ACCT 1331 Ch 2 & Ch 3 Quiz

Janet is divorced, has two children, and files as head of household. She pays $10,000 for her older child to attend Big State College. She received $4,000 of this amount from the child's Section 529 plan. Her modified AGI is $66,000. What is Janet's 2020 higher education expense deduction?

a.$0 b.$10,000 c.$2,000 d.$6,000 e.$4,000 Ans: C

Anthony transfers to Luigi a life insurance policy with a face value of $100,000 and a cash surrender value of $10,000 in settlement of a debt. Luigi continues to pay the annual premiums of $1,000 on the policy. Five years later Anthony dies, and Luigi receives the $100,000. How much, if any, is taxable income to Luigi? a.$0

a.$0 b.$100,000 c.$90,000 d.$85,000 Ans: D

Rosalind and Carl were divorced under an agreement executed July 1, 2019. The terms of the agreement provide that Rosalind will transfer to Carl her interest in a rental house worth $300,000 with a tax basis of $120,000. What is the amount of the gain that must be recognized by Rosalind on the transfer of the property and what is Carl's tax basis in the property after the transfer, respectively?

a.$0 and $300,000 b.$180,000 and $300,000 c.$180,000 and $120,000 d.$0 and $120,000 e.None of these items listed are correct. Ans: D

Anne qualifies for a home office deduction. She has expenses related to the home office of $6,892. Her net income on her Schedule C before the home office deduction is $4,029. Which of the following correctly reflects Anne's home office deduction?

a.$0. There is not enough net income on Schedule C to allow a home office deduction. b.$4,029, bringing Schedule C net income to $0. The remaining home office expense of $2,863 will be carried forward to the next year. c.$6,892, resulting in a net loss of $2,863. d.$4,029, bringing Schedule C net income to $0. The remaining home office expenses may not be carried to the next year. Ans: B

Terry's company is a widget distributor. In the current year, he had sales of $2,000,000. He had an opening inventory of $400,000, purchased more widgets for $1,000,000, incurred materials and supplies expense associated with the inventory of $50,000, and had ending inventory of $325,000. What was Terry's cost of goods sold?

a.$1,000,000 b.$1,025,000 c.$900,000 d.$1,125,000 Ans: D

Charlene, a self-employed consultant, incurred business-related expenses in 2020 as follows :Entertainment $1,000 Transportation $800 Education $450 How much of these expenses should she deduct on her 2020 Schedule C?

a.$1,250 b.$2,250 c.$1,750 d.$800 e.None of these amounts listed are correct. Ans: A

Florence is a CPA who travels to Las Vegas to take a continuing education seminar. Her expenses are: airfare $120, lodging $270, meals $180, seminar tuition $500, show ticket $80, and tour of Grand Canyon $200. Which is the correct amount Florence may deduct as an educational expense?

a.$1,350 b.$0 c.$980 d.$1,070 Ans: C

Richard operates an oriental rug store out of his home. 400 of the 1,600 square feet of floor space are allocated to the rug display and sales area. Other information is as follows: Gross income from the rug store $25,000 Cost of Goods Sold $15,000 Supplies for the store $2,000 Depreciation on total residence $12,000 Utilities for total residence $6,000 What amount of income or loss from the rug business should Richard show on his return?

a.$10,000 loss b.$2,000 loss c.$0 d.$3,500 income e.None of these amounts listed are correct. Ans: D

Emily received unemployment compensation of $10,000 in the current year. How much is taxable to Emily?

a.$10,000. Unemployment compensation is fully taxable. b.$0. Unemployment compensation is not taxable. c.$5,000. Unemployment compensation is 50 percent taxable. Half may be excluded. d.The amount taxed depends on the taxpayer's bracket for other income. Ans: A

Robert's annuity pays him $2,000 per month. His investment in the contract is $30,000 and his annual exclusion is $1,500. Robert has been receiving the annuity since January 1, 2015. On June 30, 2020, Robert dies suddenly of a heart attack. Using the general rule, what amount is included in Robert's final return for 2020 for his annuity income, and also for his remaining investment in the annuity contract?

a.$12,000 annuity income and $21,750 loss on the contract. b.$11,250 annuity income only. c.$11,250 annuity income and $21,750 loss on the contract. d.$12,000 annuity income only. Ans: C

Marjorie is single, over 65, and receives the following income: tax-exempt interest from municipal bonds of $5,000; regular interest and dividends of $7,500; pension from City of New York of $75,000; and Social Security benefits of $15,000. How much of her Social Security income is taxable?

a.$12,750 b.$15,000 c.$7,500 d.$3,750 Ans: A

Mr. Gold has a membership at the University Club. He pays the following during the year: Membership dues $600 Business lunches $3,500 Personal dinners with his wife $250 How much may Mr. Gold deduct?

a.$2,050 b.$4,100 c.$4,350 d.$1,750 Ans: D

Ira retired in June 2020 at age 66. His pension is $1,200 per month from his retirement plan to which he contributed $47,000. This year he received 6 payments totaling $7,200. Using the simplified method, how much must Ira include as taxable income in his 2020 tax return?

a.$223.81 b.$7,200.00 c.$0 d.5,857.14 Ans: D

Dick pays Susan $2,000 a month even though their divorce decree requires $3,000 in monthly payments. Their 2016 divorce decree states that Dick must pay $1,000 a month until Junior, age 6, is 18 years old and alimony of $2,000 a month. How much may Dick deduct on his 2020 return?

a.$24,000 b.$12,000 c.$36,000 d.$0, since he did not follow the divorce decree. Ans: B

Carol owned a life insurance policy with a face value of $100,000 and cash surrender value of $7,000. Her sole beneficiary was her son, Michael. On July 1, 2017, Carol died in a plane crash on her way home from one of her many trips. Michael elected to receive the payout in equal annual installments over 5 years. In 2020, Michael receives $24,000, $20,000 insurance benefits and $4,000 interest, from the insurance company. What, if anything, does Michael include in his 2020 return?

a.$24,000 payment b.$7,000 cash value c.$4,000 interest d.$0. Proceeds from insurance policies are not taxable. Ans: C

Tonie loaned a friend $5,000 to take a cruise. In the current year, Tonie's friend declares bankruptcy and the debt is considered totally worthless. What amount may Tonie deduct on her individual income tax return for the current year as a result of the worthless debt, assuming she has no other capital gains or losses for the year?

a.$3,000 short-term capital loss b.$2,000 short-term capital loss c.$5,000 ordinary loss d.$5,000 short-term capital loss Ans: A

Anne qualifies for a home office deduction. She has expenses related to the home office of $6,892. Her net income on her Schedule C before the home office deduction is $4,029. Which of the following correctly reflects Anne's home office deduction?

a.$4,029, bringing Schedule C net income to $0. The remaining home office expenses may not be carried to the next year. b.$4,029, bringing Schedule C net income to $0. The remaining home office expense of $2,863 will be carried forward to the next year. c.$0. There is not enough net income on Schedule C to allow a home office deduction. d.$6,892, resulting in a net loss of $2,863. Ans: B

Arnold and Annette are married and live in California. Arnold's salary is $50,000 and Annette earns $40,000. They have interest from a joint savings account of $400 and Annette has dividends of $5,000 from an investment account she inherited from her father during the marriage and which she has maintained as separate property. They decide to file separate returns. How much income does Annette report on her separate return?

a.$45,200 b.$45,000 c.$50,000 d.$50,200 Ans: D

Debbie, a self-employed pharmaceutical salesperson, works exclusively from her home. She has a 200 square foot room in her 2,000 square foot house in which she conducts her business. She makes $120,000 a year from her business before her home office deduction. Debbie's expenses for the year are as follows: Mortgage interest expense $25,000 Property taxes $7,000 Depreciation on the whole house $15,000 Home repair $1,000 Utilities $500 Telephone (business line only) $750 How much may Debbie include as allocable home office expense?

a.$49,250 b.$48,500 c.$4,850 d.$4,925 Ans: C

Ruth rents a 1,000 square foot, two-bedroom apartment as her home. She uses the 200 square foot second bedroom exclusively as an office for her bookkeeping business. Her total monthly expenses are rent, utilities, cleaning, pest control and insurance amounting to $2,000. In addition, during the year she made repairs to only the home office space at a cost of $1,400. What is Ruth's home office deduction on her current year Schedule C? Assume Ruth's net income from her business before the home office deduction is $40,000.

a.$5,080 b.$6,200 c.$3,400 d.$25,400 Ans: B

Michael works for American Airlines. His employer provided the following fringe benefits:1. A pre-tax flexible medical spending account of $2,500. Michael presented receipts for $2,500 and was reimbursed that amount. 2. Group term life insurance coverage of $100,000 at $10 per $1,000. 3. Standby ticket valued at $3,200 for a flight to London for Michael's vacation. 4. A deluxe room valued at $3,000 at American Airline's partner, the London Marriott, for three nights. 5. Typing on his work computer and office copy machine use valued at $10 for his son's 30-page term paper. What amount should Michael include in income?

a.$5,500 b.$6,520 c.$3,500 d.$9,710 Ans: C

Nathan owns a small business supplies store. During 2020, Nathan gives business gifts with these costs to the following individuals: Mrs. Rogers (a customer)-$27 plus $3 shipping Mr. Rogers (nonclient husband of Mrs. Rogers)-$10Ms. Green (a customer)-$22 Rebecca (Nathan's girlfriend)-$25 What is the amount of Nathan's deduction for business gifts?

a.$50 b.$62 c.$97 d.$0 e.None of these amounts listed are correct. Ans: A

Johnny's business has recorded the following for the current year: sales $50,204; returns $765; cost of sales $25,600. What is Johnny's Schedule C gross income?

a.$50,204 b.$24,604 c.$23,839 d.$25,369 Ans: C

Brenda and Mike are married and live in Washington. They have the following income: Mike's salary $60,000 Brenda's salary $40,000 Interest income from a joint account $400 Dividends from Brenda's inheritance $2,300 Dividends from Mike's stock that was purchased before his marriage to Brenda$700 If Mike and Brenda file separate returns, how much income would Brenda report on her federal tax return?

a.$52,500 b.$42,500 c.$41,700 d.$51,700 Ans: A

Betty is the big winner on Wheel of Fortune. She wins a car with a sticker price of $25,000 and a trip around the world worth $35,000. A local Honda dealer offers to buy the car for $23,000. Betty decides to sell the car to the dealer and leaves on her trip the next day. What amount, if any, must Betty include in her gross income?

a.$60,000 b.$35,000 c.$58,000 d.$0. The prizes are considered gifts from the TV network. Ans: C

Fred and Jean were divorced in 2013. The divorce decree states that Fred will pay Jean monthly alimony of $2,000. Fred must also pay child support of $3,000 monthly, until the youngest child (age 12) graduates from high school. He pays Jean $6,000 a month this entire year. How much is deductible on Fred's return?

a.$60,000 b.$72,000 c.$36,000 d.$24,000 Ans: D

Christine was employed by ABC Company from January to March 2020, earning $30,000 for the 3 month period. She was laid off on April 1, 2020, and received unemployment compensation of $2,000 a month for 6 months until she was rehired on October 1, 2020, at the same salary of $10,000 per month. How much total income must Christine report on her return?

a.$60,000 b.$72,000 c.$42,000 d.$30,000 Ans: B

Jonathan placed his new car in service on January 1 of the current year. He drove it 15,000 miles in the current year, 60 percent for business. He incurred expenses, including straight line depreciation, interest on the car loan, registration fees and taxes, gas and oil, maintenance, and repairs after a minor fender bender, of $10,500. What should his business deduction for automobile expense be?

a.$8,625 b.$6,300 c.$5,175 d.$10,500 Ans: B

Arnold purchases an annuity for $50,000 which is to pay him $1,000 a month for the rest of his life. His life expectancy from the table is 20 years. In January 2020, he receives the first payment. Using the general rule for annuities, what amount is included on his 2020 return?

a.$9,500 b.$2,500 c.$12,000 d.$0. The $12,000 is return of investment. Ans: A

Martha makes the following gifts during the year: a $100 gift card to her friend, Carol, for her birthday; a $50 bouquet of flowers to Mr. B, a client, who just had surgery; small desk calendars, $4 each, to her 200 clients at Christmas; and a $20 turkey to each of her five employees for Thanksgiving. Which of the following amounts is Martha's total deduction for business gifts?

a.$925 b.$1,050 c.$825 d.$1,025 Ans: A

Mary flies from New York to London on business. She spends 5 days working and then spends another 3 days with a friend in the Cotswolds in south England. What percent of her airfare may Mary deduct as a travel expense?

a.0 percent. The trip contained an element of personal time. b.62.5 percent. Mary must allocate the airfare between business and personal time and only the business time is deductible. c.37.5 percent. Mary must allocate the fare between business and personal and only the personal time is deductible. d.100 percent. The trip was primarily for business. Ans: B

John W. is the regional supervisor for Lotsa Foods Supermarkets in North Carolina. His office is in the Raleigh store and his home is 10 miles from the store. His regular route takes him from his home to his office, from his office to the Chapel Hill store (45 miles), and from there to the Chatham Downs store (5 miles). From there he drives to the Durham store (20 miles), and finally, to his home (30 miles). He does this every day except Friday and weekends. Assuming he works 48 weeks a year, what is his annual business mileage?

a.15,360 miles b.13,440 miles c.21,120 miles d.19,200 miles Ans: B

Which of the following must be included in gross income?

a.A "scratch off" lottery prize of $300 b.All of these items listed are correct. c.None of these items listed are correct. d.The million dollar prize won on "Survivor" e.A trip to the Super Bowl worth $5,000 won in a Pepsi drawing f.A $2,000 award for a good product idea for your company Ans: B

Linda received the following items in the current tax year. Which items must she include in her return?

a.A $500 check as a Christmas gift from her boss b.200 shares of IBM stock from her father, worth $7,000 c.200 shares of IBM stock from her father, worth $7,000 and qualified dividends of $250 on the IBM shares from her father d.A Christmas present from her mother that cost $200 and A $500 check as a Christmas gift from her boss e.Qualified dividends of $250 on the IBM shares from her father and A $500 check as a Christmas gift from her boss f.A Christmas present from her mother that cost $200 g.200 shares of IBM stock from her father, worth $7,000 and A Christmas present from her mother that cost $200 h.Qualified dividends of $250 on the IBM shares she received from her father Ans: E

Which one of the following fringe benefits is taxable to the employee receiving the benefit?

a.A company secretary types and copies another employee's term paper. b.Reimbursement of laser eye surgery cost to an employee who has a flexible medical spending account and who provides receipts. c.Payment of AICPA dues by the firm which employs the CPA. d.A 20 percent discount on clothing to a department store employee. Even after discount, the store makes a profit. e.A 15 percent discount on a building sold to an employee of the developer. f.None of these items listed are correct. Ans: E

Which of the following statements is not true?

a.A home office deduction is allowed if the office is used regularly and exclusively as the taxpayer's principal place of business. b.A home office deduction is allowed if the taxpayer uses the office regularly and exclusively for seeing clients, patients, or customers in the normal course of a trade or business. c.A home office deduction is allowed if the home office is a separate structure and not attached to the dwelling unit. d.A home office deduction is allowed if the taxpayer uses the office regularly for business and on occasion for watching movies on her high resolution flat screen monitor for personal enjoyment. Ans:

Which of the following scenarios is the one in which the education expense would be deductible (assuming that the taxpayers do not qualify for the tuition and fees deduction and the education credits)?

a.A manager taking a training class on effective leadership skills. b.A CPA taking courses in order to obtain her investment broker license. c.A cook at McDonald's going to college for a marketing degree in order to obtain a job at McDonald's headquarters. d.A law student taking a review course for the LSAT test. Ans: A

Which of the following self-employed taxpayers may not use the standard mileage method of calculating transportation costs?

a.A tree surgeon who travels to clients either from his office or his home. b.A real estate salesperson who drives a $75,000 BMW while showing houses. c.A limousine owner with a fleet of fifteen limousines. d.A CPA who drives a computer-equipped minivan to visit clients. e.All of the taxpayers listed may use the standard mileage method. Ans: C

Which is the true statement below?

a.After age 65, 100 percent of your Social Security income is taxed. b.None of your Social Security benefits are taxable because you paid the Social Security tax when you were earning. c.The formula for determining the amount of Social Security income to be taxed is the same for every filing status. d.Tax-exempt interest from municipal bonds must be included when calculating the Social Security inclusion amount. Ans: D

Alan, Barbara, Christine, and Donald are all self-employed. In the following scenarios, who would not be able to deduct educational expenses?

a.Alan is a brilliant bookkeeper who goes to school at night to earn his bachelor's degree in accounting so he can sit for the CPA exam. b.Donald, a CPA, goes to Big State University to work on his M.S. in accounting. c.Christine, a CPA, completes her continuing education requirement by attending the Tax Update Seminar to update her knowledge of federal and California tax law. d.Barbara is a CPA and spends a week in Reston, Virginia for a seminar on corporate taxes. Ans: A

Hercules is a detective in the New York City Police Department. He would like to improve his knowledge of the legal aspect of evidence collection and analysis, so he attends a law school course in forensic science with the goal of eventually earning his law degree at night. He incurs the following expenses: transportation to and from law school, $150; tuition, $1,000; and meals, $200 because he doesn't have time to go home to eat between work and school. Which of the following may Hercules deduct?

a.All of the expenses b.All of the tuition and 50 percent of meals and transportation c.All of the tuition only d.None of these expenses are correct. Ans: D

In which of the following scenarios may the employee exclude the value of meals and/or lodging from income?

a.An apartment house manager is given an apartment because the owner insists he live there 24 hours a day, 7 days a week. b.A hospital provides an intern with an on-call room and meals in the cafeteria because he cannot leave the hospital during his shift. c.An oil worker on a rig in the Gulf of Mexico gets meals and lodging in addition to his salary. d.All of these items listed are correct. Ans: D

Rosalie received the following during 2020. What, if anything, is includable in her return?

a.An inheritance from her great-aunt of $5,000 b.A birthday present from her mother of $500 c.A ring from her boyfriend worth $10,000 d.A gift from her father of 100 shares of IBM stock worth $3,800 e.All of these items listed are correct. f.None of these items listed are correct. Ans: F

In which of the following scenarios may the employee exclude the value of meals and/or lodging from income?

a.An oil worker on a rig in the Gulf of Mexico gets meals and lodging in addition to his salary. b.A hospital provides an intern with an on-call room and meals in the cafeteria because he cannot leave the hospital during his shift. c.An apartment house manager is given an apartment because the owner insists he live there 24 hours a day, 7 days a week. d.All of these items listed are correct. D Ans:

To the annuity holder, which of the following is true regarding annuity payments?

a.Annuity payments are in part a return of the original purchase price and in part taxable income. b.Annuity payments are first considered to be a tax-free return of the original purchase price. c.Annuity payments are fully includable in gross income. d.Annuity payments are similar to life insurance proceeds in that they are excluded from gross income. e.Annuity payments are revised any time the life expectancy of the annuitant changes. Ans: A

To the annuity holder, which of the following is true regarding annuity payments?

a.Annuity payments are in part a return of the original purchase price and in part taxable income. b.Annuity payments are similar to life insurance proceeds in that they are excluded from gross income. c.Annuity payments are fully includable in gross income. d.Annuity payments are revised any time the life expectancy of the annuitant changes. e.Annuity payments are first considered to be a tax-free return of the original purchase price. Ans: A

Which of the following is true regarding life insurance proceeds?

a.Are included in gross income in full if they are received as periodic payments with interest. b.Are never taxable. c.Are generally included in gross income. d.Are included in gross income if they are qualified accelerated benefits received before the death of the insured and used for long-term care. e.Generally are excluded from gross income. Ans: E

Loretta has a scholarship from the University of Azteca which covers tuition and books. In addition, she has a scholarship provided by her local church to cover room and board. She is enrolled in a work-study program in which she earns $5,000. What may she exclude from income?

a.Azteca scholarship b.Church scholarship c.Work-study earnings d.All of these items listed are correct. Ans: A

Which of the following types of income is not specifically excluded from income?

a.Birthday gifts received b.Bequests c.Municipal bond interest d.Income from a partnership Ans: D

Which of the following statements is true regarding Form W-2?

a.Box 2 of W-2 is where employers should report taxable wages, salary, bonuses and almost every type of taxable compensation. b.Form W-2 does not report the amount of federal income tax withheld from the taxpayer's wages by the employer for the year. c.If a taxpayer receives more than one Form W-2, the amounts in Box 1 are not combined before entering on Form 1040. d.State and local tax information is reported at the bottom of Form W-2 in Boxes 15 through 20. Ans: D

Which of the following lists only community property states?

a.California, Oregon, Washington b.Arizona, Nevada, Texas c.Massachusetts, New Mexico, Washington d.Idaho, Louisiana, North Carolina Ans: B

Under a 2013 divorce decree, which is true regarding the alimony payments?

a.Cash or property is acceptable as alimony payments b.Not deductible by the payor c.Payable to the recipient's estate after death d.Not considered alimony if the payor and recipient are living in the same household Ans: D

Glenn is an employee of Duke Power. His job is to perform powerline repairs. Recently, he purchased equipment to wear on the job at his own expense. Which of these items may Glenn deduct?

a.Climbing spikes b.Insulated gloves c.Hard hat d.Safety belt e.All of these choices listed are correct. f.None of these choices listed are correct. Ans: F

Which of the following is not a feature of a Qualified Tuition Program (a Section 529 plan)?

a.Contributions to the plan are limited by AGI. b.Distributions from the plan are taxable and subject to a 10 percent early withdrawal penalty if not used for qualified education expenses. c.Contributions may be made to a plan in a state other than the one in which the contributor resides. d.The plan may be sponsored by a state or by a private institution of higher learning. e.Distributions are tax free if used to pay qualified expenses. f.Reasonable room and board is a qualified expense. Ans: A

Which of the following employee fringe benefits may be excluded from income?

a.Cost of group term life insurance coverage up to $50,000 b.Pre-tax payments of up to $270 per month to employees to cover parking at work c.Pre-tax health care flexible expense spending account up to $2,750 d.Pre-tax dependent care up to $5,000 e.All of these items listed are correct. f.None of these items listed are correct. term-89 Ans: E

Bill is a self-employed CPA who does most of his new business development on the golf course. Which of the following is deductible?

a.Country club annual dues b.Tickets to a professional golf tournament given to clients c.Business meals in the club restaurant (50% of cost) d.Greens fees when playing a round of golf with clients Ans: C

In year one, Dr. Drill, an accrual basis dentist, recorded $5,000 of taxable income for dental services performed but not paid in cash by Mr. Cashless. In year two, Mr. Cashless is bankrupt and Dr. Drill has decided that the debt is uncollectible. In year two, Dr. Drill may do which of the following?

a.Deduct $5,000 as a short-term capital loss. b.Deduct $3,000 as an ordinary business loss. c.Deduct $5,000 as a long-term capital loss. d.Deduct $5,000 as an ordinary business loss. Ans: D

Which of the following describes a difference between a Section 529 Plan and an Educational Savings Account?

a.Distributions from Section 529 Plans are non-taxable if used for qualified education expenses. The Educational Savings Account distribution is taxable on the earnings portion of the distribution even if used for qualified education expenses. b.The maximum annual contribution to an Educational Savings Account is $2,000 which is phased out for high-income individuals. The contributions to a Section 529 Plan may be larger than $2,000 and are not phased out for high-income individuals. c.The contributions to a Section 529 Plan are not deductible while contributions to an Educational Savings Account are deductible. d.An Educational Savings Account income exclusion for distributions may be available in the same year as an education credit is claimed, but not if distributions from a Section 529 Plan are also taken. Ans: B

Dr. Acharya, a self-employed medical doctor, pays the following expenses. Which of the expenses is not deductible?

a.Dues to the College of Hand Surgeons b.Dues to a local health club c.Subscription to Lancet, the publication of the Royal College of Medicine d.Dues to the American Medical Association e.All of these choices listed are deductible. Ans: B

Joe, John, and Ruth are all retiring from ABC Corporation which maintains a qualified plan for employee achievement awards. Joe has been with the company for 3 years and receives a Rolex watch valued at $2,500 for his role in winning a large client from a competitor. John worked for ABC Corporation for 20 years and receives a Bulova watch worth $1,600 for length of service. Ruth also worked for 20 years and receives a gold bracelet worth $1,500 for length of service. What must each retiree include in income?

a.Each must include the full value of the award received. b.Each may exclude the value of the award. c.Joe and John may exclude their awards. Ruth must include hers. d.Ruth and John may exclude their awards. Joe must include his. Ans: D

Which of the following statements is incorrect?

a.Gifts to employees for safety achievements are limited to $400 without a special plan. b.Gifts to employees for length of service under a qualified plan may not exceed $1,600. c.There is no limit on gifts of $4 or less bearing the company name. d.The deduction for gifts to clients is limited to $40 per client per year. Ans: D

Which of the following may be excluded from income?

a.Health insurance premiums paid by one's employer b.Reimbursement for loss of a limb c.Reimbursement by the insurance company for medical expenses incurred while in Europe d.All of these items listed are correct. e.None of these items listed are correct. Ans: D

Sam's grandmother contributes $13,000 a year for 8 years to Sam's Section 529 plan in the state of North Carolina. Sam is now 18 years old and has been accepted to the University of North Carolina. He withdraws $50,000 from the Section 529 plan to pay for tuition, books, fees, and room and board. In addition, he uses $20,000 of the distribution to buy a car. What are the tax consequences to Sam and his grandmother?

a.His grandmother has no tax consequences. Sam is taxed on the earnings portion of the $20,000 not used for educational expenses. The earnings portion is also subject to a 10 percent penalty for using the distribution for a non-qualifying purpose. b.Sam pays no tax on the distribution and his grandmother may claim a $30,000 deduction. c.Sam is taxed on the full $20,000 not used for educational expenses and his grandmother has no tax consequences. d.Sam pays no tax on the distribution and his grandmother has no tax consequences. Ans: A

Which of the following are included in travel expenses when away from home?

a.Hotel b.Airfare c.Taxis and tips d.Car rental e.Laundry and dry cleaning f.None of these items listed are correct. Ans: F

Which of the following is not true regarding salaries and wages?

a.In 2020 well over the majority of all tax returns filed included some amount for wages and salaries. b.Serving as an employee of a company is the most common way to earn income in the United States. c.The amount in Box 2 is reported directly on Line 1 of Form 1040. d.An employee should receive a Form W-2 from an employer providing information about the wages paid to that employee during the year. Ans: C

Which of the following statements is true regarding the home office deduction?

a.In the optional safe harbor method, a deduction in excess of the income limit may be carried forward. b.If you use the work area for both personal use and business use, you still may qualify for the home office deduction. c.The costs of operating a home which are included in the home office allocation are typically allocated to the home office on the basis of the square footage of the office to the total square footage of the home. d.The home office deduction may reduce the net income from the business below zero (excluding mortgage interest and property taxes allocable). Ans: C

If Craig and Michelle are married and reside in California, income from which of the following would not be considered community income?

a.Income from sale of property acquired during their marriage b.Interest on investment property inherited by Michelle from her grandmother c.Craig's salary d.Interest on their joint savings account e.Rental income from a multi-apartment building purchased during their marriage f.All of these items listed would be considered community income. Ans: B

Generally speaking, which of the following is true regarding interest on U.S. savings bonds, Series EE and Series I, is:

a.It is not included in gross income. b.It is taxed when the bonds are cashed in. c.It is taxed annually with no election. d.It is taxed at preferential rates. Ans: B

Lew received a "qualified plan" length of service award of $1,500, and Sally received a $400 award for safety on the job. Which of the following statements is true?

a.Lew must include $1,100 in income but Sally may exclude her $400 b.Lew and Sally must include their awards in income c.Sally must include $400 in income but Lew may exclude his $1,500 d.Lew and Sally both may exclude their awards Ans: D

Charlie, a self-employed businessman, owns a yacht which he never uses except to entertain wealthy clients. He considers it a business asset. Which of the following is he allowed to deduct?

a.Maintenance expense b.Interest on the bank loan taken out to buy the yacht c.Catering expense of entertaining clients (no business is discussed) d.Moorage fees e.All of these choices listed are correct. f.None of these choices listed are correct. Ans: F

Nine states have a community property system of marital law. Which of the following statements is correct?

a.Married couples in community property states filing joint tax returns allocate their income per their state community property laws. b.In some states, separate property can give rise to community income. c.Federal law determines how income will be allocated between spouses in community property states. d.Separate property acquired before marriage becomes community property after marriage in community property states. e.Even though the spouses have been living apart for an entire year, personal earnings will generally be treated as having been earned one-half by each spouse. Ans: B

Which of the following would be a deductible subscription for a self-employed individual?

a.Modern Hairstyles to a hair stylist b.Monthly access to the Multiple listing service to a real estate salesperson c.American Institute of CPAs Journal to a CPA d.Journal of the American Medical Association to a doctor e.None of these items listed are correct. Ans: E

Which of the following is the common test an expense must meet to be deductible? The business expense must be:

a.Ordinary, necessary, and capable of producing a profit b.Ordinary, necessary, and given with disinterested generosity c.Paid in the current year, not extravagant, even if personal, and necessary d.Ordinary and necessary, reasonable, and have a business purpose Ans: D

Which of the following is a true statement regarding tax-free employee fringe benefit?

a.Payments up to $100,000 for group term life insurance for employees are tax free. b.The cost of using a company car for personal purposes are tax free. c.Employee discounts on real estate investments are tax free. d.A dependent care plan can only be used to cover the costs of caring for a child. e.Reimbursements paid to employees for public transportation to work and for parking at work up to certain limits each month are tax free. Ans: E

Marsha and Chuck are married and have 2 children. Chuck's employer provides health insurance which covers Chuck and his family. The employer pays 80 percent of the premiums and Chuck pays the remaining 20 percent out of his salary. During the year, Chuck's family incurs $15,000 of medical expenses. The insurance company pays $5,000 directly to physicians and reimburses Chuck for the remaining $10,000. What amount, if any, should Chuck include in his return as income?

a.Premiums paid by his employer b.$10,000 paid to him by the insurance company c.$5,000 paid directly to doctors by the insurance company d.None of these items listed are correct. Ans: D

Which of the following does not meet the three tests for deductibility of business expenses?

a.Purchase of a $6,000 television by a nursing home for showing classic movies every night in the movie room which seats fifteen residents. b.Truck expenses for a mobile dog grooming business. c.Purchase of a $6,000 television by a self-employed accountant for the purpose of watching continuing education webinars in his home office. d.Purchase of fancy paper in a printing business. Ans: C

Which of the following may be excluded from income?

a.Reimbursement for loss of a limb b.Health insurance premiums paid by one's employer c.Reimbursement by the insurance company for medical expenses incurred while in Europe d.All of these items listed are correct. e.None of these items listed are correct. Ans: D

A wealthy family hires a live-in professional nanny for the children. Of the following paid by the family, what must the nanny include in income?

a.Room and board b.Medical insurance c.Salary of $12,000 a year d.All of these items listed are correct. e.None of these items listed are correct. Ans: C

Which of the following correctly describes gross income on Schedule C, Part 1?

a.Sales plus returns and allowances less cost of goods sold b.Sales less returns and allowances less cost of goods sold plus other income c.Sales plus cost of goods sold less other income less returns and allowances d.Sales less returns and allowances less cost of goods sold Ans: B

Scott, a single taxpayer, operates the activity of making peanut butter cookies as a hobby. Steve a different taxpayer, operates a similar activity as a bona find business. Scott's gross income from his activity is $3,500, his cost of sales is $1,000 and his other expenses are $3,000. Steve's gross income and expenses happened to be the same as Scott's. Neither Scott nor Steve itemize, but both have other forms of taxable income. What is the impact on taxable income for Scott and Steve from these activities?

a.Scott and Steve will report $0 taxable income. b.Scott will report $0 income and Steve will report a $500 loss. c.Scott will report $2,500 income and $0 other deductions and Steve will report a $500 loss. d.Scott will report a $500 loss and Steve will report $3,500 income. e.Scott and Steve will report a $500 loss. Ans: C

Scott, a single taxpayer, operates the activity of making peanut butter cookies as a hobby. Steve a different taxpayer, operates a similar activity as a bona find business. Scott's gross income from his activity is $3,500, his cost of sales is $1,000 and his other expenses are $3,000. Steve's gross income and expenses happened to be the same as Scott's. Neither Scott nor Steve itemize, but both have other forms of taxable income. What is the impact on taxable income for Scott and Steve from these activities?

a.Scott will report $0 income and Steve will report a $500 loss. b.Scott will report $2,500 income and $0 other deductions and Steve will report a $500 loss. c.Scott and Steve will report a $500 loss. d.Scott will report a $500 loss and Steve will report $3,500 income. e.Scott and Steve will report $0 taxable income. Ans: B

Loretta loans Janet $10,000 to start a new business. Janet works very hard but is not successful and 3 years later closes the business and declares bankruptcy. What may Loretta deduct that year as a bad debt, assuming she has no capital gains or losses?

a.She may deduct a $10,000 capital loss. b.She may deduct a $10,000 long-term capital loss because the loan was more than a year old when it became uncollectible. c.She may report a $10,000 short-term capital loss, but will be limited to deducting $3,000 against ordinary income in the year the loan becomes uncollectible since she has no other capital transactions. The balance becomes a short-term capital loss carryover. d.She may deduct the full $10,000 as an ordinary loss because it was a business loan. Ans: C

Michelle, a marketing specialist, decides she wants to be an artist. Although she continues her marketing job, she takes art classes privately for $500, buys an easel and art supplies for $800, and travels to Italy to paint, for total travel costs of $2,500. She sells three paintings to friends and relatives for $25 each. How much and where does Michelle report her income and expenses on her tax return?

a.She reports $75 of other income and nets $75 of expenses against the income on Schedule 1 of Form 1040. b.She reports $75 of other income on Schedule 1 of Form 1040 and no deductions. c.She reports $75 of income and deducts $3,800 of expenses on Schedule C. d.She reports $75 of other income on Schedule 1 of Form 1040 and deducts $75 of expenses as miscellaneous itemized deductions subject to the 2 percent limitation on Schedule A. Ans: B

Shirley is in the 35 percent bracket and is comparing a 4 percent corporate bond to a 3 percent municipal bond. Which should Shirley buy and why?

a.She should buy the corporate bond because it has a higher interest rate. b.She should buy the corporate bond because it has an after-tax return of 6.15 percent. c.She should buy the municipal bond because it pays an equivalent yield on a taxable bond of 4.62 percent compared to the corporate bond of 4 percent. d.None of these items listed are correct. Ans: C

Steve is a retired physicist who now spends his time building fine furniture. In the current year, he sells a table for $3,000. He incurred cost of goods sold of $1,000 and general and administrative expenses of $15,000. In 12 years he has never had a profit from this activity. Which of the following is true?

a.Steve may deduct all $16,000 of his expenses because he is engaged in a trade or business. b.Steve may reduce the sales by the cost of goods sold; he may not deduct any of the general and administrative expenses because he is engaged in a hobby. c.Steve's deductions are limited to $3,000, the income derived from his hobby activity. The deductions are claimed as miscellaneous itemized deductions subject to the 2 percent limitation. d.Steve may deduct all $16,000 of expenses because he is engaged in a hobby. e.None of these statements are true. Ans: B

Steve is a retired physicist who now spends his time building fine furniture. In the current year, he sells a table for $3,000. He incurred cost of goods sold of $1,000 and general and administrative expenses of $15,000. In 12 years he has never had a profit from this activity. Which of the following is true?

a.Steve may deduct all $16,000 of his expenses because he is engaged in a trade or business. b.Steve's deductions are limited to $3,000, the income derived from his hobby activity. The deductions are claimed as miscellaneous itemized deductions subject to the 2 percent limitation. c.Steve may deduct all $16,000 of expenses because he is engaged in a hobby. d.Steve may reduce the sales by the cost of goods sold; he may not deduct any of the general and administrative expenses because he is engaged in a hobby. e.None of these statements are true. Ans: D

Which of the following is a true statement regarding tax-free fringe benefits?

a.Tax-free fringe benefits may include a flexible bicycle spending account up to $2,000 b.Tax-free fringe benefits may include group term life insurance of $100,000 c.Tax-free fringe benefits may include discounts at a hotel owned by an airline to a flight attendant working for the airline d.Tax-free fringe benefits may include discounts on public transportation but not parking at work e.All of these items listed are correct. f.None of these items listed are correct. Ans: F

Assume that Terrell is required to supply these items for his job by his employer. The employer does not reimburse Terrell for any of the costs. Which of the following is not deductible by Terrell?

a.The cost of a hard hat b.The cost of a safety-orange jacket c.The cost of steel-toed boots d.The cost of safety glasses (Terrell does not require corrective lenses) e.None of these items are deductible. Ans: E

If questioned by the IRS as to business gifts, the taxpayer must provide what substantiation?

a.The date and description of the gift b.The business purpose of the gift c.The business relationship of the recipient d.The amount of the expense e.All of these choices listed are correct. Ans: E

If a payment is less than the full amount of the alimony and child support, which of the following is true?

a.The full amount is treated as alimony. b.Any excess over the amount of the alimony due is considered to be child support. c.The full amount is treated as child support. d.Any excess over the amount of child support due is considered to be alimony. e.None of these payment can be deducted in the tax return of the spouse making the payment. Ans: D

Which of the following is true if an employer chooses a per diem method of substantiation for travel expenses?

a.The high-low method allows employees traveling mostly in high-cost areas the same high-cost per diem rate all year. b.The high-low method averages the high-cost locality and low-cost locality per diem rates to arrive at an average rate. c.Actual expense records substantiating the business reason for the trip and the dates of arrival and departure are not required. d.The employer need not use an accountable plan for reimbursing employees for travel expenses. e.The meals and incidental expenses method requires actual cost records to substantiate lodging expenses. Ans: E

Which of the following statements is true regarding the home office deduction?

a.The home office deduction may reduce the net income from the business below zero (excluding mortgage interest and property taxes allocable). b.If you use the work area for both personal use and business use, you still may qualify for the home office deduction. c.In the optional safe harbor method, a deduction in excess of the income limit may be carried forward. d.The costs of operating a home which are included in the home office allocation are typically allocated to the home office on the basis of the square footage of the office to the total square footage of the home. Ans: D

Under the Simplified Method for calculating the taxable amount for an annuity:

a.The investment in the annuity is divided by a number based on the age of the older annuitant at the starting date of the annuity when there is more than one annuitant (a joint and survivor annuity). b.The amount paid by the employee for the annuity is divided by a number based on the length of employment. c.The amount paid for the annuity by the employee is recovered first. d.There are separate tables for "well" employees and "sick" employees. e.The amount paid in by the employee to the plan is divided by a number based on the age of the employee (or the employee and spouse) at the starting date of the annuity. Ans: E

Under the Simplified Method for calculating the taxable amount for an annuity:

a.The investment in the annuity is divided by a number based on the age of the older annuitant at the starting date of the annuity when there is more than one annuitant (a joint and survivor annuity). b.The amount paid in by the employee to the plan is divided by a number based on the age of the employee (or the employee and spouse) at the starting date of the annuity. c.The amount paid for the annuity by the employee is recovered first. d.The amount paid by the employee for the annuity is divided by a number based on the length of employment. e.There are separate tables for "well" employees and "sick" employees. Ans: B

Which of the following is not a true statement?

a.The standard mileage rate is applied to all miles driven (business and commuting). b.Taxpayers who have previously used an accelerated depreciation method for their vehicle may not use the standard mileage rate. c.The standard mileage rate for 2020 is 57.5 cents per business mile. d.A taxpayer who operates a fleet of vehicles (five or more simultaneously) may not use the standard mileage method. Ans: A

Julie graduated first in her class from Gatorville High School and earned a scholarship of $10,000 a semester to attend University of Gatorville. The scholarship covers tuition, books, fees, and required equipment. In addition, Julie took out a student loan of $5,000 per semester and works part-time at the campus book store, earning $4,000 a school year. Her parents give her $500 each month. What must Julie include in her tax return?

a.The student loan funds b.The scholarship funds c.The support from her parents d.The earnings from her part-time job on campus e.All of these items listed are correct. f.None of these items listed are correct. Ans: D

Which of the following must be true for a taxpayer to file a Schedule C-EZ in 2020?:

a.The taxpayer may not file a Schedule C-EZ in 2020. b.Have gross receipts of $35,000 or more from the business. c.Have business expenses of $5,000 or more. d.Have no inventory during or at the end of the year. e.Have no more than two businesses. Ans: A

Which of the following is a feature of the 2020 higher education expenses deduction?

a.The total amount of expenses qualifying for the deduction must be paid out of a Section 529 plan or educational savings account. b.The deduction is only for graduate tuition. c.The maximum deduction is $3,000. d.There is a deduction available for married filing jointly taxpayers with modified AGI below $150,000. Ans: D

Interest from which of the following is included as gross income on one's federal tax return?

a.U.S. Treasury bonds b.City of San Diego bonds c.Bonds issued by the State of Wisconsin d.Washington State Public Works bonds e.All of these items listed are correct. f.None of these items listed are correct. Ans: A

Which of the following is included in gross income?

a.Workers' compensation b.Scholarships for tuition and books c.Child support payments d.Bequests e.Unemployment compensation Ans: E

For 2020, the minimum percentage of Social Security benefits which must be included in a low income taxpayer's gross income is?

a.85 percent b.60 percent c.0 percent d.50 percent e.100 percent Ans: C

John and Mary own IBM stock and receive $2,000 in qualified dividends in 2020. They are retired and have taxable income of $85,000. How are their dividends taxed?

a.The qualified dividends are taxed at 0 percent b.The qualified dividends are taxed at 22 percent c.The qualified dividends are taxed at 15 percent d.The qualified dividends are not included on their return Ans: C