teste pratica A1 Flashcards
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
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.
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.
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.
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
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.
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.
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.
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
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.
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.
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.
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.
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.
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
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.
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
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.
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
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.
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.
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.
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
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.
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.
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.
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.
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.
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
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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
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.
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.
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.
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
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.
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
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.
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
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.
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.
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.
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
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.
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
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.
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.
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.
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
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.
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
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.
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.
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).
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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
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.
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
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.
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.
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.
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
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.
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.
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.
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
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.
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
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.
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
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.
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.
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.
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.
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.)
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
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.
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
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.
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
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.
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.
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.
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.
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.
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
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.
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
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.
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
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
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
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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
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.
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
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.
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
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.
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
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.
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.
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.
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
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.
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
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.
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
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.
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
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.
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
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.
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
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.
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.
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.
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
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.
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.
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.
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.
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.
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
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.
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
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.
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
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.
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.
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.
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.
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.
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
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
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
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.
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
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.
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).
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.
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
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.
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
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.
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
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]
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
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.
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
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.
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.
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).
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
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.
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
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).
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
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.
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.
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.
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.
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.
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.
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.
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
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.
