teste pratica A1 Flashcards

1
Q

Mark and Molly met at a New Year’s Eve party held December 31, Year 1. They instantly bonded, fell madly in love, and were married at 11:38 p.m. that night. Identify Mark’s filing status for Year 1.

A.	 Single

B.	 Married filing jointly

C.	 Head of household

D.	 Surviving spouse
A

Choice “B” is correct. Mark and Molly were married as of midnight on December 31, Year 1. Therefore, Mark’s only options are to file as married either jointly or separately, and because “jointly” is the only option presented that qualifies, it is the correct choice.
Choices “A”, “C”, and “D” are incorrect, based on the above explanation.

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2
Q

Mort and Mindy met at a New Year’s Eve party held December 31, Year 1. They instantly bonded, fell madly in love, and were married at 11:38 p.m. that night. Sadly, Mort passed away November 15, Year 2. What filing status should Mindy use for Year 2?

A.	 Head of household.

B.	 Surviving spouse.

C.	 Married filing jointly.

D.	 Single.
A

Choice “C” is correct. Mindy will be able to use the married filing jointly status for the year Mort passed away (Year 2) even though she was not married at year-end.
Choices “D”, “A”, and “B” are incorrect, based on the above explanation.

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3
Q

John earned $500,000 in his business during the current year, and his wife received investment income of $15,000. John provides more than half of the support of his 50-year-old widowed sister, who lives with John and earned $45,000 in salary in the current year. John also provides full support for his two children, an 18-year-old daughter and a 20-year-old son, who is a full-time college student. The family employs a live-in housekeeper and a live-in butler to assist them with their residence. Both the live-in housekeeper and the live-in butler provided all of their own support. How many people qualify as either a qualifying child or qualifying relative for John?

A.	 Zero

B.	 Five

C.	 Two

D.	 Four
A

Choice “C” is correct. John’s two children meet the requirements for qualifying child (QC) under the CARES criteria. John’s sister does not meet the age test for QC, nor is she a qualifying relative (QR) because her taxable gross income of $45,000 exceeds the gross income limit under SUPORT. The butler and housekeeper both fail the support tests for both QC and QR because they provide all of their own support.

Choice “A” is incorrect. John’s children meet QC rules.

Choice “B” is incorrect. Only John’s children meet dependency definitions. They both are qualifying children. The sister, housekeeper, and butler all fail both QC and QR.

Choice “D” is incorrect. John’s children meet the definition of QC. The sister, housekeeper, and butler all fail both QC and QR.

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4
Q

Jonathan Jones is a 19-year-old full-time college student at the local community college. He lives in an apartment near campus during the school year and returns home for the summer break and holidays. Jonathan earned $5,000 this year working at the campus bookstore. His parents gave him $20,000 and his grandparents gave him $10,000 this year in support. Which of the following statements is true?

A.	 Jonathan’s parents can claim him as a dependent.

B.	 Jonathan does not meet the residency test for qualifying child.

C.	 Jonathan’s grandparents can claim him as a dependent.

D.	 Jonathan does not qualify as a dependent for his parents because his gross income is too high.
A

Choice “A” is correct. Jonathan is a qualifying child of his parents. He meets all requirements (CARES):

CARES Test (Qualifying Child)

Close Relative

Age Limit

Residency and Filing Requirements

Eliminate Gross Income Test

Support Test

Choice “B” is incorrect. Jonathan meets the residency requirements for qualifying child because he is away at college.

Choice “C” is incorrect. Jonathan’s grandparents cannot claim Jonathan as a dependent because he is a dependent of his parents.

Choice “D” is incorrect. Jonathan is a qualifying child of his parents. Qualifying child status does not have a gross income limitation.

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5
Q

Taylor, an individual, commenced business on August 4 of this year. Taylor does not keep adequate records. On which of the following dates must Taylor’s tax year end?

A.	 July 31

B.	 August 3

C.	 August 31

D.	 December 31
A

Choice “D” is correct. Because Taylor is an individual, Taylor is required to use a calendar year as her tax year. As such, Taylor’s tax year will end on December 31.

Choice “A” is incorrect. Because Taylor is an individual, she is not permitted to use a fiscal year as her tax year; rather, she must use a calendar year ending on December 31 as her tax year. The fact that she started business on August 4, or that she does not keep adequate records, is irrelevant.

Choice “B” is incorrect. Because Taylor is an individual, Taylor is not permitted to use a fiscal year as her tax year. As such, Taylor cannot choose an end date for her tax year other than December 31, regardless of the fact that her business started in August.

Choice “C” is incorrect. Because Taylor is an individual, she is required to use a calendar year as her tax year. As such, her tax year will end on December 31. The fact that she started her business in the middle of the year and that she keeps inadequate records is irrelevant.

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6
Q

In which of the following situations may taxpayers file as married filing jointly?

A.	 Taxpayers who were married but lived apart during the year.

B.	 Taxpayers who were legally separated but lived together for the entire year.

C.	 Taxpayers who were divorced during the year.

D.	 Taxpayers who were married but lived under a legal separation agreement at the end of the year.
A

In order to file a joint return, the parties must be married at the end of the year. Exception: If the parties are married but are legally separated under the laws of the state in which they reside, they cannot file a joint return (they will file either under the single or head of household filing status).

Choice “A” is correct. Taxpayers who are married but lived apart during the year are allowed to file a joint return for the year. The fact that they did not live together during the year has no bearing on the issue.

Choice “B” is incorrect. Taxpayers who were legally separated but lived together for the entire year may not file a joint return. They will generally file either under the single or head of household filing status.

Choice “C” is incorrect. Taxpayers who were divorced during the year may not file a joint return together, as they are not married at the end of the year. [Note, however, that they may become married again in the year and file a joint return with the new spouse.]

Choice “D” is incorrect. Taxpayers who are married but lived under a legal separation agreement at the end of the year may not file a joint return. They will generally file either under the single or head of household filing status.

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7
Q

In Year 4, after Mindy’s three children have grown and moved out of the house, Mindy (unmarried) moved her mother, Mary, into an assisted living facility for which Mindy pays 75% of the cost. Mindy had not previously lived with Mary, and Mary paid for her own living expenses while she lived in her own home. What filing status should Mindy use for Year 4, assuming Mary moved into the assisted living facility on January 1, Year 4?

A.	 Single.

B.	 Head of household.

C.	 Surviving spouse.

D.	 Married filing jointly.
A

Choice “B” is correct. Mindy qualifies for and should use head of household status in Year 4, because she maintained more than half of the upkeep on Mary’s principal residence for the entire taxable year (note that Mindy is not required to live with her mother to qualify for head of household status). It is the most favorable filing status for which she qualifies.
Choice “A” is incorrect. Mindy qualifies for a more favorable filing status than single.
Choice “C” is incorrect. Mindy has not had a spouse die in the past two years.

Choice “D” is incorrect. Mindy is not married.

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8
Q

As of December 31, the Mitchells were legally separated and maintained separate households for the entire year. The Mitchells have no children. What filing status should Mr. Mitchell claim for the year?

A.	 Married filing jointly

B.	 Married filing separately

C.	 Head of household

D.	 Single
A

Choice “D” is correct. Marital status for the tax year is determined as of the last day of the year. Taxpayers who are divorced or legally separated are considered unmarried. Mr. Mitchell is legally separated and does not have a qualifying dependent, so Mr. Mitchell’s filing status for the year is single.

Choice “A” is incorrect. Because the taxpayer is legally separated, he is considered unmarried and does not qualify for married-filing-jointly filing status.

Choice “B” is incorrect. Because the taxpayer is legally separated, he is considered unmarried and does not qualify for married-filing-separately filing status.

Choice “C” is incorrect. The taxpayer does not qualify for head-of-household filing status because he does not maintain a home for a qualifying dependent.

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9
Q

The Clarks have a 21-year-old son, Alex, who is a full-time student at the state university. Alex received $10,000 in scholarships this year for academic achievement. He also works part time at the university bookstore and earned $5,400 this year. The Clarks paid $7,000 to support Alex this year. Alex was home for two months in the summer and at school for the rest of the year. Alex used the scholarship, the earnings from the part-time job, and the money from his parents as his only source of support this year. Which of the following definitions does Alex meet for the Clarks?

A.	 Exemption

B.	 Qualifying child

C.	 Qualifying relative

D.	 Qualifying person
A

Choice “B” is correct. Alex meets the definition of qualifying child for the Clarks. He meets the close relative test because he is their son. He is under the age of 24 and is a full-time student, so he meets the age limit. He meets the residency requirements because his principal place of abode is his parents’ home since he was only away from home as a student. He also does not provide more than half of his own support. The scholarship does not count as support provided by Alex.

Choice “A” is incorrect. Alex is not an exemption for the Clarks. Exemptions for dependents are not allowed for tax years 2018 and later.

Choice “C” is incorrect. Alex meets the definition of qualifying child of the Clarks. He does not meet the definition of qualifying relative because his gross income is more than the gross income limit under SUPORT.

Choice “D” is incorrect. Qualifying person is not a dependency definition type.

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10
Q

Where is the deduction for qualified business income (QBI) applied in the individual tax formula?

A.	 As a deduction from adjusted gross income separate from the standard deduction and itemized deductions

B.	 As an alternative to the standard deduction

C.	 As an adjustment to arrive at adjusted gross income

D.	 As an itemized deduction
A

Choice “A” is correct. The QBI deduction is taken from adjusted gross income (“below the line”). It is not part of the itemized deductions.

Choice “B” is incorrect. The QBI deduction is not an alternative to the standard deduction.

Choice “C” is incorrect. The QBI deduction is not an adjustment to arrive at adjusted gross income.

Choice “D” is incorrect. The QBI deduction is not an itemized deduction.

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11
Q

Four years ago, when Cox’s spouse died, Cox filed a joint tax return for that year. Cox did not remarry, but continued to provide full support for a minor child who has been living with Cox. What is Cox’s most advantageous filing status for the current year?

A.	 Married filing separately.

B.	 Single.

C.	 Head of household.

D.	 Surviving spouse.
A

Choice “C” is correct. Because Cox is not married, Cox cannot file as married filing separately (or married filing jointly). Likewise, since Cox’s spouse died more than two years ago, Cox cannot file as a surviving spouse. Cox may file as single. In addition, since Cox is not married, is not a surviving spouse, and maintains a home for a minor (presumably, dependent) child, Cox may file as head of household. Because the head-of-household status provides for a larger standard deduction and “wider” tax brackets than does the single status, Cox’s most advantageous filing status is head of household.

Choice “A” is incorrect. Cox is not married and therefore cannot file as married filing separately.

Choice “B” is incorrect. Cox qualifies as head of household because Cox is not married, is not a surviving spouse, and maintains a home for a minor (presumably, dependent) child. Because the head-of-household status provides for a larger standard deduction and wider tax brackets than does the single status, Cox’s most advantageous filing status is as head of household.

Choice “D” is incorrect. Cox does not qualify as a surviving spouse because that filing status may only be used in the two years following the death of the spouse, and Cox’s spouse died four years ago.

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12
Q

Parker, whose spouse died during the preceding year, has not remarried. Parker maintains a home for a dependent child. What is Parker’s most advantageous filing status?

A.	 Married filing separately

B.	 Qualifying surviving spouse

C.	 Head of household

D.	 Single
A

Choice “B” is correct. A qualifying surviving spouse is a taxpayer who may use the married filing jointly tax return standard deduction and rates for each of two taxable years following the year of death of his or her spouse, unless he or she remarries. The surviving spouse must maintain a household that, for the entire taxable year, was the principal place of abode of a son, stepson, daughter, or stepdaughter (whether by blood or adoption). The child must be considered either a qualifying child or a qualifying relative. Parker may file as a qualifying surviving spouse because her spouse died in the previous tax year, she did not remarry, and she maintained a home for a dependent child. Because qualifying surviving spouse is the most advantageous status and Parker qualifies, Parker would file as a qualifying surviving spouse.

Choice “A” is incorrect. Parker would not qualify to file married filing separately.

Choice “C” is incorrect. Parker would not qualify as head of household for the first two years after the death of Parker’s spouse because one of the requirements for head of household status is that the taxpayer is not a surviving spouse. (Also, note that the likely reason for this requirement is that filing as head of household status would give the qualifying surviving spouse taxpayer a higher tax liability than the qualifying surviving spouse status, which would be less advantageous.)

Choice “D” is incorrect. Even though Parker would qualify as single, this filing status would give Parker a higher tax liability than the qualifying surviving spouse status and therefore is not most advantageous.

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13
Q

John and Theresa are in the process of obtaining a divorce. Although they are not legally separated, John moved out of the family home in October of Year 1 and moved into an apartment nearby. John and Theresa’s two children, Jenna and Stella, lived with Theresa in the family home for more than half of the tax year. What filing status can Theresa use to file her Year 1 tax return?

A.	 Qualifying surviving spouse.

B.	 Single.

C.	 Married filing jointly/separately.

D.	 Head of household.
A

Choice “C” is correct. John and Theresa are still married at year-end, not legally separated, and have not lived apart for the last six months of the taxable year. Theresa must file as married, but may choose to do so either jointly with John or separately.
Choice “A” is incorrect. Qualifying surviving spouse is not an option for Theresa, as John is still alive.

Choice “B” is incorrect. Filing as single is not an option, because John and Theresa are still married and not legally separated at year-end.
Choice “D” is incorrect. Head of household status is not an option because the couple is not legally separated at year-end and John did not live apart from Theresa for the last six months of the taxable year.

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14
Q

Mort and Mindy met at a New Year’s Eve party held December 31, Year 1. They instantly bonded, fell madly in love, and were married at 11:38 p.m. that night. Sadly, Mort passed away November 15, Year 2. In January, Year 3, Mindy gave birth to triplets Mark, Mandy, and Maureen. The triplets live with Mindy and she provides all of their support. Assuming Mindy has not remarried, what filing status should she use for Year 5?

A.	 Head of household.

B.	 Single.

C.	 Qualifying surviving spouse.

D.	 Married filing jointly.
A

Choice “A” is correct. Mindy should file using the head of household status. She has dependent children living with her, and no longer qualifies as married or as a surviving spouse. Head of household is the most favorable filing status for which she qualifies.

Choice “B” is incorrect. Mindy qualifies for a more favorable filing status than single.

Choice “C” is incorrect. At Year 5, more than two years have passed since Mort’s death so Mindy no longer qualifies for surviving spouse status.

Choice “D” is incorrect. Mindy is no longer married and Mort did not die in Year 5, so she is not eligible for the married filing jointly status.

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15
Q

Katherine and Bill Grant have two children. Kelly is 22 years old and is a full-time student. She lives on campus at an out-of-state university but will return home for the summer. Kelly earns $5,000 a year working part time. Her parents provide her with $15,000 of support, and her grandparents provide her with $15,000 of support. Jake is 15 years old and lives at home. He is fully supported by his parents. Jake’s friend, Luke, also lives with the Grants. Luke is 15 years old and moved into the Grant home in April. The Grants pay all of Luke’s support. How many total dependents may Katherine and Bill Grant claim for the current year?

A.	 one

B.	 three

C.	 two

D.	 zero
A

Choice “C” is correct. The Grants have two dependents. Kelly is considered a qualifying child. Kelly meets the relationship test and age test. Her time away at college is counted as home for the residence test. Kelly does not provide more than half of her own support. Jake is considered a qualifying child and meets all tests. Luke fails the qualifying child test (he is not a relative). He does not meet the qualifying relative test because he did not live with the Grants for the entire year.

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16
Q

Jake, a widower whose wife died in Year 1, maintains a household for himself and his daughter, who qualifies as his dependent. Jake did not remarry. What is the most favorable filing status that Jake qualifies for in Year 3?

A.	 Qualifying surviving spouse

B.	 Single

C.	 Married filing separately

D.	 Head of household
A

Choice “A” is correct. Jake meets the criteria for qualifying surviving spouse. A qualifying surviving spouse, may use married filing jointly (MFJ) tax rates and standard deduction for two years after the year in which a spouse dies. The taxpayer must maintain the principal residence for a dependent child for the whole year.

Choice “B” is incorrect. Although Jake is unmarried (single), he meets the criteria for qualifying surviving spouse, which can be used for two years after the year in which a spouse dies and is the more advantageous filing status.

Choice “C” is incorrect. Because Jake is a widower, he is no longer married so he would not use the married filing separately status. He does meet the criteria for qualifying surviving spouse, which can be used for two years after the year in which a spouse dies and is the more advantageous filing status.

Choice “D” is incorrect. Although Jake does qualify as head of household filing status, qualifying surviving spouse is more advantageous than head of household filing status.

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17
Q

In which of the following scenarios would the head of household filing status be available to the taxpayer?

A.	 A single taxpayer maintains a separate home for his parent, who qualifies as a dependent.

B.	 An unmarried taxpayer maintains a household with a 28-year-old son, who earned $10,000 during the tax year.

C.	 A single taxpayer maintains a household that is the principal home for five months of the year for his disabled child.

D.	 A taxpayer with no dependents is the surviving spouse of an individual who died in the current year.
A

Choice “A” is correct. Head of household filing status is available to a single taxpayer who maintains a separate home for a dependent parent. To qualify for head of household filing status, a taxpayer must be unmarried as of the last day of the tax year and maintain a home that is the principal residence of a qualifying person for more than half of the tax year. A qualifying person includes a dependent child, parent, or relative. A dependent parent is not required to live with the taxpayer, provided the taxpayer maintains a home that was the principal residence of the parent for the entire year.

Choice “B” is incorrect. The taxpayer is not entitled to head of household filing status. Her filing status is single. The taxpayer is unmarried and maintains a home for her son, but her son is not a dependent child or dependent relative. Her son is not a qualifying child dependent because he is over the age limit (under age 19, or under age 24 in the case of a full-time student). He is not a qualifying relative dependent because his gross income of $10,000 is more than the gross income threshold amount.

Choice “C” is incorrect. The taxpayer is not entitled to head of household filing status. His filing status is single. To qualify for head of household status, the taxpayer must maintain a home that is the principal residence of a qualifying person for more than half the year. Because the taxpayer maintains a household that is the principal home for his disabled child for only five months of the year, his son is not a dependent child or relative and he does not qualify for head of household status.

Choice “D” is incorrect. A taxpayer who has no dependents is not entitled to head of household filing status. Because the taxpayer’s spouse died in the current year, the taxpayer is entitled to married filing jointly status for the current year.

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18
Q

Mort and Mindy met at a New Year’s Eve party held December 31, Year 1. They instantly bonded, fell madly in love, and were married at 11:38 p.m. that night. Sadly, Mort passed away November 15, Year 2. In January, Year 3, Mindy gave birth to triplets Mark, Mandy, and Maureen. Assuming that Mindy has not remarried, what filing status should she use for Year 4?

A.	 Single.

B.	 Head of household.

C.	 Married filing jointly.

D.	 Qualifying surviving spouse.
A

Choice “D” is correct. Because Mindy does not remarry and she maintains a principal residence for her dependent children for the entire year, she may file using the qualifying surviving spouse status for the two taxable years following Mort’s death. In Year 4, the second year after Mort’s death, Mindy should file as a qualifying surviving spouse.

Choices “A”, “C”, and “B” are incorrect, based on the above explanation.

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19
Q

Mark and Meredith Rowland are married with no children. Markʹs cousin, Joe, lives with the Rowlands for the entire year. Joe lost his job and is looking for full-time employment. He is currently working odd jobs and has earned $4,000 this year. Joe is 28 years old and is not married. The Rowlands pay all of Joeʹs living expenses. Which of the following statements is true?

A.	 Joe is not a qualifying relative of the Rowlands because he is Markʹs cousin.

B.	 Joe is a qualifying relative of the Rowlands.

C.	 Joe is a qualifying child of the Rowlands.

D.	 Joe is not a qualifying child of the Rowlands because his gross income is too high.
A

Choice “B” is correct. Joe is a qualifying relative of the Rowlands. He meets the SUPORT tests:

Support: The Rowlands provide more than half of Joeʹs support.

Under: Joeʹs gross income is under $5,050 (2024).

Precludes: Joe does not file a joint return.

Only: Joe is a U.S. citizen.

Relative: Joe does not meet the relative definition of qualifying relative, but he did live with the Rowlands for the entire year.

Taxpayer lives with the Rowlands for the entire year.

Choice “A” is incorrect. Joe is a qualifying relative of the Rowlands. Although he does not meet the relationship test, he lived with the Rowlands for the entire year.

Choice “C” is incorrect. Joe is not a qualifying child of the Rowlands. He fails the “A” close-relative test and “C” age-limit test of the qualifying child tests of CARES.

Choice “D” is incorrect. The gross income test does not apply to the qualifying child dependency definition.

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20
Q

A taxpayer’s spouse dies in August of the current year. Which of the following is the taxpayer’s filing status for the current year?

A.	 Qualifying surviving spouse.

B.	 Single.

C.	 Head of household.

D.	 Married filing jointly.
A

Choice “D” is correct. The surviving spouse is considered to be married (and thus able to file as married filing jointly) for the entire current year even if the spouse dies earlier in the year (in this case in August).

Choice “A” is incorrect. The filing status is not qualifying surviving spouse for the current year.

Choice “B” is incorrect. The filing status is not single for the current year.
Choice “C” is incorrect. The filing status is not head of household for the current year.

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21
Q

Reese and Ray Reed have one daughter, Ellie, who is 14 years old. The Reeds have taken in Ellie’s friend, Holly, who has lived with them since June of the current year. Holly is also 14 years of age. The Reed family has not legally adopted Holly. Reese and Ray provide all of the support for both girls, and both girls live at the Reed residence. Who qualifies as a dependent for Reese and Ray Reed?

A.	 Neither Ellie nor Holly

B.	 Only Ellie

C.	 Only Holly

D.	 Both Ellie and Holly
A

Choice “B” is correct. Ellie is a qualifying child of Reese and Ray Reed. Holly does not meet the criteria for qualifying child because she is not related to the Reeds. Holly does not meet the criteria for qualifying relative because she did not live with the Reed family for the entire year.

Choice “A” is incorrect. Ellie is a qualifying child of Reese and Ray Reed.

Choice “C” is incorrect. Holly does not meet the criteria for qualifying child because she is not related to the Reeds. Holly does not meet the criteria for qualifying relative because she did not live with the Reed family for the entire year.

Choice “D” is incorrect. Ellie is a qualifying child of Reese and Ray Reed. Holly does not meet the criteria for qualifying child because she is not related to the Reeds. Holly does not meet the criteria for qualifying relative because she did not live with the Reed family for the entire year.

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22
Q

Sydney Wells is 45 years old and single. She has never married. She earns $50,000 per year as an elementary school teacher. Sydney fully supports her brother, Mike, who is currently unemployed. Mike lives in an apartment near Sydneyʹs house. Mike is 42 years old and is not married. What is the most advantageous filing status for Sydney?

A.	 Surviving Spouse

B.	 Single

C.	 Supporting Single

D.	 Head of Household
A

Choice “B” is correct. Mike does not meet the definition of “qualifying person” for the purposes of the head of household status for Sydney. Because Mike is Sydneyʹs brother, he would have to live with Sydney for more than half of the year to meet the “qualifying person” standard. Sydney will file as single.

Choice “A” is incorrect. Sydney has never been married.

Choice “C” is incorrect. Supporting single is not a filing status option.

Choice “D” is incorrect. Mike does not meet the definition of “qualifying person” for the purposes of the head of household status for Sydney. Because Mike is Sydneyʹs brother, he would have to live with Sydney for more than half of the year to meet the “qualifying person” standard. Sydney will file as single.

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23
Q

In Year 4, after Mindy’s three children have grown and moved out of the house, Mindy (unmarried) moved her mother, Mary, into an assisted living facility for which Mindy pays 75% of the cost. Mindy had not previously lived with Mary, and Mary paid for her own living expenses while she lived in her own home. What filing status should Mindy use for Year 4, assuming Mary moved into the assisted living facility on August 1, Year 4?

A.	 Single.

B.	 Married filing jointly.

C.	 Head of household.

D.	 Surviving spouse.
A

Choice “A” is correct. Mindy should file using the single status. She does not qualify for more favorable filing status.
Choice “B” is incorrect. Mindy is not married.
Choice “C” is incorrect. Mindy does not qualify for head of household status. Had Mary moved into the assisted living home for the entire year, Mindy would have been eligible for head of household status. Mindy did not provide more than half of Mary’s support and for Year 4 is ineligible for head of household status.
Choice “D” is incorrect. Mindy has not had a spouse die in the past two years.

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24
Q

Nicole and Andrew Harris contribute to more than half of the support of their three children, Travis, Luke, and John. Travis, age 20, worked full time at the local deli and earned $20,000. Luke, 18, is a part-time college student who earned $5,000 working as a resident assistant in the student dormitory where he lived half of the year. John, age 25, is an aspiring actor who lives at home with Nicole and Andrew. John earned $2,500 for the three commercials he starred in. Who qualifies as a dependent for Nicole and Andrew under either the rules of qualifying child or qualifying relative?

A.	 Travis

B.	 Luke and John

C.	 Travis and Luke

D.	 Travis, Luke, and John
A

Choice “B” is correct. Luke and John satisfy dependency requirements:

Travis does not meet the age limit for qualifying child. His income is over the gross income limitation for qualifying relative.

Luke meets the qualifying child rules (CARES). He is under the age of 19 and only lives away from home while at college.

John meets the qualifying relative rules (SUPORT). His parents provide more than half of his support and his gross income is under the limitation.

Choices “A”, “C”, and “D” are incorrect.

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25
Q

Susie, John, Luke, and Will provide support for their 80-year-old mother, Joyce. Joyce lives by herself in an apartment in Miami, Florida. Joyce earned $4,000 this year working at her church. Joyce provides 10% of her own support. Susie provides 30% of Joyce’s support, John provides 5% of Joyce’s support, Luke provides 15% of Joyce’s support, and Will provides 40% of Joyce’s support. Under a multiple support agreement, who may claim Joyce as a dependent?

A.	 Susie, Luke, John, and Will

B.	 Susie, Luke, and Will

C.	 Will

D.	 Susie and Will
A

Choice “B” is correct. Under a multiple support agreement, Susie, Luke, and Will are eligible to claim Joyce as a dependent because they contributed more than 10% of Joyce’s support.

Choice “A” is incorrect. John did not provide more than 10% of Joyce’s support. Therefore, he is not eligible to claim Joyce as a dependent under a multiple support agreement.

Choice “C” is incorrect. Under a multiple support agreement, Susie and Luke are also eligible to claim Joyce as a dependent because they contributed more than 10% of Joyce’s support.

Choice “D” is incorrect. Under a multiple support agreement, Luke is also eligible to claim Joyce as a dependent because he contributed more than 10% of Joyce’s support.

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26
Q

Anderson, a computer engineer, and spouse, who is unemployed, provide more than half of the support for their child, age 23, who is a full-time student and who earns $7,000. They also provide more than half of the support for their older child, age 33, who earns $2,000 during the year. How many dependents meet qualifying relative or qualifying child rules for the Andersons?

A.	 One

B.	 Three

C.	 Two

D.	 Zero
A

Choice “C” is correct. Both children meet the dependency criteria. The 23-year-old child meets qualifying child rules (CARES). The age limit is met because the 23-year-old is a full-time student. The 33-year-old meets qualifying relative rules (SUPORT). The Andersons have two dependents for tax purposes.

Choices “A”, “B”, and “D” are incorrect based on the above explanation.

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27
Q

Molly Morris is 15 years old. Molly’s parents (James and Beth) divorced in May of the current tax year. Molly lived with both parents until the divorce. Molly does not provide more than half of her own support. After the divorce, Molly’s mother has custody of Molly, but Molly lives equal time with both parents. James’ AGI is $40,000 and Beth’s AGI is $35,000. Molly’s parents cannot decide who can claim Molly as a dependent for tax purposes. Assuming neither parent waives their right to claim Molly as a dependent, which statement is true?

A.	 Beth may claim Molly as a dependent because her AGI is lower.

B.	 Beth and James must alternate claiming Molly as a dependent.

C.	 James may claim Molly as a dependent because his AGI is higher.

D.	 Both parents may claim Molly as a dependent because she lives equal time with each parent.
A

Choice “C” is correct. The parent with custody of the child for the greater part of the year may claim the child as a dependent (determined by time, not the divorce decree). Because Molly’s parents have equal custody during the year, the parent with the higher AGI would be eligible to claim Molly as a dependent, which in this case would be James. However, James could waive the right to claim Molly as a dependent.

Choices “D”, “A”, and “B” are incorrect, based on the above explanation.

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28
Q

Gail and Mark James contributed to the support of their two children, Jack and Jill, as well as Mark’s mother, Betty. Jack is a 19-year-old full time student who earned $5,000 this year working at a coffee shop on campus. Jill is 24 years old and worked full-time as a librarian and earned $25,000. Jack comes home during the summer and holidays. Jill lives at home year-round. Betty lives in an apartment in town and received $2,000 in municipal bond interest, $6,000 in dividend income, and $4,000 in nontaxable Social Security benefits. Jack, Jill, and Betty are U.S. citizens and unmarried. Gail and Mark provided more than half of the support for Jack, Jill, and Betty. How many people qualify as dependents on Gail and Mark’s tax return?

A.	 Three

B.	 Zero

C.	 One

D.	 Two
A

Choice “C” is correct. Jack meets the CARES test for a qualifying child. Jill does not meet the CARES test for a qualifying child because she is 24 and not a full-time student. She fails the age limit test of CARES. Jill also does not meet the SUPORT test because she earns more taxable income than the gross income threshold amount (“U” for under that amount). Betty does not meet the CARES test because she fails the close relative and age limit tests. (The CARES test is for a qualifying child, not a qualifying relative.) Betty also fails the SUPORT test because her taxable income ($6,000) is not under the gross income threshold amount. Therefore, Gail and Mark James can claim one person as a dependent—Jack.

Choices “D”, “A”, and “B” are incorrect, based on the above explanation.

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29
Q

Jane is a widow whose spouse died on December 31, Year 1. Jane and her spouse did not have any children but Jane’s nephew, Phil, moved into her home when Jane’s spouse died and lived there throughout Year 1 and Year 2. Phil is 25 years old and has a part-time job but spends most of his time helping Jane. Phil’s taxable gross income for Year 2 was $10,000. Jane pays all the costs of maintaining the home and provides more than half of Phil’s support. What is Jane’s most advantageous filing status for Year 2?

A.	 Married filing jointly

B.	 Single

C.	 Surviving spouse

D.	 Head of household
A

Choice “B” is correct. Jane does not meet the qualifications for head of household, surviving spouse, or married filing jointly filing status in Year 2. She is unmarried so the only filing status she qualifies for is single.

Choice “A” is incorrect. Jane was only allowed to use married filing jointly in Year 1, the year in which her spouse died. She is unmarried in Year 2, so she is not eligible for married filing jointly filing status.

Choice “C” is incorrect. Although a taxpayer may be eligible for surviving spouse filing status in the two years immediately following the spouse’s year of death, Jane is not eligible for surviving spouse because she does not maintain a home that is a principal residence for a dependent child for the entire year.

Choice “D” is incorrect. Jane would not qualify for head of household because Phil does not meet the requirements to be Jane’s dependent. Because Phil’s Year 2 taxable gross income is more than $5,050 (2024), he does not meet the gross income test under the “SUPORT” requirements for a dependent relative.

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30
Q

Which of the following is (are) among the requirements to enable a taxpayer to be classified as a “qualifying surviving spouse”?

I. A dependent has lived with the taxpayer for six months.
II. The taxpayer has maintained the cost of the principal residence for six months.
A.
Neither I nor II.

B.	 I only.

C.	 II only.

D.	 Both I and II.
A

Choice “A” is correct. The requirements that enable a taxpayer to be classified as a “qualifying surviving spouse” are:

The taxpayer’s spouse died in one of the two previous years and the taxpayer did not remarry in the current tax year;
The taxpayer has a child who can be claimed as a dependent;
This child lived in the taxpayer’s home for all of the current tax year;
The taxpayer paid over half the cost of keeping up a home for the child; and
The taxpayer could have filed a joint return in the year the spouse died.

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31
Q

Jim and Kay Ross contributed to the support of their two children, Dale and Kim, and Jim’s widowed parent, Grant. For Year 27, Dale, a 19-year-old full-time college student, earned $4,500 as a babysitter. Kim, a 23-year-old bank teller, earned $12,000. Grant received $8,000 in dividend income and $4,000 in nontaxable Social Security benefits. Grant and Kim are U.S. citizens and were over one-half supported by Jim and Kay, but neither of the two currently reside with Jim and Kay. Dale’s main place of residence is with Jim and Kay, and he is currently on a temporary absence to attend school. How many people meet the definition of either qualifying child or qualifying relative on the Year 27 joint income tax return for Jim and Kay Ross?

A.	 One

B.	 Two

C.	 Zero

D.	 Three
A

Choice “A” is correct. Only one person meets the criteria for either qualifying child or relative for the Rosses. Dale meets the definition of qualifying child. He meets all criteria of CARES. He is under the age limit because he is a full-time student under the age of 24. All other CARES tests are met. Kim does not meet the age test for qualifying child. She also does not meet the qualifying relative criteria because her taxable gross income of $12,000 exceeds the gross income limit under SUPORT. Because Grant is Jim’s parent, Grant does not have to live with the Rosses to be a qualifying relative. However, Grant’s taxable gross income of $8,000 exceeds the gross income limit, so he is not a qualifying relative. Note that Grant’s nontaxable Social Security benefits are not included in gross income for purposes of the qualifying relative gross income test.

Choice “B” is incorrect. Kim fails the age test for qualifying child (CARES) and the gross income test
for qualifying relative (SUPORT). Grant also fails the gross income test for qualifying relative (SUPORT).

Choice “C” is incorrect. Dale meets the CARES criteria for qualifying child for Jim and Kay Ross.

Choice “D” is incorrect. Only Dale meets the definition of either qualifying child or qualifying relative for Jim and Kay Ross. Kim does not meet the the age test for qualifying child or the gross income test for qualifying relative. Grant also does not meet the gross income test for qualifying relative.

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32
Q

Jane is a widow whose spouse died on January 2, Year 1. Jane and her spouse did not have any children but Jane’s nephew, Phil, moved into her home when Jane’s spouse died and lived there the entire year. Phil is 25 years old and has a part-time job but spends most of his time helping Jane. Phil’s taxable gross income for Year 1 was $10,000. Jane pays all the costs of maintaining the home and provides more than half of Phil’s support. What is Jane’s most advantageous filing status for Year 1?

A.	 Surviving spouse

B.	 Single

C.	 Married filing jointly

D.	 Head of household
A

Choice “C” is correct. A taxpayer may file a married filing jointly tax return in the year that a spouse dies, regardless of when in the tax year the spouse died. There is no requirement that the taxpayer maintain a home for a dependent child or dependent relative. The taxpayer does not meet the qualifications for single, head of household, or surviving spouse filing status in Year 1.

Choice “A” is incorrect. Surviving spouse is only available for the two years immediately following the spouse’s year of death and requires that the taxpayer maintain a home that is a principal residence for a dependent child for the entire year.

Choice “B” is incorrect. Although Jane is unmarried (a widow), she is allowed to use the more advantageous married filing jointly filing status in Year 1, the year her spouse dies.

Choice “D” is incorrect. Jane would not qualify for head of household because Phil does not meet the requirements to be Jane’s dependent. Because Phil’s Year 1 taxable gross income is more than $5,050 (2024), he does not meet the gross income test under the “SUPORT” requirements for a dependent relative.

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33
Q

Heather is single and has one son, Rhett, who is 19 years old. Rhett lived at home for four months of the current tax year before moving away to take a full-time job in another city. Heather provided more than half of Rhett’s support for the taxable year. Rhett earned $20,000 in gross income and is unmarried. Which of the following statements regarding the dependency rules for Rhett is true?

A.	 Rhett must live with Heather for the entire year to meet the qualifying relative test.

B.	 Rhett fails the age limit test for a qualifying child.

C.	 Heather may claim Rhett as a dependent because he is a qualifying relative.

D.	 Heather may claim Rhett as a dependent because he is a qualifying child.
A

Choice “B” is correct. Rhett fails both the age limit and residency test for qualifying child status.

Choice “A” is incorrect. Rhett does not have to live with Heather for the entire year to meet the qualifying relative test because he is her son.

Choice “C” is incorrect. Rhett is not considered a qualifying relative because his gross income exceeds the gross income threshold amount.

Choice “D” is incorrect. Rhett is not a qualifying child. He fails both the age limit test and the residency test (CARES).

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34
Q

Thompson’s spouse died in Year 1. Thompson did not remarry in Year 2 and lived alone the entire year. What is Thompson’s Year 2 filing status?

A.	 Married filing jointly.

B.	 Head of household.

C.	 Single.

D.	 Qualifying surviving spouse.
A

Choice “C” is correct. Filing status is determined as of the last day of the year. At the end of Year 2, Thompson is not married and does not qualify for any other filing status. Therefore, his status is single.

Choice “A” is incorrect. When a spouse dies during the year, the surviving spouse can file married filing jointly for that year under an exception to the end-of-year test. But this question is about Year 2, the year after death. Thompson is single for Year 2.

Choice “B” is incorrect. Head of household status could apply in certain circumstances where there is a dependent and surviving spouse status does not apply. That is not the case here. Thompson is single for Year 2.

Choice “D” is incorrect. Qualifying surviving spouse status, can be claimed for the two years after year of death. However, it requires the presence of a dependent child, which is not part of the facts here. Thompson is single for Year 2.

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35
Q

Bill and Anne Chambers are married and file a joint return. They have no children. Their college friend, Ryan, lived with them for the entire current tax year. Ryan is 40 years old and earned $2,000 at a part-time job and received $25,000 in municipal bond interest. Ryan is a citizen of the United States and is unmarried. Which of the following statements is true regarding claiming Ryan as a dependent on the Chambers’ tax return?

A.	 If Ryan earns $15,000 in self-employment income in addition to the part-time job and municipal bond interest, he would qualify as a dependent on the Chambers’ tax return.

B.	 Ryan qualifies as a dependent for the Chambers under the qualifying relative rules because he lived with the Chambers for the entire year, as long as Ryan does not provide more than half of his own support.

C.	 Ryan qualifies as a dependent for the Chambers under the qualifying relative rules as long as the Chambers provide more than half of Ryan’s support.

D.	 Ryan qualifies as a dependent for the Chambers under the qualifying child rules.
A

Choice “C” is correct. Ryan meets the SUPORT tests for a qualifying relative if the Chambers provide more than half of Ryan’s support.

CARES Test (Qualifying Child)

SUPORT Test (Qualifying Relative)

Close Relative

Support (over 50%) test

Age Limit

Under a specific amount of (taxable) gross income test

Residency and Filing Requirements

Precludes dependent filing a joint tax return test

Eliminate Gross Income Test

Only citizens (residents of U.S./Canada or Mexico) test

Support Test

Relative test

Ryan’s taxable income ($2,000) is under the gross income threshold amount. He doesn’t file a joint return. He is a citizen of the United States and he lives with the Chambers for the entire year.

Choice “A” is incorrect. If Ryan earns $15,000 in self-employment income, he would not meet the “U” test because his taxable income is over the gross income threshold amount.

Choice “B” is incorrect. The support test for the qualifying relative test states that the Chambers must pay more than half of the support of Ryan. The fact that Ryan does not provide more than half of his own support is not enough to meet the support test for qualifying relative (SUPORT).

Choice “D” is incorrect. Ryan does not meet the CARES test for qualifying child. He is not a close relative and not under the age limit.

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36
Q

Which of the following taxpayers would not qualify for the filing status of head of household?

A.	 A single taxpayer who provides one-half of the support for a dependent child who has lived almost the entire year at a U.S. university while pursuing an undergraduate degree.

B.	 A single taxpayer who provides over one-half of the support for a dependent parent in a nursing home but does not have a qualifying child in the household.

C.	 A married taxpayer with a dependent child in the household who has lived apart from the taxpayer's spouse for the entire year due to abandonment.

D.	 A single taxpayer whose spouse died in the preceding tax year and who has a dependent child living in the household.
A

Choice “D” is correct. A taxpayer qualifies for surviving spouse filing status for the two years following the year the taxpayer’s spouse dies if the taxpayer maintains a household where a dependent child lives for the entire year.

Choice “A” is incorrect. A single taxpayer who maintains a home that is the principal residence for a dependent child qualifies for head-of-household filing status. A full-time student under age 24 who does not provide more than half of his or her own support is a qualifying dependent child. A college student living at a university is considered temporarily away from home. The parent’s home is considered the child’s principal residence.

Choice “B” is incorrect. A single taxpayer who provides more than one-half of the support for a qualifying relative and maintains a home that is the principal residence of the qualifying relative qualifies for head-of-household filing status. A dependent parent is not required to live with the taxpayer, provided the taxpayer contributes more than half the cost of maintaining a home that is the principal residence of the parent for the entire year.

Choice “C” is incorrect. A married taxpayer who has lived apart from his or her spouse for the last six months of the year and maintains a household where a dependent child lives for more than half the year qualifies for head-of-household filing status.

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37
Q

Dave and Pam Stevens contributed to the support of their three children, Lisa, Tanya, and Hannah, and Pam’s divorced mother, Ellen. For the current year, Lisa, a 26-year-old sales clerk, earned $27,000. Tanya, a 23-year-old, full-time college graduate student in accounting, earned $35,000 working for a CPA firm. Hannah, a 20-year old artist, earned nothing during the year, but is still aspiring to sell her first piece and has signed on with an art studio. Ellen received $10,000 in nontaxable social security benefits and $2,000 in dividend income. All are U.S. citizens and are over half supported by Dave and Pam. How many dependents do Dave and Pam Stevens have under the qualifying child and qualifying relative rules?

A.	 Three

B.	 One

C.	 Zero

D.	 Two
A

Choice “A” is correct. Based on the CARES (QC) and the SUPORT (QR) tests, Dave and Pam have three dependents.

Lisa: NO. Lisa fails the age limit for QC and exceeds the gross income limitation for QR.

Tanya: YES. Tanya meets all tests of QC. She is a full-time student under the age of 24 so she meets the age test.

Hannah: YES. Hannah meets all criteria for QR. She fails the age limit test for QC.

Ellen: YES. Ellen meets the gross income limitation for QR because the Social Security income is nontaxable and not included for the gross income test.

Tanya, Hannah, and Ellen all meet dependency requirements.

Choices “C”, “B”, and “D” are incorrect based on the above explanation.

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38
Q

Jackie is 21 years old and is a full-time student at the local community college. She is married to Bill and they have no children. Jackie and Bill live in Jackie’s parents’ basement while they both finish college. Bill is 25 years old and is also a full-time student. Jackie’s parents pay more than half of Jackie and Bill’s support. Jackie has no gross income and Bill has $2,000 from a part-time job. Bill and Jackie file a joint return and received a refund because their tax liability is zero. Can Jackie’s parents claim Jackie and Bill as dependents on their tax return?

A.	 Jackie’s parents can only claim Jackie, but not Bill as a dependent.

B.	 Jackie’s parents cannot claim Jackie or Bill as dependents.

C.	 Jackie’s parents can only claim Bill, but not Jackie as a dependent.

D.	 Jackie’s parents can claim both Jackie and Bill as dependents.
A

Choice “D” is correct. Jackie qualifies as her parent’s qualifying child (CARES). Bill qualifies as Jackie’s parents’ qualifying relative (SUPORT). Even though Jackie and Bill file a joint return, they can still be considered dependents because they receive a refund and their tax liability is zero.

Choices “A”, “C”, and “B” are incorrect, based on the above explanation.

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39
Q

In the current tax year, Blake Smith provided more than half of the support for his cousin, niece, and a close family friend. Blake lives alone and sends a monthly support check to each person. None of the individuals whom Blake supports has any income or files a tax return. All three individuals are U.S. citizens. Which of the three people that Blake supports can he claim as a dependent on his tax return?

A.	 Niece

B.	 None

C.	 Cousin

D.	 Family friend
A

Choice “A” is correct. The niece meets the SUPORT test for qualifying relative status. The cousin and family friend do not meet the “R” (relative) or “T” (taxpayer lives with individual) tests. All three people whom Blake supports fail the residency test for a qualifying child.

Choice “B” is incorrect. Blake’s niece meets the SUPORT tests and therefore counts as a qualifying relative.

Choice “C” is incorrect. The cousin does not meet the “R” (relative) or “T” (taxpayer lives with individual) tests for a qualifying relative because Blake’s cousin did not live with him for the entire year.

Choice “D” is incorrect. Blake’s family friend does not meet the “R” (relative) or “T” (taxpayer lives with individual) test, because Blake’s family friend does not qualify as a qualifying relative and did not live with him for the entire year.

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40
Q

The spouse of a married taxpayer died on January 15, Year 1. The taxpayer’s qualifying child moved to live with grandparents in their home on August 30, Year 2. If the taxpayer did not remarry before the end of Year 2, then which filing status should the taxpayer choose for Year 2?

A.	 Qualifying surviving spouse

B.	 Head of household

C.	 Married filing jointly

D.	 Married filing separately
A

Choice “B” is correct. The taxpayer should choose the head of household filing status for Year 2. The taxpayer qualifies for this filing status because the taxpayer is unmarried and maintained his or her home as the principal residence for the qualifying child for more than half of the taxable year. The taxpayer does not meet the requirements for a qualifying surviving spouse as a result of the qualifying child moving to live with grandparents in their home on August 30, Year 2. To file as a qualifying surviving spouse, the surviving spouse must pay over half the cost of maintaining a household where a dependent child lives for the whole taxable year.

Choice “A” is incorrect. To file a return with qualifying surviving spouse status, the surviving spouse must pay over half of the cost of maintaining a household where a dependent child lives for the whole taxable year. Since the taxpayer’s qualifying child moved to live with grandparents in their home on August 30, Year 2 in this example, the taxpayer cannot use the qualifying surviving spouse filing status for Year 2.

Choice “C” is incorrect. If a taxpayer’s spouse dies during the year, a joint return may be filed for that corresponding year. In this example, the taxpayer’s spouse died during Year 1, so the married filing jointly status could not be used in Year 2.

Choice “D” is incorrect. In order to use the married filing separately status, a taxpayer must be married. In this example, the taxpayer is a widow(er) and did not remarry before the end of Year 2.

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41
Q

Jane is 20 years old and is a sophomore at Lake University. She is a full-time student and does not have any gross income. Jane spends the holidays and summers at home with her parents. Her total support for the current tax year is $30,000, including a scholarship for $5,000 to cover her tuition. Jane used $12,000 of her savings and her grandparents provided $13,000. Which of the following statements regarding the dependency rules for Jane is true?

A.	 Jane does not qualify as a dependent for either her parents or grandparents.

B.	 Jane’s grandparents cannot claim her as a dependent because Jane provided more than half of her own support.

C.	 Jane’s grandparents can claim her as a dependent because Jane did not provide more than half of her own support.

D.	 If Jane’s parents (rather than her grandparents) provided the $13,000, then they would not be able to claim Jane as a dependent because Jane provided more than half of her own support.
A

Choice “B” is correct. Jane does not qualify as a dependent for her grandparents as a qualifying child or relative. With respect to her grandparents, Jane’s scholarship is treated as support and thus Jane provides more than half of her own support ($12,000 savings + $5,000 scholarship = $17,000; $17,000/$30,000 = 0.57 = 57%).

Jane does qualify as a dependent of her parents because she is under 24, a full-time student, and the scholarship does not count as support with respect to her parents. She also meets all other tests of qualifying child for her parents.

Choice “A” is incorrect. Jane is a dependent of her parents because she meets all tests for a qualifying child.

Choice “C” is incorrect. Jane’s scholarship does count as support for Jane with respect to her grandparents. Because Jane provided more than half of her own support (see the calculation above), Jane’s grandparents cannot claim her as a qualifying child or relative.

Choice “D” is incorrect. The scholarship does not count as support for Jane with respect to her parents. Therefore, Jane meets all tests for qualifying child of her parents.

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42
Q

An individual received $50,000 during the current year pursuant to a divorce decree executed in 2015. A check for $25,000 was identified as annual alimony, checks totaling $10,000 as annual child support, and a check for $15,000 as a property settlement. What amount should be included in the individual’s gross income?

A.	 $40,000

B.	 $0

C.	 $25,000

D.	 $50,000
A

Rules: Payments for the support of a spouse, pursuant to a divorce agreement executed on or before December 31, 2018, are income to the spouse receiving the payments and are deductible to arrive at adjusted gross income by the payor spouse. Child support is not taxable. Property settlements are not taxable.

Choice “C” is correct. Only the $25,000 in alimony is included in the gross income of the receiving spouse.

Choice “A” is incorrect. This answer option incorrectly includes the payments received in the year for alimony and property settlement for the year [$25,000 + $15,000 = $40,000]. The property settlement ($15,000) is NOT included in the gross income of the receiving spouse.

Choice “B” is incorrect. The amount received for alimony ($25,000) is included in the gross income of the receiving spouse.

Choice “D” is incorrect. This answer option incorrectly includes all of the payments received in the year. The child support ($10,000) and the property settlement ($15,000) are NOT included in the gross income of the receiving spouse.

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43
Q

Which of the following should be included when determining adjusted gross income?

A.	 Rental value of parsonages.

B.	 Compensation for injuries or sickness.

C.	 Tuition scholarship.

D.	 Alimony received pursuant to a divorce decree executed in 2014.
A

Rule: Payments for the support of a spouse (alimony) are income to the spouse receiving the payments and are deductible to arrive at adjusted gross income (AGI) by the spouse making the payments on any divorce agreement executed on or before December 31, 2018. Alimony paid according to a divorce agreement executed after December 31, 2018, is neither taxable to the recipient nor deductible by the payor. To be alimony:

Payments must be legally required pursuant to a written divorce or separation agreement,
Payments must be in cash or its equivalent.
Payments cannot extend beyond the death of the payee-spouse,
Payments cannot be made to members of the same household.
Payments must not be designated as anything other than alimony, and
The spouses may not file a joint tax return.
Choice “D” is correct. Alimony received is considered part of income and adjusted gross income.

Choice “A” is incorrect. The rental value of parsonages (furnished by churches or synagogues) is excluded from the gross income of a minister and the minister’s adjusted gross income.

Choice “B” is incorrect. Compensation for injuries or sickness is excluded from gross income and adjusted gross income.

Choice “C” is incorrect. A scholarship for tuition is excluded from gross income and adjusted gross income. There are limits or restrictions, such as the student has to be a degree-seeking student and amounts must actually be spent on tuition, fees, books, and supplies, but generally, the amount is excluded.

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44
Q

During the current year, Adler had the following cash receipts:

Wages

18,000

Interest income from investments in municipal bonds

400

Unemployment compensation

3,900

What is the total amount that must be included in gross income on Adler’s current year income tax return?

A.	 $18,400

B.	 $18,000

C.	 $21,900

D.	 $22,300
A

Choice “C” is correct. The wages of $18,000 and unemployment compensation of $3,900 are both includable in gross income on Adler’s current year income tax return.

Choice “A” is incorrect. Municipal bond interest income is excluded from gross income, and the unemployment compensation must be included in gross income.

Choice “B” is incorrect. The unemployment compensation must be included in gross income.

Choice “D” is incorrect. Municipal bond interest income is excluded from gross income.

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45
Q

A taxpayer received $200 in interest from U.S. Treasury bonds and $300 in interest from municipal bonds. What amount of interest should be included in the taxpayer’s gross income?

A.	 $500

B.	 $0

C.	 $300

D.	 $200
A

Choice “D” is correct. In general, all income from whatever source derived is included in gross income. However, interest from state and local government bonds (i.e., “municipal” bonds) is not included in gross income. It is important to note, however, that the U.S. government is not a municipality; thus, U.S. obligations such as Treasury bonds are not municipal bonds and therefore interest on such obligations is included in gross income.

Choice “A” is incorrect. Interest from municipal bonds is tax-exempt; therefore, the $300 in this problem is not included in the taxpayer’s gross income.

Choice “B” is incorrect. Interest on municipal bonds is tax exempt, but the U.S. government is not a municipality; thus, U.S. obligations such as Treasury bonds are not municipal bonds and therefore interest on such obligations is included in gross income.

Choice “C” is incorrect. Interest from municipal bonds is tax exempt; therefore, the $300 of interest on the municipal bond is not included in the taxpayer’s gross income. The U.S. government is not a municipality; thus, U.S. obligations such as Treasury bonds are not municipal bonds, and therefore the $200 of interest on the U.S. Treasury bond is included in the taxpayer’s gross income.

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46
Q

Which of the following is taxable as gross income?

A.	 Alimony received based on a divorce agreement executed in 2019

B.	 Child support received based on a divorce agreement executed in 2015

C.	 Child support received based on a divorce agreement executed in 2019

D.	 Alimony received based on a divorce agreement executed in 2015
A

Choice “D” is correct. Alimony received based on a divorce agreement executed on or before December 31, 2018, is taxable as gross income to the recipient.

Choice “A” is incorrect. Alimony received based on a divorced agreement executed after December 31, 2018, is not taxable as gross income to the recipient.

Choice “B” is incorrect. Child support received is not taxable as gross income.

Choice “C” is incorrect. Child support received is not taxable as gross income.

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47
Q

Sanderson has made deductible contributions to his traditional IRA for many years. Sanderson recently retired at age 60 and received a distribution of $150,000. In which way, if any, will the distribution be taxed?

A.	 It will not be taxed.

B.	 Subject to a 10 percent penalty tax.

C.	 As ordinary income.

D.	 As a capital gain.
A

Choice “C” is correct. Withdrawals from deductible traditional IRAs (i.e., IRAs for which the contributions were deducted) are taxed as ordinary income. Withdrawals prior to age 59½ are also subject to a 10 percent penalty tax (unless an exception applies). Because Sanderson is over 59½, the withdrawal is not subject to the 10 percent penalty tax.

Choice “A” is incorrect. Although withdrawals from Roth IRAs are not taxed provided certain rules are met, withdrawals from deductible traditional IRAs are always taxed.

Choice “B” is incorrect. Withdrawals from deductible traditional IRAs prior to age 59½ are subject to a 10 percent penalty tax (unless an exception applies). Because Sanderson is over 59½, the withdrawal is not subject to the 10 percent penalty tax.

Choice “D” is incorrect. Withdrawals from deductible traditional IRAs are taxed as ordinary income, not capital gains.

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48
Q

Darr, an employee of Sorce C Corporation, is not a shareholder. Which of the following would be included in Darr’s taxable gross income?

A.	 The dividend income on shares of stock that the taxpayer received for services rendered.

B.	 The fair market value of land that the taxpayer inherited from an uncle.

C.	 Employer-provided medical insurance coverage under a health plan.

D.	 A $10,000 gift from the taxpayer's grandparents.
A

Choice “A” is correct. An individual receiving common stock for services rendered must recognize the fair market value as ordinary income. Any dividends received on that stock would also result in income recognition.

Choice “C” is incorrect. Employer-provided medical insurance is a tax-free fringe benefit.

Choices “D” and “B” are incorrect. Gifts and inheritances are both tax-free to the recipient. (Remember, tax is often paid by the person giving the gift or the estate at death.)

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49
Q

In the current year Jensen had the following items:

Salary
50,000

Inheritance
25,000

Alimony from ex-spouse (divorce agreement finalized in 2015)
12,000

Child support from ex-spouse
9,000

What is Jensen’s adjusted gross income (AGI) for the current year?

A.	 $62,000

B.	 $96,000

C.	 $50,000

D.	 $71,000
A

Choice “A” is correct. The question asks for AGI, but all of the items in the list are items of potential gross income. There are no adjustments included in the list; therefore, in this case, AGI is the same as gross income. The calculation is as follows:

Salary
50,000

Inheritance
0

[not taxable]
Alimony from ex-spouse
(pre-2019 agreement)
12,000

Child support from ex-spouse
0

[not taxable]
AGI
62,000

Choice “B” is incorrect. The inheritance and the child support are not included in taxable gross income.

Choice “C” is incorrect. The alimony is also taxable, in addition to the salary, because the divorce agreement was executed on or before December 31, 2018.

Choice “D” is incorrect. The salary and alimony are taxable, but the child support is not included in taxable gross income.

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50
Q

Klein, a master’s degree candidate at Blair University, was awarded a $12,000 scholarship from Blair in Year 8. The scholarship was used to pay Klein’s Year 8 university tuition and fees. Also in Year 8, Klein received $5,000 for teaching two courses at a nearby college. What amount is includable in Klein’s Year 8 gross income?

A.	 $17,000

B.	 $5,000

C.	 $0

D.	 $12,000
A

Choice “B” is correct. Scholarships are nontaxable for degree-seeking students to the extent that the proceeds are spent on tuition, fees, books, and supplies. The $5,000 for teaching courses is taxable compensation for services delivered.
Choice “A” is incorrect. The scholarship is not taxable because Klein is a degree-seeking student and used the proceeds for tuition and fees.

Choice “C” is incorrect. The $5,000 for teaching courses is taxable compensation for services delivered.
Choice “D” is incorrect. The scholarship is not taxable because Klein is a degree-seeking student and used the proceeds for tuition and fees. Furthermore, the $5,000 for teaching courses is taxable compensation for services delivered.

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51
Q

Porter was unemployed for part of the current year. Porter received $35,000 of wages, $6,400 from a state unemployment compensation plan, and $2,000 from his former employer’s company-paid supplemental unemployment benefit plan. What is the amount of Porter’s gross income for the current year?

A.	 $37,000

B.	 $35,000

C.	 $41,400

D.	 $43,400
A

Gross income includes all income unless it is specifically excluded in the tax code.

Choice “D” is correct. Wages and all unemployment compensation are not excluded from being taxable; therefore, they are included in the taxpayer’s gross income for tax purposes.

Wages received

35,000

State unemployment compensation

6,400

Employer’s unemployment compensation plan

2,000

43,400

Choice “A” is incorrect. The $6,400 of state unemployment compensation received is included as part of gross income.

Choice “B” is incorrect. All forms of unemployment compensation are included as part of gross income.

Choice “C” is incorrect. The $2,000 of his former employer’s company-paid supplemental unemployment benefit plan is included as part of gross income.

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52
Q

Which of the following statements is true regarding the taxation of Social Security benefits?

A.	 If a taxpayer’s only source of income is $10,000 of Social Security benefits, then 50% of the benefits are taxable.

B.	 50% is the maximum amount of taxable Social Security benefits.

C.	 If a taxpayer’s only source of income is $10,000 of Social Security benefits, then 85% of the benefits are taxable.

D.	 85% is the maximum amount of taxable Social Security benefits.
A

Choice “D” is correct. The maximum amount of taxable Social Security benefits is 85% of Social Security benefits received. Depending on a taxpayer’s level of modified AGI (AGI plus tax-exempt interest plus 50% of Social Security benefits), a taxpayer may include 0% to 85% of Social Security benefits received in gross income. Taxpayers must include in income the lesser of 50% (or 85%, depending on income) of Social Security received or 50% (or 85%, depending on income) of the excess modified AGI over a threshold amount. Eighty-five percent of Social Security benefits received is the maximum amount that is includable in gross income.

Choices “A” and “C” are incorrect. If a taxpayer’s only source of income is $10,000 in Social Security benefits, the taxpayer is below the threshold ($25,000 single or $34,000 married) for taxable Social Security benefits.

Choice “B” is incorrect. The maximum amount of taxable Social Security benefits is 85% of Social Security benefits received.

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53
Q

Linda is an employee of JRH Corporation. Which of the following would be included in Linda’s gross income?

A.	 $2,500 paid by JRH Corporation for an annual parking pass for Linda.

B.	 Premiums paid by JRH Corporation for a group term life insurance policy for $50,000 of coverage for Linda.

C.	 A $2,000 trip given to Linda by JRH Corporation for meeting sales goals.

D.	 $1,000 of tuition paid by JRH Corporation to State University for Linda’s master’s degree program.
A

Choice “C” is correct. The $2,000 trip is considered an award and is included in Linda’s gross income.

Choice “A” is incorrect. The value of employer-provided parking up to $315 per month may be excluded by an employee (2024).

Choice “B” is incorrect. Premiums paid by an employer on up to $50,000 of coverage for an employee are excludable from gross income.

Choice “D” is incorrect. Up to $5,250 of payments made by an employer on behalf of an employee’s educational expenses may be excluded from gross income. The exclusion applies to both undergraduate and graduate level education.

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54
Q

Daisy Dunn, a single calendar-year taxpayer with no dependents, died on March 1, Year 1. Daisy earned $20,000 from her job in Year 1 before she died and had interest income from bank accounts of $500. Her estate received another $1,500 of interest from her bank accounts in Year 1 after her death.

What is the due date for Daisy’s Year 1 final federal income tax return?

A.	 April 15, Year 2

B.	 March 1, Year 2

C.	 April 15, Year 1

D.	 December 31, Year 1
A

Choice “A” is correct. The final income tax return of a decedent for the year of death is due at the same time the decedent’s return would have been due if the taxpayer was still alive. For a calendar-year taxpayer, the final return is due on April 15 following the year of death, regardless of when during that year the death occurred. Daisy was a calendar-year taxpayer and died in Year 1, so her final income tax return for Year 1 is due by April 15, Year 2.

Choice “B” is incorrect. Daisy’s Year 1 final income tax return is due by April 15 of Year 2, the year after her death, not one year from her March 1, Year 1 date of death. The return is due by April 15 of the following year regardless of when the taxpayer dies during the year.

Choice “C” is incorrect. Daisy’s Year 1 final income tax return is due by April 15 of Year 2, the year after her death, not April 15 of Year 1, the year of death. The return is due by April 15 of the following year regardless of when the taxpayer dies during the year.

Choice “D” is incorrect. Daisy’s Year 1 final income tax return is due by April 15 of Year 2, the year after her death, not December 31 of the year of death.

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55
Q

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.	 $32,425

B.	 $32,000

C.	 $28,425

D.	 $22,000
A

Choice “B” is correct. Each item listed here is included in gross income except for the state tax refund from a prior year. The taxpayer always claims the standard deduction. This means that the state tax was not deducted in the year it was paid. Under the tax benefit rule, the refund of that tax is not taxable.

Wages

22,000

Unemployment compensation

6,000

Pension distribution (100% taxable)

4,000

Total

32,000

Choices “D”, “C”, and “A” are incorrect per the above rule and per the above computation.

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56
Q

Hall, a divorced person and custodian of her 12-year-old child, filed her current year federal income tax return as head of a household. The divorce agreement, executed in 2017, provides for Hall to receive $3,000 per month, of which $600 is designated as child support. After the child reaches 18, the monthly payments are to be reduced to $2,400 and are to continue until remarriage or death. However, for the current year, Hall received a total of only $5,000 from her former husband. Hall paid an attorney $2,000 in the current year in a suit to collect the alimony owed.

What amount should be reported in Hall’s current year tax return as alimony income?

A.	 $28,800

B.	 $0

C.	 $5,000

D.	 $36,000
A

Choice “B” is correct. None of the payments received should be considered alimony income. Hall would only claim alimony income if total receipts from her former spouse exceeded $7,200 (the required child support).

In the event of payments consisting of both child support and alimony, child support obligations will be satisfied first. Note also that if the divorce was finalized after December 31, 2018, the alimony payments would not be considered income in any situation.

Amount designated as monthly child support

600

Number of months

× 12

Amount of required child support

7,200

Payments actually received

(5,000)

Amount of payments considered alimony

0

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57
Q

Danny received the following interest and dividend payments this year. What amount should Danny include in his gross income?

Source

Amount

City of Atlanta bond interest

$1,200

U.S. Treasury bond interest

$500

State of Georgia bond interest

$1,000

Ellis Company common stock dividend

$400

Row Corporation bond interest

$600

A.	 $2,500

B.	 $1,500

C.	 $3,700

D.	 $2,200
A

Choice “B” is correct. Interest on municipal bonds (bonds issued by state or local governments) is excluded from gross income. Therefore, the city of Atlanta and State of Georgia bond interest is not taxable. The U.S. Treasury and Row Corporation bond interest is taxable. The Ellis Company stock dividend is also taxable.

Choices “A” and “C” are incorrect. Interest on municipal bonds (bonds issued by state or local governments) is excluded from gross income. Therefore, the city of Atlanta and State of Georgia bond interest is not taxable.

Choice “D” is incorrect. Although interest on municipal bonds (bonds issued by state or local governments) is excluded from gross income, income from interest on U.S. Treasury bonds and interest and dividends from corporations are included in taxable income.

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58
Q

Seth Silver had the following items of income during the taxable year:

Interest income from a checking account

1,000

Interest income from a money market account

2,050

Interest income from a municipal bond he purchased during the current year

250

Interest income from federal bonds he purchased 2 years ago

750

On his current year tax return, what amount is taxable income?

A.	 $3,800

B.	 $3,300

C.	 $4,050

D.	 $3,050
A

Choice “A” is correct. Taxable interest includes amounts received from general investment accounts as well as interest on federal obligations. Interest received from state and municipal bonds is not taxable.

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59
Q

Jasmin purchased 100 shares of Pinkstey Corporation (publicly traded company) on January 1 of Year 1 for $5,000. The FMV of the shares at the end of Year 1 was $6,000. On January 1 of Year 4, Pinkstey Corporation declared a 2-for-1 stock split when the fair market value of the stock was $65 per share. On January 1 of Year 5, Jasmin sold all of her Pinkstey Corporation stock when the fair market value was $40 per share. Which of the following statements is true?

A.	 Jasmin owns 100 shares in Pinkstey Corporation stock at the end of Year 4.

B.	 Jasmin’s basis in the Pinkstey Corporation stock at the end of Year 4 is $65/share.

C.	 Jasmin reports $6,500 in gross income for the 2-for-1 stock split in Year 4.

D.	 Jasmin has no taxable income for the Pinkstey Corporation stock in Year 4.
A

Choice “D” is correct. The 2-for-1 stock split is not a taxable event. After the split, Jasmin has 200 shares of Pinkstey Corporation stock with a basis of $25/share. Jasmin is taxed in Year 5 on the sale of the stock: $40 x 200 shares = $8000 – $5000 stock basis (200 shares x $25/share) = $3000 long-term capital gain.

Choice “A” is incorrect. After the Year 4 stock split, Jasmin owns 200 shares with a $25/share basis ($50 original basis/2).

Choice “B” is incorrect. After the Year 4 stock split, Jasmin’s basis in the stock is $25/share ($50 original basis/2). She owns 200 shares after the split.

Choice “C” is incorrect. The 2-for-1 stock split is not a taxable event.

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60
Q

Ania received a $400 state income tax refund this year. Ania deducted $1,000 of state income taxes paid in the prior year as part of her itemized deductions. Which of the following statements regarding the taxability of Ania’s refund is true?

A.	 The $400 is taxable if Ania’s itemized deductions in the prior year exceeded the standard deduction by $100.

B.	 The $400 is taxable if Ania claimed the standard deduction in the prior year.

C.	 Ania’s refund is not taxable.

D.	 The $400 is taxable if Ania’s itemized deductions in the prior year exceeded the standard deduction by $400.
A

Choice “D” is correct. Ania’s refund is includable in gross income only to the extent that the original deduction provided a tax benefit. If Ania’s itemized deductions last year exceeded the standard deduction by $400, then the state income taxes deducted created a tax benefit. Therefore, the $400 refund of the state income taxes received in the current year is taxable.

Choice “A” is incorrect. Ania’s refund is includable in gross income only to the extent that the original deduction provided a tax benefit. If Ania’s itemized deductions last year exceeded the standard deduction by $100, then the state income taxes deducted created a tax benefit of $100. Therefore only $100 of the refund of the state income taxes received in the current year is taxable.

Choice “B” is incorrect. If Ania claimed the standard deduction in the prior year, then she did not receive a tax benefit for the state income tax deduction. Therefore, none of Ania’s $400 refund in the current year is taxable.

Choice “C” is incorrect. Ania’s refund under these circumstances is taxable because the original deduction provided a tax benefit. In the prior year, her $1,000 in taxes paid were included in as part of her itemized deductions.

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61
Q

With regard to the inclusion of Social Security benefits in gross income for the tax year, which of the following statements is correct?

A.	 Fifty percent of the Social Security benefits is the maximum amount of benefits to be included in gross income.

B.	 One hundred percent of the Social Security benefits received is included in gross income.

C.	 Eighty-five percent of the Social Security benefits is the maximum amount of benefits to be included in gross income.

D.	 Social Security benefits received are never included in gross income.
A

Choice “C” is correct. The maximum amount of taxable Social Security benefits is 85 percent of Social Security benefits received. The amount of Social Security benefits that is taxed depends on whether modified adjusted gross income (AGI plus tax-exempt interest plus 50 percent of the Social Security benefits) is greater than a threshold amount. For higher income taxpayers with modified AGI of more than $34,000 ($44,000 MFJ), up to 85 percent of Social Security benefits received for the year are taxable.

Choice “A” is incorrect. Up to 50 percent of Social Security benefits are included in gross income for middle-income taxpayers with modified AGI between $25,000 and $34,000 ($32,000 and $44,000 MFJ), but up to 85 percent of Social Security benefits are included in gross income for higher income taxpayers with modified AGI of more than $34,000 ($44,000 MFJ).

Choice “B” is incorrect. The maximum amount of Social Security benefits received that is included in gross income is 85 percent for higher income taxpayers with modified AGI in excess of $34,000 ($44,000 MFJ).

Choice “D” is incorrect. No Social Security benefits are taxable for lower income taxpayers with modified AGI of $25,000 or less ($32,000 MFJ). However, up to 50 percent of Social Security benefits are taxable for middle-income taxpayers, and up to 85 percent of Social Security benefits are taxable for higher income taxpayers.

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62
Q

Kurstie received a $800 state income tax refund this year. Kurstie deducted $3,000 of state income taxes paid in the prior year as part of her itemized deductions. Which of the following statements regarding the taxability of Kurstie’s refund is true?

A.	 If Kurstie claimed the standard deduction instead, then the $800 refund is taxable.

B.	 Kurstie must include $3,000 in gross income in the current year.

C.	 If Kurstie’s itemized deductions exceeded the standard deduction by $200, then the $800 refund is included in gross income.

D.	 If Kurstie’s itemized deductions exceeded the standard deduction by $200, then $200 of the refund is included in gross income.
A

Choice “D” is correct. Kurstie’s refund is includable in gross income only to the extent that the original deduction provided a tax benefit. If Kurstie’s itemized deductions last year exceeded the standard deduction by $200, then the state income taxes deducted created a tax benefit of $200. Therefore, $200 of the state income tax refund received in the current year is taxable.

Choice “A” is incorrect. Kurstie’s refund is includable in gross income only to the extent that the original deduction provided a tax benefit. If Kurstie claimed the standard deduction in the prior year, then she did not receive a tax benefit from deducting the state income tax. Therefore, the state tax refund received in the current year is not taxable.

Choice “B” is incorrect. The most Kurstie would include in gross income in this case would be the $800 refund. She did not receive $3,000.

Choice “C” is incorrect. Kurstie’s refund is includable in gross income only to the extent that the original deduction provided a tax benefit. If Kurstie’s itemized deductions last year exceeded the standard deduction by $200, then the state income taxes deducted created a tax benefit of $200. Therefore, $200 of the state income tax refund received in the current year is taxable, not $800.

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63
Q

Bill and Jane Jones were divorced on January 1 of the current year. They have no children. In accordance with the divorce decree, Bill transferred the title of their house over to Jane. The home had a fair market value of $250,000 and was subject to a $100,000 mortgage. Under the divorce agreement, Bill is to make $1,000 monthly mortgage payments on the home for the remainder of the mortgage. In the current year, Bill made 12 mortgage payments. What amount is taxable to Jane in the current year?

A.	 $12,000

B.	 $100,000

C.	 $250,000

D.	 $0
A

Choice “D” is correct. If a divorce settlement provides for a property settlement by a spouse, the spouse gets no deduction for payments made and the payments are not includable in gross income of the spouse receiving the payment.

Choice “A” is incorrect. Because the divorce settlement provides for the payments, no deduction is allowable for payments made and the payments are not includable in gross income of the spouse receiving the payment.

Choice “B” is incorrect. If a divorce settlement provides for an assumption of debt by a spouse, the amounts are generally nontaxable.

Choice “C” is incorrect. If a divorce settlement provides for a property settlement by a spouse, the amounts are generally nontaxable.

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64
Q

Sue is 49 years old and has $10,000 in U.S. Series EE Savings Bond interest this year and paid $10,000 of qualifying educational expenses for her dependent daughter. In which of the following conditions is Sue allowed to exclude the interest on the savings bond from her gross income?

A.	 Sue’s AGI is $240,000 and her daughter did not receive any tax-free scholarships. Sue’s filing status is single.

B.	 Sue’s AGI is $40,000 and her daughter did not receive any tax-free scholarships. Sue’s filing status is married filing separately.

C.	 Sue’s AGI is $40,000 and her daughter did not receive any tax-free scholarships. Sue’s filing status is single.

D.	 Sue’s AGI is $40,000 and her daughter received $10,000 in tax-free scholarships. Sue’s filing status is single.
A

Choice “C” is correct. Interest on Series EE Savings Bonds is tax-exempt when it is used to pay for higher education for the taxpayer, a spouse, or dependents. The amount paid for higher education is reduced by any tax free-scholarships received. Because Sue’s $40,000 AGI is under the single phase-out threshold, the interest may be excluded.

Choice “A” is incorrect. Sue’s AGI of $240,000 is above the single phase-out threshold for U.S. Series EE Savings Bond interest exclusion.

Choice “B” is incorrect. There is no exclusion for U.S. Series EE Savings Bond interest for those using the married filing separately status.

Choice “D” is incorrect. The $10,000 in tax-free scholarships reduces the $10,000 of higher education costs to zero. Therefore, Sue’s $10,000 in U.S. Series EE Savings Bond interest is taxable.

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65
Q

DAC Foundation awarded Kent $75,000 in recognition of lifelong literary achievement. Kent was not required to render future services as a condition to receive the $75,000. What condition(s) must have been met for the award to be excluded from Kent’s gross income?

I.

Kent was selected for the award by DAC without any action on Kent’s part.

II.

Pursuant to Kent’s designation, DAC paid the amount of the award either to a governmental unit or to a charitable organization.

A.	 Both I and II.

B.	 II only.

C.	 I only.

D.	 Neither I nor II.
A

Choice “A” is correct. Generally, the fair market value of prizes and awards is taxable income. However, an exclusion from income for certain prizes and awards applies when the winner is selected for the award without entering into a contest (i.e., without any action on the individual’s part) and then assigns the award directly to a governmental unit or charitable organization. Therefore, conditions “I” and “II” must be met in order for Kent to exclude the award from his gross income.
Choice “B” is incorrect. “I” is a necessary condition as well. See explanation above.
Choice “C” is incorrect. “II” is a necessary condition as well. See explanation above.
Choice “D” is incorrect. “I” and “II” are both necessary conditions. See explanation above.

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66
Q

During Year 9, Ash had the following cash receipts:

Wages

13,000

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 Year 9 income tax return?

A.	 $13,350

B.	 $21,500

C.	 $13,000

D.	 $21,850
A

Choice “A” is correct. The total amount that must be included in gross income is $13,350 ($13,000 in wages plus $350 in interest income on U.S. Treasury bonds).

Wages and interest on U.S. Treasury bonds are includable in gross income and must be reported as part of gross income on a taxpayer’s income tax return.

Damages for personal injury (i.e., workers’ compensation for a job-related injury) are specifically excluded from gross income.

Choices “C”, “B”, and “D” are incorrect, per the above explanation.

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67
Q

A 65-year-old taxpayer has a traditional IRA. The taxpayer has made deductible contributions to the plan totaling $20,000. The current balance in the account is $28,000. The taxpayer withdraws $10,000 from the plan. What portion of the withdrawal is taxable?

A.	 $8,000

B.	 $2,857

C.	 $0

D.	 $10,000
A

Choice “D” is correct. The entire $10,000 withdrawal is taxable ordinary income. Earnings on deductible traditional IRA contributions accumulate tax-free until withdrawn. Distributions of both principal (contributions) and earnings from deductible traditional IRAs are taxable as ordinary income and may be subject to applicable early withdrawal penalties. However, early withdrawal penalties would not apply in this scenario because the taxpayer is over the age of 59½.

Choice “A” is incorrect. The $8,000 in earnings is taxable as a result of the withdrawal. However, the taxpayer withdrew $10,000 from the plan, so $2,000 of the principal is also taxable.

Choice “B” is incorrect. This answer choice incorrectly allocates the distribution between principal and earnings. The $28,000 account balance consists of 71.43% principal ($20,000 contributions / $28,000 total) and 28.57% earnings ($8,000 earnings / $28,000 total). Therefore, the taxable distribution was incorrectly calculated as follows: $10,000 withdrawal × 28.57% earnings = $2,857. Distributions are only allocated between taxable and nontaxable if the contributions were not deductible when made.

Choice “C” is incorrect. The full $10,000 withdrawal is taxable. For a deductible traditional IRA, distributions of contributions and earnings are both taxable.

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68
Q

Jensen reported the following items during the current year:

Fair rent value of a condominium owned by Jensen’s employer

1,400

Cash found in a desk purchased for $30 at a flea market

400

Inheritance

11,000

The employer allowed Jensen to use the condominium for free in recognition of outstanding achievement. Based on this information, what is Jensen’s gross income for the year?

A.	 $1,770

B.	 $1,400

C.	 $1,800

D.	 $12,400
A

Choice “C” is correct. Gross income includes employee achievement awards not in the form of tangible personal property. Tangible personal property does not include lodging. Gross income also includes treasure troves to the extent of its value in United States currency.

Choice “A” is incorrect. Gross income includes treasure troves to the extent of its value in United States currency.

Choice “B” is incorrect. Gross income includes treasure troves.

Choice “D” is incorrect. Gross income does not include inheritances.

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69
Q

A retiree invested $100,000 in an annuity that pays $12,000 annually for 10 years. What portion of the first payment should be included in the retiree’s gross income?

A.	 $0

B.	 $2,000

C.	 $10,000

D.	 $12,000
A

Choice “B” is correct. The annuity contract is a fixed-period annuity with payments received over 10 years. The original investment in the annuity contract is $100,000 so $10,000 of each annuity payment is nontaxable return of capital ($100,000 / 10 years). The annual annuity payment is $12,000, so $2,000 is included in gross income ($12,000 payment − $10,000 return of capital).

Choice “A” is incorrect. The taxpayer must include $2,000 of the first payment, the excess over the $10,000 return of capital, in gross income.

Choice “C” is incorrect. The $10,000 is nontaxable return of capital. The remaining $2,000 of the $12,000 annual payment is included in gross income.

Choice “D” is incorrect. Only $2,000 of the $12,000 is included in gross income. The other $10,000 is nontaxable return of capital.

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70
Q

David is a CPA and enjoys playing the lottery. This year, David won $10,000 in lottery scratch-off tickets. He spent $200 purchasing the tickets. Which statement is true regarding David’s winnings?

A.	 David must include the $10,000 in gross income and can deduct $200 as an itemized deduction.

B.	 David must include $10,000 in gross income and can deduct $200 as an adjustment to AGI.

C.	 David’s winnings are not taxable.

D.	 David must include $9,800 in gross income.
A

Choice “A” is correct. Gambling winnings are included in gross income. Gambling losses are deductible to the extent of gambling winnings, but are deducted on Schedule A and not calculated as part of gross income.

Choices “D”, “B”, and “C” are incorrect, based on the above explanation.

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71
Q

Kim was seriously injured at her job. As a result of her injury, she received the following payments:

$5,000 reimbursement from employer-provided health insurance for medical expenses paid by Kim. The premiums this year paid by Kim’s employer totaled $6,000.
$15,000 disability pay. Kim has disability insurance provided by her employer as a nontaxable fringe benefit. Kim’s employer paid $6,000 in disability premiums this year on behalf of Kim.
$10,000 received for damages for personal physical injury.
$200,000 for punitive damages.
What amount is taxable to Kim?

A.	 $0

B.	 $236,000

C.	 $225,000

D.	 $215,000
A

Choice “D” is correct. $215,000 (the amount received for disability pay and punitive damages) is taxable. The $15,000 disability pay is taxable because the insurance was paid by Kim’s employer as a nontaxable fringe benefit. If Kim had paid the disability insurance premiums after tax, then the benefits received would not be included in gross income. The $200,000 received for punitive damages is fully taxable. The $5,000 reimbursement for medical expenses paid by Kim and the health insurance premiums are not included in gross income. The $10,000 received for damages for personal physical injury is also not taxable.

Choices “C”, “B”, and “A” are incorrect, based on the above explanation.

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72
Q

Clark did not itemize deductions on his Year 8 federal income tax return. In July Year 9, Clark received a state income tax refund of $900 plus interest of $10, for overpayment of Year 8 state income tax. What amount of the state tax refund and interest is taxable on Clark’s Year 9 federal income tax return?

A.	 $910

B.	 $900

C.	 $10

D.	 $0
A

Choice “C” is correct. Except for interest from state and local government bonds, interest income is fully taxable, so the $10 is included in income. Since Clark did not itemize deductions on his Year 8 federal income tax return, he did not deduct any state income taxes last year. Under the tax benefit rule, the refund is not taxable this year because Clark did not deduct the tax last year.

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73
Q

The question below includes actual dates that must be used to determine the appropriate tax treatment of the transaction.

Fred and Wilma were divorced in 2017. Fred is required to pay Wilma $12,000 of alimony each year until their child turns 18. At that time, the payment will be reduced to $10,000 per year. In the current year, in accordance with the divorce agreement, Fred paid $6,000 directly to Wilma and $6,000 directly to the law school Wilma is attending. What amount of the payments received in the current year is income to Wilma?

A.	 $0

B.	 $12,000

C.	 $6,000

D.	 $10,000
A

Choice “D” is correct. Alimony pursuant to a divorce or separation agreement executed on or before December 31, 2018, is taxable to the recipient and deductible by the payor. Child support is not taxable to the recipient and not deductible by the payor. Because the total payment decreases to $10,000 once Fred and Wilma’s child turns 18, the $2,000 decrease is deemed child support. The fact that Fred pays the law school in accordance with the divorce agreement on Wilma’s behalf does not change the fact that $10,000 is considered alimony.

Choice “A” is incorrect. Alimony paid according to a divorce or separation agreement executed on or before December 31, 2018, is taxable to the recipient and deductible by the payor.

Choice “B” is incorrect. Alimony paid in accordance with a divorce or separation agreement executed on or before December 31, 2018, is taxable to the recipient and deductible by the payor. Child support is not taxable to the recipient and not deductible by the payor. Because the total payment decreases to $10,000 once Fred and Wilma’s child turns 18, the $2,000 decrease is deemed child support.

Choice “C” is incorrect. The fact that Fred pays the law school in accordance with the divorce agreement on Wilma’s behalf does not change the fact that $10,000 is considered alimony.

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74
Q

Larry received the following dividends in the current tax year:

$1,000 cash from Bears Inc.
$500 (FMV) of property with a $200 basis from Tigers Inc.
Stock dividend from Lions Inc. of 50 shares ($15/share FMV)
All three corporations are publicly traded. Larry had the option to receive cash instead of a stock dividend from Lions Inc. What amount of the dividends received must Larry include in gross income on his federal tax return for the current year?

A.	 $2,250

B.	 $1,500

C.	 $1,200

D.	 $1,000
A

Choice “A” is correct. The $1,000 cash dividend from Bears Inc. is taxable. The $500 FMV of the property received as a dividend from Tigers Inc. is taxable. Because Larry had the option to receive cash instead of the stock dividend from Lions Inc., the $750 FMV of the stock dividend is taxable. Consequently, the total taxable dividends equal $1,000 + $500 + $750 = $2250.

Choice “B” is incorrect. Because Larry had the option to receive cash instead of the stock dividend from Lions Inc., the $750 FMV of the stock dividend is taxable.

Choice “C” is incorrect. The property distribution is valued at the FMV of the property received as a dividend, rather than the adjusted basis. Also, because Larry had the option to receive cash instead of the stock dividend from Lions Inc., the $750 FMV of the stock dividend is taxable.

Choice “D” is incorrect. The $500 FMV of the property received as a dividend from Tigers Inc. is taxable as are cash dividends in lieu of stock.

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75
Q

Mary purchased an annuity that pays her $500 per month for the rest of her life. She paid $70,000 for the annuity. Based on IRS annuity tables, Mary’s life expectancy is 16 years. How much of the first $500 payment will Mary include in her gross income?

A.	 $135.42

B.	 $364.58

C.	 $500

D.	 $0
A

Choice “A” is correct. Based on IRS tables, Mary is expected to receive 192 (16 years x 12 months) annuity payments. Her investment in the annuity is $70,000 and her return of capital for each annuity payment is $70,000/192 = $364.58. The return of capital portion of each annuity payment is not taxable (not included in gross income). Mary must include the excess received ($500.00 – 364.58) of $135.42 in her gross income.

Choice “B” is incorrect. This is equal to the amount that is a nontaxable return of investment on the annuity, rather than the taxable income portion of each payment.

Choice “C” is incorrect. Mary is not subject to tax on the portion of the payment that is a return of investment. This is calculated using the IRS life expectancy tables and excess amounts are recognized ratably over that period.

Choice “D” is incorrect. Based on IRS tables, Mary is expected to receive 192 (16 years x 12 months) annuity payments. Her investment in the annuity is $70,000. Therefore her return of capital for each annuity payment is $70,000/192 = $364.58, which is not taxable. She must include the excess $135.42 in her gross income.

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76
Q

Mosh, a sole proprietor, uses the cash basis of accounting. At the beginning of the current year, accounts receivable were $25,000. During the year, Mosh collected $100,000 from customers. At the end of the year, accounts receivable were $15,000. What was Mosh’s gross taxable income for the current year?

A.	 $75,000

B.	 $100,000

C.	 $110,000

D.	 $90,000
A

Choice “B” is correct. The facts state that cash collections from customers were $100,000 and as a cash basis taxpayer this is the amount of Mosh’s gross taxable income for the year.

Choices “A” and “C” are incorrect. See explanation above.

Choice “D” is incorrect. $90,000 is the amount of sales that would be Mosh’s taxable income if Mosh were an accrual basis taxpayer.

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77
Q

Which of the following conditions must be present in a divorce agreement executed on or before December 31, 2018, for a payment to qualify as deductible alimony?

I.

Payments must be in cash or its equivalent.

II.

The payments must end at the recipient’s death.

A.	 I only.

B.	 Neither I nor II.

C.	 II only.

D.	 Both I and II.
A

Choice “D” is correct. Among the requirements for payments to be classified as alimony are the following:

Payment must be in cash or its equivalent.
Payments cannot extend beyond the death of the payee-spouse.
Payments must be legally required pursuant to a written divorce (or separation) agreement.
Payments cannot be made to members of the same household.
Payments must not be designated as anything other than alimony.
The spouses may not file a joint tax return.
The requirements for payments to be considered alimony (income) are the same as for payments to be alimony (deductions). Alimony paid is not deductible and alimony received is not considered taxable income for all divorce or separation agreements executed after December 31, 2018.

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78
Q

Mr. and Mrs. Williams decided during the current tax year to purchase their first new home. The cost of the home was $275,000, and a 20 percent down payment was required to secure a mortgage in the amount of $220,000. The Williamses decided to utilize $10,000 that was kept in a traditional individual retirement account (IRA) owned by Mrs. Williams. This amount was withdrawn on June 12 and used to fund the down payment on July 1. These amounts had been previously deducted as an adjustment by her on an individual tax return in the year of contribution. The remaining $45,000 for the down payment was drawn from a savings account. How much of the distribution from the IRA is subject to the premature distribution penalty tax, and how much must be included in gross income on the Williamses’ current year joint income tax return?

Penalty Tax Gross Income
A.
$10,000
$10,000
B.
$10,000
$0
C.
$0
$10,000
D.
$0
$0

A

Choice “C” is correct. Generally, a premature distribution prior to age 59 1/2 from a traditional IRA is subject to a 10 percent penalty tax. Certain exceptions to this tax are available and are contained in the mnemonic “HIM DEAD TED.”

Homebuyer (first time): Distribution used toward the purchase of a first home within 120 days of distribution ($10,000 maximum exclusion)
Insurance (medical if unemployed and with 12 consecutive weeks of unemployment compensation)
Medical expenses in excess of percentage of AGI floor
Disability (permanent or indefinite disability, but not temporary disability)
Education (college tuition, fees, books, etc.)
Adoption or birth of child made within one year from the date of birth or adoption ($5,000 maximum exclusion)
Disaster: Qualified natural disaster ($22,000 maximum per disaster)
Terminal illness or death
Emergency expenses (for personal or family emergency, up to $1,000 per year)
Domestic abuse victims (lesser of $10,000 or 50 percent of retirement account)
The amount removed from the IRA qualifies under the “H” penalty tax exception above because the $10,000 withdrawal was used toward the purchase of their first home within 120 days of distribution. However, the question states that contributions to the IRA had been previously deducted on Mrs. Williams’ individual tax return, therefore, this is a distribution from a deductible traditional IRA. Distributions from a deductible traditional IRA are taxable to the recipient as ordinary income and thus would be included in the Williamses’ taxable gross income in the year of distribution.

Choice “A” is incorrect. The amount qualifies for an exception to the premature distribution penalty tax.

Choice “B” is incorrect. The amount qualifies for an exception to the penalty tax and would be included in the Williamses’ gross income.

Choice “D” is incorrect. The distribution would be included in the Williamses’ gross income.

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79
Q

Mary purchased an annuity that pays her $500 per month for the rest of her life. She paid $70,000 for the annuity. Based on IRS annuity tables, Mary’s life expectancy is 16 years. If Mary dies after receiving 10 full years of the annuity payments, how is Mary’s annuity treated on her final tax return?

A.	 Deduct $43,750 as an itemized deduction.

B.	 Deduct $70,000 as an itemized deduction.

C.	 No deduction for the annuity.

D.	 Deduct $26,250 as an itemized deduction.
A

Choice “D” is correct. If Mary dies after receiving 10 full years of annuity payments, she will have received 120 payments (10 years × 12 months). Mary’s IRS life expectancy was 16 years (16 years × 12 months = 192 months). For the first 192 payments, Mary will have a return of capital of $364.58 ($70,000/192 months). Therefore, after 10 full years of payments she will have recovered $43,750 ($364.58 × 12 × 10, rounded) of the $70,000 investment in the annuity. The unrecovered portion ($70,000 – $43,750 = $26,250) can be deducted on Mary’s final tax return as an itemized deduction.

Choices “A”, “B”, and “C” are incorrect, based on the above explanation.

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80
Q

A cash basis taxpayer should report gross income:

A.	 For the year in which income is either actually or constructively received in cash only.

B.	 For the year in which income is either actually or constructively received, whether in cash or in property.

C.	 Only for the year in which income is actually received whether in cash or in property.

D.	 Only for the year in which income is actually received in cash.
A

Choice “B” is correct. A cash basis taxpayer should report gross income for the year in which income is either actually or constructively received, whether in cash or in property.
Choice “A” is incorrect. Income also can be received in property, not only cash.

Choice “C” is incorrect. Income also can be constructively received, not only actually.

Choice “D” is incorrect. Income also can be constructively received in property, not only actually in cash.

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81
Q

Interest on Series EE savings bonds is tax-exempt when certain conditions are met. Which of the following statements is true regarding the exclusion of Series EE savings bond interest?

I. Interest is used to pay for higher education of taxpayer, a spouse, or dependents
II. Eligible higher education expenses are reduced by tax-free scholarships
III. The taxpayer is over age 24 when the bonds are issued
IV. The bonds are acquired after 1989
V. The interest exclusion is subject to a phase-out

A.	 I, II, and III

B.	 I and II

C.	 I, II, III, and IV

D.	 I, II, III, IV, and V
A

Choice “D” is correct. All five statements are true in regard to the exclusion of U.S. Series EE savings bond interest.

Choices “B”, “A”, and “C” are incorrect, based on the above explanation.

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82
Q

Daisy Dunn is a single, calendar-year, cash-basis taxpayer with no dependents. Daisy died on March 1, Year 1. Daisy earned $20,000 from her job and $500 of interest income from bank accounts in Year 1 before she died. Her estate received another $1,500 of interest from her bank accounts in Year 1 after her death.

What is Daisy’s taxable gross income on her Year 1 final federal income tax return?

A.	 $20,500

B.	 $20,000

C.	 $0

D.	 $22,000
A

Choice “A” is correct. The $20,000 wages and $500 interest earned and received before Daisy died should be included in her taxable gross income on her Year 1 final federal income tax return. The $1,500 of interest income received after Daisy’s death by her estate should be included on the estate’s Year 1 federal income tax return.

Choice “B” is incorrect. The $500 interest earned before Daisy died is also included on her Year 1 final federal income tax return, in addition to her $20,000 in wages.

Choice “C” is incorrect. A cash-basis taxpayer’s income earned and received before the date of death is included in the taxpayer’s final federal income tax return.

Choice “D” is incorrect. Only the $20,000 wages and $500 interest earned and received before Daisy died is included on her Year 1 final federal income tax return. The $1,500 interest earned after her date of death should be included on the estate’s Year 1 federal income tax return.

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83
Q

Sullivan sustained personal injuries from an automobile accident. Sullivan was awarded $200,000 in damages for physical personal injury and $2,000,000 in punitive damages. What amount is includible in Sullivan’s gross income?

A.	 $200,000

B.	 $2,000,000

C.	 $0

D.	 $2,200,000
A

Choice “B” is correct. Punitive damages received in a personal injury case are fully taxable, except in a wrongful death case where state law has limited wrongful death awards to punitive damages. Damages that are awarded as a result of physical personal injury are not taxable and should be excluded from gross income. Therefore, Sullivan should only include the $2,000,000 of punitive damages in his gross income and not the $200,000 of damages for physical personal injury.

Choice “A” is incorrect. This answer choice incorrectly includes the $200,000 personal injury damages award in Sullivan’s gross income and excludes the $2,000,000 in punitive damages. The punitive damages are fully taxable and should be included in gross income. The amount received as compensation for personal injury is not taxable and should be excluded from Sullivan’s gross income.

Choice “C” is incorrect. This answer choice incorrectly excludes both the personal injury damages award as well as the punitive damages award. The $2,000,000 that Sullivan received in punitive damages is fully taxable and should be included in his gross income.

Choice “D” is incorrect. This answer choice incorrectly includes both the $200,000 damages award and the $2,000,000 in punitive damages in Sullivan’s gross income. The punitive damages should be included, but the damages award for personal physical injury is not taxable.

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84
Q

Which one of the following will result in an accruable expense for an accrual-basis taxpayer?

A.	 A repair completed prior to year end but not invoiced.

B.	 An invoice dated prior to year end but the repair completed after year end.

C.	 A repair completed prior to year end and paid upon completion.

D.	 A signed contract for repair work to be done and the work is to be completed at a later date.
A

RULE: An accruable expense is one is which the services have been received/performed but have not been paid for by the end of the reporting period.

Choice “A” is correct. The facts indicate that a repair was completed prior to year end but not yet invoiced. If it has not yet been invoiced, it is assumed that it has also not yet been paid for. Therefore, this is a situation in which the repair expense would be accrued at year end. Services have been performed, but they have not been paid for, as they have not even been invoiced yet.

Choice “B” is incorrect. If the repair was completed after year end, then the expense is not accruable, as the benefit of the services hasn’t been received as of year end. The fact that the repair was invoiced prior to year end does not impact the situation.

Choice “C” is incorrect. If a repair was completed and paid for prior to year end, no accrual is appropriate. On the accrual basis, the expense is taken in the year the repair is completed and the benefit is received. In this case, the account payable was also paid in the same year, but this has no effect on the expense.

Choice “D” is incorrect. The facts indicate that the work is to be completed at a date later than year end. Therefore, the expense is not accruable at year end, as the benefit of the repair hasn’t been received as of year end. It is reasonable that a signed contract for the repair work exists, but this has no effect on the accrual.

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85
Q

Pam Petty, age 45, withdrew $10,000 from her traditional IRA. Pam’s AGI is $50,000. Pam is employed as a receptionist for the entire year. In which of the following situations would Pam be subject to an early withdrawal penalty?

A.	 Pam had surgery in the current year and incurred $60,000 in medical costs.

B.	 Pam attended college full-time and paid $12,000 for tuition and books.

C.	 Pam purchased her first home sixty days after withdrawing from her IRA.

D.	 Pam paid $12,000 for medical insurance.
A

Choice “D” is correct. If a taxpayer withdraws money from an IRA before the age of 59½, is unemployed, and has received 12 consecutive weeks of unemployment compensation under federal or state law, and purchases medical insurance, there is no penalty for the early withdrawal. Pam is subject to an early withdrawal penalty because she is fully employed.

Choice “A” is incorrect. There is no penalty on a premature distribution from an IRA (before age 59½) if the distribution was used to pay for medical expenses in excess of 7.5 percent of AGI.

Choice “B” is incorrect. There is no penalty on a premature distribution from an IRA (before age 59½) if the distribution was used to pay for college tuition, fees, books, supplies, and equipment and the student attends school at least half-time.

Choice “C” is incorrect. There is no penalty on a premature distribution from an IRA (before age 59½) if the distribution was used to pay for a first-time home purchase. The maximum exclusion is $10,000 and the home purchase must be within 120 days of the distribution.

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86
Q

Under a $150,000 insurance policy on her deceased father’s life, May Green is to receive $12,000 per year for 15 years. Of the $12,000 received in the current year, the amount subject to income tax is:

A.	 $1,000

B.	 $2,000

C.	 $0

D.	 $12,000
A

Choice “B” is correct. $2,000.

Death benefit

150,000

Amount received in the current year

12,000

Less: Return of principal ($150,000 ÷ 15 years)

(10,000)

Taxable interest

2,000

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87
Q

Ryan is 39 years old and works as a real estate agent. Ryan’s marginal tax rate is 25%. Ryan has a traditional (deductible) IRA with a current balance of $80,000. The IRA consists of $60,000 of contributions that Ryan made and deducted on his tax return and $20,000 of account earnings. In the current year, Ryan receives a distribution of the entire $80,000. He contributes $60,000 of the distribution to a Roth IRA 45 days after the withdrawal and keeps the remaining $20,000. What is Ryan’s total income tax and penalty on the transactions?

A.	 $20,000 income tax, $2,000 penalty

B.	 $20,000 income tax, $8,000 penalty

C.	 $0 income tax, $0 penalty

D.	 $5,000 income tax, $2,000 penalty
A

Choice “A” is correct. Ryan will pay income tax on the entire withdrawal ($80,000 × 25% = $20,000). The distribution was taken before Ryan was age 59 1/2, so he will pay a 10 percent early withdrawal penalty on the portion of the distribution that he did not roll over to the Roth IRA ($20,000 × 10% = $2,000).

Choices “C”, “B”, and “D” are incorrect, based on the above explanation.

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88
Q

In Year 2, Carson was hired as an employee of Barton Co. As part of his employment contract, Barton provided a company car for Carson’s spouse, Mary, who is not employed. The value for the use of the automobile in Year 2 was $8,000. Carson does not use the automobile. Carson and Mary file separate individual income tax returns. What amounts, if any, should be reported as a taxable fringe benefit on Carson and Mary’s Year 2 income tax returns for the personal use of the automobile?

A.	 Carson $4,000; Mary $4,000

B.	 Carson $0; Mary $8,000

C.	 Carson $0; Mary $0

D.	 Carson $8,000; Mary $0
A

Choice “D” is correct. The value of the use of a company car is a taxable employee fringe benefit. Carson is the employee who received the benefit from his employer, even if his spouse, Mary, used the car. Mary is not an employee of the company, so the use of the company car is not a taxable employee fringe benefit to Mary.

Choice “A” is incorrect. Carson is the employee who received the benefit from his employer, so the value of the employee fringe benefit is taxable to Carson.

Choice “B” is incorrect. Carson is the employee who received the benefit from his employer, so the value of the employee fringe benefit is taxable to Carson, not Mary.

Choice “C” is incorrect. The value of the use of a company car is a taxable employee fringe benefit that is taxable to the employee, Carson.

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89
Q

Clark bought Series EE U.S. Savings Bonds after 1989. Redemption proceeds will be used for payment of college tuition for Clark’s dependent child. One of the conditions that must be met for tax exemption of accumulated interest on these bonds is that the:

A.	 Bonds must be transferred to the college for redemption by the college rather than by the owner of the bonds.

B.	 Bonds must be bought by a parent (or both parents) and put in the name of the dependent child.

C.	 Bonds must be bought by the owner of the bonds before the owner reaches the age of 24.

D.	 Purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse).
A

Choice “D” is correct. One of the conditions that must be met for tax exemption of accumulated interest on the bonds is that the purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse). Other conditions include, for post-1989 bonds, the taxpayer is over age 24 when issued and is used to pay for higher education, reduced by tax-free scholarships, of the taxpayer, spouse, or dependents.

Choice “A” is incorrect. There is no requirement that the bonds must be transferred to the college for redemption by the college rather than by the owner of the bonds.

Choice “B” is incorrect. The bonds must be bought and put in the name of the owner or co-owner, not in the name of the dependent child.
Choice “C” is incorrect. The owner must be at least 24 years old before the bonds issue date.

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90
Q

Mary purchased an annuity that pays her $500 per month for the rest of her life. She paid $70,000 for the annuity. Based on IRS annuity tables, Mary’s life expectancy is 16 years. How much of the 200th $500 monthly payment will Mary include in her gross income?

A.	 $0

B.	 $364.58

C.	 $135.42

D.	 $500
A

Choice “D” is correct. Based on IRS tables, Mary is expected to receive 192 (16 years × 12 months) annuity payments. Mary will recover her investment over the life expectancy stated in the IRS tables, or the first 192 annuity payments. After the 192nd payment, all of the annuity payment is taxable.

Choice “A” is incorrect. Mary will recover her nontaxable return of investment ratably over her life expectancy based on the IRS tables, which is 192 months. After the 192nd payment, all of the annuity payment is taxable.

Choice “B” is incorrect. Based on IRS tables, Mary is expected to receive 192 (16 years × 12 months) annuity payments. Her investment in the annuity is $70,000. Therefore, her return of capital for each annuity payment is $70,000 / 192 = $364.58. This amount is recovered ratably over that period and, after the 192nd payment, all of the annuity payment is taxable.

Choice “C” is incorrect. This is equal to the amount which will be included in taxable income for the first 192 payments. After that, all of the annuity payment is taxable.

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91
Q

Charles and Marcia are married cash-basis taxpayers. In Year 8, they had interest income as follows:

$500 interest on federal income tax refund.
$600 interest on state income tax refund.
$800 interest on federal government obligations.
$1,000 interest on state government obligations.
What amount of interest income is taxable on Charles and Marcia’s Year 8 joint income tax return?

A.	 $2,900

B.	 $500

C.	 $1,900

D.	 $1,100
A

Choice “C” is correct. The $500 interest on federal income tax refund, the $600 interest on state income tax refund, and the $800 interest on federal government obligations are taxable, for a total of $1,900. The $1,000 interest on state government obligations is normally not taxable. Recall that to determine whether or not a state tax refund is taxable for federal tax purposes, we must know if the taxpayer took the standard deduction in the prior year or itemized deductions. This is not the case for interest on a tax refund. Interest on a federal or state income tax refund is included in taxable income.

Choice “A” is incorrect. The $1,000 interest on state government obligations is normally not taxable.

Choice “B” is incorrect. The $600 interest on state income tax refund and the $800 interest on federal government obligations is also taxable.
Choice “D” is incorrect. The $800 interest on federal government obligations is also taxable.

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92
Q

A 33-year-old taxpayer withdrew $30,000 from a deductible traditional IRA. The taxpayer has a 33% effective tax rate and a 35% marginal tax rate. What is the total tax liability associated with the withdrawal?

A.	 $10,000

B.	 $13,500

C.	 $13,000

D.	 $10,500
A

Rule: Generally, unless an exception applies, retirement money cannot be withdrawn without penalty until the individual reaches the age of 59 ½. If retirement funds (without an exception) are withdrawn before the age of 59 ½, the premature distribution is subject to a 10% penalty tax (in addition to the applicable regular income tax that applies to all distributions of traditional IRA funds).

Choice “B” is correct. The taxpayer is under the age of 59 ½, and the facts do not indicate that an exception applies; therefore, the taxpayer is subject to the 10% penalty on the IRA distribution in addition to the regular income tax. The regular income tax that applies is the marginal rate (the rate for the next dollar of taxable income). The effective tax rate is simply the total tax divided by the total taxable income. In this case, the taxpayer would have to pay the regular tax on the distribution at the 35% marginal rate PLUS the 10% penalty on early distribution without an exception. The calculation to arrive at the total tax associated with the withdrawal follows:

Regular Income Tax
30,000

× 35%

10,500

Penalty Tax
30,000

× 10%

3,000

Total Tax
13,500

Choice “A” is incorrect. This answer option assumes the effective income tax rate (rounded, assuming 33.33%) applied to the $30,000 distribution. It uses the incorrect tax rate (the marginal rate should be used) and omits the inclusion of the applicable 10% penalty tax. [$30,000 × 33.33% = $10,000]

Choice “C” is incorrect. This answer option assumes the effective income tax rate (rounded, assuming 33.33%) applied to the $30,000 distribution plus the applicable 10% penalty tax [($30,000 × 33.33%) + ($30,000 × 10%) = $13,000]. It uses the incorrect tax rate (the marginal rate should be used).

Choice “D” is incorrect. This answer option includes the $30,000 distribution multiplied by the marginal tax rate, but it omits the inclusion of the applicable 10% penalty tax. [$30,000 × 35% = $10,500]

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93
Q

The following Year 1 annual report was received by Clark from the qualified defined contribution plan provided by Clark’s employer:

Beginning balance $12,700
Employer contribution 600
Plan earnings 250
Ending balance $13,550
What income must be included in Clark’s gross income for Year 1?

A.	 $250

B.	 $0

C.	 $600

D.	 $850
A

Choice “B” is correct. Employer contributions to a qualified traditional defined contribution retirement plan and earnings on the amounts contributed are not taxable income to the employee until distributed.

Choice “A” is incorrect. The plan earnings in Year 1 are not taxable income to the employee until distributed.

Choice “C” is incorrect. The employer contribution of $600 in Year 1 is not taxable income to the employee until distributed.

Choice “D” is incorrect. The $850 employer contribution and plan earnings in Year 1 are not taxable income to the employee until distributed.

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94
Q

As a result of a divorce settled in 2016, 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.	 $130,000

B.	 $0

C.	 $142,000

D.	 $30,000
A

Choice “D” is correct. Alimony payments paid according to a divorce agreement executed on or before December 31, 2018, are included in gross income. Alimony paid based on a divorce settled after December 31, 2018, is neither taxable to the recipient nor deductible by the payor. Child support and cash from property settlements are not included in gross income. Because this divorce was finalized in 2016, the alimony is included in gross income of the recipient.

Choice “A” is incorrect. $130,000 would be correct if the cash settlement from the property settlement was included in gross income, but it is not.

Choice “B” is incorrect. Zero is not correct because the alimony payments are included in gross income.

Choice “C” is incorrect. $142,000 would be correct if the cash settlement from the property settlement and the child support were included in gross income, but they are not.

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95
Q

In a tax year where the taxpayer pays qualified education expenses, interest income on the redemption of qualified U.S. Series EE Bonds may be excluded from gross income. The exclusion is subject to a modified gross income limitation and a limit of aggregate bond proceeds in excess of qualified higher-education expenses. Which of the following is (are) true?

I.

The exclusion applies for education expenses incurred by the taxpayer, the taxpayer’s spouse, or any person whom the taxpayer may claim as a dependent for the year.

II.

“Otherwise qualified higher-education expenses” must be reduced by qualified scholarships not includible in gross income.

A.	 Both I and II.

B.	 I only.

C.	 II only.

D.	 Neither I nor II.
A

Choice “A” is correct. Interest earned on Series EE bonds issued after 1989 may qualify for exclusion. One requirement is that the interest is used to pay tuition and fees for the taxpayer, spouse, or dependent enrolled in higher education. The interest exclusion is reduced by qualified scholarships that are exempt from tax and other nontaxable payments received for educational expenses (other than gifts and inheritances).

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96
Q

Elizabeth received the following sources of income in the current year:

U.S. Treasury bond certificates interest

$500

Interest on state tax refund (paid by state government for late payment of tax refund to Elizabeth)

$200

Corporate bond interest

$600

Amount received for opening a new savings account at a local bank

$50

Puerto Rico bond interest

$350

What amount must Elizabeth include in gross income on her federal income tax return?

A.	 $1,700

B.	 $1,350

C.	 $1,150

D.	 $650
A

Choice “B” is correct. $1,350 is included in Elizabeth’s gross income. The U.S. Treasury bond certificate interest ($500) plus the interest on the state tax refund ($200) plus the corporate bond interest ($600) plus the amount received for opening a new savings account ($50) equals $1,350. Interest on obligations of a possession of the United States, such as Puerto Rico, is tax-exempt.

Choice “A” is incorrect. Interest on obligations of a possession of the United States, such as Puerto Rico, is tax-exempt.

Choice “C” is incorrect. Although interest on state and municipal bonds is not taxable, interest on a state tax refund is included in taxable income.

Choice “D” is incorrect. Interest on U.S. Treasury bonds and state tax refunds are taxable unless specifically excluded by law.

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97
Q

Merrill and Joe’s divorce was finalized in June of 2012. As part of the settlement, Joe received the following:

Alimony

$3,000

/per month

Child support

1,000

/per month

Lump-sum property settlement payment

125,000

Payments began in July, 2012; however, Merrill only paid a total of $15,000 during the year. For the current year, what amount must Joe include in gross income on his individual income tax return?

A.	 $9,000

B.	 $15,000

C.	 $140,000

D.	 $134,000
A

Choice “A” is correct. Alimony received pursuant to a divorce agreement executed on or before December 31, 2018 is included in taxable gross income; child support is not. Alimony paid according to a divorce agreement executed after December 31, 2018, is neither taxable to the recipient nor deductible by the payor. Because this divorce was finalized in 2012, the alimony is included in gross income. Joe was to receive $3,000 per month in alimony for the remaining six months of the year (July - December), for a total of $18,000. Child support is non-taxable as are lump-sum property settlements made pursuant to a divorce. When total payments received do not equal the total due, the amounts are first allocated to child support. Thus, of the $15,000 paid by Merrill, $6,000 is first allocated to child support. The remaining $9,000 would constitute alimony and would be taxable income to Joe.

Choice “B” is incorrect. The $15,000 must first be allocated between the types of payments received. Any amounts are first used to satisfy any child support requirement, and the remainder would be classified as alimony.

Choice “C” is incorrect. This answer includes the total amount received, $15,000 payments (child support and alimony) and the property settlement. Lump-sum property settlements are not taxable to the recipient in a divorce.

Choice “D” is incorrect. This answer includes both the $9,000 (discussed above) and the property settlement (which is non-taxable).

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98
Q

During the year Kay received interest income as follows:

On U.S. Treasury certificates

4,000

On refund of prior year’s federal income tax

500

The total amount of interest subject to tax in Kay’s current year tax return is:

A.	 $500

B.	 $4,000

C.	 $4,500

D.	 $0
A

Choice “C” is correct. Interest income from U.S. obligations is generally taxable. Interest income on a federal tax refund is taxable, even though the federal refund itself is not taxed.
Choice “A” is incorrect. Interest income from U.S. obligations is generally taxable.
Choice “B” is incorrect. Interest income on a federal tax refund is taxable, even though the refund itself is not taxed.
Choice “D” is incorrect. Interest income from U.S. obligations is generally taxable. Interest income on a federal tax refund is taxable, even though the refund itself is not taxed.

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99
Q

Which payment(s) is (are) included in a recipient’s gross income?

I.

Payment to a graduate assistant for a part-time teaching assignment at a university. Teaching is not a requirement toward obtaining the degree.

II.

A grant to a Ph.D. candidate for his participation in a university-sponsored research project for the benefit of the university.

A.	 Neither I nor II.

B.	 Both I and II.

C.	 II only.

D.	 I only.
A

Choice “B” is correct.

I.

A payment to a student for a part-time teaching assignment is taxable income just as a payment for any other campus job would be. This is not a scholarship or fellowship.

II.

There is no exclusion in the tax law for amounts paid to a degree candidate for participation in university-sponsored research.

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100
Q

A taxpayer moved over 500 miles at the request of the taxpayer’s employer. The taxpayer incurred ordinary moving costs to transport personal property during the move. The taxpayer’s employer reimbursed 80 percent of those costs. How will this move affect the taxpayer’s taxable income for the year?

A.	 The reimbursement increases taxable income, and the expenses are deductible.

B.	 The reimbursement is excluded from taxable income, and the expenses are deductible.

C.	 The reimbursement is excluded from income, and the expenses are not deductible.

D.	 The reimbursement increases taxable income, and the expenses are not deductible.
A

Choice “D” is correct. The employer’s reimbursement of 80 percent of the taxpayer’s moving expenses is considered a fringe benefit. Unless the fringe benefit is specifically excluded from taxation, the value of the reimbursement is considered taxable income of the employee. As such, the reimbursement will increase the employee’s taxable income. Furthermore, the portion of the expenses that was not reimbursed is not deductible by the employee. Moving expenses are only deductible if they are incurred by members of the U.S. Armed Forces moving pursuant to a military order.

Choice “A” is incorrect. The moving expenses are not deductible by the taxpayer. Moving expenses are not deductible unless the taxpayer is a member of the U.S. Armed Forces, and the costs are related to a move made as a result of a military order. The employer’s reimbursement of 80 percent of the taxpayer’s moving costs is indeed included in the taxpayer’s gross income as the reimbursement constitutes a taxable fringe benefit.

Choice “B” is incorrect. The employer’s reimbursement of 80 percent of the taxpayer’s moving expenses is considered a fringe benefit and is included in the employee’s gross income, which will increase the employee’s taxable income. Furthermore, the moving expenses are only deductible if the taxpayer is a member of the U.S. Armed Forces, and the costs are related to a move made as a result of a military order.

Choice “C” is incorrect. The employer’s reimbursement of 80 percent of the taxpayer’s moving expenses is considered a fringe benefit. An employer’s reimbursement is not considered a nontaxable fringe benefit; thus, it is included in the employee’s gross income and will increase the employee’s taxable income. The moving expenses are indeed nondeductible because only moving expenses incurred by members of the U.S. Armed Forces are deductible.

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101
Q

A painter and an accountant agree to trade their services. The painter provides services valued at $550, and the accountant provides services worth $500. What amount should the accountant report as income or expense?

A.	 $550 income.

B.	 $50 income.

C.	 $500 income.

D.	 $50 expense.
A

Choice “A” is correct. In the case of noncash income, the amount of income to be reported is the fair market value of the property or services received. Since the accountant received services valued at $550, the accountant must report income of $550.

Choice “B” is incorrect. In the case of noncash income, the amount of income to be reported is the fair market value of the property or services received. The fair market value of any services rendered is irrelevant; thus, the difference between the fair market value of services received and the fair market value of services rendered does not result in additional income or expense.

Choice “C” is incorrect. In the case of noncash income, the amount of income to be reported is the fair market value of the property or services received, not the fair market value of services rendered.

Choice “D” is incorrect. In the case of noncash income, the amount of income to be reported is the fair market value of the property or services received. The fair market value of any services rendered is irrelevant; thus, the difference between the fair market value of services received and the fair market value of services rendered does not result in additional income or expense.

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102
Q

Johnson worked for ABC Co. and earned a salary of $100,000. Johnson also received, as a fringe benefit, group term-life insurance at twice Johnson’s salary. Assume the annual IRS-established uniform cost of insurance is $2.76 per $1,000 of coverage. What amount must Johnson include in gross income?

A.	 $100,414

B.	 $100,552

C.	 $100,276

D.	 $100,000
A

Choice “A” is correct. The first $50,000 of group term life insurance is a nontaxable fringe benefit. Amounts exceeding this are taxable based on IRS tables. The total group term life insurance here is $200,000 (twice the salary of $100,000). The amount exceeding $50,000 is $150,000. The cost given here is $2.76 per $1,000 of insurance. $150,000 / $1,000 = 150; 150 × $2.76 = $414. So the total amount included in gross income is $100,414 ($100,000 + $414).

Choice “B” is incorrect. $100,552 includes the entire $200,000 of the group term life insurance instead of only $150,000.

Choice “C” is incorrect. $100,276 only includes $100,000 of the group term life insurance instead of $150,000.

Choice “D” is incorrect. $100,000 does not include any of the taxable amount of group term life insurance.

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103
Q

In a 2017 divorce settlement, the ex-husband was required by court order to pay his ex-wife $36,000 in alimony. She received $25,000 in cash, a painting valued at $10,000, and the use of his beach house, valued at $3,000. What amount of gross income should she report as alimony?

A.	 $25,000

B.	 $35,000

C.	 $36,000

D.	 $38,000
A

Choice “A” is correct. Alimony includes only payments received in cash or its equivalent (e.g., the payment of bills on behalf of the ex-spouse). Alimony received pursuant to a divorce executed on or before December 31, 2018, is included in gross income of the recipient.

Choice “B” is incorrect. The painting would not be included in alimony because it is not a payment in cash or its equivalent.

Choice “C” is incorrect. The amount of alimony ordered by the court does not determine the amount of alimony that is considered gross income for tax purposes.

Choice “D” is incorrect. Neither the painting nor the use of the beach house would count as alimony because they are not payments in cash or its equivalent.

104
Q

Robbe, a cash-basis single taxpayer, reported $50,000 of adjusted gross income last year and claimed itemized deductions of $13,550, which included $5,500 of state income taxes paid last year. Robbe’s itemized deduction amount exceeded the standard deduction available to single taxpayers for last year by $1,150. In the current year, Robbe received a $1,500 state tax refund relating to the prior year. What is the proper treatment of the state tax refund?

A.	 Include none of the refund in income in the current year.

B.	 Include $1,150 in income in the current year.

C.	 Include $1,500 in income in the current year.

D.	 Amend the prior-year's return and reduce the claimed itemized deductions for that year.
A

Choice “B” is correct. Under the tax benefit rule, an itemized deduction recovered in a subsequent year is included in income in the year recovered. In this situation, the taxpayer only received a tax benefit of $1,150, the amount by which total itemized deductions exceeded the standard deduction in the prior year. Therefore only $1,150 of the $1,500 state tax refund is included in taxable income for the current year.

Choice “A” is incorrect. The amount of the tax benefit in the prior year, not $0, is included in income in the current year.

Choice “C” is incorrect. Only the amount of the tax benefit in the prior year, not the entire state tax refund, is included in income in the current year.

Choice “D” is incorrect. The amount of the tax benefit in the prior year is included in income in the current year. It is not necessary to amend the prior year’s return.

105
Q

For a cash basis taxpayer, gain or loss on a year-end sale of listed stock arises on the:

A.	 Trade date.

B.	 Settlement date.

C.	 Date of receipt of cash proceeds.

D.	 Date of delivery of stock certificate.
A

Choice “A” is correct. Trade date.

Gain or loss on a year-end sale of listed stock arises on the trade date.

Rule: Whether on the cash or accrual method of accounting, taxpayers who sell stock or securities on an established securities market must recognize gains and losses on the trade date, rather than on the settlement date.

Choices “B”, “C”, and “D” are incorrect, per the above rule.

106
Q

John and Mary were divorced in 2017. The divorce decree (executed June 30, 2017) provides that John pay alimony of $10,000 per year, to be reduced by 20 percent on their child’s 18th birthday. During the current year, the $10,000 was paid in the following way: John paid $7,000 directly to Mary and $3,000 to Spring College for Mary’s tuition. What amount of these payments should be reported as income in Mary’s current year income tax return?

A.	 $8,000

B.	 $10,000

C.	 $5,600

D.	 $8,600
A

Choice “A” is correct. Alimony paid pursuant to a divorce or separation agreement executed before December 31, 2018 would be income to Mary while child support would not. Funds qualify as child support only if 1) a specific amount is fixed or is contingent on the child’s status (e.g., reaching a certain age); 2) it is paid solely for the support of minor children; and 3) it is payable by decree, instrument, or agreement. The actual use of the funds is irrelevant to the issue. In this case, $2,000 (20% × $10,000) qualifies as child support. The other $8,000 is alimony, which would be income to Mary. Note that for all divorce or separation agreements executed after December 31, 2018, the alimony is neither taxable to the recipient nor deductible by the payor.

Choice “B” is incorrect. The 20% reduction when the child turns 18 makes 20% of the $10,000 payment, or $2,000, child support, which is nontaxable to Mary.

Choice “C” is incorrect. Take 80% of the $10,000 paid, not 80% of the $7,000 received by Mary.

Choice “D” is incorrect. Only $8,000 would be alimony per the divorce decree (80% × $10,000).

107
Q

Tana’s 2015 divorce decree requires Tana to make the following transfers to Tana’s former spouse during the current year:

Alimony payments of $3,000.

Child support of $2,000.

Property division of stock with a basis of $4,000 and a fair market value of $6,500.

What is the amount of Tana’s alimony deduction for the current year?

A.	 $7,000

B.	 $9,500

C.	 $3,000

D.	 $11,500
A

RULE: Alimony payments to a former spouse pursuant to a divorce settlement executed on or before December 31, 2018, are adjustments to arrive at AGI. Child support payments are not alimony and are not deductible. Property settlements are not alimony and are not deductible. Alimony paid in a divorce settlement executed after December 31, 2018, is not deductible.

Choice “C” is correct. Only the amount of alimony ($3,000) is allowed as Tana’s alimony deduction.

Choice “A” is incorrect. The basis of property division of stock ($4,000) is not alimony and is not deductible, but the $3,000 in alimony paid is deductible.

Choice “B” is incorrect. The fair market value of property division of stock ($6,500) is not alimony and is not deductible, but the $3,000 in alimony paid is deductible.

Choice “D” is incorrect. The fair market value of property division of stock ($6,500) and the child support ($2,000) are not alimony and are not deductible, but the $3,000 in alimony paid is deductible.

108
Q

Which of the following amounts represents an adjustment for adjusted gross income (AGI) for the current tax year?

A.	 Child support paid to a former spouse pursuant to a divorce agreement executed in 2014

B.	 Alimony paid to a former spouse pursuant to a divorce agreement executed in 2014

C.	 Alimony paid to a former spouse pursuant to a divorce agreement executed in 2019

D.	 Child support paid to a former spouse pursuant to a divorce agreement executed in 2019
A

Choice “B” is correct. Alimony paid to a former spouse based on a divorce agreement executed on or before December 31, 2018, is an adjustment to gross income.

Choice “A” is incorrect. Child support paid to a former spouse is never an adjustment to AGI.

Choice “C” is incorrect. Alimony paid to a former spouse based on a divorce agreement executed after December 31, 2018, is not an adjustment to AGI.

Choice “D” is incorrect. Child support paid to a former spouse is never an adjustment to AGI.

109
Q

In the current year, Mike and Jane Smith, both 35 years old, are filing a joint income tax return. Mike earned $40,000 in wages and was covered by his employer’s qualified retirement plan. Jane was employed part-time and received $10,000 in wages. The couple had no other income. Each contributed $5,000 to a traditional IRA account. The allowable IRA deduction on their current year joint income tax return is:

A.	 $5,000

B.	 $2,500

C.	 $0

D.	 $10,000
A

Choice “D” is correct. In 2024, taxpayers can contribute and deduct up to $7,000 to a traditional IRA. For couples filing a joint return, where at least one spouse is an active participant in a retirement plan, the deductible portion of a traditional IRA contribution is phased out. For a spouse who is an active participant, the phase-out range in 2024 begins at $123,000. For a spouse who is not an active participant, but is married to someone who is, the phase-out range in 2024 begins at $230,000. The Smiths’ income of $50,000 (Mike $40,000 + Jane $10,000) is below both phase-out ranges, so they can each deduct the full $5,000 contributed, or $10,000 in total.

Choices “C”, “A”, and “B” are incorrect, per the above explanation.

110
Q

In the current year, an unmarried individual with modified adjusted gross income of $25,000 paid $1,000 interest on a qualified education loan entered into on July 1. How may the individual treat the interest for income tax purposes?

A.	 As a $500 deduction to arrive at AGI for the year.

B.	 As a $1,000 deduction to arrive at AGI for the year.

C.	 As a nondeductible item of personal interest.

D.	 As a $1,000 itemized deduction.
A

Choice “B” is correct. The $1,000 of qualified education loan interest paid in the year is reported as a deduction to arrive at AGI for the year. The taxpayer’s AGI of $25,000 is below the phase-out threshold for unmarried taxpayers, so the deduction is not phased out.

Choice “A” is incorrect. The adjustment for education loan interest (an above-the-line deduction to arrive at AGI) is limited to the amount paid or $2,500 (whichever is lower), and all qualified education loan interest is allowed as part of the adjustment. Therefore, the total amount paid of $1,000 is an allowable adjustment.

Choice “C” is incorrect. Allowable education loan interest paid is deductible as an adjustment, which is an above-the-line deduction to arrive at AGI. Only the disallowed portion (in this case there is no disallowed portion) is a nondeductible item of personal interest.

Choice “D” is incorrect. Allowable education loan interest paid is deductible as an adjustment, which is an above-the-line deduction to arrive at AGI. It is not reported as the less-advantageous itemized deduction.

111
Q

Which of the following is considered a specified service trade or business (SSTB) for purposes of the qualified business income deduction?

A.	 Manufacturing company

B.	 Accounting firm

C.	 Engineering firm

D.	 Architectural services
A

Choice “B” is correct. Accounting services are considered an SSTB for purposes of the qualified business income deduction.

Choice “A” is incorrect. A manufacturing firm is a qualified trade or business (QTB) and not an SSTB.

Choice “C” is incorrect. An engineering firm is specifically excluded from the definition of an SSTB.

Choice “D” is incorrect. Architectural services are specifically excluded from the definition of an SSTB.

112
Q

Which of the following can be subject to the net investment income tax?

A.	 A domestic C corporation.

B.	 A limited partnership.

C.	 A nonresident alien.

D.	 An individual who is a resident of the United States.
A

Choice “D” is correct. An individual who is a U.S. resident may be subject to the 3.8 percent net investment income tax on net investment income above statutory AGI threshold amounts.

Choice “A” is incorrect. A domestic C corporation is not subject to the net investment income tax.

Choice “B” is incorrect. A limited partnership is not subject to the net investment income tax. Partnership investment income and expenses passed through to the individual partners may be subject to the net investment income tax on the partners’ individual income tax returns.

Choice “C” is incorrect. A nonresident alien is not subject to the net investment income tax.

113
Q

Which of the following is not a refundable tax credit?

A.	 Earned income credit.

B.	 Child tax credit.

C.	 Retirement savings contribution credit.

D.	 Excess social security paid.
A

Choice “C” is correct. The retirement savings contribution credit is a non-refundable credit. The EIC and child tax credit could result in a refunded amount beyond the actual tax liability, depending upon the taxpayer’s income levels. In addition, if excess Social Security is paid, the taxpayer can receive a refund of those amounts regardless of the income tax liability being reduced to zero.

114
Q

For the current year, Val and Pat White, both age 40, are filing a joint income tax return. Val earned $40,000 in wages and was covered by his employer’s qualified pension plan. Pat was unemployed and received $5,000 in alimony payments (from a divorce agreement executed in 2017) for the first four months of the year before remarrying. The couple had no other income. Each contributed $5,000 to a traditional IRA account. The allowable IRA deduction on their current year joint income tax return is:

A.	 $10,000

B.	 $5,000

C.	 $1,000

D.	 $0
A

Choice “A” is correct. In 2024, taxpayers can contribute and deduct up to $7,000 per year to an IRA. The contribution amount is limited to the taxpayer’s earned income (earned income of the married couple if filing a joint return). Alimony paid pursuant to divorce or separation agreements executed before December 31, 2018, is considered earned income for IRA purposes. For couples filing a joint return where at least one spouse is an active participant in a retirement plan, the deductible portion of the contribution is phased out. For a spouse who is an active participant, the phase-out range in 2024 begins at AGI of $123,000. For a spouse who is not an active participant, but is married to someone who is, the phase-out range in 2024 begins at $230,000. The couple’s earned income for IRA purposes here is $45,000 ($40,000 salary + $5,000 taxable alimony), which is below both phase-out ranges, so each spouse receives a deduction of the $5,000 contribution actually made.

Choice “B” is incorrect. Pat’s alimony is deemed “earned income” for the IRA contributions. However, even if Pat had no earned income, a spouse with no earned income can deduct up to $7,000, provided the couple’s combined earned income is at least $14,000.

Choice “C” is incorrect. This is the amount of the additional catch-up contribution for taxpayers age 50 and older (2024).

Choice “D” is incorrect. When a taxpayer or taxpayer’s spouse is an active participant in a retirement plan at work, the full deduction is allowed if the earned income of the couple is below the phase-out ranges (as in this case).

115
Q

In the current year, a self-employed taxpayer had gross income of $57,000. The taxpayer paid self-employment tax of $8,000, self-employed health insurance of $6,000, and $5,000 of alimony pursuant to divorce finalized in 2007. The taxpayer also contributed $2,000 to a traditional IRA. What is the taxpayer’s adjusted gross income for the year?

A.	 $40,000

B.	 $46,000

C.	 $55,000

D.	 $50,000
A

Choice “A” is correct. Adjusted gross income is gross income minus adjustments. Half of the $8,000 self-employment tax is an adjustment for AGI, as is the $6,000 self-employed health insurance, the $5,000 alimony, and the $2,000 contribution to a traditional IRA. Alimony paid pursuant to a divorce settlement executed on or before December 31, 2018, is deductible by the payor. Alimony paid pursuant to a divorce settlement executed after December 31, 2018, is not deductible. All of these amounts (total of $17,000) are subtracted from the $57,000 gross income to arrive at AGI of $40,000.

Choice “B” is incorrect. The $46,000 is the $57,000 subtracting everything but the $6,000 self-employed health insurance.

Choice “C” is incorrect. The $55,000 is the $57,000 gross income subtracting only the $2,000 IRA contribution.

Choice “D” is incorrect. The $50,000 is the $57,000 subtracting only the $5,000 alimony and the $2,000 IRA contribution.

116
Q

Which of the following statements is true regarding taxpayers with taxable income below the taxable income limitations for the qualified business income (QBI) deduction?

A.	 A qualified trade or business (QTB) and specified trade or business (SSTB) are treated the same.

B.	 QBI deduction is limited to 50 percent of W-2 wages.

C.	 QBI deduction is only allowed if the taxpayer is a qualified trade or business (QTB).

D.	 QBI deduction is a phased-out deduction if a specified service trade or business (SSTB).
A

Choice “A” is correct. A QTB and an SSTB are treated the same for taxpayers under the taxable income thresholds for the QBI deduction.

Choice “B” is incorrect. The QBI deduction is not limited to 50 percent of wages if the taxpayer is under the taxable income limitations.

Choice “C” is incorrect. For taxpayers under the taxable income limitations, the QBI deduction is allowed if the taxpayer is a QTB or an SSTB.

Choice “D” is incorrect. The QBI deduction is not phased out for an SSTB if the taxpayer is under the taxable income limitations.

117
Q

Which of the following credits can result in a refund even if the individual had no income tax liability?

A.	 Elderly and/or permanently disabled credit

B.	 Earned income credit

C.	 Lifetime learning credit

D.	 Retirement savings contribution credit
A

Choice “B” is correct. The earned income credit is refundable. The lifetime learning credit, elderly and/or permanently disabled credit, and retirement savings contribution are not refundable credits.

118
Q

Mr. and Mrs. Sloan incurred the following expenses during the year when they adopted a child:

Child’s medical expenses

5,000

Legal fees

8,000

Agency fee

3,000

Without regard to the limitation of the credit, what amount of the above expenses are qualifying expenses for the adoption credit?

A.	 $5,000

B.	 $8,000

C.	 $16,000

D.	 $11,000
A

Choice “D” is correct. The legal fees and agency fee would be qualifying expenses for the tax credit (medical expenses do not qualify).

Choice “A” is incorrect. Medical expenses are not eligible for the credit.

Choice “B” is incorrect. The agency fee is also a qualifying expense.

Choice “C” is incorrect. $5,000 of the $16,000 of total expenses are not eligible.

119
Q

The Welles family has three children. Which of the children listed below would be subject to the “kiddie tax”?

A.	 None of these

B.	 Wilson: 20 years old, full-time college student, fully supported by his parents

C.	 Willy: 20 years old, not a college student, supports himself fully

D.	 Walker: 25 years old, full-time college student, supports himself fully
A

Choice “B” is correct. The net unearned income of a dependent child under 18 years of age (or a child age 18–24 who does not provide over half of his or her own support and is a full-time student) is taxed at the parents’ marginal rate under the “kiddie tax” rules. Because Wilson is under the age of 24 and is a full-time college student who does not support himself, his net unearned income over the allowable threshold is taxed at his parents’ marginal rate.

Choice “A” is incorrect. The net unearned income of a dependent child under 18 years of age (or a child age 18–24 who does not provide over half of his or her own support and is a full-time student) is taxed at the parents’ marginal rate under the “kiddie tax” rules.

Choice “C” is incorrect. Because Willy supports himself fully, his income is not subject to the “kiddie tax.”

Choice “D” is incorrect. Because Walker is over the age of 24, his income is not subject to the “kiddie tax.”

120
Q

Dawn White’s adjusted gross income on her Year 1 tax return was $100,000. The amount covered a 12-month period. For the Year 2 tax year, the minimum payments required from White to avoid the penalty for the underpayment of estimated tax is:

A.	 90% of the current tax on the return for the current year paid in four equal installments or 110% of the prior year's tax liability paid in four equal installments.

B.	 110% of the prior year's tax liability paid in four equal installments only.

C.	 100% of the prior year's tax liability paid in four equal installments only.

D.	 90% of the current tax on the return for the current year paid in four equal installments or 100% of the prior year's tax liability paid in four equal installments.
A

Choice “D” is correct. The requirement is 90% of the current tax on the return for the current year paid in four equal installments or 100% of the prior year’s tax liability paid in four equal installments.
Choice “A” is incorrect. 110% of the prior year’s tax liability is only required if AGI is in excess of $150,000.
Choices “B” and “C” are incorrect. There is always an option to pay 90% of the current year’s tax.

121
Q

An employee who has had Social Security tax withheld in an amount greater than the maximum for a particular year may claim:

A.	 Reimbursement of such excess from his employers, if that excess resulted from correct withholding by two or more employers.

B.	 The excess as a credit against income tax, if that excess was withheld by one employer.

C.	 The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.

D.	 Such excess as either a credit or an itemized deduction, at the election of the employee, if that excess resulted from correct withholding by two or more employers.
A

Choice “C” is correct. An employee who has had Social Security tax withheld in an amount greater than the maximum for a particular year may claim the excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.
Choice “A” is incorrect. The employee may not seek reimbursement of the excess if the excess resulted from correct withholding by two or more employers.
Choice “B” is incorrect. The employee may not claim the excess as a credit against income tax, if that excess was withheld by one employer. The employer must adjust the excess for the employee.
Choice “D” is incorrect. The excess resulting from the correct withholding by two or more employers may only be claimed as a credit against income tax.

122
Q

Kant, a cash-basis individual, owns and operates an office building. Kant received the following payments during the current year:

Current rents

30,000

Advance rents for the next year

10,000

Security deposits held in a segregated account

5,000

Lease cancellation payments

15,000

What amount is included in gross income?

A.	 $40,000

B.	 $30,000

C.	 $55,000

D.	 $60,000
A

Rule: The basic formula for determination of net rental income or loss follows:

Gross rental income

Prepaid rental income

Rent cancellation payments

Improvements in lieu of rent

(Rental expenses)

Net rental income (loss)

If security deposits are held separately and not available to be applied to last month’s rent (as in a segregated account), they are a liability of the taxpayer and not included in income in the year received.

Choice “C” is correct. The calculation of gross income for the year follows:

Current rents

30,000

Advance rents for the next year

10,000

Security deposits held in a segregated account

Lease cancellation payments

15,000

Gross income from the rental activity

55,000

Choice “A” is incorrect. This answer option incorrectly includes only the current rents and the advance rents as part of gross income, when lease cancellation payments also must be included.
Choice “B” is incorrect. This answer option incorrectly includes only the current rents as part of gross income, when advance rents and lease cancellation payments also must be included.
Choice “D” is incorrect. This answer option incorrectly includes all of the payments collected for the rental activity in the year, when the security deposits that are held in a segregated account are excluded from gross income.

123
Q

Krete, an unmarried taxpayer with income exclusively from wages, filed her initial income tax return for Year 8. By December 31, Year 8, Krete’s employer had withheld $16,000 in federal income taxes and Krete had made no estimated tax payments. On April 15, Year 9, Krete timely filed an extension request to file her individual tax return and paid $300 of additional taxes. Krete’s Year 8 income tax liability was $16,500 when she timely filed her return on April 30, Year 9, and paid the remaining income tax liability balance.

What amount would be subject to the penalty for the underpayment of estimated taxes?

A.	 $0

B.	 $16,500

C.	 $500

D.	 $200
A

Choice “A” is correct. Provided the taxes due after withholdings were not over $1,000, there is no penalty for underpayment of estimated taxes. Note that there would be a failure to pay penalty on the $200 that was not paid until April 30, but this is a separate penalty.
Choice “B” is incorrect. The penalty for underpayment of estimated taxes is not assessed on the full amount of the income tax liability, only the unpaid amount after withholdings to the extent it exceeds $1,000.

Choice “C” is incorrect. If the balance of tax due after withholdings is not over $1,000, there is no penalty for underpayment of estimated taxes.
Choice “D” is incorrect. This $200 would be subject to a failure to pay penalty, but if the balance due after withholdings is not over $1,000, there is no penalty for underpayment of estimated taxes.

124
Q

Which of the following statements about the child and dependent care credit is correct?

A.	 The child must be under the age of 18 years.

B.	 The maximum credit is $600.

C.	 The child must be a direct descendant of the taxpayer.

D.	 The credit is available for the cost of the care of a disabled spouse.
A

Choice “D” is correct. The expenses for care of a spouse who is disabled and unable to take care of himself or herself are eligible for the credit, up to a maximum expenditure of $3,000.

Choice “A” is incorrect. The child must be under age 13, not age 18, to be a qualifying child for purposes of the child and dependent care credit.

Choice “B” is incorrect. The maximum child and dependent care credit is 35 percent of eligible expenses, with a phase-out for excessive AGI. The maximum qualifying expenditures is $6,000 for two or more dependents, so the maximum credit is $2,100 ($6,000 × 35%).

Choice “C” is incorrect. The child need not be a direct descendant of the taxpayer for there to be a credit. To be a qualifying child, the child must merely be a dependent of the taxpayer.

125
Q

On December 1, Year 1, Michaels, a self-employed cash basis taxpayer, borrowed $100,000 to use in her business. The loan was to be repaid on November 30, Year 2. Michaels paid the entire interest of $12,000 on December 1, Year 1. What amount of interest was deductible on Michaels’ Year 2 income tax return (assuming the business interest expense deduction limitation does not apply)?

A.	 $11,000

B.	 $12,000

C.	 $1,000

D.	 $0
A

Choice “A” is correct. Prepaid interest must be prorated over the time for which payment is made. This is true for both cash and accrual basis taxpayers. The loan is for 1 month in Year 1 and 11 months in Year 2. Therefore, 1/12 of the interest is deductible in Year 1 and 11/12, or $11,000 is deductible in Year 2.
Choices “B”, “C”, and “D” are incorrect. Prepaid interest must be prorated over the time for which payment is made. This is true for both cash and accrual basis taxpayers.

126
Q

Dr. Merry, a self-employed dentist, incurred the following expenses:

Investment expenses

700

Custodial fees for Dr. Merry’s self-employed retirement plan

40

Work uniforms for Dr. Merry and Dr. Merry’s employees

320

Subscriptions for periodicals used in the waiting room

110

Dental education seminar

1,300

What is the amount of expenses the doctor can deduct as business expenses on Schedule C, Profit or Loss from Business?

A.	 $1,770

B.	 $2,430

C.	 $1,730

D.	 $1,620
A

Choice “C” is correct. Business expenses include work uniforms for the taxpayer and taxpayer’s employees, subscriptions for periodicals for patient use, and continuing education expenses.

Choice “A” is incorrect. Business expenses do not include custodial fees for self-employed retirement accounts.

Choice “B” is incorrect. Business expenses do not include investment expenses.

Choice “D” is incorrect. Business expenses include subscriptions for periodicals for patient use.

127
Q

Baum, an unmarried optometrist and sole proprietor of Optics, buys and maintains a supply of eyeglasses and frames to sell in the ordinary course of business. In the current year, Optics had $350,000 in gross business receipts and its year-end inventory was not subject to the uniform capitalization rules. Baum’s current year adjusted gross income was $90,000 and Baum qualified to itemize deductions. During the year, Baum recorded the following information:

Business expenses:

Optics cost of goods sold
35,000

Optics rent expense
28,000

Liability insurance premium on Optics
5,250

Other expenditures:
Baum’s self-employment tax
29,750

Baum’s self-employment health insurance
8,750

Insurance premium on personal residence. In the current year, Baum’s home was
totally destroyed by fire. The furniture had an adjusted basis of $14,000 and a
fair market value of $11,000. During the year, Baum collected $3,000 in insurance
reimbursement and had no casualty gains during the year.
2,625

Qualified mortgage interest on a loan secured five years ago to acquire a personal residence
52,500

Annual interest on a $70,000, 5-year home equity loan. The loan was secured
by Baum’s home, obtained January 2 of the current year. The fair market value
of the home exceeded the mortgage and the home equity loan by a substantial
amount. The proceeds were used to purchase a car for personal use.
3,500

Points prepaid on January 2 of the current year to acquire the home equity loan
1,400

Real estate taxes on personal residence
2,200

Estimated payments of current year federal income taxes
13,500

Local property taxes on car used exclusively for personal use
300

What amount should Baum report as the total amount of self-employment income in the current year?

A.	 $252,000

B.	 $243,250

C.	 $273,000

D.	 $281,750
A

Choice “D” is correct. Baum should report $281,750 as the total amount of self-employment income in the current year, calculated as follows:

Gross business receipts

350,000

Cost of goods sold

(35,000)
Rent expense

(28,000)
Liability insurance premium

(5,250)
Total self-employment income

$281,750
Choices “B”, “A”, and “C” are incorrect. The deductions for one-half of self-employment tax and self-employment health insurance are adjustments from total gross income. They are not deducted from self-employment earnings.

128
Q

Sam’s Year 2 taxable income was $175,000 with a corresponding tax liability of $30,000. His Year 2 adjusted gross income was $200,000. For Year 3, Sam expects taxable income of $250,000 and a tax liability of $50,000. In order to avoid a penalty for underpayment of estimated tax, what is the minimum amount of Year 3 estimated tax payments that Sam can make?

A.	 $50,000

B.	 $45,000

C.	 $33,000

D.	 $30,000
A

Choice “C” is correct. To avoid penalties, a taxpayer who owes $1,000 or more in tax payments after withholdings will need to have paid in the lesser of:

90% of the current year’s tax ($50,000 x 90%) = $45,000, or

100% of the previous year’s tax ($30,000 x 100%) = $30,000

However, if the taxpayer had adjusted gross income in excess of $150,000 in the prior year, 110% of the prior year’s tax liability is used to compute the safe harbor for estimated payments. (Previous year’s tax $30,000 x 110% = $33,000).

Choice “A” is incorrect. $50,000 is 100% of the current year’s tax, which is sufficient, but more than required.

Choice “B” is incorrect. $45,000 is 90% of this year’s tax, which is sufficient, but we are looking for the minimum amount.

Choice “D” is incorrect. $30,000 is 100% of last year’s tax. This would be sufficient if the previous year’s income were $150,000 or less.

129
Q

A 22-year-old full-time student earned $11,000 in salary and received $9,000 in interest from corporate bonds. The bonds were a gift from the student’s grandparents. The student’s parents pay more than half of the student’s support, including $25,000 in tuition. Which of the following statements is correct regarding the student’s current year income tax?

A.	 A portion of the student's interest income and no other income will be subject to the "kiddie tax."

B.	 The student's salary income and no other income will be subject to the "kiddie tax."

C.	 Both the student's salary and a portion of the interest income will be subject to the "kiddie tax."

D.	 Neither the student's salary nor the interest income will be subject to the "kiddie tax."
A

Choice “A” is correct. Only a portion of the student’s interest income is subject to the kiddie tax. Net unearned income of a dependent child is taxed at the parent’s marginal rate (“kiddie tax”).

Choice “B” is incorrect. The student’s salary income is earned income, so it is not subject to the kiddie tax.

Choice “C” is incorrect. Only a portion of the interest income, not the salary income, is subject to the kiddie tax.

Choice “D” is incorrect. A portion of the student’s interest income is subject to the kiddie tax.

130
Q

Freeman, a single individual, reported the following income in the current year:

Guaranteed payment from services rendered to a partnership

50,000

Ordinary income from an S corporation

20,000

What amount of Freeman’s income is subject to self-employment tax?

A.	 $70,000

B.	 $20,000

C.	 $0

D.	 $50,000
A

Choice “D” is correct. Guaranteed payments are reasonable compensation paid to a partner for services rendered (or use of capital) without regard to his ratio of income. Earned compensation is subject to self-employment tax. Payments not guaranteed are merely another way to distribute partnership profits. The ordinary income reported from an S corporation is taxable income to the individual on their own individual tax return but is not subject to self-employment tax. The ordinary income reported from a partnership may be subject to self-employment tax (if to a general partner).

131
Q

Chris Baker’s adjusted gross income on her current year tax return was $160,000. The amount covered a 12-month period. For the next tax year, Baker may avoid the penalty for the underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of:

I.

90% of the tax on the return for the current year paid in four equal installments.

II.

110% of prior year’s tax liability paid in four equal installments.

A.	 Both I and II.

B.	 I only.

C.	 II only.

D.	 Neither I nor II.
A

Choice “A” is correct. Both I and II.

I.

Payment of 90% of the tax on the return for the current year avoids the penalty for underpayment of estimated tax.

II.

Generally, payment of 110% of the prior year’s tax liability avoids the penalty for underpayment of estimated tax when the taxpayer’s AGI from the prior year exceeds $150,000. If the taxpayer’s AGI is $150,000 or less, payment of 100% of the prior year’s tax liability avoids the penalty for underpayment of estimated tax.

Note: Payment of the lesser of the two above will provide “safe harbor” to the taxpayer.

Choices “B”, “C”, and “D” are incorrect per the above explanation.

132
Q

Which of the following is the overall limitation to the qualified business income (QBI) deduction?

A.	 Lesser of: the combined QBI deductions or 20 percent of the taxpayer's taxable income in excess of net capital gain

B.	 Lesser of: 50 percent of the combined QBI deductions or 20 percent of the taxpayer's taxable income in excess of net capital gain

C.	 Lesser of: 50 percent of W-2 wages or 25 percent of W-2 wages plus 2.5 percent of the unadjusted basis of qualified property

D.	 Taxable income limitations based on filing status
A

Choice “A” is correct. Once the QBI deduction is calculated based on the taxpayer’s eligibility, the overall deduction is limited to the lesser of the combined QBI deductions or 20 percent of the taxpayer’s taxable income in excess of net capital gain.

Choice “B” is incorrect. Once the QBI deduction is calculated based on the taxpayer’s eligibility, the overall deduction is limited to the lesser of the combined QBI deductions (not 50 percent of the combined QBI) or 20 percent of the taxpayer’s taxable income in excess of net capital gain.

Choice “C” is incorrect. The wage and property limitation determines the calculation of the QBI deduction but is not the overall limitation to the QBI deduction.

Choice “D” is incorrect. Taxable income limitations based on filing status determine the calculation of the QBI deduction. The overall limitation to the deduction, however, is the lesser of the combined QBI deductions or 20 percent of the taxpayer’s taxable income in excess of net capital gain.

133
Q

An S corporation pays one of its individual shareholders for services rendered to the S corporation, and a general partnership pays one of its partners for services rendered to the partnership. Which of the following statements is accurate regarding these payments?

A.	 The S corporation should classify the payments as nondeductible dividends reportable on Form 1099-DIV.

B.	 The S corporation should classify the payments as deductible wages reportable on Form W-2.

C.	 The partnership should classify the payments as nondeductible partnership distributions reportable on Schedule K-1.

D.	 The partnership should classify the payments as deductible wages reportable on Form W-2.
A

Choice “B” is correct. A shareholder in an S corporation can be an employee of the corporation. The individual shareholder-employee would receive a salary for the services rendered to the S corporation; therefore, the payments should be classified as deductible wages reportable on Form W-2.

Choice “A” is incorrect. The S corporation would not classify the payments as nondeductible dividends reportable on Form 1099-DIV. Payments made to a shareholder of an S corporation for services rendered to the S corporation would be classified as deductible wages reportable on Form W-2 since the shareholder can receive a salary from the S corporation as compensation.

Choice “C” is incorrect. A partnership would classify the payments to the partner as guaranteed payments reportable on Schedule K-1, rather than nondeductible partnership distributions.

Choice “D” is incorrect. Unlike S corporations, a partner in a partnership cannot be an employee of the partnership, so a partner cannot receive a salary for the services rendered. Instead, the partnership gives the partner a guaranteed payment as compensation for the services rendered. Guaranteed payments are reported on the partner’s Schedule K-1 and included in ordinary income on the partner’s individual income tax return, rather than being reported as wages.

134
Q

Marty Smarty is a CPA in private practice. In the current year, Marty had the following items of income and expenses with respect to his CPA practice:

Gross revenue
275,000

Rent expense
24,000

Wages paid to employees
60,000

Wages paid to Marty
120,000

Payroll taxes for employees
5,000

Supplies expense
10,000

Insurance expense
8,000

Depreciation expense
15,000

Business meals
4,000

Health insurance for employees
5,000

Health insurance for Marty
2,000

Business bad debt (allowance)
3,000

State income taxes for the business
10,000

What is Marty’s taxable income on Schedule C for the CPA practice for the current year?

A.	 $146,000

B.	 $144,000

C.	 $130,000

D.	 $120,000
A

Choice “A” is correct. The answer is calculated as follows:

Gross revenue
275,000

Rent expense
(24,000)

Wages paid to employees
(60,000)

Wages paid to Marty — [considered a draw, not an expense]
Payroll taxes for employees
(5,000)

Supplies expense
(10,000)

Insurance expense
(8,000)

Depreciation expense
(15,000)

Business meals
(2,000)

[only 50% deductible]
Health insurance for employees
(5,000)

Health insurance for Marty — [not deducted on Sch. C, 100% is an adjustment for AGI]
Business bad debt loss (allowance) — [direct write-off only for accrual basis taxpayers]
State income taxes for the business — [not deducted on Sch. C, an itemized deduction]
Schedule C
$146,000

Choices “D”, “C”, and “B” are incorrect, per the above calculation. Note that while state and local business taxes are fully deductible on Schedule C, state and local income taxes are always a personal expense that can only be deducted on Schedule A.

135
Q

Max, a 19-year-old single taxpayer, works part time and goes to school part time. Maxʹs adjusted gross income (AGI) for the current year is $30,000. He made a $3,000 contribution to a Roth individual retirement account (IRA). Which of the following is a true statement about Maxʹs retirement savings contribution credit for the current year?

A.	 The credit is only available for contributions to a traditional IRA, not a Roth IRA.

B.	 Max is eligible for the credit even if he is a dependent of another taxpayer.

C.	 The credit is only available for $2,000 of Maxʹs contributions to a Roth IRA.

D.	 Max is not eligible for the credit because he is not at least 21 years old by the end of the tax year.
A

Choice “C” is correct. Only $2,000 of Maxʹs $3,000 Roth IRA contribution is eligible for the credit. The retirement savings contribution credit is a nonrefundable credit for contributions of up to $2,000 to either a traditional or Roth IRA by an eligible taxpayer.

Max is an eligible taxpayer because he is at least 18 years old by the end of the year, he is not a full-time student, and he is not a dependent of another taxpayer.

Choice “A” is incorrect. The credit is available for contributions to either a traditional or Roth IRA, but only up to $2,000.

Choice “B” is incorrect. A taxpayer is not eligible for the credit if the taxpayer is a dependent of another taxpayer.

Choice “D” is incorrect. A taxpayer must be at least 18 years old, not 21 years old, by the end of the tax year to be eligible for the credit.

136
Q

An individual taxpayer with a filing status of married filing jointly owns an interest in a partnership that provides commercial cleaning services. For the current year, the taxpayer’s joint taxable income, prior to deducting any qualified business income, is $300,000. The taxpayer’s Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., and additional details from the partnership provide the following information:

Item Amount
Ordinary business income (loss)
$250,000

Employer’s Form W-2 wages deducted

in determining ordinary business income

75,000

Unadjusted basis of partnership assets used

in the partnership’s business

100,000

What is the taxpayer’s qualified business income deduction for the year?

A.	 $21,250

B.	 $35,000

C.	 $37,500

D.	 $50,000
A

Choice “D” is correct. Generally, the taxpayer’s qualified business income deduction is equal to 20% of the taxpayer’s qualified business income. This deduction is limited if the taxpayer’s taxable income before the qualified business income deduction for married taxpayers filing jointly exceeds $383,900 (2024). In this case, because the taxpayer’s taxable income before the qualified business income deduction is only $300,000, the taxpayer’s qualified business income deduction is not limited and will be equal to 20% of their qualified business income. The taxpayer’s qualified business income consists of the $250,000 of ordinary business income allocated from the partnership. Thus, the taxpayer’s qualified business income deduction equals 20% of that amount, or $50,000.

Choice “A” is incorrect. The taxpayer’s qualified business income deduction is not limited by the W-2 wage or property limitations because the taxpayer’s taxable income before the qualified business income deduction does not exceed $383,900 (MFJ) in 2024. As such, the taxpayer will calculate their qualified business income deduction by multiplying their qualified business income by 20%. The taxpayer’s qualified business income equals their $250,000 share of income from the partnership. As a result, the couple’s qualified business income deduction will equal $50,000 ($250,000 × 20%). This answer choice is incorrect because the answer choice assumes the limitation does apply, and as such, limits the qualified business income deduction to the greater of 50% of the W-2 wages (equal to $37,500) or 25% of the W-2 wages plus 2.5% of the basis of the partnership’s property (equal to $21,250).

Choice “B” is incorrect. The taxpayer’s qualified business income deduction is not limited by the W-2 wage or property limitations because the taxpayer’s taxable income before the qualified business income deduction does not exceed $383,900 (MFJ) in 2024. As such, the taxpayer will calculate their qualified business income deduction by multiplying their qualified business income by 20%. The taxpayer’s qualified business income equals their $250,000 share of income from the partnership. As a result, the couple’s qualified business income deduction will equal $50,000 ($250,000 × 20%).

Choice “C” is incorrect. The taxpayer’s qualified business income deduction is not limited by the W-2 wage limitation because the taxpayer’s taxable income before the qualified business income deduction does not exceed $383,900 (MFJ) in 2024. For the same reason, the taxpayer’s deduction is also not limited by the W-2 wage and property limitation. This answer choice is incorrect not only because it assumes the limitation applies, but it also applies the limitation incorrectly. The correct answer is determined by multiplying their qualified business income by 20%. The taxpayer’s qualified business income equals their $250,000 share of income from the partnership. As a result, the couple’s qualified business income deduction will equal $50,000 ($250,000 × 20%).

137
Q

Calculate the taxpayer’s qualified business income deduction for a specified service trade or business:

Filing status: Single

Taxable income: $300,000

Net capital gains: $0

Qualified business income (QBI): $50,000

W-2 wages: $10,000

A.	 $0

B.	 $60,000

C.	 $10,000

D.	 $5,000
A

Choice “A” is correct. A single taxpayer with taxable income before the QBI deduction of $241,950 or more (2024) is not eligible for the QBI deduction on income from a specified service trade or business (SSTB).

Choice “B” is incorrect. This amount is 20 percent of taxable income: $300,000 × 20% = $60,000. A single taxpayer with taxable income before the QBI deduction of $241,950 or more (2024) is not eligible for the QBI deduction on income from a specified service trade or business (SSTB).

Choice “C” is incorrect. This amount is the basic QBI deduction of 20 percent of the $50,000 QBI. However, a single taxpayer with taxable income before the QBI deduction of $241,950 or more (2024) is not eligible for the QBI deduction on income from a specified service trade or business (SSTB).

Choice “D” is incorrect. This amount is 50 percent of the W-2 wages: $10,000 × 50% = $5,000. A single taxpayer with taxable income before the QBI deduction of $241,950 or more (2024) is not eligible for the QBI deduction on income from a specified service trade or business (SSTB). The W-2 wage limitation does not apply.

138
Q

For the current year, Seth and Sheila intend to file a joint return. Seth expects to earn $35,000 in wages from his teaching job. He is covered by the university’s pension plan. Sheila is a volunteer at their son, Stephen’s, school. In addition to Seth’s income, they received $500 in interest income and $50 in prize winnings from a local radio contest. Each would like to make a deductible contribution to a traditional individual retirement account for the current year. They also believe they will be eligible to claim a tax credit for these contributions. Which of the following is correct?

Deductible Contribution Claim Credit
A.
No

Yes

B.	 Yes

Yes

C.	 No

No

D.	 Yes

No

A

Choice “B” is correct. Although Seth is covered by a plan, the second factor (the income limitation) is not exceeded, thus, both Seth’s and Sheila’s contributions should be deductible. In addition, both should qualify for a portion of the credit.

Choices “D”, “A”, and “C” are incorrect based upon the above explanation.

139
Q

For the current year, Jennifer has self-employment net income of $50,000 before any SEP IRA deduction and no other earned income for the year. The total amount of self-employment tax related to Jennifer’s earnings was $7,064. What is the maximum amount Jennifer may deduct for contributions to her SEP IRA for the year?

A.	 $69,000

B.	 $10,000

C.	 $9,294

D.	 $8,587
A

Choice “C” is correct. The maximum annual deductible amount for self-employed individuals to a SEP IRA is the lesser of $69,000 (2024) or 20 percent of net earnings. “Net earnings” is defined as net self-employment income minus 50 percent of self-employment (S/E) taxes.

Net self-employment income
50,000

50% of self-employment taxes
(3,532)

[$7,064 × 50%]
Self-employment earnings before SEP IRA
46,468

Times 20%
× .20

Calculated SEP IRA Deduction

9,294

The 20 percent of self-employment earnings is less than the maximum of $69,000 (2024), so the SEP IRA deduction is $9,294.

Choice “A” is incorrect. This amount ignores the fact that the maximum annual deductible amount for self-employed individuals to a SEP IRA plan is the lesser of $69,000 (2024) or 20 percent of net earnings. In this case, 20 percent of net earnings of $9,294 is less than the $69,000 maximum.

Choice “B” is incorrect. This amount ignores the reduction for one-half of self-employment taxes.

Choice “D” is incorrect. This amount assumes that 100 percent of the self-employment tax was an allowable reduction to the “net earnings” figure, which it is not. Only 50 percent of the total amount is an allowable reduction.

140
Q

Chris, age 5, has $3,000 of interest income and no earned income this year. Assuming the current applicable standard deduction for dependents is $1,300, how much of Chris’ income will be taxed at his parents’ marginal rate?

A.	 $400

B.	 $1,700

C.	 $0

D.	 $3,000
A

Choice “A” is correct. The net unearned income of a dependent child under age 18 is taxed at the parents’ marginal rate under the “kiddie tax” rules. Net unearned income is calculated by taking the child’s unearned income and reducing it by the dependent child’s allowable standard deduction of $1,300 plus an additional $1,300 that is taxed at the child’s marginal tax rate (2024). Chris’ net unearned income taxed at his parents’ marginal rate is $400 ($3,000 interest income – $1,300 standard deduction – $1,300 taxed at child’s marginal rate).

Choice “B” is incorrect. The $1,700 uses only the $1,300 standard deduction, but the next $1,300 would be taxed at the child’s marginal rate.

Choice “C” is incorrect. The $0 indicates that nothing is taxed at the parents’ marginal rate. Taxing net unearned income at the parents’ marginal rate is the whole idea of the “kiddie tax.”

Choice “D” is incorrect. The $3,000 indicates that the entire $3,000 interest income is taxed at the parents’ marginal rate.

141
Q

Baker, a sole proprietor CPA, has several clients that do business in Spain. While on a four-week vacation in Spain, Baker attended a five-day seminar on Spanish business practices that cost $700. Baker’s round-trip airfare to Spain was $600. While in Spain, Baker spent an average of $100 per day on accommodations, local travel, and other incidental expenses, for total expenses of $2,800. What amount of total expense can Baker deduct on Form 1040 Schedule C, “Profit or Loss From Business,” related to this situation?

A.	 $700

B.	 $1,200

C.	 $1,800

D.	 $4,100
A

Choice “B” is correct. Baker can deduct $1,200 in total expense on Form 1040 Schedule C, calculated as follows:

Direct educational expenses

700

[cost of the course]

Daily expenses for 5-day seminar

500

[$100 per day × 5]

Total educational expenses

1,200

Rule: If foreign travel is primarily personal in nature (e.g., a vacation), none of the travel expenses (e.g., round-trip airfare) incurred will be allowable business deductions, even if the taxpayer was involved in business activities while in the foreign country.

Choice “A” is incorrect, as the expenses for the five-day period Baker attended the seminar were directly related to being in Spain for the additional period of time and are allowable business deductions.

Choices “C” and “D” are incorrect, per the above rule.

142
Q

Frank and Mary Wood have 2 children, Becky, age 10, and Matt, age 14. The Woods incur expenses of $5,000 for after-school care for each child. Their only income is from wages. Frank’s wages are $60,000, and Mary’s wages are $2,500. What amount of Child and Dependent Care Credit may the Woods claim on their joint tax return?

A.	 $2,000

B.	 $1,000

C.	 $500

D.	 $1,750
A

Choice “C” is correct. First, determine the eligible expenses. Only expenses for Becky will qualify because Matt is not under 13 years of age. Of the $10,000 spent, only $5,000 will qualify. The maximum eligible expenses for one dependent is $3,000. The eligible expenses are also limited to the lowest earned income of either spouse. That would be Mary’s $2,500. Because of Frank and Mary’s combined income level, the credit rate of 20 percent applies. The credit is 20 percent of $2,500, or $500.

Choices “B”, “D”, and “A” are incorrect, per the above explanation.

143
Q

Pat has various items of income as follows:

W-2 wages
$24,000

Interest and dividends
$3,000

Sole proprietorship income on Schedule C
$8,000

Income from an S corporation from Schedule K-1
$12,000

Income from a general partnership from Schedule K-1
$10,000

For purposes of the self-employment tax, what are the net earnings from self-employment? (Note: Please answer before the required 92.35% calculation performed on Schedule SE.)

A.	 $10,000

B.	 $57,000

C.	 $18,000

D.	 $22,000
A

Choice “C” is correct. Income subject to self-employment includes amounts from an unincorporated sole proprietorship (Schedule C) and general partnerships. It does not include W-2 wages, interest, dividends, or income from an S corporation. The only amounts here that qualify are the $8,000 sole proprietorship income and the $10,000 from the general partnership.

Choices “A”, “D”, and “B” are incorrect, based on the above explanation.

144
Q

Briana has various items of income as follows:

W-2 wages
$24,000

Interest and dividends
$3,000

Sole proprietorship income on Schedule C
$98,000

Income from an S corporation from Schedule K-1
$12,000

Income as a limited partner from a limited partnership from Schedule K-1
$10,000

For purposes of the self-employment tax, what are the net earnings from self-employment? (Note: Please answer before the required 92.35% calculation performed on Schedule SE.)

A.	 $22,000

B.	 $10,000

C.	 $27,000

D.	 $98,000
A

Choice “D” is correct. Income subject to self-employment includes amounts from an unincorporated sole proprietorship (Schedule C) and general partnerships. It does not include W-2 wages, interest, dividends, income from an S corporation, or income as a limited partner from a limited partnership. The only amount here that qualifies is the $98,000 sole proprietorship income.

Choices “A”, “C”, and “B” are incorrect, based on the above explanation.

145
Q

Which of the following is a deduction for AGI?

A.	 Mortgage interest paid on your primary residence.

B.	 State income taxes.

C.	 Alimony paid pursuant to a 2017 divorce agreement.

D.	 Charitable contributions of property.
A

Choice “C” is correct. Alimony paid pursuant to a divorce or separation agreement executed on or before December 31, 2018, is an adjustment, which is a deduction for AGI.

Choice “A” is incorrect. Mortgage interest paid on your primary residence is an itemized deduction, which is a deduction from AGI.

Choice “B” is incorrect. State and local income taxes are an itemized deduction, which is a deduction from AGI.

Choice “D” is incorrect. Charitable contributions of property are an itemized deduction, which is a deduction from AGI.

146
Q

Harry has various items of income as follows:

W-2 wages

$24,000

Interest and dividends

$3,000

Rental real estate on Schedule E

$8,000

Income from an S corporation from Schedule K-1

$12,000

Income from a general partnership from Schedule K-1

$10,000

For purposes of the self-employment tax, what are the net earnings from self-employment? (Note: Please answer before the required 92.35% calculation performed on Schedule SE.)

A.	 $30,000

B.	 $10,000

C.	 $22,000

D.	 $57,000
A

Choice “B” is correct. Income subject to self-employment includes amounts from an unincorporated sole proprietorship (Schedule C) and general partnerships. It does not include W-2 wages, interest, dividends, rental real estate income, or income from an S corporation. The only amount here that qualifies is the $10,000 from the general partnership.

Choices “C”, “A”, and “D” are incorrect, based on the above explanation.

147
Q

The question below includes actual dates that must be used to determine the appropriate tax treatment of the transaction.

Jake and his wife divorced in 2018. Jake pays the following amounts to his former spouse during the current year:

Regular alimony payments

$30,000

Residence as part of a property settlement

$250,000

Jake and his former spouse have a 10-year-old child. When the child reaches the age of 18, the regular alimony payments are reduced by $10,000. What amount can Jake deduct as alimony for the current year?

A.	 $280,000

B.	 $20,000

C.	 $10,000

D.	 $0
A

Choice “B” is correct. The regular alimony payments are deductible because the divorce was executed prior to 2019, but the amount that is contingent on the child being under the age of 18 is deemed to be child support. Because this contingent amount is $10,000, only the other $20,000 ($30,000 – $10,000) is deemed to be true deductible alimony. The residence was a property settlement and is not part of deductible alimony.

Choice “A” is incorrect. This amount includes the child support and the property settlement, neither of which are deductible.

Choice “C” is incorrect. This is simply the reduction of the regular alimony payments when the child becomes 18.

Choice “D” is incorrect. The regular alimony payments not allocated to child support are deductible because the divorce was executed prior to 2019.

148
Q

The question below includes actual dates that must be used to determine the appropriate tax treatment of the transaction.

Jake and his wife were divorced in 2018. Jake pays the following amounts to his former spouse during the current year:

Regular alimony payments

$12,000

Child support

$10,000

Residence as part of a property settlement

$115,000

What amount can Jake deduct as alimony for the current year?

A.	 $137,000

B.	 $0

C.	 $22,000

D.	 $12,000
A

Choice “D” is correct. Alimony paid on a divorce or separation agreement executed on or before December 31, 2018 is deductible as a for AGI deduction. The regular alimony payments are deductible, but the child support is not. The residence was a property settlement and is not part of deductible alimony.

Choice “A” is incorrect. This amount includes the child support and the property settlement, both of which are not deductible.

Choice “B” is incorrect. The regular alimony payments are deductible because the divorce was executed prior to 2019.

Choice “C” is incorrect. This amount includes the child support, which is not deductible.

149
Q

Which of the following would preclude a taxpayer from deducting student loan interest expense?

A.	 The total amount paid is $1,000.

B.	 The taxpayer is single with AGI of $55,000.

C.	 The taxpayer is married filing jointly with AGI of $120,000.

D.	 The taxpayer is taken as a dependent of another taxpayer.
A

Choice “D” is correct. This deduction is not allowed if the taxpayer is a dependent of another taxpayer.

Choice “A” is incorrect. There is a limitation of $2,500 on the deduction. $1,000 is well below this limit, so it is all deductible.

Choice “B” is incorrect. $55,000 of AGI is below the single phase-out for the student loan interest expense adjustment.

Choice “C” is incorrect. $120,000 of AGI is below the MFJ phase-out for the student loan interest expense adjustment.

150
Q

Jason is a cash basis, self-employed attorney. Which of the following expenses are deductible on his Schedule C?

A.	 Mrs. Jones was billed in February of the prior year, but has never paid. Jason considers this to be bad debt.

B.	 Jason paid $35,000 in wages to his part-time assistant.

C.	 Jason made a $1,000 charitable contribution to the Boys and Girls Club.

D.	 Jason paid country club dues totaling $4,000 for the year. Jason meets potential and current clients at the country club.
A

Choice “B” is correct. Salaries and wages paid to employees are deductible business expenses on Schedule C of Form 1040.

Choice “A” is incorrect. Because Jason is a cash basis taxpayer, he has not reported the income from Mrs. Jones. Therefore, the fact that she hasn’t paid him does not create a deductible expense for Jason.

Choice “C” is incorrect. Charitable contributions are deducted on Schedule A as an itemized deduction.

Choice “D” is incorrect. Country club dues are not deductible business expenses.

151
Q

Bob and Nancy are married and file a joint return for the current tax year. They are both under age 50 and employed, with wages of $50,000 each. Their total adjusted gross income (AGI) is $131,000. Neither of them is an active participant in a qualified retirement plan at work. What is the maximum traditional IRA deduction they can take for the current year?

A.	 $14,000

B.	 $0

C.	 $11,200

D.	 $7,000
A

Choice “A” is correct. They may each deduct the maximum amount of $7,000 (2024), which is a total of $14,000. Because Bob and Nancy are not active participants in another qualified plan, their deductible contribution is not phased out.

Choice “B” is incorrect. Zero would be correct if they were phased out of the deduction, but there is no limitation here because neither Bob nor Nancy is an active participant in another qualified plan.

Choice “C” is incorrect. $11,200 would be correct if they were partially phased out of the deduction because one spouse was an active participant in a qualified employer-sponsored retirement plan and the other spouse was not (based on current year AGI phaseout amounts). There is no limitation here because neither Bob nor Nancy is an active participant in a qualified employer-sponsored retirement plan.

Choice “D” is incorrect. $7,000 would be correct if only one of them were allowed to deduct the IRA contribution. They can both take the deduction.

152
Q

The question below includes actual dates that must be used to determine the appropriate tax treatment of the transaction.

Paula pays alimony to her former spouse. The divorce decree, which was finalized in 2010, requires Paula to make regular cash payments to her former spouse of $30,000 annually. The divorce decree also requires Paula to pay the $24,000 annual mortgage on her former spouse’s home, which they used to share. Paula still has ownership interest in the home. During the current year, Paula pays $18,000 directly to her former spouse, $12,000 for some expenses of her former spouse, and $24,000 on the mortgage. How much of these payments are deductible alimony in the current year?

A.	 $18,000

B.	 $30,000

C.	 $54,000

D.	 $42,000
A

Choice “B” is correct. Alimony paid pursuant to a divorce decree executed prior to 2019 is deductible as a for AGI deduction. Deductible alimony must be paid in cash or cash equivalent. The expenses paid on behalf of the former spouse qualify as cash equivalents, so all $30,000 alimony has been paid. Deductible alimony only includes amounts that cannot extend beyond the death of the payee. The mortgage will not qualify because this would still be payable after the death of the payee.

Choice “A” is incorrect. This only includes the amounts paid in cash, but the expenses paid will qualify as a cash equivalent.

Choice “C” is incorrect. This includes all amounts paid, but the mortgage will not qualify because it would still be payable after the death of the payee.

Choice “D” is incorrect. This includes the cash payments and the mortgage. The expenses paid will qualify as a cash equivalent. The mortgage will not qualify because it would still be payable after the death of the payee.

153
Q

Which of the following would preclude a taxpayer from deducting student loan interest expense?

A.	 The taxpayer is married filing jointly with AGI of $135,000.

B.	 The taxpayer claims a dependent on his or her income tax return.

C.	 The taxpayer is single with AGI of $110,000.

D.	 The total amount paid is $1,000.
A

Choice “C” is correct. $110,000 of AGI is above the current year student loan interest expense AGI limitation for a single taxpayer.

Choice “A” is incorrect. $135,000 of AGI is below the current year student loan interest expense AGI limitation for a married taxpayer.

Choice “B” is incorrect. This deduction is not allowed if the taxpayer is a dependent of another taxpayer. But there is no requirement that the taxpayer cannot have a dependent of his or her own.

Choice “D” is incorrect. There is a limitation of $2,500 on the deduction. $1,000 is well below this limit, so it is all deductible.

154
Q

Which of the following is not a deduction for AGI?

A.	 Alimony paid pursuant to a divorce agreement executed on or before December 31, 2018.

 

B.	 Property taxes paid on your primary residence.

C.	 Business rent on a self-employed business.

D.	 One-half of self-employment tax.
A

Choice “B” is correct. Property taxes paid on your primary residence is an itemized deduction, which is a deduction from AGI.

Choice “A” is incorrect. Alimony paid pursuant to a divorce or separation agreement executed on or before December 31, 2018, is an adjustment, which is a deduction for AGI.

Choice “C” is incorrect. Business rent on a self-employed business is deductible on Schedule C. This is before the calculation of AGI.

Choice “D” is incorrect. One half of self-employment tax is an adjustment, which is a deduction for AGI.

155
Q

Charlie is a cash basis, self-employed computer technician. In the current year, Charlie had gross business receipts of $150,000. Charlie’s cash payments were as follows:

Supplies

$1,000

Wages of employees

$40,000

Contributions to local church

$10,000

Advertising

$2,000

Utilities for office

$3,000

Self-employment tax (estimated)

$5,000

Real estate taxes on personal home

$10,000

Rent for office space

$12,000

Alimony paid to ex-wife (divorce in 2012)

$8,000

What amount should Charlie report as net self-employment income on Schedule C?

A.	 $82,000

B.	 $92,000

C.	 $87,000

D.	 $59,000
A

Choice “B” is correct. Only business expenses are deductible against business income on Schedule C. Therefore, Charlie’s net self-employment income = $92,000. $150,000 gross income – $1,000 supplies – $40,000 wages – $2,000 advertising – $3,000 utilities – $12,000 rent = $92,000. The charitable contributions are deductible on Schedule A as an itemized deduction. The estimated self employment tax is not deductible on Schedule C. However, one half of self-employment tax paid is deductible as an adjustment to AGI. The real estate taxes on Charlie’s personal home are deductible on Schedule A as an itemized deduction. The alimony paid to his ex-wife is deductible as an adjustment to AGI because the divorce was finalized prior to December 31, 2018.

Choice “A” is incorrect. Only business expenses are deductible against business income on Schedule C. The real estate taxes on Charlie’s personal home are deductible on Schedule A as an itemized deduction.

Choice “C” is incorrect. The estimated self-employment tax is not deductible on Schedule C. However, one-half of self-employment tax paid is deductible as an adjustment to AGI. The alimony paid to his ex-wife is deductible as an adjustment to AGI because the divorce was finalized prior to December 31, 2018.

Choice “D” is incorrect. Only business expenses are deductible against business income on Schedule C. The charitable contributions are deductible on Schedule A as an itemized deduction. The estimated self-employment tax is not deductible. However, one half of self-employment tax paid is deductible as an adjustment to AGI. The real estate taxes on Charlie’s personal home are deductible on Schedule A as an itemized deduction. The alimony paid to his ex-wife is deductible as an adjustment to AGI because the divorce was finalized prior to December 31, 2018.

156
Q

Hunter has a loss of $50,000 from his landscaping business in 2024. He reports the loss on Schedule C of his Form 1040. After deducting the loss against his other sources of income, he has a remaining business loss of $10,000. What are Hunter’s options regarding the remaining $10,000 business loss?

A.	 He cannot carry the loss back but he can carry it forward indefinitely.

B.	 He can carry the loss back five years and forward 20 years.

C.	 He can carry the loss back five years and forward indefinitely.

D.	 He can carry the loss back two years and forward 20 years.
A

Choice “A” is correct. For tax years beginning after December 31, 2020, a net operating loss cannot be carried back, but can be carried forward indefinitely.

Choices “B”, “D”, and “C” are incorrect. These are different carryback and carryforward provisions for tax years before 2021.

157
Q

The Griffins own a mountain cabin that is used for both personal and rental purposes. In the current year, the Griffins rented the cabin out for 150 days and used it personally for 50 days. Assume that the Griffins itemize their deductions. Which of the following statements regarding the treatment of the mountain cabin on the Griffin’s tax return is true?

A.	 100% of the utilities for the mountain cabin for the entire year are deductible.

B.	 Depreciation is deductible under all rental circumstances.

C.	 Real estate taxes are deductible under all rental circumstances.

D.	 The rental income received is not included in gross income.
A

Choice “C” is correct. Real estate taxes and mortgage interest are either deducted on the rental schedule E or as an itemized deduction (subject to limitations). Therefore, real estate taxes will be deductible whether the Griffins rent their cabin or not.

Choice “A” is incorrect. Only the rental portion of the utilities is deducted on Schedule E. Because the Griffins rented their cabin for more than 15 days and used the cabin for the greater of (1) 14 days or (2) more than 10% of the rental days, their cabin is treated as a personal/rental residence. The rental portion is deducted on Schedule E. The personal use portion of the utilities expense is not deductible.

Choice “B” is incorrect. Depreciation is only deductible as a rental expense on Schedule E. If the Griffins had rented their cabin out for fewer than 15 days, then the cabin would be treated as a personal residence. As a personal residence, depreciation is not deductible. Therefore, depreciation is not deductible under all rental circumstances.

Choice “D” is incorrect. Because the Griffins rented their cabin for more than 15 days and used the cabin for the greater of (1) 14 days or (2) more than 10% of the rental days, their cabin is treated as a personal/rental residence. The Griffins would include the rental income received in their gross income on Schedule E.

158
Q

The question below includes actual dates that must be used to determine the appropriate tax treatment of the transaction.

Mark and his wife divorced in 2016. Mark pays alimony and child support to his former spouse. He is required to pay $6,000 in child support and $10,000 in alimony a year. At the beginning of the current year, he is in arrears for child support in the amount of $12,000 and for alimony in the amount of $20,000. During the current year, he starts to catch up and pays $25,000. How much is deductible alimony for the current year?

A.	 $0

B.	 $25,000

C.	 $7,000

D.	 $10,000
A

Choice “C” is correct. When a person is behind in child support and alimony, payments are allocated completely to child support first until the full obligation is met. Any additional amounts are allocated to alimony. The alimony is deductible because the divorce was executed prior to 2019. However, only the amount allocated to alimony is deductible. The first $12,000 fulfills the child support in arrears. The next $6,000 is allocated to the current-year’s child support. The remaining $7,000 ($25,000 – $12,000 – $6,000) is then allocated to the alimony in arrears and is deductible in the current year.

Choices “A”, “D”, and “B” are incorrect, based on the above explanation.

159
Q

The Groves own a beach house as a second home. This year, the Groves used the beach house personally for 4 months. For 14 days during the summer, the Groves rented out their beach house for $5,000 total to friends. Which statement is true regarding the taxability of the Groves’ beach house?

A.	 Mortgage interest paid on the beach house is deductible.

B.	 All repair expenses on the beach house are deductible.

C.	 Depreciation expense on the beach house is deductible.

D.	 $5,000 is included in gross income.
A

Choice “A” is correct. Because the Groves rented their beach house for fewer than 15 days, it is treated as a personal residence. Therefore, the rental income is excluded from gross income and mortgage interest and real estate taxes are deductible as itemized deductions on schedule A (subject to limitations).

Choices “B” and “C” are incorrect. Because the Groves rented their beach house for fewer than 15 days, it is treated as a personal residence. Therefore, repairs, utilities, depreciation, and other allowed rental expenses are not deductible.

Choice “D” is incorrect. Because the Groves rented their beach house for fewer than 15 days, it is treated as a personal residence and the rental income is excluded from gross income. Mortgage interest and real estate taxes are deductible as itemized deductions on schedule A (subject to limitations).

160
Q

Which of the following statements regarding the self-employment tax is true?

A.	 Self-employment income is subject to both federal income tax and self-employment tax.

B.	 All self-employment income is subject to both Medicare and Social Security tax.

C.	 Income and expenses from self-employment is reported on Schedule D (Form 1040).

D.	 One half of self-employment tax is deductible as an itemized deduction.
A

Choice “A” is correct. Self-employment income is subject to federal income tax and self-employment tax. The self-employment tax is made up of Social Security (12.4%) and Medicare (2.9%), for a total of 15.3%.

Choice “B” is incorrect. All self-employment income is subject to the 2.9% Medicare tax, but Social Security tax is subject to the 12.4% tax only up to a certain threshold.

Choice “C” is incorrect. Income from self-employment is reported on Schedule C of Form 1040.

Choice “D” is incorrect. One half of self-employment tax is deductible as a deduction, or adjustment, for AGI deduction.

161
Q

Which of the following is correct regarding the proper form to deduct self-employed health insurance and 50% of the tax on self-employment for a sole proprietor?

Self-Employed

Health Insurance

50% Tax on

Self-Employment

A.	 Form 1040

Form 1040

B.	 Schedule C

Schedule C

C.	 Schedule C

Form 1040

D.	 Form 1040

Schedule C

A

Choice “A” is correct. Although both of these items are business related, neither one of them is deductible directly on Schedule C. They are both considered adjustments and are deductible on Form 1040.

Choices “D”, “C”, and “B” are incorrect, based on the above explanation.

162
Q

Bob and Nancy are married and file a joint return for the current year. They are both under age 50 and employed with wages of $50,000 each. Their total AGI is $250,000. Neither of them is an active participant in a qualified retirement plan at work. What is the maximum Roth IRA contribution they can make for the current year?

A.	 $7,000

B.	 $0

C.	 $11,200

D.	 $14,000
A

Choice “B” is correct. Their AGI exceeds the current year (2024) phase-out for contributions to a Roth IRA, so they are completely phased out from making any Roth IRA contributions for the year. It is irrelevant that neither of them is covered by a qualified employer-sponsored retirement plan.

Choice “A” is incorrect. $7,000 (2024) would be correct if one of them could contribute to a Roth IRA. But because their AGI exceeds the allowable threshold, they are completely phased out.

Choice “C” is incorrect. $11,200 assumes that Bob and Nancy are allowed a partially phased-out Roth contribution. However, their AGI is above the current year threshold for Roth IRA contributions, so they are not allowed to contribute to a Roth IRA.

Choice “D” is incorrect. $14,000 would be correct if they were both allowed to make the maximum allowed Roth IRA contribution for 2024 ($7,000 × 2 = $14,000). But they are completely phased out.

163
Q

Bob and Nancy are married and file a joint return for the current tax year. They are both under age 50 and employed with wages of $50,000 each. Their total AGI is $131,000. Bob is an active participant in a qualified retirement plan at work, but Nancy is not. What is the maximum traditional IRA deduction they can take for the current year?

A.	 $11,200

B.	 $7,000

C.	 $14,000

D.	 $0
A

Choice “A” is correct. Nancy may deduct the maximum amount of $7,000 because she is not covered by a qualified employer-sponsored retirement plan and their AGI is less than $230,000 (2024). Bob’s deduction is limited because he is covered by a qualified employer-sponsored retirement plan and their AGI is $8,000 into the phase-out range of $123,000 to $143,000 (2024). Because they are $8,000 into the $20,000 range, 40% of Bob’s deduction is phased out. $7,000 × 40% = $2,800. Therefore, Bob can only deduct $4,200 ($7,000 – $2,800). The total deduction is $11,200 (Nancy $7,000 + Bob $4,200).

Choice “B” is incorrect. $7,000 (2024) would be correct if only one of them were allowed to deduct the IRA contribution. Nancy can take the full deduction and Bob can take a partial deduction.

Choice “C” is incorrect. $14,000 would be correct if they were both allowed the entire deduction ($7,000 × 2 = $14,000). Bob and Nancy are partially phased out because Bob participates in a qualified employer-sponsored retirement plan.

Choice “D” is incorrect. Zero would be correct if they were completely phased out of the deduction. But there is only a partial limitation here.

164
Q

Barkley owns a vacation cabin that was rented to unrelated parties for 10 days during the year for $2,500. The cabin was used personally by Barkley for three months and left vacant for the rest of the year. Expenses for the cabin were as follows:

Real estate taxes

1,000

Maintenance and utilities

2,000

How much rental income (loss) is included in Barkley’s adjusted gross income?

A.	 $(500)

B.	 $0

C.	 $(1,500)

D.	 $500
A

Choice “B” is correct. If a vacation residence is rented for fewer than 15 days per year, it is treated as a personal residence. The rental income ($2,500 in this case) is excluded from income. A Schedule E is not filed for this property (i.e., no income is reported, the taxes are reported as itemized deductions, and the maintenance and utilities are not deductible), so the effect on AGI is zero.

Choice “A” is incorrect. This assumes that all of the items shown are reported net on Schedule E: $2,500 – $1,000 – $2,000 = ($500). The rental income is excluded from income, the maintenance and utilities are not deductible, and the property taxes are reported on Schedule A as an itemized deduction.

Choice “C” is incorrect, per the above explanation.

Choice “D” is incorrect. This assumes that the property taxes are reported as itemized deductions but that the rental income ($2,500) less the maintenance and utilities ($2,000) are reported net on Schedule E. The rental income is excluded from income, and the maintenance and utilities are not deductible.

165
Q

During the year, Barlow moved from Chicago to Miami to start a new job, incurring costs of $1,200 to move household goods and $2,500 in temporary living expenses. Barlow was not reimbursed for any of these expenses. What amount should Barlow deduct as itemized deduction for moving expense?

A.	 $0

B.	 $2,700

C.	 $3,000

D.	 $3,700
A

Choice “A” is correct. Moving expenses are only deductible by members of the U.S. armed forces on active duty when moving pursuant to military orders.

166
Q

Janice loves to make handmade quilts as a hobby. She primarily makes quilts as gifts for friends and family and contributes quilts to charities for fundraisers, but occasionally she gets paid for making a custom quilt. In the current year, she received $200 for a custom quilt sale and had the following expenses related to her quilting activity:

Materials $950
Supplies 250
Quilt show expenses 150
Total expenses $1,350
What is the amount of Janice’s taxable quilting income or loss for the current year?

A.	 $200 income

B.	 $1,350 loss

C.	 $1,150 loss

D.	 $0 income or loss
A

Choice “A” is correct. Janice’s quilting activity is not engaged in for profit (a hobby), so she cannot deduct any of the expenses that would be deductible if the activity were engaged in for profit (a business). She is still required to include the $200 income from the activity in her taxable gross income.

Choice “B” is incorrect. A $1,350 loss would include a deduction for all the expenses related to her quilting activity but not include the $200 from the custom quilt sale in her taxable gross income. The income from the activity is included in taxable gross income but no deduction is allowed for the expenses related to the quilting activity because the activity is not engaged in for profit (a hobby).

Choice “C” is incorrect. A $1,150 loss would include a deduction for all the expenses related to her quilting activity ($200 income – $1,350 expenses = $1,150 net loss). The income from the activity is included in taxable gross income but no deduction is allowed for the expenses related to the quilting activity because the activity is not engaged in for profit (a hobby).

Choice “D” is incorrect. Janice’s quilting activity is not engaged in for profit, so no deduction is allowed for the expenses related to the activity. However, the income from the activity is still included in taxable gross income.

167
Q

Larry collects and restores antique cars as a hobby. Larry works full-time but spends most evenings working on his antique cars and nearly every weekend participating in classic collector car shows. Larry has kept nearly all of the cars he has restored although he has occasionally donated a restored car to a charity for auction. This year, Larry won a $2,500 Best of Show award at one of the car shows. In the current year, he had the following expenses related to his antique cars activity:

Car parts $900
Supplies 350
Tools 250
Car show expenses $500
Total expenses $2,000
What is the amount of Larry’s taxable income related to his antique cars activity for the current year?

A.	 $0

B.	 $2,500

C.	 $500

D.	 $2,000
A

Choice “B” is correct. Larry’s antique cars activity is not engaged in for profit (a hobby), so he cannot deduct any of the expenses that would be deductible if the activity were engaged in for profit (a business). He is still required to include the $2,500 income from the activity in his taxable gross income.

Choice “A” is incorrect. Larry’s antique cars activity is not engaged in for profit, so no deduction is allowed for the expenses related to the activity. However, the income from the activity is still included in taxable gross income.

Choice “C” is incorrect. Taxable income of $500 would include deduction for all the expenses related to his antique cars activity ($2,500 income – $2,000 expenses = $500 net income). The income from the activity is included in his taxable gross income but no deduction is allowed for the expenses related to the antique cars activity because the activity is not engaged in for profit (a hobby).

Choice “D” is incorrect. Taxable income of $2,000 would include a deduction for the car show expenses but not the restoration and maintenance costs ($2,500 income – $500 car show expenses = $2,000). The income from the activity is included in taxable gross income but no deduction is allowed for the expenses related to the antique cars activity because the activity is not engaged in for profit (a hobby).

168
Q

An individual taxpayer taking the standard deduction on Form 1040, U.S. Individual Income Tax Return, is the sole proprietor of a service business with no employees. The taxpayer paid $7,000 in self-employment taxes for the year. What amount, if any, is deductible by the taxpayer?

A.	 $3,500

B.	 $0

C.	 $7,000

D.	 $700
A

Choice “A” is correct. A taxpayer with self-employment income is permitted a deduction equal to 50 percent of the self-employment tax paid by the taxpayer in the year in determining her adjusted gross income. Since the taxpayer paid $7,000 of self-employment tax in the current year, the taxpayer is permitted to deduct $3,500 (equal to 50 percent of the $7,000).

Choice “B” is incorrect. Because the taxpayer earns self-employment income and pays self-employment tax, the taxpayer is permitted to deduct 50 percent of the self-employment tax paid in the current year as an adjustment in determining adjusted gross income. The taxpayer’s self-employment tax for the current year is $7,000. As a result, the taxpayer is permitted to deduct 50 percent of that amount, $3,500, as an above-the-line deduction.

Choice “C” is incorrect. The taxpayer cannot deduct the full amount of the self-employment tax for the year; rather, the taxpayer’s self-employment tax deduction is limited to 50 percent of the taxpayer’s self-employment tax. As such, the taxpayer will deduct $3,500 as an adjustment in determining her adjusted gross income.

Choice “D” is incorrect. The taxpayer’s self-employment tax deduction is equal to 50 percent, not 10 percent, of the taxpayer’s self-employment tax. As such, the taxpayer will take a deduction of $3,500 in determining her adjusted gross income.

169
Q

What is the basic deduction calculation for the qualified business income deduction?

A.	 20% × qualified business income (QBI)

B.	 20% × W-2 wages

C.	 30% × W-2 wages

D.	 30% × qualified business income (QBI)
A

Choice “A” is correct. The basic calculation for the QBI deduction is 20% × QBI. The deduction is subject to limitations.

Choice “B” is incorrect. The basic calculation for the QBI deduction is 20% × QBI.

Choice “C” is incorrect. The basic calculation for the QBI deduction is 20% × QBI.

Choice “D” is incorrect. The basic calculation for the QBI deduction is 20% × QBI.

170
Q

Juan recently started operating a flower shop as a proprietorship. In its first year of operations, the shop had a taxable income of $60,000. Assuming that Juan had no other employment-related earnings:

A.	 Juan will be exempt from the Medicare tax because the business earnings are below the threshold amount.

B.	 Juan will be exempt from self-employment taxes for the first three years of operations.

C.	 Juan must pay self-employment tax on the earnings of the business.

D.	 The flower shop must withhold FICA taxes from Juan's earnings.
A

Choice “C” is correct. Earnings from self-employment are subject to the income tax as well as federal self-employment tax. Thus, Juan must pay self-employment tax on the earnings of the business.

Choice “A” is incorrect. No self-employment tax is owed if self-employment income, after multiplying by 92.35 percent, is less than $400. However, Juan’s self-employment income exceeds this threshold, and thus Juan is not exempt from either of the two components of the self-employment tax (the Medicare tax and the Social Security tax).

Choice “B” is incorrect. There is no provision exempting a proprietorship from self-employment taxes for its first three years of operations.

Choice “D” is incorrect. Because Juan is the proprietor of a sole proprietorship (as opposed to an employee of an employer), the flower shop will not pay Juan a wage, and thus will not withhold either income taxes or FICA taxes from that wage.

171
Q

Which allowable deduction can be claimed in arriving at an individual’s adjusted gross income?

A.	 Unreimbursed business expense of an employee.

B.	 Alimony payment pursuant to a divorce settlement executed on or before December 31, 2018.

C.	 Personal casualty loss.

D.	 Charitable contribution.
A

Choice “B” is correct. Alimony payments are deductible to arrive at adjusted gross income (AGI) if the payments are made pursuant to a divorce settlement executed on or before December 31, 2018.

Choice “A” is incorrect. Unreimbursed business expenses of employees are not deductible.

Choice “C” is incorrect. Personal casualty losses are deductible from adjusted gross income as itemized deductions if incurred in a federally declared disaster area.

Choice “D” is incorrect. Charitable contributions are deductible from adjusted gross income as itemized deductions.

172
Q

The self-employment tax is:

A.	 Fully deductible as an itemized deduction.

B.	 One-half deductible from gross income in arriving at adjusted gross income.

C.	 Fully deductible in determining net income from self-employment.

D.	 Not deductible.
A

Choice “B” is correct. One half of the self-employment tax is deductible to arrive at adjusted gross income.
Choice “A” is incorrect. Self-employment tax is partially deductible to arrive at adjusted gross income.
Choice “C” is incorrect. Self-employment tax is not deductible in determining self-employment income.
Choice “D” is incorrect. Self-employment tax is partially deductible to arrive at adjusted gross income.

173
Q

Which of the following is both an item that is an allowable tax deduction to the partnership, reported separately on the individual partner’s Schedule K-1, and then included on the partner’s individual tax return?

A.	 Advertising expenditures

B.	 Depreciation on equipment used in the business

C.	 Salaries paid to non-partner employees

D.	 Guaranteed payments paid to partners
A

Choice “D” is correct. A partnership calculates net ordinary business income or loss and passes each partner’s distributive share through on Schedule K-1. Guaranteed payments paid to partners for services provided or for the use of capital, without regard to partnership income or profit and loss sharing ratios, are an allowable deduction to the partnership and are also separately reported on Schedule K-1 for inclusion on the partner’s tax return.

Choice “A” is incorrect. Advertising expenditures incurred by the partnership are deducted from revenues to arrive at net ordinary business income or loss at the partnership level. Each partner’s distributive share of the net income or loss is then reported on Schedule K-1.

Choice “B” is incorrect. Depreciation of assets used in the business is deducted from revenues to arrive at net ordinary business income or loss at the partnership level. Each partner’s distributive share of the net income or loss is then reported on Schedule K-1.

Choice “C” is incorrect. Salaries paid to non-partner employees are deducted from revenues to arrive at net ordinary business income or loss at the partnership level. Each partner’s distributive share of the net income or loss is then reported on Schedule K-1.

174
Q

Adams owns a second residence that is used for both personal and rental purposes. During the current year, Adams used the second residence for 50 days and rented the residence for 200 days. Which of the following statements is correct?

A.	 Depreciation may not be deducted on the property under any circumstances.

B.	 Utilities and maintenance on the property must be divided between personal and rental use.

C.	 All mortgage interest and taxes on the property will be deducted to determine the property's net income or loss.

D.	 A rental loss may be deducted if rental-related expenses exceed rental income.
A

Choice “B” is correct. The second residence is treated as a personal/rental residence and expenses must be prorated between personal and rental use.

A residence is treated as a personal/rental residence if it is rented for more than 14 days, and is used for personal purposes for the greater of (1) more than 14 days, or (2) more than 10 percent of the rental days. In this case, 10 percent of the rental days is 20 days (200 rental days × 10 percent). The 200 rental days are more than 14 days and the 50 personal use days are more than 20 days (10 percent of the rental days), so the requirements for personal/rental residence are met.

Choice “A” is incorrect. A deduction is allowed for depreciation, which is allocated to rental use based on the rental period/total annual usage (200 rental days/250 total days). The deduction for depreciation is limited to net rental income after deduction of other rental expenses.

Choice “C” is incorrect. Only an allocated portion of mortgage interest and taxes are deductible as rental expenses. Mortgage interest and taxes are allocated to rental use based on the rental period/total annual period (200 rental days/365 total days). The remaining mortgage interest and taxes may be deducted on Schedule A if the taxpayer itemizes deductions.

Choice “D” is incorrect. Rental use expenses are only deductible to the extent of rental income.

175
Q

Nan, a cash basis taxpayer, borrowed money from a bank and signed a 10-year interest-bearing note on business property on January 1 of the current year. The cash flow from Nan’s business enabled Nan to prepay the first three years of interest attributable to the note on December 31 of the current year. How should Nan treat the prepayment of interest for tax purposes?

A.	 Capitalize the interest as part of the basis of the business property.

B.	 Capitalize the interest and amortize the balance over the 10-year load period.

C.	 Deduct the current year's interest and amortize the balance over the next two years.

D.	 Deduct the entire amount as a current expense.
A

Choice “C” is correct. Interest paid in advance by a cash basis taxpayer on business loans cannot be deducted until the tax period to which the interest relates. In other words, the interest must be both paid and incurred in order to be deducted.

Choices “D”, “B”, and “A” are incorrect, per the above rule.

176
Q

An individual starts paying student loan interest in the current year. How many years may the individual deduct a portion of the student loan interest?

A.	 Current year only.

B.	 Ten years.

C.	 Five years.

D.	 Duration of time that interest is paid.
A

Taxpayers may deduct student loan interest (above-the-line for AGI) paid on qualified education loans up to a maximum of $2,500 for the tax year. There is a phase-out for the deduction and other minor restrictions, such as a married couple being required to file joint returns to take the deduction.

Choice “D” is correct. There is no limitation of the number of years that the interest may be deducted, other than that the interest may be deducted only when paid.

Choices “A”, “C”, and “B” are incorrect, based on the above explanation.

177
Q

Calculate the taxpayer’s qualified business income deduction for a qualified trade or business:

Filing status: Single

Taxable income: $100,000

Net capital gains: $0

Qualified business income (QBI): $30,000

W-2 wages: $10,000

A.	 $20,000

B.	 $15,000

C.	 $6,000

D.	 $5,000
A

Choice “C” is correct. $30,000 QBI × 20% = $6,000. W-2 wage and property limits do not apply to single taxpayers with taxable income before the QBI deduction below the taxable income threshold of $191,950 (2024).

Choice “A” is incorrect. $20,000 is the overall taxable income limitation: $100,000 taxable income – $0 net capital gains = $100,000 × 20% = $20,000. The basic QBI deduction of $6,000 is less than the overall limitation of $20,000, so the limit does not apply.

Choice “B” is incorrect. The QBI deduction is 20 percent of the $30,000 QBI, not 50 percent.

Choice “D” is incorrect. The W-2 wage and property limitations do not apply to taxpayers with taxable income before the QBI deduction below the taxable income threshold. Therefore, the deduction for QBI is not limited to $5,000 (W-2 wages of $10,000 × 50% = $5,000).

178
Q

Ben Flood, attorney at law, is a sole proprietor and files Schedule C with his federal Form 1040. Which of the following is not a deductible expense on Schedule C?

A.	 $30 business tax payable to the city in which he practices.

B.	 Health insurance for him and his family.

C.	 Salaries paid to the paralegal who works for him.

D.	 Depreciation on the computer used by his assistant.
A

Choice “B” is correct. Generally, personal expenses are not allowed as deductions on the Schedule C. Schedule C items should be only those related to the operation of the business itself. Health insurance for himself and his family is an adjustment to arrive at adjusted gross income because he is self-employed.

Choice “A” is incorrect. Business tax items are deductible expenses which should be reported on Schedule C.

Choice “C” is incorrect. Salaries and commissions paid to others as part of the business are expenses allowed on Schedule C.

Choice “D” is incorrect. Depreciation on business assets is an allowable deduction on Schedule C.

179
Q

Which of the following is not an adjustment to arrive at adjusted gross income?

A.	 Self-employment tax (50 percent).

B.	 Self-employed health insurance.

C.	 Alimony paid pursuant to a divorce settled on or before December 31, 2018.

D.	 Qualified mortgage interest paid.
A

Choice “D” is correct. Qualified mortgage interest paid is deductible on Schedule A as an itemized deduction.

Choices “B”, “C”, and “A” are incorrect. Each of these items is an adjustment to gross income to arrive at adjusted gross income.

180
Q

Which of the following is not a test for qualifying a child for the purposes of the earned income credit?

A.	 Child's age

B.	 Child's residence

C.	 Child's income

D.	 Child's relationship to the taxpayer
A

Choice “C” is correct. The amount of income earned by a taxpayer’s child does not determine whether the child qualifies for the purposes of the taxpayer’s earned income credit. The other three choices represent three of the required tests that must be met for a taxpayer’s child to qualify for the earned income credit. First, the child must have a qualifying relationship with the taxpayer. Second, the child must be under 19, or under 24 and a full-time student. Finally, the child must live with the taxpayer in the taxpayer’s main home for more than half of the year.

Choice “A” is incorrect. To qualify as a child for purposes of the earned income credit, the child must be under 19 years old (or under 24 and a full-time student). In addition to meeting this age test, the child must have a qualifying relationship with the taxpayer wishing to claim the earned income credit and must meet certain residency requirements. The child is not required to meet an income test in order to qualify as a child for purposes of the earned income credit.

Choice “B” is incorrect. To qualify as a child for purposes of the earned income credit, the child must live with the taxpayer in the taxpayer’s main home for more than half of the year. In addition to meeting this residence test, the child must have a qualifying relationship with the taxpayer wishing to claim the earned income credit and must meet certain age requirements. The child is not required to meet an income test in order to qualify as a child for purposes of the earned income credit.

Choice “D” is incorrect. To qualify as a child for purposes of the earned income credit, the child must have a qualifying relationship with the taxpayer wishing to claim the credit. The child must be the taxpayer’s child (adopted, step, and foster included), grandchild, sibling (step included), or a descendant of one of the above. In addition to having a qualifying relationship with the taxpayer, the child must meet certain age and residency requirements. The child is not required to meet an income test to qualify as a child for purposes of the earned income credit.

181
Q

How may taxes paid by an individual to a foreign country be treated?

A.	 As an itemized deduction subject to a 2% floor.

B.	 As a credit against federal income taxes due.

C.	 As an adjustment to gross income.

D.	 As a nondeductible expense.
A

Choice “B” is correct. A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. There is a limitation on the amount of the credit an individual can obtain. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction instead. Note that the only correct response to this question is choice “B”; however, also note that the other option for treating the taxes paid to the foreign country is not included as an answer option.
Choice “A” is incorrect. Although taxes paid by an individual to a foreign country are allowable itemized deductions, they are not subject to a 2% floor.
Choice “C” is incorrect. An adjustment is not allowed for taxes paid by an individual to a foreign country. A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction instead.
Choice “D” is incorrect. A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction instead.

182
Q

Madison and Nick Koz have two children, ages 8 and 10. Both children meet the definition of qualifying child. The Koz family has adjusted gross income of $300,000. What is the amount of the child tax credit on the couple’s current year income tax return?

A.	 $2,000

B.	 $6,000

C.	 $4,000

D.	 $3,000
A

Choice “C” is correct. The full child tax credit is available for MFJ taxpayers with AGI up to $400,000. The eligible children must be under the age of 17. The two Koz children qualify for the child tax credit of $2,000 each ($4,000 total).

Choices “A”, “D”, and “B” are incorrect. See explanation above.

183
Q

Which of the following is not a deduction to arrive at adjusted gross income?

A.	 Mortgage interest.

B.	 Alimony payments pursuant to a divorce settlement finalized on or before 12/31/18.

C.	 Trade or business expenses.

D.	 Capital losses in excess of capital gains.
A

Choice “A” is correct. Mortgage interest is an itemized deduction, not a deduction to arrive at adjusted gross income.

Choice “B” is incorrect. Alimony payments (on divorce agreements finalized on or before December 31, 2018) are an adjustment, which is a deduction to arrive at adjusted gross income. Alimony paid on divorce settlements finalized after December 31, 2018, is not deductible.

Choice “C” is incorrect. Trade or business expenses are deducted on Schedule C. This is before the calculation of adjusted gross income. Accordingly, this is a deduction to arrive at adjusted gross income.

Choice “D” is incorrect. Capital losses in excess of capital gains are deducted (up to $3,000) on Form 1040 before the calculation of adjusted gross income. Accordingly, this is a deduction to arrive at adjusted gross income.

184
Q

Which of the following personal tax credits can offset tax liability but cannot result in a refund to the taxpayer if the amount of the credit exceeds the taxpayerʹs tax liability?

A.	 Lifetime learning credit

B.	 American opportunity credit

C.	 Earned income credit

D.	 Child tax credit
A

Choice “A” is correct. The lifetime learning credit is an education credit that can offset an individual taxpayerʹs tax liability but does not result in a refund if the credit amount is more than the taxpayerʹs tax liability.

Choice “B” is incorrect. The American opportunity credit is a higher education credit. Forty percent of the allowable credit is refundable, subject to certain restrictions.

Choice “C” is incorrect. The earned income credit is a refundable credit for lower-income taxpayers.

Choice “D” is incorrect. The child tax credit for a dependent child may be refundable, but the amount that can be refunded is limited. A child tax credit for a non-child dependent is nonrefundable.

185
Q

Jennifer raises and trains poodles and enters them in dog shows as a hobby. She is not engaged in the activity with the intent to make a profit. In the current year, she received $1,000 in prize money from participation in dog shows and had the following expenses related to her dog show activity:

Dog food $300
Veterinary fees 800
Travel to dog shows 200
Total expenses $1,300
What is the amount of the increase or decrease in Jennifer’s current year taxable income from her hobby activity?

A.	 $300 decrease

B.	 $100 decrease

C.	 $1,000 increase

D.	 No increase or decrease
A

Choice “C” is correct. Jennifer’s activity is not engaged in for profit (a hobby), so she cannot deduct any of the expenses that would be deductible if the activity were engaged in for profit (a business). She is still required to include the $1,000 gross income from the activity in her taxable income.

Choice “A” is incorrect. A $300 decrease would include a deduction for all the expenses related to her dog show activity ($1,000 gross income – $1,300 expenses = $300 loss). The gross income from the activity is included in taxable income but no deduction is allowed for the expenses related to the dog show activity because the activity is not engaged in for profit (a hobby).

Choice “B” is incorrect. A $100 decrease would include a deduction for the dog food and veterinary fees, but not the travel to the dog shows ($1,000 gross income – $300 dog food expense – $800 veterinary fees = $100 loss). The gross income from the activity is included in taxable income but no deduction is allowed for the expenses related to the dog show activity because the activity is not engaged in for profit (a hobby).

Choice “D” is incorrect. The dog show activity is not engaged in for profit, so no deduction is allowed for the expenses related to the activity. However, the gross income from the activity is still included in taxable income.

186
Q

Nare, an accrual-basis taxpayer, owns a building which was rented to Mott under a 10-year lease expiring August 31, Year 8. On January 2, Year 2, Mott paid $30,000 as consideration for canceling the lease. On November 1, Year 2, Nare leased the building to Pine under a five-year lease. Pine paid Nare $10,000 rent for the two months of November and December, and an additional $5,000 for the last month’s rent. What amount of rental income should Nare report in its Year 2 income tax return?

A.	 $10,000

B.	 $15,000

C.	 $40,000

D.	 $45,000
A

Choice “D” is correct. Prepaid rent is income when received even for an accrual-basis taxpayer. The $30,000 received as consideration for canceling the lease is in substitution for rental payments and is thus rental income. The $5,000 prepaid for the last month’s rent is also rental income.
Choice “A” is incorrect. The $30,000 received as consideration for canceling the lease is in substitution for rental payments and is thus rental income. The $5,000 prepaid for the last month’s rent is also rental income.
Choice “B” is incorrect. The $30,000 is in substitution of rental payments and is thus rental income.
Choice “C” is incorrect. The $5,000 prepaid for the last month’s rent would also be rental income.

187
Q

Pat’s divorce decree, finalized in 2016, requires Pat to make the following transfers to Pat’s former spouse during the current year:

Alimony payments of $9,000 to be reduced to $7,000 when their child attains the age of 18.
Property division of stock with a basis of $2,000 and a fair market value of $3,500.
What is the amount of Pat’s alimony deduction for the current year?

A.	 $1,500

B.	 $7,000

C.	 $9,000

D.	 $10,500
A

Choice “B” is correct. Any amount of “alimony” that is dependent on a child reaching the age of 18, will be considered child support (which is not deductible) for tax purposes. Accordingly, only the $7,000 is deductible as alimony. Note that alimony paid on divorce settlements executed after December 31, 2018, is not deductible.

Choices “A” and “D” are incorrect. The property division is considered to be a property settlement and is not considered to be alimony. Accordingly, neither the basis, fair market value, nor realized gain has any effect on the alimony deduction.

Choice “C” is incorrect as it includes the amount deemed to be child support.

188
Q

Perle, a dentist, billed Wood $600 for dental services. Wood paid Perle $200 cash and built a bookcase for Perle’s office in full settlement of the bill. Wood sells comparable bookcases for $350. What amount should Perle include in taxable income as a result of this transaction?

A.	 $600

B.	 $550

C.	 $200

D.	 $0
A

Choice “B” is correct. The $200 cash received plus the $350 fair value of the bookcase received must be included in income by Perle, for a total of $550. The income is based on the value in money or fair value of property received by Perle, not the $600 billed.
Choice “A” is incorrect. The income is based on the total value received by Perle, not the $600 billed.

Choice “C” is incorrect. The $350 fair value of the bookcase received is also income for Perle.
Choice “D” is incorrect. Perle must report taxable income as a result of this transaction.

189
Q

A real estate broker reported the following business income and expenses for the current year:

Commission income $100,000
Expenses:
Auto rentals 2,000
Referral fees to other brokers (legal under state law) 20,000
Referral fees to nonbrokers (illegal under state law) 8,000
Parking fines 200
What amount should be reported as net profit on Schedule C, Profit or Loss from Business?

A.	 $77,800

B.	 $78,000

C.	 $69,800

D.	 $70,000
A

Choice “B” is correct. The taxpayer’s Schedule C net profit is $78,000.

The taxpayer may deduct ordinary and necessary business expenses, which include the auto rentals and referral fees to other brokers that are legal under state law. The illegal referral fees to nonbrokers and parking fines are nondeductible.

Commission income $100,000
Auto rentals (2,000)
Referral fees to other brokers (20,000)
Schedule C net profit $ 78,000
Choice “A” is incorrect. Schedule C net profit of $77,800 deducts the auto rentals, legal referral fees to other brokers, and parking fines. The parking fines are nondeductible.

Choice “C” is incorrect. Schedule C net profit of $69,800 deducts all of the listed expenses. The illegal referral fees to nonbrokers and parking fines are nondeductible.

Choice “D” is incorrect. Schedule C net profit of $70,000 deducts the auto rentals and both the legal and illegal referral fees. The illegal referral fees to nonbrokers are nondeductible.

190
Q

Guaranteed payments made by a partnership to partners for services rendered to the partnership, that are deductible business expenses under the Internal Revenue Code, are:

I.

Deductible expenses on the U.S. Partnership Return of Income, Form 1065, in order to arrive at partnership income (loss).

II.

Included on schedules K-1 to be taxed as ordinary income to the partners.

A.	 Neither I nor II.

B.	 Both I and II.

C.	 II only.

D.	 I only.
A

Choice “B” is correct. Guaranteed payments to partners are deductible on Form 1065 to arrive at partnership ordinary income. On Schedule K-1, guaranteed payments are shown as income and flow through as ordinary income.

Choices “D”, “C”, and “A” are incorrect. Each of these does not address both rules correctly.

191
Q

Which of the following statements is true regarding the net investment income (NII) tax?

A.	 The tax is 2.8 percent of the lesser of (1) the taxpayer’s net investment income; or (2) the excess of modified AGI over a threshold amount.

B.	 The tax is 3.8 percent of the lesser of (1) the taxpayer’s net investment income; or (2) the excess of modified AGI over a threshold amount.

C.	 The tax is 3.8 percent of the greater of (1) the taxpayer’s net investment income; or (2) the excess of modified AGI over a threshold amount.

D.	 The tax is 2.8 percent of the greater of (1) the taxpayer’s net investment income; or (2) the excess of modified AGI over a threshold amount.
A

Choice “B” is correct. The net investment income (NII) tax is 3.8 percent of the lesser of (1) the taxpayer’s net investment income; or (2) the excess of modified AGI over a threshold amount.

Choices “A” and “D” are incorrect. The tax rate is equal to 3.8 percent rather than 2.8 percent.

Choice “C” is incorrect. The tax is levied on the lesser amount rather than the greater amount.

192
Q

During a major sports event, a taxpayer rented his primary residence to spectators for 10 days. The taxpayer’s rental income and expenses were as follows:

Rental income $10,000
Prorated mortgage interest and taxes 1,000
Advertising 500
Commissions 1,000
How much net rental income must the taxpayer report on his income tax return?

A.	 $8,500

B.	 $0

C.	 $7,500

D.	 $10,000
A

Choice “B” is correct. The taxpayer rented his primary residence for less than 15 days during the year, so he is not required to include the rental income on his income tax return, nor is he allowed to deduct the commissions and advertising expenses related to the rental activity. He is still allowed to deduct the mortgage interest and real estate taxes as itemized deductions.

Choice “A” is incorrect. The net income from rental of the taxpayer’s residence, excluding the prorated portion of mortgage interest and real estate taxes, is $8,500. However, the taxpayer is not required to include the rental income on his income tax return because he rented his residence for less than 15 days during the year.

Choice “C” is incorrect. The net income from rental of the taxpayer’s residence, including a prorated portion of mortgage interest and real estate taxes, is $7,500. However, the taxpayer is not required to include the rental income on his income tax return because he rented his residence for less than 15 days during the year.

Choice “D” is incorrect. The taxpayer is not required to include the $10,000 of rental income on his income tax return because he rented his residence for less than 15 days during the year.

193
Q

Carson owned 40% of the outstanding stock of a C corporation. During a tax year, the corporation reported $400,000 in taxable income and distributed a total of $70,000 in cash dividends to its shareholders. Carson accurately reported $28,000 in gross income on Carson’s individual tax return. If the corporation had been an S corporation and the distributions to the owners had been proportionate, how much income would Carson have reported on Carson’s individual return?

A.	 $28,000

B.	 $132,000

C.	 $160,000

D.	 $188,000
A

Choice “C” is correct. In an S corporation, the income is passed through to the shareholder and included in taxable income whether or not it is actually distributed. Therefore, Carson will report 40% of the $400,000 taxable income, or $160,000. The $28,000 distribution will not affect the taxable income, but will reduce Carson’s basis in the S Corporation stock.

Choice “A” is incorrect. This answer is the amount of the taxable dividend received from the C corporation, which is 40 percent of the $70,000 total dividends.

Choice “B” is incorrect. This is the correct answer of $160,000 reduced by the $28,000 distribution. The $28,000 will not reduce taxable income, but will reduce Carson’s basis in the S Corporation stock.

Choice “D” is incorrect. This is the correct answer of $160,000 increased by the $28,000 distribution. The $28,000 will not increase taxable income, but will reduce Carson’s basis in the S Corporation stock.

194
Q

Aston and Becker are equal partners in AB Partnership. In the tax year, the ordinary income of the partnership is $20,000, and the partnership has a long-term capital gain of $12,000. Aston’s basis in AB was $40,000, and he received distributions of $5,000 during the year. What is Aston’s share of AB’s ordinary income?

A.	 $16,000

B.	 $15,000

C.	 $18,500

D.	 $10,000
A

Choice “D” is correct. Aston’s share of ordinary income is $10,000 (50 percent partnership percentage × $20,000 partnership ordinary income).

Choice “A” is incorrect. Ordinary income does not include long-term capital gains.

Choice “B” is incorrect. Ordinary income does not include distributions.

Choice “C” is incorrect. Ordinary income does not include distributions or long-term capital gains.

195
Q

An individual taxpayer’s tax return included the following:

Regular tax before tax credits

$ 5,000

Current year estimated tax payments

6,000

Amount paid with current year extension

1,000

Federal income tax withheld

1,000

What amount, if any, is the taxpayer’s overpayment?

A.	 $1,000

B.	 $0

C.	 $3,000

D.	 $2,000
A

Choice “C” is correct. The total tax payments applied against the $5,000 current year regular tax liability is $8,000, which includes $6,000 current year estimated tax payments, $1,000 current year withholding, and $1,000 paid with current year extension. Overpayment = $5,000 current year tax liability − $8,000 tax payments = $3,000.

Choice “A” is incorrect. The amount of the overpayment is $3,000, not $1,000. All of the tax payments are applied against the current year regular tax liability.

Choice “B” is incorrect. The amount of the overpayment is $3,000, not $0. All of the tax payments are applied against the current year regular tax liability.

Choice “D” is incorrect. The amount of the overpayment is $3,000, not $2,000. All of the tax payments are applied against the current year regular tax liability.

196
Q

A guaranteed payment by a partnership to a partner for services rendered may include an agreement to pay:

I.

A salary of $5,000 monthly without regard to partnership income.

II.

A 25 percent interest in partnership profits.

A.	 Both I and II.

B.	 I only.

C.	 II only.

D.	 Neither I nor II.
A

Choice “B” is correct.

I.

A guaranteed payment is a salary or other payment to a partner that is not calculated with respect to partnership income.
II.

Since the 25 percent interest is calculated with respect to partnership profits, it is not a guaranteed payment.

Choices “C”, “A”, and “D” are incorrect, per the above explanation.

197
Q

Miyasyke Inc., a calendar year S corporation, has 5 equal shareholders at the end of the tax year. Miyasyke had $75,000 of taxable income. Miyasyke made distributions to its shareholders of $32,000 each, for a total of $160,000. Each shareholder’s basis in the S corporation is $100,000 at the beginning of the tax year. What amount from Miyasyke should be included in each shareholder’s gross income?

A.	 $32,000

B.	 $15,000

C.	 $0

D.	 $47,000
A

Choice “B” is correct. Each shareholder reports his/her pro rata share of the S corporation’s taxable income in his or her gross income. The distributions are not taxable to the extent the shareholders’ basis exceeds the distribution (and increased for any income reported by them during the year).

Choices “A” and “D” are incorrect. Choice “A” only includes the distribution, which is not taxable in this case as the shareholder’s basis exceeds the distribution. Choice “D” includes both the shareholder’s pro rata share of the taxable income and the distribution. The distribution is not taxable in this situation.

Choice “C” is incorrect. Each shareholder’s share of taxable income (non-separately stated) is reported in the shareholder’s gross income.

198
Q

The Tiller family has a modified adjusted gross income of $50,000. The Tillers have two children, ages 12 and 13, who qualify as dependents. All of the Tillers’ income is from wages and their tax liability is $1,000 before the child tax credit. What is the amount of the child tax credit on the Tillers’ married filing jointly income tax return for the current year?

A.	 $3,000

B.	 $4,000

C.	 $1,000

D.	 $2,000
A

Choice “B” is correct. The Tillers may claim a child tax credit of $2,000 for each of the children since the children are both under age 17. The credit is partially refundable and is not limited to the amount of their tax liability. The Tillers’ AGI is below the AGI phaseout thresholds so they are entitled to the full child tax credit of $4,000.

Choice “A” is incorrect. They are entitled to the full $2,000 tax credit for both children since their AGI is below the AGI phase-out threshold amounts.

Choice “C” is incorrect. The credit is refundable and therefore not limited to the amount of their tax liability.

Choice “D” is incorrect. They are eligible for the credit for both of the children.

199
Q

An individual taxpayer received a Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc. from a small partnership, in which the taxpayer owns a 50 percent interest. The qualified business income amount attributable to the taxpayer is $70,000. That is the taxpayer’s only qualified business income, and the taxpayer has no capital gains or other investments. Ignoring the W-2 wage and property limitation, what is the net amount of increase to taxable income from the partnership income?

A.	 $70,000

B.	 $56,000

C.	 $14,000

D.	 $0
A

Choice “B” is correct. The taxpayer receives a $14,000 qualified business income deduction, which is 20 percent of the $70,000 qualified business income. The net increase in the taxpayer’s taxable income from the partnership income is $56,000 ($70,000 – $14,000).

Choice “A” is incorrect. The taxpayer’s taxable income is increased by the $70,000 share of partnership income, but it is also decreased by a $14,000 qualified business income deduction ($70,000 × 20%). The net increase in the taxpayer’s taxable income is $56,000 ($70,000 – $14,000).

Choice “C” is incorrect. $14,000 is the amount of the qualified business income deduction ($70,000 × 20%), which decreases the taxpayer’s taxable income. The net increase in the taxpayer’s taxable income from the partnership income is $56,000 ($70,000 – $14,000).

Choice “D” is incorrect. The taxpayer’s taxable income is increased by the $70,000 share of partnership income, and decreased by a $14,000 qualified business income deduction ($70,000 × 20%), for a net increase in taxable income of $56,000.

200
Q

Tom and Sharlene had the following items of income and expense during the taxable year:

Self-Employment Activity

Gross income

$35,000

Business license fees

500

Marketing Expenses

2,000

Salary paid to Sharlene

10,000

Tom’s wages from his Job

67,000

Interest from money market

1,500

Gain from sale of securities owned for 3 months

15,000

What is Tom & Sharlene’s gross income before adjustments?

A.	 $106,000

B.	 $128,500

C.	 $116,000

D.	 $131,500
A

Choice “C” is correct. Tom & Sharlene’s gross income is calculated as follows:

Net self-employment income

32,500

Tom’s wages

67,000

Interest

1,500

Gain from sale

15,000

Total gross Income

116,000

Note: Sharlene’s salary is not included as income as 100% of the net self-employment activity is taxable to her. Her salary is considered a draw and is not an allowable business deduction against the gross income of the self-employment activity.

201
Q

On December 1 of the current taxable year, Krest, a self-employed cash basis taxpayer, borrowed $200,000 to use in her business. The loan was to be repaid on November 30 of the following year. Krest paid the entire interest amount of $24,000 on December 1 of the current year. What amount of interest was deductible on Krest’s current year income tax return (assuming the business interest expense deduction limitation does not apply)?

A.	 $2,000

B.	 $0

C.	 $24,000

D.	 $22,000
A

Choice “A” is correct. Cash basis taxpayers deduct interest in the year paid or the year to which the interest relates, whichever is later. Even though all of the interest on this loan was paid on December 1, of the current year, only the interest relating to December of the current year can be deducted in the current year. The question does not give an interest rate, but because the loan is to be repaid in a lump sum at maturity, 1/12 of the interest, or $2,000 applies to each month.
Choice “B” is incorrect. Because $2,000 of the interest relates to the current year, this amount is deductible in the current year.
Choice “C” is incorrect. Cash basis taxpayers can deduct interest in the year paid or the year to which the interest relates, whichever is later, thus 11 months of the interest will not be deductible until next year.

Choice “D” is incorrect. This is the amount that cannot be deducted until the following year, the year to which the interest relates. Be sure to read questions like this very carefully, because if you had simply misread the question as seeking the amount deductible in the following year, you would get the question wrong despite understanding the rule.

202
Q

Andre Davis is 17 years old and lives at home with his parents. He earned $5,000 in the current tax year mowing lawns. Andre also received $3,000 in interest on a corporate bond that his grandmother gave him. At what marginal tax rate is Andre’s $8,000 of income taxed?

A.	 $8,000 less the standard deduction is taxed at Andre’s marginal rate.

B.	 $8,000 less the standard deduction is taxed at his parents' marginal rate.

C.	 $5,000 less the standard deduction is taxed at Andre’s marginal rate. $3,000 is taxed at his parents' marginal rate.
A

Choice “D” is correct. The net unearned income of a dependent child under 18 years of age (or a child age 18–24 who does not provide over half of his or her own support and is a full-time student) is taxed at the parents’ marginal rate. The net unearned income is calculated by taking the child’s net unearned income (in this case, interest) and subtracting the allowable standard deduction for dependents of $1,300 plus an additional $1,300 taxed at the child’s marginal rate (2024). Andre’s net unearned income is $400 ($3,000 unearned income – $1,300 standard deduction – $1,300 taxed at child’s marginal rate). Therefore, $400 is taxed at his parents’ marginal rate and $7,600 (less Andre’s standard deduction) is taxed at Andre’s marginal tax rate. Note that because Andre has both earned income and unearned income, his standard deduction is the greater of: (1) $1,300; or (2) earned income + $450 ($5,000 + $450 = $5,450).

Choices “B”, “C”, and “A” are incorrect. The “kiddie tax” applies only to unearned income in excess of $2,600, not total income or total earned income, as calculated in the above explanation.

203
Q

A taxpayer reported the following in a tax year:

Salary $122,000
Capital gain dividends 3,700
Partnership short-term capital loss (6,300)
The taxpayer acquired the partnership interest during the year in exchange for a capital contribution of $2,750, and there were no additional items affecting the taxpayer’s basis in the partnership. What is the taxpayer’s adjusted gross income for the year?

A.	 $122,950

B.	 $122,700

C.	 $119,400

D.	 $122,000
A

Choice “A” is correct. The taxpayer’s adjusted gross income (AGI) for the year is $122,950. The short-term capital loss (STCL) from the partnership can only be flowed through for deduction on the partner’s individual income tax return to the extent of the partner’s tax basis in the partnership interest. In this case, the partner’s basis is the amount of his capital contribution of $2,750, so only $2,750 of the STCL is flowed through for deduction on his individual tax return. The remaining $3,550 loss ($6,300 − $2,750) is suspended until the partner’s basis is reinstated in future years.

Individual taxpayers are allowed to deduct up to $3,000 of net capital losses each year, after netting all the capital gains and losses for the year together. The $2,750 STCL from the partnership is offset against the LTCG dividends of $3,700, so the taxpayer has a net LTCG for the year of $950.

Salary $122,000
Capital gain dividends (LTCG) $3,700
STCL from partnership (2,750)
Net LTCG 950
AGI 122,950
Choice “B” is incorrect. AGI of $122,700 includes a $3,000 deduction for the STCL from the partnership ($122,000 + $3,700 − $3,000). The STCL flowed through from the partnership is limited to the taxpayer’s basis in the partnership of $2,750. Even if the STCL flowed through from the partnership was more than $3,000, the $3,000 capital loss deduction is for net capital losses, after netting all capital gains and losses together.

Choice “C” is incorrect. AGI of $119,400 incorrectly deducts all $6,300 of the STCL from the partnership.

Choice “D” is incorrect. AGI of $122,000 only includes the salary, not the capital gain dividends or the STCL from the partnership.

204
Q

Which of the following is an itemized deduction?

A.	 Educator expenses

B.	 Moving expenses for a move due to change in employment

C.	 Qualified charitable contributions of property

D.	 Roof repair due to regular wear and tear
A

Choice “C” is correct. Qualified charitable contributions of property are an itemized deduction subject to AGI limitations.

Choice “A” is incorrect. Educator expenses are an adjustment toward AGI.

Choice “B” is incorrect. Moving expenses are an adjustment allowed in calculating adjusted gross income and are only deductible by members of the armed forces moving pursuant to military order.

Choice “D” is incorrect. Regular maintenance is not an itemized deduction. In addition, if the repair was due to a casualty loss, it would only be deductible as an itemized deduction if attributable to a federal disaster.

205
Q

In Year 1, Kane’s residence had an adjusted basis of $250,000 and it was destroyed by a tornado. The residence was located in a federally declared disaster area. An appraiser valued the decline in market value at $425,000. Later that same year, Kane received $200,000 from his insurance company for the property loss and did not elect to deduct the casualty loss in an earlier year. Kane’s Year 1 adjusted gross income was $100,000 and he did not have any casualty gains.

What total amount can Kane deduct as a Year 1 itemized deduction for casualty loss, after the application of the threshold limitations?

A.	 $49,900

B.	 $50,000

C.	 $39,900

D.	 $40,000
A

Choice “C” is correct. The starting point is the lesser of adjusted basis or decrease in FMV. Here, that is the $250,000 adjusted basis. The computation is then as follows:

Smaller loss

250,000

Insurance recovery

(200,000)

Taxpayer’s loss

50,000

Less $100

(100)

Eligible loss

49,900

10% AGI limitation

(10,000)

Deductible loss

39,900

Choices “D”, “A”, and “B” are incorrect, per the above explanation.

206
Q

Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for Year 13. During Year 13, Taylor donated land to a church and made no other contributions. Taylor purchased the land in Year 1 as an investment for $14,000. The land’s fair market value was $25,000 on the day of the donation. What is the maximum amount of charitable contribution that Taylor may deduct as an itemized deduction for the land donation for Year 13?

A.	 $11,000

B.	 $14,000

C.	 $0

D.	 $25,000
A

Choice “D” is correct. Appreciated property held longer than one year is considered capital gain property. The fair market value of capital gain property is deductible as a charitable contribution. Capital gain property given to a public charity, such as a church, is limited to 30% of AGI. Therefore, Taylor’s gift would be limited to $27,000 (30% of $90,000). The FMV of $25,000 is under the AGI limitation and is the allowed itemized deduction.
Choice “A” is incorrect. The $11,000 is the difference between the $25,000 fair market value of the land and the $14,000 original cost. It is thus the appreciation of the land before the date of donation. The appreciation of appreciated property is not the amount of the charitable contribution deduction.
Choice “B” is incorrect. The $14,000 is the original cost of the asset. The maximum deduction for appreciated property is the fair market value of the property, not the original cost.
Choice “C” is incorrect. Taylor has income in Year 13 of $90,000; therefore, at least a portion of a deduction for the land can be deducted, even if the fair market value of the land exceeded the defined limits for the year.

207
Q

Jefferson’s investment income consisted of $2,000 in interest from a U.S. Treasury bond and $1,000 interest from a municipal bond. Jefferson also paid $4,000 in investment interest expense. Assuming that Jefferson itemizes, what amount can Jefferson deduct for investment interest expense?

A.	 $3,000

B.	 $4,000

C.	 $1,000

D.	 $2,000
A

Choice “D” is correct. The itemized deduction for investment interest expense is limited to net taxable investment income. The $1,000 interest from a municipal bond is nontaxable. The taxpayer’s taxable investment income consists of the $2,000 taxable interest from a U.S. Treasury bond. Therefore the taxpayer’s investment interest expense deduction is limited to $2,000.

Choice “A” is incorrect. The taxpayer’s investment interest expense deduction is limited to the taxable investment income of $2,000, not the total investment income of $3,000.

Choice “B” is incorrect. The taxpayer can deduct only $2,000 of the $4,000 investment interest expense. The investment interest expense deduction is limited to the taxable investment income of $2,000.

Choice “C” is incorrect. The taxpayer’s investment interest expense deduction is limited to the taxable investment income of $2,000, not the nontaxable municipal bond interest income of $1,000.

208
Q

Jeffrey, a single taxpayer, had $55,000 in adjusted gross income for the current year. During the current year he contributed $19,500 to his church. He had a $5,000 charitable contribution carryover from his prior year church contribution. What was the maximum amount of properly substantiated charitable contributions that Jeffrey could report as an itemized deduction for the current year?

A.	 24,500

B.	 5,000

C.	 27,500

D.	 19,500
A

Choice “A” is correct. The deduction for cash contributions to a public charity, such as a church, is limited to 60 percent of AGI. Jeffrey’s AGI limit for the current year would be $55,000 × 60% = $33,000. The current year contributions of $19,500 plus the charitable contributions carryover from the previous year of $5,000 = $24,500. The total of $24,500 is less than the $33,000 AGI limit, so the deduction is not limited.

Choice “B” is incorrect. Jeffrey is not limited to only his carryover contributions.

Choice “C” is incorrect. This is the maximum allowed using a 50 percent of AGI limitation ($55,000 × 50% = $27,500). However, 50 percent is the limitation for ordinary income property contributions, not cash contributions, which use a 60 percent of AGI limitation. This answer choice is also above the amount of the actual deductions and Jeffrey cannot deduct more than he actually contributed.

Choice “D” is incorrect. Jeffrey is able to deduct his carryover contributions from the prior year as well.

209
Q

An individual’s losses on transactions entered into for personal purposes are deductible only if:

A.	 The losses can be characterized as hobby losses.

B.	 The losses qualify as casualty or theft losses.

C.	 The losses do not exceed $3,000 ($6,000 on a joint return).

D.	 No part of the transactions was entered into for profit.
A

Choice “B” is correct. An individual’s losses on transactions entered into for personal purposes are deductible only if the losses qualify as casualty or theft losses. Casualty and theft losses are limited to nationally declared disaster areas. In addition, the individual must itemize deductions and the loss must exceed 10 percent of AGI plus $100 per casualty.
Choice “A” is incorrect. If the losses can be characterized as hobby losses, none of the loss is deductible.
Choice “C” is incorrect. Losses entered into for personal purposes other than casualty losses are not deductible in any amount.
Choice “D” is incorrect. If no part of the transaction was entered into for profit, none of the related loss is deductible.

210
Q

The Stevensons are filing married filing jointly, and their adjusted gross income was $58,250. Additional information is as follows:

Interest paid on their home mortgage

5,200

State taxes paid

2,000

Medical expenses in excess of AGI floor

1,500

Deductible contributions to IRAs

4,000

Alimony paid to Mr. Stevenson’s first wife (divorce finalized in 2015)

5,000

Child support paid for Mr. Stevenson’s daughter

5,100

What amount may the Stevensons claim as itemized deductions on their Schedule A?

A.	 $13,800

B.	 $8,700

C.	 $12,300

D.	 $7,200
A

Choice “B” is correct. Interest on a home mortgage, state taxes paid, and medical expenses in excess of the AGI floor are itemized deductions reported on Schedule A. Contributions to IRAs and alimony paid on a divorce executed prior to 2019 are adjustments to gross income to arrive at AGI. Child support is neither an adjustment nor an itemized deduction.

Home mortgage interest

5,200

State taxes paid

2,000

Medical expenses

1,500

Total itemized deductions

8,700

Choice “A” is incorrect. This is the total of all items listed, three of which (the IRA contributions, alimony, and child support) should not be included.

Choice “C” is incorrect. This answer includes the interest, state taxes paid, and the child support. It does not include the medical expenses (as is proper) and should not include the child support.

Choice “D” is incorrect. This answer includes only the interest paid on the mortgage and the state taxes. The medical expenses in excess of the AGI floor are also deductible on Schedule A.

211
Q

An individual taxpayer earned $10,000 in investment income, $8,000 in noninterest investment expenses, and $5,000 in investment interest expense. How much is the taxpayer allowed to deduct on the current-year’s tax return for investment interest expenses?

A.	 $5,000

B.	 $2,000

C.	 $0

D.	 $3,000
A

Choice “A” is correct. The deduction for investment interest expense is limited to net taxable investment income. The noninterest investment expenses are not deductible; therefore, net investment income is equal to $10,000. All $5,000 of the investment interest expense is deductible because it is less than $10,000.

Taxable investment income includes: (i) interest and dividends (if taxed at ordinary income tax rates), (ii) rents (if the activity is not a passive activity), (iii) royalties (in excess of related expenses), (iv) net short-term capital gains, and (v) net long-term capital gains if the taxpayer elects not to claim the net capital gains reduced tax rate.

Choices “C”, “B”, and “D” are incorrect per the above explanation.

212
Q

Which of the following requirements must be met in order for a single individual to qualify for the additional standard deduction?

Must Support
Dependent Child
or Aged Parent Must Be Age 65
or Older or Blind
A.
No

No

B.	 No

Yes

C.	 Yes

No

D.	 Yes

Yes

A

Choice “B” is correct. In order to qualify for the additional standard deduction, an individual must be age 65 or older or blind by the end of the tax year. He or she does not have to support a dependent child or aged parent.

213
Q

The Browns borrowed $20,000, secured by their home, to pay their son’s college tuition. At the time of the loan, the fair market value of their home was $400,000, and it was unencumbered by other debt. The interest on the loan qualifies as:

A.	 Deductible personal interest.

B.	 Deductible qualified residence interest.

C.	 Nondeductible interest.

D.	 Investment interest expense.
A

Choice “C” is correct. Interest paid on debt not used to acquire or substantially improve a home is not deductible. This is true even if the debt is secured by a home.

Choice “A” is incorrect. Personal interest is not deductible. It is also called consumer interest.
Choice “B” is incorrect. Interest paid on debt secured by a home mortgage is not deductible if not used to acquire or substantially improve the home.

Choice “D” is incorrect. Interest paid on a debt secured by a home mortgage is not classified as investment interest.

214
Q

Bob and Nancy Goldberg are both age 67 and file a joint return. For the current year, the regular standard deduction for a couple married filing jointly is $29,200. What is the maximum standard deduction available to Bob and Nancy?

A.	 $32,300

B.	 $31,150

C.	 $30,750

D.	 $29,200
A

Choice “A” is correct. Because both Bob and Nancy are 65 or older, they are entitled to the additional standard deduction of $1,550 (2024) each in addition to the regular amount.

$29,200 + $1,550 + $1,550 = $32,300
Choice “B” is incorrect. This answer choice is the standard deduction of $29,200 plus an additional standard deduction of $1,950, which is the amount for one single taxpayer age 65 or older. Bob and Nancy are taxpayers who are married filing jointly and are entitled to two additional standard deductions of $1,550 each since they are both age 65 or older.

Choice “C” is incorrect. This answer choice is the standard deduction of $29,200 plus only one additional standard deduction of $1,550. Bob and Nancy are entitled to two additional standard deductions since they are both age 65 or older.

Choice “D” is incorrect. This answer choice is the regular standard deduction amount for married filing jointly taxpayers and does not include any additional standard deductions. Bob and Nancy are entitled to two additional standard deductions since they are both age 65 or older.

215
Q

Mary, an unmarried taxpayer, made the following charitable contributions during the current year:

A cash contribution to a church $2,000
A donation to a hospital’s thrift shop of furniture purchased two years ago for $2,000, with a fair market value of 500
A donation to a state university of publicly traded stock purchased by Mary for $3,000 four months ago, with a fair market value of 4,000
Assuming that Mary’s adjusted gross income was $50,000, what amount can Mary claim as a charitable contribution deduction?

A.	 $6,500

B.	 $6,000

C.	 $5,000

D.	 $5,500
A

Choice “D” is correct. Mary can claim $5,500 as a charitable contribution deduction.

Cash to church $2,000
Used furniture to thrift shop (FMV) 500
Publicly traded stock (cost basis) 3,000
$5,500
The used furniture donated to a thrift shop is ordinary income property because it is a personal use asset that has depreciated in value. The publicly traded stock is also ordinary income property because the stock was held for less than one year. The amount of the deduction for ordinary income property is the lesser of the property’s adjusted basis or its fair market value (FMV) at the time it is contributed.

All of the contributions were made to public charities, so the AGI limitations are 60 percent for the cash contribution and 50 percent for the ordinary income property contributions. The AGI limitations are $30,000 ($50,000 AGI × 60%) for the cash contribution and $25,000 ($50,000 × 50%) for the property contributions. The amount of the contributions are well below the AGI limitation amounts, so the charitable contribution deduction is not limited.

Choice “A” is incorrect. The $6,500 amount uses the $4,000 FMV for the publicly traded stock, rather than the lower $3,000 cost basis.

Choice “B” is incorrect. The $6,000 amount uses the $4,000 FMV for the publicly traded stock, rather than the lower $3,000 cost basis, and does not include the FMV of the used furniture.

Choice “C” is incorrect. The $5,000 amount does not include the FMV of the used furniture contributed to the hospital’s thrift store.

216
Q

Wilson, CPA, uses a commercial tax software package to prepare clients’ individual income tax returns. Upon reviewing a client’s computer-generated year 1 itemized deductions, Wilson discovers that the schedule’s deductible investment interest expense is less than the amount paid by the taxpayer and the amount that Wilson entered into the computer. After analyzing the entire tax return, Wilson determines that the computer-generated investment interest expense deduction is correct. Why is the computer-generated investment interest expense deduction correct?

I.

The client’s investment interest expense exceeds net investment income.

II.

The client’s qualified residence interest expense reduces the deductible amount of investment interest expense.

A.	 Neither I nor II.

B.	 Both I and II.

C.	 I only.

D.	 II only.
A

Choice “C” is correct. The computer-generated investment interest expense deduction will be limited to the net investment income of the taxpayer. Any excess amount will be carried forward indefinitely. For example, assume the taxpayer had $5,000 of investment interest for a year but had investment income of only $3,000. The tax preparer would enter the $5,000 paid as investment interest, and the computer would then allow only a $3,000 deduction for investment interest in the year. The remaining $2,000 of expense would be carried forward indefinitely to be applied to investment income in future years. Qualified residence interest is not investment interest and would not affect investment interest income in any manner.
Choices “D”, “B”, and “A” are incorrect, per the above discussion.

217
Q

Charitable contributions subject to the 60-percent limit that are not fully deductible in the year made may be:

A.	 Carried back two years or carried forward twenty years.

B.	 Neither carried back nor carried forward.

C.	 Carried forward indefinitely until fully deducted.

D.	 Carried forward five years.
A

Choice “D” is correct. Charitable contributions subject to the 60 percent limit that are not fully deductible in the year made may be carried forward five years.
Choice “A” is incorrect. Charitable contributions are never carried back.
Choice “B” is incorrect. Charitable contributions subject to the 60 percent limit that are not fully deductible in the year made may be carried forward.
Choice “C” is incorrect. Individual capital losses, not charitable contributions, are carried forward indefinitely until used up (or taxpayer’s death).

218
Q

Jimet, an unmarried taxpayer, qualified to itemize deductions. Jimet’s adjusted gross income was $30,000 and he made a $2,000 cash donation directly to a needy family. During the year, Jimet also donated stock, valued at $3,000, to his church. Jimet had purchased the stock four months earlier for $1,500. What was the maximum amount of the charitable contribution allowable as an itemized deduction of Jimet’s current year income tax return?

A.	 $2,000

B.	 $1,500

C.	 $5,000

D.	 $0
A

Choice “B” is correct. $1,500. The stock is ordinary income property because it was held for one year or less, so the amount of the deduction for the stock is the lesser of the adjusted basis ($1,500) or the fair market value at the time it was contributed ($3,000), which is $1,500.

The contribution of ordinary income property to public charities is limited to 50% of AGI ($30,000 AGI × 50% = $15,000). The $1,500 deduction is less than the $15,000 AGI limitation, so the deduction is not limited.

The $2,000 cash donation to a needy family is not deductible because the contribution was not made to a qualifying charity.

219
Q

Carroll, a 35-year-old unmarried taxpayer with an adjusted gross income of $100,000, incurred and paid the following unreimbursed medical expenses:

Doctor bills resulting from a serious fall

5,000

Cosmetic surgery that was necessary to correct a congenital deformity

15,000

Carroll had no medical insurance. For regular income tax purposes, what was Carroll’s maximum allowable medical expense deduction, after the applicable threshold limitation, for the year?

A.	 $12,500

B.	 $0

C.	 $15,000

D.	 $20,000
A

Choice “A” is correct. Both medical expenses are deductible. The cosmetic surgery is not elective, because it was necessary to correct a congenital deformity.

Doctor bills

5,000

Surgery

15,000

20,000

AGI floor ($100,000 × 7.5%)

(7,500)
Deduction

$12,500
Choices “B”, “C”, and “D” are incorrect, per the computation above.

220
Q

Jim had gambling losses totaling $2,500 for the year. He is including a lottery prize of $5,000 in his gross income this year. The gambling losses are:

A.	 A deduction to arrive at adjusted gross income.

B.	 A deduction from adjusted gross income, subject to a 2% AGI Floor.

C.	 A deduction from adjusted gross income.

D.	 Not deductible.
A

Choice “C” is correct. Gambling losses are deductible as a miscellaneous itemized deduction (from AGI) limited to gambling winnings.
Choices “A”, “B”, or “D” are incorrect, per the above explanation.

221
Q

The deduction by an individual taxpayer for interest on investment indebtedness is:

A.	 Limited to the taxpayer's interest income for the year.

B.	 Limited to the investment interest paid during the year.

C.	 Limited to the taxpayer's net investment income for the year.

D.	 Not limited.
A

Choice “C” is correct. The deduction for interest expense on investment indebtedness is limited to net investment income (investment income less investment expenses).

Choices “B”, “A”, and “D” are incorrect, per explanation above.

222
Q

Smith, a single individual, made the following charitable contributions during the current year. Smith’s adjusted gross income is $60,000.

Cash donation to Smith’s church

$5,000

Art work donated to the local art museum

(Purchased four months ago for $2,000, currently appraised for $3,000)

3,000

Cash contribution to a needy family

1,000

What amount should Smith deduct as a charitable contribution if Smith itemizes deductions?

A.	 $9,000

B.	 $8,000

C.	 $7,000

D.	 $5,000
A

Choice “C” is correct. This question requires the candidate to determine which items are deductible charitable contributions. The $5,000 cash donation to the church is allowable. The amount of the deduction for the artwork donated to the local art museum is $2,000. The artwork is ordinary income property because it was held for one year or less. The amount of the deduction for ordinary income property is the lesser of the property’s adjusted basis ($2,000) or its FMV at the time it is contributed ($3,000), which is $2,000.The contribution to a needy family is not a deductible contribution, as it was not made to a qualifying charitable organization.

Choice “A” is incorrect. This choice includes all three contributions. It erroneously includes the artwork at its fair market value as well as including the donation to the needy family, which is not a deductible donation.

Choice “B” is incorrect. This choice erroneously includes the donation of the artwork at its fair market value.

Choice “D” is incorrect. This choice excludes the donation of the artwork to the art museum.

223
Q

Stein, an unmarried taxpayer, had adjusted gross income of $80,000 for the year, and qualified to itemize deductions. Stein had no charitable contribution carryovers and only made one contribution during the year. Stein donated stock, purchased seven years earlier for $17,000, to a tax-exempt educational organization. The stock was valued at $25,000 when it was contributed. What is the amount of charitable contributions deductible on Stein’s current year income tax return?

A.	 $24,000

B.	 $17,000

C.	 $21,000

D.	 $25,000
A

Choice “A” is correct. Stein may deduct $24,000 on Stein’s current year income tax return.

The taxpayer can deduct long-term (i.e., held longer than 12 months) capital gain property at the higher fair market value (higher than cost basis) without paying capital gains tax on the appreciated portion. This deduction is limited to 30 percent of adjusted gross income (AGI). A five-year carryforward period applies.

Fair market value of appreciated long-term stock

25,000

Less:

Limitation

AGI

80,000

Times 30%

× 0.30

Deduction limit

(24,000)

Carryforward

1,000

224
Q

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Burgs during the year:

Repair and maintenance of motorized wheelchair for physically handicapped dependent child

300

Tuition, meals, and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care

4,000

State income tax

1,200

Self-employment tax

7,650

Four tickets to a theatre party sponsored by a qualified charitable organization; not considered a business expense; similar tickets would cost $25 each at the box office

160

Repair of glass vase accidentally broken in home by dog; vase cost $500 5 years ago; fair value $600 before accident and $200 after accident

90

Fee for breaking lease on prior apartment residence located 20 miles from new residence

500

Security deposit placed on apartment at new location

900

What amount should the Burgs deduct for gifts to charity in their itemized deductions on Schedule A for the current year?

A.	 $100

B.	 $160

C.	 $60

D.	 $0
A

Choice “C” is correct. The taxpayer may only deduct the excess contribution over the consideration received. $160 contribution – $100 value of tickets = $60.

Payment to qualified charity

160

Fair value of 4 tickets at $25

(100)

Charitable contribution

60

Choice “A” is incorrect. This amount is the value of the tickets received. The taxpayer may deduct the excess of the contribution made over the value of the tickets.

Choice “B” is incorrect. The taxpayer may only deduct the excess of the contribution made over the value of the tickets received, not the full amount of the contribution.

Choice “D” is incorrect. The taxpayer may deduct the excess of the contribution over the value of the tickets received.

225
Q

During the current year, Wood’s residence had an adjusted basis of $150,000 and it was destroyed by a tornado. The location was a federally declared disaster area. An appraiser valued the decline in market value at $175,000. Later in the current year, Wood received $130,000 from his insurance company for the property loss and did not elect to deduct the casualty loss in an earlier year. Wood’s current year adjusted gross income was $60,000 and he did not have any casualty gains.

What total amount can Wood deduct as a current year itemized deduction for casualty loss, after the application of the threshold limitations?

A.	 $13,900

B.	 $25,000

C.	 $19,900

D.	 $20,000
A

Choice “A” is correct. Casualty losses are deductible as an itemized deduction if located in a presidentially declared disaster area. Casualty losses are generally computed as the decline in fair market value, except that the fair market value is limited to the property’s basis, here $150,000. Casualty losses are reduced by the amount of any insurance recovery, reducing this loss to $20,000. Next, each individual loss is reduced by $100, bringing this loss to $19,900. Finally, the remaining total amount of all casualty losses (here there is only one) are deductible only to the extent that the amount exceeds 10% of AGI, or $6,000 here. ($150,000 - $130,000 = $20,000; $20,000 - $100 - $6,000 = $13,900.)
Choice “B” is incorrect. This is the market value decline minus the adjusted basis.
Choice “C” is incorrect. In addition to the $100 per loss nondeductible portion of each separate casualty loss, there is an overall limitation that the remaining total amount of all casualty losses is deductible only to the extent that it exceeds 10% of AGI.

Choice “D” is incorrect. This is the adjusted basis minus the insurance reimbursement, without any limitations being applied.

226
Q

An individual taxpayer reports the following information:

U.S. Treasury bond income

$100

Municipal bond income

$200

Rental income from apartment building

$500

Investment interest expense

$1,000

What amount of investment interest can the taxpayer deduct in the current year?

A.	 $800

B.	 $300

C.	 $1,000

D.	 $100
A

Choice “D” is correct. Investment interest expense deduction is an itemized deduction limited to net investment income. Taxable interest is included in net investment income. Rental income and tax exempt interest are not. Therefore, the limitation is the $100 U.S. Treasury bond interest.

Choice “A” is incorrect. $800 incorrectly includes the tax-exempt municipal bond interest and the rental income.

Choice “B” is incorrect. $300 incorrectly includes the tax-exempt municipal bond interest.

Choice “C” is incorrect. $1,000 would be correct if all of the interest qualified for deduction without limitation.

227
Q

Tom and Sally White, married and filing joint income tax returns, derive their entire income from the operation of their retail stationery shop. Their current year adjusted gross income was $100,000, and the Whites itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Whites during the year:

Repair and maintenance of motorized wheelchair for physically handicapped dependent child

600

Tuition, meals, and lodging at special school for physically handicapped dependent child in
an institution primarily for the availability of medical care, with meals and lodging furnished
as necessary incidents to that care

8,000

Without regard to the adjusted gross income percentage threshold, what amount may the Whites claim in their current year return as qualifying medical expenses?

A.	 $600

B.	 $8,600

C.	 $0

D.	 $8,000
A

Choice “B” is correct. Repair and maintenance of medical devices for a disabled dependent child ($600) are deductible medical expenses. The cost of a special school for a handicapped person in an institution primarily for the availability of medical care, when the meals and lodging are merely incident to that care ($8,000) is also a deductible medical expense.

Choice “A” is incorrect. The cost of a special school for a handicapped person in an institution primarily for the availability of medical care, when the meals and lodging are merely incident to that care is a deductible medical expense.

Choice “C” is incorrect. Repair and maintenance of medical devices for a disabled dependent child are deductible medical expenses. The cost of a special school for a handicapped person in an institution primarily for the availability of medical care, when the meals and lodging are merely incident to that care is also a deductible medical expense.

Choice “D” is incorrect. Repair and maintenance of medical devices for a disabled dependent child are deductible medical expenses.

228
Q

During the year, the Andradis, who were both under age 65, paid the following expenses:

Unreimbursed costs for prescription drugs required for their dependent daughter’s medical condition

$1,300

Mrs. Andradi’s face lift (to improve personal appearance)

$4,000

Physical therapy for their dependent son’s soccer injury

$3,000

Massage therapy fees at Mr. Andradi’s health club obtained because he enjoys massages

$500

The Andradis’ adjusted gross income for the current year was $65,000, and the current year percentage of adjusted gross income floor is 7.5 percent. What amount could be claimed on the Andradis’ current year tax return for medical expenses?

A.	 $0

B.	 $1,300

C.	 $4,875

D.	 $4,300
A

Choice “A” is correct. Deductible medical expenses are limited to the amount that exceeds 7.5 percent of the taxpayer’s adjusted gross income (AGI). Deductible medical expenses are those expenses that are “necessary” (such as doctors, prescriptions, required surgery, etc.). Nondeductible expenses are such things as elective surgeries, health club memberships, and unnecessary medical expenditures. The Andradis’ AGI is $65,000; 7.5 percent of that is $4,875. Qualified medical expenses are $1,300 for their daughter’s prescriptions and $3,000 for physical therapy for their son. Total allowable gross expenditures of $4,300 are less than the AGI floor of $4,875. So the answer is zero.

Choice “B” is incorrect. The son’s physical therapy is also a deductible expenditure, and the $1,300 does not take into account the 7.5 percent of AGI floor.

Choice “C” is incorrect. This answer is the 7.5 percent of AGI floor, which should then be compared with the qualified expenses in order to figure the amount to be deducted on Schedule A.

Choice “D” is incorrect. This answer is the total deductible medical expenses; however, the answer does not take into account the 7.5 percent of AGI floor.

229
Q

Smith, a single taxpayer who itemizes deductions, paid the following unreimbursed medical expenses:

Dentist and eye doctor fees

$5,000
Contact lenses

$500

Facial cosmetic surgery to improve Smith’s personal appearance (surgery is unrelated to personal injury or congenital deformity)

$10,000

Premium on disability insurance policy to pay him if he is injured and unable to work

$2,000

What is the total amount of Smith’s tax-deductible medical expenses before the adjusted gross income limitation?

A.	 $17,500

B.	 $5,500

C.	 $15,500

D.	 $7,500
A

Choice “B” is correct. The doctor fees ($5,000) and the contact lenses ($500) are deductible medical expenses. The surgery is not deductible because elective cosmetic surgery is not done to improve or maintain health. Premiums on disabilities policies are not deductible since payments under the policy are made to replace lost income, not to pay for medical expenses.

Choice “A” is incorrect. The surgery is not deductible because elective cosmetic surgery is not done to improve or maintain health. Premiums on disabilities policies are not deductible since payments under the policy are made to replace lost income, not to pay for medical expenses.

Choice “C” is incorrect. The surgery is not deductible because elective cosmetic surgery is not done to improve or maintain health.

Choice “D” is incorrect. Premiums on disabilities policies are not deductible since payments under the policy are made to replace lost income, not to pay for medical expenses.

230
Q

Upon the recommendation of a physician, Mark, age 40, has an air filtration system installed in his personal residence. He suffers from severe allergy problems. In connection with this matter, Mark incurs and pays the following amounts during the current year:

Filtration system and cost of installation

7,000

Increase in utility bills due to the system

700

Cost of certified appraisal

350

The system has an estimated useful life of five years. The appraisal was to determine the value of Mark’s residence with and without the system. The appraisal states that the system increased the value of Mark’s residence by $1,000. Expenses qualifying for the medical deduction in the current year total:

A.	 $6,700

B.	 $7,700

C.	 $8,050

D.	 $7,350
A

Choice “A” is correct. The cost of a home improvement is an allowable itemized medical deduction to the extent it exceeds any increase in the fair market value of the home (subject to the allowed percentage of AGI floor).

The cost of the filtration system less the increase in the home value of $1,000 is permitted ($7,000 less $1,000), plus the $700 increase in the utility bills is allowable as an itemized medical deduction (subject to the allowed percentage of AGI floor). The cost of the appraisal is not deductible as a medical expense.

7,000

(1,000)

700

6,700

Choice “B” is incorrect. This choice includes the entire cost of the filtration system and the increase in the utility bills and disregards the reduction for increase in the home value.

Choice “C” is incorrect. This choice includes the filtration system, increase in utility bills and the appraisal but does not consider the reduction for the increase in the value of the home.

Choice “D” is incorrect. This choice includes deducting the filtration system and the appraisal and disregards the reduction for the increase in the home value and the utility bills.

231
Q

Spencer, who itemizes deductions, had adjusted gross income of $60,000 for the current year. The following additional information is available for the year:

Cash contribution to church

$ 4,000

Purchase of art object at church bazaar (with a fair market value of $800 on the date of purchase)

1,200

Donation of used clothing to Salvation Army (fair value evidenced by receipt received)

600

What is the maximum amount Spencer can claim as an itemized deduction for charitable contributions in the current year?

A.	 $5,200

B.	 $5,000

C.	 $4,400

D.	 $5,400
A

Choice “B” is correct. The $4,000 cash contribution to the church is deductible. Relative to the purchase of the art object at the church bazaar, only the excess paid over fair market value ($1,200 - $800 = $400) is deductible. The used clothing donation to the Salvation Army is deductible at its fair market value of $600. The total deduction is $5,000 ($4,000 + $400 + $600). The contributions are also well below the appropriate thresholds of 60 percent for the $4,400 cash contributions and 50 percent for the $600 donation of used clothing (ordinary income property).

Choice “A” is incorrect. The used clothing donated to the Salvation Army is deductible at its $600 fair market value. In addition, the deduction for the purchase of the art object is only the $400 excess paid over fair market value, not the $1,200 paid.

Choice “C” is incorrect. The used clothing donated to the Salvation Army is deductible at its $600 fair market value.

Choice “D” is incorrect. The deduction for the purchase of the art object is not its fair market value of $800, but the $400 excess paid over its fair market value.

232
Q

Wells paid the following expenses during the year:

Premiums on an insurance policy against loss of earnings due to sickness or accident

3,000

Physical therapy after spinal surgery

2,000

Premium on an insurance policy that covers reimbursement for the cost of prescription drugs

500

In the current year, Wells recovered $1,500 of the $2,000 that she paid for physical therapy through insurance reimbursement from a group medical policy paid for by her employer. Disregarding the adjusted gross income percentage threshold, what amount could be claimed on Wells’ current year income tax return for medical expenses before the adjusted gross income limitation?

A.	 $1,000

B.	 $4,000

C.	 $3,500

D.	 $500
A

Choice “A” is correct. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care. Prescription drugs are considered medical care. Insurance against loss of income is not payment for medical care and therefore is not deductible. Qualified medical expenses must be reduced by insurance reimbursement ($2,000 + $500 - $1,500 = $1,000).
Choice “B” is incorrect. Insurance against loss of income is not payment for medical care and therefore is not deductible.
Choice “C” is incorrect. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care.
Choice “D” is incorrect. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care.

233
Q

Which one of the following expenditures qualifies as a deductible medical expense for tax purposes?

A.	 Vitamins for general health not prescribed by a physician.

B.	 Health club dues.

C.	 Transportation to physician's office for required medical care.

D.	 Mandatory Social Security taxes for basic coverage under Medicare Part A.
A

Choice “C” is correct. Transportation to a physician’s office for required medical care is a deductible medical expense for tax purposes.
Choice “A” is incorrect. Vitamins are not deductible.
Choice “B” is incorrect. Health club dues paid on a membership for general health care are not deductible. In order for the dues to be deductible, the membership would need to be recommended by a physician for a specific illness.
Choice “D” is incorrect. Premiums paid for insurance are deductible as medical expenses, including Medicare Part B premium payments. However, Social Security taxes that entitle a taxpayer to basic Medicare Part A coverage do not qualify as deductible medical insurance premiums.

234
Q

In the current year, Joan Frazer’s residence was totally destroyed by a hurricane. It was located in a federally declared disaster area. The property had an adjusted basis and a fair market value of $130,000 before the hurricane. During the year, Frazer received insurance reimbursement of $120,000 for the destruction of her home. Frazer’s current year adjusted gross income was $70,000. Frazer had no casualty gains during the year. What amount of the loss was Frazer entitled to claim as an itemized deduction on her current year tax return?

A.	 $8,600

B.	 $8,500

C.	 $2,900

D.	 $10,000
A

Choice “C” is correct. The casualty loss is measured by the difference in the property’s value before ($130,000) and after (zero) the casualty, in other words, $130,000. The loss may not exceed the adjusted basis of the property. The casualty loss must be reduced by the $120,000 insurance recovery to $10,000. This loss is reduced by $100 per casualty to $9,900. The sum of all such casualty losses (there is only one in this case) is further reduced by 10% of the taxpayer’s adjusted gross income for the year. That is 10% x $70,000 = $7,000. The amount of the casualty loss that is deductible on Frazer’s tax return is $9,900 - $7,000 = $2,900.

235
Q

Doyle has gambling losses totaling $7,000 during the current year. Doyle’s adjusted gross income is $60,000, including $3,000 in gambling winnings. Doyle can itemize the deductions. What amount of gambling losses is deductible?

A.	 $3,000

B.	 $7,000

C.	 $5,800

D.	 $0
A

Choice “A” is correct. Gambling losses are miscellaneous itemized deductions. The deduction for gambling losses are, however, limited to gambling winnings.
Choice “B” is incorrect. The deduction for gambling losses cannot exceed gambling winnings.

Choice “C” is incorrect. Gambling losses are deductible to the extent of gambling winnings.
Choice “D” is incorrect. Gambling losses are deductible up to gambling winnings.

236
Q

Jackson owns two residences. The second residence, which has never been used for rental purposes, is the only residence that is subject to a mortgage. The following expenses were incurred for the second residence in the current year:

Mortgage interest

$5,000

Utilities

$1,200

Hazard insurance

$6,000

For regular income tax purposes, what is the maximum amount allowable as a deduction for Jackson’s second residence in the current year?

A.	 $5,000 as an itemized deduction.

B.	 $6,200 in determining adjusted gross income.

C.	 $11,000 in determining adjusted gross income.

D.	 $12,200 as an itemized deduction.
A

Choice “A” is correct. For a personal residence that is not used for rental purposes, no deduction is allowed for utilities costs or insurance, thus the only deductible amount here is for the mortgage interest. Note that property taxes (not present in this problem) are deductible. In this problem we are not told whether the interest relates to acquisition indebtedness or home equity indebtedness. If it is home equity indebtedness, the proceeds of the loan must be used to substantially improve the home and are subject to an overall loan amount of $750,000 including any acquisition indebtedness.
Choice “B” is incorrect. The utilities cost is not deductible; furthermore, the deduction for personal residence interest is an itemized deduction.
Choice “C” is incorrect. The insurance cost is not deductible; furthermore, the deduction for personal residence interest is an itemized deduction.
Choice “D” is incorrect. For a personal residence, neither insurance costs nor utilities costs are deductible.

237
Q

Moore, a single taxpayer, had $50,000 in adjusted gross income for the year. During the year she contributed $18,000 to her church. She had a $10,000 charitable contribution carryover from her prior year church contribution. What was the maximum amount of properly substantiated charitable contributions that Moore could claim as an itemized deduction for the current year?

A.	 $25,000

B.	 $10,000

C.	 $18,000

D.	 $28,000
A

Choice “D” is correct. The deduction for cash contributions to a public charity is limited to 60 percent of AGI. Moore’s contribution limit for the current year is 60% × $50,000 = $30,000. The current year contributions of $18,000 plus the charitable contributions carryover from the previous year of $10,000 = $28,000. The total of $28,000 is less than the $30,000 AGI limit, so the deduction is not limited.

Choice “A” is incorrect per the explanation above.

Choice “B” is incorrect. Moore’s deduction is not limited to her prior year charitable contribution carryover.

Choice “C” is incorrect. Moore’s deduction is not limited to her current year charitable contributions.

238
Q

Which of the following would qualify as a deductible charitable contribution in Year 1 for an individual taxpayer?

A.	 A contribution on December 31, Year 1, of $500 worth of clothing to the Salvation Army for which substantiation was not obtained.

B.	 A $1,000 contribution to a foreign charity on December 31, Year 1.

C.	 A $450 contribution to a senator's campaign on December 31, Year 1.

D.	 A $200 contribution to the taxpayer's church charged by credit card on December 31, Year 1.
A

Choice “D” is correct. Contributions to charitable entities (including churches) are deductible. When the contribution is charged to a credit card, the contribution is deductible in the year the charge is made, even if payment to the credit card issuer is made in a later year.

Choice “A” is incorrect. In order to be deductible, all charitable contributions must be substantiated (e.g., by a canceled check, receipt, etc.). A contribution that is not substantiated is not deductible.

Choice “B” is incorrect. Contributions to foreign charities are not deductible as charitable contributions.

Choice “C” is incorrect. Political contributions are not deductible as charitable contributions.

239
Q

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Burgs during the year:

Repair and maintenance of motorized wheelchair for physically handicapped dependent child

300

Tuition, meals, and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care

4,000

State income tax

1,200

Self-employment tax

7,650

Four tickets to a theatre party sponsored by a qualified charitable organization; not considered a business expense; similar tickets would cost $25 each at the box office

160

Repair of glass vase accidentally broken in home by dog; vase cost $500 5 years ago; fair value $600 before accident and $200 after accident

90

Fee for breaking lease on prior apartment residence located 20 miles from new residence

500

Security deposit placed on apartment at new location

900

Without regard to the $100 “floor” and the adjusted gross income percentage threshold, what amount should the Burgs deduct for the casualty loss in their itemized deductions on Schedule A for the current year?

A.	 $90

B.	 $0

C.	 $400

D.	 $300
A

Choice “B” is correct. $0 casualty loss deduction on Schedule A because damage caused in home by dog is controllable, and avoidable, and, thus, is not unexpected and does not qualify as a “casualty.” In addition, a casualty loss is only deductible if it is in a nationally declared disaster area.

240
Q

An individual taxpayer had the following expenses paid in the current year:

Description Amount
Prescription drugs for the taxpayer’s dependent
$1,500

Burial expenses for the taxpayer’s spouse
$8,000

Elective cosmetic surgery for the taxpayer
$2,500

Contributions to the taxpayer’s health savings account
$3,000

Disregarding the adjusted gross income limitation, what amount is deductible as medical expenses and included in the taxpayer’s itemized deductions?

A.	 $1,500

B.	 $5,500

C.	 $4,000

D.	 $9,500
A

Choice “A” is correct. Only the $1,500 prescription medication for the taxpayer’s dependent qualifies as an itemized deduction. The fact that the medication is for the taxpayer’s dependent does not disqualify the taxpayer from deducting the expense because payments on behalf of a dependent are allowed. Burial costs and elective cosmetic surgery are not deductible medical expenses. Contributions to the taxpayer’s health savings account are not deductible as an itemized deduction and are only deductible as an adjustment for AGI (or an “above-the-line” deduction”).

Choice “B” is incorrect. This answer incorrectly includes the cost of the taxpayer’s elective cosmetic surgery, which is not deductible for tax purposes, as well as the taxpayer’s contributions to his health savings account, which is deductible as an adjustment for AGI and not as an itemized deduction.

Choice “C” is incorrect. This answer incorrectly includes the $2,500 of burial costs that are not deductible as medical expenses. The only item that is deductible is the $1,500 of prescription medication for the taxpayer’s dependent.

Choice “D” is incorrect. This answer incorrectly includes the burial costs for the taxpayer’s spouse, which are not deductible as medical expenses.

241
Q

On January 2, Year 1, the Kanes paid $60,000 cash and obtained a $300,000 mortgage to purchase a home. In Year 4, they borrowed $20,000 secured by their home on a home equity line of credit and used the cash to pay bills and take a vacation. That same year they took out a $7,000 auto loan.

The following information pertains to interest paid in Year 4:

Mortgage interest on first loan

$19,000

Interest on home equity line of credit

2,500

Auto loan interest

500

For Year 4, how much interest is deductible?

A.	 $19,500

B.	 $22,000

C.	 $19,000

D.	 $21,500
A

Choice “C” is correct. Interest on mortgages of up to $750,000 to buy, build, or substantially improve a home (the first loan) are fully deductible. Interest on home equity loans is only deductible if the proceeds are used to substantially improve the home. Interest for personal expenses such as auto loans and credit cards is not deductible. The total deduction is $19,000.

Choices “B”, “D”, and “A” are incorrect, per the above explanation.

242
Q

For regular tax purposes, with regard to the itemized deduction for qualified residence interest, home equity indebtedness incurred during a year:

A.	 Must exceed the taxpayer's net equity in the residence.

B.	 May exceed the fair market value of the residence.

C.	 Is only deductible when used to buy, build, or substantially improve the taxpayer's home that secures the loan.

D.	 Includes acquisition indebtedness secured by a qualified residence.
A

Choice “C” is correct. Home equity debt is only deductible when used to buy, build, or substantially improve the taxpayer’s home that secures the loan.

Choices “D”, “B”, and “A” are incorrect based on the above explanation.

243
Q

During the year, Scott charged $4,000 on his credit card for his dependent son’s medical expenses. Payment to the credit card company had not been made by the time Scott filed his income tax return in the following year. In addition, in the current year, Scott paid a physician $2,800 for the medical expenses of his wife, who died in the prior year. Disregarding the adjusted gross income percentage threshold, what amount could Scott claim in his current year income tax return for medical expenses?

A.	 $6,800

B.	 $0

C.	 $4,000

D.	 $2,800
A

Choice “A” is correct. $6,800. Scott could claim $6,800 on his current year tax return for medical expenses. Medical expenses charged to a credit card is expensed in the year the charge is made. It does not matter when the amount charged is actually paid. Expenses paid for the medical care of a decedent by the decedent’s spouse are included as medical expenses in the year paid, whether they are paid before or after the decedent’s death.

Choices “B”, “D”, and “C” are incorrect, per the above explanation.

244
Q

Pat, a single taxpayer, has adjusted gross income of $40,000 in the current year. During the year, a hurricane causes $4,100 damage to Pat’s personal use car on which Pat has no insurance. Pat resides in a federally declared disaster area. Pat purchased the car for $20,000. Immediately before the hurricane, the car’s fair market value was $11,000 and immediately after the hurricane its fair market value was $6,900. What amount should Pat deduct as a casualty loss for the current year after all threshold limitations are applied?

A.	 $4,000

B.	 $4,100

C.	 $100

D.	 $0
A

Choice “D” is correct. The calculation starts with the lesser of adjusted basis or decrease in FMV. That is $4,100. This amount is then reduced by $4,000 (10% of AGI) and the $100 per casualty. The result is zero ($4,100 – $4,000 – $100).

Choice “A” is incorrect. $4,000 is the amount after the $100 reduction but before the 10% of AGI reduction.

Choice “B” is incorrect. $4,100 is the starting point of the calculation. It is before the 10% of AGI and $100 reductions.

Choice “C” is incorrect. $100 is merely the amount of the reduction per casualty.

245
Q

Robinson’s personal residence was partially destroyed by a hurricane. Robinson resided in a federally declared disaster area. The fair market value (FMV) before the hurricane was $500,000, and the FMV after the hurricane was $300,000. Robinson’s adjusted basis in the home was $350,000. Robinson settled the insurance claim for $175,000. If Robinson’s adjusted gross income for the year is $120,000, what amount of the casualty loss may Robinson claim after consideration of threshold limitations?

A.	 $13,000

B.	 $24,900

C.	 $12,900

D.	 $25,000
A

Choice “C” is correct. The computation of the allowable casualty loss is as follows:

Lesser of:

Decrease in fair market value ($500,000 - $300,000)

200,000

or

Adjusted basis

350,000

200,000

Less: insurance proceeds

(175,000)

Economic loss

25,000

Less: 100 floor (applied to each separate casualty loss)

(100)

Remaining loss after applying 100 floor

24,900

Less: AGI threshold applied to all casualty losses in the aggregate:

10% of AGI of $120,000

(12,000)

Loss after consideration of all threshold limits

12,900

Note: It is very important to remember that the $100 reduction applies to each separate casualty loss, while the reduction for 10% of AGI applies to casualty losses in the aggregate.

Choice “A” is incorrect. Each casualty loss must be reduced by $100.

Choice “B” is incorrect. All casualty losses in the aggregate must be reduced by 10% of AGI.

Choice “D” is incorrect. Each casualty loss must be reduced by $100 and then all casualty losses in the aggregate must be reduced by 10% of AGI.

246
Q

On January 2, Year 1, the Philips paid $50,000 cash and obtained a $200,000 mortgage to purchase a home. In Year 4 they borrowed $15,000 secured by their home, and used the cash to add a new room to their residence. That same year they took out a $5,000 auto loan.

The following information pertains to interest paid in Year 4:

Mortgage interest

$17,000

Interest on room construction loan

1,500

Auto loan interest

500

For Year 4, how much interest is deductible?

A.	 $19,000

B.	 $18,500

C.	 $17,000

D.	 $17,500
A

Choice “B” is correct. Mortgages of up to $750,000 to buy, build, or substantially improve a home allow for the full deduction of interest. Interest on auto loans (consumer interest) is not deductible.
Choice “A” is incorrect. Interest on auto loans (consumer interest) is not deductible.
Choice “C” is incorrect. Mortgages of up to $750,000 to buy, build, or substantially improve a home allow for the full deduction of interest.
Choice “D” is incorrect. Mortgages of up to $750,000 to buy, build, or substantially improve a home allow for the full deduction of interest. Interest on auto loans (consumer interest) is not deductible.

247
Q

In Year 10, Farb, a cash basis individual taxpayer, received an $8,000 invoice for personal property taxes. Believing the amount to be overstated by $5,000, Farb paid the invoiced amount under protest and immediately started legal action to recover the overstatement. In November, Year 11, the matter was resolved in Farb’s favor, and he received a $5,000 refund. Farb itemizes his deductions on his tax returns.

Which of the following statements is correct regarding the deductibility of the property taxes?

A.	 Farb should deduct $8,000 in his Year 10 income tax return and should report the $5,000 refund as income in his Year 11 income tax return.

B.	 Farb should deduct $3,000 in his Year 10 income tax return.

C.	 Farb should not deduct any amount in his Year 10 income tax return when originally filed, and should file an amended Year 10 income tax return in Year 11.

D.	 Farb should not deduct any amount in his Year 10 income tax return and should deduct $3,000 in his Year 11 income tax return.
A

Choice “A” is correct. Under the tax benefit rule, Farb should report the $5,000 refund as income in Year 11 since Farb itemizes deductions and would have received a tax benefit from deducting the $8,000 paid in Year 10.
Choice “B” is incorrect. Since Farb paid $8,000 in property taxes in Year 10, Farb should deduct it in that year. This is true even though the $8,000 was paid under protest. Do not net the refund against the amount paid and deduct the net amount in Year 10.
Choice “C” is incorrect. Since Farb paid $8,000 in property taxes in Year 10, Farb should deduct it in that year. There is no need to wait and file an amended Year 10 return in Year 11.

Choice “D” is incorrect. Since Farb paid $8,000 in property taxes in Year 10, Farb should deduct it in that year. This is true even though the $8,000 was paid under protest. Do not net the refund against the amount paid and deduct the net amount in Year 11.

248
Q

Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for the current year. During the current year, Taylor donated land to a church and made no other contributions. Taylor purchased the land 15 years ago as an investment for $14,000. The land’s fair market value was $25,000 on the day of the donation. What is the maximum amount of charitable contribution that Taylor may deduct as an itemized deduction for the land donation for the current year?

A.	 $0

B.	 $14,000

C.	 $25,000

D.	 $11,000
A

Choice “C” is correct. Individual taxpayers may deduct the FMV of property donated to charity. The limit is 30 percent of the taxpayer’s AGI (30% × $90,000 = $27,000). The FMV of the property is $25,000 (which is within the allowable amount) and the church is a qualified charity.

249
Q

Matthews was a cash basis taxpayer whose current year records showed the following:

State and local income taxes withheld

1,500

State estimated income taxes paid December 30 of the current year

400

Federal income taxes withheld

2,500

State and local income taxes paid April 17 of the following year

300

What total amount was Matthews entitled to claim for taxes on her current year Schedule A of Form 1040?

A.	 $1,900

B.	 $2,200

C.	 $1,500

D.	 $4,700
A

Choice “A” is correct. State and local income taxes withheld from a cash-basis taxpayer are deductible in the year withheld, so Matthews can deduct the $1,500 withheld. She can also deduct the $400 in estimated tax liability she paid in the current year. The $2,500 federal income tax withheld is not deductible in calculating federal income tax. The current year state and local income tax paid in the following year is not deductible until paid because she is a cash-basis taxpayer. The total amount of deductible taxes, therefore, is $1,900.
Choice “B” is incorrect. Since Matthews is a cash basis taxpayer, the $300 state and local income taxes paid in the following year are not deductible until paid.
Choice “C” is incorrect. The $400 state estimated income taxes are deductible in the current year since the amount was paid in the current year.

Choice “D” is incorrect. Federal income tax withheld is not deductible in calculating federal income tax. Since Matthews is a cash basis taxpayer, the $300 state and local income taxes paid in the following year are not deductible until paid.

250
Q

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Burgs during the year:

Repair and maintenance of motorized wheelchair for their dependent child
who has a physical disability
$ 300

Tuition, meals, and lodging at a special school for children with disabilities,
primarily for the availability of medical care, with meals and lodging furnished
as necessary incidents to that care
4,000

State income tax
1,200

Self-employment tax
7,650

Four tickets to a theatre party sponsored by a qualified charitable organization;
not considered a business expense; similar tickets would cost $25 each at the box office
160

Repair of glass vase accidentally broken in home by dog; vase cost $500 5 years ago;
fair value $600 before accident and $200 after accident
90

Fee for breaking lease on prior apartment residence located 20 miles from new residence
500

Security deposit placed on apartment at new location
900

Without regard to the adjusted gross income percentage threshold, what amount may the Burgs claim in their current year return as qualifying medical expenses?

A.	 $0

B.	 $300

C.	 $4,000

D.	 $4,300
A

Choice “D” is correct. Both expenditures related to the medical care for the taxpayers’ dependent child with a physical disability are qualifying medical expenses.

Wheelchair repair and maintenance

300

School for children with disabilities

4,000
Total

4,300

Choice “A” is incorrect. Both expenditures related to the medical care for the taxpayers’ physically disabled dependent child are qualifying medical expenses.

Choice “B” is incorrect. The costs of the special school for children with disabilities are also qualifying medical expenses, not just the repair and maintenance costs for the motorized wheelchair.

Choice “C” is incorrect. The repair and maintenance costs for the motorized wheelchair are also qualifying medical expenses, not just the costs of the special school for children with disabilities.

251
Q

Which of the following statements is correct regarding the deductibility of donations made to qualifying charities by a cash-basis individual taxpayer?

A.	 The charitable contribution deduction for long-term appreciated stock is limited to 50% of adjusted gross income.

B.	 A qualified appraisal for real property donations is not required to be attached to the tax return unless the property value exceeds $10,000.

C.	 A charitable contribution deduction is not allowed for the value of services rendered to a charity.

D.	 A contemporaneous written acknowledgement is required for donations of $100.
A

Choice “C” is correct. A charitable contribution is not allowed for the value of services rendered to a charity.

Choice “A” is incorrect. The charitable contribution deduction for long-term appreciated stock is limited to 30% of adjusted gross income.

Choice “B” is incorrect. A qualified appraisal for real property donations is not required to be attached to the tax return unless the property value exceeds $5,000.

Choice “D” is incorrect. A contemporaneous written acknowledgement is required for donations of $250 or more.

252
Q

Deet, an unmarried taxpayer, qualified to itemize current year deductions. Deet’s adjusted gross income was $40,000 and he made a $1,500 substantiated cash donation directly to a needy family. Deet also donated art, valued at $11,000, to a local art museum. Deet had purchased the art work two years earlier for $2,000. What was the maximum amount of the charitable contribution allowable as an itemized deduction on Deet’s current year income tax return?

A.	 $12,500

B.	 $11,000

C.	 $3,500

D.	 $2,000
A

Choice “B” is correct. The $1,500 donation is not deductible because it was made directly to the needy family rather than to a qualified organization. Because the artwork had been held for more than one year and has appreciated in value, the fair market value of $11,000 could be deducted. The deduction of appreciated long-term capital gain (LTCG) property is limited to 30 percent of AGI. In this case, the $11,000 deduction amount is less than the AGI limit of $12,000 ($40,000 AGI × 30%), so the deduction is not limited.

Choice “A” is incorrect. The $1,500 donation is not deductible because it was made directly to the needy family rather than to a qualified organization.

Choice “C” is incorrect. The $1,500 donation is not deductible because it was made directly to the needy family rather than to a qualified organization. Furthermore, the fair market value of the artwork could be deducted because it had been held for more than one year and that value fell within the 30% of AGI overall limitation for appreciated LTCG property.

Choice “D” is incorrect. The fair market value of the artwork could be deducted because it had been held for more than one year and that value fell within the 30% of AGI overall limitation for appreciated LTCG property.

253
Q

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Burgs during the year:

Repair and maintenance of motorized wheelchair for physically handicapped dependent child

300

Tuition, meals, and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care

4,000

State income tax

1,200

Self-employment tax

7,650

Four tickets to a theatre party sponsored by a qualified charitable organization; not considered a business expense; similar tickets would cost $25 each at the box office

160

Repair of glass vase accidentally broken in home by dog; vase cost $500 5 years ago; fair value $600 before accident and $200 after accident

90

Fee for breaking lease on prior apartment residence located 20 miles from new residence

500

Security deposit placed on apartment at new location

900

What amount should the Burgs deduct for taxes expense in their itemized deductions on Schedule A for the current year?

A.	 $3,825

B.	 $5,025

C.	 $7,650

D.	 $1,200
A

Choice “D” is correct. $1,200 tax deduction for state income tax.

Self-employment tax is not an itemized deduction, but 50% can be used as adjustment in arriving at AGI.

Choice “A” is incorrect. This amount is 50 percent of the self-employment tax ($7,650 × 50% = $3,875). This amount can be deducted as an adjustment for AGI, not an itemized deduction.

Choice “B” is incorrect. This amount includes the $1,200 state income tax and 50 percent of the self-employment tax ($7,650 × 50% = $3,875). The state income tax is an itemized deduction but the 50 percent of self-employment tax is an adjustment for AGI, not an itemized deduction.

Choice “C” is incorrect. Self-employment tax is not an itemized deduction, but 50 percent can be deducted as an adjustment for AGI.

254
Q

The Rites are married, file a joint income tax return, and qualify to itemize their deductions in the current year. Their adjusted gross income for the year was $55,000, and during the year they paid the following taxes:

Real estate tax on personal residence

2,000

Personal property tax on personal automobile

500

Current-year state and city income taxes withheld from paycheck

1,000

What total amount of the expense should the Rites claim as an itemized deduction on their current-year joint income tax return?

A.	 $1,000

B.	 $3,500

C.	 $3,000

D.	 $2,500
A

Choice “B” is correct. Taxes are generally deductible in the year paid, and real estate taxes, income taxes, and personal property taxes are allowable deductions. The total amount of itemized deductions for tax expense is calculated as follows:

Real estate tax on personal residence

2,000

Personal property tax on personal automobile

500

Current-year state and city income taxes withheld

1,000

Total deduction for taxes

3,500

Choice “A” is incorrect. Real estate taxes and personal property taxes are allowable itemized deductions.

Choice “C” is incorrect. Personal property taxes are allowable itemized deductions.

Choice “D” is incorrect. Current-year state and city income taxes withheld from a paycheck are allowable itemized deductions.

255
Q

Which of the following statements is correct regarding the deductibility of an individual’s medical expenses?

A.	 A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years.

B.	 A medical expense paid by credit card is deductible in the year the credit card bill is paid.

C.	 A medical expense deduction is allowed for vitamins and supplements.

D.	 A medical expense deduction is not allowed for Medicare insurance premiums.
A

Choice “A” is correct. A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years.

Choice “B” is incorrect. A medical expense paid by credit card is deductible in the year the amount is charged to the credit card (rather than in a subsequent year when the credit card bill is paid).

Choice “C” is incorrect. Vitamins and supplements are not qualified medical expenses.

Choice “D” is incorrect. A medical expense deduction is allowed for Medicare insurance premiums.