REG Mini Exam 1 Flashcards
MCQ-09970
Troy and Edie are married and under 65 years of age. During the current year, they furnish
more than half of the support of their 20-year old daughter, Jobeth, who lives with them.
Jobeth earns $15,000 from a part-time job, most of which she sets aside for future college
expenses. Troy and Edie also provide more than half of the support of Troy’s cousin who
does not live with them. Edie’s father is 80 years old and fully supported by Troy and Edie.
He lives in an apartment down the street from Troy and Edie. How many individuals meet
the definition of dependent for Troy and Edie?
1. Three
2. Zero
3. One
4. Two
Choice “3” is correct. One individual qualifies as a dependent: Edie’s father. An individual is a dependent of a taxpayer if he/she meets either the qualifying child or relatives rules. Jobeth does not meet either qualifying child or qualifying relative criteria. She fails the age requirement of qualifying child because she is over the age of 19 and not a full-time student. Her income is too high for the qualifying relative rules. Troy’s cousin does not meet the relationship test for either qualifying child or relative. Edie’s father meets the criteria for qualifying relative. A dependent parent is not required to live with the taxpayer to be deemed a dependent.
MCQ-10033 During the current year, Freda was entirely supported by her three children, Michelle, Brian, and John, who provided support in the following percentages: Michelle 10% Brian 48% John 42% Which of the children is entitled to claim their mother as a dependent, assuming a multiple support agreement exists? 1. Michelle. 2. Michelle or John. 3. Michelle, Brian, or John. 4. Brian or John.
Choice “4” is correct. In a multiple support agreement, all must be qualifying relatives who together contribute more than 50% of the support of the dependent. In addition, a contributor must have provided more than 10% of the individual’s support to claim the individual as a dependent.
Choice “1” is incorrect. Michelle must contribute more than 10%. This answer also does not take into account Brian or John, both of whom are qualifying relatives and are able to take the dependency exemption.
Choice “2” is incorrect. Michelle is not able to take the exemption and Brian is able to take the exemption.
Choice “3” is incorrect. Michelle is not able to take the exemption as she did not contribute more than 10% of Freda’s support.
MCQ-09974
Roger, age 19, is a full-time student at State College and a candidate for a bachelor’s
degree. During the year, he received the following payments:
State scholarship for ten months (tuition and books) $3,600
Loan from college financial aid office 1,500
Cash support from parents 3,000
Cash dividends 700
Cash prize awarded in a contest 500
Total: $9,300
What is Roger’s adjusted gross income for the year?
1. $4,800
2. $700
3. $1,200
4. $9,300
Choice “3” is correct.
Dividends
700
Prizes
500
Taxable AGI
1,200
Choice “1” is incorrect. The $3,600 state scholarship for tuition and book is excludable from income because Roger is a candidate for a degree and the expenses were used to pay for tuition and books only.
Choice “2” is incorrect. In addition to cash dividends received, the $500 cash prize awarded in a contest is also taxable.
Choice “4” is incorrect. Scholarships for tuition and books to a degree-seeking student and loans are not taxable income. The $3,000 support from parents is also not income.
MCQ-03205
Kurstie received a $800 state income tax refund this year. Kurstie deducted $3,000 of state income taxes paid in the prior year as part of her itemized deductions. Which of the following statements regarding the taxability of Kurstie’s refund is true?
1. If Kurstie’s itemized deductions exceeded the standard deduction by $200, then $200 of the refund is included in gross income.
2. If Kurstie’s itemized deductions exceeded the standard deduction by $200, then the $800 refund is included in gross income.
3. Kurstie must include $3,000 in gross income in the current year.
4. If Kurstie claimed the standard deduction instead, then the $800 refund is taxable
Choice “1” is correct. Kurstie’s refund is includable in gross income only to the extent that the original deduction provided a tax benefit. If Kurstie’s itemized deductions last year exceeded the standard deduction by $200, then the state income taxes deducted created a tax benefit of $200. Therefore, $200 of the state income tax refund received in the current year is taxable.
Choice “2” is incorrect. Kurstie’s refund is includable in gross income only to the extent that the original deduction provided a tax benefit. If Kurstie’s itemized deductions last year exceeded the standard deduction by $200, then the state income taxes deducted created a tax benefit of $200. Therefore, $200 of the state income tax refund received in the current year is taxable, not $800.
Choice “3” is incorrect. The most Kurstie would include in gross income in this case would be the $800 refund. She did not receive $3,000.
Choice “4” is incorrect. Kurstie’s refund is includable in gross income only to the extent that the original deduction provided a tax benefit. If Kurstie claimed the standard deduction in the prior year, then she did not receive a tax benefit from deducting the state income tax. Therefore, the state tax refund received in the current year is not taxable.
MCQ-09973
Red, Inc. provides group term life insurance to the employees of the corporation. Susan, a
manager, received $200,000 of coverage for the year at a cost to Red, Inc. of $2,800. The Uniform Premiums (based on Susan’s age) are $9 a year for $1,000 protection. How much
of the premiums must Susan include in gross income this year?
1. $0
2. $1,800
3. $2,800
4. $1,350
Choice “4” is correct. Premiums for coverage in excess of $50,000 of coverage are taxable to the employee.
Total coverage
200,000
Maximum nontaxable coverage
(50,000)
Excess taxable
150,000
Units
÷ 1,000
Taxable units
150
Taxable cost per unit
× 9
Taxable benefit
1,350
Choice “1” is incorrect. Only the premiums on $50,000 of coverage are nontaxable to the employee.
Choice “2” is incorrect. Only the premiums on the coverage in excess of $50,000 are taxable.
Choice “3” is incorrect. Premiums on the first $50,000 of coverage are nontaxable to the employee, so the entire premium of $2,800 could not be the correct answer.
MCQ-09977 Angela, a real estate broker, had the following income and expenses in her schedule C business: Commissions income $100,000 Expenses: Commissions paid to non-brokers for referrals (illegal under state law and subject to criminal penalties) 20,000 Commissions paid to other real estate brokers for referrals (not illegal under state law) 10,000 Travel and transportation 12,000 Supplies 4,000 Office and phone 5,000 Parking tickets 500 How much net income must Angela report from this business? 1. $49,000 2. $79,000 3. $69,000 4. $48,500
Choice “3” is correct.
Commission income
100,000
Less:
Legal commissions
10,000
Travel
12,000
Supplies
4,000
Office and phone
5,000
Total expenses
(31,000)
Net income
69,000
Choice “1” is incorrect. Illegal payments ($20,000) are not deductible expenses on Schedule C.
Choice “2” is incorrect. Legal commissions are deductible on Schedule C.
Choice “4” is incorrect. Illegal payments ($20,000) and fines and penalties ($500) are not deductible expenses on Schedule C.
MCQ-10575
Don Wolf became a general partner in Gata Associates on January 1 of the current year, with a 5% interest in Gata’s profits, losses, and capital. Gata is a distributor of auto parts. Wolf does not materially participate in the partnership business. For the current year ended
December 31, Gata had an operating loss of $100,000. In addition, Gata earned interest of $20,000 on a temporary investment. Gata has kept the principal temporarily invested while
awaiting delivery of equipment that is presently on order. The principal will be used to pay for this equipment. Wolf’s passive loss for the current year is:
1. $6,000
2. $4,000
3. $0
4. $5,000
Choice “4” is correct. Wolf’s passive loss for the current year is $5,000 ($100,000 operating loss × 5% interest in partnership).
Choice “1” is incorrect. No items of income or deduction from portfolio income or activities in which the taxpayer materially participates may be combined or offset with passive losses unless the activity generating the loss is completely disposed of in a taxable transaction.
Choice “2” is incorrect. Wolf’s passive loss of $5,000 could not be reduced by his distributive share of the partnership’s “interest income” totaling $1,000. Interest income is considered “portfolio income,” and neither the partnership nor a partner can offset it against passive losses.
Choice “3” is incorrect. Wolf did not materially participate in the partnership, so the loss was passive.
MCQ-10514
Gena, an unmarried individual, had an adjusted gross income of $125,000 in the current year before any IRA deduction, taxable social security benefits, or passive activity losses. Gena incurred a loss of $30,000 in the current year from rental real estate in which she actively participated. What amount of loss attributable to this rental real estate can be used
in the current year as an offset against her income from non-passive sources?
1. $15,000
2. $12,500
3. $25,000
4. $0
Choice “2” is correct. Gena may use $12,500 of the loss attributable to her rental real estate activities as an offset to her income from non-passive sources in the current year.
RULE: Rental real estate activities are passive activities, and losses from them are generally not allowed to be used as an offset against income from any non-passive activities. However, there is a limited exception to this general rule in the case where a taxpayer actively participates in rental real estate. Under this exception, up to $25,000 of passive losses may be used to offset income from non-passive sources. This $25,000 allowance is reduced (not below zero) by an amount equal to 50% of the amount by which the taxpayer’s modified AGI exceeds $100,000 (becoming fully phased-out at modified AGI of $150,000). In this case, modified AGI of $125,000 is $25,000 higher than the $100,000 floor. The allowance of the $25,000 exception (which would apply in Gena’s case) is reduced by 50% of the difference (or $12,500). Therefore, the amount allowable to be used to offset against non-passive sources is $12,500. Note that MFS filers are not allowed any loss deduction amount unless they lived apart the entire year. If MFS filers do live apart for the entire year, they each can claim a maximum deduction of $12,500 before the phase-out, which begins when MAGI exceeds $50,000.
Choice “1” is incorrect. This answer represents 50% of the loss from rental real estate activities, which is not the proper calculation.
Choice “3” is incorrect. This is the entire loss from rental real estate activities, which is limited based upon Gena’s modified AGI.
Choice “4” is incorrect. Gena actively participates in the rental real estate activity and her modified AGI does not exceed $150,000, therefore, she is entitled to a deduction.
MCQ-10015
Which of the following legal expenses are deductible in arriving at an individual’s AGI?
1. Ordinary and necessary expenses incurred for tax advice relative to the preparation of
an individual’s income tax return.
2. Ordinary and necessary expenses incurred for estate planning advice.
3. Ordinary and necessary expenses incurred in defense of a traffic ticket.
4. Ordinary and necessary expenses incurred in connection with a trade or business.
Choice “4” is correct. Trade or business expenses are deductible on Schedule C (for AGI), where the number is transferred to Form 1040 and is part of adjusted gross income.
Choices “3”, “1”, and “2” are incorrect. These are not deductible expenses.
MCQ-12135
Mr. Jones made a contribution to his self-employed retirement plan (SEP IRA plan). This
contribution is:
1. A deduction from adjusted gross income, subject to a 2 percent AGI floor.
2. Not deductible.
3. A deduction from adjusted gross income.
4. A deduction to arrive at adjusted gross income
Choice “4” is correct. Amounts contributed to self-employed retirement plans are permitted as adjustments (for AGI).
Choices “3”, “1”, or “2” are incorrect, per the above explanation.
MCQ-10564
For the current tax year, Tom and Karen, married taxpayers filing a joint tax return, qualified to itemize deductions. Their adjusted gross income was $90,000. Karen gave $1,000 for
Christmas gifts directly to a needy family identified by her co-workers. Tom had $1,500 withheld from his payroll checks throughout the year to benefit the Children’s Make-a-Wish
Foundation. In addition, Tom and Karen donated to their church a piece of artwork valued at $2,000 that they purchased for $500 when they were married 10 years ago. There were no
other contributions made throughout the year. Considering only to the information contained
here, on their current year income tax return, Tom and Karen will claim:
1. A charitable deduction of $3,500 and a capital gain of $0.
2. A charitable deduction of $3,000 and a capital gain of $1,500.
3. A charitable deduction of $4,500 and a capital gain of $0.
4. A charitable deduction of $3,500 and a capital gain of $1,500
Choice “1” is correct. Considering only to the information contained here, on their current year income tax return, Tom and Karen will claim a charitable deduction of $3,500 [$1,500 from Tom’s payroll deductions plus $2,000 for the painting] and capital gain of $0. Because the painting [a capital asset] was held over one year before being contributed, it qualified to be deducted at the higher FMV without capital gains being recognized on the difference between the FMV and tax basis. Although the 30% rule applies to such contributions, this case is below the threshold (i.e., 30% of $90,000 AGI equals $27,000, which would be the upper limit for deducting at the higher FMV). Deductions made directly to needy families that are not listed by the IRS as qualified organizations are not allowable itemized deductions and would be deemed a gift (and follow the gift tax rules).
Choice “2” is incorrect. This choice assumes one of two scenarios. In either case, the proper amounts of charitable contributions do not exist. In the first case [$1,000 + $1,500 + $500 = $3,000], the $1,000 given to a needy family is not deductible, and the painting is deductible at the higher FMV, not the lower purchase price. In the second case [$1,000 + $2,000 = $3,000], the $1,000 given to a needy family is not deductible, and the amount given to Make-a-Wish is not included when it should be. Further, recognized capital gain on the donation of the painting is zero.
Choice “3” is incorrect. The $1,000 given to the needy family is not an allowable charitable deduction.
Choice “4” is incorrect. Capital gain is not recognized in this case.
MCQ-10626
Susan paid $1,500 of interest on credit card charges. The charges were for items purchased for personal use. The interest is:
1. A deduction from adjusted gross income.
2. Not deductible.
3. A deduction to arrive at adjusted gross income.
4. A tax credit.
Choice “2” is correct. Consumer interest is not deductible.
Choices “3”, “1”, or “4” are incorrect. Personal (consumer) interest is not deductible.
MCQ-14760 Ken's adjusted gross income for 2019 is $60,000. He contributed $52,000 in cash to a public charity. What is Ken's charitable contribution deduction for 2019? 1. $60,000 2. $52,000 3. $36,000 4. $31,200
Choice “3” is correct. In 2019, cash donated to a public charity is limited to 60% of an individual’s adjusted gross income. ($60,000 × 60% = $36,000). The AGI limit on cash contributions to public charities is temporarily increased to 100% for 2021.
Choice “1” is incorrect. The limitation on charitable contributions is 60% of AGI, not AGI itself. In addition, the contribution deduction cannot exceed the actual amounts contributed to qualified charities, unless the taxpayer has a carryover. The total deduction, whether current year contribution or carryover, is limited to 60% of AGI.
Choice “2” is incorrect. $52,000 is the amount of cash contributed. The deduction for charitable contributions is limited to 60% of Ken’s AGI and is not deductible in full.
Choice “4” is incorrect. $31,200 is 60% of the contribution, not of Ken’s AGI.
MCQ-10515
An employee who has had social security tax withheld in an amount greater than the maximum for a particular year may claim:
1. An itemized deduction for the excess or a credit against income tax, if the excess resulted from correct withholding by two or more employers.
2. Reimbursement of such excess from his employer, if the excess resulted from correct withholding by two or more employers.
3. The excess as a credit against income tax, if that excess was correctly withheld by two
or more employers.
4. The excess as a credit against income tax, provided the excess was over-withheld by
one employer.
Choice “3” 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 was correctly withheld by two or more employers.
Choices “4”, “2”, and “1” are incorrect, based on the above rule.
MCQ-15045
Which of the following tax credits may result in a refund even if the taxpayer had no income tax liability?
1. Elderly and permanently disabled credit.
2. Adoption credit.
3. Child tax credit.
4. Retirement savings contribution credit.
Choice “3” is correct. The child tax credit may result in a refund even if the taxpayer has no income tax liability.
Choices “2”, “4”, and “1” are incorrect. These allowable credits are personal tax credits that are not deemed “refundable” credits, which means that they can reduce the total tax liability to zero, but may not result in a cash refund in excess of the liability.
