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The effective tax rate is obtained by dividing the amount of tax paid by

taxable income The effective tax rate is found by dividing total tax by taxable income.

The effective tax rate is calculated by dividing the calculated tax by

B) taxable income

Your client is contemplating the sale of some of her holdings in her employer's stock. The stock was acquired in four separate purchases as follows: Purchase DateSharesCost Per ShareCostJune 1, 1996200$10$2,000June 1, 1998200$18$3,600June 1, 2000200$12$2,400June 1, 2006200$20$4,000Total800$12,000 What is the least amount of gain she would be required to report if she sold 500 shares for $12,500?

$3,700 To minimize the taxable gain, we would choose the shares with the highest cost basis. Thus we would sell the 200 shares that have a basis of $20 each, 200 of the $18 basis shares, and 100 of the $12 basis shares. This gives an aggregate basis of $8,800, resulting in a (long-term capital) gain of $3,700. The ability to use specific identification was not impacted by the Tax Cuts and Jobs Act (TCJA).

Sharon and Oliver South are a married couple filing jointly, with one dependent child. For the 2021 tax year, they have the following items relevant to their income tax situation: Wages$100,000Sole proprietorship net income$10,000Alimony paid to Oliver's former spouse$18,000Child support paid$12,000IRA contribution$6,000Self-employment tax liability$1,413Net capital loss$4,200Child tax credit$2,000Unreimbursed medical expenses$17,000 Oliver's divorce decree was finalized in 2015. Neither spouse is an active participant in a company-maintained retirement plan. What is the amount of the Souths' AGI?

$82,293 Explanation Wages$100,000Schedule C income10,000Net capital loss(3,000)Total income$107,000Alimony paid(18,000)IRA contribution($6,000)½ self-employment tax(707)AGI$82,293 Remember that net capital losses are only deductible up to $3,000 in a given year. Child support payments are neither deductible by the payor nor taxable to the recipient. The child tax credit is deducted after computing the income tax (a tax credit is a dollar-for-dollar reduction of the tax liability). Medical expenses are an itemized deduction, which are deducted after computing AGI (a below-the line deduction, or deduction from AGI)

Lindsey is age 2 and her total income was $6,000 in qualified dividends in 2021. What is the tax on the dividends at Lindsey's rate? A) $30 B) $0 C) $143 D) $95

0 Lindsey is in the 10% marginal income tax bracket. She can use the long-term capital gains tax rate on qualified dividends received. At her income and filing status, that capital gain tax rate is 0%.

Lindsey is age 2 and she received $6,000 in municipal bond interest income and $900 in other interest income in 2021. What is the total federal income tax due on her income in 2021?

0 Lindsey owes no federal income taxes in 2021. Municipal bond interest income is not taxable. The $900 in other interest income is less than Lindsey's $1,100 standard deduction amount

Michelle Will has interest income of $23,000 in the current tax year. She paid brokers' commissions of $2,000 on stock purchases and had $40,000 of investment interest expense. What amount, if any, of investment interest expense may be deducted as an itemized deduction? A) $21,000 B) $33,000 C) $0 D) $23,000

23000

Angela, age 16, is claimed as a dependent on her parents' income tax return. During 2021, she earned $2,200 from a summer job. She also earned $2,600 in interest and dividends from investments that were given to her by her great-aunt five years ago. How much of Angela's unearned income, if any, will be taxed to her in 2021 using her great-aunt's marginal tax rate of 35%? A)$400 B)$0 C)$2,600 D)$2,200

0 When applying the kiddie tax, the parents' marginal tax rate is always used (regardless of the source of the property generating the unearned income). Therefore, none of the income is taxed to Angela using the great-aunt tax rate. The $400 of unearned income ($2,600 − $2,200) is taxed to Amy at her parents' marginal tax rate.

Which of the following are includible in an individual's gross income for income tax purposes? Gambling winnings Inheritances Interest collected by the taxpayer on federal obligations Scholarships and fellowships in degree programs

1 and 3 Gambling winnings and interest on federal obligations are includible in an individual's gross income for income tax purposes. The other items are not subject to income taxation

Which of the following are qualified interest expense deductible in arriving at an individual's AGI? Student loan interest Mortgage interest on a loan acquired for a personal residence in 2021 for $600,000 Interest on home equity loan indebtedness to buy an automobile Investment interest expense A)II and III B)IV only C)I only D)I, II, III, and IV

1 only Only item I, student loan interest, is deductible in arriving at an individual's AGI. Statements II and IV are incorrect and are deductions from AGI. Statement III is not a deductible expense. Home equity loan interest is not deductible for AGI and is only deductible from AGI to the extent the proceeds are used for home acquisition or improvement and not personal expenses.

John and Karen Postman will spend a total of $5,000 on day care for their two children (ages 9 and 10) in the current tax year. These expenses were incurred to allow both John and Karen to work outside the home. Their adjusted gross income is estimated at $138,000. What is the amount of child and dependent care credit, if any, to which they are entitled?

1,000 The maximum amount of qualifying expenditures on which the credit may be based is $3,000 per child, or $6,000 for two or more children. In this situation, they spent $5,000. This is multiplied by 20% for taxpayers with an AGI greater than $43,000. Thus, $5,000 × 20% = $1,000.

Caroline, age 16, has earned income of $18,605 and interest income of $750 in 2021. She is listed as a dependent on her parents' income tax return. What is Caroline's standard deduction for earned income in 2021? A)$1,100 B)$18,000 C)$0 D)$12,550

12550 Caroline's standard deduction for earned income is $12,550 (for 2021), whereas her standard deduction for unearned income is only a maximum of $1,100 (limited to the $750 of actual unearned income in this instance). Caroline would, therefore, elect to offset her total income of $19,355 by the greater of the standard deductions, which is $12,550 in 2021.

Jeff Munroe has an annual salary of $140,000 and is not an active participant in a company-maintained retirement plan. He had the following financial transactions during the current tax year: Received a $100,000 cash inheritance due to the death of his brother Received unemployment compensation of $2,000 Had a Schedule C loss of $10,000 (assume material participation) Made an IRA contribution of $6,000 Paid qualified student loan interest of $2,000 What is Jeff's total income for the current tax year?

132000 The $140,000 salary is reduced by the $10,000 self-employment loss and increased by the unemployment compensation of $2,000. The inheritance is excluded. The IRA contribution is a potential adjustment to income, as is the student loan interest. Thus, those items do not affect the total income. Remember that total income is the figure approximately two-thirds of the way down the front of the 1040. It is the figure from which allowable adjustments to income are subtracted.

Several years ago, Allison Colbert purchased a deferred fixed annuity. The cost of the annuity was a single payment of $40,000. The annuity will provide monthly payments of $275. At the time the annuitized distributions are to begin, Allison's life expectancy will be 25 years. How much of each payment will be excluded from taxation? A) $133 B) $142 C) $57 D) $206

133 Allison is expected to receive $82,500 ($275 × 12 × 25). Her investment in the contract ($40,000) is then divided by the total expected return ($82,500) to determine the excludable portion of each payment. The exclusion ratio is the $40,000 divided by $82,500, which equals 48.48%. 48.48% of $275 = $133 excludable from each payment.

Clare is a single taxpayer. In 2021, her AGI is $235,000, including a net long-term capital gain of $50,000. What is the amount, if any, of Medicare contribution tax that she must pay? A) $570 B) $1,330 C) $0 D) $1,900

1330 She will pay the 3.8% Medicare contribution tax on $35,000. This is the lesser of the net investment income ($50,000) or the AGI in excess of the threshold amount ($235,000 - $200,000, or $35,000). In this situation, only $35,000 of the net investment income is subject to the Medicare contribution tax. Clare will pay a $1,330 Medicare contribution tax (3.8% on $35,000).

Terry and Jan are married taxpayers filing a joint tax return. Their AGI is $265,000, and their net investment income (included in the AGI) is $70,000. What is the amount, if any, of the Medicare contribution tax? A)$0 B)$15,000 C)$570 D)$2,660

570 The answer is $570. ($265,000 - $250,000 = $15,000. $15,000 × 3.8% = $570.)

Larry and Paula are a married couple who file their federal income tax returns separately. They are both over 65 and still provide full support for a son who has been blind since birth. They live together and do not itemize. They alternate listing their son as a dependent, and it is Paula's turn this year. Paula will be required to file a federal income tax return if her gross income is at least which of the following amounts in 2021?

13900 The normal filing threshold for the MFS filing status is $12,550 in 2021. For married taxpayers over age 65, the threshold is raised by $1,350 per spouse. The additional blind deduction applies only to the taxpayers themselves, not their dependents. Tangentially, if the other MFS spouse itemizes, the filing threshold is reduced to $5. (IRS pub 501, 2021) Because Larry and Paula still live together, neither can file as head-of-household with a dependent

James and Julie are a married couple filing jointly. For the 2021 tax year, they have a taxable income of $400,000. Included in the taxable income is $35,000 of net long-term capital gains from the sale of securities and $15,000 of qualified dividends. At what tax rate will their net capital gains and qualified dividends be taxed? A)25% B)20% C)15% D)0%

15% The long-term capital gains and qualified dividends are taxed at 15%. The long-term capital gains and qualified dividends fall into the taxable income range of $80,800 to $501,600 (2021) for a married couple filing jointly.

If Jason files single with gross income of $110,000 and taxable income of $91,000, what is his effective tax rate based on the tax rate schedule provided in your course references?

17.43% 24%($91,000 ‒ $86,375) + $14,751 = $1,110 + $14,751 = $15,861 ÷ $91,000 = 17.43%.

John Prentice owns 100 shares of Quantum Inc., a publicly held corporation. He receives a stock dividend of 10 shares of Quantum Inc. when the fair market value (FMV) of the stock is $10 per share. John originally paid $20 per share for the 100 shares of stock. Approximately what is John's new basis in each share of stock after the stock dividend?

18 The effect of the stock dividend is to "dilute" the basis in the previously owned shares by establishing basis in the new shares. John now owns 110 shares with an aggregate basis of $2,000. This equals an approximate basis of $18 per share.

Which of the following are adjustments to gross income (above-the-line deductions)? Medical expenses Capital losses Deductible IRA contributions

2 and 3

Your client Sally, age 30, is designing an educational investment program for her 8-year-old son. She expects to need the funds in about 10 years when her AGI will be approximately $70,000. She wants to invest at least part of the funds in tax-exempt securities. Which of the following investment(s) may yield tax-exempt interest on her federal return if the proceeds were used to finance her son's education? Treasury bills EE bonds GNMA funds Zero coupon Treasury bonds A) III and IV B) II only C) I, III, and IV D) II and III

2 only Proceeds from EE savings bonds may be exempt if the proceeds are used for qualified higher-education expenses of the taxpayer, spouse, or dependent. There is an AGI phaseout, which is $83,200‒$98,200 (2021) for a single taxpayer. (The actual phaseouts are provided on the exam.) All the other options generate currently taxable income. The Treasury bills and GNMA funds both produce taxable income on the federal return (Treasury bill interest would typically be tax exempt on her state return). The zero Treasury also produces taxable income each year as the amortized discount is added to taxable income, even though no cash income is received.

Which of the following rates apply to qualified dividends that fall above the $501,600 (2021) taxable income breakpoint for a married couple filing jointly (MFJ)? A)25% B)28% C)20% D)15%

20% Qualified dividends (and net long-term capital gains) that fall into the taxable income above $-501,600 (for MFJ) are taxed at a 20% rate

For the current tax year, Bob Phillips, an individual taxpayer filing a joint return, has $50,000 of investment interest expense and $20,000 of net investment income (interest and dividends). Bob's AGI is $200,000. How much investment interest expense, if any, may Bob deduct in the current tax year? A) $0 B) $50,000 C) $20,000 D) $21,000

20000 Investment interest expense is deductible up to the amount of net investment income. The problem tells us that the net investment income is $20,000; thus that is the maximum deduction. The fact that the dividends are included in the net investment income indicates that the taxpayer elected to include them in investment income and is forgoing the preferential rates associated with qualified dividends. The AGI has no bearing on the answer.

If Leslie and Armando file as married filing jointly, with gross income of $176,000 and taxable income of $158,000, what is their marginal tax rate based on the following tax information? Refer to the 2021 tax table provided in your course references.

22% His marginal tax bracket is 22%.

If Phoebe files single with gross income of $86,000 and taxable income of $75,000, what is her marginal tax rate? Refer to the 2021 tax table provided in your course references.

22% His marginal tax bracket is 22%.

Terry and Jan are married taxpayers filing a joint tax return. In 2021, their AGI is $310,000, and their net investment income (included in the AGI) is $90,000. What is the amount of their Medicare contribution tax for 2021? A) $2,280 B) $0 C) $3,420 D) $4,180

2280 Terry and Jan will pay the 3.8% Medicare contribution tax on $60,000. This is the lesser of the net investment income ($90,000) or the AGI in excess of the threshold amount ($310,000 - $250,000, or $60,000). In this situation, only $60,000 of the net investment income is subject to the Medicare contribution tax and calculates to $2,280 ($60,000 × 0.038).

Samantha received the following dividends in 2021 from her portfolio: Ordinary dividends from HOT stock, a publicly traded company Dividends from Sky High Realty and Trust, a publicly traded REIT Life insurance dividends from her whole life policy Qualified dividends from BET stock, a publicly traded company Which of the above is NOT considered taxable? A) IV only B) II and IV C) III only D) I and II

3 only Life insurance dividends are considered a return of premium paid (provided the cumulative dividends received over the life of the policy do not exceed the basis in the policy) and thus are not taxable. The other choices listed are taxable. Qualified dividends are eligible for long term capital gains rates. REIT dividends may qualify for a QBI deduction but nonetheless will still be taxable

Assume that married taxpayers filing jointly have a taxable income of $175,000. Using the tax rate schedule provided in your course references, what is the amount of federal income tax? Round your answer to the nearest dollar.

30,042 Taxable income$175,000 Less (from tax rate schedule)(172,750) Amount over $172,750 $2,250 Times (marginal rate, from tax rate schedule)24% Tax on amount over $172,750 $540 Plus (from tax rate schedule)$29,502 Total Tax$30,042 If you arrived at another answer, you likely did the calculation correctly but may have used the single filing status rather than the married filing joint return status or used a flat rate of 24%. While 24% is the marginal rate (the rate paid on the last dollar of income), there are dollars that are taxed at the 10%, 12%, and 22% rates as well.

Alicia is age 16 and her total income was $3,000 in bank interest in 2021. Her parents' marginal tax rate is 24%. What is her total tax on the interest? (Round the answer to the nearest dollar.)

302 Alicia is in the 10% marginal tax bracket. $1,100 is eliminated by her standard deduction for unearned income. The next $1,100 is taxed 10%, generating tax of $110. The remaining $800 is taxed at her parent's marginal rate of 24%, or $192. Therefore Alicia's total tax due is $302.

Janet and Bruce Robinson, both age 43, are married taxpayers filing jointly. They have itemized deductions consisting of the following: Home mortgage interest$19,500State income taxes$8,700Property taxes$5,200Charitable contributions$6,200Tax return preparation fee$895Unreimbursed employee business expenses$2,100Unreimbursed medical expenses$18,460 Their AGI for 2021 is $466,000. What is the amount of their allowable itemized deductions?

35,700 The total itemized deduction amount is $35,700. Note that the tax preparation fee and the unreimbursed employee business expenses are not deductible. The medical expenses are deductible only to the extent that they exceed 7.5% of AGI for 2021, which they do not. The deduction for the state income taxes and the property taxes is capped at $10,000. Taxes of $10,000, mortgage interest of $19,500, and charitable contributions of $6,200 total $35,700.

Bruce and Melissa Parish, married taxpayers filing jointly, have the following items related to their investments during the current tax year: Investment interest expense $5,000 Interest income $2,500 Short-term capital gains $1,000 Investment adviser's fees $1,250 Commissions paid on stock purchase $200 Adjusted gross income $60,000 What is the Parishes' allowable investment interest expense deduction for the current year? A) $3,450 B) $3,500 C) $5,000 D) $3,250

3500

Claudia makes $5,000 a month, and has a disability policy that pays 60% of her salary. Her employer pays 60% of the premium and she pays the remaining 40%. She needed surgery last year and received disability benefits for 60 days. What amount of taxable disability benefits did she receive

3600 Claudia received 60 days, or two months, of disability payments in the amount of 60% of her $5,000 monthly salary, or a total of $6,000. Claudia pays 40% of the premium and her employer pays 60%. The portion of the benefits received that was paid by Claudia's employer was 60% of $6,000, or $3,600, and is taxable. The remaining $2,400 is not taxable to Claudia

Neil McElroy is an engineer for Causley Computer Inc. In addition, Neil operates a janitorial service that cleans several local office buildings. Neil was divorced in 2019, and his wife received custody of their two children. He has assembled the following information for preparation of his tax return for the current tax year. Neil's salary$71,500Interest income$9,500Monthly alimony paid to ex-spouse$1,500Monthly child support$500Purchase of equipment for use in janitorial service$10,000IRA contribution$6,000 Based on the information given, which of the following are fundamental methods of managing Neil's tax liability? Tax credit: Neil could take an investment tax credit for purchases of qualifying business equipment. Deductions for AGI: Neil may deduct alimony payments of $18,000 made to ex-spouse. Deductions for AGI: Neil may deduct child support payments of $6,000. Exclusions: Neil could have invested in municipal bonds to receive tax-free income.

4 only Neil may not deduct alimony paid to his former spouse because the deduction is disallowed for alimony under divorce decrees in 2019 and thereafter. He may invest in municipal bonds to receive tax-free income. There is no investment tax credit for equipment purposes. Some students confuse this with the Section 179 expense election, but that provision provides a deduction, not a credit. Child support payments are specifically nondeductible.

Kurt and Allison Long are married and file a joint income tax return. Their adjusted gross income (AGI) is $180,000 per year. On last year's tax return, the Longs claimed a $1,200 credit for child care expenses. The Longs are in the 22% marginal income tax bracket. What amount of deductions for AGI would be required to equal the tax benefit of the $1,200 child care credit?

5,455 1,200 divided by the 225 marginal income tax bracket gives us 5455

Your client, Hal Meyer, will receive a deductible loss of $15,100 from a working oil and gas interest. Hal is in a 35% marginal income tax bracket and has asked you the approximate amount of tax savings that this will generate. What is the approximate amount, if any, of tax savings generated by this loss?

5200 In a 35% tax bracket, a $15,100 loss deduction will save $5,285. Thus, $5,200 is the closest answer.

Jane, age 35, whose filing status is single, earned a salary of $55,000 in 2021. She also made a $2,000 contribution to her Roth IRA for 2021. Jane had a capital loss of $3,000 during the year. Her uncle, Charles, gave her $100,000 in municipal bonds for which she earned interest of $3,500. In her employment as a sales representative for her company, Jane incurred $650 of unreimbursed business expenses. What is Jane's adjusted gross income (AGI)?

52000 Jane's AGI is $52,000 ($55,000 ‒ $3,000). Jane's $3,000 capital loss is a deduction for calculating AGI. Roth IRA contributions are never deductible from gross income. Municipal bond interest is not included in income. The unreimbursed business expenses are not deductible.

Victoria Glass has $6,500 of investment interest expense and net investment income of $6,000 in the current tax year. She paid broker's commissions of $1,000 during the tax year. How much investment interest expense, if any, may Victoria deduct in the current tax year?

6000 Investment interest expense is deductible only to the extent of net investment income.

Tom Bell has investment income (interest) of $8,000 in the current year. He paid $1,200 in investment adviser fees and had $7,000 of investment interest expense. His AGI is $35,000. What amount of investment interest expense may be deducted in the current year as an itemized deduction? A) $7,000 B) $6,800 C) $6,500 D) $8,000

7000 Investment interest expense is deductible up to the amount of investment income. The investment income is the interest income of $8,000. However, the deduction cannot exceed the actual investment interest expense of $7,000. Historically, the adviser fees would impact the calculation, but the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated the Tier II miscellaneous itemized deductions.

Mike has interest and short-term capital gain income of $9,000 in the current tax year. He paid broker commissions on security purchases of $1,000, paid $1,800 for investment adviser fees, and had $8,500 of investment interest expense. His AGI is $225,000. What amount of investment interest expense may be deducted as an itemized deduction?

8500 Investment interest expense is deductible up to the amount of net investment income, which is $9,000. The net investment income is simply the investment income (interest and short-term capital gains) of $9,000. Remember that the investment adviser fees were a Tier II miscellaneous itemized deduction, which are no longer deductible under the TCJA. The commissions are not a deductible item. The commissions increase the basis of the securities upon purchase and reduce the gain realized upon sale.

Which one of the following statements is true regarding self-employment taxes?

A taxpayer is allowed to deduct one-half of his self-employment tax liability as an adjustment to income. A taxpayer may deduct one-half of his self-employment tax liability as an "above the line" adjustment to income. The wage base is adjusted annually for cost of living increases. Net earnings from self-employment are determined under the same accounting method as that used for income tax purposes. Self-employed taxpayers are not subject to employer withholding.

If Stewart and Hope file married filing separately and Hope has gross income of $300,000 and taxable income of $267,000, what is her marginal tax rate? Refer to the 2021 tax table provided in your course references

A) 35.00%

Seven years ago, Karen Price purchased U.S. EE savings bonds for $5,000. During the current year, when Karen was 27 years old, she redeemed the bonds to help pay for her graduate school tuition. The accrued value at the time of redemption was $7,000. Assume Karen incurs $11,000 of tuition expenses in the year. What are the tax consequences upon the redemption of the bonds? A) All accrued interest is taxable in the current year. B) The income on the bonds is generally subject to state income taxes. C) A portion of the interest may be excluded. D) All the interest may be excluded.

A) All accrued interest is taxable in the current year. The exclusion for EE bond interest redeemed to pay for qualifying higher-education expenses applies only to bonds purchased by an individual age 24 or older, and held in that person's name, or jointly with a spouse. Karen is 27 years old; the bonds were purchased 7 years ago, when Karen was approximately 20. Because Karen does not qualify for the exclusion of the interest income because she was not age 24 or older at the time of purchase. All the interest is taxable in the year the bonds are redeemed. Remember that the interest of EE bonds is deferred until maturity, unless an election has been made to have the interest taxed each year as it accrues. Also, the interest income from EE bonds (and other federal government obligations) is generally not subject to state income tax

Which of the following is NOT a step in the tax calculation process?

A) Calculate federal tax on total income. The following are involved in the income tax computation: subtracting adjustments to income from total income to get adjusted gross income, subtracting tax withholdings from total tax liability, and deducting the greater of itemized deductions or the standard deduction from AGI to arrive at taxable income. Credits are applied to tax liability. The calculation of federal tax is on federal taxable income. LO 1.1.2

Which one of the following is CORRECT regarding the Coverdell Education Savings Account? A) Distributions may be tax free even if made for K-12 expenses. B) Room and board may be covered with a tax-free distribution only if the student is full-time. C) Distributions may be tax free only if made for a full-time student. D) Deductible contributions of up to $2,000 may be made per beneficiary.

A) Distributions may be tax free even if made for K-12 expenses. The predominant benefit of the Coverdell ESA is distributions may also be used to pay for K-12 expenses. This is unlike the 529 plan which is designed primarily to pay for college expenses (Note: a limited amount of $10,000 may now be withdrawn from a 529 for K-12 expenses per the TCJA).

Which one of the following statements is incorrect regarding investment interest expense? A) Excess investment interest expense cannot be carried forward into succeeding tax years. B) Interest paid or accrued to purchase or carry tax-exempt investments is not deductible. C) Net investment income is the taxpayer's investment income—typically interest, nonqualified dividends, and short-term capital gains. D) Investment interest expense is deductible up to the amount of the net investment income.

A) Excess investment interest expense cannot be carried forward into succeeding tax years. Excess investment interest expense can be carried forward into succeeding tax years. Investment interest expense is deductible up to the amount of net investment income. The interest on funds borrowed to purchase tax-exempt investments is not deductible. The net investment income is typically interest, nonqualified dividends, and short-term capital gains. Long-term capital gains and qualified dividends may be included at the taxpayer's election, but the taxpayer must forgo the preferential tax rates on these items.

You are working with new financial planning clients, Dan and Patrice Harden, on educational funding issues for their three dependent children. Dan and Patrice will file jointly this year, as they have always done, and anticipate an AGI of $110,000. Their oldest child, Ben, age 23, is in his first year of graduate school studying to be a pharmacist. Ben graduated from college in three years, so the American Opportunity Tax Credit was claimed for three years of Ben's education. Their middle child, Margaret, age 19, had a conviction for felony drug possession last year. She's "cleaned up her act" and will be a full-time student at a community college this year. Their youngest child, Francis, age 7, is a good kid who wants to be a doctor when he grows up. Which of the following statements concerning educational tax credits and incentives is CORRECT? Ben and Margaret would each qualify for the American Opportunity Tax Credit (AOTC). Ben and Margaret would each qualify for the Lifetime Learning Credit. Dan and Patrice may make a contribution to a Coverdell account for Francis. Only Ben would qualify for the Lifetime Learning Credit

A) II and III Ben and Margaret both qualify for the Lifetime Learning Credit. The Lifetime Learning Credit may be claimed for graduate studies, and may be claimed for a child with a felony drug conviction. Note that the Lifetime Learning Credit would allow a total of $10,000 of education expenses to be utilized on Dan and Patrice's tax return. (The Lifetime Learning Credit limitation of $10,000 is applied per return, whereas the AOTC limitation of $2,500 is per student.) The parent(s) who claims a child as a dependent is entitled to take the tax credit for the educational expenses of the child. The AGI is under the phaseout thresholds for the Lifetime Learning Credit. Even though the AOTC may generally be claimed for four years, Ben does not qualify for the AOTC because it may not be claimed for graduate work, only the first four years of undergraduate work. The AOTC may not be claimed for a child who has a felony drug conviction, so Margaret does not qualify for the AOTC. Dan and Patrice may make a Coverdell contribution for Francis, because their AGI does not exceed the phaseout limit of $190,000 to $220,000 for a married couple filing jointly. (The AGI limitations will be provided on the examination.)

Garret has the following items of income: $1,500 of interest income, $2,800 of qualified dividend income (he has not decided whether to have it taxed at the ordinary or capital gain rate), and a salary of $100,000. Which of these are classified as portfolio income? A)Interest income and dividend income B)Salary only C)Interest income, dividend income, and salary D)Interest income only

A) Interest income and dividend income

Which one of the following steps occurs in the tax calculation process?

A) Tax liability minus tax credits equals refund or tax owed

For two years, Lisa Carson was able to pay the premiums on her whole life policy without borrowing. For the past two years, she has borrowed from the cash value of her whole life policy to pay the premiums. Last year, she paid $95 of interest on the funds she borrowed. What are the tax implications in this situation? A) The interest expense is not tax deductible. B) The interest is deductible because Lisa is in the business of continuing her insurance and the interest is deductible business interest expense. C) The interest expense is tax deductible because it does not exceed $100. D) The interest expense is not tax deductible because it does not exceed $100.

A) The interest expense is not tax deductible. The interest expense is not tax deductible because interest on a loan incurred to purchase personal life insurance protection is considered personal interest, which is not deductible. Personal loan interest is not tax deductible, regardless of whether the lender is a bank or a life insurance company.

Carol, age 50, received a salary of $35,000 this year. In addition, she received a gift of $1,000 from her brother. She also made a contribution of $3,500 to her traditional IRA. She files as single, and in addition to her itemized deductions of $4,500, she had unreimbursed medical expenses from major surgery on her knees of $7,600. Which of the following best defines Carol's taxable income?

Adjusted gross income less the greater of the standard deduction or the amount of itemized deductions

Ken Brandt (a single taxpayer), age 28, holds the following securities: StockPurchase DateFair Market ValueCost BasisABC (300 shares)Oct. 3, 2003$12,200$5,500DEF (500 shares)Feb. 15, 2021$22,600$15,600GHI (100 shares)June 2, 2006$4,350$6,250LMN (700 shares)Dec. 9, 2020$19,360$28,560XYZ small-cap fund (500 shares)Oct. 20, 2011$1,200$3,700VWL (750 shares, §1244)July 17, 2005$4,050$115,600 BondsPurchase DateFair Market ValueCost BasisEE savings bondsMay 1, 2014$8,500$6,000 Assume Ken incurs $7,500 of college expenses in the current year. If Ken redeems the EE bonds to pay these expenses, what are the tax consequences?

All accrued interest is taxable in the current year The exclusion for interest on EE bonds redeemed to pay for qualifying higher-education expenses applies only to bonds purchased by an individual age 24 or older. Ken is 28 years old; the bonds were purchased approximately seven years ago, when Ken was approximately age 21. LO 2.4.1

Which of these statements regarding capital gains is CORRECT? A)A maximum rate of 28% applies to long-term gain on collectibles. B)Net long-term capital gains are subject to a 0% tax rate if a single filing taxpayer's taxable income is below $40,400 (2021). C)Net short-term gains are subject to a taxpayer's ordinary income tax rate. D)All of the above.

All of the above Net long-term capital gains (and qualified dividends) are subject to a 0% tax rate if the taxpayer's taxable income is below $40,400 (for a single taxpayer, in 2021). The breakpoints will be provided on the exam. Net short-term gains are subject to a taxpayer's ordinary income tax rate. A maximum rate of 28% applies to long-term gain on collectibles.

Eight years ago, Joan Allen, a married taxpayer filing jointly, purchased U.S. Series EE savings bonds for $6,000. She titled the bonds jointly with her husband, Hank. During the current year, when Joan was 35 years old, they redeemed the bonds to help pay for Joan's graduate school tuition. The accrued value at the time of redemption was $8,000. Their AGI for 2021 is estimated to be $100,000. Assume Joan incurs $8,000 of tuition expenses during the year. What are the tax consequences upon the redemption of the bonds? A) All accrued interest is taxable in the current year. B) The interest is taxable at both state and federal levels. C) All the interest may be excluded. D) A portion of the interest may be excluded.

All the interest may be excluded. The EE bond exclusion (for educational purposes) is phased out (for married couples filing jointly) between $124,800 and $154,800 of AGI in 2021. There is no exclusion available when AGI exceeds $154,800. It is not necessary to memorize the exact phaseout amounts because they will be provided on the exam. To qualify for the exclusion, the bonds must be purchased by an individual age 24 or older and held in that person's name, or jointly with a spouse. EE bonds are not taxable at the state level.

Matthew Brady, age 47, purchased a deferred annuity in January 1982 for $50,000. In the current year, when the surrender value was $125,000, Matthew took a nonperiodic distribution of $75,000. Which one of the following statements correctly describes the income tax consequences of the distribution? A) $75,000 is tax free. B) $50,000 is tax free, $25,000 is taxable. C) $50,000 is taxable, $25,000 is tax free. D) $75,000 is taxable income.

B) $50,000 is tax free, $25,000 is taxable. The pre-August 14, 1982, annuity retains first-in, first-out (FIFO) treatment. Thus, the basis of $50,000 is treated as being withdrawn first and is tax free. The remaining $25,000 is taxable. If this were a post-August 13, 1982, contract, it would be treated on a last-in, first-out (LIFO) basis.

Kathy, age 70, is single, an employee of Expo Corporation, and lives in the state of Alabama. Her only sources of income this year are $80,000 of W-2 wages, $6,000 in capital gains, and $1,000 in interest on State of Alabama bonds. Based on this information, Kathy's adjusted gross income (AGI) for the current year is

B) $86,000. Kathy's AGI is all income from any source derived except for those items specifically excluded by the Tax Code. The W-2 wages and capital gains total $86,000. The municipal bond interest is excluded by law. Kathy's AGI is as follows: W-2 income$80,000Interest on State of Alabama bonds (tax exempt)0Capital gains6,000AGI$86,000

Sheila, a single taxpayer, has taxable income of $470,000. Included in the taxable income is $50,000 of qualified dividends. At what rate(s) will her qualified dividends be taxed? A) 15% only B) 15% and 20% C) 20% only D) 25%

B) 15% and 20% The qualified dividends straddle the $445,850 breakpoint (for 2021). Thus, a portion fall into the $40,401 to $445,850 range and are taxed at 15%. The dividends above the $445,850 breakpoint are taxed at 20%.

Your client, Elaine Dell, is near the highest tax bracket and is contemplating several investments. She is, however, concerned about minimization of her federal income tax liability on the income from the investment. Which of the following investments would produce income that would be taxed at the lowest potential tax rate? A) A certificate of deposit B) A utility stock with a high dividend yield C) A corporate bond fund D) A zero coupon bond

B) A utility stock with a high dividend yield Qualified dividends are generally taxed at a 15% rate (or 20% for taxpayers with higher income levels). All of the other options produce interest income, which is taxable as ordinary income, at the marginal rate of the taxpayer.

Adrian Brown owned 500 shares of XYZ growth and income fund. She has become increasingly dissatisfied with the performance of the fund and, upon the advice of a friend, decided to execute a "telephone transfer" and switch the balance in the fund to the XYZ intermediate bond fund. Which one of the following describes the tax effect of such a strategy? A) No gain or loss will be recognized by the taxpayer, and the basis in the new fund will be the same as that of the old fund. B) Gain or loss will be recognized by the taxpayer on the redemption of the old fund. C) Any loss will be recognized by the taxpayer, but any gain will be deferred through a reduction in the basis of the new fund. D) No gain or loss will be recognized by the taxpayer, but the basis of the new fund will be reduced by any deferred gain or increased by any unrecognized loss.

B) Gain or loss will be recognized by the taxpayer on the redemption of the old fund. A telephone transfer is the same as a sale or other taxable redemption of the fund. Therefore, gain or loss will be recognized based on the difference in the redemption proceeds and the basis in the shares redeemed. This is true even if the transfer is made between two funds in the same fund family.

Which of the following taxpayers may owe the additional Medicare tax in 2021? Brad and Jane file jointly and have combined wages of $288,000. Terry's only income in 2021 is from his investments and totals $290,000. Jack has earned $150,000 in compensation from his employment at Bland Foods Inc. Lisa, whose filing status is head of household, is self-employed and has self-employment income of $225,000. A) IV only B) I and IV C) I only D) I, II, and III

B) I and IV Statements I and IV are correct. The additional Medicare tax rate is .9%. An individual is liable for the additional Medicare tax if the individual taxpayer's wages, other compensation, or self-employment income (combined with a spouse if filing as married filing jointly) exceeds the thresholds for the taxpayer's filing status of a combined income greater than $200,000 if single and $250,000 if married filing jointly.

Personal expenses deductible from adjusted gross income most accurately describes which one of the following

B) Itemized deductions Itemized deductions are generally personal expenses (e.g., home mortgage interest, medical expenses) that are specifically allowed as a deduction from AGI. Schedule C (sole proprietorship) expenses and adjustments to income are both deductions for AGI, or above-the-line deductions

In 1991, John Idler purchased a single premium whole life insurance policy. In the current year his medical expenses are $15,000 and his AGI is $75,000. What is the tax implication to John if he borrows the interest from the policy's accumulated cash value to pay his current year's medical expenses? A) John will be required to report the amount borrowed as income, but he will not be allowed a medical expense deduction. B) John will be required to report the amount borrowed as income and will be allowed a medical expense deduction. C) John will not be required to report the amount borrowed as income and will not be allowed a medical expense deduction. D) John will not be required to report the amount borrowed as income, but he will be allowed a medical expense deduction.

B) John will be required to report the amount borrowed as income and will be allowed a medical expense deduction. Amounts borrowed on a single premium whole life policy issued on or after June 21, 1988 (a MEC), are taxable on a last-in, first-out basis; thus, the earnings would be taxable. A medical expense deduction will be allowed regardless of the source of the funds, since the payment would be for a valid medical expense.

Which one of the following is not a social objective of the federal taxation system?

B) Revenue raising Revenue raising is one of the three main purposes of the federal taxing system; it is not a social objective. Support of charitable organizations, preservation of our nation's historical buildings, and relief for certain child care expenses (the child care credit) are social objectives of the federal taxation system.

Cash value life insurance is often structured like an investment vehicle. However cash value life insurance contains important features that shelter the inside buildup from taxation. Which of the following will NOT be considered when determining whether a policy can maintain its tax favored status? A) The death benefit B) The premium value test C) The cash value accumulation test D) The cash guideline premium test and corridor test

B) The premium value test Without a death benefit, a contract does not meet the legal definition of life insurance. There are currently two tests—only one of which must be met—in order to classify a product as life insurance for federal income tax purposes: (1) the cash value accumulation test and (2) the cash guideline premium test and corridor test. There is no premium value test.

Which one of the following reflects the CORRECT sequence of steps in the tax calculation process

B) Total income minus adjustments to income and standard or itemized deduction(s) equals federal taxable income. Total (gross) income minus adjustments to income equals adjusted gross income (AGI). AGI minus standard or itemized deduction(s) equals federal taxable income.

Jill purchased stock four years ago for $15,000. The stock had a fair market value (FMV) of $13,000 on the last day of the prior year. If Jill sells the stock for $16,000 six months later, what is her recognized gain or loss?

C) $1,000 long-term capital gain (LTCG) Because Jill sold the stock after four years, her holding period is long term and her gain is $1,000 ($16,000 − $15,000). LO 2.1.3

Four years ago, Mark received a gift of 500 shares of common stock from his grandfather. The fair market value of the stock on the date of the gift was $335 per share. His grandfather had purchased the stock three years earlier at $425 per share. Mark sold this stock for $200 per share last week. What was Mark's basis in the stock when he sold it?

C) $335 per share When the fair market value on the date of the gift is less than the donor's basis in the asset and the sale price is less than the fair market value on the date of the gift, then the fair market value on the date of the gift is used as the donee's basis.

Which of the following benefits that Claudia has received from her employer can be excluded from taxation? A) A year-end bonus. B) A company car that she uses for personal vacations. C) $5,000 of graduate education assistance. D) An athletic membership at a local club valued at $1,500 per year.

C) $5,000 of graduate education assistance. Undergraduate and graduate education assistance is excluded from an employee's income in any one year period, up to a maximum of $5,250. The other options are fully taxable.

Sally Franklin has AGI of $300,000. In addition, she currently has passive income of $150,000 and passive losses of $175,000—$150,000 of which she uses to offset the passive income and $25,000 of which is subject to disallowance. Which one of the following investments has the greatest potential for reducing Sally's tax liability?

C) A working interest in an oil and gas general partnership A working interest in an oil and gas partnership can provide unlimited loss deductions against other income. Congress considers this socially desirable to encourage investment in the industry. The caveat is investors in these instruments must also assume unlimited liability. Therefore, a working interest must be a general partnership rather than a limited partnership. The other answer choices cannot offset passive income

Which of the following statements correctly defines inside buildup as it refers to life insurance? A) During the insured's lifetime, the accumulations of cash value within a policy grow on a tax-annuitized basis. B) During the insured's lifetime, the accumulations of cash value within a policy grow on a tax-preferred basis. C) During the insured's lifetime, the accumulations of cash value within a policy grow on a tax-deferred basis. D) During the insured's lifetime, the accumulations of cash value within a policy grow on a tax-free basis.

C) During the insured's lifetime, the accumulations of cash value within a policy grow on a tax-deferred basis. Accumulations of cash value within a life insurance policy grow on a tax-deferred basis during the insured's lifetime.

Which one of the following statements is CORRECT with respect to capital gains and losses? A) Excess capital losses are carried forward for up to five years. B) Net capital gains are always taxed at a flat rate of 15%. C) Net capital losses are deductible up to $3,000 annually. D) Net capital gains are always taxed at a maximum rate of 28%.

C) Net capital losses are deductible up to $3,000 annually. Net long-term capital gains (LTCG) (from other than unrecaptured Section 1250 income and collectibles) are taxed at rates of 0%, 15%, or 20%. For married couples filing jointly, the 0% long-term capital gain rate ends at $80,800 of taxable income. For long-term capital gains falling between the $80,800 breakpoint and $1,600 of taxable income (again, for married couples filing jointly), the rate is 15%. For long-term capital gains falling into taxable income levels above $1,600 (MFJ), the rate is 20%. The table shows the breakpoints for LTCG and qualified dividend preferential rates. LTCG Rates Based on Taxable Income Filing Status0% rate15% rate20% rateSingleUnder $40,$40,-$445,850Over $4450Head of householdUnder $500$5100-$473,750Over $4,750Married filing jointlyUnder $80,0$80,-$501,600Over $1,600Estates and trustsUnder $2,$2,0-$13,250Over $13,0 Special rates apply to the sale of real estate or collectibles—25% (the maximum rate for gain attributable to straight-line depreciation on real estate), or 28% (maximum rate in the case of collectibles). Net capital losses, the capital losses remaining after netting against capital gains, are deductible up to $3,000 per year with an indefinite carryforward.

Ann Hamilton owns 500 shares in the XYZ S&P 500 Index Fund. The basis of her investment in this fund is $4,500, while the fair market value is only $2,000. She wants to sell her shares to "lock in" the $2,500 loss, but she is considering buying 500 shares of the GRC Small-Cap Index ETF the following week because she believes that the value is going to increase significantly over a longer period. As her planner, what can you accurately tell Ann about this scenario? A) The basis in the newly acquired shares would be the amount paid for those shares, increased by the $2,500 disallowed loss. B) If the loss were disallowed, the basis in the newly acquired shares would be decreased by the disallowed loss. C) The loss would be a fully deductible capital loss. D) She should wait a minimum of 61 days after the sale to repurchase the shares so that the loss may be recognized.

C) The loss would be a fully deductible capital loss. The wash sale rule disallows a loss if substantially identical securities are purchased prior to 30 days after the sale that resulted in the loss. The basis of the acquired securities is increased by the amount of the disallowed loss. The S&P 500 mutual fund should not be substantially identical to the small-cap ETF because the funds track very different indices and because of the difference in the way ETFs trade compared with mutual funds.

Which one of the following is an exception to the general rule that life insurance proceeds are excluded from income?

C) The transfer for value rule The only exception to the general rule that life insurance proceeds are excluded from income is the transfer for value rule, which applies when a life insurance contract is transferred for valuable consideration.

Tim Jones is single, 21 years old, and in his third year of college. He has an AGI of $35,000 and receives no support from his parents. The college is a Title IV institution where students are eligible to receive federal financial aid, and Tim is pursuing an undergraduate degree in criminal justice. When Tim was 13, his parents established a Uniform Transfers to Minors Act (UTMA) for him, and funded it with EE savings bonds. When Tim was a freshman, he was convicted of a felony drug possession charge. Which one of the following is CORRECT regarding Tim's situation? A) Tim could use both the American Opportunity Tax Credit and the Lifetime Learning Credit in the same year. B) Tim qualifies for the American Opportunity Tax Credit. C) Tim qualifies for the Lifetime Learning Credit. D) Tim may redeem the EE bonds potentially tax free if the proceeds are used for his qualifying education expenses

C) Tim qualifies for the Lifetime Learning Credit. Tim qualifies for the Lifetime Learning Credit. His AGI is under the phaseout range. He is pursuing a degree at an eligible institution. The felony drug conviction would preclude the use of the American Opportunity Tax Credit but not the Lifetime Learning Credit. There is no exclusion available for EE bonds unless they are held by the individual who purchases the bonds or unless they are held jointly with a spouse. A bond that has been gifted to another taxpayer does not qualify for the exclusion. The American Opportunity Tax Credit and the Lifetime Learning Credit may not be claimed in the same year for the same student. LO 2.4.1

Which one of the following reflects the CORRECT sequence of steps in the tax calculation process?

C) Total income minus adjustments to income equals AGI. Total (gross) income minus adjustments to income equals adjusted gross income (AGI). AGI minus standard or itemized deduction(s) equals federal taxable income.

Which one of the following steps is CORRECT concerning the tax calculation process?

C) Total tax liability minus withholding and/or estimated tax payments equals refund or tax owed Tax liability minus tax credits plus additional taxes owed equals total tax liability. Then total tax liability minus withholding and/or estimated tax payments made equals refund or tax amount owed. Employment eligibility is submitted via Form I-9 and is not considered part of the 1040 calculation

Beth's husband died in Year 1. Assume that Beth does not remarry and continues to maintain a home for herself and her dependent child during Year 2, Year 3, and Year 4, providing full support for her child throughout those years. For Year 4, Beth's filing status will be

C) head of household. Beth's Year 4 filing status is head of household. Qualifying widow filing status is only available for 2 years following the death of a spouse (Year 2 and Year 3

Which of the following is NOT a step in the tax calculation process?

Calculate federal tax on total income. The following are involved in the income tax computation: subtracting adjustments to income from total income to get adjusted gross income, subtracting tax withholdings from total tax liability, and deducting the greater of itemized deductions or the standard deduction from AGI to arrive at taxable income. Credits are applied to tax liability. The calculation of federal tax is on federal taxable income.

During the current year, Susan Snow received $8,000 of unemployment compensation, $4,500 of workers' compensation benefits, and $10,000 compensation for lost wages in the settlement of a lawsuit against her former employer. What amount, if any, must Susan report as income?

D) $18,000 The $8,000 of unemployment compensation and $10,000 compensation for lost wages in the settlement of a lawsuit against her former employer are included in income. Both are essentially a replacement for wages. The workers' compensation is nontaxable because it is received for injuries received on the job

If Rachel files single with gross income of $90,000 and taxable income of $76,000, what is her effective tax rate? Refer to the 2021 tax table provided in your course references

D) 16.41% 22%($76,000 ‒ $40,526) + $4,664 = $7,804 + $4,664 = $12,468 ÷ $76,000 = 16.41%.

Which of the following statements regarding home equity loan interest paid by a couple who files an income tax return as married filing jointly is NOT correct?

D) Home equity loan interest is not deductible.

Your clients, John and Mary Voight, spoke recently to their insurance agent regarding the purchase of a single premium whole life policy. The agent indicated that the policy would be a modified endowment contract. The Voights were unsure what that meant. Which of the following describe a modified endowment contract? Meets the requirements of a life insurance contract under state law Was entered into (or substantially modified) on or after June 21, 1988 Fails to meet the "seven pay test" Meets the guideline premium and corridor test or the cash value accumulation test A)II and III B)II, III, and IV C)I, II, and III D)I, II, III, and IV

D) I, II, III, and IV Statements I through IV are all elements of the IRC definition of a modified endowment contract. The contract fails to meet the seven-pay test if the cumulative amount paid under the contract at any time in the first seven years is greater than the seven net level annual premiums that would have been paid under a seven-pay, paid-up contract.

Which of the following are deductions from AGI? Qualifying alimony paid to a former spouse Child support paid to a former spouse Investment interest expense incurred by an individual State and local income taxes paid A)I, II, and III B)II and IV C)III only D)III and IV

D) III and IV Child support is not deductible. Alimony, if it meets certain tests, is an above the line deduction for AGI. Investment interest expense and State and Local Taxes are below the line deductions from AGI.

Which one of the following is a characteristic of a fixed annuity contract? A) Fixed annuity contracts are not tax advantaged, unlike other annuity contracts. B) The buyer may choose among a handful of investment options. C) The annuitant pays now for future fixed or variable payments. D) If a corporation owns the annuity contract, the earnings are not tax deferred

D) If a corporation owns the annuity contract, the earnings are not tax deferred. With a fixed annuity contract, there is no ability to select the investment options; the payments are fixed. Fixed annuity contracts are generally tax advantaged (tax deferred), unless a corporation owns the annuity contract, in which case the earnings are currently taxable. Such is also the case with a variable annuity.

This year, Ken sold several securities that left him with the following types of gains and losses: Long-term capital gain: $8,000 Short-term capital gain: $1,800 Long-term capital loss: $2,200 Short-term capital loss: $1,000 What is the net capital gain or loss on Ken's security sales? A)Net long-term loss of $1,400 B)Net long-term gain of $2,320 and net short-term gain of $800 C)Net long-term gain of $2,640 D)Net long-term gain of $5,800 and net short-term gain of $800

D) Net long-term gain of $5,800 and net short-term gain of $800 The long-term gain and loss are netted, leaving a long-term gain of $5,800. Short-term gains and losses are netted, leaving a short-term gain of $800. These are left separate due to the disparate tax treatment of short-term versus long-term gains.

Which one of the following is NOT subject to the Medicare contribution tax? A) Long-term capital gains B) Qualified dividends C) Income from a nonperiodic distribution from an annuity D) Qualified Roth distributions

D) Qualified Roth distributions Qualified Roth distributions are not subject to the Medicare contribution tax. Only taxable items, such as net capital gains, net rental income, annuity income and dividends, for example, are subject to the Medicare contribution tax.

Which of the following is NOT a step in the tax calculation process?

D) Subtract exclusions from AGI. The following are involved in the income tax computation: subtracting adjustments to income from total income to get AGI, and deducting the greater of itemized deductions or the standard deduction from AGI to arrive at taxable income. Subtracting exclusions from AGI is not a step in the tax calculation process. Excluded amounts simply do not show up as income on the return

Which of the following statements regarding the use of life insurance inside a retirement plan is CORRECT? A) If the employee dies prematurely, the survivors will receive no benefits. B) The premiums paid are a taxable benefit to the employer. C) The premiums paid are NOT a taxable benefit to the employee. D) The premiums paid are a taxable benefit to the employee.

D) The premiums paid are a taxable benefit to the employee. The premiums paid are a taxable benefit to the employee. The main benefit to the employee is in the event of their premature demise, their survivors will still receive ample retirement benefits.

The marginal tax rate is obtained by

D) finding the tax bracket of the taxable income amount. The marginal tax rate is found by finding the tax bracket that contains the taxable income amount; it is the amount at which all subsequent taxable amounts will be taxed (until entering the next tax bracket). The effective tax rate is calculated by dividing the calculated tax by taxable income.

According to the Internal Revenue Code, which of the following statements regarding gross income is CORRECT?

Gross income consists of all income except for those items that are specifically excluded by the Internal Revenue Code.

After arriving at adjusted gross income (AGI), which of the following is(are) deductible to arrive at taxable income? Additional standard deduction Standard deduction Itemized deductions if greater than the combined standard deductions

I, II, and III

Which of the following statements regarding filing status is CORRECT? The single filing status is used by unmarried and divorced taxpayers, but not those who are legally separated and who do not qualify for any other filing status. Taxpayers who file married filing jointly have joint and several liability for the payment of the income taxes due.

II only Statement I is incorrect. Taxpayers who are unmarried, legally separated, or divorced individuals who do not qualify for any other filing status generally use the single filing status. Statement II is correct.

Don and Paul are married. They adopted an infant daughter in December of last year. They have consulted you, a CFP® professional, for advice on how to proceed when filing their federal income tax return this year. What should you recommend as their filing status this year for their federal return?

Married filing jointly Having a dependent does not change the filing status for a married couple.

Courtney and Della are considering obtaining a home equity line of credit of $50,000. They will use some of the proceeds to make needed improvements to their personal residence. Della is concerned about the deductibility of the interest. Which of the following statements is(are) CORRECT?

Statement I is correct. Home equity loan interest is not deductible on a taxpayer's income tax return to the extent it is used for other than home acquisition or improvements for the home that secure the mortgage. The interest on the funds used for home improvements is deductible

George, whose wife died last November, filed a joint tax return for last year. He did not remarry after his wife's death and has continued to maintain his home for his two dependent children. In the preparation of his tax return for this year, what is George's filing status?

Qualifying widower George filed a joint return in the year of his wife's death. He can file as a qualifying widower (also known as surviving spouse) for the two years following his wife's death if he continues to maintain a home for his dependent children

Jack was divorced on March 30 of the current year and has not remarried as of the last day of the tax year. He lives alone in his condo. His ex-wife, Mary, has custody of their son Jack Jr. What is Jack's filing status for the current tax year

Single A taxpayer who is unmarried, legally separated, or divorced and does not qualify for any other filing status must use the single filing status. Jack does not have custody of his son and does not qualify for head of household status

Which one of the following is accurate regarding the Lifetime Learning Credit?

The maximum credit of $2,000 is per tax return.

Which of the following best describes the marginal tax rate?

The rate which is paid on the last taxable dollar

Which one of the following reflects the CORRECT sequence of steps in the tax calculation process?

Total (gross) income minus adjustments to income equals adjusted gross income (AGI). AGI minus standard or itemized deduction(s) equals federal taxable income.