Sample Exam 2

A (Health insurance for Jeffrey, the owner, is not deductible on Schedule C. Health insurance for a sole proprietor, subject to self-employment income requirements, is deductible, but not on Schedule C. Instead, it is claimed as an adjustment to income on Form 1040. For self-employed individuals filing Schedule C or Schedule F, the insurance policy can be either in the name of the business or in the name of the individual. Other types of insurance, including any health insurance costs paid on behalf of employees, would be deductible as ordinary business expenses on Schedule C.)

14. Jeffrey is a self-employed graphic designer who reports his income on Schedule C. His business has two employees, a full-time receptionist and an apprentice designer who works part-time. Which of the following insurance expenses is not deductible on Jeffrey's Schedule C? A. Health insurance for Jeffrey, the owner. B. Health insurance for Jeffrey's employees. C. Liability insurance for Jeffrey's business. D. Auto insurance on Jeffrey's work vehicle.

B (Because of his age and filing status, Rachid does not have to file unless he had at least $20,000 in gross income in 2019. However, he can still choose to file a return to receive any refunds or credits that he may qualify for.)

2. Rachid is 65 and unmarried. He qualifies for Head of Household filing status, because he supports his elderly mother, who is 86 years old and lives with him. Rachid had $19,900 in wage income during the year. Is he required to file a tax return in 2019? A. Yes B. No C. Depends on his mother's net income. D. Depends on his state of residence.

D (Chauncey meets the requirements to file as a Qualifying Widow(er). The qualifying widow(er) filing status is available to the taxpayer for two years after the year of the spouse's death. A 100 surviving spouse may choose to file jointly with his deceased spouse in the year of death. Then, in the two subsequent years, the surviving spouse may use the qualifying widow(er) filing status, provided that they have a qualifying dependent.)

27. Chauncey's wife died on January 5, 2017, and he filed a joint tax return for that year as the surviving spouse. Chauncey has not remarried and maintains a home for his two young children, ages 7 and 9, who lived with him all year. He provides all the financial support for his children. What is the best filing status for Chauncey in 2019? A. Single. B. Head of Household. C. Married Filing Jointly. D. Qualifying Widow(er).

C (Malika will be forced to file MFS, as a MFJ return will require both spouses to agree to file jointly and both will need to participate in the preparation and review of the return. She cannot file as head of household because she did not live apart from her husband for the last six months of the year. There is a special exception that applies to married persons who live apart from their spouses for at least the last six months of the year. In this case, the taxpayer will be "considered unmarried" for head of household filing purposes. However, since Anwar and Malika did not separate until August, and they are not legally separated, they are considered married for the entire taxable year.)

45. Anwar and Malika are legally married but have lived apart since August 10, 2019. They do not have a formal separation agreement and have not filed for divorce. They have one daughter, Leila, who lived with Malika all year. Malika provided over half of his daughter's support. Anwar does not wish to file jointly with Malika. What is the best filing status for Malika if she does not want to have any interactions with Anwar regarding taxes? A. Single. B. Head of household. C. Married filing separately. D. Married filing jointly.

B (Only the jury duty pay would be reported as "other income" on Janelle's Form 1040. Jury duty pay is typically reported to the juror on a 1099-MISC only if the amount totals $600 or more, but any amount received is taxable.)

6. Janelle has the following sources of income during the year. Which of the following types of income must be reported as "other income" on her individual tax return? A. Rental income. B. Jury duty pay. C. Social Security Retirement Income. D. Wages.

68. The answer is C. Maternity clothing is not deductible as a medical expense. Taxpayers can deduct transportation related to medical care. The costs of nursing home care and sterilization (such as a vasectomy or tubal ligation) are also deductible, even though they may be considered elective, they are expressly permitted. Medical expenses are covered in IRS Publication 502, Medical and Dental Expenses.

68. Which of the following is NOT a deductible medical expense? A. Travel expenses related to medical care. B. Nursing home care for a disabled taxpayer. C. Maternity clothing. D. Vasectomy.

85. The answer is C. Ayden is a U.S. citizen, so he must file using Form 1040. Answer "A" is incorrect because Form 1040-NR is only used by nonresident aliens, not U.S. citizens or U.S. residents. Answer "B" is incorrect, because Form 1040-SR is only for seniors who are age 65 or older. Answer "D" is incorrect because Ayden has a filing requirement because his income is over the filing threshold. The fact that he may qualify for the Foreign Earned Income Exclusion is irrelevant; he would have to file a return to claim the exclusion.

85. Ayden is single and 36 years old. He is a U.S. citizen who lives and works overseas. He has no dependents. In 2019, he earns $99,000 in wages in Spain. He has no U.S.-based income and no itemized deductions. Ayden should file using which tax form? A. Form 1040-NR. B. Form 1040-SR. C. Form 1040. D. Ayden does not have to file, because he qualifies for the Foreign Earned Income Exclusion.

D (She can use $22,000 of passive income from the partnership investment to offset her $24,000 rental loss. The remaining rental losses of $2,000 ($22,000 - $24,000) would need to be carried over to the following year. Even though she materially participated in the rental activity, she must carry over her excess rental losses because her modified adjusted gross income is over the phaseout threshold of $100,000. An individual may deduct up to $25,000 of real estate loss per year as long as their adjusted gross income is under the phaseout threshold. This is also called the special "$25,000 rental loss allowance." However, if the taxpayer's MAGI is $150,000 or more ($75,000 or more if married filing separately), then no deduction can be claimed for a rental activity loss for the year. Since Kendra's wages exceed $150,000, she must carryover any of her excess losses to the following year.)

1. Kendra is unmarried and earned $175,000 in wages for the year. She also has $22,000 of passive income from a limited partnership, and a $24,000 loss from rental real estate activities in which she actively participated. She is not a real estate professional. How should these activities be treated on her individual tax return? A. She can use $22,000 of passive income from the partnership investment to offset her $24,000 rental loss. The remaining rental losses of $2,000 would be deductible from her wages. B. She must recognize $22,000 of passive income from the partnership. All the rental losses must be carried over because her wages exceed the phaseout threshold of $100,000. C. She can use $22,000 of passive income from the partnership investment to offset her $24,000 rental loss. The remaining rental losses of $2,000 would be deductible on Schedule A as a miscellaneous itemized deduction. D. She can use $22,000 of passive income from the partnership investment to offset her $24,000 rental loss. The remaining rental losses of $2,000 ($22,000 - $24,000) would need to be carried over to the following year

B (Trinity's maximum deduction on Schedule A for taxes is $10,000. A taxpayer's total allowable deduction for state and local income, sales and property taxes is limited to a combined, total deduction of $10,000 ($5,000 if Married Filing Separate). Any state and local taxes she paid above this amount cannot be deducted. This is also called the "SALT cap.")

10. Trinity is single and lives in New York. She plans to itemize her deductions this year. She paid the following taxes during the tax year: • $3,500 in sales tax on a brand-new car. • $450 in personal property taxes on the new car. • $9,000 in property tax on her main home in New York. • $14,000 in state income tax paid to New York. What is her maximum deduction on Schedule A for taxes? A. $5,000 B. $10,000 C. $23,450 D. $26,500

100. The answer is C. Because of changes in the Tax Cuts and Jobs Act, unreimbursed employee expenses are no longer deductible for most taxpayers. However, some employees are still permitted to use Form 2106 to deduct their unreimbursed employee expenses on their federal returns. Form 2106 may be used only by the following employees: ● Armed Forces reservists. ● Qualified performing artists. ● Fee-basis state or local government officials. ● Disabled employees with impairment-related work expenses. Due to the suspension of miscellaneous itemized deductions subject to the 2% floor under section 67(a), employees who do not fit into one of the listed categories above may not use Form 2106 to deduct their unreimbursed employee expenses.

100. Which of the following employees would not be allowed to deduct their work-related expenses on Form 2106? A. An Armed Forces reservist. B. A disabled employee with impairment-related work expenses. C. An employee of an accounting firm with unreimbursed mileage expenses. D. A qualified performing artist.

D (Filing status is based in part on the taxpayer's marital status on the last day of the tax year. Therefore, Jason would be considered unmarried for tax purposes, because he was legally divorced before the end of the year. In the case of widowed taxpayers, if a taxpayer's spouse died during the year and they did not remarry, then they are still considered married for tax purposes and can file jointly with their deceased spouse.)

11. For the purpose of determining filing status, which of the following taxpayers would be considered unmarried for the entire tax year? A. Ronnie, who got married on December 31. B. Jennifer, whose husband died on November 1. Jennifer did not remarry during the year. C. Harvey, who is married, but separated from his spouse. D. Jason, who was married until his divorce became final in November of the tax year.

A (Corwin can deduct the penalty as an adjustment to income on Schedule 1 of Form 1040. This type of penalty applies when a depositor withdraws funds before a time deposit account matures. Taxpayers can adjust their income by deducting penalties they paid for withdrawing funds from a deferred interest account before maturity. A penalty for early withdrawal of funds from a savings account may be charged when the depositor withdraws funds before the maturity date for a time deposit (also called a "certificate of deposit" or "CD").)

12. Corwin withdrew $6,000 from a one-year, deferred-interest certificate of deposit in 2019 before the maturity date. As such, he had to pay an early withdrawal penalty of $291. How should this penalty be reported on Corwin's individual tax return? A. Corwin can deduct the penalty as an adjustment to income on Form 1040. B. Corwin should claim the penalty as a miscellaneous itemized deduction on Schedule A. C. Corwin can deduct the penalty from his taxable interest on Schedule B. D. Early withdrawal penalties are never deductible.

C (Lynwood and Michelle have two reporting requirements. They are required to file the FBAR as well as Form 8938. They must file an FBAR directly with the Treasury Department using their online FBAR submission website. Form 8938 must be filed with the IRS by the due date (including extensions) of their tax return. Form 8938 is filed along with the taxpayer's Form 1040. The FBAR is filed separately. The FBAR filing due date, is generally April 15, (to coincide with the due date for individual tax returns). However, an automatic extension is available to October 15 for the FBAR. The extension is automatic, and specific requests for an extension are not required.)

13. Lynwood and Michelle are both U.S. citizens who file a joint return together. They lived the entire year in the United States. They have a bank account in France with $198,000 in funds that they deposited on January 10, 2019, when they were trying to purchase a vacation home overseas. The home sale fell through, and the money remained in the account. They did not deposit any additional funds in 2019, and the account did not generate any taxable interest. What is their reporting requirement to United States authorities in 2019 relating to these funds? A. None, because they made no new deposits and had no taxable income from the account. B. They are required to file a formal disclosure statement with the IRS as a standalone statement to their 1040 tax return. C. They must file an FBAR and Form 8938. D. They must file only Form 8938 with the IRS.

A (Rosalind's standard deduction would be $12,200 in 2019. In general, the standard deduction for a decedent's final tax return is the same as it would have been had the decedent continued to live. However, if the decedent was not 65 (or older) at the time of death, the additional standard deduction for age cannot be claimed. Since Rosalind died before she turned 65, she is not eligible for the additional standard deduction on her final return. Rosalind's executor would be responsible for filing the final tax return. See IRS Publication 17 for more information.)

15. Rosalind is single with no dependents. She dies on November 1, 2019. She was 64 at the time of her death. Her birthday was December 15, so she would have reached 65 years of age if she would have lived the entire tax year. What would Rosalind's standard deduction be on her final tax return? A. Her standard deduction would be $12,200 in 2019. B. Her standard deduction would be $18,350 in 2019. C. Her standard deduction would be $4,200 in 2019, plus an additional standard deduction amount of $1,600 for taxpayers 65 and over. D. Her standard deduction would be $4,200 in 2019.

B (Individuals who have been physically present for at least 183 days over a three-year period, including the current year, meet the requirements of the substantial presence test and will be taxed as a resident of the U.S. The substantial presence test requirements include 183 days of physical presence over a three-year period comprising the current year (must be at least 31 days); the first year before the current year (where each day present in the U.S. is counted as one-third of a day); and the second year before the current year (where each day present in the U.S. is counted as one-sixth of a day).)

16. To meet the "substantial presence" test in determining U.S. residency for IRS purposes, an individual must be physically present in the United States for at least ______ days over a three-year period. A. 214 B. 183 C. 120 D. 365

C (Adair may deduct his own HSA contributions on his Form 1040 (via Form 8889 and Schedule 1) as an adjustment to income. A health savings account (HSA) is a tax-favored medical savings account available to taxpayers. HSAs are owned by individuals, but contributions may be made by an employer, the taxpayer themselves, or any other person. Amounts in an HSA may be accumulated over the years or distributed on a tax-free basis to pay for or reimburse qualified medical expenses. The HSA contribution limit (employer + employee) for 2019 is $3,500 for a single individual, so he did not make an overcontribution.)

17. Adair has a Health Savings Account (HSA) through his employer. In 2019, Adair contributed $1,200 of his own funds to his HSA. His employer contributes an additional $900 to Adair's HSA, but the employer does not include the amount in his wages. Which of the following statements is true? A. Adair must use the accumulated funds on qualifying medical expenses by March 1, 2020. B. Adair has overcontributed to his HSA and is now subject to a 6% excise tax on the excess. C. Adair may deduct his own HSA contributions on his return as an adjustment to income. D. An employer may not contribute to an employee's HSA unless the amounts are included in wages.

A (Racine may obtain an automatic waiver of the 60-day rollover requirement. The taxpayer can also request and receive a private letter ruling (PLR) granting a waiver of the 60-day rollover requirement. The IRS permits an automatic waiver of the sixty-day rollover period for retirement plan distributions under 11 common circumstances (usually where the financial institution is at fault for not properly rolling over the funds). There is no fee for using this "self-certification" procedure. She can also request a private letter ruling, but a private letter ruling is not free. The minimum fee for a PLR is $10,000, so it would behoove Racine to use the "self-certification" procedure. This procedure is outlined in Revenue Procedure 2016-47.)

18. Racine is 31 and single. She is not disabled. On March 11, 2019, she decided to transfer her traditional IRA to another financial institution. She properly initiates the transfer, but the bank makes an error and the transfer is not completed within the required 60-day rollover window. She discovers the bank's mistake and completes the IRA transfer August 12, 2019. What recourse does Racine have in this case? A. Racine may be eligible for an automatic waiver of the 60-day IRA rollover rule or request a Private Letter Ruling from the IRS. B. Racine must pay a 10% early withdrawal penalty. The 60-day IRA rollover window cannot be waived. C. Racine must request a Private Letter Ruling from the IRS. D. Racine can avoid an early withdrawal penalty by appealing her IRA withdrawal penalty to the U.S. Tax Court.

B (The basis of property received from a decedent's estate is generally the fair market value of the property on the date of the decedent's death. However, when an executor elects the alternate valuation date, the basis to the heirs is generally the fair market value of the assets six months after the date of death. Only if assets are distributed prior to six months after the date of death will the basis to the heirs be the fair value of the assets as of the date of distribution. In this case, the stock was distributed to Benjamin after the six-month post-death period. Therefore, his basis in the stock is $21,500, which is the FMV on August 20 (6 months after the date of his grandmother's death, which is the alternate valuation date for the estate). Benjamin's holding period is long-term, because inherited property is always treated as long-term property, regardless of how long the beneficiary holds the property after he receives it.)

19. Benjamin received 1,000 shares of stock as an inheritance from his grandmother, who died on February 20, 2019. His grandmother's adjusted basis in the stock was $8,000. The stock's fair market value on the date of her death was $24,500. The executor of the estate elects the alternate valuation date for valuing the gross estate. On August 20, 2019, the stock's fair market value was $21,500. Benjamin received the stock on November 26, 2019, when its fair market value was $22,100. Benjamin sells all the stock two weeks later for $22,950. What is Benjamin's basis and holding period in the inherited stock? A. $8,000 is his basis, and his holding period is long-term. B. $21,500 is his basis, and his holding period is long-term. C. $22,100 is his basis, and his holding period is short-term. D. $24,500 is his basis, and his holding period is short-term.

C (Income derived from a business carried on by an estate (or trust) generally is not included in determining the self-employment earnings of the estate. Even if a taxpayer was self-employed while he was alive and the business continues to generate income after his death, that income is not subject to self-employment tax. However, the income earned by the estate will be subject to income tax.)

20. Which of the following taxpayers would generally not be considered self-employed and therefore would not be subject to self-employment tax? A. An independent contractor. B. A general partner of a partnership that operates a trade or business. C. The estate of a deceased taxpayer that carries on a trade or business after the original owner has died. D. A person who works full-time and also has a part-time business.

C (A taxpayer's "tax home" is usually determined by the location of his principal place of work, regardless of his mailing address or where he actually lives. So, Donnie's "tax home" would be in Texas, his principal place of work. A taxpayer's "tax home" is used for tax purposes, including determining if travel expenses are deductible.)

21. Donnie owns a sole-proprietorship that refurbishes medical equipment. His machine shop is located in Texas, but Donnie actually lives in Louisiana, right near the Texas border. He also owns several rental properties in Nevada and pays for a PO Box in Nevada to receive and forward his mail. For federal tax purposes, Donnie's "tax home" would probably be determined by: A. His physical address in Louisiana. B. His mailing address in Nevada. C. His principal place of business, which is in Texas. D. Whatever mailing address is listed on his tax return.

D (Brandt can deduct the full cost of the computer as a business expense by making a de minimis safe harbor election and attaching the required statement to his timely filed tax return. Taxpayers may elect to apply a de minimis safe harbor to deduct amounts paid for tangible property up to $2,500 ($5,000 if the company has audited financial statements) per invoice or item (substantiated by an invoice) if they have accounting procedures in place whereby, they deduct amounts paid for business property if the costs of such property are under a certain de minimis amount. The election applies for a taxable year and, if made, applies to each expenditure meeting the criteria for the election in the taxable year. The taxpayer makes the election by attaching a statement titled "Section 1.263(a)-1(f) de minimis safe harbor election" to a timely filed federal tax return (including extensions) for the taxable year in which the de minimis amounts are paid. The statement should include the taxpayer's name, address, and Taxpayer Identification Number, as well as a statement that the taxpayer is making the de minimis safe harbor election. The de minimis safe harbor election does not include amounts paid for inventory or land.)

22. Brandt makes his living as a self-employed web designer. He reports his income and losses on Schedule C. He earned $79,500 designing web pages during the year. In 2019, Brandt purchased a new computer for $2,430 for use in his business. Instead of depreciating the computer, he wishes to deduct the purchase as a business expense. Which tax rule would allow him to do this? A. The principal asset rule. B. The self-employed business expense rule. C. The domestic business deduction rule. D. The de minimis safe harbor rule.

A (Barbara does not qualify for the Educator Expense Deduction (previously called the "Teacher Credit"), because she has only 440 hours of documented employment as an educator during the tax year. She cannot deduct her educator expenses because she is not a qualified educator for the purposes of the deduction. An "eligible educator" is a K-12 teacher, instructor, counselor, principal or aide that works at least 900 hours a school year in a school that provides elementary or secondary education.)

23. Barbara is a part-time science teacher at her local high school. In 2019, she spent $385 on school supplies for her students. She also paid $15 for snacks during a field trip. During the tax year, she has 440 hours of paid employment as an educator at the school. How much of her expenses can she deduct as an adjustment to income using the Educator Expense Deduction? A. $0 B. $250 C. $385 D. $400

C (Kerrie is eligible for the Premium Tax Credit from January through July, assuming she meets all the eligibility criteria. The Premium Tax Credit (PTC) is a refundable tax credit for health insurance purchased through the Health Insurance Marketplace. To be eligible for the Premium Tax Credit, the taxpayer must have been enrolled at some point during the year in one or more qualified health plans offered through the Health Insurance Marketplace (both federal and state exchanges qualify). For more information, see Publication 974, Premium Tax Credit.)

24. Kerrie is single with no dependents. On January 1, 2019, Kerrie enrolled through the Marketplace in a qualified health plan for 2019. On July 14, 2019, Kerrie enlisted in the Army and was immediately eligible for government-sponsored health coverage, so she canceled her Marketplace coverage at the end of July. For what period is Kerrie able to claim a Premium Tax Credit (assuming she meets all of the eligibility criteria)? A. The entire tax year. B. January through June. C. January through July. D. She is not eligible for the PTC because she is not enrolled in Marketplace coverage for at least six months of the tax year.

B (Abiram may deduct his charitable contributions to U.S. nonprofit organizations only. Nonresident aliens are allowed to deduct certain itemized deductions on their Forms 1040NR. For more information, see Publication 519, U.S. Tax Guide for Aliens.)

25. Abiram is a nonresident taxpayer with U.S.-based investments. He will file a Form 1040NR to report his U.S. income only. Abiram is a citizen of Morocco and donates to many charities in his home country. He also made several donations to the U.S. Red Cross, a qualifying 501(c)(3) organization. Can Abiram deduct his charitable gifts on his Form 1040NR? A. No, charitable gifts are not deductible by nonresident aliens. B. He may deduct his charitable contributions only to U.S. nonprofit organizations. C. Yes, all of his charitable gifts are deductible, including contributions to charities in his home country. D. Abiram cannot take a deduction for charitable gifts on his Form 1040NR, but he may take a tax credit instead.

C (George and Crystal are both required to file a tax return. In 2019, taxpayers of any age who use the Married Filing Separately status must file a return if they had gross income of $5 or more (not a typo, the filing threshold for MFS really is $5).)

26. George and Crystal are married and live together, but will not file a joint tax return. George is 45 and Crystal is 36. George's gross income from wages is $36,400, and Crystal's is $2,100. Crystal only had a small part-time job. Which of the following is true? A. Only George is required to file a return. B. Only Crystal is required to file a return. C. Both George and Crystal are required to file a return. D. Neither spouses must file.

C (Jerimiah's adjusted gross income is $54,000 ($42,000 + $12,000). The wages and unemployment compensation is taxable. The municipal bond interest must be reported on the tax return, but it is not taxable and not added to Jeramiah's taxable income and adjusted gross income.)

51. Jeremiah is single and age 32. He worked for part of the year, then he lost his job. For the rest of the year, he received unemployment compensation. He also had a small amount of interest from municipal bonds. His items of income are listed below. He had no other income or losses for the year. He plans to take the standard deduction. What is Jeremiah's adjusted gross income on Form 1040? Wage income $42,000 Interest from municipal bonds $220 Unemployment compensation $12,000 A. $41,780 B. $42,000 C. $54,000 D. $54,220

B (Mai-Lin can deduct only $15,000 ($25,000 - [50% × $20,000]) of the rental losses in the current year. Taxpayers (other than real estate professionals) who actively participate in a rental real estate activity can deduct up to $25,000 of loss from the activity from nonpassive income. However, the $25,000 allowance is phased out if modified adjusted gross income (MAGI) is between $100,000 and $150,000. The $25,000 maximum deduction gets phased out by $1 for every $2 that the taxpayer's MAGI is over $100,000. If the taxpayer's MAGI is $150,000 or more ($75,000 or more if married filing separately), then no deduction can be claimed for a rental activity loss for the year. This unique "rental loss" allowance is an exception to the general rule disallowing passive losses in excess of income from passive activities. For more information, see Publication 527, Residential Rental Property.)

28. Mai-Lin is single. In 2019, she had $120,000 in wage income (her only income for the year). She also owns a residential rental property that has a $28,000 loss for the year. Mai-Lin actively participated in the rental activity but is not considered a real estate professional. How much of her rental loss is deductible in the current year on Schedule E, Form 1040? A. $0 B. $15,000 C. $25,000 D. $28,000

C (Only Enoch qualifies for the Child Tax Credit. For the purposes of the Child Tax Credit, a qualifying child must: ● Be a son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (for example, a grandchild, niece, or nephew), ● Be under age 17 at the end of the year, ● Have not provided over half of his own support, ● Have lived with the taxpayer for more than half of the year, and ● Be a U.S. citizen, a U.S. national, or a U.S. resident alien. Since Enoch is the only dependent that is under the age of 17, he is the only qualifying dependent for the Child Tax Credit.)

29. Gianna has four dependents. She pays all of the household expenses, and none of the dependents have any taxable income. Which of the following dependents would qualify for the Child Tax Credit? A. Larkin, 22 years old and a full-time college student. B. Elodie, 17 years old and permanently disabled. C. Enoch, 16 years old and a full-time student. D. Susan, 63 years old, Gianna's mother and also her dependent parent.

C (Clayton must report the $22,400, as well as the $2,500 of other cash payments, as self-employment income on his Schedule C. It does not matter whether he receives a 1099-MISC or not. All of his bookkeeping-related income is taxable as self-employment income. Therefore, it is subject to income tax, as well as to SE tax. Fees received for services performed as a notary public are subject to income tax, but not self-employment tax. For more information on this topic, see the IRS instructions for Schedule SE.)

3. Clayton works as a notary and independent bookkeeper and has several business clients. His biggest client, Danville Construction Company, sends Clayton a Form 1099-MISC to report he received $22,400 for his bookkeeping work during the year. Clayton also received other cash payments of $2,500 from several different individuals for the work he completed. He did not receive Forms 1099-MISC for the $2,500. Additionally, he also received $250 in fees for services he performed as a notary public. Based on this information, how much of his income is subject to regular income tax, and how much is subject to self-employment tax? A. $22,400 is subject to income tax and self-employment tax. The remaining $2,500 is only subject to regular income tax. Notary fees are not taxable. B. $22,400 is subject only to income tax. The other $2,500 is subject to income tax and self-employment tax. Notary fees are not taxable. C. $24,900 is subject to income tax and self-employment tax. The $250 of fees received for services performed as a notary public are subject to income tax, but not self-employment tax. D. All of his income is subject to self-employment tax and income tax.

D (The entire gain can be excluded from income. Shane meets the ownership and use tests to exclude the gain because he owned and lived in the home for more than two years during the five-year period ending on the date of sale. The required two years of ownership and use do not have to be continuous, nor do they have to occur at the same time. A taxpayer will meet the tests if he can show that he owned and lived in the property as a primary residence for either 24 full months or 730 days (365 × 2) during the five-year period ending on the date of sale.)

30. Shane bought his primary residence on September 1, 2011. He lived in this home until January 30, 2019, when he moved in with his girlfriend. On September 15, 2019, Shane and his girlfriend decided to get engaged. Consequently, Shane puts his former house up for sale. On December 15, 2019, Shane's home sold, and he has an $83,000 gain. Is Shane required to report any of the profit, and, if so, what is the nature of the gain? A. He must report $83,000 of long-term capital gain. B. He must report $83,000 of short-term capital gain. C. He must prorate the capital gain based on the number of days that he was not living in the home within the last 24 months. D. All the gain can be excluded from income.

B (Rodney's basis for depreciation is $147,000. His original basis of the house at the time of its purchase was $182,000, of which $20,000 was attributable to land and $162,000 to the house. However, the basis for depreciation on the house, in this particular situation, is the fair market value of the house on the date of the conversion ($147,000) because it is less than the allocable portion of Rodney's adjusted basis ($162,000) of the house. When a primary residence is changed to rental use, the basis of the property for depreciation will be the lesser of its fair market value or its adjusted basis on the date of conversion. Land is not subject to depreciation, so the land value is not included in the depreciation calculation.)

32. Rodney moves to another city on April 1, 2019. Instead of selling his old home, he decides to convert it into a residential rental property. Three years ago, Rodney bought his home for $182,000. At the time of the initial purchase, the value of the land was assessed at $20,000. On the date the home was converted to a rental, September 1, 2019, Rodney's property had a fair market value of $168,000. Based on the current property tax rolls, $21,000 of the value is allocated to the land value, and $147,000 is allocated to the house. What is Rodney's basis for depreciation on the rental property on his Schedule E, Form 1040? A. $134,000 B. $147,000 C. $162,000 D. $182,000

58. The answer is B. The estate tax return (Form 706) is generally due nine months after the date of death. A six-month extension is available if requested prior to the due date and the estimated correct amount of tax is paid before the due date.

58. What is the due date for Form 706 for a taxpayer who died in 2019? A. Six months after the date of death. B. Nine months after the date of death. C. Twelve months after the date of death. D. The same due date as the decedent's individual tax return.

C (Hayato is eligible to take the foreign earned income exclusion based on the physical presence test (see bullet point #3, below). For 2019, the maximum exclusion for the foreign earned income exclusion is $105,900. To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, the taxpayer must have foreign earned income, their tax home must be in a foreign country, and they must be ONE of the following: ● A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, ● A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or ● A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.)

33. Hayato spends two years working in Germany as a private consultant for a multinational software company. He is a U.S. green-card holder and a natural citizen of Japan. He was physically present in Germany for 365 days in 2019 (the full year). He has qualified foreign earned income of $190,000 in 2019. As a green-card holder, he is required to file a U.S. tax return. What is the maximum amount he can exclude from his income using the Foreign Earned Income Exclusion? A. $0 B. $95,000 C. $105,900 D. $190,000

C (Under the "optional method" of calculating the home office deduction, a taxpayer can deduct $5 per square foot for the space in the home that is used for business, with a maximum allowable square footage of 300 square feet. Therefore, the maximum deduction is $1,500. The criteria for who qualifies for the deduction remains the same, but the calculation and recordkeeping requirements have been simplified. There is no depreciation expense and no recapture of depreciation upon the sale of the home. Home-related itemized deductions, such as for mortgage interest and real estate taxes, may be claimed in full on Schedule A, without allocation of portions to the home office space.)

34. Under the simplified home office deduction calculation, the maximum deduction amount a taxpayer can claim in 2019 is: A. $300 B. $500 C. $1,500 D. $3,000

B (On Dereck's tax return, he can deduct up to $3,000 of the capital loss. The unused part of the loss, $4,000 ($7,000 - $3,000), can be carried over to the following year. Dereck's adjusted gross income is $49,000 ($52,000 - $3,000 capital loss). Capital losses can be deducted on a taxpayer's return and used to reduce other income, such as wages, up to an annual limit of $3,000 (or $1,500 if married filing separately). Note: Excess capital losses will carryforward indefinitely during a taxpayer's life. However, they do not transfer after death. If a taxpayer dies with a capital loss carryover, the unused losses do not transfer to a surviving spouse or to the deceased taxpayer's estate.)

35. Dereck sold all his shares in a mutual fund in 2019. The sale resulted in a capital loss of $7,000. Dereck has wages of $52,000. He has no other income or losses during the year and will file as Single. What is Dereck's adjusted gross income in 2019? A. $45,000 B. $49,000 C. $52,000 D. $59,000

C (Katherine may use Head of Household status because she is not married and she provided over half the cost of keeping up the primary home of her dependent child for more than six months. A taxpayer may still qualify for Head of Household filing status even though the taxpayer is not claiming an exemption for their child if the taxpayer meets the following requirements: ● The taxpayer must be single or "considered unmarried" on the last day of the year. ● The taxpayer paid more than half of the cost of keeping up a home, which was the main home of their child for more than half of the year. See IRS Publication 501, Dependents, Standard Deduction, and Filing Information, for more information.)

36. Katherine is divorced and provided over half the cost of keeping up a home. Her 12-year-old daughter, Danika, lived with her for eight months in 2019. Katherine has signed a written declaration allowing her ex-husband, Troy, to claim Danika as a dependent. Troy will be claiming Danika this year. What filing status should Katherine use? A. Single. B. Married Filing Separately. C. Head of Household. D. Married Filing Jointly.

C (Josiah's basis in the 10 shares of stock received from his father would presumably be his father's adjusted basis, or $100 (this is normally the case, although his basis could also include any gift tax paid by his father related to the appreciation of the stock's value while he held it). Josiah's basis in the stock he purchased would be $620. When shares of stock are sold from lots acquired at different times and the identity of the shares sold cannot be determined, the sale is charged first against the earliest acquisitions (first-in, first-out). The 20 shares sold in October 2019 would be presumed to be the 10 shares acquired by gift from Josiah's father and half of the shares purchased in January 2019. Therefore, the basis of Josiah's Rust Valley Corporation shares he still owns would be half the basis of the purchased shares, or $310.)

37. Five years ago, Josiah received 10 shares of Rust Valley, Inc. stock as a gift from his father. His father had originally paid $10 per share for this stock, and it was trading for $20 per share at the time of the gift. On January 15, 2019, Josiah purchased an additional 20 shares of Rust Valley stock for a price of $30 per share and paid a $20 brokerage fee on this purchase. On October 30, 2019, Josiah sold 20 shares of his Rust Valley stock. He cannot accurately identify the shares he disposed of. What is Josiah's basis in the Rust Valley shares he still owns? A. $100 B. $200 C. $310 D. $360

D (The Qualifying Widow(er) filing status usually yields the same tax benefits as Married Filing Jointly. The Qualifying Widow(er) filing status entitles the taxpayer to use the Married Filing Jointly tax rates and the highest standard deduction amount.)

38. Which two filing statuses generally result in the lowest tax amounts? A. Married Filing Separately and Single. B. Head of Household and Married Filing Jointly. C. Single and Married Filing Jointly. D. Qualifying Widow(er) and Married Filing Jointly.

A (The Additional Medicare Tax of 0.9% is applied only to earned income ($188,000 + $10,000 + $56,000 = $254,000 earned income) above the threshold for a taxpayer's filing status. Therefore, Dennis owes $486 ($254,000 - $200,000 = $54,000 × .009 = $486). The interest income and the inheritance do not figure into the calculation. This tax is reported on Form 8959, Additional Medicare Tax.)

39. Dennis is single. He works full-time as a software developer for a large company. He also runs an online multiplayer gaming website, which he operates as a sole proprietorship. Dennis received the following income in 2019: Regular wages $188,000 Bonus wages from job $10,000 Self-employment income from gaming website $56,000 Interest income on CDs $3,000 Cash inheritance from his deceased sister $25,000 What amount does he owe for the Additional Medicare Tax in 2019 (the threshold is $200,000 for single filers)? A. $486 B. $558 C. $2,286 D. $9,652

C (The cost of the first $50,000 of life insurance coverage is excludable; the cost of the remaining $90,000 in coverage is taxable to Agustina as wages. An employer can exclude the cost of the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by an employer. The imputed cost of coverage in excess of $50,000 must be included in the employee's income and subject to employment taxes. If the optional policy was not considered "carried by the employer," none of the $100,000 optional coverage would be included in the employee's income. Group-term life insurance that exceeds $50,000 of coverage is subject to Social Security and Medicare taxes, but not FUTA tax or income tax withholding, even when provided as a qualified benefit in a cafeteria plan. For more information on this topic, see IRS Publication 535, Business Expenses, or Publication 15-A, Employer's Supplemental Tax Guide.)

4. Agustina receives $40,000 of life insurance coverage as a fringe benefit through her employer. She is also entitled to $100,000 of optional life insurance coverage. This optional benefit is also carried by her employer and offered to all the employees as part of their cafeteria plan. Agustina decides to enroll in the optional life insurance coverage, bringing her coverage amount to $140,000. How much of the insurance cost is excludable as a nontaxable fringe benefit to Agustina, and how much would be taxable? A. The entire cost of the life insurance policy would be excludable from income. B. The cost of the first $40,000 of coverage is excludable and the remaining amount would be taxable to Agustina as wages. C. The cost of the first $50,000 of coverage is excludable and the remaining amount would be taxable to Agustina as wages. D. The entire cost of the policy would be taxable as wages.

B (The taxpayer must be a U.S. citizen or legal U.S. resident all year with a Social Security Number that is valid for work purposes. A taxpayer cannot claim the EITC if his filing status is married filing separately (MFS). A taxpayer does not need to have a dependent child in order to qualify for the Earned Income Tax Credit. However, the EITC is increased if the taxpayer has a qualifying child. Answer "D" is incorrect because the Earned Income Credit cannot be claimed by a taxpayer with an ITIN; the taxpayer must have a valid Social Security Number in order to qualify.)

40. To qualify for the Earned Income Tax Credit, which of the following statements is true? A. The taxpayer must have a dependent child. B. The taxpayer must be a U.S. citizen or legal U.S. resident all year with a Social Security Number that is valid for work purposes. C. The taxpayer's filing status can be MFS if the taxpayer does not live with his or her spouse. D. The taxpayer must be a U.S. citizen or U.S. resident with either a valid Social Security Number or ITIN.

A (All of the gain from the sale of Khalil and Glynda's home is excludable. IRC Section 121 allows the exclusion of a capital gain of up to $250,000 ($500,000, if married filing jointly) from the sale of the taxpayer's main home. Although there are some exceptions, in general, the taxpayer must have lived and owned the house for at least two years out of the previous five years before the sale. Since Khalil and Glynda owned and lived in the home for at least two years, all their gain is excludable. For more information, see Publication 523, Selling Your Home.)

41. Khalil and Glynda own a home in Sacramento, CA, which they have always used as their primary residence. They purchased the house on December 15, 2016, for $295,000. They sold it on December 29, 2019, for $329,000. At the time of the sale, they had an existing mortgage on the property of $180,000. They use the sales proceeds to purchase a new home in Florida for $375,000. Their only other income for the year was $28,000 in social security income. They will file jointly in 2019. What is the nature and amount of their taxable gain on this transaction? A. $0 B. $34,000 C. $115,000 D. $329,000

B (Reggie's qualifying educational costs are determined as follows: Required textbooks $450 Required lab equipment $1,260 Tuition ($6,800 - $4,750 GI Bill) $2,050 Qualifying costs for the AOTC $3,760 The GI Bill is a military-based benefit that is not taxable or reportable. However, to figure the amount of qualifying educational expenses for purposes of the AOTC, Reggie must first subtract the $4,750 GI Bill payment from his tuition expenses ($6,800 - $4,750). The books and lab equipment are allowable expenses, but the student health fees are specifically disallowed (even if they are mandatory). Parking fees or tickets, transportation costs, and meal costs are not allowable for the American Opportunity Tax Credit, or the Lifetime Learning Credit.)

42. Reggie is a U.S. Air Force veteran who recently returned to college for his first undergraduate degree. He receives educational assistance from the GI Bill. The GI Bill paid $4,750 toward his college tuition in 2019, which was paid directly to the college. Reggie's total tuition cost for the year was $6,800. Reggie also paid the following additional educational costs during the year: Required textbooks $450 Mandatory student health fees $186 Required lab equipment $1,260 Commuting costs $340 Parking tickets at the college $29 Reggie wants to claim the American Opportunity Tax Credit (AOTC) on his tax return. Of the items listed above, what are his qualifying educational expenses for purposes of the credit? A. $3,946 B. $3,760 C. $8,510 D. $2,050

B (Bradley's gross profit percentage is 12.5% ($15,000 ÷ $120,000). Bradley would report 12.5% of each payment (12.5% × $30,000 = $3,750) as installment sale gain from the sale for the tax year he receives the payment (after subtracting interest, if any). The balance of each payment, exclusive of interest, is the tax-free return of his adjusted basis.)

43. Bradley agrees to sell his vacant land to a buyer under an installment sale. He sells the property at a contract price of $120,000, and his gross profit is $15,000. Bradley will receive four payments (one payment per year) of principal and interest until the note is paid off. He receives the first payment of $30,000 in 2019. The first payment does not include any interest. He wants to use the installment method to report income from the sale. What is the amount of installment sale gain that Bradley must report in 2019? A. $0 B. $3,750 C. $7,500 D. $15,000

A (Early withdrawal penalties from certificates of deposit (CDs) or other time deposit accounts are deductible as an adjustment to income. Answers B and C are both incorrect because penalties for early withdrawal from retirement accounts are never deductible.)

44. Phillip is 44 and has several investment accounts. During the year, his car breaks down, and he must pay for an expensive repair. He withdraws money from several of his investment accounts to pay for the repair, and in the process, he is charged penalties. Which of the following penalties would be deductible on his Form 1040? A. A penalty for early withdrawal of funds from a certificate of deposit. B. A 10% penalty for early withdrawal from a traditional IRA account. C. A 10% penalty for early withdrawal from a 401(k) plan. D. None of the above. Penalties are never deductible.

C (Orson's adjusted basis in the property is $117,300. The answer is calculated as follows: ($35,000 cash + $80,000 mortgage assumption + $2,300 legal fees = $117,300). If a taxpayer buys property and assumes an existing mortgage on the property, the basis includes the amount of the assumed mortgage. The basis also includes the settlement fees and closing costs for buying a property. However, the appraisal costs would not be included in the basis. The following items are examples of settlement fees or closing costs that are included in a property's basis. ● Abstract fees (abstract of title fees). ● Charges for installing utility services. ● Legal fees, settlement costs, and recording fees . ● Transfer taxes. ● Owner's title insurance. ● Any amounts the seller owes that the buyer agrees to pay, such as delinquent property taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. There are some costs that the owner cannot include in the basis of the property. The following fees are typical during the purchase of a property, but they cannot be added to the property's basis: ● Casualty insurance premiums. ● Rent for occupancy of the property before closing. ● Charges for utilities or other services related to occupancy of the property before closing. ● Charges connected with getting a loan. The following are examples of these charges: ● Points (discount points, loan origination fees). ● Mortgage insurance premiums. ● Loan assumption fees. ● Cost of a credit report. ● Fees for an appraisal required by a lender. ● Fees for refinancing a mortgage. A taxpayer also cannot include amounts placed in escrow for the future payments of items such as taxes and insurance. These costs should not be added to the basis of the property.)

46. Orson buys a residential rental property for $35,000 of cash and assumes an existing mortgage of $80,000 on the property. He also pays $2,300 in legal fees to close the deal. There was also an additional $800 charge for an appraisal required by the lender. Based on this information, what is Orson's adjusted basis in the property? A. $35,000 B. $115,000 C. $117,300 D. $118,100

D (Since Alfred filed a joint return but is not responsible for the debt, he is entitled to a portion of the refund. He may request his share of the $5,000 refund by filing Form 8379, Injured Spouse Allocation.)

47. Shannon owes $80,000 of delinquent student loans. She was not married to her husband, Alfred, when she incurred the debt. Alfred and Shannon file a joint return in 2019, which shows a refund of $5,000. Which of the following is a correct statement? A. Since he filed a joint return with his wife, Alfred has no recourse to claim a portion of the refund. The entire $5,000 refund will be offset toward Shannon's unpaid student loan debt. B. Alfred should apply for innocent spouse relief to request his portion of the refund be allocated to him. C. Alfred should apply for equitable relief to request his portion of the refund be allocated to him. D. Alfred should apply for injured spouse relief to request his portion of the refund be allocated to him.

B (Cornelia's dividends should be reported on Form 1040. Cornelia meets the requirements for reporting the capital gain distribution directly on Form 1040. She does not need a separate form. If the total amount of dividends received is over $1,500, Schedule B must also be filed with the tax return. Since Cornelia's dividends did not exceed $1,500, Schedule B is not required. The capital gain from the sale of stock should be reported on Schedule D. In some circumstances, the sale of stock may also have to be reported on Form 8949.)

48. During the year, Cornelia received ordinary dividends in the amount of $175. She also had a $700 capital gain from the sale of stock. How should these items of income be reported? A. Both amounts should be reported on Form 1040, Schedule B. B. Cornelia's ordinary dividends should be reported on Form 1040, and the capital gain from the stock sale should be reported on Schedule D. C. Cornelia's ordinary dividends should be reported on Schedule B, and the capital gain from the stock sale should be reported on Schedule D. D. Both amounts should be reported on Form 1040, Schedule D.

A (Life insurance proceeds payable to Dillon's beneficiaries would be included in the calculation of his gross estate. The gross estate includes the value of property that the taxpayer owns at the time of death. In addition to the value of life insurance proceeds, the gross estate includes the following: ● The value of certain annuities payable to the estate or to the taxpayer's heirs, and ● The value of certain property transferred within three years before the taxpayer's death. Although life-insurance proceeds are generally not taxable to the beneficiary who receives them, the value of life insurance proceeds insuring a taxpayer's life must be included in the valuation of the gross estate if the proceeds are payable to the estate, or to named beneficiaries, if the taxpayer owned the policy at the time of his death.)

49. Dillon died on July 20, 2019. The value of his assets totaled $19 million when he died, so an estate tax return must be filed (Form 706). Which of the following assets would be included in the calculation of his gross estate on Form 706? A. Life insurance proceeds payable to Dillon's children. B. Property owned solely by Dillon's spouse. C. Lifetime gifts that are complete. D. All of the items above would be included in Dillon's gross estate.

A (Vanessa must report the $100 in capital gain distributions. Capital gain distributions, such as those from mutual funds and real estate investment trusts (REITs), are taxable income. These distributions are treated as long-term capital gains, regardless of how long the taxpayer holds the shares. The other types of distributions listed are not taxable. A return of capital reduces a taxpayer's stock basis. Stock dividends reduce the basis of the individual shares held prior to the distribution. Dividends paid to cash-value life insurance policyholders are also considered nontaxable distributions. Note: Do not confuse "capital gains" with "capital gain distributions." A capital gain occurs when a taxpayer sells stock, shares of a mutual fund, or another capital asset. A capital gain distribution occurs when the mutual fund sells assets for more than their cost and distributes the realized gain to its investors.)

5. Vanessa owns stock in several companies and receives distributions from her investments throughout the year. Which of the following corporate distributions must be reported on her Form 1040 as taxable income? A. $100 in capital gain distributions from her mutual fund. B. A $350 return of capital from Decker Corporation. C. A 2-for-1 stock split where she receives 150 additional shares. D. Dividends paid on her cash-value life insurance policy.

B (Chelsea has a taxable gain of $30,000. Her basis in the new rental home is $80,000. The part of her gain that is taxable is $30,000 ($130,000 - $100,000), the unspent portion of the payment from the insurance company that she used to pay down her personal debts. The rest of the gain ($20,000) is not taxable, because it was reinvested into the replacement home. This follows the rules for involuntary conversions (IRC section 1033). The basis of the new home is calculated as follows: Cost of replacement home $100,000 Subtract gain not recognized ($20,000) Basis of the replacement home $80,000)

50. A fire destroyed Chelsea's rental property on January 5, 2019. The property was a total loss. Before the fire, the home had an adjusted basis of $80,000, and the insurance company paid her $130,000 for the loss on November 3, 2019. Chelsea bought a smaller replacement rental home for $100,000 on December 10, 2019. Chelsea used the remaining $30,000 from the insurance reimbursement to pay down her student loans. How much is her taxable gain from this casualty event, and what is her basis in the new rental property? A. No taxable gain; basis of $130,000. B. Taxable gain of $30,000; basis of $80,000. C. Taxable gain of $30,000; basis of $100,000. D. Taxable gain of $50,000; basis of $100,000.

52. The answer is B. Of the gain Alvilda realizes on the sale, $26,000 qualifies for section 121 exclusion, while $14,000 must be reported as unrecaptured §1250 gain. Although Alvilda is entitled to deduct depreciation on the part of a home used exclusively for business, she cannot exclude the part of the gain equal to any depreciation she deducted (or could have deducted) in prior tax years.

52. Alvilda used 25% of her home exclusively as an office for business. She owned and used the house as her principal residence for eight years before she sold it. She realizes a $40,000 gain on the sale. She had claimed $14,000 in depreciation deductions related to her home office. How would Alvilda treat this transaction on her tax return? A. $14,000 of taxable gain; $16,000 gain qualifies for section 121 exclusion. B. $14,000 of taxable gain; $26,000 gain qualifies for section 121 exclusion. C. $30,000 gain qualifies for section 121 exclusion. D. $40,000 gain qualifies for section 121 exclusion.

53. The answer is B. Dahlia would report $1,200 in business income. Generally, the FMV of property exchanged for services is includable in income. However, if services are performed for a price agreed on beforehand, the amount will be accepted as the FMV if there is no evidence to the contrary.

53. Dahlia is a tax preparer who reports her business income on Schedule C. She prepares the tax return for Vista Coal, Inc. and charges the company $1,200 for the tax return preparation and bookkeeping. Vista Coal, Inc. is having financial difficulties, so it offers Dahlia a laptop worth $2,000 in lieu of paying the debt. Dahlia agrees to accept the computer in full payment of her invoice. How much income would Dahlia report on Schedule C as a result of this transaction? A. $0 B. $1,200 C. $2,000 D. $3,200

54. The answer is A. Ayumi does not need to pay estimated tax because she expects her current year income tax withholding ($10,250) to be more than her prior year tax of $9,224. Therefore, Ayumi qualifies for the safe harbor rule and is not required to make estimated tax payments. Her expected income tax withholding is also more than 90% of the expected tax liability on her current year return ($11,270 × 90% = $10,143). A taxpayer is not required to pay estimated tax for the current year if: ● The taxpayer had no tax liability in the prior year. ● The taxpayer was a U.S. citizen or resident alien. ● The current tax year covered a twelve-month period. The taxpayer also does not have to pay estimated tax if she pays enough through withholding so that the tax due on the return (minus the amounts of tax credits or paid through withholding) is less than $1,000. For a taxpayer with AGI of $150,000 or less, estimated tax payments must be made if she expects the amount owed after withholding and credits to be less than the smaller of: ● 90% of the tax liability on the current year tax return, or ● 100% of the tax liability on the prior year tax return. Note: For high-income taxpayers with adjusted gross income of over $150,000 ($75,000 if married filing separately), the estimated tax safe harbor threshold for the amount owed would be 110% of the previous year's tax liability (rather than 100%).

54. Ayumi files as single and has no refundable credits. Based on the amounts listed below, is Ayumi required to pay estimated tax in the current year? AGI for the prior year $73,700 Total tax on prior year return $9,224 Anticipated AGI for the current year $82,800 Total current year estimated tax $11,270 Tax expected to be withheld from her wages in the current year $10,250 A. No, she is not required to make estimated tax payments. B. Yes, she is required to make estimated tax payments. C. She is not required to make estimated payments, but she must increase her withholding at her job. D. None of the above is correct.

55. The answer is D. Bahia must file a gift tax return and report the $16,000 gift to Johan. None of the other gifts have a reporting requirement. The general rule is that gifts to a donee that collectively are over $15,000 in 2019 are taxable gifts. However, there are several exceptions to this rule. Generally, the following gifts are not taxable gifts, and do not have a reporting requirement: ● Gifts that are not more than the annual exclusion amount (the limit is $15,000 in 2019). ● Tuition or medical expenses paid for someone directly to a school or college23 or a medical provider (the educational and medical exclusions). ● Gifts to a spouse who is a U.S. citizen (different thresholds apply to spouses who are noncitizens, even if they are legal U.S. residents). ● Contributions to a political organization for its own use. ● Contributions to a church or religious organization (church, synagogue, mosque, etc.). The donor of a gift is generally responsible for filing the gift tax return and paying gift tax (if any gift tax applies). A gift is not taxable to the recipient but may need to be reported on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

55. In 2019, Bahia gave the following gifts: ● $36,000 for her grandson Caelan's tuition, which was paid directly to the college. ● $16,000 to her brother, Johan. ● $19,000 donation to the Republican Party (not a qualifying charity). ● $15,000 to her cousin, Abigail. ● $22,000 to her synagogue, Temple Emanu-El of New York. How should these gifts be reported under the gift tax rules? A. Bahia does not need to file any gift tax returns. B. Bahia must file a gift tax return and report all the gifts. C. Bahia must file a gift tax return and report Caelan's gift and Johan's gift. D. Bahia must file a gift tax return and report the $16,000 gift to her brother Johan.

56. The answer is C. Agnes can deduct the entire cost as a medical expense on Schedule A (subject to AGI limitations). Amounts paid to buy and install special fixtures for a person with a disability, mainly for medical reasons, in a rented house, are deductible medical expenses

56. Agnes has cerebral palsy and is disabled. She cannot climb stairs or bathe herself. On her doctor's advice and with her landlord's permission, she pays a contractor to install bathroom modifications on the two-story house that she rents. Although the landlord allowed the improvements, he did not pay any of the cost of buying and installing the special accommodations Agnes did. Which of the following statements is correct? A. Agnes cannot deduct any of the expenses because none were for the actual treatment of her medical condition. B. Agnes cannot deduct any of the expenses as a medical expense because she does not legally own the property. C. Agnes can deduct the entire amount she paid for the upgrades as a medical expense on Schedule A, subject to AGI limitations. D. Agnes can deduct a portion of the expenses as an adjustment to income on Form 1040.

57. The answer is A. Gains from the sale of personal-use capital assets, such as Aileen's painting, are taxable and must be reported. The auction house's commission is $1,800 ($6,000 × 30%). Therefore, Aileen's taxable gain is $4,180 ($6,000 - $20 basis - $1,800 commission). The amount is subject to income tax, but not to self-employment tax since it is merely the sale of a personal asset and not business income. She would report the gain on Schedule D as a long-term capital gain. Fine art is considered a "collectible" so the gain would be a long-term capital gain, taxed at ordinary tax rates, but no higher than 28%.

57. Several years ago, Aileen bought an old painting from a thrift store for $20. She hung it up in her living room. In 2019, Aileen discovers the painting is an expensive original work of art. She takes the painting to an auction house and sells it for $6,000. The auction house takes a 30% commission. What amount must Aileen report as a taxable gain? A. $4,180 B. $5,000 C. $5,880 D. $6,000

59. The answer is A. Elias had a short-term capital loss of $1,200. His basis in the stock sold is figured as follows: (Gain or Loss = Sales Price - Basis) ($15,000 ÷ 1,000) x 600 shares = $9,000 basis in the shares sold. Sales Price of 600 shares = $7,800 $7,800 sales price - $9,000 basis = ($1,200) Since his holding period is less than one year, he has a short-term capital loss of ($1,200).

59. On January 13, 2019, Elias bought 1,000 shares of Express Works Inc. stock for $15,000 (including a $200 broker's commission). On December 31, 2019, he sold 600 shares of the stock for $7,800. What is the amount and nature of his gain or loss? A. Short-term capital loss of $1,200. B. Short term capital gain of $1,300. C. Long-term capital gain of $1,200. D. Short-term capital loss of $1,050.

60. The answer is B. The Form 4868 is used to request an extension to file Form 1040. Even though a taxpayer files Form 4868, Application of Automatic Extension of Time to File U.S. Individual Income Tax Return, he will owe interest and a late payment penalty on the amount owed if he does not pay the tax owed by the regular due date.

60. Which of the following statements is correct regarding the filing of Form 4868? A. Form 4868 provides a taxpayer with an automatic six-month extension to file and pay. B. Even though a taxpayer files Form 4868, he will owe interest and may be charged a late payment penalty on the amount owed if the tax is not paid by the regular due date. C. Interest is not assessed on any income tax due if Form 4868 is filed. D. A U.S. citizen who is out of the country on vacation on the due date will be allowed an additional twelve months to file when "Out of the Country" is written across the top of Form 1040.

61. The answer is D. Felix has a wash sale, and he cannot deduct the capital loss. A wash sale occurs when a taxpayer sells stock or other securities at a loss and, within 30 days before or after the sale or disposition, the taxpayer buys or acquires substantially identical stock or securities. The wash sale rules also apply if a taxpayer sells stock and then the taxpayer's spouse buys similar stock within 30 days. Since Felix's wife purchased identical securities within 30 days after Felix sold his stock, he has a wash sale. The wash sale rules apply regardless of whether a husband and wife file separate tax returns. Felix's $4,000 loss is instead added to the cost basis of the new stock. The result is an increased basis in the new stock. This adjustment postpones the loss deduction until the disposition of the new stock or securities. The holding period for the new stock includes the holding period of the stock or securities sold.

61. Felix and Florence are married but file separately (MFS). They do not live together. In 2019, Felix sells 300 shares of Stearns Company stock. The stock value had fallen, and he has a $4,000 long-term capital loss on the sale. He has no other capital gains or losses. Within 15 days after Felix sells his stock, Florence purchases 500 shares of stock in Stearns Company. How should the stock sale be reported on Felix's separate tax return? A. Felix can deduct the $4,000 on his tax return as a long-term capital loss. B. Felix can deduct $3,000 of the loss on his tax return, and the remaining $1,000 must be carried over to the next year. C. Felix can deduct $1,500 of the loss on his tax return, and the remaining $2,500 must be carried over to the next year. D. Felix has a wash sale, and he cannot deduct the loss.

62. The answer is A. Angela and Hernan are considered "married" all year. If a taxpayer's spouse dies during the year, the surviving spouse is considered married for the entire year and can choose either married filing jointly or married filing separately as his or her filing status (assuming the taxpayer did not remarry during the year).

62. Angela and Hernan are married and file jointly. On January 13, 2019, Hernan dies. Angela does not remarry before the end of the year. Angela and Hernan have one child, a 10-year-old son, who now lives with Angela. For filing status purposes, the IRS considers Angela to have been ____________ all year. A. Married. B. Unmarried. C. Single. D. Head of Household.

63. The answer is D. Oliver has until December 31, 2022, to reinvest the proceeds in similar property, without having to recognize gain from the involuntary conversion. This is because Oliver first realized a gain from the insurance reimbursement during 2020 (even though the actual fire occurred in 2019), so he will have until December 31, 2022, to replace the property under the involuntary conversion rules. To postpone reporting gain from an involuntary conversion, the taxpayer must buy replacement property within a specified period of time. This is also called the "replacement period." In this case, Oliver's "replacement period" ends two years after the close of the first tax year in which any part of his gain is realized. Since his insurance company did not issue a reimbursement until 2020, the "realized gain" occurs in 2020. As such, Oliver has until the end of 2022 (2 years after the close of the tax year in which the gain is realized)24 to purchase the replacement property. For more information on this topic, see Publication 547, Casualties, Disasters, and Thefts.

63. On February 19, 2019, Oliver had his vacation home destroyed by an electrical fire. The property initially cost $220,000 and had a Fair Market Value of $320,000. Oliver's insurance company investigated the fire as a possible arson, so they didn't settle his insurance claim until January 2, 2020, when they paid Oliver $300,000 as an insurance settlement. How long does Oliver have to reinvest the insurance proceeds under the involuntary conversion (Section 1033) rules? A. February 19, 2020. B. December 31, 2020. C. January 2, 2021. D. December 31, 2022.

64. The answer is B. Aimee cannot deduct the taxes, because they were legally owed by Tobias. Instead, she must add the taxes to her basis in the property. She cannot deduct the delinquent property taxes because she was not the owner of the property when the taxes were imposed. Property taxes paid in connection with a purchase may be added to the buyer's basis if the taxes are for the time period the property was owned by the seller. 65. The answer is B. Under the section 121 exclusion, Simon and Marguerite may exclude $500,000 of the gain on their primary residence. They must recognize $32,000 of capital gain ($805,000 - $273,000 - $500,000 exclusion) in 2019. The exclusion may be claimed only on a main home and not on a second home, and it is subject to both the ownership and occupancy tests. The loss from the Maui vacation home cannot be claimed or netted against the gain from the sale of their primary residence. A loss on a personal residence, regardless of whether it is a main home or a second/vacation home, is not deductible. Therefore, the losses that they incurred on their vacation home would not be reported on their tax return.

64. Tobias is having money troubles and agrees to sell his condo to Aimee. Aimee pays $224,000 in cash for the home and also agrees to pay all of Tobias's delinquent real estate taxes on the residence, totaling $1,900. How must Aimee treat the property tax payment of $1,900? A. The taxes can be prorated and deducted over the life of her loan. B. Aimee cannot deduct the taxes. Instead, she must add the taxes to her basis in the property. C. Aimee can deduct the property taxes as an itemized deduction on her Schedule A. D. Aimee can deduct the property taxes as a business expense on Schedule C.

65. The answer is B. Under the section 121 exclusion, Simon and Marguerite may exclude $500,000 of the gain on their primary residence. They must recognize $32,000 of capital gain ($805,000 - $273,000 - $500,000 exclusion) in 2019. The exclusion may be claimed only on a main home and not on a second home, and it is subject to both the ownership and occupancy tests. The loss from the Maui vacation home cannot be claimed or netted against the gain from the sale of their primary residence. A loss on a personal residence, regardless of whether it is a main home or a second/vacation home, is not deductible. Therefore, the losses that they incurred on their vacation home would not be reported on their tax return.

65. Simon and Marguerite are married and file jointly. They owned and lived in a home as their primary residence for over 15 years. They had purchased it for $273,000 and sold it for $805,000 in February 2019. In the same year, the couple sold their Maui vacation condo, which they had purchased for $195,000 13 months ago. They sold the condo at a loss, for $191,000 in April 2019. What amounts of taxable gain (or loss) result from these two real estate transactions? A. $0 taxable gain; $4,000 of capital loss. B. $32,000 of long-term capital gain. C. $32,000 of capital gain; $4,000 of ordinary loss. D. $529,000 of long-term capital gain.

66. The answer is A. Milas can claim $250 (the maximum amount allowed for 2019) for the educator expense deduction. Aleksandra is not eligible because the deduction is available only to kindergarten through grade 12 teachers, instructors, counselors, principals, and aides who worked at least 900 hours during the year. If Aleksandra had been an eligible educator, the couple could have claimed a maximum deduction of $500 on their jointly filed return. This deduction is sometimes called the "Teacher Credit."

66. Milas is a seventh-grade science teacher. He spent $800 of his own money on books, computer software, and other supplementary materials for his classroom in 2019. His wife, Aleksandra, is an adjunct professor at a local community college. She spent $220 of her own money on books and other supplies for the courses she teaches. They are both full-time teachers. The couple files jointly. What amount can they claim for an educator expense deduction in 2019? A. $250 B. $470 C. $500 D. $800

67. The answer is C. An annulled marriage is considered void from its inception. Theodore is deemed to be single, and he must also file amended returns (Form 1040X) claiming single for all tax years that are affected by the annulment and not closed by the statute of limitations.

67. Theodore married Hardine three years ago. They have always filed their taxes jointly. In 2019, Theodore discovers that Hardine was married before, and never properly divorced from her first husband. Theodore moves out in November and hires an attorney who files for an annulment under the charge of bigamy. Theodore's annulment is granted on February 2, 2020. Theodore does not have any children or dependents. Under these circumstances, what is Theodore's filing status for the 2019 tax year? A. Married Filing Jointly. B. Married Filing Separately. C. Single. D. Head of Household.

69. The answer is B. The calculation of Babette's gross estate includes all of the assets she owned outright at the date of her death, including the life insurance proceeds payable to her beneficiaries. However, only half of the amounts of the assets she owned jointly with her husband would be included in the calculation. Therefore, the answer is figured as follows: $150,000 IRA + $15,000 land + $1,750,000 life insurance + $30,000 checking account + $550,000 ($1,100,000/2) brokerage account + $250,000 ($500,000/2) other jointly-held property = $2,745,000. Debts not paid before the decedent's death, including medical expenses subsequently paid on her behalf, are liabilities that can be deducted from the gross estate on the estate tax return. However, the value of the "gross estate" is figured without regard to these liabilities. Once the executor figures out the value of the gross estate, there are several deductions that are allowable to determine the amount of the taxable estate. Medical expenses can also be deducted on the taxpayer's final Form 1040, even if they are paid in the year following the date of death. For more information, see Publication 559, Survivors, Executors, and Administrators.

69. Babette died on July 1, 2019. At the time of her death, she had the following assets: Roth IRA $150,000 Undeveloped land titled in her name $15,000 Life insurance proceeds payable to her children $1,750,000 Brokerage account held jointly with her spouse $1,100,000 Checking account held in her name only $30,000 Real estate held jointly with her spouse $500,000 Babette also had $50,000 of outstanding medical bills at the time of her death. Her husband, who is also the executor of her estate, paid the outstanding medical bills on January 9, 2020. What is the amount of her gross estate on Form 706? A. $2,545,000 B. $2,745,000 C. $1,295,000 D. $995,000

A (Nadia and Jasmine will be treated as each having received $9,000 of rental income each ($18,000 × 50%) and $6,000 of taxable interest ($12,000 × 50%) as the entire amount of DNI ($30,000) was distributed during the year. An amount distributed to a beneficiary retains the same character for the beneficiary that it had for the estate.)

7. Peter Smith dies on January 2, 2019. At the time of his death, Peter had several investments that earned income. He dies unmarried and without a will, so his estate must go through probate. In 2019, the Estate of Peter Smith has distributable net income (DNI) of $30,000, consisting of $18,000 of rents and $12,000 of taxable interest. The executor distributes $15,000 each to the two equal beneficiaries, Nadia and Jasmine, who are Peter's daughters. How should Nadia and Jasmine report this income on their individual tax returns? A. Each will be treated as having received $9,000 of rental income and $6,000 of taxable interest. B. Each will be treated as having received $15,000 of ordinary income, which would be reported on Schedule C. C. Each will be treated as having received $18,000 of rental income and $12,000 of interest. D. This income does not need to be reported by the taxpayers, because it has already been taxed at the estate level on Form 706.

70. The answer is D. Rihanna has a long-term capital gain of $370 ($1,320 sale price - $950 transferred basis). The basis of a gift generally remains the same for the gift recipient/donee as it was for the donor when the fair market value of the gifted asset is more than the donor's basis. Therefore, Rihanna's basis in the stock, for purposes of determining gain, is $950 (transferred basis). The holding period is also transferred, so the three years that Jakob held the stock (before giving it to his daughter) is added to her 108 holding period, which makes the disposition a long-term capital gain when Rihanna sold it on November 16, 2019.

70. Five years ago, Jakob purchased 200 shares of Baxter Steel Corporation stock. On January 10, 2019, Jakob gives his daughter, Rihanna, the 200 shares of Baxter Steel Corporation stock as a gift. Jakob's adjusted basis in the stock was $950. On the date of the transfer, the fair market value of the stock was $1,100. Rihanna sells all 200 shares for $1,320 on November 16, 2019. What is the amount and nature of Rihanna's gain? A. $150 short-term capital gain. B. $270 long-term capital gain. C. $370 short-term capital gain. D. $370 long-term capital gain.

71. The answer is D. Gambling income does not qualify as "earned income" for purposes of the Earned Income Tax Credit. For purposes of the EITC, earned income includes: ● Wages, salaries, tips, jury duty pay, and union strike benefits. ● Long-term disability benefits received prior to minimum retirement age. ● Statutory employee pay. ● Net earnings from self-employment. ● Nontaxable combat pay: although combat pay is generally not taxable, the taxpayer can elect to have nontaxable combat pay included in income for the Earned Income Tax Credit if it gives them a better tax result.

71. Which of the following types of income is not "qualifying income" for the purposes of the Earned Income Tax Credit? A. Nontaxable combat pay. B. Union strike benefits. C. Jury duty pay. D. Legal gambling income.

72. The answer is C. Celeste does not have to file a return, because she only has Social Security income, and her income is also under the filing requirement. Medicaid waiver payments are excludable from gross income and do not need to be reported on the taxpayer's return.25

72. Celeste is unmarried and 65 years old. She receives qualified Medicaid waiver payments for the personal care of her adult disabled son in her home. The Medicaid waiver payments total $17,000 for the year. Celeste also receives $12,000 in Social Security Income during the year. Does Celeste have to file a tax return in 2019? A. She must file a return because the Medicaid waiver payments and the Social Security income are taxable. B. She must file a return because the Social Security income is taxable. C. She does not have to file a return because neither the Medicaid waiver payments nor the Social Security income are taxable. D. She does not have to file a return because the Social Security income is taxable and below the standard deduction amount.

73. The answer is B. Traditional IRA distributions are taxable to the receiver. In the case of a deceased IRA holder, the distribution to the beneficiary is subject to income tax but is not subject to the 10% early withdrawal penalty, regardless of the age of the beneficiary.

73. Which of the following types of income is taxable income to the recipient? A. Damage awards for physical injury or sickness. B. Traditional IRA distributions to a beneficiary after the death of the original IRA owner. C. Accelerated death benefits for a terminally ill individual under a life insurance contract. D. Child support payments.

74. The answer is D. The cleaning deposits are refundable to the tenants, so they are not considered rental income. The advance rent must be included in Kelsey's 2019 rental income. This is because Kelsey had constructive receipt of the rent, and advance rent is always taxable when it is received, regardless of the taxpayer's accounting method. A taxpayer is deemed to have "constructive receipt" of income when the amount is made available without restriction. A taxpayer cannot hold checks or postpone taking possession of income from one tax year to another to avoid paying tax. The fact that Kelsey waited to cash the check is irrelevant because she had rights to the funds. Kelsey must calculate her rental income as follows: $11,700 ($1,300 × 9 months in 2019) $1,800 ($600 × 3 months in 2019) $600 (rent paid in advance) $14,100 rental income for 2019

74. Kelsey owns a residential rental duplex. Both units were vacant at the beginning of the year. On April 1, 2019, Kelsey begins renting the first unit for $1,300 per month. She also collects a $1,000 refundable cleaning deposit from the first tenant. The second unit is being advertised in the local newspaper, but Kelsey is having trouble finding a responsible tenant. On October 1, 2019, Kelsey is finally able to rent the second unit for $600 per month. Kelsey obtains a $300 refundable cleaning deposit from the second tenant. On December 12, 2019, Kelsey's second tenant leaves on vacation and pays his January 2020 rent in advance. Kelsey accepts the check for $600 but does not cash it until January. Based on this information, how much rental income should Kelsey report on her Schedule E for 2019? A. $13,500 B. $15,400 C. $14,800 D. $14,100

75. The answer is D. In this case the sales taxes are a liability, not income, and are therefore excluded from Regina's gross receipts and deductible expenses, as the taxes are imposed on her buyers and she is merely collecting the taxes on behalf of the state. Note that in certain states, sales taxes are imposed on the seller, and in these states, a seller who collects sales tax from their customers must include the sales taxes in gross receipts and then deducts them when paid (or incurred). Note that when a business pays sales tax in connection with the purchase of goods for use in the business, the sales tax is considered a component of the cost of the item purchased. Thus, if the item is depreciable property, the sales tax is added to its depreciable basis. If the item is merchandise for resale or to be used in the production of inventory, the tax is capitalized as a component of inventory. If the sales tax is related to a currently deductible business expense, it is likewise considered part of that expense.

75. Regina owns a clothing store in Las Vegas, Nevada, which she operates as a sole proprietorship. She collects sales tax on behalf of each customer's purchase as Nevada imposes a sales tax on the buyer of physical goods. Regina is required to collect and remit the sales tax on behalf of the state. Which of the following is a correct statement about the sales tax Regina collects from her customers in connection with the sale of inventory? A. The sales taxes collected are considered taxable income until the taxes are remitted to the proper taxing authorities. B. The sales taxes collected are deducted from her gross receipts. C. The sales taxes collected are added to her gross receipts. D. The sales taxes collected are excluded from her gross receipts and deductible expenses.

C (The Tax Cuts and Jobs Act eliminated the deduction for most business-related entertainment expenses, so the tickets to the baseball game are not deductible. The deduction for business meals is limited to 50%. Some business meal and entertainment expenses are 100% deductible if the expense is primarily for the benefit of employees who are not highly compensated or key employees. This would include things like a company picnic, holiday party, or a companywide office party. The answer is calculated as follows: Expense Cost Allowable? Deduction Tickets to a baseball game to entertain his client $196 NO $0 Business meal at a restaurant $82 50% $41 A holiday party for Mansour's 10 employees $260 100% deductible $260 Allowable deduction $301 )

76 31. Mansour is a self-employed building contractor who files on Schedule C. Mansour entertains his best client at a baseball game, and doing so, he secures a lucrative building contract. Mansour also throws a holiday party for his employees and takes another client out to lunch for his birthday. In 2019, he had the following meal and entertainment expenses related to his business: Expense Cost Tickets to a baseball game to entertain his client $196 A business meal at a restaurant with a client $82 Catering for a holiday party for Mansour's 10 employees $260 What is the allowable expense on his Schedule C? A. $171 B. $269 C. $301 D. $351

76. The answer is B. The wages, interest, alimony, and unemployment compensation are all taxable income and will be reported on Lynne's tax return ($26,200 + $5,400 + $7,400 + $5,300 = $44,300). Child support, inheritance, and worker's compensation are nontaxable income and will not be shown on Lynne's tax return. Unlike unemployment compensation, worker's compensation is not taxable, because it is a form of insurance providing wage replacement and medical benefits to employees injured in the course of employment. Compensation for injuries is generally not taxable. Note: The Tax Cuts and Jobs Act (TCJA) permanently eliminated the deduction for alimony payments for divorces that are finalized or substantially modified in 2019 and later. Divorce judgments that are finalized before 2019 are "grandfathered" and the old rules apply. Since Lynne's divorce was finalized before 2019, the alimony is taxable to her, and deductible by the payor (her ex-spouse).

76. Lynne received the following income during the year: Source Taxable? Wages $26,200 Interest income $5,400 Child support payments $6,200 Alimony income (divorce was finalized in 2017) $7,400 Inheritance from her deceased brother $12,600 Worker's compensation $2,300 Unemployment compensation $5,300 Based on the amounts above, what is Lynne's gross income before any adjustments and deductions are applied? A. $41,300 B. $44,300 C. $52,800 D. $63,100

77. The answer is B. Beatrix's original basis per share was $22 ($11,000 cost basis ÷ 500 shares). After the nontaxable stock dividend, her original $11,000 basis would be allocated to the 550 shares (500 original shares plus the 50-share stock dividend). This results in an adjusted basis of $20 per share ($11,000 ÷ 550 shares).

77. Beatrix purchased 500 shares of Health Services, Inc. stock on February 2, 2019. She paid $11,000 for all the shares. On December 12, 2019, she received 50 additional shares as a nontaxable stock dividend. What is her new basis per share at the end of the year? A. $10 per share. B. $20 per share. C. $22 per share. D. $24 per share.

78. The answer is D. Based on Vincent's AGI of $45,000, qualifying medical expenses beyond the first $3,375 (or 7.5% of his AGI) would be tax deductible. Vincent has $8,000 in medical expenses for himself, as well as $2,000 in medical expenses for his daughter. The calculation is as follows: $45,000 x 7.5% AGI threshold = $3,375 ($8,000 + $2,000) = $10,000 in qualifying medical expenses $10,000 - $3,375 = $6,625 allowable deduction Noncustodial parents, who pay medical expenses for a child after a divorce or separation, may deduct those costs on their federal income tax return, even though the other spouse may have custody of the child and/or claim the child. The fact that Vincent does not claim his daughter as a dependent is irrelevant in this case. For the purposes of the medical expense deduction, a child of divorced or separated parents can be treated as a dependent of both parents. This special rule is outlined in IRS Publication 502, Medical and Dental Expenses. Note: Although the medical expense deduction was set to change in 2019, Congress passed a two-year extension of the prior threshold as part of the Taxpayer Certainty and Disaster Tax Relief Act of 2019, which allows taxpayers to use the medical expense deduction threshold at 7.5% instead of 10%.

78. Vincent's adjusted gross income is $45,000 in 2019. He has $8,000 in qualifying medical expenses during the year. Vincent also pays an additional $2,000 in medical expenses for his daughter, who is 10 years old and does not live with him. He does not claim his daughter as a dependent on his tax return, because his ex-wife is the custodial parent. Vincent chooses to itemize his deductions this year. What is his allowable deduction for medical expenses on Schedule A? A. $3,375 B. $4,625 C. $5,500 D. $6,625

79. The answer is C. Eldridge may choose to report the bond interest in one of two ways. He can: ● Report $250 of interest income when the bond matures (this is the difference between the $500 value at maturity and the amount he paid for the bond), or ● Report $7 of interest income at the end of the first year. This is the increase in value at the end of the year ($257 - $250 = $7). Eldridge would then be required to report interest income each year until maturity. (Most taxpayers choose to report the bond interest at maturity, rather than report the interest earned by the bond every year).

79. Eldridge owns a U.S. Series EE savings bond. He does not attend any college or postsecondary school. He paid $250 for the bond in January 2019. When the bond matures in ten years, Eldridge will receive $500. At the end of the first year, the bond is worth $257. How should Eldridge report the interest income on his tax return? A. Eldridge must report the bond interest as it is being earned. Therefore, on his current year return, he would report $7 of taxable interest income. B. U.S. Series EE savings bonds are exempt from federal income tax. C. Eldridge may report $250 of interest income when the bond matures, or he may choose to report $7 of interest income at the end of the tax year. D. Eldridge is required to report the interest when the bond reaches maturity, regardless of the redemption date.

C (Jacob cannot deduct any expenses associated with the cycling competitions, but he must claim any prizes as income. Costs related to a hobby activity are no longer deductible due to the suspension of miscellaneous itemized deductions by the Tax Cuts and Jobs Act (TCJA). The IRS is likely to determine that Jacob is engaging in a "hobby" because the cycling competitions are not engaged in for profit. Although he maintains adequate records and enters the competitions with the ability to earn money, he continues to enter competitions despite sustaining losses over several years, suggesting the lack of a true profit motive. A "hobby" is an activity typically undertaken primarily for pleasure. The IRS presumes that an activity is "carried on for a profit" if it makes a profit during at least three of the last five tax years, including the current year.)

8. Jacob works full-time as a grocery store cashier. He is also a competitive cyclist and has regularly participated in cycling competitions for the past six years with the primary intent to have fun, but he can also earn prize winnings. He has devoted significant time and effort to developing expertise in cycling, and he keeps good records that track his income and expenses associated with the competitions. Jacob has not yet earned a profit through the cycling tournaments. As his tax preparer, what would you advise Jacob regarding his cycling activity? A. The cycling competitions constitute a trade or business activity, so he can deduct his expenses on Schedule C. B. Jacob is engaging in a hobby, so he can deduct his expenses only up to the amount of his competition income. The expenses are only deductible on Schedule A as a miscellaneous itemized deduction. C. Jacob cannot deduct any expenses associated with the competitions. However, he must claim any prizes as income. D. Jacob cannot deduct any expenses, but does not have to claim any of the prize income since the activity is not a business.

80. The answer is D. Victoria can claim $26,400 in alimony paid as an adjustment to income on her individual Form 1040, the total of the medical expenses and the regular alimony paid ($15,000 + $11,400). The payer can deduct the full amount if it is required by the divorce agreement or divorce decree. Since Victoria's divorce decree included a written stipulation that she was required to pay her ex-spouse's ongoing medical expenses, then those payments would also qualify as alimony. Alimony is a payment to or for a former spouse under a divorce or separation agreement. Alimony does not include voluntary payments that are not made under a divorce or separation decree. Payments to a third party (such as the 110 payment directly to the hospital) on behalf of an ex-spouse under the terms of a divorce agreement can qualify as alimony. These include payments for an ex-spouse's medical expenses, housing costs (rent, utilities, etc.), taxes, and tuition. The payments are treated as received by the spouse and then paid to the third party.26

80. Victoria and Colton divorced in 2014. Under their divorce settlement, Victoria must pay her ex-husband $15,000 in alimony per year, which she pays in equal installments each month. She is also required to pay his ongoing medical expenses for a medical condition he acquired during their marriage. In 2019, Colton's medical expenses were $11,400. She paid $10,000 of the medical expenses directly to the hospital. The other $1,400 she gave directly to Colton after getting a copy of the doctor's bill. How much of these payments can be properly deducted by Victoria as alimony? A. $15,000 B. $16,400 C. $25,000 D. $26,400

81. The answer is D. Anton must report $12,000 of gambling winnings as taxable income. He should also report the $1,300 withholding on his return. Anton can deduct his gambling losses as an itemized deduction on Schedule A, but the losses are limited to the amount of his gambling winnings. Therefore, Anton cannot deduct more than $12,000 of gambling losses. If a taxpayer does not itemize deductions, he is not allowed to deduct gambling losses. Gambling winnings over certain amounts are reported to a taxpayer on Form W-2G, Certain Gambling Winnings. Note: Gambling losses are still deductible against gambling winnings in 2019. The TCJA did, however, modify the gambling loss deduction. The TCJA expanded the definition of "gambling losses" to include other expenses incurred in gambling activities, such as travel back and forth from a casino or horse track. Professional gamblers are no longer allowed to generate net operating losses on Schedule C from wagering activities, (their losses are limited to winnings).

81. Anton is single and 68. He does not have any dependents. In 2019, Anton wins $12,000 at a casino. The casino withholds $1,300 in federal income taxes on the winnings. He also has $14,500 in gambling losses in 2019. Anton itemizes deductions. He is not a professional gambler. How should this be reported on his return? A. Anton must report $12,000 of gambling winnings as "other income." He should also report the $1,300 withholding on his return. He cannot deduct his gambling losses. B. Anton must report $12,000 of gambling winnings as "other income." He should also report the $1,300 withholding on his return. Anton can deduct $14,500 in gambling losses as an itemized deduction on Schedule A. C. Anton should report his net gambling losses of $2,500 ($14,500 - $12,000) as "other income." He should also report the $1,300 withholding on his return. D. Anton must report $12,000 of gambling winnings. He should also report the $1,300 withholding on his return. Anton can deduct up to $12,000 of gambling losses as an itemized deduction on Schedule A.

82. The answer is B. Melanie turned 13 on May 1 and is no longer a qualifying person for purposes of this credit. For the Child and Dependent Care Credit, the child must be under the age of 13 (or be disabled, of any age). However, Jason can use the $2,000 of expenses for Melanie's care that he incurred from January through April, before Melanie turned 13, to figure his tax credit because it is less than the $3,000 yearly limit for qualifying expenses for a taxpayer with one qualifying child. If there is more than one qualifying child, the amount of qualifying expenses is limited to $6,000.

82. Jason is unmarried and works full-time. He has sole custody of his daughter, Melanie. Jason pays $500 a month for after-school daycare for his daughter. On May 1, 2019, Melanie turned 13. How much of Jason's daycare expenses are qualifying expenses for purposes of the Child and Dependent Care Credit? A. $0 B. $2,000 C. $3,000 D. $6,000

83. The answer is C. Aaliyah can contribute to a Roth IRA, but her contribution is subject to a phaseout because of her MAGI (Modified Adjusted Gross Income). Even though Aaliyah is "married filing separately" she did not live with her spouse at any time during the year, so she may use the higher phase-out threshold for single taxpayers. The 2019 Roth phaseout limits are as follows: Roth IRA contribution limit phaseout (MAGI): ● $193,000 - $203,000 (MFJ); ● $122,000 - $137,000 (Single and HOH, MFS if the taxpayer did not live with their spouse); ● $0 to $10,000 (MFS, if living with spouse).

83. Aaliyah is 38 and files MFS. She has lived apart from her husband for three years, but they are not legally separated or divorced. Her modified AGI was $130,000 in 2019. Is she allowed to contribute to a Roth IRA? A. Yes; she can contribute to a Roth, and her contribution is not limited. B. No, she cannot contribute to a Roth because her income is too high. C. Yes; she can contribute to a Roth, but her contribution is limited by her MAGI. D. No; she cannot contribute to a Roth because she is filing MFS.

84. The answer is B. In Darian's case; since he has two qualifying students, he can claim a maximum of $5,000 ($2,500 × 2) in American Opportunity Credits. Darian can claim the American Opportunity Credit for Devon and Brianna, but cannot for Keisha, because she is a graduate student who had already completed four years of college as an undergraduate. A taxpayer can claim the American Opportunity Credit for qualified education expenses paid for a dependent child, the taxpayer, or a spouse listed on the return. If a taxpayer has multiple qualifying students, the taxpayer can claim multiple credits on the same return. Darian may be able to take the Lifetime Learning Credit for Keisha's education expenses if she otherwise qualifies.

84. Darian has three kids in college. They are all his dependents: 1. Brianna, age 21, a college sophomore working on her first bachelor's degree. 2. Devon, age 19, a college freshman working on his first bachelor's degree. 3. Keisha, age 23, a college graduate working on her first master's degree after having completed and graduated from a four-year undergraduate program. Based on the above scenario, what is the maximum amount of American Opportunity Tax Credits (AOTC) Darian can potentially claim on his tax return? A. $2,500 B. $5,000 C. $6,500 D. $7,500

86. The answer is D. A statutory nonemployee is the most likely to be subject to estimated taxes. There are three categories of statutory nonemployees: direct sellers, licensed real estate agents, and certain companion sitters. These taxpayers are treated as self-employed for FICA purposes and are usually required to pay estimated taxes. Answers A and C are incorrect because household employees and statutory employees would have Medicare and Social Security taxes withheld by their employers. Answer B is wrong because investment income is typically not subject to SE tax.

86. Which of the following taxpayers is the most likely to be required to pay estimated taxes? A. A household employee. B. A nonresident alien with U.S. investments, who is subject to backup withholding. C. A statutory employee. D. A statutory nonemployee

87. The answer is B. Letty will report $30,850 of wages on Form 1040. This is the total of her W-2 income and her unreported tip income ($25,600 + $4,950 + $300). The unemployment compensation must be reported as income and the state income tax refund may have to be reported if Letty had itemized her deductions in the prior year and received a tax benefit from the state tax deduction, but neither would be reported on the return as wages.

87. Letty works as a receptionist during the week and part-time as a waitress on the weekends. Based on the amounts below, what will Letty show as taxable wages income on her individual Form 1040? Receptionist, Form W-2 wages $25,600 Waitress, Form W-2 wages $4,950 Waitress, unreported tips $300 Unemployment compensation $3,700 State income tax refund $2,000 A. $30,550 B. $30,850 C. $34,250 D. $36,550

88. The answer is B. Joanna should report the disability income that she receives from her former employer as wages on her Form 1040. Generally, taxpayers who retire on disability from their regular job must include all of their disability payments in taxable income. Disability payments are taxed as wages until the taxpayer reaches the minimum retirement age (this age is set by the employer). After the taxpayer reaches the minimum retirement age, any ongoing disability payments are treated as pension income and would be reported as such. See IRS Publication 575, Pension and Annuity Income, for more information.

88. Joanna is 41 years old. While taking inventory at her employer's warehouse, a loaded pallet fell on top of her and left her paralyzed. Joanna retired on disability from her job and now receives a monthly payment from her former employer's defined benefit pension plan. She has not reached the minimum retirement age set by her company's pension plan, which is 55 years old. How should Joanna report her disability income? A. Joanna's disability income is not taxable. B. She should report her disability income as taxable wages on Form 1040. C. She should report her disability income as pension income on her Form 1040. D. She should report her disability income as unemployment compensation on her Form 1040.

89. The answer is D. Naomi may be eligible for the Retirement Savings Contributions Credit. In 2019, in order to qualify for the credit, a taxpayer who is single cannot have an AGI of more than $31,000. She would not qualify for any of the other credits listed because she does not have any dependents and her income is above the threshold for the Earned Income Tax Credit (for taxpayers with no dependents).

89. Naomi is 29 years old and single. She is not a student and does not have any dependents. She has an AGI of $27,000, all from wages. Naomi contributed $1,500 to a 401(k) during the tax year. Which credit might she be eligible for on her 2019 tax return? A. Child and Dependent Care Credit. B. Credit for Other Dependents. C. Earned Income Tax Credit. D. Retirement Savings Contributions Credit.

A (Timmy was a qualifying person for the Child and Dependent Care Credit until he reached the age of 13. The daycare expenses that Theresa incurred until his birthdate are qualifying expenses for the Child and Dependent Care credit.)

9. Theresa paid daycare expenses for her dependent son, Timmy. Theresa is unmarried and worked full-time all year. Timmy turned 13 on April 1. He is not disabled. Which of the following statements is correct about the Child and Dependent Care Credit? A. Timmy was a qualifying child until he reached the age of 13, and the daycare expenses incurred until that date are qualifying expenses for the credit. B. Timmy was a qualifying child for the entire year. C. Timmy was not a qualifying child for the credit because he turned 13 during the year. D. Timmy was not a qualifying child for the credit because he is not disabled.

90. The answer is A. A tax preparer should advise Edrik to amend his tax return using Form 1040X. Once the amended return is processed, Halfrida may file her tax return normally, claiming head of household and any applicable credits related to her child. If necessary, an extension may be submitted for Halfrida if Edrik's amended return has not been processed by the original due date. If the amended return has not been processed by the extended due date, then Halfrida must file a paper return with an explanation of the situation. A taxpayer should file an amended return when a return that has already been filed needs to be corrected. A taxpayer should file an amended return if he: ● Received another Form W-2, a corrected Form W-2, or another income statement that was not reported on the original return. ● Received an additional Form 1099 that was not reported on the original return. ● Claimed deductions or credits that should not have been claimed. ● Did not claim deductions or credits they could have claimed. ● Should have used a different filing status.

90. Halfrida is 49 and single. She has a 19-year-old dependent son named Edrik who is a full-time college student. Halfrida pays her son's tuition and provides the majority of his financial support. Edrik lives on campus and has a part-time job, where he makes $3,000 in wages for the year. Edrik files his own tax return on February 10, 2019, and he mistakenly claims the American Opportunity Credit on his personal return. On March 1, Halfrida tries to e-file her 2019 return and receives an e-file rejection when she tries to claim Edrik on her return and file as head of household. What should a tax practitioner advise in this situation? A. Advise Edrik to amend his tax return using Form 1040X. Once the amended return is processed, Halfrida can file her tax return normally, and claim the American Opportunity Credit. B. Halfrida cannot claim Edrik, because he is a legal adult and he has already filed his own return. C. Halfrida should use Form 1040X (instead of Form 1040), explaining the situation with a letter and reporting Edrik's error. D. Halfrida should file a paper return and claim head of household. She cannot claim the American Opportunity Credit for her son, however, because he already claimed the credit on his own return.

91. The answer is B. Nathaniel's deductions from his gross estate are first figured as follows: Funeral and burial costs $23,000 Attorney's fees $37,950 Debts owed at the time of death $86,500 Unpaid mortgage on the decedent's primary residence $723,700 Property taxes accrued after death Not Allowable Amount deductible from Nathaniel's Gross Estate $871,150 Certain deductions are available to reduce the Estate Tax. These amounts would be deductible from the "gross estate" in order to figure the "taxable estate" on Form 706. The most common of these is the Marital Deduction. All property that is included in the gross estate and passes to the surviving spouse is eligible for the marital deduction if the surviving spouse is a U.S. citizen. The property must pass "outright". Examples of other estate tax deductions include: ● Charitable Deduction: If the decedent leaves property to a qualifying charity, it is deductible from the gross estate. ● Mortgages, property taxes, and debts owed by the decedent at the time of death. ● Administration expenses of the estate (such as lawyer's fees and accounting costs). ● Funeral and burial expenses. ● Losses during estate administration. These deductions are allowable in addition to the estate and gift tax exemption. For 2019, the estate and gift tax exemption is $11,400,000 per taxpayer. So, using the figures above, the amount of Nathaniel's taxable estate would be figured as follows: Gross estate on the date of death $15,000,000 Amount deductible from the Gross Estate ($871,150) Estate Tax Exemption ($11,400,000) Nathaniel's Taxable Estate $2,728,850 Since the property taxes in the question accrued after the date of Nathaniel's death, they would not be includable in the calculation of the taxable estate. Since the property would pass to a daughter (instead of a surviving spouse), then Nathaniel's estate would be subject to the estate tax.

91. Nathaniel is unmarried with one adult child, named Lillianne. On May 12, 2019, Nathaniel dies. His will names his daughter Lillianne, as his executor and the sole beneficiary of his estate. Nathaniel's gross estate is valued at $15 million on the date of his death. Lillianne compiles the following list of expenses and losses related to her late father's estate: Funeral and burial costs $23,000 Attorney's fees related to the estate $37,950 Debts owed at the time of death $86,500 Unpaid mortgage on the decedent's primary residence $723,700 Property taxes accrued after death $26,000 Based on the amounts listed above, what is the amount deductible against the gross estate for Estate Tax purposes? A. $124,450 B. $871,150 C. $874,150 D. $897,150

92. The answer is A. The expenses paid for an unsuccessful adoption attempt in the United States may still be deductible. Qualified adoption expenses include court costs, attorney fees, traveling expenses (including meals and lodging while away from home), and other expenses directly related to the legal adoption of an eligible child. Qualified adoption expenses do not include costs for adopting a spouse's child, fees for a surrogate arrangement, or any expenses that were reimbursed by an employer or another organization. Expenses connected with a foreign adoption (in which the child was not a U.S. citizen or U.S. resident at the time the adoption process began) qualify only if the adoption is successful.

92. Which of the following are qualified adoption expenses for purposes of the Adoption Credit? A. Expenses paid in an unsuccessful attempt to adopt an eligible child. B. Expenses for adopting a spouse's child. C. A surrogate parenting arrangement. D. Adoption expenses reimbursed by an employer.

93. The answer is C. Jaxson has $1,100 of net long-term capital gains ($1,600 gain - $500 loss). The gain on the Hibbert, Inc. stock is short-term because the shares were not held for more than a year. Activity Bought Sold Gain/Loss Character 1,400 shares for $3,000 (basis: $1,400) 1/3/2015 12/1/2019 $1,600 LT gain 200 shares for $500 (basis: $1,000) 1/3/2014 12/25/2019 ($500) LT loss 50 shares for $1,700 (basis: $1,500) 2/1/2019 9/12/2019 $200 ST gain

93. In 2019, Jaxson had a number of stock dispositions. His investment transactions were: Activity Bought Sold Sold 1,400 shares of Depot Corp. stock for $3,000 (basis: $1,400) 1/3/2015 12/1/2019 Sold 200 shares of Lection, Inc. for $500 (basis: $1,000) 1/3/2014 12/25/2019 Sold 50 shares of Hibbert, Inc. stock for $1,700 (basis: $1,500) 2/1/2019 9/12/2019 Based on all the transactions listed above, what is Jaxson's net long-term capital gain (or loss)? A. $1,000 long-term capital loss. B. $1,200 long-term capital loss. C. $1,100 long-term capital gain. D. $1,600 long-term capital gain.

94. The answer is C. The gift is not taxable, but Tamara and Wyatt must report the gift on Form 709. The gift limit in 2019 is $15,000. If both spouses consent to split a gift, a married couple can give up to $30,000 to a person without making a taxable gift. When a married couple splits a gift, each spouse must generally file his or her own individual gift tax return. However, certain exceptions may apply that allow for only one spouse to file a return if the other spouse signifies consent on the donor spouse's Form 709.

94. Tamara and Wyatt are married and file jointly in a non-community property state. In 2019, they decide to give Tamara's nephew, Jared, $28,000. Wyatt writes a single check and both consent to the gift. What are the tax consequences of this gift? A. The gift is taxable to Jared on his individual return. B. The gift is taxable to Tamara and Wyatt on their joint return. C. The gift is not taxable, but it must be reported on Form 709. D. The gift is neither taxable nor reportable on Form 709.

95. The answer is A. Even though Edmund provided over half the cost of providing a home for his daughter, he cannot file Head of Household because his daughter did not live with him over half the year. He is not eligible for the Child and Dependent Care Credit, either, because only a custodial parent may claim the credit. Hayley cannot be Head of Household either because she did not provide more than one-half the cost of keeping up the home for her daughter.

95. Hayley and Edmund are not married, but they have a 9-year-old daughter together, named Brianne. Hayley and Edmund do not live together, and Brianne lives with her mother most of the week and only stays with her father on weekends. Edmund earned $75,000 in wages during the year. Hayley earned $42,000 in wages. Both parents support Brianne, but since Edmund earns more, he helps Hayley out with living expenses. Edmund paid over half the cost of the apartment where his daughter lives. He also paid $4,000 for Brianne's daycare in 2019. Can Edmund file as Head of Household and claim the Child and Dependent Care Credit? A. No, Edmund cannot claim the credit, and he cannot file as Head of Household. B. Edmund can file as Head of Household, but he cannot claim the credit for dependent care. C. Edmund cannot file as Head of Household, but he is allowed to claim the credit for dependent care. D. Edmund can file as Head of Household, and he can claim the credit for dependent care.

96. The answer is C. Tristan must pay an additional 0.9% Medicare tax on his wages over $200,000 ($240,000 -$200,000 = $40,000 over the threshold amount). Tristan's total Additional Medicare Tax is $360 ($40,000 × 0.9%). Employers are required to withhold the Additional Medicare Tax once an employee's earnings reach $200,000 in a calendar year. Since neither employer is required to withhold the Additional Medicare Tax on Tristan's salary, Tristan must calculate and pay the tax on his individual return. Interest income is not subject to the Additional Medicare Tax, so it is not included in the calculation. Tristan must file Form 8959, Additional Medicare Tax, to compute any Additional Medicare Tax due. A taxpayer is liable for the tax if the taxpayer's wages or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual's filing status: Filing Status Threshold Amount Married filing jointly $250,000 Married filing separate $125,000 Single, HOH, Qualifying Widow(er) $200,000 Note: The Additional Medicare Tax was legislated as part of the Affordable Care Act. Under this mandate, in addition to withholding Medicare tax at 1.45%, employers must withhold a 0.9% Additional Medicare Tax from an employee's wages once their earnings reach $200,000 in a calendar year.

96. Tristan is 37 and single. He works full-time for Echo Laboratories Inc. Tristan earns $200,000 in wages during the year. He has a second job on weekends where he earns $40,000 in wages. Lastly, he has $22,000 in interest income from a certificate of deposit. What is Tristan's Additional Medicare Tax (the threshold for single taxpayers is $200,000)? A. $0 B. $160 C. $360 D. $2,358

97. The answer is A. Samson has $5,475 of qualifying medical expenses ($4,995 + $405 + $75). The condoms would not be deductible, but all of the other medical expenses are specifically allowed in IRS Publication 502. Then he must multiply his AGI of $45,000 by 7.5% to arrive at the deductibility threshold of $3,375. Only medical expenses exceeding $3,375 can be deducted. Therefore, Samson has an allowable medical expense deduction of $2,100 (5,475 - 3,375). Note: Although the medical expense deduction was set to change in 2019, Congress passed a two-year extension of the prior threshold as part of the Taxpayer Certainty and Disaster Tax Relief Act of 2019, which allows taxpayers to use the medical expense deduction threshold at 7.5% instead of 10%.

97. In 2019, Samson had a modified adjusted gross income of $45,000 and the following medical expenses: Type of Expense Cost Smoking cessation program $4,995 False teeth $405 Acid reflux pills (prescription) $75 Condoms purchased at a drugstore $32 What is his allowable medical expense deduction on Schedule A, after applying the AGI limitations? A. $2,100 B. $3,375 C. $4,380 D. $5,475

98. The answer is B. Gina and Anthony must file a joint return to claim the American Opportunity Credit. Qualified education expenses paid on behalf of a student by someone other than the student (such as a spouse or other relative) are treated as paid by the student. In order to take the credit, they would have to file jointly.

98. Gina and Anthony married on August 30, 2019. Earlier that same year, Anthony enrolled in an accredited college to earn his first bachelor's degree and subsequently received a Form 1098-T, Tuition Statement. This was the first year Anthony ever attended college. Gina was employed with wages of $85,000 and paid for all of Anthony's educational expenses. Anthony had no taxable income for the year. Based on their circumstances, can either taxpayer claim the American Opportunity Tax Credit? A. Anthony is ineligible to claim any education credits because his wife paid his education expenses, and they were not married when the costs were incurred. B. The spouses must file a joint return to claim the American Opportunity Credit. C. Based on Gina and Anthony's AGI, they do not qualify to claim an education credit. D. Gina should deduct the education expenses on Schedule A as a miscellaneous itemized deduction, since they do not qualify to take the expenses as an education credit.

99. The answer is D. Gambling winnings are reportable as "other income" on Form 1040. Examples of the types of "other income" include the following: ● Prizes and awards. ● Jury duty pay. ● Alaska Permanent Fund dividends. ● Taxable distributions from a Coverdell education savings account (ESA). ● Hobby income.

99. What type of income is reported as "other income" on Schedule 1 of Form 1040? A. Wages. B. Capital gains and losses. C. Farming income or (loss). D. Gambling winnings.