Income Tax Practice Questions

What is the number to remember when thinking about unearned income exemption for kiddie tax?

$1,150

A client purchased a mutual fund with a $10,000 lump-sum amount 4 years ago. During the 4 years, $4,000 of dividends were reinvested. Today the shares are valued at $20,000 (including any shares purchased with dividends). If the client sells shares equal to $13,000, which statement is correct? 1. The taxable gain can be based on an average cost per share. 2. The client can choose which shares to sell, thereby controlling the taxable gain. 3. To minimize the taxable gain today, the client would sell shares with the higher cost basis. 4. The client will not have a gain as long as they sell less than what they received. A. 1, 2, 3 B. 1, 3 C. 2, 4 D. 1, 2, 3, 4

A

A client who is a sole proprietor, is going to give their best customers gifts as a token of their appreciation. If the client wants to deduct the full cost of the gifts, what is the maximum amount that they may spend on each customer's gift? A. $25 B. $50 C. $100 D. $250

A

In which of the following situations, if any, may the individual NOT be deemed a dependent of the taxpayer: A. A cousin who does not live with the taxpayer. B. A former brother-in-law who does not live with the taxpayer. The taxpayer is divorced. C. A nephew who does not live with the taxpayer. D. A legally adopted child who does not live with taxpayer.

A

What is the marginal income tax rate? A. The tax rate applied to the last dollar of taxable income earned. B. The lowest tax rate a taxpayer can pay. C. The tax rate on business profit. D. The average tax rate for an individual.

A

Client earned $20k last year with a total federal income tax liability of $1,200. This year they will earn $100,000 with an expected income tax liability of $15,000. What is the lowest amount of tax withholding client should have to meet the safe harbor rules? A. $1,200 B. $12,000 C. $13,500 D. $15,000

A - 100% of last year's tax liability or 90% of this year's tax liability.

Which is the best source for obtaining a plain language understanding about the current tax law? A. Commerce Clearing House Federal Tax Guide B. Congressional Tax Committee Reports C. Treasury Regulations D. Tax Court Reports

A - Blue book is very technical and difficult to understand.

Which of the following individuals can make a deductible contribution to a Traditional IRA in the current year? A. Jack, who is married, has an AGI of $180,000, and his spouse is an active participant in her employer's defined contribution plan, but he is not an active participant. B. Kelly, who is single, has an AGI of $85,000, and is an active participant in her employer's defined benefit plan. C. Leo, who is married, has an AGI of $135,000, and is an active participant in his employer's defined contribution plan. D. Marni, who is single with income from a family trust.

A - Although Jack's spouse is an active participant, Jack is not. Therefore he can make a deductible contribution to a Traditional IRA as long as their joint AGI does not exceed $214,000 in 2022.

Maria Blue spent $12,000 in day care services for her 4 children to allower her to work. If her AGI is $100,000, how much is her dependent care credit? A. $1,200 B. $2,400 C. $6,000 D. $12,000

A - Dependent care credit is not phased out and provides a credit up to 20% on up to $3,000 of expenses per qualifying child, with a maximum of $6,000 for two or more children. Since she spent $12,000 for 4 children, or $3,000 on each child. The maximum expenses she can use for 2 or more children is $6,000. Her expenses are limited. The $6,000 in expenses X 20% = $1,200 in child care credit.

Debra is transferred by her employer from Denver to Seattle. Her expenses are not reimbursed and are as follows: - Cost of moving household furniture: $2,400 - Transportation = $400 - Meals = $420 - Lodging = $350 Qualified Moving Expenses Are: A. $0 B. $2,800 C. $3,150 D. $3,570

A - For years after 2017, qualified moving costs are not deductible and if reimbursed by employer, they must be includable in income.

Kenny has been a night watchman at company for 10 years. During the year, he received the following benefits from the company: -Salary = $15k - Hospitalization Premiums = $3,600 - Required lodging on company premises as a condition of employment: $2,400 - Reward for preventing break-in = $1,000 What amount is includible in Kenny's adjusted gross income for the year? A. $16,000 B. $17,400 C. $18,400 D. $22,000

A - Hospitalization premiums paid by the employer and any other benefit required by the employer for the employer's benefit are not included in the employee's AGI.

If an individual who may otherwise qualify as a dependent does not spend funds that he or she has received (i.e., social security, wages), what is the IRS position regarding these unexpended amounts in terms of their application to the support test and their inclusion in being applied to the gross income test? A. Income received but not spent is applicable to the gross income test but not the support test. B. Income received but not spent is not applicable to the gross income test nor to the support test. C. Income received but not spent is applicable to the gross income test and to the support test. D. Income received but not spent is not applicable to the gross income test but is applicable to the support test.

A - Income received but not spent is applicable to gross income test, but not to the support test. To claim someone, you have to provide at least 50% of their support. If the dependent has income that just goes into their savings instead of being used toward paying their bills, then you are supporting them.

Which of the following is not an above-the-line deduction? A. Medical Expenses B. Contribution to HSA. C. Contribution to Traditional IRA D. Student Loan Interest

A - Itemized Deduction

Client has salary of $80,000, dividends of $20,000, and LP passive income of $15,000. This year, they invested in an equipment-leasing partnership. Their initial investment included $50,000 cash and a nonrecourse not for $60,000. What is the maximum tax deduction your client may take on this investment this year? A. $15,000 B. $35,000 C. $45,000 D. $50,000

A - Maximum deduction is the lesser of the passive income provided by the LP or the maximum amount at risk.

Kim and Warren are both 67 years old and healthy. They also have two dependent parents living with them, his mother and her father. They are filing their tax return and want to know how many personal exemptions they may take. You correctly inform them that they can take: A. 0 B. 2 C. 3 D. 4

A - Personal exemption was eliminated for years after 12/31/17 by TCJA.

Jacob is divorced and has full custody of his two children although they spend every other weekend with their mother. How many personal exemptions is Jacob permitted on his Form 1040? A. 0 B. 1 C. 2 D. 3

A - Personal exemptions are suspended from 1/1/18 through 12/31/25.

Under the terms of a divorce agreement dated 1/13/18, Larry is required to pay his wife Joyce $2,100 in support per month for a minimum period of 10 years and $300 per month in child support. For a 12-month period, Larry can deduct from gross income: A. $0 B. $25,250 C. $3,600 D. $28,800

A - The $2,100 is not alimony since it could extend beyond her death as the required payment is for a minimum of 10 years.

Client has determined that they need to make a 4th quarter federal estimated income tax payment. When is this payment due? A. January 15 of the next year. B. December 31st of this year. C. December 15th of this year. D. September 15th of this year.

A - The 4th quarter federal income tax estimated payment is due by January 15th of the year following the year the payment is being made for.

What is taxable income if client has the following income / expenses in a given year: Wages ($60k), Interest ($1,200), Inheritance ($50k), Alimony paid for divorce in 2010 ($10,000), Child support paid ($8,000), Federal Tax Paid ($5,000), State Taxes Paid (2k), Medical Expenses ($7500), tickets from employer for one basketball game ($100). A. $38,250 B. $40,600 C. $48,250 D. $49,100

A - Wages + Interest - Alimony = AGI ($51,200) - Standard Deduction ($12,950) = $38,250

What is a qualified dividend?

Allows the earnings from a dividend to be taxed at capital gains rates if it is held for more than 60 days within the 121 day ex-dividend date.

Jack and Marge, both 71, got married on July 1 of this year. Immediately following their honeymoon, Jack succumbed to congestive heart failure and died. The autopsy showed that Jack's death was the result of severe cardiac overexertion resulting from relentless amounts of cardiovascular stress. Jack and Marge had no dependents. What filing status should Marge use for this year's tax return? A. Marge should file single or Married Filing Separately. B. Marge should file as Married Filing Jointly. C. Marge should file as Head of Household. D. Marge cannot file as Married Filing Jointly, but she will be able to claim Jack as an exemption.

B

Which is the best source for obtaining information about the intent of a very recent change in the tax law? A. RIA Federal Tax Coordinator B. Congressional Committee Reports C. Treasury Regulations D. Tax Court Reports E. U.S. Master Tax Guide

B

Which of the following income is not subject to Social Security tax? 1. Rental real estate income. 2. Small part-time repair shop income as a proprietor. 3. Shareholder's share of S corporation's income in excess of salary. 4. Income of an individual working as an independent contractor. A. 1, 2, 3 B. 1, 3 C. 2, 4 D. 2, 3, 4

B

Which of the following is not a requirement that must be satisfied in order for a legally married taxpayer to use the head of household filing status? 1. Must file separate tax return from the spouse. 2. Must furnish over 1/2 of the cost of maintaining the household. 3. Must not be a member of the household during the last 6 months of the tax year. 4. Taxpayer must be legally separated from the spouse. A. 2 B. 4 C. 3, 4 D. 1, 2, 3

B

Which of the following is not an ordinary income asset? A. Literary compositions in the hands of the author. B. Depreciable property or real property used in a trade or business. C. Notes receivable from a trade or business. D. Stock in trade held for sale to customers in the ordinary course of business.

B

Client (age 35) and their spouse (age 33) are married with 3 young children. They both work outside the home. Client 1 is a corporate executive while their spouse is an executive assistant. Client 1 fully participates in their company's qualified retirement plan by contributing $20,500 to their salary. Client 2's employer does not offer a retirement plan. In addition, during the year they had they had the following income / expenses: Client 1 Salary: $150,000 Client 2 Salary: $32,000 Cash Gift to Client 2 Mother: $7,000 Interest from Joint savings: $100 Federal Income Taxes Withheld from Paychecks State & Local Income Taxes: $12,000 Charitable Contributions Made: $5,500 Mortgage Interest for Home: $11,100 Real Estate Taxes on Home: $6,000 Contributions to IRAs: $6,000 each. What is their taxable income? A. $124,100 B. $129,000 C. $129,700 D. $135,700

B - 150,000 - 20,500 + 32,000 + 100 - 6,000 (Only Spouse 2's) = $155,600 (AGI) - 10,000 (State Income Tax Withheld & RE Taxes Capped at 10k) - 5,500 = $129,000 *Spousal phaseout for deductible IRA contributions is $204-$214k.

Prior to TCJA, the underlying rationale for the alimony rule is that: A. The income should be taxed to the person with a claim of right to the income. B. The income should be taxed to the person who enjoys the benefits of the income. C. The fruit and tree metaphor. D. Alimony is a payment for the taxpayer's property obligation and therefore, it is taxed to the recipient.

B - As a cash basis taxpayer, the person who receives the alimony (benefits from it) will find the alimony received as taxable income.

Which of the following is a true statement regarding a current Net Operating Loss (NOL)? A. Can be carried back two years prior to the loss year. B. Can offset up to 80% of the current year's income. C. Available the year the loss occurs. D. An affirmative election must be made to forgo the carryback period.

B - Can't be carried back.

Which of the following statements is true? 1. Revenue rulings are based on a set of facts that are common to many taxpayers. 2. Private Letter Rulings are issued at the request of an individual taxpayer. 3. Determination letters are issued prior to the completion of a transaction. A. 1 B. 1, 2 C. 2, 3 D. 1, 2, 3

B - Determination letters are issued at the request of a taxpayer by the district director of the IRS when the taxpayer has already engaged in a transaction and would like to know how to report the transaction for tax purposes.

Nancy and Oliver had been married for 25 years when Oliver died suddenly in February of the current year. Although Nancy was deeply depressed about Oliver's death, she knew that Oliver would want her to move on with her life and she began dating again. It wasn't long before Nancy was swept off of her feet by Paul. After a romantic weekend in the Catskills, Paul and Nancy got married in November of the current year. What filing status will be used for Nancy and Oliver for the current year? A. Nancy and Oliver must both use the single filing status. B. Nancy will use the married filing jointly status, and Oliver will use the married filing separately status. C. Nancy and Oliver will both use the married filing jointly status. D. Nancy will use the surviving spouse filing status, and Oliver will use the married filing jointly status.

B - Nancy cannot file MFJ on two returns. She is married to Paul currently and will file MFJ with him. Oliver's final tax return will be filed as MFS.

During the current year, unmarried taxpayer residing in Montgomery County collected $200 interest on US government bonds, $600 on Montgomery County school bonds, and $550 interest on CDs held by the taxpayer. They also received $60 in dividends on Ford Co. Common Stock. What is the gross taxable income? A. $1,360 B. $760 C. $560 D. $260

B - Need to include government bonds.

Isaac is a middle school teacher with gross income this year of $35,000. Based on the following, what is Isaac's adjusted gross income? 1. $4,000 qualified education interest expense. 2. $2,000 alimony received under a pre-2018 agreement. 3. $1,000 contribution to traditional IRA. A. $30,000 B. $31,500 C. $32,000 D. $33,500

B - Qualified education interest expense deductible amount is limited to $2,500. Alimony received is included in determining their gross income of $35,000.

Gee and Bea Lee have a very diverse family. Which of the following children does not meet the relationship test for the purpose of Gee and Bea qualifying them as dependent for that child? A. Dan, Bea's 8-year-old son from a prior marriage. B. Fran, Gee's 10-year-old cousin. C. Stan, a 5-year-old foster child placed with Gee and Bea by a state agency. D. Xan, Bea's 12-year-old niece.

B - Since Fran is from the same generation as Gee, she does not meet the relationship test.

Client's child, age 21, is a full-time student and qualifies as a dependent. During the summer, they earned $5,500 from a part-time job. Their only other income consisted of $950 interest on a savings account. What is the child's taxable income for 2022? A. $0 B. $550 C. $1,150 D. $5,500

B - Standard deduction for child is the greater of $1,150 or $400 + earned income but not to exceed the normal standard deduction. $400 + $5,500 = $5,900 so it is not limited in 2022. The total income is $5,500 + $950 = $6,450. Taxable Income = $6,450 - $5,900 = $550

Self-employed physician pays fees to CFP professional. Identify the schedule on which the fees may be deductible by the client on their federal income tax return. 1. Schedule A - Itemized deductions 2. Schedule C - Profit or loss from business. 3. Schedule D - Capital Gains and Losses A. 1 B. 2 C. 1, 2 D. 1, 2, 3

B - Tax planning fees may no longer be deducted against itemized deduction. Since client is self-employed, portion related to the business and not personal may be taken as deductible expense on client's 1040.

One of the five tests which must be met to qualify as a dependent is: A. The age of the dependent. B. The dependent is either a member of the taxpayers household or meets the criteria for family relationship. C. The taxpayer is a U.S. citizen. D. All of the above.

B - The 5 dependency tests are 1. Gross Income Test, 2. Support Test, 3. Member of Household or Family Member Test, 4. Citizenship Test (U.S., Canada, or Mexico), 5. Joint Filing Test

A 1245 recapture applies when: A. A gain on sale of real property occurs due to the depreciated basis. B. All or a portion of gain on tangible personal business property resulted from depreciation taken. C. Tangible personal business property is sold regardless of whether there is a gain. D. A gain on any class of property occurs due to cost reduction.

B - Treated as ordinary income for the gain realized resulting from depreciation taken that was greater than economic reality.

In the current year, client had a Section 1231 gain of $13,00. In the prior years, client had the following Section 1231 transactions: 2021: $4,000 Loss 2020: $2,000 Loss 2019: None 2018: None 2017: None 2016: $8,000 Gain 2015: $2,000 Gain 2014: $2,000 Gain How will the client's Section 1231 gain be taxed in the current year? A. $12,000 taxed as ordinary income. B. $6,000 taxed as ordinary income and $7,000 taxed as Section 1231 capital gain. C. $12,000 taxed as Section 1231 capital gain. D. None of the above.

B - Use the 5-year look-back rule. $6,000 would be ordinary income. Remaining $7,000 would be treated as 1231 capital gain.

In which of the following venues is a jury trial available for tax controversies? A. US Tax Court B. US Tax Court, Small Claims Division C. US District Court D. US Court of Federal Claims

C

Ralph is not married and does not have any children. However, Ralph is a very good son and provides more than half of the cost of maintaining a very nice apartment and the necessary expenses for his mother. Which of the following filing statuses should Ralph use and why? A. Single, because Ralph is not married. B. Single, because Ralph does not have any qualifying children. C. Head of Household, because Ralph's mother qualifies as a dependent. D. Head of Household, because Ralph's mother is a qualifying child.

C

Which of the following completes this statement accurately? Alimony is: A. Not deductible for income tax purposes by the payor spouse for divorces prior to 2019. B. Subject to gift tax if paid to a third party on behalf of the intended recipient. C. Not deductible by the payor if the original agreement was from 2017 and restructured in 2020. D. Subject to recapture rules in the 3rd year if the settlement was a front loaded property settlement in the current year.

C

Which of the following credentials permit an individual to appear before the IRS on behalf of a client? 1. Enrolled Agent 2. CPA 3. Attorney 4. CFP A. 2, 3 B. 2, 4 C. 1, 2, 3 D. 1, 3, 4

C

With regard to Sections 1245 and 1250, Section 1231 will be applied only when: A. Any depreciable tangible personal property is sold at a profit. B. Any depreciable tangible personal property is sold at a profit above its adjusted (depreciated) basis. C. Any depreciable property is sold at a profit above its original cost. D. Any depreciable property subject to MACRS rules is sold at a profit.

C

Clients are married and normally file a joint return. Under which of the following circumstances are they required to file a tax return for the 2022 tax year? A. If client 1 is 64 and 2 is 66 and their gross income is $26,200. B. If both clients are 35, have one dependent, and their gross income is $25,000. C. If both clients are 64 and 65, client 2 is blind, and their gross income is $26,500. D. None of the above.

C - A: Standard Deduction = $25,900 + $1,400

Taxable income is the amount: A. Remaining after adjustments to income are subtracted. B. From which allowable itemized deductions are subtracted. C. Used to determine tax liability. D. To which tax credits are applied.

C - D = Tax Liability

Client is single and their taxable income is $42,750, which puts them in the 22% tax bracket. How much is their income tax liability in 2022? A. $1,027.50 B. $4,807.50 C. $5,022 D. $9,405

C - Taxes = Income below $41,775 plus 22% of any income above $41,775. $4,807.50 + (42,750 - 41,775) X .22) = $5,022

Client paid alimony for 2017 divorce ($3,600), earned commissions of $54,000, had a $1,000 capital loss on a stock investment, received a $2,000 from their mother, and paid $6,000 of qualified residential interest on their home mortgage. What is their AGI? A. $43,400 B. $45,000 C. $49,400 D. $50,400

C - $54,000 - $3,600 - $1,000 = $49,400

Which of the following statements regarding deductible expenses is not true? A. Above-the-line deductions are sometimes referred to as adjustments. B. Above-the-line deductions are usually considered to be more favorable to the taxpayer than below-the-line deductions. C. Below-the-line deductions are usually considered to be more favorable to the taxpayer than above the line deductions. D. Taxpayers may take the greater of their itemized deductions or the standard deduction.

C - Above-the-line adjustments are more favorable since many phaseouts are based on AGI.

Client is a contractor who has just purchased a tractor for use in the business. Client paid $25,000 plus $1,250 in sales tax for the tractor. The local municipality also imposes an annual personal property tax of $500. The tractor has an expected useful life in 5 years. What is the client's basis in the tractor for depreciation purposes? A. $25,000 B. $25,500 C. $26,250 D. $26,750

C - Basis = Purchase price + Any addition to to place the property into service.

Client purchased a home for $175,000. Over the years, the client made the following repairs and improvements: Room Addition = $20,000 Pool = $6,000 Roof Repair = $3,500 Painting = $2,000 Two years ago, a storm caused damage to the roof. Client decided to repair rather than replace the roof. Approximately 6 months prior to selling the home this year, the client had the house painted. What was the basis of the home when the client sold it this past year? A. $206,500 B. $204,500 C. $201,000 D. $195,000

C - Basis is increased by addition of room and pool. No increase is realized nor recognized at the time of sale for repairs made.

Client sold an apartment building last year for $100,000, paying a sale commission of $5,000 plus $2,500 closing costs. 20 years ago, the building's original cost was $80,000. Total straight line depreciation of $40,000 had been taken. The building had a mortgage of $60,000 that was assumed by the buyer. What is the buyer's cost basis? A. $70,000 B. $92,500 C. $100,000 D. $107,500

C - Buyer's cost basis is the purchase price of the building.

Which of the following is incorrect? A. Alimony paid during 2018 is a deduction for AGI. B. Expenses paid associated with royalty property are a deduction for AGI. C. Contributions to an IRA are a deduction from AGI. D. Medical expenses paid are a deduction from AGI.

C - Contributions are are deduction FOR AGI.

Which of the following personal income tax planning techniques are used to defer taxation? 1. Itemizing Deductions 2. Contributing to an Individual Retirement Account 3. Using the child care credit. 4. Owning Cash Value Life Insurance A. 1, 2 B. 2 C. 2, 4 D. 3, 4

C - Earnings on the cash value of an insurance policy grow tax-deferred.

Saul was divorced in 1996 and is now single, age 63. His gross income of $50,00 and other expenses are as follows: - Alimony = $8,000 - Charitable Contributions = $2,000 - Contribution to IRA = $2,000 - Net Expenses Paid on Rental Property = $5,000 - Interest on Personal Residence = $4,000 - State Income Tax = $2,200 What is the client's AGI? A. $28,000 B. $33,000 C. $35,000 D. $40,000

C - Gross income - Alimony, IRA, and Expenses on Rental

Client has come to you asking about the basis of property that was given to them by brother. The property had a market value of $75,000 and the brother's adjusted basis was $18,000 at the time of the gift. Brother paid gift tax of $3,500. Client wants to know what their adjusted basis in the property is. Assume brother had utilized annual gift exclusion for gifts previously given to the client that year. What will you tell them? A. Client's new basis is $18,000, the same as the brother's basis at the time of the gift. B. Client's new basis is the FMV of the gift at the time of the gift. C. Adjusted basis for client is $20,600. D. Adjusted basis for client is $21,500.

C - Increase in Donee's Basis = (Appreciation of Property / Taxable Gift) X Gift Taxes Paid = (57,000 / 75,000) X 3,500) = $2,660 Increase in Basis + Adjusted Basis = $2,660 + $18,000 = $20,660

Client is 68 years old and single. What is the lowest adjusted gross income that will require the client to file a tax return for 2022? A. $7,900 B. $12,755 C. $14,755 D. $15,750

C - Must file if their adjusted gross income is $14,700 or more for the current year ($12,950 standard deduction + $1,750 additional standard deduction for age.

Eloise is an unmarried elderly woman who lives alone in a small apartment. Eloise is only able to provide 6% of her own support. The remainder of her support is provided by the following people: 10% oldest son Frank, 22% daughter Gertrude, 30% son Henry, 32% friend Irene. Which of these individuals is eligible to claim Eloise as a dependent? A. Irene can claim Eloise as a dependent because she provides more support than anyone else. B. Frank can claim Eloise as a dependent because he is the oldest son. C. Henry can claim Eloise as a dependent, but only if Gertrude signs an appropriate statement. D. None of these individuals may claim Eloise as a dependent.

C - Must provide >10% of the support together and the other one has to sign a statement of agreement not to claim an exemption.

2 years ago, client purchased stock in a non-small business stock for $1,000 that became worthless. During the current year, the client also had an $8,000 loss on small business stock purchased 2 years ago, a $9,000 loss on non-business bad debt, and a $5,000 LT capital gain. What should the client report this year? A. $4,000 LT capital loss and $9,000 ST capital loss. B. $3,000 LT capital loss and $10,000 LT loss carryforward. C. $8,000 ordinary loss; $3,000 ST capital loss and a $2,000 ST capital loss carryover. D. $8,00 ordinary loss and a $5,000 ST capital loss.

C - Non-business bad debt is treated as ST capital loss. Loss on worthless stock is LT capital loss, loss on small business stock is recognized as an ordinary loss not subject to capital loss rules.

Client owns 25% of LLC and paid $50,000 for their interest. This year, the LLC did very well and had a profit of $100,000, but no distributions were made. What is the client's basis in their interest at the end of this year? A. $25,000 B. $50,000 C. $75,000 D. $100,000

C - Original cost basis is increased by their share in the profits. If distribution occurs, decreases the client's adjusted basis in the company.

Client has $1,500 loss from interest in partnership they don't participate in, $500 loss from a 0.2% LP, $2,400 loss from a 12% interest in an S Corp where they manage one of the departments, $32,000 salary, and $600 of dividend income. What is the client's AGI? A. $28,200 B. $30,000 C. $30,200 D. $32,600

C - Passive activity losses are suspended.

The holding period of property acquired by gift may begin on: A. The date the property was acquired by the donor only. B. The date of the gift only. C. Either the date the property was acquired by the donor or the date of the gift. D. Some other date.

C - Person receiving a gift has a holding period of the donor plus the donee if at disposition they use the gain basis. However, the holding period for a gift utilizing the loss basis (double basis) starts the holding period at the date of the gift.

Leon, age 32, is an active participant in his employer's defined benefit plan, but he would also like to make a deductible contribution to a traditional IRA this year. Leon is married, files a joint return with his wife, and they have an AGI of $116,000 in the current year. What is the maximum deductible contribution that they each can make to a traditional IRA, assuming his wife is also an active participant? A. $0 B. $2,100 C. $3,900 D. $6,000

C - Phase out range for taxpayer who are active participants and use the MFJ status is $109,000 - $129,000. Reduction = Contribution Limit X AGI - Lower Limit / 20,000. 6,000 X (116 - 109) / 20) = 2,100. Since both spouses are active participants, the maximum deductible contribution that each can make to a traditional IRA is (6,000 - 2,100) = $3,900.

Client sold an apartment building last year for $100,000, paying a sale commission of $5,000 plus $2,500 closing costs. 20 years ago, the building's original cost was $80,000. Total straight line depreciation of $40,000 had been taken. The building had a mortgage of $60,000 that was assumed by the buyer. What is the seller's adjusted cost basis? A. $32,500 B. $37,500 C. $40,000 D. $52,500

C - Purchase Price - Depreciation. Commission and closing costs reduce the net sales price.

What is the effective income tax rate? A. The highest marginal rate paid by a taxpayer based on income. B. The highest rate that is paid by an individual. C. The average rate a taxpayer pays based on taxable income. D. The tax rate considered for tax planning purposes.

C - Rate is determined by dividing the tax liability by the taxable income.

Client's husband passed away in January of this year. She does not remarry and still maintains a residence for herself and her son who is 10 years old. When she is filing her tax return for this year, she may files as: 1. Single 2. MFJ 3. MFS 4. Qualifying Widower A. 1 B. 4 C. 2, 3 D. 2, 3, 4

C - She is considered married for the year since her spouse died during the year. She does not qualify for qualifying widower since this status applies for the 2 years following the year of a spouse's death.

Vince, a single individual, is one of the founders and original shareholders of Security Consulting, Inc., a corporate security consulting firm. The company was initially capitalized with $200,000, and Vince was a 50 percent owner. The company was structured as a C corporation and filing requirements and permissible tax elections that could benefit the owners were made at the time the company was created. After several years of successful operations, Security Consulting lost market share to large national firms, and eventually closed down operations. Since it had no assets other than the goodwill of the business, there was nothing left to distribute to the shareholders. Assuming that there were no changes to Vince's ownership interest over the period of his ownership, and that Vince has no capital transactions in the current year, by how much can Vince reduce his adjusted gross income this year due to the company becoming worthless? A. $3,000 B. $50,000 C. $53,000 D. $100,000

C - Since it was capitalized with < $1M valuation and Vince was original stakeholder, the stock is Section 1244 stock. Vince can deduct up to $50,000 of losses as ordinary income in any one tax year and the remaining loss as a capital loss.

Sources of "substantial authority" available for tax research include: 1. IRC 2. Congressional Committee Reports (Blue Book) 3. Treasury Regulations 4. Private Letter Rulings A. 1, 2 B. 1, 2, 3 C. 1, 2, 3, 4 D. 1, 3, 4

C - Substantial authority is official words and rulings which can be relied on to support a tax opinion or position. All of these can be relied on by someone.

In year 1, Justin earns $700 from delivering papers for a newspaper company and is treated as self-employed. In year 2, the newspaper company hires him as an employee and pays him $700 as W-2 income with no federal or state income tax withholding. Does Justin have to file a tax return in either year? A. Yes, Yes B. No, Yes C. Yes, No D. No, No

C - The rule is that a taxpayer has to file if they have => $400 of net earnings from self-employment. If no self-employment income, no requirements to file unless their income exceeds the standard deduction and personal exemption.

Client sells a stock to their brother for $1,800. Client purchased the stock 4 years ago for $3,000 and the current fair market value of the stock is $1,800. Brother paid client $1,800 for the stock. Which of the following statements is correct regarding the tax consequences of this transaction? A. If brother sells the stock to an unrelated party for $3,500, they will realize a gain of $1,700. B. Client has a recognized loss of $1,200. C. If brother sells the stock to an unrelated party for $2,200, they will have no gain or loss. D. If brother sells the stock to an unrelated party for $3,500, they will have no gain or loss.

C - This is dual basis example. If stock is sold for < FMV, loss, between the original basis and FMV, no gain or loss, or greater than the original basis, gain.

Which of Victor and Vivian's children would not be a qualifying child for the purpose of claiming the child tax credit in the current year? A. Vivian's granddaughter, who turned 4 in the current year and lives with Victor and Vivian for more than 1/2 of the year. B. Victor's brother, who turned 16 in the current year and lives with Victor and Vivian for more than 1/2 of the year. C. Victor and Vivian's daughter, who turned 17 in the current year and does not provide more than 1/2 of her support. D. Victor and Vivian's son, who was born on October 21 of the current year.

C - To qualify for the child tax credit, the child must be under the age of 17.

Payments for employment-related care that are made to relatives of the taxpayer may qualify for the credit for child and dependent care expenses. Which of the following payments does not qualify? A. Payments for employment-related care made to the taxpayer's uncle. B. Payments for employment-related care made to the taxpayer's 21-year-old married daughter. C. Payments for employment-related care made to a 17-year-old dependent child of the taxpayer. D. Payments for employment-related care made to taxpayer's 17-year-old neice.

C - To qualify for the dependent care credit, both parents (or one if single) must be paying child care expense for them to work. They cannot use the child care expense, for the purposes of the credit, if they are a stay at home caregiver that needs a break a couple hours a day or week. Paying a dependent of the taxpayer to care for children while the taxpayer is at work does not qualify towards the credit for child and dependent care expenses. You cannot pay your 15 year old child to watch your 8 year old and have it be a qualified expense. You could pay a non-dependent 21 year old to watch the children while you are at work and that will count as a qualified expense. All the other options are qualifying payments.

As a direct results of the rules under TCJA 2017, qualifying dividends will be treated in which manner: A. Qualified dividends are taxed in the same way as capital gains at an 18% rate for those in the 28% and higher marginal tax bracket. B. Qualifying dividends are taxed at a newly instituted 5% tax rate. C. Taxation on dividends have not been impacted under TCJA. D. Qualifying dividends are taxed at set dollar points.

D

Assuming an asset is sold for a gain, when would Section 1250 ordinary income occur? A. Depreciable property is sold at a gain. B. Depreciable property is sold regardless of whether there is a gain or loss. C. Straight-line depreciation is used on real property subject to ACRS. D. Real property subject to ACRS and accelerated depreciation was used.

D

Refundable tax credits include the: A. Foreign Tax Credit B. Tax Credit for Rehab Expenses C. Disabled Access Credit D. Earned Income Credit

D

Section 1245 recapture does not apply to business equipment held for 17 months or longer if: A. The property was destroyed by fire and the insurance recovery exceeds the property's adjusted basis. B. The property was sold for a gain but was depreciated using straight-line depreciation rather than MACRS. C. The property was acquired, depreciated, and exchanged for a less valuable asset where the buyer of the asset paid additional cash in the exchange. D. The property was abandoned as worthless.

D

The Qualified Dependent Test includes which of the following tests: 1. Gross income. 2. Support. 3. Member of household or family. 4. Citizenship or residence. 5. Joint return. A. I and II only. B. I, II, IV and V only. C. I, II and IV only. D. All of the above.

D

Under what circumstances will the child of divorced parents be treated as the qualifying child of the noncustodial parent? 1. The parents are legally divorced and not living in the same household. 2. The child receives over one-half of his support for the year from his parents. 3. The child is in the custody of the parents for more than half the year. 4. The custodial parent signs a statement that he will not claim the child as a dependent for the year and the noncustodial parent attaches the statement to his return. A. I only. B. I, II and III only. C. II, III, and IV only. D. I, II, III, and IV only.

D

Which of the following are deductions for AGI? A. Self-employed health insurance. B. $6,000 qualified residential interest on vacation home. C. Alimony paid on a divorce agreement dated 2/1/16. D. A & C Only

D

Which of the following dispositions of IRC Section 1245 recapture property would result in the immediate recapture of some or all of previous depreciation deductions? A. Distribution by a partnership to its partners. B. Donation to a charity. C. Disposition at Death D. Sale for cash and an interest-bearing note.

D

Client owns a downtown office building. Client originally purchased the building for $900,000 and took depreciation deductions of $400,000. Client is in the 37% tax bracket. Straight-line depreciation would have been $400,000. What are the tax consequences if the client sells the building for $2,100,000? A. Ordinary income $0. B. $400,000 of gain taxed at 25%. C. 1231 gains of $1,200,000. D. All of the above.

D - Sale Price $2,100,000 Less Adjusted Basis $500,000 ($900,000 - $400,000) Gain $1,600,000 Breakdown of Gain: $400,000 Depreciation Recapture (25%) $0 Excess Depreciation (Ordinary Income) $1,200,000 Gain (Capital Gain)

Greg just received his student loan statement that indicates that he has paid $3,000 on his student loan during this tax year. How much of the interest may he deduct? A. None of the interest is deductible since it is consumer debt. B. $3,000 as an itemized deduction. C. $2,500 as an itemized deduction. D. $2,500 as an adjustment to income.

D - Above the line deduction.

Janice, who is single, had gross income of $38,000, and incurred the following expenses: - Charitable contributions (cash) = $2,500 - Taxes and interest on home = $9,000 - Legal fees incurred in a tax dispute = $1,000 - Medical expenses = $4,000 - Penalty on early withdrawal of savings = $200 AGI is: A. $38,000 B. $21,300 C. $29,000 D. $37,800

D - All but the penalty for early withdrawal of savings are itemized deductions.

Which of the following distributions of IRC Section 1245 recapture property may result in the immediate recapture of some or all of previous depreciation deductions? A. Distribution by a partnership to one of its partners. B. Non-simultaneous like-kind exchange. C. Disposition at death. D. Sale for an interest-bearing note.

D - Applied to the sale of depreciated assets.

Three investors with to start a manufacturing business. The business is expected to generate a large income which it will reinvest for many years. Investor #1 has substantial assets which they plan to contribute to the business. Investor #1 is also concerned about showing too much business income on their personal return. Which business structure would be most appropriate for the business? 1. LP with Investor 1 as LP. 2. Business trust with all 3 as equal interest. 3. S corporation with all 3 as equal shareholders. 4. C corporation with all 3 as shareholders. A. 1, 2, 3 B. 1, 3 C. 2, 4 D. 4 E. 1, 2, 3, 4

D - Business trust is a pass-through entity.

Walter is a cash basis taxpayer. Which of the following items must be included in their adjusted gross income calculation for the current year? A. Earnings from Series EE bonds. B. Business income that was earned on Dec. 15 of the current year. The client mailed a check on December 29th of the current year. The check arrived in Daniel's mailbox on January 2 of the following year. 3. Business sale to a customer on October 15. Daniel extended the payment due date and the client has yet to pay the bill. D. OID on the bonds for the current year.

D - Earnings on EE bonds are delayed until redeemed or matured. OID must be reported in the current year's income regardless of receipt.

Which of the following employee fringe benefits would be taxable to the employee? A. Business use of an employer-provided auto. B. Employee of an airline flying standby from LA to San Fran. C. Benefits of de minimis value. D. Monthly dues to the local health club paid by the employer. E. 10% employee discount on department store merchandise.

D - Health club must be on premises to be tax free. All other options are nondiscriminatory, thus they are nontaxable.

Can money paid for child support be structured in a divorce as to be deductible to the payor spouse for divorces prior to 2019? A. Yes, if the decree stipulates such. B. No, unless the taxpayer gets a letter ruling from the IRS. C. No, child support payments can never be made deductible. D. Yes, if the money to be considered as child support is included in deductible alimony.

D - If an agreement is reached between former spouses where the decreed amount of alimony is increased to include child support, then the additional alimony would be taxable to the recipient and deductible to the payor. The additional money cannot be based on any contingency such as with the child reaching the age of majority or death.

Clients are married. They paid $100,000 for their home 5 years ago and the FMV was $150,000 when client 1 died. What is client 2's basis in the home after client 1's death if the home was held as community property and client 1 left half their home? A. $50,000 B. $75,000 C. $125,000 D. $150,000

D - In community property state, both halves are stepped up to FMV regardless of who inherits the other half.

For purposes of determining taxable income, which of the following is true? A. Find a suitcase of money and spend it, does not have to report. B. Collects income from customer, but is being sued for refund, can defer recognition of income until the suit has been resolved. C. Embezzlement proceeds are not included in the embezzler's gross income because the embezzler has an obligation to repay the owner. D. A person who rents out their personal residence 10 days during the year is not required to include any income received.

D - Not required since it is considered personal property. They are not allowed to deduct expenses incurred to rent the home out.

Which of the following imposed the first constitutional federal income tax? A. Revenue Act of 1861. B. 16th Amendment C. Revenue Act of 1916. D. None of the above.

D - Revenue Act of 1913 imposed the first constitutional income tax.

5 years ago, client bought 10,000 shares of stock at $10 per share. Today, the stock is worth $200,000 and is paying a dividend of $8,000 per year. Client feels the stock will continue to appreciate. Client wants to establish a college education fund for their 2 daughters, age 19 (currently taking a gap year traveling Europe) and age 9. Which of the following statements is true? 1. If client gives 2,500 shares of stock to their 19-year old daughter, all dividends from the 2,500 shares will be taxed in her income bracket. 2. If client gives 2,500 shares of stock to the 9-year old, all dividends from the 2500 shares will be taxed at her marginal rate. 3. 2 years from now, if client's older daughter sells their 2500 shares of stock at $30 per share, client will need to report the gain as a LT capital gain on their personal income tax return. 4. All dividend income earned by their 9-year old daughter which exceeds $2,300 in 2022 will be taxed at the parent's tax rate. A. 2 B. 1, 2 C. 1, 3 D. 1, 4 E. 3, 4

D - Statement 1 is correct because the question doesn't say if she meets the exception of under "24" and a student. If she is in school, then the kiddie tax rules would apply until age 23. Statement 4 would be true for 2022 since their 9-year-old daughter would be subject to the kiddie tax with unearned income over $2,300.

Client purchased a stereo system for their son, age 16. The stereo was placed in the son's room and is used exclusively by him. Client also purchased a new sports care in their own name, that was used 90% of the time by their son. Which of the cost of these items may be considered as support in determining whether the client may claim their son as a dependent? A. Both the stereo and the car qualify as support because of the use test. B. Neither the stereo nor the car qualify as support because the car is the client's and the stereo is de minimus. C. The stereo does not qualify for support but the car does because they use it 90% of the time. D. The stereo qualifies for support, but the car dos not even though it is de minimus.

D - The stereo was purchased and GIVEN to the son, this qualifies as support. Because the car was not GIVEN to the son it will not be considered support. Maintenance costs (gas and insurance) qualify as support.

Clients have been in a LT relationship and were married on January 1st of the current year. They intend to file a joint return for all years in which they were eligible to do so. What filing status can client use on their tax return for last year? A. MFJ B. Surviving Spouse C. Head of Household D. Single

D - They were not married as of the last day of the tax year.

Client, who has a taxable income of $200,000, is concerned about being subject to alternative minimum tax (AMT). The following income and deductions were included in computing taxable income. Select the one item that may be added to (or subtracted from) regular taxable income in calculating the AMT. A. LT capital gain of $100,000. B. Cash contribution to your client's church $25,000. C. Dividend income of $100,000. D. Qualified residential interest of $25,000. E. State income tax payment of $25,000.

E

Client is interested in purchasing a franchise in a fast-growing chain with some of their colleagues. After carefully reviewing the proposal, you have determined that apart from a large up-front investment, the business will not need to retain income and the income generated in subsequent years will be paid out to investors. Furthermore, your client wants to be assured that after investing such a large amount, the business would not be disrupted if one of their partners lost interest or encountered personal financial reversals. What form of business makes the most sense given these circumstances? A. LP B. GP C. C Corp D. Professional Corp E. S Corp

E - An LLC could have been another choice to this as well.

T/F: If couple is married but is going to file separately, if one spouse files using itemized deductions, the other spouse can use itemized or the standard deduction.

False - If one spouse files using itemized deductions, so does the other spouse.

T/F: Alimony can be deductible / included in income even if it is paid to a 3rd party as long as it is agreed.

True

T/F: The parent with the higher AGI can claim their child as a dependent if time and expenses are split evenly.

True

T/F: You can file as head of household if you are considered to be abandoned by your spouse and are claiming dependent children.

True - Individual is required to live apart from their spouse for the entire last 6 months of the tax year to file under abandoned spouse status.

Name some qualified education expenses.

Tuition, fees, textbooks