REG R2 Flagged Questions #14 Flashcards
MCQ-07355
Robert Corp. granted an incentive stock option for 200 shares to Beverly, an employee, on March 14, Year 12. The option price and FMV on the date of grant was $150. Beverly
exercised the option on August 2, Year 14, when the FMV was $180 per share. She sold the stock on September 20, Year 15, for $250 per share. How much gross income did Beverly recognize in Year 15?
1. $0
2. $150
3. $30,000
4. $20,000
Choice “4” is correct. This is the gain Beverly will recognize upon the sale of the stock. The purchase was 200 shares at $150 per share, or $30,000. The sale was 200 shares at $250 per share, or $50,000. This gain on incentive stock options is not recognized until the sale occurs in Year 15.
Choice “1” is incorrect. The realized gain on the sale must be recognized in the year of the sale per the above explanation.
Choice “2” is incorrect. This is simply the option price per share on the date of grant.
Choice “3” is incorrect. This is simply the purchase price of the stock upon exercise of 200 shares at $150 per share.
MCQ-07357
Which of the following statements is not correct?
1. The employer may recognize a deductible expense for a nonqualified stock option in the same year that the employee will recognize ordinary income.
2. The recipient of an incentive stock option will generally have to report compensation
income in the year that the option is received.
3. For an incentive stock option, once exercised, the stock must be held at least two years after the grant date and at least one year after the exercise date.
4. Employee stock purchase plans are a type of qualified stock option plan.
Choice “2” is correct. Generally there is no recognition of compensation expense with an incentive stock option.
Choices “4”, “1”, and “3” are incorrect, as these are all true statements.
MCQ-12123
The Tiller family has a modified adjusted gross income of $50,000. The Tillers have two children, ages 12 and 13, who qualify as dependents. All of the Tillers’ income is from
wages and their tax liability is $1,000 before the child tax credit. What total amount of the child tax credit will the Tillers use as a credit? What portion of this amount is refundable?
Child Tax Credit Taken Refundable Portion
1. $4,000 $0
2. $3,800 $2,800
3. $2,000 $1,400
4. $2,000 $0
Choice “2” is correct. The Tillers’ maximum child tax credit is $4,000 ($2,000 × 2 children). The Tillers will take the first $1,000 against the tax liability. Of the remaining $3,000 credit, only $2,800 is refundable and can be taken as a credit. The refundable portion of the child tax credit for 2021 is the lesser of:
- the excess child tax credit over tax liability ($3,000)
- earned income less $2,500 × 15% ($50,000 − $2,500 = $47,500 × 15% = $7,125), or
- $1,400 per qualifying child ($1,400 × 2 = $2,800)
Therefore, $2,800 of the child tax credit is refundable. The total amount of the child tax credit utilized by the Tillers is $3,800 ($2,800 refundable + $1,000 taken against tax liability).
Choices “1”, “3”, and “4” are incorrect. See the explanation above.
MCQ-07356
Wade Inc. granted a nonqualified stock option for 100 shares at $50 per share to Mary, an employee, on May 1, Year 12. On that date, the option was selling on an established market for $4 per share. Mary exercised the option on August 2, Year 13, when the FMV was $80
per share. She sold the stock on September 2, Year 14, for $100 per share. How much gross income and what type did Mary recognize in Year 12?
1. $5,000 ordinary income
2. $5,000 capital gain
3. $400 ordinary income
4. $400 capital gain
Choice “3” is correct. The employee receiving a nonqualified stock option must recognize as ordinary income the value of the option if traded on an established market. Here, that is 100 shares at $4 per share, or $400.
Choices “1” and “2” are incorrect per the above explanation.
Choice “4” is incorrect. This is the correct amount, but it is ordinary income and not a capital gain.
MCQ-07358
James Corp. issue stock options to employees under an Employee Stock Purchase Plan. Which of the following statements is correct?
I. The option exercise price may not be less than the lesser of 95% of the FMV of the stock when granted or exercised.
II. The option cannot be exercised more than 27 months after the grant date.
1. II only.
2. I only.
3. Both.
4. Neither.
Choice “1” is correct. I is not correct because the rule states 85%, not 95%. II is a correct statement. This is a requirement of an ESPP.
Choices “2”, “3”, and “4” are incorrect per the above explanation.
MCQ-01936
During the current year, Wood’s residence had an adjusted basis of $150,000 and it was destroyed by a tornado. The location was a federally declared disaster area. 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?
1. $19,900
2. $25,000
3. $20,000
4. $13,900
Choice “4” is correct. Casualty losses are deductible as an itemized deduction if located in a presidentially declared disaster area. 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.)
Choice “1” is incorrect. In addition to the $100 per loss nondeductible portion of each separate casualty loss, there is an overall limitation that the remaining total amount of all casualty losses is deductible only to the extent that it exceeds 10% of AGI.
Choice “2” is incorrect. This is the market value decline minus the adjusted basis.
Choice “3” is incorrect. This is the adjusted basis minus the insurance reimbursement, without any limitations being applied.
MCQ-02001
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 before the adjusted
gross income limitation?
1. $500
2. $4,000
3. $1,000
4. $3,500
Choice “3” 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).
Choice “1” is incorrect. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care.
Choice “2” is incorrect. Insurance against loss of income is not payment for medical care and therefore is not deductible.
Choice “4” is incorrect. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care.
MCQ-14723
Which of the following statements is correct regarding the deductibility of an individual’s
medical expenses?
1. A medical expense deduction is not allowed for Medicare insurance premiums.
2. A medical expense deduction is allowed for vitamins and supplements.
3. A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years.
4. A medical expense paid by credit card is deductible in the year the credit card bill is paid.
Choice “3” is correct. A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years.
Choice “1” is incorrect. A medical expense deduction is allowed for Medicare insurance premiums.
Choice “2” is incorrect. Vitamins and supplements are not qualified medical expenses.
Choice “4” is incorrect. A medical expense paid by credit card is deductible in the year the amount is charged to the credit card (rather than in a subsequent year when the credit card bill is paid).
MCQ-05969
Chris, age 5, has $3,000 of interest income and no earned income this year. Assuming the current applicable standard deduction for dependents is $1,100, how much of Chris’ income
will be taxed at his parents’ marginal rate?
1. $3,000
2. $800
3. $1,900
4. $0
Choice “2” is correct. The net unearned income of a dependent child under age 18 is taxed at the parents’ marginal rate under the “kiddie tax” rules. Net unearned income is calculated by taking the child’s unearned income and reducing it by the dependent child’s allowable standard deduction of $1,100 plus an additional $1,100 (which is taxed at the child’s marginal tax rate). Chris’ net unearned income taxed at his parents’ marginal rate is $800 ($3,000 interest income – $1,100 standard deduction – $1,100 taxed at child’s marginal rate).
Choice “1” is incorrect. The $3,000 indicates that the entire $3,000 interest income is taxed at the parents’ marginal rate.
Choice “3” is incorrect. The $1,900 uses only the $1,100 standard deduction, but the next $1,100 would be taxed at the child’s marginal rate.
Choice “4” is incorrect. The $0 indicates that nothing is taxed at the parents’ marginal rate. Taxing net unearned income at the parents’ marginal rate is the whole idea of the “kiddie tax.”
MCQ-06884 Sam's Year 2 taxable income was $175,000 with a corresponding tax liability of $30,000. His Year 2 adjusted gross income was $200,000. 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? 1. $50,000 2. $45,000 3. $33,000 4. $30,000
Choice “3” 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).
Choice “1” is incorrect. $50,000 is 100% of the current year’s tax, which is sufficient, but more than required.
Choice “2” is incorrect. $45,000 is 90% of this year’s tax, which is sufficient, but we are looking for the minimum amount.
Choice “4” is incorrect. $30,000 is 100% of last year’s tax. This would be sufficient if the previous year’s income were $150,000 or less.
MCQ-06474
In Year 1, Kane’s residence had an adjusted basis of $250,000 and it was destroyed by a tornado. The residence was located in a federally declared disaster area. 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?
1. $50,000
2. $49,900
3. $40,000
4. $39,900
Choice “4” 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
Choices “3”, “2”, and “1” are incorrect, per the above explanation.
MCQ-08904
An individual taxpayer’s tax return included the following:
Regular tax before tax credits $ 5,000
Current year estimated tax payments 6,000
Amount paid with current year extension 1,000
Federal income tax withheld 1,000
What amount, if any, is the taxpayer’s overpayment?
1. $3,000
2. $0
3. $2,000
4. $1,000
Choice “1” is correct. The total tax payments applied against the $5,000 current year regular tax liability is $8,000, which includes $6,000 current year estimated tax payments, $1,000 current year withholding, and $1,000 paid with current year extension. Overpayment = $5,000 current year tax liability − $8,000 tax payments = $3,000.
Choice “2” is incorrect. The amount of the overpayment is $3,000, not $0. All of the tax payments are applied against the current year regular tax liability.
Choice “3” is incorrect. The amount of the overpayment is $3,000, not $2,000. All of the tax payments are applied against the current year regular tax liability.
Choice “4” is incorrect. The amount of the overpayment is $3,000, not $1,000. All of the tax payments are applied against the current year regular tax liability.
MCQ-14720
The question below includes actual dates that must be used to determine the appropriate tax treatment of the transaction.
In 2021, a self-employed taxpayer had gross income of $57,000. The taxpayer paid self-employment tax of $8,000, self-employed health insurance of $6,000, and $5,000 of alimony pursuant to divorce finalized in 2007. The taxpayer also contributed $2,000 to a traditional IRA. What is the taxpayer’s adjusted gross income for the year ended December 31, 2021?
1. $50,000
2. $40,000
3. $55,000
4. $46,000
Choice “2” is correct. Adjusted gross income is gross income plus or minus certain other adjustments. 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. Alimony paid pursuant to a divorce settlement executed on or before December 31, 2018, is deductible by the payor. Alimony paid pursuant to a divorce settlement executed after December 31, 2018, is not deductible. All of these amounts (total of $17,000) are subtracted from the $57,000 gross income to arrive at AGI of $40,000.
Choice “1” is incorrect. The $50,000 is the $57,000 subtracting only the $5,000 alimony and the $2,000 IRA contribution.
Choice “3” is incorrect. The $55,000 is the $57,000 gross income subtracting only the $2,000 IRA contribution.
Choice “4” is incorrect. The $46,000 is the $57,000 subtracting everything but the $6,000 self-employed health insurance.
MCQ-08655
Logan, an employee of Argon Industries, earned a salary of $60,000 in Year 2. In addition, the following two transactions between Logan and Argon occurred in Year 2: Logan received a bonus of 100 shares of publicly traded stock worth $13,000 with a basis to Argon
of $8,000, and Logan purchased 1,000 shares of unrestricted Argon stock pursuant to a nonqualifying stock option plan for $10 per share when stock was valued at $25 per share.
What amount of compensation should Argon report in Logan’s Form W-2 for Year 2?
1. $88,000
2. $93,000
3. $73,000
4. $60,000
Choice “1” is correct. The salary of $60,000 is included in the Form W-2. The FMV of the bonus of $13,000 is included in the Form W-2. Because the stock option was nonqualifying, the bargain element is included in Form W-2 as well. The stock is worth $25 per share and the option price is $10 per share. That is a bargain element on nonqualified stock options of $15 per share on 1,000 shares. That is $15,000. $60,000 + $13,000 + $15,000 = $88,000.
Choice “2” is incorrect. $93,000 is not correct based on the above rule.
Choice “3” is incorrect. $73,000 ignores the stock option.
Choice “4” is incorrect. $60,000 ignores the bonus and the stock option.
MCQ-04450
Upon the recommendation of a physician, Mark, age 40, has an air filtration system
installed in his personal residence. He suffers from severe allergy problems. In connection
with this matter, Mark incurs and pays the following amounts during the current year:
Filtration system and cost of installation $7,000
Increase in utility bills due to the system 700
Cost of certified appraisal 350
The system has an estimated useful life of five years. The appraisal was to determine the
value of Mark’s residence with and without the system. The appraisal states that the system
increased the value of Mark’s residence by $1,000. Expenses qualifying for the medical
deduction in the current year total:
1. $6,700
2. $7,700
3. $8,050
4. $7,350
Choice “1” is correct. The cost of a home improvement is an allowable itemized medical deduction to the extent it exceeds any increase in the fair market value of the home (subject to the allowed percentage of AGI floor).
The cost of the filtration system less the increase in the home value of $1,000 is permitted ($7,000 less $1,000), plus the $700 increase in the utility bills is allowable as an itemized medical deduction (subject to the allowed percentage of AGI floor). The cost of the appraisal is not deductible as a medical expense.
7,000
(1,000)
700
6,700
Choice “2” is incorrect. This choice includes the entire cost of the filtration system and the increase in the utility bills and disregards the reduction for increase in the home value.
Choice “3” is incorrect. This choice includes the filtration system, increase in utility bills and the appraisal but does not consider the reduction for the increase in the value of the home.
Choice “4” is incorrect. This choice includes deducting the filtration system and the appraisal and disregards the reduction for the increase in the home value and the utility bills
