to the extent of gambling winnings. If Rhett does not itemize his deductions, he cannot deduct his gambling losses. The capital loss carryover is deductible, but only up to $3,000, the annual capital loss deduction limit.
Question ID: EA1 M2 080 (Topic: EA Part 1 Mock Exams)
Owen and Heloise are married and file jointly. On February 2, 2023, they invested in a mutual fund, purchasing 90,000 shares. On December 28, 2023, the mutual fund reported $22,000 of capital gains to their mutual fund account. However, only $5,000 was actually distributed to them in 2023. The rest was distributed in the following year, on January 4, 2024. What is the amount and nature of the capital gain they must report on their 2023 tax joint return?
A. $5,000 short-term capital gain. B. $5,000 long-term capital gain. C. $22,000 long-term capital gain. D. $22,000 short-term capital gain.
Correct Answer Explanation for C:
Owen and Heloise must report the full amount ($22,000) that was credited to their mutual fund account in 2023, regardless of the amount that was actually distributed to them. Capital gains distributions from a mutual fund are always reported as soon as they are credited to the taxpayer’s mutual fund account, and they are also always treated as long-term, regardless of how long the taxpayer has held the shares. Investors may have to pay taxes on any capital gains distribution they receive, even if the fund performed poorly after they bought the shares.
Question ID: EA1 M2 051 (Topic: EA Part 1 Mock Exams)
Which of the following deductions is not permitted as an adjustment to income on Form 1040?
A. Penalty on the early withdrawal of a certificate of deposit. B. Property taxes paid on a personal residence. C. Self-employed health insurance. D. Alimony paid pursuant to a pre-2018 agreement.
Correct Answer Explanation for B:
Property taxes paid on a personal residence are an itemized deduction, only deductible on Schedule A. The other answers are all deductions that are allowed as adjustments to income on Form 1040 if the taxpayer otherwise qualifies to take the deduction.
Alimony paid is only deductible as an adjustment to income if the divorce decree or support agreement was finalized before January 1, 2019.
Question ID: EA1 M2 074 (Topic: EA Part 1 Mock Exams)
Abner and Viola are married. Viola is 65 and earned $18,400 in wages during the year. Abner is 62 years old and blind. He earned $5,400 in wages for the year. Abner also received $800 in HSA distributions in 2023, all of which were used for qualifying medical expenses. Are they required to file a tax return?
A. Their income is below the filing requirement, so they do not have to file a return. B. Viola is required to file a tax return, but Abner is not. C. They are required to file a tax return, whether they file jointly or separately. D. Abner is required to file a tax return, but Viola is not.
Correct Answer Explanation for C:
Abner and Viola are required to file a tax return, whether they file jointly or separately. Although Abner and Viola earned less than the standard deduction amount for married couples, a filing requirement is triggered because Abner received HSA distributions. Any taxpayer who received HSA, Archer MSA, or Medicare Advantage MSA distributions must file a return. If Abner were to file his own separate return (MFS), then Viola would be forced to file a separate return as well, because the filing threshold for MFS is only $5 of gross income in 2023.
