Question 1

A payment by a taxpayer to a former spouse pursuant to an agreement executed in 2014 may qualify as alimony even though A The payment is made to keep up the taxpayer’s property. B The payment is to a third party. C The payment is designated as child support. D The liability to make the payment would survive the recipient spouse’s death.

Accepted Answer

B The payment is to a third party. This answer is correct. Payments of cash to a third party made at the written request of the payee spouse will qualify as alimony. Payments are often made on behalf of the payee spouse, such as payments for mortgages, rent, medical costs, or education.

Question 2

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? A $32,000 B $22,000 C $28,425 D $32,425

Accepted Answer

A $32,000 This answer is correct. Wages, unemployment compensation, and fully taxable pension distributions are all included in gross income. Since Randolph always claims the standard deduction, he would not take the deduction for state taxes paid and would not have to include the refund in this year’s gross income.

Question 3

Scholarships and fellowships awarded to degree candidates are not taxable unless they are used for A Room and board. B Books. C Supplies required for the course of study. D Tuition.

Accepted Answer

A Room and board. This answer is correct. The IRC provides an exclusion from gross income for amounts received as a scholarship or fellowship grant by a degree candidate. But only amounts provided and actually used for tuition, fees, books, supplies, and equipment required for instruction qualify for this exclusion. Room and board does not qualify.

Question 4

In 2014, Sam received the following corporate distributions: I $1,500 dividend on stock held in a public corporation that offers a dividend reinvestment plan that lets him choose to use the dividend to buy (through an agent) more stock in the corporation at a price equal to its fair market value instead of receiving the dividends in cash. Sam chose to take part in the plan. II $2,500 dividend on stock held in a public corporation that offers a dividend reinvestment plan that lets him choose to use the dividend to buy (through an agent) more stock in the corporation at a price less than its fair market value. The fair market value of shares Sam purchased through the plan on the dividend payment date in 2014 was $3,000. III $2,000 return of capital distribution reported on Form 1099-DIV. ``` Based on the above information, how much ordinary dividend income must Sam report on his 2014 return? A $6,500 B $6,000 C $4,500 D $4,000 ```

Accepted Answer

C $4,500 This answer is correct. Dividends are gross income. A shareholder who, under a dividend reinvestment plan, elects to receive shares of greater value than his or her cash dividend would otherwise be receives a taxable distribution to the extent of the value of the shares. The distribution is generally a taxable dividend to the extent of the corporation’s earnings and profits. Sam’s gain is $4,500 ($3,000 + $1,500) because the gain must equal the FMV of the shares purchased. The return of capital distribution is a tax-free distribution that reduces a stock’s basis by the amount of the distribution.

Question 5

``` During 2014, Kay received interest income as follows: On U.S. Treasury certificates $4,000 On refund of 2013 federal income tax 500 The total amount of interest subject to tax in Kay’s 2014 tax return is A $500 B $4,500 C $0 D $4,000 ```

Accepted Answer

B $4,500 This answer is correct. Unless specifically excluded by the IRC, interest is included in gross income. Although interest on most obligations of a state or political subdivisions of a state are excluded from gross income, this exclusion does not apply to obligations of the U.S. if not a Series EE bond. Furthermore, interest earned on federal tax refunds is not excluded from gross income.

Question 6

``` Baker, an unmarried individual, sold a personal residence, which has an adjusted basis of $70,000, for $165,000. Baker owned and lived in the residence for 7 years. Selling expenses were $10,000. Four weeks prior to the sale, Baker paid a handyman $1,000 to paint and fix-up the residence. What is the amount of Baker’s recognized gain? A $85,000 B $95,000 C $84,000 D $0 ```

Accepted Answer

D $0 This answer is correct. While the correct amount of realized gain is $85,000, IRC Sec. 121 excludes the gain on the sale of a principal residence, up to $250,000 per taxpayer, subject to certain rules and limitations. As none of the facts would lead us to reduce this exclusion, no gain is recognized on the disposition of the home.

Question 7

During Year 3, Ruth Loy received interest income as follows: On U.S. Treasury certificates $3,000 On refund of Year 1 federal income tax 200 The total amount of interest subject to tax in Ruth’s Year 3 return is A $3,000 B $0 C $200 D $3,200

Accepted Answer

D $3,200 This answer is correct. Interest is a form of income from whatever source derived. Since no provision provides for exclusion of interest on U.S. Treasury certificates other than Series EE bonds, it must be included in gross income. Interest on governmental obligations is only exempt for state and local entities. Interest on refunds of federal income tax is also not excluded from gross income.

Question 8

During 2014, Clark received the following interest income: On Veterans Administration insurance dividends left on deposit with the V.A. $20 On state income tax refund 30 What amount should Clark include for interest income in his 2014 return? A $20 B $50 C $30 D $0

Accepted Answer

C $30 This answer is correct. Interest income is included in gross income unless specifically excluded by an IRC section. Although an exclusion for interest on certain obligations of states and municipalities is provided, it does not apply to interest on state income tax refunds. The interest on V.A. insurance dividends left on deposit with the V.A. is excluded from gross income.

Question 9

Major, a candidate for a graduate degree, received the following scholarship awards from the university in 2014: $10,000 for tuition, fees, books, and supplies required for courses $2,000 stipend for research services required by the scholarship ``` What amount of the scholarship awards should Major include as taxable income in 2014? A $0 B $12,000 C $2,000 D $10,000 ```

Accepted Answer

C $2,000 This answer is correct. Excluded from gross income are any amounts received by a candidate for a degree at an educational organization as a scholarship or grant but only to the extent that such amounts are used for tuition, fees, books, supplies, and equipment. This exclusion does not include payments for teaching, research, or other services by the student required as a condition for receiving the scholarship. Also, this exclusion does not apply if past, present, or future services are a condition of the scholarship. The $2,000 payment, which requires research services, must be included in Major’s gross income.

Question 10

During 2014, Ash had the following cash receipts: Wages $15,000 Interest income from U.S. Treasury bonds 350 Workers’ compensation following a job-related injury 8,500 What is the total amount that must be included in gross income on Ash’s 2014 income tax return? A $15,350 B $23,500 C $15,000 D $23,850

Accepted Answer

A $15,350 This answer is correct. Wages are included in gross income. Also, unless specifically excluded by the IRC, interest is included in gross income. Although interest on most obligations of a state or political subdivision of a state are excluded from gross income, this exclusion does not typically apply to obligations of the U.S. There is no indication that any of Ash’s interest is excludable as interest from a Series EE bond used for education expenses. Specifically excluded from gross income are amounts received under workers’ compensation acts as compensation for personal injuries or sickness. Therefore, Ash’s gross income for 2014 is $15,350 ($15,000 wages + $350 interest income).

Question 11

Household maintenance expenses for head of household status include upkeep and property tax, but not clothing and medical treatment. True. False.

Accepted Answer

True. Your answer is correct. Maintenance expenses include property tax, mortgage interest, rent, utilities, upkeep, repair, property insurance, and food consumed on premises. Nonqualifying costs are clothing, education, medical treatment, life insurance, transportation, vacations, services by the taxpayer, and services by the dependent.

Question 12

The amount of each exemption that an individual may claim is phased out if the individual’s AGI exceeds a threshold amount. True. False.

Accepted Answer

True. Your answer is correct. The amount of each exemption that an individual could claim was phased out if the individual’s AGI exceeds a threshold amount.

Question 13

The IRC (Internal Revenue Code) defines gross income (GI) as all income from whatever source derived except as otherwise provided. True. False.

Accepted Answer

True. Your answer is correct. The Internal Revenue Code (IRC) defines gross income (GI) as all income from whatever source derived except as otherwise provided. Section 61(a) enumerates types of income that constitute gross income. The following list is not exhaustive: compensation for services, gross income derived from business, gains derived from dealings in property, interest, rents, royalties, dividends, alimony and separate maintenance payments, annuities, income from life insurance and endowment contracts, pensions, income from discharge of indebtedness, distributive share of partnership gross income, income in respect of a decedent (income earned but not received before death), and income from an interest in an estate or trust.

Question 14

In computing gain on disposal of investment property, historical cost indicates the amount of capital invested in the property and not yet recovered by tax benefit (i.e., depreciation). True. False.

Accepted Answer

False. Your answer is correct. In computing gain on disposal of investment property, adjusted basis indicates the amount of capital invested in the property and not yet recovered by tax benefit (i.e., depreciation).

Question 15

As a result of a divorce, a taxpayer received the following during the current year: Cash from the property settlement $100,000 Child support 12,000 Alimony payments 30,000 What amount, if any, must be included in gross income for the current year? A. $30,000 B. $130,000 C. $142,000 D. $0

Accepted Answer

A. $30,000 Answer (A) is correct. Alimony payments are included in gross income. Child support and property settlements are not. (3.3.54)

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