Reg 2 Flashcards

Question 1

Q

Smith, a single individual, made the following charitable contributions during the current year. Smith’s adjusted gross income is $60,000.
Donation to Smith’s church
$5,000
Art work donated to the local art museum
(Smith purchased it for $2,000 four months ago and a local art dealer appraised it for)
3,000
Contribution to a needy family
1,000
What amount should Smith deduct as a charitable contribution?
	a.	
$8,000
	b.	
$9,000
	c.	
$5,000
	d.	
$7,000

Answer

A

Choice “d” is correct. This question is asking for the actual deduction and requires the candidate to determine which items are deductible charitable contributions. The $5,000 donation to the church is allowable. The artwork donated to the local art museum is deductible to its basis, $2,000. Although it is appreciated property, Smith held the property for only four months, making it short-term capital gain property. Donations of short-term capital gain property are deductible to the donor to the extent of his/her adjusted basis. The contribution to a needy family is not a deductible contribution, as it was not made to a qualifying organization.

Question 2

Q

Carroll, a 35 year old unmarried taxpayer with an adjusted gross income of $100,000, incurred and paid the following unreimbursed medical expenses for the year:
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 the year?
a.
$0
b.
$10,000
c.
$15,000
d.
$20,000

Answer

A

Choice "b" is correct. Both medical expenses are deductible. The cosmetic surgery is not elective, since it was necessary to correct a congenital deformity.
Doctor Bills
$ 5,000
Surgery
15,000
$ 20,000
AGI Limitation ($100,000 × 10%)
(10,000)
Deduction
$ 10,000

Question 3

Q

Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for the current year. During the current year, Taylor donated land to a church and made no other contributions. Taylor purchased the land 15 years ago as an investment for $14,000. The land's fair market value was $25,000 on the day of the donation. What is the maximum amount of charitable contribution that Taylor may deduct as an itemized deduction for the land donation for the current year?
	a.	
$0
	b.	
$11,000
	c.	
$25,000
	d.	
$14,000

Answer

A

Choice “c” is correct. Individual taxpayers may deduct the FMV of property donated to charity. The limit is 30% of the taxpayer’s AGI (30% × $90,000 = $27,000). The FMV of the property is $25,000 and is within the allowable amount.

Question 4

Q

Easel Co. has elected to reimburse employees for business expenses under a nonaccountable plan. Easel does not require employees to provide proof of expenses and allows employees to keep any amount not spent. Under the plan, Mel, an Easel employee for a full year, gets $400 per month for business automobile expenses. At the end of the year Mel informs Easel that the only business expense incurred was for business mileage of 12,000 at a rate of 30 cents per mile, the IRS standard mileage rate at the time. Mel encloses a check for $1,200 to refund the overpayment to Easel. What amount should be reported in Mel's gross income for the year?
	a.	
$0
	b.	
$4,800
	c.	
$1,200
	d.	
$3,600

Answer

A

Choice “b” is correct. Under a nonaccountable plan, $4,800 ($400 per month x 12 months) must be reported as part of Mel’s gross income for the year (in fact, the $4,800 will be included as part of Mel’s taxable wages on Mel’s W-2).

Rule: Under a nonaccountable plan (i.e., expenses are not reported to the employer), any amounts received by an employee from the employer must be reported by the employer as part of wages on the employee’s W-2 for the year (and subject to income tax withholding requirements). The gross amount received is reported as income.

Rule: Any expenses taken against the gross amount received in a nonaccountable plan (e.g., the car mileage expenses and the reimbursement to the company) are considered miscellaneous itemized deductions and are subject to the 2% AGI limitation.

Note: The examiners have attempted to trick the candidate into thinking that this is in some way an accountable plan because they provided for a return of excess funds received to the employer. However, remember that the question specifically states that the plan is nonaccountable.

Question 5

Q

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 amount of charitable contributions deductible on Stein's current year income tax return?
	a.	
$21,000
	b.	
$24,000
	c.	
$17,000
	d.	
$25,000

Answer

A

Choice “b” is correct. Stein may deduct $24,000 on Stein’s current year income tax return.
Rule: For 50%-type charities only (which include tax-exempt educational organizations), the taxpayer has the option to deduct long-term (i.e., held longer then 12 months) capital gain appreciated property at the higher fair market value (higher than cost basis) without paying capital gains tax on the appreciated portion. This deduction is limited to 30% of adjusted gross income (AGI). A 5-year carryforward period applies.

Question 6

Q

Jackson owns two residences. The second residence, which has never been used for rental purposes, is the only residence that is subject to a mortgage. The following expenses were incurred for the second residence in the current year:
Mortgage interest
$5,000
Utilities
$1,200
Hazard insurance
$6,000
For regular income tax purposes, what is the maximum amount allowable as a deduction for Jackson's second residence in the current year?
	a.	
$6,200 in determining adjusted gross income.
	b.	
$5,000 as an itemized deduction.
	c.	
$12,200 as an itemized deduction.
	d.	
$11,000 in determining adjusted gross income.

Answer

A

Choice “b” is correct. For a personal residence that is not used for rental purposes, no deduction is allowed for utilities costs or insurance, thus the only deductible amount here is for the mortgage interest. Note that property taxes (not present in this problem) are deductible. In this problem we are not told whether the interest relates to acquisition indebtedness or home equity indebtedness. The deduction for interest on home equity indebtedness is limited to interest on $100,000 of indebtedness, but this is unlikely to be a problem here even if the interest relates solely to home equity indebtedness. This is because of the amount of interest and the fact that there is no debt associated with Jackson’s other residence. The deduction for personal residence interest is an itemized deduction.

Question 7

Q

During the current year, Wood's residence had an adjusted basis of $150,000 and it was destroyed by a tornado. An appraiser valued the decline in market value at $175,000. Later in the current year, Wood received $130,000 from his insurance company for the property loss and did not elect to deduct the casualty loss in an earlier year. Wood's current year adjusted gross income was $60,000 and he did not have any casualty gains.
What total amount can Wood deduct as a current year itemized deduction for casualty loss, after the application of the threshold limitations?
	a.	
$20,000
	b.	
$25,000
	c.	
$13,900
	d.	
$19,900

Answer

A

Choice “c” is correct. Casualty losses are generally computed as the decline in fair market value, except that the fair market value is limited to the property’s basis, here $150,000. Casualty losses are reduced by the amount of any insurance recovery, reducing this loss to $20,000. Next, each individual loss is reduced by $100, bringing this loss to $19,900. Finally, the remaining total amount of all casualty losses (here there is only one) are deductible only to the extent that the amount exceeds 10% of AGI, or $6,000 here. ($150,000 - $130,000 = $20,000; $20,000 - $100 - $6,000 = $13,900.)

Question 8

Q

Deet, an unmarried taxpayer, qualified to itemize current year deductions. Deet's adjusted gross income was $40,000 and he made a $1,500 substantiated cash donation directly to a needy family. Deet also donated art, valued at $11,000, to a local art museum. Deet had purchased the art work two years earlier for $2,000. What was the maximum amount of the charitable contribution allowable as an itemized deduction on Deet's current year income tax return?
	a.	
$3,500
	b.	
$2,000
	c.	
$12,500
	d.	
$11,000

Answer

A

Choice “d” is correct. The $1,500 donation is not deductible because it was made directly to the needy family rather than to a qualified organization. Because the artwork had been held for more than one year, the fair market value could be deducted. In this case, the $11,000 was within the taxpayer’s limitation of $12,000 (30% of AGI of $40,000) for donations of appreciated property.

Question 9

Q

Grey, a calendar-year taxpayer, was employed and resided in New York. On February 2, of the current year, Grey was permanently transferred to Florida by his employer. Grey worked full-time for the entire year. In the current year, Grey incurred and paid the following unreimbursed expenses in relocating:
Lodging and travel expenses while moving
$ 1,000
Pre-move househunting costs
1,200
Costs of moving household furnishings and personal effects
1,800
What amount was deductible as moving expense on Grey's current year tax return?
	a.	
$1,800
	b.	
$1,000
	c.	
$2,800
	d.	
$4,000

Answer

A

Choice “c” is correct. The $1,000 lodging and travel expenses are fully deductible. A pre-move househunting trip is not deductible. The $1,800 expense of moving household furnishings and personal effects is fully deductible. The total deductible amount is $2,800 ($1,000 + $1,800).

Question 10

Q

Moore, a single taxpayer, had $50,000 in adjusted gross income for the year. During the year she contributed $18,000 to her church. She had a $10,000 charitable contribution carryover from her prior year church contribution. What was the maximum amount of properly substantiated charitable contributions that Moore could claim as an itemized deduction for the current year?
	a.	
$10,000
	b.	
$18,000
	c.	
$28,000
	d.	
$25,000

Answer

A

Choice “d” is correct. The contribution limit for a church is 50% of the contribution base (adjusted gross income in this case). Moore’s contribution limit for the current year is 50% × $50,000 = $25,000. Against this limit she can take her current year contributions ($18,000) plus the prior year carry-over ($10,000) until she reaches the current year limit. Therefore, she can take all the current year contributions plus $7,000 of the carryover for a $25,000 total.

Question 11

Q

Matthews was a cash basis taxpayer whose current year records showed the following:
State and local income taxes withheld
$ 1,500
State estimated income taxes paid December 30 of the current year
400
Federal income taxes withheld
2,500
State and local income taxes paid April 17 of the following year
300
What total amount was Matthews entitled to claim for taxes on her current year Schedule A of Form 1040?
	a.	
$1,900
	b.	
$4,700
	c.	
$2,200
	d.	
$1,500

Answer

A

Choice “a” is correct. State and local income taxes withheld from a cash-basis taxpayer are deductible in the year withheld, so Matthews can deduct the $1,500 withheld. She can also deduct the $400 in estimated tax liability she paid in the current year. The $2,500 federal income tax withheld is not deductible in calculating federal income tax. The current year state and local income tax paid in the following year is not deductible until paid because she is a cash-basis taxpayer. The total amount of deductible taxes, therefore, is $1,900.

Question 12

Q

In the current year, Joan Frazer's residence was totally destroyed by fire. The property had an adjusted basis and a fair market value of $130,000 before the fire. During the year, Frazer received insurance reimbursement of $120,000 for the destruction of her home. Frazer's current year adjusted gross income was $70,000. Frazer had no casualty gains during the year. What amount of the fire loss was Frazer entitled to claim as an itemized deduction on her current year tax return?
	a.	
$10,000
	b.	
$8,600
	c.	
$8,500
	d.	
$2,900

Answer

A

Choice “d” is correct. The casualty loss is measured by the difference in the property’s value before ($130,000) and after (zero) the casualty, in other words, $130,000. The casualty loss must be reduced by the $120,000 insurance recovery to $10,000. This loss is reduced by $100 per casualty to $9,900. The sum of all such casualty losses (there is only one in this case) is further reduced by 10% of the taxpayer’s adjusted gross income for the year. That is 10% x $70,000 = $7,000. The amount of the casualty loss that is deductible on Frazer’s tax return is $9,900 - $7,000 = $2,900.

Question 13

Q

Tom and Sally White, married and filing joint income tax returns, derive their entire income from the operation of their retail stationery shop. Their current year adjusted gross income was $100,000, and the Whites itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Whites during the year:
Repair and maintenance of motorized wheelchair for physically handicapped dependent child
$ 600
Tuition, meals, and lodging at special school for physically handicapped dependent child in an institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care
8,000
Without regard to the adjusted gross income percentage threshold, what amount may the Whites claim in their current year return as qualifying medical expenses?
a.
$0
b.
$8,600
c.
$8,000
d.
$600

Answer

A

Choice “b” is correct. Repair and maintenance of medical devices for a disabled dependent child ($600) are deductible medical expenses. The cost of a special school for a handicapped person in an institution primarily for the availability of medical care, when the meals and lodging are merely incident to that care ($8,000) is also a deductible medical expense.

Question 14

Q

The self-employment tax is:
a.
One-half deductible from gross income in arriving at adjusted gross income.
b.
Fully deductible as an itemized deduction.
c.
Not deductible.
d.
Fully deductible in determining net income from self-employment.

Answer

A

Choice “a” is correct. One-half of the self-employment tax is deductible to arrive at adjusted gross income.

Question 15

Q

For the current year, Val and Pat White filed a joint return. Val earned $35,000 in wages and was covered by his employer's qualified pension plan. Pat was unemployed and received $5,000 in alimony payments for the first 4 months of the year before remarrying. The couple had no other income. Each contributed $5,000 to an IRA account. The allowable IRA deduction on their current year joint tax return is:
	a.	
$2,000
	b.	
$5,000
	c.	
$0
	d.	
$10,000

Answer

A

Choice “d” is correct. In 2014, taxpayers can contribute and deduct up to $5,500 per year to an IRA, and alimony is considered earned income for IRA purposes. For couples filing a joint return where at least one spouse is an active participant in a retirement plan, the deductible portion of the contribution is phased out. For a spouse who is an active participant, the phase-out range in 2014 begins at AGI of $96,000 and is complete at $116,000. For a spouse who is not an active participant, but is married to someone who is, the phase-out range begins at $181,000 and is complete at $191,000 (2014). The earned income for IRA purposes here is $40,000 ($35,000 + $5,000), which is below both phase-out ranges, so each spouse receives a deduction of the $5,000 contribution actually made.

Question 16

Q

The deduction by an individual taxpayer for interest on investment indebtedness is:
a.
Limited to the investment interest paid during the year.
b.
Limited to the taxpayer’s interest income for the year.
c.
Not limited.
d.
Limited to the taxpayer’s net investment income for the year.

Answer

A

Choice “d” is correct. The deduction for interest expense on investment indebtedness is limited to net investment income (investment income less investment expenses).

Question 17

Q

Which expense, both incurred and paid in the same year, can be claimed as an itemized deduction subject to the two percent-of-adjusted-gross-income floor?
	a.	
Employee's unreimbursed moving expense.
	b.	
One-half of the self-employment tax.
	c.	
Employee's unreimbursed business car expense.
	d.	
Self-employed health insurance.

Answer

A

Choice “c” is correct. Employee business expenses, including unreimbursed car expense, are deductible as itemized deductions subject to the 2% floor.

Question 18

Q

The Browns borrowed $20,000, secured by their home, to pay their son's college tuition. At the time of the loan, the fair market value of their home was $400,000, and it was unencumbered by other debt. The interest on the loan qualifies as:
	a.	
Investment interest expense.
	b.	
Deductible qualified residence interest.
	c.	
Deductible personal interest.
	d.	
Nondeductible interest.

Answer

A

Choice “b” is correct. Interest paid on a debt secured by a home mortgage is classified as deductible qualified residence interest. The Browns would be able to deduct the interest paid as an itemized deduction. The limit is $100,000 of mortgage interest since the loan was not to buy, build, or improve the home.

Question 19

Q

On January 2, Year 1, the Philips paid $50,000 cash and obtained a $200,000 mortgage to purchase a home. In Year 4 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 4:
Mortgage interest
$17,000
Interest on room construction loan
1,500
Auto loan interest
500
For Year 4, how much interest is deductible, prior to any itemized deduction limitations?
	a.	
$19,000
	b.	
$17,000
	c.	
$18,500
	d.	
$17,500

Answer

A

Choice “c” is correct. Mortgages of up to $1,000,000 to buy, build, or substantially improve a home allow for the full deduction of interest. Interest on auto loans (consumer interest) is not deductible.

Question 20

Q

Wells paid the following expenses during the year:
Premiums on an insurance policy against loss of earnings due to sickness or accident
$ 3,000
Physical therapy after spinal surgery
2,000
Premium on an insurance policy that covers reimbursement for the cost of prescription drugs
500
In the current year, Wells recovered $1,500 of the $2,000 that she paid for physical therapy through insurance reimbursement from a group medical policy paid for by her employer. Disregarding the adjusted gross income percentage threshold, what amount could be claimed on Wells' current year income tax return for medical expenses?
	a.	
$500
	b.	
$3,500
	c.	
$4,000
	d.	
$1,000

Answer

A

Choice “d” is correct. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care. Prescription drugs are considered medical care. Insurance against loss of income is not payment for medical care and therefore is not deductible. Qualified medical expenses must be reduced by insurance reimbursement ($2,000 + $500 - $1,500 = $1,000).

Question 21

Q

Which allowable deduction can be claimed in arriving at an individual's adjusted gross income?
	a.	
Charitable contribution.
	b.	
Unreimbursed business expense of an outside salesperson.
	c.	
Personal casualty loss.
	d.	
Alimony payment.

Answer

A

Choice “d” is correct. Alimony payments are deductible to arrive at adjusted gross income (AGI). Charitable contributions, personal casualty losses, and unreimbursed business expenses of outside salespersons are all deductible from AGI as itemized deductions.

Question 22

Q

Davis, a sole proprietor with no employees, has a Keogh profit-sharing plan to which he may contribute and deduct 25% of his annual earned income. For this purpose, “earned income” is defined as net self-employment earnings reduced by the:
a.
Deductible Keogh contribution and one-half of the self-employment tax.
b.
Self-employment tax and one-half of the deductible Keogh contribution.
c.
Deductible Keogh contribution.
d.
Self-employment tax.

Answer

A

Choice “a” is correct. For Keogh plans, earned income is defined as net self-employment earnings reduced by the amount of the allowable Keogh deduction and ½ the self-employment tax.

Question 23

Q

Which itemized deduction is included in the category of unreimbursed expenses that are deductible only to the extent that the aggregate amount of such expenses exceeds 2% of the taxpayer's adjusted gross income?
	a.	
Medical expense.
	b.	
Tax return preparation fee.
	c.	
Charitable contributions.
	d.	
Interest expense.

Answer

A

Choice “b” is correct. Tax return preparation fee is a miscellaneous itemized deduction subject to the 2% adjusted gross income (AGI) floor.

Question 24

Q

Spencer, who itemizes deductions, had adjusted gross income of $60,000 for the current year. The following additional information is available for the year:
Cash contribution to church
$ 4,000
Purchase of art object at church bazaar (with a fair market value of $800 on the date of purchase)
1,200
Donation of used clothing to Salvation Army (fair value evidenced by receipt received)
600
What is the maximum amount Spencer can claim as a deduction for charitable contributions in the current year?
	a.	
$4,400
	b.	
$5,400
	c.	
$5,000
	d.	
$5,200

Answer

A

Choice “c” is correct. The $4,000 cash contribution to the church is deductible. Relative to the purchase of the art object at the church bazaar, only the excess paid over fair market value ($1,200 - $800 = $400) is deductible. The used clothing donation to the Salvation Army is deductible at its fair market value of $600. The total deduction is $5,000 ($4,000 + $400 + $600). Note that the total contributions deduction is below the 50% of adjusted gross income ceiling (50% x $60,000 = $30,000), since $5,000 is less than $30,000.

Question 25

Q

Charitable contributions subject to the 50-percent limit that are not fully deductible in the year made may be:
a.
Carried back two years or carried forward twenty years.
b.
Carried forward five years.
c.
Neither carried back nor carried forward.
d.
Carried forward indefinitely until fully deducted.

Answer

A

Choice “b” is correct. Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be carried forward five years.

Question 26

Q

In Year 10, Farb, a cash basis individual taxpayer, received an $8,000 invoice for personal property taxes. Believing the amount to be overstated by $5,000, Farb paid the invoiced amount under protest and immediately started legal action to recover the overstatement. In November, Year 11, the matter was resolved in Farb’s favor, and he received a $5,000 refund. Farb itemizes his deductions on his tax returns.
Which of the following statements is correct regarding the deductibility of the property taxes?
a.
Farb should not deduct any amount in his Year 10 income tax return when originally filed, and should file an amended Year 10 income tax return in Year 11.
b.
Farb should not deduct any amount in his Year 10 income tax return and should deduct $3,000 in his Year 11 income tax return.
c.
Farb should deduct $3,000 in his Year 10 income tax return.
d.
Farb should deduct $8,000 in his Year 10 income tax return and should report the $5,000 refund as income in his Year 11 income tax return.

Answer

A

Choice “d” is correct. Under the tax benefit rule, Farb should report the $5,000 refund as income in Year 11 since Farb itemizes deductions and would have received a tax benefit from deducting the $8,000 paid in Year 10.

Question 27

Q

During the year, Barlow moved from Chicago to Miami to start a new job, incurring costs of $1,200 to move household goods and $2,500 in temporary living expenses. Barlow was not reimbursed for any of these expenses. What amount should Barlow deduct as itemized deduction for moving expense?
	a.	
$0
	b.	
$3,000
	c.	
$3,700
	d.	
$2,700

Answer

A

Choice “a” is correct. There is no itemized deduction for temporary living expenses, and the direct moving expenses (such as the costs to move the goods and the costs to move the taxpayer’s family from the old to the new location) are deductible before adjusted gross income, not as an itemized deduction.

Question 28

Q

In order to qualify for the additional standard deduction, an individual must be age 65 or older or blind by the end of the tax year.

Answer

A

He or she does not have to support a dependent child or aged parent.

Question 29

Q

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.
$10,000
b.
$110,000
c.
$85,000
d.
$75,000

Answer

A

Choice “c” is correct. A capital expenditure for the improvement of a home qualifies as a medical expense if it is directly related to the prescribed medical care. However, it is deductible to the extent that the expenditure exceeds the increase in value of the home. Thus, Drake may only deduct $75,000, the difference between the cost of improvement ($100,000) and the increase in market value ($25,000) of the home. In addition, the full cost of home-related capital expenditures to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. The widening of hallways qualifies as this type of expense and, therefore, the entire $10,000 is deductible.

Question 30

Q

The doctor fees ($5,000) and the contact lenses ($500) are deductible medical expenses. The surgery is not deductible because elective cosmetic surgery is not done to improve or maintain health.

Answer

A

Premiums on disabilities policies are not deductible since payments under the policy are made to replace lost income, not to pay for medical expenses.

Question 31

Q

The Rites are married, file a joint income tax return, and qualify to itemize their deductions in the current year. Their adjusted gross income for the year was $55,000, and during the year they paid the following taxes:
Real estate tax on personal residence $ 2,000
Ad valorem tax on personal automobile 500
Current-year state and city income taxes withheld from paycheck 1,000
What total amount of the expense should the Rites claim as an itemized deduction on their current-year joint income tax return?
a.
$1,000
b.
$2,500
c.
$3,500
d.
$3,000

Answer

A

Choice “c” is correct. In answering this question, we must assume that the examiners mean to ask, “What total amount of the tax expense should the Rites claim as an itemized deduction?” Obviously, the Rites have more deductions than just those tax deductions above, or they would take advantage of the standard deduction. In any case, for cash-basis taxpayers, deductible taxes are generally deductible in the year paid, and real estate taxes, income taxes, and personal property taxes (e.g., ad valorem taxes on personal automobile) are allowable deductions. The total amount of deductions for tax expense is calculated as follows:
Real estate tax on personal residence $ 2,000
Ad valorem tax on personal automobile 500
Current-year state and city income taxes withheld 1,000
Total deduction for taxes $ 3,500

Question 32

Q

In the current year, an unmarried individual with modified adjusted gross income of $25,000 paid $1,000 interest on a qualified education loan entered into on July 1. How may the individual treat the interest for income tax purposes?
a.
As a $1,000 deduction to arrive at AGI for the year.
b.
As a $500 deduction to arrive at AGI for the year.
c.
As a $1,000 itemized deduction.
d.
As a nondeductible item of personal interest.

Answer

A

Rule: The adjustment for education loan interest (an above-the-line deduction to arrive at AGI) is limited to the amount paid or $2,500 (whichever is lower), and all qualified education loan interest is allowed as part of the adjustment. The adjustment is phased-out for single taxpayers with modified AGI between $65,000 and $80,000 (2014) and married filing jointly between $130,000 and $160,000 (2014).
Choice “a” is correct. Per the above rule, the $1,000 of qualified education loan interest paid in the year is reported as a deduction to arrive at AGI for the year.

Question 33

Q

Tana's divorce decree requires Tana to make the following transfers to Tana's former spouse during the current year:
Alimony payments of $3,000.
Child support of $2,000.
Property division of stock with a basis of $4,000 and a fair market value of $6,500.
What is the amount of Tana's alimony deduction?
	a.	
$7,000
	b.	
$9,500
	c.	
$3,000
	d.	
$11,500

Answer

A

RULE: Alimony payments to a former spouse are adjustments to arrive at AGI. Child support payments are NOT alimony and are NOT deductible. Property settlements are NOT alimony and are NOT deductible.
Choice “c” is correct. Only the amount of alimony ($3,000) is allowed as Tana’s alimony deduction.

Question 34

Q

A calendar-year individual is eligible to contribute to a deductible IRA. The taxpayer obtained a six-month extension to file until October 15 but did not file the return until November 1. What is the latest date that an IRA contribution can be made in order to qualify as a deduction on the prior year's return?
	a.	
August 15.
	b.	
April 15.
	c.	
October 15.
	d.	
November 1.

Answer

A

Choice “b” is correct. For IRAs, the adjustment is allowed for a year ONLY if the contribution is made by the due date of the tax return for individuals (April 15). The due date for filing the tax return under a filing extension is NOT allowed (i.e., filing extensions are NOT considered).

Question 35

Q

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.	
II only.
	b.	
Neither I nor II.
	c.	
Both I and II.
	d.	
I only.

Answer

A

Choice “d” is correct. The computer-generated investment interest expense deduction will be limited to the net investment income of the taxpayer. Any excess amount will be carried forward indefinitely. For example, assume the taxpayer had $5,000 of investment interest for a year but had investment income of only $3,000. The tax preparer would enter the $5,000 paid as investment interest, and the computer would then allow only a $3,000 deduction for investment interest in the year. The remaining $2,000 of expense would be carried forward indefinitely to be applied to investment income in future years. Qualified residence interest is NOT investment interest and would not affect investment interest income in any manner.

Question 36

Q

Cassidy, an individual, reported the following items of income and expense during the current year:
Salary
$ 50,000
Alimony paid to a former spouse
10,000
Inheritance from a grandparent
25,000
Proceeds of a lawsuit for physical injuries
50,000
What is the amount of Cassidy's adjusted gross income?
	a.	
$40,000
	b.	
$125,000
	c.	
$50,000
	d.	
$115,000

Answer

A

Choice "a" is correct. Gross income includes salary, but it excludes inheritance and proceeds from a lawsuit for physical injuries. Alimony paid is an adjustment from gross income to arrive at Adjusted Gross Income, as follows:
Gross Income:
Salary
$ 50,000
Inheritance
0
Proceeds from physical injury lawsuit
0
Adjustments:
Alimony paid
(10,000)
Adjusted gross income
$ 40,000

Question 37

Q

Which of the following is a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor?
	a.	
Real estate tax.
	b.	
Employee business expenses.
	c.	
Gambling losses up to the amount of gambling winnings.
	d.	
Medical expenses.

Answer

A

Choice “b” is correct. Employee business expenses are a miscellaneous itemized deduction subject to the 2% of adjusted gross income (AGI) floor.

Question 38

Q

A self-employed taxpayer had gross income of $57,000. The taxpayer paid self-employment tax of $8,000, health insurance of $6,000, and $5,000 of alimony. The taxpayer also contributed $2,000 to a traditional IRA. What is the taxpayer's adjusted gross income?
	a.	
$46,000
	b.	
$50,000
	c.	
$40,000
	d.	
$55,000

Answer

A

Choice “c” is correct. Adjusted gross income is gross income plus or minus certain other amounts. Half of the $8,000 self-employment tax is an adjustment for AGI, as is the $6,000 self-employed health insurance, the $5,000 alimony, and the $2,000 contribution to a traditional IRA. All of these amounts (total of $17,000) are subtracted from the $57,000 gross income to arrive at AGI. The AGI is thus $40,000.

Question 39

Q

Jeffrey, a single taxpayer, had $55,000 in adjusted gross income for the current year. During the current year he contributed $19,500 to his church. He had a $5,000 charitable contribution carryover from his prior year church contribution. What was the maximum amount of properly substantiated charitable contributions that Jeffrey could report as an itemized deduction for the current year?
	a.	
24,500
	b.	
19,500
	c.	
5,000
	d.	
27,500

Answer

A

Choice “a” is correct. The contribution limit for a church is 50% of the contribution base (adjusted gross income in this case). Jeffrey’s contribution limit for the current year would be $55,000 × 50% = $27,500. Against that limit, he would be able to take his contribution carryover from the prior year ($5,000) and the current year’s contributions ($19,500) for a total of $24,500.

Question 40

Q

During the year, the Andradis’, who were both under age 65, paid the following expenses:
Unreimbursed costs for prescription drugs required for their dependent daughter’s medical condition
$ 2,300
Mrs. Andradis’ face lift
4,000
Physical therapy for their dependent son’s soccer injury
3,000
Massage therapy fees at Mr. Andradis’ health club obtained because he enjoys massages
500
The Andradis’ adjusted gross income for the current year was $65,000. What amount could be claimed on the Andradis’ current year tax return for medical expenses?
a.
$2,300
b.
$0
c.
$5,300
d.
$4,875

Answer

A

Choice “b” is correct. Deductible medical expenses are limited to the amount that exceeds 10% of the taxpayer’s adjusted gross income. Deductible medical expenses are those expenses that are “necessary” (such as doctors, prescriptions, required surgery, etc.) Non-deductible expenses are such things as elective surgeries, health club memberships and unnecessary medical expenditures. The Andradis’ AGI is $65,000; 10% of that is $6,500. Qualified medical expenses are $2,300 for their daughter’s prescriptions and $3,000 for physical therapy for their son. Total allowable gross expenditures of $5,300 are less than the threshold of $6,500. So the answer is zero.

Question 41

Q

For the current year, the Stevenson's are filing married filing joint, and their adjusted gross income was $58,250. Additional information is as follows:
Interest paid on their home mortgage
$ 5,200
State taxes paid
2,000
Medical expenses in excess of 10% AGI
1,500
Deductible contributions to IRAs
4,000
Alimony paid to Mr. Stevenson's first wife
5,000
Child support paid for Mr. Stevenson's daughter
5,100
What amount may the Stevenson's claim as itemized deductions on their current year Schedule A?
	a.	
$13,800
	b.	
$7,200
	c.	
$8,700
	d.	
$12,300

Answer

A

Choice "c" is correct. Interest on a home mortgage, state taxes paid, and medical expenses in excess of 10% AGI are itemized deductions reported on Schedule A. Contributions to IRAs and alimony paid are adjustments to gross income to arrive at AGI. Child support is neither an adjustment nor an itemized deduction.
Home mortgage interest
$ 5,200
State taxes paid
2,000
Medical expenses
1,500
Total itemized deductions
$ 8,700

Question 42

Q

Which of the following is not an adjustment to arrive at adjusted gross income?
	a.	
Qualified mortgage interest paid.
	b.	
Self-employed FICA (50%).
	c.	
Alimony paid.
	d.	
Self-employed health insurance.

Answer

A

Choice “a” is correct. Qualified mortgage interest paid is deductible on Schedule A as an itemized deduction.

Question 43

Q

Which of the following items are not allowable as adjustments for moving expenses without regard to employer provided benefits or other limitations?
	a.	
Cost of moving household goods.
	b.	
Transportation.
	c.	
Expense of breaking lease.
	d.	
Cost of hotel during drive to new home.

Answer

A

Choice “c” is correct. The costs associated with breaking an existing lease are not deductible as moving expenses.

Question 44

Q

During the current year, Tarbet's residence was destroyed by a hurricane. Tarbet's basis in the property was $150,000. The fair market value determined by an appraiser shortly before the hurricane was $450,000. In November of the current year, Tarbet received $300,000 from the insurance company. Tarbet's adjusted gross income was $75,000 and she did not have any casualty gains during the year. What total amount can Tarbet deduct as a current year casualty loss itemized deduction, after the application of the threshold limitations?
	a.	
$142,400
	b.	
$450,000
	c.	
$75,000
	d.	
$0

Answer

A

Choice "d" is correct. The calculation for the deduction is as follows:
Smaller loss (lesser of cost or decrease in FMV)
$ 150,000
Less: Insurance Recovery
(300,000)
Taxpayer's Loss
(150,000)
negative, thus it is treated as zero
Less: Floor Amount of $100
(100)
Eligible Loss
0
Less: 10% of AGI
$ (7,500)
Deductible Loss
0

Question 45

Q

In the current year, Mike and Jane Smith filed a joint return. Mike earned $40,000 in wages and was covered by his employer's qualified pension plan. Jane was employed part-time and received $7,000 in wages. The couple had no other income. Each contributed $5,000 to an IRA account. The allowable IRA deduction on their current year joint tax return is:
	a.	
$2,500
	b.	
$0
	c.	
$5,000
	d.	
$10,000

Answer

A

Choice “d” is correct. In 2014, taxpayers can contribute and deduct up to $5,500 to an IRA. For couples filing a joint return, where at least one spouse is an active participant in a retirement plan, the deductible portion is phased out. For a spouse who is an active participant, the phase-out range in 2014 begins at $96,000. For a spouse who is not an active participant, but is married to someone who is, the phase-out range in 2014 begins at $181,000. The Smith’s income is below both phase-out ranges, so they can each deduct the full $5,000 contributed, or $10,000 in total.

Question 46

Q

Pat’s divorce decree requires Pat to make the following transfers to Pat’s former spouse during the current year:
Alimony payments of $9,000 to be reduced to $7,000 when their child attains the age of 18.
Property division of stock with a basis of $2,000 and a fair market value of $3,500.
What is the amount of Pat’s alimony deduction?
a.
$9,000
b.
$1,500
c.
$7,000
d.
$10,500

Answer

A

Choice “c” is correct. Any amount of “alimony” that is dependent on a child reaching the age of 18, will be considered child support (which is not deductible) for tax purposes. Accordingly, only the $7,000 is deductible as alimony.

Question 47

Q

Bob and Nancy Goldberg are both age 67 and file a joint return. For the current year, the regular standard deduction for a couple married filing jointly is $11,900. What is the maximum standard deduction available to Bob and Nancy?
	a.	
$14,300
	b.	
$12,500
	c.	
$12,800
	d.	
$11,400

Answer

A

Choice “a” is correct. Because both Bob and Nancy are 65 or older, they are entitled to the additional standard deduction of $1,200 each in addition to the regular amount.
$11,900 + $1,200 + $1,200 = $14,300

Question 48

Q

On January 2, Year 1, the Kanes paid $60,000 cash and obtained a $300,000 mortgage to purchase a home. In Year 4, they borrowed $20,000 secured by their home on a home equity line of credit and used the cash to pay bills and take a vacation. That same year they took out a $7,000 auto loan.
The following information pertains to interest paid in Year 4:
Mortgage interest on first loan
$19,000
Interest on home equity line of credit
2,500
Auto loan interest
500
For Year 4, how much interest is deductible?
	a.	
$22,000
	b.	
$19,500
	c.	
$19,000
	d.	
$21,500

Answer

A

Choice “d” is correct. Interest on mortgages of up to $1,000,000 to buy, build, or substantially improve a home (the first loan) are fully deductible. Interest on home equity loans of up to $100,000 in principal are fully deductible. Note, provided the loan is secured by the home, it does not matter what the proceeds are used for. Interest on auto loans is not deductible. Note that if the money borrowed for the auto had been borrowed from a home equity line of credit and the total principal of that revolving credit line had been less than $100,000, the related interest for the auto purchase could have qualified for a deduction; however, in this case, the auto loan was a separate loan. The total deduction is $21,500 ($19,000 + $2,500)

Question 49

Q

In Year 1, Kane's residence had an adjusted basis of $250,000 and it was destroyed by a tornado. An appraiser valued the decline in market value at $425,000. Later that same year, Kane received $200,000 from his insurance company for the property loss and did not elect to deduct the casualty loss in an earlier year. Kane's Year 1 adjusted gross income was $100,000 and he did not have any casualty gains.
What total amount can Kane deduct as a Year 1 itemized deduction for casualty loss, after the application of the threshold limitations?
	a.	
$50,000
	b.	
$49,900
	c.	
$40,000
	d.	
$39,900

Answer

A

Choice "d" is correct. The starting point is the lesser of adjusted basis or decrease in FMV. Here, that is the $250,000 adjusted basis. The computation is then as follows:
 Smaller Loss	$ 250,000
 Insurance Recovery	(200,000)
 Taxpayer's Loss	50,000
 Less $100	(100)
 Eligible Loss	49,900
 10% AGI Limitation	(10,000)
 Deductible Loss	$ 39,900

Question 50

Q

Which of the following transportation expenses incurred by an employee is not deductible?
a.
An employee drives from home to his or her office.
b.
An employee flies from San Francisco to Miami on business.
c.
An employee drives from his or her office to the office of a client.
d.
An employee drives from a first job to second.

Answer

A

Choice “a” is correct. This is an example of a commuting expense and is not deductible.

Question 51

Q

Which itemized deduction is included in the category of unreimbursed expenses that are deductible only to the extent that the aggregate amount of such expenses exceeds 2% of the taxpayer's adjusted gross income?
	a.	
Subscriptions to professional journals.
	b.	
Gambling losses to the extent of winnings.
	c.	
Medical expenses.
	d.	
Moving expenses

Answer

A

Choice “a” is correct. Subscriptions to professional journals are miscellaneous itemized deductions subject to the 2% of AGI limitation.

Question 52

Q

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 phase-outs. 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.
Amend the prior-year’s return and reduce the claimed itemized deductions for that year.
d.
Include $1,500 in income in the current year.

Answer

A

Rule: IRC Section 111 provides that gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax previously imposed (the tax benefit rule).
Choice “b” is correct. Under the tax benefit rule, an itemized deduction recovered in a subsequent year is included in income in the year recovered. In this question, only $1,150 of the state income taxes was actually deducted as an itemized deduction last year. The recovery is thus limited in the amount actually deducted (and not to the entire amount of the state tax refund).

Question 53

Q

An individual starts paying student loan interest in the current year. How many years may the individual deduct a portion of the student loan interest?
	a.	
Five years.
	b.	
Current year only.
	c.	
Ten years.
	d.	
Duration of time that interest is paid.

Answer

A

Rule: IRC Section 221 allows the deduction of student loan interest (above-the-line for AGI) paid on qualified education loans up to a maximum of $2,500 for the tax year. There is a phase-out for the deduction in 2014, and there are other minor restrictions, such as a married couple must file joint returns to take the deduction.
Choice “d” is correct. There is no limitation of the number of years that the interest may be deducted, other than that the interest may be deducted only when paid.

Question 54

Q

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

Answer

A

Choice "c" is correct. Miscellaneous itemized deductions are deductible to the extent that such miscellaneous itemized deductions exceed 2% of Adjusted Gross Income (AGI).
AGI:
$ 75,000
Tax preparation:
$ 500
× 2%
Custodial Fees:
100
2% of AGI:
$ 1,500
Publications:
150
Union Dues:
2,000
Total Miscellaneous Deductions:
2,750
(1,500)
2% of AGI
$ 1,250
Allowable Misc. Deductions

Question 55

Q

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.	
$2,500
	b.	
$3,000
	c.	
$1,600
	d.	
$2,600

Answer

A

Choice “d” is correct. Adjusted Gross Income (AGI) is gross income less adjustments or deductions to arrive at AGI. $3,000 in wages is part of gross income. The only adjustment listed is $400 in student loan interest, resulting in an AGI of $2,600.

Question 56

Q

Doyle has gambling losses totaling $7,000 during the current year. Doyle's adjusted gross income is $60,000, including $3,000 in gambling winnings. Doyle can itemize the deductions. What amount of gambling losses is deductible?
	a.	
$0
	b.	
$5,800
	c.	
$3,000
	d.	
$7,000

Answer

A

Choice “c” is correct. Gambling losses are miscellaneous itemized deductions not subject to the 2% AGI limitation. The deduction for gambling losses are, however, limited to gambling winnings.

Question 57

Q

Which one of the following expenditures qualifies as a deductible medical expense for tax purposes?
a.
Mandatory employment taxes for basic coverage under Medicare A.
b.
Transportation to physician’s office for required medical care.
c.
Vitamins for general health not prescribed by a physician.
d.
Health club dues.

Answer

A

Choice “b” is correct. Transportation to physician’s office for required medical care is a deductible medical expense for tax purposes.

Question 58

Q

For regular tax purposes, with regard to the itemized deduction for qualified residence interest, home equity indebtedness incurred during a year:
a.
Is limited to $100,000 on a joint income tax return.
b.
Includes acquisition indebtedness secured by a qualified residence.
c.
Must exceed the taxpayer’s net equity in the residence.
d.
May exceed the fair market value of the residence.

Answer

A

Choice “a” is correct. Home equity indebtedness is limited to $100,000 on a joint income tax return (or single return), but only $50,000 if married filing separately.

Question 59

Q

An individual’s losses on transactions entered into for personal purposes are deductible only if:
a.
No part of the transactions was entered into for profit.
b.
The losses can be characterized as hobby losses.
c.
The losses do not exceed $3,000 ($6,000 on a joint return).
d.
The losses qualify as casualty or theft losses.

Answer

A

Choice “d” is correct. An individual’s losses on transactions entered into for personal purposes are deductible only if the losses qualify as casualty or theft losses. In addition, the individual must itemize deductions and the loss must exceed 10% of AGI plus $100 per casualty.

Question 60

Q

During the year, Scott charged $4,000 on his credit card for his dependent son's medical expenses. Payment to the credit card company had not been made by the time Scott filed his income tax return in the following year. In addition, in the current year, Scott paid a physician $2,800 for the medical expenses of his wife, who died in the prior year. Disregarding the adjusted gross income percentage threshold, what amount could Scott claim in his current year income tax return for medical expenses?
	a.	
$0
	b.	
$4,000
	c.	
$6,800
	d.	
$2,800

Answer

A

Choice “c” is correct. $6,800. Scott could claim $6,800 on his current year tax return for medical expenses.

Rules:
Medical expenses charged to a credit card is expensed in the year the charge is made. It does not matter when the amount charged is actually paid.

Expenses paid for the medical care of a decedent by the decedent’s spouse are included as medical expenses in the year paid, whether they are paid before or after the decedent’s death.

Question 61

Q

Which of the following statements is correct regarding the deductibility of an individual’s medical expenses?
a.
A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years.
b.
Medical expenses, net of insurance reimbursements, are disregarded in the alternative minimum tax calculation.
c.
A medical expense deduction is not allowed for Medicare insurance premiums.
d.
A medical expense paid by credit card is deductible in the year the credit card bill is paid.

Answer

A

Choice “a” is correct. A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years.

Question 62

Q

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.	
$5,000
	b.	
$2,000
	c.	
$0
	d.	
$3,000

Answer

A

Choice “b” is correct. The deduction for investment interest expenses is limited to net taxable investment income which is defined as taxable investment income minus all related investment expenses (other than investment interest expense). If the investment expense is an itemized deduction, then only those expenses exceeding 2% of AGI are considered.
Taxable investment income includes: (i) interest and dividends (if taxed at ordinary income tax rates), (ii) rents (if the activity is not a passive activity), (iii) royalties (in excess of related expenses), (iv) net short-term capital gains, and (v) net long-term capital gains if the taxpayer elects not to claim the net capital gains reduced tax rate.
Calculation:
Investment income
$ 10,000
Less: Related investment expenses other than investment interest expenses
(8,000)
Net investment income
$ 2,000
The taxpayer’s deduction for investment interest expense is $2,000: the lesser of (i) $2,000 net investment income or (ii) $5,000 investment interest expense.

Question 63

Q

Brenda, employed full time, makes beaded jewelry as a hobby. In year 2, Brenda’s hobby generated $2,000 of sales, and she incurred $3,000 of travel expenses. What is the proper reporting of the income and expenses related to the activity?
a.
Sales of $2,000 are reported in gross income, and $3,000 of expenses is reported as an itemized deduction subject to the 2% limitation.
b.
Sales and expenses are netted and deducted for AGI.
c.
Sales and expenses are netted, and the net loss of $1,000 is reported as an itemized deduction not subject to the 2% limitation.
d.
Sales of $2,000 are reported in gross income, and $2,000 of expenses is reported as an itemized deduction subject to the 2% limitation.

Answer

A

Choice “d” is correct. Based upon the facts presented (“Brenda makes jewelry as a hobby…”), this activity is not a trade or business activity but is an activity not engaged in for profit. As such, the taxpayer can only deduct as itemized deductions on Schedule A of IRS form 1040 the following: (i) expenses, such as state and local income taxes and property taxes, which would be allowed regardless of whether or not the activity were engaged in for profit and (ii) all other expenses that would be allowed if such activity were engaged in for profit. However, the amount of these “other expenses” cannot exceed gross income reduced by the expenses described in “(i),” above. Furthermore, the allowable “other expenses” are subject to the “2% of AGI” limitation.
Because Brenda had only $2,000 of gross income, the most she can deduct is $2,000 of the $3,000 travel expenses she incurred. Because the travel expenses constitute “all other expenses” (see “(ii),” above), this amount is subject to the “2% of AGI” limitation.
Note that the activity-is-engaged-in-for-profit statutory presumption does not apply. Reason: that presumption applies only if the activity shows a profit for at least three taxable years during the five consecutive taxable year period ending with the year in question (year 2 for this question). Because the facts do not state that during the five year period ending with year 2 Brenda had a profit in at least three of those five years, the presumption is not available to Brenda. If the presumption would have been available to her and if she had had a profit in at least three of the five consecutive, ending with year 2, then the sales and expenses would have been netted and deducted for AGI.

Question 64

Q

Poole, 45 years old and unmarried, is in the 15% tax bracket. He had adjusted gross income of $20,000. The following information applies to Poole:
Medical expenses
$ 8,000
Standard deduction
4,700
Personal exemption
3,000
Poole wishes to minimize his income tax. What is Poole's total income tax?
	a.	
$3,000
	b.	
$1,350
	c.	
$1,650
	d.	
$1,845

Answer

A

Choice “c” is correct. Poole’s total income tax would be calculated as follows:
Adjusted gross income (AGI)
$ 20,000
Itemized deductions
(6,000)
*
14,000
Personal exemption
(3,000)
Taxable income
$ 11,000
Tax rate
× 0.15
Total income tax
$ 1,650
* Larger of $4,700 standard deduction or $6,000 itemized deduction ($8,000 medical expenses less 10% × $20,000 AGI).
Choice “a” is incorrect. Deduct itemized deductions and the personal exemption from adjusted gross income to arrive at the taxable income.
Choice “d” is incorrect. Deduct $6,000 itemized deductions ($8,000 medical expenses less 10% × $20,000 adjusted gross income) since it is larger than the $4,700 standard deduction.
Choice “b” is incorrect. Deduct $6,000 in itemized deductions, not $8,000. Reduce the $8,000 medical expenses by 10% of the adjusted gross income ($8,000 − $2,000 = $6,000).

Answer 65

A

Choice “b” is correct. A charitable contribution is not allowed for the value of services rendered to a charity.

Answer 66

A

Choice “b” is correct. The calculation starts with the lesser of adjusted basis or decrease in FMV. That is $4,100. This amount is then reduced by $4,000 (10% of AGI) and the $100 per casualty. The result is zero ($4,100 – $4,000 – $100).

Answer 67

A

Choice “b” is correct. Unreimbursed employee business expenses are not a deduction to arrive at adjusted gross income. They are an itemized deduction from adjusted gross income.

Answer 68

A

Choice “c” is correct. The earned income credit is refundable. Eligible taxpayers can get advance payments from their employers because the credit is assured.

Answer 69

A

Choice “d” is correct. The adoption fees would be qualifying expenses for the tax credit (medical expenses do not qualify).

Answer 70

A

Choice “b” is correct. A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. There is a limitation on the amount of the credit an individual can obtain. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction (NOT subject to the 2% floor) instead. Note that the only correct response to this question is choice “b”; however, also note that the other option for treating the taxes paid to the foreign country is not included as an answer option.

Answer 71

A

Choice “c” is correct. The child and dependent care credit is nonrefundable. The only refundable credits are the child tax credit (which is a different credit with a similar name), the earned income credit, withholding taxes, portions of the Hope Scholarship credit, and excess Social Security taxes paid. The child and dependent care credit is a “personal” tax credit.

Answer 72

A

Choice “d” is correct. First of all we need to determine the eligible expenses. Only expenses for Becky will qualify because Matt is not under 13 years of age. So of the $8,000 spent, only $4,000 will qualify. The maximum eligible for 1 dependent, though, is $3,000. Then it is further limited because it is limited to the lowest earned income of either spouse. That would be Mary’s $2,500. Due to their combined income level, they are in the 20% credit range. The credit is 20% of $2,500, or $500.

Answer 73

A

Choice “d” is correct. The Earned Income Credit is refundable. The other credits listed are not refundable.
Note: The Child Tax Credit (not listed) can be refundable in certain circumstances. Do not confuse this with the Child and Dependent Care credit, which is not refundable.

Answer 74

A

Rules: Earned income tax credit is a refundable tax credit. It is designed to encourage low-income workers (i.e., those with earned income) to offset the burden of U.S. tax. A claimant can have one qualifying child or two or more qualifying children for this credit. There is a maximum credit available for this purpose. Further:
The taxpayer must meet certain earned low-income thresholds.
The taxpayer must not have more than the specified amount of disqualified income.
The taxpayer must be over age 25 and less than 65 if there are no qualifying children.
If married, the taxpayer must generally file a joint return with his/her spouse (i.e., the married filing separate status disqualifies a taxpayer from claiming the earned income credit).
A qualifying child can be up to and including age 18 at the end of the tax year, provided the child shared a residence with the taxpayer for 6 months or more.
The taxpayer must be related to the qualifying child (or children) through blood, marriage, or law.
The child must be either in the same generation or a later generation of the taxpayer.
A foster child qualifies if officially placed with the taxpayer by an agency.
Choice “a” is correct. Based on the above rules, the filing status of married filing separately disqualifies a taxpayer from claiming the earned income credit.

Answer 75

A

Choice “c” is correct. The Retirement savings contribution credit is a non-refundable credit. The EIC and child tax credit could result in a refunded amount beyond the actual tax liability, depending upon the taxpayer’s income levels. In addition, if excess social security is paid, the taxpayer can receive a refund of those amounts regardless of the income tax liability being reduced to zero.

Answer 76

A

Choice “a” is correct. An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim the excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.

Answer 77

A

Choice “b” is correct. Mills’ alternative minimum taxable income starts with his taxable income ($70,000). This is increased by state and local taxes paid ($5,000) and miscellaneous deductions that exceed 2% of adjusted gross income ($2,000) for a total of $77,000. The home mortgage interest on a loan to acquire the residence ($6,000) does not increase alternative minimum taxable income.

Answer 78

A

Charitable contributions of appreciated capital gain property are not alternative minimum tax preferences.

Answer 79

A

Choice “d” is correct. Alternative minimum tax (AMT) paid can be claimed as a credit against other years if the tax was paid on items that increased AMT that year but will reverse in later years. The concept is the same as deferred taxes for financial accounting purposes. The credit is carried forward indefinitely.

Answer 80

A

Choice “c” is correct. The alternative minimum tax (AMT) is computed as the excess of tentative AMT over the regular tax.

Answer 81

A

Choice "b" is correct. Robert's itemized deductions for alternative minimum tax purposes are calculated as follows:
Medical expenses (exceeding 10% of AGI)
$ 2,000
State income taxes (not allowed)
−
Real estate taxes (not allowed)
−
Qualified housing and residence interest
10,000
Home equity mortgage interest (not used to buy, build, or improve the home-not allowed)
−
Charitable contributions (no difference)
5,000
Alternative Minimum Itemized deductions
$ 17,000

Answer 82

A

Choice “d” is correct. Both mortgage interest and miscellaneous itemized deductions are deductible for regular (schedule A) tax purposes. However, miscellaneous itemized deductions are “adjustments” and, therefore, are not allowed as deductions for alternative minimum tax (AMT) purposes.

Answer 83

A

Choice “b” is correct. Deductible contributions to individual retirement accounts are not an adjustment or preference in calculating a taxpayer’s alternative minimum taxable income. They are an adjustment in calculating adjusted gross income for regular (not alternative minimum) tax purposes.

Answer 84

A

Choice “c” is correct. Per the mnemonic “PANIC TIMME,” for purposes of calculating alterative minimum taxable income, the taxpayer must add back, among other things, the following itemized deductions:
Taxes reduced by taxable refunds,
Home mortgage interest when the mortgage loan proceeds were not used to buy, build, or improve the taxpayer’s qualified dwelling (house, condominium, apartment, or mobile home not used on a transient basis),
Medical expenses not exceeding 10% of AGI, and
Miscellaneous deductions subject to the 2% of AGI floor.
The “PANIC TIMME” add-back is as follows:
Taxes
$ 18,000
Home mortgage interest not used to buy, build, or improve a qualified dwelling (the motor home is not a qualified dwelling)
15,000
Medical expenses in excess of 7.5% AGI but not in excess of 10% of AGI (7.5% AGI is still used for taxpayers age 65 and over)
3,750
Deductible miscellaneous expenses in excess of 2% of AGI
2,000
Total “PANIC TIMME” add-back
$ 38,750

Answer 85

A

Choice “b” is correct. Alternative minimum tax will add back various deductions to arrive at alternative minimum taxable income. If an item is not added back, then it is allowed to be deducted. Personal exemptions are added back. Therefore, they are not deducted to arrive at alternative minimum taxable income.

Answer 86

A

Choice “a” is correct. Casualty losses are not added back in the alternative minimum tax (AMT) calculation. Therefore, they are allowed as a deduction.

Answer 87

A

Choice “b” is correct. Provided the taxes due after withholdings were not over $1,000, there is no penalty for underpayment of estimated taxes. Note that there would be a failure to pay penalty on the $200 that was not paid until April 30, but this is a separate penalty.

Answer 88

A

Choice “a” is correct. Both.

Answer 89

A

Choice “b” is correct. An individual submits a claim for refund of erroneously paid income taxes on Form 1040X.

Answer 90

A

Choice “d” is correct. When the return is filed early, the latest date the IRS can assess tax is 3 years from the date the return is due (April 15, Year 6 in this case).

Answer 91

A

Choice “b” is correct. In computing the amount of estimated payments due, an individual taxpayer may choose between the annualized method (90% of current year’s tax), or the prior year method (100% of last year’s tax) unless the taxpayer’s adjusted gross income exceeds $150,000 then they must use 110% of last year’s tax. Therefore, the taxpayer in this example can use the annualized method. The seasonal method is not permitted.

Answer 92

A

Choice “b” is correct. Generally, the statute of limitations on assessments is three years from the later of the due date of the return or the date the return was filed (including amended returns). The IRS has up to six years to assess additional tax if the misstatement is an understatement of 25% or more of gross income. In this case, the misstatement is $500 on $20,000 of gross income, or 2.5%. Therefore, the statute of limitations for Martinsen is the general rule. In this case, the due date of the return was April 15, Year 2. Martinson filed on March 31, Year 2. Under the general rule, the IRS has until three years from April 15, Year 2 (or, April 15, Year 5) to assess additional tax.

Answer 93

A

Choice “b” is correct. For a 30% understatement of gross income (anything over 25%), the statute of limitations is 6 years

Answer 94

A

Choice “a” is correct. The requirement is 90% of the current tax on the return for the current year paid in four equal installments or 100% of the prior year’s tax liability paid in four equal installments.

Answer 95

A

Rule: An individual may file an amended tax return (Form 1040X) within three (3) years of the date the original return was filed or within two (2) years of the date the tax was paid, whichever is later. An original return filed early is considered filed on the due date of the return.

Choice “c” is correct. In this question, the return was filed early (April 1), so the return is considered filed as of the due date, on April 15. There is no information on when the tax was paid, but it can be reasonably assumed that the tax was properly paid on April 1 with the return. So the latter of the two dates is three years. The question that arises is “three years from when,” and here the question falls somewhat short.

Three of the answers to this question are worded in terms of “the” calendar year. These answers have to mean the prior calendar year. Three years from April 15 (when the return was considered to be filed) would be three years, three months, and 15 days from the end of the prior calendar year.

Answer 96

A

Choice “c” is correct. To avoid penalties, if a taxpayer owes $1,000 or more in tax payments beyond withholdings, such taxpayer will need to have paid in for taxes the lesser of:
90% of the current year’s tax ($50,000 x 90%) = $45,000, or
100% of the previous year’s tax ($30,000 x 100%) = $30,000
However, if the taxpayer had adjusted gross income in excess of $150,000 in the prior year, 110% of the prior year’s tax liability is used to compute the safe harbor for estimated payments. (Previous year’s tax $30,000 x 110% = $33,000).

Answer 97

A

Choice “c” is correct. There is no statute of limitations for fraud or filing false tax returns.

Answer 98

A

Choice “a” is correct. April 15, 20X5.
Rule: Ordinarily, a tax must be assessed within three years after a return is filed. The assessment period begins from the due date of the return if the return is filed prior to the due date or “filing date” if the return is filed later (e.g., with an extension). The assessment period is extended to six years for returns that omit more than 25% of the gross income that should have been reported. That is not the case here ($20,000 ÷ $120,000 = 16.7%).

Answer 99

A

Choice “a” is correct. Two years from the date the tax was paid.
Rule: A taxpayer may file a claim for refund within three years from the time the return was filed, or two years from the time the tax was paid, whichever is later. Since no return has been filed, the refund claim must be filed within two years from the time the tax was paid.

Answer 100

A

Choice “a” is correct. April 15, Year 8 is the last day for IRS to assert a notice of deficiency before the statute of limitations expires, six years after due date because AGI was underreported by more than 25% (45,000 ÷ 165,000).
Rule: Ordinarily, a tax must be assessed within three years after a return is filed. The assessment period begins from the due date of the return if the return is filed prior to the due date or “filing date” if the return is filed later, e.g., with an extension. The assessment period is extended to six years for returns that omit more than 25% of the gross income that should have been reported.

Answer 101

A

Choice “b” is correct. A taxpayer can file a claim for refund by the later of three years from the time the return was filed, 3 years from the original due date of the return, or two years from the time the tax was paid (if not when the return was filed). Three years from the time the return was filed is February 15, 20X4, 3 years from the original due date of the return is April 15, 20X4, and two years from the time the tax was paid would be December 31, 20X2 (all withholding is deemed paid ratably over the year so the last dollars would be deemed paid December 31, 20X0). The later date is April 15, 20X4.

Answer 102

A

Choice “c” is correct. When a tax return has not been filed, any claim for refund must be made within two years from the time the tax was paid.

Answer 103

A

Choice “c” is correct. The statute of limitation on assessments is the statutory period during which the government can assess an additional tax. The statute of limitations applies to all taxable entities. Absent fraud, a 25 percent understatement of gross income, or agreement from the taxpayer, the statute of limitations is three years from the later of the original due date of the return or the date the return is filed.

Answer 104

A

Choice “d” is correct. Without obtaining verification, a tax preparer may in good faith rely on information furnished by a taxpayer or third parties when preparing a tax return. The tax preparer should, however, make reasonable inquiries if the information appears to be incomplete, incorrect, or inconsistent.

Answer 105

A

Choice “c” is correct. In preparing or signing a return, a CPA may in good faith rely without verification upon information furnished by the client or by third parties.

Answer 106

A

Choice “c” is correct. In determining whether to provide advice in writing, the tax preparer should consider, among other factors, the sophistication of the tax client.

Answer 107

A

Choice “d” is correct. A CPA is entitled to rely on the client’s representations that adequate documentation exists to support the expenses that the client claims. As long as the CPA asks the client whether the client has documentation, the CPA will not be liable for either a penalty or interest because of the client’s misrepresentation.

Answer 108

A

Choice “a” is correct. In general, a preparer should recommend a tax return position only if the preparer has a good faith belief that the position has a realistic possibility of being sustained administratively or judicially on its merits.

Answer 109

A

Choice “d” is correct. When a CPA discovers an error in a previously filed return, the CPA must promptly notify the client of the error.

Answer 110

A

Choice “d” is correct. The CPA should inform the taxpayer of the penalty risks with respect to the tax effects (tax return position) of a transaction unless the transaction, at the minimum, meets the more-likely-than-not standard.

Choices “b”, “a”, and “c” are incorrect.

Reason: “Not frivolous,” “realistic possibility,” and “substantial authority” are lesser standards than the more-likely-than-not standard. So, if the transaction meets only one of these lesser standards, the CPA must inform the taxpayer of the penalty risks with respect to the tax effects (tax return position) of a transaction.

Answer 111

A

Choice “b” is correct. The CPA should notify the client concerning the noncompliance and recommend the proper course of action.

Answer 112

A

Choice “b” is correct. This position passes the realistic probability standard. Given the facts, the position meets the more-likely-than-not standard; that is, a greater than 50% likelihood that the position, if it is challenged, will be upheld on the position’s merits. Therefore, it is proper for the tax preparer to recommend the position to the client. However, the tax preparer is required to inform the client of all possible penalties that the IRS could collect if the IRS disallows the position and, if upon subsequent appeal by the taxpayer the courts conclude that the taxpayer has not met the more-likely-than-not standard.

Answer 113

A

Choice “c” is correct. In general, a tax preparer should only recommend a tax return position if the tax preparer has a good faith belief that the position has a realistic possibility of being sustained administratively or judicially on its merits if challenged. However, if a tax return position does not meet the “realistic possibility standard,” the taxpayer may still take the position and the tax preparer may still prepare and sign the return provided the position is adequately disclosed on the tax return and the position is not frivolous. The tax preparer should advise the client that it might be possible to avoid certain penalties if the tax return position is disclosed on the return. However, a tax preparer may not advise a client to take a position due to the fact that they are unlikely to be audited (playing the audit lottery). Therefore, the return position in “c” cannot be taken since the tax preparer is relying upon the unlikelihood of being audited.

Answer 114

A

Choice “c” is correct. Not all questions on a return are of equal importance. However, Younger must make a reasonable effort to answer all questions because an answer to a question might impact the determination of taxable income or loss and tax liability and the failure to answer a question might result in an incomplete return or a penalty. Reasonable grounds for failure to answer a question are that (1) the answer is not easily obtainable and insignificant, (2) there is uncertainty regarding the meaning of the question, or (3) the answer is voluminous and a statement to that effect is included on the return.

Answer 115

A

Choice “d” is correct. Guess may use estimates provided by Bates if it is not practical for Bates to obtain exact data.

Answer 116

A

Choice “d” is correct. If the determination on the prior return was caused by lack of supporting data, Ivan can take a different position on the current return if he has better supporting data for the new return.

Answer 117

A

Choice “b” is correct. When an AICPA member becomes aware of an error in a previously filed return, he should promptly notify the taxpayer.

Answer 118

A

Choice “c” is correct. According to the IRS’s website under Tax Code, Regulations and Official Guidance, the “federal tax law begins with the Internal Revenue Code (IRC), [which was] enacted by Congress in Title 26 of the United States Code (26 U.S.C.).” The IRC holds the most authoritative value.

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