Section 2: Income & Assets Unit 10: Other Taxable Income

Question 1

Social Security Taxation Brackets

Answer 1

Base amounts:
MFJ: $32,000
Single, HOH, QSS, MFS and lived apart all year: $25,000
MFS (lives together at all): $0

Tax-exempt interest is included in the base amount

How to calculate base amount: 1/2 of ss benefits + all other income, including tax-exempt int.

Question 2

Tax treatment of alimony

Answer 2

Nondeductible to the payor

Nontaxable to the recipient

Like child support.

Divorces prior to 2019 are grandfathered in so there will be deductions and taxable alimony for those divorce agreements.

Question 3

Form for Gambling Winnings

Answer 3

W-2G

You CAN deduct gambling losses (up to winnings) on Sch A as a misc itemized deduction

Must report all winnings no matter if you receive a W-2G or not

Question 4

Cancelled Debt Form

Answer 4

1099-C

Question 5

NonRecourse Cancelled Debt

Answer 5

Does NOT hold borrower liable.
Does not allow the lender to pursue anything other than the collateral to collect the debt (i.e. with a mortgage they can only go after the home)

The abandonment of the debt is treated as a SALE for tax purposes. Nonbusiness debt is reported as Other Income on Sch 1.

Question 6

Amount of qualified principal residence debt that can be discharged tax-free

Answer 6

$750K

or $375K MFS

Question 7

Student loan cancellation

Answer 7

Through 2025, all federal and certain private loans can be discharged for any reason without an income tax consequence

Question 8

Punitive damage are

Answer 8

ALWAYS taxable
Other Income on Sch 1

Question 9

Hobby income

Answer 9

Taxable but not subject to SE tax.
Expenses are not deductible, but you can take Costs of Goods Sold as a deduction from gross income.
Activity primarily taken for pleasure

Question 10

Scholarship & Fellowship Taxation

Answer 10

May be excluded from income if:
- taxpayer is a degree candidate at educational institute
- amounts do not exceed qualified educational expenses
- not designated for other purposes (like room & board)
- does not represent payment for teaching, research, or personal services

Question 11

Question ID: 94815860 (Topic: Taxable Government Benefits)
Edgar is a forklift operator. He suffered severe injuries while working when a heavy pallet fell on top of him. As a result of his injuries, he received the following payments in the current year:

Worker’s compensation: $85,000
Reimbursement from his employer’s accident and health plan for medical expenses not deducted by him: $6,500
Damages for personal injuries: $28,000
Edgar must include _______________ of the payments in gross income:

A. $0
B. $34,500
C. $119,500
D. $28,000

Answer 11

Correct Answer Explanation for A:

None of the payments is taxable income. Compensation for physical injuries or sickness is always excluded from income, regardless of the form of payment. Workers’ compensation benefits are not taxable, because they are treated as non-taxable benefits paid to workers injured or disabled on the job.

Question 12

Question ID: 94849503 (Topic: Social Security Income)
Willie is 62-years-old and married. He files Married Filing Separately, and lives apart from his wife for the entire year. What is Willie’s “base amount” for computing the taxable portion of his Social Security benefits?

A. $50,000
B. $25,000
C. $32,000
D. $0

Answer 12

Correct Answer Explanation for B:

There are two relevant base amounts for figuring the taxable portion of Social Security. The lower base is $25,000 if the taxpayer is single or MFS (but lives apart from their spouse), and $32,000 if married filing jointly. The base amount is zero for married persons filing separately who lived together at any time during the year. (This question is based on an actual EA exam question released by the IRS).

Question 13

Question ID: 94815828 (Topic: Social Security Income)
Toby switched jobs in the middle of the year and ends up working for two different employers. He earns $200,000 in total wages. Social Security taxes are collected on the entire amount. What is true about Toby’s situation?

A. Both, Toby and his employers are entitled to a refund of excess Social Security taxes.
B. Toby needs to speak with his employers so that they refund excess Social Security taxes to him.
C. Toby can claim a refund of the excess Social Security taxes on his Form 1040.
D. There is no refund for excess Social Security taxes in this case.

Answer 13

Correct Answer Explanation for C:

Toby has the option to claim a refund on the excess Social Security taxes, since he worked for more than one employer during the year. In this type of scenario, the overpaid Social Security tax will be refunded when Toby files his individual return and claims the excess Social Security withholding as a credit.

Overpayments of Social Security tax are discussed in IRS Tax Topic 608, Excess Social Security and RRTA Tax Withheld.

Question 13

Question ID: 94849506 (Topic: Social Security Income)
Rosa and Keith are both 70 years old. They are married and file jointly. In the current year, Rosa received $7,000 of Social Security benefits and Keith received $11,000. Rosa also received a taxable pension of $8,000 and Keith received a taxable pension of $12,000. What is the taxable portion of their Social Security benefits?

A. $0
B. $18,000
C. $9,000
D. $19,000

Answer 13

Correct Answer Explanation for A:

None of their Social Security benefits are taxable. To determine if any percentage of Social Security benefits is taxable, a taxpayer must compare the “base amount” for the taxpayer’s filing status with the total of:

One-half of social security benefits, plus
All of the taxpayer’s other income, including tax-exempt interest.
If the sum is less than the base amount for the taxpayer’s filing status, none of the Social Security is taxable. If the sum is more than the base amount for his filing status, a percentage of their Social Security is taxable. The base amount for taxpayers filing jointly is $32,000 ($25,000 for other filing statuses). The answer is calculated as follows: Half of Rosa and Keith’s $18,000 combined Social Security benefits is $9,000. Adding in $20,000 of taxable pensions, the total is $29,000, which is less than the $32,000 base amount for their filing status, meaning none of their Social Security benefits are taxable. The taxable portion of Social Security benefits is never more than 85% and in most cases is less than 50%.

Question 14

Question ID: 94849672 (Topic: Gambling Winnings)
Usman regularly bets on horse racing. During the current year, he receives Forms W-2G for gambling winnings that total $85,000. His losses from horse racing are $93,000. He also occasionally gambles at a casino and wins $600 playing cards, but loses another $800. He does not receive Forms W-2G from the casino winnings. What amounts of gambling income and loss must Usman report on his Form 1040?

A. $85,000 income; $93,000 loss.
B. $85,600 income; $93,800 loss.
C. $8,200 net losses from gambling, no income needs to be reported.
D. $85,600 income; $85,600 loss.

Answer 14

Correct Answer Explanation for D:

Usman must report all his gambling winnings on his federal income tax return, even for the amounts for which he did not receive Forms W-2G. He can deduct his gambling losses on Schedule A, but the deduction is limited to the amount of his winnings. In other words, the MOST that he would be able to deduct in losses is the amount of his winnings (you can’t deduct more gambling losses than you win in a single year). He must report his winnings as income and claim his allowable losses separately; he cannot reduce his winnings by his losses and report the difference.

Question 15

Question ID: 95015379 (Topic: Gambling Winnings)
Perry had $20,000 in lottery winnings during the year. He must report his winnings as taxable. He spent $6,000 on lottery tickets during the year and kept his receipts. Can he deduct the cost of his lottery tickets?

A. He may deduct the cost of lottery tickets on Schedule A as a miscellaneous itemized deduction.
B. He may deduct the cost of lottery tickets as an adjustment to income on Form 1040.
C. He may not deduct the cost of lottery tickets.
D. He may deduct the cost of lottery tickets on Schedule A. This miscellaneous itemized deduction is subject to the 2% limit.

Answer 15

Correct Answer Explanation for A:

He may deduct the cost of lottery tickets on Schedule A, but only if he itemizes deductions. This miscellaneous itemized deduction is limited to gambling winnings, but no other limitations. Since his gambling winnings totaled $20,000, he may deduct the full amount of $6,000 on Schedule A.

Question 16

Question ID: 97503506 (Topic: Gambling Winnings)
Lisa had the following income and losses during the year:

Wages $14,000
Interest income $425
Gambling winnings $1,000
Gambling losses (3,000)
Discrimination lawsuit settlement $10,000
Legal fees related to the lawsuit ($4,000)
Child support payments $9,000
Food stamp benefits $5,000
How much gross income must she report on her tax return?

A. $35,425
B. $14,000
C. $21,425
D. $25,425

Answer 16

Correct Answer Explanation for D:

Lisa must report her wages, interest income, gambling income, and settlement from a discrimination lawsuit in her gross income ($14,000 + $425 + $1,000 + $10,000 = $25,425). The child support payments and the food stamp benefits are not taxable. The legal fees would be deductible as an adjustment to income, but she still must report the entire gross amount of the settlement. The gambling losses do not affect the inclusion of the gambling income within gross income. However, if Lisa chooses to itemize deductions, her gambling losses may be deducted on Schedule A to the extent of her gambling income. If Ginny does not itemize, the gambling losses are not deductible.

Question 17

Question ID: 94850120 (Topic: Cancellation of Debt Income)
Isaac has canceled debt from a foreclosure on his vacation home. The mortgage on the property was a recourse debt. What does this mean?

A. A recourse debt means that Issac must file a civil action.
B. A recourse debt means that the debt is unsecured.
C. A recourse debt means that Isaac is personally liable for the loan.
D. It means that the lender cannot pursue anything other than the collateral.

Answer 17

Correct Answer Explanation for C:

A recourse debt holds the borrower personally liable. This means that Isaac is personally liable for the mortgage. All other debt is considered nonrecourse. A nonrecourse debt (loan) does not allow the lender to pursue anything other than the collateral. For example, if a borrower defaults on a nonrecourse home loan, the bank can only foreclose on the home. The bank generally cannot take further legal action to collect the money owed on the debt. Whether a debt is recourse or nonrecourse may depend on state law.

Question 18

Question ID: 94849728 (Topic: Cancellation of Debt Income)
Joel’s primary residence is subject to a $320,000 mortgage debt. His basis in the home is $340,000. Joel loses his job and is unable to make his mortgage payments, so his bank forecloses on the home on January 10, 2023. Due to declining real estate values in his city, Joel’s former residence is sold for $280,000 on December 15, 2023, as a short-sale. The debt was canceled by the mortgage lender and Joel receives a Form 1099-C reporting the cancellation. Joel was not insolvent at the time. What amount of taxable income from cancellation of debt must Joel report on his tax return?

A. $40,000
B. $0
C. $30,000
D. $60,000

Answer 18

Correct Answer Explanation for B:

Joel has $40,000 of cancelled debt from the discharge of indebtedness. However, none of the canceled debt is taxable to Joel because it is excluded from income because it is primary residence indebtedness. Qualified principal residence indebtedness can be excluded from income. Generally, if a taxpayer excludes canceled debt from income, the taxpayer must attach Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, to report the amount of debt qualifying for exclusion. To learn more about cancellation of debt, see IRS Topic No. 431, Canceled Debt.

Question 19

Question ID: 94849601 (Topic: Cancellation of Debt Income)
Which of the following statements is correct regarding a nonbusiness bad debt?

A. It is not deductible.
B. It is deductible only if a taxpayer itemizes.
C. It is deductible as a short-term capital loss.
D. It is deductible as a long-term capital loss.

Answer 19

Correct Answer Explanation for C:

A legitimate nonbusiness bad debt is reported as a short-term capital loss on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D. It is subject to the capital loss limit of $3,000 per year, or $1,500 if the taxpayer files MFS. The taxpayer must include a detailed bad debt statement with a description of the debt, the amount, and the date it became due; the name of the debtor; the efforts made to collect the debt; and the reason the debt is worthless. For more information on deducting bad debts, see IRS Topic 453, Bad Debt Deduction.

Question 20

Question ID: 94849548 (Topic: Cancellation of Debt Income)
Rhonda had to give up her main home to foreclosure. She has a Form 1099-C, which shows the cancellation of her mortgage loan. Despite facing financial difficulties, she did not declare bankruptcy. She is also not insolvent because she has a retirement plan at work, but she does not want to withdraw from her retirement account. Rhonda confirmed that the entirety of the mortgage loan was used to buy the house. According to her Form 1099-C, $60,000 worth of debt was forgiven. How should this cancelled debt be reported on Rhonda’s tax return?

A. The cancellation of debt is fully taxable and must be reported as “other income” because she is not insolvent or in bankruptcy.
B. No income or loss to report.
C. The cancelled debt is not taxable. She must report the amount qualifying for exclusion on Form 982 and attach the form to her tax return.
D. The cancellation of debt may be taxable, but only if she is required to file a tax return.

Answer 20

Correct Answer Explanation for C:

Rhonda’s debt is a cancellation of “qualified principal residence indebtedness,” and is therefore not taxable. Rhonda should report the full amount as qualifying for the principal residence exclusion on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach the form to her tax return.

Question 21

Question ID: EA P1 933 (Topic: Cancellation of Debt Income)
Gary is having severe financial difficulties and his main home is being lost to foreclosure. He owes the bank more than the house is currently worth. The bank sends Gary a Form 1099-C reporting canceled debt from the foreclosure. Gary believes that he can exclude this canceled debt from his income. What form would should he attach to his individual return, in order to properly exclude the canceled debt?

A. Form 2210
B. Schedule J
C. Form 843
D. Form 982

Answer 21

Correct Answer Explanation for D:

Gary must attach Form 982 to his individual return. Qualified principal residence indebtedness can be excluded from income in some circumstances. Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, is used to determine the amount of discharged indebtedness that can be excluded from gross income. This includes canceled debt from a main home.

Question 22

Question ID: 94849607 (Topic: Cancellation of Debt Income)
Kendra bought a new car for $30,000. She made a $5,000 down payment and borrowed the remaining $25,000 from her bank via a recourse loan. After she stopped making payments, the bank repossessed the car. The balance due on the loan at the time of the repossession was $15,000. The FMV of the car when repossessed was $12,000. She later receives a 1099-C for the canceled debt. She was not insolvent when the debt was canceled, because she has $40,000 in a traditional IRA account. What amount is Kendra’s loss and what amount must she report as cancellation of debt income?

A. $13,000 nondeductible loss; $3,000 COD.
B. $18,000 nondeductible loss; $3,000 COD.
C. $13,000 deductible loss; $0 COD.
D. $15,000 nondeductible loss; $12,000 COD.

Answer 22

Correct Answer Explanation for B:

A taxpayer is personally liable for a recourse loan. Since a repossession is treated as a sale, the gain or loss must be computed. Kendra compares the amount realized ($12,000) with her adjusted basis ($30,000) in the vehicle to determine that she has an $18,000 nondeductible loss. She also has ordinary income from cancellation of debt. That income is $3,000 ($15,000 canceled debt − $12,000 FMV). Kendra must report the canceled debt as income on her Form 1040.

Question 23

Question ID: 95003697 (Topic: Cancellation of Debt Income)
Shane fell on hard times and stopped paying his mortgage in the prior year. His home was later foreclosed. At the time of foreclosure, he owed a balance of $190,000 to the lender and the FMV of the property was $150,000 at the time of the foreclosure. For tax purposes, the foreclosure is treated as a sale. Shane’s mortgage loan was nonrecourse. Based on this information, what would the “sale price” be for reporting this transaction?

A. The sale price would be $0.
B. The sale price would be $150,000.
C. The sale price would be $190,000.
D. The sale price would be $40,000.

Answer 23

Correct Answer Explanation for C:

Since Shane is not personally liable for the debt (a nonrecourse loan), the “selling price” would be $190,000. Nonrecourse debt is satisfied by the surrender of the secured property regardless of the FMV at the time of surrender, and the borrower is not personally liable for the debt. If property that is subject to nonrecourse debt is abandoned, foreclosed upon, subject of a short sale, or repossessed by the lender, the circumstances are treated as a sale of the property by the taxpayer. In determining the gain or loss on the disposition of the property, the balance of the non-recourse debt at the time of the disposition of the property is included in the amount realized (generally the selling price). Since Shane is not personally liable for the debt, the difference between the FMV of the property and the balance of the loan is not included in his gross income (see detailed example in Publication 4491).

Question 24

Question ID: 94849617 (Topic: Cancellation of Debt Income)
When Danny and June married five years ago, June’s parents loaned them $30,000 for a down payment on their first house. Danny and June made regular payments on the loan until June’s parents were killed in an accident in 2023. When they died, Danny and June still owed $17,500 on the balance of the loan. One of the terms of June’s parents’ will was that any balance remaining on the loan would be forgiven at their death and would be considered a gift. How should this be reported on Danny and June’s joint tax return?

A. Danny and June have to recognize $17,500 in income due to the forgiveness of the debt.
B. Danny and June do not have to recognize income due to the forgiveness of the debt, but they are required to file a gift tax return.
C. Danny and June do not have to recognize income due to the forgiveness of the debt. No reporting is required.
D. Danny and June have to recognize income due to the forgiveness of the debt, but only the amount above the gift limit.

Answer 24

Correct Answer Explanation for C:

Danny and June do not have to recognize income due to the forgiveness of the debt. No reporting is required. Loans forgiven as gifts are not taxed. If a debt is canceled by a private lender, such as a relative or friend, and the cancellation is intended as a gift, there is no income that has to be reported. Danny and June are not required to file gift tax returns, because any gift tax reporting is always done by the donor (not the donee, or the recipient of the gift).

Question 25

Question ID: 94850408 (Topic: Hobby Income)
The hobby loss rules do not apply to which of the following entity types?

A. Trusts.
B. C Corporations.
C. Individuals.
D. S Corporations.

Answer 25

Correct Answer Explanation for B:

The hobby loss rules apply to individuals, partners in a partnership, estates, trusts, and shareholders of S corporations. The hobby loss rules do not apply to C corporations. In other words, the “hobby loss” rules of the Internal Revenue Code (IRC) §183 attempt to curb perceived loss deduction abuses by activities that are not entered into for profit.

Question 26

Question ID: 94850381 (Topic: Hobby Income)
A key feature of a business is that people do it to make a profit. People engage in a hobby for sport or recreation, not to make a profit. The IRS presumes that an activity is carried on for profit if it:

A. Makes a profit during at least 3 of the last 10 tax years, including the current year.
B. Makes a profit during at least 2 of the last 5 tax years, including the previous year.
C. Makes a profit during at least 3 of the last 7 tax years, including the previous year.
D. Makes a profit during at least 3 of the last 5 tax years, including the current year.

Answer 26

Correct Answer Explanation for D:

The IRS presumes that an activity is “carried on for profit” if it makes a profit during at least 3 of the last 5 tax years, including the current year. The general rule is 2 of the last 7 years for activities that consist primarily of breeding, showing, training or racing horses. The hobby loss rules apply to individuals, S corporations, trusts, estates, and partnerships but not to C corporations.

Question 27

Question ID: 94849659 (Topic: Taxation of Court Awards and Damages)
Heidi, age 22, suffered major physical injuries after a serious car accident. The auto manufacturer was found negligent for having faulty equipment installed on her car. A jury awarded Heidi the following damages from the lawsuit:

$750,000 for physical injuries
$200,000 for emotional distress as a direct result of the injuries
$1 million for punitive damages against the auto manufacturer for faulty equipment
What amount of the damages is taxable to Heidi?

A. $1,200,000
B. $1,950,000
C. $200,000
D. $1 million

Answer 27

Correct Answer Explanation for D:

Only the punitive damages are taxable. Settlements for personal physical injuries or physical illness are not taxable. Damages received for emotional distress due to physical injury or sickness are treated the same way as damages for physical injury or sickness, so they are not included in income. If emotional distress is not due to a physical injury (for example, an employment lawsuit in which a taxpayer suffers emotional distress for injury to reputation), the proceeds are taxable, except for any damages received for medical care due to that emotional distress. Emotional distress includes physical symptoms such as headaches, insomnia, and stomach disorders.

To learn more about this topic, see the IRS webpage for Tax Implications of Settlements and Court Judgments.

Question 28

Question ID: 94849688 (Topic: Taxation of Court Awards and Damages)
Dinar received a settlement of $2 million after contracting mesothelioma from exposure to asbestos. He will receive installment payments of $200,000 per year for ten years. How should Dinar report the damages he is awarded on his income tax return?

A. He must include the entire amount of his settlement in his gross income for the tax year.
B. He must include in his gross income only the portion of the settlement paid to him each year when it is received.
C. He must report the settlement on his tax return, but it is not taxable income.
D. He can exclude the payments from his gross income

Answer 28

Correct Answer Explanation for D:

Dinar does not have to report any taxable income from the settlement. Gross income does not include the amount of damages received due to physical injuries or to sickness, regardless of whether the damages are paid as lump sums or as periodic payments. If any of the settlement includes interest, then only the interest would be taxable.

To learn more about legal settlements, see the IRS webpage for Tax Implications of Settlements and Court Judgments.

Question 29

Question ID: 94849649 (Topic: Taxation of Court Awards and Damages)
Zoey sued her employer during the year. She eventually wins a court award for emotional distress caused by unlawful discrimination. The emotional distress resulted in her hospitalization for a nervous breakdown. The court awarded Zoey total damages of $80,000, including $30,000 to refund the costs of her medical care for the nervous breakdown. How much of her court award is taxable?

A. $0
B. $80,000
C. $50,000
D. $30,000

Answer 29

Correct Answer Explanation for C:

In this case, $50,000 ($80,000 - $30,000) would be considered a taxable court award. The $30,000 of damages for her medical care would not be taxable.

Question 30

Question ID: 94849666 (Topic: Tax-Free Education Assistance (including Coverdell))
Vinita is a 28-year old graduate student at a university pursuing a doctoral degree in biochemistry. During the current year, she received the following:

$8,000 research fellowship.
$5,500 scholarship that requires her to teach two undergraduate courses a year, of which $3,000 is designated as income for teaching.
Her qualified educational expenses for tuition, required books, and required laboratory fees were $12,000. What amount is excluded from Vinita’s taxable income?

A. $16,500
B. $10,500
C. $0
D. $8,000

Answer 30

Correct Answer Explanation for B:

Vinita can exclude the full $8,000 of the fellowship and $2,500 of the scholarship. The $3,000 portion of the scholarship that is designated for her teaching is taxable income, because it is compensation for teaching two classes. A scholarship or fellowship is tax-free only if it meets all of the following requirements:

The taxpayer must be a degree candidate at an eligible educational institution that has been nationally accredited.
It does not exceed qualified educational expenses.
It is not designated for other purposes, such as room and board.
It does not represent payment for teaching, research, or other services.

Question 31

Question ID: 94850056 (Topic: Tax-Free Education Assistance (including Coverdell))
When Lonnie was born, three separate Coverdell Education Savings Accounts were set up for him: one by his parents, one by his grandmother, and one by his uncle. In 2023, what is the maximum amount of contributions that can be made to Lonnie’s Coverdell ESA accounts?

A. $1,000 per each account.
B. $2,000 total in all three accounts combined.
C. $2,000 per each account.
D. $6,000 total in all three accounts combined.

Answer 31

Correct Answer Explanation for B:

In 2023, the total amount of contributions to all Coverdell ESA’s for one designated beneficiary cannot be more than $2,000. So, for instance, if Lonnie’s parents contribute $1,000 to his account and his grandmother contributes $800, his uncle could contribute no more than $200, for a combined total of $2,000. If more than $2,000 is contributed to the accounts, it is considered an excess contribution. If an excess contribution is made, then the penalty is imposed on the beneficiary (the child). The beneficiary must pay a 6% excise tax each year on excess contributions that are in a Coverdell ESA at the end of the year if the amount is not corrected or withdrawn.

See IRS Topic No. 310 Coverdell Education Savings Accounts.

Question 32

Question ID: 94850161 (Topic: Tax-Free Education Assistance (including Coverdell))
Russo is 26 and a full-time college student. He lives on campus. He received a $25,000 scholarship during the year. The scholarship was specially designated that $10,000 was for tuition and $15,000 was for room and board. Russo’s tuition costs for the year is a total of $10,000. His costs for room and board totaled $18,000. He paid the remaining $3,000 owed for the room and board out of his own personal savings. How much of his scholarship is taxable?

A. $15,000 of the scholarship is taxable.
B. $10,000 of the scholarship is taxable.
C. $18,000 of the scholarship is taxable.
D. None of the scholarship is taxable.

Answer 32

Correct Answer Explanation for A:

Russo has a partially-taxable scholarship; $10,000 of the scholarship is not taxable, because it was used for tuition, which is a qualifying educational expense. The remaining $15,000, which was designated for room and board, must be included in income, because room and board is not a qualifying educational expense. For more information and to see similar examples, see Publication 970, Tax Benefits for Education.

Question 33

Question ID: 94815930 (Topic: Other Taxable Income)
Garland has a partial interest in several partnerships. He is merely a passive investor and does not materially participate in any of the businesses. The income is reported to Garland on (multiple) Schedules K-1. During the year, Garland had the following results from these passive activities:

French-style Cafe: $56,000 loss.
Ice cream store: $32,000 loss.
Nutrition supplement store: $18,000 loss.
Doughnut shop: $90,000 income.
What is the tax treatment of Garland’s ownership of these businesses, and how would the amounts be reported on his Form 1040?

A. No taxable income; carryover of passive activity losses of $16,000 to the following year. The amounts would be reported on Schedule E.
B. Taxable income of $90,000 and deductible losses of $106,000. The amounts would be reported on Schedule C.
C. Deductible capital loss of $16,000 in the tax year. The amounts would be reported on Schedule D.
D. Taxable income of $90,000; carryover of passive activity losses of $106,000 to the following year. The amounts would be reported on Schedule E.

Answer 33

Correct Answer Explanation for A:

Under the passive activity limitation rules, Garland cannot deduct the full amount of his losses against taxable income from other sources. Since he had passive activity income of $90,000 during the year, he can offset losses up to that amount. He can carry over the remaining passive activity losses of $16,000 to the following year. Schedule E is used to record income and loss for partners in a partnership, whether the activity is passive or not.

Question 34

Question ID: 94849755 (Topic: Other Taxable Income)
Which of the following should be reported as “other income” on Form 1040?

A. Alaska Permanent Fund dividends
B. Wages
C. Royalties
D. Self-employment income

Answer 34

Correct Answer Explanation for A:

Alaska Permanent Fund dividends are taxable as “Other Income” on Form 1040. Other examples of “other income” include:

Prizes and awards
Gambling winnings, including lotteries and raffles
Jury duty pay
Hobby income
Nonbusiness credit card debt cancellation