Download Enrolled Agent Practice Exam Questions Part 1 With 100% Correct And Verified Answers 2024 and more Exams Advanced Education in PDF only on Docsity! Enrolled Agent Practice Exam Questions Part 1 With 100% Correct And Verified Answers 2024 Which of the following is income in respect of a decedent? A) Cash received from a grandmother's estate. B) Royalties received on the deceased father's published book; the right to receive these royalties was distributed from the father's estate. C) Certificate of deposit received as a gift. D) Both cash received from a grandmother's estate and royalties received on the deceased father's published book; the right to receive these royalties was distributed from the father's estate. - Correct Answer-B) Royalties received on the deceased father's published book; the right to receive these royalties was distributed from the father's estate. Income in respect of a decedent is the amount that is earned by the taxpayer but not received prior to his or her death nor accrued prior to his or her death if on the accrual method, so it is not included in the decedent's final return. Income in respect of a decedent is included in the recipient's (e.g., the estate's) income in the year received or accrued. Which of the following recipients of money must include the funds received in his total income? A) A car pool driver who is given moneterm-0y by his passengers for highway tolls. B) An elected official who is given money by a real estate developer to influence his vote. C) A homeowner who is given a subsidy by a public utility for the purchase of a new hot water heater. D) A taxpayer who inherits one hundred silver dollars in a bequest. - Correct Answer-B) An elected official who is given money by a real estate developer to influence his vote. A bribe is income. In fact, all income from illegal activities, such as money from dealing illegal drugs, must be included on a taxpayer's 1040, either on Line 8 (from Schedule 1) or on Schedule C. Monies received from car pool passengers are reimbursements. A subsidy paid by a public utility for energy conservation is excluded from income. A bequest is also excluded from income even if the bequest is cash. Minnie's tax return shows the following income: -$800 wages -$6,490 unemployment compensation -$1,000 alimony received under the terms of a divorce decree finalized before 2019 -$8,000 rental income from apartment buildings she owns What is Minnie's earned income for the purpose of determining how much she can contribute to an IRA? A) $800 B) $7,290 C) $1,800 D) $16,290 - Correct Answer-C) $800 Generally, compensation is the amount earned from working. Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts individuals receive for providing personal services. For IRA purposes, compensation includes amounts considered taxable alimony and nontaxable combat pay. Minnie's earned income for the purpose of determining how much she can contribute to an IRA is $1,800. Only wages of $800 and taxable alimony of $1,000 count as compensation for IRA purposes, so they set the limit for the allowable contribution amount. Qualified dividends are subject to one of three maximum tax rates. Which three tax rates are used for qualified dividends? A) 15% / 25% / 37% B) 0% / 15% / 20% C) 15% / 28% / 37% D) 18% / 20% / 25% - Correct Answer-B) 0% / 15% / 20% Qualified dividends are subject to the same 0%, 15% or 20% maximum tax rate that applies to net capital gain. Qualified dividends are subject to the 20% tax rate if the regular tax rate that would apply is 37%. Qualified business income (QBI) is: A) the amount of qualified items of income and gain from a qualified trade or business. B) the net amount of qualified items of income, gain, deduction and loss from a qualified trade or business. C) the amount of qualified items of income and gain from a qualified trade or business, only to the extent included in taxable income. D) the net amount of qualified items of income, gain, deduction and loss from a qualified trade or business, only to the extent included or allowed in the determination of taxable income for the year. - Correct Answer-D) the net amount of qualified items of income, gain, deduction and loss from a qualified trade or business, only to the extent included or allowed in the determination of taxable income for the year. Qualified business income (QBI) is the net amount of qualified items of income, gain, deduction and loss from a qualified trade or business. Qualified items of gain or loss are taken into account to determine QBI or qualified business loss only to the extent included or allowed in the determination of taxable income for the year. who made non-deductible contributions to his IRA will have a cost basis in his IRA. Further nondeductible contributions will increase his basis. There is a penalty for not reporting tips to an employer as required. The penalty is: A) Equal to 50% of the social security and Medicare tax due on those tips. B) Equal to 50% of the tips that were not reported. C) Equal to 20% of the social security and Medicare tax due on those tips. D) Equal to 10% of the tips that were not reported. - Correct Answer-A) Equal to 50% of the social security and Medicare tax due on those tips. If you did not report tips to your employer as required, you may be charged a penalty equal to 50% of the social security and Medicare tax due on those tips. How should an individual report the following transactions on a return? - Total short-term capital losses $6,000 - Total short-term capital gains $15,000 - Total long-term capital losses $10,000 - Total long-term capital gains $10,000 A) $0 net capital gain B) $6,000 net capital gain C) $9,000 net capital gain D) $21,000 net capital gain - Correct Answer-C) $9,000 net capital gain A taxpayer may calculate total net gain (loss) by comparing the net short- term capital gain (loss) to the net long-term capital gain (loss). The long-term gains and losses cancel out, and the short-term gain exceeds the short-term loss by $9,000. This leaves a net capital gain of $9,000, the character of which is short-term. Joe and Jean purchased their primary residence in 1985 for $100,000. While they lived there, they made renovations at a cost of $125,000. They lived there until July 1, 2017. On June 15, 2020, the residence was sold for $800,000. From July 1, 2017, until June 15, 2020, the home was unoccupied. Joe and Jean file a joint return, and they have never excluded a gain from the sale of another home. What is their maximum taxable gain? A) $575,000 B) $0 C) $75,000 D) $200,000 - Correct Answer-C) $75,000 The couple meets the tests (owned over 2 years and lived in at least 24 of prior 60 months) to exclude up to $500,000 of gain. The total gain on the sale was $575,000 ($800,000 proceeds minus $225,000 basis), less the $500,000 exclusion leaves a taxable gain of $75,000. If you had a gain and can exclude part or all of it, enter "H" in column (f) of Form 8949. Enter the exclusion as a negative number (in parentheses) in column (g) of Form 8949. If you had a gain and can exclude part or all of it, enter "H" in column (f) of Form 8949. Enter the exclusion as a negative number (in parentheses) in column (g) of Form 8949. In 20X1, Sam bought 200 shares of stock at $9 per share for a total cost of $1,800. In 20X2, he bought 300 shares at $12 per share for a total of $3,600. In 20X3, the stock split 3 for 1. What is the basis per share in the stock after the split? A) 200 shares at $9 and 300 shares at $12 B) 600 shares at $3 and 900 shares at $4 C) 200 shares at $3 and 300 shares at $4 D) 600 shares at $9 and 900 shares at $12 - Correct Answer-B) 600 shares at $3 and 900 shares at $4 When a stock splits, the amount of money invested in the shares does not change. Allocate the basis equally to all shares received. Sam received 400 shares based on the 200 shares bought for $9 each, making each of those 600 now worth $3 each. He received 600 shares for 300 shares of the stock bought at $12 each, making the 900 now worth $4 apiece. Charlie owns a factory that specializes in making candy. Charlie just received a gift of rental property from his uncle. Which of the following is the depreciable basis in the rental property that is placed in service after Charlie received it as a gift, if the donor's basis was less than the fair market value of the property? The fair market value on the date of the gift plus or minus any required adjustments to basis. A) The fair market value on the date of the gift plus or minus any required adjustments to basis. B) The fair market value of the property on the date you converted it to rental property. C) The donor's basis of the property plus or minus any required adjustments to basis. D) All of the above. - Correct Answer-C) The donor's basis of the property plus or minus any required adjustments to basis. If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Diane, single and age 49, made a $5,000 contribution to her traditional IRA during the tax year. Her compensation that year was $4,000. The following year she files an extension until October 15 to report her taxes. What is Diane required to do in order to avoid the 6% additional tax on excess contributions? A) Withdraw the $1,000 excess contribution and all interest earned on the $1,000 by December 31 of the year she made the contribution. B) Withdraw the $1,000 excess contribution and all interest earned on the $1,000 by April 15, the original due date of the return. C) Withdraw the $1,000 excess contribution and all interest earned on the $1,000 by Oct 15, the extended due date of the return. D) File an election to deduct the $1,000 on her return for the following year by attaching a statement to her tax return - Correct Answer-C) Withdraw the $1,000 excess contribution and all interest earned on the $1,000 by Oct 15, the extended due date of the return. The way to avoid the penalty for excess contributions is to withdraw the excess contribution and any gains on the excess contribution by the due date of the return (including extensions). Diane must withdraw the excess contribution of $1,000 by October 15, the extended due date of her tax return. George and Marie sold their primary residence in 2020 for $300,000. They purchased the home about 10 years ago for $100,000 and lived in the home until the sale. George was a salesman and used 1/6th of the home as a business office. He deducted 1/6th of all costs including depreciation since buying the property. The original cost of $100,000 was assessed at $40,000 land and $60,000 building. George used the straight-line method to claim $6,667 in depreciation. What is George and Marie's realized gain on the sale? A) None B) $200,000 C) $6,667 D) $206,667 - Correct Answer-D) $206,667 Basis starts at $100,000. He claims depreciation of $6,667. This depreciation reduces his basis to $93,333. He realizes a gain on the sale of $206,667 (sales price - basis). Unrecaptured Section 1250 Gain is due to depreciation, which is recaptured in the year the property is disposed and taxed at a maximum rate of 25%. Taxpayers may be able to exclude gain from the sale of a home that they have used for business or to produce rental income. However, a taxpayer must meet the ownership and use tests. If a taxpayer is entitled to take depreciation deductions because the main home was used for business purposes or as rental property (even if not actually claimed), the part of the gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997, may not be excluded. If the part of your property used for business or to produce rental income is within your home, such as a room used as a home office for a business, you do not need to allocate gain on the sale of the property between the business part of the property and the part used as a home. In addition, you do not need to report the sale of the business or rental part on Form 4797. This is true whether or not you were entitled to claim any depreciation. Patti inherited 100 shares of Superbubble Inc stock when her mother died on August 8, 20X1; the fair market value of the stock was $10 per share. Her mother paid $290 per share when she purchased the stock ten years prior. If Patti sells all 100 shares for $60 per share on July 3, 20X4, how should she report the sale on her return for 20X4? A) $23,000 short-term capital loss B) $5,000 short-term capital gain C) $23,000 long-term capital loss D) $5,000 long-term capital gain - Correct Answer-D) $5,000 long-term capital gain Which of the following are examples of prohibited transactions with a traditional IRA? A) Selling property to it B) Using it as security for a loan C) Buying property for personal use with your IRA funds D) All of the above - Correct Answer-D) All of the above These are ALL specifically listed prohibited transactions. Generally, if there is a prohibited transaction in connection with a traditional IRA account at any time during the year, the account stops being an IRA as of the first day of that year. At that time the entire account balance is considered a distribution. If someone other than the owner or beneficiary of a traditional IRA engages in a prohibited transaction, that person may be liable for certain taxes. There is a 15% tax on the amount of the prohibited transaction and a 100% additional tax if not corrected. A 2020 net operating loss deduction is: A) not subject to a taxable income limitation B) limited to 90% of taxable income C) limited to 80% of taxable income D) not deductible - Correct Answer-A) not subject to a taxable income limitation The CARES Act temporarily suspends the TCJA's 80% of taxable income limitation allowing NOL carryforward to fully offset taxable income in tax years beginning before Jan. 1, 2021. For tax years beginning after December 31, 2020, the TCJA limits the NOL deduction to 80% of taxable income (determined without regard to the deduction) NOLs arising in taxable years beginning before 2018 remain subject to prior law. Accordingly, such NOLs are not subject to the 80-percent limitation and remain subject to the prior-law 2-year carryback rules and the 20-year carryover limitation. A couple of years ago Mason paid $100,000 to have his home built on a lot that cost him $10,000. Before changing the property to rental use last year, he paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house. On the date of change in use, his property has an FMV of $150,000, of which $30,000 is for the land and $120,000 is for the house. His depreciable basis for the house is: A) $120,000 B) $140,000 C) $118,000 D) $138,000 - Correct Answer-C) $118,000 If you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. An example of changing property held for personal use to business use would be renting out your former main home. The basis for depreciation is the lesser of the following amounts. -The FMV of the property (home) on the date of the change -Your adjusted basis on the date of the change. In this case the FMV is $120,000 and the basis is $118,000 (original construction cost of $100,000 plus improvements of $20,000 less casualty loss $2,000). Therefore the basis for depreciation is $118,000. You cannot depreciate land. Mr. and Mrs. Pigg live in a brick house for 24 months. Then, for the next 24 months, they live in a traditional wood house. Then, for the next 12 months, they live in a contemporary house made of stone. At that time, they sell the brick house with a tax basis of $300,000 and receive $420,000. After another 12 months, they sell the traditional wood house. It had a tax basis of $400,000 and is sold for $490,000. What of the following statements is true? A) The gain on both the brick house and the traditional wood house are taxable because they were not serving as their principal residence at the time of sale. B) The gain on one of the two houses can be tax free but not the gain on both. C) The gain on both of these houses is tax free because the total is less than $500,000. D) The gain on the traditional wood house can be tax free but the gain on the brick house cannot be tax free. - Correct Answer-B) The gain on one of the two houses can be tax free but not the gain on both. A gain on a house can be tax-free up to $500,000 on a joint return and $250,000 on a single return but certain rules must be met. First, the house must have served as the principal residence for the taxpayers in at least two of the previous five years. Both the brick house and the traditional wood house meet this requirement. Second, this exclusion can only be taken once every two years. Since the brick house and the traditional wooden house were sold 12 months apart, it is not possible to exclude both gains. They can exclude one gain but not both. Note that gains allocated to periods of nonqualified use after Dec. 31, 2008 cannot be excluded. Form 4137 is used _________? A) To report tips to an employer. B) To report tips in excess of $1,000 per month. C) When tips were received for work covered by the Railroad Retirement Tax Act. D) To calculate the social security and Medicare tax owed on tips not reported to employer. - Correct Answer-D) To calculate the social security and Medicare tax owed on tips not reported to employer. A taxpayer must file Form 4137 if receiving cash and charge tips of $20 or more in a calendar month and he or she did not report all of those tips to the employer. Form 4137 is also used when box 8 of Form W-2 shows allocated tips that the taxpayer must report as income. However, Form 4137 should not be used to report tips received for work covered by the Railroad Retirement Tax Act. In order to get railroad retirement credit, the taxpayer must report these tips to his or her employer. IRS Form 4137. Without considering exceptions, when can a taxpayer first take a distribution from his IRA without penalty? A) After April 1 of the year after which he turns 72 B) After April 1 of the year after which he turns 59.5 C) After he reaches age 59.5 D) After he turns 59 - Correct Answer-C) After he reaches age 59.5 Early distributions generally are amounts distributed from a taxpayer's traditional IRA account or annuity before he reaches age 59.5. Unless an exception applies, a taxpayer who takes an early distribution must pay a 10% additional tax on the distribution of any assets (money or other property) from his traditional IRA. The 10% additional tax applies to the part of the distribution that he has to include in gross income. It is in addition to any regular income tax on that amount. Alice and Mike file a joint return for 2020 on April 15, 2021. Alice, who is a non-working spouse, is 49. Both Alice and Mike contributed $4,000 each to a traditional IRA although they qualified to contribute the maximum amount. They filed their return timely. On June 1st, 2021, Mike's mother gave each of them $1,000. What additional amount of the gift may Alice and Mike contribute to each of their IRA's for the year 2020? A) 0 B) $2,000 C) $1000 D) $500 - Correct Answer-A) 0 Contributions to a traditional IRA must be made by the due date of the return, not including extension. Their due date was April 15, 2021. A contribution for 2020 cannot be made on June 1, 2021. Abigal Van Jones owned a large building with a tax basis of $700,000 but had an estimated fair value of $820,000. The property was condemned by the state government so that the building could be torn down to make way for a new highway. She was paid the fair value for the property. In a short period of time, she used $800,000 of this money to buy property that qualified as replacement property. The other $20,000 was invested in State of Idaho bonds. What gain, if any, should she recognize on this condemnation of this building? A) Zero B) $20,000 C) $100,000 D) $120,000 - Correct Answer-B) $20,000 When property is condemned, destroyed, or stolen, it is viewed as an involuntary conversion. If the owner receives an amount below the tax basis, a loss must be recognized for the difference. However, in this case, the owner received $120,000 more than the tax basis. Because the sale was not intended but was created by an involuntary conversion, the gain that is reported for tax purposes is this $120,000 gain or the amount of the proceeds left over after similar replacement property is acquired. Although $820,000 was received, only $800,000 was used for the replacement property. The $20,000 that is left is less than the $120,000 gain and must be reported for tax purposes. The investment in state bonds is irrelevant here. Dave and Dyan are married and had interest income on a bank savings account of $4,000, interest on federal treasury bonds of $3,400, interest on their state income tax refund of $400, and interest of $1,500 on New York City bonds. What is the amount of the above items that are includible in the couple's federal taxable income? A) $4,400 B) $7,400 C) $7,800 D) $9,300 - Correct Answer-C) $7,800 Richard collected baseball cards as a hobby. Richard had shared his interest in this hobby with his niece Susan, who was now also an avid card collector. At the time of his death, Richard's collection had a fair market value of $10,000 and an adjusted basis of $2,000, while Susan's collection had a fair market value of $5,000 and an adjusted basis of $1,000. Upon his death Richard's entire card collection went to Susan. With the death of her uncle, Susan lost interest in the hobby and sold all of the cards for $20,000. What is Susan's gain on the sale of these baseball cards? A) $5,000 B) $9,000 C) $13,000 D) $17,000 - Correct Answer-B) $9,000 Her basis in the inherited cards is $10,000 (the FMV of Richard's cards at the time of his death). Her cards only had a basis of $1,000. Total basis is $11,000, so there is a gain of $9,000 as a result of selling them all for $20,000. Richard Milhaus owns securities with a tax basis of $7,000. He gives them to Shania Mitchell when they are worth $6,700. She holds them but they continue to fall in value and are finally sold for $6,200. What is the impact on taxable income that she must report on this sale? A) Zero B) $300 loss C) $500 loss D) $800 loss - Correct Answer-C) $500 loss When property that has been received as a gift is sold below the previous owner's tax basis, a loss must be computed by comparing the amount received with the lower of the previous owner's basis or the fair value at the date of gift. In this problem, the previous basis was $7,000 but the fair value at the time of the conveyance was only $6,700. Consequently, the $6,200 sales price is compared to the $6,700 (because it is lower than $7,000) and a loss of $500 is recognized for income tax purposes. Merry got a $10 tip from a customer at the bakery. That was the only tip she received all month. Which of the following statements is true? A) Unless her employer asks, she does not have to report the $10 tip as income. B) She does not have to report the tip to her employer if her tips total less than $20 for the month. C) She can wait until the end of the year to report the tip to her employer. D) She never has to report tips earned while working in a bakery. - Correct Answer-B) She does not have to report the tip to her employer if her tips total less than $20 for the month. All tips received are income and are subject to federal income tax. Employees must give their employers a written report of cash and charge tips if they received $20 or more in tips during the month. Employees should use Form 4137 to figure social security and Medicare taxes on tips not reported to the employer. Several years ago, you paid $150,000 to build your home on a lot that cost you $50,000. Before converting the property to rental use last year, you paid $30,000 for permanent improvements to the house. You received a $5,000 easement payment from the State of California for use of the land for a power line. The county indicates the FMV of the house is $250,000 and the land is $100,000. What is your basis for depreciation? A) $150,000 B) $175,000 C) $180,000 D) $250,000 - Correct Answer-C) $180,000 Generally, the IRS considers compensation for granting an easement proceeds from the sale of an interest in real property. Reduce basis of the property by the amount received. If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. Since the easement is for the use of land it will reduce the basis of the land, not the structure. Your basis for depreciation of the rental property is $180,000 ($150,000 building cost + $30,000 improvements) John purchased a new gasoline-electric hybrid automobile on July 2, 20X1, for $18,000. He also claimed a $2,000 clean-fuel vehicle deduction on his 20X1 tax return for that vehicle. In 20X1, John used this automobile only for personal purposes. On January 1, 20X3, he began using the hybrid automobile exclusively for business purposes. The fair market value of the automobile on that day was $17,000. What is the automobile's depreciable basis as of January 1, 20X3? A) $15,000 B) $16,000 C) $17,000 D) $18,000 - Correct Answer-B) $16,000 If you held property for personal use and later use it in your business or income- producing activity, your depreciable basis is the lesser of the following. 1. The fair market value (FMV) of the property on the date of the change in use. 2. Your original cost or other basis adjusted as follows. - Increased by the cost of any permanent improvements or additions and other costs that must be added to basis. - Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis. The vehicle had a basis of $18,000 when purchased. He must deduct the $2,000 already claimed when figuring the basis of the vehicle for business depreciation purposes. Thus, John's adjusted basis of the vehicle is $16,000 (18,000 - 2,000 = 16,000). The adjusted basis is less than the FMV of the vehicle on the date the vehicle was placed in service so the depreciable basis is the vehicle's adjusted basis. Elaine and Hugh divorced on September 1, 2020. As part of the divorce decree, beginning in September, Hugh agreed to pay Elaine's last tuition payment of $8,000, child support payments of $500 per month, and $1,500 a month for the mortgage payment on a home titled in his name. Elaine and the children will continue to live in the home. What is the amount that Hugh can deduct as alimony for 2020? A) $13,000 B) $0 C) $8,000 D) $11,000 - Correct Answer-B) $0 Hugh cannot deduct any amount for alimony because the divorce decree was signed after December 31, 2018. If the divorce had been finalized prior to 2019, the $8,000 tuition would have counted as alimony. The mortgage payments wouldn't be alimony because the home is titled in his name only. Always remember child support is never considered alimony. Failure to take a required minimum distribution (RMD) can result in an excise tax equal to? A) 25% of the RMD amount B) 50% of the RMD amount C) 10% of the RMD amount D) 25% of the RMD amount, plus an additional 10% penalty - Correct Answer-B) 50% of the RMD amount Owners of tax-deferred retirement plans must generally begin required minimum distributions (RMD) after reaching age 72 (or 70.5 if taxpayer turned age 70.5 prior to January 1, 2020). If the taxpayer does not take any distributions, or if the distributions are not large enough, the taxpayer may have to pay a 50% excise tax on the amount not distributed as required. At their annual budget meeting, the Downtown Church voted to set the salary package for their pastor as follows: - Base salary $30,000 - Housing allowance (at fair rental value) $10,000 - Maximum reimbursement for travel (reports must be filed with receipts attached) $5000 How much of the salary package is includable in the pastor's taxable income? A) $30,000 B) $35,000 C) $40,000 D) $45,000 - Correct Answer-A) $30,000 Only the base salary is taxable income to the pastor. The housing allowance is specifically excludable from his income (as it is less than his salary and is a reasonable amount). The travel expenses are also non-taxable as they are reimbursed under an accountable plan (reimbursement is based on filed reports with proof of expenditures). Who is eligible to take the Section 199A qualified business income deduction? 1. C corporation on Form 1120 2. S corporation on Form 1120S 3. Partnership on Form 1065 4. Sole proprietorship on Schedule C 5. Individual taxpayer on Form 1040 A) 1 extent it exceeds Larry's loss. Her gain is $7,000 ($10,000 - $3,000) but is reduced to $6,500 by Larry's non-deductible loss. A taxpayer may not deduct a loss on the sale or trade of property, other than a distribution in complete liquidation of a corporation, if the transaction is directly or indirectly between the taxpayer and the following related parties: - Members of taxpayer's family, which includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.) - A partnership or corporation with more than 50% directly or indirectly owned by the taxpayer - A tax-exempt charitable or educational organization controlled by taxpayer or family member A nonresident alien taxpayer does not qualify for a social security number. What identifying number should he use on his tax return? A) Individual Taxpayer Identification Number (ITIN) B) Immigration & Naturalization Service ID (INSID) C) Identification number granted by the taxpayer's home country D) Leave the space blank - Correct Answer-A) Individual Taxpayer Identification Number (ITIN) A nonresident or resident alien who does not have, and is not eligible to get a Social Security Number, must apply for an ITIN by using Form W-7. The ITIN is used on the taxpayer's return in place of a Social Security Number. The IRS issues ITINs to foreign nationals and others who have federal tax reporting or filing requirements and do not qualify for SSNs. A non-resident alien individual not eligible for a SSN who is required to file a U.S. tax return only to claim a refund of tax under the provisions of a U.S. tax treaty needs an ITIN. Examples of individuals who need ITINs include: - A nonresident alien required to file a U.S. tax return - A U.S. resident alien (based on days present in the United States) filing a U.S. tax return - A dependent or spouse of a U.S. citizen/resident alien - A dependent or spouse of a nonresident alien visa holder Note: An ITIN is for tax use only. It does not entitle the holder to social security benefits nor does it change his employment or immigration status. What income is a resident alien required to report on his U.S. income tax return? A) Wages from his job working for an Italian company while living in Europe for the summer. B) Interest income received in a foreign bank account. C) Gain from the sale of inventory he purchased in Germany and sold in the United States. D) Income from all sources both within and outside the United States. - Correct Answer- D) Income from all sources both within and outside the United States. A Resident Alien must report income from sources both within and outside the United States on a U.S tax return. In which of the following situations may the IRS impose penalties on a taxpayer? A) Late filing B) Late payment of taxes C) Frivolous return D) All of the above - Correct Answer-D) All of the above Generally, there are three circumstances in which the IRS will impose a penalty and interest. First, if the return is filed late, the IRS will impose a penalty of 5% of the amount due, compounded every month. Second, if taxes are paid late, the penalty is usually 1/2 of 1% of the unpaid amount for each month or part of a month the tax is not paid. Third, if the taxpayer files a frivolous return, the law imposes a penalty of $5,000. A frivolous return is one that does not contain information needed to figure the correct tax or shows a substantially incorrect tax due to a frivolous position or desire to delay or interfere with the tax laws. This includes altering or striking out the preprinted language above the taxpayer's signature. Form 1040 Instructions. If you are self-employed you may be able to deduct 100% of the premiums paid for health insurance established under your business for yourself and your family. The following are considered self-employed for purposes of the deduction, EXCEPT: A) General Partner of a Partnership B) Greater than 2% Shareholder of an S Corporation C) Shareholder owning 100% of stock in a C Corporation D) Limited Partner receiving guaranteed payments - Correct Answer-C) Shareholder owning 100% of stock in a C Corporation A taxpayer is considered self-employed if he is a general partner (or a limited partner receiving guaranteed payments) or if he receives wages from an S corporation in which he is more than a 2% shareholder. The deduction cannot be more than the earned income from the business. A shareholder in a C corporation is not self-employed. What banking information must be submitted on Form 8888? A) Account number B) Routing number C) Both of the above D) None of the above - Correct Answer-C) Both of the above The bank routing number and account number must be included on Form 8888. The routing number must be nine digits. The account number can be up to 17 characters (both numbers and letters), and may include hyphens but omit spaces and special symbols. IRS Form 8888. A refund may be directly deposited into which individual retirement account? A) Traditional IRA B) Roth IRA C) SEP-IRA D) All of the above - Correct Answer-D) All of the above A refund (or part of it) may be directly deposited to a traditional IRA, Roth IRA, or SEP- IRA, but not a SIMPLE IRA account. The trustee or custodian of the account must be notified of the year to which the deposit is to be applied. IRS Form 8888. Under what circumstances would the standard deduction generally be appropriate? A) The taxpayer is claiming more than 3 dependents B) The standard deduction exceeds the taxpayer's itemized deductions C) The filing status is head of household D) The filing status is MFJ - Correct Answer-B) The standard deduction exceeds the taxpayer's itemized deductions In most cases, the federal income tax will be less if the taxpayer takes the larger of the standard deduction or itemized deductions. If a taxpayer itemizes deductions, Schedule A must be completed and attached to the Form 1040. Schedule A is generally used if the taxpayer's total itemized deductions are more than the standard deduction amount. Form 1040 Instructions. Doug is 67 and single at the end of 2020. He is required to file a tax return if his gross income is: A) at least $5 B) at least $12,400 C) at least $14,050 D) more than his amount of itemized deductions - Correct Answer-C) at least $14,050 Single taxpayers who are age 65 or older must file a tax return if their 2020 gross income is at least $14,050. Scott is filing for an extension to file his tax return, for which he owes additional taxes. He must pay the amount owed by which of the following to avoid interest and penalties? A) The original due date of the return B) The extended due date of the return C) One week following the acceptance of the tax return D) None of the above - Correct Answer-A) The original due date of the return The purpose of an extension is to give someone extra time to file a return, not extra time to pay what is owed. Additional taxes owed must be paid by the original due date of the return. Which contribution does NOT qualify for the retirement contribution credit? A) Elective deferral to SIMPLE plan B) Elective deferral to a 401(k) C) Voluntary employee contributions D) Employer contributions - Correct Answer-D) Employer contributions A taxpayer is eligible for this credit if he or she made contributions to a traditional or Roth IRA; elective deferrals to a 401(k), 403(b), governmental 457, SEP, or SIMPLE plan; or voluntary employee contributions to a qualified retirement plan. Employer contributions under 414(h)(2) are not voluntary employee contributions and do not qualify for the credit. A) 20-35%, based on AGI B) 25-35%, based on earned income C) 25-35%, based on unearned income D) 20-35%, based on filing status - Correct Answer-A) 20-35%, based on AGI To determine the amount of the Child and Dependent Care Credit, multiply work-related expenses (after applying the earned income and dollar limits) by a percentage of AGI. The applicable percentage begins at 35% for taxpayers with AGI less than $15,000 and decreases by 1% for each $2,000 increase in AGI. Taxpayers with AGI more than $43,000 receive the minimum percentage of 20%. Roberto Manzela made the following contributions to his church, a qualified charity: Land with a tax basis of $4,000 and a fair value of $16,000 and shares of stock with a tax basis of $6,000 and fair value of $9,000. Both assets had been held for several years. The taxpayer's adjusted gross income (without including any gain on the stock) is $60,000. What is the limit on the amount that can be claimed as an itemized deduction? A) $10,000 B) $12,000 C) $18,000 D) $25,000 - Correct Answer-C) $18,000 Individual taxpayers can deduct the fair value of contributions made to qualified charities. For long-term capital gain property, the amount of the deduction is limited to 30% of adjusted gross income (AGI). Here, that would be 30% of $60,000 AGI or $18,000. The FMV of the property contributed is $25,000 ($16,000 land + $9,000 stock), but ONLY up to the 30% of AGI limit of $18,000 can be deducted. TIP: The special 30% limit does not apply when using cost in place of FMV as the amount of the gift. Instead, only the 50% limit applies. Here, that would be 50% of $60,000 AGI or $30,000. While 50% of AGI is $30,000, the cost basis of the property contributed is only $10,000 ($4,000 land + $6,000 stock). Although fully deductible ($10,000), the fair value method still produces the highest deduction ($18,000). Which of the following is allowed as a miscellaneous deduction on Schedule A? A) Home office expense B) Federal estate taxes on income in respect of a decedent C) Trade association dues D) Job hunting expenses - Correct Answer-B) Federal estate taxes on income in respect of a decedent The deduction for estate taxes paid on IRD falls under "Other Miscellaneous Deductions." The remaining choices are no longer deductible (prior to 2018 these items were allowed subject to 2% AGI limit). Generally, the taxpayer may deduct the cost of medical expenses on Schedule A for which of the following: A) Doctor prescribed birth control pills. B) Controlled substances like marijuana that are in violation of federal law. C) Trips for general health improvement. D) Marriage counseling. - Correct Answer-A) Doctor prescribed birth control pills. Controlled substances in violation of federal law and trips for general health are both specifically disallowed. Marriage counseling, even if provided by a psychologist, is not deductible because the sessions are not for treatment of a medical condition. Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. Do not include expenses for procedures that are purely cosmetic or those that are merely beneficial to general health, such as vitamins or a vacation. All of the following are true with regards to education credits, EXCEPT: A) Only one of the credits can be claimed per student, per year B) If filing status is Married Filing Separate, the credits cannot be claimed C) The student must be the taxpayer, a spouse, or claimed as a dependent on the tax return D) The fees must be paid directly to the educational institute to qualify for the credit - Correct Answer-D) The fees must be paid directly to the educational institute to qualify for the credit There is no requirement for the fees to be paid directly to the educational institution; rather, the taxpayer must be able to prove amounts paid are for qualified expenses. On which form is mortgage interest paid reported to a taxpayer by the mortgage holder? A) Form W-2 B) Form W-4 C) Form 1098 D) Form 1099 - Correct Answer-C) Form 1098 If the taxpayer paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, the mortgage holder will send a Form 1098 or similar statement to the taxpayer. The statement for each year should be sent by January 31 of the following year. A copy of this form is also sent to the IRS. John is a cash basis taxpayer. During the year he incurred the following expenses for himself and his son, Michael, whom he claims as a dependent on his return. - $800 for braces - $100 for babysitting so he could visit the chiropractor - $900 for emergency room services for Michael; $875 was covered by insurance. John paid the remaining $25 in the next year. John's medical expense deduction before limitations is: A) $800 B) $825 C) $900 D) $925 - Correct Answer-A) $800 Only the $800 for braces is considered. The $100 for babysitting is not a payment for medical treatment. John cannot deduct $875 of the $900 for the ER that the insurance covers. The other $25 was paid by John but was not paid in this tax year. Mr. and Mrs. Ryan Bowling have three small children. During the current tax year, they had to pay cash of $7,000 so that these children would be cared for allowing the parents to be employed. They had adjusted gross income of $56,000. What is the amount that they can claim as a child care credit on their joint tax return? A) $1,200 B) $1,400 C) $2,100 D) $2,450 - Correct Answer-A) $1,200 For two or more children, the taxpayers can utilize up to $6,000 of their payments as long as they were needed for employment. Although the taxpayers here paid $7,000, the credit is only based on $6,000. The amount of the credit depends on the taxpayers' adjusted gross income. At very low levels, $15,000 or less, the credit is 35 percent. That rate is reduced gradually to 20 percent at over $43,000 in adjusted gross income. The Bowlings have adjusted gross income above $43,000 and must use 20 percent. The credit that they can take to reduce their income tax is $1,200 ($6,000 times 20 percent). Which of the following statements is NOT true regarding tax benefits for education? A) The American Opportunity credit may be claimed for tuition expenses incurred in the first 4 years of post-secondary education. B) The dollar limitations for the American Opportunity credit are calculated on a per student basis. C) The Lifetime Learning Credit is allowed for tuition paid for graduate program studies. D) Room and board are qualifying expenses for the American Opportunity Credit. - Correct Answer-D) Room and board are qualifying expenses for the American Opportunity Credit. The American Opportunity credit is calculated per student (and not per return like the Lifetime Learning credit). The Lifetime Learning credit covers ALL post-secondary education as well as courses to acquire or improve job skills. Room and board do not qualify as educational expenses for either the American Opportunity or Lifetime Learning credits. Which of the following applies to the allowable credit for prior year minimum tax? A) Any unused portion may not be carried forward. B) It is allowed in full against the current year's tax. C) It may only be carried forward for five years. D) The allowable credit cannot reduce the current year's tax below the current year's tentative minimum tax. - Correct Answer-D) The allowable credit cannot reduce the current year's tax below the current year's tentative minimum tax. A taxpayer with AMT liability in the current year may recapture that amount in future years in the form of a credit. This non-refundable credit can offset future AMT liability only to the extent prior AMT tax paid was due to deferral items. Parker has $90,000 income from self-employment. What is his self-employment tax rate? A) 2.9% B) 7.65% below the tentative minimum tax for the year. You can carry over any unused portion of the credit to future years (there is no 20-year limit). Mary has an early withdrawal from her 401(k). If she changes her mind within 60 days, which of the following plans can she use to make a qualified rollover contribution? A) Traditional IRA B) Qualified annuity C) SEP IRA D) All of the above - Correct Answer-D) All of the above An eligible retirement plan , under section 402(c)(8)(B), means a qualified plan or an individual retirement plan. The following eligible retirement plans can accept a qualified rollover contribution: - a qualified plan described in section 401(a) which is exempt from tax under section 501(a) - an annuity plan described in section 403(a) - an individual retirement account described in section 408(a) - an individual retirement annuity (other than an endowment contract) described in section 408(b) The Net Investment Income Tax applies to certain net investment income, which includes: A) interest only B) interest, dividends, and capital gains, increased by expenses properly allocable to the income C) 401(k) distributions D) interest, dividends, capital gains, rental and royalty income, reduced by expenses properly allocable to the income - Correct Answer-D) interest, dividends, capital gains, rental and royalty income, reduced by expenses properly allocable to the income In general, investment income includes, but is not limited to interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and businesses that are passive activities to the taxpayer (within the meaning of Section 469). The taxpayer may reduce investment income by certain expenses properly allocable to the income. Net investment income does not include distributions from a qualified retirement plan. Kristin picked up some odd jobs over the holiday break and made $385. This is her income for the entire year. Which of the following statements is true? A) She has to report the income as self-employment income. B) She should file a 1040 SE because it is considered self-employment income. C) She should file a 1040 because it is considered regular income. D) She does not need to report the income. - Correct Answer-D) She does not need to report the income. You do not have to file an income tax return if your net earnings from self-employment were less than $400. Which of the following statements is correct with regard to the payment of household employment taxes? A) Household employment taxes are included on the employer's individual income tax return and are due by April 15th of the following year. B) Household employment tax payments follow the same guidelines as regular employment tax payments and tax deposits must be made throughout the year. C) Household employment tax payments must be made quarterly with Form 941. D) Household employment tax payments are not the employer's responsibility. - Correct Answer-A) Household employment taxes are included on the employer's individual income tax return and are due by April 15th of the following year. Household employment taxes are included on the employer's individual income tax return using Schedule H (Form 1040), Household Employment Taxes, and are due by April 15. However, the employer may choose to include the wages with those of an existing sole proprietorship or farming business. For 2020, in which of the following situations would you be required to report and pay social security and Medicare taxes? A) You pay $2,500 cash to your 19-year-old daughter for babysitting your 3 year old son. B) You pay $5,500 cash to a 17-year-old who lives down the street for cleaning your house. C) You pay $2,300 cash to a 19-year-old who lives down the street for lawn care. D) You pay $7,500 cash to your mother for providing child care services at mother's home. - Correct Answer-C) You pay $2,300 cash to a 19-year-old who lives down the street for lawn care. You have a household employee if you hired someone to do household work and that worker is your employee. The worker is your employee if you can control not only what work is done, but how it is done. If you pay cash wages of $2,200 or more (for 2020) to any one household employee, then you need to report and pay social security and Medicare taxes. Do not count wages you pay to your spouse, your child under the age of 21, your parent (certain exceptions apply), or any employee under the age of 18 at any time during the year. If childcare services are provided outside of the taxpayer's home, the childcare provider is not considered a household employee. Cash wages include wages you pay by cash, check, money order, etc. Garland, a single man, was injured in an accident in December 20X1. As a result, he was confined to a wheelchair for 3 months and unable to return to work until November 20X2. During the time he was disabled, Garland took a distribution from a qualified retirement plan he had from a previous employer in order to pay medical expenses. Garland turned 49 on October 23, 20X2 and was unable to deduct any of his medical expenses as they did not exceed the threshold. Based on this information, which of the following statements is true with regards to tax on early distributions? A) The entire distribution is subject to the 10% tax on early distributions. B) The 10% tax on early distributions does not apply since the distribution was used for medical expenses. C) The tax on early distributions does not apply since Garland was temporarily disabled at the time of the distribution. D) The tax on early distributions does not appl - Correct Answer-A) The entire distribution is subject to the 10% tax on early distributions. The tax on early distributions from a qualified retirement plan does not apply to distributions that are: - Made as part of a series of substantially equal periodic payments for your life (or life expectancy). - Made because you are totally and permanently disabled. - Made on or after the death of the plan participant or contract holder. - From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees). - From a qualified retirement plan (other than an IRA) to an alternate payee under a qualified domestic relations order. - From a qualified retirement plan to the extent you have deductible medical expenses (in excess of AGI limitations), whether or not you itemize your deductions for the year. - From a qualified retirement plan due to an IRS levy of the plan. - From elective deferral accounts under 401(k) or 403(b) plans, or similar arrangements, that are qualified reservist distributions. - From an employer plan under a written election that provides a specific schedule for distribution of your entire interest if, as of March 1, 1986, you had separated from service and had begun receiving payments under the election. - From an employee stock ownership plan for dividends on employer securities held by the plan. A married taxpayer filing jointly may owe Net Investment Income Tax if modified adjusted gross income exceeds which of the following thresholds: A) $100,000 B) $125,000 C) $200,000 D) $250,000 - Correct Answer-D) $250,000 The Net Investment Income Tax (NIIT) is imposed by Section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts that have income above the statutory threshold amounts. Individuals, estates, and trusts will use Form 8960 to compute their Net Investment Income Tax. A taxpayer with Net Investment Income will owe the NIIT if modified adjusted gross income exceeds one of the following thresholds: Filing Status | Threshold Amount MFJ | $250,000 MFS | $125,000 Single | $200,000 HoH | $200,000 Qualifying Widower | $250,000 Which of the following is subject to withholding for a U.S resident? John and Linda Smith are a childless married couple with no other dependents who lived apart for all of the current year. On December 31 of the current year, they were legally separated under a decree of separate maintenance. Based on the facts, which of the following is the only filing-status choice available to them for the current year? A) MFJ return B) MFS return C) HoH D) Single - Correct Answer-D) Single The determination of whether an individual is married is made as of the close of the taxable year, so John and Linda are both single for the current year (Publication 17). Couples under a separate maintenance agreement are not considered married. Which of the following is a requirement that must be met in determining whether a taxpayer is considered unmarried for head of household filing-status purposes? A) The individual must be divorced or legally separated for over one year. B) An individual must pay less than one-half the cost of keeping up a home for the tax year. C) An individual's home must be, for at least 6 months, the main home of his or her child, stepchild, or qualified foster child whom (s)he or the noncustodial parent can properly claim as a dependent. D) An individual's spouse must not have lived in their home for the entire tax year. - Correct Answer-C) An individual's home must be, for at least 6 months, the main home of his or her child, stepchild, or qualified foster child whom (s)he or the noncustodial parent can properly claim as a dependent. In determining if a taxpayer qualifies for head of household filing status, the taxpayer is considered unmarried if all the following requirements are met: Ms. Maple, a single woman age 65, retired in 2021. Prior to her retirement, she received a $6,000 bonus plus $5,250 in wages. After her retirement, she received $9,000 in Social Security benefits. Which of the following is true? A) Ms. Maple does not have to file a 2021 income tax return. B) Ms. Maple has to file a 2021 income tax return. C) Ms. Maple has to file a 2021 income tax return but may exclude the $6,000. D) Ms. Maple has to file a 2021 income tax return but may exclude the $9,000 in Social Security benefits from income. - Correct Answer-A) Ms. Maple does not have to file a 2021 income tax return. In general, a taxpayer does not have to file a return if his or her gross income is less than his or her standard deduction [Publication 501 and Sec. 6012(a)]. For single individuals who are 65 or over, the standard deduction increases by $1,700. Therefore, the filing threshold will be $14,250($12,550 basic standard deduction + $1,700 additional standard deduction). Ms. Maple's income does not qualify her Social Security benefits for gross income inclusion in determining her filing requirement. Which of the following is true regarding the filing of Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return? A) Filing Form 4868 provides an automatic 2-month extension of time to file and pay income tax. B) Any U.S. citizen who is out of the country on April 15, 2022, is allowed an automatic 6-month extension of time to file his or her 2021 return and pay any federal income tax due. C) Interest is charged on tax not paid by the due date of the return even if an extension is obtained. D) Electronic filing cannot be used to get an extension of time to file. - Correct Answer- C) Interest is charged on tax not paid by the due date of the return even if an extension is obtained. An automatic extension of 6 months is provided for an individual who files Form 4868 or uses a credit card to make the required tax payment on or before the initial due date. Tax liability must be paid on the original due date of the tax return. Automatic extension for filing the return does not extend time for payment. Interest will be charged from the original due date. If the required payment is made by the regular due date for the return, the return can be filed anytime before the 6-month extension period ends. All of the following are true EXCEPT A) A brother-in-law must live with the taxpayer the entire year to be claimed as a dependent even if the other tests are met. B) A son, age 21, was a full-time student who earned $4,400 from his part-time job. The money was used to buy a car. Even though he earned $4,400, his parents can claim him as a dependent if the other dependency tests were met. C) For each person claimed as a dependent, the Social Security number, adoption taxpayer identification number, or individual taxpayer identification number must be listed. D) If a married person files a separate return, (s)he cannot claim his or her spouse as a dependent even if the spouse had no gross income and was not the dependent of another taxpayer. - Correct Answer-A) A brother-in-law must live with the taxpayer the entire year to be claimed as a dependent even if the other tests are met. The relationship requirement is satisfied by existence of an extended (by blood) or immediate (by blood, adoption, or marriage) relationship. The relationship need be present to only one of the two married persons who file a joint return. Any relationship established by marriage is not treated as ended by divorce or by death. An individual must satisfy either a relationship or a residence requirement but does not have to satisfy both (Publication 501). John and Joanne are the sole support of the following individuals, all U.S. citizens, none of whom lives with them. None of these individuals files a joint return or has any gross income. - Jennie, John's mother - Julie, Joanne's stepmother - Jonathan, father of John's first wife How many dependents may John and Joanne claim on their joint return? A) 3 B) 2 C) 1 D) 0 - Correct Answer-A) 3 To qualify for dependency, the taxpayer must provide over 50% of the support of a U.S. citizen who meets certain relationship tests stated in Sec. 152(a). Section 152 allows dependency for fathers, mothers, stepfathers, and stepmothers. Relationships established by marriage are not ended by death or divorce (Publication 501). Thus, each of the individuals listed qualifies under the relationship test of Sec. 152. If a nonresident alien receives income that is effectively connected with U.S. trade or business, which itemized deductions may be taken? A) Casualty and theft losses from a federally declared disaster. B) Federal income taxes. C) A charitable contribution to a charitable organization in Germany. D) Mortgage interest on a primary residence. - Correct Answer-A) Casualty and theft losses from a federally declared disaster. Nonresident aliens can deduct certain itemized deductions if income is received that is effectively connected with U.S. trade or business. These deductions include state and local income taxes, charitable contributions to U.S. organizations, casualty and theft losses, and miscellaneous deductions. Mr. and Mrs. Black received the following income for 2021. How much income should be reported on their 2021 joint return? I. W-2 income for Mrs. Black for wages of $30,000. II. W-2 for Mrs. Black for $2,000, the value of fringe benefits not included in the above W-2. Mrs. Black did not pay for the fringe benefits. III. Benefits of $5,000 paid to Mr. Black from a health and accident plan for which the premiums were paid by his employer but included in his income. A) $30,000 B) $32,000 C) $37,000 D) $35,000 - Correct Answer-B) $32,000 The IRC defines gross income as all income from whatever source derived except as provided otherwise. Section 61(a) enumerates types of income that constitute gross income. The list is not exhaustive. 1) Compensation for services, including fees, commissions, and fringe benefits 2) Gross income derived from business 3) Gains derived from dealings in property 4) Interest 5) Rents 6) Royalties 7) Dividends 8) Annuities 9) Income from life insurance and endowment contracts 10) Pensions 11) Income from discharge of indebtedness 12) Distributive share of partnership gross income $2,700 State motor vehicle tax on value of the car 360 The Bronsons sold their house on June 30 of the current year under an agreement in which the real estate taxes were not prorated between the buyer and sellers. What amount should the Bronsons deduct as taxes in calculating itemized deductions for the current year? A) $1,800 B) $2,160 C) $2,700 D) $3,060 - Correct Answer-B) $2,160 Section 164(a) allows a deduction for state and local real property taxes, and for state and local personal property taxes. Real estate taxes must be apportioned between the buyer and the seller on the basis of the number of days the property was held by each in the year of sale, regardless of an agreement not to prorate them [Sec. 164(d)]. The taxpayers held the property for 6 months of the 9-month period the taxes covered. The amount of the taxes apportioned to the Bronsons is $1,800 ($2,700 × 6 ÷ 9). The state motor vehicle tax on the value of the car is a tax on the value of personal property, so the $360 may also be deducted (Publication 17). The taxpayers may deduct a total of $2,160 as taxes in calculating their itemized deductions. Which of the following payments can Demi deduct, at least in part, as interest in the current year? A) Points that the seller paid to a lender to arrange financing for Demi's purchase of her main home. B) Interest she paid on a loan used to purchase tax-exempt bonds. C) Interest on income taxes paid to the IRS. D) Property insurance premiums on a policy entered into in 2018. - Correct Answer-A) Points that the seller paid to a lender to arrange financing for Demi's purchase of her main home. Prepaid interest paid in the form of points on a home mortgage to purchase a home is deductible in the year paid as long as points are normal business practice and are reasonable in the area. Points paid by the seller in connection with the loan to the taxpayer are treated as directly paid by the taxpayer (Publication 936). Therefore, the interest is considered as paid by Demi. Kate's records for the year reflect the following information: - Paid a church $9,500, of which $6,000 was contributed to the church and $3,500 was paid to enroll her child in its school. - Paid $100 dues to a business organization. - Paid $1,500 cash to qualified public charitable organizations. - Donated stock having a fair market value of $1,500 to a qualified charitable organization. She purchased the stock 2 years earlier for $3,000. Kate's adjusted gross income (AGI) for the year was $20,000. What is the amount of her charitable contribution deduction? A) $7,500 B) $9,000 C) $10,000 D) $13,500 - Correct Answer-B) $9,000 Taxpayers may deduct as a charitable contribution the excess of what they gave over the probable fair market value of what they received. Accordingly, Kate may deduct the $6,000 out of $9,500 contributed to the church. The dues paid to the business organization are not deductible; the entity does not qualify as a charitable organization under Sec. 170. The $1,500 to the qualified public charitable organizations, however, is deductible in full. The stock contribution is valued at the fair market value, not the purchase price. Therefore, the donated stock is valued at $1,500. The total amount of these deductions is $9,000, and this amount is below the 50%-of-adjusted-gross- income (100% for the cash donations in 2021) limitation (Publication 526). The following information pertains to Cole's personal residence, which sustained federally declared disaster fire damage in the current year: Adjusted basis $150,000 Fair market value immediately before the fire 200,000 Fair market value immediately after the fire 180,000 Fire damage repairs paid for by Cole in the current year 10,000 The house was uninsured. Before consideration of any "floor" or other limitation on tax deductibility, the amount of the casualty loss was A) $30,000 B) $20,000 C) $10,000 D) $0 - Correct Answer-B) $20,000 The amount of a casualty loss under Sec. 165 is the lesser of the decrease in the fair market value of the property resulting from the casualty or the taxpayer's adjusted basis in the property. The decrease in the fair market value of Cole's residence is $20,000 ($200,000 - $180,000). This is less than the adjusted basis, so the casualty loss is $20,000. The repairs paid by Cole are not an additional loss. Instead, they are an effort by Cole to replace the loss that has already occurred and are added to the basis of the property (Publication 547). Which of the following is an other itemized deduction reported on Schedule A? A) Amortizable premium on taxable bonds. B) Medical expenses. C) Business start-up costs. D) Business expenses of a taxpayer's sole proprietorship. - Correct Answer-A) Amortizable premium on taxable bonds. Amortizable premium on taxable bonds is an other itemized deduction reported on Schedule A. All of the following are considered adjustments for arriving at alternative minimum taxable income EXCEPT A) Local real property taxes. B) Local income taxes. C) Home mortgage interest (debt used to purchase, build, or substantially improve a residence). D) Standard deduction. - Correct Answer-C) Home mortgage interest (debt used to purchase, build, or substantially improve a residence). Taxable income must be adjusted to arrive at alternative minimum taxable income. The adjustments are described in Secs. 56 and 58, with tax preferences in Sec. 57. The adjustments with respect to itemized deductions of an individual are contained in Sec. 56(b)(1). No adjustment is made to taxable income for home mortgage interest in order to arrive at alternative minimum taxable income [Publication 17 and Sec. 56(b)(1)(C)(i) In the alternative minimum tax, all of the following are considered adjustment items for noncorporate taxpayers EXCEPT A) The standard deduction. B) Foreign income taxes paid. C) A balance of research and experimental expenditures. D) Charitable contributions. - Correct Answer-D) Charitable contributions. Adjustments are disallowed itemized deductions or standard deduction and balance of research and experimental expenditures. Charitable contributions, however, are not included in this computation as an adjustment item. Rev. Janice Burton is a full-time minister at the Downtown Missionary Church. The church allows her to use the parsonage that has an annual fair rental value of $4,800. The church pays an annual salary of $13,200, of which $1,200 is designated for utility costs. Her utility costs during the year were $1,000. What is Rev. Burton's income for self-employment tax purposes? A) $18,000 B) $13,200 C) $12,200 D) $13,400 - Correct Answer-A) 18,000 In the case of a minister, net earnings from self-employment in connection with the performance of religious duties are computed without regard to the exclusion of rental value of home or parsonage (Publication 517 and Sec. 107). Therefore, the $13,200 annual salary plus the $4,800 rental value is used to determine Rev. Burton's self- employment taxes. A single taxpayer has $130,000 in wages and $200,000 in net self-employment income. What is the amount of additional Medicare tax that would be due on Form 1040 for the year? A) $0 B) $720 C) $1,170 D) $1,845 - Correct Answer-C) $1,170 A single taxpayer with income in excess of $200,000 is taxed an additional 0.9% on the excess as a Medicare tax. The taxpayer had total income of $330,000 ($130,000 + $200,000). The additional Medicare tax due is $1,170 [($330,000 - $200,000) × 0.9%]. The basis for inherited property is the fair market value (FMV) on the date of the death or at some alternate date (as specified in the tax code). In addition, all inherited property has a long-term holding period. A gain is determined by subtracting the adjusted basis from the amount realized. Amount realized $2000 (100 shares × $20/share) Minus Adjusted basis (1,500) (100 shares × $15/share) Gain $500 Thus, Emma has a long-term gain of $500. Which of the following statements concerning the holding period of assets is true? A) In the case of stocks and bonds, the holding period begins on the day after the trading date. B) In the case of nontaxable exchanges, the holding period begins 45 days after the date you transfer the property. C) In the case of a gift, the holding period begins on the date you receive the gift. D) In the case of inherited property, there is no holding period. - Correct Answer-A) In the case of stocks and bonds, the holding period begins on the day after the trading date. For a security that is purchased and sold on a registered security exchange, the holding period begins on the day after the taxpayer purchases the security. Generally, if you own stock in a small corporation that meets the requirements of Sec. 1244 (small business) stock and you sell that stock at a loss, the loss is reported as A) Short-term loss on Schedule D limited to $3,000. B) Ordinary loss on Form 4797 limited to $25,000 for a single individual and limited to $50,000 for those filing a joint return. C) Long-term loss on Schedule D limited to $3,000. D) Ordinary loss on Form 4797 limited to $50,000 for a single individual and limited to $100,000 for those filing a joint return. - Correct Answer-D) Ordinary loss on Form 4797 limited to $50,000 for a single individual and limited to $100,000 for those filing a joint return. In the case of a loss on Sec. 1244 stock, the loss shall be treated as an ordinary loss limited to a maximum loss of $50,000 ($100,000 for a husband and wife filing jointly) for any taxable year [Sec. 1244(a-b)]. Any loss from the sale or exchange of Sec. 1244 stock should be reported on Form 4797, Sales of Business Property, up to the maximum limit for ordinary loss. Any gain from Sec. 1244 stock should not be used to offset a loss but should be reported as a capital gain on Schedule D of Form 1040 (Publication 550). Jordan sold a building used in his business. His books and records reflect the following information for the year: Original cost of building $75,000 Improvements made to building 25,000 Broker's commissions paid on sale 5,000 Cash received on sale 50,000 Total property taxes paid by Jordan 1,500 Portion of property taxes imposed on purchaser and reimbursed to Jordan by purchaser under IRC 164(d) 500 Mortgage assumed by buyer 40,000 Accumulated depreciation 35,000 Fair market value of other property received 10,000 What is Jordan's recognized gain on the sale of the property? A) $30,000 B) $30,500 C) 35,000 D) $35,500 - Correct Answer-A) $30,000 Under Sec. 1001, the gain on the sale or other disposition of property is the excess of the amount realized over the adjusted basis. Any capital repairs, such as a new roof, are added to the adjusted basis. The amount realized is the sum of any money received plus the fair market value of the nonmoney property received. The amount realized includes relief from liabilities and, in this case, the assumption of the mortgage. When calculating amount realized, the seller does not include the reimbursement for real property taxes treated under Sec. 164(d) as imposed on the purchaser. The property taxes paid by Jordan are not included in either amount realized or adjusted basis because they are deductible expenses. The full amount of the realized gain is recognized unless all or some portion thereof is specifically excluded by another statute. Jordan's recognized gain is calculated as follows: Cash received $50,000 FMV of other property 10,000 Mortgage assumed 40,000 Amount realized $100,000 Less: Adjusted basis (65,000) Commissions (5,000) 30,000 John bought his principal residence for $250,000 on May 3, 2020. He sold it on May 3, 2021, for $400,000. What is the amount and character of his gain? A) Long-term, ordinary gain of $650,000. B) Long-term, capital gain of $150,000. C) Short-term, ordinary gain of $650,000. D) Short-term, capital gain of $150,000. - Correct Answer-D) Short-term, capital gain of $150,000. Real property not used in trade or business is a capital asset (e.g., principal residence). Short-term capital is any capital held for 12 months or less starting with the day after acquisition and ending on the day of the sale. Because this sale took place within the prescribed 12-month period, it is classified as a sale of short-term capital property. After many years as a bachelor, Buddy, age 50, married Penny, age 63. Penny's only income was $10,800 of Social Security. They filed a joint return for year 2021 with a modified adjusted gross income of $150,000. Buddy is covered by a retirement plan at work, where he receives compensation of $125,000. He wishes to contribute to an IRA for himself and for Penny. Which of the following will provide them the greatest allowable tax benefit? A) He may contribute $7,000 to each IRA but only take a deduction for the $7,000 to his IRA. B) He may contribute $7,000 to each IRA but take no deduction for either IRA. C) He may contribute $7,000 to each IRA and take a deduction of $7,000 for each IRA. D) He may contribute $7,000 to each IRA but only take a deduction for the $7,000 to Penny's IRA. - Correct Answer-D) He may contribute $7,000 to each IRA but only take a deduction for the $7,000 to Penny's IRA. If covered for any part of the year by an employer retirement plan and no social security payments were received by the individual, the IRA contribution deduction is completely eliminated if the AGI is greater than $125,000 (married filing jointly). However, since Penny received no taxable compensation, the contribution to her IRA is completely deductible. The deduction is $6,000 plus an additional $1,000 for taxpayers age 50 or older. (Publication 590-A.) Jack, a single individual, made the following gifts in 2021: Payment directly to sister's qualifying college for tuition $20,000 Payment directly to sister's qualifying college for room and board 25,000 Cash to nephew 10,000 Cash to brother 30,000 What is the gross amount of gifts that Jack must include on his 2021 Form 709, United States Gift Tax Return? A) $85,000 B) $40,000 C) $65,000 D) $55,000 - Correct Answer-D) $55,000 Section 6019 provides that a gift tax return must be filed for almost all taxable gifts. Specifically excluded from the requirement for filing are transfers that qualify for and do not exceed the 15,000 annual exclusion of Sec. 2503(b). The payment to Jack's sister's college for tuition is not included (this is not considered a "gift"). The amount given for room and board is included, however. The cash payment made to the nephew is excluded due to the $15,000 annual exclusion. The total amount included is $55,000 ($25,000 room and board + $30,000 cash to brother). Which of the following statements concerning gift splitting is false? A) To qualify for gift splitting, a couple must be married at the time the gift is made to a third party. B) Both spouses must consent to the use of gift splitting. C) For gift tax purposes, a husband and wife must file a joint income tax return to qualify for the gift splitting benefits. D) The annual gift tax exclusion allows spouses who consent to split their gifts to transfer up to $30,000 to any one person during any calendar year without gift tax liability, if the gift qualifies as a present interest. - Correct Answer-C) For gift tax purposes, a husband and wife must file a joint income tax return to qualify for the gift splitting benefits. Which of the following statements is correct regarding Form 8995 Qualified Business Income (QBI) Deduction Simplified Computation? A. Corporations should complete the Form 8995 in order to claim the QBI Deduction on their corporate returns B. Taxpayers will receive the Form 8995 from the IRS, if they are determined to be eligible for the QBI Deduction C. A single individual with QBI, whose taxable income doesn't exceed the threshold amount, should use the Form 8995 to claim the QBI Deduction D. A partnership is required to attach Form 8995 to their partnership tax return to claim the QBI Deduction - Correct Answer-Key: C References: Form 8995 Instructions (2021), page 1 Which of the following is true regarding the premium tax credit (PTC)? A. Married individuals are required to file a joint return to qualify for the credit B. For at least 6 months during the year the individual was enrolled in a qualified health plan C. Form 1095-A, Health Insurance Marketplace Statement, is not needed to complete Form 8962, Premium Tax Credit (PTC) D. No PTC is allowed for any period during which an individual is not lawfully present in the United States - Correct Answer-Key: D References: IRC § 36B(c)(1)(D); Pub 974 (2020); Instructions for Form 8962 (2021), pages 2-5 Which of the following situations is reported on Form 1099 MISC: A. Payment of non-employee compensation of $600 or more B. Payments of rent of $400 C. Payments of $5 in royalty income D. Payments made to a physician or other supplier or provider of medical or healthcare services of $600 or more made in your trade of business - Correct Answer-Key: D References: 2022 Instructions for Form 1099-MISC and 1099-NEC, pages 1-10; Treas. Reg. 1.6041-1 What is the total amount a sole proprietor is obligated to report on Forms 1099-NEC based on the following expenses claimed on schedule C? Attorneys' fees to incorporated law firm: $600 Sign painter: $800 ($600 labor and $200 materials) Web page designer: $500 Incorporated janitorial company: $800 Consultant A: $1,000 ($400 paid in cash and $600 paid by check) Consultant B: $500 paid in cash Consultant C: $400 paid by check A. $1,400 B. $1,600 C. $2,000 D. $2,400 - Correct Answer-Key: D References: 2020 Instructions for Form 1099-MISC and 1099-NEC pages 8-10. Pub 15- A (2021), pages 6-9 covers whether someone is an employee or a nonemployee independent contractor. (Key is computed as $600 to law firm + $800 to sign painter + $1,000 to Consultant A = $2,400) The standard deduction is increased for individuals who are age 65 and older and/or: A. Blind B. Retired from the military C. A beneficiary of a trust D. Receiving unemployment compensation - Correct Answer-Key: A References: IRC 63(f); IRS, Publication 501 (2021), page 23 A 62-year-old, married taxpayer files Married Filing Separately, and lives apart from the spouse for the entire taxable year. What is the taxpayer's base amount for computing taxable social security benefits for the taxable year? A. Zero B. $9,000 C. $25,000 D. $32,000 - Correct Answer-Key: C References: § 86(c)(1); IRS, Publication 915 (2021); page 3; Publication 17 (2021), page 63 Which of the following is considered when calculating if any social security benefits are taxable: A. Interest that is tax-exempt B. The exclusion for foreign earned income C. Interest on education loans D. Employer-provided adoption benefits - Correct Answer-Key: A References: § 86(b)(2); IRS, Publication 915 (2021), page 3; Publication 17 (2021), page 63 If you have a dependent that you cannot claim for the child tax credit, the dependent may still qualify you for which $500 credit? A. The Alternative Minimum Tax Credit B. The State and Local Income Tax Credit C. The Credit for Other Dependents D. The Credit for Foreign Dependents - Correct Answer-Key: C References: I.R.C. § 24(h)(4); Publication 17 (2021), Chapter 14, Child Tax Credit/Credit for Other Dependents, page 109 A child may be subject to kiddie tax in the current year if: A. Neither parent of the child is alive at the end of the year B. The child is under age 18 at the end of the tax year C. The child has only nontaxable income of more than $2,200 D. The child is required to file a tax return and he or she files a joint return for the year - Correct Answer-Key: B References: I.R.C. § 1(g); Form 8615 (2021) Instructions pg. 1 Which of the following is correct regarding a personal casualty loss? A. Property due to progressive deterioration is not deductible B. It is reduced by the amount of your standard deduction C. It must be less than 10% of your adjusted gross income D. It is deducted over a three-year consecutive period - Correct Answer-Key: A References: § 165(h)(5); Publication 547 (2021) The Net Investment Income Tax may apply to which of the following? A. Alimony B. Traditional IRA distribution C. Taxable mutual fund distribution D. Tax exempt municipal bond interest - Correct Answer-Key: C References: IRC § 1411(c)(1) and (5); Instructions for Form 8960 Net Investment Income Tax--Individuals, Estates, and Trusts (2021), pages 1, 5 and 6 A single taxpayer filed their 2008 return and claimed $7,500 for the first-time homebuyer credit. The home was used as a primary residence until it was foreclosed on in the current tax year. Which is correct regarding the first-time homebuyer credit? A. The balance of the credit must be repaid and is reported on the tax return for the tax year which the foreclosure is completed B. The unpaid credit received is pro-rated over 15 years C. Since the home was purchased in 2008, there is no longer a requirement to repay the balance of the credit D. There is no requirement to repay the credit when the home is used as a primary residence for at least 5 years - Correct Answer-Key: A References: IRC § 36, Instructions for Form 5405 (Nov. 2021), page 31 For a medical expense to be deductible as an itemized deduction in the current year, the expense must exceed what percentage of adjusted gross income? A. 2.0% B. 7.5% C. 10% D. Medical expenses are no longer deductible - Correct Answer-Key: B References: IRC § 213; Publication 502, page 2 Tax preparation fees for individuals are generally deductible for the current year as: A. They are not deductible B. A tax credit on Schedule 1 C. An investment expense on Schedule A D. A miscellaneous itemized deduction subject to the 2% limit - Correct Answer-Key: A References: IRC § 67 and 67(g); Pub 17 (2021), page 101