Mid-Term Review Questions

Question 1

Marc, a single taxpayer, earns $61,800 in taxable income and $5,180 in interest from an investment in city of Birmingham bonds. Using the U.S. tax rate schedule for 2023, how much federal tax will he owe? (Use tax rate schedule.)

Answer 1

$8,904

$8,904 = $5,147 + 0.22 ($61,800 − $44,725)

Question 2

If Lindley requests an extension to file her individual tax return in a timely manner, the latest she could pay her tax due without penalty is (assuming the due date does not fall on a weekend or holiday):

Answer 2

April 15th

Question 3

A taxpayer can avoid a substantial understatement of tax penalty:

Answer 3

if the position has a reasonable basis and is disclosed on the tax return.

Question 4

Joanna received $60,000 compensation from her employer, the value of her stock in ABC company appreciated by $5,000 during the year (but she did not sell any of the stock), and she received $30,000 of life insurance proceeds from the death of her spouse. What is the amount of Joanna’s gross income from these items?

Answer 4

$60,000

$60,000 compensation is included in gross income, the increase in the value of her stock is not realized income so it is not included in gross income, and the life insurance proceeds are excluded from gross income.

Question 5

Which of the following types of income are not considered ordinary income?

a) compensation income

b) short-term capital gains

c) qualified dividend income

d) both compensation income and qualified dividend income

e) both short-term capital gains and qualified dividend income

Answer 5

e) Both short-term capital gains and qualified dividend income

Short-term capital gains are capital gains and not ordinary income (short-term gains enter the capital gains netting process). Qualified dividend income is subject to preferential rates and thus is not considered to be ordinary income.

Question 6

Madison’s gross tax liability is $9,000. Madison had $3,000 of tax credits available, and she had $8,000 of taxes withheld by her employer. What are Madison’s taxes due (or taxes refunded) with her tax return?

Answer 6

$2,000 tax refund

Question 7

Sheri and Jake Woodhouse have one daughter, Emma, who is 16 years old. They also have taken in Emma’s friend, Harriet, who has lived with them since February of the current year and is also 16 years of age. The Woodhouses have not legally adopted Harriet but Emma often refers to Harriet as her “sister.” The Woodhouses provide all of the support for both girls, and both girls live at the Woodhouse residence. Which of the following statements is true regarding whom Sheri and Jake may claim as dependents for the current year?

Answer 7

They may claim Emma as a dependent qualifying child but may not claim Harriet as a dependent.

Question 8

Jane is unmarried and has no children, but she provides more than half of her mother’s financial support. Jane’s mother lives in an apartment across town and has a part-time job earning $5,000 a year. Which is the most advantageous filing status available to Jane?

Answer 8

Single

Question 9

Which of the following series of inequalities is generally most accurate?

a) Gross income ≥ adjusted gross income ≥ taxable income

b) Adjusted gross income ≥ gross income ≥ taxable income

c) Adjusted gross income ≥ taxable income ≥ gross income

d) Gross income ≥ taxable income ≥ adjusted gross income

Answer 9

a) Gross income ≥ adjusted gross income ≥ taxable income

Question 10

Sadie received $71,200 of compensation from her employer and she received $410 of interest from a corporate bond. What is the amount of Sadie’s gross income from these items?

Answer 10

$71,610

Question 11

Which of the following statements is true?

a) income character determines the tax year in which the income is taxed

b) income character depends on the taxpayers filing status

c) qualified dividend income is taxed at a lower rate than if the same amount were ordinary income

d) a taxpayer selling a capital asset at a gain recognizes ordinary income

Answer 11

c) qualified dividend income is taxed at a lower rate than if the same amount were ordinary income

Question 12

Which of the following statements regarding tax credits is true?

a) tax credits reduce taxable income dollar for dollar

b) tax credits provide a greater tax benefit the greater the taxpayers marginal tax rate

c) tax credits reduce taxes due dollar for dollar

d) none of these are true

Answer 12

c) tax credits reduce taxes due dollar for dollar

Question 13

Jamison’s gross tax liability is $11,500. Jamison had $2,745 of available credits and he had $7,000 of taxes withheld by his employer. What are Jamison’s taxes due (or taxes refunded) with his tax return?

Answer 13

$1,755 taxes due

Question 14

Catherine de Bourgh has one child, Anne, who is 18 years old at the end of the year. Anne lived at home for seven months during the year before leaving home to attend State University for the remaining five months of the year. During the year, Anne earned $6,000 while working part time. Catherine provided 80 percent of Anne’s support and Anne provided the rest. Which of the following statements regarding whether Anne is Catherine’s qualifying child for the current year is correct?

Answer 14

Anne is a qualifying child of Catherine.

Question 15

This year Ed celebrated his 25th25th year as an employee of Designer Jeans Company. In recognition of his long and loyal service, the company awarded Ed a gold watch worth $250 and a $2,000 cash bonus. What amount must Ed include in his gross income?

Answer 15

$2,000

Cash bonus payments are includible in gross income but awards of tangible property to employees for length of service or safety achievement are excluded up to $400 of value.

Question 16

Bernie is a former executive who is retired. This year Bernie received $250,000 in pension payments and $10,000 of Social Security payments. What amount must Bernie include in his gross income?

Answer 16

$258,500

High-income individuals include 85 percent of their Social Security benefits in gross income.

Question 17

Frank received the following benefits from his employer this year. What amount must Frank include in his gross income?

Benefits Received Amount
Salary $ 54,450
Health insurance 2,900
Group-term life insurance (face $50,000)

Answer 17

$54,450

An employee may exclude from income the cost of medical and dental health insurance premiums and group-term life insurance (face $50,000) premiums an employer pays on the employee’s behalf.

Question 18

Shaun is a student who has received an academic scholarship to State University. The scholarship paid $14,000 for tuition, $2,500 for fees, and $1,000 for books. In addition, Shaun’s dormitory fees of $8,500 were paid by the university when he agreed to counsel freshman on campus living. What amount must Shaun include in his gross income?

Answer 18

8,500

Question 19

In January of the current year, Dora made a gift of stock to her granddaughter. At the time of the gift, the stock was worth $15,000. Several months later in the same year after the gift, a $500 dividend was declared on the stock and paid to Dora’s granddaughter. What amount must Dora’s granddaughter include in her gross income for the current year?

Answer 19

The gift of the stock is excluded but the dividend on the shares is taxable. Hence, the answer is $500.

Question 20

Sabina recently was sickened by eating spoiled peanut butter. She successfully sued the manufacturer for her medical bills ($3,700), her emotional distress ($6,000—she now fears peanut butter), and punitive damages ($44,000). What amount must Sabina include in her gross income?

Answer 20

44,000

Question 21

Bashira is a cash-basis calendar-year taxpayer. During the last week of December she received a letter containing a $5,000 check for services rendered. Which of the following is a true statement?

Answer 21

Bashira is taxed on the $5,000 of service income in the year she receives the check.

Question 22

Aroon is a plumber who uses the cash method of accounting. This year Aroon requested that his clients make their checks payable to his son, Feng. This year Feng received checks in the amount of $62,000 for Aroon’s plumbing services. Which of the following is a true statement?

a) Aroon is taxed on $62,000 of plumbing income this year

b) Feng is taxed on $62,000 of plumbing income this year

c) Feng is taxed on $62,000 of income from gifts received this year

d) Aroon may deduct the $62,000 received by Feng

e) none of these are correct

Answer 22

a) Aroon is taxed on $62,000 of plumbing income this year

Question 23

Wilma has a $25,000 certificate of deposit (CD) at the local bank. The interest on this certificate, $1,000, was credited to her account this year, but she must pay an early withdrawal penalty if she cashes in the CD before next year. Which of the following is a true statement?

Answer 23

Wilma must include the $1,000 of interest in her income this year.

Interest is taxed when credited to the account.

Question 24

Which of the following describes how the annuity exclusion ratio is calculated for an annuity paid over a fixed period?

a) the expected return is divided by the number of payments

b) the original investment is divided by the prevailing interest rate

c) the original investment is divided by the number of payments

d) the expected return is divided by the prevailing interest rate

e) none of these are correct

Answer 24

c) the original investment is divided by the number of payments

Question 25

Barney and Betty got divorced in 2018. In the divorce decree, Betty agreed to pay Barney $24,000 per year for five years (or until Barney’s death or remarriage) and $10,000 per year until their daughter, Pebbles, turns 19 years old. What amount (if any) is included in Barney’s gross income in 2023?

Answer 25

24,000

Question 26

Mike received the following interest payments this year. What amount must Mike include in his gross income (for federal tax purposes)?

Bond Interest
General Motors $ 1,450
City of New York 900
State of New Jersey 1,200
U.S. Treasury 850

Answer 26

2,300

Question 27

This year Zach was injured in an auto accident. As a result, he received the following payments.

Zach received $18,000 of disability pay. Zach has disability insurance provided by his employer as a nontaxable fringe benefit. Zach’s employer paid $4,300 in disability premiums for Zach this year.

Zach’s hospital bills totaled $4,500 and were paid by his health insurance. Zach has health insurance provided by his employer as a nontaxable fringe benefit. Zach’s employer paid $6,250 in health insurance premiums for Zach this year.

What amount must Zach include in his gross income?

Answer 27

$18,000

Any payment a taxpayer receives from a health and accident insurance policy for medical or dental expenses paid by the taxpayer is excluded from the taxpayer’s income. If the employer pays the disability premiums for an employee as a nontaxable fringe benefit, the employee must include all disability benefits in gross income.

Question 28

This year Norma, a single taxpayer, paid $11,200 of real estate taxes on her personal residence and $9,500 of state income taxes. Which of the following is true?

Answer 28

Norma can deduct $10,000 of taxes as an itemized deduction.

The itemized deduction for state and local taxes is limited to $10,000 for single taxpayers.

Question 29

Larry recorded the following donations this year:

$500 cash to a family in need

$2,400 to a church

$500 cash to a political campaign

To the Salvation Army household items that originally cost $1,200 but are worth $300.

What is Larry’s maximum allowable charitable contribution if his AGI is $60,000?

Answer 29

$2,700

$2,400 to church + $300 FMV of household items.

Question 30

Which of the following is a true statement?

a) congress allowed self employed taxpayers to deduct the employer portion of their self employment tax

b) to deduct expenses associated with ant profit motivated activity, taxpayers must maintain a high level of involvement or effort in the activity throughout the year

c) business activities never require a relatively high level of involvement or effort from the taxpayer

d) all business expenses are deducted for AGI

E) all of these choices are correct

Answer 30

a) congress allowed self employed taxpayers to deduct the employer portion of their self employment tax

Question 31

Which of the following is a true statement?

a) the deduction for interest on educational loans is subject to a phase out limitation

b) the deduction for moving expenses is subject to a phase out limitation

c) self employed taxpayers are allowed to deduct health care premiums even if the taxpayer is eligible to participate in an employer provided health plan

d) excess business losses are deductible up to $100,000

e) all of these choices are false

Answer 31

a) the deduction for interest on educational loans is subject to a phase out limitation

Question 32

This year, Jong paid $3,000 of interest on a qualified education loan. Jong files married filing jointly and reports modified AGI of $167,000. What is Jong’s deduction for interest expense on an educational loan?

Answer 32

$1,500

2023 phase-out percentage = [$167,000 − $155,000] ÷ $30,000 = 40%; maximum = $2,500 × (1 − 40%) = $1,500.

Question 33

Brice is a single, self-employed electrician who earns $60,000 per year in self-employment income. Brice paid the following expenses this year. Which of the expenses are deductible for AGI?

1. The cost of health insurance (not purchased through an exchange)
2. The employer portion of self-employment tax paid
3. Penalty on early withdrawal of funds from a certificate of deposit

Answer 33

All of these choices are deductible for AGI.

Question 34

Hector is a married, self-employed taxpayer, and this year he paid $3,000 for his health insurance premiums (not through an exchange). Under which of the following alternative conditions can Hector deduct the cost of the premiums for AGI?

Answer 34

Hector’s spouse participates in an employer-sponsored plan, but Hector is not eligible to participate in this plan.

Question 34

Madeoff donated stock (capital gain property) to a public charity. He purchased the stock three years ago for $100,000, and on the date of the gift, it had a fair market value of $200,000. What is his maximum charitable contribution deduction for the year related to this stock if his AGI is $500,000?

Answer 34

$150,000

The stock is appreciated capital gain property limited to 30 percent of AGI.

Question 35

Ned is a head of household with a dependent son, Todd, who is a full-time student. This year Ned made the following expenditures related to Todd’s support:

Auto insurance premiums $ 1,700
Room and board at Todd’s school 2,200
Health insurance premiums (not through an exchange) 600
Travel (to and from school) 350

What amount can Ned include in his itemized deductions?

Answer 35

$600 included in Ned’s medical expenses.

Question 36

Margaret Lindley paid $15,000 of interest on her $300,000 acquisition debt for her home (fair market value of $500,000), $4,000 of interest on her $60,000 home-equity debt used to buy a new boat and car, $1,000 of credit card interest, and $3,000 of margin interest for the purchase of stock. Assume that Margaret Lindley has $10,000 of interest income this year and no investment expenses. How much of the interest expense may she deduct this year?

Answer 36

$18,000

The credit card interest is nondeductible personal interest and the home-equity interest is not deductible. The remaining interest is deductible as qualified residence interest ($15,000) and investment interest ($3,000). The $3,000 investment interest is not restricted by her net investment income ($10,000).

Question 37

In the current year, Norris, an individual, has $50,000 of ordinary income, a net short-term capital loss (NSTCL) of $10,000, and a net long-term capital gain (NLTCG) of $2,800. From his capital gains and losses, Norris reports:

Answer 37

an offset against ordinary income of $3,000 and an NSTCL carryforward of $4,200.

$2,800 NLTCG − $10,000 NSTCL = $7,200 NSTCL. Use $3,000 NSTCL to reduce ordinary income, leaving $4,200 as an NSTCL carryforward.

Question 38

Doug and Sue Click file a joint tax return and decide to itemize their deductions. The Clicks’ income for the year consists of $90,000 in salary, $2,000 interest income, and $800 long-term capital loss. The Clicks’ expenses for the year consist of $1,500 investment interest expense. Assuming that the Clicks’ marginal tax rate is 35 percent, what is the amount of their investment interest expense deduction for the year?

Answer 38

$1,500

$2,000 ≥ investment interest expense ($1,500).

Question 39

John holds a taxable bond and a municipal bond. Which are considered part of John’s deductible investment interest expense?

Answer 39

Interest expense on taxable bond.

The interest expense on the taxable bond is considered deductible investment interest expense.

Question 40

Michelle is an active participant in the rental condominium property she owns. During the year, the property generates a ($15,000) loss; however, Michelle has sufficient tax basis and at-risk amounts to absorb the loss. If Michelle has $115,000 of salary, $10,000 of long-term capital gains, $3,000 of dividends, and no additional sources of income or deductions, how much loss can Michelle deduct?

Answer 40

$11,000

$25,000 (exception) − $14,000 (phase-out: ($128,000 − $100,000) × 0.50) = $11,000.

Question 41

The maximum amount of net capital losses individual taxpayers may deduct against their ordinary income per year is:

Answer 41

$3,000.