Tax Practice Questions

Question 1

What is a preference item for AMT?

Answer 1

Remember IPOD

Private-activity municipal bond
Oil and gas percentage depletion
Excess Intangible drilling costs (IDC) Percentage depletion is the excess depletion over the property’s adjusted basis
Depreciation (ARCS ? MACRS) - but not straight-line

Question 2

Which of the following are preference items or add-back items for purposes of the individual alternative minimum tax?

I. Qualified private-activity municipal bond interest
II. The property tax itemized deduction
III. The excess of percentage depletion over the property’s adjusted basis
IV. Cost depletion deductions

A. I, III
B. I, IV
C. I, II, III
D. II, III, IV
E. All of the above

Answer 2

Question 1: C
Cost depletion is not a preference item. Property tax is not a deduction for the AMT. It is added back to calculate the AMT (an adjustment).

Question 3

Thelma (unmarried) purchased various municipal bonds and tax-free mutual funds. She owns an expensive home (paid for) and gives to charity. At year end, her regular tax is $16,381. Her AMT is $41,892. What is the amount of her AMT payable?
A. $16,381
B. $25,511
C. $41,892
D. $58,793

Answer 3

Question 2: B
$41,892 - $16,381 = $25,511

Question 4

Floyd is subject to AMT. Which of the following approaches should reduce his AMT payable?

I. Increasing his taxable income
II. Selling his home (with a large mortgage) and renting a home
III. Purchasing additional private activity municipal bonds
IV. Buying an oil and gas limited partnership
V. Paying off his substantial current mortgage balance

A. I, II, V
B. I, V
C. III, IV
D. II, V

Answer 4

Question 3: A
If Floyd increases his taxable income, he will pay more regular taxes. Selling his home and paying off his mortgage increase his regular taxes (lower amount of itemized deductions) and his AMT (which may or may not decrease AMT payable - see note below). Renting will eliminate the property tax deduction, thereby increasing his taxable income. Answer V is correct if the marginal tax bracket is higher than the AMT bracket (This assumes that Floyd itemizes deductions). Although reducing or eliminating mortgage interest for ordinary income tax increases the income tax liability, it also increases AMT income. However, if the AMT bracket is higher than the taxpayer’s ordinary tax bracket, then AMT payable actually increases (making Answer V wrong). Answer I and II (together) are not an answer choice, so choose Answer A (I, II, and V).

NOTE: Once you get well into the 37% bracket, it is difficult to trigger AMT. Why? Your regular tax rate is 37%
versus the maximum AMT rate of 28%.

Question 5

Which of the following strategies should be considered to avoid or reduce exposure to the AMT tax?

A. Exercise of ISOs in one year
B. If you are the owner of a small corporation, pay yourself a large bonus
C. Defer paying property taxes until next year
D. Buy private activity municipal bonds rather than public purpose municipal bonds

Answer 5

Question 4: B
Increasing 1040 income tax decreases AMT exposure. Answer D should read: Buy public purpose municipal bonds (because the interest is not a preference item) rather than private purpose bonds (because the interest is a preference item).

Question 6

Interest on which of the following bonds is (are) a preference item for purposes of calculating a taxpayer’s AMT?

A. Municipal bonds
B. GO municipal bonds
C. Private activity municipal bonds
D. 30-year Treasury bonds
E. AAA corporate bonds

Answer 6

Question 5: C
GO are general obligation bonds (public purpose). Municipal bonds could be private activity. Answer I could be correct. The Treasuries and corporate bond trigger more ordinary income, not a preference item.

Question 7

If Leticia’s current year alternative minimum tax is $102,000 and her regular tax is $100,000, what is the amount
of her AMT payable for the year?

A. -$2,000
B. $2,000
C. $100,000
D. $102,000

Answer 7

Question 9: B
$102,000 AMTI less $100,000 regular tax

Question 8

XXCEL Corporation has earnings of $100 million and, due to a substantial litigation loss, only $100,000 of taxable income. What is the deductible amount that XXCEL can contribute to the National Endowment for the Arts, which is a public charity?

A. $5,000 on a Form 1120
B. $10,000 on a Schedule C
C. $5,000 on a Schedule C
D. $10,000 on a Form 1120

Answer 8

Question 6: D
Corporations file under Form 1120, not a Schedule C. The charitable deduction limit is 10% of taxable income ($100,000 x 10% = $10,000).

Question 9

Pete operates his landscaping business as a sole proprietorship. The business produces annual net earnings of $400,000. Pete read an article in the Sunday paper about incorporating to limit a business owner’s personal liability. He comes to you for advice. Which of the following statements would be proper advice for a CFP® professional to tell Pete?

I. Pete should not incorporate his business because the top corporate income tax bracket is 21%.
II. A limited partnership would also protect him from liability.
III. An S corporation would save accounting costs because it does not have to file income tax returns.
IV. Pete can reduce his current income tax liability by splitting his income between himself and a C corporation.
V. If he gives them stock, an S corporation could allow Pete to shift income to his children.

A. II, III
B. I
C. II, V
D. IV, V
E. III, IV

Answer 9

Question 1: D
The corporate tax rate is 21%. As an active participant (general partner) the limited partnership would not limit Pete’s personal liability relative to the business. If Pete took a salary of $400,000, his marginal tax bracket is 35%. This way Pete could reduce his income tax liability. An S corporation could shift income.

Question 10

Walter owns an S corporation. He starts it with $50,000 of cash. After a few months, business is expanding, so he lends the S corporation $100,000. As the year progresses, he needs more capital. The S corporation applies for a $100,000 loan. Before the bank will lend the money to the S corporation, it requires Walter to personally guarantee the debt. What is Walter’s basis for tax purposes?

A. $0
B. $50,000
C. $100,000
D. $150,000
E. $250,000

Answer 10

Question 5: D
Cash ($50,000) plus direct loan ($100,000). The bank loan will not increase basis.

Question 11

Which of the following filing statuses could help a business owner reduce his/her taxes?

A. File as a self-employed individual
B. File as an S corporation (Form 1120S).
C. File as a regular corporation (Form 1120).
D. File as an LLC.

Answer 11

Question 8: C
Answers A, B and D are conduit entities. A regular corporation will provide the owner with a separate tax entity. Money left in a corporation is taxed at 21%.

Question 12

The OKA Corporation owns 25% of the stock of DEC Corporation. For the current tax year, OKA receives $10,000 in dividends from DEC. What is the amount of OKA’s dividend-received deduction?

A. $0
B. $2,000
C. $2,500
D. $6,500
E. $10,000

Answer 12

Question 9: D
65% of the dividend received is excluded because OKA owns 20% or more of DEC. Otherwise, the deduction is limited to 50% of the dividend received when a company owns less than 20% of the paying company.

Question 13

On what forms would the owner-employee of a regular corporation receive notice of distributed taxable income?

I. Schedule K-1 of the 1120
II. W-2
III. 1099
IV. Schedule C

A. I, III
B. I, IV
C. II, III
D. III, IV

Answer 13

Question 10: C
A regular corporation would report earned income to its employees on Form W-2 and dividends to shareholders on Form 1099. If the W-2 is true, the only answer is Answer C.

Question 14

The Section 179 expense election is available for purchases of which of the following properties?

A. 1245 property
B. 1250 property
C. A franchise
D. A strip shopping center

Answer 14

Question 8: A
Only 1245 property qualifies for the Section 179 election.

Question 15

What are the Long-Term collectable gains tax rate?

Answer 15

28%

Question 16

Tim and Maggie Butler, who are married, sold their residence in June. The realized gain over the eight years they owned the home is $350,000. Instead of buying a new home, they decide to rent a condo. Which of the following statements is true?

A. The gain must be reported on the tax return for the year of the sale.
B. There is no taxable gain; therefore, no tax forms need to be filed.
C. The amount of the gain is more than exclusion. No tax forms need to be filed.
D. A Schedule D and Form 2119 must be filed.

Answer 16

Question 4: B
The $350,000 realized gain is completely excluded by the $500,000 exclusion. No return needs to be filed because there is no recognized gain.

Question 17

Tommy completed the following security transactions this year:
Long-term capital gain of $10,000 Long-term capital loss of $5,000
Short-term capital gain of $5,000 Short-term capital loss of $20,000 What is the net capital gain or loss on Tommy’s security sales?
A. Net STCL of $15,000
B. A loss of $3,000 can be taken against ordinary income
C. Net STCL of $10,000
D. Net loss of $10,000

Answer 17

Question 9: C
Yes, the STCL is $15,000 but the LTCG must be netted against the loss. Answer B is true, but it does not answer the question. Answer D is wrong. The answer must indicate short-term or long-term gain or loss.
LTCG $10,000 STCG $5,000
LTCL -$5,000 STCL -$20,000
Net LTCG (+) $5,000 Net STCL (-) $15,000

Question 18

Under Section 1031 rules, Bob and Alice Smithson exchange their rental property with a FMV of $1,000,000 and a basis of $250,000 for another rental property worth $1,000,000 with a basis of $350,000 (a swap). The new property was rented for 100 days, and then the Smithson’s used it as a personal residence for 60 days until Bob died last week. What is Alice’s basis in the property if they live in a community property state?

A. $250,000
B. $350,000
C. $500,000
D. $750,000
E. $1,000,000

Answer 18

Question 10: E
It doesn’t matter if it is rental property or a residence. As community property, it receives a full step-up in basis at the death of the first spouse.

Question 19

What is Mr. Able’s adjusted basis after the swap?

A. $0
B. $100,000
C. $150,000
D. $250,000
E. $350,000

Answer 19

Question 12: C
Realized gain (Step 1) $ 350,000 Step 4 $400,000
Recognized gain (Step 2) -100,000 Step 3 $250,000
Step 3 is $250,000 Adj, basis $150,000

Question 20

Helen is in the 28% marginal tax bracket and has the following invested assets:

• IRA with a FMV of $50,000 earning 8%
• Life Insurance cash value of $30,000 growing at 5%
• Growth mutual fund worth $20,000 and growing at 5%

What is the overall weighted return on Helen’s portfolio?

A. 5.78%
B. 6.00%
C. 6.50%
D. 6.75%
E. 7.00%

Answer 20

Question 13: C
$50,000. .5 x 8% = 4.00%
$30,000. .3 x 5% = 1.50%
$20, 000. .2 x 5% = 1.00%
$100,000 6.50%

Question 21

Ray likes new ideas. He purchases stock in Electric Zipper, Inc. (EZ). EZ fails and shuts down a year and a half later. Ray’s lost $50,000. How can he deduct his loss?

A. He can deduct up to $3,000 as LTCL and carry forward the remainder indefinitely.
B. He can deduct up to $3,000 as LTCL but only has a five-year window to deduct the remainder.
C. He can carry back losses for two years and carry forward losses for 20 years.
D. He can take the $50,000 as ordinary income loss under section 1244.

Answer 21

Question 15: A
Ray’s capital loss deduction is limited to $3,000 per year. Unless EZ was 1244 stock (not indicated). Answer D does not apply (see Income Tax Chapter 4). Answer C are the old rules for NOLs.

Question 22

In reference to types of authority, which of the following apply to a specific taxpayer and situation?
A. Treasury Regulations
B. Revenue Procedures
C. Private Letter Rulings
D. Public Rulings

Answer 22

Answer: C
By definition.

Question 23

Roberta buys and sells collectible dolls. Each year she earns about $30,000 but has $40,000 of related expenses. Which of the following is true?
A. She can take a loss on her Schedule C (self-employed)
B. The $30,000 of income must be reported as miscellaneous income
C. The $40,000 can be deducted on her Schedule A
D. She must make a profit

Answer 23

Answer: B
It never indicates that she makes a profit, therefore her activity is a hobby not a business (no Schedule C). The $30,000 of income is miscellaneous income.

Question 24

Dates for paying estimated taxes (quarterly) are?
A. March 15, June 15, September 15, December 15
B. April 1, June 1, September 1, January 1
C. April 15, June 15, September 15, January 15
D. March 1, June 1, September 1, December 1

Answer 24

Answer: C

Question 25

How many exemptions should a single person over age 65 and blind be able to claim?
A. 0
B. 1
C. 2
D. 3

Answer 25

Answer: A
Exemptions are eliminated starting in 2018.

Question 26

Joan is self-employed. She has provided you with the following information for the current year.
Net Schedule C Income $100,000
Keogh Contribution 18,000
Health Insurance Premium 5,000
Charitable Contributions 10,000
Property Tax 5,000
1/2 Self-employment Tax (given ) 7,065*
*Based on $100,000 net income.

What amount is Joan’s adjusted gross income?

A. $54,935
B. $69,935
C. $77,000
D. $80,000

Answer 26

Answer: B
Net Schedule C Income $100,000
Less adjustments
Keogh 18,000
1/2 self-employment tax 7,065
100% health insurance 5,000
-30,065
=$69,935

The self-employment tax is $100,000 x .07065. Health insurance premium paid by self-employed persons are deductible as an adjustment for AGI on the front of the 1040.

Question 27

Which of the following is not an itemized deduction?
A. Real Estate Taxes
B. Home Mortgage Interest
C. HSA Deduction
D. Charitable Gifts
E. Investment Interest Expense

Answer 27

Answer: C
The other answers are itemized deductions. Health savings account deductions are on the front of the 1040.

Question 28

Mr. and Mrs. Able have active income of $250,000. They also have portfolio income of $10,000 (interest), $5,000 (qualifying dividends), $10,000 (short-term capital gains) and $15,000 (long-term capital gains). They have been margining their stock portfolio and have incurred $35,000 of investment interest. How much of the investment interest can they deduct?
A. $20,000
B. $25,000
C. $30,000
D. $35,000

Answer 28

Answer: A
Unless the question says they opted out of the qualifying dividend tax rates and long-term gains, they are not usable.

Question 29

Mrs. Todd’s diamond ring was stolen. She bought the ring for $30,000 and insured it for $15,000. Recently she got an appraisal for $40,000 and changed her insurance to insure it for $20,000. What is the amount of Mrs. Todd’s deductible casualty loss if her AGI is $50,000?
A. $0
B. $2,100
C. $4,900
D. $5,000

Answer 29

Answer: A
Theft is no longer covered as a casualty loss. Only losses from a federally declared disaster are deductible. The calculation is shown below though it does not apply in this question.
Lesser of basis or FMV $30,000
less insurance -$20,000
less floor -$100
less 10% of AGI -$5,000
$4,900

Question 30

Cathy is self-employed. She operates her business from her home. Her gross income is $100,000. Expenses associated with her business are $30,000. How much of her home office expense of $20,000 can she deduct on her Schedule C form?
A. $18,000
B. $19,000
C. $20,000
D. $30,000

Answer 30

Answer: C
The deduction is on the Schedule C not the Schedule A.

Question 31

Abby’s mother lives with Abby and her husband. Abby supports her mother. Abby’s mother’s income sources are Social Security payments of $750 per month and $250 per month from a pension plan. Can Abby take her mother as an exemption on her 1040?
A. No, her mother will be using her exemption.
B. No, exemptions are no longer allowed.
C. Yes, Abby can take the exemption.
D. Yes, Abby can take the exemption, but she must include as income the $250 per month her mother receives as pension income.

Answer 31

Answer: B

Question 32

Mr. and Mrs. X have an AGI of $150,000. They have 3 children under 13. How much dependent care credit can they take if it costs $10,000 in dependent care for both of them to work?
A. $0
B. $1,200
C. $3,000
D. $6,000

Answer 32

Answer: B
Dependent care expenses are limited to $6,000 for 2 or more children. The credit percentage that applies is 20%. They have to be under age 13.

Question 33

Steve owns and operates a large group of retail appliance stores. The store has an extensive selection of appliances for sale. He uses LIFO. He also repairs appliances both under warranty and out of warranty. What method of tax accounting is most appropriate for Steve’s business?
A. Cash
B. Accrual
C. Hybrid
D. FIFO

Answer 33

Answer: C
They hybrid method combines the accrual method for purchases and sales of inventory with the cash method for all other transactions. “Large group” implies over $25M of revenue.

Question 34

NOLs (Net Operating Losses) are allowed for which of the following entities for losses prior to 2018?
I. Estates
II. Self-employed
III. S Corporation
IV. Partnership
V. Corporations
A. I, II, III
B. I, II, V
C. II, IV
D. III, V

Answer 34

Answer: B
NOLs are not allowed to partnerships or S Corporations. Starting in 2018, NOLs are not allowed.

Question 35

A closely held C Corporation that is owned by individuals who perform certain services is called a PSC (Personal Service Corporation). Which type of business would be classified as a PSC?
I. Insurance Agents
II. Doctors
III. CPAs
IV. Attorneys
V. Drug Store

A. All of the Above
B. I, V
C. II, III, IV
D. II, V

Answer 35

Answer: C
Health (doctors), accounting, and law (attorneys) would all be personal service. A drug store is debatable, but it is not part of correct answer choice.

Question 36

Lucy (married) starts a corporation. The corporation issues 1244 stock. If she invests $150,000 in the corporation and loses everything, what kind of losses can she take this year?
A. A 1244 loss of $100,000
B. A $3,000 capital loss
C. Both A and B
D. Neither A nor B

Answer 36

Answer: C
She can take both. She will have a $47,000 loss to carry forward.

Question 37

An S Corporation can issue all the following forms of stock except?
A. Common
B. Common Voting
C. Common Non-Voting
D. Preferred

Answer 37

Answer: D
S Corporations cannot issue preferred stock.

Question 38

Henry bought a beachfront condo for $200,000. He paid an attorney $1,000 to read and review legal documents associated with the condo. He also paid $12,000 for kitchen improvements. During the year repairs totaled $2,000 and property taxes $4,000. He claimed $7,280 for first year cost recovery deductions. What is the adjusted basis of the condo?
A. $192,720
B. $199,720
C. $205,720
D. $213,000

Answer 38

Answer: C
Cost $200,000
plus legal fees +1,000
plus improvements +12,000
less CRD -7,280
$205,720

Question 39

Office equipment is what type of property for MACRS purposes?
A. 5-year 1245 property
B. 7·year 1245 property
C. 5-year 1250 property
D. 7-year 1250 property

Answer 39

Answer: B
By definition.

Question 40

Which of the following is an example of a qualified like-kind exchange?
A. Inventory from company A in exchange for inventory from company B
B. A duplex apartment in exchange for a collectible auto
C. The personal residence of Mr. A for the personal residence of Mr. B
D. An apartment complex for a shopping center

Answer 40

Answer: D
Non-qualifying property is inventory of a business, personal residence and business equipment. Qualifying property must be generally of the same type such as real estate for real estate.

Question 41

Sally completed several securities transactions this year that produced the following:
* Long-term capital gain of $5,000
* Long-term capital loss of $3,000
* Short-term capital gain of $4,000
* Short-term capital loss of $6,000

What will be the result?

A. Zero Capital Gains and Losses
B. $4,000 of Capital Gains
C. $4,000 of Capital Losses
D. $2,000 of Capital Gains and Losses

Answer 41

Answer: A
The long-term capital gains ($2,000) are offset by the short-term capital losses ($2,000). They are zeroed out.

Question 42

Mr. and Mrs. Thomas purchased a home 10 years ago for $150,000. They expanded the second floor over the garage for $50,000. They sold the home at the top of the market for $750,000 net of real estate commissions. They did not purchase a new home. What was their recognized gain?
A. $50,000
B. $100,000
C. $150,000
D. $250,000
E. $300,000

Answer 42

Answer: A
Sold home $750,000
less adjusted basis of home -200,000
Realized gain =$550,000
less $500,000 exclusion -500 000
Recognized Gain =$50,000

Question 43

Mr. and Mrs. Boone bought a house in California for $750,000. Three months after the purchase, Mr. Boone accepted a new job in Arizona. If they sell their California house six months after the purchase for $600,000, what will be the tax result?
A. A loss of $150,000
B. A gain of $150,000
C. No loss can be taken
D. The loss can only be used against capital gains

Answer 43

Answer: C
Losses cannot be taken on the sale of a personal residence.

Question 44

Which of the following is an AMT “add-back” item?
A. Cost depletion (oil and gas)
B. State income taxes
C. Percentage depletion (oil and gas)
D. Depreciation

Answer 44

Answer: B
Most forms of taxes are AMT “add-back” items. Answers C and D are preference items.

Question 45

Tai has an AGI of $256,100. His taxable income is $170,250. He has a regular tax of $35,500 and an alternative minimum tax of $69,000. What is the amount of AMT payable?
A. $0
B. $33,500
C. $35,500
D. $69,000

Answer 45

Answer: B
$69,000 - 35,500 = $33,500

Question 46

Which of the following life insurance policies is/are subject to corporate AMT (gross receipts exceed $7.5 million)?
I. Cross-purchase buy-sell (C Corporation)
II. Key person policy (C Corporation)
III. Stock redemption (C Corporation)
IV. Collateral assignment spit-dollar (C Corporation)

A. All of Above
B. I, II
C. I, IV
D. II, III
E. None of the above

Answer 46

Answer: E
Corporate AMT has been eliminated starting in 2018 under the TCJA.

Question 47

Sam owns a small duplex that he rents out. The duplex generated $12,000 of losses. His earnings from his regular job were $150,000 and his investment income was $22,000. What is his AGI?
A. $138,000
B. $150,000
C. $160,000
D. $172,000

Answer 47

Answer: D
His AGI is above $150,000 ($150,000 + 22,000 = $172,000). The loss can only be taken if his AGI was under $150,000.

Question 48

Larry bought a limited partnership interest in a low-income housing development. He is in a 35% income tax bracket. If the development generated a deduction-equivalent tax credit of $20,000, how much of a tax credit can he use?
A. $0, limited partnerships cannot take losses
B. $3,000
C. $3,500
D. $7,000
E. $20,000

Answer 48

Answer: D
Multiply $20,000 times 35% to get the credit.

Question 49

Paul Williams invested in an oil and gas working interest as a limited partner. The oil and gas program produced a $30,000 loss. How much of the loss can he take this year?
A. $0
B. $25,000
C. 50% of $30,000
D. $30,000

Answer 49

Answer: A
If he is a limited partner, he cannot take the loss. The loss becomes a passive loss subject to the passive loss rules.

Question 50

Do separate maintenance agreements (pre-2019) qualify as a tax deduction for a payor spouse?
A. No, they are income to the payor spouse
B. No, it must be alimony
C. Yes, they are deductible
D. Not enough information to answer the question

Answer 50

Answer: C
The law reads “alimony and separate maintenance payments are deductible.”

Question 51

If the payee spouse owns the life insurance policy on the life of the payor, will the policy payments made by the payor qualify as alimony?
A. No, life insurance payments never are considered alimony
B. No, there is no value until the payor dies
C. Yes, if the payments are made under the divorce instrument
D. Yes, but only to the extent of the cash value growth of the policy

Answer 51

Answer: C
By definition.

Question 52

David and Sally are divorcing. Their two children will live with Sally. She will have custody. He will pay alimony and 100% of the support for the two children. Who will get the dependency exemption?
A. Sally
B. David
C. Sally for one child; David for one child
D. Neither

Answer 52

Answer: D
Exemptions are eliminated starting in 2018.

Question 53

Which of the following types of property is/are considered ordinary income, not capital gains, property for calculation of deductible charitable contributions?
I. Use-Related Property
II. Use-Unrelated Property
III. Inventory
IV. Long-Term Capital Gains Property
V. Short-Term Capital Gains Property

A. I, III, V
B. I, IV
C. II, III, IV
D. II, Ill, V

Answer 53

Answer: D
Use-related and long-term capital gains property can quality for FMV treatment not ordinary income type property. Answers II, III, and V are ordinary income property.

Question 53

Public charities (50%/60% for cash donations) are all the following except?
A. Private Universities
B. The Catholic Church
C. War Veterans’ Organizations
D. The Red Cross

Answer 53

Answer: C
War veterans’ organizations are 30% organizations (private charities). All schools and churches are public charities.

Question 54

Mrs. Peters (AGI $120,000) wants to gift a stock purchased this year for $75,000 now worth $50,000 to the United Way. What is the amount of allowable charitable deduction she can receive in the current year?
A. $36,000
B. $50,000
C. $60,000
D. $75,000

Answer 54

Answer: B
Loss property is limited to FMV, but FMV is treated as basis. The maximum is 50% of AGI, but limited by FMV.

Question 55

For charitable contribution deductions, which of the following is/are considered public charities (50% organizations)?
I. Foundations
II. Northwestern University (a private university)
III. The Humane Society
IV. St. Luke’s Hospital
V. The Baptist Church

A. All of the Above
B. I
C. II, III, IV, V
D. III, V

Answer 55

Answer: C
A foundation is a private charity (30% organization).