Tax 3 Flashcards
Freda purchased a stereo system for her son Wes, age 16. The stereo was placed in Wes’ room and is used exclusively by him. Freda also purchased a new sports car in her own name, that was used 90% of the time by Wes. Which of the cost of these items may be considered as support in determining whether Freda may claim Wes as a dependent?
Both the stereo and the car qualify as support because of the use test.
Neither the stereo nor the car qualify as support because the car is Freda’s and the stereo is diminimus.
The stereo does not qualify for support but the car does because he uses it 90% of the time.
The stereo qualifies for support, but the car does not even though it is de minimus.
Solution: The correct answer is D.
The stereo system purchased and GIVEN to Wes qualifies as support. Because the car was not GIVEN to Wes (although he is allowed to use it) it will not be considered support. However, maintenance costs, such as gas and insurance that the taxpayer provides for his use of the car will qualify as support.
<p>In which of the following venues is a jury trial available for tax controversies?The U.S. Tax Court.The U. S. Tax Court, Small Claims Division.A U. S. District Court.The U.S. Court of Federal Claims.All of the above.</p>
<p>Solution: The correct answer is C.A jury trial is only available in tax controversies adjudicated by the U.S. District Court. Only bench trials are available in the other venues.</p>
<p>Leona is 68 years old and single. What is the least amount of adjusted gross income that will require Leona to file a tax return for 2020?$7,900$12,405$14,055$15,350</p>
<p>Solution: The correct answer is C.Leona must file a tax return if her adjusted gross income is $14,050 or more for the current year ($12,400 basic standard deduction + $1,650 additional standard deduction for age). Any amount GREATER THAN $14,050 will cause taxes to be filed. Keep in mind this question is looking for the LEAST amount that would cause her to file.</p>
Which of the following decreases a taxpayer’s at-risk amount?
Cash and the adjusted basis of property contributed to the activity.
Amounts borrowed for use in the activity for which the taxpayer is personally liable or has pledged as security property not used in the activity.
The taxpayer’s share of amounts borrowed for use in the activity that is qualified non-recourse financing.
Passive losses which are used against passive income from another source.
Solution: The correct answer is D.
Options “A,” “B” and “C” all increase the at risk amounts.
To what extent may the rental losses of an active participant be deducted against active and passive income?
$25,000 of losses from rental property income may be deducted against ordinary income.
The taxpayer must be considered “active” in that they participate in the general management and decision making of the property.
The $25,000 is reduced $1 for every $2 over an AGI limit of $100,000.
When the AGI reaches $150,000, the deduction is lost and must be treated as regular passive income.
I and II only.
II and III only.
II, III and IV only.
All of the above.
Solution: The correct answer is D.
$25,000 of losses from rental property income may be deducted against ordinary income. The taxpayer must be considered “active” in that they participate in the general management and decision making of the property. Also, the $25,000 is reduced $1 for every $2 over an AGI limit of $100,000. When the AGI reaches $150,000, the deduction is lost and must be treated as regular passive income.
Standard Deduction for someone over 65 using the single or HOH status
$1,650 for being 65 or over
The classifications of income are:
Active Income. Earned Income. Unearned Income. Portfolio Income. Passive Income.
II, III, IV and V only.
I, II and III only.
I, IV and V only.
All of the above.
Solution: The correct answer is C.
The classifications of income are active, passive and portfolio. Earned income is a subset of active income while unearned income may be either a passive or portfolio income.
Ned, a college professor, owns a separate business in which he participates during the current year. He has one employee who works part-time in the business. Which of the following statements is correct?
If Ned participates for 120 hours and the employee participates for 120 hours during the year, Ned does not qualify as a material participant.
If Ned participates for 95 hours and the employee participates for 5 hours during the year, Ned probably does not qualify as a material participant.
If Ned participates for 500 hours and the part-time employee participates for 520 hours during the year, Ned still qualifies as a material participant.
If Ned participates for 600 hours and the part-time employee participates for 1,000 hours during the year, Ned nevertheless qualifies as a material participant.
Solution: The correct answer is D.
The rules for material participation are: 1. More than 500 hours of participation 2. Taxpayer is the only one who substantially participates 3. Taxpayer spends greater than 100 hours in the tax year and no one else spends more 4. Taxpayer has materially participated in any 5 of the previous 10 years 5. The activity is a personal services activity and the individual has materially participated in any 3 prior years 6. Taxpayer participates 100 or more hours in this activity and total participation in all such activities exceeds 500 hours A is incorrect because he would be a material participant. The rule is > 100 hours and no one spends more. They can spend the same, but not more. (#3) B is incorrect because he is the only one who substantially participates (#2) C is incorrect because he needs to spend more than 500 hours or at least the same as the highest working person to be a material participant. (#1, #3) D is correct because he spent more than 500 hours (#1)
<p>On January 1st of this year, Linda sold a piece of land she had had for years to George. Linda's basis in the land was $75,000 and she sold it for $100,000. It was agreed that George would pay Linda $10,000 as a down payment and would make installment payments of $10,000 for the next 9 years plus 10% interest. His second payment was due and payable December 31 of this year. What is Linda's tax consequence of this transaction this year?$20,000 of ordinary income$20,000 of long term capital gain$2,500 of long term capital gain and $9,000 of ordinary income$5,000 of long term capital gain and $9,000 of ordinary income</p>
<p>Solution: The correct answer is D.George is paying her $100,000. Her amount invested is $75,000. Therefore, over 10 years, her total profit will be $25,000 or $2,500 per year except for the down payment. There are two payments at the end of the year.An interest payment of 10% × $90,000*=$9,000 (ordinary income). The second payment, $10,000, consists of $2,500 capital gain and $7,500 of return of basis.*Recall the amount paid was $100,000 less a down payment of $10,000, so $90,000 was outstanding.</p>
Standard Deduction for a blind person
$1,650 for being blind
Assuming an asset is sold for a gain, when would Section 1250 ordinary income occur?
Depreciable property is sold at a gain.
Depreciable property is sold regardless of whether there is a gain or loss.
Straight line depreciation is used on real property subject to ACRS.
Real property subject to ACRS and accelerated depreciation was used.
Solution: The correct answer is D.
Section 1250 gain applies to the realized gain on real property where the accelerated method was used. The gain is the excess of accelerated over straight line (ACRS). Section 1250 gain is taxed as ordinary income. Under current law (MACRS), only straight line depreciation of real property is used.
Which of the following distributions of IRC Section 1245 recapture property may result in the immediate recapture of some or all of previous depreciation deductions?
A distribution by a partnership to one of its partners.
A non-simultaneous like-kind exchange.
A disposition at death.
A sale for an interest-bearing note.
Solution: The correct answer is D.
Section 1245 recapture is applied to the sale of depreciated assets. Option “A” is incorrect because the distribution is a property distribution and not a sale. Option “B” is incorrect because there is no “sale” as part of a like-kind exchange. Option “C” is incorrect because the property transferred at death is not classified as a sale. Option “D” is correct because it is a sale, regardless for cash, notes, either or both.
Cash Basis VS Accrual Method
Cash basis is recognized as income when received. (check is received by the taxpayer.)
The accrual accounting method recognizes expenses when the legal liability to pay arises. This usually occurs when the invoice is received.
During the current tax year, Sam Malone had $10,000 of passive income from a publicly traded limited partnership. He also has a non-publicly traded limited partnership which generated a $10,000 passive loss. How much of the passive loss is deductible by Sam during the current tax year?
$0
$1,000
$3,000
$10,000
Solution: The correct answer is A.
Income from a publicly traded limited partnership may not be offset by any other passive losses.
<p>As a direct result of the rules under TCJA 2017, qualifying dividends will be treated in which manner:Qualifying dividends are taxed in the same way as capital gains at an 18% rate for those in the 28% and higher marginal tax bracket.Qualifying dividends are taxed at a newly instituted 5% tax rate.The taxation on dividends have not been impacted under TCJA.Qualifying dividends are taxed at set dollar breakpoints.</p>
<p>Solution: The correct answer is D.Under prior law, the capital gain breakpoints were related to the tax breakpoints. Under TCJA the capital gain breakpoints are at set dollar amounts not corresponding to the current tax brackets. See provided tax tables posted in the Tax inflation Numbers section of online learning system.</p>
Which of the following is not a requirement of the individual real estate investor exception to the passive activity loss rules?
The taxpayer must materially participate in the activity.
The taxpayer must own at least 10% of the value of the real estate.
The taxpayer must have an AGI of less than $150,000.
The taxpayer must actively participate in the activity.
Solution: The correct answer is A.
The taxpayer is not required to materially participate in the activity, but the taxpayer must actively participate in the activity. Material participation requires substantial, continuous involvement in the operation of the activity. Active participation means that the taxpayer participates in making management decisions concerning the property, but is not substantially and continuously involved in the operation of the activity.
During the year, Myrna furnished more than 50% of the support for the following persons: Butch, Myrna’s husband, who has no income and does not file a return. Wallace, Myrna’s cousin, who does not live with her. Brad, Myrna’s father-in-law, who does not live with her. Dawn, Myrna’s 18 year old daughter who is a full time student. Presuming all other requirements for qualified dependent are met, on a separate return, how many qualified dependent credits may Myrna claim?
One.
Two.
Three.
Four.
Solution: The correct answer is B.
Butch, the husband, is not a qualified dependent, as a he is not eligible to be treated that way. Cousins do not meet the relationship test.
The fact that the father-in-law does not live with Myrna does not automatically disqualify him a dependent, if he meets all the other qualifying relative requirements, as stated, Myrna can claim the qualified dependent credit for him.
Myrna’s daughter is over 17 and ineligible for the qualifying child credit of $2,000 but, as a full time student, she will qualify as a qualified dependent for the $500 credit.
<p>What is the marginal income tax rate?The tax rate applied to the last dollar of taxable income earned.The lowest tax rate a taxpayer can pay.The tax rate on business profit (margin).The average tax rate for an individual.</p>
<p>Solution: The correct answer is A.The marginal tax rate is the tax rate applied to the last dollar earned.</p>
Which of the following taxpayers can use the standard deduction?
Zeke, who files a separate return from his wife Yasmine. Yasmine itemizes deductions on her return.
Xavier, who is a nonresident alien.
William, who files a tax return for less than 12 months because he changed his annual accounting period.
Violet, who is a non-citizen spouse but files MFJ.
Solution: The correct answer is D.
Only answer D describes a taxpayer who is permitted to use the standard deduction. All of the other taxpayers are required to itemize their deductions.
Bonnie and Manuel are married. He paid $100,000 for their home five years ago. Its fair market value was $150,000 when Manuel died. What is Bonnie’s basis in the home after Manuel’s death if the home was held as community property and Manuel left his half to Bonnie?
$50,000
$75,000
$125,000
$150,000
Solution: The correct answer is D.
Upon the death of either spouse in a community property state, both halves of community property are stepped to the fair market value regardless of who inherits the decendant’s half.
<p>Which of the following is a true statement regarding a current Net Operating Loss (NOL)?A NOL generally can be carried back two years prior to the loss year.A NOL can only offset up to 80% of the current year's income.A NOL deduction is available the year the loss occurs.An affirmative election must be made to forgo the carryback period.</p>
<p>Solution: The correct answer is B.NOL losses currently cannot be carried back but they can be carried forward, (except for select agricultural or insurance filers). However, the NOL can only offset 80% of the current year's income for years after 12/31/17.</p>
Alberto (age 65) and Stephanie (age 58) are raising their grandson, Jackson, who is blind and qualifies as their dependent. What is Alberto and Stephanie’s standard deduction in 2020 if they file a joint income tax return?
$24,800
$26,100
$26,450
$27,400
Solution: The correct answer is B.
In 2020 the standard deduction for a married couple is $24,800. Since Alberto is 65 years of age or older he may also take an additional standard deduction of $1,300. $24,800 + $1,300 = $26,100. Their grandson’s blindness or being a dependent has no bearing on their standard deduction.
Homer and Marge have been unable to have a baby. They decided last year that adoption would be the best choice for them. They adopted, Maggie, a 4 year old child this year. They paid $15,000 in qualifying adoption expense for the current year. Their MAGI is $170,000 and their tax due before the application of the qualified adoption credit is $11,000. What is Homer and Marge’s available adoption credit for the current year?
$9,000.
$11,000.
$13,570.
$15,000.
Solution: The correct answer is B.
They are limited to the least of a) qualifying adoption expenses (15,000), b) adoption credit of $14,300 for 2020, or c) amount of tax due ($11,000). The adoption credit is not refundable.
Under what circumstances will the child of divorced parents be treated as the qualifying child of the noncustodial parent?
The parents are legally divorced and not living in the same household.
The child receives over one-half of his support for the year from his parents.
The child is in the custody of the parents for more than half the year.
The custodial parent signs a statement that he will not claim the child as a dependent for the year and the noncustodial parent attaches the statement to his return.
I only.
I, II and III only.
II, III, and IV only.
I, II, III, and IV only.
Solution: The correct answer is D.
All of the options are requirements that must be met in order for a child of divorced parents to be treated as a qualifying child of the noncustodial parent.
Scary Berries, Inc. is a C corporation that specializes in carving berries into frightening images. The company’s primary profit generation is the sale of berries and they generate $4 million in annual revenue on average. What accounting method may Scary Berries, Inc. utilize for tax purposes?
Cash basis
Accrual basis
Either cash or accrual
Units of production
Solution: The correct answer is B.
Since Scary Berries generates its income from inventory (the berries) they must file under the accrual basis even though their revenues are under the $25 million accrual basis.
Which of the following is not an ordinary income asset?
Literary compositions in the hands of the author.
Depreciable property or real property used in a trade or business.
Notes receivable from a trade or business.
Stock in trade held for sale to customers in the ordinary course of business.
Solution: The correct answer is B.
Depreciable property or real property used in a trade or business is a Section 1231 asset, not an ordinary income asset. All of the other options are ordinary income assets.
Which of the following credits are fully refundable?
The Earned Income credit. The American Opportunity credit. Lifetime Learning credit. Child Tax credit. Adoption credit.
I, IV and V only.
I only.
I and V only.
None of the choices.
Solution: The correct answer is B.
The Earned Income credit is refundable; able to create a negative tax liability. The American Opportunity credit and Child tax credit may be partially refundable.
A client sold an apartment building last year for $100,000, paying a sales commission of $5,000 plus $2,500 closing costs. The building originally cost $80,000 20 years ago. Total straight line depreciation of $40,000 had been taken. The building had a mortgage of $60,000 which was assumed by the buyer. What is the purchaser’s cost basis?
$70,000 $92,500 $100,000 $107,500 $160,000
Solution: The correct answer is C.
The cost basis to a purchaser is the acquisition cost plus any other costs associated with purchasing the property or making it useful for service. The buyer paid $100,000. The question indicates that it was the seller and not the buyer who paid the sales commission and the closing costs. Therefore, the buyer’s basis is only the acquisition costs of $100,000. Cash $40,000 plus mortgage $60,000.
Pat invests $150,000 for a 10% interest in a limited partnership. He receives a K-1 with his loss at $80,000. How much of his loss is suspended?
$0.
$8,000.
$15,000.
$80,000.
Solution: The correct answer is D.
To determine whether any of the losses are suspended you must first apply the at-risk rules, then the passive loss rules. The amount at risk is the basis of $150,000. Since the loss is less than the amount at risk, none of the loss is suspended due to the at-risk rules. In applying the passive loss rules, the passive loss is limited to the amount of passive income for the year. Since there is no passive income for the year, none of the loss may be recognized and the $80,000 loss is suspended.
Maria and Orlando are married taxpayers who file their income tax return jointly. They have asked you to explain to them how the current law will affect their 2020 tax filing. You tell them:
Their standard deduction is $24,800.
Their deduction is 200% of a single tax filer.
The maximum taxable income in the 22% bracket for MFJ filers will be twice the amount as for single filers.
I only.
I and II only.
II and III only.
I, II and III.
Solution: The correct answer is D.
The deduction for joint filers is 200% of a single tax filer, thus addressing the marriage penalty which was extended for 2020.
Tikia, Inc. is filing their corporate income tax return for last year with a tax-year end of September 29. What is their tax accounting period?
Fiscal
Calendar
Part-year
52-53 week
Solution: The correct answer is D.
A fiscal year ends on the last day of a month other than December. A calendar year ends on the last day of December. A partial-year is for a time span less than 1 year. A 52-53 week year ends on a specified day of the week (such as Friday) that occurs in the last week of the last month of the tax year.
John, Jay and Jeff each have an ownership interest in Three Guys Burgers, Inc. Based on the following information, which of them is/are considered to have materially participated in the conduct of the Three Guys Burgers business this year?
John dedicated more than 500 hours this year to Three Guys Burgers.
Jay devoted 150 hours to Three Guys Burgers this year.
Jeff devoted 115 hours to Three Guys Burgers this year, but also devoted more than 100 hours to several other similar activities, for a total of 520 hours in all of the activities combined.
I only.
II and III only.
I and III only.
I, II and III.
Solution: The correct answer is C.
Jay has not materially participated. Although Jay devoted more than 100 hours to the activity, he did not devote more hours than anyone else because John worked at Three Guys Burgers for more than 500 hours. Jeff is also a material participant because he devoted more than 100 hours to the activity and also devoted more than 100 hours to several other similar activities, for a total of more than 500 hours in all of the activities combined.
Tab owns an apartment building and a DVD rental business. He participates for approximately 600 hours in the apartment building operations and approximately 1,000 hours in the DVD rental activity. Which of the following statements is correct?
Both the apartment building and the DVD rental businesses are passive activities.
Neither the apartment building nor the DVD rental business is a passive activity.
The DVD rental business is a passive activity, but the apartment building is not.
The apartment building is a passive activity, but the DVD rental business is not.
Solution: The correct answer is D.
Rental real estate is by definition a passive activity, therefore, the apartment rental business is passive. The DVD rental business is not a passive activity in that DVD rentals are short-term. To be considered as passive activities, other rental activity of goods and equipment must be long-term. According to code, short-term is defined as less than seven days.
Under the accrual method of accounting, the taxpayer (seller) recognizes income when:
The bill is received by the buyer.
The goods are accepted by the buyer.
The goods are loaded on the truck at the seller’s facility.
The seller writes and sends the invoice after sending the goods.
Solution: The correct answer is D.
The accrual accounting method recognizes income when the taxpayer has a right to collect. This occurs usually after the completion of a job and in no case later than when the invoice is prepared and sent.
Maria Blue spent $12,000 in day care services for her 4 children to allow her to work. If her adjusted gross income is $100,000, how much is her dependent care credit?
$1,200
$2,400
$6,000
$12,000
Solution: The correct answer is A.
The dependent care credit is not phased out and provides a credit of 20% on up to $3,000 per qualifying child with a maximum of $6,000 for two or more children. Therefore her credit is $1,200 = $6,000 × 0.20.
<p>Kelly and Terry are separated and in the process of divorce so they are going to file their income tax return for last year separately. Kelly made a large number of charitable contributions from her own separate checking account at the end of last year so she wants to file using itemized deductions. What are Terry’s options assuming Kelly files using itemized deductions?Terry may utilize the standard deduction or itemized deduction, whichever is less.Terry may utilize the standard deduction or itemized deduction, whichever is greater.Terry must utilize the standard deduction.Terry must utilize itemized deductions.</p>
<p>Solution: The correct answer is D.A married individual who files a separate return (married filing separately filing status) cannot use a standard deduction if that person’s spouse itemizes deductions.</p>
The holding period of property acquired by gift may begin on:
The date the property was acquired by the donor only.
The date of gift only.
Either the date the property was acquired by the donor or the date of the gift.
Some other date.
Solution: The correct answer is C.
A person receiving a gift has a holding period of the donor plus the donee if at disposition he uses the gain basis. However, the holding period for a gift utilizing the loss basis (where a double basis rule applies) starts the holding period at the date of the gift.
Cash Basis VS Accrual Method
CASH
- Cash basis is recognized as income when received. (check is received by the taxpayer.)
- Cash-basis taxpayers will recognize the income in the year that the payment is actually or constructively received.
ACCRUAL
- The accrual accounting method recognizes expenses when the legal liability to pay arises. This usually occurs when the invoice is received.
- Accrual-basis taxpayers must recognize the income in the year the services or goods are provided.
- The accrual accounting method recognizes income when the taxpayer has a right to collect.
- C corporations must use the Accrual method
- Partnerships with corporations as owners must use the accrual method
- S corporations are not required to use the accrual method of accounting
Wilma is married to Herb, who abandoned her five years ago. She has not seen or communicated with him since June of that year. She maintains a household in which she and her two young dependent children live. Which of the following statements about Wilma’s filing status in this year is correct?
Wilma can use the rates for single taxpayers for this year.
Wilma can file a joint return with Herb for this year.
Wilma can file as a head of household for this year.
Any of the above.
Solution: The correct answer is C.
Wilma meets the “abandoned spouse” rules. Therefore, she can file as a head of household. Otherwise, her filing status would be married, filing separately. Head of Household required that the taxpayer pay for more than 50% of the upkeep of the home in which the qualifying individuals reside. The qualifying individuals need not be dependents of the taxpayer.
Michelle’s husband passed away in January this year. She does not remarry and still maintains a residence for herself and her son who is 10 years old. When she is filing her tax return for this year she may file as:
Single
Married filing jointly
Married filing separately
Qualifying widower
I only
IV only
II and III only
II, III, and IV only
Solution: The correct answer is C.
(I) Since Michelle’s spouse died during the year she is considered married for the year. (II) and (III) Since Michelle is considered married for the full year (she was married but her spouse died during the year and she did not remarry) she may file MFS or MFJ. (IV) She does not currently qualify for filing qualifying widower since this status applies for the 2 years following the year of a spouse’s death.
One of the five tests which must be met to qualify as a dependent is:
The dependent has no income.
The taxpayer contributed over 50% of the dependent’s support.
The dependent must be under 23 years old.
The dependent must not be required to file an income tax return.
Solution: The correct answer is B.
The five dependency tests are: 1) Gross Income Test, 2) Support Test, 3) Member of Household or Family Member Test, 4) Citizenship Test (U.S., Canada or Mexico), and 5) Joint Filing Test.
Karen and Tom are married filing jointly taxpayers with 3 children. Their MAGI is $85,000. What is the maximum amount of the child tax credit that could be refundable to Karen and Tom?
$0.
$2,000.
$4,200.
$6,000.
Solution: The correct answer is C.
They have 3 children. The child tax credit is $2,000 per child against their tax obligation, up to $1,400 ($4,200 for the three children) per child can be refundable if there is no tax obligation due.
<p>During the current year, Martin, an unmarried taxpayer residing in Montgomery County, collected $200 interest on U.S. government bonds, $600 on Montgomery County school bonds, and $500 interest on a state condemnation award. He also received $60 in dividends on Ford Co. Common stock. His gross taxable income from the above is:$1,360$760$560$260</p>
<p>Solution: The correct answer is B.Interest on Montgomery County school bonds is excluded under Section 103. Gross income is $200 + $500 + $60 = $760.</p>
One of the five tests which must be met to qualify as a dependent for a qualifying relative is:
Gross income of the dependent.
The ability of the dependent to provide for their own care.
The age of the dependent.
Whether the dependent owes income taxes from a previous year having filed single.
Solution: The correct answer is A.
The five dependency tests are: 1) Gross Income Test, 2) Support Test, 3) Not a qualifying child, 4) Citizenship Test (U.S., Canada or Mexico), and 5) Joint Filing Test.
Donna Bella, whose AGI is $250,000, also has passive income of $125,000 and passive losses of $150,000. She uses $125,000 of her passive losses to offset the passive income and the rest is subject to suspension. She has come to you today to find out which of the following ideas is the best possibility for reducing her current tax liability.
An investment in an oil by-product and natural gas limited partnership generating losses.
An investment in an activity producing credits.
An investment in rental real estate as an active participant designed to generate losses.
An investment in limited partnership historic district rehab project producing both credits and passive losses.
Solution: The correct answer is B.
In this case, more losses are not required at all. Rather, credits only are needed to improve the client’s tax position.
Eloise is an unmarried elderly woman who lives alone in a small apartment. Eloise is only able to provide 6% of her own support. The remainder of her support is provided by the following people: 10% of her support is provided by her oldest son Frank. 22% of her support is provided by her daughter Gertrude. 30% of her support is provided by her son Henry. 32% of her support is provided by her friend Irene. Which of these individuals is eligible to claim Eloise as a dependent?
Irene can claim Eloise as a dependent because she provides more support than anyone else.
Frank can claim Eloise as a dependent because he is the oldest son.
Henry can claim Eloise as a dependent, but only if Gertrude signs an appropriate statement.
None of these individuals may claim Eloise as a dependent.
Solution: The correct answer is C.
Option “A” is not correct; Irene may not claim Eloise as a dependent because she does not meet the relationship test as a qualifying relative. Option “B” is not correct; Frank has not provided more than 10% of Eloise’s support, so he is not a qualifying person. Either Gertrude or Henry may claim Eloise as a dependent because they each provided more than 10% of Eloise’s support and together they provided more than 50% of her support. In order for one of them to claim Eloise as a dependent, however, the other must sign a statement agreeing not to claim an exemption for Eloise for this year.
One of the five tests which must be met to qualify as a dependent is:
Whether the dependent files a joint return that year.
That the dependent owes taxes from a previous year.
Will the dependent owe taxes this year.
The unearned income reported by the dependent.
Solution: The correct answer is A.
The five dependency tests are: 1) Gross Income Test, 2) Support Test, 3) Member of Household or Family Member Test, 4) Citizenship Test (U.S., Canada or Mexico), and 5) Joint Filing Test.
Standard Deduction for someone over 65 MFJ
$1,300
Blake is a CFP® professional and prepares tax returns for his clients. He prepared his brother’s income tax return for $1,000 and he willfully neglects to include $30,000 of income since his brother did not receive a 1099 for consulting work. Blake is aware that his brother earned the $30,000 but fails to report it since he doesn’t believe the IRS will catch the understatement of income. The additional tax on this $30,000 of income would have been $7,500. How much of a penalty may Blake be subject to for the understatement of income?
None, but his brother will be subject to penalties.
$3,750
$5,000
$7,500
Solution: The correct answer is C.
The preparer penalty for willful or reckless conduct is the greater of $5,000 or 50% of the income derived by the preparer for the return. In this case, he charged his brother $1,000.
<p>Which of the following income(s) is/are NOT subject to Social Security tax?Rental real estate income.Small part-time repair shop income as a proprietor.Shareholder's share of S corporation's income in excess of salary.Income of an individual working as an independent contractor.I, II and III only.I and III only.II and IV only.II, III and IV only.</p>
<p>Solution: The correct answer is B.(Options "I" and "III"). Neither income from rental real estate nor S corporation distributions are subject to self-employment taxes.Option "I" - Income from rental real estate is not subject to self-employment taxes.Option "II" - This implies there is no employee status, and therefore, if services are being provided then the individual's income from those services will be subject to self-employment taxes.Option "III" - A shareholder's distributive share of S corporation profits is recognized as ordinary income and not subject to self-employment taxes.Option "IV" - Income from work as an independent contractor is subject to self-employment tax.</p>
Josie is 17 years old and qualifies as a dependent for her parents. Josie earned $4,200 in wages and $900 in interest income during the current year. What is Josie’s basic standard deduction for the current year?
$4,200.
$4,550.
$5,100.
$6,350.
Solution: The correct answer is B.
Josie’s basic standard deduction is equal to her earned income plus $350. Therefore, her basic standard deduction is $4,550.
<p>The Tax Reform Act of 1986 was roughly revenue neutral because:It was supported by both Republicans and Democrats.It was not intended to raise or lower taxes.It divided the tax burden evenly between individuals and businesses.It made the tax rates equal across all tax brackets.II only.I and III only.II and III only.I, II, and IV only.</p>
<p>Solution: The correct answer is A.A piece of tax legislation is considered revenue neutral when it is expected to neither raise nor lower the total amount of taxes to be collected.</p>
<p>Lucy and Lou are married and normally file a joint return. Under which of the following circumstances are they required to file a tax return?If Lucy is 64 and Lou is 66 and their gross income is $26,000.If Lucy and Lou are both 35 and have one dependent and their gross income is $24,000.If Lucy is 64 and Lou is 64, Lou is blind, and their gross income is $26,000.None of the above.</p>
<p>Solution: The correct answer is C.The MFJ standard deduction is $24,800 and the additional standard deduction for 65 and over is $1,300.In option "A", their total standard deduction is ($24,800 + $1,300) = $26,100.In option "B", their standard deduction is $24,800.In option "C", their standard deduction is $24,800. Lou may benefit from an additional $1,300 additional standard deduction for blindness upon filing. A return must be filed to claim the ASD for blindness. The IRS will know your age, but not that you are blind.</p>
Under the accrual method of accounting, the taxpayer (buyer) recognizes expenses when:
The goods leave the seller’s warehouse.
The seller accepts the buyer’s purchase order.
The buyer receives the seller’s invoice.
The buyer first uses the goods.
Solution: The correct answer is C.
The accrual accounting method recognizes expenses when the legal liability to pay arises. This usually occurs when the invoice is received.
<p>Ginger, age 21 and a full-time student for a degree at State University, qualifies as a dependent on her parents' return. During the summer, she earned $5,500 from a part-time job. Her only other income consisted of $950 interest on a savings account. What is Ginger's taxable income for the current year?$0$600$1,100$5,500</p>
<p>Solution: The correct answer is B.The standard deduction for Ginger is the greater of $1,100 or $350 plus earned income but not to exceed the normal standard deduction. Therefore $350 + $5,500 = $5,850 so it is not limited in 2020. The total income is $5,500 + $950 = $6,450. Taxable income is $6,450 - $5,850 = $600.</p>
Linus (age 64) and Karen (age 63) are raising their granddaughter, Marie, who qualifies as their dependent. Marie is blind. Linus and Karen file a joint return in the current year. What is their standard deduction?
$24,800
$26,100
$26,450
$27,000
Solution: The correct answer is A.
Linus and Karen’s standard deduction is $24,800. They are not age 65 or older so they don’t receive an additional standard deduction. They do not receive an additional standard deduction for Marie’s blindness because additional standard deductions for age and blindness are allowed only for the taxpayer and spouse, and not for their dependents.
Which of the following creates potential Section 1245?
Amortization of goodwill.
Immediate expense deduction under Section 179.
The sale of tangible personalty used in a trade or business at a gain.
There is Section 1231 loss from the property’s disposition.
Solution: The correct answer is C.
Depreciable property includes equipment, patents, copyrights and other intangibles. Option “A” is incorrect because goodwill is amortized. Option “B” is incorrect because Section 1245 is not applied to Section 179 expensing. Option “D” is incorrect because a Section 1231 is applied to gains recognized after recapture.
Ford’s federal income tax return was due on April 15 of the current year, but Ford did not file his return or pay his taxes until June 30 of the current year. Ford’s unpaid tax balance during this period was $400. What is the total penalty that will be imposed on Ford for his failure to file and failure to pay?
$60.
$215
$400.
$435.
Solution: The correct answer is C.
The failure to file penalty is 5% of the unpaid tax balance for each month or part thereof that the tax return is late (up to 25% of the unpaid tax balance). Therefore, Ford’s failure to file penalty is $60 (3 months × $400 × 5%). However, if a tax return is filed more than 60 days late (as it is in Ford’s case), the minimum failure to file penalty is the lower of $435 or 100% of the tax due.
Therefore, Ford’s failure to file penalty is actually $400 (100% of taxes due) Ford is also subject to a failure to pay penalty of 0.5% per month or part thereof. Therefore, Ford’s failure to pay penalty is $6 (3 months × $400 × 0.5%). Note that the failure to file penalty is reduced by the failure to pay penalty. Therefore, Ford’s total penalty is $400 ($400 failure to file penalty - failure to pay= $394, plus $6 failure to pay penalty).
Which of the following is not a requirement that must be satisfied in order for a legally married taxpayer to use the head of household filing status?
The taxpayer must file a separate tax return from the spouse.
The taxpayer must furnish over one-half of the cost of maintaining the household.
The spouse must not be a member of the household during the last six months of the tax year.
The taxpayer must be legally separated from the spouse.
II only.
IV only.
III and IV only.
I, II and III only.
Solution: The correct answer is B.
The taxpayer is not required to be legally separated from the spouse in order to qualify as an abandoned spouse and use the head of household filing status. All of the other options are requirements for qualifying as an abandoned spouse.
Alexander Dumas has a salary of $80,000, dividends of $20,000 and limited partnership income of $15,000. This year, he also invested in an equipment-leasing partnership where he is not a material participant. His initial investment included $50,000 cash and a non-recourse note for $60,000. What is the maximum tax deduction Alexander may take on the equipment leasing investment this year?
$0
$15,000
$35,000
$50,000
Solution: The correct answer is B.
This is a passive activity. His deduction is equal to his limited partnership income from other sources to the extent he is at risk. The maximum investment deduction may not exceed the cumulative investment income. The $60,000 non-recourse note is irrelevant to answering this question. This question also assumes that the investment occurred in the current tax year.
If an individual who may otherwise qualify as a dependent does not spend funds that he or she has received (i.e., social security, wages), what is the IRS position regarding these unexpended amounts in terms of their application to the support test and their inclusion in being applied to the gross income test?
Income received but not spent is applicable to the gross income test but not the support test.
Income received but not spent is not applicable to the gross income test nor to the support test.
Income received but not spent is applicable to the gross income test and to the support test.
Income received but not spent is not applicable to the gross income test but is applicable to the support test.
Solution: The correct answer is A.
Income received but not spent is applicable to the gross income test but not the support test.
To claim someone as a dependent you have to provide at least 50% of their support. If the child has income that just goes into savings or spent on miscellaneous fun items instead of being used toward paying their bills (housing, clothing, food, etc.), while you are paying their bills, then you are supporting them. The income counts as gross income for the child, but it is not support unless they use it to support themselves.
<p>In year 1 Justin earns $700 from delivering papers for a newspaper company and he is treated as self-employed. In year 2 the newspaper company hires him as an employee and pays him $700 as W-2 income with no federal or state income tax withholding. Does Justin have to file a tax return in either year?Year 1: Yes Year 2: YesYear 1: No Year 2: YesYear 1: Yes Year 2: NoYear 1: No Year 2: No</p>
<p>Solution: The correct answer is C.The rule is that a taxpayer must file if he has greater than or equal to $400 of net earnings from self-employment. If the taxpayer does not have self-employment income there is no requirements to filing unless your income exceeds the standard deduction and personal exemption ($0 for 2018 - 2025) for that year.</p>
<p>Noah has been working part-time through college and earned $20,000 last year with a total federal income tax liability of $1,200. This year he will earn $100,000 with an expected income tax liability of $15,000. What is the lowest amount of tax withholding Noah should have to meet the safe harbor rules?$1,200$12,000$13,500$15,000</p>
<p>Solution: The correct answer is A.He has two choices: 100% of last year’s tax liability or 90% of this year’s tax liability. Last year’s income tax liability was $1,200 and 90% of this year is $13,500. Therefore, the lowest amount that of tax withholding that needs to be met is $1,200.</p>
Section 1245 recapture does not apply to business equipment held for 17 months or longer if:
The property was destroyed by fire and the insurance recovery exceeds the property’s adjusted basis.
The property was sold for a gain but was depreciated using straight-line depreciation rather than MACRS.
The property was acquired, depreciated, and exchanged for a less valuable asset where the buyer of the asset paid additional cash in the exchange.
The property was abandoned as worthless.
Solution: The correct answer is D.
Option “A” is incorrect because if the insurance proceeds exceed the property’s adjusted basis, the excess is considered a sale and any portion of gain attributable to depreciation will be subject to Section 1245 recapture.
Option “B” is incorrect because Section 1245 recovery occurs any time a gain results from the reduction of basis due to depreciation.
Option “C” is incorrect because Section 1245 applies to gain resulting from a reduced basis due to depreciation.
Option “D” is correct. Property sold or abandoned below the basis adjusted by depreciation is not subject to Section 1245 recapture because either not all depreciation was taken or there was more likely a loss rather than a gain. For 1245 recapture to occur there must be a gain over the basis.
<p>Paul (age 35) and his wife Stacey (age 33) are married with three young children. They both work outside the home. Paul is a corporate executive with Wellstar and Stacey is an executive assistant with a small local company. Paul fully participates in his company’s qualified retirement plan by contributing $19,500 of his salary, which is matched 100% up to 3% of compensation. Stacey’s employer does not offer a retirement plan. In addition, during the year they had the following items of income and expense:Paul’s gross salary: $150,000Stacey’s gross salary: $32,000Stacey’s cash gift to her mother: $5,000Interest from a joint savings account: $100Federal income taxes withheld from paychecks: $30,000State income taxes withheld from paychecks: $12,000Charitable contributions made: $4,400Mortgage interest for home: $11,100Real Estate Taxes on home: $6,000Contribution to Paul’s traditional IRA: $6,000Contribution to Stacey’s traditional IRA: $6,000What is Paul and Stacey’s taxable income?$124,100$131,100$134,100$139,600</p>
<p>Solution: The correct answer is B.150,000 Paul's gross salary+32,000 Stacey's gross salary182,000+ 100 Interest182,100-19,500 His 401K for 2020162,600-6,000 Her IRA (his is not deductible)156,600 AGI-10,000 State Income Tax Withheld & RE taxes (capped at $10,000)-11,100 Qualified mortgage interest-4,400 Charitable131,100 Taxable IncomeItemized deductions equal $25,500 versus the standard deduction of 24,800 in 2020</p>
<p>Two years ago, Bill purchased stock in Pinkley Corporation (the stock is not small business stock) for $1,000. In the current year, the stock became worthless. During the current year, Bill also had an $8,000 loss on small business stock (Section 1244) purchased two years ago, a $9,000 loss on a non-business bad debt, and a $5,000 long-term capital gain. What should Bill report this year?$4,000 long-term capital loss and $9,000 short-term capital loss.$3,000 long-term capital loss and $10,000 long term loss carry forward.$8,000 ordinary loss; $3,000 short-term capital loss and a $2,000 short-term capital loss carryover.$8,000 ordinary loss and $5,000 short-term capital loss.</p>
<p>Solution: The correct answer is C.The non-business bad debt is treated as a short-term capital loss. The loss on worthless stock held for more than one year is a long-term capital loss. The loss on small business stock Section 1244 is recognized as an ordinary loss not subject to the capital loss rules. Note the following calculation: $5,000 (long-term capital gain) - $1,000 (long-term capital loss worthless stock) = $4,000. From this amount, subtract $9,000 (non-business bad debt expense - short-term capital loss) to obtain a net short-term loss of ($5,000.) However, the maximum annual capital loss deduction is net $3,000.</p>
Which of the following is a tax credit that reduces the tax due on taxable income?
Qualified dependent credit.
Child tax credit.
Earned income credit.
Credit for estimated tax payments.
I, II and III only.
II and III only.
I, II, III and IV only.
III, and IV.
Solution: The correct answer is C.
The “Qualified dependent credit” is new under TCJA and applies to qualified dependents and/or qualifying children 17 and over. It is limited to $500. The “child tax credit” applies to qualifying children under age 17 and was expanded under TCJA to $2,000 per child, with the possibility of up to $1,400 per child being refundable. The “earned income credit” is a credit against the calculated tax, available to those with very low income, predominantly from earnings (wages) and it is a refundable credit. The CFP exam considers the prepayment of tax, through withholding and/or estimated tax payments, as credits as well since they also reduce the balance due.
Joel paid $25,000 for a 30 percent interest in a general partnership. The partnership loss for the year is $180,000. How much can Joel deduct?
$0.
$25,000.
$54,000.
$60,000
Solution: The correct answer is B.
Joel’s loss is limited to $25,000 due to the at-risk rules. He will also have a suspended loss of [($180,000 × 30%) - $25,000] = $29,000. The passive activity rules for income do not apply. Joel is a general partner which signifies he is a material participant.
<p>Which is the best source for obtaining a plain language understanding about the current tax law? Commerce Clearing House Federal Tax Guide. Congressional Tax Committee Reports. Treasury Regulations. Tax Court Reports.</p>
<p>Solution: The correct answer is A. Option "A" is correct because Commerce Clearing House (CCH) provides plain language interpretation of tax law. Option "B" is incorrect as the Congressional Committee Reports (sometimes known as the Blue Book) provides congressional reasoning for enacting tax law. This language is often very technical and difficult to understand. Option "D" is incorrect because Tax Court Reports provide rulings of the U.S. Tax Court in the form of case law.</p>
<p>Julian purchased 100 shares of Home Depot, a domestic corporation, common stock on July 7th this year. The ex-dividend date for their quarterly dividend is July 12th. Julian sells the Home Depot stock on August 15th of this year. If Home Depot paid a dividend of $10 on Julian’s 100 shares, what are the tax consequences to Julian if Julian is in the 25% tax bracket?No tax liability since the qualified dividend rate is 0% for individuals in the 25% bracket.$1.50 of tax liability since the qualified dividend rate is 15% for individuals in the 25% bracket.$2.50 of tax liability since the ordinary dividend rate is the taxpayer’s marginal rate.Not enough information to answer the question.</p>
<p>Solution: The correct answer is C.Home Depot dividends will qualify for qualified dividend treatment if the individual meets the requisite holding period, which is more than 60 days in the 121 days surrounding the ex-dividend date. Since he only held the stock for 39 days, he does not meet the holding period. Therefore, the tax rate applied against the dividend is his ordinary income tax rate of 25%.</p>
Michael purchased a mutual fund with a $25,000 five years ago. During the four years, $6,000 in dividends and capital gains were reinvested in the fund. Today, the fund is valued at $40,000. If Michael sells shares equal to $25,000, which statement(s) is/are correct?
The taxable gain can be based on an average cost per share.
The client can choose which shares to sell, thereby controlling the taxable gain.
To minimize the taxable gain today, the client would sell shares with the higher cost basis.
The client will NOT have a gain as long as he or she sells less than what he or she invested.
I, II and III only.
I and III only.
II and IV only.
IV only.
Solution: The correct answer is A.
Option I is correct because it is permissable to determine the per share of mutual funds using the average cost per share. Option II is correct because it is permissable to select specific identifiable shares of mutual funds to sell. Option III is correct because the higher cost basis will minimize the gain as long as the taxpayer uses the specific indentification method. Option IV is incorrect because the sales proceeds will be matched against the basis of the shares sold not the original plus adjusted investment.
<p>In calculating a net operating loss for an individual, which of the following items would not be added back to negative taxable income?Net operating loss deductionLong-term capital losses in excess of short-term capital gains.Section 1202 exclusionsNone of the above would be added back.</p>
<p>Solution: The correct answer is D.In general, the following items are not allowed when figuring an NOL. · Any deduction for personal exemptions. · Capital losses in excess of capital gains. · The section 1202 exclusion… · Nonbusiness deductions in excess of nonbusiness income. · Net operating loss deduction. · The domestic production activities deduction.</p>
One of the five tests which must be met to qualify as a dependent is:
The age of the dependent.
The dependent is either a member of the taxpayers household or meets the criteria for family relationship.
The taxpayer is a U.S. citizen.
All of the above.
Solution: The correct answer is B.
The five dependency tests are: 1) Gross Income Test, 2) Support Test, 3) Member of Household or Family Member Test, 4) Citizenship Test (U.S., Canada or Mexico), and 5) Joint Filing Test.
Under the Last In First Out (LIFO) inventory system:
The last goods purchased are the first goods sold.
LIFO means that the oldest goods will remain in inventory until sold.
The cost of goods is assigned the most current inventory costs.
LIFO insures that the newest goods are sold.
Solution: The correct answer is C.
The LIFO method is concerned with movement of costs through inventory, not goods. The cost of the last units purchased will be the first costs to be transferred to cost of goods sold when the goods are sold.
In which of the following situations, if any, may the individual NOT be deemed a dependent of the taxpayer:
A cousin who does not live with the taxpayer.
A former brother-in-law who does not live with the taxpayer. The taxpayer is divorced.
A nephew who does not live with the taxpayer.
A legally adopted child who does not live with taxpayer.
Solution: The correct answer is A.
All other parties either satisfy the relationship or member of the household test.
IRS Publication 501: Relatives who don’t have to live with you. A person related to you in any of the following ways doesn’t have to live with you all year as a member of your household to meet this test.
Your child, stepchild, foster child, or a descendant of any of them (for example, your grandchild). (A legally adopted child is considered your child.)
Your brother, sister, half brother, half sister, stepbrother, or stepsister.
Your father, mother, grandparent, or other direct ancestor, but not foster parent. Your stepfather or stepmother.
A son or daughter of your brother or sister. A son or daughter of your half brother or half sister.
A brother or sister of your father or mother.
Your son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
Any of these relationships that were established by marriage aren’t ended by death or divorce.
<p>When reviewing a client's income tax return from the prior year you notice that they had adjusted gross income of $175,000 and paid federal income tax of $31,500. Assuming that the client's income for this year will closely approximate that of last year, what is the minimum amount to pay in estimates to meet safe harbor?$28,350$31,500$34,650$37,800</p>
<p>Solution: The correct answer is A.Your primary choices are (A) = 90% of current year, (B) = 100% of prior year, and (C) = 110% of prior year. Since the client’s AGI from last year is greater than $150,000 the safe harbor is 90% of current year tax or 110% of prior year tax. Since the client’s income “closely approximates that of last year” we can utilize the 90% of current year amount. If the client’s income varies widely then we would use 110% of prior year.</p>
<p>For purposes of determining taxable income, which of the following is true?A taxpayer who finds a suitcase of money and spends the money is not required to recognize income.The taxpayer who collects income from a customer during the year, but the customer has sued for a refund, can defer recognition of the income until the suit has been resolved.Embezzlement proceeds are not included in the embezzler's gross income because the embezzler has an obligation to repay the owner.A person who rents out their personal residence 10 days during the year is not required to include any income received.</p>
<p>Solution: The correct answer is D.A person who rents their home for less than 15 days is not required to include the income as it is considered personal property, not rental or mixed use. However, no deductions related to the expense of renting out the home are allowed other than taxes and interest associated with the property that would normally be deductible as an itemized deduction.</p>
A cash basis taxpayer includes income from a service business when:
The services are performed.
The client is invoiced for the services.
The client’s check is deposited in the bank.
The client’s check is received by the taxpayer.
Solution: The correct answer is D.
Cash basis is recognized as income when received.
Which of the following is not an exception to the passive activity rules for rental activities?
If the average period of customer use is seven days or less, the activity could be considered an active trade or business.
If the average period of customer use is 30 days or less but the taxpayer does not provide significant personal services in concert with the rental activity, the activity may be classified as an active trade or business.
The activity will be considered an active trade or business if the rental of property is incidental to the non-rental activity of the taxpayer.
A rental activity that the taxpayer customarily makes available during business hours for nonexclusive use by customers will be classified as the active conduct of a trade or business, provided the taxpayer materially participates.
Solution: The correct answer is B.
Option “B” is correct because the taxpayer must provide significant personal services in concert with the rental activity and must materially participate in the activity in order to classify the activity as an active trade or business.
Which of the following statements correctly describes the cash receipts and disbursements method of accounting?
Income is reported as it is earned and expenses are reported as they are incurred.
The cash receipts method is the most difficult accounting method to understand.
A taxpayer who uses the cash method for reporting most items may use a different method for reporting self-employment income.
Reporting of income and expenses is subject to the all events test.
Solution: The correct answer is C.
Options “A” and ““D” describe the accrual method of accounting, not the cash receipts and disbursements method of accounting. Option “B” is incorrect; the cash receipts method is generally the easiest method of accounting to understand and the simplest to use.
<p>Alisha Syrmos, a CFP® Professional and fee-only financial planner, has assisted Bob Martin, a self-employed physician in tax and investment planning during the year. Identify the schedule(s) on which Alisha's fee may be deductible by Bob on his federal income tax return.Schedule A - itemized deductions.Schedule C - profit or loss from business.Schedule D - capital gains and losses.I only.II only.I and II only.I, II and III.</p>
<p>Solution: The correct answer is B.Tax planning fees may no longer be deducted against a taxpayer's itemized deduction, Schedule A. However, because the taxpayer is self-employed, the portion of services related to the business and not personal may be taken as a deductible expense on the taxpayer's Schedule C.</p>
Dakota qualifies as a dependent of his parents. This year, he earned $500 from a part-time job and $1,500 in interest from a savings account. Dakota’s taxable income for this year is:
$2,000
$1,100
$900
$600
Solution: The correct answer is C.
The calculation is as follows: $1,500 (interest) + $500 (wage) = $2,000 (gross income) - $1,100 (greater of standard deduction of $1,100 or $350 plus earned income) = $900 of taxable income, taxed at Dakota’s tax rate.
Mr. Rangel files a fraudulent income tax return (again) and has a $10,000 income tax deficiency because of it. What is the amount of his penalty?
$10,000
$8,000
$7,500
$5,000
Solution: The correct answer is C.
The penalty for filing a fraudulent income tax return is 75% of the deficiency.
<p>Billy, single (he divorced in 2010) and age 42, has the following items of income and expense for the current tax year.Wages: $60,000Interest: $1,200Inheritance: $50,000Alimony paid: $10,000Child support paid: $8,000Federal taxes paid: $5,000State taxes paid: $2,000Medical expenses: $7,500Tickets from his employer for one basketball game: $100What is his taxable income?$38,800$40,600$48,800$51,200</p>
<p>Solution: The correct answer is A.Wages $60,000Interest $1,200less Alimony AGI $51,200Std Deduction $12,400Taxable Income $38,800</p>
<p>Which of the following imposed the first constitutional federal income tax?Revenue Act of 1861.16th Amendment.Revenue Act of 1916.None of the above.</p>
<p>Solution: The correct answer is D.Answer "A" is incorrect because although the Revenue Act of 1861 did impose a federal income tax, it was later found to be unconstitutional because Congress did not have the power to levy an individual income tax at that time. Answer "B" is incorrect because the 16th Amendment gave Congress the power to impose an individual income tax, but did not itself impose that tax. Answer "C" is incorrect because the Revenue Act of 1916 raised the rates previously imposed under the Revenue Act of 1913. Therefore, answer "D" is correct because the Revenue Act of 1913 imposed the first constitutional income tax.</p>
