Principles of Income Taxation Final Study Guide

What is the purpose of Circular 230?

To provide regulations governing tax practice and applies to all persons practicing before the IRS.

Assuming a taxpayer has sufficient earned income to contribute the maximum $5,500 to a traditional IRA, her _____ deductible IRA contribution may be phased-out depending on her status and _____ _____ income.

filing adjusted gross

Employees pay _____ taxes on their salary, wages, and other compensation at a current rate of 1.45% (2.35% for higher income taxpayers).

medicare

Taxpayers are allowed to deduct charitable contributions of _____ and _____, to qualified domestic charitable organizations.

money and property

Roger purchased a new suit for $350. The sales tax rate was 6%. What is the total cost of the suit to Roger?

$371

Arlene is single and has taxable income of $18,000. Her tax liability is currently $1,970 She has the opportunity to earn an additional $5,000 if she accepts and completes a special project at work. There are no additional expenses to offset the $5,000 income. Consequently, Arlene will have a tax liability of $2,570 if she accepts the special project. Arlene has a marginal tax rate of _____.

12% Because marginal tax rate takes the highest tax rate bracket.

Payroll taxes not paid on a timely basis are subject to deposit penalties of at least _____%.

2%

If a taxpayer is _____ or older, the amount he or she may contribute is increased by $_____.

55, $1,000

True or false: Self-employment tax is deductible as an itemized deduction along with real estate taxes and state income tax.

False

Bobby received a $3,500 scholarship for the semester. He used $3,000 to pay tuition to the community college, and the remaining $500 was paid toward textbooks. How much of the scholarship must be included in gross income? A. $0 B. $500 C. $3,500 D. $3,000

A. $0

In 2014 through 2017, Korey, who is single, borrowed a total of $25,000 for higher education expenses on qualified education loans. In 2018, while still living at home and being claimed by his parents as a dependent, he began making payments on the loan. The first year's interest on the loan was reported as $550, and his AGI for the year was less than $65,000. The amount that Korey can claim on his 2018 tax return is: A. $0. B. $225. C. $340. D. $550.

A. $0 Explanation Because Korey is claimed as dependent on another's tax return, he cannot claim the deduction.

Dean i single and earned $280,000 during the current year. Without regard to federal income taxes, how much will his employer withhold from his paycheck for social security taxes and Medicare taxes? A. $13,020 B. $14,820 C. $23,940 D. $12,300

A. $13,020

If one or more non-cash gifts has a fair market value over $500, the taxpayer must: A. File Form 8283. B. Complete Schedule D. C. Attach a written explanation to the Form 1040. D. Attach a letter from the recipient organization.

A. File Form 8283.

A. Pure 1231 B. 1245 C. 1250

A. Land B. Personal property and intangibles C. Depreciable real property

Which of the following donations will qualify as a deductible charitable contribution? A. Land donated to a public university B. Furniture given to a family whose home burned C. Volunteering at Habitat for Humanity for four hours D. Cash contributions to a political campaign

A. Land donated to a public university

Which of the following debt instruments is used to build roads, schools, and other government needs and generates interest to the bondholders that is exempt from federal taxation? A. Municipal bonds B. Qualified small business bonds C. U.S. savings bonds D. Capital bonds

A. Municipal bonds

Itemized deductions are first reported on: A. Schedule A. B. Form 2106. C. Form 1040. D. Schedule B.

A. Schedule A.

Which of the following statements is incorrect regarding the treatment of gains and losses? A. Short-term capital gains are generally taxed at preferential (lower) rates. B. Ordinary losses are fully deductible against ordinary income. C. The deductibility of capital losses is subject to certain restrictions. D. Gains on the sale of Section 1231 assets are eventually characterized as either capital or ordinary.

A. Short-term capital gains are generally taxed at preferential (lower) rates.

The maximum tax bases and percentages for 2018 for the two portions of the self-employment tax are which of the following? Social Security Medicare a.$128,400 Unlimited 12.4% 2.9%

Answer A

Carol and Daryl are married filing jointly and have a modified AGI of $118,000. They have $4,000 of qualified education expenses. What amount can they take for the Lifetime Learning Credit? A. $4,000 B. $640 C. $800 D. $2,400

B. $640 Rationale: ($4,000 x 20%) = $800. [($134,000 - $118,000)/$20,000] = 80% x $800 = $640.

For 2018, the AGI threshold for the deductibility of eligible personal casualty losses generally is: A. 7.5%. B. 10%. C. 2%. D. 5%.

B. 10%.

Student loan interest is reported on Form: A. 1098-SA. B. 1098-E. C. 1099-S. D. 1098-GA.

B. 1098-E.

Bruce is single and had itemized deductions of $10,000 on his 20X1 tax return. He included $2,000 of state taxes in his itemized deductions. In 20X2, he received a $200 refund of state taxes paid in 20X1. How much of the refund (if any) should Bruce include in his taxable income for the current year (20X2)? A. $10,000 B. $200 C. None D. $6,050 E. $2,000

B. $200 Rationale: The taxable amount is the lesser of (a) the amount received [$200], (b) the amount deducted on Schedule A [$10,000], or (c) the amount by which the itemized deduction exceeded the standard deduction [$10,000 - $3,950 20X1 standard deduction amount = $6,300].

ABC Company has state wages of $160,000 subject to FUTA and SUTA. ABC made timely deposits to its state fund. How much FUTA will ABC Company owe per employee? A. $960 B. $42 C. $9,600 D. $8,640

B. $42

Under MACRS, 5-year property includes: A. Warehouse. B. Apartment complex. C. Automobiles and light trucks used in a trade or business. D. Fruit-bearing trees.

C. Automobiles and light trucks used in a trade or business.

Which of the choices below is not one of the tests that must be met to qualify as a qualifying relative? A. Support B. Relationship C. Age D. Gross income

C. Age

Deductible expenses for a service member's moving do not include: A. The cost of transporting household goods. B. Hotel costs while moving to the new location. C. Meals incurred during the move. D. Storage of household goods for a limited time upon arrival at the new location.

C. Meals incurred during the move.

When depreciating real property under MACRS, which of the following conventions is used? A. Mid-quarter B. Mid-year C. Mid-month D. Half-year

C. Mid-month

Beth pays $500 of real estate taxes during the year related to her personal residence. Where will she report this cost, if anywhere, on her tax return? A. Real Estate Taxes are not deductible. B. Schedule C C. Schedule A D. Schedule E

C. Schedule A

Which of the following items does not constitute support when determining who provided the support for a child of the taxpayer who is a full-time student? A. Recreational activities and camps B. Allowances and gifts C. Scholarships D. Food and clothing

C. Scholarships

Tim's Taxi Service sold one of its automobiles for $9,000. The cab had an original cost of $23,000 with $16,000 in accumulated depreciation. Assuming that this is the only asset sold during the year, what is the recognized gain or loss and character of the gain or loss on this sale? A. $16,000 - Sec. 1231 gain B. $9,000 - ordinary income C. $14,000 - ordinary loss D. $2,000 - ordinary income

D. $2,000 - ordinary income

Which of the choices below is not one of the tests that must be met to qualify as a qualifying relative? A. Gross income B. Support C. Relationship D. Age

D. Age

Which of the following is not a criteria for meeting the eligibility requirements for the earned income credit for an individual with no children? A. Under age 65 B. Lived in the U.S. for at least half the year C. Over age 24 D. Can be claimed as a dependent for another taxpayer

D. Can be claimed as a dependent for another taxpayer

Which of the following assets has a 5-year recovery period for MACRS depreciation? A. Buildings B. Machinery C. Office furniture and fixtures D. Light general-purpose trucks

D. Light general-purpose trucks

A corporation can pay only cash dividends to its shareholders. True or False?

False

Administrative and judicial tax authorities are interpretations of which statutory authority?

Internal Revenue Code

Mary Beth is considering accepting some additional contract work. She is trying to evaluate whether the compensation for the job is worth the effort. Which tax rate should she use to calculate her after-tax proceeds of accepting the job?

Marginal Tax Rate

Tax-advantaged retirement savings opportunities available to self-employment individuals include _____ IRAs, _____ IRAs, and _____ Plans.

SEP traditional SIMPLE

Which of the following sentences describes the average tax rate?

The average level of taxation on each dollar of the taxpayer's taxable income.

Which of the following primary authorities is not a legislative source of authority?

Treasury Regulations

True or false: Supplemental wages are subject to social security and Medicare tax, but not FUTA taxes.

false

Earnings on investments in plans such as Section 529 plans, Coverdell savings accounts, and U.S. Series EE bonds are excluded from taxation if the proceeds are used for qualifying _____ expenses.

education

Contributions to an HSA made by a qualified individual are a _____ AGI deduction, assuming that the limitations are met.

for

Interest on _____ bonds is excluded from federal income taxation.

municipal, local, city, or state

In general, life insurance proceeds are _____ (taxable/nontaxable) to the beneficiary of the policy.

nontaxable

The process of becoming legally entitled to retirement benefits is known as _____.

vesting

During 2018, businesses may elect to immediately expense up to $_____ of tangible _____ property placed in service that year under Section 179. For any assets that are completely or partially expensed, the company must reduce the _____ of the asset before computing MACRS depreciation expense.

$1,000,000 personal basis

John and Holly employed a household worker for the entire year. They paid the household worker $600 per month in cash. How much do they owe in total taxes for the Part I calculation for social security and Medicare tax?

$1,101.60

Tim and Sandy have a ten-year-old daughter. During the current year, they spent $2,000 on childcare expenses at a daycare center and paid $1,500 in childcare expenses to Sandy's sister. Their child and dependent care credit will be calculated based on a maximum limit of $_____ in childcare expenses.

$3,000

Allie's only source of income for the year is wages from a part-time job of $9,000. She is not married and has one dependent child. Allie has no tax liability and she had no income tax withheld by her employer. After applying the earned income credit, Allie's refund will be _____.

$3,060

Rachelle owns a warehouse that she purchased in September, 1998. The purchase price was $400,000. During May of 2017, Rachelle sold the warehouse. She will be able to deduct $_____ for depreciation on the warehouse 2017.

$3,846

Bruce is married filing jointly and earns $950 per week. Bruce claimed five allowances. The federal income tax that should be withheld from Bruce's paycheck using the wage bracket method is _____.

$32

Bruce is married filing jointly and earns $845 per week. Bruce claimed three allowances. The federal income tax that should be withheld from Bruce's paycheck using the wage bracket method is _____.

$38

Steve's only source of income for the year is a salary of $24,000. He is not married and has one dependent child who is eligible for the child tax credit. Steve's tax liability is $570 before any credits or prepayments are applied. He had $500 withheld from his salary. After applying the earned income credit, Steve's refund is _____.

$4,034

ABC Company has one employee who was paid $60,000 during the current year. Assume that ABC pays state unemployment taxes and is entitled to the maximum credit of 5.4% subject to a federal unemployment tax rate of 0.6%. How much FUTA will ABC Company owe?

$42

Nancy donated an antique desk to her church. Nancy paid $800 for the desk six years ago. An appraisal of the desk reported the fair market value to be $1,000. The church officers decided to donate the desk to a family whose home had been destroyed in a fire. Nancy will be able to deduct $_____ for her contribution.

$800

Rex's Wrecks purchased $1,650,000 in new equipment (7 year property) during the current year. Rex wants to use Section 179 to expense the maximum amount of the purchase. If Rex maximizes 179 and bonus amounts, Rex can expense $_____ under Sec. 179, $_____ in bonus depreciation, and $_____ in regular MACRS depreciation (rounded to the nearest dollar).

1,000,000 650,000 0

A taxpayer is not required to report rental income or deduct rental expenses on a residence that is only rented for less than _____ days, as long as the taxpayer lives in the home for more than _____ days.

15 14

The mid-quarter convention is used for all assets purchased during the year when more than _____ % of the tangible _____ property purchased is placed in service during the fourth quarter of the year.

40% personal

When a taxpayer's charitable contributions exceed the AGI ceiling limitation for the year, the excess contributions can be carried forward for _____ years.

5

For the year ended December 31, 2018, Terrance, a single professional, reported the following: Net investment income from interest, $14,000 Other expenses unrelated to the generation of interest, $6,000 Investment interest expense on funds borrowed in 2017 to purchase stocks and bonds, $15,000 What is the maximum amount that Terrance can deduct in 2018 as investment interest expense? A. $6,000. B. $15,000. C. $14,000. D. $8,000.

6,000 + 15,000 = 21,000 30% of 14,000 = 4,200

The highest percentage of Social Security benefits that may be taxed is _____, and only for moderate to high income taxpayers.

85

A _____ tax structure applies the same tax rate to all levels of income, while a _____ tax structure applies higher tax rates as the tax base increases and a _____ tax structure applies lower tax rates as the tax base increases.

A proportional tax structure applies the same tax rate to all levels of income, while a progressive tax structure applies higher tax rates as the tax base increases and a regressive tax structure applies lower tax rates as the tax base increases.

At the beginning of June 2018, Julia left her husband and is currently living in an apartment. The couple has no children. At the end of the current year, no formal proceedings have occurred in relation to the separation or potential divorce. Julia has been making a $2,000 a month maintenance payment since moving out. How much can Julia deduct in total as alimony for 2018? A. $0. B. $2,000. C. $12,000. D. $24,000.

A. $0.

April had an adjusted gross income of $50,000 last year. During the year, a flood damaged her home in a federally declared disaster area. Since she didn't live in a flood plain, she did not have flood insurance on her home. She sustained damage to her house and furnishings in the amount of $8,500. In a separate event, she discovered that a pair of gold earrings were stolen when she was on a business trip. The earrings were valued at $600. What is the total amount of April's deductible loss after all limitations have been applied? A. $3,400 B. $9,100 C. $3,900 D. $8,500 E. $3,500

A. $3,400 Rationale: Deduct 10% of AGI. 8,500 - (10% of 50,000) - ($100 for event) = 8,500 - 5,000 - 100 = 3,400

On November 30, 2018, Constance purchased an apartment building for $750,000 (assume this is the Depreciable Cost excluding any Land valuation). Determine her cost recovery deduction for 2018 rounded to the nearest dollar. A. $3,413. B. $26,138. C. $2,400. D. $0.

A. $3,413. Mid-Month Convention 27.5-Year Asset, Year 1 = 0.455% $750,000 x 0.455% = $3,412.50

Cole purchased a car for business and personal use. In 2018, he used the car 60% for business (13,000 total use miles) and used the standard mileage rate to calculate his vehicle expenses. He also paid $1,500 in interest and $360 in county property tax on the car. What is the total business deduction related to business use of the car rounded to the nearest dollar? A. $5,367. B. $1,860. C. $4,251. D. $6,111.

A. $5,367. Explanation: Standard mileage rate is $0.545 per mile. $13,000 x 60% = 7,800 miles x $0.545 = $4,251 $1,500 + $360 = $1,860 x 60% = $1,116 $4,251 + $1,116 = $5,367

What is the maximum deductible contribution to an IRA in the current year for a taxpayer under the age of 50? A. $6,000 B. $7,000 C. $15,000 D. 15% of the taxpayer's earned income

A. $6,000

Kyle invested in a Roth 401(k) seven years ago when he was 39 years old. He terminated employment with his company this year and received a lump-sum distribution of his Roth 401(k). Kyle's contributions to the Roth account total $32,000 and accumulated earnings on the account total $18,000. He has decided NOT to roll over the funds into another retirement account. How much tax and penalty will Kyle owe on the distribution if he has a 25% marginal tax rate. A. $6,300 B. $9,500 C. $0 D. $17,500

A. $6,300

Annie is self-employed and has $58,000 in income from her business. She also has investments that generated dividends of $3,000 and interest of $2,500. What is Annie's self-employment tax for the year? A. $8,195. B. $8,619. C. $8,874. D. $8,972.

A. $8,195. Explanation $58,000 × 92.35% × 15.3% = $8,195

Dean is single and has AGI of $50,000. He redeems $5,000 (principal of $3,500 and interest of $1,500) of Series I savings bonds to pay qualified higher education expenses of $2,000. How much taxable income (if any) must Dean report? A. $900 B. $0 C. $1,500 D. $600

A. $900 Rationale: Since the amount redeemed is greater than the qualified education expenses, Dean must recognize a portion of the redeemed savings bond. $1,500 x ($2,000/$5,000) = $600 excluded. $1,500 - $600 = $900.

The threshold amount for the deductibility of allowable medical expenses in 2018 is: A. 7.5% of AGI. B. 10% of AGI. C. 10% of taxable income. D. 7.5% of taxable income.

A. 7.5% of AGI.

Taylor Partnership is a general partnership with 3 equal partners. In the current year, Taylor generated taxable business income of $3,000 and made $0 distributions to its partners. How will the $3,000 be taxed for Federal income tax purposes? A. No tax at the partnership level and all $3,000 taxed at the partner level. B. Tax all $3,000 at the partnership level and tax none at the partner level. C. Tax all $3,000 at the partnership level and the after-tax amount is taxed to the partners. D. No tax at the partnership level and no tax at the partner level since no distributions were made.

A. No tax at the partnership level and all $3,000 taxed at the partner level.

Section 179 expense is available for all of the following business assets except A. Office building. B. Office furniture. C. Computer. D. Delivery truck.

A. Office building.

Which of the following statements is incorrect regarding travel for medical reasons? A. The cost of meals is deductible if required to be away from home overnight. B. The cost of lodging for the taxpayer is deductible if away from home overnight (with restrictions). C. The cost of lodging for a caregiver is deductible if away from home overnight (with restrictions). D. Transportation costs, such as mileage or airfare, are deductible.

A. The cost of meals is deductible if required to be away from home overnight.

How does depreciation affect the basis of an asset? A. The original basis is reduced by the depreciation allowed or allowable on the asset. B. The original basis is increased by the depreciation expense recognized due to the asset. C. The original basis is increased by the depreciation allowed or allowable on the asset. D. The original basis is reduced by the depreciation expense deducted due to the asset.

A. The original basis is reduced by the depreciation allowed or allowable on the asset.

Certain contributions of capital gain property do not qualify for a fair market value deduction. Which of the following characteristics of the contribution will cause the asset to not qualify for a fair market value deduction? A. The tangible personal property donated is unrelated to the charity's operations. B. The asset is real property, such as land or a building. C. The asset was held for 367 days. D. The asset is intangible, such as stock or bonds.

A. The tangible personal property donated is unrelated to the charity's operations.

Which of the following statements is incorrect regarding municipal bonds? A. They do NOT pay periodic interest payments, but interest accumulates over the term of the bond. B. The proceeds from the issuance of these bonds is often used for building roads, schools and other state and local government projects. C. The interest on the bonds is exempt from federal income taxation. D. The rate of return on these bonds is typically lower than the rate of return on taxable bonds.

A. They do NOT pay periodic interest payments, but interest accumulates over the term of the bond.

Which of the following expenses qualify for the American Opportunity Credit? (Check all that apply.) A. Required fees B. Housing C. Tuition D. Textbooks E. Parking fees F. Meal plans

Answers: A, C, D

When can the married filing jointly or married filing separately filing status be used? A. When the taxpayers are unmarried, but have lived together for the entire year B. When the taxpayers are married as of the last day of the tax year C. When one spouse died during the year and the surviving spouse has not remarried D. When the taxpayers are unmarried, but have a dependent child living with them

Answers: B, C

Which of the following are necessary for the employer to know when determining the amount of tax to withhold under either the percentage method or the wage bracket method? (Check all that apply.) A. If the employee has another form of income (second job, investment income, etc.) B. Employee's marital status C. The number of exemptions claimed on the Form W-4 D. If the employee itemizes his/her deductions E. Pay period of the company (weekly, monthly, etc.)

Answers: B, C, E

John and Holly file a joint return. John is 68 and Holly is 64. They have an AGI of $15,000 and nontaxable social security benefits of $1,500. How much credit for the elderly or the disabled, if any, can John and Holly take? A. $375 B. $150 C. $1,000 D. $525

B. $150 Rationale: Base amount $5,000 Less: SS ($1,500) Less: 1/2 AGI over $10,000 ($2,500) = $1,000 x 15% = $150.

Dean earned $80,000 during the current year. Without regard to federal income taxes, how much will his employer withhold from his paycheck for social security taxes and Medicare taxes? A. $12,240 B. $6,120 C. $4,960 D. $6,840

B. $6,120

Which statement is true regarding short-term capital gains? A. If there are a net short-term gain and a net long-term gain, both gains are taxed at regular rates. B. A long-term loss offsets a short-term gain, and if a gain results, the gain is taxed at regular rates. C. A long-term loss offsets a short-term gain, and if a gain results, the gain is taxed at preferential rates. D. If there are a net short-term gain and a net long-term gain, both gains are taxed at preferential rates.

B. A long-term loss offsets a short-term gain, and if a gain results, the gain is taxed at regular rates. Explanation After netting capital gains and losses for long-term and short-term assets, a resulting short-term gain is taxed at regular rates.

Which one of the following individuals cannot meet the residence test for being a qualifying child of another taxpayer? A. Justin attends college in a different state than where his parents live. B. Amy lived with her parents until the end of April. She moved into an apartment on May 1. C. Cathy was injured in a car accident in February. She remained in the hospital until September. D. Steven graduated from college in May and moved back in with his parents for two months. He moved out on July 15.

B. Amy lived with her parents until the end of April. She moved into an apartment on May 1.

Why is the treatment of Section 1231 gains and losses for individual taxpayers more advantageous than the treatment of gains and losses from other assets? A. Because any losses that can NOT be deducted in the current year can be carried forward indefinitely B. Because the gains receive preferential tax rates, while the losses are fully deductible rather than restricted C. Because business assets with a short-term holding period can receive the same favorable tax treatment as assets with long-term holding periods D. Because the treatment allows losses on personal use assets to be fully deducted against all types of income

B. Because the gains receive preferential tax rates, while the losses are fully deductible rather than restricted

True or false: A taxpayer that has a Health Savings Account can also be enrolled in Medicare. A. True B. False

B. False

The adjusted basis of an asset is: A. The fair market value of the asset. B. The cost basis less any accumulated depreciation. C. The trade-in value of the asset. D. The cost of the asset.

B. The cost basis less any accumulated depreciation.

Which of the following terms does not describe a casualty that could be deductible for tax purposes? A. Sudden B. Weakened C. Unusual D. Unexpected

B. Weakened

In 2006, Duncan purchased 2,000 shares of stock for $50,000 in a midsize local company with gross assets of $15,000,000. In 2018, Duncan sold the stock for $68,000. How is the gain treated for tax purposes? A. $18,000 capital gain and taxed at preferential rates. B. $9,000 excluded from gross income under § 1202 and $9,000 taxed at regular rates. C. $9,000 excluded from gross income under § 1202 and $9,000 taxed at 28%. D. $13,500 excluded from gross income under § 1202 and $4,500 taxed at preferential rates.

C. $9,000 excluded from gross income under § 1202 and $9,000 taxed at 28%. Explanation: There are special rules that apply to Qualified Small Business Stock. In this problem, all the requirements have been met to qualify for this special tax treatment. The amount of exclusion is 50% because the stock was purchased in 2006. The 75% exclusion applies to stock purchased after February 17, 2009 and before September 27, 2010 and held for more than five years.

Rick withheld taxes from his employees' paychecks and deposited them on time, but did not use the electronic deposit system for his federal payroll tax deposits. What penalty, if any, is Rick subject to? A. 2% B. 15% C. 10% D. Rick is not subject to a penalty. E. 5%

C. 10%

Estimated tax payments are reported on what form? A. 1040 B. W-2C C. 1040ES D. W-2

C. 1040ES

An employer must withhold what percent of certain taxable payments if a payee fails to give an employer the correct TIN. A. 25% B. 15% C. 24%

C. 24%

Qualified distributions from Roth 401(k) accounts are those made after the account has been open for ______ taxable years and the employee is at least ______ years of age. A. 3; 59 1/2 B. 3; 65 C. 5; 59 1/2 D. 5; 65

C. 5; 59 1/2

Which of the following tax-advantaged accounts can be used to fund qualified educational expenses from kindergarten through 12th grade and higher education expenses such as tuition, books, fees, supplies, and reasonable room and board. A. Section 529 Plans B. Series EE U.S. Treasury Bonds C. Coverdell Educational Savings Account D. Corporate Bonds

C. Coverdell Educational Savings Account

What is the formula used by the IRS when allocating mortgage interest and property taxes for residences with significant rental activities? A. Expense x (365/total rental days) B. Expense x (total rental days/365) C. Expense x (total rental days/total days used) D. Expense x (total days used/total rental days)

C. Expense x (total rental days/total days used)

How many years can excess charitable contributions be carried over before expiring? A. One year B. Three years C. Five years D. Indefinitely

C. Five years

There is one tax infraction that incurs a penalty calculated as 15% of the amount of tax owed per month with a maximum penalty of 75%. What violation incurs this level of penalty? A. Underpayment penalty B. Late payment penalty C. Fraudulent failure to file D. Late filing penalty

C. Fraudulent failure to file

Which of the following is not a "trade or business" expense? A. Depreciation on business equipment. B. Cost of goods sold. C. Mortgage interest on a personal residence. D. Mortgage interest on a warehouse.

C. Mortgage interest on a personal residence.

Which of the following statements is incorrect regarding Treasury regulations? A. Proposed regulations do not carry the same authoritative weight as final regulations. B. Final regulations represent the Treasury's interpretation of the Code. C. Temporary regulations carry less authoritative weight than final regulations. D. Proposed regulations allow public comment on them.

C. Temporary regulations carry less authoritative weight than final regulations.

What are the tax and penalty effects of nonqualified distributions of Roth 401(k) accounts? A. The entire distribution is fully taxable and subject to the 10% penalty. B. The entire distribution is nontaxable, but it is subject to the 10% penalty. C. The account earnings are fully taxable and subject to the 10% penalty, but the account contributions are nontaxable. D. The entire distribution is subject to the 10% penalty, but only the account earnings are fully taxable.

C. The account earnings are fully taxable and subject to the 10% penalty, but the account contributions are nontaxable.

Which of the following statements is incorrect regarding IRAs? A. The amount of the deductible contribution is higher for taxpayers age 50 or older. B. IRAs are individually managed retirement plans. C. The contribution to a traditional IRA is a from AGI deduction. D. IRAs have similar tax advantages to employer provided defined contribution plans.

C. The contribution to a traditional IRA is a from AGI deduction.

Which of the following statements is incorrect regarding travel for medical reasons? A. Transportation costs, such as mileage or airfare, are deductible. B. The cost of lodging for the taxpayer is deductible if away from home overnight (with restrictions). C. The cost of meals is deductible if required to be away from home overnight. D. The cost of lodging for a caregiver is deductible if away from home overnight (with restrictions).

C. The cost of meals is deductible if required to be away from home overnight.

Which of the following statements is false with respect to the standard mileage rate? A. The standard mileage rate encompasses depreciation. B. The taxpayer can have an unlimited number of autos and use the mileage rate. C. The standard mileage rate cannot be used on a taxi. D. Section 179 cannot be used on a standard mileage rate auto.

C. The standard mileage rate cannot be used on a taxi.

Employer payments to the federal government consisting of income, social security, and Medicare taxes withheld from employee paychecks are called A. EFTPS. B. FICA taxes. C. payroll tax deposits.

C. payroll tax deposits.

Mandy inherited stock upon the death of her uncle. Mandy's uncle had only owned the stock for 6 months before he died. He had a basis of $6,000 in the stock. At the date of death, the stock was valued at $6,800. Mandy sold the property three months after receiving it from the estate. What is the amount of Mandy's basis in the stock and her holding period? A. Basis = $6,000; Long-term holding period B. Basis = $6,000; Short-term holding period C. Basis = $6,800; Short-term holding period D. Basis = $6,800; Long-term holding period

D. Basis = $6,800; Long-term holding period

Rental income is reported on which schedule? A. Schedule D B. Schedule A C. Schedule C D. Schedule B E. Schedule E

E. Schedule E

True or false: In general, prizes awarded to taxpayers are excluded from gross income.

False

True or false: In order to calculate MACRS depreciation, the business needs to know the asset's original cost, the depreciation period, and which depreciation method (i.e. 200% declining balance) is used. No other information is required.

False Rationale: The business also needs to know the applicable depreciation convention (e.g. half-year or mid-quarter) to be used.

Proportional Tax Rate Structure

Imposes a constant tax rate across the tax base.

Regressive Tax Rate Structure

Imposes a decreasing marginal tax rate as the tax base increases.

Name a type of income item that is listed on line 21 of Schedule 1. ____

Jury Duty, Gambling Winnings

Which type of tax authority is the Internal Revenue Code of 1986?

Legislative

Match the type of real property with the MACRS recovery period for that type of property.

Nondepreciable - Land 39 yrs. - Nonresidential property placed in service after May 13, 1993 27.5 yrs. - Residential rental property 31.5 yrs. - Nonresidential property placed in service after Dec. 31, 1986 and before May 13, 1993

What are private letter rulings?

Private letter rulings are less authoritative and more specific than revenue rulings and regulations.

Tax-advantaged retirement savings plans, such as _____ IRAs and _____ Keogh Plans, provide small business owners a way to save for retirement with plans that provide _____ contribution limits than other individually managed plans.

SEP individual larger

Which type of tax authority is the Internal Revenue Code of 1986?

Statutory/ Legislative

The federal income tax system is an example of what tax structure?

The federal income tax system is an example of a progressive tax structure.

Social security is an example of what type of tax structure?

The social security tax is an example of a regressive tax structure because individuals do NOT incur this tax on earnings in excess of $128,400 (for 2018).

The _____ _____ credit is available for students enrolled in a qualified postsecondary educational institution during the first four years of their education.

american opportunity

A(n) _____ _____ _____ penalty will be assessed on a taxpayer who pays her taxes due after the due date of the return.

failure to pay

Concerning charitable contributions, when donating ordinary income property, taxpayers can only deduct the lesser of (1) the property's _____ _____ value or (2) the property's _____ _____.

fair market, adjusted basis

True or false: Activities classified as hobbies can generate tax deductible losses that can be used against other types of income.

false

True or false: Employers do not have to withhold taxes on employee tips.

false

True or false: Self-employed taxpayers pay the employee portion of the FICA tax burden through self-employment taxes, but they are exempt from paying the employer portion.

false

Taxpayers traveling for the primary purpose of receiving essential and deductible medical care may deduct some or all of the costs of _____ and _____.

logding and transportation

The only types of personal interest still available as a deduction are _____ interest and _____ interest.

mortgage, investment

Self-employed persons pay FICA taxes on the _____ earnings from their business while employees pay FICA taxes on _____.

net wages

Assets that are created or used in a taxpayer's trade or business or that have been in service for one year or less are referred to as _____ (ordinary/ capital) assets.

ordinary

Assets that are created or used in a taxpayer's trade or business or that have been in service for one year or less are referred to as _____ (ordinary/capital) assets.

ordinary

Both traditional IRA distributions and traditional 401(k) distributions are taxed as _____ _____.

ordinary income

In order for employers to determine the amount of tax to withhold, they will use either a(n) _____ method or a(n) _____ _____ method with a withholding table. (Enter one word per space.)

percentage wage bracket

_____ _____ property is any property that is used for personal purposes, rather than for use in a trade, business, or income-producing venture. Machinery, furniture, and any other tangible property other than buildings and land is designated as _____ property. The term that includes buildings and land is _____ property.

personal use personal real

Contributions to a traditional 401(k) are made with _____-tax dollars, while contributions to a Roth 401(k) are made with _____-tax dollars. Qualified distributions from a Roth 401(k) are fully _____ (taxable/nontaxable).

pre after nontaxable

A tax _____ includes income taxes withheld from a taxpayer's salary by an employer, estimated tax payments paid directly to the IRS, and amounts from a prior year overpayment that were applied to the current year's tax liability.

prepayment

The objective of business activities is to make a(n) _____. When a taxpayer's activity is pursued for personal pleasure, that activity is treated as a(n) _____ when revenues and expenses are incurred.

profit hobby

Regarding portfolio investments, _____ dividends generally are taxed at capital gains rates and _____ dividends are taxed at ordinary rates.

qualified, non-qualified

In order to qualify for the child tax credit, the child must meet the same requirements as the requirements for a(n) _____ _____ and be under age _____ at the end of the year.

qualifying child, 17

Depreciation _____ changes the character of the gain on the sale of a Section 1231 asset from a Section 1231 gain into ordinary income.

recapture

Under the cash method, taxpayers recognize income in the period they _____ it, rather than when they actually _____ it.

received, earned

The amount of Section 1245 depreciation recapture that will be taxed as ordinary income is the lesser of (1) the _____ gain on the sale or (2) total _____ _____ on the asset.

recognized accumulated depreciation

Unmarried taxpayers will file as _____ if they do not qualify for head of household or qualifying widow(er) status.

single

In order to meet the _____ test, the taxpayer must pay more than half of the living expenses for the qualifying relative.

support

Taxpayers may be subject to a(n) _____ _____ if they have taxes due and have not met the safe harbor provisions.

tax penalty

Gary, age 47, incurred $4,200 in qualified medical expenses last year. His AGI was $50,000. Gary will be able to deduct $_____ as an itemized deduction for medical expenses.

$450

Dean earned $180,000 during the current year. Without regard to federal income taxes, how much will his employer withhold from his paycheck for social security taxes and Medicare taxes?

$10,571

Randy had an adjusted gross income of $70,000 in the current year. His car was destroyed in a hurricane that was in a Federally Declared Disaster Area during the year. His basis in the car was $25,000, but its fair market value prior to the accident was only $18,000. The car was a total loss. He did not have collision coverage, so he did not receive any insurance reimbursement for the accident. Randy's deductible tax loss for the casualty after all applicable floor limitations is $_____.

$10,900

The total loss from each separate casualty from Federally Declared Disaster Areas during the year is reduced by a $_____ floor and the combined losses from all casualties for the year is reduced by _____% of AGI.

$100, 10%

Bruce is single and earns $3,000 per month. Bruce claimed two allowances. The federal income tax should be withheld from Bruce's paycheck using the percentage method is _____.

$221.8

Linda and Mason file a joint return. Their AGI before social security was $22,000, social security benefits received were $9,000, and tax exempt interest was $1,250. What is the amount of their provisional income?

$27,750 ($22,000 + $4,500 + $1,250)

Sandy earned a salary of $50,000 last year. Her parents gave her a car valued at $23,000 for her birthday. In addition, she earned $1,200 in interest income on a savings account and inherited $75,000 from her grandmother's estate. What is the amount of Sandy's gross income?

$51,200

Bruce is single and earns $750 per week. Bruce claimed two allowances. Bruce will have _____ of federal income tax withheld from his paycheck using the percentage method.

$58.11

The maximum contribution that a taxpayer under age 50 at year end can make into a Roth IRA is $_____ which is _____ (equal to/higher than/lower than) the allowable contribution for a traditional IRA.

$6,000 equal to

Sam is single and earns $845 per week. Sam claimed two allowances. The federal income tax should be withheld from Sam's paycheck using the wage bracket method is _____.

$70

Barbara's Bakery purchased appliances (7 year property). In year 4, she sold those appliances. Her original cost in the appliances was $40,000 and she did NOT use bonus depreciation in the year she purchased them. She has been using the mid-quarter convention when calculating the depreciation, and they were purchased in the fourth quarter of that year. If Barbara sold the furnishings in March of the year 4, she will be able to deduct $_____ of depreciation this year. (Use the MACRS tables at the end of the chapter to assist with this problem.)

$703

Angie's Cupcake Shop replaced the tables and chairs in the shop. The old furniture was 7-year property and was in its third year of depreciation when it was sold in May. The original cost of the furniture was $8,200. Angie will be able to deduct $_____ in depreciation during the year of sale.

$717.09 Explanation: 7 year depreciation in the third year is 17.49% Since we are using the half year convention (may) it is 8,200x 17.49% = 1,434.18/2 = $717.09

Homeowners may deduct interest on up to _____ of acquisition indebtedness on up to two personal residences.

$750,000

Owen is considering giving a large charitable contribution to an organization in the current year. Owen's adjusted gross income for the year will be $150,000. He wants to contribute $80,000 in either cash or property. If he contributes cash to a public charity, he can deduct $_____ this year. If he contributes capital gain property that is worth $80,000 to a public charity, he can deduct $_____. Or, if he contributes the capital gain property to a private nonoperating foundation, he can deduct $_____ this year.

$90,000 $45,000 $30,000

Taxpayers can claim an adoption credit of _____% of qualified adoption expenses paid up to a maximum dollar amount of $_____, per eligible child adopted.

100% $13,810

For the current year, taxpayers can elect to immediately expense _____% of qualified property as bonus depreciation. The bonus depreciation is calculated (before/after) _____ the Section 179 expense and (before/after) _____ regular MACRS depreciation.

100% after before

Arlene is single and has taxable income of $34,000. Her tax liability is currently $3,890. She has the opportunity to earn an additional $5,000 this year. Her tax liability will grow to $4,520 if she receives the additional income. What is Arlene's marginal tax rate?

12.6% Rationale: Change in tax/change in taxable income: (4520-3890)/5000 = .126 or 12.6%

Land used in a trade or business is categorized as a pure Section _____ asset. Personal property used in a trade or business is categorized as a Section _____ asset and depreciable real property used in a trade or business is categorized as a Section _____ asset.

1231 1245 1250

A taxpayer is required to report rental income and deduct rental expenses on a residence that is rented for _____ days or more as long as the taxpayer lives in the home for the more than _____ days or _____% of the days rented. Rental losses _____ (can/cannot) be deducted against ordinary income.

15 14 10% cannot

Steven and Sally have income from all sources (taxable and nontaxable) totaling $139,286. Their taxable income is $114,706. Their tax liability is $17,114. Their average tax rate is _______.

15% Rationale: 17,114/ 114,706 = 0.149 = 15%

During the year, Greta's mountain cabin was almost completely destroyed by a fire started in the kitchen. She had adjusted gross income of $110,000 in 2018 and related data with respect to the cabin follows: Cost basis: $121,000 Value before casualty: $155,000 Value after casualty:$15,000 Greta was partially insured for the loss and in 2018 she received a $100,000 insurance settlement. What is Greta's allowable casualty loss deduction for 2018? A. $0. B. $20,000. C. $35,900. D. $9,900.

155,000 - 15,000 = 140,000 - 100,000 = 40,000 Allowed casualty loss deduction = 10% of AGI 110,000 x 10% = 11,000 40,000 - 100 - 11,000 =

Carly's Classic Limo Service sold one of its automobiles for $19,000. The car was an antique car that Carly used to promote the business. The car had an original cost of $13,000 with $11,000 in accumulated depreciation. The recognized gain on the sale was $_____ . Carly will recognize ordinary income due to depreciation recapture of $_____ and Section 1231 gain of $_____.

17,000 = (19,000 - (13,000-11,000)) 11,000 6,000 = (19,000-13,000)

Under Code Section _____, businesses may elect to immediately expense up to $_____ of tangible personal property placed in service during the current year.

179 $1,000,000

The lifetime learning credit is equal to _____% of eligible expenses up to an annual maximum of _____ of eligible expenses in one year.

20%, $10,000

Frick and Frack are equal partners in F&F Industries. The company generated net income of $60,000 during the year and distributed $7,000 cash to both Frick and Frack. How much income should Frack report on his individual income tax return due to the partnership interest?

30,000

The late filing penalty equals _____% of the amount of tax owed for each month that the tax return is late, with a maximum penalty of _____%.

5%, 25%

In order to avoid paying a penalty on the conversion of a traditional IRA to a Roth IRA, the rollover must be completed within _____ days.

60

Cash and property donations to public charities are limited to _____% of a taxpayer's AGI beginning in 2018. Donations of capital gain property to public charities are generally limited to _____% of a taxpayer's AGI. And, donations of capital gain property to private nonoperating foundations are limited to _____% of AGI.

60 30 20

Taxpayers are allowed to rollover funds from a traditional IRA to a Roth IRA without paying a penalty if the rollover is completed within _____ days from the withdrawal from the traditional IRA. The amount of the rollover is subject to a _____% mandatory withholding, and it is taxed as _____ income.

60 days 20% ordinary

Sales tax is an example of what tax rate structure?

A sales tax is an example of a tax that uses a proportional tax rate structure when compared to its tax base.

On July 15, 2016, Travis purchased some office furniture for $20,000 to be used in his business. He did not elect to expense the equipment under §179 or bonus. On December 15, 2018, he sells the equipment. What is his cost recovery deduction for 2018? A. $1,749. B. $2,858. C. $0. D. $3,498.

A. $1,749. Half-Year Convention 7-Year Asset (Furniture), Year 3 = 17.49% 20,000 x 17.49% = 3,498 / 2 = 1,749

In 2018, Maria who is 66, had adjusted gross income of $27,000, paid the following medical expenses: Prescription medicines $275 Dentist and doctor expenses $1,350 Health insurance premiums $400 Two pair of eyeglasses $185 What amount can Maria deduct as medical expenses (after the adjusted gross income limitation) in calculating her itemized deductions for 2018? A. $2,025. B. $0. C. $2,710. D. $185.

A. $2,025 Explanation: Medical dues limit is 7.5% of AGI. 275+1350+400+185 = 2,210 27,000 x 7.5% = 2,025

Bruce is enrolled at a qualified postsecondary educational institution. He paid $3,000 in qualified expenses during the year. What is the amount of his American Opportunity Credit? A. $2,250 B. $750 C. $3,000 D. $2,500

A. $2,250 Rationale: He is limited to 100 percent of the first $2,000 and 25 percent of the next $2,000.

In 2018 Ann received 1,000 shares of stock as a gift from her husband, Tim, who purchased them in 2009. At the time of the gift, the FMV of the stock was $29,300 and Tim's basis was $31,000. If Ann sells the stock for $26,834 in 2018, what is the nature and amount of the loss from the sale? A. $2,466 short-term loss. B. $1,700 long-term loss. C. $4,166 long-term loss. D. $2,466 short-term loss and $1,700 long-term loss.

A. $2,466 short-term loss. Explanation If the FMV at the time of the gift was less than basis and the stock was sold for less than the FMV, Ann uses the FMV of the stock. The holding period (see Table 7-3) when there is a loss starts the day after the date of the gift. In this case, the loss is short-term.

Denis and Debbie are married and file jointly. They have two children that qualify for the child tax credit. Their AGI for the current year is $422,000. What is the amount of their child tax credit? A. $2,900 B. $4,000 C. 0 D. $2,800

A. $2,900

John and Holly employed a household worker for the entire year. They paid the household worker $1,600 per month in cash. How much do they owe in total taxes for the Part I calculation for social security and Medicare tax? A. $2,937.60 B. $244.80 C. $1,468.80 D. John and Holly are not required to report.

A. $2,937.60

Sam traded a parcel of land for a tractor and a car. He had purchased the land five years earlier for $16,000. The market value of the car and tractor is $20,000. What is the amount of gross income resulting from this transaction? A. $4,000 B. $0 C. $16,000 D. $20,000

A. $4,000 Rationale: The gross income is the fair market value received ($20,000) less the basis in the property given ($16,000) which equals $4,000.

Shanika lives in Oregon which imposes a state tax on income. For 2018, Shanika had the following transactions related to her state income taxes: State taxes withheld in 2018 $3,500 State refund received in 2018 of 2017 tax $600 Additional assessment paid in 2018 of 2016 tax $750 Shanika plans to itemize on her 2018 return. What amount of state and local taxes should Shanika deduct in calculating itemized deductions for her 2018 federal income tax return? A. $4,250. B. $3,500. C. $750. D. $4,850.

A. $4,250. Explanation: 3,500+750 = 4,250

Francisco, a single taxpayer, has income from his W-2 of $93,250. He also has a short-term capital loss of $7,311, a short-term capital gain of $2,100, and a long-term capital gain of $4,680. What is Francisco's AGI for 2018? A. $92,719. B. $93,250. C. $95,350. D. $100,030.

A. $92,719. Explanation The short-term capital loss of $7,311 and short-term capital gain of $2,100 are netted together to result in a net short-term capital loss of $5,211. This net short-term capital loss can be used to completely offset the long-term capital gain of $4,680, leaving a $531 short-term capital loss. AGI is $92,719 (wages of $93,250 less short-term capital loss of $531).

Which of the following statements is true regarding the individual income tax formula? A. A taxpayer may deduct the greater of his standard deduction or his itemized deductions from AGI to arrive at taxable income. B. A taxpayer may deduct the greater of his standard deduction or his itemized deductions for AGI to arrive at adjusted gross income. C. A taxpayer may deduct the greater of his standard deduction or his personal exemption from AGI to arrive at taxable income. D. A taxpayer may deduct the greater of his standard deduction or his personal exemption for AGI to arrive at adjusted gross income.

A. A taxpayer may deduct the greater of his standard deduction or his itemized deductions from AGI to arrive at taxable income.

Nicole inherited several acres of land upon the death of her grandmother. Nicole's grandmother had owned the land for 20 years and had a basis in the property of $8,000. At the date of death, the land was valued at $38,000. Nicole sold the property eight months after receiving it from the estate. What is the amount of Nicole's basis in the land and her holding period? A. Basis = $38,000; Long-term holding period B. Basis = $8,000; Long-term holding period C. Basis = $8,000; Short-term holding period D. Basis = $38,000; Short-term holding period

A. Basis = $38,000; Long-term holding period

Penalties for the early withdrawal of savings are reported by the financial institution on: A. Box 2 of Form 1099-INT. B. Form EWIP. C. A letter of notification. D. None of the choices are correct.

A. Box 2 of Form 1099-INT.

Which of the following is not a flow-through entity? A. C corporation B. General partnership C. S corporation D. Limited liability company

A. C corporation

A. Purchased property B. Inherited property C. Gifted property with FMV less than donor's basis D. Gifted property with FMV greater than donor's basis matches

A. Cost basis B. Fair market value C. Donor's basis for gains & FMV for losses D. Donor's basis

Certain types of investments may be tax-advantaged when used to help fund higher education. The growth in value and earnings from the investment are nontaxable if the proceeds are used to pay for qualifying educational expenditures. Which of the following types of investments qualify for this treatment? A. Coverdell savings accounts B. U.S. Series EE bonds C. Municipal bonds D. Roth IRA plans E. Section 529 plans

A. Coverdell savings accounts B. U.S. Series EE bonds E. Section 529 plans

A. Capital improvement B. Repair and maintenance

A. Depreciate over appropriate depreciable life B. Deduct immediately from gross income

Which of the following statements is correct regarding the choice of a taxpayer's filing status? A. Filing status depends on marital status and whether the taxpayer has dependents. B. Filing status depends on the age of the taxpayer. C. Filing status depends on the race and gender of the taxpayer. D. Filing status depends on the level of income generated by the taxpayer.

A. Filing status depends on marital status and whether the taxpayer has dependents.

Which form is used to report amounts withheld for income, social security, and Medicare taxes for the quarter? A. Form 941 B. Form 941-X C. Form 944 D. Form 941-V

A. Form 941

Which of the following is considered an other itemized deductions is subject to a built in limitation for deductibility? A. Gambling losses. B. Unreimbursed employee expenses. C. Investment expenses. D. Tax preparation fees.

A. Gambling losses.

Which of the following types of cash receipts is not taxable to the recipient? A. Gift from a friend B. Gambling winnings C. Lottery winnings D. Raffle prizes

A. Gift from a friend

Which of the following describes the difference between business activities and hobbies? A. Hobbies are not primarily profit-motivated. B. Business activities do not have net losses. C. Business activities require a full-time work schedule. D. Hobbies do not generate revenue.

A. Hobbies are not primarily profit-motivated.

Which of the following statements is false regarding the recognition of income? A. Income is realized when a taxpayer sells an asset for $50 that she had purchased earlier for $50. B. Income is realized when a taxpayer receives a refund of an amount that was deducted in a prior period. C. Income may be in the form of cash, property, or services received in a transaction. D. Income is NOT realized for the return of the capital received in a sales transaction.

A. Income is realized when a taxpayer sells an asset for $50 that she had purchased earlier for $50.

Employers are required to send the Social Security Administration a copy of employees W-2s no later than A. January 31. B. January 15. C. February 28 (February 29 on leap years). D. December 31.

A. January 31.

Melina's daughter, Linda, is considered permanently and totally disabled. Linda is 30 years old and still lives with Melina. Which of the following statements is accurate regarding the age test for a qualifying child as it applies to Linda? A. Linda is deemed to meet the age test because she is permanently and totally disabled. B. Linda does NOT meet the age test because she is not a full-time student. C. Linda does NOT meet the age test because she is not under the age of 19.

A. Linda is deemed to meet the age test because she is permanently and totally disabled.

Chris runs a business out of her home. She uses 500 square feet of her home exclusively for the business. Her home is 2500 square feet in total. Chris had $36,000 of business revenue and $32,000 of business expenses from her home business. The following expenses relate to her home: Mortgage interest $12,400 Real estate taxes $1,800 Repairs $3,200 Utilities $2,600 Insurance $650 Depreciation (on business use portion of home) $1,750 What is Chris' net income from her business and the amount of expenses carried over to the following year, if any? Net Income Carry over a. $0 $1,880 b. $0 $0 c. $4,000 $4,130 d. $36,000 $0 A. Option A B. Option B C. Option C D. Option D

A. Option A $0 Net Income, $1,880 Carry Over

Which one of the following choices does not represent an economic benefit to the taxpayer? A. Proceeds from a loan B. Income from investments C. Proceeds from property sales D. Income from services

A. Proceeds from a loan

Which of the following tests states that the qualifying child must not have provided more than half his or her own living expenses for the year? A. Support B. Residence C. Relationship D. Gross income

A. Support

A. Ordinary Gain B. Ordinary Loss C. Capital Gain D. Capital Loss

A. Taxed at regular, marginal rates B. Fully deductible against all types of income C. May be taxed at favorable (less than marginal) rates D. Deductibility is subject to certain restrictions against certain types of income

How can taxpayers protect themselves from incurring an underpayment penalty? A. Taxpayers should meet one of the safe harbor provisions for estimated tax payment requirements. B. As long as the tax return is filed and taxes are paid by the due date, there is no underpayment penalty. C. When income is unpredictable, the tax return should be filed by the end of the year. D. The taxpayer should file an extension if they can NOT pay the taxes that are due.

A. Taxpayers should meet one of the safe harbor provisions for estimated tax payment requirements.

Andrews, Badin, and Carr formed a partnership, ABC. During Year 2, the partnership sold some land that was held for investment and generated a long-term capital gain. How will this income be reported on the partners' individual tax returns? A. The income will retain its character and be reported as a long-term capital gain. B. The income will be combined with the profit generated by the partnership and flow through to the partners as ordinary income. C. The partnership will pay the tax due on the long-term capital gain rather than allocate it to the partners. D. The income will be reported on the partners' individual tax returns only if they receive the proceeds from the sale.

A. The income will retain its character and be reported as a long-term capital gain.

When a taxpayer rents his residence to unrelated parties for 14 or fewer days, and the taxpayer lives in the residence for at least 15 days, how is the rental activity treated? A. The owner does NOT include the rental income and is not allowed to deduct any expenses related to the rental. B. The owner includes the rental income and deducts the rental expenses to the extent of the rental income. Losses are disallowed for tax purposes. C. The owner includes the rental income and deducts the rental expenses. If the result is a rental loss, it can offset ordinary income. D. The owner includes the rental income, but is not allowed to deduct the rental expenses.

A. The owner does NOT include the rental income and is not allowed to deduct any expenses related to the rental.

Which of the following statements is incorrect regarding workers' compensation payments? A. The payments are included in gross income because they are a replacement of wages. B. The payments are received due to work-related physical injury. C. Workers' compensation payments have a different tax treatment from unemployment compensation payments. D. The payments are nontaxable because they are due to a physical injury.

A. The payments are included in gross income because they are a replacement of wages.

True or false: A qualified education loan may be incurred by the parent of a child attending a qualified institution as long as that child is a dependent. A. True B. False

A. True

Which of the following instruments do not pay periodic interest payments, but rather accumulate interest over the life of the instrument? A. U.S. savings bonds B. Certificate of deposits C. Corporate bonds D. Mutual funds

A. U.S. savings bonds

Court-ordered cash payments pursuant to a divorce or legal separation which provide financial support to an ex-spouse and do not continue after the death of the ex-spouse are referred to as A. alimony. B. property settlements. C. child support payments. D. punitive damages.

A. alimony.

A qualified education loan may be used for expenses related to A. at least half-time work load. B. full-time work load. C. at least one course hour.

A. at least half-time work load.

When the basis exceeds the amount realized, the result is a A. loss. B. gain.

A. loss.

Which of the following choices reduces the basis of an asset? (Check all that apply.) A. Depreciation allowed, but not deducted, on the asset B. Depreciation actually deducted on the asset C. Ordinary repairs related to the asset D. Maintenance costs related to the asset

Answers: A, B

Which of the following individuals would meet the relationship test for being a qualifying relative of the taxpayer through a qualifying family relationship? A. Sister-in-law B. Mother C. Nephew D. Grandmother E. Aunt F. Cousin

Answers: A, B, C, D, E

Which of the following individuals would meet the relationship test for being a qualifying child of the taxpayer? A. Brother (younger than the taxpayer) B. Grandchild C. Niece (younger than the taxpayer) D. Father E. Child F. Cousin (younger than the taxpayer)

Answers: A, B, C, E

Which of the following items are needed to calculate MACRS depreciation for an asset? (Check all that apply.) A. Applicable depreciation convention B. Applicable depreciation period C. Asset's condition or age D. Asset's original cost E. Applicable depreciation method F. Asset's expected usefulness

Answers: A, B, D, E

Which of the following criteria will contribute toward qualifying a taxpayer for head of household status? A. Be unmarried (or considered unmarried under the abandoned spouse provisions) at the end of the year B. Provide over half the cost of a household for a dependent parent not living with the taxpayer C. Be a qualifying widow or widower D. Be married with a spouse that is not employed outside the home E. Pay more than half the costs of keeping up a home for the year F. Living with a qualifying person (other than parents) in the taxpayer's home for more than half the year

Answers: A, B, E, F

Brenda received a $15,000 college scholarship for the current year. She used the scholarship to pay the following fees: tuition $9,000, lab fees $60, parking fees $120, books $750, housing $4,000, and a meal plan $1,070. What can she exclude from gross income? A. $750 books B. $9,000 tuition C. $1,070 meals D. $120 parking fees E. $4,000 housing F. $60 lab fees

Answers: A, B, F Rationale: Scholarship proceeds used to pay for housing and meals are fully taxable. Parking is not a required fee, so the proceeds of a scholarship used to pay parking fees is taxable.

Which of the following assets purchased in the current year are eligible to be expensed under Section 179 assuming the cost does not exceed the limitations? (Check all that apply.) A. New office furniture B. Storage warehouse C. New delivery truck D. Land for future building site E. Apartment complex

Answers: A, C

Andrew volunteered for the American Red Cross after a recent hurricane. He traveled 200 miles and helped the victims of the disaster in the clean up for five days. He also donated $1,500 to the American Red Cross, but charged the amount of the donation on his credit card. He plans to pay $300 plus interest each month on the credit card charge, so he will pay $900 of the $1,500 charge by the end of the year. What amounts will Andrew be able to deduct for his charitable contributions? (Check all that apply.) A. Mileage for the 200 miles he drove to the ravaged area B. $900 that is actually paid toward the credit card bill during the year C. $1,500 charged to the credit card during the year D. The cost of lodging while he is volunteering E. The value of his time for five days based on his current salary

Answers: A, C, D

Which of the following statements is correct? A. If a taxpayer receives a state tax refund for a tax year where she deducted the state tax paid, she must report the refund as gross income. B. A taxpayer must recognize cash received in exchange for services rendered, but NOT property or services if they were received instead of cash. C. When taxpayers sell assets, they may exclude the original cost of those assets from gross income. D. Taxpayers who exchange or trade goods or services with each other must recognize the increase in value of the goods or services as income. E. A current year insurance reimbursement of prior year medical expenses is recognized even if the expenses were NOT deducted in the prior year.

Answers: A, C, D

What type of information is needed from an employee in order for the employer to withhold the correct amount of income tax from her paycheck? (Check all that apply.) A. The number of withholding allowances to claim B. Whether the employee earns a salary or she earns wages C. Whether the employee is single or married D. The age of the employee E. Whether or not the employee wants an additional amount withheld

Answers: A, C, E

Which of the following items may be subtracted from adjusted gross income to arrive at taxable income? A. Itemized deductions B. Tax prepayments C. Standard deduction D. Tax credits E. Dependency exemptions

Answers: A, C, E

Which of the following would qualify as maintenance and repairs expenses? (Check all that apply.) A. Replacing air filters B. Replacing the built-in dishwasher C. Cleaning the interior carpet D. Replacing the perimeter fence E. Sealing the deck

Answers: A, C, E

Estimated taxes can be used to pay tax on taxable income from which of the following? (Check all the apply.) A. Interest B. Tips C. Alimony D. Salaries or wages E. Earnings from self-employment F. Dividends

Answers: A, C, E, F

Which of the following individuals would meet the relationship test for being a qualifying relative of the taxpayer if s/he has only lived with the taxpayer for eight months of the year? A. Brother B. Cousin C. Grandchild D. Friend E. Father F. Niece

Answers: A, C, E, F

Which of the following requirements are necessary to qualify for head of household status? A. Pay more than half the costs of keeping up a home for the year B. Be a qualifying widow or widower C. Have lived with a qualifying person in the taxpayer's home for the entire year D. Be unmarried (or considered unmarried under the abandoned spouse provisions) at the end of the year

Answers: A, D

Choose the items included in the calculation of an asset's adjusted basis. (Check all that apply.) A. Start with the asset's original basis. B. Add accumulated depreciation actually taken on the asset. C. Add additional costs for routine maintenance on the asset. D. Add costs necessary to prepare the asset for use in the business. E. Subtract prior depreciation allowed or allowable on the asset. F. Subtract ordinary repair expenses.

Answers: A, D, E

Which of the following types of taxes may be deducted from AGI as itemized deductions? (Check all that apply.) A. State and local income taxes B. Federal income taxes C. Excise taxes paid on cigarette and alcohol purchases D. Real estate taxes on a primary residence E. Personal property tax on the value of a car

Answers: A, D, E

Which of the following statements are characteristics of alimony for divorce decrees before 1/1/19? (Check all that apply.) A. Alimony is included in the gross income of the person receiving it. B. Alimony can include property divisions between ex-spouses in a divorce agreement. C. Alimony is NOT deductible to the person paying it. D. Alimony may be paid to a spouse who is still living with the payor as long as there is a separation agreement in place. E. Alimony payments can NOT continue after the death of the recipient. F. Alimony must be paid in cash. G. Alimony is deductible for AGI for the person paying it.

Answers: A, E, F, G

When a taxpayer has a house that is used as rental property and the taxpayer stays in the house for less than 15 days during the year, how are the revenues and expenses treated for tax purposes? (Check all that apply.) A. The nonrental percentage of property tax is deductible as an itemized deduction, but the nonrental percentage of mortgage interest is NOT deductible. B. The owner includes the rental income and deducts the rental expenses to the extent of the rental income. Losses are disallowed for tax purposes. C. The owner includes the rental income, but is NOT allowed to deduct the rental expenses. D. The personal percentage of real property taxes and mortgage interest are deductible as itemized deductions. E. The owner does NOT include the rental income and is not allowed to deduct any expenses related to the rental. F. Owner includes rental income and deducts allocated expenses. If a loss results, it offsets ordinary income subject to passive activity limitations.

Answers: A, F

Which of the following are true regarding an HSA, if the taxpayer is an employee? (Check all that apply.) A. No permission is required from the IRS to establish the HSA. B. The taxpayer must have a high-deductible health plan. C. The taxpayer may be enrolled in Medicare. D. The taxpayer may have a separate disability insurance plan. E. The taxpayer must be over 65.

Answers: A. B, D

Regarding portfolio investments, which types of income are taxed at a rate lower than the taxpayer's marginal tax rate? A. Short-term capital gains B. Qualified dividends C. Long-term capital gains D. Interest on corporate bonds E. Nonqualified dividends

Answers: B, C

Which of the following would result in capital income? (Check all that apply.) A. Sale of Inventory after a year B. Sale of Stock after a year C. Sale of Land held for investment after a year D. Wages E. Sale of Outstanding Accounts Receivable after a year

Answers: B, C

Which of the following represents economic benefits to a taxpayer? A. Cash received from a bank loan B. A computer received in exchange for services rendered C. Interest income on investments D. Cash received for completing a job

Answers: B, C, D

Which of the following medical costs would be deductible as qualified medical expenses? (Check all that apply.) A. Liposuction to improve appearance B. Plastic surgery to reduce scarring after a dog bite C. Health insurance premiums paid with after tax dollars D. Chiropractic services E. Prescription medications

Answers: B, C, D, E

Which of the following criteria are characteristic of the child tax credit? (Check all that apply.) A. The amount of the credit is $3,000 per child. B. The individual must be under age 17 at year-end. C. The individual must be a qualifying child for dependent purposes. D. The individual must be under age 13 at year-end. E. The credit is subject to phase-out based on taxpayer's AGI. F. The individual must be a qualifying relative for dependent purposes.

Answers: B, C, E

Which of the following payments to a taxpayer should be included in gross income? A. Compensatory damages awarded for lost wages due to injuries sustained in a fall at the grocery store B. Emotional distress damages awarded due to slander of the taxpayer's reputation C. Compensatory damages for lost wages awarded in a sex discrimination lawsuit D. Emotional distress damages awarded due to injuries from a car accident E. Punitive damages awarded after an accident at work where the taxpayer sustained a non-physical injury

Answers: B, C, E

Which of the following would result in ordinary income? (Check all that apply.) A. Sale of Stock after a year B. Sale of Accounts Receivable after a year C. Sale of Inventory after a year D. Sale of Land held for investment after a year E. W2 Compensation

Answers: B, C, E

Which of the choices below are the tests that must be met to qualify as a qualifying child? A. Gross income B. Age C. Relationship D. Occupation E. Support F. Residence

Answers: B, C, E, F

Which of the following choices are characteristics of Coverdell Educational Savings Accounts? (Check all that apply.) A. Expenses for higher education, such as tuition and books, are NOT qualified educational expenses for this type of account. B. Reasonable room and board costs are included in qualified higher education expenses. C. Distributions may be used to pay for qualified educational costs of kindergarten through 12th grade. D. The contribution limit is NOT subject to any phase out for higher levels of AGI. E. Earnings on the account are NOT taxable if used for qualified educational expenses. F. The maximum yearly contributions to the account are limited to $2,000 for each beneficiary.

Answers: B, C, E, F

Which of the following types of taxes may be deducted from AGI as itemized deductions? (Check all that apply.) A. Federal estate taxes B. Real estate taxes on property held for investment C. Federal gift taxes D. Personal property tax on the value of a boat E. Social security tax withheld from pay

Answers: B, D

Which of the following are true regarding the earned income credit? (Check all that apply.) A. The earned income tax credit is a nonrefundable tax credit. B. Individuals who are dependents of other taxpayers are not eligible for the credit. C. Individuals with no qualifying children must be at least 21 years old to claim the credit. D. The credit is designed to offset the effect of employment taxes on compensation paid to low-income taxpayers. E. Individuals with at least one qualifying child are eligible for the credit regardless of age.

Answers: B, D, E

Which of the following expenses typically qualify for the Lifetime Learning Credit? (Check all that apply.) A. Housing in a university dormitory B. Fees for continuing professional education required for job C. Meal plans on campus D. Tuition for graduate courses E. Textbooks required for courses at a university F. Tuition for full-time enrollment at a university

Answers: B, D, E

Which of the following medical costs would be deductible as qualified medical expenses? (Check all that apply.) A. Over-the-counter medications B. Lasik eye surgery C. Tummy tuck D. Eyeglasses E. Dental work

Answers: B, D, E

Which of the following fringe benefits are excluded from taxation? A. Personal use of a company car B. Qualified moving expenses C. Off-site gym membership D. Medical insurance E. Dependent care benefits F. Life insurance under $50,000 G. Free lodging at the discretion of the employee

Answers: B, D, E, F

Which of the following statements is incorrect regarding the receipt of Social Security benefits? A. Social Security benefits are not taxable if the recipient has relatively low taxable income. B. Up to 85% of Social Security benefits may be taxed to taxpayers with moderate to high taxable income. C. 50% of Social Security benefits are taxable to all taxpayers because the employers contributed funds that were never taxed to the employee. D. Social Security benefits are not taxable because the contributions were taxed when the taxpayer was working.

Answers: C, D

Which of the following cash receipts are taxable to the recipient? A. Child support B. Loan proceeds C. Awards D. Gambling winnings E. Prizes

Answers: C, D, E

Which of the following choices are forms of tax prepayments? A. A tax credit used to reduce the tax liability in the current year B. A tax refund received in the current year for the prior year C. An overpayment of taxes in the prior year that was applied as an estimated payment for the current year D. Estimated tax payments the taxpayer made directly to the IRS E. Income tax withheld from a taxpayer's salary or wages by an employer

Answers: C, D, E

Which of the following individuals would meet the relationship test for being a qualifying child of the taxpayer? A. Aunt B. Cousin (younger than the taxpayer) C. Nephew (younger than the taxpayer) D. Half-sister (younger than the taxpayer) E. Stepson F. Grandmother

Answers: C, D, E

Which of the following would qualify as capital improvements? (Check all that apply.) A. Replacing air filters B. Sealing the deck C. Replacing the perimeter fence D. Cleaning the interior carpet E. Replacing the built-in dishwasher

Answers: C, E

Charlie and Lucy have a home in Louisville, Kentucky. During the week of the Kentucky Derby, Charlie and Lucy go on vacation and rent their home to a family who wants to attend the derby festivities and the races. Charlie and Lucy receive net rental income of $2,500 for the week. They spend about $500 to stock the bar and provide amenities for their tenants. Utilities, insurance, and interest expense for that week total $300. What is the amount of net rental income Charlie and Lucy will report from this transaction? A. $1,800 B. $0 C. $2,200 D. $2,500 E. $2,000

B. $0 Explanation: Since the home is NOT rented for 14 days or more, the rental revenue and expenses are not reported.

Marion drives 20 miles a day from his first job to his second job. He worked 125 days during 2018 on both jobs. What is Marion's mileage deduction rounded to the nearest dollar assuming he uses the standard mileage rate and mileage is incurred ratably throughout the year? A. $1,400. B. $1,363. C. $3,905. D. $77.

B. $1,363. Explanation: 20 mpd x 125 days = 2,500 miles 2,500 miles x $0.545 = $1,362.50

Carol and Daryl are married filing jointly and have a modified AGI of $168,000. They have $4,000 of qualified education expenses. What amount can they take for the American Opportunity Credit? A. $2,500 B. $1,500 C. $4,000 D. $2,400

B. $1,500

Kara is single with no dependents. She has itemized deductions of $4,100. What is the total of her from AGI deductions for 2018? A. $8,150 B. $12,000 C. $16,100 D. $4,100

B. $12,000

The Renfros were granted a decree of divorce in 2017. In accordance with the decree, Josh Renfro is to pay his ex-wife $24,000 a year until their only child, Evelyn, now 10, turns 18, and then the payments will decrease to $14,000 per year. For 2018, how much can Josh deduct as alimony in total? A. $10,000. B. $14,000. C. $24,000. D. None of the choices are correct

B. $14,000. Explanation Any of the payments that relate to child support are not deductible. Because the payments decrease to $14,000 per year when the child turns 18, the amount of $10,000 is seemingly child support and not alimony. Beginning in 2019, alimony will no longer be deductible by the payer spouse nor included in income of the recipient spouse. This rule will only apply to divorce or separation agreements executed after December 31, 2018 and will also affect those agreements executed on or before December 31, 2018, but modified after that date to include these new provisions.

Barbara's Bakery purchased three new assets during the prior year. She chose NOT to use Section 179 to immediately expense the assets and she elected NOT to use bonus depreciation. She purchased furnishings for $15,000 in April, equipment for $6,000 in July, and appliances for $40,000 in November. Using the MACRS tables in the textbook with a 7-year recovery period, what is the amount of depreciation that can be taken on these assets in the current (second) year? A. $14,939 B. $16,072 C. $16,806 D. $16,163

B. $16,072 Rationale: Each asset should be depreciated for recovery period 2 using the mid-quarter table ($15,000 x.2347; $6,000 x.2551; $40,000 x.2755).

Sheri's only source of income for the year is a salary of $40,000. She is not married and has three dependent children who are not eligible for the child tax credit. Sheri's tax liability is $1,795 before any credits or prepayments are applied. She had $2,000 withheld from her salary. After applying the earned income credit, what is the amount of Sheri's refund? A. $3,931 refund B. $2,136 refund C. $136 refund

B. $2,136 refund Rationale: EIC is 1931: 1931 credit + 2,000 withheld - 1795 tax liability = 2136

Dean is single and has AGI of $80,000. He redeems $5,000 (principal of $3,500 and interest of $1,500) of Series I savings bonds to pay qualified higher education expenses of $6,000. How much interest (if any) can Dean exclude from income? A. $1,500 B. $45 C. $0 D. $1,800

B. $45 Rationale: Dean's income exceeds the AGI limit of $77,200 for a single filer. $1,500 x [($80,000 - $79,550)/$15,000] = 45.

Katherine earned $100,000 from her job at a local business in 2018. She also had $42,000 in self-employed consulting income. What is the amount of her self-employment tax rounded to the nearest dollar? A. $4,647. B. $5,935. C. $6,426. D. $0.

B. $5,935. 42,000x92.35% = 38,787 (Taxable Income after Deductions) 38,787*15.30% = 5,934.41 (Multiply the taxable income with applicable tax rate.)

Because the eligibility for deductible IRA contributions for married couples is dependent on the amount of their joint adjusted gross income and earned income, which of the following statements is true? A. Regardless of joint income, a non-earning spouse is NOT allowed to deduct the amount of her IRA, but she may invest in a nondeductible IRA. B. A non-earning spouse is eligible to contribute to an IRA as long as the total IRA contributions do NOT exceed the working spouse's earned income. C. The deductible contribution for the lower earning spouse is dependent on that spouse's earned income, but may be phased out due to the joint AGI.

B. A non-earning spouse is eligible to contribute to an IRA as long as the total IRA contributions do NOT exceed the working spouse's earned income.

Which of the following statements is true regarding documentation requirements for charitable contributions? A. If the total deduction for all noncash contributions for the year is more than $500, Section A of Form 8283, Noncash Charitable Contributions, must be completed. B. All of these are true. C. A contribution charged to a credit card is considered a cash contribution for purposes of documentation requirements. D. A noncash contribution of less than $250 must be supported by a cancelled check, or a receipt, or other written acknowledgement from the charitable organization.

B. All of these are true.

Andrew invested in a U.S. Treasury bond. He paid $500 for the initial investment one year ago. The redemption value of the bond increased by $25 in the current year. Which of the following options is not acceptable for reporting the income? A. Andrew may permanently exclude all interest if the savings bonds are Series EE or Series I bonds and the proceeds are used for educational expenses. B. Andrew may request to receive the $25 in cash in the current year, so that he would have the wherewithal to pay the tax. C. Andrew may recognize no interest in the current year, but recognize the total interest accumulated the year the bond is redeemed. D. Andrew could elect to recognize the $25 as interest in the current year.

B. Andrew may request to receive the $25 in cash in the current year, so that he would have the wherewithal to pay the tax.

Some charitable contributions are limited to 60% of the taxpayer's AGI, others may be limited to a lower % of AGI. Deductions to which of the following organizations are subject to the 60% limitation on deductible contributions? A. Rotary, Elks, and Lions Clubs who raise money for public causes. B. Both churches and conventions of organizations of churches and educational organizations and hospitals and certain medical research organizations associated with these hospitals. C. Hospitals and certain medical research organizations associated with these hospitals. D. Churches and conventions of organizations of churches and educational organizations.

B. Both churches and conventions of organizations of churches and educational organizations and hospitals and certain medical research organizations associated with these hospitals.

Action Sport is an S corporation owned equally by three shareholders. During the current year, Action Sport generated taxable income of $60,000. What is the tax treatment, if any, of the $60,000 income? A. Action Sports will report and pay tax on $60,000. B. Each shareholder will report $20,000 in taxable income. C. S corporations are tax-exempt entities, so there is no tax liability resulting from Action Sport's operations. D. Each shareholder will report the portion of income that he or she receives in cash, and Action Sport will pay tax on the remaining income.

B. Each shareholder will report $20,000 in taxable income.

Which of the following statements is accurate when referring to hobby expenses? A. Hobby expenses are NOT deductible because revenues generated from hobbies are not taxable. B. Hobby expenses are deductible as itemized deductions and only to the extent of the revenue generated by the hobby. C. Hobby expenses are NOT deductible, but revenues generated by the hobby are taxable. D. Hobby expenses are deductible FOR AGI, but only to the extent of the revenue generated by the hobby. E. Hobby expenses are deductible against the revenue generated by the hobby and will result in a deductible loss if they exceed revenues.

B. Hobby expenses are deductible as itemized deductions and only to the extent of the revenue generated by the hobby.

Which of the following items does not qualify as an educator expense item deduction? A. Computers and software. B. Home schooling expenses. C. Professional development expenses related to the curriculum. D. Books.

B. Home schooling expenses.

Horatio and Maria are married and have three children. Horatio is self-employed and pays health insurance premiums for himself and his family. Which of the following situations would disqualify part or all of the premium costs from being deductible for AGI? A. Horatio and Maria's children are all dependents for tax purposes. B. Horatio incurred a net loss in his business during the current year. C. One of Horatio's children is not a dependent because she is 25 and earns too much income. D. Maria does not have an employer-sponsored health insurance plan available at work.

B. Horatio incurred a net loss in his business during the current year.

Corey is 25 and has a full-time job. His younger brother, James, is 20 and was enrolled as a full-time student at the community college during the fall semester. James lives with Corey. Which of the following statements is correct with respect to the age requirement for a qualifying child? A. James does NOT meet the age test because he is not under the age of 19. B. James meets the age test because he is younger than Corey, and he is under age 24 and a full-time student. C. James does NOT meet the age test because he was not enrolled as a full-time student for the entire year. D. James must be older than than Corey in order to meet the age test.

B. James meets the age test because he is younger than Corey, and he is under age 24 and a full-time student.

Which of the following fringe benefits provided by an employer is not excluded from gross income? A. Medical insurance B. Life insurance coverage in excess of $50,000 C. De minimis (or small) benefits D. Qualified transportation expenses

B. Life insurance coverage in excess of $50,000

Which of the following calculations is used to determine an asset's adjusted basis? A. Original basis + depreciation taken - significant improvements B. Original basis + significant improvements - depreciation allowed or allowable C. Original basis + depreciation allowed or allowable - significant improvements D. Original basis + ordinary repairs - depreciation taken

B. Original basis + significant improvements - depreciation allowed or allowable

Antoine owns a car. He uses the car for personal transportation. Which of the following classifications apply to the car? (Check all that apply.) A. Investment property B. Personal property C. Business property D. Real property E. Income-producing property

B. Personal property

Which of the following properties is not eligible for the §179 expense election when purchased? A. Manufacturing equipment. B. Rental property. C. A business automobile. D. A business computer.

B. Rental property.

All of the following expenses increase the basis of stock held for investment except: A. Commission fees on the purchase of the stock. B. Stock splits. C. Stock dividends from a dividend reinvestment plan. D. All of the choices increase the basis of stock held for investment.

B. Stock splits.

Which one of the following is not an advantage of the cash method for reporting income? A. Taxpayers recognize income in the period they receive it, giving them the wherewithal to pay the tax. B. Taxpayers are able to deduct expenses in the period incurred, which may be before they actually pay them. C. Taxpayers have some control over when income is received and expenses are paid which assists in tax planning. D. The cash method generally simplifies the computation of income.

B. Taxpayers are able to deduct expenses in the period incurred, which may be before they actually pay them.

A business purchased a new delivery truck at the end of March during the current year. The truck was the only asset purchased during the year. Which of the following statements is correct regarding the depreciation that can be taken on the truck? A. The business will deduct one-fourth (3 months) of a full year's depreciation on the truck in the current year. B. The business will deduct one-half of a full year's depreciation on the truck in the current year. C. The business will deduct 3.5 quarters (10.5 months) of depreciation on the truck in the current year. D. The business will deduct three-fourths (9 months) of a full year's depreciation on the truck in the current year.

B. The business will deduct one-half of a full year's depreciation on the truck in the current year. Rationale: The business will use the mid year convention because there was no property purchased in the last quarter of the year

Why are individually managed retirement plans, such as traditional or Roth IRAs, not very attractive to small business owners? A. These plans are NOT tax deductible for their businesses, while employer-provided plans are deductible as business expenses. B. The contribution levels are relatively low compared to employer-provided plans. C. Small business owners do NOT receive the same tax advantages as other individuals investing in these plans.

B. The contribution levels are relatively low compared to employer-provided plans.

How much of a self-employed taxpayer's self-employment tax may be deducted for AGI? A. Self-employment tax is deductible to the extent of the self-employment income. B. The employer portion of self-employment tax is deductible. C. All of the self-employment tax is deductible. D. None of self-employment tax is deductible.

B. The employer portion of self-employment tax is deductible.

Which of the following is true concerning the deduction for qualified medical expenses? A. The expenses are fully deductible. B. The expenses must be reduced by 7.5% of AGI C. The expenses can be increased by 7.5% D. Most individuals are able to deduct medical expenses.

B. The expenses must be reduced by 7.5% of AGI

Which of the following choices describes the marginal tax treatment for qualified dividends? A. The income is taxed at the lower of the taxpayer's marginal rate or at a maximum 15%. B. The income may be taxed as low as 0%, depending on the taxpayer's ordinary income rate. C. The income may be taxed at a rate as high as 20%, depending on the taxpayer's marginal rate. D. The income is always taxed at the taxpayer's ordinary income tax rate.

B. The income may be taxed as low as 0%, depending on the taxpayer's ordinary income rate. C. The income may be taxed at a rate as high as 20%, depending on the taxpayer's marginal rate.

When a gain results from the sale of Section 1245 property, how does the taxpayer determine the amount that should be taxed as ordinary income? A. The gain is allocated to ordinary income based on the profit percentage of the sale. B. The lesser of the recognized gain or the accumulated depreciation on the asset is ordinary income. C. The total amount of accumulated depreciation on the asset is recaptured as ordinary income. D. The current year's depreciation is recaptured as ordinary income.

B. The lesser of the recognized gain or the accumulated depreciation on the asset is ordinary income.

Which of the following is incorrect regarding luxury automobile limitations? A. Passenger autos with a gross weight of less than 6,000 pounds are subject to the limits. B. The luxury limitations do not apply to the Section 179 expense deduction. C. The limits are reduced further if the business use is less than 100%. D. Light trucks or vans that are less than 6,000 pounds are subject to the limits.

B. The luxury limitations do not apply to the Section 179 expense deduction.

Which of the following choices is not correct regarding deductible transportation expenses for a taxpayer using her personal vehicle for business purposes? A.The taxpayer can deduct a standard mileage rate based on business miles driven. B. The taxpayer can deduct the business portion of the vehicle operating costs, plus depreciation, plus a standard mileage rate based on business miles. C. The taxpayer can deduct the business portion of the actual costs of operating the vehicle plus depreciation. D. The taxpayer can NOT deduct the costs of commuting from her home to her regular place of business.

B. The taxpayer can deduct the business portion of the vehicle operating costs, plus depreciation, plus a standard mileage rate based on business miles.

Regarding charitable contributions, which of the following statements is incorrect when referring to donations of capital gain property? A. To qualify as capital gain property, the asset must have been owned by the taxpayer for more than one year. B. The taxpayer must include the appreciation of the asset in gross income. C. The taxpayer will be allowed to deduct the fair market value of the property. D. To qualify as capital gain property, the asset must have appreciated in value.

B. The taxpayer must include the appreciation of the asset in gross income.

When does a business have to use the mid-quarter convention? A. When a tangible personal property asset is placed in service during the fourth quarter of the year B. When more than 40% of the tangible personal property purchased is placed in service during the fourth quarter of the year C. When more that half of a business's assets including real property purchased are placed in service during the fourth quarter of the year D. When more than 60% of the tangible personal property purchased is placed in service during the fourth quarter of the year

B. When more than 40% of the tangible personal property purchased is placed in service during the fourth quarter of the year

An individual that is unrelated to the taxpayer may meet the relationship test for a qualifying relative if he or she: A. lives with the taxpayer for less than the entire year, but more than half the year. B. lives with the taxpayer for the entire year. C. marries the taxpayer during the year.

B. lives with the taxpayer for the entire year

If a taxpayer uses a standard deduction and receives a tax refund, the taxpayer A. may have to include all or part of the refund in their taxable income for the next year. B. will not have to include any of the refund in their taxable income for the next year.

B. will not have to include any of the refund in their taxable income for the next year.

Lan is from Vietnam and has lived in the U.S. for five months during the year. He is not yet considered a resident because he hasn't lived in the U.S. for long enough. He resides with his uncle who is a U.S. citizen. Lan is single and a full-time student. He is considered a qualifying child of his uncle. Which of the following is correct regarding Lan's status as a dependent? A. Lan can NOT be claimed by his uncle because he would need to meet the qualifying relative requirements, rather than the qualifying child. B. Lan can be claimed as a dependent by his uncle because his uncle is a citizen and An is a qualifying child. C. Lan can NOT be claimed as a dependent by his uncle because he is not a citizen or resident of the U.S.. D. Lan can be claimed by his uncle because he will not have to file a tax return since he has no income.

C.

Jake runs a business out of his home. He uses 600 square feet of his home exclusively for the business. His home is 2,400 square feet in total. Jake had $27,000 of business revenue and $22,000 of business expenses from his home-based business. The following expenses relate to his home: Mortgage interest $10,800 Real estate taxes $1,600 Utilities $2,400 Insurance $600 Repairs $2,400 Depreciation (on business use portion of home) $1,200 What is Jake's net income from his business? What amount of expenses is carried over to the following year, if any? A. ($14,000) and $0 carryover. B. ($650) and $0 carryover. C. $0 and $650 carryover. D. $550 and $0 carryover.

C. $0 and $650 carryover. Explanation The expenses from the home office cannot create a loss in the business. $5,000 − 25% ($10,800 + $1,600 + $2,400 + $600 + $2,400) = $550 − $550 depreciation = $0; carryover $650

During 2018 Yoko paid the following expenses: Prescription medicines $525 Doctors and dentists $1,050 Vitamins and ibuprofen $275 Health club membership fee $450 What is the total amount of medical expenses (before application of the adjusted gross income limitation) that would enter into the calculation of itemized deductions on Yoko's 2018 income tax return? A. $525. B. $1,325. C. $1,575. D. $1,500.

C. $1,575. Explanation: 525+1,050 = 1,575 Remember that medical expenses are only allowed a maximum of 7.5% deduction from AGI.

During 2018, Remy paid the following expenses: Prescription medicines$640 Aspirin, vitamins, and cold medicine $165 Hospital and treatment fees $1,050 Health insurance premiums $250 What is the total amount of medical expenses (before considering the limitation based on adjusted gross income) that would enter into the calculation of itemized deductions on Remy's 2018 income tax return? A. $0. B. $1,885. C. $1,940. D. $2,105.

C. $1,940. Explanation: 640+1,050+250 = 1,940 Non-prescription drugs are not tax deductible. Remember that medical expenses are only allowed a maximum of 7.5% deduction from AGI.

Bruce is single and earns $1,750 semi-monthly. Bruce claimed two allowances. How much federal income tax should be withheld from Bruce's paycheck using the percentage method? A. $182.92 B. $168 C. $140.94 D. $105.3

C. $140.94

Baxter and Bailey use the married filing jointly status on their tax return.They incurred $4,000 in undergraduate tuition for Bailey to finish her degree. She was in her fifth year and graduated in May. Baxter started graduate school in August. They spent $8,000 in tuition for his education. What is the amount of their lifetime learning credit? A. $2,400 B. $12,000 C. $2,000 D. $10,000

C. $2,000 Rationale: $2,000 (20% of the first $10,000 in eligible expenses).

Tim's Taxi Service sold one of its automobiles for $5,000. The cab had an original cost of $23,000 with $16,000 in accumulated depreciation. What is the recognized gain or loss and character of the gain or loss on this sale? A. $18,000 - ordinary loss B. $16,000 - ordinary income C. $2,000 - ordinary loss D. $5,000 - ordinary income

C. $2,000 - ordinary loss Rationale: ($23,000-$16,000) - $5,000 = $7,000 - $5,000 = ($2,000); losses on Section 1231 assets are taxed as ordinary losses.

Jenny and Jerry have a home with a fair market value of $625,000. They borrowed $400,000 ten years ago to purchase the home. They currently owe $250,000 on the acquisition loan. They recently borrowed $110,000 on a home-equity loan. The proceeds were used to purchase a car, take a vacation, and redecorate their home. What is the maximum amount of their indebtedness that can generate deductible interest in the current year? A. $350,000 B. $360,000 C. $250,000 D. $400,000

C. $250,000

Jacob, who is single, has income from his Schedule C of $175,000. His taxable income is $140,000 after his other deductions. What is Jacob's QBI deduction for 2018? A. $63,000. B. $35,000. C. $28,000. D. $0.

C. $28,000. Explanation: QBI means Qualified Business Income 140,000 x 20% = 28,000

Tom purchased a 7-year asset for his business in February, 2014 for $4,500 and used the half-year convention for MACRS. He did not deduct any bonus depreciation. He sold the asset in April, 2017. How much depreciation will Tom deduct in 2017? A. $562 B. $214 C. $281 D. $187

C. $281 Explanation: $4,500 x 12.49% = $565.05 /2 = $281.02

On May 20, 2017, Jessica purchased land for $105,647 to use in her business. She sold it on May 21, 2018, for $102,595. What is the amount and type of loss on this sale if Jessica does not have any other sales from a trade or business? A. $3,052 deferred loss. B. $3,052 long-term capital loss. C. $3,052 ordinary loss. D. $3,052 § 1231 loss.

C. $3,052 ordinary loss. Explanation $105,647 basis − $102,595 sales price = $3,052 loss. Since this was land used in her business the loss is considered ordinary.

Shana is a self-employed carpenter who had net earnings from self-employment of $3,500. She paid $325 per month for health insurance over the last year. Shana is entitled to a for AGI deduction for health insurance of: A. $0. B. $325. C. $3,500. D. $3,900.

C. $3,500.

Sam traded a parcel of land for a tractor and a car. He had purchased the land five years earlier for $16,000. The market value of the car and tractor is $20,000. What is the amount of gross income resulting from this transaction? A. $16,000 B. $0 C. $4,000 D. $20,000

C. $4,000

Jimmy took a business trip from Dallas to Brazil. He was there for a total of seven days, of which two were weekend days. Over the weekend, he spent his time sightseeing and relaxing. His expenses were as follows: Airfare $1,400 Lodging (7 days × $300) $2,100 Meals (7 days × $85) $595 Taxi fares ($600 to and from business meetings) $800 How much is Jimmy allowed to deduct? A. $3,404 B. $3,496 C. $4,598 D. $4,895

C. $4,598 Explanation $1,400 + $2,100 + 50% ($595) + $800 = $4,598

Stacy is unmarried and has three children that qualify for the child tax credit. Her AGI for the current year is $207,000. What is the amount of her child tax credit? A. 0 B. $4,200 C. $5,650 D. $6,000

C. $5,650

Mia is required under a 2017 divorce decree to pay $600 of alimony and $300 of child support per month for 12 years. In addition, Mia makes a voluntary payment of $100 per month. How much of each total monthly payment can Mia deduct in 2018? A. $100. B. $300. C. $600. D. $700.

C. $600. Explanation Alimony payments are deductible, but child support payments are not. In addition, the voluntary payment, since it is not required per the decree, is not deductible.

Frank purchased a vehicle for business and personal use. In 2018, he used the vehicle 70% for business (11,000 business miles incurred equally throughout the year) and calculated his vehicle expenses using the standard mileage rate. Frank also paid $1,800 in interest and $480 in county property tax on the car. What is the total business deduction related to business use of the car? A. $5,995. B. $6,365. C. $7,591. D. $8,275.

C. $7,591. Explanation (11,000 miles x 54.5 cents/mile) + 70% ($1,800 + $480) = $7,591

Marcus has two jobs. He works as a night auditor at the Midnight Motel. When his shift at the motel is over, he works as a short order cook at the Break-An-Egg Restaurant. On a typical day, he drives the following distances: Home to Midnight Motel 4 miles Midnight Motel to restaurant 12 miles Restaurant to home 8 miles How many miles per day would qualify as transportation expenses for tax purposes? A. 0. B. 4. C. 12. D. 24.

C. 12. Explanation: Mileage between home to work is not deductible. Mileage between work to work IS deductible.

Lesa drives her car approximately 18,000 miles per year. During the most recent year, she drove 7,000 miles commuting to and from work, 4,500 miles for business-related conferences and client visits, and 6,500 miles for personal trips. How many miles are considered business miles and can be used to determine the tax deduction for transportation expenses? A. 2,250 B. 11,500 C. 4,500 D. 5,750

C. 4,500

Which of the following types of imputed income are not included in gross income (i.e. are not taxable)? A. Employee discounts of 25% on services B. An employer's $12,000 loan to an employee with no interest on the note C. A bargain purchase between a father and his son

C. A bargain purchase between a father and his son

Which of the following individuals can deduct education expenses? A. A real estate broker who attends college to get an accounting degree. B. A CPA who attends a review course to obtain his building contractor's license. C. A corporate executive attending an executive MBA program. D. An accounting bookkeeper taking a CPA review course to pass the CPA exam and become a CPA.

C. A corporate executive attending an executive MBA program.

Which of the following would most likely not qualify as support for meeting the support test? A. A wedding dress B. Summer camp with horseback riding, swimming, and other activities C. A riding lawnmower used by a child to mow the family yard D. Medical and dental care

C. A riding lawnmower used by a child to mow the family yard

The standard mileage rate encompasses all of the following auto costs except for: A. Gasoline, oil, and insurance. B. Maintenance and repairs. C. Auto property taxes. D. Depreciation or lease payments.

C. Auto property taxes.

Which one of the following types of charitable contributions is not deductible for federal income tax purposes? A. Contributions made with credit cards where the charge is paid in a subsequent year B. Contributions made through payroll deduction C. Cash paid to attend a fundraising event where only a portion of the funds go to a charitable cause D. Travel costs incurred for charitable purposes

C. Cash paid to attend a fundraising event where only a portion of the funds go to a charitable cause

Which one of the following credits is a tax subsidy designed to help taxpayers provide care for their dependents, so that they can work or look for work? A. Caregiving assistance credit B. Earned income credit C. Child and dependent care credit D. Child tax credit

C. Child and dependent care credit

Which of the following assets is not considered to be an ordinary asset? A. Equipment owned for six months and used in taxpayer's business B. Accounts receivable in taxpayer's business C. Corporate stock in taxpayer's investment portfolio D. Inventory in taxpayer's business

C. Corporate stock in taxpayer's investment portfolio

Carol is an accountant for a local firm. She also speaks at accounting conferences for additional income on the side. Carol earned $10,000 in consulting fees during the year and $50,000 of wages from her accounting work. Where will Carol report the income from her accounting work on her tax return? A. Schedule C B. Form 1099-MISC C. Form 1040 Line 7 (wages) D. Form 1040 Line 21 (other income) E. She is not required to report the income.

C. Form 1040 Line 7 (wages)

Which of the following statements is false? A. Gross income includes income realized in any form, whether in money, property, or services. B. The definition of gross income is all-inclusive, since the IRC states that all income is potentially taxable. C. Gross income includes all income from whatever source derived, unless excluded by law. D. Gross income includes only those sources of income that are specifically excluded in the IRC.

C. Gross income includes all income from whatever source derived, unless excluded by law.

Which of the following types of interest expense is not deductible as an itemized deduction? A. Interest on acquisition debt secured by a personal residence B. Interest on a loan used to purchase taxable securities to generate interest income C. Interest on credit cards used to purchase furnishing for a personal residence D. Interest on a home-equity loan to remodel the kitchen

C. Interest on credit cards used to purchase furnishing for a personal residence

Izzy ran into a cash shortfall and had to cash in a certificate of deposit early. She incurred a $50 penalty for early withdrawal. How should Izzy treat the penalty for tax purposes? A. Izzy can deduct the $50 from any interest income reported for tax purposes. B. Izzy can NOT deduct the $50 penalty because penalties are against public policy. C. Izzy can deduct the $50 as a "for" AGI deduction. D. Izzy can deduct the $50 as an investment expense from AGI (if she is able to itemize deductions).

C. Izzy can deduct the $50 as a "for" AGI deduction.

Which of the following individuals is eligible to receive (or qualify their parents to receive) the American Opportunity Credit? A. Khloe is married and in her third year as a full time student at UCLA. She uses the married filing separately filing status on her tax return. B. Kris is a fifth-year senior at IU. She is 23, a full time student, and a dependent of her parents. C. Kim is single, works full time, and goes to college half time at LSU. D. Kourtney is a graduate student at NYU, but is still a dependent of her parents.

C. Kim is single, works full time, and goes to college half time at LSU.

Lance paid $21,000 for seven acres of land six years ago. During the current year, Lance donated the land to his church. An appraisal of the land determined that the fair market value of the land is $30,000. Which of the following statements is true concerning the donation of land? A. Lance will need to include the appreciation of $9,000 in gross income in order to take the full deduction. B. The church, a tax exempt entity, will have to pay tax on a gain of $9,000 if it chooses to sell the land. C. Lance will be able to deduct $30,000 as a charitable contribution. D. Lance must deduct $21,000 for the land.

C. Lance will be able to deduct $30,000 as a charitable contribution.

Bruce is single and had itemized deductions of $6,200 on his 20X1 tax return when the standard deduction was $6,300. He included $1,000 of state taxes in his itemized deductions. In 20X2, he received a $200 refund of state taxes paid in 20X1. How much of the refund (if any) should Bruce include in his taxable income for the current year (20X2)? A. $200 B. $1,000 C. None D. $100

C. None Rationale: Since Bruce's itemized deductions in 20X1 only exceeded the standard deduction by $200 ($6,300 - $6,100), the most he must include in income is $200.

How often are employers required to report payroll-related information to employees? A. Weekly B. Annually C. On each paycheck D. Monthly

C. On each paycheck

Which of the following statements is incorrect regarding flow-through entities? A. Operating losses from flow-through entities may or may NOT be deductible in the current year, depending on certain limits imposed on the taxpayer. B. Operating income from flow-through entities is taxed as ordinary income to the taxpayer-owners of the entities. C. Operating income from flow-through entities may or may NOT be taxable in the current year, depending on certain limits imposed on the taxpayer. D. Operating losses are treated as ordinary losses for taxpayers to the extent they are deductible.

C. Operating income from flow-through entities may or may NOT be taxable in the current year, depending on certain limits imposed on the taxpayer.

Which of the following statements is correct regarding the deductibility of self-employment tax for self-employed taxpayers? A. Self-employed taxpayers can deduct 100% of the self-employment tax they pay from AGI. B. Self-employed taxpayers can deduct 100% of the self-employment tax they pay for AGI. C. Self-employed taxpayers can deduct the employer portion of the self-employment tax they pay for AGI. D. Self-employed taxpayers can deduct the employer portion of the self-employment tax they pay as a deduction from AGI.

C. Self-employed taxpayers can deduct the employer portion of the self-employment tax they pay for AGI.

Which of the following statements is incorrect regarding interest earned on U.S. savings bonds? A. Taxpayers may elect to include the increase in the bond redemption value in income each year. B. Taxpayers may exclude interest from Series EE and Series I bonds if the proceeds are used for educational expenses. C. Taxpayers include the periodic interest payments from U.S. savings bonds in gross income each year when received. D. Taxpayers may recognize the interest that has accumulated on the bonds when they are redeemed.

C. Taxpayers include the periodic interest payments from U.S. savings bonds in gross income each year when received.

In order for an employee to deduct home office expenses, which of the following must occur: A. There must be no other fixed business location. B. The taxpayer's most important activities must occur in the home. C. The business use of the home must be specifically for trade or business purposes. D. The home office deduction for an employee is not deductible

C. The business use of the home must be specifically for trade or business purposes.

Harli is taking her 6-month-old daughter to the doctor to receive vaccinations. Which of the following statements is correct regarding the deductibility of the vaccinations? A. The cost of vaccinations is NOT deductible because Harli's daughter is not receiving a cure or treatment for a current illness. B. The cost of vaccinations is deductible for Harli's daughter, but not for Harli. C. The cost of vaccinations is deductible because it is for the prevention of a disease. D. The cost of vaccinations is NOT deductible because receiving vaccinations is not mandatory, but a choice by the parents.

C. The cost of vaccinations is deductible because it is for the prevention of a disease.

Which of the following statements is not accurate regarding the deduction for qualified education loan interest? A. Loans used to provide room and board during college are considered qualifying educational expenses. B. The interest on educational loans for a taxpayer's dependents is deductible. C. The full amount of interest paid on qualified educational loans is deductible. D. The amount of the deduction is phased out depending on filing status and modified AGI.

C. The full amount of interest paid on qualified educational loans is deductible. Rationale: There is a current limit of $2,500 annually.

Which of the following is not a criteria for the American Opportunity credit? A. The student must be in the first four years of postsecondary education. B. The amount of the credit is 100 percent of the first $2,000 and 25 percent of the next $2,000 spent on qualifying expenses. C. The individual must be a full time student. D. The student must be enrolled in a qualified postsecondary education institution.

C. The individual must be a full time student.

If property is converted from personal-use property to business property, the depreciable cost basis is which of the following? A. FMV of the asset. B. Cost of the asset. C. The lower of the cost or FMV at the date of conversion. D. The cost of a new similar asset at the date of conversion.

C. The lower of the cost or FMV at the date of conversion.

When a taxpayer rents his residence to unrelated parties for 14 or fewer days, and the taxpayer lives in the residence for at least 15 days, how is the rental activity treated? A. The owner includes the rental income and deducts the rental expenses. If the result is a rental loss, it can offset ordinary income. B. The owner includes the rental income and deducts the rental expenses to the extent of the rental income. Losses are disallowed for tax purposes. C. The owner includes the rental income, but is not allowed to deduct the rental expenses. C. The owner does NOT include the rental income and is not allowed to deduct any expenses related to the rental.

C. The owner does NOT include the rental income and is not allowed to deduct any expenses related to the rental.

Which of the following penalties is deductible for AGI? A. The penalty for late payments on a bank loan B. The penalty for underpayment of income tax C. The penalty for early withdrawal of a timed savings account D. The penalty for early distribution of a retirement account

C. The penalty for early withdrawal of a timed savings account

Markita donated stock that she has held for less than a year to a qualified charitable organization. Her basis in the stock is $1,000 and the fair market value of the stock is $1,200. Which of the following statements is true regarding Markita's donation? A. The stock is capital gain property. She will deduct $1,000, since her basis is less than fair market value. B. The stock is capital gain property. She will deduct $1,200, since capital gain property is allowed to be deducted at fair market value. C. The stock is ordinary income property. She will deduct $1,000, since her basis is less than fair market value. D. The stock is ordinary income property. She will deduct $1,200, since a stock donation is valued at fair market value.

C. The stock is ordinary income property. She will deduct $1,000, since her basis is less than fair market value.

Payees can avoid backup withholding by furnishing a correct TIN to the payer on what form? A. W-3 B. W-4 C. W-9 D. W-2

C. W-9

When can a taxpayer deduct moving expenses? A. The individual must move relatively far from the current residence or be starting a new job. B. The individual can NOT deduct moving expenses because the costs of moving are considered personal, rather than business related. C. When a taxpayer moves under an order for an active military transfer D. The individual can deduct the cost of any move as long as they have NOT deducted moving expenses in the prior two years.

C. When a taxpayer moves under an order for an active military transfer

Chasity is 20, has a full-time job, and supports herself. Her brother, William, age 22, has decided to go back to college. He moved in with Chasity and is attending college full-time. Which of the following statements is accurate regarding the age test for a qualifying child and how it applies to William? A. William meets the age test because he is full-time student under age 24. B. William does NOT meet the age test because he is not under the age of 19. C. William does NOT meet the age test because he is older than Chasity. D. William does NOT meet the age test because he is not Chasity's child.

C. William does NOT meet the age test because he is older than Chasity.

When determining the amount of the tax loss from any specific casualty from a Federally Declared Disaster Area, the loss is the lesser of the decline in value of the property or the A. insured value of the damaged asset. B. fair market value of the damaged asset. C. taxpayer's tax basis in the damaged asset. D. replacement cost of the damaged asset.

C. taxpayer's tax basis in the damaged asset.

Flo and Artis (wife and husband) are itemizing their Schedule A expenses on their tax year 2018 return. Artis traveled to Japan for his employer, but was not reimbursed. His meal expenses totaled $500. How much can Artis deduct for meals before applying the 2% of AGI limitation? A. $250. B. $150. C. $500. D. $0.

D. $0. Explanation: "You can no longer claim any miscellaneous itemized deductions, including the deduction for unreimbursed job expenses."

On May 26, 2014, Jamal purchased machinery for $30,000 to be used in his business. He did not elect to expense the equipment under §179 or the bonus. On October 10, 2018, he sells the machinery to a scrap metal dealer. What is his cost recovery deduction for 2018 rounded to the nearest dollar? A. $0. B. $4,287. C. $2,679. D. $1,340.

D. $1,340. Explanation: Half year convention 7-year asset, year 5 = 8.93% 30,000 x 8.93% = $2,679 / 2 = $1,339.50

Barbara's Bakery purchased furnishings (7 year property) 4 years ago. During the current year, she sold those assets. Her original cost in the furnishings was $15,000 and she did NOT use bonus depreciation in the year she purchased them. Due to other asset purchases that year, she has been using the mid-quarter convention when calculating the depreciation, and they were purchased in the second quarter of that year. If Barbara sold the furnishings in October of the current year (recovery period 4), how much depreciation will she will be able to deduct this year. (Use the MACRS tables at the end of the chapter to assist with this problem.) A. $1,796 B. $898 C. $0 D. $1,571

D. $1,571 Explanation: ($15,000 x.1197) x.875 = $1,571.

In June 2018, Kelly purchased new equipment for $26,000 to be used in her business. Assuming Kelly has net income from her business of $75,000 prior to the deduction, what is the maximum amount of cost recovery Kelly can deduct rounded to the nearest dollar, assuming she does not elect §179 expense or bonus depreciation? A. $26,000. B. $13,000. C. $3,715. D. $14,858.

D. $14,858. Explanation: 7-Year Asset, Year 1 = 14.29% ($26,000 x 50% bonus) + ($26,000 x 14.29% = $3,715.40 /2 = $1,857.70) = $13,000 + $1,857.70 = $14,857.70

Shante is employed by a local pharmaceutical company where she earned $48,000 in 2018. During the year, she also had self-employment income of $18,000. Her self-employment tax rounded to the nearest dollar is: A. $0. B. $2,754. C. $2,061. D. $2,543.

D. $2,543. 18,000x92.35% = 16,623 16,623x15.30% = 2,543.32

Jim sells a parcel of land for $75,000 cash, and the buyer assumes Jim's liability of $10,000 on the land. Jim's basis is $64,000. What is the gain or loss on the sale? A. $1,000 loss. B. $1,000 gain. C. $11,000 gain. D. $21,000 gain.

D. $21,000 gain.

Amal received a Form 1099-DIV with a capital gain distribution of $210. She also received a Form 1099-B from the sale of 240 shares of AMS stock she purchased for $2,900 plus a $28 commission fee on February 22, 2017. The net proceeds of the stock sale were $2,700 (the commission fee was $14) and the trade date was February 22, 2018. What are the amounts and nature of Amal's gains (losses) on these transactions? A. $214 short-term loss and $210 long-term gain. B. $214 long-term loss and $210 short-term gain. C. $228 long-term loss and $210 short-term gain. D. $228 short-term loss and $210 long-term gain.

D. $228 short-term loss and $210 long-term gain. Explanation: Capital gain distributions are considered long-term.

Under current tax law, the deductible amount for expenses under the educator expense deduction is limited per taxpayer to: A. $100. B. $150. C. $200. D. $250.

D. $250.

Patricia, a professional gambler, had the following income and expenses in her business: Gambling winnings $275,000 Expenses Fees paid for illegal information 18,000 Travel costs $8,000 Office expenses $5,000 Supplies $3,000 Business long-distance phone charges $1,000 Tickets for illegal parking $900 How much net income must Patricia report from this business? A. $0. B. $240,000. C. $239,100. D. $258,000

D. $258,000 Explanation: 275,000 - 8,000 - 5,000 - 3,000 - 1,000 = 258,000 *Illegal activities are NOT allowed to be deducted as an expense...*

In July 2018, Cassie purchases equipment for $55,000 to be used in her business. Assuming Cassie has a small net loss from her business prior to the deduction, what is the maximum amount of cost recovery Cassie can deduct? A. $7,860. B. $31,430. C. $55,000. D. $27,500.

D. $27,500. Explanation: 50% deduction for 2018 55,000 x 50$ = 27,500

Dean is single and earned $40,000 of wages and $10,000 in tips during the current year. Without regard to federal income taxes, how much will his employer withhold from his paycheck for social security taxes and Medicare taxes? A. $4,275 B. $3,060 C. $3,100 D. $3,825

D. $3,825

During the current year, Sam received interest income from the following investments: $400 from State of Wyoming bonds, $200 from Ford Motor Co., $50 from City of Laramie bonds, and $100 from U.S. Treasury bonds. How much of the interest received will be included in gross income? A. $600 B. $200 C. $700 D. $300

D. $300 Rationale: The State of Wyoming and City of Laramie bonds are not taxable.

Barbara's Bakery purchased three new assets during the current year. Since this is Barbara's first year in the bakery business, she chose NOT to use Section 179 to immediately expense the assets and she elected NOT to use bonus depreciation. She purchased furnishings for $15,000 in April, equipment for $6,000 in July, and a new appliances for $40,000 in November. Using the MACRS tables with a 7-year recovery period, what is the amount of depreciation that can be taken on these assets in the first year? A. $4,429 B. $8,717 C. $2,178 D. $4,748

D. $4,748 Rationale: Each asset should be depreciated using the mid-quarter table for the quarter in which it was purchased.

During the year, Cory purchased a log skidder (7-year property) for $55,000 for his business. Assume that he has income from his business of $30,000, and he and his wife have combined salaries and wages income of $40,000. What is the maximum deduction he can take for his business in relation to the log skidder purchase? A. $7,860. B. $30,000. C. $31,429. D. $55,000.

D. $55,000. Explanation: He could take Section 179 up to the limit ($1,000,000 in 2018) against active income. Wages and salary are considered active income so the answer would be $55,000.

What is the maximum amount of personal residence acquisition debt on which interest is fully deductible? A. $250,000. B. $0. C. $500,000. D. $750,000.

D. $750,000. Look more into this question...

Akule paid the following amounts of interest in 2018: $150 on his personal credit card $9,500 on his home mortgage $750 on a personal car loan, which was not used for business $350 on funds borrowed to purchase tax-exempt securities What is his deductible interest for 2018? A. $1,250. B. $9,500. C. $350. D. $9,850.

D. $9,850. (9,500 + 350)

As a for AGI deduction, self-employed health insurance premiums are deductible at: A. 50%. B. 70%. C. 80%. D. 100%.

D. 100%

Which of the following statements is correct concerning a gift? A. A gift is included in the gross income of the person giving the gift. B. A gift may be subject to "gift tax" which is paid by the person receiving the gift. C. A gift is included in the gross income of the person receiving the gift. D. A gift may be subject to "gift tax" which is paid by the person giving the gift.

D. A gift may be subject to "gift tax" which is paid by the person giving the gift.

Which of the following individuals can deduct his or her education expenses? A. An accountant who attends law school to get a law degree. B. A medical doctor who attends a review course to obtain a financial consultant license. C. An accounting bookkeeper that takes a CPA review course to pass the CPA exam and become a CPA. D. A lawyer who goes to law school to get a specialized tax degree.

D. A lawyer who goes to law school to get a specialized tax degree.

Which of the following choices is not a form of a tax prepayment? A. An overpayment of taxes in the prior year that was applied as an estimated payment for the current year B. Income tax withheld from a taxpayer's salary or wages by an employer C. Estimated tax payments the taxpayer made directly to the IRS D. A tax refund received in the current year for the prior year

D. A tax refund received in the current year for the prior year

Which of the following statements is not correct regarding alimony? A. Alimony payments must be made in cash. B. Alimony is deductible for AGI for the person paying it. C. Alimony is included in gross income of the person receiving it. D. Alimony is another term for child support.

D. Alimony is another term for child support.

If a service member moves because of a permanent change of station, they can deduct the reasonable unreimbursed expenses of moving themselves and members of their household, including: A. Moving household goods and personal effects. B. Travel, including auto, bus, train, or air transportation. C. The cost of storing and insuring your household goods and personal effects for a limited period of time. D. All of the choices are correct.

D. All of the choices are correct.

Which of the following is not a relevant factor to be considered in deciding whether an activity is profit seeking or a hobby? A. Manner in which the taxpayer carries on the activity. B. Expertise of the taxpayer or his or her advisers. C. Time and effort expended by the taxpayer in carrying on the activity. D. All of the choices are relevant factors.

D. All of the choices are relevant factors.

Which of the following statements is correct concerning an inheritance? A. An inheritance is included in the gross income of the person who died on his final income tax return. B. An inheritance is included in the gross income of the person receiving the inheritance. C. An inheritance may be subject to the federal estate tax which is paid by the person receiving the inheritance. D. An inheritance may be subject to the federal estate tax which is paid by the estate of the person who died.

D. An inheritance may be subject to the federal estate tax which is paid by the estate of the person who died.

Andrew is trying to determine if Annie will qualify as his dependent. She will not meet the criteria for a qualifying child, so Andrew is checking to see if she is a qualifying relative. Assuming there is not a multiple support agreement involved, which of the following criteria for the support test must be met in order for Annie to be considered a qualifying relative for Andrew? A. Annie must live with the Andrew for over half of the year in order to meet the support test. B. Annie must be related to the Andrew in order to meet the support test. C. Annie must NOT provide over half of her own support, but it doesn't matter who is providing the support. D. Andrew must provide over half of Annie's support for the year.

D. Andrew must provide over half of Annie's support for the year.

The deduction for half of the self-employment tax is: A. Based on a total of 7.65% of FICA taxes. B. Based on the gross earnings of the business. C. Based on filing status. D. Based on the net earnings of the business.

D. Based on the net earnings of the business.

What is the formula used by the Tax Court when allocating mortgage interest and property taxes for residences with significant rental activities? A. Expense x (365/total rental days) B. Expense x (total days used/total rental days) C. Expense x (total rental days/total days used) D. Expense x (total rental days/365)

D. Expense x (total rental days/365)

Malika and Henry's vacation home was completely destroyed by fire in a location that was a declared a federal disaster area. They had no insurance to cover the loss. On which of the following forms would they report their loss? A. Schedule A, Itemized Deductions, only. B. Form 4684, Casualties and Thefts, only. C. Form 4684, Casualties and Thefts, and Schedule A, Itemized Deductions. D. Form 4684, Casualties and Thefts, and Form 1040, U.S. Individual Income Tax Return, as an adjustment to gross income.

D. Form 4684, Casualties and Thefts, and Form 1040, U.S. Individual Income Tax Return, as an adjustment to gross income.

To qualify for a medical expense deduction as a taxpayer's dependent, a person must be a dependent either at the time the medical services were provided or at the time the expenses were paid. A person generally qualifies as a dependent for purposes of the medical expense deduction if the person: A. Is the unrelated caregiver for taxpayer's elderly parents. B. Was a foreign student staying briefly at taxpayer's home. C. Would qualify as a dependent except for the amount of gross income. D. Is an unmarried adult child of taxpayer's sibling.

D. Is an unmarried adult child of taxpayer's sibling.

In 2018, the U.S. President declared a federal disaster due to the flooding in Louisiana. Danielle lives in that area and lost her home in the flood. What choice does she have regarding when she can claim the loss on her tax return? A. It must be claimed in 2017 if the return has not been filed by the date of the loss. B. It must be claimed in 2018 if the loss is greater than the modified adjusted gross income. C. It may be claimed in 2019 if an election is filed with the 2018 return. D. It may be claimed in 2017 or 2018.

D. It may be claimed in 2017 or 2018.

Horatio and Maria are married and have three children. Horatio is self-employed and pays health insurance premiums for himself and his family. Which of the following situations would disqualify part or all of the premium costs from being deductible for AGI? A. One of Horatio's children is not a dependent because she is 25 and earns too much income. B. Horatio's net income from his business exceeds the cost of the health insurance premiums. C. Horatio and Maria's children are all dependents for tax purposes. D. Maria has an employer-sponsored health insurance plan available at work, but they do not participate.

D. Maria has an employer-sponsored health insurance plan available at work, but they do not participate.

Which filing status is used if one spouse dies during the year and the surviving spouse does not remarry before the end of the year? A. Single B. Qualifying widow or widower C. Head of household D. Married filing jointly

D. Married filing jointly

Kayla and Ben were married in November of the current year. What will be their filing status for the current year? A. Married filing separately because they have been married for less than half of the year B. One spouse can file as head of household and the other will file single since they live together but have been married less than half the year C. Single because they were married for less than half of the year D. Married filing jointly (or separately) because they were married as of the end of the year

D. Married filing jointly (or separately) because they were married as of the end of the year

Which of the following criteria is not necessary to qualify as a dependent of another taxpayer? A. Must be a citizen of the U.S. or a resident of the U.S., Canada, or Mexico B. Must be considered either a qualifying child or a qualifying relative C. Must NOT file a joint return unless there is no tax liability on the couple's tax return D. Must be unmarried for at least a portion of the year

D. Must be unmarried for at least a portion of the year

To be eligible to deduct moving expenses, a taxpayer: A. Must be a member of the armed forces. B. Must be on active duty. C. Must be undergoing a permanent change of station. D. Must meet all of the provided criteria.

D. Must meet all of the provided criteria.

Which of the following miscellaneous deductions are subject to the 2% of adjusted gross income limitation for 2018? A. Safe deposit box fees. B. Unreimbursed employee business expenses. C. Investment counsel and advisory fees. D. None of these.

D. None of these.

Which of the following assets has a 7-year recovery period for MACRS depreciation? A. Buildings B. Light general-purpose trucks C. Computers and peripheral equipment D. Office furniture and fixtures

D. Office furniture and fixtures

Which of the following is not a type of Section 1231 asset? A. Personal property and intangibles B. Depreciable real property C. Land D. Personal use property

D. Personal use property

Which of the following is deductible as an other itemized deduction? A. Union dues. B. None of these are considered an other itemized deduction. C. Job-hunting expenses. D. Professional dues and subscriptions.

D. Professional dues and subscriptions.

When there are a net short-term loss and a net long-term loss, which of the following is true? A. The entire short-term loss is used to reduce other income before the long-term loss can be used to offset other income. B. A long-term loss is used to reduce other income before the short-term loss. C. Regardless of the amount of a short-term or long-term loss, the maximum amount of loss that can be taken in any one year is $3,000. Any remaining loss amounts can be carried forward for three years for individual taxpayers. D. Regardless of the amount of a short-term or long-term loss, the maximum amount of loss that can be taken in any one year is $3,000. Any remaining loss amounts can be carried forward indefinitely for individual taxpayers.

D. Regardless of the amount of a short-term or long-term loss, the maximum amount of loss that can be taken in any one year is $3,000. Any remaining loss amounts can be carried forward indefinitely for individual taxpayers. Explanation: The maximum amount of a loss that can be taken in any one year is $3,000 regardless of holding period status. Any remaining loss amounts can be carried forward indefinitely to offset future year gains.

Which of the following criteria is not required for a business expense to be considered ordinary and necessary? A. Appropriate under the circumstances B. Helpful to the business C. Conducive to the business activities D. Repetitive in nature

D. Repetitive in nature

Beth pays $500 of real estate taxes during the year related to her rental property. Where will she report this cost, if anywhere, on her tax return? A. Schedule A B. Schedule C C. Real Estate Taxes are not deductible. D. Schedule E

D. Schedule E

Which expenses incurred in a trade or business are deductible? A. Political lobbying expenses. B. Bribes. C. Fines and penalties. D. Supplies expenses.

D. Supplies expenses. Explanation: Political lobbying, bribes, or fines and penalties are not tax deductible.

Mark's Markers purchased a new machine to use in the manufacturing process for $2,500. The sales tax was an additional $150 and the shipping charges were $200. One month after using the machine, a small part broke and needed repair. The cost of the repair was $900. How will Mark's Markers treat the costs for tax purposes? A. The cost of $2,650 will be capitalized and depreciated over the asset's life. The shipping and repairs of $1,100 will be expensed immediately. B. The cost of $2,500 will be capitalized and depreciated over the asset's life. The other costs of $1,250 will be expensed immediately. C. The cost of $2,700 will be capitalized and depreciated over the asset's life. The repairs and tax of $1,050 will be expensed immediately. D. The cost of $2,850 will be capitalized and depreciated over the asset's life. Repairs of $900 will be expensed immediately.

D. The cost of $2,850 will be capitalized and depreciated over the asset's life. Repairs of $900 will be expensed immediately.

Which of the following choices is not considered deductible transportation expenses? A. The cost of driving to a client's place of business to deliver a final report B. The cost of driving a pizza delivery vehicle to deliver pizzas C. The cost of airfare to attend a business conference in another state D. The cost of driving from home to work

D. The cost of driving from home to work

How much of a self-employed taxpayer's self-employment tax may be deducted for AGI? A. Self-employment tax is deductible to the extent of the self-employment income. B. All of the self-employment tax is deductible. C. None of self-employment tax is deductible. D. The employer portion of self-employment tax is deductible.

D. The employer portion of self-employment tax is deductible.

When a taxpayer converts a deductible traditional IRA to a Roth IRA in a rollover, what are the tax implications? A. The account earnings are taxed as capital gain, but the contributions are NOT taxable. B. The account earnings are taxed as ordinary income, but the contributions are NOT taxable. C. The entire amount of the rollover is taxed as capital gain. D. The entire amount of the rollover is taxed as ordinary income.

D. The entire amount of the rollover is taxed as ordinary income.

Which of the following statements describes what is intended by the terms ordinary and necessary when referring to deductible business expenses? A. The expenses must be less than the revenues or the activity is not profit-motivated. B. The expenses must be critical for generating a profit, not just helpful. C. The expenses must be repetitive in nature rather than one-time expenses. D. The expenses must be appropriate and helpful for generating a profit.

D. The expenses must be appropriate and helpful for generating a profit.

Which of the following items would be an other itemized deduction on Schedule A of Form? A. None of the above. B. Job-hunting costs. C. Professional dues to membership organizations. D. Work uniforms that cannot be used for normal wear.

D. Work uniforms that cannot be used for normal wear.

In order to meet the requirements of the residence test for a qualifying child, the individual must live with the taxpayer for: A. at least one-third of the year B. the entire year C. longer than he has resided with anyone else during the year D. more than half the year

D. more than half the year

Supplemental wages includes all of the following except A. vacation pay. B. commissions. C. taxable fringe benefits. D. salary.

D. salary.

A taxpayer may file as a single taxpayer when: A. she has been unmarried for over half of the year B. she is separated from her husband, but not yet divorced C. her spouse died during the year D. she is unmarried at the end of the tax year

D. she is unmarried at the end of the tax year

Ethan's Eggroll House purchased a new computer and printer in January for $1,500. In February, the business purchased a new oven for $1,200. How much depreciation will be taken on these items in the current year if the taxpayer does NOT elect to use Section 179 and does NOT use bonus depreciation? A. $214 computer; $171 oven B. $300 computer; $240 oven C. $525 computer; $300 oven D. $375 computer; $300 oven E. $300 computer; $171 oven F. $525 computer; $420 oven

E. $300 computer; $171 oven Rationale: The computer has a 5-year recovery period ($1,500 x 20%), and the oven has a 7-year recovery period ($1,200 x 14.29%).

Randy owns and rents a duplex that he purchased 17 years ago in the month of May. The purchase price was $250,000. During August of the current year, Randy sold the duplex. What is the amount of depreciation that can be deducted in the current year? (Round to the nearest dollar.) A. $6,439 B. $4,006 C. $9,090 D. $6,410 E. $5,681

E. $5,681 Explanation: Use the midmonth convention table. Month 5 (May), Year 17 = 3.636% 250,000 x 3.636% = 9,090 x 7.5/12(August) = $5,681.25

Carol is an accountant for a local firm. She also speaks at accounting conferences for additional income on the side. Carol earned $10,000 in consulting fees during the year and $50,000 of regular income from her accounting work. Where will Carol report the consulting fees on her tax return? A. Form 1099-MISC B. She is not required to report the income. C. Form 1040 Line 21 (other income) D. Form 1040 Line 7 (wages) E. Schedule C

E. Schedule C

Janet owns land that she uses in her business. Which of the following statements is correct regarding the land? A. The land is classified as personal property, and it can be depreciated because it is a business asset. B. The land is classified as personal property, but it can NOT be depreciated, even though it is a business asset. C. The land is classified as real property, and it can be depreciated because it is a business asset. D. The land is classified as personal-use property, and it can NOT be depreciated because it is not a business asset. E. The land is classified as real property, but it can NOT be depreciated, even though it is a business asset.

E. The land is classified as real property, but it can NOT be depreciated, even though it is a business asset.

An individual must recognize income on his or her tax return if the transaction meets three conditions. Name the three conditions: ________, ________, ________

Economic benefit, conclusion, not tax-exempt income

Paola purchased an office building on January 5, 2017, for $450,000. $30,000 of the price was for the land. On September 25, 2018, he sold the office building. What is the cost recovery deduction for 2018 rounded to the nearest dollar? A. $10,769. B. $7,628. C. $0. D. $7,321.

Explanation: 39-year asset, year 2 = 3.636% 450,000 - 30,000 = $420,000 420,000 x 3.636% x 8.5/12 = 10,817.10 September (9-0.5) = 8.5

A Schedule B is required if an individual receives $1,500 of interest for the tax year. True or False?

False

All interest received from state or local bonds is not taxable. True or False?

False

Holiday turkeys given to employees are included in gross income. True or False?

False

True or false: A six-month extension will allow the taxpayer to extend the tax payment date without penalty.

False

True or false: A taxpayer may deduct both his standard deduction and his itemized deductions from AGI in order to calculate taxable income.

False

True or false: An individual will qualify as a qualifying child if he satisfies at least one of the following tests: age, support, relationship, and residence.

False

True or false: No drugs obtained from outside the US (with or without a prescription) can be deductible on the US Federal Tax Return.

False

True or false: Scholarships received by college students are nontaxable regardless of what the money is used for because the scholarship proceeds are considered to be a gift.

False

True or false: Depreciation recapture changes the character of the gain or loss on a Section 1231 asset from capital to ordinary.

False Explanation: Depreciation recapture applies to gains, but does not apply to losses.

Progressive Tax Rate Structure

Imposes an increasing marginal rate as the tax base increases.

If the state tax payments that were deducted resulted in the taxpayer receiving a refund in the following year, the state tax refund must be included as taxable income according to the _____ _____ rule.

Tax benefit

The Treasury Department is charged with ______ and ______ the tax laws of the United States.

The Treasury Department is charged with administering and interpreting the tax laws of the United States.

What type of tax structure does the federal individual income tax system in the United States use?

The federal individual income tax system in the United States uses a progressive tax structure.

Why was the first personal income tax enacted in 1861?

The first personal income tax was enacted in 1861 to fund the civil war.

An individual is required to impute interest on a deferred payment contract where no interest, or a low rate of interest, is stated. True or False?

True

If someone purchases a debt instrument (such as a bond) from an issuer for an amount less than par value, the transaction creates original issue discount (OID). True or False?

True

In general, scholarships are not taxable if the use of the money is to pay tuition, fees, books, supplies, and equipment. True or False?

True

Income may be realized in any form, whether in money, property, or services. True or False?

True

Qualified dividends arise from the earnings and profits of the payer corporation. True or False?

True

True or false: Income and deductions from a partnership or S corporation are taxed on the owners' tax returns rather than the entity's tax return.

True

True or false: Income and deductions generated within a partnership or S corporation that are subject to various tax treatments (i.e. qualified dividends, capital gains, etc.) retain their character when they flow-through to the owners rather than being reclassified as ordinary income or loss.

True

U.S. _____ _____ do not pay out periodic interest payments, but the interest _____ over the term of the bond.

U.S. savings bonds do not pay out periodic interest payments, but the interest accrues over the term of the bond.

The term used when one former spouse is required to provide financial support to the other spouse pursuant to a legal separation or divorce is _____.

alimony

The _____ _____ credit can only be used for a student's first four years in a qualified postsecondary education institution, while the _____ _____ credit can be used for any course of instruction whether or not it's in the first four years of a qualified post-secondary education.

american opportunity, lifetime learning

In general, when contributing property to charity, taxpayers are allowed to deduct the fair market value of appreciated _____ _____ property on the date of the donation.

capital gains

A _____ _____ is defined as a loss from a sudden, unexpected, or unusual event such as a fire, storm, or shipwreck.

casualty loss

In order to meet the criteria for a qualifying _____ (child/relative), the dependent must not have provided more than half of his or her own support for the year. However, the support may have been provided by someone other than the taxpayer.

child

The _____ _____ _____ _____ credit helps taxpayers pay the cost of providing care for dependents, so that taxpayers can work.

child and dependent care

A self-employed taxpayer can deduct expenses for the business use of the home if the business use is _____ _____, and for the taxpayer's trade or business.

exclusive regular

Unincorporated business and rental activities do not pay taxes at the organization level; rather these types of activities are _____ _____ entities whose operating income and losses are allocated to the owners of the entities.

flow through

In addition to receiving a salary from a company, many employers provide _____ _____ that are excluded from gross income.

fringe benefits

Qualified retirements plans can not discriminate in favor of _____ _____ _____.

highly compensated employees

For below-market-loans, the imputed interest rate is treated as interest _____ to the lender and interest _____ to the borrower.

income/ revenue, expense

After determining the loss on each of the assets affected by the casualty, the taxpayer must further reduce the loss by any _____ _____ the individual is eligible to receive.

insurance settlement

Taxpayers receiving indirect economic benefits, such as bargain purchases or below-market loans, are said to have _____ income which may be taxable.

interest

The amount of Section 1245 depreciation recapture that will be taxed as ordinary income is the _____ of (1) the recognized gain on the sale or (2) total accumulated depreciation on the asset. The remainder of any gain is characterized as Section _____ gain, which may be taxed at capital gain rates.

lesser 1231

The _____ _____ credit is available for individuals in any course of instruction to acquire or improve their job skills.

lifetime learning

The _____ _____ credit is a maximum credit of $2,000 per taxpayer, while the _____ _____ credit is a maximum credit of $2,500 per qualifying student.

lifetime learning, american opportunity

Ordinary income is generally taxed at _____ tax rates, while capital gains are generally taxed at _____ rates.

marginal or ordinary capital, special, or lower

The _____-_____ convention is used for all assets purchased during the year when more than _____ % of the tangible personal property purchased is placed in service during the fourth quarter of the year.

mid quarter 40%

All real property is depreciated using the _____-_____ convention.

mid-month

The _____-_____ convention allows one-half of a full year's depreciation in the year the asset is placed in service, regardless of when it was actually placed in service.

mid-year

When donating _____ _____ property as a charitable contribution, taxpayers can only deduct the _____ of (1) the property's fair market value or (2) the property's adjusted basis.

ordinary income, lesser

All gains and losses are eventually characterized as either _____ or _____ gains or losses.

ordinary or capital

Land and buildings are classified as _____ property, while items such as machinery, equipment, and furnishings are classified as tangible, personal property.

real

Qualified _____ plans come in two forms. A defined _____ plan specifies the amount the employee will receive at retirement, while a defined _____ plan outlines the maximum annual amount that can be paid into the plan.

retirement benefit contribution

Instead of a deductible, traditional IRA, taxpayers can invest in a nondeductible _____ IRA. Because the contributions are NOT deductible, the qualified distributions are _____.

roth nontaxable

Sole proprietors and independent contractors pay _____ _____ taxes on their net profit which represents both the employee and employer component of FICA and Medicare.

self employment

Employees pay _____ _____ taxes on their salary, wages, and other compensation at a current rate of 6.2%.

social security

Up to 85% of _____ _____ benefits, in retirement, may be taxable for taxpayers with moderate to high taxable income.

social security

A taxpayer may deduct interest expense paid on qualified _____ loans where the proceeds were used for tuition, fees, books, and other necessary expenses. The interest is deductible _____ AGI.

student, for

The three tests that must be met to qualify as a qualifying relative are: _____, _____, and _____.

support, relationship, gross income

Qualified distributions from a _____ IRA are fully taxable and qualified distributions from a _____ IRA are tax-exempt.

traditional Roth

With a(n) _____ IRA, distributions are taxed as ordinary income (assuming no nondeductible contributions to the IRA). This treatment is the same as the treatment of a(n) _____ 401(k).

traditional traditional

Fraud on a tax return can also lead to criminal charges. True or False?

true

True or false: An employee is able to increase or decrease the amount of tax withheld from his salary through information supplied on Form W-4.

true

True or false: It is harder for an employee to deduct a home office than it is for a self-employed taxpayer to deduct a home office.

true

True or false: The lifetime learning credit is available for any course of instruction and is not limited to courses taken at postsecondary educational institutions.

true

Gross income means all income from _______ _________ __________.

whatever source derived.

Taxpayers receive _____ _____ when they are unable to work due to work-related injuries. These benefits are _____ because they are due to a physical injury.

workers compensation, nontaxable

In 2017, Ryan files as single and has taxable income of $75,673. Using the tax tables in Appendix D, his tax liability totals $

$12,588 Rationale: Use Tax Charts on IRS.gov

Cathy purchases a new computer for $500 in a state where the sales tax rate is 5%. The amount of sales tax that will be added to the purchase is $____.

$25

Amy and Ethan are married and file a joint return for 2017. Using the tax tables in Appendix D, their taxable income is $95,300. What is the amount of their tax liability?

$12851 Rationale: Round up

Randall is single and has total income from all sources (taxable and nontaxable) of $83,000. His taxable income is $62,000. Randall's tax liability is $9,580. What is Randall's average tax rate?

15.45% Rationale: 9,580/62,000=15.45%

Which of the following statements is correct regarding the deductibility of self-employment taxes? A. Taxpayers are allowed to deduct the employer portion of their self-employment taxes FOR AGI. B. Taxpayers are allowed to deduct the employee portion of their self-employment taxes FOR AGI. C. Taxpayers are allowed to deduct the employer portion of their self-employment taxes FROM AGI. D. Taxpayers are allowed to deduct the employee portion of their self-employment taxes FROM AGI.

A. Taxpayers are allowed to deduct the employer portion of their self-employment taxes FOR AGI.

Taxpayers eligible to take the student loan interest deduction do not include: A. A student who is claimed as a dependent on another's return. B. A self-supporting student. C. The parents of a dependent student who took out the loan on their child's behalf. D. A married student filing jointly.

A. A student who is claimed as a dependent on another's return.

A. Basis B. Adjusted Basis C. Amount Realized D. Amount Reconized

A. The amount of investment in property for tax purposes B. The cost of an asset reflecting increases or decreases due to improvements or depreciation deductions C. Cash received plus the FMV of any property or services received plus the amount of any debt assumed by the purchaser D. The amount that will be recorded as a gain or loss on the tax return

Which of the following are deductible? (Check all that apply.) A. Prescription birth control pills B. Prescription nicotine patches C. Prescription drug obtained in Canada (not FDA approved) D. Prescription medical marijuana

Answers: A, B

Which of the following expenses will qualify for the American Opportunity Credit in the current year? (Check all that apply.) A. Textbooks and required lab fees are paid in the current year. B. Parking permit is paid in the current year. C. Tuition for a term beginning in January is paid in December of the current year. D. Tuition is billed during December of the current year for the term beginning in January. Payment is made in January. E. Housing fees are paid in the current year.

Answers: A, C

Which of the following would be included in rental income? (Check all that apply.) A. Prepaid rent B. Security deposits C. Expenses paid by tenant in lieu of rent

Answers: A, C

Put the following items in the order in which they are found in the individual income tax formula. A. Taxable Income B. Minus Tax Credits and Prepayments C. Equals Tax Due or Refunded D. Equals Income Tax Liability E. Times Tax Rates

Answers: A, E, D, B, C

The child and dependent care credit is available for expenses paid to provide care for which of the following individuals? (Check all that apply.) A. A dependent who is a qualifying child regardless of age B. A spouse who is physically or mentally incapable of caring for himself C. A dependent under age 13 D. A dependent who is physically or mentally incapable of caring for himself

Answers: B, C, D

Which of the following statements are correct regarding the history of the U.S. personal income tax? A. The first personal income tax contained a very high marginal tax rate. B. The first personal income tax was enacted to fund the Spanish-American War. C. The income tax was once ruled unconstitutional. D. The 16th Amendment to the U.S. Constitution gives Congress the power to assess income tax on individuals.

Answers: C & D

Put the following items in the order in which they are found in the individual income tax formula. A. Equals Taxes Due or Refunded B. Minus tax credits and prepayments C. Taxable Income D. Equals Income Tax Liability E. Times Tax Rates

Answers: C, E, D, B, A

Put the following items in the order in which they are found in the individual income tax formula. A. Minus Tax Credits and Prepayments B. Times Tax Rate C. Equals Income Tax Liability D. Equals Tax Due or Refunded E. Taxable Income

Answers: E, B, C, A, D

Jordan has two jobs. She works as a night auditor at the Moonlight Motel. When her shift at the motel is over, she works as a short-order cook at the Greasy Spoon Restaurant. On a typical day, she drives the following number of miles: Home to Moonlight Motel 4 Moonlight Motel to Greasy Spoon Restaurant 7 Greasy Spoon Restaurant to home 12 How many miles would qualify as transportation expenses for tax purposes? A. 4 B. 7 C. 11 D. 12

B. 7 Explanation: Only miles between working locations are tax deductible (not home to work)

Which of the following taxes uses a progressive tax rate structure? A. Excise tax B. Federal individual income tax C. Sales Tax D. Social Security Tax

B. Federal Individual Income Tax

Starting with the highest authoritative weight, rank the authorities in descending order. A. Revenue Rulings and Revenue Procedures B. Internal Revenue Code C. Treasury Regulations D. Private Letter Rulings

B. Internal Revenue Code C. Treasury Regulations A. Revenue Rulings and Revenue Procedures D. Private Letter Rulings

Which of the following is false with respect to the standard mileage rate? A. It can be used if the taxpayer owns the vehicle and uses the standard mileage rate for the first year it was placed in service. B. It includes parking fees, tolls, and property taxes on the vehicle. C. It encompasses depreciation or lease payments, maintenance and repairs, gasoline, oil, insurance, and vehicle registration fees. D. It does not include interest expense on acquisition of the automobile.

B. It includes parking fees, tolls, and property taxes on the vehicle.

Which of the following statements is incorrect regarding the child and dependent care credit? A. The qualifying expenditures are limited to the earned income of the lesser-earning spouse when married filing jointly. B. The credit completely phases out for high income taxpayers. C. The minimum dependent care credit is 20% of qualifying expenditures. D. Expenditures for care within the home can qualify for the credit.

B. The credit completely phases out for high income taxpayers.

Isaiah, an NBA point guard, is advised by his physician to install a Jacuzzi in his residence since he is afflicted with a back problem incurred after years of running up and down the court. The cost of installing the Jacuzzi is $6,500. He installs the Jacuzzi in January of 2018, and it increases the value of his residence by $3,500. Disregarding the limitation based on adjusted gross income, how much of the cost of the Jacuzzi may Isaiah take into account in determining his medical expense deduction for 2018? A. $6,500. B. $10,000. C. $3,000. D. $3,500.

C. $3,000. Explanation (6500 - 3500 = 3,000)

John and Holly file a joint return. John is 68 and Holly is 65. They have an AGI of $15,000 and nontaxable social security benefits of $1,500. How much credit for the elderly or the disabled, if any, can John and Holly take? A. $150 B. $750 C. $525 D. $3,500

C. $525 Rationale: John and Holly must subtract the social security benefits even though they are not taxable.

For 2018, the maximum aggregate annual contribution that a taxpayer, under age 55, can make to a Health Savings Account (HSA) for family coverage is: A. $1,350. B. $3,450. C. $6,900. D. $13,300.

C. $6,900 Explanation For someone over the age of 55, an additional $1,000 can be added to the allowable contribution.

What type of retirement plan typically requires a significant amount of work to track employee benefits and to compute required contributions; is structured where the employer bears the investment risk; and combines the funds, rather than having each employee with a separate accounts? A. A defined contribution plan B. A nonqualified retirement plan C. A defined benefit plan D. An individual retirement account

C. A defined benefit plan

Which of the following medical payments would be deductible for the taxpayer in the current year? A. Doctor bills incurred by the taxpayer in the current year that will be paid next year B. Doctor bills incurred by the taxpayer and paid with the taxpayer's pre-tax flexible spending account dollars C. Doctor bills paid by the taxpayer for his son who is claimed as a dependent by the taxpayer's ex-wife D. Doctor bills incurred by the taxpayer, but paid by the taxpayer's health insurance company

C. Doctor bills paid by the taxpayer for his son who is claimed as a dependent by the taxpayer's ex-wife

Which of the following statements is correct regarding the sale of Section 1231 assets? A. Net Section 1231 losses are treated as capital losses with the deductibility subject to restrictions. B. Any gain from Section 1231 assets is taxed as a short-term capital gain. C. Net Section 1231 losses are fully deductible against all types of income. D. Net Section 1231 gains are taxed as ordinary income at the taxpayer's marginal rate.

C. Net Section 1231 losses are fully deductible against all types of income.

Which of the following taxes uses a proportional tax rate structure? A. Social Security Tax B. Federal Individual Income Tax C. State Sales Tax D. Federal Estate Tax

C. State Sales Tax

When a taxpayer rents his residence to unrelated parties for 15 or more days, how is the rental activity treated? A. The owner includes the rental income, but is NOT allowed to deduct the rental expenses. B. The owner includes the rental income and deducts the rental expenses. If the result is a rental loss, it can offset ordinary income. C. The owner includes the income and deducts the rental expenses to the extent of the rent income. Losses are NOT allowed. D. The owner does NOT include the rental income and is not allowed to deduct any expenses related to the rental.

C. The owner includes the income and deducts the rental expenses to the extent of the rent income. Losses are NOT allowed.

Which of the following choices is a characteristic of a qualified retirement plan? A. The plan can be funded with future operations rather than current contributions. B. The plan must be a defined benefit plan to be considered a qualified retirement plan. C. The plan may NOT discriminate against the rank-and-file employees. D. The plan must be a defined contribution plan to be considered a qualified retirement plan.

C. The plan may NOT discriminate against the rank-and-file employees.

Which of the following items is not a qualified medical expense? A. Vaccinations for the prevention of a disease B. Prescription medication for the cure of an illness C. Vitamins for promoting good health D. MRI for the diagnosis of a bodily injury

C. Vitamins for promoting good health

Which of the following may not be deducted either totally or partially as medical expenses? (Disregard any limitations which may apply.) A. $3,000 to a family physician for medical care. B. $600 for eyeglasses. C. $1,000 long-term care insurance. D. $300 for maternity clothes.

D. $300 for maternity clothes.

To be eligible to fund a Health Savings Account (HSA), a taxpayer must meet which of the following criteria: A. An employee (or spouse) who works for an employer with a high-deductible health plan. B. An uninsured employee who has purchased a high-deductible health plan on his or her own. C. A self-employed individual. D. All of these choices are correct.

D. All of these choices are correct.

At the end of the year, the employer is required to summarize all of an employee's earnings and taxes on a A. Form W-3. B. Form W-4. C. Form W-9. D. Form W-2.

D. Form W-2.

Which of the following costs are deductible on Form 1040, Schedule A, as taxes? 1. Real estate taxes on property owned in Mexico. 2. Property tax portion of vehicle registration, based on the value of the auto. 3. Fine for speeding. 4. Personal property tax on a pleasure boat. A. 3 and 4. B. All of the items are deductible. C. 1, 2, and 4. D. None of the items are deductible.

D. None of the items are deductible.

What is a statutory tax authority?

Internal Revenue Code

What type of tax authority is the U.S. Constitution, the Internal Revenue Code, and tax treaties?

Legislative

What do revenue rulings address?

Revenue rulings address the application of the Code and regulations to a specific factual situation. They provide a much more detailed interpretation of the Code than the regulations as it applies to a specific transaction.

Which of the following taxes uses a regressive tax rate structure?

Social Security Tax.

The _____ tax rate measures the average percentage of tax on only taxable income.

The average tax rate measures the average percentage of tax on only taxable income.

Who has the ultimate authority to interpret the IRC and settle tax disputes?

The judicial system

The _____ tax rate indicates the rate of tax on the next additional increment of income.

The marginal tax rate indicates the rate of tax on the next additional increment of income.

Which tax rate structure for the tax rate remains the same for all levels of the tax base?

The tax rate structure for which the tax rate remains the same for all levels of the tax base is the proportional rate structure.

What are the three types of tax rate structures?

The three types of tax rate structures are progressive, proportional, and regressive.

The _____ _____ is charged with administering and interpreting the tax laws.

The treasury department is charged with administering and interpreting the tax laws.

The _____ amount is credited to the account of the taxpayer and reduces the amount of tax otherwise due to the government on the due date of the return.

The withholding amount is credited to the account of the taxpayer and reduces the amount of tax otherwise due to the government on the due date of the return.

Treasury regulations come in four forms: _____ regulations have been issued in their final form and represent the Treasury's interpretations of the Code; _____ regulations have a limited life but carry high authoritative weight; _____ regulations, which have the lowest authority; and _____ regulations are written under a direct mandate by Congress, take the place of the IRC, and have full effect of the law.

Treasury regulations come in four forms: final regulations have been issued in their final form and represent the Treasury's interpretations of the Code; temporary regulations have a limited life but carry high authoritative weight; proposed regulations, which have the lowest authority; and legislative regulations are written under a direct mandate by Congress, take the place of the IRC, and have full effect of the law.

An individual can exclude certain income from taxation even though a transaction that has economic benefits has occurred. True or False?

True

If you provide consulting services to your friend and, in exchange, he fixes your car, you and your friend must report on both tax returns the fair market value of the services provided. True or False?

True

True or false: Taxpayers pay most of their tax liability prior to the due date of their tax returns.

True

True or false: Unemployment benefits are taxable.

True

A taxpayer's filing status depends on his or her _____ _____, at the end of the year and whether the taxpayer has any _____.

marital status, dependents

When a taxpayer owns a home that he lives in for 14 days or less, the home is considered to be a(n) _____ for tax purposes. If he rents the property to unrelated parties, the loss is _____ (deductible/nondeductible) for tax purposes, subject to the passive loss rules. (Enter one word per blank)

rental deductible