EA 2022 Assaignment Test

Samuel, a civil engineer, drives his own vehicle to various locations to inspect bridges for safety standard requirements. His employer reimburses Samuel $400 each month for various business expenses and does not expect Samuel to provide proof of his expenses. His employer included this $4,800 reimbursement in Samuel's 2022 W-2 as part of his wages. In 2022, Samuel incurred $3,000 in transportation expense, $1,000 in parking and tolls expense, $1,800 in car repairs expense, and $600 for expenses while attending a professional association convention. Assume that Samuel uses the vehicle for business purposes only and that he maintains adequate documentation to support all of his above expenditures. What amount is Samuel entitled to deduct on his Schedule A for itemized deductions? $6,400 of expenses subject to the 2% of adjusted gross income limitation $1,600, the difference between his expenditures and what he was reimbursed $0 since he cannot deduct expenses subject to the 2% of adjusted gross income limitation $4,800 since his employer follows a nonaccountable plan

$0 since he cannot deduct expenses subject to the 2% of adjusted gross income limitation The treatment of reimbursements depends on the type of plan maintained by the employer; there are two basic types of reimbursement arrangements: accountable plans and nonaccountable plans. (Publication 463, page 29) If the plan is an accountable plan, the employer should not include any reimbursements in the employee's W-2 as part of his or her wages. If the employer did include the reimbursement amounts, then the employee should ask for a corrected Form W-2. If the plan is a nonaccountable plan, employees generally must complete Form 2106 to deduct travel, transportation, and entertainment expenses incurred. (Publication 463, page 29) Under prior TCJA law, since Samuel uses his vehicle for business purposes only, he would be able to deduct all the expenses associated with the vehicle's use. Thus, he can deduct $6,400, which is the sum of $3,000, $1,000, $1,800, and $600 as a 2% miscellaneous deduction. However, TCJA has suspended the 2% miscellaneous deductions for 2018 through 2026, except for Armed Forces reservists, fee-based state or local government officials, qualified performing artists, or disabled employees with impairment-related work expenses. Therefore, Samuel cannot claim any deduction. (Publication 17, page 98) Publication 17, page 98 Publication 463, page 29

Wanda purchased a manuscript in 1947 for $10. In 2020, the year before her death, Wanda gave the manuscript to her granddaughter Ruth. At the time of the gift, the manuscript had an appraised value of $510. In 2022, Ruth sold the manuscript for $1,010. What is the amount and character of Ruth's gain from the sale of this manuscript? $1,000 long-term capital gain $1,000 ordinary gain $500 long-term capital gain $500 ordinary gain

$1,000 long-term capital gain Since the gift had an FMV greater than its adjusted basis, Wanda uses the adjusted basis of the received property (i.e., $10) as her adjusted basis. Hence, the gain from the sale is $1,000, which is the difference between $1,010 and $10. if a taxpayer receives a gift of property and the basis is determined by the donor's adjusted basis, the taxpayer's holding period is considered to have started on the same day the donor's holding period started. (Publication 551, page 9) In this case, Ruth has a long-term capital gain of $1,000 because her holding period is considered to have started on the same day as her Grandmother's (Wanda, the donor), which means that the asset was held for more than 1 year. Publication 551, page 9

Kiran bought stock in the Big Bang Corporation in 2018 for $2,000. In 2021, Kiran received a return of capital distribution of $100 as a partial return on her investment. In 2022, Kiran sold the stock for $3,000. Her basis in the stock is: $3,000. $2,100. $1,900. $2,000.

$1,900. The basis of stocks or bonds generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. The basis of the stock is adjusted for certain events that occur after purchase. For example, if the person receives additional stock from nontaxable stock dividends or stock splits, divide the adjusted basis of the old stock by the number of shares of old and new stock. This rule applies only when the additional stock received is identical to the stock held. Likewise, the basis is reduced when nontaxable distributions are received because they are a return of capital. (Publication 550, page 20) In this problem, Kiran's basis in Big Bang Corporation is $1,900, which is the purchase price of $2,000 less the return of capital distribution of $100. Publication 550, page 20

Larry purchased stock in 2020 for $100. During 2021, he received a return of capital of $80 on this stock. During 2022, he received another return of capital of $30. Larry had no other stock transactions in 2022. What amount should he report on his 2022 income tax return and what is his basis in the stock at the end of 2022? $30 capital gain, $100 stock basis $30 dividend income, $100 stock basis $10 capital gain, zero stock basis $10 dividend income, zero stock basis

$10 capital gain, zero stock basis Larry has a basis of $20 ($100 less $80) after the nontaxable distribution of $80 in 2021. The $30 distribution by the company in 2022 results in a further basis reduction of $20 and a $10 long-term capital gain, which is the excess over basis. Publication 550, page 20 Larry has a basis of $20 ($100 less $80) after the nontaxable distribution of $80 in 2021. The $30 distribution by the company in 2022 results in a further basis reduction of $20 and a $10 long-term capital gain, which is the excess over basis. Publication 550, page 20

Ms. Red, age 28, is single and received $10,000 in unemployment benefits from the state for 2022. She also received $3,000 from the state to reduce the costs of her winter fuel bill. What amount of income should Ms. Red report for 2022? $7,600 $13,000 $10,000 $0

$10,000 Publication 17, pages 70 and 71, states that a taxpayer must include in income all unemployment compensation received by the taxpayer. The person should receive a Form 1099-G showing the unemployment compensation paid to him or her. Welfare and other public assistance benefits from a public welfare fund based upon need, such as payments due to blindness, generally are not included in gross income. Payments made by a state to qualified people to reduce their cost of winter energy use, for example, are not taxable pursuant to Publication 17, page 71. Ms. Red, therefore, must report only $10,000, which are her state unemployment benefits for the year. Publication 17, pages 70-71

Jennifer works for Joyce and received a parcel of land as payment for her services. Joyce's basis in the land was $6,000 and the land had an FMV of $10,000. Jennifer's basis in the land is: $0. $6,000. $10,000. $4,000.

$10,000. In general, gross income includes all income that the taxpayer receives in the form of money, goods, property, and services that is not exempt from tax. It also includes income from sources outside the United States or from the sale of a person's main home (even if the person can exclude all or part of it). (See Publication 17, pages 45-46.) When a taxpayer receives property for services, the taxpayer must include its fair market value in income in the year the property is received. The amount included in income becomes the taxpayer's basis in the property. If the services were performed for a price agreed on beforehand, it is accepted as the fair market value of the property IF there is no evidence to the contrary. (See Publication 551, pages 2-4.) Publication 17, pages 45-46 Publication 551, pages 2-4

The requirement to file the FinCEN Form 114 applies to U.S. persons with a financial interest in or signature authority over any foreign financial account(s), if the aggregate value of these accounts, at any time during the calendar year, exceeds: $10,000. $7,500. $5,000. $1,000.

$10,000. Publication 4261, page 1, states that any United States person who has a financial interest in or signature authority over any financial account(s) located outside of the United States is required to electronically file a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year. Note: This question appears in different forms, but the key issue is recognizing the aggregate value of these accounts must EXCEED (not be equal to) $10,000. Publication 4261, page 1

Bernie is a self-employed accountant in 2022. He reported net income of $50,000 on his Schedule C for 2022. During the year, Bernie paid the following: $5,200 child support, $5,000 in alimony resulting from a divorce finalized in 2021, $6,000 in medical insurance premiums, deductible portion of self-employment taxes of $3,533, and $2,000 to his IRA plan. What amounts are deductible in arriving at adjusted gross income for 2022? $25,266 $21,733 $11,533 $16,533

$11,533 $6,000 in medical insurance premiums, $3,533, deductible portion of self-employment taxes $2,000 to his IRA plan. ---------------------------- $11,533 There are several pieces of this problem that need to be addressed to determine the deductible amount in arriving at AGI. First, a self-employed person is able to deduct, as an adjustment to income, up to 100% of the amount paid for medical and qualified long-term care insurance on behalf of the person and the person's spouse, dependents, and children who were under age 27 at the end of 2022. The limitation here is that the insurance plan must be established under the individual's trade or business, and the person cannot take this deduction to the extent that the amount of the deduction is more than the taxpayer's earned income from that trade or business. (See Publication 502, page 21.) Second, if a taxpayer is self-employed (a sole proprietor or a partner), a deduction is allowed for 50% of the taxpayer's self-employment taxes in 2022. (See Publication 17, Table 11-1, page 96.) Third, because Bernie is self-employed and therefore is not covered under an employer's pension plan, he is able to take a deduction for an IRA contribution. (See Table 9-2 in Publication 17, page 78.) Finally, for divorce or separation agreements executed after December 31, 2018, a taxpayer may no longer deduct an amount equal to the alimony or separate maintenance payments paid during the tax year, nor will the alimony or separate maintenance payments be included in the gross income of the recipient spouse. (Publication 504, page 17) As a result of the above rules, Bernie can deduct $11,533 in arriving at AGI, which is the sum of his hospitalization insurance of $6,000, IRA contribution of $2,000, and the deductible portion of his self-employment taxes of $3,533. Publication 17, pages 78 and 96 Publication 502, page 21 Publication 504, page 17

** Jack, a U.S. citizen, was a resident of England for all of 2022. He received $120,000 in wages from an English corporation, and paid taxes to England on this income. What portion of the $120,000 is exempt from U.S. income tax? $0 $108,700 $112,000 $120,000

$112,000 In order to lessen the potential for double taxation, United States taxpayers are allowed to take an amount of qualified foreign taxes paid or accrued during the year as a credit or a deduction. Taken as a deduction, foreign income taxes reduce your taxable income. Taken as a credit, foreign income taxes reduce your tax liability. Regardless of which option a taxpayer elects, they must treat all foreign income taxes the same way during that year. (Publication 54, page 24) Claiming the credit is done on Schedule 3 (Form 1040 or 1040-SR), line 1, and generally requires a taxpayer to complete and attach Form 1116 to Form 1040. In order to claim the deduction, the taxpayer must itemize their deductions, and therefore take the deduction on Schedule A. (Publication 54, page 24) In addition, United States citizens or resident aliens who work "abroad" are taxed on worldwide income. However, the person may qualify to exclude from gross income up to $112,000 of foreign earned income for 2022 (Publication 54, page 20). However, a taxpayer is not permitted to take the credit or deduction for foreign income taxes paid on earnings that can be excluded from the U.S. tax under any of the following (Publication 54, page 24): Foreign earned income exclusion Foreign housing exclusion Possession exclusion Given that Jack received $120,000 while he was a resident of England for all of 2022, he may be able to exclude up to $112,000 (not the entire $120,000) from gross income. IRC Sections 911(b)(1) and (d)(2) Publication 54, pages 20 and 24

** During 2022, Ms. Gonzales paid $800 for real estate taxes on her primary residence and $600 on her mountain cabin. Her filing status is single, and she celebrated her 65th birthday on January 1, 2023. What standard deduction amount can Ms. Gonzales claim on her tax return for 2022? $12,950 $14,700 $16,450 $19,400

$14,700 Table 10-2 on page 92 of Publication 17 provides the standard deduction amounts for taxpayers born before January 2, 1957 (i.e., age 65 or older), or who are blind. Ms. Gonzales is able to claim $14,700 as her standard deduction, which is the amount listed for a single taxpayer claiming either age 65 or blind. For those interested, $14,700 is the sum of $12,950 for a filing status of single and $1,750 for being age 65 as of January 1, 2023. Please note the special rule that a person is treated as being age 65 in 2022 even though their birthday is celebrated on January 1, 2023. Publication 17, page 92

A taxpayer purchases real estate rental property for $150,000. She pays $25,000 cash and obtains a mortgage for $125,000. She pays closing costs of $8,000, which includes $4,000 in points on the mortgage and $4,000 for bank fees and title costs. The basis in the property is: $33,000 depreciation, $125,000 amortization. $158,000, depreciation only. $154,000 depreciation, $4,000 amortization. $150,000 depreciation, $8,000 amortization.

$154,000 depreciation, $4,000 amortization. A taxpayer's basis is the amount of a taxpayer's investment in property for tax purposes. In determining the basis for property that is purchased, the settlement fees and closing costs for buying the property are included. Conversely, fees and costs for getting a loan on the property are not part of the basis calculation. A list of settlement costs that are included in basis is given in Publication 551, page 3, and a list of settlement costs that are not included in basis is given on that same page. The amount that a taxpayer pays for points in order to secure a loan is deducted over the term of the loan, i.e., amortized. (For more information on how to deduct points, see pages 2 and 3 of Publication 551 or pages 6 through 8 of Publication 936.) Therefore, the basis in the property in the above question is: $154,000 depreciation, which is the sum of the purchase price ($150,000) and title costs ($4,000), and $4,000 amortization (ratably over the life (term) of the mortgage), which is the payment for points. Publication 551, pages 2-3 Publication 936, pages 6-8

Margaret's 2022 Form 709, page 1, has the following entries: Tax on current-year gifts $2,692,000Maximum applicable credit 4,769,800Credit used in prior years 2,277,800 Based on this information, what is the balance due on Margaret's Form 709 gift tax return this year? $0 $169,200 $200,000 $369,200

$200,000 The gift tax presently payable is determined by applying the applicable tax rate to the sum of all prior years' taxable gifts and then subtracting that from the tentative tax. The tentative tax is then reduced by the amount of applicable credit. The basic credit (formerly the unified credit) amount in 2022 is $4,769,800. (Form 709 Instructions, page 1) Thus, the balance of tax due on Margaret's Form 709 gift tax return this year is $200,000, which is the tax on current-year gifts of $2,692,000 less the applicable credit of $2,492,000. (The applicable credit is calculated as $4,769,800 − $2,277,800.) Instructions for Form 709, pages 1-2 IRC Sections 2502 and 2505

John and Mary, a married couple, have a wide variety of investments and are cash basis taxpayers. Because their self-employment earnings are considerable, they reinvested the following: $4,000 of mutual fund dividends and $5,000 of certificate of deposit interest. They also earned dividends on corporate stock of $12,000 that they received and spent. Interest of $2,000 that had accrued on a loan to a friend was not paid until the following year. What is the amount of interest and dividends currently taxable to them? $21,000 $14,000 $16,000 $23,000

$21,000 In general, any interest that is received or that is credited to an account and can be withdrawn is taxable income. (For exceptions to this, see chapter 6 in Publication 17.) If a taxpayer uses the cash method, interest income is reported in the year in which it was actually or constructively received. (Publication 17, pages 53 and 59) As provided on page 20 of Publication 550, a number of corporations have a dividend reinvestment plan, whereby the taxpayer may choose to use his or her dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. If the taxpayer makes this election and stock is bought at a price equal to its fair market value, the taxpayer must report the dividends as income. Given that John and Mary are cash basis taxpayers they are not required to report the accrued loan interest income of $2,000 until the year of actual receipt. Therefore, the amount of interest and dividends taxable to them is $21,000, computed as follows: Mutual fund dividends $ 4,000 Certificate of deposit interest 5,000 Corporate stock dividends 12,000 Taxable interest and dividends $21,000 Caution The inclusion of mutual fund interest, which is taxable, is oftentimes mistaken for municipal fund interest, which is tax exempt. Publication 17, pages 53 and 59 Publication 550, page 20

** U.S. Co. is a 25% owner of an Irish corporation. The Irish corporation reported $8,500,000 in sales and $3,500,000 in general expenses. It paid $500,000 in taxes to the Irish government (10%). The adjusted taxable bases of the Irish company's assets are $2,000,000. Assume U.S. Co. makes an election under Section 250. What is the tax liability associated with its GILTI inclusion for U.S. Co.? $0 $252,000 $152,000 $26,000

$26,000 The net U.S. tax liability is calculated as follows: CFC's net income = $8,500,000 sales − $3,500,000 expenses = $5,000,000 QBAI = 10% × $2,000,000 = $200,000 Indirect foreign tax credit available = 25% × ($500,000 × 80%) = $100,000 GILTI inclusion for U.S. Co. = 25% × ($5,000,000 − $200,000) = $1,200,000 GILTI inclusion after electing section 250 = $1,200,000 × 50% = $600,000 U.S. tax liability before indirect foreign tax credit = $600,000 × 21% = $126,000 Net U.S. tax liability = $126,000 - $100,000 Indirect foreign tax credit = $26,000 IRS Code Section 951(A) governs GILTI tax. Final and temporary regulations were issued on June 14, 2019. IRC Section 951(A)

Gordon, age 70, is retired and works part-time as a security guard earning $8,000. He received $5,000 interest from a savings account and $2,500 interest from tax-exempt municipal bonds. His Social Security benefits were $12,000 and his taxable pension was $6,000. To determine if any of his Social Security is taxable, Gordon should compare how much of his income to the $25,000 base amount? $27,500 $21,500 $19,000 $25,000

$27,500 8000 wages+5000 interest from saving account+ 2500+municipal bonds + 6000 taxable pension=21500+12000/2=27500 Social Security benefits are includible if one-half of the Social Security benefits plus all other income, including tax-exempt interest, are more than the base amount of $25,000 for a single taxpayer. To find out whether any of a person's benefits are taxable, the base amount is compared to total income, which is one-half of the person's benefits plus all other income, including tax-exempt interest. In this case, the total income equals $27,500 and is the sum of the earnings ($8,000), interest from the savings account ($5,000), municipal bond interest ($2,500), taxable pension ($6,000), and one-half of the taxpayer's Social Security income ($6,000). See Publication 17, pages 60 through 64, to review the rules for determining the taxable portion of a person's Social Security benefits. Publication 17, pages 60-64

Charles gave his daughter, Jane, a residential house. He had purchased the house for $250,000 in 2008. The fair market value on the date of the gift was $300,000. Charles had added a $25,000 roof the year before he gave it to Jane. Jane converts the house to a residential rental property within 1 year of the gift. Jane's basis in the property is: $300,000. $250,000. $225,000. $275,000.

$275,000. A taxpayer's basis is the amount of a taxpayer's investment in property for tax purposes. The basis of property that is received as a gift is the same as the donor's adjusted basis at the time of gift if the fair market value of the property is equal to or greater than the donor's adjusted basis. Therefore, Jane's basis in the property received from Charles is $275,000, which is calculated as the sum of the adjusted basis to Charles on the date of the gift of $250,000 and the additional cost for the roof of $25,000. (Publication 551, page 9) Publication 551, page 10 provides that if the property is converted from personal to business, the basis is the lesser of the following two amounts: The FMV of the property on the date of the conversion The adjusted basis on the date of the conversion In this case, we must assume that the adjusted basis of the gifted property is less than the FMV on the date of conversion since information to the contrary is not provided. Therefore, Jane's basis in the property is $275,000. Publication 551, pages 9-10

Mr. and Mrs. Beet own a house which they rent to non-related parties. They had some major expenses during 2022 as follows: $2,000 to replace the cabinets in the kitchen $500 to replace the stove $600 to replace the built-in dishwasher $400 to resurface the tub in the master bathroom What is the amount and character of their expenses? $2,000 capital improvements and $1,500 repairs expense $2,600 capital improvements and $900 repairs expense $400 capital improvements and $3,100 repairs expense $3,100 capital improvements and $400 repairs expense

$3,100 capital improvements and $400 repairs expense In 2013, the IRS issued TD 9636 (Tangible Property Final Regulations), applicable to tax year beginning on or after January 1, 2014 which finalized the guidance on Sections 162(a) and 263(a). An expense is for an improvement if it results in a betterment to the taxpayer's property, restores the taxpayer's property, or adapts the property to a new or different use. Table 1-1 of Publication 527, page 5, shows examples of many improvements. In general, improvements add to the value of the property, prolong its useful life, or adapt it to new uses. (See also pages 4-5 of Publication 551 for examples of increases to basis.) Improvements include but are not limited to: putting a recreation room in an unfinished basement, adding a bathroom or bedroom, putting up a new fence, putting in new plumbing or wiring, putting on a new roof, and paving an unpaved driveway. Furthermore, if a taxpayer makes improvements to the property, the cost of the improvement must be capitalized and depreciated as if the improvement were separate property. Replacement of old assets with new assets are generally considered improvements and as such, must be capitalized. However, if the taxpayer qualifies and makes a de minimis safe harbor election, the taxpayer may immediately deduct repairs and maintenance costs up to $2,500 per invoice per item. In this case, there is no indication Mr. and Mrs. Beet made the de minimis safe harbor election and as such they are required to capitalize the costs associated with the new appliances. Publication 551, pages 4-5 Publication 527, page 5 T.D. 9636 Reg. Section 1.263(a)-3 Income

A taxpayer is a cash basis taxpayer. During the year, he paid the following medical expenses for himself and his daughter, Johanna, whom he claims as a dependent on his tax return: $310 for glasses for Johanna and $290 for himself $650 for a dental root canal procedure for him $900 for hospital emergency services; of which $700 was paid by insurance in the same year $1,250 for Johanna's braces, which he charged to his credit card in December and paid in January of the next year $500 for prescriptions for allergies $2,200 cosmetic plastic surgery The taxpayer's medical expense deduction before limitations is: $6,100. $4,150. $3,200. $5,400.

$3,200. The list of items that are and are not treated as deductible medical and dental expenses are provided on pages 15-17 of Publication 502. The following items are deductible medical and dental expenses: Hospital services fees (lab work, therapy, nursing services, surgery, etc.) Medical services fees (from doctors, dentists, surgeons, specialists, and other medical practitioners) Prescription medicines (prescribed by a doctor) and insulin Special items (artificial limbs, false teeth, eyeglasses, contact lenses, hearing aids, crutches, wheelchair, etc.) According to page 15 of Publication 502, expenses incurred for surgery that is purely cosmetic are not deductible. In this problem, the taxpayer is able claim medical expenses of $3,200, which is the sum of glasses for Johanna and the taxpayer of $600, dental cost of $650, hospital ER services of $900, Johanna's braces of $1,250, and prescriptions of $500, less the insurance company's reimbursement amount of $700. Cosmetic plastic surgery costs are not deductible medical expenses. Publication 502, pages 15-17

** Lois, a cash basis taxpayer, died on September 30, 2022. Assume the following details regarding the assets of her estate: Lois' home was appraised for $2,000,000 at the date of her death and sold on March 15, 2023, for $1,950,000. Lois had a time certificate in the amount of $100,000. The certificate was redeemed for funeral expenses on October 1, 2022. (Ignore interest for purposes of this question.) Lois had common stock valued at $1,850,000 at the date of death. On the alternate valuation date, the stock was valued at $1,750,000. Lois had personal and household furnishings that were appraised at $25,000 as of the date of death. The executor gave all of the items to a charity on November 1, 2022. If the alternate valuation date is elected, what is the gross value of the estate if it were to be reported? $3,825,000 $3,875,000 $3,925,000 $3,975,000

$3,825,000 Fair Market Value (FMV) Alternate Valuation Home $1,950,000 Certificate of Deposit 100,000 Stock 1,750,000 Personal Items 25,000 + = Gross Estate Value $3,825,000 Unless the election to adopt an alternate valuation is made at the time the return is filed, the value of all property included in the gross estate will be the value on the date of the decedent's death. Alternate valuation cannot be applied to only a part of the property. The election for alternate valuation may not be made unless the election will decrease both the value of the gross estate and the total net estate and GST (generation-skipping transfer) taxes due after application of all allowable credits. Once made, the election may not be revoked. Additionally, if the alternate valuation method is used, the value of the property that is included in the gross estate must be in agreement with the following applicable dates: Any property distributed, sold, exchanged, or otherwise disposed of or separated or passed from the gross estate by any method within 6 months after the decedent's death is valued on the date of distribution, sale, exchange, or other disposition. Any property not distributed, sold, exchanged, or otherwise disposed of within the 6-month period is valued on the date 6 months after the date of the decedent's death. Any property, interest, or estate that is "affected by mere lapse of time" is valued as of the date of decedent's death or on the date of its distribution, sale, exchange, or other disposition, whichever occurs first.

**John is a furniture maker and carpenter. He makes half of his income as an employee of Concept Designs, Inc., a fine furniture manufacturing corporation. John makes the other half of his income from a personal business where he purchases, renovates, and then resells houses. In January 2022, John purchased a house that is not his residence for $50,000. He spends $10,000 in materials renovating the house, which he sells in November 2022 for $90,000. What is the amount and character of John's gain from this transaction? $20,000 ordinary gain $30,000 short-term capital gain $30,000 ordinary gain $20,000 short-term capital gain

$30,000 ordinary gain When someone sells a property that is mainly for sale to a customer in his trade or business, the gain is ordinary Income. It is noncapital asset if you purchase to resell. publication 550, page 43, provides that the gain or loss on a sale or trade of property is found by comparing the amount realized with the adjusted basis of the property. In this case, John has a gain on the sale of the property of $30,000, which is the difference between the selling price of $90,000 and the adjusted basis of $60,000 ($50,000 purchase price plus $10,000 renovation costs). The next issue is to determine the character of the gain; is it capital or ordinary? Generally, a sale or trade of a capital asset (defined below) results in a capital gain or loss. A sale or trade of a noncapital asset generally results in ordinary gain or loss. For the most part, everything you own and use for personal purposes, pleasure, or investment is a capital asset. A noncapital asset, on the other hand, is property that is not a capital asset. The following kinds of property are not capital assets: property held mainly for sale to customers or property that will physically become part of merchandise for sale to customers. This includes stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business. (Publication 550, page 49) As given above, John sells property that is held mainly for sale to customers in his trade or business, which means the gain of $30,000 is treated as ordinary income. Publication 550, pages 43 and 49

Sharon sold two collections during 2022. These were her only sales. Determine the amount and character of her gains/losses on these sales. Coin collection she began as a child with a basis of $1,000, sold for $5,000 Collection of original short stories she wrote in 2018, sold for $20,000 $20,000 long-term capital gain $24,000 long-term capital gain $4,000 long-term capital gain and $20,000 ordinary income $24,000 ordinary income

$4,000 long-term capital gain and $20,000 ordinary income Sharon has a gain of $4,000 ($5,000 less $1,000) for the coin collection, which qualifies as a long-term capital gain transaction. Second, she has ordinary income of $20,000 on the sale of her original short stories because this asset is a literary composition and as such is not a capital asset. Publication 550, pages 48 and 49, defines what is and is not a capital asset. Almost everything a taxpayer owns and uses for personal purposes or investment is a capital asset. There are a few exceptions, including but not limited to property sold in the normal course of business; copyright; a literary, musical, or artistic composition; a letter; a memorandum; or similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs), which were created by the taxpayer's personal efforts, or prepared or produced for the taxpayer (in the case of a letter, memorandum, or similar property). If the taxpayer holds investment property for more than 1 year, any capital gain or loss is a long-term capital gain or loss. If the taxpayer holds the property 1 year or less, any capital gain or loss is a short-term capital gain or loss. Sharon sold two collections in the year. First, Sharon has a gain of $4,000 ($5,000 less $1,000) for the coin collection, which qualifies as a long-term capital gain transaction. Second, she has ordinary income of $20,000 on the sale of her original short stories because this asset is a literary composition and as such is not a capital asset. Publication 550, pages 48-49

Max, a fiduciary, pledged his client's traditional IRA of $300,000 as security for a loan. If Max is found liable for engaging in a prohibited transaction, what is the minimum penalty he is most likely to pay if the transaction is corrected? $45,000 $30,000 $36,000 $300,000

$45,000 300000*.15%=45000 Correct The tax issue on a prohibited transaction is a complex one. First, the minimum additional penalty that Max (as the fiduciary) would incur by engaging in a prohibited transaction is $45,000, which is 15% of the IRA value. Second, if Max fails to correct the transaction, then he can be subject to a penalty of $300,000, which is a 100% penalty. The issues of taxes on prohibited transactions by someone other than the owner is addressed on page 24 in Publication 590-B. If someone other than the owner or beneficiary of a traditional IRA engages in a prohibited transaction, that person may be liable for certain taxes. In general, there is a 15% tax on the amount of the prohibited transaction and a 100% additional tax if the transaction is not corrected. Note: If the taxpayer (and not someone other than the taxpayer) uses part of their traditional IRA account as security for a loan, that part is treated as a distribution and is included in their gross income. In addition, they may be subject to a 10% additional tax on the early distribution. Publication 590-B, pages 23-24

**John, who is not married, made the following transfers during 2022: $11,000 to his son Bradley $17,000 to his daughter Alexandria $7,000 political contribution $5,000 charitable contribution Car to his son Bradley ($22,000 basis; $16,000 FMV) What is the gross amount of gifts that John will report on his 2022 Form 709 (before deductions)? $16,000 $44,000 $49,000 $56,000

$49,000 $11,000 to Bradley $16,000 (FMV of car)), $17,000 to his daughter Alexandria, and $5,000 to charities. =49.000 Generally, the federal gift tax applies to any transfer by gift of real or personal property, whether tangible or intangible, that is made directly or indirectly, in trust, or by any other means to a donee. Additionally, there are four types of transfers that are not subject to the gift tax. These are transfers to political organizations, transfers to certain exempt organizations, and payments that qualify for the educational and medical exclusions. More specific to this question, transfers to a political organization as defined in IRC Section 527(e)(1) for the use of the organization is not subject to the gift tax and are not reported on Form 709. (Form 709 Instructions, page 2) Furthermore, the value of a gift is the fair market value (FMV) of the property on the date the gift was made (valuation date). That is, the FMV is the price at which the property would change hands between a willing buyer and a willing seller, when neither is forced to buy or to sell, and when both have reasonable knowledge of all relevant facts. (Form 709 Instructions, page 10) If the taxpayer is required to file a return to report noncharitable gifts and the taxpayer made gifts to charities, the taxpayer must include all of his or her gifts to charities on the return. (Form 709 Instructions, page 2) Thus, John will report a gross amount of $49,000 of gifts on his 2022 Form 709, which is the sum of $27,000 to his son Bradley ($11,000 plus $16,000 (FMV of car)), $17,000 to his daughter Alexandria, and $5,000 to charities. Be aware: This question is somewhat tricky in that it gave two gifts to Bradley, where one is below the $15,000 threshold. When some gifts are below the $16,000 threshold and others are more than the threshold, all gifts have to be disclosed on the tax return. The $16,000 will be applied to each gift to determine the taxable portion of the gift. For instance, if the taxpayer gifts four gifts: $17,000, $5,000, $21,000, he/she will have taxable gifts of $6,000 calculated as follows: 17,000-16,000=$1,000, $5,000-$16,000 = no taxable gift, $21,000-16,000= $5,000. Total taxable gifts = $6,000. Beware

Jeremy decided to itemize on his 2022 return. He has the following receipts. Compute the amount of deduction for taxes he can take on his Schedule A, Itemized Deductions. State income tax: $3,000 Federal income tax: $12,000 County real estate tax: $2,000 Fee for his car inspection that he uses only personally: $50 Homeowners' association fees on his personal home: $500 Self-employment tax of $1,000 $18,550 $6,000 $5,000 $5,500

$5,000 State income tax: $3,000+County real estate tax: $2,000 Table 11-1, which appears on page 96 of Publication 17, contains a listing of the taxes that are generally deductible by a taxpayer as an itemized deduction. The list contains items such as state and local taxes, foreign income taxes, real estate taxes, and property taxes. The following list of items generally is not deductible as real estate taxes: taxes for local benefits, itemized charges for services (such as trash and garbage pickup fees), transfer taxes (or stamp taxes), rent increases due to higher real estate taxes, and homeowners' association charges. (Publication 17, page 96) Personal property tax is deductible if it is a state or local tax that is charged on personal property, based only on the value of the personal property, and charged on a yearly basis, even if it is collected more or less than once a year. (Publication 17, pages 97) Finally, self-employment taxes are deductible as an adjustment for AGI and not as an itemized deduction. (Publication 17, page 97) Note: The deduction for state and local taxes is limited to $10,000 ($5,000 if married filing separately). Hence, Jeremy would have $5,000 in itemized taxes for the year ($3,000 in state income taxes and $2,000 in county real estate taxes). Publication 17, pages 96-97

**In meeting the gross income test for claiming his father as a dependent, Doug considered the income received by his father. This income included gross rents of $4,000 (expenses were $2,000), municipal bond interest of $1,200, dividends of $1,400, and Social Security of $4,000. What is Doug's father's gross income for dependency test purposes? $3,400 $5,400 $9,400 $8,600

$5,400 Total of rents of $4000 Dividen income $1400 To meet the gross income test, a person's gross income for the year must be less than $4,400 in 2022. Gross income is defined as all income in the form of money, property, and services that is not exempt from tax. In a manufacturing, merchandising, or mining business, gross income is the total net sales minus the cost of goods sold, plus any miscellaneous income from the business. In the case of rental property, gross receipts are gross income. Do not deduct taxes, repairs, etc. to determine the gross income from rental property. Gross income also includes all taxable unemployment compensation, taxable social security benefits, and certain scholarship and fellowship grants. Scholarships received by degree candidates that are used for tuition, fees, supplies, books, and equipment required for particular courses generally are not included in gross income. Tax-exempt income, such as certain Social Security payments, is not included in gross income. (See Publication 17, page 34.) In this case, Doug's father has gross income for the dependency test purpose of $5,400, which is the sum of the rents ($4,000) and the dividend income ($1,400). Publication 17, page 34

Yasmin purchased 50 shares of Tele Company stock on February 6, 2022, at $20 a share. She sold all 50 shares on February 23, 2022, for $15 a share. Later on the same day, she repurchased 40 shares of Tele Company stock at $16 per share. With only the information provided, what is Yasmin's net capital loss that she can deduct on her 2022 return? $250 net capital loss $640 net capital loss $750 net capital loss $50 net capital loss

$50 net capital loss 50*20=1000 50*15=750 =.> 1000-750=250 purchased 40 out of 50 back >>> 250*-(40/50)=200 250-200=50 Publication 550, pages 56-57, discusses the treatment of property transactions that are known as a wash sale. In general, a taxpayer cannot deduct losses from sales or trades of stock or securities in a wash sale. A wash sale occurs when a taxpayer sells or trades stock or securities at a loss and within 30 days before or after the sale whereby the taxpayer or spouse: buys substantially identical stock or securities, acquires substantially identical stock or securities in a fully taxable trade acquires a contract or option to buy substantially identical stock or securities, or acquires substantially identical stock or securities for the taxpayer's IRA or Roth IRA. Furthermore, if a taxpayer sells stock and the taxpayer's spouse or a corporation controlled by the taxpayer buys substantially identical stock, the taxpayer has a wash sale. In the case of a wash sale, the disallowed loss is added to the cost of the new stock or securities. The adjustment postpones the loss deduction until the disposition of the new stock or securities. Furthermore, the taxpayer's holding period for the new stock or securities includes the holding period of the stock or securities sold. Publication 550, pages 56-57, provides, in part, that if the number of shares of substantially identical stock or securities repurchased within the 30 days before or after the sale is either more or less than the number of shares sold by the taxpayer, the taxpayer must determine the particular shares to which the wash sale rules apply. This determination is done by matching the shares bought with an equal number of the shares sold. The shares bought must be matched in the same order that the taxpayer bought them, beginning with the first shares bought. The shares or securities so matched are subject to the wash sale rules. Example: A taxpayer bought 100 shares of M stock on September 21, 2021. On February 1, 2022, the taxpayer sold those shares at a $1,000 loss. On each of the 4 days from February 5, 2021, to February 8, 2022, the taxpayer bought 50 shares of substantially identical stock. As a result of the wash sale rules, t

**In 2018, Mr. Chang purchased 50 shares of common stock in Corporation D for $1,000. In 2020, Corporation D declared a stock dividend of 2 shares of its common stock for each 10 shares held. In 2022, D's common stock split 2-for-1 at a time when the fair market value was $20 a share. What is Mr. Chang's basis in each of his shares of D's stock (rounded to the nearest dollar) if both distributions were tax-free and all the stock received was identical to the stock purchased? $8 per share $20 for 100 shares and $0 for all additional shares $17 for 60 shares and $20 for 60 shares $20 per share

$8 per share 50*20=1000 50/2=5 60..1000/60=16.66...16.66/2=8.33 or 60*2=120 1000/120 shares =8.33 Distributions by a corporation of its own stock are commonly known as stock dividends. Stock rights (also known as stock options) are distributions by a corporation of rights to acquire the corporation's stock. Generally, stock dividends and stock rights are not taxable and therefore are not reportable. (Publication 550, page 21) The basis of stocks or bonds generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. The basis of the stock is adjusted for certain events that occur after purchase. For example, if the person receives additional stock from nontaxable stock dividends or stock splits, divide the adjusted basis of the old stock by the number of shares of old and new stock. This rule applies only when the additional stock received is identical to the stock held. Likewise, the basis is reduced when nontaxable distributions are received because they are a return of capital (Publication 550, page 21). In this problem, Mr. Chang's basis in Corporation D stock prior to the stock dividend is $1,000 (50 shares × $20 per share). As a result of the first stock dividend of 2 shares for every 10 shares held, Mr. Chang receives 10 additional shares of stock (50 shares ÷ 10 = 5, which is multiplied by 2 for 10 additional shares). The basis of the stock after the stock dividend is reduced to $16.67 per share ($1,000 ÷ 60 shares). In 2018, the stock split doubles the number of shares held to 120 shares (60 × 2) and likewise splits the adjusted basis to $8.33 per share ($16.67 ÷ 2 or $1,000 ÷ 120 shares). Publication 550, page 21

Jim files his tax return as married filing separately. He has not lived with his wife for 2 years. In tax year 2022, by court order, he paid her $500 per month as separate maintenance and $200 per month as child support. What amount can Jim deduct as alimony expense in 2022? $0 $2,400 $6,000 $8,400

0 For divorce or separation agreements executed before December 31, 2018, IRC Section 71 permits, alimony and separate maintenance payments are included as income to the recipient, and therefore under IRC Section 215 such payments are deductible by the payer if certain requirements are met. The requirements as given on pages 14-15 of Publication 504 for permitting a deduction for alimony paid are: the payments are required by a divorce or separation instrument, the payer and recipient spouse do not file a joint return with each other, payments are in cash, such payments are not designated as "not alimony," spouses are not members of the same household, no commitment to continue payments after death of the recipient spouse, and payment is not treated as child support. But, for divorce or separation agreements executed after December 31, 2018, a taxpayer may no longer deduct an amount equal to the alimony or separate maintenance payments paid during the tax year, nor will the alimony or separate maintenance payments be included in the gross income of the recipient spouse. Therefore, given that the court ordered the separate maintenance payments to be made beginning in 2022, he is not entitled to deduct the $6,000 in alimony paid. IRC Sections 71 and 215 Publication 502, pages 14-15

The taxpayer earned $1,000 in interest in 2021. The taxpayer withdrew $700 in 2021 and $300 in 2022. How much of the original $1,000 should taxpayer report as interest earned in 2022? $0 $300 $700 $1,000

0 Publication 17, page 53, provides the basic concept to the tax treatment of interest income. In general, any interest that a taxpayer receives or that is credited to his or her account and can be withdrawn is taxable income. (It does not have to be entered in the taxpayer's passbook or bankbook.) There are some exceptions to this general statement, but they are not applicable in this problem. Most individual taxpayers use the cash method. If a taxpayer uses this method, they generally report their interest income in the year in which they actually or constructively receive it. (Publication 17, page 59) The taxpayer earned interest in 2021 and, as such, the taxpayer pays taxes on the earnings in that year. A later withdrawal of that income does not trigger another taxable event. Publication 17, pages 53 and 59

** Vernon, age 73, had compensation of $4,000 in 2022. He made a $4,000 contribution to his traditional IRA during 2022. The balance of the IRA account at the end of the 2022 was $10,000. Vernon did not withdraw any amount of the contribution by the due date of the 2022 return. What would be the tax because of an excess contribution for 2022? $0 $90 $240 $150

0 The general rule for 2022 as given in Publication 590-A, page 8, is that the maximum annual contribution to a person's traditional IRA is the smaller of $6,000 ($7,000 if you are 50 or older) or the person's taxable compensation for the year. Given that Vernon is permitted to make contributions to his traditional IRA (over age 72), all $4,000 of his contribution is no longer deemed to be an excess contribution. Hence, Vernon would owe no excise tax. Publication 590-A, pages 2 and 8

** Nature Corporation declared and distributed a stock dividend of 1 share for each 10 shares held by stockholders. Donna had 100 shares ($5.50 per share basis) and received 10 additional shares with a fair market value of $6.00 per share. Which of the following is most applicable to the stock dividend? 100 shares at $5.50 per share basis and 10 shares at zero basis per share 110 shares at $5.00 per share basis and $55 taxable income 110 shares at $5.00 per share 100 shares at $5.00 per share basis and 10 shares at $6.00 per share basis

100 shares at $5.50 per share basis and 10 shares at zero basis per share $550 (100 shares × $5.50 per share) Distributions by a corporation of its own stock are commonly known as stock dividends. Generally, stock dividends are not taxable and therefore are not reportable (Publication 550, pages 21 and 22). The basis of stocks or bonds generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. The basis of the stock is adjusted for certain events that occur after purchase. For example, if the person receives additional stock from nontaxable stock dividends or stock splits, divide the adjusted basis of the old stock by the number of shares of old and new stock. This rule applies only when the additional stock received is identical to the stock held. Likewise, the basis is reduced when nontaxable distributions are received because they are a return of capital (Publication 551, page 20). In this problem, Donna's basis in Nature Corporation stock prior to the stock dividend is $550 (100 shares × $5.50 per share). As a result of the stock dividend, the basis is adjusted to $5.00 per share, which is the original basis of $550 divided by the number of shares after the dividend or 110 shares. Publication 550, pages 20-22

John and Joanne are the sole support of the following individuals, all U.S. citizens, none of whom lives with them. None of these individuals files a joint return or has any gross income: Jennie, John's mother Julie, Joanne's stepmother Jonathan, father of John's first wife How many individuals, excluding John and Joanne, are listed on their tax return for 2022 as dependents? 3 2 1 0

3 For 2022, a taxpayer cannot claim a personal exemption deduction for themselves, their spouse, or their dependents. However, dependents are still listed on Form 1040 in order to claim appropriate tax credits. (Publication 17, page 25) Therefore, the following rules are provided: The term "dependent" means a qualifying child or a qualifying relative. There are four tests that must be met for a person to be a qualifying relative (see Table 3-1, Publication 17, page 26): Not a qualifying child Member of the household or satisfies the relationship test Gross income test (less than $4,400 in 2022) Support test (more than half of the person's total support for the year) If a person is a qualifying relative or a qualifying child, the person must satisfy three additional tests (Publication 17, page 25) to claim an exemption for him or her: Dependent taxpayer test Joint return test Citizen or resident test The exemption and dependency rules are covered in chapter 3 of Publication 17. An exception exists to the Member of the Household rule. In particular, a person related to the taxpayer in any of the following ways does not have to live with the taxpayer for the entire year as a member of the taxpayer's household to meet this test (see Publication 17, page 33): Child, grandchild, great-grandchild, etc. (a legally adopted child is considered your child), Stepchild, foster child, Brother, sister, half-brother, half-sister, stepbrother, or stepsister, Parent, grandparent, or other direct ancestor, but not foster parent, Stepfather or stepmother, Brother or sister of the taxpayer's father or mother, Son or daughter of the taxpayer's brother or sister, or Father-in-law, mother-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law. Better yet, any of these relationships that were established by marriage are not ended by death or divorce. As a result of the new tax, John and Joanne can claim three dependents on their return because the three individuals do not need to live with the taxpayer in order to be claimed as a dependent. Publication 17, pages 25-26 and 33

Virginia's earned income for 2022 was $14,000. She paid $3,000 to a qualifying child care center for the care of her 2-year-old son while she worked. She received $2,000 from Social Services to assist with her childcare expenses. How would Virginia's childcare credit for 2022 be computed? 35% of $1,000 50% of $1,000 50% of $3,000 31% of $1,000

35% of $1,000 In general, a taxpayer may be able to claim the dependent care credit if the taxpayer pays someone to care for his or her dependent that is under age 13 or for the taxpayer's spouse or dependent that is not able to care for him or herself. For tax year 2022, the credit can be up to 35% of the taxpayer's expenses. To qualify for the credit, the taxpayer must pay these expenses so that they can work or look for work. (Publication 503, page 2) If a taxpayer receives dependent care benefits, the dollar limit for purposes of the credit may be reduced (Publication 503, page 13). Dependent care benefits include: * amounts the taxpayer's employer pays directly to either the taxpayer or the taxpayer's care provider for the care of his or her qualifying person while at work, * the fair market value of care in a day-care facility provided or sponsored by the taxpayer's employer, and * pre-tax contributions the taxpayer made under a dependent care flexible spending arrangement. In this case, Virginia's adjusted gross income is $14,000, which corresponds to a credit rate of 35%, and her dependent care expenses are $1,000, which corresponds to the difference between the total cost of $3,000 and the assistance she received of $2,000. Thus, Virginia is able to claim a dependent care credit of $350, which is 35% of $1,000. Publication 503, pages 2-3 and 12-13 Amount of Credit To determine the amount of your credit, multiply your work-related expenses (after applying the earned income and dollar limits) by a percentage. This percentage depends on your adjusted gross income shown on Form 1040, 1040-SR, or 1040-NR, line 11. The following table shows the percentage to use based on adjusted gross income. IF your adjusted gross income is: THEN the Over: But not over: percentage is: $ 0 — $15,000 35% 15,000 — 17,000 34% 17,000 — 19,000 33% 19,000 — 21,000 32% 21,000 —

Thomas and Rebecca are the parents of four children, ages 10, 12, 15, and 22. Their 22-year-old child is a full-time student with income of $5,600. Thomas and Rebecca provided more than 50% of the support for all their children. If they file a joint return, how many of the children can they list on their Form 1040 as dependents? 1 2 3 4

4 For 2022, a taxpayer cannot claim a personal exemption deduction for themselves, their spouse, or their dependents. However, dependents are still listed on Form 1040 in order to claim appropriate tax credits. Therefore, the following rules are provided. A taxpayer is allowed to claim one dependent for each person that satisfies the qualifying child or qualifying relative tests (Publication 17, page 27). There are five tests that must be met for a person to be a qualifying child (see pages 26 through 28 and Table 3-1 on page 26 of Publication 17): Relationship Age Residency Support Joint return Be aware that Table 3-1 gives the basic definitions for the tests given above. A child satisfies the age test (see Publication 17, page 28) if the child is: under age 19 at the end of the year, a full-time student under age 24 at the end of the year, or permanently and totally disabled at any time during the year, regardless of age. A qualifying child can include one's brother, sister, half-brother, half-sister, or descendant of any of them as well as an adopted or foster child. In this case, four dependents are permitted: one for each of the couple's children. Although their 22-year-old child has income of $5,600, which exceeds the gross income test limit of $4,400 for 2022, he or she still qualifies as a dependent. The gross income test does not apply to a taxpayer's child if the child is a full-time student and is younger than 24 years of age at the end of the year. Publication 17, pages 26-29

John failed to take required minimum distributions from his traditional IRA. The excess accumulation is subject to a penalty of: 6%. 10%. 15%. 50%.

50%. A taxpayer cannot keep funds in a traditional IRA (including SEP and SIMPLE IRAs) indefinitely. Required minimum distributions must be taken annually. If there are no distributions, or if the distributions are not large enough, the taxpayer may have to pay a 50% excise tax on the amount not distributed as required. Due to the fact that John failed to take required minimum distributions from his traditional IRA, the excess accumulation (also known as minimum distribution) is subject to a penalty of 50%. Publication 590-B, page 7

Clyde is a degree candidate at a local college. During the fall semester, he received a $3,000 scholarship from a local foundation. Clyde spent the entire $3,000 and another $1,500 from a student loan during this semester. He paid the following expenses: tuition $2,000, books $500, and room and board $2,000. How much of the $3,000 scholarship should Clyde report as income? $500 $0 $3,000 $1,000

500 Publication 17, page 74, states, in part, that a candidate for a degree can exclude amounts received as a qualified scholarship or fellowship. A qualified scholarship or fellowship is any amount received by a taxpayer that is for: tuition and fees to enroll at or attend an educational institution, or fees, books, supplies, and equipment required for courses at the educational institution. Amounts used for room and board do not qualify for the exclusion. Clyde would report $500 of the $3,000 scholarship that he received. The $500 is the difference between the amount received of $3,000 and the qualified excluded expenses of $2,000 for tuition and $500 for books. For additional information on qualified scholarships and fellowship grants, see Publication 970, Tax Benefits for Education. Publication 17, page 74

Kathy rented out her summer home for 80 days and used it personally for 20 days. She paid $1,000 for utilities and $2,000 for repairs. Rental income was $8,000. What was Kathy's net rental income? $0 $5,000 $5,600 $8,000

5600 80/100=.80 .80*3000=2400 8000-2400=5600 If a taxpayer uses a dwelling unit (including a vacation home) for both rental and personal purposes, the expenses for such must be divided between the rental use and the personal use based on the number of days used for each purpose. (Publication 527, pages 17-19) The following rules should be regarded when dividing expenses (Publication 527, page 17): Any day that the unit is rented at a fair rental price is a day of rental use even if the unit was used for personal purposes that day. Any day that the unit is available for rent but not actually rented is not a day of rental use. Additionally, rental deductions are limited if a taxpayer rents property for 15 or more days during the tax year and uses it for the greater of (a) more than 14 days or (b) more than 10% of the number of days during the year for which the home is rented. Under this limitation, the amount of rental activity deductions may not exceed the amount by which the gross income derived from such activity exceeds the deductions otherwise allowable for the property, such as interest and taxes (similar to hobby loss rules). (Publication 527, page 19) Given that Kathy's rental income was $8,000, her applicable deductions are limited to that extent. The rental property was used 100 days, which is the sum of 80 days (rental) and 20 days (personal use). All expenses are based on 80% (80 days rented ÷ 100 days used) and the deductible expense would be calculated as follows: Utilities, etc. $ 800 of the $1,000 Repairs 1,600 of the $2,000 Maximum deductible $2,400 which does not exceed the rental income amount of $8,000 See Worksheet 5-1 of Publication 527 (pages 20-21) for figuring the limit on rental deductions. As a result, Kathy's net rental income is $5,600, which is the rental income of $8,000 less the maximum deductible rental expenses of $2,400. IRC Section 280A Publication 527, pages 17-21

**David is an interstate truck driver subject to Department of Transportation hours of service but is not an employee. In 2022, what percent of his meals can he deduct while working as an interstate truck driver? 50% 75% 80% 90%

80% taxpayer can deduct 50% of the expenses incurred for business-related meals. The Consolidated Appropriations Act, 2021 (CAA) allows businesses to deduct 100% of business meals for years 2021 and 2022. The business meal expenses are required to be incurred for food and beverages provided by a restaurant. However, a taxpayer can deduct a higher percentage of their meal expenses while traveling away from their tax home if the meals take place during or incident to any period subject to the Department of Transportation's "hours of service" limits. The percentage, in this situation, is 80%. IRC Section 274(n)(3) Publication 463, page 12

When must a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, be filed after the date of the decedent's death, unless an extension of time to file is received? 3 months 3 months and 15 days 6 months 9 months

9 months The Form 706 to report estate and/or generation-skipping transfer tax must be filed within 9 months after the date of the decedent's death unless an extension of time to file has been approved. Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, is used to apply for an automatic 6-month extension of time to file. Instructions for Form 706, page 3

**Which of the following statements regarding the annual exclusion for gift taxes in 2022 is true? A gift made by a spouse is always split between the spouses if they are married and filing jointly. A gift of a future interest cannot be excluded under the annual exclusion. The annual exclusion amount for 2022 is $15,000. None of the answer choices are correct.

A gift of a future interest cannot be excluded under the annual exclusion. Generally, the federal gift tax applies to any transfer by gift of real or personal property, whether tangible or intangible, that is made directly or indirectly, in trust, or by any other means to a donee. A gift of a present interest may be excluded, whereas gifts of a future interest cannot be excluded under the annual exclusion. A gift is considered a present interest if the donee has immediate rights to the use, possession, and enjoyment of the property or income from the property. A gift is considered a future interest if the donee's rights to the use, possession, and enjoyment of the property or income from the property will not begin until some future date. The annual exclusion for 2022 is $16,000. A married couple can elect to gift splitting, but it is not an automatic election. Instructions for Form 709, pages 1-3 and 6

Which of the following is a true statement regarding a rollover distribution from a qualified plan to a traditional IRA? To be an eligible rollover, you must rollover the entire distribution from the qualified plan. You can deduct the distribution rolled over, up to the amount of the allowable deductible contribution limit for the year. If you chose the direct rollover option, the payer must generally withhold 20% of it for income tax. A hardship distribution from a qualified plan is not an eligible rollover distribution.

A hardship distribution from a qualified plan is not an eligible rollover distribution. Publication 575, page 28, provides the general rules for an eligible rollover distribution. An eligible rollover distribution is any distribution of all or any part of the balance to the taxpayer's credit in a qualified retirement plan except: any of a series of substantially equal distributions paid at least once a year over the taxpayer's lifetime or life expectancy, the joint lives or life expectancies of the taxpayer and beneficiary, or a period of 10 years or more, a required minimum distribution, hardship distributions, corrective distributions of excess contributions or excess deferrals, a loan treated as a distribution, dividends on employer securities, and the cost of life insurance coverage. Therefore, a hardship distribution from a qualified plan is not an eligible rollover distribution. Publication 575, page 28

Which of the following penalties is a taxpayer likely to be assessed if they fail to keep adequate books and records when claiming the earned income credit? Accuracy-related penalty Fraud penalty Frivolous tax submission There is no penalty.

Accuracy-related penalty In general, a taxpayer may have to pay an accuracy-related penalty if they underpay their tax because they show negligence or disregard of the rules or regulations, substantially understate their income tax, claim tax benefits for a transaction that lacks economic substance, or fail to disclose a foreign financial asset. The term "negligence" includes a failure to make a reasonable attempt to comply with the tax law or to exercise ordinary and reasonable care in preparing a return. Negligence also includes failure to keep adequate books and records. Hence, a taxpayer is negligent if they fail to keep adequate books and records when claiming the earned income credit and may be subject to an accuracy-related penalty. Publication 17, page 19 error_outline

In general, which of the following items are allowable deductions against a decedent's estate (Form 706)? Mortgages (decedent's liability) Charitable bequests Funeral expenses All of the answer choices are correct.

All of the answer choices are correct. An estate will arrive at the taxable estate by subtracting related deductions from the gross estate. As applicable in this question, the following expenses as given in Part 5 of Form 706 are permitted as deductions for an estate: funeral expenses, mortgages (decedent's liability), and charitable bequests. Therefore, all of the above listed expenses are allowable deductions against a decedent's estate. Form 706, page 3 Instructions for Form 706, pages 33-34 and 38-39

Which of the following statements is correct about filing Form 8867 with a 2022 tax return concerning the paid preparer's earned income credit (EIC)? It is a tax preparer's checklist that is filed with the taxpayer's tax return. It contains a due diligence requirements section. It contains a checklist section for documents provided to the tax preparer. All of the answer choices are correct.

All of the answer choices are correct. Form 8867 is a paid preparer's (not a taxpayer's) due diligence checklist that should be completed by a tax preparer. It is required to be filed with tax returns for any taxpayer claiming the EIC, child tax credit (CTC), additional child tax credit, and American opportunity tax credit (AOTC). In addition, beginning with 2018 tax returns, this form must be filed for any taxpayer claiming Head of Household. The checklist for 2022 has six parts: The first part (Due Diligence Requirements) is applicable to all taxpayers claiming any of the four tax credits to determine whether the taxpayer satisfies the basic requirements for claiming the credit. The second part pertains to Due Diligence Questions pertaining to Returns Claiming EIC. The third part pertains to Due Diligence Questions pertaining to Returns Claiming CTC/ACTC/ODC. The fourth part pertains to Due Diligence Questions pertaining to Returns Claiming the AOTC. The fifth part pertains to Head of Household. The sixth part certifies the credit eligibility by the tax preparer. As a result, all three responses are correct. The form must be filed with the tax return and it is a tax preparer's due diligence checklist. Form 8867, pages 1-2

Which of the following organizations qualify for deductible contributions (not dues)? A public library in your city The Salvation Army Churches All of the answer choices are correct.

All of the answer choices are correct. In order to deduct charitable contributions, those contributions must be made to a qualified organization. To become a qualified organization, most organizations, other than churches and governments, must apply to the IRS for such status. (Publication 526, page 2) The money or property you give to the following organizations would be deductible as charitable contributions (Table 1, Publication 526, page 3): Churches, synagogues, temples, mosques, and other religious organizations Federal, state, and local governments, if your contribution is solely for public purposes (for example, a gift to reduce the public debt) Nonprofit schools and hospitals Public parks and recreation facilities The Salvation Army, American Red Cross, CARE, Goodwill Industries, United Way, Boy Scouts of America, Girl Scouts of America, Boys and Girls Clubs of America, etc. War veterans' groups Publication 526, pages 2-3

** If an involuntary conversion occurs when your property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and you receive other property or money in payment, such as insurance or a condemnation award, which of the following statements is correct? Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes unless the property is your main home. You may not have to report a gain on an involuntary conversion if you receive property that is similar or related in service or use to the converted property. If you receive money or property that is not similar or related in service or use to the involuntarily converted property and you buy qualifying replacement property within a certain period of time, you can choose to postpone reporting the gain. All of the answer choices are correct.

All of the answer choices are correct. Publication 544, pages 6 and 7, provides that an involuntary conversion occurs when a person's property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and the person receives other property or money in payment, such as insurance or a condemnation award. Involuntary conversions are also called involuntary exchanges. In addition, a gain or loss from an involuntary conversion on a taxpayer's property is usually recognized for tax purposes unless the property is the taxpayer's main home. The gain or loss is reported on the taxpayer's tax return for the year that it is realized. A taxpayer cannot deduct a loss from an involuntary conversion of property that was held for personal use unless the loss resulted from a casualty or theft. However, depending on the type of property received by the taxpayer, a gain may not need to be reported on an involuntary conversion. That is, the gain is not reported if the taxpayer received property that is similar or related in service or use to the converted property. The basis for the new property is the same basis for the converted property. This means that the gain is deferred until a taxable sale or exchange occurs. If the taxpayer receives money or property that is not similar or related in service or use to the involuntarily converted property and the taxpayer buys qualifying replacement property within a certain period of time, the taxpayer can choose to postpone reporting the gain. As a result, all of the statements given in this question are correct responses. Publication 544, pages 6-7

Generally, in which of the following scenarios must a gift tax return be filed? You gave gifts to an individual (other than your spouse) totaling more than $16,000. You gave a gift of a future interest that was less than $16,000. You wish to split gifts with your spouse. All of the answer choices are correct.

All of the answer choices are correct. Specific to this question, a citizen or resident of the United States generally must file a gift tax return (whether or not any tax is ultimately due) in the following situations: if gifts were given to someone in 2022 totaling more than $16,000 (other than to your spouse), certain gifts, called future interests, are not subject to the $16,000 annual exclusion, and Form 709 must be filed even if the gift was under $16,000, or a gift tax return must be filed to split gifts with a spouse (regardless of the amount). For a detailed list of situations requiring Form 709 to be filed, refer to pages 1 through 3 of the IRS instructions for Form 709.Therefore, in the above question, all of the above situations would require the filing of Form 709. Instructions for Form 709, pages 1-3

Which of the following is not a prohibited transaction for a person's traditional IRA? Using it as security for a loan Selling property to it Receiving unreasonable compensation for managing it All of the answer choices are prohibited transactions.

All of the answer choices are prohibited transactions. Publication 590-B, pages 23 and 24, and Publication 17, page 83, provide that a prohibited transaction is any improper use of a taxpayer's traditional IRA account or annuity by the taxpayer, the taxpayer's beneficiary, or any disqualified person. Disqualified persons include the taxpayer's fiduciary and members of the taxpayer's family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant). The following are examples of prohibited transactions with a traditional IRA: Borrowing money from it Selling property to it Using it as security for a loan Buying property for personal use (present or future) with IRA funds As a result, all of the responses are prohibited transactions for a person's traditional IRA. Publication 590-B, pages 23-24 Publication 17, page 83

Which of the following statements is correct concerning the ABLE account? Distributions to pay for qualified disability expenses are not included in gross income. The earnings portion of a distribution in excess of qualified disability is included in gross income. Any distribution amount included in taxable income from an ABLE account is assessed an additional tax of 10%. All of the responses are correct.

All of the responses are correct. Publication 907, pages 7-9, provides the general rules for the taxing of distributions from ABLE accounts. In general, a person can take distributions from their ABLE account to pay for any qualified disability expenses such as expenses for maintaining or improving their health, independence, or quality of life. Qualified disability expenses include those for education; housing; transportation; employment training and support; assistive technology; personal support services; health, prevention and wellness; financial management; administrative services; legal fees; expenses for oversight and monitoring; and funeral and burial. If distributions from a person's ABLE account during a year are not more than their qualified disability expenses for that year, no amount is taxable for that year. If the total amount distributed during a year is more than their qualified disability expenses for that year, the earnings portion of the distribution is included in their income for that year. The includible portion is calculated as follows: (Qualified portion of distribution ÷ Total distribution) × Earnings portion of distribution = Nontaxable earnings amount In addition, the tax on any distribution included in a person's taxable income is increased by 10%. This tax is figured on Form 5329, Part II, and is filed even if the taxpayer is not otherwise required to file a federal income tax return. Publication 907, pages 7-9

Jerry has two dependent children, Greg and Mandy, who are attending an accredited, qualified college in 2022. Greg is a senior who spent $7,000 for tuition and fees. Mandy, a freshman with no prior postsecondary education, had tuition expenses of $5,000 and transportation expenses of $400. Jerry meets all the income and filing status requirements for the education credits. Which of the following statements is correct for 2022? Jerry cannot claim the American Opportunity Credit on the room and board expenses of Mandy. Jerry can claim the American Opportunity Credit on the educational cost of Greg. Jerry cannot claim the American Opportunity Credit on the transportation expenses of Mandy. All of these statements are correct.

All of these statements are correct. AOC does not cover romm and board expenses. Taxpayers are able to claim an American Opportunity Credit if the taxpayers can satisfy all three of the following requirements (Publication 970, pages 11-12): 1-) the taxpayer pays qualified education expenses of higher education, 2) the taxpayer pays the qualified education expenses for an eligible student, and 3) the eligible student is the taxpayer, the taxpayer's spouse, or a dependent for which the taxpayer claims an exemption on his or her tax return. The American Opportunity Credit is available for qualified education expenses, which include tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Qualified education expenses do not include amounts paid for insurance, medical expenses, room and board, and transportation, to name a few items. (Publication 970, pages 13 and 17) As a result, all the responses given in this problem are correct. Publication 970, pages 11-17 Advising Tax Payers

***According to the IRS, which of the following is NOT an option for addressing failure to comply with U.S. tax and information return obligations with respect to non-U.S. investments? Streamlined filing compliance procedures Delinquent FBAR submission procedures Amending the prior year's tax return and including the missing information ("quiet disclosure") Delinquent International Information Return submission procedures

Amending the prior year's tax return and including the missing information ("quiet disclosure") Amending the prior year's tax return to include information not reported on the original return is not "endorsed" by the IRS, nor does it provide any audit or further examination protection. The IRS lists and describes various amnesty programs for offshore compliance options on their webpage "Delinquent FBAR submission procedures."

Which of the following entities are required to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return? An individual An estate or trust A corporation All of the answer choices are correct.

An individual A series of situations is provided in the instructions for Form 709 for who must file a gift tax form. In general, the following are required to file gift tax returns: only individuals, a taxpayer who gives gifts to someone in 2022 totaling more than $16,000 (other than the taxpayer's spouse); and if a trust, estate, partnership, or corporation makes a gift, the individual beneficiaries, partners, or stockholders are considered donors and may be liable for the gift and GST (generation-skipping transfer) taxes. Thus the best response to this question is an individual. Instructions for Form 709, page 2

SSB Tax Corporation declared and distributed a stock dividend of 1 share for each 4 shares held by each stockholder. Donn had 100 shares and, as a result of the stock dividend, he received 25 additional shares. The stock dividend is taxable, since the stockholder received stock in the company in lieu of cash. The stock dividend is taxable for the fair market value of the shares received on the date of issue. Donn purchased his 100 shares of stock for $5.00 per share. As a result of the stock dividend, he must adjust the basis of the 125 shares to $4.00 a share. This is nontaxable because it is a return of capital.

Donn purchased his 100 shares of stock for $5.00 per share. As a result of the stock dividend, he must adjust the basis of the 125 shares to $4.00 a share. Stock dividens are non taxable, and not return in capital because he gots to share for free. Stocks dividens are taxable when they are sold. 500/125=4 The basis of stocks or bonds generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. The basis of the stock is adjusted for certain events that occur after purchase. For example, if the person receives additional stock from nontaxable stock dividends or stock splits, divide the adjusted basis of the old stock by the number of shares of old and new stock. This rule applies only when the additional stock received is identical to the stock held. Likewise, the basis is reduced when nontaxable distributions are received because they are a return of capital (Publication 551, page 2). Example A taxpayer bought 100 shares of XYZ stock for $1,000 or $10 a share. At another time, a taxpayer bought an additional 100 shares of XYZ stock for $1,600 or $16 a share. Now assume that XYZ declares a 2-for-1 stock split. The taxpayer now has 200 shares of XYZ stock with a basis of $1,000 or $5 a share and an additional 200 shares of XYZ stock with a basis of $1,600 or $8 a share. This problem is somewhat tricky, but there is only one possible correct response. The basis in the stock prior to the stock dividend is $500 (100 shares × $5 per share) per the information given in the response. As a result of the stock dividend, the basis is adjusted to $4 per share, which is the original basis of $500 divided by the number of shares after the dividend of 125 shares. Publication 551, page 2

When Joe's financial institution offered a substantial discount of $5,000 for early payment of his home mortgage, he borrowed from a family member to take advantage of this offer. The mortgage is the original debt from when he purchased his home and it is the only debt on his home. How should Joe treat this discount transaction? File Form 982 to claim the exclusion Report $5,000 on Schedule 1 (Form 1040) Reduce his home mortgage interest deduction by $5,000 Report $5,000 original issue discount as interest income

File Form 982 to claim the exclusion Publication 17, page 66, states, in part, that if a taxpayer's financial institution offers a discount for the early payment of the taxpayer's mortgage loan, the amount of the discount is canceled debt and, as such, the amount is included in gross income of the taxpayer unless it qualifies for exclusion under excluded debt. Publication 4681, pages 3-4, provides, a series of examples illustrating the qualified principal residence indebtedness exclusion. This provision was extended as a result of the Taxpayer Certainty and Disaster Relief Act of 2019, which is included in the Further Consolidated Appropriations Act of 2019 (Consolidated Appropriation Act of 2021, under Taxpayer Certainty and Disaster Tax Relief Act of 2020 extended the exclusion from income of discharge of indebtedness but modified the limits of how much indebtedness taxpayers may exclude). To show that all or part of a taxpayer's canceled debt is excluded from income because it is qualified principal residence indebtedness, attach Form 982 to the taxpayer's federal income tax return and check the box on line 1e. On line 2 of Form 982, include the amount of canceled qualified principal residence indebtedness, but not more than the amount of the exclusion limit (explained earlier). If the taxpayer continues to own their home after a cancellation of qualified principal residence indebtedness, the taxpayer must reduce their basis in the home as explained under Reduction of Tax Attributes appearing on pages 3 and 4 of Publication 4681 Publication 17, page 66 Publication 4681, pages 3-4

Which of the following forms is generally filed by a taxpayer that is repaying the first-time homebuyer credit? Form 1040-NR Form 1040A Form 1040 Form 1040-ES

Form 1040 The repayment requirement has expired for homes purchased after 2008. The repayment requirement continues to apply to homes purchased in 2008. The Form 5405 Instructions, page 1, provide that a taxpayer must file Form 5405 (Repayment of the First-Time Homebuyer Credit) with their 2022 tax return if they purchased the home in 2008 and they either: disposed of it in 2022 or ceased using it as their main home in 2022. In these cases, the taxpayer needs to repay the balance of the unpaid credit with their 2022 tax return. In all other cases, the taxpayer is not required to file Form 5405. Instead, the taxpayer can enter their 2022 repayment on 2022 repayment on 2022 Schedule 2 (Form 1040 or 1040-SR), if the taxpayer owns and used the home as their main home during all of 2022. Form 1040-NR is an income tax return filed by a U.S. nonresident alien. In addition, Form 1040-A and 1040-EZ are no longer available for tax years 2018 and later. In general, the taxpayer will need to only file Form 1040 or Form 1040-SR to repay the credit amount from the claimed first-time homebuyer credit. Instructions for Form 5405, pages 1 and 3

In which situation would local transportation expenses not be deductible? From the regular or main job to the second job From the regular or main job to a temporary work location From the second job to a temporary work location From home (residence) to the second job on your day off from your main job

From home (residence) to the second job on your day off from your main job Publication 463, page 13, states that there are some expenses that a taxpayer can deduct for business transportation when not traveling away from home. These expenses include the cost of transportation by air, rail, bus, taxi, etc., and the cost of driving and maintaining the taxpayer's car. When the taxpayer has two places of work, transportation expenses they have in going between home and part-time job on a day off from the main job are commuting expenses. For more examples, please refer to pages 13-14 of Publication 463. Publication 463, pages 13-14

** Thomas claimed the EIC on his 2020 tax return, which was filed in March 2022. The IRS determined that he was not entitled to the EIC and that his error was due to reckless or intentional disregard of the EIC rules. In September 2022, he received a statutory notice of deficiency telling him an adjustment would be made and tax assessed unless he filed a petition with the Tax Court within 90 days. Thomas did not act on this notice within 90 days. Therefore, his EIC was denied in December 2022. Which of the following applies to Thomas? He can claim the EIC on his 2022 tax return if he attaches Form 8862. He cannot claim the EIC until he files his 2023 tax return, and only then if he attaches Form 8862. He cannot claim the EIC until he files his 2024 tax return, and only then if he attaches Form 8862. He cannot claim the EIC until he files his 2025 tax return, and only then if he attaches Form 8862.

He cannot claim the EIC until he files his 2024 tax return, and only then if he attaches Form 8862. If the IRS determined that a taxpayer was not entitled to the EIC and that the error was due to reckless or intentional disregard of the EIC rules, then they are unable to claim the credit for 2 years. The problem that can arise is the timing on the notification. In this case, the taxpayer is not able to claim the EIC on his 2022 tax return because he received the notice of denial in December 2022, which is before he filed his 2022 tax return. Hence, he cannot claim the EIC for tax year 2022 or 2023. The taxpayer can, however, claim the EIC on his 2024 tax return, but only if he attaches Form 8862 to that return. Thus, the penalty that the taxpayer has suffered is the loss of the tax credit for 2 years. In this case, Thomas cannot claim the EIC until he files his 2023 tax return, and only then if he attaches Form 8862. Publication 596 provides several timing examples on page 21. Publication 596, pages 20-22

In 2022, Jerry was required to use his car for his employer. His employer's mileage reimbursement was $0.15 per mile. Which of the following statements is correct if Jerry's actual expenses are more than the reimbursement? He can deduct the excess amount on Schedule C only. He can deduct the excess amount on Form 2106 and Schedule A. He can deduct the excess amount on Schedule A only. He cannot deduct any of the excess amounts.

He cannot deduct any of the excess amounts. When an employee uses his or her car in the performance of the taxpayer's job as an employee and the allowance is less than or equal to the federal rate, the allowance would not be included in box 1 of the employee's Form W-2. (See Publication 463, page 28.) However, if the employee's actual expenses are more than the allowance, the unreimbursed amount (i.e., the excess expense) are not deductible by a regular employee between 2018 and 2026 per TCJA. (See Publication 17, page 98) The only individuals who can deduct excess expenses by completing Form 2106 and deducting the excess amount as an itemized deduction on Schedule A are Armed Forces reservist, fee-based state or local government officials, qualified performing artists, or disabled employees with impairment-related work expenses. Since Jerry doesn't qualify under any of these exceptions, he cannot deduct the excess amount on Form 2106 and Schedule A. Publication 17, page 98 Publication 463, page 28

**Which of the following statements about stock options is correct? If a taxpayer satisfies the holding period requirement for an incentive stock option, the gain or loss is capital. The holding period for stock acquired by exercising an option granted under an employee stock purchase plan begins on the day the option is granted. If a taxpayer is granted a nonstatutory stock option, the taxpayer does not need to include income from the option even if the fair market value of the option is readily determinable. All of the responses are correct.

If a taxpayer satisfies the holding period requirement for an incentive stock option, the gain or loss is capital. Pursuant to Publication 525, pages 11 and 12, a nonstatutory stock option is treated like other property received as compensation by the taxpayer if the option has a readily determinable fair market value at the time it is granted. In the case of an incentive stock option (ISO), if a taxpayer sells stock acquired by exercising an ISO and has satisfied the holding period requirement, the gain or loss from the sale is treated as a capital gain or loss. The sale is reported as explained in the instructions for Schedule D (Form 1040). The basis of the stock is the amount paid by the taxpayer for the stock. If a taxpayer acquires stock by exercising an option granted under an employee stock purchase plan, their holding period for the property acquired begins on the day after the taxpayer exercises the option (not when the option was granted). Hence, the correct response for this question is if a taxpayer satisfies the holding period requirement for an incentive stock option, the gain or loss is capital. Publication 525, pages 11-12

Which of the following statements is correct? If you hold a capital asset 1 year or less, the gain or loss from its disposition is short term. If you hold a capital asset less than 1 year, the gain or loss from its disposition is long term. If you hold a capital asset 1 year and a day, the gain or loss from its disposition is short term. If you hold a capital asset less than 1 year and a day, the gain or loss from its disposition is long term.

If you hold a capital asset 1 year or less, the gain or loss from its disposition is short term. Publication 550, page 52-53, essentially states that if a capital asset is held more than 1 year, any capital gain or loss is a long-term capital gain or loss. If the property is held for 1 year or less, any capital gain or loss is a short-term capital gain or loss. To determine how long the taxpayer held the investment property, the taxpayer begins counting on the date after the day the property is acquired and includes the day the property is disposed of. Publication 550, pages 52-53

The Becks own and operate an assisted-living facility. They provide maid service and meals in a common dining room. Where should they report the income and expenses from this activity? Other income on Form 1040 and expenses as itemized deductions on Schedule A Income and expenses on Schedule E, Supplemental Income and Loss Income and expenses on Schedule C, Profit or Loss From Business Short-term capital gain on Schedule D

Income and expenses on Schedule C, Profit or Loss From Business If a taxpayer rents a building, room, or an apartment and provides limited additional services, such as heat, light, and trash collection, the rental income and expenses of renting such property would be reported on Schedule E. On the other hand, if a taxpayer provides significant services that are predominantly for the convenience of the tenant, such as regular cleaning, changing of linen, and maid service, the rental income and expenses would be reported on Schedule C. Given that the Becks own and operate an assisted-living facility and provide maid service and meals in a common dining room, limited services that are primarily for the convenience of the tenants, the income and expenses associated with this activity should be reported on Schedule C, Profit or Loss From Business. Publication 527, page 12

Which of the following statements is correct about filing Form 8867 with a 2022 tax return concerning the paid preparer's earned income credit (EIC)? It is a taxpayer's checklist that is filed with their tax return. It contains a due diligence requirements section for tax returns claiming the EIC. It is set up for taxpayers with one or two children only. All of the responses are correct.

It contains a due diligence requirements section for tax returns claiming the EIC. Form 8867 is a paid preparer's (not a taxpayer's) due diligence checklist that should be completed by a tax preparer. It is required to be filed with tax returns for any taxpayer claiming the EIC, child tax credit (CTC), additional child tax credit, and American opportunity tax credit (AOTC). In addition, beginning with 2018 tax returns, this form must be filed for any taxpayer claiming Head of Household. The checklist for 2022 has six parts: The first part (Due Diligence Requirements) is applicable to all taxpayers claiming any of the four tax credits to determine whether the taxpayer satisfies the basic requirements for claiming the credit. The second part pertains to Due Diligence Questions pertaining to Returns Claiming EIC. The third part pertains to Due Diligence Questions pertaining to Returns Claiming CTC/ACTC/ODC. The fourth part pertains to Due Diligence Questions pertaining to Returns Claiming the AOTC. The fifth part pertains to claiming Head of Household. The sixth part certifies the credit eligibility by the tax preparer. As a result, the only correct response for this question is that the checklist contains a due diligence requirements section for tax returns claiming the EIC. Form 8867, pages 1-2

** Which of the following statements is incorrect concerning the basis in property inherited from a decedent? It is generally the fair market value of the property at the alternate valuation date, if elected. It is generally the fair market value of the property at the date of the decedent's death. It is generally the same basis as the decedent's basis at the date of death. It is the appraisal value at the date of death for state inheritance if a federal estate tax return does not have to be filed.

It is generally the same basis as the decedent's basis at the date of death. Publication 551, pages 9 and 10, states that a taxpayer's basis in property inherited from a decedent is generally one of the following: the FMV of the property at the date of the individual's death, the FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation, the value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes, or the decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. In addition, if a federal estate tax return does not have to be filed, the taxpayer's basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Therefore, it is incorrect to say that the basis in the inherited property is the same as the decedent's basis at the time of death. It may be, but it need not be the same. Publication 551, pages 9-10

Sally, age 38, does a conversion of $14,000 by a rollover from her traditional IRA into her Roth IRA. She took the distribution from her traditional IRA on December 15, 2022, and completed the conversion into her Roth IRA on January 20, 2023. How should the taxable portion of the transaction be handled by Sally on her federal income tax return? It is included entirely in her taxable income for 2022 and the contribution is treated as a 2022 Roth contribution. It is included entirely in her taxable income for 2022 and the contribution is treated as a 2023 Roth contribution. It is included entirely in her taxable income for 2023 and the contribution is treated as a 2023 Roth contribution. It is included entirely in her taxable income for 2023 and the contribution is treated as a 2022 Roth contribution.

It is included entirely in her taxable income for 2022 and the contribution is treated as a 2022 Roth contribution. Publication 590-A, page 29, provides that a taxpayer can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. The amount that is withdrawn and timely contributed (converted) to the Roth IRA is called a conversion contribution. If properly (and timely) rolled over, the 10% additional tax on early distributions will not apply. However, a part or all of the distribution from the taxpayer's traditional IRA may be included in gross income and subjected to ordinary income tax. The taxpayer must roll over into the Roth IRA the same property they received from the traditional IRA. Also, the taxpayer can roll over part of the withdrawal into a Roth IRA and keep the rest of it. The amount kept will generally be taxable (except for the part that is a return of nondeductible contributions) and may be subject to the 10% additional tax on early distributions. Therefore, the distribution and contribution are treated as occurring in 2022 as long as they were completed within the 60 days. Moreover, the distribution from the IRA is included in gross income and the conversion amount is treated as a Roth IRA contribution. Publication 590-A, page 29

You purchased a heating, ventilating, and air conditioning (HVAC) unit for your rental property on December 15. It was delivered on December 28 and was installed and ready for use on January 2. When should the HVAC unit be considered placed in service? December 15 December 28 December 31 January 2

January 2 Note: To depreciate it should generate income. Personal property that does not generate income is not depreciable. A taxpayer begins to depreciate property when it is placed in service in the taxpayer's trade or business or for the production of income. Likewise, a taxpayer stops depreciating it either when the taxpayer has fully recovered their cost or other basis, or when the taxpayer retires it from service, whichever happens first. Property is considered placed in service in a rental activity when it is ready and available for a specific use in that activity whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. In this problem, the HVAC is not ready for use until January 2 and as such, that is the date that it is placed in service. See Publication 527, page 6, for a review of the topic. On November 22 of last year, a taxpayer purchased a dishwasher for his rental property. The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year. Because the dishwasher was not ready for use last year, it is not considered placed in service until this year. If the appliance had been ready for use when it was delivered in December of last year, it would have been considered placed in service in December, even if it was not actually used until this year. Be aware that if the property is placed in service in a personal activity, the taxpayer cannot claim depreciation. However, if the taxpayer changes the property's use from personal to business or income-producing, then the taxpayer will be able to claim depreciation deduction. Special rules on the basis of the property do apply. Publication 527, page 6

Jennifer expects to owe $1,500 in tax for 2023. Her tax liability for 2022 was $0. Which of the following statements is correct concerning Jennifer's requirement to pay estimated tax for 2023? Jennifer is required to pay estimated tax for 2023. Jennifer should pay estimated taxes for 2023. Jennifer is not required to pay estimated tax for 2023. There is insufficient information to respond to the question.

Jennifer is not required to pay estimated tax for 2023. Publication 17 (pages 39 and 40) provides the general rule regarding when a taxpayer is not required to pay estimated taxes for the coming year. In general, a taxpayer must satisfy all three of the following conditions to be excluded from paying estimated tax for 2023: the taxpayer had no tax liability for 2022, the taxpayer was a U.S. citizen or resident for the whole year, and the taxpayer's 2022 tax year covered a 12-month period. In this case, the first exception applies (i.e., no tax liability in 2022), and one must assume that the second and third exceptions apply. Publication 17, pages 39-40

On June 30, 2022 John Smith made a gift of $2,000 to his daughter. John will need to file a gift tax return (Form 709) on or after January 1, 2023, but no later than: March 15, 2023 April 15, 2023. March 31, 2023. John will not have to file Form 709 for the year ending December 31, 2022.

John will not have to file Form 709 for the year ending December 31, 2022. Generally, the federal gift tax applies to any transfer by gift of real or personal property, whether tangible or intangible, that is made directly or indirectly, in trust, or by any other means to a donee. However, an exclusion is allowed for a gift of a present interest. The annual exclusion is $16,000 for 2022. Given that John's gift falls under the exclusion amount, he will not have to file Form 709 for the year ending December 31, 2022. If, however, John's gifts exceeded the applicable exclusion amount, Form 709 should be filed on or after January 1 but not later than April 15. Instructions for Form 709, pages 1-2 and 4

Which of the following is a medical deduction? Legal abortion Maternity clothing Health club dues advised by your doctor None of the answer choices are correct.

Legal abortion Publication 502, pages 5 through 17 list all of the deductible medical expenses. Per page 5, costs associated with legal abortion are deductible. However, per page 16 maternity clothes and health club dues, even if following doctor's advice, cannot be included as deductible medical and dental expenses. Publication 502, pages 5-17

Thomas files a Form 1040-NR in 2022. Which of the following items cannot be deducted as an itemized deduction on his 2022 return? State and local income taxes withheld from the taxpayer's salary during 2022 on income connected with a U.S. trade or business Losses related to exempt income connected with a non-U.S. business in 2022 Deductions apportioned to income connected with a U.S. business in 2022 Contributions given to U.S. organizations that are religious, charitable, educational, or scientific in purpose

Losses related to exempt income connected with a non-U.S. business in 2022 The Form 1040-NR Instructions, page 38, provide that a person filing Form 1040NR includes only those deductions and losses properly allocated and apportioned to income effectively connected with a U.S. trade or business. A person, however, does not include deductions and/or losses that relate to exempt income or to income that is not effectively connected with a U.S. trade or business. State and local income taxes withheld from the taxpayer's salary during 2022 on income connected with a U.S. trade or business are deductible. Likewise, contributions given to U.S. organizations that are religious, charitable, educational, scientific, or literary in purpose are deductible. As a result, Thomas cannot include as an itemized deduction loss related to exempt income connected with a non-U.S. business in 2022. Instructions for Form 1040-NR, page 38

** Maria has a traditional IRA, from which she has taken a taxable distribution of $8,000. Under which of the following circumstances will the distribution be subject to the 10% penalty for premature distributions? Maria's AGI is $30,000, and she had $13,000 in unreimbursed deductible medical expenses which exceed 10% of her adjusted gross income. Maria's granddaughter is a sophomore in college, and Maria paid her tuition expenses of $10,000. Maria is age 57, the distribution is not part of a series of equal periodic payments, and she has no qualifying expenses or conditions. The distribution was made pursuant to an IRS levy on Maria's IRA.

Maria is age 57, the distribution is not part of a series of equal periodic payments, and she has no qualifying expenses or conditions. Pursuant to Publication 590-B, page 25, distributions before the taxpayer is age 59-1/2 are called early distributions. Most early distributions from a traditional IRA result in a 10% additional tax on the distribution of any assets (money or other property). There are several exceptions to the age 59-1/2, which means some early distributions are not subject to the 10% additional tax. A list of these exceptions is given below and can be found in Publication 590-B, beginning on page 25: The taxpayer has unreimbursed medical expenses that are more than 7.5% of the taxpayer's AGI. The distributions are not more than the cost of the taxpayer's medical insurance due to a period of unemployment. The taxpayer is totally and permanently disabled. The person is the beneficiary of a deceased IRA owner. The taxpayer is receiving distributions in the form of an annuity. The distributions are not more than the taxpayer's qualified higher education expenses. The taxpayer uses the distributions to buy, build, or rebuild a first home. The distribution is due to an IRS levy of the qualified plan. The distribution is a qualified reservist distribution. In Maria's case, she cannot avoid the excise tax penalty because she is age 57 (under age 59-1/2), the distribution is not a series of equal periodic payments, and she has no qualifying expenses or conditions. Publication 590-B, pages 25-27

**Maude has a small business that has a profit of $15,000. Her husband, Harold, has a farm that has a loss of $7,000. They are married. Which of the following is correct regarding their self-employment tax computation? If they file separately, Harold may not elect to use the optional method. Maude must pay self-employment tax on $15,000. On a joint return, the self-employment tax may be computed based on $8,000 of income for Maude only. If they file separately, they may elect to split the net profit for self-employment tax purposes, each paying based on $4,000.

Maude must pay self-employment tax on $15,000. Publication 334, page 44, provides the following information concerning self-employment tax and filing a joint return. If a taxpayer files a joint return, the taxpayer cannot file a joint Schedule SE. This is true whether one spouse or both spouses have earnings subject to SE tax. In addition, a taxpayer's spouse is not considered self-employed just because the taxpayer is self-employed. If both of the spouses have earnings subject to SE tax, then each spouse must complete a separate Schedule SE. In this case, Maude must pay self-employment tax on the $15,000 of profit that she made in her business. Publication 334, page 44 Instructions for Schedule SE (Form 1040)

** Meg Griffin holds the following: a French savings account holding $8,000, an investment account at UBS Switzerland holding securities with a value of $3,500, an undeveloped tract of land purchased for $12,000 with a fair market value of $14,000 in the Bahamas, and an interest in an UK Social Security payment program valued at $50,000 (based on life expectancy, using a discounted present value of future payments method). Which of the following statements is correct? Meg has a FinCEN Form 114-filing requirement for the French savings account and the Swiss investment account, and a Form 8938 filing requirement for interest in the UK Social Security account. Meg is not required to file FinCEN Form 114 because the French and the Swiss account balances are individually below $10,000. Meg should file FinCEN Form 114 only because the aggregated values of her French and Swiss accounts exceed $10,000. She need not file Form 8938 since the interest in a foreign government's Social Security program does not constitute a financial interest. All of Meg's foreign assets should be disclosed on Form 8938 since in aggregate, they exceed $50,000.

Meg should file FinCEN Form 114 only because the aggregated values of her French and Swiss accounts exceed $10,000. She need not file Form 8938 since the interest in a foreign government's Social Security program does not constitute a financial interest. Meg is required to file FinCEN Form 114 because the aggregated values of her accounts exceed $10,000. However, the aggregated value of the two accounts $11,500 does not meet the filing threshold for Form 8938. As such, Form 8938 is not required to be filed. Meg's interest in a foreign government's Social Security program is not considered a financial interest. The tract of land does not represent a financial asset and, as such, it will not be considered for any of the two filing requirements. Foreign financial assets excepted from reporting are defined in "Assets Not Required to be Reported" in the instructions to Form 8938. Types of specified foreign financial assets are defined in the instructions to Form 8938 under the section "Specified Foreign Financial Assets." FinCEN From 114 Form 8938

**When Amelia bought her first home in 2019, she paid $100,000 plus $1,000 closing costs. In 2020, she added a deck that cost $5,000. Then, in July 2022, a real estate dealer accepted her house as a trade-in and allowed her $125,000 (amount received as a trade-in) toward a new house priced at $200,000. How should Amelia report this transaction on her 2022 return? $19,000 long-term capital gain No reporting because the trade is not a sale $0 taxable gain and reduce her basis in her new house by $19,000 No reporting required

No reporting required The gain or loss on a sale or trade of property is found by comparing the amount realized with the adjusted basis of the property. In the case of a personal residence that is the primary one, a special rule applies whereby the taxpayer can exclude up to $250,000 per spouse of the gain on the sale of the main home if all of the following are true (see Publication 523, pages 2 and 3): The taxpayer meets the ownership test (i.e., owned the home for at least 2 of the last 5 years). The taxpayer meets the use test (i.e., lived in the main home for at least 2 of the last 5 years). During the 2-year period ending on the date of the sale, the taxpayer did not exclude gain from the sale of another home. Be aware that there are some exceptions in this area, which are covered more thoroughly in Publication 523, pages 3 through 6. In this problem, the taxpayer satisfies the special rule for excluding $250,000. Thus, the gain from the sale is $19,000, which is the amount received as a trade-in of $125,000 less the property's basis of $106,000 ($100,000 + $5,000 + $1,000). However, since the gain of $19,000 is less than the $250,000 exclusion amount, none of it is recognized. Furthermore, the sale of a taxpayer's main home is not reported on the tax return unless the taxpayer has a gain and does not qualify to exclude all of it, the taxpayer has a gain and chooses not to exclude it, or the taxpayer received Form 1099-S (see Publication 523, page 3). Thus, Amelia does not report the sale of her main home. Publication 523, pages 2-6

Which of the following early distributions from an IRA is not an exception to the early distribution excise tax? An early distribution caused by an IRS levy of the qualified plan An early distribution due to the taxpayer being totally and permanently disabled An early distribution that is not more than the taxpayer's qualified higher education expenses None of the answer choices are subject to the early distribution excise tax.

None of the answer choices are subject to the early distribution excise tax. Publication 590-B, page 25, provides the general exceptions to the early distribution excise tax penalty. The following are some exceptions to this excise tax: The taxpayer has unreimbursed medical expenses that are more than 7.5% of the taxpayer's AGI. The distributions are not more than the cost of the taxpayer's medical insurance due to a period of unemployment. The taxpayer is totally and permanently disabled. The taxpayer is the beneficiary of a deceased IRA owner. The taxpayer is receiving distributions in the form of an annuity. The distributions are not more than the taxpayer's qualified higher education expenses. The taxpayer uses the distributions to buy, build, or rebuild a first home. The distribution is due to an IRS levy of the qualified plan. The distribution is a qualified reservist distribution. As given in the listing above, all three distributions are exceptions to the early distribution penalty. Note This question is worded quite oddly, with a negative question and a negative correct response. Publication 590-B, page 25

Which of the following entertainment activities are deductible as a business expense? A meeting or discussion at a nightclub, theater, or sporting event A meeting or discussion during what is essentially a social gathering, such as a cocktail party A meeting with a group that includes persons who are not business associates at places such as cocktail lounges, country clubs, golf clubs, athletic clubs, or vacation resorts None of the listed entertainment activities are deductible entertainment expenses.

None of the listed entertainment activities are deductible entertainment expenses. Publication 463, page 10, states, in part, for tax years 2018 through 2025 entertainment expenses are no longer deductible. The cost of business meals generally remains deductible, subject to the 50% limitation (for 2021 and 2022, there will be a temporary allowance of business meals for 100% of meal cost). See Section 274 for additional information on the changes. Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. Generally, entertainment expenses are nondeductible for expenses paid after December 2017. Facilities used in connection with entertainment and related membership dues (such as country club dues) are also non-deductible. Meal expenses are limited to 50% unless an exception applies. As a result of the new law, the taxpayer is not able to deduct any of the entertainment expenses given in this problem. Publication 463, page 10

Generally, which of the following expenses paid by Kathy, a salesperson, are deductible as entertainment expenses? Chamber of commerce dues Cover charges and cost of meals for taking a client to a nightclub Country club dues where she entertains clients None of the listed items are deductible as entertainment expenses.

None of the listed items are deductible as entertainment expenses. In order to answer this question, one must understand what is meant by "entertainment expenses." Publication 463, page 10, states, in part, that entertainment expenses include any activity that is considered to provide entertainment, amusement, or recreation. Entertainment expenses include but are not limited to entertaining guest at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts; or on hunting, fishing, vacation, and similar trips. Beginning in 2018, a taxpayer can no longer take a deduction for any expense related to activities generally considered entertainment, amusement, or recreation. Publication 463, page 10

**How is the sale of Section 1244 (small business) stock treated for federal income tax purposes? Ordinary loss or ordinary income Ordinary loss or capital gain Ordinary income or capital loss Capital gain or capital loss

Ordinary loss or capital gain He held less than a year it is ordinary gain or loss, not capital gain. A taxpayer can deduct as an ordinary loss, rather than as a capital loss, his or her loss on the sale, trade, or worthlessness of Section 1244 stock. The loss is reported on Form 4797, line 10. Any gain on this stock is capital gain and is reported on Form 8949 if the stock is a capital asset in the taxpayer's hands (Publication 550, page 52). In addition, if the basis of the taxpayer's Section 1244 stock has increased, through contributions to capital or otherwise, the taxpayer must treat this increase as applying to stock that is not Section 1244 stock when the taxpayer figures the ordinary loss on its sale (Publication 550, page 52). As a result, the sale of Section 1244 stock can be deducted as an ordinary loss and as a capital gain if the stock is being held as a capital asset in the taxpayer's hands. For more information on losses on Section 1244 (small business) stock, see chapter 4 of Publication 550. Publication 550, pages 52-53

Jack's antique car caught fire and was totally destroyed. The car was appraised for $22,500. Jack only had it insured for $15,000 since this was more than enough to cover his adjusted basis of $9,000. He decided not to replace the car. What should Jack report on his 2022 tax return? Deduct a loss of $7,500 Deduct a loss of $6,000 Report income of $6,000 None of the answer choices are correct.

Report income of $6,000 15000-9000=6000 Publication 547, page 3, provides, in part, that a casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. For tax years 2018 through 2025, if you are an individual, casualty losses of personal-use property are deductible only if the loss is attributable to a federally declared disaster (federal casualty loss). On the other hand, if a taxpayer receives an insurance or other reimbursement that is more than their adjusted basis in the destroyed or stolen property, they have a gain from the casualty or theft. In this case, they must include this gain in their income in the year the reimbursement is received, unless the taxpayer chooses to postpone reporting the gain as explained in Publication 547, page 13. In this case, Jack has an adjusted basis of $9,000 and a decrease in the FMV of $22,500 ($22,500 − $0). Since the smaller of the two calculations is $9,000, this amount is compared to the insurance coverage, which is $15,000. The result is that Jack has income (not a loss) of $6,000 from the casualty, which he must claim on his tax return. Publication 547, pages 3 and 13

Ron sold property for $10,000. The agreement calls for $1,000 as a down payment and a payment of $1,500 in each of the next 6 years to be made from an irrevocable escrow account. The escrow account contains funds provided by the purchaser for the balance of the purchase price plus interest. How is this transaction handled by Ron for tax purposes? Ron uses the installment method to report the sale. Ron uses the installment method to report the sale by electing to pay a special interest charge. Ron would report the entire gain in the year of sale. None of the answer choices are correct.

Ron would report the entire gain in the year of sale. The irrevocable escrow account can not report as an installment method. The entire gain needs to be reported in the year of the sale. Publication 537, page 7, states that in some cases, the sales agreement or a later agreement may call for the buyer to establish an irrevocable escrow account from which the remaining installment payments (including interest) are to be made. These sales cannot be reported on the installment method. The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. When an escrow account is established, the taxpayer no longer relies on the buyer for the rest of the payments, but on the escrow arrangement. Example A taxpayer sells property for $100,000. The sales agreement calls for a down payment of $10,000 and a payment of $15,000 in each of the next 6 years to be made from an irrevocable escrow account containing the balance of the purchase price plus interest. The taxpayer cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. The taxpayer would report the entire gain in the year of sale. Publication 537, page 7

Rosa purchased a home in Quogue, New York, in 2008 but she lives in Brooklyn with her sister. She lets her son Bob and his wife Samantha live in the Quogue house. Astoria Bank holds the mortgage with only Rosa's name on the property, as she did not add her son's name to the property deed. Since Bob lives in the Quogue house, he makes the monthly mortgage payments to Astoria Bank. Who can deduct the mortgage interest expense for the year 2022? Bob, since he makes the payments Rosa, since she owns the property and is liable for the payments Both, since they are related Neither, since Rosa is not paying her liability and Bob is paying for what he is not liable

Rosa, since she owns the property and is liable for the payments Instructions to Schedule A, Form 1040, page A-8 indicate a taxpayer cannot deduct personal interest. Examples of personal interest include car loans, credit card interest, etc. The instructions also indicate the taxpayer is entitled to deduct qualified home mortgage interest and interest on student loans (on Schedule 1). Publication 936, page 2, states, in general, that home mortgage interest includes any interest that is paid on a loan secured by the taxpayer's home (main home or a second home). The loan may be a mortgage to buy the taxpayer's home, a second mortgage, a line of credit, or a home equity loan (provided that the equity loan is used to buy, build or improve the residence). Deductibility of interest associated with a mortgage loan is limited to $750,000 for loans originating after December 15, 2017 (Publication 936, page 2). A taxpayer can deduct home mortgage interest only if the taxpayer meets all the following conditions: The taxpayer must file Form 1040 or 1040-SR and itemize deductions on Schedule A (Form 1040 or 1040-SR). Both the taxpayer and the lender must intend that the loan be repaid. The mortgage is a secured debt on a qualified home in which the taxpayer has an ownership interest. As a result, since Rosa owns the property and only Rosa is liable for the mortgage payments, Rosa is the taxpayer that can claim the interest expense deduction. Publication 936, page 2 Instructions for Schedule A (Form 1040), page A-8

Joe had a taxable gain on the sale of his main home, which could not be totally excluded on his 2022 tax return. He had no business use of the home. Which schedule does he need to submit to report the gain? Schedule C, for sole proprietors Schedule A, for itemized deductions Schedule D, for capital gains Schedule SE, for self-employment income

Schedule D, for capital gains In the case of a sale of a personal residence, the sale is not reported on a taxpayer's tax return unless the taxpayer: has a gain and the taxpayer does not qualify to exclude all of it, has a gain and the taxpayer chooses not to exclude it, or receives Form 1099-S. If, on the other hand, the taxpayer has a taxable gain of any amount on the sale of the personal residence that cannot be excluded, the entire gain realized is reported on Form 8949 and the details on how to report the gain or loss are found in the instructions for Schedule D (Form 1040 or 1040-SR) and the instructions for Form 8949. Publication 523, page 16

**Elton declared bankruptcy in the current year. Included in the liabilities discharged in the bankruptcy was a $15,000 personal loan Elton had received from his friend, Edward, 2 years ago. How would Edward treat this for tax purposes? Ordinary loss on Form 4797 Long-term capital loss on Schedule D Short-term capital loss on Form 8949 Investment expense subject to 2% miscellaneous itemized deduction limitation

Short-term capital loss on Form 8949 If money owed to a taxpayer becomes uncollectible in a given tax year, the taxpayer may have an allowable deduction for bad debt. The bad debt must arise from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money. Those bad debts incurred outside of operating a business or trade are categorized as nonbusiness bad debt and are deductible when deemed totally worthless (not partially worthless). Nonbusiness bad debts are deducted as a short-term capital loss on Form 8949, which is carried over to Schedule D (Form 1040). (Publication 550, page 54, and Form 8949) Publication 550, page 66, further provides that short-term capital losses are subject to a $3,000 ($1,500 for married filing separate) allowable capital loss per year deduction limitation. Given that Elton included in his bankruptcy declaration the $15,000 loan that he received from Edward, a friend, and assuming that this transaction meets the requirements of a genuine debt, Edward may deduct the uncollected monies as a short-term capital loss on Form 8949. Note: This is another example of a nonbusiness bad debt where it is unclear whether a genuine debtor-creditor relationship exists. Since there is no correct response if we assume there is no genuine debtor-creditor relationship, we are forced, in this case, to assume that one exists. Publication 550, pages 54 and 66 Form 8949

John bought his principal residence for $250,000 on May 3, 2021. He sold it on May 3, 2022, for $400,000. What is the amount and character of his gain? Long-term, ordinary gain of $650,000 Long-term, capital gain of $150,000 Short-term, ordinary gain of $650,000 Short-term, capital gain of $150,000

Short-term, capital gain of $150,000 If the taxpayer holds investment property for more than 1 year, any capital gain or loss is a long-term capital gain or loss. Pages 15 and 16 of Publication 523 provides that the gain or loss on a sale or trade of property is found by comparing the amount realized with the adjusted basis of the property. In the case of a personal residence that is the primary residence, a special rule applies whereby the taxpayer can exclude up to $250,000 per spouse of the gain on the sale of the main home if all of the following are true: The taxpayer meets the ownership test (i.e., owned the home for at least 2 of the last 5 years). The taxpayer meets the use test (i.e., lived in the main home for at least 2 of the last 5 years). During the 2-year period ending on the date of the sale, the taxpayer did not exclude gain from the sale of another home. (Publication 3, page 523) Since John did not hold the residence for 2 years, these exclusion rules do not apply. Hence, John has a gain to recognize. The question to be answered now is the type of gain: short term or long term. If the taxpayer holds investment property for more than 1 year, any capital gain or loss is a long-term capital gain or loss. If the taxpayer holds the property 1 year or less, any capital gain or loss is a short-term capital gain or loss (Publication 523, pages 15-16). To determine how long the taxpayer held the investment property, begin counting on the date after the day the taxpayer acquired the property (trade date, not settlement date, for securities traded on an established market). The day the taxpayer disposes of the property is part of the holding period. Note: Although this is the rule for counting days, a simple rule to count either the day of purchase or the date of sale but not both. In this problem, the taxpayer did not satisfy the special rule for excluding $250,000 and he did not hold the residence for more than 1 year. Thus, the gain from the sale is $150,000, which is the amount received of $400,000 less the property's basis of $250,000, and it is short term. Publication 523, pages 3 and 15-16

** Which of the following statements is correct regarding Form 1095-A, Health Insurance Marketplace Statement? Taxpayers do not need Form 1095-A to complete Form 8962, Premium Tax Credit (PTC), to reconcile advance payments of the premium tax credit or claim the premium tax credit on their tax return. Taxpayers will receive Form 1095-A to complete Form 8962, Premium Tax Credit (PTC), if they have been covered by an employer insurance plan for the entire year. Taxpayers will use Form 1095-A to complete Form 8962, Premium Tax Credit (PTC), to reconcile advance payments of the premium tax credit or claim the premium tax credit on their tax return. Taxpayers will attach a Form 1095-A with their return to reconcile advance payments of the premium tax.

Taxpayers will use Form 1095-A to complete Form 8962, Premium Tax Credit (PTC), to reconcile advance payments of the premium tax credit or claim the premium tax credit on their tax return. Form 8962 Instructions, pages 2 and 3, provide that a taxpayer will need Form 1095-A to complete Form 8962. The Marketplace uses Form 1095-A to report certain information to the IRS about individuals who enrolled in a qualified health plan through the Marketplace. The Marketplace sends copies to individuals to allow them to accurately file a tax return taking the premium tax credit (PTC) and reconciling the advanced PTC (APTC). For 2022, the Marketplace is required to provide or send Form 1095-A to the individual(s) identified in the Marketplace enrollment application by January 31, 2023. If the taxpayer is expecting to receive Form 1095-A for a qualified health plan and they do not receive it by early February, they should contact the Marketplace. Under certain circumstances, for example, where two spouses enroll in a qualified health plan and divorce during the year, the Marketplace will provide Form 1095-A to one taxpayer, but another taxpayer will also need the information from that form to complete Form 8962. The recipient of Form 1095-A should provide a copy to other taxpayers as needed. Therefore, the correct response is taxpayers will use Form 1095A to complete Form 8962, Premium Tax Credit (PTC), to reconcile advance payments of the PTC or claim the PTC on their tax return. Instructions for Form 8962, pages 2-3

Maggie trades stock in ABC Company with an adjusted basis of $7,000 for DEF Company stock with a fair market value of $10,000. She had no other transactions during the year. What is the amount realized and what is her gain or loss on this transaction? The amount realized is $10,000 and the amount of gain is $3,000. The amount realized is $10,000 and the amount of loss is $3,000. The amount realized is $7,000 and the amount of gain is $4,000. The amount realized is $17,000 and the amount of gain is $3,000.

The amount realized is $10,000 and the amount of gain is $3,000. The gain or loss on a sale or trade of property is found by comparing the amount realized with the adjusted basis of the property. If the amount realized from a sale or trade is more than the adjusted basis of the property the taxpayer transferred, the difference is a gain, and If the adjusted basis of the property you transfer is more than the amount realized, the difference is a loss. The adjusted basis of property is the original cost or other original basis properly adjusted (increased or decreased) for certain items. Maggie has a gain of $3,000, which is the difference between the amount realized, which is the fair market value of the acquired stock (i.e., $10,000), and the adjusted basis of the traded stock (i.e., $7,000). Publication 550, page 43

Which of the following statements is correct concerning excess contribution to a traditional IRA and the 6% excise tax? The contribution and any earnings on it must be withdrawn by the date the taxpayer's return is due (excluding extension) to avoid the 6% excise tax. The contribution and any earnings on it must be withdrawn by the date the taxpayer's return is due (including extension) to avoid the 6% excise tax. The contribution only must be withdrawn by the date the taxpayer's return is due (including extension) to avoid the 6% excise tax. The contribution only must be withdrawn by the date the taxpayer's return is due (excluding extension) to avoid the 6% excise tax.

The contribution and any earnings on it must be withdrawn by the date the taxpayer's return is due (including extension) to avoid the 6% excise tax. Publication 590-A, pages 34 and 35, provides the general rules for the tax when making an excess contribution to an IRA. In general, if the excess contributions for a year and the interest or other income that was earned on the excess contribution are not withdrawn by the date the taxpayer's return for the year is due (within 6 months of the due date of your return, excluding extensions), the taxpayer is subject to a 6% tax. The taxpayer must pay the 6% tax each year on excess amounts that remain in the taxpayer's traditional IRA at the end of the tax year. The tax cannot be more than 6% of the value of the taxpayer's IRA as of the end of the taxpayer's tax year. Publication 590-A, pages 34-35 Retirement Income

** Which of the following items is not considered when determining if a taxpayer's Social Security benefits may be taxable? The exclusion for foreign earned income Interest that is tax-exempt Notary fees received Unemployment benefits

The exclusion for foreign earned income To find out whether any of a taxpayer's Social Security benefits may be taxable, compare the base amount for their filing status with the total of: one-half of their benefits plus all their other income, including tax-exempt interest. When making this comparison, do not reduce the taxpayer's other income by any exclusions for: interest from qualified U.S. savings bonds, employer-provided adoption benefits, foreign earned income or foreign housing, or income earned by bona fide residents of American Samoa or Puerto Rico. Publication 17, pages 62-64, provides that a taxpayer's income is not reduced by any exclusions for foreign earned income when determining if a taxpayer's Social Security benefits may be taxable. Publication 17, pages 62-64

Interest was credited to Jane's savings account on December 31, 2022. Which of the following statements is correct? The interest becomes taxable after Jane removes the interest from her account. The interest becomes taxable in 2023 because interest is taxable the day after it is credited to a person's account, which is January 1, 2023. The interest becomes taxable in 2022 because it was credited to her account in 2022, even though it was December 31, 2022. There isn't enough information to respond to the question.

The interest becomes taxable in 2022 because it was credited to her account in 2022, even though it was December 31, 2022. Most individual taxpayers use the cash method. Under this method, taxpayers generally report any interest as interest income in the year that they receive or constructively receive the interest. The interest is constructively received if it is credited to his or her account or is made available to the taxpayer. Moreover, the taxpayer does not need to have physical possession of it. For example, the taxpayer is considered to receive interest, dividends, or other earnings on any deposit or account in a bank, savings and loan, or similar financial institution, or interest on life insurance policy dividends left to accumulate, when they are credited to the person's account and can be withdrawn by the person. This is true even if they are not yet entered in the taxpayer's passbook or bankbook. One exception to this rule is municipal bond interest, which is excludable. Publication 17, page 59

What action can a tax preparer take when the taxpayer has been audited for the same items in either of the 2 preceding years, had no change proposed on his or her tax liability, and receives notice that his or her return has been selected for examination? The tax preparer can disregard the notice under the repeat examination rule. The tax preparer must submit to the examination. The tax preparer may contact the Internal Revenue Service and request that the examination be discontinued under the repeat examination rule. The tax preparer must submit to the examination because the repeat examination rule pertains to the 3 preceding years.

The tax preparer may contact the Internal Revenue Service and request that the examination be discontinued under the repeat examination rule. Publication 556, page 4, provides insight into the issue of repeat examinations. In particular, the IRS tries to avoid repeat examinations of the same items, but sometimes this happens. If a taxpayer's tax return was examined for the same items in either of the 2 previous years and no change was proposed to the taxpayer's tax liability, the taxpayer should contact the IRS as soon as possible to see if the examination should be discontinued. Publication 556, page 4

Mr. and Mrs. Black purchased their primary residence in 2014 and lived in it until they sold it in 2022. They purchased the home for $250,000 and sold it for $650,000. Which of the following statements is correct? They are required to report the gain of $150,000 from the sale of their home on their 2022 tax return. They are required to report the gain of $400,000 from the sale of their home on their 2022 tax return. They are not required to report the sale of their home on their 2022 tax return. They are required to report the sale of their home on their 2022 tax return even though there is no gain.

They are not required to report the sale of their home on their 2022 tax return. Publication 523, page 2, states that if the taxpayer sold his or her main home in 2022, the taxpayer may be able to exclude from income any gain up to a limit of $250,000 ($500,000 on a joint return in most cases). If the taxpayer can exclude all of the gain, the taxpayer does not need to report the sale on his or her tax return. If, on the other hand, the taxpayer cannot exclude all of the gain (i.e., the taxpayer has a gain beyond $250,000 or $500,000, if applicable), then the taxpayer must report the gain on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D (Form 1040 or 1040-SR). A taxpayer may need to complete Form 4797, Sales of Business Property. Pursuant to Publication 523, pages 3-6, the $250,000 exclusion is applicable if the taxpayer is able to satisfy the ownership test and use test, and the primary residence has been held for more than 2 out of the last 5 years. Similarly, if a taxpayer has a loss on the sale, the loss cannot be deducted on the tax return. (Publication 523, page 13). Since the gain on the sale of the taxpayer's home is $400,000 ($650,000 − $250,000), which is less than the $500,000, no gain is recognized and, therefore, the gain is not reported. Publication 523, pages 2-6 and 13

** Antonio is an ordained minister. As a minister, Antonio is a common-law employee of the church where he works, but his earnings and parsonage allowance are treated as self-employment income on which he pays self-employment tax. If the church had no retirement plan under which Antonio was covered, which of the following would Antonio be permitted to establish for himself? Traditional IRA Savings incentive match plan for employees (SIMPLE) IRA Simplified employee pension (SEP) Either a traditional IRA or a SIMPLE IRA

Traditional IRA In general, a taxpayer can set up and contribute to a traditional IRA if the taxpayer (or, if filing a joint return, the taxpayer's spouse) received taxable compensation during the year. Generally, compensation is the amount that the taxpayer earns from working. This includes wages and salaries, commissions, self-employment income, and alimony. Compensation includes earnings from self-employment even if they are not subject to self-employment tax because of religious beliefs. (Publication 590-A, page 6) SIMPLE and SEP plans are tax-favored retirement plans that certain small employers (including self-employed individuals) can set up for the benefit of their employees. If a congregation pays a salary for a minister to perform qualified services, the minister is subject to the congregation's control and, as such, the person is a common-law employee. Thus, the person is not self-employed for purposes of setting up a retirement plan. Even though Antonio has self-employment income, he is a common-law employee (not a small business). Hence, he is not eligible to establish either of these plans (Publication 517, page 12). As an aside, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services that are reported on Schedule C, are earnings from self-employment for all tax purposes. That is, this income is eligible for a contribution to a SIMPLE or SEP plan. Because Antonio has taxable compensation during the year Antonio can establish a traditional IRA for himself. Publication 590-A, page 6 Publication 517, page 12

Which of the following statements is correct if you inherited a traditional IRA from someone other than your spouse? You can treat the traditional IRA as your own. You cannot convert it to a Roth IRA. You can roll over any amounts into or out of the inherited IRA. You can change the name on the inherited IRA to your own name.

You cannot convert it to a Roth IRA. Only spouse of deceseased person can treat the IRA like their own. Publication 590-B, page 6, states that if a taxpayer inherits a traditional IRA from anyone other than the taxpayer's deceased spouse, the taxpayer cannot treat the inherited IRA as his or her own. This means that the taxpayer cannot roll over any amounts into or out of the inherited IRA. The taxpayer, however, can make a trustee-to-trustee transfer as long as the new IRA is set up and maintained in the name of the deceased IRA owner for the benefit of taxpayer as beneficiary. Thus, an inherited IRA cannot be converted to a Roth IRA. Publication 590-B, page 6

Who would not be a qualifying person for purposes of filing as head of household in 2022? Your mother, whom you can claim as a dependent Your adopted child who lives with you, is married, and can be claimed as your dependent Your foster child who lived with you all year and is your dependent Your aunt, related to you by blood. She does not live with you but is your dependent.

Your aunt, related to you by blood. She does not live with you but is your dependent. She needs to live with you morre than half of the year. For a person to be able to file as head of household, the taxpayer must meet all of the following requirements: Be unmarried or "considered unmarried" on the last day of the year, Pay more than half the cost of keeping up a home for the year, and Have a "qualifying person" live with the taxpayer in the home for more than half the year (except for temporary absences, such as school). Dependent parents, however, are not required to live with the taxpayer. In this case, the aunt is related by blood to and is a dependent of the taxpayer, but she does not live with the taxpayer and is not a parent; thus, she is not a qualifying person for filing as head of household. Publication 17, pages 23-24

Joe exchanged a building for another like-kind building. Joe had a basis of $16,000, plus he had made $10,000 in improvements prior to the exchange. He exchanged it for a building worth $36,000. Joe did not recognize any gain from the exchange on his 2022 individual tax return. What is Joe's basis in the new property? $26,000 $36,000 $10,000 $16,000

it is basis of 16000+10000=26000 Publication 544, page 12, provides a discussion on the basis of property received in a like-kind exchange. If the taxpayer acquires property in a like-kind exchange, the basis of that property is the same as the basis of the property transferred by the taxpayer. Example A taxpayer exchanged real estate held for investment with an adjusted basis of $25,000 for other real estate held for investment. The basis of the taxpayer's new property is the same as the basis of the old ($25,000). If, in addition to giving up like-kind property, the taxpayer pays money in a like-kind exchange, the taxpayer still has no recognized gain or loss. The basis of the property received, on the other hand, is the basis of the property given up, increased by the money paid. Be aware that an exchange of personal property for real property does not qualify as a like-kind exchange. In this case, Joe's basis in the new building is $26,000, which is the basis of the old building given by Joe ($16,000 basis plus $10,000 in improvements). Publication 544, page 12

If a taxpayer has capital gains dividends, but has no other capital gain: capital gain distributions must be put on Schedule B. no Schedule D is required, and the amount is put directly on the Form 1040. dividends and capital gains dividends may be added together on Schedule B. it must be combined with interest on the Schedule B.

no Schedule D is required, and the amount is put directly on the Form 1040. Pursuant to Exception 1 as given in Publication 550, page 64, the taxpayer that receives only capital gain distributions does not need to file Form 8949 or Schedule D if all of the following are true: The taxpayer has no capital losses and the only amounts the taxpayer would have to report on Schedule D are capital gain distributions from box 2a of Form 1099-DIV (or substitute statement). The taxpayer does not have an amount in box 2b, 2c, or 2d of any Form 1099-DIV (or substitute statement). If both of the above statements are true, the taxpayer satisfies the exceptions to filing Form 8949 and Schedule D, reports the capital gain distributions directly on line 7 of Form 1040, and checks the box on line 7. (See Publication 550, page 64.) Publication 550, page 64

The interest on qualified U.S. savings bonds may not be taxable if you pay: a reduced rent that is government subsidized. qualified higher education expenses in the same year. household employee wages in excess of $1,000. mortgage interest for a rental property.

qualified higher education expenses in the same year. Pursuant to Publication 17, page 57, a taxpayer may be able to exclude from income all or part of the interest they receive on the redemption of qualified U.S. savings bonds during the year if the taxpayer pays qualified higher educational expenses during the same year. This exclusion is known as the Education Savings Bond Program. Moreover, a taxpayer doesn't qualify for this exclusion if their filing status is married filing separately. Publication 17, page 57

The following statements about dividends received from a dividend reinvestment plan are correct, except: reinvested dividends are not taxable if not removed from the plan. reinvested dividends are taxable in the year paid. reinvested dividends are taxable and are added to the basis of the stock or mutual fund. reinvested dividends are treated as ordinary dividends.

reinvested dividends are not taxable if not removed from the plan. Some corporations allow stockholders to participate in the company's dividend reinvestment plan rather than accept the cash dividend. When a taxpayer elects to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash from the corporation, the reinvested dividend amount is reported as dividend income by the taxpayer. Moreover, the reinvested dividends are taxable in the year paid and are added to the basis of the stock or mutual fund. Publication 550, pages 19 and 20, provides additional information on this issue.

The following statements about dividends received from a dividend reinvestment plan are correct, except: reinvested dividends are not taxable if not removed from the plan. reinvested dividends are taxable in the year paid. reinvested dividends are taxable and are added to the basis of the stock or mutual fund. reinvested dividends are treated as ordinary dividends.

reinvested dividends are not taxable if not removed from the plan. Some corporations allow stockholders to participate in the company's dividend reinvestment plan rather than accept the cash dividend. When a taxpayer elects to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash from the corporation, the reinvested dividend amount is reported as dividend income by the taxpayer. Moreover, the reinvested dividends are taxable in the year paid and are added to the basis of the stock or mutual fund. Publication 550, pages 19 and 20, provides additional information on this issue. Publication 550, pages 19-2

All of the following statements about a Coverdell education savings account are correct for 2022, except: the maximum contributions on behalf of a beneficiary per year are $2,000. the maximum number of accounts that a beneficiary can have is three. contributions to the account are not deductible. earnings on the account may be taxable when distributed.

the maximum number of accounts that a beneficiary can have is three. There is no limitation on the number of accounts Publication 970, page 41, states that a taxpayer may be able to establish a Coverdell Education Savings Account (ESA) to finance the qualified education expenses of a designated beneficiary if the taxpayer's modified adjusted gross income is less than $110,000 ($220,000 if filing a joint return). Furthermore, there is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. However, contributions must be in cash and cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special-needs beneficiary. In addition, the total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. (Publication 970, page 42) Contributions to a Coverdell account are not deductible, but the earnings on the account are not taxable until distributed. Better yet, the distribution may be tax-free, depending on the situation. Publication 970, pages 41-42

** Unless an extension is received, Form 706 (estate tax return) generally must be filed: by the 15th day of the 4th month following the month of death. within 9 months of the date of death. within 6 months of the date of death. no later than the due date of the estate income tax return.

within 9 months of the date of death. Unless an extension of time to file Form 706 has been received, the estate tax return must be filed within 9 months after the date of the decedent's death. Instructions for Form 706, page 3