REG R1 Flagged Questions #10 Flashcards
MCQ-01811
Cobb, an unmarried individual, had an adjusted gross income of $200,000 in the current year before any IRA deduction, taxable Social Security benefits, or passive activity losses. Cobb incurred a loss of $30,000 in the current year from rental real estate in which he actively participated. What amount of loss attributable to this rental real estate can be used
in the current year as an offset against income from nonpassive sources?
1. $0
2. $30,000
3. $25,000
4. $12,500
Choice “1” is correct. Cobb may not use any of the loss attributable to his rental real estate as an offset against income from nonpassive sources in the current year because he does not qualify for the “Mom and Pop” exception. Under this exception, up to $25,000 of passive losses and the deduction equivalent of tax credits that are attributable to rental real estate may be used as an offset against income from nonpassive sources. This $25,000 allowance is reduced, but not below zero, by 50% of the amount by which the individual’s modified AGI exceeds $100,000. The $25,000 is therefore completely phased out when modified AGI reaches $150,000. Because Cobb’s AGI was $200,000, he did not qualify for the exception.
Choices “4”, “3”, and “2” are incorrect. Rental activities are passive activities and generally are not allowed to use any of the loss attributable to the rental activity to offset any income produced from nonpassive sources. There is a limited exception in the case of losses from rental real estate in which the taxpayer actively participates, but Cobb did not qualify for it.
MCQ-14622
Jim and Kay Ross contributed to the support of their two children, Dale and Kim, and Jim’s widowed parent, Grant. For Year 27, Dale, a 19-year-old full-time college student, earned $4,500 as a babysitter. Kim, a 23-year-old bank teller, earned $12,000. Grant received
$5,000 in dividend income and $4,000 in nontaxable Social Security benefits. Grant and Kim are U.S. citizens and were over one-half supported by Jim and Kay, but neither of the two currently reside with Jim and Kay. Dale’s main place of residence is with Jim and Kay, and he is currently on a temporary absence to attend school. How many people meet the
definition of either qualifying child or qualifying relative on the Year 27 joint income tax
return for Jim and Kay Ross?
1. Zero
2. One
3. Three
4. Two
Choice “2” is correct. Only one person meets the criteria for either qualifying child or relative for the Rosses. Dale meets the definition of qualifying child. He meets all criteria of CARES. He is under the age limit because he is a full-time student under the age of 24. All other CARES tests are met. Kim does not meet the age test for qualifying child. She also does not meet the qualifying relative criteria because her taxable gross income of $12,000 exceeds the gross income limit under SUPORT. Because Grant is Jim’s parent, Grant does not have to live with the Rosses to be a qualifying relative. However, Grant’s taxable gross income of $5,000 exceeds the gross income limit, so he is not a qualifying relative. Note that Grant’s nontaxable Social Security benefits are not included in gross income for purposes of the qualifying relative gross income test.
Choice “1” is incorrect. Dale meets the CARES criteria for qualifying child for Jim and Kay Ross.
Choice “3” is incorrect. Only Dale meets the definition of either qualifying child or qualifying relative for Jim and Kay Ross. Kim does not meet the the age test for qualifying child or the gross income test for qualifying relative. Grant also does not meet the gross income test for qualifying relative.
Choice “4” is incorrect. Kim fails the age test for qualifying child (CARES) and the gross income test
for qualifying relative (SUPORT). Grant also fails the gross income test for qualifying relative (SUPORT).
MCQ-12540
During a major sports event, a taxpayer rented his primary residence to spectators for 10
days. The taxpayer’s rental income and expenses were as follows:
Rental income $10,000
Prorated mortgage interest and taxes 1,000
Advertising 500
Commissions 1,000
How much net rental income must the taxpayer report on his income tax return?
1. $0
2. $7,500
3. $8,500
4. $10,000
Choice “1” is correct. The taxpayer rented his primary residence for less than 15 days during the year, so he is not required to include the rental income on his income tax return, nor is he allowed to deduct the commissions and advertising expenses related to the rental activity. He is still allowed to deduct the mortgage interest and real estate taxes as itemized deductions.
Choice “2” is incorrect. The net income from rental of the taxpayer’s residence, including a prorated portion of mortgage interest and real estate taxes, is $7,500. However, the taxpayer is not required to include the rental income on his income tax return because he rented his residence for less than 15 days during the year.
Choice “3” is incorrect. The net income from rental of the taxpayer’s residence, excluding the prorated portion of mortgage interest and real estate taxes, is $8,500. However, the taxpayer is not required to include the rental income on his income tax return because he rented his residence for less than 15 days during the year.
Choice “4” is incorrect. The taxpayer is not required to include the $10,000 of rental income on his income tax return because he rented his residence for less than 15 days during the year.
MCQ-14699 Calculate the taxpayer's qualified business income deduction for a specified service trade or business: Filing status: Single Taxable income: $300,000 Net capital gains: $0 Qualified business income (QBI): $50,000 W-2 wages: $10,000 1. $0 2. $60,000 3. $5,000 4. $15,000
Choice “1” is correct. A taxpayer with taxable income before the QBI deduction of $214,900 or more (2021) is not eligible for the QBI deduction on income from a specified service trade or business (SSTB).
Choice “2” is incorrect. This amount is 20% of taxable income: $300,000 × 20% = $60,000. A taxpayer with taxable income before the QBI deduction of $214,900 or more (2021) is not eligible for the QBI deduction on income from a specified service trade or business (SSTB).
Choice “3” is incorrect. This amount is 50% of the W-2 wages: $10,000 × 50% = $5,000. A taxpayer with taxable income before the QBI deduction of $214,900 or more (2021) is not eligible for the QBI deduction on income from a specified service trade or business (SSTB). The W-2 wage limitation does not apply.
Choice “4” is incorrect. A taxpayer with taxable income before the QBI deduction of $214,900 or more (2021) is not eligible for the QBI deduction on income from a specified service trade or business (SSTB).
MCQ-08788
What is the basic deduction calculation for the qualifying business income deduction?
1. 20% × W-2 wages
2. 20% × Qualifying business income (QBI)
3. 30% × W-2 wages
4. 30% × Qualifying business income (QBI)
Choice “2” is correct. The basic calculation for the QBI deduction is 20% × QBI. The deduction is subject to limitations.
Choice “1” is incorrect. The basic calculation for the QBI deduction is 20% × QBI.
Choice “3” is incorrect. The basic calculation for the QBI deduction is 20% × QBI.
Choice “4” is incorrect. The basic calculation for the QBI deduction is 20% × QBI.
MCQ-14930
Which of the following taxpayers would not qualify for the filing status of head of
household?
1. A single taxpayer who provides one-half of the support for a dependent child who has lived almost the entire year at a U.S. university while pursuing an undergraduate degree.
2. A married taxpayer with a dependent child in the household who has lived apart from the taxpayer’s spouse for the entire year due to abandonment.
3. A single taxpayer who provides over one-half of the support for a dependent parent in a nursing home but does not have a qualifying child in the household.
4. A single taxpayer whose spouse died in the preceding tax year and who has a dependent child living in the household.
Choice “4” is correct. A taxpayer qualifies for surviving spouse, or qualifying widow(er), filing status for the two years following the year the taxpayer’s spouse dies if the taxpayer maintains a household where a dependent child lives for the entire year.
Choice “1” is incorrect. A single taxpayer who maintains a home that is the principal residence for a dependent child qualifies for head-of-household filing status. A full-time student under age 24 who does not provide more than half of his or her own support is a qualifying dependent child. A college student living at a university is considered temporarily away from home. The parent’s home is considered the child’s principal residence.
Choice “2” is incorrect. A married taxpayer who has lived apart from his or her spouse for the last six months of the year and maintains a household where a dependent child lives for more than half the year qualifies for head-of-household filing status.
Choice “3” is incorrect. A single taxpayer who provides more than one-half of the support for a qualifying relative and maintains a home that is the principal residence of the qualifying relative qualifies for head-of-household filing status. A dependent parent is not required to live with the taxpayer, provided the taxpayer contributes more than half the cost of maintaining a home that is the principal residence of the parent for the entire year.
MCQ-07173
An individual taxpayer reports the following items for the current year:
Ordinary income from partnership A, operating a movie theater in which the
taxpayer materially participates
Net loss from partnership B, operating an equipment rental business in which
the taxpayer does not materially participates $70,000
(9,000)
Rental income from building rented to a third party 7,000
Short-term capital gain from sale of stock 4,000
What is the taxpayer’s adjusted gross income for the year?
1. $77,000
2. $74,000
3. $72,000
4. $70,000
Choice “2” is correct. Except in the year in which an individual, estate, trust, or closely-held C corporation disposes of an entire interest in a passive activity investment, such taxpayers cannot deduct passive activity expenses and losses against income and gain attributable to non-passive activities. A passive activity is (i) any activity in which such taxpayers do not materially participate and (ii) as a general rule, such taxpayers’ rental real estate investments, regardless of the extent of such taxpayers’ involvement with the rental real estate operations. A limited exception (the “Mom and Pop Exception”) regarding rental real estate activities is available to individuals, but the facts of this question do not provide any information which would entitle the taxpayer to the benefits of this exception.
Hence, the taxpayer can deduct, against the profit from the taxpayer’s $7,000 passive activity rental income from the building rented to a third party, only $7,000 of the $9,000 net loss from partnership B which is operating an equipment rental business in which the taxpayer does not materially participate.
Computation of adjusted gross income for the year:
Ordinary income from partnership A, operating a movie theater in which the taxpayer materially participates
70,000
Rental income from building rented to a third party (a passive activity)
7,000
Net loss from partnership B, operating an equipment rental business in which the taxpayer does not materially participate
(per the above rule the taxpayer can deduct only $7,000 of the $9,000 passive activity loss)
(7,000)
Short-term capital gain from sale of stock (fully taxable)
4,000
Adjusted gross income for the year
74,000
Choices “4”, “3”, and “1” are incorrect per the above rule and per the above computations.
MCQ-14635
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 6,000 at a rate of 60 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?
1. $1,200
2. $4,800
3. $0
4. $3,600
Choice “2” 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).
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.
Choices “3”, “1”, and “4” are incorrect, per the above explanation.
MCQ-08191
Randolph is a single individual who always claims the standard deduction. Randolph
received the following in the current year:
Wages $22,000
Unemployment compensation 6,000
Pension distribution (100% taxable) 4,000
A state tax refund from the previous year 425
What is Randolph’s gross income?
$32,425
$28,425
$32,000
$22,000
Choice “3” is correct. Each item listed here is included in gross income except for the state tax refund from a prior year. The taxpayer always claims the standard deduction. This means that the state tax was not deducted in the year it was paid. Under the tax benefit rule, the refund of that tax is not taxable.
Wages
22,000
Unemployment compensation
6,000
Pension distribution (100% taxable)
4,000
Total
32,000
Choices “4”, “2”, and “1” are incorrect per the above rule and per the above computation.
MCQ-14628
In the current year Jensen had the following items:
Salary $50,000
Inheritance 25,000
Alimony from ex-spouse (divorce agreement finalized in 2015) 12,000
Child support from ex-spouse 9,000
Capital loss on investment stock sale (6,000)
What is Jensen’s adjusted gross income (AGI) for the current year?
$84,000
$62,000
$59,000
$44,000
Choice “3” is correct. The question asks for AGI, but all of the items in the list are items of potential gross income. There are no adjustments included in the list; therefore, in this case, AGI is the same as gross income. The calculation is as follows:
Salary
50,000
Inheritance
0
[not taxable]
Alimony from ex-spouse
12,000
Child support from ex-spouse
0
[not taxable]
Capital loss on investment stock sale
(3,000)
[maximum deductible]
AGI
59,000
Choices “4”, “2”, and “1” are incorrect, per the above explanation.
MCQ-14929
A taxpayer reported the following in a tax year:
Salary $122,000
Capital gain dividends 3,700
Partnership short-term capital loss (6,300)
The taxpayer acquired the partnership interest during the year in exchange for a capital
contribution of $2,750, and there were no additional items affecting the taxpayer’s basis in
the partnership. What is the taxpayer’s adjusted gross income for the year?
1. $122,700
2. $122,950
3. $119,400
4. $122,000
Choice “2” is correct. The taxpayer’s adjusted gross income (AGI) for the year is $122,950. The short-term capital loss (STCL) from the partnership can only be flowed through for deduction on the partner’s individual income tax return to the extent of the partner’s tax basis in the partnership interest. In this case, the partner’s basis is the amount of his capital contribution of $2,750, so only $2,750 of the STCL is flowed through for deduction on his individual tax return. The remaining $3,550 loss ($6,300 − $2,750) is suspended until the partner’s basis is reinstated in future years.
Individual taxpayers are allowed to deduct up to $3,000 of net capital losses each year, after netting all the capital gains and losses for the year together. The $2,750 STCL from the partnership is offset against the LTCG dividends of $3,700, so the taxpayer has a net LTCG for the year of $950.
Salary $122,000 Capital gain dividends (LTCG) $3,700 STCL from partnership (2,750) Net LTCG 950 AGI 122,950 Choice "1" is incorrect. AGI of $122,700 includes a $3,000 deduction for the STCL from the partnership ($122,000 + $3,700 − $3,000). The STCL flowed through from the partnership is limited to the taxpayer's basis in the partnership of $2,750. Even if the STCL flowed through from the partnership was more than $3,000, the $3,000 capital loss deduction is for net capital losses, after netting all capital gains and losses together.
Choice “3” is incorrect. AGI of $119,400 incorrectly deducts all $6,300 of the STCL from the partnership.
Choice “4” is incorrect. AGI of $122,000 only includes the salary, not the capital gain dividends or the STCL from the partnership.
