REG 2 - Calc & Individual Taxation taxes and items

Question 1

Which of the following credits can result in a refund even if the individual had no income tax liability?

a. Credit for prior year minimum tax.
b. Elderly and permanently and totally disabled credit.
c. Earned income credit.
d. Child and dependent care credit.

Answer 1

Earned income credit

Question 2

Mr. and Mrs. Sloan incurred the following expenses during the year when they adopted a child:
Child's medical expenses $ 5,000
Legal expenses  $8,000
Agency fee   $3,000
Without regard to the limitation of the credit, what amount of the above expenses are qualifying expenses for the adoption credit?
	a.	$10,160
	b.	$16,000
	c.	$5,000
	d.	$11,000

Answer 2

$11,000. Because child’s medical expenses are not eligible for the credit. they are an itemized deduction.

Question 3

How may taxes paid by an individual to a foreign country be treated?

a. As a credit against federal income taxes due.
b. As a nondeductible expense.
c. As an itemized deduction subject to the 2% floor.
d. As an adjustment to gross income.

Answer 3

As a credit against federal income taxes due. 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 “a”; however, also note that the other option for treating the taxes paid to the foreign country is not included as an answer option.

Question 4

Which of the following statements about the child and dependent care credit is correct?

a. The child must be a direct descendant of the taxpayer.
b. The credit is nonrefundable.
c. The maximum credit is $600.
d. The child must be under the age of 18 years.

Answer 4

The Credit is nonrefundable. 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.

Question 5

Frank and Mary Wood have 2 children, Becky, age 10, and Matt, age 14. The Woods incur expenses of $4,000 for after school-care for each child. Their only income is from wages. Frank’s wages are $60,000, and Mary’s wages are $2,500. What amount of Child and Dependent Care Credit may the Woods claim on their joint tax return?

a. $1,200
b. $500
c. $1,600
d. $800

Answer 5

$500. 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.

Question 6

Which of the following disqualifies an individual from the earned income credit?

a. The taxpayer's five-year-old child lived in the taxpayer's home for only eight months.
b. The taxpayer has a filing status of married filing separately.
c. The taxpayer's qualifying child is a 17-year-old grandchild.
d. The taxpayer has earned income of $5,000.

Answer 6

The taxpayer has a filing status of married filing separately.
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.

Question 7

Which of the following is not a refundable tax credit?

a. Child tax credit.
b. Retirement savings contribution credit.
c. Excess social security paid.
d. Earned income credit.

Answer 7

Retirement savings contribution credit.

Question 8

An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim:

a. Reimbursement of such excess from his employers, if that excess resulted from correct withholding by two or more employers.
b. Such excess as either a credit or an itemized deduction, at the election of the employee, if that excess resulted from correct withholding by two or more employers.
c. The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.
d. The excess as a credit against income tax, if that excess was withheld by one employer.

Answer 8

The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.

Question 9

Don Mills, a single taxpayer, had $70,000 in taxable income before personal exemptions in the current year. Mills had no tax preferences. His itemized deductions were as follows:
State and local income taxes: $ 5,000
Home mortgage interest on loan to acquire residence: $6,000
Miscellaneous deductions that exceed 2% of adjusted gross income: $2,000
What amount did Mills report as alternative minimum taxable income before the AMT exemption?
a. $75,000
b. $72,000
c. $83,000
d. $77,000

Answer 9

$77,000. 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.

Question 10

Alternative minimum tax preferences include:
Tax exempt interest from private activity bonds
and/ or
Charitable contributions of appreciated capital gain property

Answer 10

Includes Tax Exempt Interest, Note Charitable contributions.
Tax exempt interest from private activity bonds (generally) and accelerated depletion, depreciation, or amortization are alternative minimum tax preference items. Charitable contributions of appreciated capital gain property are not alternative minimum tax preferences.

Question 11

The credit for prior year alternative minimum tax liability may be carried:

a. Forward indefinitely.
b. Back to the 3 preceding years.
c. Forward for a maximum of 5 years.
d. Back to the 3 preceding years or carried forward for a maximum of 5 years.

Answer 11

Forward indefinitely

Question 12

The alternative minimum tax (AMT) is computed as the:

a. Excess of the regular tax over the tentative AMT.
b. Lesser of the tentative AMT or the regular tax.
c. Excess of the tentative AMT over the regular tax.
d. The tentative AMT plus the regular tax.

Answer 12

Excess of the tentative AMT over the regular tax.

Question 13

Robert had current-year adjusted gross income of $100,000 and potential itemized deductions as follows:
Medical expenses (before percentage limitations): $ 12,000
State income taxes: $4,000
Real estate taxes: $3,500
Qualified housing and residence mortgage interest: $10,000
Home equity mortgage interest (used to consolidate personal debts): $4,500
Charitable contributions (cash): $5,000
What are Robert’s itemized deductions for alternative minimum tax?
a. $25,500
b. $21,500
c. $19,500
d. $17,000

Answer 13

$17,000.
Medical expenses over 10% AGI = $2,000
State income taxes - not allowed
Real estate taxes - not allowed
qualified housing interest = $10,000
Home equity mortgage interest (not used to buy, build, or improve) - $0
Charitable contributions (no difference) = $5,000

Question 14

Farr, an unmarried taxpayer, had $70,000 of adjusted gross income and the following deductions for regular income tax purposes:
Home mortgage interest on a loan to acquire a principal residence $ 11,000
Miscellaneous itemized deductions above the threshold limitation 2,000
What are Farr’s total allowable itemized deductions for computing alternative minimum taxable income?
a. $2,000
b. $13,000
c. $11,000
d. $0

Answer 14

$11,000. 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.

Question 15

Which of the following is not an adjustment or preference to arrive at alternative minimum taxable income?

a. Passive activity losses.
b. Deductible medical expenses.
c. Individual taxpayer net operating losses.
d. Deductible contributions to individual retirement accounts.

Answer 15

Deductible contributions to individual retirement accounts.

Question 16

On their joint tax return, Sam and Joann, who are both over age 65, had adjusted gross income (AGI) of $150,000 and claimed the following itemized deductions:
Interest of $15,000 on a $100,000 home equity loan to purchase a motor home
Real estate tax and state income taxes of $18,000
Unreimbursed medical expenses of $15,000 (prior to AGI limitation)
Miscellaneous itemized deductions of $5,000 (prior to AGI limitation)
Based on these deductions, what would be the amount of AMT add-back adjustment in computing alternative minimum taxable income?
a. $35,000
b. $38,750
c. $23,750
d. $21,750

Answer 16

$38,750. 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 $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

Question 17

Which of the following may not be deducted in the computation of alternative minimum taxable income of an individual?

a. One-half of the self-employment tax deduction.
b. Traditional IRA account contribution.
c. Personal exemptions.
d. Charitable contributions.

Answer 17

Personal Exemptions.
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.

Question 18

When computing alternative minimum tax, the individual taxpayer may take a deduction for which of the following items?

a. State income taxes.
b. Casualty losses.
c. Miscellaneous itemized deductions in excess of 2% of adjusted gross income floor.
d. Personal and dependency exemptions.

Answer 18

Casualty Losses.
Casualty losses are not added back in the alternative minimum tax (AMT) calculation. Therefore, they are allowed as a deduction.

Question 19

Krete, an unmarried taxpayer with income exclusively from wages, filed her initial income tax return for Year 8. By December 31, Year 8, Krete’s employer had withheld $16,000 in federal income taxes and Krete had made no estimated tax payments. On April 15, Year 9, Krete timely filed an extension request to file her individual tax return and paid $300 of additional taxes. Krete’s Year 8 income tax liability was $16,500 when she timely filed her return on April 30, Year 9, and paid the remaining income tax liability balance.
What amount would be subject to the penalty for the underpayment of estimated taxes?
a. $0
b. $200
c. $16,500
d. $500

Answer 19

a. $0. 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.

Question 20

Chris Baker’s adjusted gross income on her current year tax return was $160,000. The amount covered a 12-month period. For the next tax year, Baker may avoid the penalty for the underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of:

I. 90% of the tax on the return for the current year paid in four equal installments.
II. 110% of prior year’s tax liability paid in four equal installments.
a. II only.
b. Neither I nor II.
c. Both I and II.
d. I only.

Answer 20

both I and II.

Question 21

A claim for refund of erroneously paid income taxes, filed by an individual before the statute of limitations expires, must be submitted on Form:

a. 843
b. 1139
c. 1040X
d. 1045

Answer 21

c. 1040X

Question 22

A calendar-year taxpayer files an individual tax return for Year 2 on March 20, Year 3. The taxpayer neither committed fraud nor omitted amounts in excess of 25% of gross income on the tax return. What is the latest date that the Internal Revenue Service can assess tax and assert a notice of deficiency?

a. April 15, Year 6.
b. March 20, Year 6.
c. March 20, Year 5.
d. April 15, Year 5.

Answer 22

a. April 15, Year 6
Choice “a” 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).

Question 23

A CPA's adjusted gross income (AGI) for the preceding 12-month tax year exceeds $150,000. Which of the following methods is (are) available to the CPA to compute the required annual payment of estimated tax for the current year in order to make timely estimated tax payments and avoid the underpayment of estimated tax penalty?
I. The annualization method.
II. The seasonal method.
	a.	II only.
	b.	I only.
	c.	Neither I nor II.
	d.	Both I and II.

Answer 23

Choice “b” the annualization method only. 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.

Question 24

Martinsen, a calendar-year individual, files a year 1 tax return on March 31, Year 2. Martinsen reports $20,000 of gross income. Martinsen inadvertently omits $500 interest income. The IRS may assess additional tax up until which of the following dates?

a. April 15, Year 5.
b. March 31, Year 8.
c. March 31, Year 5.
d. April 15, Year 8.

Answer 24

a. April 15, Year 5. 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 originally reported. 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.

Question 25

Martin filed a timely return on April 15. Martin inadvertently omitted income that amounted to 30% of his gross income stated on the return. The statute of limitations for Martin’s return would end after how many years?

a. 7 years.
b. 6 years.
c. 3 years.
d. Unlimited.

Answer 25

b. 6 years

Question 26

Dawn White’s adjusted gross income on her Year 1 tax return was $100,000. The amount covered a 12-month period. For the Year 2 tax year, the minimum payments required from White to avoid the penalty for the underpayment of estimated tax is:

a. 100% of the prior year's tax liability paid in four equal installments only.
b. 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.
c. 90% of the current tax on the return for the current year paid in four equal installments or 110% of the prior year's tax liability paid in four equal installments.
d. 110% of the prior year's tax liability paid in four equal installments only.

Answer 26

b. 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.

Question 27

A calendar-year individual filed an income tax return on April 1. This return can be amended no later than:

a. Three years, three months, and 15 days after the end of the calendar year.
b. Ten months and 15 days after the end of the calendar year.
c. Three years after the return was filed.
d. Four months and 15 days after the end of the calendar year.

Answer 27

a. Three years, three months, and 15 days after the end of the calendar year.

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.

Question 28

Sam’s year 2 taxable income was $175,000 with a corresponding tax liability of $30,000. For year 3, Sam expects taxable income of $250,000 and a tax liability of $50,000. In order to avoid a penalty for underpayment of estimated tax, what is the minimum amount of year 3 estimated tax payments that Sam can make?

a. $50,000
b. $30,000
c. $33,000
d. $45,000

Answer 28

c. $33,000. 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).

Question 29

An individual taxpayer agreed to a finding of fraud on an income tax return filed two years ago. What is the maximum time limitation, if any, after which the IRS may not assess any additional taxes against the taxpayer for this tax return?

a. One year.
b. Three years.
c. There is no time limitation.
d. Two years.

Answer 29

c. there is no time limitation.

Question 30

Keen, a calendar-year taxpayer, reported a gross income of $100,000 on his 20X1 income tax return. Inadvertently omitted from gross income was a $20,000 commission that should have been included in 20X1. Keen filed his 20X1 return on March 15, 20X2. To collect the tax on the $20,000 omission, the Internal Revenue Service must assert a notice of deficiency no later than:

a. March 15, 20X5.
b. March 15, 20X8.
c. April 15, 20X8.
d. April 15, 20X5.

Answer 30

d. 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 originally reported. That is not the case here ($20,000 ÷ $100,000 = 20%).

Question 31

If an individual paid income tax in the current year but did not file a current year return because his income was insufficient to require the filing of a return, the deadline for filing a refund claim is:

a. Three years from the date a return would have been due.
b. Two years from the date the tax was paid.
c. Two years from the date a return would have been due.
d. Three years from the date the tax was paid.

Answer 31

b. 2 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.

Question 32

On April 15, Year 2, a married couple filed their joint Year 1 calendar-year return showing gross income of $120,000. Their return had been prepared by a professional tax preparer who mistakenly omitted $45,000 of income, which the preparer in good faith considered to be nontaxable. No information with regard to this omitted income was disclosed on the return or attached statements. By what date must the lnternal Revenue Service assert a notice of deficiency before the statute of limitations expires?

a. December 31, Year 4.
b. April 15, Year 5.
c. April 15, Year 8.
d. December 31, Year 7.

Answer 32

c. April 15, Year 8.
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 gross income was underreported by more than 25% (45,000 ÷ 120,000).
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 originally reported.

Question 33

Ms. Marsh filed her 20X0 individual income tax return on February 15, 20X1. All her tax was paid during the year through withholding. The return was due on April 15, 20X1. During January 20X2, she discovered that she had not taken a properly substantiated charitable contribution that would have reduced her total tax by $250 on her 20X0 tax return. By what date must she file her amended return to claim a refund of the tax paid?

a. December 31, 20X2.
b. December 31, 20X3.
c. April 15, 20X4.
d. February 15, 20X4.

Answer 33

April 15, 20X4. 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.

Question 34

An individual paid taxes 27 months ago, but did not file a tax return for that year. Now the individual wants to file a claim for refund of federal income taxes that were paid at that time. The individual must file the claim for refund within which of the following time periods after those taxes were paid?

a. Four years.
b. One year.
c. Two years.
d. Three years.

Answer 34

c. 2 years

Question 35

A taxpayer has had one issue under audit by the Internal Revenue Service for several years. Unless the taxpayer agrees otherwise, the IRS has at most how many years to assess taxes after the taxpayer’s return was filed?

a. Five.
b. Seven.
c. Three.
d. Four.

Answer 35

c. 3 years