econ 138a final

Allen was homeless for part of last year. He received welfare payments from the government totaling $5,000 and food stamps valued at $500. The amount of these payments included in Allen's gross income is ______. $5,000 $500 $5,500 $0

$0

Paul, a single individual, owns his own home. This year, he paid $25,000 of interest on acquisition debt with a balance of $650,000 and $3,000 of interest on a home equity loan of $50,000 used to pay off student loans. Paul's allowable itemized deduction for mortgage interest is

$25000

Mildred and Milton and married and filing a joint return. Mildred is 72 years old and blind. Milton 70 years old. Their standard deduction is ______. $24,400 $28,300 $25,700 $27,000

$28,300 Reason: The standard deduction is increased by $1,300 if the taxpayer is blind or over the age of 65. Because both are over the age of 65 and Mildred is blind, the standard deduction of $24,400 is increased by 3 × $1,300 = $3,900 to be $28,300.

Which of the following statements regarding Keogh plans is false? Self-employed individuals may participate in a Keogh plan. A Keogh plan is always structured as a defined-benefit plan. A Keogh plan is a qualified retirement plan. Keogh plans have the same tax implications to the participant as 401(k) plans.

A Keogh plan is always structured as a defined-benefit plan. Reason: A Keogh may be set up as either a defined-benefit or a defined-contribution plan. However, a defined-contribution plan is more common.

Which of the following statements is false regarding capital assets? All dispositions of capital assets are classified as either short-term or long-term. Nonbusiness bad debt is always classified as a short-term capital loss, regardless of the holding period of the debt. All long-term capital assets are taxed at a 28% tax rate. Capital assets are classified as short-term if held for less than one year.

All long-term capital assets are taxed at a 28% tax rate. Reason: Only a subcategory of long -term gains and losses from capital assets are taxed at 28%. These include gains from the sale of collectibles and qualified business stocks.

Alyssa is a single mother. Based on her AGI and number of children, her earned income credit is $4,215. Her taxable income is $25,000, and the resulting tax is $3,083 (see attached tax rate schedule). Which of the following statements best describes Alyssa's tax position? Alyssa will owe no federal income tax and will receive a $1,132 refund attributable to the earned income credit. Alyssa will owe no federal income tax this year and may use the $1,132 credit in a future year when she has a tax liability. Alyssa will owe no federal income tax in the current year.

Alyssa will owe no federal income tax and will receive a $1,132 refund attributable to the earned income credit.

Which of the following is not an education tax subsidy? American Jobs Credit American Opportunity Credit Lifetime Learning Credit

American Jobs Credit

Which of the following statements is true? All individuals are taxed at the same rate for federal tax purposes. Reason: The tax rate schedule differs for each filing status. Therefore, different individuals may be subject to different tax rates. WIth respect to individuals, only U.S. citizens are taxable entities for federal tax purposes. Reason: Permanent residents are also taxable entities. Differences exist in the computation of taxable income for individuals depending on their filing status.

Differences exist in the computation of taxable income for individuals depending on their filing status.

True or false: Personal, living, and family expenses are generally deductible as an itemized deduction. True Reason: Personal, living, and family expenses are generally not deductible. False

False

True or false: The annual economic benefit of living in owner-occupied housing is included in taxable income. True Reason: This benefit is not subject to income tax. False

False

True or false: The foreign earned income exclusion provides tax relief to non-U.S. citizens working for U.S. multinational companies. True Reason: The foreign earned income exclusion provides tax relief to U.S. citizens residing abroad and working for the foreign operations of U.S. multinational companies. False

False

True or false: The original purpose of AMT was to ensure that tax preferences did not result in low income taxpayers not paying an equitable share of taxes.

False

Only fringe-benefits that are non-taxable to the employee may be offered in an employer-provided careteria plan. True Reason: Cafeteria plans may offer employees a selection of both taxable and non-taxable benefits, including additional salary. False Reason: Cafeteria plans may offer employees a selection of both taxable and non-taxable benefits, including additional salary.

False Reason: Cafeteria plans may offer employees a selection of both taxable and non-taxable benefits, including additional salary.

Which of the following statements is false? Married individuals must file a joint return. Reason: Married individuals may file separate returns. A widower may file as married filing jointly in the year the spouse died. Unmarried individuals with dependent children will not normally file using the single filing status. Reason: Unmarried individuals with dependent children will typically file as head of household.

Married individuals must file a joint return. Reason: Married individuals may file separate returns.

Which of the following is false regarding AGI? All taxable income items are included in the computation of AGI. Deductible expenditures from a sole proprietorship are reported above-the-line, not separately, but included in the net profit number. No deductions are included in the computation of AGI.

No deductions are included in the computation of AGI. Reason: Certain above-the-line deductions are included in the computation of AGI, such as the deduction for self-employment taxes paid.

Which of the following creative assets is considered a capital asset? Sculpture owned by its creator Painting owned by an art collector and purchased from a gallery Painting owned by the parents of the artist and received from the artist as a gift

Painting owned by an art collector and purchased from a gallery

Which of the following is not a form of equity-based compensation? Performance-based cash bonus Stock option award Restricted stock award

Performance-based cash bonus

Which of the following statements regarding inflation adjusted debt instruments is false? Periodic interest payments are calculated based on a fixed principal value. These debt instruments may result in the reporting of taxable income without any corresponding cash inflow. The periodic interest payment plus any increase in principal represents taxable income. Periodic interest payments are calculated based on a stated rate of interest that is fixed.

Periodic interest payments are calculated based on a fixed principal value. Reason: The principal value is adjusted based on a formula tied to the inflation rate.

Which of the following statements about the gift tax is false? The tax is imposed on the recipient of the gift. The donor's basis in the gifted asset will become the donee's basis in the asset. The tax is based on the fair market value of the gift. An individual may gift a total of $11.4 million (2019) during his/her lifetime without being considered a gift for tax purposes. Reason: The annual exclusion per donee is $15,000 (in 2018). The lifetime transfer exclusion is $11.4 million (2019 indexed).

The tax is imposed on the recipient of the gift.

Louis and Jean recently sold their personal residence. For tax purposes ______. (Select all that apply.) gain or loss on sale of their personal residence is included in the calculation of taxable income a gain on sale of their personal residence could be taxable a loss on sale of their personal residence is not deductible

a gain on sale of their personal residence could be taxable a loss on sale of their personal residence is not deductible

Nondeductible surgical costs include ______. (Select all that apply.) a laser procedure to remove a tattoo surgery to repair a cleft palate a face lift performed to appear younger

a laser procedure to remove a tattoo a face lift performed to appear younger

AGI is ______. the final step in the computation of taxable income Reason: AGI is an intermediate step. a measure often used to determine whether the taxpayer is eligible for a deduction or credit an "above-the-line" income item included in the tax computation Reason: AGI might be thought of as "the line."

a measure often used to determine whether the taxpayer is eligible for a deduction or credit

Relative to non qualified options, incentive stock options (ISO's) might be considered unfavorable to employers because ______. employers may only issue incentive options if their net income has declined in recent years employers must recognize a financial statement expense on the grant date only for incentive stock options Reason: Both non qualified and incentive options require expense recognition on the grant date. the employer is never permitted a deduction for the bargain element

the employer is never permitted a deduction for the bargain element

Defined-contribution plans ______. increasingly dominate the proportion of employer sponsored qualified retirement plans in the Unites States include traditional pension plans and profit sharing plans Reason: Traditional employer sponsored pension plans are defined-benefit plans. generally provide no benefit to an employee unless the employee has significant longevity and retires with the company Reason: To the contrary, defined-contribution plans generally have vesting requirements that allow employees the right to the value of their plan even after a relatively short period of time.

increasingly dominate the proportion of employer sponsored qualified retirement plans in the Unites States

The federal government subsidizes charitable activities ______. directly through federal subsidies, rather than through the tax system only for a very narrow set of organizations indirectly through the tax system by allowing a charitable contribution deduction

indirectly through the tax system by allowing a charitable contribution deduction

An Employee Stock Ownership Plan (ESOP) ______. insulates an employee from financial loss due to changes in the financial health of the company they work for Reason: To the contrary, an ESOP provides benefits in the form of ownership in the company. Therefore, the employee benefits (suffers) financially, when the company does well (poorly). is not a qualified retirement plan is a defined-contribution plan

is a defined-contribution plan

The tax treatment of gifts and inheritances ______. is a major exception to the general rule that economic receipts are taxable; gifts and inheritances are tax exempt follows the general rule that all economic receipts are included in gross income distinguishes between gifts and inheritances, because gifts are taxable and inheritances are tax exempt

is a major exception to the general rule that economic receipts are taxable; gifts and inheritances are tax exempt

Inherited property that ______. has depreciated in value is assigned a carryover basis when transferred to the beneficiary Reason: Inherited property receives a step-up in basis or step-down to the fair market value on the date of death. is appreciated in value is never taxed on the appreciation that occurs prior to the date of death is appreciated in value is assigned a carryover basis when transferred to the beneficiary Reason: Inherited property receives a step-up in basis or step-down to the fair market value on the date of death.

is appreciated in value is never taxed on the appreciation that occurs prior to the date of death

The Medicare contribution tax ______. (Select all that apply.) applies to taxpayers who elect to participate in Medicare upon retirement Reason: The tax applies to all taxpayers who meet the AGI threshold and who have net investment income. is assessed on net investment income only applies to self-employed individuals Reason: The tax applies to all taxpayers who meet the AGI threshold and who have net investment income. applies to taxpayers who exceed an AGI threshold.

is assessed on net investment income applies to taxpayers who exceed an AGI threshold.

Alternative Minimum Taxable Income (AMTI) ______. is computed independently of taxable income for regular tax purposes is computed as regular tax purposes adjusted upward or downward for AMT adjustment and preferences represents a second computation of taxable income to be used at the discretion of the taxpayer

is computed as regular tax purposes adjusted upward or downward for AMT adjustment and preferences

Filing status ______. (Select all that apply.) is defined in the tax law reflects marital status and family situation does not change once it has been assigned Reason: Filing status can change as marital status and family situation changes. is determined by formal request to the IRS

is defined in the tax law reflects marital status and family situation

The minimum distribution rule for qualified retirement plans ______. requires taxpayers to estimate their life expectancy based on their knowledge of their family history and health Reason: Life expectancy is based on a standard set of tables found in the Treasury regulations. is intended to place a limit on the tax deferral period for contributions and earnings requires taxpayers to withdraw the entire remaining balance from a qualified retirement plan within one year after reaching age 70 1/2 Reason: The minimum distribution rules do not require taxpayers to withdraw the entire plan balance but, rather, begin taking distributions by the age defined in the provision.

is intended to place a limit on the tax deferral period for contributions and earnings

A profit sharing plan ______. requires an annual contribution to the plan is an employer sponsored defined-benefit plan is more common in firms with unpredictable cash flows

is more common in firms with unpredictable cash flows Reason: Profit sharing plans are favored by firms with uncertain cash flows or those with volatile earnings.

Investment interest expense ______. (Select all that apply.) is deductible above the line Reason: Investment interest expense may be deductible as an itemized deduction. is not deductible to the extent it is attributable to tax-exempt income may be deductible as an itemized deduction may be limited in the current year, preventing a taxpayer from ever realizing a tax benefit for the interest expense Reason: To the extent investment interest expense is limited, it may be carried forward and deducted in a future year.

is not deductible to the extent it is attributable to tax-exempt income may be deductible as an itemized deduction

The dependent care credit ______. is only available if the taxpayer has earned income is available to offset the cost of care for any dependent of the taxpayer Reason: The dependent must be under the age of 13 or physically or mentally incapable of caring for themselves. phases out completely for high income taxpayers Reason: The dependent care credit phases out up to 80%.

is only available if the taxpayer has earned income

The AMT exemption is ______. is the same for regardless of income and filing status is phased-out in an amount equal to 25% of AMTI in excess of the AMTI threshold available to all taxpayers

is phased-out in an amount equal to 25% of AMTI in excess of the AMTI threshold

Gain on the sale of personal use assets ______. (Select all that apply.) is typically capital gain typically qualifies for preferential tax rates is often tax exempt is typically noncapital

is typically capital gain typically qualifies for preferential tax rates

If the sale of a personal use asset produces a loss, the loss is ______. deductible only against gains from the sale of personal use assets not deductible considered a capital loss, deductible only against capital gains

not deductible

Ellie contributed to a Roth IRA. The contribution is ______. deductible as an itemized deduction Reason: Contributions to Roth IRAs are made with after-tax dollars and are, therefore, non deductible. deductible above-the-line Reason: Contributions to Roth IRAs are made with after-tax dollars and are, therefore, non deductible. not deductible Reason: Contributions to Roth IRAs are made with after-tax dollars and are, therefore, non deductible.

not deductible Reason: Contributions to Roth IRAs are made with after-tax dollars and are, therefore, non deductible.

Miles, age 45, quit his long-time employment with Marx Brothers. When he terminated employment, he instructed the company to transfer the balance in his 401(k) to a newly established rollover IRA. By doing so, the ______. rollover event does not result in a tax consequence to Miles earnings of the account are no longer tax deferred Reason: The earnings continue to be tax deferred in the new rollover IRA. rollover results in a tax on all contributions by employers Reason: There is no tax event as long as the funds are rolled into a new qualified retirement plan, such as a rollover IRA.

rollover event does not result in a tax consequence to Miles

Which of the following is a qualified retirement plan available only to self-employed individuals? Roth IRA 401(k) plan Keogh plan Money market account

Keogh plan

This year, Marcus won $5,000 on his first trip to Las Vegas. On a second trip one month later, he lost $7,000. He incurred $2,500 of expenses directly related to his gambling. Assuming that Marcus itemizes deductions, the net impact of these activities on his taxable income this year is ______. $0 Reason: Marcus is allowed to deduct his losses only to the extent of his winnings. He will report $5,000 of income and $5,000 of expenses/losses, which net to 0 impact. $2,500 decrease Reason: Marcus is allowed to deduct his losses only to the extent of his winnings. He will report $5,000 of income and $5,000 of expenses/losses, which net to 0 impact. $5,000 increase Reason: Marcus is allowed to deduct his losses only to the extent of his winnings. He will report $5,000 of income and $5,000 of expenses/losses, which net to 0 impact.

$0 Reason: Marcus is allowed to deduct his losses only to the extent of his winnings. He will report $5,000 of income and $5,000 of expenses/losses, which net to 0 impact.

Eileen and Elliot are married and file a joint return. Their AGI is $105,000, and they report total itemized deductions of $23,250. If they are subject to a 22% marginal tax rate, the incremental tax benefit from itemizing is ______. $165 $5,115 $0 $5,280

$0 Reason: They will take the standard deduction of $24,400, so there is no incremental benefit from itemizing.

Special rules limit the deductibility of compensation to the CEO and the three highest paid executives of a publicly traded company. These rules limit the compensation deduction to

$1 million

Brandon was injured in an accident and sued the responsible party for negligence. In court, he was awarded $500,000 compensation for his physical injuries and $1 million in punitive damages. The amount he must include in gross income is ______. $0 Reason: Only the punitive damages are taxable. $500,000 Reason: Only the punitive damages are taxable. $1.5 million Reason: Only the punitive damages are taxable. $1 million Reason: Only the punitive damages are taxable.

$1 million Reason: Only the punitive damages are taxable.

Michael is claimed as a dependent on his parent's 2019 tax return. This year, he earned $600 from mowing lawns and $220 in dividend income from stock gifted to him several years ago from his grandparents. His standard deduction for 2019 is ______. $12,000 $1,050 $1,250

$1,050 Reason: His standard deduction is $1050. His earned income is $600 plus $350 = $950 which is less than the standard amount of $1050.

Grant Corporation is a publicly traded company. The CEO has a compensation contract that guarantees $1.2 million plus a $500,000 bonus if stock price and sales meet predetermined levels. Choose the two answers that reflect the permitted deduction and the after-tax cost of CEO compensation should Grant reach the performance goals. Assume a 35% marginal tax rate. $1,350,000 after-tax cost Reason: The after-tax cost is $1.7 million less tax savings of $350,000; (deduction of $1 million × 35%) = $1,350,000. $1 million deduction Reason: Grant may only deduct $1 million of compensation, $1.7 million deduction Reason: Grant may only deduct $1 million of compensation, $1,525,000 after-tax cost Reason: The after-tax cost is $1.7 million less tax savings of $350,000; (deduction of $1 million × 35%) = $1,350,000. $500,000 deduction Reason: Grant may only deduct $1 million of compensation, $1,105,000 after-tax cost Reason: The after-tax cost is $1.7 million less tax savings of $350,000; (deduction of $1 million × 35%) = $1,350,000. $975,000 after-tax cost Reason: The after-tax cost is $1.7 million less tax savings of $350,000; (deduction of $1 million × 35%) = $1,350,000.

$1,350,000 after-tax cost $1 million deduction

Mr. Reynolds passed away this year. On his date of death, the fair market value of all of the assets in the estate was $2.2 million and his debts totaled $250,000. His estate paid $10,000 in legal fees, donated $20,000 to United Way, bequeathed $600,000 to his spouse, and the remaining $1.32 million was to be divided among his children. His taxable estate is ______. $0 Reason: $2.2 million - $250,000 (debts) - $10,000 (legal fees in administering the estate) - $20,000 (charitable organization) - $600,000 (spousal exemption) = $1.320,000. $1.32 million Reason: $2.2 million - $250,000 (debts) - $10,000 (legal fees in administering the estate) - $20,000 (charitable organization) - $600,000 (spousal exemption) = $1.320,000. $1.82 million Reason: $2.2 million - $250,000 (debts) - $10,000 (legal fees in administering the estate) - $20,000 (charitable organization) - $600,000 (spousal exemption) = $1.320,000. $1.92 million Reason: $2.2 million - $250,000 (debts) - $10,000 (legal fees in administering the estate) - $20,000 (charitable organization) - $600,000 (spousal exemption) = $1.320,000.

$1.32 million Reason: $2.2 million - $250,000 (debts) - $10,000 (legal fees in administering the estate) - $20,000 (charitable organization) - $600,000 (spousal exemption) = $1.320,000.

Mr. and Mrs. Short are married and file a joint return. They report the following items: Salary - Mrs. Short $100,000 Dividend Income 2,000 Share of partnership income 24,000 Above-the-line deductions 3,000 Itemized deductions 14,000 The Short's AGI is

$123,000

Drew, a single individual, sold his home after one year because of a job transfer to another state. The maximum amount of gain Drew could exclude from taxation on this sale is

$125000

Enrique paid $96,000 for an annuity contract that will pay $1,600 per month for life. Based on Enrique's age, his expected return on the contract is $400,000. This year, Enrique received payments totaling $19,200. How much is taxable to Enrique each year? $1,536 Reason: Enrique's premiums represent 24% ($96,000/$400,000). Thus, it is assumed that 24% of the annuity payments (24% × $19,200 = $4,608) reflect a return of investment and is nontaxable. The remaining $14,592 ($19,200 - $4,608) is taxable. $14,592 Reason: Enrique's premiums represent 24% ($96,000/$400,000). Thus, it is assumed that 24% of the annuity payments (24% × $19,200 = $4,608) reflect a return of investment and is nontaxable. The remaining $14,592 ($19,200 - $4,608) is taxable. $16,600 Reason: Enrique's premiums represent 24% ($96,000/$400,000). Thus, it is assumed that 24% of the annuity payments (24% × $19,200 = $4,608) reflect a return of investment and is nontaxable. The remaining $14,592 ($19,200 - $4,608) is taxable. $4,608 Reason: Enrique's premiums represent 24% ($96,000/$400,000). Thus, it is assumed that 24% of the annuity payments (24% × $19,200 = $4,608) reflect a return of investment and is nontaxable. The remaining $14,592 ($19,200 - $4,608) is taxable.

$14,592 Reason: Enrique's premiums represent 24% ($96,000/$400,000). Thus, it is assumed that 24% of the annuity payments (24% × $19,200 = $4,608) reflect a return of investment and is nontaxable. The remaining $14,592 ($19,200 - $4,608) is taxable.

Marissa is a single mom with two dependent children. She is 30 years old. Her standard deduction is

$18350

Kristi Winn is a single parent with a two-year old daughter. This year, Kristi incurred $10,000 of day care costs. Her employer reimburses day care costs of up to $7,000 per year per employee. What are the tax consequences to Kristi and her employer related to this fringe benefit? No taxable income to Kristi; no deduction for her employer Reason: Kristi may exclude $5,000 of the $7,000 reimbursement from income. The employer may deduct the full amount reimbursed as compensation expense. No taxable income to Kristi; $5,000 deduction for her employer Reason: Kristi may exclude $5,000 of the $7,000 reimbursement from income. The employer may deduct the full amount reimbursed as compensation expense. No taxable income to Kristi; $7,000 deduction for her employer Reason: Kristi may exclude $5,000 of the $7,000 reimbursement from income. The employer may deduct the full amount reimbursed as compensation expense. $2,000 taxable income to Kristi; no deduction for her employer Reason: Kristi may exclude $5,000 of the $7,000 reimbursement from income. The employer may deduct the full amount reimbursed as compensation expense. $2,000 taxable income to Kristi; $5,000 deduction for her employer Reason: Kristi may exclude $5,000 of the $7,000 reimbursement from income. The employer may deduct the full amount reimbursed as compensation expense. $2,000 taxable income to Kristi; $7,000 deduction for her employer Reason: Kristi may exclude $5,000 of the $7,000 reimbursement from income. The employer may deduct the full amount reimbursed as compensation expense.

$2,000 taxable income to Kristi; $7,000 deduction for her employer Reason: Kristi may exclude $5,000 of the $7,000 reimbursement from income. The employer may deduct the full amount reimbursed as compensation expense.

Mark and Ellen Eanet own a vacation home in Florida. They use the home January through September and rent the home for the remainder of the year. They report the following financial details attributed to the period October to December only: Rent revenue: $15,000 Mortgage interest: $2,000 Property taxes: $3,500 Maintenance expenses: $6,000 MACRS depreciation: $1,200 The Eanets correctly report their rental activity on a Schedule E. What is the cumulative effect of this activity on their AGI? $12,700 decrease Reason: Rental Revenue of $15,000 less attributable expenses of $12,700 results in net rental activity of $2,300. $2,300 increase Reason: Rental Revenue of $15,000 less attributable expenses of $12,700 results in net rental activity of $2,300. No effect Reason: Rental Revenue of $15,000 less attributable expenses of $12,700 results in net rental activity of $2,300. $15,000 increase Reason: Rental Revenue of $15,000 less attributable expenses of $12,700 results in net rental activity of $2,300.

$2,300 increase Reason: Rental Revenue of $15,000 less attributable expenses of $12,700 results in net rental activity of $2,300.

On June 5 of the current year, Mr. Schaffer liquidated the following three investments: ABC Stock: Purchased two years ago and sold at a $4,000 gain. DEF Stock: Purchased 6 months ago and sold at a $2,000 loss. GHI Stock: Purchased four years ago and sold at a $500 gain. For tax purposes, Mr. Schaffer will report a ______. $4,500 long-term capital gain and a separately reported $2,000 short-term capital loss Reason: Total long-term capital gains are $4,500 which are netted against a $2,000 short-term capital loss, resulting in a $2,500 net long-term capital gain. $2,500 net short-term capital gain Reason: Total long-term capital gains are $4,500 which are netted against a $2,000 short-term capital loss, resulting in a $2,500 net long-term capital gain. $2,500 net long-term capital gain Reason: Total long-term capital gains are $4,500 which are netted against a $2,000 short-term capital loss, resulting in a $2,500 net long-term capital gain.

$2,500 net long-term capital gain Reason: Total long-term capital gains are $4,500 which are netted against a $2,000 short-term capital loss, resulting in a $2,500 net long-term capital gain.

Melanie's mother died two years ago. Her estate was not subject to any federal estate tax. Melanie inherited a parcel of land from her mother. The fair market value of the land was $120,000 at the time of her mother's death and was originally purchased 12 years ago for $80,000. This year, Melanie sold the land for $140,000. Melanie's gain or loss on the sale is ______. $0 Reason: Melanie gets a step-up in basis to $120,000. Thus, her gain is $20,000 (proceeds of $140,000 less step-up basis of $120,000). $20,000 Reason: Melanie gets a step-up in basis to $120,000. Thus, her gain is $20,000 (proceeds of $140,000 less step-up basis of $120,000). $60,000 Reason: Melanie gets a step-up in basis to $120,000. Thus, her gain is $20,000 (proceeds of $140,000 less step-up basis of $120,000). $80,000 Reason: Melanie gets a step-up in basis to $120,000. Thus, her gain is $20,000 (proceeds of $140,000 less step-up basis of $120,000).

$20,000 Reason: Melanie gets a step-up in basis to $120,000. Thus, her gain is $20,000 (proceeds of $140,000 less step-up basis of $120,000).

Mindy's home was completely destroyed by a tornado. President Trump immediately declared the entire county a federally declared disaster area. Mindy purchased the home one year before for $200,000 of which $180,000 was attributed to the home and $20,000 for the land. Just prior to the destruction, the fair market value of her home was estimated to be $190,000. Insurance reimbursed Mindy $150,000 for repairs. Assuming Mindy's AGI is $70,000, she is entitled to a casualty loss deduction of

$22900

Missy is claimed as a dependent on her parent's 2019 tax return. She earned $2,000 from her job at Yummy Yogurt Shop in 2019. Her standard deduction for 2019 is

$2350

Otto Oltorf, an executive with Sky, Inc., reports the following income: Salary: $275,000 Interest income: $2,000 Qualified dividend income: $4,500 Passive loss from partnership interest: $8,200 Passive income from rental activities: $4,200 Otto's AGI is ______. $275,000 Reason: Otto may offset the $4,200 passive income using the passive loss generated in the current year. Therefore, he computes AGI as $275,000 + $2,000 + $4,500 + 0 ($4,200 passive income offset by passive loss) = $281,500. Otto will have a passive loss carryforward of $4,000. $277,500 Reason: Otto may offset the $4,200 passive income using the passive loss generated in the current year. Therefore, he computes AGI as $275,000 + $2,000 + $4,500 + 0 ($4,200 passive income offset by passive loss) = $281,500. Otto will have a passive loss carryforward of $4,000. $285,700 Reason: Otto may offset the $4,200 passive income using the passive loss generated in the current year. Therefore, he computes AGI as $275,000 + $2,000 + $4,500 + 0 ($4,200 passive income offset by passive loss) = $281,500. Otto will have a passive loss carryforward of $4,000. $281,500 Reason: Otto may offset the $4,200 passive income using the passive loss generated in the current year. Therefore, he computes AGI as $275,000 + $2,000 + $4,500 + 0 ($4,200 passive income offset by passive loss) = $281,500. Otto will have a passive loss carryforward of $4,000.

$281,500 Reason: Otto may offset the $4,200 passive income using the passive loss generated in the current year. Therefore, he computes AGI as $275,000 + $2,000 + $4,500 + 0 ($4,200 passive income offset by passive loss) = $281,500. Otto will have a passive loss carryforward of $4,000.

Graham and Kathy, a married couple filing a joint return, own their principal residence and a vacation home. This year, they paid the following mortgage interest on these two residences: $22,000 on acquisition debt of $500,000 related to their principal residence and $7,000 on a $200,000 mortgage on their vacation home. How much of this mortgage interest can Graham and Kathy deduct as an itemized deduction? $29,000 Reason: Acquisition debt on the primary residence and one vacation home is fully deductible if the total acquisition debt does not exceed $1,000,000 for debt incurred prior to December 17, 2018 and $750,000 following that date. $22,000 Reason: Acquisition debt on the primary residence and one vacation home is fully deductible if the total acquisition debt does not exceed $1,000,000 for debt incurred prior to December 17, 2018 and $750,000 following that date. $7,000 Reason: Acquisition debt on the primary residence and one vacation home is fully deductible if the total acquisition debt does not exceed $1,000,000 for debt incurred prior to December 17, 2018 and $750,000 following that date.

$29,000 Reason: Acquisition debt on the primary residence and one vacation home is fully deductible if the total acquisition debt does not exceed $1,000,000 for debt incurred prior to December 17, 2018 and $750,000 following that date.

This year, Ms. Leonard invested $29,000 in a mutual fund. During the year, the investment yielded the following: Qualified dividend income: $1,200 Dividends reinvested: $1,000 Nontaxable distributions: $800 Ms. Leonard's basis at year end is ______. $27,800 Reason: Purchase price of $29,000 plus dividends reinvested of $1,000 less nontaxable distributions of $800 = $29,200. $28,000 Reason: Purchase price of $29,000 plus dividends reinvested of $1,000 less nontaxable distributions of $800 = $29,200. $29,200 Reason: Purchase price of $29,000 plus dividends reinvested of $1,000 less nontaxable distributions of $800 = $29,200. $30,000 Reason: Purchase price of $29,000 plus dividends reinvested of $1,000 less nontaxable distributions of $800 = $29,200.

$29,200 Reason: Purchase price of $29,000 plus dividends reinvested of $1,000 less nontaxable distributions of $800 = $29,200.

John is subject to a 15% marginal tax rate on ordinary income. This year, he received two dividend distributions, $1,200 from Highpoint, Inc. and $2,000 from Lowmark, Inc. The Form 1099 indicates the dividend from Highpoint is a qualified dividend. John's tax liability on the dividend income is ______. $480 Reason: The Highpoint dividend (qualified) is subject to a 0% preferential rate, while the $2,000 dividend from Lowmark (not qualified) is subject to a 15% rate ($300 tax). $0 Reason: The Highpoint dividend (qualified) is subject to a 0% preferential rate, while the $2,000 dividend from Lowmark (not qualified) is subject to a 15% rate ($300 tax). $300 Reason: The Highpoint dividend (qualified) is subject to a 0% preferential rate, while the $2,000 dividend from Lowmark (not qualified) is subject to a 15% rate ($300 tax).

$300 Reason: The Highpoint dividend (qualified) is subject to a 0% preferential rate, while the $2,000 dividend from Lowmark (not qualified) is subject to a 15% rate ($300 tax)

Mr. and Mrs. Ricketts have determined that their assets have accumulated beyond what they will need in retirement. They would like to use the annual gift tax exclusion to distribute cash to their children and their families. They have two married children and a total of six grandchildren. The maximum they may distribute under the annual gift tax exclusion is

$300000

Mr. and Mrs. Wyatt report $350,000 of AGI which includes salaries of $320,000, net profit of $22,000 from Ms.Wyatt's cake decorating business, capital gains of $3,000, and dividend income of $5,000. Their Medicare contribution tax is

$304

Jim is single. His AMTI is $610,300. He is entitled to an AMT exemption of

$46700

Clint and Charlotte are married with one dependent child, and AGI of $120,000. They pay $12,000 per year for their 2-year old daughter to attend the daycare in the building in which they are employed. Their dependent care credit is ______. $600 $0 $3,000

$600 Reason: Because their AGI is high, they are permitted the minimum credit. Maximum expenses permitted under the credit are $3,000, and they are permitted 20% or $600.

Riley, an unmarried taxpayer, reports $220,000 of AGI which includes his salary of $180,000, $22,000 in dividend income, and $18,000 in capital gains. He has no related investment activities. His Medicare contribution tax is

$760

Mr. Black received a $12,000 dividend from Whitehawk, Inc. Mr. Black's Form 1099 indicated that $8,000 was a qualified dividend and $4,000 was a nontaxable distribution. Which of the following best describes Mr. Black's tax consequences? $8,000 dividend income taxed at a preferential rate, a $4,000 reduction in basis for Black's investment in Whitehawk. $8,000 dividend income taxed at his ordinary rate, a $4,000 reduction in basis for Black's investment in Whitehawk. Reason: $8,000 dividend income taxed at a preferential rate, a $4,000 reduction in basis for Black's investment in Whitehawk. $12,000 dividend income taxed at a preferential rate, no reduction in basis for Black's investment in Whitehawk. Reason: $8,000 dividend income taxed at a preferential rate, a $4,000 reduction in basis for Black's investment in Whitehawk.

$8,000 dividend income taxed at a preferential rate, a $4,000 reduction in basis for Black's investment in Whitehawk.

Lily is unmarried with no dependents. In 2019, she reports $97,000 of AGI. Included in AGI is $20,000 of qualified business income. She also reports $13,000 of itemized deductions. Lily's taxable income is ______. $93,000 $73,000 $67,800 $80,000

$80,000 Reason: Taxable income is $80,000 computed as AGI of $97,000 less $13,000 itemized deduction and $4,000 QBI deduction (20% × $20,000).

Elena has AGI of $93,000 before considering the following transactions that occurred this year: 200 shares of Alpha Corp sold at a $12,000 long term capital loss. 100 shares of Beta Inc. sold at a $3,000 long term capital gain. 150 shares of Chi Company sold at a $3,000 short term capital gain. Elena will report AGI of ______. $93,000 Reason: Elena has a net $3,000 short-term capital gain and a net $9,000 long-term capital loss which combine to a $6,000 long-term capital loss. She may deduct $3,000 in the current year and may carry forward the remaining $3,000. $90,000 Reason: Elena has a net $3,000 short-term capital gain and a net $9,000 long-term capital loss which combine to a $6,000 long-term capital loss. She may deduct $3,000 in the current year and may carry forward the remaining $3,000. $87,000 Reason: Elena has a net $3,000 short-term capital gain and a net $9,000 long-term capital loss which combine to a $6,000 long-term capital loss. She may deduct $3,000 in the current year and may carry forward the remaining $3,000.

$90,000 Reason: Elena has a net $3,000 short-term capital gain and a net $9,000 long-term capital loss which combine to a $6,000 long-term capital loss. She may deduct $3,000 in the current year and may carry forward the remaining $3,000.

Lucas is a U.S. citizen working in his employer's London office for the past five years. If his $200,000 salary is his only source of income, his AGI is

$94100

Which of the following statements about 401(k) plans is false? 401(k) plans are not qualified retirement plans. 401(k) plans are employer sponsored retirement plans. 401(k) plans allow for contributions by both employees and employers.

401(k) plans are not qualified retirement plans.

Which of the following correctly reflects characteristics of an employer sponsored 401(k) plan and a deferred compensation plan? (Select all that apply.) 401(k): May not discriminate in favor of key employees; Deferred Compensation Plans: May not discriminate in favor of key employees Reason: Deferred compensation plans may discriminate in favor of highly compensated or key employees because they are not a qualified plan. 401(k): Qualified; Deferred Compensation Plans: Not Qualified 401(k): Defers receipt of cash currently earned; Deferred Compensation Plans: Defers receipt of cash currently earned

401(k): Qualified; Deferred Compensation Plans: Not Qualified 401(k): Defers receipt of cash currently earned; Deferred Compensation Plans: Defers receipt of cash currently earned

Leona is a single individual receiving Social Security benefits. Leona also has significant retirement income from her former employer. If Leona's modified AGI is $50,000, what percentage of her Social Security benefits will be taxable? 50% Reason: Single individuals with modified AGI above $34,000 pay tax on 85% of Social Security benefits. 85% 0% Reason: Single individuals with modified AGI above $34,000 pay tax on 85% of Social Security benefits.

85%

Which of the following statements is true? A taxpayer who is married for less than half the year may elect to use the single rates for that year. Reason: A taxpayer who is married on the last day of the year may not use the single rates. All unmarried taxpayers must file as a single taxpayer. Reason: Depending on the situation, a single taxpayer may file as single or head of household. A child who is considered a dependent of another taxpayer and who earns income is required to file as a single taxpayer. Reason: Regardless of age, children who earn income must file as a single taxpayer.

A child who is considered a dependent of another taxpayer and who earns income is required to file as a single taxpayer. Reason: Regardless of age, children who earn income must file as a single taxpayer.

Which of the following statements is true? All unmarried taxpayers must file as a single taxpayer. Reason: Depending on the situation, a single taxpayer may file as single or head of household. A taxpayer who is married for less than half the year may elect to use the single rates for that year. Reason: A taxpayer who is married on the last day of the year may not use the single rates. A child who is considered a dependent of another taxpayer and who earns income is required to file as a single taxpayer. Reason: Regardless of age, children who earn income must file as a single taxpayer.

A child who is considered a dependent of another taxpayer and who earns income is required to file as a single taxpayer. Reason: Regardless of age, children who earn income must file as a single taxpayer.

Regulated investment company

A company that owns and manages mutual funds

Which of the following does not represent a type of qualified retirement plan? An IRA initiated by an individuals A Keogh plan available to self-employed individuals A deferred compensation arrangement Employer sponsored plan, such as a 401 (k)

A deferred compensation arrangement

employer sponsored plan

A defined contribution plan, such as a 401(k)

mutual fund

A diversified portfolio on securities

Which of the following transactions would be classified into a special subcategory taxed at 28%? (Select all that apply.) A gain recognized on the sale of a collection of baseball cards purchased 5 years ago A gain recognized on the sale of a stamp collection that was purchased earlier in the same year Reason: Long-term gains (not short-term gains) from collectibles are included in the subcategory taxed at 28%. A gain from the sale of a capital asset purchased 2 years ago Reason: Only long-term gains and losses from the sale of collectibles or qualified business stock fall into the subcategory taxed at 28%. A loss from default of nonbusiness bad debt Reason: Only long-term gains from the sale of collectibles or qualified business stock fall into the subcategory taxed at 28%. A gain from the sale of qualified small business stock purchased 3 years ago

A gain recognized on the sale of a collection of baseball cards purchased 5 years ago A gain from the sale of qualified small business stock purchased 3 years ago

Which of the following transfers are treated as taxable gifts for federal gift tax purposes? A political contribution to the Democratic party Reason: Political contributions are specifically excluded. A charitable contribution to Red Cross Reason: Charitable contributions are specifically excluded. A payment to a hospital to cover medical expenses of the taxpayer's parent Reason: Payments for medical expenses made directly to the hospital are specifically excluded. A gift to the taxpayer's niece used by the niece to support herself while in college Reason: The gift would have been excluded if it were made directly to the university to cover tuition expenses.

A gift to the taxpayer's niece used by the niece to support herself while in college Reason: The gift would have been excluded if it were made directly to the university to cover tuition expenses.

Which of the following statements best reflects the maximum transfer a married couple may make without the transfer being considered a gift for gift tax purposes? A married couple may transfer up to $30,000 each year to as many individuals as they would like. A married couple may transfer a maximum of $15,000 each year divided among as many individuals as they would like. Reason: A married couple may transfer up to $30,000 to as many individuals as they would like each year. A married couple may transfer up to $30,000 each year to only one individual. Reason: A married couple may transfer up to $30,000 to as many individuals as they would like each year. A married couple may transfer up to $30,000 each year divided among as many individuals as they would like. Reason: A married couple may transfer up to $30,000 to as many individuals as they would like each year.

A married couple may transfer up to $30,000 each year to as many individuals as they would like.

Which of the following statements about a qualifying relative as defined under the dependency rules is false? A qualifying relative may not have gross income in excess of $4,200 (in 2019). A qualifying relative must be related to the taxpayer. A qualifying relative must receive more than one-half their financial support from the taxpayer for whom they are a dependent.

A qualifying relative must be related to the taxpayer.

Which of the following statements is false with respect to tax payments? A tax refund indicates that the taxpayer has engaged in careful tax preparation and planning. The filing deadline for an individual taxpayer is the 15th day of the fourth month after the close of the calendar year. If withholding is less than the income tax liability, the balance is due April 15.

A tax refund indicates that the taxpayer has engaged in careful tax preparation and planning. Reason: A refund indicates that the taxpayer prepaid, through withholding and estimated tax payments, more than their current year tax liability.

Which of the following statements about AGI is false? AGI equals total income less itemized deductions. The ability to take certain deductions or credits is often limited based on exceeding an AGI threshold. When deductions are termed "above-the-line," the referenced "line" is AGI.

AGI equals total income less itemized deductions. Reason: Itemized deductions are not included in the computation of AGI.

Which of the following is accurate about the AMT tax rate structure? AMT is a regressive tax structure. AMT is based on a flat 20% tax rate. The AMT tax rate structure has two tax brackets.

AMT is based on a flat 20% tax rate.

Which of the following statements about accelerated death benefits is false? These benefits are available to any taxpayer as long as they are specified in the life insurance contract. These benefits are taxable upon receipt, but at a lower rate than the taxpayer's marginal tax rate. Accelerated death benefits have a policy objective targeted at relieving financial hardship for terminally or chronically ill taxpayers.

Accelerated death benefits have a policy objective targeted at relieving financial hardship for terminally or chronically ill taxpayers.

Which of the following statements about the computation of gain or loss on the sale of shares of stock is true? Amount realized from the sale includes cash and any noncash assets received. Basis is computed as the purchase price less any fees incurred in the transaction. Reason: Basis is computed as the purchase price plus any fees incurred in the transaction. Fees incurred in selling the investment do not affect the gain or loss reported. Reason: Fees paid on the sale reduce the proceeds from the sale, thereby reducing the gain or increasing the loss of the sale.

Amount realized from the sale includes cash and any noncash assets received.

Jennifer, a sales rep with Proctor, Inc., earned $112,000 salary in 2019. She elected to contribute the maximum permitted to her 401(k) plan. Her employer matches 25% of her contributions. Which of the following statements are true? (Select all that apply.) Amounts contributed to the plan by Jennifer are tax deferred. Reason: While amounts contributed are not taxed currently, they will be taxed when Jennifer withdraws them. Thus, they are tax deferred. Proctor is entitled to a $4,750 deduction for contributions to Jennifer's 401(k). Reason: 25% x $19,000 Jennifer's contributions to the plan will be invested and earnings will be taxed in the year that they are earned. Reason: Earnings will be taxed upon withdrawal from the plan. Therefore, they are tax deferred. Jennifer's taxable salary is $98,125. Reason: Her taxable salary is $93,000 ($112,000 less her $19,000 contribution). Jennifer is not taxed on amounts contributed by her employer.

Amounts contributed to the plan by Jennifer are tax deferred. Reason: While amounts contributed are not taxed currently, they will be taxed when Jennifer withdraws them. Thus, they are tax deferred.

Which of the following statements about deductions is true? An itemized deduction always reduces taxable income. Reason: An itemized deduction will not reduce taxable income unless itemized deductions exceed the standard deduction. Itemized deductions can be above-the-line or below-the-line. Reason: By definition, itemized deductions are below-the-line. An above-the-line deduction always reduces taxable income.

An above-the-line deduction always reduces taxable income.

Which of the following statements about employee stock options is false? An employee stock option has the potential to infuse capital into the company issuing the options. An employee stock option is the right to purchase a company's stock for a specific price during a defined period of time. An employee stock option is a form of compensation that requires a significant cash outlay.

An employee stock option has the potential to infuse capital into the company issuing the options.

Which of the following statements relating defined-contribution and defined-benefit plans is false? An employer sponsored plan can only be structured as a defined-benefit plan. Individual plans are typically defined-contribution plans. Both types of plans are qualified retirement plans. Therefore, both are eligible for tax favored status. Contributions to both types of plans are deductible.

An employer sponsored plan can only be structured as a defined-benefit plan. Individual plans are typically defined-contribution plans.

Which of the following statements about the individual AMT is false? The original intent of the AMT was to limit the tax benefit available to high income taxpayers taking advantage of preference items. The effect of the Tax Cuts and Jobs Act was to significantly reduce the number of taxpayers subject to AMT. An individual will pay either AMT or regular tax, depending on which is greater.

An individual will pay either AMT or regular tax, depending on which is greater. Reason: An individual subject to AMT generally pays AMT in addition to their regular tax liability.

Which of the following statements about an investment in undeveloped land are true? (Select all that apply.) Gain recognized on the sale of undeveloped land is ordinary if that land is held as an investment. Reason: Gain recognized on the sale of undeveloped land held as an investment is classified as capital. An investor can elect to capitalize the related property taxes. An investor can elect to capitalize interest expenses on a mortgage incurred to purchase the undeveloped land.

An investor can elect to capitalize the related property taxes. An investor can elect to capitalize interest expenses on a mortgage incurred to purchase the undeveloped land.

Long-term capital gain on the sale of which of the following personal use assets is taxed at a maximum rate of 28 percent? (Select all that apply.) Personal residence Antiques Works of art

Antiques Works of art

Which of the following statements is false? A loss due to federally declared disaster qualifies as a casualty loss. The amount of the loss equals the greater of the tax basis in the property or the decrease in value. Reason: The amount of the loss equals the lesser of the tax basis in the property or the decrease in value. Any allowable deduction is an itemized deduction.

Any allowable deduction is an itemized deduction.

Which of the following reflects the due dates for quarterly estimated tax payments? March 15; June 15; September 15; December 15 April 15; July 15; October 15; January 15 of the following year April 15; June 15; September 15; January 15 of the following year

April 15; June 15; September 15; January 15 of the following year

Mr. Adams purchased 200 shares of Tyco stock for $10/share. Broker's fees were $20 for the entire purchase. Three years later, Mr. Adams sold this investment for $15/share less a broker's fee of $20. Determine Mr. Adam's basis in the stock and gain on the sale. Basis: $2,000; Gain: $980 Reason: Basis: (200 X $10) + $20 = $2,020. Proceeds from sale: (200 X $15) -$20 = $2,980. Gain: $2,980 - $2,020 = $960. Basis: $2,020; Gain: $960 Reason: Basis: (200 × $10) + $20 = $2,020. Proceeds from sale: (200 × $15) -$20 = $2,980. Gain: $2,980 - $2,020 = $960. Basis: $2,020; Gain: $980 Reason: Basis: (200 × $10) + $20 = $2,020. Proceeds from sale: (200 × $15) -$20 = $2,980. Gain: $2,980 - $2,020 = $960. Basis: $2,000; Gain: $1,000 Reason: Basis: (200 × $10) + $20 = $2,020. Proceeds from sale: (200 × $15) -$20 = $2,980. Gain: $2,980 - $2,020 = $960.

Basis: $2,020; Gain: $960 Reason: Basis: (200 × $10) + $20 = $2,020. Proceeds from sale: (200 × $15) -$20 = $2,980. Gain: $2,980 - $2,020 = $960.

In 2010, Harley paid $24,000 for 3,200 shares in a mutual fund. Since that time, the fund has distributed $4,500 in dividends of which Harley has elected to reinvest half of the dividends in the fund. This year, Harley sold her entire investment for $31,000. Determine her basis in the investment and gain from the sale. Basis: $24,000; Gain: $4,750 Reason: Basis: $24,000 + $2,250 = $26,250. Gain: $31,000 - $26,250 = $4,750. Basis: $24,000; Gain: $7,000 Reason: Basis: $24,000 + $2,250 = $26,250. Gain: $31,000 - $26,250 = $4,750. Basis: $26,250; Gain: $4,750 Reason: Basis: $24,000 + $2,250 = $26,250. Gain: $31,000 - $26,250 = $4,750. Basis: $28,500; Gain: $4,750 Reason: Basis: $24,000 + $2,250 = $26,250. Gain: $31,000 - $26,250 = $4,750.

Basis: $26,250; Gain: $4,750 Reason: Basis: $24,000 + $2,250 = $26,250. Gain: $31,000 - $26,250 = $4,750.

In 2013, Maggie purchased 1,000 shares in a mutual fund for $5,200. Maggie participates in a dividend reinvestment program. Her reinvested dividends were: 2013: $480 2014: $500 2015: $520 At year end, Maggie held a total of 1,250 shares (1,000 from the original purchase plus 250 through the dividend reinvestment plan.) At this time, she sold 100 shares for $736. Assume Maggie uses an average cost method, determine her total basis for the 100 shares sold and the gain on the sale. Basis: $520; Gain: $216 Reason: Basis: $5,200 + $480 + $500 + $520 = $6,700. $6,700/1,250 share = $5.36/share. Total basis for 100 shares = $536. Gain: $736 - $536 = $200. Basis: $536; Gain: $200 Reason: Basis: $5,200 + $480 + $500 + $520 = $6,700. $6,700/1,250 share = $5.36/share. Total basis for 100 shares = $536. Gain: $736 - $536 = $200. Basis: $620; Gain: $116 Reason: Basis: $5,200 + $480 + $500 + $520 = $6,700. $6,700/1,250 share = $5.36/share. Total basis for 100 shares = $536. Gain: $736 - $536 = $200. Basis: $670; Gain: $66 Reason: Basis: $5,200 + $480 + $500 + $520 = $6,700. $6,700/1,250 share = $5.36/share. Total basis for 100 shares = $536. Gain: $736 - $536 = $200.

Basis: $536; Gain: $200 Reason: Basis: $5,200 + $480 + $500 + $520 = $6,700. $6,700/1,250 share = $5.36/share. Total basis for 100 shares = $536. Gain: $736 - $536 = $200.

In 2011, Juan began purchasing shares in Pet Products, Inc. each month. This month, Juan sold half of his investment in Pet Products, Inc. Which of the following statements accurately describes the method Juan is permitted for tracking the basis in his investment in Pet Products? Because Juan purchased shares over many months and cannot identify the basis of each share, he may use average cost or FIFO for tracking basis. The tax law permits a choice of FIFO or LIFO, but once adopted, Juan must use this method for all of his financial investments. Reason: Because Juan purchased shares over many months and cannot identify the basis of each share, he may use average cost or FIFO for tracking basis. Because Juan purchased shares over many months and cannot identify the basis of each share, he must use an average cost for tracking basis. Reason: Because Juan purchased shares over many months and cannot identify the basis of each share, he may use average cost or FIFO for tracking basis.

Because Juan purchased shares over many months and cannot identify the basis of each share, he may use average cost or FIFO for tracking basis.

Which of the following statements about financial assets is true? Investors have little control over when gains from investments in financial assets are taxed. Reason: Investors can control the timing of taxation because they can control the timing of the sale of financial assets. Because taxation occurs upon disposal of an invested asset, investors are able to defer taxation on wealth increases from appreciation. The principle that gains from invested assets are taxed only upon realization is a departure from how assets are typically taxed. Reason: This is a key principle of taxation that applies to most types of assets.

Because taxation occurs upon disposal of an invested asset, investors are able to defer taxation on wealth increases from appreciation.

Mr. and Mrs. Backlund file a joint return. They provide more than 50% support for their three children, Lindsay (age 27, full-time college student, earned $10,000 from part-time job), Louisa (age 21, full-time college student, earned $17,000 from part-time job) and John (age 17, earned no income). All three children live full time in the Backlund's home. Which of the following statements is true? Both John and Louisa are qualifying children of the Backlunds. All three are qualifying children of the Backlunds. Reason: Lindsay is too old to be a qualifying child and earns too much to be a qualifying relative. John is the only qualifying child of the Backlunds.

Both John and Louisa are qualifying children of the Backlunds.

Which is not a reason that employers choose to provide fringe benefits? Companies provide fringe benefits to remain competitive in the labor market. Congress mandates that companies provide a minimum level of fringe benefits to all employees. Fringe benefits are often non taxable to the employee and fully deductible by the employer, providing a tax advantage. Employers can often provide fringe benefits at a lower cost because they are able to take advantage of economies of scale.

Cafeteria plans ______. allow employees to customize their benefits to best meet their needs specifically include only non cash employee benefits Reason: Cafeteria plans can provide salary in lieu of non cash benefit options. are limited to nontaxable fringe benefits Reason: Cafeteria plans can include taxable and nontaxable fringe benefits.

Which statement does not accurately describe the tax consequences of rental real estate? Rents received net of operating and maintenance expenses are taxable to the owner. Capital expenditures from rental activities are always currently deductible in arriving at net profit. A taxpayer includes the net profit from rental activities in AGI.

Capital expenditures from rental activities are always currently deductible in arriving at net profit. Reason: In general, capital expenditures must be capitalized and depreciated. The depreciation expense is deducted in arriving at net profit.

Which of the following prizes or awards are subject to income tax? (Select all that apply.) Cash award to a college professor for outstanding teaching Cash scholarship used to pay tuition Reason: Scholarships used to fund tuition, fees, and books are not taxable. New car won on a game show

Cash award to a college professor for outstanding teaching New car won on a game show

John and Jane finalized their divorce in January 2018. Which of the following transfers received as part of the divorce settlement are tax exempt? (Select all that apply.) Child support received Alimony payments received Property settlement received

Child support received Property settlement received

Which of the following situations describes a nontaxable exchange? (Select all that apply.) Common stock in one company is exchanged for common stock in another company pursuant to a reorganization agreement. Common stock is exchanged for common stock (different class) in the same company Preferred stock is exchanged for preferred stock in the same company. Common stock is exchanged for common stock (same class of stock) in the same company. Preferred stock in a company is exchanged for common stock in the same company.

Common stock in one company is exchanged for common stock in another company pursuant to a reorganization agreement. Common stock is exchanged for common stock (different class) in the same company Preferred stock is exchanged for preferred stock in the same company. Common stock is exchanged for common stock (same class of stock) in the same company.

Which of the following types of legal settlements are exempt from tax? Awards for defamation of character Compensation for injury or illness Punitive damages awarded for negligence of the payer

Compensation for injury or illness

Which of the following statements is false regarding traditional IRAs? Deductible contributions are an itemized deduction. Contributions may be fully deductible, partially deductible or non deductible. The ability to deduct a contribution is dependent on AGI and whether an individual, or spouse, participates in another qualified retirement plan.

Deductible contributions are an itemized deduction. Reason: Deductible contributions are an above-the-line deduction.

From the following list of employer provided, non-taxable fringe benefits, identify the benefits that are non-taxable to employees only up to a threshold prescribed by Congress. (Select all that apply.) Medical insurance coverage Dependent care assistance Reason: Dependent care assistance up to $5,000 is not taxable to the employee. Group term life insurance coverage Reason: The value of life insurance premiums are non-taxable to the extent the benefit does not exceed $50,000 of coverage.

Dependent care assistance Reason: Dependent care assistance up to $5,000 is not taxable to the employee. Group term life insurance coverage Reason: The value of life insurance premiums are non-taxable to the extent the benefit does not exceed $50,000 of coverage.

Which of the following best describes compensation contracting? Compensation design for high ranking executives reflects a public market with little room for tax efficient planning. Reason: Compensation design for high ranking executives reflects a private market where negotiation between the employer and the executive is possible. Efficient tax planning should involve designing a compensation package that results in the greatest overall tax savings. Rank and file employees are generally able to negotiate customized compensation packages to create tax savings. Reason: Rank and file employees generally have little flexibility in the design of the compensation packet.

Efficient tax planning should involve designing a compensation package that results in the greatest overall tax savings.

Eli is self-employed and operates as a sole proprietor. Eli has a medical insurance policy to cover himself and his family. Which of the following statements is true regarding the premiums Eli pays for this policy? Eli may deduct the premiums as an above-the-line deduction. Eli may not deduct the premiums. Eli may deduct the premiums as a business expense in arriving at net profit from his business reported in AGI.

Eli may deduct the premiums as an above-the-line deduction.

Which of the following is not a reason the IRS prefers classification of a worker as an employee rather than as an independent contractor? The IRS has determined that self-employed individuals historically have a relatively poor history with tax compliance. The withholding requirements associated with employee status increases the likelihood of collection of both payroll and income tax. Employees are assessed higher total payroll taxes.

Employees are assessed higher total payroll taxes. Reason: Total payroll taxes should be about the same.

Which of the following statements regarding the tax consequences associated with an employee is true? Employers are required to withhold both payroll tax (Social Security and Medicare) and income tax from employee wages. Employees may elect to report net profit from their job above-the-line. Reason: Employees only report wages and other forms of compensation above-the-line. At year-end, employers provide employees with a 1099 reflecting their wages for the current year. Reason: 1099s are provided for independent contractors. An employer would issue a W-2 to an employee.

Employees may elect to report net profit from their job above-the-line.

Which of the following statements is false regarding the tax consequences of wages? If annual withholding exceeds the individual's income tax liability, the Treasury will send a refund as calculated on the tax return. Employees typically recognize wages in the year received. Employees may elect whether or not to have their employers withhold federal income taxes from their wages.

Employees may elect whether or not to have their employers withhold federal income taxes from their wages

Which of the following statements concerning qualified retirement plans is false? Employer contributions are not deductible by the employer in the year of contribution. The plan is tax-deferred so that earnings can accumulate on a before-tax basis. Employer contributions to the plan are not included in the taxpayer's gross income.

Employer contributions are not deductible by the employer in the year of contribution. Reason: Employer contributions are deductible in the year of contribution.

Which of the following features of a qualified retirement plan are true? (Select all that apply.) Employer contributions to the plan are deductible by the employer in the year of contribution. Amounts that an employee contributes are not taxed currently to the employee. Withdrawals from the plan by the employee at retirement are not taxed. Investment earnings generated by the plan are not taxed in the year they are generated.

Employer contributions to the plan are deductible by the employer in the year of contribution. Amounts that an employee contributes are not taxed currently to the employee. Investment earnings generated by the plan are not taxed in the year they are generated.

Which of the following is geneally not a characteristic of an ESOP? The value of the retirement benefit depends on the value of the employer's stock. Employers generally make cash contributions on behalf of their employee. Distributions from the plan are taxed only to the extent of the ESOP's aggregate basis in the stock.

Employers generally make cash contributions on behalf of their employee. Reason: Employer contributions are generally in the form of the employer's own stock.

Which of the following is not a requirement of an employer sponsored qualified retirement plan? The plan must be administered for the benefit of participants in the form of a trust. Employers may defer funding of the plan until the employee retires and is eligible to withdraw funds. The employer must allow equitable participation that does not discriminate in favor of officers, employee-owners, or highly compensated employees.

Employers may defer funding of the plan until the employee retires and is eligible to withdraw funds. Reason: The employer must fund the retirement plan currently.

On November 4, 2018, Erin purchased a U.S. Treasury bill that matured on February 28, 2019. She redeemed the bond on February 28, 2019. Which of the following statements regarding her federal taxable income is true? Erin will never be subject to federal income tax on the interest income. Erin will defer recognition of all interest income until 2019. Erin will prorate interest income and recognize a portion in 2018 and a portion in 2019.

Erin will defer recognition of all interest income until 2019.

True or false: The classification of an individual as a dependent only has the potential to affect a taxpayers filing status. True Reason: The determination that an individual is a dependent has the potential to affect filing status in addition to the availability of other provisions of the law, including certain tax credits. False Reason: The determination that an individual is a dependent has the potential to affect filing status in addition to the availability of other provisions of the law, including certain tax credits.

False Reason: The determination that an individual is a dependent has the potential to affect filing status in addition to the availability of other provisions of the law, including certain tax credits.

True or false: If requested by the filing deadline, a taxpayer may request a six month extension to both file their return and pay their outstanding tax obligation. True False

False Reason: The taxpayer may request an extension to file their return, but not to pay their tax obligation.

securities

Financial assets in the form of equity interest

Which of the following statements about Group Term Life Insurance is false? An employer may deduct the total actual cost of employer provided insurance. For tax purposes, cost of coverage is based on the actual premiums for the current year allocated across policies. Reason: The cost is based on a uniform premium table provided by Treasury. Employees are taxed on the cost of coverage exceeding $50,000.

For tax purposes, cost of coverage is based on the actual premiums for the current year allocated across policies.

Which of the following statements regarding dependent care assistance programs is false? Similar to other forms of compensation, employers may deduct the full amount of dependent care assistance provided employees. For the value to be excluded from employee income, dependent care assistance must be provided on the employer's premises. Employees may exclude from income the value of employer provided dependent care assistance of up to a $5,000 annually.

For the value to be excluded from employee income, dependent care assistance must be provided on the employer's premises.

Which of the following statements best describe fringe benefits? (Select all that apply.) Fringe benefits can often be offered by employers at a cost lower than the employee could purchase for themselves. Fringe benefits are a form of compensation. Fringe benefits have the same tax implications as salary and bonuses. Reason: Unlike salary and bonus, fringe benefits are often exempt from taxation to the employee. Fringe benefits are only offered by Fortune 500 companies. Reason: Fringe benefits are a common form of compensation, not exclusive to the largest companies.

Fringe benefits can often be offered by employers at a cost lower than the employee could purchase for themselves. Fringe benefits are a form of compensation.

Which of the following statements concerning compensation for high ranking executives is false? An objective of the employee is to maximize the after-tax value of total compensation. From an employee perspective, efficient tax planning always involves negotiating more before-tax compensation. An objective of the employer is to minimize the after-tax cost of total compensation.

From an employee perspective, efficient tax planning always involves negotiating more before-tax compensation. Reason: Efficient tax planning focuses on after-tax income.

Which of the following statements about Section 1244 stock is false? Some portion of a loss recognized on the sale of Section 1244 stock is an ordinary deduction. A portion of the gain from the sale of Section 1244 stock may be exempt from taxation. The amount exempted is dependent on the acquisition date. Gain recognized on the sale of Section 1244 stock is always taxed at the taxpayer's marginal tax rate.

Gain recognized on the sale of Section 1244 stock is always taxed at the taxpayer's marginal tax rate. Reason: The maximum tax rate on gains from Section 1244 stock is 28%. However, a portion of the gain may be exempt from taxation altogether.

Which of the following statements about the dependent credit is false? The requirement that the taxpayer has earned income aligns with the purpose of providing tax relief, so taxpayers may maintain gainful employment. For costs to be eligible for the credit, care may be provided by either a day care facility or a caregiver who works in the home. High income taxpayers are not eligible for the credit.

High income taxpayers are not eligible for the credit. Reason: The maximum phase-out is 80% for high income taxpayers..

Which of the following are typical nontax costs that may offset the preferential tax treatment of annuities and life insurance contracts? (Select all that apply.) Higher commissions and fees than nontax favored investments Higher investment returns than nontax favored investments Reason: Lower investment returns is a nontax cost associated with life insurance and annuity investment vehicles. Fees for surrendering policies prior to the first annuity payment

Higher commissions and fees than nontax favored investments Fees for surrendering policies prior to the first annuity payment

Bob Kranske died this year. This year, his taxable income is $225,000, which reflects a 32% marginal tax rate. During his lifetime, he made taxable gifts that were far in excess of the lifetime exclusion. Mr. Kranske's taxable estate is $22.4 million. Which of the following statements is true? His taxable estate is subject to a 40% tax rate. His taxable estate is subject to a 32% marginal tax rate. We cannot determine the rate from the information provided.

His taxable estate is subject to a 40% tax rate.

Brock Company made a new public offering of 1-year corporate bonds with 2% stated rate of interest. Ashley purchased for $18,000 Brock Company bonds with a face value of $20,000, reflecting a $2,000 discount. Ashley will receive annual interest payments of $400. Which of the following statements are true regarding the tax consequences of this investment? (Select all that apply.) If the bonds are held to maturity, Ashley will recognize an additional $2,000 of interest income (equivalent to the discount) at maturity. Reason: Ashley will amortize the $2,000 discount as interest income over the life of the bond. If Ashley redeems the bonds for the face value at maturity, the redemption will not result in any taxable income. Reason: Because the discount was the result of a newly issued bond, the discount was amortized and recognized as taxable income over the life of the bond. Ashley will recognize the $400 of interest income each year as it is received.

If Ashley redeems the bonds for the face value at maturity, the redemption will not result in any taxable income. Ashley will recognize the $400 of interest income each year as it is received.

Ryan owns a beach front condo which he rents to vacationers. Which of the following statements is false? Ryan will report the net profit from rental activities as part of AGI. If Ryan materially participates in the management of this property, the income will not be passive. Depending on his AGI, Ryan may be able to deduct up to $25,000 in losses attributable to this rental property.

If Ryan materially participates in the management of this property, the income will not be passive. Reason: Rental income is passive, regardless of the owner's participation level.

Which of the following statements is false regarding the tax consequences associated with life insurance policies? (Select all that apply.) If a policy is redeemed prior to the death of the insured, the total cash surrender value is taxed as ordinary income. If a policy is held until the death of the insured, all proceeds paid to the beneficiary are exempt from tax. The inside build up in a life insurance policy is not taxed until the policy is liquidated.

If a policy is redeemed prior to the death of the insured, the total cash surrender value is taxed as ordinary income. Reason: The cash surrender value in excess of premiums paid is taxed as ordinary income.

Mr. and Mrs. Rylander are married and file a joint income tax return. This year, Mr. Rylander gifted $50,000 to their favorite grandchild to support him during college. Which of the following statements are true? (Choose all that apply.) If gift splitting is not elected, $15,000 is excluded and $35,000 is considered a gift by Mr. Rylander for federal tax purposes. The transfer is specifically excluded for gift tax purposes because it is intended to support the cost of eduction. Reason: The payment would have to be made directly to the educational institution to pay for tuition. If gift splitting is elected, $30,000 is excluded and $10,000 is considered gifted by Mr. Rylander and $10,000 by Mrs. Rylander.

If gift splitting is not elected, $15,000 is excluded and $35,000 is considered a gift by Mr. Rylander for federal tax purposes. If gift splitting is elected, $30,000 is excluded and $10,000 is considered gifted by Mr. Rylander and $10,000 by Mrs. Rylander.

Mrs. Linn exchanged 200 shares of Necker, Inc. common stock for 300 shares of Granger Corporation stock. Mrs. Linn's basis in Necker stock was $12,200 and the FMV of Granger stock was $22,000 on the date of the exchange. Which of the following statements is false? If the exchange is not pursuant to a reorganization involving both companies, Ms. Linn recognizes $9,800 gain on the exchange. If the exchange is not pursuant to a reorganization involving both companies, Ms. Linn's basis in Granger stock is $22,000. If the exchange is pursuant to a reorganization involving both companies, Ms. Linn recognizes no gain. If the exchange is pursuant to a reorganization involving both companies, Ms. Linn's basis in Granger stock is $22,000.

If the exchange is pursuant to a reorganization involving both companies, Ms. Linn's basis in Granger stock is $22,000. Reason: Ms. Linn recognizes no gain and, therefore, takes a carryover basis of $12,200.

Which of the following statements regarding the tax consequences of wages is false? Accrual basis employers may deduct compensation earned but not paid by year-end only if payment occurs within 2.5 months of year end. Reason: An exception exists to the accrual basis rules. Accrued compensation may be deducted if it is paid within 2.5 months of the year-end. Whether wages are currently deductible by the employer depends on the type of service—personal or business-related—rendered by the employee. If wages are not deductible as a business expense, then there will never be a payroll tax obligation. Reason: If wages are attributable to personal services (for example, a nanny), they are not deductible for federal tax purposes, but there is a payroll tax obligation.

If wages are not deductible as a business expense, then there will never be a payroll tax obligation. Reason: If wages are attributable to personal services (for example, a nanny), they are not deductible for federal tax purposes, but there is a payroll tax obligation.

In 2019, Baker Inc. granted non qualified employee stock options with an exercise price of $20. Which of the following statements is false? The option grant will not result in a book/tax difference. Reason: For financial reporting purposes, an expense is reported in the year of grant. For tax purposes, a deduction is not permitted until the year of exercise. This difference results in a temporary book/tax difference. In 2019, Baker will report a permanent book/tax difference related to the option grant. Reason: For financial reporting purposes, an expense is reported in the year of grant. For tax purposes, a deduction is not permitted until the year of exercise. This difference results in a temporary book/tax difference. In 2019, Baker will report a temporary book/tax difference related to the option grant. Reason: For financial reporting purposes, an expense is reported in the year of grant. For tax purposes, a deduction is not permitted until the year of exercise. This difference results in a temporary book/tax difference.

In 2019, Baker will report a temporary book/tax difference related to the option grant. Reason: For financial reporting purposes, an expense is reported in the year of grant. For tax purposes, a deduction is not permitted until the year of exercise. This difference results in a temporary book/tax difference.

In which of the following cases is a realized loss tax deductible? (Select all that apply.) Sale of equipment used in a business Sale of stock held as an investment Sale of personal residence

Sale of equipment used in a business Sale of stock held as an investment

Which of the following statements best reflects the current trend for qualified retirement plans? Increasingly, employees have multiple employers over their careers. Defined-contribution plans are better structured to allow for portability. Employers are increasingly offering defined-benefit plans. Reason: Employers are increasingly offering defined-contribution plans. The fact that retirees are living longer puts financial stress and financial uncertainty on employers providing defined-contribution plans. Reason: Pensions, or defined-benefit plans, result in a longer term commitment and are, therefore, more likely to increase financial uncertainty for the employer.

Increasingly, employees have multiple employers over their careers. Defined-contribution plans are better structured to allow for portability.

Which of the following statements about payment of taxes is false? Investment brokers are required to withhold tax on all investment income. Employers are required to withhold tax on wages. Quarterly estimated tax payments are usually required for sole proprietors with taxable income.

Investment brokers are required to withhold tax on all investment income. Reason: Brokers are not required to withhold tax on investment income. Therefore, taxpayers with significant investment income may need to make estimated tax payments.

Which of the following statements is true regarding the deductibility of investment interest expense? Investment interest expense is deductible only to the extent of net investment income. Investment interest expense is deductible above the line. Reason: Investment interest expense is deductible as an itemized deduction. Net investment income includes investment income less any related investment expense, including interest. Reason: Investment interest expense is not included as an investment expense for this purpose.

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

Jax Company administers a qualified retirement account. The plan dictates that Jax will contribute 2% of annual book income to the plan. This amount will be allocated among employees based on a formula that includes their base compensation and years of service. Which of the following statements is false? This plan can best be described as a profit sharing plan. Jax may always allocate to every employee 100% of their base salary, if funds permit. This plan is a defined-contribution plan. As the plan is structured, Jax is not required to make an annual contribution if Jax reports a net loss.

Jax may always allocate to every employee 100% of their base salary, if funds permit. Reason: In 2019, the maximum contribution is the lesser of 100% of annual compensation or $56,000. Therefore, if an employee's annual compensation is greater than $56,000, the contribution is limited to $56,000.

Jeremy is unmarried and age 30. He is a participant in a 401(k) plan. He would like to supplement his retirement by also establishing a traditional IRA. Which of the following statements is true? To the extent Jeremy's contributions are deductible, he will deduct them as an itemized deduction. Jeremy may contribute $10,000 annually to an IRA. Reason: The maximum contribution is $6,000 if his AGI is below a defined threshold. Jeremy's ability to deduct his contributions is dependent on his AGI.

Jeremy's ability to deduct his contributions is dependent on his AGI.

Which of the following situations does not reflect a passive ownership interest? Ellen was given a partnership interest in exchange for commercial space. Her partners manage the business and she only occasionally consults. John owns/operates a remodeling business as a sole proprietorship. In recent years, John has retired, leaving his foreman to manage the business. Jim and Jerry own a management company. Owners hire them to manage their rental property.

Jim and Jerry own a management company. Owners hire them to manage their rental property.

As a condition of employment, Joann is required to purchase a "western outfit" for her job at the Lazy Z Dude Ranch. Her employer has designed a custom outfit, manufactured and sold by Western Wear Unlimited. While Joann is required to purchase the uniform, her employer will reimburse her for the costs. Joann purchased and was reimbursed for two outfits at a cost of $400. Identify the tax implications. Joann - no taxable income Lazy D - no tax deduction Reason: Joann - no taxable income Lazy D - $400 tax deduction Joann - $400 taxable income Lazy D - no tax deduction Reason: Joann - no taxable income Lazy D - $400 tax deduction Joann - no taxable income Lazy D - $400 tax deduction Reason: Joann - no taxable income Lazy D - $400 tax deduction

Joann - no taxable income Lazy D - $400 tax deduction Reason: Joann - no taxable income Lazy D - $400 tax deduction

John has been an Arkansas-based employee of Long Company for 10 years. Long Company required John to relocate to South Dakota as part of their expansion to the areal. John incurred $10,000 of moving costs, for which Long reimbursed John for $8,000 of those costs. Which best describes the tax implications to John and Long Company? John - $0 deduction/$8,000 gross income Long - $8,000 deduction Reason: John - $0 deduction/$8,000 gross income Long - $8,000 deduction as compensation expense John - $10,000 deduction/$0 gross income Long - $8,000 deduction Reason: John - $0 deduction/$8,000 gross income Long - $8,000 deduction as compensation expense John - $0 deduction/$8,000 gross income Long - $0 deduction Reason: John - $0 deduction/$8,000 gross income Long - $8,000 deduction as compensation expense

John - $0 deduction/$8,000 gross income Long - $8,000 deduction Reason: John - $0 deduction/$8,000 gross income Long - $8,000 deduction as compensation expense

Blade provides an employer sponsored medical insurance plan for its employees. Assume Blade paid $800 in premiums to the insurance company for each employee. John is employed by Blade and earns $40,000. Which of the following statements is true with respect to John and these elements of compensation? John will report $40,000 of taxable income. Blade will deduct $40,000. Reason: John will report $40,000 of taxable income. Blade will deduct $40,800. While the premium paid on John's behalf is excluded from John's income, Blade is permitted the deduction. John will report $40,800 of taxable income. Blade will deduct $40,000. Reason: John will report $40,000 of taxable income. Blade will deduct $40,800. While the premium paid on John's behalf is excluded from John's income, Blade is permitted the deduction. John will report $40,800 of taxable income. Blade will deduct $40,800. Reason: John will report $40,000 of taxable income. Blade will deduct $40,800. While the premium paid on John's behalf is excluded from John's income, Blade is permitted the deduction. John will report $40,000 of taxable income. Blade will deduct $40,800. Reason: John will report $40,000 of taxable income. Blade will deduct $40,800. While the premium paid on John's behalf is excluded from John's income, Blade is permitted the deduction.

John will report $40,000 of taxable income. Blade will deduct $40,800. Reason: John will report $40,000 of taxable income. Blade will deduct $40,800. While the premium paid on John's behalf is excluded from John's income, Blade is permitted the deduction.

This year, Kris paid $8,000 of interest on funds borrowed to purchase securities for her investment portfolio. Her AGI was $90,000 which included $5,000 of net investment income. Which statement best describes her tax situation related to investment interest expense? Kris may deduct $5,000 of investment interest expense as an itemized deduction and carryforward the remaining $3,000. Reason: The deduction is limited to net investment income of $5,000. As a result, she may only deduct $5,000. She may carry forward the remaining $3,000. Kris may deduct $8,000 of investment interest expense as a miscellaneous itemized deduction. Reason: The deduction is limited to net investment income of $5,000. As a result, she may only deduct $5,000. She may carry forward the remaining $3,000. Kris may not deduct investment interest expense as an itemized deduction. Reason: The deduction is limited to net investment income of $5,000. As a result, she may only deduct $5,000. She may carry forward the remaining $3,000.

Kris may deduct $5,000 of investment interest expense as an itemized deduction and carryforward the remaining $3,000. Reason: The deduction is limited to net investment income of $5,000. As a result, she may only deduct $5,000. She may carry forward the remaining $3,000.

Which of the following statements is true about a decedent's estate? A testamentary transfer is a transfer that occurs just prior to the death of the individual. Reason: A testamentary transfers occurs after or at time of death. Life insurance death benefits paid upon the death of the insured to a named beneficiary are included in the taxable estate. The probate estate includes the decedent's taxable estate. Reason: The taxable estate includes the probate estate plus certain property that transfers outside of probate.

Life insurance death benefits paid upon the death of the insured to a named beneficiary are included in the taxable estate.

Which of the following statements regarding preferential rates on capital gains is false? Long-term capital gains have always been taxed at lower rates than ordinary income. One argument against a preferential rate is that it is unfairly beneficial to high income taxpayers. One argument in support of a preferential rate on capital gains is that it offsets the effect of inflation.

Long-term capital gains have always been taxed at lower rates than ordinary income.

Mario and Maria Moreno have no children of their own. However, their niece, Lupe, lives with them, and they provide more than one-half of her financial support. Which describes a scenario in which the Moreno's may not consider Lupe a qualifying child? Lupe is 22 years old, lives with the Morenos full time, and is not a full-time student. Lupe is 16 and lives with the Morenos seven months of the year. Lupe is 18 years old, lives with the Morenos full time, and earns $10,000.

Lupe is 22 years old, lives with the Morenos full time, and is not a full-time student

last year, Lyle acquired an ownership interest in a partnership. He does not materially participate. Last year, he was allocated a $10,000 loss. This year, Lyle made the decision to dispose of the ownership interest. Which of the following statements is true? The value of the suspended loss is the same regardless of when Lyle may utilize it. Reason: The value of the suspended loss declines the longer it is suspended. The value may also change in relation to changes in the taxpayer's marginal tax rate. Lyle will only realize a tax benefit for the loss generated last year if the partnership is profitable in the current year. Reason: Lyle will deduct this loss in the year of disposal, regardless of whether the business activity is profitable or not. Lyle will deduct the suspended loss in the current year. Reason: Lyle will deduct this loss in the year of disposal, regardless of whether the business activity is profitable or not.

Lyle will deduct the suspended loss in the current year. Reason: Lyle will deduct this loss in the year of disposal, regardless of whether the business activity is profitable or not.

Lynn owns and manages an apartment complex. This year, the complex generated a $40,000 net loss. Her AGI before consideration of this loss is $65,000 (none of which includes passive income). Which of the following statements best describes the tax consequence of the rental income? Lynn may not currently deduct any of the rental loss and reports $65,000 AGI. Lynn may deduct $40,000 of the rental loss and report $25,000 AGI. Reason: Because Lynn's AGI is less than $100,000, she may deduct $25,000 of the rental loss currently. The remaining $15,000 is suspended and carried forward to a future year. Lynn may deduct $25,000 and report $40,000 AGI. Reason: Because Lynn's AGI is less than $100,000, she may deduct $25,000 of the rental loss currently. The remaining $15,000 is suspended and carried forward to a future year.

Lynn may deduct $25,000 and report $40,000 AGI. Reason: Because Lynn's AGI is less than $100,000, she may deduct $25,000 of the rental loss currently. The remaining $15,000 is suspended and carried forward to a future year.

In 2007, Marilyn established a $200,000 life insurance policy and named her son, Mark, as the sole beneficiary. Marilyn died in 2017 when the cash surrender value was $62,000 and her total premiums paid since 2007 was $40,000. The policy paid Mark $200,000 upon her death. Which of the following reflects the tax consequence of the payment? Mark does not report any taxable income. Mark recognizes $160,000 in taxable income. Reason: Mark does not report any taxable income because the payment was made upon Marilyn's death. Mark recognizes $200,000 in taxable income. Reason: Mark does not report any taxable income because the payment was made upon Marilyn's death.

Mark does not report any taxable income.

Which of the following statements regarding discounts related to debt obligations is false? An original issue discount results when an investor purchases newly issued bonds at a price lower than the bond's face value. A market discount results when an investor purchases bonds in a market transaction at a price lower than the bond's face value. Market discounts and original issue discounts on debt obligations are subject to the same tax treatment.

Market discounts and original issue discounts on debt obligations are subject to the same tax treatment.

Kristen and Austin married in 2012. They have no children. Kristen died on January 2, 2018. Which tax rates will Austin use for 2018 and 2019? Married, filing jointly for both tax years Reason: Austin uses married, filing jointly rates in the year of death. Because they have no dependent children, his filing status is single for 2019. Single for both tax years Reason: Austin uses married, filing jointly rates in the year of death. Because they have no dependent children, his filing status is single for 2019. Married, filing jointly for 2018 and single for 2019 Married, filing jointly for 2018 and head of household for 2019 Reason: Austin uses married, filing jointly rates in the year of death. Because they have no dependent children, his filing status is single for 2019.

Married, filing jointly for 2018 and single for 2019

Which of the following statements about material participation is true? A business activity in which an owner materially participates is generally classified as passive. Reason: A business activity in which an owner materially participates is generally not classified as passive. An individual operating as a sole proprietor is always presumed to be materially participating. Reason: A sole proprietor may choose to leave the operations of the business to his employees. In that case, his interest would be passive. Material participation means that the owner is involved in the day-to-day operations on a regular, continuous, and substantial basis.

Material participation means that the owner is involved in the day-to-day operations on a regular, continuous, and substantial basis.

In 2008, Mike Walters purchased a life insurance policy that would pay a $250,000 death benefit to his beneficiary, his daughter Lana. Since he established the policy, Mike has paid $44,000 in premiums. This year, Mike liquidated the policy for the $52,000 cash surrender value. Which of the following statements is true? Mike recognizes no income upon liquidation. Reason: Mike recognizes $8,000 of ordinary income upon liquidation -- the $52,000 cash surrender value in excess of the $44,000 in premiums paid. Mike recognizes $8,000 of capital gain upon liquidation. Reason: Mike recognizes $8,000 of ordinary income upon liquidation -- the $52,000 cash surrender value in excess of the $44,000 in premiums paid. Mike recognizes $8,000 of ordinary income upon liquidation. Reason: Mike recognizes $8,000 of ordinary income upon liquidation -- the $52,000 cash surrender value in excess of the $44,000 in premiums paid. Mike recognizes $52,000 of capital gain upon liquidation. Reason: Mike recognizes $8,000 of ordinary income upon liquidation -- the $52,000 cash surrender value in excess of the $44,000 in premiums paid. Mike recognizes $52,000 of ordinary income upon liquidation. Reason: Mike recognizes $8,000 of ordinary income upon liquidation -- the $52,000 cash surrender value in excess of the $44,000 in premiums paid.

Mike recognizes $8,000 of ordinary income upon liquidation. Reason: Mike recognizes $8,000 of ordinary income upon liquidation -- the $52,000 cash surrender value in excess of the $44,000 in premiums paid.

Mr. Chen owns and manages several rental properties. This year, his business generated a $36,000 loss. His AGI before consideration of this loss is $124,000 (none of which includes passive income). Which of the following statements best describes the tax consequence of the rental income? Mr. Chen may deduct $13,000 and $12,000 is suspended. Reason: Mr. Chen's ability to deduct rental loss is limited because his AGI exceeds $100,000. The limitation is $12,000 (half the excess over $100,000). Therefore, Mr. Chen may deduct $13,000 ($25,000 - $12,000). Mr. Chen may deduct $25,000 and $11,000 is suspended. Reason: Mr. Chen's ability to deduct rental loss is limited because his AGI exceeds $100,000. The limitation is $12,000 (half the excess over $100,000). Therefore, Mr. Chen may deduct $13,000 ($25,000 - $12,000). Mr. Chen may deduct $13,000 and $23,000 is suspended. Reason: Mr. Chen's ability to deduct rental loss is limited because his AGI exceeds $100,000. The limitation is $12,000 (half the excess over $100,000). Therefore, Mr. Chen may deduct $13,000 ($25,000 - $12,000). Mr. Chen may not deduct any of the loss and $36,000 is suspended. Reason: Mr. Chen's ability to deduct rental loss is limited because his AGI exceeds $100,000. The limitation is $12,000 (half the excess over $100,000). Therefore, Mr. Chen may deduct $13,000 ($25,000 - $12,000).

Mr. Chen may deduct $13,000 and $23,000 is suspended. Reason: Mr. Chen's ability to deduct rental loss is limited because his AGI exceeds $100,000. The limitation is $12,000 (half the excess over $100,000). Therefore, Mr. Chen may deduct $13,000 ($25,000 - $12,000).

Three years ago, Ms. Plummer loaned $15,000 to XXY partnership in exchange for an interest bearing note. This year, XXY dissolved and announced to its creditors that it was insolvent and unable to pay its creditors. Which of the following statements is true? Ms. Plummer may deduct $15,000 as a capital loss. Reason: As business bad debt, Ms. Plummer may deduct $15,000 as a capital loss. Ms. Plummer is not entitled to a deduction for this business bad debt. Reason: As business bad debt, Ms. Plummer may deduct $15,000 as a capital loss. Ms. Plummer may deduct $15,000 as an ordinary loss. Reason: As business bad debt, Ms. Plummer may deduct $15,000 as a capital loss

Ms. Plummer may deduct $15,000 as a capital loss. Reason: As business bad debt, Ms. Plummer may deduct $15,000 as a capital loss.

Ms. Tebow paid $4,200 in interest expense on a mortgage related to her investment in undeveloped land and $2,000 in property taxes. Her AGI is $120,000 which includes $3,200 of interest income. Which of the following statements is false? Ms. Tebow may elect to capitalize the property taxes and investment interest expense, increasing her basis in the investment. Ms. Tebow may report $2,000 of property taxes as an itemized deduction. Ms. Tebow may currently report $4,200 of investment interest expense.

Ms. Tebow may currently report $4,200 of investment interest expense. Reason: Investment interest expense is limited to $1,200 representing the net investment income ($3,200 interest income less $2,000 in property taxes).

Mike and Misty Morrow own My Printing, a business that they operate as a sole proprietorship. Their 16 year-old son, Junior, works for the business 10 hours per week after school. Which of the following statements are true regarding Junior's employment in the family business? (Select all that apply.) My Printing may deduct compensation paid to Junior as long as it is "reasonable." The law prevents the Morrows from hiring their minor child. Junior's wages are subject to Social Security and Medicare. Reason: The law specifically exempts from payroll taxes wages earned by children under the age of 18 in their parent's business. Employing Junior has the overall effect of shifting income to a lower taxed entity.

My Printing may deduct compensation paid to Junior as long as it is "reasonable." Employing Junior has the overall effect of shifting income to a lower taxed entity.

Scott and Lauren Lockett own a vacation home in Colorado. They use the home January through October and rent the home for the remainder of the year. They report the following financial details attributed to the period November to December only: Rent revenue: $15,000 Mortgage interest: $6,000 Property taxes: $4,500 Maintenance expenses: $6,000 MACRS depreciation: $10,200 The Locketts correctly report their rental activity on a Schedule E. What is the cumulative effect of this activity on their AGI in the current year? $15,000 increase Reason: Rental Revenue of $15,000 less attributable expenses of $26,700 results in net rental loss. Expenses are deductible only to the extent of rental income. $11,700 decrease Reason: Rental Revenue of $15,000 less attributable expenses of $26,700 results in net rental loss. Expenses are deductible only to the extent of rental income. No effect Reason: Rental Revenue of $15,000 less attributable expenses of $26,700 results in net rental loss. Expenses are deductible only to the extent of rental income. $17,000 increase Reason: Rental Revenue of $15,000 less attributable expenses of $26,700 results in net rental loss. Expenses are deductible only to the extent of rental income.

No effect Reason: Rental Revenue of $15,000 less attributable expenses of $26,700 results in net rental loss. Expenses are deductible only to the extent of rental income.

Which of the following statements about the gift tax is true? A donee that was gifted stock (selling for $4,000 on day of transfer and originally purchased for $1,200) will assume a $4,000 basis in the stock. Reason: The donee will assume a basis of $1,200, the carryover basis. Gifts in excess of the lifetime exclusion amount are taxed at the donors marginal tax rate on ordinary income. Reason: Gifts in excess of the lifetime exclusion amount are taxed at the gift tax rate of 40%. No gift tax is paid until the total of all gifts by a taxpayer exceeds the lifetime exclusion amount ($5 million indexed annually).

No gift tax is paid until the total of all gifts by a taxpayer exceeds the lifetime exclusion amount ($5 million indexed annually).

Which of the following statements is false with regard to the classification of undeveloped land as inventory or an investment for tax purposes? The determination by the IRS is subjective and based on a variety of factors, including the taxpayer's sales history. Owning a parcel of land that is subdivided into smaller lots would provide support that the land is held for investment. The distinction could determine whether any gains from the sale are considered ordinary or capital gains. Reason: Gains from the sale or inventory would be considered ordinary. Gains from the sale of an investment would be considered capital gains.

Owning a parcel of land that is subdivided into smaller lots would provide support that the land is held for investment.

Which of the following is false regardibg the minimum distribution rules for qualified retirement plans? Plan participants must generally begin taking retirement distributions within one year following retirement. Reason: The requirement is no later than April 1 of the year following the year the participant reaches the age 70.5. The required minimum distribution is based on life expecancy tables provided by the Treasury. Reason: WIthdrawing more than the required minimum distribution serves to reduce the duration of the tax deferral associated with qualified plans.

Plan participants must generally begin taking retirement distributions within one year following retirement. Reason: The requirement is no later than April 1 of the year following the year the participant reaches the age 70.5.

Keough plan

Plans available only to a self-employed Individual

Which of the following statements about dividend income is false? Qualified dividend income is eligible for a preferential rate that is not available to interest income. Qualified dividend income can include dividend income from certain qualified foreign corporations. Preferential rates are available to both individuals and corporations receiving qualified dividends.

Preferential rates are available to both individuals and corporations receiving qualified dividends. Reason: Preferential rates on qualified dividends are available only to individual investors.

Which of the following statements regarding Health and Accident Insurance is false? Premiums paid by employers for health insurance coverage provided to employees are not taxable to employees. Congress provides a tax incentive to encourage employers to provide coverage to their employees. Premiums paid by employers for health insurance coverage provided to employees are not deductible by the employers.

Premiums paid by employers for health insurance coverage provided to employees are not deductible by the employers. Reason: Premiums paid by employers for health insurance coverage provided to employees are deductible by the employers.

Which of the following expenditures are qualified medical expenses? (Select all that apply.) Prescription drugs Chiropractor costs Over-the-counter medications Crutches

Prescription drugs Chiropractor costs Crutches

John and Jane finalized their divorce in January 2018. Which of the following transfers received as part of the divorce settlement are tax exempt? (Select all that apply.) Property settlement received Child support received Alimony payments received

Property settlement received Child support received

Which of the following statements is false with respect to qualified retirement plans? Providing executives sufficient alternatives for retirement savings is an overriding policy objective of Congress in designing tax law. The tax law contains strict requirements that must be satisfied for retirement plan to be "qualified." A tax plan that is "qualified" is entitled to tax favored status.

Providing executives sufficient alternatives for retirement savings is an overriding policy objective of Congress in designing tax law. Reason: A policy objective is to require employers to offer this benefit across all compensation levels, rather than targeting executives or other highly compensated employees.

Which of the following types of income reported on Form 1099 may either be taxed at a preferential rate or exempt from tax altogether? (Select all that apply.) Qualified dividend distributions Ordinary dividends Long-term capital gains distributions Nontaxable distributions Interest income

Qualified dividend distributions Long-term capital gains distributions Nontaxable distributions

Which of the following types of income are taxed at a preferential rate? (Select all that apply.) Short-term capital gains Interest income from savings account Qualified dividend income Long-term capital gains

Qualified dividend income Long-term capital gains

Which of the following types of income are permitted a preferential tax rate? (Select all that apply.) Salary and wages Qualified dividends Capital gains Interest income

Qualified dividends Capital gains

Rachel, age 37, quit her job and received a distribution of $42,000 from her employer sponsored qualified retirement plan. She immediately purchased a car costing $27,000 and contributed the remaining $15,000 to a new qualified retirement plan. Which of the following statements is false? To avoid taxes and a penalty on the rollover, she must completed the transfer of funds to the new plan within 60 days of the distribution. Rachel will owe tax on the entire $42,000 distribution. Rachel will owe a penalty of $2,700 on the distribution.

Rachel will owe tax on the entire $42,000 distribution. Reason: Rachel will only owe tax on $27,000, the funds not rolled into another qualified retirement plan.

Which of the following statements is false about taxation of gains and losses from security transactions? The manner in which invested assets are taxed allows for a deferral of tax on wealth changes due to appreciation. Realized and unrealized gains from appreciation of investment assets are taxed currently. Disposition of financial securities results in a tax consequence.

Realized and unrealized gains from appreciation of investment assets are taxed currently. Reason: Only realized gains are taxed.

cash surrender value

Reflects the investment element available to the policyholder should the policy be liquidated prior to the death of the insured

Which of the following best describes the differences between traditional IRAs and Roth IRAs? Roth IRA: Contributions deductible; earnings tax exempt. Traditional IRA: Contributions deductible; earnings tax deferred. Reason: Roth IRA: Contributions non deductible; earnings tax exempt. Traditional IRA: Contributions may be deductible; earnings tax deferred. Roth IRA: Contributions not deductible; earnings tax exempt. Traditional IRA: Contributions not deductible; earnings tax deferred. Reason: Roth IRA: Contributions non deductible; earnings tax exempt. Traditional IRA: Contributions may be deductible; earnings tax deferred. Roth IRA: Contributions non deductible; earnings tax exempt. Traditional IRA: Contributions may be deductible; earnings tax deferred. Reason: Roth IRA: Contributions non deductible; earnings tax exempt. Traditional IRA: Contributions may be deductible; earnings tax deferred. Roth IRA: Contributions non deductible; earnings tax deferred. Traditional IRA: Contributions may be deductible; earnings tax deferred. Reason: Roth IRA: Contributions non deductible; earnings tax exempt. Traditional IRA: Contributions may be deductible; earnings tax deferred.

Roth IRA: Contributions non deductible; earnings tax exempt. Traditional IRA: Contributions may be deductible; earnings tax deferred. Reason: Roth IRA: Contributions non deductible; earnings tax exempt. Traditional IRA: Contributions may be deductible; earnings tax deferred.

In which of the following circumstances will the taxpayer be subject to a 10% penalty on a withdrawal from a qualified retirement plan? John, age 45, becomes permanently disabled and withdraws funds to pay for medical expenses. Reason: John is disabled, so is not subject to a penalty. Scott, age 40, withdraws funds after becoming unemployed. Reason: Scott has not reached 55 to meet the exception for employment termination. Therefore, Scott's withdrawal is subject to the 10% penalty. Elizabeth, age 60, withdraws funds to purchase a vacation home. Reason: Elizabeth is of retirement age (59 1/2), so is not subject to a penalty.

Scott, age 40, withdraws funds after becoming unemployed. Reason: Scott has not reached 55 to meet the exception for employment termination. Therefore, Scott's withdrawal is subject to the 10% penalty.

Which of the following statements is true regarding private activity bonds? They generally offer a higher rate of return than corporate bonds of comparable risk. Federal law dictates that they may not be issued by state and local governments. Since 1986, the interest from private activity bonds represents an AMT preference item.

Since 1986, the interest from private activity bonds represents an AMT preference item.

In 2019, Marshall was employed by Buckeye, Inc. until September when he accepted a new position with Spartan Company. Marshall earned $100,000 from Buckeye and $70,000 from Spartan. Which of the following reflects the amount of wages on which Spartan must withhold Social Security and Medicare tax? Social Security on $32,900; Medicare tax on $41,600 No Social Security; Medicare tax on $70,000 Social Security on $32,900; Medicare tax on $70,000 Social Security on $70,000; Medicare tax on $70,000

Social Security on $70,000; Medicare tax on $70,000 Reason: Spartan must apply withholding rules without considering any other employment. Therefore, Spartan withholds Social Security and Medicare tax on the full $70,000. Marshall may claim a credit for any excess amounts paid.

In the case of an S Corporatin with a single shareholder, the incentive to pay the sole shareholder an unreasonably low salary for services performed can generall be attribued to the desire to minimize payroll taxes. True False

True

Which of the following statements is false? Investment income is primarily attributable to invested capital. The tax consequences of business and investment activities are generally the same. Business profit is distinguished from investment income by the owner's personal role in generating the income.

The tax consequences of business and investment activities are generally the same.

Ms. Clark paid $62,000 for 25,000 shares of Acme, Inc. stock. This year Acme declared bankruptcy, and the shareholders were notified that their stock has no value. Which of the following statements is false? Investors may recognize the unrecovered basis in the investment as a loss. The stock is deemed sold on the last day of the year with the amount realized assumed to be zero. The character of any recognized loss is ordinary.

The character of any recognized loss is ordinary. Reason: The character of the recognized loss is capital.

Which of the following approaches has Congress used to provide tax subsidies for education? (Select all that apply.) Tax credits for qualified expenses Exclusions from income for certain types of interest income Above-the-line deductions for qualified expenses Exclusion from income for certain types of student jobs

Tax credits for qualified expenses Exclusions from income for certain types of interest income Above-the-line deductions for qualified expenses

Which of the following approaches has Congress used to provide tax subsidies for education? (Select all that apply.) Tax credits for qualified expenses Above-the-line deductions for qualified expenses Exclusion from income for certain types of student jobs Exclusions from income for certain types of interest income

Tax credits for qualified expenses Above-the-line deductions for qualified expenses Exclusions from income for certain types of interest income

Mr. and Mrs. Henley could not complete their 2019 Form 1040 before April 15, 2020. They estimate that they will owe a balance of $2,500 with the return. Which of the following statements is true? If the Henleys fail to file their tax return by April 15, they will be subject to a failure to file penalty in all circumstances. The Henleys can file an extension request by April 15 to extend the tax payment and filing deadline by six months. The Henleys can file an extension request by April 15 to extend the filing deadline six months, but they must pay the balance with the request.

The Henleys can file an extension request by April 15 to extend the filing deadline six months, but they must pay the balance with the request. Reason: The extension will only extend the filing deadline. It will not extend the tax payment deadline.

Which of the following statements regarding employee versus independent contractor status is false? The IRS has a higher probability of collecting income and payroll tax from an independent contractor than from an employee. The determination as to whether a worker is an employee or an independent contractor is based on a subjective set of guidelines. If the IRS reclassifies a worker from independent contractor to employee, the employer may be liable for the employee's share of unpaid payroll.

The IRS has a higher probability of collecting income and payroll tax from an independent contractor than from an employee. Reason: The IRS has a higher probability of collecting income and payroll tax from an employee because of the withholding requirements.

Which of the following statements is false regarding compensation paid to an owner of an S corporation? The IRS may reclassify salary paid to an owner as a constructive dividend payment. Payroll taxes can be reduced by paying an owner excessive compensation. Increasing compensation generally does not change the total income (salary and corporate income) recognized by the sole owner of an S corporation.

The IRS may reclassify salary paid to an owner as a constructive dividend payment. Reason: In contrast to the case of a closely-held corporation, the IRS may reclassify the dividend to be a constructive salary payment.

Jared and his three brothers are the sole owners of Cline Corporation. They are also employees of Cline. The IRS has determined that Jared's salary is excessive. Which of the following statements is true? The IRS will likely disallow the entire compensation deduction related to Jared's wages. Cline will not be permitted a deduction for compensation to Jared because the tax law prohibits firms from classifying shareholders as employees. The IRS may reclassify the portion that is determined to be unreasonable as a constructive dividend.

The IRS may reclassify the portion that is determined to be unreasonable as a constructive dividend.

Which of the following statements reflect the IRS process for determining if compensation is reasonable for an employee-shareholder of a closely held corporation? (Select all that apply.) The IRS process is subjective. Court guidance provided the IRS holds that the employee-shareholder role in the company is the single most important factor it will consider. Reason: The courts have held that there is no one single-most important factor. The IRS applies factors identified by the courts. The IRS disregards information that supports what non-owner employees would be paid in similar circumstances. Reason: Ultimately, the IRS is trying to determine what compensation might be if the employee was not an owner and could not exert influence.

The IRS process is subjective. The IRS applies factors identified by the courts.

Which of the following statements are false? The measure "taxable income" includes many adjustments that reflect how a taxpayer's personal situation may impact their ability to pay. Reason: For example, adjustments include a greater standard deduction for elderly and blind taxpayers. The purpose of the standard deduction is to allow all taxpayers a certain amount of income "tax free." The amount of the standard deduction is directly related to a taxpayer's cash flows.

The amount of the standard deduction is directly related to a taxpayer's cash flows. Reason: It is a standard amount, independent of the taxpayer's cash inflows or outflows.

Which of the following statements is false regarding bonds issued by state and local governments? The interest income may be taxed by the state in which the taxpayer resides. The interest income is tax exempt for U.S. income tax purposes. The bond will likely offer a higher rate of interest than corporate bonds with the same degree of risk.

The bond will likely offer a higher rate of interest than corporate bonds with the same degree of risk. Reason: The bond will likely offer a lower rate of interest as corporate bonds with the same degree of risk.

Which of the following statements concerning the individual alternative minimum tax (AMT) computation is true? The AMT rate is a flat 20%. Reason: The AMT structure contains a 26% and a 28% bracket. The calculation of alternative minimum taxable income begins with taxable income for regular tax purposes. A taxpayer with no preference items for the year cannot be liable for AMT. Reason: Both AMT adjustments and tax preference items result in AMTI varying from taxable income for regular tax purposes.

The calculation of alternative minimum taxable income begins with taxable income for regular tax purposes.

Which of the following statements is true regarding the structure of life insurance policies? A life insurance policy may either provide a death benefit or an investment feature, but both may not be built into the contract. The beneficiary is the person(s) who pays the policy premium. The cash surrender value represents the amount that would be received if a policy is liquidated before the death of the insured.

The cash surrender value represents the amount that would be received if a policy is liquidated before the death of the insured.

Which of the following statements regarding the financial reporting and tax implications of deferred compensation is false? For the financial statements, the company records compensation expense in the period it is earned, regardless of when the salary is paid. The company is permitted a deduction in the period the employee earns the salary, regardless of when the salary is paid. The employee reports taxable income when the cash is received after the deferral period. Deferred compensation results in a temporary book/tax difference.

The company is permitted a deduction in the period the employee earns the salary, regardless of when the salary is paid. Reason: The company is permitted a deduction only when the salary is paid.

Which of the following statements is false regarding the deductibility of investment interest expense? If interest expense exceeds net investment income, the nondeductible portion may be deducted in a future year. The deduction is limited to net investment income which includes all capital gains and all dividend income. A deduction is not permitted for interest expense related to tax-exempt investments, such as municipal bonds.

The deduction is limited to net investment income which includes all capital gains and all dividend income. Reason: Capital gains and qualified dividends that are taxed at a preferential rate are not included in the computation of net investment income.

Kyle purchased 10-year corporate bonds for $24,000. The bonds had a face value (redemption value at maturity) of $25,000 and a 3% stated rate of interest. Which of the following statements is false? Kyle will receive and recognize $750 of interest income each year. The discount will result in an additional $1,000 of income recognized over the life of the bond. If Kyle holds the bond until maturity, he will recognize $1,000 ordinary income as a result of the redemption.

The discount will result in an additional $1,000 of income recognized over the life of the bond. Reason: Kyle is permitted to defer recognition of the discount until redemption or sale of the bond.

Which of the following statements regarding Roth and traditional IRAs is false? Both types of of IRAs allow for tax favored retirement savings. The earnings from both types of IRAs are tax deferred. Both types of IRAs are typically established and maintained through a bank or financial institution.

The earnings from both types of IRAs are tax deferred. Reason: The earnings from a Roth IRA are tax exempt, while the earnings from a traditional IRA are tax deferred.

Which of the following generally does not describe a restricted stock award? Is a form of equity based compensation that requires no cash outlay by the employer. The employee may sell the stock at any time after the award has been made by the employer. The award generally requires that the employee forfeit the shares if the employee terminates employment.

The employee may sell the stock at any time after the award has been made by the employer. Reason: Restricted stock generally requires a vesting period during which the employee may not sell the shares.

Which of the following statements regarding the foreign earned income exclusion is false? The exclusion is available to any U.S. citizen employed by a non-U.S. company regardless of where that company is located. Reason: The exclusion is available to U.S. citizens earning income while residing abroad. It is not available to U.S. citizens working in the U.S. for a non-U.S. company. The exclusion is available to U.S. citizens working and residing abroad for a U.S. multinational company. Expatriates may not claim a foreign tax credit for foreign tax paid on income excluded from U.S. taxation.

The exclusion is available to any U.S. citizen employed by a non-U.S. company regardless of where that company is located. Reason: The exclusion is available to U.S. citizens earning income while residing abroad. It is not available to U.S. citizens working in the U.S. for a non-U.S. company.

Which of the following is not a factor that the IRS might consider in determining reasonableness of an employee's compensation? The compensation level of other individuals performing the same type service for similar companies The employee's education and years of service The number of hours worked and the duties performed by the employee The financial situation of the employee Internal consistency between the employees compensation and other employees in the company

The financial situation of the employee

Indicate which of the following represents a financial incentive that may motivate a firm to classify a worker as an independent contractor rather than an employee. (Select all that apply.) An independent contractor charges less for the same job relative to the base salary required to hire an employee to do the same job. The firm can avoid the administrative costs associated with income tax withholding requirements. While the firm is required to pay Social Security tax on the fee paid to the independent contractor, the tax is charged at a lower rate. Reason: The firm does not pay Social Security tax on fees paid to independent contractors. The firm will not provide medical, dental, or other fringe benefits to the independent contractor.

The firm can avoid the administrative costs associated with income tax withholding requirements. The firm will not provide medical, dental, or other fringe benefits to the independent contractor.

Indicate which of the following represents a financial incentive that may motivate a firm to classify a worker as an independent contractor rather than an employee. (Select all that apply.) The firm will not provide medical, dental, or other fringe benefits to the independent contractor. An independent contractor charges less for the same job relative to the base salary required to hire an employee to do the same job. The firm can avoid the administrative costs associated with income tax withholding requirements. While the firm is required to pay Social Security tax on the fee paid to the independent contractor, the tax is charged at a lower rate. Reason: The firm does not pay Social Security tax on fees paid to independent contractors.

The firm will not provide medical, dental, or other fringe benefits to the independent contractor. The firm can avoid the administrative costs associated with income tax withholding requirements.

Which of the following statements is false regarding fringe benefits for self-employed individuals? The general rule is that fringe benefits for self-employed individuals are purchased with before-tax dollars. Reason: For self-employed individuals, most fringe benefits are purchased with after-tax dollars. The inability to deduct fringe benefits results in a higher after-tax cost. Unlike most fringe benefits, premiums for health insurance are deductible above-the-line. Reason: Unlike most fringe benefits, premiums for Health and Accident Insurance are deductible above-the-line.

The general rule is that fringe benefits for self-employed individuals are purchased with before-tax dollars. Reason: For self-employed individuals, most fringe benefits are purchased with after-tax dollars.

Subject to limitations, the gain on the sale of a residence may be excluded from taxable income. Which of the following situations would cause the exclusion to be disallowed? (Select all that apply) The home was owned and used as the taxpayers' principal residence for 1 of the last 5 years. The taxpayer used the home as a vacation property or second residence. The total realized gain was $200,000 and the taxpayer was married filing jointly.

The home was owned and used as the taxpayers' principal residence for 1 of the last 5 years. The taxpayer used the home as a vacation property or second residence.

Which of the following statements is false regarding passive activities? The classification as passive is intended to distinguish income that is the economic equivalent of invested income. The classification as passive has tax consequences to an entity that generates an operating loss. Reason: For passive activities, the taxpayer may be prevented from reporting a net loss. Thus, the ability for losses to offset other forms of ordinary income is limited. The income generated is never characterized as ordinary. Reason: Income may retain the character as ordinary, but the taxpayer may lose the ability to currently deduct losses from passive activities.

The income generated is never characterized as ordinary. Reason: Income may retain the character as ordinary, but the taxpayer may lose the ability to currently deduct losses from passive activities.

insider build up

The increase in the cash surrender value

Which of the following is not a feature of the kiddie tax? The kiddie tax applies only to earned income. The kiddie tax can require that certain types of income reported on a child's tax return be taxed at the rate that applies to estates. The kiddie tax provisions are triggered by investment income in excess of a specific statutory threshold.

The kiddie tax applies only to earned income.

Which of the following statements is false regarding marginal tax rates for individual taxpayers? The marginal tax rate can always be determined by consulting the appropriate line on the tax rate schedule. High income taxpayers must evaluate the impact of phase-outs when assessing the value of an itemized deduction. Especially for high income taxpayers, a sure way to precisely identify the marginal tax rate is to do the full income tax computation.

The marginal tax rate can always be determined by consulting the appropriate line on the tax rate schedule. Reason: Other factors may make the marginal tax rate vary from what is indicated by consulting the tax rate schedule. One potential factor is the impact of phase-outs related to deductions and exemptions.

Which of the following statements regarding the maximum allowable contribution to an IRA is false? The maximum allowable contribution is never greater than $7,000 which includes a $1,000 incremental contribution for those 50 years or older. The maximum allowable contribution is dependent on AGI for both a Roth and a traditional IRA. The maximum allowable contribution is limited to 100% of wages or income from self-employment.

The maximum allowable contribution is dependent on AGI for both a Roth and a traditional IRA. Reason: Roth IRAs have an additional AGI limitation. Traditional IRAs do not have an AGI limitation for contributions, but do have an AGI limitation for deductibility.

The statutory requirements for qualified retirement plans support which of the following policy objectives? (Select all that apply.) Employees should be required to participate to increase the likelihood that individuals are financially prepared for retirement. Reason: The provisions do not require participants to participate. The risk associated with investment in qualified retirement plans should be minimized. Employers must administer plans in a manner that is equitable across employees of all income levels.

The provisions do not require participants to participate. The risk associated with investment in qualified retirement plans should be minimized. Employers must administer plans in a manner that is equitable across employees of all income levels.

Brad's employer, SouthCorp, offers a defined-contribution plan. In 2019, Brad's salary is $43,000. Which of the following statements is true regarding SouthCorp's 2019 contribution to the plan on behalf of Brad? (Select all that apply.) The maximum that SouthCorp may contribute to the plan for Brad is $55,000. Reason: SouthCorp may contribute up to $55,000 per employee, but cannot exceed the employee's annual compensation of $43,000. The maximum that SouthCorp may contribute to the plan for Brad is $43,000. SouthCorp may deduct their contribution to the plan in 2019. SouthCorp may deduct their contribution to the plan when Brad withdraws the amount at retirement. Reason: SouthCorp may deduct their contribution to the plan in 2019. SouthCorp may not deduct their contribution to the plan. Reason: SouthCorp may deduct their contribution to the plan in 2019. Brad is taxed on SouthCorp's contribution to his defined contribution plan in 2019. Reason: SouthCorp may deduct their contribution to the plan in 2019. Brad is taxed on SouthCorp's contribution to his defined-contribution plan when he withdraws it from the account

The maximum that SouthCorp may contribute to the plan for Brad is $43,000. SouthCorp may deduct their contribution to the plan in 2019. Brad is taxed on SouthCorp's contribution to his defined-contribution plan when he withdraws it from the account.

Which of the following better describe characteristics of an independent contractor as opposed to an employee? (select all that apply.) The nature of the work relationship tends to be more temporary in nature. The work relationship typically involves a prescribed regular work schedule and compensation arrangement. Reason: For an independent contractor, the relationship is generally more focused on achieving an outcome(s) with prescribed expectations about delivery. The work relationship does not typically involve direct supervision of the task. The work space and supplies necessary to complete the job are provided. Reason: This better reflects an employee relationship.

The nature of the work relationship tends to be more temporary in nature. The work relationship does not typically involve direct supervision of the task.

Indicate which of the following is not a factor in determining the deductibility of a traditional IRA contribution. AGI The number of dependens that a taxpayer may claim. Filing status Reason: Filing status determines the AGI threshold. The individual's participation in another qualified retirement plan Whether the individual's spouse participates in another qualified retirement plan

The number of dependens that a taxpayer may claim.

premiums

The payment or series of payments to secure an insurance contract

Which of the following statements about compensation for closely-held corporations is false? Compensation arrangements in closely-held corporations are presumed to be arms-length. Relative to public corporations, the IRS is more likely to scrutinize compensation levels for employee-shareholders. The possibility that salary negotiations may be influenced by the dual role of the employee-shareholder reflects a competitive market.

The possibility that salary negotiations may be influenced by the dual role of the employee-shareholder reflects a competitive market. Reason: The possibility that salary negotiations may be influenced by the dual role of the employee-shareholder reflects a fictitious market

Which of the following statements about compensation for closely-held corporations is false? Relative to public corporations, the IRS is more likely to scrutinize compensation levels for employee-shareholders. The possibility that salary negotiations may be influenced by the dual role of the employee-shareholder reflects a competitive market. Compensation arrangements in closely-held corporations are presumed to be arms-length.

The possibility that salary negotiations may be influenced by the dual role of the employee-shareholder reflects a competitive market. Reason: The possibility that salary negotiations may be influenced by the dual role of the employee-shareholder reflects a fictitious market.

Which of the following statements about qualified dividend income is false? The preferential rate for qualified dividend income is eliminated for taxpayers with the highest marginal tax rate. The maximum tax rate on qualified dividend income is 20%. Qualified dividend income is tax exempt for the lowest marginal tax rate taxpayers.

The preferential rate for qualified dividend income is eliminated for taxpayers with the highest marginal tax rate. Reason: All taxpayers benefit from a preferential tax rate on qualified dividends. Taxpayers with the highest marginal rate are permitted a preferential rate of 20% on qualified dividends.

Which of the following is true regarding investment income? When an individual actively manages an investment portfolio, the income generated is considered business income. The tax consequences of investment income is the same as business income. The primary source of investment income is invested capital.

The primary source of investment income is invested capital.

Which of the following is not a factor that determines whether an investment meets the requirements to receive the preferential tax treatment for qualified small business stock under Section 1244? The manner in which the stock is acquired Reason: To meet the requirements, the stock must have been acquired directly from the corporation. The industry in which the corporation operates Reason: Certain industries are prohibited, such as financial, leasing and real estate. The profitability of the corporation The size (in terms of assets) of the corporation Reason: To meet the requirements, the corporation issuing the stock may not have more than $50 million in gross assets immediately after the qualified small business stock is issued.

The profitability of the corporation

The child credit ______. is only permitted for the first four children in the case of a taxpayer who files head of household, and six children for a couple filing jointly Reason: The provision does not specify a maximum. provisions stipulate a maximum credit of $2,000 for each qualifying dependent and $500 for certain non-child dependents is partially phased-out for high income taxpayers Reason: The child credit is completely phased-out for high income taxpayers.

The provision does not specify a maximum. provisions stipulate a maximum credit of $2,000 for each qualifying dependent and $500 for certain non-child dependents

Jamal is single. His AGI is $56,000 and he reports $7,200 of itemized deductions. What amount will Jamal subtract from AGI? The standard deduction of $12,200 Itemized deductions of $7,200 The total of the standard and itemized deductions - $19,400.

The standard deduction of $12,200

Which of the following statements is true about non qualified options versus incentive stock options? The total income recognized by the employee option holder is the same regardless of the type of option, although the timing may be different. Reason: Income attributable to incentive stock options is deferred until the stock is sold. The total income recognized is the same for non qualified options, but the bargain element is recognized at the exercise date. The characterization of income recognized by the employee option holder is always the same regardless of the type of option. Reason: Non qualified options can result in ordinary income for the bargain element and capital gains for the remaining gain recognized at the time of sale. Conversely, this same income may all be recognized as capital gains in the case of incentive stock options. Employers are generally permitted a greater deduction, in total, for incentive stock options relative to non qualified stock options. Reason: Employers are permitted to deduct the bargain element associated with a non qualified option, but are not allowed any deduction for incentive stock options.

The total income recognized by the employee option holder is the same regardless of the type of option, although the timing may be different. Reason: Income attributable to incentive stock options is deferred until the stock is sold. The total income recognized is the same for non qualified options, but the bargain element is recognized at the exercise date.

Which of the following statements about the U.S. transfer tax system is false? The transfer tax system has had the same structure since it was enacted in 1916. The transfer tax system was originally enacted to provide a mechanism in the tax system for wealth redistribution. The transfer tax system has three components that are integrated: the estate, gift and generation-skipping tax.

The transfer tax system has had the same structure since it was enacted in 1916. Reason: The structure has changed several times since the first estate tax was enacted.

Trent has a 24% marginal tax rate. He is offered the following option: A tax credit of $1,000 or an additional itemized deduction of $4,000. Assuming that his itemized deductions exceed the standard deduction, which of the following statements are true? (Select all that apply.) The value of the $4,000 deduction is $960. As Trent's marginal tax rate increases, the value of the credit increases. Reason: The value of the credit is $1,000 regardless of the marginal tax rate. As Trent's marginal tax rate increases, the value of the deduction increases. The value of the credit is $280. Reason: The credit directly reduces taxes by $1,000, so the value is $1,000.

The value of the $4,000 deduction is $960. As Trent's marginal tax rate increases, the value of the deduction increases.

which of the following is true regarding wages paid to an employer's child who is under the age of 18? The wages are subject to FICA but not unemployment tax. Reason: The wages are not subject to either FICA or unemployment tax. The wages are subject to unemployment tax but not FICA. Reason: The wages are not subject to either FICA or unemployment tax. The wages are not subject to either FICA or unemployment tax. The wages are subject to both FICA and unemployment tax. Reason: The wages are not subject to either FICA or unemployment tax.

The wages are not subject to either FICA or unemployment tax.

Which of the following statements regarding a rollover from a traditional IRA to a Roth IRA is false? This rollover allows taxpayers to covert a tax deferred investment into a tax exempt investment. There is no tax consequence associated with the rollover. AGI limits prevent some taxpayers from contributing to a Roth, but rollover rules allow them to fund a Roth by transferring from a traditional IRA.

There is no tax consequence associated with the rollover. Reason: The rollover is a taxable event.

Which of the following statements is false regarding employee related expenses paid by the employee and reimbursed by the employer? They are not included in gross income of the employee. Reason: Reimbursed employee related expenses are not included in the gross income of the employee. They are deductible by the employer. Reason: Reimbursed employee related expenses are deductible by the employer. They are deductible by the employee. Reason: Reimbursed employee related expenses are not deductible by the employee.

They are deductible by the employee. Reason: Reimbursed employee related expenses are not deductible by the employee.

Which of the following statements about employee stock options is false? They provide an option to acquire equity over an indefinite period of time. They provide employees an option to acquire equity of the firm at a bargain price. They are intended to provide employees an incentive to maximize firm value.

They provide an option to acquire equity over an indefinite period of time. Reason: Options are granted for a specific period of time.

Last year, Robert sold one block of securities that resulted in an $11,000 long-term capital loss, generating a carryforward of $8,000. This year, Robert engaged in three transactions which resulted in a $4,000 net long-term capital gain. Before considering these transactions, his AGI this year was $120,000. Which of the following statements is true? This year, Robert will report AGI of $126,000 and a long-term capital loss carryforward of $4,000. Reason: Combining the carryforward of $8,000 and the long-term capital gain of $4,000 this year results in a $4,000 long-term capital loss in the current year. Robert may recognize a net capital loss of $3,000, reducing AGI to $117,000, and carryforward the remaining $1,000 long-term capital loss. This year, Robert will report AGI of $117,000 and a long-term capital loss carryforward of $1,000. Reason: Combining the carryforward of $8,000 and the long-term capital gain of $4,000 this year results in a $4,000 long-term capital loss in the current year. Robert may recognize a net capital loss of $3,000, reducing AGI to $117,000, and carryforward the remaining $1,000 long-term capital loss. This year, Robert will report AGI of $120,000 and a long-term capital loss carryforward of $4,000. Reason: Combining the carryforward of $8,000 and the long-term capital gain of $4,000 this year results in a $4,000 long-term capital loss in the current year. Robert may recognize a net capital loss of $3,000, reducing AGI to $117,000, and carryforward the remaining $1,000 long-term capital loss.

This year, Robert will report AGI of $117,000 and a long-term capital loss carryforward of $1,000. Reason: Combining the carryforward of $8,000 and the long-term capital gain of $4,000 this year results in a $4,000 long-term capital loss in the current year. Robert may recognize a net capital loss of $3,000, reducing AGI to $117,000, and carryforward the remaining $1,000 long-term capital loss.

Last year, Shana purchased a limited interest in a business partnership which is her only passive activity. Last year, she was allocated $15,000 of the partnership's ordinary business loss. This year, she was allocated $7,200 of the partnership's ordinary business income. Which of the following statements is false? This year, she may deduct $7,200 of the loss generated last year. Last year, she could not deduct any of the loss allocated her. This year, Shana has a carryforward of $7,800 in losses that may be used for up to three years.

This year, Shana has a carryforward of $7,800 in losses that may be used for up to three years. Reason: There is no time limit on the use of suspended losses.

Which of the following statements about total income is false? Total income includes compensation and salaries. Computing total income is the first step in computing taxable income. Total income excludes income from business ventures in which the taxpayer engages.

Total income excludes income from business ventures in which the taxpayer engages. Reason: It includes the net profit for sole proprietorships, partnership interest, rental property, etc.

Mr. and Mrs. White file a joint return. They have two children. Both are full-time college students, and the Whites provide more than half of their financial support. Trenton is 22 years old, lives on campus, and he earned $7,000 from a part-time job. Lisa is 26 years old, lives at home, and earns $2,000 from a part-time job. Which of the following statements are true? (Select all that apply.) Trenton is a qualifying child. Trenton is a qualifying relative. Reason: Trenton is a qualifying child because he is a full-time student and under the age of 24. Lisa is a qualifying child. Reason: Lisa is not a qualifying child because she is not under the age of 24. However, she does meet the requirements of a qualifying relative. Lisa is a qualifying relative. Trenton is not a qualifying child or qualifying relative. Lisa is not a qualifying child or qualifying relative.

Trenton is a qualifying child. Lisa is a qualifying relative.

True or false: To the extent an employer reimburses an employee for employment related moving expenses, the employer may deduct those costs. True Reason: Beginning in 2018, employment related moving expenses are not deductible by the employee. Any reimbursement by the employer must be included in the employee's gross income and is deductible by the employer as compensation expense. False Reason: Beginning in 2018, employment related moving expenses are not deductible by the employee. Any reimbursement by the employer must be included in the employee's gross income and is deductible by the employer as compensation expense.

True Reason: Beginning in 2018, employment related moving expenses are not deductible by the employee. Any reimbursement by the employer must be included in the employee's gross income and is deductible by the employer as compensation expense.

Which of the following statements is false regarding defined-benefit plans? Under statutory tax law, minimum annual plan benefits are based on an employee's length of service with the company. Employer contributions to the plan are deductible by the company. Under statutory tax law, maximum annual plan benefits are typically based on an employee's salary level.

Under statutory tax law, minimum annual plan benefits are based on an employee's length of service with the company. Reason: Statutory law address maximum annual plan benefits. Employees are not taxed on employer contributions to the plan.

Which of the following statements regarding fringe benefits is true? Fringe benefits that are excluded from income taxation remain subject to Social Security and Medicare taxes. Unless specifically excluded by law, any economic benefit received as a result of services provided is subject to tax. Employers are not permitted a deduction for a fringe benefit that is not taxable to the employee.

Unless specifically excluded by law, any economic benefit received as a result of services provided is subject to tax.

Which of the following personal expenses are generally not deductible? (Select all that apply.) Utility costs for personal residence Lunch during the workday Property taxes on personal residence Membership at a gym

Utility costs for personal residence Lunch during the workday Membership at a gym

Which of the following statements is false regarding compensation? When an executive compensation package is negotiated, the primary tax objective should be to minimize the tax to which the executive is subject. By altering the amount and nature of elements included in the compensation package, it is possible to alter the tax implications. The compensation package reflects a contractual arrangement between the employee and the employer.

When an executive compensation package is negotiated, the primary tax objective should be to minimize the tax to which the executive is subject. Reason: The primary objective is to create the best tax circumstance overall and negotiate how the benefit should be split.

Which of the following statements regarding business-related wages is false? With respect to compensation level, the IRS can objectively evaluate if it is "reasonable" and, therefore, deductible. Compensation that would be paid for similar services by similar business enterprises would generally support an IRS determination of "reasonable." The tax law provides a deduction for wages paid to the extent that it is determined to be reasonable in amount.

With respect to compensation level, the IRS can objectively evaluate if it is "reasonable" and, therefore, deductible. Reason: This is a subjective determination because, for example, job responsibilities vary across companies as do employee qualifications.

Wyatt Corporation needs an additional worker on a multi-year project. Wyatt could hire an employee for a $40,000 annual salary. A second option would be to hire an independent contractor for a $45,000 annual fee. Which of the following is true? Wyatt must withhold payroll tax from the salary or from the fee. Reason: Only wages paid to an employee are subject to payroll tax. An independent contractor would be subject to self-employment tax instead. Wyatt must issue a W-2 at the end of each taxable year in either case. Reason: Wyatt would issue a W-2 in the case of the employee relationship and a 1099 in the case of an independent contractor relationship. Wyatt withholds income taxes only in the case of the employee relationship. Reason: In the case of an independent contractor, the withholding rules do not apply. The independent contractor must instead make quarterly estimated tax payments.

Wyatt withholds income taxes only in the case of the employee relationship. Reason: In the case of an independent contractor, the withholding rules do not apply. The independent contractor must instead make quarterly estimated tax payments.

The untaxed bargain element of an ISO is ______. subtracted from taxable income in the computation of AMTI added to taxable income in the computation of AMTI is not an adjustment to taxable income in the computation of AMTI

added to taxable income in the computation of AMTI

An above-the-line deduction ______ reduces AGI and ______ reduces taxable income. An itemized deduction ______ reduces AGI and ______ reduces taxable income. always; always; never; sometimes always; always; always; always never; always; never; always always; always; sometimes; sometimes

always; always; never; sometimes Reason: An above-the-line deduction always reduces AGI, and thus always reduces taxable income. Itemized deductions are below-the-line, so do not reduce AGI and only sometimes reduce taxable income.

For tax purposes, the determination that compensation is reasonable is ______. more often challenged by the IRS when compensation was determined in a competitive marketplace Reason: It is evaluated against the compensation level expected in an arm's-length transaction. evaluated against the compensation level expected in an arm's-length transaction evaluated according to benchmark compensation levels provided in the Internal Revenue Code Reason: It is evaluated against the compensation level expected in an arm's-length transaction.

evaluated against the compensation level expected in an arm's-length transaction

Itemized deductions only create a tax savings when itemized deductions ______ the standard deduction. are equal to exceed are less than

exceed Reason: Unless itemized deductions exceed the standard, itemized deductions do not result in a tax benefit.

Suspended losses from passive activities ______. have a maximum carryforward period of twenty years Reason: The carryforward period for suspended losses on passive activities does not have a time limit. are never realized unless the business activity becomes profitable Reason: Suspended loss from passive activities are deducted upon disposition of the interest in the passive activity. are deducted upon disposition of the interest in the passive activity

are deducted upon disposition of the interest in the passive activity

Government transfer payments received without regard to economic need ______. are included in gross income are tax exempt may be partially taxable

are included in gross income

Investment expenses, other than interest expense, ______. are deductible only to the extent you have investment income are not deductible are reported net of investment income above the line Reason: Investment expenses, other than interest, are not deductible.

are not deductible

IRAs ______. are retirement vehicles established by an individual have the same tax implications, regardless of whether they are established as a traditional or Roth IRA can be established by an employer for the benefit of the employees

are retirement vehicles established by an individual

Need-based payments received from local, state, or federal government agencies ______. are tax exempt may be partially taxable are included in gross income

are tax exempt

Contributions to public charities are deductible ______. as an itemized deduction, limited to 60 percent of AGI only to the extent they exceed 60 percent of AGI as an itemized deduction, limited to 10 percent of taxable income

as an itemized deduction, limited to 60 percent of AGI

The gift tax is ______. assessed on inter vivos transfers Reason: Inter vivos transfers are gifts made during the life of the taxpayer. assessed on all gifts except transfers to a spouse Reason: There are several exceptions, including gifts to charity or a gift made in the form of a tuition payment on behalf of another individual. paid by the recipient of the gift Reason: The gift tax is paid by the donor.

assessed on inter vivos transfers Reason: Inter vivos transfers are gifts made during the life of the taxpayer.

The marriage penalty ______. is generally more prevalent among low income taxpayers relative to high income taxpayers Reason: The marriage penalty is more prevalent among high income taxpayers. is not present in the U.S. federal income tax system Reason: The U.S. tax system has features that lead to a marriage penalty. refers to the notion that the tax system is not neutral with respect to marital status

refers to the notion that the tax system is not neutral with respect to marital status

Milton is a retired, unmarried taxpayer with no dependents. In a typical year, his only itemized deductions are his property taxes of $4,500 and a $6,000 donation to his church. His tax accountant has advised him to consider making an $12,000 contribution to his church every other year instead of an annual $6,000 contribution. This technique is best described as ______. tax sheltering bunching tax evasion

bunching

The primary tax distinction between a business and a hobby is that ______. business expenses are fully deductible, while hobby expenses are not deductible business expenses are an itemized deduction, while hobby expenses are reported on Schedule C hobby revenue is tax exempt, while business revenue is included in gross income

business expenses are fully deductible, while hobby expenses are not deductible

State and local sales taxes can be deducted instead of state and local income taxes. are only deductible as a business expense. can be deducted in addition to state and local income taxes.

can be deducted instead of state and local income taxes.

The taxable estate ______. (Select all that apply.) can be reduced to zero by transferring all of the assets to a charitable organization after considering the lifetime exclusion, is taxed at the decedent's marginal tax rate on their final income tax return Reason: The taxable estate is taxed at 40%. is reduced by transfers made to the surviving spouse

can be reduced to zero by transferring all of the assets to a charitable organization is reduced by transfers made to the surviving spouse

Morrow's Machinery offers all employees the option to participate in their 401(k) plan. They have been advised to add another plan that is targeted towards their executive team which will allow participants to defer tax on income beyond what the 401(k) allows. From the executive perspective, this plan is more risky than the 401(k) because Morrow's is not required to currently fund the plan or have it administered by a trust. This plan is likely a ______. deferred pension arrangement Reason: It is a deferred compensation plan. Keogh plan Reason: It is a deferred compensation plan. profit sharing plan Reason: It is a deferred compensation plan. deferred compensation plan

deferred compensation plan

An employer provided qualified retirement plan in which the plan defines the amount of the annual employer contribution, rather than the benefit to be received upon retirement, is termed a

defined-contribution plan

The earned income credit is ______. a non-refundable credit Reason: It is a refundable credit. computed independent of family size or marital status Reason: The amount of the credit is based on number of children and filing status. designed to financially encourage unemployed individuals to enter the workforce

designed to financially encourage unemployed individuals to enter the workforce

An extension of time to file an individual tax return ______. is always four months may be denied by the IRS if the taxpayer fails to provide a reasonable explanation is only granted if the taxpayer who requests an extension to file provides the IRS with a reasonable reason does not extend the time for payment of tax

does not extend the time for payment of tax

The beneficiary of a life insurance policy must pay tax at the time the insurance policy is purchased. does not include any death benefit received in gross income. pays tax at the time the insurance proceeds are paid.

does not include any death benefit received in gross income.

eXtreme Sports is negotiating a compensation package with a valued employee. eXtreme has offered this employee $100,000 base salary plus medical and dental coverage costing eXtreme $10,000. Which of the following statements is true regarding this package? eXtreme is subject to payroll tax on both the $100,000 salary and the value of the insurance coverage provided the employee. Reason: Neither the employee nor the employer is subject to payroll taxes on the value of medical and dental coverage. The salary and insurance coverage is taxable to the employee, but the employee is only subject to payroll taxes on the salary. Reason: The insurance coverage is not taxable (income or payroll tax) to the employee. eXtreme may deduct both the $100,000 salary and the $10,000 cost of insurance coverage.

eXtreme may deduct both the $100,000 salary and the $10,000 cost of insurance coverage.

The QBI deduction is ______. is a result of the taxpayer earning dividend or interest income a deduction permitted in arriving at AGI (above-the-line) equal to 20% of qualified business income

equal to 20% of qualified business income

The tax rules for gambling activities provide that ______. (Select all that apply.) gambling winnings are included in gross income gambling losses are deductible as an itemized deduction, only to the extent of gambling winnings gambling losses are fully deductible as an itemized deduction

gambling winnings are included in gross income gambling losses are deductible as an itemized deduction, only to the extent of gambling winnings

Indicate which of the following statements is false: Debt instruments issued by the U.S. government ______. generate interest that is not subject to state income tax Reason: States exempt interest generated by the U.S. government issued debt instruments. generate interest that is tax exempt for U.S. federal income tax purposes Reason: Interest generated by the U.S. government issued debt instruments is taxable for U.S. federal income tax purposes. include Treasury bills, Treasury notes, Series EE savings bond, and TIPS

generate interest that is tax exempt for U.S. federal income tax purposes Reason: Interest generated by the U.S. government issued debt instruments is taxable for U.S. federal income tax purposes.

The transfer tax system has multiple integrated components including a(n) ______. (Select all that apply.) gift tax estate tax generation skipping tax tax on exchanges of similar assets

gift tax estate tax generation skipping tax

Tangible assets purchased for personal use ______. (Select all that apply.) may be depreciable if subject to wear and tear have a tax basis equal to their cost are not depreciable

have a tax basis equal to their cost are not depreciable

Under a defined-contribution plan, ______. the plan maintains separate investment accounts for each employee employer contributions to the plan are currently taxable to the employee Reason: Employer contributions are deductible by the employer, but not taxable to the employee. the plan guarantees a specific financial benefit to the employee upon retirement Reason: Under a defined-contribution plan, the employer guarantees a specific annual contribution. The total benefit available to the employee upon retirement depends on the investment results of the invested funds.

he plan maintains separate investment accounts for each employee

Hunt is single. His disabled father lives with him and is considered a dependent. Hunt's filing status is ______. married, filing jointly and surviving spouse Reason: Hunt may file head of household because he maintains a household for a dependent family member. head of household single Reason: Hunt may file head of household because he maintains a household for a dependent family member. married, filing separately Reason: Hunt may file head of household because he maintains a household for a dependent family member.

head of household

Employee paychecks typically ______. (Select all that apply.) include income tax withholding which reflects the actual income taxes owed for the wages earned that period Reason: Withholding is only an estimate of and prepayment towards the actual tax liability calculated with the income tax return at year end with the income. include payroll tax withholding which reflects the actual payroll taxes attributable to wages earned that period reflect wages earned less amounts withheld for payroll taxes, income tax, and other benefits

include payroll tax withholding which reflects the actual payroll taxes attributable to wages earned that period reflect wages earned less amounts withheld for payroll taxes, income tax, and other benefits

Total income ______. includes both income earned from business ventures and as an employee excludes income earned from business ventures and from investments excludes income earned as an employee

includes both income earned from business ventures and as an employee

The tax expenditures budget quantifies tax revenues forgone as a result of tax preference items. The largest component of the federal government's tax expenditures budget is the ______. income exclusion for employer provided Health Insurance foreign earned income provision tax deferral for deductible IRA contributions

income exclusion for employer provided Health Insurance

For the current year, John reports the following information: Salary (from W-2): $95,000 Rent received from lease of rental home: $24,000 Maintenance cost for rental home: $10,000 Property tax on rental home: $2,000 Purchase of new air conditioning unit for rental home: $6,000 Depreciation expense on air conditioning unit: $1,200 Which of the following statement is false? John will report $6,000 net profit from rental activities in AGI. Reason: Rent of $24,000 less deductible expenses of $13,200 for a profit of $10,800. Deductible expenses include maintenance ($10,000), property taxes ($2,000), and depreciation ($1,200). John will report $4,800 net profit from rental activities in AGI. Reason: Rent of $24,000 less deductible expenses of $13,200 for a profit of $10,800. Deductible expenses include maintenance ($10,000), property taxes ($2,000), and depreciation ($1,200). John will report $10,800 net profit from rental activities in AGI. Reason: Rent of $24,000 less deductible expenses of $13,200 for a profit of $10,800. Deductible expenses include maintenance ($10,000), property taxes ($2,000), and depreciation ($1,200).

john will report $10,800 net profit from rental activities in AGI. Reason: Rent of $24,000 less deductible expenses of $13,200 for a profit of $10,800. Deductible expenses include maintenance ($10,000), property taxes ($2,000), and depreciation ($1,200).

Deductible tax payments include ______. (Select all that apply.) local income taxes property taxes on personal residence federal gift taxes federal income taxes

local income taxes property taxes on personal residence

The before-tax rate of return offered by municipal bonds is generally ______ than the rate offered by corporate bonds of comparable risk because the income generated is taxed ______ heavily than interest from corporate bond. higher; more Reason: lower; less higher; less Reason: lower; less lower; more Reason: lower; less lower; less

lower; less

John finished graduate school on December 20, 2019 and married on December 27, 2019. His 2019 filing status is ______. single married, filing jointly head of household

married, filing jointly

A taxpayer realizing a gain on sale of a personal residence, but failing to meet the ownership or use requirements for a full gain exclusion, ______. must include all of the realized gain in taxable income may be entitled to a partial exclusion if the sale was due to a change in employment, health, or unforeseen circumstances should immediately repurchase the residence in order to avoid adverse tax consequences associated with gain recognition

may be entitled to a partial exclusion if the sale was due to a change in employment, health, or unforeseen circumstances

Social Security benefits ______. may be partially taxable, depending on the taxpayer's level of income are tax exempt, regardless of the taxpayer's other income sources must be included in gross income

may be partially taxable, depending on the taxpayer's level of income

As ownership interest in undeveloped land ______. is always considered inventory for tax purposes Reason: Undeveloped land may be classified as either inventory or an investment depending on the intent of the owner. Each carries different tax implications. is always considered an investment for tax purposes and subject to preferential capital gains rates Reason: Undeveloped land may be classified as either inventory or an investment depending on the intent of the owner. Each carries different tax implications. may be subject to different tax implications depending on the business intent of the particular owner Reason: Undeveloped land may be classified as either inventory or an investment depending on the intent of the owner. Each carries different tax implications.

may be subject to different tax implications depending on the business intent of the particular owner Reason: Undeveloped land may be classified as either inventory or an investment depending on the intent of the owner. Each carries different tax implications.

For a retirement plan to have tax favored status, the plan ______. must include a vested right to 100% of the retirement benefit within six or seven years of service, depending on the type of plan must include a vested right to 100% of the retirement benefit within two years of service Reason: The plan must include a vested right to 100% of the retirement benefit within six or seven years of service, depending on the type of plan. is not required to have a vesting provision as long as it is administered by an independent trust Reason: The plan must include a vested right to 100% of the retirement benefit within six or seven years of service, depending on the type of plan.

must include a vested right to 100% of the retirement benefit within six or seven years of service, depending on the type of plan

An unemployed worker receiving unemployment compensation ______. must include such as compensation in gross income may be subject to tax on a portion of the benefits, depending on other sources of income is not taxed on such unemployment benefits

must include such as compensation in gross income

A taxpayer earning revenue and incurring expenses for an activity considered a hobby ______. must include the revenue in gross income. is permitted to deduct expenses in full in the computation of adjusted gross income is permitted a deduction for the expenses only up to the amount of the revenue

must include the revenue in gross income.

Taylor, age 31, has the opportunity to invest in a business venture. To fund the investment, she withdrew $20,000 from her qualified retirement plan. As a result of the withdrawal, Taylor ______. must pay a $2,000 penalty and report $20,000 of taxable income Reason: This is a premature withdrawal. Therefore, Taylor must pay tax on the income and also pay a 10% penalty on the withdrawn funds. has no tax consequence if the funds are used to fund an investment Reason: This is a premature withdrawal. Therefore, Taylor must pay tax on the income and also pay a 10% penalty on the withdrawn funds. must pay a $2,000 penalty Reason: This is a premature withdrawal. Therefore, Taylor must pay tax on the income and also pay a 10% penalty on the withdrawn funds.

must pay a $2,000 penalty and report $20,000 of taxable income Reason: This is a premature withdrawal. Therefore, Taylor must pay tax on the income and also pay a 10% penalty on the withdrawn funds.

If a taxpayer owns a vacation home used in part for personal purposes and in part as a rental property, the tax rules for the rental use provide that ______. (Select all that apply.) depreciation cannot be deducted for the rental period of the property rental expenses are deductible, but cannot create a loss rental income is subject to tax

rental expenses are deductible, but cannot create a loss rental income is subject to tax

Clara is 65 and withdrew $20,000 from a Roth IRA this year. This withdrawal is ______. subject to tax at Clara's marginal tax rate Reason: Withdrawals from Roth IRAs are not subject to tax because contributions are after-tax and earnings are tax exempt. not subject to tax Reason: Withdrawals from Roth IRAs are not subject to tax because contributions are after-tax and earnings are tax exempt. subject to tax, but only to the extent Clara made deductible contributions Reason: Withdrawals from Roth IRAs are not subject to tax because contributions are after-tax and earnings are tax exempt.

not subject to tax Reason: Withdrawals from Roth IRAs are not subject to tax because contributions are after-tax and earnings are tax exempt.

Qualified medical expenses are deductible ______. only if reimbursed by insurance whether or not reimbursed by insurance only if not reimbursed by insurance

only if not reimbursed by insurance

IRAs (Individual Retirement Accounts)

plans initiated by individuals

A charitable contribution of noncash property ______. produces a tax deduction equal to the value of the property only if the item is an ordinary income asset produces a tax deduction equal to the value of the property only if the item is a long-term capital gain asset does not produce a tax deduction

produces a tax deduction equal to the value of the property only if the item is a long-term capital gain asset

The Social Security tax system ______. (Select all that apply.) provides a minimal income level to senior citizens is funded through employee payroll and self-employment taxes is only one of many income sources for the majority of retired individuals

provides a minimal income level to senior citizens is funded through employee payroll and self-employment taxes

The tax treatment of creative assets ______. follows the general rule that personal use assets are capital in nature provides an exception to the general rule that personal use assets are capital in nature provides that gain on sale of creative assets is not subject to tax

provides an exception to the general rule that personal use assets are capital in nature

The primary purpose of purchasing a PIG (passive income generator) is to ______. result in a reclassification from passive income to income generated by an active trade or business Reason: The purpose is to immediately realize the tax benefit associated with suspended losses. realize the tax benefit of a suspended loss currently Reason: The purpose is to immediately realize the tax benefit associated with suspended losses. convert ordinary income to income taxed at a preferential rate Reason: The purpose is to immediately realize the tax benefit associated with suspended losses.

realize the tax benefit of a suspended loss currently Reason: The purpose is to immediately realize the tax benefit associated with suspended losses.

When alimony is paid as part of a divorce settlement that was executed prior to December 31, 2018, the recipient ______. recognizes gross income and the payer is allowed a deduction does not recognize gross income and the payer is not permitted a deduction recognizes gross income, but the payer is not permitted a deduction

recognizes gross income and the payer is allowed a deduction

Tax credits ______. reduce the tax liability by $1 for every $1 of credit reduce taxable income by $1 for every $1 of credit increase AGI for every $1 of credit

reduce the tax liability by $1 for every $1 of credit

The kiddie tax ______. refers to rules that require a child's unearned income to be taxed at the rate that applies to estates is a special tax filing status for children under the age of 14 who earn income Reason: The kiddie tax refers to rules that require a child's unearned income to be taxed at the rate that applies to estates. generally applies only to children under the age of 14 Reason: The kiddie tax rules generally apply to children under the age of 18 but, in certain circumstances, can apply to dependents up to the age of 24.

refers to rules that require a child's unearned income to be taxed at the rate that applies to estates

Deductible tax payments can include: (Select all that apply.) state income taxes. employee payroll taxes. property taxes on personal automobiles. federal estate taxes.

state income taxes. property taxes on personal automobiles.

A fringe benefit that is exempted from income tax is ______. exempted from payroll tax subject to payroll tax Reason: A fringe benefit that is exempted from income tax is exempted from payroll tax. exempted from payroll tax if the benefit is provided in cash Reason: A fringe benefit that is exempted from income tax is exempted from payroll tax regardless of whether it is a cash benefit.

subject to payroll tax

Tyler contributed $6,000 to a qualified retirement plan. Contributions to the plan and earnings generated are ______. tax exempt and never taxed Reason: Tax deferred; taxed when withdrawn. tax deferred and taxed when withdrawn fully taxed as earned Reason: Tax deferred; taxed when withdrawn.

tax deferred and taxed when withdrawn

ABC Company collected $1 million of life insurance proceeds on the death of its CFO. This economic benefit is ______. taxable to the extent it exceeds premiums paid on the insurance policy tax exempt included in ABC's gross income

tax exempt

Municipal bond interest is ______. income derived from a bond issued by the U.S. government tax exempt for U.S. income tax purposes always tax exempt for state tax purposes

tax exempt for U.S. income tax purposes

Interest generated by U.S. debt instruments, such as Treasury notes or Series EE bonds, is generally ______ for state income tax purposes and ______ for U.S. income tax purposes. tax exempt; tax exempt Reason: tax exempt; taxable tax exempt; taxable taxable; tax exempt Reason: tax exempt; taxable taxable; taxable Reason: tax exempt; taxable

tax exempt; taxable

A refund of state or local income taxes is ______. generally tax exempt taxable only if the prior deduction for the tax payment produced tax savings an economic benefit that should be included in gross income

taxable only if the prior deduction for the tax payment produced tax savings

Mr. Beede, a cash basis taxpayer, owns shares of Freeman, Inc. in his investment portfolio. On December 10, 2019, Freeman, Inc. declared a dividend. Mr. Beede's share of the dividend was direct deposited to his account on December 30, 2019. Due to the holiday schedule, Mr. Beede did not have access to the funds until January 2, 2020. The dividend income is ______. taxable to Mr. Beede in 2020 Reason: Mr. Beede is in constructive receipt of the dividend in 2019. Therefore, the dividend is taxable in 2019. taxable to Mr. Beede in 2019 Reason: Mr. Beede is in constructive receipt of the dividend in 2019. Therefore, the dividend is taxable in 2019. not taxable until Mr. Beede accesses the funds Reason: Mr. Beede is in constructive receipt of the dividend in 2019. Therefore, the dividend is taxable in 2019.

taxable to Mr. Beede in 2019 Reason: Mr. Beede is in constructive receipt of the dividend in 2019. Therefore, the dividend is taxable in 2019.

Ms. Frost, a cash basis taxpayer, owns shares of XYZ, Inc. in her investment portfolio and participates in a dividend reinvestment program. Therefore, her share of the 4th quarter 2019 dividend paid by XYZ was reinvested in additional shares of XYZ. The dividend is ______. taxable to Ms. Frost in 2019 Reason: Ms. Frost is in constructive receipt of the dividend in 2019. Therefore, the dividend is taxable in 2019 not taxable to Ms. Frost because she did not receive cash when the dividends were payable Reason: Ms. Frost is in constructive receipt of the dividend in 2019. Therefore, the dividend is taxable in 2019 not taxable until Ms. Frost sells the shares of XYZ and converts the investment to cash Reason: Ms. Frost is in constructive receipt of the dividend in 2019. Therefore, the dividend is taxable in 2019

taxable to Ms. Frost in 2019 Reason: Ms. Frost is in constructive receipt of the dividend in 2019. Therefore, the dividend is taxable in 2019

The difference between tax and financial reporting for employee stock option grants results in a(n) ______ book/tax difference that is ______. temporary, favorable Reason: The company reports a book expense in the year of grant, but is not permitted a deduction until the exercise date. This results in a temporary book/tax difference that is unfavorable. temporary, unfavorable Reason: The company reports a book expense in the year of grant, but is not permitted a deduction until the exercise date. This results in a temporary book/tax difference that is unfavorable. permanent, favorable Reason: The company reports a book expense in the year of grant, but is not permitted a deduction until the exercise date. This results in a temporary book/tax difference that is unfavorable. permanent, unfavorable Reason: The company reports a book expense in the year of grant, but is not permitted a deduction until the exercise date. This results in a temporary book/tax difference that is unfavorable.

temporary, unfavorable Reason: The company reports a book expense in the year of grant, but is not permitted a deduction until the exercise date. This results in a temporary book/tax difference that is unfavorable.

The determination that an individual is a dependent has the potential to impact all of the following except ______. the tax rates applied to the taxpayer claiming the dependent filing status of the taxpayer claiming the dependent the availability of certain credits for the taxpayer the due date of the return

the due date of the return

Kelsi and Kirk are both 35 years old and file a joint return. In 2019, their itemized deductions total $22,500. On their 2019 tax return, they will reduce AGI by ______. the standard deduction Reason: The standard deduction of $24,400 exceeds their itemized deductions of $22,500. Therefore, they will elect to take the standard deduction. the standard deduction of $24,400 and by $22,500 of itemized deductions Reason: The standard deduction of $24,400 exceeds their itemized deductions of $22,500. Therefore, they will elect to take the standard deduction. $22,500 of itemized deductions Reason: The standard deduction of $24,400 exceeds their itemized deductions of $22,500. Therefore, they will elect to take the standard deduction.

the standard deduction Reason: The standard deduction of $24,400 exceeds their itemized deductions of $22,500. Therefore, they will elect to take the standard deduction.

The foreign earned income exclusion was implemented ______. to increase the ability for multinational U.S. companies to compete globally and to hire U.S. citizens for their foreign operations to encourage multinational companies to tap into local talent in foreign markets in which they operate in recognition that employees in multinational companies have a strong desire to work abroad, and to align the tax law to support this desire

to increase the ability for multinational U.S. companies to compete globally and to hire U.S. citizens for their foreign operations

True or false: As a general rule, all economic benefits are subject to tax unless a specific statutory exclusion exists. True False Reason: Gross income includes all income from whatever source derived.

true

True or false: Life insurance policies and annuity contracts enjoy preferential tax status. The benefit of this status is typically offset by higher fees and lower rates of return for these savings vehicles relative to other investment options that are not subject to preferential tax status. True False Reason: Life insurance policies and annuity contracts enjoy preferential tax status. The benefit of this status is typically offset by higher fees and lower rates of return for these savings vehicles relative to other investment options that are not subject to preferential tax status.

true

This year, Mr. Hicks reported a $7,000 long-term capital loss and a $3,200 short-term capital gain. For tax purposes, Mr. Hicks ______. will net the transactions and include in AGI a $3,800 short-term capital loss Reason: Mr. Hicks will net the transactions and include in income a $3,800 long-term capital loss. will net the transactions and include in income a $3,800 long-term capital loss may not net the two transactions because the loss is long-term Reason: Mr. Hicks will net the transactions and include in income a $3,800 long-term capital loss.

will net the transactions and include in income a $3,800 long-term capital loss

For a given year, filing status is determined ______. as the status for which the taxpayer qualified for the most days in the taxable year Reason: Filing status is determined with respect to the criteria evaluated on the last day of the taxable year. with respect to the criteria evaluated on July 1 (midpoint) of the taxable year Reason: Filing status is determined with respect to the criteria evaluated on the last day of the taxable year. with respect to the criteria evaluated on the first day of the taxable year Reason: Filing status is determined with respect to the criteria evaluated on the last day of the taxable year. with respect to the criteria evaluated on the last day of the taxable year

with respect to the criteria evaluated on the last day of the taxable year