End of Chapter Questions in Textbook

b (Only the wages and the bonus are taxable ($30,000 + $2,000). The parking pass is a nontaxable transportation benefit, and the employer contributions are not taxable until Chandra withdraws the money from her retirement account. Chandra does not have to report the use of the copier, because it is considered a de minimis fringe benefit.)

1. Chandra received the following income and fringe benefits in 2022: Form W-2 wages $30,000 End-of-the-year bonus $2,000 Parking pass per month $90 Employer contributions to her 401(k) plan $900 Occasional free use of a copier on the employer's premises $15 How much income must Chandra report on her tax return? A. $30,000 B. $32,000 C. $32,500 D. $34,480

C (Huang is exempt from the substantial presence test for five years. In determining residency status for tax purposes, students temporarily in the U.S. on an F, J, M, or Q visa are exempt from the substantial presence test for five years.)

1. Huang is an international student temporarily in the U.S. on an F-1 Visa. Huang arrived in the U.S. on January 1, 2022, and was present in the U.S. all year, studying at Yale University. How long is he exempt from the substantial presence test? A. One year. B. Three years. C. Five years. D. There is no exemption to the substantial presence test.

b (Armando's inability to pay his debt is not a result of bankruptcy or insolvency, so he must include the full amount of the canceled debt ($5,000) in his gross income.)

1. Armando received a $15,000 personal loan from his credit union but stopped making payments. The credit union determined that the legal fees to collect might be higher than the amount Armando owed, so it canceled the remaining amount of $5,000 due on the loan. Armando did not file for bankruptcy, nor is he insolvent. How much income must he include from the debt cancellation? A. $0 B. $5,000 C. $10,000 D. $15,000

1. The answer is C. A sibling would not be considered a disqualified person. A "prohibited transaction" under the Internal Revenue Code (IRC) is a transaction prohibited by law between a retirement plan and a disqualified person. A disqualified person is any member of the IRA owner's immediate family spouses, ancestors, and direct lineal descendants, and spouses of those descendants. The IRS does not consider siblings, cousins, aunts and uncles, or stepchildren as disqualified persons for the purposes of this rule.

1. For the purposes of the prohibited transaction rules, which of the following would not be considered a disqualified person? A. The spouse of the IRA owner. B. The daughter of the IRA owner. C. The sibling of the IRA owner. D. The parent of the IRA owner.

b (Gaston and Brittany must report six months of rental income at $3,000 per month, or $18,000, but the refundable security deposit of $6,000 is not recognized as income in 2022. They can deduct 6/12 of the amounts incurred for mortgage interest, property taxes, and casualty insurance, or $10,500, plus the $500 cost of repairs while the house was rented. Thus, their reportable net rental income before considering depreciation would be $7,000. The calculations are as follows: Taxable rental income Six months of rent at $3,000 per month $18,000 Minus deductible expenses: Mortgage interest (for six months) 5,000 Property taxes (for six months) 5,000 Casualty insurance (for six months) 500 Repair costs 500 Expenses before depreciation (11,000) Rental income before depreciation $7,000)

1. In 2022, Gaston and Brittany moved to Florida. They decided to rent their old house in California instead of selling it. They had purchased the home five years ago for $500,000 and had paid $80,000 for various major improvements over the years. The purchase price of $500,000 was attributable to fair market values of $100,000 for the land and $400,000 for the house. Their new tenant paid a refundable security deposit of $6,000 and moved in on July 1, 2022. The FMV of the property on July 1 was $525,000, comprised of $105,000 for the land and $420,000 for the house. The tenant then paid rent of $3,000 each month from July through December of 2022. Gaston and Brittany incurred the following expenses related to the house: • Mortgage interest: $10,000 • Property taxes: $10,000 • Casualty insurance: $1,000 In addition, they paid $500 for repairs during December, when a bathroom pipe broke. Exclusive of depreciation expense, what was Gaston and Brittany's taxable rental income? A. $1,500 B. $7,000 C. $7,250 D. $13,000

b (The donor is generally responsible for paying gift tax. Under special arrangements the donee may agree to pay the tax instead.)

1. In general, who is responsible for paying gift tax? A. The estate. B. The donor. C. The gift recipient. D. The executor.

1. The answer is D. Kyong must do a monthly calculation to determine the actual amount of her PTC, which must then be reconciled with the advance premium tax credits paid to her insurer to lower her premium payments. Kyong must enter the amount of any excess advance premium tax credit payments made on her behalf on her return and normally repay the excess. Any taxpayer who claims the Premium Tax Credit (whether advance credit payments were made or not) must file a tax return and include Form 8962, Premium Tax Credit (PTC). If there were no excess advance premium tax credit payments and the amount of the PTC is more than the amount of her tax liability, she may receive the difference as a refund.

1. Kyong enrolled in the federal Marketplace for 2022 to obtain health insurance. She estimated her household income for the year, qualified for the Premium Tax Credit, and her expected credit paid in advance to her insurance company. What must Kyong do when she files her income tax return? A. She must repay half of the credit that she received in advance. B. She will not owe any additional tax but may be eligible for a larger amount of the credit. C. She must reconcile the advance premium tax credit payments with the actual Premium Tax Credit that she calculates on Form 8962. Any excess amount will be counted as household income and used to project her credit for the next year. D. She must reconcile the advance premium tax credit payments with the actual Premium Tax Credit she calculates on Form 8962. She may receive a refund, or she may have to repay any excess advance premium tax credit payments, depending on her individual situation.

c

1. Mitchell and Kaylie are married and file jointly. They owned and used their house as their main home for 15 months. Mitchell got a new job in another state, so they sold their home. What is the maximum amount they can exclude from income under the rules regarding a reduced exclusion? A. $156,250 B. $250,000 C. $312,500 D. $500,000

a (This payment qualifies as alimony, and Linda must include the $4,000 as taxable alimony income on her return as the divorce was finalized prior to 2019. The payment may be treated as alimony for tax purposes because the payments of Linda's medical expenses are a condition of the divorce agreement. Payments to a third party on behalf of an ex-spouse under the terms of a divorce instrument can be alimony, if they qualify. These include payments for a spouse's medical expenses, housing costs (rent and utilities), taxes, and tuition. The payments are treated by the ex-spouse as if they were received directly and included as income.)

1. Rick and Linda's divorce was finalized in 2017. Under the legal terms of his divorce decree, Rick must pay the medical expenses of his former spouse, Linda. In January 2022, Rick sends a check totaling $4,000 directly to Mercy General Hospital to pay for Linda's emergency surgery. Which of the following statements is correct? A. This payment qualifies as alimony, and Linda must include the $4,000 as taxable alimony on her individual tax return. B. This payment does not qualify as alimony, but Rick can claim a deduction for the medical expenses on his return. C. Linda must include the $4,000 as income on her return, but Rick cannot deduct the expense as alimony because it was paid to a third party. D. None of the above

1. The answer is B. The maximum foreign earned income exclusion is $112,000 in 2022. This amount is applied per taxpayer. Sasha's earned income exceeded the exclusion amount. She can exclude up to $112,000 in 2022. Anton's earned income is $90,000, so that is the most he can exclude. His dividends do not figure into the calculation. The maximum excluded income on their joint return would therefore be ($112,000 + $90,000) = $202,000. Each spouse would file their own, separate Form 2555, and attach it to their Form 1040 in order to take the deduction.

1. Sasha and Anton are married and file jointly. Both are U.S. citizens who live and work in Poland, which is their tax home. They received the following income in 2022: • Foreign wages Sasha earned in Poland: $129,000 • Foreign wages Anton earned in Poland: $90,000 • Dividend income Anton earned on his investments: $11,800 Sasha and Anton both qualify to take the foreign earned income exclusion on their joint tax return. What is the total amount of qualifying foreign earned income that Sasha and Anton can exclude in 2022? A. $112,000 B. $202,000 C. $213,500 D. $224,000

d (The related party transaction rules do not apply in this scenario. Related party transaction rules are designed to prevent improper deductions between two parties joined by a special relationship. However, the related party transaction rules do not apply to stepsiblings, so there are no related party issues between Simeon and Gerald or their corporations. Related party transaction rules do not apply to uncles, aunts, nieces, nephews, cousins, stepchildren, stepsiblings, stepparents, or in-laws.)

1. Simeon owns 100% of the stock in TOP Corporation. Gerald owns 100% of the stock in DAB Corporation. In 2022, TOP Corporation sold used manufacturing equipment to DAB Corporation at a $52,000 loss. Simeon and Gerald are stepbrothers. Concerning the related party transaction loss rules, how should this transaction between Simeon and Gerald be handled? A. Any losses on the sale of property between the corporations would be disallowed, and the transaction would be treated as a constructive dividend to Simeon. B. The related party transaction rules do not apply to their corporations, but they would apply individually to Simeon and Gerald, resulting in taxable income to each of them. C. The related party transaction rules apply individually to Simeon and Gerald, but not to their corporations. D. The related party transaction rules do not apply in this scenario.

1. The answer is C. A partnership interest in a foreign partnership can trigger the filing of Form 8938 if the partnership interest is not held in a U.S.-based financial account. Answer "A" and answer "B" are not correct because a personal residence or a rental property does not have to be reported, if directly held (i.e., not held in a foreign entity). Answer "D" is not correct, because directly held precious metals, such as gold, are not specified foreign financial assets.

1. Sophia is unmarried and lives in Texas. She is a U.S. citizen and has ownership of specified foreign assets, which she inherited when her Italian grandmother died. Which of the following foreign assets, all of which are located in Italy, may trigger the filing of the Form 8938? A. A personal residence B. A profitable rental property C. A partnership interest in an Italian partnership D. Directly-held precious metals

1. The answer is D. Schedule 8812 is used to calculate the Child Tax Credit as well as the Additional Child Tax Credit.

1. Which Schedule is required to calculate the Additional Child Tax Credit? A. Schedule EIC B. Schedule 8862 C. Schedule J D. Schedule 8812

d (Gabriel is not allowed to claim the standard deduction. A married taxpayer who files separately and whose spouse itemizes deductions must either itemize his deductions or claim zero as his deduction.)

1. Which of the following taxpayers must either itemize deductions or claim zero as their standard deduction? A. Mindy, who files a joint return with her disabled husband. B. Leslie, who is unmarried, claims two dependents, and files Form 1040. C. Pearl, whose itemized deductions are more than the standard deduction. D. Gabriel, whose wife files a separate return and itemizes her deductions.

a (The final Form 1040 for the decedent would not include IRD.)

10. All of the following tax returns may include income in respect of a decedent (IRD) except: A. The final Form 1040 for the decedent. B. The decedent's estate, Form 1041, if the decedent's estate receives the right to the income. C. The Form 1040 of any person to whom the estate properly distributes the income. D. A beneficiary's Form 1040, if the right to income arising out of the decedent's death is passed directly to the beneficiary and is never acquired by the decedent's estate.

c (Asher must allocate his expenses between personal use and rental use. He can deduct as rental expenses seven-twelfths 7 months/12 months of annual expenses, such as taxes and insurance. Starting in June, he can deduct as rental expenses the amounts he paid for items generally billed monthly, such as utilities. When figuring his allowable depreciation, he should treat the property as placed in service on June 1.)

10. Asher decides to convert his primary residence into a rental property. He moves out of his home on May 1, 2022, and starts renting it a month later, on June 1, 2022. He has $12,000 of mortgage interest for the year. He itemizes his deductions. How should Asher report his mortgage interest expense? A. Report the entire $12,000 on Schedule E. B. Report the entire $12,000 on Schedule A. C. Report $7,000 on Schedule E as interest expense and $5,000 on Schedule A as mortgage interest. D. Report $8,000 on Schedule E as interest expense and $4,000 on Schedule A as mortgage interest.

b (Bruce will have to pay a 6% excise penalty if he does not correct the overcontribution. A 6% penalty applies to excess contributions to a health savings account.)

10. Bruce makes an excess contribution to his HSA by accidentally contributing over the maximum allowable amount. What is the penalty on excess contributions if Bruce does not withdraw the overcontribution? A. No penalty. B. 6% penalty. C. 10% penalty. D. 20% penalty.

10. The answer is A. Charlotte has $104,500 of gross income, but only her wages ($90,000) would qualify for the foreign earned income exclusion. U.S. citizens and U.S. resident aliens who live abroad are taxed on their worldwide income. However, they may qualify to exclude a portion of their foreign earnings (up to $112,000 for 2022). A qualifying individual with qualifying income may elect to exclude foreign earned income, and this exclusion applies only if a tax return is filed and the income is reported. The municipal bond interest would be nontaxable, so the only income which would potentially be subject to income tax in this scenario would be the $12,000 in rental income and $500 in dividends.

10. Charlotte is a U.S. citizen who lives and works in France, which is her tax home. She does not maintain a residence in the U.S., although she does own a residential rental property in Florida, which is currently rented and produces rental income. She received the following income: • Rental income earned on the Florida rental: $12,000 • Dividend income earned on investments: $500 • Municipal bond interest: $2,000 • Wages earned in France: $90,000 Charlotte wants to take the foreign earned income exclusion on her individual tax return. What is the total amount of qualifying foreign earned income that Charlotte can report on her Form 2555? A. $90,000 B. $92,500 C. $99,200 D. $102,100

d

10. Geoff is a self-employed consultant. He sold his main home in 2022 at a $29,000 gain. He meets the "ownership and use" tests to exclude the gain from his income. However, he used one bedroom of the home as a business office for the last two years. His records show he claimed $3,000 of depreciation for a qualified home office, taking the deduction on his Schedule C. What is Geoff s taxable gain on the sale, if any? A. $0 B. $1,000 C. $2,000 D. $3,000

b (The sale of a second home is a taxable event in the event of a gain. Since Roshan and T atiana owned the property for longer than one year, their gain is long-term. The gain is calculated as follows: Sale price $254,000 Minus selling expenses (12,500) Net proceeds 241,500 Minus adjusted basis in the property (232,000) Taxable gain on the sale $9,500)

10. Roshan and Tatiana owned a vacation home for 14 months before selling it for $254,000. Their adjusted basis in the home was $232,000, and they incurred $12,500 of selling expenses. Prior to the sale, they did not rent the home. What is the nature and amount of their gain? A. $22,000 long-term capital gain. B. $9,500 long-term capital gain. C. $9,500 short-term capital gain. D. $34,500 long-term capital gain.

10. The answer is B. Vadik may convert his traditional IRA to a Roth IRA, but he will owe income tax on the conversion. If he wishes to convert all or a portion of his traditional IRA to a Roth IRA, he is required to pay income taxes on the amount of pretax (deductible) contributions converted, as well as the growth in value resulting from earnings on those contributions. After the funds are converted to a Roth IRA, additional earnings are tax-free, and distributions are generally not subject to tax. However, penalties apply if he withdraws from the Roth IRA within five years of the conversion. The conversion is reported on Form 8606, Nondeductible IRAs.

10. Vadik, age 42, has a traditional IRA account. He wants to convert his traditional IRA to a Roth IRA. Which of the following statements is correct? A. Vadik can convert his traditional IRA to a Roth IRA and the transaction is tax-free. B. Vadik can convert his traditional IRA to a Roth IRA. Income tax must be paid on the conversion. C. Vadik can rollover his traditional IRA to a Roth IRA only if his income is under $150,000. D. Vadik cannot convert his traditional IRA to a Roth IRA because he is under 59 and a half years of age.

d (A nonresident or dual-status alien (who is not married to a U.S. citizen or resident) must itemize deductions. Qiang cannot use the standard deduction. The other taxpayers listed are not required to itemize their deductions but may elect to do so if they wish.)

10. Which of the following taxpayers is required to itemize deductions and cannot take the standard deduction? A. Tawana, who has one dependent child. B. Vernice, who wants to deduct the alimony she paid to her ex-husband. C. Leslie, whose itemized deductions are more than the standard deduction. D. Qiang, who is a nonresident alien.

10. The answer is D. Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, is an information return, not a tax return because foreign gifts or bequests are not subject to income tax. A U.S. person must file Form 3520 if he receives gifts or bequests valued at more than $100,000 from a nonresident alien individual or foreign estate.

10.A U.S. person who receives a gift or bequest valued at more than from a nonresident alien or foreign estate must file an information return with the IRS. A. $10,000 B. $25,000 C. $50,000 D. $100,000

10. The answer is A. A taxpayer can only receive the APTC if they obtain health insurance through the Marketplace. The credit is essentially a subsidy to help a taxpayer obtain health insurance.

10.How can a taxpayer receive advance payments of the Premium Tax Credit? A. When a taxpayer applies for health insurance on the Marketplace. B. When a taxpayer receives Medicare or Medicaid. C. When a taxpayer receives an offer of coverage from a private employer. D. When a taxpayer applies for travel insurance through a private insurer.

a (Since the divorce decree was finalized in 2022, none of the alimony is deductible by Jackson, and the alimony is not reported as income by Latrice.)

10.Latrice and Jackson's divorce decree requires Jackson to pay Latrice $250 per month of child support and $1,500 per month of alimony. Their divorce was final on January 13, 2022. Jackson makes all of his child support and alimony payments on time during the year. How much of these payments is Latrice required to report as taxable income on her 2022 return? A. $0 B. $1,500 C. $18,000 D. $21,000

10. The answer is B. The American Opportunity Tax Credit is worth up to $2,500 per eligible student. The maximum credit equals 100% of the first $2,000 and 25% of the next $2,000 of qualified expenses.

10.The American Opportunity Credit has a maximum credit of up to . A. $2,000 credit per eligible student. B. $2,500 credit per eligible student. C. $2,500 credit per tax return. D. $4,000 credit per eligible student.

11. The answer is B. Adrienne and Konnor are subject to the Additional Medicare Tax. Their combined compensation is $317,000, which is $67,000 above the applicable threshold of $250,000 for joint filers. Their Additional Medicare Tax is $603 ($67,000 x 0.9%).

11. Adrienne and Konnor are married and file jointly. Adrienne has $133,000 of self-employment income. Konnor earned $184,000 in wages. Compute the amount of their Additional Medicare Tax, if any. A. $0 B. $603 C. $1,053 D. $2,853

b (Alejandra's medical expense deduction (before any AGI limitations) is $2,900 ($1,900 + $1,000). The childcare cost is not deductible, even though it was incurred while she was obtaining medical care. The amount reimbursed by insurance is not deductible. Most cosmetic procedures are not deductible, unless they are specifically to correct a disease or defect, so the Botox injections for wrinkles are not deductible.)

11. Alejandra had the following medical expenses in 2022: • Botox injections for wrinkles: $6,000. • Treatment for a broken leg: $9,000 (of which $8,000 was reimbursed by insurance). • Doctor-prescribed back brace: $1,900. • Child care while in the hospital: $200. What is her medical expense deduction before the limitation based on the 7.5%-of-AGI threshold? A. $1,900 B. $2,900 C. $7,900 D. $8,900

11. The answer is C. Amadeus is required to file an FBAR, even if he does not have any other filing requirement. There are two separate reporting requirements for taxpayers who hold certain types of foreign assets or who have certain amounts of funds in foreign bank accounts. An FBAR generally must be filed with the BSA E-Filing System if a taxpayer has more than $10,000 in offshore bank accounts. T axpayers also must file a statement with the IRS if they hold foreign financial assets with an aggregate value that exceeds $50,000 ($100,000 MFJ) on the last day of the tax year, or that exceeds $75,000 ($150,000 MFJ) at any time during the tax year. In Amadeus's case, since the funds in his foreign account total $23,000, and he does not otherwise have a filing requirement, he is only required to file an FBAR.

11. Amadeus, age 65, is a U.S. resident (green card holder) who lives in Florida, has a bank account located in Austria. He opened the account several years ago to send money to his elderly mother, Ursula, who is a citizen of Austria. He has signature authority on the account but does not withdraw money from it or collect any of the interest income on the account. On December 31, 2022, the account has a balance of $23,000 (which was the highest balance in the account for the year). He receives Social Security and otherwise does not have a U.S. filing requirement or any tax liability for the year. What is Amadeus's reporting requirement for this account? A. Amadeus is not required to file any returns. B. Amadeus must file Form 8938, Statement of Specified Foreign Financial Assets, with the IRS when he files his tax return. C. Amadeus must file an FBAR, Report of Foreign Bank and Financial Accounts. D. Amadeus and Ursula must both file an FBAR, Report of Foreign Bank and Financial Accounts, with the Treasury Department, and file Form 8938, Statement of Specified Foreign Financial Assets, with the IRS when he files his tax return.

d (Gross income does not include damages received due to physical injuries or sickness, regardless of whether the damages are paid as lump sums or as periodic payments. Archer may exclude all the payments from gross income.)

11. Archer is a former National Football League cornerback. In 2022, he is awarded a sizable settlement in a class-action lawsuit for concussion injuries for physical pain and suffering. The settlement will be paid in installments over a period of ten years. How should Archer report the damages he is awarded on his income tax return? A. He must include the entire amount of his settlement in gross income for the year. B. He must include in his gross income only the portion of the settlement paid to him each year when it is received. C. He must report the settlement on his tax return, but it is not taxable income. D. He may exclude the payments from his gross income.

A (Constance can use the amounts to pay her college tuition, but none of the other expenses are eligible for the savings bond exclusion. The savings bond education tax exclusion permits qualified taxpayers to exclude from their gross income all or part of the interest paid upon the redemption of eligible Series EE and I Bonds. Eligible educational expenses include tuition and required fees. The costs of room and board, as well as required textbooks, are not eligible expenses for the educational savings bond exclusion.)

11. Constance is using educational savings bonds to help pay her college expenses. Which of the following is a "qualified expense" for the educational savings bond exclusion? A. College tuition. B. Room and board. C. Required textbooks. D. Student health fees.

d (Alimony paid after a taxpayer's death is never deductible from the gross estate. It is merely considered a distribution to a beneficiary. Deductions from the gross estate are allowed for: • Funeral expenses paid out of the estate. • Debts owed at the time of death. • Estate administration expenses. • The marital deduction, charitable deduction, and state death tax deduction.)

11. Cullen died in 2022. Following his death, the executor of his estate paid the following bills. Which of these is not an allowable deduction in determining Cullen's taxable estate? A. Estate administration expenses, including lawyer's fees. B. State inheritance taxes. C. Charitable contributions. D. Alimony paid after the taxpayer's death.

d (The moving expense reimbursement must be reported as wages on Georgina's Form W-2. If an employer pays or reimburses moving expenses, the amounts are treated as taxable compensation to the employee. The only exception to this rule is for moving expenses reimbursed by the government on behalf of U.S. Armed Forces personnel.)

11. Georgina was offered a management position in another state on May 31, 2022. She accepts the position, and her new employer reimburses her $4,550 for her moving expenses. Georgina submitted all the proper receipts to her new employer. How should this reimbursement be treated for tax purposes? A. The employer can reimburse Georgina on a pre-tax basis. B. The expense is nontaxable as long as Georgina's employer gives her a gift card. C. The reimbursement is tax-exempt because it is a qualified moving expense. D. Because this is a reimbursement of a nondeductible expense, it is treated as taxable wages and must be included on Georgina's Form W-2.

b (Habib has a net loss on his rental of $7,400 ($20,600 - $28,000 ($17,000 + $17,000). The loss is permitted because he actively participates in the activity, and his income is below the threshold for the special loss allowance. He also can deduct the $7,400 loss from his other income i.e., his wages.)

11. Habib owns a residential rental property that he actively manages himself. He collects rental income of $20,600 during the year. The rental operating expenses total $17,000. In addition, there is, $11,000 of depreciation. Habib earns $90,000 in wages during the year, and has no other activity for the year. He files as single. What is his allowable rental loss on Schedule E? A. $0, all his losses must be carried forward. B. $7,400 C. $10,600 D. $28,000

b

11. Magnus and Grace were married on January 12, 2011. They purchased their first home together on March 30, 2011, for $150,000. On February 2, 2022, Magnus and Grace legally separate. The court grants Grace sole ownership of the home as part of their divorce settlement. The divorce became final on November 10, 2022, and the fair market value of the home was $370,000 when ownership was transferred to Grace. She sells the house on December 23, 2022, for $480,000 and keeps all the proceeds for herself. What is Grace's taxable gain in this transaction? A. $0 B. $80,000 C. $120,000 D. $210,000

11. The answer is D. Colton's wage income will never be subject to the kiddie tax. The kiddie tax only applies to investment income, never to wages or other types of "earned income." Since Colton's dividend income is way below the kiddie tax threshold, he will not be subject to the kiddie tax no matter how much he earns in wages.

11.Colton is 22, a full-time college student, and is claimed as a dependent on his parents' tax return. He has a part-time job at a local mall. Colton has $210 of dividend income in 2022. What is the maximum amount of wages Colton can earn in 2022 without triggering the kiddie tax? A. $1,100 B. $2,200 C. $12,950 D. Unlimited - the kiddie tax is not applicable.

11. The answer is C. If they file jointly, Susie can contribute $6,000 (she is under 50 years of age). Ernesto can contribute $7,000 because he is over the age of 50. The SECURE Act eliminated the age limit for making contributions to a traditional IRA, so taxpayers of any age can contribute to a traditional IRA as long as they have qualifying compensation.

11.Ernesto, age 72, and Susie, age 49, are married and file jointly. In 2022, Ernesto earned wages of $55,000, and Susie earned $4,100. If they file jointly, how much can they contribute to their traditional IRAs? A. Susie and Ernesto can each contribute $6,000 to their respective IRA accounts. B. Susie and Ernesto can each contribute $7,000 to their respective IRA accounts. C. Susie can contribute $6,000. Ernesto can contribute $7,000. D. Susie can contribute $7,000. Ernesto cannot make an IRA contribution because he is 72.

11. The answer is C. The American Opportunity Tax Credit is worth up to $2,500 per qualifying student. Rocco can potentially claim $5,000 in AOC credits on his tax return ($2,500 each for Patricia and Marico). Patricia and Marico would be qualifying students for AOC purposes because they are working on their first undergraduate degree. Kasha would not qualify, because she is working on a graduate degree after having completed a four-year undergraduate degree. The American Opportunity Credit is only available for four years of postsecondaiy school. Kasha's educational expenses may be eligible for the Lifetime Learning Credit, however.

11.Rocco has three kids in college. They are all his dependents: • Patricia, age 22, a college sophomore working on her first bachelor's degree. • Marico, age 19, a college freshman working on his first bachelor's degree. • Kasha, age 23, a graduate student, working on her first master's degree. Kasha had a four-year bachelor's degree from the same college. Based on the above scenario, what is the maximum amount of American Opportunity Tax Credits (AOTC) Rocco can claim on his tax return? A. $2,500 B. $4,500 C. $5,000 D. $7,500

c (Tahir must report the $120 as a long-term capital gain. Mutual funds frequently distribute capital gains to shareholders. Capital gain distributions for mutual funds are always taxed as long-term capital gains, no matter how long a taxpayer has actually held the mutual fund shares.)

11.Tahir purchased 100 shares in Foresthill Mutual Fund on June 1, 2022, for $750. He received a capital gain distribution of $120 in 2022, but he did not sell his shares in the mutual fund during the year. The $120 was reported to him on Form 1099-DIV. How should this be reported on his tax return? A. He must reduce his stock's basis by $120. B. He must report the $120 as interest income. C. He must report the $120 as a long-term capital gain. D. He must report the $120 as a short-term capital gain.

b (Alana would be required to file her gift tax return by April 18, 2023, the filing deadline for 2022 individual tax returns. Gift tax returns are typically due on April 15 of the following calendar year (the individual filing deadline), and payment of the tax is also due then, although the filing may be subject to a six-month extension. If the donor died during the year, the filing deadline is the earlier of (1] the due date for the donor's estate tax return (with extensions) or (2) April 15 (with a six-month extension available via a personal income tax return extension or by filing Form 8892).)

12. Alana made a cash gift to her nephew totaling $48,000 on March 20, 2022. Alana is required to file a gift tax return. Assuming no extensions are filed, when is her gift tax return due? A. March 20, 2023 B. April 18, 2023 C. October 15, 2023 D. December 31, 2023

12. The answer is A. Ralph, the noncustodial parent, can claim the Child Tax Credit if Danika signs Form 8332. He cannot claim the Earned Income Tax Credit because he is not the custodial parent. He cannot claim the Adoption Credit because the Adoption Credit is only for qualified adoption expenses. He cannot claim the American Opportunity Credit, because the credit only applies to expenses incurred for postsecondary education (i.e., college expenses, not private school tuition for K-12 students, and Amelie is a high school student).

12. Danika and Ralph are divorced. They have one child together, Amelie, age 15, who lives with Danika. Amelie is a full-time student at a private high school. All are U.S. citizens and have SSNs. Together, Danika and Ralph provide more than half of Amelie's support, including $10,000 in tuition expenses for Amelie's private school. Danika's AGI is $31,000, and Ralph's AGI is $39,000. Ralph is the noncustodial parent, but Danika signs Form 8332, giving Ralph the right to claim Amelie on his tax return. Based on this information, which credit might Ralph qualify for if he claims his daughter as a dependent? A. Child Tax Credit B. Adoption Credit. C. Earned Income Tax Credit. D. American Opportunity Credit.

a

12. During the year, Kaylie bought 52 total shares of Deerfield Corporation stock for $624. That cost included a $40 broker commission. Three months later, Deerfield Corporation issued a 2-for-1 stock split. What is her basis per share after the split? A. $6 per share. B. $12 per share. C. $24 per share. D. $26 per share.

a (Taxpayers can deduct taxes imposed during a prior year, as long as the taxes were paid during the current tax year.)

12. For a tax to be deductible in 2022, all of the following must be correct except: A. The tax must be imposed during the tax year. B. The taxpayer must be legally liable for the tax. C. The tax must be paid during the tax year. D. The tax must be paid by the taxpayer.

12. The answer is A. If Herman does not file a tax return and reconcile his advance payments of the premium tax credit on Form 8962, he could be prevented from applying for Marketplace premium tax credits in the following calendar year. [1] If a taxpayer is MFS and is eligible for relief from the requirement to file MFJ because of spousal abuse or abandonment, there is a special box on Form 8962 that should be checked. See detailed example here: https://apps.irs.gov/app/vita/content/globalmedia/teacher/premium tax credit form 8962 4012.pdf.

12. Herman gets his health insurance from the Healthcare Marketplace and receives advanced Premium Tax Credits payment during the year to help pay for his health insurance premiums. He has a filing requirement, but he does not file his tax return on time, or reconcile his Premium Tax Credit. What are the consequences of this? A. Herman could be prevented from receiving the Premium Tax Credit in the future. B. Herman can no longer obtain insurance from the Marketplace. C. Herman can be assessed an excise tax that totals 100% of his healthcare premiums. There are no consequences.

c

12. Isaiah has lived in and owned his home for 15 months. He decides to move in with his girlfriend, so he sells his home for $285,000. His adjusted basis in the home is $160,000. What is the amount and nature of his taxable gain on the sale? A. $0 B. $35,000 long-term capital gain. C. $125,000 long-term capital gain. D. $125,000 short-term capital gain.

c (Karly would report $7,500 in canceled debt income ($10,000 - $2,500) on her Form 1040 (Schedule 1).)

12. Karly is trying to get her finances in order. During the year, she negotiated a settlement with her credit card company, to which she owed a delinquent debt. She owed $10,000 on her credit card. As part of the negotiation, the credit card company agreed to accept a $2,500 settlement as payment in full. Karly was not insolvent and not in bankruptcy when the debt was canceled. What amount should be reported as "other income" on Karl/s Form 1040 (Schedule 1)? A. $0 B. $2,500 C. $7,500 D. $10,000

12. The answer is B. Dividends paid by a C corporation would not be eligible for the QBI deduction. The "Section 199A Deduction" or the "QBI deduction," allows a deduction of up to 20% of qualified business income for owners of passthrough businesses. A C corporation is not a passthrough entity, so any income earned or later distributed by a C corporation is not eligible for the 199A deduction for its shareholders.

12. Leopoldo is an entrepreneur who has an ownership stake in several businesses. He earns income from many sources. Which of the following activities cannot produce a QBI deduction for Leopoldo on his individual Form 1040? A. A rental activity reported on Schedule E B. Dividends paid to Leopoldo by a C corporation C. Income earned from a limited partnership interest. D. Pass-through income from his ownership in an S corporation.

a (Obadiah can deduct alimony paid as an adjustment to income, because his divorce was final before the 2019 tax year and is therefore considered "grandfathered." He does not need to itemize his deductions in order to take the deduction. He must file Form 1040 and enter the amount of alimony paid as an adjustment to income on Schedule 1.)

12. Obadiah paid $22,000 of alimony to his ex-wife in 2022. His divorce became final in 2016. Which of the following statements is correct? A. He can deduct alimony paid as an adjustment to income. B. The deduction for alimony is entered on Schedule B. C. He can deduct alimony only if he itemizes deductions on his tax return. D. He cannot deduct the alimony.

b (If a taxpayer serves in a combat zone as an enlisted person for any part of a month, all of his pay received for military service that month is excluded from gross income. Since Salvador served for a few days in September, as well as January, all the income for those months is excluded as combat pay. Only October through December would be taxable.)

12. Salvador is an enlisted soldier in the U.S. Army who served in a combat zone from January 30, 2022, to September 2, 2022. He returned to the United States and received his regular duty pay for the remainder of the year. How many months of his income are taxable in 2022? A. Zero. All the income is tax-free. B. Three months of wages are subject to tax. C. Four months of wages are subject to tax. D. Twelve months of wages are subject to tax.

d (Depreciation is an income tax deduction that allows a business to recover the cost or basis of property it uses over time. It is an annual allowance for the wear and tear, deterioration, or obsolescence of assets.)

12. Which of the following describes depreciation? A. A business expense that applies only to rental properties. B. An improvement to an asset that must be capitalized. C. A common type of accounting method used by most partnerships. D. A tax deduction that allows a business to recover the cost basis of an asset over time.

d (Rishi cannot claim a loss for the sale of his home. Losses on the sale of personal- use property, including a personal residence, are never deductible. If the house had been a rental property, however, the loss would have been deductible and reported on Form 4797 and Schedule D as well.)

12.Rishi purchased his main home five years ago for $150,000. He sold it at a loss, for $115,000 in 2022. Which of the following statements is correct? A. If he itemizes deductions, Rishi can claim a loss of $35,000 on his tax return. B. Rishi can claim a loss of $3,000 but must carry over the remainder to future years until the loss is completely deducted. C. Rishi can claim a loss of $35,000 because the home sale was an involuntary conversion. D. Rishi cannot claim a loss for the sale of his home.

12. The answer is C. Steven may contribute $6,000 in 2022, the maximum contribution allowed for his age, because a taxpayer may elect to treat nontaxable combat pay as qualifying compensation for IRA purposes. The interest income is not considered qualifying compensation, but his wages exceed the maximum contribution amount, so he is still allowed to make the maximum contribution for the year.

12.Steven, age 36 and single, is in the Marines. He has the following income in 2022: Nontaxable combat pay $30,500 Regular wages $2,100 Interest income $4,600 What is the maximum amount that Steven can contribute to a traditional IRA? A. $2,100 B. $4,600 C. $6,000 D. $7,000

c

13. Annalise sold her primary residence in Utah and moved to Florida. She had purchased the house in 2011 for $200,000, and she sold it in 2022 for $550,000, net of selling expenses. During the time she lived in the house, she paid $25,000 for major improvements (a new pool) and $15,000 for general repairs. Assuming that Annalise utilizes the maximum available exclusion, what amount would she report as a taxable capital gain? A. $0 B. $60,000 C. $75,000 D. $100,000

13. The answer is C. Edwin qualifies for the Lifetime Learning Credit. He does not qualify for the American Opportunity Credit because he is not a degree candidate and because his course does not meet the requirements. The "College Saver's Credit" and the "General Education Credit" do not exist.

13. Edwin is a professional bookkeeper. He takes an accounting course at the local community college to improve his work-related skills. Edwin is not a degree candidate. Which educational credit does he qualify for? A. American Opportunity Credit B. College Saver's Credit C. Lifetime Learning Credit D. General Education Credit

c (Since the alternate valuation date was elected by the executor, Renata's basis is the fair market value on the alternate valuation date, or $23,100. This is the basis that she must use in order to calculate her gain or loss on the sale of the stock. The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent's death. However, an executor has the option of choosing an alternate valuation date, which is six months after the date of death for valuing the gross estate.

13. Renata received 100 shares of stock as an inheritance from her brother, who died on January 6, 2022. Her brother's adjusted basis in the stock was $4,750. The stock's fair market value on the date of her brother's death was $26,200. Her brother's estate was valuable, and a Form 706 will be filed for the estate. The executor of the estate elects the alternate valuation date for valuing the gross estate. Six months later, on July 6, 2022, the stock's fair market value had dropped to $23,100. Renata finally received the stock on August 26, 2022, when its fair market value was $23,500. She sold the stock a week later for $23,450. What is Renata's basis in the inherited stock, in order to determine her taxable gain on the sale? A. $4,750 B. $22,200 C. $23,100 D. $23,450

d (Salome's gross profit is $5,000, and the gross profit percentage is 50%. Her selling price is $25,000 ($2,000 down payment + $8,000 to be paid over four years + $15,000 for buyer's assumption of mortgage]. Therefore, Salome's gross profit is $5,000 ($25,000 - $20,000 adjusted basis). If the entire selling price were payable in cash, her gross profit percentage would have been 20% ($5,000/$25,000). However, if a buyer assumes or pays off a mortgage or other debt on a property, the calculation of the installment sale gross profit percentage is affected. The mortgage assumption is subtracted before calculating the gross profit percentage, except to the extent that it exceeds the adjusted basis of the property for installment sale purposes, to derive what the IRS calls "contract price" rather than selling price. The mortgage assumption is considered a recovery of the seller's basis in the year of sale. Although the mortgage assumption is considered a payment, none of the gross profit is recognized in connection with the assumption. Instead, in this case, the contract price is considered to be $10,000 ($25,000 selling price - $15,000 mortgage assumption). Therefore, Salom's gross profit

13. Salome sells an empty lot with an adjusted basis of $20,000 in an installment sale. Her buyer assumes an existing mortgage on the property of $15,000 and agrees to pay Salome $10,000, with a cash down payment of $2,000 and then $2,000 every year (plus 12% interest) in each of the next four years. What is Salome's gross profit and gross profit percentage on this installment sale? A. The gross profit is $5,000, and the gross profit percentage is 20%. B. The gross profit is $10,000, and the gross profit percentage is 100%. C. The gross profit is $15,000, and the gross profit percentage is 20%. D. The gross profit is $5,000, and the gross profit percentage is 50%.

a (The building of the new deck on a rental property would be considered a depreciable improvement. The other choices are repairs and may be deducted as current expenses.)

13. Which of the following costs related to rental property should be classified as a capital improvement and depreciated rather than being expensed currently? A. Building a new outdoor deck. B. Repairing a broken toilet. C. Painting the family room. D. Patching a hole in the wall.

C (Only original documents of birth certificates and passports are accepted (or documents that have been "certified" by the original issuing agency). Notarized copies are not accepted. )

13. Which of the following documents will be accepted as a valid means of identification for a taxpayer applying for an ITIN? A. Notarized copies of birth certificates and passports. B. Color copies of birth certificates and passports. C. Original birth certificates and passports. D. Photocopies of birth certificates and passports.

d (An employer may provide up to $50,000 of life insurance coverage as a nontaxable benefit to an employee. The value of any insurance coverage that exceeds $50,000 is a taxable benefit. All of the other items are taxable.)

13. Which of the following is not taxable income to the recipient? A. Long-term disability payments from a policy paid by the recipient's employer. B. Bartering income. C. Gains from the sale of stock. D. $25,000 of group-term life insurance coverage provided by an employer.

c (Yoshiko's allowable deduction is $27,050. The answer is calculated as follows: $24,000 + $3,000 + $50 = $21,050. The deduction for investment interest expense is limited to her net investment income of $3,000. The excess amount of interest expense of $2,000 ($5,000 - $3,000) must be carried over to the next tax year and may be used to offset investment income in future tax years. Late fees paid on a qualifying home mortgage are deductible as mortgage interest on Schedule A. The credit card interest and interest paid on her car loan are not deductible.)

13. Yoshiko is single and has the following income and expenses: Form W-2 wages - $70,000 Interest income received from a CD - 3,000 Mortgage interest on a primary residence (acquisition debt of $400,000) - (24,000) Investment interest expense - (5,000) Personal credit card interest - (3,400) Car loan interest on her personal vehicle - (1,200) Late fees incurred on her mortgage - (50) She plans to itemize this year. What is her total allowable deduction for interest expense on her Schedule A? A. $24,000 B. $27,000 C. $27,050 D. $32,400

a (Zander cannot deduct any of his expenses. The educator expense deduction is only available for K-12 educators. College instructors do not qualify.)

13. Zander is a college instructor at Chico State University in California. In 2022, he paid $300 for materials that he used in the classroom. He also paid $210 in parking fees to park across the street from the university when the faculty lot was full. What amount of qualifying expenses does he have for purposes of the educator expense deduction? A. $0 B. $250 C. $300 D. $510

13. The answer is B. Nichelle's maximum contribution for 2022 is $5,300. Only her wage income qualifies as "compensation" for the purposes of an IRA contribution. The annuity income, rental income, and interest income do not qualify.

13.Nichelle is single, age 63, and has the following taxable income in 2022: Annuity income $15,600 Form W-2 wages $5,300 Interest income $2,800 Passive rental income from a residential rental $26,000 What is the maximum amount that Nichelle can contribute to her traditional IRA in 2022? A. $3,000 B. $5,300 C. $6,000 D. $7,000

b (The standard deduction amount is based on the taxpayer's filing and dependent status, and whether the taxpayer is blind or at least 65 years old. It is not based on a taxpayer's income.)

14. All of the following factors determine the amount of a taxpayer's standard deduction except: A. The taxpayer's filing status. B. The taxpayer's adjusted gross income. C. Whether the taxpayer is 65 or older, or blind. D. Whether the taxpayer can be claimed as a dependent.

14. The answer is B. A 6% excise tax applies to excess contributions. The taxpayer will not have to pay the 6% tax on the excess contribution if the excess contribution and any earnings are withdrawn by the due date of his return, including extensions. If a taxpayer corrects the excess contribution in time, the 6% penalty will apply only to the earnings on the excess contribution.

14. An "excess" contribution to an IRA is subject to an excise tax. What is the applicable excise tax rate? A. 3% B. 6% C. 10% D. 50%

c (Graciela must pay income tax and a 20% penalty on the withdrawal. Withdrawals from an HSA for non-eligible expenses are allowed, but the withdrawal is subject to a 20% penalty, in addition to regular income tax.)

14. Graciela, age 41, had an HSA account set up with her employer that had $4,000 in the account at the end of the year. She then quit her job in June and withdrew all the funds from her HSA. She had no qualifying medical expenses during 2022. Instead, she used the funds to buy a used car. What is the consequence of this action? A. Nothing; taxpayers are allowed to withdraw from their HSA accounts at any time. B. Her withdrawal is prohibited and will result in a forfeiture of the funds. C. Graciela must pay income tax and a 20% penalty on the withdrawal. D. Graciela must pay income tax and a 6% penalty on the withdrawal.

a

14. Grady exchanges his residential rental property with an adjusted basis of $50,000 and an FMV of $80,000 for 10 acres of undeveloped land with an FMV of $80,000. He plans to hold the land as an investment. What is Grady's basis in the land after this Section 1031 exchange? A. $50,000 B. $70,000 C. $80,000 D. This is not a qualifying like-kind exchange.

b (The loss is disallowed. Melissa has a wash sale because her spouse repurchased identical securities within 30 days. It does not matter if they file separate returns. If a taxpayer sells the stock and her spouse then repurchases identical stock within 3 0 days, the taxpayer has a wash sale. The fact that the taxpayers file MFS is irrelevant—the wash sale rules still apply, even if the taxpayers file separate returns.)

14. Melissa purchased 1,000 shares of Sunshine Foods, Inc. stock five years ago at $10 per share. She sold 900 shares on January 15, 2022, at $9 per share, resulting in a $900 loss. Melissa's husband, Singh, purchased 900 shares of Sunshine Foods Inc. stock on February 10, 2022. Singh and Melissa keep their finances separate and will file MFS. Which of the following statements is correct? A. Melissa can deduct the $900 capital loss on her tax return. B. Melissa has a wash sale, and her loss is not deductible. C. Singh can deduct the loss on his separate tax return. D. None of the above.

c (Verona must report $20,015 in taxable income. The wages, interest, alimony, and lottery winnings are taxable income ($13,000 + $15 + $2,000 + $5,000 = $20,015). Child support, inheritances, and worker's compensation are non-taxable income. Note: Do not confuse worker's compensation with unemployment compensation. Worker's compensation is NOT taxable, while unemployment compensation is taxable.)

14. Verona divorced from her husband in 2017. In 2022, she received the following income (listed below). What amount of her income is taxable? Amounts Wages $13,000 Interest income 15 Child support 6,000 Taxable alimony 2,000 Inheritance 10,000 Worker's compensation 1,000 Lottery winnings 5,000 A. $13,015 B. $16,015 C. $20,015 D. $30,015

c (Estate tax returns are due nine months from the date of death, although the executor may request a 6-month extension of time to file.)

14. When is an estate tax return (Form 706) due? A. Four months after the close of the taxable year. B. Six months after the close of the calendar year. C. Nine months after the date of death. D. Twelve months after the date of death.

14. The answer is B. The taxpayer must be a U.S. citizen or legal U.S. resident all year. Answer "A" is incorrect, because taxpayers do not need to have a dependent child to qualify for EITC. However, the amount of the credit is greatly increased if the taxpayer has a qualifying child. Answer "C" is incorrect, because an ITIN is not sufficient to claim EITC. A taxpayer must have an SSN that is valid for work purposes. Answer "D" is incorrect because many types of earned income qualify for EITC, including wages, self-employment income, Medicare Waiver payments, combat pay, tips, strike benefits, etc.

14.To qualify for the Earned Income Tax Credit, which of the following statements is correct? A. The taxpayer must have a dependent child. B. The taxpayer must be a U.S. citizen or legal U.S. resident all year. C. The taxpayer can have an ITIN or an SSN. D. The taxpayer's only income can be from wages or self-employment.

15. The answer is B. Aaron's son, Cameron, does not qualify because he is over the age limit for the credit. To qualify for the Child and Dependent Care Credit, the dependent must be under the age of 13 (or disabled).

15. Aaron pays for daycare costs for the following individuals so he can work. Each is a qualifying individual for purposes of the Child and Dependent Care Credit except: A. Aaron's wife, Lilly, who is completely disabled. B. Aaron's son, Cameron, age 14, who is a student, and not disabled. C. Aaron's nephew, Andy, age 10, who is also his dependent. D. Aaron's mother, Polly, who is 72, and is permanently disabled.

b (Deborah can deduct 50% of the self-employment tax she paid as an adjustment to income on Schedule 1 of her Form 1040.)

15. Deborah was a self-employed poultry farmer in 2022. She files Schedule F to report her income and loss. She had total self-employment tax of $4,896 on her Schedule SE. Which of the following statements is correct? A. She can deduct 100% of the self-employment tax as an adjustment to income on Form 1040. B. She can deduct 50% of the self-employment tax as an adjustment to income on Form 1040. C. She can deduct 50% of the self-employment tax as a business expense on Schedule F. D. She cannot deduct the self-employment tax.

a

15. Fleur is single and bought her first home ten years ago for $350,000. She lived continuously in the house until she sold it in 2022 for $620,000. Which of the following statements is correct? A. She may exclude $250,000 of the gain and report the remainder as a long-term capital gain. B. She may exclude the entire gain. No amount needs to be reported. C. She may not exclude any of the gain. D. She may exclude $250,000 of gain. The remaining amount must be reported as ordinary income.

c (The first $8 of nondividend distributions per share reduces Francoise's basis to zero. In 2022, the final $2 of nondividend distribution must be reported as a capital gain.)

15. Francoise bought 1 share in the Vanes Mutual Fund four years ago for $8. Since then, she received the following nondividend distributions: • 2019: $2 per share • 2020: $2 per share • 2021: $3 per share • 2022: $3 per share What is Francoise's remaining basis in the 1 share, and what amount of gain (if any) must she report in 2022? A. $0 basis; $6 gain. B. $14 basis; $0 gain. C. $0 basis; $2 gain. D. $8 basis; $3 gain.

15. The answer is C. Gwendolyn can make a traditional IRA contribution, but she cannot deduct her IRA contribution. Contributions to a traditional IRA who participates in an employer-sponsored retirement plan are allowed, but their deductibility is phased out at higher income thresholds (these thresholds are in the chapter). When a taxpayer's MAGI reaches a certain threshold, the taxpayer's traditional IRA contribution is not deductible (if they are covered by a workplace plan). If Gwendolyn makes nondeductible contributions to her traditional IRA, she must attach Form 8606, Nondeductible IRAs, to her tax return.

15. Gwendolyn, age 38, is single and has no dependents. She contributes $6,000 to a traditional IRA, and she also participates in her employer's 401 (k) plan. She has a modified adjusted gross income of $239,000 in 2022. Which of the following is correct regarding her IRA contribution? A. It is fully deductible. B. It is partially deductible. C. It is not deductible. D. It is subject to a 6% excise tax.

c (Since they are both filing MFS, Angeline is forced to either itemize her deductions or claim "zero" as her standard deduction. A taxpayer whose spouse itemizes deductions must either itemize deductions or claim zero as the standard deduction. This only applies in situations when both taxpayers are filing MFS. If one spouse qualifies for Head of Household filing status, then neither spouse would be forced to itemize.)

15. Herschel and Angeline will both file "married filing separate" tax returns in 2022. Herschel plans to itemize his medical expenses; therefore, what must Angeline do? A. They will have to file jointly. B. Angeline must take the standard deduction. C. Angeline must either itemize her deductions or claim zero as her standard deduction. D. Angeline may choose to itemize or take the standard deduction.

a (Foreclosure of a vacation property does not qualify for the exclusion of canceled debt income. Canceled mortgage debt related to second homes and vacation homes does not qualify, (unless the taxpayer has filed bankruptcy or is insolvent).)

15. In which of the following instances is canceled debt not excluded from income in 2022? A. Mortgage debt of a vacation home where the borrower is not insolvent or in bankruptcy. B. Qualified farm indebtedness. C. Medical debt discharged in bankruptcy. D. Student loans discharged after death.

b (Since Matthew declined to file an estate tax return, he did not elect portability. No estate tax is due after Sandy's death because the value of her estate is below the exclusion amount. However, all her assets passed to her surviving spouse. Matthew's estate is now in excess of the annual exclusion amount. Assuming there is no change in the value of Matthew's assets and no applicable deductions upon his passing, there will be estate tax due upon his death. He could have avoided this scenario if he had filed an estate tax return and elected portability.)

15. Sandy and Matthew are married and have combined assets valued at approximately $15 million. They are both U.S. citizens. On May 10,2022, Sandy dies. The FMV of Sandy's estate is $7 million on the date of her death. Matthew is the executor of his wife's estate and her sole beneficiary. Since the value of Sandy's estate was below the $12.06 million threshold, Matthew decides not to file an estate tax return, and he declines to take the portability election. What future impact does this have on Matthew, the surviving spouse? A. There is no taxable effect on Matthew in this scenario. B. Since Matthew declined to file an estate tax return, he did not elect portability. There will be estate tax due upon Matthew's death, assuming that the value of his assets does not decline, and there will be no deductions for estate tax purposes. C. Matthew will owe estate tax in 2022 on his inheritance. D. Sandy's estate will owe estate tax in 2022. Her estate tax return must be filed by the executor.

b (Yoshiko's shares are now valued as follows: three with a basis of $10 each ($30 + 3), and three with a basis of $15 each ($45 + 3). If a taxpayer receives a nontaxable stock dividend, she must divide the adjusted basis of the old stock by the number of shares of old and new stock. The result is the taxpayer's basis for each share of stock. The basis per share after the 3-for-1 stock split is calculated by dividing the original price by 3.)

15. Yoshiko owns two shares of common stock in Singleton Toys, Inc. She bought one share for $30 in 2017 and the other for $45 in 2018. In 2022, the corporation distributed two additional shares of common stock for each share held (a 3-for-1 stock split). Yoshiko owns six shares after the stock split. How is Yoshiko's basis allocated between these six shares? A. All six shares now have a basis of $12.50. B. Three shares have a basis of $10 each, and three have a basis of $15 each. C. The shares are all valued at $45 each. D. Three shares have a basis of zero, and three shares have a basis of $30.

b

16. Alistair and Gabrielle are married and file jointly. They sold their primary residence in Los Angeles after living in it for 292 days because Gabrielle gave birth to triplets, and they needed a larger place to live. They originally bought their home for $585,000 and sold it for $845,000. The total gain on the sale of their home is $260,000. Since they lived there for less than two years but meet one of the exceptions, what is the actual amount of their reduced exclusion? (Two years = 730 days.) A. $60,000 B. $200,000 C. $260,000 D. $500,000

b (The answer is $42,000 ($40,000 wages + $2,000 prize). Samantha must recognize the prize even though she has not taken the trip because she had constructive receipt of the winnings. The accident settlement and child support payments are not taxable.)

16. Avery and Samantha are married and file jointly. They received the following income during the year. How much income should be reported on their joint return? • W-2 income for Samantha for wages of $40,000. • 1099-MISC for Samantha for $2,000, the value of a prize trip she won to the Bahamas. She is planning to take the trip in the following year. • Court settlement of $10,000 paid to Avery from a car accident for injuries he suffered. • $4,000 child support for Samantha's son from a previous marriage. A. $40,000 B. $42,000 C. $46,000 D. $52,000

b (Only Debby's sick pay is taxable, because sick pay from an employer is always taxable as wages and is therefore included in Debby's gross income. Settlements for personal injuries from an accident are not taxable. If a taxpayer pays the full cost of an accident insurance plan, the benefits for personal injury or illness are not included in income. If the employer pays the cost of an accident insurance plan, the amounts are taxable to the employee.)

16. Debby broke her leg in a car accident and was unable to work for three months. She received an accident settlement of $13,000 from her insurance company. During this time, she also received $7,500 of sick pay from her employer. In addition, she received $5,000 from an accident policy she had purchased herself. How much of this income is taxable to Debby? A. $5,000 B. $7,500 C. $12,500 D. $18,000

a

16. Four years ago, Sunil purchased 100 units of Ethereum, a cryptocurrency, for $9,000. On March 5, 2022, he exchanged all 100 units of Ethereum for 3.47826 units of Bitcoin, another cryptocurrency, worth $160,000 on the date of exchange. What gain, if any, must Sunil report in 2022? A. $151,000 long-term capital gain B. $151,000 short-term capital gain C. $151,000 long-term capital loss D. Sunil has no gain or loss from the exchange.

16. The answer is A. Joanne is allowed to make her retirement contribution at any time during the year up to the due date of her tax return, not including extensions. IRA contributions for 2022 must be made by April 18, 2023 (the due date for 2022 returns).

16. Joanne e-files her 2022 tax return early, on February 27, 2023. What is the latest date that she can make a traditional IRA contribution for the 2022 tax year? A. April 18, 2023 B. February 27, 2023 C. December 31, 2022 D. October 15, 2023 (with a valid extension)

a (Kiara can deduct $1,900 for her donation. She is allowed to take the lesser of the car's FMV or the amount for which the charity was able to sell the car. Since the charity sold the car for only $1,900, that is the amount of her allowable deduction, regardless of any other estimates of its value.)

16. Kiara bought her car seven years ago for $15,000. A used car guide shows the FMV for her model and make of car is currently $5,000. Kiara's cousin, Buckley, offered her $4,500 for the car a week ago, but she declined to sell it to him. Instead, she decides to donate her used car to a qualified charity. At the end of the year, she receives a Form 1098-C from the charity showing the car was sold at auction for $1,900. How much is Kiara's allowable charitable deduction on Schedule A? A. $1,900 B. $4,500 C. $5,000 D. $15,000

b (The most that they can deduct is $590 $300 + $290. Mackenzie can count only the first $300 of her educator expenses, but because they are married and filing jointly, and both are teachers, they can count up to $300 for Cardan. Since Cardan only spent $290, then that is his maximum credit. Each person's expenses have to stand alone based on an example in the IRS' VITA training module.)

16. Mackenzie and Cardan are married and file jointly. Both are full-time high school teachers. Mackenzie spent $495 on books and supplies for her chemistry students. Cardan teaches art education, and he spent $290 on paints and canvas for his class. All of the supplies they purchased are qualifying supplies. What is the maximum in educator expenses that they can deduct on their tax return in 2022? A. $300 B. $590 C. $600 D. $785

d (Vladimir's basis in the home is $120,000, the FMV on the date of his mother's death. Heirs can generally use a stepped-up basis for inherited property, regardless of what the deceased person actually paid for the asset. The improvements that his mother made while she was still alive are also irrelevant in Vladimir's basis calculation. The basis of inherited property is generally the FMV of the property on the date of the decedent's death. When the property is ultimately sold, the beneficiary's gain or loss will be calculated based on the change in value from the date of death.)

16. Vladimir wishes to sell a home that he inherited from his mother in 2022. His mother paid $45,000 for the home fifteen years ago. She put a new roof on the property two years ago at the cost of $10,500. The fair market value of the home on the date of his mother's death was $120,000. An estate tax return was not required for his mother's estate, and the alternate valuation date was not elected. What is Vladimir's basis in the inherited home? A. $34,500 B. $45,000 C. $55,500 D. $120,000

a (The portability election allows a surviving spouse's estate the right to use a deceased spousal unused exclusion (DSUE), which is the remaining unused portion of the previously deceased spouse's basic exclusion amount. The portability election must be made by filing an estate tax return for the deceased spouse, even if no estate tax is owed.)

16. Which of the following statements concerning the deceased spousal unused exclusion (DSUE) is correct? A. A portability election can only be made by filing Form 706. B. The DSUE allows an unlimited estate tax deduction for a surviving spouse. C. The predeceased spouse must have died from natural causes. D. The maximum DSUE available for a spouse who dies in 2022 is $16,000.

16. The answer is A. Zahir and Elmeria can claim a maximum credit of $2,000 on their joint tax return. The Lifetime Learning Credit is allowed for 20% of the first $10,000 of qualified tuition and fees paid during the year. The credit is per tax return, not per student, so only a maximum of $2,000 can be claimed each year, no matter how many qualifying students a taxpayer may have.

16. Zahir has two children in graduate school. His wife, Elmeria, also attends a graduate program at a local university. Zahir and his wife file jointly. What is the maximum amount of the Lifetime Learning Credit that Zahir and Elmeria can claim on their joint return? A. $2,000 B. $2,500 C. $4,000 D. $6,000

c (Claudine's basis in the land is calculated as follows: $250,000 (cost basis) + $260,000 (demolition costs) = $510,000. The loan amount is irrelevant because the act of borrowing alone does not increase the basis; the amount spent on the improvement of the property increases its basis.)

17. Claudine owns a piece of land that she purchased several years ago for $250,000. The land is now worth $750,000. During the year, she borrows $500,000 from the bank to improve the property. She uses $260,000 of the loan to demolish two existing buildings on the property and clear the land for the construction of a stockyard and horse stable, which will begin next year. What is Claudine's basis in the land after the demolition is completed? A. $250,000 B. $460,000 C. $510,000 D. $750,000

c (Ginny must report her wages, interest income, gambling income, and settlement from a discrimination lawsuit ($14,000 + $125 + $1,000 + $10,000 = $25,125). The child support payments and the food stamp benefits are not taxable. The gambling losses do not affect the inclusion of the gambling income within gross income. However, if Ginny chooses to itemize deductions, her gambling losses may be deducted on Schedule A to the extent of her gambling income. If Ginny does not itemize, the gambling losses are not deductible.)

17. Ginny had the following income and losses in 2022:Amounts Wages $14,000 Interest income 125 Gambling winnings 1,000 Gambling losses (2,000) Discrimination lawsuit settlement 10,000 Child support payments 9,000 Food stamp benefits 5,000 How much gross income must Ginny report on her tax return? A. $14,125 B. $15,125 C. $25,125 D. $39,000

b (Noah realized a long-term gain of $300 because the basis and holding period would automatically default to the oldest block of shares, which he purchased in 2020 (over a year ago]. The "FIFO method" is used if the taxpayer cannot or does not specifically identify the shares sold.)

17. Noah bought two blocks (each of 400 shares) of Acme Corporation stock. He purchased the first block on May 30, 2020, for $1,200 and the second block on June 8, 2022, for $1,600. On July 12, 2022, he needed money to fix his car, so he sold 400 shares for $1,500 but did not specify which block of stocks he sold. Noah's stock sale results in a: A. Long-term loss of $100. B. Long-term gain of $300. C. Short-term loss of $100. D. Short-term gain of $300.

b (Oscar's donation is limited to $50. Generally, the FMV of used clothing and household goods is far less than the original cost. For used clothing, a taxpayer should claim as a deduction the value the price that a buyer typically would pay in a thrift shop or at a garage sale for those items.)

17. Oscar donated a leather coat to a thrift store operated by his church. He paid $450 for the coat three years ago. Similar coats in the thrift store sell for $50. What is Oscar's charitable deduction? A. $0 B. $50 C. $400 D. $450

d (Federal estate tax is not deductible from the gross estate. The other items listed are allowable deductions from the gross estate. The decedent's unpaid medical expenses represent liabilities that can be deducted from the gross estate. Alternatively, if the expenses are paid by the estate during the one-year period beginning with the day after death, the personal representative can elect to treat all or part of the expenses as paid by the decedent at the time they were incurred and deduct them on the decedent's final tax return (1040).)

17. Which of the following items is not an allowable deduction from the gross estate? A. Debts owed at the time of death. B. Medical expenses of the decedent. C. Funeral expenses of the decedent. D. Federal estate tax.

17. The answer is B. The American Opportunity Credit (AOTC) is the only answer that is a refundable tax credit. Up to 40% of the American Opportunity T ax Credit is refundable, meaning that the taxpayer can receive a refund even if they have zero tax liability.

17.Which of the following education tax benefits listed below is partially refundable? A. Coverdell Education Savings Account B. American Opportunity Credit C. Lifetime Learning Credit D. Student Loan Interest Deduction

c (Bruno does not have a gift tax return requirement. Tuition or medical expenses paid directly to a medical or educational institution for someone else are not included in the calculation of taxable gifts, and there is no reporting requirement.)

18. Bruno, age 71, pays $19,000 of college tuition for his favorite granddaughter, Margaret, age 25, directly to her college. Bruno does not claim his granddaughter as a dependent. Which of the following statements is correct? A. The gift is taxable, and Margaret must report the gift tax on her individual tax return. B. The gift is not taxable, but Bruno must file a gift tax return. C. The gift is not taxable, and no gift tax return is required. D. The gift is taxable, and Bruno must file a gift tax return.

c (Because Colin bought shares in the same corporation within 30 days of its sale at a loss, this is considered a "wash sale," and he cannot deduct his loss of $250 on the sale. Instead, he must add the disallowed loss to the cost of the new stock purchased on December 22, 2022 to obtain his adjusted basis in the stock.)

18. Colin purchased 100 shares of Entertainment Media, Inc. stock for $1,000 on January 3, 2022. He sold these shares for $750 on December 22,2022. Colin has seller's remorse, and on January 19,2023, he repurchases 100 shares of Entertainment Media for $800. Which of the following statements is correct? A. Colin can report a $250 capital loss in 2022. B. Colin can report a taxable loss in 2023. C. Colin cannot deduct his stock loss of $250 and must add the disallowed loss to his basis. D. Colin can deduct the loss as an adjustment to income in 2023.

a (Clifford's basis is $102,000. The basis of gifted property for the donee is generally equal to the donor's adjusted basis, which is called a "transferred basis," when its FMV exceeds the donor's basis ($120,000 minus $18,000 depreciation = $102,000) at the time of the gift. While not the case here, if the fair market value of the property on the date of the gift is less than the transferred basis, the donee's basis for gain is the transferred basis. However, if the donee reports a loss on the sale of gifted property when the fair market value of the property on the date of the gift is less than the transferred basis, his basis is the lower of: the transferred basis or the FMV of the property on the date of the gift. Example: Irwin buys 100 shares of Cortex Cars, Inc. for $50 per share. His cost basis is $50 x 100 shares or $5,000. Six months later, Cortex Cars, Inc. declares a 2-for-1 stock split, and Irwin receives 100 additional shares of stock. Therefore, his new basis in each individual stock is $25 = ($5,000 + [100 + 100]). His total basis in the shares remains $5,000.)

18. Flora gifted her grandson, Clifford, a residential rental property. She had purchased the property ten years ago for $120,000 and has claimed $18,000 in depreciation. The fair market value of the rental house on the day of transfer was $144,000. Assuming no gift tax was paid, what is Clifford's basis in the property? A. $102,000 B. $120,000 C. $126,000 D. $144,000

a (Only the mortgage interest and property taxes are deductible. Neither the homeowner's association dues, nor the fine, or political contribution are deductible. Although the orthodontic fees for the tooth extraction are a qualified medical expense, the amounts are less than 7.5% of her AGI, so she cannot deduct her medical costs, either. The answer is figured as follows: Homeowners' association dues NO Fine from homeowner's association for violation of bylaws NO Mortgage interest on her main home 9,000 Property taxes on her main home 2,800 Political contributions to the Green Party NO Unreimbursed orthodontic fees for a tooth extraction NO Total allowable deductions on Schedule A $11,800)

18. Leandra's adjusted gross income was $75,000 in 2022. She incurred the following expenses: Homeowners' association dues - $1,000 Fine from homeowner's association for violation of bylaws - $100 Mortgage interest on her main home - $9,000 Property taxes on her main home - $2,800 Political contributions to the Green Party - $250 Unreimbursed orthodontic fees for a tooth extraction - $1,200 Based on the information provided, what is the amount of expenses they can deduct as an itemized deduction on Schedule A? A. $11,800 B. $12,250 C. $13,450 D. $14,450

c (Lucian must report $14,000 in taxable income. The amounts for loss of wages and emotional distress are taxable as ordinary income ($4,000 + $10,000 = $14,000). Damages for emotional distress that is not due to physical injury or sickness are usually taxable (as in this case where the distress was attributed to the job discrimination and lawsuit). The damages awarded for physical injury are not taxable.)

18. Lucian, age 70, experiences age-related discrimination on his job and sues his company. After he files the lawsuit, he is physically attacked by the company owner, who breaks Lucian's arm. The court awards Lucian the following amounts: • $4,000 for emotional distress attributable to the age discrimination lawsuit. • $10,000 for loss of wages attributable to the age discrimination lawsuit. • $35,000 for physical injury related to the assault. • $16,000 reimbursement for medical expenses related to the assault How much of this award is taxable to Lucian? A. $4,000 B. $10,000 C. $14,000 D. $49,000

18. The answer is B. Orrin cannot claim the EITC for two tax years. There are restrictions on EITC claims by taxpayers for whom a previous claim was denied or reduced due to any reason other than a math or clerical error. If a taxpayer was determined to have claimed the EITC due to reckless or intentional disregard of the EITC rules, he cannot claim the EITC for two tax years. If the error was due to fraud, the taxpayer cannot claim the EITC for ten tax years.

18. Orrin was audited in 2022, and the IRS determined that he claimed the Earned Income Tax Credit erroneously due to reckless disregard of the EITC rules. For how many years is Orrin prohibited from claiming the EITC? A. None. B. Two years. C. Five years. D. Ten years.

d (Since the royalty check was received before the taxpayer died, it is not considered IRD income. Income in respect of a decedent is taxable income earned but not received by the decedent by the time of death. The fact that the royalty check was not cashed has no bearing on the nature of the income, and it should be reported as taxable income on the decedent's final income tax return (Form 1040).)

19. Which of the following is not income in respect of a decedent (IRD)? A. Wages earned before death but still unpaid at the time of death. B. Vacation time paid after death. C. IRA funds that were distributed before the taxpayer's death, but not received until after death. D. A royalty check that was received before death but not cashed.

d (Property taxes paid on a home in Mexico are not deductible. The deduction for foreign real property taxes is no longer allowed.)

19. Which of the following taxes is not deductible on Schedule A? A. Property taxes paid on a vacation home located in Hawaii. B. State income taxes. C. Property taxes based on a vehicle's value [a portion of DMV fees). D. Property taxes paid on a home in Mexico.

19. The answer is D. Bethany is eligible for the American Opportunity Tax Credit because she is pursuing a degree and is enrolled at least half-time for at least one academic period during the year. Answer "A" is incorrect, because graduate students do not qualify. The AOTC is a credit for qualified education expenses paid for an eligible student only for the first four years of higher education. Answer "B" is incorrect because courses that do not lead to a degree, certificate, or other recognized credential do not qualify for the AOTC. Answer "C" is incorrect because students with felony drug convictions are ineligible for this credit.

19.Which of the following individuals is eligible for the American Opportunity Tax Credit? A. Garrett, who is enrolled full-time as a graduate student pursuing a master's degree in biology after having completed a four-year undergraduate degree. B. Lucy, who is taking a ceramics class at a community college for fun. C. Willie, who is a full-time undergraduate student and was convicted of a felony for distribution of cocaine. D. Bethany, who is a college freshman pursuing an undergraduate degree in computer science, and who attended classes half-time the entire school year.

2. The answer is C. Assuming Alfred has sufficient qualifying compensation; he could contribute $3,500 to his traditional IRA ($2,500 + $3,500 = $6,000). The 2022 maximum for contributions to all types of IRAs is $6,000 per taxpayer (for taxpayers under the age of 50). Taxpayers are allowed to have different types of IRA accounts, but the maximum contribution limits apply to their total contributions for the year.

2. Alfred is 42 and unmarried. He earned $47,000 in wages during the year. He has a Roth IRA and a traditional IRA with two different financial institutions. In 2022, he contributed $2,500 to his Roth IRA. He also wants to contribute to his traditional IRA account. What is the maximum he can contribute to a traditional IRA in 2022? A. $0 B. $2,500 C. $3,500 D. $4,500

b (Only Christopher's home mortgage interest [$5,000) is potentially deductible as interest on Schedule A. The other types of interest are all personal interest, which is not deductible. Interest paid on an empty plot of land is not deductible as mortgage interest. Only the interest secured by an actual home (not land) is deductible as mortgage interest.)

2. Christopher is unmarried and files as head of household. During the year, he paid: Mortgage interest on his main home (acquisition mortgage of $300,000) - $5,000 Credit card interest - $600 Auto loan interest - $4,000 Loan interest on an empty lot that was purchased to build a second home - $3,000 What amount can they report as deductible mortgage interest? A. $0 B. $5,000 C. $8,000 D. $8,600

c (The estate tax return for Claude's estate is due on February 4, 2023. If required to be filed, Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, must be filed nine months after the date of a decedent's death. Any estate tax would be owed at this time. An executor may request a six-month extension to file Form 706, but the tax would still be owed on the earlier date.)

2. Claude dies on May 4, 2022. His assets are valued at $60 million on the date of his death, so a Form 706 needs to be filed for his estate. When is the estate tax return due? A. November 4, 2023 B. November 5, 2023 C. February 4, 2023 D. April 18, 2023

2. The answer is A. Evelyn is not required to issue a Form W-2 to her nanny as less than $2,400 in wages were paid and no Federal income taxes were withheld. In addition, Evelyn does not have to report or pay Social Security and Medicare taxes on the nanny's wages. If an employer pays a household employee cash wages of less than $2,400 in 2022, the employer is not required to report or pay Social Security and Medicare taxes on that employee's wages. Regardless of whether Form W-2 is issued, the nanny must report the income on Form 1040.

2. Evelyn hired a part-time nanny to work in her home. She paid the nanny $1,950 of wages in 2022 before firing her for being constantly late. No Federal payroll or income taxes were withheld from the nanny's paychecks. Which of the following statements is correct? A. Evelyn is not required to issue a Form W-2 to the nanny and does not have to report or pay Social Security and Medicare taxes on the nanny's wages. B. The income is not taxable to the nanny. C. No reporting is required by either party if the wages are paid in cash. D. Evelyn can deduct the nanny's wages as a business expense on Schedule C.

a (Because Jasmine worked only 440 hours as an educator during the tax year, she cannot deduct her educator expenses as an adjustment to income. An educator must have at least 900 hours of qualified employment during the school year to take this deduction as an adjustment to income.)

2. Jasmine is a part-time art teacher at an elementary school. She spends $350 on qualified expenses for her art students and $75 on materials for a health course that she also teaches. She worked 600 hours as an educator during the tax year. How much can she deduct in educator expenses as an adjustment to income? A. $0 B. $250 C. $300 D. $375

2. The answer is C. Lizzie can claim a maximum adoption credit of $29,780 ($14,890 per child). Note that the adoption credit is not refundable, so any amount that she cannot use in the current year may be carried forward up to 5 years.

2. Lizzie adopted two children from Korea. The foreign adoptions became final in 2022. She incurred $42,000 in legal, travel, and agency fees. How much can Lizzie claim in 2022 as an adoption credit? A. $0 B. $14,890 C. $29,780 D. $42,000

c (Depreciation begins on the placed-in-service date when an asset becomes ready and available for first use. Typically, the placed-in-service date and the purchase date are the same, but that is not always the case. Since Pamela did not have the HVAC unit installed and ready for use until January 2, 2023, she must wait until 2023 to begin depreciating the unit. The fact that the unit was paid for with a credit card is irrelevant it is treated the same as if it was paid by check or cash.)

2. Pamela ordered an HVAC unit for her rental property on November 30, December 28, 2022, and was installed and ready for use on January 2, 2023. a credit card and paid off the card on February 3, 2023. On which date considered "placed in service" for depreciation purposes? A. November 15, 2022 B. December 28, 2022 C. January 2, 2023 D. February 3, 2023

2. The answer is C. Part III of Schedule B (Form 1040) is completed by taxpayers who have financial accounts in foreign countries.

2. Part_____ of Schedule B (Form 1040) is completed by taxpayers who have financial accounts in foreign countries. A. Part I. B. Part II. C. Part III. D. Schedule B is not used for this purpose.

b

2. Rajendra exchanged farmland that he held for investment for an office building. The original cost of his farmland was $16,000, and he made $10,000 of land improvements (such as permanent fencing) prior to the exchange. The fair market value of the office building at the time of the exchange was $66,000. Rajendra did not receive or pay any cash in the exchange. What is Rajendra's basis in the office building after the exchange? A. $16,000 B. $26,000 C. $40,000 D. $66,000

c (To determine the holding period, a taxpayer must begin counting on the day after the acquisition date. If a taxpayer's holding period is not more than one year, the taxpayer will have a short-term gain or loss. The amount realized in the transaction has no bearing on the holding period.)

2. When trying to determine the holding period for an investment property, which of the following is important? A. The cost of the property. B. In the case of gifted property, the amount of the gift. C. The date of acquisition. D. The amount realized in the transaction.

b (Points related to a loan used to acquire property may be deductible in the year they are paid or amortizable over the term of the loan. Points are a type of mortgage interest. They are not added to the basis of the property.)

2. Which of the following is not added to the basis of property? A. Legal and accounting fees for transferring the title. B. Points on a loan. C. Sales tax. D. Freight-in charges.

2. The answer is C. The Additional Medicare Tax is applied to MFS taxpayers whose earned income exceeds $125,000. Lizzie will owe an additional 0.9% tax on the $15,000 of earned income that exceeds the $125,000 threshold ($15,000 x .009 = $135 Additional Medicare Tax).

2. Which of the following taxpayers would be subject to the Additional Medicare Tax? A. Nasir, who files as HOH and earned $180,000 of wages and $50,000 of interest income. B. Kerrie, who is single and earned $196,000 of wages. C. Lizzie, who files separately from her husband and earned $140,000 of wages. D. Adley, who is a qualifying widower and has $200,000 in wages.

c (Unemployment compensation is taxable income. None of the other amounts would be taxable to the recipient.)

2. Which of the following would be considered taxable income to the recipient? A. Life insurance proceeds paid to a beneficiary. B. Adoption expense reimbursements. C. Unemployment compensation. D. Welfare benefits.

b (Any IRA distributions from an inherited IRA are taxable to Emma, but not subject to an early withdrawal penalty. Distributions of retirement plan benefits or distributions from taxable IRA accounts to a decedent's beneficiaries are generally subject to income tax when received. The decedent's surviving spouse may be able to defer taxation by rolling over the assets of a taxable IRA to another IRA or to a qualified plan. However, a child or other beneficiary is not allowed this same treatment. Qualified distributions from a Roth IRA or of previously nondeductible contributions to a traditional IRA are generally not taxable.)

20. Emma's father dies during the year. Emma is the sole beneficiary of her father's traditional IRA. Emma is 46 years old when she takes possession of her father's IRA. Which of the following statements is correct about the distributions from the inherited IRA account? A. Emma can avoid taxation by rolling over the IRA to her own IRA account. B. Any distributions are taxable to Emma but not subject to an early withdrawal penalty. C. Any tax on the distributions must be paid from her father's estate. D. The distributions are taxable to Emma, and also subject to an early withdrawal penalty because Emma is younger than 59%.

20. The answer is D. Household employee income is considered earned income because it is a type of wages. Alimony, capital gains, interest and dividends are not considered earned income for purposes of the EITC.

20. For purposes of the EITC, which of the following types of income is considered "earned" income? A. Taxable alimony B. Interest and dividends C. Capital gains D. Household employee income

c (Isaac's casualty loss is $6,000. Isaac must reduce his ($90,000) loss by the $80,000 insurance proceeds and the $4,000 he received from his employer.)

20. Isaac's main home was damaged by a hurricane, and his county was later deemed a federal disaster area. He incurred $90,000 worth of flood damage to his home, but $80,000 was reimbursed by his homeowner's insurance. His basis in the home was $200,000 at the time of the hurricane. Isaac's employer had a disaster relief fund for its employees. Isaac received $4,000 from the fund and spent the entire amount on repairs to his home. What is Isaac's casualty loss (before the calculation of any limitations)? A. $0 B. $4,000 C. $6,000 D. $10,000

b (The contributions to the political organization and the Chamber of Commerce are not deductible on Schedule A. Bowen's allowable deduction is calculated as follows: $100 + $120 + $75 + $25 = $320.)

21. Bowen donated to all of the following nonprofit organizations in 2022. What is his allowable deduction for charitable gifts on Schedule A? Organization Amount Methodist church -$100 County animal shelter - 120 Salvation Army - 75 American Red Cross - 25 Republican party - 50 Chamber of Commerce - 300 Total contributions - $670 A. $220 B. $320 C. $520 D. $670

21. The answer is B. A refundable credit is generally more valuable in reducing tax liability. Refundable credits, such as the Earned Income Tax Credit, are not limited by an individual's tax liability. The taxpayer can receive a refund even with zero tax liability.

21. Generally, which is most beneficial to taxpayers when it comes to reducing income tax liability: a nonrefundable credit, a refundable credit, or a deduction? A. A nonrefundable tax credit. B. A refundable tax credit. C. A tax deduction. D. All are equally beneficial in reducing income tax liability.

b (In order to make a gift to one individual in excess of the annual exclusion of $16,000 and avoid using any of their basic exclusion amounts; a married couple can use gift splitting. Gift splitting allows married couples to give up to $32,000 to a single person in 2022 without making a taxable gift, but they each must consent to the gift, and each may be required to file a gift tax return. Gifts to a spouse generally do not require a return to be filed, unless the spouse is not a U.S. citizen. Even if the receiving spouse is not a U.S. citizen, the limits are higher than the normal gift limit ($164,000 for 2022). Therefore, a $40,000 gift to a spouse (even one who is not a U.S. citizen) would not have to be reported on a gift tax return.)

21. In which case must a gift tax return be filed? A. A married couple gives a gift of $16,000 to an unrelated person. B. A married couple gives a gift of $25,000 to a related person with a single check. C. A single individual gives a gift of $14,000 to an unrelated person. D. A wife gives a gift of $40,000 to her husband who is not a U.S. citizen.

22. The answer is C. Childcare costs to obtain medical care are not a deductible expense. Deductible costs must be "work-related" and for a child under 13, a disabled dependent, or a disabled spouse of any age. Childcare costs incurred so that the taxpayer can volunteer, obtain medical care, run errands, or do other personal businesses do not qualify.

22. All of the following are qualified expenses for purposes of the Child and Dependent Care Credit except: A. A $500 payment to a grandparent for child care while the taxpayer is employed. B. A $300 payment to a daycare center while the taxpayer is looking for employment. C. A $500 child care expense while the taxpayer obtains emergency medical care. D. A $600 adult daycare expense for a disabled spouse while the taxpayer works.

c (If elected by Esther (the executor), the alternate valuation date is May 5, 2023. An estate is normally valued on the date of the decedent's death. However, an executor may elect, under certain requirements, an alternate valuation date for an estate, which would be six months after the date of death.)

22. Esther is the executor for her father's estate. He died on November 5,2022. Which of the following dates would be the alternate valuation date for his estate (if elected)? A. August 5, 2023. B. April 18, 2023. C. May 5, 2023. D. October 15, 2023.

b (The antique furniture donation would require an appraisal. Lamar must also complete Form 8283 and attach it to his tax return. The IRS requires a taxpayer to obtain a written appraisal by a qualified appraiser for any noncash contribution of more than $5,000. The antique furniture would require a qualified written appraisal before the taxpayer could deduct the donation on his tax return. Lamar must retain a copy of the appraisal for his own records, but in most cases, he does not have to attach the appraisal to his tax return. Answer "A" is incorrect because a cash donation does not require an appraisal. Answer "C" is incorrect because the donation of stock or other securities does not require an appraisal. Answer "D" is incorrect because a donation of a vehicle valued at less than $500 does not require an appraisal or any other type of documentation beyond a written acknowledgment from the organization.)

22. Lamar donates to his church multiple times during the year. Which one of the donations listed below will require a qualified appraisal before the contribution can be deducted on his return? A. A cash donation of $12,000. B. A donation of antique furniture valued at $6,500. C. A donation of appreciated stock with a fair market value of $12,500. D. A donation of an old motorcycle valued at $450.

a (Angie and Sheldon cannot deduct any of their medical expenses. In 2022, only the medical expenses that exceed 7.5% of the taxpayer's AGI are deductible. The total of Angie and Sheldon's qualifying medical expenses, $8,200, is less than $9,375 ($125,000 x 7.5%). Of the items listed, only the smoking cessation program, the contact lenses, and the prescription medications filled in the United States are qualified medical expenses. Prescription medications shipped from other countries are ineligible. The teeth whitening procedure would be considered a cosmetic enhancement and would not be a qualified medical expense, whether performed by a dentist or not.)

23. Angie and Sheldon, both age 41, file a joint return and claim their two children as dependents. They have adjusted gross income of $125,000. In 2022, the family accumulated $12,120 of unreimbursed medical and dental expenses that included the following: Prescription medications filled in the U.S. - $6,500 Prescription medications ordered and shipped from another country - $1,320 Prescription contacts lenses for Angie - $500 Teeth whitening procedure by Angie's dentist and custom bleach trays - $2,600 Prescribed smoking cessation program for Sheldon - $1,200 What amount can they deduct for their medical expenses? A. $0 B. $6,500 C. $8,200 D. $9,375

b (The value of property transferred to Mildred's son five years before her death would not be included in her gross estate. A taxpayer's gross estate includes the following: • The FMV of all tangible and intangible property owned partially or outright by the decedent at the time of death. • Life insurance proceeds payable to the estate or, for policies owned by the decedent, payable to the heirs or beneficiaries. • The value of certain annuities or survivor benefits payable to the heirs or beneficiaries. • The value of certain property transferred within three years before the taxpayer's death (not five years, as stated in answer B).)

23. Mildred died on February 20, 2022. Her estate is valued at $24 million, so an estate tax return must be filed. Which of the following assets would not be included in the calculation of her gross estate? A. Life insurance proceeds payable to Mildred's children. B. The value of real property transferred to Mildred's son five years before her death. C. The value of property owned jointly by Mildred and her spouse. D. The value of Mildred's traditional IRA.

23. The answer is A. Wynona does not qualify for the AOTC because she is in her fifth year of college, and her parents have already claimed the credit for her in the prior four years. It is irrelevant that she will be filing her own return this year, the credit has already been claimed for her first four years of college. If she had been eligible for the credit, she would have had $11,000 of qualifying expenses. Room and board and student health fees are not qualifying expenses for the AOTC, and the qualifying tuition cost must be reduced by any tax-free scholarships, such as the Pell grant. The AOC is a maximum credit of $2,500 per student (100% of the first $2,000 of eligible expenses and 25% of the next $2,000). Wynona may use her education expenses to calculate the Lifetime Learning Credit, instead.

23. Wynona is 25 and attends college full-time, pursuing an undergraduate degree in architecture. Because she changed majors in her junior year, she is now in her fifth year of college. She received a $4,000 Pell grant for 2022, and her parents have claimed the American Opportunity Credit for Wynona the past four years. Wynona earned $19,000 working on campus and will file her own return as "single" in 2022. What amount can she claim for the AOTC in 2022 based upon the following expenses? Tuition $15,000 Room and board $12,000 Required Student Health Fees $1,000 A. $0 B. $2,000 C. $2,500 D. $11,000

a (Union dues are not deductible as a miscellaneous itemized deduction. All of the other expenses would be deductible on Schedule A.)

24. All of the following miscellaneous itemized deductions are allowable in 2022 except: A. Union dues. B. Impairment-related work expenses of persons with disabilities. C. Federal estate tax on income in respect of a decedent. D. Gambling losses to the extent of gambling winnings.

c (Jeffrey is required to file a gift tax return. Gift tax reporting must be done by the donor, not the recipient, of the gift. The first $16,000 of the gift is not subject to gift tax because of the annual exclusion. The remaining $10,000 will be shown as a net taxable gift on Form 709.)

24. Jeffrey gives $26,000 to his friend, Rachel, in 2022. Which of the following statements is correct? A. The first $16,000 of the gift is not subject to the gift tax, but the remainder is subject to gift tax, and Rachel is responsible for paying it. B. Rachel is required to file a gift tax return and pay tax on the entire gift. C. Jeffrey is required to file a gift tax return, Form 709. D. Jeffrey may choose to report the gift on his individual Form 1040, Schedule A.

24. The answer is C. The Child and Dependent Care Credit is not refundable in 2022, meaning it can reduce a taxpayer's income tax to zero, but will not produce a refund beyond that. All of the other credits listed are refundable or have a refundable component.

24.Which of the following credits is not refundable in 2022? A. Earned Income Tax Credit. B. Additional Child Tax Credit. C. The Child and Dependent Care Credit. D. American Opportunity Credit.

b (Although a full marital deduction is allowed for a spouse who is a U.S. citizen, a transfer of property to a noncitizen spouse is limited, and the excess amount would be subject to gift tax. Noncitizen spouses can only receive $164,000 in 2022. This is true even if the spouse is a legal U.S. resident (a green card holder).)

25. All of the following gifts are excluded from the determination of the gift tax, regardless of the amount, except: A. A gift made to a political organization. B. A cash gift given to a nonresident alien spouse of a U.S. citizen. C. A medical bill paid directly to a hospital on behalf of a relative. D. A gift made to a qualifying charity.

b (Byrne is allowed to deduct the charitable gift to a U.S. charity on his Form 1040- NR. Nonresident aliens are limited as to the types of itemized deductions they can claim. Among other restrictions, they are not allowed to claim the deduction for mortgage interest. Answer "D" is incorrect because nonresident aliens cannot claim the standard deduction.)

25. Byrne is a visiting foreign professor from Ireland who is teaching at a U.S. university on a J-1 visa. He is classified as a nonresident alien for tax purposes and will file Form 1040-NR. Which of the following is Byrne potentially allowed to claim on his income tax return? A. Disability insurance premiums. B. A charitable gift of $150 to the American Cancer Society. C. Mortgage interest on his main home. D. The standard deduction.

25. The answer is C. Since two of his children are under the age of 17, and his AGI is under the limit of $200,000 for non-joint-return filers, Stephen is eligible to take a Child Tax Credit of $4,000 on his return ($2,000 x 2 children).

25. Stephen files as head of household. He has three children, ages 8, 10, and 18. All the children lived with Stephen all year long, and all have valid Social Security numbers. All of Stephen's income for the year is from wages, and his modified AGI is $190,000. Based on this information, what is the maximum Child Tax Credit that Stephen can claim on his return? A. $0, his AGI is too high. B. $2,000 C. $4,000 D. $6,000

26. The answer is A. Because Orlando's equipment rental fee is mandatory, it is considered a qualified expense. For AOTC purposes, "qualified education expenses" do not include insurance or medical expenses (such as student health fees), room and board, transportation, or similar personal, living, or family expenses, or any course of instruction or other education involving sports, games, or hobbies, unless the course is part of the student's degree program.

26. Orlando is a university senior studying to be an optometrist. Which of the following expenses is a qualifying expense for the American Opportunity Tax Credit? A. Mandatory equipment rental B. Student health fees C. Room and board D. A physical education course unrelated to his program

c (Consuela cannot deduct all her mutual fund losses in the current year. However, she is allowed to claim a $3,000 capital loss on her 2022 tax return. The remainder of the loss ($8,250) will carry forward indefinitely to subsequent years until they are fully exhausted.)

3. Consuela is unmarried. She purchased 1,000 shares of Hometown Mutual Fund on February 15, 2020, for $15 per share. On April 30, 2022, she sold all her shares for $3.75 per share. She also earned $49,000 of wages in 2022. She has no other transactions during the year. How should the mutual fund sale be reported on her tax return? A. She has a capital loss of $11,250 that she can deduct against her wage income. B. She must carry over all of the losses to a future tax year to offset future capital gains. C. She can deduct a $3,000 capital loss on her tax return, and the remainder of the losses will carry forward to subsequent years. D. She can deduct a $1,500 capital loss on her tax return, and the remainder of the losses will carry forward to subsequent years.

d (A gift of a future interest cannot be excluded under the annual exclusion. A gift is considered a present interest if the donee has all immediate rights to the use, possession, and enjoyment of the property or income from the property. A gift is considered a future interest if the donee's rights to the use, possession, and enjoyment of the property or income from the property will not begin until some future date. "Future interests" include: reversions, remainders, and other similar interests.)

3. Eileen's aunt gives her a gift of a "future interest" on her estate. Eileen will have full use of the estate after her aunt dies. Which is the correct statement about this gift? A. Eileen's aunt can use the annual gift tax exclusion for this gift. B. The gift is considered a present interest. C. Eileen must pay estate tax on the gift. D. Eileen's aunt cannot use the annual gift tax exclusion for this gift.

3. The answer is B. Since Aaron is married and lived with his wife during the year but is filing separately, he can contribute no more than $4,000, the amount of his qualifying compensation for IRA purposes.

3. Elizabeth and Aaron are both age 61, married, and lived together all year. They both work, and each has a traditional IRA. Aaron is mostly retired, and Elizabeth still works full-time. In 2022, Aaron earned $4,000 of wages from working at a hardware store on the weekends. He also received $18,000 of annuity income. Elizabeth earned $52,000 in wages. They prefer to file separately. If they file MFS, what is the maximum that Aaron can contribute to his IRA? A. $1,000 B. $4,000 C. $5,500 D. $6,500

3. The answer is B. Karen can claim $2,000 as a Child Tax Credit for one child (the credit is $2,000 per qualifying child under the age of 17). In 2022, Karen only has one qualifying child (the 10-year-old), because children who are 17 or older are not qualifying children for purposes of the Child Tax Credit.

3. Karen has three children, ages 10, 17, and 19. All the children live with her, are full-time students, and claimed as dependents on her tax return. Karen's AGI is $165,000 in 2022 and she files head of household. Her tax liability before the application of any credits is $8,900. What is the maximum Child Tax Credit she can claim on her 2022 tax return? A. $0 B. $2,000 C. $4,000 D. $6,000

b

3. Natalia exchanged a retail building with an adjusted basis of $160,000 for a warehouse. The fair market value of the warehouse she received was $200,000. She also received $10,000 of cash and paid $5,000 of exchange expenses to complete the exchange. What is her recognized (taxable) gain on the transaction, if any? A. $0 B. $5,000 C. $10,000 D. $45,000

3. The answer is A. The Foreign Tax Credit applies to taxpayers who have paid foreign income taxes to a foreign country on foreign-sourced income and are subject to U.S. tax on the same income.

3. The Foreign Tax Credit applies to: A. Taxpayers who have paid foreign taxes to a foreign country on foreign-sourced income and are subject to U.S. tax on the same income. B. Taxpayers who have paid U.S. taxes while living and working abroad. C. Taxpayers who have paid U.S. taxes while living and working abroad and who are subject to U.S. tax on their worldwide income. D. Nonresident aliens who have paid foreign taxes to a foreign country on foreign-sourced income and are subject to U.S. tax on the same income.

c (Theodore and Keyah's maximum deduction for student loan interest is $2,500. The deduction is limited to the lesser of $2,500 or the amount of interest actually paid. It doesn't matter how many qualifying student loans there are; the maximum is $2,500 per tax return (not per taxpayer or per student).)

3. Theodore and Keyah have a MAGI of $75,000. They are married and file a joint return. Four years ago, they took out a loan so their daughter, Miranda, could earn an associate's degree at a local junior college. Miranda is 23 and is still their dependent. In 2022, they paid $3,000 of student loan interest on Miranda's student loan. How much student loan interest can Theodore and Keyah deduct on their tax return? A. $0 B. $1,000 C. $2,500 D. $3,000

b (Velma has an excess contribution of $1,200. The excess contribution must be withdrawn, or it will be subject to an excise tax of 6%, plus an additional 6% on any interest or profits derived from the excess contribution. This tax will apply to each year that the excess remains in the account. The maximum contribution to a Coverdell is $2,000 per year per beneficiary, regardless of how many accounts the beneficiary has. Any earnings withdrawn as part of a corrective distribution are taxable in the year of the excess contribution, even if the corrective distribution occurs in the following year (note that the rules for excess contributions do not apply to 529 plans, there is no limit that can be contributed to a 529, although there may be gift tax considerations if the amounts contributed exceed annual gift limits). )

3. Velma is 16 years old. She has two Coverdell accounts. One was set up by her grandparents, and the other was set up by her mother. Velma received $3,200 in total contributions in her Coverdell accounts in 2022: $1,500 from her grandparents, and $1,700 deposited by her mother. Which of the following statements is true? A. The Coverdell contributions are deductible and can remain in the accounts until Velma reaches 30 years of age. B. Velma has an excess contribution of $1,200. The excess contribution must be withdrawn, or it will be subject to an excise tax. C. Velma may withdraw the funds penalty-free and invest the amounts in a Roth IRA. D. Velma has an excess contribution of $200. She can transfer this excess contribution to an IRA account.

3. The answer is A. The FinCen 114 (FBAR) and Schedule B (part III) are both used to report foreign bank accounts and foreign financial accounts. Taxpayers with foreign financial accounts will typically need to complete Part III of Schedule B to indicate that they hold such an account, although they do not need to state the dollar amounts that the account contains. Unlike the FBAR, there is no dollar threshold on the duty to report foreign accounts on Schedule B.

3. Which of the following forms is completed to report foreign bank accounts? A. Schedule B (Form 1040) and FinCen 114 (FBAR). B. Form 1116 and FinCen 114 (FBAR). C. Schedule B (Form 1040) and Form 2555. D. Only the FinCen 114 (FBAR).

b (Only the foreign income taxes are deductible. Taxpayers can deduct foreign income tax on Schedule A as an itemized deduction. Foreign income taxes are not subject to the SALT cap.)

3. Which of the following taxes can taxpayers potentially deduct on Schedule A? A. Foreign sales taxes. B. Foreign income taxes. C. Excise taxes on alcohol and tobacco. D. Foreign real estate taxes.

3. The answer is B. A nonresident alien would not be subject to the net investment income tax (NIIT). The net investment income tax applies to individuals, estates, and trusts. Only U.S. citizens and U.S. residents are subject to the tax.

3. Which of the following would not be subject to the net investment income tax (NIIT)? A. An estate of a deceased taxpayer. B. A nonresident alien. C. A trust. D. An individual with only rental income.

a (Zachariah would report nine months January-September of mortgage interest and property taxes as itemized deductions on Schedule A, that is, $1,800 and $450, and the other three months October-December as expenses on Schedule E, that is, $600 and $150. This question is based on an example in Publication 4491)

3. Zachariah lived in his home until the end of September. Then his employer transferred his job overseas and Zachariah began renting out his residence on October 1, 2022. The property is rented at fair rental value. The total amount of Zachariah's mortgage interest for the entire tax year was $2,400 and his property taxes were $600 for the year. How much of Zachariah's mortgage interest and property taxes should be reported on his Schedule E? A. $600 in interest and $150 in property taxes B. $1,800 in interest and $450 in property taxes C. $2,000 in interest and $500 in property taxes D. None of it

c

4. A fire destroyed Bryant's main home on July 15, 2022. On November 23, 2022, he received an insurance reimbursement, which exceeds his basis in the home. Rather than recognizing any gain, Bryant wants to replace the home, but at the end of the year, he still hasn't found a property that he likes yet. What is the latest date that Bryant can purchase replacement property to defer all the gain from his insurance reimbursement? A. July 15, 2023 B. August 23, 2024 C. December 31, 2024 D. July 15, 2025

d (College instructors do not qualify. An eligible educator must work 900 hours a year in a school that provides elementary or secondary education (K-12). Part-time teachers qualify if they meet the yearly teachers' requirement for hours worked. The term educator includes instructors, counselors, principals, and aides.)

4. All of the following statements are correct about the qualified educator expense deduction except: A. A school counselor may qualify. B. A part-time teacher may qualify. C. A school principal may qualify. D. A college instructor may qualify.

b (Antoine is allowed to claim a maximum of $12,500 of losses on his separately filed return. If a taxpayer actively participated in a passive rental real estate activity that produced a loss, he can deduct the loss to offset his nonpassive income, up to $25,000. However, married persons filing separate returns who lived apart during the year are each allowed a maximum of $12,500 for losses from passive real estate activities. Married persons who file separate returns but lived together during the year are not allowed to take losses on rental real estate activity. Instead, the losses are suspended and must be carried over until the property produces income, or the property is disposed of.)

4. Antoine and Ludivina are physically separated and have lived apart for three years. They file separate tax returns (MFS). They own a rental property jointly; actively participate in the rental activity, and share income and losses equally. The rental property had $30,000 of losses during the year. Antoine has wage income of $48,000. He has no other items of income or loss. What is the maximum amount of rental losses that Antoine can claim on his separate return? A. $0 B. $12,500 C. $15,000 D. $25,000

d (For federal income tax purposes, cash inheritances are generally not taxable to the beneficiary, although the beneficiary may be responsible for a related estate tax liability that has not been satisfied.)

4. Cash inheritances are generally: A . Taxable to the beneficiary for any amount. B. Taxable to the beneficiary for amounts over $15,000. C. Taxable to the beneficiary for amounts over $5 million. D. Not taxable to the beneficiary for any amount.

D ( To avoid an underpayment penalty, Cristiano must pay the smaller of: • 110% of his prior-year tax liability or • 90% of his expected tax for the current year. This estimated tax safe harbor rule applies to higher-income taxpayers with an adjusted gross income of more than $150,000 ($75,000 if filing an MFS return). )

4. Cristiano is single and earned $350,000 as a self-employed software developer during the year. Under the estimated tax safe harbor rules for high-income taxpayers, he can avoid an underpayment penalty if he pays what percentage of his prior-year tax liability? A. 50% B. 90% C. 100% D. 110%

a (The answer is calculated as follows: The original basis is increased by the broker's commission. Therefore, Marsha's adjusted basis is $10,145 ($10,110 + $35). The gross proceeds from the sale are $8,859, which is subtracted from the basis, resulting in a long-term capital loss of $1,286 ($8,859 - $10,145) because she held the stock for more than one year.)

4. Five years ago, Marsha bought 100 shares of stock. Her sale date was February 10, 2022. Marsha's original cost for the stock was $10,110 plus an additional $35 in broker's fees. When she sold the stock, she received gross proceeds of $8,859. What is the net gain or loss from this transaction? A. $1,286 long-term capital loss. B. $1,286 short-term capital loss. C. $1,251 long-term capital loss. D. $1,251 long-term capital gain.

a (Landon can claim the expenses for the special device as an impairment related work expense. If a taxpayer has a physical or mental disability that limits employment, he can deduct the expense as a miscellaneous itemized deduction on Schedule A.)

4. Landon is deaf. He purchased a special device to use at his workplace so he can identify when his phone rings. He paid for the device out-of-pocket, and his employer did not reimburse him. How should Landon report this on his tax return? A. Landon can claim the purchase as an itemized deduction on Schedule A. B. Landon can deduct the purchase as an adjustment to income. C. Landon cannot deduct the purchase because he is not totally disabled. D. Landon cannot deduct the purchase because he is not self-employed.

4. The answer is B. Shari has 60 days to complete the indirect rollover. If she does not complete the rollover within 60 days, the entire distribution is subject to income tax in 2022.

4. Shari switched jobs in the middle of the year. She received a distribution in 2022 from her former employer's retirement plan, intending to roll it over into a new IRA. Instead of doing a direct transfer, the trustee screws up the paperwork and sends Shari a paper check. How long does she have to complete the indirect rollover to avoid income tax and penalties on the distribution? A. 30 days from distribution. B. 60 days from distribution. C. December 31 of that tax year. D. April 15 of the next tax year.

4. The answer is B. The Premium Tax Credit is refundable, meaning that a taxpayer may be able to receive the full amount of credit as a refund, assuming he has no other tax liability. The PTC is available only to a taxpayer, his spouse, or his dependents that had health coverage through a federal or state exchange (i.e., the Healthcare Marketplace) for all or part of the year.

4. The Premium Tax Credit is: A. A nonrefundable credit. B. A refundable credit. C. Available to all taxpayers with Marketplace insurance. D. Available to all taxpayers with any health insurance.

4. The answer is B. A nephew who lived with the taxpayer for nine months may qualify for the Child Tax Credit. Answers "A" and "C" are both incorrect because the children are not under the age of 17. Answer "D" is incorrect because the foster child only lived with the taxpayer for four months, so the foster child did not meet the residency test.

4. Which of the following individuals would be a qualifying child for the Child Tax Credit? A. A 17-year-old dependent who is a full-time student. B. A six-year-old nephew who lived with the taxpayer for nine months. C. A step-brother who is 21 years old and disabled. D. A foster child who has lived with the taxpayer for four months.

4. The answer is C. Nonresident aliens are not subject to the FBAR filing requirement. All of the following are subject to the FBAR filing requirement if they hold foreign bank accounts or applicable foreign assets. • A U.S. citizen or U.S. resident of the United States, (includes nonresident aliens electing to be treated as residents in order to file a joint tax return). • A domestic entity, (corporation, estate or trust).

4. Which of the following is NOT considered "U.S. person" for the purposes of filing an FBAR? A. A U.S. citizen who lives in Israel. B. A U.S. resident who lives in Russia. C. A nonresident alien with $100,000 in U.S. investments that files Form 1040-NR. D. A U.S. consular officer that lives and works overseas in a U.S. embassy.

4. The answer is C. Taxpayers have the option to claim an itemized deduction for foreign taxes paid on Schedule A. They may choose either the deduction or the credit, whichever gives them the lowest tax. Taxpayers cannot claim both the deduction and a tax credit on the same return.

4. Which of the following statements is correct regarding the Foreign Tax Credit? A. The Foreign Tax Credit is a refundable credit. B. The Foreign Tax Credit is available to U.S. citizens and nonresident aliens. C. Taxpayers may choose to deduct foreign taxes paid, in lieu of the Foreign Tax Credit. D. Taxpayers can claim both a deduction and a tax credit for foreign taxes paid to different countries.

d (All tip income is subject to federal income tax, whether cash or noncash. An individual who receives less than $20 per month of tips while working one job does not have to report the tip income to his employer, but the income is still subject to income tax and must be reported on Form 1040.)

4. Which of the following tip income, if any, is exempt from federal tax? A. Tips of less than $20 per month. B. Noncash tips. C. Tips not reported to the employer. D. None of the above. All tips are taxable.

a (Secured debt on a residence that a taxpayer's dependent parent lives in would not qualify as QPRI, because the qualified principal residence indebtedness exclusion only applies to a taxpayer's main home (not a parent's home, a vacation home, or rental property). A "principal residence" is generally the home where the taxpayer lives most of the time. A taxpayer can have only one principal residence at a time.)

4. Which of the following types of debt would not be classified as qualified principal residence indebtedness, for the purposes of the QPRI exclusion? A. Secured debt on a residence that a taxpayer's dependent parent lives in. The taxpayer lives in his own home, but pays the mortgage and all the expenses on his parent's home. B. A home equity loan incurred to install an outdoor pool in a principal residence. C. A secured loan on a main home that was used to replace the roof on the residence. D. A mortgage used to purchase land on which the taxpayer's main home was eventually built.

5. The answer is B. The tentative minimum tax is calculated separately from the regular tax (it is not figured in addition to the taxpayer's regular tax]. The AMT is owed only if the tentative minimum tax is greater than the regular tax.

5. All of the following statements are correct about the alternative minimum tax except: A. Congress passed the alternative minimum tax to ensure that individuals that benefit from certain exclusions, deductions, or credits pay at least a minimum amount of tax. B. The tentative minimum tax is figured in addition to a taxpayer's regular tax. C. The AMT is the excess of the tentative minimum tax over the regular tax. D. The AMT is permanently indexed for inflation.

c (Adjustments are deducted from gross income to derive adjusted gross income AGI, and itemized and standard deductions are subtracted from AGI. The amount of a taxpayer's AGI is important, as it can affect his eligibility for certain deductions and the amounts that he can claim. For example, certain items are phased out at specified levels of AGI, and some itemized deductions must exceed specified percentages of AGI to be deductible. In addition, itemized deductions may be subject to the alternative minimum tax or may total less than the taxpayer's applicable standard deduction.)

5. An adjustment to income is considered the most beneficial type of deduction because: A. It favors taxpayers who choose to itemize their deductions. B. It is simpler to figure out qualifying expenses for adjustments to income than it is other deductions. C. It lowers a taxpayer's adjusted gross income and thus can affect the amounts of certain credits and deductions he may be able to claim. D. There is no significant difference between an adjustment to income and other tax deductions.

5. The answer is B. Generally, records of accounts required to be reported on the FBAR should be kept for six years from the due date of the report, which is the year following the calendar year being reported.

5. As a general rule, how long should taxpayers keep records related to an FBAR filing (from the due date of the FBAR)? A. 3 years. B. 6 years. C. 7 years. D. 10 years.

5 The answer is A. Unlike traditional IRAs, Roth IRAs do not require withdrawals until after the death of the owner. This is why Roth IRAs are used as an estate-planning tool. Traditional IRAs require owners to begin taking required minimum distributions (RMDs) at age 72. A Roth IRA does not require any distributions until after the owner's death.

5. At which age does the owner of a Roth IRA have to begin taking required minimum distributions? A. Never required B. At age 70 and a half C. At age 72 D. 75

d

5. Clayton trades a commercial building with an adjusted basis of $84,000 for an industrial tractor with a fair market value of $97,000. Clayton plans to use the tractor in his farming business. What is the basis of the tractor, and how much taxable gain, if any, must Clayton report? A. $0 gain; $97,000 basis. B. $0 gain; $13,000 basis. C. $13,000 gain; $84,000 basis. D. $13,000 gain; $97,000 basis.

d (The mortgage interest and property tax on both his main home in Chicago and the mountain cabin are deductible (assuming the ceiling on qualifying mortgage debt is not an issue). The mortgage interest on the third home is not deductible. The property tax on all the homes is potentially deductible, but the deduction is limited to $10,000 by the SALT cap in 2022. The mortgage interest on a second home is deductible, even if the taxpayer did not use the home during the year. A taxpayer may deduct mortgage interest on up to two homes. The answer is calculated as follows: Home Location Mortgage Interest Property Tax Main home in Chicago $18,500 $7,500 Cabin in Tahoe $5,200 $2,800 Condo in Las Vegas 3rd home Not Deductible $1,950 Totals before limitations $23,700 $12,250 Allowable deduction $23,700 $10,000 (SALT limit) )

5. Clemens owns three personal homes. None of them are rental properties. He has an AGI of $128,000 in 2022. His primary residence is in Chicago, where he works. He also owns a mountain cabin in Lake Tahoe and a small condo in Las Vegas, which he uses several times a year. In 2022, Clemens did not use the mountain cabin, and it sat empty all year. He pays property tax and mortgage interest on all three properties. Home Location Mortgage Interest Property Tax Main Home Chicago $18,500 $7,500 Cabin in Tahoe $5,200 $2,800 Condo in Las Vegas $4,500 $1,950 All of the mortgage debt is qualifying acquisition debt. Based on the information above, which of the following statements is correct? A. Clemens may claim a mortgage interest deduction of $18,500 and a property tax deduction of $7,500 on Schedule A. B. Clemens may claim a mortgage interest deduction of $23,700 and a property tax deduction of $10,300 on Schedule E. C. Clemens may claim a mortgage interest deduction of $28,200 and a property tax deduction of $12,250 on Schedule A. D. Clemens may claim an allowable mortgage interest deduction of $23,700 and a property tax deduction of $10,000 on Schedule A.

c (Emmy must report $9,000 of her winnings as taxable income, and $9,000 of the losses are reported on Schedule A as an itemized deduction. The amount of losses deducted may not exceed gambling winnings.)

5. Emmy had $9,000 of gambling winnings from slot machine play during the year. She also incurred $15,000 of gambling losses. How should these transactions be reported on her tax return? A. The $9,000 of winnings are reported as income, and the $15,000 of losses are reported as an adjustment to income on Schedule 1. B. The $9,000 of winnings are reported as income, and the $15,000 of losses are reported as an itemized deduction on Schedule A. C. The $9,000 of winnings are reported as income, and $9,000 of losses are reported as an itemized deduction on Schedule A. D. The $9,000 of winnings are reported as income, but the gambling losses are not deductible.

a (Jeanne will owe no estate taxes related to the value of Maximo's estate. The marital deduction allows for an unlimited transfer of property from one spouse to another during his lifetime or from his estate after death without being subject to gift or estate taxes. To qualify for this unlimited deduction, the spouse receiving the assets must be a U.S. citizen, a legal spouse, and must have outright ownership of the assets.)

5. Maximo is a legal U.S. resident (a green card holder). He dies on June 1, 2022, and leaves his entire estate to his wife, Jeanne, who is a U.S. citizen. Maximo's estate is valued at $50 million on the date of his death. What amount of tax must Jeanne pay on her late husband's estate in 2022? A. $0 B. $15.52 million C. $20.4 million D. $37.98 million

c (Rajiv has a short-term capital loss of $600 = (100 shares x $26) - (100 shares x $20) that would be reported in the year of sale. Rajiv's holding period was not more than one year, which means that the loss must be treated as short-term. To determine the holding period, you must begin counting on the day after the date the taxpayer acquires the property.)

5. Rajiv bought 100 shares of stock on February 1, 2021, when the share price was $26. He sold the stock for $20 a share on February 1, 2022 (exactly one year later). How should this trade be reported, and what is the nature of Rajiv's gain or loss? A. A long-term capital loss of $600. B. A short-term capital loss of $500. C. A short-term capital loss of $600. D. This is a wash sale, and there is no gain or loss.

C (Because she was legally divorced by the end of the year, T ania is considered Single for the entire tax year. However, because she has children and meets the requirements for head of household, she should use this as her filing status because it will result in a lower tax.)

5. Tania's divorce became final on October 30, 2022. She has sole custody of her two children, who lived with her the entire year. The children are both under the age of 17. She provided more than half of the cost of keeping up the home. What filing status should she use? A. Single B. Married Filing Separately C. Head of Household D. Qualifying Surviving Spouse

5. The answer is A. The Additional Medicare Tax applies to 0.9% of a taxpayer's earned income above a threshold based on his filing status. For single, head of household, and qualifying surviving spouses, the threshold is $200,000. For married couples filing jointly, the amount is $250,000. For married couples filing separately, the amount is $125,000.

5. The Additional Medicare Tax is: A. 0.9% on a taxpayer's earned income above a certain threshold. B. 3.8% on a taxpayer's earned income above a certain threshold. C. 0.9% on a taxpayer's investment income above a certain threshold. D. 3.8% on a taxpayer's investment income above a certain threshold.

c (Treyton must include $24,000 in his income in the first year. He must recognize all the advance rent as income in the year of receipt. The security deposit does not have to be recognized as income because it is refundable to the tenant at the termination of the lease period.)

5. Treyton owns a commercial building. He signs a three-year lease with a business tenant who wishes to rent the building. Treyton offers a substantial discount to the tenant if payment is made in advance. The tenant agrees, and in December 2022, Treyton receives $12,000 for the entire first year's rent and $12,000 as rent for the last year of the lease. He also receives a $1,500 security deposit that is refundable at the end of the lease. How much rental income must Treyton include in his tax return? A. $1,500 B. $12,000 C. $24,000 D. $25,500

5. The answer is C. Expenses related to a surrogate arrangement are not a qualified adoption expense. Qualified adoption expenses are expenses directly related to the legal adoption of an eligible child. These expenses include adoption fees, court costs, attorney fees, travel expenses (including amounts spent for meals and lodging) while away from home, and re-adoption expenses to adopt a foreign child.

5. Which of the following expenses is not a qualified expense for purposes of the Adoption Credit? A. Court costs. B. Re-adoption expenses to adopt a foreign child. C. Attorney fees for a surrogate arrangement. D. Travel expenses.

a (Annika's basis for depreciation on the house is its fair market value on the date of the conversion ($147,000) because the FMV on the date of conversion is less than the amount of her original cost that was allocable to the house ($175,800). When a taxpayer converts property held for personal use to rental use (for example, the rental of a former home), the basis for depreciation will be the lesser of fair market value or the adjusted basis on the date of conversion.)

6. Annika converted her primary residence to rental use during the year. Her original cost was $189,000, of which $13,200 was allocated to the land, and $175,800 was to the house. The property's value has gone down since its purchase, and on the date of the conversion to a rental property, the property had a fair market value of $158,000, of which $11,000 was allocable to the land and $147,000 to the house. What is Annika's basis for depreciation on Schedule E? A. $147,000 B. $158,000 C. $175,800 D. $189,000

c (Barton does not have to pay tax on his Social Security. In order to figure out the taxable portion of Social Security, the taxpayer's total income, including tax-exempt interest, must be compared to the base amount for his filing status, which is $25,000. The amount of income that should be compared to the $25,000 base amount is calculated as follows: Part-time job $8,000 Interest 5,000 % of Social Security 5,500 Taxable pension 6,000 Total $24,500 His income plus one-half of Social Security is less than the applicable base amount ($25,000). However, he is still required to file a tax return, because his overall income exceeds the minimum filing requirement.)

6. Barton, age 64, is unmarried and retired. He earned the following income in 2022. To determine if any of his Social Security is taxable, Barton should compare how much of his income to the $25,000 base amount? Part-time job - $8,000 Bank interest - 5,000 Social Security - 11,000 Taxable pension - 6,000 Total - $30,000 A. $11,000 B. $19,000 C. $24,500 D. $30,000

b (Chuck and Lourdes can deduct only $1,400 ($700 x two months) of self-employed health insurance for the months that they were ineligible to participate in an employer plan. No deduction is allowed for self-employed health insurance for any month that the taxpayer has the option to participate in an employer-sponsored and subsidized plan. This is true even if the taxpayer declines the coverage. A self-employed taxpayer can deduct 100% of health insurance premiums as an adjustment to income, but only if neither he nor his spouse was eligible to participate in an employer's health plan.)

6. Chuck and Lourdes are married and file jointly. Chuck is self employed, and his net profit from his Schedule C business was $50,000 in 2022. They pay $700 per month for Chuck's health insurance coverage. Lourdes was a homemaker until she started working for a construction company in early February. Lourdes and Chuck became eligible to participate in her employer's subsidized health plan on March 1, 2022, but they did not want to switch insurance plans, so Lourdes declined her employer's coverage. Which of the following statements is correct? A. They can deduct $700 for both January and February, and $350 per month for each of the last ten months of the year, as self-employed health insurance premiums on Chuck's Schedule C. B. They can deduct $1,400 in self-employed health insurance premiums, which is for January and February, the two months they were not eligible to participate in an employer plan. C. They can deduct 100% of their health insurance premiums because they declined the employer coverage. D. They can deduct 50% of their health insurance premiums on Chuck's Schedule C.

c (Emelie can claim a deduction for a contribution of $250 or more only if she has a receipt or acknowledgment from a qualified organization. The receipt must include: • The amount of cash contributed. • Whether the qualified organization gave the taxpayer any goods or services in return. • If applicable, a description and good faith estimate of the value of any goods or services provided in return by the organization. A receipt must also show the date of the donation and the name of the organization that was paid.)

6. Emelie donates $430 in cash to her church. Which of the following is required on the receipt to substantiate the donation correctly for IRS recordkeeping requirements? A. The reason for the contribution. B. Emelie's home address. C. The amount of the donation. D. Emelie's method of payment.

6. The answer is C. In 2022, the nanny tax applies when a taxpayer pays a household employee $2,400 or more of wages during the year.

6. In 2022, at which threshold does an employer have to withhold and pay Social Security and Medicare taxes for a household employee? A. When the taxpayer pays a household employee $400 or more of wages. B. When the taxpayer pays a household employee $600 or more of wages. C. When the taxpayer pays a household employee $2,400 or more of wages. D. When the taxpayer pays a household employee $12,550 or more of wages.

6. The answer is A. On a jointly filed return, they are both allowed to contribute and deduct the maximum allowable for their age bracket ($6,000 each in 2022). The rental income is not qualifying compensation for IRA purposes, but William and Melissa may use their combined self-employment income to figure their maximum allowable IRA contribution. Even though Melissa's business had a net operating loss for the year, she is not required to "offset" her Schedule C losses from her wages when determining her "allowable" IRA contribution. The answer is figured as follows: William: $9,900 self-employment income + Melissa: $3,000 wages = $12,900 in total "qualifying compensation" If they file jointly, they can each contribute $6,000 to a traditional IRA for themselves ($6,000 x 2 = $12,000, which is less than the amount of their qualifying compensation).

6. Melissa, age 41, and William, age 47, are married and file jointly. Both are self-employed and report their business income on Schedule C. William's Schedule C business has $9,900 in profits during the year. His wife, Melissa, has a loss of ($5,100) on her Schedule C. Melissa also earned $3,000 in wages from a part-time seasonal job. They also co-own a residential rental property that they manage together. The rental earned $58,000 in passive income during the year. What is their maximum allowable IRA contribution for 2022? A. William can contribute $6,000, and Melissa can contribute $6,000. B. William can contribute $6,000, and Melissa can contribute $3,000. C. William can contribute $6,000, and Melissa cannot contribute. D. William can contribute $7,000, and Melissa can contribute $3,000.

6. The answer is C. Noriko may be subject to a penalty of $10,000 for nonfiling of Form 8938. If a taxpayer is required to file Form 8938, but it is not complete and correctly filed by the due date (including extensions), a taxpayer may be subject to a penalty of $10,000. There would be additional penalties if the form is not filed within 90 days from the mailing of a notice from the IRS regarding a notice of a failure to file Form 8938.

6. Noriko is a U.S. citizen who is required to file Form 8938 with her personal income tax return because she has $800,000 in specified foreign assets. Noriko does not include a Form 8938 with her 2022 income tax return, but she later amends her personal tax return after the due date to include Form 8938. What potential penalty is Noriko subject to regarding the late-filed Form 8938? A. $2,500 B. $5,000 C. $10,000 D. $60,000

d (Shawn is not required to file a gift tax return. None of the gifts are taxable gifts, and therefore, no reporting is required. Tuition or medical expenses paid for someone directly to an educational or medical institution are not counted as taxable gifts. Nor are gifts to a political organization or gifts to a qualified charity.)

6. Shawn, a single taxpayer, has never been required to file a gift tax return. In 2022, Shawn gave the following gifts: • Tuition paid directly to a state university for his nephew: $18,000. • Payment to General Hospital for to brother's medical bills: $15,500. • Cash donation to a homeless shelter, a qualified 501(c)(3) organization: $50,000. • Gift to the Libertarian Party (not a qualified charity): $25,000. Is Shawn required to file a gift tax return for 2022? A. Yes, because the donation to the political party is not an excludable gift. B. Yes, because each of the gifts exceeded the gift tax threshold. C. Yes, because the political gift is a reportable transaction. D. No

6. The answer is D. She may qualify for the Retirement Savings Contribution Credit (also called the Saver's Credit). Sienna does not qualify for the Earned Income Tax Credit because her income exceeds the AGI threshold for her filing status in 2022. She does not qualify for the Child Tax Credit or Credit for Other Dependents because she does not have a qualifying dependent.

6. Sienna is 30 and unmarried. Sienna earned $22,900 in wages in 2022. She also has qualified dividends of $4,750. She deposits $1,000 into her traditional IRA during the year. She has a valid Social Security number. She does not have any dependents and no other income for the year. Which of the following credits may she qualify for in 2022? A. Earned Income Tax Credit B. Child Tax Credit C. Credit for Other Dependents D. Retirement Savings Contribution Credit

6. The answer is B. Zhavia would be the only taxpayer who would be eligible, because she is the only one who had coverage from the Marketplace. Answer "A" is incorrect, because a taxpayer enrolled in an employer-sponsored plan is not eligible for the Premium Tax Credit. Answers "C" and "D" are incorrect, because a taxpayer who receives coverage through Medicaid, Medicare, or other government health plans, such as military (Tricare) coverage outside of the Marketplace is not eligible for the PTC.

6. Which of the following individuals would be eligible for the Premium Tax Credit, assuming they meet the applicable income guidelines? A. Bowie, who had minimum essential coverage through his employer. B. Zhavia, who was enrolled for two months through the federal Marketplace. C. Imran, who received Medicaid coverage for twelve months of the year. D. Peyton, who is a full-time U.S. military officer.

c (Losses on the sale of personal-use property, including a loss on the sale of a primary residence or a vacation home, are not deductible. Only losses associated with business property and investment property (such as stocks and bonds or rental property) are deductible.)

6. Which of the following losses is deductible? A. A loss on the sale of a primary residence. B. A loss on the sale of a vacation home. C. A loss on the sale of rental property. D. A loss on the sale of a personal-use mobile home.

d

6. Which of the following transactions does not qualify for a section 1031 like-kind exchange? A. An exchange of a commercial building in Chicago for empty farmland in Nebraska. B. An exchange of an apartment building in Delaware for a factory building in Alaska. C. An exchange of a residential rental for an undeveloped lot of land. D. An exchange of a developer's land inventory for a house flipper's housing inventory.

A (If a taxpayer's spouse died during the year, the taxpayer is considered married for the whole year and can file as MFJ. Therefore, Yolanda should file a joint return for 2022.)

6. Yolanda's husband died on November 14, 2022. She has one dependent son, who is eight years old. She did not remarry during the year. What is the most beneficial filing status for Yolanda to use in 2022? A. Married filing jointly. B. Single. C. Qualifying surviving spouse. D. Head of household.

a (After calculating the allowable deductions from the gross estate, Ahmed's net estate is valued at $11.2 million. This amount is less than the basic exclusion amount of $12.06 million for 2022, so no estate tax is applicable in this case. However, because the gross value of his estate is more than 12.06 million, an estate tax return (Form 706) is required to be filed. Gross value of the estate: FMV of Assets $14,000,000 Mortgage debt ($2,500,000) Medical debt ($300,000) Net Estate $11,200,000)

7. Ahmed, age 73, died in 2022, after a long battle with Alzheimer's disease. At the time of his death, he had assets of $14 million and owed a mortgage totaling $2,500,000 on his main home. He also had outstanding medical debts of $300,000 that remained unpaid at the time of his death. He had not used any of his basic exclusion amount during his lifetime. Based upon the information provided, what is the taxable amount of Ahmed's estate that must be reported on Form 706? A. $0 B. $4 million C. $5.5 million D. $6 million

d (All the rental income may be excluded under the "15-day rule." Amandine's home is primarily for personal use, and a rental period of fewer than 15 days is disregarded, which means the IRS does not consider it a rental. The rental income is not taxable, but the rental expenses (such as utilities or maintenance costs) are also not deductible.)

7. Amandine's home is used exclusively as her residence all year, except for 13 days. During this time, Amandine rents her home to alumni while the local college has its homecoming celebration. She made $3,000 of rental income and had $500 of rental expenses during this 13-day period. Which of the following statements is correct? A. Amandine must recognize $3,000 of rental income, and deduct the $500 in expenses on Schedule E. B. Amandine can exclude only $2,500 of the rental income. C. Amandine can deduct her expenses when she reports her rental income on Schedule E. D. All of the rental income may be excluded.

a (Bianca does not have any taxable canceled debt. The amount of Bianca's assets immediately prior to the debt cancellation exceeded the amount of debt that was discharged. The entire amount of the debt cancellation can be excluded from income, due to her insolvency. She should still report the canceled debt by filing Form 982, and checking the box for "insolvency." The canceled debt will not be taxable. Liabilities $15,000 The fair market value of assets (2,000) Amount of insolvency 13,000 Amount of debt cancellation $9,000)

7. Bianca was discharged from her liability to repay $9,000 of credit card debt. The lender reported the discharged debt on Form 1099-C. Immediately prior to the debt cancellation, Bianca had liabilities of $15,000, and the fair market value of her assets was $2,000. What portion of the canceled debt must Bianca include in income? A. $0 B. $3,000 C. $7,000 D. $9,000

7. The answer is B. Fyodor's IRA contribution for 2022 is limited to $3,500, the total amount of his wages. The interest income and the gifted money from his parents are not qualifying compensation for IRA purposes.

7. Fyodor, age 25, is an unmarried college student working part-time. He earns $3,500 in wages during 2022. He also receives $500 of interest income and a $9,000 gift from his parents to help pay his college tuition. What is his maximum IRA contribution in 2022? A. $0 B. $3,500 C. $5,500 D. $6,500

7. The answer is D. Sebastian and Hannah can take the full Adoption Credit of $14,890 in 2022 because they adopted a special needs child. Under a special rule for taxpayers who adopt special needs children, the maximum Adoption Credit is allowed, even if the taxpayer has a lesser amount of adoption expenses. These special rules apply to private adoptions, as well as adoptions from public agencies like the U.S. foster care system, as long as the child is a U.S. citizen or U.S. resident. Foreign children aren't considered to have "special needs" for purposes of this rule.

7. In 2022, Sebastian and Hannah adopt a special-needs infant from a private adoption agency in another state. The child is a U.S. citizen with a valid SSN. Their adoption expenses are $7,000, and their travel expenses related to the adoption are $1,200, which was the cost of their flights. What is their maximum Adoption Credit? A. $0 B. $7,000 C. $8,200 D. $14,890

d

7. Lenora had several unfortunate events happen to her during the year. Which of the following would not be an acceptable "unforeseen circumstance" for Lenora to take a reduced exclusion on the sale of her primary residence? A. Her home is condemned by the city. B. A legal separation that will lead to a divorce. C. Serious illness of a close family member who she must go care for. D. Moving to another state to be closer to her grandchildren.

a (The sales price is $750 more than the adjusted basis of the shares. The gain is short-term since Nikhil did not own the shares for more than one year.)

7. Nikhil's adjusted basis in 500 shares of Medico Corporation was $2,550. He owned the shares for six months. If he sells all 500 shares for $3,300, what is the resulting gain or loss? A. $750 short-term gain. B. $700 short-term gain. C. $750 long-term gain. D. $750 long-term loss.

a (Brigit's original basis in the total stock was $5,100, which is $5.10 per share, so her basis in the 500 shares she sold is 500 x $5.10, or $2,550.)

7. On May 13, 2022, Brigit purchased 1,000 shares of Equity Industries, Inc. for $5,100, including the broker's commission. On August 14, 2022, she sold 500 shares for $3,300. What is the adjusted basis of the stock she sold? A. $2,550 B. $3,255 C. $3,300 D. $5,100

7. The answer is B. Terry and Myriam are not eligible for the Premium Tax Credit because they file separate returns. Unless one of a limited number of exceptions applies,[1] a married couple cannot claim the Premium Tax Credit unless they file jointly.

7. Terry and Myriam are married but choose to file separately because of Terry's past-due child support. Their household income for 2022 is at 200% of the federal poverty line. They enroll in the federal Marketplace for health coverage. Which of the following statements is correct? A. They are not eligible for the Premium Tax Credit because their income is too high. B. They are not eligible for the Premium Tax Credit because of their filing status. C. They will owe a shared responsibility payment. D. They are eligible for the Advance Premium Tax Credit.

d (On a jointly filed tax return, if both taxpayers are teachers, they both may take the qualified educator expense deduction, up to a maximum of $600 in 2022 ($300 each).)

7. Two full-time teachers who are married and file jointly can deduct a maximum of in qualified educator expenses in 2022: A. $100 B. $250 C. $500 D. $600

7. The answer is B. The taxpayer must only attach Form 8938 to their federal return. The FBAR, Form 114, is not filed with a federal tax return or with the IRS. It is filed online with the Financial Crimes Enforcement Network e-filing system.

7. When e-filing their federal return, a taxpayer who meets the requirements to file both Form 8938, Statement of Specified Foreign Financial Assets, and the FBAR (Form 114, Report of Foreign Bank and Financial Accounts) should do which of the following? A. Attach both forms to their federal return. B. Attach only Form 8938 to their federal return and file Form 114 through the Financial Crimes Enforcement Network's E-Filing system. C. Attach only Form 114 to their federal return as it contains the 8938 information. D. Submit both forms separately to the Internal Revenue Service.

C (If a taxpayer must file a U.S. tax return or is listed on a tax return as a spouse or dependent and is not eligible for a Social Security number, he must apply for an ITIN.)

7. Which of the following taxpayers is required to have an individual taxpayer identification number (ITIN)? A. A nonresident alien with a J-1 visa and a Social Security number who moves outside the U.S. B. Anyone who does not have a Social Security number but has U.S.-source income. C. A nonresident alien who must file a U.S. tax return and is not eligible for a Social Security number. D. All nonresident aliens and resident aliens that are physically present in the U.S. for more than six calendar months.

7. The answer is A. Only individuals, estates, and trusts are eligible to claim the Credit for the Prior Year Minimum Tax by filing Form 8801. The AMT credit is calculated differently for corporations, which use a different form and set of instructions to determine whether they are eligible for the credit.

7. Which of the following taxpayers would not be eligible for the Credit for the Prior Year Minimum Tax by filing Form 8801? A. An S corporation B. A trust C. A decedent's estate D. An individual

d (Zachary's charitable contribution is $275 ($250 plane ticket + $25 materials = $215). He can claim his travel and meeting expenses as charitable contributions because they are directly related to his charitable activities. However, he cannot claim the cost of the evening at the theater, as that is a personal entertainment expense.)

7. Zachary is a volunteer delegate for the United Methodist Church. He spent three days attending his church's annual conference. He spent $250 on a plane ticket to the meeting and $25 on materials for the meeting. In the evening, Zachary went to the theater with two other meeting attendees. He spent $50 on theater tickets. The church did not reimburse Zachary for any of his costs. How much can he deduct as a charitable expense? A. $0 B. $125 C. $250 D. $275

8. The answer is B. Childcare is not a qualifying education expense, even if the childcare is offered on- campus. For purposes of the Lifetime Learning Credit, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.

8. All of the listed expenses are deductible for the Lifetime Learning Credit except: A. Required books. B. Childcare in order to attend class. C. Tuition. D. Required fees.

a

8. Elvis bought a house for $189,000 on July 1, 2018. He lived there continuously for 13 months and then moved in with his girlfriend. They later separated, and Elvis moved back into his own house and lived there for an additional 12 months until he sold it on July 30, 2022, for $220,000. What is the amount and nature of his gain? A. $0. B. $31,000 long-term capital gain. C. $31,000 short-term capital gain. D. $30,000 long-term capital gain.

8. The answer is B. Emilee's modified adjusted gross income is $260,000 (170,000 + $50,000 + $40,000). The municipal bond interest is not included in the calculation, because it is tax-exempt. Emilee's modified adjusted gross income exceeds the threshold of $200,000 for single taxpayers by $60,000. Her net investment income is $90,000 ($50,000 + $40,000). Her NIIT is based on the lesser of $60,000 (the amount that Emilee's modified adjusted gross income exceeds the $200,000 threshold] or $90,000 (Emilee's Net Investment Income). Emilee owes NIIT of $2,280 ($60,000 x 3.8%).

8. Emilee files single. She has the following income in 2022: • $50,000 in capital gains from the sale of stock. • $40,000 in passive royalty income. • $20,000 in municipal bond interest. • $170,000 of self-employment income. Calculate her net investment income tax, if any. A. $0 B. $2,280 C. $3,420 D. $4,180

8. The answer is C. Jabbar does not need to ask if the entire credit was used towards the purchase of their main home. From the instructions for Form 5405: To properly complete Form 5405, all of the questions should be asked except for the use of the proceeds of the credit. There was no stipulation as to how the credit would be used when the first-time homebuyer received it. (This question is modified from an actual EA exam question that was released by the IRS).

8. Jabbar is a tax preparer. Upon reviewing a new client's prior-year tax return, Jabbar sees taxes paid for the first-time homebuyer credit repayment. Jabbar should ask the taxpayer all of the following questions except: A. What was the total amount of the original credit received? B. How much of the original credit was repaid on the prior year's returns? C. Was the entire credit used towards the purchase of their main home? D. Are the taxpayers still using the home that generated the credit as their main home?

a (Kenia can use $2,000 of her rental loss to offset the passive activity income from the limited partnership. The remaining $1,500 loss can be offset against her $40,000 of wages. A taxpayer can deduct up to $25,000 per year of losses for rental real estate activities in which she actively participates, as long as their modified AGI does not exceed a certain amount. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities against nonpassive income.)

8. Kenia is single and has $40,000 of wages and $2,000 of passive activity income from a limited partnership. These are her only sources of income for the year. She also has ($3,500) in passive activity losses from a rental real estate activity in which she actively participated. Which of the following statements is correct? A. The first $2,000 of her $3,500 passive loss offsets her passive income. She can deduct the remaining $1,500 loss to reduce taxation of her wages. B. She cannot deduct the passive loss to reduce taxation of her wages. C. She cannot offset the rental loss against the passive income from the partnership because it is not the same type of passive activity. D. She must carry over her loss to the subsequent tax year.

8. The answer is D. They can contribute $13,000 in 2022 if they file jointly. Kristina can contribute $6,000, and Ruslan can contribute $7,000 because he is age 50. Even though Kristina only has $1,200 of qualifying compensation, she can use her husband's compensation to determine her maximum contribution (as long as they file jointly).

8. Kristina, 48, is a full-time graduate student with $1,200 of wages. She marries Ruslan, 50, during the year. Ruslan has taxable wages of $66,000 in 2022. What is the maximum they can contribute to their traditional IRA accounts in 2022 if they file jointly? A. $1,200 B. $8,200 C. $12,000 D. $13,000

8. The answer is C. In most cases, the maximum penalty amount for all years under examination will be limited to 50% of the highest aggregate balance of all unreported foreign financial accounts during the years under investigation.

8. Regarding the FBAR reporting requirement, the IRS issued guidance on penalties for failing to file the FBAR that caps the maximum percentage of the penalty. In most cases, the total penalty amount for all years under examination will be limited to___________ of the highest aggregate balance of all unreported foreign financial accounts during the years under investigation. A. 10% B. 25% C. 50% D. 75%

c (The maximum amount that is ever taxable on net Social Security benefits is 85%, which in Sheldon's case is 11,720 x 85% = 9,962.)

8. Sheldon received Social Security in 2022 totaling $11,720. Sheldon also liquidated all of his stock and moved into senior housing during the year. He received $350,500 of taxable income from the stock sale. What is the maximum taxable amount of Sheldon's Social Security benefits? A. $0 B. $5,860 C. $9,962 D. $11,720

c (Withdrawals for nonmedical expenses from an HSA are allowed but are subject to income tax. Nonmedical distributions are also subject to an additional penalty tax of 20%, except when the taxpayer has turned 65, become disabled, or died. Sherry has become permanently disabled, in which case her HSA withdrawals are not subject to penalty, but the withdrawals will still be subject to income tax.)

8. Sherry is 31 and has an HSA. She becomes permanently disabled during the year due to a serious accident. Sherry withdraws all the money from her HSA, but does not use the funds for medical expenses, because she became eligible for Emergency Medicaid and Medicaid covered her medical expenses. Which of the following statements is correct? A. She may withdraw money from her HSA for nonmedical expenses, but the withdrawals will be subject to income tax and also an additional penalty of 20%. B. She may not take nonmedical distributions from her account. C. She may withdraw money from her HSA for nonmedical expenses. The withdrawals will be subject to income tax but will not be subject to a penalty. D. She must be at least 65 to take nonmedical distributions from an HSA.

c (Elise and the beneficiaries can be held liable for the tax debt, up to the value of the assets distributed. The tax liability for an estate attaches to the assets of the estate itself. If the assets are distributed to the beneficiaries before the taxes are paid, the executor and the beneficiaries can be held liable for the tax debt, (up to the value of the assets distributed). )

8. The executor of Ophelia's estate is her sister, Elise. Elise decides to make a distribution of 100% of the estate's assets before paying the estate's income tax liability. Which of the following statements is correct? A. The beneficiaries of the estate can be held liable for the payment of the liability, even if the liability exceeds the value of the estate assets. B. No one can be held liable for the tax if the assets have been distributed. C. Elise and the beneficiaries can be held liable for the tax debt, up to the value of the assets distributed. D. None of the above.

d (Unused capital losses may be carried over indefinitely until they are utilized. There is no limit to how many years an individual taxpayer can claim the losses. However, capital losses do not transfer to an estate or surviving spouse after the taxpayer has died.)

8. What is the maximum number of years a taxpayer can carry over an unused capital loss? A. One year. B. Two years. C. Five years. D. Indefinitely.

d (The deduction for capital improvements is limited to the excess of the actual cost of the improvements over the increase in the fair market value of the home. Since the increase in the fair market value of the home exceeds the cost of the elevator, none of the costs can be deducted as a medical expense.)

8. Which of the following home improvements cannot be deducted as an itemized medical expense? A. The cost of installing stairlifts for a disabled individual. B. The cost of lowering cabinets to accommodate a disability. C. The cost of making doorways wider to accommodate a wheelchair. D. An elevator that costs $14,000 and adds $15,000 to the FMV of the home.

b

9. Ahmad is a qualified farmer. He trades a plot of pastureland (adjusted basis $300,000, FMV $665,000) for agricultural land with an existing almond orchard (FMV $725,000), and in addition, he pays $60,000 of cash to complete the exchange. What is his basis in the orchard property? A. $325,000 B. $360,000 C. $690,000 D. $725,000

c (No deduction for Delia's funeral expenses can be taken on Form 1041 or Form 1040. Funeral expenses may be claimed only as a deduction from the gross estate on Form 706. If an estate tax return is not filed, then the funeral expenses are not deductible.)

9. Delia's estate has funeral expenses for the cost of her burial. How should the executor deduct these costs? A. Funeral expenses are an itemized deduction on Form 1040. B. Funeral expenses are deducted on Form 1041. C. Funeral expenses are deducted on Form 706. D. Funeral expenses are a non-deductible expense.

c (Kyung-Hu may deduct the entire $968 as a rental expense on Schedule E. Generally, the expenses of renting a property, such as maintenance, insurance, taxes, and interest, can be deducted from rental income. This cost is a repair, not an improvement, because the window was already broken. If all the windows had been replaced with energy-efficient windows, the cost would have been considered an improvement and added to the property's basis.)

9. Kyung-Hu owns a residential rental house. Last year, she paid $968 to repair a broken window. The cost of the labor was $468, and the cost of the replacement window was $500. She replaced the broken window with a premium energy-saving window. What is the correct treatment of this expense? A. She cannot deduct the cost since it was an improvement; she must add it to the basis of the property. B. She can deduct $468 as a rental expense on Schedule E (the labor cost). The cost of the actual window ($500) must be capitalized and depreciated. C. She can deduct the entire $968 as a rental expense on Schedule E. D. She can deduct $968 on Schedule A as an itemized deduction.

c (The wages and the prize are both reportable as taxable income. Child support is not taxable to the receiver, nor deductible by the payor. The alimony is taxable to Marcello and deductible by his ex-wife, since the divorce decree was finalized before 2019, when the TCJA alimony changes took effect. The answer is calculated as follows: ($32,000 + $600 + $2,000) = $34,600.)

9. Marcello received $32,000 of wages in 2022. He also won a prize from his homeowner's association for developing a new water conservation plan. The prize was free landscaping service for a year, valued at $600. Marcello also received $7,000 in child support and $2,000 in alimony from his ex-wife, whom he divorced in 2017. Marcello has sole custody of his children. What is Marcello's gross income (before deductions and adjustments) for 2022? A. $32,000 B. $32,600 C. $34,600 D. $39,600

b (Marshall can only deduct the $140 early withdrawal penalty from the CD. Early withdrawal penalties are deductible if made from a time deposit account, such as a certificate of deposit. The other types of penalties are not deductible.)

9. Marshall lost his job last year and withdrew money from a number of bank and investment accounts. He paid the following penalties: The penalty for early withdrawal from a CD - $140 The penalty for early withdrawal from a traditional IRA-$200 A late penalty for not paying his credit card on time-$50 What amount can Marshall deduct as an adjustment to income on his Form 1040? A. $0 B. $140 C. $200 D. $250

c (Salazar has a short-term capital loss because he did not hold the stock for more than one year. He can deduct $3,000 of the loss, netting it against his wage income. The remaining amount, $4,000, must be carried over to future tax years. A capital loss carryover retains its character as either long-term or short-term.)

9. Salazar bought ten shares of Atomic Corporation stock on May 2, 2021. He sold them for a $7,000 loss on May 2, 2022. He has no other capital gains or losses. He also has $20,000 of wage income during the year. How must Salazar treat this transaction on his tax return? A. He can deduct the $7,000 as a long-term capital loss on his return. B. He can deduct the $7,000 as a short-term capital loss on his return. C. He can deduct $3,000 as a short-term capital loss to offset his wage income on his return. The remaining amount, $4,000, must be carried over to future tax years. D. He cannot deduct any of the capital loss; it must be carried over to future tax years.

c (Wage income is never considered self-employment income. The other examples listed are all types of self-employment income and subject to self-employment tax on Form 1040.)

9. Self-employment income does not include: A. The income of ministers for the performance of services such as baptisms and marriages. B. Ordinary partnership income allocated to general partners on Schedule K-1. C. Wages earned by a temporary employee. D. Payments received by independent contractors.

9. The answer is D. Usman and Alyssa must pay the unpaid balance of the entire credit in 2022, the year they made the rental conversion.

9. Usman and Alyssa filed their 2008 return as Married Filing Jointly and claimed $7,500 for the firsttime homebuyer credit. The couple used their home as a primary residence. In 2022, Usman and Alyssa converted the home into a rental property. What, if any, is the tax obligation of the taxpayers regarding the first-time homebuyer credit? A. Since they used the home at least 2 of the last 5 years, there is no requirement to repay. B. They must pro-rate the credit received over 15 years and repay 50% of the original credit. C. They must reduce their basis in the property by 50% of the unpaid balance of the credit. D. They must repay the entire unpaid balance of the credit in the current year.

9. The answer is D. Form 8962, Premium Tax Credit, is used to calculate the PTC and reconcile advance payments of the credit. Taxpayers who receive advance payments of the Premium Tax Credit are required to file a tax return and reconcile the payments on Form 8962; this is regardless of the taxpayer's income level.

9. Which form is used for the reconciliation of the Premium Tax Credit? A. Form 1095-B B. Form 1095-C C. Form 8832 D. Form 8962

a (A taxpayer has the option of claiming sales taxes as an itemized deduction on Schedule A instead of claiming state and local income taxes. A taxpayer cannot claim both. The other expenses listed are not deductible on Schedule A.)

9. Which of the following can taxpayers deduct on Schedule A? A. Local sales taxes. B. Fines for speeding. C. Social Security taxes. D. Homeowners' association fees.

9. The answer is A. Distributions made prior to age 59 and a half are subject to a 10% early withdrawal penalty, (if no exception applies). Some exceptions that allow early distributions from an IRA, as well as from qualified retirement plans, include the following: • Distributions made to a beneficiary after death. • Distributions made because of permanent disability. • Distributions to the extent of medical expenses (medical expenses that exceed 7.5%-of-AGI), whether or not the taxpayer itemizes deductions for the year. • Distributions made due to an IRS levy. • Qualified disaster distributions. The distributions listed above are not subject to the 10% early withdrawal penalty.

9. Which of the following distributions from a traditional IRA is subject to an additional 10% penalty? A. Distributions made prior to age 59 and a half. B. Distributions made after age 70 and a half. C. Distributions made to a beneficiary after the IRA owner's death. D. Distributions made due to an IRS levy.

9. The answer is C. Foreign real estate held in a foreign trust would be a specified foreign asset. If the real estate is held through a foreign entity, such as a corporation, partnership, trust or estate, then the interest in the entity is a specified foreign financial asset that must be reported on Form 8938. Answers "A" and "B" are incorrect, because directly held tangible assets, such as art, antiques, jewelry, cars and other collectibles, are not specified foreign financial assets. Answer "D" is incorrect, because payments or the rights to receive the foreign equivalent of social security are not specified foreign financial assets and are not reportable.

9. Which of the following is a "specified foreign asset" for reporting purposes? A. Artwork displayed in a foreign museum. B. Jewelry held in a foreign country. C. Real estate held in a foreign trust. D. Payments or the rights to receive the foreign equivalent of social security.

9. The answer is A. Felix is a qualifying child for the Child Tax Credit because he was under age 17 at the end of the year. Siblings can be qualifying children for purposes of this credit, and half-siblings are treated the same as full siblings for tax purposes.

9. William is 53 and unmarried. William's half-brother, Felix, turned 16 on June 30, 2022. Felix lived with William all year, and he is a U.S. citizen. William claimed Felix as a dependent on his return. Which of the following statements is correct? A. Felix is a qualifying child for the Child Tax Credit. B. Felix is not a qualifying child for the Child Tax Credit, because he is a sibling. C. Felix is not a qualifying child for the Child T ax Credit because siblings do not qualify. D. Felix only qualifies for the Child Tax Credit if he is a full-time student.

d (The payment of personal expenses (such as a gym membership, personal rent, and club dues) on behalf of an employee-shareholder is treated as a constructive distribution. In this case, the payment of his monthly gym membership is likely to be reclassified as a taxable dividend to Kendrick or a nondividend distribution, depending upon whether the corporation has earnings and profits. Answer "A" is incorrect because the use of a company copier is an allowable de minimis fringe benefit. Choice "B" and "C" are incorrect because dental and medical benefits, as well as the reimbursement of license fees directly related to his job are an allowable employee benefit. See Publication 5137, Fringe Benefit Guide, for more information.)

1. Kendrick is a 5% shareholder of a family-owned C corporation, Archetype Builders, Inc., where he works as a full-time architect. Archetype Builders, Inc. pays for many expenses for Kendrick's benefit. Which of the following would the IRS likely classify as a constructive distribution, and therefore taxable to Kendrick and non-deductible to the corporation? A. Use of a company copy machine for making occasional personal copies. B. Payment of licenses and memberships directly related to his job. C. Dental insurance premiums paid by the corporation through a cafeteria plan. D. Parent of Kendrick's monthly gym membership by the corporation.

d (Mackenzie's basis is determined as follows: ($50,000 + $4,000 = $54,000). She cannot deduct the delinquent property taxes on her Schedule A. Any obligations of the seller assumed by the buyer increase the basis of the asset and are not currently deductible. Since Mackenzie did not owe the property taxes, but she still agreed to pay them, she must add the property tax to the basis of the property.

1. Mackenzie purchases an empty lot at auction for $50,000. She pays $15,000 in cash and finances the remaining $35,000 with a bank loan. The lot has a $4,000 tax lien against it for unpaid property taxes, which she also agrees to pay as a condition of the sale. What is Mackenzie's basis in the lot? A. $19,000 B. $46,000 C. $50,000 D. $54,000

A (Reyna must file a tax return. A single dependent whose earned income was more than $12,950 in 2022 must normally file a return. Her father may still claim Reyna as a dependent and a qualifying child because she is a full-time student and under age 24 at the end of the year, and did not provide more than one-half of her own support.)

1. Reyna, age 22, is single and a full-time college student who is claimed as a dependent on her parents' tax return. Her parents provide the majority of her support and pay for all her college tuition and books. In 2022, Reyna earned $13,300 in wages from her part-time job as a waitress. She had no other income. Is she required to file a tax return? A. Yes. B. No. C. Reyna is only required to file a tax return if she is self-employed. D. Reyna should file a return because she will receive a refund, but she is not required to file.

C (Kayden cannot be a qualifying child for Ursula because he does not meet the age test, but he can be claimed as a qualifying relative. The 2022 limit for gross income for qualifying relatives is $4,400. Therefore, if Kayden earns less than this amount during the year, his mother can claim him as a "qualifying relative" dependent on her tax return.)

1. Ursula and her son live together. Kayden is 27 years old, not disabled, and has a part-time job. Ursula provides more than half of Kayden's support. Ursula can claim Kayden as a qualifying relative, as long as he does not earn _____ or more in 2022. A. $1,100 B. $3,500 C. $4,400 D. $12,400

A (Although the interest is not taxable, Araceli must still report the income on her federal return. Interest earned on state and local bonds (municipal bonds or "muni" bonds) are generally tax-exempt at the federal level. Note that these bonds may be taxable at the state and local level, even if they are not taxable at the federal level.)

10. Araceli received $500 of interest from municipal bonds issued by the state of New Jersey. How should she report this on her Form 1040? A. It must be reported on her tax return, but it is not taxable income. B. It must be reported as interest income, and it is 100% taxable. C. She does not have to report the bond interest. D. She must report the interest on her state tax return, but it does not have to be reported on her federal return.

A (Bradley is Cheryl's qualifying child because he meets the age test, support test, and relationship test. Also, because Bradley is single, he is a qualifying person for Cheryl to claim head of household filing status. Bradley is not required to be a full-time student because any child under the age of 19 at the end of the tax year will be treated as a qualifying child if all the other tests are met. Bradley is only 18 years old and therefore passes the age test.)

10. Cheryl is 46 and unmarried. Her nephew, Bradley, lived with her all year and turned 18 years old on December 28, 2022. Bradley is not a student anymore because he finished high school last year and did not go to college. Bradley did not provide more than one-half of his own support. He had $4,200 of income from wages and $1,020 of investment income. Which of the following statements is correct? A. Bradley is Cheryl's qualifying child. B. Bradley is not a qualifying child; however, Cheryl can claim him as a qualifying relative. C. Bradley is neither a qualifying child nor a qualifying relative. D. Cheryl can claim Bradley only if he goes back to college.

a (Clergy members may exclude from gross income for income tax purposes, but not for self-employment tax purposes, the rental value of a home, or a rental allowance to the extent the allowance is used to provide a home, even if deductions are taken for home expenses paid with the allowance.)

10. Orrin is an ordained minister in the Evangelical Church of Savannah. He owns his home, and his monthly house payment is $900. His monthly utilities total $150. The fair rental value in his neighborhood is $1,000. Orrin receives a housing allowance from his church in the amount of $950 per month. What portion of his monthly housing allowance would he include in his gross income for income tax purposes? A. $0 B. $100 C. $150 D. $950

D (An executor for a deceased taxpayer can amend a joint return to an MFS return up to one year after the filing deadline. This is the only exception to a rule that generally prevents a taxpayer from amending a joint return to a separate return past the filing deadline. Answer "C" is incorrect because if a marriage has been annulled, the filing status would be amended to "single" rather than "MFS" because an annulment invalidates the original marriage contract.)

10. When may a taxpayer amend a joint tax return from "married filing jointly" to "married filing separately" after the original filing deadline? A. Never. B. Only within the statute of limitations for filing amended returns. C. Only when a marriage has been annulled. D. An estate's personal representative may amend a joint return to MFS for the decedent, if elected by the surviving spouse.

d (The basis of property must be increased for tax assessments the taxpayer is required to pay to finance local improvements, such as paving roads, installing pedestrian sidewalks, and building ditches. Basis is decreased for depreciation deductions and manufacturers' rebates received, and when the taxpayer incurs theft or other casualty losses.)

10. Which of the following does not decrease the basis of an asset? A. Depreciation B. Manufacturers' rebates C. Theft losses D. Assessments for local improvements

D (Living outside the country is not a valid reason to extend the statute of limitations for claiming a refund. In some cases, a request for a tax refund will be honored past the normal three- year deadline. Exceptions exist for military personnel, individuals who are financially disabled, taxpayers who live in federally-declared disaster areas, and taxpayers who have bad debts from worthless securities.

10. Which of the following is not an acceptable reason for extending the statute of limitations for claiming a refund past the normal filing deadline? A. A bad debt from worthless securities. B. Living in a federally declared disaster area. C. Exceptions for military personnel. D. Living outside the country for three years.

A (Even though she filed an extension request using Form 4868, Catherine may owe interest and a late payment (i.e., failure-to-pay) penalty on the amount owed if she does not pay the tax due by the regular due date. However, she will not be assessed a late filing penalty (failure-to-file) because she filed her tax return before the extended due date.)

11. Catherine files an extension request (Form 4868), which allows her an additional six months to file her tax return. When she finally prepares her return on October 6, she realizes that she owes a substantial amount of tax. She pays the tax when she files the return, which she does before the extended due date. Which penalties, if any, will Catherine be likely to owe? A. She will owe interest on the amount owed and a late payment penalty. B. She will owe interest on the amount owed and a late filing penalty. C. She will owe interest on the amount owed, a late payment penalty, and a late filing penalty. D. She will not owe any penalties because she filed before the extended due date and paid the taxes owed with the return.

d (Manish's basis in the truck includes the cost of acquiring the property (including any taxes associated with the purchase and delivery charges) and preparing it for use (in this case, installing the bedliner). Therefore, his basis is as follows: ($15,000 + $1,300 + $250) = $16,550. Any funds that are borrowed to pay for an asset are included in the basis.)

11. Manish purchases a work truck for $15,000 to use in his carpentry business. He pays $5,000 in cash and finances the remaining $10,000 with a five-year loan. He pays the dealer taxes and delivery costs of $1,300 and an additional $250 to install a protective bedliner. What is Manish's basis for depreciation of the truck? A. $6,550 B. $10,000 C. $16,300 D. $16,550

A (His parents may claim Orion as a qualifying child. He was a full-time student, and temporary absences for education are allowed and do not count as time living away from home. The scholarship does not have to be counted as part of the support test.)

11. Orion is 22 years old, single, and a full-time graduate student. He studied on a student exchange program in Costa Rica during the year and did not have any taxable income, although he was awarded a scholarship of $6,000, which he used for his tuition. He did not live at home with his parents a single day during the tax year. Orion's parents provided the majority of his financial support and want to claim him as a dependent. Which of the following is true? A. His parents may claim Orion as a qualifying child. B. His parents may claim Orion as a qualifying relative. C. His parents may not claim Orion as a dependent. D. Orion should file his own tax return.

a (A de minimis fringe benefit is deductible by the employer but is not taxable to the employee. The IRS defines a de minimis benefit in this way: a benefit that, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical. For example, a de minimis fringe benefit might include occasional snacks, coffee, or doughnuts provided in a company's break room. The items in the other choices would be taxable to the employee.)

11. Which of the following types of fringe benefits are normally deductible by an employer, but not taxable to the employee? A. De minimis fringe benefit. B. Use of an employer's apartment, vacation home, or boat for personal purposes C. Membership in a country club or athletic facility. D. A gift card.

A (A U.S. citizen (or U.S. resident), who is married to a nonresident alien, can elect to file a joint return as long as both spouses sign the return and agree to be taxed on their worldwide income. A Social Security number is not required for the nonresident spouse because a nonresident spouse that is ineligible for an SSN may request an ITIN to file jointly with a U.S. resident spouse. An election statement must be attached to the return. )

11.A U.S. citizen who is married to a nonresident alien can file a joint return as long as both spouses: A. Sign the return and agree to be taxed on their worldwide income. B. Are living overseas and do not plan to reside in the United States. C. Have valid Social Security numbers. D. Are physically present in the United States.

D (For the tax year 2022, Giuseppe's failure-to-file penalty is $450 or 100% of the unpaid tax (whichever is less) because he filed his tax return more than 60 days late.)

12. Giuseppe files his 2022 tax return more than 60 days late, because he forgot to file an extension, and he owes tax when he files his return. What is the minimum penalty he will face? A. A minimum of 25% of his unpaid taxes. B. A minimum of 5% of his unpaid taxes. C. The smaller of $275 or 100% of the unpaid tax. D. The lesser of $450 or 100% of the unpaid tax.

D (In 2022, Liza is eligible for "qualifying surviving spouse" filing status. Liza and Stuart qualified to file MFJ in the year he died, with Liza signing the tax return as a surviving spouse. The year of death is the last year for which a taxpayer can file MFJ. For each of the two tax years following the year of the spouse's death, the surviving spouse can use the "qualifying surviving spouse" status, if she has a qualifying dependent and does not remarry.)

12. Liza and Stuart were married for nine years. Stuart died on April 3, 2020. Liza did not remarry after her husband's death. Liza has one dependent son, age 7. Which filing status should Liza use for her 2022 tax return? A. Single. B. Married filing jointly. C. Head of household. D. Qualifying surviving spouse.

C (A taxpayer cannot claim another person as a dependent if that person provided more than one-half of their own support (more than 50%). )

12.A taxpayer cannot claim a qualifying child as a dependent if that child provides more than ___ of their own support. A. 25% B. 33% C. 50% D. 75%

C (The dividends earned on deposits in credit unions are reported as interest income rather than dividend income.)

12.Which of the following dividends should be reported as interest income on a taxpayer's return? A. Stock dividends. B. Preferred dividends. C. Dividends earned on deposits in credit unions. D. Qualified dividends.

A (Only Luther or Silas are eligible to claim Greta under a multiple support agreement. Caprice is not eligible because she does not provide more than 10% of her mother's support. Either Luther or Silas may use Form 2120, Multiple Support Declaration, to report their multiple support arrangement.)

13. Greta is 80 years old. She has three children: Luther, Silas, and Caprice. Each child contributes financially towards her support. Luther and Silas each provide 45%, and Caprice provides 10%. Which taxpayer would be eligible to claim Greta as a dependent parent under a multiple support agreement? A. Luther or Silas. B. Caprice or Silas. C. Luther, Silas, or Caprice. No one is eligible to claim Greta

c (Use of a company vehicle for commuting is not a qualified fringe benefit. Commuting expenses are not deductible. The use of a company van after normal working hours is personal use and not business use, so it would result in taxable income to the employee. The cell phone, reimbursements for business travel, and the occasional personal use of an office copy machine are noncash fringe benefits that are not taxable.)

13. Which of the following fringe benefits provided by the employer will result in taxable income to the employee? A. A cell phone used by a salesperson to talk to clients while on the road. B. Reimbursements paid by the employers for qualified business travel expenses. C. Use of a company van for daily commuting. D. Occasional personal use of an office copy machine.

d (Demolition costs are not deductible. They must be added to the basis of the land on which the building was located. The costs increase the basis of the land, and not the basis of any subsequent building that may be constructed on the property at a later date.)

13. Which of the following is added to a property's basis instead of deducted on the tax return? A. Casualty loss. B. Personal property tax based on the value of a car. C. Investment interest expense. D. The cost of demolishing a building.

A (Nondividend distributions are not paid out of a corporation's earnings and profits. They are considered a recovery or return of capital and therefore are generally not taxable. However, these distributions reduce the taxpayer's basis in the stock of the corporation. Once the basis in the stock is reduced to zero, any additional nondividend distributions are taxed as capital gains.)

13.Nondividend distributions are: A. Considered a return of capital. B. Never taxable. C. Always taxable as ordinary income. D. Always taxable as passive income.

C (A dependent parent does not have to live with a taxpayer for the taxpayer to elect the head of household filing status. This special rule applies to parents who are related to the taxpayer by blood, marriage, or adoption if the taxpayer pays more than half of the qualifying parent's household costs. Answer "A" is incorrect because a married person can still qualify for head of household if they are "considered unmarried" for tax purposes. A married person can be "considered unmarried" in certain circumstances if they live apart from their spouse and can file as head of household.)

13.Which of the following statements is correct regarding the HOH filing status? A. The taxpayer must be unmarried to qualify for the head of household filing status. B. The taxpayer's spouse must live in the home during the tax year. C. The taxpayer's dependent parent does not have to live with the taxpayer to qualify for head of household filing status. D. The taxpayer must have paid roughly half of the cost of keeping up the house for the entire year.

B (Durant has until the original due date of the return (not including extensions) to pay the amount owed and not incur a late payment penalty. Taxpayers should submit their payment of taxes due on or before the unextended due date. For the 2022 tax year, Durant has until April 18, 2023, to pay the amount he owes.)

14. Durant files his 2022 tax return on February 25, 2023. He has a balance due of $800 on the return. How long can he wait to pay the amount owed and not incur a late payment penalty? A. He will owe a late payment penalty unless he pays his tax liability when he files his return. B. He has until the due date of the return (not including extensions) to pay the amount owed and not owe a penalty. C. He has until the due date of the return (including extensions) to pay the amount owed and not owe a penalty. D. He does not have to pay the amount due by a certain date because it is less than the safe harbor amount of $1,000

b (Mccoy's basis in each share after the stock dividend is $15 ($45 -h 3). If a taxpayer receives a nontaxable stock dividend, he divides the adjusted basis of the stock by the total number of shares of stock (old and new). The result is the taxpayer's basis for each share of stock.)

14. Mccoy bought one share of Sugar City Media, Inc. on January 1 for $45. On December 20, the corporation distributed two new shares of common stock for each share held. Mccoy then had three shares of common stock What is Mccoy's basis for each share? A. $5 B. $15 C. $45 D. $135

a (The reimbursed amounts are not taxable to Rasheed. Under an accountable plan, employee reimbursements are not included in the employee's income. In this scenario, the travel expenses incurred by the employee would be deductible by Rasheed's employer as an ordinary business expense.)

14. Rasheed is employed as a staff accountant by a large CPA firm. When he travels for his audit work, he submits his travel receipts for reimbursement by his firm, which has an accountable plan for its employees. Which of the following statements is correct about accountable plans? A. The reimbursed amounts are not taxable to Rasheed. B. Rasheed may deduct his travel expenses on his personal tax return. C. His employer cannot deduct the travel expenses as a business expense, even though Rasheed was reimbursed in full. D. Reimbursed expenses are taxable to the employee.

A (The married filing separately (MFS) status is for taxpayers who are married and either: • Choose to file separate returns, or • Do not agree to file a joint return. )

14. The married filing separately (MFS) status is for taxpayers who: A. Are married and choose to file separate returns. B. Are legally divorced on the last day of the year. C. Are unmarried but engaged to be married. D. Are unmarried but have a dependent child.

B (Camille is classified as a U.S. resident alien for tax purposes in 2022 because she has already been in the U.S. during five previous calendar years in exempt student immigration status (three years with her father in F-2 status from 2012-2014, and two years as a student herself in 2020 and 2021). Camille should file Form 1040 in 2022, not Form 1040-NR (this question is based on a case study in the IRS' VITA tax training program).)

15. Camille is 26 years old and an international student at Tulane University. She first came to the U.S. in 2012 from France in F-2 student immigration status with her father while he was completing his doctorate. They remained in the U.S. in the same status until he completed his doctorate in 2014, and then returned home to France. Camille reentered the U.S. in J-1 student immigration status in 2020, and has not left the U.S. nor changed her immigration status. Camille works on-campus as a part-time tutor and earns $15,700 in wages during the year. For federal income tax purposes, what is Camille's residency status in 2022? A. Camille is a nonresident alien. B. Camille is a resident alien. C. Camille is an undocumented alien. D. Camille is a dual-status alien.

B (Regardless of the amount she owed in a prior year, Corinne is not required to pay estimated tax if she expects and in fact has a zero tax liability for the current tax year.)

15. Corinne is age 29 and a legal U.S. resident (a green card holder) who paid estimated tax in the prior year totaling $2,560. On December 10, 2022, she closed her business as a self-employed translator. She is now unemployed and living with her parents. Corinne expects to have zero tax liability in 2023. Which of the following statements is correct? A. She is still required to make estimated tax payments. B. She is not required to make any estimated tax payments in 2022. C. She must pay a minimum of $2,560 in estimated tax payments in 2022, or she will be subject to a failure-to-pay penalty. D. She must make a minimum of $1,000 in estimated tax payments in 2022, or she will be subject to an underpayment penalty.

a (Paxton only has to include his wages on his tax return ($61,000). The free flights offered on standby to airline personnel are considered no-additional-cost services and are not taxable to the employee. Reimbursements under an accountable plan and amounts paid for worker's compensation are nontaxable. Since Paxton returned the unspent amounts to his employer, the travel reimbursements qualify under an accountable plan, and the amounts spent are not taxable to him.)

15. Paxton is a flight attendant who earned wages of $61,000 in 2022. The airline provided free transportation on standby from his home in Little Rock to the airline's hub in Charlotte, NC. The fair market value of the commuting flights was $5,000. Paxton also received advances under an accountable plan of $9,000 for overnight travel, but only spent $6,000. He returned the excess ($3,000) to his employer. Paxton was injured on the job and received worker's compensation of $4,100. What amount must he include in gross income on his individual tax return? A. $61,000 B. $64,000 C. $65,100 D. $71,000

C (If a taxpayer omitted more than 25% of his gross income on his return, the IRS has up to six years to assess a deficiency. [1] The deadline for most taxpayers to file their 2022 federal tax returns is April 18, 2023, instead of the usual April 15 date. This is because April 15, 2023 is on a Saturday, and Emancipation Day, which is a holiday recognized in Washington D.C., is on Monday, April 17, 2023.)

16. What is the normal statute of limitations for an IRS assessment on a tax return from which more than 25% of the taxpayer's gross income was omitted? A. There is no statute of limitations on the return. B. Three years from the date the return was filed. C. Six years from the date the return was filed. D. Ten years from the date the return was filed.

B (Church employees who are exempt from Social Security and Medicare taxes and have wages of $108.28 or more for the year are required to file a tax return. In answer "B," the church employee's wages are below that threshold. In all of the other answers, the taxpayer would be required to file a return.)

16.All of the following individuals are required to file an income tax return except: A. A taxpayer who owes household employment tax for a nanny. B. A church employee who is exempt from FICA taxes, who earned $104 of wages in 2022. C. A 66-year-old unmarried taxpayer who is blind and earned $19,200 in 2022. D. A 26-year-old single taxpayer who earned $8,500 in 2022 and owes a 10% penalty on withdrawals from a traditional IRA account.

B (Taxpayers should keep the supporting documentation for their tax returns for at least three years from the date the return was filed, or three years from the date the return was due, whichever is later. This includes applicable worksheets, receipts, and other forms.)

6. Generally, how long should taxpayers keep the supporting documentation for their tax returns? A. Four years from the date the return was filed, or the return was due, whichever is later. B. Three years from the date the return was filed, or the return was due, whichever is later. C. Two years from the date the return was filed, or the return was due, whichever is later. D. Ten years from the date the return was filed, or the return was due, whichever is later.

D (Married couples must agree to file jointly. If one spouse does not agree to file jointly, they are individually subject to the MFS filing threshold. In this case, Adrienne and Troy are both required to file separate tax returns because both are above the applicable earnings threshold for MFS.)

17. Adrienne and Troy are married and lived together all year. Adrienne earned $1,900 in wages during the year, and Troy earned $72,000. Adrienne wants to file a joint return, but Troy refuses to file with Adrienne and instead files a separate return on his own. Which of the following statements is correct? A. Adrienne can file a joint tax return and e-file it if Troy refuses to provide his signature. B. Adrienne can file as single because Troy refuses to sign a joint return. C. Adrienne does not have a filing requirement because her income is below the filing threshold. D. Adrienne and Troy must both file separate returns.

c (Alphonse must report the interest income in the year he receives it. Only the $175 of interest income is taxable. Life insurance proceeds are not taxable to the recipient. However, any interest earned on life insurance proceeds is taxable.)

17.Alphonse was the sole beneficiary of his mother's life insurance policy. His mother died on June 1, 2022. Alphonse received the following payments on December 31, 2022: • $360,000 lump-sum death benefit from his mother's life insurance policy. • $175 of interest income on the life insurance proceeds. What is the proper treatment of these payments? A. The life insurance proceeds are taxable in 2022. The interest is not taxable. B. The life insurance proceeds and interest income are both taxable to Alphonse. C. Only the $175 of interest income is taxable in 2022. The life insurance proceeds are not taxable. D. None of these payments are taxable to Alphonse. Instead, they are taxable to his mother's estate.

d (Mileage reimbursements, if paid through an accountable plan, are not included in an employee's wages.)

18. Of the following items, only ___ is not taxable to an employee: A. A holiday bonus. B. Overtime pay. C. Vacation pay. D. A mileage reimbursement under an accountable plan.

C (A parent is the only dependent relative who does not have to live with the taxpayer for the taxpayer to claim "head of household" status. In order to file for head of household, the "qualifying person" must be one of the following: a birth child, adopted child, grandchild, stepchild, foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendant of any of those, or a parent. The qualifying person must also live with the taxpayer (unless the absence is temporary). The only exception to the "residency test" is a parent, who does not have to live with the taxpayer. A cousin does not qualify because they do not meet the relationship test. The adopted child in answer "D" does not qualify because the child lived with the taxpayer for less than one-half of the year.)

18. Which dependent relative may qualify a taxpayer for head of household filing status? A. An adult stepdaughter who lives in her own apartment who is supported by the taxpayer. B. A cousin who lives with the taxpayer all year. C. A parent who lives in his own home and not with the taxpayer. D. An adopted child who lived with the taxpayer for five months of the tax year.

C (Harish qualifies for head of household filing status because he can be "considered unmarried" for tax purposes. His son lived with him for more than six months, he did not live with his spouse the last half of the year, and he paid more than half the cost of keeping up a home for the year for a qualifying child. Couples who are living apart but not yet divorced or legally separated are allowed to file jointly, but both spouses must agree to do so. Therefore, if Eleanor refuses to file jointly with Harish, the most beneficial filing status for Harish is head of household. )

19. Harish is 39 years old and has lived apart from his wife, Eleanor, since February 1, 2022. Their divorce was not yet final at the end of 2022, and they were not legally separated under a separate maintenance decree. They have two children, a son, age fifteen, and a daughter, age sixteen. After Harish and Eleanor split up, their son lived with Harish. Their daughter chose to live with Eleanor. Harish provides all of the support for the minor child living with him. Eleanor refuses to file jointly with Harish in 2022. The most beneficial filing status that Harish qualifies for is: A. Married filing separately B. Single C. Head of household D. Married filing jointly

d (A taxpayer's vacation property was sold on December 28, 2022, but whose payment was in escrow until January 4, 2023 would not have constructive receipt. A taxpayer does not need physical possession of income to have constructive receipt. However, income is not considered constructively received if the taxpayer cannot access the funds because of restrictions. Since the taxpayer's control of the receipt of the funds in the escrow account was substantially limited until the transaction had closed, the taxpayer did not constructively receive the income until the following year.)

19. Income was constructively received in 2022 in each of the following situations except: A. Wages were deposited in the taxpayer's bank account on December 26, 2022, but were not withdrawn by the taxpayer until January 8, 2023. B. A taxpayer was informed his check for services was available on December 15, 2022. The taxpayer did not pick up the check until January 30, 2023. C. A taxpayer received a check on December 31, 2022, but did not deposit it until January 5, 2023. D. A taxpayer's vacation property was sold on December 28, 2022. The payment was not received by the taxpayer until January 4, 2023, when the escrow company released the funds.

A (A qualifying child must be related to the taxpayer by blood, marriage, or legal adoption. A "step" relationship formed by marriage is not dissolved by divorce or death for federal tax purposes. Since Jeremy did not live with his mother but did live with his stepfather, Wesley, for more than half the year, Wesley is considered the custodial parent for tax purposes, and he can claim his stepson as a qualifying child.)

2. Apollonia and Wesley file for divorce. Apollonia has one teenage son from a prior relationship named Jeremy, age 17. After the divorce is final, Apollonia develops a drug problem and disappears. In 2022, Jeremy lives for nine months with his (former) stepfather, Wesley, who provides all of Jeremy's support. Which of the following statements is correct? A. Wesley can claim Jeremy as his qualifying child. B. Wesley can claim Jeremy as his dependent but not as a qualifying child because the divorce dissolved any legal relationship between them. C. Wesley cannot claim Jeremy as his dependent because they are not related persons. D. Only Apollonia can claim Jeremy as her dependent.

B (Ezequiel and Candra are allowed to amend their separate returns to a joint return. If a taxpayer files a separate return, he may elect to amend the filing status to married filing jointly at any time within three years from the due date of the original return (not including any extensions). However, the same does not hold true in reverse. Once a taxpayer files a joint return, he cannot choose to file a separate return for that year after the due date of the return (with a rare exception for deceased taxpayers).)

2. Ezequiel and Candra are married, but they choose to file separate returns for 2022 because the IRS is auditing Ezequiel for a previous tax issue. Ezequiel and Candra file their MFS returns on time. A few months after filing their separate returns, the audit is over, and Ezequiel's previous tax issue has been resolved. He then wishes to file amended returns and file jointly with his wife to claim the Earned Income Tax Credit (EITC). Which of the following statements is correct? A. Taxpayers are prohibited from changing their filing status to claim the EITC. B. Ezequiel and Candra can amend their MFS tax returns to MFJ in order to claim EITC. C. Ezequiel and Candra can amend their MFS tax returns to MFJ, but they cannot claim the EITC on an amended return. D. Candra cannot file jointly with Ezequiel after she has already filed a separate tax return.

C (Leonardo is deemed to have earned the dividends in 2022, and whether or not he received a 1099-DIV is irrelevant. Mutual fund dividends are taxable regardless of whether the taxpayer withdraws the dividends or reinvests them. Furthermore, if dividends from a mutual fund (or REIT) are declared in October, November, or December and paid no later than January of the following year, the dividends are taxable in the year declared, even though they are not paid until the following year, so Leonardo must report the earnings in 2022.)

2. Leonardo invested in a mutual fund during the year. The fund declared a dividend on December 20, 2022, and Leonardo received the $19 dividend distribution on January 2, 2023. He did not receive a Form 1099-DIV for the amount, and he did not withdraw the money from his mutual fund. Leonardo sold his investment in the mutual fund on January 19, 2023. Which of the following statements is correct? A. The dividend is not taxable in 2022 because Leonardo did not withdraw the earnings. B. The dividend is not taxable in 2022 because Leonardo did not receive a 1099-DIV. C. The dividend is taxable and must be reported in 2022. D. The dividend is taxable but does not have to be reported until 2023.

b (Orval must pay self-employment tax on 92.65% of his net earnings from his business, regardless of how he and Rainelle choose to file. Taxpayers cannot combine both spouses' income or loss to determine their earnings subject to SE tax. However, if a taxpayer has more than one business, he must combine the net profit or loss from each to determine the total earnings subject to SE tax.)

2. Orval and Rainelle are married, and both are self-employed with their own businesses. Orval owns a business that has a $9,750 net profit during the year. His wife, Rainelle, has an overall business loss of ($11,100). They both file Schedules C to report their self-employment income. Which of the following statements is correct? A. On their joint return, they will not have to pay self-employment tax, because the losses from Rainelle's business will offset Orval's income. B. Orval must pay self-employment tax on $9,750, regardless of his wife's income or losses. C. They can file MFS and offset each other's self-employment tax. D. If they choose to file separate returns, they may split the profits and losses equally between their two businesses.

C (Roksana should file a claim as an injured spouse to request her portion of their tax refund. She would do so by filing Form 8379, InjuredSpouse Allocation. If the request is granted, the IRS will retain her husband's portion of their tax refund to offset his unpaid child support but will allow Roksana to obtain her portion of the refund. In contrast, innocent spouse relief is when tax has been incorrectly reported on a joint return, and one spouse is relieved of the obligation to pay the other spouse's portion of the tax liability.)

2. Roksana and Baptiste file a joint return. Their tax refund will be applied toward Baptiste's unpaid child support obligations from an earlier relationship. To request her portion of a joint refund, Roksana should file: A. As an innocent spouse. B. As a damaged spouse. C. As an injured spouse. D. For equitable relief.

B (As long as they are married and are neither divorced nor legally separated, Elisabete and Sirius can file a joint return or file separately. Neither spouse can file as head of household, (even though they lived apart), because they do not have any dependents. They are also not eligible to file as single, because they were legally married on the last day of the tax year.

24. Elisabete and Sirius were married in 2018. They have no children or other dependents. They split up two years ago but never officially filed for divorce. Although they lived apart all of 2022, they are neither divorced nor legally separated. Which of the following filing statuses can they use? A. Single or married filing separately. B. Married filing jointly or married filing separately. C. Married filing separately or head of household. D. Single or qualifying surviving spouse.

A (Baylee has to file a tax return because of the amount of her unearned income: i.e., the $3,400 lottery prize. Her earned income—$1,400 in wages—was not high enough to trigger a filing requirement, but the lottery winnings (unearned income) do trigger a filing requirement. Answer "D" is incorrect because most U.S. states allow 18-year-olds to play the state lottery because they are legal adults. However, even if playing the lottery was illegal in her state, it would still be considered taxable, unearned income, and it would not change her filing requirement for the year. Despite the fact that Baylee has to file her own return, her parents can still claim her as a qualifying child.)

20. Baylee is an 18-year-old high school senior in her last year of high school. She worked at a toy store during the Christmas holiday and earned $1,400 in wages in December 2022. She also received $3,400 for a winning scratch-off lottery ticket. Her parents claim Baylee as a dependent on their joint tax return. Does Baylee have to file her own return? A. Yes, because of the amount of her unearned income. B. Yes, because of the combined amount of her unearned and earned income. C. No, because her earned income is below the threshold for a dependent. D. No, because it is illegal for a high school student to play the lottery.

B (To be eligible for the qualifying surviving spouse filing status, the taxpayer normally must have a dependent child. For the purposes of the "qualifying surviving spouse" filing status, a qualifying child can be an adopted child, biological child, or stepchild, but does not include a foster child. This special rule for dependents that excludes foster children only pertains to the qualifying surviving spouse filing status.[1] Answer "C" is incorrect because legally adopted children are always treated the same as biological children for federal tax law purposes. )

21. Which of the following dependency relationships would not qualify a taxpayer to claim "qualifying surviving spouse" as their filing status after the death of a spouse? A. A biological child. B. A foster child. C. An adopted child. D. A stepchild.

C (Alexandra cannot claim head of household status because Sebastian lived with her for only five months, which is less than half the year.)

22. Alexandra's younger brother, Sebastian, is 18 and a full-time student. Sebastian lived with a friend from January through February of 2022. From March through July, Sebastian lived with his sister, Alexandra. On August 1, 2022, Sebastian moved back in with his friends and stayed with them for the rest of the year. However, since Sebastian did not have a job, Alexandra gave him money every month and provided the majority of his financial support for the entire year. Alexandra has no other dependents. Which of the following statements is correct? A. Alexandra can file as head of household. B. Alexandra can file jointly with Sebastian. C. Alexandra cannot file as head of household. D. Sebastian can file as head of household.

D (For Louisa to file as head of household, her home must have been the main home of her qualifying child for more than half the tax year (i.e., over six months). Since her son lived with her for only four months, he would not have been in the household sufficient time to qualify her for this filing status.)

23. Louisa legally separated from her husband in 2022. They share custody of a 13-year-old son. Which of the following facts would prevent Louisa from filing as head of household? A. Louisa has maintained a separate residence from her husband since February 11, 2022. B. Her son's principal home is with Louisa. C. Louisa's parents assisted her with 40% of her household costs. D. Louisa's son lived with her for four months. He lived with his father for the rest of the year.

A (Tatiana must file Form 1040. Form 1040-NR is only for nonresident taxpayers, and Form 1040-SR is for seniors that are 65 years of age or older. With few exceptions, green card holders are taxed as U.S. citizens and do not file Form 1040-NR, regardless of where they live. [1] Note that this is a unique rule that applies to the qualifying surviving spouse filing status ONLY. For a surviving spouse (a taxpayer whose spouse has died) a "qualifying child" does not include a foster child. Please be aware that this filing status is very rare and a scenario where you would have a surviving spouse with a foster child would be even more so. It is unlikely that you would ever see this scenario in actual practice, but we briefly cover it here, because on the EA exam the IRS does test on exceptions, in addition to the general rules. )

25. Tatiana is 41 years old and divorced. She files as head of household and has two dependent children. Tatiana is a citizen of Canada and a legal U.S. resident (a green card holder). She lived in Canada for the entire tax year and earned all her income working in Canada. She earned $63,000 in 2022 and plans to itemize her deductions. Which tax form should Tatiana use to report her income? A. Form 1040 B. Form 1040-NR C. Form 1040-X D. Form 1040-SR

c (Anastasia's commissions must be included in gross income, as well as advance payments in anticipation of future services ($12,000 + $1,000 = $13,000). The expense reimbursements from an accountable plan ($200) would not be included in her taxable income.)

3. Anastasia is a sales rep who sells pharmaceutical drugs to doctor's offices on commission (she is an employee). On December 25, 2022, Anastasia receives $12,000 of income from commissions, plus an advance of $1,000 for future commissions. She also receives a $200 check for expense reimbursements from her employer after turning in her receipts as part of an accountable plan. How much taxable income should Anastasia report on her 2022 tax return? A. $11,800 B. $12,000 C. $13,000 D. $13,200

D (If a taxpayer is given a choice between receiving cash or stock, a stock dividend is taxable in the year it is distributed.)

9. All of the following statements about stock dividends are correct except: A. When a stock dividend is distributed, the basis of the stockholder's existing shares is adjusted to reflect the issuance of the new shares. B. A stock dividend occurs when a corporation distributes stock to its own shareholders. C. A taxpayer generally recognizes income only when he sells the stock received in a stock dividend distribution. D. A stock dividend is never taxable, even if a taxpayer has the choice to receive cash instead of stock.

B (Janella and Marcello must both file tax returns, regardless if they file jointly or separately. Normally, Janella and Marcello would not be required to file because their combined gross income was less than the filing requirement, and they are both over 65 (this threshold applies if both spouses are 65 or over and they are filing jointly). However, because Marcello's net earnings from self-employment exceeds $400, he is required to file a return, including Schedules C and SE. Further, if Janella did not wish to file a joint return with Marcello, she would nevertheless be required to file separately because her income exceeds the applicable threshold of $5 for MFS filers in 2022. Therefore, whether they choose to file jointly or separately, both are required to file tax returns for 2022.)

3. Janella, age 65, and Marcello, age 66, are married and file jointly. Janella's income was $17,600 in wages, and Marcello's net earnings from self-employment was $520, and he also had $4,000 in Social Security income. Neither had any other income during the year. Based on this information, which of the following statements is correct? A. Janella and Marcello are not required to file tax returns. B. Janella and Marcello are both required to file tax returns. C. Only Janella is required to file a separate tax return. D. Only Marcello is required to file a separate tax return.

A (If no other interest is credited to Marcelo during the year, the Form 1099-INT he receives will show $20 of interest for the year. The IRS does not count reward points or cashback from a credit card as taxable interest income, (it is treated as a rebate), so Marcelo does not have to report the $100 in rewards points or pay any tax on it.)

3. Marcelo opened a savings account at his local bank and deposited $800. The account earned $20 interest during the year. On his credit card account, Marcelo received $100 worth of reward points for charging $10,000 of purchases, which he used to pay a portion of his credit card bill. How much interest income must Marcelo report on his Form 1040? A. $20 B. $75 C. $120 D. $900

D (Taxpayers are considered "married" for the entire year if: • They were married on the last day of the tax year, or • One spouse died during the year, and the surviving spouse has not remarried as of the end of the year.)

3. Taxpayers are considered to be "married" for the entire year if: A. The spouses had their marriage annulled during the tax year. B. The spouses are legally separated under a separate maintenance decree. C. The spouses are divorced on December 31 of the tax year. D. One spouse dies during the year, and the surviving spouse does not remarry.

b (The basis of inherited property is generally the FMV of the property on the date of the decedent's death, regardless of what the deceased person paid for the property or the tax basis in the property in the hands of the decedent right before death.)

3. The basis of inherited property is generally: A. The adjusted basis to the decedent. B. The fair market value of the property on the date of the decedent's death. C. The purchase price that the decedent paid. D. Determined nine months after the death of the decedent.

A (Even though Wyatt is over the normal age threshold for a qualifying child, he is considered Waylen's qualifying child. This is because Wyatt is permanently disabled, and Waylen provides the majority of his financial support and care. The normal age thresholds for "qualifying children" do not apply in the case of permanently disabled individuals. The wages earned by Wyatt were earned in a sheltered workshop. Income earned in a sheltered workshop does not count as gross income for an adult child for the purposes of determining dependency.)

3. Waylen, 52, is unmarried and lives with his son Wyatt, who has Down syndrome. Wyatt is 32 years old and permanently disabled. Wyatt had $800 of interest income and $6,200 of wages from a parttime job at a sheltered workshop. Waylen provided more than one-half of his son Wyatt's support. Which of the following statements is correct? A. Waylen can file as head of household, with Wyatt as his qualifying child. B. Waylen does not qualify for head of household, but he could still claim Wyatt as his qualifying relative because Wyatt does not meet the age test for a qualifying child. C. Waylen can file as head of household, with Wyatt as his qualifying relative. D. Waylen must file as single, and he cannot claim his son because of the amount of Wyatt's income.

C (Eugene provided more than one-half of his own support for the year, so he is not Khristina's qualifying child or her qualifying relative. To meet the support test, the child cannot have provided more than half of his own support for the year.)

4. Khristina's son, Eugene, lives with her. Eugene is 18-year-old and does not go to school. She provided $5,100 toward her son's support for the year. Eugene also has a part-time job and provided $14,950 toward his own support. He also paid part of the utilities and rent on the home. Can Khristina claim her son as a dependent? A. Yes, she can claim Eugene as a qualifying child. B. Yes, she can claim Eugene as a qualifying relative. C. No; Eugene provided more than half of his own support for the year. D. No; Eugene is 18-years-old.

c (Esteban's basis in the pedigreed animal is $1,500. If a taxpayer receives property as payment for services, he must include the property's FMV in income, and this becomes his basis in the property. However, if the two parties agree on a cost beforehand, the IRS will usually accept the agreed upon cost as the asset's basis.)

6. Esteban owns a landscape design business. He installs artificial turf at a client's home and bills the client $1,500 for his services. After the installation, his client, Alice, receives a foreclosure notice and is unable to pay Esteban's bill. Alice has a pedigreed Golden Retriever show dog that just had puppies. The FMV of each puppy is $1,800. Esteban loves animals and decides to take one of the puppies as full payment on Alice's delinquent bill. What is Esteban's basis in his new dog? A. $0 B. $300 C. $1,500 D. $1,800

A (Nikkie must file amended tax returns for the previous two years. She cannot file jointly with her former husband in 2022. If a couple obtains a court decree of annulment, the taxpayer must file amended returns (Form 1040-X), claiming single or head of household status for all tax years affected by the annulment that are not closed by the statute of limitations for filing an amended tax return.)

4. Nikkie's marriage was annulled on February 5, 2022. She filed jointly with her husband in the previous two years. She has not yet filed her 2022 tax return. Nikkie has no dependents. Which of the following statements is correct? A. She must file amended returns, claiming single filing status for all open years affected by the annulment. She will file as single for 2022. B. She is not required to file amended returns. She can file jointly with her husband because she was still married to him for part of the year. C. She is not required to amend any tax returns. She must file as married filing separately in 2022. D. She is not required to amend returns for any prior years. She must file as single in 2022.

B (Paul must generally have held stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the date a shareholder will no longer be entitled to receive the most recently declared dividend. When figuring the holding period for qualified dividends, the taxpayer may count the number of days he held the stock and include the day he disposed of the stock. The date the taxpayer acquires the stock is not included in the holding period. A longer holding period may apply for dividends paid on preferred stock.)

4. Paul bought 100 shares of stock during the year, and the stock paid him $80 in dividends. How long must Paul have held stock in order for his dividend income to be considered "qualified dividends." A. More than 30 days during the 121-day period that begins 60 days before the ex-dividend date. B. More than 60 days during the 121-day period that begins 60 days before the ex-dividend date. C. More than 120 days. D. More than one year.

a (If Ronald cannot determine his basis in the painting, the IRS will treat the asset as having a zero basis. To compute gain or loss on a sale, a taxpayer must determine his basis in the property sold. If he cannot determine his basis in the property, the IRS will deem the basis to be zero.)

4. Ronald owns a valuable antique painting that he purchased at auction many years ago. This year, he wants to sell the painting, but he lost all the paperwork related to the purchase. He has no records of his basis and cannot remember the price he paid. If Ronald cannot determine his basis in the painting, the IRS will deem the basis to be: A. Zero. B. Fair market value. C. Actual cost. D. Average cost.

a (All of the disability benefits can be excluded from Bartholomew's taxable income. VA disability compensation is exempt from taxation if the veteran was terminated through separation or discharged under honorable conditions. The VA does not issue Form W-2, Form 1099-R, or any other tax-related document for veterans' disability benefits.)

5. Bartholomew is a naval officer who was injured while serving in a combat zone. He was later awarded Veterans Affairs (VA) disability benefits. How are these payments reported on Bartholomew's tax return? A. 100% of the disability benefits may be excluded from income. B. 50% of the disability benefits may be excluded from income. C. 100% of the disability benefits may be excluded from income for enlisted personnel, but not for officers. D. The disability benefits are all taxable as pension income.

D (Becky meets all the qualifying child tests: the relationship test, the age test (because she is under 24 and a full-time student), the residency test (because the time spent at college is a legitimate temporary absence), and the support test (because she did not provide over half of her own support). Therefore, her parents can claim Becky as a qualifying child.)

5. Becky is 22 and a full-time college student. During the year, she lived at home with her parents for four months and lived in the college dorms for the remainder of the year. She worked part-time and earned $6,500, but that income did not amount to half of her total support. Can Becky's parents claim her as a dependent? A. No, because Becky earned more than the gross income threshold. B. No, Becky did not live with her parents for half the year, and she does not meet the age test. C. Yes, her parents can claim her as a dependent, but only as a qualifying relative. D. Yes, her parents can claim her as a qualifying child.

d (Henry's basis in the Pharma Technology, Inc. stock is $4,070 ([1,000 x $4] = $4,000+ $70).)

5. Henry bought 1,000 shares of Pharma Technology, Inc. stock for $4 per share and paid an additional $70 for his broker's commission. What is Henry's overall basis in the stock? A. $1,000 B. $3,930 C. $4,000 D. $4,070

C (If Lenny has his amended 2019 return postmarked on or before April 18, 2023,[1] it will be within the three-year limit, and the return will be accepted and Lenny's refund will be issued. If the amended return is postmarked after that date, it will fall outside the three-year statute of limitations, and he will not receive a refund. )

5. Lenny's 2019 tax return was due April 15, 2020. He filed his return before the deadline, on March 30, 2020. Later, Lenny looked over his records, and discovered that he was eligible for an education credit that would result in a refund. He neglected to take this credit on his 2019 return. What is the latest date that Lenny can amend his 2019 tax return in order to receive a refund? A. March 30, 2022 B. March 30, 2023 C. April 18, 2023 D. October 15, 2023

B (Derrick must report the interest earned each year until maturity. Savings bond owners must use the same interest-reporting method for all the Series EE and Series I bonds they own.)

5. Six years ago, Derrick bought a U.S. Series EE savings bond and decided to report the interest earned each year until maturity. This year, he bought another Series EE savings bond. How should Derrick report the interest on this new bond? A. He must wait until the second bond matures to report all the interest earned at that time. B. He must report the interest earned each year until maturity. C. He can use either method to report interest earned as long as he makes the election on a timely filed return. D. This type of interest is now exempt from federal income tax.

C (Ordinary dividends are taxable as ordinary income in the year they are earned. Only amounts over $1,500 must be reported on Schedule B, so Bastien can report the $1,200 of dividend income directly on page one of his Form 1040.)

6. Bastien received a Form 1099-DIV from his brokerage firm, showing that he earned $1,200 of ordinary dividends in 2022. He received no other investment income during the year. How should this income be handled on Bastien's tax return? A. He must report the dividend income on Schedule B, but it is not taxable. B. He must report the dividend income on Schedule D. C. He can report the dividend income on page one of his Form 1040, taxable as ordinary income. D. He does not have to report the dividend income until he sells the stock from the corporations that distributed the dividends.

B (An employer-provided company car would be partially taxable if it was used for personal driving. The value of the personal use of the automobile must be added to the employee's wages. These valuation rules are covered in IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits.)

6. Which of the following fringe benefits is taxable (or partially taxable) to the employee? A. Health insurance covered 100% by the employer. B. An employer-provided company car that is used for commuting. C. Group-term life insurance coverage of $50,000. D. Employer contributions to an employee's 401(k) plan.

B (The passport test is not one of the tests for a qualifying child. In general, to be a taxpayer's qualifying child, a dependent must satisfy four tests: • Relationship: The taxpayer's child or stepchild (whether by blood or adoption), foster child, sibling or step-sibling, or a descendant of one of these. • Residence: Has the same principal residence as the taxpayer for more than half the tax year. • Age: Must be under the age of 19 at the end of the tax year, or under the age of 24 if a full-time student, or be permanently and totally disabled at any time during the year. • Support: Did not provide more than one-half of his or her own support for the year. • Tie-breaker test: A child may meet all the other tests to be a qualifying child of two or more individuals, however only one of them can treat the child as a qualifying child.)

6. Which of the following is not one of the tests that must be met for a child to be considered a qualifying child? A. Relationship test B. Passport test C. Age test D. Joint return test

B (Ordinary dividends are taxed at higher ordinary income rates than qualified dividends. If certain conditions are met, qualified dividends are given preferred tax treatment. Qualified dividends must have been paid by a U.S. corporation or a qualified foreign corporation, and the taxpayer generally must have held the stock for more than sixty days during the 121-day period that begins sixty days before the ex-dividend date.)

7. All of the following statements about dividends are correct except: A. A taxpayer will pay a higher tax rate on an ordinary dividend than on a qualified dividend. B. A taxpayer will pay a higher tax rate on a qualified dividend than on an ordinary dividend. C. The ex-dividend date is the date a shareholder will no longer be entitled to receive the most recently declared dividend (normally right after the record date). D. When figuring the holding period for qualified dividends, the taxpayer may count the number of days he held the stock (starting the day after the stock was acquired) and include the day he disposed of the stock.

C (A taxpayer may not claim a housekeeper or other household employee as a dependent, regardless of whether or not the employee lived with the taxpayer.

7. All of the following statements are correct about the rules of dependents except: A. One spouse is never considered the dependent of the other spouse. B. A taxpayer may not claim a stillborn child as a dependent. C. A housekeeper can be a dependent, as long as the housekeeper lives with the taxpayer all year. D. A child is considered to have lived with the taxpayer during periods when the child is temporarily absent.

a (Meals furnished to Alida are not taxable because they are for the convenience of the employer. Meals that employers furnish to a restaurant employee during, immediately before, or after the employee's working hours are considered furnished for the employer's convenience. Since Alida is a waitress who works during the normal breakfast and lunch periods, Flavian can exclude from her wages the value of those meals. If Flavian allowed Alida to have meals without charge on her days off, the value of those meals would be included in her wages.)

7. Flavian owns a restaurant. He provides his daytime waitress, Alida, two meals during each workday. Flavian encourages (but does not require) Alida to have her breakfast on the business premises before starting work so she can help him answer phones. She is required to have her lunch on the premises. How should Flavian treat this fringe benefit to Alida? A. None of Alida's meals at the restaurant are taxable. B. All of Alida's meals at the restaurant are taxable. C. Alida's lunch is not taxable, but her breakfast is. D. Alida's meals are taxed at a flat rate of 15%.

D (Although Pierre provided over half the cost of maintaining a home for Madison and Ivette, he cannot file as head of household since Ivette (his daughter) did not live with him for more than half the year. Madison cannot file as HOH either because she did not provide more than one- half the cost of keeping up the home for her daughter. However, either Pierre or Madison may still claim Ivette as a dependent and file as "Single." Generally, a child is the qualifying child of the custodial parent, so Madison would have the primary right to claim Ivette. But Madison may also choose to release the dependency exemption to Pierre (who is the noncustodial parent) by using Form 8332.)

7. Madison and Pierre are not married and do not live together, but they have a two-year-old daughter named Ivette. Madison and her daughter lived together all year while Pierre lived alone in his own apartment. Pierre cares for his daughter two days a week. Madison earned $17,900 working as a grocery store bagger. Pierre earned $48,000 managing a hardware store. Pierre paid over half the cost of Madison's apartment for rent and utilities, where his daughter Ivette lives. He also gave Madison child support and extra money for groceries. Pierre does not support any other family member. Which of the following statements is correct? A. Pierre can file as head of household. B. Madison can file as head of household. C. Pierre and Madison can file jointly. D. Neither Pierre nor Madison can claim head of household filing status.

B (Since Astrid is the custodial parent and refuses to sign Form 8332, Sergey cannot claim either child. Without Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, signed and attached to the return, Sergey does not have the primary right to claim the children, since he is not the custodial parent.)

8. Astrid and Sergey divorced ten years ago. They have twelve-year-old twins who live with Astrid. Her AGI is $41,000, and Sergey's AGI is $48,000. Although Astrid is the custodial parent, their divorce decree states that Sergey can claim the children on his tax return. However, Astrid refuses to sign Form 8332. Which of the following statements is correct? A. Sergey can claim one child as a dependent, and Astrid can claim the other. B. Sergey cannot claim either child. C. Sergey and Astrid can each claim the children as dependents on their respective tax returns. D. Neither Astrid nor Sergey can claim the children as dependents.

B (Isabella does not need to pay estimated tax because she expects her income tax withholding in the current year ($10,250) to be greater than both—90% of the tax to be shown on her current year return ($11,270 x 90% = $10,143) and 100% of her prior-year tax liability ($9,224). Therefore, Isabella qualifies for the safe harbor rule and is not required to make estimated tax payments. A taxpayer is not required to pay estimated tax if: • The taxpayer was a U.S. citizen or resident alien and had no tax liability in the prior year, and • The prior tax year covered a twelve-month period. A taxpayer also does not have to pay estimated tax if she pays enough through withholding so that the tax due on the return is less than $1,000. In most cases, a taxpayer must pay estimated tax if she expects withholding (plus any refundable credits) to be less than the smaller of: • 90% of the tax to be shown on the current year tax return, or • 100% of the tax shown on the prior-year tax return. )

8. Isabella files as single and has no dependents or refundable credits. All of her income is from wages. Based on the figures below, is she required to pay estimated taxes in the current year? AGI for prior tax year $73,700 Total tax on prior-year return $9,224 Anticipated AGI for the current year $82,800 Total current year estimated tax liability $11,270 Tax expected to be withheld in the current year $10,250 A. Yes, she is required to make estimated tax payments. B. No, she is not required to make estimated tax payments. C. She is not required to make estimated tax payments because she does not have self-employment income. D. None of the above is correct.

C (Miguel must include the total amount of interest earned, $375, in his income. If he itemizes deductions on Schedule A, he can deduct $200 of interest expense, subject to the net investment income limit. He may not report the investment income and expenses on a net basis (i.e., the taxable interest income less the allowable deduction).)

8. Miguel deposited $4,000 of his own funds and also borrowed $12,000 from the bank to buy a nine- month certificate of deposit for $16,000. The certificate earned $375 at maturity in 2022, and Miguel received $175, which represented the $375 he earned minus $200 of interest charged on the $12,000 loan. The bank gives Miguel a Form 1099-INT showing the $375 interest he earned. The bank also gives him a statement showing that he paid $200 of interest. How should Miguel report these amounts on his tax return? A. He should report $175 of interest income. B. He should report $375 of interest income. The $200 of interest he paid to the bank is not deductible. C. He should report $375 of interest income and can deduct $200 on his Schedule A (if taking itemized deductions), subject to the net investment income limit. D. He does not have to report any income from this transaction.

C (Since Lionel and Rosemarie are married, they can file either jointly or separately. If Rosemarie does not agree to file jointly with Lionel, both taxpayers must file MFS. The filing requirement threshold for married filing separately in 2022 is $5, so both spouses have a filing requirement.)

8. Rosemarie, age 65, and Lionel, age 72, were married on December 26, 2022. They have no dependents. Rosemarie had wages of $2,000, and Lionel had Social Security income of $19,000 for the year. Lionel wants to file jointly, but Rosemarie wants to file separately. Which of the following statements is correct? A. Lionel is required to file a tax return using the MFS status. Rosemarie is not required to file a return. B. Lionel may claim Rosemarie as a dependent, as long as she does not file her own separate return. C. Lionel and Rosemarie are both required to file tax returns, and they must both file MFS. D. Lionel and Rosemarie may both file as single since they were married for less than one month during the taxable year.

d (Adjusted gross income (AGI) is gross income (the sum of all income subject to taxation that the taxpayer receives during the year) minus certain allowable deductions or adjustments. AGI is calculated before the standard deduction or itemized deductions are taken.)

8. What is "adjusted gross income"? A. The sum of all sources of taxable income that the taxpayer receives during the year, minus any allowable credits. B. The amount of earned income a taxpayer receives during the year. C. Another term for taxable income. D. Gross income minus certain allowable adjustments, calculated before the standard deduction or itemized deductions are taken.

d (The cost basis of an asset includes sales tax and other expenses connected with the purchase. In most situations, the basis of an asset is its cost, including any sales tax, installation costs, or brokers' commissions paid. However, there are many other times when cost cannot be used to determine basis, such as when an asset is inherited or received as a gift. None of the other answers are correct.)

8. Which statement is correct about the basis of assets? A. The basis of an asset is always equal to its cost. B. Depreciation increases the basis of an asset. C. The basis rules are the same for assets received through inheritance as those obtained by gift. D. The cost basis of an asset generally includes sales tax and other expenses connected with the original purchase.

b (Rahul's original basis per share was $11 ([$1,050 + $50 broker's commission = $1,100] + 100). After the stock dividend, his $1,100 basis must be spread over 110 shares (100 original shares plus the additional 10 shares). Therefore, if Rahul's basis in the stock was $1,100 for 100 shares, the ten additional shares mean Rahul's basis per share decreased to $10 per share ($1,100 -r 110).)

9. Four years ago, Rahul paid $1,050 for 100 shares of Silverton Corporation stock, plus an additional broker's commission of $50. During the year, Rahul received ten additional shares of Silverton stock as a nontaxable stock dividend. What is the adjusted basis of Rahul's stock at the end of the year? A. $9 per share. B. $10 per share. C. $11 per share. D. $25 per share.

B (Breton must live with his grandfather, Clarence, for more than half the year (over six months) in order to qualify as his qualifying child. There are exceptions for temporary absences.)

9. In 2022, Clarence took legal and physical custody of his ten-year-old grandson, Breton. Breton's parents were both incarcerated all year for drug trafficking, and do not have the right to claim Breton as a dependent. How long must Breton live in Clarence's home for Clarence to qualify for head of household status? A. At least three months. B. More than half the year. C. The entire year. D. More than twelve months.

D

9. Kingston provides the sole support for his mother. To claim her as a dependent on his Form 1040, Kingston's mother must be a resident or citizen of which of the following countries? A. United States B. Mexico C. Canada D. Any of the above

B (The 2022 backup withholding rate is 24%. The IRS may require backup withholding if a taxpayer has a delinquent tax debt; if he fails to report all his interest, dividends, and other income, or if his Social Security number does not match records provided to the IRS.)

9. The 2022 backup withholding rate for U.S. taxpayers is: A. 10% B. 24% C. 25% D. 30%